SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X]QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31,
1994
OR
[ ]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File Number 1-8692
PACIFIC GATEWAY PROPERTIES, INC.
(Exact name of Registrant as specified in its charter)
NEW YORK
04-2816560
(State or other jurisdiction of
(IRS Employer
incorporation or organization)
Identification No.)
ONE RINCON CENTER, 101 SPEAR STREET, SUITE 215, SAN
FRANCISCO, CALIFORNIA 94105
(Address of principal executive offices)
(Zip Code)
Registrant's telephone number, including area
code (415) 543-8600
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 March 31, 1994:
Page 1 of 14
<PAGE>
$1.00 Par Value Common Stock
3,878,964
(Title of Class)
(Number of Shares Outstanding)
PACIFIC GATEWAY PROPERTIES, INC.
INDEX
Part I - Financial Information: Page Number
Item 1. Financial Statements
Consolidated Balance Sheet as of March 31,
1994
and December 31, 1993 3
Consolidated Statement of Income for the
Three Months Ended March 31, 1994 and 1993 4
Consolidated Statement of Cash Flows for the
Three Months Ended March 31, 1994 and 1993 5
Notes to Financial Statements 6-
10
Item 2. Management's Discussion and
Analysis of Financial Condition
and Results of Operations 10-13
Part II - Other Information
Item 1. Legal Proceedings None
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 None
Item 6. Exhibits and Reports on
Form 8-K 13
Signatures 14
Page 2 of 14 <PAGE>
PACIFIC GATEWAY PROPERTIES, INC.
CONSOLIDATED BALANCE SHEET (Unaudited)
(In Thousands, Except Share Amounts)
<TABLE>
<CAPTION>
As of As of
March 31, December 31,
1994 1993
ASSETS
<S> <C> <C>
Cash and short-term investments $ 843 $ 743
Accounts receivable 1,208 993
Other current assets 98 163
Investment and hotel properties:
Land 16,516 16,516
Buildings 73,226 73,192
Other deferred costs 15,813 15,563
Subtotal investment and hotel properties 105,555 105,271
Less-accumulated depreciation
and amortization and net
realizable value reserve (30,042) (29,485)
Investment and hotel properties, net 75,513 75,786
Equity investment in and loans to Rincon Center
Associates, net 6,286 6,491
Note receivable 234 236
Other assets, net 94 178
Total assets $ 84,276 $ 84,590
LIABILITIES AND STOCKHOLDERS' DEFICIT
Accounts payable $ 780 $ 1,142
Accrued payroll, property and sales taxes 388 603
Prepaid rent 78 240
Accrued interest on debt 489 214
Other current liabilities 138 46
Tenant security deposits 611 624
Debt 96,337 97,095
Other debt related to equity investment
in Rincon Center Associates 1,845 1,821
Excess of cash distributions received
over equity in earnings to date
of Golden Gateway Center 18,002 18,126
Total liabilities 118,668 119,911
Stockholders' deficit:
Common stock $1.00 par value--
Authorized--10,000,000 shares
Issued--4,010,150 shares 4,010 4,010
Paid-in-deficit (10,223) (10,223)
Retained deficit (27,987) (28,916)
Treasury stock, at cost--131,186 common shares (2,082) (2,082)
Warrants for common stock 1,890 1,890
Total stockholders' deficit (34,392) (35,321)
Total liabilities and stockholders'
deficit $ 84,276 $ 84,590
</TABLE>
Page 3 of 14 <PAGE>
The accompanying notes are an integral part of these consolidated financial
statements
Page 4 of 14
<PAGE>
PACIFIC GATEWAY PROPERTIES, INC.
CONSOLIDATED STATEMENT OF INCOME (Unaudited)
(In Thousands, Except Per Share Amounts)
<TABLE>
For the Quarter
Ended March
<CAPTION>
<S> <C> <C>
1994 1993
Investment Properties:
Rental revenues $2,859 $3,530
Operating expenses (1,217) (1,578)
Income before depreciation and interest
expense 1,642 1,952
Interest expense (803) (1,394)
Depreciation and amortization (468) (747)
Investment properties income (loss) 371 (189)
Hotel Property:
Revenues 2,706 2,381
Operating expenses (1,541) (1,568)
Income before depreciation and interest
expense 1,165 813
Interest expense (185) (203)
Depreciation and amortization (92) (95)
Hotel income 888 515
Equity in Partnership Income (Loss):
Golden Gateway Center (GGC) 331 213
Rincon Center Associates (RCA) (545) (566)
Equity in partnership income (loss) (214) (353)
General and administrative expenses (360) (403)
Interest expense on debt secured by equity
investment in GGC and other corporate
debt (168) (137)
Interest and fee expense for debt related to
equity investment in RCA (59) --
Interest income 142 7
Other income 335 88
Income (loss) before partnership and
property transactions,and income taxes 935 (472)
Gain on sale of partnership interest -- 3,602
Loss on sale of real estate asset -- (156)
Income before income taxes 935 2,974
Income tax provision (6) (4)
Net Income $ 929 $2,970
Income per share, primary and fully diluted $ 0.23 $ 0.77
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements
Page 5 of 14 <PAGE>
PACIFIC GATEWAY PROPERTIES, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS (Unaudited)
(In Thousands)
<TABLE>
For the Three Months
M\Ended March 31,
1994 1993
<S> <C> <C>
Cash flow from operating activities:
Net income $929 $2,970
Non-cash revenues and expenses included in income:
Provision for depreciation 580 842
Equity in loss of investment partnerships 214 353
Other non-cash charges relating to investment
partnerships -- (62)
Loss on sale of real estate assets, net -- 156
Gain on sale of partnership interests -- (3,602)
Changes in assets and liabilities:
Accounts receivable and other current assets (150) (13)
Other assets 67 20
Accounts payable and other current liabilities (371) (286)
Other liabilities (13) (350)
Cash flow generated by operating activities 1,256 28
Cash flow from investing activities:
Additions to investment and hotel properties (204) (303)
Proceeds from sale of property -- 895
Proceeds from sale of partnership interest, net -- 1,781
Contributions to investment partnerships (340) (38)
Distributions from investment partnerships 206 177
Net cash generated by (used in) investing activities (338) 2,512
Cash flow from financing activities:
Borrowings in connection with equity investment 399 --
Payments on debt (758) (148)
Payment on debt, and accrued fees and interest in
connection with equity investment (375) --
Payment on line-of-credit -- (1,500)
Payment of loan costs and fees (84) --
Mortgages satisfied in connection with property
disposition -- (767)
Net cash used in financing activities (818) (2,415)
Increase in cash and short term investments 100 125
Balance at beginning of period 743 1,510
Balance at end of period $ 843 $1,635
Supplementary disclosures:
Cash paid for interest $1,044 $1,526
</TABLE>
Page 6 of 14 <PAGE>
The accompanying notes are an integral part of these consolidated financial
statements
Page 7 of 14
<PAGE>
PACIFIC GATEWAY PROPERTIES, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
For the Quarter Ended March 31, 1994
1. Organization and Summary of Significant
Accounting Policies
The significant accounting policies and other
information regarding the Registrant's financial
statements are set forth in the Notes to the
Registrant's Audited Consolidated Financial Statements
for the three years ended December 31, 1993, as set
forth in the Registrant's Annual Report on Form 10K.
The Registrant has made no significant changes to
these policies during 1994.
In the opinion of the Registrant, the
accompanying unaudited financial statements reflect
all adjustments necessary to present fairly the
Registrant's financial position as of March 31, 1994,
and its results of operations and cash flows for the
three month periods ended March 31, 1994 and 1993.
Reclassifications
Certain prior year amounts have been
reclassified to be consistent with current year
classifications.
2. REAL ESTATE PARTNERSHIP INVESTMENTS
OPERATING PARTNERSHIPS
Golden Gateway Center Partnership (GGC)--San
Francisco, California
The Registrant owned a 32.5% general partnership
interest in GGC during 1992. In connection with the
sale of a portion of its interest in 1991, the
Registrant entered into an arrangement whereby,
barring certain conditions, the Registrant could put
or the buyers could call an additional 3% partnership
interest, at different points in time after December
31, 1992, at essentially the same price as the 1991
transaction. The Registrant put the additional 3%
partnership interest to the buyers in February 1993
for cash proceeds of $1,795,000, resulting in a gain
of $3,602,000. As of March 31, 1994, the Registrant
owns a 29.5% partnership interest in GGC. The
Registrant has accounted for its investment in GGC on
the equity basis since 1991.
Summary financial data for the three months ended
March 31, 1994 and 1993, for GGC is as follows (in
thousands):
Page 8 of 14 <PAGE>
<TABLE>
<S> <C> <C>
.
. 1994 1993
Cash distributions to the Registrant
from GGC $ 206 $ 177
Income from operations:
Revenues $4,941 $4,760
Expenses:
Operating 1,751 2,024
Interest 1,839 1,806
Depreciation and amortization 230 247
. 3,820 4,077
Net income $1,121 $ 683
Registrant's share of net income of GGC $ 331 $ 213
</TABLE>
Rincon Center Associates Partnership (RCA)--San
Francisco, California
The Registrant owns general and limited
partnership interests in RCA totalling approximately
23%, and is responsible for 20% of cash requirements
in excess of available financing. The Registrant's
investment in RCA includes contributions of $340,000
and $38,000 during the first quarters of 1994 and
1993, respectively, to fund operating costs and debt
repayments.
RCA sold Rincon Center Phase One to Chrysler
MacNally Corporation (Chrysler) in June 1988;
subsequently, RCA leased the property back under a
master lease which is treated as an operating lease
for financial reporting purposes.
In September 1993, RCA completed a refinancing
of Rincon Center Phase Two with its existing lender.
As a result of this refinancing, the Registrant's
letter-of-credit, in favor of the bank involved in the
RCA financing, was reduced from $6.25 million to $4.5
million. The letter-of-credit expires June 1994.
This letter-of-credit is secured by the Registrant's
410 First Avenue property and the lender has requested
additional collateral. The Registrant is seeking to
satisfy the collateral request and/or further reduce
the required amount of the letter-of-credit, however,
its ability to do so is dependent upon the cooperation
of another lender.
The Registrant earns a fee from RCA for posting
the letter-of-credit and earns a preferred return at
the prime rate plus 2% on its advances to RCA. Since
1993, no letter-of-credit fees or interest on its
advances have been accrued. During the first quarter
of 1994, RCA paid the Registrant approximately
$233,000 in outstanding letter-of-credit fees and
$142,000 in outstanding interest on its advances
Page 9 of 14
<PAGE>
relating to prior years. As previously discussed, it
is the Registrant's policy not to recognize this
income until received.
The Registrant completed an agreement in June
1993 with the other general partner in RCA. This
agreement provides the Registrant with the flexibility
to borrow funds from the other general partner to
limit its future cash obligations to RCA. Under this
funding arrangement, all amounts advanced, related
fees and accrued interest are non-recourse to the
Registrant. This agreement does not reduce the level
of the Registrant's general and limited partnership
interests in RCA. Interest accrues on the unpaid
portion of both the principal amount advanced and
related fees at the Bank of America prime rate plus
2%. Amounts advanced under this funding arrangement,
plus related fees and accrued interest, are required
to be repaid from future cash distributed by RCA to
the Registrant.
On March 31, 1994, the Registrant repaid a
total of $375,000 toward the amounts advanced,
accrued fees, and accrued interest using the payment
received from RCA for outstanding letter-of-credit
fees and interest on advances as previously discussed.
The total amount outstanding under this funding
arrangement as of March 31, 1994, was $1,845,000. All
accrued fees and interest were paid in full as of
March 31, 1994.
Summary financial statement data for the three
months ended March 31, 1994 and 1993, for RCA is as
follows (in thousands):
<TABLE>
1994 1993
<S> <C> <C>
Cash contributions from the
Registrant to RCA $ 340 $ 38
Income (loss) from operations:
Revenue $ 5,040 $ 4,884
Expenses:
Operating and lease expenses 4,243 3,782
Financing 2,160 2,589
Depreciation and amortization 1,025 996
7,428 7,367
Net loss $(2,388) $(2,483)
Registrant's share of net loss of RCA $ (545) $ (566)
</TABLE>
3. Per Share Data - Per share data is based on the
weighted average number of the Registrant's common
shares and common share equivalents. Outstanding
warrants and stock options enter into the common
shares outstanding using the Treasury Stock Method, as
follows:
Page 10 of 14 <PAGE>
<TABLE>
<CAPTION>
As of March 31, 1994 1993
<S> <C> <C>
Weighted average common shares
outstanding 3,878,964 3,878,964
Common share equivalents 226,987 3,071
Total weighted average common shares
and common share equivalents, for
primary and fully diluted 4,105,951 3,882,035
</TABLE>
4. Debt
Debt Secured by Partnership Interest in Golden
Gateway Center and Mortgages on Real Estate From
Primary Lender - In December 1993, the Registrant
completed a restructuring of its non-revolving line-
of-credit, letter-of-credit, unsecured bonds, and
certain mortgages with its primary lender.
Statement of Financial Accounting Standards No.
15 requires the Registrant to account for future
interest resulting from this transaction using an
imputed interest rate versus the stated rates on the
debt from the primary lender. In addition, the
primary lender's cancellation of debt of $4 million is
not recognized for financial reporting purposes. The
imputed interest rate as of March 31, 1994, was
approximately 4.0%. As a result, the amount of
interest recorded for financial reporting purposes is
lower than the stated interest on the face amount of
the debt by approximately $109,000 for the first
quarter of 1994. Since the imputed interest for
financial reporting purposes is less than the stated
interest rates, the difference was allocated to reduce
actual interest expense and the principal amount
outstanding on the Registrant's Consolidated Financial
Statements.
Line-of-Credit - The Registrant restructured
its non-revolving line-of-credit with its primary
lender in December 1993. The balance of the line-of-
credit as of December 31, 1992, was $10.5 million, and
in February 1993, the Registrant repaid $1.5 million
of the balance outstanding using the proceeds of the
sale of the 3% Golden Gateway Center partnership
interest as previously discussed.
Other Mortgages on Real Estate - The Registrant
continues to actively pursue potential sales of
certain real estate assets in cases where a
transaction would generate acceptable stockholder
value and improve corporate liquidity. One property
was sold in January 1993 which generated a non-cash
loss of $156,000 and resulted in satisfaction of the
outstanding $767,000 mortgage loan.
The Mountain Bay Plaza property is still in the
process of foreclosure as more fully described in the
Page 11 of 14
<PAGE>
Registrant's 1993 Audited Consolidated Financial
Statements. The net book value of the property
continues to equal the amount of the mortgage debt in
the Registrant's Consolidated Financial Statements as
of March 31, 1994.
5. Income Taxes
Except for actual state franchise tax payments
made, no provision for income taxes has been recorded
in the first quarter of 1994, since the Registrant
will utilize a portion of its net operating loss
carryforward to offset current year income and any
alternative minimum tax is not considered material at
this time.
ITEM 2. Management's Discussion and Analysis of
Financial Conditions and Results of Operations
Financial Position
Capital Improvements, Tenant Improvements and
Other Deferred Costs - First quarter 1994 additions to
investment properties amounted to approximately
$204,000 for tenant improvements, capital improvements
and other deferred costs. The $204,000 of capital
expenditures during the first quarter of 1994 is a
decrease from the $303,000 expended in the first
quarter of 1993.
Financing - On March 31, 1994, the face amount
of the floating rate mortgage debt totaled
approximately $58.2 million, bearing interest at
quarter-end weighted average stated rate of 5.7%. The
face amount of the fixed rate mortgage debt (excluding
the Mountain Bay Plaza debt) totaled approximately
$19.4 million bearing interest at quarter-end weighted
average stated rate of 9.9%.
Net Income
Investment Properties - During the first
quarter of 1994, the income from investment properties
was $371,000 compared to a loss of $189,000 during the
first quarter of 1993. Approximately, $122,000 of the
income in the first quarter of 1994 is attributable to
Mountain Bay Plaza which is in the process of being
foreclosed by its lender. On January 20, 1994, the
Court appointed a Receiver to operate the property,
and the Registrant's income does not reflect a full
quarters operations from this property in 1994.
Approximately $634,000 (of the $671,000) reduction in
rental revenues and $382,000 (of the net $361,000)
reduction in operating expenses in the first quarter
of 1994 compared to the first quarter of 1993 is due
to: one property disposition in Boca Raton, Florida
during the first quarter of 1993, the Mountain Bay
Plaza foreclosure-in-process, and two property
Page 12 of 14 <PAGE>
dispositions in the latter part of 1993 (Fairmount
Square, Phoenix, Arizona and the Longwood, Florida
buildings). For the remaining balance of investment
properties, there was a decrease in rental revenue of
$37,000 and an increase in operating expenses of
$21,000 for the first quarter in 1994 compared to the
first quarter in 1993. The decrease in rental revenue
in the first quarter 1994 is primarily a result of
tenant consolidations in the Registrant's portfolio
compared to the first quarter in 1993.
Hotel Property - The hotel property income
increased from $515,000 in the first quarter 1993 to
$888,000 in the first quarter 1994. The bulk of the
improvement relates to an increase in the average
occupancy and in the average daily room rate.
Interest expense decreased $18,000 from the first
quarter 1993 amount of $203,000 to $185,000 for the
first quarter 1994, primarily as a result of the
effects of the Registrant's debt restructuring with
its primary lender in December 1993.
Equity in Partnership Income - Golden Gateway
Center (GGC) - Net income for GGC during the first
quarter of 1994 and 1993 was $1,121,000 and $683,000
respectively, reflecting continued improvement in
operations for the project.
Equity in Partnership Loss - Rincon Center
Associates (RCA) -The net loss for Rincon Center
decreased from $2,483,000 in the first quarter of 1993
to a net loss of $2,388,000 in the first quarter of
1994. The reduction in the net loss is a result of
stabilized occupancy and a reduction in operating cost
at Rincon Center.
General and Administrative Expenses - General
and administrative expenses in the first quarter of
1994 amounted to $360,000 compared to $403,000 for the
first quarter of 1993. The amount incurred during the
first quarters of 1994 and 1993 was what the
Registrant anticipated and reflects ongoing efforts to
reduce these costs.
Interest Expense on Debt Secured by Equity
Investment in GGC and Other Corporate Debt - In
1994, corporate interest expense relates to that
portion of the Registrant's debt with its primary
lender that is cross-collateralized by the
Registrant's partnership interest in GGC. In 1993,
corporate interest expense relates primarily to
borrowings under the Registrant's non-revolving line-
of-credit and unsecured bonds. Interest expense in
the first quarter of 1994 was $168,000 compared to
$137,000 for the first quarter of 1993. This increase
is a result of the Registrant's debt restructuring
with its primary lender which increased the amount of
debt cross-collateralized by the GGC partnership
Page 13 of 14
<PAGE>
interest.
Interest and Fee Expense for Debt Related to
Equity Investment in RCA - During the first quarter
of 1994, the Registrant incurred approximately $59,000
in interest and fee expense related to the funding
arrangement with the other general partner on Rincon
Center, as previously discussed. This funding
arrangement did not exist in the first quarter of
1993.
Interest Income - During the first quarter
1994 and 1993 interest income was $142,000 and $7,000,
respectively. A significant portion of the interest
income in the first quarter of 1994 is attributable to
a payment by RCA for a portion of the interest
outstanding on partner advances to RCA.
Other Income - In the first quarter of 1994,
other income includes a $233,000 payment by RCA for a
portion of the fees due its general partners for
posting a letter-of-credit; and the proceeds from the
sale of vacant land in Longwood, Florida and Colorado
Springs, Colorado. Other income in the first quarter
of 1993 includes primarily fees accrued for Rincon
Center Associates (RCA) for posting a secured letter-
of-credit.
Gain on Sale of Partnership Interest - In
February 1993, the Registrant sold an additional 3%
partnership interest in Golden Gateway Center as
previously discussed.
Loss on Sale of Real Estate Asset - In January
1993, the Registrant disposed of its BOCA II property
in Boca Raton, Florida to an unrelated third party.
In connection with this property disposition, the
Registrant realized a loss of $156,000. The net cash
proceeds from the BOCA II disposition amounted to
approximately $103,000.
Liquidity and Capital Resources
The bulk of the Registrant's resources are
committed to relatively non-liquid real estate assets.
Traditionally, these assets, due to their value and
cash flow, provided the Registrant with an ability to
generate capital as required, both internally and
externally, through asset-based financings. In
addition, in 1993 and 1992 assets or portions thereof,
were sold to provide further liquidity.
Page 14 of 14
<PAGE>
During 1993, the Registrant took several
aggressive actions to generate and conserve cash, and
continues to review and analyze additional potential
actions. At the same time, the Registrant is seeking
to retain value and identify future opportunities for
investment. The Registrant's liquidity was under
significant strain throughout 1993 which continues to
be the case in 1994. The Registrant has sought to
reduce the strain by minimizing its financial exposure
to properties secured by non-recourse mortgage loans.
This has been done when such expected exposure
exceeded the total of estimated future cash flow after
debt service plus the estimated residual cash in
excess of the cost of servicing the mortgage, which a
sale of such property may generate. No properties
were conveyed to lenders in 1993, however, Mountain
Bay Plaza may be conveyed to its lender in 1994.
Additionally, the Registrant has actively pursued
potential sales of certain real estate assets in the
past, and may continue to do so in the future in cases
where a transaction would generate acceptable
stockholder value and corporate liquidity. In the
first quarter of 1993, the Registrant sold one such
property as previously discussed.
It is the Registrant's intent to increase its
liquidity in a variety of ways including: (a) regular
debt reductions, (b) the sale of properties which do
not fit within its long term strategy, and (c)
infusion of new capital through either a private
placement or public offering when market conditions
permit. Funds raised in the preceding fashion would
be used for such things as tenant improvements and
other capital requirements, certain mandatory debt
reductions, and new investments.
The Registrant experienced more stabilized
operating results in 1993, and expects this trend to
continue since certain unprofitable properties
disposed of in 1992 and 1993 will no longer affect
operating results.
ITEM 6. Exhibits and Reports on Form 8K
The Registrant filed a report on Form 8K on
January 25, 1994, for the issuance of Warrants to its
primary lender to acquire up to 2,000,000 shares of
the Registrant's Common Stock at an exercise price of
$2.875 per share in connection with a debt
restructuring in December 1993 as previously
discussed.
Page 15 of 14
<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.
PACIFIC GATEWAY
PROPERTIES, INC.
Registrant
Date: May 11, 1994
Roger D. Snell
President and Chief
Executive Officer
Date: May 11, 1994
Raymond V. Marino
Vice President and
Controller
( P r i n c i p a l
Financial &
Accounting Officer)
Page 16 of 14
<PAGE>
