<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 September 30, 2000
|_|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)
110 WEST "A" STREET, SAN DIEGO, CALIFORNIA 92101
------------------------------------------ --------------------------
(Address of principal executive offices) (Zip Code)
(619) 652-4700
---------------------------------------------------
Registrant's telephone number, including area code
-------------------------------------------------------------------------------
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 November 10,
2000: 32,329,622.
<PAGE>
PART 1 FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
BURNHAM PACIFIC PROPERTIES, INC.
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 2000 AND DECEMBER 31, 1999
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
September 30, 2000 December 31, 1999
------------------ -----------------
<S> <C> <C>
ASSETS
Real Estate $ 982,293 $ 1,036,294
Less Accumulated Depreciation (74,940) (65,494)
--------------- -----------
Real Estate-Net 907,253 970,800
Real Estate Held for Sale 29,661 8,737
Cash and Cash Equivalents 4,236 11,119
Restricted Cash 11,126 9,827
Receivables-Net 10,582 8,413
Investment in Unconsolidated Subsidiaries 3,617 3,650
Other Assets 23,979 22,469
--------------- -----------
Total $ 990,454 $ 1,035,015
=============== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Accounts Payable and Other Liabilities $ 25,100 $ 29,224
Tenant Security Deposits 2,569 2,606
Notes Payable 406,530 400,410
Line of Credit Advances 157,392 138,420
--------------- -----------
Total Liabilities 591,591 570,660
--------------- -----------
Commitments and Contingencies
Minority Interest 24,536 66,350
--------------- -----------
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 December 31, 1999 -- 28
Preferred Stock, Par Value $0.01/share, 10,000,000 Shares
Authorized, 4,800,000 Shares designated as Series 2000-C
Convertible Preferred, 4,400,000 Shares outstanding at
September 30, 2000 44 --
Common Stock, Par Value $.01/share, 90,000,000 Shares
Authorized, 32,329,622 and 32,273,546 Shares
Outstanding at September 30, 2000 and
December 31, 1999, respectively 323 323
Paid in Capital in Excess of Par 568,250 528,811
Dividends Paid in Excess of Net Income (194,290) (131,157)
--------------- -----------
Total Stockholders' Equity 374,327 398,005
--------------- -----------
Total $ 990,454 $ 1,035,015
=============== ===========
</TABLE>
See the Accompanying Notes
<PAGE>
BURNHAM PACIFIC PROPERTIES, INC.
CONSOLIDATED STATEMENTS OF INCOME
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
2000 1999 2000 1999
------------ ----------- ------------ -----------
<S> <C> <C> <C> <C>
REVENUES
Rents $ 30,232 $ 29,104 $ 89,277 $ 95,995
Fee Income 893 2,092 3,046 4,058
Interest and Other 330 355 1,301 1,002
-------- -------- --------- ---------
Total Revenues 31,455 31,551 93,624 101,055
-------- -------- --------- ---------
EXPENSES
Interest 11,310 9,188 32,019 28,996
Rental Operating 9,663 8,897 28,530 27,812
General and Administrative 4,090 2,242 8,794 5,901
Litigation 977 -- 3,613 --
Costs Associated with Unsolicited Proposal and
Pursuit of Strategic Alternatives 3,320 1,797 4,642 2,672
Restructuring Charge 2,144 (147) 2,144 1,353
Abandoned Acquisition Costs -- -- -- 748
Impairment Write-Off 32,330 1,000 32,330 2,200
Depreciation and Amortization 6,567 6,188 19,960 19,668
-------- -------- --------- ---------
Total Expenses 70,401 29,165 132,032 89,350
-------- -------- --------- ---------
Income (Loss) From Operations Before Income from
Unconsolidated Subsidiaries, Minority
Interest, Gain on Sales of Real Estate and
Cumulative Effect of Change in Accounting
Principle (38,946) 2,386 (38,408) 11,705
Income from Unconsolidated Subsidiaries 41 204 117 646
Minority Interest 607 (1,567) (1,404) (3,950)
Gain on Sales of Real Estate 832 9,499 1,226 9,499
-------- -------- --------- ---------
Net Income (Loss) Before Cumulative Effect
of Change in Accounting Principle (37,466) 10,522 (38,469) 17,900
Cumulative Effect of Change in Accounting
Principle -- -- -- (1,866)
-------- -------- --------- ---------
Net Income (Loss) $(37,466) $ 10,522 $ (38,469) $ 16,034
Dividends Paid to Preferred Stockholders (1,667) (1,400) (4,467) (4,200)
-------- -------- --------- ---------
Income (Loss) Available to Common Stockholders $(39,133) $ 9,122 $ (42,936) $ 11,834
======== ======== ========= =========
BASIC AND DILUTED EARNINGS PER SHARE
Net Income (Loss) Before Cumulative Effect of
Change in Accounting Principle $ (1.21) $ 0.28 $ (1.33) $ 0.43
Cumulative Effect of Change in Accounting
Principle -- -- -- (0.06)
-------- -------- --------- ---------
Net Income (Loss) $ (1.21) $ 0.28 $ (1.33) $ 0.37
======== ======== ========= =========
</TABLE>
See the Accompanying Notes
<PAGE>
BURNHAM PACIFIC PROPERTIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
2000 1999
----------- ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income (Loss) $(38,469) $ 16,034
Adjustments to Reconcile Net Income (Loss) to
Net Cash Provided by Operating Activities:
Depreciation and Amortization 20,935 20,795
Impairment Write-off 32,330 2,200
Gain on Sales of Real Estate (1,226) (9,499)
Cumulative Effect of Change in Accounting Principle -- 1,866
Abandoned Acquisitions Costs -- 748
Restructuring Charge 2,144 371
Provision for Bad Debt 785 627
Common Stock - Directors' Fees 115 192
Stock Options - Compensation Expense 200 201
Minority Interest 1,404 3,950
Income from Unconsolidated Subsidiaries (98) (646)
Changes in Other Assets and Liabilities:
Receivables and Other Assets (5,926) (10,363)
Accounts Payable and Other Liabilities (1,264) (20,541)
Tenant Security Deposits (37) (417)
-------- --------
Net Cash Provided by Operating Activities 10,893 5,518
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Payments for Acquisitions of Real Estate and
Capital Expenditures (34,331) (55,659)
Reimbursement of Development Costs 100 7,450
Proceeds from Sales of Real Estate 21,567 44,726
Investment in Unconsolidated Subsidiaries (95) (1,153)
-------- --------
Net Cash Used for Investing Activities (12,759) (4,636)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Borrowings under Line of Credit Agreements 35,469 17,000
Repayments under Line of Credit Agreements (16,497) (27,917)
Principal Payments of Notes Payable (8,226) (4,407)
Borrowings under Notes Payable 14,346 30,945
Restricted Cash (1,299) (2,445)
Dividends Paid (24,667) (29,448)
Issuance of Stock-Net -- 43
Distributions Made to Minority Interest Holders (4,143) (4,437)
-------- --------
Net Cash Provided by (Used for) Financing Activities (5,017) (20,666)
-------- --------
Net Decrease in Cash and Cash Equivalents (6,883) (19,784)
Cash and Cash Equivalents at Beginning of Period 11,119 20,873
-------- --------
Cash and Cash Equivalents at End of Period $ 4,236 $ 1,089
======== ========
SUPPLEMENTAL DISCLOSURES OF CASH
FLOW INFORMATION
Cash Paid During Nine Months for Interest $ 21,139 $ 31,972
======== ========
</TABLE>
See the Accompanying Notes
<PAGE>
BURNHAM PACIFIC PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2000, DECEMBER 31, 1999, AND SEPTEMBER 30, 1999
(UNAUDITED)
1. INTERIM FINANCIAL STATEMENTS
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, 1999. Certain of the 1999 amounts have been reclassified
to conform to 2000 presentation.
Common dividends of $3,232,404 ($.10 per share) were paid on September
29, 2000 to common stockholders of record as of September 19, 2000.
Preferred dividends of $1,667,000 ($0.50 per share) were paid on
September 29, 2000 to preferred stockholders.
Accounts Receivable is net of an allowance for doubtful accounts of
approximately $3,195,000 and $3,311,000 at September 30, 2000 and
December 31, 1999, respectively.
2. NEW ACCOUNTING PRONOUNCEMENTS
In December 1999, SEC Staff Accounting Bulletin (SAB) No. 101, "Revenue
Recognition in Financial Statements" was issued. SAB 101 provides the
SEC staff's views in applying generally accepted accounting principles
to selected revenue recognition issues, including contingent rental
income. Rents that are based on tenant's sales and are paid after
reaching a sales threshold are contingent rental revenues under SAB
101. Under SAB 101, contingent rental income from tenants should be
recognized as revenue only after the tenants exceed their sales
threshold as opposed to accruing the rental income evenly over the
year. During June 2000, the SEC delayed the effective date of SAB 101.
The Company will be required to adopt SAB 101 in the fourth quarter of
2000. If the Company had reversed the percentage rent for the tenants
which had not exceeded their sales breakpoint by September 30, 2000,
revenues for the three and nine month periods ended September 30, 2000
would have been reduced by approximately $120,000 and $297,000,
respectively, and by $108,000 and $335,000 for the three and nine month
periods ended September 30, 1999, respectively.
In June 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards ("SFAS") No. 133, "Accounting for
Derivative Instruments and Hedging Activities." SFAS No. 133
establishes accounting and reporting standards for derivative
instruments and for hedging activities. The new standard will become
effective for the Company for the first quarter of 2001. Interim
reporting of this standard will be required. At present, the Company
does not hold any derivative instruments nor does it engage in hedging
activities. The Company has not assessed the effect of this standard on
its future reporting and disclosures.
<PAGE>
3. 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 (loss) 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 Nine Months Ended
September 30, September 30,
2000 1999 2000 1999
------------ ------------ -------- --------
<S> <C> <C> <C> <C>
Numerator:
Net Income (Loss) $(37,466) $ 10,522 $(38,469) $ 16,034
Less:
Dividends Paid to Preferred Stockholders (1,667) (1,400) (4,467) (4,200)
-------- -------- -------- --------
Income (Loss) Available to Common
Stockholders for Basic and Diluted
Earnings Per Share $(39,133) $ 9,122 $(42,936) $ 11,834
======== ======== ======== ========
Denominator:
Shares for Basic Earnings Per Share -
weighted average shares outstanding 32,330 32,063 32,308 31,993
Effect of Dilutive Securities:
Stock Options -- 17 -- 15
-------- -------- -------- --------
Shares for Diluted Earnings Per Share 32,330 32,080 32,308 32,008
======== ======== ======== ========
Basic and Diluted Earnings Per Share $ (1.21) $ 0.28 $ (1.33) $ 0.37
======== ======== ======== ========
Diluted Earnings Per Share $ (1.21) $ 0.28 $ (1.33) $ 0.37
======== ======== ======== ========
</TABLE>
In 2000 and 1999, dividends and shares from conversion of Preferred
Stock and minority interest expense and shares issuable upon the
redemption of units of limited partnership of Burnham Pacific
Operating Partnership, L.P. (the "Operating Partnership") units were
excluded from the diluted earnings per share calculations because
they were anti-dilutive.
4. REAL ESTATE
Real Estate is summarized as follows (in thousands):
<TABLE>
<CAPTION>
September 30, 2000 December 31, 1999
------------------ -----------------
<S> <C> <C>
Retail Centers $ 884,940 $ 912,543
Retail Centers Under Development 93,241 87,397
Office/Industrial Buildings -- 29,333
Other 4,012 7,021
--------------- -----------
Total Real Estate 982,193 1,036,294
Accumulated Depreciation (74,940) (65,494)
--------------- -----------
Real Estate-Net $ 907,253 $ 970,800
=============== ===========
</TABLE>
The Company evaluates at each balance sheet date whether events and
circumstances have occurred that indicate possible impairment to its
real estate properties. During the third quarter of fiscal 2000, the
Company recorded a non-cash charge of $32,330,000 for impairment of
certain real estate properties in accordance with Statement of
Financial Accounting Standards No. 121, "Accounting for the Impairment
of Long-Lived Assets
<PAGE>
and for Long-Lived Assets to be Disposed of." The impairment charge
was based upon a comprehensive review of all 57 of the Company's
properties taking into account the Company's intention to have
shareholders vote to approve a Plan of Complete Liquidation and
Dissolution (the "Plan of Liquidation"), the Company's implementation
of several steps in contemplation of a liquidation, a significantly
shortened holding period for the properties, and current market
conditions. As such, the carrying values of 11 properties were written
down to the Company's estimates of fair value. Fair value was based on
recent offers, or other estimates of fair value, such as discounted
future cash flow. Accordingly, the actual results could vary
significantly from such estimates.
In addition, if the Plan of Liquidation is approved by the
shareholders, the Company will change to the liquidation basis of
accounting from the historical cost basis. Assets will be valued at
their estimated net realizable amounts and liabilities will be stated
at estimated amounts to be paid. Adjustments to convert from the
going-concern (historical cost) basis to the liquidation basis will be
based upon recent offers, actual sales and third-party appraisals, of
the Company's properties.
On July 31, 2000, the Company sold the Scripps Ranch office building
for approximately $5,550,000, resulting in a gain of approximately
$556,000. Net proceeds were used to reduce outstanding indebtedness
under the Company's secured credit facility (the "GE Facility") with
CMF Capital Company LLC (a subsidiary of General Electric Capital
Corporation) and for general working capital purposes.
On August 16, 2000, the Company sold its leasehold interest in the Bear
Creek shopping center for approximately $3,500,000, resulting in a gain
of approximately $88,000. Net proceeds were used to reduce outstanding
indebtedness under the GE Facility and for general working
capital purposes.
On August 28, 2000, the Company sold the Santee Village Square shopping
center for approximately $6,525,000, resulting in a gain of
approximately $188,000. Net proceeds were used to reduce outstanding
indebtedness under the GE Facility and for general working capital
purposes.
During the three months ended September 30, 2000, approximately
$29,661,000 of Real Estate was classified as Real Estate Held for Sale
due to the Company's intention to sell the Design Market Shopping
Center and the Anacomp office building.
5. SERVICE CORPORATION SUBSIDIARY
Until September 2000, the Company was party to an agreement with the
State of California Public Employees' Retirement System ("CalPERS")
pursuant to which the Company was eligible to earn asset management,
leasing, acquisition, and disposition fees. Although this agreement has
terminated, it was originally thought to be possible that the fee
income that could be earned through this arrangement might approach or
exceed 5% of its gross revenues for calendar year 2000. In order to
maintain the Company's status as a REIT it was necessary for the
Company to assign to BPP Services, Inc., a Maryland corporation, its
rights and obligations to perform asset management services and leasing
services in connection with the agreement with CalPERS and its right to
receive fees for the performance of such services. This assignment
became effective as of March 1, 2000. In order to satisfy the REIT
provisions of the Internal Revenue Code, in calendar year 2000 the
Company may not, directly or indirectly, own more than 10% of the
voting stock in BPP Services, Inc. Accordingly, the Operating
<PAGE>
Partnership owns 1% of the outstanding voting stock of BPP Services,
Inc. The senior executive officers of the Company either own or have
the right to acquire from certain former executives of the Company
the remaining 99% of the outstanding voting stock. However, including
the shares of non-voting stock, the Operating Partnership owns 95% of
the outstanding equity and economic interest in BPP Services, Inc.
and the Senior executive officers either own or have the right to
acquire from certain former executives of the Company the remaining
5% interest.
On September 30, 2000 CalPERS exercised its right under the joint
venture agreement between CalPERS and the Company to terminate
the Company's role as managing memeber of BPP Retail, LLC. As a
result, the Company is no longer engaged in fee generating asset
management, leasing, acquisition and disposition activity under
this arrangement. Therefor, the need for a separate service
corporation no longer exists. The Company expects that BPP Services,
Inc. will be either liquidated or merged into the Operating
Partnership on or prior to December 31, 2000.
6. SEGMENT INFORMATION
The Company historically had 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 September 30, 2000, the Company owns interests in 57
retail operating properties, of which 56 are operational and one of
which is being developed. The Company also owned one office building
which was sold on October 27, 2000. For the three months ended
September 30, 2000 and 1999, no tenant of the Company accounted for 10%
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):
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------
Retail Office Total
-----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Three Months Ended September 30, 2000:
Rental Revenues $ 29,630 $ 602 $30,232
Net Operating Income $ 19,987 $ 582 $20,569
Nine Months Ended September 30, 2000:
Rental Revenues $ 87,257 $ 2,020 $89,277
Net Operating Income $ 58,798 $ 1,949 $60,747
</TABLE>
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------
Retail Office Total
-----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Three Months Ended September 30, 1999:
Rental Revenues $ 27,210 $ 1,894 $29,104
Net Operating Income $ 18,534 $ 1,673 $20,207
Nine Months Ended September 30, 1999:
Rental Revenues $ 90,312 $ 5,683 $ 95,995
Net Operating Income $ 63,140 $ 5,043 $ 68,183
----------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------
SEPTEMBER 30, 2000 DECEMBER 31, 1999
------------------ -----------------
<S> <C> <C>
Retail Real Estate $ 978,181 $ 999,940
Office Real Estate - 29,333
--------- ----------
Total Real Estate $ 978,181 $1,029,273
========= ==========
</TABLE>
<PAGE>
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 Nine Months Ended
September 30, September 30,
---------------------------- --------------------------------
2000 1999 2000 1999
-------------- ------------ ------------- ----------------
<S> <C> <C> <C> <C>
REVENUES:
Total Rental Revenues for Reportable Segments $ 30,232 $ 29,104 $ 89,277 $ 95,995
Fee Income 893 2,092 3,046 4,058
Interest Revenue 330 355 1,301 1,002
-------- -------- --------- ---------
TOTAL CONSOLIDATED REVENUES $ 31,455 $ 31,551 $ 93,624 $ 101,055
======== ======== ========= =========
NET OPERATING INCOME:
Total Net Operating Income for Reportable Segments $ 20,569 $ 20,207 $ 60,747 $ 68,183
Additions:
Interest and Other Revenue 330 355 1,301 1,002
Fee Income 893 2,092 3,046 4,058
Income from Unconsolidated Subsidiaries 41 204 117 646
Gain on Sales of Real Estate 832 9,499 1,226 9,499
-------- -------- --------- ---------
Total Additions 2,096 12,150 5,690 15,205
Deductions:
Interest Expense 11,310 9,188 32,019 28,996
General and Administrative Expenses 4,090 2,242 8,794 5,901
Litigation Expense 977 -- 3,613 --
Restructuring Charge 2,144 (147) 2,144 1,353
Abandoned Acquisition Costs -- -- -- 748
Costs Associated with Unsolicited Proposal and
Pursuit of Strategic Alternatives 3,320 1,797 4,642 2,672
Impairment Write-Off 32,330 1,000 32,330 2,200
Depreciation and Amortization 6,567 6,188 19,960 19,668
Minority Interest (607) 1,567 1,404 3,950
-------- -------- --------- ---------
Total Deductions 60,131 21,835 104,906 65,488
Net Income (Loss) Before Cumulative Effect of Change
in Accounting Principle $(37,466) $ 10,522 $ (38,469) $ 17,900
Cumulative Effect of Change in Accounting Principle -- -- -- (1,866)
-------- -------- --------- ---------
Net Income (Loss) $(37,466) $ 10,522 $ (38,469) $ 16,034
======== ======== ========= =========
</TABLE>
The following table reconciles the total real estate for the reportable segments
to consolidated assets for the Company at September 30, 2000 and December 31,
1999 (in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30, 2000 DECEMBER 31, 1999
------------------ -----------------
<S> <C> <C>
Total Real Estate for Reportable Segments $ 978,181 $ 1,029,273
Other Real Estate 4,012 7,021
--------- -----------
Total Real Estate $ 982,193 $ 1,036,294
Less Accumulated Depreciation (74,940) (65,494)
--------- -----------
Real Estate, Net 907,253 970,800
Other Assets 83,201 64,215
--------- -----------
Consolidated Assets $ 990,454 $ 1,035,015
========= ===========
</TABLE>
Other real estate includes assets related to the corporate offices of the
Company, which are not included in segment information.
<PAGE>
7. RESTRUCTURING
The Company recorded a restructuring reserve in the first quarter of
1999 as a result of the decision to outsource the property management
function. In the third quarter of 2000, a restructuring reserve was
recorded as a result of the termination of the CalPERS joint venture
(BPP Retail, LLC). The following paragraphs describe the restructuring
reserves in detail.
OUTSOURCING PROPERTY MANAGEMENT
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 charge consisted of personnel related costs
($750,000), the closing of certain corporate offices ($500,000) and the
write-off of furniture and equipment ($250,000).
During the quarter ended September 30, 1999, the Company completed the
hiring of its third party providers, its planned reduction in workforce
and the process of closing its property management offices. It was
determined during the third quarter of 1999 that $120,000 of the
reserve estimated for personnel related costs was not necessary due to
certain personnel leaving prior to earning severance benefits and that
$127,000 of the reserve estimated for the write-off of furniture and
equipment was not necessary due to the redeployment of certain
computers to other offices of the Company. In addition, it was
determined that $100,000 of additional reserve was needed for office
closures due to a change in the future value of sub-lease payments. As
a result of these changes in estimates, the Company reallocated
$100,000 of reserves from personnel related costs to office closures
and reversed $147,000 of reserve during the quarter ended September 30,
1999. The remaining reserve for office closures ($269,000) represents
future obligated lease payments for corporate offices which were
closed, offset by future receipts for sub-leases entered into with the
Company for the related closed office spaces. The following table
reflects the composition of the Company's restructuring reserve, the
expenditures applied against it and the portion of the reserve reversed
as of September 30, 2000:
<TABLE>
<CAPTION>
Reserve for Outsourcing to Third Party Property Managers
--------------------------------------------------------------------
Original Reserve as of
Restructuring Expenditures Reserve September 30,
Reserve Applied Reversed 2000
-------------- ------------- ------------ ----------------
<S> <C> <C> <C> <C>
Personnel related costs $ 750,000 $ (630,000) $ (120,000) $ -
Office closures 500,000 (331,000) 100,000 269,000
Write-off of furniture and
equipment 250,000 (123,000) (127,000) -
---------- ----------- ---------- ----------
Total $1,500,000 $(1,084,000) $ (147,000) $ 269,000
========== =========== ========== ==========
</TABLE>
TERMINATION OF BPP RETAIL, LLC.
On September 30, 2000, CalPERS exercised its right under the joint
venture agreement between CalPERS and the Company to terminate the
Company's role as managing member of BPP Retail, LLC, as described
in note 9 below. As a result, the Company laid off 42 employees,
completely closed two offices, and reduced the size of two other
offices. The Company estimated and recorded in the third quarter
of 2000 a restructuring charge of approximately $2,144,000. This
charge consisted of personnel related costs
<PAGE>
($1,565,000), the closing of certain corporate offices and the
write-off of furniture and equipment net of expected sales proceeds
($579,000). The following table reflects the composition of the
Company's restructuring reserve, and the expenditures applied against
it as of September 30, 2000:
<TABLE>
<CAPTION>
Reserve for terminating BPP Retail, LLC
----------------- ---------------- -----------------
Original Reserve as of
Restructuring Expenditures September 30,
Reserve Applied 2000
-------------- ------------ ----------------
<S> <C> <C> <C>
Personnel related costs $1,565,000 $ - $ 1,565,000
Office closures, write off of
furniture and equipment 863,000 (863,000) -
Expected sales proceeds (284,000) - (284,000)
---------- --------- ------------
Total $2,144,000 $(863,000) $ 1,281,000
========== ========= ===========
</TABLE>
8. COSTS ASSOCIATED WITH UNSOLICITED PROPOSAL AND PURSUIT OF
STRATEGIC ALTERNATIVES, AND ADOPTION OF PLAN OF LIQUIDATION
On June 7, 1999, the Company received an unsolicited proposal from
Schottenstein Stores Corporation ("Schottenstein") and certain of 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. The
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 stockholders and the holders of units in the
Company's Operating Partnership. On July 12, 1999, Schottenstein
increased its contingent proposal to $13.50 per share.
On July 23, 1999, after an extensive evaluation of the Schottenstein
proposal and after consultation with its financial advisor, Goldman,
Sachs & Co., the Company's Board of Directors concluded that it would
not be in the best interest of the Company's Common Stockholders to
accept the proposal and unanimously voted to reject Schottenstein's
proposal.
On November 12, 1999, the Company announced that its Board of Directors
had instructed management and Goldman, Sachs & Co. to actively pursue a
full range of strategic alternatives in order to maximize stockholder
value. The Company also announced that it had commenced the active
marketing of certain properties to provide additional liquidity and
financial flexibility.
On February 21, 2000, the Company announced that it had completed the
initial phase of this process. In this regard, the Company entered into
numerous confidentiality agreements with potential bidders.
On May 10, 2000, after extensive negotiations and exchanges of
information with potential bidders, the Company received bids from two
interested parties to purchase the entire Company contingent upon
certain conditions.
<PAGE>
On July 7, 2000, the final remaining bidder submitted an offer to
purchase the entire Company subject to several potential adjustments.
On July 14, 2000, after extensive discussions and after consulting with
its management and its financial advisor, the Board of Directors
rejected the offer and instructed management and its financial advisor
to engage in negotiations to improve the offer price and the terms and
conditions of the offer. The Board also instructed management to
finalize a plan of reorganization and a plan of liquidation for its
review.
On August 7, 2000, the Company announced that, in connection with the
Company's pursuit of its strategic alternatives, the Company and its
preferred stockholders that are affiliates of Westbrook Partners had
entered into an agreement pursuant to which Westbrook agreed to suspend
any rights that it may have as a result of its purported election to
exercise a right to a Change of Control Preference under the terms of
the Company's Series 1997-A Convertible Preferred Stock. If valid, the
election of a Change of Control Preference would have the effect of
prohibiting the Company from making distributions to the holders of the
Company's Common Stock until Westbrook's Preferred Stock has been
redeemed. The Company does not agree with the position taken by
Westbrook, but the parties did not believe that it was necessary to
resolve the matter at that time given that the Company's Board of
Directors had not concluded its review of the Company's strategic
alternatives. Additionally, pursuant to the agreement, the Company
agreed that Westbrook may in the future revive the rights it has, if
any, as a result of the election and Westbrook agreed that the Company
shall be entitled to the rights and defenses it has, if any, with
respect to the election.
On August 8, 2000, after a review of the Company's strategic
alternatives and after consulting with its management and its financial
advisor, with respect to the last bid submitted for the entire Company,
the Board rejected the last remaining bidder's revised non-contingent
bid. The Board then determined that a plan of liquidation would better
maximize stockholder value than any other alternative, including a
reorganization of the Company or continuing operations of the Company.
On August 13, 2000, the Operating Partnership and the Company entered
into an agreement with certain of the Operating Partnerhip's preferred
unitholders, Blackacre SMC Master Holdings, LLC ("Blackacre"), pursuant
to which Blackacre would be treated as if it had submitted a notice to
the Operating Partnership electing to exercise its right to a Change
of Control Preference under the terms of the Operating Partnership
Agreement and such notice would be suspended, but, like Westbrook,
Blackacre could elect to revive the election to receive the Change in
Control Preference. If valid, the election of a Change of Control
<PAGE>
Preference would have the effect of prohibiting the Company from making
distributions to the holders of the Company's common units until
Blackacre's preferred units have been redeemed. Additionally, pursuant
to the agreement, the Company and the Operating Partnership agreed that
Blackacre may in the future revive the rights it has, if any, as a
result of the election and Blackacre agreed that the Company and the
Operating Partnership shall be entitled to the rights and defenses each
has, if any, with respect to the election.
On August 14, 2000, Schottenstein, certain affiliates of Schottenstein,
and Michael L. Ashner and Susan Ashner (collectively, the "SA Group")
issued a press release announcing, among other things, that together
they would nominate a slate of directors for election at the Annual
Meeting to pursue a liquidation of the Company.
On August 15, 2000, the Company announced that the Board of Directors
intended to adopt a plan of liquidation and planned to have the Company
retain a third party to oversee and manage the liquidation process. The
Company also announced that it had reached an agreement in principle
with Westbrook and Blackacre that they would support the Board's
decision to develop a plan of liquidation.
On August 31, 2000, the Board of Directors adopted the Plan of
Liquidation, subject to approval by the Company's stockholders, and
after extensive negotiations, the Company, the Operating Partnership,
Westbrook and Blackacre entered into an Exchange Agreement. Pursuant
to the Exchange Agreement, Westbrook and Blackacre exchanged their
respective preferred Operating Partnership units for the same number
of shares of Series 1997-A Preferred Stock, and then Westbrook
exchanged 2,800,000 shares of Series 1997-A Preferred Stock for the
same number of shares of Series 2000-C Convertible Preferred Stock
(the "Preferred Stock") and Blackacre exchanged 1,600,000 shares of
Series 1997-A Preferred Stock for the same number of shares of
Preferred Stock. The Exchange Agreement and the terms of the Preferred
Stock gave the holders of the Preferred Stock the right to receive
an amount equal to the Change of Control Preference from the net
proceeds of sales of assets as part of the Plan of Liquidation and
to require the Company to redeem the Preferred Stock in any event
on or after September 30, 2001 for the amount of the Change of
Control Preference (i.e. an aggregate amount equal to $126,000,000 plus
accrued dividends and distributions, plus 5% of any accrued and due
dividends and distribution). In addition to other rights, the holders
of the Preferred Stock were granted the right as a separate group to
elect two directors to the Company's Board of Directors at any time
after the date of the agreement. Presently, the holders of Preferred
Stock have not elected directors. The Exchange Agreement also permitted
the Company to pay ordinary dividends to holders of shares of Common
Stock through the first quarter of 2001, provided that such dividends
are paid out of "operating cash" (as defined in the Exchange
Agreement), in an amount not exceeding the average quarterly dividend
or distribution paid to the holders of shares of Common Stock for the
four fiscal quarters immediately preceding the date of the Exchange
Agreement, and after payment of all accrued dividends and accrued
distributions owing to the Preferred Stockholders as of the date of
such quarterly dividend.
On September 5, 2000, the Company entered into a Purchase and Sale
Agreement with The Prudential Insurance Company of America for the sale
of fifteen of the Company's properties for a gross purchase price of
approximately $356,000,000, consisting of approximately $183,000,000
in cash and the assumption of approximately $173,000,000 of
liabilities.
<PAGE>
On September 10, 2000, after negotiating bids from several potential
liquidation agents, the Company entered into an agreement with DDR Real
Estate Services Inc. ("DDRRES") pursuant to which DDRRES agreed to act
as a liquidation agent on behalf of the Company with respect to its
remaining assets.
On September 11, 2000, the Company entered into an agreement with the
SA Group pursuant to which, among other things, the Company and the SA
Group granted each other mutual general releases and the SA Group
agreed to dismiss the pending litigation in the United States District
Court for the District of Maryland. The Company elected Jay L.
Schottenstein and Michael L. Ashner to the Company's Board of Directors
and appointed Mr. Schottenstein to serve as Co-Chairman of the Board of
Directors. The SA Group agreed to vote their shares in favor of the
Plan of Liquidation and for the Company's nominees for director. The
Company agreed to allow the SA Group to purchase up to 19.9% of the
Company's Common Stock under the Company's Shareholder Rights Plan,
subject to the Company's continued qualification as a real estate
investment trust under the Internal Revenue Code of 1986, as amended.
To reimburse the SA Group for expenses incurred in connection with its
litigation and to settle such litigation, the Company agreed to pay the
SA Group $1,000,000 and to pay the SA Group an additional $1,500,000
when and if the Preferred Stock was redeemed.
Also on September 11, 2000, the Company and the Preferred Stockholders
entered into a letter agreement pursuant to which, among other things,
the Preferred Stockholders consented to the agreement with the SA Group
and agreed to support and vote for the SA Group's nominees to serve on
the Company's Board of Directors. Under the letter agreement, the
Company agreed to allow each of Westbrook, Blackacre and Morgan
Stanley Dean Witter & Co. and its affiliates to purchase up to 19.9%
of the Company's Common Stock under the Company's Shareholder Rights
Plan, and to take such action as is necessary to exempt such ownership
from certain limitations set forth in the Company's Charter, subject to
the Company's continued qualification as a real estate investment trust
under the Internal Revenue Code of 1986, as amended. The Company also
agreed that on and after the date on which no shares of Preferred Stock
remain outstanding, it would expand the Board of Directors by one,
elect Curtis Greer to fill the vacancy created by such expansion and
nominate Mr. Greer or such other person holding that Board seat for
election to the Board at any subsequent meeting of the stockholders at
which Directors are to be elected.
On September 19, 2000, the Company entered into a Purchase and Sale
Agreement with GMS Realty, LLC for the sale of 19 of the Company's
properties for a gross purchase price of approximately $305,000,000
consisting of $167,000,000 in cash and the assumption of $138,000,000
of liabilities. On October 17, 2000, GMS terminated the agreement and
the Company returned GMS' escrow deposit of $5,000,000.
In connection with the evaluation of the Schottenstein proposal, the
Company's pursuit of all of its strategic alternatives, the Company's
negotiations and consummations of agreements with the SA Group and its
Preferred Stockholders, the Company's adoption and implementation of
the Plan of Liquidation and the Company's defending against certain
litigation incidental to the foregoing, the Company has incurred, and
expects that it will continue to incur, significant costs for
financial, advisory, legal and other services. For the quarter ended
September 30, 2000, the Company incurred approximately $3,320,0000 of
these related costs.
<PAGE>
9. JOINT VENTURE WITH CALPERS
During 1998, the Operating Partnership and CalPERS formed BPP Retail,
LLC ("BPP Retail") to acquire neighborhood, community, promotional,
and specialty shopping centers in the western United States. In
December of 1999, the Company and CalPERS made certain modifications
to the joint venture agreement. As part of the modifications, the
Company exchanged substantially all of its equity interest in BPP
Retail for consideration having a total value of approximately
$39,400,000. The Company continued to serve as the managing member
of BPP Retail and was entitled to receive fees for asset management,
leasing, acquisition, and disposition activities, but was no longer
eligible for the incentive fee attributable to increases in asset
values.
On September 30, 2000, CalPERS exercised its right under the joint
venture agreement between CalPERS and the Company to terminate the
Company's role as managing member of BPP Retail, LLC.
10. SECURITIES
At September 30, 2000, 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.
During the three months ended March 31, 2000, 40,000 units of the
Operating Partnership, of which the Company is the general partner,
were tendered for redemption by the holders thereof and the Company
issued 40,000 shares of common stock in exchange therefor. No units
were tendered for redemption during the three months ended June 30,
2000 or September 30, 2000.
In the quarter ended March 30, 2000, the Operating Partnership received
notice to redeem 12,600 limited partnership units of BPP/Marin, L.P.
for approximately $125,000. These units were redeemed in the quarter
ended June 30, 2000.
11. CONTINGENCIES
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 and the Company violated their fiduciary duties
by adopting a shareholder rights agreement, responding to
Schottenstein's proposal inappropriately, and adopting severance and
other compensatory arrangements.
On June 12, 2000 the Court dismissed the complaint, and denied
plaintiffs' request for leave to amend. Counsel for plaintiffs have
expressed an intent to appeal the Court's dismissal of the lawsuit. The
Company believes that any appeal would be without merit and intends to
vigorously defend against the lawsuit. However, there can be no
assurance that such defense will be successful.
<PAGE>
On February 7, 2000, a derivative lawsuit was filed in the Superior
Court of California, County of San Diego, by a purported shareholder,
asserting claims on behalf of the Company. On May 2, 2000, the
plaintiff filed an amended complaint. The amended complaint contains
claims similar to those asserted in the pending class action lawsuit
described above. It names as defendants the Company's Board of
Directors and certain of its current and former officers. It also
names the Company as a nominal defendant. The Company believes that
the plaintiff has not complied with the requirements for bringing a
derivative action, and has filed a motion asking the Court to
dismiss the suit. That motion is pending.
On June 14, 2000, Schottenstein Stores Corporation and certain of its
affiliates (the "Schottenstein Group") commenced an action against the
Company and certain of its directors in the United States District
Court for the District of Maryland. The complaint in the Maryland
action alleged that the Company and its directors violated their
fiduciary duties by inter alia, continuing the date of the annual
meeting of stockholders to October 18, 2000, adopting a shareholder
rights agreement, failing to adequately respond to plaintiff's prior
acquisition proposal, and adopting certain severance and other
compensation arrangements. On July 31, 2000, the Company and its
directors filed a Motion to Dismiss all claims in the litigation. On
September 11, 2000, the Company entered an agreement with the
Schottenstein Group pursuant to which, among other things, the Company
and the Schottenstein Group granted each other mutual general releases
and the Schottenstein Group agreed to dismiss the pending litigation in
the United States District Court for the District of Maryland.
On August 9, 2000, a complaint was filed in San Diego Superior Court.
The suit was purportedly brought on behalf of the Company as a
derivative action and simultaneously on behalf of the Company's
shareholders as a class action. The complaint appears to raise similar
issues to those raised by the prior-filed class action and derivative
lawsuits described above. The Company believes the complaint is without
merit and intends to vigorously defend against such complaint.
Also in 1999, a lawsuit was filed against the Company by a tenant of a
Company-owned property. The complaint alleges, among other things,
misrepresentation regarding the use of that property. On July 31, 2000,
a jury in San Francisco, California, returned a verdict against the
Company for breach of contract and misrepresentation. The jury awarded
the tenant of a Company-owned property out-of-pocket losses, and
separately awarded the tenant future lost profits. The Company
challenged the award for net lost profits as duplicative. The Court has
ruled against the Company and has confirmed the lost profit judgment.
The judgment ultimately will include an additional sum for partial
reimbursement of the tenant's attorneys' fees and costs. After judgment
was entered, the Company sought to modify or vacate the judgment, both
of which motions were denied by the Court. The Company may appeal.
During the three and nine months ended September 30, 2000, the Company
accrued and incurred litigation expenses of $977,000 and $3,613,000,
respectively related to this lawsuit. There can be no assurance as to
the final outcome of any appeals. The Company may incur additional
expenses in future periods depending on its decision regarding an
appeal.
The Company is also subject to other legal proceedings and claims that
arise may in the ordinary course of its business. The Company's
management believes that the outcome of such other ordinary legal
proceedings and claims will not have a material adverse effect on
the Company's financial statements or its business.
<PAGE>
12. SUBSEQUENT EVENTS
On October 27, 2000, the Company sold the Anacomp office building for
approximately $21,300,000, resulting in a gain of approximately
$1,614,000. Proceeds were used to reduce borrowings under the GE
Facility.
13. ADOPTION OF PLAN OF LIQUIDATION AND RELATED ASSET SALES
On August 31, 2000, the Company's Board of Directors adopted a plan
the Plan of Liquidation. The Plan of Liquidation contemplates the
orderly sale of the Company's assets for cash or cash equivalents
and the payment of (or provision for) the Company's liabilities and
expenses, including the establishment of a reserve to fund the
Company's contingent liabilities. The principal purpose of the Plan
of Liquidation is to maximize stockholder value by liquidating the
Company's assets and distributing the net proceeds of the liquidation
to the holders of the Company's Preferred Stock and the Company's
Common Stock. The Company entered into three agreements to further
this objective, two of which are currently in effect.
PRUDENTIAL AGREEMENT
On September 5, 2000, the Company entered into a Purchase and Sale
Agreement (the "Prudential Agreement") with The Prudential Insurance
Company of America ("Prudential") pursuant to which Prudential has
agreed to acquire 15 of the Company's properties for a gross purchase
price of approximately $356,000,000, consisting of approximately $183
million in cash and the assumption of approximately $173 million of
liabilities. Closings will occur for a property as the conditions are
satisfied for that property.
Under the Prudential Agreement, the purchaser of the 15 properties is
Prudential. However, the Prudential Agreement permits the assignment of
the agreement by Prudential to a joint venture comprised of Prudential,
Developers Diversified Realty Corporation and/or Coventry Real Estate
Partners, Ltd., which is an affiliate of Developers Diversified Realty
Corporation. It is also currently anticipated that the right to
purchase one of the properties will be assigned to Developers
Diversified Realty Corporation or an affiliated entity to purchase on
its own account. It is also currently anticipated that the right to
purchase the remaining properties will be assigned to the Retail Value
Investment Program, which is a joint venture among Developers
Diversified Realty Corporation, Coventry Real Estate Partners, Ltd. and
Prudential Real Estate Investors, which is an affiliate of Prudential.
LIQUIDATION SERVICES AGREEMENT
On September 10, 2000, the Company entered into an agreement (the
"Liquidation Services Agreement") with DDR Real Estate Services Inc.
("DDRRES" or the "Liquidator") pursuant to which the Liquidator agreed
to manage and oversee the liquidation process. The initial term of the
Liquidation Services Agreement ends on October 17, 2002, subject to the
unilateral right of the Company to extend the initial term for a period
of six months upon 60 days prior written notice to the Liquidator. The
Liquidator may request a six month extension from the Company upon the
same 60 days prior notice, which request shall not be unreasonably
denied by the Company.
<PAGE>
Subject to the terms of the agreement, the Liquidator will provide
property, asset and construction management services and leasing
services for all of the Company's properties other than those
properties sold to Prudential or GMS Realty, LLC. As compensation for
the property management services to be rendered by the Liquidator under
the Liquidation Services Agreement, the Company agreed to pay the
Liquidator a property management fee equal to four percent (4%) of the
gross revenues received from the properties in consecutive monthly
installments as and when such revenues are received. As compensation
for the asset management services to be rendered by the Liquidator, the
Company agreed to pay to the Liquidator an asset management fee equal
to two percent (2%) of the gross revenues received from the properties
in consecutive monthly installments as and when said gross revenues are
received. In addition, if and to the extent that the liquidation
results in liquidating distributions to the common stockholders of the
Company in excess of $7.50 per share, the Liquidator shall be paid a
disposition incentive fee equal to 10% of the amount by which the
actual aggregate amount of the per share liquidating distributions to
the common stockholders exceeds $7.50 per share. As compensation for
its construction management services, the Liquidator shall receive a
construction management fee equal to 5% of costs, excluding the cost of
land, for all construction projects having aggregate costs of greater
than $50,000. In addition, the Liquidator shall receive certain leasing
fees as follows:
- for new leases, 6% of rent received for years 1 through 5;
3% of rent for years 6 through 10 (reduced to 5% and 2.5%,
respectively, if no co-broker);
- for ground leases, 3% of rent received for years 1 through
5; 1.5% of rent for years 6 through 10;
- for renewals, 50% of the amount of new lease commissions;
and
- the Liquidator is responsible for the payment of any third
party brokerage commissions.
The Liquidator commenced asset management of the properties and
preparation for the transfer of property management and leasing
services immediately upon the signing of the Liquidation Services
Agreement. It is a condition precedent to the effectiveness of the
Liquidation Services Agreement that the Company shall have obtained
approval of the Plan of Liquidation from the stockholders of the
Company. If the stockholders approve the Plan of Liquidation, the
Company will transfer property management and leasing functions to the
Liquidator pursuant to a schedule reasonably approved by the Company
and the Liquidator. In consideration of performing such functions prior
to stockholder approval, the Liquidator will receive a monthly fee,
prorated for partial months, equal to $125,000 per month. The
Liquidation Services Agreement gives the Company absolute discretion in
approving sales of properties. In addition, the Liquidation Services
Agreement provides the Company with the ability to pursue potential
sales of properties on its own behalf and obligates the Liquidator to
pursue such sales as the Company directs and not to interfere with any
efforts of the Company in its own liquidation efforts. The Liquidation
Services Agreement also provides the Company with the sole right to
manage and coordinate the sales of properties pursuant to the
Prudential Agreement.
<PAGE>
GMS AGREEMENT
On September 19, 2000, an affiliate of the Company, BPP Golden State
Acquisitions, LLC, entered into a Purchase and Sale Agreement with GMS
Realty, LLC ("GMS") pursuant to which GMS would acquire 19 of the
Company's properties for a gross purchase price of approximately
$305,000,000, consisting of $167,000,000 in cash and the assumption of
$138,000,000 in liabilities. Pursuant to the purchase agreement, GMS
deposited $5,000,000 into escrow. On October 17, 2000, after conducting
due diligence review GMS terminated the agreement and the Company
returned GMS' escrow deposit of $5,000,000.
<PAGE>
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This Form 10-Q, including the footnotes to the Company's consolidated financial
statements, contains "forward-looking statements" as that term is defined under
the Private Securities Litigation Reform Act of 1995. Forward-looking statements
can be identified by the use of the words "believe," "expect," "anticipate,"
"intend," "estimate," "assume," "plan," and other similar expressions in this
Form 10-Q that predict or indicate future events or trends or that do not relate
to historical matters. The Company cannot assure the future results or outcomes
of the matters described in these statements; rather, these statements merely
reflect its current expectations of the approximate outcome of the matter
discussed. In addition, information concerning the following are forward-looking
statements:
- implementation of our liquidation strategy;
- possible or assumed future results of the Company's decision
to adopt the plan of liquidation;
- the completion, and the timing and cost of completion, of
properties under development or redevelopment;
- the timing of lease-up and occupancy of properties;
- the availability and timing of financing; and o cost, yield
and earnings estimates.
Forward-looking statements should not be relied on because they involve known
and unknown risks, uncertainties and other factors, some of which are beyond the
Company's control. These risks, uncertainties and other factors may cause actual
results, performance or achievements to differ materially from the anticipated
future results, performance or achievements expressed or implied by such
forward-looking statements. Some of the factors that could cause actual results,
performance or achievements to differ materially from those express or implied
by such forward-looking statements were disclosed in the Company's 1999 Annual
Report on Form 10-K. The risk factors contained in that Form 10-K may not be
exhaustive. Therefore, the information in that Form 10-K should be read together
with other reports and documents that are filed by the Company with the SEC from
time to time, including this quarterly report on Form 10-Q, which may
supplement, modify, supersede or update those risk factors.
The Company's unaudited consolidated financial statements and notes included in
this report and the audited financial statements for the year ended December 31,
1999 and the notes included in the Company's annual report on Form 10-K should
be read in conjunction with the following discussion.
MATERIAL CHANGES IN RESULTS OF OPERATIONS
THE FOLLOWING PARAGRAPHS DESCRIBE THE MATERIAL CHANGES AND RESULTS OF OPERATIONS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO THE THREE MONTHS ENDED
SEPTEMBER 30, 1999:
Net income (loss) available to common stockholders for the three months ended
September 30, 2000 was a net loss of $39,133,000 as compared to net income of
$9,122,000 for the third quarter of 1999. The net loss for the third quarter of
2000 included a net gain on sales of real estate of $832,000, while net income
for the third quarter of 1999 included a net gain on sales of real estate of
$9,499,000. The 2000 and 1999 three-month periods were unfavorably impacted by
costs of $3,320,000 and $1,797,000, respectively, associated with the Company's
pursuit of its
<PAGE>
strategic alternatives. The 2000 three-month period was also unfavorably
impacted by an impairment write-off of $32,330,000 taken in connection with the
Company's recently announced plan to liquidate, a restructuring charge of
$2,144,000 for severance and related costs for employees affected by the
recently announced termination of the Company's joint venture with CalPERS, and
litigation expenses of $977,000 related to a recent verdict against the Company
in favor of a tenant. The 1999 three-month period was also unfavorably impacted
by an impairment write-off of $1,000,000 related to the sale of an office
building.
Total revenues decreased approximately $96,000. A decrease in rental income as a
result of asset sales completed in the last three months of 1999 and the first
nine months of 2000, and a decrease in management fee income, were partially
offset by an increase in rental income from development and redevelopment
projects.
Interest expense increased $2,122,000 primarily as a result of an increase in
interest rates and higher costs associated with the refinancing of the
Company's secured credit facility (the "GE Facility") with CMF Capital
Company LLC (a subsidiary of General Electric Capital Corporation) in
November 1999. Interest capitalized in conjunction with development and
redevelopment projects was $1,403,000 in the third quarter of 2000, compared
with $1,514,000 in the third quarter of 1999. Total debt outstanding at
September 30, 2000 and the related weighted average interest rate were
$563,922,000 and 8.05%, respectively (exclusive of $14,425,000 of fixed-rate
mortgage debt in unconsolidated subsidiaries), compared with $575,852,000 and
7.37%, respectively, at September 30, 1999.
Rental operating expenses increased $766,000, primarily due to an increased
level of expenses from development and redevelopment projects and an
increased level of acquisition and asset management activity related to the
Company's former joint venture with CalPERS, offset by reduced operating
expenses resulting from 1999 asset sales.
General and administrative expenses increased $1,848,000, primarily as a result
of a $1,625,000 severance expense related to the resignation of the Company's
former Chief Executive Officer.
Depreciation and amortization expenses decreased $379,000. Decreases
resulting from asset sales in 1999 were offset by the impact of portions of
development and redevelopment projects being placed into service.
Income from unconsolidated subsidiaries decreased $163,000 as a result of the
Company's December 1999 transfer to CalPERS of substantially all of its equity
interest in BPP Retail, LLC.
Impairment Write-Off:
The Company evaluates at each balance sheet date whether events and
circumstances have occurred that indicate possible impairment to its real estate
properties. During the third quarter of fiscal 2000, the Company recorded a
non-cash charge of $32,330,000 for impairment of certain real estate properties
in accordance with Statement of Financial Accounting Standards No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed of." The impairment charge was based upon a comprehensive review of
all 57 of the Company's properties taking into account the Company's intention
to have shareholders vote to approve a Plan of Complete Liquidation and
Dissolution (the "Plan of Liquidation"), the Company's implementation of several
steps in contemplation of a liquidation, a significantly shortened holding
period for the properties, and current market conditions. As such, the carrying
values of 11 properties were written down to the Company's estimates of fair
value. Fair value was based on recent offers, or other estimates of fair value,
such as discounted future cash flow. Accordingly, the actual results could vary
significantly from such estimates.
<PAGE>
In addition, if the Plan of Liquidation is approved by the shareholders, the
Company will change to the liquidation basis of accounting from the historical
cost basis. Assets will be valued at their estimated net realizable amounts and
liabilities will be stated at estimated amounts to be paid. Adjustments to
convert from the going-concern (historical cost) basis to the liquidation basis
will be based upon recent offers, actual sales and third-party appraisals, of
the Company's properties.
The third quarter 2000 results were impacted by a gain on sales of real estate
of $832,000 as follows:
On July 31, 2000, the Company sold the Scripps Ranch office building for
approximately $5,550,000, resulting in a gain of approximately $556,000. Net
proceeds were used to reduce outstanding indebtedness under the GE Facility
and for general working capital purposes.
On August 16, 2000, the Company sold its leasehold interest in the Bear Creek
shopping center for approximately $3,500,000, resulting in a gain of
approximately $88,000. Net proceeds were used to reduce outstanding
indebtedness under the GE Facility and for general working capital purposes.
On August 28, 2000, the Company sold the Santee Village Square shopping
center for approximately $6,525,000, resulting in a gain of approximately
$188,000. Net proceeds were used to reduce outstanding indebtedness under the
GE Facility and for general working capital purposes.
During the three months ended September 30, 2000, approximately $29,661,000 of
Real Estate was classified as Real Estate Held for Sale due to the Company's
intention to sell the Design Market Shopping Center and the Anacomp office
building.
<PAGE>
THE FOLLOWING PARAGRAPHS DESCRIBE THE MATERIAL CHANGES AND RESULTS OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO THE NINE MONTHS ENDED
SEPTEMBER 30, 1999:
Net income (loss) available to common stockholders for the nine months ended
September 30, 2000 was a net loss of $42,936,000 as compared to net income of
$11,834,000 for the nine months ended September 30, 1999. The net loss for the
2000 nine-month period included a net gain on sales of real estate of
$1,226,000, while net income for the 1999 nine-month period included a net gain
on the sales of real estate of $9,499,000. The 2000 and 1999 nine-month periods
were unfavorably impacted by costs of $4,642,000 and $2,672,000, respectively,
associated with the Company's pursuit of its strategic alternatives. The 2000
nine-month period was also unfavorably impacted by the impairment write off of
$32,330,000 taken in connection with the Company's recently announced plan to
liquidate, the $2,144,000 restructuring charge related to the termination of the
CalPERS joint venture and litigation expense totaling $3,613,000 related to a
July 31, 2000 verdict against the Company in favor of a tenant. The 1999
nine-month period was also unfavorably impacted by a $1,353,000 restructuring
charge related to the Company's decision to outsource its property management
function to third-party providers, $748,000 in costs associated with the
abandonment of certain prospective acquisition transactions, $2,200,000 in
impairment write-offs related to the sales of two office buildings, and
$1,866,000 recognized as the cumulative effect of a change in accounting
principle.
Total revenues decreased $7,431,000 primarily as a result of asset sales in
1999, a decrease in lease termination fees of $1,582,000, and a decrease in
management fees of $1,012,000.
Revenues for nine-months ended September 30, 2000 and 1999 would have been
reduced by approximately $297,000 and $335,000, respectively, if the Company had
adopted SAB 101.
Interest expense increased $3,023,000 primarily as a result of an increase in
interest rates and higher costs associated with the refinancing of the GE
Facility in November 1999. Interest capitalized in conjunction with
development and redevelopment projects was $4,449,000 for the 2000 period,
compared with $3,874,000 for the 1999 period.
Rental operating expenses increased $718,000 primarily due to an increased
level of expenses from development and redevelopment projects placed into
service, and the increased level of acquisition and asset management activity
related to the Company's former joint venture with CalPERS, offset by reduced
operating expenses resulting from 1999 asset sales.
General and administrative expenses increased $2,893,000 primarily as a result
of the increased level of activity related to the Company's former joint venture
with CalPERS and severance expenses totaling $1,875,000 relating to the
resignation of the Company's former Chief Operating Officer and former Chief
Executive Officer.
Depreciation and amortization expenses increased $292,000 as a result of the
impact of portions of development and redevelopment projects being placed into
service, partially offset by asset sales in 1999.
Income from unconsolidated subsidiaries decreased $529,000 as a result of the
Company's December 1999 transfer to CalPERS of substantially all of its equity
interest in BPP Retail, LLC.
<PAGE>
Cumulative Effect of Change in Accounting Principle:
During the quarter ended March 31, 1999, the Company implemented Statement of
Position ("SOP") 98-5, "Reporting on the Costs of Start-up Activities." The
adoption of SOP 98-5 was 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 in 1998.
Abandoned Acquisition Costs:
During the nine months ended September 30, 1999, the Company recorded a $748,000
charge related to the abandonment of transactions in process prior to the
acquisition of a large portfolio of properties by the Company's joint venture
with CalPERS.
Restructuring Charges:
OUTSOURCING OF PROPERTY MANAGEMENT FUNCTION:
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. The charge consisted
of personnel related costs ($750,000), the closing of certain corporate offices
($500,000) and the write-off of furniture and equipment ($250,000).
During the quarter ended September 30, 1999, the Company completed the hiring of
the third party providers, its planned reduction in workforce and the process of
closing its property management offices. It was determined during the third
quarter of 1999 that $120,000 of the reserve estimated for personnel related
costs was not necessary due to certain personnel leaving prior to earning
severance benefits and that $127,000 of the reserve estimated for the write-off
of furniture and equipment was not necessary due to the redeployment of certain
computers to other offices of the Company. In addition, it was determined that
$100,000 of additional reserve was needed for office closures due to a change in
the future value of sub-lease payments. As a result of these changes in
estimates, the Company reallocated $100,000 of reserves from personnel related
costs to office closures and reversed $147,000 of reserve during the quarter
ended September 30, 1999. The remaining reserve for office closures ($269,000)
represents future obligated lease payments for corporate offices which were
closed, offset by future receipts for sub-leases entered into with the Company
for the related closed office spaces. The following table reflects the
composition of such restructuring reserve, the expenditures applied against it
and the portion of the reserve reversed as of September 30, 2000:
<TABLE>
<CAPTION>
Original Reserve
Restructuring Expenditures Reversed Reserve as of
Reserve Applied /Increased September 30, 2000
-------------- --------------- ------------ ------------------
<S> <C> <C> <C> <C>
Personnel Related Costs $ 750,000 $ (630,000) $ (120,000) $ -
Office Closures 500,000 (331,000) 100,000 269,000
Write-off of Furniture and
Equipment 250,000 (123,000) (127,000) -
---------- ------------ ----------- ---------
Total $1,500,000 $(1,084,000) $ (147,000) $ 269,000
========== =========== ========== =========
</TABLE>
TERMINATION OF CALPERS JOINT VENTURE:
<PAGE>
On September 30, 2000, CalPERS exercised its right under the joint venture
agreement between the Company and CalPERS to terminate the Company's role as the
managing member of BPP Retail, LLC. As a result, the Company laid off 42
employees, completely closed two offices, and reduced the size of two other
offices. The Company estimated and recorded in the third quarter of 2000, a
restructuring charge of approximately $2,144,000. This charge consisted of
personnel related costs ($1,565,000), the closing of certain corporate offices
and the write-off of furniture and equipment net of expected sales proceeds
($579,000). The following table reflects the composition of such restructuring
reserve, and the expenditures applied against it as of September 30, 2000:
<TABLE>
<CAPTION>
Reserve for terminating BPP Retail, LLC
----------------------------------------------------
Original Reserve as of
Restructuring Expenditures September 30,
Reserve Applied 2000
-------------- ------------- -----------------
<S> <C> <C> <C>
Personnel related costs $1,565,000 $ - $1,565,000
Office closures, write off of
furniture and equipment 863,000 (863,000) -
Expected sales proceeds (284,000) - (284,000)
---------- ---------- ----------
Total $2,144,000 $(863,000) $1,281,000
========== ========= ==========
</TABLE>
Costs Associated With Unsolicited Proposal, Pursuit Of Strategic Alternatives
And Adoption Of Plan Of Liquidation:
On June 7, 1999, the Company received an unsolicited proposal from
Schottenstein Stores Corporation ("Schottenstein") and certain of 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. The 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 stockholders and the
holders of units in the Company's Operating Partnership. On July 12, 1999,
Schottenstein increased its contingent proposal to $13.50 per share.
On July 23, 1999, after an extensive evaluation of the Schottenstein proposal
and after consultation with its financial advisor, Goldman, Sachs & Co., the
Company's Board of Directors concluded that it would not be in the best interest
of the Company's Common Stockholders to accept the proposal and unanimously
voted to reject Schottenstein's proposal.
On November 12, 1999, the Company announced that its Board of Directors had
instructed management and Goldman, Sachs & Co. to actively pursue a full range
of strategic alternatives in order to maximize stockholder value. The Company
also announced that it had commenced the active marketing of certain properties
to provide additional liquidity and financial flexibility.
On February 21, 2000, the Company announced that it had completed the initial
phase of this process. In this regard, the Company entered into numerous
confidentiality agreements with potential bidders.
On May 10, 2000, after extensive negotiations and exchanges of information with
potential bidders, the Company received bids from two interested parties to
purchase the entire Company contingent upon certain conditions.
<PAGE>
On July 7, 2000, the final remaining bidder submitted an offer to purchase the
entire Company subject to several potential adjustments. On July 14, 2000, after
extensive discussions and after consulting with its management and its financial
advisor, the Board of Directors rejected the offer and instructed management and
its financial advisor to engage in negotiations to improve the offer price and
the terms and conditions of the offer. The Board also instructed management to
finalize a plan of reorganization and a plan of liquidation for its review.
On August 7, 2000, the Company announced that, in connection with the Company's
pursuit of its strategic alternatives, the Company and its preferred
stockholders that are affiliates of Westbrook Partners had entered into an
agreement pursuant to which Westbrook agreed to suspend any rights that it may
have as a result of its purported election to exercise a right to a Change of
Control Preference under the terms of the Company's Series 1997-A Convertible
Preferred Stock. If valid, the election of a Change of Control Preference would
have the effect of prohibiting the Company from making distributions to the
holders of the Company's Common Stock until Westbrook's Preferred Stock has been
redeemed. The Company does not agree with the position taken by Westbrook, but
the parties did not believe that it was necessary to resolve the matter at that
time given that the Company's Board of Directors had not concluded its review of
the Company's strategic alternatives. Additionally, pursuant to the agreement,
the Company agreed that Westbrook may in the future revive the rights it has, if
any, as a result of the election and Westbrook agreed that the Company shall be
entitled to the rights and defenses it has, if any, with respect to the
election.
On August 8, 2000, after a review of the Company's strategic alternatives and
after consulting with its management and its financial advisor, with respect to
the last bid submitted for the entire Company, the Board rejected the last
remaining bidder's revised non-contingent bid. The Board then determined that a
plan of liquidation would better maximize stockholder value than any other
alternative, including a reorganization of the Company or continuing operations
of the Company.
On August 13, 2000, the Operating Partnership and the Company entered into an
agreement with certain of its preferred unitholders, Blackacre SMC Master
Holdings, LLC ("Blackacre"), pursuant to which Blackacre would be treated as if
it had submitted a notice to the Operating Partnership electing to exercise its
right to a Change of Control Preference under the terms of the Operating
Partnership Agreement and such notice would be suspended, but, like Westbrook,
Blackacre could elect to revive the election to receive the Change in Control
Preference. If valid, the election of a Change of Control
<PAGE>
Preference would have the effect of prohibiting the Company from making
distributions to the holders of the Company's common units until Blackacre's
preferred units have been redeemed. Additionally, pursuant to the agreement, the
Company and the Operating Partnership agreed that Blackacre may in the future
revive the rights it has, if any, as a result of the election and Blackacre
agreed that the Company and the Operating Partnership shall be entitled to the
rights and defenses each has, if any, with respect to the election.
On August 14, 2000, Schottenstein, certain affiliates of Schottenstein, and
Michael L. Ashner and Susan Ashner (collectively, the "SA Group") issued a press
release announcing, among other things, that together they would nominate a
slate of directors for election at the Annual Meeting to pursue a liquidation of
the Company.
On August 15, 2000, the Company announced that the Board of Directors intended
to adopt a plan of liquidation and planned to have the Company retain a third
party to oversee and manage the liquidation process. The Company also announced
that it had reached an agreement in principle with Westbrook and Blackacre that
they would support the Board's decision to develop a plan of liquidation.
On August 31, 2000, the Board of Directors adopted a plan of complete
liquidation and dissolution (the "Plan of Liquidation"), subject to approval by
the Company's stockholders, and after extensive negotiations, the Company, the
Operating Partnership, Westbrook and Blackacre entered into an Exchange
Agreement. Pursuant to the Exchange Agreement, Westbrook and Blackacre exchanged
their respective preferred Operating Partnership units for the same number of
shares of Series 1997-A Preferred Stock, and then Westbrook exchanged 2,800,000
shares of Series 1997-A Preferred Stock for the same number of shares of Series
2000-C Convertible Preferred Stock (the "Preferred Stock") and Blackacre
exchanged 1,600,000 shares of Series 1997-A Preferred Stock for the same number
of shares of Preferred Stock. The Exchange Agreement and the terms of the
Preferred Stock gave the holders of the Preferred Stock the right to receive an
amount equal to the Change of Control Preference from the net proceeds of sales
of assets as part of the Plan of Liquidation and to require the Company to
redeem the Preferred Stock in any event on or after September 30, 2001 for the
amount of the Change of Control Preference (i.e. an aggregate amount equal to
$126,000,000, plus accrued dividends and distributions, plus 5% of any accrued
and due dividends and distributions). In addition to other rights, the holders
of the Preferred Stock were granted the right as a separate group to elect two
directors to the Company's Board of Directors at any time after the date of the
agreement. Presently, the holders of Preferred Stock have not elected directors.
The Exchange Agreement also permitted the Company to pay ordinary dividends to
holders of shares of Common Stock through the first quarter of 2001, provided
that such dividends are paid out of "operating cash" (as defined in the Exchange
Agreement), in an amount not exceeding the average quarterly dividend or
distribution paid to the holders of shares of Common Stock for the four fiscal
quarters immediately preceding the date of the Exchange Agreement, and after
payment of all accrued dividends and accrued distributions owing to the
Preferred Stockholders as of the date of such quarterly dividend.
On September 5, 2000, the Company entered into a Purchase and Sale Agreement
with The Prudential Insurance Company of America for the sale of fifteen of the
Company's properties for a gross purchase price of approximately $356,000,000 in
a combination of cash and the assumption of indebtedness.
<PAGE>
On September 10, 2000, after negotiating bids from several potential liquidation
agents, the Company entered into an agreement with DDR Real Estate Services Inc.
("DDRRES") pursuant to which DDRRES agreed to act as a liquidation agent on
behalf of the Company with respect to its remaining assets.
On September 11, 2000, the Company entered into an agreement with the SA Group
pursuant to which, among other things, the Company and the SA Group granted each
other mutual general releases and the SA Group agreed to dismiss the pending
litigation in the United States District Court for the District of Maryland. The
Company elected Jay L. Schottenstein and Michael L. Ashner to the Company's
Board of Directors and appointed Mr. Schottenstein to serve as Co-Chairman of
the Board of Directors. The SA Group agreed to vote their shares in favor of the
Plan of Liquidation and for the Company's nominees for director. The Company
agreed to allow the SA Group to purchase up to 19.9% of the Company's Common
Stock under the Company's Shareholder Rights Plan, subject to the Company's
continued qualification as a real estate investment trust under the Internal
Revenue Code of 1986, as amended. To reimburse the SA Group for expenses
incurred in connection with its litigation and to settle such litigation, the
Company agreed to pay the SA Group $1,000,000 and to pay the SA Group an
additional $1,500,000 when and if the Preferred Stock was redeemed.
Also on September 11, 2000, the Company and the Preferred Stockholders entered
into a letter agreement pursuant to which, among other things, the Preferred
Stockholders consented to the agreement with the SA Group and agreed to support
and vote for the SA Group's nominees to serve on the Company's Board of
Directors. Under the letter agreement, the Company agreed to allow each of
Westbrook, Blackacre and Morgan Stanley, Dean Witter & Co. and its affiliates to
purchase up to 19.9% of the Company's Common Stock under the Company's
Shareholder Rights Plan, and to take such action as is necessary to exempt such
ownership from certain limitations set forth in the Company's Charter, subject
to the Company's continued qualification as a real estate investment trust under
the Internal Revenue Code of 1986, as amended. The Company also agreed that on
and after the date on which no shares of Preferred Stock remain outstanding, it
would expand the Board of Directors by one, elect Curtis Greer to fill the
vacancy created by such expansion and nominate Mr. Greer or such other person
holding that Board seat for election to the Board at any subsequent meeting of
the stockholders at which Directors are to be elected.
On September 19, 2000, the Company entered into a Purchase and Sale Agreement
with GMS Realty, LLC for the sale of 19 of the Company's properties for a
gross purchase price of approximately $305,000,000 consisting of $167,000,000
in cash and the assumption of $138,000,000 in liabilities. On October 17,
2000, GMS terminated the agreement and the Company returned GMS' escrow
deposit of $5,000,000.
In connection with the evaluation of the Schottenstein proposal, the Company's
pursuit of all of its strategic alternatives, the Company's negotiations and
consummations of agreements with the SA Group and its Preferred Stockholders,
the Company's adoption and implementation of the Plan of Liquidation and the
Company's defending against certain litigation incidental to the foregoing, the
Company has incurred, and expects that it will continue to incur, significant
costs for financial, advisory, legal and other services. For the quarter ended
September 30, 2000, the Company incurred approximately $3,320,0000 of these
related costs.
<PAGE>
FUNDS FROM OPERATIONS
September 30, 2000 and 1999
The Company considers Funds from Operations ("FFO") to be a relevant
supplemental measure of the performance of an equity REIT because it 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.
The Company defines FFO in accordance with the definition established by the
Board of Governors of the National Association of Real Estate Investment Trusts
("NAREIT"). This definition was amended by NAREIT in October 1999, and adopted
by the Company during the first quarter of 2000. Accordingly, the Company
defines FFO as net income (loss) (computed in accordance with generally accepted
accounting principles ("GAAP")), excluding gains (or losses) from debt
restructuring, sales or property and extraordinary items as defined under GAAP,
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 NAREIT, 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 expansion, 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.
FFO for the three months ended September 30, 2000 on a fully-diluted basis
was a negative $1,148,000, as compared to $7,254,000 for the three months
ended September 30, 1999. Fully-diluted FFO for both periods does not assume
the conversion of the Company's convertible preferred stock and other common
stock equivalents because such conversion would be accretive to the Company.
For the nine months ended September 30, 2000, FFO on a fully-diluted basis
was $7,921,000, as compared to $30,690,000 for the first nine months of 1999.
Fully-diluted FFO for the nine months ended September 30, 2000 does not
assume the conversion of the Company's convertible preferred stock and other
common stock equivalents because such conversion would be accretive to the
Company. Fully-diluted FFO for the nine months ended September 30, 1999 does
not assume the conversion of the Company's convertible preferred stock
because such conversion would be accretive to the Company.
The year-over-year decline in FFO for both periods was primarily attributable
to lower revenues resulting from asset sales occurring subsequent to March
31, 1999, a decrease in lease termination fees and management fee income, an
increase in borrowing costs which is partially due to the refinancing of the
GE Facility during the fourth quarter of 1999, litigation expense related to
a recent verdict against the Company in favor of a tenant, and costs
associated with the Company's pursuit of its strategic alternatives.
<PAGE>
The calculation of FFO for the respective periods is as follows (in thousands).
The 1999 presentation has been changed to reflect the new definition of FFO:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------------------- ----------------------------------
THE CALCULATION OF FFO: 2000 1999 2000 1999
----------------------- ----------------- ---------------- ---------------- -----------------
<S> <C> <C> <C> <C>
Income (Loss) Available to Common Stockholders $ (39,133) $ 9,122 $ (42,936) $ 11,834
Adjustments:
Depreciation and Amortization of Real Estate and
Tenant Improvements 6,487 6,631 19,753 20,339
Cumulative Effect of Change in Accounting
Principle -- -- -- 1,866
Gain on Sales of Real Estate (832) (9,499) (1,226) (9,499)
Impairment Write-Off 32,330 1,000 32,330 2,200
------------ ------------ ------------ ------------
Funds from Operations-Basic $ (1,148) $ 7,254 $ 7,921 $ 26,740
Adjustments:
Operating Partnership Units 3,950
Convertible Preferred Stock --
------------ ------------ ------------ ------------
Funds from Operations-Diluted $ (1,148) $ 7,254 $ 7,921 $ 30,690
============ ============ ============ ============
WEIGHTED AVG NUMBER OF SHARES:
Basic 32,324,107 32,063,441 32,308,001 31,992,929
============ ============ ============ ============
Diluted 32,324,107 32,083,441 32,308,001 37,086,381
============ ============ ============ ============
FFO PER SHARE:
Basic $ (0.04) $ .23 $ .25 $ 0.84
============ ============ ============ ============
Diluted $ (0.04) $ .23 $ .25 $ 0.83
============ ============ ============ ============
</TABLE>
MATERIAL CHANGES IN FINANCIAL CONDITION
September 30, 2000 compared to December 31, 1999
The Company maintains a secured credit facility, the GE Facility with CMF
Capital Company, LLC (a subsidiary of General Electric Capital Corporation),
which at September 30, 2000, provides up to $162,266,000 in short term
credit. At September 30, 2000, borrowings of approximately $154,892,000 were
outstanding. Borrowings under the GE Facility bear interest at a rate equal
to the London InterBank Offered Rate ("LIBOR") plus 2.50% per annum. At
September 30, 2000 and December 31, 1999, the average rate of interest on the
advances under the GE Facility was approximately 9.125% and 8.30%,
respectively. The GE Facility is scheduled to mature on November 30, 2000,
and is subject to various loan covenants. While the Company continues to
negotiate the terms and conditions of a renewal, the Company expects that, if
the GE Facility is not renewed on or prior to maturity, it will receive a 30
day extension from the lender.
The Company also maintains a $2,500,000 unsecured revolving credit facility with
Union Bank (the "Union Bank Facility"). At September 30, 2000, there was
$2,500,000 borrowed on this facility. The Union Bank Facility bears interest at
a rate of LIBOR plus 2.00% per annum and matured on November 1, 2000. The
Company does not expect Union Bank to call the loan prior to repayment, and the
Company intends to repay the loan with proceeds from asset sales.
At September 30, 2000, the Company had three construction loans outstanding with
various lenders (the "Construction Facilities"). The Company had approximately
$25,216,000 of outstanding indebtedness secured by the 1000 Van Ness property in
downtown San Francisco. Borrowings under this loan bear interest at LIBOR plus
1.90% per annum, and it is scheduled to mature on December 31, 2000. The Company
also had approximately $43,467,000 of
<PAGE>
outstanding indebtedness secured by the Downtown Pleasant Hill shopping center.
Borrowings under this loan bear interest at LIBOR plus 1.75% per annum, and it
was scheduled to mature in November 2000. The Company and the lender have agreed
to extend the maturity date under this loan to February 3, 2001. Finally,
the Company had approximately $8,836,000 of outstanding indebtedness secured by
the Cameron Park shopping center. Borrowings under this loan bear interest at
LIBOR plus 2.25% per annum, and it is scheduled to mature on December 1, 2000.
The Company believes that the funds provided from the Construction Facilities
will be materially sufficient to complete these projects. Prior to the maturity
dates of these loans, the Company intends to either refinance or replace them
with traditional mortgage financing.
There can be no assurance that the Company will be able to refinance, replace or
extend any or all of the GE Facility, the Union Bank Facility or the
Construction Facilities (collectively, the "Credit Facilities"), or that such
Credit Facilities can be refinanced, replaced or extended on terms that are as
favorable to the Company as the terms currently in effect.
Total debt outstanding (exclusive of approximately $14,425,000 of outstanding
debt in unconsolidated subsidiaries) on September 30, 2000 and the related
weighted average rate were $563,922,000 and 8.05%, respectively, compared to
$538,830,000 and 7.73% on December 31, 1999.
At September 30, 2000, the Company's capitalization consisted of $563,922,000 of
debt, $120,000,000 of preferred stock and preferred Operating Partnership units,
and $204,788,000 of market equity (market equity is defined as the product of
(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 a
share of common stock of the Company on the New York Stock Exchange at September
30, 2000 of $6.0625), resulting in a debt to total market capitalization ratio
of .63 to 1.0 compared to the ratio of .55 to 1.0 at December 31, 1999. At
September 30, 2000, the Company's total debt consisted of approximately
$374,004,000 of fixed rate debt, and $216,918,000 of variable rate debt.
Dividend distributions are declared at the discretion of the Board of Directors
and depend on actual FFO of the Company, its financial condition, capital
requirements, the REIT provisions of the Internal Revenue Code and other factors
that the Board of Directors deems relevant. With respect to the fourth quarter
of 2000, the Board of Directors will determine in December whether to declare a
quarterly cash distribution with respect to the common stock and, if declared,
the per share amount thereof. However, based on the Company's declining FFO and
capital constraints, there can be no assurance that the Company will continue to
pay regular quarterly distributions to the holders of common stock at the
current amount or at all.
At September 30, 2000, the Company had effective shelf registration statements
on file with the Securities and Exchange Commission relating an aggregate of
$202,144,000 of registered and unissued debt and equity securities.
<PAGE>
NEW ACCOUNTING PRONOUNCEMENT
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 establishes accounting and
reporting standards for derivative instruments and for hedging activities. The
new standard will become effective for the Company for the first quarter of
2001. Interim reporting of this standard will be required. At present, the
Company does not hold any derivative instruments nor does it engage in hedging
activities. The Company has not assessed the effect of these standard on its
future reporting and disclosures.
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There are no material changes to the information provided in Part II, Item 7A of
the Company's Form 10-K for the fiscal year ended December 31, 1999.
<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 and the
Company violated their fiduciary duties by adopting a shareholder rights
agreement, responding to Schottenstein's proposal inappropriately, and adopting
severance and other compensatory arrangements.
On June 12, 2000 the Court dismissed the complaint, and denied plaintiffs'
request for leave to amend. Counsel for plaintiffs have expressed an intent to
appeal the Court's dismissal of the lawsuit. The Company believes that any
appeal would be without merit and intends to vigorously defend against the
lawsuit. However, there can be no assurance that such defense will be
successful.
On February 7, 2000, a derivative lawsuit was filed in the Superior Court of
California, County of San Diego, by a purported shareholder, asserting claims
on behalf of the Company. On May 2, 2000, the plaintiff filed an amended
complaint. The amended complaint contains claims similar to those asserted in
the pending class action lawsuit described above. It names as defendants the
Company's Board of Directors and certain of its current and former officers.
It also names the Company as a nominal defendant. The Company believes that
the plaintiff has not complied with the requirements for bringing a
derivative action, and has filed a motion asking the Court to dismiss the
suit. That motion is pending.
On June 14, 2000, Schottenstein Stores Corporation and certain of its affiliates
(the "Schottenstein Group") commenced an action against the Company and certain
of its directors in the United States District Court for the District of
Maryland. The complaint in the Maryland action alleged that the Company and its
directors violated their fiduciary duties by inter alia, continuing the date of
the annual meeting of stockholders to October 18, 2000, adopting a shareholder
rights agreement, failing to adequately respond to plaintiff's prior acquisition
proposal, and adopting certain severance and other compensation arrangements. On
July 31, 2000, the Company and its directors filed a Motion to Dismiss all
claims in the litigation. On September 11, 2000, the Company entered into an
agreement with the Schottenstein Group pursuant to which, among other things,
the Company and the Schottenstein Group granted each other mutual general
releases and the Schottenstein Group agreed to dismiss the pending litigation in
the United States District Court for the District of Maryland.
On August 9, 2000, a complaint was filed in San Diego Superior Court. The suit
was purportedly brought on behalf of the Company as a derivative action and
simultaneously on behalf of the Company's shareholders as a class action. The
complaint appears to raise similar issues to those raised by the prior-filed
class action and derivative lawsuits described above. The Company believes the
complaint is without merit and intends to vigorously defend against such
complaint.
<PAGE>
Also in 1999, a lawsuit was filed against the Company by a tenant of a Company
owned property. The complaint alleges, among other things, misrepresentation
regarding the use of that property. On July 31, 2000, a jury in San Francisco,
California, returned a verdict against the Company for breach of contract and
misrepresentation. The jury awarded the tenant of a Company-owned property
out-of-pocket losses, and separately awarded the tenant future lost profits. The
Company challenged the award for net lost profits as duplicative. The Court has
ruled against the Company and has confirmed the cost profit judgment. The
judgment ultimately will include an additional sum for partial reimbursement of
the tenant's attorneys' fees and costs. After judgment was entered, the Company
sought to modify or vacate the judgment, both of which motions were denied by
the Court. The Company may appeal. During the three and nine months ended
September 30, 2000 the Company accrued and incurred litigation expenses of
$977,000 and $3,613,000, respectively related to this lawsuit. There can be no
assurance as to the final outcome of any appeals. The Company may incur
additional expenses in future periods depending on its decision regarding an
appeal.
The Company is also subject to other legal proceedings and claims that may
arise in the ordinary course of its business. The Company's management
believes that the outcome of such other ordinary legal proceedings and claims
will not have a material adverse effect on the Company's financial statements
or its business.
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:
Not Applicable.
ITEM 5. OTHER INFORMATION:
Not Applicable.
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K:
(a) The following Exhibits are part of this report:
3(i).1 Articles of Amendment and Restatement of the Company, dated as of May
27, 1997 (incorporated by reference to pages B-1 through B-13 of the
Company's Proxy Statement for its 1997 Annual Meeting, filed March 31,
1997).
3(i).2 Articles Supplementary to the Articles of Amendment and Restatement of
the Company classifying and designating the Series 1997-A Convertible
Preferred Stock (incorporated by reference to Exhibit 3.1.2 of the
Company's Current Report on Form 8-K, filed January 14, 1998).
3(i).3 Articles Supplementary to the Articles of Amendment and Restatement of
the Company, classifying and designating the Series B Junior
Participating Cumulative Preferred Stock (incorporated by reference to
Exhibit 3.1 of the Company's Current Report on Form 8-K, filed June 24,
1999).
3(i).4 Articles Supplementary to the Articles of Amendment and Restatement of
the Company, classifying and designating the Series 2000-C Convertible
Preferred Stock (incorporated by reference to Exhibit 3(i).4 of the
Company's Current Report on Form 8-K, filed September 6, 2000).
3(ii).1 Bylaws of the Company, as amended and restated on November 19, 1997
(incorporated by reference to Exhibit 3.2 of the Company's Current
Report on Form 8-K, filed December 16, 1997).
3(ii).2 Text of February 9, 2000 Amendments to Bylaws (incorporated by
reference to Exhibit 3(ii).2 of the Company's Current Report on Form
8-K, filed on February 10, 2000).
3(ii).3 Text of April 5, 2000 Amendment to Bylaws (incorporated by reference to
Exhibit 3(ii).3 of the Company's Current Report on Form 8-K, filed on
April 10, 2000).
3(ii).4 Text of May 31, 2000 Amendment to Bylaws (incorporated by reference to
Exhibit 3(ii).4 of the Company's Current Report on Form 8-K, filed on
June 1, 2000).
3(ii).5 Text of August 14, 2000 Amendment to Bylaws (incorporated by reference
to Exhibit 3(ii).5 of the Company's Current Report on Form 8-K, filed
on August 17, 2000).
3(ii).6 Text of August 27, 2000 Amendment to Bylaws (incorporated by reference
to Exhibit 3(ii).6 of the Company's Current Report on Form 8-K, filed
on August 28, 2000).
3(ii).7 Text of August 30, 2000 Amendment to Bylaws.
3(ii).8 Text of August 31, 2000 Amendment to Bylaws (incorporated by reference
to Exhibit 3(ii).7 of the Company's Current Report on Form 8-K, filed
on September 1, 2000).
3(ii).9 Text of September 4, 2000 Amendment to Bylaws (incorporated by
reference to Exhibit 3(ii).8 of the Company's Current Report on Form
8-K, filed on September 6, 2000).
3(ii).10 Text of September 10, 2000 Amendment to Bylaws.
3(ii).11 Text of October 16, 2000 Amendment to Bylaws.
4.1 Shareholder Rights Agreement, dated as of June 19, 1999, between the
Company and First Chicago Trust Company of New York, as Rights Agent
(incorporated by reference to Exhibit 4.1 of the Company's Current
Report on Form 8-K, filed June 24, 1999).
<PAGE>
4.2 Amendment No. 1 to Rights Agreement, dated as of August 31, 2000,
between the Company and First Chicago Trust Company of New York, as
Rights Agent (incorporated by reference to Exhibit 4.2 of the Company's
Form 8-A/A, filed November 7, 2000).
4.3 Amendment No. 2 to Rights Agreement, dated as of September 11, 2000,
between the Company and First Chicago Trust Company of New York, as
Rights Agent (incorporated by reference to Exhibit 4.3 of the Company's
Form 8-A/A, filed November 7, 2000).
10.1 Exchange Agreement, dated as of August 31, 2000, among the Company,
Burnham Pacific Operating Partnership, L.P., Westbrook Burnham
Holdings, L.L.C., Westbrook Burnham Co-Holdings, L.L.C., and Blackacre
SMC Master Holdings, LLC (incorporated by reference to Exhibit 10.1 of
the Company's Current Report on Form 8-K, filed September 6, 2000).
10.2 Purchase and Sale Agreement, dated as of September 5, 2000, by and
between the Company and The Prudential Insurance Company of America.
10.3 Liquidation and Property Management Services Agreement, dated September
10, 2000, between the Company and DDR Real Estate Services Inc.
(incorporated by reference to Exhibit 10.2 of the Company's Current
Report on Form 8-K, filed on September 21, 2000).
10.4 Agreement, dated as of September 11, 2000, by and among the Company,
Burnham Pacific Operating Partnership, L.P., Jay L. Schottenstein,
Schottenstein Stores Corporation, Jubilee Limited Partnership, Jubilee
Limited Partnership III, Schottenstein Professional Asset Management
Corp., Michael L. Ashner and Susan Ashner (incorporated by reference to
Exhibit 10.1 of the Company's Current Report on Form 8-K, filed on
September 21, 2000).
10.5 Letter Agreement, dated September 11, 2000, by and among the Company,
Burnham Pacific Operating Partnership, L.P., Westbrook Burnham
Holdings, L.L.C., Westbrook Burnham Co-Holdings, L.L.C., and Blackacre
SMC Master Holdings, LLC (incorporated by reference to Exhibit 10.3 of
the Company's Current Report on Form 8-K, filed on September 21, 2000).
10.6 Purchase and Sale Agreement, dated September 19, 2000, by and among an
affiliate of the Company, BPP Golden State Acquisitions, LLC, and GMS
Realty, LLC.
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 August 4, 2000 (earliest event reported August 4,
2000): Item 5, announcing that the Company was in negotiations with certain of
its preferred stockholders with respect to a proposed agreement pursuant to
which the preferred stockholders would agree to suspend any rights they may have
as a result of their purported election of a Change of Control Preference under
the terms of the Series 1997-A Preferred Stock.
<PAGE>
Form 8-K Report filed August 8, 2000 (earliest event reported August 7,
2000): Item 5, announcing that the Company had entered into an agreement with
certain of its preferred stockholders pursuant to which, among other things,
they agreed to suspend any rights they may have had as a result of the purported
election of a Change of Control Preference.
Form 8-K Report filed August 17, 2000 (earliest event reported August
14, 2000): Item 5, announcing that the Board of Directors intends to adopt a
final plan of liquidation, the Company had reached an agreement in principle
with its two largest preferred equityholders to support the Board's decision to
develop a plan of liquidation, the Company had amended its Bylaws, J. David
Martin had resigned as chief executive officer and as a Director of the Company
and Scott C. Verges was elected the Company's interim chief executive officer.
Form 8-K Report filed August 23, 2000 (earliest event reported August
15, 2000): Item 5, announcing that the Company was negotiating a definitive
agreement with its two largest preferred equityholders regarding the matters set
forth in the agreement in principle previously announced, and filing a copy of
the separation agreement between the Company and J. David Martin relating to the
resignation of Mr. Martin.
Form 8-K Report filed August 28, 2000 (earliest event reported August
27, 2000): Item 5, the Company had amended its Bylaws to extend the date by
which stockholders may nominate directors and make stockholder proposals at the
Company's 2000 annual meeting of stockholders.
Form 8-K Report filed September 1, 2000 (earliest event reported August
31, 2000): Item 5, the Company had amended its Bylaws to extend the date by
which stockholders may nominate directors and make stockholder proposals at the
Company's 2000 annual meeting of stockholders.
Form 8-K Report filed September 6, 2000 (earliest event reported
September 4, 2000): Item 5, announcing that the Board of Directors had approved
the adoption of a Plan of Complete Liquidation and Dissolution, the Company had
signed an agreement for the sale of 15 properties to The Prudential Insurance
Company of America for approximately $356 million in cash, the Company had
revised its arrangements with its preferred equityholders and the Company had
amended its Bylaws to extend the date by which stockholders may nominate
directors and make stockholder proposals at the Company's 2000 annual meeting of
stockholders.
Form 8-K Report filed September 21, 2000 (earliest event reported
September 11, 2000): Item 5, announcing various agreements among the Company
and a group affiliated with Mr. Jay L. Schottenstein and Mr. Michael L.
Ashner.
<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: //NOVEMBER 14, 2000// By: /s/ SCOTT C. VERGES
---------------------------- -------------------------------
Scott C. Verges,
Interim Chief Executive Officer
Date: //NOVEMBER 14, 2000// By: /s/ DANIEL B. PLATT
---------------------------- -------------------------------
Daniel B. Platt,
Chief Financial Officer
