<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 March 31, 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
of incorporation) Identification No.)
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 March 12,
2000: 32,318,796.
1
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PART 1 FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
BURNHAM PACIFIC PROPERTIES, INC.
CONSOLIDATED BALANCE SHEETS
MARCH 31, 2000 AND DECEMBER 31, 1999
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
ASSETS March 31, 2000 December 31, 1999
------------------------- --------------------------
<S> <C> <C>
Real Estate $1,037,932 $1,036,294
Less Accumulated Depreciation (71,598) (65,494)
------------------------- --------------------------
Real Estate-Net 966,334 970,800
Real Estate Held for Sale 8,742 8,737
Cash and Cash Equivalents 6,031 11,119
Restricted Cash 11,956 9,827
Receivables-Net 9,364 8,413
Investment in Unconsolidated Subsidiaries 3,783 3,650
Other Assets 24,993 22,469
------------------------- --------------------------
Total $1,031,203 $1,035,015
========================= ==========================
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Accounts Payable and Other Liabilities $ 16,152 $ 29,224
Tenant Security Deposits 2,608 2,606
Notes Payable 407,432 400,410
Line of Credit Advances 149,420 138,420
------------------------- --------------------------
Total Liabilities 575,612 570,660
------------------------- --------------------------
Commitments and Contingencies
Minority Interest 65,617 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 March 31, 2000 and
December 31, 1999 28 28
Common Stock, Par Value $.01/share, 95,000,000 Shares
Authorized, 32,318,796 and 32,273,546 Shares
Outstanding at March 31, 2000 and
December 31, 1999, respectively 323 323
Paid in Capital in Excess of Par 529,342 528,811
Dividends Paid in Excess of Net Income (139,719) (131,157)
------------------------- --------------------------
Total Stockholders' Equity 389,974 398,005
------------------------- --------------------------
Total $1,031,203 $1,035,015
========================= ==========================
</TABLE>
See the Accompanying Notes
2
<PAGE>
BURNHAM PACIFIC PROPERTIES, INC.
CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE MONTHS ENDED MARCH 31, 2000 AND 1999
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
2000 1999
------------------- --------------------
<S> <C> <C>
REVENUES
Rents $29,295 $34,435
Fee Income 1,200 384
Interest and Other 565 316
------------------- --------------------
Total Revenues 31,060 35,135
------------------- --------------------
EXPENSES
Interest 9,145 9,888
Rental Operating 9,513 9,374
General and Administrative 2,246 1,754
Restructuring Charge - 1,500
Abandoned Acquisition Costs - 748
Costs Associated with Unsolicited Proposal and Pursuit
of Strategic Alternatives 339 -
Depreciation and Amortization 7,463 7,161
------------------- --------------------
Total Expenses 28,706 30,425
------------------- --------------------
Income From Operations Before Income from Unconsolidated
Subsidiaries, Minority Interest and Cumulative
Effect of Change in Accounting Principle 2,354 4,710
Income (loss) from Unconsolidated Subsidiaries 49 (31)
Minority Interest (1,083) (1,102)
------------------- --------------------
Net Income Before Cumulative Effect of Change in
Accounting Principle 1,320 3,577
Cumulative Effect of Change in Accounting Principle - (1,866)
------------------- --------------------
Net Income $ 1,320 $ 1,711
Dividends Paid to Preferred Stockholders (1,400) (1,400)
------------------- --------------------
Income (Loss) Available to Common Stockholders $ (80) $ 311
=================== ====================
BASIC AND DILUTED EARNINGS PER SHARE:
Net Income (Loss) Before Cumulative Effect of Change in
Accounting Principle $(0.002) $ 0.07
Cumulative Effect of Change in Accounting Principle - (0.06)
------------------- --------------------
Net Income (Loss) $(0.002) $ 0.01
=================== ====================
</TABLE>
See the Accompanying Notes
3
<PAGE>
BURNHAM PACIFIC PROPERTIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 2000 AND 1999
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
2000 1999
---------------- ----------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income $ 1,320 $ 1,711
Adjustments to Reconcile Net Income to
Net Cash Provided by Operating Activities:
Depreciation and Amortization 7,463 7,161
Cumulative Effect of Change in Accounting Principle - 1,866
Abandoned Acquisitions Costs - 748
Provision for Bad Debt 85 175
Common Stock - Directors' Fees 47 63
Stock Options - Compensation Expense 67 67
Minority Interest 1,083 1,102
Income (loss) from Unconsolidated Subsidiaries (49) 31
Changes in Other Assets and Liabilities:
Receivables and Other Assets (2,859) (2,194)
Accounts Payable and Other Liabilities (8,436) 145
Tenant Security Deposits 2 (28)
---------------- ----------------
Net Cash Provided by (used for) Operating Activities (1,277) 10,847
---------------- ----------------
CASH FLOWS FROM INVESTING ACTIVITIES
Payments for Acquisitions of Real Estate and
Capital Improvements (8,475) (20,170)
Reimbursement of Development Costs 100 7,450
Investment in Unconsolidated Subsidiaries (48) -
---------------- ----------------
Net Cash Used for Investing Activities (8,423) (12,720)
---------------- ----------------
CASH FLOWS FROM FINANCING ACTIVITIES
Borrowings under Line of Credit Agreements 11,000 -
Repayments under Line of Credit Agreements - (1,196)
Principal Payments of Notes Payable (1,273) (1,880)
Borrowings under Notes Payable 8,295 -
Restricted Cash (2,129) (1,348)
Dividends Paid (9,882) (9,789)
Issuance of Stock-Net - 43
Distributions Made to Minority Interest Holders (1,424) (1,504)
Contributions Made from Minority Interest Holders 25 -
---------------- ----------------
Net Cash Provided by (Used for) Financing Activities 4,612 (15,674)
---------------- ----------------
Net Decrease in Cash and Cash Equivalents (5,088) (17,547)
Cash and Cash Equivalents at Beginning of Period 11,119 20,873
================ ================
Cash and Cash Equivalents at End of Period $ 6,031 $ 3,326
================ ================
SUPPLEMENTAL DISCLOSURES OF CASH
FLOW INFORMATION
Cash Paid During Three Months for Interest $10,422 $ 11,816
================ ================
SUPPLEMENTAL DISCLOSURE OF NON-CASH
INVESTING AND FINANCING ACTIVITIES
Notes Payable Issued for Additional Consideration of
Real Estate Acquired $ - $4,000
================ ================
</TABLE>
See the Accompanying Notes
4
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BURNHAM PACIFIC PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2000, DECEMBER 31, 1999, AND MARCH 31, 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 approximately $8,482,000 ($0.2625 per share) were
paid on March 31, 2000 to common stockholders of record on March 24,
2000.
Preferred dividends of $1,400,000 ($0.50 per share) were paid on
March 31, 2000 to preferred stockholders.
Accounts Receivable is net of an allowance for doubtful accounts of
approximately $3,269,000 and $3,311,000 at March 31, 2000 and December
31, 1999, respectively.
2. NEW ACCOUNTING PRONOUNCEMENT
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. Contingent rental revenue from tenants should be recognized as
revenue only after the tenants exceed their sales breakpoint. The
Company will be required to adopt SAB 101 in the second quarter of
2000. Revenues for the three-month period ended March 31, 2000 and 1999
would have been reduced by approximately $89,000 and $120,000,
respectively, if the Company reversed the percentage rent for the
tenants who had not exceeded their sales breakpoint at March 31, 2000
and 1999, respectively.
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):
5
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<TABLE>
<CAPTION>
Three Months Ended
March 31,
2000 1999
-------------- --------------
<S> <C> <C>
Numerator:
Net Income $ 1,320 $ 1,711
Less:
Dividends Paid to Preferred Stockholders (1,400) (1,400)
------- -------
Income (Loss) Available to Common
Stockholders for Basic and Diluted
Earnings Per Share $ (80) $ 311
======= =======
Denominator:
Shares for Basic and Diluted Earnings Per
Share - weighted average shares outstanding 32,283 31,954
======= =======
Basic and Diluted Earnings Per Share $(0.002) $ 0.01
======= =======
</TABLE>
In 2000 and 1999, dividends and shares from conversion of Preferred
Stock and minority interest expense and shares from the conversion 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>
March 31, 2000 December 31, 1999
-------------------------- -------------------------
<S> <C> <C>
Retail Centers $914,984 $912,543
Retail Centers Under Development 86,444 87,397
Office/Industrial Buildings 29,338 29,333
Other 7,166 7,021
-------------------------- -------------------------
Total Real Estate 1,037,932 1,036,294
Accumulated Depreciation (71,598) (65,494)
-------------------------- -------------------------
Real Estate-Net $966,334 $970,800
========================== =========================
</TABLE>
5. FORMATION OF SERVICE CORPORATION SUBSIDIARY
The Company earns asset management, leasing, acquisitions, and
disposition fees through an agreement with the State of California
Public Employees' Retirement System ("CalPERS"). The related potential
fee income that the Company may earn through this arrangement could
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
Partnership owns 1% of the outstanding voting stock of BPP Services,
Inc. and the remaining 99% of the outstanding voting stock is owned
equally by the Company's five senior executive officers. 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 executive officers own a 5% interest. In
accordance with recently enacted legislation, the Company
6
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anticipates that, on or after January 1, 2001, it will cause BPP
Services, Inc. to elect to become a "taxable REIT subsidiary" in which
case the Operating Partnership will have the option to acquire the
remaining 5% of the equity that it does not currently own.
6. SEGMENT INFORMATION
The Company has two reportable segments: Retail Operating properties
and Office/Industrial properties. The Company focuses its investments
on retail shopping centers located in major metropolitan areas. As of
March 31, 2000, the Company owns interests in 62 retail operating
properties, of which 61 were fully operational, and one of which is
being developed.
The Company also owns interests in two office and industrial properties
which it considers non-strategic and therefore does not allocate a
material amount of Company resources to this segment. For the three
months ended March 31, 2000 and 1999, there was no tenant of the
Company that accounted for ten percent or more of the total revenues of
the Company.
The Company evaluates the performance of its assets within these
segments based on the net operating income of the respective property.
Net operating income is calculated as rental revenues of the property
less its rental expenses (such as common area expenses, property taxes,
insurance and other owner's expenses). The summary of the Company's
operations by segment is as follows (in thousands):
<TABLE>
<CAPTION>
2000
----------------------------------------------------------
Three Months Ended March 31, 2000: Retail Office Total
<S> <C> <C> <C>
Rental Revenues $ 28,593 $ 702 $ 29,295
================ ================ ================
Net Operating Income $ 19,096 $ 686 $ 19,782
================ ================ ================
Real Estate at March 31, 2000 $1,001,428 $29,338 $1,030,766
================ ================ ================
</TABLE>
<TABLE>
<CAPTION>
1999
----------------------------------------------------------
Three Months Ended March 31, 1999: Retail Office Total
<S> <C> <C> <C>
Rental Revenues $ 32,553 $ 1,882 $ 34,435
================ ================ ================
Net Operating Income $ 23,395 $ 1,666 $ 25,061
================ ================ ================
Real Estate at December 31, 1999 $ 999,941 $29,332 $1,029,273
================ ================ ================
</TABLE>
The following table reconciles the Company's reportable segments' rental
revenues and net operating income to consolidated net income of the Company for
the periods presented (in thousands):
7
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended
March 31,
2000 1999
------------- -------------
<S> <C> <C>
Revenues:
Total Rental Revenues for Reportable Segments $29,295 $34,435
Fee Income 1,200 384
Interest Revenue 565 316
============= =============
Total Consolidated Revenues $31,060 $35,135
============= =============
Net Operating Income:
------------- -------------
Total Net Operating Income for Reportable Segments $19,782 $25,061
------------- -------------
Additions:
Interest and Other Revenue 565 316
Fee Income 1,200 384
Income from Unconsolidated Subsidiaries 49 -
------------- -------------
Total Additions 1,814 700
------------- -------------
Deductions:
Interest Expense 9,145 9,888
General and Administrative Expenses 2,246 1,754
Restructuring Charge - 1,500
Abandoned Acquisition Costs - 748
Loss from Unconsolidated Subsidiaries - 31
Costs Associated with Unsolicited Proposal and
Pursuit of Strategic Alternatives 339 -
Depreciation and Amortization 7,463 7,161
Minority Interest 1,083 1,102
------------- -------------
Total Deductions 20,276 22,184
------------- -------------
Net Income Before Cumulative Effect of Change
in Accounting Principle $ 1,320 $ 3,577
Cumulative Effect of Change in Accounting Principle - (1,866)
------------- -------------
Net Income $ 1,320 $ 1,711
============= =============
</TABLE>
The following table reconciles the total real estate for the reportable segments
to consolidated assets for the Company at March 31, 2000 and December 31, 1999
(in thousands):
<TABLE>
<CAPTION>
March 31, 2000 December 31, 1999
-------------------------- -------------------------
<S> <C> <C>
Total Real Estate for Reportable Segments $1,030,766 $1,029,273
Other Real Estate 7,166 7,021
-------------------------- -------------------------
Total Real Estate $1,037,932 $1,036,294
Accumulated Depreciation (71,598) (65,494)
-------------------------- -------------------------
Real Estate, Net 966,334 970,800
Other Assets 64,869 64,215
-------------------------- -------------------------
Consolidated Assets $1,031,203 $1,035,015
========================== =========================
</TABLE>
Other real estate includes assets related to the corporate offices of the
Company, which are not included in segment information.
8
<PAGE>
7. RESTRUCTURING
On March 18, 1999, the Board of Directors of the Company approved the
Company's plan to restructure its internal operations to outsource its
property management function to third party providers. The Company
estimated and recorded in the first quarter of 1999 a restructuring
charge of $1,500,000. This 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 personnel related costs ($6,000)
represents funds needed for consultants hired to assist with the
transition to third party managers. The remaining reserve for office
closures ($309,000) 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 March 31, 2000:
<TABLE>
<CAPTION>
Original Restructuring
Restructuring Expenditures Reserve Reserve
Reserve Applied Reversed March 31, 2000
--------------- ---------------- --------------- ----------------
<S> <C> <C> <C> <C>
Personnel Related Costs $ 750,000 $ (624,000) $ (120,000) $ 6,000
Office Closures 500,000 (291,000) 100,000 309,000
Write-off of Furniture and Equipment 250,000 (123,000) (127,000) -
--------------- ---------------- --------------- ----------------
Total $1,500,000 $(1,038,000) $ (147,000) $ 315,000
=============== ================ =============== ================
</TABLE>
8. COSTS ASSOCIATED WITH UNSOLICITED PROPOSAL AND PURSUIT OF
STRATEGIC ALTERNATIVES
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
9
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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 receiving advice from Goldman, Sachs & Co., Inc.,
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., Inc. 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 has entered
into numerous confidentiality agreements with potential bidders and
continues to discuss possible transactions with a limited number of
bidders. No assurances can be given, however, that these discussions
will lead to any agreement with any of the bidders or that any such
agreement will be completed.
In connection with the evaluation of the Schottenstein proposal, the
Company's pursuit of all of its strategic alternatives, 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 March 31, 2000, the Company incurred
approximately $339,000 of these related costs.
9. SECURITIES
At March 31, 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.
10. CONTINGENCIES
LEGAL PROCEEDINGS: 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 the property. The
tenant is seeking to recover funds that it claims to have invested in
the property of $1,000,000 to $2,000,000. The Company believes this
case is without merit and is vigorously defending itself against the
allegations. Accordingly, the Company has not recorded any loss
provision relative to damages sought by the tenant. Although the
outcome of this lawsuit cannot be predicted
10
<PAGE>
with certainty, the Company does not believe that the outcome of this
case will have a materially adverse effect on the Company's financial
statements or its business.
Also in 1999, a class action lawsuit was filed against the Company and
its Board of Directors. The complaint alleged 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 various severance arrangements. The
plaintiff also filed a motion for preliminary injunction. On November
17, 1999, the trial court denied the plaintiff's motion, and the
plaintiff is appealing that ruling. Defendants have filed a motion in
the trial court to dismiss the complaint. The Company believes the
lawsuit is without merit and intends to defend against it vigorously.
In February 2000, a derivative lawsuit was filed, naming as defendants
the Company's Board of Directors and four of its officers and naming
the Company as a nominal defendant. The allegations contained in the
derivative complaint are similar to the allegations in the pending
class action lawsuit described above. The Company believes that the
plaintiff has not properly complied with the requirements for bringing
a derivative action, and the Company intends to assert this position
vigorously.
The Company is also subject to other legal proceedings and claims that
arise in the ordinary course of its business. It is the opinion of the
Company's management that the outcome of such matters will not have a
material adverse effect on the Company's financial statements or its
business.
11. SUBSEQUENT EVENTS
On April 11, 2000, the Company sold its interest in the residential
parcel of its Downtown Pleasant Hill development project for
approximately $2,980,000, resulting in no gain or loss. Proceeds were
used to repay a construction loan secured by the project.
On April 28, 2000, the Company sold its interest in a retail shopping
center for approximately $3,250,000, resulting in a gain of
approximately $450,000. Proceeds were used to repay mortgage debt
secured by the center sold and to repay borrowings under the Company's
Credit Facility.
11
<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
outcome 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:
- 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
- cost, yield and earnings estimates.
Forward-looking statements should not be relied on since 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 expressed 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 MARCH 31, 2000 COMPARED TO THE THREE MONTHS ENDED
MARCH 31, 1999:
The results of operations for the three months ended March 31, 2000 resulted in
a loss of $80,000 as compared to Income Available to Common Stockholders of
$311,000 for the first quarter of 1999. This decrease was primarily attributable
to lower revenues resulting from asset sales occurring subsequent to March 31,
1999; a decrease in lease termination fees; an increase in general and
administrative expenses partially offset by an increase in management fee
income; and an increase in borrowing costs.
12
<PAGE>
Total revenues decreased $4,075,000 primarily as a result of asset sales in 1999
and a decrease in lease termination fees of $686,000, offset by an increase in
management fee income of $816,000.
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. Contingent
rental revenue from tenants should be recognized as revenue only after the
tenants exceed their sales breakpoint. The Company will be required to adopt SAB
101 in the second quarter of 2000. Revenues for the three-month period ended
March 31, 2000 and 1999 would have been reduced by approximately $89,000 and
$120,000, respectively, if the Company reversed the percentage rent for the
tenants which had not exceeded their sales breakpoint at March 31, 2000 and
1999, respectively.
Rental operating expenses increased $139,000 primarily as a result of
outsourcing of property management to third party providers and due to the
increased level of activity associated with the Company's joint venture with
the State of California Public Employees' Retirement System ("CalPERS"),
offset by the 1999 asset sales.
Interest expense decreased $743,000 as a result of reduced average borrowings
offset by an increase in interest rates. The reduction of debt from asset sales
was partially offset by increases in debt related to development and
redevelopment projects and capital expenditures related to leasing activities.
Interest capitalized in conjunction with development and expansion projects was
$1,430,000 for the 2000 period, compared with $1,144,000 during the 1999
three-month period. Total debt outstanding on March 31, 2000 and the related
weighted average interest rate were $556,852,000 and 7.82%, respectively
(exclusive of $14,546,000 of fixed rate mortgage debt in unconsolidated
subsidiaries), compared with $575,952,000 and 7.27%, respectively, at March 31,
1999.
Depreciation and amortization expenses increased $302,000 as a result of
portions of certain development and redevelopment projects being placed into
service and an increase in the amortization of deferred financing costs, offset
by the impact of asset sales.
General and administrative expenses increased $492,000 as a result of the
increased level of activity related to the Company's joint venture agreement
with CalPERS. These additional costs were partially offset by the aforementioned
management fee income derived from the agreement with CalPERS.
Results for the first quarter were positively impacted by a net decrease of
$3,775,000 in non-recurring expenses. These expenses are described in detail in
the following paragraphs.
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 is reported as a cumulative effect of change in accounting
principle and represents start-up and organization costs previously carried and
amortized as other assets. These costs of approximately $1,866,000 represent
unamortized costs related primarily to the Company becoming self-advised in
1991, the conversion to an "UPREIT" structure in 1997 and the formation of its
joint venture with CalPERS during 1998.
Costs Associated with Unsolicited Proposal and Pursuit of Strategic
Alternatives:
13
<PAGE>
On June 7, 1999, the Company received a 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 receiving advice from Goldman, Sachs & Co., Inc., 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., Inc. 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 has entered into numerous
confidentiality agreements with potential bidders and continues to discuss
possible transaction with a limited number of bidders. No assurances can be
given, however, that these discussions will lead to any agreement with any of
the bidders or that any such agreement will be completed.
In connection with the evaluation of the Schottenstein proposal, the Company's
pursuit of all of its strategic alternatives, 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 March 31,
2000, the Company incurred approximately $339,000 of these related costs.
Restructuring Charge:
On March 18, 1999, the Board of Directors of the Company approved the Company's
plan to restructure its internal operations to outsource its property management
function to third party providers. The Company estimated and recorded in the
first quarter of 1999 a restructuring charge of $1,500,000. This 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
14
<PAGE>
of these changes in estimates, the Company reallocated $100,000 of reserves from
personnel related costs to office closures and reversed $147,000 of the reserve
during the quarter ended September 30, 1999. The remaining reserve for personnel
related costs ($6,000) represents funds needed for consultants hired to assist
with the transition to third-party managers. The remaining reserve for office
closures ($309,000) 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
March 31, 2000:
<TABLE>
<CAPTION>
Original Restructuring
Restructuring Expenditures Reserve Reserve
Reserve Applied Reversed March 31, 2000
--------------- ---------------- --------------- ----------------
<S> <C> <C> <C> <C>
Personnel Related Costs $ 750,000 $ (624,000) $ (120,000) $ 6,000
Office Closures 500,000 (291,000) 100,000 309,000
Write-off of Furniture and Equipment 250,000 (123,000) (127,000) -
--------------- ---------------- --------------- ----------------
Total $1,500,000 $(1,038,000) $ (147,000) $ 315,000
=============== ================ =============== ================
</TABLE>
Abandoned Acquisition Costs:
As noted below, during the three months ended March 31, 1999, the Company
recorded a $748,000 charge related to the abandonment of transactions in process
prior to the AMB portfolio acquisition.
FUNDS FROM OPERATIONS
March 31, 2000 and 1999:
The Company considers Funds from Operations ("FFO") to be a relevant
supplemental measure of the performance of an equity REIT because such measure
does not recognize depreciation and certain amortization expenses as operating
expenses. Management believes that reductions for these charges are not
meaningful in evaluating income producing real estate, which historically has
not depreciated. The Company defines FFO in accordance with the definition
established by the Board of Governors of the National Association of Real Estate
Investment Trusts ("NARIET"). 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 of 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
15
<PAGE>
distributions, needed capital replacements or expansions, debt service
obligations, or other commitments and uncertainties. The Company believes that
in order to facilitate a clear understanding of the combined historical
operating results of the Company, FFO should be examined in conjunction with net
income as presented in the consolidated financial statements and information
included elsewhere in this report.
FFO for the first quarter of 2000 on a diluted basis was $6,344,000 as compared
to $10,059,000 for the same period in 1999. Diluted FFO for the first quarter of
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. Diluted FFO for the first quarter of 1999 does not assume the
conversion of the Company's convertible preferred stock but does assume
conversion of other common stock equivalents. The decline in FFO is primarily
attributable to lower revenues resulting from asset sales occurring subsequent
to March 31, 1999, a decrease in lease termination fees, an increase in general
and administrative expenses, partially offset by an increase in management fee
income, and an increase in borrowing costs.
The calculation of FFO for the respective periods is as follows (in thousands).
The 1999 presentation has been changed to reflect the new definitions of FFO:
<TABLE>
<CAPTION>
Three Months Ended
March 31,
---------------------------
2000 1999
-------------- --------------
<S> <C> <C>
Income Available to Common Stockholders $ (80) $ 311
Adjustments:
Depreciation and Amortization of Real Estate and
Tenant Improvements 6,424 6,780
Cumulative Effect of Change in Accounting Principle - 1,866
-------------- --------------
Funds from Operations-Basic $ 6,344 $ 8,957
Effect of Dilutive Securities:
Operating Partnership Units - 1,102
-------------- --------------
Funds from Operations-Dilutive $ 6,344 $10,059
============== ==============
</TABLE>
16
<PAGE>
MATERIAL CHANGES IN FINANCIAL CONDITION
March 31, 2000 compared to December 31, 1999:
The Company maintains a credit facility (the "GE Facility") with CMF Capital
Company, LLC (a subsidiary of General Electric Capital Corporation) in the
current amount of $176,263,000, which is secured by various mortgages. At
March 31, 2000, borrowings of approximately $149,420,000 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 March 31, 2000 and
December 31, 1999, the average rate of interest on the advances under the
line of credit was approximately 8.44% and 8.30%, respectively. The GE
Facility is scheduled to mature in November 2000, and is subject to various
loan covenants. The Company intends to either refinance the GE Facility with
CMF Capital Company, LLC or replace the facility with another lender prior to
the maturity date. The Company also maintains a $5,000,000 unsecured
revolving credit facility with Union Bank (the "Union Bank Facility"). At
March 31, 2000, there was nothing borrowed on this facility. The Union Bank
Facility bears interest at a rate of LIBOR plus 2.00% per annum and is
scheduled to mature in September 2000.
At March 31, 2000, the Company had three construction loans outstanding with
various lenders (the "Construction Facilities"). The Company had
approximately $7,894,000 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 in
December 2000. The Company also had approximately $40,958,000 of 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 is scheduled to mature in November 2000. Finally, the Company had
approximately $7,668,000 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 in December 2000. The Company
believes that the funds provided from these Construction Facilities will be
materially sufficient to complete these projects. Prior to the maturity date
of these loans, the Company intends to either refinance or replace them with
traditional mortgage financing.
The debt outstanding (exclusive of approximately $14,546,000 of debt in
unconsolidated subsidiaries) on March 31, 2000 and related weighted average rate
were $556,852,000 and 7.75% respectively, compared to $538,830,000 and 7.73% on
December 31, 1999. Interest capitalized in conjunction with development and
expansion projects was approximately $1,430,000 and three months ended March 31,
2000 as compared to approximately $1,144,000 the same period in 1999.
At March 31, 2000, the Company's capitalization consisted of $556,852,000 of
debt (excluding the Company's proportionate share of joint venture debt which
is approximately $3,637,000), $120,000,000 of preferred stock and preferred
Operating Partnership units, and $239,339,000 of market equity (market equity
is defined as (i) the sum of the number of outstanding shares of Common Stock
of the Company plus Common Units of the Operating Partnership held by
partners of the Operating Partnership other than the Company, multiplied by
(ii) the closing price of the shares of Common Stock on the New York Stock
Exchange at March 31, 2000 of $7.06), resulting in a debt to total market
capitalization ratio of .61 to 1.0 compared to the ratio of .55 to 1.0 at
December 31, 1999. At March 31, 2000, the Company's total debt consisted of
$334,379,000 of fixed rate debt, and $222,473,000 of variable rate debt.
17
<PAGE>
It is management's intention that the Company have access to the capital
resources necessary to expand and develop its business. Accordingly, the Company
may seek to obtain funds through additional borrowings and public offerings and
private placements of debt and equity securities.
At March 31, 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.
18
<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 September 9, 1999, plaintiffs moved for a preliminary injunction, asking the
court to void the shareholder rights plan and rescind the severance agreements.
Defendants opposed this motion. On November 22, 1999, the court denied
plaintiffs' motion. On January 14, 2000, plaintiffs filed a notice of appeal
from the court's ruling. The same day, plaintiffs also filed a Consolidated
Amended Complaint, consolidating their complaint with a similar class action
complaint that was filed against the same defendants on October 12, 1999. On
April 17, 2000, defendants filed a motion to have the case dismissed. That
motion is pending. The Company believes the complaint is without merit and
intends to vigorously defend against the lawsuit. However, there can be no
assurance that such defense will be successful. If the Company does not prevail,
the suit could render the shareholder rights plan ineffective, thereby making
the Company more vulnerable to unsolicited acquisition proposals and increasing
the possibility that the Company will have to allocate material amounts of
financial and management resources to protect the Company from unwanted takeover
attempts that may not maximize shareholder value.
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 four of its 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 the Company intends to assert
this position vigorously.
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 the property. The tenant is seeking to recover funds
that it claims to have invested in the property of $1,000,000 to $2,000,000.
The Company believes this case is without merit and is vigorously defending
itself against the allegations. Accordingly, the Company has not recorded any
loss provision relative to damages sought by the tenant. Although the outcome
of this lawsuit cannot be predicted with certainty, it is the opinion of the
Company's management that the outcome of the case will not have a materially
adverse effect on the Company's financial statements or its business.
The Company is also subject to other legal proceedings and claims that arise in
the ordinary course of its business. It is the opinion of the Company's
management that the outcome of such matters will not have a material adverse
effect on the Company's financial statements or its business.
19
<PAGE>
ITEM 2. CHANGES IN 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. These shares were issued in reliance on an
exemption from registration under Section 4(2) and Regulation D of the
Securities Act of 1933, as amended. The Company is relying on the exemption
based upon factual representations received from the recipients of the shares.
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.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K:
(a) The following Exhibits are part of this report:
3(ii).1 Bylaws of the Company, as amended and restated as of November
19, 1997 (incorporated by reference to Exhibit 3.2 of the
Company's Current Report on Form 8-K filed on December 16,
1997).
3(ii).2 Text of February 9, 2000 Amendments to Bylaws (incorporated
by reference to Exhibit 3(ii).2 to the Company's Form 8-K
filed with the SEC on February 10, 2000).
3(ii).3 Text of April 5, 2000 Amendment to Bylaws (incorporated
by reference to Exhibit 3(ii).3 to the Company's Form
8-K filed with the SEC on April 10, 2000).
20
<PAGE>
(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 February 16, 2000 (earliest event reported
February 15, 2000): Item 5, press release regarding Burnham Pacific
Completes Initial Phase of Exploring Strategic Alternatives.
Form 8-K Report filed February 10, 2000 (earliest event reported
February 9, 2000): Item 5, regarding amendment to bylaws to change date
of annual meeting of stockholders.
Form 8-K Report filed February 3, 2000 (earliest event reported
February 3, 2000): Item 5, regarding a letter dated February 3, 2000
from the Company addressed to Mr. Jay L. Schottenstein.
Form 8-K Report filed January 14, 2000 (earliest event reported
December 15,1999): Item 5, regarding Second Amendment to Operating
Agreement of BPP Retail, LLC.
21
<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: //May 15, 2000// By: /s/ J. DAVID MARTIN
----------------- -----------------------------
J. David Martin,
Chief Executive Officer
Date: //May 15, 2000// By: /s/ DANIEL B. PLATT
----------------- -----------------------------
Daniel B. Platt,
Chief Financial Officer
22
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> MAR-31-2000
<CASH> 17,987<F1>
<SECURITIES> 0
<RECEIVABLES> 12,633
<ALLOWANCES> (3,269)
<INVENTORY> 0
<CURRENT-ASSETS> 56,127<F2><F3>
<PP&E> 1,037,932
<DEPRECIATION> (71,598)
<TOTAL-ASSETS> 1,031,203<F4>
<CURRENT-LIABILITIES> 18,760
<BONDS> 556,852
0
68,894
<COMMON> 460,799
<OTHER-SE> (139,719)
<TOTAL-LIABILITY-AND-EQUITY> 1,031,203<F5><F6>
<SALES> 29,295
<TOTAL-REVENUES> 31,060
<CGS> 9,428
<TOTAL-COSTS> 9,428
<OTHER-EXPENSES> 10,048
<LOSS-PROVISION> 85
<INTEREST-EXPENSE> 9,145
<INCOME-PRETAX> (80)
<INCOME-TAX> 0
<INCOME-CONTINUING> (80)<F7><F8><F9>
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (80)<F10>
<EPS-BASIC> (.002)
<EPS-DILUTED> (.002)
<FN>
<F1>INCLUDES 11,956 OF RESTRICTED CASH.
<F2>INCLUDES 3,783 OF INVESTMENT IN UNCONSOLIDATED SUBSIDIARIES.
<F3>ALSO INCLUDES, 24,993 OF OTHER ASSETS AND 9,364 OF RECEIVABLES-NET.
<F4>INCLUDES 8,742 OF REAL ESTATE HELD FOR SALE.
<F5>INCLUDES 529,342 OF PAID IN CAPITAL IN EXCESS OF PAR.
<F6>ALSO INCLUDES 65,617 OF MINORITY INTEREST.
<F7>INCLUDES 1,400 DISTRIBUTION TO PREFERRED STOCKHOLDERS.
<F8>INCLUDES 1,083 MINORITY INTEREST.
<F9>ALSO INCLUDES 49 OF INCOME FROM UNCONSOLIDATED SUBSIDIARIES.
<F10>INCLUDES 1,400 DIVIDENDS PAID TO PREFERRED STOCKHOLDERS.
</FN>
</TABLE>
