<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
/X/ Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended June 30, 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 _______________
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
August 12, 1999: 31,965,600.
<PAGE>
PART 1 FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
BURNHAM PACIFIC PROPERTIES, INC.
CONSOLIDATED BALANCE SHEETS
JUNE 30, 1999 AND DECEMBER 31, 1998
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
ASSETS June 30, 1999 December 31, 1998
------------- ------------------
<S> <C> <C>
Real Estate $ 1,045,711 $ 1,137,779
Less Accumulated Depreciation (77,257) (79,837)
----------- -----------
Real Estate-Net 968,454 1,057,942
Real Estate Held for Sale 19,006 --
Cash and Cash Equivalents 3,058 20,873
Restricted Cash 8,664 7,737
Receivables-Net 11,189 7,697
Investment in Unconsolidated Subsidiaries 61,693 3,438
Other Assets 16,797 16,489
----------- -----------
Total $ 1,088,861 $ 1,114,176
----------- -----------
----------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Accounts Payable and Other Liabilities $ 18,765 $ 50,572
Tenant Security Deposits 2,785 2,982
Notes Payable 412,456 394,029
Line of Credit Advances 183,375 180,999
----------- -----------
Total Liabilities 617,381 628,582
----------- -----------
Commitments and Contingencies
Minority Interest 69,383 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 June 30, 1999 and
December 31, 1998 28 28
Common Stock, Par Value $.01/share, 95,000,000 Shares
Authorized, 31,965,600 and 31,954,008 Shares
Outstanding at June 30, 1999 and
December 31, 1998, respectively 320 319
Paid in Capital in Excess of Par 525,743 524,957
Dividends Paid in Excess of Net Income (123,994) (109,927)
----------- -----------
Total Stockholders' Equity 402,097 415,377
----------- -----------
Total $ 1,088,861 $ 1,114,176
----------- -----------
----------- -----------
</TABLE>
See the Accompanying Notes
2
<PAGE>
BURNHAM PACIFIC PROPERTIES, INC.
CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 1999 AND 1998
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
REVENUES June 30, June 30,
1999 1998 1999 1998
-------------- --------- -------------- --------
<S> <C> <C> <C> <C>
Rents $ 32,456 $ 31,899 $ 66,891 $ 61,538
Fee Income 1,582 -- 1,966 --
Interest 331 226 647 454
-------- -------- -------- --------
Total Revenues 34,369 32,125 69,504 61,992
-------- -------- -------- --------
EXPENSES
Interest 9,275 7,749 19,163 17,215
Rental Operating 9,541 8,596 18,915 16,848
General and Administrative 1,905 1,392 3,659 2,503
Restructuring Charge -- -- 1,500 --
Abandoned Acquisition Costs -- -- 748 --
Costs Associated with Unsolicited Proposal and
Litigation 875 -- 875 --
Impairment Write-Off 1,200 -- 1,200 --
Depreciation and Amortization 6,964 6,750 14,125 13,181
-------- -------- -------- --------
Total Costs and Expenses 29,760 24,487 60,185 49,747
-------- -------- -------- --------
Income From Operations Before Income from
Unconsolidated Subsidiaries, Minority Interest
and Cumulative Effect of Change in Accounting
Principle 4,609 7,638 9,319 12,245
Income from Unconsolidated Subsidiaries 473 33 442 128
Minority Interest (1,281) (1,159) (2,383) (2,325)
-------- -------- -------- --------
Net Income Before Cumulative Effect of Change in
Accounting Principle 3,801 6,512 7,378 10,048
Cumulative Effect of Change in Accounting Principle
-- -- (1,866) --
-------- -------- -------- --------
Net Income $ 3,801 $ 6,512 $ 5,512 $ 10,048
Dividends Paid to Preferred Stockholders (1,400) (1,400) (2,800) (2,800)
-------- -------- -------- --------
Income Available to Common Stockholders $ 2,401 $ 5,112 $ 2,712 $ 7,248
-------- -------- -------- --------
-------- -------- -------- --------
BASIC AND DILUTED EARNINGS PER SHARE:
Net Income Before Cumulative Effect of Change in
Accounting Principle $ 0.08 $ 0.16 $ 0.14 $ 0.26
Cumulative Effect of Change in Accounting Principle
-- -- (0.06) --
-------- -------- -------- --------
Net Income $ 0.08 $ 0.16 $ 0.08 $ 0.26
-------- -------- -------- --------
-------- -------- -------- --------
Proforma Amounts Assuming the Change in Accounting
Principle is Applied Retroactively:
Net Income $ 3,801 $ 6,516 $ 7,378 $ 9,796
Net Income Per Share - Basic and Diluted $ 0.08 $ 0.16 $ 0.08 $ 0.25
</TABLE>
See the Accompanying Notes
3
<PAGE>
BURNHAM PACIFIC PROPERTIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND 1998
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
1999 1998
--------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income $ 5,512 $ 10,048
Adjustments to Reconcile Net Income to
Net Cash Provided By Operating Activities:
Depreciation and Amortization 14,125 13,181
Impairment Write-off 1,200 --
Cumulative Effect of Change in Accounting Principle 1,866 --
Abandoned Acquisitions Costs 748 --
Restructuring Charge 1,500 --
Provision for Bad Debt 350 350
Common Stock - Directors' Fees 137 172
Stock Options - Compensation Expense 134 145
Minority Interest 2,383 2,325
Income from Unconsolidated Subsidiaries (442) (128)
Changes in Other Assets and Liabilities:
Receivables and Other Assets (9,280) (4,041)
Accounts Payable and Other Liabilities (3,467) (74)
Tenant Security Deposits (197) 335
--------- ---------
Net Cash Provided By Operating Activities 14,569 22,313
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Payments for Acquisitions of Real Estate and
Capital Improvements (36,334) (87,036)
Reimbursement of Development Costs 7,450 --
Investment in Unconsolidated Subsidiaries (832) --
--------- ---------
Net Cash Used For Investing Activities (29,716) (87,036)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Borrowings Under Line of Credit Agreements 5,000 37,000
Repayments Under Line of Credit Agreements (2,624) (80,000)
Principal Payments of Notes Payable (3,343) (25,044)
Proceeds from Issuance of Notes Payable 21,770 38,925
Restricted Cash (927) 188
Dividends Paid (19,579) (17,328)
Issuance of Stock-Net 43 112,976
Distributions Made to Minority Interest Holders (3,008) (2,441)
Payment for Minority Interest -- (175)
--------- ---------
Net Cash Provided by (Used For) Financing Activities (2,668) 64,101
--------- ---------
Net Decrease in Cash and Cash Equivalents (17,815) (622)
Cash and Cash Equivalents at Beginning Of Period 20,873 6,841
--------- ---------
Cash and Cash Equivalents at End Of Period $ 3,058 $ 6,219
--------- ---------
--------- ---------
</TABLE>
4
<PAGE>
BURNHAM PACIFIC PROPERTIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONT'D.)
FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND 1998
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<S> <C> <C>
SUPPLEMENTAL DISCLOSURES OF CASH
FLOW INFORMATION
Cash Paid During Six Months For Interest $21,223 $19,870
------- -------
------- -------
SUPPLEMENTAL DISCLOSURE OF NON-CASH
INVESTING AND FINANCING ACTIVITIES
Notes Payable Issued for Additional Consideration of
Real Estate Acquired $ 4,000 $ --
------- -------
------- -------
Notes Payable Assumed $ -- $23,596
Operating Partnership Units Issued in Connection with
Real Estate Acquisitions -- 18,083
Liability due to Seller -- 1,352
Cash Paid for Real Estate -- 13,532
------- -------
Fair Value of Real Estate Acquired $ -- $56,563
------- -------
------- -------
</TABLE>
See the Accompanying Notes
5
<PAGE>
BURNHAM PACIFIC PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999, DECEMBER 31, 1998, AND JUNE 30, 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
June 30, 1999 to shareholders of record on June 23, 1999.
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):
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
1999 1998 1999 1998
---------------------------------------- -------------- -------------- -------------- ----------
<S> <C> <C> <C> <C>
Numerator:
Net Income $ 3,801 $ 6,512 $ 5,512 $ 10,048
Less:
Dividends Paid to Preferred Stockholders (1,400) (1,400) (2,800) (2,800)
-------- -------- -------- --------
Income Available to Common
Stockholders for Basic and Diluted
Earnings Per Share $ 2,401 $ 5,112 $ 2,712 $ 7,248
-------- -------- -------- --------
-------- -------- -------- --------
Denominator:
Shares for Basic Earnings Per Share -
weighted average shares outstanding 31,960 31,911 31,957 27,799
Effect of Dilutive Securities:
Stock Options 40 210 40 210
-------- -------- -------- --------
Shares for Diluted Earnings Per Share 32,000 32,121 31,997 28,009
-------- -------- -------- --------
-------- -------- -------- --------
Basic Earnings Per Share $ 0.08 $ 0.16 $ 0.08 $ 0.26
-------- -------- -------- --------
-------- -------- -------- --------
Diluted Earnings Per Share $ 0.08 $ 0.16 $ 0.08 $ 0.26
-------- -------- -------- --------
-------- -------- -------- --------
</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.
6
<PAGE>
3. REAL ESTATE
Real Estate is summarized as follows (in thousands):
<TABLE>
<CAPTION>
June 30, 1999 December 31, 1998
-------------------------- -------------------------
<S> <C> <C>
Retail Centers $ 952,077 $1,038,978
Retail Centers Under Development 53,465 34,814
Office/Industrial Buildings 34,087 57,876
Other 6,082 6,111
-------------------------- -------------------------
Total Real Estate 1,045,711 1,137,779
Accumulated Depreciation (77,257) (79,837)
-------------------------- -------------------------
Real Estate-Net $ 968,454 $1,057,942
-------------------------- -------------------------
-------------------------- -------------------------
</TABLE>
4. INVESTMENT IN UNCONSOLIDATED SUBSIDIARIES
On April 1, 1999, the Company contributed three retail properties
valued at approximately $22,800,000 into BPP Retail, LLC (the joint
venture between the Company and CalPERS - the "Joint Venture").
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 the Joint
Venture expired. The purpose of the option was to permit the Company's
Operating Partnership to contribute two retail properties (the
"Contributed Projects") into the Joint Venture 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, the Joint Venture provided the Operating Partnership
approximately $22,195,000 (the "Net Asset Value") in exchange for the
economic interests in the Contributed Projects.
On June 15, 1999 the Joint Venture obtained a $421,000,000 Credit
Facility of which $171,000,000 is supported by the Joint Venture
partners' commitment to contribute additional equity to the Joint
Venture by December 31, 2000 and $250,000,000 is unsecured. The Joint
Venture's Credit Facility bears interest at rates of Eurodollar plus
1.00% or prime for secured borrowings or Eurodollar plus 1.38% or prime
for unsecured borrowings. At June 30, 1999, the average rate of
interest on the Joint Venture's Credit Facility advances was
approximately 6.09%. This facility is scheduled to mature in June 2000.
On June 15, 1999, the Joint Venture completed the acquisition of nine
retail shopping centers contained in the first phase of the AMB
Portfolio. The purchase price was approximately $207,400,000. The
acquisition of the portfolio was financed primarily by $182,500,000 of
borrowings under the Joint Venture's Credit Facility with the balance
coming from CalPERS contributed capital. In connection with the closing
of the first phase of the AMB Portfolio, the Company granted to 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. The
value of the option as of the date of grant was estimated to be
approximately $234,000 and is included at June 30, 1999 in investment
in unconsolidated subsidiaries on the balance sheet of the Company.
On June 15, 1999, the Company contributed one additional retail
shopping center valued at approximately $15,900,000 into the Joint
Venture.
7
<PAGE>
At June 30, 1999, the Company's interest in the Joint Venture was
approximately 20%. The Company accounts for its investment using the
equity method of accounting.
On June 30, 1999, the Company announced that it had elected not to
pursue Phase Four of the AMB Portfolio.
On June 1, 1999, the operating agreement of BPP Retail, LLC, the
Company's joint venture with CalPERS, was amended to expand the
permitted geographical scope of the joint venture's investments from
the western United States to nationwide, in order to permit the
acquisition of properties in the AMB Portfolio. In addition, effective
June 1, 1999, a newly formed limited liability company, Burnham Pacific
Employees LLC ("BP Employees LLC"), was appointed the Manager of BPP
Retail, LLC. The Operating Partnership is the sole Managing Member of
BP Employees LLC, and certain members of the Company's management
("Employee Members") hold non-managing membership interests in BP
Employees LLC. Under the terms of the BPP Retail, LLC joint venture,
the Manager of BPP Retail, LLC is entitled to an incentive distribution
("Incentive Distribution") calculated on an annual basis. The right to
Incentive Distributions is based and contingent upon, among other
things, appreciation in the value of the BPP Retail, LLC assets over a
specified threshold during each year. Under the terms of the BP
Employees LLC limited liability company agreement, one-half of any
Incentive Distribution received by BP Employees LLC will be distributed
to the Operating Partnership and one-half will be distributed to the
Employee Members.
5. 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
June 30, 1999, the Company owns interests in 70 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 (see
Note 10). For the three months ended June 30, 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):
8
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended
---------------------------------
June 30, 1999
---------------------------------
Retail Office Total
<S> <C> <C> <C>
Rental Revenues $30,549 $ 1,907 $32,456
------- ------- -------
------- ------- -------
Net Operating Income $22,794 $ 1,703 $24,497
------- ------- -------
------- ------- -------
<CAPTION>
June 30, 1998
---------------------------------
Retail Office Total
<S> <C> <C> <C>
Rental Revenues $30,029 $ 1,870 $31,899
------- ------- -------
------- ------- -------
Net Operating Income $21,641 $ 1,662 $23,303
------- ------- -------
------- ------- -------
<CAPTION>
Six Months Ended
---------------------------------
June 30, 1999
---------------------------------
Retail Office Total
<S> <C> <C> <C>
Rental Revenues $63,102 $ 3,789 $66,891
------- ------- -------
------- ------- -------
Net Operating Income $46,572 $ 3,370 $49,942
------- ------- -------
------- ------- -------
<CAPTION>
June 30, 1998
---------------------------------
Retail Office Total
<S> <C> <C> <C>
Rental Revenues $57,764 $ 3,774 $61,538
------- ------- -------
------- ------- -------
Net Operating Income $41,339 $ 3,351 $44,690
------- ------- -------
------- ------- -------
<CAPTION>
June 30, 1999 December 31, 1998
----------------- ---------------------
<S> <C> <C>
Retail Real Estate $1,005,542 $1,073,792
Office Real Estate 34,087 57,876
----------------- ---------------------
Total Real Estate $1,039,629 $1,131,668
----------------- ---------------------
----------------- ---------------------
</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):
9
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
1999 1998 1999 1998
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
REVENUES:
Total Rental Revenues for Reportable Segments $ 32,456 $ 31,899 $ 66,891 $ 61,538
Fee Income 1,582 -- 1,966 --
Interest Revenue 331 226 647 454
------------- ------------- ------------- -------------
TOTAL CONSOLIDATED REVENUES $ 34,369 $ 32,125 $ 69,504 $ 61,992
------------- ------------- ------------- -------------
NET OPERATING INCOME:
------------- ------------- ------------- -------------
Total Net Operating Income for Reportable Segments $ 24,497 $ 23,303 $ 49,942 $ 44,690
------------- ------------- ------------- -------------
Additions:
Interest Revenue 331 226 647 454
Income from Unconsolidated Subsidiaries 473 33 442 128
------------- ------------- ------------- -------------
Total Additions 804 259 1,089 582
------------- ------------- ------------- -------------
Deductions:
Interest Expense 9,275 7,749 19,163 17,215
General and Administrative Expenses 1,905 1,392 3,659 2,503
Restructuring Charge -- -- 1,500 --
Abandoned Acquisition Costs -- -- 748 --
Costs Associated with Unsolicited Proposal and
Litigation 875 -- 875 --
Impairment Write-off 1,200 -- 1,200 --
Depreciation and Amortization 6,964 6,750 14,125 13,181
Minority Interest 1,281 1,159 2,383 2,325
------------- ------------- ------------- -------------
Total Deductions 21,500 17,050 43,653 35,224
------------- ------------- ------------- -------------
Net Income Before Cumulative Effect of Change
in Accounting Principle $ 3,801 $ 6,512 $ 7,378 $ 10,048
Cumulative Effect of Change in Accounting Principle -- -- (1,866) --
------------- ------------- ------------- -------------
Net Income $ 3,801 $ 6,512 $ 5,512 $ 10,048
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
</TABLE>
The following table reconciles the total real estate for the reportable
segments to consolidated assets for the Company at June 30, 1999 and
December 31, 1998 (in thousands):
10
<PAGE>
<TABLE>
<CAPTION>
June 30, 1999 December 31, 1998
----------------- -----------------
<S> <C> <C>
Total Real Estate for Reportable Segments $ 1,039,629 $ 1,131,668
Other Real Estate 6,082 6,111
----------------- -----------------
Total Real Estate $ 1,045,711 $ 1,137,779
Accumulated Depreciation (77,257) (79,837)
----------------- -----------------
Real Estate, Net 968,454 1,057,942
Other Assets 120,407 56,234
----------------- -----------------
Consolidated Assets $ 1,088,861 $ 1,114,176
----------------- -----------------
----------------- -----------------
</TABLE>
Other real estate includes assets related to the corporate offices of
the Company, which are not included in segment information.
6. DEBT
In May 1999, the Company obtained a $55,000,000 construction loan,
secured by one of the Company's development properties. Borrowings
under this loan bear interest at LIBOR (London Inter-Bank Offered
Rates) plus 2.00% or prime. The loan is scheduled to mature in November
2000. The initial draw in May 1999 of approximately $18,400,000 was
used to reduce borrowings under the Company's Credit Facility. The
balance outstanding at June 30, 1999 was approximately $21,770,000 with
an average interest rate of approximately 7.17% (see Note 10).
During June 1999, the Company borrowed $5,000,000 under its $5,000,000
unsecured Revolving Credit Agreement which was repaid during July 1999
(see Note 10).
7. 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. The Company
estimated and recorded in the first quarter of 1999 a restructuring
charge of $1,500,000. 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 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).
11
<PAGE>
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).
As of June 30, 1999, the Company had completed the hiring of its third
party providers, completed approximately 76% of its planned reduction
in workforce and began the process of closing its property management
offices. The following table reflects the composition of the Company's
restructuring reserve and the expenditures applied against it as of
June 30, 1999:
<TABLE>
<CAPTION>
Original Restructuring
Restructuring Expenditures Reserve
Reserve Applied June 30, 1999
------------- ------------ -------------
<S> <C> <C> <C>
Personnel Related $ 750,000 $ 428,000 $ 322,000
Office Closures 500,000 176,000 324,000
Write-off of Furniture and Equipment 250,000 -- 250,000
------------- ------------ -------------
Total $1,500,000 $ 604,000 $ 896,000
------------- ------------ -------------
------------- ------------ -------------
</TABLE>
The Company expects the restructuring to be completed during the
third quarter of 1999.
8. COSTS ASSOCIATED WITH UNSOLICITED PROPOSAL AND LITIGATION
On June 7, 1999, the Company received a proposal from Schottenstein
Stores Corporation ("Schottenstein") and its affiliates to negotiate a
business combination in which the Company would be merged into an
acquisition affiliate of Schottenstein and the holders of the Company's
common stock would receive $13 per share. Schottenstein filed a
Schedule 13D with the Securities and Exchange Commission in which it
also reported that Schottenstein and its affiliates had acquired
approximately 8.2% of the Company's outstanding Common Stock. The
merger proposal was subject to a number of conditions, including
completion of due diligence satisfactory to Schottenstein, obtaining
new senior debt financing, and the assumption of certain outstanding
indebtedness of the Company. The proposed transaction was also made
conditional upon approval of the Company's shareholders and the holders
of units in the Company's operating partnership.
On June 21, 1999, the Company announced that it had retained Goldman,
Sachs & Co. to assist the Company in reviewing the acquisition proposal
from Schottenstein and its affiliates. Also on June 19, 1999, the
Company's Board of Directors adopted a Shareholder Rights Agreement
(the "Rights Agreement") to help ensure that the Company's shareholders
receive fair and equal treatment in the event of any proposed
acquisition of the Company.
On July 14, 1999, the Company responded to a letter from Schottenstein
dated July 12, 1999, in which Schottenstein increased its contingent
offer to $13.50 per share. In its response, the Company assured
Schottenstein that the Board of Directors had been seriously reviewing
the Schottenstein offer and its revised offer, and that the Board of
12
<PAGE>
Directors remains committed to acting in the best interests of all of
the Company's shareholders. The Company also stated that a
representative of the Company would contact Schottenstein or its
financial advisor once the Board of Directors is in a position to make
an informed response to the Schottenstein proposal. The letter from the
Company also indicated that its financial advisor, Goldman, Sachs &
Co., had been in contact with Schottenstein's financial advisor, had
offered to meet with them and had communicated to them that the Company
was seriously reviewing the Schottenstein proposal.
On July 23, 1999, after extensive review of the Schottenstein
proposal and after receiving advice from Goldman, Sachs & Co., the
Company's Board of Directors concluded that it would not be in the
best interests of the Company's Common Shareholders to accept the
proposal and unanimously voted to reject Schottenstein's conditional
and unsolicited proposal to purchase the outstanding stock of the
Company and the outstanding units of the Company's operating
partnership. Nevertheless, so long as this proposal is outstanding,
the Company will remain uncertain about its ability to implement its
current business plan and about its future generally. This
uncertainty may harm the Company's business and may result in the
loss of business opportunities that may be otherwise pursued.
Although the Company has entered into various arrangements intended
to preserve the attention and dedication of its employees, including
members of its senior management, as described below, the Company's
management team may be distracted from the day-to-day operations of
its business as a result of such uncertainty and some may decide to
leave their employment with the Company. The loss of their services
and their distraction could have a material adverse effect on the
Company's operations. In addition, the Company is incurring (and may
continue to incur) significant costs for financial advisory, legal
and other consulting services expended in evaluating and responding
to this proposal and its consequences. As of June 30, 1999, the
Company incurred $875,000 of these related costs and expects to incur
an additional $2,000,000 in costs prior to the end of 1999. Total
future costs could exceed these estimates.
On June 19, 1999, the Company adopted an Executive Severance Plan, a
Management Severance Plan and a Rank and File Severance Plan. These
plans, as subsequently amended as of July 23, 1999 (collectively, the
"Plans"), are intended to reinforce and encourage the continued
attention and dedication of the Company's employees to their assigned
duties, as well as assist the Company in recruiting new employees,
notwithstanding the possibility, threat or occurrence of a change in
control of the Company. The Company believes that the possibility or
threat of a change in control inevitably creates distractions, risks
and uncertainties for its executives and other employees. Since the
Company considers it essential to the best interests of its
stockholders to foster the continuous employment of key management and
other personnel, and since the Company did not have any employment or
other severance agreements with any of its executives or employees that
could have served such function, the Company believes that the adoption
of the Plans was an adequate mechanism by which to promote an
environment in which its executives and employees may continue
performing their duties without distraction.
For the same reasons cited above, on June 30, 1999, the Company entered
into Senior Executive Severance Agreements (the "Severance Agreements")
with certain of its most senior executives not otherwise entitled to
participate in the aforementioned Plans (i.e., J. David Martin, Joseph
William Byrne, James W. Gaube, Daniel B. Platt and Scott C. Verges (the
"Senior Executives")), whose leadership and management expertise is
vital to the continued operation of the Company's business. In general,
the Severance Agreements provide that in the event certain Terminating
Events (as defined in the
13
<PAGE>
Severance Agreements) occur with respect to a Senior Executive
following a Change in Control (as defined in the Severance Agreements),
then the Company shall pay the Senior Executive an aggregate of three
times such Senior Executive's then current annual base salary plus
three times such Senior Executive's then current target annual bonus.
In addition, the Severance Agreements provide for the continuation of
certain health, dental and life insurance and other welfare benefits
for thirty-six (36) months, provided that any such benefits are offset
against any amounts payable under any other Company plan. The Severance
Agreements also provide for the reimbursement of certain excise tax
liabilities that may arise in connection with the benefits provided
pursuant thereto.
Finally, effective as of August 1, 1999, the Company entered into
Phantom Shares Agreements (the "Phantom Agreements") with the Senior
Executives. The phantom share awards (the "Phantom Awards") granted
pursuant to the Phantom Agreements are used solely as a device for the
measurement and determination of certain amounts to be paid to the
executive in lieu of granting additional equity interests. In general,
the Phantom Awards vest ratably over ten years from the date of grant,
subject to acceleration upon a Change of Control (as defined in the
Phantom Agreements), at which time the Company must redeem the Phantom
Awards at a price per award equal to the fair market value of one share
of the Company's common stock as of the vesting date. The total number
of Phantom Shares granted was 545,926.
The above descriptions of the Rights Agreement, the Plans, the
Severance Agreements and the Phantom Agreements are not complete and
are qualified in their entirety by reference to such documents, all of
which have been filed as exhibits to reports of the Company on Form
8-K.
9. SECURITIES
At June 30, 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.
10. SUBSEQUENT EVENTS
On July 2, 1999, the Company sold its interest in four retail shopping
centers for approximately $44,400,000, resulting in a gain of
approximately $8,300,000. Proceeds were used to repay mortgage debt
secured by the centers sold, reduce borrowings under the Company's
$5,000,000 unsecured Revolving Credit Agreement and repay borrowings
under the Company's Credit Facility.
On July 26, 1999, the Company borrowed approximately $2,048,000 on its
construction loan (see Note 6) in connection with the construction of
its development property in Pleasant Hill, California.
On August 4, 1999, the Joint Venture completed the acquisition of
twelve retail shopping centers contained in the second phase of the AMB
Portfolio. The purchase price was
14
<PAGE>
approximately $246,000,000. The acquisition of the portfolio was
financed primarily by $121,000,000 of borrowings under the Joint
Venture's Credit Facility, with the remaining balance coming from
CalPERS contributed capital.
Bergen Brunswig exercised its option to acquire its headquarters office
building from the Company, under the terms of their lease. The sale is
expected to be completed on or before March 31, 2000. The Company
expects to receive approximately $19,300,000 in gross proceeds before
the repayment of a mortgage obligation of approximately $9,340,000.
Remaining proceeds will be used to reduce borrowings under the
Company's Credit Facility. As a result, the Company took a one-time
impairment write-down of $1,200,000 during the second quarter of
1999. The net book value of the office building prior to the
write-down was approximately $20,200,000. The Bergen Building's net
operating income for the three month and six month periods ended
June 30, 1999 was $835,000 and $1,655,000, respectively. At June 30,
1999, the adjusted net book value of this asset is reflected as
"Real Estate Held for Sale" on the balance sheet.
15
<PAGE>
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
MATERIAL CHANGES IN RESULTS OF OPERATIONS
Three months ended June 30, 1999 compared to June 30, 1998:
Income available to Common Stockholders was $2,401,000 ($0.08 per share) for the
three month period ended June 30, 1999, a decrease of $2,711,000 (53%), as
compared to $5,112,000 ($0.16 per share) for the same period in 1998. The
primary reasons for this change are discussed in the following paragraphs.
Revenues in the 1999 three month period increased approximately $2,244,000 as
compared to the same period of 1998 as a result of: (a) fee income in the amount
of $1,582,000 related to the Company's new joint-venture ("BPP Retail, LLC")
with the California Public Employees' Retirement System ("CalPERS") and (b) an
increase in rental revenues as a result of new leasing activity, higher levels
of expense reimbursements, and the acquisition of approximately $98,343,000 of
shopping centers during 1998. These increases were offset by a decrease in lease
termination fees of approximately $995,000.
Total Costs and Expenses increased approximately $5,273,000 during the three
months ended June 30, 1999 as compared to the same period of 1998 partially due
to an increase in interest expense ($1,526,000), Rental Operating expenses
($945,000), General and Administrative expenses ($513,000) and Depreciation and
Amortization ($214,000). These increased expenses were primarily the result of
the shopping centers acquired during 1998 and the growth of the Company. In
addition, the second quarter of 1999 Costs and Expenses included one-time
charges for an impairment write-off in the amount of $1,200,000 and costs
associated with an unsolicited proposal and litigation offer in the amount of
$875,000.
Income From Unconsolidated Subsidiaries increased approximately $440,000 in 1999
as compared to the same three-month period of 1998 as a result of the Company's
investment in BPP Retail, LLC.
Six months ended June 30, 1999 compared to June 30, 1998:
Income available to Common Stockholders was $2,712,000 ($0.08 per share) for the
six month period ended June 30, 1999, a decrease of $4,536,000 (63%), as
compared to $7,248,000 ($0.26 per share) for the same period in 1998.
The primary reasons for this change are discussed in the following paragraphs.
Revenues in 1999 increased approximately $7,512,000 as compared to the same
period of 1998 as a result of Fee Income in the amount of $1,966,000 related to
the Company's new joint-venture with CalPERS and an increase in rental revenues
as a result of new leasing activity, higher levels of expense reimbursements,
and the acquisition of approximately $98,343,000 of shopping centers during
1998. These increases were offset by a decrease in lease termination fees of
approximately $295,000.
Total Costs and Expenses increased approximately $10,438,000 during the six
months ended June 30, 1999 as compared to the same period of 1998 partially due
to an increase in interest expense ($1,948,000), Rental Operating expenses
($2,067,000), General and Administrative expenses ($1,156,000) and Depreciation
and Amortization ($944,000). These increased expenses
16
<PAGE>
were primarily the result of the shopping centers acquired during 1998 and the
growth of the Company. In addition, the six months ended June 30, 1999 included
one-time charges for an impairment write-off in the amount of $1,200,000, costs
associated with unsolicited proposal and litigation in the amount of $875,000, a
$1,500,000 restructuring charge and abandoned acquisition costs of $748,000.
Income From Unconsolidated Subsidiaries increased approximately $314,000 in 1999
as compared to the same six-month period of 1998 as a result of the Company's
investment in BPP Retail, LLC.
During the six months ended June 30, 1999 the Company recorded a $1,866,000
cumulative effect of a change in accounting principle. 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 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.
Costs Associated with Unsolicited Proposal and Litigation:
On June 7, 1999, the Company received a proposal from Schottenstein Stores
Corporation ("Schottenstein") and its affiliates to negotiate a business
combination in which the Company would be merged into an acquisition affiliate
of Schottenstein and the holders of the Company's common stock would received
$13 per share. Schottenstein filed a Schedule 13D with the Securities and
Exchange Commission in which it also reported that Schottenstein and its
affiliates had acquired approximately 8.2% of the Company's outstanding Common
Stock. The merger proposal was subject to a number of conditions, including
completion of due diligence satisfactory to Schottenstein, obtaining new senior
debt financing, and the assumption of certain outstanding indebtedness of the
Company. The proposed transaction was also made conditional upon approval of the
Company's shareholders and the holders of units in the Company's operating
partnership.
On June 21, 1999, the Company announced that it had retained Goldman, Sachs &
Co. to assist the Company in reviewing the acquisition proposal from
Schottenstein and its affiliates. Also on June 19, 1999, the Company's Board of
Directors adopted a Shareholder Rights Agreement (the "Rights Agreement") to
help ensure that the Company's shareholders receive fair and equal treatment in
the event of any proposed acquisition of the Company.
On July 14, 1999, the Company responded to a letter from Schottenstein dated
July 12, 1999, in which Schottenstein increased its contingent offer to $13.50
per share. In its response, the Company assured Schottenstein that the Board of
Directors had been seriously reviewing the Schottenstein offer and its revised
offer, and that the Board of Directors remains committed to acting in the best
interests of all of the Company's shareholders. The Company also stated that a
representative of the Company would contact Schottenstein or its financial
advisor once the Board of Directors is in a position to make an informed
response to the Schottenstein proposal. The letter from the Company also
indicated that its financial advisor, Goldman, Sachs & Co., had
17
<PAGE>
been in contact with Schottenstein's financial advisor, had offered to meet with
them and had communicated to them that the Company was seriously reviewing the
Schottenstein proposal.
On July 23, 1999, after extensive review of the Schottenstein proposal and
after receiving advice from Goldman, Sachs & Co., the Company's Board of
Directors concluded that it would not be in the best interests of the
Company's Common Shareholders to accept the proposal and unanimously voted to
reject Schottenstein's conditional and unsolicited proposal to purchase the
outstanding stock of the Company and the outstanding units of the Company's
operating partnership. Nevertheless, so long as this proposal is outstanding,
the Company will remain uncertain about its ability to implement its current
business plan and about its future generally. This uncertainty may harm the
Company's business and may result in the loss of business opportunities that
may be otherwise pursued. Although the Company has entered into various
arrangements intended to preserve the attention and dedication of its
employees, including members of its senior management, as described below,
the Company's management team may be distracted from the day-to-day
operations of its business as a result of such uncertainty and some may
decide to leave their employment with the Company. The loss of their services
and their distraction could have a material adverse effect on the Company's
operations. In addition, the Company is incurring (and may continue to incur)
significant costs for financial advisory, legal and other consulting services
expended in evaluating and responding to this proposal and its consequences.
As of June 30, 1999, the Company incurred $875,000 of these related costs and
expects to incur an additional $2,000,000 in costs prior to the end of 1999.
Total future costs could exceed these estimates.
On June 19, 1999, the Company adopted an Executive Severance Plan, a Management
Severance Plan and a Rank and File Severance Plan. These plans, as subsequently
amended as of July 23, 1999 (collectively, the "Plans"), are intended to
reinforce and encourage the continued attention and dedication of the Company's
employees to their assigned duties, as well as assist the Company in recruiting
new employees, notwithstanding the possibility, threat or occurrence of a change
in control of the Company. The Company believes that the possibility or threat
of a change in control inevitably creates distractions, risks and uncertainties
for its executives and other employees. Since the Company considers it essential
to the best interests of its stockholders to foster the continuous employment of
key management and other personnel, and since the Company did not have any
employment or other severance agreements with any of its executives or employees
that could have served such function, the Company believes that the adoption of
the Plans was an adequate mechanism by which to promote an environment in which
its executives and employees may continue performing their duties without
distraction.
For the same reasons cited above, on June 30, 1999, the Company entered into
Senior Executive Severance Agreements (the "Severance Agreements") with certain
of its most senior executives not otherwise entitled to participate in the
aforementioned Plans (i.e., J. David Martin, Joseph William Byrne, James W.
Gaube, Daniel B. Platt and Scott C. Verges (the "Senior Executives")), whose
leadership and management expertise is vital to the continued operation of the
Company's business. In general, the Severance Agreements provide that in the
event certain Terminating Events (as defined in the Severance Agreements) occur
with respect to a Senior Executive following a Change in Control (as defined in
the Severance Agreements), then the Company shall pay the Senior Executive an
aggregate of three times such Senior Executive's then current annual base salary
plus three times such Senior Executive's then current target annual bonus. In
addition, the Severance Agreements provide for the continuation of certain
health, dental and life insurance and other welfare benefits for thirty-six (36)
months, provided that any such benefits are offset against any amounts payable
under any other Company plan. The Severance Agreements also provide for the
reimbursement of certain excise tax liabilities that may arise in connection
with the benefits provided pursuant thereto.
18
<PAGE>
Finally, effective as of August 1, 1999, the Company entered into Phantom Shares
Agreements (the "Phantom Agreements") with the Senior Executives. The phantom
share awards (the "Phantom Awards") granted pursuant to the Phantom Agreements
are used solely as a device for the measurement and determination of certain
amounts to be paid to the executive in lieu of granting additional equity
interests. In general, the Phantom Awards vest ratably over ten years from the
date of grant, subject to acceleration upon a Change of Control (as defined in
the Phantom Agreements), at which time the Company must redeem the Phantom
Awards at a price per award equal to the fair market value of one share of the
Company's Common Stock as of the vesting date. The total number of Phantom
Shares granted was 545,926.
The above descriptions of the Rights Agreement, the Plans, the Severance
Agreements and the Phantom Agreements are not complete and are qualified in
their entirety by reference to such documents, all of which have been filed as
exhibits to reports of the Company on Form 8-K.
Impairment Write-Off:
Bergen Brunswig exercised its option to acquire its headquarters office building
from the Company, under the terms of their lease. The sale is expected to be
completed on or before March 31, 2000. As a result, the Company took a one-time
impairment write-down of $1,200,000 during the second quarter of 1999. The net
book value of the office building prior to the write-down was approximately
$20,200,000. The Bergen Building's net operating income for the three month and
six month periods ended June 30, 1999 was $835,000 and $1,655,000, respectively.
At June 30, 1999, the adjusted net book value of this asset is reflected as
"Real Estate Held for Sale" on the balance sheet.
Restructuring Charge:
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. The Company estimated and recorded in the
first quarter of 1999 a restructuring charge of $1,500,000. 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 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,
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<PAGE>
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).
As of June 30, 1999, the Company had completed the hiring of its third party
providers, completed approximately 76% of its planned reduction in workforce and
began the process of closing its property management offices. The following
table reflects the composition of the Company's restructuring reserve and the
expenditures applied against it as of June 30, 1999:
<TABLE>
<CAPTION>
Original Restructuring
Restructuring Expenditures Reserve
Reserve Applied June 30, 1999
----------------- ----------------- -----------------
<S> <C> <C> <C>
Personnel Related $ 750,000 $ 428,000 $ 322,000
Office Closures 500,000 176,000 324,000
Write-off of Furniture and Equipment 250,000 -- 250,000
----------------- ----------------- -----------------
Total $1,500,000 $ 604,000 $ 896,000
----------------- ----------------- -----------------
----------------- ----------------- -----------------
</TABLE>
The Company expects the restructuring to be completed during the third quarter
of 1999.
Abandoned Acquisition Costs:
As noted above, during the three months ended March 31, 1999, the Company
recorded a $748,000 charge related to the abandonment of transactions in process
prior to the AMB portfolio acquisition.
FUNDS FROM OPERATIONS
June 30, 1999 and 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
20
<PAGE>
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 and six months ended June 30, 1999, diluted FFO increased $164,000
and $3,219,000 respectively, compared to the same periods in 1998. The change
was net of several effects, but was primarily attributable to the increase in
revenues from fee income and rental revenues from core portfolio properties,
acquisitions, and development, offset by a decrease in lease termination fees
and increases in rental operating expenses, interest expenses and general and
administrative expenses.
The calculation of FFO for the respective periods is as follows (in thousands):
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
----------------------- ---------------------
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Income Available to Common Stockholders $ 2,401 $ 5,112 $ 2,712 $ 7,248
Adjustments:
Depreciation and Amortization of Real Estate and
Tenant Improvements 6,928 6,250 13,708 12,200
Restructuring Charge -- -- 1,500 --
Abandoned Acquisitions Costs -- -- 748 --
Costs Associated with Unsolicited Proposal and
Litigation 875 -- 875 --
Impairment Write-off 1,200 -- 1,200 --
Cumulative Effect of Change in Accounting Principle -- -- 1,866 --
-------- -------- -------- --------
Funds from Operations-Basic 11,404 11,362 22,609 19,448
Effect of Dilutive Securities:
Operating Partnership Units 1,281 1,159 2,383 2,325
Convertible Preferred Stock 1,400 1,400 2,800 2,800
-------- -------- -------- --------
Funds from Operations-Dilutive $14,085 $13,921 $27,792 $24,573
-------- -------- -------- --------
-------- -------- -------- --------
</TABLE>
The Company believes that the adjustments for costs associated with unsolicited
proposal and litigation, restructuring charges and abandoned acquisition costs
are appropriate FFO adjustments.
The costs associated with unsolicited proposal and litigation relate to
certain events which were described elsewhere. Due to the unusual nature of
these events the Company believes that the related costs should be an
adjustment to FFO in order not to distort the comparative measurement of the
Company's performance.
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
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<PAGE>
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
June 30, 1999 compared to December 31, 1998:
At June 30, 1999 and December 31, 1998, approximately $6,236,000 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 June 30, 1999 and December 31, 1998, the
average rate of interest on line of credit advances was approximately 6.68% 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 June 30, 1999, borrowings of approximately
$108,393,000 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 accrue interest at LIBOR
plus 2.00% or prime. The Company had $5,000,000 borrowed against this Revolving
Credit Agreement as of June 30, 1999 at a rate of interest of approximately
7.24%. This facility is scheduled to mature in November 1999.
On April 1, 1999, the Company contributed three retail properties valued at
approximately $22,800,000 into BPP Retail, LLC (the joint venture between the
Company and CalPERS - the "Joint Venture").
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 the Joint Venture expired. The purpose of
the option was to permit the Company's Operating Partnership to contribute two
retail properties (the "Contributed Projects") into the Joint Venture even
though CalPERS had not received all the required information (such
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<PAGE>
as appraisals) to approve or disapprove the contribution. When the option
agreement was entered into, the Joint Venture provided the Operating Partnership
approximately $22,195,000 (the "Net Asset Value") in exchange for the economic
interests in the Contributed Projects.
On June 15, 1999 the Joint Venture obtained a $421,000,000 Credit Facility of
which $171,000,000 is supported by the Joint Venture partners' commitment to
contribute additional equity to the Joint Venture by December 31, 2000 and
$250,000,000 is unsecured. The Joint Venture's Credit Facility bears interest at
rates of Eurodollar plus 1.00% or prime for secured borrowings or Eurodollar
plus 1.38% or prime for unsecured borrowings. At June 30, 1999, the average rate
of interest on the Joint Venture's Credit Facility advances was approximately
6.09%. This facility is scheduled to mature in June 2000.
On June 15, 1999, the Joint Venture completed the acquisition of nine retail
shopping centers contained in the first phase of the AMB Portfolio. The purchase
price was approximately $207,400,000. The acquisition of the portfolio was
financed primarily by $182,500,000 of borrowings under the Joint Venture's
Credit Facility with the balance coming from CalPERS contributed capital. In
connection with the closing of the first phase of the AMB Portfolio, the Company
granted to 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. The
value of the option as of the date of grant was estimated to be approximately
$234,000 and is included at June 30, 1999 in investment in unconsolidated
subsidiaries on the balance sheet of the Company.
On June 15, 1999, the Company contributed one additional retail shopping center
valued at approximately $15,900,000 into the Joint Venture.
At June 30, 1999, the Company's interest in the Joint Venture was approximately
20%. The Company accounts for its investment using the equity method of
accounting.
On June 30, 1999, the Company announced that it had elected not to pursue Phase
Four of the AMB Portfolio.
On June 1, 1999, the operating agreement of BPP Retail, LLC, the Company's joint
venture with CalPERS, was amended to expand the permitted geographical scope of
the joint venture's investments from the western United States to nationwide, in
order to permit the acquisition of properties in the AMB Portfolio. In addition,
effective June 1, 1999, a newly formed limited liability company, Burnham
Pacific Employees LLC ("BP Employees LLC"), was appointed the Manager of BPP
Retail, LLC. The Operating Partnership is the sole Managing Member of BP
Employees LLC, and certain members of the Company's management ("Employee
Members") hold non-managing membership interests in BP Employees LLC. Under the
terms of the BPP Retail, LLC joint venture, the Manager of BPP Retail, LLC is
entitled to an incentive distribution ("Incentive Distribution") calculated on
an annual basis. The right to Incentive Distributions is based and contingent
upon, among other things, appreciation in the value of the BPP Retail, LLC
assets over a specified threshold during each year. Under the terms of the BP
Employees LLC limited liability company agreement, one-half of any Incentive
Distribution received by BP Employees LLC will be distributed to the Operating
Partnership and one-half will be distributed to the Employee Members.
At June 30, 1999, the Company had $5,097,000 outstanding under a construction
loan, secured by one of the Company's properties. Borrowings under this loan
bear interest at LIBOR plus
23
<PAGE>
1.90% or at prime plus .50%. As of June 30, 1999 the rate of interest is
approximately 7.08%. The loan matures in December 1999.
In May 1999, the Company obtained a $55,000,000 construction loan, secured by
one of the Company's development properties. Borrowings under this loan bear
interest at LIBOR (London Inter-Bank Offered Rates) plus 2.00% or prime. The
loan is scheduled to mature in November 2000. The initial draw in May 1999 of
approximately $18,400,000 was used to reduce borrowings under the Company's
Credit Facility. The balance outstanding at June 30, 1999 was approximately
$21,770,000 with an average interest rate of approximately 7.17%.
The debt outstanding (exclusive of approximately $197,219,000 of debt in
unconsolidated subsidiaries) on June 30, 1999 and related weighted average rate
were $595,831,000 and 7.37% respectively, compared to $544,857,000 and 7.61% on
June 30, 1998. Interest capitalized in conjunction with development and
expansion projects was approximately $1,100,000 and $2,400,000 for the three and
six months ended June 30, 1999, respectively, as compared to approximately
$2,009,000 and $3,146,000 for the same periods in 1998.
At June 30, 1999, the Company's capitalization consisted of $595,831,000 of debt
(excluding the Company's proportionate share of joint venture debt which is
approximately $40,200,000), $120,000,000 of preferred stock and preferred
operating partnership units, and $416,954,000 of market equity (market equity is
defined as (i) the sum of the number of 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 June 30,
1999 of $12.31) resulting in a debt to total market capitalization ratio of .53
to 1.0 compared to the ratio of .52 to 1.0 at December 31, 1998. At June 30,
1999, the Company's total debt consisted of $368,943,000 of fixed rate debt, and
$226,888,000 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 June 30, 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
24
<PAGE>
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 has installed 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. During the
second quarter of 1999, 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 would
require minor modifications. These modifications and/or upgrades have been
obtained from the computer manufacturers and will be installed prior to the end
of the third quarter.
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 53
% 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 51
% 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.
25
<PAGE>
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 70 % 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.
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.
26
<PAGE>
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS:
On June 23, 1999, a class action lawsuit was filed in the Superior Court of the
State of California, County of San Diego, against the Company and its Board of
Directors. The complaint was purportedly filed on behalf of the public
shareholders of the Company and alleges that the Board of Directors violated
their fiduciary duties to the Company's shareholders because they adopted a
shareholder rights agreement designed to halt the acquisition attempt by
Schottenstein and deter other unsolicited takeover attempts. The plaintiffs
seeks to enjoin the adoption of the shareholders rights agreement. The Company
believes the complaint is without merit and intends to vigorously defend the
lawsuit. However, there can be no assurance that such defense will be
successful. If the Company does not prevail, the suit could render the
shareholder rights plan ineffective, thereby making the Company more vulnerable
to unsolicited acquisition proposals and increasing the possibility that the
Company will have to allocate material amounts of financial and management
resources to protect the Company from unwanted takeover attempts that may not
maximize shareholder value.
ITEM 2. CHANGES IN SECURITIES:
Not Applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES:
Not Applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS:
On May 11, 1999, the Company held its regular Annual Meeting of Shareholders.
Proxies for such meeting were solicited pursuant to Regulation 14 under the Act.
At such meeting, one matter was presented for vote. The matter was the election
of eight directors. There was no solicitation in opposition to the nominated
Directors and all such directors were elected for a one-year term.
Shares were voted as follows:
<TABLE>
<CAPTION>
FOR WITHHELD
--- --------
ELECTION OF DIRECTORS
- ---------------------
<S> <C> <C>
Malin Burnham 32,598,303 286,261
James D. Harper, Jr. 32,600,503 284,061
James D. Klingbeil 32,604,604 279,960
J. David Martin 32,589,834 294,730
Nina B. Matis 32,595,525 289,039
Donne P. Moen 32,600,943 283,621
Philip S. Schlein 32,602,538 282,026
Robin Wolaner 32,596,453 288,111
</TABLE>
ITEM 5. OTHER INFORMATION:
Not Applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K:
27
<PAGE>
(a) The following Exhibits are part of this report:
27.0 Financial Data Schedule.
(b) The following reports on Form 8-K were filed during or with respect to
matters occurring within the period covered by this report:
Form 8-K Report filed June 11, 1999, (earliest event reported June 7,
1999): Item 5, regarding the announcement of the unsolicited proposal
from Schottenstein Stores Corporation to negotiate a business
combination in which the Company would be merged into an acquisition
affiliate of Schottenstein, and holders of the Company's Common Stock
would receive $13 per share.
Form 8-K Report filed June 19, 1999 (earliest event reported June 19,
1999): Item 5, regarding the Board of Directors of the Company adopting
a Shareholder Rights Agreement.
Form 8-K Report filed June 24, 1999 (earliest event reported June 15,
1999): Item 5, regarding the announcement of the completion of the
acquisition of nine retail centers from AMB Property Corporation for
$207.4 million by BPP Retail LLC, a co-investment entity between the
Company and the California Public Employees' Retirement System
("CalPERS").
Form 8-K Report filed July 30, 1999 (earliest event reported July 13,
1999): Item 5, regarding the letter sent to Schottenstein Stores
Corporation, dated July 23, 1999, stating that the Board had decided
that it is not interested in pursuing discussions with Schottenstein.
Form 8-K Report filed August 9, 1999 (earliest event reported June 19,
1999): Item 5, regarding employee retention program.
28
<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 16, 1999 By: /s/ J. David Martin
----------------------- ----------------------------------------
J. David Martin, Chief Executive Officer
Date: August 16, 1999 By: /s/ Daniel B. Platt
----------------------- ----------------------------------------
Daniel B. Platt, Chief Financial Officer
29
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> JUN-30-1999
<CASH> 11,722<F1>
<SECURITIES> 0
<RECEIVABLES> 13,161
<ALLOWANCES> (1,972)
<INVENTORY> 0
<CURRENT-ASSETS> 101,401<F2><F3>
<PP&E> 1,045,711
<DEPRECIATION> (77,257)
<TOTAL-ASSETS> 1,088,861<F4>
<CURRENT-LIABILITIES> 21,550
<BONDS> 595,831
0
68,894
<COMMON> 457,224
<OTHER-SE> (123,994)
<TOTAL-LIABILITY-AND-EQUITY> 1,088,861<F5><F6>
<SALES> 66,891
<TOTAL-REVENUES> 69,504
<CGS> 18,565
<TOTAL-COSTS> 18,565
<OTHER-EXPENSES> 22,107
<LOSS-PROVISION> 350
<INTEREST-EXPENSE> 19,163
<INCOME-PRETAX> 7,378
<INCOME-TAX> 0
<INCOME-CONTINUING> 7,378<F7><F8><F9>
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 1,866
<NET-INCOME> 2,712<F10>
<EPS-BASIC> .08
<EPS-DILUTED> .08
<FN>
<F1>Includes 8,664 of restricted cash.
<F2>Includes 61,693 of Investment in Unconsolidated Subsidiaries.
<F3>Also includes, 16,797 of Other Assets and 11,189 of Receivables-Net.
<F4>Includes 19,006 of Real Estate Held for Sale.
<F5>Includes 525,743 of paid in capital in excess of par.
<F6>Also includes 69,383 of Minority Interest.
<F7>Includes 2,800 Distribution to Preferred Stockholders.
<F8>Includes 2,383 Minority Interest.
<F9>Also includes 442 of Income from Unconsolidated Subsidiaries.
<F10>Includes 2,800 Dividends Paid to Preferred Stockholders.
</FN>
</TABLE>
