<PAGE> 1
FILED PURSUANT TO RULE 424(B)(2)
FILE NO. 33-68712
PROSPECTUS SUPPLEMENT
(To Prospectus Dated March 25, 1997)
5,500,000 Shares
Burnham Pacific Properties, Inc.
COMMON STOCK
------------------------
BURNHAM PACIFIC PROPERTIES, INC. (THE "COMPANY") IS A FULLY-INTEGRATED,
SELF-MANAGED REAL ESTATE OPERATING COMPANY WHICH ACQUIRES, REHABILITATES,
DEVELOPS AND MANAGES RETAIL PROPERTIES ON THE WEST COAST. AS OF APRIL 7, 1997,
THE COMPANY OWNED INTERESTS IN 25 RETAIL PROPERTIES AND IN FOUR RETAIL PROJECTS
IN VARIOUS STAGES OF DEVELOPMENT, ALL LOCATED IN CALIFORNIA. TEN OF THE
COMPANY'S RETAIL PROPERTIES WERE ACQUIRED ON OR AFTER DECEMBER 31, 1996. THE
COMPANY ALSO OWNS FOUR OFFICE AND INDUSTRIAL PROPERTIES LOCATED IN SOUTHERN
CALIFORNIA. ASSUMING THE COMPLETION OF THOSE DEVELOPMENT PROPERTIES PRESENTLY
UNDER CONSTRUCTION, THE COMPANY WILL OWN INTERESTS IN 28 RETAIL PROPERTIES WITH
4,400,037 SQUARE FEET OF COMPANY-OWNED GROSS LEASABLE AREA ("GLA"). THE COMPANY
HAS ELECTED TO QUALIFY AS A REAL ESTATE INVESTMENT TRUST ("REIT") FOR FEDERAL
INCOME TAX PURPOSES.
------------------------
ALL OF THE SHARES OF COMMON STOCK, NO PAR VALUE PER SHARE, OF THE COMPANY (THE
"COMMON STOCK") OFFERED HEREBY ARE BEING SOLD BY THE COMPANY. THE COMMON STOCK
IS LISTED ON THE NEW YORK STOCK EXCHANGE (THE "NYSE") UNDER THE SYMBOL "BPP."
THE LAST REPORTED SALE PRICE OF THE COMMON STOCK ON THE NYSE ON APRIL 28, 1997
WAS $12 3/8 PER SHARE. SEE "PRICE RANGE OF COMMON STOCK AND DISTRIBUTIONS."
------------------------
THE COMMON STOCK IS SUBJECT TO CERTAIN RESTRICTIONS ON OWNERSHIP DESIGNED TO
PRESERVE THE COMPANY'S STATUS AS A REIT FOR FEDERAL INCOME TAX PURPOSES. SEE
"DESCRIPTION OF COMMON STOCK" IN THE ACCOMPANYING PROSPECTUS.
------------------------
SEE "RISK FACTORS" BEGINNING ON PAGE 3 OF THE ACCOMPANYING PROSPECTUS FOR
INFORMATION THAT SHOULD BE CONSIDERED BY PROSPECTIVE INVESTORS.
------------------------
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 SUPPLEMENT OR THE PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
------------------------
PRICE $12 3/8 A SHARE
------------------------
<TABLE>
<CAPTION>
UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC COMMISSIONS (1) COMPANY (2)
------------------------------------------------------
<S> <C> <C> <C>
Per Share.......................................... $12.375 $.650 $11.725
Total (3).......................................... $68,062,500 $3,575,000 $64,487,500
</TABLE>
- ---------------
(1) The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933. See
"Underwriting."
(2) Before deducting expenses payable by the Company estimated at $800,000.
(3) The Company has granted to the Underwriters an option, exercisable within 30
days of the date hereof, to purchase up to an aggregate of 825,000
additional shares of Common Stock at the price to public less underwriting
discounts and commissions for the purpose of covering over-allotments, if
any. If the Underwriters exercise such option in full, the total price to
public, underwriting discounts and commissions and proceeds to Company will
be $78,271,875, $4,111,250 and $74,160,625, respectively. See
"Underwriting."
------------------------
The shares are offered, subject to prior sale, when, as, and if accepted by
the Underwriters named herein, and subject to approval of certain legal matters
by Brown & Wood LLP, counsel for the Underwriters. It is expected that delivery
of the shares of Common Stock will be made on or about May 2, 1997 at the
offices of Morgan Stanley & Co. Incorporated, New York, N.Y., against payment
therefor in immediately available funds.
------------------------
MORGAN STANLEY & CO.
Incorporated
LEHMAN BROTHERS
MERRILL LYNCH & CO.
EVEREN SECURITIES, INC.
April 28, 1997
<PAGE> 2
[INSERT MAP]
<PAGE> 3
No dealer, salesperson or other person has been authorized to give any
information or to make any representations other than those contained or
incorporated by reference in this Prospectus Supplement or the accompanying
Prospectus in connection with the offer made by this Prospectus Supplement and
the accompanying 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 Supplement and the accompanying
Prospectus do not constitute an offer to sell or a solicitation of any offer to
buy any security other than the Common Stock offered hereby, nor do they
constitute an offer to sell or a solicitation of any offer to buy the Common
Stock by anyone in any 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 Supplement or the
accompanying Prospectus nor any sale or offer made hereunder shall, under any
circumstances, create any implication that there has been no change in the
affairs of the Company since the date hereof.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
PROSPECTUS SUPPLEMENT
Prospectus Supplement Summary......................................................... S-5
Recent Events......................................................................... S-12
Use of Proceeds....................................................................... S-17
Price Range of Common Stock and Distributions......................................... S-17
Capitalization........................................................................ S-19
Selected Consolidated Financial and Other Data........................................ S-20
Pro Forma Condensed Consolidated Financial Statements................................. S-22
Management's Discussion and Analysis of Financial Condition and Results of
Operations.......................................................................... S-25
The Company........................................................................... S-30
The Properties and Markets............................................................ S-36
Executive Officers and Directors...................................................... S-46
Related Party Transactions............................................................ S-48
Underwriting.......................................................................... S-50
Experts............................................................................... S-51
Legal Matters......................................................................... S-51
PROSPECTUS
Available Information................................................................. 2
Incorporation of Certain Documents by Reference....................................... 2
The Company........................................................................... 3
Ratio of Earnings to Fixed Charges.................................................... 3
Use of Proceeds....................................................................... 3
Risk Factors.......................................................................... 3
Description of Common Stock........................................................... 11
Description of Debentures............................................................. 19
Federal Income Tax Considerations..................................................... 24
Plan of Distribution.................................................................. 25
Legal Matters......................................................................... 25
Experts............................................................................... 25
</TABLE>
------------------------
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK.
SPECIFICALLY, THE UNDERWRITERS MAY OVERALLOT IN CONNECTION WITH THE OFFERING,
AND MAY BID FOR, AND PURCHASE, SHARES OF THE COMMON STOCK IN THE OPEN MARKET.
FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."
S-3
<PAGE> 4
(This page intentionally left blank)
S-4
<PAGE> 5
PROSPECTUS SUPPLEMENT SUMMARY
The following summary is qualified in its entirety by the detailed
information appearing elsewhere in this Prospectus Supplement and the
accompanying Prospectus and incorporated herein and therein by reference. The
information contained in this Prospectus Supplement assumes no exercise of the
Underwriters' over-allotment option, unless otherwise indicated. The offering of
5,500,000 shares of the Company's Common Stock made hereby is referred to herein
as the "Offering." All references to the "Company" in this Prospectus Supplement
and the accompanying Prospectus include Burnham Pacific Properties, Inc. and its
consolidated subsidiaries unless otherwise expressly stated or the context
otherwise requires; and all references to the square footage of gross leasable
area ("GLA") and square footage are approximate. This Prospectus Supplement and
the accompanying Prospectus, as well as certain of the information incorporated
by reference herein and therein, contain forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933, as amended (the
"Securities Act"), and Section 21E of the Securities Exchange Act of 1934, as
amended (the "Exchange Act"). The Company's actual results could differ
materially from those set forth in the forward-looking statements. Certain
factors that might cause such a difference are discussed in the section entitled
"Risk Factors" beginning on page 3 of the accompanying Prospectus.
THE COMPANY
The Company is a fully-integrated, self-managed real estate operating
company which acquires, rehabilitates, develops and manages retail properties on
the West Coast. In late 1995, the Company began an extensive reorganization
designed to concentrate its future efforts on retail properties. In October
1995, the Company succeeded to the shopping center operations of The Martin
Group of Companies, Inc. ("The Martin Group"), a San Francisco based real estate
operating company owned by J. David Martin. As part of the transaction, the
Company appointed J. David Martin as its Chief Executive Officer and President
and as a member of its Board of Directors and acquired a supermarket and
drugstore anchored community shopping center (a "Market/Drug center") and
interests in certain retail development projects that The Martin Group had begun
(the "Martin Projects"). See "The Company -- The Martin Transactions."
Since October 1995, the Company has:
- internalized its property management activities;
- internalized a substantial portion of its leasing activities;
- opened regional offices in Los Angeles, San Francisco and Portland,
Oregon;
- acquired additional retail Properties and geographically diversified its
holdings within California;
- substantially completed one of its development projects, completed the
first phase of a second development project and started a third; and
- disposed of certain of its non-strategic assets.
As of April 7, 1997, the Company owned interests in 25 retail properties
and in four retail projects in various stages of development, all located in
California. Ten of the Company's retail properties were acquired on or after
December 31, 1996. The Company also owns four office and industrial properties
located in Southern California which it considers non-strategic and which may be
sold as suitable opportunities arise. Assuming the completion of those
development properties presently under construction, the Company will own
interests in 28 retail properties with 4,400,037 square feet of Company-owned
GLA. Those properties which are owned by the Company or in which the Company has
an interest are herein referred to collectively as the "Properties," and
individually as a "Property."
The Company was incorporated in 1986 as the successor to a publicly-traded
real estate limited partnership which was organized in San Diego in 1963. The
Company has elected to qualify as a REIT for federal income tax purposes.
S-5
<PAGE> 6
RECENT ACQUISITIONS
Recent Acquisitions. From and including December 31, 1996, the Company has
completed the acquisition of two portfolios containing a total of seven
Properties and three additional Properties containing, in the aggregate,
approximately 1,646,315 square feet of Company-owned GLA (the "Recent
Acquisitions"). The Company's acquisition cost for the Recent Acquisitions was,
in the aggregate, approximately $146.8 million. The weighted average historical
yield on the Recent Acquisitions is 10.11%. The Company believes that its
internal capabilities provide it with an opportunity to achieve yields higher
than historical yields for these Properties. There can be no assurance, however,
that the Company will be able to do so. The following table and Property
descriptions set forth information regarding the Recent Acquisitions:
<TABLE>
<CAPTION>
ACQUISITION
COMPANY- HISTORICAL COST/
ACQUISITION TOTAL OWNED PERCENT NET OPERATING ACQUISITION HISTORICAL SQUARE
PROPERTY DATE GLA GLA OCCUPIED(1) INCOME(2) COST(3) YIELD(4) FOOT(5)
- ---------------------- ----------- --------- --------- ----------- ------------- ------------ ---------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Margarita Plaza(6).... 12/31/96 76,744 76,744 100% $ 945,000(7) $ 9,568,000 9.88%(7) $124.67
Downey Portfolio...... 1/31/97 964,557 646,798 91 5,307,000 52,100,000 10.19 80.55
Foothill Plaza........ 2/28/97 52,315 52,315 86 710,000(7) 6,202,000 11.45(7) 118.55
Crenshaw Imperial
Shopping Center..... 4/3/97 151,151 151,151 99 917,000(7) 9,080,000 10.10(7) 60.07
BRE Portfolio......... 4/4/97 888,184 719,307 89 6,962,000 69,800,000 9.97 97.04
--------- --------- --- ----------- ------------ ----- -------
Total/Weighted
Average........... 2,132,951 1,646,315 91% $14,841,000 $146,750,000 10.11% $ 89.14
========= ========= === =========== ============ ===== =======
</TABLE>
- ---------------
(1) Based on occupancy at April 1, 1997. Data reflects occupancy of the
Company-owned portion only.
(2) Represents historical net operating income for 1996 for the Company-owned
portion.
(3) Includes the Company's estimated closing costs.
(4) Defined as historical net operating income for 1996 divided by acquisition
cost.
(5) Defined as acquisition cost divided by Company-owned GLA.
(6) The Company currently owns a 25% interest in this Property. See "Recent
Events -- Financings -- Joint Ventures." Data is for this Property as a
whole.
(7) The historical net operating income for 1996 for this Property was derived
solely from financial information provided by the prior owner of the
Property.
S-6
<PAGE> 7
THE PROPERTIES
The following tables summarize certain information relating to the
Company's Properties, including three development Properties under construction,
as of April 7, 1997:
<TABLE>
<CAPTION>
RETAIL PROPERTIES(1) TYPE OF COMPANY-OWNED
San Diego Region CENTER GLA(2) OCCUPANCY(2)
-------------- ------------- ------------
<S> <C> <C> <C>
Point Loma Plaza...................................... Market/Drug 213,229 96%
Mesa Shopping Center.................................. Market/Drug 142,532 99
Poway Plaza........................................... Market/Drug 74,060 80
Navajo Shopping Center................................ Market/Drug 58,379 49(3)
Wiegand Plaza II...................................... Promotional 110,843 99
Independence Square(4)................................ Promotional 92,627 91
Santee Village Square................................. Entertainment 80,995 90
San Diego Factory Outlet Center....................... Outlet 255,440 95
Ruffin Village(4)..................................... Convenience 44,594 88
Plaza Rancho Carmel................................... Convenience 26,978 82
------------- ---
TOTAL/WEIGHTED AVERAGE SAN DIEGO REGION............. 1,099,677 94%(5)
Los Angeles Region
Ladera Center(6)...................................... Market/Drug 184,684 95
Santa Fe Springs...................................... Market/Drug 164,730 93
Crenshaw Imperial Shopping Center..................... Market/Drug 151,151 99
La Mancha Shopping Center............................. Market/Drug 103,904 99
Margarita Plaza(7).................................... Market/Drug 76,744 100
Central Shopping Center............................... Market/Drug 62,314 87
Ontario Village....................................... Market/Drug 39,954 78
West Lancaster Plaza - Phase III...................... Market/Drug 29,318 57
The Plaza at Puente Hills............................. Promotional 516,538 92
Valley Central Shopping Center........................ Promotional 480,092 97
------------- ---
TOTAL/WEIGHTED AVERAGE LOS ANGELES REGION........... 1,809,429 94%
San Francisco Region
Cameron Park.......................................... Market/Drug 97,434 78
Richmond Shopping Center.............................. Market/Drug 76,692 100
Foothill Plaza........................................ Market/Drug 52,315 86
Fremont Hub........................................... Promotional 492,263 88
Pacific West Outlet Center............................ Outlet 203,412 87
------------- ---
TOTAL/WEIGHTED AVERAGE SAN FRANCISCO REGION......... 922,116 88%
------------- ---
TOTAL/WEIGHTED AVERAGE CURRENT RETAIL............... 3,831,222 92%(5)
DEVELOPMENT PROPERTIES CURRENTLY UNDER CONSTRUCTION
Gateway Center(4)..................................... Market/Drug 185,949 --
Hilltop Plaza......................................... Promotional 251,366 --
1000 Van Ness......................................... Entertainment 131,500 --
------------- ---
TOTAL DEVELOPMENT................................... 568,815 --
------------- ---
GRAND TOTAL RETAIL.................................. 4,400,037 --
OFFICE AND INDUSTRIAL PROPERTIES
Anacomp Building...................................... 338,485 50
Bergen Brunswig....................................... 175,000 100
Scripps Ranch Buildings(8)............................ 49,684 50
Marcoa Building....................................... 28,600 100
------------- ---
TOTAL/WEIGHTED AVERAGE OFFICE AND INDUSTRIAL........ 591,769 67%
------------- ---
GRAND TOTAL/WEIGHTED AVERAGE........................ 4,991,806 89%(9)
=============== ============
</TABLE>
- ---------------
(1) Excludes Village Station. See "Recent Events -- Other Events."
(2) Data reflects GLA and occupancy only for the portions of the Properties
owned by the Company. Occupancy data is as of April 1, 1997.
(3) Reflects vacancy due in large part to rehabilitation in progress. The
Company expects the occupancy rate to be 71% following the completion of the
rehabilitation and the addition of a 44,180 square foot Albertsons. See
"Recent Events -- Rehabilitation and Development."
(4) Indicates a property held under ground lease.
(5) Does not include Navajo Shopping Center.
(6) The Company anticipates that it will sell a 75% interest in this Property.
See "Recent Events -- Financings -- Joint Ventures." Data is for this
Property as a whole.
(7) The Company currently owns a 25% interest in this Property. See "Recent
Events -- Financings -- Joint Ventures." Data is for this Property as a
whole.
(8) Formerly known as the IMED Buildings. IMED Corporation vacated both
buildings on the Property at the expiration of its lease on March 31, 1997.
One building containing 24,972 square feet has been re-leased to Edge
Semiconductor effective April 1, 1997.
(9) Does not include Navajo Shopping Center and the development Properties
currently under construction.
S-7
<PAGE> 8
THE OFFERING
Common Stock offered
hereby....................... 5,500,000 shares of Common Stock
Common Stock to be
outstanding after the
Offering................... 22,596,452 shares of Common Stock(1)
Use of proceeds from the
Offering..................... To repay a portion of the indebtedness incurred
in connection with the Recent Acquisitions.
NYSE symbol.................. "BPP"
- ---------------
(1) Excludes 43,373 shares of Common Stock that may be issuable upon exchange of
outstanding limited partnership units issued in connection with the
acquisition of five Properties, including one of the Martin Projects. Up to
1,870,000 additional shares of Common Stock may become issuable upon
exchange of limited partnership units that may be issued in connection with
the development of the five remaining Martin Projects. See "Related Party
Transactions." Also excludes 1,800,000 shares reserved for issuance upon the
exercise of options under the Company's stock option plan, under which
options to acquire 1,522,187 shares are currently outstanding.
S-8
<PAGE> 9
SUMMARY FINANCIAL AND OTHER DATA
The Company's consolidated summary financial and other data is presented on
an historical basis as of and for each of the five years in the period ended
December 31, 1996, and on a pro forma basis as of and for the year ended
December 31, 1996. The historical consolidated summary financial and other data
set forth below (other than data regarding GLA, number of properties, occupancy
rate and total market equity) has been derived from the consolidated financial
statements of the Company which have been audited by Deloitte & Touche LLP,
independent auditors. The historical consolidated summary financial and other
data should be read in conjunction with "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and the Company's consolidated
financial statements and notes thereto included or incorporated by reference in
this Prospectus Supplement and the accompanying Prospectus.
The following pro forma operating data and pro forma other data with
respect to funds from operations ("FFO"), EBIDA and the ratio of FFO before
interest expense to interest expense give effect to the following transactions
as if they had occurred on January 1, 1996: (i) the acquisition of Ladera
Shopping Center ("Ladera") (which occurred in July 1996); (ii) the consummation
of the Recent Acquisitions (which were completed on or after December 31, 1996),
(iii) the redemption of the Company's 8 1/2% convertible debentures due 2002
(the "Convertible Debentures"), which occurred in November 1996, (iv) the
consummation of the Offering and the application of the estimated net proceeds
therefrom as described under "Use of Proceeds," (v) the sale of interests in
five properties (which occurred in 1996), and (vi) certain other transactions
described in the pro forma condensed consolidated financial statements included
elsewhere herein. The following pro forma balance sheet data and pro forma other
data with respect to GLA, number of properties and occupancy rate give effect to
the following transactions as if they had occurred on December 31, 1996: (i) the
recent acquisition of nine Properties, (ii) the consummation of the Offering and
the application of the estimated net proceeds therefrom as described under "Use
of Proceeds," and (iii) certain other transactions described in the pro forma
condensed consolidated financial statements included elsewhere herein. The
consolidated summary pro forma financial and other data set forth below should
be read in conjunction with "Pro Forma Condensed Consolidated Financial
Statements" (including the notes thereto), "Management's Discussion and Analysis
of Financial Condition and Results of Operations," the consolidated financial
statements and notes thereto of the Company, and the financial statements of the
Downey Portfolio and the BRE Portfolio included or incorporated by reference in
this Prospectus Supplement and the accompanying Prospectus.
The consolidated summary pro forma financial and other data set forth below
are subject to a number of estimates, assumptions and other uncertainties, and
do not purport to be indicative of the actual financial position or results of
operations that would have occurred had the transactions and events reflected
therein in fact occurred on the dates specified, nor do such consolidated
summary pro forma financial and other data purport to be indicative of the
results of operations or financial condition that may be achieved in the future.
S-9
<PAGE> 10
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------------------
PRO
FORMA(1) ACTUAL
---------- ------------------------------------------------------------
1996 1996 1995 1994 1993 1992
---------- ---------- ---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C>
OPERATING DATA
Rents..................................... $60,588 $46,864 $ 48,188 $51,026 $40,410 $26,738
Interest.................................. 442 450 481 361 769 1,287
------- ------- -------- ------- ------- -------
Total Revenues........................ 61,030 47,314 48,669 51,387 41,179 28,025
------- ------- -------- ------- ------- -------
Interest.................................. 14,811 10,744 11,960 11,582 10,483 11,208
Rental Operating Costs.................... 16,640 12,603 12,067 12,181 9,192 6,352
Provision for Bad Debt.................... 410 410 972 302 373 727
General and Administrative................ 2,415 2,415 3,084 2,194 1,855 1,487
Depreciation and Amortization............. 13,731 11,250 13,117 11,964 9,430 7,193
Impairments/Writedowns of Assets.......... 22,420
------- ------- -------- ------- ------- -------
Total Costs and Expenses.............. 48,007 37,422 63,620 38,223 31,333 26,967
------- ------- -------- ------- ------- -------
Income (Loss) from Operations Before Gain
on Sales of Real Estate, Distribution to
Minority Interest Holders, Income from
Unconsolidated Subsidiaries and
Extraordinary Item...................... 13,023 9,892 (14,951) 13,164 9,846 1,058
Gain on Sales of Real Estate.............. 2,298 2,298 2,233
Distribution to Minority Interest
Holders................................. (37) (35)
Income from Unconsolidated Subsidiaries... 654
------- ------- -------- ------- ------- -------
Income (Loss) Before Extraordinary Item... 15,938 12,155 (12,718) 13,164 9,846 1,058
Extraordinary Loss From Early
Extinguishment of Debt.................. (884) (884)
------- ------- -------- ------- ------- -------
Net Income (Loss)......................... $15,054 $11,271 $(12,718) $13,164 $ 9,846 $ 1,058
======= ======= ======== ======= ======= =======
Per Share Data:
Weighted Average Shares Outstanding....... 22,584,498 17,084,498 17,016,354 15,731,552 12,767,606 8,292,030
Income (Loss) Before Extraordinary Item... $ 0.71 $ 0.71 $ (0.75) $ 0.84 $ 0.77 $ 0.13
Net Income (Loss)......................... 0.67 0.66 (0.75) 0.84 0.77 0.13
Cash Dividends............................ 1.00 1.00 1.33 1.415 1.39 1.36
OTHER DATA
Funds From Operations(2).................. 26,860 20,466 19,914 24,259 18,597 7,461
EBIDA(3).................................. 42,182 31,851 32,546 36,710 29,759 19,459
Ratio of FFO Before Interest Expense to
Interest Expense(4)..................... 2.81x 2.90x 2.67x 3.09x 2.77x 1.67x
Total Square Footage of GLA of Properties
at End of Period........................ 4,514,777 2,945,206 3,242,087 3,153,012 3,130,436 2,302,296
Number of Properties at End of Period..... 32(5) 23(5) 23 24 24 22
Occupancy Rate at End of Period(6)........ 89% 87% 94% 95% 96% 95%
</TABLE>
S-10
<PAGE> 11
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
-------------------------------------------------------------------
PRO
FORMA(1) ACTUAL
-------- -------------------------------------------------------
1996 1996 1995 1994 1993 1992
-------- -------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA
Real Estate (Before Accumulated
Depreciation)........................... $496,962 $389,634 $367,088 $387,959 $383,863 $271,753
Total Assets.............................. 471,241 356,195 327,770 358,022 360,262 259,790
Total Indebtedness........................ 229,789 178,452 142,806 141,499 162,607 159,252
Minority Interest......................... 455 434 434
Total Stockholders' Equity................ 237,413 173,725 179,160 212,771 193,089 93,879
Total Market Equity(7).................... 279,631 256,447 164,496 215,542 256,729 140,302
</TABLE>
- ---------------
(1) See "Pro Forma Condensed Consolidated Financial Statements."
(2) The Company considers FFO to be a relevant supplemental measure of the
performance of an equity REIT since such measure does not recognize
depreciation and certain amortization expenses as operating expenses.
Management believes that reductions for these charges are not meaningful in
evaluating income-producing real estate. FFO means net income (loss)
(computed in accordance with generally accepted accounting principles
("GAAP")), before gains (or losses) from debt restructuring and sales of
property, plus depreciation of real property. FFO does not represent cash
generated from operating activities in accordance with GAAP and is not
necessarily indicative of cash available to fund cash needs and should not
be considered as an alternative to net income as an indicator of the
Company's operating performance or as an alternative to cash flow as a
measure of liquidity. FFO as presented here may not be comparable to
similarly titled measures used by other companies.
(3) EBIDA means earnings before interest expense, depreciation and amortization,
gains (or losses) on sales of real estate, and extraordinary items plus
income from unconsolidated subsidiaries. EBIDA does not represent net income
or cash flows from operating, financing and investing activities as defined
by GAAP and does not purport to indicate that cash flows will be sufficient
to fund cash needs. It should not be considered as an alternative to net
income as an indicator of the Company's operating performance or to cash
flows as a measure of liquidity.
(4) The numerator used in calculating the ratio of FFO before interest expense
to interest expense is the sum of FFO plus interest expense. The Company
believes that in addition to the ratio of earnings to fixed charges set
forth in the accompanying Prospectus, this ratio provides a useful measure
of a REIT's ability to service its debt because of the exclusion of non-cash
items such as depreciation and amortization from the definition of FFO. This
ratio differs from a GAAP-based ratio of earnings to fixed charges and
should not be considered as an alternative to that ratio.
(5) Includes interests in three properties under development as of December 31,
1996. Excludes Village Station. See "Recent Events -- Other Events."
(6) Reflects occupancy rate only for the portion of the properties owned by the
Company.
(7) Total market equity is presented as of the end of the period and is
calculated as the product of (i) the total number of shares of Common Stock
outstanding multiplied by (ii) the closing price of the Common Stock on the
NYSE on the last day of the period or, in the case of pro forma total market
equity, the last reported sale price of the Common Stock on April 28, 1997
of $12.375 per share.
S-11
<PAGE> 12
RECENT EVENTS
RECENT ACQUISITIONS
From and including December 31, 1996, the Company has completed the
acquisition of two portfolios containing a total of seven Properties and three
additional Properties containing, in the aggregate, approximately 1,646,315
square feet of Company-owned GLA. The Company's acquisition cost for the Recent
Acquisitions was, in the aggregate, approximately $146.8 million. The weighted
average historical yield on the Recent Acquisitions is 10.11%. The Company
believes that its internal capabilities provide it with an opportunity to
achieve yields higher than historical yields for these Properties. There can be
no assurance, however, that the Company will be able to do so. The following
table and Property descriptions set forth information regarding the Recent
Acquisitions:
<TABLE>
<CAPTION>
ACQUISITION
COMPANY- HISTORICAL COST/
ACQUISITION TOTAL OWNED PERCENT NET OPERATING ACQUISITION HISTORICAL SQUARE
PROPERTY DATE GLA GLA OCCUPIED(1) INCOME(2) COST(3) YIELD(4) FOOT(5)
- ---------------------- ----------- --------- --------- ----------- ------------- ------------ ---------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Margarita Plaza(6).... 12/31/96 76,744 76,744 100% $ 945,000(7) $ 9,568,000 9.88%(7) $124.67
Downey Portfolio...... 1/31/97 964,557 646,798 91 5,307,000 52,100,000 10.19 80.55
Foothill Plaza........ 2/28/97 52,315 52,315 86 710,000(7) 6,202,000 11.45(7) 118.55
Crenshaw Imperial
Shopping Center..... 4/3/97 151,151 151,151 99 917,000(7) 9,080,000 10.10(7) 60.07
BRE Portfolio......... 4/4/97 888,184 719,307 89 6,962,000 69,800,000 9.97 97.04
--------- --------- --- ----------- ------------ ----- -------
Total/Weighted
Average......... 2,132,951 1,646,315 91% $14,841,000 $146,750,000 10.11% $ 89.14
========= ========= === =========== ============ ===== =======
</TABLE>
- ---------------
(1) Based on occupancy at April 1, 1997. Data reflects occupancy of the
Company-owned portion only.
(2) Represents historical net operating income for 1996 for the Company-owned
portion.
(3) Includes the Company's estimated closing costs.
(4) Defined as historical net operating income for 1996 divided by acquisition
cost.
(5) Defined as acquisition cost divided by Company-owned GLA.
(6) The Company currently owns a 25% interest in this Property. See
"-- Financings -- Joint Ventures." Data is for this Property as a whole.
(7) The historical net operating income for 1996 for this Property was derived
solely from financial information provided by the prior owner of the
Property.
Margarita Plaza, Huntington Park is a 76,744 square foot Market/Drug center
anchored by a Food-4-Less supermarket. The Property is located southeast of Los
Angeles. The Property was 100% occupied as of April 1, 1997. The Company's joint
venture partner in Margarita Plaza is California Urban Investment Partners
("CUIP"). See " -- Financings -- Joint Ventures."
The Downey Portfolio. On January 31, 1997, the Company completed the
acquisition of interests in four retail Properties from an affiliate of Downey
Savings and Loan, an institutional lender. The Company structured the
acquisition of these Properties through subsidiary partnerships which issued
1,495 limited partnership units (convertible into an aggregate of 1,495 shares
of Common Stock) in connection with the acquisition. The Downey Portfolio
consists of the following Properties:
Valley Central Shopping Center, Lancaster, a 610,396 square-foot
Promotional and Entertainment center (as hereinafter defined) anchored by
Wal-Mart, HomeBase, Circuit City, Staples, Michael's, Marshall's, Cinemark
Theaters, Home Furniture and CostCo (not owned), of which the Company owns
480,092 square feet. The Property is located adjacent to the Antelope
Valley Freeway, northeast of Los Angeles. The Company-owned portion of the
Property was 97% occupied as of April 1, 1997.
Cameron Park Shopping Center, Cameron Park, a 97,434 square-foot
Market/Drug center anchored by a Safeway supermarket. The Property is
located along Highway 50, east of Sacramento. The Property was 78% occupied
as of April 1, 1997.
Ontario Village Shopping Center, Ontario, a 97,149 square-foot
Market/Drug center, anchored by Stater Brothers (not owned) and Pic'n'Save
(not owned), of which the Company owns 39,954 square feet. The Property is
located just west of downtown Ontario, midway between Interstate 10 and the
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<PAGE> 13
Pomona Freeway, northeast of Los Angeles. The Company-owned portion of the
Property was 78% occupied as of April 1, 1997.
West Lancaster Plaza, Lancaster, a 159,578 square foot Market/Drug
center anchored by Albertson's Supermarket (not owned) of which the Company
owns 29,318 square feet. The Property is located in downtown Lancaster,
northeast of Los Angeles. The Company-owned portion of the Property was 57%
occupied as of April 1, 1997.
Foothill Plaza, Los Altos is a 52,315 square foot Market/Drug center
anchored by Payless Drugs. The Property is located at the intersection of
Interstate 280 and the Foothill Expressway on the San Francisco peninsula. The
Property was 86% occupied as of April 1, 1997.
Crenshaw Imperial Plaza, Inglewood is a 151,151 square foot Market/Drug
center anchored by Ralphs and Thrifty Drugs. The Property is located at the
intersection of Crenshaw Avenue and Imperial Boulevard east of Los Angeles
International Airport. The Property was 99% occupied as of April 1, 1997.
BRE Portfolio. On April 4, 1997, the Company completed the acquisition of
a portfolio of three properties from BRE Properties, Inc. The BRE Portfolio
consists of the following Properties:
Fremont Hub, Fremont, a 661,140 square foot Market/Drug and
Promotional center, of which the Company owns 492,263 square feet. The
center contains a Market/Drug component and a Promotional component. The
Market/Drug component is anchored by Safeway and Longs Drugs. The
Promotional component is anchored by Home Express, Ross, Old Navy, Office
Max, Michael's, General Cinema and Montgomery Ward (not owned). The
Property is located at the intersection of Fremont Boulevard and Mowry
Avenue in the City of Fremont, northeast of San Jose. The Company-owned
portion of the Property was 88% occupied as of April 1, 1997.
Central Shopping Center, Ventura, a 62,314 square foot Market/Drug
center anchored by Ralphs. The Property is located at the intersection of
Telephone Road and Petit Road, in the City of Ventura, north of Los
Angeles. The Property was 87% occupied as of April 1, 1997.
Santa Fe Springs Plaza, Santa Fe Springs, a 164,730 square foot
Market/Drug center anchored by Ralphs. The Property is located at the
intersection of Telegraph and Carminta Roads in the City of Santa Fe
Springs, southeast of Los Angeles. The Property was 93% occupied as of
April 1, 1997.
The Company believes that its current and target markets continue to
provide opportunities to purchase properties at attractive prices that offer the
Company opportunities to add value through its proactive property management and
rehabilitation skills. The Company is in active negotiations with a number of
sellers regarding additional acquisitions.
REHABILITATION AND DEVELOPMENT
Currently, the Company has the following rehabilitation project underway:
Navajo Shopping Center, San Diego. The Company is investing approximately
$4.1 million in the expansion of its Navajo Shopping Center from 81,435 square
feet (prior to the rehabilitation) to 102,559 square feet to accommodate a
44,180 square foot Albertson's supermarket as a new anchor tenant. The entire
Property will also receive architectural renovations and upgraded landscaping,
lighting and signage. The redevelopment is intended to increase the stability of
the Property's rental revenues by increasing the percentage of GLA devoted to
anchor tenants from 20% to 59%, and by creating an environment more conducive to
attracting and retaining tenants.
The Company is currently at various stages of development on the following
Martin Projects (see "The Company -- The Martin Transactions" and "Related Party
Transactions"):
Gateway Retail Center, Marin City. The Company has agreed to acquire
Gateway Retail Center, a substantially completed 185,949 square foot Market/Drug
center anchored by FoodsCo, Longs Drugs, Ross, and PetsMart. The property is
located in southern Marin County, California on Interstate 101, the main north-
south highway through Marin County. The project has an estimated total cost of
$22.0 million. One building containing 11,000 square feet remains to be
constructed, which the Company expects will occur prior to the end of 1997.
Title to this property is currently held by an affiliate of The Martin Group and
is expected to be transferred to the Company upon completion of construction.
However, unless otherwise expressly stated or
S-13
<PAGE> 14
the context otherwise requires, information in this Prospectus Supplement
(including information as to Company-owned GLA) assumes that this Property is
owned by the Company. See "Related Party Transactions."
Hilltop Plaza, Richmond. The Company has recently completed the first
phase ("Phase I") of its Hilltop Plaza development project located adjacent to
Interstate 80 in the City of Richmond in the San Francisco Bay area. Hilltop
Plaza is a Promotional center of approximately 251,366 square feet anchored by
Circuit City, Barnes & Noble, Ross, PetsMart and Office Max. Phase I contains
143,178 square feet of anchor tenant GLA and 36,839 square feet of additional
retail space. The second phase ("Phase II") is expected to contain approximately
71,349 square feet of additional GLA. The project has an estimated total cost
for both Phase I and Phase II of $35.4 million. The Company expects to complete
Phase II in mid-1998.
1000 Van Ness, San Francisco. In September 1996, the Company started the
redevelopment of the 1000 Van Ness building and adjacent new construction in the
city block bounded by Van Ness Avenue (Route 101), O'Farrell, Polk and Myrtle
Streets in downtown San Francisco. At completion, the mixed-use facility is
expected to contain an approximately 131,500 square foot Entertainment center
anchored by AMC Theatres and a 450 car parking garage, both owned by the
Company, and a residential component owned by a residential developer. The total
project cost associated with the portion to be owned by the Company is estimated
to be $53 million. Completion is currently scheduled for mid-1998.
Downtown Pleasant Hill, Pleasant Hill. The Company also has development
rights to purchase various parcels of land and construct a Promotional and
Entertainment center containing approximately 360,000 square feet of GLA as part
of the City of Pleasant Hill's Downtown Pleasant Hill project. The project is
located on Highway 680 in Contra Costa County, east of San Francisco. The
Company estimates that the Company's total investment required to develop this
project after the sale of various land parcels to other developers for
residential development to be approximately $60 million. The Company anticipates
that construction will begin by year-end 1997 and that the project will be
completed during 1999.
As discussed in the accompanying Prospectus under "Risk
Factors -- Acquisition and Development Activities," there can be no assurance
that projects currently under development will be completed as currently
planned, by the dates currently scheduled or for the amounts currently budgeted,
the occurrence of any of which could have a material adverse effect on the
Company. Likewise, there can be no assurance that development projects currently
under consideration or negotiation will be initiated or completed.
FINANCINGS
Credit Facility. In November 1996, the Company arranged a new $135 million
credit facility (the "Credit Facility") with Nomura Asset Capital Corporation.
Of the total amount, $90 million is secured and $45 million is unsecured. At
April 7, 1997, borrowings of approximately $105 million were outstanding under
the Credit Facility, of which $60 million were secured by mortgages on seven of
the Properties and the remainder was unsecured. The Credit Facility may be used
for acquisitions, for working capital and for general corporate purposes. The
Credit Facility is scheduled to mature in November 1998, with a one-year
extension option available. The secured portion of the Credit Facility carries
an interest rate equal to the London Inter-Bank Offer Rate ("LIBOR") plus 1.65%,
and the unsecured portion of the Credit Facility carries an interest rate equal
to LIBOR plus 1.75%.
In order to facilitate the closing of the acquisition of the BRE Portfolio
on April 4, 1997, the Company negotiated a temporary increase in its Credit
Facility of approximately $70 million (the "Bridge Financing"). Of the total
amount, $42 million is secured by mortgages on the three properties so acquired
and $28 million is unsecured. The secured portion of the Bridge Financing
carries an interest rate equal to LIBOR plus 1.65%, and the unsecured portion of
the Bridge Financing carries an interest rate equal to LIBOR plus 2.50%. The
Bridge Financing will mature sixty days from the date of funding and such
maturity may be extended for ninety additional days. See "Use of Proceeds" with
respect to the Company's intention to repay the Bridge Financing.
S-14
<PAGE> 15
In November 1996, the Company used borrowings of approximately $26.0
million under the new Credit Facility to redeem the $25.7 million principal
amount of its Convertible Debentures remaining outstanding, and to pay interest
accrued thereon.
Joint Ventures. The Company considers joint venture investors as an
alternative source of financing. The Company has agreed to joint venture with
CUIP, a joint investment partnership of the California Public Employees
Retirement System, Johnson Development Company and MacFarlane Partners, an
investment advisor owned by Victor B. MacFarlane, a former Director of the
Company. The Company has been advised that Mr. MacFarlane holds an approximate
1 1/2% indirect ownership interest in CUIP.
In December 1996, the Company purchased Margarita Plaza ("Margarita") in
Huntington Park, California. In February 1997, CUIP purchased a 75% interest in
the Property and reimbursed the Company for 75% of its acquisition cost
(approximately $7.2 million). The Company retains a 25% interest in the
Property, and will receive customary fees from the joint venture for providing
property management and leasing services for this Property.
The Company anticipates that during the second quarter of 1997 CUIP will
pay the Company approximately $15.2 million to fund CUIP's 75% interest in
Ladera. The Company will retain a 25% interest in Ladera and will receive
customary fees from the joint venture for providing property management and
leasing services for this Property. However, there can be no assurance that the
sale of this joint venture interest will occur as planned.
Unless otherwise expressly stated or the context otherwise requires,
information set forth herein regarding each of Margarita and Ladera (including
information as to net operating income, base rent, historical yield and
Company-owned GLA) relates to the Property as a whole.
The Company may also enter into joint ventures for selected other
properties that it may acquire or develop. See "Risk Factors -- Investments in
Joint Ventures" in the accompanying Prospectus.
OTHER EVENTS
Plaza Rancho Carmel, San Diego. On January 31, 1997, the Company sold a
9,744 square foot parcel of this 36,722 square foot unanchored shopping center
located in San Diego for $735,000. Prior to the sale, Plaza Rancho Carmel was
72.5% occupied; occupancy of the portion that the Company continues to own was
82% as of April 1, 1997. The Company recognized no gain or loss on the sale.
Village Station, La Mesa. Village Station is a 57,673 square foot shopping
center located in La Mesa, which was acquired by the Company in 1984. The $3.9
million non-recourse mortgage on the Property matured in December 1996. The
Company has determined to deed it to the mortgagee in lieu of foreclosure or
alternatively not to contest the foreclosure of the mortgage. The Company
estimates that any gain or loss associated with the disposition of this Property
will not be significant.
PROPOSED REINCORPORATION
The Company's Board of Directors has voted to recommend at the 1997 Annual
Meeting of Shareholders of the Company that the shareholders approve the change
of the Company's state of incorporation from California to Maryland. If
approved, the reincorporation will be effected through a merger of the Company
into a newly-formed wholly owned Maryland subsidiary of the Company. If
implemented, the reincorporation would result in no change of the Company's
name, business, operations or management; and each outstanding share of the
Company's Common Stock (including the Common Stock issued in the Offering) would
automatically be converted into a share of the Maryland corporation's common
stock. The provisions of the Maryland General Corporation Law and of the
proposed charter and bylaws of the Maryland corporation differ in certain
respects from the provisions of the California General Corporation Law ("CGCL")
and of the current articles of incorporation and bylaws of the Company that may
affect the rights of the shareholders. For example, shareholders of the Company
have authority (which they have never exercised) to use cumulative voting in the
election of Directors, while no such authority would exist for shareholders
under the proposed charter of the Maryland corporation. The principal reason for
the reincorporation is to eliminate a possible
S-15
<PAGE> 16
limitation contained in the CGCL on the legal authority of the Company to pay
distributions necessary to ensure the Company's continued qualification as REIT
under the Internal Revenue Code of 1986, as amended (the "Code"). Only
shareholders of record on March 14, 1997 will be entitled to vote at the 1997
Annual Meeting of Shareholders. Accordingly, investors will not be permitted to
vote the shares of Common Stock offered hereby in connection with the proposed
reincorporation. In addition, no dissenters' rights or rights of appraisal will
be available to the Company's shareholders, including investors purchasing
shares in this Offering, in connection with the proposed reincorporation. See
"Risk Factors -- Distributions to Shareholders" and "-- Proposed
Reincorporation" and "Description of Common Stock -- Proposed Reincorporation of
the Company" in the accompanying Prospectus.
S-16
<PAGE> 17
USE OF PROCEEDS
The net proceeds to the Company from the sale of the Common Stock offered
hereby are expected to be approximately $63.7 million (approximately $73.4
million if the Underwriters' over-allotment option is exercised in full).
The Company will use net proceeds to repay indebtedness outstanding under
the Bridge Financing (which indebtedness aggregated approximately $70 million at
the date of this Prospectus Supplement), and any remaining net proceeds will be
applied to repay borrowings under the Credit Facility incurred in connection
with the Recent Acquisitions. Pending application for such purposes, the net
proceeds may be invested in short term investments. To the extent that the net
proceeds are not sufficient to repay the Bridge Financing in full, the Company
intends to use borrowings under the Credit Facility or other available cash to
repay the balance of the Bridge Financing.
PRICE RANGE OF COMMON STOCK AND DISTRIBUTIONS
The Company's Common Stock is listed on the NYSE under the symbol "BPP."
The following table sets forth the high and low sale prices for Common Stock as
reported on the NYSE Composite Tape and distributions declared by the Company
for each quarterly period indicated.
<TABLE>
<CAPTION>
DIVIDENDS
DECLARED
QUARTERLY PERIOD HIGH LOW PER SHARE
--------------------------------------------------------- ------- ------- ----------
<S> <C> <C> <C>
1995
First quarter.......................................... $13.375 $11.875 $.36
Second quarter......................................... 13.500 11.625 .36
Third quarter.......................................... 14.500 11.375 .36
Fourth quarter......................................... 11.875 9.500 .25
1996
First quarter.......................................... 11.125 9.750 .25
Second quarter......................................... 11.875 10.250 .25
Third quarter.......................................... 13.000 11.000 .25
Fourth quarter......................................... 15.000 11.875 .25
1997
First quarter.......................................... 15.250 12.750 .25
Second quarter (through April 28, 1997)................ 13.375 11.750
</TABLE>
The last reported sale price of the Common Stock on the NYSE as of a recent
date is set forth on the cover page of this Prospectus Supplement. As of
December 31, 1996, there were approximately 3,000 record holders of Common
Stock. The transfer agent and registrar for the Common Stock is First Chicago
Trust Company of New York.
Future distributions by the Company will be at the discretion of the Board
of Directors and will depend upon the actual FFO of the Company, its financial
condition and results of operations, capital requirements, the annual
distribution requirements under the REIT provisions of the Code, restrictions in
debt instruments, applicable legal restrictions and such other factors as the
Board of Directors deems relevant. In that regard, the Credit Facility currently
provides that distributions to shareholders of the Company may not exceed 95% of
FFO, but that the Company may make distributions necessary to preserve its
qualifications as a REIT.
In addition, certain provisions of the CGCL could limit the Company's
ability to pay or prevent the Company from paying dividends on its Common Stock.
See "Risk Factors -- Distributions to Shareholders" in the accompanying
Prospectus. Consequently, the Board of Directors of the Company is proposing to
reincorporate the Company in Maryland. See "Risk Factors -- Proposed
Reincorporation" and "Description of Common Stock -- Proposed Reincorporation of
the Company" in the accompanying Prospectus.
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<PAGE> 18
One of the Company's financial objectives is to retain a greater portion of
its FFO for investment in its portfolio and other general corporate purposes. In
furtherance of this objective, the Company reduced the amount of its regular
quarterly dividend from $.36 per share to $.25 per share, commencing in the
fourth quarter of 1995, which contributed to the increase in retained FFO shown
in the following table.
<TABLE>
<CAPTION>
DIVIDENDS DIVIDENDS
DECLARED DECLARED
ON COMMON AS A PERCENTAGE RETAINED
STOCK FFO(1) OF FFO FFO(2)
--------- ------- --------------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Year ended December 31, 1995...................... $22,564 $19,914 113% $ --
Year ended December 31, 1996...................... 17,113 20,466 84 3,353
</TABLE>
- ---------------
(1) See footnote (2) to "Prospectus Supplement Summary -- Summary Financial and
Other Data" for a definition of FFO.
(2) Retained FFO is calculated by subtracting dividends declared on Common Stock
from FFO. For the year ended December 31, 1995, dividends declared on Common
Stock exceeded FFO by $2,650,000.
S-18
<PAGE> 19
CAPITALIZATION
The following table sets forth the consolidated capitalization of the
Company as of December 31, 1996 and on a pro forma basis as if the Offering and
the application of the estimated net proceeds therefrom as described under "Use
of Proceeds," certain Recent Acquisitions and certain other transactions
described in the Company's pro forma condensed consolidated financial statements
and notes thereto included elsewhere herein had been completed on December 31,
1996. The following pro forma data does not purport to be indicative of the
actual capitalization that would have occurred had the transactions and events
reflected therein in fact occurred on the date specified. The capitalization
table should be read in conjunction with "Pro Forma Condensed Consolidated
Financial Statements" and the notes thereto, "Management's Discussion and
Analysis of Financial Condition and Results of Operations," the Company's
historical consolidated financial statements and notes thereto, and the
financial statements of the Downey Portfolio and the BRE Portfolio included or
incorporated by reference in this Prospectus Supplement and the accompanying
Prospectus.
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
1996
----------------------
ACTUAL PRO FORMA
-------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Debt:
Mortgage loans...................................................... $105,552 $ 139,932(1)
Credit Facility..................................................... 72,900 89,857(2)
-------- --------
Total debt............................................................ 178,452(3) 229,789(3)
-------- --------
Minority interest..................................................... 434 455
-------- --------
Stockholders' equity:
Preferred Stock, no par value; 5,000,000 shares authorized, no
shares issued or outstanding
Common Stock, no par value; 40,000,000 shares authorized; 17,096,452
and 22,596,452, respectively, issued and outstanding(4).......... 262,340 326,028
Dividends paid in excess of net income.............................. (88,615) (88,615)
-------- --------
Total stockholders' equity.................................. 173,725 237,413
-------- --------
Total capitalization........................................ $352,611(3) $ 467,657(3)
======== ========
</TABLE>
- ---------------
(1) The following summarizes the pro forma adjustments to mortgage loans
(dollars in thousands):
<TABLE>
<S> <C>
Balance at December 31, 1996..................................................... $105,552
Add: Additional borrowings incurred subsequent to December 31, 1996 in
connection with Recent Acquisitions....................................... 34,380
--------
Total................................................................. $139,932
========
</TABLE>
(2) The following summarizes the pro forma adjustments to the Company's Credit
Facility, including the Bridge Financing (dollars in thousands):
<TABLE>
<S> <C>
Balance at December 31, 1996..................................................... $ 72,900
Add: Additional borrowings incurred subsequent to December 31, 1996 in
connection with Recent Acquisitions....................................... 103,035
Less: Estimated net proceeds from the Offering.................................. (63,688)
Less: Proceeds from joint venture financings.................................... (22,390)
--------
Total................................................................. $ 89,857
========
</TABLE>
(3) Includes $17,275,000 of debt maturing in one year.
(4) Excludes 43,373 shares of Common Stock that may be issuable upon exchange of
outstanding limited partnership units issued in connection with the
acquisition of five Properties, including one of the Martin Projects. Up to
1,870,000 additional shares of Common Stock may become issuable upon
exchange of limited partnership units that may be issued in connection with
the development of the five remaining Martin Projects. See "Related Party
Transactions." Also excludes 1,800,000 shares reserved for issuance upon the
exercise of options under the Company's stock option plan, under which
options to acquire 1,522,187 shares are currently outstanding.
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<PAGE> 20
SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA
The Company's selected consolidated financial and other data set forth
below (other than data regarding GLA, number of properties, occupancy rate and
total market equity) has been derived from the consolidated financial statements
of the Company which have been audited by Deloitte & Touche LLP, independent
auditors. The selected consolidated financial and other data should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the Company's consolidated financial statements
and notes thereto included or incorporated by reference in this Prospectus
Supplement and the accompanying Prospectus.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------------------------
1996 1995 1994 1993 1992
-------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
OPERATING DATA
Rents....................................... $ 46,864 $ 48,188 $ 51,026 $ 40,410 $ 26,738
Interest.................................... 450 481 361 769 1,287
-------- -------- -------- -------- --------
Total Revenues.......................... 47,314 48,669 51,387 41,179 28,025
-------- -------- -------- -------- --------
Interest.................................... 10,744 11,960 11,582 10,483 11,208
Rental Operating Costs...................... 12,603 12,067 12,181 9,192 6,352
Provision for Bad Debt...................... 410 972 302 373 727
General and Administrative.................. 2,415 3,084 2,194 1,855 1,487
Depreciation and Amortization............... 11,250 13,117 11,964 9,430 7,193
Impairments/Writedowns of Assets............ 22,420
-------- -------- -------- -------- --------
Total Costs and Expenses................ 37,422 63,620 38,223 31,333 26,967
-------- -------- -------- -------- --------
Income (Loss) from Operations Before Gain on
Sales of Real Estate, Distribution to
Minority Interest Holders and
Extraordinary Item........................ 9,892 (14,951) 13,164 9,846 1,058
Gain on Sales of Real Estate................ 2,298 2,233
Distribution to Minority Interest Holders... (35)
-------- -------- -------- -------- --------
Income (Loss) Before Extraordinary Item..... 12,155 (12,718) 13,164 9,846 1,058
Extraordinary Loss From Early Extinguishment
of Debt................................... (884)
-------- -------- -------- -------- --------
Net Income (Loss)........................... $ 11,271 $(12,718) $ 13,164 $ 9,846 $ 1,058
======== ======== ======== ======== ========
Per Share Data:
Weighted Average Shares Outstanding......... 17,084,498 17,016,354 15,731,552 12,767,606 8,292,030
Income (Loss) Before Extraordinary Item..... $ 0.71 $ (0.75) $ 0.84 $ 0.77 $ 0.13
Net Income (Loss)........................... 0.66 (0.75) 0.84 0.77 0.13
Cash Dividends.............................. 1.00 1.33 1.415 1.39 1.36
OTHER DATA
Funds From Operations(1).................... 20,466 19,914 24,259 18,597 7,461
EBIDA(2).................................... 31,851 32,546 36,710 29,759 19,459
Ratio of FFO Before Interest Expense to
Interest Expense(3)....................... 2.90x 2.67x 3.09x 2.77x 1.67x
Total Square Footage of GLA of Properties at
End of Period............................. 2,945,206 3,242,087 3,153,012 3,130,436 2,302,296
Number of Properties at End of Period....... 23(4) 23 24 24 22
Occupancy Rate at End of Period(5).......... 87% 94% 95% 96% 95%
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
------------------------------------------------------------
1996 1995 1994 1993 1992
-------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA
Real Estate (Before Accumulated
Depreciation)............................. $389,634 $367,088 $387,959 $383,863 $271,753
Total Assets................................ 356,195 327,770 358,022 360,262 259,790
Total Indebtedness.......................... 178,452 142,806 141,499 162,607 159,252
Minority Interest........................... 434 434
Total Stockholders' Equity.................. 173,725 179,160 212,771 193,089 93,879
Total Market Equity(6)...................... 256,447 164,496 215,542 256,729 140,302
</TABLE>
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<PAGE> 21
- ---------------
(1) See footnote (2) to "Prospectus Supplement Summary -- Summary Financial and
Other Data" for a definition of FFO.
(2) See footnote (3) to "Prospectus Supplement Summary -- Summary Financial and
Other Data" for a definition of EBIDA.
(3) The numerator used in calculating the ratio of FFO before interest expense
to interest expense is the sum of FFO plus interest expense. The Company
believes that in addition to the ratio of earnings to fixed charges set
forth in the accompanying Prospectus, this ratio provides a useful measure
of a REIT's ability to service its debt because of the exclusion of non-cash
items such as depreciation and amortization from the definition of FFO. This
ratio differs from a GAAP-based ratio of earnings to fixed charges and
should not be considered as an alternative to that ratio.
(4) Includes interests in three properties under development as of December 31,
1996. Excludes Village Station. See "Recent Events -- Other Events."
(5) Reflects occupancy rate for Company-owned portion of the Properties only.
(6) Total market equity is presented as of the end of the period and is
calculated as the product of (i) the total number of shares of Common Stock
outstanding multiplied by (ii) the closing price of the Common Stock on the
NYSE on the last day of the period.
S-21
<PAGE> 22
PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The accompanying unaudited pro forma condensed consolidated statement of
income gives effect to the following transactions as if they had occurred on
January 1, 1996; (i) the acquisition of Ladera (which occurred in July 1996),
(ii) the acquisition of Margarita (which occurred in December 1996) and the
consummation of the other Recent Acquisitions (which were completed after
December 31, 1996), (iii) the redemption of the Convertible Debentures (which
occurred in 1996), (iv) the consummation of the Offering and the application of
the estimated net proceeds therefrom as described under "Use of Proceeds," (v)
the sale of interests in five properties (which occurred in 1996) and the
application of the proceeds therefrom to repay indebtedness, and (vi) the sale
of a 75% joint venture interest in each of Ladera and Margarita (one such sale
having occurred in February 1997, while the other such sale is pending) and the
application of the estimated proceeds therefrom to repay indebtedness. The
accompanying unaudited pro forma condensed consolidated balance sheet gives
effect to the following transactions as if they had occurred on December 31,
1996: (i) the acquisition of Foothill Plaza ("Foothill"), the Downey Portfolio,
Crenshaw Imperial Plaza ("Crenshaw") and the BRE Portfolio, which acquisitions
were completed after December 31, 1996, (ii) the consummation of the Offering
and the application of the estimated net proceeds therefrom as described under
"Use of Proceeds," and (iii) the sale of a 75% joint venture interest in each of
Ladera and Margarita and the application of the estimated proceeds therefrom to
repay indebtedness.
These pro forma condensed consolidated financial statements should be read
in conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations," the consolidated financial statements and notes
thereto of the Company, and the financial statements of the Downey Portfolio and
the BRE Portfolio included or incorporated by reference in this Prospectus
Supplement and the accompanying Prospectus.
The pro forma condensed consolidated financial statements are unaudited and
are subject to a number of estimates, assumptions and other uncertainties, and
do not purport to be indicative of the actual financial position or results of
operations that would have occurred had the transactions and events reflected
therein in fact occurred on the dates specified, nor do such financial
statements purport to be indicative of the results of operations or financial
condition that may be achieved in the future. In particular, although the
Company believes that it is probable that the pending sale of a 75% joint
venture interest in Ladera will be consummated, there can be no assurance in
that regard. Moreover, the historical financial information for Margarita,
Foothill and Crenshaw, three of the Recent Acquisitions, which was used in
preparing the pro forma condensed consolidated statement of income was provided
by the prior owners of those properties and there can be no assurance as to its
accuracy. In addition, because Ladera was acquired by the Company in July 1996,
the historical financial information for Ladera which was used in preparing the
pro forma condensed consolidated statement of income was prepared by annualizing
Ladera's results of operations for the five months ended December 31, 1996 and
therefore does not represent Ladera's actual historical results of operations
for the year ended December 31, 1996.
S-22
<PAGE> 23
PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
AS OF DECEMBER 31, 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
RECENT JOINT VENTURE
HISTORICAL(1) ACQUISITIONS(2) OFFERING(3) FINANCINGS(4) PRO FORMA
------------- --------------- ----------- ---------------- ----------
<S> <C> <C> <C> <C> <C>
ASSETS
Real Estate................................. $ 389,634 $ 137,182 $ -- $(29,854) $496,962
Less Accumulated Depreciation............... (48,978) (48,978)
-------- ------- -------- -------- --------
Real Estate - Net........................... 340,656 137,182 -- (29,854) 447,984
Investment in Unconsolidated Subsidiaries... 7,464 7,464
Cash and Cash Equivalents................... 4,095 4,095
Receivables - Net........................... 4,860 4,860
Other Assets................................ 6,584 254 6,838
-------- ------- -------- -------- --------
Total................................... $ 356,195 $ 137,436 $ -- $(22,390) $471,241
======== ======= ======== ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Accounts Payable and Other.................. $ 2,655 $ -- $ -- -- $ 2,655
Tenant Security Deposits.................... 929 929
Notes Payable............................... 105,552 34,380 139,932
Credit Facility............................. 72,900 103,035 (63,688) (22,390) 89,857
-------- ------- -------- -------- --------
Total Liabilities....................... 182,036 137,415 (63,688) (22,390) 233,373
-------- ------- -------- -------- --------
Minority Interest........................... 434 21 -- -- 455
-------- ------- -------- -------- --------
STOCKHOLDERS' EQUITY:
Common Stock................................ 262,340 63,688 326,028
Distributions Paid in Excess of Net
Income.................................... (88,615) (88,615)
-------- ------- -------- -------- --------
Total Stockholders' Equity.............. 173,725 -- 63,688 -- 237,413
-------- ------- -------- -------- --------
Total................................... $ 356,195 $ 137,436 $ -- $(22,390) $471,241
======== ======= ======== ======== ========
</TABLE>
- ---------------
(1) Reflects the historical condensed consolidated balance sheet of the Company
as of December 31, 1996.
(2) Reflects the acquisitions of Foothill, the Downey Portfolio, Crenshaw and
the BRE Portfolio, which were acquired by the Company after December 31,
1996, for an aggregate investment of approximately $137,182,000. The
acquisitions were funded with the assumption of $8,980,000 of mortgage loans
and a new $25,400,000 mortgage loan, with the remaining funds provided by
borrowings under the Company's Credit Facility, including the Bridge
Financing. Margarita was acquired by the Company on December 31, 1996 and is
included in the Historical column.
(3) Reflects the estimated net proceeds from the Offering and the application of
such estimated net proceeds as described under "Use of Proceeds."
(4) Reflects the Company's sale of a 75% interest in each of Ladera and
Margarita for approximately $22,390,000 and the use of the estimated
proceeds therefrom to repay borrowings under the Company's Credit Facility.
S-23
<PAGE> 24
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF INCOME
FOR THE YEAR ENDED DECEMBER 31, 1996
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
REDEMPTION OF
RECENT CONVERTIBLE REAL ESTATE JOINT VENTURE
HISTORICAL(1) ACQUISITIONS(2) DEBENTURES(3) OFFERING(4) SALES(5) FINANCINGS(6) PRO FORMA
------------- --------------- ------------- ----------- ----------- ------------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
REVENUES:
Rents......................... $ 46,864 $22,518 $ -- $ -- $(4,417) $(4,377) $ 60,588
Interest...................... 450 11 (19) 442
----------- ------- ----- ------- -------- ------- -------
Total Revenues............ 47,314 22,529 -- -- (4,417) (4,396) 61,030
----------- ------- ----- ------- -------- ------- -------
COSTS AND EXPENSES:
Interest...................... 10,744 12,036 (288) (4,700) (1,329) $(1,652) 14,811
Rental Operating Costs........ 12,603 6,325 (1,038) (1,250) 16,640
Provision for Bad Debt........ 410 410
General and Administrative.... 2,415 2,415
Depreciation and
Amortization................ 11,250 3,570 (425) (664) 13,731
----------- ------- ----- ------- -------- ------- -------
Total Costs and
Expenses................ 37,422 21,931 (288) (4,700) (2,792) (3,566) 48,007
----------- ------- ----- ------- -------- ------- -------
Income From Operations Before
Gain on Sales of Real
Estate, Distribution to
Minority Interest Holders,
Income From Unconsolidated
Subsidiaries and
Extraordinary Item.......... 9,892 598 288 4,700 (1,625) (830) 13,023
Gain on Sales of Real
Estate...................... 2,298 2,298
Distribution to Minority
Interest Holders............ (35) (2) (37)
Income from Unconsolidated
Subsidiaries................ 654 654
----------- ------- ----- ------- -------- ------- -------
Net Income Before
Extraordinary Item.......... $ 12,155 $ 596 $ 288 $ 4,700 $(1,625) $ (176) $ 15,938
=========== ======= ===== ======= ======== ======= =======
Net Income Per Share Before
Extraordinary Item.......... $ 0.71 $ 0.71
Weighted Average Number of
Shares Outstanding.......... 17,084,498 22,584,498
</TABLE>
- ---------------
(1) Reflects the historical condensed consolidated statement of income of the
Company for the year ended December 31, 1996, excluding extraordinary items.
(2) Reflects (i) the acquisition of Ladera (which occurred in July 1996) and
(ii) the acquisition of Margarita (which occurred in December 1996) and the
consummation of the other Recent Acquisitions (which were completed after
December 31, 1996), as if such transactions had occurred on January 1, 1996.
The acquisitions were funded with the assumption of $3,693,000 and
$5,287,000 of mortgage indebtedness bearing interest at 9.75% and 8.8% per
annum, respectively, and a new $25,400,000 mortgage loan bearing interest at
7.98% per annum, with the remaining funds provided by borrowings under the
Company's Credit Facility at an assumed rate of 7.38% per annum (the
weighted average interest rate on the Company's Credit Facility at April 1,
1997). Estimated depreciation and amortization expense is based upon the
Company's investment in such properties using asset lives of 30 years.
(3) Reflects the redemption of $25,700,000 aggregate principal amount of the
Convertible Debentures, plus payment of accrued interest thereon, using
borrowings of $26,000,000 under the Company's Credit Facility based on an
assumed interest rate of 7.38% per annum.
(4) Reflects the application of the estimated net proceeds from the Offering to
repay borrowings under the Credit Facility (assuming an interest rate of
7.38% per annum on such borrowings).
(5) Reflects the elimination of the operations of the Company's interest in five
properties sold during 1996, and the application of the proceeds therefrom
to repay indebtedness under the Credit Facility (assuming an interest rate
of 7.38%), as if such transactions had occurred on January 1, 1996.
(6) Reflects the Company's sale of a 75% joint venture interest in each of
Ladera and Margarita, and the application of the estimated proceeds
therefrom to repay indebtedness under the Credit Facility (assuming an
interest rate of 7.38%), as if such transactions had occurred on January 1,
1996. The joint venture interest in Margarita was sold during the first
quarter of 1997, while the sale of the joint venture interest in Ladera is
pending.
S-24
<PAGE> 25
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the Company's
consolidated financial statements and notes thereto incorporated by reference in
this Prospectus Supplement and the accompanying Prospectus. Historical results
and percentage relationships set forth in the consolidated statements of income
contained in the Company's consolidated financial statements, including trends
which might appear, should not be taken as indicative of future operations.
The Company's strategic focus is the development, acquisition,
rehabilitation, and operation of retail shopping centers on the West Coast. At
December 31, 1996, the Company owned interests in 21 retail shopping centers,
all located in California, 16 of which were fully operational, one of which was
operating but undergoing renovation and expansion, and four of which were in
various stages of development. At December 31, 1996, the Company also owned four
office/industrial properties located in Southern California, which are
considered non-strategic.
As part of its ongoing business, the Company regularly engages in
discussions with public and private real estate entities regarding possible
portfolio or asset acquisitions or business combinations.
RESULTS OF OPERATIONS
Comparison of 1996 to 1995. In the fourth quarter of 1995, the Company
announced that its Board of Directors had approved a plan to dispose of a
portion of the Company's non-strategic properties and to redeploy the proceeds
from disposition into retail properties. As a result of the decision to dispose
of these properties, the Company took a one-time non-cash charge of $21,373,000
in 1995 to write those assets down to their fair market value. During 1996, all
five of the written-down properties were sold, resulting in a net gain on sale
of $2,298,000. In 1995, the Company took additional one-time charges of
$1,047,000 to write down goodwill, outdated computer equipment and a
discontinued investment in a real estate advisor, and $2,500,000 related to the
implementation of the Company's new strategic plan. There were no additional
charges related to the implementation of the plan taken in 1996. The $2,500,000
charge included a non-cash reduction in revenues of $1,278,000, primarily as a
result of a change in the formula used to estimate common area maintenance
reimbursements and percentage rents, and $975,000 in one-time general and
administrative expenses related to the transition to the new management team,
studies by new management of various organizational and operating policies of
the Company, and organizational and strategic changes resulting from those
studies, including the internalization of property management and the
installation of a new property management operating system.
Including these charges, net income increased $23,989,000 from a net loss
of $12,718,000 in 1995 to net income of $11,271,000 in 1996. If the one-time
charges in 1995 were excluded, net income before gain on sales of real estate,
minority interest, and extraordinary item would have decreased $77,000 from
$9,969,000 in 1995 to $9,892,000 in 1996. This decrease was net of several
effects, but, as discussed in the following paragraphs, was primarily
attributable to the expiration of the McDonnell Douglas lease and the subsequent
sale of the building in June of 1996, the sale of the Beverly Garland Hotel in
December of 1995, lower rents received on the Anacomp Building following the
renegotiation of the Anacomp lease during the first quarter of 1996, and higher
expenses related to the opening of regional offices in Los Angeles and San
Francisco.
Revenues decreased $1,355,000 to $47,314,000 in 1996 from $48,669,000 in
1995. Excluding the one-time charges in 1995, the decrease was $2,633,000 from
$49,947,000 in 1995 to $47,314,000 in 1996. This decrease is primarily
attributable to the sales of the McDonnell Douglas Building and the Beverly
Garland Hotel and the renegotiation of the Anacomp lease.
Rental operating expense increased $536,000 to $12,603,000 in 1996 from
$12,067,000 in 1995. This increase is primarily attributable to the addition of
new properties, the expense associated with carrying the vacancy in the Anacomp
Building, and the opening of offices in Los Angeles and San Francisco.
The provision for bad debt decreased $562,000 to $410,000 in 1996 from
$972,000 in 1995. This decrease is primarily attributable to fewer credit
problems amongst smaller tenants.
S-25
<PAGE> 26
Interest expense decreased $1,216,000 to $10,744,000 in 1996 from
$11,960,000 in 1995. This decrease is primarily attributable to a lower
short-term interest rate environment in 1996 and slightly lower average
outstanding borrowings under the Company's lines of credit.
Depreciation and amortization expense decreased $1,867,000 to $11,250,000
in 1996 from $13,117,000 in 1995. This decrease reflects the elimination of
depreciation and amortization charges on the properties sold in 1995 and 1996.
General and administrative expenses decreased $669,000 to $2,415,000 in
1996 from $3,084,000 in 1995. Exclusive of the one-time charges in 1995, general
and administrative expenses would have increased $306,000 in 1996. This increase
reflects the costs associated with the opening of offices in Los Angeles and San
Francisco as well as other increases commensurate with the increasing level of
operations in the Company.
In June 1996, the Company disposed of the McDonnell Douglas Building.
Proceeds from the disposition totaled $9,301,000, resulting in a gain of $9,000.
In July 1996, the Company disposed of the Fireman's Fund and Highlands Plaza
buildings. Proceeds from the dispositions totaled $22,701,000, resulting in a
gain of $291,000. In September 1996, the Company disposed of its 11.85% interest
in the building in which its corporate headquarters are located. Proceeds from
the disposition totaled $1,939,000, resulting in a gain of $1,981,000. In
October 1996, the Company disposed of the Miramar Business Center. Proceeds from
the disposition totaled $6,934,000, resulting in a gain of $17,000. Proceeds
from these sales were used to reduce outstanding borrowings under the Company's
lines of credit.
In November 1996, the Company redeemed all of its outstanding 8- 1/2%
Convertible Debentures due 2002, which aggregated $25,700,000 in principal
amount, incurring an extraordinary loss from the early extinguishment of debt of
$884,000.
The Company considers Funds From Operations ("FFO") to be a relevant
supplemental measure of the performance of an equity REIT since such measure
does not recognize depreciation and certain amortization expenses as operating
expenses. Management believes that reductions for these charges are not
meaningful in evaluating income-producing real estate, which historically has
not depreciated. FFO means net income (loss) (computed in accordance with
generally accepted accounting principles), before gains (or losses) from debt
restructuring and sales of property, plus depreciation of real property. FFO
does not represent cash generated from operating activities in accordance with
generally accepted accounting principles and is not necessarily indicative of
cash available to fund cash needs and should not be considered as an alternative
to net income as an indicator of the Company's operating performance or as an
alternative to cash flow as a measure of liquidity.
During 1996, the Company reported that FFO increased $552,000 to
$20,466,000 in 1996 from $19,914,000 in 1995. If the one-time charges in 1995
were excluded, the Company would have reported a decrease in FFO in 1996 of
$1,948,000. This decrease was net of several effects, but was primarily
attributable to the expiration of the McDonnell Douglas lease and the subsequent
sale of the building in June of 1996, the sale of the Beverly Garland Hotel in
December of 1995, lower rents received on the Anacomp Building following the
renegotiation of the Anacomp lease during the first quarter of 1996, and higher
expenses related to the opening of regional offices in Los Angeles and San
Francisco.
Comparison of 1995 to 1994. Including the one-time charges in 1995, net
income decreased $25,882,000 from net income of $13,164,000 in 1994 to a net
loss of $12,718,000 in 1995. If these one-time charges in 1995 were excluded,
the Company would have reported net income before gain on sales of real estate
of $9,969,000 in 1995 as compared to $13,164,000 in 1994. This decrease was
primarily attributable to increases in interest expense, provision for bad debt,
and depreciation and amortization, the sale of A-Storage in June 1995, and the
changes in the formula used to estimate common area maintenance reimbursements
and percentage rents. The principal reasons for this decrease are discussed in
the following paragraphs.
Revenues decreased $2,718,000 to $48,669,000 in 1995 from $51,387,000 in
1994. This decrease is primarily due to the changes in estimation techniques
previously mentioned, recognition in 1994 of certain
S-26
<PAGE> 27
1993 tenant percentage rents that were not estimatable at the end of 1993, and a
decrease in other percentage rents and sale of the A-Storage facility in 1995.
Rental operating expenses decreased $114,000 to $12,067,000 in 1995 from
$12,181,000 in 1994. The decrease is primarily due to the sale of A-Storage.
The provision for bad debt increased $670,000 to $972,000 in 1995 from
$302,000 in 1994. This increase is primarily attributable to higher than normal
credit problems amongst smaller tenants and a decision by the Company to
increase the general provision for bad debt by $150,000.
Interest expense increased $378,000 to $11,960,000 in 1995 from $11,582,000
in 1994. The increase is primarily attributable to a higher short-term interest
rate environment for much of 1995 and slightly higher average outstanding
borrowings under the Company's lines of credit.
Depreciation and amortization expense increased $1,153,000 to $13,117,000
in 1995 from $11,964,000 in 1994. The increase reflects additional depreciation
expense for rehabilitations of existing properties during 1994 and 1995.
General and administrative expenses increased $890,000 to $3,084,000 in
1995 from $2,194,000 in 1994. The increase reflects the previously mentioned
one-time charges.
In July 1995, the Company disposed of its A-Storage facility. Proceeds from
the disposition totaled $2,619,000, resulting in a gain of $1,428,000. In
December 1995, the Company sold its interest in Beverly Garland Hotel. Proceeds
from the sale totaled $10,000,000 resulting in a gain of $805,000. Proceeds from
these sales were used to reduce outstanding borrowings under the Company's lines
of credit.
During 1995, the Company reported that FFO decreased $4,542,000 to
$20,586,000 from $25,128,000 in 1994. The principal reasons for this decrease
include increases in interest expense and the provisions for bad debt, the sale
of the A-Storage facility, changes in accounting estimation techniques, and a
decrease in tenant percentage rents. If the one-time charges were excluded, the
Company would have reported FFO of $23,086,000 in 1995, a decrease of $2,042,000
from 1994.
LIQUIDITY AND CAPITAL RESOURCES
The Company anticipates that cash flow from operating activities will
continue to provide adequate capital for required payments on notes payable,
recurring tenant improvements, and dividend payments in accordance with REIT
requirements through the end of 1997. However, the Company will require
additional sources of capital to finance the acquisition and development of
additional properties. Sources of this additional capital may include borrowings
under credit facilities and mortgage indebtedness, proceeds from sales of
non-strategic assets, the sale of interests in certain properties to third
parties and, to the extent market conditions permit, the issuance of debt or
equity securities. However, there can be no assurances that capital necessary to
finance future acquisitions and developments will be available on acceptable
terms or at all.
The Company satisfied its REIT requirement under the Code of distributing
at least 95% of ordinary taxable income with distributions to shareholders of
$17,113,000 in 1996. Accordingly, Federal income taxes were not incurred at the
corporate level.
In November 1996, the Company entered into a new $135,000,000 credit
facility (the "Credit Facility") with Nomura Asset Capital Corporation,
replacing a $50,000,000 credit facility with Bank of America. Of the total
amount, $90,000,000 is secured by mortgages on six of the Company's Properties
and $45,000,000 is unsecured. At December 31, 1996, borrowings of approximately
$72,900,000 were outstanding under the Credit Facility, of which $35,525,000 and
$37,375,000 were outstanding under the secured and unsecured portions of the
Credit Facility, respectively. Borrowings under the secured and unsecured
portions of the Credit Facility bear interest at rates of LIBOR (London
Interbank Offer Rate) plus 1.65% or LIBOR plus 1.85% (subsequently reduced to
1.75%), respectively. The Credit Facility is scheduled to mature in November
1998, with a one year extension option available.
S-27
<PAGE> 28
In November 1996, the Company redeemed all of its remaining outstanding
8-1/2% Convertible Debentures due 2002, which aggregated $25,700,000 in
principal, using proceeds from its Credit Facility.
At December 31, 1996, the Company had $15,275,000 outstanding under a
$28,800,000 construction loan agreement with Comerica Bank, secured by one of
the Company's development properties. The remaining availability of $13,525,000
is expected to be used to fund the completion of a 250,000 square foot retail
shopping center in Richmond, California. Borrowings under this loan bear
interest at the bank's eurodollar base rate plus 2.50% or at its prime rate. The
loan is scheduled to mature in November 1997, and the Company has the right to
extend for an additional year.
At December 31, 1996, the Company's capitalization consisted of
$178,452,000 of debt and $256,447,000 of market equity (market equity is defined
as shares of Common Stock outstanding multiplied by the closing price on the
NYSE, which was $15.00 at December 31, 1996) resulting in a debt to total market
capitalization ratio of .41 to 1.0. At December 31, 1996, the Company's total
debt consisted of $121,977,000 of variable rate debt and $56,475,000 of fixed
rate debt. The weighted average rates of interest on the variable and fixed rate
debt were 7.55% and 8.96%, respectively, at December 31, 1996.
It is management's intention that the Company have access to the capital
resources necessary to expand and develop its business. Accordingly, the Company
may seek to obtain funds through additional borrowings and public offerings and
private placements of debt and equity securities, although there can be no
assurance that additional capital will be available on acceptable terms or at
all. The Company has on file with the Securities and Exchange Commission a $200
million shelf registration statement on Form S-3. This registration statement
was filed for the purpose of issuing either common stock or convertible
debentures. The Common Stock offered hereby will be the first securities issued
under such registration statement.
OPERATING ACTIVITIES
Cash flow provided by operating activities was $17,521,000, $24,078,000,
and $19,825,000 for 1996, 1995 and 1994, respectively. Cash provided by
operating activities decreased in 1996 compared to the prior years for a variety
of reasons, including decreased revenues and costs associated with the new
Credit Facility.
INVESTING ACTIVITIES
Cash flow used (provided) by investing activities was $33,399,000,
($2,519,000) and $5,138,000 for 1996, 1995 and 1994, respectively. The
substantial increase in 1996 compared to prior years resulted from increased
acquisition and development activity.
FINANCING ACTIVITIES
Cash flow provided (used) by financing activities was $18,430,000,
($26,718,000), and ($13,923,000) in 1996, 1995 and 1994, respectively. Net
borrowings from credit facilities and notes payable increased to $61,346,000 in
1996 from net repayments of $5,825,000 in 1995, while distributions paid in 1996
decreased to $17,113,000 from $22,564,000 in 1995. A portion of these borrowings
during 1996 were used by the Company to redeem its remaining outstanding 8-1/2%
Convertible Debentures due 2002, totaling $26,000,000 in principal and interest.
In 1994, cash flow used by financing activities included a net repayment on
credit facilities of $3,100,000 and distributions of $22,723,000, partially
offset by proceeds from the issuance of stock of $13,254,000.
EFFECTS OF INFLATION
Substantially all of the Company's leases contain provisions designed to
mitigate the adverse impact of inflation. Such provisions include clauses
enabling the Company to receive percentage rentals based on tenants' gross
sales, which generally increase as prices rise, and/or escalation clauses, which
generally increase rental rates during the terms of the leases. Such escalation
clauses are often related to increases in the consumer price index or similar
inflation indices. Most of the Company's leases require the tenant to pay its
share of operating expenses, including common area maintenance, real estate
taxes and insurance, thereby
S-28
<PAGE> 29
reducing the Company's exposure to increases in these operating expenses
resulting from inflation to the extent that its Properties are occupied. The
Company periodically evaluates its exposure to short-term interest rates and
may, from time to time, enter into interest rate protection agreements which
mitigate, but do not eliminate, the effect of changes in interest rates on its
floating-rate loans.
CERTAIN FACTORS THAT COULD AFFECT FUTURE RESULTS
Management's discussion and analysis of financial condition and results of
operations contains (as do other portions of this Prospectus Supplement) certain
forward-looking statements that are subject to risk and uncertainty. Reference
is made to "Risk Factors" in the accompanying Prospectus for a discussion of
certain factors that might cause actual results to differ materially from those
set forth in the forward-looking statements.
S-29
<PAGE> 30
THE COMPANY
Burnham Pacific Properties, Inc. is a fully-integrated, self-managed real
estate operating company which acquires, rehabilitates, develops and manages
retail properties on the West Coast. The Company was incorporated in 1986 as the
successor to a publicly-traded real estate limited partnership which was
organized in San Diego in 1963. The Company has elected to qualify as a REIT for
federal income tax purposes. Prior to 1996, the Company operated as a
multi-asset class REIT, with the substantial majority of its assets located in
San Diego County. As described below, the Company has undergone an extensive
reorganization beginning in late 1995. See " -- The Martin Transactions" and
" -- Repositioning."
As of April 7, 1997, the Company owned interests in 25 retail properties
and in four retail projects in various stages of development, all located in
California. Ten of the Company's retail Properties were acquired on or after
December 31, 1996. The Company also owns four office and industrial Properties
located in Southern California, which it considers non-strategic and which may
be sold as suitable opportunities arise. Assuming the completion of those
development properties presently under construction, the Company will own
interests in 28 retail properties with 4,400,037 square feet of Company-owned
GLA.
The Company's executive offices are located at 610 West Ash Street, Suite
1600, San Diego, California 92112 and its telephone number is (619) 652-4700.
THE MARTIN TRANSACTIONS
In early 1995, the Company began an extensive reorganization designed to
concentrate its future efforts on retail properties. This reorganization had
several goals: (i) attracting leadership with skills to expand the Company,
including development and redevelopment experience; (ii) broadening the
Company's presence in several metropolitan California markets; and (iii)
enhancing the Company's ability to attract capital. Additionally, the Company
was seeking an attractive portfolio of retail properties to expand and diversify
the Company's investments and enhance its retail orientation. In October 1995,
the Company succeeded to the shopping center operations of The Martin Group by
consummating the "Martin Transactions." As part of the Martin Transactions, J.
David Martin was appointed as the Company's Chief Executive Officer and
President and a member of the Company's Board of Directors. The Company
simultaneously appointed Daniel B. Platt, formerly Group Executive Vice
President of the Real Estate Industries Group of Bank of America, as its Chief
Financial Officer and Chief Administrative Officer, and James M. Kessler,
formerly Managing Director of retail operations for The Martin Group, as an
Executive Vice President. Concurrently with these appointments, the Company
acquired interests in the Martin Projects from Mr. Martin and other affiliates
of The Martin Group. The Martin Projects in which the Company has an interest
consist of the following:
- Richmond City Center, a 76,692 square foot Market/Drug center located in
Richmond, which was completed in 1995.
- Gateway Retail Center, a 185,949 square foot Market/Drug center located
in Marin County, which was recently substantially completed. See "Recent
Events -- Rehabilitation and Redevelopment."
- Hilltop Plaza, an approximately 251,366 square foot Promotional center
located in Richmond, the first phase of which is now complete and the
second phase of which is scheduled to be completed in mid-1998. See
"Recent Events -- Rehabilitation and Development."
- 1000 Van Ness, an approximately 131,500 square foot Entertainment center
located in downtown San Francisco, which is currently under construction
and expected to be completed in mid-1998. See "Recent
Events -- Rehabilitation and Development."
- Downtown Pleasant Hill, an approximately 360,000 square foot Promotional
and Entertainment center located in Pleasant Hill, on which the Company
currently plans to begin construction by year end 1997. See "Recent
Events -- Rehabilitation and Development."
S-30
<PAGE> 31
- Gateway 101, a potential 125,000 square foot Promotional retail project
proposed to be constructed in East Palo Alto. The Company is currently
negotiating with the City of East Palo Alto for development rights to
this project.
For additional information regarding the Martin Transactions, see "Related
Party Transactions."
REPOSITIONING
Immediately following its appointment on October 1, 1995, the Company's new
management initiated a thorough review of the Company's properties, markets,
growth prospects, and property management and financial practices. It also
sponsored reviews of the Company's legal and accounting policies by its outside
counsel and independent auditors, respectively. As a result of these reviews,
new management developed a business plan for repositioning the Company which was
approved by its Board of Directors in November 1995. The principal features of
this plan are as follows:
Increased Financial Flexibility. In November 1995, the Company's Board of
Directors determined that it should establish a more conservative dividend
payout ratio and reduce its dividend. Accordingly, the Board reduced the
previous $.36 per share quarterly distribution to $.25 per share in the fourth
quarter of 1995, and has maintained the $.25 per share quarterly dividend rate
since that time. See "Price Range of Common Stock and Distributions."
In addition, the Company took a number of one-time charges in the fourth
quarter of 1995, including a $21,373,000 non-cash charge to write down the
non-strategic assets it had elected to dispose of to their then estimated fair
market value; $1,047,000 to write down goodwill, outdated computer equipment and
a discontinued investment in a real estate advisor; a $2,500,000 charge that
included a non-cash reduction in revenues of $1,278,000 primarily as a result of
a change in the formula used to estimate common area maintenance reimbursements
and percentage rents; and $975,000 in one-time general and administrative
expenses related to the Martin Transactions and the Company's repositioning. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
The Company adopted a variety of financial strategies intended to allow it
to accomplish its repositioning and lessen its reliance upon the public markets
as a source of additional capital. These included establishing a conservative
distribution payout ratio, redeployment of sales proceeds generated through
property dispositions, use of joint ventures to help finance new acquisitions
and developments, paying for acquisitions with Common Stock or securities (such
as limited partnership units) which are convertible into or exchangeable for
Common Stock and arranging for the new Credit Facility.
Added Personnel and Capabilities. At the end of 1995, the Company
internalized the management of the majority of its portfolio. Additionally, the
Company has invested in a new property management information system that allows
for more accurate control of property-level operating expenses and calculation
of expenses reimbursable by tenants. In 1996, the Company appointed a director
of leasing in San Diego and has recently added similar positions for its offices
in Los Angeles and San Francisco.
In anticipation of significant changes in and additions to its portfolio,
the Company created a new acquisitions and dispositions group and added an
experienced rehabilitation and development group. As a result of these changes,
the Company is now a fully-integrated real estate operating company.
Disposed of Non-Strategic Assets. The Company identified and wrote down to
their then estimated fair market value five of its non-strategic Properties, all
of which were sold in 1996. The properties consisted of two multi-tenant office
buildings, one scientific research building, one industrial/unanchored retail
project, and a minority interest in the building in which the Company's
corporate headquarters are located. The net sales proceeds of $40.9 million were
used to pay down indebtedness under the Company's former credit facilities.
Enhanced Property Focus. The Company concluded that it should focus
exclusively on acquiring, rehabilitating, developing and managing retail
properties. Reasons for this focus include the Company's belief that these
properties are favorably priced relative to certain other real estate assets,
and that an imbalance exists between the number of these properties that could
benefit from rehabilitation and the number of property owners who could
successfully complete such rehabilitation, and the operational advantages of
focusing management efforts on a single asset type.
S-31
<PAGE> 32
The following charts show the composition of the Company's portfolio by
property type (i) as of October 1, 1995, the date of the appointment of new
management, (ii) as of April 7, 1997, and (iii) on a pro forma basis as of April
7, 1997 as if the three Martin Projects currently under construction had been
completed at that date.
[% of Company-Owned GLA by Property Type Chart]
Enhanced Geographic Diversity. The Company has also implemented a strategy
of diversifying its holdings geographically within California. The acquisition
and development of the Martin Projects gave the Company a significant presence
in the San Francisco Bay Area, and its subsequent acquisitions, including the
Recent Acquisitions, have provided further diversification.
The following charts show the distribution of the Company's properties by
region (i) as of October 1, 1995, the date of appointment of new management,
(ii) as of April 7, 1997, and (iii) on a pro forma basis as of April 7, 1997 as
if the three Martin Projects currently under construction had been completed at
that date.
[% of Company-Owned Retail GLA by Region Chart]
The Company has furthered its strategy of geographic diversification with
the recent opening of a Portland, Oregon office with the intent of expanding
into Oregon and Washington. The Company believes that general economic and real
estate market conditions in those states present attractive opportunities for
the Company's growth. See "The Properties and Markets -- Target Markets."
S-32
<PAGE> 33
GROWTH STRATEGIES AND OPERATING APPROACH
The Company's primary objective is to enhance the total return to its
shareholders through sustainable increases in its FFO. Its strategies to meet
this objective are:
- acquiring additional retail properties at prices that it believes should
produce attractive short-term and long-term returns and/or present the
Company with the opportunity to add value through the application of its
management and rehabilitation expertise;
- rehabilitating the Company's Properties when it believes such
rehabilitation can increase revenues, decrease the volatility of
revenues, or increase the value of a Property;
- developing new retail properties when it believes such development can
produce short-term and long-term returns which compare favorably (on a
risk-adjusted basis) to the initial and long-term returns that the
Company could achieve on an acquisition of comparable quality;
- enhancing cash flow from its Properties through its property management
and leasing expertise; and
- selectively disposing of assets and redeploying the sales proceeds.
Acquisitions. The Company believes that opportunities continue to exist to
purchase properties in its current and new markets at attractive prices and/or
which can benefit from the Company's proactive property management and
rehabilitation expertise.
The Company has acquired retail properties with a total acquisition cost of
approximately $146.8 million on or after December 31, 1996 with a weighted
average historical yield of 10.11% for 1996 (based on acquisition costs and
historical net operating income for 1996). The Company believes that its
internal capabilities provide it with an opportunity to achieve yields higher
than historical yields for these properties. There can be no assurance, however,
that the Company will be able to do so. See "Recent Events -- Recent
Acquisitions."
As part of its ongoing business, the Company regularly engages in
discussions with public and private real estate entities regarding possible
single asset or portfolio acquisitions or business combinations.
The Company is focused primarily upon the acquisition of properties which
present it with an opportunity to apply its management and rehabilitation
expertise. Such properties may have significant vacancies or may require
substantial capital expenditures due to deferred maintenance, and may have space
configurations which do not meet the current requirements of today's anchor
tenants. The Company believes that many smaller investors in retail properties
may not have the capital or expertise necessary to take on the challenges of
such properties, and that many institutional investors do not have the higher
level of internal resources that management and rehabilitation of these
properties require. The Company's strategy therefore has the further advantage
of differentiating itself from a number of other purchasers of retail
properties, which the Company believes may reduce the competition that it faces
in making acquisitions.
The Company typically begins its acquisition process with a thorough
examination of a property's trade area. This includes both an assessment of the
competition that the property faces and a demographic analysis of the population
trends in the area served by the property. Next, the Company calculates the
property's projected cash flows through a detailed lease-by-lease analysis which
considers such factors as the property's current rental rates as opposed to the
Company's estimate of appropriate market rental rates for the property, current
lease terms for the property, tenant sales trends, and historical tenant
turnover. Using its integrated, team approach, the Company also involves its
property management and rehabilitation teams in assessing acquisitions and
identifying strategies for increasing their cash flow through retenanting,
leasing and rehabilitations.
Infill Locations. The Company has targeted for acquisition retail
properties which in its opinion are in infill locations. The Company
defines infill locations as those which are typified by significant
population densities and low availability of land which could be developed
into competitive retail properties. Such properties allow for a more
precise analysis of their trade areas and competition than properties
located in areas which are undergoing substantial real estate development.
S-33
<PAGE> 34
As a part of its focus on infill locations, the Company selectively
targets acquisitions in urban areas. The Company believes that these areas
present attractive opportunities because of the high population densities
typical of urban areas and because they have historically been underserved
by major retailers. Urban locations tend to require a higher level of
attention to property management to create an inviting and safe atmosphere
and community identification with the property. The Company believes such
factors deter competitors with less experience in such areas from pursuing
similar acquisition opportunities.
Market Dominance. The Company also looks for properties that in its
opinion are dominant within their immediate trade area. Attributes that
contribute to market dominance include site attributes, such as high
visibility, easy access, and proximity to heavily-traveled streets, good
design and layout, well-known tenants that appeal to consumers, and a mix
of goods and services available within the property which are not
duplicated elsewhere within the trade area. The Company assesses the
property's competitive position, paying particular attention to fundamental
real estate issues such as layout, access and visibility, because it views
its acquisitions primarily as investments in real estate, not in particular
tenants.
Rehabilitations and Development. The Company has a fully internalized
development and rehabilitations group, with expertise in substantially all
aspects of development and construction, including site selection, tenant
marketing and leasing, land use entitlements, design, and construction contract
administration.
The Company seeks to apply its development expertise and add value to its
portfolio by rehabilitating existing Properties, such as its Navajo Shopping
Center in San Diego. See "Recent Events -- Rehabilitation and Development." The
Company believes that its rehabilitation activities can increase revenues by
creating additional leasable area, and can lead to higher tenant retention and
occupancy due to the more attractive environment they create for tenants. The
Company has identified additional Properties within its portfolio that it
believes could benefit from its rehabilitation expertise.
The Company believes that attractive development opportunities exist in its
current and target markets due to, among other factors, the changing physical
requirements of retail tenants and the emergence of new categories of retailers.
The Company analyzes a potential development project's site characteristics in
the same manner that it assesses acquisitions. It only pursues a development
when the indicated initial and long term returns on such development compare
favorably with the initial and long term returns on an acquisition of comparable
quality, after taking account of the additional risk inherent in the development
process. In most cases, the Company develops properties which it could not
obtain through acquisition, because development allows the Company to create a
property which is state-of-the-art, and meets current retailer requirements and
preferences.
The Company utilizes a variety of strategies to mitigate development risk.
It seeks to strictly control its spending on development projects prior to
receiving development entitlements. It attempts to purchase land for development
only after it has received development entitlements, lease commitments from
anchor tenants, and detailed construction cost estimates from a general
contractor.
The Company currently has under construction three development projects,
which it anticipates will have a total cost at completion of $110.4 million. In
addition, the Company has recently approved an additional development project
with an anticipated total cost at completion of $60 million and on which it
expects to begin construction by year end 1997. See "Recent
Events -- Rehabilitation and Developments."
Property Management. As part of its repositioning, the Company has added
considerably to the internal resources it has available to manage its portfolio.
The Company believes that these changes will better enable it to improve the
operating results of its existing retail portfolio. The Company believes that
internalizing property management allows it to better monitor the performance of
its portfolio and control expenses, and that internalizing leasing reduces
expenditures on leasing commissions and fosters better relationships with
tenants. The Company's regional offices in San Diego, Los Angeles, San Francisco
and Portland allow it to be closer to its Properties and tenants in these areas
and to more closely monitor local market conditions.
S-34
<PAGE> 35
The Company believes that its property management and leasing activities
contributed to the 4.7% increase in its "same store" net operating income (4.0%
if Village Station is included) for the retail Properties that the Company owned
and continuously operated from 1995 to 1996.
Dispositions. The Company considers dispositions an essential element of
its overall growth strategy. It uses its financial systems to identify
disposition opportunities for its assets, and, consistent with the restrictions
imposed by the REIT rules under the Code, will periodically dispose of assets
when it believes that they have reached a cyclical peak in value, or assets
which it believes can produce net sales proceeds disproportionate to their
ability to contribute to revenues. The Company also owns four office properties
located in Southern California which it considers non-strategic and which may be
sold as suitable opportunities arise. Proceeds generated by such sales typically
will be redeployed into the acquisition of additional retail properties; pending
application for such purpose, such proceeds may be used to reduce borrowings.
In 1996, the Company sold five properties and used the $40.9 million net
sales proceeds to pay down indebtedness under its former credit facilities.
S-35
<PAGE> 36
THE PROPERTIES AND MARKETS
PROPERTIES
The Company has targeted three types of retail properties: Market/Drug
centers, Promotional centers and, to a lesser extent, Entertainment centers.
The Company defines Market/Drug centers as those centers that serve a
fairly localized trade area and that offer an assortment of goods and services,
such as groceries and drugs, designed to meet the day-to-day needs of the
average shopper. The Company believes that such centers are less susceptible to
economic downturns because purchases from supermarkets and drug stores tend to
be less discretionary in nature. The Company believes that supermarkets and
drugstores are excellent anchor tenants because of the regular, recurring nature
of the shopping trips they generate. Because many supermarket and drug chains
continue to adjust the average size of their stores, many of these centers also
lend themselves to the Company's rehabilitation strategy.
The Company's targeted Promotional centers have multiple retailers as
anchor tenants which typically offer convenience, a broad selection and low
pricing on a fairly discrete category of retail merchandise, and limited amounts
of non-anchor space. Such retailers are sometimes referred to as "category
killers." In acquiring Promotional centers, the Company tends to avoid those
centers anchored by "big box" tenants such as discount department stores and
general merchandise retailers. The Company believes that the limited number of
potential tenants in the 100,000 square foot and greater size range that these
"big box" tenants typically occupy presents additional re-leasing risk should
such a tenant vacate its premises. The Company believes that a much larger pool
of tenants is available in the 15,000-40,000 square foot range typical of the
Company's Promotional tenants.
The Company defines Entertainment centers as those centers whose principal
draw is one or more entertainment-related anchor tenants, typically a
multiscreen cinema. The Company finds these properties attractive because of
continuing recent growth in multiscreen theaters and consumer interest in other
kinds of entertainment venues, such as theme restaurants. In addition, the
Company looks for Market/Drug and Promotional centers with an Entertainment
component, since the Entertainment component typically brings additional traffic
to the center during the evenings, extending the center's hours of operation.
The Company believes the characteristic common to these retail property
types is the ability to attract tenants that can offer value-priced products and
services to a broad base of consumers. The Company defines value pricing as a
combination of price, quality, convenience and service.
The following chart shows the composition of the Company's portfolio by
property type (i) as of October 1, 1995, the date of the appointment of new
management, (ii) as of April 7, 1997, and (iii) on a pro forma basis as of April
7, 1997 as if the three Martin Projects currently under construction had been
completed at that date.
[Retail GLA by Property Type Pie Chart]
S-36
<PAGE> 37
The following tables set forth certain information relating to the
Company's Properties, including three development Properties under construction
as of April 7, 1997:
<TABLE>
<CAPTION>
GLA OWNED BY THE
GLA COMPANY
--------------------------------------------- ------------------
% OF COMPANY-OWNED OCCUPANCY(1)
TYPE OF PROPERTY ---------------------------------- TOTAL ------------------
PROPERTY CENTER OWNED ANCHORS(4) SHOPS TOTAL PROPERTY ANCHORS SHOPS
- ------------------------------ -------------- -------- ---------- ---------- ---------- ---------- ------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
RETAIL PROPERTIES(7)
San Diego Region
Point Loma Plaza Market/Drug 100% 115,764 97,465 213,229 213,229 100% 91%
San Diego (Point
Loma)
Mesa Shopping Center Market/Drug 100% 54,185 88,347 142,532 142,532 100% 99%
San Diego (Mira Mesa)
Poway Plaza Market/Drug 100% 18,160 55,900 74,060 114,627 100% 74%
Poway
Navajo Shopping Center Market/Drug 100% 16,123 42,256 58,379 58,379 100% 30%(8)
San Diego (Lake Murray)
Wiegand Plaza II Promotional 100% 67,111 43,732 110,843 110,843 100% 98%
Encintas
Independence Square(9) Promotional 100% 43,763 48,864 92,627 92,627 100% 84%
San Diego (Kearny
Mesa)
Santee Village Square Entertainment 100% 26,878 54,117 80,995 80,995 100% 84%
Santee
San Diego Factory Outlet 100% 137,867 117,573 255,440 255,440 100% 89%
Outlet Center
San Ysidro
Ruffin Village(9) Convenience 100% -- 44,594 44,594 44,594 -- 88%
San Diego (Kearny Mesa)
Plaza Rancho Carmel Convenience 100% -- 26,978 26,978 36,722 -- 82%
San Diego (Carmel
Mtn. Ranch)
TOTAL/WEIGHTED AVERAGE ------- ------- --------- --------- --- ---
SAN DIEGO REGION 479,851 619,826 1,099,677 1,149,988 100%(10) 89%(10)
Los Angeles Region
Ladera Center(11) Market/Drug 100% 105,545 79,139 184,684 184,684 100% 87%
Los Angeles
Santa Fe Springs Market/Drug 100% 58,004 106,726 164,730 164,730 100% 89%
Santa Fe Springs
Crenshaw Imperial Market/Drug 100% 57,000 94,151 151,151 151,151 100% 98%
Shopping Center
Inglewood
La Mancha Shopping Market/Drug 100% 54,790 49,114 103,904 103,904 100% 97%
Center
Fullerton
Margarita Plaza(12) Market/Drug 25% 43,350 33,394 76,744 76,744 100% 100%
Huntington Park
Central Shopping Center Market/Drug 100% 21,000 41,314 62,314 62,314 100% 80%
Ventura
Ontario Village Market/Drug 99% -- 39,954 39,954 97,149 -- 78%
Ontario
West Lancaster Plaza Market/Drug 99% -- 29,318 29,318 159,578 -- 57%
Lancaster
<CAPTION>
GLA OWNED BY
THE COMPANY ANCHOR
------------ ANNUALIZED BASE TENANTS
OCCUPANCY(1) ANNUALIZED BASE RENT(2) RENT/OCCUPIED SQ. FT.(3) -------------
------------ ------------------------------------ ---------------------------
PROPERTY TOTAL ANCHORS SHOPS TOTAL ANCHOR(5) SHOPS(6) TOTAL NAME
- ---------------------------- ----- ----------- ----------- ------------ --------- -------- ------ -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
RETAIL PROPERTIES(7)
San Diego Region
Point Loma Plaza 96% $ 1,263,468 $ 1,532,167 $ 2,795,635 $ 10.91 $17.27 $13.67 Vons
San Diego (Point Sport Chalet
Loma) Miller's
Outpost
Family
Fitness
Mesa Shopping Center 99% 273,100 1,236,898 1,509,998 5.04 14.19 10.68 Lucky's
San Diego (Mira Mesa) Thrifty Drugs
Poway Plaza 80% 127,116 522,670 649,786 7.00 12.70 10.95 Thrifty Drugs
Poway Lucky's
Navajo Shopping Center 49%(8) 112,860 183,267 296,127 7.00 14.55 10.31 Thrifty Drugs
San Diego (Lake Murray) Albertson's
Wiegand Plaza II 99% 761,549 872,907 1,634,456 11.35 20.43 14.88 AMC Theatres
Encintas
TJ Maxx
Beverages &
More
Independence Square(9) 91% 408,225 654,064 1,062,289 9.33 16.03 12.56 Ethan-Allen
San Diego (Kearny Interiors
Mesa) Saddleback
Santee Village Square 90% 437,900 742,894 1,180,794 16.29 16.27 16.28 AMC Theatres
Santee
San Diego Factory 95% 1,218,091 1,766,477 2,984,568 8.84 16.85 12.30 Nike
Outlet Center Levi's
San Ysidro Mikasa
K-Mart
Guess
Ruffin Village(9) 88% -- 479,521 479,521 -- 12.19 12.19
San Diego (Kearny Mesa)
Plaza Rancho Carmel 82% -- 314,061 314,061 -- 14.15 14.15
San Diego (Carmel
Mtn. Ranch)
TOTAL/WEIGHTED AVERAGE --- ---------- ---------- ---------- ------ ------ ------
SAN DIEGO REGION 94%(10) 4,602,309 8,304,926 12,907,235 9.59 15.81 12.84
Los Angeles Region
Ladera Center(11) 95% 921,740 1,382,947 2,304,687 8.73 20.01 13.19 Ralphs
Los Angeles Sav-On
Ross
Service
Merchandise
Santa Fe Springs 93% 442,975 1,527,487 1,970,462 7.64 16.16 12.92 Ralphs
Santa Fe Springs
Crenshaw Imperial 99% 164,000 879,408 1,043,408 2.88 9.50 6.97 Ralphs
Shopping Center Thrifty Drugs
Inglewood
La Mancha Shopping 99% 145,717 509,142 654,859 2.66 10.67 6.39 Ralphs
Center Thrifty Drugs
Fullerton
Margarita Plaza(12) 100% 380,429 652,135 1,032,564 8.78 19.53 13.45 Food-4-Less
Huntington Park
Central Shopping Center 87% 15,750 463,098 478,848 0.75 14.06 8.88 Ralphs
Ventura
Ontario Village 78% -- 481,329 481,329 -- 15.47 15.47 Stater
Ontario Brothers
Supermarket
Pic'N'Save
West Lancaster Plaza 57% -- 200,483 200,483 -- 11.90 11.90 Albertson's
Lancaster
<CAPTION>
ANCHOR
TENANTS
-----------
LEASE
PROPERTY EXPIRATION
- ------------------------------ -----------
RETAIL PROPERTIES(7)
San Diego Region
Point Loma Plaza 12/31/08
San Diego (Point 11/21/07
Loma) 1/31/98
5/31/04
Mesa Shopping Center 11/30/09
San Diego (Mira Mesa) 5/31/99
Poway Plaza 5/31/07
Poway (Not Owned)
Navajo Shopping Center 12/31/16
San Diego (Lake Murray) 1/31/21
Wiegand Plaza II 12/31/02
Encintas
5/21/05
10/31/06
Independence Square(9) 11/30/14
San Diego (Kearny
Mesa) 11/30/05
Santee Village Square 12/31/98
Santee
San Diego Factory 5/31/04
Outlet Center 1/31/01
San Ysidro 12/27/98
8/31/06
11/30/01
Ruffin Village(9)
San Diego (Kearny Mesa)
Plaza Rancho Carmel
San Diego (Carmel
Mtn. Ranch)
TOTAL/WEIGHTED AVERAGE
SAN DIEGO REGION
Los Angeles Region
Ladera Center(11) 12/31/03
Los Angeles 3/31/04
1/31/02
2/28/00
Santa Fe Springs 9/30/07
Santa Fe Springs
Crenshaw Imperial 4/30/06
Shopping Center 5/31/09
Inglewood
La Mancha Shopping 4/30/99
Center 5/31/99
Fullerton
Margarita Plaza(12) 4/30/10
Huntington Park
Central Shopping Center 8/31/02
Ventura
Ontario Village (Not Owned)
Ontario
(Not Owned)
West Lancaster Plaza (Not Owned)
Lancaster
</TABLE>
S-37
<PAGE> 38
<TABLE>
<CAPTION>
GLA OWNED BY THE
GLA COMPANY
--------------------------------------------- ------------------
% OF COMPANY-OWNED OCCUPANCY(1)
TYPE OF PROPERTY ---------------------------------- TOTAL ------------------
PROPERTY CENTER OWNED ANCHORS(4) SHOPS TOTAL PROPERTY ANCHORS SHOPS
- ------------------------------ -------------- -------- ---------- ---------- ---------- ---------- ------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
The Plaza at Promotional 100% 287,431 229,107 516,538 778,822 100% 83%
Puente Hills
City of Industry
Valley Central Promotional 99% 378,822 101,270 480,092 610,396 100% 86%
Shopping
Center
Lancaster
--------- --------- --------- --------- --- ---
TOTAL/WEIGHTED AVERAGE 1,005,942 803,487 1,809,429 2,389,472 100% 86%
LOS ANGELES REGION
San Francisco Region
Cameron Park Market/Drug 99% 36,615 60,819 97,434 97,434 100% 64%
Cameron Park
Richmond Market/Drug 98% 44,000 32,692 76,692 76,692 100% 100%
Shopping
Center
Richmond
Foothill Plaza Market/Drug 100% 22,413 29,902 52,315 52,315 100% 76%
Los Altos
Fremont Hub Promotional 100% 246,005 246,258 492,263 661,140 100% 77%
Fremont
Pacific West Outlet Outlet 100% 42,650 160,762 203,412 203,412 100% 84%
Center
Gilroy
--------- --------- --------- --------- --- ---
TOTAL/WEIGHTED AVERAGE 391,683 530,433 922,116 1,090,993 100% 79%
SAN FRANCISCO REGION --------- --------- --------- --------- --- ---
TOTAL/WEIGHTED AVERAGE 1,877,476 1,953,746 3,831,222 4,630,453 100%(10) 85%(10)
CURRENT RETAIL
<CAPTION>
GLA OWNED BY
THE COMPANY ANCHOR
------------ ANNUALIZED BASE TENANTS
OCCUPANCY(1) ANNUALIZED BASE RENT(2) RENT/OCCUPIED SQ. FT.(3) -------------
------------ -------------------------------------- ---------------------------
PROPERTY TOTAL ANCHORS SHOPS TOTAL ANCHOR(5) SHOPS(6) TOTAL NAME
- ---------------------------- ----- ------------ ------------ ------------ --------- -------- ------ -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
The Plaza at 92% $ 2,850,246 $ 3,214,839 $ 6,065,085 $ 9.92 $16.99 $12.73 IKEA
Puente Hills Circuit City
City of Industry AMC Theatres
Smart & Final
Office Depot
Miller's
Outpost
Sam's Club
Home Depot
Toys R Us
Valley Central 97% 2,863,359 1,621,532 4,484,891 7.56 18.54 9.62 Wal-Mart
Shopping Staples
Center HomeBase
Lancaster Michael's
Circuit City
Marshall's
Cinemark
Theatres
Home
Furniture
Costco
--- ----------- ----------- ----------- ------ ------ ------
TOTAL/WEIGHTED AVERAGE 94% 7,784,216 10,932,400 18,716,616 7.74 15.73 11.00
LOS ANGELES REGION
San Francisco Region
Cameron Park 78% 161,565 405,276 566,841 4.41 10.36 7.48 Safeway
Cameron Park
Richmond 100% 503,847 525,809 1,029,656 11.45 16.08 13.43 FoodsCo
Shopping Walgreen's
Center
Richmond
Foothill Plaza 86% 223,300 366,857 590,157 9.96 16.24 13.11 Payless Drugs
Los Altos
Fremont Hub 88% 1,752,880 3,339,037 5,091,917 7.13 17.68 11.71 Safeway
Fremont Home Express
General
Cinema
Ross
Michael's
Office Max
Long's
Old Navy
Montgomery
Ward
Pacific West Outlet 87% 669,356 2,850,080 3,519,436 15.69 21.16 19.84 Liz Claiborne
Center Nike
Gilroy Levi's
Mikasa
Calvin Klein
--- ----------- ----------- ----------- ------ ------ ------
TOTAL/WEIGHTED AVERAGE 88% $ 3,310,948 $ 7,487,059 $10,798,00 7 $ 8.45 $17.91 $13.34
SAN FRANCISCO REGION --- ----------- ----------- ----------- ------ ------ ------
TOTAL/WEIGHTED AVERAGE 92%(10) $ 15,697,473 $ 26,724,385 $ 42,421,858 $ 8.36 $16.31 $12.07
CURRENT RETAIL
<CAPTION>
ANCHOR
TENANTS
-----------
LEASE
PROPERTY EXPIRATION
- ------------------------------ -----------
The Plaza at 10/31/07
Puente Hills 1/31/08
City of Industry 11/30/07
10/30/11
8/31/12
1/31/08
(Not Owned)
(Not Owned)
(Not Owned)
Valley Central 7/27/10
Shopping 3/31/03
Center 8/31/08
Lancaster 2/28/00
1/31/11
1/31/01
10/31/17
12/31/97
(Not Owned)
TOTAL/WEIGHTED AVERAGE
LOS ANGELES REGION
San Francisco Region
Cameron Park 11/30/00
Cameron Park
Richmond 9/30/13
Shopping 11/30/33
Center
Richmond
Foothill Plaza 1/31/19
Los Altos
Fremont Hub 10/31/04
Fremont 1/31/02
12/31/07
1/31/00
2/28/04
12/14/01
2/28/03
1/31/00
(Not Owned)
Pacific West Outlet 5/31/06
Center 1/31/05
Gilroy 8/31/01
1/31/02
2/28/02
TOTAL/WEIGHTED AVERAGE
SAN FRANCISCO REGION
TOTAL/WEIGHTED AVERAGE
CURRENT RETAIL
</TABLE>
S-38
<PAGE> 39
<TABLE>
<CAPTION>
GLA OWNED BY THE
GLA COMPANY
-------------------------------------------- ---------------------
% OF COMPANY-OWNED OCCUPANCY(1)
TYPE OF PROPERTY --------------------------------- TOTAL ---------------------
PROPERTY CENTER OWNED ANCHORS(4) SHOPS TOTAL PROPERTY ANCHORS SHOPS
- ------------------------------ -------------- -------- ---------- ---------- ---------- ---------- ---------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
DEVELOPMENT PROPERTIES
CURRENTLY UNDER CONSTRUCTION
Gateway Center(9)(17) Market/Drug (13) 121,511 64,438 185,949 185,949 -- --
Marin City
Hilltop Plaza Promotional (13) 196,178 55,188 251,366 251,366 -- --
Richmond
1000 Van Ness Entertainment (13) 102,000 29,500 131,500 131,500 -- --
San Francisco
--------- --------- --------- --------- --- ---
TOTAL DEVELOPMENT 419,689 149,126 568,815 568,815 -- --
--------- --------- --------- --------- --- ---
GRAND TOTAL RETAIL 2,297,165 2,102,872 4,400,037 5,199,268 -- --
OFFICE AND INDUSTRIAL
PROPERTIES
Anacomp Building 100% 338,485 338,485
Poway
Bergen Brunswig 100% 175,000 175,000
Orange
Scripps Ranch Buildings(15) 100% 49,684 49,684
San Diego
(Scripps Ranch)
Marcoa Building 100% 28,600 28,600
San Diego
(Sorrento Mesa)
--------- ---------
TOTAL/WEIGHTED AVERAGE 591,769 591,769
OFFICE AND INDUSTRIAL --------- --------- --------- ---------
GRAND TOTAL/WEIGHTED AVERAGE 2,297,165 2,102,872 4,991,806 5,791,037
========= ========= ========= =========
<CAPTION>
GLA OWNED BY
THE COMPANY
------------ ANNUALIZED BASE ANCHOR TENANTS
OCCUPANCY(1) ANNUALIZED BASE RENT(2) RENT/OCCUPIED SQ. FT.(3) ---------------
------------ ------------------------------------- -----------------------------
PROPERTY TOTAL ANCHORS SHOPS TOTAL ANCHOR(5) SHOPS(6) TOTAL NAME
- ----------------------------- ----- ----------- ----------- ----------- --------- -------- -------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
DEVELOPMENT PROPERTIES
CURRENTLY UNDER CONSTRUCTION
Gateway Center(9)(17) -- -- -- -- -- -- -- FoodsCo
Marin City Ross
PetsMart
Longs Drugs
Hilltop Plaza -- -- -- -- -- -- -- Circuit City
Richmond Barnes & Noble
Ross
PetsMart
Office Max
1000 Van Ness -- -- -- -- -- -- -- AMC Theatres
San Francisco
--- ----------- ----------- ----------- ------ ------ ------
TOTAL DEVELOPMENT -- -- -- -- -- -- --
--- ----------- ----------- ----------- ------ ------ ------
GRAND TOTAL RETAIL -- -- -- -- -- -- --
OFFICE AND INDUSTRIAL
PROPERTIES
Anacomp Building 50% 1,983,970(14) 11.67(14) Anacomp
Poway
Bergen Brunswig 100% 4,291,000 24.52 Bergen
Orange Brunswig Corp.
Scripps Ranch Buildings(15) 50% 242,728 9.72 Edge
Semiconductor
San Diego
(Scripps Ranch)
Marcoa Building 100% 623,510 21.80 Marcoa
San Diego Publishing
(Sorrento Mesa) Company
--- ----------- ------
TOTAL/WEIGHTED AVERAGE OFFICE 67% $ 7,141,208 $17.92
--- ----------- ------
GRAND TOTAL/WEIGHTED AVERAGE 89%(10)(16) $49,563,066(16) $12.66(16)
=== =========== ======
<CAPTION>
ANCHOR
TENANTS
-----------
LEASE
PROPERTY EXPIRATION
- ------------------------------ -----------
DEVELOPMENT PROPERTIES
CURRENTLY UNDER CONSTRUCTION
Gateway Center(9)(17) 9/30/21
Marin City 1/31/07
12/31/11
2/28/22
Hilltop Plaza 1/31/17
Richmond 4/30/07
(est.)
1/31/08
1/31/12
1/31/12
1000 Van Ness 6/31/18
San Francisco (est.)
TOTAL DEVELOPMENT
GRAND TOTAL RETAIL
OFFICE AND INDUSTRIAL
PROPERTIES
Anacomp Building 1/31/99
Poway
Bergen Brunswig 3/31/00
Orange
Scripps Ranch Buildings(15) 3/31/04
San Diego
(Scripps Ranch)
Marcoa Building 9/30/99
San Diego
(Sorrento Mesa)
TOTAL/WEIGHTED AVERAGE
OFFICE AND INDUSTRIAL
GRAND TOTAL/WEIGHTED AVERAGE
</TABLE>
- ---------------
(1) Based on occupancy as of April 1, 1997. Data reflects occupancy only for the
portions of the properties owned by the Company.
(2) Annualized base rent is calculated by multiplying base rent for April 1997
by twelve. Data regarding base rents for Crenshaw Imperial Shopping Center,
Fremont Hub, Central Shopping Center and Santa Fe Springs Plaza has been
derived solely from information provided by the prior owners.
(3) Calculated by dividing annualized base rent (calculated as described in note
(2) above) by the square footage that the Company or the prior owner, as the
case may be, had leased at April 1, 1997.
(4) Anchor tenants are defined as all tenants occupying at least 14,000 square
feet, except for the Company's outlet centers, where they are defined as all
tenants occupying at least 7,500 square feet.
(5) Calculated by dividing annualized base rent (calculated as described in note
(2) above) for the anchor tenants by the square footage that they had leased
at April 1, 1997.
(6) Calculated by dividing annualized base rent (calculated as described in note
(2) above) for the tenants (excluding anchor tenants) by the square footage
that they had leased at April 1, 1997.
(7) Excludes Village Station. See "Recent Events -- Other Events."
(8) Reflects vacancy due in large part to rehabilitation in progress. The
Company expects the occupancy rate to be 71% following the completion of the
rehabilitation and the addition of a 44,180 square foot Albertsons. See
"Recent Events -- Rehabilitation and Development."
(9) Indicates a property held under ground lease.
S-39
<PAGE> 40
(10) Does not include Navajo Shopping Center.
(11) The Company anticipates that it will sell a 75% interest in this Property.
See "Recent Events -- Financings -- Joint Ventures." Data is for this
Property as a whole.
(12) The Company currently owns a 25% interest in this Property. See "Recent
Events -- Financings -- Joint Ventures." Data is for this Property as a
whole.
(13) Not determinable until completion of construction. See "The Company -- The
Martin Transactions" and "Related Party Transactions."
(14) Includes penalty rent for 50% of space vacated by Anacomp.
(15) Formerly known as the IMED Buildings. IMED Corporation vacated both
buildings on the Property at the expiration of its lease on March 31,
1997. One building containing 24,972 square feet has been re-leased to
Edge Semiconductor effective April 1, 1997.
(16) Excludes development properties.
(17) Title to this Property is currently held by an affiliate of The Martin
Group and is expected to be transferred to the Company upon completion of
construction. See "Related Party Transactions."
S-40
<PAGE> 41
The following tables set forth scheduled lease expirations for leases in
effect as of April 1, 1997, excluding Village Station, for each of the next ten
years, for (i) all of the Company's Properties (excluding development
properties) and (ii) all of the Company's retail Properties (excluding
development properties). The tables assume that none of the tenants exercises
renewal options or termination rights.
Lease Expirations of the Company's Portfolio
<TABLE>
<CAPTION>
NUMBER OF GROSS LEASABLE AREA ANNUALIZED BASE RENT(2)
TOTAL ANCHOR ---------------------- -------------------------------------
NUMBER OF TENANT APPROXIMATE PERCENT PERCENT
LEASES LEASES GLA OF OF AVERAGE PER
LEASES EXPIRING IN: EXPIRING EXPIRING(1) (SQ. FT.) TOTAL AMOUNT TOTAL SQ. FT.
- ------------------- --------- ------------ ----------- ------- ----------- ------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
1997............... 108 1 212,840 5% $ 3,298,283 7% $ 15.50
1998............... 110 3 299,421 8 4,059,558 8 13.56
1999............... 116 5 530,456 14 7,116,256 14 13.42
2000............... 92 6 508,356 13 8,825,240 18 17.36
2001............... 82 5 302,714 8 4,496,270 9 14.85
2002............... 39 5 220,424 6 2,736,632 5 12.42
2003............... 29 3 195,961 5 2,327,402 5 11.88
2004............... 30 6 259,759 7 2,507,534 5 9.65
2005............... 14 3 96,847 2 1,243,814 3 12.84
2006............... 11 4 194,139 5 1,477,657 3 7.61
After 2006......... 44 26 1,108,327 28 11,133,965 23 10.05
</TABLE>
Lease Expirations for Retail Properties
<TABLE>
<CAPTION>
NUMBER OF GROSS LEASABLE AREA ANNUALIZED BASE RENT(2)
TOTAL ANCHOR ------------------------- -------------------------------------
NUMBER OF TENANT APPROXIMATE PERCENT PERCENT
LEASES EXPIRING LEASES LEASES GLA OF OF AVERAGE
IN: EXPIRING EXPIRING(1) (SQ. FT.) TOTAL AMOUNT TOTAL PER SQ. FT.
- ----------------- --------- ------------ ----------- ---------- ----------- ------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
1997............. 108 1 212,840 6% $ 3,298,283 8% $ 15.50
1998............. 110 3 299,421 8 4,059,558 10 13.56
1999............. 114 3 331,856 9 4,508,776 11 13.59
2000............. 91 5 333,356 9 4,534,240 11 13.60
2001............. 82 5 302,714 9 4,496,270 11 14.85
2002............. 39 5 220,424 6 2,736,632 7 12.42
2003............. 29 3 195,961 6 2,327,402 6 11.88
2004............. 29 5 234,787 7 2,264,806 5 9.65
2005............. 14 3 96,847 3 1,243,814 3 12.84
2006............. 11 4 194,139 5 1,477,657 4 7.61
After 2006....... 44 26 1,108,327 31 11,133,965 26 10.05
</TABLE>
- ---------------
(1) Anchor tenants are defined as all tenants occupying at least 14,000 square
feet or as tenants of outlet centers occupying at least 7,500 square feet.
(2) Annualized base rent is calculated by multiplying base rent for April 1997
by twelve. Data regarding base rents for Crenshaw and the BRE Portfolio has
been derived solely from information provided by the prior owners.
S-41
<PAGE> 42
Tenant Concentrations
The following table lists the top ten tenants (in terms of annualized base
rent) for all of the Company's retail Properties (excluding development
properties) based on leases in place as of April 1, 1997. In the aggregate,
these top ten retail tenants account for 18.92% of the annualized base rental.
<TABLE>
<CAPTION>
ANNUALIZED PERCENTAGE OF LEASED
NUMBER OF TENANT BASE ANNUALIZED GLA
TENANT LOCATIONS RENT(1) BASE RENT(1) (SQ. FT.)
--------------------------- ------------------ ---------- --------------- ---------
<S> <C> <C> <C> <C>
AMC Theaters............... 3 $1,487,108 3.51% 92,656
IKEA....................... 1 1,088,004 2.56 150,000
Ralphs Supermarkets........ 5 955,162 2.25 189,954
WalMart.................... 1 811,751 1.91 117,645
Food-4-Less Supermarkets... 2 744,276 1.75 73,350
Circuit City............... 2 682,440 1.61 63,050
HomeBase................... 1 660,443 1.56 113,789
K-Mart..................... 1 621,732 1.47 98,194
Vons Supermarkets.......... 1 525,000 1.24 50,000
Cinemark Theatres.......... 1 448,570 1.06 35,182
---------- ------- -------
Total................. $8,024,486 18.92% 983,820
========== ======= =======
</TABLE>
- ---------------
(1) Annualized base rent is calculated by multiplying base rent for April 1997
by twelve. Data regarding base rents for Crenshaw and the BRE Portfolio has
been derived solely from information provided by the prior owners.
S-42
<PAGE> 43
INDEBTEDNESS
The Company's total outstanding consolidated mortgage debt on the
Properties(other than mortgage debt under the Credit Facility and a construction
loan) was approximately $118 million at April 7, 1997. Additionally, at April 7,
1997, the Company had $102 million and $72.9 million outstanding under the
secured and unsecured portions of its Credit Facility, respectively, including
$42 million and $28 million under the secured and unsecured portions,
respectively, of the Bridge Financing. Additionally, at April 7, 1997, the
Company had $16.7 million outstanding under a $28.8 million construction loan
secured by one of the Company's development Properties. The following table sets
forth certain information regarding the consolidated mortgage debt obligations
of the Company, including mortgage obligations relating to specific Properties,
and secured and unsecured indebtedness under the Credit Facility and the
construction loan. All of the mortgage debt is nonrecourse to the Company,
except for mortgage debt under the Credit Facility.
<TABLE>
<CAPTION>
PRINCIPAL BALANCE
OUTSTANDING AT INTEREST ANNUAL
MORTGAGE DEBT APRIL 7, 1997 RATE PAYMENT MATURITY DATE(1)
- -------------------------------- ------------------ ------------- ----------- ----------------
<S> <C> <C> <C> <C>
The Plaza at Puente Hills....... $ 33,100,000 7.98% $ 3,060,656 March 2004
Valley Central Shopping
Center........................ 25,400,000 7.98 2,347,452 March 2004
Point Loma Plaza................ 15,684,019 8.13 1,772,892 December 1999
Bergen Brunswig................. 9,602,993 8.38 912,096 October 1999
Mesa Shopping Center............ 8,074,333 10.00 911,976 December 2001
Wiegand Plaza II................ 7,267,422 10.00 977,328 December 2001
Richmond Shopping Center........ 7,014,622 9.50 755,280 January 2005
Crenshaw Imperial Shopping
Center........................ 5,287,397 8.80 534,948 July 2020
Ontario Village................. 3,684,125 9.75 411,456 July 1998
San Diego Factory Outlet
Center........................ 2,909,668 8.67 453,132 September 2006
Village Station(2).............. -- -- -- --
------------------ ------ -----------
Total/Weighted Average Mortgage
Debt.......................... $118,024,579 8.49% $12,137,216
==========
------------------
CREDIT FACILITY(3)
- --------------------------------
Secured Portion(4).............. $ 60,024,653 7.34% -- November 1998 (5)
Secured Portion--Bridge
Financing(6).................. 42,000,000 7.34 -- June 1997 (7)
Unsecured Portion............... 44,957,960 7.44 -- November 1998 (5)
Unsecured Portion--Bridge
Financing..................... 28,000,000 8.19 -- June 1997 (7)
------------------
Total Credit Facility........... $174,982,613
------------------
Construction Loan(3)............ $ 16,684,890 8.18% November 1997 (5)
------------------
Total All Indebtedness.......... $309,692,082
==============
</TABLE>
- ---------------
(1) All indebtedness is subject to a balloon principal payment on the date
indicated, with the exception of the debt secured by the Company's interest
in the Crenshaw Imperial Shopping Center.
(2) The Company has determined to deed this Property to the mortgagee in lieu of
foreclosure. See "Recent Events -- Other Events."
(3) This indebtedness bears interest at a floating rate. The interest rate in
the table is the interest rate at April 7, 1997.
(4) The secured portion of the Credit Facility currently is secured by the
Company's interest in the following Properties: San Diego Factory Outlet
Center, Pacific West Factory Outlet Center, Navajo Shopping Center, Santee
Village Square, La Mancha Shopping Center, Foothill Plaza and Poway Plaza,
and will also be secured by additional properties acquired with future
borrowings under the Credit Facility.
(5) Contains a one year extension option.
(6) Secured by the Company's interest in the BRE Portfolio.
(7) The Bridge Financing contains a ninety day extension option.
S-43
<PAGE> 44
TARGET MARKETS
Currently, all of the Company's Properties are located in the three major
metropolitan regions of California: San Diego, Los Angeles and San Francisco
(including Sacramento). The Company has targeted similar areas in Oregon
(Portland) and Washington (Seattle) for expansion. The Company has targeted
these markets for the following reasons:
- large market and fragmented ownership of retail properties;
- growth in demand; and
- constraints in supply.
Large Market/Fragmented Ownership. According to data provided by the
International Council on Shopping Centers, there are over 763 million square
feet of retail properties in California, Oregon and Washington serving over 40
million people. According to the National Research Bureau's Shopping Center
Database, the largest non-mall owner of retail properties owns less than 1% of
the total retail square footage in these regions. The Company believes that
operational efficiencies can be created through consolidation of ownership
within its markets.
Growth in Demand. The Company believes that its target California Markets
(as defined below) have experienced historical population growth and retail
sales. The following graph shows growth in population and retail sales in the
California Markets for the five year period from 1991 to 1996.
[COMPANY'S CALIFORNIA MARKETS CHART]
According to Regional Financial Associates, Inc. and the U.S. Department of
Commerce, from 1991 to 1996 population in the Company's California Markets grew
a total of 3.7%, while retail sales grew a total of 14.8%.
In addition, according to Regional Financial Associates, Inc., from 1995 to
2000, population in all of the Company's target markets is projected to grow a
total of 6.4% compared to 4.5% for the U.S. as a whole, and employment in all of
the Company's target markets is projected to grow a total of 9.3% compared to
7.5% for the U.S. as a whole, although no assurance can be given that such
growth will occur.
S-44
<PAGE> 45
In addition, the Company believes that economic conditions on the West
Coast have benefitted from a variety of factors, including the following:
Emerging Trade Center: The West Coast is strategically positioned as
a gateway to foreign trade with the nations of the Pacific Rim. According
to data from the U.S. Department of Commerce and Gruen & Gruen Associates,
the volume of trade handled by the West Coast ports of Los Angeles, Long
Beach, Oakland, Portland and Seattle/Tacoma grew by 227% between 1985 and
1995.
Growing Industries: The Company believes that its target markets are
major centers of employment in a variety of fields such as electronics,
bioscience, software, communications, aerospace and entertainment and that
such markets have the potential for future growth in these areas. For
example, the West Coast is home to such companies as Hewlett-Packard,
Microsoft, Intel Corporation, Amgen, Genentech, Chiron, Boeing, Walt
Disney, and Universal Studios.
Infrastructure: Supporting the growth of industries such as
telecommunications and biotechnology are a well-educated labor force, the
presence of research universities such as Caltech, the University of
California system and Stanford University, and research institutions such
as Lawrence Livermore Lab, the Jet Propulsion Laboratory, and the Salk
Institute.
Supply Constraints. The Company also believes that regulations such as the
California Environmental Quality Act, well-organized environmental and historic
preservation advocates, and prevailing political sentiment in favor of managed
growth in its target markets make it more difficult to receive approvals to
develop new properties, which should help to insulate, to some degree, the
Company's Properties from additional competition.
The information included under this caption "Target Markets" has been
obtained from sources the Company believes to be reliable. However, the Company
has not independently verified any such information and there can be no
assurance as to its accuracy. In addition, historical increases in population,
retail sales, employment, foreign trade or similar matters in any geographic
area do not purport to be indicative of whether population, retail sales,
employment, foreign trade or similar matters will increase or decrease in the
future.
S-45
<PAGE> 46
EXECUTIVE OFFICERS AND DIRECTORS
EXECUTIVE OFFICERS AND DIRECTORS
The following table lists the Executive Officers and Directors of the
Company.
<TABLE>
<CAPTION>
NAME AGE POSITION
------------------------------------- --- -------------------------------------
<S> <C> <C>
J. David Martin...................... 41 Director, President, Chief Executive
Officer
Daniel B. Platt...................... 50 Executive Vice President, Chief
Financial Officer, Chief
Administrative Officer
Michael L. Rubin..................... 51 Executive Vice President, Regional
Operating Officer, Southern
California Region
James M. Kessler..................... 44 Executive Vice President, Regional
Operating Officer, San Francisco
Region
James W. Gaube....................... 47 Executive Vice President, Regional
Operating Officer, Pacific Northwest
Region
Malin Burnham........................ 69 Chairman of the Board
Philip L. Gildred, Jr................ 60 Director
James D. Klingbeil................... 61 Director
Donne P. Moen........................ 61 Director
Thomas A. Page....................... 64 Director
Philip S. Schlein.................... 62 Director
Richard R. Tartre.................... 58 Director
</TABLE>
J. DAVID MARTIN became President, Chief Executive Officer and a Director of
the Company on October 1, 1995. From 1984 until joining the Company, Mr. Martin
was the Founder, Chairman and Chief Executive Officer of The Martin Group, a
full-service real estate development and management company of which Mr. Martin
still retains the title of Chairman. Mr. Martin is a Trustee of Golden Gate
University and a member of the Policy Advisory Board for the Center for Real
Estate and Urban Economics at the University of California. He is a Director of
the Bay Area Council and a Director of the Bay Area Economic Forum. Mr. Martin
is an officer of the Golden Gate Chapter of the Young Presidents' Organization.
He is also a member of the Urban Land Institute, International Council of
Shopping Centers and the National Association of Real Estate Investment Trusts.
DANIEL B. PLATT has been the Chief Financial Officer and Chief
Administrative Officer of the Company since October 1, 1995. Until 1994, Mr.
Platt was Group Executive Vice President of the Real Estate Industries Group of
Bank of America with responsibility for merging the real estate lending
activities of the two banks upon Bank of America's acquisition of Security
Pacific Bank in 1992. Mr. Platt joined Security Pacific in 1990 as Executive
Vice President responsible for creating a new real estate workout group and in
1991 was made Vice Chairman of the Real Estate Industries Group, where he
assumed additional corporate management responsibilities for all real estate
activities. Prior to joining Security Pacific, Mr. Platt spent 20 years with
Union Bank, where he was responsible for all real estate and commercial lending
activities.
MICHAEL L. RUBIN has been a Vice President of the Company since 1986 and
became Executive Vice President in 1992. He also was Chief Operating Officer of
the Company from 1993 to 1997, when his title changed to Regional Operating
Officer in charge of Southern California operations. Mr. Rubin is a Certified
Property Manager and a licensed real estate broker.
JAMES M. KESSLER has been Executive Vice President of the Company since
October 1, 1995. From such date he was also Director of Development of the
Company until 1997, when his title was changed to Regional Operating Officer in
charge of San Francisco's Region operations. From 1990 until joining the
Company, Mr. Kessler had served as Managing Director of The Martin Group with
overall responsibilities for that company's retail developments. Between 1985
and 1990, Mr. Kessler served as Director of Marketing for
S-46
<PAGE> 47
Transpacific Development Company, with overall responsibility for the marketing
of the company's northern California portfolio valued in excess of $500 million.
JAMES W. GAUBE joined the Company February 1, 1997 as an Executive Vice
President and Regional Operating Officer in charge of Pacific Northwest
operations. From June of 1995 until joining the Company Mr. Gaube served as
Senior Vice President, Real Estate, Design & Construction, of Thrifty Payless,
Inc. in Oregon. From July 1994 through May 1995 he served as Western Regional
Director of Real Estate for Home Depot in California. Prior to that, from 1993
to June of 1994 Mr. Gaube served as Senior Vice President, Real Estate &
Construction for Payless Drug Stores Northwest, Inc. in Oregon. From 1986
through June 1994, he served as Senior Vice President of Real Estate and
Construction for Payless Drug Stores Northwest, Inc. Beginning in 1966, Mr.
Gaube enjoyed a twenty year career at Safeway Stores, Inc. where he served as
Regional Real Estate Director prior to leaving.
MALIN BURNHAM has been Chairman of the Board of Directors since 1986 and
served as interim President and Chief Executive Officer from October 1994 to
October 1995. Mr. Burnham is a private investor. He is also Chairman of John
Burnham & Company and First National Bank (San Diego) and a Trustee of The
Burnham Institute.
PHILIP L. GILDRED, JR. has been a Director since 1986. He is a Director and
President of Gildred Development Company and Secretary-Treasurer of Gildred
Building Company. Both of these companies are engaged in the ownership and
development of Southern California real estate. Mr. Gildred also is a Director
and Founding Chairman of the Sharp Hospital Foundation. Mr. Gildred will not
stand for reelection at the 1997 Annual Meeting of Shareholders.
JAMES D. KLINGBEIL has been a Director since 1996. He is Chairman,
President and Chief Executive Officer of American Apartment Communities, Inc.,
which is the successor entity to The Klingbeil Company, which he founded in
1961. Both of these companies are engaged in the ownership and development of
housing nationwide. He is a Trustee and former President of the Urban Land
Institute, and a member of the Chief Executives Organization and World Business
Council, and serves on the Policy Advisory Board for the Center for Real Estate
and Urban Economics, University of California. He has also served as Public
Interest Director, Federal Home Loan Bank of Cincinnati, as a member of the
Young Presidents' Organization and the Federal Home Loan Mortgage Corporation
Advisory Board.
DONNE P. MOEN has been a Director since 1996. He is the retired President
and Vice Chairman of Union Bank in California, where he served in a variety of
executive positions from 1963 until 1992. Mr. Moen is also a member of the board
of a number of civic and nonprofit organizations including The Los Angeles
Library Foundation, The Los Angeles Urban League, Los Angeles Educational
Partnership, Toberman Settlement House, and Chadwick School.
THOMAS A. PAGE has been a Director since 1992. Since 1983, Mr. Page has
been Chairman of the Board and through 1995 served as Chief Executive Officer of
San Diego Gas & Electric Company. Mr. Page is also Chairman of Enova Corp. and
is a member of the California Business Roundtable, the Board of Overseers of the
University of California at San Diego, and a Trustee of The Burnham Institute.
He is a certified public accountant and a professional engineer.
PHILIP S. SCHLEIN has been a Director since 1996. He has been a partner in
U.S. Venture Partners, a California based venture capital company, since 1985.
Prior to that time, he had a 28-year career in the retailing industry, including
serving as President and Chief Executive Officer of Macy's California from 1974
to 1985. Mr. Schlein was a member of the Board of Directors of Apple Computer,
Inc. from 1979 to 1987. He currently serves as a Director of Ross Stores, Inc.,
ReSound Corporation, Quick Response Services, Imaginarium, Una Mas!, SelfCare
Catalog, C.W. Gourmet, Instill Corporation, Bebe, and Home Chef.
RICHARD R. TARTRE has been a Director since 1986. Since January 1997, Mr.
Tartre has been a Senior Vice President of MetLife, Chairman of MetLife
Securities Inc., and Chairman of MetLife General Agency Inc. Formerly he had
been President and Chief Executive Officer of Astra Management Corp., a mutual
fund management firm for one year. Prior to that, for more than five years, he
had served as Managing Director of
S-47
<PAGE> 48
Eden Financial Group Inc., a national marketer of insurance and investment
products. Mr. Tartre is a licensed securities principal and also serves as a
director of Mission West Properties and Triton Group, Ltd.
EMPLOYMENT AGREEMENTS
J. David Martin joined the Company effective October 1, 1995. Pursuant to
his Employment Agreement of the same date (the "Employment Agreement"), Mr.
Martin serves as the Company's President, Chief Executive Officer and a Director
for an indefinite term, subject to termination by the Company or Mr. Martin.
Pursuant to the Employment Agreement, Mr. Martin receives a minimum base salary
of $250,000 per year. Mr. Martin will also be entitled to a bonus for 1997 and
each subsequent year in such amount as the Compensation Committee of the Board
of Directors determines.
RELATED PARTY TRANSACTIONS
In October 1995, the Company succeeded to the shopping center operations of
the Martin Group by consummating the Martin Transactions. As part of the Martin
Transactions, the Company acquired interests in the Martin Projects from Mr.
Martin and other affiliates of the Martin Group. Each of the Martin Projects is
currently owned by a separate limited partnership of which the Company is
general partner and Mr. Martin and various other persons affiliated with The
Martin Group (collectively, including Mr. Martin, the "Martin Group Affiliates")
are the limited partners. Each of the partnership agreements contemplates that
the Company will acquire or develop a specified Martin Project through the
relevant partnership and that upon completion and stabilization of rental
revenues from the property, the limited partners will receive a number of
limited partnership units determined as follows: (i) the annualized net
operating income of the Property will be multiplied by 10 in order to arrive at
a hypothetical value of the completed property, (ii) the cost of construction
and other project costs will be deducted from such hypothetical value in order
to "value" the equity interests of the limited partners in the Property, and
(iii) such equity interest will be stated as a number of limited partnership
units determined by dividing such limited partners' equity by $16. Each holder
of limited partnership units will have the right to "put" such units to the
partnership at a price equal to the then market value of an equivalent number of
shares of the Company's Common Stock; as a result, the actual value which a
holder of limited partnership units would be entitled to receive upon exercise
of such "put" option will depend upon the market value of the Common Stock at
the time, which may be more or less than $16 per limited partnership unit. If
such "put" is exercised, the Company has the option of either purchasing the
limited partnership units for cash or delivering one share of Common Stock for
each limited partnership unit.
Each partnership agreement specifies the maximum number of limited
partnership units that may be issued to the limited partners of that
partnership. If the hypothetical equity value of any such partnership is
determined to be less than originally estimated (either because project costs
are higher than estimated or because stabilized net operating income is less
than estimated or both), then the number of limited partnership units and the
corresponding number of shares of Common Stock of the Company which may be
exchanged for such units will be reduced. Other than to reflect a stock split or
other capital adjustment of the shares of Common Stock, under no circumstances
can the number of units be increased above the number specified in the
applicable partnership agreement. The limited partnership that acquired Richmond
City Center issued limited partnership units exchangeable for 41,878 shares of
Common Stock in consideration for the interests of the Martin Group Affiliates
in the project. A maximum of 1,870,000 shares of Common Stock have been reserved
for issuance upon exchange of the maximum number of 1,870,000 limited
partnership units that may be issued with respect to the remaining five Martin
Projects. In connection with each of the Martin Projects, the Company entered
into a registration rights agreement with the limited partners of each limited
partnership pursuant to which such limited partners will have the right to
require the Company to register under the Securities Act the shares of Common
Stock which are issued upon the exchange of limited partnership units for offer
and sale to the public and to join in certain registrations of securities of the
Company.
Upon the execution and delivery of the partnership agreement with respect
to each of the Martin Projects, in 1995, the Martin Group Affiliates contributed
their interests in the Martin Projects to the
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<PAGE> 49
partnerships in exchange for limited partnership units (in the case of Richmond
City Center) or the right to receive such units (in the case of the other Martin
Projects) as described above, and the Company reimbursed The Martin Group for
its out-of-pocket costs with respect to the relevant development property. The
Company thereafter became obligated to make further contributions to each
partnership (other than the partnership holding the completed Richmond City
Center Property) to fund the completion of the relevant project, subject to the
Company's right to abandon a project as described below. Because of restrictions
on the transferability of The Martin Group's development rights with respect to
the Gateway Retail Center project, however, the partnership agreement between
the Company and the Martin Group Affiliates relating to this Property was signed
in escrow, with the Martin Group Affiliates retaining title to and
responsibility for the development of the Property until completion of
construction.
Each of such partnership agreements gives the Board of Directors of the
Company, exclusive of Mr. Martin, the authority to determine not to proceed with
the commencement of construction of the relevant development property (or not to
close the escrow with respect to Gateway Retail Center). In the event of a
determination to proceed with a given project, the partnership agreements
provide that thereafter the Company is required to make further contributions to
the partnership to fund the completion of the property. In the event of a
determination by the Board of Directors not to proceed with a given project, the
Martin Group Affiliates have the option to reacquire the Property at the
Company's cost plus interest on such costs.
After due diligence coordinated by disinterested executive officers of the
Company, the Board of Directors, without Mr. Martin participating, approved
during 1996 the acquisition of Gateway Retail Center, following the completion
of construction, the commencement of construction of Hilltop Plaza and 1000 Van
Ness, and in March 1997 subject to the satisfaction of various conditions
approved the commencement of construction of Downtown Pleasant Hill. The Company
expects that upon completion and occupancy of each of these Properties, the
applicable partnerships will issue partnership units to the Martin Group
Affiliates in accordance with the partnership agreements. The Board of Directors
has not yet determined whether to commence the Gateway 101 project located in
East Palo Alto.
S-49
<PAGE> 50
UNDERWRITING
Under the terms and subject to the conditions contained in an Underwriting
Agreement dated the date hereof, the Underwriters named below have severally
agreed to purchase, and the Company has agreed to sell to them severally, the
respective number of shares of Common Stock set forth opposite their respective
names below:
<TABLE>
<CAPTION>
NUMBER
UNDERWRITERS OF SHARES
-------------------------------------------------------------- ---------
<S> <C>
Morgan Stanley & Co. Incorporated............................. 1,350,000
Lehman Brothers Inc........................................... 1,350,000
Merrill Lynch, Pierce, Fenner & Smith
Incorporated..................................... 1,350,000
EVEREN Securities, Inc........................................ 450,000
Alex. Brown & Sons Incorporated............................... 100,000
Credit Suisse First Boston Corporation........................ 100,000
Dean Witter Reynolds Inc...................................... 100,000
A.G. Edwards & Sons, Inc...................................... 100,000
Jefferies & Company, Inc...................................... 50,000
Legg Mason Wood Walker, Incorporated.......................... 50,000
Montgomery Securities......................................... 100,000
PaineWebber Incorporated...................................... 100,000
Robertson, Stephens & Company LLC............................. 100,000
The Robinson-Humphrey Company, Inc............................ 50,000
Smith Barney Inc.............................................. 100,000
Sutro & Co. Incorporated...................................... 50,000
---------
Total............................................... 5,500,000
=========
</TABLE>
The Underwriting Agreement provides that the obligations of the several
Underwriters to pay for and accept delivery of the Common Stock are subject to
the approval of certain legal matters by their counsel and to certain other
conditions. The Underwriters are committed to take and pay for all of the shares
of Common Stock offered hereby (other than those covered by the over-allotment
option described below) if any are taken.
The Underwriters propose to offer part of the Common Stock directly to the
public at the public offering price set forth on the cover page hereof and part
to certain dealers at a price that represents a concession not in excess of $.39
per share of Common Stock. Any Underwriter may allow, and such dealers may
reallow, a concession not in excess of $.10 per share to certain other dealers.
The Company has agreed to indemnify the several Underwriters against
certain liabilities, including liabilities under the Securities Act of 1933.
The Company has granted to the Underwriters an option, exercisable for 30
days from the date of this Prospectus Supplement, to purchase up to an
additional 825,000 shares of Common Stock at the public offering price set forth
on the cover page of this Prospectus Supplement, less underwriting discounts and
commissions. The Underwriters may exercise such option solely for the purpose of
covering over-allotments, if any, incurred in the sale of the Common Stock.
At the request of the Company, the Underwriters have reserved for sale, at
the initial offering price, up to 37,000 shares offered hereby for directors,
officers and employees of the Company. The number of shares of Common Stock
available for sale to the general public will be reduced to the extent such
persons purchase such reserved shares. Any reserved shares which are not so
purchased will be offered by the Underwriters to the general public on the same
basis as the other shares offered hereby.
S-50
<PAGE> 51
In order to facilitate the offering of the Common Stock, the Underwriters
may engage in transactions that stabilize, maintain or otherwise affect the
price of the Common Stock. Specifically, the Underwriters may over-allot in
connection with the Offering, creating a short position in the Common Stock for
their own account. In addition, to cover over-allotments or to stabilize the
price of the Common Stock, the Underwriters may bid for, and purchase, shares of
Common Stock in the open market. Any of these activities may stabilize or
maintain the market price of the Common Stock above independent market levels.
The Underwriters are not required to engage in these activities, and may end any
of these activities at any time.
The Company has agreed that, during the period of 90 days from the date of
this Prospectus Supplement, it will not, without the prior written consent of
Morgan Stanley & Co. Incorporated, as a representative of the several
Underwriters, directly or indirectly, (i) offer, pledge, sell, contract to sell,
sell any option or contract to purchase, purchase any option or contract to
sell, grant any option, right or warrant to purchase or otherwise transfer or
dispose of any shares of Common Stock or any securities convertible into or
exercisable or exchangeable for Common Stock or (ii) enter into any swap or any
other agreement or any transaction that transfers, in whole or in part, directly
or indirectly, the economic consequence of ownership of the Common Stock, except
for (A) the shares of Common Stock offered hereby, (B) shares of Common Stock
issuable pursuant to any employee stock option plans existing on the date of
this Prospectus Supplement or (C) limited partnership units issued in connection
with property acquisitions which are not convertible into or exercisable or
exchangeable for Common Stock until after the end of such 90 day period.
EXPERTS
The Company's consolidated financial statements and the related financial
statement schedule incorporated by reference in this Prospectus Supplement and
the accompanying Prospectus have been audited by Deloitte & Touche LLP,
independent auditors, as stated in their reports thereon, which are incorporated
herein and in the accompanying Prospectus by reference and have been so
incorporated by reference herein and therein in reliance upon the reports of
such firm given upon their authority as experts in accounting and auditing.
The BRE Portfolio's Combined Statement of Gross Income and Direct Operating
Expenses for each of the three years in the period ended December 31, 1996
incorporated by reference in this Prospectus Supplement and the accompanying
Prospectus has been audited by Ernst & Young LLP, independent auditors, as
stated in their report thereon incorporated herein and in the accompanying
Prospectus and has been so incorporated by reference herein and therein in
reliance upon the report of such firm given upon their authority as experts in
accounting and auditing.
The combined statements of revenue and direct operating expenses of The
Downey Portfolio for each of the years in the three-year period ended December
31, 1996, have been incorporated by reference herein and in the accompanying
Prospectus in reliance upon the report of KPMG Peat Marwick LLP, independent
certified public accountants, incorporated by reference herein and therein, and
upon the authority of said firm as experts in accounting and auditing. Such
report contains a paragraph that states that the combined statements of revenue
and certain expenses were prepared for the purpose of complying with the rules
and regulations of the Securities and Exchange Commission as described in note
1. It is not intended to be a complete presentation of The Downey Portfolio's
combined revenue and direct operating expenses.
LEGAL MATTERS
The validity of the shares of Common Stock offered hereby will be passed
upon for the Company by Goodwin, Procter & Hoar LLP, Boston, Massachusetts.
Goodwin, Procter & Hoar LLP will rely upon the opinion of Loeb & Loeb LLP, Los
Angeles, California as to certain matters of California law. Brown & Wood, LLP,
San Francisco, California, will act as counsel for the Underwriters.
S-51
<PAGE> 52
PROSPECTUS
BURNHAM PACIFIC PROPERTIES, INC.
SHARES OF COMMON STOCK
AND/OR
CONVERTIBLE DEBENTURES
------------------------
Any combination of shares of common stock, without par value (the "Common
Stock"), and/or Convertible Debentures, issuable in series (the "Debentures"),
with a maximum aggregate offering price of $200,000,000, are being offered from
time to time (the "Offering(s)") by Burnham Pacific Properties, Inc., a
California corporation (the "Company"). The Company has elected to qualify as a
real estate investment trust for federal income tax purposes. The Common Stock
and Debentures are hereinafter collectively referred to as the "Securities."
When a particular Offering of the Securities is proposed, a supplement to this
Prospectus (the "Prospectus Supplement") will be delivered with this Prospectus
setting forth: the type and amount of Securities offered; the purchase price and
other terms of the offering; and any listing on a securities exchange; and, if
Debentures are offered, the rate and time of payment of interest, the maturity
or maturities, the initial price and date after which such Debentures may be
converted into Common Stock, the terms for a sinking, purchase or analogous
fund, if any, and the terms for redemption or early payment, if any.
The Securities may be sold: (i) through underwriting syndicates represented
by one or more managing underwriters, or by one or more underwriters without a
syndicate; (ii) through agents designated from time to time; and (iii) directly
to institutional investors. The names of any underwriters or agents of the
Company involved in the sale of the Securities in which this Prospectus is being
delivered and any applicable commissions or discounts will be set forth in the
Prospectus Supplement. The net proceeds to the Company from such sale will also
be set forth in the Prospectus Supplement.
The Company's shares of Common Stock are traded on the New York Stock
Exchange under the symbol "BPP." A recent closing sale price of such shares on
the New York Stock Exchange prior to the commencement of an Offering will be set
forth on the cover page of the Prospectus Supplement.
The Debentures will be unsecured general obligations of the Company
issuable in one or more series and will be subordinated to all existing and
future Senior Indebtedness (as defined herein) of the Company. The indenture
under which the Debentures will be issued does not restrict the amount of Senior
Indebtedness or other indebtedness that may be incurred by the Company. As of
December 31, 1996, the Company had approximately $178,000,000 of Senior
Indebtedness.
There is currently no market for the Debentures.
------------------------
SEE "RISK FACTORS" ON PAGE 3 FOR A DISCUSSION OF CERTAIN FACTORS THAT
SHOULD BE CONSIDERED IN CONNECTION WITH AN INVESTMENT IN THE SECURITIES.
------------------------
No offers or sales will be made except through a Prospectus Supplement.
------------------------
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.
------------------------
The date of this Prospectus is March 25, 1997.
<PAGE> 53
AVAILABLE INFORMATION
No person has been authorized to give any information or to make any
representation not contained or incorporated by reference in this Prospectus or
any accompanying Prospectus Supplement and, if given or made, such information
or representation must not be relied upon as having been authorized by the
Company or any underwriter, dealer or agent. Neither the delivery of this
Prospectus or any accompanying Prospectus Supplement nor any sale made hereunder
or thereunder shall, under any circumstances, create an implication that the
information contained herein or in the accompanying Prospectus Supplement is
correct as of any date subsequent to the date hereof or thereof or that there
has been no change in the affairs of the Company since the date hereof or
thereof. Neither this Prospectus nor any accompanying Prospectus Supplement
constitutes an offer to sell or a solicitation of an offer to buy Securities in
any 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.
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "1934 Act"), and in accordance therewith
files periodic and current reports, proxy statements and other information with
the Securities and Exchange Commission (the "Commission"). Copies of such
material can be obtained by mail from the Public Reference Section of the
Commission at 450 Fifth Street, N.W., Washington, D.C. 20549 at prescribed
rates. Such reports, proxy statements and other information can also be
inspected and copied at the public reference facilities maintained by the
Commission at Room 1024, 450 Fifth Street N.W., Washington, D.C. 20549, and at
the Commission's Regional Offices located at 500 West Madison Street (Suite
1400), Chicago, Illinois 60661 and at 7 World Trade Center, 13th Floor, New
York, New York 10048 and at the offices of the New York Stock Exchange, Inc., 20
Broad Street, New York, New York 10005. The Commission also maintains a Web site
that contains reports, proxy statements and other information about the Company
filed electronically with the Commission: http://www.sec.gov.
The Company has filed with the Commission a Registration Statement on Form
S-3 (together with all amendments and exhibits thereto, the "Registration
Statement") under the Securities Act. This Prospectus does not contain all the
information set forth in the Registration Statement, certain parts of which are
omitted in accordance with the rules and regulations of the Commission. For
further information, reference is made to the Registration Statement, copies of
which may be obtained upon payment of a fee prescribed by the Commission, or may
be examined free of charge at the principal office of the Commission in
Washington, D.C.
Statements made in this Prospectus or in the accompanying Prospectus
Supplement as to the contents of any contract or other document referred to do
not purport to be complete, and 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.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The Company hereby incorporates by reference its Annual Report on Form 10-K
for the year ended December 31, 1996 and the Company's Current Report on Form
8-K dated January 31, 1997.
All documents subsequently filed by the Company pursuant to Sections 13(a),
13(c), 14 or 15(d) of the 1934 Act after the date of this Prospectus and prior
to the termination of the Offering of the Securities shall be deemed to be
incorporated by reference in this Prospectus and to be a part hereof from the
date of the filing of such documents. Any statement contained herein or in a
document incorporated or deemed to be incorporated by reference shall be deemed
to be modified or superseded for purposes of this Prospectus to the extent that
a statement contained herein (or in an applicable Prospectus Supplement) or in
any subsequently filed document that is incorporated or deemed to be
incorporated by reference herein modifies or supersedes such statement. Any such
statement so modified or superseded shall not be deemed to constitute a part of
this Prospectus or any Prospectus Supplement, except as so modified or
superseded.
2
<PAGE> 54
The Company will provide, without charge, to each person, including any
beneficial owner, to whom a copy of this Prospectus is delivered, at the request
of such person, a copy of any or all of the documents incorporated herein by
reference (other than exhibits thereto, unless such exhibits are specifically
incorporated by reference into such documents). Written requests for such copies
should be directed to Daniel B. Platt, Chief Financial Officer, Burnham Pacific
Properties, Inc., 610 West Ash Street, Suite 1600, San Diego, California 92101,
telephone (619) 652-4700.
THE COMPANY
The Company is a fully-integrated, self-managed real estate operating
company which acquires, rehabilitates, develops and manages retail properties on
the West Coast. The Company was incorporated in 1986 as the successor to a
publicly-traded real estate limited partnership which was organized in 1963. The
Company has elected to qualify as a real estate investment trust ("REIT") for
federal income tax purposes.
The Company is organized under the laws of the State of California. Its
principal executive office is located at 610 West Ash Street, Suite 1600, San
Diego, California, 92101, telephone (619) 652-4700.
RATIO OF EARNINGS TO FIXED CHARGES
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------
1992 1993 1994 1995 1996
---- ---- ---- ------- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Ratio of earnings to fixed charges................... 1.09 1.94 2.13 -- 1.67
Deficiency in the coverage of fixed charges by
earnings before fixed charges...................... -- -- -- $15,048 --
</TABLE>
The ratio of earnings to fixed charges equals earnings before fixed charges
divided by fixed charges. For purposes of calculating the ratio of earnings to
fixed charges, earnings before fixed charges consist of income from operations
plus fixed charges (other than capitalized interest). Fixed charges consist of
interest expense and capitalized interest.
Exclusive of the impairments/writedowns of assets, the ratio of earnings to
fixed charges for the year ended December 31, 1995, would have been 1.61.
USE OF PROCEEDS
Unless otherwise described in the applicable Prospectus Supplement, the
Company intends to use the net proceeds from the sale of Securities primarily to
repay indebtedness, to acquire additional retail shopping centers or other
retail or entertainment facilities and to fund the development, expansion and/or
improvement of new or existing retail shopping centers or other retail or
entertainment centers already owned by the Company. The net proceeds from the
sale of Securities may also be used for other general corporate purposes.
Pending their use as described above, net proceeds from the sale of Securities
may be invested in short term investments.
RISK FACTORS
In addition to the other information set forth and incorporated by
reference herein, prospective investors should carefully consider the following
information in evaluating the Company and its business before making an
investment in the Securities offered hereby. The information contained and
incorporated by reference in this Prospectus and the applicable Prospectus
Supplement contains forward-looking statements within the meaning of Section 27A
of the Securities Act of 1933, as amended (the "Securities Act") and Section 21E
of the 1934 Act that involve a number of risks and uncertainties. A number of
factors could cause results to differ materially from those anticipated by such
forward-looking statements. These factors include, but are not limited to, the
competitive environment in the retail industry in general and in the Company's
specific market areas, changes in prevailing interest rates and the availability
of financing, inflation, economic conditions in
3
<PAGE> 55
general and in the Company's specific market areas, labor disturbances, demands
placed on management by the recent substantial increase in the number of
properties owned by the Company (the "Properties"), and changes in the Company's
acquisition plans and certain other factors described below. In addition, such
forward-looking statements are necessarily dependent upon assumptions, estimates
and data that may be incorrect or imprecise. Accordingly, any forward-looking
statements included or incorporated by reference in this Prospectus and the
applicable Prospectus Supplement do not purport to be predictions of future
events or circumstances and may not be realized. Forward-looking statements can
be identified by, among other things, the use of forward-looking terminology
such as "believes," "expects," "may," "will," "should," "seeks," "pro forma," or
"anticipates," or the negative thereof, or other variations thereon or
comparable terminology, or by discussions of strategy or intentions.
DISTRIBUTIONS TO SHAREHOLDERS
As a California corporation, the Company is subject to the California
General Corporation Law (the "CGCL"). Under the CGCL, a corporation may only
make a distribution to shareholders if (i) its retained earnings immediately
prior to payment of the distribution are at least equal to the amount of the
distribution, or (ii) generally, its total assets (determined on the basis of
their depreciated historical cost in accordance with generally accepted
accounting principles ("GAAP") and exclusive of certain intangible assets and
certain other charges and expenses) are equal to at least 1 1/4 times its total
liabilities (excluding certain deferred items) immediately after giving effect
to the distribution. The CGCL also prohibits a California corporation from
making any distribution to shareholders if the corporation is or, as a result
thereof, would be likely to be unable to meet its liabilities as they mature.
The CGCL also imposes certain further limitations on distributions on common
stock if capital stock with a preference on distributions of assets upon
liquidation or payment of dividends is outstanding.
The Company has historically paid quarterly cash dividends since its
incorporation in 1986. Like most REITs whose assets consist of real property,
the Company's distributions have reflected the amount of cash available for
distribution from Property operations or from "Funds From Operations" rather
than from "retained earnings." "Funds From Operations," as currently defined by
the National Association of Real Estate Investment Trusts, represents net income
(computed in accordance with GAAP), excluding gains (or losses) from debt
restructuring and sales of property, plus depreciation and amortization of real
estate assets, and after adjustments for unconsolidated partnerships and joint
ventures. Non-cash charges for depreciation reduce net income and consequently
retained earnings, but not Funds From Operations or cash available for
distribution.
The Company's quarterly distributions over the past 10 years have exceeded
its GAAP net income over the period and resulted in negative "retained earnings"
on the Company's balance sheet, with the result that the Company's legal ability
under the CGCL to make distributions depends upon the book value of its assets
exceeding 1 1/4 times its liabilities. Such "book value" is also determined in
accordance with GAAP, which means that such book value cannot exceed the
historic acquisition cost of the Company's Properties less charges for
depreciation and certain deductions related to writedowns for impairment. As a
result, the book value of Properties will typically decline over time and, in
any event, does not purport to reflect the actual fair market value of the
assets at the time that distributions to shareholders are made. Accordingly,
there can be no assurance that the Company will continue to be able to satisfy
the CGCL requirements with respect to the payment of distributions to
shareholders. A failure to satisfy these provisions would require a reduction in
or cessation of distributions to shareholders, which could prevent the Company
from satisfying the distribution requirements under the Internal Revenue Code of
1986, as amended (the "Code") necessary to maintain its REIT status, either of
which would likely have a material adverse effect on the Company and on its
ability to make distributions to shareholders. See "Federal Income Tax
Considerations" for a discussion of the Company's requirement to make
distributions under the Code. Consequently, the Board of Directors of the
Company is proposing to reincorporate the Company in Maryland. See "-- Proposed
Reincorporation" and "Description of Common Stock -- Proposed Reincorporation of
the Company".
4
<PAGE> 56
GENERAL REAL ESTATE INVESTMENT RISKS
Real property investments are subject to a variety of risks. The yields
available from equity investments in real estate depend on the amount of income
generated and expenses incurred. If the Properties do not generate sufficient
income to meet operating expenses, including debt service and capital
expenditures, the Company's results of operations and ability to make
distributions to its shareholders will be adversely affected. The performance of
the economy in each of the areas in which the Company's Properties are located
affects occupancy, market rental and vacancy rates and expenses, and,
consequently, has an impact on the revenues from the Properties and their
underlying values. The financial results of major local employers may have an
impact on the revenues and value of certain of the Properties.
Revenues from the Company's Properties may be further adversely affected
by, among other things, the general economic climate, local economic conditions
in which the Properties are located, such as oversupply of space or a reduction
in demand for rental space, the attractiveness of the Properties to tenants,
competition from other available space, the ability of the Company to provide
for adequate maintenance and insurance and increased operating expenses
(including real estate taxes and utilities) which may not be passed through to
tenants; and the expense of periodically renovating, repairing and re-leasing
space. There is also the risk that as leases on the Properties expire, tenants
will enter into new leases on terms that are less favorable to the Company.
Revenues and real estate values may also be adversely affected by such factors
as applicable laws (e.g., the Americans With Disabilities Act of 1990 and tax
laws), interest rate levels and the availability and terms of financing. In
addition, real estate investments are relatively illiquid and, therefore, will
tend to limit the ability of the Company to vary its portfolio promptly in
response to changes in economic or other conditions.
Most of the leases of the Company's retail Properties, as is common with
many multi-tenant shopping centers, provide for tenants to reimburse the Company
for a portion (frequently based upon the portion of total retail space in the
Property that is occupied by the tenant) of the common area maintenance, real
estate taxes, insurance and other operating expenses of the Property. To the
extent that a Property has vacant rentable space, not only will the Company be
deprived of the base rent that it would receive if the vacant space were
occupied, but the Company itself will have to bear the unreimbursed expense
applicable to such vacant space. Likewise, such expenses are generally not
reduced when circumstances cause a reduction in rental revenues from the
Property. If a Property is mortgaged to secure the payment of indebtedness and
if the Company is unable to meet its mortgage payments, a loss could be
sustained as a result of foreclosure on the Property or the exercise of other
remedies by the mortgagee. Likewise, if a Property suffers sustained reductions
in revenues, the Company may sustain a writedown of the asset value and a
related charge to earnings.
INVESTMENT IN SINGLE INDUSTRY
The Company's current strategy is to acquire interests only in retail
shopping centers and related properties. As a result, the Company will be
subject to risks inherent in investments in a single industry. The effects on
cash available for distribution to the Company's shareholders resulting from a
downturn in the retail industry might be more pronounced than if the Company's
portfolio were more diversified as to property types.
Among the risks that the Company as an owner of Properties leased primarily
to retail tenants may face are the volatile nature of the retail business and
changes in consumer preferences, which may result in tenant failures or changes
in the physical requirements of retailers that the Company may be required to
accommodate in order to retain or attract tenants. Retail chains may overexpand
in the same general market area, thereby creating competition with their own
stores that may be in one or more of the Company's Properties. Because many
anchor tenants frequently have negotiating power to demand the exclusive or sole
right to sell certain types of products in a shopping center, the existence of
such rights may adversely limit the Company's ability to lease space in the
center to retailers of potentially competing products. The foregoing and similar
factors may affect the revenues, and resulting value, of the Company's
Properties.
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BANKRUPTCY AND FINANCIAL CONDITION OF TENANTS
At any time, a tenant of the Properties may seek the protection of the
bankruptcy laws, which could result in the rejection and termination of such
tenant's lease and thereby adversely affect the Company's results of operations
and ability to make distributions to its shareholders. Although the Company has
not experienced material losses from tenant bankruptcies, no assurance can be
given that tenants will not file for bankruptcy protection in the future, or if
any tenants file, that they will affirm their leases and continue to make rental
payments in a timely manner. In addition, a tenant from time to time may
experience a downturn in its business which may weaken its financial condition
and result in the failure to make rental payments when due. If tenant leases are
not affirmed following bankruptcy or if a tenant's financial condition weakens,
the Company's results of operations and ability to make distributions to its
shareholders may be adversely affected.
GEOGRAPHIC CONCENTRATION
The Company's Properties are all located within the State of California,
and within such state primarily in the San Diego County, greater Los Angeles and
San Francisco Bay areas. This concentration of Properties subjects the Company
to the strengths or weaknesses of the California economy and the aforementioned
local economies in a number of ways. The performance of the economy in each
locality affects occupancy, market rental rates and expenses and, consequently,
has an impact on the revenues from the Company's Properties and their underlying
values. The financial results of major local employers may have an impact on the
revenues and value of certain of the Properties. A downturn in the economy of
California in general or of any of these local economies could adversely affect
the Company's results of operations and ability to make distributions to its
shareholders. In that regard, certain areas of California (particularly the
greater Los Angeles area) have in the past been adversely affected by reductions
in defense spending, and certain other areas of California (particularly the San
Francisco Bay area) may be substantially influenced by conditions in the high
technology industries. Additionally, certain areas in California have been and
remain subject to various natural disasters, including earthquakes and floods.
See "-- Insurance Coverage Limitations."
COMPETITION
Numerous retail properties compete with the Company's Properties in
attracting tenants to lease space. Some of these competing properties are newer
and better located or designed and may offer lower expenses or be better
capitalized than the Company's Properties. The number of competitive commercial
properties in a particular area could have a material adverse effect on the
Company's ability to lease space in its Properties or at newly developed or
acquired properties and on the rents charged.
Additionally, the Company may be competing for investment opportunities
with entities which have substantially greater financial resources than the
Company. These entities may generally be able to accept more risk than the
Company can prudently manage. Competition may generally reduce the number of
suitable investment opportunities offered to the Company and increase the
bargaining power of property owners seeking to sell.
ACQUISITION AND DEVELOPMENT ACTIVITIES
The Company intends to acquire existing retail commercial properties to the
extent that they can be acquired on acceptable terms and meet the Company's
investment criteria, including the availability of suitable financing.
Acquisitions of retail commercial properties entail general investment risks
associated with any real estate investment, including the risk that investments
will fail to perform as expected or that estimates of the cost of improvements
to bring an acquired property up to standards established for the intended
market position may prove inaccurate.
The Company is pursuing certain commercial property development projects
and expects to develop other projects. As a general matter, property development
projects typically carry a higher, and sometimes substantially higher, level of
risk than the acquisition of existing properties. For example, development
projects generally require various governmental and other approvals, the receipt
of which cannot be assured. Approvals
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frequently require undertakings for public infrastructure improvements or other
activities to mitigate the effects of the proposed development, whose costs also
cannot be assured. The Company's development activities will entail a variety of
other risks, including the risk that funds will be expended and management time
will be devoted to projects which may not come to fruition; the risk that a
project will not be developed by the scheduled completion date; the risk that
construction costs of a project may exceed original estimates, possibly making
the project economically unfavorable to operate or requiring a writedown of the
carrying amount of the project; the risk that occupancy rates and rents at a
completed project will be less than anticipated; and the risk that expenses at a
completed development will be higher than anticipated. These risks may adversely
affect the Company's results of operations and ability to make distributions to
its shareholders.
The integration of the aforementioned acquisition and development
properties into the systems and procedures of the Company presents a management
challenge, and the failure to integrate such properties into the Company's
operating structures could have a material adverse effect on the Company's
results of operations and ability to make distributions to its shareholders.
CONSEQUENCES OF FAILURE TO QUALIFY AS A REIT
The Company has elected to qualify as a REIT under the Code. Although the
Company believes that it has operated in a manner which satisfies the REIT
qualification requirements since 1987, no assurance can be given that the
Company's qualification as a REIT will not be challenged by the Internal Revenue
Service for taxable years still subject to audit or that the Company will
continue to qualify as a REIT in future years. A REIT generally is not taxed on
distributed income so long as it distributes to its shareholders at least 95% of
its real estate investment trust taxable income. Qualification as a REIT
involves the satisfaction of numerous requirements (some on an annual or
quarterly basis) established under highly technical and complex Code provisions
for which there are only limited judicial or administrative interpretations and
involves the determination of various factual matters and circumstances not
entirely within the Company's control. If in any taxable year the Company were
to fail to qualify as a REIT, the Company would not be allowed a deduction for
distributions to shareholders in computing taxable income and would be subject
to federal income tax on its taxable income at regular corporate rates. Unless
entitled to relief under certain statutory provisions, the Company would also be
disqualified from treatment as a REIT for the four taxable years following the
year during which qualification was lost. As a result, the funds available for
distribution to the Company's shareholders would be reduced for each of the
years involved. Although the Company currently intends to operate in a manner
designed to qualify as a REIT, it is possible that future economic, market,
legal, tax or other considerations may cause the Company to fail to qualify as a
REIT or may cause the Company's Board of Directors to revoke the REIT election.
See "Federal Income Tax Considerations."
PROPOSED REINCORPORATION
The Board of Directors of the Company has unanimously approved a proposal
to change the Company's state of incorporation from California to Maryland (the
"Reincorporation"). The primary purpose of the proposed change in domicile is to
avoid the applicability of the aforementioned provisions under the CGCL which
restrict the Company's ability to make distributions to its shareholders and
could potentially prevent the Company from making distributions in an amount
necessary to qualify as a REIT under the Code. See "-- Distributions to
Shareholders." The proposed Reincorporation is subject to approval by
shareholders at the 1997 Annual Meeting, the Proxy Statement for which will
describe the reasons for and certain consequences of the proposed
Reincorporation including certain differences between California and Maryland
corporation law and certain differences between the rights of shareholders of
the Company and the rights of stockholders of the successor Maryland
corporation. If the Reincorporation is consummated, matters relating to
shareholders' rights, corporate governance and similar matters generally will be
governed by Maryland law rather than California law, and no assurance can be
given that Maryland law with respect to those matters will not be less favorable
to shareholders than California law. See "Description of Common
Stock -- Proposed Reincorporation of the Company."
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DEPENDENCE ON KEY PERSONNEL
The Company is dependent on the efforts of its executive officers, J. David
Martin, President and Chief Executive Officer of the Company, and Daniel B.
Platt, Executive Vice President, Chief Financial Officer and Chief
Administrative Officer of the Company, and the loss of their services could have
an adverse affect on the operations of the Company. Mr. Martin has entered into
an employment agreement with the Company.
CONFLICTS OF INTEREST
The Company currently has various development projects which it acquired
from its President and Chief Executive Officer, J. David Martin, concurrently
with Mr. Martin's appointment as President and Chief Executive Officer in 1995.
While the Company has adopted procedures for decision-making with respect to
such projects (including Mr. Martin's absence from Board of Directors meeting
discussions involving such projects), nevertheless the arrangement could result
in conflicts of interest in one or more of the projects.
ENVIRONMENTAL MATTERS
Under various federal, state and local laws, ordinances and regulations, an
owner or operator of real estate is liable for the costs of removal or
remediation of certain hazardous or toxic substances on or in such property.
Such laws often impose such liability without regard to whether the owner or
operator knew of, or was responsible for, the presence of such hazardous or
toxic substances. The presence of such substances, or the failure to properly
remediate such substances, may adversely affect the owner's or operator's
ability to sell or rent such property or to borrow using such property as
collateral. Persons who arrange for the disposal or treatment of such hazardous
or toxic substances may also be liable for the costs of removal or remediation
of such substances at a disposal or treatment facility, whether or not such
facility is owned or operated by such person. 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, may be potentially liable for removal or remediation costs.
Certain environmental laws impose liability for release of asbestos-containing
materials into the air, and third parties may seek recovery from owners or
operators of real properties for personal injuries associated with
asbestos-containing materials. The Company may be potentially liable for removal
or remediation costs, as well as certain other costs, including governmental
fines and costs related to injuries to persons and property, resulting from the
environmental condition of its Properties, regardless of whether the Company
itself actually contributed to such condition.
RISKS OF LEVERAGE
Neither the Amended and Restated Bylaws of the Company (the "Bylaws") nor
the articles of incorporation of the Company, as amended (the "Articles of
Incorporation"), limit the amount of indebtedness the Company may incur.
Although financial covenants contained in the Company's line of credit facility
(the "Credit Facility") limit the amount of additional indebtedness the Company
may incur, those covenants currently would permit the Company to incur
substantial additional indebtedness. Currently, the maximum committed amount
available under the Company's Credit Facility is $135 million. The Company has
utilized the Credit Facility to finance certain recent acquisitions and may use
the Credit Facility to fund the acquisition of additional properties and for
other general corporate purposes. A portion of the Credit Facility is currently
secured by certain Properties owned by the Company and the Credit Facility
requires that the Company comply with a number of financial covenants. The
Company is also obligated by other indebtedness secured by individual
Properties. There can be no assurances that the Company will be able to meet its
debt service obligations or to comply with the financial covenants in its debt
instruments and, to the extent that it cannot, the lenders typically would be
entitled to demand immediate repayment of the related indebtedness and to
commence foreclosure proceedings against the property securing such
indebtedness, thereby subjecting the Company to the risk of loss of some or all
of its assets, including certain of its Properties. Adverse economic conditions
could cause the terms on which borrowings become available to be unfavorable. In
such circumstances, if the Company is in need of capital to repay indebtedness
in accordance with its terms or otherwise, it could be required to liquidate one
or more investments in Properties at unfavorable prices. The Company will be
subject to the 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 of
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increases in interest rates on indebtedness (such as borrowings under the Credit
Facility) which bears interest at floating rates, the risk that existing
indebtedness cannot be refinanced or that the terms of such refinancing will not
be as favorable as the terms of existing indebtedness. The Company's mortgage
indebtedness (other than indebtedness under the Credit Facility) is generally
nonrecourse to the Company. However, even with respect to nonrecourse mortgage
indebtedness, the lenders may have the right to recover deficiencies from the
Company in certain circumstances, including fraud, misapplication of funds and
environmental liabilities.
INVESTMENTS IN JOINT VENTURES
In February 1997, the Company conveyed to an institutional investor,
California Urban Investment Partners ("CUIP"), a 75% interest in one of its
Properties, Margarita Plaza. This was accomplished by contributing the Property
to a limited liability company in which the Company has a 25% managing member
interest and CUIP has a 75% managing member interest. As part of the
transaction, CUIP reimbursed the Company for 75% of its acquisition cost of the
Property. The Company has agreed to convey a 75% interest in another one of its
Properties, Ladera Center, in a similar manner.
The Company may in the future acquire interests in limited and general
partnerships, limited liability companies, joint ventures and other enterprises
(collectively, "Joint Ventures") formed to own or develop real property or
interests in real property. The Company may acquire minority interests in
certain such Joint Ventures and also may acquire interests as a passive investor
without rights to actively participate in management of the Joint Ventures.
Investments in Joint Ventures involve additional risks, including the
possibility that the other participants may become bankrupt or have economic or
other business interests or goals which are inconsistent with those of the
Company, that the Company will not have the right or power to direct the
management and policies of the Joint Ventures and that such other participants
may take action contrary to the instructions or requests of the Company and its
policies and objectives or which could jeopardize the Company's ability to
maintain its qualification as a REIT. Such investments may also have the
potential risk of impasse on decisions, such as a sale, because neither the
Company nor any of the other participants have full control over the Joint
Ventures. The Company will, however, seek to maintain sufficient control of such
Joint Ventures to permit the Company's business objectives to be achieved and
its status as a REIT preserved, although there can be no assurance that it will
be successful in doing so, which could have a material adverse effect on the
Company and its ability to make distributions to shareholders. There is no
limitation under the Company's organizational documents as to the amount of
available funds that may be invested in Joint Ventures.
INSURANCE COVERAGE LIMITATIONS
The Company carries comprehensive general liability coverage and umbrella
liability coverage on all of its Properties with limits of liability which the
Company deems adequate (subject to deductibles) to insure against liability
claims and provide for the cost of defense. Similarly, the Company is insured
against the risk of direct physical damage in amounts the Company estimates to
be adequate (subject to deductibles) to reimburse the Company on a replacement
cost basis for costs incurred to repair or rebuild each Property, including loss
of rental income during the reconstruction period. There are, however, certain
types of extraordinary losses which may be either uninsurable, or not
economically insurable. Should any uninsured loss occur, the Company could lose
its investment in, and anticipated revenues from, a Property, which could have a
material adverse effect on the Company and its ability to make distributions to
shareholders. Currently the Company also insures certain of its Properties for
loss caused by earthquake in the aggregate amount of $23 million (subject to
deductibles) and one of its Properties for loss caused by flood. Because of the
high cost of this type of insurance coverage and the wide fluctuations in price
and availability, the Company has made the determination that the risk of loss
due to earthquake and flood does not justify the cost to increase this coverage
any further under current market conditions. However, there can be no assurance
that the occurrence of an earthquake, flood or other natural disaster will not
adversely affect the Company.
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AUTHORITY TO ISSUE PREFERRED STOCK
The Company's articles of incorporation authorize the Board of Directors to
issue up to 5,000,000 shares of Preference Stock ("Preferred Stock") and to
establish the preferences and rights of any such shares issued. See "Description
of Common Stock." The issuance of Preferred Stock would likely result in the
holders of the Preferred Stock being entitled to priority in distributions,
thereby potentially reducing cash available for distribution to holders of
Common Stock, and upon the liquidation of the Company. In addition, the issuance
of Preferred Stock could involve the creation of voting rights for the holders
of Preferred Stock that might result in their voting as a class with the holders
of Common Stock or as a separate class on certain matters, including the
election of one or more Directors of the Company. As a result, the Board of
Directors could, without shareholder action, authorize the issuance of one or
more series of Preferred Stock with voting, distribution, liquidation and other
rights that could adversely affect holders of Common Stock. No shares of
Preferred Stock are currently issued or outstanding.
EFFECT OF VARIOUS MARKET FACTORS ON PRICE OF COMMON STOCK
A variety of factors may influence the price of the Company's Common Stock
in public trading markets. The Company believes that investors generally
perceive REITs as yield-driven investments and compare the annual yield from
distributions by REITs with yields on various other types of financial
instruments. Thus an increase in market interest rates generally could adversely
affect the market price of the Company's Common Stock. Similarly, to the extent
that the investing public has a negative perception of companies in the retail
business or REITs that own and operate retail shopping centers and other
properties catering to retail tenants, the value of the Company's Common Stock
may be negatively impacted in comparison to shares of other REITs owning other
types of properties and catering to different types of tenants.
The market price for the Common Stock may be affected by factors such as
the announcement of new acquisitions or development projects by the Company or
its competitors, quarterly variations in the Company's operating results or the
operating results of the Company's competitors, changes in earnings (losses) or
other estimates by analysts or reported results that vary from such estimates.
In addition, the stock market may experience significant price fluctuations
which could affect the market price of the Company's Common Stock which may be
unrelated to the operating performance of the Company. Following periods of
volatility in the market price of the Company's Common Stock, securities class
action litigation could be initiated against the Company which could result in
substantial costs and a diversion of management's attention and resources, which
would have a material adverse effect on the Company and its ability to make
distributions to shareholders.
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DESCRIPTION OF COMMON STOCK
GENERAL
The Company is authorized to issue 40,000,000 shares of Common Stock and
5,000,000 shares of Preferred Stock, each without stated par value. The
shareholders are authorized to vote on all matters entitled to be voted upon by
shareholders as provided in the CGCL. At each election of Directors, each holder
of Common Stock is entitled to vote the number of shares of Common Stock held by
the shareholder for as many persons as there are Directors to be elected by vote
of the holders of Common Stock, or to cumulate the shareholder's votes by giving
one candidate as many votes as equal the number of shares of Common Stock held
by the shareholder multiplied by the number of Directors to be elected by such
holders, or by distributing such votes on the same principle among any number of
such candidates, subject to compliance with certain procedural requirements. In
the event that the Company's proposed Reincorporation is consummated,
shareholders will thereafter not be permitted to cumulate votes in the election
of directors or otherwise. In addition, the proposed Reincorporation would also
result in an increase in the authorized shares of stock of the successor
Maryland Corporation (as defined below). See "-- Proposed Reincorporation of the
Company."
Subject to any prior rights of any Preferred Stock, each outstanding share
of Common Stock has equal dividend and liquidation rights with every other
outstanding share of Common Stock. Shares of Common Stock are non-assessable and
have no preference, conversion, exchange or preemptive rights.
The following description of certain provisions of the Articles of
Incorporation and Bylaws and of certain provisions of the CGCL and the MGCL (as
defined below) does not purport to be complete and is subject to, and qualified
in its entirety by reference to, the provisions of the Articles of Incorporation
and Bylaws and of the CGCL and MGCL.
REDEMPTION AND RESTRICTION ON TRANSFER OF SHARES
Under the provisions of the Code, one of the requirements for qualification
as a REIT is that at no time during the second half of any taxable year may five
or fewer individuals own, directly or indirectly, more than 50% in value of the
outstanding shares of stock of the REIT.
In order that the Company may meet this requirement at all times, its
Bylaws provide that no person shall at any time directly or indirectly acquire
ownership of more than 9.8% of the outstanding shares of the Company's Common
Stock. Common Stock owned by persons in excess of that amount are deemed "Excess
Shares." For purposes of determining indirect ownership, the constructive
ownership provisions applicable under Section 544(a) of the Code apply. These
provisions attribute ownership of stock owned by a corporation, partnership,
estate or trust proportionately to its shareholders, partners or beneficiaries,
attribute ownership of stock owned by family members to other members of the
same family, treat stock for which a person has an option as actually owned by
that person, and set forth rules as to when stock constructively owned by a
person is considered to be actually owned by such person. Accordingly, shares of
Common Stock owned by a person who actually owns less than 9.8% of those
outstanding may nevertheless be Excess Shares where one or more of the foregoing
relationships exists.
The Bylaws provide that the Company may redeem any shares that are Excess
Shares, including shares that remain or become Excess Shares because of the
decrease in outstanding shares resulting from such redemption. From and after
the date of giving notice of redemption (the "notice date"), the shares called
for redemption shall cease to be outstanding and the holder shall not be
entitled to dividends, voting rights or other benefits except the right to
payment by the Company of the redemption price. Subject to the limitation
described in the next sentence, the redemption price will be the average closing
sales price as reported by a national securities exchange or on the NASDAQ
National Market System, as applicable, during the 30-day period ending on the
business day prior to the notice date or, if such shares are not listed or
reported on any such exchange or system, the mean between the average per share
closing bid and asked prices during such 30-day period or, if there have been no
sales on such an exchange or system and no published bid or asked quotations,
the price determined by the Directors in good faith. The Bylaws further provide
that unless the Directors determine that it is in the interest of the Company to
make earlier payment, the redemption price
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shall be payable only upon liquidation of the Company and shall not exceed the
amount which is the sum of the per-share distributions designated as (i)
liquidating distributions, and (ii) return of capital distributions declared
with respect to unredeemed shares subsequent to the notice date (i.e., the
amount per share that a shareholder whose shares are not redeemed would receive
upon liquidation of the Company) and no interest shall accrue with respect to
the periods subsequent to the notice date to the date of such payment. However,
if the person from whom the Excess Shares were redeemed sells a like number of
shares within 30 days of the redemption date, the Company shall rescind the
redemption of the Excess Shares unless counsel to the Company is of the opinion
that such rescission would jeopardize the Company's tax status as a REIT. In
that event, in lieu of rescission, the Company shall make immediate payment for
the shares.
The Bylaws provide that the foregoing provision shall not apply to the
acquisition of shares of Common Stock pursuant to a cash tender offer made for
all outstanding shares of Common Stock of the Company if two-thirds of the
outstanding shares not owned by the tender offeror and its affiliates and
associates are tendered and accepted pursuant to the offer. Such provisions also
do not apply to the acquisition of shares of Common Stock by an underwriter in a
public offering or to any transaction involving the issuance of shares by the
Company when its Board of Directors determines that its qualification as a REIT
would not be jeopardized.
The Bylaws authorize the Company to refuse to effect the transfer of any
shares of Common Stock which would jeopardize the qualification of the Company
as a REIT, and also provide that any purported acquisition of shares of Common
Stock that would result in the disqualification of the Company as a REIT shall
be null and void.
The Bylaws also grant the Board of Directors the authority to cause the
Company, from time to time, to repurchase its shares of Common Stock.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the shares of Common Stock is First
Chicago Trust Company of New York.
PREFERRED STOCK
The Board of Directors of the Company has authority, without shareholder
approval, to issue up to 5,000,000 shares of Preferred Stock, which may be
issued in one or more series with such rights, preferences, privileges and
restrictions as are designated and established by the Board. No shares of
Preferred Stock are currently outstanding and the Board of Directors has not
established any series of Preferred Stock.
PROPOSED REINCORPORATION OF THE COMPANY
General
The Board of Directors has unanimously approved a proposal to change the
Company's state of incorporation from California to Maryland. The
Reincorporation will require the affirmative vote of holders of a majority of
the outstanding shares of Common Stock. The Company intends to submit the
proposed Reincorporation to a vote of its shareholders at its 1997 Annual
Meeting of Shareholders.
The primary purpose of the Reincorporation is to avoid the applicability of
certain provisions under the CGCL which restrict the Company's ability to make
distributions to its shareholders and could potentially prevent the Company from
making distributions in an amount necessary to qualify as a REIT under the Code.
See "Risk Factors -- Distributions to Shareholders," and "-- Proposed
Reincorporation of the Company -- Comparison of Rights of Shareholders of the
Company and Stockholders of the Maryland Corporation."
In determining that the Reincorporation is in the best interests of the
Company's shareholders, the Board of Directors also considered the fact that
Maryland is the state of incorporation for many corporations that qualify as
REITs. As such, the Company believes that Maryland law offers more certainty as
to the rights and
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obligations of the Company, and its directors, officers and shareholders and, as
a result of the Reincorporation, the Company expects greater predictability with
respect to these matters.
In the event that the Reincorporation is not approved, the Company will
continue to operate as a California corporation and will continue to be subject
to California's restrictions on distributions to shareholders.
Merger of the Company into a Newly Formed Maryland Subsidiary
The proposed Reincorporation will be accomplished by merging the Company
into a newly formed Maryland subsidiary of the Company (the "Maryland
Corporation"), pursuant to an Agreement and Plan of Merger (the "Merger
Agreement"), a copy of which will be attached as an appendix to the Proxy
Statement for the 1997 Annual Meeting of Shareholders (the "Proxy Statement").
The Maryland Corporation will be incorporated in Maryland specifically for the
purpose of implementing the Reincorporation and will conduct no business and
have no material assets or liabilities prior to the Reincorporation. After
completion of the merger, the Company will cease to exist under California law
and the Maryland Corporation will continue to operate the business of the
Company under the name Burnham Pacific Properties, Inc. The authorized capital
of the Maryland Corporation will consist of 75,000,000 shares of common stock,
5,000,000 shares of preferred stock and 20,000,000 shares of Excess Stock
(defined below), each with a par value of $.01 per share. Under the Merger
Agreement, each outstanding share of the Company's Common Stock will be
automatically converted into one share of the Maryland Corporation's common
stock (the "Maryland Common Stock") at the effective time of the merger. The
Reincorporation will not result in any change in the Company's management,
business, assets or liabilities and will not result in any relocation of
management or other employees. The Reincorporation will not result in
recognition of any gain or loss to the Company or any of the shareholders for
federal income tax purposes. Shareholders of the Company will have no
dissenters' rights of appraisal with respect to the Reincorporation proposal.
As discussed below, the rights of holders of Maryland Common Stock will
differ in certain respects from the rights of holders of the Company's Common
Stock, including the fact that holders of the Maryland Common Stock will not be
entitled to cumulative voting rights in the election of directors. See "--
Proposed Reincorporation of the Company -- Comparison of Rights of Shareholders
of the Company and Stockholders of the Maryland Corporation". The Maryland
Common Stock will continue to be listed, without interruption, on the New York
Stock Exchange (the "NYSE") under the same symbol "BPP" as the Company's Common
Stock prior to the merger.
Comparison of Rights of Shareholders of the Company and Stockholders of the
Maryland Corporation
The Company is organized as a corporation under the laws of the State of
California and the Maryland Corporation will be organized as a corporation under
the laws of the State of Maryland. As a California corporation, the Company is
subject to the CGCL, a general corporation statute dealing with a wide variety
of matters, including election, tenure, duties and liabilities of directors and
officers; dividends and other distributions; rights of shareholders; and
extraordinary actions, such as amendments to the articles of incorporation,
mergers, sales of all or substantially all of the Company's assets and
dissolution. The Company also is governed by its Articles of Incorporation (the
"California Articles"), and its Bylaws (the "California Bylaws"), which have
been adopted pursuant to the CGCL. As a Maryland corporation, the Maryland
Corporation will be governed by the Maryland General Corporation Law ("MGCL"), a
general corporation statute covering substantially the same matters as are
covered by the CGCL, and by the Articles of Incorporation and Bylaws of the
Maryland Corporation (the "Maryland Articles" and "Maryland Bylaws",
respectively). A number of differences between the CGCL and the MGCL and among
these various documents are summarized below. The CGCL refers to "shareholders"
and the MGCL refers to "stockholders." The use of either term refers to the
holders of capital stock of the Company or the Maryland Corporation as the case
may be.
The discussion of the comparative rights of the shareholders of the Company
and the stockholders of the Maryland Corporation set forth below does not
purport to be complete and is subject to and qualified in its
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entirety by reference to the CGCL and the MGCL and also to the California
Articles, California Bylaws, Maryland Articles and Maryland Bylaws, copies of
which are available from the Company as described under "Available Information".
Dividends and Other Distributions. Under the CGCL, the Company may only
make a distribution to shareholders if (i) its retained earnings immediately
prior to payment of the distribution are at least equal to the amount of the
distribution, or (ii) generally, its total assets (determined on the basis of
their depreciated historical cost in accordance with GAAP and exclusive of
certain intangible assets and certain other charges and expenses) are equal to
at least 1 1/4 times its total liabilities (excluding certain deferred items)
immediately after giving effect to the distribution. The CGCL also prohibits a
California corporation from making any distribution to shareholders if the
corporation is or, as a result thereof, would be likely to be unable to meet its
liabilities as they mature. The CGCL also imposes certain further limitations on
distributions on common stock if capital stock with a preference on
distributions of assets upon liquidation is outstanding. The MGCL allows the
payment of dividends and other distributions unless after giving effect to the
distribution, (i) the corporation would not be able to pay its indebtedness as
it becomes due in the ordinary course of business or (ii) the corporation's
total assets would be less than the sum of the corporation's liabilities plus,
unless the charter provides otherwise (which the Maryland Articles do not), the
amount that would be needed upon dissolution to satisfy the preferential rights
of those stockholders whose preferential rights upon dissolution are superior to
those receiving the distribution. The MGCL provision regarding distributions is
therefore more favorable to the Company in the context of its continuing ability
to make distributions to its stockholders, including distributions required to
retain its qualification as a REIT.
Shareholder Voting Rights. California law provides for cumulative voting
in the election of directors (which permits holders of less than a majority of
the voting securities of a corporation to cumulate their votes and elect a
director or directors in certain situations) but permits the elimination thereof
in the case of a listed corporation (which is defined as a corporation that has
shares listed on the NYSE or other national securities exchanges). The
California Bylaws specifically provide for cumulative voting. Under the MGCL,
cumulative voting is not available unless so provided in the corporation's
articles of incorporation. The Maryland Articles do not provide for cumulative
voting. As a result, holders of a majority of the shares of Maryland Common
Stock will generally be entitled to elect all of the directors of the Maryland
Corporation.
With certain exceptions, the CGCL requires that mergers, reorganizations,
certain sales of assets and similar transactions be approved by the holders of a
majority of each class of shares outstanding. In contrast, the MGCL requires,
with certain exceptions, that the holders of two-thirds of all shares entitled
to vote on the matter must approve mergers, consolidations, share exchanges and
transfers of assets unless the charter provides for a different number not less
than a majority; the Maryland Articles provide that such matters may be approved
by the holders of a majority of shares entitled to vote on the matter.
Under the CGCL, the articles of incorporation and bylaws of California
corporations may include supermajority voting provisions. These provisions,
however, must be renewed every two years and may not require a vote in excess of
66 2/3% of the outstanding shares. In contrast, under the MGCL, the articles of
incorporation of a Maryland corporation may include supermajority voting
provisions without restrictions. The Maryland Articles currently do not contain
any supermajority voting provisions.
Limitation of Liability. Pursuant to the CGCL and the California Articles,
the liability of directors of the Company to the Company or to any shareholder
of the Company for money damages for breach of fiduciary duty has been
eliminated, except (i) for acts or omissions that involve intentional misconduct
or a knowing and culpable violation of the law, (ii) for acts or omissions that
a director believes to be contrary to the best interests of the Company or its
shareholders or that involve the absence of good faith on the part of the
director, (iii) for any transaction from which a director derived an improper
personal benefit, (iv) for acts or omissions that show a reckless disregard for
the director's duty to the Company or its shareholders in circumstances in which
the director was aware, or should have been aware, in the ordinary course of
performing a director's duties, of a risk of serious injury to the Company or
its shareholders, (v) for acts or
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omissions that constitute an unexcused pattern of inattention that amounts to an
abdication of the director's duty to the Company or its shareholders, (vi) for
violations of the CGCL requirements governing Company contracts in which the
director has a material interest, or (vii) for corporate actions for which the
director and the Company are jointly and severally liable. In general, the
liability of officers may not be eliminated or limited under California law.
Pursuant to the MGCL and the Maryland Articles, the liability of directors
and officers to the Maryland Corporation or to any stockholder of the Maryland
Corporation for money damages will be eliminated, except for (i) actual receipt
of an improper personal benefit in money, property or services or (ii) active
and deliberate dishonesty established by a final judgment as being material to
the cause of action. Maryland law therefore permits the limitation of directors'
and officers' liability in a broader range of circumstances than does California
law. As a result, the directors and officers of the Maryland Corporation may not
be liable for certain actions for which they might have otherwise been liable
under California law.
Indemnification of Directors and Officers. The Bylaws of both the Company
and the Maryland Corporation require the Company and the Maryland Corporation to
indemnify, and advance expenses to, their respective present and former
directors, officers and employees to the maximum extent permitted by the CGCL or
the MGCL, as applicable.
The CGCL contains provisions authorizing corporations to indemnify an
officer or director if such officer or director acted in good faith and in a
manner that such officer or director reasonably believed to be in the best
interest of the corporation. The CGCL also permits the corporation to advance
expenses to a director or officer, provided that the corporation receives an
undertaking, usually in the form of a bond, by or on behalf of such director or
officer to repay any amounts advanced if it is determined ultimately that the
director or officer is not entitled to be indemnified under the CGCL. Under the
CGCL, the termination of any proceeding by conviction or upon a plea of nolo
contendere or its equivalent shall not, of itself, create a presumption that
such person failed to meet the standard of conduct necessary to allow
indemnification.
In addition, the CGCL permits indemnification in derivative actions except
that (i) indemnification may only be made with court approval when a person is
adjudged liable to the corporation in the performance of that person's duty to
the corporation and its shareholders and (ii) indemnification of amounts paid to
settle and/or expenses incurred to defend a threatened or pending action shall
not be made when such threatened or pending action is settled or otherwise
disposed of without court approval. No indemnification is permitted under the
CGCL for the actions for which liability for money damages may not be limited,
as described above under "-- Proposed Reincorporation of the Company --
Limitation of Liability."
The MGCL permits indemnification for amounts paid in settlement of a
proceeding by or in the right of a corporation; however, indemnification is
prohibited if the person seeking indemnification has been found liable to the
corporation in a proceeding brought by or in the right of the corporation,
unless otherwise ordered by a court and then only for expenses. In contrast to
California law, under Maryland law a termination of a proceeding by conviction
or upon a plea of nolo contendere or its equivalent creates a rebuttable
presumption that such person did not meet the requisite standard of conduct to
allow indemnification.
Removal of Directors. Under the CGCL and the California Bylaws, any or all
directors may be removed with or without cause if the removal is approved by a
majority of the outstanding shares entitled to vote, except that no director may
be removed (unless the entire board is removed) when the votes cast against
removal would be sufficient to elect the director if voted cumulatively at an
election at which the same total number of votes were cast and the entire number
of directors authorized at the time of the most recent election were then being
elected. The CGCL also provides that the superior court of the proper county
may, at the request of shareholders holding at least 10% of the number of
outstanding shares of any class, remove from office any director in case of
fraudulent or dishonest acts or gross abuse of authority or discretion with
reference to the corporation and may bar from reelection any director so removed
for a period prescribed by the court.
The MGCL provides that the stockholders of a corporation may remove any
director, with or without cause, by the affirmative vote of a majority of all
the votes entitled to be cast for the election of directors, unless the charter
of the corporation provides otherwise. The MGCL further states that if the
stockholders of
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any class or series are entitled separately to elect one or more directors, a
director elected by a class or series may not be removed without cause except by
the affirmative vote of a majority of all of the votes of that class or series,
unless the charter of the corporation provides otherwise. The Maryland Articles
provide that directors may be removed only for cause following a hearing. In
contrast to California law, the MGCL does not provide for the removal of
directors by a court upon petition of shareholders.
Special Meetings of Shareholders. The CGCL and the California Bylaws
provide that a special meeting of shareholders may be called by the Board of
Directors, the Chairman of the Board, the President, or by the holders of shares
entitled to cast not less than 10% of the votes at the meeting. Under the MGCL
and the Maryland Bylaws, a special meeting of stockholders may be called by the
Chairman of the Board, the President or a majority of the Board of Directors and
shall be called by the Secretary of the Maryland Corporation at the request in
writing of shareholders entitled to cast a majority of all the votes entitled to
be cast at the meeting. The MGCL and the Maryland Bylaws also provide, however,
that unless requested by stockholders entitled to cast a majority of all the
votes entitled to be cast at such meeting, a special meeting need not be called
to consider any matter which is substantially the same as a matter voted on at
any special meeting of the stockholders held during the preceding 12 months.
Thus, the stockholders' right to call a special meeting under Maryland law is
more limited than under California law.
Inspection of Books and Records. Under the CGCL, upon written demand for
any purpose reasonably related to the shareholder's interest as a shareholder,
any shareholder of the Company may inspect and copy the record of shareholders
and inspect any other corporate books and records. A shareholder or shareholders
(i) who hold at least 5% of the outstanding voting shares of the corporation or
(ii) who hold at least 1% of those voting shares and have filed a Schedule 14A
with the Securities and Exchange Commission shall have an absolute right to
inspect and copy the record of shareholders. These rights apply both to any
California corporation and any foreign corporation that keeps such records in
California or has its principal executive office in California. Thus, the
inspection rights provided by the CGCL will be applicable to the Maryland
Corporation after the Reincorporation.
The MGCL provides a right to inspect and copy the corporation's books of
account and stock ledger to individuals who have been stockholders for more than
six months and own at least 5% of any class of a Maryland corporation's
outstanding shares. In addition, any stockholder of a Maryland corporation has
the right to inspect certain corporate records and to request that the
corporation provide a sworn statement showing all stock and securities issued
and all consideration received by the corporation within the preceding 12
months.
Amendments to Bylaws and Articles. Under the CGCL, a corporation's bylaws
may be adopted, amended or repealed by approval of the shareholders or by the
board of directors; however, the shareholders may never be divested of the power
to adopt, amend or repeal the bylaws. In addition, the CGCL provides that a
bylaw changing a fixed number of directors or the maximum or minimum number of
directors may only be adopted by the holders of a majority of the shares
entitled to vote. The California Bylaws provide that no amendment thereto may be
made unless approved by the vote of the holders of a majority of the voting
securities outstanding.
Under the MGCL, the power to adopt, alter and repeal the bylaws is vested
in the stockholders except to the extent that the charter or bylaws vest such
power in the board of directors. The Maryland Articles and the Maryland Bylaws
provide that the Maryland Board of Directors shall have the power to adopt,
amend or repeal the Maryland Bylaws, provided that any such action may only be
taken by the affirmative vote of no less than two-thirds of all directors at the
time. Alternatively, the Maryland Articles and the Maryland Bylaws provide that
the Maryland Bylaws may be adopted, amended or repealed by the affirmative vote
of a majority of the Maryland Board of Directors and of all the votes cast by
holders of shares of stock entitled to vote generally in the election of
directors.
Under California law, the articles of incorporation may be amended only if
such amendment is approved by the board of directors and by the holders of a
majority of the outstanding shares of stock entitled to vote on the matter.
Under Maryland law, an amendment to the charter of a corporation must be
approved by the board of directors and the holders of two-thirds of the shares
entitled to vote on such matter unless such
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articles provide for a different vote not less than a majority of such shares so
entitled to vote; the Maryland Articles provide that they may be amended by the
holders of a majority of the shares entitled to vote on such matter.
Limit on Share Ownership; "Excess Stock." Both the California Bylaws and
the Maryland Articles contain provisions limiting the ownership of shares which
are intended to ensure that the Company and the Maryland Corporation meet the
requirements of the Code for qualification as a REIT. Among other things, these
provisions are intended to meet the requirement of the Code that, at no time
during the second half of any taxable year, may five or fewer individuals
(defined in the Code to include certain entities) own more than 50% in value of
the outstanding capital stock. The limitations currently applicable to the
Company are described above under "-- Redemption and Restriction on Transfer of
Shares."
The Maryland Articles limit any holder from owning, or being deemed to own
after applying the constructive ownership provisions of the Code described
above, shares of stock of the Maryland Corporation having a value that is more
than 9.8% (the "Ownership Limit") of the value of all outstanding stock of the
Maryland Corporation. Under the Maryland Articles, any transfer of stock or any
security convertible into stock that would create direct or indirect ownership
of stock in excess of the Ownership Limit (a "prohibited transfer") shall be
null and void, and the intended transferee will acquire no rights to the stock.
Shares of stock owned, or deemed to be owned, or transferred to a stockholder in
excess of the Ownership Limit will automatically be exchanged for shares of the
Maryland Corporation's Excess Stock (the "Excess Stock") that will be
transferred, by operation of law, to an unaffiliated trustee to be named by the
Board of Directors of the Maryland Corporation for the exclusive benefit (except
to the extent described below) of one or more charitable beneficiaries
designated from time to time by the Maryland Corporation. The Excess Stock held
in trust will be considered as issued and outstanding shares of stock of the
Maryland Corporation, will be entitled to receive distributions authorized and
declared by the Maryland Corporation and may be voted by the trustee for the
exclusive benefit of the charitable beneficiary. Any dividend or distribution
paid to a purported transferee of Excess Stock prior to the discovery by the
Maryland Corporation that stock has been transferred in a prohibited transfer
shall be repaid to the Maryland Corporation upon demand and thereupon paid over
by the Maryland Corporation to the trustee. Subject to applicable law, any votes
of holders of shares of stock purported to have been cast by a purported
transferee prior to such discovery of a prohibited transfer will be
retroactively deemed not to have been cast and may be recast by the trustee for
the benefit of the charitable beneficiary, but said retroactive nullification or
recant of the vote of the relevant shares of stock shall not adversely affect
the rights of any person (other than the purported transferee) who has relied in
good faith upon the effectiveness of the matter that was the subject of the
stockholder action as to which such votes were cast.
Excess Stock is not transferable. Subject to the redemption rights of the
Maryland Corporation, discussed below, the trustee of the trust may, however,
sell and transfer the interest in the trust to a transferee in whose hands the
interest in the trust representing Excess Stock would not be an interest in
Excess Stock, and upon such sale the shares of Excess Stock represented by the
sold interest shall be automatically exchanged for shares of stock of the class
that was originally exchanged into such Excess Stock. Upon such sale, the
trustee shall distribute to the purported transferee only so much of the sales
proceeds as is not more than the price paid by the purported transferee in the
prohibited transfer that resulted in the exchange of Excess Stock for the stock
purported to have been transferred (or, if the purported transferee received
such stock by gift, devise or otherwise without giving value for such stock,
only an amount that does not exceed the market price for such stock, as
determined in the manner set forth in the Maryland Articles, at the time of the
prohibited transfer), and the trustee shall distribute all remaining proceeds
from such sale to the charitable beneficiary.
In addition to the foregoing transfer restrictions, the Maryland
Corporation will have the right, for a period of 90 days during the time any
Excess Stock is held by the trustee, to purchase all or any portion of the
Excess Stock from the trustee for the lesser of the price paid for the stock by
the original purported transferee (or, if the purported transferee received such
stock by gift, devise or otherwise without giving value for such stock, the
market price of the stock as determined in the manner set forth in the Maryland
Articles at the time of such prohibited transfer) or the market price (as so
determined) of the stock on the date the Maryland Corporation exercises its
right to purchase. Upon any such purchase by the Maryland Corporation, the
trustee
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shall distribute the purchase price to the original purported transferee. The
90-day period begins on the date on which the Maryland Corporation receives
written notice of the prohibited transfer or other event resulting in the
exchange of stock for Excess Stock.
Both the California Bylaws and the Maryland Articles authorize the Board of
Directors to permit a transfer which would otherwise be prohibited if the Board
is satisfied that such transfer will not jeopardize the Company's or the
Maryland Corporation's status as a REIT. Both also provide that the provisions
relating to Excess Shares or the Ownership Limit shall not apply to shares of
capital stock acquired pursuant to an all-cash tender offer for all outstanding
shares of capital stock in conformity with applicable laws where not less than
two-thirds of the outstanding shares of capital stock (not including securities
held by the tender offeror and/or its affiliates and associates) are tendered
and accepted pursuant to such tender offer and, in the case of the Maryland
Corporation, where the tender offeror commits in such tender offer, if the offer
is accepted by the holders of two-thirds of the outstanding stock, promptly
after the tender offeror's purchase of the tendered stock to give any
non-tendering stockholders a reasonable opportunity to "put" their shares of
stock to the tender offeror at a price not less than that paid pursuant to the
tender offer.
Business Combination Statute. 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 a Maryland corporation and any person who beneficially owns
10% or more of the voting power of the corporation's shares or an affiliate of
the corporation who, at any time within the two-year period prior to the date in
question, was the beneficial owner of 10% or more of the voting power of the
then-outstanding voting stock of the corporation (an "Interested Maryland
Stockholder") or an affiliate thereof are prohibited for five years following
the date on which the Interested Maryland Stockholder becomes an Interested
Maryland Stockholder. Thereafter, the MGCL provides that any such business
combination must be recommended by the board of directors of such corporation
and approved by the affirmative vote of at least (a) 80% of the votes entitled
to be cast by holders of outstanding voting shares of the corporation and (b)
two-thirds of the votes entitled to be cast by holders of outstanding voting
shares of the corporation other than shares held by the Interested Maryland
Stockholder with whom the business combination is to be effected, unless, among
other things, the corporation's stockholders receive a minimum price (as defined
in the MGCL) for their shares and the consideration is received in cash or in
the same form as previously paid by the Interested Maryland Stockholder for its
shares. These provisions of Maryland law do not apply, however, to business
combinations that are approved or exempted by the board of directors of the
corporation prior to the time that the Interested Maryland Stockholder becomes
an Interested Maryland Stockholder.
Pursuant to the authority granted under the MGCL, the Board of Directors
will adopt a resolution providing that the "business combination" provisions of
the MGCL shall not apply to the Maryland Corporation. This resolution will only
be revoked if the Maryland Board of Directors determines that such revocation is
in the best interests of the Maryland Corporation and its stockholders.
California law does not include a business combination statute. However,
the CGCL requires delivery of a fairness opinion in connection with some
business combination transactions between a corporation and an interested party
(an "Interested Party"). The CGCL defines "Interested Party" to include (i) a
person who directly or indirectly controls the corporation that is the subject
of the proposed combination, (ii) is directly or indirectly controlled by an
officer or director of the subject corporation or (iii) is an entity in which a
material financial interest is held by any director or executive officer of the
subject corporation.
Control Share Acquisition Statute. The MGCL contains an additional
provision which eliminates the voting rights of "control shares" in certain
circumstances. The MGCL provides that a person (the "acquiror") who proposes to
acquire or acquires "control shares" of a Maryland corporation must obtain the
approval of the holders of two-thirds of the shares entitled to vote on the
matter (excluding shares of stock owned by the acquiror, by officers or by
directors who are employees of the corporation) in order to vote the control
shares that the acquiror acquires. "Control shares" are voting shares of stock
which, if aggregated with all other shares of stock previously acquired by such
person, would entitle the acquiror to exercise voting power (except solely by
virtue of a revocable proxy) in electing directors within one of the following
ranges of voting power:
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(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 that the acquiror is then entitled to vote as a result of having
previously obtained stockholder approval.
The MGCL permits a Maryland corporation to elect not to be governed by the
control share acquisition statute by including a provision in its bylaws opting
out of the application of the control share acquisition provision of the MGCL.
The Maryland Corporation has included such a provision in the Maryland Bylaws.
The Maryland Board of Directors may, at any time, without stockholder approval,
vote to amend the Maryland Bylaws to eliminate this provision, which would
result in the Maryland Corporation being governed by the control share
acquisition statute. The Maryland Bylaws will only be amended by the Maryland
Board of Directors in the future to eliminate this provision if the Maryland
Board of Directors determines that it is in the best interests of the
stockholders to do so.
Unlike Maryland, California does not have a control share acquisition
statute.
Interested Director Transactions. Under both California and Maryland law,
certain contracts or transactions in which one or more of a corporation's
directors has an interest are not void or voidable solely because of such
interest if certain conditions are met. Under California and Maryland law, (i)
either the shareholders or the board of directors must approve any contract or
transaction after full disclosure of the material facts (and in the case of
board approval in California, the contract or transaction must also be "just and
reasonable") or (ii) the contract or transaction must have been just and
reasonable or fair and reasonable, as applicable, at the time it was authorized
or approved. California law has a more stringent requirement than Maryland law
in circumstances where board approval is sought with respect to an interested
director transaction because the contract or transaction must be just and
reasonable and must be approved by a majority vote of a quorum of the directors,
without counting the vote of any interested directors (except that interested
directors may be counted for purposes of establishing a quorum). Under the MGCL,
if board approval is sought, there is no requirement that the contract or
transaction be fair and reasonable and the approval for the contract or
transaction may be obtained by a majority vote of the disinterested directors
(even though less than a majority of a quorum). The Maryland Board of Directors,
therefore, may be able to approve certain transactions under Maryland law that
the Company's Board of Directors would not be able to approve under California
law because more than a majority of a quorum of directors are interested
directors. See "Risk Factors -- Conflicts of Interest".
The CGCL also provides that any loan or guarantee to or for the benefit of
a director or officer of the corporation or its parent requires the approval of
the shareholders unless such loan or guaranty is pursuant to a plan that has
been approved by the holders of a majority of the outstanding shares. However,
under the CGCL, the bylaws of a corporation with more than 100 shareholders may
authorize the board of directors alone to approve loans or guaranties to
directors and officers. The California Bylaws do not currently contain such a
provision allowing the directors to approve such loans or guaranties.
In contrast, under the MGCL, a corporation may make loans to or guarantee
the obligations of its officers and employees if, in the judgment of the board
of directors, such loan or guaranty may reasonably be expected to benefit the
corporation.
DESCRIPTION OF DEBENTURES
The Debentures will be issued in one or more series under an Indenture
which may be supplemented by supplemental indentures (the "Indenture") between
the Company and Fleet Bank of Massachusetts, N.A., as Trustee (the "Trustee") or
another trustee named in an applicable Prospectus Supplement. The terms of the
Debentures include those stated in the Indenture and those made part of the
Indenture (before any supplements) by reference to the Trust Indenture Act of
1939, as amended (the "Act"). A copy of the form of the Indenture is filed as an
exhibit to the Registration Statement and is incorporated herein by reference.
The following is a summary of certain provisions of the Indenture, does not
purport to be complete, and is qualified in its entirety by reference to the
detailed provisions of the Indenture (including the form of
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Debenture attached thereto). Parenthetical references to sections are references
to the corresponding section of the Indenture unless otherwise indicated.
The terms of the Debentures offered in any Prospectus Supplement may differ
from the terms set forth below, in which case the terms set forth below shall be
deemed to have been superseded to the extent of any different terms set forth in
such Prospectus Supplement.
GENERAL
The Indenture does not limit the aggregate principal amount of Debentures
that may be issued thereunder and provides that Debentures may be issued from
time to time in one or more series. The Debentures will be unsecured general
obligations of the Company convertible into shares of Common Stock of the
Company. Debentures of any series will bear interest from the date set forth in
the applicable Prospectus Supplement at the rate shown on the cover page of the
applicable Prospectus Supplement. Principal (and premium, if any) and interest
will be payable, the Debentures will be convertible and exchangeable, and
transfers will be registrable, at the office or agency of the Company maintained
for such purposes, initially at the offices of the Trustee. The Company may pay
principal (and a premium, if any) and interest by check and may mail an interest
check to the address of the person entitled thereto as it appears in the
Debenture Register (Paragraph 2 of the Debenture).
The Debentures will be issued only in fully registered form in
denominations of $1,000 principal amount or any integral multiple thereof
(Section 2.03). The Debentures are exchangeable and transfers thereof will be
registrable without charge therefor, except that the Company may require payment
of a sum sufficient to cover any tax or other governmental charge payable in
connection therewith (Section 2.06).
Conversion Rights. Any portion of the principal amount of any Debentures
of any series which is $1,000 or an integral multiple thereof will be
convertible into shares of Common Stock of the Company at any time prior to
redemption or maturity, following the date set forth in the applicable
Prospectus Supplement. The conversion price or rate will be set forth on the
cover of the applicable Prospectus Supplement (subject to adjustments as
described below), except that the right to convert Debentures of a series called
for redemption will terminate at the close of business on the specific
redemption date and will be lost if not exercised prior to that time (Section
10.01).
To protect the Company's status as a REIT, a registered holder of
Debentures (a "Holder") may not convert any Debenture, if as a result of such
conversion any Person would then be deemed to beneficially own 9.8% or more in
value of the Company's shares (Paragraph 7 of the Debenture).
The conversion price will be subject to adjustment under certain
conditions, including (i) the payment of dividends (and other distributions) in
shares of Common Stock on any class of shares of capital stock of the Company;
(ii) subdivisions, combinations and reclassifications of shares of Common Stock;
(iii) the issuance to all or substantially all holders of shares of Common Stock
of rights or warrants entitling them to subscribe for or purchase shares of
Common Stock at a price per share (or having a conversion price per share) at
less than the current market price, as defined (but shares of Common Stock
issued under the Company's dividend reinvestment plan or stock option plan will
not be deemed to be issued pursuant to rights or warrants for this purpose); and
(iv) distributions to all or substantially all holders of shares of Common
Stock, or evidences of indebtedness or assets (including securities, but
excluding those rights, warrants, dividends and distributions referred to above
and dividends and distributions not prohibited under the terms of the Indenture
including purchase rights under the dividend reinvestment plan) of the Company;
subject to the limitation that all adjustments by reason of any of the foregoing
need not be made until they result in a cumulative change in the conversion
price of at least 1%. In the event the Company shall effect any capital
reorganization or reclassification of its shares of Common Stock or shall
consolidate or merge with or into any trust or corporation (other than a
consolidation or merger in which the Company is the surviving entity) or shall
sell or transfer all or substantially all its assets, the Holders of any series
of the Debentures shall, if entitled to convert such Debentures at any time
after such transaction, receive upon conversion thereof, in lieu of each share
of Common Stock into which the Debentures would have been convertible prior to
such transaction, the same
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kind and amount of stock and other securities, cash or property as shall have
been issuable or distributable in connection with such transaction with respect
to each share of Common Stock (Sections 10.04 and 10.10).
A conversion price adjustment made according to the provisions of the
Debentures of any series (or the absence of provision for such an adjustment)
might result in a constructive distribution to the Holders of Debentures of such
series or shares of Common Stock that would be subject to taxation as a
dividend. The Company may, at its option, make such reductions in the conversion
price, in addition to those set forth above, as the Board of Directors deems
advisable to avoid or diminish any income tax to holders of shares of Common
Stock resulting from any dividend or distribution of shares of Common Stock (or
rights to acquire shares of Common Stock) or from any event treated as such for
income tax purposes or for any other reason. The Board will have the power to
resolve any ambiguity or correct any error in the provision relating to the
adjustment of the conversion price of the Debentures of such series. Its actions
shall be final and conclusive (Section 10.04).
Fractional shares will not be issued upon conversion, but, in lieu thereof,
the Company will pay a cash adjustment based upon market price (Section 10.08).
The Holders of Debentures at the close of business on an interest payment
record date shall be entitled to receive the interest payable on such Debentures
on the corresponding interest payment date notwithstanding the conversion
thereof. However, Debentures surrendered for conversion during the period from
the close of business on any record date to the opening of business on the
corresponding interest payment date must be accompanied by payment of an amount
equal to the interest payable on such interest payment date. If a Debenture is
converted on an interest payment date, the interest payable on such date will be
paid to the person who was the record Holder at the close of business on the
corresponding interest payment record date, and the converting Holder need not
include payment of such interest upon surrender of the Debentures for
conversion. Except as aforesaid, no payment or adjustment is to be made on
conversion for interest accrued on the Debentures or for dividends on shares of
Common Stock (Section 10.03).
Subordination of Debentures. The indebtedness evidenced by the Debentures
of any series will be subordinated and junior in right of payment to the extent
set forth in the Indenture to the prior payment in full of amounts then due on
all Senior Indebtedness (as defined). No payment shall be made by the Company on
account of principal of (or premium, if any) or interest on the Debentures of
any series or on account of the purchase or other acquisition of Debentures of
any series, if there shall have occurred and be continuing a default with
respect to any Senior Indebtedness permitting the holders to accelerate the
maturity thereof or with respect to the payment of any Senior Indebtedness, and
such default shall be the subject of a judicial proceeding or the Company shall
have received notice of such default from any holder of Senior Indebtedness,
unless and until such default or event of default shall have been cured or
waived or shall have ceased to exist. By reason of these provisions, in the
event of default on any Senior Indebtedness, whether now outstanding or
hereafter issued, payments of principal of (and premium if any) and interest on
the Debentures of any series may not be permitted to be made until such Senior
Indebtedness is paid in full, or the event of default on such Senior
Indebtedness is cured or waived (Section 11.02).
Upon any acceleration of the principal of the Debentures or any
distribution of assets of the Company upon any receivership, dissolution,
winding-up, liquidation, reorganization, or similar proceedings of the Company,
whether voluntary or involuntary, or in bankruptcy or insolvency, all amounts
due or to become due upon all Senior Indebtedness must be paid in full before
the Holders of the Debentures of any series or the Trustee are entitled to
receive or retain any assets so distributed in respect of the Debentures
(Section 11.02). By reason of this provision, in the event of insolvency,
Holders of the Debentures of any series may recover less, ratably, than holders
of Senior Indebtedness.
"Senior Indebtedness" is defined to mean the principal, premium, if any,
unpaid interest (including interest accruing on or after the filing of any
petition in bankruptcy or for reorganization relating to the Company whether or
not a claim for post-filing interest is allowed in such proceeding), fees,
charges, expenses, reimbursement and indemnification obligations, and all other
amounts payable under or in respect of Indebtedness (as defined) of the Company,
whether any such Indebtedness exists as of the date of the Indenture or is
created, incurred, assumed or guaranteed after such date. The aggregate amount
of Senior
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Indebtedness of the Company (excluding its subsidiaries) outstanding at December
31, 1996 was approximately $178,000,000. There is no limit under the Indenture
on the amount of Senior Indebtedness that the Company may incur (Section 11.01).
"Indebtedness" with respect to any Person is defined to mean:
(i) all indebtedness for money borrowed whether or not evidenced by a
promissory note, draft, or similar instrument;
(ii) that portion of obligations with respect to leases that is
properly classified as a liability on a balance sheet in accordance with
generally accepted accounting principles;
(iii) notes payable and drafts accepted representing extensions of
credit;
(iv) any balance owed for all or any part of the deferred purchase
price of property or services which purchase price is due more than six
months from the date of incurrence of the obligation in respect thereof
(except any such balance that constitutes (a) a trade payable or an accrued
liability arising in the ordinary course of business or (b) a trade draft
or note payable issued in the ordinary course of business in connection
with the purchase of goods or services), if and to the extent such debt
would appear as a liability upon a balance sheet of such person prepared in
accordance with generally accepted accounting principles; and
(v) any deferral, amendment, renewal, extension, supplement or
refunding of any liability of the kind described in any of the preceding
clauses (i) through (iv).
Optional Redemption. The Debentures of any series will be subject to
redemption, in whole or in part, on any date subsequent to the date set forth in
the Prospectus Supplement at the option of the Company on not less than 30 nor
more than 60 days' prior notice by mail at a redemption price equal to 100% (or
such greater price as is set forth in the Prospectus Supplement relating to such
series of Debentures) of the principal amount, plus interest accrued to the date
of redemption (Section 3.01). The Company may exercise its redemption powers
over a Holder's Debentures at any time to the extent deemed sufficient by the
Company to prevent the Holder of such securities or any other person having an
interest therein if such securities were converted into Common Stock from being
deemed to own Excess Shares or, following the Reincorporation, Excess Stock.
(See "Description of Common Stock -- Redemption and Restriction on Transfer of
Shares").
Modification of the Indenture. With certain exceptions, the rights and
obligations of the Company and the rights of Holders of any series of Debentures
may only be modified by the Company and the Trustee with the consent of the
Holders of at least a majority in outstanding principal amount of each series of
affected Debentures. Without the consent of each affected Debenture Holder, no
amendment or waiver of supplement may (i) reduce the principal of, or premium,
if any, or rate of interest on, any Debenture; (ii) change the stated maturity
date of the principal of, or any installment of interest on, any Debenture;
(iii) waive a default in the payment of the principal amount of, or the interest
on, or any premium payable on redemption of, any Debenture; (iv) change the
currency for payment of the principal of, or premium or interest on, any
Debenture; (v) impair the right to institute suit for the enforcement of any
such payment when due; (vi) adversely affect the right to convert any Debenture;
(vii) reduce the amount of outstanding Debentures necessary to consent to an
amendment or waiver provided for in the Indenture; or (viii) modify any
provisions of the Indenture relating to the modification, supplement and
amendment of the Indenture or waivers of past defaults, except as otherwise
specified (Section 9.02).
Events of Default, Notice and Waiver. The following are Events of Default
under the Indenture with respect to the Debentures of any series: (i) default in
the payment of interest on any Debentures of such series when due and payable,
which continues for 30 days; (ii) default in the payment of principal of (or
premium, if any) on any Debentures of such series when due, whether at maturity,
upon redemption or otherwise; (iii) failure to perform any other covenant of the
Company contained in the Indenture or any Debenture of such series which
continues for 60 days after written notice is given as provided in the Indenture
(other than a covenant included in the Indenture solely for the benefit of one
or more series of Debentures other than such series); (iv) default under any
bond, debenture or other Indebtedness of the Company or any subsidiary if
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(a) either (x) such event of default results from the failure to pay any such
Indebtedness when due or (y) as a result of such event of default, the maturity
of such Indebtedness has been accelerated prior to its expressed maturity and
such acceleration shall not be rescinded or annulled or the accelerated amount
paid within ten days after notice to the Company of such acceleration, and (b)
the principal amount of such Indebtedness, together with the principal amount of
any other Indebtedness in default for failure to pay principal or interest
thereon, or the maturity of which has been so accelerated, aggregates
$10,000,000 or more; and (v) certain events of bankruptcy, insolvency or
reorganization relating to the Company (Section 6.01). If an Event of Default
shall occur and be continuing, the Trustee or the Holders of a majority in
aggregate principal amount of any Debentures may declare the Debentures due and
payable (Section 6.02).
The Indenture provides that the Trustee shall, within 90 days after the
occurrence of any Default or Event of Default with respect to the Debentures of
any series, give to the Holders of Debentures of such series notice of all
uncured Defaults or Events of Default known to it. The Trustee shall be
protected if in good faith it determines that the withholding of such notice is
in the interest of the Holders of Debentures of any series, except in the case
of a default in the payment of the principal of (or premium, if any) or interest
on any of the Debentures of such series in which event notice must be given
(Section 7.05).
The Indenture provides that the Holders of a majority in aggregate
principal amount of the outstanding Debentures of any series may direct the
time, method and place of conducting any proceedings for any remedy available to
the Trustee or exercising any trust or power conferred on the Trustee with
respect to the Debentures of such series (Section 6.05). The right of a Holder
to institute a proceeding with respect to the Indenture is subject to certain
conditions including notice and indemnity to the Trustee, but the Holder has an
absolute right to receipt of principal of (and premium, if any) and interest on
such Holder's Debenture on or after the respective due dates expressed in the
Debentures and to institute suit for the enforcement of any such payments
(Section 6.06).
The Holders of a majority in principal amount of the outstanding Debentures
of any series may on behalf of the Holders of all Debentures of such series
waive certain past defaults, except a default in payment of the principal of (or
premium, if any) or interest on any Debentures of such series or in respect of
certain provisions of the Indenture which cannot be modified or amended without
the consent of the Holder of each Debenture affected thereby (Section 9.02).
The Company will be required to furnish the Trustee annually a statement of
certain officers of the Company stating whether or not they know of any Default
or Events of Default (as defined in the Indenture) and, if they have such
knowledge, a description of the efforts to remedy the same (Section 4.05).
Consolidation, Merger, Sale or Conveyance. The Company may merge or
consolidate with, or sell or convey all or substantially all of its assets to,
any other corporation or entity, provided that (i) either the Company shall be
the continuing entity, or the successor entity (if other than the Company) shall
be a corporation organized and existing under the laws of the United States or a
state thereof or the District of Columbia (although it may, in turn, be owned by
a foreign entity) and such corporation shall expressly assume by supplemental
indenture all of the obligations of the Company under the Debentures and the
Indenture; (ii) immediately after giving effect to such transactions no Default
or Event of Default shall have occurred and be continuing, and (iii) the Company
shall have delivered to the Trustee an Officers' Certificate and opinion of
counsel, stating that the transaction and supplemental indenture comply with the
Indenture (Section 5.01).
Reorganization and Other Transactions. The Indenture does not afford the
Holders of the Debentures any protection from a decline in credit quality nor
does it give any protection in the event of a highly leveraged transaction,
reorganization, restructuring, merger or similar transaction (a "Leveraged
Transaction") involving the Company that may adversely affect Holders of the
Debentures. The Indenture does not contain any provision requiring the Company
to repurchase any of the Debentures in the event of a Leveraged Transaction,
even though the Company's creditworthiness and the market value of the
Debentures may decline significantly as a result of any such transaction.
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FEDERAL INCOME TAX CONSIDERATIONS
The Company has elected to qualify as a REIT under the Code. In the opinion
of Goodwin, Procter & Hoar LLP, the Company has been organized in conformity
with the requirements for qualification as a REIT under the Code, and its manner
of operation has met and will continue to meet the requirements for
qualification and taxation as a REIT under the Code. This opinion is based on
various assumptions and is conditioned upon representations made by the Company
as to factual matters and the continuation of such factual matters. Investors
should be aware, however, that opinions of counsel are not binding upon the
Internal Revenue Service or any court. Moreover, such qualification and taxation
as a REIT in any tax year depends upon the Company's ability to meet in its
actual results for that tax year the various source of income, ownership of
assets, distribution and diversity of ownership requirements of the Code for
qualification as a REIT, which results will not be reviewed by Goodwin, Procter
& Hoar LLP. Accordingly, no assurance can be given that the actual results of
the Company for any particular tax year will in fact satisfy the requirements
for qualification. Likewise, although the Company believes that it has operated
in a manner which satisfies the REIT qualification requirements under the Code
since its organization in 1987, no assurance can be given that the Company's
qualification as a REIT will not be challenged by the Internal Revenue Service
for taxable years still subject to audit.
The provisions of the Code pertaining to REITs are highly technical and
complex. The following is a brief and very general summary of certain provisions
which currently govern the federal income tax treatment of the Company and its
shareholders. For the particular provisions which govern the federal income tax
treatment of the Company and its shareholders, reference is made to Sections 856
through 860 of the Code and the income tax regulations promulgated thereunder.
The following summary is qualified in its entirety by such reference. This
discussion does not address any state tax considerations or issues that arise as
a result of an investor's special circumstances or special status under the
Code.
Under the Code, if certain requirements are met in a taxable year,
including the requirement that the REIT distribute to the shareholders at least
95% of its real estate investment trust taxable income for the taxable year, a
REIT will generally not be subject to federal income tax with respect to income
which it distributes to its shareholders. However, the Company may be subject to
federal income tax under certain circumstances, including taxes at regular
corporate rates on any undistributed REIT taxable income, the "alternative
minimum tax" on its items of tax preferences, and taxes imposed on income and
gain generated by certain extraordinary transactions. If the Company fails to
qualify during any taxable year as a REIT, unless certain relief provisions are
available, it will be subject to tax (including any applicable alternative
minimum tax) on its taxable income at regular corporate rates, which could have
a material adverse effect upon the Company and its ability to make distributions
to its shareholders. For additional discussion of certain issues relating to the
Company's qualifications as a REIT, see "Risk Factors -- Consequences of Failure
to Qualify as a REIT."
As long as the Company qualifies as a REIT, distributions made to the
Company's taxable U.S. shareholders out of current or accumulated earnings and
profits (and not designated as capital gain dividends) will be taken into
account by such U.S. shareholders as ordinary income and will not be eligible
for the dividends received deduction generally available to corporations. As
used herein, the term "U.S. shareholder" means a holder of Common Stock that for
U.S. federal income tax purposes is (i) a citizen or resident of the United
States, (ii) a corporation, partnership, or other entity created or organized in
or under the laws of the United States or any political subdivision thereof, or
(iii) an estate or trust the income of which is subject to U.S. federal income
taxation regardless of its source and (iv) does not have special status under
the Code, such as tax-exempt organization; provided, however, for taxable years
beginning after December 31, 1996 (or certain earlier periods if the trust so
elects) trusts are to be included as "U.S. shareholders" only if a court within
the United States is able to exercise primary supervision over the
administration of such trust and one or more United States fiduciaries have the
authority to control all substantial decisions of the trust. Distributions that
are designated as capital gain dividends will be taxed as long-term capital
gains (to the extent they do not exceed the Company's actual net capital gain
for the taxable year) without regard to the period for which the shareholder has
held his Common Stock. However, corporate shareholders may be required to treat
up to 20% of certain capital gain dividends as ordinary income. Distributions in
excess of
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current and accumulated earnings and profits will not be taxable to a
shareholder to the extent that they do not exceed the adjusted basis of the
shareholder's Common Stock, but rather will reduce the adjusted basis of such
stock. To the extent that distributions in excess of current and accumulated
earnings and profits exceed the adjusted basis of shareholder's Common Stock,
the distributions will be included in income as long-term capital gain (or
short-term capital gain if the Common Stock has been held for one year or less)
assuming the Common Stock is a capital asset in the hands of the shareholder. In
addition, any dividend 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 distribution is
actually paid by the Company during January of the following calendar year.
Investors are urged to consult their own tax advisors with respect to the
tax consequences arising under federal law and the laws of any state,
municipality or other taxing jurisdiction. Foreign investors should consult
their own tax advisors concerning the tax consequences of an investment in the
Company including the possibility of United States income tax withholding on
Company distributions.
PLAN OF DISTRIBUTION
The Company may sell the Securities in any of three ways: (i) through
underwriting syndicates represented by one or more managing underwriters, or by
one or more underwriters without a syndicate; (ii) through agents designated
from time to time; or (iii) directly to institutional investors. The names of
any underwriters or agents of the Company involved in the sale of the Securities
for which this Prospectus is being delivered, and any applicable commission or
discounts, will be set forth in the Prospectus Supplement. The net proceeds to
the Company from such sale shall be set forth in the Prospectus Supplement.
Under agreements entered into with the Company, agents and underwriters may
be entitled to indemnification by the Company against certain civil liabilities,
including liabilities under the Securities Act, or to contribution with respect
to payments which the agents or underwriters may be required to make in respect
thereof. Agents and underwriters may engage in transactions with or perform
services for the Company in the ordinary course of business.
LEGAL MATTERS
The validity of the Securities that are the subject of this Prospectus will
be passed upon for the Company by Goodwin, Procter & Hoar LLP, Boston,
Massachusetts. In the case of an underwritten public offering, certain legal
matters will be passed upon for the Underwriters by legal counsel named in the
applicable Prospectus Supplement. Each such legal counsel may rely, as to
matters of California law, upon the opinion of California counsel named in the
applicable Prospectus Supplement.
EXPERTS
The financial statements and the related financial statement schedules
incorporated in this Prospectus by reference from the Company's Annual Report on
Form 10-K have been audited by Deloitte & Touche LLP, independent auditors, as
stated in their report, which is incorporated herein by reference, and have been
so incorporated in reliance upon the report of such firm given upon their
authority as experts in accounting and auditing.
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[Three aerial photographs as follows: Point Loma Plaza,
upper left corner of page, Ladera Center, middle of
page, and Hilltop Plaza, lower right corner of page, each
photograph captioned with name, location, property type and
total amount of Company-owned GLA.]
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[Burnham Pacific Logo]
