<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q/A-1
(Mark One)
/X/ Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended March 31, 1999
/ / Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from ______________ to ________________
Commission file number 1-9524
BURNHAM PACIFIC PROPERTIES, INC.
------------------------------------------------------
(Exact name of Registrant as specified in its Charter)
Maryland 33-0204162
- ---------------------------- ---------------------------------
(State of other jurisdiction (IRS Employer Identification No.)
of incorporation)
610 West Ash Street, San Diego, California 92101
- ------------------------------------------ -------------------
(Address of principal executive offices) (Zip Code)
(619) 652-4700
--------------------------------------------------
Registrant's telephone number, including area code
NA
-------------------------------------------------------------------
Former name, former address and former fiscal year if changed since
last report.
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. YES /X/ NO / /
Number of shares of the Registrant's common stock outstanding at May 14,
1999: 31,960,008.
<PAGE>
[PART 1, Items 1 and 2 as previously filed is amended in its entirety to read
as follows:]
PART 1 FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
BURNHAM PACIFIC PROPERTIES, INC.
CONSOLIDATED BALANCE SHEETS
MARCH 31, 1999 AND DECEMBER 31, 1998
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
March 31, 1999 December 31, 1998
------------------------------ ------------------------------
<S> <C> <C>
ASSETS
Real Estate $1,142,778 $1,137,779
Less Accumulated Depreciation (86,480) (79,837)
------------------------------ ------------------------------
Real Estate-Net 1,056,298 1,057,942
Cash and Cash Equivalents 3,326 20,873
Restricted Cash 9,085 7,737
Receivables-Net 6,889 7,697
Investment in Unconsolidated Subsidiaries 3,426 3,438
Other Assets 16,734 16,489
------------------------------ ------------------------------
Total $1,095,758 $1,114,176
------------------------------ ------------------------------
------------------------------ ------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Accounts Payable and Other Liabilities $ 39,536 $ 50,572
Tenant Security Deposits 2,954 2,982
Notes Payable 396,149 394,029
Line of Credit Advances 179,803 180,999
------------------------------ ------------------------------
Total Liabilities 618,442 628,582
------------------------------ ------------------------------
Commitments and Contingencies
Minority Interest 69,707 70,217
------------------------------ ------------------------------
Stockholders' Equity:
Preferred Stock, Par Value $.01/share 5,000,000
Shares Authorized, 4,800,000 Shares Designated as
Series 1997-A Convertible Preferred, 2,800,000
Shares Outstanding at March 31, 1999 and
December 31, 1998 28 28
Common Stock, Par Value $.01/share, 95,000,000
Shares Authorized, 31,960,008 and 31,954,008
Outstanding at March 31, 1999 and December 31,
1998, respectively 320 319
Paid in Capital in Excess of Par 525,266 524,957
Dividends Paid in Excess of Net Income (118,005) (109,927)
------------------------------ ------------------------------
Total Stockholders' Equity 407,609 415,377
------------------------------ ------------------------------
Total $1,095,758 $1,114,176
------------------------------ ------------------------------
------------------------------ ------------------------------
</TABLE>
See the Accompanying Notes
2
<PAGE>
BURNHAM PACIFIC PROPERTIES, INC.
CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND 1998
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
March 31,
--------------------------------------------
1999 1998
------------------- -------------------
<S> <C> <C>
REVENUES
Rents $34,435 $29,639
Fee Income 384 -
Interest 316 228
------------------- -------------------
Total Revenues 35,135 29,867
------------------- -------------------
EXPENSES
Interest 9,888 9,466
Rental Operating 9,374 8,252
General and Administrative 1,754 1,111
Restructuring Charge 1,500 -
Abandoned Acquisition Costs 748 -
Depreciation and Amortization 7,161 6,431
------------------- -------------------
Total Costs and Expenses 30,425 25,260
------------------- -------------------
Income From Operations Before Income (Loss) from Unconsolidated
Subsidiaries, Minority Interest and Cumulative Effect of Change
in Accounting Principle 4,710 4,607
Income (Loss) from Unconsolidated Subsidiaries (31) 95
Minority Interest (1,102) (1,166)
------------------- -------------------
Net Income Before Cumulative Effect of Change in Accounting Principle 3,577 3,536
Cumulative Effect of Change in Accounting Principle (1,866) -
------------------- -------------------
Net Income $ 1,711 $ 3,536
Dividends Paid to Preferred Stockholders (1,400) (1,400)
------------------- -------------------
Income Available to Common Stockholders $ 311 $ 2,136
------------------- -------------------
------------------- -------------------
BASIC AND DILUTED EARNINGS PER SHARE:
Income Before Cumulative Effect of Change in Accounting Principle $ 0.07 $ 0.09
Cumulative Effect of Change in Accounting Principle (0.06) -
------------------- -------------------
Net Income $ 0.01 $ 0.09
------------------- -------------------
------------------- -------------------
Proforma Amounts Assuming the Change in Accounting Principle
is Applied Retroactively:
Net Income $ 3,577 $ 3,280
Net Income Per Share - Basic and Diluted $ 0.07 $ 0.08
</TABLE>
See the Accompanying Notes
3
<PAGE>
BURNHAM PACIFIC PROPERTIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND 1998
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
1999 1998
------------------- -------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income $ 1,711 $ 3,536
Adjustments to Reconcile Net Income to
Net Cash Provided By Operating Activities:
Depreciation and Amortization 7,161 6,431
Cumulative Effect of Change in Accounting Principle 1,866 -
Abandoned Acquisitions Costs 748 -
Provision for Bad Debt 175 175
Common Stock - Directors' Fees 63 87
Stock Options - Compensation Expense 67 88
Minority Interest 1,102 1,166
Changes in Other Assets and Liabilities:
Receivables and Other Assets (2,715) (173)
Accounts Payable and Other Liabilities 145 (1,039)
Tenant Security Deposits (28) 32
------------------- -------------------
Net Cash Provided By Operating Activities 10,295 10,303
------------------- -------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Payments for Acquisitions of Real Estate and
Capital Improvements (19,618) (42,650)
Reimbursement of Development Costs 7,450 -
------------------- -------------------
Net Cash Used For Investing Activities (12,168) (42,650)
------------------- -------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Borrowings Under Line of Credit Agreements - 10,000
Repayments Under Line of Credit Agreements (1,196) (80,000)
Principal Payments of Notes Payable (1,880) (20,094)
Proceeds from Issuance of Notes Payable - 26,472
Restricted Cash (1,348) 692
Dividends Paid (9,789) (7,560)
Issuance of Stock-Net 43 113,135
Distributions Made to Minority Interest Holders (1,504) (1,328)
------------------- -------------------
Net Cash Provided (Used) for Financing Activities (15,674) 41,317
------------------- -------------------
Net Increase (Decrease) in Cash and Cash Equivalents (17,547) 8,970
Cash and Cash Equivalents at Beginning Of Period 20,873 6,841
------------------- -------------------
Cash and Cash Equivalents at End Of Period $ 3,326 $ 15,811
------------------- -------------------
------------------- -------------------
SUPPLEMENTAL DISCLOSURES OF CASH
FLOW INFORMATION
Cash Paid During Three Months For Interest $ 11,816 $ 9,719
------------------- -------------------
------------------- -------------------
SUPPLEMENTAL DISCLOSURE OF NON-CASH
INVESTING AND FINANCING ACTIVITIES
Notes Payable Issued for Additional Consideration of
Real Estate Acquired $ 4,000
-------------------
-------------------
</TABLE>
See the Accompanying Notes
4
<PAGE>
BURNHAM PACIFIC PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999, DECEMBER 31, 1998, AND MARCH 31, 1998
(UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accompanying consolidated financial statements are unaudited but, in
the opinion of management, reflect all normal recurring adjustments
necessary for a fair presentation of operating results. These financial
statements should be read in conjunction with the audited financial
statements of Burnham Pacific Properties, Inc. for the year ended December
31, 1998. Certain of the 1998 amounts have been reclassified to conform to
1999 presentation.
Dividends Per Share - Dividends of .2625 cents per share were paid on
March 31,1999 to shareholders of record on March 24, 1999.
In April 1998, the American Institute of Certified Public Accountants
issued Statement of Positions ("SOP") 98-5, "Reporting on the Costs of
Start-up Activities". This SOP requires that entities expense the costs of
start-up activities and organization costs incurred and is effective for
fiscal years beginning after December 15, 1998. The Company has adopted
SOP 98-5 in the first quarter of 1999. This initial application is
reported as a cumulative effect of change in accounting principle and
represents start-up and organization costs previously carried and
amortized as other assets. These costs of approximately $1,866,000,
represent unamortized costs related primarily to the Company becoming
self-advised in 1991, the conversion to an "UPREIT" Structure in 1997 and
the formation of its joint venture with the California Public Employees'
Retirement System ("CalPERS") during 1998.
2. NET INCOME PER SHARE
The following table sets forth the computation of basic and diluted
earnings per share ("EPS") for the periods indicated. Basic EPS excludes
dilution created by stock equivalents and is computed by dividing net
income available to common stockholders for the respective periods by the
weighted average number of shares outstanding during the applicable
period. Diluted EPS reflects the potential dilution created by stock
equivalents if such equivalents are converted into common stock (in
thousands, except per share amounts):
5
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended
March 31,
1999 1998
- ------------------------------------------------ ------------------------------ ------------------------------
<S> <C> <C>
Numerator:
Net Income $ 1,711 $ 3,536
Less:
Dividends Paid to Preferred Stockholders (1,400) (1,400)
------------------------------ ------------------------------
Income Available to Common
Stockholders for Basic and Diluted
Earnings Per Share $ 311 $ 2,136
------------------------------ ------------------------------
------------------------------ ------------------------------
Denominator:
Shares for Basic Earnings Per Share -
weighted average shares outstanding 31,954 23,641
Effect of Dilutive Securities:
Stock Options - 125
------------------------------ ------------------------------
Shares for Diluted Earnings Per Share 31,954 23,766
------------------------------ ------------------------------
------------------------------ ------------------------------
Basic Earnings Per Share $ 0.01 $ 0.09
------------------------------ ------------------------------
------------------------------ ------------------------------
Diluted Earnings Per Share $ 0.01 $ 0.09
------------------------------ ------------------------------
------------------------------ ------------------------------
</TABLE>
In 1999 and 1998, dividends and shares from conversion of Preferred Stock
and minority interest expense and shares from the conversion of Operating
Partnership units were excluded from the diluted earnings per share
calculations because they were anti-dilutive.
3. RESTRUCTURING
On March 18, 1999, the Board of Directors of the Company approved the
Company's plan to restructure its internal operations to outsource its
property management function to third party providers. This outsourcing
is expected to benefit the Company in several ways. First, it enables
the Company to more efficiently enter and exit selected markets and
assets as opportunities present themselves. This ability is key to
the Company's focus on maximizing the return on invested capital.
Secondly, it allows the Company to establish strategic relationships
with national property management companies as well as local
providers. These relationships should benefit the Company with
increased opportunities and improved services. Third, it allows the
management team to focus more time on value-added activities that
will more directly impact the bottom line. The outsourcing will
result in an approximately 26 percent reduction in the Company's
workforce and the closure of three of its property management
offices. The anticipated monthly recurring costs of outsourcing to
third party providers are approximately the same as the current
recurring internal costs ($250,000).
The Company has also recorded a restructuring charge of $1,500,000
during the three months ended March 31, 1999 and expects the
restructuring to transpire during the second and third quarters of
1999. As of March 31, 1999, no expenditures have been incurred or
applied against the reserve. This restructuring charge is primarily
attributable to personnel related costs for the employees subject to
the restructuring, and the costs associated with reducing and
eliminating offices, furniture and equipment. The personnel related
costs include severance benefits, the Company's portion of related
payroll taxes, insurance and 401(k) match. During the week of March 22,
1999, all 37 employees in the Company's property management department
were notified of the terms of their benefits package. The personnel
related costs comprise approximately one-half of the total reserve
($750,000).
The costs attributable to reducing and eliminating offices include
lease termination fees, rental losses for vacated office spaces and
tenant improvements and design fees attributable to abandoned office
space. The costs attributable to reducing and eliminating offices
comprise approximately one-third of the total reserve ($500,000). The
costs associated with reducing and eliminating furniture and equipment
include the write-off of the net book value of the furniture and
equipment for the terminated employees to the extent that these assets
could not be redeployed in other functional areas of the Company. The
costs attributable to eliminating the furniture and equipment are
approximately one-sixth of the total reserve ($250,000).
The Company believes that during the second quarter of 1999 it will
complete its hiring of third party providers, and begin the process of
closing property management offices and reducing its workforce. It is
estimated that in the second quarter of 1999, approximately $600,000 of
expenditures will be charged against the reserve with the remainder
expended in the third quarter of 1999.
4. SEGMENT INFORMATION
The Company has two reportable segments: Retail Operating properties and
Office/Industrial properties. The Company focuses its investments on
retail shopping centers located in major metropolitan areas. As of
March 31, 1999, the Company owns interests in 71 retail operating
properties and has one retail project currently under development.
The Company also owns interests in four office and industrial properties
which it considers non-strategic and therefore does not allocate a
material amount of Company resources to this segment. For the three months
ended March 31, 1999 and 1998 there was no tenant of the Company that
accounted for ten percent or more of the total revenues of the Company.
The Company evaluates the performance of its assets within these segments
based on the net operating income of the respective property. Net
operating income is calculated as rental revenues of the property less its
rental expenses (such as common area expenses, property taxes, insurance
and other owner's expenses). The summary of the Company's operations by
segment is as follows (in thousands):
6
<PAGE>
<TABLE>
<CAPTION>
1999
---------------------------------------------------------------------
Retail Office Total
<S> <C> <C> <C>
Rental Revenues $ 32,553 $ 1,882 $ 34,435
-------------------- -------------------- -------------------
-------------------- -------------------- -------------------
Net Operating Income $ 23,779 $ 1,666 $ 25,445
-------------------- -------------------- -------------------
-------------------- -------------------- -------------------
Real Estate at March 31 $1,078,800 $57,884 $1,136,684
-------------------- -------------------- -------------------
-------------------- -------------------- -------------------
1998
---------------------------------------------------------------------
Retail Office Total
Rental Revenues $ 27,735 $ 1,904 $ 29,639
-------------------- -------------------- -------------------
-------------------- -------------------- -------------------
Net Operating Income $ 19,698 $ 1,689 $ 21,387
-------------------- -------------------- -------------------
-------------------- -------------------- -------------------
Real Estate at March 31 $ 944,362 $ 57,861 $1,002,223
-------------------- -------------------- -------------------
-------------------- -------------------- -------------------
</TABLE>
The following table reconciles the Company's reportable segments' rental
revenues and net operating income to consolidated net income of the Company
for the periods presented (in thousands):
<TABLE>
<CAPTION>
Three Months Ended
March 31,
1999 1998
------------------- -------------------
<S> <C> <C>
REVENUES:
Total Rental Revenues for Reportable Segments $34,435 $29,639
Fee Income 384 -
Interest Revenue 316 228
------------------- -------------------
TOTAL CONSOLIDATED REVENUES $35,135 $29,867
------------------- -------------------
------------------- -------------------
NET OPERATING INCOME:
------------------- -------------------
Total Net Operating Income for Reportable Segments $25,445 $21,387
------------------- -------------------
Additions:
Interest Revenue 316 228
Income from Unconsolidated Subsidiaries - 95
------------------- -------------------
Total Additions 316 323
------------------- -------------------
Deductions:
Interest Expense 9,888 9,466
General and Administrative Expenses 1,754 1,111
Restructuring Charge 1,500 -
Abandoned Acquisition Costs 748 -
Loss from Unconsolidated Subsidiaries 31 -
Depreciation and Amortization 7,161 6,431
Minority Interest 1,102 1,166
------------------- -------------------
Total Deductions 22,184 18,174
------------------- -------------------
Net Income Before Cumulative Effect of Change
in Accounting Principle $ 3,577 $ 3,536
Cumulative Effect of Change in Accounting Principle (1,866) -
------------------- -------------------
Net Income $ 1,711 $ 3,536
------------------- -------------------
------------------- -------------------
</TABLE>
The following table reconciles the total real estate for the reportable
segments to consolidated assets for the Company at March 31, 1999 and 1998
(in thousands):
<TABLE>
<CAPTION>
1999 1998
------------------- -------------------
<S> <C> <C>
Total Real Estate for Reportable Segments $1,136,684 $1,002,223
Other Real Estate 6,094 4,527
------------------- -------------------
Total Real Estate $1,142,778 $1,006,750
Accumulated Depreciation (86,480) (61,681)
------------------- -------------------
Real Estate - Net 1,056,298 945,069
Other Assets 39,460 42,565
------------------- -------------------
Consolidated Assets $1,095,758 $ 987,634
------------------- -------------------
------------------- -------------------
</TABLE>
7
<PAGE>
Other real estate includes assets related to the corporate offices of the
Company, which are not included in segment information.
5. REAL ESTATE
Real Estate is summarized as follows (in thousands):
<TABLE>
<CAPTION>
March 31, 1999 December 31, 1998
------------------------------ ------------------------------
<S> <C> <C>
Retail Centers $1,038,680 $1,038,978
Retail Centers Under Development 40,120 34,814
Office/Industrial Buildings 57,884 57,876
Other 6,094 6,111
------------------------------ ------------------------------
Total Real Estate 1,142,778 1,137,779
Accumulated Depreciation (86,480) (79,837)
------------------------------ ------------------------------
Real Estate-Net $1,056,298 $1,057,942
------------------------------ ------------------------------
------------------------------ ------------------------------
</TABLE>
During the three month period ended March 31, 1999, the Company was paid
the remainder of the reimbursable costs (approximately $7,450,000) related
to the acquisition and construction of the residential portion of the 1000
Van Ness project. Upon receipt of the final payment of the reimbursable
costs (which totaled approximately $18,200,000) the Company conveyed all
of the unsold residential units.
On March 9, 1999, BPP Retail, LLC (the joint venture between the Company
and CalPERS) agreed to acquire 28 shopping centers owned by AMB Property
Corporation aggregating 5.1 million square feet for approximately $663.4
million. The properties are expected to be acquired in three separate
closings; on or about June 15, July 31 and December 1, 1999. The Company
has agreed to acquire six additional shopping centers from AMB aggregating
1.5 million square feet for approximately $284.4 million; if completed,
this purchase, which is subject to the Company's obtaining financing and
other conditions, is currently expected to close by year-end 1999. In
connection with the AMB transaction, CalPERS and the Company agreed to
increase the aggregate amount of indebtedness that the joint venture might
incur through December 31, 2000 to approximately $450,000,000 and the
Company agreed to grant CalPERS an option expiring June 30, 2000 to
purchase 1 million shares of Common Stock of the Company at an exercise
price of $15.375 per share.
6. SECURITIES
At March 31, 1999, the Company had effective shelf registration statements
on file with the Securities and Exchange Commission relating to an
aggregate of $202,144,000 of registered and unissued debt and equity
securities.
7. SUBSEQUENT EVENTS
On April 1, 1999, the Company made its initial contribution of three
retail properties (the "Initial Contribution") valued at approximately
$22,800,000 into BPP Retail, LLC.
Simultaneously, the put option contained in the Agreement Regarding
Contribution of Certain Properties and Put Options entered into in
December 1998 between the Company's Operating Partnership and BPP Retail,
LLC expired. The purpose of the option was to permit the Company's
Operating Partnership to contribute two retail
8
<PAGE>
properties (the "Contributed Projects") into BPP Retail, LLC even
though CalPERS had not received all the required information (such as
appraisals) to approve or disapprove the contribution. When the option
agreement was entered into BPP Retail, LLC provided the Operating
Partnership approximately $22,195,000 (the "Net Asset Value") in
exchange for the economic interests in the Contributed Projects. The
consolidated balance sheets of the Company as of March 31, 1999 and
December 31, 1998 continue to include the net book value of the
Contributed Projects, and the funds received for the Net Asset Value is
included in accounts payable and other liabilities.
With the Company's Initial Contribution and the expiration of the put
option, the Company's interest in BPP Retail, LLC is approximately 14%.
During April 1999, the Company borrowed $3,000,000 under its $5,000,000
unsecured Revolving Credit Agreement.
9
<PAGE>
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
MATERIAL CHANGES IN RESULTS OF OPERATIONS
Three months ended March 31, 1999 compared to the three months ended March 31,
1998:
During the three months ended March 31, 1999, net income decreased $1,825,000
or 52%, to $1,711,000 ($0.01 per share) compared to $3,536,000 ($0.09 per
share) for the same period in 1998. The primary reasons for the decrease are
attributable to a $1,500,000 restructuring charge, abandoned acquisition
costs of $748,000 and the $1,866,000 cumulative effect of change in
accounting principle recorded during the three month period ended March 31,
1999. If these three charges were excluded, net income would have been
approximately $5,825,000 ($0.14 per share) for the 1999 period or a
$2,289,000 increase compared to the same period in 1998. This adjusted
increase in net income is primarily attributable to increased net operating
income (total rental revenues less rental operating expenses) aggregating
$3,674,000, resulting from new leasing and higher levels of expense
reimbursements of core portfolio properties, the acquisition of approximately
$98,343,000 of shopping centers in 1998, and $384,000 of fee income related
to the Company's new joint-venture ("BPP Retail, LLC") with the California
Public Employees' Retirement System ("CalPERS"). The aforementioned increase
to net income was partially offset by increases in depreciation and
amortization, general and administrative expenses and interest expense of
$730,000, $643,000, and $422,000, respectively.
Total revenues increased $5,268,000 to $35,135,000 in 1999 from $29,867,000
in 1998. This increase is primarily attributable to the acquisition activity
in 1998 and $384,000 of fee income.
Rental operating expenses increased $1,122,000 to $9,374,000 in 1999 from
$8,252,000 in 1998. This increase is primarily attributable to the addition
of new properties in 1998.
Interest expense increased $422,000 to $9,888,000 in 1999 from $9,466,000 in
1998. The overall increase in interest expense is primarily related to debt
incurred for the 1998 acquisitions. The debt outstanding (exclusive of
$14,774,000 of fixed rate mortgage debt in unconsolidated subsidiaries) on
March 31, 1999 and related weighted average rate were $575,952,000 and 7.27%
respectively, compared to $486,758,000 and 7.53% on March 31, 1998. Interest
capitalized in conjunction with development and expansion projects was
$1,144,000 for the three months ended March 31, 1999, as compared to $1,137,000
for the same period in 1998.
Depreciation and Amortization expenses increased $730,000 to $7,161,000 in
1999 from $6,431,000 in 1998. The increase is primarily attributable to the
growth related to the shopping centers acquired in 1998.
General and Administrative expenses increased $643,000 to $1,754,000 in 1999
from $1,111,000 in 1998. The increase is attributable to the growth of the
Company primarily related to the 1998 acquisitions and developments.
In April 1998, the American Institute of Certified Public Accountants issued
Statement of Positions ("SOP") 98-5, "Reporting on the Costs of Start-up
Activities". This SOP requires that entities expense the costs of start-up
activities and organization costs incurred and is effective for fiscal years
beginning after December 15, 1998. The Company has implemented SOP 98-5 in
the first quarter of 1999. The adoption of SOP 98-5 is reported as a
cumulative effect of change in accounting principle and represents start up
and organization costs previously carried and
10
<PAGE>
amortized as other assets. These costs of approximately $1,866,000, represent
unamortized costs related primarily to the Company becoming self-advised in
1991, the conversion to an "UPREIT" Structure in 1997 and the formation of
its joint venture with CalPERS during 1998.
During the three months ended March 31, 1999, the Company recorded a $748,000
charge related to the abandonment of acquisitions transactions.
On March 18, 1999, the Board of Directors of the Company approved the
Company's plan to restructure its internal operations to outsource its
property management function to third party providers. This outsourcing is
expected to benefit the Company in several ways. First, it enables the
Company to more efficiently enter and exit selected markets and assets as
opportunities present themselves. This ability is key to the Company's focus
on maximizing the return on invested capital. Secondly, it allows the Company
to establish strategic relationships with national property management
companies as well as local providers. These relationships should benefit the
Company with increased opportunities and improved services. Third, it allows
the management team to focus more time on value-added activities that will
more directly impact the bottom line. The outsourcing will result in an
approximately 26 percent reduction in the Company's workforce and the closure
of three of its property management offices. The anticipated monthly
recurring costs of outsourcing to third party providers are approximately the
same as the current recurring internal costs ($250,000).
The Company has also recorded a restructuring charge of $1,500,000 during the
three months ended March 31, 1999 and expects the restructuring to transpire
during the second and third quarters of 1999. As of March 31, 1999, no
expenditures have been incurred or applied against the reserve. This
restructuring charge is primarily attributable to personnel related costs for
the employees subject to the restructuring, and the costs associated with
reducing and eliminating offices, furniture and equipment. The personnel
related costs include severance benefits, the Company's portion of related
payroll taxes, insurance and 401(k) match. During the week of March 22, 1999,
all 37 employees in the Company's property management department were
notified of the terms of their benefits package. The personnel related costs
comprise approximately one-half of the total reserve ($750,000).
The costs attributable to reducing and eliminating offices include lease
termination fees, rental losses for vacated office spaces and tenant
improvements and design fees attributable to abandoned office space. The
costs attributable to reducing and eliminating offices comprise approximately
one-third of the total reserve ($500,000). The costs associated with reducing
and eliminating furniture and equipment include the write-off of the net book
value of the furniture and equipment for the terminated employees to the
extent that these assets could not be redeployed in other functional areas of
the Company. The costs attributable to eliminating the furniture and
equipment are approximately one-sixth of the total reserve ($250,000).
The Company believes that during the second quarter of 1999 it will complete
its hiring of third party providers, and begin the process of closing
property management offices and reducing its workforce. It is estimated that
in the second quarter of 1999, approximately $600,000 of expenditures will be
charged against the reserve with the remainder expended in the third quarter
of 1999.
FUNDS FROM OPERATIONS
Three months ended March 31, 1999 compared to the three months ended March 31,
1998:
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. Consistent with the standards established in the White
Paper on FFO approved by the Board of Governors of the National Association
of Real Estate Investment Trusts in March 1995, the Company defines FFO as
net income (loss) (computed in accordance with GAAP), excluding gains (or
losses) from debt restructuring, sales of property and non-recurring items,
plus real estate related depreciation and amortization and after adjustments
for unconsolidated partnerships and joint ventures. Management believes FFO
is helpful to investors as a measure of the performance of an equity REIT
because, along with cash flows from operating activities, financing
activities, and investing activities, it provides investors with an
understanding of the ability of the Company to incur and service debt and
make capital expenditures. The Company computes FFO in accordance with
standards established by the White Paper, which may differ from the
methodology for calculating FFO utilized by other equity REITs, and
accordingly, may not be comparable to such other REITs. FFO should not be
considered as an alternative to net income (determined in accordance with
GAAP) as an indication of the Company's financial performance or to cash
flows from operating activities (determined in accordance with GAAP) as a
measure of the Company's liquidity, nor is it indicative of funds available
to fund the Company's cash needs, including its ability to make
distributions, needed capital replacements or expansions, debt service
obligations, or other commitments and uncertainties. The Company believes
that in order to facilitate a clear understanding of the combined historical
operating results of the Company, FFO should be examined in conjunction with
net income as presented in the consolidated financial statements and
information included elsewhere in this report.
For the three months ended March 31, 1999, diluted FFO increased $3,055,000
to $13,707,000 as compared to $10,652,000 for the same period in 1998. The
increase was net of several effects, but was primarily attributable to the
increase in revenues from core portfolio properties, acquisitions, and
development.
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<PAGE>
The calculation of FFO for the respective periods is as follows (in thousands):
<TABLE>
<CAPTION>
Three Months Ended
March 31,
--------------------------------------------
1999 1998
------------------- -------------------
<S> <C> <C>
Income Available to Common Stockholders $ 311 $ 2,136
Adjustments:
Depreciation and Amortization of Real Estate and Tenant
Improvements 6,780 5,950
Restructuring Charge 1,500 -
Abandoned Acquisitions Costs 748 -
Cumulative Effect of Change in Accounting Principle 1,866 -
------------------- -------------------
Funds from Operations-Basic 11,205 8,086
Effect of Dilutive Securities:
Operating Partnership Units 1,102 1,166
Convertible Preferred Stock 1,400 1,400
------------------- -------------------
Funds from Operations-Dilutive $13,707 $10,652
------------------- -------------------
------------------- -------------------
</TABLE>
The Company believes that the adjustments for restructuring charges and
abandoned acquisition costs are appropriate FFO adjustments.
As described elsewhere, the restructuring charge was related to the Company's
plans to outsource its internal property management function to third-party
providers. The Company has traditionally provided all functions necessary to
run the business from internal sources. The Company believed that a fully
integrated company could operate more efficiently than a company that relies
on third party providers. Due to the Company's plans for growth, the
philosophy has changed. The Company believes that outsourcing property
management helps the Company be more efficient than having internal property
management. The restructuring plan requires the complete and one-time
elimination of the Company's property management function. The costs incurred
to complete the restructuring plan will not recur in future periods.
The abandoned acquisition costs relate to costs associated with projects that
the Company had to abandon in connection with its committing to the AMB
transactions and entering into a joint venture agreement with CalPERS. These
costs are unusual since the Company does not normally expend such costs until
it is reasonably assured that the associated properties will be acquired.
Also, these costs are nonrecurring since these costs will no longer be
incurred by the Company, but will be incurred by BPP Retail (the "Joint
Venture").
MATERIAL CHANGES IN FINANCIAL CONDITION
March 31, 1999 compared to December 31,1998:
As of March 31, 1999, and December 31, 1998 approximately $6,375,000 and
$5,567,000, respectively, of straight-lined rent escalations and free rent
are included in other assets.
The Company has a $205,000,000 Credit Facility of which $135,000,000 is
secured or to be secured by mortgages on various of the Company's properties
and $70,000,000 is unsecured. The Credit Facility bears interest at rates of
LIBOR (London Inter-Bank Offer Rate) plus 1.40% for secured borrowings or
LIBOR plus 1.50% for unsecured borrowings. At March 31, 1999 and December 31,
1998, the average rate of interest on line of credit advances was
approximately 6.38% and 7.07%, respectively. The Credit Facility is scheduled
to mature in November 1999. The lender has notified the Company that, due to
a change in strategic focus, it intends to liquidate its line of credit
business in 1999 and, therefore, will not entertain a request to renew the
Credit Facility at maturity. The Company intends to refinance the credit
facility with another lender prior to the maturity date. At March 31, 1999,
borrowings of approximately $109,821,000 were outstanding under the secured
portion of the Credit Facility and $69,982,000 was outstanding under the
unsecured portion.
During January 1999, the Company entered into a $5,000,000 unsecured
Revolving Credit Agreement with a bank. Outstanding borrowings will accrue
interest at LIBOR plus 2.00% or prime. The Company had not borrowed against
this Revolving Credit Agreement as of March 31, 1999. During April 1999, the
Company borrowed $3,000,000 under this Revolving Credit Agreement. This
facility is scheduled to mature in November 1999.
At March 31, 1999, the Company had $5,097,000 outstanding under a
construction loan, secured by one of the Company's development properties.
Borrowings under this loan bear interest at LIBOR plus 1.90% or at prime plus
.50%. The loan matures in December 1999.
At March 31, 1999, the Company's capitalization consisted of $575,952,000 of
debt (excluding the Company's proportionate share of joint venture mortgage
debt which is approximately 25% of $14,774,000), $120,000,000 of preferred
stock and preferred operating partnership units, and $355,588,000 of market
equity (market equity is defined as (i) the sum of the number of
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<PAGE>
outstanding shares of Common Stock of the Company plus Common Units of the
Operating Partnership held by partners of the Operating Partnership other
than the Company, multiplied by (ii) the closing price of the shares of Common
Stock on the New York Stock Exchange at March 31, 1999 of $10.50) resulting
in a debt to total market capitalization ratio of .55 to 1.0 compared to the
ratio of .52 to 1.0 at December 31, 1998. At March 31, 1999, the Company's
total debt consisted of $370,383,000 of fixed rate debt, and $201,569,000 of
variable rate debt.
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, private placements of debt and equity securities and proceeds from
sales of non-strategic assets. At March 31, 1999, the Company had effective
shelf registration statements on file with the Securities and Exchange
Commission relating to an aggregate of $202,144,000 of registered and
unissued debt and equity securities.
FORWARD-LOOKING STATEMENTS
This Form 10-Q contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. The words "believe", "expect", "anticipate", "intend",
"estimate", "assume", "plan", and other similar expressions which are
predictions of or indicate future events and trends and which do not relate
to historical matters identify forward-looking statements. Forward-looking
statements also include, without limitation, the Company's expectations as to
when it will complete the modification and testing phases of its Year 2000
project plan as well as its Year 2000 contingency plans; its estimated cost
of achieving Year 2000 readiness; and the Company's belief that its internal
systems will be Year 2000 complaint in a timely manner. Reference is made to
the Company's Form 10-K Report for the year ended December 31, 1998 under the
caption "Forward Looking Statements and Certain Risk Factors" for a
discussion of certain factors which could cause the Company's actual results
to differ materially from those set forth in the forward-looking statements.
YEAR 2000 READINESS
The Company has substantially completed its Year 2000 evaluation of the
systems used to run property operating systems such as security,
energy, elevator and safety systems as well as the software and
hardware used to run the Company's information systems. The Company
will continue to identify and monitor Year 2000 issues throughout the
end of the year. The Company will test the time-sensitive property
level systems that it has been informed are believed to be Year 2000
ready and will reprogram or replace the systems found not to be Year
2000 ready before the end of the year. The Company does not believe
that the costs associated with becoming Year 2000 ready will exceed
$250,000.
The manufacturer of the accounting software that the Company uses has
indicated that its software is Year 2000 ready, and the Company plans
to install this software during the second quarter of 1999. The Company
intends to test this accounting software during the third quarter of
1999. The Company has hired a Year 2000 consulting firm to test the
Company's information systems. The consultant evaluated, assessed and
tested both the Company's hardware and other software systems; the
consultant has concluded that the hardware and other software is
substantially Year 2000 ready but will require minor modifications.
These modifications and/or upgrades will be obtained from the computer
manufacturers and installed prior to the end of the third quarter.
13
<PAGE>
The Company's ability to complete all Year 2000 modifications prior to
any anticipated impact on its operating systems is based on assumptions
of future events and depends upon the ability of third party
manufacturers to make necessary modifications to current versions of
their products, the availability of resources to install and test the
modified systems and other factors. Accordingly, these modifications
may not be successful.
Even if all of the Company's own systems are Year 2000 ready, its
business could still be disrupted if its tenants, business partners,
suppliers and other parties are not ready. The Company is currently
surveying and monitoring its material vendors and tenants regarding the
Year 2000 readiness status of their computer hardware and software
systems. Informational letters were sent to all of the Company's
tenants advising them of the Year 2000 issue in the fourth quarter of
1998. Also in the fourth quarter of 1998, the Company's Year 2000
survey was sent to its material tenants. Responses to the survey were
returned to the Company beginning in the first quarter of 1999. To
date, approximately 46 % of those surveyed have responded, and there
have been no major deficiencies noted. The Company's survey was sent to
its material vendors, including its landlords, in the fourth quarter of
1998. Responses to the survey were returned to the Company beginning in
the first quarter of 1999. To date, approximately 37% of those surveyed
have responded, and there have been no major deficiencies noted. The
Company will continue to review the results of these surveys, assess
the impact of the results on its operations and take whatever action it
deems necessary. Testing may be required for several, but not all,
third parties. Test strategies and schedules will be unique to each
situation once the Company understands the respective requirements and
readiness levels. The Company's business could be harmed if other
entities, including governmental units and utility companies, that
provide services to the Company's properties, tenants and customers
fail to be Year 2000 ready. Accordingly, in addition to its significant
tenants, the Company is seeking to ascertain the Year 2000 readiness
of:
- - each utility company servicing each property; and
- - each city, town, county or other governmental unit providing
police, fire, traffic control and other governmental services
relevant to the efficient operation of the property.
The Company's survey was sent to such utility companies and
governmental units during the first quarter of 1999. To date,
approximately 45 % of those surveyed have responded and there have been
no major discrepancies noted.
After the Company surveys the Year 2000 readiness of other parties, it
intends to determine if it will need any contingency plans to deal with
the non-readiness of others. At the present time, the Company does not
believe that Year 2000 non-readiness of tenants is likely to have any
significant effect on it and its operations. However, if a major tenant
of any of its properties is not Year 2000 ready, its business could
suffer, which in turn could result in:
- - that tenant's inability to pay rent; and
- - decrease in customer traffic and business of other tenants at
that property.
14
<PAGE>
The Company does not anticipate that it will need contingency plans to
deal with tenant non-readiness. However, the Company does recognize
that it may need to develop contingency plans to provide for the
continued operation of one or more individual properties whose
suppliers of services necessary for the efficient operation of the
property may not be fully Year 2000 ready by January 1, 2000. The
Company believes that the most reasonable worst-case Year 2000 scenario
that may affect its business would be a prolonged failure of a supplier
of these services, particularly utility services, that may harm
operations of one or several of its tenants.
15
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
BURNHAM PACIFIC PROPERTIES, INC.
Date: August 12, 1999 By: /s/ J. David Martin
----------------------------- ---------------------------------------
J. David Martin, Chief Executive Officer
Date: August 12, 1999 By: /s/ Daniel B. Platt
----------------------------- ---------------------------------------
Daniel B. Platt, Chief Financial Officer
16
