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 June 30, 1995
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 (IRS Employer
jurisdiction of Identification No.)
incorporation or
organization)
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 June 30, 1995:
$1.00 Par Value Common Stock 3,892,596
(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 June 30, 1995
and December 31, 1994 3
Consolidated Statement of
Income for the Three
and Six Months Ended
June 30, 1995 and 1994 4
Consolidated Statement of Cash
Flows for the Three and Six
Months Ended June 30, 1995 and 1994 5
Notes to Financial Statements 6-9
Item 2. Management's Discussion and
Analysis of Financial Condition
and Results of Operations 9-12
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 12
Item 5. Other Information None
Item 6. Exhibits and Reports - Form 8-K None
Signatures 13
PACIFIC GATEWAY PROPERTIES, INC.
CONSOLIDATED BALANCE SHEET
(In Thousands, Except Share Amounts)
As of As of
June 30, December 31,
1995 1994
(Unaudited) (Audited)
ASSETS
Cash and short-term investments $ 124 $ 359
Cash reserved for capital improvements 499 597
Accounts receivable 1,103 785
Other current assets 72 42
Investment and hotel properties:
Land 15,170 15,230
Buildings 46,284 46,741
Other deferred costs 19,908 18,463
Subtotal investment and hotel properties 81,362 80,434
Less-accumulated depreciation
and amortization and net
realizable value reserve (23,494) (22,075)
Investment and hotel properties, net 57,868 58,359
Equity investment in and loans to Rincon Center
Associates, net 2,569 4,020
Deferred tax asset 5,593 6,845
Note receivable 226 229
Other assets, net 148 198
Total assets $ 68,202 $ 71,434
LIABILITIES AND STOCKHOLDERS' DEFICIT
Accounts payable $ 974 $ 1,132
Accrued payroll, property and sales taxes 415 328
Prepaid rent 326 210
Accrued interest on debt 376 459
Tenant security deposits 456 414
Other current liabilities 8 85
Debt related to corporate, investment
and hotel properties 60,0826 1,149
Other debt related to equity investment
in Rincon Center Associates 2,130 1,950
Deferred tax liability 10,449 12,209
Total liabilities 75,216 77,936
Stockholders' deficit:
Common stock $1.00 par value--
Authorized--10,000,000 shares
Issued--4,011,150 shares 4,011 4,011
Paid-in-deficit (10,222) (10,222)
Retained deficit (655) (99)
Treasury stock, at cost--118,554 common shares
at June 30, 1995 and 131,186 common shares
at December 31, 1994 (2,038) (2,082)
Warrants for common stock 1,890 1,890
Total stockholders' deficit (7,014) (6,502)
Total liabilities and
stockholders' deficit $ 68,202 $ 71,434
The accompanying notes are an integral part of these consolidated
financial statements
PACIFIC GATEWAY PROPERTIES, INC.
CONSOLIDATED STATEMENT OF INCOME (Unaudited)
(In Thousands, Except Per Share Amounts)
For the Three Months For the Six Month
Ended June 30, Ended June 30,
1995 1994 1995 1994
Investment Properties:
Rental revenues $3,049 $2,519 $6,228 $5,378
Operating expenses (1,404) (1,384) (2,666) (2,601)
Income before depreciation and
interest expense 1,645 1,135 3,562 2,777
Interest expense (778) (846) (1,634) (1,649)
Depreciation and amortization (581) (532) (1,172) (1,000)
Investment properties
income(loss) 286 (243) 756 128
Hotel Property:
Revenues, $1,815 1,875 4,431 4,581
Operating expenses (1,276) (1,356) (2,669) (2,897)
Income before depreciation and
interest expense 539 519 1,762 1,684
Interest expense (136) (207) (359) (391)
Depreciation and amortization (155) (94) (311) (186)
Hotel income 248 218 1,092 1,107
Equity in Partnership Income (Loss):
Golden Gateway Center (GGC) -- 380 -- 710
Rincon Center Associates (RCA) (982) (712) (1,767) (1,257)
Equity in partnership losses (982) (332) (1,767) (547)
General and administrative expenses (305) (297) (658) (656)
Interest expense on debt secured by
equity investment in GGC and
other corporate debt -- (187) -- (355)
Interest and fee expense for debt
related to equity investment in RCA (66) (51) (123) (110)
Interest income 12 17 15 159
Other income -- 52 -- 387
Income (loss) before property
transactions and income taxes (807) (823) (685) 113
Gain on sale of real estate asset 177 -- 177 --
Income (loss) before extraordinary
item and income taxes (630) (823) (508) 113
Extraordinary write-off of
unamortized loan fees from
debt refinancing (233) -- (233) --
Income (loss) before income taxes (863) (823) (741) 113
Income tax benefit (provision) 237 (4) 187 (10)
Net Income (loss) ($626) ($827) ($554) $103
Income (loss) per share, primary
and fully diluted ($0.15) ($0.20) ($0.14) $0.03
The accompanying notes are an integral part of these consolidated
financial statements
PACIFIC GATEWAY PROPERTIES, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS (Unaudited)
(In Thousands)
For the Three Months For the Six Months
Ended June 30, Ended June 30,
1995 1994 1995 1994
Cash flow from operating activities:
Net income (loss) ($626) ($827) ($554) $103
Non-cash revenues and expenses
included in income:
Provision for depreciation 736 645 1,483 1,224
Equity in loss of investment
partnerships 982 332 1,767 547
Extraordinary write-off of unamortized
loan fees from debt refinancing 233 -- 233 --
Gain on sale of real estate asset (177) -- (177) --
Changes in assets and liabilities:
Accounts receivable and other
current assets (200) 538 (389) 388
Other assets 26 (190) 96 (123)
Accounts payable and other
current liabilities (97) 121 (106) 153
Current tax liability (305) -- -- --
Deferred taxes (113) -- (508) --
Other liabilities 56 341 26 (76)
Cash flow generated by operating
activities 515 960 1,871 2,216
Cash flow from investing activities:
Additions to investment and
hotel properties (376) (710) (1,551) (913)
Proceeds from sale of real
estate asset 510 -- 510 --
Contributions to Rincon Center
Associates,net -- (111) (315) (451)
Distributions from
Golden Gateway Center -- 310 -- 516
Net cash generated by (used in) investing
activities 134 (511) (1,356) (848)
Cash flow from financing activities:
Borrowings under property and
corporate debt 19,937 -- 20,910 --
Borrowings in connection with
equity investment, net 65 88 463 112
Payments on debt (20,570) (264) (21,859) (1,022)
Payment of loan costs and fees (7) (7) (7) (91)
Issuance of Treasury Stock -- -- 45 --
Mortgages satisfied in connection
with property dispositions (400) -- (400) --
Net cash used in financing activities (975) (183) (848) (1,001)
Increase (decrease)in cash and
short term investments (326) 267 (333) 367
Balance at beginning of period 624 843 956 743
Balance at end of period (Includes
$499 restricted at June 30, 1995
and none at June 30, 1994) $ 298 $1,110 $ 623 $1,110
Supplementary disclosures:
Cash paid for interest $1,028 $1,238 $2,355 $2,392
Cash paid for taxes $ 181 $ 4 $ 321 $ 10
The accompanying notes are an integral part of these consolidated
financial statements
PACIFIC GATEWAY PROPERTIES, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
For the Quarter and Six Months Ended June 30, 1995
1.Organization and Summary of Significant Accounting Policies
The accompanying unaudited consolidated financial statements should be read
in conjunction with the 1994 Form 10-K of the Registrant. 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
consolidated financial statements.
In the opinion of the Registrant, all material adjustments 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 and six
months ended June 30, 1995 are not necessarily indicative of the results that
may be expected for the year ending December 31, 1995.
REAL ESTATE ASSET SOLD
In June 1995, the Registrant completed the sale of a parcel of land in Walnut
Creek, California to an unrelated third party. In connection with this
property disposition, the Registrant realized a gain of $177,000. The net
cash proceeds, after repayment of $400,000 of mortgage debt and other costs
of the sale, amounted to approximately $106,000.
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
In October of 1994, the GGC Partnership completed a redemption of the
Registrant's remaining 29.5% partnership interest. Summary financial data
for GGC is as follows (in thousands):
Three Months Six Months
ended June 30, ended June 30,
1994 1994
Cash distributions to the Registrant
from GGC $ 310 $ 516
Income from operations:
Revenues $5,091 $10,032
Expenses:
Operating 1,681 3,432
Interest 1,852 3,691
Depreciation and amortization 270 500
3,803 7,623
Net income $1,288 $2,409
Registrant's share of net income of GGC $ 380 $ 710
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 earns a fee from RCA for posting a $4.5 million letter-of-credit
and earns a preferred return at the prime rate plus 2% on its advances to RCA.
Since December 1994, the Registrant has recorded any letter-of-credit fees
and interest on advances paid by RCA as a reduction to equity investment in
and loans to RCA. During the first six months of 1995, RCA paid the
Registrant approximately $85,000 in outstanding letter-of-credit fees.
The letter of credit expires December 23, 1995.
The Registrant entered into 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 bothy 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, if any. The total amount outstanding under this funding
arrangement as of June 30, 1995 was $2,130,000.
Summary financial statement data for RCA is as follows (in thousands):
Three Months Ended Six Months ended
June 30, June 30,
1995 1994 1995 1994
Registrant's share of
contributions to
RCA, net $ -- $ 111 $ 315 $ 451
Income (loss) from
operations:
Revenue $ 4,879 $ 5,006 $10,253 $10,046
Expenses:
Operating and
lease expenses 3,202 3,139 6,223 6,075
Financing 5,052 3,942 9,818 7,409
Depreciation and
amortization 925 1,044 1,950 2,069
9,179 8,125 17,991 15,553
Net loss $(4,300) $(3,119)$(7,738) $(5,507)
Registrant's share of
net loss of RCA $ (982) $ (712)$(1,767) $(1,257)
As of the date of this report, the Managing General Partner of RCA
had not completed the financial accounting for RCA Partnership. As a
result, the Registrant has recorded an estimate of revenue and expenses
for the first six months of 1995 based upon actual operating revenue
and expenses for January through May 1995. The Registrant has conferred
with the Managing General Partner of RCA and considers the projection
a reasonable estimate, however, actual results will differ from
this projection.
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. The number of common shares
and common share equivalents used in the earnings per share calculation
are as follows:
As of June 30, 1995 1994
Primary 4,089,097 4,057,787
Fully diluted 4,089,097 4,081,836
4. Debt
Debt Secured by 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,
at the time of the restructuring, is not reconized for financial
reporting purposes. The imputed interest rate as of June 30, 1995,
was approximately 4.4%. As a result, the amount of interest recorded
for financial reporting purposes is lower than the stated interest
on the face amount of the debt by approximately $282,000 for the first
six months of 1995. The face amount of the debt with the primary lender
as of June 30, 1995 and 1994 was $17,246,000 and $47,888,000, respectively.
As a result of the refinancing of the Walnut Creek Executive Park
("WCEP") mortgage, discussed below, the Registrant achieved the level
of debt repayments necessary to cancel 650,000 warrants issued to the
primary lender in December 1993, leaving one million exercisable
warrants outstanding. However, in June 1995, the Registrant entered
into a letter agreement with its primary lender that allows the
650,000 warrants to remain outstanding until the balance of the
November 1994 construction loan is repaid in full in exchange for the
primary lender receiving lower release prices on the June 1995
refinancing and the sale of the Walnut Creek parcel of land.
The balance of the construction loan as of June 30, 1995 amounted
to $325,000, and the Registrant anticipates that the construction
loan will be repaid in full by September 1995.
Other Mortgages on Real Estate - In June 1995, the Registrant
completed the refinancing of $20,000,000 of debt related to
Walnut Creek Executive Park. This debt was due in the fourth
quarter of 1997. The new loan carries a 7.85% annual interest
rate until maturity with fixed monthly amortization payments of
approximately $162,000. The loan is amortized over 20 years and
is due July 1, 2005. The new loan has a prepayment penalty and
is non-recourse to the Registrant. In addition, the new loan requires the
Registrant to fund a reserve for future tenant improvements of $9,314
per month in the first twenty four months of the loan, and increasing
to $17,647 per month in month 25 through 68 of the loan. These funds
are included as cash reserved for capital improvements on the
Registrant's Consolidated Balance Sheet. As a result of this refinancing,
the Registrant has written off the unamortized portion of the loan
fees associated with the debt that was retired, which amounted to
$233,000 and is recorded as an extraordinary item.
ITEM 2. Management's Discussion and Analysis of Financial
Conditions and Results of Operations
Financial Position
Financing - On June 30, 1995, the face amount of the floating rate
mortgage debt totaled approximately $27.2 million, bearing interest
at quarter-end weighted average stated rate of 7.9%. The face amount
of the fixed rate mortgage debt totaled approximately $32.1
million bearing interest at quarter-end weighted average stated
rate of 8.7%.
Net Income
Investment Properties - During the first six months of 1995,
the income from investment properties was $756,000 compared to
income of $128,000 during the first six months of 1994.
During the second quarter of 1995 income from investment properties
was $286,000 compared to a loss of $243,000 during the second
quarter of 1994. The increase in income from investment
properties for the first six months of 1995 compared to 1994
is primarily attributable to increased occupancy in the
Registrant's portfolio. Interest expense decreased slightly from
the first six months of 1994 amount of $1,649,000 to $1,634,000
during the first six months of 1995 as a result of the
Registrant's 1993 debt restructuring which was offset by an
increase in interest rates on the Registrant's floating rate
mortgage debt. Depreciation and amortization expense increased
as a result of commencing depreciation of expenditures capitalized
during 1994 and early 1995 relating to the Registrant's leasing
activities and capital improvement projects.
Hotel Property - The hotel property income was $1,092,000
in the first six months of 1995 compared to $1,107,000 in the first
six months of 1994. For the three months ended June 30, 1995, the
hotel property income was $248,000 compared to income of $218,000
for the three months ended June 30, 1994. The modest decrease in
income for the first six months of 1995 compared to 1994 was a
result of lower corporate demand which was offset by an increase
in average daily rate. Interest expense decreased from the first six
months of 1994 amount of $391,000 to $359,000 for the first six months
of 1995, primarily as a result of the effects of the decrease in
the effective interest rate in connection with the Registrant's
debt restructuring with its primary lender in December 1993 which
was offset by increased borrowing in connection with the hotel's
refurbishment and higher interest rates during the first six months
of 1995. Depreciation expense increased in the first six months
of 1995 compared to 1994 as a result of commencing depreciation
on the capital improvements completed in late 1994.
Equity in Partnership Income - Golden Gateway Center (GGC) - In
October 1994, the GGC Partnership completed a redemption of the
Registrant's remaining 29.5% partnership interest.
Equity in Partnership Loss - Rincon Center Associates (RCA) - The
net loss for Rincon Center increased from $5,507,000 in the first
six months of 1994 to $7,738,000 in the first six months of 1995.
The increase in the loss is primarily the result of increasing
interest rates on the projects floating rate debt. The net loss
for RCA during the second quarter of 1995 and 1994 was $4,300,000
and $3,119,000, respectively. The Registrant's equity share of the
RCA loss amounted to $1,767,000 and $1,257,00 during the first six months
of 1995. The increase in the loss is primarily the result of increasing
interest rates on the projects floating rate debt. The net loss for RCA
during the second quarter of 1995 and 1994 was $4,300,000 and $3,119,999,
respectively. The Registrant's equity share of the RCA loss amounted to
$1,767,000 and $1,257,000 during the first six months of 1995 and 1994,
respectively. The Registrants equity share of the RCA loss amounted to
$982,000 and $712,000 in the second quarter of 1995 and 1994, respectively.
General and Administrative Expenses - General and administrative
expenses in the first six months of 1995 amounted to $658,000 compared
to $656,000 for the first six months of 1994. General and administrative
expenses for the second quarter of 1995 and 1994 was $305,000 and
$297,000, respectively.
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.
As a result of the redemption of the Registrant's GGC Partnership
interest in October 1994, a portion of the proceeds repaid all of
the debt collateralized by the GGC partnership interest.
Interest and Fee Expense for Debt Related to Equity Investment in
RCA - During the first six months of 1995 and 1994, the Registrant
incurred approximately $123,000 and $110,000, respectively,
in interest and fee expense related to the funding arrangement with
the other general partner on Rincon Center, as previously discussed.
During the second quarters of 1995 and 1994, the Registrant incurred
approximately $66,000 and $51,000, respectively, in interest and fee
expense relating to the RCA funding arrangement.
Interest Income - During the first six months 1995 and 1994
interest income was $15,000 and $159,000, respectively. Interest income
was $12,000 and $17,000 during the second quarter of 1995 and 1994,
respectively. A significant portion of the interest income in the
first six months of 1994 is attributable to a payment by RCA for a
portion of the interest outstanding on partnership advances to RCA.
Since December 1994, the Registrant has recorded interest received on
its advances to RCA as a reduction to equity investment in and
loans to RCA.
Other Income - During the first six months of 1994 other income
was $387,000, and $52,000 during the second quarter of 1994. In the
first six months off 1994 other income includes primarily a payment by
RCA to the Registrant for a portion of the fees due its general partners
for posting a letter-of-credit. Since December 1994, the Registrant
has recorded letter-of-credit fees received from RCA as a reduction
to equity investment in and loans to RCA.
Gain on Sale of Real Estate Asset - In June 1995, the Registrant
disposed of a parcel of land in Walnut Creek, California to an unrelated
third party. In connection with this property disposition, the
Registrant realized a gain of $177,000.
Extraordinary Write-off of Unamortized Loan Fees from Debt
Refinancings - In June 1995, the Registrant completed the refinancing
of the mortgage debt at Walnut Creek Executive Park. As a result, the
Registrant has written-off the unamortized portion of the loan fees
associated with the debt that was retired.
Income Tax Benefit (Provision) - A tax benefit is recorded in
connection with the net loss for the three and six months ended
June 30, 1995 in accordance with Statement of Financial
Accounting Standards No. 109. In the first six months of 1994,
the Registrant recorded a provision for income taxes of $10,000 which
primarily represents state franchise tax fees.
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, since 1992, assets or portions
thereof, were sold to provide further liquidity.
The Registrant has taken several aggressive actions to generate
and conserve cash, and continues to review and analyze additional
potential actions. At the same time, the Registrant is seeking to
retain value and identify future opportunities for investment. The
Registrant's liquidity was under significant strain throughout 1994
which continues to be the case in 1995. The Registrant has actively
pursued potential sales of certain real estate assets in the past,
and is continuing to do so in cases where a trasaction would generate
acceptable stockholder value and corporate liquidity.
It is the Registrant's intent to increase its liquidity through
debt refinancings and the sale of properties which do not fit within
its long term strategy. 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.
In June 1995, the Registrant completed a refinancing of the Walnut
Creek Executive Park which fixed $20,000,000 in mortgage debt, at a
7.85% annual interest rate. This refinancing extended the maturity date
of this debt from the fourth quarter of 1997 through July 2005.
In June 1995, the Registrant completed the sale of a parcel of
land in Walnut Creek, California which repaid $400,000 in mortgage debt,
as previously discussed.
The Registrant experienced more stabilized operating results in 1994,
and expects this trend to continue in 1995 since certain unprofitable
properties disposed of in 1992 and 1993 will no longer affect operating
results. In addition, the completion of certain leasing transactions
during the second and third quarters of 1994 has substantially reduced
the level of vacancy in the Registrant's portfolio.
ITEM 4. Submission of Matters to a Vote of Security Holders
The Annual Meeting of Shareholders of the Registrant was held on
May 9, 1995, and the Shareholders elected seven Directors. At the
Annual Meeting, 3,371,262 shares of a total of 3,892,596 shares
were represented; 3,314,647 shares voted in favor of all Nominees
for Director.
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: August 11, 1995 Roger D. Snell
Roger D. Snell
President and Chief Executive Officer
Date: August 11, 1995 Raymond V. Marino
Raymond V. Marino
Vice President and
Chief Financial Officer
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