<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-Q
<TABLE>
<C> <S>
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
</TABLE>
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2000
OR
<TABLE>
<C> <S>
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
</TABLE>
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 (IRS Employer
incorporation or organization) Identification No.)
930 MONTGOMERY STREET, SUITE 400,
SAN FRANCISCO, CALIFORNIA 94133
--------------------------------- ---------
(Address of principal executive (Zip Code)
offices)
</TABLE>
(415) 398-4800
---------------------------------------------
Registrant's telephone number, including area code
NOT APPLICABLE
------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since last
report)
------------------------
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 the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date of May 1, 2000:
3,933,536 shares of Common Stock, $1.00 par value and 300,000 shares of
Series 1 Convertible Preferred Stock, $1.00 par value.
- --------------------------------------------------------------------------------
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<PAGE>
PACIFIC GATEWAY PROPERTIES, INC.
INDEX
<TABLE>
<CAPTION>
PAGE NUMBER
-----------
<C> <S> <C>
Part I--Financial Information:
Item 1. Consolidated Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets as of March 31, 2000
and December 31, 1999..................................... 3
Condensed Consolidated Statements of Operations for the
Three Months Ended March 31, 2000 and 1999................ 4
Condensed Consolidated Statement of Stockholders' Equity for
the Three Months Ended March 31, 2000..................... 5
Condensed Consolidated Statements of Cash Flows for the
Three Months Ended March 31, 2000 and 1999................ 6
Notes to Condensed Consolidated Financial Statements
(Unaudited)............................................... 7-9
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 10-13
Item 3. Quantitative and Qualitative Disclosures About Market
Risk...................................................... 13-14
Part II--Other Information
Item 1. Legal Proceedings........................................... 14
Item 2. Changes in Security......................................... None
Item 3. Defaults Upon Senior Securities............................. None
Item 4. Submission of Matters to a Vote of Security Holders......... None
Item 5. Other Information........................................... 14
Item 6. Exhibits and Reports on Form 8-K............................ 15
Signatures.......................................................................... 16
</TABLE>
<PAGE>
PACIFIC GATEWAY PROPERTIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
AS OF AS OF
MARCH 31, DECEMBER 31,
2000 1999
---------- -------------
<S> <C> <C>
ASSETS
Cash and cash equivalents................................... $ 1,359 $ 5,609
Restricted cash............................................. 1,971 1,793
Accounts receivable, income taxes receivable and other
current assets............................................ 1,255 254
Investment properties:...................................... 70,105 70,000
Less-accumulated depreciation............................. (20,149) (19,523)
-------- --------
Investment properties, net.............................. 49,956 50,477
-------- --------
Capitalized loan costs, net................................. 565 600
Capitalized lease commissions, rent concessions and other
deferred costs, net....................................... 2,178 2,086
-------- --------
Total assets............................................ $ 57,284 $ 60,819
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable, unearned rental revenue, tenant security
deposits, accrued interest and other current
liabilities............................................... $ 3,318 $ 2,681
Current income taxes payable................................ 171 6,551
Debt related to investment properties....................... 45,539 44,516
-------- --------
Total liabilities....................................... 49,028 53,748
STOCKHOLDERS' EQUITY
Common Stock $1.00 par value:
Authorized--10,000,000 shares
Issued and outstanding--4,052,090 shares as of March 31,
2000 and December 31, 1999.............................. 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........................................... 12,320 11,135
Treasury Stock, at cost--118,554 common shares at March 31,
2000 and December 31, 1999................................ (2,037) (2,037)
-------- --------
Total stockholders' equity................................ 8,256 7,071
-------- --------
Total liabilities and stockholders' equity.............. $ 57,284 $ 60,819
======== ========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
3
<PAGE>
PACIFIC GATEWAY PROPERTIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
FOR THE THREE
MONTHS ENDED
MARCH 31,
-------------------
2000 1999
-------- --------
<S> <C> <C>
INVESTMENT PROPERTIES:
Rental revenues........................................... $ 4,715 $ 4,382
Operating expenses........................................ (1,459) (1,408)
Interest expense.......................................... (962) (973)
Depreciation and amortization............................. (1,008) (924)
------- -------
Investment properties income............................ 1,286 1,077
------- -------
General and administrative expenses......................... (657) (568)
Other income, net........................................... 391 72
------- -------
Income before taxes......................................... 1,020 581
Income tax (provision) benefit.............................. 800 (238)
------- -------
Net income................................................ $ 1,820 $ 343
======= =======
Preferred dividends......................................... (45) (27)
------- -------
Net income available to common stockholders............... $ 1,775 $ 316
======= =======
Income per common share, basic.............................. $ 0.45 $ 0.08
======= =======
Income per common share, diluted............................ $ 0.42 $ 0.08
======= =======
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
4
<PAGE>
PACIFIC GATEWAY PROPERTIES, INC.
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (UNAUDITED)
FOR THE THREE MONTHS ENDED MARCH 31, 2000
(IN THOUSANDS)
<TABLE>
<CAPTION>
SERIES 1
CONVERTIBLE
COMMON PREFERRED PAID-IN- RETAINED TREASURY
STOCK STOCK DEFICIT EARNINGS STOCK TOTAL
-------- ----------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1999.................. $4,052 $2,889 $(8,968) $11,135 $(2,037) $7,071
Net income.................................. -- 45 -- 1,775 -- 1,820
Dividends................................... -- (45) -- (590) -- (635)
------ ------ ------- ------- ------- ------
Balance at March 31, 2000..................... $4,052 $2,889 $(8,968) $12,320 $(2,037) $8,256
====== ====== ======= ======= ======= ======
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
5
<PAGE>
PACIFIC GATEWAY PROPERTIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE THREE
MONTHS ENDED
MARCH 31,
-------------------
2000 1999
-------- --------
<S> <C> <C>
Cash flow from operating activities:
Net income................................................ $ 1,820 $ 343
Non-cash revenues and expenses included in net income:
Depreciation and amortization........................... 1,008 924
Deferred taxes, net..................................... -- 225
Current taxes payable................................... (6,380) --
Current taxes receivable................................ (980) --
Gain on sale of property, net........................... (323) --
Gain on settlement of reimbursement obligation, net..... -- (6)
Change in assets and liabilities:
Accounts receivable and other current assets............ (21) (202)
Accounts payable and other current liabilities.......... 638 (152)
------- -------
NET CASH GENERATED BY (USED IN) OPERATING ACTIVITIES...... (4,238) 1,132
------- -------
Cash flow from investing activities:
Additions to building and other improvements, capitalized
lease commissions, rent concessions, and other deferred
costs................................................... (545) (288)
(Increase) decrease in restricted cash.................... (178) (177)
Proceeds from sale of property, net....................... 323 3,785
------- -------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES....... (400) 3,320
------- -------
Cash flow from financing activities:
Borrowings under debt related to corporate financing...... 1,300 --
Payments on debt.......................................... (277) (267)
Payment to settle reimbursement obligation................ -- (4,200)
Payment of dividends...................................... (635) (381)
------- -------
NET CASH GENERATED BY (USED IN) FINANCING ACTIVITIES...... 388 (4,848)
------- -------
Decrease in cash and cash equivalents....................... (4,250) (396)
Balance at beginning of period.............................. 5,609 6,535
------- -------
Balance at end of period.................................... $ 1,359 $ 6,139
======= =======
SUPPLEMENTAL DISCLOSURES:
Cash paid for interest.................................... $ 1,006 $ 1,618
======= =======
Cash paid for taxes....................................... $ 6,561 $ 1
======= =======
NON-CASH TRANSACTIONS:
Write-off of fully depreciated assets..................... $ 252 $ --
======= =======
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
6
<PAGE>
PACIFIC GATEWAY PROPERTIES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE QUARTER ENDED MARCH 31, 2000
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accompanying unaudited condensed consolidated financial statements
should be read in conjunction with Pacific Gateway Properties, Inc.'s (the
"Company") 1999 Form 10-K and Form 10-Q for the quarter ended March 31, 1999.
These statements have been prepared in accordance with the instructions of the
Securities and Exchange Commission Form 10-Q and do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements.
Pacific Gateway Properties, Inc., is a Maryland corporation, formed for the
purpose of investing and managing income producing real estate. The Company
elected to be taxed as a Real Estate Investment Trust ("REIT") beginning 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 2 to
the Company's Condensed Consolidated Financial Statements.
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. Although these efforts
continue, the Company can provide no assurances as to the timing or ultimate
conclusion of any such action.
In the opinion of the Company, all material adjustments of a normal
recurring nature considered necessary for a fair presentation of results of
operations for the interim periods have been included. The results of
consolidated operations for the three months ended March 31, 2000 are not
necessarily indicative of the results that may be expected for the year ending
December 31, 2000.
RECLASSIFICATIONS
Certain prior period amounts have been reclassified to be consistent with
current period presentation.
ESTIMATES AND ASSUMPTIONS
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.
2. 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 in 1999 and for the current period, and intends
for it to continue to meet the qualifications in the future and to distribute
its REIT taxable income to shareholders in the year 2000 and subsequent years.
7
<PAGE>
PACIFIC GATEWAY PROPERTIES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE QUARTER ENDED MARCH 31, 2000
2. INCOME TAXES (CONTINUED)
In connection with its election to be taxed as a REIT, the Company elected
to be subject to the "built-in gain" rules. Under these rules, taxes will be
payable to the extent that the net unrealized gains on the Company's assets
(calculated as of the date of conversion to REIT status) are recognized in
taxable dispositions during the ten-year period following the conversion. At
March 31, 2000, these net realized gains were approximately $323,000. A current
federal and state tax liability of approximately $150,000 for "built-in gain"
tax has been recognized. It may however, be necessary to recognize a liability
for such taxes in the future if management's plans and intentions with respect
to asset dispositions, or the related tax laws, change. Management does not
expect that the Company will pay taxes on "built-in gains" on any other of its
assets. Based on these considerations, management does not believe that the
Company will be liable for income taxes at the federal level or in most of the
states in which it operates in future years. Accordingly, the Company has not
recognized a deferred tax liability at March 31, 2000, and does not expect to
provide for deferred income taxes in future periods except in certain states and
as noted previously.
The Company recorded a current income tax receivable of approximately
$980,000 resulting from an adjustment to the 1999 tax liability related to the
sale of the 410 First Avenue property and the RCA Amendment as more fully
discussed in Note 2 to the Company's 1999 Form 10-K.
3. PER SHARE DATA
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 stock options and warrants enter into the
weighted average shares outstanding when computing diluted earnings per share
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>
THREE MONTHS ENDED
MARCH 31,
---------------------
2000 1999
--------- ---------
<S> <C> <C>
Basic.................................................. 3,933,536 3,933,536
Stock options and Series 1 Convertible Preferred
Stock................................................ 423,318 81,675
--------- ---------
Diluted................................................ 4,356,854 4,015,211
========= =========
</TABLE>
The Company's Series 1 Convertible Preferred Stock was excluded from diluted
earnings per share for the three months ended March 31, 1999 as inclusion would
have been anti-dilutive.
4. GAIN ON SALE OF MOUNTAIN VIEW PROPERTY
On March 15, 2000, the Company sold the Mountain View property in Mountain
View, California for approximately $326,000, and incurred selling expenses of
approximately $3,000. The Company had previously written the property down to
zero due to uncertainties related to certain parking easement rights. As a
result, the Company recognized a gain of $323,000 which is included in other
income on the
8
<PAGE>
PACIFIC GATEWAY PROPERTIES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE QUARTER ENDED MARCH 31, 2000
4. GAIN ON SALE OF MOUNTAIN VIEW PROPERTY (CONTINUED)
accompanying Condensed Consolidated Statement of Operations. The net proceeds
from the sale were used for general corporate purposes.
5. NON-REVOLVING LINE OF CREDIT
On March 7, 2000, the Company entered into a non-revolving line of credit
with Redwood Bank for $1,300,000. 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 and is secured
by the stock of a wholly-owned subsidiary. The Company intends to repay the loan
from operating cash flow, additional mortgage borrowings, or a possible asset
sale.
9
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
INTRODUCTION
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'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 investment on the West Coast with 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.
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. Although these efforts
continue, the Registrant can provide no assurances as to the timing or ultimate
conclusion of any such action.
The following discussion should be read in conjunction with the Registrant's
Form 10-K for 1999, quarterly report on Form 10-Q for the quarter ended
March 31, 1999, and in conjunction with the Unaudited Condensed Consolidated
Balance Sheet, Statements of Operations and Cash Flows and the notes thereto.
Unless otherwise defined in this report, or unless the context otherwise
requires, the capitalized words or phrases used in this section either
(i) describe accounting terms that are used as line items in such financial
statements, or (ii) have the meaning ascribed to them in such financial
statements and the notes thereto.
FINANCIAL CONDITION
CAPITAL IMPROVEMENTS, TENANT IMPROVEMENTS AND OTHER DEFERRED COSTS--During
the three months ended March 31, 2000, there were additions to investment
properties amounting to approximately $545,000 for tenant improvements, capital
improvements and other deferred costs which includes leasing commissions. The
Registrant anticipates further additions to investment properties of
approximately $890,000 during the remainder of 2000, which will be funded from
cash, restricted cash, and cash flow generated by operating activities.
FINANCING--Approximately $277,000 of debt principal was repaid in the three
months ended March 31, 2000 as scheduled debt amortization. In addition, on
March 7, 2000, the Registrant entered into a non-revolving line of credit with
Redwood Bank for $1,300,000. The loan carries a floating interest rate of prime
plus 0.50%, full recourse to the Registrant, 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 and is secured by the
stock of a wholly-owned subsidiary. The purpose of the loan was to provide short
term bridge financing for the payment of the income taxes due on Rincon Center.
The Registrant intends to repay the loan from operating cash flow, additional
mortgage borrowings, or a possible asset sale.
10
<PAGE>
MATERIAL CHANGES IN RESULTS OF OPERATIONS
INVESTMENT PROPERTIES--During the first three months of 2000, the income
from investment properties was $1,286,000 compared to income of $1,077,000
during the first three months of 1999. The increase of $209,000 in income from
investment properties is attributable to new leasing activity and renewal of
existing leases at higher rates. Interest expense decreased from $973,000 during
the first three months of 1999 to $962,000 during the first three months of 2000
primarily as a result of a reduction in principal outstanding from normally
scheduled debt amortization. Depreciation and amortization expense increased by
$84,000 as a result of commencing depreciation of expenditures capitalized
during late 1999 relating to the Registrant's leasing activities and capital
improvement projects.
GENERAL AND ADMINISTRATIVE EXPENSES--General and administrative expenses in
the first three months of 2000 amounted to $657,000 compared to $568,000 for the
first three months of 1999. The increase is primarily attributable to increases
in professional services as a result of the Company's REIT election and
personnel costs.
OTHER INCOME, NET--Other income, net, consisted of the gain of $323,000 from
the sale of the Mountain View land parcel in the first quarter of 2000, and
interest income of $68,000 and $72,000 during the first three months of 2000 and
1999, respectively.
INCOME TAX (PROVISION) BENEFIT--A current tax benefit of $800,000 has been
recorded which consists of a benefit of $980,000 resulting from an adjustment to
the 1999 tax liability related to the sale of the 410 First Avenue property and
the RCA Amendment as more fully discussed in the Registrant's 1999 Form 10-K,
offset by a tax provision on the built-in gain related to the sale of the
Mountain View land parcel.
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 in 1999 and for the current period, 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.
In connection with its election to be taxed as a REIT, the Registrant
elected to be subject to the "built-in gain" rules. Under these rules, taxes
will be payable to the extent that the net unrealized gains on the Registrant's
assets (calculated as of the date of conversion to REIT status) are recognized
in taxable dispositions during the ten-year period following conversion. At
March 31, 2000, these net realized gains were approximately $323,000 related to
the Mountain View land parcel sale. A federal and state tax liability for
"built-in gain" tax has been recognized. It may however, be necessary to
recognize a liability for such taxes in the future if management's plans and
intentions with respect to asset disposition or the related tax laws, change.
Management does not expect that the Registrant will pay taxes on "built-in
gains" on any other of its assets. Based on these consideration, 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 has not recognized a deferred tax liability at
March 31, 2000, and does not expect to provide for deferred income taxes in
future periods except in certain states and as noted previously. The Registrant
recorded a current tax payable of approximately $150,000 related to a "built-in
gain" tax on the sale of the Mountain View property and minimum amounts due for
state taxes.
11
<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 liabilites 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 in 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 March 31, 2000, the Registrant had
approximately $1.4 million of unrestricted cash, $2.0 million of restricted
cash, investment properties with a net book value of approximately $50 million,
total non-recourse mortgage debt of approximately $46 million and stockholders'
equity of approximately $8.3 million. Additionally, quarterly payments of
dividends to shareholders increased from $381,018 in March 1999 to $635,000 in
March 2000. 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 preceeding fashion would be used for tenant
improvements and other capital requirements, certain mandatory debt reductions,
and general corporate purposes including possible new investments.
The Registrant is also obligated to fund reserves for building and tenant
improvements, leasing commissions and debt service 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 loan agreements
during the twelve month period ending March 31, 2001, will amount to
approximately $597,000, and will be funded from future cash flow generated by
operating activities.
12
<PAGE>
Additionally, the Registrant is obligated to pay off its non-revolving line
of credit with Redwood Bank of $1,300,000 on or before December 10, 2000, as
previously discussed.
Scheduled principal maturites on the above described debt during the twelve
month period ending March 31, 2001, will amount to approximately $2,408,000.
Approximately $277,000 of debt principal was repaid in the three months ended
March 31, 2000 as scheduled debt amortization.
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 any.
The Registrant continued to experience more stabilized operating results in
its Properties during the first quarter of 2000 and, based on the Registrant's
current assessment of market and economic factors, expects this trend to
continue. In addition, the completion of certain leasing transactions has
continued to reduce the level of vacancies 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.
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-Q 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
including statements in this Form 10-Q relating to liquidity and capital
resources and trends in operating results involves known and unforseen 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-Q, investors are cautioned
not to place undue reliance on any forward-looking statements.
ITEM 3. 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 and corporate line of credit.
The Registrant does not believe that changes in
13
<PAGE>
market interest rates will have a material impact on the Registrant's earnings
or on its ability to perform its obligations under its two floating rate
mortgage loans or its corporate line of credit.
Approximately 12% of the principal amount of the Registrant's outstanding
debt at March 31, 2000 consisted of variable rate obligations. 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 either for
trading or for other purposes. 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
--------------------------------------------------------------------------------
(IN THOUSANDS)
2000 2001 2002 2003 2004 THEREAFTER
-------- -------- -------- -------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
Secured Fixed Rate Debt............. $1,047 $1,151 $1,252 $1,362 $1,481 $33,765
Fixed Interest Rate................. 8.50% 8.50% 8.50% 8.50% 8.50% 8.50%
Secured Variable Rate Debt.......... $1,361 $ 66 $ 71 $ 78 $ 85 $ 3,820
Average Interest Rate............... 8.38% 8.38% 8.38% 8.38% 8.38% 8.38%
<CAPTION>
EXPECTED MATURITIES
----------------------
(IN THOUSANDS)
FAIR
TOTAL VALUE
-------- --------
<S> <C> <C>
Secured Fixed Rate Debt............. $40,058 $40,058
Fixed Interest Rate.................
Secured Variable Rate Debt.......... $ 5,481 $ 5,481
Average Interest Rate...............
</TABLE>
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 March 31, 2000.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
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 judgement 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 of the County of Santa Clara intends to
appeal this ruling and order. The Registrant has filed a similar motion against
the City of San Jose which is set for hearing on May 16, 2000. 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 a different judge will rule the same way in the
litigation against the City of San Jose. Both the County of Santa Clara and City
of San Jose have initiated informal discussions with the Registrant to possibly
settle the litigation, and waive any rights of appeal.
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 5. OTHER INFORMATION
On April 25, 2000, the Registrant filed Form 10-K/A for the year ended
December 31, 1999 to include Part III, Items 10 through 13.
14
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibits
<TABLE>
<CAPTION>
NO. DESCRIPTION
--------------------- -----------
<S> <C>
27 Financial Data Schedule
</TABLE>
15
<PAGE>
SIGNATURES
Pursuant to the requirements 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>
PACIFIC GATEWAY PROPERTIES, INC.
Registrant
Date: May 12, 2000 /s/ RAYMOND V. MARINO
------------------------------------------------
Raymond V. Marino
PRESIDENT AND CHIEF EXECUTIVE OFFICER
(PRINCIPAL EXECUTIVE AND FINANCIAL OFFICER)
Date: May 12, 2000 /s/ MELANIE L. ADKINS
------------------------------------------------
Melanie L. Adkins
CONTROLLER--CORPORATE
(PRINCIPAL ACCOUNTING OFFICER)
Date: May 12, 2000 /s/ NEIL C. MARCK
------------------------------------------------
Neil C. Marck
CONTROLLER--MANAGEMENT COMPANY
(PRINCIPAL ACCOUNTING OFFICER)
</TABLE>
16
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<CASH> 3,330
<SECURITIES> 0
<RECEIVABLES> 170
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 4,585
<PP&E> 70,105
<DEPRECIATION> 20,149
<TOTAL-ASSETS> 57,284
<CURRENT-LIABILITIES> 3,489
<BONDS> 45,539
2,889
0
<COMMON> 4,052
<OTHER-SE> 1,315
<TOTAL-LIABILITY-AND-EQUITY> 57,284
<SALES> 0
<TOTAL-REVENUES> 4,715
<CGS> 0
<TOTAL-COSTS> 1,459
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 962
<INCOME-PRETAX> 1,020
<INCOME-TAX> (800)
<INCOME-CONTINUING> 1,820
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,820
<EPS-BASIC> 0.45
<EPS-DILUTED> 0.42
</TABLE>
