SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Form 10-K Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the fiscal year ended December 31, 2001 Commission file number 1-12222 BEDFORD PROPERTY INVESTORS, INC. (Exact name of Registrant as specified in its charter) MARYLAND 68-0306514 - --------- ---------- (State or other jurisdiction (I.R.S. Employer of incorporation or organization) Identification No.) 270 Lafayette Circle, Lafayette, CA 94549 ------------------------------------------- (Address of principal executive offices) Registrant's telephone number, including area code (925) 283-8910 -------------- Securities Registered Pursuant to Section 12(b) of the Act: Name of each exchange Title of each class on which registered - ------------------- ------------------- Common Stock, par value $0.02 per share New York Stock Exchange Pacific 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. [X] The aggregate market value of the voting stock held by non-affiliates of Registrant as of March 15, 2002 was approximately $380,456,000. The number of shares of Registrant's Common Stock, par value $0.02 per share, outstanding as of March 15, 2002 was 16,692,040. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Registrant's Proxy Statement to be mailed to stockholders in connection with the Registrant's annual meeting of stockholders, scheduled to be held on May 16, 2002, are incorporated by reference in Part III of this report. Except as expressly incorporated by reference, the Registrant's Proxy Statement shall not be deemed to be part of this report. When used in this annual report, the words "believes," "anticipates" and similar expressions are intended to identify forward-looking statements. Such statements are subject to certain risks and uncertainties which could cause actual results to differ materially from those projected, including, but not limited to, those set forth in the sections entitled "Potential Factors Affecting Future Operating Results" and "Qualitative and Quantitative Disclosures About Market Risk" below. Readers are cautioned not to place undue reliance on these forward-looking statements which speak only as of the date hereof. The Company undertakes no obligation to publicly release the result of any revisions to these forward-looking statements which may be made to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events. PART I - ------ ITEM 1. BUSINESS - ------------------- The Company Bedford Property Investors, Inc. is a self-administered and self- managed equity REIT engaged in the business of owning, managing, acquiring and developing industrial and suburban office properties proximate to metropolitan areas in the western United States. As of December 31, 2001, the Company owned and operated 86 properties totaling approximately 6.7 million rentable square feet. Of these 86 properties (the "Properties"), 58 are industrial (the "Industrial Properties") and 28 are suburban office (the "Suburban Office Properties"). As of December 31, 2001, the Properties were leased to 444 tenants with average occupancy of approximately 96%. The Properties are located in Northern and Southern California, Washington, Arizona, Nevada and Colorado. In addition to the Properties, the Company owns four development properties: one suburban office, one service center flex and two office-flex projects totaling 233,900 rentable square feet, which were approximately 29% leased as of December 31, 2001. The Company seeks to grow its asset base through the development of new industrial and suburban office properties as well as through the acquisition of industrial and suburban office properties and portfolios of such properties. The Company's strategy is to operate in suburban markets that are experiencing, or are expected by the Company to experience, superior economic growth and are subject to limitations on the development of similar properties. The Company believes that employment growth is a reliable indicator of future demand for both industrial and suburban office space. In addition, the Company believes that certain supply-side constraints, such as limited availability of undeveloped land in a market, increase a market's potential for higher than average rental growth over time. The Company continues to target selected markets in which the Properties are located as well as selected other markets in which the Company has expertise. Business Objective and Growth Plan Business Objective The Company's business objective is to increase stockholders' long- term total return through increases in the dividend and the appreciation in value of the Common Stock. To achieve this objective, the Company seeks to (i) increase cash flow by internal growth of rents from its existing Properties, (ii) develop new industrial and suburban office properties, (iii) acquire quality industrial and suburban office properties and/or portfolios of such properties, and (iv) repurchase its common stock. Internal Growth The Company seeks to increase cash flow from existing Properties through (i) the lease-up of vacant space, (ii) the reduction of costs associated with tenant turnover by retaining existing tenants, (iii) the negotiation of increases in rental rates and of contractual periodic rent increases when market conditions permit, and (iv) the strict containment of operating expenses and capital expenditures. During 2001, leases for 1,071,773 square feet of space expired with a weighted average base rental rate of $11.37 per square foot. As of December 31, 2001, approximately 95% of this space has been re-leased, and the weighted average base rental rate of the new leases is $13.05 per square foot, an increase of 14.8%. Past performance is not necessarily indicative of results that will be obtained in the future, and no assurance can be given in that regard. Development The Company seeks to develop properties in strong markets where (i) demand for space has caused or is expected to cause occupancy rates to remain high, (ii) barriers to entry such as scarcity of land or entitlement challenges exist, and (iii) the project complements its existing portfolio. The Company's management team has experience in all phases of the development process, including market analysis, site selection, zoning, design, pre-development leasing, construction management and permanent financing. Since 2000, the Company has been especially focused on the development of office-tech and flex-tech product. These are multi-tenant buildings designed to meet the needs of a wide range of uses. The flex-tech product anticipates the changing needs of high-growth tenants and accommodates their need for flexible facility configurations. The Company evaluates the competitive environment, demand and rent trends, and development pipelines before embarking on or acquiring each new project. The Company is currently in the process of developing properties in Northern and Southern California and Colorado, and is considering developing additional properties in the same markets as well as in the Pacific Northwest. The Company's management team has significant development experience in each of these markets. The Company's activities relating to the development of new properties, including the due diligence process, are conducted on an exclusive basis by Bedford Acquisitions, Inc. (BAI), a California corporation wholly-owned by Mr. Peter Bedford, the Company's Chairman of the Board and Chief Executive Officer. For these services, BAI receives fees in amounts equal to the lesser of (i) 1 1/2 % of the gross amount of the aggregate purchase price of property acquisitions and dispositions, up to 1 1/2 % of any loans arranged by BAI, plus 7% of development project costs, or (ii) an amount equal to (a) the aggregate amount of approved expenses funded by BAI through the time of such acquisition, disposition, loan or development minus (b) the aggregate amount of fees previously paid to BAI pursuant to such arrangement. In no event will the aggregate amount of fees paid to BAI exceed the aggregate amount of costs funded by BAI. The current agreement with BAI has a one-year term expiring December 31, 2002, which is automatically extended for an additional term of one year unless either party gives notice of its intent to terminate the agreement by October 31, 2002. Acquisitions The Company seeks to acquire industrial and suburban office properties and/or portfolios of such properties. The Company believes that (i) the experience of its management team, (ii) its existing $150 million credit facility which contains a $25 million accordion feature, (iii) its relationships with private and institutional real estate owners, (iv) its strong relationships with real estate brokers, and (v) its integrated asset management program enable it to effectively identify and capitalize on acquisition opportunities. Each acquisition opportunity is reviewed to evaluate whether it meets the following criteria: (i) potential for higher occupancy levels and/or rents as well as for lower turnover and/or operating expenses, (ii) ability to generate returns in excess of the Company's weighted average cost of capital, taking into account the estimated costs associated with tenant turnover (i.e., tenant improvements, leasing commissions and the loss of income due to vacancy), and (iii) availability for purchase at a price at or below estimated replacement cost. However, the Company has in the past acquired, and may in the future acquire, properties which do not meet one or more of these criteria. This may be particularly true with the acquisition of a portfolio of properties, which may include individual properties that do not meet one or more of the foregoing criteria. Following completion of an initial review of a property, the Company may make a purchase offer, subject to satisfactory completion of its due diligence process. The due diligence process enables the Company to refine its original estimate of a property's potential performance and typically includes a complete review and analysis of the property's physical structure, systems, environmental status and projected financial performance. The due diligence also includes an evaluation of the local market including competitive properties and relevant economic and demographic information. Mr. Bedford and at least one other officer and one other Board member of the Company, will typically visit each proposed acquisition property before the purchase is closed. Acquisitions of properties for the Company are conducted by BAI as described above. Share Repurchase In July 1998, the Company's board of directors approved a share repurchase program of 3 million shares which was increased first to 4.5 million shares in September 1999 then to 8 million shares in September 2000 and later to 10 million shares in January 2002. Since November 1998, the Company has repurchased and retired 7.1 million shares at an average price of $17.90 per share. This represents 31% of the shares outstanding at November 30, 1998 when the Company began implementing its share repurchase program. From November 1998 when the Company's stock traded at a discount to its estimated net asset value (estimated based on current cap rate and earning estimates), the Company bought in shares under the share repurchase program. During 2001, with a dividend yield approximately equal to 9% and an average borrowing cost of 6.9%, the Company continued to repurchase its common stock because buying back stock increases the stockholders' relative percentage ownership in the Company and therefore brings additional value to that ownership. Corporate Strategies In pursuing its business objectives and growth plans, the Company intends to: 1. Pursue a Market Driven Strategy. The Company's strategy is to continue to operate in suburban markets which are experiencing, or are expected by the Company to experience, above average economic growth, and which are, ideally, subject to supply-side constraints. The metropolitan areas in which the Company operates have multiple suburban "cores" and it believes that the potential for growth in these metropolitan areas is generally greatest in and around these suburban cores. It is the Company's experience that such suburban cores emerge as jobs move to the suburbs and typically offer a well-trained and well-educated work force, high quality of life and, in many cases, a diversified economic base. The Company focuses on owning, managing, acquiring and developing properties in these suburban cores. Additionally, the Company seeks out real estate markets that are subject to supply-side constraints such as limited availability of undeveloped land and/or geographic, topographic, regulatory and/or infrastructure restrictions. Such restrictions limit the supply of new commercial space, which, when combined with a growing employment and population base, enhances the long-term return potential for an investment in real estate assets. 2. Focus its Efforts in the Western United States. The Company is currently targeting selected suburban markets in the western United States. These markets have not been immune to the economic slowdown that began in the second half of 2000. Job growth in many of the markets in which the Company operates has slowed significantly and has stopped altogether in others. Markets that tended to be the strongest participants in the telecommunication/technology boom of the late 1990s have been the hardest hit by slowing job-formation. As a consequence, demand for commercial space has declined as well. However, the Company believes that the combination of the quality of its assets, the long-term attractiveness of its sub-markets, and its experience in these markets will provide an opportunity for good returns to its shareholders in the future. In 2001, the Company continued the process of selling assets which had either reached their point of inflection relative to continued growth opportunities, were located in secondary markets, or were of a quality inconsistent with the balance of the portfolio. Included in these sales were properties located in Phoenix, Tucson, and Denver. 3. Develop and Acquire "Service Center Flex and Suburban Office" Properties. Among the Company's targeted properties are service center flex industrial properties as well as suburban office flex buildings. These buildings provide for a wider range of function than that offered by traditional office or industrial properties and are an efficient facility choice for technology sector firms that have frequently changing space needs. These properties are divisible into units ranging from approximately 1,500 square feet to approximately 20,000 square feet in order to accommodate multiple tenants of various sizes and needs. The buildings, which generally range in size from 8,000 to 80,000 square feet, have a clear height of 12 to 18 feet and are built using concrete tilt construction with store fronts incorporated in the front elevation and service doors or continued storefront in the back elevation. The Company believes that these properties require more management expertise than other types of industrial properties and that it has developed such expertise. The Company also believes that many potential buyers do not wish or are not well-positioned to undertake such active management. As a result, the Company believes that it often faces fewer competitors for this product and is generally able to acquire these properties at above average yields. 4. Sell Selected Assets The Company funds a portion of its development and acquisition activities and the share repurchase program through the sale of selected assets. Such assets include buildings that, in our opinion, have maximized their value or have become obsolete due to their physical attributes, are in secondary markets, or are not of a quality consistent with the rest of our properties. In addition, in 2000 the Company redefined its geographical focus in the western United States and sold real estate assets that did not fit this western orientation. 5. Continue Neighborhooding Neighborhooding describes expansion in areas where the Company owns existing properties. This strategy capitalizes on management's expertise and knowledge of the local market, economy, and tenant needs for expansion. It results in efficiency in property management and therefore enables the Company to acquire or develop properties at greater yields. The Company utilized this concept in developing projects and acquiring properties in Fremont, Napa, Ontario, Petaluma, and San Diego, California; Phoenix, Arizona; Denver, Colorado; and Federal Way, Washington. 6. Utilize In-House Asset and Property Management The Company believes that the long-term value of its Properties is enhanced through in-house asset management. As of December 31, 2001, the Company directly manages 85 of its 86 properties. The Company conducts its Northern California property management activities out of its headquarters office in Lafayette, California; its Southern California property management activities out of its regional office in Tustin, California; its Arizona property management activities out of its regional office in Phoenix, Arizona; its Seattle property management activities out of its regional office in Seattle, Washington; and its Colorado property management activities out of its office in Denver, Colorado. A single asset, a suburban office property located in Reno, Nevada is managed by a local firm. The Company's asset management team develops and monitors a comprehensive asset management plan for each Property in an effort to ensure its efficient operation. The Company's Vice President of Property/Asset Management works directly with the Company's internal finance and accounting staff to develop and monitor detailed budgets and financial reports for each Property. He also works with each property manager to identify and implement opportunities to improve cash flow from each Property and to maximize each Property's long-term investment value. The Company's property management staff is generally responsible for leasing activities, ordinary maintenance and repairs, keeping financial records on income and expenses, rent collection, payment of operating expenses and property operations. The Company's property management philosophy is based on the belief that the long-term value of the Properties is enhanced by attention to detail and hands-on service provided by professional in-house property management. The Company believes that a successful leasing program starts by servicing existing tenants first. Costs associated with tenant turnover (i.e., tenant improvements, leasing commissions and the loss of income due to vacancy) can be significant and, by addressing and attending to existing tenants' needs, the Company believes that it can increase its retention of existing tenants and simultaneously make its properties more attractive to new tenants. 7. Cooperate with Local Real Estate Brokers The Company seeks to develop strong relationships with local real estate brokers, who can provide access to tenants as well as general market intelligence and research. The Company believes that these relationships have enhanced the Company's ability to attract and retain tenants. Transactions and Significant Events During 2001 Development and Acquisitions Development activity during the year included the continued leasing of 144,000 square feet in two projects located in Denver, Colorado and Napa, California, which were shell complete during 2000. As of December 31, 2001, these projects were 80% leased with estimated yields ranging from 11% to 12%. The Company also completed the shell construction and partial lease-up of two projects located in Napa and Ontario, California, and two projects in Denver, Colorado, adding 263,000 square feet to the available inventory. As of December 31, 2001, these projects were 36% leased. This new leasable space provides the Company with a significant opportunity to increase its operating revenue. The Company also acquired a 9.3 acre parcel of vacant land in Napa, California. This parcel of land is adjacent to existing Properties and will be used for future development opportunities. Sell Selected Assets During the year, the Company sold four Properties, including three Industrial Properties and one Suburban Office Property, totaling 342,000 rentable square feet for $20,178,000. These sales produced gains totaling $5,938,000. The cash proceeds from these sales were used to fund a portion of the repurchases of the Company's common stock and a portion of the development costs. Use of Information Technology The Company's management has made a significant commitment to employ information technology in all the day-to-day operations of the firm. A number of steps have been taken during the past three years to digitize internal practices and eliminate redundancies. These steps include the creation of a management information system designed to facilitate real-time dissemination of operating results to field offices. This system provides the framework for timely operations reviews with each Regional Manager, the focus of which are market opportunities and the action steps necessary to take advantage of them. In addition, all basic business functions have been digitized to simplify practices, reduce paper-flow, and enhance productivity. The Company's Markets The Properties are located in select markets proximate to metropolitan areas in Northern and Southern California, Washington, Arizona, Nevada and Colorado. During the economic recovery of the second half of the 1990s, these markets were characterized by strong demand for commercial property without significant increases in supply. Those trends began to shift during late 2000 and throughout 2001. Job growth and demand for commercial real estate facilities has slowed in concert with a national recession that has not left these markets untouched. The Company believes that, for the most part, the commercial real estate excesses attending the expansion that ended in 1990 have been avoided in this cycle. There have not been improvident additions to the stock of suburban office or flex space and, in consequence, the current imbalance is demand-related and not a function of new supply. Nonetheless, vacancies began to move up last year and surplus sub- lease space came on the markets in abundant supply. Generally, those markets which had experienced the highest rate of job-formation also experienced the largest proportion of surplus space. The East Side of Seattle and Silicon Valley in California, both of which experienced significant growth in telecommunications, technology, and internet- related employment, are good examples of this trend. Looking beyond the current economic slowdown, the Company continues to believe that the Properties which it has acquired and built are of excellent quality and will retain strong occupancy rates in a competitive market context. In particular the San Francisco Bay Area, Seattle, and San Diego, areas in which the Company has over 50% of its square footage, are again areas ranked favorably as investment markets in the 2002 edition of Emerging Trends in Real Estate, a publication of PricewaterhouseCoopers and Lend Lease Real Estate Investments. Quality of life, a well-educated workforce, and natural and environmentally derived barriers to entry are present in these markets and are characteristics which have been associated with good real estate returns in the past. Operating Performance For the year ended December 31, 2001, the Company reported income before gain on sales and extraordinary item of $30,785,000, on rental revenues of $99,949,000, compared with income before gain on sale and extraordinary item of $29,916,000, on rental revenues of $97,518,000 for the year ended December 31, 2000. Gain on sales of real estate investments for the year ended December 31, 2001 was $5,938,000 compared with gain on sales of real estate investments of $38,171,000 for the year ended December 31, 2000. The Company's Funds From Operations ("FFO": see definition under "Selected Financial Data") for the year ended December 31, 2001 was $47,110,000 as compared to $43,864,000 for the year ended December 31, 2000. Due to the share repurchase program, FFO was spread over fewer shares, resulting in the growth of the "per share" amount. Increase in Dividends on Common Stock In September 2001, the Company announced a 7% increase in its quarterly Common Stock dividend from $0.45 to $0.48 per share, or $1.92 on an annualized basis. The higher dividend rate commenced with the Company's dividend for the third quarter of 2001. The dividends declared for the four quarters in 2001 totaled $1.86, a 7% increase compared with the dividends declared for the four quarters in 2000. Credit Facility In May 2001, the Company renewed its revolving credit facility with a bank group led by Bank of America. The facility, which matures on June 2004, consists of a $150 million secured line with an accordion feature to expand the facility to $175 million, if needed. Interest on the facility is at a floating rate equal to either the lender's published "reference rate" or LIBOR plus a margin ranging from 1.30% to 1.55%, depending on the Company's leverage level. At December 31, 2001, the facility had an outstanding balance of $80,925,000, with an interest rate of LIBOR plus 1.55% (an effective rate of 4.99%). The Company was in compliance with the covenants and requirements of its revolving credit facility throughout 2001. Mortgage Loans In November 2001, the Company obtained $21,819,000 of new first mortgage financing from Union Bank of California. The financing, a renewal of an existing mortgage with the same lender, consists of a three-year loan, bearing interest at a floating rate of LIBOR plus 1.6% (an effective rate of 4.02% as of December 31, 2001). The old loan, which had an outstanding balance of approximately $14 million and a maturity date of January 2, 2002, carried a fixed interest of 7.5%. The $21,819,000 mortgage is collaterized by the same property pool as the expiring loan, namely nine properties located in California. Proceeds of the new mortgage loan were used to pay off the expiring mortgage and to pay down a portion of the outstanding balance of the Company's credit facility. In August 2001, the Company closed on $18 million of mortgage financing from Washington Mutual Bank. The loan has a 10-year term and bears interest at a floating rate of a trailing 1-year treasury rate plus 2.60% (an effective rate of 7.92% as of December 31, 2001). Proceeds from the loan were used to pay down a portion of the outstanding balance of the $150 million line of credit. Dividends The Company has made regular quarterly distributions to the holders of its Common Stock every quarter since the second quarter of 1993, and has increased the dividend fifteen times since then from $0.10 per share in the second quarter of 1993 to $0.48 per share in the fourth quarter of 2001. In March 2002, the Company declared a dividend distribution for the first quarter 2002 to its stockholders in the amount of $0.48 per share of Common Stock, payable 15 days after the quarter-end. Tenants Based on rentable square feet, as of December 31, 2001, the Suburban Office Properties and Industrial Properties were approximately 96% occupied by a total of 444 tenants, of which 117 were Suburban Office Property tenants and 327 were Industrial Property tenants. The Company's tenants include local, regional, national and international companies engaged in a wide variety of businesses. Financing The Company expects cash flow from operations to be sufficient to pay operating expenses, real estate taxes, general and administrative expenses, and interest on indebtedness and to make distributions to stockholders required to maintain the Company's REIT qualification. The Company expects to fund the cost of acquisitions, capital expenditures, costs associated with lease renewals and reletting of space, repayment of indebtedness, share repurchases, and development of properties from (i) cash flow from operations, (ii) borrowings under the credit facility and, if available, other indebtedness (which may include indebtedness assumed in acquisitions), and (iii) the sale of certain real estate investments. Insurance The Company carries commercial general liability coverage with primary limits of $1 million per occurrence and $2 million in the aggregate, as well as a $40 million umbrella liability policy. This coverage protects the Company against liability claims as well as the cost of defense. The Company carries property insurance on a replacement value basis covering both the cost of direct physical damage and the loss of rental income. This coverage is subject to certain exclusions, including terrorism and mold. Separate flood and earthquake insurance is provided with an annual aggregate limit of $10 million subject to a deductible of 2-10% of total insurable value per building with respect to the earthquake coverage. Additional flood and earthquake coverage with an aggregate limit of $20 million is provided for property located in California. The Company also carries director and officer liability insurance with an aggregate limit of $10 million, and a fidelity bond in the amount of $1 million. This coverage protects the Company's directors and officers against liability claims as well as the cost of defense. Competition, Regulation, and Other Factors The success of the Company depends upon, among other factors, general economic conditions and trends, including real estate trends, interest rates, government regulations and legislation, income tax laws and zoning laws. The Company typically competes in its markets with other REITs, institutional owners, and private operators of commercial property. The Company's real estate investments are located in markets in which they face significant competition for the rental revenues they generate. Many of the Company's investments, particularly the office buildings, are located in markets in which there is a significant supply of available space, resulting in intense competition for tenants and low rents. For example, the Company owns property in the east side market in Seattle. This market has been negatively affected by job loss in that region and there is considerable inventory available. In addition, the Company owns property in Phoenix, Arizona and in Denver, Colorado. In both of these cities, substantial amounts of development have occurred, resulting in excess inventory at a time when demand has slackened. The Company believes that its competitive strengths will enable it to operate successfully in the face of these risks. These competitive strengths include an experienced management team, a long history of operations in all of its current markets, a diversified tenant base, and limited exposure to a significant single-tenant default. Government Regulations The Company's properties are subject to various federal, state and local regulatory requirements such as local building codes and other similar regulations. The Company believes its properties are currently in substantial compliance with all applicable regulatory requirements, although expenditures at its properties may be required to comply with changes in these laws. No material expenditures are contemplated at this time in order to comply with any such laws or regulations. Under various federal, state and local laws, ordinances and regulations, an owner or operator of real estate is liable for the costs of removal or remediation of certain hazardous or toxic substances released on, above, under, or in such property. Such laws often impose such liability without regard to whether the owner knew of, or was responsible for, the presence of such hazardous or toxic substances. The costs of such removal or remediation could be substantial. Additionally, the presence of such substances or the failure to properly remediate such substances may adversely affect the owner's ability to borrow using such real estate as collateral. The Company believes that it is in compliance in all material respects with all federal, state and local laws regarding hazardous or toxic substances, and the Company has not been notified by any governmental authority of any non-compliance or other claim in connection with any of its present or former properties. Accordingly, the Company does not currently anticipate that compliance with federal, state and local environmental protection regulations will have any material adverse impact on the financial position, results of operations or liquidity of the Company. There can be no assurance, however, that future discoveries or events at the Company's properties, or changes to current environmental regulations, will not result in such a material adverse impact. Other Information The Company currently employs 33 full time employees. The Company is not dependent upon a single tenant or a limited number of tenants. ITEM 2. PROPERTIES - -------------------- Real Estate Summary As of December 31, 2001, the Company's real estate investments were diversified by property type as follows (dollars in thousands): Number of Percent Properties Cost of Total ---------------------------------- Industrial buildings 58 $303,563 46% Office buildings 29 328,619 50% Operating properties held for sale 3 11,157 2% Land held for development 11 13,469 2% ---------------------------------- Total 101 $656,808 100% ---------------------------------- ---------------------------------- As of December 31, 2001, the Company's real estate investments were diversified by geographic region as follows (dollars in thousands): Number of Investment % of Total Properties Amount Investment ------------------------------------ Industrial buildings Northern California 29 $152,296 23 Arizona 15 72,343 11 Southern California 12 64,715 10 Greater Seattle Area 2 14,209 2 ------------------------------------ Total industrial buildings 58 303,563 46 ------------------------------------ Office buildings Northern California 5 26,151 4 Arizona 5 36,223 5 Southern California 4 31,396 5 Colorado 8 104,247 16 Greater Seattle Area 6 117,648 18 Nevada 1 12,954 2 ------------------------------------ Total office buildings 29 328,619 50 ------------------------------------ Operating properties held for sale Northern California 3 11,157 2 ------------------------------------ Total operating properties held for sale 3 11,157 2 ------------------------------------ Land held for development Northern California 4 5,717 * Arizona 1 645 * Southern California 4 3,168 * Colorado 2 3,939 * ------------------------------------ Total land held for development 11 13,469 2 ------------------------------------ Total 101 $656,808 100% ------------------------------------ ------------------------------------ * Less than 1% Percentage Leased and 10% Tenants The following table sets forth the occupancy rates for each of the last five years, the number of tenants occupying 10% or more of the developed square feet at the property as of the end of the year and the principal business of the tenants in the Company's properties at December 31, 2001. Percentage Occupied/Number of Tenants Occupying 10% or more 1997 1998 1999 2000 2001 Property % # % # % # % # % # Principal Business at December 31, 2001 - ------------------------------------------------------------------------------------------------- INDUSTRIAL BUILDINGS - --------------------- Northern California Building #3 at Contra Costa Diablo Ind. Park, Concord 100% 1 100% 1 100% 1 100% 1 100% 1 Television cable service. Building #8 at Contra Costa Diablo Ind. Park, Concord 100% 1 100% 1 100% 1 100% 1 100% 1 Warehouse and storage of medical supplies. Building #18 at Mason Ind. Park, Concord 100% 2 92% 2 100% 2 100% 2 100% 2 Warehouse of scaffolding materials and construction supplies; roofing contractor. Milpitas Town Center, Milpitas 100% 4 100% 3 100% 4 100% 3 100% 3 Manufacturer of blood glucose meters; integrated technology solutions; manufacturer of vacuum pumps and related parts. 598 Gibraltar Drive, Milpitas 100% 1 100% 1 100% 1 100% 1 100% 1 Electronic computer component manufacturer. Auburn Court, Fremont 100% 4 100% 4 68% 3 100% 4 100% 4 Research and development of silicon implants and other medical products; electronic computer component manufacturer; computer software developer; high- performance fiber optic components supplier. 47650 Westinghouse Drive, Fremont 100% 1 100% 1 100% 1 100% 1 100% 1 Electronic personal computer board assembly. 410 Allerton, South San Francisco 100% 1 100% 1 100% 1 100% 1 100% 1 Candy manufacturer and distributor. 400 Grandview, South San Francisco 100% 4 100% 4 100% 4 100% 4 100% 4 Radiology research and developer; freight forwarding companies; retail display company. 342 Allerton, South San Francisco 100% 4 100% 4 100% 4 100% 4 100% 4 Freight forwarding companies; food broker. 301 East Grand, South San Francisco 100% 3 100% 3 75% 2 100% 3 100% 3 Freight forwarding; distributor of MRI equipment; moving company. Fourier Avenue, Fremont 100% 1 100% 1 100% 1 100% 1 100% 1 Manufacturer of testers and equipment for semi-conductors. Lundy Avenue, San Jose 100% 2 82% 1 100% 2 100% 2 100% 2 Testing and distribution of semi-conductors and other related electronic components; software sales and development. 115 Mason Circle, Concord 100% 5 100% 5 100% 5 100% 5 100% 5 Manufacturer and distributor of pipeline; distributor of fund raising products; distributor of water purifying systems; fluid sealing and handling company. 47600 Westinghouse Drive, Fremont 100% 1 100% 1 100% 1 100% 1 100% 1 Research and development assembly and testing related to the semi- conductor/ electronics industry. 860-870 Napa Valley Corporate Way, Napa 86% 3 100% 3 88% 2 94% 2 100% 2 Winery; engineering company and software developer. 47633 Westinghouse Drive, Fremont 100% 1 100% 1 100% 1 100% 1 100% 1 Research and development assembly and testing related to the semi- conductor/ electronics industry. 47513 Westinghouse Drive, Fremont N/A 100% 2 100% 2 100% 2 100% 2 Manufacturer of semi-conductor equipment; manufacturer and designer of arterial balloon catheters and other related devices. Bordeaux Centre, Napa N/A 38% 2 89% 4 100% 5 100% 5 Cork manufacturer; marine electronics distributor; wine storage and distributor; research and development of packaging material; and wine club distributor. O'Toole Business Park, San Jose 90% 0 89% 0 100% 0 100% 1 84% 1 Commercial print shop. 6500 Kaiser Drive, Fremont 100% 1 100% 1 100% 1 100% 1 100% 1 Research and development, manufacturer of computers. Bedford Fremont Business Park, Fremont 100% 1 100% 1 97% 1 97% 1 97% 1 Administration and testing of samples for managed care organizations. Spinnaker Court, Fremont 100% 2 100% 2 100% 2 100% 3 100% 3 Design-to- distribution of computing solutions; manufacturer of electronic components for semiconductor; developer of broadband products and related components. 2277 Pine View Way, Petaluma 100% 1 100% 1 100% 1 100% 1 100% 1 Manufacturer and distributor of eyeglass lenses for world-wide distribution. The Mondavi Building, Napa 100% 1 100% 1 100% 1 100% 1 100% 1 Wine storage and administration. Monterey Commerce Center 2, Monterey* 100% 1 100% 1 100% 1 100% 1 100% 1 Language interpretation. Monterey Commerce Center 3, Monterey* 100% 3 100% 3 100% 3 81% 4 81% 4 Office equipment sales/service; telephone/data switching center; electronic building systems sales/service/ warehousing; pharmaceutical sales/service/ warehousing. Parkpoint Business Center, Santa Rosa N/A 100% 3 100% 3 95% 3 98% 3 Physical therapy and rehabilitation; point of sale machine manufacturer; mortgage broker. 2180 S. McDowell Blvd., Petaluma N/A 100% 2 81% 1 69% 1 100% 2 Manufacturer of high-end, commercial grade sound equipment; valve and regulator automation sales and manufacturer. 2190 S. McDowell Blvd., Petaluma N/A 100% 2 100% 2 100% 2 100% 2 Bread distributor; distributor of paper and packaging products. Carneros Commons Phase II, Napa N/A N/A N/A N/A 63% 1 Wine maker and exporter. Southern California Dupont Industrial Center, Ontario 100% 1 97% 1 100% 2 100% 1 97% 1 Distributor of swimming pool supplies. 3002 Dow Business Center, Tustin 100% 0 99% 0 99% 0 98% 0 98% 0 No single tenant over 10%. Carroll Tech I, San Diego 100% 1 100% 1 100% 1 100% 1 100% 1 Sales and service of point of sales equipment. Vista 1, Vista 100% 1 0% 0 0% 0 100% 1 100% 1 Water purifying components manufacturer. Vista 2, Vista 100% 1 100% 1 100% 1 100% 1 100% 1 Manufacturer of graphite golf club shaft. Signal Systems Building, San Diego 100% 1 100% 1 100% 1 100% 1 100% 1 Developer and manufacturer of avionic diagnostic equipment. Carroll Tech II, San Diego 100% 1 100% 1 100% 1 100% 1 100% 1 Bio-technology company. 2230 Oak Ridge Way, Vista 100% 1 100% 1 100% 1 100% 1 100% 1 Manufacturer of equipment for circuit board assembly. 6960 Flanders Drive, San Diego N/A 100% 1 100% 1 100% 1 100% 1 Geotechnical and environmental consultant. Canyon Vista Center, San Diego N/A N/A 100% 3 100% 3 100% 3 Designer of interactive entertainment software; product development testing and marketing; testing of computer networking products. 6325 Lusk Blvd., San Diego N/A N/A 100% 2 100% 2 100% 1 Bio-tech company developing diabetes self- test products. Jurupa Business Center, Phase I, Ontario N/A N/A N/A N/A 0% 0 New development project in lease- up phase. Arizona Westech Business Center, Phoenix 96% 0 95% 0 96% 0 95% 0 94% 0 No single tenant over 10%. Westech II, Phoenix N/A 100% 3 100% 2 100% 2 100% 2 Healthcare consultants; travel agency. 2601 W. Broadway, Tempe 100% 1 100% 1 100% 1 100% 1 100% 1 Wireless phone service provider. Phoenix Airport Center #2, Phoenix 100% 1 100% 1 100% 1 100% 1 100% 1 Electronic parts sales and customer service. Phoenix Airport Center #3, Phoenix 100% 1 100% 1 100% 1 100% 1 100% 1 Cosmetic manufacturer and distributor. Phoenix Airport Center #4, Phoenix 100% 1 100% 1 100% 1 100% 1 100% 1 Package delivery/service call center. Phoenix Airport Center #5, Phoenix N/A 100% 1 100% 1 100% 1 100% 1 Healthcare maintenance organization corporate office. Butterfield Business Center, Tucson 100% 3 100% 3 100% 2 100% 2 100% 2 Sears call center; research and development of automobile care items. Butterfield Tech Center II, Tucson N/A N/A 56% 2 100% 4 100% 4 Package distribution facilities; school book distribution facility; distributor of industrial uniform supplies. Greystone Business Park, Tempe N/A N/A 11% 1 86% 3 100% 3 Sales and service of electronic equipment; business communications equipment and multimedia integrations services; sales, service and support facilities for distribution of electrical components. Cimarron Business Park, Scottsdale N/A 98% 2 97% 2 90% 1 79% 1 Printing and sales office. Rio Salado Corporate Centre, Phoenix N/A N/A N/A 0% 0% Rehabilitated property in lease-up phase. Phoenix Tech Center, Phoenix N/A N/A N/A 100% 1 100% 1 Reprocessing/ recycling of single-use non- medical devices. The Adams Brothers Building, Phoenix N/A N/A 100% 1 100% 1 100% 1 Interior design and home products sales. Bedford Realty Partners, L.P., Phoenix N/A N/A 100% 2 100% 2 91% 2 Medical research; consulting engineers. Greater Seattle Area Highlands Campus Building B, Bothell N/A N/A N/A 86% 4 93% 4 Manufacturer and distributor of micro-biological lab testing equipment; medical prescription service provider; wholesaler of flooring products; tele- communication. Highlands Campus Building C, Bothell N/A N/A N/A 60% 2 75% 3 Civil engineering consulting; manufacturer and distributor of ultrasound equipment; home furnishings club/distributor. OFFICE BUILDINGS - ----------------- Northern California Village Green, Lafayette 99% 1 100% 2 100% 2 100% 2 100% 2 Environmental consultant; real estate investment trust. Carneros Commons Phase I, N/A N/A N/A 0% 0 30% 1 E-commerce Napa payment processing service. Canyon Park, San Ramon 100% 2 100% 2 100% 2 100% 2 100% 2 Geotechnical lab and research; healthcare provider. Crow Canyon Centre, San Ramon N/A N/A 50% 1 100% 2 100% 2 Healthcare provider; real estate mortgage and interior designer. Monterey Commerce Center 1, Monterey* 87% 4 82% 4 79% 3 88% 3 92% 3 Technology - software; technology - digital audio discs; financing/ loan servicing. 3380 Cypress Drive, Petaluma N/A 100% 1 100% 1 100% 1 100% 1 Manufacturer of hearing devices. Southern California Laguna Hills Square, Laguna 96% 4 93% 4 95% 4 100% 2 100% 2 Medical facility; optometry and eye surgery. Carroll Tech III, San Diego 100% 1 100% 1 100% 1 100% 1 100% 1 On-line game developer. Scripps Wateridge, San Diego 100% 2 100% 2 100% 2 100% 2 100% 2 Wireless communications; supplier of digital wireless communication products and technologies. Carroll Tech IV, San Diego N/A N/A 100% 1 100% 1 100% 1 Manufacturer of video games. Colorado Oracle Building, Denver 100% 2 100% 2 100% 2 100% 2 100% 2 Computer software company; banking. Texaco Building, Denver N/A 100% 1 100% 1 100% 1 100% 1 Oil company. WaterPark @ Briarwood Bldg. 1, Englewood N/A N/A N/A 62% 1 100% 2 Corporate travel agency; resort time share company. Belleview Corp. Plaza II Office, Denver N/A N/A N/A N/A 20% 1 Healthcare company. WaterPark @ Briarwood Bldg. 2, Englewood N/A N/A N/A 70% 2 100% 2 Data processing solutions for the finance industry; distributor of electrical components and computer products. WaterPark @ Briarwood Bldg. 3, Englewood N/A N/A N/A N/A 22% 1 Insurance provider. WaterPark @ Briarwood Bldg. 4, Englewood N/A N/A N/A N/A 100% 1 County government. Bedford Center @ Rampart, Englewood N/A N/A N/A 97% 3 96% 3 Office equipment sales and leasing; insurance company; corporate travel agency. Arizona Executive Center at Southbank, Phoenix 98% 3 98% 3 98% 3 92% 3 100% 3 Travel agency; call center for medical records; telemarketing call center. Phoenix Airport Center #1, Phoenix 100% 5 100% 5 100% 3 100% 5 88% 3 Banking services; security services and sales office; electronic marketing and sales. Cabrillo Executive Center, Phoenix N/A 97% 2 100% 2 94% 3 96% 3 Insurance company; provider of email systems and software for businesses; home builder. Mountain Pointe Office Park, Phoenix N/A N/A 0% 0 100% 1 100% 1 Civil engineering. 1355 S. Clearview Avenue, Mesa N/A N/A 100% 1 100% 1 100% 1 Debt collection services. Greater Seattle Area Orillia Office Park, Renton 100% 1 100% 1 100% 1 100% 1 100% 1 Manufacturer of aircraft. Adobe Systems Bldg. 1, Seattle N/A 100% 1 100% 1 100% 1 100% 1 Computer software design and engineering. Adobe Systems Bldg. II, Seattle N/A 77% 1 100% 2 100% 2 100% 2 Computer software design and engineering; non- profit acupuncture and alternative medicine school and clinic. Highlands Campus, Bldg. A, Bothell N/A N/A 38% 1 100% 2 100% 2 Computer software research and development; cellular phone manufacturer. The Federal Way Building, Federal Way N/A N/A 100% 3 100% 2 100% 2 Property/casualty insurance company; gasoline company. Federal Way Building II, Federal Way N/A N/A 100% 4 100% 3 88% 3 Producer of semiconductor/ computer technology components; financial advisor and lender; and insurance company. Nevada U. S. Bank Centre, Reno 94% 1 99% 1 100% 2 90% 2 80% 2 Insurance services; mining. * Presented as held for sale in the accompanying balance sheet as of December 31, 2001. Lease Expirations - Real Estate Portfolio The following table presents lease expirations for each of the ten years and thereafter beginning January 1, 2002. The table presents: (i) the number of leases that expire each year, (ii) the square feet covered by such expiring leases, and (iii) the percentage of total occupied square feet for expiring leases. Number of Percentage Leases Occupied of Occupied Year Expiring Square Feet Square Feet ------- ---------- ----------- ------------ 2002 92 729,607 11.3% 2003 85 924,329 14.3 2004 106 1,659,100 25.6 2005 84 1,354,188 20.9 2006 46 642,244 9.9 2007 13 505,084 7.8 2008 6 39,109 0.6 2009 4 124,480 1.9 2010 6 365,875 5.7 2011 and thereafter 2 130,200 2.0 --- --------- ------ Total 444 6,474,216 100.0% --- --------- ------ --- --------- ------ Principal Provisions of Leases The following table sets forth the principal provisions of leases which represent more than 10% of the gross leasable area ("GLA") of each of the Company's Properties and the realty tax rate for each Property for 2001. Annual # of Leases Square Feet Contract Rent Property with 10% or Project of Each ($/Sq/Yr) Lease Renewal Property Taxes/Rate More of GLA Square Feet Tenant At End of Year Expiration Options - --------------------------------------------------------------------------------------------------------------------------- - -- INDUSTRIAL BUILDINGS Northern California Building #3 at Contra Costa $19,099 1 21,840 21,840 $8.28 Feb. 05 None Diablo Ind. Park, Concord $1.01/100 Building #8 at Contra Costa $28,564 1 31,800 31,800 $11.61 Dec. 05 1-5 yr. Diablo Ind. Park, Concord $1.01/100 Building #18 at Mason $21,203 2 28,836 7,225 $7.68 May 03 None Industrial Park, Concord $1.01/100 4,825 $9.00 Feb. 06 None Milpitas Town Center, $72,620 4 102,620 23,924 $18.00 Apr. 04 1-1 yr. Milpitas $1.10/100 1-5 yr. 24,426 $11.28 Apr. 04 1-1 yr. 1-2 yr. 30,840 $15.00 Jul. 03 1-5 yr. 23,430 $14.16 Jan. 05 None 598 Gibraltar Drive, $48,446 1 45,090 45,090 $19.97 Apr. 05 None Milpitas $1.10/100 Auburn Court, $48,994 4 68,030 16,095 $15.60 Jul. 04 None Fremont $1.04/100 12,060 $14.40 Apr. 03 None 15,755 $15.00 Mar. 03 None 18,160 $22.05 Jul. 05 None 47650 Westinghouse Drive, $16,546 1 24,030 24,030 $10.80 Sep. 04 None Fremont $1.04/100 410 Allerton, $27,222 1 46,050 46,050 $9.60 Apr. 06 None South San Francisco $1.02/100 400 Grandview, $83,462 4 107,004 21,841 $8.19 Dec. 03 None South San Francisco $1.02/100 43,642 $6.72 Mar. 06 None 18,789 $9.17 May 04 None 18,864 $6.84 Jan. 03 None 342 Allerton, $55,487 4 69,312 19,751 $11.40 Mar. 03 None South San Francisco $1.02/100 9,720 $9.85 Mar. 05 None 30,953 $15.60 Feb. 06 None 8,888 $10.53 Aug. 02 None 301 East Grand, $34,540 3 57,846 26,240 $8.77 Jun. 03 None South San Francisco $1.02/100 17,206 $5.29 Dec. 03 None 14,400 $9.00 Jan. 05 1-5 yr. Fourier Avenue, $108,302 1 104,400 104,400 $10.67 Apr. 04 None Fremont $1.04/100 Lundy Avenue, $53,410 2 60,428 49,342 $15.60 Apr. 06 1-5 yr. San Jose $1.09/100 11,086 $15.60 Jul. 04 1-5 yr. 115 Mason Circle, $19,780 5 35,000 5,833 $7.05 Apr. 05 None Concord $1.01/100 5,832 $8.40 Jul. 04 None 8,154 $7.92 Aug. 02 None 7,296 $7.00 Nov. 02 1-3 yr. 7,885 $7.66 Apr. 03 None 47600 Westinghouse Drive, $17,194 1 24,030 24,030 $11.64 Oct. 03 1-3 yr. Fremont $1.04/100 860-870 Napa Valley Corporate $84,946 2 67,775 17,551 $13.20 Feb. 03 None Way, Napa $1.03/100 7,558 $11.02 MTM None 47633 Westinghouse Drive, $54,631 1 50,088 50,088 $12.55 Oct. 03 1-3 yr. Fremont $1.04/100 47513 Westinghouse Drive, $104,348 2 65,385 35,132 $16.56 Feb. 05 1-5 yr. Fremont $1.04/100 30,253 $15.60 Feb. 04 1-5 yr. Bordeaux Centre, $161,673 5 150,000 22,075 $8.10 Nov. 07 2-5 yr. Napa $1.03/100 16,076 $7.55 Nov. 07 1-5 yr. 51,790 $6.11 Jan. 04 1-5 yr. 18,434 $6.19 Dec. 04 1-5 yr. 16,180 $8.90 May 05 1-5 yr. O'Toole Business Park, $119,894 1 122,320 14,005 $22.20 Apr. 03 None San Jose $1.09/100 6500 Kaiser Drive, $170,711 1 78,611 78,611 $10.20 Sep. 04 2-5 yr. Fremont $1.04/100 Bedford Fremont Business $147,291 1 146,509 71,532 $16.92 Jul. 03 1-3 yr. Center, Fremont $1.04/100 Spinnaker Court, $151,274 3 98,500 53,380 $22.80 Mar. 04 None Fremont $1.04/100 24,350 $10.51 Mar. 05 None 20,770 $28.35 Nov. 05 1-5 yr. 2277 Pine View Way, $107,348 1 120,480 120,480 $7.61 Mar. 07 2-5 yr. Petaluma $1.07/100 The Mondavi Building, $103,711 1 120,157 120,157 $5.42 Sep. 12 1-5 yr. Napa $1.03/100 Monterey Commerce $23,780 1 28,020 28,020 $15.60 Dec. 05 1-5 yr. Center 2, Monterey $1.00/100 Monterey Commerce $23,465 4 24,240 3,817 $16.20 Jul. 04 None Center 3, Monterey $1.00/100 3,050 $14.76 Nov. 03 1-3 yr. 4,448 $15.60 Oct. 05 1-5 yr. 8,350 $17.40 Oct. 05 1-5 yr. Parkpoint Business Center, $74,844 3 67,869 8,767 $16.20 Dec. 01 None Santa Rosa $1.09/100 7,894 $16.07 Jan. 02 None 17,505 $16.20 Mar. 03 1-5 yr. 2180 S. McDowell Blvd., $40,999 2 43,197 29,709 $8.53 Mar. 05 None Petaluma $1.07/100 13,488 $9.12 Feb. 06 1-5 yr. 2190 S. McDowell Blvd., $31,132 2 32,719 17,131 $9.62 Mar. 04 1-5 yr. Petaluma $1.07/100 15,588 $8.59 Apr. 06 2-5 yr. Carneros Commons Phase II, $29,815 1 36,885 23,107 $16.14 Oct. 08 2-5 yr. Napa $1.03/100 Southern California Dupont Industrial Center, $204,034 1 451,192 183,244 $2.88 Jan. 07 2-5 yr. Ontario $1.02/100 3002 Dow Business Center, $190,479 0 192,125 N/A N/A N/A N/A Tustin $1.01/100 Carroll Tech I, $22,644 1 21,936 21,936 $9.84 Nov. 05 2-3 yr. San Diego $1.11/100 Vista 1, $25,603 1 42,508 42,508 $6.71 Oct. 10 1-10 yr. Vista $1.03/100 Vista 2, $35,168 1 47,550 47,550 $6.86 Sep. 02 None Vista $1.03/100 Signal Systems Building, $104,106 1 109,780 109,780 $11.08 Aug. 06 2-5 yr. San Diego $1.02/100 Carroll Tech II, $36,950 1 37,586 37,586 $14.40 Dec. 01 None San Diego $1.11/100 2230 Oak Ridge Way, $34,282 1 44,063 44,063 $7.08 Aug. 04 2-5 yr. Vista $1.01/100 6960 Flanders Drive, $39,913 1 33,144 33,144 $10.80 Jun. 03 None San Diego $1.11/100 Canyon Vista Center, $71,409 3 63,746 17,591 $7.92 Dec. 04 1-5 yr. San Diego $1.11/100 18,643 $11.88 Jan. 06 1-3 yr. 27,512 $11.08 May 02 1-5 yr. 6325 Lusk Blvd., $63,286 1 49,942 49,942 $14.59 Jun. 04 1-5 yr. San Diego $1.11/100 Jurupa Business Center, $18,884 0 41,726 N/A N/A N/A N/A Ontario $1.02/100 Arizona Westech Business Center, $137,791 0 143,940 N/A N/A N/A N/A Phoenix $12.83/100 Westech II, $116,192 3 80,878 14,615 $9.24 Oct. 04 None Phoenix $12.83/100 11,819 $9.78 Nov. 02 1-2 yr. 11,739 $8.76 Nov. 02 1-2 yr. 2601 W. Broadway, $60,411 1 44,244 44,244 $7.72 Jan. 07 2-5 yr. Tempe $12.36/100 Phoenix Airport Center #2, $60,044 1 35,768 35,768 $10.50 Aug. 06 1-5 yr. Phoenix $12.83/100 Phoenix Airport Center #3, $60,207 1 55,122 55,122 $9.00 Jul. 03 1-2 yr. Phoenix $12.83/100 Phoenix Airport Center #4, $36,684 1 30,504 30,504 $8.36 Jun. 05 1-5 yr. Phoenix $12.83/100 Phoenix Airport Center #5, $104,337 1 60,000 60,000 $9.56 Sep. 02 1-5 yr. Phoenix $12.83/100 Butterfield Business Center, $125,720 3 95,746 50,000 $6.30 Aug. 04 2-5 yr. Tucson $17.57/100 14,982 $2.86 Aug. 04 1-5 yr. 26,026 $8.53 Jun. 04 1-2 yr. Butterfield Tech Center II, $42,656 4 33,082 7,383 $7.73 Mar. 06 2-5 yr. Tucson $17.57/100 11,064 $6.72 Sep. 02 1-2 yr. 7,259 $6.68 Dec. 02 1-2 yr. 7,376 $7.32 Nov. 04 None Greystone Business Park, $96,827 3 60,738 6,520 $11.20 Nov. 04 2-3 yr. Tempe $12.36/100 34,471 $11.64 Mar. 07 1-3 yr. 19,747 $11.88 Sep. 05 2-5 yr. Cimarron Business Park, $145,117 1 94,800 13,800 $11.13 Mar. 04 None Scottsdale $11.68/100 Rio Salado Corporate Centre, $76,646 0 80,322 N/A N/A N/A N/A Phoenix $12.36/100 Phoenix Tech Center, $36,738 1 39,280 39,280 $9.90 Feb. 05 2-5 yr. Phoenix $12.79/100 The Adams Brothers Building, $97,050 1 71,345 71,345 $5.02 Jan. 04 2-5 yr. Phoenix $17.10/100 Bedford Realty Partners, L.P., $187,872 2 101,835 32,729 $9.60 MTM None Phoenix $17.10/100 30,409 $7.56 Jun. 05 None Greater Seattle Area Highlands Campus Building B, $74,292 4 69,821 14,970 $12.65 Aug. 04 1-5 yr. Bothell $1.28/100 20,831 $12.30 Jan. 05 1-5 yr. 9,412 $11.95 Jul. 08 1-5 yr. 9,201 $16.00 Sep. 05 None Highlands Campus Building C, $42,927 3 57,478 7,008 $12.36 Jul. 07 1-5 yr. Bothell $1.28/100 27,251 $15.00 Dec. 07 None 8,780 $13.32 Oct. 08 1-5 yr. OFFICE BUILDINGS Northern California Village Green, $27,465 2 16,795 2,119 $31.17 Oct. 05 None Lafayette $1.11/100 11,062 $25.59 Mar. 05 None Carneros Commons Phase I, $32,300 1 40,290 8,900 $14.40 Mar. 06 None Napa $1.03/100 Canyon Park, $63,625 2 57,667 48,265 $21.69 Feb. 05 2-5 yr. San Ramon $1.05/100 9,402 $23.08 Jan. 03 None Crow Canyon Centre, $84,052 2 39,108 19,615 $25.80 Dec. 06 2-5 yr. San Ramon $1.05/100 16,478 $26.16 Jan. 05 1-5 yr. Monterey Commerce Center 1, $64,323 4 50,031 5,809 $20.40 Aug. 02 1-3 yr. Monterey $1.00/100 7,000 $19.56 Mar. 03 1-5 yr. 16,088 $20.40 Jul. 03 None 7,166 $20.40 Jul. 04 1-5 yr. 3880 Cypress Drive, $56,751 1 35,100 35,100 $13.56 May 07 1-5 yr. Petaluma $1.09/100 Southern California Laguna Hills Square, $67,285 5 51,734 8,474 $29.67 Nov. 10 2-5 yr. Laguna $1.04/100 7,368 $26.91 Sep. 05 1-5 yr. 6,391 $27.27 Sep. 05 2-5 yr. 9,229 $21.84 Jun. 02 2-3 yr. 5,981 $29.17 Oct. 10 None Carroll Tech III, $24,824 1 29,307 29,307 $10.38 Mar. 09 1-5 yr. San Diego $1.11/100 Scripps Wateridge, $200,630 2 123,853 49,295 $13.85 Jul. 06 1-5 yr. San Diego $1.11/100 74,558 $14.18 Aug. 05 2-3 yr. Carroll Tech IV, $59,555 1 43,415 43,415 $12.81 Mar. 09 None San Diego $1.11/100 Colorado Oracle Building, $280,947 2 90,712 10,043 $18.00 Oct. 11 4-5 yr. Denver $8.58/100 77,090 $25.00 Sep. 03 None Texaco Building, $576,540 1 237,055 237,055 $20.06 Jan. 05 2-5 yr. Denver $7.52/100 Waterpark @ Briarwood Bldg. 1, $83,083 2 29,405 18,295 $13.23 Aug. 05 1-5 yr. Englewood $11.97/100 11,110 $13.25 Feb. 06 None Belleview Corp. Plaza II - $108,034 1 81,508 15,644 $17.75 Sep. 06 1-5 yr. Office, Denver $8.58/100 Waterpark @ Briarwood Bldg. 2, $208,502 3 73,781 14,911 $12.70 Feb. 06 None Englewood $11.97/100 36,077 $13.14 Oct. 05 None 21,232 $14.14 Oct. 05 2-5 yr. WaterPark @ Briarwood Bldg. 3, $14,807 1 73,781 16,301 $14.00 Jan. 07 1-5 yr. Englewood $11.97/100 WaterPark @ Briarwood Bldg. 4, $5,900 1 29,400 29,400 $14.00 Feb. 06 1-5 yr. Englewood $11.97/100 Bedford Center @ Rampart $674,517 3 165,191 36,857 $13.26 Mar. 04 2-2 yr. Englewood $10.55/100 41,717 $12.50 Dec. 04 2-2 yr. 55,550 $13.00 Oct. 05 2-3 yr. Arizona Executive Center at Southbank, $295,537 4 140,157 38,106 $10.33 Jan. 02 1-5 yr. Phoenix $17.10/100 17,910 $8.96 Sep. 03 2-5 yr. 30,518 $12.19 Jun. 04 1-5 yr. 21,626 $10.00 Jul. 02 2-5 yr. Phoenix Airport Center #1, $57,525 3 32,460 19,443 $12.87 Nov. 05 2-5 yr. Phoenix $12.83/100 4,527 $20.00 Dec. 01 1-5 yr. 4,449 $19.05 Dec. 02 None Cabrillo Executive Center, $149,141 3 60,321 12,400 $18.23 Aug. 08 None Phoenix $13.30/100 21,056 $17.50 Dec. 01 None 6,034 $18.79 Oct. 02 1-5 yr. Mountain Pointe Office Park, $94,314 1 54,584 54,584 $19.20 Oct. 10 1-5 yr. Phoenix $12.83/100 1355 S. Clearview Avenue, $76,586 1 57,193 57,193 $12.72 Apr. 05 2-5 yr. Mesa $10.95/100 Greater Seattle Area Orillia Office Park, $334,984 1 334,255 334,255 $10.50 Feb. 04 None Renton $1.20/100 Adobe Systems Bldg. 1, $275,351 1 161,117 161,117 $15.53 Jul. 10 2-5 yr. Seattle $1.14/100 Adobe Systems Bldg. 2, $223,300 2 136,111 93,211 $15.53 Jul. 10 2-5 yr. Seattle $1.14/100 19,867 $24.17 Nov. 03 None Highlands Campus Building A $122,975 2 74,559 39,824 $14.56 May 05 2-3 yr. Bothell $1.28/100 13,498 $15.50 Dec. 04 1-5 yr. The Federal Way Building, $108,300 2 65,000 32,871 $13.10 Apr. 06 2-3 yr. Federal Way $1.30/100 26,420 $14.22 Oct. 04 1-5 yr. Federal Way Building II, $198,686 3 115,032 16,230 $15.00 Jun. 05 1-5 yr. Federal Way $1.30/100 50,000 $13.44 Aug. 09 2-5 yr. 12,083 $14.99 Apr. 06 None Nevada U.S. Bank Centre, $142,094 2 104,324 36,363 $20.40 Oct. 04 None Reno $3.52/100 13,064 $21.36 Jun. 04 None Average Base Rent The following table sets forth the average rent at the end of each year for the last five years for each property owned as of December 31, 2001 (in dollars): Average Base Rent ($/Sq Ft/Yr) At End of Year 1997 1998 1999 2000 2001 ------ ------ ------ ------ ------ INDUSTRIAL BUILDINGS: Northern California Building #3 at Contra Costa Diablo $6.84 $6.84 $7.80 $8.04 $8.28 Building #8 at Contra Costa Diablo 6.00 6.00 6.72 11.61 11.61 Building #18 at Mason Industrial Park 6.88 6.93 7.22 7.54 8.49 Milpitas Town Center 8.90 10.69 12.74 14.36 14.62 598 Gibraltar Drive 9.48 10.44 10.44 19.20 19.97 Auburn Court 7.80 10.62 11.25 16.13 16.86 47650 Westinghouse Drive 9.00 9.60 10.20 10.80 10.80 410 Allerton 5.16 6.60 7.20 7.80 9.60 400 Grandview 7.03 7.50 7.95 8.27 7.72 342 Allerton 7.57 7.73 9.13 10.40 12.95 301 East Grand 5.58 6.30 6.90 7.42 7.79 Fourier Avenue 8.99 8.99 8.99 8.99 10.67 Lundy Avenue 7.09 7.36 14.40 14.51 15.60 115 Mason Circle 6.22 6.59 6.78 7.21 7.60 47600 Westinghouse Drive 10.20 10.56 10.92 11.28 11.64 860-870 Napa Valley Corporate Way 8.86 9.48 9.90 11.06 11.72 47633 Westinghouse Drive 11.60 11.83 12.06 12.31 12.55 47513 Westinghouse Drive N/A 14.32 14.92 15.52 16.12 Bordeaux Centre N/A 7.33 6.57 7.06 7.26 O'Toole Business Park 10.31 13.81 14.38 17.16 22.09 6500 Kaiser Drive 9.00 9.60 9.60 10.20 10.20 Bedford Fremont Business Center 11.93 14.63 16.39 17.97 20.23 Spinnaker Court 8.01 8.25 8.25 14.72 20.93 2277 Pine View Way 6.91 6.91 7.25 7.25 7.61 The Mondavi Building 4.92 4.92 5.17 5.17 5.42 Monterey Commerce Center 2 14.16 14.64 15.12 15.60 15.60 Monterey Commerce Center 3 14.70 15.22 15.32 15.59 16.35 Parkpoint Business Center N/A 15.19 15.68 16.50 17.03 2180 S. McDowell Blvd. N/A 8.37 11.20 8.28 8.71 2190 S. McDowell Blvd. N/A 8.19 8.39 8.89 9.13 Carneros Commons Phase II* N/A N/A N/A N/A 16.14 Southern California Dupont Industrial Center 3.40 3.44 3.67 3.82 3.88 3002 Dow Business Center 8.32 8.86 9.52 10.20 10.92 Carroll Tech I 11.93 3.17 9.11 9.47 9.84 Vista 1 0.00 0.00 0.00 3.11 6.71 Vista 2 6.61 6.88 7.15 7.44 6.86 Signal Systems Building 8.11 10.20 10.42 10.79 11.08 Carroll Tech II 11.52 12.00 13.79 14.40 14.40 2230 Oak Ridge Way N/A 6.49 6.63 6.83 7.08 6960 Flanders Drive N/A 9.60 9.98 10.38 10.80 Canyon Vista Center N/A N/A 8.86 10.05 10.44 6325 Lusk Blvd. N/A N/A 12.48 12.98 14.59 Jurupa Business Center * N/A N/A N/A N/A - Arizona Westech Business Center 9.44 9.99 9.97 10.37 10.66 Westech II N/A 8.86 8.87 9.63 9.78 2601 W. Broadway 7.14 7.14 7.14 7.43 7.72 Phoenix Airport Center #2 7.20 7.20 7.80 7.80 10.50 Phoenix Airport Center #3 6.36 6.36 7.02 7.02 9.18 Phoenix Airport Center #4 7.20 7.80 7.80 8.36 8.36 Phoenix Airport Center #5 7.21 8.68 8.68 9.56 9.56 Butterfield Business Center 7.08 7.11 6.38 6.45 6.35 Butterfield Tech Center II N/A N/A 6.67 6.85 7.07 Greystone Business Park N/A N/A 10.56 10.85 11.67 Cimarron Business Park N/A 8.94 10.09 10.29 10.53 Rio Salado Corporate Centre N/A N/A N/A 0.00 0.00 Phoenix Tech Center N/A N/A N/A 9.90 9.90 The Adams Brothers Building N/A N/A 4.56 4.69 5.02 Bedford Realty Partners, L.P. N/A N/A 7.21 8.00 8.26 Greater Seattle Area Highlands Campus Building B N/A N/A N/A 12.34 13.02 Highlands Campus Building C N/A N/A N/A 14.46 14.23 OFFICE BUILDINGS: - ----------------- Northern California Village Green $23.24 $23.70 $24.45 $26.69 $27.58 Carneros Commons Phase I N/A N/A N/A 0.00 15.35 Canyon Park 15.92 16.44 16.44 20.92 21.92 Crow Canyon Centre N/A N/A 25.20 25.43 26.66 Monterey Commerce Center 1 20.12 19.78 19.69 20.36 20.68 3880 Cypress Drive N/A 13.08 13.08 13.56 13.56 Southern California Laguna Hills Square 23.90 24.79 25.17 24.44 25.51 Carroll Tech III 8.52 8.52 9.60 9.98 10.38 Scripps Wateridge 11.41 12.53 13.16 13.40 14.05 Carroll Tech IV N/A N/A 15.00 12.44 12.81 Colorado Oracle Building 23.37 23.34 23.34 23.34 24.22 Texaco Building N/A 18.05 18.05 20.06 20.06 WaterPark @ Briarwood Bldg. 1 N/A N/A N/A 12.90 13.24 Belleview Corp. Plaza II Office * N/A N/A N/A N/A 17.75 WaterPark @ Briarwood Bldg. 2 N/A N/A N/A 13.18 13.39 WaterPark @ Briarwood Bldg. 3 * N/A N/A N/A N/A 14.00 WaterPark @ Briarwood Bldg. 4 N/A N/A N/A N/A 14.00 Bedford Center @ Rampart N/A N/A N/A 12.73 13.09 Arizona Executive Center at Southbank 9.23 9.46 9.64 9.89 10.78 Phoenix Airport Center #1 13.81 13.69 13.97 9.97 14.97 Cabrillo Executive Center N/A 16.64 17.03 17.24 18.00 Mountain Pointe Office Park N/A N/A N/A 19.20 19.20 1355 S. Clearview Avenue N/A N/A 12.72 12.72 12.72 Greater Seattle Area Orillia Office Park 9.35 9.35 9.35 10.50 10.50 Adobe Systems Bldg. 1 N/A 15.53 15.53 15.53 15.53 Adobe Systems Bldg. 2 N/A 22.04 16.71 16.74 17.39 Highlands Campus Building A N/A N/A 12.51 15.06 15.25 The Federal Way Building N/A N/A 12.65 13.77 13.77 Federal Way Building II N/A N/A 14.20 14.31 14.24 Nevada U.S. Bank Centre 18.59 18.76 19.03 22.48 21.07 * Shell construction completed during 2001; property in lease-up phase. Tax Information The following table sets forth tax information of the Company's real estate investments at December 31, 2001, as follows: (i) Federal tax basis, (ii) method of depreciation, and (iii) life claimed, with respect to each property or component thereof for purposes of depreciation (dollars in thousands): Federal Depreciation Life Depreciable assets Tax Basis Method In Years INDUSTRIAL BUILDINGS Northern California $ 5,171 MACRS - 200% 5.00 2,841 MACRS - 150% 15.00 3,783 Straight Line 31.50 100,123 Straight Line 39.00 ------- 111,918 Southern California 1,562 MACRS - 200% 5.00 871 MACRS - 150% 15.00 43,130 Straight Line 39.00 ------- 45,563 Arizona 2,186 MACRS - 200% 5.00 1,210 MACRS - 150% 15.00 48,211 Straight Line 39.00 ------- 51,607 Greater Seattle Area 10,345 Straight Line 39.00 ------- Total depreciable assets for industrial buildings 219,433 ------- OFFICE BUILDINGS - ----------------- Northern California 2,547 MACRS - 200% 5.00 1,485 MACRS - 150% 15.00 22,038 Straight Line 39.00 ------- 26,070 Southern California 2,563 MACRS - 200% 5.00 1,390 MACRS - 150% 15.00 18,085 Straight Line 39.00 ------- 22,038 Arizona 2,721 MACRS - 200% 5.00 1,564 MACRS - 150% 15.00 19,093 Straight Line 39.00 ------- 23,378 Greater Seattle Area 11,770 MACRS - 200% 5.00 6,274 MACRS - 150% 15.00 79,960 Straight Line 39.00 ------- 98,004 Nevada 1,258 MACRS - 200% 5.00 674 MACRS - 150% 15.00 8,924 Straight Line 39.00 ------- 10,856 Colorado 6,702 MACRS - 200% 5.00 3,584 MACRS - 150% 15.00 69,440 Straight Line 39.00 ------- 79,726 ------- Total depreciable assets for office buildings 260,072 ------- Grand total $479,505 ------- ------- For additional information on the Company's real estate portfolio, see Note 2 to the Consolidated Financial Statements. ITEM 3. LEGAL PROCEEDINGS - --------------------------- Not applicable. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS - -------------------------------------------------------------- Not applicable. PART II - ------- ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED - ------------------------------------------------------------ STOCKHOLDER MATTERS - -------------------- The Common Stock of the Company trades on the New York Stock Exchange and the Pacific Exchange under the symbol "BED." As of March 15, 2002, the Company had 937 stockholders of record. A significant number of these stockholders are also nominees holding stock in street name for individuals. The following table shows the high and low sale prices per share reported on the New York Stock Exchange and the dividends declared per share by the Company on the Common Stock for each quarterly period during 2000 and 2001. Dividend High Low Per Share ------------------------------------ 2000 First Quarter $17.63 $15.63 $.42 Second Quarter 19.44 15.63 .42 Third Quarter 21.06 18.56 .45 Fourth Quarter 20.75 18.00 .45 2001 First Quarter 21.00 18.30 .45 Second Quarter 20.96 18.00 .45 Third Quarter 22.20 18.50 .48 Fourth Quarter 23.24 19.60 .48 ITEM 6. SELECTED FINANCIAL DATA - --------------------------------- Following is a table of selected financial data of the Company for the last five years (which should be read in conjunction with the discussion under "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the Consolidated Financial Statements and Notes thereto contained herein): (in thousands of dollars, except per share data) 2001 2000 1999 1998 1997 Operating Data: Rental income $ 99,949 $ 97,518 $ 90,527 $ 73,451 $ 46,377 Gain on sales of real estate investments 5,938 38,171 7,743 - 11,533 Net income 36,723 68,087 39,855 31,496 31,291 Per common share - assuming dilution: Income before extraordinary item $ 2.16 $ 3.69 $ 1.87 $ 1.38 $ 1.94 Net income $ 2.16 $ 3.69 $ 1.86 $ 1.38 $ 1.94 Balance Sheet Data: Real estate investments $607,654 $ 611,444 $ 651,038 $ 581,458 $ 423,086 Bank loan payable 80,925 77,320 137,156 147,443 8,216 Mortgage loans payable 242,066 224,205 206,880 80,116 60,323 Common and other stockholders' equity 280,969 299,515 300,180 347,589 346,426 Other Data: Net cash provided by operating activities $ 47,580 $ 45,825 $ 45,540 $ 38,949 $ 25,041 Net cash provided (used) by investing activities (6,707) 70,005 (72,317) (168,018) (180,358) Net cash provided (used) by financing activities (38,521) (114,254) 27,075 128,994 155,350 Funds From Operations(1) 47,110 43,864 45,554 42,312 25,582 Dividends declared per share $ 1.86 $ 1.74 $ 1.56 $ 1.32 $ 1.13 (1) Management considers Funds From Operations to be one measure of the performance of an equity REIT. Funds From Operations is used by financial analysts in evaluating REITs and can be one measure of a REIT's ability to make cash distributions. Presentation of this information provides the reader with an additional measure to compare the performance of REITs. Funds From Operations generally is defined by the National Association of Real Estate Investment Trusts as net income (loss) (computed in accordance with accounting principles generally accepted in the United States of America), excluding extraordinary items such as gains (losses) from debt restructurings and sales of property, plus depreciation and amortization, and after adjustments for unconsolidated partnerships and joint ventures. Funds From Operations was computed by the Company in accordance with this definition. It does not represent cash generated by operating activities in accordance with accounting principles generally accepted in the United States of America; it is not necessarily indicative of cash available to fund cash needs and should not be considered as an alternative to net income (loss) as an indicator of the Company's operating performance or as an alternative to cash flow as a measure of liquidity. Further, Funds From Operations as disclosed by other REITs may not be comparable to the Company's presentation. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION - ---------------------------------------------------------------------- AND RESULTS OF OPERATIONS - ----------------------------- Overview The following should be read in conjunction with the Selected Financial Data and the consolidated financial statements and notes thereto, all of which are included herein. When used in this annual report, the words "believes," "anticipates" and similar expressions are intended to identify forward-looking statements. Such statements are subject to certain risks and uncertainties which could cause actual results to differ materially from those projected, including, but not limited to, those set forth in the sections entitled "Potential Factors Affecting Future Operating Results" and "Qualitative and Quantitative Disclosures About Market Risk" below. Readers are cautioned not to place undue reliance on these forward-looking statements which speak only as of the date hereof. The Company undertakes no obligation to publicly release the result of any revisions to these forward-looking statements which may be made to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events. Critical Accounting Policies and Estimates In response to the SEC's Release Numbers 33-8040, "Cautionary Advice Regarding Disclosure About Critical Accounting Policies," and 33-8056, "Commission Statement about Management's Discussion and Analysis of Financial Condition and Results of Operations," the Company has identified the following critical accounting policies that affect its more significant judgments and estimates used in the preparation of its consolidated financial statements. The preparation of the Company's financial statements in conformity with accounting principles generally accepted in the United States of America requires management of the Company to make estimates and judgments that affect the reported amounts of assets and liabilities, revenues and expenses, and related disclosures of contingent assets and liabilities. On an on-going basis, the Company evaluates its estimates, including those related to asset impairment, deferred assets, rental income recognition and allowance for doubtful accounts. We state these accounting policies in the notes to the consolidated financial statements and at relevant sections in this discussion and analysis. These estimates are based on the information that currently is available and on various other assumptions that are believed to be reasonable under the circumstances. Actual results could vary from those estimates and those estimates could be different under different assumptions or conditions. Real estate investments are recorded at cost less accumulated depreciation. The cost of real estate includes the purchase price or development cost of the properties and other related acquisition costs. Development costs include interest and real estate taxes incurred during the construction period and development fees paid to Bedford Acquisitions, Inc. (BAI). See " Related Party Transactions" for a description of BAI. Expenditures for maintenance and repairs that do not add to the value or prolong the useful life of the property are expensed. Expenditures for asset replacements or significant improvements that extend the life or increase the property's value are capitalized. Real estate properties are depreciated using the straight-line method over estimated useful lives. When circumstances such as adverse market conditions indicate an impairment of a property, the Company will recognize a loss to the extent that the carrying value exceeds the fair value of the property. Real estate investments that are considered held for sale are carried at the lower of carrying amount or fair value less costs to sell and such properties are no longer depreciated. Costs incurred for debt financing and property leasing are capitalized as deferred costs. Deferred loan costs include amounts paid to lenders and others to obtain financing and amounts paid to BAI. Such costs are amortized over the term of the related loan. Amortization of deferred financing costs is included in interest expense in the Company's income statement. Deferred leasing costs include leasing commissions that are amortized using the straight-line method over the term of the related lease. Deferred leasing costs are included with the basis when a property is sold and therefore reduce the gain on sale. Unamortized financing and leasing costs are charged to expense in the event of debt prepayment or early termination of the lease. Base rental income is recognized on a straight-line basis over the terms of the respective lease agreements. Differences between rental income recognized and amounts contractually due under the lease agreements are credited or charged, as applicable, to rent receivable. The amount of straight-line rent receivable is charged against income upon early termination of a lease or as a reduction of gain on sale of the property. The Company maintains an allowance for doubtful accounts for estimated losses resulting from the inability of tenants to make required payments, which results in a reduction to income. Management determines the adequacy of this allowance by continually evaluating individual tenant receivables considering the tenant's financial condition, security deposits, letters of credit, lease guarantees and current economic conditions. Results of Operations The Company's operations consist of developing, owning and operating industrial and suburban office properties located primarily in the western United States. Variances in revenues, expenses, net income and cash flows in the years compared below were due primarily to the acquisition, development and sale of operating properties as follows: 2001 2000 1999 Number of Square Number of Square Number of Square Properties Feet Properties Feet Properties Feet ------------------ ------------------- ------------------- Acquisitions - ------------ Industrial - - - - 5 334,000 Office - - 1 165,000 4 280,000 ------------------ ------------------- ------------------- - - 1 165,000 9 614,000 ------------------ ------------------- ------------------- ------------------ ------------------- ------------------- Development - ----------- Industrial 1 37,000 3 160,000 2 235,000 Office 4 185,000 2 103,000 3 154,000 ------------------ ------------------- ------------------- 5 222,000 5 263,000 5 389,000 ------------------ ------------------- ------------------- ------------------ ------------------- ------------------- Sales - ----- Industrial 3 290,000 15 917,000 3 448,000 Office 1 52,000 5 314,000 1 114,000 ------------------ ------------------- ------------------- 4 342,000 20 1,231,000 4 562,000 ------------------ ------------------- ------------------- ------------------ ------------------- ------------------- Comparison of 2001 to 2000 Income from Property Operations - -------------------------------- Income from property operations (defined as rental income less rental expenses) increased $463,000 or 1% in 2001 compared with 2000. This is due to an increase in rental income of $2,431,000, partially offset by an increase in rental expenses (which include operating expenses, real estate taxes, and depreciation and amortization) of $1,968,000. The increase in rental income and expenses is primarily attributable to the property acquired in 2000 and properties developed during 2001 and 2000. These acquisition and development activities increased rental income and rental expenses in 2001 by $5,191,000 and $3,230,000, respectively, as compared to 2000. These increases were partially offset by the sale of fifteen industrial properties and five office properties in 2000, and the sale of three industrial properties and one office property in 2001, which resulted in a reduction in rental income and rental expenses of $9,392,000 and $3,175,000, respectively, as compared to 2000. The remaining increase in rental income of $6,632,000 is primarily due to an increase in rental rates and expense recovery income. The remaining increase of $1,913,000 in rental expenses is mainly due to increases in real estate taxes, and depreciation and amortization expense. Expenses - --------- General and administrative expenses decreased $146,000 or 3% in 2001 compared to 2000, primarily as a result of $120,000 of tax service fees accrued in 2000 for a cost segregation study performed by the Company's outside accountants. Interest expense, which includes amortization of loan fees, decreased $1,705,000 or 7% in 2001 compared with 2000. The decrease is attributable to lower interest rates on the Company's variable rate debt and a lower weighted average outstanding debt balance in 2001 as compared to 2000, partially offset by increased amortization of loan fees in 2001. The amortization of loan fees was $2,156,000 and $1,658,000 for 2001 and 2000, respectively. The increase in amortization of loan fees is due to costs associated with the renewal of the Company's $150 million revolving credit facility and new mortgage financing. Other (Expense) Income - ----------------------- During 2001, the Company recorded $526,000 in other expense. This sum represents $400,000 for litigation accruals and $126,000 of pre- development costs incurred for a project in Denver that was subsequently abandoned due to deterioration in market conditions. During 2000, the Company recorded $615,000 in other income. This sum represents a forfeited earnest money deposit from a buyer who failed to perform under the terms of the Purchase and Sale Agreement for a property located in Tempe, Arizona. Gain on Sales of Real Estate Investments, Net - ---------------------------------------------- In the fourth quarter 2001, the Company sold two industrial properties in Denver, Colorado, an industrial property in Tempe, Arizona, and an office property in Tucson, Arizona for net sale prices totaling $19,282,000, which resulted in an aggregate gain of approximately $5,938,000. In the first quarter 2000, the Company sold an industrial property in San Jose, California and two industrial properties in Beaverton, Oregon for net sale prices totaling $36,338,000, which resulted in an aggregate gain of approximately $15,234,000. In the second quarter 2000, the Company sold an industrial property in San Diego, California for a net sale price of $2,165,000, which resulted in a loss of approximately $6,000. In the third quarter 2000, the Company sold three office properties, ten industrial properties, and a .99 acre parcel of land for net sale prices totaling $74,773,000, which resulted in an aggregate net gain of approximately $20,219,000. The properties were located in Mountain View, California; Bellevue, Washington; Overland Park and Lenexa, Kansas; Kansas City, Missouri; and Austin, Texas. In the fourth quarter 2000, the Company sold an office property in Overland Park, Kansas, an office property in Austin, Texas, and an industrial property in Farmers Branch, Texas, which included 1.43 acres of land. These properties were sold for net sale prices totaling $17,306,000, which resulted in an aggregate net gain of $2,724,000. Dividends - ---------- Common stock dividends to stockholders and distributions to Operating Partnership (OP) Unitholders declared for the first and second quarters of 2001 were $0.45 per share or OP Unit, and $0.48 per share or OP Unit for the third and fourth quarters. Consistent with the Company's policy, dividends and distributions were paid in the quarter following the quarter in which they were declared. Comparison of 2000 to 1999 Income from Property Operations - -------------------------------- Income from property operations (defined as rental income less rental expenses) increased $3,085,000 or 6% in 2000 compared with 1999. This is due to an increase in rental income of $6,991,000, partially offset by an increase in rental expenses (which include operating expenses, real estate taxes and depreciation and amortization) of $3,906,000. The increase in rental income and expenses is primarily attributable to properties acquired and properties developed during 2000 and 1999. These acquisition and development activities increased rental income and rental expenses in 2000 by $9,513,000 and $4,367,000, respectively, as compared to 1999. These increases were partially offset by the sale of one office property and three industrial properties in 1999, and the sale of fifteen industrial properties and five office properties in 2000, which resulted in a reduction in rental income and rental expenses of $7,300,000 and $2,946,000, respectively, as compared to 1999. The remaining increase in rental income of $4,778,000 is primarily due to an increase in rental rates and expense recovery income. The remaining increase of $2,485,000 in rental expenses is mainly due to increases in property tax assessments, management fees and electricity costs. Expenses - --------- General and administrative expenses increased $648,000 or 18% in 2000 compared to 1999, primarily as a result of increased costs in 2000 associated with stock compensation benefits and $120,000 of tax service fees accrued for a cost segregation study performed by the Company's outside accountants. Interest expense, which includes amortization of loan fees, increased $5,856,000 or 31% in 2000 compared with 1999. The increase is attributable to the Company's higher borrowing costs and related costs to finance the property acquisitions and development activities during 1999 and 2000, the repurchase of shares since November 1998, and higher amortization of loan fees in 2000. The amortization of loan fees was $1,658,000 and $1,495,000 for 2000 and 1999, respectively. Other (Expense) Income - ----------------------- During 2000, the Company recorded $615,000 in other income. This sum represents a forfeited earnest money deposit from a buyer who failed to perform under the terms of the Purchase and Sale Agreement for a property located in Tempe, Arizona. The Company did not incur any amounts for other expense or income during the year 1999. Gain on Sales of Real Estate Investments, Net - ---------------------------------------------- In the first quarter 2000, the Company sold an industrial property in San Jose, California and two industrial properties in Beaverton, Oregon for net sale prices totaling $36,338,000, which resulted in an aggregate gain of approximately $15,234,000. In the second quarter 2000, the Company sold an industrial property in San Diego, California for a net sale price of $2,165,000, which resulted in a loss of approximately $6,000. In the third quarter 2000, the Company sold three office properties, ten industrial properties, and a .99 acre parcel of land for net sale prices totaling $74,773,000, which resulted in an aggregate net gain of approximately $20,219,000. The properties were located in Mountain View, California; Bellevue, Washington; Overland Park and Lenexa, Kansas; Kansas City, Missouri; and Austin, Texas. In the fourth quarter 2000, the Company sold an office property in Overland Park, Kansas, an office property in Austin, Texas, and an industrial property in Farmers Branch, Texas, which included 1.43 acres of land. These properties were sold for net sale prices totaling $17,306,000, which resulted in an aggregate net gain of $2,724,000. In the first quarter 1999, the Company sold an industrial property in South San Francisco, California for a net sale price of $1,789,000, which resulted in a gain of approximately $540,000. In the second quarter 1999, the Company sold an office property in Salt Lake City, Utah and a 1.35 acre parcel of land in Vista, California for net sale prices totaling $13,545,000, which resulted in an aggregate gain of approximately $7,043,000. In the third quarter 1999, the Company sold an industrial property in Modesto, California for a net sale price of $4,012,000, which resulted in a gain of approximately $218,000. In the fourth quarter 1999, the Company sold an industrial property in Lenexa, Kansas for a net sale price of $4,895,000, which resulted in a loss of approximately $58,000. Dividends - ---------- Common stock dividends to stockholders and distributions to OP Unitholders declared for the first and second quarters of 2000 were $0.42 per share or OP Unit, and $0.45 per share or OP Unit for the third and fourth quarters. Consistent with the Company's policy, dividends and distributions were paid in the quarter following the quarter in which they were declared. Liquidity and Capital Resources The Company expects to fund the cost of acquisitions, capital expenditures, costs associated with lease renewals and reletting of space, repayment of indebtedness, share repurchases, and development of properties from (i) cash flow from operations, (ii) borrowings under the credit facility and, if available, other indebtedness (which may include indebtedness assumed in acquisitions), and (iii) the sale of certain real estate investments. The Company's capital expenditures were approximately $5,200,000 in 2001 and $8,900,000 in 2000. These capital expenditures consist primarily of building improvements, tenant improvements, and lease commissions. The Company expects to have capital expenditures of approximately $9,900,000 for 2002. The Company's cash and cash equivalents increased to $5,512,000 at December 31, 2001, from $3,160,000 at December 31, 2000. This increase is due to $47,580,000 of cash provided from operations, partially offset by $38,521,000 and $6,707,000 used by financing activities and investing activities, respectively. Net cash of $47,580,000 provided by operating activities consisted primarily of $51,829,000 of net income adjusted for non-cash items, offset by $4,249,000 used in working capital and other activities. Net cash used in working capital and other activities resulted from expenditures incurred by the Company in acquiring other assets and a decrease in accounts payable and accrued expenses, partially offset by an increase in other liabilities. Net cash of $6,707,000 used for investing activities consisted of cash used for investments in real estate of $25,989,000, offset by net proceeds from sales of real estate investments of $19,282,000. Cash used for investments in real estate of $25,989,000 consists of $20,607,000 in developments costs, and $5,382,000 of investments in existing properties. Net cash used by financing activities of $38,521,000 consisted of repayments of bank borrowings and mortgage loans of $61,552,000, payment of dividends and distributions of $31,767,000, the repurchase of 1,394,018 shares of stock for $27,346,000, and the redemption of 5,932 shares of OP Units for $131,000, offset by net proceeds from bank borrowings and mortgage loans of $79,979,000 and net proceeds from stock options exercised by employees and directors of $2,296,000. The Company's ability to continue to finance its operations is subject to several uncertainties. For example, the Company's ability to obtain mortgage loans on income producing property is dependent upon the ability to attract and retain tenants and the economics of the various markets in which the properties are located, as well as the willingness of mortgage-lending institutions to make loans secured by real property. The Company's ability to sell real estate investments is partially dependent upon the ability of purchasers to obtain financing at reasonable commercial rates. In May 2001, the Company renewed its revolving credit facility with a bank group led by Bank of America. The facility, which matures on June 1, 2004, consists of a $150 million secured line with an accordion feature which allows the Company at its option to expand the facility to $175 million, if needed. Interest on the facility is at a floating rate equal to either the lender's published "reference rate" or LIBOR plus a margin ranging from 1.30% to 1.55% depending on the Company's leverage level. As of December 31, 2001, the facility had an outstanding balance of $80,925,000 and an effective interest rate of 4.99%. In August 2001, the Company obtained $18 million of mortgage financing from Washington Mutual Bank. The loan has a 10-year term and bears interest at a floating rate of a trailing one-year treasury rate plus 2.60% (an effective rate of 7.92% as of December 31, 2001). The trailing one-year treasury rate, which is calculated by averaging the previous twelve months' rates, is adjusted every six months with a minimum and maximum 1% change over the previous six month rate. Proceeds from the loan were used to pay down a portion of the outstanding balance of the $150 million line of credit. In November 2001, the Company obtained $21,819,000 of new first mortgage financing from Union Bank of California. The financing, a renewal of an existing mortgage with the same lender, consists of a three-year loan, bearing interest at a floating rate of LIBOR plus 1.60% (an effective rate of 4.02% as of December 31, 2001). The old loan, which had an outstanding balance of approximately $14 million and a maturity date of January 2, 2002, carried a fixed interest of 7.50%. The $21,819,000 mortgage is collaterized by the same property pool as the expiring loan, namely nine properties located in California. Proceeds of the new mortgage loan were used to pay off the expiring mortgage and to pay down a portion of the outstanding balance of the Company's credit facility. The Company was in compliance with the covenants and requirements of its various debt financings during the year ended December 31, 2001. The Company anticipates that the cash flow generated by its real estate investments and funds available under the above credit facility will be sufficient to meet its short-term liquidity requirements. Contractual Obligations and Commercial Commitments The following summarizes the Company's contractual obligations and other commitments at December 31, 2001, and the effect such obligations could have on its liquidity and cash flow in future periods (in thousands): Amount of Commitment Expiring by Period ----------------------------------------------- Less than 1-3 4-5 Over 5 1 year Years Years Years Total ----------------------------------------------- Bank Loan Payable $ - $ 80,925 $ - $ - $ 80,925 Mortgage Loans Payable 5,048 48,501 103,822 84,695 242,066 Construction Contract Commitments 1,584 - - - 1,584 Standby Letters of Credit 2,096 - - - 2,096 ----------------------------------------------- Total $8,728 $129,426 $103,822 $84,695 $326,671 ----------------------------------------------- ----------------------------------------------- Related Party Transactions The Company's activities relating to the acquisition of new properties, sales of Company owned real estate, development of real property, and financing arrangements are currently performed by Bedford Acquisitions, Inc., (BAI), a corporation wholly-owned by Peter Bedford, the Company's Chairman of the Board and Chief Executive Officer. The Company uses the services of BAI for its acquisition, disposition, financing and development activities because the Company incurs expenses related only to those transactions which are successfully completed rather than incurring expenses related to unsuccessful efforts and associated overhead costs. These services have been provided pursuant to written contracts (renewable annually since January 1, 1995), which provide that BAI is obligated to provide services to the Company with respect to the Company's acquisition, disposition, financing and development activities, and that BAI is responsible for the payment of expenses incurred in connection therewith. BAI must submit to the Company a cost estimate for the Company's approval relating to each activity, setting forth the estimated timing and amount of all projected BAI costs relating to such activities. Pursuant to the contract, Mr. Bedford is obligated to pay BAI's expenses described above if BAI fails to make any such payments in a timely fashion, provided that Mr. Bedford is not obligated to pay any such amounts exceeding $1 million or following a termination of BAI's obligations based on the expiration or termination of the term of the contract. This arrangement provides that BAI earns a success fee in an amount equal to 1 1/2% of the purchase price of property acquisitions, 1 1/2% of the sale price of dispositions, up to 1 1/2% of the amount of any loans (less third-party commissions), and 7% of the development costs. The total amount of such fees payable to BAI by the Company is limited to the lesser of: (i) the aggregate amount of such fees earned, or (ii) the aggregate amount of approved expenses incurred by BAI through the time of such acquisition, disposition, financing or development. The current agreement with BAI has a one-year term expiring December 31, 2002, which is automatically extended for an additional term of one year unless either party gives notice of its interest to terminate the agreement by October 31, 2002. For the years ended December 31, 2001, 2000, and 1999, the Company paid BAI an aggregate amount of approximately $2,816,000, $2,431,000 and $2,783,000, respectively, for acquisition, disposition, financing, and development activities performed pursuant to the foregoing arrangements. As of December 31, 2001 and 2000, the Company had an accrued liability of $1,945,000 and $866,000, respectively, for fees earned by BAI in excess of amounts paid to BAI by the Company under the agreement. The Company believes that since the fees charged under the foregoing arrangements (i) are comparable to those charged by other real estate service entities or other third party service providers under similar arrangements and (ii) are charged only for services on successful acquisitions, dispositions, financings and developed properties, such fees are properly includable as costs of acquisitions or dispositions or as capitalized costs of financings and developed properties. If the Company were to discontinue this arrangement it would first look to other service providers to meet most if not all of these services. There is no assurance that the same level of quality and cost effectiveness would be achieved. Additionally, the Company would likely incur additional internal costs to administer such services. If acceptable service providers were not available for all or a part of these services, the Company would evaluate its needs under circumstances existing at that time and consider additions to its staff to meet such requirements. If such services were performed internally, pre- acquisition costs associated with operating properties and costs associated with any unsuccessful efforts related to new borrowings would be expensed. If service levels comparable to those required in 2001, 2000, and 1999 were performed internally at the same expense levels incurred by BAI, the Company estimates that $744,000, $323,000, and $1,310,000 could have been expensed in those periods rather than capitalized and amortized against future periods in the form of depreciation and amortization. Had such amounts been expensed in those periods, diluted earnings per share would have been $0.04, $0.02 and $0.06 less than corresponding amounts actually reported in 2001, 2000, and 1999, respectively. At December 31, 2001 and 2000, the Company did not have any other relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. As such, the Company is not materially exposed to any financing, liquidity, market or credit risk that could arise if the Company had engaged in such relationships. Potential Factors Affecting Future Operating Results Many factors affect the Company's actual financial performance and may cause the Company's future results to be different from past performance or trends. These factors include the following: Economic Environment Both the national economy and the economies of the western states in which the Company owns, manages and develops properties have been and continue to be in a recession. The early indicators of how this affects the real estate industry in general, and the Company in particular, are slightly reduced occupancy rates, flattening of growth in market rental rates, and reduced activity levels in the flow of prospective tenants for space currently available for lease. The Company's property types and locations provide some degree of risk diversification but are not immune to a prolonged down cycle in the real estate markets in which the Company operates. Although the Company believes it is well positioned to meet the challenges ahead, it is possible that further reductions in occupancy rates and the absence of rental rate growth, or even reductions in market rental rates, will result in reduction of rental revenues, operating income, cash flows, and the market value of the Company's shares. Prolonged recession could also affect the Company's ability to obtain financing at acceptable rates of interest and to access funds from the disposition of properties at acceptable disposition prices. These conditions and those that follow and many other factors affect the Company's actual financial performance and may cause the Company's future results to be markedly outside of the Company's current expectations. Interest Rate Fluctuations At the present time, borrowings under the Company's credit facility, the $4.6 million and $21.8 million mortgage loans from Union Bank, the $30.9 million mortgage loans from Security Life of Denver Insurance Company, and the $18.0 million mortgage loan from Washington Mutual bear interest at floating rates. The floating interest rate on the $30.9 million mortgage loans has been fixed for a period of one year with interest swap agreements which expire on July 1, 2002. The LIBOR rate on the $21.8 million mortgage loan has been fixed for a period of one year. Its effective interest rate of 4.02% expires on December 20, 2002. The Company recognizes that its results from operations may be negatively impacted by future increases in interest rates and substantial additional borrowings to finance property acquisitions, development projects and share repurchases. Lease Renewals While the Company historically has been successful in renewing and reletting space, the Company is subject to the risk that certain leases expiring in 2002 and beyond may not be renewed, or the terms of renewal may be less favorable to the Company than current lease terms. The Company expects to incur costs in making improvements or repairs to its portfolio of properties required by new or renewing tenants and expects to incur expenses associated with brokerage commissions payable in connection with the reletting of space. Inflation Most of the leases require the tenants to pay their share of operating expenses, including common area maintenance, real estate taxes and insurance, thereby reducing the Company's exposure to increases in costs and operating expenses resulting from inflation. Inflation, including escalations in electricity costs in California and neighboring states, however, could result in an increase in the Company's borrowing and other operating expenses. Government Regulations The Company's properties are subject to various federal, state and local regulatory requirements such as local building codes and other similar regulations. The Company believes its properties are currently in substantial compliance with all applicable regulatory requirements, although expenditures at its properties may be required to comply with changes in these laws. No material expenditures are contemplated at this time in order to comply with any such laws or regulations. Under various federal, state and local laws, ordinances and regulations, an owner or operator of real estate is liable for the costs of removal or remediation of certain hazardous or toxic substances released on, above, under, or in such property. Such laws often impose such liability without regard to whether the owner knew of, or was responsible for, the presence of such hazardous or toxic substances. The costs of such removal or remediation could be substantial. Additionally, the presence of such substances or the failure to properly remediate such substances may adversely affect the owner's ability to borrow using such real estate as collateral. The Company believes that it is in compliance in all material respects with all federal, state and local laws regarding hazardous or toxic substances, and the Company has not been notified by any governmental authority of any non-compliance or other claim in connection with any of its present or former properties. Accordingly, the Company does not currently anticipate that compliance with federal, state and local environmental protection regulations will have any material adverse impact on the financial position, results of operations or liquidity of the Company. There can be no assurance, however, that future discoveries or events at the Company's properties, or changes to current environmental regulations, will not result in such a material adverse impact. Financial Performance Management considers Funds From Operations (FFO) to be one measure of the performance of an equity REIT. FFO during the three and twelve months ended December 31, 2001 was $11,848,000 and $47,110,000, respectively. During the same periods in 2000, FFO was $10,533,000 and $43,864,000, respectively. FFO is used by financial analysts in evaluating REITs and can be one measure of a REIT's ability to make cash distributions. Presentation of this information provides the reader with an additional measure to compare the performance of REITs. FFO is generally defined by the National Association of Real Estate Investment Trusts as net income (loss) (computed in accordance with accounting principles generally accepted in the United States of America), excluding extraordinary items such as gains (losses) from debt restructurings and sales of property, plus depreciation and amortization, and after adjustments for unconsolidated partnerships and joint ventures. FFO was computed by the Company in accordance with this definition. FFO does not represent cash generated by operating activities in accordance with accounting principles generally accepted in the United States of America; it is not necessarily indicative of cash available to fund cash needs and should not be considered as an alternative to net income (loss) as an indicator of the Company's operating performance or as an alternative to cash flow as a measure of liquidity. Further, FFO as disclosed by other REITs may not be comparable to the Company's presentation. Three Months Ended Twelve Months Ended December 31, December 31, 2001 2000 2001 2000 ---- ---- ---- ---- Funds From Operations (in thousands, except share amounts): Net income $13,251 $9,490 $36,723 $68,087 Add: Depreciation and amortization 4,501 3,752 16,183 13,812 Minority interest 34 35 142 136 (Gain) on sales of real estate investments, net (5,938) (2,744) (5,938) (38,171) ------- ------- ------- -------- Funds From Operations $11,848 $10,533 $47,110 $43,864 ------- ------- ------- -------- ------- ------- ------- -------- Weighted average number of shares - diluted 16,531,537 17,666,761 17,045,493 18,501,905 ---------- ----------- ----------- ----------- ---------- ----------- ----------- ----------- ITEM 7A. QUALITATIVE AND QUANTITATIVE 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 balances its borrowings between fixed and variable rate debt. While the Company has entered into interest swap agreements to minimize its exposure to interest rate fluctuations, the Company does not enter into derivative or interest rate transactions for speculative 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 (dollars in thousands): Fair 2002 2003 2004 2005 2006 Thereafter Total Value ---- ---- ---- ---- ---- ---------- ----- ----- Variable rate LIBOR debt $ 1,333 $ 1,840 $102,950 $28,842 $ 541 $15,551 $151,057 $151,057 Weighted average interest rate 5.19% 4.82% 4.80% 3.95% 7.92% 7.92% 4.97% 4.97% Fixed rate debt $ 3,715 $21,278 $ 3,358 $27,710 $46,729 $69,144 $171,934 $181,813 Weighted average interest rate 7.11% 7.07% 7.36% 7.19% 7.67% 7.17% 7.30% 6.00% As the table incorporates only those exposures that exist as of December 31, 2001, it 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 ultimate realized gain or loss with respect to interest rate fluctuations will depend on the exposures that arise during the period, the Company's hedging strategies at that time, and interest rates. On June 18, 2001, the Company entered into interest swap agreements with United California Bank. The swap agreements allow the Company to hedge its exposure to variable interest rates on two mortgages with remaining principal balances totaling $26,425,000 by effectively paying a fixed rate of interest over the term of the swap agreement. Interest rate pay differentials that arise under these swap agreements are recognized in interest expense over the term of the contracts. These interest rate swap agreements were considered to be fully effective in hedging the variable rate risk associated with the two mortgages. The following summarizes the principal value and fair value of the Company's interest swap contracts. The principal value at December 31, 2001 provides an indication of the extent of the Company's involvement in these contracts but does not represent exposure to credit, interest rate or market risks (dollars in thousands): Principal Fixed Contract Cumulative Approximate Liability Amount (1) Rate Maturity Cash Paid, Net at December 31, 2001 (2) - ---------- ----- -------- ----------- ---------------------------- $22,878 5.55% July 1, 2002 $128 $268 3,547 5.55% July 1, 2002 29 42 ------ --- --- $26,425 $157 $310 ------ --- --- ------ --- --- (1) The principal amount is included in the table of qualitative and quantitative disclosure about market risk as variable rate LIBOR debt and fixed rate debt, as applicable. (2) Represents the approximate amount which the Company would have paid as of December 31, 2001 if the swap contracts were terminated. To determine the fair values of derivative instruments in accordance with SFAS 133, the Company uses the discounted cash flow method, which requires the use of assumptions about market conditions and risks existing at the balance sheet date. Considerable judgment is required in interpreting market data to develop estimates of market value. Accordingly, estimated fair value is a general approximation of value, and such value may or may not actually be realized. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA - ----------------------------------------------------- The response to this item is submitted as a separate section of this Form 10-K. See Item 14. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND - ---------------------------------------------------------------------- FINANCIAL DISCLOSURE - -------------------- None. PART III - -------- The information required by Items 10 through 13 of Part III is incorporated by reference from the Registrant's Proxy Statement which will be mailed to stockholders in connection with the Registrant's annual meeting of stockholders scheduled to be held on May 16, 2002. PART IV - ------- ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM - ---------------------------------------------------------------------- 8-K - ---- A. 1. Financial Statements Page ---- Independent Auditors' Report. F1 Consolidated Balance Sheets as of December 31, 2001 and 2000. F2 Consolidated Statements of Income for the years ended December 31, 2001, 2000 and 1999. F3 Consolidated Statements of Stockholders' Equity for the years ended December 31, 2001, 2000 and 1999. F4 Consolidated Statements of Cash Flows for the years ended December 31, 2001, 2000 and 1999. F5 Notes to Consolidated Financial Statements. F6 2. Financial Statement Schedule Page ---- Schedule III - Real Estate and Accumulated Depreciation F24 All other schedules have been omitted as they are not applicable, or not required or because the information is given in the Consolidated Financial Statements or related Notes to Consolidated Financial Statements. 3. Exhibits Exhibit No. List of Exhibits 3.1(a) Articles of Incorporation of Bedford Property Investors, Inc. is incorporated herein by reference to Exhibit 4.2 of the Company's Registration Statement on Form S-2 (File No. 333-00921) filed on February 14, 1996. 3.1(b) Articles of Amendment of Charter of Bedford Property Investors, Inc. is incorporated herein by reference to Exhibit 4.2 of the Company's Amendment No. 1 to its Registration Statement on Form S-2/A (File No. 333- 00921) filed on March 29, 1996. 3.1(c) Articles of Amendment of Charter of Bedford Property Investors, Inc. is incorporated herein by reference to Exhibit 3.1 to the Company's Form 10-Q for the quarter ended June 30, 1997. 3.2 Amended and Restated Bylaws of the Company are incorporated herein by reference to Exhibit 3.2 to the Company's Form 10-K for the year ended December 31, 2000. 10.6(a) BPIA Agreement dated as of January 1, 1995, by and between Westminster Holdings, Inc., a California corporation doing business as BPI Acquisitions and Bedford Property Investors, Inc., is incorporated herein by reference to Exhibit 10.6 (a) to the Company's Form 10-K for the year ended December 31, 2000. 10.6(b) Amendment to BPIA Agreement dated as of January 1, 1997 is incorporated herein by reference to Exhibit 10.6(b) to the Company's Form 10-K for the year ended December 31, 2000. 10.6(c) Second Amendment to BPIA Agreement dated as of January 1, 1999 is incorporated herein by reference to Exhibit 10.6(c) to the Company's Form 10-K for the year ended December 31, 2000. 10.6(d) Third Amendment to BPIA Agreement dated as of December 10, 2000 is incorporated herein by reference to Exhibit 10.6(d) to the Company's Form 10-K for the year ended December 31, 2000. 10.6(e) Fourth Amendment to BPIA Agreement dated as of December 10, 2000 is incorporated herein by reference to Exhibit 10.6(e) to the Company's Form 10-K for the year ended December 31, 2000. 10.6(f)* Fifth Amendment to BPIA Agreement dated as of November 10, 2001. 10.13 Promissory Note dated March 20, 1996 executed by the Company and payable to the order of Prudential Insurance Company of America is incorporated herein by reference to Exhibit 10.13 to the Company's Amendment No. 1 to its Registration Statement on Form S-2 (File No. 333-00921) filed on March 29, 1996. 10.14 Loan Agreement dated as of December 24, 1996 between Bedford Property Investors, Inc. as Borrower and Union Bank of California, N.A. as Lender is incorporated herein by reference to Exhibit 10.14 to the Company's Form 10-K for the year ended December 31, 1996. 10.15 The Company's Dividend Reinvestment and Stock Purchase Plan is incorporated herein by reference to the Company's post-effective Amendment No. 1 to its Registration Statement on Form S-3 (File No. 333-33795) filed on November 20, 1997. 10.16 The Company's Amended and Restated Employee Stock Plan incorporated herein by reference to Exhibit 10.16 to the Company's Form 10-K for the year ended December 31, 1997. 10.18 The Company's Amended and Restated 1992 Directors' Stock Option Plan is incorporated herein by reference to Exhibit 10.18 to the Company's Form 10-K for the year ended December 31, 1997. 10.22 Promissory Note made as of May 28, 1999, by and between Bedford Property Investors, Incorporated and Teachers Insurance and Annuity Association of America is incorporated herein by reference to Exhibit 10.22 to the Company's Form 10-Q for the quarter ended June 30, 1999. 10.23 Promissory Note made as of May 28, 1999, by and between Bedford Property Investors, Incorporated and Teachers Insurance and Annuity Association of America is incorporated herein by reference to Exhibit 10.23 to the Company's Form 10-Q for the quarter ended June 30, 1999. 10.24 Promissory Note made as of May 28, 1999, by and between Bedford Property Investors, Incorporated and Teachers Insurance and Annuity Association of America is incorporated herein by reference to Exhibit 10.24 to the Company's Form 10-Q for the quarter ended June 30, 1999. 10.28 Promissory Note made as of November 22, 1999, by and between Bedford Property Investors, Incorporated and Teachers Insurance and Annuity Association of America is incorporated herein by reference to Exhibit 10.28 to the Company's Form 10-K for the year ended December 31, 1999. 10.29 Loan Agreement dated as of July 27, 2000, between Bedford Property Investors, Inc. as Borrower and Security Life of Denver Insurance Company as Lender is incorporated herein by reference to Exhibit 10.29 to the Company's Form 10-Q for the quarter ended June 30, 2000. 10.30 Loan Agreement dated as of July 27, 2000, between Bedford Property Investors, Inc. as Borrower and Security Life of Denver Insurance Company as Lender is incorporated herein by reference to Exhibit 10.30 to the Company's Form 10-Q for the quarter ended June 30, 2000. 10.31 Amended and Restated Promissory Note dated May 24, 1996 executed by the Company and payable to the order of Prudential Insurance Company of America is incorporated herein by reference to Exhibit 10.13 to the Company's Form 10-Q for the quarter ended June 30, 1996. 10.32 Loan Agreement dated as of January 30, 1998 between Bedford Property Investors, Inc. as Borrower and Prudential Insurance Company of America as Lender is incorporated herein by reference to Exhibit 10.15 to the Company's Form 10-K for the year ended December 31, 1997. 10.34 Form of Retention Agreement is incorporated herein by reference to Exhibit 10.34 to the Company's Form 10-K for the year ended December 31, 2000. 10.35 Fifth Amended and Restated Credit Agreement among Bedford Property Investors, Inc., The Banks Party Hereto, Bank of America, NA, as Administrative Agent for The Banks, Union Bank of California, NA, as Co- Agent, and Banc of America Securities LLC, as Sole Lead Arranger and Sole Book Manager, dated May 18, 2001 is incorporated herein by reference to Exhibit 10.35 to the Company's Form 10-Q for the quarter ended June 30, 2001. 10.36 Promissory Note, dated as of July 23, 2001, between Bedford Property Investors, Inc. as Borrower and Washington Mutual Bank as Lender is incorporated herein by reference to Exhibit 10.36 to the Company's Form 10- Q for the quarter ended June 30, 2001. 10.37 Interest Rate Protection Agreement, dated as of June 18, 2001, between Bedford Property Investors, Inc. and United California Bank, formerly Sanwa Bank California is incorporated herein by reference to Exhibit 10.37 to the Company's Form 10-Q for the quarter ended June 30, 2001. 10.38 Interest Rate Protection Agreement, dated as of June 18, 2001, between Bedford Property Investors, Inc. and United California Bank, formerly Sanwa Bank California, is incorporated herein by reference to Exhibit 10.38 to the Company's Form 10-Q for the quarter ended June 30, 2001. 10.39 Master Agreement, dated as of May 15, 2001, between Bedford Property Investors, Inc. and United California Bank, formerly Sanwa Bank California, is incorporated herein by reference to Exhibit 10.39 to the Company's Form 10-Q for the quarter ended June 30, 2001. 10.40* Amended and Restated Promissory Note, dated as of November 19, 2001, between Bedford Property Investors, Inc. as borrower and Union Bank of California, N.A. as lender. 12* Ratio of Earnings to Fixed Charges. 23.1* Consent of KPMG LLP, independent auditors. * Filed herewith Independent Auditors' Report To the Stockholders and the Board of Directors of Bedford Property Investors, Inc.: We have audited the consolidated financial statements of Bedford Property Investors, Inc. and subsidiaries as listed in the accompanying index. In connection with our audits of the consolidated financial statements, we also audited the consolidated financial statement schedule as listed in the accompanying index. 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 auditing standards generally accepted in the United States of America. 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 Bedford Property Investors, Inc. and subsidiaries as of December 31, 2001 and 2000, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2001, in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the related consolidated financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein. KPMG LLP San Francisco, California February 11, 2002 BEDFORD PROPERTY INVESTORS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 31, 2001 AND 2000 (in thousands, except share and per share amounts) 2001 2000 - ---------------------------------------------------------------------- Assets: Real estate investments: Industrial buildings $303,563 $305,857 Office buildings 328,619 310,882 Operating properties held for sale 11,157 5,226 Properties under development - 13,702 Land held for development 13,469 11,721 - ---------------------------------------------------------------------- 656,808 647,388 Less accumulated depreciation 49,154 35,944 - ---------------------------------------------------------------------- 607,654 611,444 Cash and cash equivalents 5,512 3,160 Other assets 22,728 19,562 - ---------------------------------------------------------------------- $635,894 $634,166 - ---------------------------------------------------------------------- - ---------------------------------------------------------------------- Liabilities and Stockholders' Equity: Bank loan payable $ 80,925 $ 77,320 Mortgage loans payable 242,066 224,205 Accounts payable and accrued expenses 11,653 15,665 Dividends and distributions payable 7,962 8,005 Other liabilities 11,184 8,227 - ---------------------------------------------------------------------- Total liabilities 353,790 333,422 - ---------------------------------------------------------------------- Minority interest in consolidated partnership 1,135 1,229 - ---------------------------------------------------------------------- Stockholders' equity: Common stock, par value $0.02 per share; authorized 50,000,000 shares; issued and outstanding 16,515,200 shares in 2001 and 17,709,738 shares in 2000 330 354 Additional paid-in capital 292,731 316,084 Accumulated dividends in excess of net income (11,782) (16,923) Accumulated other comprehensive loss (310) - - ---------------------------------------------------------------------- Total stockholders' equity 280,969 299,515 - ---------------------------------------------------------------------- $635,894 $634,166 - ---------------------------------------------------------------------- - ---------------------------------------------------------------------- See accompanying notes to consolidated financial statements. BEDFORD PROPERTY INVESTORS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 and 1999 (in thousands, except share and per share amounts) 2001 2000 1999 - ------------------------------------------------------------------------------------------------ Property operations: Rental income $99,949 $97,518 $90,527 Rental expenses: Operating expenses 16,122 16,814 14,550 Real estate taxes 9,209 8,920 8,074 Depreciation and amortization 16,183 13,812 13,016 - ------------------------------------------------------------------------------------------------ Income from property operations 58,435 57,972 54,887 General and administrative expenses (4,063) (4,209) (3,561) Interest income 202 500 182 Interest expense (23,121) (24,826) (18,970) Other (expense) income (526) 615 - - ------------------------------------------------------------------------------------------------ Income before gain on sales of real estate investments and minority interest 30,927 30,052 32,538 Gain on sales of real estate investments, net 5,938 38,171 7,743 Minority interest (142) (136) (128) - ------------------------------------------------------------------------------------------------ Income before extraordinary item 36,723 68,087 40,153 Extraordinary item-loss on early extinguishment of debt - - (298) - ------------------------------------------------------------------------------------------------ Net income $36,723 $68,087 $39,855 - ------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------ Earnings per share - basic: Income before extraordinary item $ 2.19 $ 3.73 $ 1.88 Extraordinary item-loss on early extinguishment of debt - - (0.01) - ------------------------------------------------------------------------------------------------ Net income per share - basic $ 2.19 $ 3.73 $ 1.87 - ------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------ Weighted average number of shares - basic 16,747,498 18,236,512 21,267,088 - ------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------ Earnings per share - diluted: Income before extraordinary item $ 2.16 $ 3.69 $ 1.87 Extraordinary item-loss on early extinguishment of debt - - (0.01) - ------------------------------------------------------------------------------------------------ Net income per share - diluted $ 2.16 $ 3.69 $ 1.86 - ------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------ Weighted average number of shares - diluted 17,045,493 18,501,905 21,477,013 - ------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------ See accompanying notes to consolidated financial statements. BEDFORD PROPERTY INVESTORS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999 (in thousands, except per share amounts) Accumulated Accumulated Total Additional dividends other stock- Common paid-in in excess of comprehensive holders' stock capital net income loss equity - ------------------------------------------------------------------------------------------------ Balance, December 31, 1998 $ 453 $407,760 $(60,624) $ - $347,589 Issuance of common stock 6 1,001 - - 1,007 Repurchase and retirement of common stock (67) (56,518) - - (56,585) Amortization of deferred compensation - 977 - - 977 Net income - - 39,855 - 39,855 Dividends to common stockholders ($1.56 per share) - - (32,663) - (32,663) - ------------------------------------------------------------------------------------------------ Balance, December 31, 1999 392 353,220 (53,432) - 300,180 Issuance of common stock 8 3,221 - - 3,229 Repurchase and retirement of common stock (46) (41,892) - - (41,938) Amortization of deferred compensation - 1,535 - - 1,535 Net income - - 68,087 - 68,087 Dividends to common stockholders ($1.74 per share) - - (31,578) - (31,578) - ------------------------------------------------------------------------------------------------ Balance, December 31, 2000 354 316,084 (16,923) - 299,515 Issuance of common stock 4 2,254 - - 2,258 Repurchase and retirement of common stock (28) (27,318) - - (27,346) Amortization of deferred compensation - 1,711 - - 1,711 Dividends to common stockholders ($1.86 per share) - - (31,582) - (31,582) - ------------------------------------------------------------------------------------------------ Subtototal 330 292,731 (48,505) - 244,556 - ------------------------------------------------------------------------------------------------ Net income - - 36,723 - 36,723 Other comprehensive loss - - - (310) (310) - ------------------------------------------------------------------------------------------------ Comprehensive income (loss) - - 36,723 (310) 36,413 - ------------------------------------------------------------------------------------------------ Balance, December 31, 2001 $ 330 $292,731 $(11,782) $(310) $280,969 - ------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------ See accompanying notes to consolidated financial statements. BEDFORD PROPERTY INVESTORS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999 (in thousands) 2001 2000 1999 - ------------------------------------------------------------------------------------------------ Operating Activities: Net income $ 36,723 $ 68,087 $ 39,855 Adjustments to reconcile net income to net cash provided by operating activities: Minority interest 142 136 128 Depreciation and amortization 18,686 15,767 14,212 Stock compensation amortization 1,711 1,535 - Uncollectible accounts expense 505 42 247 Gain on sales of real estate investments, net (5,938) (38,171) (7,743) Change in other assets (3,393) (6,857) (4,683) Change in accounts payable and accrued expenses (3,503) 4,931 1,534 Change in other liabilities 2,647 355 1,990 - ------------------------------------------------------------------------------------------------ Net cash provided by operating activities 47,580 45,825 45,540 - ------------------------------------------------------------------------------------------------ Investing Activities: Investments in real estate (25,989) (60,576) (96,558) Proceeds from sales of real estate investments, net 19,282 130,581 24,241 - ------------------------------------------------------------------------------------------------ Net cash (used) provided by investing activities (6,707) 70,005 (72,317) - ------------------------------------------------------------------------------------------------ Financing Activities: Proceeds from bank loan payable 55,162 79,624 141,972 Repayments of bank loan payable (53,659) (139,778) (152,657) Proceeds from mortgage loans payable, net of loan costs 24,817 30,153 134,208 Repayments of mortgage loans payable (7,893) (13,566) (8,995) Issuance of common stock 2,296 3,229 2,004 Repurchase and retirement of common stock (27,346) (41,938) (56,585) Redemption of partnership units (131) - (160) Payment of dividends and distributions (31,767) (31,978) (32,712) - ------------------------------------------------------------------------------------------------ Net cash (used) provided by financing activities (38,521) (114,254) 27,075 - ------------------------------------------------------------------------------------------------ Net increase in cash and cash equivalents 2,352 1,576 298 Cash and cash equivalents at beginning of year 3,160 1,584 1,286 - ------------------------------------------------------------------------------------------------ Cash and cash equivalents at end of year $ 5,512 $ 3,160 $ 1,584 - ------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------ Supplemental disclosure of cash flow information a) Non-cash investing and financing activities: Debt incurred with real estate acquired $ - $ - $ 5,602 b) Cash paid during the year for interest, net of amounts capitalized $ 21,149 $ 23,372 $ 16,624 - ------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------ See accompanying notes to consolidated financial statements. BEDFORD PROPERTY INVESTORS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2001 AND 2000 Note 1 - Organization and Summary of Significant Accounting Policies - --------------------------------------------------------------------- and Practices - ------------- The Company - ------------ Bedford Property Investors, Inc. (the "Company") is a Maryland real estate investment trust with investments primarily in industrial and suburban office properties concentrated in the western United States. The Company's common stock trades under the symbol "BED" on both the New York Stock Exchange and Pacific Exchange. Critical Accounting Policies and Use of Estimates - -------------------------------------------------- In response to the SEC's Release Number 33-8040, "Cautionary Advice Regarding Disclosure About Critical Accounting Policies," the Company identifies the following critical accounting areas that affect its more significant judgments and estimates used in the preparation of its consolidated financial statements. The related accounting policies are included in this and other notes to the consolidated financial statements and, as appropriate, in Management's Discussion and Analysis of Financial Condition and Results of Operations. The preparation of the Company's financial statements in conformity with accounting principles generally accepted in the United States of America requires management of the Company to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of financial statements, and the reported amounts of revenues and expenses during the reporting periods. On an on-going basis, the Company evaluates its estimates, including those related to asset impairment, deferred assets, rental income recognition and allowance for doubtful accounts. These estimates are based on the information that currently is available and on various other assumptions that are believed to be reasonable under the circumstances. Actual results could vary from those estimates and those estimates could be different under different assumptions or conditions. Principles of Consolidation - ---------------------------- The consolidated financial statements include the accounts of the Company and Bedford Realty Partners, L.P. All significant inter-entity balances have been eliminated in consolidation. Real Estate Investments - ------------------------ Real estate investments are recorded at cost less accumulated depreciation. The cost of real estate includes the purchase price or development cost of the properties and other related acquisition costs including amounts paid to BAI (see Note 5). Development costs include interest and real estate taxes incurred during the construction period and development fees paid to BAI (see Note 5). Expenditures for maintenance and repairs that do not add to the value or prolong the useful life of the property are expensed. Expenditures for asset replacements or significant improvements that extend the life or increase the property's value are capitalized. Real estate investment costs are depreciated using the straight-line method over estimated useful lives as follows: building improvements - 45 years; tenant improvements - term of related lease. The depreciable cost for buildings in development is based on the percentage of leased space until the building becomes fully leased or one year after shell completion. When circumstances such as adverse market conditions indicate an impairment of a property, the Company will recognize a loss to the extent that the carrying value exceeds the fair value of the property. As of December 31, 2001 and 2000, none of the Company's real estate assets was considered impaired. Real estate investments that are considered held for sale are carried at the lower of carrying amount or fair value less costs to sell and such properties are no longer depreciated. Rental Income Recognition - -------------------------- Base rental income is recognized on a straight-line basis over the terms of the respective lease agreements. Differences between rental income recognized and amounts contractually due under the lease agreements are credited or charged, as applicable, to rent receivable. The excess of straight-line rental income over contractual rental income increased revenue by $1,055,000, $2,597,000, and $2,797,000 for 2001, 2000, and 1999, respectively. Straight-line rent receivable is included with the basis of a property and therefore reduces gain when the property is sold. Rental payments received before they are recognized as income are recorded as prepaid income. Most of the Company's lease agreements provide for recovery of some or all of the property operating expenses and real estate taxes. Property operating expense reimbursements, real estate tax reimbursements, and other recoverable costs are recognized in the period during which the related expenses are incurred. The Company maintains an allowance for doubtful accounts for estimated losses resulting from the inability of tenants to make required payments, which results in a reduction to rental income. Management determines the adequacy of this allowance by continually evaluating individual tenant receivables considering the tenant's financial condition, security deposits, letters of credit, lease guarantees, and current economic conditions. Deferred Financing and Leasing Costs - ------------------------------------- Costs incurred for debt financing and property leasing are capitalized as deferred costs. Deferred loan costs include amounts paid to lenders to obtain financing and financing fees paid to BAI (see Note 5). Such costs are amortized on a straight-line basis, which approximates the interest method, over the term of the related loan. Amortization of deferred financing costs is included in interest expense in the Company's income statement. Deferred leasing costs include leasing commissions that are amortized using the straight-line method over the term of the related lease. Unamortized deferred leasing costs are included with the basis when a property is sold and therefore reduce the gain on sale. Unamortized financing and leasing costs are charged to expense in the event of prepayment of the debt or early termination of the lease. Federal Income Taxes - --------------------- The Company has elected to be taxed as a real estate investment trust under Sections 856 to 860 of the Internal Revenue Code of 1986, as amended (the "Code"). A real estate investment trust is generally not subject to federal income tax on that portion of its real estate investment trust taxable income ("Taxable Income") that is distributed to its stockholders, provided that at least 90% of Taxable Income is distributed and other requirements are met. The Company believes it is in compliance with the Code. As of December 31, 2001, for federal income tax purposes, the Company had an ordinary loss carry forward of approximately $19 million. As the Company does not expect to incur income tax liabilities, there may be little or no value realized from such carryforwards. For federal income tax purposes, dividend distributions made for 2001 were classified 80% as ordinary, 3% as unrecaptured section 1250 gain, and 17% capital gain; dividend distributions made for 2000 were classified 2% as ordinary, 19% as unrecaptured section 1250 gain, and 79% as capital gain; dividend distributions made for 1999 were classified 97% as ordinary and 3% as capital gain. The determination of the tax treatment for dividend distributions is based on the Company's earnings and profits. Income reported for financial reporting purposes will differ from earnings and profits for federal income tax purposes primarily due to differences in the estimated lives used to calculate depreciation. Derivative Instruments and Hedging Activities - ---------------------------------------------- Effective January 1, 2001, the Company adopted Statement of Financial Accounting Standards No. 133 (SFAS 133), "Accounting for Derivative Instruments and Hedging Activities," as amended. SFAS 133, as amended, establishes accounting and reporting standards for derivative financial instruments. Specifically, SFAS 133 requires an entity to recognize all derivatives as either assets or liabilities in the statement of financial position and to measure those instruments at fair value. Additionally, the fair value adjustments will affect either other comprehensive income or net income depending on whether the derivative instrument qualifies as a hedge for accounting purposes and, if so, the nature of the hedging activity. The adoption of SFAS 133 did not have a material impact on the Company's financial statements (see Note 9). The Company believes that its hedging derivative instruments are effective in reducing the interest rate risk exposure that they are designated to hedge. This effectiveness is essential for qualifying for hedge accounting. Instruments that meet the hedging criteria are formally designated as hedges at the inception of the derivative contract and changes in the fair value of the instrument are included in other comprehensive income until the instrument matures. When the terms of an underlying transaction are modified, or when the underlying hedged item ceases to exist, all changes in the fair value of the instrument are included in net income each period until the instrument matures. Any derivative instrument used for risk management that does not meet the hedging criteria is marked-to-market with changes in value included in net income for each period. Stock-Based Compensation - ------------------------- The Company measures compensation expense for its employee stock-based compensation plans using the intrinsic value method and has provided in Note 6 pro forma disclosures of the effect on net income and earnings per share as if the fair value-based method had been applied in measuring compensation expense. Per Share Data - --------------- Per share data are based on the weighted average number of common shares outstanding during the year. Stock options issued under the Company's stock option plans, non-vested restricted stock, and the limited partnership units of Bedford Realty Partners, L.P. are included in the calculation of diluted per share data if, upon exercise or vestiture, they would have a dilutive effect. Cash and Cash Equivalents - -------------------------- The Company considers all demand deposits, money market accounts and temporary cash investments to be cash equivalents. The Company maintains its cash and cash equivalents at financial institutions. The combined account balances at each institution periodically exceed the Federal Depository Insurance Corporation ("FDIC") insurance coverage, and, as a result, there is a concentration of credit risk related to amounts on deposit in excess of FDIC insurance coverage. The Company believes that the risk is not significant, as the Company does not anticipate their non-performance. Reclassifications - ------------------ Certain prior year accounts have been reclassified to conform to the current year presentation. Recent Accounting Pronouncements - --------------------------------- In July 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible Assets," which addresses financial accounting and reporting for acquired goodwill and other intangible assets and supersedes APB Opinion No. 17, "Intangible Assets." The Company will adopt SFAS No. 142 effective January 1, 2002. The Company has determined that the adoption of SFAS No. 142 will not have a material impact on the Company's financial statements. In October 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." SFAS No. 144 supercedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." SFAS No. 144 applies to all long-lived assets (including discontinued operations). SFAS No. 144 requires that long-lived assets that are to be disposed of by sale be measured at the lower of book value or fair value less cost to sell. The Company will adopt SFAS No. 144 effective January 1, 2002. The Company has determined that the adoption of SFAS No. 144 will not have a material impact on the Company's financial statements. Note 2 - Real Estate Investments - --------------------------------- As of December 31, 2001, the Company's real estate investments were diversified by property type as follows (dollars in thousands): Number of Percent Properties Cost of Total -------------------------------- Industrial buildings 58 $303,563 46% Office buildings 29 328,619 50% Operating properties held for sale 3 11,157 2% Land held for development 11 13,469 2% -------------------------------- Total 101 $656,808 100% -------------------------------- -------------------------------- Note 2 - Real Estate Investments (continued) - --------------------------------------------- The following table sets forth the Company's real estate investments as of December 31, 2001 (in thousands): Less Development Accumulated Land Building In-Progress Depreciation Total ------------------------------------------------------------ Industrial buildings - -------------------- Northern California $ 43,485 $108,811 $ - $14,814 $137,482 Arizona 18,750 53,593 - 5,887 66,456 Southern California 19,197 45,518 - 5,459 59,256 Greater Seattle Area 3,409 10,800 - 1,329 12,880 ------------------------------------------------------------ Total industrial buildings 84,841 218,722 - 27,489 276,074 ------------------------------------------------------------ Office buildings - ---------------- Northern California 5,665 20,486 - 1,771 24,380 Arizona 10,622 25,601 - 2,151 34,072 Southern California 9,361 22,035 - 2,369 29,027 Colorado 13,935 90,312 - 5,030 99,217 Greater Seattle Area 16,811 100,837 - 8,408 109,240 Nevada 2,102 10,852 - 1,203 11,751 ------------------------------------------------------------ Total office buildings 58,496 270,123 - 20,932 307,687 ------------------------------------------------------------ Operating properties held for sale - ---------------------------------- Northern California 1,831 9,326 - 733 10,424 ------------------------------------------------------------ Total operating properties held for sale 1,831 9,326 - 733 10,424 ------------------------------------------------------------ Land held for development - ------------------------- Northern California 5,717 - - - 5,717 Arizona 645 - - - 645 Southern California 3,168 - - - 3,168 Colorado 3,939 - - - 3,939 ------------------------------------------------------------ Total land held for development 13,469 - - - 13,469 ------------------------------------------------------------ Total as of December 31, 2001 $158,637 $498,171 $ - $49,154 $607,654 ------------------------------------------------------------ ------------------------------------------------------------ Total as of December 31, 2000 $160,997 $476,999 $9,392 $35,944 $611,444 ------------------------------------------------------------ ------------------------------------------------------------ </table> Company personnel directly manage all but one of the Company's properties from regional offices in Lafayette, California; Tustin, California; Phoenix, Arizona; Denver, Colorado; and Seattle, Washington. The Company has retained an outside manager to assist in some of the management functions for the U.S. Bank Centre in Reno, Nevada. All financial record-keeping is centralized at the Company's corporate office in Lafayette, California. Income from property operations for operating properties held for sale as of December 31, 2001 was $1,110,000, $855,000, and $915,000 for the year ended December 31, 2001, 2000, and 1999, respectively. During 2001, 2000, and 1999, the Company capitalized interest costs relating to properties under development totaling $1,303,000, $1,964,000, and $2,148,000, respectively. Note 3 - Consolidated Partnership - --------------------------------- In December 1996, the Company formed Bedford Realty Partners, L.P. (the "Operating Partnership"), with the Company as the sole general partner, for the purpose of acquiring real estate. In exchange for contributing a property into the Operating Partnership, the owners of the property received limited partnership units ("OP Units"). A limited partner can seek redemption of the OP Units at any time. The Company, at its option, may redeem the OP Units by either (i) issuing common stock at the rate of one share of common stock for each OP Unit, or (ii) paying cash to a limited partner based on the average trading price of its common stock. Each OP Unit is allocated partnership income and cash flow at a rate equal to the dividend being paid by the Company on a share of common stock. Additional partnership income and cash flow is allocated approximately 99% to the Company and 1% to the limited partners. This acquisition strategy is referred to as a "Down REIT" transaction; as long as certain tax attributes are maintained, the income tax consequences to a limited partner are generally deferred until such time as the limited partner redeems their OP Units. On December 17, 1996, the Company acquired a $3.6 million industrial property located in Modesto, California utilizing the Operating Partnership. The sellers of the property received 108,497 OP Units. A director of the Company was a 9% owner of the property, but did not participate in the approval of the acquisition. In December 1999, the Modesto, California property was exchanged for a property located in Phoenix, Arizona. As of December 31, 2001, the Company has redeemed 36,437 OP Units for cash. Effective January 15, 2002, the Company exercised its option to redeem the remaining outstanding 72,060 OP Units of the limited partners of Bedford Realty Partners, L.P. The OP Units were redeemed by either (i) issuing Company common stock at the rate of one share of common stock for each OP Unit, or (ii) paying cash to the limited partner based on the closing trading price of its common stock, whichever the limited partner preferred. Effective January 15, 2002, the operating property, Diablo Business Center, a nine building service center flex complex which was held in the Bedford Realty Partners' partnership, is wholly-owned by the Company. Note 4 - Leases - ---------------- Minimum future lease payments to be received as of December 31, 2001 are as follows (in thousands): <table> <s> <c> <c> 2002 $ 79,800 2003 73,784 2004 56,049 2005 35,048 2006 20,116 Thereafter 38,561 ------- $303,358 ------- ------- </table> The total minimum future lease payments shown above do not include tenants' obligations for reimbursement of operating expenses or taxes as provided by the terms of certain leases. Note 5 - Related Party Transactions - ------------------------------------ The Company's activities relating to the acquisition of new properties, sales of Company owned real estate, development of real property, and financing arrangements are currently performed by Bedford Acquisitions, Inc., (BAI), a corporation wholly owned by Peter Bedford, the Company's Chairman of the Board and Chief Executive Officer. The Company uses the services of BAI for its acquisition, disposition, financing and development activities because the Company incurs expenses related only to those transactions which are successfully completed rather than incurring expenses related to unsuccessful efforts and associated overhead costs. This arrangement provides that BAI earns a success fee in an amount equal to 1 1/2% of the purchase price of property acquisitions, 1 1/2% of the sale price of dispositions, up to 1 1/2% of the amount of any loans (less third-party commissions), and 7% of the development costs. The total amount of such fees payable to BAI by the Company is limited to the lesser of: (i) the aggregate amount of such fees earned, or (ii) the aggregate amount of approved expenses incurred by BAI through the time of such acquisition, disposition, financing or development. The current agreement with BAI has a one-year term expiring December 31, 2002, which is automatically extended for an additional term of one year unless either party gives notice of its interest to terminate the agreement by October 31, 2002. For the years ended December 31, 2001, 2000, and 1999, the Company paid BAI an aggregate amount of approximately $2,816,000, $2,431,000 and $2,783,000, respectively, for acquisition, disposition, financing, and development activities performed pursuant to the foregoing arrangements. As of December 31, 2001 and 2000, the Company had an accrued liability of $1,945,000 and $866,000, respectively, for fees earned by BAI in excess of amounts paid to BAI by the Company under the agreement. At December 31, 2001 and 2000, the Company did not have any other relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. As such, the Company is not materially exposed to any financing, liquidity, market or credit risk that could arise if the Company had engaged in such relationships. Note 6 - Stock Compensation Plans - ---------------------------------- Initially 900,000 shares of the Company's Common Stock were reserved for issuance under the Employee Stock Option Plan (the "Employee Plan"). In May 1998, the shareholders approved an additional 2,100,000 shares. The Employee Plan expires in 2003. The Employee Plan provides for non-qualified stock options, incentive stock options, and grants of restricted stock. The Employee Plan is administered by the Compensation Committee of the Board of Directors, which determines the terms of options granted, including the exercise price, the number of shares subject to the option, and the exercisability of the options. Options granted to employees are exercisable upon vesting, and typically vest over a four-year period. The Employee Plan requires that the exercise price of incentive stock options be at least equal to the fair market value of such shares on the date of grant and that the exercise price of non-qualified stock options be equal to at least 85% of the fair market value of such shares on the date of the grant. The maximum term of options granted is ten years. In September 1995, the Company established a Management Stock Acquisition program which was subsequently modified by the Board in 1999. Under the program, certain options may be exercised by option holders with a recourse note payable to the Company. Such note bears interest at 7.5% or the Applicable Federal Rate as defined by the Internal Revenue Service, whichever is higher. The note is due on the first of nine years and nine months after the date of the grant or within ninety days from termination of employment, with interest payable quarterly. From the beginning of the program through December 31, 2001, options for 205,750 shares of Common Stock were exercised in exchange for notes payable to the Company. The unpaid balance of the notes was $1,230,000 and $2,150,000 at December 31, 2001 and 2000, respectively, and is included in the accompanying consolidated balance sheets as a reduction of additional paid-in capital. In addition, the Company may grant restricted stock to employees pursuant to the Employee Plan. These shares generally vest over five years and are subject to forfeiture under certain conditions. From 1997 through December 31, 2001, the Company has granted 510,382 shares of restricted stock net of forfeitures. Deferred compensation associated with unvested restricted stock was $4,612,000 and $4,003,000 as of December 31, 2001 and 2000, respectively, and is included in the accompanying consolidated balance sheets as a reduction of additional paid-in capital. Initially 250,000 shares of the Company's Common Stock were reserved for issuance under the Directors' Stock Option Plan (the "Directors' Plan"). In May 1996 and 1998, the shareholders approved an additional 250,000 shares and 500,000 shares, respectively. The Directors' Plan expires in 2002. The Directors' Plan provides for the grant of non-qualified stock options to directors of the Company. The Directors' Plan contains an automatic grant feature whereby a director receives a one-time "initial option" to purchase 25,000 shares upon a director's appointment to the Board of Directors and thereafter receives automatic annual grants of options to purchase 10,000 shares upon re-election to the Board of Directors. Options granted are generally exercisable six months from the date of grant. The Directors' Plan requires that the exercise price of options be equal to the fair market value of the underlying shares on the date of grant. The maximum term of options granted is ten years. The Company records deferred compensation when it makes restricted stock awards or compensatory stock option grants to employees or directors. In the case of grants to employees, the amount of deferred compensation initially recorded is the difference, if any, between the exercise price (zero in the case of restricted stock awards) and fair market value of the common stock on the date of grant. Such deferred compensation is fixed and remains unchanged for subsequent increases or decreases in the market value of the Company's common stock. In the case of options granted to non-employees, the amount of deferred compensation recorded is the fair value of the stock options on the grant date as determined using a Black-Scholes valuation model. The Company records deferred compensation as a reduction to stockholders' equity and an offsetting increase to additional paid-in capital, which are all netted for financial statement purposes as additional paid-in capital. The Company then amortizes deferred compensation into stock based compensation expense over the performance period, which typically coincides with the vesting period of the stock-based award of 5 years. Had compensation costs for the stock options granted to employees been determined consistent with FASB Statement No. 123, the Company's net income and earnings per share would have been reduced to the pro forma amounts as follows (in thousands, except per share amounts): <table> <s> <c> <c> <c> 2001 2000 1999 ----------------------------- Net income: As reported $36,723 $68,087 $39,855 Pro forma 36,537 67,865 39,496 Earnings per share - basic: As reported $ 2.19 $ 3.73 $ 1.87 Pro forma 2.18 3.72 1.86 Earnings per share - diluted: As reported $ 2.16 $ 3.69 $ 1.86 Pro forma 2.15 3.68 1.84 </table> The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model with the following weighted-average assumptions used for grants in 2001, 2000 and 1999, respectively: dividend yield of 9.0%, 9.2%, and 9.4%; expected volatility of 17.9%, 18.2% and 18.4%; risk-free interest rates of 4.9%, 5.1% and 6.8%. The expected life for the director's options is ten years for 2001 and 2000, and five years for 1999. The expected life for the employee's options is ten years for each period. A summary of the status of the Company's plans as of December 31, 2001, 2000 and 1999 and changes during the years ended on those dates is presented below: <table> <s> <c> <c> <c> <c> <c> <c> 2001 2000 1999 ---------------------------------------------------------------------- Weighted Weighted Weighted Average Average Average Exercise Exercise Exercise Shares Price Shares Price Shares Price ---------------------------------------------------------------------- Employee Plan - -------------- Outstanding at beginning of year 475,250 $18.46 736,625 $17.72 1,117,250 $18.10 Granted 123,000 18.87 127,000 17.94 - - Exercised (69,000) 17.32 (138,375) 13.26 (63,500) 13.66 Forfeited and cancelled - - (250,000) 18.89 (317,125) 19.15 ---------------------------------------------------------------------- Outstanding at end of year 529,250 $18.67 475,250 $18.46 736,625 $17.72 ---------------------------------------------------------------------- ---------------------------------------------------------------------- Options exercisable 248,250 141,250 330,875 ---------------------------------------------------------------------- ---------------------------------------------------------------------- Weighted average fair value of options granted during the year $ 1.30 $ 1.04 - ---------------------------------------------------------------------- ---------------------------------------------------------------------- Directors' Plan - ---------------- Outstanding at beginning of year 240,000 $17.79 345,000 $16.33 310,000 $15.79 Granted 50,000 18.87 50,000 17.94 70,000 17.72 Exercised (10,000) 14.22 (145,000) 14.24 (25,000) 12.97 Expired - - (10,000) 17.72 (10,000) 17.72 ---------------------------------------------------------------------- Outstanding at end of year 280,000 $18.11 240,000 $17.79 345,000 $16.33 ---------------------------------------------------------------------- ---------------------------------------------------------------------- Options exercisable 280,000 240,000 345,000 ---------------------------------------------------------------------- ---------------------------------------------------------------------- Weighted average fair value of options granted during the year $ 1.30 $ 1.04 $ 1.24 ---------------------------------------------------------------------- ---------------------------------------------------------------------- </table> The following table summarizes information about stock options outstanding on December 31, 2001: <table> <s> <c> <c> <c> <c> <c> Options Outstanding Options Exercisable ---------------------------------------------- ---------------------------- Weighted Avg. Range of Number Remaining Weighted Avg. Number Weighted Avg. Exercise Price Outstanding Contractual Life Exercise Price Exercisable Exercise Price - -------------- ----------- ----------------- -------------- ----------- --------------- Employee Plan - -------------- $17.63 to 17.94 226,250 7.0 $17.79 137,000 $17.69 18.87 to 19.56 273,000 7.8 19.25 81,250 19.56 20.06 30,000 5.9 20.06 30,000 20.06 -------- ----- ------- -------- ------- $17.63 to 20.06 529,250 7.3 $18.67 248,250 $18.59 -------- ----- ------- -------- ------- -------- ----- ------- -------- ------- Directors' Plan - ---------------- $14.22 30,000 4.8 $14.22 30,000 $14.22 17.72 50,000 7.8 17.72 50,000 17.72 17.94 50,000 8.8 17.94 50,000 17.94 18.82 50,000 5.8 18.82 50,000 18.82 18.87 50,000 9.8 18.87 50,000 18.87 19.56 50,000 6.8 19.56 50,000 19.56 -------- ----- ------- -------- ------- $14.22 to 19.56 280,000 7.5 $18.11 280,000 $18.11 -------- ----- ------- -------- ------- -------- ----- ------- -------- ------- </table> Note 7 - Bank Loan Payable - --------------------------- In May 2001, the Company renewed its revolving credit facility with a bank group led by Bank of America. The facility, which matures on June 1, 2004, consists of a $150 million secured line with an accordion feature which allows the Company at its option to expand the facility to $175 million, if needed. Interest on the facility is at a floating rate equal to either the lender's published "reference rate" or LIBOR plus a margin ranging from 1.30% to 1.55% depending on the Company's leverage level. As of December 31, 2001, the facility had an outstanding balance of $80,925,000, with an interest rate of LIBOR plus 1.55%. It is secured by 31 properties and interests in such properties, which collectively accounted for approximately 33% of the Company's annualized base rent and approximately 34% of the Company's total real estate assets as of December 31, 2001. The credit facility contains various restrictive covenants including, among other things, a covenant limiting quarterly dividends to 95% of average Funds From Operations. The Company was in compliance with the covenants and requirements of its revolving credit facility during the year ended December 31, 2001. The daily weighted average amount owed to the bank was $92,183,000 and $116,683,000 for the twelve months ended December 31, 2001 and 2000, respectively. The weighted average annual interest rates in each of these periods was 6.13% and 7.75%, respectively. The effective interest rate at December 31, 2001 was 4.99%. Note 8 - Mortgage Loans Payable - -------------------------------- In August 2001, the Company obtained $18 million of mortgage financing from Washington Mutual Bank. The loan has a 10-year term and bears interest at a floating rate of a trailing one-year treasury rate plus 2.60% (an effective rate of 7.92% as of December 31, 2001). The trailing one-year treasury rate, which is calculated by averaging the previous 12 months' rates, is adjusted every six months with a minimum and maximum 1% change over the previous six month rate. Proceeds from the loan were used to pay down a portion of the outstanding balance of the $150 million line of credit. In November 2001, the Company obtained $21,819,000 of new first mortgage financing from Union Bank of California. The financing, a renewal of an existing mortgage with the same lender, consists of a three-year loan, bearing interest at a floating rate of LIBOR plus 1.60% (an effective rate of 4.02% as of December 31, 2001). The old loan, which had an outstanding balance of approximately $14 million and a maturity date of January 2, 2002, carried a fixed interest of 7.50%. The $21,819,000 mortgage is collaterized by the same property pool as the expiring loan, namely nine properties located in California. Proceeds of the new mortgage loan were used to pay off the expiring mortgage and to pay down a portion of the outstanding balance of the Company's credit facility. Mortgage loans payable at December 31, 2001 and 2000 consist of the following (dollars in thousands): <table> <s> <c> <c> <c> <c> Maturity Date Interest Rate as of 12-31-01 2001 2000 -------------- ----------------------------- ------ ------ January 1, 2002 N/A $ - $ 14,321 March 15, 2003 7.02% 18,550 18,916 November 19, 2004 current rate of 4.02%(1) 21,774 - January 1, 2005 current rate of 6.00%(2) 4,481 4,553 June 1, 2005 7.17% 26,275 26,727 August 1, 2005 current rate of 5.55%(3) 3,547 7,444 August 1, 2005 current rate of 5.55%(3) 22,878 23,316 July 31, 2006 8.90% 8,143 8,336 July 31, 2006 6.91% 19,526 19,920 December 1, 2006 7.95% 21,541 21,858 June 1, 2007 7.17% 35,736 36,353 June 1, 2009 7.17% 41,740 42,461 August 1, 2011 current rate of 7.918%(4) 17,875 - -------- -------- Total $242,066 $224,205 -------- -------- -------- -------- </table> (1) Floating rate based on LIBOR plus 1.60%. (2) Floating rate based on 3 month LIBOR plus 2.50% (adjusted quarterly). (3) Floating rate based on fixed rate on interest swap agreements. See Note 9. (4) Floating rate based on a 12-month average of U.S. Treasury Security Yields plus 2.60% (adjusted semi-annually). The mortgage loans are collaterized by 49 properties and interests in such properties, which collectively accounted for approximately 62% of the Company's annualized base rents and approximately 56% of the Company's total real estate assets as of December 31, 2001. The Company was in compliance with the covenants and requirements of its various mortgages during the year ended December 31, 2001. The following table presents scheduled principal payments on mortgage loans as of December 31, 2001 (in thousands): <table> <s> <c> Twelve month period ending December 31, 2002 $ 5,048 Twelve month period ending December 31, 2003 23,118 Twelve month period ending December 31, 2004 25,383 Twelve month period ending December 31, 2005 56,552 Twelve month period ending December 31, 2006 47,270 Total thereafter 84,695 ------- $ 242,066 ------- ------- </table> Note 9 - Derivative Instruments and Hedging Activities - -------------------------------------------------------- In the normal course of business, the Company is exposed to the effect of interest rate changes. The Company limits these risks by following established risk management policies and procedures including the use of derivatives. For interest rate exposures, interest rate swaps are used primarily to hedge the cash flow risk of variable rate borrowing obligations. The Company does not use derivatives for trading or speculative purposes. Further, the Company has a policy of only entering into contracts with major financial institutions. When viewed in conjunction with the underlying and offsetting exposure that the derivatives are designed to hedge, the Company has not sustained a material loss from those instruments, nor does it anticipate any material adverse effect on its net income or financial position in the future from the use of derivatives. Interest rate swaps that convert variable payments to fixed payments are cash flow hedges. Hedging relationships that are fully effective have no effect on net income or FFO. The unrealized gains and losses in the fair value of these interest rate swaps are reported on the balance sheet, as a component of other assets or other liabilities as appropriate, with a corresponding adjustment to accumulated other comprehensive income (loss). On June 18, 2001, the Company entered into interest swap agreements with United California Bank. The swap agreements allow the Company to hedge its exposure to variable interest rates on two mortgages with remaining principal balances totaling $26,425,000 by effectively paying a fixed rate of interest over the term of the swap agreement. Interest rate pay differentials that arise under these swap agreements are recognized in interest expense over the term of the contracts. These interest rate swap agreements were considered to be fully effective in hedging the variable rate risk associated with the two mortgages. The following summarizes the principal value and fair value of the Company's interest swap contracts. The principal value at December 31, 2001 provides an indication of the extent of the Company's involvement in these contracts but does not represent exposure to credit, interest rate or market risks (dollars in thousands): <table> <s> <c> <c> <c> <c> <c> Approximate Principal Fixed Contract Cumulative Liability at Amount Rate Maturity Cash Paid, Net December 31, 2001 (1) --------- ----- -------- -------------- --------------------- $22,878 5.55% July 1, 2002 $128 $268 3,547 5.55% July 1, 2002 29 42 ------ --- --- $26,425 $157 $310 ------ --- --- ------ --- --- </table> (1) Represents the approximate amount which the Company would have paid as of December 31, 2001 if the swap contracts were terminated. To determine the fair values of derivative instruments in accordance with SFAS 133, the Company uses the discounted cash flow method, which requires the use of assumptions about market conditions and risks existing at the balance sheet date. Considerable judgment is required in interpreting market data to develop estimates of market value. Accordingly, estimated fair value is a general approximation of value, and such value may or may not actually be realized. At December 31, 2001, $310,000 is included in other liabilities and accumulated other comprehensive loss, a stockholders' equity account, reflecting the estimated market value of the swap contract obligations at that date. Note 10 - Repurchases of Common Stock - -------------------------------------- In July 1998, the Company's board of directors approved a share repurchase program of 3 million shares which was increased first to 4.5 million shares in September 1999, then to 8 million shares in September 2000 and later to 10 million shares in January 2002. Since November 1998, the Company has repurchased and retired 7.1 million shares at an average price of $17.90 per share. This represents 31% of the shares outstanding at November 30, 1998 when the Company began implementing its share repurchase program. Note 11 - Segment Disclosure - ----------------------------- The Company has five reportable segments organized by the region in which they operate: Northern California (Northern California and Nevada), Southwest (Arizona and greater Austin, Texas), Southern California, Northwest (greater Portland, Oregon and greater Seattle, Washington) and Colorado. During the year ended December 31, 2000, the Midwest portfolio (greater Kansas City, Kansas/Missouri, and greater Dallas, Texas) and the properties located in Austin, Texas were sold; therefore, the Midwest segment and the properties located in Austin are not reported for the year ended December 31, 2001. The accounting policies of the segments are the same as those described in the summary of significant accounting policies. The Company evaluates performance based upon income from real estate from the combined properties in each segment. <table> <s> <c> <c> <c> <c> <c> <c> <c> For the year ended December 31, 2001 (dollars in thousands) ------------------------------------------------------------------------------- Northern Southern Corporate California Southwest California Northwest Colorado & Other Consolidated ---------- --------- ---------- --------- --------- ---------- ------------- Rental income $ 35,416 $ 16,759 $ 14,231 $ 18,658 $ 14,885 $ - $ 99,949 Operating expenses and real estate taxes 7,433 4,648 2,726 5,339 5,185 - 25,331 Depreciation and amortization 5,105 2,990 1,953 3,787 2,348 - 16,183 ------------------------------------------------------------------------------- Income from property operations $ 22,878 $ 9,121 $ 9,552 $ 9,532 $ 7,352 $ - $ 58,435 Percent of income from property operations 39% 16% 16% 16% 13% 0% 100% General and administra- tive expenses - - - - - (4,063) (4,063) Interest income(1) 26 4 - 13 - 159 202 Interest expense - - - - - (23,121) (23,121) Other expense - - - - - (526) (526) ------------------------------------------------------------------------------- Income (loss) before gain on sales and minority interest 22,904 9,125 9,552 9,545 7,352 (27,551) 30,927 Gain on sales of real estate investments - 2,169 - - 3,769 - 5,938 Minority interest - - - - - (142) (142) ------------------------------------------------------------------------------- Net income (loss) $ 22,904 $ 11,294 $ 9,552 $ 9,545 $ 11,121 $(27,693) $ 36,723 ------------------------------------------------------------------------------- ------------------------------------------------------------------------------- Real estate investments $208,274 $109,210 $ 99,281 $131,857 $108,186 $ - $656,808 ------------------------------------------------------------------------------- ------------------------------------------------------------------------------- Additions (dispositions) of real estate investments $ 7,533 $ (7,795) $ 3,080 $ 1,008 $ 5,594 $ - $ 9,420 ------------------------------------------------------------------------------- ------------------------------------------------------------------------------- Total assets $218,660 $105,137 $110,160 $116,369 $ 79,170 $ 6,398 $635,894 ------------------------------------------------------------------------------- ------------------------------------------------------------------------------- </table> (1) The interest income in Northern California, Southwest, and Northwest segments represents interest earned from tenant notes receivable. <table> <s> <c> <c> <c> <c> <c> <c> <c> <c> For the year ended December 31, 2000 (dollars in thousands) -------------------------------------------------------------------------------- Northern Southern Corporate Con- California Southwest California Northwest Midwest Colorado & Other solidated ---------- --------- ---------- --------- -------- --------- --------- --------- Rental income $ 33,438 $ 18,497 $ 13,788 $ 18,755 $ 3,628 $ 9,412 $ - $ 97,518 Operating expenses and real estate taxes 7,368 5,264 2,656 5,769 1,238 3,439 - 25,734 Depreciation and amortization 4,861 2,587 1,913 3,306 (86) 1,231 - 13,812 -------------------------------------------------------------------------------- Income from property operations $ 21,209 $ 10,646 $ 9,219 $ 9,680 $ 2,476 $ 4,742 $ - $ 57,972 Percent of income from property operations 37% 18% 16% 17% 4% 8% - % 100% General and administra- tive expenses - - - - - - (4,209) (4,209) Interest income(1) 26 4 - 1 1 - 468 500 Interest expense - - - - - - (24,826) (24,826) Other income - 615 - - - - - 615 -------------------------------------------------------------------------------- Income (loss) before gain (loss) on sales and minority interest 21,235 11,265 9,219 9,681 2,477 4,742 (28,567) 30,052 Gain (loss) on sales of real estate investments, net 26,174 2,756 (6) 5,431 3,816 - - 38,171 Minority interest - - - - - - (136) (136) -------------------------------------------------------------------------------- Net income (loss) $ 47,409 $ 14,021 $ 9,213 $ 15,112 $ 6,293 $ 4,742 $(28,703) $ 68,087 -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- Real estate investments $200,741 $117,005 $ 96,201 $130,849 $ - $102,592 $ - $647,388 -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- (Dispositions) additions of real estate investments $ (4,517) $(16,506) $ 1,743 $(19,532) $(30,293) $ 36,760 $ - $(32,345) -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- Total assets $210,137 $108,337 $105,497 $115,247 $ 7,253 $ 83,636 $ 4,059 $634,166 -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- </table> (1) The interest income in Northern California, Southwest, Northwest, and Midwest segments represents interest earned from tenant notes receivable. <table> <s> <c> <c> <c> <c> <c> <c> <c> <c> For the year ended December 31, 1999 (dollars in thousands) -------------------------------------------------------------------------------- Northern Southern Corporate Con- California Southwest California Northwest Midwest Colorado & Other solidated ---------- --------- ---------- --------- -------- --------- --------- --------- Rental income $ 32,900 $ 15,726 $ 12,382 $ 15,528 $ 5,363 $ 8,628 $ - $ 90,527 Operating expenses and real estate taxes 7,193 4,274 2,481 3,944 1,509 2,947 276 22,624 Depreciation and amortization 4,624 2,087 1,768 2,509 874 1,154 - 13,016 -------------------------------------------------------------------------------- Income from property operations $ 21,083 $ 9,365 $ 8,133 $ 9,075 $ 2,980 $ 4,527 $ (276) $ 54,887 Percent of income from property operations 38% 17% 15% 17% 6% 8% (1)% 100% General and administra- tive expenses - - - - - - (3,561) (3,561) Interest income(1) 24 3 - 4 - - 151 182 Interest expense - - - - - - (18,970) (18,970) -------------------------------------------------------------------------------- Income (loss) before gain (loss) on sales and minority interest 21,107 9,368 8,133 9,079 2,980 4,527 (22,656) 32,538 Gain (loss) on sales of real estate investments, net 7,756 - 45 - (58) - - 7,743 Minority interest - - - - - - (128) (128) -------------------------------------------------------------------------------- Income (loss) before extraordinary item 28,863 9,368 8,178 9,079 2,922 4,527 (22,784) 40,153 Loss on early extinguishment of debt (298) - - - - - - (298) -------------------------------------------------------------------------------- Net income (loss) $ 28,565 $ 9,368 $ 8,178 $ 9,079 $ 2,922 $ 4,527 $(22,784) $ 39,855 -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- Real estate investments $205,258 $133,511 $ 94,458 $150,381 $ 30,293 $ 65,832 $ - $679,733 -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- (Dispositions) additions of real estate investments $ (4,331) $ 24,079 $ 17,060 $ 37,131 $ (1,918) $ 7,731 $ - $ 79,752 -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- Total assets $212,612 $123,411 $101,542 $134,843 $ 29,662 $ 64,329 $ 5,011 $671,410 -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- </table> (1) The interest income in Northern California, Southwest, and Northwest segments represents interest earned from tenant notes receivable. Note 12 - Fair Value of Financial Instruments - ---------------------------------------------- The carrying values of cash and cash equivalents, trade accounts payable and receivables approximate fair value due to the short-term maturity of these instruments. Management has determined that the market value of the $171,934,000 fixed rate debt at December 31, 2001 is approximately $181,813,000 based on the terms of existing debt compared to those available in the marketplace. At December 31, 2000, the fixed rate debt of $188,892,000 had an approximate market value of $189,452,000. The carrying value of variable rate debt approximates fair value, as the interest rates and other terms are comparable to current market terms. Note 13 - Earnings per Share - ----------------------------- Following is a reconciliation of earnings per share: (in thousands, except share and per share amounts) Year Ended December 31, ----------------------- 2001 2000 1999 ---- ---- ---- Basic: - ------ Income before extraordinary item $ 36,723 $ 68,087 $ 40,153 Extraordinary item - loss on early extinguishment of debt - - (298) ----------------------------------------- Net income $ 36,723 $ 68,087 $ 39,855 ----------------------------------------- ----------------------------------------- Weighted average number of shares - basic 16,747,498 18,236,512 21,267,088 ----------------------------------------- ----------------------------------------- Earnings per share: Income before extraordinary item $ 2.19 $ 3.73 $ 1.88 Extraordinary item - loss on early extinguishment of debt - - (0.01) ----------------------------------------- Earnings per share $ 2.19 $ 3.73 $ 1.87 ----------------------------------------- ----------------------------------------- Diluted: Income before extraordinary item $ 36,723 $ 68,087 $ 40,153 Add: Minority interest 142 136 128 Extraordinary item - loss on early extinguishment of debt - - (298) ----------------------------------------- Net income for diluted earnings per share $ 36,865 $ 68,223 $ 39,983 ----------------------------------------- ----------------------------------------- Weighted average number of shares 16,747,498 18,236,512 21,267,088 Weighted average shares of dilutive stock options using average period stock price under the treasury stock method 75,229 52,958 62,196 Weighted average shares issuable upon the conversion of operating partnership units 77,423 77,992 82,402 Weighted average shares of non-vested restricted stock using average period stock price under the treasury stock method 145,343 134,443 65,327 ----------------------------------------- Weighted average number of shares - diluted 17,045,493 18,501,905 21,477,013 ----------------------------------------- ----------------------------------------- Earnings per share: Income before extraordinary item $ 2.16 $ 3.69 $ 1.87 Extraordinary item - loss on early extinguishment of debt - - (0.01) ----------------------------------------- Earnings per share $ 2.16 $ 3.69 $ 1.86 ----------------------------------------- ----------------------------------------- Since their effect would have been antidilutive, 280,000 and 817,000 of the Company's stock options have been excluded from diluted earnings per share for the years ended December 31, 2000 and 1999, respectively. Note 14 - Quarterly Financial Data-Unaudited - --------------------------------------------- The following is a summary of quarterly results of operations for 2001 and 2000 (in thousands, except per share amounts): 2001 Quarters Ended 3/31 6/30 9/30 12/31 - ------------------------------------------------------------------------------------------------ Rental income $24,390 $25,033 $25,211 $25,315 Income from property operations 14,498 14,557 14,852 14,528 Income before gain on sales of real estate investments and minority interest 7,634 7,814 8,132 7,347 Net income 7,599 7,779 8,094 13,251 Earnings per share - basic $ 0.44 $ 0.46 $ 0.49 $ 0.82 Earnings per share - diluted $ 0.43 $ 0.45 $ 0.48 $ 0.80 - ------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------ 2000 Quarters Ended 3/31 6/30 9/30 12/31 - ------------------------------------------------------------------------------------------------ Rental income $24,392 $24,957 $24,662 $23,507 Income from property operations 14,941 14,708 14,942 13,380 Income before gain on sales of real estate investments and minority interest 8,030 7,550 7,689 6,781 Net income 23,231 7,511 27,854 9,490 Earnings per share - basic $ 1.20 $ 0.41 $ 1.54 $ 0.55 Earnings per share - diluted $ 1.19 $ 0.41 $ 1.52 $ 0.54 - ------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------ Note 15 - Commitments and Contingencies - ---------------------------------------- As of December 31, 2001, the Company has contractual construction commitments relating to its properties under development of approximately $17 million of which $15 million has been paid. The Company had outstanding undrawn letters of credit against its Credit Facility of approximately $2.1 million at December 31, 2001. From time to time, the Company is subject to legal claims in the ordinary course of business. The 2001 consolidated financial statements include an accrual of $400,000 for one such matter. The Company is not aware of any other legal proceedings or claims that it believes will have, individually or in the aggregate, a material adverse effect on its business, prospects, financial condition, operating results or cash flows. BEDFORD PROPERTY INVESTORS, INC. AND SUBSIDIARIES SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION December 31, 2001 (in thousands of dollars) Initial Cost to Cost Company Capital- Build- ized Subse- Accum- Depre- ings & quent to Gross Amount ulated Date Date ciable Improve- Acqui- Carried at Close of Period Depre- Con- Ac- Life Description Land ment sition Land Building Total ciation structed quired (Years) - ----------------------------------------------------------------------------------------------------------------------- Industrial buildings: - ---------------------- Northern California Building #3 at Contra Costa Diablo Industrial Park, Concord* $ 495 $ 1,159 $ 61 $ 495 $ 1,220 $ 1,715 $ 310 1983 12/90 45 Building #8 at Contra Costa Diablo Industrial Park, Concord* 877 1,548 205 877 1,753 2,630 524 1981 12/90 45 Building #18 at Mason Industrial Park, Concord* 610 1,265 141 610 1,406 2,016 352 1984 12/90 45 Milpitas Town Center, Milpitas* 1,400 4,421 149 1,400 4,570 5,970 763 1983 8/94 45 598 Gibraltar Drive, Milpitas* 535 2,522 - 535 2,522 3,057 1,088 1996 5/96 45 Auburn Court, Fremont* 1,391 2,473 395 1,415 2,844 4,259 451 1983 12/95 45 47650 Westinghouse Drive, Fremont* 267 893 60 271 949 1,220 127 1982 12/95 45 410 Allerton, South San Francisco* 1,333 889 39 1,356 905 2,261 122 1970 12/95 45 400 Grandview, South San Francisco* 3,246 3,517 1,681 3,300 5,144 8,444 576 1976 12/95 45 342 Allerton, South San Francisco* 2,516 1,542 447 2,557 1,948 4,505 282 1969 12/95 45 301 East Grand, South San Francisco* 2,036 959 200 2,070 1,125 3,195 163 1974 12/95 45 Fourier Avenue, Fremont* 2,120 7,018 - 2,120 7,018 9,138 871 1982 5/96 45 Lundy Avenue, San Jose* 2,055 2,184 268 2,055 2,452 4,507 306 1982 7/96 45 115 Mason Circle, Concord* 697 854 93 697 947 1,644 141 1971 9/96 45 47600 Westinghouse Drive, Fremont* 356 1,067 43 356 1,110 1,466 131 1982 9/96 45 860-870 Napa Valley Corporate Way, Napa* 933 3,515 729 933 4,244 5,177 593 1984 9/96 45 47633 Westinghouse Drive, Fremont* 1,051 3,239 251 1,051 3,490 4,541 401 1983 10/96 45 47513 Westinghouse Drive, Fremont* 1,624 - 4,089 1,625 4,088 5,713 947 1998 10/96 45 Bordeaux Centre, Napa* 1,151 - 6,708 1,151 6,708 7,859 1,300 1998 12/96 45 O'Toole Business Park, San Jose* 3,933 5,748 606 3,934 6,353 10,287 765 1984 12/96 45 6500 Kaiser Drive, Fremont* 1,556 6,411 28 1,556 6,439 7,995 715 1990 1/97 45 Bedford Fremont Business Center, Fremont* 3,598 9,004 255 3,598 9,259 12,857 1,067 1990 3/97 45 Spinnaker Court, Fremont* 2,548 5,989 387 2,549 6,375 8,924 664 1986 5/97 45 2277 Pine View Way, Petaluma* 1,861 7,074 4 1,862 7,077 8,939 721 1989 6/97 45 Mondavi Building, Napa* 1,315 5,214 - 1,315 5,214 6,529 492 1985 9/97 45 Parkpoint Business Center, Santa Rosa* 1,975 4,474 572 1,976 5,045 7,021 469 1981 2/98 45 2180 S. McDowell Blvd., Petaluma* 773 3,006 141 774 3,146 3,920 267 1990 7/98 45 2190 S. McDowell Blvd., Petaluma* 587 2,283 - 587 2,283 2,870 178 1996 7/98 45 Carneros Commons Phase II, Napa 461 - 3,175 461 3,175 3,636 31 2001 12/96 45 Arizona Westech Business Center, Phoenix* 3,531 4,422 714 3,531 5,136 8,667 906 1985 4/96 45 Westech II, Phoenix* 1,033 - 3,954 1,033 3,954 4,987 1,087 1998 7/96 45 2601 W. Broadway, Tempe* 1,127 2,348 102 1,127 2,450 3,577 239 1977 7/97 45 Building #2 at Phoenix Airport Center, Phoenix* 723 3,278 30 723 3,308 4,031 323 1990 7/97 45 Building #3 at Phoenix Airport Center, Phoenix* 682 3,163 25 682 3,188 3,870 311 1990 7/97 45 Building #4 at Phoenix Airport Center, Phoenix* 517 1,732 18 517 1,750 2,267 170 1990 7/97 45 Building #5 at Phoenix Airport Center, Phoenix* 1,507 3,860 33 1,507 3,893 5,400 379 1990 7/97 45 Butterfield Business Center, Tucson* 909 4,230 128 909 4,358 5,267 404 1986 11/97 45 Butterfield Tech Center II, Tucson* 102 - 1,811 102 1,811 1,913 337 1999 11/97 45 Greystone Business Park, Tempe* 1,232 - 4,578 1,232 4,578 5,810 523 1999 12/97 45 Cimarron Business Park, Scottsdale* 1,776 4,471 272 1,778 4,741 6,519 427 1979-85 3/98 45 Rio Salado Corporate Center, Tempe 1,723 2,882 1,709 1,723 4,591 6,314 147 1982-84 7/98 45 Phoenix Tech Center, Phoenix* 1,322 945 883 1,323 1,827 3,150 244 1985 8/98 45 The Adams Brothers Building, Phoenix* 1,572 1,613 49 1,572 1,662 3,234 95 1988-95 6/99 45 Bedford Realty Partners, L.P., Phoenix* 992 6,241 106 992 6,347 7,339 294 1986 12/99 45 Southern California Dupont Industrial Center, Ontario* 3,588 6,162 275 3,588 6,437 10,025 1,202 1989 5/94 45 3002 Dow Business Center, Tustin* 4,209 7,291 1,375 4,305 8,570 12,875 1,589 1987-89 12/95 45 Carroll Tech I, San Diego* 511 1,372 187 511 1,559 2,070 234 1984 10/96 45 Vista I, Vista 646 2,135 64 646 2,199 2,845 250 1990 10/96 45 Vista II, Vista 566 1,832 - 566 1,832 2,398 210 1990 10/96 45 Signal Systems Building, San Diego* 2,228 7,264 - 2,228 7,264 9,492 807 1990 12/96 45 Carroll Tech II, San Diego* 1,022 2,129 - 1,022 2,129 3,151 248 1984 10/96 45 2230 Oak Ridge Way, Vista* 684 2,191 - 684 2,191 2,875 216 1997 10/97 45 6960 Flanders Drive, San Diego* 864 2,591 (2) 865 2,588 3,453 202 1989 6/98 45 Canyon Vista Center, San Diego* 1,664 4,645 227 1,664 4,872 6,536 306 1986 4/99 45 6325 Lusk Blvd., San Diego* 2,229 3,484 9 2,229 3,493 5,722 194 1991 7/99 45 Jurupa Business Center Phase I, Ontario 889 - 2,384 889 2,384 3,273 - 2001 12/00 45 Greater Seattle Area Highlands Campus Building B, Bothell* 1,762 - 5,858 1,762 5,858 7,620 912 1999 6/98 45 Highlands Campus Building C, Bothell* 1,646 - 4,943 1,646 4,943 6,589 417 2000 6/98 45 Office buildings: - ------------------ Northern California Village Green, Lafayette* 547 1,245 646 743 1,695 2,438 317 1983 7/94 45 Carneros Commons Phase I, Napa 500 - 3,006 500 3,006 3,506 52 2000 12/96 45 Canyon Park, San Ramon* 1,933 3,098 3,670 1,933 6,768 8,701 567 1971-72 12/97 45 Crow Canyon Centre, San Ramon* 778 - 5,257 778 5,257 6,035 543 1999 12/97 45 3380 Cypress Drive, Petaluma- 1,709 3,760 1 1,710 3,760 5,470 292 1989 7/98 45 Arizona Executive Center at Southbank, Phoenix* 4,943 7,134 186 4,943 7,320 12,263 795 1989 3/97 45 Building #1 at Phoenix Airport Center, Phoenix* 944 1,541 132 944 1,673 2,617 157 1990 7/97 45 Phoenix Airport Center Parking, Phoenix* 1,369 81 - 1,369 81 1,450 8 1990 7/97 45 Cabrillo Executive Center, Phoenix* 480 5,614 515 481 6,128 6,609 547 1983 2/98 45 Mountain Pointe Office Park, Phoenix* 837 - 4,945 837 4,945 5,782 332 1999 2/98 45 1355 S. Clearview Avenue, Mesa* 2,049 5,450 3 2,049 5,453 7,502 313 1998 6/99 45 Southern California Laguna Hills Square, Laguna* 2,436 3,655 1,138 2,436 4,793 7,229 748 1983 3/96 45 Building #3 at Carroll Tech Center, San Diego* 716 1,400 59 716 1,459 2,175 172 1984 10/96 45 Scripps Wateridge, San Diego* 4,160 12,472 11 4,160 12,483 16,643 1,248 1990 6/97 45 Building #4 at Carroll Tech Center, San Diego* 2,050 3,224 76 2,050 3,300 5,350 201 1986 3/99 45 Colorado Oracle Building, Denver* 1,860 13,249 106 1,860 13,355 15,215 1,248 1996 10/97 45 Texaco Building, Denver* 3,699 31,631 1,647 3,700 33,277 36,977 2,577 1981 5/98 45 WaterPark @ Briarwood Building 1, Englewood 286 - 2,700 286 2,700 2,986 229 2000 4/99 45 Belleview Corporate Plaza II Office, Denver 2,560 - 9,139 2560 9,139 11,699 36 2001 10/98 45 WaterPark @ Briarwood Building 2, Englewood 716 - 5,811 716 5,811 6,527 314 2000 4/99 45 WaterPark @ Briarwood Building 3, Englewood 716 - 5,265 716 5,265 5,981 6 2001 4/99 45 WaterPark @ Briarwood Building 4, Englewood 285 - 3,093 285 3,093 3,378 186 2001 4/99 45 Bedford Center at Rampart, Englewood* 3,811 18,031 (359) 3,811 17,672 21,483 434 1998 11/00 45 Greater Seattle Area Orillia Office Park, Renton* 10,021 22,975 - 10,021 22,975 32,996 2,298 1986 7/97 45 Adobe Systems Bldg. 1, Seattle* - 22,403 3,923 - 26,326 26,326 2,047 1998 3/98 45 Adobe Systems Bldg. 2, Seattle* - 18,931 3,353 - 22,284 22,284 1,761 1998 3/98 45 Highlands Campus, Building A, Bothell* 2,066 - 7,783 2,066 7,783 9,849 1,182 1999 6/98 45 The Federal Way Building, Federal Way* 2,208 7,009 29 2,208 7,038 9,246 401 1999 6/99 45 Federal Way II, Federal Way* 2,500 14,307 140 2,515 14,432 16,947 718 1999 9/99 45 Nevada U.S. Bank Centre, Reno* 2,102 10,264 588 2,102 10,852 12,954 1,202 1989 5/97 45 Operating properties held - -------------------------- for sale: - ---------- Building #1 at Monterey Commerce Center, Monterey-* 616 5,302 242 616 5,544 6,160 454 1990 12/97 45 Building #2 at Monterey Commerce Center, Monterey* 611 1,833 1 611 1,834 2,445 132 1990 12/97 45 Building #3 at Monterey Commerce Center, Monterey* 604 1,812 136 604 1,948 2,552 147 1990 12/97 45 Land held for development: - -------------------------- Scripps Land, San Diego, CA 622 - 88 710 - 710 - N/A 6/97 45 Mondavi Land, Napa Lot 12G, Northern CA 1,150 - 22 1,172 - 1,172 - N/A 3/98 45 West Tempe Lots 30 and 31, Tempe, AZ 551 - 94 645 - 645 - N/A 7/98 45 210 Lafayette Circle, Northern CA 511 - 8 519 - 519 - N/A 11/98 45 Belleview Corporate Plaza III, IV, Denver, CO 2,094 - 17 2,111 - 2,111 - N/A 10/99 45 Belleview Corporate Plaza, V, Denver, CO 1,561 - 267 1,828 - 1,828 - N/A 10/98 45 Napa Lots 9B & 8D, Napa, CA 2,161 - 32 2,193 - 2,193 - N/A 11/00 45 Jurupa Business Center Phase II, Ontario, CA 889 - 72 961 - 961 - N/A 12/00 45 Jurupa Business Center Phase III, Ontario, CA 558 - 5 563 - 563 - N/A 12/00 45 Jurupa Business Center Phase IV, Ontario, CA 928 - 6 934 - 934 - N/A 12/00 45 Napa Lot 10C, Napa, CA 1,833 - - 1,833 - 1,833 - N/A 10/01 45 ----------------------------------------------------------------- $157,526 $384,970 $114,312 $158,637 $498,171 $656,808 $49,154 ----------------------------------------------------------------- ----------------------------------------------------------------- (A) (A) * Property is encumbered, see footnotes 7 and 8 to the consolidated financial statements. See accompanying independent auditors' report. NOTES TO SCHEDULE III (in thousands of dollars) (A) An analysis of the activity in real estate investments for the years ended December 31, 2001, 2000, and 1999 is presented below in accordance with accounting principles generally accepted in the United States of America: Investment Accumulated Depreciation ---------------------------- ------------------------ 2001 2000 1999 2001 2000 1999 ---- ---- ---- ---- ---- ---- BALANCE AT BEGINNING OF YEAR $647,388 $679,733 $599,981 $35,944 $28,695 $18,523 Add (deduct): Acquisition of Carroll Tech IV - - 5,330 - - - Acquisition of Canyon Vista Center - - 6,389 - - - Acquisition of WaterPark at Briarwood - - 1,620 - - - Acquisition of 1355 S. Clearview Avenue - - 7,502 - - - Acquisition of The Adams Brothers Building - - 3,234 - - - Acquisition of The Federal Way Building - - 9,217 - - - Acquisition of 6325 Lusk Blvd. - - 5,723 - - - Acquisition of Panorama III - - 2,658 - - - Acquisition of Federal Way II - - 16,807 - - - Acquisition of Belleview Corporate Plaza - - 6,837 - - - Sale of 417 Eccles (B) - - (1,200) - - (37) Sale of Woodlands Tower II (C) - - (6,963) - - (1,031) Sale of Oak Ridge Land (C) - - (378) - - - Sale of Doherty Avenue (D) - - (3,909) - - (152) Sale of Continental Can (E) - - (5,016) - - (124) Acquisition of Bedford Center at Rampart - 21,122 - - - - Acquisition of Napa Land Lots 9B & 8D - 2,161 - - - - Acquisition of Jurupa Land - 3,266 - - - - Sale of 350 E. Plumeria (F) - (8,570) - - (373) - Sale of Twin Oaks Technology Center (F) - (6,904) - - (620) - Sale of Twin Oaks Business Center (F) - (4,617) - - (380) - Sale of 5502 Oberlin Drive (G) - (2,188) - - (28) - Sale of 100 View Street (H) - (4,636) - - (365) - Sale of Kenyon Center (I) - (15,075) - - (677) - Sale of 99th Street #1 (I) - (2,276) - - (159) - Sale of 99th Street #2 (I) - (828) - - (54) - Sale of 99th Street #3 (I) - (2,718) - - (505) - Sale of 99th Street #4 (I) - (3,723) - - (391) - Sale of Lackman Business Center (I) - (2,517) - - (245) - Sale of Panorama (I) - (4,125) - - (289) - Sale of Panorama III (I) - (2,649) - - (22) - Sale of Overland Park Land (I) - (1) - - - - Sale of 6600 College Blvd. (I) - (6,619) - - (382) - Sale of Austin Braker 2 (I) - (2,285) - - (59) - Sale of Austin Rutland (I) - (3,280) - - (94) - Sale of Austin SouthPark(I) - (5,815) - - (160) - Sale of Didde Building (J) - (2,226) - - (58) - Sale of Great Hills Trail (J) - (9,859) - - (394) - Sale of Ferrell Drive (J) - (2,791) - - (73) - Sale of Ferrell Drive Land (J) - (188) - - - - Acquisition of Napa Lot 10C 1,833 - - - - - Sale of Bryant Street Quad (K) (3,752) - - (269) - - Sale of Bryant Street Annex (K) (1,480) - - (130) - - Sale of Expressway Corporate Center (K) (4,867) - - (306) - - Sale of Troika Building (L) (4,017) - - (262) - - Capitalized costs 21,703 34,996 31,901 - - - Depreciation - - - 14,177 12,577 11,516 ------------------------------ --------------------------- BALANCE AT END OF YEAR $656,808 $647,388 $679,733 $49,154 $35,944 $28,695 ------------------------------ --------------------------- ------------------------------ --------------------------- AGGREGATE COST FOR FEDERAL INCOME TAX PURPOSES $479,505 $467,618 $509,328 ------------------------------ ------------------------------ (B) The property was sold in March 1999. (H) The property was sold in August 2000. (C) The properties were sold in June 1999. (I) The properties were sold in September 2000. (D) The property was sold in August 1999. (J) The properties were sold in October 2000. (E) The property was sold in December 1999. (K) The properties were sold in October 2001. (F) The properties were sold in March 2000. (L) The property was sold in November 2001. (G) The property was sold in June 2000. 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. BEDFORD PROPERTY INVESTORS, INC. By: /s/ Peter B. Bedford -------------------------- Peter B. Bedford Chairman of the Board and Chief Executive Officer Dated: March 27, 2002 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 capacity and on the date indicated. /s/ Peter B. Bedford March 27, 2002 - --------------------------------------- Peter B. Bedford, Chairman of the Board and Chief Executive Officer /s/ Anthony Downs March 27, 2002 - --------------------------------------- Anthony Downs, Director /s/ Anthony M. Frank March 27, 2002 - --------------------------------------- Anthony M. Frank, Director /s/ Martin I. Zankel March 27, 2002 - --------------------------------------- Martin I. Zankel, Director /s/ Thomas H. Nolan, Jr. March 27, 2002 - --------------------------------------- Thomas H. Nolan, Jr., Director /s/ Hanh Kihara March 27, 2002 - --------------------------------------- Hanh Kihara Senior Vice President and Chief Financial Officer /s/ Krista K. Rowland March 27, 2002 - --------------------------------------- Krista K. Rowland, Vice President and Controller Exhibit 12 Bedford Property Investors, Inc. and Subsidiaries Computation of Ratio of Earnings to Fixed Charges and Preferred Dividends and Limited Partner Distributions (in thousands, except ratios) Year Ended December 31, ----------------------- 2001 2000 1999 1998 1997 ---- ---- ---- ---- ---- Net income $36,723 $68,087 $39,855 $31,496 $31,291 Fixed charges - interest and amortization of loan fees 23,121 24,826 18,970 11,164 7,918 Fixed charges - interest capitalized 1,303 1,964 2,148 2,177 627 ------ ------ ------ ------ ------ Net income including fixed charges 61,147 94,877 60,973 44,837 39,836 Preferred dividends and limited partner distributions 142 136 128 117 3,608 ------ ------ ------ ------ ------ Net income including fixed charges, preferred dividends and limited partner distributions $61,289 $95,013 $61,101 $44,954 $43,444 ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ Ratio of earnings to fixed charges, including preferred dividends and limited partner distributions 2.49 3.53 2.88 3.34 3.57 ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ Ratio of earnings to fixed charges, excluding preferred dividends and limited partner distributions 2.51 3.54 2.89 3.36 4.66 ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ Exhibit 23.1 CONSENT OF KPMG LLP, INDEPENDENT AUDITORS The Board of Directors Bedford Property Investors, Inc.: We consent to incorporation by reference in the registration statements on Form S-3 (No.'s 333-23687, 333-33643 and 333-33795) and the registration statements on Form S-8 (No.'s 033-52375, 333-18215, 333-70681 and 333-74707) of Bedford Property Investors, Inc. of our report dated February 11, 2002, relating to the consolidated balance sheets of Bedford Property Investors, Inc. and subsidiaries as of December 31, 2001 and 2000, and the related consolidated statements of income, stockholders' equity and cash flows for each of the years in the three-year period ended December 31, 2001, and the related consolidated financial statement schedule as of December 31, 2001, which report appears in the December 31, 2001 annual report on Form 10-K of Bedford Property Investors, Inc. KPMG LLP San Francisco, California March 27, 2002