<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q/A
(Mark One)
|X| Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the quarterly period ended June 30, 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 001-09524
----------------
BURNHAM PACIFIC PROPERTIES, INC.
--------------------------------
(Exact name of Registrant as specified in its Charter)
Maryland 33-0204162
---------------------------------------------- ---------------------------------
(State of other jurisdiction of incorporation) (IRS Employer 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 August 11,
2000: 32,324,046.
1
<PAGE>
EXPLANATORY NOTE
Note: This amendment is filed to reflect a change in the manner of accounting
for the Company's interest in BPP Services, Inc., its recently formed service
corporation subsidiary. Following discussions with the Securities and
Exchange Commission in connection with the Company's preparation of proxy
materials for the Company's 2000 annual meeting of stockholders, the Company
is reporting its interest in BPP Services, Inc. under the equity method of
accounting. Prior to this change, the Company had been consolidating the
results of BPP Services, Inc.
<PAGE>
PART 1 FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
BURNHAM PACIFIC PROPERTIES, INC.
CONSOLIDATED BALANCE SHEETS
JUNE 30, 2000 AND DECEMBER 31, 1999
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
ASSETS June 30, 2000 December 31, 1999
------------------------- --------------------------
<S> <C> <C>
Real Estate $ 1,025,079 $ 1,036,294
Less Accumulated Depreciation (72,315) (65,494)
------------------------- --------------------------
Real Estate-Net 952,764 970,800
Real Estate Held for Sale 29,755 8,737
Cash and Cash Equivalents 5,474 11,119
Restricted Cash 9,474 9,827
Receivables-Net 8,680 8,413
Investment in Unconsolidated Subsidiaries 3,813 3,650
Other Assets 25,182 22,469
------------------------- --------------------------
Total $ 1,035,142 $ 1,035,015
========================= ==========================
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Accounts Payable and Other Liabilities $ 21,211 $ 29,224
Tenant Security Deposits 2,651 2,606
Notes Payable 405,989 400,410
Line of Credit Advances 162,420 138,420
------------------------- --------------------------
Total Liabilities 592,271 570,660
------------------------- --------------------------
Commitments and Contingencies
Minority Interest 64,941 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 June 30, 2000 and
December 31, 1999 28 28
Common Stock, Par Value $.01/share, 95,000,000 Shares
Authorized, 32,324,046 and 32,273,546 Shares
Outstanding at June 30, 2000 and
December 31, 1999, respectively 323 323
Paid in Capital in Excess of Par 529,505 528,811
Dividends Paid in Excess of Net Income (151,926) (131,157)
------------------------- --------------------------
Total Stockholders' Equity 377,930 398,005
------------------------- --------------------------
Total $ 1,035,142 $ 1,035,015
========================= ==========================
</TABLE>
See the Accompanying Notes
2
<PAGE>
BURNHAM PACIFIC PROPERTIES, INC.
CONSOLIDATED STATEMENTS OF INCOME
FOR THE SIX MONTHS ENDED JUNE 30, 2000 AND 1999
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
2000 1999 2000 1999
---------------- --------------- ------------------ -----------------
<S> <C> <C> <C> <C>
REVENUES
Rents $ 29,814 $ 32,456 $ 59,109 $ 66,891
Fee Income -0- 1,582 803 1,966
Interest and Other 233 331 798 647
---------------- --------------- ------------------ -----------------
Total Revenues 30,047 34,369 60,710 69,504
---------------- --------------- ------------------ -----------------
EXPENSES
Interest 10,589 9,610 19,734 19,498
Rental Operating 8,528 9,541 17,408 18,915
General and Administrative 2,458 1,905 4,704 3,659
Litigation 2,400 - 2,636 -
Costs Associated with Unsolicited Proposal and
Pursuit of Strategic Alternatives 983 875 1,322 875
Restructuring Charge - - - 1,500
Abandoned Acquisition Costs - - - 748
Impairment Write-Off - 1,200 - 1,200
Depreciation and Amortization 6,905 6,629 14,368 13,790
---------------- --------------- ------------------ -----------------
Total Expenses 31,863 29,760 60,172 60,185
---------------- --------------- ------------------ -----------------
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 (1,816) 4,609 538 9,319
Income from Unconsolidated Subsidiaries 19 473 66 442
Minority Interest (920) (1,281) (2,001) (2,383)
Gain on Sales of Real Estate 394 - 394 -
---------------- --------------- ------------------ -----------------
Net Income (Loss) Before Cumulative Effect
of Change in Accounting Principle (2,323) 3,801 (1,003) 7,378
Cumulative Effect of Change in Accounting Principle - - - (1,866)
---------------- --------------- ------------------ -----------------
Net Income (Loss) $ (2,323) $ 3,801 $ (1,003) $ 5,512
Dividends Paid to Preferred Stockholders (1,400) (1,400) (2,800) (2,800)
---------------- --------------- ------------------ -----------------
Income (Loss) Available to Common Stockholders $ (3,723) $ 2,401 $ (3,803) $ 2,712
================ =============== ================== =================
BASIC AND DILUTED EARNINGS PER SHARE:
Net Income (Loss) Before Cumulative Effect of
Change in Accounting Principle $ (0.12) $ 0.08 $ (0.12) $ 0.14
Cumulative Effect of Change in Accounting
Principle - - - (0.06)
---------------- --------------- ------------------ -----------------
Net Income (Loss) $ (0.12) $ 0.08 $ (0.12) $ 0.08
================ =============== ================== =================
</TABLE>
See the Accompanying Notes
3
<PAGE>
BURNHAM PACIFIC PROPERTIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 2000 AND 1999
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
2000 1999
---------------- ----------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income (Loss) $ (1,003) $ 5,512
Adjustments to Reconcile Net Income (Loss) to
Net Cash Provided by Operating Activities:
Depreciation and Amortization 14,368 13,790
Impairment Write-off - 1,200
Gain on Sales of Real Estate (394) -
Cumulative Effect of Change in Accounting Principle - 1,866
Abandoned Acquisitions Costs - 748
Litigation Expenses 1,900 -
Restructuring Charge - 1,500
Provision for Bad Debt 407 350
Common Stock - Directors' Fees 83 137
Stock Options - Compensation Expense 133 134
Minority Interest 2,001 2,383
Income from Unconsolidated Subsidiaries (66) (442)
Changes in Other Assets and Liabilities:
Receivables and Other Assets (1,755) (8,945)
Accounts Payable and Other Liabilities (7,143) (3,467)
Tenant Security Deposits 45 (197)
---------------- ----------------
Net Cash Provided by Operating Activities 8,576 14,569
---------------- ----------------
CASH FLOWS FROM INVESTING ACTIVITIES
Payments for Acquisitions of Real Estate and
Capital Expenditures (27,531) (36,334)
Reimbursement of Development Costs 100 7,450
Proceeds from Sales of Real Estate 6,049 -
Investment in Unconsolidated Subsidiaries (67) (832)
---------------- ----------------
Net Cash Used for Investing Activities (21,449) (29,716)
---------------- ----------------
CASH FLOWS FROM FINANCING ACTIVITIES
Borrowings under Line of Credit Agreements 24,000 5,000
Repayments under Line of Credit Agreements - (2,624)
Principal Payments of Notes Payable (6,975) (3,343)
Borrowings under Notes Payable 12,554 21,770
Restricted Cash 353 (927)
Dividends Paid (19,768) (19,579)
Issuance of Stock-Net - 43
Distributions Made to Minority Interest Holders (2,961) (3,008)
Contributions Made from Minority Interest Holders 25 -
---------------- ----------------
Net Cash Provided by (Used for) Financing Activities 7,228 (2,668)
---------------- ----------------
Net Decrease in Cash and Cash Equivalents (5,645) (17,815)
Cash and Cash Equivalents at Beginning of Period 11,119 20,873
---------------- ----------------
Cash and Cash Equivalents at End of Period $ 5,474 $ 3,058
================ ================
SUPPLEMENTAL DISCLOSURES OF CASH
FLOW INFORMATION
Cash Paid During Six Months for Interest $ 21,139 $ 21,223
================ ================
SUPPLEMENTAL DISCLOSURE OF NON-CASH
INVESTING AND FINANCING ACTIVITIES
Notes Payable Issued for Additional Consideration of
Real Estate Acquired $ - $ 4,000
================ ================
</TABLE>
See the Accompanying Notes
4
<PAGE>
BURNHAM PACIFIC PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000, DECEMBER 31, 1999, AND JUNE 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 approximately $8,484,000 ($.2625 per share) were
paid on June 30, 2000 to common stockholders of record as of June 20,
2000.
Preferred dividends of $1,400,000 ($0.50 per share) were paid on June
30, 2000 to preferred stockholders.
Accounts Receivable is net of an allowance for doubtful accounts of
approximately $3,260,000 and $3,311,000 at June 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, revenues for the three
and six month periods ended June 30, 2000 would have been reduced by
approximately $89,000 and $141,000, respectively, and by $177,000 and
$261,000 for the three and six month periods ended June 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.
5
<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 Six Months Ended
June 30, June 30,
2000 1999 2000 1999
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Numerator:
Net Income (Loss) $ (2,323) $ 3,801 $ (1,003) $ 5,512
Less:
Dividends Paid to Preferred Stockholders (1,400) (1,400) (2,800) (2,800)
-------------- -------------- -------------- --------------
Income (Loss) Available to Common
Stockholders for Basic and Diluted
Earnings Per Share $ (3,723) $ 2,401 $ (3,803) $ 2,712
============== ============== ============== ==============
Denominator:
Shares for Basic Earnings Per Share -
weighted average shares outstanding 32,319 31,960 32,301 31,957
Effect of Dilutive Securities:
Stock Options - 40 - 40
-------------- -------------- -------------- --------------
Shares for Diluted Earnings Per Share 32,319 32,000 32,301 31,997
============== ============== ============== ==============
Basic and Diluted Earnings Per Share $ (0.12) $ 0.08 $ (0.12) $ 0.08
============== ============== ============== ==============
</TABLE>
In 2000 and 1999, dividends and shares from conversion of Preferred
Stock and minority interest expense and shares issuable upon the
redemption 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>
June 30, 2000 December 31, 1999
-------------------------- -------------------------
<S> <C> <C>
Retail Centers $ 926,918 $ 912,543
Retail Centers Under Development 91,647 87,397
Office/Industrial Buildings - 29,333
Other 6,514 7,021
-------------------------- -------------------------
Total Real Estate 1,025,079 1,036,294
Accumulated Depreciation (72,315) (65,494)
-------------------------- -------------------------
Real Estate-Net $ 952,764 $ 970,800
========================== =========================
</TABLE>
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 a loss of approximately $19,000.
Proceeds were used to reduce borrowings of a construction loan
secured by the project.
6
<PAGE>
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 $413,000. Proceeds were used to repay mortgage debt
secured by the center sold and to reduce borrowings under the Company's
line of credit.
During the three months ended June 30, 2000, approximately $23,620,000
of Real Estate was reclassified into the Real Estate Held for Sale due
to the Company's intention to attempt to sell the related assets.
5. FORMATION OF SERVICE CORPORATION SUBSIDIARY
The Company earns asset management, leasing, acquisition, and
disposition fees through an agreement with the State of California
Public Employees' Retirement System ("CalPERS"). The fee income that
the Company earns 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 by the Company's four
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. BPP Services, Inc. is accounted for under the equity
method of accounting.
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
June 30, 2000, the Company owns interests in 61 retail operating
properties, of which 60 are 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 June 30, 2000 and 1999, no tenant of the
Company accounted for 10% or more of the total revenues of the
Company.
7
<PAGE>
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
----------------------------------------------------------------------------------------------------------
Retail Office Total
----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Three Months Ended June 30, 2000:
Rental Revenues $ 29,099 $ 715 $ 29,814
================ ================ ================
Net Operating Income $ 20,606 $ 680 $ 21,286
================ ================ ================
Six Months Ended June 30, 2000:
Rental Revenues $ 57,692 $ 1,417 $ 59,109
================ ================ ================
Net Operating Income $ 40,335 $ 1,366 $ 41,701
================ ================ ================
1999
----------------------------------------------------------------------------------------------------------
Retail Office Total
----------------------------------------------------------------------------------------------------------
Three Months Ended June 30, 1999:
Rental Revenues $ 30,549 $ 1,907 $ 32,456
================ ================ ================
Net Operating Income $ 21,212 $ 1,703 $ 22,915
================ ================ ================
Six Months Ended June 30, 1999:
Rental Revenues $ 63,102 $ 3,789 $ 66,891
================ ================ ================
Net Operating Income $ 44,606 $ 3,370 $ 47,976
================ ================ ================
----------------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
June 30, 2000 December 31, 1999
----------------- ---------------------
<S> <C> <C>
Retail Real Estate $1,018,565 $ 999,940
Office Real Estate - 29,333
----------------- ---------------------
Total Real Estate $1,018,565 $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):
8
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
2000 1999 2000 1999
-------------- ------------ ------------- ----------------
<S> <C> <C> <C> <C>
REVENUES:
Total Rental Revenues for Reportable Segments $ 29,814 $ 32,456 $ 59,109 $ 66,891
Fee Income 0 1,582 803 1,966
Interest Revenue 233 331 798 647
-------------- ------------ ------------- ----------------
TOTAL CONSOLIDATED REVENUES $ 30,047 $ 34,369 $ 60,710 $ 69,504
============== ============ ============= ================
NET OPERATING INCOME:
-------------- ------------ ------------- ----------------
Total Net Operating Income for Reportable Segments $ 21,286 $ 22,915 $ 41,701 $ 47,976
-------------- ------------ ------------- ----------------
Additions:
Interest and Other Revenue 233 331 798 647
Fee Income 0 1,582 803 1,966
Income from Unconsolidated Subsidiaries 19 473 66 442
Gain on Sales of Real Estate 394 - 394 -
-------------- ------------ ------------- ----------------
Total Additions 646 2,386 2,061 3,055
-------------- ------------ ------------- ----------------
Deductions:
Interest Expense 10,589 9,610 19,734 19,498
General and Administrative Expenses 2,458 1,905 4,704 3,659
Litigation Expense 2,400 - 2,636 -
Restructuring Charge - - - 1,500
Abandoned Acquisition Costs - - - 748
Costs Associated with Unsolicited Proposal and
Pursuit of Strategic Alternatives 983 875 1,322 875
Impairment Write-Off - 1,200 - 1,200
Depreciation and Amortization 6,905 6,629 14,368 13,790
Minority Interest 920 1,281 2,001 2,383
-------------- ------------ ------------- ----------------
Total Deductions 24,255 21,500 44,765 43,653
-------------- ------------ ------------- ----------------
Net Income (Loss) Before Cumulative Effect of Change
in Accounting Principle $ (2,323) $ 3,801 $ (1,003) $ 7,378
Cumulative Effect of Change in Accounting Principle - - - (1,866)
-------------- ------------ ------------- ----------------
Net Income (Loss) $ (2,323) $ 3,801 $ (1,003) $ 5,512
============== ============ ============= ================
</TABLE>
The following table reconciles the total real estate for the reportable
segments to consolidated assets for the Company at June 30, 2000 and
December 31, 1999 (in thousands):
<TABLE>
<CAPTION>
June 30, 2000 December 31, 1999
-------------------------- -------------------------
<S> <C> <C>
Total Real Estate for Reportable Segments $ 1,018,565 $1,029,273
Other Real Estate 6,514 7,021
-------------------------- -------------------------
Total Real Estate $ 1,025,079 $ 1,036,294
Accumulated Depreciation (72,315) (65,494)
-------------------------- -------------------------
Real Estate, Net 952,764 970,800
Other Assets 82,683 64,215
-------------------------- -------------------------
Consolidated Assets $ 1,035,447 $ 1,035,015
========================== =========================
</TABLE>
Other real estate includes assets related to the corporate offices of
the Company, which are not included in segment information.
9
<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 office closures ($289,554) 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 June 30, 2000:
<TABLE>
<CAPTION>
Original Restructuring
Restructuring Expenditures Reserve Reserve
Reserve Applied Reversed June 30, 2000
--------------- ---------------- --------------- ----------------
<S> <C> <C> <C> <C>
Personnel Related Costs $ 750,000 $ (630,000) $ (120,000) $ -
Office Closures 500,000 (310,446) 100,000 289,554
Write-off of Furniture and Equipment 250,000 (123,000) (127,000) -
--------------- ---------------- --------------- ----------------
Total $1,500,000 $(1,063,446) $ (147,000) $ 289,554
=============== ================ =============== ================
</TABLE>
10
<PAGE>
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 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 had entered
into numerous confidentiality agreements with potential bidders.
Subsequent to February 21, 2000, the Company exchanged due diligence
materials with a limited number of interested parties and continues
to engage in discussions with parties interested in pursuing various
transactions. No assurances can be given, however, that these
discussions will lead to any agreement with any of such parties or
that any such agreement will be completed.
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 (the "Preferred
Stock"). If valid, the election of a Change of Control Preference would
have the effect of prohibiting the
11
<PAGE>
Company from making distributions to the holders of the Company's
Common Stock until the 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.
Despite the purported election by Westbrook of a Change of Control
Preference, there can be no assurance that there will be a change of
control transaction involving the Company or any assurances with
respect to the terms upon which any such transaction could be
consummated. In addition, there can be no assurance that the Company
will continue paying regular quarterly distributions to its Common
Stockholders.
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 June 30, 2000, the Company incurred
approximately $983,000 of these related costs.
9. SECURITIES
At June 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.
During the three months ended June 30, 2000, the Operating Partnership
purchased 12,600 limited partnership units of BPP/Marin, L.P. for
approximately $125,000.
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. 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 out-of-pocket losses, and separately awarded
the tenant future lost profits. The Company has challenged the award
for net lost profits as duplicative, and expects the Court will enter
Judgment after September 5, 2000, upon deciding this issue. The
judgment ultimately will include an additional sum for partial
reimbursement of the tenant's attorneys' fees and costs. Once judgment
is entered, the Company may seek to modify or vacate the judgment, and
may also appeal. There can be no assurance as to the final outcome of
any post-trial motions or appeal. For the three and six months ended
June 30, 2000, the Company has expensed $2,400,000 and
12
<PAGE>
$2,636,000 respectively, in connection with this litigation. The
Company may incur additional expenses in future periods depending on
the judgment entered.
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. 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. If the Company does not prevail, the
suit could render the shaeholder 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. In February 2000, a derivative lawsuit
was filed. 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
and naming the Company as a nominal defendant. The allegations
contained in the derivative complaint are similar to the allegation
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 has filed a
motion asking the Court to dismiss the suit. That motion is pending.
On June 14, 2000, The Schottenstein Stores Group, Inc. and certain
of its affiliates 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 alleges
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 the
directors filed a Motion to Dismiss all claims in the litigation,
which motion remains pending. 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 it.
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 EVENT
On July 31, 2000, the Company sold its interest in an office building
for approximately $5,550,000, resulting in a gain of approximately
$550,000. Proceeds were used to reduce borrowings under the Company's
line of credit.
13
<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:
|X| the completion, and the timing and cost of completion, of properties
under development or redevelopment;
|X| the timing of lease-up and occupancy of properties;
|X| the availability and timing of financing; and
|X| 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
Formation of Service Corporation Subsidiary:
The Company is party to an agreement with the State of California Public
Employees' Retirement System ("CalPERS") pursuant to which the Company earns
asset management, leasing, acquisition, and disposition fees. In order to
maintain the Company's status as a REIT, it became necessary for the Company to
form a Service Corporation since the fee income that could be earned through
this arrangement might approach or exceed 5% of its gross revenues for
calendar year 2000. Accordingly, the Company formed BPP Services, Inc., a
Maryland corporation, and assigned to BPP Services 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. The
Company accounts for BPP Services under the equity method of accounting.
THE FOLLOWING PARAGRAPHS DESCRIBE THE MATERIAL CHANGES AND RESULTS OF OPERATIONS
FOR THE THREE MONTHS ENDED JUNE 30, 2000 COMPARED TO THE THREE MONTHS ENDED JUNE
30, 1999:
The results of operations for the three months ended June 30, 2000 resulted in a
net loss of $3,723,000 as compared to Income Available to Common Stockholders of
$2,401,000 for the second quarter of 1999. This decrease was primarily
attributable to lower revenues resulting from asset sales occurring subsequent
to June 30, 1999, a decrease in lease termination fees, lower acquisition fee
income, an increase in borrowing costs, an increase in rental operating and
general and administrative expenses and litigation expenses. In addition, the
1999 results were negatively impacted by an impairment write-off.
Total revenues decreased $4,322,000. Rental Revenues decreased $2,642,000 as a
result of Asset Sales completed subsequent to March 1999, and a decrease in
lease termination fees of $736,000. Management Fee income decreased
$1,582,000 as a result of less fee income related to the Company's joint
venture with CalPERS and the formation of BPP Services, Inc.
14
<PAGE>
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, revenues for the three month periods
ended June 30, 2000 and 1999 would have been reduced by approximately $89,000
and $141,000, respectively.
Interest expense increased $979,000 primarily as a result of an increase in
interest rates and the refinancing of the Company's line of credit. Interest
capitalized in conjunction with development and expansion projects was
$1,616,000 for the second quarter of 2000, compared with $1,100,000 during
the second quarter of 1999. Total debt outstanding on June 30, 2000 and the
related weighted average interest rate were $568,409,000 and 8.09%,
respectively (exclusive of $14,486,000 of fixed mortgage debt in
unconsolidated subsidiaries), compared with $595,831,000 and 7.37%,
respectively, at June 30, 1999.
Rental operating expenses decreased approximately $1,013,000 primarily due to
asset sales completed subsequent to March 30, 1999, and the formation of BPP
Services, Inc. in March 2000.
General and administrative expenses increased $553,000 primarily as a result of
the increased level of activity related to the Company's joint venture agreement
with CalPERS and an expense associated with a severance agreement related to
the resignation of the Company's Chief Operating Officer in the amount of
$250,000.
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 a tenant of a Company owned property out-of-pocket losses, and
separately awarded the tenant future lost profits. The Company has challenged
the award for net lost profits as duplicative, and expects the Court will
enter Judgment after September 5, 2000, upon deciding this issue. The
judgment ultimately will include an additional sum for partial reimbursement
of the tenant's attorneys' fees and costs. Once judgment is entered, the
Company may seek to modify or vacate the judgment, and may also appeal.
During the quarter ended June 30, 2000 the Company accrued and incurred
litigation expenses of $2,400,000 related to this lawsuit. There can be no
assurance as to the final outcome of any post-trial motions or appeal. The
Company may incur additional expenses in future periods depending on the
judgment entered.
Depreciation and amortization expenses decreased $276,000 as a result of asset
sales partially offset by the impact of portions of certain development and
redevelopment projects being placed into service.
15
<PAGE>
Income from Unconsolidated Subsidiaries decreased $454,000 primarily as a
result of the Company's sale of its equity interest in BPP Retail, LLC.
The second quarter 2000 results were partially impacted by a Gain on Sales of
Real Estate of $394,000 as a result of the following two sales:
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 a loss of approximately $19,000. 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 $413,000.
Proceeds were used to repay mortgage debt secured by the center and to reduce
borrowings under the Company's Credit Facility.
Results for the second quarter of 1999 were negatively impacted by an impairment
write-off in the amount of $1,200,000 related to an office building.
THE FOLLOWING PARAGRAPHS DESCRIBE THE MATERIAL CHANGES AND RESULTS OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 2000 COMPARED TO THE SIX MONTHS ENDED JUNE 30,
1999:
The results of operations for the six months ended June 30, 2000 resulted in a
net loss of $3,803,000 as compared to Income Available to Common Stockholders of
$2,712,000 for the first six months of 1999. This decrease was primarily
attributable to lower revenues resulting from 1999 asset sales, a decrease in
lease termination fees, an increase in rental operating and general and
administrative expenses, the costs associated with the Company's pursuit of
strategic alternatives and litigation expenses. These decreases were partly
offset by the 1999 charges for restructuring, abandoned acquisition costs,
impairment write off and the cumulative effect of change in accounting
principle.
Total revenues decreased $8,794,000 primarily due to asset sales completed
subsequent to March 1999, a decrease in lease termination fees of $1,400,000,
and the formation of BPP Services, Inc. in March 2000.
Revenues for the six month periods ended June 30, 2000 and 1999 would have been
reduced by approximately $177,000 and $261,000, respectively, if the company had
adopted SAB 101.
Interest expense increased $236,000 as a result of an increase in interest
rates and the refinancing of the Company's line of credit. Interest
capitalized in conjunction with development and expansion projects was
$3,046,000 for the 2000 period, compared with $2,400,000 during the 1999
six-month period.
Rental operating expenses decreased $1,507,000 primarily as a result of
reduced operating expenses resulting from asset sales completed in 1999 and
the formation of BPP Services, Inc. in March 2000.
General and administrative expenses increased $1,045,000 primarily as a result
of the increased level of activity related to the Company's joint venture
agreement with CalPERS and an expense associated with a severance agreement
related to the resignation of the Company's Chief Operating Officer in the
amount of $250,000.
16
<PAGE>
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 a tenant of a Company owned property out-of-pocket losses, and
separately awarded the tenant future lost profits. The Company has challenged
the award for net lost profits as duplicative, and expects the Court will
enter Judgment after September 5, 2000, upon deciding this issue. The
judgment ultimately will include an additional sum for partial reimbursement
of the tenant's attorneys' fees and costs. Once judgment is entered, the
Company may seek to modify or vacate the judgment, and may also appeal.
During the six months ended June 30, 2000 the Company accrued and incurred
litigation expenses of $2,636,000 related to this lawsuit. There can be no
assurance as to the final outcome of any post-trial motions or appeal. The
Company may incur additional expenses in future periods depending on the
judgment entered.
Depreciation and amortization expenses increased $578,000 as a result of
portions of certain development and redevelopment projects being placed into
service, offset by the impact of asset sales.
Income from Unconsolidated Subsidiaries decreased $376,000 as a result of the
Company's sale of its equity interest in BPP Retail, LLC.
Results for the first six months of 1999 were negatively impacted by a change
in accounting of $1,866,000, an impairment write-off of $1,200,000 related to
an office building, a restructuring charge of $1,500,000, abandoned
acquisitions costs of $748,000 and costs associated with an unsolicited
proposal and pursuit of strategic alternatives. 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 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 during 1998.
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 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
17
<PAGE>
September 30, 1999. The remaining reserve for office closures ($289,554)
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 June 30, 2000:
<TABLE>
<CAPTION>
Original Restructuring
Restructuring Expenditures Reserve Reserve
Reserve Applied Reversed June 30, 2000
--------------- ---------------- --------------- ----------------
<S> <C> <C> <C> <C>
Personnel Related Costs $ 750,000 $ (630,000) $ (120,000) $ -
Office Closures 500,000 (310,446) 100,000 289,554
Write-off of Furniture and Equipment 250,000 (123,000) (127,000) -
--------------- ---------------- --------------- ----------------
Total $1,500,000 $(1,063,446) $ (147,000) $ 289,554
=============== ================ =============== ================
</TABLE>
Abandoned Acquisition Costs:
During the six months ended June 30, 2000, the Company recorded a $748,000
charge related to the abandonment of transactions in process prior to the AMB
portfolio acquisition.
Costs Associated with Unsolicited Proposal and Pursuit of Strategic
Alternatives:
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 the 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 had entered into numerous
confidentiality agreements with potential bidders.
Subsequent to February 21, 2000, the Company exchanged due diligence
materials with a limited number of interested parties and continues to engage
in discussions with parties interested in pursuing various transactions. No
assurances can be given, however, that these discussions will lead to any
agreement with any of such parties or that any such agreement will be
completed.
18
<PAGE>
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 (the "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 the 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.
Despite the purported election by Westbrook of a Change of Control Preference,
there can be no assurance that there will be a change of control transaction
involving the Company or any assurances with respect to the terms upon which any
such transaction could be consummated. In addition, there can be no assurance
that the Company will continue paying regular quarterly distributions to its
Common Stockholders.
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 June 30,
2000, the Company incurred approximately $983,000 of these related costs.
FUNDS FROM OPERATIONS
June 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 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
19
<PAGE>
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 expansions, debt service
obligations, or other commitments and uncertainties. The Company believes that
in order to facilitate a clear understanding of the combined historical
operating results of the Company, FFO should be examined in conjunction with net
income as presented in the consolidated financial statements and information
included elsewhere in this report.
For the three and six months ended June 30, 2000, diluted FFO decreased
$10,485,000 and $12,800,000, respectively, compared to the same periods in 1999.
Diluted FFO for the 2000 periods does not assume the conversion of the Company's
Preferred Stock and other common stock equivalents because such conversion would
be accretive to the Company. The decline in FFO is primarily attributable to
lower revenues resulting from asset sales during 1999, a decrease in lease
termination fees, an increase in rental operating and general administrative
expenses, an increase in borrowing costs, and an accrued litigation expense.
In addition, the six months ended June 30, 2000 results were impacted by the
Company's pursuit of strategic alternatives.
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 Six Months Ended
June 30, June 30,
----------------------------- --------------------------------
2000 1999 2000 1999
-------------- ---------------- ---------------- -----------------
<S> <C> <C> <C> <C>
Income (Loss) Available to Common Stockholders $(3,723) $ 2,401 $(3,803) $ 2,712
Adjustments:
Depreciation and Amortization of Real Estate and
Tenant Improvements 6,842 6,928 13,266 13,708
Impairment Write-Off - 1,200 - 1,200
Gain on Sales of Real Estate (394) - (394) -
Cumulative Effect of Change in Accounting
Principle - - - 1,866
-------------- ---------------- ---------------- -----------------
Funds from Operations-Basic $ 2,725 $ 10,529 $ 9,069 $ 19,486
Effect of Dilutive Securities:
Operating Partnership Units - 1,281 - 2,383
Convertible Preferred Stock - 1,400 - -
-------------- ---------------- ---------------- -----------------
Funds from Operations-Dilutive $ 2,725 $ 13,210 $ 9,069 $ 21,869
============== ================ ================ =================
</TABLE>
MATERIAL CHANGES IN FINANCIAL CONDITION
June 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 June 30, 2000, provides up to $176,263,000 in short term credit. At
June 30, 2000, borrowings of approximately $157,420,000 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 June 30, 2000 and
December 31, 1999, the average rate of interest on the advances under the line
of credit was approximately 9.19% and 8.30%, respectively. The GE Facility is
scheduled to
20
<PAGE>
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 June 30, 2000, there was $5,000,000
borrowed on this facility. The Union Bank Facility bears interest at a rate of
LIBOR plus 2.00% per annum and was scheduled to mature on September 1, 2000.
However, Union Bank has agreed to extend the maturity date for sixty days in
exchange for a principal reduction in the amount of $1,000,000.
At June 30, 2000, the Company had three construction loans outstanding with
various lenders (the "Construction Facilities"). The Company had approximately
$8,781,000 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 $40,144,000 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 $8,839,000 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.
There can be no assurance that the Company will be able to refinance or
replace 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 or replaced on terms that are as
favorable to the Company as the terms currently in effect.
The debt outstanding (exclusive of approximately $14,486,000 of debt in
unconsolidated subsidiaries) on June 30, 2000 and related weighted average rate
were $568,409,000 and 8.09%, respectively, compared to $538,830,000 and 7.73% on
December 31, 1999.
At June 30, 2000, the Company's capitalization consisted of $568,409,000 of debt
(excluding the Company's proportionate share of joint venture debt which is
approximately $3,621,500), $120,000,000 of preferred stock and preferred
Operating Partnership units, and $232,935,000 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 the shares of Common Stock on the New York Stock
Exchange at June 30, 2000 of $6.88), resulting in a debt to total market
capitalization ration of .62 to 1.0 compared to the ratio of .55 to 1.0 at
December 31, 1999. At June 30, 2000, the Company's total debt consisted of
$348,226,000 of fixed rate debt, and $220,183,000 of variable rate debt.
It is management's intention that the Company have access to the capital
resources necessary to expand and develop its business. Accordingly, the Company
may seek to obtain funds through additional borrowings and public offerings and
private placements of debt and equity securities.
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 deem relevant. With respect to the
third quarter of 2000, the Board of Directors will determine in August
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 paying regular quarterly distributions to the
holders of Common Stock at the current amount or at all.
At June 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.
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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.
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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. 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 has filed a motion asking the
Court to dismiss the suit. That motion is pending.
On June 14, 2000, The Schottenstein Stores Group, Inc. and certain of its
affiliates 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 alleges 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 the directors
filed a Motion to Dismiss all claims in the litigation, which motion remains
pending.
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 it.
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. 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 out-of-pocket losses, and
separately awarded the tenant future lost profits. The Company has challenged
the award for net lost profits as duplicative, and expects the Court will enter
Judgment after September 5, 2000, upon deciding this issue. The judgment
ultimately will include an additional sum for partial reimbursement of the
tenant's attorneys' fees and costs. Once judgment is entered, the Company may
seek to modify or vacate the judgment, and may also appeal. There can be no
assurance as to the final outcome of any post-trial motions or appeal. For the
three and six months ended June 30, 2000, the Company has expensed $2,400,000
and $2,636,000 respectively, in connection with this litigation. The Company may
incur additional expenses in future periods depending on the judgment entered.
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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.
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.
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(ii).1 Bylaws of the Company, as amended and restated on November 19,
1997 (incorporated by reference to the 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).
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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).
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).
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 April 10, 2000 (earliest event reported April 5,
2000): Item 5, press release announcing that Board of Directors rescheduled
the date of the Company's 2000 Annual Meeting of Stockholders to Tuesday,
September 12, 2000.
Form 8-K Report filed June 1, 2000 (earliest event reported May 31, 2000):
Item 5, regarding resignation of Chief Operating Officer, Joseph Wm. Byrne,
press release announcing that Board of Directors rescheduled the date of
the Company's 2000 Annual Meeting of Stockholders to Wednesday, October 18,
2000, and press release announcing second quarter dividend payable June 30,
2000.
Form 8-K Report filed June 15, 2000 (earliest event reported June 14,
2000): Item 5, press release regarding Burnham Pacific plans to oppose
Schottenstein's attempt to reschedule annual meeting.
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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 22, 2000// By: /s/ SCOTT C. VERGES
-------------------------- ----------------------------------------
Scott C. Verges, Chief Executive Officer
Date: //November 22, 2000// By: /s/ DANIEL B. PLATT
-------------------------- ----------------------------------------
Daniel B. Platt, Chief Financial Officer
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