ITEM 1. Business General
Pacific Gateway Properties, Inc. (the "Registrant") was incorporated under the laws of the State of New York in January of 1984 and began its operations in April of 1984 upon the transfer to it of certain assets formerly owned by Perini Corporation and the distribution of shares of the Registrant's Common Stock to the stockholders of Perini Corporation in May of 1984.
The Registrant holds interests in income producing real estate. As of December 31, 1994, the Registrant's portfolio of operating properties consists of economic interests in the following:
(i) Walnut Creek Executive Park, Walnut Creek, California--a 427,000 square foot office park consisting of twelve low-rise (one- to three-story) office buildings and a restaurant building--100% owned;
(ii) South Bay Office Tower, San Jose, California--a 164,000 square foot, twelve-story office building-- 100% owned;
(iii) Radisson Suite Hotel, Tucson, Arizona--a 306 suite hotel--100% owned;
(iv) North Tucson Business Center, Tucson, Arizona--a one-story, 91,000 square foot office/industrial building-- 100% owned;
(v) Village Commons Shopping Center, West Palm Beach, Florida--a 170,000 square foot shopping center-- 100% owned;
(vi) 1200 Weston Road, Weston (Fort Lauderdale), Florida--a three-story, 15,000 square foot office building-- 100% owned;
(vii) 410 First Avenue, Needham, Massachusetts--a single-story office/industrial building totalling 38,000 square feet located in a suburb of Boston--100% owned; and
(viii) Rincon Center, San Francisco, California--a mixed-use (retail, office, apartment) complex in downtown San Francisco. The two phase project contains 78,000 square feet of retail space, 423,000 square feet of office space, 320 apartment units and 720 parking spaces. Registrant owns 22.8% in general and limited partnership interests.
Management of Properties
The Radisson Suite Hotel has its own management organization in place which is supervised by the Registrant. The Registrant manages the remaining operating properties, Rincon Center and other third party owned properties.
Property Owned in Partnership with Others
A significant portion of the Registrant's portfolio consists of a partnership interest in Rincon Center Associates (RCA). The Registrant is not the managing general partner of the aforementioned partnership. Operating and other decisions with respect to this partnership property are generally controlled by the managing general partner unrelated to the Registrant; therefore, the Registrant has less flexibility with respect to such assets than if it owned them outright.
Business Plan and Policies
The Registrant's overall business plan has been to assemble a substantial portfolio of income producing properties. The Registrant historically focused its property acquisitions in four markets: Northern California, Arizona, Florida and Massachusetts. The Registrant has invested in mixed-use projects, office buildings, apartments, industrial buildings, a shopping center and a hotel. The Registrant's long-term objectives continue to be maximizing net cash flow from operations and achieving growth through appreciation of asset values rather than through reported earnings. The current strategic plan of the Registrant is to focus on real estate investments on the West Coast with a specific emphasis on the San Francisco Bay Area. The current investment emphasis will be in commercial properties which require aggressive management and leasing in order to maximize their potential. This strategy is influenced by the following factors: (1) the Registrant's current property portfolio is concentrated on the West Coast; and (2) the Registrant believes that geographic concentration will influence operational efficiencies, as well as new property investment and third party property management service opportunities.
During 1994, the Registrant continued to examine each asset in its portfolio, focusing on each property's current cash flow, anticipated cash requirements, the economics of its local marketplace, as well as the asset's position in that market and the potential for sale, refinancing, and return on additional investment. In conjunction with the above described process, the Registrant has also determined it appropriate to offer for sale certain assets to reduce its involvement in certain markets, create liquidity and advance the geographic and property type concentration, and efficiency of the Registrant's operations. In 1994 the Registrant sold a day care center building in Walnut Creek, California, and agreed to a redemption of the Registrant's 29.5% general partnership interest in Golden Gateway Center.
The Registrant will continue to make use of borrowed money or leveraging, as is customary with the types of properties it intends to own. The amount of mortgage debt supported by each project depends on, among other factors, its cash flow available to service such debt. In December 1994, the Registrant completed the refinancing of approximately $6.5 million of debt with one of its lenders. This refinancing is more fully discussed in the pages that follow.
Competition
Within its geographic areas of operation, the Registrant is subject to competition from a variety of investors, including insurance companies, pension funds, corporate and individual real estate developers, and investors with similar investment objectives to those of the Registrant. Some of these competitors have greater financial resources, larger staffs and longer operating histories than the Registrant. As an owner of commercial real estate properties, the Registrant competes with other owners of similar properties in connection with their financing, sale, lease, or other disposition and use.
Employees
As of December 31, 1994, the Registrant has 160 full-time and 28 part-time employees, compared to 177 full-time and 43 part-time employees as of December 31, 1993.
Financial Information About Industry Segments, Seasonality and Other Factors
The Registrant is engaged in the business of owning and managing income producing real estate. The requirement for a presentation about industry segments is not applicable. The Registrant's business is not affected by seasonal factors, except for its hotel property. All of the Registrant's operations are located in the United States.
Property Insurance
The Registrant believes that all of the wholly owned properties and properties owned in partnership with others are adequately covered by insurance. One of the California operating properties, Rincon Center, does not maintain earthquake insurance.
Tenants
There are no individual tenants in any of the Registrant's wholly owned properties that contribute 10% or more to consolidated revenues and the loss of which would have a material adverse affect on the Registrant taken as a whole. Generally, lease terms range from one to five years and leases of approximately 83,000 square feet of rental space (or approximately 9.2% of the Registrant's investment portfolio) will mature in 1995.
ITEM 2.
ITEM 2. Properties
As of December 31, 1994, the Registrant had a total of eight operating properties.
Information regarding encumbrances on the Registrant's properties is incorporated herein by reference to Item 14, Schedule III, Real Estate and Accumulated Depreciation as of December 31, 1994.
The following table sets forth detailed information regarding the Registrant's properties which were owned as of December 31, 1994:
ITEM 2. Properties, continued (dollar amounts in thousands)
Property General # of Units Name Description Location Leasable sq. ft.
Walnut Creek 11 two story woodWalnut Creek,427,000 sq.ft. set on 29 Executive Parkframed garden officeCaliforniaacres with parking for buildings, a three over 1,720 cars story structural steel frame office building, 8,000 sq. ft. restaurant
South Bay Twelve story officeSan Jose,164,000 sq.ft. office Office Tower building Californiaspace and two levels of subterranean parking
Radisson SuiteHotel operation underTucson, Arizona306 suites Hotel a license agreement with Radisson Hotels International - 7 connected mid-rise buildings
North Tucson Single story office/Tucson, Arizona91,000 sq. ft. 2 tenants;Registrant 100% $ 1,148 $485 Business Centerindustrial building 100% occupancy
(1) Funds from operations are defined as operating revenue less operating, general and administrative expenses, and interest expense on debt, excluding gains or losses, depreciation and amortization. (2) The sale of a property or the partnership interest may result in a substantial tax liability.
Year End Calendar Year 1994 1994 # of Tenants and/orOwned% Registrant Tax Funds From Occupancy % By Ownership Basis (2)Operations (1)
59% tenants; Registrant100% $17,215 $230 91% occupancy
48 tenants; Registrant100% $12,473 $200 86.5% occupancy
1994 average Registrant100% $10,499 $1,211 occupancy was 73.5%
2 tenants Registrant100% $1,148 $485 ITEM 2. Properties, continued (dollar amounts in thousands)
Property General # of Units Name Description Location Leasable sq. ft.
Village CommonsCommunity shoppingWest Palm Beach,170,000 sq. ft. Shopping Centercenter Florida
1200 Weston Road3 story officeFort Lauderdale,15,000 sq. ft. building Florida
410 First Avenue (3)Single tenant office/Needham,38,000 sq. ft. industrial buildingMassachusetts
Rincon CenterMajor mixed useSan Francisco,320 Apartments project in the SanCalifornia78,000 sq. ft. of Francisco Financial retail space District 423,000 sq. ft. of office space 2 level garage 720 automobiles
(1) Funds from operations are defined as operating revenue less operating, general and administrative expenses, and interest expense on debt, excluding gains or losses, depreciation and amortization. (2) The sale of a property or the partnership interest may result in a substantial tax liability. (3) Tenant lease expired in late 1994 and remained on a month to month basis at a reduced rent and less square footage. (4) The tax basis of this partnership investment is negative since the Registrant's share of tax losses exceeds its investment in this partnership. (5) Represents the Registrant's 22.8% equity share of Rincon Center's funds from operations.
Year End Calendar Year 1994 1994 # of Tenants and/orOwned% Registrant Tax Funds From Occupancy % By Ownership Basis (2) Operations (1)
48 tenants; Registrant 100% $8,363 $645 84% occupancy
2 tenants; Registrant 100% $311 $260 100% occupancy
1 tenant; Registrant 100% $2,123 $494 28% occupancy
100% occupancyRincon Center 22.8% $(12,255)(4)$(1,557)(5) 32 tenants; Associates, a 94% occupancyCalifornai Limited 8 tenants; Partnership 100% occupancy Other Matters Relating to Properties
South Bay Office Tower Refinancing
In December 1994, the Registrant completed the refinancing of South Bay Office Tower with its existing lender for $6.5 million. The new loan carries an 11% annual interest rate in year one, 12% thereafter until maturity, with fixed monthly payments of $68,000 with the balance due December 1997. This new loan may be prepaid at any time without penalty and is non- recourse to the Registrant.
Radisson Suite Hotel Refurbishment
The hotel is operated by employees of a corporate entity owned by the Registrant under a license agreement with Radisson Hotels International, a part of The Carlson Hospitality Group, Inc. As a result of a 1993 refinancing, the Registrant completed a $1.5 million refurbishment of the property in January 1995. The project primarily focussed upon upgrading all of the hotel's 306 suites.
Mountain Bay Plaza Settlement
In December 1993, the mortgage loan matured on Mountain Bay Plaza (MBP), and the lender was not willing to extend the loan. In March 1995, the Registrant and MBP's lender signed a Settlement Agreement and Mutual Release (the "Agreement"). The Agreement provides for a release of all claims and counterclaims by and between the Registrant and MBP's lender thus allowing the lender to complete its foreclosure on MBP.
410 First Avenue Pledged as Collateral
In 1986 this property was pledged as collateral to secure a $6.25 million letter-of-credit in favor of Rincon Center Associates' lender. In July 1993, Rincon Center Associates completed refinancing on Phases One and Two, and the letter- of-credit was reduced to $4.5 million. This property is occupied by a single tenant, and the lease for this tenant expired during the fourth quarter of 1994. The tenant currently occupies part of the space on a month-to-month basis at a reduced rent. The Registrant is actively seeking to re-lease or sell this building. As a result of a decline in market rents for this type of building, the Registrant has recorded a $1 million provision for write-down to net realizable value as more fully discussed in the Registrant's Consolidated Financial Statements.
ITEM 3.
ITEM 3. Legal Proceedings
The Registrant is involved in various other claims and lawsuits incidental to its business. In the opinion of the Registrant, these other claims and lawsuits in the aggregate will not have a material adverse impact on the Registrant's financial condition.
ITEM 4.
ITEM 4. Submission of Matters to a Vote of Security Holders
Not applicable.
PART II
ITEM 5.
ITEM 5. Market for Registrant's Common Equity and Related Stockholder Matters
Common Stock
On March 15, 1995, there were approximately 3,000 holders of record of the Registrant's Common Stock. The Registrant's Common Stock is traded on the American Stock Exchange under the symbol "PGP".
The table below sets forth, for the indicated periods, the high and low prices per share of the Registrant's Common Stock as reported on the American Stock Exchange Consolidated Reporting System.
HighLow
First Quarter (through March 15, 1995) $4 3/16 $3 3/8
First Quarter 4 3 3/8 Second Quarter 3 7/8 3 1/16 Third Quarter 4 5/8 3 3/8 Fourth Quarter 4 1/4 2 7/8
First Quarter 3 5/82 3/8 Second Quarter 3 3/82 1/2 Third Quarter 3 1/82 1/4 Fourth Quarter 3 3/42 7/16
ITEM 6.
ITEM 6. Selected Financial Data. The selected financial data should be read in conjunction with the Consolidated Financial Statements and related notes in Item 14. The selected financial data is not covered by the reports of the independent public accountants. (In thousands, except per share data)
AS OF DECEMBER 31,
1994 1993 1992 1991 1990
FINANCIAL POSITION Investment and hotel properties, net of depreciation and amortization $58,359$75,786$79,470$105,426$133,686 Equity investment in Rincon Center Associates 4,020 6,491 7,272 8,542 9,810 Deferred tax asset 6,845 -- -- -- -- Other assets 2,210 2,313 2,671 21,157 2,006 Total assets $71,434$ 84,590$ 89,413$135,125$145,502 Debt $63,099$ 98,916$107,732$146,023$163,576 Minority interests$ --$ --$ --$ --$ 411 Deferred tax liability $12,209$ --$ --$ 902$ -- Excess of cash distributions received over equity in earnings of Golden Gateway Center$ --$ 18,126$ 19,839$ 19,795$ 23,790 Stockholders' deficit$ (6,502)$(35,321)$(41,795)$(38,964)$(49,863) Stockholders' deficit per share, primary$ (1.58)$ (9.10)$ (10.77)$ (10.04)$ (12.85) Stockholders' deficit per share, fully diluted$ (1.55)$ (9.05)$ (10.77)$ (10.04)$ (12.85)
ITEM 6. Selected Financial Data, (continued) - The selected financial data should be read in conjunction with the Consolidated Financial Statements and related notes in Item 14. The selected financial data is not covered by the reports of the independent public accountants. (In thousands, except per share data)
FOR THE YEAR ENDED DECEMBER 31,
1994 1993 1992 1991 1990
INCOME RESULTS
Revenue from investment properties $11,027$14,193$15,304$19,304$21,829
Revenue from hotel property 7,357 7,837 6,725 6,447 6,427
Equity in partnership income (loss), net (1,298) (1,719) (2,749) (2,210) (3,849)
Provision for write-down to estimated net realizable value (1,000) (1,000) -- (2,538)(10,537)
Gain on sales of real estate assets 664 1,045 2,807 23,611 --
Gain (loss) on disposition of partnership interests 39,078 3,602 (2,031) -- --
Extraordinary items (325) 4,850 -- 2,967 --
Net income (loss)$28,817$ 4,583$ (2,831) $10,897$(24,346)
Income (loss) per share, primary:
Income (loss) before extraordinary items $ 7.10$ (0.07)$ (0.73)$ 2.04$ (6.27) Extraordinary items (0.08) 1.25 -- 0.77 --
Net income (loss), primary$ 7.02$ 1.18$ (0.73)$ 2.81$ (6.27)
Number of common shares and share equivalents outstanding, primary 4,106 3,881 3,879 3,879 3,879
Income (loss) per share, fully diluted:
Income (loss) before extraordinary items $ 6.96$ (0.07)$ (0.73)$ 2.04$ (6.27)
Extraordinary items (0.08) 1.24 -- .77 --
Net income (loss), fully diluted $ 6.88$ 1.17$ (0.73)$ 2.81$ (6.27)
Number of common shares and share equivalents outstanding, fully diluted 4,187 3,904 3,879 3,879 3,879
ITEM 7.
ITEM 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Financial Condition
Capital Improvements, Tenant Improvements and Other Deferred Costs -- In 1994 there were additions to investment and hotel properties amounting to approximately $5.9 million for tenant improvements, capital improvements and other deferred costs which includes leasing commissions and loan fees.
Financing -- A total of approximately $20.4 million of debt was repaid in 1994 as a result of the redemption of the 29.5% partnership interest in Golden Gateway Center, disposition of one property and scheduled debt amortization, as more fully discussed in the Registrant's Consolidated Financial Statements. In addition, approximately $18.9 of debt was removed from the Registrant's consolidated Balance Sheet as a result of the settlement reached with the lender of Mountain Bay Plaza. The Registrant completed one refinancing in 1994 related to its mortgage debt in the amount of $6.5 million.
On December 31, 1994, the face amount of the floating rate mortgage debt totaled approximately $39.6 million, bearing interest at year-end weighted average rate of 8.23%. The face amount of the fixed rate mortgage debt totaled approximately $20.1 million bearing interest at year-end weighted average rate of 9.43%. The book value of the Registrant's debt differs from the face value as more fully described in the Registrant's Consolidated Financial Statements.
Net Income (Loss)
Investment Properties -- During 1994, the income from investment properties was $385,000 compared to a loss of $1,165,000 during 1993. Approximately $3,343,000 (of the net $3,166,000 reduction in rental revenues) and approximately $1,728,000 (of the net $1,624,000 reduction in operating expenses) is due to several property dispositions in 1993 and 1994. For the remaining balance of investment properties, there was an increase in rental revenue of approximately $178,000 and an increase in operating expenses of approximately $104,000 from 1993 to 1994. This increase in rental revenue in 1994 is primarily a result of rental payments commencing in the fourth quarter for a portion of the new leases signed in mid 1994. The increase in operating expenses is primarily attributable to increases in certain operating expenses. Interest expense decreased from $5,463,000 in 1993 to $3,356,000 in 1994 as a result of the Registrant's 1993 debt restructuring, certain asset dispositions, and the Mountain Bay Plaza foreclosure. The Registrant's decrease in interest expense would have been greater, but rising interest rates during 1994 on its floating rate mortgage debt negatively impacted these results.
The reduction in the loss between 1993 and 1992 was a result of a decrease in revenues of $1,111,000 that were offset by a reduction in operating expenses of $347,000, interest expense reduction of $415,000, and lower depreciation and amortization of $535,000. The decrease in revenue of $1,111,000 between 1993 and 1992 was attributable to a combination of a decrease in revenues from property dispositions in 1992 and 1993; tenant renewals at lower rental rates, tenants downsizing and/or tenants vacating; a reduction in expense recoveries from new and renewing tenants receiving new expense base years; and to a lesser extent, lower expense pass throughs due to overall property expense reductions. These amounts were offset by new tenant lease revenue in 1993.
Hotel Property -- The hotel property had income of $827,000 in 1994 compared with income of $833,000 in 1993. As a result of lower corporate demand and the impact of the hotel's refurbishment during the third and fourth quarters of 1994, occupancy decreased from 1993 to 1994. However, the hotel was able to achieve an increase in average daily rates from 1993 to 1994 which partially offset the impact from the decline in occupancy. Even though interest rates increased in 1994, interest expense on the hotel's debt remained flat primarily as a result of the effects of the Registrant's debt restructuring with its primary lender in December 1993. The hotel property had income of $833,000 in 1993 compared with a loss of $45,000 in 1992. The bulk of the improvement relates to an increase in both the average daily rate and occupancy between 1992 to 1993 and a decrease in operating expenses. Interest expense decreased from $941,000 in 1992 to $744,000 in 1993 primarily as a result of lower floating interest rates.
Partnership Operations -- Golden Gateway Center (GGC) -- In October 1994 the GGC partnership completed a redemption of the Registrant's partnership interest for $21 million. The equity in partnership income reflects only the Registrant's share of income, expenses and distributions for the first nine months of 1994. GGC's revenues increased 3.3% in 1993 over 1992, while operating expenses decreased by 4.3%, resulting in a $1,984,000 increase in net operating income from $9,769,000 in 1992 to $11,753,000 in 1993. The increase in 1993 net operating income is due to increased occupancy, rental rate increases and reductions in operating expenses. The increase in interest expense resulted from increased borrowings related to GGC's capital improvement program. The Registrant sold 3% of its partnership interest in February 1993 and owned 29.5% partnership interest for the balance of 1993.
Rincon Center Associates (RCA) -- RCA's net loss decreased from $11.9 million in 1993 to a net loss of $10.4 million in 1994. The decrease in the net loss is a result of lower operating costs and depreciation and increased rental revenues. Financing costs increased due to higher interest rates. RCA's revenues were relatively flat between 1993 and 1992 since the project reached stabilized occupancy in 1992. Operating expenses in 1993 included a one-time non-cash charge of $560,000 from the amortization of deferred lease costs relating to Rincon Center Phase One's master lease. Excluding the one-time non-cash charge of $560,000, operating expenses in 1993 decreased approximately 4% from 1992 as a result of continued cost reduction efforts. RCA's interest expense decreased from $10,862,000 in 1992 to $10,582,000 in 1993. This decrease in interest expense resulted from a decrease in interest rates on the project's debt during 1993 and a reduction of debt on the project as a result of a paydown of the debt outstanding in 1993 in connection with the two refinancings. A copy of the RCA audited Financial Statements are included as an exhibit to this report.
General and Administrative Expenses -- General and administrative expenses decreased from $1,593,000 in 1993 to $1,446,000 in 1994, and decreased from $1,837,000 in 1992 to $1,593,000 in 1993. The decrease in expenses relates to a combination of cost reduction measures including a reduction in personnel costs, other professional services, directors' fees, and bonuses to former executives.
Interest Expense on Debt Secured by Equity Investment in GGC and Other Corporate Debt -- In 1994, corporate interest expense relates to that portion of the Registrant's debt with its primary lender that was cross- collateralized by the Registrant's partnership interest in Golden Gateway Center (GGC). Corporate interest increased from $570,000 in 1993 to $754,000 in 1994. This increase is a result of the Registrant's debt restructuring with its primary lender which increased the amount of debt cross-collateralized by the GGC partnership interest and higher interest rates during 1994.
Prior to 1994, interest expense related primarily to borrowings under the Registrant's non-revolving line-of-credit, unsecured notes and bonds, and unsecured notes payable to a subsidiary of Perini Corporation. Interest expense related to this corporate debt decreased from $740,000 in 1992 to $570,000 in 1993. This decrease is mainly attributable to a reduction in the non-revolving line-of-credit borrowings from $10.5 million to $9 million in February 1993, relating to the use of $1.5 million of proceeds from the sale of the Registrant's 3% partnership interest in Golden Gateway Center, and lower interest rates.
Interest and Fee Expense for Debt Related to Equity Investment in RCA -- During 1994 and 1993, the Registrant incurred approximately $199,000 and $161,000, respectively, in interest and fee expense related to the funding arrangement with the other general partner on Rincon Center which is more fully discussed in the Registrant's Consolidated Financial Statements. The funding arrangement with the other general partner on Rincon Center did not exist in 1992.
Interest Income -- During 1994, 1993 and 1992, interest income was $138,000, $18,000 and $219,000, respectively. Interest income in 1994 consists primarily of $82,000 for interest earned on the redemption of the Registrant's GGC interest between September 30, 1994, closing date, and the date when the Registrant received the funding from the redemption in October 1994. Interest income in 1993 consists primarily of interest earned on cash invested. Interest income in 1992 consists primarily of interest earned in connection with the sale of the Registrant's 12.2% partnership interest in GGC in December 1991.
Forgiveness of Accrued Interest -- In 1992, the Registrant recorded a $400,000 gain from forgiveness of accrued interest payable to a subsidiary of Perini Corporation.
Other Income -- In 1994 and 1993, other income consists primarily of income from the sale of vacant land in Colorado and Florida. The amounts for 1992 include primarily accrued fees for RCA for posting a secured letter-of-credit and amortization of a deferred gain on Golden Gateway Center.
Gain on Sale of Partnership Interests -- In October 1994, the Golden Gateway Center (GGC) partnership completed a redemption of the Registrant's remaining 29.5% partnership interest in GGC resulting in a gain of approximately $39 million as more fully discussed in the Registrant's Consolidated Financial Statements. In February 1993, the Registrant disposed of a 3% partnership interest in GGC resulting in a gain of approximately $3.6 million. The 1992 loss of approximately $2 million was recorded in connection with the dissolution of the Southwest Village partnership.
Gain on Sales of Real Estate Assets, Net -- In July 1994, the Registrant completed the sale of a separately parcelled building at Walnut Creek Executive Park to an unrelated third party. In connection with this disposition, the Registrant realized a gain of $664,000. In 1993, the Registrant recorded a loss of approximately $204,000 on the sale of two Florida buildings and a non-cash gain of $1,249,000 on the disposition of one building in Arizona. Results for 1992 reflect the gain on a sale of real estate assets from the sale of an industrial property to a subsidiary of Perini Corporation.
Provision for Write-Down to Estimated Net Realizable Value -- In 1994, the Registrant recorded a provision for write-down to net realizable value of $1 million as a result of the sole tenant of the 410 First Avenue building not renewing its lease, and a downturn in market rental and sales rates. In 1993, the Registrant recorded a provision for write-down to net realizable value of $1 million in connection with the funding of a $1 million letter-of-credit to the lender on the Mountain Bay Plaza property, Mountain View, California, as a result of the lender instituting foreclosure proceedings. There were no write-downs of investment properties' book values to their estimated net realizable value in 1992.
Income Tax (Provision) Benefit -- The Registrant used a portion of its net operating loss carryover to reduce its 1994 taxable income, which resulted in the Registrant recording a net $7.4 million provision for income taxes as more fully discussed in the Registrant's Consolidated Financial Statements. The Registrant has used a portion of its net operating loss carryover to eliminate 1993 and 1992 taxable income, except for certain state franchise taxes. As a result of utilizing its net operating loss carryover in 1992 to offset the 1991 deferred tax liability, the Registrant recorded a benefit for income taxes of $899,000 in 1992.
Extraordinary Gain (Loss) from Extinguishment of Debt --In December 1994, the Registrant completed a refinancing with the existing lender at South Bay Office Tower (SBOT), San Jose, California, which resulted in additional funding and a modification of terms. As a result, the Registrant has written-off the unamortized portion of the 1993 loan fees of $325,000 and capitalized the 1994 loan fees. In December 1993, the Registrant completed a discounted pay-off and refinancing of the SBOT resulting in a gain from the extinguishment of debt of $4,850,000.
Liquidity and Capital Resources
The bulk of the Registrant's resources are committed to relatively non-liquid real estate assets. Traditionally, these assets, due to their value and cash flow, provided the Registrant with an ability to generate capital as required, both internally and externally, through asset-based financings. In addition, in 1994, 1993 and 1992 assets or portions thereof, were sold to provide further liquidity.
During 1994, 1993 and 1992, the Registrant took several aggressive actions to generate and conserve cash and continues to review and analyze additional potential actions. At the same time, the Registrant is seeking to retain value and identify future opportunities for investment. The Registrant's liquidity was under significant strain throughout 1994, 1993 and 1992; this condition continues to be the case in 1995. The Registrant sought to reduce the strain by minimizing its financial exposure to properties secured by non-recourse mortgage loans. The Registrant conveyed three properties to their respective lenders in 1992 in satisfaction of $21 million of non-recourse debt. No properties were conveyed to lenders in 1993. In 1994, Mountain Bay Plaza was transferred to its lender in satisfaction of approximately $18.9 million of non- recourse debt as previously discussed. In addition, the Registrant actively pursued potential sales of certain real estate assets in cases where a transaction would generate acceptable stockholder value and corporate liquidity. In 1994, the Registrant agreed to the redemption of its remaining 29.5% partnership interest in Golden Gateway Center partnership and sold one building.
In December 1993, the Registrant completed the refinancing of South Bay Office Tower, San Jose, California, with a new lender for $5.5 million. As a result, the Registrant recorded an extraordinary gain from extinguishment of debt of $4.85 million. In December 1994, the Registrant refinanced the South Bay Office Tower with the same lender for $6.5 million and a modification of loan terms, resulting in an extraordinary loss from this refinancing as more fully discussed above. The net proceeds from the refinancing will be used to fund tenant improvements, leasing commissions and capital improvements.
In December 1993, the Registrant completed a restructuring of $49.3 million of existing debt consisting of its non-revolving line-of-credit, letter-of-credit, unsecured bonds, and mortgages with its primary lender on its Walnut Creek Executive Park, North Tucson Business Center, Weston Building, and Radisson Suite Hotel. In connection with the restructuring, the Registrant issued to the primary lender Warrants to acquire up to 2 million shares of the Registrant's Common Stock as an inducement to complete the restructuring. The exercise price for the Warrants is $2.875 per share. Warrants to acquire 1 million shares are immediately exercisable. In addition, the primary lender is entitled to amortization in the form of minimum quarterly fixed payments plus a percentage of remaining cash flow. There is also a restriction on the ability of the Registrant to pay dividends, and the Registrant is required to pay the primary lender a portion of any proceeds from the refinancing or sale of collateralized property or any new capital raised.
The Registrant paid its primary lender $18.5 million of the $21 million in proceeds from the redemption of the Registrant's GGC partnership interest in October 1994, which resulted in the cancellation of 350,000 warrants on January 31, 1995. An additional 650,000 warrants will be cancelled if the Registrant repays the primary lender $1.5 million by March 31, 1996, in addition to the minimum $1 million annual debt amortization. The Registrant will try to repay the primary lender the amount necessary to cancel the 650,000 warrants from the proceeds of either asset sales or mortgage refinancings.
The Registrant recognizes that the issuance of the remaining warrants, when and if exercised, may result in significant dilution to the Registrant's shareholders. If the remaining 1,650,000 warrants are exercised it would provide $4.74 million of additional paid-in capital; however, there is no assurance that the warrants will be exercised by the Registrant's primary lender. Further details of this restructuring and warrants are more fully discussed in the Registrant's Consolidated Financial Statements.
The $4.5 million letter-of-credit posted by the Registrant in favor of a Rincon Center Associates' lender was extended to June 1995. This letter-of-credit is secured by the Registrant's 410 First Avenue property which is currently listed for sale, and the lender has requested additional collateral. The Registrant is seeking to satisfy the collateral request and/or further reduce the required amount of the letter-of-credit, however, its ability to do so is dependent upon the cooperation of another lender.
It is the Registrant's intent to attempt to increase its liquidity in a variety of ways including: (a) debt refinancings, (b) the sale of properties which do not fit its long term strategy, and (c) infusion of new capital through either a private placement or public offering when market conditions permit. Funds raised in the preceding fashion would be used for such things as tenant improvements and other capital requirements, certain mandatory debt reductions, and new investments.
The Registrant experienced more stabilized operating results in 1994, and expects this trend to continue since certain unprofitable properties disposed of in 1992 and 1993 will no longer affect operating results. In addition, the completion of certain leasing transactions during the second and third quarters of 1994 has substantially reduced the level of vacancy in the Registrant's portfolio. Since rent commencement for the lease transactions that were completed in July 1994 did not begin until late 1994 and early 1995, the effect of all of these leases will not impact the Registrant's financial results until the second quarter of 1995.
Impact of Inflation
The Registrant's management believes that inflation has not had any appreciable negative impact on the Registrant's operations because a substantial number of the Registrant's and partnerships' commercial leases include provisions requiring increases in rental payments based upon increases in various consumer price indices as well as the pass-through to tenants of specified operating expense increases.
ITEM 8.
ITEM 8. Financial Statements and Supplementary Data
The Reports of Independent Public Accountants, Consolidated Financial Statements, Supplementary Schedules and Financial Statements of Rincon Center Associates are set forth on the pages that follow in this Report and are hereby incorporated herein.
ITEM 9.
ITEM 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
PART III
ITEM 10.
ITEM 10. Executive Officers of the Registrant
Set forth below is certain information concerning persons who are executive officers of the Registrant.
Roger D. Snell (Age 39). Mr. Snell has been a Director, President and Chief Executive Officer of the Registrant since July 1992. His responsibilities include carrying out the decisions of the Board of Directors and overseeing all of the Company's operations and investments on a daily basis. Prior to joining PGP in July of 1993, Mr. Snell was the partner in charge of commercial operations for Paragon Group in Northern California. He began that operation in late 1985 and was responsible for the development, acquisition, management and leasing of over 2,650,000 square feet of properties. Mr. Snell has a B.S. in Business Administration from the University of California at Berkeley and an MBA from the Harvard Business School. He is an active member in the National Association of Real Estate Investment Trusts (NAREIT), the Urban Land Institute (ULI), and is a former member of the National Association of Office and Industrial Parks (NAIOP) and the Society of Industrial and Office Realtors (SIOR).
Raymond V. Marino (Age 36). Mr. Marino has been a Vice President of the Registrant since August 1992. His responsibilities include the management of personnel in the property management and financial operations of the Registrant, and assisting the Registrant's President with investor relations and debt and equity financings. Previously, he was with Hunting Gate Investments, a private British real estate investment and management company, as Vice President of Finance and Controller. Mr. Marino has a Bachelor of Science Degree in Accounting from Santa Clara University and a Masters Degree in Taxation from Golden Gate University. Mr. Marino maintains an active license as a California Certified Public Accountant, and is a member of the American Institute of CPA's, California Society of CPA's, and National Association of Real Estate Investment Trusts.
Christopher M. Watson (Age 36). Mr. Watson has been Vice President of the Registrant since September 1992. His responsibilities include the management of personnel in marketing, leasing and construction operations of the Registrant, and marketing of third party property management services. Previously, he was Vice President for Coldwell Banker Commercial Real Estate Services Inc., as a licensed real estate agent representing both property owners and investors in commercial real estate leasing and acquisitions. Mr. Watson is a graduate from the University of California at Berkeley.
Each executive officer holds office until the first meeting of directors following the annual meeting of stockholders and until his successor is duly chosen and qualified.
Additional information called for by Part III is hereby incorporated by reference from the information set forth under the headings "Election of Directors", "Ownership of Common Stock by Directors and Officers", "Certain Other Beneficial Holders", "Executive Compensation" and "Certain Transactions" in the Registrant's definitive proxy statement for the Annual Meeting of Stockholders to be held May 9, 1995, such definitive proxy statement to be filed with the Securities and Exchange Commission pursuant to Regulation 14A within 120 days after the end of the fiscal year covered by this Annual Report on Form 10-K.
PART IV
ITEM 14.
ITEM 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a)1. The following financial statements and supplementary financial information are filed as part of this report:
Financial Statements of the Registrant Page
Consolidated Balance Sheet as of December 31, 1994 and 1993 18
Consolidated Statement of Income (Loss) for the three years ended December 31, 1994, 1993 and 199219
Consolidated Statement of Stockholders' Deficit for the three years ended December, 1994, 1993 and 1992 20
Consolidated Statement of Cash Flows for the three years ended December 31, 1994, 1993 and 199221
Notes to Consolidated Financial Statements22 - 32
Report of Independent Public Accountants33
(a)2.The following financial statement schedule is filed as part of this report:
Report of Independent Public Accountants on Schedule34
Schedule III -- Real Estate and Accumulated Depreciation as of December 31, 199435 - 36
All other schedules are omitted because of the absence of the conditions under which they are required or because the required information is included in the Consolidated Financial Statements or in the Notes thereto. Page (a)3.Exhibits
Subsidiaries of the Registrant37
(b)During the quarter ended December 31, 1994, the Registrant made one filing on Form 8-K in connection with the redemption of the Registrant's 29.5% partnership interest in Golden Gateway Center, as previously discussed.
(c)The following financial statements are filed as part of this report:
Financial Statements of Rincon Center AssociatesPage
Report of Independent Public Accountants39
Balance Sheets--December 31, 1994 and 199340
Statements of Operations for the years ended December 31, 1994, 1993 and 199241
Statements of Changes in Partner's Deficit for the years ended December 31, 1994, 1993 and 199242
Statements of Cash Flows for the years ended December 31, 1994, 1993 and 199243
Notes to Financial Statements44 - 49
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
PACIFIC GATEWAY PROPERTIES, INC. (Registrant)
By: Roger D. Snell
Roger D. Snell
President and Chief Executive Officer
Dated: March 23, 1995
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
SignatureTitle Date
Roger D. Snell Roger D. SnellPresident and Chief Executive Officer, and Director
March 23, 1995
Raymond V. Marino Raymond V. MarinoVice President (Chief Financial and Accounting Officer) March 23, 1995
Robert P. Freeman Robert P. FreemanDirector March 23, 1995
Marshall A. Jacobs Marshall A. JacobsDirector March 23, 1995
David E. Post David E. PostDirector March 23, 1995
Roderick A. Young Roderick A. YoungDirector March 23, 1995
PACIFIC GATEWAY PROPERTIES, INC. CONSOLIDATED FINANCIAL STATEMENTS
As of December 31, 1994, 1993 and 1992
PACIFIC GATEWAY PROPERTIES, INC. CONSOLIDATED BALANCE SHEET (In Thousands, Except Share Amounts)
As of December 31,
1994 1993 ASSETS Cash and short-term investments$ 359$ 743 Cash - restricted 597 -- Accounts receivable 785 993 Other current assets 42 163 Investment and hotel properties: Land 15,230 16,516 Buildings 46,741 73,192 Other deferred costs 18,463 15,563 Subtotal investment and hotel properties 80,434 105,271 Less-accumulated depreciation and amortization and net realizable value reserve (22,075) (29,485) Investment and hotel properties, net 58,359 75,786
Equity investment in and loans to Rincon Center Associates 4,020 6,491 Deferred tax asset 6,845 -- Note receivable 229 236 Other assets, net 198 178 Total assets $71,434 $ 84,590
LIABILITIES AND STOCKHOLDERS' DEFICIT Accounts payable $ 1,132 $ 1,142 Accrued payroll, property and sales taxes328 603 Prepaid rent 210 240 Accrued interest on debt 459 214 Tenant security deposits 414 624 Other current liabilities 85 46 Debt related to corporate, investment and hotel properties 61,149 97,095 Other debt related to equity investment in Rincon Center Associates1,950 1,821 Deferred tax liability 12,209 -- Excess of cash distributions received over equity in earnings to date of Golden Gateway Center -- 18,126 Total liabilities 77,936 119,911
Commitments and contingencies (Notes 2, 3 and 5) Stockholders' deficit: Common stock $1.00 par value-- Authorized--10,000,000 shares Issued--4,011,150 shares4,011 4,010 Paid-in-deficit (10,222) (10,223) Retained earnings (deficit)(99) (28,916) Treasury stock, at cost--131,186 common shares(2,082) (2,082) Warrants for common stock 1,890 1,890 Total stockholders' deficit (6,502) (35,321) Total liabilities and stockholders' deficit$ 71,434$ 84,590
The accompanying notes are an integral part of these consolidated financial statements
PACIFIC GATEWAY PROPERTIES, INC. CONSOLIDATED STATEMENT OF INCOME (LOSS) (In Thousands, Except Per Share Amounts)
For the Year Ended December 31, 1994 1993 1992 Investment Properties: Rental revenues $11,027 $14,193 $15,304 Operating expenses (5,201) (6,825) (7,172) Income before depreciation and interest expense 5,826 7,368 8,132 Interest expense (3,356)(5,463)(5,878) Depreciation and amortization (2,085)(3,070)(3,605) Investment properties income (loss) 385 (1,165) (1,351) Hotel Property: Revenues7,357 7,837 6,725 Operating expenses (5,367) (5,877) (5,474) Income before depreciation and interest expense1,990 1,960 1,251 Interest expense (779) (744) (941) Depreciation and amortization (384) (383) (354) Hotel income (loss) 827 833 (44) Equity in Partnership Losses: Golden Gateway Center (GGC) 1,085 1,007 499 Rincon Center Associates (RCA) (2,383)(2,726)(2,952) Southwest Villages -- -- (296) Equity in partnership losses (1,298) (1,719) (2,749) General and administrative expenses(1,446)(1,593)(1,837) Interest expense on debt secured by equity investment in GGC and other corporate debt (754) (570) (740) Interest and fee expense for debt related to equity investment in RCA (199) (161) -- Interest income138 18 219 Forgiveness of accrued interest -- -- 400 Other income 122 447 1,596 Loss before partnership and property transactions, reserves, income taxes and extraordinary item(2,225)(3,910)(4,506) Gain (loss) on disposition of partnership interests39,078 3,602 (2,031) Gain on sale of real estate assets, net 664 1,045 2,807 Provision for net realizable value (1,000) (1,000) -- Income (loss) before income taxes and extraordinary items36,517 (263) (3,730) Income tax (provision) benefit (7,375) (4) 899 Income (loss) before extraordinary items29,142 (267) (2,831) Extraordinary gain (loss) from extinguishment of debt (325) 4,850
Net income (loss) $28,817$ 4,583$ (2,831)
Income (loss) per share, primary: Income (loss) before extraordinary items$ 7.10$ (0.07)$ (0.73) Extraordinary items (0.08) 1.25 -- Net income (loss) $ 7.02$ 1.18$ (0.73)
Income (loss) per share, fully diluted: Income (loss) before extraordinary items$ 6.96$ (0.07)$ (0.73) Extraordinary items (0.08) 1.24 -- Net income (loss) $ 6.88$ 1.17$ (0.73)
The accompanying notes are an integral part of these consolidated financial statements
PACIFIC GATEWAY PROPERTIES, INC. CONSOLIDATED STATEMENT OF STOCKHOLDER'S EQUITY (DEFICIT) FOR THE THREE YEARS ENDED DECEMBER 31, 1994 (IN THOUSANDS)
WARRANTS PAID-IN RETAINED FOR COMMON CAPITAL EARNINGS TREASURY COMMON STOCK (DEFICIT) (DEFICIT) STOCK STOCK TOTAL
Balance at January 31, 1992 $ 4,010 $(10,223) $(30,668) $ (2,082) $ --$(38,963)
Net Loss -- -- ( 2,831) -- -- ( 2,831)
Balance at December 31, 1992 4,010 (10,223)(33,499)(2,082) --$(41,794)
Net income -- -- 4,583 -- --4,583
Issuance of warrants for common stock -- -- -- -- 1,890 1,890
Balance at December 31, 1993 4,010 (10,223)(28,916) (2,082) 1,890(35,321)
Net income -- -- 28,817 -- --28,817
Issuance of common stock from exercise of stock options 1 1 -- -- -- 2
Balance at December 31, 1994 $ 4,011 $(10,222)$ (99)$ (2,082)$ 1,890$ (6,502)
The accompanying notes are an integral part of these consolidated financial statements
PACIFIC GATEWAY PROPERTIES, INC. CONSOLIDATED STATEMENT OF CASH FLOWS (In Thousands)
For the Year Ended December 31,
1994 1993 1992 Cash flow from operating activities: Net income (loss) $28,817 $4,583$(2,831) Non-cash revenues and expenses included in income: Provision for depreciation2,529 3,530 3,959 Equity in loss of investment partnerships1,298 1,719 4,780 Provision for write-down to estimated net realizable value1,000 1,000 -- Other non-cash charges relating to investment partnerships--(187)(678) Gain on sale of real estate assets, net(664)(1,045)(2,807) Gain on disposition of partnership interests(39,078)(3,602)-- Extraordinary items 325 (4,850) -- Changes in assets and liabilities: Accounts receivable and other current assets 370 (137) 17,429 Other assets (56) (107) 93 Deferred tax benefit, net 5,364 -- (902) Accounts payable and other current liabilities70 (596)(3,845) Other liabilities (231) (171) 113 Cash flow generated by (used in) operating activities (256) 137 15,311
Cash flow from investing activities: Additions to investment and hotel properties (5,528)(1,135)(1,584) Proceeds from sale of properties 1,419 895 5,172 Proceeds from sale of partnership interest, net 20,968 1,781 -- Distributions (contribs) to investment partnerships, net89(1,698)(1,557) Distributions from GGC 929 1,120 975 Net cash generated by investing activities 17,877 963 3,006
Cash flow from financing activities: Borrowings under property and hotel debt 8,750 5,500 400 Borrowings in connection with equity investment, net129 1,760 -- Payments on debt (25,930) (6,130)(5,197) Net decrease in line-of-credit borrowings--(1,500)(9,984) Payment of loan costs and fees in connection with equity investment (359) (730) -- Mortgages satisfied in connection with property dispositions--(767) (4,500) Proceeds from exercise of stock options 2 -- -- Net cash used in financing activities(17,408) (1,867)(19,281)
Increase (decrease) in cash and short term investments 213 (767) (964) Balance at beginning of year 743 1,510 2,474 Balance at end of year ($597,000 restr at December 31, 1994)$956$ 743$1,510
Supplementary disclosures: Cash paid for interest $ 4,842 $ 6,567$10,262 Return of property and other assets to lenders in satisfaction of debt $18,766$ --$21,213
The accompanying notes are an integral part of these consolidated financial statements PACIFIC GATEWAY PROPERTIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS For the Three Years Ended December 31, 1994
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization
Pacific Gateway Properties, Inc., (the Company) is a New York corporation formed in 1984 for the purpose of investing and managing income producing real estate.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and all majority-owned subsidiaries and partnerships. Significant intercompany accounts and transactions have been eliminated in consolidation. Partnerships in which the Company has less than a 50% interest but has limited management influence, are accounted for using the equity method.
Cash and Short-Term Investments
The Company's policy is to invest cash in excess of operating requirements in income producing investments. Cash and short-term investments include cash and money market accounts, all of which have maturities of three months or less.
Cash - Restricted
The Company has recorded restricted cash in connection with the receipt of insurance proceeds that are committed to the reconstruction of a fire damaged building; proceeds from the sale of a building in July 1994 which are designated for future tenant improvements; and proceeds from the refinancing of South Bay Office Tower which are to be used for future tenant improvements, capital improvements and leasing commissions.
Investment Properties and Equity Investments in Real Estate Partnership
Land, buildings and improvements are recorded at cost. Depreciation on investment and hotel properties is provided using the straight-line method over estimated useful lives ranging from 28 to 40 years. Other deferred costs include capital improvements, tenant improvements, leasing costs, and deferred real estate mortgage costs. Deferred real estate mortgage costs consist of loan fees, legal, accounting, engineering, appraisal, and other costs associated with a financing and are amortized using the straight-line method over the primary term of related debt instrument. Costs associated with a lease are amortized over the term of the lease. The remaining deferred costs are amortized using the straight-line method over the estimated useful life of the asset to which they relate. Repairs and maintenance are charged to expense as incurred.
In 1994, one property's net book value was reduced as a result of a decrease in sales and rental rates in the market. In 1993, one property's net book value, the Mountain Bay Plaza, was reduced to the amount of the mortgage debt on the property in connection with a lender commencing proceedings to foreclose on the property, and in 1992 there was no adjustment to the net realizable value reserve.
Income Taxes
Effective January 1, 1993, the Company adopted Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" (SFAS 109). Under SFAS 109, deferred taxes are computed based on the difference between the financial statement and income tax basis of assets and liabilities using the enacted marginal tax rate. As permitted under the provisions of SFAS 109, the Company elected not to restate prior years.
Real Estate Assets and Partnership Interest Sold
Gain (loss) on sales of real estate assets and partnership interests are included in the Consolidated Statement of Income (Loss) and consist of the following (in thousands):
1994 1993 1992
Boca II $ -- $ (196) $ -- Longwood -- (8) -- Fairmount Square -- 1,249 -- Easton Industrial Park -- -- 2,807 Walnut Creek Day Care Building 664 -- -- 664 1,045 2,807 Southwest Villages -- (5) (2,031) Golden Gateway Center 39,078 3,607 -- Total $39,742 $4,647 $ 776
Per Share Data
Per share data is based on the weighted average number of the Company's common shares and common share equivalents. Outstanding warrants and stock options enter into the common shares outstanding using the Treasury Stock Method. The number of common share and common share equivalents used in the earnings per share calculations are as follows:
As of December 31, 1994 1993 1992
Primary 4,105,808 3,881,024 3,878,964
Fully diluted 4,186,515 3,904,371 3,878,964
Going Concern
The Company's Consolidated Financial Statements have been presented on a going concern basis which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. The weakening of the commercial real estate markets has resulted in a continued strain on cash flow in both 1994 and 1993. During 1994, the Company continued its program of consolidating its property portfolio commenced in 1991. In 1994 and 1992, the Company eliminated the significant cash drain associated with three properties which were transferred to their respective lenders in satisfaction of mortgages totalling $18.9 million and $21.3 million, respectively. In 1994 the Company sold off the balance of its interests in GGC to pay down a portion of its debt with its primary bank lender and cancelled 350,000 warrants for common stock.
Reclassifications
Certain prior year amounts have been reclassified to be consistent with current year classifications.
2. REAL ESTATE PARTNERSHIP INVESTMENTS
OPERATING PARTNERSHIPS
Golden Gateway Center Partnership (GGC)--San Francisco, California
On December 31, 1991, the Company sold a 12.2% partnership interest in GGC and, in a separate transaction, disposed of its option to acquire the additional 21.6% partnership interest.
The Company owned a 32.5% partnership interest in GGC in 1992 which owns the Golden Gateway Center apartment complex. In February 1993, the Company sold 3% of its partnership interest to the other partners in GGC for cash proceeds of $1,781,000, resulting in a gain of $3,607,000. As of December 31, 1993, the Company owned a 29.5% partnership interest in GGC. In October 1994, GGC redeemed the Company's remaining 29.5% partnership interest for $21 million, resulting in a gain of $39 million. The Company accounted for its investment in GGC on the equity basis since 1991. Summary Financial data for GGC is as follows (in thousands):
As of December 31, 1993
Investment property, net $20,167 Other assets 1,307 $21,474
Mortgage debt and lines of credit $79,742 Other liabilities 2,604 Partners' deficit (60,872) $21,474
For the Nine Months Ended September 30, 1994 1993 1992
Cash distributions to the Company from GGC$ 929$ 1,120$ 975
Income from operations: Revenues $15,118 $19,296 $18,676 Expenses: Operating 5,113 7,543 7,882 Interest 5,556 7,280 7,261 Write-off project costs -- -- 1,025 Depreciation and amortization 771 1,104 990 11,440 15,927 17,158 Net income 3,678 $ 3,369 $ 1,518
Company's share of net income of GGC$ 1,085 $ 1,007 $ 499
Rincon Center Associates Partnership (RCA)--San Francisco, California
The Company owns general and limited partnership interests in RCA totalling approximately 23% and is responsible for 20% of cash requirements in excess of available financing. The Company's investment in RCA includes $511,000, $1,698,000 and $1,175,000, advanced during 1994, 1993 and 1992, respectively, to fund development, operating costs and debt repayments.
RCA sold Rincon Center Phase One to Chrysler MacNally Corporation (Chrysler) in June 1988; subsequently, RCA leased the property back under a master lease which is treated as an operating lease for financial reporting purposes. In July 1993, Chrysler completed a refinancing of Rincon Center Phase One. The maturity date of this debt is July 1, 1998. Payments under the master lease agreement may be adjusted to reflect adjustments in the rate of interest payable by Chrysler on the Rincon Center Phase One debt. The master lease also permits Chrysler to put the property back to RCA at stipulated prices beginning January 1998 if long-term financing meeting certain conditions is not obtained. RCA intends to obtain financing meeting the conditions of the master lease prior to January 1998. In September 1993, RCA completed a refinancing of Rincon Center Phase Two with its existing lender. The Company has also posted a $4.5 million letter-of-credit in favor of the bank involved in a portion of the RCA financing. This letter-of-credit is secured by the Registrant's 410 First Avenue property in Needham, Massachusetts. The letter-of-credit expires June 1995.
The Company earns a fee from RCA for posting the letter-of-credit and earns a preferred return at a rate of prime plus 2% on its advances to RCA. In 1994, the Company received approximately $453,000 in letter-of-credit fees and $147,000 of interest on its advances which is recorded as a reduction to equity investment and loans to RCA. In 1993, no letter-of-credit fees or preferred return payments on its advances were accrued or received by the Company.
The Company entered into an agreement in June 1993 with the other general partner in RCA. This agreement provides the Company with the flexibility to borrow funds from the other general partner to limit its future cash obligations to RCA. Under this funding arrangement, all amounts advanced, related fees and accrued interest are non- recourse to the Company. The Company shall pay a related fee to the extent of amounts advanced multiplied by the percentage applicable to the year in which such funds are advanced as set forth hereafter:
Calendar Applicable Year Percentage
1993 6.0% 1994 6.0% 1995 10.0% 1996 17.5% 1997 and thereafter25.0%
Interest accrues on the unpaid portion of both the principal amount advanced and related fees at the Bank of America prime rate plus 2%. Amounts advanced under this funding arrangement, plus related fees and accrued interest, are required to be repaid from future cash distributed by RCA to the Company, if any.
This agreement does not reduce the level of the Company's general and limited partnership interests in RCA. As of December 31, 1994, approximately $2,171,000 had been advanced under this agreement since July 1993. In addition, fees and accrued interest relating to the amount advanced through December 31, 1994, of approximately $199,000 and $161,000 was expensed by the Company in 1994 and 1993, respectively. The unpaid portion of advances, fees and accrued interest as of December 31, 1994 and 1993, was $1,950,000 and $1,821,000, respectively, and is recorded as debt in the Company's Consolidated Balance Sheet.
Summary financial statement data for RCA is as follows (in thousands):
As of December 31, 1994 1993
Investment properties, net$116,613 $119,876 Other assets 25,312 26,730 $141,925 $146,606
Debt $ 60,895 $ 62,370 Amounts due to partners 129,150 119,389 Other liabilities 12,838 15,365 Partner's deficit (60,959) (50,518) $141,925 $146,606
1994 1993 1992
Company's cash distributions from (contributions to) RCA, net$ 89$ (1,698) $ (1,175)
Net loss from operations: Revenue $ 20,285 $ 19,708 $ 19,796 Expenses: Operating and lease expenses15,913 16,979 17,143 Financing 11,194 10,635 10,862 Depreciation and amortization 3,619 4,040 4,726 30,726 31,654 32,731 Net loss $(10,441) $(11,946) $(12,935)
Company's share of net loss of RCA$ (2,383)$ (2,726)$ (2,952)
DEVELOPMENT PARTNERSHIPS
Southwest Villages Partnership (SWV)--Phoenix, Arizona
On December 31, 1992, the Company entered into an agreement to sell the Southwest Villages property to an unrelated third party and to dissolve the partnership (the Company had a 50% partnership interest in SWV in 1992). The buyer purchased the property for $8 million. This project was funded with tax exempt Industrial Development Bonds (IDB's), and after this sale, the unpaid balance of the IDB's was approximately $4.4 million.
Each of the remaining general partners assumed 50% of the remaining IDB's. The Company was obligated to pay its $2.2 million share of the IDB's at a rate of $360,000 a year into a bond sinking fund. The Company was relieved of its obligation to fund the sinking fund obligation after December 31, 1993, as a result of a debt restructuring with its primary lender. The details of this restructuring are discussed in footnote 3.
Net loss recorded on the dissolution of the partnership at December 31, 1992, was $2,031,000. The Company made a cash contribution of $382,000 to SWV in 1992.
Summary income statement data for SWV is as follows (in thousands): Loss from operations: Revenue $ 1,574 Expenses: Operating (1,086) Financing (717) Depreciation and amortization (362) Loss on sale of project (3,844) Net Loss $(4,435)
Company's share of net loss of SWV $ (296)
3. DEBT
As of December 31, 1994 and 1993, the Company had the following debt outstanding (in thousands):
1994 1993 Debt related to corporate, investment and hotel properties:
Corporate debt and mortgages on real estate from primary lender (in accordance with Generally Accepted Accounting Principles, the recorded amount of this debt differs from the face amount of the debt as more fully discussed on the pages that follow). The interest rate and security on this debt is also described on the pages that follow.$29,446 $48,386
Other mortgages on real estate:
South Bay Office Tower, interest payable monthly, fixed at 11% in year one, and 12% thereafter until maturity. Principal due December 22, 1997.6,500 5,500
Mountain Bay Plaza, loan matured on December 1, 1993 and the property was subsequently foreclosed.--18,766
Walnut Creek Executive Park, interest fixed at 8.5%, due October 1, 1997. 8,609 8,983
1994 1993 Village Commons Shopping Center, interest variable at LIBOR plus 1.25% (7.4% at December 31, 1994), due September 30, 1996. 15,355 15,460
Construction loan:
Walnut Creek Executive Park, interest variable at prime plus 2.75% or LIBOR plus 4.5% (11.25% at December 31, 1994), due November 1, 1997. 1,239 -- $61,149 $97,095
Debt related to equity investment in RCA, interest variable at prime rate plus 2%, (10.5% at December 31, 1994). $ 1,950 $ 1,821
Corporate Debt and Mortgages on Real Estate From Primary Lender
In December 1993, the Company completed a restructuring of its non-revolving line-of-credit, letter-of- credit, unsecured bonds, and certain mortgages with its primary lender. The new loan is in the form of a Tranche A and Tranche B Note. This restructuring was completed in order to stabilize the Company's relationship with its primary lender.
The Tranche A note (Note A) with a balance of approximately $24 million is recourse debt to the Company and its subsidiaries, and is cross collateralized with several properties. Note A has a variable interest rate at LIBOR plus 2.5% payable monthly. The LIBOR rate may be fixed up to one year for minimum contract amounts of $1 million. A quarterly principal payment of $250,000 is due each year. In addition, 75% of the Company's quarterly cash flow, as defined in the loan agreement is due. No cash flow payments were required in 1994. In addition to the quarterly installments, the Note A also requires principal payments of $5 million by January 31, 1995, and $15 million by March 31, 1996. In 1994, the Company satisfied the $5 million required principal payment, and $13.5 million of the required $15 million with the $18.5 million paid to the primary lender in October 1994 from a portion of the proceeds from the redemption of its partnership interest in GGC. Note A matures November 1, 1997.
The Tranche B Note (Note B) with a balance of approximately $5.4 million (including accrued interest) is non- recourse debt cross collateralized with the same partnership interest and properties as Note A. Note B has a fixed interest rate of 9% that accrues and defers until maturity at November 1, 1997.
In connection with the restructuring, the Company issued to the primary lender warrants to acquire up to 2,000,000 shares of the Company's common stock. The exercise price for the warrants is $2.875 per share. Warrants to acquire 1,000,000 shares were immediately exercisable. Warrants to acquire 350,000 shares were cancelled on January 31, 1995, in connection with a repayment of $18.5 million to the primary lender in October 1994. Warrants to acquire an additional 650,000 shares do not become exercisable if the Company pays the required $15 million installment under the Note A with the primary lender on or prior to March 31, 1996 (of which $13.5 million has already been paid). Warrants that are exercisable expire on the later of November 1, 1997, or two years after the amounts outstanding under both Note A and Note B are repaid in full. The warrants have customary anti-dilution protection that addresses stock splits, stock dividends, recombinations and reclassifications, and certain other issuances of additional common stock. The Company also has a right of first offer to acquire the shares of common stock or warrants prior to any transfer thereof. The Company has valued the one million warrants that were exercisable at December 31, 1993, at $1.89 million which is recorded as equity in the Company's Consolidated Balance.
Statement of Financial Accounting Standards No. 15 requires the Company to account for future interest resulting from this restructuring using an imputed interest rate versus the stated rates on the Notes A and B. In addition, the primary lender's cancellation of debt of $4 million at the time of the restructuring was not recognized for financial reporting purposes. The imputed interest rate as of December 31, 1994, was approximately 5.4%. As a result, the amount of interest recorded for financial reporting purposes is lower than the stated interest on the face amount of the debt by approximately $450,000 for 1994. The face amount of the debt with the primary lender as December 31, 1994, was approximately $28 million.
Other Mortgages on Real Estate South Bay Office Tower Refinancing
In December 1994, the Company completed the refinancing of South Bay Office Tower with its existing lender for $6.5 million. The new loan carries an 11% annual interest rate in year one, 12% thereafter until maturity, with fixed monthly amortization payments of $68,000 and is due December 22, 1997. This new loan may be prepaid at any time without penalty and is non-recourse to the Company. A portion of the loan proceeds are subject to the terms and conditions of a Disbursement Agreement with the lender to fund tenant improvements, leasing commissions and capital improvements. These funds are classified on the Company's Consolidated Balance Sheet as restricted cash. As a result of this refinancing, the Company has written off the unamortized portion of the 1993 loan fees of $325,000 which is recorded as an extraordinary item. The Company has capitalized approximately $218,000 of loan fees in connection with the 1994 refinancing.
Mountain Bay Plaza (MBP) Settlement
The Company and MBP's lender entered into a Settlement Agreement and Mutual Release (the "Agreement"). As a result, the Company has eliminated the asset and debt from its Consolidated Balance Sheet as of December 31, 1994.
Construction Loan
In November 1994, the Company obtained a $4 million construction loan from its primary lender. The funds from this loan are to be used exclusively to fund the tenant improvement costs and leasing commissions. The loan has a variable interest rate at either the prime rate plus 2.75% or LIBOR plus 4.5%, payable monthly. A fixed monthly principal payment of $257,634 is due each month commencing December 15, 1994 through March 15, 1995, at which time payments are based on a formula calculated from cash flows as defined in the loan agreement. The Company has also pledged the net sales proceeds upon the sale of a building to repay this loan. The Company anticipates that it will not borrow in excess of approximately $1.5 million under this loan. The loan matures November 1, 1997.
Loan Maturities
The maturities of debt outstanding as of December 31, 1994 and required minimum principal payments in each of the next five years are summarized as follows (in thousands):
Debt Related Debt To Corporate,Related to Investment Equity and Hotel Investment Properties in RCA
1995 $ 2,392 $ -- 1996 16,745 -- 1997 42,012 -- 1998 -- -- 1999 -- -- Thereafter -- 1,950 $61,149 $1,950
4. OTHER RELATED PARTY ITEMS
Directors and Officers
As of December 31, 1992, four of the Company's eight directors were also directors of Perini Corporation (Perini), and the two companies had the same controlling stockholder group until mid 1993. Three of the four directors that were directors of Perini were not slated as nominees for another term in the Company's 1993 Proxy Statement. One of the Company's five directors was a director of Perini as of December 31, 1993 and 1994.
Service Agreement
In 1992, $57,000 was paid to Perini for specific administrative services provided and rent. No services were provided in 1994 or 1993.
Property Sale
The Company sold an industrial property to a subsidiary of Perini in 1992, for consideration of $5,000,000. The Company recognized a gain on sale of $2,807,000 in the 1992 Consolidated Statement of Income (Loss).
5. INCOME TAXES
Effective January 1, 1993, the Company provides for income taxes under the liability method in accordance with Statement of Financial Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes". For years 1992 and prior, the Company accounted for income taxes in accordance with Accounting Principles Board Opinion No. 11. There was no financial statement impact from the adoption of SFAS No. 109.
The deferred income tax provision (benefit) represents the tax effect of temporary differences between income (loss) determined for financial reporting and for income tax purposes. The Company has a tax net operating loss carryover for Federal purposes of approximately $10 million, which will expire between 2005 and 2007. The Company has an investment tax credit carryover totalling approximately $1.5 million which will expire between 2000 and 2003. The Company also has an alternative minimum tax credit carryover of approximately $700,000 which can be carried forward indefinitely.
The components of the total deferred tax assets and total deferred tax liabilities are as follows (in thousands):
Federal State Total Deferred tax assets: Cancellation of debt $ 581 $ 154 $ 735 Net operating loss carryover2,985 201 3,186 Tax credits carryover 2,147 -- 2,147 State deferred tax liability 777 -- 777 $ 6,490 $ 355 $ 6,845 Deferred tax liabilities: Excess tax depreciation $(3,599) $ (956) $(4,555) Excess partnership losses from RCA (6,047) (1,607) (7,654) $(9,646) $(2,563) $(12,209)
The table below reconciles the difference between the statutory Federal income tax rate and the effective rate in the Consolidated Statement of Income (Loss). Percentages
1994 1993 1992
Statutory Federal income tax rate 35% (34%) 34% State income tax 6 -- -- Partnership taxable income greater than book income -- -- (26) Net operating losses not currently benefited -- -- 16 41 (34) 24 Change in valuation reserve (21) 34 -- Effective tax rate 20% --% 24%
The components of the provision (benefit) for income taxes were as follows (in thousands):
1994 1993 1992
Federal-current $ 675 $ -- $ -- Federal - deferred 3,203 -- (902) State - current 1,279 4 3 State - deferred 2,218 -- -- $7,375 $ 4 $(899) 6. LESSOR ARRANGEMENTS
As of December 31, 1994, approximately 790,000 of a total of approximately 903,000 square feet or 87.5% of the Company's (100% owned) commercial space was leased. The terms of the leases generally require tenants to pay base rent plus their proportionate share of certain operating expenses or expense increases. Minimum rental amounts due to the Company pursuant to these operating leases through expiration are as follows (in thousands):
1995 $ 9,727 1996 8,747 1997 7,295 1998 6,213 1999 4,965 Thereafter 10,862 $47,809
7. STOCK AND EMPLOYEE BENEFIT PLANS
Restricted Stock Plan
Pursuant to the Company's restricted stock plan, 50,000 shares of the Company's common stock were reserved for issuance to key employees at a price of $1.00 per share. From 1984 to 1988, 48,567 shares were issued to key employees and the Company discontinued this plan in 1993.
Incentive Stock Option Plan
Under the Company's incentive stock option plan, up to 200,000 shares of the Company's common stock are reserved for issuance. This plan provides for options to be granted at fair market value on the date of grant and for the options to become exercisable over a period of ten years. The options shall have a term not exceeding ten years.
As of December 31, 1994, a total of 192,850 options were outstanding and 6,150 shares were available for future grants. Of the outstanding options, 145,000 are exercisable in equal cumulative installments over five years beginning in 1993 at prices ranging from $2.344 to $3.625 per share. The remaining 47,850 outstanding options are exercisable in equal cumulative installments over five years beginning in 1995 at prices ranging from $3.563 to $4.56 per share.
Simplified Employee Pension Plan
The Company has adopted a Simplified Employee Pension Plan (SEP) pursuant to which the Company contributes a percentage of each eligible employee's compensation to an Individual Retirement Account maintained by the employee. All SEP contributions are fully vested. Contributions for 1993 and 1992 were $7,000 and $46,000 respectively. The continuation of the SEP and level of contributions are subject to annual review and approval of the Company's Board of Directors. As of the date of this report, the Board of Directors had not convened to decide on the amount of the 1994 contribution.
8. QUARTERLY FINANCIAL DATA (Unaudited)
The following tables set forth unaudited quarterly financial data (in thousands, except per share amounts) for each of the two years ended December 31, 1994 and December 31, 1993.
By Quarter
1994 First Second Third Fourth Total
Investment properties income (loss)$ 371$ (243)$ (240)$ 497$ 385
Hotel property income (loss) 888 218 (314) 35 827
Equity in partnership loss (214) (332) (73) (679) (1,298)
Gain on disposition of partnership interest -- -- --39,078 39,078
Gain on sale of real estate asset -- -- 661 3 664
Extraordinary loss from extinguishment of debt -- -- -- (325) (325)
Net income (loss) $ 929$ (827)$ (509) $29,224 $28,817
Income (loss) per share, primary:
Income (loss) before extraordinary item$ 0.23$ (0.20)$ (0.12)$ 7.19$ 7.10
Extraordinary item -- -- -- (0.08) (0.08)
Net income (loss) $ 0.23 $ (0.20)$ (0.12)$ 7.11 $ 7.02
Income (loss) per share, fully diluted:
Income (loss) before extraordinary item$ 0.22$ (0.20)$ (0.12)$ 7.06$ 6.96
Extraordinary item -- -- -- (0.08) (0.08)
Net income (loss) $ 0.22 $ (0.20)$ (0.12)$ 6.98 $ 6.88
By Quarter
1993 First Second Third Fourth Total
Investment properties loss$ (189)$ (191)$ (202)$ (583)$(1,165)
Hotel property income (loss) 515 225 (101) 194 833
Equity in partnership loss (353) (360) (334) (672) (1,719)
Gain on disposition of partnership interest 3,608 (6) -- -- 3,602
Gain (loss) on sales of real estate assets (156) -- 1,209 (8) 1,045
Extraordinary gain from extinguishment -- -- -- 4,850 4,850 of debt
Net income (loss) $ 2,970 $ (702) $ 100 $2,215 $ 4,583
Net income (loss) per share before extraordinary item, primary and fully diluted $ 0.77$ (0.18) $ 0.03$ (0.69)$ (0.07)
Extraordinary item per share, primary and fully diluted -- -- -- 1.24 1.24
Net income (loss) per share, primary and fully diluted $ 0.77$ (0.18)$ 0.03$ 0.55 $ 1.17
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Pacific Gateway Properties, Inc.:
We have audited the accompanying consolidated balance sheet of Pacific Gateway Properties, Inc. (a New York corporation) and subsidiaries as of December 31, 1994 and 1993, and the related consolidated statements of income (loss), stockholders' deficit and cash flows for each of the three years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Pacific Gateway Properties, Inc. and subsidiaries as of December 31, 1994 and 1993, and the results of their operations and their cash flows for each of the three years then ended in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
San Francisco, California March 3, 1995
PACIFIC GATEWAY PROPERTIES, INC.
SCHEDULE III-- REAL ESTATE AND ACCUMULATED DEPRECIATION TOGETHER WITH REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON SCHEDULE
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON SCHEDULE
To Pacific Gateway Properties, Inc.:
We have audited, in accordance with generally accepted auditing standards, the consolidated financial statements of Pacific Gateway Properties, Inc., and have issued our report thereon dated March 3, 1995. Our audit was made for the purpose of forming an opinion on those statements taken as a whole. The supplemental schedule, listed in the index on page 14, is the responsibility of the Registrant's management and is presented for purposes of complying with the Securities and Exchange Commission's rules and is not part of the basic financial statements. This schedule has been subjected to the auditing procedures applied in the audit of the basic financial statements and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole.
ARTHUR ANDERSEN LLP
San Francisco, California March 3, 1995
PACIFIC GATEWAY PROPERTIES, INC.
SCHEDULE III-- REAL ESTATE AND ACCUMULATED DEPRECIATION
December 31, 1994 (In Thousands) Initial Cost to Company SubsequentGross Carrying Amount at (Note 1) Cost,December 31, 1994 Building CapitalizedBuildings, Improvements ImprovementsImprovements and Other and Otherand Other Deferred DeferredDeferred Total Descirption Encumbrances Land Costs CostsCosts(Note 2)
Office Building--San Jose, CA$6,500$3,439$13,754$2,342$16,096$19,535 Office/Commercial Buildings -- Walnut Creek, CA. (Thirteen Buildings) (Notes 4 and 6)8,6091,41612,3407,09519,43520,851 Hotel--Tucson, AZ. (Note 4)--3,58418,5831,93620,51924,103 Office/Industrial Building-- Tucson, AZ. (Notes 4 and 6)--148621 531 1,1521,300 Office/Industrial Building-- Needham, MA. (Note 5)--4944,006 189 4,195 4,689 Office Building--Fort Lauderdale, FL. (Note 4 and 6)--44 299 14 313 357 Shopping Center--West Palm Beach, FL. (Note 6)15,3556,1052,0271,0663,0939,198 Mortgage Debt and Loan Cost Related to Primary Lender (Note 4)$61,149$15,230$51,630$13,574$65,204$80,434
Accumulated Depreciation and Amortization and Net Realizable Value Reserve Date ofDate (Note 3) ConstructionAcquired
$ 4,529 1972 1985
4,271 1975to 19861988
9,724 1985 1985
183 1987 1988
2,397 1961 1984
61 1986 1988
983 1987 1988
(73)
$22,075
See accompanying notes on the following page PACIFIC GATEWAY PROPERTIES, INC.
SCHEDULE III-- REAL ESTATE AND ACCUMULATED DEPRECIATION --(Continued)
December 31, 1994 (In Thousands)
NOTE 1 The cost basis of the above properties for financial statement and tax purposes is substantially the same.
NOTE 2 The changes in the total cost of land, buildings, improvements and other deferred costs for the three years ended December 31, are as follows:
1994 1993 1992 Balance at beginning of period$105,271 $107,435 $140,736 Additions 5,562 1,135 1,584 Write-off of fully amortized items(1,183) (1,932) (836) Cost of disposed properties (29,216) (1,367) (34,049)
Balance at end of period $ 80,434 $105,271 $107,435
NOTE 3 The changes in accumulated depreciation and amortization and the net realizable value reserve for the three years ended December 31, are as follows:
1994 1993 1992 Balance at beginning of period$29,485 $27,965 $35,310 Provision for write-down to net realizable value1,0001,000 -- Depreciation expense 2,529 3,530 3,959 Write-off of fully amortized items(1,183) (1,932) (836) Relief of accumulated balances and net realizable value reserve related to disposed properties (9,756) (1,078) (10,468)
Balance at end of period $22,075 $29,485 $27,965
NOTE 4 Registrant's interest in these properties are pledged in support of Registrant's primary lender's debt agreement. Such agreement also provides for cross-collateralization with the primary lender's mortgages on the Registrant's properties in Walnut Creek, Ca., Fort Lauderdale Fl., and both the office/industrial building and the hotel in Tucson, Az.
NOTE 5 This property is pledged in support of a $4.5 million letter-of-credit.
NOTE 6 These properties were obtained by Golden Gate Building Company pursuant to tax-deferred exchanges of interests in the Alcoa Building and distributed to the Registrant.
Exhibit 21
PACIFIC GATEWAY PROPERTIES, INC.
SUBSIDIARIES OF THE REGISTRANT
Percentage Place of Interest of Voting Name Organization Securities Owned
Pacific Gateway Properties, Inc.New York
Pacific Gateway Properties California 100% Management Corporation
Perini Investment Properties California 100% Executive Suites, Inc.
Maritime Plaza Associates California 100%
Rincon Center Associates California Limited 22.8% Partnership
Pacific Gateway Properties California 100% Hotels, Inc.
RINCON CENTER ASSOCIATES A CALIFORNIA LIMITED PARTNERSHIP
FINANCIAL STATEMENTS AS OF DECEMBER 31, 1994 AND 1993 TOGETHER WITH AUDITORS' REPORT
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Partners of Rincon Center Associates A California Limited Partnership:
We have audited the accompanying balance sheets of Rincon Center Associates, A California Limited Partnership as of December 31, 1994 and 1993, and the related statements of operations, changes in partners' deficit and cash flows for the three years in the period ended December 31, 1994. These financial statements are the responsibility of the Partnership's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Rincon Center Associates, A California Limited Partnership as of December 31,1994 and 1993 and the results of its operations and its cash flows for the three years in the period ended December 31, 1994, in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Boston, Massachusetts February 7, 1995
RINCON CENTER ASSOCIATES A CALIFORNIA LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1994
1. PARTNERSHIP ORGANIZATION:
Rincon Center Associates, A California Limited Partnership (the Partnership) was formed on September 18, 1984, to lease and develop land and buildings located in the Rincon Point-South Beach Redevelopment Project Area in the City and County of San Francisco, California. The Rincon Center Project (the Project) compromises commercial and retail space, 320 rental housing units and associated off- street parking. The Project was developed in two distinct segments: Rincon One and Rincon Two.
Profits and losses are shared by the partners in accordance with their percentage interest as provided in the partnership agreement and as shown in the statements of changes in partners' deficit. Cash profits, as determined by the managing general partner, are distributed to the partners in the same percentage interest.
Perini Land and Development Company (PL&D) is the managing general partner of the Partnership and has the responsibility for general management, administration and control of the Partnership's property, business and affairs. In addition, PL&D provides project and general accounting services to the Partnership (Note 7). Pacific Gateway Properties, Inc. (PGP), formerly Perini Investment Properties, Inc., is the other general partner.
2. SIGNIFICANT ACCOUNTING POLICIES:
The accompanying financial statements have been prepared using the accrual basis of accounting.
Real Estate Used in Operations
Real estate used in operations includes all costs capitalized during the development of the Project. These costs include interest and financing costs, ground rent expense during construction, property taxes, tenant improvements and other capitalizable overhead costs.
Depreciation and Amortization
The Partnership uses the straight-line method of depreciation. The significant asset groups and their estimated useful lives are:
Structural components of buildings 60 years Nonstructural components of buildings 25 years All other depreciable assets 5-30 years
Leasehold improvements are amortized using the straight- line method over the lesser of their useful lives or the lease terms.
2. SIGNIFICANT ACCOUNTING POLICIES: Continued
Income Taxes
In accordance with federal and state income tax regulations, no income taxes are levied on the Partnership; rather, such taxes are levied on the individual partners. Consequently, no provision or liability for federal or state income taxes is reflected in the accompanying financial statements.
Rental Income
Certain lease agreements provide for periods of free rent or stepped increases in rent over the lease term. In such cases, revenue is recognized at a constant rate over the term of the lease. Amounts recognized as income but not yet due under the terms of the leases are shown in the accompanying balance sheets as deferred rent receivable.
Statements of Cash Flows
Cash paid for interest was $2,191,000, $2,414,000 and $3,199,000 in 1994, 1993 and 1992, respectively.
Accrued Lease Liability
The Partnership is leasing Rincon One from Chrysler McNally (Chrysler) over a 25-year lease term (Note 3). In connection with this lease, the Partnership was granted a free rent concession for one year. The intent of Chrysler's free rent provision was to match a similar provision granted by the Partnership to an anchor sublease tenant of Rincon One, whose lease is for 10 years. The Partnership expensed rent in the first year of the lease and amortized the accrued lease liability related to Rincon One over 10 years through 1993 and is amortizing the remaining balance over 50 months effective January 1, 1994 to match the expense with the revenue recorded on the sublease.
Three amendments to the master lease agreement were made in 1993 in connection with the extension of Chrysler's existing financing on the property (Note 3). The rent schedule was revised which resulted in an increase to the accrued lease liability during 1993 in order to normalize the rent expense over the remaining lease term.
Other Assets
Other assets include prepaid expenses, deferred lease commissions and fixed assets. Deferred lease commissions are amortized over the life of the lease. Fixed assets are amortized over the life of the asset, which is generally five years.
Reclassification of Prior Year Amounts
Certain prior year amounts have been reclassified to conform with the current year presentation. 3.OPERATING LEASE, RINCON ONE:
On June 24, 1988, the Partnership sold Rincon One to Chrysler and subsequently leased the property back under a master lease with a basic term of 25 years and four 5-year renewal options at the Partnership's discretion. The transaction was accounted for as a sale and operating leaseback and the gain on the sale of $1,540,000 was deferred and is now being amortized over a 25-year period which is recorded as a reduction to depreciation and amortization in the accompanying statement of operations. The Partnership had not recorded any amortization related to this deferred gain through December 31, 1993.
In connection with the sale and operating leaseback of Rincon One, Chrysler assumed and agreed to perform the Partnership's financing obligations. The Partnership, in accordance with the master lease and several amendments in 1993, agreed to obtain a financial commitment on behalf of Chrysler to replace at least $43,000,000 of Chrysler's long- term financing by July 1, 1993. To satisfy this commitment, the Partnership successfully extended existing financing to July 1, 1998. To complete the extension, the Partnership had to advance funds sufficient to reduce the financing from $46,500,000 to $40,500,000. At December 31, 1994, the financing obligation outstanding was approximately $39,300,000. The Partnership received a 10% secured note in the principal amount of $6,000,000 from Chrysler upon the Partnership's advance of funds to reduce the financing. In addition, as part of the obligations of the extension, the Partnership will have to further amortize the financing from its current level to $33,000,000 by July 1, 1998. If, by January 1, 1998, the Partnership has not received a further extension or new commitment for financing on the property for at least $33,000,000, Chrysler will have the right under the lease to require the Partnership to purchase the property for a stipulated amount significantly in excess of the financing obligation (approximately $18,800,000 in excess of the then outstanding financing obligation). The Partnership intends to obtain financing meeting the conditions of the lease prior to January 1, 1998.
Payments under the master lease agreement may be adjusted to reflect adjustments in the rate of interest payable by Chrysler on the Rincon One debt. Future minimum lease payments based on scheduled payments under the master lease agreement are as follows:
1995 $ 6,570,000 1996 6,550,000 1997 5,952,000 1998 5,634,000 1999 5,875,000 Thereafter 79,246,000
4. NOTES RECEIVABLE:
5. GROUND LEASE:
The Partnership entered into a 65-year ground lease with the United States Postal Service for the Project property on April 19, 1985. On June 24, 1988, this lease was bifurcated into two leases (Rincon One and Rincon Two). The terms of the original lease did not change; the dollar amounts were simply split between the two properties. Under the terms of the leases, the Partnership must make monthly lease payments (Basic Rent) of $140,415 and $239,085 for Rincon One and Rincon Two, respectively. In April 1994, and every six years thereafter, the monthly base payments can be increased based on the increase in the Consumer Price Index subject to a minimum of 5 percent per year and a maximum of 8 percent per year. In addition, the Basic Rent can be increased based on reappraisal of the underlying property on the occurrence of certain events if those events occur prior to the regular reappraisal dates of April 19, 2019, and each twelfth year thereafter for the remainder of the lease term.
The lease agreement calls for the payment of certain percentage rents based on revenues received from the subleasing of the Rincon One building. Percentage rents paid in 1994, 1993 and 1992, were $275,000, $259,000 and $267,000, respectively.
This lease has been accounted for as an operating lease, with minimum future lease payments of:
1995 $ 4,690,000 1996 4,690,000 1997 4,690,000 1998 4,565,000 1999 4,554,000 Thereafter 893,819,000
5. GROUND LEASE: Continued
At December 31, 1990, ground rent of approximately $10,480,000 was capitalized and is included in real estate used in operations in the accompanying balance sheets. The capitalized ground rent is being amortized over 60 years. Under the provisions of the original lease, no lease payments were to be made from the inception of the lease (April 19, 1985) until April 18, 1987, and one-half of the regular monthly payment was due for the period from April 19, 1987 to April 18, 1988. However, as allowed by the lease agreement, the Partnership deferred the payment of Basic Rent until the initial occupancy date, February 8, 1988. At December 31, 1994 and 1993, the deferred Basic Rent and interest for the period April 19, 1987 to April 18, 1988, amounted to $420,000 and $552,000, respectively, and are being paid in 120 monthly installments together with interest at a rate based on the average discount rates of 90- day U.S. Treasury bills, which was approximately 4.625% percent for the year ended December 31, 1994. The rate will be adjusted every 90 days as long as a balance is due on the deferred rent. The remaining deferred ground rent related to the free rent period amounted to $6,558,000 and $6,754,000 at December 31, 1994 and 1993, respectively, and is being amortized over the lease term.
6. CONSTRUCTION NOTES PAYABLE:
Residential
The residential portion of the Project is being financed with a $36,000,000 loan from the Redevelopment Agency of the City and County of San Francisco (the Agency), of which $33,500,000 and $34,100,000 was outstanding at December 31, 1994 and 1993, respectively. The Agency raised these funds through the issuance of Variable Rate Demand Multifamily Housing Revenue Bonds (Rincon Center Project) 1985 Issue B (the Bonds).
The interest rate on the Bonds is variable at the rate required to produce a market value for the Bonds equal to their par value. At December 31, 1994, 1993 and 1992, the effective interest rate on the bonds was 5.40 percent, 3.00 percent and 3.13 percent, respectively. Interest payments are to be made on the first business day of each March, June, September and December.
The Partnership has the option to convert the Bonds to a fixed interest rate at any of the above interest payment dates. The fixed rate will be the rate required to produce a market value for the Bonds equal to their par value. After conversion to a fixed rate, interest payments must be made on each June 1 and December 1.
6. CONSTRUCTION NOTES PAYABLE: Continued
The Partnership must repay the residential loan as the Bonds become due. The Bonds shall be redeemed in at least the minimum amounts set forth below:
1995 $ 600,000 1996 700,000 1997 700,000 1998 900,000 1999 1,000,000 Thereafter 29,600,000
The Bonds are due December 1, 2006. The Bonds are secured by an irrevocable letter of credit issued by Citibank in the name of the Partnership in the amount of approximately $34,546,000. In the event that drawings are made on the letter of credit, the Partnership has agreed to reimburse Citibank for such drawings pursuant to the terms of a Reimbursement Agreement. The Partnership obligations under the Reimbursement Agreement are secured by a deed of trust on the Project and the equity letters of credit and guarantees described below.
Commercial
The development and construction of the commercial portion of the Project was financed pursuant to a Construction Loan Agreement between the Partnership and Citibank, of which $27,395,000 and $28,270,000 was outstanding at December 31, 1994 and 1993, respectively. The loan and the irrevocable letters of credit supporting the residential bond are secured by a deed of trust on the Project and the equity letters of credit currently in the aggregate amount of $7,300,000, issued to Citibank by Bank of America, N.T. & S.A. on behalf of the general partners. PL&D has also provided a $3.5 million corporate guarantee to support the Project financing. PGP and Perini Corporation, the parent company of PL&D, have agreed to reimburse Bank of America for any drawings under these letters of credit. An annual fee equal to prime plus 1 percent of the aggregate amount is due to PGP and PL&D for the use of these letters of credit. The loan is also secured by the guarantees described in Note 7. As of December 31, 1994 and 1993, $29,000 and $751,000, respectively, of accrued letter of credit fees were included in accrued liabilities in the accompanying balance sheets. The total fee in 1994, 1993 and 1992 was $184,000, $751,000 and $909,000, respectively. The fee in 1994 reflects a $421,000 reduction in letter of credit fees charged to the general partners in prior years due to a reduction in the equity letter of credits at the Partnership.
In 1993, the Partnership extended the loan to October 1, 1998, which required a $600,000 up front paydown and an additional fee of $105,000. The loan requires the Partnership to amortize $13,000,000 over the five years to October 1, 1998. Amounts are payable as follows: $2,192,000 in 1995; $2,708,000 in 1996; $3,150,000 in 1997; and the remainder in 1998. The Partnership obtained a swap agreement with interest rates stepping up from 5.61% to 7.96% over the loan term. The effect of the swap agreement in 1994 was to reduce interest expense by approximately $135,000. At December 31, 1994 the rate on the loan was 6.36%.
7. TRANSACTION WITH GENERAL PARTNERS:
PL&D has guaranteed the payment of both interest on the financing of the Project and operating deficit, if any. It has also guaranteed the master lease under the sale and operating lease-back transaction (Note 3).
In accordance with the construction loan agreement (Note 6), the general partners have advanced monies to the Partnership to fund project costs. At December 31, 1994 and 1993, the general partners had advanced $88,043,000 and $85,488,000, respectively. The advances accrue interest at a rate of prime plus 2 percent. The related accrued interest liability of $41,107,000 and $33,901,000 as of December 31, 1994 and 1993, respectively, is reflected in the accompanying balance sheets. For the years ended December 31, 1994, 1993 and 1992, interest expense on partner advances was $7,940,000, $6,469,000 and $6,141,000, respectively.
Effective January 1, 1988, PL&D retained Pacific Gateway Properties Management Corporation (PGPMC), a wholly owned subsidiary of PGP, to provide management and leasing services for the Project. As compensation for managing the facilities, the Partnership paid PGPMC a base management fee of $222,000 annually until leasing the residential portion of the Project was completed. At such time, the compensation increased to $319,200 per year or, if greater, the sum of 3 percent of the first $13,000,000 of the annual gross receipts plus 2 percent of receipts in excess of the $13,000,000. The fees incurred for the years ended December 31, 1994, 1993 and 1992 were $514,000, $497,000 and $485,000, respectively, and were included in administrative and other expenses in the accompanying statements of operations. At December 31, 1994 and 1993, $24,000 and $27,000, respectively, related to this fee had not been paid and is included in accounts payable and accrued liabilities. Additionally, the Partnership reimburses PGPMC for certain payroll costs.
8. REAL PROPERTY TAX REDUCTION
The Partnership received reductions in real property tax assessments for the tax years from 1990 to 1993 which amounted to approximately $1,891,000, and has been recorded as other income in the 1994 financial statements. Professional service expenses related to the property tax assessments approximated $330,000 and is recorded in the accompanying statement of operations.