<PAGE>
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 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)
NEW YORK 04-2816560
(State or other jurisdiction of (IRS Employer
incorporation or organization ) Identification No.)
ONE RINCON CENTER
101 SPEAR STREET, SUITE 215
SAN FRANCISCO, CALIFORNIA 94105
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (415) 543-8600
SECURITIES REGISTERED PURSUANT TO SECTION 12 (b) OF THE ACT:
Name of each exchange
Title of each class on which registered
------------------- ---------------------
Common Stock, $1.00 par value American Stock Exchange
per share
SECURITIES REGISTERED PURSUANT TO SECTION 12 (g) OF THE ACT: NONE
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K (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.
DOCUMENT INCORPORATED BY REFERENCE
Portions of the Registrant's definitive Proxy Statement for its 1997 annual
meeting of shareholders, are incorporated by reference into Part III.
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PART I
ITEM 1. BUSINESS
GENERAL
Pacific Gateway Properties, Inc. (the "Registrant") was incorporated
under the laws of the State of New York in January 1984 and began its
operations in April 1984 upon the transfer to it of certain assets formerly
owned by Perini Corporation and the distribution of shares of the
Registrant's Common Stock to the stockholders of Perini Corporation in May
1984.
The Registrant holds interests in income producing real estate. As of
December 31, 1996, the Registrant's portfolio of operating properties
consists of economic interests in the following:
(i) Walnut Creek Executive Park, Walnut Creek, California--a
418,000 square foot office park consisting of twelve low-rise (one- to
three-story) office buildings--100% owned;
(ii) South Bay Office Tower, San Jose, California--a 164,000
square foot, twelve-story office building--100% owned;
(iii) North Tucson Business Center, Tucson, Arizona--a one-story,
91,000 square foot office/industrial building--100% owned;
(iv) Weston Office Building, Weston (Fort Lauderdale), Florida--a
three-story, 15,000 square foot office building--100% owned;
(v) 410 First Avenue, Needham, Massachusetts--a single-story
office/industrial building totaling 38,000 square feetlocated in a
suburb of Boston--100% owned; and
(vi) Rincon Center, San Francisco, California--a mixed-use (retail,
office, apartment) complex in downtown San Francisco. This two
phase project contains 78,000 square feet of retail space, 423,000
square feet of office space, 320 apartment units and 720 parking
spaces. The Registrant owns general (non-managing) and limited
partnership interests in the partnership that owns Rincon Center totaling
approximately 22.8%.
In addition to the interests referred to above, on January 17, 1997, the
Registrant acquired the following properties:
(i) West Valley Executive Park ("WVEP") (formerly Paulsen Office
Park), San Jose, California--a campus style office park comprised of
five two-story buildings and one single-story building totaling 165,000
square feet--100% owned;
(ii) 930 Montgomery Street, San Francisco, California--a six-story,
steel frame office building totaling 23,000 square feet--100% owned.
MANAGEMENT OF PROPERTIES
The Registrant manages the operating properties directly or through
third party management companies. During 1996, the Registrant also provided
leasing, construction and/or property management services to Rincon Center
and other third party owned properties.
PROPERTY OWNED IN PARTNERSHIP WITH OTHERS
The Registrant's portfolio includes its general (non-managing) and
limited partnership interests in Rincon Center Associates, a California
limited partnership ("RCA"). RCA owns Rincon Center. The Registrant is not
the managing general partner of RCA. Operating and other decisions with
respect to Rincon Center are generally controlled by the managing general
partner, an entity that is unrelated to the Registrant; therefore, the
Registrant has less flexibility with respect to such asset, than if it owned
it outright.
BUSINESS PLAN AND POLICIES
The Registrant's overall business plan has been to assemble a portfolio
of income producing properties. The Registrant has historically focused its
property acquisitions in four markets: Northern California, Arizona, Florida
and Massachusetts. The Registrant's long-term objectives continue to be
maximizing net cash flow from operations and achieving growth through
appreciation of asset values. The current strategic plan of the Registrant
is to focus on real estate investments on the West Coast with a specific
emphasis on the San
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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 Registrant's current property portfolio is concentrated on
the West Coast; and (2) the Registrant believes that geographic concentration
will influence operational efficiencies.
The Registrant regularly examines each asset in its portfolio, focusing
on each property's current cash flow, anticipated cash requirements, the
economics of its local marketplace, as well as the asset's position in that
market and the potiential for sale, refinancing, and return on additional
investment. In conjunction with this process, the Registrant from time to
time offers for sale certain assets to reduce its involvement in certain
markets, create liquidity and advance the geographic and property type
concentration and efficiency of the Registrant's operations. In 1996, the
Registrant sold its hotel property in Arizona and its shopping center
property in Florida and completed the refinancing of $14.3 million of
mortgage debt on the Weston Office Building, North Tucson Business Center and
South Bay Office Tower. These transactions are more fully discussed in the
pages that follow. The Registrant intends to continue to make use of
borrowed money or leveraging, as is customary with the types of properties it
intends to own. The amount of mortgage debt supported by each project
depends on, among other factors, its cash flow available to service such debt.
COMPETITION
Within its geographic areas of operation, the Registrant is subject to
competition from a variety of investors, including insurance companies,
pension funds, corporate and individual real estate developers, real estate
investment trusts, and investors with similar investment objectives to those
of the Registrant. Some of these competitors have greater financial
resources, larger staffs and longer operating histories than the Registrant.
As an owner of commercial real estate properties, the Registrant competes
with other owners of similar properties in connection with their financing,
sale, lease, or other disposition and use.
EMPLOYEES
As of December 31, 1996, the Registrant had 12 full-time and no
part-time employees, compared to 117 full-time and 5 part-time employees as
of December 31, 1995. The reduction in personnel is primarily related to the
sale of the Registrant's Arizona hotel property in 1996.
FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS, SEASONALITY AND OTHER FACTORS
The Registrant is engaged in the business of owning and managing income
producing real estate. The requirement for a presentation about industry
segments is not applicable. The Registrant's business is not affected by
seasonal factors, except for its former hotel property investment. All of
the Registrant's operations are located in the United States.
PROPERTY INSURANCE
The Registrant believes that all of the wholly owned properties and
properties owned in partnership with others are adequately covered by
insurance. The Registrant's wholly owned San Francisco Bay Area properties
do not maintain earthquake insurance.
TENANTS
There are no individual tenants in any of the Registrant's wholly owned
properties that contribute 10% or more to consolidated revenues, except for
AirTouch Communications, Inc. (a tenant at Walnut Creek Executive Park), the
loss of which would have a material adverse effect on the Registrant taken as
a whole. Netcom On-Line Communications Services, Inc., a tenant at South Bay
Office Tower, occupies approximately 23% of that building, and does not
contribute 10% or more to the Registrant's consolidated revenues. Generally,
lease terms range from one to five years. Leases of approximately 101,200
square feet of rental space, or approximately 15% of the leases in the
Registrant's investment portfolio as of December 31, 1996, will expire in
1997.
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.
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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.
The following table sets forth certain information regarding the Registrant's
properties which were owned as of December 31, 1996:
<TABLE>
<CAPTION>
PROPERTY GENERAL # OF UNITS AND/OR # OF TENANTS AND OWNED % REGISTRANT
NAME DESCRIPTION LOCATION LEASABLE SQ. FT. OCCUPANCY % BY OWNERSHIP
- ------- ----------- -------- ----------------- ---------------- --- ---------
<S> <C> <C> <C> <C> <C> <C>
Walnut Creek 11 two-story wood Walnut Creek, 418,000 sq.ft. set on 27 63 tenants; Registrant 100%
Executive Park framed garden California acres with parking for 88% occupancy
office buildings, over 1,720 cars
and one three-
story structural
steel frame
office building
South Bay Twelve-story San Jose, 164,000 sq.ft. 44 tenants; Registrant 100%
Office Tower office building California and two levels of 92% occupancy
subterranean parking
North Tucson Single-story Tucson, Arizona 91,000 sq. ft. 2 tenants; Registrant 100%
Business Center offfice/industrial 100% occupancy
building
Weston Office Three-story office Fort Lauderdale, 15,000 sq. ft. 3 tenants; Registrant 100%
Building building Florida 100% occupancy
410 First Avenue Single tenant Needham, 38,000 sq. ft. 1 Tenant Registrant 100%
office/industrial Massachusetts 100% occupancy
building
Rincon Center Major mixed use San Francisco, 320 Apartments; Apartments- RCA 22.8%
project in the San California 78,000 sq. ft. of 99% occupancy
Francisco Financial retail space; Retail Space -
District 423,000 sq. ft. of 31 tenants;
office space; 91% occupancy
2 level garage with Office Space -
parking for 720 9 tenants;
automobiles 97% occupancy
</TABLE>
4
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<TABLE>
In addition to the interests referred to above, on January 17, 1997, the Registrant acquired the following properties:
PROPERTY GENERAL # OF UNITS AND/OR # OF TENANTS AND OWNED % REGISTRANT
NAME DESCRIPTION LOCATION LEASABLE SQ. FT. OCCUPANCY % BY OWNERSHIP
- ------- ----------- -------- ----------------- ---------------- --- ---------
<S> <C> <C> <C> <C> <C> <C>
West Valley Campus style San Jose, 165,000 sq. ft. 130 Tenants Registrant 100%
Executive Park office park California 98% occupancy
(Formerly with five two-
Paulsen Office story and one
Park) single-story wood
frame buildings
930 Montgomery Six-story, steel San Francisco, 23,000 sq. ft. 6 Tenants Registrant 100%
Street frame office California 100% occupancy
building
</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 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 $7,908,000. 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.
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 $3,749,000.
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.
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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 developmentt enterprises, and professional
service companies. North Tucson Business Center tenants include printing and
telemarketing companies. Westion 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.
ITEM 3. LEGAL PROCEEDINGS
On March 20, 1997, the Registrant filed a Complaint in the San Francisco
Superior Court, Case No. 985464, against Rincon Center Associates and Perini
Land and Development Company seeking to recover $812,532.75 in commissions
due for leasing and construction services performed for Rincon Center. The
Complaint is in the process of being served. Given the fact that the
Complaint was just filed, and no discovery has been taken, the Registrant is
not in a position at this time to opine as to the likelihood or remoteness of
liability, or the amount of damages should liability be established.
The Registrant is involved in various other claims and lawsuits
incidental to its business. In the opinion of the Registrant, these other
claims and lawsuits in the aggregate will not have a material adverse impact
on the Registrant's financial condition.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
EXECUTIVE OFFICERS OF THE REGISTRANT
Set forth below is certain information concerning persons who are
executive officers of the Registrant.
RAYMOND V. MARINO (Age 38). Mr. Marino had been Vice President and Chief
Financial Officer of the Registrant since August 1992, and became President
and Chief Executive Officer as of January 1996 and a Director in March 1996.
Previously, he was with Hunting Gate Investments, a private British real
estate investment and management company, as Vice President of Finance and
Controller. Mr. Marino has a Bachelor of Science degree in Accounting from
Santa Clara University and a Masters degree in Taxation from Golden Gate
University. Mr. Marino maintains an active license as a California Certified
Public Accountant, and is a member of the American Institute of CPA's,
California Society of CPA's, and National Association of Real Estate
Investment Trusts.
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CHRISTOPHER M. WATSON (Age 38). Mr. Watson had been Vice President of the
Registrant since September 1992, and became Executive Vice President as of
January 1996. His responsibilities include the management of personnel in
the property management, marketing and leasing operations of the Registrant.
Previously, he was Vice President for Coldwell Banker Commercial Real Estate
Services Inc., as a licensed real estate agent representing both property
owners and investors in commercial real estate leasing and acquisitions. Mr.
Watson has a Bachelor of Arts degree from the University of California at
Berkeley.
ANDREW T. GORAYEB (Age 33). Mr. Gorayeb had been Director of Finance of the
Registrant since November 1994, and became Vice President of Finance as of
January 1996. His responsibilities include financings, dispositions and
acquisitions. Previously, Mr. Gorayeb was Managing Director with General
Electric Capital, Commercial Real Estate Financings and Services. Mr.
Gorayeb has Bachelor of Arts degrees in Political Science and Economics from
Bates College.
FELECIA A. VERNON-CHANCEY (47). Ms. Vernon-Chancey has been Vice
President/Controller as of June 1996. Her responsibilities include tax,
compliance and financial reporting. Previously, she was with Transamerica
Real Estate Management Co., a real estate management subsidiary of
Transamerica as Assistant Vice President/Controller. Previously, Ms.
Vernon-Chancey was Chief Financial Officer with Restaurant Management and
Control Systems (ReMACS), a software development company. Her
responsibilites included tax, compliance, financial reporting and treasury.
Ms. Vernon-Chancey has a Bachelor of Science degree in Business
Administration/Accounting from San Francisco State University. Ms.
Vernon-Chancey maintains an active license as a California Certified Public
Accountant, and is a member of the American Institute of CPA's and California
Society of CPA's.
Each executive officer holds office until the first meeting of directors
following the annual meeting of stockholders and until his successor is duly
chosen and qualified.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
COMMON STOCK
On March 18, 1997, there were approximately 1,200 holders of record of
the Registrant's Common Stock. The Registrant's Common Stock is traded on
the American Stock Exchange under the symbol "PGP".
The table below sets forth, for the indicated periods, the high and low
prices per share of the Registrant's Common Stock as reported on the American
Stock Exchange Consolidated Reporting System.
HIGH LOW
1997
First Quarter (through March 18, 1997) $4 3/8 $3 1/4
1996
First Quarter 3 7/16 2 1/2
Second Quarter 4 3/4 2 14/16
Third Quarter 4 3/4 3 1/4
Fourth Quarter 3 3/4 2 3/8
1995
First Quarter 4 1/4 3 1/8
Second Quarter 4 3/16 3 1/8
Third Quarter 3 9/16 2 7/8
Fourth Quarter 2 15/16 2 7/16
During the third quarter of 1990, the Registrant's Board of Directors
determined to suspend dividend payments until operating cash flows can again
support such payments. The Registrant has not paid dividends since the third
quarter of 1990 and will continue to periodically review its ability to
resume dividends as practical.
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<TABLE>
ITEM 6. SELECTED FINANCIAL DATA. The selected financial data should be read in conjunction with the Consolidated Financial
Statements of the Registrant and related notes listed in Item 14 of this annual report and included elsewhere herein. The
selected financial data is not covered by the report of the independent public accountants. (In thousands, except per share data)
AS OF DECEMBER 31,
- ----------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
FINANCIAL POSITION
Investment and hotel
properties, net $ 32,797 $33,572 $ 58,359 $ 75,786 $ 79,470
Properties held for sale -- 22,230 -- -- --
Equity investment
and loans to RCA -- -- 4,020 6,491 7,272
Deferred tax asset 4,183 6,831 6,845 -- --
Other assets 15,413 3,254 2,210 2,313 2,671
-------- ------- -------- --------- --------
Total assets $ 52,393 $65,887 $ 71,434 $ 84,590 $ 89,413
-------- ------- -------- --------- --------
-------- ------- -------- --------- --------
Debt $ 33,722 $61,778 $ 63,099 $ 98,916 $107,732
-------- ------- -------- --------- --------
-------- ------- -------- --------- --------
Deferred tax liability $ 15,012 $10,514 $ 12,209 $ -- $ --
-------- ------- -------- --------- --------
-------- ------- -------- --------- --------
Excess of cash
distributions
received over
equity in
earnings
of Golden
Gateway Center $ -- $ -- $ -- $ 18,126 $ 19,839
-------- ------- -------- --------- --------
-------- ------- -------- --------- --------
Stockholders' equity (deficit) $ 2,168 $(9,186) $ (6,502) $ (35,321) $(41,795)
-------- ------- -------- --------- --------
-------- ------- -------- --------- --------
Stockholders' equity (deficit)
per share, primary $ 0.52 $ (2.23) $ (1.58) $ (9.10) $ (10.77)
-------- ------- -------- --------- --------
-------- ------- -------- --------- --------
Stockholders' equity (deficit) per share,
fully diluted $ 0.51 $ (2.23) $ (1.55) $ (9.05) $ (10.77)
-------- ------- -------- --------- --------
-------- ------- -------- --------- --------
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ITEM 6. SELECTED FINANCIAL DATA, (CONTINUED) - The selected financial data should be read in conjunction with the Consolidated
Financial Statements of the Registrant and related notes in Item 14 of this annual report and included herein. The selected
financial data is not covered by the report of the independent public accountants. (In thousands, except per share data)
FOR THE YEAR ENDED DECEMBER 31,
- --------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
INCOME RESULTS
Revenue from investment properties $ 11,011 $12,200 $ 11,027 $ 14,193 $ 15,304
-------- ------- -------- --------- --------
-------- ------- -------- --------- --------
Revenue from hotel property $ 6,111 $ 7,009 $ 7,357 $ 7,837 $ 6,725
-------- ------- -------- --------- --------
-------- ------- -------- --------- --------
Investment in partnership
gain (loss), net $ 2,940 $(4,090) $ (1,298) $ (1,719) $ (2,749)
-------- ------- -------- --------- --------
-------- ------- -------- --------- --------
Provision for write-down to
estimated net realizable value $ -- $ (540) $ (1,000) $ (1,000) $ --
-------- ------- -------- --------- --------
-------- ------- -------- --------- --------
Gain on sales of real estate
assets, net $ 16,714 $ 177 $ 664 $ 1,045 $ 2,807
-------- ------- -------- --------- --------
-------- ------- -------- --------- --------
Gain (loss) on redemption
of partnership interests $ -- $ -- $ 39,078 $ 3,602 $ (2,031)
-------- ------- -------- --------- --------
-------- ------- -------- --------- --------
Extraordinary items $ 766 $ (233) $ (325) $ 4,850 $ --
-------- ------- -------- --------- --------
-------- ------- -------- --------- --------
Net income (loss) $ 11,354 $ 2,729 $ 28,817 $ 4,583 $ (2,831)
-------- ------- -------- --------- --------
-------- ------- -------- --------- --------
Income (loss) per share, primary:
Income (loss) before extraordinary items $ 2.52 $ (0.60) $ 7.10 $ (0.07) $ (0.73)
Extraordinary items 0.18 (0.06) (0.08) 1.25 --
-------- ------- -------- --------- --------
Net income (loss), primary $ 2.70 $ (0.66) $ 7.02 $ 1.18 $ (0.73)
-------- ------- -------- --------- --------
-------- ------- -------- --------- --------
Number of common shares and share
equivalents outstanding, primary 4,205 4,124 4,106 3,881 3,879
-------- ------- -------- --------- --------
-------- ------- -------- --------- --------
Income (loss) per share, fully diluted:
Income (loss) before extraordinary items $ 2.49 $ (0.60) $ 6.96 $ (0.07) $ 2.04
Extraordinary items 0.18 (0.06) (0.08) 1.24 .77
-------- ------- -------- --------- --------
Net income (loss), fully diluted $ 2.67 $ (0.66) $ 6.88 $ 1.17 $ 2.81
-------- ------- -------- --------- --------
-------- ------- -------- --------- --------
Number of common shares and share
equivalents outstanding, fully diluted 4,256 4,124 4,187 3,904 3,879
-------- ------- -------- --------- --------
-------- ------- -------- --------- --------
</TABLE>
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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 $254,000 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 $39.4 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 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.
11
<PAGE>
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 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
12
<PAGE>
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, 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.
13
<PAGE>
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.
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):
Current Pro Forma
------- ---------
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
------- ---------
------- ---------
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.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and supplementary data required by this Item
8 are included in Part IV as indexed under Items 14 (a) 1 and 2.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
14
<PAGE>
PART III
The information called for by Part III is hereby incorporated by reference
from the information set forth under the captions "Election of Directors",
"Ownership of Common Stock" and "Executive Compensation" in Registrant's
definitive Proxy Statement for its 1997 Annual Meeting of Shareholders, which
meeting involves the election of directors, such definitive Proxy Statement to
be filed with the Securities and Exchange Commission pursuant to Regulation 14A
within 120 days after the end of the fiscal year covered by this Annual Report
on Form 10-K. In addition, information on Registrant's executive officers has
been included in Part I above under the caption "Executive Officers of the
Registrant".
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a)1. The following financial statements and supplementary financial
information are filed as part of this report:
FINANCIAL STATEMENTS OF THE REGISTRANT PAGES
- -------------------------------------- -----
Consolidated Balance Sheet as of December 31, 1996 and 1995 19
Consolidated Statement of Income (Loss) for the three
years ended December 31, 1996, 1995 and 1994 20
Consolidated Statement of Stockholders' Equity
(Deficit) for the three years ended December, 1996, 1995 and 1994 21
Consolidated Statement of Cash Flows for the three
years ended December 31, 1996, 1995 and 1994 22
Notes to Consolidated Financial Statements 23 - 34
Report of Independent Public Accountants 35
(a)2.The following financial statement schedule is filed
as part of this report:
Schedule III -- Real Estate and Accumulated Depreciation
as of December 31, 1996 36 - 37
All other schedules are omitted because of the absence of the conditions
under which they are required or because the required information is included
in the Consolidated Financial Statements or in the Notes thereto.
(a)3.Exhibits
This section to be completed by amendment.
21. Subsidiaries of the Registrant 38
(b) The Registrant filed a Form 8-K dated December 24, 1996, reporting
under Items 2 and 7.
The Registrant filed a Form 8-K dated January 30, 1997, reporting
under Items 2 and 7.
The Registrant filed a Form 8-K dated March 24, 1997, reporting
under Items 2 and 7.
(c) The following financial statements are filed as part of the Form 10-K
report with the Securities and Exchange Commission.
15
<PAGE>
FINANCIAL STATEMENTS OF RINCON CENTER ASSOCIATES PAGE
- ------------------------------------------------ ----
Report of Independent Public Accountants 40
Balance Sheets -- December 31, 1996 and 1995 41
Statements of Operations for the years ended
December 31, 1996, 1995 and 1994 42
Statements of Changes in Partner's Deficit for the
years ended December 31, 1996, 1995 and 1994 43
Statements of Cash Flows for the years ended
December 31, 1996, 1995 and 1994 44
Notes to Financial Statements 45-52
16
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
PACIFIC GATEWAY PROPERTIES, INC.
(Registrant)
By: Raymond V. Marino
-------------------------
Raymond V. Marino
President and Chief Executive Officer
Dated: March 26, 1997
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
- --------- ----- ----
Raymond V. Marino
- ----------------- Director, President and March 26, 1997
Raymond V. Marino Chief Executive Officer
Felecia A. Vernon-Chancey
- ------------------------- Vice President and Controller March 26, 1997
Felecia A. Vernon-Chancey (Principal Accounting Officer)
H. Todd Cobey, Jr.
- ------------------ Director March 26, 1997
H. Todd Cobey, Jr.
Lawrence B. Helzel
- ------------------ Director March 26, 1997
Lawrence B. Helzel
Marshall A. Jacobs
- ------------------ Director March 26, 1997
Marshall A. Jacobs
David E. Post
- ------------- Director March 26, 1997
David E. Post
Martin S. Roher
- --------------- Director March 26, 1997
Martin S. Roher
John V. Winfield
- ---------------- Director March 26, 1997
John V. Winfield
17
<PAGE>
PACIFIC GATEWAY PROPERTIES, INC.
CONSOLIDATED FINANCIAL STATEMENTS
As of December 31, 1996 and 1995
and for the year ended
December 31, 1996, 1995 and 1994
18
<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
-------- -------
-------- -------
The accompanying notes are an integral part of these consolidated financial statements
</TABLE>
19
<PAGE>
PACIFIC GATEWAY PROPERTIES, INC.
CONSOLIDATED STATEMENT OF INCOME (LOSS)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
FOR THE YEAR ENDED DECEMBER 31,
1996 1995 1994
------- ------- -------
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 RC 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
------- ------- -------
------- ------- -------
The accompanying notes are an integral part of these consolidated
financial statements
20
<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
21
<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 1,043 3,691 (256)
-------- -------- --------
Cash flow from investing activities:
Additions to investment and hotel properties (2,072) (2,768) (5,528)
Proceeds from sale of properties 38,856 510 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 36,784 (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 (39,416) (23,297) (25,930)
Payment of loan costs and fees (254) (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 (35,104) (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
-------- -------- --------
-------- -------- --------
Cash paid for taxes $ 510 $ 483 $ 2,007
-------- -------- --------
-------- -------- --------
</TABLE>
The accompanying notes are an integral part of these Consolidated Financial
Statements.
22
<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):
Capital, tenant improvement and lease commission reserves $ 915
Acquisition reserves 7,988
Debt service, property tax and insurance reserves 1,072
------
Total $9,975
------
------
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 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
23
<PAGE>
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):
1996 1995 1994
------- ---- -------
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
------- ---- -------
------- ---- -------
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:
AS OF DECEMBER 31, 1996 1995 1994
--------- --------- ---------
Primary 4,204,822 4,124,082 4,105,808
--------- --------- ---------
--------- --------- ---------
Fully diluted 4,256,021 4,124,082 4,186,515
--------- --------- ---------
--------- --------- ---------
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.
24
<PAGE>
2. REAL ESTATE PARTNERSHIP INVESTMENTS
OPERATING PARTNERSHIPS
RINCON CENTER ASSOCIATES PARTNERSHIP (RCA)--SAN FRANCISCO, CALIFORNIA
The Company owns general (non-managing) and limited partnership
interests in RCA totaling approximately 22.8% and, subject to the funding
agreement entered into with RCA's managing general partner, 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 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.
Summary financial statement data for RCA is as follows (in thousands):
25
<PAGE>
AS OF DECEMBER 31, 1996 1995
-------- --------
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
-------- --------
-------- --------
1996 1995 1994
-------- -------- --------
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)
-------- -------- --------
-------- -------- --------
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.
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
-------
-------
Summary Financial data for GGC is as follows (in thousands):
FOR THE NINE
MONTHS ENDED
SEPTEMBER 30, 1994
------------------
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
-------
-------
26
<PAGE>
3. DEBT
As of December 31, 1996 and 1995, the Company had the following debt
outstanding (in thousands):
1996 1995
---- ----
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
------- -------
------- -------
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 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
27
<PAGE>
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 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):
CURRENT PRO FORMA
------- ---------
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
------- -------
------- -------
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.
28
<PAGE>
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):
FEDERAL STATE TOTAL
------- ------ -------
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
Debt relating to tax deferred
exchange 7,811 1,994 9,805
Excess partnership losses from RCA 3,754 950 4,704
------- ------ -------
$11,966 $3,046 $15,012
------- ------ -------
------- ------ -------
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
----------------------------
1996 1995 1994
------- ------ -------
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%
---- ---- ----
---- ---- ----
The components of the (provision) benefit for income taxes
were as follows (in thousands):
1996 1995 1994
------- ------ -------
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)
------- ------ -------
------- ------ -------
29
<PAGE>
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):
CURRENT PRO FORMA
------- ---------
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
------- -------
------- -------
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.
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:
30
<PAGE>
<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.
31
<PAGE>
8. QUARTERLY FINANCIAL DATA (UNAUDITED)
The following tables set forth unaudited quarterly financial data (in
thousands, except per share amounts) for each of the two years ended December
31, 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>
32
<PAGE>
<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>
33
<PAGE>
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.
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, 996
(IN THOUSANDS, EXCEPT SHARE AMOUNT)
(UNAUDITED)
Acquired
Historical Properties Pro Forma
---------- ---------- ---------
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
------- ------- -------
------- ------- -------
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.
34
<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
35
<PAGE>
PACIFIC GATEWAY PROPERTIES, INC.
SCHEDULE III-- REAL ESTATE AND ACCUMULATED DEPRECIATION
DECEMBER 31, 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
Initial Cost
to Company
(Note 1) Subsequent
-------- Costs,
Encumbrances Building and Capitalized
Description (Note 4) Land Improvements Improvements
- ----------- -------- ---- ------------ ------------
<S> <C> <C> <C> <C>
Office/Commercial Buildings --
Walnut Creek, CA. (Twelve
Buildings) (Notes 4 and 6) $19,438 $1,357 $12,086 $7,271
Office Building--San Jose, CA 9,450 3,439 13,754 2,302
Office/Industrial Building--
Tucson, AZ. (Notes 4 and 6) 3,841 147 621 395
Office Building--Fort Lauderdale,
FL. (Note 4 and 6) 993 44 299 5
Office/Industrial Building--
Needham, MA. (Note 5) -- 494 4,006 364
Corporate Leasehold Improvements -- -- -- 48
----- ----- ------ ------
TOTAL $33,722 $5,481 $30,766 $10,385
------- ------ ------- -------
------- ------ ------- -------
<CAPTION>
Accumulated
Depreciation
and Amortization
and Provision
Gross Carrying Amount at for Write-down
December 31, 1996 to Net 1996
------------------------ Realizable Projected
Buildings and Total Value Tax Basis Date of Construction/
Description Improvements (Note 2) (Note 3 and 7) ( Note 8) Acquisition
- ----------- ------------ -------- -------------- --------- -----------
<S> <C> <C> <C> <C> <C>
Office/Commercial Buildings --
Walnut Creek, CA. (Twelve 1975 to
Buildings) (Notes 4 and 6) $19,357 $20,714 $5,239 $17,374 1986/1988
Office Building--San Jose, CA 16,056 19,495 5,525 $11,742 1972/1985
Office/Industrial Building--
Tucson, AZ. (Notes 4 and 6) 1,016 1,163 342 $ 1,240 1987/1988
Office Building--Fort Lauderdale,
FL. (Note 4 and 6) 304 348 65 $ 359 1986/1988
Office/Industrial Building--
Needham, MA. (Note 5) 4,370 4,864 2,635 $ 2,329 1961/1984
Corporate Leasehold Improvements-- 48 48 29
------ ------ ------
TOTAL $41,151 $46,632 $13,835
------- ------- -------
------- ------- -------
</TABLE>
See accompanying notes on the following page
36
<PAGE>
PACIFIC GATEWAY PROPERTIES, INC.
SCHEDULE III-- REAL ESTATE AND ACCUMULATED DEPRECIATION --(CONTINUED)
DECEMBER 31, 1996
(IN THOUSANDS)
NOTE 1 The original cost basis of the above properties for financial
statement and tax purposes is substantially the same.
NOTE 2 The changes in the total cost of land, buildings, and improvements
for the three years ended December 31, are as follows:
1996 1995 1994
-------- ------- --------
Balance at beginning of period $ 76,684 $76,500 $101,485
Additions 1,527 2,177 4,687
Write-off of fully amortized items (526) (1,679) (884)
Cost of disposed properties (31,053) (314) (28,788)
-------- ------- --------
Balance at end of period $ 46,632 $76,684 $ 76,500
-------- ------- --------
-------- ------- --------
NOTE 3 The changes in accumulated depreciation and amortization and the
provision for write-down to net realizable value for the three years
ended December 31, are as follows:
<TABLE>
<CAPTION>
1996 1995 1994
------- ------- -------
<S> <C> <C> <C>
Balance at beginning of period $20,882 $19,807 $27,065
Provision for write-down to net realizable value -- -- 1,000
Depreciation expense 2,239 2,795 2,136
Write-off of fully amortized items (526) (1,679) (884)
Relief of accumulated balances and provision for
write-down to net realizable value related
to disposed properties (8,760) (41) (9,510)
------- ------- -------
Balance at end of period $13,835 $20,882 $19,807
------- ------- -------
------- ------- -------
</TABLE>
NOTE 4 Refer to Note 3 in the Registrant's Consolidated Financial Statements.
NOTE 5 This property is pledged in support of a $3.65 million
letter-of-credit which is posted in favor of the lender on Rincon
Center.
NOTE 6 These properties were obtained by Golden Gate Building Company
pursuant to tax-deferred exchanges of interests in the Alcoa Building
and distributed to the Registrant.
NOTE 7 The total provision for write-down to net realizable value pertains
to 410 First Avenue property in Needham, Massachusetts.
NOTE 8 The sale of a property may result in substantial tax liability.
37
<PAGE>
EXHIBIT 21
PACIFIC GATEWAY PROPERTIES, INC.
SUBSIDIARIES OF THE REGISTRANT
PERCENTAGE
PLACE OF INTEREST OF VOTING
NAME ORGANIZATION SECURITIES OWNED
- ---- ------------ ------------------
Pacific Gateway Properties, Inc. New York 100%
Pacific Gateway Properties California 100%
Management Corporation
Pacific Gateway Properties California 100%
Hotels, Inc.
Perini Investment Properties California 100%
Executive Suites, Inc.
Maritime Plaza Associates California 100%
PGP - South Bay Office Tower, Inc. California 100%
PGP - North Tucson Business Center, Inc. California 100%
PGP - Weston, Inc. California 100%
Rincon Center Associates California 22.8%
Limited
Partnership
38
<PAGE>
RINCON CENTER ASSOCIATES
A CALIFORNIA LIMITED PARTNERSHIP
FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1996 AND 1995
TOGETHER WITH AUDITORS' REPORT
39
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Partners of Rincon Center Associates,
a California Limited Partnership:
We have audited the accompanying balance sheets of Rincon Center Associates
(a California Limited Partnership) as of December 31, 1996 and 1995, and the
related statements of operations, changes in partners' deficit and cash flows
for each of the three years ended December 31, 1996. These financial
statements are the responsibility of the Partnership's management. Our
responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Rincon Center Associates, a
California Limited Partnership as of December 31, 1996 and 1995, and the
results of its operations and its cash flows for each of the three years
ended December 31, 1996, in conformity with generally accepted accounting
principles.
ARTHUR ANDERSEN LLP
Boston, Massachusetts
February 26, 1997
40
<PAGE>
RINCON CENTER ASSOCIATES
A CALIFORNIA LIMITED PARTNERSHIP
BALANCE SHEETS--DECEMBER 31, 1996 AND 1995
ASSETS
1996 1995
CASH $ 152,000 $ 139,000
ACCOUNTS RECEIVABLE, NET RESERVES OF $28,000 AND $0
AT DECEMBER 31, 1996 AND 1995, RESPECTIVELY 674,000 721,000
DEFERRED RENT RECEIVABLE 2,631,000 4,994,000
NOTES RECEIVABLE, NET OF RESERVES OF $0 AND $155,000
AT DECEMBER 31, 1996 AND 1995, RESPECTIVELY 14,635,000 14,966,000
REAL ESTATE USED IN OPERATIONS, NET 108,783,000 111,541,000
LEASEHOLD IMPROVEMENTS, NET 1,712,000 1,961,000
OTHER ASSETS, NET 2,950,000 1,803,000
------------ ------------
Total assets $131,537,000 $136,125,000
------------ ------------
------------ ------------
LIABILITIES AND PARTNERS' DEFICIT
CONSTRUCTION NOTES PAYABLE $ 56,012,000 $ 58,720,000
ACCOUNTS PAYABLE AND ACCRUED LIABILITIES 4,818,000 4,267,000
ACCRUED GROUND RENT LIABILITY, NET 6,171,000 6,380,000
ACCRUED LEASE LIABILITY, NET 708,000 538,000
DEFERRED INCOME 1,006,000 1,068,000
ACCRUED INTEREST DUE GENERAL PARTNERS 59,984,000 50,817,000
DUE TO PERINI LAND AND DEVELOPMENT COMPANY 78,547,000 74,584,000
DUE TO PACIFIC GATEWAY PROPERTIES, INC. 19,625,000 18,634,000
------------ ------------
Total liabilities 226,871,000 215,008,000
COMMITMENTS AND CONTINGENCIES (Notes 3, 5 and 6)
PARTNERS' DEFICIT (95,334,000) (78,883,000)
------------ ------------
Total liabilities and partners' deficit $131,537,000 $136,125,000
------------ ------------
------------ ------------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
41
<PAGE>
RINCON CENTER ASSOCIATES
A CALIFORNIA LIMITED PARTNERSHIP
STATEMENTS OF OPERATIONS
FOR THE THREE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
REVENUE:
Rental income $ 17,891,000 $ 17,307,000 $ 17,352,000
Parking and other income 1,304,000 1,305,000 1,267,000
------------ ------------ ------------
Total revenue 19,195,000 18,612,000 18,619,000
------------ ------------ ------------
EXPENSES:
Operating 4,668,000 5,286,000 4,952,000
Administrative and other 1,447,000 1,375,000 1,389,000
Property taxes and insurance 2,115,000 1,887,000 1,655,000
Leases 6,128,000 6,336,000 4,910,000
Ground rent 4,656,000 4,689,000 4,337,000
Interest and letter-of-credit fees 14,217,000 14,402,000 11,354,000
Depreciation and amortization 3,925,000 4,115,000 4,019,000
------------ ------------ ------------
Total expenses 37,156,000 38,090,000 32,616,000
------------ ------------ ------------
Net loss from operations (17,961,000) (19,478,000) (13,997,000)
PROPERTY TAX REDUCTION - - 1,891,000
INTEREST INCOME 1,510,000 1,554,000 1,665,000
------------ ------------ ------------
Net loss $(16,451,000) $(17,924,000) $(10,441,000)
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
42
<PAGE>
RINCON CENTER ASSOCIATES
A CALIFORNIA LIMITED PARTNERSHIP
STATEMENTS OF CHANGES IN PARTNERS' DEFICIT
FOR THE THREE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
GENERAL LIMITED
PARTNERS PARTNERS TOTAL
BALANCE, DECEMBER 31, 1993 $(25,175,000) $(25,343,000) $(50,518,000)
Net loss (5,231,000) (5,210,000) (10,441,000)
------------ ------------ ------------
BALANCE, DECEMBER 31, 1994 (30,406,000) (30,553,000) (60,959,000)
Net loss (8,980,000) (8,944,000) (17,924,000)
------------ ------------ ------------
BALANCE, DECEMBER 31, 1995 (39,386,000) (39,497,000) (78,883,000)
Net loss (8,242,000) (8,209,000) (16,451,000)
------------ ------------ ------------
BALANCE, DECEMBER 31, 1996 $(47,628,000) $(47,706,000) $(95,334,000)
------------ ------------ ------------
------------ ------------ ------------
PARTNERS' PERCENTAGE INTEREST 50.1% 49.9% 100.0%
---- ---- -----
---- ---- -----
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
43
<PAGE>
RINCON CENTER ASSOCIATES
A CALIFORNIA LIMITED PARTNERSHIP
STATEMENTS OF CASH FLOWS
FOR THE THREE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(16,451,000) $(17,924,000) $(10,441,000)
Adjustments to reconcile net loss to net cash used in
operating activities-
Depreciation and amortization 3,925,000 4,115,000 4,019,000
Amortization of deferred income (62,000) (72,000) (400,000)
Decrease (increase) in accounts receivable 47,000 10,000 (531,000)
Decrease in deferred rent receivable 2,363,000 1,976,000 913,000
(Increase) decrease in other assets (1,596,000) (95,000) 357,000
Increase (decrease) in accounts payable and accrued liabilities 551,000 927,000 (629,000)
Decrease in accrued ground rent liability (209,000) (178,000) (196,000)
(Decrease) increase in accrued lease liability 170,000 (1,263,000) (1,301,000)
Increase in accrued interest due general partners 9,167,000 9,710,000 7,206,000
------------ ------------ ------------
Net cash used in operating activities (2,095,000) (2,794,000) (1,003,000)
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Expenditure on real estate used in operations (408,000) (348,000) (362,000)
Additions to leasehold improvements (61,000) (180,000) (81,000)
Payments on notes receivable 331,000 395,000 312,000
------------ ------------ ------------
Net cash used in investing activities (138,000) (133,000) (131,000)
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on construction notes payable (2,708,000) (2,175,000) (1,475,000)
Advances from general partners 4,954,000 5,175,000 2,555,000
------------ ------------ ------------
Net cash provided by financing activities 2,246,000 3,000,000 1,080,000
------------ ------------ ------------
INCREASE (DECREASE) IN CASH 13,000 73,000 (54,000)
CASH, BEGINNING OF YEAR 139,000 66,000 120,000
------------ ------------ ------------
CASH, END OF YEAR $ 152,000 $ 139,000 $ 66,000
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
44
<PAGE>
RINCON CENTER ASSOCIATES
A CALIFORNIA LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996
(1) PARTNERSHIP ORGANIZATION
Rincon Center Associates, a California Limited Partnership (the
Partnership), was formed on September 18, 1984 to lease and develop land
and buildings located in the Rincon Point-South Beach Redevelopment
Project Area in the City and County of San Francisco, California. The
Rincon Center Project (the Project) comprises commercial and retail
space, 320 rental housing units and associated off-street parking. The
Project was developed in two distinct segments: Rincon One and Rincon
Two.
Profits and losses are shared by the partners in accordance with their
percentage interest as provided in the partnership agreement and as
shown in the statements of changes in partners' deficit. Cash profits,
as determined by the managing general partner, are distributed to the
partners in the same percentage interest.
Perini Land and Development Company (PL&D) is the managing general
partner of the Partnership and has the responsibility for general
management, administration and control of the Partnership's property,
business and affairs. In addition, PL&D provides project and general
accounting services to the Partnership (Note 7). Pacific Gateway
Properties, Inc. (PGP), formerly Perini Investment Properties, Inc., is
the other general partner.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF ACCOUNTING
The accompanying financial statements have been prepared using the
accrual basis of accounting.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. The most significant estimates with regard
to these financial statements relate to the estimating of net realizable
value of real estate used in operations and the potential liability in
conjunction with certain contingencies and commitments. Actual results
could differ from these estimates.
45
<PAGE>
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
REAL ESTATE USED IN OPERATIONS
Real estate used in operations includes all costs capitalized during the
development of the Project. These costs include interest and financing
costs, ground rent expense during construction, property taxes, tenant
improvements and other capitalizable overhead costs. This real estate
investment is stated at the lower of cost or market when there is a
permanent impairment in the carrying value of the investment.
Impairment in the carrying value of the properties is measured by
estimating the future cash flows expected to result from the properties
in the ordinary course of business and the conversion of the housing
units to condominiums and resulting sale and eventual sale of the
commercial and retail properties.
EFFECT OF RECENTLY ISSUED ACCOUNTING STANDARD
The Financial Accounting Standards Board has issued Statement of
Financial Accounting Standards No. 121, ACCOUNTING FOR THE IMPAIRMENT OF
LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF, which is
effective for fiscal years beginning after December 15, 1995. This
standard requires that long-lived assets be reviewed for recoverability.
Impairment losses are recognized when future cash flows or other
benefits are less than the carrying amount of the asset. The
Partnership has adopted the new standard for its year ending December
31, 1996, and it does not have a significant effect on financial
position or results of operations.
DEPRECIATION AND AMORTIZATION
The Partnership uses the straight-line method of depreciation. The
significant asset groups and their estimated useful lives are:
Structural components of buildings 60 years
Nonstructural components of buildings 25 years
All other depreciable asset 3-30 years
Leasehold improvements are amortized using the straight-line method over
the shorter of their useful lives or the lease terms.
INCOME TAXES
In accordance with federal and state income tax regulations, no income
taxes are levied on the Partnership; rather, such taxes are levied on
the individual partners. Consequently, no provision or liability for
federal or state income taxes is reflected in the accompanying financial
statements.
46
<PAGE>
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
RENTAL INCOME
Certain lease agreements provide for periods of free rent or stepped
increases in rent over the lease term. In such cases, revenue is
recognized at a constant rate over the term of the lease. Amounts
recognized as income but not yet due under the terms of the leases are
shown in the accompanying balance sheets as deferred rent receivable.
STATEMENTS OF CASH FLOWS
Cash paid for interest was $2,372,000, $2,541,000 and $2,191,000 in
1996, 1995 and 1994, respectively.
ACCRUED LEASE LIABILITY
The Partnership is leasing Rincon One from Chrysler McNally (Chrysler)
over a 25-year lease term (Note 3). In connection with this lease, the
Partnership was granted a free rent concession for one year. The intent
of Chrysler's free rent provision was to match a similar provision
granted by the Partnership to an anchor sublease tenant of Rincon One,
whose lease is for 10 years. The Partnership expensed rent in the first
year of the lease and amortized the accrued lease liability related to
Rincon One over 10 years through 1993 and is amortizing the remaining
balance over 50 months effective January 1, 1994 to match the expense
with the revenue recorded on the sublease.
Three amendments to the master lease agreement were made in 1993 in
connection with the extension of Chrysler's existing financing on the
property (Note 3). The rent schedule was revised, which resulted in
adjustments to the accrued lease liability in order to normalize the
rent expense over the remaining lease term.
OTHER ASSETS
Other assets include prepaid expenses, deferred lease commissions and
fixed assets. Deferred lease commissions are amortized over the life of
the lease. Fixed assets are depreciated over the life of the asset,
which is generally five years.
(3) OPERATING LEASE, RINCON ONE
On June 24, 1988, the Partnership sold Rincon One to Chrysler and
subsequently leased the property back under a master lease with a basic
term of 25 years, with four five-year renewal options at the
Partnership's discretion. The transaction was accounted for as a sale
and operating leaseback, and the gain on the sale of $1,540,000 was
deferred and is currently being amortized over a 25-year period, which
is recorded as a reduction to expenses--leases in the accompanying
47
<PAGE>
(3) OPERATING LEASE, RINCON ONE (Continued)
statements of operations.
In connection with the sale and operating leaseback of Rincon One,
Chrysler assumed and agreed to satisfy the Partnership's financing
obligations. The Partnership, in accordance with the master lease and
several amendments in 1993, agreed to obtain a financial commitment on
behalf of Chrysler to replace at least $43,000,000 of Chrysler's
long-term financing by July 1, 1993. To satisfy this commitment, the
Partnership successfully extended existing financing with Citicorp Real
Estate Inc. to July 1, 1998. To complete the extension, the Partnership
had to advance funds sufficient to reduce the Chrysler financing from
$46,500,000 to $40,500,000. At December 31, 1996, the Chrysler
financing obligation outstanding was approximately $36,200,000. The
Partnership received a 10% secured note in the principal amount of
$6,000,000 from Chrysler upon the Partnership's advance of funds to
reduce the financing. In addition, as part of the obligations of the
extension, the Partnership will have to further amortize the financing
from its current level to $33,000,000 by July 1, 1998. If, by January
1, 1998, the Partnership has not received a further extension or new
commitment for financing on the property for at least $33,000,000,
Chrysler will have the right under the lease to require the Partnership
to purchase the property for a stipulated amount, approximately
$18,800,000 in excess of the then outstanding financing obligation, net
of the note receivable from Chrysler (see Note 4). The Partnership
intends to obtain financing meeting the conditions of the lease prior to
January 1, 1998.
Payments under the master lease agreement may be adjusted to reflect
adjustments in the rate of interest payable by Chrysler on the Rincon
One debt. Future minimum lease payments based on scheduled payments
under the master lease agreement are as follows:
1997 $ 5,952,000
1998 5,634,000
1999 5,875,000
2000 5,875,000
2001 5,875,000
Thereafter 67,497,000
48
<PAGE>
(4) NOTES RECEIVABLE
At December 31, 1996 and 1995, the Partnership had the following
notes receivable:
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
Two notes due from Chrysler secured by
second deed of trust on Rincon One,
bearing interest at 10%, with monthly
principal and interest payments of
$150,285 in 1996 and 1995; unpaid balance
due July 2013 $14,576,000 $14,904,000
Notes from tenants secured by tenant
improvements, bearing interest at 8% to
11%, with maturities from 1997 to 2001,
due in monthly installments 59,000 62,000
------ ------
$14,635,000 $14,966,000
----------- -----------
----------- -----------
</TABLE>
(5) GROUND LEASE
The Partnership entered into a 65-year ground lease with the United
States Postal Service for the Project property on April 19, 1985. On
June 24, 1988, this lease was bifurcated into two leases (Rincon One
and Rincon Two). Under the terms of the leases, the Partnership must
make monthly lease payments (Basic Rent) of $140,415 and $239,085 for
Rincon One and Rincon Two, respectively. In April 1994, and every
six years thereafter, the monthly base payments can be increased
based on the increase in the Consumer Price Index, subject to a
minimum of 5% per year and a maximum of 8% per year. In addition,
the Basic Rent can be increased based on reappraisal of the
underlying property on the occurrence of certain events if those
events occur prior to the regular reappraisal dates of April 19,
2019, and each twelfth year thereafter for the remainder of the lease
term.
The lease agreement calls for the payment of certain percentage rents
based on revenues received from the subleasing of the Rincon One
building. Percentage rents paid in 1996, 1995 and 1994 were
$283,000, $262,000 and $275,000, respectively.
This lease has been accounted for as an operating lease, with the
following minimum future lease payments:
1997 $ 4,645,000
1998 4,554,000
1999 4,554,000
2000 5,507,000
2001 5,920,000
Thereafter 882,392,000
49
<PAGE>
(5) GROUND LEASE (CONTINUED)
Under the provisions of the original lease, no lease payments were to
be made from the inception of the lease (April 19, 1985) until April
18, 1987, and one-half of the regular monthly payment was due for the
period from April 19, 1987 to April 18, 1988. However, as allowed by
the lease agreement, the Partnership deferred the payment of Basic
Rent until the initial occupancy date, February 8, 1988. At December
31, 1996 and 1995, the deferred Basic Rent and interest for the
period April 19, 1987 to April 18, 1988, amounted to $169,000 and
$290,000, respectively, and are being paid in 120 monthly
installments together with interest at a rate based on the average
discount rate of 90-day U.S. Treasury bills, which was approximately
5.00% and 5.62% for the years ended December 31, 1996 and 1995,
respectively. The rate will be adjusted every 90 days as long as a
balance is due on the deferred rent. The remaining deferred ground
rent related to the free rent period amounted to $6,171,000 and
$6,380,000 at December 31, 1996 and 1995, respectively, and is being
amortized over the lease term.
(6) CONSTRUCTION NOTES PAYABLE
RESIDENTIAL
The residential portion of the Project is being financed with a
$36,000,000 loan from the Redevelopment Agency of the City and County
of San Francisco (the Agency), of which $32,200,000 and $32,900,000
was outstanding at December 31, 1996 and 1995, respectively. The
Agency raised these funds through the issuance of Variable Rate
Demand Multifamily Housing Revenue Bonds (Rincon Center Project) 1985
Issue B (the Bonds).
The interest rate on the Bonds is variable at the rate required to
produce a market value for the Bonds equal to their par value. At
December 31, 1996, 1995 and 1994, the effective interest rate on the
bonds was 3.0%, 5.15% and 5.40%, respectively. Interest payments are
to be made on the first business day of each March, June, September
and December.
The Partnership has the option to convert the Bonds to a fixed
interest rate at any of the above interest payment dates. The fixed
rate will be the rate required to produce a market value for the
Bonds equal to their par value. After conversion to a fixed rate,
interest payments must be made on each June 1 and December 1.
The Partnership must repay the residential loan as the Bonds become
due. The Bonds shall be redeemed in at least the minimum amounts set
forth below:
1997 $ 700,000
1998 900,000
1999 1,000,000
2000 1,000,000
2001 1,100,000
50
<PAGE>
Thereafter 27,500,000
The Bonds are due December 1, 2006. The Bonds are secured by an
irrevocable letter of credit issued by Citibank in the name of the
Partnership in the amount of approximately $33,200,000. In the event
that drawings are made on the letter of credit, the Partnership has
agreed to reimburse Citibank for such drawings pursuant to the terms
of a Reimbursement Agreement. The Partnership obligations under the
Reimbursement Agreement are secured by a deed of trust on the Project
and the equity letters of credit and guarantees described below.
Commercial
The development and construction of the commercial portion of the
Project was financed pursuant to a Construction Loan Agreement
between the Partnership and Citibank, of which $23,812,000 and
$25,820,000 was outstanding at December 31, 1996 and 1995,
respectively. The loan and the irrevocable letters of credit
supporting the residential bond are secured by a deed of trust on the
Project and the equity letters of credit currently in the aggregate
amount of $7,300,000, issued to Citibank by Bank of America,
N.T. & S.A. on behalf of the general partners. PL&D has also
provided a $3,900,000 corporate guarantee to support the Project
financing. PGP and Perini Corporation, the parent company of PL&D,
have agreed to reimburse Bank of America for any drawings under these
letters of credit. An annual fee equal to prime plus 1% of the
aggregate amount is due to PGP and PL&D for the use of these letters
of credit. The loan is also secured by the guarantees described in
Note 7. The total fee in 1996, 1995 and 1994 was $742,000, $718,000
and $184,000, respectively. The fee in 1994 reflects a $421,000
reduction in letter-of-credit fees charged to the general partners in
prior years due to a reduction in the equity letters of credit at the
Partnership.
In 1993, the Partnership extended the loan to October 1, 1998, which
required a $600,000 up-front paydown and an additional fee of
$105,000. The loan requires the Partnership to amortize $13,000,000
over the five years to October 1, 1998. Amounts are payable as
follows: $3,150,000 in 1997 and $3,250,000 in 1998. The Partnership
obtained a swap agreement with interest rates stepping up from 5.61%
to 7.96% over the loan term. The effect of the swap agreement in
1996 was to reduce interest expense by approximately $58,000. At
December 31, 1996, the rate on the loan was 7.54%.
(7) TRANSACTION WITH GENERAL PARTNERS
PL&D has guaranteed the payment of both interest on the financing of
the Project and operating deficits, if any. It has also guaranteed
the master lease under the sale and operating lease-back transaction
(Note 3).
In accordance with the Construction Loan Agreement (Note 6), the
general partners have advanced monies to the Partnership to fund
project costs. At December 31, 1996 and 1995, the general
51
<PAGE>
(7) TRANSACTION WITH GENERAL PARTNERS (CONTINUED)
partners had advanced $98,172,000 and $93,218,000, respectively. The
advances accrue interest at a rate of prime plus 2%. For the years
ended December 31, 1996, 1995 and 1994, interest expense on partner
advances was $9,897,000, $9,939,000 and $7,940,000, respectively.
Through June 1995, PL&D retained Pacific Gateway Properties
Management Corporation (PGPMC), a wholly owned subsidiary of PGP, to
provide management and leasing services for the Project. As
compensation for managing the facilities, the Partnership paid PGPMC
a base management fee of $319,200 per year or, if greater, the sum of
3% of the first $13,000,000 of the annual gross receipts plus 2% of
receipts in excess of the $13,000,000. For 1995, fees paid to PGPMC
amounted to approximately $453,000, including a termination fee of
approximately $153,000. The fees incurred for the years ended
December 31, 1994 were $514,000 and were included in administrative
and other expenses in the accompanying statements of operations.
PL&D has retained Eagle Western Management (EWM) to provide
management and leasing services to the project to replace PGPMC.
Fees incurred for 1996 and 1995 amounted to approximately $377,000
and $164,000, respectively. Additionally, the Partnership reimburses
PGPMC and EWM for certain payroll costs.
Through December 31, 1996, PL&D retained PGP to continue to provide
leasing and construction management services for the project. During
1996, approximately $22,000 was paid to PGP for leasing and
construction management.
(8) REAL PROPERTY TAX REDUCTION
The Partnership received reductions in real property tax assessments
for the tax years from 1990 to 1993, which amounted to approximately
$1,891,000, and were recorded as other income in the 1994 financial
statements. Professional service expenses related to the property
tax assessments approximated $330,000 and were recorded in the
accompanying statement of operations during 1994.
52
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
ON SCHEDULE
To the Partners of Rincon Center Associates,
a California Limited Partnership:
We have audited in accordance with generally accepted auditing standards, the
financial statements of Rincon Center Associates (a California Limited
Partnership) as of December 31, 1996 and we have issued our report thereon
dated February 26, 1997. Our audit was made for the purpose of forming an
opinion on the basic financial statements taken as a whole. Schedule III -
Real Estate and Accumulated Depreciation is the responsibility of the
Partnership's management and is presented for the purposes of complying with
the Securities and Exchange Commission's rules and is not part of the basic
financial statements. This schedule has been subjected to the auditing
procedures applied in the audit of the basic financial statements and, in our
opinion, fairly states, in all material respects, the financial data required
to be set forth therein in relation to the basic financial statements taken
as a whole.
ARTHUR ANDERSEN LLP
Boston, Massachusetts
February 26, 1997
53
<PAGE>
RINCON CENTER ASSOCIATES
SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION
AS OF DECEMBER 31, 1996
<TABLE>
<CAPTION>
- ------------- ------------ -------------------------- ------------------------
Column A Column B Column C Column D
- ------------- ------------ -------------------------- ------------------------
Cost Capitalized
Initial Cost To Subsequent to
Company Acquisition
-------------------------- ------------------------
Buildings and Carrying
Description Encumbrances Land Improvements Improvements Costs
- -------------- ------------ --------- -------------- ------------ -----------
<S> <C> <C> <C> <C> <C>
Building $56,012,000 $0 $115,035,000 $5,926,000 $9,040,000
located in the
Rincon
Point-South
Beach
Redevelopment
Project Area in
the City and
County of San
Francisco, CA
------------------------------------- ------------ ------------ --------- ---------------
Column E Column F Column G Column H Column I
------------------------------------- ------------ ------------ --------- ---------------
Gross Amount at Which Life on Which
Carried at Close of Period Depreciation in
-------------------------------------- Latest Income
Buildings and Accumulated Date of Date Statement is
Description Land Improvements Total Depreciation Construction Acquired Computed
- -------------- --------- -------------- ------------- ------------ ------------ --------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C>
Building - $130,001,000 $130,001,000 $21,217,000 April 1985 - N/A 25-60 years on
located in the March 1990 building and
Rincon 3-25 years on
Point-South improvements
Beach
Redevelopment
Project Area in
the City and
County of San
Francisco, CA
</TABLE>
NOTE 1: RECONCILIATION OF AMOUNTS SHOWN IN COLUMN E:
<TABLE>
<CAPTION>
1996 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
Balance at beginning of year: $129,617,000 $129,265,000 $129,446,000
Additions during year:
Cost of improvements 384,000 348,000 362,000
Other - 4,000 0
Deductions during year:
Other: - - (543,000)
------------ ------------ ------------
Balance at end of year: $130,001,000 $129,617,000 $129,265,000
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
NOTE 2: RECONCILIATION OF AMOUNTS SHOWN IN COLUMN F:
<TABLE>
<CAPTION>
1996 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
Balance at beginning of year: $18,076,000 $14,713,000 $11,425,000
Additions during year:
Provision for year 3,141,000 3,363,000 3,431,000
Other - - (143,000)
------------ ------------ ------------
Balance at end of year: $21,217,000 $18,076,000 $14,713,000
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
NOTE 3: DISCLOSURE REQUIREMENT FOR COLUMN E:
Aggregate cost for Federal income tax purposes of $97,116,000.
54
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 12,814
<SECURITIES> 0
<RECEIVABLES> 359
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 14,053
<PP&E> 46,632
<DEPRECIATION> (13,835)
<TOTAL-ASSETS> 52,393
<CURRENT-LIABILITIES> 1,491
<BONDS> 33,722
0
0
<COMMON> 4,011
<OTHER-SE> (1,843)
<TOTAL-LIABILITY-AND-EQUITY> 52,393
<SALES> 16,714
<TOTAL-REVENUES> 20,602
<CGS> 0
<TOTAL-COSTS> 12,795
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 4,495
<INCOME-PRETAX> 18,423
<INCOME-TAX> 7,835
<INCOME-CONTINUING> 10,588
<DISCONTINUED> 0
<EXTRAORDINARY> 766
<CHANGES> 0
<NET-INCOME> 11,354
<EPS-PRIMARY> 2.52
<EPS-DILUTED> 2.49
</TABLE>
