ITEM 1. BUSINESS - -----------------
INTRODUCTION
Santa Anita Realty Enterprises, Inc. ("Realty") and Santa Anita Operating Company ("Operating Company") are two separate companies, the stocks of which trade as a single unit under a stock-pairing arrangement on the New York Stock Exchange. Realty and Operating Company were each incorporated in 1979 and are the successors of a corporation originally organized in 1934 to conduct thoroughbred horse racing in Southern California. As used herein, the terms "Realty" and "Operating Company" include wholly owned subsidiaries of Realty and Operating Company, respectively, unless the context requires otherwise. This document constitutes the annual report on Form 10-K for both Realty and Operating Company.
REALTY
Realty is incorporated under the laws of the State of Delaware. Realty's principal executive offices are located at 363 San Miguel Drive, Suite 100, Newport Beach, California 92660-7805.
Realty operates as a real estate investment trust ("REIT") under the provisions of the Internal Revenue Code of 1986 (the "Code"). As such, Realty is principally engaged in investing in and holding real property, including Santa Anita Racetrack, 622,000 square feet of industrial space, the real estate underlying the Santa Anita Fashion Park shopping center ("Fashion Park"), a 50 percent interest in the operation of Fashion Park and a 32.5 percent interest in Towson Town Center (major regional shopping centers), and a number of neighborhood shopping centers and office buildings. Until February 18, 1994, Realty also owned 2,654 apartment units and an additional 185,000 square feet of industrial space. Realty is a self-administered equity REIT.
PACIFIC GULF PROPERTIES INC.
In June 1993, Realty's Board of Directors approved management's recommendation to recapitalize certain assets of Realty. Pursuant to this recapitalization, in November 1993, Realty entered into a Purchase and Sale Agreement to sell its multifamily and industrial operations to Pacific Gulf Properties Inc. ("Pacific"), in conjunction with Pacific's proposed public offering of common stock. The transaction was structured into two parts: (1) Realty would sell all of its apartments and industrial properties to Pacific with the exception of Realty's interest in the Baldwin Industrial Park joint venture; and (2) Pacific would enter into a binding agreement to buy Realty's interest in Baldwin Industrial Park.
On February 18, 1994, Realty completed the first part of this transaction by selling to Pacific ten multifamily properties, containing 2,654 apartment units, located in Southern California, the Pacific Northwest, and Texas and three industrial properties, containing an aggregate of 185,000 leasable square feet of industrial space, located in the State of Washington (the "Transferred Properties"). Realty's corporate headquarters building and related assets were also acquired by Pacific. The sale of the Transferred Properties followed the public offerings of common stock and convertible subordinated debentures by Pacific.
Pursuant to the Purchase and Sale Agreement, Pacific agreed to buy Realty's interest in Baldwin Industrial Park subject to satisfaction of certain conditions, for a minimum price of $8.9 million payable in additional shares of Pacific common stock, with the final price dependent upon completion of negotiations with other owners of Baldwin Industrial Park and an appraisal process. Management believes the sale of Realty's interest in Baldwin Industrial Park will be completed in the second half of 1994. Pacific is required to issue to Realty non-refundable letters of credit totaling up to $2.5 million by March 31, 1994 to secure its obligation to
ITEM 1. BUSINESS (CONTINUED) - ----------------
acquire Realty's interest in Baldwin Industrial Park and pay for the corporate headquarters building and other assets related to the Transferred Properties.
In consideration of the sale of the Transferred Properties, Realty received approximately $44.4 million in cash and 149,900 shares of the common stock of Pacific. In addition, Realty was relieved of approximately $44.3 million of mortgage debt on the Transferred Properties. Realty will also receive, at the time the acquisition of Baldwin Industrial Park is completed, up to $1.2 million in additional common stock of Pacific as consideration for its corporate headquarters and other net assets related to the Transferred Properties.
The two parts of the above transaction will result in a loss of $10,974,000. This loss has been reflected in the Realty and Realty and Operating Company combined statements of operations for the year ended December 31, 1993. If the Baldwin Industrial Park portion of the transaction described above does not occur, an additional loss of approximately $5,900,000 will be recognized by Realty in 1994. (See "Notes to Financial Statements - Note 2 - Disposition of Multifamily and Industrial Properties Subsequent to Year End.")
In connection with the sale, the executive officers, various managers and most other employees of Realty resigned and became officers and employees of Pacific on February 18, 1994.
Realty and Pacific have also entered into a one-year management agreement whereby Pacific has agreed to provide management services to Realty. Finally, with respect to the common stock of Pacific owned by Realty, Pacific has entered into a registration rights agreement with Realty which, under certain circumstances, allows Realty to require the registration of the Pacific stock it owns.
As a result of the February 18, 1994 sale to Pacific, Realty owns approximately 3.6% of Pacific's outstanding common shares. Upon completion of Pacific's acquisition of Baldwin Industrial Park assuming a price per share equal to $18.25 (the public offering price of Pacific's common shares) and the minimum price for Realty's interest in Baldwin Industrial Park and the corporate headquarters building and certain other assets related to the Transferred Properties, Realty will own approximately 14.9% of Pacific's outstanding common shares. The February 18, 1994 sale also accomplished the following objectives: (1) the transaction de-leveraged Realty by paying down its lines of credit by $44.4 million and transferring certain debt in the amount of $44.3 million related to the apartment and industrial properties to Pacific; (2) Realty's existing shareholders' interest in Santa Anita Racetrack and Fashion Park was not diluted; and (3) Realty shareholders will participate in the potential growth of Pacific through Realty's ownership position.
Item 1. Business (continued) - ----------------
SUMMARY FINANCIAL INFORMATION
The following table sets forth certain unaudited financial information with respect to Realty:
- ------------------------- (a) See Item 1. "Business - Realty - Pacific Gulf Properties." (b) Calculated in accordance with the definition of funds from operations as defined by the National Association of Real Estate Investment Trusts ("NAREIT"), except 1993 which excludes $5,734,000 received from the California Franchise Tax Board related to the settlement of certain state tax issues. Net income (computed in accordance with generally accepted accounting principles), excluding gains (losses) from debt restructuring and sales of property, plus depreciation and amortization, and after adjustments for unconsolidated partnerships and joint ventures. Adjustments for unconsolidated joint ventures were calculated by adding distributions from unconsolidated joint ventures net of equity in the earnings (losses) of the venture and excluding distributions associated with the sale of property by the venture. (c) Pro forma funds from operations for the year ended December 31, 1993, after giving effect to the Pacific transaction, was $16,151,000.
ITEM 1. BUSINESS (CONTINUED) - ----------------
REAL ESTATE INVESTMENTS AND POLICIES
Realty's portfolio of real estate investments is outlined below. Information with respect to the real estate investments subject to the Pacific transaction are separately listed:
SUMMARY OF REAL ESTATE INVESTMENTS AS OF DECEMBER 31, 1993
- ------------------------------------- (a) Square feet except as indicated. (b) Net book value (total cost of project less accumulated depreciation) at December 31, 1993. Amounts represent 100% of project net book value. (c) Amounts represent 100% of project encumbrances. (d) Subsequent to December 31, 1993, the loan was refinanced (see Item 1. "Business - Realty - Regional Malls - Santa Anita Fashion Park"). (e) A major shopping center which was expanded into a 980,000 square foot regional mall. Expanded mall area opened in October 1991. Additional anchor tenant opened in fall of 1992. (f) Realty is entitled to receive a preferred return on its equity investment. (g) A retail building adjacent to the Towson Town Center project that is expected to become part of the regional mall described in (e) above. (h) Pacific has an option to acquire this property (see Item 1. "Business - Realty - Land"). (i) Corporate offices of Realty and Pacific. (j) Pacific has agreed to acquire this property during 1994 (see Item 1. "Business - Realty - Pacific Gulf Properties").
ITEM 1. BUSINESS (CONTINUED) - -----------------
The following table presents information with respect to Realty's wholly owned and consolidated joint venture projects, other than Santa Anita Racetrack, by type as of December 31, 1993. Information with respect to the projects subject to the Pacific transaction is separately listed. Information on the consolidated joint venture projects represents 100% of the projects' leasable area and net operating income.
- ---------------------- (a) Rental property revenues less rental property operating expenses for all wholly owned properties and consolidated joint venture properties. (b) Does not include square footage in Towson Town Center (980,000 square feet) or Joppa Associates (240,000 square feet), or land underlying Fashion Park of 73 acres. (c) Net operating income includes only actual number of months of activity for each project. (d) Includes - property Pacific has agreed to acquire during 1994 (see Item 1. "Business - Realty - Pacific Gulf Properties").
The disposition of the multifamily and industrial operations to Pacific is consistent with Realty's plan to focus its efforts on the Santa Anita Racetrack and related property in Arcadia. Realty's current investment policy is to focus its efforts on the Santa Anita Racetrack and related property in Arcadia. Realty's investment policies are subject to ongoing review by its Board of Directors and may be changed in the future depending on various factors, including the general climate for real estate investments.
SANTA ANITA RACETRACK
Santa Anita Racetrack, which is leased by Realty to the Los Angeles Turf Club, Incorporated ("LATC"), a subsidiary of Operating Company, is located on approximately 312 acres, 14 miles northeast of downtown Los Angeles, adjacent to major transportation routes. LATC conducts one of the largest thoroughbred horse racing meets in the United States in terms of both average daily attendance and average daily pari-mutuel wagering.
The Santa Anita Racetrack was opened for thoroughbred horse racing in 1934 by a group of investors led by Dr. Charles H. Strub. The Santa Anita Meet has been held at Santa Anita Racetrack each year since its founding except for three years during World War II. Over the years, the racetrack facilities have been expanded. At present, the physical plant consists of a large grandstand structure, stalls for approximately 2,000 horses, and a parking area covering approximately 128 acres which can accommodate approximately 20,000 automobiles. The grandstand facilities include clubhouse and Turf Club accommodations, a general admission
Item 1. Business (continued) - ----------------
area, and food and beverage facilities, which range from fast food stands to restaurants, both at outdoor terrace tables and indoor dining areas. The grandstand has seating capacity for 25,000 as well as standing room for additional patrons. The structure also contains Operating Company's executive and administrative offices. The grounds surrounding the grandstand are extensively landscaped and contain a European-style paddock and infield accommodations, including picnic facilities for special groups and the general public.
The lease rental payable to Realty by LATC is 1.5% of total live on-track wagering at Santa Anita Racetrack, including live on-track wagering during the meet conducted by the Oak Tree Racing Association ("Oak Tree"). In addition, Realty receives 40% of LATC's revenues from satellite wagering (not to exceed 1.5% of such wagering) and the simulcasting of races originating from Santa Anita Racetrack after mandated payments to the State, to horse owners and to breeders. Accordingly, the rental income which Realty receives from Santa Anita Racetrack is directly affected by and dependent upon the racing activities and the wagering by patrons (see Item 1. "Business -- Operating Company -- Santa Anita Racetrack").
Based upon the rental formula for the year ended December 31, 1993, Realty received approximately $11.6 million in rental income from horse racing. The lease expires in December 1994 at which time it is expected to be renewed on terms to be renegotiated by Realty and LATC which, in light of Operating Company's declining profitability, may result in reduced revenue to Realty (see Item 1. "Business -- Operating Company" and Item 6. "Selected Financial Data - - - Operating Company").
The following table shows rental earned by Realty under the LATC lease for the last five years:
- ------------------------- (a) Oak Tree races five weeks in even-numbered years and six weeks in odd- numbered years.
For a further description of the Santa Anita Meet and the Oak Tree Meet, see Item 1. "Business -- Operating Company -- Santa Anita Racetrack."
REGIONAL MALLS
SANTA ANITA FASHION PARK
Santa Anita Fashion Park is a completely enclosed, climate-controlled regional mall located adjacent to Santa Anita Racetrack with approximately 900,000 square feet of leasable area. Fashion Park is owned and operated by a partnership, Anita Associates, of which Realty is a 50% limited partner. The general partner of Anita Associates is Hahn-UPI, which in turn is a limited partnership of which The Hahn Company, a developer of shopping centers, is the general partner.
Fashion Park is currently undergoing an expansion which is anticipated to be completed in the fall of 1994. In addition to the existing major tenants, Robinsons/May, J.C. Penney and Broadway, a new 146,000 square foot Nordstrom store is being added. During 1993, the Robinsons/May store was expanded by
Item 1. Business (continued) - ----------------
approximately 40,000 square feet. In 1994, an additional 45,000 square feet of mall stores will be completed with the Nordstrom expansion. During 1993, a food court of approximately 13,000 square feet was completed and opened.
In January 1994, the partnership refinanced its existing debt by entering into a loan agreement with an insurance company whereby a maximum of $62,355,000 may be borrowed, bearing interest at 9%, with repayment over ten years. On January 25, 1994, $46,577,193 of the total loan amount was drawn.
There are currently 116 tenants operating mall stores with original lease terms varying up to 10 years. New leases are generally seven to ten years with clauses providing for escalation of the basic rent every three years. Typically, leases with mall tenants are structured to provide Anita Associates with overage rents upon attainment by the tenant of certain sales levels, which are specified under the individual leases of the various stores. Overage rents represent a fixed percentage of the gross sales of a tenant less its base rent.
Realty has leased the land underlying Fashion Park to Anita Associates and to the major tenants of Fashion Park until 2037, with two additional ten-year option periods and one additional five-year option period. The ground rent is $527,000 annually until 1996 when the annual rent will increase to $794,000 through 2007. During the remaining 30-year term and the three additional option periods, the annual ground rent may be increased up to 25% based upon the appraised value of the land. Under the provisions of the ground leases, Anita Associates is responsible for real estate taxes and other operating expenses. Robinsons/May, J. C. Penney and The Broadway pay their own real estate taxes.
The following table contains certain information pertaining to the mall stores in Fashion Park (excluding major tenants):
- ------------------- (a) Decline due primarily to certain leases not being renewed in anticipation of the expansion discussed above.
The land underlying Fashion Park is security for a loan maturing in 2009 with a balance at December 31, 1993 of $4,100,000. Payments on this indebtedness, which is without recourse to Realty, are approximately $473,000 annually. The security to the lender also includes an assignment of the ground rents received by Realty and a collateral assignment of the ground leases.
TOWSON TOWN CENTER
Towson Town Center located in Towson, Maryland, is a 563,000 square foot (excluding major tenants) regional mall which opened in 1991. Realty is a 50% partner with The Hahn Company in H-T Associates, a joint venture which owns a 65% interest in a partnership which owns the Towson Town Center. Realty has invested a total of $7.5 million in H-T Associates. The major tenants at Towson Town Center are Nordstrom and Hecht's department stores.
There are 183 other tenants operating mall stores with original lease terms varying up to 15 years. The average annual rental rate per square foot including overage rents was $28.23 per square foot for the operating mall stores. The mall tenant leases generally provide for escalation of the basic rent every three years and are structured to provide Towson Town Center with overage rents upon attainment by the tenant of certain sales levels, which are specified under the individual leases of the various stores. Overage rents represent a fixed percentage of the gross sales of a tenant less its base rent.
ITEM 1. BUSINESS (CONTINUED) - -----------------
Realty is a joint and several guarantor of loans used to expand the Towson Town Center and a department store and land adjacent to the Towson Town Center in the amount of $82,630,000. In 1993 the guarantee amount was reduced by $93,337,000. Annually, the guarantors may request a reduction in the amount of the guaranty based on the economic performance of the regional mall (see "Notes to Financial Statements -- Note 3 -- Investments in Joint Ventures").
SHOPPING CENTERS
Realty owns a portfolio of six neighborhood shopping centers. The shopping centers typically consist of a major supermarket, retail store or drugstore as a major tenant and often include a variety or general merchandise store and smaller service store tenants. The major tenant in two centers owns its building and the underlying land, while in the four other centers, the land or improvements are leased to the major tenant. Leases on the properties range from two to ten years in duration, but typically are from three to five years. They are generally triple net leases (tenant pays all operating costs, insurance and property taxes) and provide for future rental increases. At December 31, 1993, the average occupancy of the three shopping centers located in California was 88% and the average occupancy of the three shopping centers located in Arizona was 90%.
OFFICE BUILDINGS
Realty owns interests in four office buildings located in Arcadia, Santa Ana, Upland and Newport Beach, California. The office buildings in Santa Ana and Upland are for general office use, the building in Arcadia is a medical office building and the building in Newport Beach was occupied by Realty in March 1993 and was sold to Pacific on February 18, 1994. Office leases are typically for a period of five to ten years and are offered on a full-service gross basis. In addition, tenants are given a tenant improvement allowance and rental concessions in the form of additional tenant improvement allowances or free rent. At December 31, 1993, the occupancy of the office buildings, was 82%.
Effective as of December 31, 1993, Realty acquired the minority partnership interest in the office building located in Santa Ana. The partnership interest was acquired in consideration for the cancellation of certain receivables from the minority partner, payment of $250,000 and the assumption of the minority partner's capital account.
LAND
Realty is a 50% partner in French Valley Ventures, a partnership which acquired 24 acres of unimproved land located in Temecula, California. The partnership is actively seeking the necessary entitlements on the property and is reviewing the possibility of developing an industrial project on the site.
Subsequent to year-end, Realty granted to Pacific an option to acquire this partnership interest in the undeveloped parcel of land for $1,957,000. The option is exercisable beginning March 1, 1994 and expires December 31, 1994.
APARTMENTS
On July 1, 1993, Realty acquired a 256-unit apartment complex located in Austin, Texas, which was subsequently sold to Pacific. Realty acquired the project for $6,750,000. At December 31, 1993 the complex was 96% leased.
During 1993, prior to the sale of its apartments to Pacific, Realty acquired the minority partnership interests in Applewood Village Partners and SAREFIM, partnerships which owned 406 and 504 units, respectively, from the minority partners. The partnership interests were acquired in consideration for cash, the cancellation of certain receivables from the minority partners and the assumption of the minority partners' share of the excess of partnership liabilities over assets.
ITEM 1. BUSINESS (CONTINUED) - ----------------
INDUSTRIAL
BALDWIN INDUSTRIAL PARK
Realty is a 50% limited partner in a partnership formed to develop an industrial park on a 45-acre parcel of land in Baldwin Park, California. The land is leased from one of the partners for a period of 55 years. The industrial park is comprised of a total of approximately 622,000 square feet of office and industrial space in a complex of buildings ranging in size from 25,000 to 65,000 square feet. The park is currently 90% leased to tenants which include Gerber's Foods, Federal Express and Home Savings of America ("Home"). Home, the current lessee of a ten-acre parcel in the industrial park and of a 55,656 square foot building in the industrial park, has options to purchase both the ten-acre parcel and the building and land underlying the building under the terms of its leases. Home has exercised its options under both agreements.
Under the partnership agreement, Realty is entitled to receive 80% of the cash flow from the partnership in order to provide Realty with a cumulative return of 12% per annum on its invested capital. To the extent there is sufficient cash flow for Realty to receive its 12% cumulative return, the remaining partners are entitled to 80% of the excess cash flow to provide them with a cumulative annual return equal to that received by Realty. Additional cash flow is to be divided equally between Realty and the remaining partners.
The partnership exercised an option to buy the land underlying the Home parcel in 1991 and has the option to acquire the remaining parcels in 1994. If the partnership does not exercise any portion of its option to acquire the land, Realty then has the right to exercise that portion of the option under the same terms as the partnership. In addition to the above-mentioned partnership option, Realty has an option to purchase the partnership interests of the other partners in 1994 at the fair market value of the interests in 1994.
Subsequent to year-end, Realty agreed to sell its interest in the partnership and assigned its option to purchase the partnership interest of the other partners to Pacific. (See Item 1. "Business - Realty-Pacific Gulf Properties Inc." and "Notes to Financial Statements - Note 2 - Disposition of Multifamily and Industrial Operations Subsequent to Year End"). Pacific has exercised this option to purchase the partnership interest of the other partners.
SEATTLE INDUSTRIAL BUILDINGS
During 1993, prior to the sale of its industrial properties to Pacific, Realty acquired the minority partnership interest in SARESAM Ventures, a partnership which owned 185,000 square feet of industrial buildings located in the Seattle, Washington area. The partnership interest was acquired in consideration for the cancellation of certain receivables from the minority partners and the assumption of the minority partners' share of the excess of partnership liabilities over assets.
MANAGEMENT OF PROPERTIES
Realty manages its shopping centers (other than the regional malls) and office buildings directly. Based on a normal property management fee charged by outside managers, Realty believes it realizes an economic benefit as well as the benefits of direct control by managing the properties directly.
ITEM 1. BUSINESS (CONTINUED) - ----------------
COMPETITIVE AND OTHER CONDITIONS
The industrial buildings, regional shopping malls, shopping centers and office buildings owned by Realty encounter significant competition from similar or larger industrial buildings, regional shopping malls, shopping centers and office buildings developed and owned by other companies.
Realty's income from its real estate assets is also affected by general economic conditions. The current recession has adversely affected vacancy rates in office buildings and industrial parks generally. The current recession and other competitive conditions have also affected the rent payable by LATC (see Item 1. "Business -- Operating Company -- Competitive and Other Conditions"). Continuation of the recession could adversely impact vacancy rates, the nature of Realty's tenants, the rents Realty is able to obtain from its tenants and its financial results.
Some of Realty's properties are located in Southern California, which is an area prone to earthquakes. To date, none of Realty's projects have sustained any significant damage as a result of earthquakes. However, there can be no assurance that any potential earthquakes will not damage Realty's properties or negatively impact the financial position or results of Realty.
EMPLOYEES
At December 31, 1993, Realty employed 58 persons on a full-time basis. In connection with the sale to Pacific, the executive officers, various managers and most other employees of Realty resigned and became officers and employees of Pacific on February 18, 1994. Realty has entered into a one-year management agreement with Pacific to assure an orderly transaction, and, as of March 16, 1994, appointed a new Chief Executive Officer (see Item 4a. "Executive Officers of Realty and Operating Company"). Realty believes that relations with its employees are satisfactory.
Item 1. Business (continued)
SEASONAL VARIATIONS IN BUSINESS
Realty is subject to significant seasonal variation in revenues due primarily to the seasonality of thoroughbred horse racing. The following table presents unaudited quarterly results of operations for Realty during 1993 and 1992:
ITEM 1. BUSINESS (CONTINUED) - ----------------
Operating Company
Santa Anita Operating Company ("Operating Company") is organized under the laws of the State of Delaware. Operating Company's principal executive offices are located at Santa Anita Racetrack, 285 West Huntington Drive, Post Office Box 60014, Arcadia, California 91066-6014.
Operating Company is engaged in thoroughbred horse racing. The thoroughbred horse racing operation is conducted by a subsidiary of Operating Company, Los Angeles Turf Club, Incorporated ("LATC"), which leases Santa Anita Racetrack from Realty. The lease expires in December 1994 when its terms will be renegotiated (see Item 1. "Business -- Realty -- Santa Anita Racetrack").
SANTA ANITA RACETRACK
LATC conducts an annual 17-week thoroughbred horse racing meet which commences immediately after Christmas and continues through mid-April. LATC conducts one of the largest thoroughbred racing meets in the United States in terms of both average daily attendance and average daily pari-mutuel wagering.
LATC leases the racetrack from Realty for the full year under a master lease for a fee of 1.5% of the total live on-track wagering at Santa Anita Racetrack, which includes the Oak Tree meet. In addition, LATC pays to Realty 40% of its revenues from satellite wagering (not to exceed 1.5% of such wagering) and the simulcasting of races originating from Santa Anita Racetrack after mandated payments to the State, to horse owners and to breeders. When LATC operates as a satellite for Hollywood Park Racetrack ("Hollywood Park") and Del Mar Racetrack ("Del Mar"), LATC does not pay any additional rent to Realty. LATC has sublet the racetrack to Oak Tree to conduct its annual thoroughbred horse racing meet (31 days in 1993), which commences in late September or early October. Oak Tree races five weeks in even-numbered years and six weeks in odd- numbered years.
Under a sublease which expires in 2000, Oak Tree makes annual rental payments to LATC equal to 1.5% of the total live on-track pari-mutuel wagering from its racing meet and 25% of its satellite and simulcast revenues after mandated payments to the State, to horse owners and to breeders. LATC pays to Realty 40% of all satellite and simulcast revenues received from Oak Tree. Because the rental received from Oak Tree's on-track pari-mutuel wagering is identical to the rental paid to Realty, LATC does not reflect these amounts in its financial statements. In addition, Oak Tree reimburses LATC an amount equal to 0.8% of its on-track pari-mutuel wagering for certain expenses of operating Santa Anita Racetrack on behalf of Oak Tree. LATC also receives supplemental rent representing Oak Tree's adjusted profits above an agreed-upon level and will rebate rent to Oak Tree if Oak Tree's adjusted profits fall below such level (see Item 1. "Business -- Operating Company -- Santa Anita Racetrack -- Pari-Mutuel Wagering").
The number of racing days at the Santa Anita meet declined from 90 in 1989 to 83 in 1993. Total pari-mutuel wagering on the Santa Anita meet decreased from $654.1 million in 1989 to $613.5 million in 1993. For all years prior to 1989, all of Santa Anita pari-mutuel wagering was conducted on-track. In 1989, $122.1 million of the total amount wagered was wagered at satellite locations with $532.0 million being wagered on-track. In 1993, $362.8 million of the total amount wagered was wagered at satellite locations with $250.7 million being wagered on-track.
Total attendance was 2.9 million in 1989, of which 621,000 was at satellite locations. By 1993, on-track attendance had declined to 1.2 million, down from 1.5 million in 1992. Although 1,332,126 and 1,576,763 patrons attended satellite locations during the Santa Anita meets in 1993 and 1992, respectively, LATC does not share in the revenues from admissions, parking and food and beverage sales at the satellite locations.
Item 1. Business (continued) - ----------------------------
The following tables summarize key operating statistics for the 1989-1993 Santa Anita meets and the 1989-1993 Oak Tree meets, together with the attendance and wagering statistics relating to the transmission of the Del Mar and Hollywood Park signals to Santa Anita Racetrack.
- ------------------
(a) Total handle or total attendance divided by the number of race days will produce a different average daily result due to the fact that satellite locations may not have operated from the beginning of the Santa Anita meet, therefore, average daily attendance and wagering is calculated based upon the number of days each satellite location is open. (b) Includes simulcast wagering on races originating at other racetracks. (c) Satellite wagering expanded to include Hollywood Park and Los Alamitos effective with the 1991 Oak Tree meet. (d) Interstate wagering (common pooling) began in October 1990. (e) Oak Tree races five weeks in even-numbered years and six weeks in odd- numbered years.
- ------------------- (a) Began in November 1991.
Management anticipates that the general trend of increases in off-track wagering will continue and the decrease experienced in on-track attendance and on-track wagering will also continue albeit at a slower rate.
During the last five years, 54% of the annual revenues of LATC resulted from pari-mutuel and other wagering commissions. The remaining revenues resulted from admissions, parking, food and beverage sales, sale of programs and interest and other income.
The following table sets forth certain unaudited financial information with respect to LATC:
The mix of revenues has changed significantly from 1989 to 1993 primarily as a result of the introduction of satellite wagering on races originating at Santa Anita Racetrack, operating as a satellite location for Del Mar and Hollywood Park, changes in average daily pari-mutuel wagering, selective price increases, the introduction of additional exotic wagering opportunities on which the retention amount is higher than on conventional wagering and a new lease with Oak Tree, all of which have largely offset declines in commissions from on- track wagering. In addition, LATC recognized $400,000 in 1990 and $1,000,000 in 1991 from the 1990 sale of the Canterbury Downs management consulting contract. Also, interest income has fluctuated as a function of cash balances available for investments and changing interest rates.
LATC's total expenses decreased from $63.8 million in 1989 to $61.5 million in 1993. The majority of these expenses are pari-mutuel wagering or attendance- related, the result of operating as a satellite location for Del Mar and Hollywood Park and the aggregate effect of a new lease with Oak Tree. In 1991, costs and expenses included $1.1 million in earthquake damage. From 1991 to 1992, total costs and expenses increased by $2,064,000 primarily due to the fact that LATC operated as a satellite location for the first time for Hollywood Park's spring thoroughbred meet, the engagement of outside consultants in the amount of $660,000 to review the company's operations, and additional rent paid to Realty in the amount of $1,027,000. From 1992 to 1993, total costs and expenses decreased primarily due to fewer race days and lower on-track attendance and wagering.
ITEM 1. BUSINESS (CONTINUED) - ----------------
For further information regarding operating results, see Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Santa Anita Operating Company."
PARI-MUTUEL WAGERING
Pari-mutuel means literally a mutual wager, or wagering by individuals against each other. The racetrack acts as the broker for the wagers made by the public and deducts a "take-out" or gross commission which is fixed by the State and shared with the State, the racetrack operator, the horse owners and breeders, and the municipality in which the racetrack is located. The racetrack operator has no interest in which horse wins a given race.
As a condition of the issuance of a racing license, California law requires that a certain number of racing days be conducted as charity days. The net proceeds from these charity days are distributed to beneficiaries through a nonprofit organization approved by the California Horse Racing Board (the "Horse Racing Board"). LATC is required to conduct five charity days.
ON-TRACK WAGERING
The State has vested administrative authority for racing and wagering at horse racing meets with the Horse Racing Board. The Horse Racing Board, which consists of seven members appointed by the governor of the State, is charged with the responsibility of regulating the form of wagering, the length and conduct of meets and the distribution of the pari-mutuel wagering within the limits set by the California legislature. The Horse Racing Board is also charged with the responsibility of licensing horse racing associations on an annual basis to conduct horse racing meets and of licensing directors, officers and persons employed by the associations to operate such meets.
California law specifies the percentage distribution of pari-mutuel wagering with the percentage varying based upon the total wagering for the meet, breed of horse and type of wager. The following table sets forth the allocation of the total pari-mutuel wagering, on- and off-track, by percentage and dollar amount during the 1992-93 Santa Anita meet:
ITEM 1. BUSINESS (CONTINUED) - ----------------
SATELLITE WAGERING - CALIFORNIA
LATC and Oak Tree send televised racing signals to other southern California racetracks, wagering facilities on Indian reservation land in California and non-racing fair sites in central and southern California. Pari- mutuel wagering at a satellite facility is included in the pari-mutuel pools at the host racing associations. LATC's and Oak Tree's share of the satellite wagering was approximately 4.3% of the satellite pari-mutuel wagering on races originating at Santa Anita Racetrack.
In the fall of 1993, California law permitted LATC and Oak Tree to send and receive televised racing signals on races with purses exceeding $20,000 to and from northern California racetracks and nonracing fairs. In 1993, Bay Meadows, San Mateo, California became an additional satellite location during the Santa Anita meet. LATC's commission on the northern California satellite wagering was about 3.3%.
LATC has been advised that other Indian tribes are planning satellite wagering facilities on reservation land in southern California. Any other facilities opened by an Indian tribe must obtain approval from the State and must enter into an agreement with the racing associations with respect to the pari-mutuel operations.
During the Hollywood Park and Del Mar meets, LATC and other Southern California racing associations and fairs operate as satellite facilities. In addition to retaining 2% of the pari-mutuel wagering at Santa Anita Racetrack as its commission, LATC receives income from admissions, parking and food and beverage sales. In 1993, Santa Anita Racetrack operated 141 days as a satellite for Hollywood Park and Del Mar.
SATELLITE WAGERING - INTERSTATE
Legislation has been enacted in certain states permitting the transmission of pari-mutuel wagers across state lines. This format permits patrons wagering in those states on races held at Santa Anita Racetrack to participate in the same pari-mutuel pool payouts available to LATC's on-track patrons and Southern California satellite patrons. LATC currently participates in satellite wagering with numerous sites in Nevada, and additional locations in Alabama, Arizona, Colorado, Connecticut, Delaware, Florida, Idaho, Iowa, Kansas, Louisiana, Maryland, Massachusetts, Montana, Nebraska, New Hampshire, New Jersey, New York, North Dakota, Oregon, Pennsylvania, Rhode Island, Texas, Washington and West Virginia and receives a negotiated percentage of the pari-mutuel wagering at such sites.
Interstate satellite wagering started in 1991 with total pari-mutuel wagering of $39,445,000 which increased to $95,411,000 for 1993. LATC's share of the commissions from interstate satellite wagering was $1,811,000 for 1993.
SIMULCASTING
In 1993, LATC and Oak Tree transmitted their live racing signals (simulcast) to numerous locations in the United States, Mexico and Canada. LATC's share of the commissions for transmitting its racing signal, was $1,280,000 in 1993 and $1,416,000 in 1992. During the Oak Tree meet, LATC receives 25% of Oak Tree's share of simulcasting revenues. LATC is pursuing the opportunity to transmit its signal to other locations.
CANTERBURY DOWNS
In 1984, LATC entered into a management consulting contract with Minnesota Racetrack, Inc. ("MRI"). MRI developed and owned a horse racing facility, Canterbury Downs, in the Minneapolis area of Minnesota, which opened in June 1985. In 1990, LATC sold its interest in the management consulting contract with Canterbury Downs and recognized $400,000 as income. In 1991, LATC recognized an additional $1,000,000 as income.
ITEM 1. BUSINESS (CONTINUED) - ----------------
COMPETITIVE AND OTHER CONDITIONS
The southern California area offers a wide range of leisure time spectator activities, including professional and college teams which participate in all major sports. LATC and Oak Tree compete with such sporting events for their share of the leisure time market and with other numerous leisure time activities available to the community, some of which are broadcast on television.
As an outdoor activity, horse racing is more susceptible to inclement weather than some other leisure time activities. This is particularly true of the Santa Anita meet which is held during the winter. Prior to the 1992-1993 meet, LATC had never lost a race due to inclement weather. During the 1992-1993 meet, LATC lost two full days and two partial days of racing because of inclement weather. A local Arcadia ordinance presently limits live horse racing to daylight hours but allows the importation of a horse racing broadcast signal one evening per week.
The Horse Racing Board has annually licensed LATC and Oak Tree to conduct racing meets at Santa Anita Racetrack. At present, the Horse Racing Board has not licensed other thoroughbred racetracks in Southern California to conduct racing during these meets. Since 1972, however, night harness racing and night quarterhorse meets have been conducted at other racetracks in Southern California during portions of these meets. LATC and Oak Tree could be adversely affected by legislative or Horse Racing Board action which would increase the number of competitive racing days, reduce the number of racing days available to LATC and Oak Tree, or authorize other forms of wagering.
The California State Lottery Act of 1984, which provides for the establishment of a state-operated lottery, was implemented in 1985. In the opinion of management, the State lottery has had an adverse impact and will continue to have an adverse impact on total attendance and pari-mutuel wagering at Santa Anita Racetrack (see Item 1 "Business -- Operating Company -- Santa Anita Racetrack"). Although it is unaware of any empirical studies, management believes that the State lottery has had and will continue to have an adverse impact on many other businesses in the State of California.
In the future, legislation could be enacted to allow casino gaming or other forms of gaming which are competitive with pari-mutuel wagering at Santa Anita Park. Under federal law, certain types of gaming are lawful on Indian lands if conducted in conformance with a Tribal-State compact, which the applicable state must negotiate with an Indian tribe in good faith. Certain Indian tribes seeking to establish gaming in California have instituted litigation against the State of California to compel the State to permit them to do so. In 1993, one court held that California has a public policy prohibiting casino gaming and need not negotiate a compact with respect to casino gaming. However, the court also held that certain other forms of gaming were the proper subject of a compact. Other courts are not bound by that decision and may hold differently. If the Indian tribes are successful in establishing casino gaming or other forms of gaming in California, such gaming could have an adverse impact on LATC.
DEPENDENCE ON LIMITED NUMBER OF CUSTOMERS
No material part of Operating Company's business is dependent upon a single customer or a few customers; therefore, the loss of any one customer would not have a materially adverse effect on the business of Operating Company.
EMPLOYEE AND LABOR RELATIONS
During the year ended December 31, 1993, LATC regularly employed approximately 1,600 employees. Substantially all are employed on a seasonal basis in connection with live thoroughbred horse racing or satellite meets at Santa Anita Racetrack. During the relatively short periods when live or satellite racing meets at Santa Anita Racetrack are not being conducted, LATC maintains a staff of approximately 260 employees, most of
whom are engaged in maintaining or improving the physical facilities at Santa Anita Racetrack or are engaged in preparing for the next live or satellite meet.
All of LATC's employees, except for approximately 70 full-time management and clerical employees, are covered by collective bargaining agreements with labor unions. A majority of the current labor agreements covering racetrack employees will expire in April 1995 after the Santa Anita meet.
SEASONAL VARIATIONS IN BUSINESS
Operating Company is also subject to significant seasonal variation. LATC conducts an annual meet commencing immediately after Christmas and continuing through mid-April. This seasonal variation is indicated by the following unaudited quarterly results of operations for Operating Company during 1993 and 1992:
In 1993, revenues and cost of sales from food and beverage operations have been reflected as a separate component in Operating Company's and Combined Realty and Operating Company's statement of operations. In prior years these operations were in horse racing revenues. All prior year and interim financial statements and disclosures for Operating Company and Combined Realty and Operating Company have been restated to reflect this reclassification.
Operating Company has adopted an accounting practice whereby the revenues associated with thoroughbred horse racing at Santa Anita Racetrack are reported as they are earned. Costs and expenses associated with thoroughbred horse racing revenues are charged against income in those interim periods in which the thoroughbred horse racing revenues are recognized. Other costs and expenses are recognized as they actually occur throughout the year.
ITEM 1. BUSINESS (CONTINUED) - ----------------
INCOME TAX MATTERS
In the opinion of management, Realty has operated in a manner which has qualified it as a REIT under Sections 856 through 860 of the Code. Realty intends to continue to operate in a manner which will allow it to qualify as a REIT under the Code. Under these sections, a corporation that is principally engaged in the business of investing in real estate and that, in any taxable year, meets certain requirements that qualify it as a REIT generally is not subject to federal income tax on its taxable income and gains that it distributes to its shareholders. Income and gains that are not so distributed will be taxed to a REIT at regular corporate rates. In addition, a REIT is subject to certain taxes on net income from "foreclosure property" as defined in the Code, income from the sale of property held primarily for sale to customers in the ordinary course of business and excessive unqualified income.
REIT REQUIREMENTS
To qualify for tax treatment as a REIT under the Code, Realty at a minimum must meet the following requirements:
(1) At least 95% of Realty's gross income each taxable year (excluding gains from the sale of property other than foreclosure property held primarily for sale to customers in the ordinary course of its trade or business) must be derived from:
(a) rents from real property;
(b) gain from the sale or disposition of real property that is not held primarily for sale to customers in the ordinary course of business;
(c) interest on obligations secured by mortgages on real property (with certain minor exceptions);
(d) dividends or other distributions from, or gains from the sale of, shares of qualified REITs that are not held primarily for sale to customers in the ordinary course of business;
(e) abatements and refunds of real property taxes;
(f) income and gain derived from foreclosure property;
(g) most types of commitment fees related to either real property or mortgage loans;
(h) gains from sales or dispositions of real estate assets that are not "prohibited transactions" under the Code;
(i) income attributable to stock or debt instruments acquired with the proceeds from the sale of stock or certain debt obligations ("new capital") of Realty received during a one-year period beginning on the day such proceeds were received ("qualified temporary investment income");
(j) dividends;
(k) interest on obligations other than those secured by mortgages on properties; and
(l) gains from sales or dispositions of securities not held primarily for sale to customers in the ordinary course of business.
ITEM 1. BUSINESS (CONTINUED) - ----------------
In addition, at least 75% of Realty's gross income each taxable year (excluding gains from the sale of property other than foreclosure property held primarily for sale to customers in the ordinary course of its trade or business) must be derived from items (a) through (i) above. For purposes of these requirements, the term "rents from real property" is defined in the Code to include charges for services customarily furnished or rendered in connection with the rental of real property, whether or not such charges are separately stated, and rent attributable to incidental personal property that is leased under, or in connection with, a lease of real property, provided that the rent attributable to such personal property for the taxable year does not exceed 15% of the total rent for the taxable year attributable to both the real and personal property leased under such lease. The term "rents from real property" is also defined to exclude: (i) any amount received or accrued with respect to real property, if the determination of such amount depends in whole or in part on the income or profits derived by any person from the property (except that any amount so received or accrued shall not be excluded from "rents from real property" solely by reason of being determined on the basis of a fixed percentage of receipts or sales); (ii) any amount received or accrued, directly or indirectly, from any person or corporation if ownership of a 10% or greater interest in the stock, assets or net profits of such person or corporation is attributed to Realty; (iii) any amount received or accrued from property that Realty manages or operates or for which Realty furnishes services to the tenants, which would constitute unrelated trade or business income if received by certain tax-exempt entities, either itself or through another person who is not an "independent contractor" (as defined in the Code) from whom Realty does not derive or receive income; and (iv) any amount received or accrued from property with respect to which Realty furnishes (whether or not through an independent contractor) services not customarily rendered to tenants in properties of a similar class in the geographic market in which the property is located.
If Realty should fail to satisfy the foregoing income tests but otherwise satisfies the requirements for taxation as a REIT and if such failure is held to be due to reasonable cause and not willful neglect and if certain other requirements are met, then Realty would continue to qualify as a REIT but would be subject to a 100% tax on the excessive unqualified income reduced by an approximation of the expenses incurred in earning that income.
(2) Less than 30% of Realty's gross income during any taxable year can be derived from the sale or disposition of: (i) stock or securities held for less than one year; (ii) property held primarily for sale to customers in the ordinary course of business (other than foreclosure property); and (iii) real property (including interests in mortgages on each property) held for less than four years (other than foreclosure property and gains arising from involuntary conversions).
(3) At the end of each calendar quarter, at least 75% of the value of Realty's total assets must consist of real estate assets (real property, interests in real property, interests in mortgages on real property, shares in qualified real estate investment trusts and stock or debt instruments attributable to the temporary investment of new capital), cash and cash items (including receivables) and government securities. With respect to securities that are not included in the 75% asset class, Realty may not at the end of any calendar quarter own either (i) securities representing more than 10% of the outstanding voting securities of any one issuer or (ii) securities of any one issuer having a value that is more than 5% of the value of Realty's total assets. Realty's share of income earned or assets held by a partnership in which Realty is a partner will be characterized by Realty in the same manner as they are characterized by the partnership for purposes of the assets and income requirements described in this paragraph (3) and in paragraphs (1) and (2) above.
(4) The shares of Realty must be "transferable" and beneficial ownership of them must be held by 100 or more persons during at least 335 days of each taxable year (or a proportionate part of a short taxable year). More than 50% of the outstanding stock may not be owned, directly or indirectly, actually or constructively, by or for five or fewer "individuals" at any time during the last half of any taxable year. For the purpose of such determination, shares owned directly or indirectly by or for a
ITEM 1. BUSINESS (CONTINUED) - ----------------
corporation, partnership, estate or trust are considered as being owned proportionately by its shareholders, partners or beneficiaries; an individual is considered as owning shares directly or indirectly owned by or for members of his family; and the holder of an option to acquire shares is considered as owning such shares. In addition, because of the lessor- lessee relationship between Realty and LATC, no person may own, actually or constructively, 10% or more of the outstanding voting power or total number of shares of stock of the two companies. The bylaws of Operating Company and Realty preclude any transfer of shares which would cause the ownership of shares not to be in conformity with the above requirements. Each year Realty must demand written statements from the record holders of designated percentages of its shares disclosing the actual owners of the shares and must maintain, within the Internal Revenue District in which it is required to file its federal income tax return, permanent records showing the information it has thus received as to the actual ownership of such shares and a list of those persons failing or refusing to comply with such demand.
(5) Realty must distribute to its shareholders dividends in an amount at least equal to the sum of 95% of its "real estate investment trust taxable income" before deduction of dividends paid (i.e., taxable income less any net capital gain and less any net income from foreclosure property or from property held primarily for sale to customers, and subject to certain other adjustments provided in the Code); plus (i) 95% of the excess of the net income from foreclosure property over the tax imposed on such income by the Code; less (ii) a portion of certain noncash items of Realty that are required to be included in income, such as the amounts includable in gross income under Section 467 of the Code (relating to certain payments for use of property or services). The distribution requirement is reduced by the amount by which the sum of such noncash items exceeds 5% of real estate investment trust taxable income. Such undistributed amount remains subject to tax at the tax rate then otherwise applicable to corporate taxpayers. During 1993, Realty has, or will be deemed to have, distributed at least 95% of its real estate investment trust taxable income as adjusted.
For this purpose, certain dividends paid by Realty after the close of the taxable year may be considered as having been paid during the taxable year. However, if Realty does not actually distribute each year at least the sum of (i) 85% of its real estate investment taxable income, (ii) 95% of its capital gain net income and (iii) any undistributed taxable income from prior periods, then the amount by which such sums exceed the actual distributions during the taxable year will be subject to a 4% excise tax.
If a determination (by a court or by the Internal Revenue Service) requires an adjustment to Realty's taxable income that results in a failure to meet the percentage distribution requirements (e.g., a determination that increases the amount of Realty's real estate investment taxable income), Realty may, by following the "deficiency dividend" procedure of the Code, cure the failure to meet the annual percentage distribution requirement by distributing a dividend within 90 days after the determination, even though this deficiency dividend is not distributed to the shareholders in the same taxable year as that in which income was earned. Realty will, however, be liable for interest based on the amount of the deficiency dividend.
(6) The directors of Realty must have authority over the management of Realty, the conduct of its affairs and, with certain limitations, the management and disposition of Realty's property.
(7) Realty must have the calendar year as its annual accounting period.
(8) Realty must satisfy certain procedural requirements.
TAXATION OF REALTY AS A REIT
In any year in which Realty qualifies under the requirements summarized above, it generally will not be taxed on that portion of its ordinary income or net capital gain that is distributed to shareholders, other than net income from foreclosure property, excess unqualified income and gains from property held primarily for sale.
ITEM 1. BUSINESS (CONTINUED) - ----------------
Realty will be taxed at applicable corporate rates on any undistributed taxable income or net capital gain and will not be entitled to carry back any net operating losses. It also will be taxed at the highest rate of tax applicable to corporations on any net income from foreclosure property and, subject to the safe harbor described below, at the rate of 100% on any income derived from the sale or other disposition of property, other than foreclosure property, held primarily for sale. In computing its net operating losses and the income subject to these latter taxes, Realty will not be allowed a deduction for dividends paid or received.
Although Realty will also be subject to a 100% tax on the gain derived from the sale of property (other than foreclosure property) held primarily for sale, a safe harbor is provided such that gains from the sale of real property are excluded from this 100% tax for a given year if each of the following conditions is satisfied:
(a) the property has been held by Realty for at least four years;
(b) total capital expenditures with respect to the property during the four-year period preceding the date of sale do not exceed 30% of the net selling price of the property;
(c) either (i) Realty does not make more than seven sales of properties (other than foreclosure property) during the taxable year or (ii) the aggregate adjusted bases (as determined for purposes of computing earnings and profits) of property (other than foreclosure property) sold by Realty during the taxable year do not exceed 10% of the aggregate adjusted bases (as so determined) of all of the assets of Realty as of the beginning of the taxable year;
(d) if the property has not been acquired through foreclosure or lease termination, the property has been held by Realty for the production of rental income for at least four years; and
(e) if the requirement of paragraph (c)(i) is not satisfied, substantially all of the marketing and development expenditures with respect to the sold properties were made through independent contractors from whom Realty does not derive or receive any income.
TERMINATION OR REVOCATION OF REIT STATUS
If, in any taxable year after it has filed an election with the Internal Revenue Service to be treated as a REIT, Realty fails to so qualify, Realty's election will be terminated, and Realty will not be permitted to file a new election to obtain such tax treatment until the fifth taxable year following the termination. However, if Realty's failure to qualify was due to reasonable cause and not due to willful neglect and if certain other requirements are met, Realty would be permitted to file a new election to be treated as a REIT for the year following the termination. If Realty voluntarily revokes its election for any year, it will not be eligible to file a new election until the fifth taxable year following such revocation.
If Realty fails to qualify for taxation as a REIT in any taxable year and the above relief provisions do not apply, then Realty would be subject to tax (including any applicable alternative minimum tax) on its taxable income at regular corporate rates. Distributions to shareholders of Realty with respect to any year in which Realty failed to qualify would not be deductible by Realty nor would they be required to be made. In such event, distributions to shareholders, to the extent out of current or accumulated earnings and profits, would be taxed as ordinary income and subject to certain limitations of the Code, eligible for the dividends-received deduction for corporations (see "Taxation of Realty's Shareholders"). Failure to qualify could result in Realty incurring substantial indebtedness (to the extent borrowings are feasible) or disposing of substantial investments, in order to pay the resulting taxes or, in the discretion of Realty, to maintain the level of Realty's distributions to its shareholders.
ITEM 1. BUSINESS (CONTINUED) - ----------------
TAXATION OF REALTY'S SHAREHOLDERS
So long as Realty qualifies for taxation as a REIT, distributions made to its shareholders out of current or accumulated earnings and profits (or deemed to be from current or accumulated earnings or profits), other than capital gain dividends (discussed below), will be dividends taxable as ordinary income. Distributions to shareholders of a REIT are not eligible for the dividends- received deduction for a corporation. Dividends to shareholders that are properly designated by Realty as capital gain dividends generally will be treated as long-term capital gain (to the extent they do not exceed Realty's actual net capital gain for the taxable year) regardless of how long a shareholder has owned his or her shares. However, corporate shareholders may be required to treat up to 20% of certain capital gain dividends as ordinary income. In general, any gain or loss realized upon a taxable disposition of shares will be treated as long-term capital gain or loss if the shares have been held for more than twelve months and otherwise as short-term capital gain or loss. However, if a shareholder receives a long-term capital gain dividend and such shareholder has held his or her stock for six months or less, any loss realized on the subsequent sale of the shares will, to the extent of the gain, be treated as long-term capital loss. Certain constructive ownership rules apply to determine the holding period.
In the event that Realty distributes cash generated by its activities which exceeds its net earnings, and provided there are no undistributed current or accumulated earnings and profits and the distribution does not qualify as a "deficiency dividend," such distributions will constitute a return of capital to the extent they do not exceed a shareholder's tax basis for the shareholder's shares and will be tax free to the shareholder. In such event, the tax basis of the shares held by each shareholder must be reduced correspondingly by the amount of such distributions. If such distributions exceed the tax basis of the shares of a shareholder, the shareholder will recognize capital gain in an amount equal to such excess, provided the shareholder holds the shares as a capital asset. Shareholders may not include on their own returns any of Realty's ordinary or capital losses. Realty will notify each shareholder after the close of its taxable year as to the portions of the distributions that constitute ordinary income, return of capital and capital gain. For this purpose, any dividends declared in October, November or December of a year, which are payable to shareholders of record on any day of such a month, shall be treated as if they had been paid and received on December 31 of such year, provided such dividends are actually paid in January of the following year. Shareholders are required to include on their own returns any ordinary dividends in the taxable year in which such dividends are received.
If in any taxable year Realty does not qualify as a REIT, it will be taxed as a corporation, and distributions to its shareholders will neither be required to be made nor will they be deductible by Realty in computing its taxable income, with the result that the assets of Realty and the amounts available for distribution to shareholders would be reduced to the extent of any tax payable. Disqualification as a REIT could occur even though Realty had previously distributed to its shareholders all of its income for such year, or years, in which it did not qualify as a REIT. In such circumstances, distributions, to the extent made out of Realty's current or accumulated earnings and profits, would be taxable to the shareholders as dividends, but, subject to certain limitations of the Code, would be eligible for the dividends-received deduction for corporations.
TAX-EXEMPT INVESTORS
The Internal Revenue Service has ruled that amounts distributed by a REIT to a tax-exempt employee's pension trust do not constitute ''unrelated trade or business income" and should therefore be nontaxable to such trust. This ruling does not apply to the extent the tax-exempt investor has borrowed to acquire shares of the REIT's stock. Moreover, the application of this ruling is subject to additional limitations that are beyond the scope of this disclosure.
ITEM 1. BUSINESS (CONTINUED) - ----------------
STATE AND TERRITORIAL TAXES
The state or territorial income tax treatment of Realty and its shareholders may not conform to the federal income tax treatment above. As a result, prospective shareholders should consult their own tax advisors for an explanation of the effect of state and territorial tax laws on their investment in Realty.
FOREIGN INVESTORS
The preceding discussion does not address the federal income tax consequences to foreign investors of an investment in Realty. Foreign investors should consult their own tax advisors concerning the federal income tax considerations to them of the ownership of shares in Realty.
BACKUP WITHHOLDING
The Code imposes a modified form of "backup withholding" for payments of interest and dividends. This withholding applies only if a shareholder, among other things: (i) fails to furnish Realty with a properly certified taxpayer identification number; (ii) furnishes Realty with an incorrect taxpayer identification number; (iii) fails to report properly interest or dividends from any source or; (iv) under certain circumstances, fails to provide Realty or his or her securities broker with a certified statement, under penalty of perjury, that he or she is not subject to backup withholding. The backup withholding rate is 31% of "reportable payments" which include dividends. Shareholders should consult their tax advisors as to the procedure for ensuring that Realty distributions to them will not be subject to backup withholding.
TAXATION OF OPERATING COMPANY
Operating Company pays ordinary corporate income taxes on its taxable income. Any income, net of taxes, will be available for retention in Operating Company's business or for distribution to shareholders as dividends. Any dividends distributed by Operating Company will be subject to tax at ordinary rates and generally will be eligible for the dividends received deduction for corporate shareholders to the extent of Operating Company's current or accumulated earnings and profits. Distributions in excess of current or accumulated earnings and profits are treated first, as a return of investment and then, to the extent that such distribution excludes a shareholder's investment, as gain from the sale or exchange of such shares. However, there is no tax provision which requires Operating Company to distribute any of its after-tax earnings and Operating Company does not expect to pay cash dividends in the foreseeable future.
FUTURE LEGISLATION
It should be noted that future legislation could be enacted or regulations promulgated, the nature and likelihood of which cannot be predicted, that might change in whole or in part, the income tax consequences summarized herein and reduce or eliminate the advantages which may be derived from the ownership of paired common stock.
The foregoing is a summary of some of the more significant provisions of the Code as it relates to REITs and is qualified in its entirety by reference to the Code and regulations promulgated thereunder.
ITEM 2.


ITEM 2. PROPERTIES - -------------------
Information concerning property owned by Realty and Operating Company may be found under Item 1. "Business."
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS - -------------------------
Certain claims, suits and complaints arising in the ordinary course of business have been filed or were pending against Realty and/or Operating Company and its subsidiaries at December 31, 1993. In the opinion of the managements of Realty and Operating Company, all such matters are adequately covered by insurance or, if not so covered, are without merit or are of such kind, or involve such amounts, as would not have a significant effect on the financial position or results of operations of Realty and Operating Company if disposed of unfavorably.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS - -----------------------------------------------------------
Not applicable.
ITEM 4A. EXECUTIVE OFFICERS OF REALTY AND OPERATING COMPANY - -----------------------------------------------------------
(a) The names, ages and business experience of Realty's executive officers during the past five years are set forth below:
Each executive officer of Realty is appointed by the Board of Directors annually and holds office until his successor is duly appointed.
(b) The names, ages and business experience of Operating Company's executive officers during the past five years are set forth below:
Each executive officer of Operating Company is appointed by the Board of Directors annually and holds office until a successor is duly appointed.
PART II
ITEM 5.
ITEM 5. MARKET FOR THE REGISTRANTS' COMMON EQUITY AND RELATED SHAREHOLDER - -------------------------------------------------------------------------- MATTERS - -------
The paired Common Stock of Realty and Operating Company is traded on the New York Stock Exchange as Santa Anita Realty Enterprises under the symbol SAR. The following table sets forth the high and low closing prices for the paired Common Stock on the New York Stock Exchange Composite Tape and the cash dividends declared by Realty for the periods indicated. Operating Company has not declared cash dividends.
- ---------- (a) $.56 of the dividends paid per share during 1992 represented a return of capital. (b) $.56 of the dividends paid per share during 1993 represented a return of capital.
A regular quarterly dividend of $.34 per share is payable on April 8, 1994 to shareholders of record on March 8, 1994. The closing price of the paired Common Stock on the New York Stock Exchange Composite Tape on March 8, 1994 was $17- 5/8 per share. As of March 8, 1994, there were approximately 22,000 holders of the paired Common Stock, including the beneficial owners of shares held in nominee accounts.
Realty intends to pay regular quarterly dividends based upon a percentage of management's estimate of funds from operations for the entire year and, if necessary, to pay special dividends after the close of the year to effect distribution of at least 95% of its taxable income (other than net capital gains) (see item 1. "Business -- Income Tax Matters -- REIT Requirements").
In order to retain earnings to finance its capital improvement program and for the growth of its business, Operating Company has not paid cash dividends since its formation and does not expect to pay cash dividends in the foreseeable future.
ITEM 5. MARKET FOR THE REGISTRANTS' COMMON EQUITY AND RELATED SHAREHOLDER - -------------------------------------------------------------------------- MATTERS (CONTINUED) - -------
The statement on the face of this annual report on Form 10-K regarding the aggregate market value of paired voting stock of Realty and Operating Company held by nonaffiliates is based on the assumption that all directors and officers of Realty and Operating Company were, for purposes of this calculation only (and not for any other purpose), affiliates of Realty or Operating Company.
ITEM 6.
Item 6. "Selected Financial Data - Operating Company").
Rental revenues from other real estate investments for the year ended December 31, 1993 were $38,953,000, an increase of 10.4% from those reported in 1992 of $35,290,000. The 1993 increases are due primarily to additional revenues from a new multifamily property acquisition in 1993 and the full year inclusion of several multifamily properties acquired in 1992.
Interest and other income increased 115.3% to $4,991,000 for the year ended December 31, 1993 from $2,318,000 reported for 1992. The increase is primarily attributable to $3,211,000 of interest income in 1993 on a tax settlement from the California Franchise Tax Board. The settlement was for tax years prior to 1980 related to Realty's predecessor. In addition to the interest earned on the settlement, Realty recorded a $2,523,000 income tax benefit.
Costs and expenses of $55,482,000 for the year ended December 31, 1993 increased 38.4% from those reported for 1992 of $40,080,000. The increase is primarily due to the loss on the disposition of the multifamily and industrial operations to Pacific and increases in depreciation and rental property operating expenses associated with the acquisitions of real estate projects noted above.
In June 1993, Realty's Board of Directors approved management's recommendation to recapitalize certain assets of Realty. Pursuant to this recapitalization, in November 1993, Realty entered into a Purchase and Sale Agreement to sell its multifamily and industrial operations to Pacific Gulf Properties Inc. ("Pacific"), in conjunction with its proposed public offering of common stock. The transaction was scheduled to be completed in two parts: (1) Realty would sell all of its apartments and industrial properties to Pacific with the exception of Realty's interest in the Baldwin Industrial Park joint venture; and (2) Pacific would enter into a binding agreement to buy Realty's interest in Baldwin Industrial Park.
On February 18, 1994, Realty completed the first part of this transaction by selling to Pacific ten multifamily properties, containing 2,654 apartment units, located in Southern California, the Pacific Northwest, and Texas and three industrial properties, containing an aggregate of 185,000 leasable square feet of industrial
ITEM 7.
ITEM 7. MANAGEMENTS' DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND ----------------------------------------------------------------------- RESULTS OF OPERATIONS (continued) ---------------------
space, located in the State of Washington (the "Transferred Properties"). Realty's corporate headquarters building and related assets were also acquired by Pacific. The sale of the Transferred Properties followed the public offerings of common stock and convertible subordinated debentures by Pacific.
Pursuant to the Purchase and Sale Agreement, Pacific agreed to buy Realty's interest in Baldwin Industrial Park subject to satisfaction of certain conditions, for a minimum price of $8.9 million payable in additional shares of Pacific common stock with the final price dependent upon completion of negotiations with other owners of Baldwin Industrial Park and an appraisal process. Management believes the sale of Realty's interest in Baldwin Industrial Park will be completed in the second half of 1994. Pacific is required to issue to Realty non-refundable letters of credit totaling up to $2.5 million by March 31, 1994 to secure its obligation to acquire Realty's interest in Baldwin Industrial Park and pay for the corporate headquarters building and other assets related to the Transferred Properties.
In consideration of the sale of the Transferred Properties, Realty received approximately $44.4 million in cash and 149,900 shares of the common stock of Pacific. In addition, Realty was relieved of approximately $44.3 million of mortgage debt on the Transferred Properties. Realty will also receive, at the time the acquisition of Baldwin Industrial Park is completed, up to $1.2 million in additional common stock of Pacific as consideration for its corporate headquarters and other net assets related to the Transferred Properties.
The two parts of the above transaction will result in a loss of $10,974,000. This loss has been reflected in the Realty and Realty and Operating Company combined statements of operations for the year ended December 31, 1993. If the Baldwin Industrial Park portion of the transaction described above does not occur, an additional loss of approximately $5,900,000 will be recognized by Realty in 1994. (See "Notes to Financial Statements - Note 2 - Disposition of Multifamily and Industrial Properties Subsequent to Year End.")
In connection with the sale, the executive officers, various managers and most other employees of Realty resigned and became officers and employees of Pacific on February 18, 1994.
Realty and Pacific have also entered into a one-year management agreement whereby Pacific has agreed to provide management services to Realty. Finally, with respect to the common stock of Pacific owned by Realty, Pacific has entered into a registration rights agreement with Realty which, under certain circumstances, allows Realty to require the registration of the Pacific stock it owns.
Net income for the year ended December 31, 1993 was $2,619,000, a decrease of 74.4% compared with the $10,211,000 reported in 1992 due to the factors described above.
RESULTS OF OPERATIONS -- 1992 COMPARED WITH 1991
Realty's revenues were derived principally from the rental of real property. Total revenues for the year ended December 31, 1992 were $50,291,000 compared with $45,408,000 reported for the year ended December 31, 1991, a 10.8% increase.
Rental revenue from real estate properties amounted to $47,973,000 for the year ended December 31, 1992, up 12.4% from the year-earlier level of $42,699,000.
In 1992, the most significant source of rental revenue was the lease with Santa Anita Racetrack. Revenues for 1992 rose to $12,683,000, up 7.3% from $11,817,000 reported in 1991. The increase resulted from an increase in total wagering at Santa Anita Racetrack due to six additional racing days during 1992 and increases in out-of-state simulcast revenues.
Rental revenues from other real estate investments for 1992 increased to $35,290,000, up 14.3% from $30,882,000 in 1991. This increase was due primarily to additional revenues from new property
ITEM 7. MANAGEMENTS' DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND ----------------------------------------------------------------------- RESULTS OF OPERATIONS (continued) ---------------------
acquisitions, the receipt of previously reserved past due rents and increased revenues from Santa Anita Fashion Park.
Interest and other income declined 14.4% to $2,318,000 in 1992 from $2,709,000 in 1991. The decrease is due to reduced funds held for investment and lower interest rates on funds held for investment, offset in part by the sale of a neighborhood shopping center in Phoenix, Arizona, net of a loss on a lease agreement, which generated a net gain of $646,000 (net of cost of $4,475,000). Realty reported a gain of $177,000 (net of cost of $223,000) in 1991 from the sale of a small land parcel in Southern California.
Costs and expenses increased 12.2 percent to $40,080,000 in 1992, up from $35,709,000 in 1991. The increase is due primarily to higher levels of depreciation, interest and rental property operating expenses associated with the acquisition of 1,109 new apartment units, and the expensing in 1992 of $580,000 of nonrecurring charges for the engagement of consultants to review the operations of the Realty and to assist in preparing a long range strategic plan. Realty reported a loss of $1,446,000 from the Towson Town Center unconsolidated joint venture primarily due to depreciation (the project was under construction in the prior periods).
Net income for the year ended December 31, 1992 increased 5.3% to $10,211,000 compared with income of $9,699,000 reported in 1991 due to the factors described above.
LIQUIDITY AND CAPITAL RESOURCES
Realty had liquidity available from a combination of short- and long- term sources. Short-term sources included cash of $7,633,000 at December 31, 1993.
In connection with the sale of properties to Pacific, Realty paid down its lines of credit by $44.4 million and transferred to Pacific $44.3 million of indebtedness associated with the multifamily and industrial properties. As of December 31, 1993, Realty was not in compliance with certain covenants contained in its credit agreements. The banks have waived such noncompliance through April 30, 1994 conditioned, among other things, on no additional borrowings under the credit agreements (at December 31, 1993, $78,361,000 loans and letters of credit were outstanding under these agreements). Realty is in the process of renegotiating these credit agreements. Management is of the opinion that Realty has sufficient liquidity from other sources to assure that its operations will not be adversely affected pending this renegotiation.
Realty had approximately $13,591,000 of long-term receivables at December 31, 1993, with maturities ranging from 1994 to 2002. For the year ended December 31, 1993, long-term receivables earned interest income of $996,000.
In the opinion of management, as of December 31, 1993 Realty's real estate investments had a market value substantially in excess of the historical costs and indebtedness related to such real estate investments. Management believes that this provides significant additional borrowing capacity.
IMPACT OF INFLATION
Realty's management believes that, for the foreseeable future, revenues and income from Santa Anita Racetrack, Fashion Park and its other real estate should not be adversely affected in a material way by inflationary pressures. Leases at Fashion Park include clauses enabling Realty to participate in tenants' future increases and gross revenues. Tenant leases on many other properties include provisions which tie the lease payments to the Consumer Price Index or include step-up provisions.
ITEM 7. MANAGEMENTS' DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND - ----------------------------------------------------------------------- RESULTS OF OPERATIONS (continued) - ---------------------
SANTA ANITA OPERATING COMPANY
Operating Company is engaged in thoroughbred horse racing through its wholly owned subsidiary, Los Angeles Turf Club, Incorporated ("LATC") which leases the Santa Anita Racetrack ("Santa Anita") from Realty.
The following narrative discusses Operating Company's results of operations for the years ended December 31, 1993, 1992 and 1991 together with liquidity and capital resources as of December 31, 1993.
RESULTS OF OPERATIONS -- 1993 COMPARED WITH 1992
Operating Company derives its revenues from thoroughbred horse racing activities. Total revenues were $61,347,000 in 1993, down 9.3% from $67,654,000 in 1992. In 1993, live thoroughbred horse racing at Santa Anita Racetrack totaled 83 days compared with 94 days in 1992. Total and average daily on- track attendance at the live racing events in 1993 were down 20.4% and 9.8%, respectively, from 1992. Total wagering at the live racing events was down 10.6% while average daily wagering increased 1.2% in 1993 compared with 1992. On-track wagering and inter-track wagering declined 20.2% and 13.6%, respectively, while interstate wagering increased 43.8% in 1993 compared with 1992.
In addition to a weak California economy and the continued negative effect of inter-track wagering on the on-track attendance and wagering, management believes the declines in average daily attendance and wagering were the result of inclement weather (in excess of 41 inches of rain, three times normal) during much of the 1992-1993 race meet, which caused the cancellation of two full race days and two partial race days in January.
Also, Santa Anita Racetrack operated 42 days in 1993 and 43 days in 1992 as a satellite wagering facility for Del Mar and 99 days in 1993 and 101 days in 1992 as a satellite wagering facility for Hollywood Park. Total attendance and wagering as a satellite wagering facility were down 3.5% and 2.5%, respectively, in 1993 compared with 1992. Average daily attendance and wagering were down 1.4% and 0.4%, respectively, in 1993 compared with 1992.
Horse racing revenues and direct operating costs declined in 1993 compared with 1992 due to fewer race days, lower attendance and lower wagering at both the live racing events and as a satellite wagering facility. Horse racing revenues in 1993 were $49,081,000 down 8.6% from $53,683,000 in 1992. Direct horse racing operating costs in 1993 were $40,981,000, down 9.1% from $45,089,000 in 1992.
Food and beverage revenues and cost of sales were also lower in 1993 compared with 1992 due to the factors described above. As a percentage of sales, cost of sales increased to 29.2% in 1993 compared with 27.5% in 1992.
General and administrative expenses were $6,693,000 in 1993, down 19.9% from $8,361,000 in 1992 due to administrative staff reductions in 1993 and to the costs related to the engagement of outside consultants in the prior year to review the Operating Company's operations. Partially offsetting the declines in general and administrative expenses, however, was the one-time charge of $759,000 in 1993 for the post-retirement benefits payable as a result of the death of the former Chairman of the Board of Operating Company.
Interest expense increased to $493,000 in 1993 from $194,000 in 1992 due to a higher level of debt at LATC.
Rental expense to Realty was $9,233,000 in 1993 compared with $10,955,000 in 1992. The decrease in rental expense of $1,722,000 reflects the decline in wagering.
ITEM 7. MANAGEMENTS' DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND - ----------------------------------------------------------------------- RESULTS OF OPERATIONS (continued) - ---------------------
Due to the revenue and expense items previously discussed, Operating Company reported a net loss of $2,232,000 or $.20 per share in 1993 compared with a net loss of $2,896,000 or $.26 per share in 1992.
RESULTS OF OPERATIONS -- 1992 COMPARED WITH 1991
In 1992, the expansion of intertrack wagering within Los Angeles and Orange Counties caused intertrack revenues to increase $7,657,000 while on-track revenues decreased $7,246,000. On-track attendance-related revenues declined as a result of a 24.0% drop in on-track attendance at the 1991-1992 Santa Anita race meet and a decline in on-track wagering of $147,248,000, or 31.3 percent at the same meet. The on-track attendance and wagering decreases were, in part, caused by the continuing economic recession in Southern California. These changes, combined with a decline in interest income of $1,842,000 as a result of declining interest rates, primarily account for the total decline of $899,000 in total revenues to $67,654,000 for the year ended December 31, 1992.
The decline in revenues from live racing events was partially offset by an increase in revenue by Santa Anita Racetrack operating as a satellite location, selected price increases and increased interstate simulcasting revenues. Santa Anita Racetrack operated as a satellite location for Hollywood Park for an additional 69 days in 1992.
Direct operating costs related to horse racing operations were $45,089,000 in 1992, virtually equal with $45,093,000 reported in 1991, in spite of the fact Santa Anita Racetrack operated as a satellite location for Hollywood Park for an additional 69 days.
General and administrative expenses were $8,361,000 for 1992, an increase of $1,493,000 or 21.7 percent, compared with the $6,868,000 in 1991. The increase resulted primarily from the expanded satellite racing season at Santa Anita Racetrack and the engagement of outside consultants ($660,000) to review the company's operations, including cost efficiencies, and to identify opportunities to enhance revenue.
Depreciation and amortization expenses were $2,732,000 for 1992, an increase of $98,000 or 3.7 percent, compared with $2,634,000 reported for 1991. These non-cash charges resulted from the ongoing capital improvement program at Santa Anita Racetrack.
Total rent paid to Realty was $10,955,000 for the year ended December 31, 1992, compared with $9,928,000 in 1991. The increase of $1,027,000 reflects increases in interstate simulcast revenues offset by decreases in the on-track and intertrack wagering.
Due to the revenue and expense items previously discussed, Operating Company reported a net loss of $2,896,000 or $.26 per share in 1992 compared with net income of $259,000 or $.02 per share in 1991.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1993, Operating Company's sources of liquidity included cash and short-term investments of $14,388,000 and an unsecured line of credit with Realty of $10,000,000, of which approximately $3,500,000 was utilized in connection with a guarantee of a capital lease. Operating Company's ability to utilize Realty's line of credit is dependent upon Realty's liquidity and capital resources. As a result of Realty's noncompliance with certain covenants contained within its credit agreements, Realty is currently unable to borrow additional moneys under its lines of credit. Accordingly, borrowings by Realty under these agreements would not provide a source of liquidity for Operating Company. Realty is in the process of renegotiating its credit agreements. (See Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations - Realty - Liquidity and Capital Resources"). For the year ended December 31, 1993, short-term investments earned interest income of $326,000.
ITEM 7. MANAGEMENTS' DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND - ----------------------------------------------------------------------- RESULTS OF OPERATIONS (continued) - ---------------------
The cash balances and related interest income from short-term investments reflect seasonal variations associated with the Santa Anita meet. During the meet, large cash balances and short-term investments are maintained by LATC, including amounts to be disbursed, for payment of license fees payable to the state, purses payable to horse owners and uncashed winning pari-mutuel tickets payable to the public.
IMPACT OF INFLATION
LATC's expenses are heavily labor-intensive with labor rates being covered by negotiated contracts with labor unions. Labor contracts with the pari- mutuel, service and operational employees were successfully renegotiated in April 1992. These new contracts expire in 1995. Management continues to address cost containment and labor productivity in all areas.
ITEM 8.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA - ----------------------------------------------------
See Index to Financial Statements for a listing of the financial statements and supplementary data filed with this report.
ITEM 9.
ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE - -------------------------------------------------------------
Not applicable.
PART III
Pursuant to General Instruction G(3) to Form 10-K, the information called for by this part of Form 10-K is incorporated herein by reference to the registrants' definitive joint proxy statement to be filed, pursuant to Regulation 14A, with the Securities and Exchange Commission not later than 120 days after the end of the year ended December 31, 1993.
PART IV
ITEM 14.






ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K - -------------------------------------------------------------------------
(a) The following documents are filed as part of this report:
1. Financial Statements See Index to Financial Statements
2. Financial Statement Schedules See Index to Financial Statement Schedules
3. Exhibits See Exhibit Index
(b) Reports on Form 8-K. No reports on Form 8-K have been filed during the last quarter of the fiscal year ended December 31, 1993.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, Realty and Operating Company have duly caused this report to be signed on their behalf by the undersigned, thereunto duly authorized.
SANTA ANITA REALTY ENTERPRISES, INC. SANTA ANITA OPERATING COMPANY
By: /s/ SHERWOOD C. CHILLINGWORTH By: /s/ STEPHEN F. KELLER ----------------------------- ---------------------------- Sherwood C. Chillingworth Stephen F. Keller Vice Chairman of the Board and Chairman of the Board, President Chief Executive Officer and Chief Executive Officer (Principal Executive Officer) (Principal Executive Officer)
March 29, 1994 March 29, 1994 ---------------------------- ---------------------------- Date Date
By: /s/ GLENNON E. KING /s/ RICHARD D. BRUMBAUGH ---------------------------- ---------------------------- Glennon E. King Richard D. Brumbaugh Acting Chief Financial Officer Vice President-Finance (Principal Financial and (Principal Financial and Accounting Officer) Accounting Officer)
March 29, 1994 March 29, 1994 ---------------------------- ----------------------------- Date Date
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 registrants and in the capacity and on the date indicated.
Date: March 29, 1994 ---------------
SANTA ANITA REALTY ENTERPRISES, INC. AND SANTA ANITA OPERATING COMPANY AND SUBSIDIARIES
SANTA ANITA REALTY ENTERPRISES, INC. AND SANTA ANITA OPERATING COMPANY AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENT SCHEDULES
The schedules listed below relate to Realty and Operating Company as indicated:
Schedules not listed above have been omitted because either the conditions under which they are required are absent, not applicable, or the required information is included in the financial statements and related notes thereto.
INDEPENDENT AUDITORS' REPORT
To the Shareholders and Board of Directors Santa Anita Realty Enterprises, Inc. and Santa Anita Operating Company
We have audited the financial statements and the related financial statement schedules, listed on pages 42 and 43 of:
(a) Santa Anita Realty Enterprises, Inc.;
(b) Santa Anita Operating Company and Subsidiaries; and
(c) Santa Anita Realty Enterprises, Inc. and Santa Anita Operating Company and Subsidiaries Combined.
These financial statements and financial statement schedules are the responsibility of the companies' management. Our responsibility is to express an opinion on these financial statements and financial statement schedules based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audits 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 financial statements referred to above present fairly, in all material respects, the financial position of the above-listed entities at December 31, 1993 and 1992 and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1993, in conformity with generally accepted accounting principles. Further, it is our opinion that the financial statement schedules referred to above present fairly, in all material respects, the information set forth therein.
KENNETH LEVENTHAL & COMPANY
Newport Beach, California March 1, 1994
SANTA ANITA REALTY ENTERPRISES, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1993 AND 1992
ASSETS
LIABILITIES AND SHAREHOLDERS' EQUITY
See accompanying notes.
SANTA ANITA REALTY ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1993, 1992 AND 1991
See accompanying notes.
SANTA ANITA REALTY ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1993, 1992 AND 1991
SANTA ANITA REALTY ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1993, 1992 AND 1991
See accompanying notes.
SANTA ANITA OPERATING COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1993 AND 1992
ASSETS
See accompanying notes.
SANTA ANITA OPERATING COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31 ,1993, 1992 AND 1991
See accompanying notes.
SANTA ANITA OPERATING COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1993, 1992 AND 1991
See accompanying notes.
SANTA ANITA OPERATING COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1993, 1992 AND 1991
See accompanying notes.
SANTA ANITA REALTY ENTERPRISES, INC. AND SANTA ANITA OPERATING COMPANY AND SUBSIDIARIES
COMBINED BALANCE SHEETS
DECEMBER 31, 1993 AND 1992
ASSETS
See accompanying notes.
SANTA ANITA REALTY ENTERPRISES, INC. AND SANTA ANITA OPERATING COMPANY AND SUBSIDIARIES
COMBINED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1993, 1992 AND 1991
See accompanying notes.
SANTA ANITA REALTY ENTERPRISES INC. AND SANTA ANITA OPERATING COMPANY AND SUBSIDIARIES
COMBINED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1993, 1992 AND 1991
See accompanying notes.
SANTA ANITA REALTY ENTERPRISES, INC. AND SANTA ANITA OPERATING COMPANY AND SUBSIDIARIES
COMBINED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1993, 1992 AND 1991
See accompanying notes.
SANTA ANITA REALTY ENTERPRISES, INC. AND SANTA ANITA OPERATING COMPANY AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31 , 1993, 1992 AND 1991
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
Santa Anita Realty Enterprises, Inc. ("Realty") and Santa Anita Operating Company and Subsidiaries ("Operating Company") are two separate companies, the stock of which trades as a single unit under a stock-pairing arrangement on the New York Stock Exchange. Realty and Operating Company were each incorporated in 1979 and are the successors of a corporation originally organized in 1934 to conduct thoroughbred horse racing in Southern California.
Realty is principally engaged in holding and investing in retail, commercial, industrial and multifamily real property located primarily in the western United States. Subsequent to year-end Realty disposed of its multifamily and industrial properties (Note 2). Realty operates as a real estate investment trust ("REIT") under the Internal Revenue Code of 1986 and, accordingly, pays no income taxes on earnings distributed to shareholders.
Operating Company is engaged in thoroughbred horse racing. The thoroughbred horse racing operation is conducted by a subsidiary of Operating Company, Los Angeles Turf Club, Incorporated ("LATC"), which leases the Santa Anita Racetrack from Realty.
Separate and combined financial statements have been presented for Realty and Operating Company. Realty and Combined Realty and Operating Company use an unclassified balance sheet presentation.
The separate results of operations and the separate net income per share of Realty and Operating Company cannot usually be added together to total the combined results of operations and net income per share because of adjustments and eliminations arising from inter-entity transactions. All significant intercompany and inter-entity balances and transactions have been eliminated in consolidation and combination.
REAL ESTATE ASSETS
Investment properties are carried at cost and consist of land, buildings, and related improvements. Depreciation is provided on a straight-line basis over the estimated useful lives of the properties, ranging primarily from 15 to 40 years.
INVESTMENTS IN JOINT VENTURES
All joint ventures in which Realty exercises significant control and has a 50% or greater ownership interest are consolidated. The ownership interests of outside partners in Realty's consolidated joint ventures are reflected as minority interest (excess of liabilities over assets) on the balance sheets for Realty and Combined Realty and Operating Company.
Investments in unconsolidated joint ventures are accounted for using the equity method of accounting.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
CASH AND CASH EQUIVALENTS
Highly liquid short-term investments, with maturities of three months or less, at the date of acquisition, are considered cash equivalents.
PROPERTY, PLANT AND EQUIPMENT
Depreciation of property, plant and equipment and the capital lease obligation is provided primarily on the straight-line method generally over the following estimated useful lives:
Building and improvements 25 to 45 years Machinery and other equipment 5 to 15 years Leasehold improvements 5 to 32 years
Expenditures which materially increase property lives are capitalized. The cost of maintenance and repairs is charged to expense as incurred. When depreciable property is retired or disposed of, the related cost and accumulated depreciation is removed from the accounts and any gain or loss is reflected in current operations.
INCOME TAXES
Realty and Operating Company adopted SFAS No. 109, "Accounting for Income Taxes," effective January 1, 1993. The new standard of accounting replaces SFAS No. 96 which the company adopted in 1988. The cumulative effect of adopting Statement 109 was immaterial for the year ended December 31, 1993.
DEFERRED REVENUES
Operating Company's deferred revenues consist of prepaid admission tickets and parking, which are recognized as income ratably over the period of the related race meets. Also, deferred revenue includes prepaid rent from Oak Tree which is recognized over the remaining term of the lease.
SHAREHOLDERS' EQUITY
The outstanding shares of Realty common stock and Operating Company common stock are only transferable and tradable in combination as a paired unit consisting of one share of Realty common stock and one share of Operating Company common stock.
OPERATING COMPANY'S REVENUES AND COSTS
Operating Company has adopted an accounting policy whereby the revenues associated with thoroughbred horse racing at Santa Anita Racetrack are reported as they are earned. Costs and expenses associated with thoroughbred horse racing revenues are charged against income in those periods in which the thoroughbred horse racing revenues are recognized. Other costs and expenses are recognized as they actually occur throughout the year. The rental fee paid by Operating Company to Realty is recognized by both Realty and Operating Company as it is earned.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
RENTAL PROPERTY REVENUES
Rental property revenues are recorded on a straight-line basis over the related lease term. As a result, deferred rent is created when rental income is recognized during free rent periods of a lease. The deferred rent is included in prepaid expenses and other assets, evaluated for collectibility and amortized over the remaining term of the lease.
HORSE RACING REVENUES AND DIRECT OPERATING COSTS
Operating Company's horse racing revenues and direct operating costs are shown net of state and local taxes, stakes, purses and awards.
CONCENTRATION OF CREDIT RISK
Financial instruments which potentially subject Realty and Operating Company to concentrations of credit risk are primarily cash investments and receivables. Realty and Operating Company place their cash investments in investment grade short-term instruments and limit the amount of credit exposure to any one commercial issuer. Concentrations of credit risk with respect to accounts receivable are limited due to the number of retail, commercial and residential tenants, and Santa Anita catering patrons. Real estate receivables are secured by first trust deeds on commercial real estate located in Southern California, and Phoenix, Arizona. Advances to unconsolidated joint ventures are unsecured and due from partnerships in which Realty is a 50% or less general partner.
FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
Realty is an issuer of financial instruments with off-balance sheet risk in the normal course of business which exposes Realty to credit risks. These financial instruments include commitments to extend credit, financial guarantees and letters of credit.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Management has estimated the fair value of its financial instruments using available market information and appropriate valuation methodologies. Considerable judgment is required in interpreting market data to develop estimates of fair value. Accordingly, the estimated values for Realty and Operating Company as of December 31, 1993 are not necessarily indicative of the amounts that could be realized in current market exchanges.
For those financial instruments for which it is practicable to estimate value, management has determined that the carrying amounts of Realty's and Operating Company's financial instruments approximate their fair value as of December 31,1993.
DIVIDEND REINVESTMENT PLAN
In November 1992 Realty and Operating Company terminated their dividend reinvestment and stock purchase plan (the "Plan") which had enabled shareholders to reinvest dividends and purchase shares of Realty and Operating Company stock. Since October 1990, shares issued under the terms of the Plan had been purchased in the open market. Prior to that date, new shares had been issued.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
COMMON STOCK AND NET INCOME (LOSS) PER COMMON SHARE
Net income (loss) per common share is computed based upon the weighted average number of common shares outstanding during each period for each company. Stock options have not been included in the computation since they have no material dilutive effect.
Operating Company holds shares of Realty's common stock which are unpaired pursuant to a stock option plan approved by the shareholders. The shares held totaled 115,500 as of December 31, 1993, 1992 and 1991, respectively. These shares affect the calculation of Realty's net income per common share but are eliminated in the combined calculation of net income per common share.
RECLASSIFICATIONS
Certain prior year amounts have been restated to conform to current year presentation.
NOTE 2 - DISPOSITION OF MULTIFAMILY AND INDUSTRIAL PROPERTIES SUBSEQUENT TO YEAR END
In November 1993, Realty entered into a Purchase and Sale Agreement to sell its multifamily and industrial operations to Pacific Gulf Properties Inc. ("Pacific"), in conjunction with Pacific's proposed public offering of common stock and debentures. The transaction was structured into two parts: (1) Realty would sell all of its apartments and industrial properties to Pacific with the exception of Realty's interest in the Baldwin Industrial Park joint venture; and (2) Pacific would enter into a binding agreement to buy Realty's interest in Baldwin Industrial Park.
On February 18, 1994, Realty completed the first part of this transaction by selling to Pacific ten multifamily properties, containing 2,654 apartment units, located in Southern California, the Pacific Northwest, and Texas and three industrial properties, containing an aggregate of 185,000 leasable square feet of industrial space, located in the State of Washington (the "Transferred Properties"). Realty's corporate headquarters building and related assets were also acquired by Pacific. The sale of the Transferred Properties followed the public offerings of common stock and convertible subordinated debentures by Pacific.
Pursuant to the Purchase and Sale Agreement, Pacific agreed to buy Realty's interest in Baldwin Industrial Park subject to satisfaction of certain conditions, for a minimum price of $8.9 million payable in additional shares of Pacific common stock, with the final price dependent upon completion of negotiations with the other owners of Baldwin Industrial Park and an appraisal process. Management believes the sale of Realty's interest in Baldwin Industrial Park will be completed in the second half of 1994. Pacific is required to issue to Realty non-refundable letters of credit totaling $2.5 million by March 31, 1994 to secure its obligation to acquire Realty's interest in Baldwin Industrial Park and pay for the corporate headquarters building and other assets related to the Transferred Properties.
In consideration of the sale of the Transferred Properties, Realty received approximately $44.4 million in cash and 149,900 shares of the common stock of Pacific. In addition, Realty was relieved of approximately $44.3 million of mortgage debt on the Transferred Properties. Realty will also receive, at the time the acquisition of Baldwin Industrial Park is completed, up to $1.2 million in additional common stock of Pacific as consideration for its corporate headquarters and other net assets related to the Transferred Properties.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 2 - DISPOSITION OF MULTIFAMILY AND INDUSTRIAL OPERATIONS SUBSEQUENT TO YEAR END (CONTINUED)
The two parts of the above transaction will result in a loss of $10,974,000. This loss has been reflected in the Realty and Realty and Operating Company combined statements of operations for the year ended December 31, 1993. If the Baldwin Industrial Park portion of the transaction described above does not occur, an additional loss will be recognized by Realty in 1994. The loss could approximate $5,900,000, depending upon whether the $2.5 million in letters of credit are drawn.
Realty and Pacific have also entered into a one-year management agreement whereby Pacific has agreed to provide management services to Realty. Finally, with respect to the common stock of Pacific owned by Realty, Pacific has entered into a registration rights agreement with Realty which, under certain circumstances, allows Realty to require the registration of the Pacific stock it owns.
The following unaudited pro forma condensed balance sheets of Realty and Realty and Operating Company combined are presented as if both parts of the transaction had occurred on December 31, 1993. The unaudited pro forma condensed balance sheets are not necessarily indicative of what the actual financial position of Realty or Realty and Operating Company combined would have been at December 31, 1993 nor do they purport to represent the future financial position of Realty or Realty and Operating Company combined.
The accompanying notes are an integral part of this pro forma balance sheet.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 2 - DISPOSITION OF MULTIFAMILY AND INDUSTRIAL OPERATIONS SUBSEQUENT TO YEAR END (CONTINUED)
Notes: - ------
(a) Reflects the disposition of the assets and liabilities of the Multifamily and Industrial Operations as if both parts of the transaction had occurred on December 31, 1993. The amounts reflected represent the assets and liabilities directly identifiable with the Multifamily and Industrial Operations transferred by Realty to Pacific.
(b) As a result of the February 18, 1994 sale to Pacific, Realty will have an investment in the common shares of Pacific totaling $2,738,000. Upon completion of Realty's disposition of Baldwin Industrial Park, assuming a price per share equal to $18.25 (the initial public offering price of Pacific's common shares) and the minimum price for Realty's interest in Baldwin Industrial Park and the corporate headquarters building and certain other assets related to the Transferred Properties, Realty will receive additional Pacific stock totaling approximately $10,064,000.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 2 - DISPOSITION OF MULTIFAMILY AND INDUSTRIAL OPERATIONS SUBSEQUENT TO YEAR END (CONTINUED)
The following unaudited pro forma statements of operation of Realty and Realty and Operating Company combined are presented as if both parts of the transaction had occurred on January 1, 1993. The unaudited pro forma statements of operation are not necessarily indicative of what the actual results of operations would have been if the transaction had been consummated on January 1, 1993 nor do they purport to represent the results of operations of Realty or Realty and Operating Company combined for any future period.
The accompanying notes are an integral part of this pro forma statement of operations.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 2 - DISPOSITION OF MULTIFAMILY AND INDUSTRIAL OPERATIONS SUBSEQUENT TO YEAR END (CONTINUED)
Notes: - ------
(1) Reflects the operations for the year ended December 31, 1993 of the Multifamily and Industrial Operations directly identifiable with, and allocations of other costs and expenses related to, the Multifamily and Industrial Operations being transferred by Realty to Pacific.
(2) Estimated annual distributions to be received on Realty's investment in Pacific ($1.56 per common share) less the amount of such distributions estimated to represent the return of capital ($.56 per common share).
(3) Elimination of interest expense on real estate and other loans payable repaid or assumed by Pacific.
(4) Elimination of the minority interest in earnings of joint ventures resulting from Realty's acquisition of the Partnership interests and subsequent transfer to Pacific.
NOTES TO FINANCIAL STATEMENTS (continued)
Note 3 - Investments in Joint Ventures
Realty's real estate properties include investments in the following consolidated real estate joint ventures:
The financial condition and operations of the above-listed joint ventures are consolidated with the financial statements of Realty and Combined Realty and Operating Company.
Combined condensed financial information for consolidated joint ventures as of December 31, 1993, 1992 and 1991 and for the years then ended is as follows:
NOTE 3 - INVESTMENTS IN JOINT VENTURES (CONTINUED)
During 1993, Realty acquired the partnership interests of its minority partners in the following joint ventures: SARESAM, SAREFIM, Applewood Village Partners and Hubanita. The partnership interests were acquired in consideration for cash, the cancellation of certain receivables from the minority partners and the assumption of the minority partners' capital account and payment of $250,000 related to Hubanita. The financial statements of Realty and Combined Realty and Operating Company reflect the acquisition of the minority interests.
Realty's investments in unconsolidated joint ventures include investments in the following commercial real estate ventures:
Unaudited combined condensed financial statement information for unconsolidated joint ventures as of December 31, 1993, 1992 and 1991 and for the years then ended is as follows:
NOTE 3 - INVESTMENTS IN JOINT VENTURES (CONTINUED)
Realty is a joint and several guarantor of loans issued to expand the Towson Town Center located in Towson, Maryland (owned 65% by H-T Associates) and a department store and land (owned 100% by Joppa Associates) adjacent to Towson Town Center in the amount of $82,630,000. The maximum loan balance to which the guarantees relate is $188,500,000. Realty's two partners in the ventures have also each executed repayment guarantees, although one of the partners has a limited repayment guaranty. Annually, the guarantors may request a reduction in the amount of the guaranty based on the economic performance of the regional mall.
NOTE 4 - REAL ESTATE LOANS AND ADVANCES RECEIVABLE
Realty's real estate loans and advances receivable as of December 31, 1993 and 1992 consist of the following:
Contractual principal repayments on real estate loans and advances receivable as of December 31, 1993 are due as follows:
The prime rate was 6.0% during 1993 and at December 31, 1993.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 5 - LOANS PAYABLE
Realty's real estate loans payable related to real estate as of December 31, 1993 and 1992 consist of the following:
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 5 - LOANS PAYABLE (CONTINUED)
Realty's other loans payable as of December 31, 1993 and 1992 consist of the following:
As of December 31, 1993, Realty was not in compliance with certain covenants contained in its credit agreements. The banks have waived such noncompliance through April 30, 1994 conditioned, among other things, on no additional borrowings under the credit agreements. Realty is in the process of renegotiating these credit agreements. Management is of the opinion that Realty has sufficient liquidity from other sources to assure that its operations will not be adversely affected pending this renegotiation.
Under the terms of these agreements, Realty may borrow funds, at Realty's option, based upon prime rates, LIBOR (London Interbank Offered Rate) based rates or Certificate of Deposit rates. At December 31, 1993, all funds are borrowed on prime or LIBOR-based rates. LIBOR-based rates ranged from 2.80% to 3.84% and the prime rate was 6.0% at December 31, 1993.
The revolving lines of credit require certain compensating balances. Under the lines of credit agreements, the compensating balance requirements at December 31, 1993, which represent cash balances that are not available for withdrawal, amounted to $1,000,000. In addition, Realty is required to pay annual commitment fees ranging from 0.15% to 0.25% on the unused portion of these lines of credit.
Operating Company entered into a sale-leaseback transaction related to the financing of certain television, video monitoring and production equipment under a five-year lease expiring in December 1997. This financing arrangement is accounted for as a capital lease. Accordingly, the equipment and related lease obligation are reflected as machinery and other equipment and other loans payable, respectively, on Operating Company's and Realty and Operating Company's combined balance sheets. Realty has guaranteed $3,500,000 of the lease obligation.
NOTES TO FINANCIAL STATEMENTS (Continued)
NOTE 5 - LOANS PAYABLE (CONTINUED)
The assets recorded under this capital lease are:
Total future minimum lease payments under this capital lease and the present value of the minimum lease payments as of December 31, 1993 consist of the following:
For the year ending December 31,
Interest costs for the years ended December 31, 1993, 1992 and 1991 are as follows:
NOTES TO FINANCIAL STATEMENTS (COINTINUED)
NOTE 5 - LOANS PAYABLE (CONTINUED)
NOTE 6 - OTHER LIABILITIES
Other liabilities as of December 31, 1993 and 1992 consist of the following:
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 6 - OTHER LIABILITIES (CONTINUED)
Advances payable represent amounts due to Realty's other partner in Anita Associates. The amount is expected to be repaid from the proceeds of the refinancing of Anita Associates' existing debt. The advances bear interest at 10% and are unsecured.
NOTE 7 - INCOME TAXES
As a REIT, Realty is taxed only on undistributed REIT income. During each of the years ended December 31, 1993, 1992 and 1991, Realty distributed at least 95% of its REIT taxable earnings to its shareholders. For the years ended December 31, 1993, 1992 and 1991, 41.2%, 41.2% and 52.9%, respectively, of the dividends distributed to shareholders represented a return of capital. None of the dividends distributed to shareholders during 1993, 1992 and 1991 represented capital gains.
The composition of Combined Realty and Operating Company's income tax provision (benefit) and income taxes paid for the years ended December 31, 1993, 1992 and 1991 is as follows:
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 7 - INCOME TAXES (CONTINUED)
Deferred income taxes arise from temporary differences in the recognition of certain items of revenues and expenses for financial statement and tax reporting purposes. The sources of temporary differences and their related tax effect for the years ended December 31, 1993, 1992 and 1991 are as follows:
A reconciliation of Combined Realty and Operating Company's total income tax provision for the years ended December 31, 1993, 1992 and 1991 to the statutory federal corporate income tax rate of 34% follows:
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 7 - INCOME TAXES (CONTINUED)
The deferred tax assets (liabilities) as of December 31, 1993 and 1992 consist of the following:
In prior years, Realty had filed claims with the California Franchise Tax Board for refunds with respect to the 1970 through 1979 tax years; LATC was assessed California franchise tax and interest for the years 1980 through 1982; and, Operating Company was assessed additional franchise tax for the years 1983 through 1985. In 1993, a refund of interest and taxes in the amount of $6,082,000 was received from the California Franchise Tax Board in the settlement of the above claims. Realty has recognized $3,211,000 of interest income, net of expenses of $120,000 and an income tax benefit in the amount of $2,523,000. Operating Company has recorded additional deferred taxes payable in the amount of $228,000.
The Franchise Tax Board has audited the 1986 through 1988 tax years of Operating Company. Operating Company has protested these proposed assessments. The additional assessment has been accrued by Operating Company.
In February 1994, the Franchise Tax Board initiated an audit of Operating Company's 1989 through 1991 tax years.
At December 31, 1993, for federal income tax purposes, Operating Company's net operating loss carryforward is approximately $6,504,000 which substantially expires in 2004.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 8 - COMMITMENTS AND CONTINGENCIES
Realty's wholly owned and consolidated real estate investments consist of Santa Anita Racetrack, Fashion Park (a regional mall), various neighborhood shopping centers, industrial parks, apartment complexes and office buildings. The racetrack is leased to LATC (Note 11); the land underlying Fashion Park has been ground leased for 65 years; each of the various neighborhood shopping centers has been leased to non-anchor tenants with terms ranging from three to five years; and, the office buildings have been leased with terms generally ranging from two to ten years.
The minimum future lease payments to be received from Realty's wholly owned and consolidated real estate investments (excluding rentals relating to the Santa Anita Racetrack which are paid by LATC to Realty) for the five years ending December 31, are as follows:
Substantially all of the retail leases provide for additional contingent rentals based upon the gross income of the tenants in excess of stipulated minimums. Realty's share of these contingent rentals totaled $258,000 in 1993, $337,000 in 1992 and $362,000 in 1991.
Realty leases the Santa Anita Racetrack to Operating Company's subsidiary, LATC. The lease provides for a rental fee of 1.5% of the total gross on-track pari-mutuel wagering generated at the racetrack. The lease, which is subject to renewal, expires in 1994. Realty also receives 40% of LATC's revenues from satellite wagering and the simulcasting of races originating from the Santa Anita Racetrack after mandated payments to the State of California and to horse owners. The lease amounts are eliminated in combination.
Realty has entered into several general and limited partnerships to own and operate real estate. As of December 31, 1993, Realty has committed to invest an additional $307,000 in these partnerships.
Realty has obtained a standby letter of credit totaling $448,000 related to financing on a real estate investment.
In 1992, Realty and Operating Company entered into severance agreements with certain officers. Under certain circumstances, the severance agreements provide for a lump sum payment if there is a "change in control" of the entities. No provision under these severance agreements has been accrued or funded.
Certain other claims, suits and complaints arising in the ordinary course of business have been filed or are pending against Realty and Operating Company. In the opinion of management, all such matters are adequately covered by insurance or, if not so covered, are without merit or are of such kind or involve such amounts as would not have a significant effect on the financial position or results of operations if disposed of unfavorably.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 9 - STOCK OPTION PROGRAM AND EMPLOYEE DEFINED BENEFIT PLANS
STOCK OPTION PROGRAM
During 1984, Realty reserved 400,000 shares of common stock for sale under its Stock Incentive Plan. During 1984, Operating Company also reserved 400,000 shares for sale under its Stock Option Program. Each company also reserved 400,000 shares for issuance under the other company's plan. During 1993, Operating Company reserved an additional 222,820 shares for sale. The shares are to be issued either as Incentive Stock Options or Non-Qualified Stock Options.
The options, which are contingent upon continuous employment, are exercisable at any time once vested, for up to three years after the date of retirement or death and for up to 90 days after resignation. For both Realty and Operating Company, Incentive Stock Options and Non-Qualified Stock Options expire in 1995 through 2003.
Information with respect to shares under option as of December 31, 1993, 1992 and 1991 is as follows:
(a) In connection with the disposition of the multifamily and industrial operations (Note 2), the executive officers of Realty resigned effective February 18, 1994. In accordance with the stock option program, the nonvested portion of their stock options terminated on February 18, 1994. The nonvested stock options totaled 41,200 as of December 31, 1993. The unexercised vested portion of their stock options still outstanding 90 days subsequent to the resignation date will be terminated on that date. As of December 31, 1993 the vested portion of their stock options totaled 33,800.
Certain officers and/or directors of Realty and Operating Company have exercised stock options. At the time of the exercise, the individuals signed notes for the purchase price of the stock (Note 11).
At the time of exercise of Realty options, employees also have to buy directly from Operating Company shares of Operating Company stock at its fair market value per share to pair with Realty shares.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 9 - STOCK OPTION PROGRAM AND EMPLOYEE DEFINED BENEFIT PLANS (CONTINUED)
In addition, Operating Company is required to purchase Realty shares to pair with the Operating Company shares being purchased by its employees. In 1984, Operating Company purchased 200,000 shares of Realty stock for this purpose.
RETIREMENT INCOME PLAN
Realty and Operating Company have a defined benefit retirement plan for year-round employees who are at least 21 years of age with one or more years of service and who are not covered by collective bargaining agreements. Plan assets consist of investments in a life insurance group annuity contract. Plan benefits are based primarily on years of service and qualifying compensation during the final years of employment. Funding requirements comply with federal requirements that are imposed by law.
The net periodic pension cost for 1993 for Realty and Operating Company was $104,000 and $367,000 respectively; for 1992 was $109,000 and $339,000, respectively; and for 1991 was $87,000 and $300,000, respectively. The provisions include amortization of past service cost over 30 years. Based upon an actuarial valuation date of January 1, 1993, the present value of accumulated plan benefits (calculated using a rate of return of 8.5%) at December 31, 1993 was $6,280,000, and the plan's net assets available for benefits were $5,607,000.
The combined net periodic pension cost for the years ended December 31, 1993, 1992 and 1991 for the retirement income plan included the following components:
NOTES TO FINANCIAL STATEMENTS (Continued)
NOTE 9 - STOCK OPTION PROGRAM AND EMPLOYEE DEFINED BENEFIT PLANS (CONTINUED)
The following table sets forth the funded status of Realty's and Operating Company's retirement income plan and amounts recognized in the balance sheets at December 31, 1993 and 1992:
Assumptions used in determining the funded status of the retirement income plan are as follows:
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 9 - STOCK OPTION PROGRAM AND EMPLOYEE DEFINED BENEFIT PLANS (CONTINUED)
DEFERRED COMPENSATION PLAN
Realty and Operating Company have defined benefit deferred compensation agreements which provide selected management employees with a fixed benefit at retirement. Plan benefits are based primarily on years of service and qualifying compensation during the final years of employment.
The net periodic pension cost for 1993 for Realty and Operating Company was $263,000 and $860,000, respectively; for 1992 was $93,000 and $243,000, respectively; and for 1991 was $98,000 and $233,000 respectively. During 1993, Realty and Operating Company recorded a combined $961,000 of pension expense, net of $793,000 of life insurance proceeds as a nonrecurring charge to the plan resulting from the death of an officer. It is the policy of Realty and Operating Company to fund only amounts sufficient to cover current deferred compensation benefits payable to retirees. The present value of unfunded benefits at December 31, 1993, based upon an actuarial valuation date of January 1, 1993, was $4,280,000 (calculated using a rate of return of 10%) and Realty's and Operating Company's combined accrued liability totaled $3,792,000.
Net periodic pension cost for the years ended December 31, 1993, 1992 and 1991 for the deferred compensation plan included the following components:
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 9 - STOCK OPTION PROGRAM AND EMPLOYEE DEFINED BENEFIT PLANS (CONTINUED)
The following table sets forth the funded status of Realty's and Operating Company's deferred compensation plan and amounts recognized in the balance sheets at December 31, 1993 and 1992:
Assumptions used in determining the funded status of the deferred compensation plan are as follows:
NOTE 10 - SHAREHOLDER RIGHTS PLAN
In June 1989, the Board of Directors of Realty adopted a shareholder rights plan and declared the distribution of one right for each outstanding share of common stock. The distribution was made in August 1989. Each right entitles the holder to purchase from Realty, initially, one one-hundredth of a share of junior participating preferred stock at a price of $100 per share, subject to adjustment. The rights are attached to all outstanding common shares, and no separate rights certificates will be distributed. The rights are not exercisable or transferable apart from the common stock until the earlier of ten business days following a public announcement that a person or group has acquired beneficial ownership of 10% or more of Realty's general voting power or ten business days following the commencement of, or announcement of the intention to commence, a tender or exchange offer that would result in a person or group beneficially owning 10% or more of Realty's general voting power.
Upon the occurrence of certain other events related to changes in the ownership of Realty's outstanding common stock or business combinations involving a holder of more than 10% of Realty's general voting power, each holder of a right would be entitled to purchase shares of Realty's common stock, or an acquiring corporation's common stock, having a market value of two times the exercise price of the right.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 10 - SHAREHOLDER RIGHTS PLAN (CONTINUED)
During such time as the stock-pairing arrangement between Realty and Operating Company shall remain in effect, Operating Company will issue, on a share-for-share basis, Operating Company common shares, or, as the case may be, Operating Company junior participating preferred shares to each person receiving Realty common shares or preferred shares upon exercise or in exchange for one or more rights.
Realty is entitled to redeem the rights in whole, but not in part, at a price of $.001 per right prior to the earlier of the expiration of the rights in August 1999 or the close of business ten days after the announcement that a 10% position has been acquired.
NOTE 11 - RELATED PARTY TRANSACTIONS
LATC leases the Santa Anita Racetrack from Realty. Rent is based upon 1.5% of the aggregate live on-track wagering and 40% of LATC's revenues received from simulcast and satellite wagering on races originating at Santa Anita Racetrack. For the years ended December 31, 1993, 1992 and 1991, LATC paid Realty (including charity days) $11,634,000, $12,683,000 and $11,817,000, respectively, in rent, of which $9,233,000, $10,955,000 and $9,928,000, respectively, were attributable to the Santa Anita meets (exclusive of charity days), with the remainder being attributable to the Oak Tree meets and charity days. The lease arrangement between LATC and Realty requires LATC to assume costs attributable to taxes, maintenance and insurance.
Both Realty and Operating Company have notes receivable from certain officers, former officers and/or former directors resulting from their exercise of stock options (Note 9). Notes receivable from officers, former officers and/or former directors as of December 31, 1993 and 1992, for Realty were $81,000 and $184,000, respectively, and for Operating Company were $393,000 and $ 890,000, respectively.
NOTE 12 - COMBINED QUARTERLY FINANCIAL INFORMATION - UNAUDITED
Condensed combined unaudited quarterly results of operations for Combined Realty and Operating Company are as follows:
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 12 - COMBINED QUARTERLY FINANCIAL INFORMATION - UNAUDITED (CONTINUED)
In 1993, revenues and cost of sales from food and beverage operations have been reflected as a separate component in Operating Company's and Combined Realty and Operating Company's statements of operations. In prior years these operations were reflected in horse racing revenues. All prior year and interim financial statements and disclosures for Operating Company and Combined Realty and Operating Company have been restated to reflect this reclassification.
Operating Company adopted an accounting practice whereby the revenues associated with thoroughbred horse racing at Santa Anita Racetrack are reported as they are earned. Costs and expenses associated with thoroughbred horse racing revenues are charged against income in those interim periods in which the thoroughbred horse racing revenues are recognized. Other costs and expenses are recognized as they actually occur throughout the year.
The total of the amounts shown above as quarterly net income per common share may differ from the amount shown on the Combined Statements of Operations because the annual computation is made separately and is based upon the average number of shares outstanding for the year.
Realty and Operating Company are subject to significant seasonal variations in revenues and net income (loss) due primarily to the seasonality of thoroughbred horse racing.
SANTA ANITA OPERATING COMPANY AND SUBSIDIARIES
SCHEDULE I - MARKETABLE SECURITIES - OTHER INVESTMENTS
SANTA ANITA REALTY ENTERPRISES, INC.
SCHEDULE II - AMOUNTS RECEIVABLE FROM RELATED PARTIES AND UNDERWRITERS, PROMOTERS, AND EMPLOYEES OTHER THAN RELATED PARTIES
FOR THE YEARS ENDED DECEMBER 31, 1993, 1992 AND 1991
- -------------- (a) Note receivable at the prime rate, adjusted annually, payable in five annual installments through 1993, arising from the exercise of stock options of Realty. (b) Resigned effective December 27, 1993. (c) Note receivable at the prime rate, adjusted annually, payable in five annual installments through 1994, arising from the exercise of stock options of Realty. (d) Note receivable at 7% interest, payable in five annual installments through 1992, arising from the exercise of stock options of Realty.
SANTA ANITA REALTY ENTERPRISES, INC.
SCHEDULE II - AMOUNTS RECEIVABLE FROM RELATED PARTIES AND UNDERWRITERS, PROMOTERS, AND EMPLOYEES OTHER THAN RELATED PARTIES
FOR THE YEARS ENDED DECEMBER 31, 1993, 1992 AND 1991
- -------------- (a) Note receivable at the prime rate, adjusted annually, payable in five annual installments through 1993, arising from the exercise of stock options of Realty. (b) Note receivable at the prime rate, adjusted annually, payable in five annual installments through 1994, arising from the exercise of stock options of Realty. (c) Note receivable at 7% interest, payable in five annual installments through 1992, arising from the exercise of stock options of Realty.
SANTA ANITA OPERATING COMPANY AND SUBSIDIARIES
SCHEDULE II - AMOUNTS RECEIVABLE FROM RELATED PARTIES AND UNDERWRITERS, PROMOTERS, AND EMPLOYEES OTHER THAN RELATED PARTIES
FOR THE YEARS ENDED DECEMBER 31, 1993, 1992 AND 1991
- -------------- (a) Note receivable at the prime rate, adjusted annually, payable in five annual installments through 1995, arising from the exercise of stock options of Operating Company. (b) Note receivable at the prime rate, adjusted annually, payable in five annual installments through 1993, arising from the exercise of stock options of Operating Company. (c) Decreased May 5, 1993. (d) The balance of Mr. Strub's note will be reduced at the rate of $5,000 per month by his widow, Mrs. Elizabeth Strub, who has personally guaranteed the note. Additionally, irrevocable escrow instructions have been executed by the trustee of Mr. Strub's estate wherein escrow proceeds arising from the sale of a single family residence will be applied to the outstanding balance.
SANTA ANITA OPERATING COMPANY AND SUBSIDIARIES
SCHEDULE II - AMOUNTS RECEIVABLE FROM RELATED PARTIES AND UNDERWRITERS, PROMOTERS, AND EMPLOYEES OTHER THAN RELATED PARTIES
FOR THE YEARS ENDED DECEMBER 31, 1993, 1992 AND 1991
- -------------- (a) Note receivable at the prime rate, adjusted annually, payable in five annual installments through 1992, arising from the exercise of stock options of Operating Company.
(b) Note receivable at the prime rate, adjusted annually, payable in five annual installments through 1995, arising from the exercise of stock options of Operating Company.
(c) Note receivable at the prime rate, adjusted annually, payable in five annual installments through 1993, arising from the exercise of stock options of Operating Company.
(d) Note receivable at 7% interest, payable in five annual installments through 1992, arising from the exercise of stock options of Operating Company.
SANTA ANITA OPERATING COMPANY AND SUBSIDIARIES
SCHEDULE V - PROPERTY, PLANT AND EQUIPMENT
FOR THE YEARS ENDED DECEMBER 31, 1993, 1992 AND 1991
SANTA ANITA OPERATING COMPANY AND SUBSIDIARIES
SCHEDULE VI - ACCUMULATED DEPRECIATION, DEPLETION AND AMORTIZATION OF PROPERTY, PLANT AND EQUIPMENT
FOR THE YEARS ENDED DECEMBER 31, 1993, 1992 AND 1991
SANTA ANITA REALTY ENTERPRISES, INC.
SCHEDULE VIII - VALUATION AND QUALIFYING ACCOUNTS
DECEMBER 31, 1993
SANTA ANITA REALTY ENTERPRISES, INC.
SCHEDULE X - SUPPLEMENTARY INCOME STATEMENT INFORMATION
FOR THE YEARS ENDED DECEMBER 31, 1993, 1992 AND 1991
SANTA ANITA OPERATING COMPANY AND SUBSIDIARIES
SCHEDULE X - SUPPLEMENTARY INCOME STATEMENT INFORMATION
FOR THE YEARS ENDED DECEMBER 31, 1993, 1992 AND 1991
SANTA ANITA REALTY ENTERPRISES, INC. SCHEDULE XI - REAL ESTATE AND ACCUMULATED DEPRECIATION DECEMBER 31, 1993
The accompanying notes are an integral part of this schedule.
SANTA ANITA REALTY ENTERPRISES, INC. SCHEDULE XI - REAL ESTATE AND ACCUMULATED DEPRECIATION DECEMBER 31, 1993 (CONTINUED)
- ------------ Notes
(a) Initial costs December 31, 1979 book value (b) Component depreciation used (c) All dollar figures represent 100% of amounts attributable to the property (d) Initial costs December 31, 1987 book value (e) Property subject to Pacific transaction (Note 2)
INDEPENDENT AUDITORS' REPORT -----------------------------
To the Partners H-T Associates
We have audited the accompanying consolidated balance sheet of H-T Associates (a Maryland general partnership) and subsidiary (a Maryland general partnership) as of December 31, 1993, and the related consolidated statements of operations, partners' capital and cash flows for the year then ended. These consolidated financial statements are the responsibility of H-T Associates' management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides 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 H-T Associates and subsidiary as of December 31, 1993, and the results of their operations and their cash flows for the year then ended in conformity with generally accepted accounting principles.
KPMG PEAT MARWICK
San Diego, California February 11, 1994
INDEPENDENT AUDITORS' REPORT -----------------------------
To the Partners H-T Associates San Diego, California
We have audited the accompanying consolidated balance sheet of H-T Associates (a Maryland general partnership) and subsidiary (a Maryland general partnership) as of December 31, 1992, and the related consolidated statements of operations, partners' capital and cash flows for the year then ended. These financial statements are the responsibility of H-T Associates' management. Our responsibility is to express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the 1992 consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of H-T Associates and subsidiary as of December 31, 1992, and the results of their operations and their cash flows for the year then ended in conformity with generally accepted accounting principles.
KENNETH LEVENTHAL & COMPANY
Newport Beach, California January 28, 1993
INDEPENDENT AUDITORS' REPORT ----------------------------
To the Partners H-T Associates San Diego, California
We have audited the accompanying consolidated statements of operations, partners' capital and cash flows of H-T Associates (a Maryland general partnership) and subsidiary (a Maryland general partnership) for the year ended December 31, 1991. These financial statements are the responsibility of H-T Associates' management. Our responsibility is to express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, such 1991 consolidated financial statements present fairly, in all material respects, the results of operations and cash flows of H-T Associates and subsidiary for the year ended December 31, 1991, in conformity with generally accepted accounting principles.
DELOITTE & TOUCHE
San Diego, California February 3, 1992
H-T ASSOCIATES (a Maryland general partnership) AND SUBSIDIARY (a Maryland general partnership)
CONSOLIDATED BALANCE SHEETS ---------------------------
See notes to consolidated financial statements.
H-T ASSOCIATES -------------- (a Maryland general partnership) AND SUBSIDIARY (a Maryland general partnership)
CONSOLIDATED STATEMENTS OF OPERATIONS -------------------------------------
See notes to consolidated financial statements.
H-T ASSOCIATES -------------- (a Maryland general partnership) AND SUBSIDIARY (a Maryland general partnership)
CONSOLIDATED STATEMENTS OF PARTNERS' CAPITAL --------------------------------------------
YEARS ENDED DECEMBER 31, 1993, 1992 AND 1991 --------------------------------------------
See notes to consolidated financial statements.
H-T ASSOCIATES -------------- (a Maryland general partnership) AND SUBSIDIARY (a Maryland general partnership)
CONSOLIDATED STATEMENTS OF CASH FLOWS -------------------------------------
See notes to consolidated financial statements.
H-T ASSOCIATES (a Maryland general partnership) AND SUBSIDIARY (a Maryland general partnership)
CONSOLIDATED STATEMENTS OF CASH FLOWS -------------------------------------
(Continued)
See notes to consolidated financial statements.
H-T ASSOCIATES -------------- (a Maryland general partnership) AND SUBSIDIARY (a Maryland general partnership)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ------------------------------------------
DECEMBER 31, 1993, 1992 AND 1991 --------------------------------
A. Organization and Accounting Policies: ------------------------------------
H-T Associates (the "Partnership") is a Maryland general partnership formed on July 28, 1987. Its primary asset is a 65% ownership in Towson Town Center Associates ("TTCA"), formed to develop and operate a regional shopping center near Baltimore, Maryland. The general partners of the Partnership are Ernest W. Hahn, Inc. and Santa Anita Realty Enterprises, Inc. The Partnership is to continue until December 31, 2087, unless terminated earlier. Profits and losses are shared as follows:
Ernest W. Hahn, Inc. ("Hahn") 50% Santa Anita Realty Enterprises, Inc. ("Santa Anita") 50%
The consolidated financial statements of the Partnership include the accounts of the Partnership and TTCA. TTCA is a Maryland general partnership comprised of the Partnership and DeChiaro Associates ("DeChiaro") as 65% and 35% general partners, respectively. All significant intercompany balances and transactions have been eliminated.
Certain reclassifications of prior year amounts have been made in order to conform with the current year presentation.
The Partnership's accounting policies are as follows:
1. Shopping center property is recorded at cost and includes direct construction costs, interest, construction loan fees, property taxes and related costs capitalized during the construction period, as these amounts are expected to be recovered from operations.
2. The costs of shopping center buildings and improvements, less a 5% salvage value, are depreciated using the straight-line method over the estimated useful life of 40 years.
3. Direct costs of obtaining leases and permanent financing are deferred and are being amortized over the lease and loan periods, respectively.
4. Maintenance and repairs are charged to operations as incurred.
5. Expenditures for betterments are capitalized and depreciated over the remaining depreciable life of the property.
6. Costs incurred in connection with early termination of a tenant lease are amortized over the life of the lease with the replacement tenant. To the extent payments received from an incoming tenant do not represent future rentals or cost recoveries for tenant improvements, they are recorded as income when received.
H-T ASSOCIATES -------------- (a Maryland general partnership) AND SUBSIDIARY (a Maryland general partnership)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) ------------------------------------------------------
A. Organization and Accounting Policies: (continued) ------------------------------------
7. Taxable income or loss of the Partnership is reported by, and is the responsibility of, the respective partners. Accordingly, the Partnership makes no provision for income taxes.
8. The Partnership recognizes scheduled rent increases on a straight-line basis. Accordingly, a deferred receivable for rents which are to be received in subsequent years is reflected in the accompanying consolidated balance sheets.
9. The differential to be paid or received under interest rate swap agreements is accrued as interest rates change, and is recognized over the life of the agreements (Note B).
B. Notes payable: -------------
In 1990, TTCA entered into a building loan agreement with a commercial bank, secured by an indemnity deed of trust encumbering the property. In connection with the loan, Hahn and Santa Anita executed a repayment guaranty of $66,135,000 each and DeChiaro executed a limited repayment guaranty of $4,513,000. TTCA can borrow up to $170,000,000. The principal balance of the loan is due May 1999. The agreement provides that TTCA can: (1) obtain funds at the then current prime rate of the commercial bank; (2) obtain funds based on the then current London Interbank Offered Rate ("LIBOR") plus a spread (as defined); or, (3) obtain funds through the issuance of commercial paper at rates based upon the interest rates offered in the commercial paper market plus letter of credit fees. For the years ended December 31, 1993 and 1992, all funds were obtained under the commercial paper option for a total outstanding balance of $164,641,000 and $159,473,000, respectively. Interest is payable monthly. The variable interest rate in effect on the outstanding balance as of December 31, 1993 and 1992 was 3.2% and 3.7%, respectively.
TTCA has also entered into interest rate swap agreements to reduce the impact of changes in interest rates on its loan. As of December 31, 1993 and 1992, TTCA had two interest rate swap agreements outstanding with a commercial bank which have a total notional principal amount of $82,000,000.
The agreements provide for TTCA to pay fixed rates of interest of 9.3% and 8.8% on swaps of $45,000,000 and $37,000,000, respectively, and to receive floating interest based on 30 day commercial paper rates. The effective variable rate of interest on the swap agreements as of December 31, 1993 is 3.2%. The interest rate swap agreements mature at the time the building loan matures. TTCA is exposed to credit loss in the event of nonperformance by the commercial bank with the interest rate swap agreements.
The net effective interest rates on amounts outstanding under the building loan agreement at December 31, 1993, 1992 and 1991, after giving effect to the interest rate swaps, was 6.9%, 6.4% and 8.3%, respectively.
H-T ASSOCIATES (a Maryland general partnership) AND SUBSIDIARY (a Maryland general partnership)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
B. Notes payable: (continued) -------------
The differential between the amounts paid and received under the interest rate contract is included as either an addition to, or a reduction in, interest incurred. Total interest incurred was $11,383,329, $11,420,746, and $10,419,887 of which $0, $3,491,669 and $8,515,010 was capitalized, for the years ended December 31, 1993, 1992, and 1991, respectively.
C. Commitments: ------------
Partnership as Lessor: ---------------------
TTCA leases space to tenants in the shopping center for which it charges minimum rents and receives reimbursement for real estate taxes and certain other operating expenses. The terms of the leases range from 5 to 30 years and generally provide for additional overage rents during any year that tenants' gross sales exceed stated amounts.
Future minimum rental revenues to be received under leases in force at December 31, 1993 are as follows:
Property Under Development: ---------------------------
During 1991, TTCA completed a major expansion and renovation of the previously existing shopping center. Pursuant to the Development Manager's Agreement between TTCA and Hahn, Hahn is to receive an estimated $5.1 million as compensation for managing the development of the project. Of this amount $5,080,619, $5,041,792 and $4,682,015 were incurred as of December 31, 1993, 1992 and 1991, respectively.
H-T ASSOCIATES -------------- (a Maryland general partnersip) AND SUBSIDIARY (A Maryland general partnership)
D. Advances from Partners: ----------------------
Hahn and Santa Anita have both made advances to the Partnership to finance certain construction funding requirements and other cash flow needs. These advances bear interest at 1% above the prime rate and they are required to be repaid prior to any distributions to the partners, other than distributions of Net Cash Flow from Operations (Note E). Interest incurred on the advances totaled $540,555, $558,918 and $702,773 for the years ended December 31, 1993, 1992 and 1991, respectively. The prime rate was 6.0%, 6.0% and 6.5% at December 31, 1993, 1992 and 1991, respectively.
E. Partnership Distributions: -------------------------
Distributions of Net Cash flow from Operations of the Partnership (as defined by the Amended and Restated Partnership Agreement) are subject to certain priorities. The period from inception of the Partnership through October 16, 1991 (the Grand Opening Date of the shopping center) is referred to as the Initial Term. During the Initial Term, both partners were entitled to a cumulative, compounded return (at the Prime Rate, as defined) on their capital contributions. A $500,000 distribution was made during the Initial Term. The "Primary Term" follows the Initial Term, and ends when cash flow for a consecutive 12-month period exceeds the sum of $1,192,000 plus any unpaid cumulative returns. During the "Primary Term," Santa Anita receives a cumulative return of $447,000 for the first year, $521,500 for the second year, and $596,000 for each year thereafter. Hahn receives non-cumulative returns of the same amounts. Following the Primary Term, distributions of Net Cash Flow from Operations are made to the partners in accordance with their percentage interests.
F. Related Party Transactions: --------------------------
Hahn and its wholly owned subsidiary, Hahn Property Management Corporation ("HMPC"), provide property management, leasing and various legal services to TTCA. A summary of costs and fees incurred by Hahn and HMPC by TTCA during 1993, 1992 and 1991 is presented below:
H-T ASSOCIATES -------------- (a Maryland general partnership) AND SUBSIDIARY (a Maryland general partnership)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) ------------------------------------------------------
F. Related Party Transactions: (continued) --------------------------
Related Property: -----------------
Certain property adjacent to TTCA's regional shopping center is owned by Joppa Associates ("Joppa"). The partners of TTCA are also the partners of Joppa. TTCA has benefitted from Joppa's ownership of the adjacent property. The partners consider the two properties one project.
G. Disclosures About the Fair Value of Financial Instruments: ---------------------------------------------------------
In the opinion of management, the carrying amounts of TTCA's financial instruments approximate fair value except:
Interest Rate Swaps (Note B): ----------------------------
The fair value of interest rate swaps (used for hedging purposes) is the estimated amount that TTCA would pay to terminate the swap agreements at the reporting date, taking into account current interest rates and the current credit worthiness of the swap counterparties. The fair value of the interest rate swaps is a net payable of $13,593,031.
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