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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K/A
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996
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)
<TABLE>
<S> <C>
NEW YORK 04-2816560
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
930 MONTGOMERY STREET, SUITE 400
SAN FRANCISCO, CALIFORNIA 94133
(Address of principal executive offices) (Zip Code)
</TABLE>
Registrant's telephone number, including area code (415) 398-4800
Securities registered pursuant to Section 12 (b) of the Act:
<TABLE>
<S> <C>
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
- ---------------------------- -----------------------
Common Stock, $1.00 par American Stock Exchange
value per share
</TABLE>
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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 (Section 229.405) 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 [ ].
State the aggregate market value of the voting stock held by non-affiliates
of the Registrant as of March 18, 1997: Common Stock, Par Value
$1.00--$10,303,496.
Indicate the number of shares outstanding of each of the Registrant's
classes of common stock, as of March 18, 1997: Common Stock, Par Value
$1.00--3,892,596 shares.
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DOCUMENT INCORPORATED BY REFERENCE
Portions of the Registrant's definitive Proxy Statement for its 1997 annual
meeting shareholders, are incorporated by reference into Part III.
Pacific Gateway Properties, Inc. (the "Registrant") hereby amends the
following Items to its Annual Report on Form 10-K for the year ended December
31, 1996:
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<S> <C>
ITEM 2. PROPERTIES
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
</TABLE>
The following financial statements of the Registrant are filed as part of
this report:
Consolidated Balance Sheet as of December 31, 1996 and 1995
Consolidated Statement of Income (Loss) for the three years ended December
31, 1996, 1995 and 1994
Consolidated Statement of Stockholders' Equity (Deficit) for the three
years ended December 1996, 1995 and 1994
Consolidated Statement of Cash Flows for the three years ended December 31,
1996, 1995 and 1994
Notes to Consolidated Financial Statements
Report of Independent Public Accountants
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ITEM 2. PROPERTIES
As of December 31, 1996, the Registrant had an economic interest in a total
of six operating properties, and two additional properties were acquired on
January 17, 1997.
For information concerning encumbrances on the Registrant's properties
reference is made to "Other Matters Relating to Properties" below and to Notes 3
and 9 of the Notes to the Registrant's Consolidated Financial Statements
included elsewhere in this annual report.
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The following table sets forth certain information regarding the
Registrant's properties which were owned as of December 31, 1996:
<TABLE>
<CAPTION>
# OF UNITS AND/OR # OF TENANTS AND
PROPERTY NAME GENERAL DESCRIPTION LOCATION LEASABLE SQ. FT. OCCUPANCY %
- ---------------------- ------------------------------ ---------------------- --------------------- ----------------------
<S> <C> <C> <C> <C>
Walnut Creek 11 two-story wood framed Walnut Creek, 418,000 sq.ft. acres 63 tenants
Executive Park garden office buildings, and California with parking for over 88% occupancy
one three-story structural 1,720 cars
steel frame office building
South Bay Office Tower Twelve-story office building San Jose, California 164,000 sq.ft. and 44 tenants;
two levels of 92% occupancy
subterranean parking
North Tucson Business Single-story office/industrial Tucson, Arizona 91,000 sq. ft. 2 tenants;
Center building 100% occupancy
Weston Office Building Three-story office building Fort Lauderdale, 15,000 sq. ft. 3 tenants;
Florida 100% occupancy
410 First Avenue Single tenant Needham, Massachusetts 38,000 sq. ft. 1 Tenant
office/industrial building 100% occupancy
Rincon Center Major mixed use project in the San Francisco, 320 Apartments; Apartments -
San Francisco Financial California 78,000 sq. ft. of 99% occupancy
District retail space; 423,000 Retail Space -
sq. ft. of office 31 tenants; 91%
space; 2 level garage occupancy
with parking for 720 Office Space - 9
automobiles tenants; 97% occupancy
<CAPTION>
% REGISTRANT
PROPERTY NAME OWNED BY OWNERSHIP
- ---------------------- --------- ------------
<S> <C> <C>
Walnut Creek Registrant 100%
Executive Park
South Bay Office Tower Registrant 100%
North Tucson Business Registrant 100%
Center
Weston Office Building Registrant 100%
410 First Avenue Registrant 100%
Rincon Center RCA 22.8%
</TABLE>
In addition to the interests referred to above, on January 17, 1997, the
Registrant acquired the following properties:
<TABLE>
<CAPTION>
# OF UNITS AND/OR # OF TENANTS AND
PROPERTY NAME GENERAL DESCRIPTION LOCATION LEASABLE SQ. FT. OCCUPANCY %
- ---------------------- ------------------------------ ---------------------- --------------------- ----------------------
<S> <C> <C> <C> <C>
West Valley Executive Campus style office park with San Jose, California 165,000 sq. ft. 130 Tenants
Park (Formerly Paulsen five two-story and one 98% occupancy
Office Park) single-story wood frame
buildings
930 Montgomery Street Six-story, steel frame office San Francisco, 23,000 sq. ft. 6 Tenants
building California 100% occupancy
<CAPTION>
% REGISTRANT
PROPERTY NAME OWNED BY OWNERSHIP
- ---------------------- --------- ------------
<S> <C> <C>
West Valley Executive Registrant 100%
Park (Formerly Paulsen
Office Park)
930 Montgomery Street Registrant 100%
</TABLE>
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OTHER MATTERS RELATING TO PROPERTIES
SOUTH BAY OFFICE TOWER REFINANCING
In December 1996, the Registrant completed the refinancing of $9.45 million
of debt related to South Bay Office Tower. The new loan bears interest at 8.66%
through maturity. The loan requires fixed monthly payments of $77,000. The loan
is amortized over 25 years and is due January 2007. This new loan may be prepaid
any time after the first day of the fifth (5th) loan year with a 30-day written
notice to the lender. A prepayment consideration of the greater of one percent
of the loan balance, or the present value of all remaining payments of principal
and interest is payable on the prepayment date. Concurrent with the closing, the
Registrant deposited $701,000 with the lender to fund future capital
improvements. In addition, the lender held in escrow additional debt proceeds of
$940,000 which will be released to the Registrant upon the completion of certain
leasing transactions that were in process as of December 31, 1996. Also, the
loan required an additional $22,052 per month to be deposited for future capital
improvements, tenant improvements and leasing commissions until the reserve
equals $668,000. The Registrant is required to maintain a minimum balance of
$668,000 in the reserve during the term of the loan. These funds are included
within cash reserved for capital improvements, acquisitions and debt service on
the Registrant's Consolidated Balance Sheet.
RADISSON SUITES HOTEL SALE
In December 1996, the Registrant closed the sale of the Radisson Suites
Hotel located in Tucson, Arizona to an unrelated party for $21,307,000. In
connection with this property disposition, the Registrant realized a gain for
financial reporting purposes of $5,814,000. The pre-tax net proceeds, after
repayment of $12,011,000 of mortgage debt and other costs of the sale amounted
to $8,266,000. The Registrant completed a tax deferred exchange in accordance
with Section 1031 of the Internal Revenue Code, in January 1997, with the
acquisition of West Valley Executive Park and 930 Montgomery Street, as
previously noted. Accordingly, the Registrant recognized a gain of $1,400,000
and deferred a gain of $8,900,000 as a result of completing the exchange
transaction for tax reporting purposes.
WESTON OFFICE BUILDING REFINANCING
In October 1996, the Registrant completed the refinancing of $1,000,000 of
debt related to its Weston Office Building in Florida. The new loan carries an
8.45% annual interest rate until maturity with fixed monthly amortization
payments of approximately $9,818. The loan is amortized over 15 years and is due
October 2001. The new loan has no prepayment penalty. This new loan is an
obligation of a subsidiary of the Registrant and the Registrant provided a
guarantee of 50% of the outstanding principal balance, or $500,000, whichever is
greater.
NORTH TUCSON BUSINESS CENTER REFINANCING
In September 1996, the Registrant completed the refinancing of $3,850,000 of
debt related to North Tucson Business Center in Arizona. The new loan carries a
9.62% annual interest rate until maturity with fixed monthly amortization
payments of approximately $34,000. The loan is amortized over 25 years and is
due October 2006. Concurrent with the closing, the Registrant deposited $40,768
with the lender to fund future tenant improvements and leasing commissions
during the term of the loan. Also, the loan requires an additional $3,397 per
month to be deposited for future tenant improvements and leasing commissions
during the term of the loan. The monthly reserve deposit amount may be decreased
if certain tenant renewals occur. In addition, the Registrant is required to
fund a debt service reserve of $8,200 per month until $295,000 has been funded.
These funds are included within cash reserved for capital improvements,
acquisitions and debt service on the Registrant's Consolidated Balance Sheet.
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VILLAGE COMMONS SHOPPING CENTER SALE
In April 1996, the Registrant sold the Village Commons Shopping Center 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 $3,931,000.
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. The $850,000 portion was eliminated with the payoff of the mortgage
debt from the sale of the Radisson Suites Hotel.
PRINCIPAL BUSINESS CARRIED ON IN OR FROM THE PROPERTIES
Walnut Creek Executive Park tenants include banking, healthcare,
telecommunications, research and development enterprises, and professional
service companies. South Bay Office Tower tenants include healthcare,
telecommunications, research and development enterprises, and professional
service companies. North Tucson Business Center tenants include printing and
telemarketing companies. Weston Office Building tenants include banking,
financial products services and real estate development companies. 410 First
Avenue's tenant is a hardware and software products company.
RECENT PROPERTY ACQUISITIONS
On January 17, 1997, the Registrant acquired two properties for an aggregate
purchase price of $20,750,000. The equity required to purchase the acquired
properties was obtained primarily from the Registrant's sale of the Radisson
Suites Hotel in December 1996. Neither the Registrant, any subsidiary of the
Registrant nor any director or officer of the Registrant was affiliated with or
had a relationship with the respective sellers of the acquired properties
described below.
On January 17, 1997, the Registrant completed the purchase of WVEP which is
a multi-tenant, six building campus style office park located at 4000-4050
Moorpark Avenue, San Jose, California for $17,500,000 or $106.06 per square
foot. WVEP's six buildings contain approximately 165,000 square feet and are
situated on 7.7 acres. The Registrant purchased WVEP from Peter Paulsen. In
connection with this acquisition, the Registrant assumed approximately
$10,200,000 in debt from Sun Life Assurance Company of Canada (U.S.) which is
amortized over 20 years at a fixed annual interest rate of 9.125%, and matures
on June 30, 2005. The debt continues to be assumable and is subject to a
prepayment penalty if paid off prior to maturity.
On January 17, 1997, the Registrant completed the purchase of 930 Montgomery
Street which is a multi-tenant, 23,000 square foot, six-story, steel frame
office building located at 930 Montgomery Street, San Francisco, California for
$3,250,000 or $141.30 per square foot. The Registrant purchased 930 Montgomery
Street from Donlon H. Gabrielsen and Agnes H. Gabrielsen. In connection with
this acquisition, the Registrant obtained new debt of $2,112,500 from Redwood
Bank which is amortized over 25 years at a floating annual interest rate of 3%
over the one year treasury bond rate, adjustable every six months, and maturing
on February 1, 2002. This debt can be prepaid at any time without a penalty.
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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 1996,
there were additions to investment and hotel properties amounting to
approximately $2,072,000 for tenant improvements, capital improvements and other
deferred costs which includes leasing commissions. Additionally, the Registrant
incurred $450,000 in 1996 relating to loan costs. The Registrant anticipates
additions to investment properties will amount to approximately $2,000,000 in
1997.
FINANCING--A total of approximately $38.5 million of debt was repaid in 1996
as a result of debt refinancing, the sale of the hotel and shopping center and
scheduled debt amortization, as more fully discussed in the Registrant's
Consolidated Financial Statements. The Registrant completed refinancings in 1996
related to its mortgage debt at North Tucson Business Center, Weston Office
Building, and South Bay Office Tower in the amount of $14.3 million.
At December 31, 1996, the Registrant's fixed rate mortgage debt totaled
approximately $33.7 million bearing interest at a weighted average rate of
8.29%. With the addition of the debt incurred with the January 17, 1997
acquisitions, the Registrant's fixed rate mortgage debt increased to
approximately $43.9 million bearing interest at a weighted average rate of 8.49%
and the Registrant has one floating rate mortgage of approximately $2.1 million
bearing interest at a rate of 8.63% as of January 1997.
NET INCOME (LOSS)
INVESTMENT PROPERTIES--During 1996, the loss from investment properties was
$1,181,000 compared to a gain of $747,000 during 1995. The decrease in rental
revenues for 1996 compared to 1995 is due to the sale of Village Commons
Shopping Center (VCSC) and decreased occupancy at Walnut Creek Executive Park
(WCEP). The decrease in operating expenses for 1996 compared to 1995 is
primarily attributed to the sale of VCSC and reduced costs at WCEP. The increase
in interest expense for 1996 compared to 1995 is the result of the Registrant's
1996 debt refinancings. The increase in depreciation and amortization expense is
the result of increased capital expenditures in 1996. The additional expense was
partially offset by the cessation of depreciation on the VCSC property which was
held for sale.
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 attributed to increased occupancy in 1995 for
leases signed in late 1994. Operating expenses increased in 1995 from 1994 due
primarily to increased occupancy in the Registrant's portfolio which was
partially offset by a property tax refund received in 1995 of approximately
$120,000 relating to a previously disposed of property. Interest expense was
constant between 1995 and 1994. The increase in depreciation and amortization
expense is the result of commencing depreciation on expenditures capitalized in
1995 related to the Registrant's leasing activities and capital improvements.
HOTEL PROPERTY--In December 1996, the Registrant sold the hotel property.
During 1996, the income from the hotel property was $1,013,000 compared to
$1,158,000 during 1995. The decrease in revenues for 1996 compared to 1995 is
due to the decrease in occupancy which was offset in part by an increase in the
average daily rate. Operating expenses were constant between 1996 and 1995.
However, operating expenses in 1996 included an asset management fee of $446,745
which was paid to the buyer of the hotel as consideration for the one year
extended close of escrow during 1996. The decrease in interest expense for 1996
compared to 1995 is the result of the Registrant's debt restructuring with its
primary lender. The decrease in depreciation and amortization expense is the
result of the cessation of depreciation since this property was held for sale.
During 1995, the income from the hotel property was $1,158,000 compared to
$827,000 during 1994. The decrease in revenues for 1995 compared to 1994 is due
to a decrease in occupancy offset by an
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increase in the average daily rate. The decrease in operating expenses for 1995
compared to 1994 is primarily attributed to leasing the hotel's food and
beverage operation to an unrelated third party restaurant operator. The decrease
in interest expense for 1995 compared to 1994 is the result 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. The increase in
depreciation and amortization expense is the result of commencing depreciation
on expenditures capitalized in 1995 related to the hotel's improvements
completed in late 1994.
INVESTMENT IN PARTNERSHIPS--Subsequent to 1994, the Registrant's partnership
interests consisted of only its 22.8% combined general (non-managing) and
limited partnership interests in RCA. In 1996, the Registrant ceased recording
any activity related to its interest in RCA because (i) in 1995, it had written-
down its equity investment in and loans to RCA to zero, and (ii) the Registrant
currently has no obligation, prospects or plans to invest further in or on
behalf of RCA.
During 1995, the Registrant recorded its 22.8% equity interest in RCA's net
loss which amounted to $4,090,000. Additionally, in 1995, the Registrant
recorded a $540,000 provision for net realizable value to write-down the
remaining balance of its equity investment in and loans to RCA to zero as the
Registrant attributed no value to its equity investment in RCA.
In 1993, the Registrant entered into an agreement with RCA's managing
general partner whereby such managing general partner agreed to advance funds to
RCA on behalf of the Registrant on an unsecured non-recourse basis, subject to
interest at prime plus 2% and certain fees (principal, unpaid interest and fees
are collectively referred to as the RCA Advances). The RCA Advances are only
required to be repaid from the Registrant's share of future distributions from
RCA, if any. At December 31, 1995, the RCA Advances amounted to $2,940,000.
During 1996, the Registrant recorded a credit to income ("Reversal of debt
related to investment in RCA" on the Registrant's Consolidated Statement of
Income (Loss)) to eliminate the previously recorded liability for the RCA
Advances of $2,940,000 as (i) the Registrant has no intent or legal obligation
to repay the RCA Advances other than from its share of distributions from RCA,
if any, and (ii) the Registrant does not anticipate any material cash
distributions by RCA in the foreseeable future. During 1996, 1995 and 1994, RCA
incurred net losses of approximately $16,451,000, $17,924,000 and $10,441,000,
respectively. The RCA Advances amount to $3,991,000 at December 31, 1996.
During 1995 and 1994, the Registrant recorded interest and fees related to
the RCA Advances of $340,000 and $199,000, respectively.
During 1994, the Registrant recorded its 22.8% equity interest in RCA's net
loss which amounted to $2,383,000. Additionally, in 1994, the Registrant
recorded its equity in partnership net income from its partnership investment in
Golden Gateway Center (GGC) in the amount of $1,085,000. In October 1994, the
Registrant's interest in GGC was redeemed by GGC for $21,000,000, resulting in a
gain of $39,078,000.
The Registrant projects a negative tax basis for its partnership investment
in RCA of approximately $22,000,000, as of December 31, 1996, 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 will face a substantial
taxable gain if and when its interest in RCA is ever disposed of.
GENERAL AND ADMINISTRATIVE EXPENSES--General and administrative expenses
increased to $1,603,000 in 1996 from $1,476,000 in 1995. The increase in general
and administrative expenses are attributable to increased professional fees
offset by a reduction in payroll costs. The general and administrative expenses
remained constant in 1995 and 1994.
INTEREST EXPENSE ON PARTNERSHIP AND OTHER CORPORATE DEBT--In 1994, interest
expense on partnership and other corporate debt included $754,000 related to
that portion of the Registrant's debt with its primary lender which was
cross-collateralized by the Registrant's partnership interest in GGC. As a
result of the
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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.
OTHER INCOME (EXPENSE)--Other income was $540,000 in 1996 compared to an
expense of $15,000 in 1995. The increase in other income is attributable to the
sale of vacant land in Colorado and business advisory fees, net of depreciation
on corporate fixed assets. In 1995, other expense related to depreciation on
corporate fixed assets. In 1994, the other income of $260,000 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 REAL ESTATE ASSETS, NET--In December 1996, the Registrant
sold the Radisson Suites Hotel in Tucson, Arizona to an unrelated party and
realized a gain for financial reporting purposes of $5,814,000. In April 1996,
the Registrant sold the Village Commons Shopping Center in West Palm Beach,
Florida, to an unrelated party and realized a gain for financial reporting
purposes of $10,900,000. In June 1995, the Registrant disposed of a parcel of
land in Walnut Creek, California, to an unrelated 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 party and
realized a gain of $664,000.
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 $1,000,000 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.
INCOME TAX (PROVISION) BENEFIT--In 1996, the Registrant recorded an income
tax provision primarily related to the gain on sale of real estate assets for
financial reporting purposes. 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 included elsewhere in this
annual report.
EXTRAORDINARY GAIN (LOSS) FROM EXTINGUISHMENT OF DEBT--In December 1996, the
Registrant completed the sale of the Radisson Suites Hotel. As a result of this
sale, the Registrant was able to pay off debt to the primary lender resulting in
an extraordinary gain on extinguishment of debt of $766,000 which results from
the difference between the face value of the debt principal and the amount
required to extinguish the related obligation, net of the related write off of
loan fees. 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 had 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, 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.
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,
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earnings or competitive position resulting from compliance with present federal,
state or local environmental control provisions.
DISCUSSION OF KNOWN TRENDS, EVENTS AND UNCERTAINTIES
The economic climate for commercial real estate has 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,
have provided the Registrant with an ability to generate capital as required,
both internally and externally, through asset-based financings. In addition,
since 1992, assets or portions thereof were sold to provide further liquidity.
The Registrant has taken several actions to generate and conserve cash as
discussed below and continues to review and analyze alternative actions. At the
same time, the Registrant is seeking to retain value and identify future
opportunities for investment. At December 31, 1996, the Registrant had
$2,899,000 of unrestricted cash and investment properties with a net book value
of approximately $32.8 million, total fixed rate, nonrecourse mortgage notes of
approximately $33.7 million and a year end weighted average stated interest rate
of 8.29% per annum and stockholders' equity of approximately $2.2 million. At
December 31, 1996, the Registrant had $9,975,000 of restricted cash, and on
January 17, 1997, the Registrant utilized $8,422,000 to acquire two properties
as previously discussed. 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
various alternatives to improve its liquidity through debt refinancing and the
sale of properties which do not fit within its long term strategy. Funds raised
in the preceding fashion would be used for such things as tenant improvements
and other capital requirements, certain mandatory debt reductions, and possible
new investments.
Scheduled principal maturities on the above described debt over the next
twelve months ended December 31, 1997, amount to approximately $622,000. The
acquisition of WVEP and 930 Montgomery Street properties, subsequent to December
31, 1996, will increase the scheduled principal maturities over the next twelve
months ended December 31, 1997, to a total of approximately $846,000. As
discussed in the Registrant's Consolidated Financial Statements, the Registrant
is also obligated to fund reserves for building, tenant improvements and leasing
commissions in connection with its mortgage loans on Walnut Creek Executive
Park, North Tucson Business Center, and South Bay Office Tower. Scheduled
funding under the various mortgage loan agreements over the twelve months ending
December 31, 1997, amounts to approximately $516,000.
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. The letter-of-credit is undrawn at December 31, 1996 and
matures in June 1997. The Registrant's Massachusetts property is pledged as
collateral for the letter-of-credit.
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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. Additionally, RCA's general partner agreed to advance funds to
RCA on behalf of the Registrant on an unsecured non-recourse basis, subject to
interest at prime plus 2% and certain fees (principal, unpaid interest and fees
are collectively referred to as the RCA Advances). The RCA Advances amount to
$3,991,000 at December 31, 1996, and are not recorded by the Registrant since
(i) the RCA Advances are only required to be repaid from the Registrant's share
of future distributions from RCA, if any, (ii) the Registrant has no intention
or legal obligation to repay the RCA Advances other than from its share of
distributions from RCA, if any, and (iii) the Registrant does not anticipate any
material cash distributions by RCA in the foreseeable future.
As of December 31, 1996, the Registrant's mortgage debt had scheduled annual
principal maturities as follows (in thousands):
<TABLE>
<CAPTION>
CURRENT PRO FORMA
--------- -----------
<S> <C> <C>
1997 $ 622 $ 846
1998 675 943
1999 732 1,025
2000 794 1,115
2001 1,644 1,996
Thereafter 29,255 40,112
--------- -----------
$ 33,722 $ 46,037
--------- -----------
--------- -----------
</TABLE>
The Pro Forma column reflects the January 17, 1997, purchase of the West
Valley Executive Park and the 930 Montgomery Street properties.
Except as described above, at December 31, 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 cash restricted
for capital improvements, acquisitions and debt service 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.
The Registrant experienced more stabilized operating results in its wholly
owned properties in 1996, and, except for RCA, expects this trend to continue.
In addition, the completion of certain leasing transactions has continued to
reduce the level of vacancy in the Registrant's portfolio; however, the
Registrant is continuing to aggressively pursue new leases on currently
available space and renew existing leases as they expire.
11
<PAGE>
PACIFIC GATEWAY PROPERTIES, INC.
CONSOLIDATED BALANCE SHEET
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
----------------------
1996 1995
---------- ----------
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 2,899 $ 176
Cash restricted for capital improvements, acquisitions and debt service 9,975 241
Accounts receivable 359 577
Prepaid taxes 280 459
Other current assets 540 7
Investment properties:
Land 5,481 5,481
Buildings 31,847 31,847
Furniture, fixtures and equipment 9,304 8,350
---------- ----------
Subtotal investment properties 46,632 45,678
Less-accumulated depreciation and provision for write-down to net realizable value (13,835) (12,106)
---------- ----------
Investment properties, net 32,797 33,572
---------- ----------
Properties held for sale, net of accumulated depreciation of $8,776 at December 31, 1995 -- 22,230
Deferred tax asset 4,183 6,831
Capitalized loan costs, net of accumulated amortization of $381 and $1,210 at December 31,
1996 and 1995, respectively 857 816
Capitalized lease commissions, net of accumulated amortization of $1,016 and $1,521 at
December 31, 1996 and 1995, respectively 503 753
Other assets, net -- 225
---------- ----------
Total assets $ 52,393 $ 65,887
---------- ----------
---------- ----------
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Accounts payable $ 612 $ 1,293
Accrued payroll, property and sales taxes 195 513
Prepaid rent 418 133
Accrued interest on debt -- 298
Tenant security deposits 266 417
Other current liabilities -- 127
Debt related to corporate, investment and hotel properties 33,722 58,838
Other debt related to equity investment in RCA -- 2,940
Deferred tax liability 15,012 10,514
---------- ----------
Total liabilities 50,225 75,073
---------- ----------
Stockholders' equity (deficit):
Common stock $1.00 par value--
Authorized--10,000,000 shares; Issued--4,011,150 shares 4,011 4,011
Paid-in-deficit (10,222) (10,222)
Retained earnings (deficit) 8,526 (2,828)
Treasury stock, at cost--118,554 common shares at December 31, 1996 and December 31, 1995 (2,037) (2,037)
Warrants for common stock 1,890 1,890
---------- ----------
Total stockholders' equity (deficit) 2,168 (9,186)
---------- ----------
Total liabilities and stockholders' equity (deficit) $ 52,393 $ 65,887
---------- ----------
---------- ----------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements
12
<PAGE>
PACIFIC GATEWAY PROPERTIES, INC.
CONSOLIDATED STATEMENT OF INCOME (LOSS)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
-------------------------------
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
INVESTMENT PROPERTIES:
Rental revenues $ 11,011 $ 12,200 $ 11,027
Operating expenses (5,468) (5,517) (5,201)
Interest expense (4,092) (3,355) (3,356)
Depreciation and amortization (2,632) (2,581) (2,085)
--------- --------- ---------
Investment properties income (loss) (1,181) 747 385
--------- --------- ---------
HOTEL PROPERTY:
Revenues 6,111 7,009 7,357
Operating expenses (4,695) (4,697) (5,367)
Interest expense (403) (491) (779)
Depreciation and amortization -- (663) (384)
--------- --------- ---------
Hotel income 1,013 1,158 827
--------- --------- ---------
INVESTMENT IN PARTNERSHIPS:
Equity in partnership losses, net -- (4,090) (1,298)
Reversal of debt related to investment in RCA 2,940 -- --
--------- --------- ---------
Investment in partnerships 2,940 (4,090) (1,298)
--------- --------- ---------
General and administrative expenses (1,603) (1,476) (1,446)
Interest expense on partnership and other corporate debt -- (340) (953)
Other income (expense) 540 (15) 260
--------- --------- ---------
Income (loss) before partnership and property transactions, reserves, income
taxes and extraordinary items 1,709 (4,016) (2,225)
Gain on redemption of partnership interest -- -- 39,078
Gain on sale of real estate assets, net 16,714 177 664
Provision for write-down to estimated net realizable value -- (540) (1,000)
--------- --------- ---------
Income (loss) before income taxes and extraordinary items 18,423 (4,379) 36,517
Income tax (provision) benefit (7,835) 1,883 (7,375)
--------- --------- ---------
Income (loss) before extraordinary items 10,588 (2,496) 29,142
Extraordinary gain (loss) from extinguishment of debt 766 (233) (325)
--------- --------- ---------
Net income (loss) $ 11,354 $ (2,729) $ 28,817
--------- --------- ---------
--------- --------- ---------
Income (loss) per share, primary:
Income (loss) before extraordinary items $ 2.52 $ (0.60) $ 7.10
Extraordinary items 0.18 (0.06) (0.08)
--------- --------- ---------
Net income (loss) $ 2.70 $ (0.66) $ 7.02
--------- --------- ---------
--------- --------- ---------
Income (loss) per share, fully diluted:
Income (loss) before extraordinary items $ 2.49 $ (0.60) $ 6.96
Extraordinary items 0.18 (0.06) (0.08)
--------- --------- ---------
Net income (loss) $ 2.67 $ (0.66) $ 6.88
--------- --------- ---------
--------- --------- ---------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements
13
<PAGE>
PACIFIC GATEWAY PROPERTIES, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE THREE YEARS ENDED DECEMBER 31, 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
WARRANTS
RETAINED FOR
COMMON PAID-IN EARNINGS TREASURY COMMON
STOCK DEFICIT (DEFICIT) STOCK STOCK TOTAL
----------- ---------- ---------- --------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
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)
Net Income -- -- 11,354 -- -- 11,354
----------- ---------- ---------- --------- ----------- ----------
Balance at December 31, 1996 $ 4,011 $ (10,222) $ 8,526 $ (2,037) $ 1,890 $ 2,168
----------- ---------- ---------- --------- ----------- ----------
----------- ---------- ---------- --------- ----------- ----------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements
14
<PAGE>
PACIFIC GATEWAY PROPERTIES, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
----------------------------------
1996 1995 1994
---------- ---------- ----------
<S> <C> <C> <C>
Cash flow from operating activities:
Net income (loss) $ 11,354 $ (2,729) $ 28,817
Non-cash revenues and expenses included in income:
Depreciation and amortization 2,632 3,275 2,529
Investment in partnerships -- 4,090 1,298
Provision for write-down to estimated net realizable value -- 540 1,000
Gain on sale of real estate assets, net (16,714) (177) (664)
Reversal of debt related to investment in RCA (2,940) -- --
Gain on redemption of partnership interests -- -- (39,078)
Extraordinary items (766) 233 325
Changes in assets and liabilities:
Accounts receivable, prepaid taxes and other current assets (136) (212) 370
Other assets 225 198 (56)
Deferred tax benefit, net 7,146 (1,681) 5,364
Accounts payable and other current liabilities (1,290) 154 (161)
---------- ---------- ----------
CASH FLOW GENERATED BY (USED IN) OPERATING ACTIVITIES (489) 3,691 (256)
---------- ---------- ----------
Cash flow from investing activities:
Additions to investment and hotel properties (1,876) (2,768) (5,528)
Proceeds from sale of properties 39,432 510 1,419
Proceeds from dissolution sale of partnership interest, net -- -- 20,968
Contributions to RCA -- (1,035) (511)
Distributions from RCA -- 424 600
Distributions from GGC -- -- 929
---------- ---------- ----------
NET CASH GENERATED BY (USED IN) INVESTING ACTIVITIES 37,556 (2,869) 17,877
---------- ---------- ----------
Cash flow from financing activities:
Borrowings under property and hotel debt 14,300 20,986 8,750
Borrowings in connection with equity investment, net -- 990 129
Payments on debt (38,460) (23,297) (25,930)
Payment of loan costs and fees (450) (85) (359)
(Increase) decrease in cash restricted for capital improvements (9,734) 356 (597)
Issuance of treasury stock -- 45 --
Proceeds from exercise of stock options -- -- 2
---------- ---------- ----------
NET CASH USED IN FINANCING ACTIVITIES (34,344) (1,005) (18,005)
---------- ---------- ----------
Increase (decrease) in cash and short term investments 2,723 (183) (384)
Balance at beginning of year 176 359 743
---------- ---------- ----------
Balance at end of year $ 2,899 $ 176 $ 359
---------- ---------- ----------
---------- ---------- ----------
SUPPLEMENTARY DISCLOSURES:
Cash paid for interest $ 4,495 $ 4,486 $ 4,842
---------- ---------- ----------
---------- ---------- ----------
Return of property and other assets to lenders in satisfaction of debt $ -- $ -- $ 18,766
---------- ---------- ----------
---------- ---------- ----------
Reduction of debt due to Statement of Financial Accounting Standards No. 15 $ 956 $ -- $ --
---------- ---------- ----------
---------- ---------- ----------
Cash paid for taxes $ 510 $ 483 $ 2,007
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
The accompanying notes are an integral part of these Consolidated Financial
Statements.
15
<PAGE>
PACIFIC GATEWAY PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE YEARS ENDED DECEMBER 31, 1996
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. The Company's overall business plan has been to assemble a substantial
portfolio of income producing properties. The Company historically focused its
property acquisitions in four markets: Northern California, Arizona, Florida and
Massachusetts. The Company'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 Company 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 is on commercial properties which require
aggressive management and leasing in order to maximize their potential. This
strategy is influenced by the following factors: (1) the Company's current
property portfolio is concentrated on the West Coast; and (2) the Company
believes that geographic concentration will influence operational efficiencies.
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 no management influence,
are accounted for using the equity method.
REVENUE RECOGNITION
Rental revenues are recognized on a straight-line basis over the term of
occupancy in accordance with the provisions of the leases.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include cash, commercial paper and money market
accounts, all of which have original maturities of three months or less.
CASH RESTRICTED FOR CAPITAL IMPROVEMENTS, ACQUISITIONS AND DEBT SERVICE
As of December 31, 1996 restricted cash is comprised of the following (in
thousands):
<TABLE>
<S> <C>
Capital, tenant improvement and lease commission reserves $ 915
Acquisition reserves 7,988
Debt service, property tax and insurance reserves 1,072
---------
Total $ 9,975
---------
---------
</TABLE>
INVESTMENT PROPERTIES AND PROPERTIES HELD FOR SALE
Land, buildings and improvements are recorded at cost. Depreciation on
investment properties is provided using the straight-line method over estimated
useful lives ranging from 28 to 40 years. The Company had classified the
Radisson Suites Hotel and Village Commons Shopping Center properties as held for
sale at December 31, 1995, at contract prices less the estimated costs of the
sale of these
16
<PAGE>
PACIFIC GATEWAY PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE THREE YEARS ENDED DECEMBER 31, 1996
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
properties, which were greater than their respective carrying costs. Both of
these properties were sold 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 adopted SFAS
121 in 1995 and the adoption has not had a material impact upon its financial
position and results of operations, except that, in accordance with SFAS 121,
the Company has ceased to provide for depreciation on the properties held for
sale.
INCOME TAXES
The Company accounts for taxes under 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.
GAINS FROM REAL ESTATE ASSETS SOLD AND PARTNERSHIP INTEREST REDEEMED
Gain (loss) on sales of real estate assets and redemption of partnership
interests are included in the Company's Consolidated Statement of Income (Loss)
and consists of the following (in thousands):
<TABLE>
<CAPTION>
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
Radisson Suites Hotel $ 5,814 $ -- $ --
Village Commons Shopping Center 10,900 -- --
Walnut Creek Day Care Building -- -- 664
Walnut Creek Parcel of Land -- 177 --
--------- --------- ---------
Subtotal of Real Estate Assets Sold 16,714 177 664
Golden Gateway Center Redemption -- -- 39,078
--------- --------- ---------
Total $ 16,714 $ 177 $ 39,742
--------- --------- ---------
--------- --------- ---------
</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, 1996 1995 1994
- ------------------------------------------------------- ---------- ---------- ----------
<S> <C> <C> <C>
Primary 4,204,822 4,124,082 4,105,808
---------- ---------- ----------
---------- ---------- ----------
Fully diluted 4,256,021 4,124,082 4,186,515
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
17
<PAGE>
PACIFIC GATEWAY PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE THREE YEARS ENDED DECEMBER 31, 1996
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 Company's wholly owned San Francisco Bay
Area properties do not maintain earthquake insurance. 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.
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, Perini Land & Development Company (a
wholly owned subsidiary of Perini Corporation), discussed below, is responsible
for 20% of cash requirements in excess of available financing. The Company's
minority, general (non-managing) and limited partnership interests 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
18
<PAGE>
PACIFIC GATEWAY PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE THREE YEARS ENDED DECEMBER 31, 1996
2. REAL ESTATE PARTNERSHIP INVESTMENTS (CONTINUED)
letter-of-credit is secured by the Company's 410 First Avenue property in
Needham, Massachusetts, with a net book value of approximately $2.2 million at
December 31, 1996. The letter-of-credit expires June 1997.
In 1996, the Company ceased recording any activity related to its interest
in RCA because (i) it had previously written-down its equity investment in and
loans to RCA to zero in 1995 and (ii) the Company currently has no obligation,
prospects or plans to invest further in or on behalf of RCA. During 1995, the
Company recorded its 22.8% equity interest in RCA's net loss which amounted to
$4,090,000. Additionally, in 1995, the Company recorded a $540,000 provision for
net realizable value to write-down the remaining balance of its equity
investment in and loans to RCA to zero as the Company attributed no value to its
equity investment in RCA.
In 1993, the Company entered into an agreement with RCA's managing general
partner whereby such managing general partner agreed to advance funds to RCA on
behalf of the Company on an unsecured non-recourse basis, subject to interest at
prime plus 2% and certain annual fees (principal, unpaid interest and fees are
collectively referred to as the RCA Advances). This agreement does not reduce
the level of the Company's general and limited partnership interests in RCA. The
RCA Advances are only required to be repaid from the Company's share of future
distributions from RCA, if any. At December 31, 1995, the RCA Advances amounted
to $2,940,000. During 1996, the Company recorded a credit to income ("Reversal
of Debt Related to Investment in RCA" on the Company's Consolidated Statement of
Income (Loss)) to eliminate the previously recorded liability for the RCA
Advances of $2,940,000 as (i) the Company has no intention or legal obligation
to repay the RCA Advances other than from its share of distributions from RCA,
if any, and (ii) the Company does not anticipate any cash distributions by RCA
in the foreseeable future. During 1996, 1995 and 1994, RCA incurred net losses
of approximately $16,451,000, $17,924,000 and $10,441,000, respectively. The RCA
Advances amount to $3,991,000 at December 31, 1996.
During 1995 and 1994, the Company recorded interest and fees related to the
RCA Advances of $340,000 and $199,000, respectively. As previously discussed,
the Company ceased recording any activity relating to RCA in 1996.
Subsequent to December 31, 1996, the Company has asserted certain claims
against RCA for payment to the Company by RCA for leasing services provided to
RCA by the Company during 1996. The Company has not accrued for such claims
pending resolution of this matter with RCA's managing general partner.
19
<PAGE>
PACIFIC GATEWAY PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE THREE YEARS ENDED DECEMBER 31, 1996
2. REAL ESTATE PARTNERSHIP INVESTMENTS (CONTINUED)
Summary financial statement data for RCA is as follows (in thousands):
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1996 1995
---------- ----------
<S> <C> <C> <C>
Investment properties, net $ 110,495 $ 113,502
Other assets 21,042 22,623
---------- ----------
$ 131,537 $ 136,125
---------- ----------
---------- ----------
Debt $ 56,012 $ 58,720
Amounts due to partners 158,156 144,035
Other liabilities 12,703 12,253
Partners' deficit (95,334) (78,883)
---------- ----------
$ 131,537 $ 136,125
---------- ----------
---------- ----------
<CAPTION>
1996 1995 1994
---------- ---------- ----------
<S> <C> <C> <C>
Revenue $ 20,705 $ 20,165 $ 20,285
---------- ---------- ----------
Expenses:
Operating and lease expenses 18,519 19,572 17,244
Financing 14,712 14,402 11,354
Depreciation and amortization 3,925 4,115 4,019
Property tax reduction -- -- (1,891)
---------- ---------- ----------
37,156 38,089 30,726
---------- ---------- ----------
Net loss $ (16,451) $ (17,924) $ (10,441)
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
GOLDEN GATEWAY CENTER PARTNERSHIP (GGC)--SAN FRANCISCO, CALIFORNIA
In October 1994, GGC redeemed the Company's remaining 29.5% partnership
interest for approximately $21 million, resulting in a gain of approximately $39
million which is described in more detail below (in thousands). The Company
accounted for its investment in GGC on the equity basis since 1991.
<TABLE>
<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>
20
<PAGE>
PACIFIC GATEWAY PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE THREE YEARS ENDED DECEMBER 31, 1996
2. REAL ESTATE PARTNERSHIP INVESTMENTS (CONTINUED)
Summary Financial data for GGC is as follows (in thousands):
<TABLE>
<CAPTION>
FOR THE NINE
MONTHS ENDED
SEPTEMBER 30, 1994
------------------
<S> <C>
Company's share of cash distributions from GGC $ 929
-------
-------
Income from operations:
Revenues $ 15,118
-------
Expenses:
Operating 5,113
Interest 5,556
Depreciation and amortization 771
-------
11,440
-------
Net income 3,678
-------
-------
Company's share of net income of GGC $ 1,085
-------
-------
</TABLE>
3. DEBT
As of December 31, 1996 and 1995, the Company had the following debt
outstanding (in thousands):
<TABLE>
<CAPTION>
1996 1995
--------- ---------
<S> <C> <C>
Debt related to corporate, investment and hotel properties, paid in full
in 1996. $ -- $ 17,353
Other mortgages on real estate:
South Bay Office Tower, interest fixed at 8.66%, due January 2007. 9,450 6,394
Walnut Creek Executive Park, interest fixed at 7.85%, due July 2005. 19,438 19,841
Village Commons Shopping Center, interest variable at LIBOR plus
1.25%, paid in full in 1996. -- 15,250
Weston Office Building, interest fixed at 8.45%, due October 2001. 993 --
North Tucson Business Center, interest fixed at 9.62%, due October
2006. 3,841 --
--------- ---------
$ 33,722 $ 58,838
--------- ---------
--------- ---------
</TABLE>
CORPORATE DEBT AND MORTGAGES ON REAL ESTATE
In December 1993, the Company completed a restructuring of its non-revolving
line-of-credit, letter-of-credit, unsecured bonds, and certain mortgages. The
new loan was in the form of a Tranche A and Tranche B Note. The Tranche A Note
(Note A), with a face amount of approximately $11.4 million as of December 31,
1995, had a variable interest rate at LIBOR plus 2.5%. The Tranche B Note (Note
B) with a
21
<PAGE>
PACIFIC GATEWAY PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE THREE YEARS ENDED DECEMBER 31, 1996
3. DEBT (CONTINUED)
face amount of approximately $5.9 million as of December 31, 1995, (including
accrued interest) had a fixed interest rate of 9%. Both Notes A and B were paid
in full in 1996 using the proceeds from the sale of the Radisson Suites Hotel.
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 of which one million warrants have been canceled leaving one million
exercisable warrants outstanding at December 31, 1996. The outstanding warrants
expire December 11, 1998. 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 at $1.89 million which is recorded as equity in the Company's
Consolidated Balance Sheet.
Statement of Financial Accounting Standards No. 15 required 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. In connection
with the retirement of Notes A and B, the Company recorded an extraordinary gain
on extinguishment of debt resulting from the difference in the face value and
the amount required to extinguish the debt, net of the write-off of related loan
fees.
OTHER MORTGAGES ON REAL ESTATE
SOUTH BAY OFFICE TOWER REFINANCING
In December 1996, the Company completed the refinancing of $9.45 million of
debt related to South Bay Office Tower. The new loan bears interest at 8.66%
through maturity. The loan requires fixed monthly payments of $77,000. The loan
is amortized over 25 years and is due January 2007. This new loan may be prepaid
any time after the first day of the fifth (5th) loan year with a 30-day written
notice to the lender. A prepayment consideration of the greater of one percent
of the loan balance, or the present value of all remaining payments of principal
and interest is payable on the prepayment date. Concurrent with the closing, the
Company deposited $701,000 with the lender to fund future capital improvements.
In addition, the lender holds in escrow additional debt proceeds of $940,000
which will be released to the Company upon the completion of certain leasing
transactions that were in process as of December 31, 1996. Also, the loan
requires an additional $22,052 per month to be deposited for future capital
improvements, tenant improvements and leasing commissions until the reserve
equals $668,000. The Company is required to maintain a minimum balance of
$668,000 during the term of the loan. These funds are classified within cash
reserved for capital improvements, acquisitions and debt service on the
Company's Consolidated Balance Sheet.
WESTON OFFICE BUILDING REFINANCING
In October 1996, the Company completed the refinancing of $1,000,000 of debt
related to its Weston Office Building in Florida. The new loan carries an 8.45%
annual interest rate until maturity with fixed monthly amortization payments of
approximately $9,818. The loan is amortized over 15 years and is due October
2001. The new loan has no prepayment penalty. This new loan is an obligation of
a subsidiary of
22
<PAGE>
PACIFIC GATEWAY PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE THREE YEARS ENDED DECEMBER 31, 1996
3. DEBT (CONTINUED)
the Company and the Company has provided a guarantee of 50% of the outstanding
principal balance, or $500,000, whichever is greater.
NORTH TUCSON BUSINESS CENTER REFINANCING
In September 1996, the Company completed the refinancing of $3,850,000 of
debt related to North Tucson Business Center in Arizona. The new loan carries a
9.62% annual interest rate until maturity with fixed monthly amortization
payments of approximately $34,000. The loan is amortized over 25 years and is
due October 2006. Concurrent with the closing, the Company deposited $40,768
with the lender to fund future tenant improvements and leasing commissions
during the term of the loan. Also, the loan requires an additional $3,397 per
month to be deposited for future tenant improvements and leasing commissions
during the term of the loan. The monthly reserve deposit amount may be decreased
if certain tenant renewals occur. In addition, the Company is required to fund a
debt service reserve of $8,200 per month until $295,000 has been funded. These
funds are classified within cash reserved for capital improvements, acquisitions
and debt service on the Company's Consolidated Balance Sheet.
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. 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 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, 1996,
amounted to $56,000 and is classified within cash restricted for capital
improvements, acquisitions and debt service on the Company's Consolidated
Balance Sheet. As a result of this refinancing, the Company wrote-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 in 1995.
LOAN MATURITIES
The maturities of debt outstanding as of December 31, 1996, and required
minimum principal payments in each of the next five years are summarized as
follows (in thousands):
<TABLE>
<CAPTION>
CURRENT PRO FORMA
--------- -----------
<S> <C> <C>
1997 $ 622 $ 846
1998 675 943
1999 732 1,025
2000 794 1,115
2001 1,644 1,996
Thereafter 29,255 40,112
--------- -----------
$ 33,722 $ 46,037
--------- -----------
--------- -----------
</TABLE>
23
<PAGE>
PACIFIC GATEWAY PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE THREE YEARS ENDED DECEMBER 31, 1996
3. DEBT (CONTINUED)
The Pro Forma column reflects the January 17,1997, purchase of the West
Valley Executive Park and 930 Montgomery Street properties referred to in Note
9.
4. OTHER RELATED PARTY ITEMS
One of the Company's seven directors as of December 31, 1996 was a Director
of Perini Corporation as of December 31, 1994. A wholly owned subsidiary of the
Perini Corporation, Perini Land & Development Company, is the managing general
partner of RCA.
5. INCOME TAXES
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).
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 $4.6 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, 1996 (in thousands):
<TABLE>
<CAPTION>
FEDERAL STATE TOTAL
--------- --------- ---------
<S> <C> <C> <C>
Deferred tax assets:
Net operating loss carryover $ 963 $ 120 $ 1,083
Tax credits carryover 2,202 -- 2,202
State deferred tax 774 -- 774
Prepaid rent 99 25 124
--------- --------- ---------
$ 4,038 $ 145 $ 4,183
--------- --------- ---------
--------- --------- ---------
Deferred tax liabilities:
Excess tax depreciation $ 401 $ 102 $ 503
Excess partnership losses from RCA 7,811 1,994 9,805
Debt relating to tax deferred exchange 3,754 950 4,704
--------- --------- ---------
$ 11,966 $ 3,046 $ 15,012
--------- --------- ---------
--------- --------- ---------
</TABLE>
24
<PAGE>
PACIFIC GATEWAY PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE THREE YEARS ENDED DECEMBER 31, 1996
5. INCOME TAXES (CONTINUED)
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).
PERCENTAGES
<TABLE>
<CAPTION>
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
Statutory Federal income tax rate 34% (34)% 35%
State income tax 7 (7) 6
-- -- --
41 (41) 41
Change in valuation reserve -- -- (21)
-- -- --
Effective tax rate provision (benefit) 41% (41)% 20%
-- -- --
-- -- --
</TABLE>
The components of the (provision) benefit for income taxes were as follows
(in thousands):
<TABLE>
<CAPTION>
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
Federal--current $ (142) $ -- $ (675)
Federal--deferred (5,977) 1,608 (3,203)
State--current (376) -- (1,279)
State--deferred (1,340) 275 (2,218)
--------- --------- ---------
$ (7,835) $ 1,883 $ (7,375)
--------- --------- ---------
--------- --------- ---------
</TABLE>
6. LESSOR ARRANGEMENTS
As of December 31, 1996, approximately 664,000 of a total of approximately
726,000 square feet or 91.5% of the Company's wholly owned commercial space was
leased. On January 17, 1997, the Company acquired the West Valley Executive Park
and 930 Montgomery Street properties which brought the total square footage of
the Company's wholly owned properties to 916,000 square feet. As of the
acquisition date, a total of 850,000 square feet or 93% of the Company's wholly
owned space was leased. 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>
<CAPTION>
CURRENT PRO FORMA
--------- -----------
<S> <C> <C>
1997 $ 8,809 $ 10,998
1998 7,560 8,532
1999 6,016 6,429
2000 4,476 4,762
2001 2,143 2,355
Thereafter 2,662 2,662
--------- -----------
$ 31,666 $ 35,738
--------- -----------
--------- -----------
</TABLE>
25
<PAGE>
PACIFIC GATEWAY PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE THREE YEARS ENDED DECEMBER 31, 1996
6. LESSOR ARRANGEMENTS (CONTINUED)
The Pro Forma column reflects the January 17, 1997, purchase of the West
Valley Executive Park and 930 Montgomery Street properties.
7. STOCK, WARRANTS AND EMPLOYEE BENEFIT PLANS
INCENTIVE STOCK OPTION PLAN
The Company has two stock option plans, the 1985 Incentive Stock Option Plan
(the "1985 Plan") and the 1996 Stock Option Plan (the "1996 Plan"). Under the
1985 Plan, 200,000 shares of the Company's common stock were reserved for
issuance. This plan provides for options to be granted at fair market value on
the date of grant for terms not exceeding ten years. As of December 31, 1996, a
total of 57,350 options were outstanding under the 1985 Plan and no additional
grants may be made. Of such outstanding options, 35,000 are exercisable in equal
cumulative installments over five years beginning in 1993 at prices ranging from
$2.97 to $3.13 per share and 22,350 outstanding options are exercisable in equal
cumulative installments over five years beginning in 1995 at prices ranging from
$3.56 to $4.56 per share. Under the 1996 Plan, a total of 200,000 shares of
Common Stock have been reserved for issuance. This plan provides for options to
be granted at fair market value on the date of grant for terms not exceeding ten
years. During 1996, options to purchase an aggregate of 150,000 shares of Common
Stock were granted at an exercise price of $2.56. Of such options outstanding
under the 1996 Plan, 40,000 were exercisable in 1996, 50,000 are exercisable in
1998, and 10,000 are exercisable in 1999, 2000 and 2001, respectively.
In October 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standard No. 123 "Accounting for Stock Based
Compensation" (SFAS 123), which establishes financial accounting and reporting
standards for stock based compensation plans. As permitted by SFAS 123, the
Company will continue to account for these plans under APB Opinion No. 25, under
which no compensation expense has been recognized. The additional compensation
expense that would have been disclosed as if the Company had adopted SFAS 123 is
not material in 1996 and 1995.
26
<PAGE>
PACIFIC GATEWAY PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE THREE YEARS ENDED DECEMBER 31, 1996
7. STOCK, WARRANTS AND EMPLOYEE BENEFIT PLANS (CONTINUED)
A summary of the status of the Company's two stock option plans and stock
warrants at December 31, 1996, 1995, and 1994 and changes during the years then
ended is presented in the table and narrative below:
<TABLE>
<CAPTION>
1996 1995 1994
----------------------- ----------------------- -----------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
---------- ----------- ---------- ----------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year 1,182,850* $ 2.97 1,182,850* $ 2.97 1,140,000* $ 2.94
Granted 150,000 2.56 -- -- 42,850 3.74
Exercised -- -- -- -- -- --
Expired (125,500) 3.58 -- -- -- --
---------- ---------- ----------
Outstanding at end of year 1,207,350 2.86 1,182,850 2.97 1,182,850 2.97
---------- ---------- ----------
---------- ---------- ----------
Exercisable at end of year 1,076,940 92,570 56,000
---------- ---------- ----------
---------- ---------- ----------
Weighted Average Fair Value of Options
Granted $ 1.68 $ 0.00 $ 2.45
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
* Included in this amount are one million warrants related to the 1993 debt
restructuring. These warrants will expire on December 11, 1998.
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing model with the following weighted-average
assumptions used for grants during 1996: expected dividend yield of 0%, expected
volatility of 43.4%, risk-free interest rate of 6.29% and expected life of 10
years.
TREASURY STOCK ISSUANCE
In 1995, the Company issued, as 1994 executive compensation to the Company's
then Chief Executive Officer, 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.
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, 1996, no contributions had been made to this
plan by the Company.
27
<PAGE>
PACIFIC GATEWAY PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE THREE YEARS ENDED DECEMBER 31, 1996
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, 1996 and December 31, 1995.
<TABLE>
<CAPTION>
BY QUARTER
1996 FIRST SECOND THIRD FOURTH TOTAL
<S> <C> <C> <C> <C> <C>
Investment properties income (loss) $ 401 $ (27) $ (79) $ (1,476) $ (1,181)
--------- --------- --------- ---------- ---------
--------- --------- --------- ---------- ---------
Hotel property income (loss) 954 192 (108) (25) 1,013
--------- --------- --------- ---------- ---------
--------- --------- --------- ---------- ---------
Gain on sale of real estate asset -- 10,900 -- 5,814 16,714
--------- --------- --------- ---------- ---------
--------- --------- --------- ---------- ---------
Extraordinary loss from extinguishment of debt -- -- -- 766 766
--------- --------- --------- ---------- ---------
--------- --------- --------- ---------- ---------
Net income (loss) $ 589 $ (6,379) $ (549) $ 17,693 $ 11,354
--------- --------- --------- ---------- ---------
--------- --------- --------- ---------- ---------
Income (loss) per share, primary:
Income (loss) before extraordinary item $ 0.15 $ (1.49) $ (0.13) $ 3.99 $ 2.52
Extraordinary item -- -- -- .18 .18
--------- --------- --------- ---------- ---------
Net income (loss) $ 0.15 $ (1.49) $ (0.13) $ 4.17 $ 2.70
--------- --------- --------- ---------- ---------
--------- --------- --------- ---------- ---------
Income (loss) per share, fully diluted:
Income (loss) before extraordinary item $ 0.14 $ (1.46) $ (0.13) $ 3.94 $ 2.49
Extraordinary item -- -- -- 0.18 0.18
--------- --------- --------- ---------- ---------
Net income (loss) $ 0.14 $ (1.46) $ (0.13) $ 4.12 $ 2.74
--------- --------- --------- ---------- ---------
--------- --------- --------- ---------- ---------
</TABLE>
<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>
28
<PAGE>
PACIFIC GATEWAY PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE THREE YEARS ENDED DECEMBER 31, 1996
9. SUBSEQUENT EVENTS
On January 17, 1997, the Company purchased two properties to complete a tax
deferred exchange in accordance with Section 1031 of the Internal Revenue Code,
in connection with the sale of the Radisson Suites Hotel. The first acquisition
was West Valley Executive Park, a multi-tenant, six building, 165,000 square
foot campus style office park in San Jose, California, that was acquired for
$17,500,000. In connection with the acquisition, the Company assumed
approximately $10,200,000 in mortgage debt from Sun Life Assurance Company of
Canada (U.S.). The loan is amortized over twenty (20) years at a fixed annual
interest rate of 9.125% and matures on June 30, 2005. The debt continues to be
assumable and is subject to a prepayment penalty if paid off prior to maturity.
The second acquisition was a mutli-tenant, 23,000 square foot, six-story steel
frame office building located at 930 Montgomery Street, San Francisco,
California, for $3,250,000. In connection with the 930 Montgomery Street
acquisition, the Company obtained $2,112,500 in mortgage debt from Redwood Bank.
The loan is amortized over twenty-five (25) years at a floating interest rate of
3% over the one year treasury bond rate, adjustable every six months and matures
on February 1, 2002. The Redwood Bank debt can be prepaid at any time without a
penalty.
29
<PAGE>
9. SUBSEQUENT EVENTS (CONTINUED)
The following Consolidated Condensed Pro Forma Balance Sheet of the Company
which is unaudited reflects the Company's financial position as if these
purchases had occurred as of December 31, 1996:
PACIFIC GATEWAY PROPERTIES, INC.
CONSOLIDATED CONDENSED PRO FORMA BALANCE SHEET
AS OF DECEMBER 31, 1996
(IN THOUSANDS, EXCEPT SHARE AMOUNT)
(UNAUDITED)
<TABLE>
<CAPTION>
ACQUIRED
HISTORICAL PROPERTIES PRO FORMA
----------- ----------- -----------
<S> <C> <C> <C>
ASSETS
Investments in real estate, net $ 32,797 $ 20,750 $ 53,547
Cash and short-term investments 12,874 (8,422) 4,452
Deferred tax asset 4,183 -- 4,183
Deferred financing and leasing costs 1,360 125 1,485
Other assets 1,179 -- 1,179
----------- ----------- -----------
Total assets $ 52,393 $ 12,453 $ 64,846
----------- ----------- -----------
----------- ----------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Accounts payable and accruals $ 1,491 $ 216 $ 1,707
Mortgage loans 33,722 12,313 46,035
Deferred tax liability 15,012 (76) 14,936
----------- ----------- -----------
Total liabilities 50,225 12,453 62,678
----------- ----------- -----------
Stockholders' Equity (Deficit)
Common stock 4,011 -- 4,011
Paid-in-deficit (10,222) -- (10,222)
Accumulated earnings 8,526 -- 8,526
Treasury stock, at cost--118,554 common shares at December 31, 1996 (2,037) -- (2,037)
Warrants for common stock 1,890 -- 1,890
----------- ----------- -----------
Total stockholders' equity (deficit) 2,168 -- 2,168
----------- ----------- -----------
Total liabilities and stockholders' equity (deficit) $ 52,393 $ 12,453 $ 64,846
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
In the opinion of management, the pro forma consolidated condensed financial
information provides for all material adjustments necessary to reflect the
material effects of the acquisitions of the West Valley Executive Park and 930
Montgomery Street properties.
The pro forma balance sheet is unaudited and is not necessarily indicative
of the consolidated financial position that would have occurred if the
transactions and adjustments reflected therein had been consummated on the date
presented, or on any particular date in the future, nor does it purport to
represent the financial position of the Company for future periods.
30
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To 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, 1996 and 1995, and the related consolidated statements of income
(loss), stockholders' equity (deficit) and cash flows for each of the three
years in the period ended December 31, 1996. 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, 1996 and 1995, and
the results of their operations and their cash flows for each of the three years
in the period ended December 31, 1996, 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 7, 1997
31
<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 amendment to the
report to be signed on its behalf by the undersigned, thereunto duly authorized.
<TABLE>
<S> <C> <C>
PACIFIC GATEWAY PROPERTIES, INC.
(REGISTRANT)
By: /s/ RAYMOND V. MARINO
-----------------------------------------
Raymond V. Marino
PRESIDENT AND CHIEF EXECUTIVE OFFICER
</TABLE>
Dated: November 21, 1997
32
