-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, SLpv0LRr4ISw+5tiH6g/3cNI+k3Vv0JvsD0XmfBXue0ye4rRyIv7BFEP/GPrpIvq deke1IKxuK5UGa9P6IZCsg== 0000892569-99-000743.txt : 19990329 0000892569-99-000743.hdr.sgml : 19990329 ACCESSION NUMBER: 0000892569-99-000743 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 16 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990326 FILER: COMPANY DATA: COMPANY CONFORMED NAME: PAN PACIFIC RETAIL PROPERTIES INC CENTRAL INDEX KEY: 0001040454 STANDARD INDUSTRIAL CLASSIFICATION: REAL ESTATE INVESTMENT TRUSTS [6798] IRS NUMBER: 330752457 STATE OF INCORPORATION: MD FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-13243 FILM NUMBER: 99573899 BUSINESS ADDRESS: STREET 1: 1631-B S MELROSE DR CITY: VISTA STATE: CA ZIP: 92083 BUSINESS PHONE: 7607271002 MAIL ADDRESS: STREET 1: 1631-B SOUTH MELROSE DR CITY: VISTA STATE: CA ZIP: 92083 10-K 1 FORM 10-K FOR THE FISCAL YEAR ENDED 12/31/98 1 ================================================================================ SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998 COMMISSION FILE NUMBER: 001-13243 PAN PACIFIC RETAIL PROPERTIES, INC. (Exact Name of Registrant as Specified in Its Charter) MARYLAND 33-0752457 (State of Incorporation) (I.R.S. Employer Identification No.) 1621-B SOUTH MELROSE DRIVE, VISTA, CALIFORNIA 92083 (Address of Principal Executive Offices) (zip code) Registrant's telephone number, including area code: (760) 727-1002 Securities registered pursuant to Section 12(b) of the Act: TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED ----------------------------- ----------------------------------------- Common Stock, $0.01 par value New York Stock Exchange Securities registered pursuant to Section 12(g) of the Act: None ------------------------- Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes /X/ No / /. Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] The aggregate market value of the shares of common stock held by non-affiliates was approximately $180,198,000 based upon the closing price on the New York Stock Exchange for such shares of $17.625 on March 18, 1999. As of March 18, 1999, the number of shares of the Registrant's common stock outstanding was 21,162,012. 2 DOCUMENTS INCORPORATED BY REFERENCE Part III of this report on Form 10-K incorporates by reference information from the Registrant's definitive proxy statement to be filed with the Securities and Exchange Commission within 120 days of the close of the Registrant's fiscal year. PAN PACIFIC RETAIL PROPERTIES, INC. TABLE OF CONTENTS PART I Page ---- ITEM 1. BUSINESS......................................................... 1 ITEM 2. PROPERTIES....................................................... 8 ITEM 3. LEGAL PROCEEDINGS................................................ 19 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.............. 19 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS........................................... 19 ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA............................. 20 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS........................... 21 ITEM 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK....... 29 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA...................... 29 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE........................ 29 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT............... 30 ITEM 11. EXECUTIVE COMPENSATION........................................... 30 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.................................................... 30 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS................... 30 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K...................................................... 30 3 PART I ITEM 1. BUSINESS Pan Pacific Retail Properties, Inc. (the "Company"), a self-administered and self-managed real estate investment trust (a "REIT"), was formed in April 1997 to continue and expand the acquisition, ownership, management, leasing and development business of Pan Pacific Development (U.S.) Inc. and its affiliates (collectively, "PPD"). The Company's portfolio consists principally of community and neighborhood shopping centers predominantly located in four key Western U.S. markets. On August 13, 1997, the Company completed its initial public offering (the "IPO"). As of December 31, 1998, the Company owned or controlled a portfolio of 54 shopping center properties (collectively, the "Properties"), of which 50 are located in the Western United States including 12 in Northern California, 9 in Southern California, 7 in Nevada and 22 in the Pacific Northwest (8 in Washington and 14 in Oregon). The Company employed 88 people as of December 31, 1998, including five executive officers and senior personnel, in the areas of administration, accounting services, property management, maintenance, leasing, acquisitions and business development. The Company's executive offices are located at 1621-B South Melrose Drive, Vista, California, and its telephone number is (760) 727-1002. In addition to personnel located at its executive offices, the Company operates regional offices in Las Vegas, Nevada; Kent, Washington; Portland, Oregon; Chino, California; and Sacramento, California. Each of the regional offices is responsible for property management, maintenance and leasing. The Company has made an election to be taxed as a REIT under Sections 856 through 860 of the Internal Revenue Code of 1986, as amended (the "Code") commencing with its taxable year ended December 31, 1997. The Company believes that, commencing with its taxable year ended December 31, 1997, it has been organized and has operated in such a manner so as to qualify for taxation as a REIT under the Code, and the Company intends to continue to operate in such a manner, but no assurance can be given that it will continue to operate in such a manner so as to qualify or remain qualified. Even if the Company qualifies for taxation as a REIT, the Company may be subject to certain federal, state and local taxes on its revenue and properties. BUSINESS STRATEGIES The Company's business strategies involve three fundamental practices: o Owning and operating shopping centers in select markets with strong economic and demographic characteristics in order to establish and maintain a portfolio of real estate assets with stable income and the potential for long-term growth; o Developing local and regional market expertise through the hands-on participation of senior management in property operations and leasing in order to capitalize on market trends, retailing trends and acquisition opportunities; and o Establishing and maintaining a diversified and complementary tenant mix with an emphasis on tenants that provide day-to-day consumer necessities in order to provide steady rental revenue. GROWTH STRATEGIES The Company's principal growth strategy is to acquire shopping centers that provide an opportunity to expand in current markets or to establish a presence in targeted markets with favorable economic and demographic characteristics. The Company seeks to acquire properties that can benefit from its hands-on management, that may require repositioning, redevelopment or renovation or which can be purchased at attractive capitalization rates and are consistent in terms of quality and location with the Company's existing portfolio. 1 4 The Company seeks to continue to utilize its in-depth market knowledge within its four key markets to pursue its strategy of opportunistic acquisitions of shopping centers for long-term investment. The Company believes that significant opportunities exist within these markets to acquire shopping center properties that are consistent with its existing portfolio in terms of quality of construction, positive submarket demographics and location attributes and that provide attractive initial investment yields with potential for growth in cash flow. The Company further believes it has certain competitive advantages which enhance its ability to identify and capitalize on acquisition opportunities, including: (i) long-standing relationships with institutional and other owners of shopping center properties in the Company's four primary regions; (ii) fully integrated real estate operations which enable the Company to respond quickly to acquisition opportunities and to capitalize on the resulting economies of scale; and (iii) access to capital as a public company. Since the closing of the Company's IPO on August 13, 1997 through December 31, 1998, the Company has acquired 29 shopping centers totaling 3,482,920 square feet of retail space for approximately $317.7 million. All of the properties are located in the Company's four key markets, and 19 of the shopping centers (66%) are anchored by grocery stores. Management believes that all of the centers are located in markets with strong demographic characteristics. Management intends to add value to these retail properties through the application of its active, hands-on management and aggressive leasing strategies. Although the Company believes that current market conditions generally favor acquisitions, management intends to continue developing quality shopping center properties when it believes market conditions and tenant opportunities support favorable risk-adjusted returns. During 1998, the Company expanded the size of its portfolio by completing the build out of four outparcels totaling 47,722 square feet of leasable area for approximately $3,400,000. All of the newly developed space is leased. During 1999, the Company is planning to build 15,600 square feet of new space at two existing operating properties and deliver one serviced parcel to a tenant at another, all subject to finalization of lease agreements, entitlements and other conditions. In addition to the foregoing, the Company has approximately 40,000 square feet of buildable expansion space at five properties which management is working on pre-leasing. The Company also seeks to maximize the cash flow from its existing Properties by continuing to enhance the operating performance of each Property through its in-house leasing and property management programs. The Company aggressively pursues: (i) the leasing of currently available space; (ii) the renewal or releasing of expiring leases at higher rental rates which management believes currently are available based on improving market conditions and its recent leasing activity; and (iii) economies of scale in the management and leasing of properties that may be realized by focusing its acquisition and development activities within its four primary regions. FINANCING STRATEGIES The Company's financing strategy is to maintain a strong and flexible financial position by maintaining a prudent level of leverage, maintaining a pool of unencumbered assets and managing its variable interest rate exposure. The Company intends to finance future acquisitions with the most advantageous sources of capital available to the Company, which may include the sale of common stock, preferred stock or debt securities through public offerings or private placements, the incurrence of additional indebtedness through secured or unsecured borrowings and the issuance of operating units in exchange for contributed property. During 1998, the Company completed a secondary offering of 4,348,000 shares of common stock at $21.125 per share. The net proceeds to the Company were approximately $85,913,000. The Company also obtained an increase to its unsecured credit facility (the "Unsecured Credit Facility") from $150,000,000 to $200,000,000 and a reduction in the top borrowing rate thereunder to LIBOR plus 1.375%. Also, during 1998, the Company formed Pan Pacific (Portland), LLC ("PPP LLC"), with the Company as sole managing member. In the fourth quarter, PPP LLC acquired a portfolio of six shopping centers located in Oregon. In exchange for four properties which were contributed to PPP LLC, 832,617 units were issued to certain non-managing members. Distributions are made to the non-managing members at a rate equal to the distribution being paid by the Company on a share of common stock. A non-managing member can seek redemption of their units after the first anniversary. The Company, at its option, may redeem the units by either (i) issuing common stock at the rate of one share for each unit, or (ii) paying cash. 2 5 RECENT DEVELOPMENTS On January 5, 1999, the Company purchased the remaining 50% interest in Melrose Village Plaza, located in Vista, California, for $7,150,000, thereby giving the Company a 100% interest in this 132,674 square foot neighborhood shopping center anchored by Lucky Supermarket and Sav-On Drug Store. DISPOSITIONS The Company has no current intention to cause the disposition of any of the Properties, although it reserves the right to do so if, after taking into account the tax consequences of any disposition, including the Company's continued ability to qualify as a REIT, it determines that such action would be in its best interests. CERTAIN CAUTIONARY STATEMENTS REAL ESTATE INVESTMENT ASSOCIATED RISKS. Real property investments are subject to varying degrees of risk. The yields available from equity investments in real estate depend in large part on the amount of income generated and expenses incurred. If the Properties do not generate revenue sufficient to meet operating expenses, including debt service, tenant improvements, leasing commissions and other capital expenditures, we may have to borrow additional amounts to cover fixed costs. This would adversely affect our cash flow and ability to make distributions to our stockholders. Our revenue and the value of our properties may be adversely affected by a number of factors, including: o The national economic climate; o The local economic climate; o Local real estate conditions; o Changes in retail expenditures by consumers; o The perceptions of prospective tenants of the attractiveness of the property; o Our ability to manage and maintain the Properties and secure adequate insurance; and o Increases in operating costs (including real estate taxes and utilities). In addition, real estate values and income from properties are also affected by factors such as applicable laws, including tax laws, interest rate levels and the availability of financing. OUR POTENTIAL INABILITY TO RETAIN TENANTS AND RELET SPACE. We will be subject to the risks that, upon expiration or termination, leases may not be renewed, the space may not be relet or the terms of renewal or reletting (including the cost of required renovations) may be less favorable than current lease terms. Leases covering a total of approximately 7.2% and 43.1% of the leased gross leasable area ("GLA") of the Properties will expire through the end of 1999 and 2003, respectively. We budget for renovation and reletting expenses, which takes into consideration our view of both the current and expected market conditions in the geographic regions in which the Properties are located, but we cannot assure you that these reserves will be sufficient to cover these costs. Our cash flow and ability to make expected distributions to stockholders could be adversely affected, if: o We are unable to promptly relet or renew leases for all or a substantial portion of this space; o The rental rates upon renewal or reletting are significantly lower than expected; or o Our reserves for these purposes prove inadequate. 3 6 DEPENDENCE ON MARKET CONDITIONS IN THE GEOGRAPHIC REGIONS. Twelve Properties are located in Northern California, 9 Properties are located in Southern California, 6 are located in Las Vegas, Nevada and 22 are located in the Pacific Northwest (8 in Washington and 14 in Oregon). To the extent that general economic or other relevant conditions in these regions decline and result in a decrease in consumer demand in these regions, our performance may be adversely affected. POTENTIAL ILLIQUIDITY OF REAL ESTATE. Equity real estate investments are relatively illiquid. This illiquidity tends to limit our ability to vary our portfolio promptly in response to changes in economic or other conditions. In addition, the Code limits a REIT's ability to sell properties held for fewer than four years, which may affect our ability to sell properties without adversely affecting returns to holders of common stock. COMPETITION WITH OTHER DEVELOPERS AND REAL ESTATE COMPANIES. There are numerous commercial developers and real estate companies that compete with us in seeking land for development, properties for acquisition and tenants for properties. There are numerous shopping facilities that compete with the Properties in attracting retailers to lease space. In addition, retailers at the Properties face increasing competition from outlet stores, discount shopping clubs, and other forms of marketing of goods, such as direct mail, internet marketing and telemarketing. This competition may reduce properties available for acquisition or development, reduce percentage rents payable to us and may, through the introduction of competition, contribute to lease defaults or insolvency of tenants. Thus, competition could materially affect our ability to generate net income and to make distributions to our stockholders. COST OF COMPLIANCE WITH CHANGES IN LAWS. Because increases in income, service or transfer taxes are generally not passed through to tenants under leases, these increases may adversely affect our cash flow and our ability to make distributions to stockholders. The Properties are also subject to various federal, state and local regulatory requirements, such as requirements of the Americans with Disabilities Act of 1990 and state and local fire and life safety requirements. Failure to comply with these requirements could result in the imposition of fines by governmental authorities or awards of damages to private litigants. In addition, we cannot assure you that these requirements will not be changed or that new requirements will not be imposed which would require significant unanticipated expenditures by us. Any of these events could adversely affect our cash flow and expected distributions. RELIANCE ON CERTAIN TENANTS AND ANCHORS. Our income and funds from operations could be adversely affected in the event of the bankruptcy or insolvency, or a downturn in the business, of any anchor store, or if any anchor tenant does not renew its lease when it expires. If tenant sales at the Properties were to decline, tenants might be unable to pay their rent or other occupancy costs. In the event of default by a tenant, delays and costs in enforcing our rights could be experienced. In addition, the closing of one or more anchor-occupied stores or lease termination by one or more anchor tenants of a shopping center, whose leases may permit termination, could adversely impact that Property and result in lease terminations or reductions in rent by other tenants, whose leases may permit termination or rent reduction in those circumstances. This could adversely affect our ability to re-lease the space that is vacated. Each of these developments could adversely affect our funds from operations and our ability to make expected distributions to stockholders. LIMITATIONS ON CONTROL OF PARTIALLY-OWNED PROPERTIES. We own a 94% partnership interest in the limited partnership that owns Chino Town Square. We may have certain fiduciary responsibilities to third parties which we will need to consider when making decisions relating to this Property. We will not have sole control of certain major decisions relating to this Property and will need to seek the consent of these third parties under certain circumstances such as sales, refinancings, the timing and amount of additional capital contributions to the Property and the transfer, assignment or pledge of our partnership interests in the partnerships owning this Property. In addition, we may also participate with other entities in property ownership through joint ventures or partnerships in the future. Partnership or joint venture investments may, under certain circumstances, involve risks not otherwise present, including: o The possibility that our partners or co-venturers might become bankrupt; o These partners or co-venturers might at any time have economic or other business interests or goals that are inconsistent with our business interests or goals; 4 7 o These partners or co-venturers may be in a position to take action contrary to our instructions or requests; and o These partners or co-venturers may be in a position to take action contrary to our policies or objectives, including our policy with respect to maintaining our qualification as a REIT. LACK OF OPERATING HISTORY WITH RESPECT TO THE RECENT ACQUISITION AND DEVELOPMENT OF PROPERTIES. At December 31, 1998, we owned and operated 54 Properties, consisting of approximately 7.2 million square feet of owned space. Twenty-two of the Properties have been acquired since January 1, 1998, and may have characteristics or deficiencies currently unknown to us that affect their value or revenue potential. It is also possible that the operating performance of these Properties may decline under our management. As we acquire additional properties, we will be subject to risks associated with managing new properties, including lease-up and tenant retention. In addition, our ability to manage our growth effectively will require us to successfully integrate our new acquisitions into our existing management structure. We cannot assure you that we will succeed with this integration or effectively manage additional properties. We also cannot assure you that newly acquired properties will perform as expected. INFLUENCE OF CERTAIN AFFILIATES. Stuart Tanz, our Chairman, President and Chief Executive Officer, through his and his families' ownership interests in Revenue Properties Company Limited ("RPC") and RPC's ownership of Pan Pacific Development (U.S.), Inc. ("PPD (U.S.)"), owns or controls over 50% of our total outstanding shares of common stock as of March 15, 1999. In addition, PPD (U.S.) has the right to nominate certain of our directors. Consequently, although the Tanz family will not be able to take action on our behalf without the concurrence of other members of our Board of Directors, they may be able to exert substantial influence over our affairs. This influence might not be consistent with the interest of other stockholders. In addition, there may be conflicts between the interests of the public stockholders of RPC and our public stockholders. DEPENDENCE ON KEY MANAGEMENT PERSONNEL. Our executive officers have substantial experience in owning, operating, managing, acquiring and developing shopping centers. We believe that our success will depend in large part upon their efforts. If any key management personnel do not remain in our employ, we could be materially adversely affected. DEBT FINANCING AND EXISTING DEBT MATURITIES. We are subject to risks normally associated with debt financing, including: o The risk that our cash flow will be insufficient to meet required payments of principal and interest; o The risk that existing indebtedness on the Properties (which in all cases will not have been fully amortized at maturity) will not be able to be refinanced; or o The terms of such refinancing will not be as favorable as the terms of existing indebtedness. At December 31, 1998, we had outstanding indebtedness of approximately $282,524,000, including unamortized note payable premiums totaling $1,958,000, which will mature over 14 years. Since we anticipate that only a small portion of the principal of the indebtedness will be repaid prior to maturity, and that we will not have funds on hand sufficient to repay the balance of the indebtedness in full at maturity, it will be necessary for us to refinance the debt either through additional borrowings or equity or debt offerings. If principal payments due at maturity cannot be refinanced, extended or paid with proceeds of other capital transactions, we expect that our cash flow will not be sufficient in all years to pay distributions at expected levels and to repay all this maturing debt. Also, if prevailing interest rates or other factors at the time of refinancing (such as the reluctance of lenders to make commercial real estate loans) result in higher interest rates upon refinancing, the interest expense relating to refinanced indebtedness would increase. This could adversely affect our cash flow and our ability to make expected distributions to our stockholders. In addition, if we are unable to refinance the indebtedness on acceptable terms, we might dispose of properties upon disadvantageous terms, which might result in losses to us and might adversely affect funds available for distribution to stockholders. 5 8 POTENTIAL DEFAULTS UNDER MORTGAGE FINANCING. At December 31, 1998, we had approximately $142,066,000 in principal amount of mortgage financing. The payment and other obligations under certain of the mortgage financing is secured by cross-collateralized, and cross-defaulted first mortgage liens in the aggregate amount of approximately $53,429,000 on four Properties and $18,768,000 on three Properties. If we are unable to meet our obligations under the mortgage financing, the Properties securing that debt could be foreclosed upon. This could have a material adverse effect on us and our ability to make expected distributions and could threaten our continued viability. RISING INTEREST RATES AND VARIABLE RATE DEBT. Advances under our unsecured credit facility may bear interest at a variable rate. In addition, we may incur other variable rate indebtedness in the future. Increases in interest rates on such indebtedness would increase our interest expense, which could adversely affect our cash flow and our ability to pay expected distributions to stockholders. Accordingly, we may in the future engage in other transactions to further limit our exposure to rising interest rates as appropriate and cost effective. TAX LIABILITIES AS A CONSEQUENCE OF FAILURE TO QUALIFY AS A REIT. Commencing with our taxable year ended December 31, 1997, we believe that we have qualified as a REIT under the Code. Qualification as a REIT involves the satisfaction of numerous requirements (some on an annual and some on a quarterly basis) established under highly technical and complex Code provisions for which there are only limited judicial and administrative interpretations. These requirements involve the determination of various facts and circumstances not entirely within our control. Legislation, new regulations, administrative interpretations or court decisions may significantly change the tax laws with respect to qualification as a REIT or the federal income tax consequences of such qualification. If we fail to qualify as a REIT in any taxable year, we would be subject to federal income tax (including any applicable alternative minimum tax) on our taxable income at regular corporate rates. Moreover, unless we were entitled to relief under certain statutory provisions, we also would be disqualified from treatment as a REIT for the four taxable years following the year in which we lost our qualification. This treatment would significantly reduce our net earnings available for distribution to stockholders because of our additional tax liability for the years involved. In addition, distributions to stockholders would no longer be required. ACQUISITION AND DEVELOPMENT INVESTMENTS MAY NOT PERFORM AS EXPECTED. We intend to continue acquiring, developing and redeveloping shopping center properties. Acquisitions of retail properties entail risks that investments will fail to perform in accordance with expectations. Estimates of development costs and costs of improvements, to bring an acquired property up to standards established for the market position intended for that property, may prove inaccurate. We intend to expand or renovate our Properties from time to time. Expansion and renovation projects generally require expenditure of capital as well as various government and other approvals, the receipt of which cannot be assured. While policies with respect to expansion and renovation activities are intended to limit some of the risks otherwise associated with such activities, we will still incur certain risks, including expenditures of funds on, and devotion of management's time to, projects which may not be completed. We anticipate that future acquisitions, development and renovations will be financed through a combination of advances under our unsecured credit facility, other lines of credit and other forms of secured or unsecured financing. If new developments are financed through construction loans, there is a risk that, upon completion of construction, permanent financing for newly developed properties may not be available or may be available only on disadvantageous terms. It is possible that we will in the future expand our business to new geographic markets. We will not initially possess the same level of familiarity with new markets outside of the geographic areas in which the Properties are currently located. This could adversely affect our ability to acquire, develop, manage or lease properties in any new localities. 6 9 We also intend to develop and construct shopping centers in accordance with our business and growth strategies. Risks associated with our development and construction activities may include: o Abandonment of development opportunities; o Construction costs of a property exceeding original estimates, possibly making the property uneconomical; o Occupancy rates and rents at a newly completed property may not be sufficient to make the property profitable; o Financing may not be available on favorable terms for development of a property; and o Construction and lease-up may not be completed on schedule, resulting in increased debt service expense and construction costs. In addition, new development activities, regardless of whether they would ultimately be successful, typically require a substantial portion of management's time and attention. Development activities would also be subject to risks relating to our inability to obtain, or delays in obtaining, all necessary zoning, land use, building, occupancy, and other required governmental permits and authorizations. THE PROPERTIES MAY BE SUBJECT TO UNKNOWN ENVIRONMENTAL LIABILITIES. Under various federal, state and local environmental laws, ordinances and regulations, a current or previous owner or operator of real estate may be required to investigate and clean up hazardous or toxic substances or petroleum product releases at the property. They may also be held liable to a governmental entity or to third parties for property damage and for investigation and clean-up costs incurred by these parties in connection with the contamination. These laws typically impose clean-up responsibility and liability without regard to whether the owner knew of or caused the presence of the contaminants. Liability under these laws may still be imposed even when the contaminants were associated with previous owners or operators and the liability under these laws has been interpreted to be joint and several, unless the harm is divisible and there is a reasonable basis for allocation of responsibility. The costs of investigation, remediation or removal of these substances may be substantial, and the presence of these substances, or the failure to properly remediate the contamination on the property, may adversely affect the owner's ability to sell or rent the property or to borrow using the property as collateral. The presence of contamination at a property can impair the value of the property even if the contamination is migrating onto the property from an adjoining property. Those who arrange for the disposal or treatment of hazardous or toxic substances at a disposal or treatment facility may also be liable for the costs of removal or remediation of a release of hazardous or toxic substances at the disposal or treatment facility, whether or not the facility is owned or operated by them. In addition, some environmental laws create a lien on the contaminated site in favor of the government for damages and costs incurred in connection with the contamination. Sometimes, the remedy to remediate contamination may include deed restriction or institutional control, which can restrict how the property may be used. Finally, the owner of a site may be subject to common law claims by third parties based on damages and costs resulting from environmental contamination stemming from the site. Certain federal, state and local laws, regulations and ordinances govern the removal, encapsulation or disturbance of asbestos containing materials ("ACMs") when these materials are in poor condition or in the event of construction, remodeling, renovation or demolition of a building. These laws may impose liability for release of ACMs and may allow third parties to seek recovery from owners or operators of real properties for personal injury associated with ACMs. In connection with our ownership and operation of the Properties, we may be potentially liable for these costs. Shopping centers may have businesses such as dry cleaners and auto repair or servicing businesses which handle, store and generate small quantities of hazardous wastes. The operation may result in spills or releases from time-to-time that can result in soil or groundwater contamination. Independent environmental consultants have conducted or updated Phase I Environmental Assessments (the "Phase I Assessments") at the Properties. These Phase I Assessments have included, among other things, a visual inspection of the Properties and the surrounding area and a review of relevant state, federal and historical documents. 7 10 Our Phase I Assessments of the Properties have not revealed any environmental liability that we believe would have a material adverse effect on our business, assets or results of operations taken as a whole, nor are we aware of any such material environmental liability. It is still possible that our Phase I Assessments do not reveal all environmental liabilities or that there are material environmental liabilities of which we are unaware. Moreover, we cannot assure you that (i) future laws, ordinances or regulations will not impose any material environmental liability or (ii) the current environmental condition of the Properties will not be affected by tenants, by the condition of land or operations in the vicinity of the Properties (such as the presence of underground storage tanks), or by third parties unrelated to us. NO LIMITATION ON AMOUNT OF INDEBTEDNESS WE MAY INCUR. At December 31, 1998, our debt to total market capitalization ratio was approximately 39.2% (assuming the conversion of PPP LLC units). We currently have a policy of incurring debt only if upon incurrence the debt to total market capitalization ratio would be 50% or less. It should be noted, however, that our organizational documents do not contain any limitation on the amount of indebtedness we may incur. Accordingly, the Board of Directors could alter or eliminate this policy. If this policy were changed, we could become more highly leveraged, resulting in an increase in debt service that could adversely affect our cash flow and, consequently, reduce the amount available for distribution to stockholders. This could increase the risk of default on our indebtedness. CERTAIN TYPES OF LOSSES MAY EXCEED INSURANCE COVERAGE. We carry comprehensive liability, public area liability, fire, earthquake, flood, boiler and machinery, extended coverage and rental loss insurance covering the Properties, with policy specifications and insured limits which we believe are adequate and appropriate under the circumstances. There are, however, certain types of losses that are not generally insured because it is not economically feasible to insure against these losses. If an uninsured loss or a loss exceeding insured limits occurs, we could lose our capital invested in the Property, as well as the anticipated future revenue from the Property. In the case of debt which is with recourse to us, we would remain obligated for any mortgage debt or other financial obligations related to the Property. In these circumstances, any loss would adversely affect us. DISPOSITION OF PROPERTIES WITH BUILT-IN GAIN. In connection with our formation, certain entities taxable as "C" corporations were merged either into us or into our subsidiaries which qualified as "qualified REIT subsidiaries". Certain of these entities held 13 properties with "built-in gain" at the time the entities were merged into us or into our subsidiaries. A property has "built-in gain" if (i) on the day it was acquired, the former owner's tax basis in the property was less than the property's fair market value, and (ii) it was acquired in a transaction in which our tax basis in the property was determined by reference to the former owner's tax basis in the property. Under Treasury Regulations which have not yet been promulgated, if these properties are sold within 10 years of the date we acquired them, we will be required to pay taxes on the built-in gain that would have been realized if the merging "C" corporation had liquidated on the day before the date of the mergers. Therefore, we may have less flexibility in determining whether or not to dispose of these properties. If we desire to dispose of these properties at some future date within this 10 year period, we may be subject to tax on the built-in gain. ITEM 2. PROPERTIES GENERAL As of December 31, 1998, the Properties consist of 54 neighborhood/ community shopping centers containing 8.2 million square feet of which 7.2 million square feet is owned by the Company with the balance owned by certain retailers. The Properties are primarily situated in four key Western U.S. markets including Northern California, Southern California, Nevada and the Pacific Northwest, each of which the Company believes has attractive economic and demographic characteristics. The largest concentration of Properties, consisting of 34% of the total GLA, is located in California (20% of which is located in Northern California and 14% is located in Southern California). Another 20% of the total GLA is located in Nevada and 26% of the total GLA is located in Oregon with 16% located in Washington. In addition, Properties consisting of the remaining 4% of the total GLA are located in New Mexico, Tennessee, Kentucky and Florida. As of December 31, 1998, 96.5% of the Properties' total GLA was leased by 1,197 tenants. 8 11 The Properties are regionally managed under active central control by the Company's executive officers. Property management, leasing, capital expenditures, construction and acquisition decisions are centrally administered at the Company's corporate office. The Company employs property managers at each of its regional offices to oversee and direct the day-to-day operations of the Properties, as well as the on-site personnel. Property managers communicate daily with the Company's corporate offices to implement the Company's policies and procedures. As a result of management's in-house leasing program, the Properties benefit from a stable, diversified merchandising mix. At December 31, 1998, 70.1% of the total leased GLA was leased to national tenants, 9.8% leased to regional tenants and 20.1% to local tenants. To promote stability and attract non-anchor tenants, the Company generally enters into long-term leases (typically 15 to 20 years) with major or anchor tenants which usually contain provisions permitting tenants to renew their leases at rates which often include fixed rent increases or CPI adjustments from the prior base rent. At December 31, 1998, anchor tenants leased 59.0% of the total leased GLA, with only 49.6% of anchor-leased GLA (29.3% of the total leased GLA) scheduled to expire within the next 10 years. To take advantage of improving market conditions and changing retail trends, the Company generally enters into shorter term leases (typically three to five years) with non-anchor tenants. The Company's leases are generally on a triple-net basis, which require the tenants to pay their pro rata share of all real property taxes, insurance and property operating expenses. 9 12 PROPERTIES The following table sets forth certain information for the 54 properties owned at December 31, 1998.
Gross Leasable Area ------------------- % Leased Year Tenant as of Completed/ Company Owned Owned Total 12/31/98 Property and Location Expanded (Sq. Ft.) (Sq. Ft.) (Sq. Ft.) (5) - ------------------------------------------------------------------------------------------------------------------------------ NORTHERN CALIFORNIA Brookvale Shopping Center ........ 1968/ 131,239 -- 131,239 100.0% Fremont, CA 1989 Chico Crossroads ................. 1988/ 267,735 -- 267,735 99.6 Chico, CA 1994 Creekside Center ................. 1968 80,911 -- 80,911 98.9 Hayward, CA Fairmont Shopping Center ......... 1988 104,281 -- 104,281 96.1 Pacifica, CA Fashion Faire Shopping Center .... 1987 95,255 -- 95,255 100.0 San Leandro, CA Glen Cove Center ................. 1990 66,000 -- 66,000 96.8 Vallejo, CA Laguna Village ................... 1996 108,203 -- 108,203 100.0 Sacramento , CA Lakewood Shopping Center ......... 1988 107,769 -- 107,769 100.0 Windsor, CA Manteca Marketplace .............. 1972/ 172,435 -- 172,435 97.9 Manteca, CA 1988 Monterey Plaza ................... 1990 183,180 49,500 232,680 98.3 San Jose, CA Rosewood Village ................. 1988 50,248 -- 50,248 91.6 Santa Rosa, CA Westwood Village Shopping Center . 1981/ 102,375 -- 102,375 85.8 South Redding, CA 1998 --------- --------- --------- ------ Total/Weighted Average ............... 1,469,631 49,500 1,519,131 97.7% ========= ========= ========= ====== SOUTHERN CALIFORNIA Arlington Courtyard .............. 1991 12,221 -- 12,221 92.8% Riverside, CA Chino Town Square (2) ............ 1987 337,001 188,060 525,061 99.3 Chino, CA Foothill Center .................. 1990 19,541 -- 19,541 69.9 Rialto, CA Laurentian Center ................ 1988 97,131 -- 97,131 100.0 Ontario, CA Melrose Village Plaza (2) ........ 1990 132,674 -- 132,674 97.8 Vista, CA Palmdale Center .................. 1975 81,050 -- 81,050 100.0 Palmdale, CA San Dimas Marketplace ............ 1997 154,020 117,000 271,020 100.0 San Dimas, CA Tustin Heights Shopping Center ... 1983 131,518 -- 131,518 100.0 Tustin, CA Vineyard Village East ............ 1992 45,200 -- 45,200 100.0 Ontario, CA --------- --------- --------- ------ Total/Weighted Average ............... 1,010,356 305,060 1,315,416 98.8% ========= ========= ========= ====== PACIFIC NORTHWEST 24 Hour Fitness Building ......... 1989/ 40,000 -- 40,000 100.0% Hillsboro, OR 1998 Bear Creek Plaza ................. 1977/ 183,998 -- 183,998 95.0 Medford, OR 1998 Canyon Ridge Plaza ............... 1995 81,747 181,300 263,047 100.0 Kent, WA Claremont Village Plaza .......... 1955/ 88,706 -- 88,706 100.0 Everett, WA 1994 Hermiston Plaza .................. 1976/ 150,396 -- 150,396 100.0 Hermiston, OR 1998 Hood River ....................... 1967/ 104,162 -- 104,162 80.6 Hood River, OR 1979 Milwaukie Marketplace ............ 1989 185,859 10,323 196,182 100.0 Milwaukie, OR Olympia Square ................... 1988 167,721 -- 167,721 94.6 Olympia, WA Olympia West Center .............. 1980/ 69,212 3,800 73,012 100.0 Olympia, WA 1995 Oregon City Shopping Center ...... 1961/ 247,689 -- 247,689 98.2 Oregon City, OR 1983 Oregon Trail Shopping Center ..... 1977 210,784 -- 210,784 62.0 Gresham, OR Pacific Commons .................. 1987 151,233 55,241 206,474 100.0 Spanaway, WA Panther Lake ..................... 1989 69,090 44,237 113,327 96.7 Kent, WA Pioneer Plaza .................... 1988 96,027 -- 96,027 88.9 Springfield, OR Powell Valley Junction ........... 1990 100,583 -- 100,583 92.9 Gresham, OR
Annualized Base Rent In Place at 12/31/98 (1) -------------------- Total Ann. Number Base of Tenants Rent/ as of Leased 12/31/98 Ann. Base Sq. Ft. Property and Location (5) Rent ($)(1) (4) Major Retailers - ------------------------------------------------------------------------------------------------------------------------------------ NORTHERN CALIFORNIA Brookvale Shopping Center ........ 18 $ 1,166,797 $ 8.89 Lucky Supermarket, Longs Drugs, Bally Fitness Fremont, CA Chico Crossroads ................. 17 2,033,799 7.63 Food-4-Less, HomeBase Chico, CA Barnes & Noble, Office Depot Creekside Center ................. 17 682,940 8.53 Lucky Supermarket, Longs Drugs Hayward, CA Fairmont Shopping Center ......... 28 1,153,508 11.51 Lucky Supermarket, Rite Aid Pacifica, CA Fashion Faire Shopping Center .... 17 1,329,088 13.95 Ross Dress for Less, Michael's, Pier 1 Imports San Leandro, CA Glen Cove Center ................. 10 821,876 12.86 Safeway Supermarket Vallejo, CA Laguna Village ................... 14 1,806,851 16.70 United Artists Theatre, 24 Hour Fitness Sacramento , CA Lakewood Shopping Center ......... 28 981,971 9.11 Raley's Supermarket, U.S. Post Office Windsor, CA Manteca Marketplace .............. 26 1,767,325 10.47 Save Mart Supermarket, Rite-Aid, Manteca, CA Stadium 10 Cinemas, Ben Franklin Crafts Monterey Plaza ................... 31 2,547,858 14.15 Wal-Mart, Lucky Supermarket(3), Walgreens San Jose, CA Rosewood Village ................. 18 671,436 14.59 Lad's Supermarket, Bradley Video Santa Rosa, CA Westwood Village Shopping Center . 21 636,993 7.25 Holiday Market, Rite Aid South Redding, CA ----- ----------- ----------- Total/Weighted Average ............... 245 $15,600,442 $ 10.86 ===== =========== =========== SOUTHERN CALIFORNIA Arlington Courtyard .............. 5 $ 138,773 $ 12.24 Harvest Christian Bookstore Riverside, CA Chino Town Square (2) ............ 53 4,515,913 13.50 Target (3), Wal-Mart, Mervyn's (3), Chino, CA Nordstrom Rack, AMC Theaters Foothill Center .................. 7 110,756 8.11 PIP Printing Rialto, CA Laurentian Center ................ 25 1,141,008 11.75 Pep Boys, 24 Hour Fitness, Abbey Carpet Ontario, CA Melrose Village Plaza (2) ........ 30 1,401,123 10.80 Lucky Supermarket, Sav-On Drug Vista, CA Palmdale Center .................. 14 506,241 6.25 Smart & Final, Rite Aid, Palmdale, CA Pic 'N' Save San Dimas Marketplace ............ 23 2,296,415 14.91 Target, Office Max, Ross Stores, San Dimas, CA Petco Tustin Heights Shopping Center ... 21 1,629,570 12.39 Ralphs, Longs Drugs, Tustin, CA Michael's Arts & Crafts Vineyard Village East ............ 4 366,946 8.12 Sears, Dunn Edwards Ontario, CA ----- ----------- ----------- Total/Weighted Average ............... 182 $12,106,745 $ 12.13 ===== =========== =========== PACIFIC NORTHWEST 24 Hour Fitness Building ......... 1 $ 466,815 $ 11.67 24 Hour Fitness Hillsboro, OR Bear Creek Plaza ................. 24 1,156,265 6.61 Albertsons, Bi-Mart, TJ Maxx, Medford, OR Value Village Canyon Ridge Plaza ............... 15 853,890 10.45 Target (3), Top Foods (3), Ross Kent, WA Dress For Less Claremont Village Plaza .......... 14 1,207,154 13.61 QFC Supermarket Everett, WA Hermiston Plaza .................. 24 755,449 5.02 Safeway Supermarket, Rite Aid Hermiston, OR Hood River ....................... 8 428,983 5.11 Rosauer's Supermarket, Hi School Pharmacy Hood River, OR Milwaukie Marketplace ............ 27 1,640,324 8.83 Albertsons, Rite Aid, Jo-Ann Fabrics Milwaukie, OR & Crafts Olympia Square ................... 35 1,788,270 11.28 Albertsons, Ross Dress For Less Olympia, WA Olympia West Center .............. 6 1,233,399 17.82 Barnes & Noble, Good Guys, Petco Olympia, WA Oregon City Shopping Center ...... 39 1,661,073 6.83 Emporium, Rite Aid Drugs, Fisherman's Oregon City, OR Market, Michael's Arts & Crafts Oregon Trail Shopping Center ..... 29 1,308,756 10.02 Office Depot, Michael's Arts & Crafts Gresham, OR Mt. Hood Athletic Club Pacific Commons .................. 23 1,521,610 10.06 Stockmarket Foods, K-Mart Spanaway, WA Panther Lake ..................... 20 884,010 13.23 Albertson's, Rite Aid Kent, WA Pioneer Plaza .................... 20 754,567 8.84 Safeway Supermarket Springfield, OR Powell Valley Junction ........... 6 774,585 8.29 Food-4-Less, Gresham, OR Cascade Athletic Club
(1) Annualized base rent for all leases in place at December 31, 1998 calculated as follows: total base rent, calculated in accordance with GAAP, to be received during the entire term of each lease, divided by the terms in months of such leases, multiplied by 12. (2) The company owns a 94% interest in Chino Town Square and 50% interest in Melrose Village Plaza. Table reflects 100% of Property data. (3) These retailers own their space and are not tenants of the company. (4) Annualized base rent divided by the owned GLA leased at December 31, 1998. (5) Percent leased and total number of tenants includes month to month leases. 10 13
Gross Leasable Area ------------------- % Leased Year Tenant as of Completed/ Company Owned Owned Total 12/31/98 Property and Location Expanded (Sq. Ft.) (Sq. Ft.) (Sq. Ft.) (5) - ----------------------------------------------------------------------------------------------------------------------------- Sandy Marketplace ................ 1985 98,638 -- 98,638 100.0 Sandy, OR Shute Park Plaza ................. 1989 58,560 -- 58,560 100.0 Hillsboro, OR Southgate Shopping Center ........ 1957/ 50,862 -- 50,862 100.0 Milwaukie, OR 1986 Sunset Mall & Office ............. 1969/ 112,746 2,500 115,246 100.0 Portland, OR 1997 Sunset Square .................... 1989 352,523 11,943 364,466 97.4 Bellingham, WA Tacoma Central ................... 1987/ 134,868 165,519 300,387 99.4 Tacoma, WA 1994 Tanasbourne Village .............. 1990 210,992 1,209 212,201 100.0 Hillsboro, OR --------- --------- --------- ------ Total/Weighted Average ............... 2,966,396 476,072 3,442,468 94.8% ========= ========= ========= ====== NEVADA Cheyenne Commons ................. 1992 362,758 -- 362,758 100.0% Las Vegas, NV Green Valley Town & Country ...... 1990 130,722 -- 130,722 97.2 Henderson, NV Mira Loma Shopping Center 1985 94,361 2,546 96,907 92.4 Reno, NV Rainbow Promenade ................ 1995/ 228,279 -- 228,279 100.0 Las Vegas, NV 1997 Sahara Pavilion North ............ 1989 333,679 -- 333,679 99.4 Las Vegas, NV Sahara Pavilion South ............ 1990 160,682 -- 160,682 98.7 Las Vegas, NV Winterwood Pavilion .............. 1990 127,975 -- 127,975 94.8 Las Vegas, NV --------- --------- --------- ------ Total/Weighted Average ............... 1,438,456 2,546 1,441,002 98.5% ========= ========= ========= ====== OTHER Country Club Center .............. 1988/ 57,626 63,000 120,626 88.2% Albuquerque, NM 1998 Jumbo Sports ..................... 1990 51,542 40,000 91,542 64.0 Memphis, TN Maysville Marketsquare ........... 1991/ 126,507 89,612 216,119 96.4 Maysville, KY 1993 Ocoee Plaza ...................... 1990 52,242 -- 52,242 100.0 Ocoee, FL --------- --------- --------- ------ Total/Weighted Average ............... 287,917 192,612 480,529 89.6% ========= ========= ========= ====== PORTFOLIO TOTAL/WEIGHTED AVERAGE ............... 7,172,756 1,025,790 8,198,546 96.5% ========= ========= ========= ======
Annualized Base Rent In Place at 12/31/98 (1) -------------------- Ann. Number Base of Tenants Rent/ as of Leased 12/31/98 Ann. Base Sq. Ft. Property and Location (5) Rent ($)(1) (4) Major Retailers - ------------------------------------------------------------------------------------------------------------------------------------ Sandy Marketplace ................ 20 813,931 8.25 Thriftway Supermarket, Sandy, OR Hi School Pharmacy Shute Park Plaza ................. 22 700,748 11.97 True Value Hillsboro, OR Southgate Shopping Center ........ 10 581,959 11.44 Office Max Milwaukie, OR Sunset Mall & Office ............. 27 1,170,971 10.39 Safeway Supermarket, Homespun Crafters Portland, OR Sunset Square .................... 40 2,718,146 7.92 Ennen's Food, K-Mart, Bellingham, WA Jo-Ann Fabrics & Crafts, Rite Aid Tacoma Central ................... 21 2,109,999 15.74 Target (3), Top Food & Drug (3), Tacoma, WA Office Depot, TJ Maxx, Cineplex Odeon Tanasbourne Village .............. 40 2,602,597 12.34 Safeway Supermarket, Rite Aid, Jo-Ann Fabrics Hillsboro, OR & Crafts, Pier 1 Imports ----- ----------- ----------- Total/Weighted Average ............... 471 $27,133,501 $ 9.65 ===== =========== =========== NEVADA Cheyenne Commons ................. 46 $ 4,314,799 $ 11.89 Wal-Mart, 24 Hour Fitness, Las Vegas, NV Ross Dress For Less Green Valley Town & Country ...... 36 1,736,728 13.67 Lucky/Sav-On Superstore Henderson, NV Mira Loma Shopping Center 18 882,488 10.12 Scolari's Market, Longs Drugs Reno, NV Rainbow Promenade ................ 26 3,260,475 14.28 United Artists Theatre, Barnes & Noble, Las Vegas, NV Linens 'N Things, Office Max, Cost Plus Sahara Pavilion North ............ 69 4,325,676 13.04 Vons, Longs Drugs, TJ Maxx, Las Vegas, NV Sheplers, Border's Books Sahara Pavilion South ............ 22 2,209,731 13.93 Sports Authority, Office Max, Las Vegas, NV Michael's Arts & Crafts Winterwood Pavilion .............. 23 1,095,804 9.03 Vons, Heilig-Meyer Furniture Las Vegas, NV ----- ----------- ----------- Total/Weighted Average ............... 240 $17,825,701 $ 12.58 ===== =========== =========== OTHER Country Club Center .............. 19 $ 580,994 $ 11.43 Furr's Supermarket (3) Albuquerque, NM Jumbo Sports ..................... 10 368,619 11.17 Jumbo Sports (3), Hancock Fabrics Memphis, TN Maysville Marketsquare ........... 17 844,875 6.93 Wal-Mart (3), Kroger Company Maysville, KY J.C. Penney Ocoee Plaza ...................... 13 371,902 7.12 Food Lion, Family Dollar Ocoee, FL ----- ----------- ----------- Total/Weighted Average ............... 59 $ 2,166,390 $ 8.40 ===== =========== =========== PORTFOLIO TOTAL/WEIGHTED AVERAGE ............... 1,197 $74,832,779 $ 10.81 ===== =========== ===========
(1) Annualized base rent for all leases in place at December 31,1998 calculated as follows: total base rent, calculated in accordance with GAAP, to be received during the entire term of each lease, divided by the terms in months of such leases, multiplied by 12. (2) The company owns a 94% interest in Chino Town Square and 50% interest in Melrose Village Plaza Table reflects 100% of Property data. (3) These retailers own their space and are not tenants of the company. (4) Annualized base rent divided by the owned GLA leased at December 31, 1998. (5) Percent leased and total number of tenants includes month to month leases. 11 14 NATIONAL, REGIONAL AND LOCAL TENANT SUMMARY The following table sets forth certain information regarding the Company's national, regional and local tenants at each Property owned at December 31, 1998.
NATIONAL TENANTS (1) REGIONAL TENANTS (1) LOCAL TENANTS (1) ---------------------------- --------------------------- --------------------------- % OF PROPERTY % OF PROPERTY % OF PROPERTY % OF PROPERTY ANN. BASE % OF PROPERTY ANN. BASE % OF PROPERTY ANN. BASE PROPERTY LEASED GLA RENT (2) LEASED GLA RENT (2) LEASED GLA RENT (2) - ---------------------------------------------------------------------- --------------------------- --------------------------- NORTHERN CALIFORNIA Brookvale Shopping Center ....... 89.11% 79.74% 0.00% 0.00% 10.89% 20.26% Chico Crossroads ................ 98.61 97.54 -- -- 1.39 2.46 Creekside Center ................ 76.64 57.55 1.82 3.27 21.54 39.18 Fairmont Shopping Center ........ 67.57 51.35 -- -- 32.43 48.65 Fashion Faire Place ............. 76.68 69.57 -- -- 23.32 30.43 Glen Cove Center ................ 84.04 77.82 -- -- 15.96 22.18 Laguna Village .................. 80.27 79.27 5.97 5.01 13.77 15.71 Lakewood Shopping Center ........ 79.41 69.00 1.37 1.78 19.21 29.22 Manteca Marketplace ............. 36.60 33.50 50.80 49.00 12.60 17.50 Monterey Plaza .................. 80.55 66.90 1.65 3.01 17.80 30.09 Rosewood Village ................ 10.42 16.30 44.98 39.47 44.60 44.23 Westwood Village Shopping Center 42.40 48.73 2.08 2.78 55.53 48.49 -------------------------- ------------------------- -------------------------- WEIGHTED AVERAGE .................... 73.91% 66.07% 8.44% 8.68% 17.64% 25.24% SOUTHERN CALIFORNIA Arlington Courtyard ............. 21.58% 29.74% 45.41% 33.33% 33.01% 36.93% Chino Town Square ............... 83.22 76.10 6.40 9.62 10.38 14.28 Foothill Center ................. 23.48 19.91 -- -- 76.52 80.09 Laurentian Center .............. 47.30 49.33 20.78 16.62 31.93 34.04 Melrose Village Plaza ........... 77.82 71.17 1.03 1.47 21.15 27.35 Palmdale Shopping Center ........ 85.74 69.86 -- -- 14.26 30.14 San Dimas Marketplace ........... 91.64 88.40 1.67 2.15 6.69 9.45 Tustin Heights Shopping Center .. 77.89 64.71 7.67 9.41 14.44 25.88 Vineyard Village East ........... 57.52 42.51 42.48 57.49 -- -- -------------------------- ------------------------- -------------------------- WEIGHTED AVERAGE .................... 77.24% 71.48% 8.05% 9.13% 14.71% 19.39% PACIFIC NORTHWEST 24 Hour Fitness ................. 100.00% 100.00% 0.00% 0.00% 0.00% 0.00% Bear Creek Plaza ................ 84.41 73.50 9.08 13.68 6.52 12.81 Canyon Ridge Plaza .............. 83.70 82.16 10.20 10.90 6.11 6.94 Claremont Village ............... 68.22 71.02 6.91 7.18 24.87 21.79 Hermiston Plaza ................. 66.65 40.69 15.32 20.13 18.03 39.18 Hood River Shopping Center ...... 10.89 11.77 50.52 61.76 38.59 26.48 Milwaukie Marketplace ........... 75.46 52.68 2.15 7.56 22.39 39.77 Olympia Square .................. 72.42 63.82 17.99 24.30 9.59 11.87 Olympia West Center ............. 71.95 76.43 19.57 18.16 8.47 5.41 Oregon City Shopping Center ..... 65.82 45.11 5.27 13.91 28.91 40.99 Oregon Trail Shopping Center .... 53.96 53.34 5.55 10.49 40.49 36.16 Pacific Commons Shopping Center . 69.49 64.40 2.15 2.48 28.37 33.12 Panther Lake .................... 61.35 51.99 8.96 8.96 29.69 39.06 Pioneer Plaza ................... 17.68 16.50 10.73 20.44 71.59 63.07 Powell Valley Junction .......... 64.20 60.98 -- -- 35.80 39.02
(1) The company defines national tenants as any tenant that operates in at least four metropolitan areas located in more than one region (i.e., northwest, northeast, midwest, southwest or southeast); regional tenants as any tenant that operates in two or more metropolitan areas located within the same region; local tenants as any tenant that operates stores only within the same metropolitan area as the shopping center. (2) Annualized base rent for all leases in place at December 31, 1998 calculated as follows: total base rent, calculated in accordance with GAAP, to be received during the entire term of each lease, divided by the terms in months for such leases, multiplied by 12. 12 15
NATIONAL TENANTS (1) REGIONAL TENANTS (1) LOCAL TENANTS (1) ---------------------------- --------------------------- --------------------------- % OF PROPERTY % OF PROPERTY % OF PROPERTY % OF PROPERTY ANN. BASE % OF PROPERTY ANN. BASE % OF PROPERTY ANN. BASE PROPERTY LEASED GLA RENT (2) LEASED GLA RENT (2) LEASED GLA RENT (2) - ---------------------------------------------------------------------- --------------------------- --------------------------- Sandy Marketplace ............... 31.00 31.62 22.41 17.60 46.59 50.78 Shute Park Plaza ................ 25.85 19.48 15.96 20.39 58.19 60.12 Southgate Shopping Center ....... 70.63 62.12 10.69 13.24 18.67 24.64 Sunset Mall & Office ............ 48.92 26.97 6.84 12.18 44.24 60.86 Sunset Square ................... 63.34 48.22 29.83 39.43 6.82 12.35 Tacoma Central .................. 68.64 52.29 26.59 41.98 4.77 5.73 Tanasbourne Village ............. 61.10 50.59 14.28 20.36 24.62 29.06 -------------------------- ------------------------- -------------------------- WEIGHTED AVERAGE .................... 62.50% 53.50% 14.02% 19.13% 23.48% 27.37% NEVADA Cheyenne Commons ................ 90.32% 81.34% 0.68% 1.42% 8.99% 17.24% Green Valley Town & Country ..... 51.47 40.07 3.69 5.50 44.84 54.43 Mira Loma Shopping Center ....... 27.32 28.14 1.52 2.02 71.16 69.84 Rainbow Promenade ............... 90.06 83.99 1.75 3.10 8.18 12.91 Sahara Pavilion North ........... 71.70 61.74 11.14 12.44 17.17 25.82 Sahara Pavilion South ........... 80.00 73.95 6.43 7.61 13.57 18.44 Winterwood Pavilion ............. 74.91 66.47 9.73 6.44 15.36 27.09 -------------------------- ------------------------- -------------------------- WEIGHTED AVERAGE .................... 76.37% 68.70% 5.06% 5.91% 18.57% 25.39% OTHER Country Club Center ............. 25.86% 34.69% 5.90% 6.51% 68.24% 58.80% Jumbo Sports .................... 54.58 57.06 -- -- 45.42 42.94 Maysville Market Square ......... 90.44 87.84 4.30 5.20 5.26 6.95 Ocoee Plaza ..................... 77.44 75.28 -- -- 22.56 24.72 ========================== ========================= ========================== WEIGHTED AVERAGE .................... 70.41% 66.08% 3.19% 3.77% 26.39% 30.16% ========================== ========================= ========================== PORTFOLIO WEIGHTED AVERAGE .......... 70.13% 63.04% 9.76% 11.71% 20.11% 25.24% ========================== ========================= ==========================
(1) The company defines national tenants as any tenant that operates in at least four metropolitan areas located in more than one region (i.e., northwest, northeast, midwest, southwest or southeast); regional tenants as any tenant that operates in two or more metropolitan areas located within the same region; local tenants as any tenant that operates stores only within the same metropolitan area as the shopping center. (2) Annualized base rent for all leases in place at December 31, 1998 calculated as follows: total base rent, calculated in accordance with GAAP, to be received during the entire term of each lease, divided by the terms in months for such leases, multiplied by 12. 13 16 ANCHOR AND NON-ANCHOR TENANT SUMMARY The following table sets forth certain information regarding anchor and non-anchor tenants at December 31, 1998.
ANCHOR TENANTS (1) NON-ANCHOR TENANTS (1) ----------------------------- --------------------------- % % OF PROPERTY % % OF PROPERTY OCCUPIED ANN. BASE OCCUPIED ANN. BASE PROPERTY GLA RENT GLA RENT - ------------------------------------------------------------------------------------------------------------- NORTHERN CALIFORNIA Brookvale Shopping Center ........ 73.59% 46.63% 26.41% 53.37% Chico Crossroads ................. 85.56 76.29 14.44 23.71 Creekside Center ................. 65.80 27.09 34.20 72.91 Fairmont Shopping Center ......... 52.14 28.50 47.86 71.50 Fashion Faire Place .............. 54.66 38.04 45.34 61.96 Glen Cove Center ................. 78.79 71.06 21.21 28.94 Laguna Village ................... 79.27 78.23 20.73 21.77 Lakewood Shopping Center ......... 52.41 34.54 47.59 65.46 Manteca Marketplace .............. 58.20 52.45 41.80 47.55 Monterey Plaza ................... 56.37 29.88 43.63 70.12 Rosewood Village ................. - - 100.00 100.00 Westwood Village Shopping Center . 66.76 48.71 33.24 51.29 ----------------------------- --------------------------- WEIGHTED AVERAGE ..................... 65.00% 47.69% 35.00% 52.31% SOUTHERN CALIFORNIA Arlington Courtyard .............. 0.00% 0.00% 100.00% 100.00% Chino Town Square ................ 63.29 54.21 36.71 45.79 Foothill Center .................. - - 100.00 100.00 Laurentian Center ............... 37.47 33.62 62.53 66.38 Melrose Village Plaza ............ 53.17 42.01 46.83 57.99 Palmdale Shopping Center ......... 75.79 47.55 24.21 52.45 San Dimas Marketplace ............ 46.88 39.27 53.12 60.73 Tustin Heights Shopping Center ... 62.36 40.69 37.64 59.31 Vineyard Village East ............ 57.52 42.51 42.48 57.49 ----------------------------- --------------------------- WEIGHTED AVERAGE ..................... 56.06% 44.37% 43.94% 55.63% PACIFIC NORTHWEST 24 Hour Fitness .................. 100.00% 100.00% 0.00% 0.00% Bear Creek Plaza ................. 71.29 54.14 28.71 45.86 Canyon Ridge Plaza ............... 33.27 21.86 66.73 78.14 Claremont Village ................ 44.65 44.78 55.35 55.22 Hermiston Plaza .................. 72.09 38.12 27.91 61.88 Hood River Shopping Center ....... 80.05 57.16 19.95 42.84 Milwaukie Marketplace ............ 49.81 30.39 50.19 69.61 Olympia Square ................... 49.24 35.86 50.76 64.14 Olympia West Center .............. 56.65 62.26 43.35 37.74 Oregon City Shopping Center ...... 71.10 43.43 28.90 56.57 Oregon Trail Shopping Center ..... 48.65 35.69 51.35 64.31 Pacific Commons Shopping Center .. 50.43 47.92 49.57 52.08 Panther Lake ..................... 38.10 22.04 61.90 77.96 Pioneer Plaza .................... 55.10 40.64 44.90 59.36 Powell Valley Junction ........... 87.34 78.50 12.66 21.50
(1) Anchors defined as single tenants which lease 15,000 square feet or more, non-anchors defined as tenants which lease less than 15,000 square feet. (2) Annualized base rent for all leases in place in which tenants are in occupancy at December 31, 1998 calculated as follows: total base rent, calculated in accordance with GAAP, to be received during the entire term of each lease, divided by the terms in months for such leases, multiplied by 12. 14 17
ANCHOR TENANTS (1) NON-ANCHOR TENANTS (1) ----------------------------- --------------------------- % % OF PROPERTY % % OF PROPERTY OCCUPIED ANN. BASE OCCUPIED ANN. BASE PROPERTY GLA RENT GLA RENT - ------------------------------------------------------------------------------------------------------------- Sandy Marketplace ................ 51.60 42.46 48.40 57.54 Shute Park Plaza ................. - - 100.00 100.00 Southgate Shopping Center ........ 58.98 45.36 41.02 54.64 Sunset Mall & Office ............. 42.57 18.77 57.43 81.23 Sunset Square .................... 75.35 54.47 24.65 45.53 Tacoma Central ................... 65.75 61.58 34.25 38.42 Tanasbourne Village .............. 47.62 30.87 52.38 69.13 ----------------------------- --------------------------- WEIGHTED AVERAGE 59.09% 43.47% 40.91% 56.53% NEVADA Cheyenne Commons ................. 67.56% 45.22% 32.44% 54.78% Green Valley Town & Country ...... 38.62 21.74 61.38 78.26 Mira Loma ........................ 64.61 52.53 35.39 47.47 Rainbow Promenade ................ 65.13 55.75 34.87 44.25 Sahara Pavilion North ............ 48.49 29.36 51.51 70.64 Sahara Pavilion South ............ 59.51 39.27 40.49 60.73 Winterwood Pavilion .............. 55.90 32.71 44.10 67.29 ----------------------------- --------------------------- WEIGHTED AVERAGE 57.99% 39.83% 42.01% 60.17% OTHER Country Club Center .............. 0.00% 0.00% 100.00% 100.00% Jumbo Sports ..................... - - 100.00 100.00 Maysville Market Square .......... 65.63 60.33 34.37 39.67 Ocoee Plaza ...................... 47.85 45.71 52.15 54.29 ----------------------------- --------------------------- WEIGHTED AVERAGE 40.60% 31.22% 59.40% 68.78% ----------------------------- --------------------------- PORTFOLIO WEIGHTED AVERAGE ....... 58.95% 43.25% 41.05% 56.75% ============================= ===========================
(1) Anchors defined as single tenants which lease 15,000 square feet or more, non-anchors defined as tenants which lease less than 15,000 square feet. (2) Annualized base rent for all leases in place in which tenants are in occupancy at December 31, 1998 calculated as follows: total base rent, calculated in accordance with GAAP, to be received during the entire term of each lease, divided by the terms in months for such leases, multiplied by 12. 15 18 MAJOR TENANTS The following table summarizes certain information regarding tenants which individually accounted for 1.0% or more of the annualized base rent at December 31, 1998.
ANNUALIZED BASE RENT IN PLACE AT 12/31/98 --------------------------------------------- LEASED GLA % OF TOTAL TOTAL ANN. BASE % OF TOTAL NUMBER OF AS OF 12/31/98 LEASED ANN. BASE RENT/SQ. FT. ANN. BASE TENANT LEASES (SQ. FT.) GLA RENT ($) (1) ($) (2) RENT - -------------------- ---------- -------------- ---------- ------------ ----------- ---------- Wal-Mart 3 316,588 4.63% $2,836,372 $8.96 3.85% Lucky/Albertson's/Sav-On(3) 9 344,107 5.04 2,177,727 6.33 2.96 24 Hour Fitness 4 125,675 1.84 1,713,238 13.63 2.33 Vons/Safeway 6 292,756 4.28 1,636,988 5.59 2.22 Rite Aid 12 268,674 3.93 1,363,664 5.08 1.85 United Artists Theatre 2 88,196 1.29 1,361,109 15.43 1.85 Office Max, Inc. 4 111,050 1.63 1,192,212 10.74 1.62 Ross Dress for Less 5 126,393 1.85 1,042,254 8.25 1.41 Barnes & Noble 3 70,573 1.03 999,250 14.16 1.36 ---------- ------------- ---------- ------------ ----------- --------- TOTAL 48 1,744,012 25.52% $14,322,814 $8.21 19.45% ========== ============= ========== ============ =========== =========
(1) Annualized base rent for all leases in place at December 31, 1998 calculated as follows: total base rent, calculated in accordance with GAAP, to be received during the entire term of each lease, divided by the terms in months for such leases, multiplied by 12. (2) Annualized base rent divided by, gross leasable area at December 31, 1998. (3) Combination of Lucky, Albertson's and Sav-On is pro-forma and anticipates their proposed merger is completed. 16 19 LEASE EXPIRATIONS The following schedules set forth certain information regarding lease expirations for the properties for each of the ten years beginning with 1998, assuming that none of the tenants exercise renewal options or termination rights, if any, at or prior to the scheduled expirations. LEASE EXPIRATION ANALYSIS ALL LEASES
ANNUALIZED BASE RENT IN PLACE AT 12/31/98 ----------------------------------------------- LEASE NUMBER OF GLA UNDER TOTAL ANN. ANN. BASE EXPIRATION LEASES EXPIRING % OF BASE RENT ($) % OF ANN. RENT TENANT YEAR EXPIRING LEASES(SQ.FT.) GLA (2) BASE RENT ($/SQ. FT)(3) - ------ ---------- --------- --------------- ------ ------------- --------- ------------- 1............... 1999 149 492,858 7.21 4,740,855 6.43 9.62 2............... 2000 207 628,661 9.20 7,831,378 10.63 12.46 3............... 2001 204 642,880 9.41 7,354,458 9.98 11.44 4............... 2002 178 542,870 7.94 7,200,510 9.77 13.26 5............... 2003 159 637,508 9.33 7,252,654 9.84 11.38 6............... 2004 46 329,757 4.83 2,840,375 3.86 8.61 7............... 2005 35 351,038 5.14 3,704,093 5.03 10.55 8............... 2006 27 337,720 4.94 3,744,394 5.08 11.09 9............... 2007 30 220,145 3.22 2,615,649 3.55 11.88 10.............. 2008 29 421,810 6.17 3,660,683 4.97 8.68 11 and after 2009+ 100 2,228,015 32.61 22,740,417 30.86 10.21 ----- --------- ------ ----------- ------ ------ TOTAL/WEIGHTED AVERAGE 1,164 6,833,262 100.00% $73,685,466 100.00% $10.78 ===== ========= ====== =========== ====== ======
ALL ANCHOR LEASES(1)
ANNUALIZED BASE RENT IN PLACE AT 12/31/98 ----------------------------------------------- LEASE NUMBER OF GLA UNDER TOTAL ANN. ANN. BASE EXPIRATION LEASES EXPIRING % OF BASE RENT ($) % OF ANN. RENT TENANT YEAR EXPIRING LEASES(SQ.FT.) GLA (2) BASE RENT ($/SQ. FT)(3) - ------ ---------- --------- --------------- ------ ------------- --------- ------------- 1............... 1999 5 184,371 4.58 670,605 2.10 3.64 2............... 2000 9 199,112 4.94 1,392,470 4.37 6.99 3............... 2001 8 203,421 5.05 980,622 3.08 4.82 4............... 2002 4 127,202 3.16 796,701 2.50 6.26 5............... 2003 9 230,239 5.72 1,604,019 5.03 6.97 6............... 2004 5 159,139 3.95 701,434 2.20 4.41 7............... 2005 10 244,772 6.08 1,993,662 6.26 8.14 8............... 2006 5 216,091 5.36 2,124,944 6.67 9.83 9............... 2007 5 111,730 2.77 870,137 2.73 7.79 10.............. 2008 7 323,070 8.02 2,036,271 6.39 6.30 11 and after.... 2009+ 53 2,028,841 50.37 18,698,930 58.67 9.22 ----- --------- ------ ----------- ------ ------ TOTAL/WEIGHTED AVERAGE 120 4,027,988 100.00% $31,870,395 100.00% $ 7.91 ===== ========= ====== =========== ====== ======
Note: Number of Leases expiring does not include tenants on a month-to-month agreement, whose combined occupancy totals 47,043 sq. ft. (1) The company defines anchors as single tenants which lease 15,000 square feet or more, non-anchors defined as tenants which lease less than 15,000 square feet. (2) Annualized base rent for all leases in place at December 31, 1998 calculated as follows: total base rent, calculated in accordance with GAAP, to be received during the entire term of each lease, divided by the terms in months for such leases, multiplied by 12. (3) Annualized base rent divided by gross leasable area at December 31, 1998. 17 20 ALL NON-ANCHOR LEASES(1)
ANNUALIZED BASE RENT IN PLACE AT 12/31/98 ------------------------------------------------ LEASE NUMBER OF GLA UNDER TOTAL ANN. ANN. BASE EXPIRATION LEASES EXPIRING % OF BASE RENT ($) % OF ANN. RENT TENANT YEAR EXPIRING LEASES(SQ.FT.) GLA (2) BASE RENT ($/SQ. FT.)(3) - ------ ---------- --------- --------------- --------- ------------- --------- -------------- 1 ....................... 1999 144 308,487 11.00 4,070,250 9.73 13.19 2 ....................... 2000 198 429,549 15.31 6,438,909 15.40 14.99 3 ....................... 2001 196 439,459 15.66 6,373,837 15.24 14.50 4 ....................... 2002 174 415,668 14.82 6,403,809 15.31 15.41 5 ....................... 2003 150 407,269 14.52 5,648,036 13.51 13.87 6 ....................... 2004 41 170,618 6.08 2,138,941 5.12 12.54 7 ....................... 2005 25 106,266 3.79 1,710,432 4.09 16.10 8 ....................... 2006 22 121,629 4.34 1,619,451 3.87 13.31 9 ....................... 2007 25 108,415 3.86 1,745,512 4.17 16.10 10....................... 2008 22 98,740 3.52 1,624,412 3.89 16.45 11 and after............. 2009 + 47 199,174 7.10 4,041,486 9.67 20.29 --------- --------------- --------- ------------- --------- ------------- TOTAL/WEIGHTED AVERAGE 1,044 2,805,274 100.00% $41,815,075 100.00% $14.91 ========= =============== ========= ============= ========= =============
Note: Number of Leases expiring does not include tenants on a month-to-month agreement, whose combined occupancy totals 47,043 sq. ft. (1) The company defines anchors as single tenants which lease 15,000 square feet or more, non-anchors defined as tenants which lease less than 15,000 square feet. (2) Annualized base rent for all leases in place at December 31, 1998 calculated as follows: total base rent, calculated in accordance with GAAP, to be received during the entire term of each lease, divided by the terms in months for such leases, multiplied by 12. (3) Annualized base rent divided by gross leasable area at December 31, 1998. 18 21 ITEM 3. LEGAL PROCEEDINGS The Company is a party to legal proceedings that arise in the normal course of business, which matters are generally covered by insurance. The resolution of these matters cannot be predicted with certainty. However, in the opinion of management, based upon currently available information, liability under such proceedings, either individually or in the aggregate, will not have a materially adverse effect on the Company's consolidated financial statements taken as a whole. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS During the fourth quarter of 1998, no matters were submitted to a vote of stockholders of the Company. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The Company's common stock began trading on the New York Stock Exchange ("NYSE") on August 8, 1997, under the symbol "PNP". On March 4, 1999 the Company had approximately 45 stockholders of record and approximately 2,700 beneficial owners. The following table sets forth for the periods indicated the high and low sales prices as reported by the NYSE and the distributions declared by the Company.
DISTRIBUTIONS HIGH LOW DECLARED ------- ------- ------------- Third Quarter 1997 (from August 8, 1997) $20.750 $19.750 $0.2128 Fourth Quarter 1997 $22.000 $19.875 $0.3625 First Quarter 1998 $22.562 $21.375 $0.3800 Second Quarter 1998 $22.750 $19.375 $0.3800 Third Quarter 1998 $22.000 $16.500 $0.3800 Fourth Quarter 1998 $20.500 $17.562 $0.3800
The fourth quarter 1998 distribution on an annualized basis amounts to $1.52 per share. All distributions will be made by the Company at the discretion of the Board of Directors and will depend upon the earnings of the Company, its financial condition and such other factors as the Board of Directors deem relevant. In order to qualify for the beneficial tax treatment accorded to real estate investment trusts under the Code, the Company is required to make distributions to holders of its shares in an amount at least equal to 95% of the Company's "real estate investment trust taxable income," as defined in Section 857 of the Code. 19 22 ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA The following table sets forth selected financial data for the Company on a historical basis. The following data should be read in connection with management's discussion and analysis of financial condition and results of operations and the consolidated financial statements and notes thereto located elsewhere in this report. SELECTED CONSOLIDATED FINANCIAL DATA (1) (AMOUNTS IN THOUSANDS, EXCEPT PER SHARE INFORMATION)
YEARS ENDED DECEMBER 31, ------------------------------------------------------------------------- 1998 1997 1996 1995 1994 -------- -------- -------- -------- -------- STATEMENTS OF OPERATIONS DATA: Total revenue ................................... $ 79,253 $ 46,710 $ 35,623 $ 30,767 $ 27,078 Operating and general and administrative expenses ..................................... 19,765 14,216 12,766 12,775 12,810 Depreciation and amortization ................... 14,298 8,928 7,693 6,340 6,129 Interest expense ................................ 18,295 14,057 14,671 12,262 11,405 Income (loss) before extraordinary item ......... 26,634 9,356 449 (615) (3,216) Net income (loss) ............................... 26,634 8,313 449 (615) (3,216) Per share data: Income before extraordinary item-diluted (2) 1.35 0.55 -- -- -- Net income-diluted (2) ..................... 1.35 0.49 -- -- -- Distributions declared ..................... 1.52 0.58 -- -- --
AS OF DECEMBER 31, ------------------------------------------------------------------------ 1998 1997 1996 1995 1994 -------- -------- -------- -------- -------- BALANCE SHEET DATA: Properties, net ........... $667,478 $455,514 $264,017 $251,423 $214,554 Total assets .............. 705,541 487,220 293,186 275,690 247,101 Notes payable ............. 144,024 108,316 192,915 191,302 160,465 Line of credit payable .... 138,500 62,450 -- -- -- Advances from related party -- -- 32,113 16,482 10,790 Minority interest ......... 17,318 1,521 1,539 1,347 1,373 Stockholders' equity ...... 383,088 301,055 -- -- -- Owner's equity ............ -- -- 61,808 61,359 61,974
(1) The financial data as of the dates and for the periods prior to August 13, 1997 represents the combined financial data of Pan Pacific Development Properties. See Note 1 to the consolidated financial statements. (2) The 1997 data is calculated as if the shares were outstanding for the entire year based on the diluted number of shares assumed to be outstanding (see Note 2(i) to the consolidated financial statements). The years prior to 1997 had no outstanding shares of common stock and therefore the information is not relevant or included here. 20 23 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW The following discussion should be read in connection with the consolidated financial statements of Pan Pacific Retail Properties, Inc. and subsidiaries (the "Company"), and the notes thereto, appearing elsewhere in this report. The Company receives income primarily from rental revenue (including recoveries from tenants) from shopping center properties. As a result of the Company's acquisition and development program, the financial data show increases in total revenue from period to period, largely attributable to: (i) acquisitions; and (ii) a development property placed into operation during 1997. The Company has experienced economies of scale as it has grown its portfolio from 25 properties, at the initial pubic offering ("IPO") in August 1997, to 54 properties at December 31, 1998. For example, the Company has experienced a decrease in overhead costs as a percentage of total revenue. As another example, during the year ended December 31, 1998, the Company owned properties comprising a weighted average GLA of 6,026,000 square feet. Total expenses, excluding interest, depreciation and amortization for the year ended December 31, 1998 were $19,765,000 or $3.28 per square foot. By comparison, during the year ended December 31, 1997, the Company owned properties comprising a weighted average GLA of 3,581,000 square feet. Total expenses, excluding interest, depreciation and amortization, for the year ended December 31, 1997 were $14,216,000 or $3.97 per square foot. The Company expects that the more significant part of its revenue growth in the next year or two will come from additional acquisitions and rent increases from re-leasing and re-tenanting initiatives, the benefit of the stabilization of the properties acquired during 1998 and the revenue generated from expanded GLA due to the buildout of outparcels. RESULTS OF OPERATIONS Comparison of the Year Ended December 31, 1998 to the Year Ended December 31, 1997. Total revenue increased by $32,543,000 or 69.7% to $79,253,000 for the year ended December 31, 1998 as compared to $46,710,000 for the year ended December 31, 1997. Rental revenue increased by $26,096,000 or 70.3% to $63,213,000 from $37,117,000 for the year ended December 31, 1998, compared to the year ended December 31, 1997. The increase in rental revenue resulted principally from the acquisition of San Dimas Marketplace and Bear Creek Plaza in January 1998, Milwaukie Marketplace, Pioneer Plaza, Powell Valley Junction and Shute Park Plaza in February 1998, Manteca Marketplace in March 1998, a 24 Hour Fitness building, Panther Lake Shopping Center and Creekside Center in April 1998, Westwood Village Shopping Center and Fashion Faire Shopping Center in May 1998, Pacific Commons Shopping Center in June 1998, Oregon Trail, Hermiston Plaza and Hood River Center in October 1998, and Sandy Marketplace, Southgate Center, Oregon City Shopping Center, Sunset Mall, Mira Loma Shopping Center and Glen Cove Center in November 1998 (collectively, the "1998 Acquisitions") and the benefit of a full year of rental revenue from the acquisition of Chico Crossroads in February 1997, Monterey Plaza in April 1997, Fairmont Shopping Center in May 1997, Lakewood Shopping Center in June 1997, Green Valley Town & Country in August 1997, Rainbow Promenade in September 1997, Claremont Village, Olympia West Center and Tacoma Central in November 1997, Tustin Heights, Palmdale Center and Brookvale Center in December 1997 and the inclusion in operations of Laguna Village Phase II in the third quarter of 1997 (collectively, the "1997 Acquisitions"). Recoveries from tenants increased by $5,686,000 or 70.7% to $13,728,000 for the year ended December 31, 1998, compared to $8,042,000, for the year ended December 31, 1997. This increase resulted primarily from the 1998 Acquisitions and the 1997 Acquisitions. Recoveries from tenants were 88.3% of property operating expenses and property taxes for the year ended December 31, 1998 as compared to 86.2% of the same expenses for the same period in 1997. 21 24 Property expenses include property operating expenses and property taxes. Property operating expenses increased by $3,671,000 or 59.8% from $6,142,000 to $9,813,000 for the year ended December 31, 1998, compared to the year ended December 31, 1997. The increase in property operating expenses was primarily attributable to the 1998 Acquisitions and the 1997 Acquisitions. Property taxes increased by $2,548,000 or 80.0% for the year ended December 31, 1998, compared to the year ended December 31, 1997. The increase in property taxes was also primarily the result of the 1998 Acquisitions and the 1997 Acquisitions. Depreciation and amortization increased by $5,370,000 or 60.2% to $14,298,000 from $8,928,000 for the year ended December 31, 1998 compared to the year ended December 31, 1997. This was primarily due to the 1998 Acquisitions, the 1997 Acquisitions and amortization for current year additions of tenant improvements and leasing commissions. Interest expense increased by $4,238,000 or 30.2% to $18,295,000 from $14,057,000 for the year ended December 31, 1998, compared to the year ended December 31, 1997, primarily as a result of interest expense relating to amounts drawn on the Company's unsecured credit facility (the "Unsecured Credit Facility") to finance acquisitions, interest expense related to the assumption of fixed rate mortgages on Tacoma Central and Olympia West in the fourth quarter of 1997, interest expense on the fixed rate mortgage assumed related to Westwood Village Shopping Center in the second quarter of 1998 as well as interest expense on the fixed rate mortgages assumed related to Sunset Mall, Oregon City Shopping Center, Sandy Marketplace and Southgate Center in the fourth quarter of 1998. These increases were offset by decreases in interest expense related to the repayment of debt of approximately $134,000,000 in August 1997 in connection with the Company's IPO and approximately $82,000,000 in May 1998 in connection with the Company's secondary offering. General and administrative expenses increased by $186,000 or 4.7% to $4,109,000 from $3,923,000 for the year ended December 31, 1998, compared to the year ended December 31, 1997. This increase was primarily attributable to annual salary increases and costs associated with additional staffing necessitated by the acquisitions. These increases were partially offset by a decrease in the management fee paid to Revenue Properties Company Limited ("RPC") as that fee is no longer being charged effective with the completion of the IPO. As a percentage of total revenue, general and administrative expenses were 5.2% and 8.4% for the years ended December 31, 1998 and 1997, respectively. Other expenses consist primarily of loan guaranty fees and the expensing of due diligence costs for acquisitions that are not completed. Other expenses decreased by $856,000 or 88.8% to $108,000 from $964,000 for the year ended December 31, 1998, compared to the year ended December 31, 1997. The decrease was primarily due to loan guaranty fees paid to RPC which are no longer being charged as the debt which was guaranteed was paid off in August 1997 in connection with the IPO. In 1997, as part of the Formation Transactions (see Note 1 to the consolidated financial statements located elsewhere in this report), $134,217,000 of notes payable were repaid. In connection with the early payoff of these notes, an extraordinary loss of $1,043,000 was recorded which included prepayment penalties and the write-off of unamortized financing costs and loan premium. 22 25 The following table compares the operating data for the 19 properties ("Same Properties") that were owned and in operation for the entirety of both years ended December 31, 1998 and 1997:
1998 1997 ----------- ----------- Revenue: Rental .............................. $28,804,000 $28,462,000 Recoveries from tenants ............. 7,798,000 7,597,000 Operating income from unconsolidated partnerships ..................... 948,000 887,000 Other ............................... 383,000 485,000 ----------- ----------- $37,933,000 $37,431,000 Operating expenses: Property operating and property taxes 8,539,000 8,653,000 ----------- ----------- Operating income ....................... $29,394,000 $28,778,000 =========== ===========
Operating income for the Same Properties for the year ended December 31, 1998 increased over the same period in the prior year by $616,000 or 2.1%. This increase was attributable to increased rental revenue due to increased occupancy levels primarily at Cheyenne Commons and Chino Town Square. This increase was offset by a decrease in other income primarily due to termination fees recorded in 1997 at Sunset Square. Operating expenses for these Same Properties decreased by $114,000 or 1.3% primarily due to bad debt expense in 1997 at Sunset Square. Comparison of the Year Ended December 31, 1997 to the Year Ended December 31, 1996. Total revenue increased by $11,087,000 or 31.1% to $46,710,000 for the year ended December 31, 1997 as compared to $35,623,000 for the year ended December 31, 1996. Rental revenue increased by $8,767,000 or 30.9% to $37,117,000 from $28,350,000 for the year ended December 31, 1997, compared to the year ended December 31, 1996. The increase in rental revenue resulted principally from the 1997 Acquisitions. In addition, the inclusion in operations of Laguna Village Phase I in May 1996 added to this increase. Rental revenue also increased as a result of increased occupancy levels, primarily at Canyon Ridge Plaza, Sahara Pavilion North, Chino Town Square and Tanasbourne Village. Recoveries from tenants increased by $1,828,000 or 29.4% to $8,042,000 for the year ended December 31, 1997, compared to $6,214,000, for the year ended December 31, 1996. This increase resulted primarily from the 1997 Acquisitions. In addition, 1997 included a full year of recoveries for Laguna Village Phase I. Recoveries from tenants were 86.2% of property operating expenses and property taxes for the year ended December 31, 1997 as compared to 84.4% of the same expenses for the same period in 1996. Property expenses include property operating expenses and property taxes. Property operating expenses increased by $1,021,000 or 19.9% from $5,121,000 to $6,142,000 for the year ended December 31, 1997, compared to the year ended December 31, 1996. The increase in property operating expenses was primarily attributable to the 1997 Acquisitions. In addition, 1997 included a full year of property operating expenses for Laguna Village Phase I. Property taxes increased by $943,000 or 42.0% for the year ended December 31, 1997, compared to the year ended December 31, 1996. The increase in property taxes was primarily the result of the completion of Laguna Village Phase I in 1996 and the 1997 Acquisitions. Depreciation and amortization increased by $1,235,000 or 16.1% to $8,928,000 from $7,693,000 for the year ended December 31, 1997 compared to the year ended December 31, 1996. This was primarily due to the May 1996 completion of Laguna Village Phase I and the 1997 Acquisitions. Interest expense decreased by $614,000 or 4.2% to $14,057,000 from $14,671,000 for the year ended December 31, 1997, compared to the year ended December 31, 1996, primarily as a result of decreased interest expense relating to the repayment of debt of approximately $134,000,000 in August 1997 in connection with the Company's 23 26 IPO. This decrease was partially offset by interest expense related to the debt assumed pursuant to the acquisition of Monterey Plaza in April 1997 which was subsequently repaid in August 1997, the interest expense associated with the Unsecured Credit Facility, the net impact of the December 1996 refinancing of variable rate debt to fixed rate debt and construction loan interest related to the development of Laguna Village Phase I. General and administrative expenses increased by $695,000 or 21.5% to $3,923,000 from $3,228,000 for the year ended December 31, 1997, compared to the year ended December 31, 1996. This increase was primarily attributable to annual salary increases and costs associated with additional staffing necessitated by the 1997 Acquisitions. Expenses for tax and audit services were also increased as a result of new public reporting requirements. These increases were partially offset by a decrease in the management fee paid to RPC as that fee is no longer being charged effective with the completion of the IPO. As a percentage of total revenue, general and administrative expenses were 8.4% and 9.1% for the years ended December 31, 1997 and 1996, respectively. The Company expects that general and administrative expenses will continue to decrease as a percentage of total revenue in future periods due to economies of scale which the Company anticipates should be realized as additional properties are acquired. Other expenses consist primarily of loan guaranty fees and the expensing of due diligence costs for acquisitions that are not completed. Other expenses decreased by $1,209,000 or 55.6% to $964,000 from $2,173,000 for the year ended December 31, 1997, compared to the year ended December 31, 1996. The decrease was primarily due to loan guaranty fees paid to RPC which are no longer being charged as the debt which was guaranteed was paid off in August 1997 in connection with the IPO. This decrease was partially offset by the expensing of due diligence costs in 1997 related to potential acquisitions which were not consummated. As part of the Formation Transactions (see Note 1 to the consolidated financial statements located elsewhere in this report), $134,217,000 of notes payable were repaid. In connection with the early payoff of these notes, an extraordinary loss of $1,043,000 was recorded which included prepayment penalties and the write-off of unamortized financing costs and loan premium. The following table compares the operating data for the 19 properties ("Same Properties") that were owned and in operation for the entirety of both years ended December 31, 1997 and 1996:
1997 1996 ----------- ----------- Revenue: Rental .............................. $28,462,000 $27,757,000 Recoveries from tenants ............. 7,597,000 6,908,000 Operating income from unconsolidated 887,000 871,000 partnerships Other ............................... 485,000 432,000 ----------- ----------- $37,431,000 $35,968,000 Operating expenses: Property operating and property taxes 8,653,000 8,335,000 ----------- ----------- Operating income ....................... $28,778,000 $27,633,000 =========== ===========
Operating income for the Same Properties for the year ended December 31, 1997 increased over the same period in the prior year by $1,145,000 or 4.1%. This increase was attributable to increased rental revenue due to increased occupancy levels primarily at Canyon Ridge Plaza, Cheyenne Commons, Sahara Pavilion North, Chino Town Square and Tanasbourne Village. In addition, there were approximately $153,000 of lease termination fees received at Canyon Ridge Plaza and Sahara Pavilion North in 1997. Property operating expenses for these Same Properties increased by $318,000 or 3.8% for the year ended December 31, 1997, over the same period in the prior year due primarily to increased property tax expense and center enhancement costs such as painting, new awnings, signage and landscaping at Cheyenne Commons as well as increased bad debt expense at Sunset Square. 24 27 FUNDS FROM OPERATIONS The White Paper on Funds from Operations approved by the Board of Governors of the National Association of Real Estate Investment Trusts in March 1995 (the "White Paper") defines Funds from Operations as net income (loss) (computed in accordance with GAAP), excluding gains (or losses) from debt restructuring and sales of property, plus real estate related depreciation and amortization and after adjustments for unconsolidated partnerships and joint ventures. Management considers Funds from Operations an appropriate measure of performance of an equity REIT because it is predicated on cash flow analyses. The Company computes Funds from Operations in accordance with standards established by the White Paper. The Company's computation of Funds from Operations may, however, differ from the methodology for calculating Funds from Operations utilized by other equity REITs and, therefore, may not be comparable to such other REITs. Funds from Operations should not be considered as an alternative to net income (determined in accordance with GAAP) as a measure of the Company's liquidity, nor is it indicative of funds available to fund the Company's cash needs, including its ability to make distributions. The following table presents the Company's actual Funds from Operations for the year ended December 31, 1998 and actual and pro forma Funds from Operations for the years ended December 31, 1997 and 1996 (see Note 12 to the consolidated financial statements located elsewhere in this report for an explanation of pro forma adjustments):
DECEMBER 31, 1998 DECEMBER 31, 1997 DECEMBER 31, 1996 ------------ ------------------------------- ------------------------------- ACTUAL ACTUAL PRO FORMA ACTUAL PRO FORMA ------------ ------------ ------------ ------------ ------------ Net income ....................... $ 26,634,000 $ 8,313,000 $ 17,537,000 $ 449,000 $ 16,361,000 Add: Extraordinary loss ............ -- 1,043,000 -- -- -- Depreciation and amortization . 14,298,000 8,928,000 9,484,000 7,693,000 8,738,000 Depreciation of unconsolidated partnerships ............... 211,000 208,000 208,000 214,000 214,000 Depreciation of non-real estate corporate assets ........... (220,000) (204,000) (204,000) (174,000) (174,000) Minority interest in PPP LLC .. 211,000 -- -- -- -- ------------ ------------ ------------ ------------ ------------ Funds from Operations ............ $ 41,134,000 $ 18,288,000 $ 27,025,000 $ 8,182,000 $ 25,139,000 ============ ============ ============ ============ ============ Weighted average number of shares of common stock outstanding (assuming dilution) ........... 19,662,622 16,866,173 -- -- -- Number of shares of common stock assumed to be outstanding ..... -- -- 16,814,012 -- 16,814,012
CASH FLOWS Comparison of the Year Ended December 31, 1998 to the Year Ended December 31, 1997. Net cash provided by operating activities increased by $24,121,000 to $39,363,000 for the year ended December 31, 1998, as compared to $15,242,000 for the year ended December 31, 1997. The increase was primarily the result of an increase in operating income due to property acquisitions. Net cash used in investing activities increased by $527,000 to $166,803,000 for the year ended December 31, 1998, compared to $166,276,000 for the year ended December 31, 1997. The increase was primarily the result of additions to properties for the 1998 Acquisitions, offset by contributions to unconsolidated partnerships in 1997. Net cash provided by financing activities decreased by $12,600,000 to $130,199,000 for the year ended December 31, 1998, compared to $142,799,000 for the year ended December 31, 1997. The decrease primarily resulted from a decrease in notes payable payments, offset by a decrease in advances from related party, a decrease in issuance of common stock and an increase in distributions paid. 25 28 Comparison of the Year Ended December 31, 1997 to the Year Ended December 31, 1996. Net cash provided by operating activities increased by $8,749,000 to $15,242,000 for the year ended December 31, 1997, as compared to $6,493,000 for the year ended December 31, 1996. The increase was primarily the result of an increase in operating income due to property acquisitions. Net cash used in investing activities increased by $147,474,000 to $166,276,000 for the year ended December 31, 1997, compared to $18,802,000 for the year ended December 31, 1996. The increase was primarily the result of additions to properties for the 1997 Acquisitions. The increase was also attributable to contributions to unconsolidated partnerships. In the comparable period in 1996, the use of cash for investing activities was primarily for the purpose of acquiring the remaining ownership interests in Laurentian Center and additions to property under development. Net cash provided by financing activities increased by $127,833,000 to $142,799,000 for the year ended December 31, 1997, compared to $14,966,000 for the year ended December 31, 1996. The increase resulted from amounts drawn on the Company's unsecured line of credit, net proceeds of the IPO including the full exercise of the underwriters' over-allotment option and increases in advances from RPC (see Note 1 to the consolidated financial statements located elsewhere in this report) prior to the IPO for certain of the 1997 Acquisitions. These increases were partially offset by notes payable payments reflecting the paydown of a significant amount of portfolio debt in connection with the IPO. YEAR 2000 ISSUE The Year 2000 issue is the result of computer programs being written using two digits rather than four to define the applicable year. Computer systems, software and devices with embedded technology that are date-sensitive may recognize a date using "00" as the year 1900 rather than the year 2000. This could result in system failures, miscalculations or disruptions in operations, including, among other things, a temporary inability to process transactions or engage in similar normal business activities. The Company has conducted an assessment of how it may be impacted by the Year 2000 issue and is implementing a comprehensive plan to address all known aspects of the issue. Based on the Company's assessment of its internal computer systems (including related hardware, software, customized applications and network systems) with respect to the Year 2000 issue, the Company determined that its existing network and IBM AS400 operating systems were not Year 2000 compliant. Accordingly, the Company recently replaced its network operating system with a new operating system and expects to complete a conversion to a new software package, which does not run on the IBM AS400 but on a Year 2000 compliant NT platform, by June 30, 1999. The Company believes that these measures, the actual and estimated costs of which have been and are expected to continue to be immaterial in the aggregate, will enable its internal computer systems to be Year 2000 compliant. The Company is also reviewing the efforts of its significant tenants, vendors and other service providers to become Year 2000 compliant. Letters and questionnaires have been or are in the process of being sent to all critical entities with which the Company does business to assess their Year 2000 readiness. The Company will review the responses to such letters and questionnaires, assess the impact that the Year 2000 readiness status of such entities may have on the Company's operations, and take whatever action is deemed necessary. Based on responses received to date, there has been no indication that the respondents have any material concerns related to their ability to address all of their known significant Year 2000 issues on a timely basis. The Company anticipates that these review activities will be on-going for 1999 and will include any necessary follow-up efforts. The Company, however, cannot presently estimate the total cost of this phase of its Year 2000 readiness program. Although the review of such entities is continuing, the Company is not currently aware of any third party circumstances with respect to the Year 2000 issue that may have a material adverse impact on the Company. The Company can provide no assurance that the Year 2000 compliance plans of such third parties will be successfully completed in a timely manner. 26 29 Based on the results to date of the Company's internal assessment and external inquiries, the Company does not believe that the Year 2000 issue will pose significant operational problems for the Company or otherwise have a material adverse effect on its results of operations or financial position. Although management believes it has undertaken a careful and thorough analysis, if all Year 2000 issues are not properly identified, or assessment, remediation and testing efforts are not completed in a timely manner with respect to the problems that are identified, there can be no assurance that the Year 2000 issue will not have a material adverse effect on the Company's results of operations or adversely affect the Company's relationships with tenants, vendors and other service providers. Further, management believes it has undertaken a careful survey of third party entities and does not believe there to be a material concern based upon the potential third party risks that have been identified, however, there can be no assurance that the Year 2000 issues of these other entities will not have a material adverse effect on the Company's results of operations. A contingency plan has not yet been developed for dealing with the most reasonably likely worst case scenario resulting from the Year 2000 issues as such scenario has not yet been clearly identified. LIQUIDITY AND CAPITAL RESOURCES The Company believes the IPO and related Formation Transactions that were completed in August 1997 and the secondary offering which was completed in May 1998 improved its financial position through changes to its capital structure, which principally included a substantial reduction of its overall debt and its debt-to-equity ratio. In connection with the Formation Transactions, the Company repaid all of its existing floating rate mortgage debt. As a result, the total principal amount of outstanding secured debt after the Formation Transactions and the acquisition of Green Valley Town & Country was reduced by approximately $146,000,000. In connection with the secondary offering, the Unsecured Credit Facility was paid down by approximately $82,000,000. These transactions resulted in a significant reduction in interest expense as a percentage of total revenue, 23.1% for the year ended December 31, 1998 and 30.1% for the year ended December 31, 1997. Thus, cash from operations needed to fund debt service requirements was substantially decreased. The total market capitalization of the Company at December 31, 1998, was approximately $721,042,000, based on the market closing price at December 31, 1998 of $19.9375 per share (assuming the conversion of PPP LLC's 832,617 units) and the debt outstanding of approximately $282,524,000 (exclusive of accounts payable and accrued expenses). As a result, the Company's debt to total market capitalization ratio was approximately 39.2% at December 31, 1998. On May 18, 1998 the Company closed its secondary equity offering of 4,348,000 shares of common stock which included the partial exercise of the underwriters' over allotment option. The Company believes that its capital structure combined with its Unsecured Credit Facility enhances the Company's ability to take advantage of acquisition opportunities as well as to provide funds for general corporate purposes. In March 1998, the Company obtained an increase to its Unsecured Credit Facility from $150,000,000 to $200,000,000 and a reduction in the borrowing rate thereunder to LIBOR plus 1.375% (which rate is reduced to LIBOR plus 1.25% for as long as the Company's debt-to-book value ratio is .30 or below). The Company had $61,500,000 available under the Unsecured Credit Facility at December 31, 1998. At the Company's option, amounts borrowed under the Unsecured Credit Facility bear interest at either LIBOR plus 1.375% or a reference rate. The weighted average interest rate for amounts borrowed under the Unsecured Credit Facility at December 31, 1998 was 6.58%. The Company anticipates that the Unsecured Credit Facility will continue to be used primarily to acquire additional properties and for general corporate purposes. The Company's indebtedness outstanding at December 31, 1998 requires balloon payments of $7,700,000 in 1999, $168,559,000 in 2000, $4,004,000 in 2004, $7,443,000 in 2005, and $67,491,000 in 2007. The balloon payments due in the year 2000 include the balance drawn on the Unsecured Credit Facility at December 31, 1998 of $138,500,000. It is likely that the Company will not have sufficient funds on hand to repay these balloon amounts at maturity. Therefore, the Company expects to refinance such debt either through additional debt financings secured by individual properties or groups of properties, by unsecured private or public debt offerings or by additional equity offerings. At December 31, 1998, 40 of the Company's 54 properties remained unencumbered. The Unsecured Credit Facility, which matures in 2000, is renewable, subject to certain conditions. 27 30 The Company expects to make distributions from cash available for distributions, which the Company believes will exceed historical cash available for distributions due to the reduction in debt service resulting from the repayments of indebtedness described above and from the net cash flows from acquired properties. Amounts accumulated for distributions will be invested by the Company primarily in short-term investments such as collateralized securities of the United States government or its agencies, high-grade commercial paper and bank deposits or will be used to pay down outstanding balances on the Unsecured Credit Facility, if any. The following table provides historical distribution information:
Distribution Quarter Ended Date Declared Record Date Date Paid Per Share ------------- ------------- ----------- --------- ------------ September 30, 1997 October 6, 1997 October 22, 1997 October 31, 1997 $0.2128 December 31, 1997 December 5, 1997 December 29, 1997 January 19, 1998 $0.3625 March 31, 1998 March 17, 1998 March 31, 1998 April 17, 1998 $0.3800 June 30, 1998 June 19, 1998 June 30, 1998 July 17, 1998 $0.3800 September 30, 1998 September 11, 1998 October 5, 1998 October 21, 1998 $0.3800 December 31, 1998 December 8, 1998 December 22, 1998 January 20, 1999 $0.3800
The Company expects to meet its short-term liquidity requirements generally through its current working capital and net cash provided by operations. The Company believes that its net cash provided by operations will be sufficient to allow the Company to make the distributions necessary to enable the Company to continue to qualify as a REIT. The Company also believes that the foregoing sources of liquidity will be sufficient to fund its short-term liquidity needs for the foreseeable future. The Company expects to meet certain long-term liquidity requirements such as property acquisition and development, scheduled debt maturities, renovations, expansions and other non-recurring capital improvements through long-term secured and unsecured indebtedness and the issuance of additional equity or debt securities. The Company also expects to use funds available under the Unsecured Credit Facility to finance acquisition and development activities and capital improvements on an interim basis. INFLATION Substantially all of the leases provide for the recovery of real estate taxes and operating expenses incurred by the Company. In addition, many of the leases provide for fixed base rent increases or indexed escalations (based on the consumer price index or other measures) and percentage rent. The Company believes that inflationary increases in expenses will be substantially offset by expense reimbursements, contractual rent increases and percentage rent described above. The Unsecured Credit Facility bears interest at a variable rate, which will be influenced by changes in short-term interest rates, and will be sensitive to inflation. IMPACT OF ACCOUNTING PRONOUNCEMENTS ISSUED BUT NOT ADOPTED BY THE COMPANY In April 1998, the AICPA Accounting Standards Executive Committee issued Statement of Position 98-5, "Reporting on the Costs of Start-Up Activities" ("SOP 98-5"). SOP 98-5 requires that costs incurred during start-up activities, including organization costs, be expensed as incurred. SOP 98-5 is effective for financial statements for fiscal years beginning after December 15, 1998. Initial application of SOP 98-5 should be reported as a cumulative effect of a change in accounting principle. Management believes that the adoption of SOP 98-5 will not have a material impact on the Company. 28 31 ITEM 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company is exposed to interest rate changes primarily as a result of its line of credit and long-term debt used to maintain liquidity and fund capital expenditures and expansion of the Company's real estate investment portfolio and operations. The Company's interest rate risk management objective is to limit the impact of interest rate changes on earnings and cash flows and to lower its overall borrowing costs. To achieve its objectives the Company borrows primarily at fixed rates and could enter into derivative financial instruments such as interest rate swaps, caps and treasury locks in order to mitigate its interest rate risk on a related financial instrument. The Company does not enter into derivative or interest rate transactions for speculative or trading purposes. The Company's interest rate risk is monitored using a variety of techniques. The table below presents the principal amounts, weighted average interest rates, fair values and other terms required by year of expected maturity to evaluate the expected cash flows and sensitivity to interest rate changes.
Fair 1999 2000 2001 2002 2003 Thereafter Total Value(3) -------- --------- --------- --------- --------- ---------- --------- --------- Fixed rate debt (1) (2) ...... $ 2,252 $ 31,836 $ 1,812 $ 1,965 $ 2,136 $ 94,365 $ 134,366 $ 135,117 Average interest rate ........ 8.15% 8.15% 8.17% 8.17% 8.17% 8.17% 8.15% 7.61% Variable rate LIBOR debt (1).. -- $ 138,500 -- -- -- -- $ 138,500 $ 138,500 Average interest rate ........ -- 6.58% -- -- -- -- 6.58% 6.58%
(1) Principal amounts shown are in thousands. (2) For purposes of this disclosure, the 1999 fixed rate principal amount excludes $7,700 as that amount was repaid on January 5, 1999. (3) The fair value of fixed rate debt and variable rate LIBOR debt were determined based on the current rates offered for fixed rate debt and variable rate LIBOR debt with similar risks and maturities. Except for the item noted in (2) above, the table incorporates only those exposures that exist as of December 31, 1998, and does not consider those exposures or positions which could arise after that date. Moreover, because firm commitments are not presented in the table above, the information presented therein has limited predictive value. As a result, the Company's interest rate fluctuations will depend on the exposures that arise during the period and interest rates. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The financial statements and supplementary data required by Regulation S-X are included in this Annual Report on Form 10-K commencing on page F-1. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not applicable. PART III Certain information required by Part III is omitted from this annual report on Form 10-K in that the Company will file a definitive proxy statement within 120 days after the end of its fiscal year pursuant to Regulation 14A for its Annual Meeting of Stockholders to be held in May, 1999 (the "Proxy Statement") and the information included therein is incorporated herein by reference. 29 32 ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information contained in the sections captioned "Proposal One; Election of Directors" and "Compliance with Federal Securities Laws" of the Proxy Statement are incorporated herein by reference. ITEM 11. EXECUTIVE COMPENSATION The information contained in the section captioned "Executive Compensation" of the Proxy Statement is incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information contained in the section captioned "Principal and Management Stockholders" of the Proxy Statement is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information contained in the section captioned "Certain Relationships and Related Transactions" of the Proxy Statement is incorporated herein by reference. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) Financial Statements and Schedules The following consolidated financial information is included as a separate section of this Annual Report on Form 10-K. 1. Consolidated Financial Statements:
Page (s) -------- Independent Auditors' Report..................................... F-1 Consolidated Balance Sheets as of December 31, 1998 and 1997...................................................... F-2 Consolidated Statements of Income for the years ended December 31, 1998, 1997 and 1996.............................. F-3 Consolidated Statements of Equity for the years ended December 31, 1998, 1997 and 1996.............................. F-4 Consolidated Statements of Cash Flows for the years ended December 31, 1998, 1997 and 1996.............................. F-5 Notes to Consolidated Financial Statements....................... F-7 2. Consolidated Financial Statement Schedule: Schedule III--Properties and Accumulated Depreciation............ F-20
30 33 3. Exhibits Exhibit No. Description ----------- -------------------------------------------------------- 3.1 Articles of Amendment and Restatement of the Company (previously filed as Exhibit 3.1 to the Company's Registration Statement on Form S-11 (Registration No. 333-28715) and incorporated herein by reference) 3.2 Amended and Restated Bylaws of the Company (previously filed as Exhibit 3.2 to the Company's Registration Statement on Form S-11 (Registration No. 333-28715) and incorporated herein by reference) 4.1 Form of Certificate of Common Stock (previously filed as Exhibit 4.1 to the Company's Registration Statement on Form S-11 (Registration No. 333-28715) and incorporated herein by reference) 10.1 The 1997 Stock Option and Incentive Plan of Pan Pacific Retail Properties, Inc. (previously filed as Exhibit 10.1 to the Company's Registration Statement on Form S-11 (Registration No. 333-28715) and incorporated herein by reference) 10.2 Form of Officers and Directors Indemnification Agreement (previously filed as Exhibit 10.2 to the Company's Registration Statement on Form S-11 (Registration No. 333- 28715) and incorporated herein by reference) 10.3 Form of Employment Agreement between the Company and Mr. Stuart A. Tanz (previously filed as Exhibit 10.3 to the Company's Registration Statement on Form S-11 (Registration No. 333-28715) and incorporated herein by reference) 10.4 Form of Employment Agreement between the Company and Mr. David L. Adlard (previously filed as Exhibit 10.4 to the Company's Registration Statement on Form S-11 (Registration No. 333-28715) and incorporated herein by reference) 10.5 Form of Employment Agreement between the Company and Mr. Jeffrey S. Stauffer (previously filed as Exhibit 10.5 to the Company's Registration Statement on Form S-11 (Registration No. 333-28715) and incorporated herein by reference) 10.6 Form of Miscellaneous Rights Agreement (previously filed as Exhibit 10.6 to the Company's Registration Statement on Form S-11 (Registration No. 333-28715) and incorporated herein by reference) 10.7 Form of Non-Competition Agreement (previously filed as Exhibit 10.7 to the Company's Registration Statement on Form S-11 (Registration No. 333-28715) and incorporated herein by reference) 10.8 Purchase and Sale Agreement for Green Valley Town & Country Shopping Center (previously filed as Exhibit 10.11 to the Company's Registration Statement on Form S-11 (Registration No. 333-28715) and incorporated herein by reference) 10.9 Credit Agreement with Bank of America NT&SA (previously filed as Exhibit 10.8 to the Company's filing of Form 10-Q for the quarter ended June 30, 1997 and incorporated herein by reference) 31 34 Exhibit No. Description ----------- -------------------------------------------------------- 10.10 Purchase and Sale Agreement for Rainbow Promenade (previously filed as Exhibit 10.9 to the Company's filing of Form 10-Q for the quarter ended June 30, 1997 and incorporated herein by reference) 10.11 Purchase and Sale Agreement for Claremont Village Shopping Center (previously filed as Exhibit 10.9 to the Company's filing of Form 10-Q for the quarter ended September 30, 1997 and incorporated herein by reference) 10.12 Purchase and Sale Agreement for Olympia West Plaza Shopping Center (previously filed as Exhibit 10.10 to the Company's filing of Form 10-Q for the quarter ended September 30, 1997 and incorporated herein by reference) 10.13 Purchase and Sale Agreement for Tacoma Central Shopping Center (previously filed as Exhibit 10.11 to the Company's filing of Form 10-Q for the quarter ended September 30, 1997 and incorporated herein by reference) 10.14 Modification Agreement to the Credit Agreement with Bank of America NT & SA (previously filed as Exhibit 10.3 to the Company's Registration Statement on Form S-11 (Registration No. 333-50125) and incorporated herein by reference) 10.15 Amended and Restated Limited Liability Company Agreement of Pan Pacific (Portland), LLC (previously filed as Exhibit 99.1 to the Company's Form 8-K filed October 23, 1998 and incorporated herein by reference) 10.16 Purchase and Sale and Ground Lease Assignment and Assumption Agreement and Escrow Instructions (previously filed as Exhibit 99.2 to the Company's Form 8-K filed on October 23, 1998 and incorporated herein by reference) 10.17 First Amendment To Purchase and Sale Ground Lease Assignment and Assumption Agreement and Escrow Instructions (previously filed as Exhibit 99.3 to the Company's Form 8-K Filed October 23, 1998 and incorporated herein by reference) 10.18 Purchase and Sale Agreement and Escrow Instructions (previously filed as Exhibit 99.4 to the Company's Form 8-K filed October 23, 1998 and incorporated herein by reference) 10.19 Contribution Agreement and Escrow Instructions by and between Portland Fixture Limited Partnership PFMGP, Inc., and Pan Pacific (Portland), LLC dated September 23, 1998, and related amendments (previously filed as Exhibit 99.2 to the Company's Form 8-K filed November 12, 1998 and incorporated herein by reference) 10.20 Contribution Agreement and Escrow Instructions by and between Portland Fixture Limited Partnership, Independent Member Corp., Byron P. Henry, Steven J. Oliva and Pan Pacific (Portland), LLC dated September 23, 1998, and related amendments (previously filed as Exhibit 99.3 to the Company's Form 8-K filed November 12, 1998 and incorporated herein by reference) 10.21 Form of First Amendment to Employment Agreement between the Company and Mr. Stuart A. Tanz 10.22 Form of First Amendment to Non-Qualified Stock Option Agreement between the Company and Mr. Stuart A. Tanz 32 35 Exhibit No. Description ----------- -------------------------------------------------------- 10.23 Form of First Amendment to Incentive Stock Option Agreement between the Company and Mr. Stuart A. Tanz 10.24 Restricted Stock Agreement between the Company and Mr. Stuart A. Tanz 10.25 Form of First Amendment to Restricted Stock Agreement between the Company and Mr. Stuart A. Tanz 10.26 Form of First Amendment to Employment Agreement between the Company and Mr. Jeffrey S. Stauffer 10.27 Restricted Stock Agreement between the Company and Mr. Jeffrey S. Stauffer 10.28 Form of First Amendment to Restricted Stock Agreement between the Company and Mr. Jeffrey S. Stauffer 10.29 Form of First Amendment to Employment Agreement between the Company and Mr. David L. Adlard 10.30 Restricted Stock Agreement between the Company and Mr. David L. Adlard 10.31 Form of First Amendment to Restricted Stock Agreement between the Company and Mr. David L. Adlard 10.32 Form of First Amendment to Non-Qualified Stock Option Agreement for Independent Directors 21.1 Subsidiaries of the Registrant 23.1 Consent of KPMG LLP 27.1 Financial Data Schedule (electronically filed with the Securities and Exchange Commission only) (b) Reports on Form 8-K. 1. A Form 8-K was filed on October 23, 1998 for purposes of reporting the acquisition of three shopping centers located in the pacific northwest that occurred on October 9, 1998. No financial statements or pro forma financial information were filed as it was impracticable to do so at the time. An amended 8-K which included the financial statements and pro forma financial information was filed on December 21, 1998. 2. A Form 8-K was filed on November 12, 1998 for the purposes of reporting the acquisition of four shopping centers located in the pacific northwest that occurred on November 5, 1998 and November 9, 1998. No financial statements or pro forma financial information were filed as it was impracticable to do so at the time. An amended 8-K which included the financial statements and pro forma financial information was filed December 21, 1998. 33 36 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 on March 19, 1999. Pan Pacific Retail Properties, Inc. By: /s/ Stuart A. Tanz By: /s/ David L. Adlard -------------------------------- -------------------------------- Stuart A. Tanz David L. Adlard President and Chief Executive Executive Vice President and Officer Chief Financial Officer By: /s/ Laurie A. Sneve -------------------------------- Laurie A. Sneve, CPA Vice President and Controller 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/ Stuart A. Tanz Director, Chairman, Chief Executive March 19, 1999 - -------------------------------- Officer and President Stuart A. Tanz /s/ David L. Adlard Executive Vice President, Chief March 19, 1999 - -------------------------------- Financial Officer, Treasurer David L. Adlard and Secretary /s/ Laurie A. Sneve Vice President and Controller March 19, 1999 - -------------------------------- Laurie A. Sneve, CPA /s/ Paul D. Campbell Director March 19, 1999 - -------------------------------- Paul D. Campbell /s/ Mark J. Riedy Director March 19, 1999 - -------------------------------- Mark J. Riedy /s/ Bernard M. Feldman Director March 19, 1999 - -------------------------------- Bernard M. Feldman /s/ Melvin S. Adess Director March 19, 1999 - -------------------------------- Melvin S. Adess /s/ David P. Zimel Director March 19, 1999 - -------------------------------- David P. Zimel
34 37 INDEPENDENT AUDITORS' REPORT The Board of Directors Pan Pacific Retail Properties, Inc.: We have audited the accompanying consolidated balance sheets of Pan Pacific Retail Properties, Inc. and subsidiaries (see Note 1) as of December 31, 1998 and 1997, and the related consolidated statements of income, equity and cash flows for each of the years in the three-year period ended December 31, 1998. In connection with our audits of the consolidated financial statements, we also have audited the accompanying financial statement schedule III. These consolidated financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these 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, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Pan Pacific Retail Properties, Inc. and subsidiaries as of December 31, 1998 and 1997, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1998, in conformity with generally accepted accounting principles. Also in our opinion, the related financial statement schedule III, 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. KPMG LLP San Diego, California February 11, 1999, except as to Note 9(f), which is as of March 24, 1999 F-1 38 PAN PACIFIC RETAIL PROPERTIES, INC. CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE DATA)
DECEMBER 31, DECEMBER 31, ASSETS: 1998 1997 ------------ ------------ Operating properties, at cost: Land $ 186,891 $ 139,959 Buildings and improvements (including related party development and acquisition fees of $1,235) 490,874 313,483 Tenant improvements 31,757 32,148 ------------ ------------ 709,522 485,590 Less accumulated depreciation and amortization (42,044) (30,076) ------------ ------------ 667,478 455,514 Investments in unconsolidated partnerships 9,946 9,921 Cash and cash equivalents 2,759 -- Restricted cash 912 661 Accounts receivable (net of allowance for doubtful accounts of $412 and $125, respectively) 2,958 1,626 Accrued rent receivable (net of allowance for doubtful accounts of $1,071 and $847, respectively) 9,643 7,620 Notes receivable 2,411 2,981 Deferred lease commissions (including unamortized related party amounts of $2,310 and $2,236, respectively, and net of accumulated amortization of $2,093 and $2,023, respectively) 2,955 2,683 Prepaid expenses 5,244 3,860 Other assets 1,235 2,354 ------------ ------------ $ 705,541 $ 487,220 ============ ============ LIABILITIES AND EQUITY: Notes payable $ 144,024 $ 108,316 Line of credit payable 138,500 62,450 Accounts payable (including related party amounts of $16 and $11, respectively) 5,880 2,183 Accrued expenses and other liabilities (including related party amounts of $389 and $692, respectively) 8,504 5,600 Distributions payable (including related party amounts of $4,107 and $3,130, respectively) 8,227 6,095 ------------ ------------ 305,135 184,644 Minority interests 17,318 1,521 ------------ ------------ Stockholders' equity: Common stock par value $.01 per share, 100,000,000 authorized shares, 21,162,012 and 16,814,012 shares issued and outstanding at December 31, 1998 and 1997, respectively 212 168 Paid in capital in excess of par value 481,182 395,313 Accumulated deficit (98,306) (94,426) ------------ ------------ 383,088 301,055 ------------ ------------ $ 705,541 $ 487,220 ============ ============
See accompanying notes to consolidated financial statements. F-2 39 PAN PACIFIC RETAIL PROPERTIES, INC. CONSOLIDATED STATEMENTS OF INCOME (NOTE 1) (IN THOUSANDS, EXCEPT SHARE DATA)
FOR THE YEARS ENDED DECEMBER 31, -------------------------------------------- 1998 1997 1996 ---------- ---------- ---------- REVENUE: Base rent $ 62,585 $ 36,839 $ 28,111 Percentage rent 628 278 239 Recoveries from tenants 13,728 8,042 6,214 Income from unconsolidated partnerships 737 409 109 Other 1,575 1,142 950 ---------- ---------- ---------- 79,253 46,710 35,623 ---------- ---------- ---------- EXPENSES: Property operating 9,813 6,142 5,121 Property taxes 5,735 3,187 2,244 Depreciation and amortization 14,298 8,928 7,693 Interest 18,295 14,057 14,671 General and administrative 4,109 3,923 3,228 Other 108 964 2,173 ---------- ---------- ---------- 52,358 37,201 35,130 ---------- ---------- ---------- INCOME BEFORE MINORITY INTERESTS AND EXTRAORDINARY ITEM 26,895 9,509 493 Minority interests (261) (153) (44) ---------- ---------- ---------- INCOME BEFORE EXTRAORDINARY ITEM 26,634 9,356 449 Extraordinary loss on early extinguishment of debt -- (1,043) -- ---------- ---------- ---------- NET INCOME $ 26,634 $ 8,313 $ 449 ========== ========== ========== Basic earnings per share: Income before extraordinary item $ 1.37 $ 0.56 $ -- Extraordinary item $ -- $ (0.06) $ -- Net income $ 1.37 $ 0.49 $ -- Diluted earnings per share: Income before extraordinary item $ 1.35 $ 0.55 $ -- Extraordinary item $ -- $ (0.06) $ -- Net income $ 1.35 $ 0.49 $ --
See accompanying notes to consolidated financial statements. F-3 40 PAN PACIFIC RETAIL PROPERTIES, INC. CONSOLIDATED STATEMENTS OF EQUITY (NOTE 1) (IN THOUSANDS, EXCEPT SHARE DATA)
RETAINED COMMON STOCK ADDITIONAL EARNINGS OWNER'S ------------------------- PAID-IN (ACCUMULATED EQUITY SHARES AMOUNT CAPITAL DEFICIT) TOTAL ----------- ----------- ----------- ----------- ----------- ----------- Balance at December 31, 1995 $ 61,359 -- $ -- $ -- $ -- $ 61,359 Net income 449 -- -- -- -- 449 ----------- ----------- ----------- ----------- ----------- ----------- Balance at December 31, 1996 61,808 -- -- -- -- 61,808 Net proceeds from the initial public offering -- 8,050,000 80 143,204 -- 143,284 Capital contribution from PPD (Note 1) (61,808) 8,764,012 88 252,109 (93,066) 97,323 Net income -- -- -- -- 8,313 8,313 Cash dividends paid and declared -- -- -- -- (9,673) (9,673) ----------- ----------- ----------- ----------- ----------- ----------- Balance at December 31, 1997 -- 16,814,012 168 395,313 (94,426) 301,055 Net proceeds from secondary offering -- 4,348,000 44 85,869 -- 85,913 Net income -- -- -- -- 26,634 26,634 Cash distributions paid and declared -- -- -- -- (30,514) (30,514) ----------- ----------- ----------- ----------- ----------- ----------- Balance at December 31, 1998 $ -- 21,162,012 $ 212 $ 481,182 $ (98,306) $ 383,088 =========== =========== =========== =========== =========== ===========
See accompanying notes to consolidated financial statements. F-4 41 PAN PACIFIC RETAIL PROPERTIES, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (NOTE 1) (IN THOUSANDS)
FOR THE YEARS ENDED DECEMBER 31, --------------------------------------------- 1998 1997 1996 --------- --------- --------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 26,634 $ 8,313 $ 449 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 14,298 8,928 7,693 Amortization of prepaid financing costs 697 453 264 Income from unconsolidated partnerships (737) (409) (109) Extraordinary loss on early extinguishment of debt -- 1,043 -- Minority interests 261 153 44 Changes in assets and liabilities: Decrease (increase) in restricted cash (251) 36 629 Decrease (increase) in accounts receivable (1,332) (552) 358 Increase in accrued rent receivable (2,023) (1,625) (1,627) Increase in deferred lease commissions (1,039) (906) (536) Increase in prepaid expenses (1,480) (823) (575) Increase in other assets (609) (1,424) (129) Increase (decrease) in accounts payable 1,124 904 (701) Increase in accrued expenses and other liabilities 3,820 1,151 733 --------- --------- --------- Net cash provided by operating activities 39,363 15,242 6,493 --------- --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES: Acquisitions of and additions to operating properties (169,140) (157,650) (12,860) Additions to property under development -- (3,245) (6,634) Increase (decrease) in construction accounts payable and accrued expenses 1,656 917 (579) Contributions to unconsolidated partnerships -- (7,010) (290) Distributions from unconsolidated partnerships 712 -- -- Increase in other assets -- -- (265) Acquisitions of and increases in notes receivable (144) (4,651) (608) Collections of notes receivable 113 5,363 2,434 --------- --------- --------- Net cash used in investing activities (166,803) (166,276) (18,802) --------- --------- --------- CASH FLOWS FROM FINANCING ACTIVITIES: Line of credit proceeds 177,101 68,500 -- Line of credit payments (101,051) (6,050) -- Notes payable proceeds -- -- 11,666 Notes payable payments (2,479) (123,539) (10,053) Advances from related party -- 65,210 15,270 Payment of financing costs (601) (216) (1,170) Acquisition of minority interests (160) (170) -- Contributions from minority interests -- -- 148 Payment of prepayment penalties -- (1,035) -- Refunds from (payments to) loan escrow 43 393 (895) Issuance of common stock 85,913 143,284 -- Distributions paid (28,567) (3,578) -- --------- --------- --------- Net cash provided by financing activities 130,199 142,799 14,966 --------- --------- --------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 2,759 (8,235) 2,657 CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR -- 8,235 5,578 --------- --------- --------- CASH AND CASH EQUIVALENTS AT END OF YEAR $ 2,759 $ -- $ 8,235 ========= ========= ========= (Continued)
F-5 42 PAN PACIFIC RETAIL PROPERTIES, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
FOR THE YEARS ENDED DECEMBER 31, ---------------------------------------- 1998 1997 1996 ---------- ---------- ---------- SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid for interest (net of amounts capitalized of $286, $229 and $412, respectively) $ 17,539 $ 14,206 $ 15,744 Income taxes paid $ 20 $ 19 $ 222 SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES: Transfer from property under development to operating properties $ -- $ 5,907 $ 9,327 Transfer from property under development to prepaid financing costs $ -- $ -- $ 116 Transfer from property under development to deferred lease commissions $ -- $ 119 $ 197 Transfer of acquisition deposits (included in other assets) to operating properties $ 1,465 $ -- $ -- Notes payable assumed upon acquisition of operating properties $ 38,187 $ 37,421 $ -- Wrap-around note receivable and note payable assumed $ -- $ 1,519 $ -- Transfer of notes receivable to operating properties through foreclosure $ 601 $ 1,283 $ -- Acquisition of minority interest $ 15,722 $ -- $ -- Additions to loan fees and accounts payable $ -- $ -- $ 158 Reclassification of advances from related party to stockholders' equity $ -- $ 97,323 $ -- Distributions payable $ 8,227 $ 6,095 $ --
See accompanying notes to consolidated financial statements. F-6 43 PAN PACIFIC RETAIL PROPERTIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 (TABULAR AMOUNTS ARE IN THOUSANDS, EXCEPT OPTION AND SHARE DATA) 1. ORGANIZATION AND BASIS OF PRESENTATION Pan Pacific Realty Corporation was incorporated in the state of Maryland on April 16, 1997 (inception) and subsequently changed its name to Pan Pacific Retail Properties, Inc. (together with its subsidiaries, the "Company"). The Company was formed to continue to operate and expand the shopping center business conducted by Pan Pacific Development (U.S.) Inc. ("PPD"), a wholly-owned subsidiary of Revenue Properties Company Limited ("Revenue Properties"), and its subsidiaries related to the ownership, leasing and management of its neighborhood and community shopping centers and a medical office building ("Pan Pacific Development Properties"). As of December 31, 1998, the Company owns a portfolio comprised of 54 properties located primarily in the Western region of the United States. Commencing with its taxable year ended December 31, 1997, the Company believes it qualifies as a real estate investment trust ("REIT") under Sections 856 through 860 of the Internal Revenue Code. On August 13, 1997, the Company completed an initial public offering of 8,050,000 shares of common stock at $19.50 per share (including 1,050,000 shares issued as a result of the full exercise of the over-allotment option by the underwriters on September 8, 1997) (the "Offering"). The aggregate proceeds to the Company, net of underwriters' discount, advisory fee and offering costs were approximately $143,284,000. The following transactions occurred simultaneously with the completion of the Offering (collectively, the "Formation Transactions"): o Certain properties were transferred by PPD entities to the Company and certain PPD entities were merged with and into the Company. o PPD advanced cash of $26,486,000 to the Company (the "PPD Contribution"). o The Company obtained a $150,000,000 unsecured credit facility (the "Unsecured Credit Facility") which has been and is expected to be used to finance additional shopping center acquisitions and for other corporate purposes. o A portion of the estimated net proceeds of the Offering and the PPD Contribution were used by the Company to repay indebtedness of the Company and to pay transaction costs, including fees and expenses associated with the Unsecured Credit Facility. The transfer of certain properties and the merger of certain PPD entities with and into the Company was accounted for as a combination of affiliated entities under common control in a manner similar to a pooling-of-interests. Under this method, the assets, liabilities and equity were carried over at their historical book values and their operations have been recorded on a combined historical basis. The pooling-of-interests method of accounting also requires the reporting of results of operations, for the period in which the combination occurred, as though the entities had been combined as of either the beginning of the period or inception. Accordingly, the results of operations for the year ended December 31, 1997 comprise those of the combined entities from August 13, 1997 through December 31, 1997. Prior to the combination, the Company had no significant operations; therefore, the combined operations for the periods prior to August 13, 1997 represent primarily the operations of Pan Pacific Development Properties. All of the accounts of PPD unrelated to these activities have been excluded from these consolidated financial statements. A deficit of $93,066,000 was accumulated by Pan Pacific Development Properties prior to the Formation Transactions. The combination did not require any material adjustments to conform to accounting policies of the separate entities. F-7 44 PAN PACIFIC RETAIL PROPERTIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 (TABULAR AMOUNTS ARE IN THOUSANDS, EXCEPT OPTION AND SHARE DATA) 1. ORGANIZATION AND BASIS OF PRESENTATION (CONTINUED) On May 18, 1998, the Company completed a secondary offering of 4,348,000 shares of common stock at $21.125 per share (including 348,000 shares issued as a result of the partial exercise of the over-allotment option by the underwriters on June 11, 1998). The aggregate proceeds to the Company, net of underwriters' discount, advisory fee and offering costs were approximately $85,913,000. In September 1998, the Company formed Pan Pacific (Portland), LLC ("PPP LLC"), with the Company as the sole managing member. In October and November of 1998, PPP LLC acquired a portfolio of six shopping centers located in Oregon. In exchange for four properties which were contributed to PPP LLC, 832,617 units were issued to certain non-managing members. A non-managing member can seek redemption of the units after the first anniversary. The Company, at its option, may redeem the units by either (i) issuing common stock at the rate of one share of common stock for each unit, or (ii) paying cash to the non-managing member based on the average trading price of its common stock. Distributions are made to the non-managing members at a rate equal to the distribution being paid by the Company on a share of common stock. Net income or loss is allocated to the non-managing members in an amount equal to the cumulative distributions earned by such members. All remaining net income or loss is allocated to the managing member. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND PRACTICES (a) PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries (Note 1). All material intercompany transactions and balances have been eliminated. At December 31, 1998, the Company consolidated Chino Town Square, of which the Company's ownership interest is 93.7%, and PPP LLC, of which the Company's ownership interest is 56.2%. The Company has recorded a minority interest for the portions not owned by the Company. (b) CASH AND CASH EQUIVALENTS For purposes of reporting cash flows, highly liquid investments with an original maturity of three months or less are considered cash equivalents. (c) INCOME RECOGNITION Rental revenue is recognized on a straight-line basis over the terms of the leases, less a general allowance for doubtful accounts relating to accrued rent receivable for leases which may be terminated before the end of the contracted term. (d) CAPITALIZATION OF COSTS The Company capitalizes certain acquisition related costs to the carrying costs of the property acquired. These costs are being depreciated over the estimated useful lives of the properties. The capitalized costs associated with unsuccessful acquisitions are charged to expense when the acquisition is abandoned. F-8 45 PAN PACIFIC RETAIL PROPERTIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 (TABULAR AMOUNTS ARE IN THOUSANDS, EXCEPT OPTION AND SHARE DATA) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND PRACTICES (CONTINUED) (e) DEPRECIATION AND AMORTIZATION Depreciation on buildings and improvements is provided using a forty-year straight-line basis. Tenant improvements and costs incurred in obtaining leases are depreciated on a straight-line basis over the lives of the respective leases. Prepaid loan fees are amortized over the lives of the loans and the related amortization expense is included as a component of interest expense. (f) IMPAIRMENT OF LONG-LIVED ASSETS AND LONG-LIVED ASSETS TO BE DISPOSED OF The Company reviews long-lived assets and certain identifiable intangibles for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future net cash flows, undiscounted and without interest, expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceed the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell. (g) INCOME TAXES As of April 16, 1997, the Company elected to be taxed as a REIT pursuant to the Internal Revenue Code, as amended. In general, a corporation that distributes at least 95% of its REIT taxable income to stockholders in any taxable year and complies with certain other requirements (relating primarily to the nature of its assets and the sources of its revenue) is not subject to federal income taxation to the extent of the income which it distributes. Management believes that the Company has qualified and intends for it to continue to qualify as a REIT in the future. As discussed more fully in Note 7, management also does not expect that the Company will pay income taxes on "built-in gains" on certain of its assets. Based on these considerations, management does not believe that the Company will be liable for income taxes at the federal level or in most of the states in which it operates in future years. Where required, deferred income taxes are accounted for using the asset and liability method. Under this method, deferred income taxes are recognized for temporary differences between the financial reporting bases of assets and liabilities and their respective tax bases and for operating loss and tax credit carryforwards based on enacted tax rates expected to be in effect when such amounts are realized or settled. However, deferred tax assets are recognized only to the extent that it is more likely than not that they will be realized based on consideration of available evidence, including tax planning strategies and other factors. (h) CREDIT RISK The Company predominantly operates in one industry segment, real estate ownership, management and development. No single tenant accounts for 10% or more of rental revenue. Financial instruments which potentially subject the Company to concentrations of credit risk consist principally of temporary cash investments and receivables. The Company places its temporary cash investments with financial institutions which the Company believes are of high credit quality. Concentration of credit risk with respect to receivables is limited due to the large number of tenants comprising the Company's customer base, and their dispersion across many geographical areas. At December 31, 1998 and 1997, the Company had no significant concentration of credit risk. F-9 46 PAN PACIFIC RETAIL PROPERTIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 (TABULAR AMOUNTS ARE IN THOUSANDS, EXCEPT OPTION AND SHARE DATA) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND PRACTICES (CONTINUED) (i) NET INCOME PER SHARE Basic earnings per share ("EPS") is computed by dividing earnings available to common stockholders during the period by the weighted average number of common shares outstanding during each period. Diluted EPS is computed by dividing the amount of earnings for the period available to common stockholders during the period by the weighted average number of shares that would have been outstanding assuming the issuance of common shares for all dilutive potential common shares outstanding during the reporting period, net of shares assumed to be repurchased using the treasury stock method. The following is a reconciliation of the denominator for the basic EPS computation to the denominator of the diluted EPS computation (all net income is available to common stockholders for the period presented):
FOR THE YEARS ENDED DECEMBER 31, 1998 1997 ---------- ---------- Weighted average shares used for the basic EPS computation (deemed outstanding the entire year in 1997) 19,507,141 16,814,012 Incremental shares from the assumed exercise of dilutive stock options and units 155,481 52,161 ---------- ---------- Weighted average shares used for the diluted EPS computation 19,662,622 16,866,173 ========== ==========
At December 31, 1998, there were 328,500 anti-dilutive options outstanding. There were no anti-dilutive options outstanding at December 31, 1997. An earnings per share calculation for 1996 is not applicable as there were no shares outstanding during this year. (j) STOCK OPTION PLAN The Company accounts for its stock option plan in accordance with the provisions of Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees", and related interpretations. As such, compensation expense is recorded on the date of grant only if the current market price of the underlying stock exceeds the exercise price. Statement of Financial Accounting Standards No. 123 ("SFAS No. 123"), "Accounting for Stock-Based Compensation", permits entities to recognize as expense over the vesting period the fair value of all stock-based awards on the date of grant. Alternatively, SFAS No. 123 allows entities to continue to apply the provisions of APB Opinion No. 25 and provide pro forma net income and pro forma earnings per share disclosures for employee stock option grants made as if the fair-value-based method defined in SFAS No. 123 had been applied. The Company has elected to continue to apply the provisions of APB Opinion No. 25 and provide the annual pro forma disclosures required by SFAS No. 123. F-10 47 PAN PACIFIC RETAIL PROPERTIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 (TABULAR AMOUNTS ARE IN THOUSANDS, EXCEPT OPTION AND SHARE DATA) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND PRACTICES (CONTINUED) (k) SEGMENT REPORTING The Company adopted the provisions of Statement of Financial Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and Related Information" ("SFAS No. 131"). SFAS No. 131 establishes standards for the way public business enterprises report information about operating segments in annual financial statements and requires that those enterprises report selected information about operating segments in interim financial reports issued to stockholders. It also establishes standards for related disclosures about products and services, geographic areas, and major customers. (l) USE OF ESTIMATES Management of the Company has made a number of estimates and assumptions relating to the reporting of assets, liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reporting of revenue and expenses during the reporting period to prepare these financial statements in conformity with generally accepted accounting principles. Actual results could differ from those estimates. (m) RECLASSIFICATIONS Certain reclassifications of 1996 and 1997 amounts have been made in order to conform to 1998 presentation. 3. INVESTMENTS IN UNCONSOLIDATED PARTNERSHIPS The accompanying consolidated financial statements include investments in two partnerships in which the Company does not own a controlling interest. At December 31, 1998 and 1997, the Company owned 50% general partner interests in Melrose Village Plaza and North Coast Health Center. These investments are reported using the equity method. On January 5, 1999, the Company acquired the remaining interest in Melrose Village Plaza from the limited partner (see Note 15). Summarized combined financial information for the partnerships is presented below:
AS OF DECEMBER 31, ------------------------- 1998 1997 ---------- ---------- Properties $ 19,182 $ 19,364 Other assets 894 550 ---------- ---------- Total assets $ 20,076 $ 19,914 ========== ========== Liabilities $ 184 $ 72 Equity 19,892 19,842 ---------- ---------- Total liabilities and equity $ 20,076 $ 19,914 ========== ==========
FOR THE YEARS ENDED DECEMBER 31, ------------------------------------- 1998 1997 1996 --------- --------- --------- Revenue $ 4,186 $ 4,046 $ 4,064 Expenses 2,712 3,228 3,846 --------- --------- --------- Net income $ 1,474 $ 818 $ 218 ========= ========= =========
F-11 48 PAN PACIFIC RETAIL PROPERTIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 (TABULAR AMOUNTS ARE IN THOUSANDS, EXCEPT OPTION AND SHARE DATA) 4. NOTES PAYABLE AND LINE OF CREDIT
DECEMBER 31, -------------------------- 1998 1997 ---------- ---------- Notes payable consist of the following: Bank notes payable, secured by a mortgage and deeds of trust, bearing interest at 8.17% with monthly principal and interest payments of $404, due in January 2007 $ 53,429 $ 53,836 Bank note payable, secured by a deed of trust, bearing interest at 8.00% with monthly principal and interest payments of $230, due in March 2000 27,160 27,726 Bank note payable, secured by a deed of trust, bearing interest at 7.75% with monthly principal and interest payments of $37, due in March 2004 4,561 4,652 Bank note payable, secured by a deed of trust, bearing interest at 8.52% with monthly principal and interest payments of $35, due in January 2007 4,441 4,472 Bank notes payable, secured by deeds of trust, bearing interest at 7.80% with monthly principal and interest payments of $107, due in December 2005 11,172 11,569 Bank notes payable, secured by deeds of trust, bearing interest at 7.88% with monthly principal and interest payments of $56, due in November 2010 5,161 6,061 Bank note payable, secured by deeds of trust, bearing interest at 8.73% with monthly principal and interest payments of $144, due in February 2007 (a) 17,148 -- Bank note payable, secured by a deed of trust, bearing interest at 7.65% with monthly principal and interest payments of $54, due in October 2012 (b) 7,569 -- Bank note payable, secured by a deed of trust, bearing interest at 8.50% with monthly principal and interest payments of $34, due in March 2000 3,725 -- Promissory note payable, secured by a deed of trust, bearing interest at 8%, due and repaid in January 1999 7,700 -- ---------- ---------- 142,066 108,316 Unamortized note payable premiums 1,958 -- ---------- ---------- $ 144,024 $ 108,316 ========== ==========
F-12 49 PAN PACIFIC RETAIL PROPERTIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 (TABULAR AMOUNTS ARE IN THOUSANDS, EXCEPT OPTION AND SHARE DATA) 4. NOTES PAYABLE AND LINE OF CREDIT (CONTINUED) Principal payments under these notes payable are due as follows: 1999 $ 9,952 2000 31,836 2001 1,812 2002 1,965 2003 2,136 2004 and subsequent 94,365 --------- $142,066 =========
(a) Excludes unamortized note payable premium of $1,620. (b) Excludes unamortized note payable premium of $338. As part of the Formation Transactions, $134,217,000 of notes payable were repaid. In connection with the early payoff of these notes, an extraordinary loss of $1,043,000 was recorded which includes prepayment penalties, unamortized financing costs and loan premium. The Company also has a $200,000,000 Unsecured Credit Facility which bears interest, at the Company's option, at either LIBOR plus 1.375% or a reference rate and expires in August 2000. At December 31, 1998, the amount drawn on this line of credit was $138,500,000 and the interest rate was 6.58%. The credit facility requires a quarterly fee of .25% per annum on the unused amount of the available commitment if less than half of the commitment has been used. The quarterly unused fee decreases to .125% per annum once more than half of the commitment has been drawn. 5. FINANCIAL INSTRUMENTS The following methods and assumptions were used to estimate fair value of each class of financial instruments: i) Cash and cash equivalents, restricted cash, accounts receivable, certain notes receivable, accounts payable and accrued expenses and other liabilities The carrying amounts approximate fair values because of the short maturity of these instruments. ii) A note receivable and advances from related party It was not practicable to estimate the fair value of these instruments due to the uncertainty of the timing of repayment. iii) Notes receivable The fair value of the notes receivable approximates the carrying amount based on market rates for the same or other instruments with similar risk, security and remaining maturities. F-13 50 PAN PACIFIC RETAIL PROPERTIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 (TABULAR AMOUNTS ARE IN THOUSANDS, EXCEPT OPTION AND SHARE DATA) 5. FINANCIAL INSTRUMENTS (CONTINUED) iv) Notes and line of credit payable The fair value of notes payable and the line of credit payable approximates the carrying amount based on the current rates offered for notes and lines of credit payable with similar risks and maturities. 6. STOCK OPTION PLAN In August 1997, the Company established the 1997 Stock Option and Incentive Plan (the "Plan") pursuant to which the Company's Board of Directors may grant stock options to officers and key employees. The Plan authorizes grants of options to purchase up to 1,620,000 shares of authorized but unissued common stock. Stock options are granted with an exercise price equal to the stock's fair value at the date of grant. At the time of the Offering, the Company issued to certain officers, directors and key employees, 900,000 common stock options pursuant to the Plan. The stock options were granted with an exercise price of $19.50, equal to the stock's fair value at the date of grant. On March 17, 1998, the Company issued an additional 337,500 common stock options pursuant to the Plan. The stock options were granted with an exercise price of $22.1875, equal to the stock's fair value at the date of grant. The stock options have seven-year terms and vest 33 1/3% per year over three years from the date of grant, except for the options granted to the independent directors which vest 33 1/3% immediately, with the remainder vesting ratably over two years. At December 31, 1998, there were 404,833 additional shares available for grant under the Plan. The per share weighted-average fair value of stock options granted during 1998 and 1997 were $2.48 and $2.64, respectively, on the dates of grant using the Black-Scholes option-pricing model using the following weighted-average assumptions:
1998 1997 ----- ----- Expected distribution yield 7.50% 6.75% Risk-free interest rate 5.00% 6.50% Expected volatility 23.72% 22.05% Expected life (years) 5 5
The Company applies APB Opinion No. 25 in accounting for its Plan and, accordingly, no compensation cost has been recognized for its stock options in the financial statements. Had the Company determined compensation cost based on the fair value at the grant date for its stock options under SFAS No. 123, the Company's net income would have been reduced to the pro forma amounts indicated below:
1998 1997 ------------------------------ ----------------------------- AS REPORTED PRO FORMA AS REPORTED PRO FORMA ------------ ------------ ------------ ------------ Net income $ 26,634 $ 25,676 $ 8,313 $ 8,012 Diluted earnings per share $ 1.35 $ 1.31 $ 0.49 $ 0.48
Pro forma net income reflects options granted since adoption of the Plan. F-14 51 PAN PACIFIC RETAIL PROPERTIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 (TABULAR AMOUNTS ARE IN THOUSANDS, EXCEPT OPTION AND SHARE DATA) 6. STOCK OPTION PLAN (CONTINUED) Stock option activity during the periods presented is as follows:
NUMBER OF WEIGHTED-AVERAGE OPTIONS EXERCISE PRICE ------------ ---------------- Balance at December 31, 1996 -- -- Granted 900,000 $ 19.5000 Exercised -- -- Forfeited -- -- Expired -- -- ------------ Balance at December 31, 1997 900,000 19.5000 Granted 337,500 22.1875 Exercised -- -- Forfeited (20,666) 20.6700 Expired (1,667) 19.5000 ------------ Balance at December 31, 1998 1,215,167 20.2265 ============
At December 31, 1998, the weighted-average exercise price and weighted-average remaining contractual life of outstanding options were $20.2265 and 5.7 years, respectively. At December 31, 1998, 310,007 of the options were exercisable. 7. INCOME TAXES The Company's income tax expense is included in other expenses and consists of the following:
FOR THE YEARS ENDED DECEMBER 31, -------------------------------- 1998 1997 1996 -------- -------- -------- Current income taxes: Federal $ -- $ -- $ 49 State 20 19 73 -------- -------- -------- $ 20 $ 19 $ 122 ======== ======== ========
The differences between income tax expense computed using statutory income tax rates and the Company's effective income tax rate are as follows:
FOR THE YEARS ENDED DECEMBER 31, ---------------------------------------------- 1998 1997 1996 ------------ ------------ ------------ Federal income taxes $ 9,062 $ 3,188 $ 194 State income taxes, net of federal benefit 1,554 572 34 Decrease in valuation allowance -- (2,519) (228) Distributions paid deduction (10,616) (1,222) -- Other 20 -- 122 ------------ ------------ ------------ $ 20 $ 19 $ 122 ============ ============ ============
F-15 52 PAN PACIFIC RETAIL PROPERTIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 (TABULAR AMOUNTS ARE IN THOUSANDS, EXCEPT OPTION AND SHARE DATA) 7. INCOME TAXES (CONTINUED) At December 31, 1998, the Company had unused net operating losses carried forward for federal income tax purposes of approximately $12,000,000. The Company went through a change in control for tax purposes during 1997 which significantly restricts the use of the Company's net operating losses carried forward in future years. The net operating losses carried forward expire at various times through 2010. As discussed in Note 2(g), the Company elected to be taxed as a REIT, effective April 16, 1997. Management believes that the Company qualified and management's intent is to continue to qualify as a REIT and therefore does not expect the Company will be liable for income taxes on "built-in gains" on its assets at the federal level or in most states in future years. Accordingly, for the years ended December 31, 1998 and 1997, no provision was recorded for federal or substantially all state income taxes. In connection with the Company's incorporation and the Offering in 1997, certain nontaxable mergers were consummated with PPD whereby several wholly-owned subsidiaries of PPD merged with and into the Company. To the extent the excess fair value of the assets at the date of merger exceeded the aggregate adjusted tax bases of those assets, a net unrecognized built-in gain was created for income tax purposes. In connection with its election to be taxed as a REIT, the Company will also elect to be subject to the "built-in gain" rules. Under these rules, taxes may be payable at the time and to the extent that the net unrealized gains on the Company's assets at the date of conversion to REIT status are recognized in taxable dispositions of such assets in the ten-year period following conversion. Such net unrealized gains were approximately $50,000,000 at December 31, 1998 and 1997. Management believes that the Company will not be required to make payments of income taxes on built-in gains during the ten-year period ending December 31, 2007 due to the availability of its net operating loss carryforward to offset built-in gains which might be recognized, the potential for the Company to make nontaxable dispositions, if necessary (e.g., like-kind exchanges of properties) and the intent and ability of the Company to defer asset dispositions to periods when related gains will not be subject to the built-in gains income taxes. However, it may be necessary to recognize a liability for such income taxes in the future if management's plans and intentions with respect to asset dispositions, or the related tax laws, change. 8. FUTURE LEASE REVENUE Total future minimum lease receipts under noncancellable operating tenant leases in effect at December 31, 1998 are as follows: 1999 $ 70,804 2000 66,240 2001 59,116 2002 52,513 2003 44,572 2004 and subsequent 255,178 -------- $548,423 ========
F-16 53 PAN PACIFIC RETAIL PROPERTIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 (TABULAR AMOUNTS ARE IN THOUSANDS, EXCEPT OPTION AND SHARE DATA) 9. RELATED PARTY TRANSACTIONS (a) Included in general and administrative expenses are management fees totaling $481,000 and $780,000 for the years ended December 31, 1997 and 1996, respectively, which are a reimbursement of costs incurred by Revenue Properties for managing the development of the properties, directing corporate strategy, and consulting on operations. Effective August 13, 1997, at the closing of the Offering, these fees are no longer being incurred by the Company. (b) The Company paid a consulting fee of $259,000 and $420,000 for the years ended December 31, 1997 and 1996, respectively, to a sole proprietorship owned by a director of Revenue Properties. Effective August 13, 1997, at the closing of the Offering, these fees are no longer being incurred by the Company. (c) The Company incurred $529,000 and $1,878,000 for the years ended December 31, 1997 and 1996, respectively, for loan guaranty fees charged by Revenue Properties. These fees are recorded as a component of other expenses. Effective August 13, 1997, at the closing of the Offering, these fees are no longer being incurred by the Company. (d) Pursuant to the Offering, the Company issued shares of common stock in lieu of repayment of net advances from Revenue Properties of $97,323,000 at August 13, 1997. Subsequent to this date, no advances have been received from Revenue Properties. (e) Distributions paid to PPD during 1998 and 1997 were $14,625,000 and $1,837,000, respectively. At December 31, 1998 and 1997, $4,107,000 and $3,130,000, respectively, were payable as distributions to PPD. (f) The Company has a note receivable at December 31, 1998 of $144,000 due from an executive officer. The note bears interest at 7.00% and matures in December 1999. On January 21, 1999, principal of $20,000 was repaid. On March 24, 1999, the remaining principal and accrued interest outstanding of approximately $125,000 was repaid. 10. EMPLOYEE BENEFIT PLAN The Company implemented an employee benefit plan in March 1997. All employees of the Company who meet certain minimum age and period of service requirements are eligible to participate in a Section 401(k) plan as defined by the Internal Revenue Code. The employee benefit plan allows eligible employees to defer up to 15 percent of their annual compensation. The amounts contributed by employees are immediately vested and non-forfeitable. The Company, at management's discretion, may match employee contributions. This cost is accrued as incurred. The Company's cost for the years ended December 31, 1998 and 1997 was approximately $17,000 and $63,000, respectively. F-17 54 PAN PACIFIC RETAIL PROPERTIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 (TABULAR AMOUNTS ARE IN THOUSANDS, EXCEPT OPTION AND SHARE DATA) 11. COMMITMENTS AND CONTINGENCIES (a) The Company leases certain real estate and office equipment under operating leases expiring at various dates through 2021. Rental expense was $809,695, $636,958 and $618,018 for the years ended December 31, 1998, 1997 and 1996, respectively. Minimum rentals under noncancellable leases in effect at December 31, 1998 were as follows: 1999 $ 778 2000 776 2001 776 2002 445 2003 209 2004 and subsequent 3,296 ------- $ 6,280 =======
(b) Various claims and legal proceedings arise in the ordinary course of business. The ultimate amount of liability from all claims and actions cannot be determined with certainty, but in the opinion of management, the ultimate liability from all pending and threatened legal claims will not materially affect the consolidated financial statements taken as a whole. 12. UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL INFORMATION The accompanying unaudited pro forma information for the years ended December 31, 1997 and 1996 is presented as if the Formation Transactions (including the acquisition of Chico Crossroads, Monterey Plaza, Fairmont Shopping Center, Lakewood Shopping Center, Green Valley Town & Country and secured notes receivable), the Offering described in Note 1 to the financial statements and the repayment of notes payable pursuant to the Offering had all occurred on January 1, 1996. Such pro forma information is based upon the historical financial statements of the Company and should be read in connection with the financial statements and the notes thereto. This unaudited pro forma condensed information does not purport to represent what the actual results of operations of the Company would have been assuming such transactions had been completed as set forth above, nor does it purport to predict the results of operations for future periods. Pro Forma Condensed Income Statements (in thousands, except share data)
FOR THE YEARS ENDED DECEMBER 31, 1997 1996 ---------- ---------- (unaudited) (unaudited) Total revenue $ 50,358 $ 45,559 Net income $ 17,537 $ 16,361 Basic and diluted earnings per share $ 1.04 $ 0.97(a)
(a) assuming 16,814,012 shares outstanding F-18 55 PAN PACIFIC RETAIL PROPERTIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 (TABULAR AMOUNTS ARE IN THOUSANDS, EXCEPT OPTION AND SHARE DATA) 13. QUARTERLY FINANCIAL DATA (UNAUDITED) The following summarizes the condensed quarterly financial information for the Company:
QUARTERS ENDED 1998 --------------------------------------------------------------- DECEMBER 31 SEPTEMBER 30 JUNE 30 MARCH 31 ------------ ------------ ------------ ------------ Revenue $ 22,323 $ 20,242 $ 19,248 $ 17,440 Expenses and minority interests 14,612 12,793 13,146 12,068 ============ ============ ============ ============ Net income $ 7,711 $ 7,449 $ 6,102 $ 5,372 ============ ============ ============ ============ Basic and diluted earnings per share $ 0.36 $ 0.35 $ 0.32 $ 0.32
QUARTERS ENDED 1997 --------------------------------------------------------------- DECEMBER 31 SEPTEMBER 30 JUNE 30 MARCH 31 ------------ ------------ ------------ ------------ Revenue $ 14,571 $ 12,154 $ 10,667 $ 9,318 Expenses and minority interests 9,421 8,925 9,873 9,135 ------------ ------------ ------------ ------------ Income before extraordinary item 5,150 3,229 794 183 Extraordinary loss on early extinguishment of debt -- 1,043 -- -- ============ ============ ============ ============ Net income $ 5,150 $ 2,186 $ 794 $ 183 ============ ============ ============ ============ Basic earnings per share: Income before extraordinary item $ 0.31 $ 0.19 $ 0.05 $ 0.01 Net income $ 0.31 $ 0.13 $ 0.05 $ 0.01
14. SEGMENT REPORTING The Company predominantly operates in one industry segment, real estate ownership, management and development. As of December 31, 1998, the Company owned 54 community shopping centers primarily located in the Western United States (see Note 1). Management reviews operating and financial data for each property separately and independently from all other properties when making resource allocation decisions and measuring performance. Therefore, the Company has 54 operating segments, with no segment representing more than 10% of the total for the Company. No single tenant accounts for 10% or more of rental revenue and none of the shopping centers are located in a foreign country. 15. SUBSEQUENT EVENT On January 5, 1999, the Company purchased the remaining 50% partnership interest in Melrose Village Plaza. The purchase price was $7,150,000 and was financed primarily by a draw under the Company's line of credit. F-19 56 PAN PACIFIC RETAIL PROPERTIES, INC. SCHEDULE III PROPERTIES AND ACCUMULATED DEPRECIATION DECEMBER 31, 1998 (IN THOUSANDS)
COSTS CAPITALIZED SUBSEQUENT TO INITIAL COSTS ACQUISITION --------------------------- ----------------------------- BUILDINGS AND CARRYING DESCRIPTION ENCUMBRANCES LAND IMPROVEMENTS(2) IMPROVEMENTS(2) COSTS - ----------- ------------ ---- --------------- --------------- -------- PROPERTIES: 24 Hour Fitness Hillsboro, OR $ -- $ 569 $ 1,706 $ 188 $ -- Arlington Courtyard Riverside, CA -- 401 753 73 -- Bear Creek Plaza Medford, OR -- 3,275 9,825 609 -- Brookvale Center Fremont, CA -- 3,164 9,492 426 -- Canyon Ridge Plaza Kent, WA -- 2,457 -- 7,641 1,275 Cheyenne Commons Las Vegas, NV -- 8,540 26,810 1,262 -- Chico Crossroads Chico, CA -- 3,600 17,063 16 -- Chino Town Square Chino, CA 27,160 8,801 10,297 25,465 -- Claremont Village Everett, WA -- 2,320 6,987 129 -- Country Club Center Rio Rancho, NM 3,253 566 2,514 777 -- Creekside Center Hayward, CA -- 1,500 4,500 51 -- Fairmont Shopping Center Fairmont, CA -- 3,420 8,003 127 -- Fashion Faire San Leandro, CA -- 2,863 8,588 121 -- Foothill Center Rialto, CA -- 314 1,078 20 -- Glen Cove Center Vallejo, CA 3,850 1,925 5,775 10 -- Green Valley Town & Country Henderson, NV -- 4,096 12,333 54 -- Hermiston Plaza Hermiston, OR -- 1,931 5,791 758 -- Hood River Center Hood River, OR -- 1,169 3,507 172 -- Jumbo Sports Memphis, TN -- 1,204 3,780 186 -- Laguna Village Sacramento, CA -- 3,226 -- 14,793 1,644 Lakewood Shopping Center Lakewood, CA -- 2,363 7,125 43 -- Laurentian Center Ontario, CA 4,561 2,767 6,445 689 -- Manteca Marketplace Manteca, CA -- 3,904 11,713 353 -- Maysville Marketsquare Maysville, KY 5,323 3,454 2,001 3,693 79 Milwaukie Marketplace Milwaukie, OR -- 3,181 9,554 177 -- Mira Loma Shopping Center Reno, NV 3,850 1,925 5,775 11 --
TOTAL COSTS -------------------------------------- BUILDINGS DATE OF AND TOTAL ACCUMULATED ACQUIS.(A) DESCRIPTION E LAND IMPROVEMENTS (1)(2)(3) DEPRECIATION(2)(3) CONSTR.(C) - ----------- - ---- ------------ --------- ------------------- ----------- PROPERTIES: 24 Hour Fitness Hillsboro, OR $ 569 $ 1,894 $ 2,463 $ 44 1998(A) Arlington Courtyard Riverside, CA 401 826 1,227 175 1994(A) Bear Creek Plaza Medford, OR 3,275 10,434 13,709 257 1998(A) Brookvale Center Fremont, CA 3,164 9,918 13,082 261 1997(A) Canyon Ridge Plaza Kent, WA 2,641 8,732 11,373 833 1992(A) 1995(C) Cheyenne Commons Las Vegas, NV 8,540 28,072 36,612 2,757 1995(A) Chico Crossroads Chico, CA 3,600 17,079 20,679 790 1997(A) Chino Town Square Chino, CA 21,249 23,314 44,563 2,061 1992(A) Claremont Village Everett, WA 2,320 7,116 9,436 212 1997(A) Country Club Center Rio Rancho, NM 566 3,291 3,857 819 1992(A) Creekside Center Hayward, CA 1,500 4,551 6,051 86 1998(A) Fairmont Shopping Center Fairmont, CA 3,420 8,130 11,550 348 1997(A) Fashion Faire San Leondro, CA 2,863 8,709 11,572 128 1998(A) Foothill Center Rialto, CA 314 1,098 1,412 50 1997(A) Glen Cove Center Vallejo, CA 1,925 5,785 7,710 24 1998(A) Green Valley Town & Country Henderson, NV 4,096 12,387 16,483 425 1997(A) Hermiston Plaza Hermiston, OR 1,931 6,549 8,480 39 1998(A) Hood River Center Hood River, OR 1,169 3,679 4,848 23 1998(A) Jumbo Sports Memphis, TN 1,204 3,966 5,170 879 1992(A) Laguna Village Sacramento, CA 3,448 16,215 19,663 1,238 1992(A) 1996/97(C) Lakewood Shopping Center Lakewood, CA 2,363 7,168 9,531 291 1997(A) Lanrentian Center Ontario, CA 2,767 7,134 9,901 1,179 1994/96(A) Manteca Marketplace Manteca, CA 3,904 12,066 15,970 262 1998(A) Maysville Marketsquare Maysville, KY 3,299 5,928 9,227 1,005 1992(A) 1993(C) Milwaukie Marketplace Milwaukie, OR 3,181 9,731 12,912 205 1998(A) Mira Loma Shopping Center Reno, NV 1,925 5,786 7,711 18 1998(A)
F-20 57 PAN PACIFIC RETAIL PROPERTIES, INC. SCHEDULE III PROPERTIES AND ACCUMULATED DEPRECIATION (CONTINUED) DECEMBER 31, 1998 (IN THOUSANDS)
COSTS CAPITALIZED SUBSEQUENT TO INITIAL COSTS ACQUISITION --------------------------- ----------------------------- BUILDINGS AND CARRYING DESCRIPTION ENCUMBRANCES LAND IMPROVEMENTS(2) IMPROVEMENTS(2) COSTS - ----------- ------------ ---- --------------- --------------- -------- PROPERTIES: Monterey Plaza San Jose, CA -- 7,688 18,761 136 -- Ocoee Plaza Ocoee, FL -- 651 2,911 314 -- Olympia Square Olympia, WA 13,998 3,737 11,580 1,341 -- Olympia West Center Olympia, WA 5,161 2,735 8,295 141 -- Oregon City Shopping Center Oregon City, OR 10,510 4,426 13,272 120 -- Oregon Trail Gresham, OR -- 3,593 10,779 1,217 -- Pacific Commons Shopping Center Spanaway, WA -- 3,419 10,256 58 -- Palmdale Center Palmdale, CA -- 1,150 3,454 56 -- Panther Lake Shopping Center Kent, WA -- 1,950 5,850 61 -- Pioneer Plaza Springfield, OR -- 1,864 5,591 130 -- Powell Valley Junction Gresham, OR -- 1,546 4,639 162 -- Rainbow Promenade Las Vegas, NV -- 9,390 21,774 262 -- Rosewood Village Santa Rosa, CA 4,441 2,180 4,958 172 -- Sahara Pavilion North Las Vegas, NV 30,855 11,920 28,554 471 -- Sahara Pavilion South Las Vegas, NV -- 4,833 12,988 1,101 -- San Dimas Market Place San Dimas, CA -- 5,700 17,100 218 -- Sandy Marketplace Sandy, OR 4,880 2,046 6,064 101 -- Shute Park Plaza Hillsboro, OR -- 994 2,981 101 -- Southgate Center Milwaukie, OR 3,378 1,424 4,268 34 -- Sunset Mall Portland, OR 7,907 2,996 8,989 79 -- Sunset Square Bellingham, WA -- 6,100 18,647 1,676 -- Tacoma Central Tacoma, WA 11,172 5,314 16,288 41 -- Tanasbourne Village Hillsboro, OR -- 5,573 13,861 1,433 -- Tustin Heights Tustin, CA -- 3,675 10,776 412 -- Vineyard Village East Ontario, CA -- 649 2,716 137 -- Westwood Village Shopping Center Redding, CA 3,725 1,131 3,393 261 -- Winterwood Pavilion Las Vegas, NV -- 4,573 13,015 1,078 -- -------- -------- -------- ------- ------ $144,024 $174,192 $463,175 $69,157 $2,998 ======== ======== ======== ======= ======
TOTAL COSTS -------------------------------------- BUILDINGS DATE OF AND TOTAL ACCUMULATED ACQUIS.(A) DESCRIPTION LAND IMPROVEMENTS (1)(2)(3) DEPRECIATION(2)(3) CONSTR.(C) - ----------- ---- ------------ --------- ------------------- ----------- PROPERTIES: Monterey Plaza San Jose, CA 7,688 18,897 26,585 820 1997(A) Ocoee Plaza Ocoee, FL 651 3,225 3,876 522 1992(A) Olympia Square Olympia, WA 3,737 12,921 16,658 3,144 1992(A) Olympia West Center Olympia, WA 2,735 8,436 11,171 253 1997(A) Oregon City Shopping Center Oregon City, OR 4,426 13,392 17,818 59 1998(A) Oregon Trail Gresham, OR 3,593 11,996 15,589 75 1998(A) Pacific Commons Shopping Center Spanaway, WA 3,419 10,314 13,733 130 1998(A) Palmdale Center Palmdale, CA 1,150 3,510 4,660 87 1997(A) Panther Lake Shopping Center Kent, WA 1,950 5,911 7,861 112 1998(A) Pioneer Plaza Springfield, OR 1,864 5,721 7,585 134 1998(A) Powell Valley Junction Gresham, OR 1,546 4,801 6,347 110 1998(A) Rainbow Promenade Las Vegas, NV 9,390 22,036 31,426 714 1997(A) Rosewood Village Santa Rosa, CA 2,180 5,130 7,310 1,215 1992(A) Sahara Pavilion North Las Vegas, NV 11,920 29,025 40,945 5,141 1992(A) Sahara Pavilion South Las Vegas, NV 4,833 14,089 18,922 2,812 1992(A) San Dimas Market Place San Dimas, CA 5,700 17,318 23,018 432 1998(A) Sandy Marketplace Sandy, OR 2,046 6,165 8,211 27 1998(A) Shute Park Plaza Hillsboro, OR 994 3,082 4,076 72 1998(A) Southgate Center Milwaukie, OR 1,424 4,302 5,726 19 1998(A) Sunset Mall Portland, OR 2,996 9,068 12,064 37 1998(A) Sunset Square Bellingham, WA 6,100 20,323 26,423 4,436 1992(A) Tacoma Central Tacoma, WA 5,314 16,329 21,643 477 1997(A) Tanasbourne Village Hillsboro, OR 5,573 15,294 20,867 2,998 1992(A) Tustin Heights Tustin, CA 3,675 11,188 14,863 278 1997(A) Vineyard Village East Ontario, CA 649 2,853 3,502 384 1994(A) Westwood Village Shopping Center Redding, CA 1,131 3,654 4,785 51 1998(A) Winterwood Pavilion Las Vegas, NV 4,573 14,093 18,666 3,096 1992(A) -------- -------- -------- ------- $186,891 $522,631 $709,522 $42,044 ======== ======== ======== =======
F-21 58 PAN PACIFIC RETAIL PROPERTIES, INC. SCHEDULE III PROPERTIES AND ACCUMULATED DEPRECIATION (CONTINUED) DECEMBER 31, 1998 (IN THOUSANDS) NOTES: (1) The aggregate gross cost of the properties owned by Pan Pacific Retail Properties, Inc. for federal income tax purposes, approximated $721,166 as of December 31, 1998. (2) Net of write-offs of fully depreciated assets. (3) The following table reconciles the historical cost and related accumulated depreciation and amortization of Pan Pacific Retail Properties, Inc. from January 1, 1996 through December 31, 1998:
FOR THE YEARS ENDED DECEMBER 31, COST OF PROPERTIES 1998 1997 1996 --------- --------- --------- Balance, beginning of period $ 485,590 $ 290,874 $ 273,677 Additions during period (acquisition, improvements, etc.) 224,989 199,251 18,682 Interest capitalized 286 229 412 Deductions during period (write-off of tenant improvements) (1,343) (4,764) (1,897) --------- --------- --------- Balance, close of period $ 709,522 $ 485,590 $ 290,874 ========= ========= =========
FOR THE YEARS ENDED DECEMBER 31, ACCUMULATED DEPRECIATION AND AMORTIZATION 1998 1997 1996 -------- -------- -------- Balance, beginning of period $ 30,076 $ 26,857 $ 22,254 Additions during period (depreciation and amortization expense) 13,311 7,983 6,500 Deductions during period (write-off of accumulated depreciation of tenant improvements) (1,343) (4,764) (1,897) -------- -------- -------- Balance, close of period $ 42,044 $ 30,076 $ 26,857 ======== ======== ========
See accompanying independent auditors' report. F-22 59 EXHIBIT INDEX Exhibit No. Description ----------- -------------------------------------------------------- 3.1 Articles of Amendment and Restatement of the Company (previously filed as Exhibit 3.1 to the Company's Registration Statement on Form S-11 (Registration No. 333-28715) and incorporated herein by reference) 3.2 Amended and Restated Bylaws of the Company (previously filed as Exhibit 3.2 to the Company's Registration Statement on Form S-11 (Registration No. 333-28715) and incorporated herein by reference) 4.1 Form of Certificate of Common Stock (previously filed as Exhibit 4.1 to the Company's Registration Statement on Form S-11 (Registration No. 333-28715) and incorporated herein by reference) 10.1 The 1997 Stock Option and Incentive Plan of Pan Pacific Retail Properties, Inc. (previously filed as Exhibit 10.1 to the Company's Registration Statement on Form S-11 (Registration No. 333-28715) and incorporated herein by reference) 10.2 Form of Officers and Directors Indemnification Agreement (previously filed as Exhibit 10.2 to the Company's Registration Statement on Form S-11 (Registration No. 333-28715) and incorporated herein by reference) 10.3 Form of Employment Agreement between the Company and Mr. Stuart A. Tanz (previously filed as Exhibit 10.3 to the Company's Registration Statement on Form S-11 (Registration No. 333-28715) and incorporated herein by reference) 10.4 Form of Employment Agreement between the Company and Mr. David L. Adlard (previously filed as Exhibit 10.4 to the Company's Registration Statement on Form S-11 (Registration No. 333-28715) and incorporated herein by reference) 10.5 Form of Employment Agreement between the Company and Mr. Jeffrey S. Stauffer (previously filed as Exhibit 10.5 to the Company's Registration Statement on Form S-11 (Registration No. 333-28715) and incorporated herein by reference) 10.6 Form of Miscellaneous Rights Agreement (previously filed as Exhibit 10.6 to the Company's Registration Statement on Form S-11 (Registration No. 333-28715) and incorporated herein by reference) 10.7 Form of Non-Competition Agreement (previously filed as Exhibit 10.7 to the Company's Registration Statement on Form S-11 (Registration No. 333-28715) and incorporated herein by reference) 10.8 Purchase and Sale Agreement for Green Valley Town & Country Shopping Center (previously filed as Exhibit 10.11 to the Company's Registration Statement on Form S-11 (Registration No. 333-28715) and incorporated herein by reference) 10.9 Credit Agreement with Bank of America NT&SA (previously filed as Exhibit 10.8 to the Company's filing of Form 10-Q for the quarter ended June 30, 1997 and incorporated herein by reference) 60 Exhibit No. Description ----------- -------------------------------------------------------- 10.10 Purchase and Sale Agreement for Rainbow Promenade (previously filed as Exhibit 10.9 to the Company's filing of Form 10-Q for the quarter ended June 30, 1997 and incorporated herein by reference) 10.11 Purchase and Sale Agreement for Claremont Village Shopping Center (previously filed as Exhibit 10.9 to the Company's filing of Form 10-Q for the quarter ended September 30, 1997 and incorporated herein by reference) 10.12 Purchase and Sale Agreement for Olympia West Plaza Shopping Center (previously filed as Exhibit 10.10 to the Company's filing of Form 10-Q for the quarter ended September 30, 1997 and incorporated herein by reference) 10.13 Purchase and Sale Agreement for Tacoma Central Shopping Center (previously filed as Exhibit 10.11 to the Company's filing of Form 10-Q for the quarter ended September 30, 1997 and incorporated herein by reference) 10.14 Modification Agreement to the Credit Agreement with Bank of America NT & SA (previously filed as exhibit 10.3 to the Company's Registration Statement on Form S-11 (Registration No. 333-50125) and incorporated herein by reference) 10.15 Amended and Restated Limited Liability Company Agreement of Pan Pacific (Portland), LLC (previously filed as Exhibit 99.1 to the Company's Form 8-K filed October 23, 1998 and incorporated herein by reference) 10.16 Purchase and Sale and Ground Lease Assignment and Assumption Agreement and Escrow Instructions (previously filed as Exhibit 99.2 to the Company's Form 8-K filed on October 23, 1998 and incorporated herein by reference) 10.17 First Amendment To Purchase and Sale Ground Lease Assignment and Assumption Agreement and Escrow Instructions (previously filed as Exhibit 99.3 to the Company's Form 8-K Filed October 23, 1998 and incorporated herein by reference) 10.18 Purchase and Sale Agreement and Escrow Instructions (previously filed as Exhibit 99.4 to the Company's Form 8-K filed October 23, 1998 and incorporated herein by reference) 10.19 Contribution Agreement and Escrow Instructions by and between Portland Fixture Limited Partnership PFMGP, Inc., and Pan Pacific (Portland), LLC dated September 23, 1998, and related amendments (previously filed as Exhibit 99.2 to the Company's Form 8-K filed November 12, 1998 and incorporated herein by reference) 10.20 Contribution Agreement and Escrow Instructions by and between Portland Fixture Limited Partnership, Independent Member Corp., Byron P. Henry, Steven J. Oliva and Pan Pacific (Portland), LLC dated September 23, 1998, and related amendments (previously filed as Exhibit 99.3 to the Company's Form 8-K filed November 12, 1998 and incorporated herein by reference) 10.21 Form of First Amendment to Employment Agreement between the Company and Mr. Stuart A. Tanz 10.22 Form of First Amendment to Non-Qualified Stock Option Agreement between the Company and Mr. Stuart A. Tanz 61 Exhibit No. Description ----------- -------------------------------------------------------- 10.23 Form of First Amendment to Incentive Stock Option Agreement between the Company and Mr. Stuart A. Tanz 10.24 Restricted Stock Agreement between the Company and Mr. Stuart A. Tanz 10.25 Form of First Amendment to Restricted Stock Agreement between the Company and Mr. Stuart A. Tanz 10.26 Form of First Amendment to Employment Agreement between the Company and Mr. Jeffrey S. Stauffer 10.27 Restricted Stock Agreement between the Company and Mr. Jeffrey S. Stauffer 10.28 Form of First Amendment to Restricted Stock Agreement between the Company and Mr. Jeffrey S. Stauffer 10.29 Form of First Amendment to Employment Agreement between the Company and Mr. David L. Adlard 10.30 Restricted Stock Agreement between the Company and Mr. David L. Adlard 10.31 Form of First Amendment to Restricted Stock Agreement between the Company and Mr. David L. Adlard 10.32 Form of First Amendment to Non-Qualified Stock Option Agreement for Independent Directors 21.1 Subsidiaries of the Registrant 23.1 Consent of KPMG LLP 27.1 Financial Data Schedule (electronically filed with the Securities and Exchange Commission only) EX-10.21 2 FIRST AMENDMENT TO EMPLOYMENT AGREEMENT - TANZ 1 EXHIBIT 10.21 FIRST AMENDMENT TO EMPLOYMENT AGREEMENT PAN PACIFIC RETAIL PROPERTIES, INC., a Maryland corporation (the "Company") and STUART A. TANZ ("Executive") have entered into that certain Employment Agreement (the "Agreement") effective as of August 13, 1997. In order to amend the Agreement in certain respects, the Company and Executive hereby agree as follows effective as of __________________, 1998. I. Section 5.2(a) of the Agreement is hereby amended in its entirety to read as follows: (a) Amount. In the event the Company terminates Executive's services hereunder pursuant to Section 5.1, Executive shall continue to render services to the Company pursuant to this Agreement until the date of termination and shall continue to receive compensation, as provided hereunder, through the termination date. In addition to other compensation payable to Executive for services rendered through the termination date, the Company shall pay Executive no later than the date of such termination, as a single severance payment, an amount equal to the sum of (i) three times Executive's highest annual Base Compensation paid hereunder during the preceding twenty-four month period (or, if Executive has been employed less than twelve months, three times the amount of Base Compensation paid during the period employed) plus (ii) three times the average annual bonus (excluding any bonus payment deemed by the Compensation Committee in its sole discretion to be a "Special Bonus") received by the Executive during the preceding twenty-four month period (or during the period the Executive has been employed hereunder if shorter than twelve months) (the "Severance Amount"). II. Section 5.2(c) of the Agreement is hereby amended in its entirety to read as follows: (c) 280G "Gross-Up". (i) Anything in this Agreement to the contrary notwithstanding, if it shall be determined that any payment or distribution to Executive or for his benefit (whether paid or payable or distributed or distributable) pursuant to the terms of this Agreement or otherwise (the "Payment") would be subject to the excise tax (the "Excise Tax") imposed by section 4999 of the Internal Revenue Code of 1986, as amended (the "Code"), then Executive shall be entitled to receive from the Company an additional payment (the "Gross-Up Payment") in an amount such that the net amount of the Payment and the Gross-Up Payment retained by Executive after the calculation and deduction of all Excise Taxes 2 (including any interest or penalties imposed with respect to such taxes) on the Payment and all federal, state and local income tax, employment tax and Excise Tax (including any interest or penalties imposed with respect to such taxes) on the Gross-Up Payment provided for in this Section 5.2(c), shall be equal to the Payment; (ii) All determinations required to be made under this Section 5.2(c), including whether and when the Gross-Up Payment is required and the amount of such Gross-Up Payment, and the assumptions to be used in arriving at such determinations shall be made by the Accountants (as defined below) which shall provide Executive and the Company with detailed supporting calculations with respect to such Gross-Up Payment within fifteen (15) business days of the receipt of notice from Executive or the Company that Executive has received or will receive a Payment. For the purposes of this Section 5.2(c), the "Accountants" shall mean the Company's independent certified public accountants serving immediately prior to the Change in Control (as defined in Section 5.6). In the event that the Accountants are also serving as accountant or auditor for the individual, entity or group effecting the Change in Control, Executive shall appoint another nationally recognized public accounting firm to make the determinations required hereunder (which accounting firm shall then be referred to as the Accountants hereunder). All fees and expenses of the Accountants shall be borne solely by the Company and it shall be the Company's obligation to cause the Accountants to take any actions required hereby. For the purposes of determining whether any of the Payments will be subject to the Excise Tax and the amount of such Excise Tax, such Payments will be treated as "parachute payments" within the meaning of section 280G of the Code, and all "parachute payments" in excess of the "base amount" (as defined under section 280G(b)(3) of the Code) shall be treated as subject to the Excise Tax, unless and except to the extent that in the opinion of the Accountants such Payments (in whole or in part) either do not constitute "parachute payments" or represent reasonable compensation for services actually rendered (within the meaning of section 280G(b)(4) of the Code) in excess of the "base amount," or such "parachute payments" are otherwise not subject to such Excise Tax. For purposes of determining the amount of the Gross-Up Payment, Executive shall be deemed to pay Federal income taxes at the highest applicable marginal rate of federal income taxation for the calendar year in which the Gross-Up Payment is to be made and to pay any applicable state and local income taxes at the highest applicable marginal rate of taxation for the calendar year in which the Gross-Up Payment is to be made, net of the maximum reduction in federal income taxes which could be obtained from the deduction of such state or local taxes if paid in such year (determined without regard to limitations on deductions based upon the amount of Executive's adjusted gross income), and to have otherwise allowable deductions for federal, state and local income tax purposes at least equal to those disallowed because of the inclusion of the Gross-Up Payment in Executive's adjusted gross income. To the extent practicable, any Gross-Up Payment with respect to any Payment shall be paid by the Company at the time Executive is entitled to receive the Payment and in no event will any Gross-Up Payment be paid later than five 2 3 days after the receipt by Executive of the Accountants' determination. Any determination by the Accountants shall be binding upon the Company and Executive. As a result of uncertainty in the application of section 4999 of the Code at the time of the initial determination by the Accountants hereunder, it is possible that the Gross-Up Payment made will have been an amount less than the Company should have paid pursuant to this Section 5.2(c) (the "Underpayment"). In the event that the Company exhausts its remedies pursuant to Section 5.2(c)(ii) and Executive is required to make a payment of any Excise Tax, the Underpayment shall be promptly paid by the Company to or for Executive's benefit; and (iii) Executive shall notify the Company in writing of any claim by the Internal Revenue Service that, if successful, would require the payment by the Company of the Gross-Up Payment. Such notification shall be given as soon as practicable after Executive is informed in writing of such claim and shall apprise the Company of the nature of such claim and the date on which such claim is requested to be paid. Executive shall not pay such claim prior to the expiration of the 30-day period following the date on which Executive gives such notice to the Company (or such shorter period ending on the date that any payment of taxes, interest and/or penalties with respect to such claim is due). If the Company notifies Executive in writing prior to the expiration of such period that it desires to contest such claim, Executive shall: (A) give the Company any information reasonably requested by the Company relating to such claim; (B) take such action in connection with contesting such claim as the Company shall reasonably request in writing from time to time, including, without limitation, accepting legal representation with respect to such claim by an attorney reasonably selected by the Company; (C) cooperate with the Company in good faith in order to effectively contest such claim; and (D) permit the Company to participate in any proceedings relating to such claims; provided, however, that the Company shall bear and pay directly all costs and expenses (including additional interest and penalties) incurred in connection with such contest and shall indemnify Executive for and hold Executive harmless from, on an after-tax basis, any Excise Tax or income tax (including interest and penalties with respect thereto) imposed as a result of such representation and payment of all related costs and expenses. Without limiting the foregoing provisions of this Section 5.2(c), the Company shall control all proceedings taken in connection with such contest and, at its sole option, may pursue or forgo any and all administrative appeals, proceedings, hearings and conferences with the taxing authority in respect of such claim and may, at its sole option, either direct Executive to pay the tax claimed and sue for a refund or contest the claim in any 3 4 permissible manner, and Executive agrees to prosecute such contest to a determination before any administrative tribunal, in a court of initial jurisdiction and in one or more appellate courts, as the Company shall determine; provided, however, that if the Company directs Executive to pay such claim and sue for a refund, the Company shall advance the amount of such payment to Executive, on an interest-free basis, and shall indemnify Executive for and hold Executive harmless from, on an after-tax basis, any Excise Tax or income tax (including interest or penalties with respect thereto) imposed with respect to such advance or with respect to any imputed income with respect to such advance (including as a result of any forgiveness by the Company of such advance); provided, further, that any extension of the statute of limitations relating to the payment of taxes for the taxable year of Executive with respect to which such contested amount is claimed to be due is limited solely to such contested amount. Furthermore, the Company's control of the contest shall be limited to issues with respect to which a Gross-Up Payment would be payable hereunder and Executive shall be entitled to settle or contest, as the case may be, any other issue raised by the Internal Revenue Service or any other taxing authority. III. Section 5.6 of the Agreement is hereby amended in its entirety to read as follows: 5.6 Change of Control. Executive may terminate this Agreement, upon at least 10 days' prior written notice to the Company at any time within one year after a "change in control" (as hereinafter defined) of the Company. In the event Executive terminates this Agreement within one year after a change in control pursuant to this Section 5.6, (i) Executive shall continue to render services pursuant hereto and shall continue to receive compensation, as provided hereunder, through the termination date, (ii) the Company shall pay Executive no later than the date of such termination, as a single severance payment, an amount equal to the Severance Amount and (iii) following such termination, the Company shall provide the Severance Benefits as required by Section 5.2(b). For purposes of this Agreement, a "change in control" shall mean the occurrence of any of the following events: (a) the individuals constituting the Board as of the date of the initial public offering of common stock of the Company (the "Incumbent Board") cease for any reason to constitute at least a majority of the Board; provided, however, that if the election, or nomination for election by the Company's stockholders, of any new director was approved by a vote of at least a majority of the Incumbent Board, such new director shall be considered a member of the Incumbent Board; (b) provided that the number of shares of common stock of the Company directly held by PPD and its subsidiaries (other than the Company and the Company's subsidiaries) represents 50% or less of the total outstanding shares of common stock of the Company, an acquisition 4 5 of any voting securities of the Company (the "Voting Securities") by any "person" (as the term "person" is used for purposes of Section 13(d) or Section 14(d) of the Securities Exchange Act of 1934, as amended (the "1934 Act")) immediately after which such person has "beneficial ownership" (within the meaning of Rule 13d-3 promulgated under the 1934 Act) of 20% or more of the combined voting power of the Company's then outstanding Voting Securities; or (c) approval by the stockholders of the Company of: (i) a merger, consolidation, share exchange or reorganization of the Company, unless the stock holders of the Company, immediately before such merger, consolidation, share exchange or reorganization, own, directly or indirectly immediately following such merger, consolidation, share exchange or reorganization, at least 80% of the combined voting power of the outstanding voting securities of the corporation that is the successor in such merger, consolidation, share exchange or reorganization (the "Surviving Company") in substantially the same proportion as their ownership of the Voting Securities immediately before such merger, consolidation, share exchange or reorganization; or (ii) a complete liquidation or dissolution of the Company; or (iii) an agreement for the sale or other disposition of all or substantially all of the assets of the Company. Executed at Vista, California this ___ day of ________ 1998. THE COMPANY PAN PACIFIC RETAIL PROPERTIES, INC. a Maryland Corporation By: --------------------------------- David L. Adlard Executive Vice President EXECUTIVE --------------------------------- Stuart A. Tanz 5 EX-10.22 3 FIRST AMENDMENT TO NON-QUALIFIED STOCK AGREEMENT 1 EXHIBIT 10.22 FIRST AMENDMENT TO NON-QUALIFIED STOCK OPTION AGREEMENT PAN PACIFIC RETAIL PROPERTIES, INC., a Maryland corporation (the "Company") and STUART A. TANZ ("Optionee") have entered into that certain Non-Qualified Stock Option Agreement (the "Agreement") effective as of August 13, 1997. In order to amend the Agreement in certain respects, the Company and Optionee hereby agree as follows effective as of __________________, 1998. Section 1.4 of the Agreement is hereby amended in its entirety to read as follows: 1.4 Change of Control. "Change in Control" shall mean the occurrence of any of the following events: (a) the individuals constituting the Board as of the date of the initial public offering of common stock of the Company (the "Incumbent Board") cease for any reason to constitute at least a majority of the Board; provided, however, that if the election, or nomination for election by the Company's stockholders, of any new director was approved by a vote of at least a majority of the Incumbent Board, such new director shall be considered a member of the Incumbent Board; (b) provided that the number of shares of common stock of the Company directly held by Pan Pacific Development (U.S.) Inc., a Delaware corporation and its subsidiaries (other than the Company and the Company's subsidiaries) represents 50% or less of the total outstanding shares of common stock of the Company, an acquisition of any voting securities of the Company (the "Voting Securities") by any "person" (as the term "person" is used for purposes of Section 13(d) or Section 14(d) of the Securities Exchange Act of 1934, as amended (the "1934 Act")) immediately after which such person has "beneficial ownership" (within the meaning of Rule 13d-3 promulgated under the 1934 Act) of 20% or more of the combined voting power of the Company's then outstanding Voting Securities; or (c) approval by the stockholders of the Company of: (i) a merger, consolidation, share exchange or reorganization of the Company, unless the stock holders of the Company, immediately before such merger, consolidation, share exchange or reorganization, own, directly or indirectly immediately following such merger, consolidation, share exchange or reorganization, at least 80% of the combined voting power of the outstanding voting securities of the corporation that is the 2 successor in such merger, consolidation, share exchange or reorganization (the "Surviving Company") in substantially the same proportion as their ownership of the Voting Securities immediately before such merger, consolidation, share exchange or reorganization; or (ii) a complete liquidation or dissolution of the Company; or (iii) an agreement for the sale or other disposition of all or substantially all of the assets of the Company. Executed at Vista, California this ___ day of ________ 1998. THE COMPANY PAN PACIFIC RETAIL PROPERTIES, INC. a Maryland Corporation By: --------------------------------- David L. Adlard Executive Vice President OPTIONEE --------------------------------- Stuart A. Tanz 2 EX-10.23 4 FIRST AMENDMENT TO INCENTIVE STOCK AGREEMENT 1 EXHIBIT 10.23 FIRST AMENDMENT TO INCENTIVE STOCK OPTION AGREEMENT PAN PACIFIC RETAIL PROPERTIES, INC., a Maryland corporation (the "Company") and STUART A. TANZ ("Optionee") have entered into that certain Incentive Stock Option Agreement (the "Agreement") effective as of March 17, 1998. In order to amend the Agreement in certain respects, the Company and Optionee hereby agree as follows effective as of __________________, 1998. Section 1.3 of the Agreement is hereby amended in its entirety to read as follows: 1.3 Change of Control. "Change in Control" shall mean the occurrence of any of the following events: (a) the individuals constituting the Board as of the date of the initial public offering of common stock of the Company (the "Incumbent Board") cease for any reason to constitute at least a majority of the Board; provided, however, that if the election, or nomination for election by the Company's stockholders, of any new director was approved by a vote of at least a majority of the Incumbent Board, such new director shall be considered a member of the Incumbent Board; (b) provided that the number of shares of common stock of the Company directly held by Pan Pacific Development (U.S.) Inc., a Delaware corporation and its subsidiaries (other than the Company and the Company's subsidiaries) represents 50% or less of the total outstanding shares of common stock of the Company, an acquisition of any voting securities of the Company (the "Voting Securities") by any "person" (as the term "person" is used for purposes of Section 13(d) or Section 14(d) of the Securities Exchange Act of 1934, as amended (the "1934 Act")) immediately after which such person has "beneficial ownership" (within the meaning of Rule 13d-3 promulgated under the 1934 Act) of 20% or more of the combined voting power of the Company's then outstanding Voting Securities; or (c) approval by the stockholders of the Company of: (i) a merger, consolidation, share exchange or reorganization of the Company, unless the stock holders of the Company, immediately before such merger, consolidation, share exchange or reorganization, own, directly or indirectly immediately following such merger, consolidation, share exchange or reorganization, at least 80% of the combined voting power of the outstanding voting securities of the corporation that is the 2 successor in such merger, consolidation, share exchange or reorganization (the "Surviving Company") in substantially the same proportion as their ownership of the Voting Securities immediately before such merger, consolidation, share exchange or reorganization; or (ii) a complete liquidation or dissolution of the Company; or (iii) an agreement for the sale or other disposition of all or substantially all of the assets of the Company. Executed at Vista, California this ___ day of ________ 1998. THE COMPANY PAN PACIFIC RETAIL PROPERTIES, INC. a Maryland Corporation By: --------------------------------- David L. Adlard Executive Vice President OPTIONEE --------------------------------- Stuart A. Tanz 2 EX-10.24 5 RESTRICTED STOCK AGREEMENT - TANZ 1 EXHIBIT 10.24 RESTRICTED STOCK AGREEMENT THIS AGREEMENT is made between Stuart A. Tanz (the "Employee") and Pan Pacific Retail Properties, Inc. (the "Company") as of August 13, 1997. RECITALS (1) Pursuant to the Company's 1997 Stock and Option Incentive Plan, the Company has granted to Employee an award of 100,000 shares of common stock (the "Shares"). (2) As a condition to Employee's grant of Restricted Stock, Employee must execute this Restricted Stock Agreement (this "Agreement"), which sets forth the rights and obligations of the parties with respect to the Shares. 1. Forfeiture; Vesting. (a) If Employee's employment or consulting relationship with the Company is terminated for any reason, including, but not limited to, for cause, death, and disability, all unvested Shares shall be forfeited and shall be transferred to the Company; provided that as to Shares that would have vested at the end of the year of termination, such Shares shall vest on a prorated basis based on the number of days elapsed in such year and rounding down to the nearest Share. (b) The Shares issued hereunder shall become vested in three (3) cumulative installments as follows: (i) The first installment shall consist of 33,334 Shares and shall vest on August 13, 1998; (ii) The second installment shall consist of 33,333 Shares and shall vest on August 13, 1999; (iii) The third installment shall consist of 33,333 Shares and shall vest on August 13, 2000. (c) For example, if termination occurs on July 31, 1999, then Employee will retain as vested the 33,334 Shares that vested on August 13, 1998 and 32,145 of the 33,333 Shares that would otherwise have vested on August 13, 1999 (352/365 days times 33,333 Shares equals 32,145.8 Shares, which is rounded down to 32,145). 2. Transferability of the Shares; Escrow. (a) Employee hereby authorizes and directs the secretary of the Company, or such other person designated by the Company, to transfer the unvested Shares that have been forfeited to the Company. 2 (b) To insure the availability for delivery of Employee's unvested Shares upon forfeiture to the Company, Employee hereby appoints the secretary of the Company, or any other person designated by the Company as escrow agent, as its attorney-in-fact to assign and transfer unto the Company, such unvested Shares, if any, forfeited to the Company pursuant to Section 1 and shall, upon execution of this Agreement, deliver and deposit with the secretary of the Company, or such other person designated by the Company, the Share certificates representing the unvested Shares, together with the stock assignment duly endorsed in blank, attached hereto as Exhibit 1. The unvested Shares and stock assignment shall be held by the secretary in escrow, pursuant to the Joint Escrow Instructions of the Company and Employee attached as Exhibit 2 hereto, until such unvested Shares are vested, or until such time as this Agreement no longer is in effect. As a further condition to the Company's obligations under this Agreement, the spouse of the Employee, if any, shall execute and deliver to the Company the Consent of Spouse attached hereto as Exhibit 3. Upon vesting of the unvested Shares, the escrow agent shall promptly deliver to the Employee the certificate or certificates representing such Shares in the escrow agent's possession belonging to the Employee, and the escrow agent shall be discharged of all further obligations hereunder; provided, however, that the escrow agent shall nevertheless retain such certificate or certificates as escrow agent if so required pursuant to other restrictions imposed pursuant to this Agreement. (c) The Company, or its designee, shall not be liable for any act it may do or omit to do with respect to holding the Shares in escrow and while acting in good faith and in the exercise of its judgment. (d) Transfer or sale of the Shares is subject to restrictions on transfer imposed by any applicable state and federal securities laws. Any transferee shall hold such Shares subject to all the provisions hereof and shall acknowledge the same by signing a copy of this Agreement. (e) This Agreement shall terminate upon the earlier of (i) an event of forfeiture, as described in Section 1(a) herein, or (ii) August 13, 2000. 3. Ownership, Voting Rights, Duties. This Agreement shall not affect in any way the ownership, voting rights or other rights or duties of Employee, except as specifically provided herein. 4. Legends. The Share certificate evidencing the Shares issued hereunder shall be endorsed with the following legend (in addition to any legend required under applicable federal and federal and state securities laws and the Company's charter): THE SHARES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO CERTAIN RESTRICTIONS UPON TRANSFER AND FORFEITURE AS SET FORTH IN AN AGREEMENT BETWEEN THE COMPANY AND THE HOLDER OF THE SHARES, A COPY OF WHICH IS ON FILE WITH THE SECRETARY OF THE COMPANY. 5. Adjustment for Stock Split. All references to the number of Shares in this Agreement shall be appropriately adjusted to reflect any stock split, stock dividend or other change in the Shares which may be made by the Company after the date of this Agreement. 2 3 6. Notices. Notices required hereunder shall be given in person or by registered mail to the address of Employee shown on the records of the Company, and to the Company at its principal executive office. 7. Survival of Terms. This Agreement shall apply to and bind Employee and the Company and their respective permitted assignees and transferees, heirs, legatees, executors, administrators and legal successors. 8. No Section 83(b) Elections. Because such election could have an impact on the Company's ability to continue as a real estate investment trust under the Code (defined below), Employee agrees that Employee will not file an election under Section 83(b) of the Internal Revenue Code of 1986, as amended (the "Code"), with respect to the Shares. If Employee does file a Section 83(b) election then such election shall cause the forfeiture of all of the Shares, without proration (notwithstanding Section 1(a)). 9. Representations. Employee has reviewed with his own tax advisors the federal, state, local and foreign tax consequences of this investment and the transactions contemplated by this Agreement. Employee is relying solely on such advisors and not on any statements or representations of the Company or any of its agents. Employee understands that he (and not the Company) shall be responsible for his own tax liability that may arise as a result of the grant of the Shares or the transactions contemplated by this Agreement. 10. Governing Law. This Agreement shall be governed by and construed and enforced in accordance with California law. 11. Employee agrees and understands that neither this Agreement nor the grant of Shares alters the Employee's status as an at will employee of the Company. Employee represents that he has read this Agreement and is familiar with its terms and provisions. Employee hereby agrees to accept as binding, conclusive and final all decisions or interpretations of the Board of Directors of the Company (or the Compensation Committee thereof) upon any questions arising under this Agreement. 3 4 IN WITNESS WHEREOF, this Agreement is deemed made as of the date first set forth above. "COMPANY" PAN PACIFIC RETAIL PROPERTIES, INC. By: --------------------------------- Title: ------------------------------ "EMPLOYEE" STUART A. TANZ Address: ------------------------------------ ------------------------------------ ------------------------------------ 4 5 EXHIBIT 1 ASSIGNMENT SEPARATE FROM CERTIFICATE FOR VALUE RECEIVED I, Stuart A. Tanz, hereby sell, assign and transfer unto ______________________ ________________________ (______________) Shares of the Common Stock of Pan Pacific Retail Properties, Inc. standing in my name of the books of said corporation represented by Certificate No. _______________ herewith and do hereby irrevocably constitute and appoint ______________________ to transfer the said stock on the books of the within named corporation with full power of substitution in the premises. This Stock Assignment may be used only in accordance with the Restricted Stock Agreement between Pan Pacific Retail Properties, Inc. and the undersigned dated August 13, 1997. Dated: _______________, 1997 Signature: _____________________________________ INSTRUCTIONS: Please do not fill in any blanks other than the signature line. The purpose of this assignment is to enable the Company to transfer the Shares upon forfeiture as set forth in the Agreement, without requiring additional signatures on the part of the Employee. 1 6 EXHIBIT 2 JOINT ESCROW INSTRUCTIONS ___________, 1997 Corporate Secretary Pan Pacific Retail Properties, Inc. 1631-B South Melrose Drive Vista, California 92083 Dear Corporate Secretary: As Escrow Agent for both Pan Pacific Retail Properties, Inc. (the "Company"), and the undersigned employee of the Company (the "Employee"), you are hereby authorized and directed to hold the documents delivered to you pursuant to the terms of that certain Restricted Stock Agreement ("Agreement") between the Company and the undersigned, in accordance with the following instructions: 1. In the event the Company advises you that a forfeiture has occurred as set forth in the Agreement, the Company shall give to Employee and you a written notice specifying the number of Shares of stock to be transferred to the Company. Employee and the Company hereby irrevocably authorize and direct you to effect the transfer contemplated by such notice. 2. Upon receipt of such notice, you are directed (a) to date the stock assignments necessary for the transfer in question, (b) to fill in the number of Shares being transferred, and (c) to deliver the same, together with the certificate evidencing the Shares of stock to be transferred to the Company. 3. Employee irrevocably authorizes the Company to deposit with you any certificates evidencing Shares of stock to be held by you hereunder and any additions and substitutions to said Shares as defined in the Agreement. Employee does hereby irrevocably constitute and appoint you as Employee's attorney-in-fact and agent for the term of this escrow to execute with respect to such securities all documents necessary or appropriate to make such securities negotiable and to complete any transfer herein contemplated, including but not limited to the filing with any applicable state blue sky authority of any required applications for consent to, or notice of transfer of, the securities. Subject to the provisions of this paragraph 3, Employee shall exercise all rights and privileges of a stockholder of the Company while the stock is held by you. 4. Upon written request of the Employee, on any of August 13, 1998, 1999 or 2000, unless the Company has provided a notice of forfeiture, you will deliver to Employee a certificate or certificates representing so many Shares of stock as are not then subject to forfeiture. Within 120 days after cessation of Employee's continuous employment by or services to the Company, or any parent or subsidiary of the Company, you will deliver to Employee a certificate or certificates representing the aggregate number of Shares held or issued pursuant to the Agreement and not forfeited to the Company. 1 7 5. If at the time of termination of this escrow you should have in your possession any documents, securities, or other property belonging to Employee, you shall deliver all of the same to Employee and shall be discharged of all further obligations hereunder. 6. Your duties hereunder may be altered, amended, modified or revoked only by a writing signed by all of the parties hereto. 7. You shall be obligated only for the performance of such duties as are specifically set forth herein and may rely and shall be protected in relying or refraining from acting on any instrument reasonably believed by you to be genuine and to have been signed or presented by the proper party or parties. You shall not be personally liable for any act you may do or omit to do hereunder as Escrow Agent or as attorney-in-fact for Employee while acting in good faith, and any act done or omitted by you pursuant to the advice of your own attorneys shall be conclusive evidence of such good faith. 8. You are hereby expressly authorized to disregard any and all warnings given by any of the parties hereto or by any other person or corporation, excepting only orders or process of courts of law and are hereby expressly authorized to comply with and obey orders, judgments or decrees of any court. In case you obey or comply with any such order, judgment or decree, you shall not be liable to any of the parties hereto or to any other person, firm or corporation by reason of such compliance, notwithstanding any such order, judgment or decree being subsequently reversed, modified, annulled, set aside, vacated or found to have been entered without jurisdiction. 9. You shall not be liable in any respect on account of the identity, authorities or rights of the parties executing or delivering or purporting to execute or deliver the Agreement or any documents or papers deposited or called for hereunder. 10. You shall not be liable for the outlawing of any rights under the Statute of Limitations with respect to these Joint Escrow Instructions or any documents deposited with you. 11. You shall be entitled to employ such legal counsel and other experts as you may deem necessary properly to advise you in connection with your obligations hereunder, may rely upon the advice of such counsel, and may pay such counsel reasonable compensation therefor. 12. Your responsibilities as Escrow Agent hereunder shall terminate (i) on August 13, 2000 or an event of forfeiture, whichever occurs first, or (ii) if you shall cease to be an officer or agent of the Company or if you shall resign by written notice to each party. In the event of the latter, the Company shall appoint a successor Escrow Agent. 13. If you reasonably require other or further instruments in connection with these Joint Escrow Instructions or obligations in respect hereto, the necessary parties hereto shall join in furnishing such instruments. 14. It is understood and agreed that should any dispute arise with respect to the delivery and/or ownership or right of possession of the securities held by you hereunder, you are authorized and directed to retain in your possession without liability to anyone all or any part of 2 8 said securities until such disputes shall have been settled either by mutual written agreement of the parties concerned or by a final order, decree or judgment of a court of competent jurisdiction after the time for appeal has expired and no appeal has been perfected, but you shall be under no duty whatsoever to institute or defend any such proceedings. 15. Any notice required or permitted hereunder shall be given in writing and shall be deemed effectively given upon personal delivery or upon deposit in the United States Post Office, by registered or certified mail with postage and fees prepaid, addressed to each of the other parties thereunto entitled at the following addresses or at such other addresses as a party may designate by ten days' advance written notice to each of the other parties hereto. COMPANY: Pan Pacific Retail Properties, Inc. 1631-B South Melrose Vista, California 92083 Attn: President EMPLOYEE: ------------------------------------ ------------------------------------ ------------------------------------ ESCROW AGENT: Corporate Secretary Pan Pacific Retail Properties, Inc. 1631-B South Melrose Vista, California 92083 Attn: President 16. By signing these Joint Escrow Instructions, you become a party hereto only for the purpose of said Joint Escrow Instructions; you do not become a party to the Agreement. 17. This instrument shall be binding upon and inure to the benefit of the parties hereto, and their respective successors and permitted assigns. 3 9 18. These Joint Escrow Instructions shall be governed by, and construed and enforced in accordance with, the laws of the State of California. PAN PACIFIC RETAIL PROPERTIES, INC. By: --------------------------------- Title: ------------------------------ EMPLOYEE: ------------------------------------ ESCROW AGENT: ------------------------------------ Corporate Secretary 4 10 EXHIBIT 3 CONSENT OF SPOUSE I, ____________________, spouse of ___________________, have read and approve the foregoing Restricted Stock Agreement. In consideration of granting of the Shares to my spouse, set forth in the Restricted Stock Agreement, I hereby appoint my spouse as my attorney-in-fact in respect to the exercise of any rights under the Restricted Stock Agreement and agree to be bound by the provisions of the Restricted Stock Agreement insofar as I may have any rights in said Restricted Stock Agreement or any Shares issued pursuant thereto under the community property laws or similar laws relating to marital property in effect in the state of our residence as of the date of the signing of the foregoing Restricted Stock Agreement. Dated: _______________, 1997 _________________________________________________ 1 EX-10.25 6 FIRST AMENDMENT TO RESTRICTED STOCK AGREEMENT 1 EXHIBIT 10.25 FIRST AMENDMENT TO RESTRICTED STOCK AGREEMENT PAN PACIFIC RETAIL PROPERTIES, INC., a Maryland corporation (the "Company") and STUART A. TANZ ("Employee") have entered into that certain Restricted Stock Agreement (the "Agreement") effective as of August 13, 1997. In order to amend the Agreement in certain respects, the Company and Employee hereby agree as follows effective as of __________________, 1998. Subsection 1(d) is hereby added to the Agreement to read in its entirety as follows: (d) In the case of a "Change in Control" (as hereinafter defined) prior to the termination of Employee's employment or consulting relationship with the Company, then, immediately prior to the occurrence of such Change in Control, the Shares shall become fully vested and shall cease to be subject to forfeiture under subsection 1(a) after such event. For purposes of this Agreement, "Change in Control" shall mean the occurrence of any of the following events: (a) the individuals constituting the Board of Directors of the Company (the "Board") as of the date of the initial public offering of common stock of the Company (the "Incumbent Board") cease for any reason to constitute at least a majority of the Board; provided, however, that if the election, or nomination for election by the Company's stockholders, of any new director was approved by a vote of at least a majority of the Incumbent Board, such new director shall be considered a member of the Incumbent Board; (b) provided that the number of shares of common stock of the Company directly held by Pan Pacific Development (U.S.) Inc., a Delaware corporation and its subsidiaries (other than the Company and the Company's subsidiaries) represents 50% or less of the total outstanding shares of common stock of the Company, an acquisition of any voting securities of the Company (the "Voting Securities") by any "person" (as the term "person" is used for purposes of Section 13(d) or Section 14(d) of the Securities Exchange Act of 1934, as amended (the "1934 Act")) immediately after which such person has "beneficial ownership" (within the meaning of Rule 13d-3 promulgated under the 1934 Act) of 20% or more of the combined voting power of the Company's then outstanding Voting Securities; or (c) approval by the stockholders of the Company of: 2 (i) a merger, consolidation, share exchange or reorganization of the Company, unless the stock holders of the Company, immediately before such merger, consolidation, share exchange or reorganization, own, directly or indirectly immediately following such merger, consolidation, share exchange or reorganization, at least 80% of the combined voting power of the outstanding voting securities of the corporation that is the successor in such merger, consolidation, share exchange or reorganization (the "Surviving Company") in substantially the same proportion as their ownership of the Voting Securities immediately before such merger, consolidation, share exchange or reorganization; or (ii) a complete liquidation or dissolution of the Company; or (iii) an agreement for the sale or other disposition of all or substantially all of the assets of the Company. Executed at Vista, California this ___ day of ________ 1998. THE COMPANY PAN PACIFIC RETAIL PROPERTIES, INC. a Maryland Corporation By: --------------------------------- David L. Adlard Executive Vice President EMPLOYEE --------------------------------- Stuart A. Tanz 2 EX-10.26 7 FIRST AMENDMENT TO EMPLOYMENT AGREEMENT - STAUFFER 1 EXHIBIT 10.26 FIRST AMENDMENT TO EMPLOYMENT AGREEMENT PAN PACIFIC RETAIL PROPERTIES, INC., a Maryland corporation (the "Company") and JEFFREY S. STAUFFER ("Executive") have entered into that certain Employment Agreement (the "Agreement") effective as of August 13, 1997. In order to amend the Agreement in certain respects, the Company and Executive hereby agree as follows effective as of __________________, 1998. I. Section 5.2(a) of the Agreement is hereby amended in its entirety to read as follows: (a) Amount. In the event the Company terminates Executive's services hereunder pursuant to Section 5.1, Executive shall continue to render services to the Company pursuant to this Agreement until the date of termination and shall continue to receive compensation, as provided hereunder, through the termination date. In addition to other compensation payable to Executive for services rendered through the termination date, the Company shall pay Executive no later than the date of such termination, as a single severance payment, an amount equal to Executive's highest monthly Base Compensation paid hereunder during the preceding 12 month period, multiplied by 12 (the "Multiplier"); provided, however, that for each full year of service with the Company, the Multiplier shall be increased by one, subject to an overall cap of 18 (the "Severance Amount"). For example, provided that Executive has rendered continuous service hereunder from the Effective Date of the Agreement through August 13, 1999, the Executive's Severance Amount, if determined as of that date, shall be the Executive's highest monthly Base Compensation paid hereunder for the 12 month period preceding August 13, 1999, multiplied by 14. II. Section 5.4 of the Agreement is hereby amended in its entirety to read as follows: 5.4 By Executive For Good Reason. Executive may terminate this Agreement for good reason upon at least 10 days' prior written notice to the Company. For purposes of this Agreement, "good reason" shall mean: 2 (a) the Company's material breach of any of its respective obligations hereunder and either such breach is incurable or, if curable, has not been cured within 15 business days following receipt by the Company of written notice from Executive to the Company of such breach by the Company; (b) any material decrease in Executive's authority or responsibilities as Senior Vice President, Operations and Development of the Company without Executive's prior consent; or (c) any material decrease in the overall compensation and benefits payable to Executive by the Company (including, without limitation, Base Compensation, bonus compensation and any other compensation or benefits payable to Executive under this Agreement) without Executive's prior consent; or (d) following a change in control (as defined in Section 5.6, below) of the Company, the relocation of Executive's principal place of employment to a location more than 50 miles from Vista, California without Executive's prior consent. In the event that Executive terminates this Agreement for good reason pursuant to this Section 5.4, Executive shall have the right to receive Executive's compensation as provided hereunder through the effective date of termination and shall also have the same rights and remedies against the Company as Executive would have had if the Company had terminated Executive's employment without cause pursuant to Section 5.1 (including the right to receive the Severance Amount payable and the Severance Benefits to be provided under Section 5.2). III. Section 5.6 of the Agreement is hereby amended in its entirety to read as follows: 5.6 Change of Control. Executive may terminate this Agreement, upon at least 10 days' prior written notice to the Company at any time within one year after a "change in control" (as hereinafter defined) of the Company. In the event Executive terminates this Agreement for good reason within one year after a change in control pursuant to this Section 5.6, (i) Executive shall continue to render services pursuant hereto and shall continue to receive compensation, as provided hereunder, through the termination date, (ii) the Company shall pay Executive no later than the date of such termination, as a single severance payment, an amount equal to the Severance Amount and (iii) following such 2 3 termination, the Company shall provide the Severance Benefits as required by Section 5.2(b). Upon Executive's termination of this Agreement without good reason pursuant to this Section 5.6, (i) Executive shall have the right to receive Executive's compensation as provided hereunder through the effective date of termination, and (ii) the Company on the one hand, and Executive, on the other hand, shall not have any further right or remedy against one another except as provided in Sections 6, 7 and 8 hereof which shall remain in full force and effect. For purposes of this Agreement, a "change in control" shall mean the occurrence of any of the following events: (a) the individuals constituting the Board as of the date of the initial public offering of common stock of the Company (the "Incumbent Board") cease for any reason to constitute at least a majority of the Board; provided, however, that if the election, or nomination for election by the Company's stockholders, of any new director was approved by a vote of at least a majority of the Incumbent Board, such new director shall be considered a member of the Incumbent Board; (b) provided that the number of shares of common stock of the Company directly held by PPD and its subsidiaries (other than the Company and the Company's subsidiaries) represents 50% or less of the total outstanding shares of common stock of the Company, an acquisition of any voting securities of the Company (the "Voting Securities") by any "person" (as the term "person" is used for purposes of Section 13(d) or Section 14(d) of the Securities Exchange Act of 1934, as amended (the "1934 Act")) immediately after which such person has "beneficial ownership" (within the meaning of Rule 13d-3 promulgated under the 1934 Act) of 20% or more of the combined voting power of the Company's then outstanding Voting Securities; or (c) approval by the stockholders of the Company of: (i) a merger, consolidation, share exchange or reorganization of the Company, unless the stockholders of the Company, immediately before such merger, consolidation, share exchange or reorganization, own, directly or indirectly immediately following such merger, consolidation, share exchange or reorganization, at least 80% of the combined voting power of the outstanding voting securities of the corporation that is the successor in such merger, consolidation, share exchange or reorganization (the "Surviving Company") in substantially the same proportion as their ownership of the Voting Securities 3 4 immediately before such merger, consolidation, share exchange or reorganization; or (ii) a complete liquidation or dissolution of the Company; or (iii) an agreement for the sale or other disposition of all or substantially all of the assets of the Company. Executed at Vista, California this ___ day of _________ 1998. THE COMPANY PAN PACIFIC RETAIL PROPERTIES, INC. a Maryland Corporation By: --------------------------------- Stuart A. Tanz Chief Executive Officer and President EXECUTIVE --------------------------------- Jeffrey S. Stauffer 4 EX-10.27 8 RESTRICTED STOCK AGREEMENT - STAUFFER 1 EXHIBIT 10.27 RESTRICTED STOCK AGREEMENT THIS AGREEMENT is made between Jeffrey S. Stauffer (the "Employee") and Pan Pacific Retail Properties, Inc. (the "Company") as of August 13, 1997. RECITALS (1) Pursuant to the Company's 1997 Stock and Option Incentive Plan, the Company has granted to Employee an award of 10,000 shares of common stock (the "Shares"). (2) As a condition to Employee's grant of Restricted Stock, Employee must execute this Restricted Stock Agreement (this "Agreement"), which sets forth the rights and obligations of the parties with respect to the Shares. 1. Forfeiture; Vesting. (a) If Employee's employment or consulting relationship with the Company is terminated for any reason, including, but not limited to, for cause, death, and disability, all unvested Shares shall be forfeited and shall be transferred to the Company; provided that as to Shares that would have vested at the end of the year of termination, such Shares shall vest on a prorated basis based on the number of days elapsed in such year and rounding down to the nearest Share. (b) The Shares issued hereunder shall become vested in three (3) cumulative installments as follows: (i) The first installment shall consist of 3,334 Shares and shall vest on August 13, 1998; (ii) The second installment shall consist of 3,333 Shares and shall vest on August 13, 1999; (iii) The third installment shall consist of 3,333 Shares and shall vest on August 13, 2000. (c) For example, if termination occurs on July 31, 1999, then Employee will retain as vested the 3,334 Shares that vested on August 13, 1998 and 3,214 of the 3,333 Shares that would otherwise have vested on August 13, 1999 (352/365 days times 3,333 Shares equals 3,214.3 Shares, which is rounded down to 3,214). 2. Transferability of the Shares; Escrow. (a) Employee hereby authorizes and directs the secretary of the Company, or such other person designated by the Company, to transfer the unvested Shares that have been forfeited to the Company. 2 (b) To insure the availability for delivery of Employee's unvested Shares upon forfeiture to the Company, Employee hereby appoints the secretary of the Company, or any other person designated by the Company as escrow agent, as its attorney-in-fact to assign and transfer unto the Company, such unvested Shares, if any, forfeited to the Company pursuant to Section 1 and shall, upon execution of this Agreement, deliver and deposit with the secretary of the Company, or such other person designated by the Company, the Share certificates representing the unvested Shares, together with the stock assignment duly endorsed in blank, attached hereto as Exhibit 1. The unvested Shares and stock assignment shall be held by the secretary in escrow, pursuant to the Joint Escrow Instructions of the Company and Employee attached as Exhibit 2 hereto, until such unvested Shares are vested, or until such time as this Agreement no longer is in effect. As a further condition to the Company's obligations under this Agreement, the spouse of the Employee, if any, shall execute and deliver to the Company the Consent of Spouse attached hereto as Exhibit 3. Upon vesting of the unvested Shares, the escrow agent shall promptly deliver to the Employee the certificate or certificates representing such Shares in the escrow agent's possession belonging to the Employee, and the escrow agent shall be discharged of all further obligations hereunder; provided, however, that the escrow agent shall nevertheless retain such certificate or certificates as escrow agent if so required pursuant to other restrictions imposed pursuant to this Agreement. (c) The Company, or its designee, shall not be liable for any act it may do or omit to do with respect to holding the Shares in escrow and while acting in good faith and in the exercise of its judgment. (d) Transfer or sale of the Shares is subject to restrictions on transfer imposed by any applicable state and federal securities laws. Any transferee shall hold such Shares subject to all the provisions hereof and shall acknowledge the same by signing a copy of this Agreement. (e) This Agreement shall terminate upon the earlier of (i) an event of forfeiture, as described in Section 1(a) herein, or (ii) August 13, 2000. 3. Ownership, Voting Rights, Duties. This Agreement shall not affect in any way the ownership, voting rights or other rights or duties of Employee, except as specifically provided herein. 4. Legends. The Share certificate evidencing the Shares issued hereunder shall be endorsed with the following legend (in addition to any legend required under applicable federal and federal and state securities laws and the Company's charter): THE SHARES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO CERTAIN RESTRICTIONS UPON TRANSFER AND FORFEITURE AS SET FORTH IN AN AGREEMENT BETWEEN THE COMPANY AND THE HOLDER OF THE SHARES, A COPY OF WHICH IS ON FILE WITH THE SECRETARY OF THE COMPANY. 5. Adjustment for Stock Split. All references to the number of Shares in this Agreement shall be appropriately adjusted to reflect any stock split, stock dividend or other change in the Shares which may be made by the Company after the date of this Agreement. 2 3 6. Notices. Notices required hereunder shall be given in person or by registered mail to the address of Employee shown on the records of the Company, and to the Company at its principal executive office. 7. Survival of Terms. This Agreement shall apply to and bind Employee and the Company and their respective permitted assignees and transferees, heirs, legatees, executors, administrators and legal successors. 8. No Section 83(b) Elections. Because such election could have an impact on the Company's ability to continue as a real estate investment trust under the Code (defined below), Employee agrees that Employee will not file an election under Section 83(b) of the Internal Revenue Code of 1986, as amended (the "Code"), with respect to the Shares. If Employee does file a Section 83(b) election then such election shall cause the forfeiture of all of the Shares, without proration (notwithstanding Section 1(a)). 9. Representations. Employee has reviewed with his own tax advisors the federal, state, local and foreign tax consequences of this investment and the transactions contemplated by this Agreement. Employee is relying solely on such advisors and not on any statements or representations of the Company or any of its agents. Employee understands that he (and not the Company) shall be responsible for his own tax liability that may arise as a result of the grant of the Shares or the transactions contemplated by this Agreement. 10. Governing Law. This Agreement shall be governed by and construed and enforced in accordance with California law. 11. Employee agrees and understands that neither this Agreement nor the grant of Shares alters the Employee's status as an at will employee of the Company. Employee represents that he has read this Agreement and is familiar with its terms and provisions. Employee hereby agrees to accept as binding, conclusive and final all decisions or interpretations of the Board of Directors of the Company (or the Compensation Committee thereof) upon any questions arising under this Agreement. 3 4 IN WITNESS WHEREOF, this Agreement is deemed made as of the date first set forth above. "COMPANY" PAN PACIFIC RETAIL PROPERTIES, INC. By: --------------------------------- Title: ------------------------------ "EMPLOYEE" JEFFREY S. STAUFFER Address: ------------------------------------ ------------------------------------ ------------------------------------ 4 5 EXHIBIT 1 ASSIGNMENT SEPARATE FROM CERTIFICATE FOR VALUE RECEIVED I, Jeffrey S. Stauffer, hereby sell, assign and transfer unto ______________(______________) Shares of the Common Stock of Pan Pacific Retail Properties, Inc. standing in my name of the books of said corporation represented by Certificate No. _______________ herewith and do hereby irrevocably constitute and appoint ___________________ to transfer the said stock on the books of the within named corporation with full power of substitution in the premises. This Stock Assignment may be used only in accordance with the Restricted Stock Agreement between Pan Pacific Retail Properties, Inc. and the undersigned dated August 13, 1997. Dated: _______________, 1997 Signature:_________________________________ INSTRUCTIONS: Please do not fill in any blanks other than the signature line. The purpose of this assignment is to enable the Company to transfer the Shares upon forfeiture as set forth in the Agreement, without requiring additional signatures on the part of the Employee. 1 6 EXHIBIT 2 JOINT ESCROW INSTRUCTIONS ___________, 1997 Corporate Secretary Pan Pacific Retail Properties, Inc. 1631-B South Melrose Drive Vista, California 92083 Dear Corporate Secretary: As Escrow Agent for both Pan Pacific Retail Properties, Inc. (the "Company"), and the undersigned employee of the Company (the "Employee"), you are hereby authorized and directed to hold the documents delivered to you pursuant to the terms of that certain Restricted Stock Agreement ("Agreement") between the Company and the undersigned, in accordance with the following instructions: 1. In the event the Company advises you that a forfeiture has occurred as set forth in the Agreement, the Company shall give to Employee and you a written notice specifying the number of Shares of stock to be transferred to the Company. Employee and the Company hereby irrevocably authorize and direct you to effect the transfer contemplated by such notice. 2. Upon receipt of such notice, you are directed (a) to date the stock assignments necessary for the transfer in question, (b) to fill in the number of Shares being transferred, and (c) to deliver the same, together with the certificate evidencing the Shares of stock to be transferred to the Company. 3. Employee irrevocably authorizes the Company to deposit with you any certificates evidencing Shares of stock to be held by you hereunder and any additions and substitutions to said Shares as defined in the Agreement. Employee does hereby irrevocably constitute and appoint you as Employee's attorney-in-fact and agent for the term of this escrow to execute with respect to such securities all documents necessary or appropriate to make such securities negotiable and to complete any transfer herein contemplated, including but not limited to the filing with any applicable state blue sky authority of any required applications for consent to, or notice of transfer of, the securities. Subject to the provisions of this paragraph 3, Employee shall exercise all rights and privileges of a stockholder of the Company while the stock is held by you. 4. Upon written request of the Employee, on any of August 13, 1998, 1999 or 2000, unless the Company has provided a notice of forfeiture, you will deliver to Employee a certificate or certificates representing so many Shares of stock as are not then subject to forfeiture. Within 120 days after cessation of Employee's continuous employment by or services to the Company, or any parent or subsidiary of the Company, you will deliver to Employee a certificate or certificates representing the aggregate number of Shares held or issued pursuant to the Agreement and not forfeited to the Company. 1 7 5. If at the time of termination of this escrow you should have in your possession any documents, securities, or other property belonging to Employee, you shall deliver all of the same to Employee and shall be discharged of all further obligations hereunder. 6. Your duties hereunder may be altered, amended, modified or revoked only by a writing signed by all of the parties hereto. 7. You shall be obligated only for the performance of such duties as are specifically set forth herein and may rely and shall be protected in relying or refraining from acting on any instrument reasonably believed by you to be genuine and to have been signed or presented by the proper party or parties. You shall not be personally liable for any act you may do or omit to do hereunder as Escrow Agent or as attorney-in-fact for Employee while acting in good faith, and any act done or omitted by you pursuant to the advice of your own attorneys shall be conclusive evidence of such good faith. 8. You are hereby expressly authorized to disregard any and all warnings given by any of the parties hereto or by any other person or corporation, excepting only orders or process of courts of law and are hereby expressly authorized to comply with and obey orders, judgments or decrees of any court. In case you obey or comply with any such order, judgment or decree, you shall not be liable to any of the parties hereto or to any other person, firm or corporation by reason of such compliance, notwithstanding any such order, judgment or decree being subsequently reversed, modified, annulled, set aside, vacated or found to have been entered without jurisdiction. 9. You shall not be liable in any respect on account of the identity, authorities or rights of the parties executing or delivering or purporting to execute or deliver the Agreement or any documents or papers deposited or called for hereunder. 10. You shall not be liable for the outlawing of any rights under the Statute of Limitations with respect to these Joint Escrow Instructions or any documents deposited with you. 11. You shall be entitled to employ such legal counsel and other experts as you may deem necessary properly to advise you in connection with your obligations hereunder, may rely upon the advice of such counsel, and may pay such counsel reasonable compensation therefor. 12. Your responsibilities as Escrow Agent hereunder shall terminate (i) on August 13, 2000 or an event of forfeiture, whichever occurs first, or (ii) if you shall cease to be an officer or agent of the Company or if you shall resign by written notice to each party. In the event of the latter, the Company shall appoint a successor Escrow Agent. 13. If you reasonably require other or further instruments in connection with these Joint Escrow Instructions or obligations in respect hereto, the necessary parties hereto shall join in furnishing such instruments. 14. It is understood and agreed that should any dispute arise with respect to the delivery and/or ownership or right of possession of the securities held by you hereunder, you are authorized and directed to retain in your possession without liability to anyone all or any part of 2 8 said securities until such disputes shall have been settled either by mutual written agreement of the parties concerned or by a final order, decree or judgment of a court of competent jurisdiction after the time for appeal has expired and no appeal has been perfected, but you shall be under no duty whatsoever to institute or defend any such proceedings. 15. Any notice required or permitted hereunder shall be given in writing and shall be deemed effectively given upon personal delivery or upon deposit in the United States Post Office, by registered or certified mail with postage and fees prepaid, addressed to each of the other parties thereunto entitled at the following addresses or at such other addresses as a party may designate by ten days' advance written notice to each of the other parties hereto. COMPANY: Pan Pacific Retail Properties, Inc. 1631-B South Melrose Vista, California 92083 Attn: President EMPLOYEE: ------------------------------------ ------------------------------------ ------------------------------------ ESCROW AGENT: Corporate Secretary Pan Pacific Retail Properties, Inc. 1631-B South Melrose Vista, California 92083 Attn: President 16. By signing these Joint Escrow Instructions, you become a party hereto only for the purpose of said Joint Escrow Instructions; you do not become a party to the Agreement. 17. This instrument shall be binding upon and inure to the benefit of the parties hereto, and their respective successors and permitted assigns. 3 9 18. These Joint Escrow Instructions shall be governed by, and construed and enforced in accordance with, the laws of the State of California. PAN PACIFIC RETAIL PROPERTIES, INC. By: --------------------------------- Title: ------------------------------ EMPLOYEE: ------------------------------------ ESCROW AGENT: ------------------------------------ Corporate Secretary 4 10 EXHIBIT 3 CONSENT OF SPOUSE I, ____________________, spouse of ___________________, have read and approve the foregoing Restricted Stock Agreement. In consideration of granting of the Shares to my spouse, set forth in the Restricted Stock Agreement, I hereby appoint my spouse as my attorney-in-fact in respect to the exercise of any rights under the Restricted Stock Agreement and agree to be bound by the provisions of the Restricted Stock Agreement insofar as I may have any rights in said Restricted Stock Agreement or any Shares issued pursuant thereto under the community property laws or similar laws relating to marital property in effect in the state of our residence as of the date of the signing of the foregoing Restricted Stock Agreement. Dated: _______________, 1997 ________________________________________________ 1 EX-10.28 9 FIRST AMENDMENT TO RESTRICTED STOCK AGREEMENT 1 EXHIBIT 10.28 FIRST AMENDMENT TO RESTRICTED STOCK AGREEMENT PAN PACIFIC RETAIL PROPERTIES, INC., a Maryland corporation (the "Company") and JEFFREY S. STAUFFER ("Employee") have entered into that certain Restricted Stock Agreement (the "Agreement") effective as of August 13, 1997. In order to amend the Agreement in certain respects, the Company and Employee hereby agree as follows effective as of __________________, 1998. Subsection 1(d) is hereby added to the Agreement to read in its entirety as follows: (d) In the case of a "Change in Control" (as hereinafter defined) prior to the termination of Employee's employment or consulting relationship with the Company, then, immediately prior to the occurrence of such Change in Control, the Shares shall become fully vested and shall cease to be subject to forfeiture under subsection 1(a) after such event. For purposes of this Agreement, "Change in Control" shall mean the occurrence of any of the following events: (a) the individuals constituting the Board of Directors of the Company (the "Board") as of the date of the initial public offering of common stock of the Company (the "Incumbent Board") cease for any reason to constitute at least a majority of the Board; provided, however, that if the election, or nomination for election by the Company's stockholders, of any new director was approved by a vote of at least a majority of the Incumbent Board, such new director shall be considered a member of the Incumbent Board; (b) provided that the number of shares of common stock of the Company directly held by Pan Pacific Development (U.S.) Inc., a Delaware corporation and its subsidiaries (other than the Company and the Company's subsidiaries) represents 50% or less of the total outstanding shares of common stock of the Company, an acquisition of any voting securities of the Company (the "Voting Securities") by any "person" (as the term "person" is used for purposes of Section 13(d) or Section 14(d) of the Securities Exchange Act of 1934, as amended (the "1934 Act")) immediately after which such person has "beneficial ownership" (within the meaning of Rule 13d-3 promulgated under the 1934 Act) of 20% or more of the combined voting power of the Company's then outstanding Voting Securities; or (c) approval by the stockholders of the Company of: 2 (i) a merger, consolidation, share exchange or reorganization of the Company, unless the stock holders of the Company, immediately before such merger, consolidation, share exchange or reorganization, own, directly or indirectly immediately following such merger, consolidation, share exchange or reorganization, at least 80% of the combined voting power of the outstanding voting securities of the corporation that is the successor in such merger, consolidation, share exchange or reorganization (the "Surviving Company") in substantially the same proportion as their ownership of the Voting Securities immediately before such merger, consolidation, share exchange or reorganization; or (ii) a complete liquidation or dissolution of the Company; or (iii) an agreement for the sale or other disposition of all or substantially all of the assets of the Company. Executed at Vista, California this ___ day of ________ 1998. THE COMPANY PAN PACIFIC RETAIL PROPERTIES, INC. a Maryland Corporation By: --------------------------------- Stuart A. Tanz Chief Executive Officer and President EMPLOYEE --------------------------------- Jeffrey S. Stauffer 2 EX-10.29 10 FIRST AMENDMENT TO EMPLOYMENT AGREEMENT - ADLARD 1 EXHIBIT 10.29 FIRST AMENDMENT TO EMPLOYMENT AGREEMENT PAN PACIFIC RETAIL PROPERTIES, INC., a Maryland corporation (the "Company") and DAVID L. ADLARD ("Executive") have entered into that certain Employment Agreement (the "Agreement") effective as of August 13, 1997. In order to amend the Agreement in certain respects, the Company and Executive hereby agree as follows effective as of __________________, 1998. I. Section 5.2(a) of the Agreement is hereby amended in its entirety to read as follows: (a) Amount. In the event the Company terminates Executive's services hereunder pursuant to Section 5.1, Executive shall continue to render services to the Company pursuant to this Agreement until the date of termination and shall continue to receive compensation, as provided hereunder, through the termination date. In addition to other compensation payable to Executive for services rendered through the termination date, the Company shall pay Executive no later than the date of such termination, as a single severance payment, an amount equal to Executive's highest monthly Base Compensation paid hereunder during the preceding twelve month period, multiplied by eight (the "Multiplier"); provided, however, that for each full year of service with the Company, the Multiplier shall be increased by one, subject to an overall cap of 18 (the "Severance Amount"). For example, provided that Executive has rendered continuous service hereunder from the Effective Date of the Agreement through August 13, 1999, the Executive's Severance Amount, if determined as of that date, shall be the Executive's highest monthly Base Compensation paid hereunder for the twelve month period preceding August 13, 1999, multiplied by 10. II. Section 5.4 of the Agreement is hereby amended in its entirety to read as follows: 5.4 By Executive For Good Reason. Executive may terminate this Agreement for good reason upon at least 10 days' prior written notice to the Company. For purposes of this Agreement, "good reason" shall mean: 2 (a) the Company's material breach of any of its respective obligations hereunder and either such breach is incurable or, if curable, has not been cured within 15 business days following receipt of written notice by the Company from Executive to the Company of such breach by the Company; (b) any material decrease in Executive's authority or responsibilities as Executive Vice President and Chief Financial Officer of the Company without Executive's prior consent; (c) any material decrease in the overall compensation and benefits payable to Executive by the Company (including, without limitation, Base Compensation, bonus compensation and any other compensation or benefits payable to Executive under this Agreement) without Executive's prior consent; or (d) following a change in control (as defined in Section 5.6, below) of the Company, the relocation of Executive's principal place of employment to a location more than 50 miles from Vista, California without Executive's prior consent. In the event that Executive terminates this Agreement for good reason pursuant to this Section 5.4, Executive shall have the right to receive Executive's compensation as provided hereunder through the effective date of termination and shall also have the same rights and remedies against the Company as Executive would have had if the Company had terminated Executive's employment without cause pursuant to Section 5.1 (including the right to receive the Severance Amount payable and the Severance Benefits to be provided under Section 5.2). III. Section 5.6 of the Agreement is hereby amended in its entirety to read as follows: 5.6 Change of Control. Executive may terminate this Agreement, upon at least 10 days' prior written notice to the Company at any time within one year after a "change in control" (as hereinafter defined) of the Company. In the event Executive terminates this Agreement for good reason within one year after a change in control pursuant to this Section 5.6, (i) Executive shall continue to render services pursuant hereto and shall continue to receive compensation, as provided hereunder, through the termination date, (ii) the Company shall pay Executive no later than the date of such termination, as a single severance payment, an amount equal to the Severance Amount and (iii) following such 2 3 termination, the Company shall provide the Severance Benefits as required by Section 5.2(b). Upon Executive's termination of this Agreement without good reason pursuant to this Section 5.6, (i) Executive shall have the right to receive Executive's compensation as provided hereunder through the effective date of termination, and (ii) the Company on the one hand, and Executive, on the other hand, shall not have any further right or remedy against one another except as provided in Sections 6, 7 and 8 hereof which shall remain in full force and effect. For purposes of this Agreement, a "change in control" shall mean the occurrence of any of the following events: (a) the individuals constituting the Board as of the date of the initial public offering of common stock of the Company (the "Incumbent Board") cease for any reason to constitute at least a majority of the Board; provided, however, that if the election, or nomination for election by the Company's stockholders, of any new director was approved by a vote of at least a majority of the Incumbent Board, such new director shall be considered a member of the Incumbent Board; (b) provided that the number of shares of common stock of the Company directly held by PPD and its subsidiaries (other than the Company and the Company's subsidiaries) represents 50% or less of the total outstanding shares of common stock of the Company, an acquisition of any voting securities of the Company (the "Voting Securities") by any "person" (as the term "person" is used for purposes of Section 13(d) or Section 14(d) of the Securities Exchange Act of 1934, as amended (the "1934 Act")) immediately after which such person has "beneficial ownership" (within the meaning of Rule 13d-3 promulgated under the 1934 Act) of 20% or more of the combined voting power of the Company's then outstanding Voting Securities; or (c) approval by the stockholders of the Company of: (i) a merger, consolidation, share exchange or reorganization of the Company, unless the stockholders of the Company, immediately before such merger, consolidation, share exchange or reorganization, own, directly or indirectly immediately following such merger, consolidation, share exchange or reorganization, at least 80% of the combined voting power of the outstanding voting securities of the corporation that is the successor in such merger, consolidation, share exchange or reorganization (the "Surviving Company") in substantially the 3 4 same proportion as their ownership of the Voting Securities immediately before such merger, consolidation, share exchange or reorganization; or (ii) a complete liquidation or dissolution of the Company; or (iii) an agreement for the sale or other disposition of all or substantially all of the assets of the Company. Executed at Vista, California this ___ day of _________ 1998. THE COMPANY PAN PACIFIC RETAIL PROPERTIES, INC. a Maryland Corporation By: --------------------------------- Stuart A. Tanz Chief Executive Officer and President EXECUTIVE --------------------------------- David L. Adlard 4 EX-10.30 11 RESTRICTED STOCK AGREEMENT - ADLARD 1 EXHIBIT 10.30 RESTRICTED STOCK AGREEMENT THIS AGREEMENT is made between David L. Adlard (the "Employee") and Pan Pacific Retail Properties, Inc. (the "Company") as of August 13, 1997. RECITALS (1) Pursuant to the Company's 1997 Stock and Option Incentive Plan, the Company has granted to Employee an award of 10,000 shares of common stock (the "Shares"). (2) As a condition to Employee's grant of Restricted Stock, Employee must execute this Restricted Stock Agreement (this "Agreement"), which sets forth the rights and obligations of the parties with respect to the Shares. 1. Forfeiture; Vesting. (a) If Employee's employment or consulting relationship with the Company is terminated for any reason, including, but not limited to, for cause, death, and disability, all unvested Shares shall be forfeited and shall be transferred to the Company; provided that as to Shares that would have vested at the end of the year of termination, such Shares shall vest on a prorated basis based on the number of days elapsed in such year and rounding down to the nearest Share. (b) The Shares issued hereunder shall become vested in three (3) cumulative installments as follows: (i) The first installment shall consist of 3,334 Shares and shall vest on August 13, 1998; (ii) The second installment shall consist of 3,333 Shares and shall vest on August 13, 1999; (iii) The third installment shall consist of 3,333 Shares and shall vest on August 13, 2000. (c) For example, if termination occurs on July 31, 1999, then Employee will retain as vested the 3,334 Shares that vested on August 13, 1998 and 3,214 of the 3,333 Shares that would otherwise have vested on August 13, 1999 (352/365 days times 3,333 Shares equals 3,214.3 Shares, which is rounded down to 3,214). 2. Transferability of the Shares; Escrow. (a) Employee hereby authorizes and directs the secretary of the Company, or such other person designated by the Company, to transfer the unvested Shares that have been forfeited to the Company. 2 (b) To insure the availability for delivery of Employee's unvested Shares upon forfeiture to the Company, Employee hereby appoints the secretary of the Company, or any other person designated by the Company as escrow agent, as its attorney-in-fact to assign and transfer unto the Company, such unvested Shares, if any, forfeited to the Company pursuant to Section 1 and shall, upon execution of this Agreement, deliver and deposit with the secretary of the Company, or such other person designated by the Company, the Share certificates representing the unvested Shares, together with the stock assignment duly endorsed in blank, attached hereto as Exhibit 1. The unvested Shares and stock assignment shall be held by the secretary in escrow, pursuant to the Joint Escrow Instructions of the Company and Employee attached as Exhibit 2 hereto, until such unvested Shares are vested, or until such time as this Agreement no longer is in effect. As a further condition to the Company's obligations under this Agreement, the spouse of the Employee, if any, shall execute and deliver to the Company the Consent of Spouse attached hereto as Exhibit 3. Upon vesting of the unvested Shares, the escrow agent shall promptly deliver to the Employee the certificate or certificates representing such Shares in the escrow agent's possession belonging to the Employee, and the escrow agent shall be discharged of all further obligations hereunder; provided, however, that the escrow agent shall nevertheless retain such certificate or certificates as escrow agent if so required pursuant to other restrictions imposed pursuant to this Agreement. (c) The Company, or its designee, shall not be liable for any act it may do or omit to do with respect to holding the Shares in escrow and while acting in good faith and in the exercise of its judgment. (d) Transfer or sale of the Shares is subject to restrictions on transfer imposed by any applicable state and federal securities laws. Any transferee shall hold such Shares subject to all the provisions hereof and shall acknowledge the same by signing a copy of this Agreement. (e) This Agreement shall terminate upon the earlier of (i) an event of forfeiture, as described in Section 1(a) herein, or (ii) August 13, 2000. 3. Ownership, Voting Rights, Duties. This Agreement shall not affect in any way the ownership, voting rights or other rights or duties of Employee, except as specifically provided herein. 4. Legends. The Share certificate evidencing the Shares issued hereunder shall be endorsed with the following legend (in addition to any legend required under applicable federal and federal and state securities laws and the Company's charter): THE SHARES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO CERTAIN RESTRICTIONS UPON TRANSFER AND FORFEITURE AS SET FORTH IN AN AGREEMENT BETWEEN THE COMPANY AND THE HOLDER OF THE SHARES, A COPY OF WHICH IS ON FILE WITH THE SECRETARY OF THE COMPANY. 5. Adjustment for Stock Split. All references to the number of Shares in this Agreement shall be appropriately adjusted to reflect any stock split, stock dividend or other change in the Shares which may be made by the Company after the date of this Agreement. 2 3 6. Notices. Notices required hereunder shall be given in person or by registered mail to the address of Employee shown on the records of the Company, and to the Company at its principal executive office. 7. Survival of Terms. This Agreement shall apply to and bind Employee and the Company and their respective permitted assignees and transferees, heirs, legatees, executors, administrators and legal successors. 8. No Section 83(b) Elections. Because such election could have an impact on the Company's ability to continue as a real estate investment trust under the Code (defined below), Employee agrees that Employee will not file an election under Section 83(b) of the Internal Revenue Code of 1986, as amended (the "Code"), with respect to the Shares. If Employee does file a Section 83(b) election then such election shall cause the forfeiture of all of the Shares, without proration (notwithstanding Section 1(a)). 9. Representations. Employee has reviewed with his own tax advisors the federal, state, local and foreign tax consequences of this investment and the transactions contemplated by this Agreement. Employee is relying solely on such advisors and not on any statements or representations of the Company or any of its agents. Employee understands that he (and not the Company) shall be responsible for his own tax liability that may arise as a result of the grant of the Shares or the transactions contemplated by this Agreement. 10. Governing Law. This Agreement shall be governed by and construed and enforced in accordance with California law. 11. Employee agrees and understands that neither this Agreement nor the grant of Shares alters the Employee's status as an at will employee of the Company. Employee represents that he has read this Agreement and is familiar with its terms and provisions. Employee hereby agrees to accept as binding, conclusive and final all decisions or interpretations of the Board of Directors of the Company (or the Compensation Committee thereof) upon any questions arising under this Agreement. 3 4 IN WITNESS WHEREOF, this Agreement is deemed made as of the date first set forth above. "COMPANY" PAN PACIFIC RETAIL PROPERTIES, INC. By: --------------------------------- Title: ------------------------------ "EMPLOYEE" DAVID L. ADLARD Address: ------------------------------------ ------------------------------------ ------------------------------------ 4 5 EXHIBIT 1 ASSIGNMENT SEPARATE FROM CERTIFICATE FOR VALUE RECEIVED I, David L. Adlard, hereby sell, assign and transfer unto ______________ (__________) Shares of the Common Stock of Pan Pacific Retail Properties, Inc. standing in my name of the books of said corporation represented by Certificate No. _______________ herewith and do hereby irrevocably constitute and appoint ______________ to transfer the said stock on the books of the within named corporation with full power of substitution in the premises. This Stock Assignment may be used only in accordance with the Restricted Stock Agreement between Pan Pacific Retail Properties, Inc. and the undersigned dated August 13, 1997. Dated: _______________, 1997 Signature:______________________________ INSTRUCTIONS: Please do not fill in any blanks other than the signature line. The purpose of this assignment is to enable the Company to transfer the Shares upon forfeiture as set forth in the Agreement, without requiring additional signatures on the part of the Employee. 1 6 EXHIBIT 2 JOINT ESCROW INSTRUCTIONS ____________, 1997 Corporate Secretary Pan Pacific Retail Properties, Inc. 1631-B South Melrose Drive Vista, California 92083 Dear Corporate Secretary: As Escrow Agent for both Pan Pacific Retail Properties, Inc. (the "Company"), and the undersigned employee of the Company (the "Employee"), you are hereby authorized and directed to hold the documents delivered to you pursuant to the terms of that certain Restricted Stock Agreement ("Agreement") between the Company and the undersigned, in accordance with the following instructions: 1. In the event the Company advises you that a forfeiture has occurred as set forth in the Agreement, the Company shall give to Employee and you a written notice specifying the number of Shares of stock to be transferred to the Company. Employee and the Company hereby irrevocably authorize and direct you to effect the transfer contemplated by such notice. 2. Upon receipt of such notice, you are directed (a) to date the stock assignments necessary for the transfer in question, (b) to fill in the number of Shares being transferred, and (c) to deliver the same, together with the certificate evidencing the Shares of stock to be transferred to the Company. 3. Employee irrevocably authorizes the Company to deposit with you any certificates evidencing Shares of stock to be held by you hereunder and any additions and substitutions to said Shares as defined in the Agreement. Employee does hereby irrevocably constitute and appoint you as Employee's attorney-in-fact and agent for the term of this escrow to execute with respect to such securities all documents necessary or appropriate to make such securities negotiable and to complete any transfer herein contemplated, including but not limited to the filing with any applicable state blue sky authority of any required applications for consent to, or notice of transfer of, the securities. Subject to the provisions of this paragraph 3, Employee shall exercise all rights and privileges of a stockholder of the Company while the stock is held by you. 4. Upon written request of the Employee, on any of August 13, 1998, 1999 or 2000, unless the Company has provided a notice of forfeiture, you will deliver to Employee a certificate or certificates representing so many Shares of stock as are not then subject to forfeiture. Within 120 days after cessation of Employee's continuous employment by or services to the Company, or any parent or subsidiary of the Company, you will deliver to Employee a certificate or certificates representing the aggregate number of Shares held or issued pursuant to the Agreement and not forfeited to the Company. 1 7 5. If at the time of termination of this escrow you should have in your possession any documents, securities, or other property belonging to Employee, you shall deliver all of the same to Employee and shall be discharged of all further obligations hereunder. 6. Your duties hereunder may be altered, amended, modified or revoked only by a writing signed by all of the parties hereto. 7. You shall be obligated only for the performance of such duties as are specifically set forth herein and may rely and shall be protected in relying or refraining from acting on any instrument reasonably believed by you to be genuine and to have been signed or presented by the proper party or parties. You shall not be personally liable for any act you may do or omit to do hereunder as Escrow Agent or as attorney-in-fact for Employee while acting in good faith, and any act done or omitted by you pursuant to the advice of your own attorneys shall be conclusive evidence of such good faith. 8. You are hereby expressly authorized to disregard any and all warnings given by any of the parties hereto or by any other person or corporation, excepting only orders or process of courts of law and are hereby expressly authorized to comply with and obey orders, judgments or decrees of any court. In case you obey or comply with any such order, judgment or decree, you shall not be liable to any of the parties hereto or to any other person, firm or corporation by reason of such compliance, notwithstanding any such order, judgment or decree being subsequently reversed, modified, annulled, set aside, vacated or found to have been entered without jurisdiction. 9. You shall not be liable in any respect on account of the identity, authorities or rights of the parties executing or delivering or purporting to execute or deliver the Agreement or any documents or papers deposited or called for hereunder. 10. You shall not be liable for the outlawing of any rights under the Statute of Limitations with respect to these Joint Escrow Instructions or any documents deposited with you. 11. You shall be entitled to employ such legal counsel and other experts as you may deem necessary properly to advise you in connection with your obligations hereunder, may rely upon the advice of such counsel, and may pay such counsel reasonable compensation therefor. 12. Your responsibilities as Escrow Agent hereunder shall terminate (i) on August 13, 2000 or an event of forfeiture, whichever occurs first, or (ii) if you shall cease to be an officer or agent of the Company or if you shall resign by written notice to each party. In the event of the latter, the Company shall appoint a successor Escrow Agent. 13. If you reasonably require other or further instruments in connection with these Joint Escrow Instructions or obligations in respect hereto, the necessary parties hereto shall join in furnishing such instruments. 14. It is understood and agreed that should any dispute arise with respect to the delivery and/or ownership or right of possession of the securities held by you hereunder, you are authorized and directed to retain in your possession without liability to anyone all or any part of 2 8 said securities until such disputes shall have been settled either by mutual written agreement of the parties concerned or by a final order, decree or judgment of a court of competent jurisdiction after the time for appeal has expired and no appeal has been perfected, but you shall be under no duty whatsoever to institute or defend any such proceedings. 15. Any notice required or permitted hereunder shall be given in writing and shall be deemed effectively given upon personal delivery or upon deposit in the United States Post Office, by registered or certified mail with postage and fees prepaid, addressed to each of the other parties thereunto entitled at the following addresses or at such other addresses as a party may designate by ten days' advance written notice to each of the other parties hereto. COMPANY: Pan Pacific Retail Properties, Inc. 1631-B South Melrose Vista, California 92083 Attn: President EMPLOYEE: ------------------------------------ ------------------------------------ ------------------------------------ ESCROW AGENT: Corporate Secretary Pan Pacific Retail Properties, Inc. 1631-B South Melrose Vista, California 92083 Attn: President 16. By signing these Joint Escrow Instructions, you become a party hereto only for the purpose of said Joint Escrow Instructions; you do not become a party to the Agreement. 17. This instrument shall be binding upon and inure to the benefit of the parties hereto, and their respective successors and permitted assigns. 3 9 18. These Joint Escrow Instructions shall be governed by, and construed and enforced in accordance with, the laws of the State of California. PAN PACIFIC RETAIL PROPERTIES, INC. By: --------------------------------- Title: ------------------------------ EMPLOYEE: ------------------------------------ ESCROW AGENT: ------------------------------------ Corporate Secretary 4 10 EXHIBIT 3 CONSENT OF SPOUSE I, ____________________, spouse of ___________________, have read and approve the foregoing Restricted Stock Agreement. In consideration of granting of the Shares to my spouse, set forth in the Restricted Stock Agreement, I hereby appoint my spouse as my attorney-in-fact in respect to the exercise of any rights under the Restricted Stock Agreement and agree to be bound by the provisions of the Restricted Stock Agreement insofar as I may have any rights in said Restricted Stock Agreement or any Shares issued pursuant thereto under the community property laws or similar laws relating to marital property in effect in the state of our residence as of the date of the signing of the foregoing Restricted Stock Agreement. Dated: _______________, 1997 ________________________________________________ 1 EX-10.31 12 FIRST AMENDMENT TO RESTRICTED STOCK AGREEMENT 1 EXHIBIT 10.31 FIRST AMENDMENT TO RESTRICTED STOCK AGREEMENT PAN PACIFIC RETAIL PROPERTIES, INC., a Maryland corporation (the "Company") and DAVID L. ADLARD ("Employee") have entered into that certain Restricted Stock Agreement (the "Agreement") effective as of August 13, 1997. In order to amend the Agreement in certain respects, the Company and Employee hereby agree as follows effective as of __________________, 1998. Subsection 1(d) is hereby added to the Agreement to read in its entirety as follows: (d) In the case of a "Change in Control" (as hereinafter defined) prior to the termination of Employee's employment or consulting relationship with the Company, then, immediately prior to the occurrence of such Change in Control, the Shares shall become fully vested and shall cease to be subject to forfeiture under subsection 1(a) after such event. For purposes of this Agreement, "Change in Control" shall mean the occurrence of any of the following events: (a) the individuals constituting the Board of Directors of the Company (the "Board") as of the date of the initial public offering of common stock of the Company (the "Incumbent Board") cease for any reason to constitute at least a majority of the Board; provided, however, that if the election, or nomination for election by the Company's stockholders, of any new director was approved by a vote of at least a majority of the Incumbent Board, such new director shall be considered a member of the Incumbent Board; (b) provided that the number of shares of common stock of the Company directly held by Pan Pacific Development (U.S.) Inc., a Delaware corporation and its subsidiaries (other than the Company and the Company's subsidiaries) represents 50% or less of the total outstanding shares of common stock of the Company, an acquisition of any voting securities of the Company (the "Voting Securities") by any "person" (as the term "person" is used for purposes of Section 13(d) or Section 14(d) of the Securities Exchange Act of 1934, as amended (the "1934 Act")) immediately after which such person has "beneficial ownership" (within the meaning of Rule 13d-3 promulgated under the 1934 Act) of 20% or more of the combined voting power of the Company's then outstanding Voting Securities; or (c) approval by the stockholders of the Company of: 2 (i) a merger, consolidation, share exchange or reorganization of the Company, unless the stock holders of the Company, immediately before such merger, consolidation, share exchange or reorganization, own, directly or indirectly immediately following such merger, consolidation, share exchange or reorganization, at least 80% of the combined voting power of the outstanding voting securities of the corporation that is the successor in such merger, consolidation, share exchange or reorganization (the "Surviving Company") in substantially the same proportion as their ownership of the Voting Securities immediately before such merger, consolidation, share exchange or reorganization; or (ii) a complete liquidation or dissolution of the Company; or (iii) an agreement for the sale or other disposition of all or substantially all of the assets of the Company. Executed at Vista, California this ___ day of ________ 1998. THE COMPANY PAN PACIFIC RETAIL PROPERTIES, INC. a Maryland Corporation By: --------------------------------- Stuart A. Tanz Chief Executive Officer and President EMPLOYEE --------------------------------- David L. Adlard 2 EX-10.32 13 FIRST AMENDMENT TO NON-QUALIFIED STOCK AGREEMENT 1 EXHIBIT 10.32 FIRST AMENDMENT TO NON-QUALIFIED STOCK OPTION AGREEMENT FOR INDEPENDENT DIRECTORS PAN PACIFIC RETAIL PROPERTIES, INC., a Maryland corporation (the "Company") and [ ], an Independent Director of the Company ("Optionee") have entered into that certain Incentive Stock Option Agreement (the "Agreement") effective as of [ ]. In order to amend the Agreement in certain respects, the Company and Optionee hereby agree as follows effective as of __________________, 1998. Section 1.4 of the Agreement is hereby amended in its entirety to read as follows: 1.4 Change of Control. "Change in Control" shall mean the occurrence of any of the following events: (a) the individuals constituting the Board as of the date of the initial public offering of common stock of the Company (the "Incumbent Board") cease for any reason to constitute at least a majority of the Board; provided, however, that if the election, or nomination for election by the Company's stockholders, of any new director was approved by a vote of at least a majority of the Incumbent Board, such new director shall be considered a member of the Incumbent Board; (b) provided that the number of shares of common stock of the Company directly held by Pan Pacific Development (U.S.) Inc., a Delaware corporation and its subsidiaries (other than the Company and the Company's subsidiaries) represents 50% or less of the total outstanding shares of common stock of the Company, an acquisition of any voting securities of the Company (the "Voting Securities") by any "person" (as the term "person" is used for purposes of Section 13(d) or Section 14(d) of the Securities Exchange Act of 1934, as amended (the "1934 Act")) immediately after which such person has "beneficial ownership" (within the meaning of Rule 13d-3 promulgated under the 1934 Act) of 20% or more of the combined voting power of the Company's then outstanding Voting Securities; or (c) approval by the stockholders of the Company of: (i) a merger, consolidation, share exchange or reorganization of the Company, unless the stock holders of the 2 Company, immediately before such merger, consolidation, share exchange or reorganization, own, directly or indirectly immediately following such merger, consolidation, share exchange or reorganization, at least 80% of the combined voting power of the outstanding voting securities of the corporation that is the successor in such merger, consolidation, share exchange or reorganization (the "Surviving Company") in substantially the same proportion as their ownership of the Voting Securities immediately before such merger, consolidation, share exchange or reorganization; or (ii) a complete liquidation or dissolution of the Company; or (iii) an agreement for the sale or other disposition of all or substantially all of the assets of the Company. Executed at Vista, California this ___ day of ________ 1998. THE COMPANY PAN PACIFIC RETAIL PROPERTIES, INC. a Maryland Corporation By: --------------------------------- [ ] [ ] OPTIONEE --------------------------------- [ ] 2 EX-21.1 14 SUBSIDIARIES OF THE REGISTRANT 1 EXHIBIT 21.1 SUBSIDIARIES OF THE REGISTRANT Sahara Pavilion North U.S., Inc., a Nevada corporation Pan Pacific Development (Chino), Inc., a Delaware corporation Pan Pacific Development (Kentucky), Inc., a Kentucky corporation Pan Pacific Development (New Mexico), Inc., a New Mexico corporation Pan Pacific Development (Olympia Square), Inc., a Washington corporation Pan Pacific Development (Rosewood), Inc., a California corporation Pan Pacific Development (Tennesee), L.P., a Delaware limited partnership Pan Pacific Development (Tennessee) Acquisition, Inc., a Delaware corporation Melrose Village Plaza Partners, a California partnership North Coast Health Center, a California joint venture partnership Pan Pacific (Clackamas), Inc., a Delaware corporation Pan Pacific (Portland), LLC, a Delaware limited liability company Maysville Marketsquare Associates L.P., a Kentucky limited partnership Pan Pacific (Clackamas), LLC, an Oregon limited liability company Pan Pacific (Sunset Mall), LLC, an Oregon limited liability company EX-23.1 15 CONSENT OF KPMG LLP 1 EXHIBIT 23.1 The Board of Directors Pan Pacific Retail Properties, Inc.: We consent to incorporation by reference in Registration Statement Nos. 333-63319, 333-63743 and 333-72551, each on Form S-3 of Pan Pacific Retail Properties, Inc. and to incorporation by reference in Registration Statement No. 333-61169 on Form S-8 of Pan Pacific Retail Properties, Inc., of our report relating to the consolidated balance sheets of Pan Pacific Retail Properties, Inc. as of December 31, 1998 and 1997, and the related consolidated statements of income, equity and cash flows for each of the years in the three-year period ended December 31, 1998, and the related Schedule III. Such report is dated February 11, 1999, except as to Note 9(f), which is as of March 24, 1999, and appears in the December 31, 1998, annual report on Form 10-K of Pan Pacific Retail Properties, Inc. /s/ KPMG LLP San Diego, California March 24, 1999 EX-27.1 16 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10-K AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS 1,000 YEAR DEC-31-1998 JAN-01-1998 DEC-31-1998 3,671 0 16,495 1,483 0 0 709,522 42,044 705,541 0 0 0 0 212 382,876 705,541 0 79,253 0 0 33,635 428 18,295 26,895 20 0 0 0 0 26,634 1.37 1.35
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