SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X]QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1996
OR
[ ]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File Number 1-8692
PACIFIC GATEWAY PROPERTIES, INC.
(Exact name of Registrant as specified in its charter)
NEW YORK 04-2816560
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
ONE RINCON CENTER, 101 SPEAR STREET, SUITE 215, SAN FRANCISCO, CALIFORNIA 94105
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (415) 543-8600
Not Applicable
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of June 30, 1996:
$1.00 Par Value Common Stock 3,892,596
(Title of Class) (Number of Shares Outstanding)
<PAGE>
PACIFIC GATEWAY PROPERTIES, INC.
INDEX
Part I - Financial Information: Page Number
Item 1. Financial Statements
Consolidated Balance Sheets as of June 30, 1996
and December 31, 1995 3
Consolidated Statements of Income for the Three and
Six Months Ended June 30, 1996
and 1995 4
Consolidated Statements of Cash Flows for the Three
and Six Months Ended June 30, 1996 5
and 1995
Notes to Financial Statements 6-8
Item 2. Management's Discussion and
Analysis of Financial Condition
and Results of Operations 9-13
Part II - Other Information
Item 1. Legal Proceedings None
Item 2. Changes in Security None
Item 3. Defaults Upon Senior Securities None
Item 4. Submission of Matters to a Vote
of Security Holders None
Item 5. Other Information None
Item 6. Exhibits and Reports on Form 8-K 13
Signatures 14
<PAGE>
PACIFIC GATEWAY PROPERTIES, INC.
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(In Thousands, Except Share Amounts)
As of As of
June 30, December 31,
1996 1995
ASSETS
Cash and short-term investments $ 2,746 $ 176
Cash reserved for capital improvements 103 241
Accounts receivable 437 510
Prepaid taxes 687 459
Other current assets 157 74
Investment properties:
Land 5,481 5,481
Buildings 31,847 31,847
Furniture, fixtures and equipment 9,282 8,350
Subtotal investment properties 46,610 45,678
Less-accumulated depreciation and net
realizable value reserve (13,158) (12,106)
Investment properties, net 33,452 33,572
Properties held for sale, net of accumulated
depreciation of $8,080 at June 30, 1996 and $8,776 at
December 31, 1995 14,349 22,230
Deferred tax asset 3,629 6,831
Note receivable, accrued interest and fees 237 225
Capitalized loan costs, net of accumulated amortization
of $1,088 and $1,210 at June 30, 1996 and December
31, 1995, respectively 592 816
Capitalized lease commissions and rent concessions,
net of accumulated amortization of $1,361 and $1,521
at June 30, 1996 and December 31, 1995, respectively 611 753
Total assets $57,000 $65,887
LIABILITIES AND STOCKHOLDERS' DEFICIT
Accounts payable $ 655 $ 1,293
Accrued payroll, property and sales taxes 258 513
Prepaid rent 62 133
Accrued interest on debt 254 298
State income taxes payable 626 --
Amount due for tenant improvements 150 --
Other current liabilities 114 127
Tenant security deposits 296 417
Debt related to corporate, investment
and hotel properties 42,552 58,838
Other debt related to equity investment
in Rincon Center Associates 2,940 2,940
Deferred tax liability 11,311 10,514
Total liabilities 59,218 75,073
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 earnings (deficit) 4,140 (2,828)
Treasury stock, at cost--118,554 common shares at
June 30, 1996 and December 31, 1995 (2,037) (2,037)
Warrants for common stock 1,890 1,890
Total stockholders' deficit (2,218) (9,186)
Total liabilities and stockholders' deficit $57,000 $65,887
The accompanying notes are an integral part of these consolidated financial
statements
PACIFIC GATEWAY PROPERTIES, INC.
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(In Thousands, Except Per Share Amounts)
For the Three Months For the Six Months
Ended June 30, Ended June 30,
1996 1995 1996 1995
Investment Properties:
Rental revenues $ 2,546 $ 3,049 $ 5,720 $ 6,228
Operating expenses (1,334)(1,404) (2,600) (2,666)
Interest expense (605) (778) (1,508) (1,634)
Depreciation and amortization (634) (581) (1,238) (1,172)
Investment properties income (loss) (27) 286 374 756
Hotel Property:
Revenues 1,388 1,815 3,879 4,431
Operating expenses (1,101)(1,276) (2,545) (2,669)
Interest expense (95) (136) (188) (359)
Depreciation and amortization -- (155) -- (311)
Hotel income 192 248 1,146 1,092
Equity in Partnership Loss:
Rincon Center Associates (RCA) -- (982) -- (1,767)
Interest and fee expense for debt
related to equity investment in RCA -- (66) -- (123)
General and administrative expenses (462) (305) (858) (658)
Interest income 37 12 49 15
Other income, net 173 -- 165 --
Income (loss)before property transactions,
income taxes and extraordinary item (87) (807) 876 (685)
Gain on sale of real estate assets, no 10,900 177 10,900 177
Income (loss) before income taxes and
extraordinary item 10,813 (630) 11,776 (508)
Income tax benefit (provision) (4,434) 237 (4,808) 187
Income (loss) before extraordinary item 6,379 (393) 6,968 (321)
Extraordinary loss from extinguishment
of debt -- (233) -- (233)
Net income (loss) $ 6,379 $ (626) $ 6,968 $ (554)
Earnings (loss) per share, primary:
Earnings (loss) before extraordinary item $1.49 $(.09) $1.67 $(.08)
Extraordinary item -- (.06) -- (.06)
Net earnings (loss) $1.49 $(.15) $1.67 $(.14)
Earnings (loss) per share, fully diluted:
Earnings (loss) before extraordinary item $1.46 $(.09) $1.60 $(.08)
Extraordinary item -- (.06) -- (.06)
Net earnings (loss) $1.46 $(.15) $1.60 $(.14)
The accompanying notes are an integral part of these consolidated financial
statements
PACIFIC GATEWAY PROPERTIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(In Thousands)
For the Three Months For the Six Months
Ended June 30, Ended June 30,
1996 1995 1996 1995
Cash flow from operating activities:
Net income (loss) $ 6,379 $ (626) $ 6,968 $ (554)
Non-cash revenues and expenses
included in net income (loss):
Provision for depreciation and
amortization 634 736 1,238 1,483
Equity in partnership loss -- 982 -- 1,767
Gain on sale of real estate assets,
net (10,900) (177) (10,900) (177)
Extraordinary item -- 233 -- 233
Change in assets and liabilities:
Accounts receivable, prepaid taxes
and other current assets (337) (200) (250) (389)
Other assets, net -- 26 -- 96
Accounts payable and other current
liabilities (518) (97) (871) (106)
Current tax liability 626 (305) 626 --
Deferred taxes 3,625 (113) 3,999 (508)
Other liabilities (148) 56 (121) 26
Net cash generated by (used in) operating
activities (639) 515 689 1,871
Cash flow from investing activities:
Additions to investment properties,
properties held for sale, capitalized
loan costs (net) and capitalized lease
commissions and rent concessions (net) (875) (376) (1,093)(1,551)
Proceeds from sale of properties, net 19,122 510 19,122 510
Contributions to Rincon Center Associates -- -- -- (400)
Distribution from Rincon Center Associates -- -- -- 85
Net cash generated by (used in) investing
activities 18,247 134 18,029 (1,356)
Cash flow from financing activities:
Borrowings under property and corporate debt -- 19,937 -- 20,910
Borrowings in connection with equity
investment, net -- 65 -- 463
Payments on debt (388)(20,570) (1,062) (21,859)
Payment of loan costs and fees in connection
with equity investment -- (7) -- (7)
Mortgages satisfied in connection with
property dispositions (15,224) (400) (15,224) (400)
Issuance of treasury stock -- -- -- 45
(Increase) decrease in cash reserved for
capital improvements, net (29) (15) 138 98
Net cash used in financing activities (15,641) (990) (16,148 (750)
Increase (decrease) in cash and short-term
investments 1,967 (341) 2,570 (235)
Balance at beginning of period 779 465 176 359
Balance at end of period $ 2,746 $ 124 $ 2,746 $ 124
Supplemental disclosures of cash flow
info
Cash paid during the period for:
Interest $ 811 $ 1,028 $ 1,885 $ 2,355
Income Taxes $ 410 $ 181 $ 410 $ 321
The accompanying notes are an integral part of these consolidated financial
statements
PACIFIC GATEWAY PROPERTIES, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
For the Quarter and Six Months Ended June 30, 1996
1. Organization and Summary of Significant Accounting Policies
The accompanying unaudited consolidated financial statements should be read
in conjunction with the 1995 Form 10-K of the Registrant. These statements have
been prepared in accordance with the instructions of the Securities and Exchange
Commission Form 10-Q and do not include all of the information and footnotes
required by generally accepted accounting principles for complete consolidated
financial statements.
In the opinion of the Registrant, all material adjustments of a normal
recurring nature considered necessary for a fair presentation of results of
operations for the interim periods have been included. The results of
consolidated operations for the three and six months ended June 30, 1996 are not
necessarily indicative of the results that may be expected for the year ending
December 31, 1996.
Reclassifications
Certain prior year amounts have been reclassified to be consistent with
current year classifications.
Estimates and Assumptions
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities,
disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenues and expenses during the
reporting period. Actual results will differ from those estimates.
2. Rincon Center Associates Partnership (RCA)-- San Francisco, California
The Registrant owns general (non-managing) and limited partnership
interests in RCA totaling approximately 23%, and is responsible for 20% of RCA's
cash requirements in excess of available financing, subject to the agreement
with the managing general partner discussed below.
The Registrant earns a fee from RCA for posting a $3.65 million letter-
of-credit and earns a preferred return at the prime rate plus 2% on its advances
to RCA. In December 1995, the Registrant recorded a provision for the write
down of its equity investment and loans to RCA to zero reflecting the fact that
RCA has experienced ongoing operating losses which made realization of the
Registrant's investment and loans to RCA unlikely. Additionally, commencing
January 1, 1996, the Registrant (i) ceased recording its allocable share of
RCA's net loss as recording such losses would result in "negative equity" in
RCA for
the Registrant which would not properly reflect the Registrant's economic
interest in RCA, (ii) ceased recording any interest on the Registrant's advances
to the Partnership and for posting a $3.65 million letter-of-credit, (iii)
ceased recording additional advances to RCA made on the Registrant's behalf
by RCA's managing general partner in recognition of the fact that, as discussed
below,
such advances are non-recourse to the Registrant and are only required to be
repaid from future cash distributions to the Registrant by RCA, if any, and (iv)
ceased accruing interest on the funding arrangement with the managing general
partner of RCA which amounted to $2,940,000 through December 31, 1995. The
Registrant's share of any distributions from RCA will be used to reduce the
amount outstanding under a funding arrangement with the managing general partner
of RCA, as more fully described below. During the first six months of 1996, no
letter-of-credit fees or interest on advances were paid by RCA to the
Registrant.
The letter-of-credit has been renewed until December 23, 1996.
The Registrant entered into an agreement in June 1993 with the managing
general partner in RCA. This agreement provides the Registrant 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,
related fees and accrued interest are non-recourse to the Registrant. This
agreement does not reduce the level of the Registrant's general and limited
partnership interests in RCA. Interest accrues on the unpaid portion of both
the
principal amount advanced and related fees at the Bank of America prime rate
plus2%. Amounts advanced under this funding arrangement, plus related fees and
accrued interest, are required to be repaid from future cash distributed by RCA
to the Registrant, if any. The total amount outstanding under this funding
arrangement as of June 30, 1996 was $3,442,000.
Summary financial statement data for RCA is as follows (in thousands):
As of June 30, December 31,
1996 1995
Investment Properties, net $112,070 $113,502
Other assets 21,530 22,623
$133,600 $136,125
Debt $ 57,744 $58,720
Amounts due to partners 150,643 144,035
Other liabilities 11,235 12,253
Partners' deficit (86,022) (78,883)
$133,600 $136,125
Three Months Ended Six Months Ended
June 30, June 30,
1996 1995 1996 1995
Loss from operations:
Revenue $5,483 $4,879 $10,824 $10,253
Expenses:
Operating and
lease expenses 3,289 3,202 6,680 6,223
Financing 4,682 5,052 9,394 9,818
Depreciation and
amortization 945 925 1,889 1,950
8,916 9,179 17,963 17,991
Net loss $(3,433)$(4,300) $(7,139) $(7,738)
Registrant's share of
net loss of RCA $ (784)$ (982) $(1,630) $(1,767)
Registrant's share of cash
distributions from RCA,
net $ 36 $ -- $ 52 $ --
Registrant's share of cash
contributions to RCA,
net $ -- $ -- $ 385 $ 315
As of the date of this report, the managing general partner of RCA had not
completed the financial accounting for RCA. As a result, the Registrant has
recorded an estimate of revenue and expenses for the first six months of 1996
based upon actual operating revenue and expenses for January through May 1996.
The Registrant has conferred with the Managing General Partner of RCA and
considers the projection a reasonable estimate; however, actual results will
differ from this projection.
3. Per Share Data - Per share data is based on the weighted average number
of the Registrant's common shares and common share equivalents. Outstanding
warrants and stock options enter into the common shares outstanding using the
Treasury Stock Method. The number of common share and common share equivalents
used in the earnings per share calculations are as follows:
For the Three Months For the Six Months
Ended June 30, Ended June 30,
1996 1995 1996 1995
Primary 4,284,697 4,089,097 4,166,097 4,089,097
Fully diluted 4,367,059 4,089,097 4,367,059 4,089,097
4. Debt Secured by Mortgages on Real Estate From Primary Lender - In December
1993, the Registrant completed a restructuring of its non-revolving line-of-
credit, letter-of-credit, unsecured bonds, and certain mortgages with its
primary lender. Statement of Financial Accounting Standards No. 15 requires the
Registrant to account for future interest resulting from this transaction using
an imputed interest rate versus the stated rates on the debt from the primary
lender. In addition, the primary lender's cancellation of debt of $4 million,
at the time of the restructuring, is not recognized for financial reporting
purposes. The debt has a recorded balance of $16.5 million and $17.1 million at
June 30, 1996, and December 31, 1995, respectively. The imputed interest rate
as of June 30, 1996, was approximately 4.5%. 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 $63,000 for the
first six months of 1996. The face amount of the debt with the primary
lender as of June 30, 1996,and December 31, 1995, was approximately
$16.7 million and $17.3 million,respectively.
5. Gain on Sale of Real Estate Assets, Net - On April 4, 1996, the Registrant
sold 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 realized a gain for financial reporting purposes of
$10,900,000. The pre-tax net cash proceeds, after repayment of $15,224,000 of
mortgage debt and other costs of the sale, amounted to $3,749,000.
6. Subsequent Event - On July 1, 1996, the Registrant announced that it signed
a letter of intent to be acquired for an all cash purchase price of $5.00 per
share of the Registrant's common stock. The proposed transaction is subject to
numerous conditions including the parties entering into a definitive acquisition
agreement and the bidder satisfactorily completing a due diligence investigation
of the Registrant. Since the July 1 announcement, the bidder has commenced its
due diligence and drafting of a definitive agreement. The Registrant can
provide no assurance that the proposed transaction will be completed.
ITEM 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Liquidity and Capital Resources
The bulk of the Registrant's resources are committed to relatively
non-liquid real estate assets. Traditionally, these assets, due to their value
and cash flow, provided the Registrant with an ability to generate capital as
required, both internally and externally, through asset-based financings. In
addition, since 1992, assets or portions thereof were sold to provide further
liquidity.
Although, as indicated on Note 6 to the unaudited Consolidated Financial
Statements included in this report, the Registrant has entered into a letter of
intent to be acquired. As there is no assurance that such transaction will be
effected, the Registrant intends to continue to operate its business in the
ordinary course, subject to such limitations as may be imposed in the
contemplated acquisition agreement should one be entered into. The Registrant
has taken several actions to generate and conserve cash, and continues to review
and analyze additional potential actions. At the same time, the Registrant is
seeking to retain value and identify future opportunities for investment. At
June 30, 1996, the Registrant has $2.7 million in unrestricted cash, investment
properties and properties held for sale with a net book value of $47.8 million,
total fixed and variable mortgage debt with a book value of $42.6 million and
stockholders' deficit of $2.2 million. Accordingly, given the Registrant's
desire to increase its liquidity, the Registrant has actively pursued potential
sales 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 alternatives to improve its
liquidity through debt refinancings and the sale of properties which do not
fit within its long term strategy. Funds raised in the preceding fashion
would be used for such things as tenant improvements and other capital
requirements, certain mandatory debt reductions, and possible new investments.
At June 30, 1996, the Registrant has the following debt outstanding:
- Fixed rate, nonrecourse mortgage notes with a face value of $32.0
million at a quarter end weighted average stated interest rate of
8.9% per annum.
- Variable rate mortgage notes with a face value of $10.6 million at
a quarter end weighted average stated interest rate of 8.0% per
annum. The variable rate notes provide for certain guarantees and
recourse provisions applicable to the Registrant.
- Nonrecourse loans, accrued interest and fees from the managing
general partner in RCA with a face value of $3.4 million, interest
at prime plus 2% (10.25% at June 30, 1996), with principal, interest
and fees payable 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 June 30, 1997, amount to approximately $1.5 million. The
Registrant is also obligated to fund a reserve for tenant improvements in
connection with one of its debt agreements. Scheduled funding under such
agreement over the twelve months ending June 30, 1997, 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 $3.65
million and $850,000, respectively. The letter-of-credit is undrawn at June 30,
1996, and matures on December 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.
Except as described above, at June 30, 1996, 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 $103,000 in
cash reserved 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 reserve
described above, unrestricted cash, cash flow generated by operating activities
and funds generated from future debt refinancings or property sales, if any.
On April 4, 1996, the Registrant sold the Village Commons Shopping Center,
located in West Palm Beach, Florida, to an unrelated party for $19,300,000. In
connection with this property disposition, the Registrant realized a gain for
financial reporting purposes of $10,900,000. The pre-tax net cash proceeds,
after repayment of $15,224,000 of mortgage debt and other costs of the sale,
amounted to $3,749,000.
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. If the
sale closes in December 1996, the Registrant expects to realize a pre-tax gain
of approximately $6 million. 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 in order to defer the estimated $2,000,000 of taxes
attributable to the gain on this sale. The pre-tax net cash proceeds, after
repayment of $12.25 million of mortgage debt
(assuming refinancing of North Tucson Business Center for $3.5 million and the
refinancing of the Weston office building for $1.0 million) comprising principal
payments of $5.9 million variable and $6.35 million fixed rate mortgage debt
with the Registrant's primary lender and other costs of the sale, are
expected to amount to approximately $8.2 million.
<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 June 30, 1996.
Land $ 3,584,000
Building 12,645,000
Furniture, fixtures and equipment 6,200,000
22,429,000
Accumulated depreciation and
amortization (8,080,000)
14,349,000
Other deferred costs, net 36,000 $14,385,000
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,
California
and Weston, Florida office buildings and the industrial building in Tucson,
Arizona which, if accomplished, will provide excess debt proceeds to the
Registrant, and reduce and secure fixed rate mortgage debt at these properties,
respectively. The excess debt proceeds will be used for general corporate
purposes. The Registrant can make no assurances that the sale of the hotel or
refinancings will be completed.
Material Changes in Results of Operations
Investment Properties - During the first six months of 1996, the income
from investment properties was $374,000 compared to income of $756,000
during the
first six months of 1995. During the second quarter of 1996 the loss from
investment properties was $27,000 compared to income of $286,000 for the second
quarter of 1995. The decrease in income from investment properties for the
first six months of 1996 compared to 1995 is primarily attributable to the sale
of
Village Commons Shopping Center (VCSC) in April 1996 and a reduction in
occupancy
at Walnut Creek Executive Park. Interest expense decreased from $1,634,000
during the first six months of 1995 to $1,508,000 during the first six months of
1996 primarily as a result of reduced debt balances. Depreciation and
amortization expense increased as a result of commencing depreciation of
expenditures capitalized during 1995 and early 1996 relating to the Registrant's
leasing activities and capital improvement projects which was offset by the
cessation of depreciation on the VCSC which was sold in 1996.
Hotel Property - During the first six months of 1996, the hotel property
income was $1,146,000 compared to $1,092,000 during the first six months of
1995. During the second quarter of 1996, the hotel property income was $192,000
compared to $248,000 for the second quarter of 1995. The decrease in income
during the second quarter was due to a decrease in occupancy offset by an
increase in average daily rate, a decrease in interest expense and the cessation
of depreciation expense in 1996. Average occupancy decreased from 84.6% for the
first six months of 1995 to 73.0% for the first six months of 1996. The average
daily rate increased from $85.20 for the first six months of 1995 to $91.95 for
the first six months of 1996. Interest expense decreased from $359,000 for the
first six months of 1995 to $188,000 for the first six months of 1996 primarily
as a result of the effects of the lower principal balance on the hotel's debt.
Effective January 1, 1996, the Registrant ceased recording depreciation on the
hotel since it is classified as an asset held for sale in accordance with
Statement of Financial Accounting Standards No. 121. Had the Registrant
recorded
depreciation on the hotel, such depreciation would have approximated $296,000
for
the first six months of 1996. Total hotel revenues and expenses in 1996 have
also decreased from 1995 as a result of a change in restaurant operations. The
restaurant was leased to an unrelated party in 1995 and, as a result, no
restaurant revenues or expenses are reflected in 1996, resulting in a decline in
hotel revenues of $348,000 and operating expenses of $334,000 for the first six
months of 1996.
Equity in Partnership Loss - Rincon Center Associates (RCA) - As of December
31, 1995, the Registrant recorded a provision for the write down of its equity
investment and loans to RCA to zero reflecting the fact that RCA has experienced
ongoing operating losses which made realization of the Registrant's investment
and loans to RCA unlikely. Additionally, commencing January 1, 1996, the
Registrant (i) ceased recording its allocable share of RCA's net loss as
recording such losses would result in "negative equity" in RCA for the
Registrant
which would not properly reflect the Registrant's economic interest in RCA, (ii)
ceased recording any interest on the Registrant's advances to the Partnership
and
for posting a $3.65 million letter-of-credit, (iii) ceased recording additional
advances to RCA made on the Registrant's behalf by RCA's managing general
partner in recognition of the fact that, as discussed below, such advances are
non-recourse to the Registrant and are only required to be repaid from
future cash distributions to the Registrant by RCA, if any, and (iv) ceased
accruing interest
on the funding arrangement with the managing general partner of RCA which
amounted to $2,940,000 through December 31, 1995. The net loss for RCA decreased
from $7,738,000 in the first six months of 1995 to an estimated $7,139,000 in
the
first six months of 1996. The net loss for RCA decreased from $4,300,000 in the
second quarter of 1995 to an estimated $3,433,000 in the second quarter of
1996.
The decrease in the loss is primarily the result of an increase in operating
revenues and a decrease in financing expenses. The Registrant's unrecorded
equity share of the RCA loss amounted to $1,630,000 and $1,767,000 during the
first six months of 1996 and 1995, respectively. The Registrant's equity share
of the RCA loss amounted to $784,000 and $982,000 in the second quarter of 1996
and 1995, respectively.
Interest and Fee Expense for Debt Related to Equity Investment in RCA -
During the first six months of 1995, the Registrant incurred $123,000 in
interest
and fee expense related to the funding arrangement with the managing general
partner on RCA, as previously discussed.
General and Administrative Expenses - General and administrative expenses in
the first six months of 1996 amounted to $858,000 compared to $658,000 for the
first six months of 1995. General and administrative expenses for the second
quarter of 1996 and 1995 were $462,000 and $305,000, respectively. The increase
is primarily attributable to an increase in legal and accounting fees in
connection with the Registrant's proposed merger, directors fees, insurance and
severance compensation to former employees.
Interest Income - Interest income on the note receivable and cash
investments
was $49,000 and $15,000 during the first six months of 1996 and 1995,
respectively. Interest income on the note receivable and cash investments was
$37,000 and $12,000 during the second quarter of 1996 and 1995, respectively.
Other Income, Net - Other income consisting primarily of business advisory
fees and income from the sale of vacant land in Colorado was $165,000 and
$173,000 during the first six months and second quarter of 1996, respectively.
Gain on Sale of Real Estate Assets, Net - In April 1996, the Registrant sold
the Village Commons Shopping Center, located in West Palm Beach, Florida, to an
unrelated party and realized a gain of $10,900,000. In June 1995, the
Registrant sold a parcel of land in Walnut Creek, California, to an unrelated
party and realized a gain of $177,000.
Income Tax Benefit (Provision) - A tax provision is recorded in connection
with the net income for the three and six months ended June 30, 1996, of
$4,434,000 and $4,808,000, respectively, in accordance with Statement of
Financial Accounting Standards No. 109. A tax benefit was recorded in connection
with the net loss for the three and six months ended June 30, 1995, of $237,000
and $187,000, respectively.
Risks and Uncertainties Associated with Forward Looking Statements
This document contains forward looking statements which involve risks and
uncertainties. The Registrant's actual results may differ significantly from
the
results discussed in the forward looking statements. Factors that may cause
such differences include, but are not limited to, the risks described under the
captions (i) "Management's Discussions and Analysis of Financial Condition and
Results of Operations - Discussion of Known Trends, Events and Uncertainties" in
the Registrant's Annual Report on Form 10-K for the year ended December 31,
1995.
ITEM 6. Exhibits and Reports on Form 8-K
a) Reports on Form 8-K -- On April 19, 1996, the Registrant filed Form 8-K to
report the sale of Village Commons Shopping Center (VCSC). On April 23, 1996,
the Registrant filed Form 8-K/A (Amendment #1) to the Form 8-K to include the
purchase and sale agreement on the sale of VCSC.
b) Reports on Form 8-K -- On October 28, 1994, the Registrant filed Form 8-K to
report the redemption of the Registrant's partnership interest in Golden Gateway
Center. On August 14, 1996, the Registrant filed Form 8-K/A (Amendement #1) to
the Form 8-K to include the pro-forma financial impact of the redemption on the
Registrant's financial statements.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PACIFIC GATEWAY PROPERTIES, INC.
Registrant
Date: August 15, 1996 Raymond V. Marino
Raymond V. Marino
President and Chief Executive Officer
Date: August 15, 1996 Felecia Vernon-Chancey
Felecia Vernon-Chancey
Vice President and Controller
(Principal Accounting Officer)
