<PAGE>
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 1995
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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
SECURITIES REGISTERED PURSUANT TO SECTION 12 (b) OF THE ACT:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
------------------- -------------------
Common Stock, $1.00 par value American Stock Exchange
per share
SECURITIES REGISTERED PURSUANT TO SECTION 12 (g) OF THE ACT: NONE
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K (Section229.405) of this chapter) is not contained herein,
and will not be contained, to the best of Registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K [X].
State the aggregate market value of the voting stock held by non-affiliates
of the Registrant as of March 15, 1996: Common Stock, Par Value $1.00--
$10,461,352.
Indicate the number of shares outstanding of each of the Registrant's
classes of common stock, as of March 15, 1996: Common Stock, Par Value $1.00
- --3,892,596 shares.
DOCUMENT INCORPORATED BY REFERENCE
Portions of the definitive Proxy Statement dated April 30, 1996, are
incorporated by reference into Part III.
<PAGE>
PART I
ITEM 1. BUSINESS
GENERAL
Pacific Gateway Properties, Inc. (the "Registrant") was incorporated under
the laws of the State of New York in January of 1984 and began its operations in
April of 1984 upon the transfer to it of certain assets formerly owned by Perini
Corporation and the distribution of shares of the Registrant's Common Stock to
the stockholders of Perini Corporation in May of 1984.
The Registrant holds interests in income producing real estate. As of
December 31, 1995 the Registrant's portfolio of operating properties consists of
economic interests in the following:
(i) Walnut Creek Executive Park, Walnut Creek, California--a 418,000
square foot office park consisting of twelve low-rise (one- to three-story)
office buildings --100% owned;
(ii) South Bay Office Tower, San Jose, California--a 164,000 square
foot, twelve-story office building--100% owned;
(iii) Radisson Suite Hotel, Tucson, Arizona--a 306 suite hotel--100%
owned;
(iv) North Tucson Business Center, Tucson, Arizona--a one-story,
91,000 square foot office/industrial building--100% owned;
(v) Village Commons Shopping Center, West Palm Beach, Florida--a
170,000 square foot shopping center--100% owned;
(vi) 1200 Weston Road, Weston (Fort Lauderdale), Florida--a
three-story, 15,000 square foot office building--100% owned;
(vii) 410 First Avenue, Needham, Massachusetts--a single-story
office/industrial building totaling 38,000 square feet located in a suburb
of Boston--100% owned; and
(viii) Rincon Center, San Francisco, California--a mixed-use (retail,
office, apartment) complex in downtown San Francisco. The two phase
project contains 78,000 square feet of retail space, 423,000 square feet of
office space, 320 apartment units and 720 parking spaces. The Registrant
owns 22.8% in general (non-managing) and limited partnership interests in
the partnership that owns Rincon Center.
MANAGEMENT OF PROPERTIES
The Radisson Suite Hotel has its own management organization in place which
is supervised by the Registrant. The Registrant manages the remaining operating
properties directly or through third party management companies. The Registrant
also provides leasing, construction and/or property management services to
Rincon Center and other third party owned properties.
PROPERTY OWNED IN PARTNERSHIP WITH OTHERS
A significant portion of the Registrant's portfolio consists of its general
(non-managing) and limited partnership interests in Rincon Center Associates, a
California Limited Partnership (RCA). RCA owns Rincon Center. Since the
Registrant is not the managing general partner of RCA, operating and other
decisions with respect to Rincon are generally controlled by the managing
general partner, an entity that is unrelated to the Registrant; therefore, the
Registrant has less flexibility with respect to such asset, than if it owned it
outright.
BUSINESS PLAN AND POLICIES
The Registrant's overall business plan has been to assemble a substantial
portfolio of income producing properties. The Registrant historically focused
its property acquisitions in four markets: Northern California, Arizona, Florida
and Massachusetts. The Registrant has invested in mixed-use projects, office
buildings, apartments, industrial buildings, a shopping center and a hotel. The
Registrant's long-term objectives continue to be maximizing net cash flow from
operations and achieving growth through appreciation of asset values. The
current strategic plan of the Registrant is to focus on real estate investments
on the West Coast with a specific emphasis on the San Francisco Bay Area. The
current investment emphasis will be in commercial properties which require
aggressive management and leasing in order to maximize their potential. This
strategy is influenced by the following factors: (1) the Registrant's current
property portfolio
2
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is concentrated on the West Coast; and (2) the Registrant believes that
geographic concentration will influence operational efficiencies, as well as new
property investment and third party property management service opportunities.
During 1995, the Registrant examined each asset in its portfolio, focusing
on each property's current cash flow, anticipated cash requirements, the
economics of its local marketplace, as well as the asset's position in that
market and the potential for sale, refinancing, and return on additional
investment. In conjunction with the above described process, the Registrant has
also determined it appropriate to offer for sale certain assets to reduce its
involvement in certain markets, create liquidity and advance the geographic and
property type concentration and efficiency of the Registrant's operations. In
1995, the Registrant sold a parcel of land in Walnut Creek, California. As of
December 31, 1995, the Registrant was in escrow to sell its hotel property in
Arizona, and in negotiations to sell its shopping center property in Florida, as
more fully described in the pages that follow. In 1994, the Registrant sold a
day care center building in Walnut Creek, California, and agreed to a redemption
of the Registrant's 29.5% general partnership interest in Golden Gateway Center.
The Registrant will continue to make use of borrowed money or leveraging,
as is customary with the types of properties it intends to own. The amount of
mortgage debt supported by each project depends on, among other factors, its
cash flow available to service such debt. In June 1995, the Registrant
completed the refinancing of $20 million of mortgage debt on Walnut Creek
Executive Park with the existing lender, and in December 1994, the Registrant
completed the refinancing of approximately $6.5 million of mortgage debt on
South Bay Office Tower with the existing lender. These refinancings are more
fully discussed in the pages that follow.
In addition, the Registrant is evaluating other possible alternatives to
increase stockholder value, including but not limited to a possible sale or
merger of the Registrant.
COMPETITION
Within its geographic areas of operation, the Registrant is subject to
competition from a variety of investors, including insurance companies, pension
funds, corporate and individual real estate developers, and investors with
similar investment objectives to those of the Registrant. Some of these
competitors have greater financial resources, larger staffs and longer operating
histories than the Registrant. As an owner of commercial real estate
properties, the Registrant competes with other owners of similar properties in
connection with their financing, sale, lease, or other disposition and use.
EMPLOYEES
As of December 31, 1995, the Registrant had 117 full-time and 5 part-time
employees, compared to 168 full-time and 28 part-time employees as of December
31, 1994.
FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS, SEASONALITY AND OTHER FACTORS
The Registrant is engaged in the business of owning and managing income
producing real estate. The requirement for a presentation about industry
segments is not applicable. The Registrant's business is not affected by
seasonal factors, except for its hotel property. All of the Registrant's
operations are located in the United States.
PROPERTY INSURANCE
The Registrant believes that all of the wholly owned properties and
properties owned in partnership with others are adequately covered by insurance.
The Registrant's Walnut Creek and San Jose properties, and Rincon Center Phase
Two, do not maintain earthquake insurance.
TENANTS
There are no individual tenants in any of the Registrant's wholly owned
properties that contribute 10% or more to consolidated revenues, except for
AirTouch Communications, Inc. (a tenant at Walnut Creek Executive Park), the
loss of which would have a material adverse affect on the Registrant taken as a
whole. Netcom On-Line Communications Services, Inc., a tenant at South Bay
Office Tower, occupies approximately 29% of that building, and does not
contribute 10% or more to the Registrant's consolidated revenues. Generally,
lease terms range from one to five years. Leases of approximately 84,000 square
feet of rental space, excluding Village Commons Shopping Center in Florida, or
approximately 12% of the leases in the Registrant's investment portfolio as of
December 31, 1995, will expire in 1996.
3
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ITEM 2. PROPERTIES
As of December 31, 1995, the Registrant had an economic interest in a total
of eight operating properties.
Information regarding encumbrances on the Registrant's properties is
incorporated herein by reference to Item 14, Schedule III, Real Estate and
Accumulated Depreciation as of December 31, 1995.
The following table sets forth detailed information regarding the
Registrant's properties which were owned as of December 31, 1995:
<TABLE>
<CAPTION>
PROPERTY GENERAL # OF UNITS AND/OR # OF TENANTS AND/OR OWNED % REGISTRANT
NAME DESCRIPTION LOCATION LEASABLE SQ. FT. OCCUPANCY % BY OWNERSHIP
- ---- ----------- -------- ---------------- ----------- -- ---------
<S> <C> <C> <C> <C> <C> <C>
Walnut Creek 11 two story wood Walnut Creek, 418,000 sq.ft. set on 27 59 tenants; Registrant 100%
Executive Park framed garden office California acres with parking for 87% occupancy
buildings, and one over 1,720 cars
three story
structural steel
frame office building
South Bay Twelve story office San Jose, 164,000 sq.ft. and 41 tenants; Registrant 100%
Office Tower building California two levels of 99% occupancy
subterranean parking
Radisson Suite Hotel operated under Tucson, Arizona 306 suites 1995 average Registrant 100%
Hotel a license agreement occupancy was 78%;
with Radisson Hotels average daily rate
International - 7 was $76.
connected mid-rise
buildings
North Tucson Single story office/ Tucson, Arizona 91,000 sq. ft. 2 tenants; Registrant 100%
Business Center industrial building 100% occupancy
</TABLE>
4
<PAGE>
ITEM 2. PROPERTIES, CONTINUED
<TABLE>
<CAPTION>
PROPERTY GENERAL # OF UNITS AND/OR # OF TENANTS AND/OR OWNED % REGISTRANT
NAME DESCRIPTION LOCATION LEASABLE SQ. FT. OCCUPANCY % BY OWNERSHIP
- ---- ----------- -------- ---------------- ------------------- -- -----------
<S> <C> <C> <C> <C> <C> <C>
Village Commons Community shopping West Palm Beach, 170,000 sq. ft. 52 tenants; Registrant 100%
Shopping Center center Florida 93% occupancy
1200 Weston Road 3 story office Fort Lauderdale, 15,000 sq. ft. 2 tenants; Registrant 100%
building Florida 100% occupancy
410 First Avenue Single tenant office/ Needham, 38,000 sq. ft. 1 Tenant Registrant 100%
industrial building Massachusetts 100% Leased (1)
Rincon Center Major mixed use San Francisco, 320 Apartments; Apartments-99% RCA 22.8%
project in the San California 78,000 sq. ft. of occup. 31 tenants;
Francisco Financial retail space; Retail Space - 86%
District 423,000 sq. ft. of occup. Office Space
office space; - 9 tenants; 100%
2 level garage with occupancy
parking for 720
automobiles
</TABLE>
(1) - A lease was signed in December 1995 with a tenant who will occupy 100% of
the space in this building beginning March 1, 1996.
5
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OTHER MATTERS RELATING TO PROPERTIES
VILLAGE COMMONS SHOPPING CENTER
In March 1996, the Registrant entered into a contract to sell the Village
Commons Shopping Center, located in West Palm Beach, Florida, to an unrelated
third party for $19,300,000. In connection with this property disposition, the
Registrant will realize a gain for financial reporting purposes of approximately
$10,972,000. The pre-tax net cash proceeds, after estimated repayment of
$15,225,000 of mortgage debt and other costs of the sale, will amount to
approximately $3,875,000.
The following summarizes the land, fixed assets, and other deferred costs
of the shopping center which are included in the Registrant's Consolidated
Balance Sheet as of December 31, 1995:
<TABLE>
<CAPTION>
<S> <C>
Land $6,105,000
Building 2,033,000
Furniture, fixtures and equipment 458,000
----------
Subtotal investment 8,596,000
Accumulated depreciation and amortization (696,000)
----------
Investment, net 7,900,000
Other deferred costs, net 273,000
----------
Total investment and deferred costs - net $8,173,000
----------
----------
</TABLE>
WALNUT CREEK EXECUTIVE PARK SALE OF PARCEL OF LAND
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.
WALNUT CREEK EXECUTIVE PARK REFINANCING
In June 1995, the Registrant completed the refinancing of $20 million of
debt related to Walnut Creek Executive Park. 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.
SOUTH BAY OFFICE TOWER REFINANCING
In December 1994, the Registrant completed the refinancing of South Bay
Office Tower with its existing lender for $6.5 million. The new loan bears
interest at 11% through December 1995 and 12% thereafter. The loan requires
fixed monthly payments of $68,000 with the balance due December 1997. This new
loan may be prepaid at any time without penalty and is non-recourse to the
Registrant. The Registrant is presently attempting to refinance this loan at a
lower interest rate.
RADISSON SUITE HOTEL REFURBISHMENT AND SALE
The hotel is operated by employees of a corporate entity owned by the
Registrant under a license agreement with Radisson Hotels International, a
part of The Carlson Hospitality Group, Inc. In December 1995, the Registrant
agreed to terms with an unrelated third party buyer to sell the hotel for
$21,300,000. Under the terms of the sale agreement the Registrant exercised
its option to extend the close of escrow until as late as December 1996. The
Registrant has the right to close the escrow within 90 days after delivering
a written notice to the buyers, during the extended close of escrow period.
During the extended close of escrow period, the Registrant will review
potential acquisitions of one or more properties in order to reinvest all or
a portion of the proceeds from the sale of the hotel. The Registrant
anticipates closing the sale in 1996 and realizing a gain of approximately
$5,968,000. The pre-tax net cash proceeds, after repayment of $13,750,000 of
mortgage debt (assuming completion of the refinancing of North Tucson
Business Center discussed on the pages that follow) and other costs of the
sale, will amount to approximately $6,584,000.
6
<PAGE>
The following summarizes the land, fixed assets, and other deferred costs
of the hotel which are included in the Registrant's Consolidated Balance Sheet
as of December 31, 1995:
<TABLE>
<CAPTION>
<S> <C>
Land $3,584,000
Building 12,645,000
Furniture, fixtures and equipment 6,181,000
-----------
Subtotal Investment 22,410,000
Accumulated depreciation and amortization (8,080,000)
-----------
Investment, net 14,330,000
Other deferred costs, net 36,000
-----------
Total investment & deferred costs, net $14,366,000
-----------
-----------
</TABLE>
NORTH TUCSON BUSINESS CENTER (NTBC) REFINANCING IN PROCESS
Presently, NTBC is included in a pool of collateral for a single mortgage
loan. The other properties in the collateral pool include the Registrant's
Radisson Hotel in Arizona and Weston Road office building in Florida. The
Registrant is presently attempting to refinance this property with a different
lender, so that the amount of debt allocated to the other two assets in the
collateral pool is reduced. If the Registrant is successful in completing a
refinancing of the NTBC, this will increase the Registrant's ability to complete
a tax deferred exchange on the sale of the Radisson Hotel, since the debt to
sales price ratio will be at a level that will increase the Registrant's ability
to obtain new financing in a possible exchange transaction involving the hotel.
MOUNTAIN BAY PLAZA (MBP) SETTLEMENT
In December 1993, the mortgage loan matured on MBP and the lender was not
willing to extend the loan. In March 1995, the Registrant and MBP's lender
signed a Settlement Agreement and Mutual Release (the "Agreement"). The
Agreement provides for a release of all claims and counterclaims by and between
the Registrant and MBP's lender thus allowing the lender to complete its
foreclosure on MBP. The Registrant recorded the effective foreclosure in 1994.
410 FIRST AVENUE PLEDGED AS COLLATERAL
In 1986, this property was pledged as collateral to secure a $6.25 million
letter-of-credit in favor of RCA's lender. In July 1993, RCA completed
refinancing on Phases One and Two and the letter-of-credit was reduced to $4.5
million, with $3.65 million allocated to Rincon Center and $850,000 allocated to
the Registrant's mortgage debt cross collateralized by three of its wholly owned
properties with the same lender.
ITEM 3. LEGAL PROCEEDINGS
The Registrant is involved in various other claims and lawsuits incidental
to its business. In the opinion of the Registrant, these other claims and
lawsuits in the aggregate will not have a material adverse impact on the
Registrant's financial condition.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
7
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
COMMON STOCK
On March 15, 1996, there were approximately 3,000 holders of record of
the Registrant's Common Stock. The Registrant's Common Stock is traded on the
American Stock Exchange under the symbol "PGP".
The table below sets forth, for the indicated periods, the high and low
prices per share of the Registrant's Common Stock as reported on the American
Stock Exchange Consolidated Reporting System.
<TABLE>
<CAPTION>
HIGH LOW
<S> <C> <C>
1996
First Quarter (through
March 15, 1996) $3 7/16 $2 5/8
1995
First Quarter 4 1/4 3 1/8
Second Quarter 4 3/16 3 1/8
Third Quarter 3 9/16 2 7/8
Fourth Quarter 2 15/16 2 7/16
1994
First Quarter 4 3 3/8
Second Quarter 3 7/8 3 1/16
Third Quarter 4 5/8 3 3/8
Fourth Quarter 4 1/4 2 7/8
</TABLE>
During the third quarter of 1990, the Registrant's Board of Directors
determined to suspend dividend payments until operating cash flows can again
support such payments. The Registrant has not paid dividends since the third
quarter of 1990 and will continue to periodically review its ability to
resume dividends as is practical. The Registrant has also agreed with its
primary lender to restrict the payment of dividends until that lender is
repaid in full, as more fully discussed in the Registrant's Consolidated
Financial Statements.
8
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ITEM 6. SELECTED FINANCIAL DATA. The selected financial data should be read
in conjunction with the Consolidated Financial Statements and related notes
in Item 14. The selected financial data is not covered by the reports of the
independent public accountants. (In thousands, except per share data)
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
- -----------------------------------------------------------------------------------------------------------------------------------
1995 1994 1993 1992 1991
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
FINANCIAL POSITION
Investment and hotel
properties, net $33,572 $58,359 $ 75,786 $ 79,470 $105,426
Properties held for sale 22,230 -- -- -- --
Equity investment
and loans to RCA -- 4,020 6,491 7,272 8,542
Deferred tax asset 6,831 6,845 -- -- --
Other assets 3,254 2,210 2,313 2,671 21,157
------- ------- -------- --------- --------
Total assets $65,887 $71,434 $ 84,590 $ 89,413 $135,125
------- ------- -------- --------- --------
------- ------- -------- --------- --------
Debt $61,778 $63,099 $ 98,916 $ 107,732 $146,023
------- ------- -------- --------- --------
------- ------- -------- --------- --------
Deferred tax liability $10,514 $12,209 $ -- $ -- $ 902
------- ------- -------- --------- --------
------- ------- -------- --------- --------
Excess of cash
distributions
received over
equity in
earnings
of Golden
Gateway Center $ -- $ -- $ 18,126 $ 19,839 $ 19,795
------- -------- -------- --------- --------
------- -------- -------- --------- --------
Stockholders' deficit $(9,186) $ (6,502) $(35,321) $ (41,795) $(38,964)
-------- ------- -------- --------- --------
-------- ------- -------- --------- --------
Stockholders' deficit
per share, primary $ (2.23) $ (1.58) $ (9.10) $ (10.77) $ (10.04)
-------- -------- --------- --------- --------
-------- -------- --------- --------- --------
Stockholders' deficit per share,
fully diluted $ (2.23) $ (1.55) $ (9.05) $ (10.77) $ (10.04)
-------- --------- --------- ---------- ---------
-------- --------- --------- ---------- ---------
</TABLE>
9
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA, (CONTINUED) - The selected financial data
should be read in conjunction with the Consolidated Financial Statements
and related notes in Item 14. The selected financial data is not covered by
the report of the independent public accountants. (In thousands, except per
share data)
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
- -----------------------------------------------------------------------------------------------------------------------------------
1995 1994 1993 1992 1991
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
INCOME RESULTS
Revenue from investment properties $ 12,200 $ 11,027 $ 14,193 $ 15,304 $ 19,304
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
Revenue from hotel property $ 7,009 $ 7,357 $ 7,837 $ 6,725 $ 6,447
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
Equity in partnership
loss, net $ (4,090) $ (1,298) $ (1,719) $ (2,749) $ (2,210)
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
Provision for write down to
estimated net realizable value $ (540) $ (1,000) $ (1,000) -- $ (2,538)
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
Gain on sales of real estate
assets $ 177 $ 664 $ 1,045 $ 2,807 $ 23,611
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
Gain (loss) on dissolution
of partnership interests $ -- $ 39,078 $ 3,602 $ (2,031) --
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
Extraordinary items $ (233) $ (325) $ 4,850 -- $ 2,967
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
Net income (loss) $ (2,729) $ 28,817 $ 4,583 $ (2,831) $ 10,897
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
Income (loss) per share, primary:
Income (loss) before extraordinary items $ (0.60) $ 7.10 $ (0.07) $ (0.73) $ 2.04
Extraordinary items (0.06) (0.08) 1.25 -- 0.77
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
Net income (loss), primary $ (0.66) $ 7.02 $ 1.18 $ (0.73) $ 2.81
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
Number of common shares and share
equivalents outstanding, primary 4,124 4,106 3,881 3,879 3,879
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
Income (loss) per share, fully diluted:
Income (loss) before extraordinary items $ (0.60) $ 6.96 $ (0.07) $ (0.73) $ 2.04
Extraordinary items (0.06) (0.08) 1.24 -- 77
-------- -------- -------- -------- ---------
-------- -------- -------- -------- ---------
Net income (loss), fully diluted $(0.66) $ 6.88 $ 1.17 $ (0.73) $ 2.81
-------- -------- -------- -------- ---------
-------- -------- -------- -------- ---------
Number of common shares and share
equivalents outstanding, fully
diluted 4,124 4,187 3,904 3,879 3,879
-------- -------- -------- -------- ---------
-------- -------- -------- -------- ---------
</TABLE>
10
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FINANCIAL CONDITION
CAPITAL IMPROVEMENTS, TENANT IMPROVEMENTS AND OTHER DEFERRED COSTS --
In 1995, there were additions to investment and hotel properties amounting to
approximately $2,768,000 for tenant improvements, capital improvements and other
deferred costs which includes leasing commissions and loan fees. The Registrant
anticipates that such costs will amount to approximately $1,900,000 in 1996.
FINANCING -- A total of approximately $23 million of debt was repaid
in 1995 as a result of a debt refinancing, the sale of a parcel of land and
scheduled debt amortization, as more fully discussed in the Registrant's
Consolidated Financial Statements. The Registrant completed one refinancing in
1995 related to its mortgage debt at Walnut Creek Executive Park in the amount
of $20 million.
At December 31, 1995, the face amount of the floating rate mortgage
debt totaled approximately $26.6 million, bearing interest at a weighted average
rate of 7.72%. The face amount of the fixed rate mortgage debt totaled
approximately $32.2 million bearing interest at a weighted average rate of
8.69%. The book value of the Registrant's debt differs from the face value as
more fully described in the Registrant's Consolidated Financial Statements. All
floating rate mortgage debt will be repaid upon the sale of the shopping center
in Florida and hotel in Arizona, as previously discussed.
NET INCOME (LOSS)
INVESTMENT PROPERTIES -- During 1995, the income from investment
properties was $747,000 compared to $385,000 during 1994. The increase in
income from investment properties for 1995 compared to 1994 is primarily
attributable to increased occupancy in the Registrant's portfolio. Rental
payments were received for the full year of 1995 for certain leases which were
signed in mid-1994 and commenced in the fourth quarter of 1994. In addition, in
1995, the Registrant received a property tax refund for a previous year of
approximately $120,000 related to Mountain Bay Plaza. Interest expense was
constant between 1994 and 1995. Depreciation and amortization expense increased
as a result of commencing depreciation on expenditures capitalized during 1994
and early 1995 relating to the Registrant's leasing activities and capital
improvement projects.
During 1994, the income from investment properties was $385,000
compared to a loss of $1,165,000 during 1993. Property dispositions in 1993 and
1994 account for approximately $3,343,000 of the net $3,166,000 reduction in
rental revenues and approximately $1,728,000 of the net $1,624,000 reduction in
operating expenses, respectively. For the remaining balance of investment
properties, there was an increase in rental revenue of approximately $177,000
and an increase in operating expenses of approximately $104,000 from 1993 to
1994. This increase in rental revenue in 1994 is primarily a result of rental
payments commencing in the fourth quarter for a portion of the new leases signed
in mid-1994. The increase in operating expenses is primarily attributable to
increases in certain operating expenses. Interest expense decreased from
$5,463,000 in 1993 to $3,356,000 in 1994 as a result of the Registrant's 1993
debt restructuring with its primary lender in December 1993 which was offset by
rising interest rates during 1994 on its floating rate mortgage debt.
HOTEL PROPERTY -- The hotel property income was $1,158,000 in 1995
compared to $827,000 in 1994. The increase in income in 1995 compared to 1994
was the result of an increase in the average daily rate and lower interest
expense. The reduction in hotel operating expenses is primarily the result of
the lease of the hotel's food and beverage operation to an unrelated third party
restaurant operator. Interest expense decreased from $779,000 to $491,000 in
1995, primarily as a result of the effects of 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 nine months of 1995. Depreciation expense
increased in 1995 compared to 1994 as a result of commencing depreciation on the
capital improvements completed in late 1994.
The hotel property income of $827,000 in 1994 compared with income of
$833,000 in 1993. As a result of lower corporate demand and the impact of the
hotel's refurbishment during the third and fourth quarters of 1994, occupancy
decreased from 1993 to 1994. However, the hotel was able to achieve an increase
in average daily rates from 1993 to 1994 which partially offset the impact from
the decline in occupancy. Even though interest rates increased in 1994,
interest expense on the hotel's debt remained flat primarily as a result of the
effects of the Registrant's debt restructuring with its primary lender in
December 1993.
EQUITY IN PARTNERSHIP (LOSSES) -- Golden Gateway Center (GGC) -- In
October 1994, the GGC partnership completed a redemption of the Registrant's
partnership interest for $21 million. The equity in GGC's income reflects only
the Registrant's share of income, expenses and distributions for the first nine
months of 1994.
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Rincon Center Associates (RCA) -- The Registrant holds a 22.8% general (non-
managing) and limited partnership interest in RCA, the partnership which holds
title to Rincon Center. Since June of 1993, the Registrant has been able to
satisfy its cash obligations to RCA because of an agreement with the managing
general partner of RCA to advance such funds on behalf of the Registrant.
While all funds advanced on behalf of the Registrant are non-recourse, the
Registrant pays a related fee to the extent of the amounts advanced multiplied
by the percentage applicable to the year in which such funds are advanced as set
forth hereafter:
Calendar Applicable
Year Percentage
---- ----------
1993 6.0%
1994 6.0%
1995 10.0%
1996 17.5%
1997 and thereafter 25.0%
Interest accrues on the unpaid portion of both the principal amount
advanced and related fees at the Bank of America prime rate plus 2%. Amounts
advanced under this funding arrangement, plus related fees and accrued interest,
are only required to be repaid from future cash distributed by RCA to the
Registrant, if any.
During 1995, 1994 and 1993, the Registrant incurred approximately
$340,000, $199,000 and $161,000, respectively, in interest and fee expense
related to the funding arrangement. The unpaid portion of advances, fees and
accrued interest as of December 31, 1995 and 1994 was $2,940,000 and $1,950,000,
respectively, and is recorded as debt on the Registrant's Consolidated Balance
Sheet.
While the funding arrangement has permitted the Registrant to maintain
its 22.8% interest in RCA, it should be noted that this percentage of ownership
can not be maintained indefinitely unless the Registrant is able to pay to the
managing general partner all of the advances, fees and accrued interest which it
owes. The Registrant currently has no prospects or plans to secure or repay any
advances as of December 31, 1995, and, accordingly, during 1995, Registrant
recorded a provision of $540,000 for the write-down of its equity investment
in and loans to RCA to zero.
Operations of RCA incurred a net loss of $17,924,000 in 1995,
$10,441,000 in 1994 and $11,946,000 in 1993. The Registrant's share of such net
losses was $4,090,000 in 1995, $2,383,000 in 1994 and $2,726,000 in 1993. The
increase in the loss is primarily the result of increased operating and interest
expense. In 1994, RCA recorded income from a property tax reduction which
reduced the amount of the 1994 loss.
The Registrant's projected tax basis of its partnership investment in
RCA is approximately a negative $17,939,000, as of December 31, 1995, since the
Registrant's share of tax losses exceeds its investment in RCA. The
Registrant's negative tax basis in RCA indicates that the Registrant may face a
major taxable gain if and when its interest in RCA is ever sold.
In February 1996, the General Services Administration ("GSA") advised
RCA that the Circuit Court of Appeals for the Ninth Circuit, the major tenant in
Phase Two of Rincon Center, was not going to renew its lease which expires on
December 31, 1996. This lease covers approximately 179,000 square feet of
office space. It is doubtful if another tenant can be secured to occupy most or
all of this space at a rental rate comparable to that currently being paid by
GSA which amounted to approximately $5,723,000 in 1995.
The managing general partner of RCA has advised the Registrant that it
will not, at this time, provide the funds either for itself or for the
Registrant to pay for substantial tenant improvements which may be necessary to
secure a new lessee for the GSA space. Moreover, banks, which have been
contacted to lend the funds for major tenant improvements, have not exhibited
any interest. If such financing for tenant improvements cannot be secured and
the space remains unoccupied or is leased at a rental rate substantially less
than what is being paid by the GSA, there will be a materially adverse financial
impact on the operations of Rincon Center.
GENERAL AND ADMINISTRATIVE EXPENSES -- General and administrative
expenses increased to $1,476,000 in 1995 from $1,446,000 in 1994. The decrease
in general and administrative expenses in 1994 from the 1993 amount of
$1,593,000 is attributable to a combination of cost reduction measures including
a reduction in personnel costs, other professional services, director's fees and
bonuses to former executives.
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INTEREST EXPENSE ON DEBT SECURED BY EQUITY INVESTMENT IN GGC AND OTHER
CORPORATE DEBT -- In 1994, corporate interest expense related to that portion of
the Registrant's debt with its primary lender that was 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
and, therefore, no corporate interest is recorded for 1995. Corporate interest
increased from $570,000 in 1993 to $754,000 in 1994. This increase was a result
of the Registrant's debt restructuring with its primary lender which increased
the amount of debt cross-collateralized by the GGC partnership interest and
higher interest rates during 1994.
INTEREST AND FEE EXPENSE FOR DEBT RELATED TO EQUITY INVESTMENT IN RCA --
During 1995 and 1994, the Registrant incurred approximately $340,000 and
$199,000, respectively, in interest and fee expense related to the funding
arrangement with the managing general partner of Rincon Center which is more
fully discussed in the Registrant's Consolidated Financial Statements. The
respective increases are due to the increase in outstanding debt related thereto
and an increase in interest rates.
INTEREST INCOME -- During 1995 and 1994, interest income was $16,000 and
$138,000, respectively. Interest income in 1995 consists primarily of interest
earned on cash held in restricted accounts. Interest income in 1994 consists
primarily of $82,000 for interest earned on the redemption of the Registrant's
GGC interest between the September 30, 1994, closing date, and the date when the
Registrant received the funding from the redemption in October 1994. Interest
income in 1993 of $18,000 primarily consisted of interest earned on cash
reserves.
OTHER INCOME (EXPENSE) -- In 1995 other expense relates to depreciation
on corporate fixed assets. In 1994 and 1993, other income primarily consisted
of income from the sale of vacant land in Colorado and Florida, net of
depreciation on corporate fixed assets.
GAIN ON SALE OF PARTNERSHIP INTERESTS -- In October 1994, the GGC
partnership completed a redemption of the Registrant's remaining 29.5%
partnership interest in GGC resulting in a gain of approximately $39 million as
more fully discussed in the Registrant's Consolidated Financial Statements. In
February 1993, the Registrant disposed of a 3% partnership interest in GGC which
resulted in a gain of approximately $3.6 million.
GAIN ON SALE OF REAL ESTATE ASSETS, NET -- In June 1995, the Registrant
disposed of a parcel of land in Walnut Creek, California, to an unrelated third
party and realized a gain of $177,000. In July 1994, the Registrant completed
the sale of a separately parceled building at the Walnut Creek Executive Park to
an unrelated third party and realized a gain of $664,000. In 1993, the
Registrant recorded a loss of approximately $204,000 on the sale of two Florida
buildings, and a non-cash gain of approximately $1.2 million on the disposition
of one building in Arizona.
PROVISION FOR WRITE-DOWN TO ESTIMATED NET REALIZABLE VALUE -- In 1995,
the Registrant recorded a provision of approximately $540,000 for the write-down
to zero of its investment in RCA, as previously discussed. In 1994, the
Registrant recorded a provision of $1 million for the write down of its
investment in the 410 First Avenue building as a result of the sole tenant of
the property not renewing its lease and a substantial reduction in market rental
rates. In 1993, the Registrant recorded a provision for net realizable value of
$1,000,000 in connection with the funding of a $1 million letter-of-credit to
the lender on the Mountain Bay Plaza property, Mountain View, California, as a
result of the lender instituting foreclosure proceedings.
INCOME TAX (PROVISION) BENEFIT -- The Registrant recorded a tax benefit
in 1995, primarily as a result of the income tax effect of the book loss
incurred during the year. In 1994, the Registrant used a portion of its net
operating loss carryover to reduce its 1994 taxable income, which resulted in
the Registrant recording a net $7.4 million provision for income taxes as more
fully discussed in the Registrant's Consolidated Financial Statements. The
Registrant used a portion of its net operating loss carryover to eliminate 1993
taxable income, except for certain state franchise taxes.
EXTRAORDINARY GAIN (LOSS) FROM EXTINGUISHMENT OF DEBT -- In June 1995,
the Registrant completed the refinancing of $20 million of debt related to
Walnut Creek Executive Park. As a result of this refinancing, the Registrant
has written off the unamortized loan fees of $233,000 associated with the debt
that was retired. In December 1994, the Registrant completed a refinancing with
the existing lender at South Bay Office Tower (SBOT), San Jose, California,
which resulted in additional funding and a modification of terms. As a result,
the Registrant had written-off the unamortized portion of the 1993 loan fees of
$325,000 and capitalized the 1994 loan fees. In December 1993, the Registrant
completed a discounted pay-off and refinancing of the SBOT resulting in a gain
from the extinguishment of debt of $4,850,000.
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LIQUIDITY AND CAPITAL RESOURCES
REGULATION AND SUPERVISION
Many jurisdictions have adopted laws and regulations relating to the
ownership of real estate. Compliance with these requirements from time to time
may require capital expenditures by the Registrant (for example, expenditures
necessary in order to comply with the Americans with Disabilities Act or changes
in local building or other codes). In addition, the Registrant may from time to
time have to expend capital for environmental control facilities. While the
ownership of real estate may entail environmental risks and liabilities to the
owner, the Registrant's management is sensitive to environmental issues and is
not currently aware of and does not expect any material effects on current or
future capital expenditures, earnings or competitive position resulting from
compliance with present federal, state or local environmental control
provisions.
DISCUSSION OF KNOWN TRENDS, EVENTS AND UNCERTAINTIES
The adverse economic climate for commercial real estate which has
persisted over the last several years has begun to show signs that rental rates
and property values have stabilized and in selected markets have actually
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,
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 as discussed below and continues to review and analyze alternative
actions. At the same time, the Registrant is seeking to retain value and
identify future opportunities for investment. At December 31, 1995, the
Registrant had $176,000 of unrestricted cash, investments and hotel properties
with a net book value of $55.8 million, total fixed and variable mortgage debt
with a book value of $58.8 million and a stockholders's deficit of $9.2 million.
Accordingly, given the Registrant's desire to increase its liquidity, the
Registrant has actively pursued the sale of selected real estate assets in the
past, has restructured and refinanced its mortgage debt, and has entered into an
agreement with the managing general partner of RCA to limit the Registrant's
cash obligations to RCA. The Registrant continues to evaluate the alternatives
to improve its liquidity through debt refinancing and the sale of properties
which do not fit within its long term strategy. Funds raised in the preceding
fashion would be used for such things as tenant improvements and other capital
requirements, certain mandatory debt reductions, and possible new investments.
At December 31, 1995, the Registrant has the following debt outstanding:
- Fixed rate, nonrecourse mortgage notes with a face value of
$32.2 million and a year end weighted average stated interest
rate of 8.69% per annum.
- Variable rate mortgage notes with a face value of $26.6 million
and a year end weighted average interest rate of 7.72% per
annum. The variable rate notes provide for certain guarantees
and recourse provisions applicable to the Registrant.
- Nonrecourse loans from the managing general partner in RCA in
the principal amount of $2.9 million, interest at Bank of
America prime rate plus 2% (10.50% at December 31, 1995);
principal and interest only required to be repaid from future
cash distributions to the Registrant by RCA, if any.
Scheduled principal maturities on the above described debt over the next
twelve months ending December 31, 1996 amount to approximately $1.7 million,
excluding $15.2 million secured by Village Commons Shopping Center in Florida
which are expected to be repaid from the sales proceeds upon the close of escrow
which is anticipated to occur in April 1996. As discussed in Note 3 of the
accompanying Consolidated Financial Statements, the Registrant is also obligated
to fund a reserve for tenant improvements in
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connection with its mortgage loan on Walnut Creek Executive Park. Scheduled
funding under such agreement over the twelve months ending December 31, 1996
amounts to approximately $112,000.
Additionally, the Registrant is contingently liable under a bank letter-
of-credit posted on behalf of RCA and other mortgage debt in the amount of $4.5
million. The letter-of-credit is undrawn at December 31, 1995, and matures on
June 23, 1996. The Registrant's Massachusetts property is pledged as
collateral for the letter-of-credit.
The Registrant's minority, non-managing partnership interest in RCA
represents significant potential financial exposure. This exposure includes and
may not be limited to the potential tax liability associated with the
Registrant's negative tax basis, the joint and several guarantees provided by
the Registrant to the mortgage lender on Rincon Center Phase Two and the master
lessor on Rincon Center Phase One, and the potential tax liability that would
exist from the cancellation of debt in connection with a possible debt
restructuring.
As of December 31, 1995, the Registrant's $58.8 million of mortgage debt
had scheduled annual principal maturities as follows (in thousands):
1996 $ 16,954
1997 23,361
1998 471
1999 510
2000 551
Thereafter 16,991
------
$ 58,838
--------
--------
After considering the mortgage debt principal pay downs from the
anticipated sales of the Village Commons Shopping Center and Radisson Suites
Hotel, and the anticipated refinancing of North Tucson Business Center
(negotiations for this proposed refinancing have not been concluded and there
can be no assurance that this refinancing can be completed), of $15.225 million,
$13.7 million, and $4.0 million, respectively, the Registrant's remaining 1996
and 1997 mortgage debt principal maturities will amount to $1.7 million and
$5.611 million, respectively. Additionally, the two sales are expected to
provide the Registrant with additional unrestricted cash funds of $10.4 million
(prior to the reinvestment, if any, of the hotel sales proceeds).
The Registrant is in escrow to sell the Radisson Suites Hotel in Tucson,
Arizona. Under the terms of the sale agreement, the Registrant exercised its
option to extend the close of escrow until December 1996. The Registrant has
the right to close the escrow within 90 days after delivering a written notice
to the buyers, during the extended close of escrow period. During the extended
close of escrow period, the Registrant will be reviewing potential acquisitions
of one or more properties in order to reinvest all or a portion of the proceeds
from the sale of the hotel. If the sale doesn't close until December 1996, the
Registrant will realize a gain of approximately $5.9 million. The pre-tax net
cash proceeds, after repayment of $13.7 million of mortgage debt (assuming
refinancing of North Tucson Business Center for $4.0 million) comprising
principal payments of $7.7 million variable and $6.0 million fixed rate mortgage
debt with the Registrant's primary lender and other costs of the sale, will
amount to approximately $6.5 million.
The Registrant has entered into a contract to sell the Village Commons
Shopping Center, located in West Palm Beach, Florida, to an unrelated third
party. In connection with this property disposition, the Registrant will
realize a gain for financial reporting purposes of approximately $10.9 million.
The pre-tax net cash proceeds, after repayment of $15.2 million of mortgage debt
(comprising variable rate mortgage debt which had a principal amount outstanding
of $15.2 million at December 31, 1995) and other costs of the sale, will amount
to approximately $3.8 million which will be used for future working capital
requirements and to increase cash reserves. The Registrant can make no
assurances that this sale will be completed.
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 pre-
tax cash proceeds, after repayment of $400,000 of mortgage debt and other costs
of the sale, amounted to approximately $106,000. The Registrant will continue
to actively pursue potential sales of certain real estate assets in cases where
a transaction would generate acceptable stockholder value and corporate
liquidity.
In June 1995, the Registrant completed the refinancing of $20 million of
debt related to Walnut Creek Executive Park. The new loan carries a 7.85% annual
interest rate until maturity with fixed monthly amortization payments of
approximately $162,000. This refinancing extended the maturity date of this
debt from the fourth quarter of 1997 to July 2005. 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.
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In 1994, MBP was transferred to its lender in satisfaction of
approximately $18.9 million of non-recourse debt, as previously discussed. In
1994, the Registrant agreed to the redemption of its remaining 29.5% partnership
interest in GGC partnership and sold one building in Walnut Creek, California.
In December 1993, the Registrant completed the refinancing of SBOT, San
Jose, California, with a new lender for $5.5 million. As a result, the
Registrant recorded an extraordinary gain from extinguishment of debt of $4.85
million. In December 1994, the Registrant refinanced the SBOT with the same
lender for $6.5 million and a modification of loan terms resulting in an
extraordinary loss from the write-off of the unamortized loan fees, as more
fully described above. The net proceeds from the refinancing will be used to
fund tenant improvements, leasing commissions and capital improvements. The
Registrant is presently attempting to refinance this loan at a lower interest
rate.
Except as described above, at December 31, 1995, the Registrant has no
contractual commitments for any material capital expenditures over the next
twelve months or beyond that are not expected to be funded from the $241,000 in
cash restricted for capital improvements 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, in part, from the
restricted cash described above, cash flow generated by operating activities and
funds generated from future debt refinancings or property sales, if any.
As previously discussed, the Registrant has entered into a purchase
agreement with an unrelated third party to sell its Radisson Suite Hotel in
Tucson, Arizona. Due to the hotel's low tax basis, the Registrant is evaluating
whether or not to complete a tax deferred exchange. If the Registrant does not
complete a tax deferred exchange, there will be excess cash proceeds after
payment of taxes, debt and cost of the sale which will be used for future
capital improvements, leasing costs and possible acquisitions. In addition, the
Registrant has loan applications in process to refinance its San Jose office
building and the industrial building in Tucson which, if accomplished, will
provide excess debt proceeds to the Registrant, and reduce and fix the mortgage
interest rate at these properties, respectively. The excess debt proceeds will
be used to provide reserves for future capital improvements and leasing costs
anticipated throughout 1996. The Registrant can make no assurances that the
sale of the hotel or refinancings will be completed.
The face amount of debt outstanding with the Registrant's primary lender
as of December 31, 1995, was $17.3 million and is cross-collateralized by the
Registrant's hotel property, an industrial building in Tucson, Arizona, and an
office building in Weston, Florida. Under the terms of the loan agreement, the
Registrant is scheduled to make mandatory principal payments of $250,000 on
January 1, April 1, July 1, and October 1. However, the agreement provides that
the Registrant can make the payment as late as March 31, June 30, September 30,
and December 31, without an "Event of Default", if, during the existing
calendar quarter and prior three calendar quarters, the Registrant has made
payments, under the terms of the loan, equal to at least $1 million. Under the
terms of this provision, a mandatory principal payment of $250,000, due on
October 1, 1995, was made on January 15, 1996, and the Registrant received a
waiver of default from the lender. Also, under the terms of this provision, a
mandatory principal payment of $250,000 was due on January 1, 1996, made in
March 1996, did not constitute an event of default.
In December 1993, the Registrant completed a restructuring of $49.3
million of existing debt consisting of its non-revolving line-of-credit, letter-
of-credit, unsecured bonds, and mortgages with its primary lender on its Walnut
Creek Executive Park, North Tucson Business Center, Weston Building, and
Radisson Suite Hotel. In connection with the restructuring, the Registrant at
that time issued to the primary lender warrants to acquire up to two million
shares of the Registrant's common stock as an inducement to complete the
restructuring. The exercise price for the warrants is $2.875 per share.
Warrants to acquire one million shares are immediately exercisable. In
addition, the primary lender is entitled to amortization in the form of minimum
quarterly fixed payments plus a percentage of remaining cash flow. There is
also a restriction on the ability of the Registrant to pay dividends, and the
Registrant is required to pay the primary lender a portion of any proceeds from
the refinancing or sale of collateralized property or any new capital raised.
The Registrant paid its primary lender $18.5 million of the $21 million
in proceeds from the redemption of the Registrant's GGC partnership interest in
October 1994, which resulted in the cancellation of 350,000 of the warrants,
issued in December 1993, on January 31, 1995. As a result of the refinancing of
the Walnut Creek Executive Park ("WCEP") mortgage in June 1995, discussed above,
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 allowed the 650,000
warrants to remain outstanding until the balance of the November 1994
construction loan was repaid in full in exchange for the primary lender
receiving lower release prices on the June 1995 WCEP refinancing and the sale of
the Walnut Creek parcel of land. During the third quarter of 1995, the
remaining outstanding balance on the construction loan was repaid in full; the
650,000 warrants were then canceled as of September 30, 1995.
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The Registrant recognizes that the issuance of the remaining 1,000,000
warrants, when and if exercised, may result in significant dilution to the
Registrant's shareholders. If the remaining 1,000,000 warrants are exercised it
would provide $2,875,000 of proceeds; however, there is no assurance that the
warrants will be exercised.
The Registrant experienced more stabilized operating results in 1995,
and, except for RCA, expects this trend to continue since certain unprofitable
properties disposed of in 1992 and 1993 will no longer affect operating results.
In addition, the completion of certain leasing transactions during the second
and third quarters of 1994 has substantially reduced the level of vacancy in the
Registrant's portfolio; however, the Registrant is continuing aggressively to
pursue new leases on currently available space and renew existing leases as they
expire.
IMPACT OF INFLATION
The Registrant's management believes that inflation has not had any
appreciable negative impact on the Registrant's operations because a substantial
number of the Registrant's commercial leases include provisions requiring
increases in rental payments based upon increases in various consumer price
indices as well as the pass-through to tenants of specified operating expense
increases.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Reports of Independent Public Accountants, Consolidated Financial
Statements, Supplementary Schedules and Financial Statements of Rincon Center
Associates are set forth on the pages that follow in this Report and are hereby
incorporated herein.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. EXECUTIVE OFFICERS OF THE REGISTRANT
Set forth below is certain information concerning persons who are
executive officers of the Registrant.
Raymond V. Marino (Age 37). Mr. Marino had been Vice President and
Chief Financial Officer of the Registrant since August 1992, and became a
Director, President and Chief Executive Officer in January 1996. Previously, he
was with Hunting Gate Investments, a private British real estate investment and
management company, as Vice President of Finance and Controller. Mr. Marino has
a Bachelor of Science degree in Accounting from Santa Clara University and a
Masters degree in Taxation from Golden Gate University. Mr. Marino maintains an
active license as a California Certified Public Accountant, and is a member of
the American Institute of CPA's, California Society of CPA's, and National
Association of Real Estate Investment Trusts.
Christopher M. Watson (Age 37). Mr. Watson had been Vice President of
the Registrant since September 1992, and became Executive Vice President in
January 1996. His responsibilities include the management of personnel in the
property management, marketing, leasing and construction operations of the
Registrant, and marketing of third party property management services.
Previously, he was Vice President for Coldwell Banker Commercial Real Estate
Services Inc., as a licensed real estate agent representing both property owners
and investors in commercial real estate leasing and acquisitions. Mr. Watson
has a Bachelor's degree from the University of California at Berkeley.
Andrew T. Gorayeb (Age 32). Mr. Gorayeb had been Director of Finance of
the Registrant since November 1994, and became Vice President of Finance in
January 1996. His responsibilities include financings, dispositions and
acquisitions. Previously, Mr. Gorayeb was Managing Director with General
Electric Capital, Commercial Real Estate Financings and Services. Mr. Gorayeb
has Bachelor of Arts degrees in Political Science and Economics from Bates
College.
Gary W. Furney (Age 44). Mr. Furney had been Assistant Controller of
the Registrant since February 1995 and became Vice President and Controller in
January 1996. His responsibilities include the management of all accounting
personnel and accounting functions of the Registrant. Previously, he was Vice
President of Finance and Administration for Maxim Property Management Company, a
real estate property management company. Prior to that he was the Controller
for Landsing Pacific Fund, a publicly traded Real Estate Investment Trust. Mr.
Furney has a Bachelor of Business Administration degree from Baylor University
and a Masters degree in Finance from Golden Gate University. Mr. Furney is a
member of the American Institute of CPA's and the California Society of CPA's.
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Each executive officer holds office until the first meeting of
directors following the annual meeting of stockholders and until his successor
is duly chosen and qualified.
Additional information called for by Part III is hereby incorporated by
reference from the information set forth under the headings "Election of
Directors", "Ownership of Common Stock by Directors and Officers", "Certain
Other Beneficial Holders", "Executive Compensation" and "Certain Transactions"
in the Registrant's definitive proxy statement for the Annual Meeting of
Stockholders to be held June 27, 1996, such definitive proxy statement to be
filed with the Securities and Exchange Commission pursuant to Regulation 14A
within 120 days after the end of the fiscal year covered by this Annual Report
on Form 10-K.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a)1. The following financial statements and supplementary financial
information are filed as part of this report:
FINANCIAL STATEMENTS OF THE REGISTRANT PAGES
- -------------------------------------- -----
Consolidated Balance Sheet as of December 31, 1995 and 1994 22
Consolidated Statement of Income (Loss) for the three 23
years ended December 31, 1995, 1994 and 1993
Consolidated Statement of Stockholders' 24
Deficit for the three years ended December, 1995, 1994 and 1993
Consolidated Statement of Cash Flows for the three 25
years ended December 31, 1995, 1994 and 1993
Notes to Consolidated Financial Statements 26-37
Report of Independent Public Accountants 38
(a)2. The following financial statement schedule is filed as part
of this report:
Schedule III -- Real Estate and Accumulated Depreciation
as of December 31, 1995 39-40
All other schedules are omitted because of the absence of the
conditions under which they are required or because the required information is
included in the Consolidated Financial Statements or in the Notes thereto.
(a)3. Exhibits
Subsidiaries of the Registrant 41
(b) During the quarter ended December 31, 1995, the Registrant
made no filings on Form 8-K.
(c) The Form 10-Q for the quarterly period ended June 30, 1995,
was amended to include a sentence regarding the extension of
the expiration date of the $4.5 million letter-of-credit
posted in favor of Rincon Center from June 23, 1995 to
December 23, 1995. In addition, a typographical error in
Note 4 to the Registrant's Consolidated Financial Statements
was corrected which only appeared in the Securities and
Exchange Commission's electronically filed copy.
(d) The Form 8-K dated October 28, 1994, was amended on October
26, 1995, to include certain pro forma financial information
as required by Item 7(b) of Form 8-K.
(e) The following financial statements are filed as part of the
Form 10-K report with the Securities and Exchange Commission.
18
<PAGE>
FINANCIAL STATEMENTS OF RINCON CENTER ASSOCIATES PAGE #
- ------------------------------------------------ ------
Report of Independent Public Accountants 43
Balance Sheets--December 31, 1995 and 1994 44
Statements of Operations for the years ended 45
December 31, 1995, 1994 and 1993
Statements of Changes in Partner's Deficit for the 46
years ended December 31, 1995, 1994 and 1993
Statements of Cash Flows for the years ended 47
December 31, 1995, 1994 and 1993
Notes to Financial Statements 48 - 55
Report of Independent Auditors on Schedule 56
Schedule III - Real Estate and Accumulated Depreciation
as of December 31, 1995 57
19
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
PACIFIC GATEWAY PROPERTIES, INC.
(Registrant)
By: Raymond V. Marino
-------------------------
Raymond V. Marino
President and Chief Executive Officer
Dated: March 21, 1996
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
- --------- ----- ----
Raymond V. Marino President , Chief Executive Officer and March 21, 1996
- -----------------
Raymond V. Marino Director
Gary W. Furney Vice President and Controller March 21, 1996
- --------------
Gary W. Furney (Principal Accounting Officer)
H. Todd Cobey, Jr. Director March 21, 1996
- ------------------
H. Todd Cobey, Jr.
Lawrence B. Helzel Director March 21, 1996
- ------------------
Lawrence B. Helzel
Marshall A. Jacobs Director March 21, 1996
- ------------------
Marshall A. Jacobs
David E. Post Director March 21, 1996
- ------------
David E. Post
Martin S. Roher Director March 21, 1996
- ---------------
Martin S. Roher
John V. Winfield Director March 21, 1996
- ----------------
John V. Winfield
20
<PAGE>
PACIFIC GATEWAY PROPERTIES, INC.
CONSOLIDATED FINANCIAL STATEMENTS
As of December 31, 1995 and 1994
and for the year ended
December 31, 1995, 1994 and 1993
21
<PAGE>
PACIFIC GATEWAY PROPERTIES, INC.
CONSOLIDATED BALANCE SHEET
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
---------------------------------
1995 1994
---- ----
<S> <C> <C>
ASSETS
Cash and short-term investments $ 176 $ 359
Cash restricted for capital improvements 241 597
Accounts receivable 577 785
Prepaid taxes 459 --
Other current assets 7 42
Investment and hotel properties:
Land 5,481 15,230
Buildings 31,847 46,539
Furniture, fixtures and equipment 8,350 14,731
--------- --------
Subtotal investment and hotel properties 45,678 76,500
Less-accumulated depreciation
and provision for write-down to net realizable value (12,106) (19,807)
--------- --------
Investment and hotel properties, net 33,572 56,693
--------- --------
Properties held for sale, net of accumulated depreciation of $8,776
at December 31, 1995 .. 22,230 --
Equity investment in and loans to RCA, net -- 4,020
Deferred tax asset 6,831 6,845
Note receivable 225 229
Capitalized loan costs, net of accumulated amortization
of $1,210 and $992 at December 31, 1995 and 1994, respectively 816 813
Capitalized lease commissions, net of accumulated
amortization of $1,521 and $1,275 at December 31, 1995
and 1994, respectively 753 853
Other assets, net -- 198
--------- --------
Total assets $65,887 $ 71,434
--------- --------
--------- --------
LIABILITIES AND STOCKHOLDERS' DEFICIT
Accounts payable $ 1,293 $ 1,132
Accrued payroll, property and sales taxes 513 328
Prepaid rent 133 210
Accrued interest on debt 298 459
Tenant security deposits 417 414
Other current liabilities 127 85
Debt related to corporate, investment and hotel properties 58,838 61,149
Other debt related to equity investment in RCA 2,940 1,950
Deferred tax liability 10,514 12,209
--------- --------
Total liabilities 75,073 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)
Accumulated deficit (2,828) (99)
Treasury stock, at cost--118,554 common shares at
December 31, 1995 and 131,186 common shares at
December 31, 1994 (2,037) (2,082)
Warrants for common stock 1,890 1,890
--------- --------
Total stockholders' deficit (9,186) (6,502)
-------- --------
Total liabilities and stockholders' deficit $ 65,887 $ 71,434
--------- --------
--------- --------
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements
22
<PAGE>
PACIFIC GATEWAY PROPERTIES, INC.
CONSOLIDATED STATEMENT OF INCOME/LOSS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
For the Year Ended December 31,
---------------------------------
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
INVESTMENT PROPERTIES:
Rental revenues $12,200 $11,027 $14,193
Operating expenses (5,517) (5,201) (6,825)
Interest expense (3,355) (3,356) (5,463)
Depreciation and amortization (2,581) (2,085) (3,070)
--------- -------- --------
Investment properties income (loss) 747 385 (1,165)
--------- -------- --------
HOTEL PROPERTY:
Revenues 7,009 7,357 7,837
Operating expenses (4,697) (5,367) (5,877)
Interest expense (491) (779) (744)
Depreciation and amortization (663) (384) (383)
--------- -------- --------
Hotel income 1,158 827 833
--------- -------- --------
EQUITY IN PARTNERSHIP LOSSES:
Golden Gateway Center (GGC) -- 1,085 1,007
Rincon Center Associates (RCA) (4,090) (2,383) (2,726)
--------- -------- --------
Equity in partnership losses (4,090) (1,298) (1,719)
--------- -------- --------
General and administrative expenses (1,476) (1,446) (1,593)
Interest expense on debt secured by
equity investment in GGC and
other corporate debt -- (754) (570)
Interest and fee expense for debt related to equity
investment in RCA (340) (199) (161)
Interest income 16 138 18
Other income (expense) (31) 122 447
--------- -------- --------
Loss before partnership and property transactions,
reserves, income taxes and extraordinary items (4,016) (2,225) (3,910)
Gain on dissolution of partnership interests -- 39,078 3,602
Gain on sale of real estate assets, net 177 664 1,045
Provision for write-down to estimated net realizable value (540) (1,000) (1,000)
--------- -------- --------
Income (loss) before income taxes and extraordinary items (4,379) 36,517 (263)
Income tax (provision) benefit 1,883 (7,375) (4)
--------- -------- --------
Income (loss) before extraordinary items (2,496) 29,142 (267)
Extraordinary gain (loss) from extinguishment of debt (233) (325) 4,850
--------- -------- --------
Net income (loss) $ (2,729) $ 28,817 $ 4,583
--------- -------- --------
--------- -------- --------
Income (loss) per share, primary:
Income (loss) before extraordinary items $ (0.60) $ 7.10 $ (0.07)
Extraordinary items (0.06) (0.08) 1.25
--------- -------- --------
Net income (loss) $ (0.66) $ 7.02 $ 1.18
--------- -------- --------
--------- -------- --------
Income (loss) per share, fully diluted:
Income (loss) before extraordinary items $ (0.60) $ 6.96 $ (0.07)
Extraordinary items (0.06) (0.08) 1.24
--------- -------- --------
Net income (loss) $ (0.66) $ 6.88 $ 1.17
--------- -------- --------
--------- -------- --------
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements
23
<PAGE>
PACIFIC GATEWAY PROPERTIES, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' DEFICIT
FOR THE THREE YEARS ENDED DECEMBER 31, 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
RETAINED WARRANTS
PAID-IN EARNINGS/ FOR
COMMON CAPITAL ACCUMULATED TREASURY
STOCK (DEFICIT) (DEFICIT) STOCK STOCK TOTAL
------- --------- --------- -------- ------ --------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1992 $4,010 $(10,223) $(33,499) $(2,082) -- $(41,794)
Net income -- -- 4,583 -- -- 4,583
Issuance of warrants for common stock -- -- -- -- 1,890 1,890
------- --------- -------- -------- ------ --------
Balance at December 31, 1993 4,010 (10,223) (28,916) (2,082) 1,890 (35,321)
Net income -- -- 28,817 -- -- 28,817
Issuance of common stock from
exercise of stock options 1 1 -- -- -- 2
------- --------- -------- -------- ------ --------
Balance at December 31, 1994 4,011 (10,222) (99) (2,082) 1,890 (6,502)
Net Loss (2,729) (2,729)
Issuance of Treasury Stock 45 45
------- --------- -------- -------- ------ --------
Balance at December 31, 1995 $4,011 $(10,222) $(2,828) $(2,037) $1,890 $(9,186)
------- --------- -------- -------- ------ --------
------- --------- -------- -------- ------ --------
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements
24
<PAGE>
PACIFIC GATEWAY PROPERTIES, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
-------------------------------
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Cash flow from operating activities:
Net income (loss) $(2,729) $28,817 $4,583
Non-cash revenues and expenses
included in income:
Depreciation and amortization 3,275 2,529 3,530
Equity in partnership losses 4,090 1,298 1,719
Provision for write-down to
estimated net realizable value 540 1,000 1,000
Other non-cash charges relating
to investment partnerships -- -- (187)
Gain on sale of real estate
assets, net (177) (664) (1,045)
Gain on dissolution of
partnership interests -- (39,078) (3,602)
Extraordinary items 233 325 (4,850)
Changes in assets and liabilities:
Accounts receivable, prepaid taxes and
other current assets (212) 370 (137)
Other assets 198 (56) (107)
Deferred tax benefit, net (1,681) 5,364 --
Accounts payable and other
current liabilities 151 70 (596)
Other liabilities 3 (231) (171)
-------- -------- -------
CASH FLOW GENERATED BY (USED IN)
OPERATING ACTIVITIES 3,691 (256) 137
-------- -------- -------
Cash flow from investing activities:
Additions to investment and hotel
properties (2,768) (5,528) (1,135)
Proceeds from sale of properties 510 1,419 895
Proceeds from dissolution sale of
partnership interest, net -- 20,968 1,781
Contributions to RCA (1,035) (511) (1,698)
Distributions from RCA 424 600 --
Distributions from GGC -- 929 1,120
-------- -------- -------
NET CASH GENERATED BY (USED IN)
INVESTING ACTIVITIES (2,869) 17,877 963
-------- -------- -------
Cash flow from financing activities:
Borrowings under property and
hotel debt 20,986 8,750 5,500
Borrowings in connection with
equity investment, net 990 129 1,760
Payments on debt (22,897) (25,930) (6,130)
Net decrease in line-of-credit
borrowings -- -- (1,500)
Payment of loan costs and fees in
connection
with equity investment (85) (359) (730)
Mortgages satisfied in connection with
property dispositions (400) -- (767)
(Increase) decrease in cash restricted
for capital improvements 356 (597) --
Issuance of treasury stock 45 -- --
Proceeds from exercise of stock options -- 2 --
-------- -------- -------
NET CASH USED IN FINANCING ACTIVITIES (1,005) (18,005) (1,867)
-------- -------- -------
Decrease in cash and short term investments (183) (384) (767)
Balance at beginning of year 359 743 1,510
-------- -------- -------
Balance at end of year $ 176 $ 359 $ 743
-------- -------- -------
-------- -------- -------
SUPPLEMENTARY DISCLOSURES:
Cash paid for interest $ 4,486 $ 4,842 $6,567
-------- -------- -------
-------- -------- -------
Return of property and other
assets to lenders in
satisfaction of debt $ -- $18,766 $ --
-------- -------- -------
-------- -------- -------
Cash paid for taxes $ 483 $ 2,007 $ 4
-------- -------- -------
-------- -------- -------
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements
25
<PAGE>
PACIFIC GATEWAY PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE YEARS ENDED DECEMBER 31, 1995
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
Pacific Gateway Properties, Inc., (the "Company") is a New York
corporation formed in 1984 for the purpose of investing and managing income
producing real estate.
PRINCIPLES OF CONSOLIDATION
The Company's Consolidated Financial Statements include the accounts of
the Company and all owned subsidiaries and partnerships. Significant
intercompany accounts and transactions have been eliminated in consolidation.
Partnerships in which the Company has less than a 50% interest and has limited
or no management influence, are accounted for using the equity method.
REVENUE RECOGNITION
The Company's minimum rental income from leases is recognized on a
straight-line basis over the term of the occupancy in accordance with the
provisions of the leases.
CASH AND SHORT-TERM INVESTMENTS
The Company's policy is to invest cash in excess of operating
requirements in income producing investments. Cash and short-term investments
include cash and money market accounts, all of which have original maturities of
three months or less.
CASH-RESTRICTED FOR CAPITAL IMPROVEMENTS
As a result of the refinancing of $20 million of debt related to Walnut
Creek Executive Park in June 1995, the Company is required 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 months 25 through 68
of the loan. These funds are included as cash restricted for capital
improvements on the Company's Consolidated Balance Sheet. In addition, the
Company had cash restricted for capital improvements in connection with the
proceeds from the refinancing of South Bay Office Tower which are to be used for
future tenant improvements, capital improvements and leasing commissions as of
December 31, 1995 and 1994.
INVESTMENT AND HOTEL PROPERTIES AND PROPERTIES HELD FOR SALE
Land, buildings and improvements are recorded at cost. Depreciation on
investment and hotel properties is provided using the straight-line method over
estimated useful lives ranging from 28 to 40 years. At December 31, 1995, the
Company had classified the Radisson Suite Hotel and Village Commons Shopping
Center properties as held for sale. Both of these properties are under
contracts for sale that the Company anticipates closing in 1996.
In March 1995, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standard No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long Lived Assets to be Disposed Of"
(SFAS 121). SFAS 121 requires that long-lived assets be reviewed for impairment
whenever events or changes in circumstances indicate that the carrying amount of
an asset may not be recoverable. An impairment loss is recognized when expected
undiscounted cash flows are less than the carrying value of the asset.
Measurement of impairment is based upon the fair value of the asset. The
Company plans to adopt SFAS 121 in 1996 and believes that the adoption will not
have a material impact upon its financial position and results of operations,
except that, in accordance with SFAS 121, the Company will cease providing for
depreciation on the properties held for sale. In 1995, such depreciation for
assets to be disposed of amounted to approximately $844,000.
EQUITY INVESTMENT IN AND LOAN(S) TO RINCON CENTER ASSOCIATES
The equity investment in and loans to Rincon Center Associates ("RCA"),
a California Limited Partnership is comprised of the Company's 22.8% general
(non-managing) and limited partnership interest in RCA (accounted for by the
equity method) and loans made by or on behalf of the Company to RCA by the
managing partner (see Note 2).
26
<PAGE>
INCOME TAXES
Effective January 1, 1993, the Company adopted Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes" (SFAS 109). Under
SFAS 109, deferred taxes are computed based on the difference between the
financial statement and income tax basis of assets and liabilities using the
enacted marginal tax rate. As permitted under the provisions of SFAS 109, the
Company elected not to restate prior years.
GAINS FROM REAL ESTATE ASSETS AND PARTNERSHIP INTEREST SOLD
Gain (loss) on sales of real estate assets and partnership interests
are included in the Company's Consolidated Statement of Income (Loss) and
consists of the following (in thousands):
<TABLE>
<CAPTION>
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Boca II $ -- $ -- $ (196)
Longwood -- -- (8)
Fairmount Square -- -- 1,249
Walnut Creek Day Care Building -- 664 --
Walnut Creek Parcel of Land 177 -- --
------ ------- ------
Subtotal of Real Estate Assets Sold 177 664 1,045
Southwest Villages -- -- (5)
Golden Gateway Center -- 39,078 3,607
------ ------- ------
Total $ 177 $39,742 $4,647
------ ------- ------
------ ------- ------
</TABLE>
PER SHARE DATA
Per share data is based on the weighted average number of the Company's
common shares and common share equivalents. Outstanding warrants and stock
options enter into the common shares outstanding using the Treasury Stock
Method. The number of common shares and common share equivalents used in the
earnings per share calculations are as follows:
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Primary 4,124,082 4,105,808 3,881,024
--------- --------- ---------
--------- --------- ---------
Fully diluted 4,124,082 4,186,515 3,904,371
--------- --------- ---------
--------- --------- ---------
</TABLE>
RISKS AND UNCERTAINTIES
The preparation of Consolidated Financial Statements in conformity with
generally accepted accounting principles requires the Company's management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the Consolidated Financial Statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
The Company's ability to (i) meet its debt obligations, (ii) provide
dividends either from operations, or the ultimate disposition of the Company's
properties or (iii) continue as a going concern may be impacted by changes in
interest rates, property values, geographic economic conditions, or the entry of
other competitors to the market. The accompanying consolidated financial
statements do not provide for any adjustments with regard to these
uncertainties.
RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform with the
current year presentation.
27
<PAGE>
2. REAL ESTATE PARTNERSHIP INVESTMENTS
OPERATING PARTNERSHIPS
RINCON CENTER ASSOCIATES PARTNERSHIP(RCA)--SAN FRANCISCO, CALIFORNIA
The Company owns general (non-managing) and limited partnership
interests in RCA totaling approximately 22.8% and, subject to the funding
agreement entered into with RCA's managing general partner discussed below, is
responsible for 20% of cash requirements in excess of available financing. The
Company's investment in RCA includes $1,035,000, $511,000 and $1,698,000
advanced either directly or on behalf of the Company during 1995, 1994 and 1993,
respectively, to fund development, operating costs and debt repayments. The
Company's minority, non-managing partnership interest in RCA represents
significant potential financial exposure. This exposure includes and may not be
limited to the potential tax liability associated with the Company's negative
tax basis, the joint and several guarantees provided by the Company to the
mortgage lender on Rincon Center Phase Two and the master lessor on Rincon
Center Phase One, and the potential tax liability that would exist from the
cancellation of debt in connection with a possible debt restructuring.
RCA sold Rincon Center Phase One to Chrysler MacNally Corporation
(Chrysler) in June 1988; subsequently, RCA leased the property back under a
master lease which is treated as an operating lease for financial reporting
purposes. In July 1993, Chrysler completed a refinancing of Rincon Center Phase
One. The maturity date of this debt is July 1, 1998. Payments under the master
lease agreement may be adjusted to reflect adjustments in the rate of interest
payable by Chrysler on the Rincon Center Phase One debt. The master lease also
permits Chrysler to put the property back to RCA at stipulated prices beginning
January 1998 if long-term financing meeting certain conditions is not obtained.
RCA intends to try to obtain financing meeting the conditions of the master
lease prior to January 1998. In September 1993, RCA completed a refinancing of
Rincon Center Phase Two with its existing lender. The Company has also posted a
$3.65 million letter-of-credit in favor of the bank involved in a portion of the
RCA financing. This letter-of-credit is secured by the Registrant's 410 First
Avenue property in Needham, Massachusetts. The letter-of-credit expires in June
1996.
The Company earned a fee from RCA for posting the letter-of-credit and
earns a preferred return at the Bank of America prime rate plus 2% on its
advances to RCA. In 1995, the Company received approximately $373,000 in
letter-of-credit fees and $46,000 of interest on its advances. In 1994, the
Company received approximately $453,000 in letter-of-credit fees and $147,000 of
interest on its advances. Both the letter-of-credit fees and interest on
advances were recorded as reductions to equity investment in and loans to RCA on
the Company's Consolidated Balance Sheet. In 1993, no letter-of-credit fees or
preferred return payments on its advances were accrued or received by the
Company.
The Company entered into an agreement in June 1993 with the managing
general partner of RCA. This agreement provides the Company with the
flexibility to borrow funds from the managing general partner to limit its
future cash obligations to RCA. Under this funding arrangement, all amounts
advanced by the managing general partner on behalf of the Company, related fees
and accrued interest are non-recourse to the Company. The Company shall pay a
related fee to the extent of amounts advanced multiplied by the percentage
applicable to the year in which such funds are advanced as set forth hereafter:
<TABLE>
<CAPTION>
Calendar Applicable
Year Percentage
---- ----------
<S> <C>
1993 6.0%
1994 6.0%
1995 10.0%
1996 17.5%
1997 and thereafter 25.0%
</TABLE>
Interest accrues on the unpaid portion of both the principal amount
advanced by the managing general partner on behalf of the Company and related
fees at the Bank of America at prime rate plus 2%. Amounts advanced by the
managing general partner on behalf of the Company under this funding
arrangement, plus related fees and accrued interest, are only required to be
repaid from future cash distributed by RCA to the Company, if any. The Company
currently has no prospects or plans to secure or repay any advances as of
December 31, 1995, and accordingly, during 1995, the Company recorded a
provision of $540,000 for the write-down of its equity investment in and loans
to RCA to zero.
28
<PAGE>
This agreement does not reduce the level of the Company's general and
limited partnership interests in RCA. As of December 31, 1995, approximately
$3,206,000 had been advanced under this agreement since July 1993. In addition,
fees and accrued interest relating to the amount advanced through December 31,
1995, of approximately $340,000 and $199,000, were expensed by the Company in
1995 and 1994, respectively. The unpaid portion of advances, fees and accrued
interest as of December 31, 1995 and 1994, was $2,940,000 and $1,950,000,
respectively, and is recorded as debt related to equity investment in RCA on the
Company's Consolidated Balance Sheet.
Summary financial statement data for RCA is as follows (in thousands):
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Investment properties, net $ 113,502 $ 116,613 $119,876
Other assets 22,623 25,312 26,730
-------- -------- -------
$ 136,125 $ 141,925 $146,606
-------- -------- -------
-------- -------- -------
Debt $ 58,720 $ 60,895 $ 62,370
Amounts due to partners 144,035 129,150 119,389
Other liabilities 12,253 12,839 15,365
Partner's deficit (78,883) (60,959) (50,518)
-------- --------- -------
$ 136,125 $ 141,925 $146,606
-------- -------- -------
-------- -------- -------
Company's share of cash
distributions from
RCA, net $ 424 $ 600 $ --
-------- --------- --------
-------- --------- --------
Company's share of cash
contributions to RCA $ (1,035) $ (511) $ (1,698)
------- -------- --------
------- -------- --------
Net loss from operations:
Revenue $ 20,165 $ 20,285 $ 19,708
-------- -------- -------
Expenses:
Operating and lease expenses 19,572 17,244 16,979
Financing 14,402 11,354 10,635
Depreciation and amortization 4,115 4,019 4,040
Property tax reduction -- (1,891) --
-------- -------- --------
38,089 30,726 31,654
-------- -------- --------
Net loss $ (17,924) $(10,441) $(11,946)
-------- -------- -------
-------- -------- -------
Company's share of net loss
of RCA $ (4,090) $ (2,383) $(2,726)
--------- --------- --------
--------- --------- --------
</TABLE>
GOLDEN GATEWAY CENTER PARTNERSHIP (GGC)--SAN FRANCISCO, CALIFORNIA
The Company owned a 32.5% partnership interest in GGC in 1992 which
owned the Golden Gateway Center apartment complex. In February 1993, the
Company sold 3% of its partnership interest to the other partners in GGC for
cash proceeds of $1,781,000, resulting in a gain of $3,607,000. As of
December 31, 1993, the Company owned a 29.5% partnership interest in GGC. In
October 1994, GGC redeemed the Company's remaining 29.5% partnership interest
for $21 million, resulting in a gain of $39 million. The Company accounted
for its investment in GGC on the equity basis since 1991. The gain on the
redemption of the Company's 29.5% partnership interest is calculated as
follows (in thousands):
<TABLE>
<CAPTION>
<S> <C>
Cash proceeds $21,000
Add: Excess of cash distributions received
over equity in earnings to date of GGC,
and reversal of accrued liabilities & reserves 18,128
Less: cost of sale (50)
--------
Gain on redemption $39,078
--------
--------
</TABLE>
29
<PAGE>
Summary Financial data for GGC is as follows (in thousands):
<TABLE>
<CAPTION>
FOR THE NINE
MONTHS ENDED
SEPTEMBER 30, 1994 1993
------------------ ----
<S> <C> <C>
Company's share of cash distributions from GGC $ 929 $ 1,120
------ ------
------ ------
Income from operations:
Revenues $15,118 $19,296
------ ------
Expenses:
Operating 5,113 7,543
Interest 5,556 7,280
Depreciation and amortization 771 1,104
------ ------
11,440 15,927
------ ------
Net income 3,678 $ 3,369
------ ------
------ ------
Company's share of net income of GGC $ 1,085 $ 1,007
------ ------
------ ------
</TABLE>
3. DEBT
As of December 31, 1995 and 1994, the Company had the following debt
outstanding (in thousands):
<TABLE>
<CAPTION>
1995 1994
---- ----
<S> <C> <C>
Debt related to corporate, investment and hotel properties:
Corporate debt and mortgages on real estate from
primary lender (in accordance with Generally
Accepted Accounting Principles the recorded amount
of this debt differs from the face amount of the debt
as more fully discussed on the pages that follow).
The interest rate and security on this debt are also
described on the pages that follow. $17,353 $29,446
Other mortgages on real estate:
South Bay Office Tower, interest payable monthly,
fixed at 11% in 1995, and 12% thereafter until
maturity, due December 22, 1997. 6,394 6,500
Walnut Creek Executive Park, interest fixed
at 8.5%, retired in June 1995. -- 8,609
Walnut Creek Executive Park, interest
fixed at 7.85%, due July 1, 2005 19,841 --
Village Commons Shopping Center,
interest variable at LIBOR plus 1.25%,
(7.16% at December 31, 1995), due
September 30, 1996. 15,250 15,355
Construction loan:
Walnut Creek Executive Park, interest
variable at prime plus 2.75% or LIBOR plus
4.5%, retired in June 1995. -- 1,239
------- -------
$58,838 $61,149
------- -------
------- -------
Debt related to equity investment in RCA,
interest variable at prime plus 2%,
(10.5% at December 31, 1995). $ 2,940 $ 1,950
------- -------
------- -------
</TABLE>
30
<PAGE>
CORPORATE DEBT AND MORTGAGES ON REAL ESTATE FROM PRIMARY LENDER
In December 1993, the Company completed a restructuring of its non-
revolving line-of-credit, letter-of-credit, unsecured bonds, and certain
mortgages with its primary lender. The new loan is in the form of a Tranche A
and Tranche B Note. This restructuring was completed in order to stabilize the
Company's relationship with its primary lender. The Company has also posted an
$850,000 letter of credit in favor of the primary lender in connection with this
restructuring.
The Tranche A Note (Note A), with a face amount of approximately $11.4
million as of December 31, 1995 is recourse debt to the Company and its
subsidiaries, and is cross collateralized with several properties. Note A has a
variable interest rate at LIBOR plus 2.5% (8.44% at December 31, 1995) payable
monthly. The LIBOR rate may be fixed up to one year for minimum contract
amounts of $1 million. A principal payment of $250,000 is due each quarter.
The Company made the mandatory $250,000 quarterly principal payments during the
first three quarters of 1995 but did not make the mandatory $250,000 principal
payment due on October 1, 1995. On January 15, 1996, the Company made the
October 1995 mandatory principal payment and received a waiver of default from
the lender. During the term of this loan, the Company has remained current on
all interest payments.
In addition to the quarterly installments, Note A also requires
principal payments of $5 million by January 31, 1995 and $15 million by March
31, 1996. In 1994, the Company satisfied the $5 million required principal
payment and $13.5 million of the required $15 million with the $18.5 million
paid to the primary lender in October 1994 from a portion of the proceeds from
the redemption of its partnership interest in GGC. The Company satisfied the
remaining $1.5 million installment from the $11.3 million paid to the lender in
June 1995 from a portion of the proceeds from the refinancing of the loan on
Walnut Creek Executive Park more fully discussed below. Note A matures November
1, 1997.
The Tranche B Note (Note B) with a face amount of approximately $5.9
million as of December 31, 1995 (including accrued interest) is non-recourse
debt cross collateralized with the same partnership interest and properties as
Note A. Note B has a fixed interest rate of 9% that accrues and defers until
maturity at November 1, 1997.
In connection with the 1993 restructuring, the Company issued to the
primary lender warrants to acquire up to two million shares of the Company's
common stock. The exercise price for the warrants is $2.875 per share.
Warrants to acquire one million shares were immediately exercisable. Warrants
to acquire 350,000 shares were canceled on January 31, 1995, in connection with
a repayment of $18.5 million to the primary lender in October 1994. As a result
of the refinancing of the Walnut Creek Executive Park ("WCEP") mortgage,
discussed below, the Company 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
Company entered into a letter agreement with its primary lender that allowed the
650,000 warrants to remain outstanding, until repayment of the balance of the
November 1994 construction loan was repaid in, full in exchange for the primary
lender receiving lower release prices on the June 1995 WCEP refinancing and the
sale of the Walnut Creek parcel of land. During the third quarter of 1995, the
remaining outstanding balance on the construction loan was repaid in full and
the 650,000 warrants were canceled as of September 30, 1995.
Warrants that are exercisable expire on the later of November 1, 1997,
or two years after the amounts outstanding under both Note A and Note B are
repaid in full. The warrants have customary anti-dilution protection that
addresses stock splits, stock dividends, recombinations and reclassifications,
and certain other issuances of additional common stock. The Company also has a
right of first offer to acquire the shares of common stock or warrants prior to
any transfer thereof.
The Company has valued the one million warrants that were exercisable
at December 31, 1993, at $1.89 million which is recorded as equity in the
Company's Consolidated Balance Sheet.
Statement of Financial Accounting Standards No. 15 requires the Company
to account for future interest resulting from this restructuring using an
imputed interest rate versus the stated rates on the Notes A and B. In
addition, the primary lender's cancellation of debt of $4 million at the time of
the restructuring was not recognized for financial reporting purposes. The
imputed interest rates as of December 31, 1995 and December 31, 1994, were
approximately 4.4% and 5.4%, respectively. 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 $479,000 for 1995 and $450,000 for
1994. The face amounts of debt and accrued interest with the primary lender as
of December 31, 1995 and December 31, 1994, are approximately $17.3 million and
$28 million, respectively.
31
<PAGE>
OTHER MORTGAGES ON REAL ESTATE
WALNUT CREEK EXECUTIVE PARK REFINANCING
In June 1995, the Company 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 and interest 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 Company. In addition,
the new loan requires the Company 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 months 25 through 68 of the loan. The
portion of the reserve funded and unspent through December 31, 1995 amounted to
$56,000 and is included as cash restricted for capital improvements on the
Company's Consolidated Balance Sheet. As a result of this refinancing, the
Company 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.
SOUTH BAY OFFICE TOWER (SBOT) REFINANCING
In December 1994, the Company completed the refinancing of SBOT with
its existing lender for $6.5 million. The new loan carries an 11% annual
interest rate in 1995 and 12% thereafter until maturity, with fixed monthly
amortization payments of $68,000, and is due December 22, 1997. This new loan
may be prepaid at any time without penalty and is non-recourse to the Company.
A portion of the loan proceeds are subject to the terms and conditions of a
Disbursement Agreement with the lender to fund tenant improvements, leasing
commissions and capital improvements. These funds are classified on the
Company's Consolidated Balance Sheet as cash restricted for capital
improvements. As a result of this refinancing, the Company has written off the
unamortized portion of the 1993 loan fees of $325,000 which is recorded as an
extraordinary item in 1994. The Company capitalized approximately $218,000 of
loan fees in connection with the 1994 refinancing.
MOUNTAIN BAY PLAZA (MBP) SETTLEMENT
The Company and MBP's lender entered into a Settlement Agreement and
Mutual Release. As a result, the Company eliminated the asset and debt from its
Consolidated Balance Sheet as of December 31, 1994.
CONSTRUCTION LOAN
In November 1994, the Company obtained a $4 million construction loan
from its primary lender. The funds from this loan were used exclusively to fund
tenant improvement costs and leasing commissions. The loan had a variable
interest rate at either the prime rate plus 2.75% or LIBOR plus 4.5%, payable
monthly. Fixed monthly principal payments of $257,634 were paid each month
commencing December 15, 1994 through March 15, 1995, at which time payments were
based on a formula calculated from cash flows as defined in the loan agreement.
The Company repaid this loan in 1995 from a combination of monthly principal
payments, cash flow payments and the sale of the parcel of land in Walnut Creek.
LOAN MATURITIES
The maturities of debt outstanding as of December 31, 1995, and
required minimum principal payments in each of the next five years are
summarized as follows (in thousands):
<TABLE>
<CAPTION>
Debt Related Debt
To Corporate, Related to
Investment Equity
and Hotel Investment
Properties in RCA
------------ ----------
<S> <C> <C>
1996 $16,954 $ --
1997 23,361 --
1998 471 --
1999 510 --
2000 551 --
Thereafter 16,991 2,940
------- ------
$58,838 $2,940
------- ------
------- ------
</TABLE>
32
<PAGE>
Approximately $15,225,000 of the 1996 maturities are expected to be repaid
with the proceeds from the sale of the Florida shopping center which is
anticipated to close in April 1996. Approximately $17.3 million of the above
scheduled 1997 maturities are expected to be repaid with the proceeds from the
sale of the Arizona hotel which is scheduled to close prior to December 1996.
The Company can make no assurances that these sales will be completed.
4. OTHER RELATED PARTY ITEMS
One of the Company's seven directors as of December 31, 1995 was a Director
of Perini Corporation as of December 31, 1994 and 1993. A wholly owned
subsidiary of the Perini Corporation is the managing general partner of RCA.
5. INCOME TAXES
Effective January 1, 1993, the Company provides for income taxes under the
liability method in accordance with Statement of Financial Accounting Standards
No. 109, "Accounting for Income Taxes" (SFAS 109). For years 1992 and prior,
the Company accounted for income taxes in accordance with Accounting Principles
Board Opinion No. 11. There was no financial statement impact from the adoption
of SFAS 109.
The deferred income tax (provision) benefit represents the tax effect of
temporary differences between income (loss) determined for financial reporting
and for income tax purposes. The Company has a tax net operating loss carryover
for Federal income tax purposes of approximately $11.7 million, which will
expire between 2005 and 2010. The Company has an investment tax credit carryover
totaling approximately $1.5 million which will expire between 2000 and 2003.
The Company also has an alternative minimum tax credit carryover for Federal
income tax purposes of approximately $730,000 which can be carried forward
indefinitely.
The components of the deferred tax assets and deferred tax liabilities are
as follows at December 31, 1995 (in thousands):
<TABLE>
<CAPTION>
FEDERAL STATE TOTAL
------- ----- -----
<S> <C> <C> <C>
Deferred tax assets:
Cancellation of debt $ 200 $ 50 $ 250
Net operating loss carryover 3,461 281 3,742
Tax credits carryover 2,202 -- 2,202
State deferred tax 637 -- 637
------- ------- --------
$6,500 $ 331 $ 6,831
------- ------- --------
------- ------- --------
Deferred tax liabilities:
Excess tax depreciation $(2,082) $ (536) $ (2,618)
Prepaid Rent ( 1) -- ( 1)
Excess partnership losses from RCA (6,279) (1,616) (7,895)
------- ------- --------
$(8,362) $(2,152) $(10,514)
------- ------- --------
------- ------- --------
</TABLE>
The table below reconciles the difference between the statutory Federal
income tax rate and the effective rate in the Company's Consolidated Statement
of Income (Loss).
<TABLE>
<CAPTION>
PERCENTAGES
-----------
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Statutory Federal income tax rate (34)% 35% 34%
State income tax (7) 6
--
Net operating losses not currently benefited -- -- --
-- -- --
(41) 41 (34)
Change in valuation reserve -- (21) 34
-- -- --
Effective tax rate provision (benefit) (41)% 20% --%
----- ---- ----
----- ---- ----
</TABLE>
33
<PAGE>
The components of the (provision) benefit for income taxes were as follows
(in thousands):
<TABLE>
<CAPTION>
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Federal - current $ -- $ (675) $ --
Federal - deferred 1,608 (3,203) --
State - current -- (1,279) (4)
State - deferred 275 (2,218) --
------ -------- ------
$1,883 $(7,375) $ (4)
------ -------- -------
------ -------- -------
</TABLE>
6. LESSOR ARRANGEMENTS
As of December 31, 1995, approximately 671,500 of a total of approximately
725,200 square feet or 92.6% of the Company's (100% owned) commercial space was
leased, excluding the Village Commons Shopping Center. The terms of the leases
generally require tenants to pay base rent plus their proportionate share of
certain operating expenses or expense increases. Minimum rental amounts due to
the Company pursuant to these operating leases through expiration are as follows
(in thousands):
<TABLE>
<S> <C>
1996 $8,041
1997 7,161
1998 6,249
1999 4,987
2000 2,226
Thereafter 5,044
--------
$33,708
--------
--------
</TABLE>
7. STOCK AND EMPLOYEE BENEFIT PLANS
RESTRICTED STOCK PLAN
Pursuant to the Company's restricted stock plan, 50,000 shares of the
Company's common stock were reserved for issuance to key employees at a price of
$1.00 per share. From 1984 to 1988, 48,567 shares were issued to key employees
and the Company discontinued this plan in 1993.
INCENTIVE STOCK OPTION PLAN
Under the Company's incentive stock option plan, up to 200,000 shares of
the Company's common stock are reserved for issuance. This plan provides for
options to be granted at fair market value on the date of grant and for the
options to become exercisable over a period of ten years. The options shall
have a term not exceeding ten years.
As of December 31, 1995, a total of 182,850 options were outstanding and
under the terms of the plan no further shares were available for grant. Of the
outstanding options, 100,000 and 20,500 are fully vested and exerciseable at
$3.625 and $3.688 per share, respectively. An additional 35,000 outstanding
options are exercisable in equal cumulative installments over five years
beginning in 1993 at prices ranging from $2.968 to $3.125 per share. There are
5,000 outstanding options which are exercisable in equal cumulative installments
over five years beginning in 1994 at $2.344 per share. The remaining 22,350
outstanding options are exercisable in equal cumulative installments over five
years beginning in 1995 at prices ranging from $3.563 to $4.56 per share.
In October 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standard (SFAS) No. 123, "Accounting for Stock Based
Compensation" (SFAS 123), which establishes financial accounting and reporting
standards for stock based employee compensation plans. SFAS 123 becomes
effective for the Company in its 1996 fiscal year. This statement encourages a
"fair value based method" of accounting for an employee stock option or similar
equity instrument which calls for compensation cost to be measured at the grant
date based on the value of the award and is recognized over the service period,
which is usually the vesting period. In accordance with the provisions of SFAS
123, the Company will record measurement of compensation for its stock plans
using the "intrinsic value based method" of accounting, with disclosure of the
pro forma impact on net income and earnings per share as if the "fair value
based method" of accounting had been applied. The Company plans to adopt SFAS
123 in 1996 and believes that the adoption will not have a material impact upon
its financial position and results of operations.
34
<PAGE>
In 1995 the Company issued, as 1994 executive compensation for Roger D.
Snell, 12,632 shares of Common Stock of the Company, held as Treasury Stock,
representing the cash equivalent of $45,000, based upon the mean between the
high and low sales prices for such shares reported on the date of the grant,
December 5, 1994.
SIMPLIFIED EMPLOYEE PENSION PLAN
The Company has adopted a Simplified Employee Pension Plan (SEP) pursuant
to which the Company contributes a percentage of each eligible employee's
compensation to an Individual Retirement Account maintained by the employee.
All SEP contributions are fully vested. Contributions for 1995, 1994 and 1993
were $9,900, $4,000 and $7,000, respectively. The SEP was discontinued as of
January 1, 1996.
401(k) PLAN
Effective January 1, 1996, the Company adopted a non-contributory 401(k)
Plan. All 401(k) Plan contributions are fully vested. The level of any Company
contributions are subject to annual review and approval of the Company's Board
of Directors. As of December 31, 1995 no contributions had been made to this
plan.
35
<PAGE>
8. QUARTERLY FINANCIAL DATA (Unaudited)
The following tables set forth unaudited quarterly financial data (in
thousands, except per share amounts) for each of the two years ended December
31, 1995 and December 31, 1994.
<TABLE>
<CAPTION>
BY QUARTER
1995 FIRST SECOND THIRD FOURTH TOTAL
<S> <C> <C> <C> <C> <C>
Investment properties income (loss) $ 471 $ 286 $ (144) $ 134 $ 747
------- ------- -------- ------- --------
------- ------- -------- ------- --------
Hotel property income (loss) 843 248 (205) 272 1,158
------- ------- -------- ------- --------
------- ------- -------- ------- --------
Equity in partnership losses (785) (982) (941) (1,382) (4,090)
------- ------- -------- ------- --------
------- ------- -------- ------- --------
Gain on sale of real estate asset -- 177 -- -- 177
------- ------- -------- ------- --------
------- ------- -------- ------- --------
Extraordinary loss from
extinguishment of debt -- (233) -- -- (233)
------- ------- -------- ------- --------
------- ------- -------- ------- --------
Net income (loss) $ 72 $ (626) $(1,398) $ (777) $(2,729)
------- ------- -------- ------- --------
------- ------- -------- ------- --------
Income (loss) per share, primary:
Income (loss) before extraordinary item $ 0.02 $(0.09) $ (0.34) $(0.19) $ (0.60)
Extraordinary item -- (0.06) -- -- (0.06)
------- ------- -------- ------- --------
Net income (loss) $ 0.02 $(0.15) $ (0.34) $(0.19) $ (0.66)
------- ------- -------- ------- --------
------- ------- -------- ------- --------
Income (loss) per share, fully diluted:
Income (loss) before extraordinary item $ 0.02 $(0.09) $ (0.34) $(0.19) $ (0.60)
Extraordinary item -- (0.06) -- -- (0.06)
------- ------- -------- ------- --------
Net income (loss) $ 0.02 $(0.15) $ (0.34) $(0.19) $ (0.66)
------- ------- -------- ------- --------
------- ------- -------- ------- --------
</TABLE>
36
<PAGE>
<TABLE>
<CAPTION>
BY QUARTER
1994 FIRST SECOND THIRD FOURTH TOTAL
<S> <C> <C> <C> <C> <C>
Investment properties income (loss) $ 371 $ (243) $ (240) $ 497 $ 385
------- ------- -------- ------- --------
------- ------- -------- ------- --------
Hotel property income (loss) 888 218 (314) 35 827
------- ------- -------- ------- --------
------- ------- -------- ------- --------
Equity in partnership losses (214) (332) (73) (679) (1,298)
------- ------- -------- ------- --------
------- ------- -------- ------- --------
Gain on disposition of partnership interest -- -- -- 39,078 39,078
------- ------- -------- ------- --------
------- ------- -------- ------- --------
Gain on sale of real estate asset -- -- 661 3 664
------- ------- -------- ------- --------
------- ------- -------- ------- --------
Extraordinary loss from
extinguishment of debt -- -- -- (325) (325)
------- ------- -------- ------- --------
------- ------- -------- ------- --------
Net income (loss) $ 929 $ (827) $ (509) $29,224 $28,817
------- ------- -------- ------- --------
------- ------- -------- ------- --------
Income (loss) per share, primary:
Income (loss) before extraordinary item $ 0.23 $(0.20) $(0.12) $ 7.19 $ 7.10
Extraordinary item -- -- -- (0.08) (0.08)
------- ------- -------- ------- --------
Net income (loss) $ 0.23 $(0.20) $(0.12) $ 7.11 $ 7.02
------- ------- -------- ------- --------
------- ------- -------- ------- --------
Income (loss) per share, fully diluted:
Income (loss) before extraordinary item $ 0.22 $(0.20) $(0.12) $ 7.06 $ 6.96
Extraordinary item -- -- -- (0.08) (0.08)
------- ------- -------- ------- --------
Net income (loss) 0.22 $(0.20) $(0.12) $ 6.98 $ 6.88
------- ------- -------- ------- --------
------- ------- -------- ------- --------
</TABLE>
37
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
TO THE BOARD OF DIRECTORS AND SHAREHOLDERS OF PACIFIC GATEWAY PROPERTIES, INC.:
We have audited the accompanying consolidated balance sheets of Pacific
Gateway Properties, Inc. (a New York corporation) and subsidiaries as of
December 31, 1995 and 1994, and the related consolidated statements of income
(loss), stockholders' deficit and cash flows for each of the three years in the
period ended December 31, 1995. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Pacific
Gateway Properties, Inc. and subsidiaries as of December 31, 1995 and 1994, and
the results of their operations and their cash flows for each of the three
years in the period ended December 31, 1995, in conformity with generally
accepted accounting principles.
Our audits were made for the purpose of forming an opinion on the basic
consolidated financial statements taken as a whole. The schedules listed in the
index of financial statements are presented for purposes of complying with the
Securities and Exchange Commission's rules and are not part of the basic
consolidated financial statements. These schedules have been subjected to the
auditing procedures applied in the audit of the basic consolidated financial
statements and, in our opinion, fairly state in all material respects the
financial data required to be set forth therein in relation to the basic
consolidated financial statements taken as a whole.
ARTHUR ANDERSEN LLP
San Francisco, California
March 12, 1996
38
<PAGE>
PACIFIC GATEWAY PROPERTIES, INC.
SCHEDULE III-- REAL ESTATE AND ACCUMULATED DEPRECIATION
DECEMBER 31, 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
Initial Cost
to Company Gross Carrying Amount
(Note 1) Subsequent December 31, 1995
------------ Costs, ---------------------
Encumbrances Building Capitalized Buildings, Total
Description (Note 4) Land Improvements Improvements Improvements (Note 2)
- ----------- -------- ---- ------------ ------------- ------------ --------
<S> <C> <C> <C> <C> <C> <C>
Office Building--San Jose, CA $6,394 $3,439 $13,754 $2,201 $15,955 $19,394
Office/Commercial Buildings --
Walnut Creek, CA. (Twelve
Buildings) (Notes 4 and 6) 19,841 1,357 12,086 6,594 18,680 20,037
Office/Industrial Building--
Tucson, AZ. (Notes 4 and 6) -- 147 621 395 1,016 1,163
Office/Industrial Building--
Needham, MA. (Note 5) -- 494 4,006 188 4,194 4,688
Office Building--Fort Lauderdale,
FL. (Note 4 and 6) -- 44 299 5 304 348
Mortgage Debt and Loan Cost
Related to Primary Lender
(Note 4) 17,353 -- -- 48 48 48
------- ------- ------- ------- ------- -------
Sub-total 43,588 5,481 30,766 9,431 40,197 45,678
------- ------- ------- ------- ------- -------
Assets held for Sale
- --------------------
Hotel--Tucson, AZ. (Note 4) -- 3,584 18,583 243 18,826 22,410
Shopping Center--West Palm
Beach, FL. (Note 6) 15,250 6,105 2,027 464 2,491 8,596
------- ------- ------- ------- ------- -------
Sub-total 15,250 9,689 20,610 707 21,317 31,006
------- ------- ------- ------- ------- -------
$58,838 $15,170 $51,376 $10,138 $61,514 $76,684
------- ------- ------- ------- ------- -------
------- ------- ------- ------- ------- -------
<CAPTION>
Accumulated
Depreciation
and Amortization
and Provision
for Write-down
to Net 1995
Realizable Projected
Value Tax Basis Date of Construction/
Description (Note 3) (Note 8) Acquistion
- ----------- ------------ -------- ----------
<S> <C> <C> <C>
Office Building--San Jose, CA $ 5,064 $12,107 1972/1985
Office/Commercial Buildings --
Walnut Creek, CA. (Twelve 1975 to
Buildings) (Notes 4 and 6) 4,211 $17,447 1986/1988
Office/Industrial Building--
Tucson, AZ. (Notes 4 and 6) 250 $ 1,099 1987/1988
Office/Industrial Building--
Needham, MA. (Note 5) 2,504 $ 2,016 1961/1984
Office Building--Fort Lauderdale,
FL. (Note 4 and 6) 58 $ 320 1986/1988
Mortgage Debt and Loan Cost
Related to Primary Lender
(Note 4) 19
-------
Sub-total 12,106
-------
Assets held for Sale
- --------------------
Hotel--Tucson, AZ. (Note 4) 8,080 $ 9,887 1985/1985
Shopping Center--West Palm
Beach, FL. (Note 6) 696 $ 8,307 1987/1988
-------
Sub-total 8,776
-------
$20,882
-------
-------
</TABLE>
See accompanying notes on the following page
39
<PAGE>
PACIFIC GATEWAY PROPERTIES, INC.
SCHEDULE III-- REAL ESTATE AND ACCUMULATED DEPRECIATION --(CONTINUED)
DECEMBER 31, 1995
(IN THOUSANDS)
NOTE 1 The original cost basis of the above properties for financial
statement and tax purposes is substantially the same.
NOTE 2 The changes in the total cost of land, buildings, and improvements for
the three years ended December 31, are as follows:
<TABLE>
<CAPTION>
1995 1994 1993
<S> <C> <C> <C>
Balance at beginning of period $76,500 $101,485 $103,930
Additions 2,177 4,687 124
Write-off of fully amortized items (1,679) (884) (1,399)
Cost of disposed properties (314) (28,788) (1,170)
------- -------- --------
Balance at end of period $76,684 $ 76,500 $101,485
------- -------- --------
------- -------- --------
</TABLE>
NOTE 3 The changes in accumulated depreciation and amortization and the
provision for write-down to net realizable value for the three years
ended December 31, are as follows:
<TABLE>
<CAPTION>
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Balance at beginning of period $19,807 $27,065 $25,447
Provision for write-down to net realizable value -- 1,000 1,000
Depreciation expense 2,795 2,136 2,961
Write-off of fully amortized items (1,679) (884) (1,399)
Relief of accumulated balances and provision for
write-down to net realizable value related
to disposed properties ( 41) (9,510) ( 944)
------- ------- -------
Balance at end of period $20,882 $19,807 $27,065
------- ------- -------
------- ------- -------
</TABLE>
NOTE 4 Registrant's interest in these properties are pledged in support of
Registrant's primary lender's debt agreement. Such agreement also
provides for cross-collateralization with the primary lender's
mortgages on the Registrant's properties in Walnut Creek, CA (in 1994
and 1993 only), Fort Lauderdale FL, and both the office/industrial
building and the hotel in Tucson, AZ.
NOTE 5 This property is pledged in support of a $4.5 million letter-of-credit
of which $3.65 million is posted in favor of the lender on Rincon
Center and $850,000 is posted as additional collateral in connection
with the debt collateralized by the Registrant's Arizona properties
and Florida office building.
NOTE 6 These properties were obtained by Golden Gate Building Company
pursuant to tax-deferred exchanges of interests in the Alcoa Building
and distributed to the Registrant.
NOTE 7 The total provision for write-down to net realizable value pertains to
410 First Avenue.
NOTE 8 The sale of a property may result in substantial tax liability.
40
<PAGE>
RINCON CENTER ASSOCIATES
A CALIFORNIA LIMITED PARTNERSHIP
FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1995 AND 1994
TOGETHER WITH AUDITORS' REPORT
41
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Partners of Rincon Center Associates,
a California Limited Partnership:
We have audited the accompanying balance sheets of Rincon Center Associates (a
California Limited Partnership) as of December 31, 1995 and 1994, and the
related statements of operations, changes in partners' deficit and cash flows
for each of the three years ended December 31, 1995. These financial statements
are the responsibility of the Partnership's management. Our responsibility is
to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Rincon Center Associates, a
California Limited Partnership as of December 31, 1995 and 1994 and the results
of its operations and its cash flows for each of the three years ended December
31, 1995, in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Boston, Massachusetts
February 26, 1996
42
<PAGE>
RINCON CENTER ASSOCIATES
A CALIFORNIA LIMITED PARTNERSHIP
BALANCE SHEETS--DECEMBER 31, 1995 AND 1994
<TABLE>
<CAPTION>
ASSETS
1995 1994
<S> <C> <C>
CASH $ 139,000 $ 66,000
ACCOUNTS RECEIVABLE, NET RESERVES OF $45,000 AT DECEMBER 31, 1994 721,000 731,000
DEFERRED RENT RECEIVABLE 4,994,000 6,970,000
NOTES RECEIVABLE, NET OF RESERVES OF $155,000 AT DECEMBER 31, 1995 AND 1994 14,966,000 15,361,000
REAL ESTATE USED IN OPERATIONS, NET 111,541,000 114,552,000
LEASEHOLD IMPROVEMENTS, NET 1,961,000 2,061,000
OTHER ASSETS, NET 1,803,000 2,184,000
------------- -------------
Total assets $ 136,125,000 $ 141,925,000
------------- -------------
------------- -------------
LIABILITIES AND PARTNERS' DEFICIT
CONSTRUCTION NOTES PAYABLE $ 58,720,000 $ 60,895,000
ACCOUNTS PAYABLE AND ACCRUED LIABILITIES 3,978,000 2,920,000
ACCRUED GROUND RENT LIABILITY, NET 6,669,000 6,978,000
ACCRUED LEASE LIABILITY, NET 538,000 1,801,000
DEFERRED INCOME 1,068,000 1,140,000
ACCRUED INTEREST DUE GENERAL PARTNERS 50,817,000 41,107,000
DUE TO PERINI LAND AND DEVELOPMENT COMPANY 74,584,000 70,444,000
DUE TO PACIFIC GATEWAY PROPERTIES, INC. 18,634,000 17,599,000
------------- -------------
Total liabilities 215,008,000 202,884,000
COMMITMENTS AND CONTINGENCIES (Notes 3, 5 and 6)
PARTNERS' DEFICIT (78,883,000) (60,959,000)
------------- -------------
Total liabilities and partners' deficit $ 136,125,000 $ 141,925,000
------------- -------------
------------- -------------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
43
<PAGE>
RINCON CENTER ASSOCIATES
A CALIFORNIA LIMITED PARTNERSHIP
STATEMENTS OF OPERATIONS
FOR THE THREE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
<TABLE>
<CAPTION>
1995 1994 1993
<S> <C> <C> <C>
REVENUE:
Rental income $ 17,307,000 $ 17,352,000 $ 17,083,000
Parking and other income 1,305,000 1,267,000 1,260,000
------------ ------------ ------------
Total revenue 18,612,000 18,619,000 18,343,000
EXPENSES:
Operating 5,286,000 4,952,000 5,132,000
Administrative and other 1,375,000 1,389,000 1,556,000
Property taxes and insurance 1,887,000 1,655,000 2,438,000
Leases 6,336,000 4,910,000 4,515,000
Ground rent 4,689,000 4,337,000 3,391,000
Interest and letter-of-credit fees 14,402,000 11,354,000 10,582,000
Depreciation and amortization 4,115,000 4,019,000 4,040,000
------------ ------------ ------------
Total expenses 38,090,000 32,616,000 31,654,000
------------ ------------ ------------
Net loss from operations (19,478,000) (13,997,000) (13,311,000)
PROPERTY TAX REDUCTION - 1,891,000 -
INTEREST INCOME 1,554,000 1,665,000 1,365,000
------------ ------------ ------------
Net loss $(17,924,000) $(10,441,000) $(11,946,000)
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
44
<PAGE>
RINCON CENTER ASSOCIATES
A CALIFORNIA LIMITED PARTNERSHIP
STATEMENTS OF CHANGES IN PARTNERS' DEFICIT
FOR THE THREE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
<TABLE>
<CAPTION>
GENERAL LIMITED
PARTNERS PARTNERS TOTAL
<S> <C> <C> <C>
BALANCE, DECEMBER 31, 1992 $(19,190,000) $(19,382,000) $(38,572,000)
Net loss (5,985,000) (5,961,000) (11,946,000)
------------ ------------ ------------
BALANCE, DECEMBER 31, 1993 (25,175,000) (25,343,000) (50,518,000)
Net loss (5,231,000) (5,210,000) (10,441,000)
------------ ------------ ------------
BALANCE, DECEMBER 31, 1994 (30,406,000) (30,553,000) (60,959,000)
Net loss (8,980,000) (8,944,000) (17,924,000)
------------ ------------ ------------
BALANCE, DECEMBER 31, 1995 $(39,386,000) $(39,497,000) $(78,883,000)
------------ ------------ ------------
------------ ------------ ------------
PARTNERS' PERCENTAGE INTEREST 50.1% 49.9% 100.0%
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
45
<PAGE>
RINCON CENTER ASSOCIATES
A CALIFORNIA LIMITED PARTNERSHIP
STATEMENTS OF CASH FLOWS
FOR THE THREE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
<TABLE>
<CAPTION>
1995 1994 1993
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(17,924,000) $(10,441,000) $(11,946,000)
Adjustments to reconcile net loss to net cash used in operating
activities-
Depreciation and amortization 4,115,000 4,019,000 4,040,000
Amortization of deferred income (72,000) (400,000) -
Decrease (increase) in accounts receivable 10,000 (531,000) 2,030,000
Decrease (increase) in deferred rent receivable 1,976,000 913,000 (257,000)
(Increase) decrease in other assets (95,000) 357,000 (214,000)
Increase (decrease) in accounts payable and accrued
liabilities 1,058,000 (496,000) (191,000)
Decrease in accrued ground rent liability (309,000) (329,000) (329,000)
(Decrease) increase in accrued lease liability (1,263,000) (1,301,000) 72,000
Increase in accrued interest due general partners 9,710,000 7,206,000 6,469,000
------------ ------------ ------------
Net cash used in operating activities (2,794,000) (1,003,000) (326,000)
------------ ------------ ------------
CASH FLOW FROM INVESTING ACTIVITIES:
Expenditure on real estate used in operations (348,000) (362,000) (642,000)
Additions to leasehold improvements (180,000) (81,000) (118,000)
Additions to fixed assets - - (30,000)
Increase in notes receivable - - (6,000,000)
Payments on notes receivable 395,000 312,000 312,000
------------ ------------ ------------
Net cash used in investing activities (133,000) (131,000) (6,478,000)
------------ ------------ ------------
CASH FLOW FROM FINANCING ACTIVITIES:
Payments on construction notes payable (2,175,000) (1,475,000) (1,854,000)
Advances from general partners 5,175,000 2,555,000 8,506,000
------------ ------------ ------------
Net cash provided by financing activities 3,000,000 1,080,000 6,652,000
------------ ------------ ------------
INCREASE (DECREASE) IN CASH 73,000 (54,000) (152,000)
CASH, BEGINNING OF YEAR 66,000 120,000 272,000
------------ ------------ ------------
CASH, END OF YEAR $ 139,000 $ 66,000 $ 120,000
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
46
<PAGE>
RINCON CENTER ASSOCIATES
A CALIFORNIA LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1995
(1) PARTNERSHIP ORGANIZATION
Rincon Center Associates, a California Limited Partnership (the
Partnership), was formed on September 18, 1984, to lease and develop land
and buildings located in the Rincon Point-South Beach Redevelopment Project
Area in the City and County of San Francisco, California. The Rincon
Center Project (the Project) compromises commercial and retail space, 320
rental housing units and associated off-street parking. The Project was
developed in two distinct segments: Rincon One and Rincon Two.
Profits and losses are shared by the partners in accordance with their
percentage interest as provided in the partnership agreement and as shown
in the statements of changes in partners' deficit. Cash profits, as
determined by the managing general partner, are distributed to the partners
in the same percentage interest.
Perini Land and Development Company (PL&D) is the managing general partner
of the Partnership and has the responsibility for general management,
administration and control of the Partnership's property, business and
affairs. In addition, PL&D provides project and general accounting
services to the Partnership (Note 7). Pacific Gateway Properties, Inc.
(PGP), formerly Perini Investment Properties, Inc., is the other general
partner.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF ACCOUNTING
The accompanying financial statements have been prepared using the accrual
basis of accounting.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates that
affect the reported amounts of assets and liabilities and 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. The most significant estimates with regard to these financial
statements relate to the estimating of net realizable value of real estate
used in operations and the potential liability in conjunction with certain
contingencies and commitments. Actual results could differ from these
estimates.
47
<PAGE>
RINCON CENTER ASSOCIATES
A CALIFORNIA LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1995
(Continued)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
REAL ESTATE USED IN OPERATIONS
Real estate used in operations includes all costs capitalized during the
development of the Project. These costs include interest and financing
costs, ground rent expense during construction, property taxes, tenant
improvements and other capitalizable overhead costs. This real estate
investment is stated at the lower of cost or market when there is a
permanent impairment in the carrying value of the investment. Impairment
in the carrying value of the properties is measured by estimating the
future cash flows expected to result from the properties in the ordinary
course of business and the conversion of the housing units to condominiums
and resulting sale and eventual sale of the commercial and retail
properties.
DEPRECIATION AND AMORTIZATION
The Partnership uses the straight-line method of depreciation. The
significant asset groups and their estimated useful lives are:
Structural components of buildings 60 years
Nonstructural components of buildings 25 years
All other depreciable assets 3-30 years
Leasehold improvements are amortized using the straight-line method over
the shorter of their useful lives or the lease terms.
INCOME TAXES
In accordance with federal and state income tax regulations, no income
taxes are levied on the Partnership; rather, such taxes are levied on the
individual partners. Consequently, no provision or liability for federal
or state income taxes is reflected in the accompanying financial
statements.
RENTAL INCOME
Certain lease agreements provide for periods of free rent or stepped
increases in rent over the lease term. In such cases, revenue is
recognized at a constant rate over the term of the lease. Amounts
recognized as income but not yet due under the terms of the leases are
shown in the accompanying balance sheets as deferred rent receivable.
48
<PAGE>
RINCON CENTER ASSOCIATES
A CALIFORNIA LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1995
(CONTINUED)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
STATEMENTS OF CASH FLOWS
Cash paid for interest was $2,541,000, $2,191,000 and $2,414,000 in 1995,
1994 and 1993, respectively.
ACCRUED LEASE LIABILITY
The Partnership is leasing Rincon One from Chrysler McNally (Chrysler) over
a 25-year lease term (Note 3). In connection with this lease, the
Partnership was granted a free rent concession for one year. The intent of
Chrysler's free rent provision was to match a similar provision granted by
the Partnership to an anchor sublease tenant of Rincon One, whose lease is
for 10 years. The Partnership expensed rent in the first year of the lease
and amortized the accrued lease liability related to Rincon One over 10
years through 1993 and is amortizing the remaining balance over 50 months
effective January 1, 1994 to match the expense with the revenue recorded on
the sublease.
Three amendments to the master lease agreement were made in 1993 in
connection with the extension of Chrysler's existing financing on the
property (Note 3). The rent schedule was revised which resulted in
adjustments to the accrued lease liability in order to normalize the rent
expense over the remaining lease term.
OTHER ASSETS
Other assets include prepaid expenses, deferred lease commissions and fixed
assets. Deferred lease commissions are amortized over the life of the
lease. Fixed assets are depreciated over the life of the asset, which is
generally five years.
(3) OPERATING LEASE, RINCON ONE
On June 24, 1988, the Partnership sold Rincon One to Chrysler and
subsequently leased the property back under a master lease with a basic term
of 25 years, with four five-year renewal options at the Partnership's
discretion. The transaction was accounted for as a sale and operating
leaseback and the gain on the sale of $1,540,000 was deferred and is
currently being amortized over a 25-year period which is recorded as a
reduction to expenses--leases in the accompanying statements of operations.
The Partnership had not recorded any amortization related to this deferred
gain through December 31, 1993.
49
<PAGE>
RINCON CENTER ASSOCIATES
A CALIFORNIA LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1995
(Continued)
(3) OPERATING LEASE, RINCON ONE (Continued)
In connection with the sale and operating leaseback of Rincon One, Chrysler
assumed and agreed to satisfy the Partnership's financing obligations. The
Partnership, in accordance with the master lease and several amendments in
1993, agreed to obtain a financial commitment on behalf of Chrysler to
replace at least $43,000,000 of Chrysler's long-term financing by July 1,
1993. To satisfy this commitment, the Partnership successfully extended
existing financing to July 1, 1998. To complete the extension, the
Partnership had to advance funds sufficient to reduce the financing from
$46,500,000 to $40,500,000. At December 31, 1995, the financing obligation
outstanding was approximately $38,200,000. The Partnership received a 10%
secured note in the principal amount of $6,000,000 from Chrysler upon the
Partnership's advance of funds to reduce the financing. In addition, as
part of the obligations of the extension, the Partnership will have to
further amortize the financing from its current level to $33,000,000 by
July 1, 1998. If, by January 1, 1998, the Partnership has not received a
further extension or new commitment for financing on the property for at
least $33,000,000, Chrysler will have the right under the lease to require
the Partnership to purchase the property for a stipulated amount
significantly in excess of the financing obligation, net of the note
receivable (approximately $18,800,000 in excess of the then outstanding
financing obligation). The Partnership intends to obtain financing meeting
the conditions of the lease prior to January 1, 1998.
Payments under the master lease agreement may be adjusted to reflect
adjustments in the rate of interest payable by Chrysler on the Rincon One
debt. Future minimum lease payments based on scheduled payments under the
master lease agreement are as follows:
<TABLE>
<CAPTION> <S> <C>
1996 $6,558,000
1997 5,959,000
1998 5,696,000
1999 5,875,000
2000 5,875,000
Thereafter 73,432,000
</TABLE>
50
<PAGE>
RINCON CENTER ASSOCIATES
A CALIFORNIA LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1995
(CONTINUED)
4) NOTES RECEIVABLE
At December 31, 1995 and 1994, the Partnership had the following notes
receivable:
<TABLE>
<CAPTION>
1995 1994
<S> <C> <C>
Due from Chrysler secured by second deed of trust
on Rincon One, bearing interest at 10 percent,
with monthly principal and interest payments of
$150,285 in 1995 and 1994; unpaid balance due July
2013 $14,904,000 $15,200,000
Notes from tenants secured by tenant improvements,
bearing interest at 8 percent to 11 percent,
with maturitiesfrom 1996 to 2001,
due in monthly installments 62,000 161,000
----------- -----------
$14,966,000 15,361,000
----------- -----------
----------- -----------
</TABLE>
(5) GROUND LEASE
The Partnership entered into a 65-year ground lease with the United States
Postal Service for the Project property on April 19, 1985. On June 24,
1988, this lease was bifurcated into two leases (Rincon One and Rincon
Two). Under the terms of the leases, the Partnership must make monthly
lease payments (Basic Rent) of $140,415 and $239,085 for Rincon One and
Rincon Two, respectively. In April 1994, and every six years thereafter,
the monthly base payments can be increased based on the increase in the
Consumer Price Index subject to a minimum of 5 percent per year and a
maximum of 8 percent per year. In addition, the Basic Rent can be
increased based on reappraisal of the underlying property on the occurrence
of certain events if those events occur prior to the regular reappraisal
dates of April 19, 2019, and each twelfth year thereafter for the remainder
of the lease term.
The lease agreement calls for the payment of certain percentage rents based
on revenues received from the subleasing of the Rincon One building.
Percentage rents paid in 1995, 1994 and 1993, were $262,000, $275,000 and
$259,000, respectively.
This lease has been accounted for as an operating lease, with minimum future
lease payments of:
<TABLE>
<CAPTION>
<S> <C>
1996 $ 4,690,000
1997 4,645,000
1998 4,554,000
1999 4,554,000
2000 5,507,000
Thereafter 888,312,000
</TABLE>
51
<PAGE>
RINCON CENTER ASSOCIATES
A CALIFORNIA LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1995
(CONTINUED)
(5) GROUND LEASE (Continued)
Under the provisions of the original lease, no lease payments were to be
made from the inception of the lease (April 19, 1985) until April 18, 1987,
and one-half of the regular monthly payment was due for the period from
April 19, 1987 to April 18, 1988. However, as allowed by the lease
agreement, the Partnership deferred the payment of Basic Rent until the
initial occupancy date, February 8, 1988. At December 31, 1995 and 1994,
the deferred Basic Rent and interest for the period April 19, 1987 to April
18, 1988, amounted to $290,000 and $420,000, respectively, and are being
paid in 120 monthly installments together with interest at a rate based on
the average discount rates of 90-day U.S. Treasury bills, which was
approximately 5.62% percent for the year ended December 31, 1995. The rate
will be adjusted every 90 days as long as a balance is due on the deferred
rent. The remaining deferred ground rent related to the free rent period
amounted to $6,380,000 and $6,558,000 at December 31, 1995 and 1994,
respectively, and is being amortized over the lease term.
(6) CONSTRUCTION NOTES PAYABLE
RESIDENTIAL
The residential portion of the Project is being financed with a $36,000,000
loan from the Redevelopment Agency of the City and County of San Francisco
(the Agency), of which $32,900,000 and $33,500,000 was outstanding at
December 31, 1995 and 1994, respectively. The Agency raised these funds
through the issuance of Variable Rate Demand Multifamily Housing Revenue
Bonds (Rincon Center Project) 1985 Issue B (the Bonds).
The interest rate on the Bonds is variable at the rate required to produce
a market value for the Bonds equal to their par value. At December 31,
1995, 1994 and 1993, the effective interest rate on the bonds was 5.15
percent, 5.40 percent and 3.00 percent, respectively. Interest payments
are to be made on the first business day of each March, June, September and
December.
The Partnership has the option to convert the Bonds to a fixed interest
rate at any of the above interest payment dates. The fixed rate will be
the rate required to produce a market value for the Bonds equal to their
par value. After conversion to a fixed rate, interest payments must be
made on each June 1 and December 1.
52
<PAGE>
RINCON CENTER ASSOCIATES
A CALIFORNIA LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1995
(CONTINUED)
(6) CONSTRUCTION NOTES PAYABLE (Continued)
The Partnership must repay the residential loan as the Bonds become due.
The Bonds shall be redeemed in at least the minimum amounts set forth below:
<TABLE>
<CAPTION>
<S> <C>
1996 $ 700,000
1997 700,000
1998 900,000
1999 1,000,000
2000 1,000,000
Thereafter 28,600,000
</TABLE>
The Bonds are due December 1, 2006. The Bonds are secured by an
irrevocable letter of credit issued by Citibank in the name of the
Partnership in the amount of approximately $33,928,000. In the event that
drawings are made on the letter of credit, the Partnership has agreed to
reimburse Citibank for such drawings pursuant to the terms of a
Reimbursement Agreement. The Partnership obligations under the
Reimbursement Agreement are secured by a deed of trust on the Project and
the equity letters of credit and guarantees described below.
COMMERCIAL
The development and construction of the commercial portion of the Project
was financed pursuant to a Construction Loan Agreement between the
Partnership and Citibank, of which $25,820,000 and $27,395,000 was
outstanding at December 31, 1995 and 1994, respectively. The loan and the
irrevocable letters of credit supporting the residential bond are secured
by a deed of trust on the Project and the equity letters of credit
currently in the aggregate amount of $7,300,000, issued to Citibank by Bank
of America, N.T. & S.A. on behalf of the general partners. PL&D has also
provided a $3,500,000 corporate guarantee to support the Project financing.
PGP and Perini Corporation, the parent company of PL&D, have agreed to
reimburse Bank of America for any drawings under these letters of credit.
An annual fee equal to prime plus 1 percent of the aggregate amount is due
to PGP and PL&D for the use of these letters of credit. The loan is also
secured by the guarantees described in Note 7. The total fee in 1995, 1994
and 1993 was $718,000, $184,000 and $751,000, respectively. The fee in
1994 reflects a $421,000 reduction in letter of credit fees charged to the
general partners in prior years due to a reduction in the equity letters of
credit at the Partnership.
In 1993, the Partnership extended the loan to October 1, 1998, which
required a $600,000 up-front paydown and an additional fee of $105,000.
The loan requires the Partnership to amortize $13,000,000 over the five
years to October 1, 1998. Amounts are payable as follows: $2,708,000 in
1996;
53
<PAGE>
(6) CONSTRUCTION NOTES PAYABLE (Continued)
$3,150,000 in 1997; and $3,250,000 in 1998. The Partnership obtained a
swap agreement with interest rates stepping up from 5.61% to 7.96% over the
loan term. The effect of the swap agreement in 1995 was to reduce interest
expense by approximately $267,000. At December 31, 1995, the rate on the
loan was 7.07%.
(7) TRANSACTION WITH GENERAL PARTNERS
PL&D has guaranteed the payment of both interest on the financing of the
Project and operating deficits, if any. It has also guaranteed the master
lease under the sale and operating lease-back transaction (Note 3).
In accordance with the Construction Loan Agreement (Note 6), the general
partners have advanced monies to the Partnership to fund project costs. At
December 31, 1995 and 1994, the general partners had advanced $93,218,000
and $88,043,000, respectively. The advances accrue interest at a rate of
prime plus 2 percent. For the years ended December 31, 1995, 1994 and
1993, interest expense on partner advances was $9,939,000, $7,940,000 and
$6,469,000, respectively.
Through June 1995, PL&D retained Pacific Gateway Properties Management
Corporation (PGPMC), a wholly owned subsidiary of PGP, to provide management
and leasing services for the Project. As compensation for managing the
facilities, the Partnership paid PGPMC a base management fee of $319,200 per
year or, if greater, the sum of 3 percent of the first $13,000,000 of the
annual gross receipts plus 2 percent of receipts in excess of the
$13,000,000. For 1995, fees paid to PGPMC amounted to approximately
$453,000, including a termination fee of approximately $153,000. The fees
incurred for the years ended December 31, 1994 and 1993 were $514,000 and
$497,000, respectively, and were included in administrative and other
expenses in the accompanying statements of operations. PL&D has retained
Eagle Western Management (EWM) to provide management and leasing services to
the project to replace PGPMC. Fees incurred for 1995 amounted to
approximately $164,000. Additionally, the Partnership reimburses PGPMC and
EWM for certain payroll costs.
(8) REAL PROPERTY TAX REDUCTION
The Partnership received reductions in real property tax assessments for the
tax years from 1990 to 1993 which amounted to approximately $1,891,000, and
were recorded as other income in the 1994 financial statements.
Professional service expenses related to the property tax assessments
approximated $330,000 and were recorded in the accompanying statement of
operations during 1994.
54
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANT
ON SCHEDULE
To Rincon Center Associates:
We have audited in accordance with generally accepted auditing standards, the
financical statements of Rincon Center Associates as of December 31, 1995 and
we have issued our report thereon dated February 26, 1996. Our audit was made
for the purpose of forming an opinion on the basic financial statements taken
as a whole. Schedule III--Real Estate and Accumulated Depreciation is the
responsibility of the Company's management and is presented for the purposes of
complying with the Securities and Exchange Commission's rules and is not part of
the basic financial statements. This schedule has been subjected to the auditing
procedures applied in the audit of the basic financial statements and, in our
opinion, fairly state, in all material respects, the financial data required to
be set forth therein in relation to the basic financial statements taken as a
whole.
ARTHUR ANDERSEN LLP
Boston, Massachusetts
February 26, 1996
55
<PAGE>
RINCON CENTER ASSOCIATES
Schedule III - Real Estate and Accumulated Depreciation
As of December 31, 1995
<TABLE>
<CAPTION>
- ------------- -------------- ----------------------- ---------------------------- ----------------------------------------
Column A Column B Column C Column D Column E
- ------------- -------------- ----------------------- ---------------------------- ----------------------------------------
Cost Capitalized
Initial Cost to Subsequent to Gross Amount at Which
Company Acquisition Carried at Close of Period
----------------------- ---------------------------- ----------------------------------------
Buildings and Carrying Buildings and
Description Encumbrances Land Improvements Improvements Costs Land Improvements Total
- ------------- -------------- ------ --------------- -------------- ------------ ------ ---------------- --------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Building $ 58,720,000 $ - $ 115,035,000 $ 14,582,000 $ 9,040,000 $ - $ 129,617,000 $ 129,617,000
located in
the Rincon
Point-South
Beach
Redevelopment
Project Area
in the City and
County of San
Francisco, CA.
<CAPTION>
- ------------- -------------- -------------- ------------ -----------------
Column A Column F Column G Column H Column I
- ------------- -------------- -------------- ------------ -----------------
Life on Which
Depreciation in
Latest Income
Accumulated Date of Date Statement is
Description Depreciation Construction Acquired Computed
- ------------- -------------- -------------- ------------ -----------------
<S> <C> <C> <C> <C>
Building $ 18,076,000 April 1985- N/A 25-60 years on
located in March 1990 building and
the Rincon 3-25 years on
Point-South improvements
Beach
Redevelopment
Project Area
in the City and
County of San
Francisco, CA.
</TABLE>
Note 1: Reconciliation of amounts shown In Column E:
<TABLE>
<CAPTION>
1995 1994 1993
--------------- --------------- ---------------
<S> <C> <C> <C>
Balance at beginning of year: $ 129,265,000 $ 129,446,000 $ 129,437,000
Additions during year
Cost of Improvements 348,000 362,000 642,000
Other 4,000 - -
Deductions during year:
Other: - (543,000) (633,000)
--------------- --------------- --------------
Balance at end of year: $ 129,617,000 $ 129,265,000 $ 129,446,000
--------------- --------------- --------------
--------------- --------------- --------------
</TABLE>
Note 2: Reconciliation of amounts shown in Column F:
<TABLE>
<CAPTION>
1995 1994 1993
--------------- --------------- ---------------
<S> <C> <C> <C>
Balance at beginning of year: $ 14,713,000 $ 11,425,000 $ 7,932,000
Additions during year:
Provision for year 3,363,000 3,431,000 3,493,000
Other - (143,000) -
--------------- --------------- ---------------
Balance at beginning of year: $ 18,076,000 $ 14,713,000 $ 11,425,000
--------------- --------------- ---------------
--------------- --------------- ---------------
</TABLE>
Note 3: Disclosure requirement for Column E:
Aggregate cost for Federal income tax purposes of $96,574,000.
56
<PAGE>
EXHIBIT 21
PACIFIC GATEWAY PROPERTIES, INC.
SUBSIDIARIES OF THE REGISTRANT
<TABLE>
<CAPTION>
PERCENTAGE
PLACE OF INTEREST OF VOTING
NAME ORGANIZATION SECURITIES OWNED
- ---- ------------ ------------------
<S> <C> <C>
Pacific Gateway Properties, Inc. New York 100%
Pacific Gateway Properties California 100%
Management Corporation
Pacific Gateway Properties California 100%
Hotels, Inc.
Perini Investment Properties California 100%
Executive Suites, Inc.
Maritime Plaza Associates California 100%
Rincon Center Associates California Limited 22.8%
Partnership
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<CURRENCY> US$
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> DEC-31-1995
<EXCHANGE-RATE> 1.00
<CASH> 417
<SECURITIES> 0
<RECEIVABLES> 577
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 1,460
<PP&E> 76,684
<DEPRECIATION> 20,882
<TOTAL-ASSETS> 65,887
<CURRENT-LIABILITIES> 2,781
<BONDS> 0
0
0
<COMMON> 4,011
<OTHER-SE> (13,197)
<TOTAL-LIABILITY-AND-EQUITY> 65,887
<SALES> 0
<TOTAL-REVENUES> 19,209
<CGS> 0
<TOTAL-COSTS> 10,214
<OTHER-EXPENSES> 7,090
<LOSS-PROVISION> 540
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (4,379)
<INCOME-TAX> 1,883
<INCOME-CONTINUING> (2,496)
<DISCONTINUED> 0
<EXTRAORDINARY> (233)
<CHANGES> 0
<NET-INCOME> (2,729)
<EPS-PRIMARY> (0.66)
<EPS-DILUTED> (0.66)
</TABLE>
