<PAGE>
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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-K
(MARK ONE)
<TABLE>
<C> <S>
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
</TABLE>
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999
OR
<TABLE>
<C> <S>
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
</TABLE>
FOR THE TRANSITION PERIOD FROM ______________ TO ______________
COMMISSION FILE NUMBER 1-8692
PACIFIC GATEWAY PROPERTIES, INC.
(Exact name of Registrant as specified in its charter)
<TABLE>
<S> <C>
MARYLAND 04-2816560
- ----------------------------------- -----------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
930 MONTGOMERY STREET, SUITE 400
SAN FRANCISCO, CALIFORNIA 94133
- ----------------------------------- -----------------------------------
(Address of principal executive (Zip Code)
offices)
</TABLE>
Registrant's telephone number, including area code (415) 398-4800
------------------------
Securities registered pursuant to Section 12 (b) of the Act:
<TABLE>
<S> <C>
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
- ----------------------------- -----------------------
Common Stock, $1.00 par value American Stock Exchange
per share
</TABLE>
Securities registered pursuant to Section 12 (g) of the Act: None
------------------------
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes /X/ No / /
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K ($229.405 of this chapter) is not contained herein, and
will not be contained, to the best of Registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K / /.
State the aggregate market value of the voting stock held by non-affiliates
of the Registrant as of February 18, 2000: Common Stock, Par Value
$1.00--$17,815,929.
Indicate the number of shares outstanding of each of the Registrant's
classes of common stock, as of February 18, 2000: Common Stock, Par Value
$1.00--3,933,536 shares.
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<PAGE>
PART I
ITEM 1. BUSINESS
GENERAL
Pacific Gateway Properties, Inc. (the "Registrant") is a Maryland
corporation that was reincorporated from New York effective September 1, 1999,
and began its operations in April 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 1984.
The Registrant holds interests in income producing real estate. As of
December 31, 1999, the Registrant's portfolio of operating properties (the
"Properties") consisted of economic interests in the following:
(i) Walnut Creek Executive Park, Walnut Creek, California--a 419,000
square foot office park consisting of eleven two-story and one three-story
office buildings--100% owned;
(ii) South Bay Office Tower, San Jose, California--a 170,000 square
foot, twelve-story office building--100% owned;
(iii) North Tucson Business Center, Tucson, Arizona--a 91,000 square
foot, single- story office/industrial building--100% owned;
(iv) Weston Office Building, Fort Lauderdale, Florida--a 14,000 square
foot, three-story office building--100% owned;
(v) West Valley Executive Park, San Jose, California--a 165,000 square
foot, campus style office park comprised of five two-story buildings and one
single-story building--100% owned;
(vi) 930 Montgomery Street, San Francisco, California--a 23,000 square
foot, six-story, steel frame office building--100% owned.
MANAGEMENT OF PROPERTIES
The Registrant manages the Properties directly or through third party
management companies.
PROPERTY OWNED IN PARTNERSHIP WITH OTHERS
Prior to October 12, 1999, the Registrant's portfolio included general
(non-managing) and limited partnership interests in Rincon Center Associates, a
California limited partnership (RCA). RCA owned Rincon Center, a mixed use
commercial project in San Francisco, California.
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 the following markets: Northern California,
Arizona, Florida and Massachusetts. The Registrant's objectives continue to be
maximizing net cash flow from operations and achieving growth through
appreciation of asset values. 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 is on commercial
properties which require aggressive management and leasing in order to maximize
their potential values. 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
enhance operational efficiencies.
The Registrant regularly examines 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
2
<PAGE>
position in that market and the potential for sale, refinancing and return on
additional investment. In conjunction with this process, the Registrant from
time to time offers 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.
On October 13, 1999, the Registrant announced that Prudential Securities
Incorporated had been assisting the Board of Directors in evaluating various
strategic alternatives. Following a lengthy review process, the Board of
Directors determined that it would be in the best interest of the Registrant's
shareholders to pursue a possible sale or merger. However, the Registrant can
provide no assurances as to the timing or ultimate conclusion of any such
action.
RECENT DEVELOPMENTS
The Board of Directors of the Registrant obtained shareholder approval in
1999 for a proposal which allowed the Registrant to reincorporate in the State
of Maryland (the "Reincorporation") and convert to a real estate investment
trust ("REIT") by making the appropriate elections under federal tax laws (the
"REIT Election").
The Reincorporation, which was completed on September 1, 1999, did not
result in a change in the Registrant's management, capitalization, assets,
liabilities or net worth, but did result in certain ownership and transfer
restrictions applicable to the Registrant's common stock. The Registrant has
elected to be taxed as a REIT for fiscal 1999 and is therefore required to meet
certain asset and income tests, and other requirements, in order to maintain
REIT status as further discussed in Note 5 to the Registrant's Consolidated
Financial Statements. A REIT that satisfies all REIT qualification tests
generally is exempt from federal taxation on its income. The Registrant believes
it qualifies as a REIT for 1999.
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, REIT's, 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 or leasing transactions.
EMPLOYEES
As of December 31, 1999 and 1998, the Registrant had 12 full-time employees
and one part-time employee.
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 industry segment presentation is not
applicable. The Registrant's business is not affected by seasonal factors. All
of the Registrant's operations are located in the United States.
ITEM 2. PROPERTIES
GENERAL
As of December 31, 1999, the Properties were located in California, Arizona,
and Florida. The total rentable square footage of the properties at
December 31, 1999, was approximately 882,000 square feet. As of December 31,
1999, the weighted average occupancy rate of the Properties was approximately
97%.
3
<PAGE>
For the year ended December 31, 1999, three of the Properties (Walnut Creek
Executive Park, West Valley Executive Park, and South Bay Office Tower) had net
book values equal to 10.0% or more of the Registrant's consolidated total assets
or had investment property revenues that amounted to 10.0% or more of the
Registrant's consolidated investment property revenues as more fully discussed
below.
Each of the Properties is held by the Registrant in fee simple title. Until
October 12, 1999, the Registrant held a 22.8% limited partnership and
non-managing general partnership interest in RCA. Rincon Center also had a
leasehold interest in the land under Rincon Center. Substantially all of the
income from the Properties consists of rent received under long term operating
leases. These leases generally provide for the payment of rent in advance and
for the payment by the tenants of a pro-rata share of operating expenses as
defined in each tenant's lease.
THE LOCATION OF THE REGISTRANT'S PROPERTIES
The following table sets forth certain information regarding the Properties
which were owned as of December 31, 1999:
<TABLE>
<CAPTION>
# OF UNITS AND/OR
PROPERTY GENERAL LEASABLE SQ. FT. # OF TENANTS
NAME DESCRIPTION LOCATION AS OF YEAR END AND OCCUPANCY %
- ---- --------------------- --------------------- --------------------- ---------------------
<S> <C> <C> <C> <C>
Walnut Creek Eleven two-story wood Walnut Creek, 419,000 sq.ft. 72 tenants;
Executive Park framed office California 99% occupancy
buildings, and one
three-story steel
frame office building
South Bay Twelve-story office San Jose, 170,000 sq.ft. 51 tenants;
Office Tower building California 88% occupancy
North Tucson Business Single-story office/ Tucson, 91,000 sq. ft. 2 tenants;
Center industrial building Arizona 100% occupancy
Weston Office Three-story office Ft. Lauderdale, 14,000 sq. ft. 3 tenants;
Building building Florida 100% occupancy
West Valley Executive Five two-story and San Jose, 165,000 sq. ft. 74 tenants;
Park one single-story wood California 100% occupancy
frame buildings
930 Montgomery Street Six-story, steel San Francisco, 23,000 sq. ft. 8 tenants;
frame office building California 100% occupancy
</TABLE>
For information concerning encumbrances on the Properties, reference is made
to "Other Matters Relating to the Properties" below and to Note 3 of the Notes
to the Registrant's Consolidated Financial Statements.
CAPITAL IMPROVEMENTS, TENANT IMPROVEMENTS, LEASING COMMISSIONS, AND OTHER
DEFERRED COSTS
While maintaining high occupancy levels in each of its properties and
markets is an important goal, the Registrant also focuses on controlling the
expenditures associated with leasing, renewing or re-
4
<PAGE>
leasing space. The following table sets forth information related to new and
renewal leasing activity and expenditures for the year ended December 31, 1999.
<TABLE>
<CAPTION>
WEIGHTED PERCENTAGE
AVERAGE CHANGE IN
WEIGHTED WEIGHTED EFFECTIVE WEIGHTED
NUMBER AVERAGE AVERAGE MONTHLY AVERAGE
OF SQUARE LEASE COSTS PER RENTAL RATE EFFECTIVE TENANTS
TYPE LEASES FEET TERM (MO.) SQ. FOOT (1) PER SQ. FOOT RENTAL RATE(2) RETAINED (3)
- ---- -------- -------- ----------- ------------ ------------ -------------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
New Leases..................... 41 76,790 44 $9.56 2.43 18% N/A
Renewals....................... 16 65,707 53 $6.10 1.61 (20%) 72%
</TABLE>
- ------------------------
(1) Represents tenant improvement and commission costs per square foot.
(2) Measured as the difference between net weighted average effective rental
rates on new and renewal leases in 1999 compared to 1998. The decrease in
weighted average effective rental rates from 1998 to 1999 for renewals is
primarily due to the inclusion of Kaiser Foundation which renewed at Walnut
Creek Executive Park in 32,243 square feet at $1.46 per square foot from
$1.21 per square foot.
(3) Based upon occupied square footage, percentage of tenants retained by the
Registrant at lease expiration, tenants the Registrant chose not to renew to
accommodate the expansion of existing tenants and tenants that renewed, but
moved to another space.
During the year ended December 31, 1999, there were additions to the
Properties amounting to approximately $2,483,000 which consisted of tenant
improvements, capital improvements and other deferred costs which included
leasing commissions. The Registrant anticipates additions to the Properties of
approximately $1.7 million in 2000.
LEASE EXPIRATIONS OF THE REGISTRANT'S PROPERTIES
For the purposes of the following tables "Expiring Annual Revenue" includes
only revenue for months occupied for each year, respectively.
For each of the Properties, land, buildings and improvements are recorded at
cost. Depreciation for federal income tax purposes on investment properties is
provided using the Modified Accelerated Cost Recovery System (MACRS) method over
statutory useful lives ranging from 7 to 39 years. Capitalized loan costs
consist of loan fees, legal, accounting, engineering, appraisal, and other costs
associated with financings and are amortized using the straight-line method over
the primary term of the related debt instrument. Costs associated with a lease
are amortized over the term of the lease. Repairs and maintenance costs are
charged to expense as incurred.
The following table shows annual property tax cost per square foot for the
five years ended December 31, 1999:
ANNUAL PROPERTY TAX COST PER SQUARE FOOT
<TABLE>
<CAPTION>
PROPERTY 1999 1998 1997 1996 1995
- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Walnut Creek Executive Park.............................. $1.12 $1.02 $1.02 $1.11 $1.01
South Bay Office Tower................................... $1.39 $1.24 $0.97 $0.85 $0.81
West Valley Executive Park(1)............................ $1.28 $1.22 $1.13 N/A N/A
</TABLE>
- ------------------------
Note (1): This property was not acquired until January 1997.
5
<PAGE>
The following table shows average occupancy data for the Properties which
have net book values or investment property revenue greater than 10% of the
Registrant's consolidated total assets or investment property revenue,
respectively, for the five years ended December 31, 1999:
AVERAGE OCCUPANCY FOR THE YEAR
<TABLE>
<CAPTION>
PROPERTY 1999 1998 1997 1996 1995
- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Walnut Creek Executive Park................................. 98% 98% 91% 88% 87%
South Bay Office Tower...................................... 93% 91% 89% 92% 99%
West Valley Executive Park(1)............................... 96% 85% 61% N/A N/A
Total:...................................................... 96% 94% 84% 89% 90%
</TABLE>
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Note (1): This property was not acquired until January 1997.
The following table shows annual property tax cost for the five years ended
December 31, 1999:
ANNUAL PROPERTY TAX COST (in thousands)
<TABLE>
<CAPTION>
PROPERTY 1999 1998 1997 1996 1995
- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Walnut Creek Executive Park................................. $468 $426 $426 $466 $425
South Bay Office Tower...................................... $236 $205 $160 $141 $135
West Valley Executive Park(1)............................... $211 $201 $187 N/A N/A
</TABLE>
- ------------------------
Note (1): This property was not acquired until January 1997.
The following table shows annual rental revenues for the five years ended
December 31, 1999:
ANNUAL RENTAL REVENUES (in thousands)
<TABLE>
<CAPTION>
PROPERTY 1999 1998 1997 1996 1995
- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Walnut Creek Executive Park......................... $6,703 $6,307 $5,640 $5,063 $5,271
South Bay Office Tower.............................. $4,119 $3,674 $2,768 $2,752 $2,280
West Valley Executive Park(1)....................... $4,345 $3,356 $2,560 N/A N/A
</TABLE>
- ------------------------
Note (1): This property was not acquired until January 1997.
The following table shows average annual rental rates per square foot of
occupied space for the five years ended December 31, 1999:
AVERAGE ANNUAL RENTAL RATE PER SQUARE FOOT
<TABLE>
<CAPTION>
PROPERTY 1999 1998 1997 1996 1995
- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Walnut Creek Executive Park......................... $16.31 $15.74 $15.19 $13.87 $14.75
South Bay Office Tower.............................. $26.06 $23.67 $19.34 $17.61 $14.30
West Valley Executive Park(1)....................... $27.37 $24.95 $19.30 N/A N/A
</TABLE>
- ------------------------
Note (1): This property was not acquired until January 1997.
6
<PAGE>
WALNUT CREEK EXECUTIVE PARK
Walnut Creek Executive Park is a 419,000 square foot campus style office
park consisting of eleven two-story and one three-story office buildings in
Walnut Creek, California. Tenants of this property include banking, healthcare,
telecommunications, software development enterprises, a public utility, and
professional service companies.
For the year ended December 31, 1999, the average occupancy rate for the
property was 98%, and the average monthly full service rental rate was $1.36 (or
$16.31 annually) per square foot. As of December 31, 1999, the property was
approximately 99% leased and two tenants occupied 10% or more of the rentable
square footage, including Airtouch Communications, Inc. and Kaiser Foundation,
whose principal businesses are telecommunications and healthcare, respectively.
Their leases provide for $3,042,000 of rental revenue per year. The Airtouch
leases expire in March 2001 and the Kaiser leases expire between September 2003
and April 2004. Each of these tenants have options to renew their leases.
The following table shows lease expiration data as of December 31, 1999, for
Walnut Creek Executive Park assuming that no tenants exercise renewal options:
<TABLE>
<CAPTION>
PERCENTAGE
OF TOTAL
REVENUE
NUMBER OF EXPIRING REPRESENTED
LEASES SQUARE ANNUAL BY EXPIRING
YEAR EXPIRING FOOTAGE REVENUE LEASES
- ---- --------- -------- ---------- -----------
<S> <C> <C> <C> <C>
2000............................... 18 27,281 $ 339,912 6.1%
2001............................... 13 158,892 495,731 35.3%
2002............................... 12 40,013 339,390 9.4%
2003............................... 8 58,789 637,472 16.2%
2004............................... 12 90,980 534,734 24.2%
2005............................... 1 8,367 53,549 2.3%
2006............................... 0 0 0 0.0%
2007............................... 0 0 0 0.0%
2008............................... 2 23,689 75,804 6.5%
2009............................... 0 0 0 0.0%
-- ------- ---------- -----
Totals............................. 66 408,011 $2,476,592 100.0%
</TABLE>
Walnut Creek Executive Park's federal tax basis is $17,486,000.
WEST VALLEY EXECUTIVE PARK
West Valley Executive Park is a 165,000 square foot campus style office park
comprised of five two-story buildings and one single-story building in San Jose,
California. Tenants of this property include healthcare, technology and software
related companies, financial services and other professional service companies.
For the year ended December 31, 1999, the average occupancy rate for the
property was 96% and the average monthly full service rental rate was $2.28 (or
$27.37 annually) per square foot. As of December 31, 1999, the property was 100%
leased, and no tenants occupied 10% or more of the rentable square footage.
7
<PAGE>
The following table shows lease expiration data as of December 31, 1999, for
West Valley Executive Park assuming that no tenants exercise renewal options:
<TABLE>
<CAPTION>
PERCENTAGE
OF TOTAL
REVENUE
NUMBER OF EXPIRING REPRESENTED
LEASES SQUARE ANNUAL BY EXPIRING
YEAR EXPIRING FOOTAGE REVENUE LEASES
- ---- --------- -------- ---------- -----------
<S> <C> <C> <C> <C>
2000............................... 11 10,899 $ 244,166 6.6%
2001............................... 24 42,725 604,027 25.9%
2002............................... 26 56,539 731,979 34.8%
2003............................... 11 41,242 385,733 26.7%
2004............................... 3 9,114 108,408 6.0%
2005............................... 0 0 0 0.0%
2006............................... 0 0 0 0.0%
2007............................... 0 0 0 0.0%
2008............................... 0 0 0 0.0%
2009............................... 0 0 0 0.0%
-- ------- ---------- -----
Totals............................. 75 160,519 $2,074,313 100.0%
</TABLE>
West Valley Executive Park's federal tax basis is $9,266,000.
SOUTH BAY OFFICE TOWER
South Bay Office Tower is a 170,000 square foot twelve-story office building
in San Jose, California. Tenants of this property include healthcare,
telecommunications, research and development enterprises, and professional
service companies.
For the year ended December 31, 1999, the average occupancy rate for the
property was 93% and the average monthly full service rental rate was $2.17 (or
$26.06 annually) per square foot. As of December 31, 1999, the property was
approximately 88% leased, and one tenant occupied 10% or more of the rentable
square footage, Synacom Technology, Inc., whose principal business is
telecommunications. Their lease provides for $643,000 of rental revenue per year
and expires in February 2003. Synacom has no option to extend its lease.
The following table shows lease expiration data as of December 31, 1999, for
South Bay Office Tower assuming that no tenants exercise renewal options:
<TABLE>
<CAPTION>
PERCENTAGE
OF TOTAL
REVENUE
NUMBER OF EXPIRING REPRESENTED
LEASES SQUARE ANNUAL BY EXPIRING
YEAR EXPIRING FOOTAGE REVENUE LEASES
- ---- --------- -------- ---------- -----------
<S> <C> <C> <C> <C>
2000............................... 7 9,643 $ 200,201 6.4%
2001............................... 12 38,175 499,244 20.8%
2002............................... 18 47,921 736,008 35.5%
2003............................... 7 30,846 440,289 23.0%
2004............................... 4 14,763 423,902 11.6%
2005............................... 1 5,194 78,949 2.7%
2006............................... 0 0 0 0.0%
2007............................... 0 0 0 0.0%
2008............................... 0 0 0 0.0%
2009............................... 0 0 0 0.0%
-- ------- ---------- -----
Totals............................. 49 146,542 $2,378,593 100.0%
</TABLE>
South Bay Office Tower's federal tax basis is $10,368,000.
8
<PAGE>
PROPERTY INSURANCE
The Registrant believes that all of the Properties are adequately covered by
insurance. The Registrant's San Francisco Bay Area properties do not maintain
earthquake insurance.
TENANTS
There are no individual tenants in any of the Properties that contributed
15% or more to consolidated investment property revenues for the years ended
December 31, 1999, 1998, and 1997. Generally, lease terms range from one to ten
years. Leases of approximately 56,000 square feet of rental space, or
approximately 6.5% of the leases in the Registrant's investment portfolio as of
December 31, 1999, will expire in 2000.
OTHER MATTERS RELATING TO THE PROPERTIES
WESTON OFFICE BUILDING
In May 1999 the Registrant paid off approximately $897,000 in mortgage debt
on the Weston Office Building. Loan fees associated with this debt of
approximately $24,000 were written off. The Registrant did not incur any
prepayment penalties in connection with the pay-off of this debt.
ITEM 3. LEGAL PROCEEDINGS
On January 20, 1999, the Registrant completed the sale of the 410 First
Avenue property located in Needham, Massachusetts to an unrelated party for
approximately $3,950,000. In connection with this property disposition, the
Registrant recorded a provision of approximately $58,000 which was reported by
the Registrant on its 1998 Consolidated Statement of Operations. Concurrent with
the sale of 410 First Avenue, the proceeds were used to re-pay a letter of
credit obligation of $4.2 million due Bank of America National Trust and Savings
Association (BofA). Pursuant to a mutual release and settlement agreement, BofA
and the Registrant have resolved all legal differences effectively ending all
litigation and cross-litigation between the parties. See Note 2 to the
Registrant's Consolidated Financial Statements for further discussion.
On October 14, 1999, the San Francisco Superior Court dismissed with
prejudice the Registrant's litigation against Rincon Center Associates and
Perini Land and Development Company (Case No. 985464), relating to commissions
for leasing and construction services performed for Rincon Center. On
October 13, 1999, the San Francisco Superior Court dismissed with prejudice the
Registrant's litigation against Perini Land and Development Company and Perini
Corporation (Case No. 301993), relating to allegations that the defendants
usurped the opportunity of the Rincon Center Associates to purchase the fee
interest upon which Rincon Center sits. On October 13, 1999, the Supreme Court
of New York, County of New York, dismissed with prejudice the Registrant's
litigation against Citibank (Case No. 99/119-800) relating to allegations that
Citibank's failure to accept a substitute letter of credit for delivery to
Citibank in connection with Rincon Center resulted in damage to the Registrant
arising from the subsequent draw on the existing letter by Citibank and the
resultant reimbursement obligations to Bank of America, the original letter of
credit issuer.
The Registrant is currently engaged as plaintiff in litigation with the
County of Santa Clara and the City of San Jose for the reimbursement of
approximately $50,000 in transfer taxes paid by the Registrant in connection
with the recordation of a deed relating to the refinancing of one of the
Registrant's properties. The Registrant alleges that the transfer tax was
assessed wrongfully and should be refunded. On February 15, 2000, the Company
won a motion for summary judgment in its litigation against the County of Santa
Clara, and the judge ordered the refund of $11,495 in wrongfully assessed taxes.
It is unclear at this time whether the County of Santa Clara intends to appeal
this ruling and order. While the facts and issues in the Registrant's litigation
against the City of San Jose are extremely similar to those in its litigation
against the County of Santa Clara, there can be no certainty that the
9
<PAGE>
City of San Jose will refund the taxes at issue in light of the ruling in the
litigation against the County of Santa Clara, or that a different judge will
rule the same way in the litigation against the City of San Jose.
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 position or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Registrant did not submit any matters to a vote of security holders in
the fourth quarter of the year ended December 31, 1999.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
COMMON STOCK
On February 18, 2000, there were approximately 939 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.
<TABLE>
<CAPTION>
HIGH LOW
-------- --------
<S> <C> <C>
2000
First Quarter (through February 18, 2000).............. $11 9/16 $ 9 7/8
1999
First Quarter.......................................... 7 7/8 6
Second Quarter......................................... 9 1/8 6 1/8
Third Quarter.......................................... 8 5/8 7 1/4
Fourth Quarter......................................... 10 7 7/16
1998
First Quarter.......................................... 8 4 1/4
Second Quarter......................................... 11 3/8 7 3/4
Third Quarter.......................................... 11 3/4 8 7/8
Fourth Quarter......................................... 8 7/8 6 1/16
</TABLE>
10
<PAGE>
DISTRIBUTIONS
During the years ended December 31, 1998 and 1999, the Registrant declared
and/or paid the following quarterly cash distributions:
<TABLE>
<CAPTION>
SERIES 1
COMMON PREFERRED
STOCK STOCK SERIES 1
DIVIDENDS COMMON DIVIDENDS PREFERRED
PER STOCK PER STOCK
QUARTERLY PERIOD SHARE DIVIDENDS SHARE DIVIDENDS
- ---------------- --------- --------- --------- ---------
<S> <C> <C> <C> <C>
1998
First Quarter......................... -- -- -- --
Second Quarter........................ -- -- -- --
Third Quarter......................... -- -- -- --
Fourth Quarter........................ $0.05 $196,677 $0.05 $15,000
1999
First Quarter......................... $0.09 $354,018 $0.09 $27,000
Second Quarter........................ $0.11 $432,689 $0.11 $33,000
Third Quarter......................... $0.13 $511,360 $0.13 $39,000
Fourth Quarter........................ $0.15 $590,030 $0.15 $45,000
</TABLE>
In the third quarter of 1990 the Board of Directors suspended payment of
dividends, and resumed the payment of dividends in the fourth quarter of 1998.
Future dividends by the Registrant will be at the discretion of the Board of
Directors and will depend upon the Registrant's funds available, its financial
condition, its capital and lease requirements, and the annual distribution
requirements under the REIT provisions of the Internal Revenue Code. No
assurances can be given as to the amounts of dividends, if any, that will be
distributed in the future.
ITEM 6. SELECTED FINANCIAL DATA.
The selected financial data should be read in conjunction with the
Consolidated Financial Statements of the Registrant and related notes listed in
Item 14 of this annual report and included elsewhere herein. The selected
financial data is unaudited. (In thousands, except per share data)
AS OF DECEMBER 31,
<TABLE>
<CAPTION>
1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
FINANCIAL POSITION
Investment properties, net..................... $50,477 $51,933 $54,225 $32,797 $33,572
Properties held for sale, net.................. -- 2,480 -- -- 22,230
Deferred tax asset............................. -- 10,216 8,203 4,183 6,831
Other assets................................... 10,342 10,922 6,283 15,413 3,254
------- ------- ------- ------- -------
Total assets................................... $60,819 $75,551 $68,711 $52,393 $65,887
======= ======= ======= ======= =======
Debt........................................... $44,516 $48,707 $47,402 $33,722 $61,778
======= ======= ======= ======= =======
Deferred tax liability......................... $ -- $20,274 $17,983 $15,012 $10,514
======= ======= ======= ======= =======
Stockholders' equity (deficit)................. $ 7,071 $ 3,117 $ 648 $ 2,168 $(9,186)
======= ======= ======= ======= =======
Stockholders' equity (deficit) per share....... $ 1.80 $ 0.80 $ 0.17 $ 0.56 $ (2.36)
======= ======= ======= ======= =======
</TABLE>
11
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA, (CONTINUED)
The selected financial data should be read in conjunction with the
Consolidated Financial Statements of the Registrant and related notes listed in
Item 14 of this annual report and included elsewhere herein. The selected
financial data is unaudited. (In thousands, except share and per share data)
FOR THE YEAR ENDED DECEMBER 31,
<TABLE>
<CAPTION>
1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
INCOME RESULTS
Revenue from investment properties............. $17,980 $16,528 $13,721 $11,011 $12,200
Revenue from hotel property.................... $ -- $ -- $ -- $ 6,111 $ 7,009
Investment in partnership, net................. $ -- $ -- $ -- $ 2,940 $(4,090)
Provision for settlement of reimbursement
obligation................................... $ -- $ (58) $(2,200) $ -- $ --
Gain on sale of real estate assets, net........ $ -- $ -- $ -- $16,714 $ 177
Provision for write-down to estimated net
realizable value............................. $ -- $ -- $ -- $ -- $ (540)
Extraordinary items............................ $ -- $ -- $ -- $ 766 $ (233)
Net income (loss).............................. $ 5,986 $ 593 $(1,726) $11,354 $(2,729)
Net income (loss) available to common
stockholders................................. $ 5,842 $ 578 $(1,726) $11,354 $(2,729)
Income (loss) per common share, basic:
Income (loss) before extraordinary items..... $ 1.49 $ 0.15 $ (0.44) $ 2.72 $ (0.64)
Extraordinary items.......................... -- -- -- 0.20 (0.06)
------- ------- ------- ------- -------
Net income (loss) available to common
stockholders............................... $ 1.49 $ 0.15 $ (0.44) $ 2.92 $ (0.70)
======= ======= ======= ======= =======
Number of common shares and share
equivalents outstanding, basic............. 3,934 3,917 3,893 3,893 3,893
======= ======= ======= ======= =======
Income (loss) per common share, diluted:
Income (loss) before extraordinary items..... $ 1.35 $ 0.14 $ (0.44) $ 2.58 $ (0.64)
Extraordinary items.......................... -- -- -- 0.19 (0.06)
------- ------- ------- ------- -------
Net income (loss) available to common
stockholders............................... $ 1.35 $ 0.14 $ (0.44) $ 2.77 $ (0.70)
======= ======= ======= ======= =======
Number of common shares and share
equivalents outstanding, diluted........... 4,333 4,104 3,893 4,100 3,893
======= ======= ======= ======= =======
</TABLE>
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
1999, there were additions to investment properties amounting to approximately
$2,483,000 for tenant improvements, capital improvements, rent concessions and
other deferred costs which includes leasing commissions. Additionally, in 1998
the Registrant incurred $60,000 in loan costs. The Registrant anticipates that
additions to investment properties will amount to approximately $1.7 million in
2000.
12
<PAGE>
FINANCING--A total of approximately $1,035,000 of debt principal was repaid
in 1999 as scheduled debt amortization. In addition, the Registrant paid off
$897,000 in mortgage debt as more fully discussed in Note 3 to the Registrant's
Consolidated Financial Statements. Accordingly, at December 31, 1999, the
Registrant had fixed rate mortgage debt of approximately $40.3 million bearing
interest at a weighted average rate of 8.50%, and two floating rate mortgages
for the sum of approximately $4.2 million, bearing interest at a rate of 7.75%
as of December 31, 1999.
NET INCOME (LOSS)
INVESTMENT PROPERTIES--During 1999, income from investment properties was
$3,990,000 compared to income of $2,204,000 for 1998. The increase in rental
revenues for 1999 compared to 1998 is a result of an increase in both occupancy
and rental rates at several properties. Included in rental revenues for 1998 is
a $340,000 lease buyout from a tenant at Walnut Creek Executive Park which was
reinvested in re-tenanting the space in the third quarter of 1998. The increase
in operating expenses for 1999 compared to 1998 is primarily due to higher
occupancy at its California properties. Interest expense decreased from
$4,300,000 in 1998 to $3,819,000 in 1999. Included in interest expense for 1998
is $414,000 of interest recorded on the settlement obligation as more fully
discussed in Note 2 to the Registrant's Consolidated Financial Statements.
Depreciation and amortization expense increased as a result of commencing
depreciation on expenditures capitalized during 1999 relating to increased
leasing activity and capital improvement projects.
During 1998, the income from investment properties was $2,204,000 compared
to income of $599,000 for 1997. The increase in rental revenues for 1998
compared to 1997 is a result of an increase in both occupancy and rental rates
at several properties. The increase in operating expenses for 1998 compared to
1997 is primarily due to higher occupancy at its California properties and a
property tax refund received in 1997. Interest expense increased from $4,058,000
in 1997 to $4,300,000 in 1998. Included in interest expense for 1997 and 1998 is
$227,000 and $414,000, respectively, of interest recorded on the settlement
obligation as described above. Depreciation and amortization expense increased
for 1998 compared to 1997 as a result of increased leasing activity and capital
expenditures in 1998.
INVESTMENT IN PARTNERSHIP--On October 12, 1999, the Registrant executed
Amendment No. 3 to the Limited Partnership Agreement of RCA (the "Amendment"),
which allocated gross income to the Registrant for fiscal year 1999 to the
extent that the Registrant had a deficit capital account in RCA. As a result of
the Amendment, the Registrant estimates that it realized a tax gain of
approximately $26.8 million. In addition, a loan to RCA from the managing
general partner of RCA on behalf of the Registrant in the amount of
approximately $8.6 million was cancelled, and the agreement obligating the
managing general partner to continue making loans to RCA on behalf of the
Registrant was terminated. As a result of the Amendment and cancellation of the
loan, the Registrant estimates that it realized a total tax gain of
approximately $35.4 million. The Registrant further estimates that the net tax
liability after utilizing the Registrant's net operating loss carryover and
unused tax credits will amount to approximately $6.6 million. The Registrant had
written off its investment in RCA to zero in 1995, and has fully reserved for
the tax liability described above in 1999. The Registrant intends to fund the
estimated tax liability from its cash reserves, cash flow from operations and
additional borrowing.
In a separate transaction, RCA completed the disposition of its sole asset,
Rincon Center, located in San Francisco, California, to an unrelated party on
October 12, 1999. RCA's disposition of Rincon Center has had no impact on the
Registrant's financial statements. In connection with the disposition, all
contingent liabilities associated with RCA were eliminated, pending litigation
among the parties involved in Rincon Center were dismissed with prejudice and
mutual settlement and release agreements were executed by all parties. The
Registrant and the managing general partner of RCA
13
<PAGE>
have wound up the affairs of RCA partnership as of December 31, 1999. The
winding up of the RCA partnership had no financial impact on the Registrant's
financial statements.
GENERAL AND ADMINISTRATIVE EXPENSES--General and administrative expenses
increased from $1,360,000 in 1998 to $1,828,000 in 1999. This increase is
primarily due to an increase in professional services attributable to the RCA
settlement, the Registrant's reincorporation in Maryland, fees paid to the
Registrant's financial advisor, and personnel costs. General and administrative
expenses increased from $1,250,000 in 1997 to $1,360,000 in 1998. The increase
in general and administrative expenses for 1998 compared to 1997 was primarily
attributable to an increase in professional fees.
OTHER INCOME--Other income was $328,000 in 1999 compared to $196,000 in
1998. The increase is primarily due to an increase in interest income from
additional interest income earned on cash reserves.
PROVISION FOR SETTLEMENT OF REIMBURSEMENT OBLIGATION--In 1998 and 1997, the
Registrant recorded a provision of $58,000 and $2,200,000, respectively, for the
ultimate settlement of a letter-of-credit reimbursement obligation. On
January 20, 1999, the Registrant sold the 410 First Avenue property in Needham,
Massachusetts for approximately $3,785,000, net of selling expenses of
approximately $165,000. This property had been classified as a property held for
sale on the Registrant's December 31, 1998 Balance Sheet. The net proceeds from
the sale were utilized to partially fund the $4.2 million settlement of
outstanding debt, as more fully discussed in Note 2 to the Registrant's
Consolidated Financial Statements.
INCOME TAX (PROVISION) BENEFIT--In March 2000, the Registrant determined
that it would elect to be taxed as a real estate investment trust (REIT)
pursuant to the Internal Revenue Code, as amended, effective January 1, 1999. In
general, a corporation that has made a REIT election and that distributes at
least 95% of its REIT taxable income to shareholders in any taxable year and
complies with certain other requirements (relating primarily to the nature of
its assets and the sources of its revenue) is not subject to federal income
taxation to the extent of the income which it distributes. Management believes
that the Registrant met the qualifications for REIT status for 1999, and intends
for it to continue to meet the qualifications in the future. As a REIT, the
Registrant will be required to distribute its REIT taxable income to
shareholders in subsequent years to the extent REIT status is maintained.
Management also does not expect that the Registrant will pay taxes on "built-in
gains" on its assets. Based on these considerations, management does not believe
that the Registrant will be liable for income taxes at the Federal level or in
most of the states in which it operates in future years. Accordingly, the
Registrant eliminated substantially all of its existing deferred tax assets and
liabilities at December 31, 1999 and does not expect to provide for deferred
income taxes in future periods except in certain states. The Registrant wrote
off approximately $3.5 million of a net deferred tax liability which is
reflected as an income tax benefit in the 1999 Statement of Operations. The
Registrant recorded a current tax payable of approximately $6.6 million related
to the RCA Amendment (see Note 2 to the Registrant's Consolidated Financial
Statements).
The Registrant provides for income taxes under the liability method in
accordance with Statement of Financial Accounting Standards No. 109, "Accounting
for Income Taxes" (SFAS 109). For 1998 and 1997 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.
In 1997, the Registrant recorded an income tax benefit of 37% on its loss
before taxes. This amount was less than the 40% effective rate recorded in 1998,
due to certain 1997 taxable items which were not included in income for
financial reporting purposes.
14
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
REGULATION AND SUPERVISION
Many jurisdictions have adopted laws and regulations relating to the
ownership of real estate. Compliance with these requirements from time to time
may require capital expenditures by the Registrant (for example, expenditures
necessary in order to comply with the Americans with Disabilities Act or changes
in local building or other codes). In addition, the Registrant may from time to
time have to expend capital for environmental control facilities. While the
ownership of real estate may entail environmental risks and liabilities to the
owner, the Registrant's management is sensitive to environmental issues and is
not currently aware of and does not expect any material effects on current or
future capital expenditures, earnings or competitive position resulting from
compliance with present federal, state or local environmental control
provisions.
DISCUSSION OF KNOWN TRENDS, EVENTS AND UNCERTAINTIES
The economic climate for commercial real estate has shown signs that rental
rates and property values have stabilized and selected markets have improved.
Notwithstanding a stabilizing real estate market, tenants may or may not
continue to renew leases as they expire or may renew on less favorable terms.
Conditions differ in each market in which the Registrant's properties are
located. Because of the continuing uncertainty of future economic developments
in each market, the impact these developments will have on the Registrant's
future cash flow and results of operations is uncertain.
Inflation, inflationary expectations and their effect on interest rates may
affect the Registrant in the future by changing the underlying value of the
Registrant's real estate or by impacting the costs of financing the Registrant's
operations.
LIQUIDITY AND CAPITAL RESOURCES
The bulk of the Registrant's resources are committed to relatively
non-liquid real estate assets. These assets, due to their value and cash flow,
have provided the Registrant with an ability to generate capital as required,
both internally and externally, through asset-based financings. In addition,
since 1992, assets or portions thereof were sold to provide further liquidity.
The Registrant has taken several actions to generate and conserve cash as
discussed below and continues to review and analyze alternative actions. At the
same time, the Registrant is seeking to retain value and identify future
opportunities for investment. At December 31, 1999, the Registrant had
approximately $5.6 million of unrestricted cash, $1.8 million of restricted
cash, investment properties with a net book value of approximately $50.5
million, total non-recourse mortgage debt of approximately $44.5 million and
stockholders' equity of approximately $7.1 million. Additionally, payments of
distributions to shareholders increased from $212,000 in 1998 to $2,032,000 in
1999. Given the Registrant's desire to increase its liquidity, the Registrant
has actively pursued the sale of selected real estate assets in the past, and
has restructured and refinanced its mortgage debt. The Registrant continues to
evaluate various alternatives to improve its liquidity through debt refinancing
and the sale of properties which do not fit within its long term strategy. Funds
raised in the preceding fashion would be used for tenant improvements and other
capital requirements, certain mandatory debt reductions, and possible new
investments.
On October 13, 1999, the Registrant announced that Prudential Securities
Incorporated had been assisting the Board of Directors in evaluating various
strategic alternatives. Following a lengthy review process, the Board of
Directors determined that it would be in the best interest of the Registrant's
shareholders to pursue a possible sale or merger. However, the Registrant can
provide no assurances as to the timing or ultimate conclusion of any such
action.
15
<PAGE>
As of December 31, 1999, the Registrant's mortgage debt had scheduled annual
principal maturities as follows (in thousands):
<TABLE>
<CAPTION>
CURRENT
--------
<S> <C>
2000....................................................... $ 1,095
2001....................................................... 1,190
2002....................................................... 1,294
2003....................................................... 1,407
2004....................................................... 1,530
Thereafter................................................. 38,000
-------
$44,516
=======
</TABLE>
The Registrant is also obligated to fund reserves for building, tenant
improvements and leasing commissions in connection with its mortgage loans on
Walnut Creek Executive Park, North Tucson Business Center, and South Bay Office
Tower. Scheduled funding under the various mortgage loan agreements over the
twelve months ending December 31, 2000, will amount to approximately $597,000.
On October 12, 1999, the Registrant executed Amendment No. 3 to the Limited
Partnership Agreement of RCA (the "Amendment"), which allocated gross income to
the Registrant for fiscal year 1999 to the extent that the Registrant had a
deficit capital account in RCA. As a result of the Amendment, the Registrant
estimates that it incurred a tax gain of approximately $26.8 million. In
addition, a loan to RCA from the managing general partner of RCA in the amount
of approximately $8.6 million was cancelled, and the agreement obligating the
managing general partner to continue making loans to RCA on behalf of the
Registrant was terminated. As a result of the Amendment and cancellation of the
loan, the Registrant estimates that it incurred a total tax gain of
approximately $35.4 million. The Registrant further estimates that the net tax
liability after utilizing the Registrant's net operating loss carryover and
unused tax credits will amount to approximately $6.6 million. The Registrant had
written of its investment in RCA to zero in 1995, and has fully recorded the tax
liability described above. The Registrant will fund the estimated tax liability
from its cash reserves, cash flow from operations, additional borrowing, or a
possible asset sale.
In a separate transaction, RCA completed the disposition of its sole asset,
Rincon Center located in San Francisco, California to an unrelated party on
October 12, 1999. RCA's disposition of Rincon Center has had no impact on the
Registrant's financial statements. In connection with the disposition, all
contingent liabilities associated with RCA were eliminated, pending litigation
among the parties involved in Rincon Center were dismissed with prejudice, and
mutual settlement and release agreements were executed by all parties. The
Registrant and the managing general partner of RCA have wound up the affairs of
RCA partnership as of December 31 1999. The wind up of the RCA partnership had
no financial impact on the Registrant's financial statements.
At December 31, 1999, the Registrant's material capital expenditures over
the next twelve months and beyond are expected to be funded from restricted cash
or future cash flow generated by operating activities. Ongoing repair and
maintenance expenditures are expected to be funded from cash flow generated by
operating activities. Future tenant improvements and leasing commissions will be
funded from restricted cash, cash flow generated by operating activities and
funds generated from future debt refinancings or property sales, if necessary.
The Registrant continued to experience more stabilized operating results in
its wholly owned properties during 1999, and expects this trend to continue. In
addition, the completion of certain leasing transactions has continued to reduce
the level of vacancy in the Registrant's portfolio and the Registrant is
continuing to aggressively pursue new leases on currently available space and
renew existing leases as they expire.
16
<PAGE>
YEAR 2000 COMPLIANCE
The Registrant conducted a comprehensive company-wide test of financial and
non-financial systems to ensure that its systems would adequately handle the
year 2000 issues. The Registrant also surveyed its property managers to
determine if its HVAC, security, lighting and other critical building systems at
its Properties were year 2000 compliant. The Registrant experienced no
significant problems with any of its financial or non-financial systems, nor did
any of the critical systems at its Properties malfunction, at the turn of the
century. In addition, the Registrant has not experienced any significant year
2000 issues with respect to its third party suppliers. The Registrant will
continue to monitor its systems and those at its Properties for potential
imbedded year 2000 problems. The costs incurred by the Registrant in connection
with its year 2000 compliance program have been, and are expected to remain,
immaterial to its financial position, results of operations and cash flows.
FORWARD-LOOKING STATEMENTS; FACTORS THAT MAY AFFECT OPERATING RESULTS
Certain information included in this Form 10-K and other materials filed or
to be filed by the Registrant with the Securities and Exchange Commission may
constitute forward-looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995. Such forward-looking information
involves known and unforeseen risks, uncertainties and other factors that may
cause actual results or performance to be materially different from those
expressed or implied by such forward-looking statements. These risks and
uncertainties include, but are not limited to, uncertainties affecting the real
estate business generally, such as lease renewals and the financial stability of
tenants, general economic conditions and conditions in the Registrant's markets,
risks relating to acquisitions and dispositions of properties, risks relating to
interest rate levels and fluctuations, the availability of financing, and
regulatory risks. Given these and other risks described elsewhere in this Form
10-K, investors are cautioned not to place undue reliance on any forward-looking
statements.
ITEM 7A. QUALITATIVE AND QUANTITATIVE INFORMATION ABOUT MARKET RISK
INTEREST RATES
The Registrant's primary market risk exposure is to changes in interest
rates on its floating rate mortgage loans payable. The Registrant does not
believe that changes in market interest rates will have a material impact on the
performance or fair value of its two floating rate mortgage loans.
Approximately 9.4% and 8.7% of the Registrant's outstanding debt were
subject to variable rates at December 31, 1999 and 1998, respectively. In
addition, the average weighted interest rate on the Registrant's floating rate
debt decreased from 8.38% at December 31, 1998 to 7.75% at December 31, 1999.
The Registrant reviews interest rate exposure in the portfolio quarterly in an
effort to minimize the risk of interest rate fluctuations. The Registrant does
not have any other material market-sensitive financial debt instruments. It is
not the Registrant's policy to engage in hedging activities for previously
outstanding debt instruments or for speculative or trading purposes.
The table below provides information about the Registrant's debt
obligations. The table presents principal cash flows and related weighted
average interest rates by expected maturity dates. Weighted average variable
rates are based on rates in effect at the reporting date.
<TABLE>
<CAPTION>
EXPECTED MATURITIES
---------------------------------------------------------------------------------------
FAIR
2000 2001 2002 2003 2004 THEREAFTER TOTAL VALUE
-------- -------- -------- -------- -------- ---------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Secured Fixed................... $1,037 $1,128 $1,226 $1,333 $1,450 $34,146 $40,320 $40,320
Fixed Interest Rate............. 8.50% 8.50% 8.50% 8.50% 8.50% 8.50%
Secured Variable................ $ 59 $ 62 $ 68 $ 74 $ 80 $ 3,853 $ 4,196 $ 4,196
Average Interest Rate........... 7.75% 7.75% 7.75% 7.75% 7.75% 7.75%
</TABLE>
17
<PAGE>
The Registrant believes that the interest rates given in the table for fixed
rate borrowings approximate the rates the Registrant could currently obtain for
instruments of similar terms and maturities and that the fair values of such
instruments approximate carrying value at December 31, 1999.
A change of 1/4% in the index rate to which the Registrant's variable rate
debt is tied would change the annual interest incurred by the Registrant by
approximately $10,000 based upon the balances outstanding on variable rate
instruments at December 31, 1999.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and supplementary data required by this Item 8 are
included in Part IV as indexed under Items 14 (a) 1 and 2.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
The information called for by Part III will be included in an amendment to
this Form 10-K, to be filed within 120 days after the end of the fiscal year
covered by this Annual Report on Form 10-K.
PART IV
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:
<TABLE>
<CAPTION>
FINANCIAL STATEMENTS OF THE REGISTRANT PAGES
- -------------------------------------- --------
<S> <C>
Consolidated Balance Sheets as of December 31, 1999 and
1998...................................................... 22
Consolidated Statements of Operations for the three years
ended December 31, 1999, 1998 and 1997.................... 23
Consolidated Statements of Stockholders' Equity for the
three years ended December, 1999, 1998 and 1997........... 24
Consolidated Statements of Cash Flows for the three years
ended December 31, 1999, 1998 and 1997.................... 25
Notes to Consolidated Financial Statements.................. 26-36
Report of Independent Public Accountants.................... 37
</TABLE>
(a) 2. The following financial statement schedule is filed as part of this
report:
<TABLE>
<CAPTION>
<S> <C>
Schedule III --Real Estate and Accumulated Depreciation
as of December 31, 1999................... 38-39
</TABLE>
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.
(a) 3. Exhibits
Any exhibits required by this subsection of Item 14 will be filed by
amendment.
<TABLE>
<S> <C>
21. Subsidiaries of the Registrant.................... 40
23.1 Consent of Independent Public Accountants......... 41
</TABLE>
18
<PAGE>
(b) The Registrant filed a Form 8-K dated October 19, 1999, reporting under
Items 5 and 7 the Amendment No. 3 to the Limited Partnership Agreement of
Rincon Center Associates.
The Registrant filed a Form 8-K dated September 7, 1999, reporting under
Item 5 the consummation of its reincorporation from New York to Maryland.
The Registrant filed a Form 10-K/A for the year ended December 31, 1998,
dated April 29, 1999, reporting under Items 10 through 13.
The Registrant filed Form S-8 POS (Amendment No. 2) dated November 23, 1999.
19
<PAGE>
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.
<TABLE>
<S> <C> <C>
PACIFIC GATEWAY PROPERTIES, INC.
(REGISTRANT)
By: RAYMOND V. MARINO
----------------------------------------
Raymond V. Marino
PRESIDENT AND CHIEF EXECUTIVE OFFICER
</TABLE>
Dated: March 13, 2000
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.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
RAYMOND V. MARINO Director, President and Chief
- ------------------------------------ Executive Officer and Chief March 13, 2000
Raymond V. Marino Financial Officer
MELANIE L. ADKINS
- ------------------------------------ Controller - Corporate March 13, 2000
Melanie L. Adkins (Principal Accounting Officer)
NEIL C. MARCK
- ------------------------------------ Controller - Management Company March 13, 2000
Neil C. Marck (Principal Accounting Officer)
STEVEN A. CALABRESE
- ------------------------------------ Director March 13, 2000
Steven A. Calabrese
MARK D. GROSSI
- ------------------------------------ Director March 13, 2000
Mark D. Grossi
LAWRENCE B. HELZEL
- ------------------------------------ Director March 13, 2000
Lawrence B. Helzel
CHRISTOPHER L. JARRATT
- ------------------------------------ Director March 13, 2000
Christopher L. Jarratt
RICHARD M. OSBORNE
- ------------------------------------ Director March 13, 2000
Richard M. Osborne
MARTIN S. ROHER
- ------------------------------------ Director March 13, 2000
Martin S. Roher
</TABLE>
20
<PAGE>
PACIFIC GATEWAY PROPERTIES, INC.
CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1999 AND 1998
AND FOR THE YEARS ENDED
DECEMBER 31, 1999, 1998 AND 1997
21
<PAGE>
PACIFIC GATEWAY PROPERTIES, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
-------------------
1999 1998
-------- --------
<S> <C> <C>
ASSETS
Cash and cash equivalents................................... $ 5,609 $ 6,535
Restricted cash............................................. 1,793 1,573
Accounts receivable......................................... 172 148
Other current assets........................................ 82 82
Investment properties:
Land...................................................... 9,137 9,137
Buildings................................................. 46,138 46,008
Building and other improvements........................... 14,725 12,993
-------- --------
Subtotal investment properties.......................... 70,000 68,138
Less-accumulated depreciation............................. (19,523) (16,205)
-------- --------
Investment properties, net.............................. 50,477 51,933
-------- --------
Property held for sale, net of accumulated depreciation and
reserve for write-down to net realizable value of $2,733
at December 31, 1998...................................... -- 2,480
Deferred tax asset.......................................... -- 10,216
Capitalized loan costs, net of accumulated amortization of
$333 and $233 at December 31, 1999 and 1998,
respectively.............................................. 600 743
Capitalized lease commissions, rent concessions and other
deferred costs, net of accumulated amortization of $1,819
and $1,455 at December 31, 1999 and 1998, respectively.... 2,086 1,841
-------- --------
Total assets.......................................... $ 60,819 $ 75,551
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current income taxes payable................................ $ 6,551 $ --
Accounts payable............................................ 783 879
Accrued payroll, property and sales taxes................... 103 117
Accrued interest on debt.................................... 165 811
Unearned rental revenue..................................... 367 413
Tenant security deposits.................................... 1,263 1,233
Debt related to investment properties....................... 44,516 48,707
Deferred tax liability...................................... -- 20,274
-------- --------
Total liabilities....................................... 53,748 72,434
-------- --------
Stockholders' equity:
Common stock $1.00 par value:
Authorized--10,000,000 shares; Issued--4,052,090 shares as
of December 31, 1999 and 1998........................... 4,052 4,052
Series 1 Convertible Preferred Stock $1.00 par value, $3,000
preference in liquidation:
Authorized, issued and outstanding--300,000 shares........ 2,889 2,889
Paid-in-deficit............................................. (8,968) (8,968)
Retained earnings........................................... 11,135 7,181
Treasury stock, at cost--118,554 common shares at
December 31, 1999 and December 31, 1998................... (2,037) (2,037)
-------- --------
Total stockholders' equity.............................. 7,071 3,117
-------- --------
Total liabilities and stockholders' equity............ $ 60,819 $ 75,551
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
22
<PAGE>
PACIFIC GATEWAY PROPERTIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
---------------------------------
1999 1998 1997
--------- --------- ---------
<S> <C> <C> <C>
INVESTMENT PROPERTIES:
Rental revenues........................................... $17,980 $16,528 $13,721
Operating expenses........................................ (6,337) (6,340) (5,955)
Interest expense.......................................... (3,819) (4,300) (4,058)
Depreciation and amortization............................. (3,834) (3,684) (3,109)
------- ------- -------
Investment properties income............................ 3,990 2,204 599
------- ------- -------
HOTEL PROPERTY:
Operating expenses........................................ -- -- (93)
------- ------- -------
Hotel property loss..................................... -- -- (93)
------- ------- -------
General and administrative expenses......................... (1,828) (1,360) (1,250)
Other income................................................ 328 196 192
------- ------- -------
Income (loss) before settlement obligation, property
transactions, and income taxes.......................... 2,490 1,040 (552)
Provision for settlement of reimbursement obligation........ -- (58) (2,200)
------- ------- -------
Income (loss) before income taxes........................... 2,490 982 (2,752)
Income tax (provision) benefit.............................. 3,496 (389) 1,026
------- ------- -------
Net income (loss)......................................... $ 5,986 $ 593 $(1,726)
------- ------- -------
Preferred dividends......................................... (144) (15) --
------- ------- -------
Net income (loss) available to common stockholders.......... $ 5,842 $ 578 $(1,726)
======= ======= =======
Income (loss) per common share, basic:
Net income (loss) available to common stockholders...... $ 1.49 $ 0.15 $ (0.44)
======= ======= =======
Income (loss) per common share, diluted:
Net income (loss) available to common stockholders...... $ 1.35 $ 0.14 $ (0.44)
======= ======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
23
<PAGE>
PACIFIC GATEWAY PROPERTIES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE THREE YEARS ENDED DECEMBER 31, 1999
(IN THOUSANDS EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
SERIES 1 WARRANTS
CONVERTIBLE FOR
COMMON PREFERRED PAID-IN- RETAINED TREASURY COMMON
STOCK STOCK DEFICIT EARNINGS STOCK STOCK TOTAL
-------- ----------- -------- -------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1996................ $4,011 $ -- $(10,222) $ 8,526 $(2,037) $ 1,890 $ 2,168
Net loss.................................. -- -- -- (1,726) -- -- (1,726)
Issuance of common stock from exercise of
stock options........................... 7 -- 15 -- -- -- 22
Return of profit from shareholder
short-swing sale........................ -- -- 184 -- -- -- 184
------ ------ -------- ------- ------- ------- -------
Balance at December 31, 1997................ $4,018 $ -- $(10,023) $ 6,800 $(2,037) $ 1,890 $ 648
Net income................................ -- 15 -- 578 -- -- 593
Dividend payment.......................... -- (15) -- (197) -- -- (212)
Repurchase of warrants.................... -- -- 883 -- -- (1,890) (1,007)
Issuance of 300,000 shares of preferred
stock................................... -- 2,889 -- -- -- -- 2,889
Tax benefit from exercise of stock
options................................. -- -- 104 -- -- -- 104
Issuance of common stock from exercise of
stock options........................... 34 -- 65 -- -- -- 99
Return of profit from shareholder
short-swing sale........................ -- -- 3 -- -- -- 3
------ ------ -------- ------- ------- ------- -------
Balance at December 31, 1998................ $4,052 $2,889 $ (8,968) $ 7,181 $(2,037) $ -- $ 3,117
Net income................................ -- 144 -- 5,842 -- -- 5,986
Dividend payment.......................... -- (144) -- (1,888) -- -- (2,032)
------ ------ -------- ------- ------- ------- -------
Balance at December 31, 1999................ $4,052 $2,889 $ (8,968) $11,135 $(2,037) $ -- $ 7,071
====== ====== ======== ======= ======= ======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
24
<PAGE>
PACIFIC GATEWAY PROPERTIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
DECEMBER 31,
------------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Cash flow from operating activities:
Net income (loss)......................................... $ 5,986 $ 593 $ (1,726)
Non-cash revenues and expenses included in net income
(loss):
Depreciation and amortization........................... 3,834 3,684 3,109
Provision for settlement of reimbursement obligation.... -- 58 2,200
Deferred taxes, net..................................... (10,058) 278 (1,049)
Current taxes payable................................... 6,551 -- --
Changes in assets and liabilities:
Accounts receivable and other current assets.............. (24) 22 927
Accounts payable and other current liabilities............ (132) 775 1,187
-------- ------- --------
NET CASH GENERATED BY OPERATING ACTIVITIES.................. 6,157 5,410 4,648
-------- ------- --------
Cash flow from investing activities:
Additions to building and other improvements, capitalized
lease commissions, rent concessions and other deferred
costs................................................... (2,483) (4,176) (4,161)
Acquisition of investment properties...................... -- -- (10,797)
Proceeds from sale of property, net....................... 3,785 -- --
(Increase) decrease in restricted cash.................... (220) 173 8,229
-------- ------- --------
NET CASH GENERATED BY (USED IN) INVESTING ACTIVITIES........ 1,082 (4,003) (6,729)
-------- ------- --------
Cash flow from financing activities:
Borrowings under debt related to investment properties.... -- 4,273 2,112
Payment to settle reimbursement obligation................ (4,200) -- --
Payments on debt.......................................... (1,933) (3,026) (835)
Payment of loan costs and fees............................ -- (60) (236)
Repurchase of warrants.................................... -- (1,007) --
Proceeds from sale of preferred stock, net of issuance
costs................................................... -- 2,889 --
Payment of dividends...................................... (2,032) (212) --
Proceeds from stock options exercised..................... -- 99 22
Tax benefit from exercise of stock options................ -- 104 --
Proceeds from shareholder short-swing sale................ -- 3 184
-------- ------- --------
NET CASH GENERATED BY (USED IN) FINANCING ACTIVITIES........ (8,165) 3,063 1,247
-------- ------- --------
Increase (decrease) in cash and cash equivalents............ (926) 4,470 (834)
Balance at beginning of year................................ 6,535 2,065 2,899
-------- ------- --------
Balance at end of year...................................... $ 5,609 $ 6,535 $ 2,065
======== ======= ========
SUPPLEMENTARY DISCLOSURES:
Cash paid for interest.................................... $ 4,465 $ 3,791 $ 3,673
======== ======= ========
Cash paid for taxes....................................... $ 11 $ 1 $ --
======== ======= ========
Non-cash transactions:
Portion of acquisition of investment properties funded by
assumption of mortgage debt............................. $ -- $ -- $ 10,203
======== ======= ========
Increase in debt related to investment properties in
connection with reimbursement obligation................ $ -- $ 58 $ 2,200
======== ======= ========
Decrease in paid-in-deficit from repurchase of warrants... $ -- $ 883 $ --
======== ======= ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
25
<PAGE>
PACIFIC GATEWAY PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE YEARS ENDED DECEMBER 31, 1999
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
Pacific Gateway Properties, Inc., (the "Company") is a Maryland corporation,
formed for the purpose of investing and managing income producing real estate.
The Company reincorporated from New York effective September 1, 1999. The
reincorporation did not result in a change in the Company's management,
capitalization, assets, liabilities or net worth, but did result in certain
ownership and transfer restrictions applicable to the Company's common stock.
The Company's overall business plan has been to assemble a substantial portfolio
of income producing properties. The Company has elected to be taxed as a Real
Estate Investment Trust ("REIT") for fiscal 1999 and is therefore required to
meet certain asset and income tests, and other requirements, in order to
maintain REIT status as further discussed in Note 5 to the Company's
Consolidated Financial Statements. The Company believes it qualifies as a REIT
under the Internal Revenue Code of 1986 (the "Code"), as amended for 1999. The
Company historically focused its property acquisitions in four markets: Northern
California, Arizona, Florida and Massachusetts. The Company's long-term
objectives continue to be maximizing net cash flow from operations and achieving
growth through appreciation of asset values. The current strategic plan of the
Company 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 is on
commercial properties which require aggressive management and leasing in order
to maximize their potential. This strategy is influenced by the following
factors: (1) the Company's current property portfolio is concentrated on the
West Coast; and (2) the Company believes that geographic concentration will
create operational efficiencies.
On October 13, 1999, the Company announced that Prudential Securities
Incorporated had been assisting the Board of Directors in evaluating various
strategic alternatives. Following a lengthy review process, the Board of
Directors determined that it would be in the best interest of the Company's
shareholders to pursue a possible sale or merger. However, the Company can
provide no assurances as to the timing or ultimate conclusion of any such
action.
PRINCIPLES OF CONSOLIDATION
The Company's Consolidated Financial Statements include the accounts of the
Company and all wholly owned subsidiaries. Significant intercompany accounts and
transactions have been eliminated in consolidation. The investment in RCA in
which the Company had a 22.8% partnership interest and had no management
control, was accounted for using the equity method.
REVENUE RECOGNITION
Rental revenues are recognized on a straight-line basis over the term of
occupancy in accordance with the provisions of the leases.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include cash, commercial paper and money market
accounts, all of which have original maturities of three months or less.
26
<PAGE>
PACIFIC GATEWAY PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE THREE YEARS ENDED DECEMBER 31, 1999
RESTRICTED CASH
As of December 31, 1999, restricted cash is comprised of the following (in
thousands):
<TABLE>
<CAPTION>
<S> <C>
Capital, tenant improvement and lease commission reserves... $1,110
Security deposits from certain tenants...................... 269
Debt service, property tax and insurance reserves........... 414
------
Total....................................................... $1,793
======
</TABLE>
INVESTMENT PROPERTIES, PROPERTY HELD FOR SALE, AND OTHER DEFERRED COSTS
Land, buildings and improvements are recorded at cost. Depreciation on
investment properties is provided using the straight-line method over estimated
useful lives ranging from 10 to 40 years. At December 31, 1998, the Company had
classified the 410 First Avenue property as held for sale. This property was
sold in January 1999.
The following table summarizes the condensed results of operations of the
410 First Avenue property held for disposition for the years ended
December 1999, 1998, and 1997 (in thousands):
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Rental Revenues............................................. $ 15 $ 301 $ 302
Operating Expenses.......................................... 1 96 44
Interest Expense............................................ -- 414 226
Depreciation and amortization............................... -- 11 78
Provision for reimbursement obligation...................... -- 58 2,200
---- ------ --------
Investment property income (loss)........................... $ 14 $ (278) $ (2,246)
==== ====== ========
</TABLE>
Capitalized loan costs consist of loan fees, legal, accounting, engineering,
appraisal, and other costs associated with financings and are amortized using
the straight-line method over the primary term of related debt instrument. Lease
commissions and rent concessions 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.
The Company periodically reviews its long-lived assets for impairment
whenever events or changes in circumstances indicate that the carrying amount of
an asset may not be recoverable. An impairment loss would be recognized when
expected cash flows (not discounted) are less than the carrying value of the
asset. Measurement of impairment is based upon the fair value of the asset.
EARNINGS PER SHARE
Basic earnings per share is computed as earnings divided by weighted average
shares, excluding the dilutive effects of stock options and other potentially
dilutive securities. Outstanding warrants and stock options enter into the
weighted average shares outstanding when computing diluted earnings per share
27
<PAGE>
PACIFIC GATEWAY PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE THREE YEARS ENDED DECEMBER 31, 1999
using the Treasury Stock Method. The number of weighted average common shares
and potential common shares used in the earnings per share calculations are as
follows:
<TABLE>
<CAPTION>
1999 1998 1997
--------- --------- ---------
<S> <C> <C> <C>
Basic....................................................... 3,933,536 3,916,612 3,893,133
Stock options, warrants and series 1 convertible preferred
stock................................................... 399,628 187,166 --
--------- --------- ---------
Diluted..................................................... 4,333,164 4,103,778 3,893,133
========= ========= =========
</TABLE>
In 1997, due to the Company's loss position, the inclusion of stock options
and warrants would have been anti-dilutive, and accordingly the number of
outstanding shares used in calculating basic and diluted earnings per share for
that year are the same.
RISKS AND UNCERTAINTIES AND USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities,
disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
The Company's ability to (i) meet its debt obligations, (ii) provide
dividends either from operations, or the ultimate disposition of the Company's
properties or (iii) continue as a going concern may be impacted by changes in
interest rates, property values, geographic economic conditions, or the entry of
other competitors to the market. The Company's wholly owned San Francisco Bay
Area properties do not maintain earthquake insurance. The accompanying
Consolidated Financial Statements do not provide for any adjustments with regard
to these uncertainties.
RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform with the
current year presentation.
NEW ACCOUNTING PRONOUNCEMENT
On June 15, 1998, the FASB issued Statement of Financial Accounting
Standards No. 133, Accounting for Derivative Instruments and Hedging Activities
("SFAS 133"). SFAS 133 establishes accounting and reporting standards requiring
that every derivative instrument (including certain derivative instruments
embedded in other contracts) be recorded on the balance sheet as either an asset
or liability measured at its fair value. SFAS 133 requires that changes in the
derivative's fair value be recognized currently in earnings unless specific
hedge accounting criteria are met. Special accounting for qualifying hedges
allows a derivative's gains and losses to offset related results on the hedged
item in the income statement and requires that a company must formally document,
designate and assess the effectiveness of transactions that receive hedge
accounting.
SFAS No. 133 may become effective for the Company beginning with the 2001
fiscal year and may not be applied retroactively. Management does not expect the
impact of SFAS 133 to be material to the financial statements. However, the SFAS
133 could increase volatility in earnings and other comprehensive income.
28
<PAGE>
PACIFIC GATEWAY PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE THREE YEARS ENDED DECEMBER 31, 1999
2. REAL ESTATE PARTNERSHIP INVESTMENTS
RINCON CENTER ASSOCIATES PARTNERSHIP (RCA)--SAN FRANCISCO, CALIFORNIA
Prior to October 12, 1999, the Company owned a general (non-managing) and
limited partnership interests in Rincon Center Associates ("RCA"), a California
limited partnership, totaling approximately 22.8%. On October 12, 1999, several
actions were taken relating to RCA.
On October 12, 1999, the Company executed Amendment No. 3 to the Limited
Partnership Agreement of RCA (the "Amendment"), which allocated gross income to
the Company for fiscal year 1999 to the extent that the Company had a deficit
capital account in RCA. As a result of the Amendment, the Company estimates that
it realized a tax gain of approximately $26.8 million. In addition, a loan to
RCA from the managing general partner of RCA in the amount of approximately $8.6
million was cancelled, and the agreement obligating the managing general partner
to continue making loans to RCA on behalf of the Company was terminated. As a
result of the Amendment and cancellation of the loan, the Company estimates that
it realized a total tax gain of approximately $35.4 million. The Company further
estimates that the net tax liability after utilizing the Company's net operating
loss carryover and unused tax credits will amount to approximately
$6.6 million. The Company had written off its investment in RCA to zero in 1995,
and has fully reserved for the tax liability described above. The Company will
fund the estimated tax liability from its cash reserves, cash flow from
operations and additional borrowing.
In a separate transaction, RCA completed the disposition of its sole asset,
Rincon Center located in San Francisco, California, to an unrelated party on
October 12, 1999. RCA's disposition of Rincon Center will have no impact on the
Company's financial statements. In connection with the disposition, all
contingent liabilities associated with RCA were eliminated, pending litigation
among the parties involved in Rincon Center were dismissed with prejudice, and
mutual settlement and release agreements were executed by all parties. The
Company and the managing general partner of RCA have wound up the affairs of the
RCA partnership as of December 31, 1999. The winding up of the RCA partnership
had no financial impact on the Company's financial statements.
The commercial portion of Rincon Center Phase Two was financed pursuant to a
Construction Loan Agreement between RCA and Citibank. A portion of the security
for the Construction Loan Agreement was a $3.65 million letter of credit issued
by Bank of America National Trust and Savings Association (the "Issuing Bank")
on behalf of the Company in favor of Citibank. The letter of credit for $3.65
million was drawn by Citibank prior to its expiration date of June 23, 1997. The
Issuing Bank made a demand on the Company to reimburse them for the $3.65
million drawn on the letter of credit and also notified the Company it is in
default with respect to the reimbursement obligation. In accordance with
generally accepted accounting principles, effective June 30, 1997, the Company
recorded a "provision for settlement of reimbursement obligation" in the amount
of $2.2 million to provide for the ultimate settlement of the reimbursement
obligation. On or about August 18, 1997, the Issuing Bank commenced an action
against the Company in the Land Court Department of the Trial Court of
Massachusetts (the Land Court), to obtain a conditional judgment in the full
amount of the Company's indebtedness to the Issuing Bank. The Company filed a
complaint against the Issuing Bank on November 21, 1997 in the Superior Court
Department of the Trial Court of the Commonwealth of Massachusetts (the Superior
Court) seeking damages, equitable relief and a jury trial for causes of action
flowing from the Issuing Bank's conduct regarding the letter of credit.
29
<PAGE>
PACIFIC GATEWAY PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE THREE YEARS ENDED DECEMBER 31, 1999
2. REAL ESTATE PARTNERSHIP INVESTMENTS (CONTINUED)
The Company and the Issuing Bank settled the Land and Superior Court actions
on January 15, 1999. Pursuant to the terms of a mutual release and settlement
agreement, the Company paid the Issuing Bank the sum of $4.2 million and
released the Issuing Bank from all claims raised in the Superior Court action.
The Issuing Bank, meanwhile, executed discharges of mortgage and rent
assignment, and released the Company from all claims raised in the Land Court
action. Concurrent with the mutual release and settlement between the Company
and the Issuing Bank, the Company closed on the sale of the 410 First Avenue
property on January 20, 1999, for approximately $3,950,000. In connection with
this property disposition, the Company recorded a provision of approximately
$58,000 in its 1998 Consolidated Statement of Operations. The net proceeds from
the sale were utilized to partially fund the $4.2 million settlement with the
Issuing Bank.
3. DEBT
As of December 31, 1999 and 1998, the Company had the following outstanding
debt related to its investment properties (in thousands):
<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
South Bay Office Tower, interest fixed at 8.66%, due
January 2007.......................................... $ 9,096 $ 9,228
Walnut Creek Executive Park, interest fixed at 7.85%,
due June 2005......................................... 18,021 18,531
Weston Office Building, interest fixed at 8.45%, paid in
full in May 1999...................................... -- 918
North Tucson Business Center, interest fixed at 9.62%,
due October 2006...................................... 3,709 3,757
West Valley Executive Park (4000-4040 buildings),
interest fixed at 9.13%, due June 2005................ 9,495 9,759
West Valley Executive Park (4050 building), interest at
7.75% as of December 31, 1999 (floating rate of 2.875%
over the one year treasury bond rate adjustable every
six months), due July 2008............................ 1,544 1,567
930 Montgomery Street, interest at 7.75% as of
December 31, 1999 (floating rate of 2.875% over the
one year treasury bond rate adjustable every six
months), due September 2008........................... 2,651 2,689
410 First Avenue (See Note 2)........................... -- 2,258
-------- --------
$ 44,516 $ 48,707
======== ========
</TABLE>
MORTGAGES ON REAL ESTATE
SOUTH BAY OFFICE TOWER
In December 1996, the Company completed the refinancing of $9.45 million of
debt related to South Bay Office Tower. The loan bears interest at 8.66% through
maturity and requires fixed monthly payments of $77,000. The loan is amortized
over 25 years and matures on January 2007. This loan may
30
<PAGE>
PACIFIC GATEWAY PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE THREE YEARS ENDED DECEMBER 31, 1999
3. DEBT (CONTINUED)
be prepaid any time after the first day of the fifth (5th) loan year with a
30-day written notice to the lender. A prepayment consideration of the greater
of one percent of the loan balance, or the present value of all remaining
payments of principal and interest is payable on the prepayment date. The loan
is non-recourse to the Company. Concurrent with the closing, the Company
deposited $701,000 with the lender to fund future capital improvements. As of
December 31, 1999, the entire $701,000 has been reimbursed to the Company by the
lender. Also, the loan requires $22,100 per month to be deposited for future
tenant improvements and leasing commissions until the reserve equals a maximum
of $668,000 and an additional $5,520 per month to be deposited in a replacement
reserve during the term of the loan. The portion of reserves funded and unspent
through December 31, 1999, including interest, amounted to approximately
$208,000 and is classified as restricted cash on the Company's Consolidated
Balance Sheet.
31
<PAGE>
PACIFIC GATEWAY PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE THREE YEARS ENDED DECEMBER 31, 1999
WALNUT CREEK EXECUTIVE PARK
In June 1995, the Company completed the refinancing of $20,000,000 of debt
related to Walnut Creek Executive Park. The loan carries a 7.85% annual interest
rate until maturity with fixed monthly payments of approximately $162,000. The
loan is amortized over 21 years and matures on June 2005. The loan has a
prepayment penalty and is non-recourse to the Company. In addition, the loan
requires the Company to fund a reserve for future tenant improvements of $17,600
per month through month sixty-eight (68) of the loan or until the reserve,
including interest, reaches a balance of $1,000,000. The balance of the reserve
as of December 31, 1999, including interest, amounted to approximately $789,000
and is classified as restricted cash on the Company's Consolidated Balance
Sheet.
WESTON OFFICE BUILDING
In May 1999, the Company paid off approximately $897,000 in mortgage debt on
the Weston office building. Loan fees associated with this debt of approximately
$24,000 were written off in the third quarter of 1999. The Company did not incur
any prepayment penalties in connection with the payoff of this debt.
NORTH TUCSON BUSINESS CENTER
In September 1996, the Company completed the refinancing of $3,850,000 of
debt related to North Tucson Business Center in Arizona. The loan carries a
9.62% annual interest rate until maturity with fixed monthly payments of
approximately $34,000. The loan is amortized over 25 years and matures on
October 2006. The loan is non-recourse to the Company. Concurrent with the
closing, the Company deposited $40,800 with the lender to fund future tenant
improvements and leasing commissions during the term of the loan. The loan also
requires an additional $3,400 per month to be deposited for future tenant
improvements and leasing commissions and $1,100 per month to be deposited in a
replacement reserve during the term of the loan. In addition, the Company was
required to fund a debt service reserve of $8,200 per month which was fully
funded as of the reporting date up to the $295,000 maximum. The debt service,
tenant improvement and leasing commission reserves may be reduced if certain
tenant renewals occur. The portion of the reserves funded and unspent through
December 31, 1999, including interest, amounted to approximately $113,000 and is
classified as restricted cash on the Company's Consolidated Balance Sheet.
WEST VALLEY EXECUTIVE PARK
In connection with the January 17, 1997 acquisition of this property, the
Company assumed approximately $10,203,000 in non-recourse mortgage debt related
to buildings 4000-4040 at West Valley Executive Park in San Jose, California.
The loan carries a 9.13% annual interest rate until maturity with fixed monthly
payments of approximately $95,300. The loan is amortized over 20 years and
matures on June 2005. The debt continues to be assumable and is subject to a
prepayment penalty. Pursuant to the loan document, the debt may not be paid off
prior to July 1, 2000. However, recent correspondence from the lender indicated
they would accept an early pay-off, subject to a yield maintenance prepayment
penalty.
In June 1998, the Company completed the financing of $1,575,000 of mortgage
debt from Redwood Bank related to the 4050 Moorpark building at West Valley
Executive Park. The new loan carries a variable interest rate of 2.875% over the
one year treasury bond rate, adjustable semi-annually
32
<PAGE>
PACIFIC GATEWAY PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE THREE YEARS ENDED DECEMBER 31, 1999
(7.75% at December 31, 1999). The loan has fixed monthly payments of
approximately $12,500. The loan is amortized over 25 years and matures on
July 2008. This debt is non-recourse and can be prepaid at any time without a
penalty. This debt contains a cross default provision with the loan on the
Company's 930 Montgomery Street property in San Francisco, California.
930 MONTGOMERY STREET
In July 1998, the Company completed the refinancing of $2,076,000 of
mortgage debt from Redwood Bank related to its 930 Montgomery Street property in
San Francisco, California. The new loan of $2,697,500 carries a variable
interest rate of 2.875% over the one year treasury bond rate, adjustable
semi-annually (7.75% at December 31, 1999). The loan has fixed monthly payments
of approximately $21,500. The loan is amortized over 25 years and matures on
September 2008. This debt is non-recourse and can be prepaid at any time without
a penalty. This debt contains a cross default provision with the loan on the
Company's 4050 Moorpark building at West Valley Executive Park property in San
Jose, California.
CORPORATE DEBT
In December 1993, the Company completed a restructuring of its non-revolving
line-of-credit, letter-of-credit, unsecured bonds, and certain mortgages. This
debt was paid in full in 1996 using a portion of the proceeds from the sale of
the Radisson Suites Hotel.
In connection with this restructuring, the Company issued to Citicorp Real
Estate, Inc. (Citicorp) warrants to acquire up to two million shares of the
Company's common stock at an exercise price of $2.875 per share. One million of
the warrants were canceled leaving one million exercisable warrants outstanding,
which the Company recorded in the stockholders' equity section of the Company's
Consolidated Balance Sheet at a carrying value of $1,890,000.
On March 31, 1998, the Company completed the repurchase of the 1,000,000
outstanding warrants to purchase 1,000,000 shares of the Company's common stock
from Citicorp, for $1,000,000. As a result of this transaction, the Company has
recorded the difference between the carrying value of the warrants and the net
purchase price, which amounts to $883,000, as additional paid-in-capital in the
Company's Consolidated Balance Sheet as of December 31, 1998.
FAIR VALUE OF FIXED RATE MORTGAGES
The estimated fair value of the fixed rate mortgages as of December 31, 1999
was approximately $40,370,000.
33
<PAGE>
PACIFIC GATEWAY PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE THREE YEARS ENDED DECEMBER 31, 1999
LOAN MATURITIES
The maturities of debt outstanding as of December 31, 1999, and required
minimum principal payments in each of the next five years and thereafter are
summarized as follows (in thousands):
<TABLE>
<CAPTION>
CURRENT
--------
<S> <C>
2000...................................................... $ 1,095
2001...................................................... 1,190
2002...................................................... 1,294
2003...................................................... 1,407
2004...................................................... 1,530
Thereafter................................................ 38,000
--------
$ 44,516
========
</TABLE>
4. ACQUISITION OF INVESTMENT PROPERTIES
On January 17, 1997, the Company purchased two properties to complete a tax
deferred exchange in accordance with Section 1031 of the Internal Revenue Code,
as amended, in connection with the sale of the Radisson Suites Hotel. The first
acquisition was West Valley Executive Park, a multi-tenant, six building,
165,000 square foot office park in San Jose, California, that was acquired for
$17,500,000. The second acquisition was a multi-tenant, 23,000 square foot,
six-story steel frame office building located at 930 Montgomery Street, San
Francisco, California, for $3,250,000. See Note 3 for discussion of the mortgage
debt assumed and borrowed in connection with these acquisitions.
5. INCOME TAXES
In March 2000, the Company determined that it would elect to be taxed as a
REIT pursuant to the Internal Revenue Code, as amended, effective January 1,
1999. In general, a corporation that distributes at least 95% of its REIT
taxable income to shareholders in any taxable year and complies with certain
other requirements (relating primarily to the nature of its assets and the
sources of its revenue) is not subject to federal income taxation to the extent
of the income which it distributes. Management believes that the Company met the
qualifications for REIT status for 1999, and intends for it to continue to meet
the qualifications in the future and to distribute its REIT taxable income to
shareholders in 1999 and subsequent years. Management also does not expect that
the Company will pay taxes on "built-in gains" on its assets. Based on these
considerations, management does not believe that the Company will be liable for
income taxes at the federal level or in most of the states in which it operates
in future years. Accordingly, the Company eliminated its existing deferred tax
assets and liabilities at December 31, 1999, and does not expect to provide for
deferred income taxes in future periods except in certain states. The Company
wrote off approximately $3.5 million of a net deferred tax liability which is
reflected as an income tax benefit in the 1999 Statement of Operations. The
Company recorded a current tax payable of approximately $6.6 million related to
the RCA Amendment (see Note 2).
The Company provides for income taxes under the liability method in
accordance with Statement of Financial Accounting Standards No. 109, "Accounting
for Income Taxes" (SFAS 109). For 1998 and 1997 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.
34
<PAGE>
PACIFIC GATEWAY PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE THREE YEARS ENDED DECEMBER 31, 1999
5. INCOME TAXES (CONTINUED)
The table below reconciles the difference between the statutory federal
income tax rate and the effective rate in the Company's Consolidated Statement
of Income (Loss).
<TABLE>
<CAPTION>
(PROVISION) BENEFIT
PERCENTAGES
-----------------------
1998 1997
-------- --------
<S> <C> <C>
Statutory federal income tax rate........................... (34%) 34%
State income tax............................................ (6) 6
Taxable items not recognized for financial reporting
purposes.................................................. -- (3)
----- --
Effective tax rate (provision) benefit...................... (40%) 37%
===== ==
</TABLE>
The components of the (provision) benefit for income taxes were as follows
(in thousands):
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Federal--current............................................ $ (3,788) $ -- $ (17)
Federal--deferred........................................... 6,915 (81) 992
State--current.............................................. (2,777) (6) (6)
State--deferred............................................. 3,146 (302) 57
-------- ------ -------
$ 3,496 $ (389) $ 1,026
======== ====== =======
</TABLE>
6. LESSOR ARRANGEMENTS
As of December 31, 1999, approximately 856,000 of a total of approximately
882,000 square feet or 97% of the Company's wholly owned commercial space was
leased (unaudited). 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):
<TABLE>
<CAPTION>
CURRENT
--------
<S> <C>
2000...................................................... $ 16,692
2001...................................................... 12,938
2002...................................................... 9,194
2003...................................................... 5,095
2004...................................................... 2,294
2005...................................................... 1,073
2006...................................................... 960
2007...................................................... 923
2008...................................................... 68
2009...................................................... --
Thereafter................................................ --
--------
$ 49,237
========
</TABLE>
35
<PAGE>
PACIFIC GATEWAY PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE THREE YEARS ENDED DECEMBER 31, 1999
7. STOCK OPTIONS, WARRANTS AND EMPLOYEE BENEFIT PLANS
INCENTIVE STOCK OPTION PLAN
The Company has two stock option plans, the 1985 Incentive Stock Option Plan
(the "1985 Plan") and the 1996 Stock Option Plan (the "1996 Plan"). Under the
1985 Plan, 200,000 shares of the Company's Common Stock were reserved for
issuance. This plan provides for options to be granted at fair market value on
the date of grant for terms not exceeding ten years. During 1998, options to
purchase 19,940 shares were exercised and options to purchase 1,235 shares were
canceled. During 1997, options to purchase 4,000 shares were exercised and
options to purchase 11,000 shares were canceled. As of December 31, 1999, a
total of 21,175 options were outstanding under the 1985 Plan and no additional
grants may be made. Of such outstanding options, 15,000 are exercisable in equal
cumulative installments over five years beginning in 1993 at the price of $3.13
per share and 6,175 outstanding options are exercisable in equal cumulative
installments over five years beginning in 1995 at prices ranging from $3.69 to
$4.56 per share.
Under the 1996 Plan, a total of 200,000 shares of common stock have been
reserved for issuance. This plan provides for options to be granted at fair
market value on the date of grant for terms not exceeding ten years. During
1997, options to purchase an aggregate of 30,000 shares were granted at an
exercise price of $4.94. During 1998, options to purchase 45,000 shares were
granted at exercise prices ranging from $6.06 to $6.69 per share. During 1997,
options to purchase 3,000 shares were exercised, and options to purchase 12,000
shares were canceled. During 1998, options to purchase 14,000 shares were
exercised, and options to purchase 21,000 shares were canceled. As of
December 31, 1999, a total of 175,000 options were outstanding under the 1996
plan. Of such options outstanding under the 1996 Plan, 40,000 were exercisable
in 1996, 40,000 were exercisable in 1997, 26,000 were exercisable in 1998,
31,000 were exercisable in 1999, 11,000 are exercisable in 2000, 2001 and 2002,
respectively, and 5,000 are exercisable in 2003.
In October 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standard No. 123 "Accounting for Stock Based
Compensation" (SFAS 123), which establishes financial accounting and reporting
standards for stock based compensation plans. As permitted by SFAS 123, the
Company will continue to account for these plans under APB Opinion No. 25, under
which no compensation expense will be recognized. The additional compensation
expense that would have been recorded if the Company had adopted SFAS 123 is
$120,000, $54,000, and $48,000 in 1999, 1998 and 1997, respectively. Basic and
diluted earnings per share would have been reduced to $1.45 and $1.32, $0.14 and
$0.13, and $(0.46) and (0.46), for the years ended December 31, 1999, 1998 and
1997, respectively. The fair value of each option grant is estimated on the date
of grant using the Black-Scholes option-pricing model with the following
weighted-average assumptions used for the grants for October 29, 1998 and
March 16, 1998, respectively: expected dividend yield of 2.96% and 3.17%;
expected volatility of 47.6% and 46.9%; risk-free interest rates of 4.54% and
5.54%, and expected lives of 10 years for both grants.
36
<PAGE>
PACIFIC GATEWAY PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE THREE YEARS ENDED DECEMBER 31, 1999
7. STOCK OPTIONS, WARRANTS AND EMPLOYEE BENEFIT PLANS (CONTINUED)
A summary of the status of the Company's two stock option plans and stock
warrants at December 31, 1999, 1998, and 1997, and changes during the years then
ended is presented in the table below:
<TABLE>
<CAPTION>
1999 1998 1997
------------------- ---------------------- ---------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
-------- -------- ----------- -------- ---------- --------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of
year.......................... 196,175 $3.91 1,207,350* $2.91 1,207,350* $2.86
Granted......................... -- -- 45,000 6.41 30,000 4.94
Exercised....................... -- -- (33,940) 2.79 (7,000) 3.13
Expired......................... -- -- (1,022,235) 2.87 (23,000) 2.91
-------- ----------- ----------
Outstanding at end of year...... 196,175 $3.91 196,175 $3.91 1,207,350 $2.91
======== =========== ==========
Exercisable at end of year...... 158,175 125,940 1,124,410
======== =========== ==========
Weighted Average Fair Value of
Options Outstanding........... $ 3.91 $ 2.72 $ 3.30
======== =========== ==========
</TABLE>
- ------------------------
* Included in this amount are one million warrants related to the 1993 debt
restructuring. These warrants were repurchased on March 31, 1998 (see Note 3
for further discussion).
401(K) PLAN
Effective January 1, 1996, the Company adopted a discretionary
non-contributory 401(k) Plan. All 401(k) Plan contributions by the Company are
fully vested after four years of service with the Company. The level of any
Company contributions are subject to annual review and approval of the Company's
Board of Directors. The Board of Directors approved a 1999 contribution of five
percent of qualified employee compensation which amounted to $48,400.
Contributions of $31,000 and $27,800 were made in the years 1998 and 1997,
respectively.
8. PREFERRED STOCK
An amendment to the Certificate of Incorporation to provide for issuance of
300,000 shares of Series 1 Convertible Preferred Stock, $1.00 par value, (the
"Preferred Stock") to GEM Value/PGP, L.L.C. ("GEM"), was approved by unanimous
written consent of the Company's Board of Directors on September 10, 1998.
Proceeds from the sale of the Preferred Stock to GEM were approximately
$2,889,000, net of issuance costs of $111,000. These funds are currently being
held in short-term investments pending potential future acquisitions, reduction
of debt obligations or payment of 1999 income taxes.
GEM's 300,000 shares of the Preferred Stock are convertible at any time, at
the option of the holder, into the Company's common stock on a one for one basis
and have the same voting rights as the Company's common stock.
37
<PAGE>
PACIFIC GATEWAY PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE THREE YEARS ENDED DECEMBER 31, 1999
8. PREFERRED STOCK (CONTINUED)
The Preferred Stock will receive dividends, if any, from the Company's cash
flow on a pari passu basis with common shareholders. The agreement with GEM does
not require the Company to make any distributions. In the event of a full or
partial liquidation or change of control of the Company as defined, GEM will be
entitled to a liquidation preference of $10.00 per share. GEM also received
customary registration rights for the common stock issuable upon conversion of
the Preferred Stock.
In addition, GEM has entered into an agreement with the Company and three
entities controlled by the Company's Chairman, Richard Osborne, whereby GEM has
a "tag along" right to sell its preferred shares, or common shares if converted,
on a pro rata basis with these entities. This right is exercisable should any of
the Osborne controlled entities sell cumulatively in excess of 200,000 shares of
the Company's common stock.
9. PAID-IN-DEFICIT
On July 16, 1998, the Company received approximately $3,000 in cash from a
shareholder as a result of their compliance with the Securities Exchange Act's
requirement that profits from the sale of certain securities of a company that
were held less than six months by certain officers, directors and principal
stockholders must be returned to the company. In accordance with generally
accepted accounting principles, the Company recorded such proceeds as a credit
to the Company's paid-in-deficit.
The Company received approximately $184,000 in cash on June 18, 1997, from a
shareholder as a return of profit from the sale of certain securities. This
amount has been recorded as a credit to the Company's paid-in-deficit.
38
<PAGE>
PACIFIC GATEWAY PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE THREE YEARS ENDED DECEMBER 31, 1999
10. 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, 1999 and December 31, 1998:
<TABLE>
<CAPTION>
BY QUARTER
----------
1999 FIRST SECOND THIRD FOURTH TOTAL
---- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Investment properties income............. $1,077 $ 870 $ 855 $1,188 $3,990
====== ===== ====== ====== ======
Net income (loss) available to common
stockholders........................... $ 316 $ 304 $ (761) $5,983 $5,842
====== ===== ====== ====== ======
Income (loss) per share, basic:.......... $ 0.08 $0.08 $(0.18) $ 1.51 $ 1.49
====== ===== ====== ====== ======
Income (loss) per share, diluted:........ $ 0.08 $0.08 $(0.18) $ 1.37 $ 1.35
====== ===== ====== ====== ======
</TABLE>
<TABLE>
<CAPTION>
BY QUARTER
----------
1998 FIRST SECOND THIRD FOURTH TOTAL
---- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Investment properties income
(loss)............................ $ 196 $ 889 $ 449 $ 670 $2,204
====== ====== ====== ===== ======
Provision for settlement of
reimbursement obligation.......... -- -- -- (58) (58)
====== ====== ====== ===== ======
Net income (loss) available to
common stockholders............... $ (137) $ 390 $ 162 $ 163 $ 578
====== ====== ====== ===== ======
Income (loss) per share, basic:..... $(0.04) $ 0.10 $ 0.04 $0.05 $ 0.15
====== ====== ====== ===== ======
Income (loss) per share, diluted:... $(0.04) $ 0.10 $ 0.04 $0.04 $ 0.14
====== ====== ====== ===== ======
</TABLE>
11. SUBSEQUENT EVENTS (UNAUDITED)
On March 7, 2000, the Company entered into a non-revolving line of credit
with Redwood Bank for $1,750,000. The loan carries a floating interest rate of
prime plus 0.50%, full recourse to the Company, interest only payments during
the first 120 days of the loan, and will amortize on a 36 month schedule
commencing August 10, 2000. The loan matures on December 10, 2000. The purpose
of the loan is to provide short term bridge financing for the payment of the
income taxes due on Rincon Center. The Company intends to repay the loan from
operating cash flow, additional mortgage borrowings, or a possible asset sale.
39
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
TO THE BOARD OF DIRECTORS OF PACIFIC GATEWAY PROPERTIES, INC.:
We have audited the accompanying consolidated balance sheets of Pacific
Gateway Properties, Inc. (a Maryland corporation) and subsidiaries as of
December 31, 1999 and 1998, and the related consolidated statements of
operations, stockholders' equity and cash flows for each of the three years in
the period ended December 31, 1999. These financial statements and the schedule
referred to below are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the 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, 1999 and 1998, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1999, in conformity with generally accepted accounting principles.
Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedule listed in the index to the
financial statements is presented for purposes of complying with the Securities
and Exchange Commission's rules and is not a required 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, is fairly stated in all material respects in relation to the basic
financial statements taken as a whole.
ARTHUR ANDERSEN LLP
San Francisco, California
March 3, 2000
40
<PAGE>
PACIFIC GATEWAY PROPERTIES, INC.
SCHEDULE III--REAL ESTATE AND ACCUMULATED DEPRECIATION
AS OF DECEMBER 31, 1999
(IN THOUSANDS)
<TABLE>
<CAPTION>
GROSS CARRYING AMOUNT AT
INITIAL COST TO COMPANY SUBSEQUENT DECEMBER 31, 1999
------------------------- COSTS, -------------------------- ACCUMULATED
ENCUMBRANCES BUILDINGS AND CAPITALIZED BUILDINGS AND TOTAL DEPRECIATION
DESCRIPTION (NOTE 3) LAND IMPROVEMENTS IMPROVEMENTS IMPROVEMENTS (NOTE 1) (NOTE 2)
- ----------- ------------ --------- ------------- ------------ ------------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Walnut Creek.............
Executive Park......... $18,021 $1,357 $12,086 $ 9,508 $21,594 $22,951 $ 8,996
South Bay Office
Tower.................. 9,096 3,439 13,754 3,988 17,742 21,181 7,705
North Tucson
Business Center........ 3,709 147 621 673 1,294 1,441 531
Weston Office
Building............. -- 44 299 5 304 348 88
West Valley
Executive Park......... 11,039 3,500 14,187 2,834 17,021 20,521 1,830
930 Montgomery Street 2,651 650 2,597 228 2,825 3,475 317
Corporate Leasehold
Improvements -- -- -- 83 83 83 56
------- ------ ------- ------- ------- ------- -------
TOTAL $44,516 $9,137 $43,544 $17,319 $60,863 $70,000 $19,523
======= ====== ======= ======= ======= ======= =======
<CAPTION>
1999
PROJECTED DATE OF
TAX CONSTRUCTION/
DESCRIPTION BASIS ACQUISITION
- ----------- --------- -------------
<S> <C> <C>
Walnut Creek............. 1975 to
Executive Park......... $17,486 1986/1988
South Bay Office
Tower.................. 10,368 1972/1985
North Tucson
Business Center........ 1,473 1987/1988
Weston Office
Building............. 320 1986/1988
West Valley
Executive Park......... 9,266 1978/1997
930 Montgomery Street 1,948 1985/1997
Corporate Leasehold
Improvements 32 N/A
-------
TOTAL $40,893
=======
</TABLE>
41
<PAGE>
PACIFIC GATEWAY PROPERTIES, INC.
SCHEDULE III--REAL ESTATE AND ACCUMULATED DEPRECIATION
DECEMBER 31, 1999
(IN THOUSANDS)
NOTE 1. THE CHANGES IN THE TOTAL COST OF LAND, BUILDINGS, AND IMPROVEMENTS FOR
THE THREE YEARS ENDED DECEMBER 31, ARE AS FOLLOWS:
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Balance at beginning of period................... $73,002 $70,656 $46,632
Additions........................................ 1,869 3,104 3,245
Cost of acquired properties...................... -- -- 20,934
Write-off of fully amortized items............... (7) (758) (155)
Cost of disposed property........................ (4,864) -- --
------- ------- -------
Balance at end of period......................... $70,000 $73,002 $70,656
======= ======= =======
</TABLE>
NOTE 2. THE CHANGES IN ACCUMULATED DEPRECIATION AND AMORTIZATION AND THE
PROVISION FOR WRITE-DOWN TO NET REALIZABLE VALUE FOR THE THREE YEARS
ENDED DECEMBER 31, ARE AS FOLLOWS:
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Balance at beginning of period................... $18,907 $16,431 $13,835
Depreciation expense............................. 3,318 3,234 2,751
Write-off of fully amortized items............... (7) (758) (155)
Relief of accumulated balances related to
disposed property.............................. (2,695) -- --
------- ------- -------
Balance at end of period......................... $19,523 $18,907 $16,431
======= ======= =======
</TABLE>
NOTE 3. REFER TO NOTE 3 IN THE COMPANY'S CONSOLIDATED FINANCIAL STATEMENTS.
42
<PAGE>
Exhibit 21
PACIFIC GATEWAY PROPERTIES, INC.
SUBSIDIARIES OF THE REGISTRANT
<TABLE>
<CAPTION>
PERCENTAGE
PLACE OF INTEREST OF VOTING
NAME ORGANIZATION SECURITIES OWNED
- ---- ------------ ------------------
<S> <C> <C>
Pacific Gateway Properties, Inc. Maryland 100%
Pacific Gateway Properties California 100%
Management Corporation
Pacific Gateway Properties California 100%
Hotels, Inc.
PGP - South Bay Office Tower, Inc. California 100%
PGP - North Tucson Business Center, Inc. California 100%
PGP - Weston, Inc. California 100%
</TABLE>
43
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of
our report included in this Form 10-K, into the Company's previously filed
Registration Statement File No. 333-34541.
<TABLE>
<S> <C>
San Francisco, California ARTHUR ANDERSEN LLP
March 10, 2000
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 7,402
<SECURITIES> 0
<RECEIVABLES> 172
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 7,656
<PP&E> 70,000
<DEPRECIATION> 19,523
<TOTAL-ASSETS> 60,819
<CURRENT-LIABILITIES> 9,232
<BONDS> 44,516
2,889
0
<COMMON> 4,052
<OTHER-SE> 130
<TOTAL-LIABILITY-AND-EQUITY> 60,819
<SALES> 0
<TOTAL-REVENUES> 17,980
<CGS> 0
<TOTAL-COSTS> 6,337
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,819
<INCOME-PRETAX> 2,490
<INCOME-TAX> (3,496)
<INCOME-CONTINUING> 5,842
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,842
<EPS-BASIC> 1.49
<EPS-DILUTED> 1.35
</TABLE>
