ITEM 1. BUSINESS
GENERAL
Burnham Pacific Properties, Inc. (the "Company") is a fully-integrated real estate operating company which acquires, rehabilitates, develops and manages retail shopping centers on the West Coast. As of December 31, 1997, the Company owned interests in 61 retail shopping centers, 59 of which were fully operational, and two of which were in various stages of development. Fifty-four of the properties were located in California, six in Washington and 1 in New Mexico. At December 31, 1997, the Company also owned four office/industrial properties located in Southern California, which are considered non-strategic. Total Company owned-gross leasable area ("GLA") was approximately 8.5 million square feet.
The Company was originally incorporated as a California corporation in 1986 and in 1987 became the successor to a publicly-traded real estate limited partnership which was organized in 1963. The Company reorganized as a Maryland corporation in May 1997. The Company has elected to qualify as a REIT for federal income tax purposes.
OPERATING PARTNERSHIP FORMATION
The Company formed Burnham Pacific Operating Partnership, L.P. (the "Operating Partnership") under the Delaware Revised Uniform Limited Partnership Act in November 1997, and by year end had transferred to the Operating Partnership or subsidiaries of the Operating Partnership legal or beneficial ownership of substantially all of the real property and related personal property owned by the Company and its subsidiaries and of the beneficial
interest owned by the Company and its subsidiaries in any partnership or limited liability company that owns a direct or indirect interest in real property and related personal property. The Company intends that the Operating Partnership (including subsidiaries of the Operating Partnership) will be the vehicle through which the Company will own its current assets, will make its future acquisitions and generally conduct its business. Effective January 1, 1998, the Operating Partnership has become the employer and paymaster of all of the Company's employees. The Company's operating partnership structure (frequently called an "UPREIT Structure") provides sellers the opportunity to contribute properties to the Company (through the Operating Partnership) on a tax-deferred basis in exchange for limited partner units of the Operating Partnership. The Company believes that its ability to offer tax-deferred transactions to sellers will enhance its attractiveness to local owners and developers. References in this report to the "Company" include the Operating Partnership and other consolidated subsidiaries unless the context otherwise requires.
1995-1996 RESTRUCTURING
In October 1995, the Company appointed J. David Martin as its Chief Executive Officer and President and as a member of its Board of Directors. The Company simultaneously appointed Daniel B. Platt as its Chief Financial Officer and Chief Administrative Officer and James M. Kessler as Director of Development. Concurrently with these appointments, the Company acquired interests in certain retail development projects from Mr. Martin and certain affiliates ("The Martin Properties"). (For additional information regarding these projects, see "Properties - Development Properties" and "Real Estate - Development Properties" in Note 2 to the Financial Statements accompanying this report.)
In November 1995, new management developed, and the Board of Directors approved, a business plan for repositioning the Company which was executed in late 1995 and in 1996. The focus of this plan was to position the Company for future growth. The principal features of the plan included those discussed below.
The Company increased its financial flexibility by reducing its quarterly dividend, negotiating a new credit facility with increased borrowing capacity, negotiating a joint venture relationship with a major pension fund and developing a "DownReit" structure to pay for acquisitions with limited partnership units which are exchangeable for common stock.
The Company concluded that it should focus exclusively on the acquisition, rehabilitation, development and management of market/drug and promotional retail centers and diversify its geographic focus throughout California. Consistent with the new retail orientation, the Company disposed of five of its non-strategic office and industrial properties in 1996 and used the proceeds to pay down borrowings under its previous lines of credit.
The Company also increased its internal capabilities by internalizing the management of the majority of its portfolio, investing in new property management information systems, creating an acquisitions and dispositions group, internalizing the leasing of a significant portion of its portfolio, adding an experienced rehabilitations and development group and opening regional offices in Los Angeles and San Francisco.
During 1996, the Company engaged in development activities with respect to two of the Martin Projects. It substantially completed construction of Phase I of Hilltop Plaza in Richmond, California and began construction on 1000 Van Ness, a multi-use project in downtown San Francisco. See "Properties - Development Properties."
1997 ACTIVITIES
In 1997, the Company built on the same guiding principles that formed its October 1995 Business Plan while concentrating its efforts on the growth of its retail portfolio by acquiring 42 properties totaling 5.6 million square feet of Company-owned GLA for approximately $598.1 million. The acquisition activity was notable, particularly in the fourth quarter, with the acquisition of the six properties in the Pacific Northwest and the acquisition on December 31, 1997 of a portfolio of 20 California shopping centers (the "Golden State Properties") containing approximately 2.6 million square feet of Company-owned GLA. In addition, the Company sold its Pacific West Outlet Center which was considered to be non-strategic and sold 75% interests in Ladera Center and Margarita Plaza to California Urban Investment Partners, retaining a 25% interest in each center.
The Company continued its geographic diversification by expanding into the Pacific Northwest through the opening of offices in Portland and Seattle. The Company also strengthened its management team with the addition of two senior executives with a combined total of 64 years experience in retail real estate, much of it working for the type of retail companies that are the Company's anchor tenants.
The Company financed its acquisition activities through a variety of sources including the public issuance of common stock, the private issuance of preferred stock and Operating Partnership units, mortgage indebtedness, proceeds from the sale of non-strategic assets, the sale of interests in certain properties to third parties, and borrowings under credit facilities.
The Company's development and rehabilitations group completed one rehabilitation project, substantially completed the construction and leasing of the 1000 Van Ness project, and obtained final approval from its Board of Directors for the commencement of construction of the retail portion of the Downtown Pleasant Hill project. See "Properties - Development Properties."
Throughout 1997, the Company engaged in discussions concerning acquisitions and developments of retail properties that might be consistent with its business plan. Some of these discussions have resulted in an additional acquisition subsequent to year-end. See Note 18 - "Subsequent Events" to the accompanying Financial Statements. As a part of its ongoing business, the Company regularly engages in discussions with public and private real estate entities regarding possible portfolio or asset acquisitions or business combinations. See Item 7 "Management's Discussion and Analysis of Financial Condition and Results of Operations" for further discussions of various of the Company's activities during the year.
Golden State Properties Acquisition
Pursuant to the terms of the acquisition agreement (the "Contribution Agreement"), the then owners of the Golden State Properties (the "Golden State Contributors") contributed 20 shopping centers to the Operating Partnership in exchange for initial consideration of approximately $302.4 million. This initial consideration was comprised of approximately $50 million of Preferred Limited Partner Units ("Preferred Units") of the Operating Partnership and approximately $252.4 million in cash. The Company financed the cash portion of the purchase price through the privately negotiated sale of $70 million of Series 1997-A Convertible Preferred Stock ("Series A Preferred Stock") and the borrowing by a bankruptcy-remote subsidiary of the Operating Partnership of $150 million in first mortgage debt collateralized by 19 of the Golden State Properties and $32.4 million of additional borrowings under the Company's existing credit facility with Nomura Asset Capital Corporation. The mortgage debt bears interest at 6.76% annually (representing a spread of 95 basis points over the treasury bond rates of comparable maturities) and is fixed for the ten year term. The preferences and other economic terms of the Preferred Units are substantially identical to those of the Series A Preferred Stock. A description of certain terms of the Series A Preferred Stock, the Preferred units and the common units of the Operating Partnership (the "Common Units") is contained in Item 5 ("Market for Registrant's Common Equity and Related Stockholder Matters - Recent Issues of Unregistered Securities") of this report.
In addition, the Golden State Contributors have the right to receive additional consideration of up to $41.6 million for additional income resulting from the lease-up of certain specified portions of the Golden State Properties and construction and lease-up of certain additional space. The additional consideration, if any, will be paid out over an eighteen-month period. The Golden State Contributors have the option of taking the additional consideration in Common Units with the number of such Common Units to be the amount of such additional value divided by the then fair market value (as determined at the respective times of payment) of the Common Stock, subject to certain conditions. The Golden State Contributors will have the option of having the Company or the Operating Partnership immediately redeem such Common Units for cash. Any leases for the unleased and unbuilt space must adhere to certain standards as to use, creditworthiness and lease terms, with the Contributors responsible for all leasing costs and the Company retaining certain approval rights.
EMPLOYEES
At December 31, 1997, the Company had 72 employees.
PROPERTIES
Market/Drug centers comprise approximately 65% of the Company's retail portfolio. The Company defines Market/Drug centers as those that serve a fairly localized trade area and that offer an assortment of goods and services, such as groceries and drugs, designed to meet the day-to-day needs of consumers. Management believes that such centers are less susceptible to economic downturns because purchases from supermarkets and drug stores tend
to be less discretionary in nature, and further believes that supermarkets and drugstores are strong anchor tenants because of the regular, recurring nature of the shopping trips they generate. Because many supermarket and drug chains continue to adjust the average size of their stores, many of these centers also lend themselves to the Company's rehabilitation strategy.
Promotional centers comprise approximately 31% of the Company's retail portfolio. The Company defines promotional centers as those centers with multiple retailers as anchor tenants. The Company defines promotional retailers as retailers which typically offer convenience, a broad selection and low pricing on a fairly discrete category of retail merchandise, and limited amounts of non-anchor space. Such retailers are sometimes referred to as "category killers." Management believes that promotional retailers provide a broad base of potential tenants for 15,000 to 45,000 square-foot stores, typical of the Company's Promotional Centers, thereby mitigating its releasing risk.
In addition, the Company looks for Market/Drug and Promotional centers with an entertainment component (such as a multiscreen cinema), because the entertainment component typically brings additional traffic to the center during the evenings, extending the center's hours of operation.
The Company believes the characteristic common to these three retail property types is the ability to attract tenants that can offer value-priced products and services to a broad base of consumers. The Company defines value pricing as a combination of price, quality, convenience and service.
RETAIL PROPERTIES - At December 31, 1997, the Company's operating retail properties consisted of 45 Market/Drug centers, 10 promotional centers, one entertainment center, two convenience centers and one factory outlet center. These Properties range in size from approximately 9,000 square feet to approximately 517,000 square feet, which contained in the aggregate approximately 7,861,700 million square feet of Company-owned GLA. The majority of these Properties are located in California, including 14 in the San Diego region, 15 in the Los Angeles region and 21 in the San Francisco/Sacramento region. In addition, six Properties are located in the Pacific Northwest and one Property in New Mexico. The Company also owns interests in two Market/Drug Centers in unconsolidated subsidiaries.
Fifty-three of these operating retail Properties are owned by the Company (primarily through the Operating Partnership and subsidiaries) in fee, and 5 are held under long-term ground leases with expiration dates ranging from 2023 to 2089. In addition, the Company held a leasehold interest in a 44,300 square foot free-standing building. The Company leased these properties to approximately 1,148 different tenants and overall occupancy at year-end 1997 was approximately 91%. No single tenant accounted for as much as 10% of the Company's revenues for 1997.
OFFICE/INDUSTRIAL PROPERTIES - At December 31, 1997, the Company also owned four office properties located in Southern California, which are considered non-strategic. These Properties range in size from approximately 29,000 square feet to approximately 338,000 square feet and aggregated approximately 591,000 square feet of GLA. At December 31, 1997, all of the buildings were 100% leased.
DEVELOPMENT PROPERTIES - The Company also holds interests in two development properties as follows:
1000 VAN NESS, SAN FRANCISCO. Redevelopment of the historic 1000 Van Ness building and adjacent new construction in downtown San Francisco. At completion, the 209,000 square foot mixed-use facility will contain a 131,500 square foot entertainment component anchored by AMC Theaters and owned by the Company, and a residential component owned by a residential developer. Total project cost after the sale of a portion of the building to the residential developer is estimated to be $53.5 million. Completion is scheduled for the third quarter of 1998.
DOWNTOWN PLEASANT HILL, PLEASANT HILL. The Company has development rights to purchase various parcels of land and construct a market, promotional and entertainment anchored center containing approximately 360,000 square feet of GLA as part of the City of Pleasant Hill Downtown Pleasant Hill Redevelopment project. The Company estimates the total investment required to develop this project after the sale of various land parcels to other developers for residential development to be approximately $65 million. The Company began purchasing individual land parcels in late 1997 and anticipates that the project will be completed in late 1999.
The following table sets forth the completed, operating properties owned by the Company at December 31, 1997.
(1) Does not include two properties held through unconsolidated subsidiaries in which the Company holds 25% joint venture interests.
BANKRUPTCY REMOTE PROPERTIES
Twenty-six of the Company's Properties (listed in the table below), having a net book value of approximately $466,033,000 at December 31, 1997, (collectively, the "Bankruptcy Remote Properties" and, each a "Bankruptcy Remote Property") are wholly-owned by various "Bankruptcy Remote Entities" which are indirect subsidiaries of the Company. The assets of each Bankruptcy Remote Entity, including the respective Bankruptcy Remote Property or Properties owned by each, are owned by that Bankruptcy Remote Entity alone and are not available to satisfy claims that any creditor may have against the Company, its affiliates, or any other person or entity. No Bankruptcy Remote Entity has agreed to pay or make its assets available to pay creditors of the Company, any of its affiliates or any other person or entity. Neither the Company nor any of its affiliates has agreed to pay or make its assets available to pay creditors of any Bankruptcy Remote Entity (other than any agreement by a Bankruptcy Remote Entity to pay its own creditors). No affiliate of any Bankruptcy Remote Entity has agreed to pay or make its assets available to pay creditors of any Bankruptcy Remote Entity.
LEASE EXPIRATIONS OF THE COMPANY'S PORTFOLIO
The following table sets forth scheduled lease expirations for leases in effect as of December 31, 1997, for each of the next ten years for all of the Company's Properties. The tables assume that none of the tenants exercises renewal options or termination rights.
INDEBTEDNESS
The Company's total outstanding consolidated mortgage debt secured by interests in its properties (other than those properties secured under the Credit Facility) was $350,758,180 at December 31, 1997. The following table sets forth certain information regarding this debt.
__________________ (1) "Bankruptcy Remote Property" (2) Adjusted annually at February 1. (3) Balloon payment at maturity.
Additionally, at December 31, 1997, the Company had $105,887,700 and $74,981,500 outstanding under the secured and unsecured portions of its Credit Facility, respectively. The following properties secured the secured portion of the Credit Facility: San Diego Factory Outlet Center, Navajo Shopping Center, Santee Village Square, Poway Plaza, Meridian Village, Auburn Village, La Mancha Shopping Center, Independence Square, Santa Fe Springs, Central Shopping Center, Foothill Plaza and Fremont Hub. For a discussion concerning the Company's Credit Facility, see Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources."
In addition, the Company has a construction loan which matures in June 1998, which is secured by Hilltop Plaza. At December 31, 1997, $18,753,000 was outstanding under this loan at a rate of approximately 8.50%.
For additional information concerning debt secured by the Company's Properties, reference is made to Notes 2, 3, 4 and 5 to the Consolidated Financial Statements.
SIGNIFICANT PROPERTIES
Only one Property, The Plaza at Puente Hills, accounted for 10 percent or more of the Company's total revenues in 1997. No property accounted for 10 percent or more of the total assets of the Company at December 31, 1997.
THE PLAZA AT PUENTE HILLS represented 6% of the Company's total assets at December 31, 1997 and 13% of the Company's total 1997 revenues. As of December 31, 1997, annual base rentals ranged from $7.80 to $31.08 per square foot. At December 31, 1997, one tenant, IKEA Furniture, occupied more than 10% of the rentable square footage (150,000 square feet) at a base rental as of December 31, 1997 of $2 million per annum, for a term ending in 2007, with four five-year renewal options. The 1997 property tax rate was 1.83% resulting in a tax of approximately $1,300,000 (including special assessments), substantially all of which was reimbursed by tenants under their leases. Management believes that the Property is adequately covered by insurance. During the period 1993 to 1997, this Property has experienced the following average rental per square foot and occupancy percentage:
The following tabulation shows the expiration schedule of leases at the Plaza at Puente Hills as of December 31, 1997.
RISK FACTORS
This report contains forward-looking statements within the meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act. Actual events, developments and results could differ materially from those anticipated or projected in the forward-looking statements as a result of a number of factors, including those listed below and elsewhere in this document. However, because the Company operates in a rapidly changing environment, there can be no assurance that the following factors include all material risks to the Company at any given time. See "Forward-Looking Statements" at the beginning of this report.
GENERAL REAL ESTATE INVESTMENT RISKS
Real property investments are subject to a variety of risks. The yields available from equity investments in real estate depend on the amount of income generated and expenses incurred. If the Properties do not generate sufficient income to meet operating expenses, including debt service and capital expenditures, the Company's results of operations and ability to make distributions to its shareholders will be adversely affected. The performance of the economy in each of the areas in which the Company's Properties are located affects occupancy, market rental and vacancy rates and expenses, and, consequently, has an impact on the revenues from the Properties and their underlying values. The financial results of major local employers may have an impact on the revenues and value of certain of the Properties.
Revenues from the Company's Properties may be further adversely affected by, among other things, the general economic climate, local economic conditions in which the Properties are located, such as oversupply of space or a reduction in demand for rental space, the attractiveness of the Properties to tenants, competition from other available space, the ability of the Company to provide for adequate maintenance and insurance and increased operating expenses (including real estate taxes and utilities) which may not be passed through to tenants; and the expense of periodically renovating, repairing and re-leasing space. There is also the risk that as leases on the Properties expire, tenants will enter into new leases on terms that are less favorable to the
Company. Revenues and real estate values may also be adversely affected by such factors as applicable laws (e.g., the Americans With Disabilities Act of 1990 and tax laws), interest rate levels and the availability and terms of financing. In addition, real estate investments are relatively illiquid and, therefore, will tend to limit the ability of the Company to vary its portfolio promptly in response to changes in economic or other conditions.
Most of the leases of the Company's retail Properties, as is common with many multi-tenant shopping centers, provide for tenants to reimburse the Company for a portion (frequently based upon the portion of total retail space in the Property that is occupied by the tenant) of the common area maintenance, real estate taxes, insurance and other operating expenses of the Property. To the extent that a Property has vacant rentable space, not only will the Company be deprived of the base rent that it would receive if the vacant space were occupied, but the Company itself will have to bear the unreimbursed expense applicable to such vacant space. Likewise, such expenses are generally not reduced when circumstances cause a reduction in rental revenues from the Property. If a Property is mortgaged to secure the payment of indebtedness and if the Company is unable to meet its mortgage payments, a loss could be sustained as a result of foreclosure on the Property or the exercise of other remedies by the mortgagee. Likewise, if a Property suffers sustained reductions in revenues, the Company may sustain a writedown of the asset value and a related charge to earnings.
GEOGRAPHIC CONCENTRATION
The Company's Properties are all located on the West Coast with substantial concentration in the State of California, and within such state primarily in the San Diego County, greater Los Angeles and San Francisco Bay areas. This concentration of Properties subjects the Company to the strengths or weaknesses of the California economy and the aforementioned local economies in a number of ways. The performance of the economy in each locality affects occupancy, market rental rates and expenses and, consequently, has an impact on the revenues from the Company's Properties and their underlying values. The financial results of major local employers may have an impact on the revenues and value of certain of the Properties. A downturn in the economy of California in general or of any of these local economies could adversely affect the Company's results of operations and ability to make distributions to its shareholders. In that regard, certain areas of California (particularly the greater Los Angeles area) have in the past been adversely affected by reductions in defense spending, and certain other areas of California (particularly the San Francisco Bay area) may be substantially influenced by conditions in the high technology industries. Additionally, certain areas in California have been and remain subject to various natural disasters, including earthquakes and floods.
INVESTMENT IN SINGLE INDUSTRY
The Company's current strategy is to acquire interests only in retail shopping centers and related properties. As a result, the Company will be subject to risks inherent in investments in a single industry. The effects on cash available for distribution to the Company's shareholders resulting from a downturn in the retail industry might be more pronounced than if the Company's portfolio were more diversified as to property types.
Among the risks that the Company as an owner of Properties leased primarily to retail tenants may face are the volatile nature of the retail business and changes in consumer preferences, which may result in tenant failures or changes in the physical requirements of retailers that the Company may be required to accommodate in order to retain or attract tenants.
Retail chains may overexpand in the same general market area, thereby creating competition with their own stores that may be in one or more of the Company's Properties. Because many anchor tenants frequently have negotiating power to demand the exclusive or sole right to sell certain types of products in a shopping center, the existence of such rights may adversely limit the Company's ability to lease space in the center to retailers of potentially competing products. The foregoing and similar factors may affect the revenues, and resulting value, of the Company's Properties.
COMPETITION
Numerous retail properties compete with the Company's Properties in attracting tenants to lease space. Some of these competing properties are newer and better located or designed and may offer lower expenses or be better capitalized than the Company's Properties. The number of competitive commercial properties in a particular area could have a material adverse effect on the Company's ability to lease space in its Properties or at newly developed or acquired properties and on the rents charged.
Additionally, the Company may be competing for investment opportunities with entities which have substantially greater financial resources than the Company. These entities may generally be able to accept more risk than the Company can prudently manage. Competition may generally reduce the number of suitable investment opportunities offered to the Company and increase the bargaining power of property owners seeking to sell.
BANKRUPTCY AND FINANCIAL CONDITION OF TENANTS
At any time, a tenant of the Properties may seek the protection of the bankruptcy laws, which could result in the rejection and termination of such tenant's lease and thereby adversely affect the Company's results of operations and ability to make distributions to its shareholders. Although the Company has not experienced material losses from tenant bankruptcies, no assurance can be given that tenants will not file for bankruptcy protection in the future, or if any tenants file, that they will affirm their leases and continue to make rental payments in a timely manner. In addition, a tenant from time to time may experience a downturn in its business which may weaken its financial condition and result in the failure to make rental payments when due. If tenant leases are not affirmed following bankruptcy or if a tenant's financial condition weakens, the Company's results of operations and ability to make distributions to its shareholders may be adversely affected.
ACQUISITION AND DEVELOPMENT ACTIVITIES
The Company intends to acquire existing retail commercial properties to the extent that they can be acquired on acceptable terms and meet the Company's investment criteria, including the availability of suitable financing. Acquisitions of retail commercial properties entail general investment risks associated with any real estate investment, including the risk that investments will fail to perform as expected or that estimates of the cost of improvements to bring an acquired property up to standards established for the intended market position may prove inaccurate. The Company also faces the risk that its pre-acquisition investigation of the physical and legal attributes of properties that it acquires (e.g. concerning such matters as engineering and environmental condition, compliance with zoning and building codes, existence of easements,
nature of tenancies, lease terms, creditworthiness of tenants) will not reveal matters that the Company would expect to be aware of with respect to properties that it has owned and operated for a significant period of time.
The Company is pursuing certain commercial property development projects and expects to develop other projects. As a general matter, property development projects typically carry a higher, and sometimes substantially higher, level of risk than the acquisition of existing properties. For example, development projects generally require various governmental and other approvals, the receipt of which cannot be assured. Approvals frequently require undertakings for public infrastructure improvements or other activities to mitigate the effects of the proposed development, whose costs also cannot be assured. The Company's development activities will entail a variety of other risks, including the risk that funds will be expended and management time will be devoted to projects which may not come to fruition; the risk that construction costs of a project may exceed original estimates, possibly making the project economically unfavorable to operate or requiring a writedown of the carrying amount of the project; the risk that occupancy rates and rents at a completed project will be less than anticipated; and the risk that expenses at a completed development will be higher than anticipated. These risks may adversely affect the Company's results of operations and ability to make distributions to its shareholders.
The integration of a large number of acquisition and development properties into the systems and procedures of the Company presents a management challenge, and the failure to integrate such properties into the Company's operating structures could have a material adverse effect on the Company's results of operations and ability to make distributions to its shareholders.
DEPENDENCE ON KEY PERSONNEL
The Company is dependent on the efforts of its executive officers, J. David Martin, President and Chief Executive Officer of the Company, and Daniel B. Platt, Executive Vice President, Chief Financial Officer and Chief Administrative Officer of the Company, and the loss of their services could have an adverse affect on the operations of the Company. The Company has an employment agreement with Mr. Martin, which is terminable by either party at will.
CONFLICTS OF INTEREST
The Company currently has various development projects which it acquired from its President and Chief Executive Officer, J. David Martin, concurrently with Mr. Martin's appointment as President and Chief Executive Officer in 1995. While the Company has adopted procedures for decision-making with respect to such projects (including Mr. Martin's absence from Board of Directors meeting discussions involving such projects), nevertheless the arrangement could result in conflicts of interest in one or more of the projects.
CONSEQUENCES OF FAILURE TO QUALIFY AS A REIT
The Company has elected to qualify as a REIT under the Code. Although the Company believes that it has operated in a manner which satisfies the REIT qualification requirements since 1987, no assurance can be given that the Company's qualification as a REIT will not be challenged by the Internal Revenue Service for taxable years still subject to audit or that the
Company will continue to qualify as a REIT in future years. A REIT generally is not taxed on distributed income so long as it distributes to its shareholders at least 95% of its real estate investment trust taxable income currently. Qualification as a REIT involves the satisfaction of numerous requirements (some on an annual or quarterly basis) established under highly technical and complex Code provisions for which there are only limited judicial or administrative interpretations and involves the determination of various factual matters and circumstances not entirely within the Company's control. If in any taxable year the Company were to fail to qualify as a REIT, the Company would not be allowed a deduction for distributions to shareholders in computing taxable income and would be subject to federal income tax on its taxable income at regular corporate rates. Unless entitled to relief under certain statutory provisions, the Company would also be disqualified from treatment as a REIT for the four taxable years following the year during which qualification was lost. As a result, the funds available for distribution to the Company's shareholders would be reduced for each of the years involved. Although the Company currently intends to operate in a manner designed to qualify as a REIT, it is possible that future economic, market, legal, tax or other considerations may cause the Company to fail to qualify as a REIT or may cause the Company's Board of Directors to revoke the REIT election.
ENVIRONMENTAL MATTERS
Under various federal, state and local laws, ordinances and regulations, an owner or operator of real estate is liable for the costs of removal or remediation of certain hazardous or toxic substances on or in such property. Such laws often impose such liability without regard to whether the owner or operator knew of, or was responsible for, the presence of such hazardous or toxic substances. The presence of such substances, or the failure to properly remediate such substances, may adversely affect the owner's or operator's ability to sell or rent such property or to borrow using such property as collateral. Persons who arrange for the disposal or treatment of such hazardous or toxic substances may also be liable for the costs of removal or remediation of such substances at a disposal or treatment facility, whether or not such facility is owned or operated by such person. In connection with the ownership (direct or indirect), operation, management and development of real properties, the Company may be considered an owner or operator of such properties or as having arranged for the disposal or treatment of hazardous or toxic substances and, therefore, may be potentially liable for removal or remediation costs. Certain environmental laws impose liability for release of asbestos-containing materials into the air, and third parties may seek recovery from owners or operators of real properties for personal injuries associated with asbestos-containing materials. The Company may be potentially liable for removal or remediation costs, as well as certain other costs, including governmental fines and costs related to injuries to persons and property, resulting from the environmental condition of its Properties, regardless of whether the Company itself actually contributed to such condition.
RISKS OF LEVERAGE
Like many owners of real estate, the Company relies on borrowings to assist it in acquiring, developing and holding its properties. The Company currently has a line of credit facility (the "Credit Facility") that has secured and unsecured portions and also owns various Properties that are encumbered by deeds of trust or mortgages to various lenders. Neither the Charter nor the Bylaws of the Company limit the amount of indebtedness the Company may incur. Although financial covenants contained in the Credit Facility limit the amount of additional indebtedness the Company may incur, those covenants currently would permit the Company to incur substantial additional indebtedness. Currently, the maximum committed
amount available under the Company's Credit Facility is $205 million. The Company has utilized the Credit Facility to finance certain recent acquisitions and may use the Credit Facility to fund the acquisition of additional properties and for other general corporate purposes. A portion of the Credit Facility is currently secured by certain Properties owned by the Company and the Credit Facility requires that the Company comply with a number of financial covenants. The Company is also obligated by other indebtedness secured by individual Properties. There can be no assurances that the Company will be able to meet its debt service obligations or to comply with the financial covenants in its debt instruments and, to the extent that it cannot, the lenders typically would be entitled to demand immediate repayment of the related indebtedness and to commence foreclosure proceedings against the property securing such indebtedness, thereby subjecting the Company to the risk of loss of some or all of its assets, including certain of its Properties. Adverse economic conditions could cause the terms on which borrowings become available to be unfavorable. In such circumstances, if the Company is in need of capital to repay indebtedness in accordance with its terms or otherwise, it could be required to liquidate one or more investments in Properties at unfavorable prices. The Company will be subject to the risks normally associated with debt financing, including the risk that the Company's cash flow will be insufficient to meet required payments of principal and interest, the risk of increases in interest rates on indebtedness (such as borrowings under the Credit Facility) which bears interest at floating rates, the risk that existing indebtedness cannot be refinanced or that the terms of such refinancing will not be as favorable as the terms of existing indebtedness. The Company's mortgage indebtedness (other than indebtedness under the Credit Facility) is generally nonrecourse to the Company. However, even with respect to nonrecourse mortgage indebtedness, the lenders may have the right to recover deficiencies from the Company in certain circumstances, including fraud, misapplication of funds and environmental liabilities.
A significant portion of the Company's mortgage debt is represented by mortgages or deeds of trust on properties ("Bankruptcy Remote Properties") for which title is held by separate subsidiaries of the Company ("Bankruptcy Remote Entities") whose sole purpose is to own and operate the specific Property or Properties and to make the borrowing secured by the specific mortgage or deed of trust. The mortgage notes secured by the Bankruptcy Remote Properties are typically purchased and sold by the lender as a part of what are commonly known as a Collateralized Mortgage Obligations ("CMO") or Collateralized Mortgage-Backed Securities ("CMBS") pool or program serviced by an independent servicing agent. The assets of each Bankruptcy Remote Entity, including the respective Bankruptcy Remote Property or Properties owned by each, are owned by that Bankruptcy Remote Entity alone and are not available to satisfy claims that any creditor may have against the Company, any of its affiliates, or any other person or entity. Neither the Company nor any of its affiliates has agreed to pay or make its assets available to pay creditors of any Bankruptcy Remote Entity (other than any agreement by a Bankruptcy Remote Entity to pay its own creditors). No affiliate of any Bankruptcy Remote Entity has agreed to pay or make its assets available to pay creditors of any Bankruptcy Remote entity.
INVESTMENTS IN JOINT VENTURES
The Company has two investments with an institutional investor, California Urban Investment Partners ("CUIP"), represented by a 25% managing member interest (with CUIP owning the remaining 75% managing member interest) in two separate limited liability companies. Each of the properties involved, Ladera Center and Margarita Plaza, was originally purchased by the Company, with CUIP acquiring its interest in the property during 1997 by reimbursing the Company for 75% of its original investment.
The Company may in the future acquire interests in limited and general partnerships, limited liability companies, joint ventures and other enterprises (collectively, "Joint Ventures") formed to own or develop real property or interests in real property. The Company may acquire minority interests in certain such Joint Ventures and also may acquire interests as a passive investor without rights to actively participate in management of the Joint Ventures. Investments in Joint Ventures involve additional risks, including the possibility that the other participants may become bankrupt or have economic or other business interests or goals which are inconsistent with those of the Company, that the Company will not have the right or power to direct the management and policies of the Joint Ventures and that such other participants may take action contrary to the instructions or requests of the Company and its policies and objectives or which could jeopardize the Company's ability to maintain its qualification as a REIT. Such investments may also have the potential risk of impasse on decisions, such as a sale, because neither the Company nor any of the other participants have full control over the Joint Ventures. The Company will, however, seek to maintain sufficient control of such Joint Ventures to permit the Company's business objectives to be achieved and its status as a REIT preserved, although there can be no assurance that it will be successful in doing so, which could have a material adverse effect on the Company and its ability to make distributions to shareholders. There is no limitation under the Company's organizational documents as to the amount of available funds that may be invested in Joint Ventures.
INSURANCE COVERAGE LIMITATIONS
The Company carries comprehensive general liability coverage and umbrella liability coverage on all of its Properties and with limits of liability which the Company deems adequate (subject to deductibles and subject to the limitations described below as insurance for losses caused by earthquake or flood) to insure against liability claims and provide for the cost of defense. Similarly, the Company is insured against the risk of direct physical damage in amounts the Company estimates to be adequate (subject to deductibles) to reimburse the Company on a replacement cost basis for costs incurred to repair or rebuild each Property, including loss of rental income during the reconstruction period. There are, however, certain types of extraordinary losses which may be either uninsurable, or not economically insurable. Should any uninsured loss occur, the Company could lose its investment in, and anticipated revenues from, a Property, which could have a material adverse effect on the Company and its ability to make distributions to shareholders. Currently the Company also insures certain of its Properties for loss caused by earthquakes in the aggregate amount of $50 million (subject to deductibles) and one of its Properties for loss caused by flood. Because of the high cost of this type of insurance coverage and the wide fluctuations in price and availability, the Company has made the determination that the risk of loss due to earthquake and flood does not justify the cost to increase this coverage any further under current market conditions. However, there can be no assurance that the occurrence of an earthquake, flood or other natural disaster will not adversely
affect the Company.
EFFECT OF VARIOUS MARKET FACTORS ON PRICE OF COMMON STOCK
A variety of factors may influence the price of the Company's Common Stock in public trading markets. The Company believes that investors generally perceive REITs as yield-driven investments and compare the annual yield from distributions by REITs with yields on various other types of financial instruments. Thus an increase in market interest rates generally could adversely affect the market price of the Company's Common Stock. Similarly, to the extent that the investing public has a negative perception of companies in the retail business or REITs that own and operate retail shopping centers and other properties catering to retail tenants, the value of the Company's Common Stock may be negatively impacted in comparison to shares of other REITs owning other types of properties and catering to different types of tenants.
The market price for the Common Stock may be affected by factors such as the announcement of new acquisitions or development projects by the Company or its competitors, quarterly variations in the Company's operating results or the operating results of the Company's competitors, changes in earnings (losses) or other estimates by analysts or reported results that vary from such estimates. In addition, the stock market may experience significant price fluctuations which could affect the market price of the Company's Common Stock which may be unrelated to the operating performance of the Company. Following periods of volatility in the market price of the Company's Common Stock, securities class action litigation could be initiated against the Company which could result in substantial costs and a diversion of management's attention and resources, which would have a material adverse effect on the Company and its ability to make distributions to shareholders.
ITEM 2.
ITEM 2. PROPERTIES
The Properties of the Company owned at December 31, 1997 are described under Item 1 "Business" and in Notes 2 and 3 to the Consolidated Financial Statements. The Company has entered into leases with third party landlords for the office space that it occupies for its regional offices. Such leases are generally on commercially standard terms and do not involve any commitments which management believes are material to its operations or financial condition.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
The Company is not presently involved in any material litigation nor, to its knowledge, is any material litigation threatened against the Company or its properties, other than routine litigation arising in the ordinary course of business.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of security holders during the fourth quarter of the fiscal year covered by this report.
PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
MARKET DATA
Common Stock of the Company is listed on the New York Stock Exchange under the symbol "BPP". The following table sets forth the high and low sale prices of the Common Stock, as reported by the New York Stock Exchange Composite Tape, and the per share dividends paid by the Company for each calendar quarter during 1997 and 1996.
At December 31, 1997, there were approximately 2,626 holders of record of the Company's Common Stock.
RECENT ISSUES OF UNREGISTERED SECURITIES
The following unregistered securities were issued by the Company (or by the Operating Partnership) during the fourth quarter of the fiscal year ended December 31, 1997. No registration statement for any of such issuances was required in connection with the issuances, because the transactions did not involve a public offering and were exempt under Section 4(2) of the Securities Act. Each of the following transactions occurred as of December 31, 1997.
(i) The Company issued 2,800,0000 shares of Series 1997-A Convertible Preferred Stock ("Series A Preferred Stock") at a cash price of $25 per share pursuant to the Stock Purchase Agreement dated as of December 5, 1997 ("Stock Purchase Agreement") among the Company, the Operating Partnership, Westbrook Burnham Holdings, L.L.C. and Westbrook Burnham Co-Holdings, L.L.C. (the latter two parties, collectively, the "Buyer"). The Series A Preferred Stock has a dividend yield of 8% and is convertible after a period of approximately
one year into Common Stock at a conversion price per share initially equal to $15.375, which price represents 107% of the $14.375 base price per share of the Common Stock at the time that the principal terms of the Series A Preferred Stock were negotiated. The Company used the proceeds of the sale to finance, in part, $70,000,000 of the cash portion of the initial consideration paid for the Golden State Properties.
(ii) The Operating Partnership issued an aggregate of 4,800,000 Series 1997-A Preferred Limited Partner Units ("Preferred Units"). 2,000,000 of such Preferred Units were issued at an agreed-upon price of $25 per Preferred Unit upon the contribution to the Operating Partnership of the Golden State Properties by investment funds affiliated with Blackacre Capital Group, L.P. and Highridge Partners (the "Contributors"), representing $50,000,000 of the initial consideration paid for the Golden State Properties. Each Preferred Unit has a distribution priority of 8% and each Preferred Unit issued to the Contributors is exchangeable after a specified period of time for a share of Series A Preferred Stock of the Company on a 1-for-1 basis. The distribution and liquidation preferences of the Preferred Units are substantially identical to the preferences of the Series A Preferred Stock. Concurrently, the Operating Partnership issued 2,800,000 Preferred Units to the Company, in order that distributions paid by the Operating Partnership with respect to its Preferred Units will provide the funds for the Company to pay distributions with respect to the Series A Preferred Stock.
(iii) The Operating Partnership issued 574,483 common limited partner units ("Common Units") to Simi Valley, LLC upon the contribution by Simi Valley, LLC to the Operating Partnership of Simi Valley Plaza. The issuance of such Common Units, which after a period of time and subject to various conditions may be put to the Operating Partnership on a 1-for-1 basis for shares of Common Stock of the Company or the cash value of such shares (such consideration to be at the election of the Company), represented approximately $8.3 million of the acquisition price of Simi Valley Plaza.
Incorporated herein by reference to the discussion under the indicated captions of the Company's Proxy Statement for its 1998 Annual Meeting of Stockholders is a description of the "Series A Preferred Stock of the Corporation", "Common Units of the Operating Partnership", "Preferred Units of the Operating Partnership", and "Other Provisions" of the Golden State Contribution Agreement and of the Stock Purchase Agreement with the Buyer, which descriptions are qualified in their entirety by reference to the terms of the specific securities, of the Golden State Contribution Agreement and of the Stock Purchase Agreement filed as exhibits listed in Item 14 of this Report.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data should be read with Management's Discussion and Analysis of Financial Condition and Results of Operations, which is included in Item 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS:
OVERVIEW
The following discussion should be read in conjunction with the consolidated financial statements and notes thereto appearing elsewhere in this Annual Report on Form 10-K. Historical results set forth in the consolidated statements of income contained in the consolidated financial statements, including trends which might appear, should not be taken as indicative of future operations. References herein to the Company include Burnham Pacific Operating Partnership L.P. (the "Operating Partnership") and the other directly and indirectly owned subsidiaries of the Company unless the context otherwise requires. Effective in the fourth quarter of 1997, the Company formed the Operating Partnership and transferred the fee or beneficial interest in substantially all of its assets to the Operating Partnership or subsidiaries of the Operating Partnership, thereby becoming what is commonly referred to as an "UPREIT."
The Company's strategic focus is the development, acquisition, rehabilitation, and operation of retail shopping centers on the West Coast. At December 31, 1997, the Company owned interests in 61 retail shopping centers, 59 of which were fully operational, and two of which were in various stages of development. Fifty-four of the properties are located in California, six in Washington, and one in New Mexico. As of December 31, 1997, the Company also owned four office/industrial properties located in Southern California, which are considered non-strategic.
As part of its ongoing business, the Company regularly engages in discussions with public and private real estate entities regarding possible portfolio or asset acquisitions or business combinations.
RESULTS OF OPERATIONS
COMPARISON OF 1997 TO 1996. NET INCOME increased $7,427,000 to $18,698,000 in 1997 from $11,271,000 in 1996. The increase in net income is primarily attributable to increased net operating income (total revenues less rental operating expenses and provision for bad debt) aggregating $15,157,000, resulting from new leasing and higher levels of expense reimbursement of core portfolio properties, the 42 shopping centers acquired or developed in 1997, an increase in income from unconsolidated subsidiaries of $223,000, and an increase in gain on sales of real estate of $3,598,000. The aforementioned increases to net income were partially offset by increases in depreciation and amortization, general and administrative expenses and interest expense of $4,025,000, $620,000, and $7,728,000, respectively.
Total REVENUES increased $20,860,000 to $68,174,000 in 1997 from $47,314,000 in 1996. This increase is primarily attributable to the acquisition activity in 1997.
RENTAL OPERATING EXPENSES increased $5,617,000 to $18,220,000 in 1997 from $12,603,000 in 1996. This increase is primarily attributable to the addition of new properties in 1997.
THE PROVISION FOR BAD DEBT increased $86,000 to $496,000 in 1997 from $410,000 in 1996. This increase is primarily attributable to the increased number of tenants resulting from the 1997 acquisitions.
INTEREST EXPENSE increased $7,728,000 to $18,472,000 in 1997 from $10,744,000 in 1996. The overall increase in interest expense is primarily related to the 1997 acquisitions. The debt outstanding (exclusive of $15,035,000 of fixed rate mortgage debt in unconsolidated subsidiaries) on December 31, 1997 and related weighted average interest rate was $550,380,000 and 7.56% respectively, compared to $178,452,000 and 8.0%, respectively on December 31, 1996. Interest capitalized in conjunction with development and expansion projects was $3,242,000 for 1997, as compared to $1,658,000 in 1996.
DEPRECIATION AND AMORTIZATION EXPENSES increased $4,025,000 to $15,275,000 in 1997 from $11,250,000 in 1996. The increase is primarily attributable to the growth related to the shopping centers acquired in 1997.
GENERAL AND ADMINISTRATIVE EXPENSES increased $620,000 to $3,035,000 in 1997 from $2,415,000 in 1996. The increase is attributable to the growth of the Company primarily related to the 1997 acquisitions and developments.
In February 1997, the Company disposed of a portion of its Plaza Rancho Carmel Shopping Center for $735,000. On June 11, 1997, title to the Company's Village Station Shopping Center was conveyed to the holder of the $3,900,000 non-recourse mortgage secured by the property. No gain or loss resulted from either of these events.
In December 1997, the Company disposed of its Pacific West Outlet Center for approximately $38,500,000, resulting in a gain of $5,896,000.
COMPARISON OF 1996 TO 1995. In the fourth quarter of 1995, the Company announced that its Board of Directors had approved a plan to dispose of a portion of the Company's non-strategic properties and to redeploy the proceeds from disposition into retail properties. As a result of the decision to dispose of these properties, the Company took a one-time non-cash charge of $21,373,000 in 1995 to write those assets down to their fair market value. During 1996, all five of the written-down properties were sold, resulting in a net gain on sale of $2,298,000. In 1995, the Company took additional one-time charges of $1,047,000 to write down goodwill, outdated computer equipment and a discontinued investment in a real estate advisor, and $2,500,000 related to the implementation of the Company's new strategic plan. There were no additional charges taken in 1996 related to the implementation of the plan. The $2,500,000 charge included a non-cash reduction in revenues of $1,278,000, primarily as a result of a change in the formula used to estimate common area maintenance reimbursements and percentage rents; and $975,000 in one-time general and administrative expenses related to the transition to the new management team, studies by new management of various organizational and operating policies of the Company, and organizational and strategic changes resulting from those studies, including the internalization of property management and the installation of a new property management operating system.
Including these charges, NET INCOME increased $23,989,000 from a net loss of $12,718,000 in 1995 to net income of $11,271,000 in 1996. If the one-time charges in 1995 were excluded, net income before gain on sales of real estate, minority interest, and
extraordinary item would have decreased $77,000 from $9,969,000 in 1995 to $9,892,000 in 1996. This decrease was net of several effects, but was primarily attributable to the expiration of the McDonnell Douglas lease and the subsequent sale of the building in June of 1996, the sale of the Beverly Garland Hotel in December of 1995, lower rents received on the Anacomp Building following the renegotiation of the Anacomp lease during the first quarter of 1996, and higher expenses related to the opening of regional offices in Los Angeles and San Francisco.
TOTAL REVENUES decreased $1,355,000 to $47,314,000 in 1996 from $48,669,000 in 1995. Excluding the one-time charges in 1995, the decrease was $2,633,000 from $49,947,000 in 1995 to $47,314,000 in 1996. This decrease is primarily attributable to the sales of the McDonnell Douglas Building and the Beverly Garland Hotel, and the renegotiation of the Anacomp lease.
RENTAL OPERATING EXPENSE increased $536,000 to $12,603,000 in 1996 from $12,067,000 in 1995. This increase is primarily attributable to the addition of new properties, the expense associated with carrying the vacancy in the Anacomp Building, and the opening of offices in Los Angeles and San Francisco.
THE PROVISION FOR BAD DEBT decreased $562,000 to $410,000 in 1996 from $972,000 in 1995. This decrease is primarily attributable to fewer credit problems amongst smaller tenants.
INTEREST EXPENSE decreased $1,216,000 to $10,744,000 in 1996 from $11,960,000 in 1995. This decrease is primarily attributable to a lower short-term interest rate environment in 1996 and slightly lower average outstanding borrowings under the Company's lines of credit.
DEPRECIATION AND AMORTIZATION EXPENSES decreased $1,867,000 to $11,250,000 in 1996 from $13,117,000 in 1995. This decrease reflects the elimination of depreciation and amortization charges on the properties sold in 1995 and 1996.
GENERAL AND ADMINISTRATIVE EXPENSES decreased $669,000 to $2,415,000 in 1996 from $3,084,000 in 1995. Exclusive of the one-time charges in 1995, general and administrative expenses would have increased $306,000 in 1996. This increase reflects the costs associated with the opening of offices in Los Angeles and San Francisco as well as other increases commensurate with the increasing level of operations in the Company.
In June 1996, the Company disposed of the McDonnell Douglas Building. Proceeds from the disposition totaled $9,301,000, resulting in a gain of $9,000. In July, 1996, the Company disposed of the Fireman's Fund and Highlands Plaza Buildings. Proceeds from the dispositions totaled $22,701,000, resulting in a gain of $291,000. In September, 1996, the Company disposed of its 11.85% interest in the building in which its corporate headquarters are located. Proceeds from the disposition totaled $1,939,000, resulting in a gain of $1,981,000. In October, 1996, the Company disposed of the Miramar Business Center. Proceeds from the disposition totaled $6,934,000, resulting in a gain of $17,000. Proceeds from these sales were used to reduce outstanding borrowings under the Company's lines of credit.
In November 1996, the Company redeemed all of its outstanding 8-1/2% convertible debentures due 2002, which aggregated $25,700,000 in principal amount, incurring an extraordinary loss from the early extinguishment of debt of $884,000.
FUNDS FROM OPERATIONS
The Company considers FUNDS FROM OPERATIONS (FFO) to be a relevant supplemental measure of the performance of an equity REIT since such measure does not recognize depreciation and certain amortization expenses as operating expenses. Management believes that reductions for these charges are not meaningful in evaluating income-producing real estate, which historically has not depreciated. FFO means net income (loss) (computed in accordance with generally accepted accounting principles), before gains (or losses) from debt restructuring and sales of property, plus depreciation of real property. FFO does not represent cash generated from operating activities in accordance with generally accepted accounting principles and is not necessarily indicative of cash available to fund cash needs and should not be considered as an alternative to net income as an indicator of the Company's operating performance or as an alternative to cash flow as a measure of liquidity. In 1997, FFO increased $6,543,000 to $27,009,000 as compared to $20,466,000 in 1996. The increase was net of several effects, but was primarily attributable to the increase in revenues from core portfolio properties, acquisitions, and developments. In 1996, FFO increased $552,000 to $20,466,000 from $19,914,000 in 1995. If the one-time charges in 1995 were excluded, the Company would have reported a decrease in FFO in 1996 of $1,948,000. This decrease was net of several effects, but was primarily attributable to the expiration of the McDonnell Douglas lease and the subsequent sale of the building in June of 1996, the sale of the Beverly Garland Hotel in December of 1995, lower rents received on the Anacomp Building following the renegotiation of the Anacomp lease during the first quarter of 1996, and higher expenses related to the opening of regional offices in Los Angeles and San Francisco. FFO as presented here may not be comparable to similarly titled measures used by other companies.
The Company's calculation of FFO is as follows (in thousands):
LIQUIDITY AND CAPITAL RESOURCES
The Company anticipates that cash flow from operating activities will continue to provide adequate capital for all payments on notes payable, recurring tenant improvements, and dividend payments in accordance with REIT requirements through the end of 1998. However, the Company will require additional sources of capital to finance the acquisition and development of additional properties. Sources of this additional capital may include cash on hand, borrowings under credit facilities and mortgage indebtedness, proceeds from sales of non-strategic assets, the sale of interests in certain properties to third parties, the issuance of Operating Partnership Units to sellers of properties and, to the extent market conditions permit, the issuance of debt or equity securities. However, there can be no assurances that capital necessary to finance future acquisitions and developments will be available on acceptable terms or at all. Cash flow from
operating activities for 1997 increased to $26,835,000 as compared to $17,521,000 in 1996. The increase is primarily attributable to the acquisitions and developments completed in 1997 and 1996 and new leasing of the core portfolio properties.
The Company satisfied its REIT requirement under the Internal Revenue Code of 1986 of distributing at least 95% of ordinary taxable income with distributions to shareholders of $21,856,000 in 1997. Accordingly, Federal income taxes were not incurred at the corporate level.
ACQUISITIONS AND DEVELOPMENTS
During 1997, the Company acquired interests in 42 shopping centers aggregating 5.6 million square feet of Company-owned GLA (gross leasable area) at an aggregate initial purchase price of approximately $598,100,000. Twenty of these properties (the "Golden State Properties") aggregating approximately 2.6 million square feet were acquired as a portfolio on December 31, 1997. The initial purchase price was $302,400,000 which was funded through $150,000,000 of secured indebtedness, $50,000,000 of Preferred Limited Partner Units of the Operating Partnership, $70,000,000 of Preferred Stock of the Company, and $32,400,000 of cash drawn principally from the Company's credit facility. The Company is obligated to pay up to $41,600,000 of additional consideration for additional value resulting from the lease-up of certain specified portions of the Golden State Properties and construction and lease-up of certain additional space. The additional consideration, if any, will be based upon incremental income and will be determined monthly until $11,600,000 has been paid and thereafter as of December 31, 1998 and June 30, 1999.
During 1997, the Company completed the first phase of a shopping center development in Richmond, California, totaling 183,500 square feet, at an aggregate cost of approximately $28,684,000. Construction also commenced on the development of a 131,500 square foot entertainment complex in San Francisco, California with a projected net cost of approximately $54,100,000. Completion is scheduled for mid-1998.
In December 1996, the Company purchased a 76,744 square foot shopping center in Huntington Park, California, for a purchase price of approximately $9,568,000. In February 1997, the Company entered into a joint venture agreement with California Urban Investment Partners, L.P. ("CUIP"), an investment entity of CalPers, wherein the Company contributed this property to an entity in which CUIP purchased a 75% interest in the venture and reimbursed the Company for 75% of its acquisition cost. The Company retained a 25% interest in the venture and continues to manage the property pursuant to a management agreement.
In July 1996, the Company entered into a joint venture agreement with CUIP into which the Company made an initial contribution of approximately $20,125,000 to fund the acquisition of a 184,684 square foot shopping center in Los Angeles, California. On August 1, 1997, CUIP funded its 75% interest in the venture which was in turn distributed to the Company. In addition to owning a 25% interest in the joint venture, the Company continues to manage the property pursuant to a management agreement.
FINANCING ACTIVITIES
The above acquisitions and developments were financed through cash provided from operating activities, revolving credit facilities, new mortgages, mortgages assumed, construction loans, issuance of Operating Partnership units, and issuance of Preferred and Common Stock of the Company. Total debt outstanding at December 31, 1997 was $550,380,000 compared to $178,452,000 at December 31, 1996. In 1997, the Company increased total debt by $371,928,000 primarily to fund acquisitions and developments.
During the third quarter of 1997, the Company obtained an increase in the borrowing capacity under its revolving credit facility from $135,000,000 to $205,000,000 of which $135,000,000 is to be secured by various mortgages and $70,000,000 is unsecured. At December 31, 1997, borrowings of approximately $180,869,000 were outstanding of which $105,888,000 and $74,981,000 (with the lender's consent) were outstanding under the secured and unsecured portions, respectively. The Company also negotiated a reduction of 25 basis points in the current interest rate to LIBOR plus 1.40% and LIBOR plus 1.50% on the secured and unsecured portions, respectively. In connection with the Company's transfer of substantially all of its assets to the Operating Partnership in December 1997, the Operating Partnership became the principal obligor under the credit facility which is now guaranteed by the Company. The credit facility is scheduled to mature in November 1998, with a one year extension option available.
At December 31, 1997, the Company had $18,753,000 outstanding under a construction loan agreement with Comerica Bank, secured by one of the Company's development properties. Borrowings under this loan bear interest at the Bank's Eurodollar base rate plus 2.00% or at its Prime rate. The loan is scheduled to mature in June 1998.
In May 1997, the Company issued 6,325,000 shares of Common Stock and received net proceeds of approximately $73,175,000 which it used to retire debt.
On December 31, 1997, the Company issued 2,800,000 shares of Series 1997-A Convertible Preferred Stock to affiliates of Westbrook Real Estate Partnership II, L.P., and Westbrook Real Estate Co-Investment Partnership II, L.P. and received $70,000,000 of proceeds. The Company used the proceeds to finance, in part, the acquisition of the Golden State Properties portfolio. The Series A Preferred Stock has a cumulative dividend yield of 8% and is convertible into Common Stock in 25% increments between the first and second anniversaries of the date of issuance at a conversion price per share initially equal to $15.375, subject to anti-dilution adjustments. At the same time, the Company issued 2,000,000 Series 1997-A Preferred Limited Partner Units (the "Preferred Units") of the Operating Partnership to Blackacre Capital Group, L.P. and Highridge Partners representing $50,000,000 of the initial consideration for the acquisition of the Golden State Properties portfolio. The Preferred Units were issued on terms comparable to the Company's Series A Preferred Stock and, after the passage of time and the satisfaction of other conditions, are exchangeable on a 1-for-1 basis for shares of Series A Preferred Stock. Although the acquisition of the Golden State Properties portfolio and the issuance of the Series A Preferred Stock and the Preferred Units (collectively "Preferred Securities") did not require approval by the Company's stockholders, the issuance upon the exchange or conversion of Preferred Securities of a number of shares of Common Stock equal to or exceeding 20% of the number of shares of Common Stock outstanding at the time of the acquisition does require such approval pursuant to NYSE regulations. Accordingly, if the Company's stockholders do not approve the issuance of such greater amount of Common Stock at a meeting to be held not later than June 30, 1998, the Company will be required to redeem for cash by that date an aggregate of
approximately 2,000,000 shares of Series A Preferred Stock and Preferred Units together having an aggregate stated value of approximately $50,000,000.
Portions of the consideration for six other shopping centers acquired during 1997 consisted of an aggregate of 576,100 Common Units of the Operating Partnership (or of other limited partnership subsidiaries of the Operating Partnership). Subject to the passage of time and the satisfaction of other conditions, each such Common Unit is exchangeable on a 1-for-1 basis for a share of Common Stock of the Company.
At December 31, 1997, the Company's capitalization consisted of $550,380,000 of debt (excluding the Company's proportionate share of joint venture mortgage debt which is approximately 25% of $15,035,000), $120,000,000 of Preferred Stock and Preferred Operating Partnership units, and $368,569,000 of market equity (market equity is defined as outstanding shares of Common Stock of the Company and Common Units of the Operating Partnership, held by partners of the Operating Partnership other than the Company, multiplied by the closing price of the shares of Common Stock on the New York Stock Exchange at December 31, 1997 of $15.3125) resulting in a debt to total market capitalization ratio of .53 to 1.0 compared to the ratios of .41 to 1.0 and .46 to 1.0 at December 31, 1996 and 1995, respectively. At December 31, 1997, the Company's total debt consisted of $349,140,000 of fixed rate debt, and $201,240,000 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. At December 31, 1997, the Company had effective shelf registration statements on file with the Securities and Exchange Commission relating to an aggregate of $321,728,000 registered and unissued debt and equity securities.
YEAR 2000 ISSUES
In the operation of its business the Company uses commercial computer software primarily purchased from or provided by independent software vendors. After an analysis of the Company's exposure to the impact of "year 2000 issues" (i.e. issues that may arise resulting from computer programs that use only the last two, rather than all four, digits of the year), management has determined that such commercial software is already substantially year 2000 compliant, and that completion of year 2000 compliance should not have a material impact on the Company's business, operations or financial condition. Management is not in a position to evaluate the extent (if any) to which any year 2000 issues that may affect the economy generally, or any tenants, suppliers or others with whom the Company does business, in particular would also be likely to affect the Company.
EFFECTS OF INFLATION
Substantially all of the Company's leases contain provisions designed to mitigate the adverse impact of inflation. Such provisions include clauses enabling the Company to receive percentage rentals based on tenants' gross sales, which generally increase as prices rise, and/or escalation clauses, which generally increase rental rates during the terms of the leases. Such escalation clauses are often related to increases in the consumer price index or similar inflation indices. Most of the Company's leases require the tenant to pay its share of operating expenses, including common area maintenance, real estate taxes and insurance, thereby reducing the Company's exposure to increases in these operating expenses resulting from inflation to the extent that its properties are occupied. The Company periodically evaluates its exposure to short-term interest rates and may, from time to time, enter into interest rate protection agreements which mitigate, but do not eliminate, the effect of changes in interest rates on its floating-rate loans.
CERTAIN CAUTIONARY STATEMENTS
Certain statements in this Annual Report on Form 10-K may be deemed to be "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21 E of the Securities Exchange Act of 1934, as amended. Such forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause the actual results of the Company to be materially different from historical results or from any results expressed or implied by such forward-looking statements. Such risks, uncertainties and other factors include, but are not limited to, the competitive environment in the retail industry, national and local economic conditions, changes in prevailing interest rates and in the availability of financing, the illiquidity of real estate investment in general, bankruptcy and financial condition of tenants, and environmental risks. Reference is made to RISK FACTORS contained elsewhere in this Annual Report on Form 10-K for a further discussion of these and other factors that might cause actual results to differ materially from those set forth in the forward-looking statements.
ITEM 7A.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES OF MARKET RISK
Not applicable.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEPENDENT AUDITORS' REPORT
We have audited the accompanying consolidated balance sheets of Burnham Pacific Properties, Inc. as of December 31, 1997 and 1996, and the related consolidated statements of income, stockholders' equity, and cash flows for each of the three years in the period ended December 31, 1997. Our audits also included the financial statement schedule listed in Item 14(a). These consolidated financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on the consolidated financial statements and financial statement schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Burnham Pacific Properties, Inc. as of December 31, 1997 and 1996, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1997, in conformity with generally accepted accounting principles. Also, in our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly in all material respects the information set forth therein.
//Deloitte & Touche LLP// San Diego, California
February 12, 1998
BURNHAM PACIFIC PROPERTIES, INC. CONSOLIDATED BALANCE SHEETS DECEMBER 31, 1997 AND 1996 (in thousands, except share amounts)
See the Accompanying Notes
BURNHAM PACIFIC PROPERTIES, INC. CONSOLIDATED STATEMENTS OF INCOME FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995 (in thousands, except share and per share amounts)
See the Accompanying Notes
BURNHAM PACIFIC PROPERTIES, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY For the Years Ended December 31, 1997, 1996 and 1995 (in thousands, except share amounts)
See the Accompanying Notes
BURNHAM PACIFIC PROPERTIES, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995 (in thousands)
BURNHAM PACIFIC PROPERTIES, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995 (in thousands) (continued)
See the Accompanying Notes
BURNHAM PACIFIC PROPERTIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1997, 1996 and 1995
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization
Burnham Pacific Properties, Inc. (the "Company") is a fully integrated, self-managed real estate company which acquires, rehabilitates, develops and manages retail properties on the West Coast. On November 14, 1997, the Company formed Burnham Pacific Operating Partnership, L.P. (the "Operating Partnership") under the Delaware Revised Uniform Limited Partnership Act, and subsequently transferred to the Operating Partnership legal or beneficial ownership of substantially all of the real property and related personal property owned by the Company and its subsidiaries and of the beneficial interest owned by the Company and its subsidiaries in any partnership or limited liability company that owns a direct or indirect interest in real property and related personal property. The Operating Partnership is the vehicle through which the Company will own its current assets, will make its future acquisitions, and generally conduct its business.
As of December 31, 1997, the Company owns an approximately 84% economic interest in the Operating Partnership and is its sole general partner.
The Company, primarily through the Operating Partnership and subsidiaries of the Operating Partnership, owns interests in 59 retail operating properties located in California, Washington and New Mexico as of December 31, 1997. The Company also owns interests in two retail projects in various stages of development, as well as four industrial and office properties located in Southern California. The Company has elected to qualify as a real estate investment trust ("REIT") for Federal income tax purposes.
Basis of Presentation
The accompanying consolidated financial statements include the accounts of the Company and the Operating Partnership and subsidiaries of the Operating Partnership. All significant intercompany balances and transactions have been eliminated in consolidation.
The 16% limited partner interest in the Operating Partnership not owned by the Company is reflected in these financial statements as minority interest.
Use of Estimates
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Real Estate
Real Estate is stated at cost or, in the case of real estate which management believes is impaired, at the lower fair value of such properties. Additions, renovations and improvements are capitalized. Maintenance and repairs which do not extend asset lives are expensed as incurred. Depreciation is computed using the straight-line method over estimated useful lives ranging from 14 to 30 years for buildings, 2 to 17 years for improvements, and 3 to 10 years for furniture, fixtures and equipment.
Amortization
Deferred loan fees, direct lease costs and certain other costs are amortized using the straight-line method over the related estimated life.
Straight-Line Rent
As of December 31, 1997 and 1996, approximately $2,463,000 and $1,793,000, respectively, of straight-line rent is included in Other Assets.
Income Taxes
Income taxes have not been provided as the Company believes that it has met all requirements in 1997, 1996 and 1995 to qualify as a REIT under Internal Revenue Code Sections 856-860 including the distribution of at least 95% of ordinary taxable income to stockholders. Taxable income differs from net income for financial reporting purposes principally because of differences in the timing of recognition of interest, depreciation, rental revenue, and sales of assets. The reported amounts of the Company's net assets at December 31, 1997 was greater than their tax basis for Federal purposes by approximately $32,143,000.
Net Income (Loss) Per Share
Net income (loss) per share is calculated using the weighted average number of shares outstanding during each year. In February of 1997, the Financial Accounting Standards Boards (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 128, Earnings Per Share (EPS). This statement requires the presentation of earnings per share to reflect both "Basic EPS" and "Diluted EPS" on the face of the income statement.
In general, Basic EPS excludes dilution created by stock equivalents and is a function of the weighted average number of common shares outstanding for the period. Diluted EPS does reflect the potential dilution created by stock equivalents as if such equivalents were converted into common stock and is calculated in substantially the same manner as fully Diluted EPS illustrated in APB Opinion Number 15, "Earnings Per Share."
The following tables are the reconciliations from the basic to the diluted EPS computations for "net income (loss) before extraordinary item" for 1997, 1996 and 1995 (dollars except per share amounts in thousands):
Options to purchase 230,877 shares at price ranges of $15.20 to $18.88 per share were outstanding as of December 31, 1997, but were not included in the computation of diluted EPS because the options' exercise price was greater than the market price of the common stock of the Company.
Subsequent to December 31, 1997, the Company's Board of Directors granted options for 669,500 shares at exercise prices of $12.50 to $14.50 per share (See Note 18).
Cash and Cash Equivalents
For purposes of reporting cash flows, cash and cash equivalents include cash and certificates of deposit with original maturities of less than 90 days.
Restricted Cash
Restricted cash is required to be held in escrow accounts as specified by the terms of certain of the Company's Notes Payable at December 31, 1997. The restricted cash is to be used to pay for insurance, taxes and capital expenditures pertaining to the related real estate that collateralize the notes payable.
Financial Instruments
The carrying values reflected in the consolidated balance sheets at December 31, 1997 and 1996 reasonably approximate the fair values for cash and cash equivalents, receivables, accounts payable, and line of credit advances. In making such assessment, the Company has utilized discounted cash flow analyses, estimates, and quoted market prices as appropriate. At December 31, 1997, the Company estimated that the fair value of notes payable was lower than their carrying value by approximately $9,736,000 and at December 31, 1996 the Company estimated that the fair value of notes payable was higher than their carrying value by approximately $2,100,000.
Accounting for Impairments
In the fourth quarter of 1995, the Company adopted Statement of Accounting Standards Number 121 (FAS 121), "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of." FAS 121 requires that assets to be held and used be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset in question may not be recoverable (see Note 8).
Redeemable Securities
Because the Company has a contingent obligation (see Note 10) to redeem 1,126,386 shares of its 2,800,000 shares of Series 1997-A Convertible Preferred Stock outstanding, the value of such potentially redeemable shares of approximately $28,160,000 is not included in Stockholders' Equity.
Reclassifications
Certain of the 1996 and 1995 amounts have been reclassified to conform to the 1997 presentation.
2. REAL ESTATE
SUMMARY: Real Estate is summarized as follows (in thousands):
The real estate is leased to tenants under leases expiring at various dates through 2047. Certain of these leases contain provisions for rent increases based on cost-of-living indices and certain leases contain renewal options of up to 55 years. Future minimum rental income to be received by the Company under the terms of these operating leases is as follows as of December 31, 1997 (in thousands):
Forty-nine properties, including the 26 Bankruptcy Remote Properties described in the following paragraph, having a net book value of approximately $758,693,000 at December 31, 1997, are pledged as collateral for notes payable described in Notes 4 and 5. In addition, the notes are secured by assignments of rents on such real estate. Certain real estate is located on land which is subject to noncancelable ground leases expiring at various dates through 2089 with minimum annual lease payments of approximately $1,520,000.
BANKRUPTCY REMOTE PROPERTIES: Twenty-six properties having a net book value of approximately $466,033,000 at December 31, 1997, (collectively the "Bankruptcy Remote Properties," and each a "Bankruptcy Remote Property") are wholly-owned by various "Bankruptcy Remote Entities." Each Bankruptcy Remote Entity is an indirect subsidiary of the Company. The assets of each Bankruptcy Remote Entity, including the respective Bankruptcy Remote Property or Properties owned by each, are owned by that Bankruptcy Remote Entity alone and are not available to satisfy claims that any creditor may have against the Company, its affiliates, or any other person or entity. No Bankruptcy Remote Entity has agreed to pay or make its assets available to pay creditors of the Company, any of its affiliates, or any other person or entity. Neither the Company nor any of its affiliates has agreed to pay or make its assets available to pay creditors of any Bankruptcy Remote Entity (other than any agreement by a Bankruptcy Remote Entity to pay its own creditors). No affiliate of any Bankruptcy Remote Entity has agreed to pay or make its assets available to pay creditors of any Bankruptcy Remote Entity.
DEVELOPMENT PROPERTIES: On September 28, 1995, the Company and various persons affiliated with The Martin Group of Companies, Inc., a San Francisco-based real estate development firm owned by J. David Martin, executed definitive documents relating to the Company's acquisition of interests in six retail properties in the San Francisco Bay area (the "Martin Properties"). Each of the Martin Properties is currently owned by a separate limited partnership of which the Company is general partner and Mr. Martin and various other persons affiliated with The Martin Group (collectively, including Mr. Martin, the "Martin Group Affiliates") are the limited partners. Each of the partnership agreements contemplates that the Company will acquire or develop a specified Martin Property through the relevant partnership and that upon completion and stabilization of rental revenues from the property, the limited partners will receive a number of limited partnership units determined as follows: (i) the annualized net operating income of the Property will be multiplied by 10 in order to arrive at a hypothetical value of the completed property, (ii) the cost of construction and other project costs will be deducted from such hypothetical value in order to "value" the equity interests of the limited partners in the Property, and (iii) such equity interest will be stated as a number of limited partnership units determined by dividing such limited partners' equity by $16. Each holder of limited partnership units will have the right to "put" such units to the partnership at a price equal to the then market value of an equivalent number of shares of the Company's Common Stock. As a result, the actual value which a holder of limited partnership units would be entitled to receive upon exercise of such "put" option will depend upon the market value of the Common Stock at the time, which may be more or less than $16 per limited partnership unit. If such "put" is exercised, the Company has the option of either purchasing the limited partnership units for cash or delivering one share of Common Stock for each limited partnership unit.
Each partnership agreement specifies the maximum number of limited partnership units that may be issued to the limited partners of that partnership. If the hypothetical equity value of any such partnership is determined to be less than originally estimated (either because project costs are higher than estimated or because stabilized net operating income is less than estimated or both), then the number of limited partnership units and the corresponding number of shares of Common Stock of the Company which may be exchanged for such units will be reduced. Other than to reflect a stock split or other capital adjustment of the shares of Common Stock, under no circumstances can the number of units be increased above the number specified in the applicable partnership agreement. Limited partnership units exchangeable for 44,848 shares of Common Stock have been issued to the Martin Group Affiliates as of December 31, 1997, and the Company had agreed to issue limited partnership units exchangeable for an additional 90,000 shares of Common Stock on January 1, 1998 (See Note 18 - Subsequent Events). At December
31, 1997 and 1996, these partnership units had a cost basis of $477,000 and $434,000, respectively and are reflected as minority interest in the accompanying consolidated financial statements. A maximum of 1,642,000 shares of Common Stock have been reserved for issuance upon exchange of the maximum number of 1,642,000 limited partnership units that may be issued with respect to the remaining four Martin Properties. In connection with each of the Martin Properties, the Company entered into a registration rights agreement with the limited partners of each limited partnership pursuant to which such limited partners will have the right to require the Company to register under the Securities Act the shares of Common Stock which are issued upon the exchange of limited partnership units for offer and sale to the public and to join in certain registrations of securities of the Company. The total project costs (exclusive of partnership units representing the equity interest of the limited partners) for the four remaining Martin Properties are estimated at approximately $175,000,000 of which approximately $73,000,000 has been expended through December 31, 1997.
3. ACQUISITIONS
During the year ended December 31, 1997, the Company and certain of its subsidiaries completed the acquisition of 42 retail shopping centers totalling approximately 5.6 million square feet of Company-owned GLA for an aggregate purchase price of approximately $598,100,000. Included in this acquisition activity was the acquisition on December 31, 1997, of a portfolio of twenty shopping centers (the "Golden State Properties") containing approximately 2.6 million square feet of gross leasable area, all of which are located in California, and the related financing thereof. Pursuant to the terms of the agreement to contribute dated as of December 5, 1997 (the "Contribution Agreement") by and among the Company and certain investment funds (the "Contributors"), on December 31, 1997, the Contributors contributed the Golden State Properties to the Company's Operating Partnership in exchange for initial consideration of approximately $302,400,000. Of this consideration $50,000,000 was in the form of 2,000,000 preferred limited partner units of the Operating Partnership ("Preferred Units") (see Note 10). The Company financed the cash portion of the acquisition price of the Golden State Properties through the privately negotiated sale of $70,000,000 of the Company's newly-designated and issued Series 1997-A Convertible Preferred Stock (see Note 10), the borrowing of first mortgage debt collateralized by nineteen of the Golden State Properties (see Note 4) and additional borrowings under its existing credit facility (see Note 5).
The Contributors have the right to receive additional consideration of up to $41,600,000 for additional value resulting from the lease-up of certain specified portions of the Golden State Properties and construction and lease-up of certain additional space. The additional consideration, if any, will be based upon incremental income and will be paid out over an eighteen-month period. The Contributors have the option of taking the additional consideration in common limited partner units of the Operating Partnership ("Common Units") with the number of such Common Units to be equal to the amount of such additional value divided by the then fair market value (as determined at the respective times of payment) of the common stock, of the Company (the "Common Stock"), except that $14.375 shall be deemed to be the fair market value for shares issued for the first $11,600,000 of such additional consideration. The Contributors will also have the option of having the Company or the Operating Partnership immediately redeem such Common Units for cash. Any leases for the unleased and unbuilt space must adhere to certain standards as to use, creditworthiness and lease terms, with the Contributors responsible for all leasing costs and the Company retaining certain approval rights.
During the year ended December 31, 1996, the Company acquired two retail shopping centers totalling approximately 261,400 square feet for a total purchase price of approximately $29,700,000.
4. NOTES PAYABLE
Notes payable are summarized as follows (in thousands):
Interest expense for the years ended December 31, 1997, 1996 and 1995 is reported net of capitalized interest totaling approximately $3,242,000, $1,658,000 and $97,000, respectively.
Principal maturities on the notes payable are summarized as follows (in thousands):
At December 31, 1997, the Company had $18,753,000 outstanding under a construction loan agreement, secured by one of the Company's development properties. Borrowings under this loan bear interest at the Bank's Eurodollar base rate plus 2.00% or at its prime rate (approximately 8.50% at December 31, 1997). The loan is scheduled to mature in June 1998, and borrowings are included in notes payable.
During February 1997, the Company paid off mortgage loans secured by one of its shopping centers with borrowings under the Company's credit facilities. In addition, the Company refinanced a variable rate mortgage loan secured by another property with a fixed rate mortgage loan. In connection with these extinguishments of debt, the Company recorded an extraordinary loss of $52,000.
On December 31, 1997, the Company, through a Bankruptcy Remote Entity (see Note 2), sold to Nomura Asset Capital Corporation a 8.33%, $135,040,000 mortgage promissory note due December 31, 2007 for $150,000,000, being the equivalent of a 6.76%, $150,000,000 mortgage promissory note with the same maturity. The Company has accounted for the sale of the mortgage note and the payment of principal and interest thereon as if the note were a 6.76% $150,000,000 mortgage promissory note. The first mortgage debt is collateralized by nineteen of the twenty Golden State Properties. The proceeds of this mortgage financing were used to finance, in part, the acquisitions of the Golden State Properties pursuant to the Contribution Agreement (see Note 3).
5. LINE OF CREDIT ADVANCES
In November 1996, the Company obtained a $90,000,000 revolving credit facility secured by certain real estate on which outstanding borrowings accrued interest at LIBOR (London Interbank Offer Rate) plus 1.65% and a $45,000,000 unsecured credit facility under which outstanding borrowings accrued interest at LIBOR plus 1.75%. During the third quarter of 1997, the Company obtained an increase in the borrowing capacity under its revolving credit facility from $135,000,000 to $205,000,000 of which $135,000,000 is to be secured by various mortgages and $70,000,000 is unsecured. The Company also negotiated a reduction of .25% in the interest rate to LIBOR plus 1.40% and LIBOR plus 1.50% on the secured and unsecured portions, respectively. At December 31, 1997, borrowings of approximately $180,869,000 were outstanding of which $105,888,000 and $74,981,000 (with the lender's consent) were outstanding under the secured and unsecured portions, respectively. The credit facility is scheduled to mature in November 1998, with a one year extension option available and is subject to various borrowing base and debt service coverage limitations.
6. CONVERTIBLE DEBENTURES
On March 6, 1992, the Company issued $75,000,000 of 8-1/2% Convertible Debentures due 2002 at $1,000 per Debenture. During November 1996, the Company redeemed the remaining balance of these Convertible Debentures at par ($25,700,000). Proceeds for the redemption were obtained from borrowings under the Company's credit facilities. In connection with this extinguishment of debt, the Company recorded an extraordinary loss of $884,000. Through December 31, 1995, 3,081,000 shares had been issued as a result of the conversion of $49,309,000 of these Debentures; there were no conversions during 1996.
7. GAIN ON SALES OF REAL ESTATE
At December 30, 1997, the Company sold the Pacific West Outlet Center. Proceeds from the disposition totaled approximately $38,500,000, resulting in a gain of approximately $5,896,000. Two other properties were disposed of without realization of gain or loss during 1997. During 1996, the Company disposed of the McDonnell Douglas Building, Highlands Plaza, the Fireman's Fund Building, the Miramar Business Plaza and its interest in the building which contains its corporate headquarters. Proceeds from the dispositions totaled approximately $40,874,000, resulting in a gain of approximately $2,298,000. During 1995, the Company disposed of A-Storage Place and the Beverly Garland Hotel. Proceeds from the dispositions totaled approximately $12,619,000, resulting in a gain of approximately $2,233,000. All such proceeds were used to reduce borrowings under the Company's credit facilities.
8. IMPAIRMENTS/WRITEDOWNS OF ASSETS
During the fourth quarter 1995, the Company announced that its Board of Directors had approved a plan to dispose of a portion of the Company's office portfolio and to redeploy the proceeds from disposition into target retail properties. As a result of the decision to dispose of these properties, the Company took a one-time non-cash charge of $21,373,000. Fair market value was based on estimated sales proceeds and discounted cash flows for the related properties. In addition, the Company took additional one-time charges of $1,047,000 to write down goodwill, outdated computer equipment, a discontinued investment in a real estate advisor, and $2,500,000 related to the implementation of the Company's new strategic plan. The $2,500,000
charge included a non-cash reduction in revenues of $1,278,000 primarily as a result of a change in the formula used to estimate common area maintenance reimbursements and percentage rents; and $975,000 in one-time general and administrative expenses related to the transition to a new management team, studies by new management of various organizational and operating policies of the Company, and organizational and strategic changes resulting from those studies including the internalization of property management and the installation of a new property management operating system.
9. DIVIDEND DISTRIBUTIONS
Based on information provided by the Company's regular tax advisor, the status of the dividends distributed for 1997, 1996 and 1995 for Federal income tax purposes is as follows:
10. ISSUANCE OF SECURITIES
SERIES 1997-A CONVERTIBLE PREFERRED STOCK: On December 31, 1997, the Company issued 2,800,000 shares of Series 1997-A Convertible Preferred Stock, par value $.01 per share (the "Series A Preferred Stock") in a privately-negotiated sale at a price of $25.00 per share. The Series A Preferred Stock has a cumulative dividend yield of 8%. On and after December 31, 1998, March 31, 1999, June 30, 1999, and September 30, 1999 (or earlier in the event of certain defined events), each holder of shares of Series A Preferred Stock will have the right to convert 25% of the shares of Series A Preferred Stock held of record by the holder into a number of shares of Common Stock equal to (i) the stated value plus the amount, if any, of the per share amount of outstanding dividends as of the effective time of the conversion, divided by (ii) the conversion price, initially equal to $15.375. After the fifth anniversary of the date of the first issuance of shares of Series A Preferred Stock, the Company may give notice of mandatory conversion of all of the outstanding Series A Preferred Stock if the value of the Common Stock (both on the day prior to the notice of conversion and on a value weighted basis over a period of time prior to such date) is greater than the initial conversion price; and after such notice all such outstanding shares shall be mandatorily converted into Common Stock, except that each holder of Series A Preferred Stock shall have the right, prior to the date established for such mandatory conversion, instead to cause the Company to redeem such holder's Series A Preferred Stock at its stated value plus accrued dividends to the redemption date multiplied by a percentage equal to 105% if the redemption date is prior to December 31, 2003, decreasing by 1% each year thereafter (but not less than 100% after December 31, 2007). The Company used the proceeds of the sale to finance, in part, the acquisition of the Golden State Properties (see Note 3).
COMMON STOCK: On May 2, 1997, the Company issued 6,325,000 shares of Common Stock at a public offering price of $12.375 per share. The shares were sold pursuant to a previously filed $200 million shelf registration statement. The net proceeds of the offering were used to reduce borrowings under the Company's credit facilities.
PREFERRED OPERATING PARTNERSHIP UNITS: On December 31, 1997, 2,000,000 Series 1997-A Preferred Limited Partner Units of the Operating Partnership (the "Preferred Units") were issued at a price of $25.00 per unit. After approximately a year and subject to certain conditions, Preferred Units are exchangeable at the option of the holder for Series A Preferred Stock on a 1-for-1 basis. Each Preferred Unit has substantially identical distribution and liquidation rights as each share of Series A Preferred Stock. Such Preferred Units are classified as minority interest at December 31, 1997. The Company used the proceeds of the sale to finance, in part, the acquisition of the Golden State Properties (see Note 3).
REDEMPTION CONTINGENCY: Under the rules of the New York Stock Exchange (on which the Company's Common Stock is listed), the number of shares of Common Stock which the Company may issue in connection with the conversion of Series A Preferred Stock (including shares of Series A Preferred Stock issuable upon the exchange of Preferred Units for such Series A Preferred Stock) is limited to a number that is less than 20% of the outstanding shares of Common Stock at December 31, 1997, unless the stockholders of the Company approve the issuance of Common Stock upon the conversion of all such Preferred securities. The Company intends to ask the holders of its Common Stock to approve, at the Company's 1998 Annual Meeting or a special meeting to be held not later than June 30, 1998, the issuance of Common Stock upon the conversion of all $120,000,000 of such Preferred securities. In the event that the stockholders do not approve such issuance, the Company will be obligated to redeem 1,126,386 shares of Series A Preferred Stock and 804,561 Preferred Units having an aggregate stated value of approximately $48,274,000 not later than June 30, 1998, in order to reduce the number of shares of Common Stock issuable upon conversion of the remaining unredeemed Preferred securities to less than 20% of the outstanding shares of Common Stock at December 31, 1997. Of this amount, $28,160,000 is classified as Preferred Stock, and the remainder is classified as Minority Interest.
ISSUANCE OF PARTNERSHIP UNITS; "PUT" RIGHTS OF COMMON UNITS: Under the partnership agreement of the Operating Partnership, whenever the Company issues any shares of Common Stock or Preferred Stock, the Company must contribute the proceeds of such issuance to the Operating Partnership and the Operating Partnership will issue the same number of Common Units or Preferred Units to the Company, so that the Company will at all times own the same number of Common Units (including units held by the Company as general partner as well as limited partner units owned by the Company) and Preferred Units as there are outstanding shares of Common Stock or Preferred Stock of the Company. Distributions by the Operating Partnership with respect to Preferred Units and Common Units provide the funds to enable the Company to make distributions to the holders of its Series A Preferred Stock and Common Stock. The partnership agreement also provides that, approximately one year after the issuance of Common Units (or earlier in the event of certain extraordinary transactions), the holder of each Common Unit other than the Company will have the right to require the Operating Partnership to redeem each Common Unit at a redemption price equal to the then market value of a share of Common Stock. Such redemption will be in cash, except that the Company may assume the redemption obligation and pay the redemption in form of shares of its Common Stock.
UNISSUED REGISTERED SECURITIES: As of December 31, 1997, the Company has registered an aggregate of $321,728,125 of unissued securities under various shelf registration statements.
11. PRICE RANGE OF COMMON STOCK
Market quotations are from the New York Stock Exchange Index. As of December 31, 1997, there were approximately 2,626 holders of record of the Company's shares.
12. STOCK OPTIONS
The Company has a stock option and incentive plan which expires in 2006 and is administered by the Compensation Committee of the Board of Directors. A maximum of 1,800,000 shares of Common Stock are reserved for issuance upon the exercise of options or other stock-based awards that may be granted under the plan. Options granted expire 10 years from the date of grant. The plan as revised in 1996 also provides for grants from such reserved shares to each non-employee director of the Company of restricted shares of the Company's Common Stock in lieu of cash compensation. Restricted stock vests evenly over a three year period or earlier upon such person's termination of service as director. At December 31, 1997, 174,659 shares had been purchased pursuant to the exercise of options or restricted stock granted under the plan, unexercised options for 1,361,377 shares are outstanding (of which 316,833 are subject to future vesting requirements), and options or other awards for 263,964 shares are available for future awards under the plan (see Note 18).
Activity under the stock option plan is summarized below:
During 1997, the Company repurchased 135,560 options for an average price of approximately $0.49 per option.
The following table summarizes information concerning options outstanding and exercisable at December 31, 1997:
Financial Accounting Standards Number 123, "Accounting for Stock-Based Compensation" ("FAS No. 123") was effective in 1996. FAS No. 123 requires either the recording or disclosure of compensation cost for stock-based employee compensation plans at fair value. The Company has adopted the disclosure-only provisions of FAS No. 123. Accordingly, no compensation costs have been recognized in 1997, 1996 or 1995. Had compensation cost for the Company's Stock Option Plan been recognized based on the fair value at the grant date for awards consistent with the provisions of FAS No. 123, the Company's net income (loss) and basic earnings (loss) per share would have been reflected as the pro forma amounts below:
The pro forma effect on net income for 1997, 1996 and 1995 is not representative of the pro forma effect on net income in future years because it does not take into consideration pro forma compensation expense related to grants made prior to 1995. No options were granted during 1997. The estimated fair value of options granted under the Company's stock option plan during 1996 and 1995 were $705,000 and $946,000, respectively, on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions: 8.0% dividend yield, volatility of 25%, risk free rate of return of 6.00% and expected lives of 5 years. The estimated fair value of options granted are subject to the assumptions made and if the assumptions changed, the estimated fair value amounts could be significantly different. The above weighted-average assumptions are an approximation of historical information and are not intended to represent future events or trends.
13. DIVIDEND REINVESTMENT PLAN
During 1995, the Company had a Dividend Reinvestment Plan which enabled stockholders to invest their dividends in newly issued shares at a 5% discount from "fair market value" (as defined in the Plan). For 1995, 222,894 shares were issued through the Plan. The Company suspended the direct discounted reinvestment portion of the Plan effective January 1, 1996.
14. REPURCHASE OF STOCK
During the second quarter of 1995, the Company purchased 94,500 shares of stock on the open market at an average price of $13.28.
15. TRANSACTIONS WITH RELATED PARTIES
The Company acquired two retail centers in July and December 1996, having a net book value of $30,221,000 at December 31, 1996, with the expectation that an institutional investor would ultimately acquire 75% interests in such centers by paying the Company 75% of its acquisition costs for these properties. On February 20, 1997 and August 1, 1997, the institutional investor funded $7,173,000 and $15,254,000, respectively, to acquire a 75% interest in each of the two retail centers. The Company is advised that an entity controlled by a former director of the Company holds an approximately 1.5% interest in, and is an advisor to, the institutional investor.
In April 1995, the Company entered into an agreement to contribute up to $650,000 as an investor in a real estate advisor organized to provide advisory services to investment vehicles acquiring real property located in the Republic of Mexico. The Company's chairman and two other unrelated individuals were the managers of, and individually owned interests in, the advisor. In November 1995, following the investment of $350,000 in the advisor, and in conjunction with the Board of Directors' determination to concentrate the Company's future activities on retail properties, the Company terminated the contribution agreement and wrote off its investment in the advisor.
The Company temporarily advanced the $200,000 purchase price for 16,000 shares of its Common Stock purchased during 1995 by each of three Company directors, at the then fair market value of such stock. The note of one director, for $197,000 bearing interest at the Company's cost of borrowing, remained outstanding at December 31, 1995, and, was fully repaid early in 1996. The sales to the directors were a part of a stock purchase program offered
to all Company employees which, except for the purchases by the three directors, was rescinded prior to the 1995 year-end.
For a description of transactions in which the Company's current president and chief executive officer was an interested party prior to his election to such positions and as a director, see "Development Properties" in Note 2.
16. RETIREMENT SAVINGS PLAN
The Company has a contributory Retirement Savings Plan. The maximum contribution is 15% of annual salaries of which up to 3% is matched by the Company up to 75% of employee contributions. The Company's contributions to this Plan for 1997, 1996 and 1995 were approximately $48,000, $33,000, and $29,000, respectively.
17. QUARTERLY FINANCIAL DATA (Unaudited)
Summarized quarterly financial data for 1997 and 1996 is as follows (in thousands, except per share amounts):
18. SUBSEQUENT EVENTS
On January 1, 1998, 90,000 limited partnership units exchangeable for 90,000 shares of Common Stock were issued to the Martin Group Affiliates in connection with the Company's acquisition of another Martin Property (see Note 2). The partnership units had a cost basis of approximately $1,440,000 and were included in accounts payable and other liabilities at December 31, 1997.
In January 1998, the Company obtained a $44,457,000 construction loan, secured by one of the Company's development properties. Borrowings under this loan bear interest at LIBOR plus 1.90% or at the lender's prime rate plus .50%. The loan is scheduled to mature in January 1999. The initial draw on January 9, 1998 was approximately $10,222,000.
On February 2, 1998, the Company purchased a retail shopping center for $14,825,000. The acquisition was financed with borrowings under a new $7,000,000, 7.45%, 7-year mortgage loan secured by the retail shopping center, with the balance coming from borrowings under the Company's credit facility.
On January 14, 1998, the Company's Board of Directors, subject to stockholder approval at the 1998 Annual Meeting, voted to increase the number of shares of Common Stock for which awards may be granted under the stock option and incentive plan (see Note 12) by 1,150,000 shares. Subject to the approval of such increase, the Compensation Committee concurrently granted options for an aggregate of 525,000 shares of Common Stock to certain key executives, exercisable at $12.50 per share, the current value of the Corporation's stock on the New York Stock Exchange at the time such options were approved in December, 1996. On January 14, 1998, the Compensation Committee also granted options for an aggregate of 144,500 shares of Common Stock to other employees of the Company at an exercise price of $14.50 per share, the closing price of the Corporation's stock on that day.
19. PRO FORMA FINANCIAL INFORMATION
As discussed in Notes 3 and 7, the Company and certain of its subsidiaries acquired and disposed of interests in certain properties during 1997 and 1996. The acquisitions have been accounted for as a purchase. The operating results of the acquisitions and disposals have been included in the consolidated statements of income from the date of acquisition and disposal.
The following unaudited supplemental pro forma operating data is presented for the years ended December 31, 1997 and 1996 as if each of the following transactions had occurred as of the beginning of the respective periods: (i) the acquisitions and dispositions by the Company of all properties in 1997 and 1996, (ii) the completion of the sale by the Company of 6,325,000 shares of Common Stock in May 1997 (see Note 10) and (iii) the redemption of $25,700,000 aggregate principal amount of 8.5% Convertible Debentures (See Note 6).
The unaudited pro forma financial information is presented for informational purposes only and may not be indicative of what actual results of operations would have been had the transaction occurred as of January 1, 1997 or 1996, nor does it purport to represent the results of future operations. (Amounts in thousands, except per share amounts.)
PART III
ITEMS 10 THROUGH 13.
Incorporated by reference to the following sections of the Company's Proxy Statement for its 1998 Annual Meeting: "Nominees for Directors," "Executive Officers," "Beneficial Ownership of Management," "Beneficial Ownership of Non-Management," and "Executive Compensation" under "PROPOSAL I-ELECTION OF DIRECTORS" and "CERTAIN TRANSACTIONS WITH MANAGEMENT."
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The following financial statements and Independent Auditors' Report are included under Item 8.
Independent Auditors' Report.
Consolidated Balance sheets as of December 31, 1997 and 1996.
Consolidated Statements of Income for each of the three years in the period ended December 31, 1997.
Consolidated Statements of Stockholders' Equity for each of the three years in the period ended December 31, 1997.
Consolidated Statements of Cash Flows for each of the three years in the period ended December 31, 1997.
Notes to Consolidated Financial Statements, December 31, 1997, 1996, and 1995.
The following Supplemental Financial Schedules are included herein:
III - Real Estate and Accumulated Depreciation.
All other schedules are omitted because of the absence of the conditions under which they are required or because the required information is included in the financial statements and notes.
(b) REPORTS ON FORM 8-K
(i) Form 8-K Report filed November 17, 1997 (earliest event reported August 15, 1997): Item 5, regarding acquisitions of Gateway Retail Center, Mountaingate Plaza and the first acquisitions under the Powell Portfolio and the letter of intent relating to the Golden State Acquisition; and Item 7, exhibit relating to the Golden State Acquisition.
(ii) Form 8-K Report filed December 16, 1997 (earliest event reported November 7, 1997): Item 5, regarding Golden State Properties Portfolio Transactions, Powell Portfolio Acquisition, Mountaingate Plaza, Ernst Leasehold Portfolio Acquisition, Simi Valley Plaza Acquisition, Meridian Village Shopping Center Acquisition, Disposition of Pacific West Outlet Center, Operating Partnership Formation, Designation of Series A Preferred Stock and Description of Operating Partnership Units; and Item 7, regarding Financial Statements, Pro Forma financial information, and exhibits.
(iii) Form 8-K Report filed January 14, 1998 (earliest event reported December 31, 1997): Item 2, regarding Golden State Properties Acquisition and financing; Item 5, regarding substantial completion of transfer of assets to Burnham Pacific Operating Partnership, L.P. and admission of limited partners, and acquisition of Simi Valley Plaza, and disposition of Pacific West Outlet Center; Item 7 regarding Financial Statements and exhibits.
(c) EXHIBITS
3.1.1 Charter of the Company, as Amended and Restated May 6, 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.
3.1.2 Articles Supplementary relating to Series 1997-A Convertible Preferred Stock, incorporated by reference to Exhibit 3.1.2 of the Company's Form 8-K Report (earliest event reported December 31, 1997), filed January 14, 1998 (the "January 14, 1998 Form 8-K").
3.2 Bylaws of the Company, as amended dated November 19, 1997, incorporated by reference to the Company's report on Form 8-K (earliest event reported November 7, 1997), filed December 16, 1997 (the "December 16, 1997 Form 8-K Report").
4.1 Form of stock certificate for common stock of the Company, incorporated by reference to Exhibit 4.0 to Registration Statement No. 33-20489 and subsequently overprinted to state "THE CORPORATION IS NOW INCORPORATED IN THE STATE OF MARYLAND WITH $0.01 PAR VALUE PER SHARE."
4.2 Stock Purchase Agreement dated as of December 5, 1997 by and among Burnham Pacific Properties, Inc., Burnham Pacific Operating Partnership, L.P., Westbrook Burnham Holdings, L.L.C. and Westbrook Burnham Co-Holdings, L.L.C., incorporated by reference to Exhibit 4.1 of the January 14, 1998 Form 10-K.
4.3 Registration Rights Agreement dated as of December 31, 1997 by and among Burnham Pacific Properties, Inc., Westbrook Burnham Holdings, L.L.C. and Westbrook Burnham Co-Holdings, L.L.C., incorporated by reference to Exhibit 4.2.1 of the January 14, 1998 Form 8-K.
4.4 Registration Rights Agreement dated as of December 31, 1997 by and among Burnham Pacific Properties, Inc. and the Existing Partners (of Golden State Properties) listed on Exhibit A-1 thereto, incorporated by reference to Exhibit 4.2.2 of the January 14, 1998 Form 8-K.
10.1.1 Agreement of Limited Partnership of Burnham Pacific Operating Partnership, L.P. dated as of November 14, 1997, incorporated by reference to Exhibit 10.1.1 of the December 16, 1997 Form 8-K.
10.1.2 First Amendment to Agreement of Limited Partnership of Burnham Pacific Operating Partnership, L.P., dated as of December 31, 1997 (the "First Amendment"), incorporated by reference to Exhibit 10.1 of the January 14, 1998 Form 8-K.
*10.1.3 Exhibit C to the First Amendment (defining the rights of Preferred Units and Common Units of Burnham Pacific Operating Partnership, L.P.)
10.2 Agreement to Contribute among Burnham Pacific Properties, Inc., and Burnham Pacific Operating Partnership, L.P. and the Contributors and Existing Partners of the Golden State Properties party thereto, dated as of December 5, 1997, incorporated by reference to Exhibit 10.2 to the December 16, 1997 Form 8-K.
10.3 Loan Agreement dated as of December 31, 1997 between BPP/Golden State Acquisitions, Inc., L.L.C. and Nomura Asset Capital Corporation, incorporated by reference to Exhibit 10.2 of the January 14, 1998 Form 8-K.
10.4 Amended and Restated Revolving Loan Agreement dated as of December 31, 1997 by and between Burnham Pacific Operating Partnership, L.P. and
Nomura Asset Capital Corporation, incorporated by reference to Exhibit 10.3 of the January 14, 1998 Form 8-K.
10.5 Stock Option and Incentive Plan of the Company as amended and restated as of May 6, 1997, incorporated by reference to Appendix D to the Company's Proxy Statement for its 1997 Annual Meeting.
10.6 Employment Agreement between the Company and J. David Martin dated as of October 1, 1995, incorporated by reference to Exhibit 10.1 to the Company's report on Form 10-Q for the quarter ended September 30, 1995.
10.7 Form of Indemnification Agreement entered into with each of the Company's Directors and Officers, incorporated by reference to Exhibit 10.6 filed with the Company's 1995 report on Form 10-K.
*21.1 List of subsidiaries of the Company.
*23.1 Consent of Deloitte & Touche LLP.
*27.1 Financial Data Schedule
*27.2 Financial Data Schedule
*27.3 Financial Data Schedule
*Filed herewith.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
By: /s/ J. DAVID MARTIN ---------------------------------- J. David Martin, President
Dated: March 18, 1998 -------------------------------
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
Signature Title Date --------- ----- ----
/s/ MALIN BURNHAM Chairman of the Board March 18, 1998 - ------------------------ ---------------------- Malin Burnham
/s/ J. DAVID MARTIN President, Director March 18, 1998 - ------------------------ ---------------------- J. David Martin
/s/ DANIEL B. PLATT Chief Financial Officer March 18, 1998 - ------------------------ ---------------------- Daniel B. Platt
/s/ DONNE P. MOEN Director March 18, 1998 - ------------------------ ---------------------- Donne P. Moen
/s/ RICHARD R. TARTRE Director March 18, 1998 - ------------------------ ---------------------- Richard R. Tartre
/s/ THOMAS A. PAGE Director March 18, 1998 - ------------------------ ---------------------- Thomas A. Page
/s/ PHILLIP S. SCHLEIN Director March 18, 1998 - ------------------------ ---------------------- Phillip S. Schlein
Director - ------------------------ ---------------------- James D. Klingbeil
/s/ ROBIN WOLANER Director March 18, 1998 - ------------------------ ---------------------- Robin Wolaner
Director - ------------------------ ---------------------- James D. Harper, Jr.
BURNHAM PACIFIC PROPERTIES, INC. REAL ESTATE AND ACCUMULATED DEPRECIATION FORM 10-K SCHEDULE III DECEMBER 31, 1997 - -------------------------------------------------------------------------------
BURNHAM PACIFIC PROPERTIES, INC. REAL ESTATE AND ACCUMULATED DEPRECIATION FORM 10-K SCHEDULE III DECEMBER 31, 1997 - -------------------------------------------------------------------------------
BURNHAM PACIFIC PROPERTIES, INC. REAL ESTATE AND ACCUMULATED DEPRECIATION FORM 10-K SCHEDULE III DECEMBER 31, 1997 - -------------------------------------------------------------------------------
BURNHAM PACIFIC PROPERTIES, INC. REAL ESTATE AND ACCUMULATED DEPRECIATION FORM 10-K SCHEDULE III DECEMBER 31, 1997 - -------------------------------------------------------------------------------
REAL ESTATE AND ACCUMULATED DEPRECIATION FORM 10-K SCHEDULE III NOTES DECEMBER 31, 1997
Note 1: San Diego Factory Outlet Center, Navajo Shopping Center, Meridian Village, Auburn Village Poway Shopping Center, Santee Village, Independence Square, La Mancha Shopping Center, Santa Fe Springs, Central Shopping Center, Foothill Plaza and Freemont Hub are jointly encumbered under the Company's secured line of credit, under which $74,981,538 was outstanding at at December 31, 1997, which was not included in the above schedule.
Note 2: Menifee Town Center, San Marcos Lucky Plaza, 580 Marketplace, Arcade Square,Creekside Shopping Center Discovery Plaza, Fremont Gateway, Hallmark Town Center, Prospector's Plaza, Santa Rosa, Shasta Crossroads, Silver Creek Plaza, Southampton Ceenter, Summerhills Shopping Center, Sunset Center Buena Vista Market Place, Centerwood Plaza, Ralph's Center and Westminster Center are jointly encumbered under a $150,000,000 Mortgage Loan.
Note 3: The amounts above do not include: $4,931,353 of furniture fixtures and equipment and acquisitions in progress and $1,023,805 of related accumulated depreciation, and $44,745,761 of costs incurred to date on development of five retail centers which are also classified with property in the financial statements.
Note 4: The aggregate cost for federal income tax purposes for buildings and improvements December 31, 1997 was approximately $624,634,000.
(A) Additions during the period are broken down as follows: