<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, 1998
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.)
930 MONTGOMERY STREET, SUITE 400
SAN FRANCISCO, CALIFORNIA 94133
---------------------------------- ---------
(Address of principal executive offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (415) 398-4800
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 per share American Stock Exchange
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 2, 1999: Common Stock, Par Value $1.00 --
$11,054,462.
Indicate the number of shares outstanding of each of the Registrant's
classes of common stock, as of March 2, 1999: Common Stock, Par Value $1.00 --
3,933,536 shares.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART I
ITEM 1. BUSINESS
GENERAL
Pacific Gateway Properties, Inc. (the Registrant) was incorporated under the
laws of the State of New York in January 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, 1998, the Registrant's portfolio of operating properties consisted
of economic interests in the following:
(i) Walnut Creek Executive Park, Walnut Creek, California--a 419,000
square foot office park consisting of twelve low-rise (two- and three-story)
office buildings--100% owned;
(ii) South Bay Office Tower, San Jose, California--a 170,000 square
foot, twelve-story office building--100% owned;
(iii) North Tucson Business Center, Tucson, Arizona--a 91,000 square
foot, single-story office/ industrial building--100% owned;
(iv) Weston Office Building, Fort Lauderdale, Florida--a 14,000 square
foot, three-story office building--100% owned;
(v) 410 First Avenue, Needham, Massachusetts--a 38,000 square foot,
single-story office/ industrial building located in a suburb of Boston--100%
owned, subsequently sold in January 1999 as further discussed in Note 2 to
the Registrant's Consolidated Financial Statements;
(vi) West Valley Executive Park, San Jose, California--a 165,000 square
foot, campus style office park comprised of five two-story buildings and one
single-story building--100% owned;
(vii) 930 Montgomery Street, San Francisco, California--a 23,000 square
foot, six-story, steel frame office building--100% owned; and
(viii) Rincon Center, San Francisco, California--a mixed-use (retail,
office, apartment) complex in downtown San Francisco. This two phase project
contains 63,000 square feet of retail space, 414,000 square feet of office
space and 320 apartment units. The Registrant owns general (non-managing)
and limited partnership interests totaling approximately 22.8% in the
partnership that in turn owns Rincon Center. See "Item 3--Legal Proceedings"
and Note 2 to the Registrant's Consolidated Financial Statements for
information regarding pending litigation and other risks associated with
this project.
MANAGEMENT OF PROPERTIES
The Registrant manages its 100% owned 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 RCA and
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.
2
<PAGE>
BUSINESS PLAN AND POLICIES
The Registrant's overall business plan has been to assemble a substantial
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 investment on the West Coast with 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
Registrant's current property portfolio is concentrated on the West Coast; and
(2) the Registrant believes that geographic concentration will enhance
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
potential 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. In 1997, the Registrant
acquired two office properties in California. These transactions are more fully
discussed in the Registrant's December 31, 1997 Form 10-K. In 1998, the
Registrant completed the refinancing of $2.7 million of mortgage debt on the 930
Montgomery building, and new financing of $1.6 million on the 4050 Moorpark
building at the West Valley Executive Park project. In January 1999, the
Registrant sold its 410 First Avenue property as further discussed in Note 2 to
the Registrant's Consolidated Financial Statements. 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.
RECENT DEVELOPMENTS
The Board of Directors of the Registrant intends to solicit shareholder
approval for a proposal which would allow the Registrant to reincorporate in the
State of Maryland (the "Reincorporation") and convert to a real estate
investment trust ("REIT") by making the appropriate elections under federal tax
laws (the "REIT Election"). The proposal is subject to shareholder approval and
the Board of Directors would have discretion not to pursue Reincorporation or
the REIT Election after shareholder approval.
A REIT that satisfies all REIT qualification tests generally is exempt from
federal taxation on its income. If consummated, the Reincorporation would not
result in a change in the Registrant's management, capitalization, assets,
liabilities or net worth, but would result in certain ownership and transfer
restrictions applicable to the Registrant's common stock. In addition, if REIT
status is elected, the Registrant would be required to meet certain asset and
income tests, and other requirements, in order to maintain REIT status.
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, or leasing
transactions.
3
<PAGE>
EMPLOYEES
As of December 31, 1998, the Registrant had 12 full-time employees and one
part-time employee, compared to 13 full-time employees and one part-time
employee as of December 31, 1997. The decrease in personnel is primarily due to
the elimination of one executive position.
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 industry segment presentation is not
applicable. The Registrant's business is not affected by seasonal factors,
except for its former hotel and retail property investments. All of the
Registrant's operations are located in the United States.
ITEM 2. PROPERTIES
GENERAL
- -------
AS OF DECEMBER 31, 1998, THE REGISTRANT'S PORTFOLIO OF PROPERTIES CONSISTED OF
OFFICE INCOME-PRODUCING PROPERTIES LOCATED IN CALIFORNIA, ARIZONA, FLORIDA AND
MASSACHUSETTS. THE TOTAL RENTABLE SQUARE FOOTAGE OF THE PROPERTIES AT DECEMBER
31, 1998, WAS APPROXIMATELY 920,000 SQUARE FEET. AS OF DECEMBER 31, 1998, THE
WEIGHTED AVERAGE OCCUPANCY RATE OF THE PROPERTIES WAS APPROXIMATELY 96%.
For the year ended December 31, 1998, three of the properties (Walnut Creek
Executive Park, West Valley Executive Park, and South Bay Office Tower) had net
book values equal to 10.0% or more of the Registrant's consolidated total assets
or had investment property revenues that amounted to 10.0% or more of the
Registrant's consolidated investment property revenues as more fully discussed
below.
Each of the 100% owned properties is held by the Registrant in fee simple
title. The Registrant holds a 22.8% limited partnership and non-managing general
partnership interest in RCA. RCA owns the improvements in a mixed use commercial
real estate project known as Rincon Center located in San Francisco, California.
Rincon Center has a leasehold interest in the land under Rincon Center.
Substantially all of the income from the Registrant's properties consists of
rent received under long term leases. These leases generally provide for the
payment of rent in advance and for the payment by the tenants of a pro-rata
share of operating expenses as defined in the tenant's lease.
4
<PAGE>
THE LOCATION OF THE REGISTRANT'S PROPERTIES
The following table sets forth certain information regarding the
Registrant's properties which were owned as of December 31, 1998:
<TABLE>
<CAPTION>
# OF UNITS
PROPERTY GENERAL AND/OR # OF TENANTS OWNED % REGISTRANT
NAME DESCRIPTION LOCATION LEASABLE SQ. FT. AND OCCUPANCY % BY OWNERSHIP
- ---------------- --------------------- -------------- ---------------- ---------------- --------- -------------
<S> <C> <C> <C> <C> <C> <C>
Walnut Creek Eleven two-story wood Walnut Creek, 419,000 sq. ft. 74 tenants; 98% Registrant 100%
Executive Park framed office California occupancy
buildings, and one
three-story
structural steel
frame office building
South Bay Twelve-story office San Jose, 170,000 sq.ft. 46 tenants; 95% Registrant 100%
Office Tower building California occupancy
North Tucson Single-story office/ Tucson, 91,000 sq. ft. 2 tenants; 100% Registrant 100%
Business Center industrial building Arizona occupancy
Weston Office Three-story office Ft. 14,000 sq. ft. 3 tenants; 100% Registrant 100%
Building building Lauderdale, occupancy
Florida
410 First Avenue Single-story office/ Needham, 38,000 sq. ft. 1 tenant; 100% Registrant 100%
(Note 1) industrial building Massachusetts occupancy
West Valley Five two-story and San Jose, 165,000 sq. ft. 69 tenants; 85% Registrant 100%
Executive Park one single-story wood California occupancy
frame buildings
930 Montgomery Six-story, steel San Francisco, 23,000 sq. ft. 8 tenants; 100% Registrant 100%
Street frame office building California occupancy
Rincon Center Major mixed-use San Francisco, 63,000 sq. ft. Retail Space - RCA 22.8%
project in downtown California of retail space; 35 tenants; 98%
San Francisco occupancy
414,000 sq. ft. Office Space - 9
of office space; tenants; 98%
occupancy
200,000 sq. ft. Apartments - 97%
of residential occupancy
space (320
apartments)
</TABLE>
For information concerning encumbrances on the Registrant's properties,
reference is made to "Other Matters Relating to Properties" below and to Note 3
of the Notes to the Registrant's Consolidated Financial Statements included
elsewhere in this annual report.
Note 1: The Registrant sold this property in January 1999, as further discussed
in Note 2 in the Registrant's Consolidated Financial Statements.
CAPITAL IMPROVEMENTS, TENANT IMPROVEMENTS, LEASING COMMISSIONS, AND OTHER
- -------------------------------------------------------------------------
DEFERRED COSTS
--------------
While maintaining high occupancy levels in each of its properties and markets is
an important goal, the Registrant also focuses on controlling the expenditures
associated with leasing, renewing or re-leasing
5
<PAGE>
space. The following table sets forth information related to new and renewal
leasing activity and expenditures for the year ended December 31, 1998.
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
WEIGHTED EFFECTIVE PERCENTAGE CHANGE
AVERAGE COSTS MONTHLY RENTAL IN WEIGHTED AVERAGE
NUMBER OF SQUARE WEIGHTED AVERAGE PER SQ. RATE PER SQ. EFFECTIVE RENTAL
TYPE LEASES FEET LEASE TERM (MO.) FOOT(1) FOOT RATE(2)
- -------------------------- ------------- --------- ----------------- ------------- --------------- -------------------
<S> <C> <C> <C> <C> <C> <C>
New Leases................ 51 168,893 55 $ 10.56 $ 2.06 58%
Renewals.................. 33 92,318 44 $ 4.35 $ 1.93 22%
<CAPTION>
TENANTS
TYPE RETAINED(3)
- -------------------------- ---------------
<S> <C>
New Leases................ N/A
Renewals.................. 79%
</TABLE>
- ------------------------------
(1) Represents tenant improvement and commission costs per square foot.
(2) Measured as the difference between net weighted average effective rental
rates on new and renewal leases in 1998 compared to 1997.
(3) Based upon occupied square footage, percentage of tenants retained by the
Registrant at lease expiration, tenants the Registrant chose not to renew to
accommodate the expansion of existing tenants and tenants that renewed, but
moved to another space.
During the year ended December 31, 1998, there were additions to investment
properties amounting to approximately $4,176,000 which consisted of tenant
improvements, capital improvements, rent concessions and other deferred costs
which includes leasing commissions. Additionally, the Registrant incurred
$60,000 in 1998 relating to loan costs. The Registrant anticipates additions to
investment properties of approximately $2,000,000 in 1999.
LEASE EXPIRATIONS OF THE REGISTRANT'S MAJOR PROPERTIES
- ------------------------------------------------------
For the purposes of the following tables "Expiring Annual Revenue" includes only
revenue for months occupied for each year, respectively.
For each of the Registrant's 100% owned properties, land, buildings and
improvements are recorded at cost. Depreciation for federal income tax purposes
on investment properties is provided using the Modified Accelerated Cost
Recovery System (MACRS) method over statutory useful lives ranging from 7 to 39
years. Capitalized loan costs consist of loan fees, legal, accounting,
engineering, appraisal, and other costs associated with financings and are
amortized using the straight-line method over the primary term of related debt
instrument. Costs associated with a lease are amortized over the term of the
lease. Repairs and maintenance costs are charged to expense as incurred.
The following table shows average occupancy data for the five years ended
December 31, 1998:
AVERAGE OCCUPANCY AT YEAR END
<TABLE>
<CAPTION>
PROPERTY 1998 1997 1996 1995 1994
- --------------------------------------------------------------------------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
WALNUT CREEK EXECUTIVE PARK................................................ 98% 91% 88% 87% 91%
SOUTH BAY OFFICE TOWER..................................................... 91% 89% 92% 99% 87%
WEST VALLEY EXECUTIVE PARK(1).............................................. 85% 61% N/A N/A N/A
TOTAL.................................................................. 94% 84% 89% 90% 90%
</TABLE>
Note (1): This property was not acquired until January 1997.
6
<PAGE>
The following table shows annual property tax cost per square foot for the
five years ended December 31, 1998:
AVERAGE PROPERTY TAX COST PER SQUARE FOOT
<TABLE>
<CAPTION>
PROPERTY 1998 1997 1996 1995 1994
- ----------------------------------------------------------------------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
WALNUT CREEK EXECUTIVE PARK............................................ $ 1.02 $ 1.02 $ 1.11 $ 1.01 $ 1.04
SOUTH BAY OFFICE TOWER................................................. $ 1.24 $ 0.97 $ 0.85 $ 0.81 $ 0.81
WEST VALLEY EXECUTIVE PARK(1).......................................... $ 1.22 $ 1.13 N/A N/A N/A
</TABLE>
Note (1): This property was not acquired until January 1997.
The following table shows annual property tax cost for the five years ended
December 31, 1998:
ANNUAL PROPERTY TAX COST (in thousands)
<TABLE>
<CAPTION>
PROPERTY 1998 1997 1996 1995 1994
- ----------------------------------------------------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
WALNUT CREEK EXECUTIVE PARK.......................... $ 426 $ 426 $ 466 $ 425 $ 435
SOUTH BAY OFFICE TOWER............................... $ 205 $ 160 $ 141 $ 135 $ 134
WEST VALLEY EXECUTIVE PARK(1)........................ $ 201 $ 187 N/A N/A N/A
</TABLE>
Note (1): This property was not acquired until January 1997.
The following table shows annual rental revenues for the five years ended
December 31, 1998:
AVERAGE RENTAL REVENUES (in thousands)
<TABLE>
<CAPTION>
PROPERTY 1998 1997 1996 1995 1994
- ---------------------------------------------------- ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
WALNUT CREEK EXECUTIVE PARK......................... $ 6,307 $ 5,640 $ 5,063 $ 5,271 $ 3,951
SOUTH BAY OFFICE TOWER.............................. $ 3,674 $ 2,768 $ 2,752 $ 2,280 $ 2,184
WEST VALLEY EXECUTIVE PARK(1)....................... $ 3,356 $ 2,560 N/A N/A N/A
</TABLE>
Note (1): This property was not acquired until January 1997.
The following table shows average annual rental rates per square foot of
occupied space for the five years ended December 31, 1998:
AVERAGE ANNUAL RENTAL RATE PER SQUARE FOOT
<TABLE>
<CAPTION>
PROPERTY 1998 1997 1996 1995 1994
- ----------------------------------------------------------------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
WALNUT CREEK EXECUTIVE PARK...................................... 15.74 15.19 13.87 14.75 11.02
SOUTH BAY OFFICE TOWER........................................... 23.67 19.34 17.61 14.30 14.61
WEST VALLEY EXECUTIVE PARK(1).................................... 24.95 19.30 N/A N/A N/A
</TABLE>
Note (1): This property was not acquired until January 1997.
WALNUT CREEK EXECUTIVE PARK
- ---------------------------
Walnut Creek Executive Park is a 419,000 square foot campus style office park
consisting of 12 low-rise (two- and three-story) office buildings in Walnut
Creek, California. Tenants of this property include
7
<PAGE>
banking, healthcare, telecommunications, software development enterprises, a
public utility, and professional service companies.
For the year ended December 31, 1998, the average occupancy rate for the
property was 96%, and the average monthly full service rental rate was $1.31 (or
$15.72 annually) per square foot. As of December 31, 1998, the property was
approximately 98% leased and two tenants occupied 10% or more of the rentable
square footage, including Airtouch Communications, Inc. and Kaiser Foundation,
whose principal businesses are telecommunications and healthcare, respectively.
Their leases provide for $2,848,000 of rental revenue per year and expire in
March 2001 and September 2003, respectively. Each of these tenants have options
to renew their leases.
The following table shows lease expiration data as of December 31, 1998 for
Walnut Creek Executive Park assuming that no tenants exercise renewal options:
<TABLE>
<CAPTION>
PERCENTAGE OF
TOTAL REVENUE
EXPIRING REPRESENTED
NUMBER OF SQUARE ANNUAL BY EXPIRING
YEAR LEASES EXPIRING FOOTAGE REVENUE LEASES
- ---------------------------- --------------- ------- ---------- -------------
<S> <C> <C> <C> <C>
1999........................ 19 68,834 $ 351,648 14.2%
2000........................ 15 23,537 263,971 10.6%
2001........................ 8 158,230 514,830 20.8%
2002........................ 4 27,822 293,153 11.8%
2003........................ 7 60,796 682,366 27.5%
2004........................ 4 31,670 242,619 9.8%
2005........................ 1 8,367 53,549 2.2%
2006........................ -- -- -- 0.0%
2007........................ -- -- -- 0.0%
2008........................ 1 23,689 75,805 3.1%
------- ---------- -----
Totals...................... 59 402,945 $2,477,941 100.0%
</TABLE>
Walnut Creek Executive Park's federal tax basis is $17,899,000.
WEST VALLEY EXECUTIVE PARK
- --------------------------
WEST VALLEY EXECUTIVE PARK IS A 165,000 SQUARE FOOT CAMPUS STYLE OFFICE PARK
COMPRISED OF FIVE TWO-STORY BUILDINGS AND ONE SINGLE-STORY BUILDING IN SAN JOSE,
CALIFORNIA. TENANTS OF THIS PROPERTY INCLUDE HEALTHCARE, TECHNOLOGY AND SOFTWARE
RELATED COMPANIES, FINANCIAL SERVICES AND OTHER PROFESSIONAL SERVICE COMPANIES.
For the year ended December 31, 1998, the average occupancy rate for the
property was 81% and the average monthly full service rental rate was $2.09 (or
$25.08 annually) per square foot. As of December 31, 1998, the property was
approximately 85% leased, and no tenants occupied 10% or more of the rentable
square footage.
8
<PAGE>
The following table shows lease expiration data as of December 31, 1998 for
West Valley Executive Park assuming that no tenants exercise renewal options:
<TABLE>
<CAPTION>
PERCENTAGE OF
TOTAL REVENUE
EXPIRING REPRESENTED
NUMBER OF SQUARE ANNUAL BY EXPIRING
YEAR LEASES EXPIRING FOOTAGE REVENUE LEASES
- ---------------------------- --------------- ------- ---------- -------------
<S> <C> <C> <C> <C>
1999........................ 6 5,408 $ 68,870 3.8%
2000........................ 12 13,929 324,776 18.2%
2001........................ 20 40,092 511,105 28.6%
2002........................ 11 34,268 468,730 26.2%
2003........................ 9 37,674 363,948 20.4%
2004........................ 1 6,352 49,927 2.8%
2005........................ -- -- -- 0.0%
2006........................ -- -- -- 0.0%
2007........................ -- -- -- 0.0%
2008........................ -- -- -- 0.0%
------- ---------- -----
Totals...................... 59 137,723 $1,787,356 100.0%
</TABLE>
West Valley Executive Park's federal tax basis is $9,187,000.
SOUTH BAY OFFICE TOWER
- ----------------------
SOUTH BAY OFFICE TOWER IS A 170,000 SQUARE FOOT TWELVE STORY OFFICE BUILDING IN
SAN JOSE, CALIFORNIA. TENANTS OF THIS PROPERTY INCLUDE HEALTHCARE,
TELECOMMUNICATIONS, RESEARCH AND DEVELOPMENT ENTERPRISES, AND PROFESSIONAL
SERVICE COMPANIES. FOR THE YEAR ENDED DECEMBER 31, 1998, THE AVERAGE OCCUPANCY
RATE FOR THE PROPERTY WAS 91% AND THE AVERAGE MONTHLY FULL SERVICE RENTAL RATE
WAS $1.98 (OR $23.76 ANNUALLY) PER SQUARE FOOT. AS OF DECEMBER 31, 1998, THE
PROPERTY WAS APPROXIMATELY 95% LEASED, AND TWO TENANTS OCCUPIED 10% OR MORE OF
THE RENTABLE SQUARE FOOTAGE, INCLUDING SYNACOM TECHNOLOGY, INC. AND NETCOM ON
LINE COMMUNICATIONS, WHOSE PRINCIPAL BUSINESSES ARE TELECOMMUNICATIONS. THEIR
LEASES PROVIDE FOR $1,104,000 OF RENTAL REVENUE PER YEAR AND EXPIRE IN FEBRUARY
2003 AND AUGUST 1999, RESPECTIVELY.
The following table shows lease expiration data as of December 31, 1998 for
South Bay Office Tower assuming that no tenants exercise renewal options:
<TABLE>
<CAPTION>
PERCENTAGE OF
TOTAL REVENUE
EXPIRING REPRESENTED
NUMBER OF SQUARE ANNUAL BY EXPIRING
YEAR LEASES EXPIRING FOOTAGE REVENUE LEASES
- ---------------------------- --------------- ------- ---------- -------------
<S> <C> <C> <C> <C>
1999........................ 9 38,973 $ 482,516 19.2%
2000........................ 9 13,440 237,272 9.4%
2001........................ 10 35,601 540,446 21.5%
2002........................ 8 35,320 723,050 28.8%
2003........................ 7 30,725 453,398 18.0%
2004........................ -- -- -- 0.0%
2005........................ 1 5,194 78,949 3.1%
2006........................ -- -- -- 0.0%
2007........................ -- -- -- 0.0%
2008........................ -- -- -- 0.0%
------- ---------- -----
Totals...................... 44 159,253 $2,515,631 100.0%
</TABLE>
South Bay Office Tower's federal tax basis is $11,271,000.
9
<PAGE>
PROPERTY INSURANCE
The Registrant believes that all of the wholly owned properties and the
property 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 contributed 15% or more to consolidated investment property
revenues for the years ended December 31, 1998 and 1997. For the year ended
December 31, 1996, one tenant, AirTouch Communications, Inc. (a tenant at Walnut
Creek Executive Park), contributed 16.8% to consolidated investment property
revenues. Generally, lease terms range from one to ten years. Leases of
approximately 116,000 square feet of rental space, or approximately 13% of the
leases in the Registrant's investment portfolio as of December 31, 1998, will
expire in 1999.
OTHER MATTERS RELATING TO PROPERTIES
WEST VALLEY EXECUTIVE PARK (WVEP)
In June 1998, the Registrant completed the financing of $1,575,000 of
mortgage debt from Redwood Bank related to the 4050 Moorpark building at its
West Valley Executive Park property in San Jose, California. The new loan
carries a variable interest rate of 2.875% over the one year treasury bond rate,
adjustable semi-annually (8.375% at December 31, 1998). The loan has fixed
monthly amortization payments of approximately $12,500. The loan is amortized
over 25 years and matures on July 1, 2008. This debt is nonrecourse and can be
prepaid at any time without a penalty. This debt contains a cross default
provision with the loan on the Registrant's 930 Montgomery Street property in
San Francisco, California.
930 MONTGOMERY STREET
In July 1998, the Registrant completed the refinancing of $2,076,000 of
mortgage debt from Redwood Bank related to its 930 Montgomery Street property in
San Francisco, California. The new loan of $2,697,500 carries a variable
interest rate of 2.875% over the one year treasury bond rate, adjustable semi-
annually (8.375% at December 31, 1998). The loan has fixed monthly amortization
payments of principal and interest of approximately $21,500. The loan is
amortized over 25 years and matures on September 1, 2008. This debt is
nonrecourse and can be prepaid at any time without a penalty. This debt contains
a cross default provision with the loan on the Registrant's 4050 Moorpark
building at West Valley Executive Park in San Jose, California.
410 FIRST AVENUE
On January 20, 1999, the Registrant completed the sale of 410 First Avenue
located in Needham, Massachusetts to an unrelated party for approximately
$3,950,000. In connection with this property disposition, the Registrant
recorded a provision of approximately $58,000 which was reported by the
Registrant on its 1998 Consolidated Statement of Income (Loss). Concurrent with
the sale of 410 First Avenue, the proceeds were used in connection with the
settlement of the letter of credit obligation of $4.2 million due Bank of
America National Trust and Savings Association. Pursuant to a mutual release and
settlement agreement, the Issuing Bank and the Registrant have resolved all
legal differences effectively ending all litigation and cross-litigation between
the parties. See Note 2 to the Registrant's Consolidated Financial Statements
for further discussion.
10
<PAGE>
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 approximately $812,000 in
commissions due for leasing and construction services performed for Rincon
Center. The Complaint has been answered and a Cross-Complaint has been filed.
The Cross-Complaint seeks indemnity concerning the claim for leasing commissions
on the ground that the Registrant is also a general partner of RCA, and further
seeks to rescind or otherwise avoid the effect of a letter agreement of June 22,
1993, regarding non-recourse loans from Perini Land and Development Company to
the Registrant, together with restitution of amounts loaned to the Registrant
pursuant to such letter agreement. A trial date has been set for June 7, 1999,
however the case is only in the beginning stages of discovery, and, based on
advice from counsel, 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.
See Note 2 to the Registrant's Consolidated Financial Statements concerning
the $3.65 million letter of credit issued by the the Issuing Bank as a portion
of the security for the refinancing of Rincon Center, Phase Two. On or about
August 18, 1997, the Issuing Bank commenced an action against the Registrant in
the Land Court Department of the Trial Court of Massachusetts (the Land Court),
to obtain a conditional judgment in the full amount of the Registrant's
indebtedness to the Issuing Bank. The Registrant had previously filed a
complaint against the Issuing Bank on November 21, 1997 in the Superior Court
Department of the Trial Court of the Commonwealth of Massachusetts (the Superior
Court) seeking damages, equitable relief and a jury trial for causes of action
flowing from the Issuing Bank's conduct regarding the letter of credit.
The Registrant and the Issuing Bank settled the Land and Superior Court
actions on January 15, 1999. Pursuant to the terms of a mutual release and
settlement agreement, the Registrant paid the Issuing Bank the sum of $4.2
million and released the Issuing Bank from all claims raised in the Superior
Court action. The Issuing Bank, meanwhile, executed discharges of mortgage and
rent assignment, and released the Registrant from all claims raised in the Land
Court action. Concurrent with the mutual release and settlement between the
Registrant and the Issuing Bank, the Registrant closed on the sale of the 410
First Avenue property on January 20, 1999, for approximately $3,950,000. The net
proceeds from the sale were used to partially fund the settlement with the
Issuing Bank. In connection with this property disposition the Registrant
recorded an additional provision of approximately $58,000 which was recognized
in 1998.
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 position or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
11
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
COMMON STOCK
On March 2, 1999, there were approximately 1,022 holders of record of the
Registrant's Common Stock. The Registrant's Common Stock is traded on the
American Stock Exchange under the symbol "PGP".
The table below sets forth, for the indicated periods, the high and low
prices per share of the Registrant's Common Stock as reported on the American
Stock Exchange Consolidated Reporting System.
<TABLE>
<CAPTION>
HIGH LOW
------- -------
<S> <C> <C>
1999
First Quarter (through March 2, 1999)........................................................... $ 7 7/8 $ 6
1998
First Quarter................................................................................... 8 4 1/4
Second Quarter.................................................................................. 11 3/8 7 3/4
Third Quarter................................................................................... 11 3/4 8 7/8
Fourth Quarter.................................................................................. 8 7/8 6 1/16
1997
First Quarter................................................................................... 4 1/2 3 1/4
Second Quarter.................................................................................. 6 4 1/4
Third Quarter................................................................................... 5 7/8 4 5/8
Fourth Quarter.................................................................................. 5 3/8 4 3/4
</TABLE>
In the third quarter of 1990 the Board of Directors suspended payment of
dividends, and resumed the payment of dividends in the fourth quarter of 1998.
On October 29, 1998, the Registrant's Board of Directors announced that the
dividend payable to holders of Common Stock and Series 1 Convertible Preferred
Stock at the record date of November 20, 1998 would be $0.05 per share. Future
dividends by the Registrant will be at the discretion of the Board of Directors
and will depend upon the Registrant's funds available, its financial condition,
and its capital and lease requirements. No assurances can be given as to the
amounts of dividends, if any, that will be distributed in the future.
On September 10, 1998, in a transaction exempt from registration
requirements under Regulation D, promulgated under Section 4(2) of the
Securities Act of 1933, and Section 4(2) of the Securities Act, the Registrant
sold 300,000 shares of Series 1 Convertible Preferred Stock to GEM Value/PGP,
L.L.C. (GEM), an affiliate of GEM Value Fund, L.P. for $3,000,000 in cash. See
Note 8 to the Registrant's Consolidated Financial Statements for further
discussion.
12
<PAGE>
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)
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
-----------------------------------------------------
1998 1997 1996 1995 1994
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
FINANCIAL POSITION
Investment properties, net......................................... $ 51,933 $ 54,225 $ 32,797 $ 33,572 $ 58,359
Properties held for sale, net...................................... 2,480 -- -- 22,230 --
Equity investment and loans to RCA................................. -- -- -- -- 4,020
Deferred tax asset................................................. 10,216 8,203 4,183 6,831 6,845
Other assets....................................................... 10,922 6,283 15,413 3,254 2,210
--------- --------- --------- --------- ---------
Total assets....................................................... $ 75,551 $ 68,711 $ 52,393 $ 65,887 $ 71,434
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Debt............................................................... $ 48,707 $ 47,402 $ 33,722 $ 61,778 $ 63,099
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Deferred tax liability............................................. $ 20,274 $ 17,983 $ 15,012 $ 10,514 $ 12,209
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Stockholders' equity (deficit)..................................... $ 3,117 $ 648 $ 2,168 $ (9,186) $ (6,502)
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Stockholders' equity (deficit) per share........................... $ 0.80 $ 0.17 $ 0.56 $ (2.36) $ (1.68)
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
INCOME RESULTS
Revenue from investment properties................................. $ 16,528 $ 13,721 $ 11,011 $ 12,200 $ 11,027
Revenue from hotel property........................................ $ -- $ -- $ 6,111 $ 7,009 $ 7,357
Investment in partnership, net..................................... $ -- $ -- $ 2,940 $ (4,090) $ (1,298)
Gain on redemption of partnership interests........................ $ -- $ -- $ -- $ -- $ 39,078
Provision for settlement of reimbursement obligation............... $ (58) $ (2,200) $ -- $ -- $ --
Gain on sale of real estate assets, net............................ $ -- $ -- $ 16,714 $ 177 $ 664
Provision for write-down to estimated net realizable value......... $ -- $ -- $ -- $ (540) $ (1,000)
Extraordinary items................................................ $ -- $ -- $ 766 $ (233) $ (325)
Net income (loss).................................................. $ 593 $ (1,726) $ 11,354 $ (2,729) $ 28,817
Net income (loss) available to common stockholders................. $ 578 $ (1,726) $ 11,354 $ (2,729) $ 28,817
Income (loss) per common share, basic:
Income (loss) before extraordinary items........................... $ 0.15 $ (0.44) $ 2.72 $ (0.64) $ 7.51
Extraordinary items.............................................. -- -- 0.20 (0.06) (0.08)
--------- --------- --------- --------- ---------
Net income (loss) available to common stockholders............... $ 0.15 $ (0.44) $ 2.92 $ (0.70) $ 7.43
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Number of common shares and share equivalents outstanding,
basic.......................................................... 3,917 3,893 3,893 3,893 3,880
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Income (loss) per common share, diluted:
Income (loss) before extraordinary items......................... $ 0.14 $ (0.44) $ 2.58 $ (0.64) $ 7.09
Extraordinary items.............................................. -- -- 0.19 (0.06) (0.08)
--------- --------- --------- --------- ---------
Net income (loss) available to common stockholders............... $ 0.14 $ (0.44) $ 2.77 $ (0.70) $ 7.01
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Number of common shares and share equivalents outstanding,
diluted........................................................ 4,104 3,893 4,100 3,893 4,111
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
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 1998,
there were additions to investment properties amounting to approximately
$4,189,000 for tenant improvements, capital improvements, rent concessions and
other deferred costs which includes leasing commissions. Additionally, the
Registrant incurred in 1998 $60,000 in loan costs. The Registrant anticipates
that additions to investment properties will amount to approximately $2,000,000
in 1999.
FINANCING--A total of approximately $950,000 of debt principal was repaid in
1998 as scheduled debt amortization. In connection with the refinancing of
$2,076,000 of mortgage debt on the Registrant's
13
<PAGE>
930 Montgomery Street building in San Francisco, California, the Registrant
borrowed $2,698,000 under a floating rate mortgage note. On June 1, 1998, new
borrowing for the previously unencumbered 4050 Moorpark building at West Valley
Executive Park was obtained in the amount of $1,575,000. The proceeds from these
financings are currently being held in short-term investments pending potential
future acquisitions, reduction of debt obligations and/or other capital
expenditures. Accordingly, at December 31, 1998, the Registrant has fixed rate
mortgage debt of approximately $42.1 million bearing interest at a weighted
average rate of 8.49%, two floating rate mortgages for the sum of approximately
$4.3 million each bearing interest at a rate of 8.375% as of December 31, 1998,
and a secured estimated settlement obligation recorded at $2.3 million (accruing
interest at a rate of prime plus 3% on the stated settlement obligation of $3.65
million). The estimated settlement obligation is more fully discussed in Note 2
to the Registrant's Consolidated Financial Statements.
NET INCOME (LOSS)
- -----------------
INVESTMENT PROPERTIES--During 1998, income from investment properties was
$2,204,000 compared to income of $599,000 for 1997. The increase in rental
revenues for 1998 compared to 1997 is a result of an increase in both occupancy
and rental rates at several properties. Also included in rental revenues for
1998 is a $340,000 lease buyout from a tenant at Walnut Creek Executive Park
which was reinvested in re-tenanting the space in the third quarter of 1998. The
increase in operating expenses for 1998 compared to 1997 is primarily due to
higher occupancy at its California properties. Interest expense increased from
$4,058,000 in 1997 to $4,300,000 in 1998. Included in interest expense for 1997
and 1998 is $227,000 and $414,000, respectively, of interest recorded on the
settlement obligation as described above. Also included in interest expense for
1998 is $66,000 of interest for the 4050 Moorpark building at West Valley
Executive Park which was financed in July 1998. Depreciation and amortization
expense increased as a result of commencing depreciation on expenditures
capitalized during 1998 relating to increased leasing activity and capital
improvement projects.
During 1997, the income from investment properties was $599,000 compared to
a loss of $1,181,000 for 1996. The increase in rental revenues for 1997 compared
to 1996 is due to the acquisition of two investment properties in January 1997
and increased rental rates at several properties. The increase in operating
expenses for 1997 compared to 1996 is due to the acquisition of two investment
properties, offset by decreased payroll costs and a property tax refund received
in 1997. Interest expense decreased slightly from $4,092,000 in 1996 to
$4,058,000 in 1997. Included in interest expense for 1997 is $227,000 of
interest recorded on the settlement obligation as described above. Depreciation
and amortization expense increased for 1997 compared to 1996 as a result of
increased capital expenditures in 1997 and the two new investment property
acquisitions completed in January 1997.
HOTEL PROPERTY--The Registrant sold the hotel property in December 1996 and,
accordingly, a comparison of operations from 1996 to 1997 is not meaningful.
INVESTMENT IN PARTNERSHIP--Subsequent to 1994, the Registrant's partnership
interests consisted of 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.
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 annual fees (principal, unpaid interest
and fees are collectively referred to as the RCA Advances). The agreement does
not reduce the level of the Registrant's general and limited partnership
interests in RCA. The RCA Advances are only required to be repaid from the
Registrant's share of future distributions from RCA, if any. During 1996, the
Registrant
14
<PAGE>
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. During 1998,
1997 and 1996, RCA incurred net losses of approximately $18,164,000, $37,923,000
and $16,451,000, respectively. The RCA Advances amount to approximately
$8,525,000 at December 31, 1998 and as noted above, are not recorded on the
Registrant's financial statements since (i) the RCA Advances are only required
to be repaid from the Registrant's share of future distributions, if any, (ii)
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 (iii) the Registrant
does not anticipate any material cash distributions by RCA in the foreseeable
future.
The Registrant has a negative tax basis in its partnership investment in RCA
of approximately $26,637,000, as of December 31, 1998, 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 from $1,250,000 in 1997 to $1,360,000 in 1998. This increase is
primarily attributable to an increase in professional services. General and
administrative expenses decreased from $1,603,000 in 1996 to $1,250,000 in 1997.
The decrease in general and administrative expenses for 1997 compared to 1996 is
attributable to a decrease in professional fees and personnel costs.
OTHER INCOME (EXPENSE)--Other income was $196,000 in 1998 compared to
$192,000 in 1997. Other income was $192,000 in 1997 compared to $540,000 in
1996. In 1997 and 1998, other income consists primarily of interest earned,
offset by depreciation on corporate fixed assets. Other income for 1996 included
the gain from the sale of vacant land in Colorado and business advisory fees,
net of depreciation on corporate fixed assets.
PROVISION FOR SETTLEMENT OF REIMBURSEMENT OBLIGATION--In 1998 and 1997, the
Registrant recorded a provision of $58,000 and $2,200,000, respectively, for the
ultimate settlement of a letter-of-credit reimbursement obligation, as more
fully discussed in Note 2 to the Registrant's Consolidated Financial Statements.
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.
INCOME TAX (PROVISION) BENEFIT--In 1997, the Registrant recorded an income
tax benefit of 37% of loss before taxes. This amount was less than the 40% and
41% effective rates recorded in 1998 and 1996, respectively, due to certain 1997
taxable items which were not included in income for financial statement
purposes.
EXTRAORDINARY GAIN 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 hotel's mortgage 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.
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
15
<PAGE>
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 shown signs that rental
rates and property values have stabilized and selected markets have 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, 1998, the Registrant had
approximately $6.5 million of unrestricted cash, $1.6 million of restricted
cash, investment properties with a net book value of approximately $51.9
million, property held for sale of approximately $2.5 million, total
non-recourse mortgage debt and secured estimated settlement obligation of
approximately $48.7 million and stockholders' equity of approximately $3.1
million. 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 tenant improvements and other capital requirements, certain
mandatory debt reductions, and possible new investments.
As of December 31, 1998, the Registrant's mortgage debt had scheduled annual
principal maturities as follows (in thousands):
<TABLE>
<CAPTION>
CURRENT
---------
<S> <C>
1999........................................................................... $ 3,312
2000........................................................................... 1,149
2001........................................................................... 2,034
2002........................................................................... 1,304
2003........................................................................... 1,418
Thereafter..................................................................... 39,490
---------
$ 48,707
---------
---------
</TABLE>
16
<PAGE>
The 1999 scheduled principal maturities of $3,312,000 includes the
$2,258,000 liability related to the reimbursement obligation which was repaid in
January 1999, as previously discussed in Item 3, Legal Proceedings. 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, 1999, amounts to approximately $597,000.
The Registrant's Board of Directors approved the sale of 300,000 shares of
Series 1 Convertible Preferred Stock ("Preferred Stock") to GEM Value/PGP,
L.L.C. (GEM), an affiliate of GEM Value Fund, L.P. Proceeds from the sale of the
Preferred Stock were approximately $2,889,000, net of issuance costs of
$111,000. These funds are currently being held in short-term investments pending
potential future acquisitions, reduction of debt obligations and/or other
capital expenditures.
On March 31, 1998 the Registrant completed the repurchase of the 1,000,000
outstanding warrants to purchase 1,000,000 shares of the Registrant's common
stock at an exercise price of $2.875 per share from Citicorp Real Estate, Inc.
(Citicorp), for $1,000,000. As a result of this transaction, the Registrant has
recorded the difference betwwen the carrying value of the warrants and the net
purchase price, which amounted to $883,000, as additional paid-in-capital in the
Registrant's Consolidated Balance Sheet as of December 31, 1998.
The Registrant's minority, general (non-managing) and limited partnership
interests in RCA represent 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 managing general partner
agreed to advance funds to RCA on behalf of the Registrant on an unsecured
non-recourse basis, subject to interest at the prime rate plus 2% and certain
fees (principal, unpaid interest and fees are collectively referred to as the
RCA Advances). As indicated previously, RCA's managing general partner is
seeking to void the letter agreement under which these loans were made and is
also seeking restitution of the loans advanced. The RCA Advances amount to
$8,525,000 at December 31, 1998, 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. The managing
general partner of RCA is currently in negotiations to refinance the debt on
Rincon Center Phases One and Two as more fully described in Note 2 to the
Registrant's Consolidated Financial Statements. The proposed refinancing is
subject to a number of conditions and approvals among the parties involved in
the refinancing. The managing general partner of RCA and the Registrant can make
no assurances that the refinancing will be completed.
Except as described above, at December 31, 1998, the Registrant's material
capital expenditures over the next twelve months and beyond are expected to be
funded from restricted cash 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 from restricted cash, cash
flow generated by operating activities and funds generated from future debt
refinancings or property sales, if any.
The Registrant continued to experience more stabilized operating results in
its wholly owned properties during 1998, 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 and the
Registrant is continuing to aggressively pursue new leases on currently
available space and renew existing leases as they expire.
17
<PAGE>
YEAR 2000 COMPLIANCE
The inability of computers, software and other equipment utilizing
microprocessors to recognize and properly process data fields containing a
two-digit year is commonly referred to as the Year 2000 compliance issue. As the
Year 2000 approaches, such systems may be unable to accurately process certain
date-based information. As used by the Registrant, "Year 2000 ready" means that
a system will function in the Year 2000 without modification or adjustment, or
with a one-time manual adjustment.
THE REGISTRANT'S STATE OF READINESS. The Registrant utilizes a number of
computer software programs and operating systems across its entire organization
including applications used in financial business systems and various
administrative functions. The Registrant has established an action plan for
addressing Year 2000 issues. The Registrant's action plan for addressing Year
2000 compliance issues in its information technology ("IT") and non-IT systems
covers four phases: (i) identification of all IT and non-IT systems; (ii)
assessment of Year 2000 issues; (iii) repair of IT and non-IT systems, if
necessary; and (iv) creation of a contingency plan to address any potential Year
2000 failures. The Registrant is also contacting third parties with which it
deals (such as financial institutions and vendors) to evaluate their Year 2000
readiness and determine whether any Year 2000 failure will affect their ability
to perform as the Year 2000 approaches and arrives.
As of December 31, 1998, the Registrant has completed the first two phases
of its Year 2000 action plan with respect to its IT systems. The Registrant has
identified all of its IT systems, assessed the Year 2000 readiness of these
systems (which involved review and testing by internal personnel) and has begun
to make necessary repairs. As of December 31, 1998, the Registrant has completed
its Year 2000 action plan with respect to its non-IT systems. The Registrant has
identified all of its non-IT systems (which are comprised of embedded systems
contained in its properties), assessed the Year 2000 readiness of these systems
through review and testing and concluded that any failure of these systems to be
Year 2000 ready is not reasonably likely to have a material adverse effect on
the Registrant's financial condition and results of operations. The Registrant
is scheduled to complete all four phases of its Year 2000 initiative with
respect to its IT systems no later than June 30, 1999.
The Registrant has received assurances from a majority of its suppliers and
third parties with which it interacts that they have addressed their Year 2000
issues. The Registrant is evaluating these assurances for their adequacy and
accuracy and, in cases where the Registrant has not received assurances from
third parties, is initiating further mail or phone correspondence. As a general
matter, the Registrant is vulnerable to failures by third parties to address
their own Year 2000 issues. The Registrant relies heavily upon third parties for
utility services, maintenance labor, financial services, building materials and
office supplies. There can be no assurance that the Registrant's suppliers and
other third parties will adequately address their Year 2000 issues, and any such
issues could have a material adverse affect upon the Registrant's financial
condition and results of operations.
COST OF ADDRESSING THE REGISTRANT'S YEAR 2000 ISSUES. The Registrant has
not spent a material amount of financial resources to remediate Year 2000
problems and does not anticipate that it will spend a material amount of
financial resources to remediate Year 2000 problems in the future. The costs of
such remediation will be paid out as part of the Registrant's general and
administrative expenses.
RISKS OF THE REGISTRANT'S YEAR 2000 ISSUES. Based upon the Registrant's
assessment and remediation efforts to date, and the planned, normal
course-of-business upgrades, management believes that any residual Year 2000
risk is limited to non-material, non-critical business applications and support
hardware. No assurance can be given, however, that all of the Registrant's
systems will be Year 2000 ready or that non-compliance, if any, will not have a
material adverse effect on the Registrant's future liquidity or results of
operations or ability to service debt. In addition, the failure to address Year
2000 issues by the Registrant's suppliers and other third parties with which it
interacts could have a material adverse effect upon the Registrant's financial
condition and results of operations.
18
<PAGE>
THE REGISTRANT'S CONTINGENCY PLANS. The Registrant's Year 2000 action plan
calls for the Registrant to develop a Year 2000 contingency plan. The Registrant
will develop such a plan if the results of its Year 2000 action plan identify
risks of a Year 2000 failure.
FORWARD-LOOKING STATEMENTS; FACTORS THAT MAY AFFECT OPERATING RESULTS
Certain information included in this Form 10-K and other materials filed or
to be filed by the Registrant with the Securities and Exchange Commission may
constitute forward-looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995. Such forward-looking information
involves known and unforeseen risks, uncertainties and other factors that may
cause actual results or performance to be materially different from those
expressed or implied by such forward-looking statements. These risks and
uncertainties include, but are not limited to, uncertainties affecting the real
estate business generally, such as lease renewals and the financial stability of
tenants, general economic conditions and conditions in the Registrant's markets,
risks relating to acquisitions and dispositions of properties, risks relating to
interest rate levels and fluctuations, the availability of financing, and
regulatory risks. Given these and other risks described elsewhere in this Form
10-K, investors are cautioned not to place undue reliance on any forward-looking
statements.
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.
PART III
The information called for by Part III will be included in an amendment to
this Form 10-K, to be filed within 120 days after the end of the fiscal year
covered by this Annual Report on Form 10-K.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) 1. The following financial statements and supplementary financial
information are filed as part of this report:
<TABLE>
<CAPTION>
FINANCIAL STATEMENTS OF THE REGISTRANT PAGES
- -------------------------------------------------------------------------------------------------------- ---------
<S> <C>
Consolidated Balance Sheet as of December 31, 1998 and 1997............................................. 23
Consolidated Statement of Income (Loss) for the three years ended December 31, 1998, 1997 and 1996...... 24
Consolidated Statement of Stockholders' Equity (Deficit) for the three years ended December, 1998, 1997
and 1996............................................................................................... 25
Consolidated Statement of Cash Flows for the three years ended December 31, 1998, 1997 and 1996......... 26-27
Notes to Consolidated Financial Statements.............................................................. 28-41
Report of Independent Public Accountants................................................................ 42
(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, 1998.......................... 43-44
</TABLE>
19
<PAGE>
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.
<TABLE>
<CAPTION>
(a) 3. Exhibits
<S> <C> <C>
This section to be completed by amendment.
21. Subsidiaries of the Registrant 45
(b) The Registrant filed a Form 8-K dated April 9, 1998, to report the Warrant Repurchase
Agreement entered into as of March 31, 1998.
The Registrant filed a Form 8-K dated September 29, 1998, reporting the issuance of Series
1 Convertible Preferred Stock under Item 5.
The Registrant filed a Form 10-K/A for the year ended December 31, 1997, dated April 30,
1998, reporting under Items 10 through 13.
The Registrant filed a Form S-4 dated November 10, 1998.
The Registrant filed Form S-4/A (Amendment No. 1) dated December 31, 1998.
</TABLE>
20
<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.
<TABLE>
<S> <C> <C>
PACIFIC GATEWAY PROPERTIES, INC.
(Registrant)
By: RAYMOND V. MARINO
-----------------------------------------
Raymond V. Marino
President and Chief Executive Officer
</TABLE>
Dated: March 10, 1999
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.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------ -------------------------- -------------------
<S> <C> <C>
Director, President and
RAYMOND V. MARINO Chief Executive Officer
- ------------------------------ and Chief Financial March 10, 1999
Raymond V. Marino Officer
MELANIE L. ADKINS Controller--Corporate
- ------------------------------ (Principal Accounting March 10, 1999
Melanie L. Adkins Officer)
NEIL C. MARCK Controller--Management
- ------------------------------ Company (Principal March 10, 1999
Neil C. Marck Accounting Officer)
STEVEN A. CALABRESE
- ------------------------------ Director March 10, 1999
Steven A. Calabrese
MARK D. GROSSI
- ------------------------------ Director March 10, 1999
Mark D. Grossi
LAWRENCE B. HELZEL
- ------------------------------ Director March 10, 1999
Lawrence B. Helzel
CHRISTOPHER L. JARRATT
- ------------------------------ Director March 10, 1999
Christopher L. Jarratt
RICHARD M. OSBORNE
- ------------------------------ Director March 10, 1999
Richard M. Osborne
MARTIN S. ROHER
- ------------------------------ Director March 10, 1999
Martin S. Roher
</TABLE>
21
<PAGE>
PACIFIC GATEWAY PROPERTIES, INC.
CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1998 AND 1997
AND FOR THE YEARS ENDED
DECEMBER 31, 1998, 1997 AND 1996
22
<PAGE>
PACIFIC GATEWAY PROPERTIES, INC.
CONSOLIDATED BALANCE SHEET
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
--------------------
1998 1997
--------- ---------
<S> <C> <C>
ASSETS
Cash and cash equivalents................................................................... $ 6,535 $ 2,065
Restricted cash............................................................................. 1,573 1,746
Accounts receivable......................................................................... 148 112
Other current assets........................................................................ 82 140
Investment properties:
Land...................................................................................... 9,137 9,631
Buildings................................................................................. 46,008 49,665
Building and other improvements........................................................... 12,993 11,360
--------- ---------
Subtotal investment properties.......................................................... 68,138 70,656
Less-accumulated depreciation............................................................. (16,205) (16,431)
--------- ---------
Investment properties, net.............................................................. 51,933 54,225
--------- ---------
Property held for sale, net of accumulated depreciation and reserve for write-down to net
realizable value of $2,733 at December 31, 1998........................................... 2,480 --
Deferred tax asset.......................................................................... 10,216 8,203
Capitalized loan costs, net of accumulated amortization of $233 and $134 at December 31,
1998 and 1997, respectively............................................................... 743 818
Capitalized lease commissions, rent concessions and other deferred costs, net of accumulated
amortization of $1,455 and $1,476 at December 31, 1998 and 1997, respectively............. 1,841 1,402
--------- ---------
Total assets........................................................................ $ 75,551 $ 68,711
--------- ---------
--------- ---------
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable............................................................................ $ 879 $ 1,109
Accrued payroll, property and sales taxes................................................... 117 195
Accrued interest on debt.................................................................... 811 385
Unearned rental revenue..................................................................... 413 286
Tenant security deposits.................................................................... 1,233 703
Debt related to investment properties....................................................... 48,707 47,402
Deferred tax liability...................................................................... 20,274 17,983
--------- ---------
Total liabilities..................................................................... 72,434 68,063
--------- ---------
Stockholders' equity:
Common stock $1.00 par value--
Authorized--10,000,000 shares; Issued--4,052,090 and 4,018,150 shares at December 31, 1998
and 1997, respectively.................................................................... 4,052 4,018
Series 1 Convertible Preferred Stock $1.00 par value, $3,000,000 preference in liquidation:
Authorized and issued--300,000 shares..................................................... 2,889 --
Paid-in-deficit............................................................................. (8,968) (10,023)
Retained earnings........................................................................... 7,181 6,800
Treasury stock, at cost--118,554 common shares at December 31, 1998 and December 31, 1997... (2,037) (2,037)
Warrants for common stock................................................................... -- 1,890
--------- ---------
Total stockholders' equity............................................................ 3,117 648
--------- ---------
Total liabilities and stockholders' equity.......................................... $ 75,551 $ 68,711
--------- ---------
--------- ---------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
23
<PAGE>
PACIFIC GATEWAY PROPERTIES, INC.
CONSOLIDATED STATEMENT OF INCOME (LOSS)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
-------------------------------
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
INVESTMENT PROPERTIES:
Rental revenues................................................................ $ 16,528 $ 13,721 $ 11,011
Operating expenses............................................................. (6,340) (5,955) (5,468)
Interest expense............................................................... (4,300) (4,058) (4,092)
Depreciation and amortization.................................................. (3,684) (3,109) (2,632)
--------- --------- ---------
Investment properties income (loss).......................................... 2,204 599 (1,181)
--------- --------- ---------
HOTEL PROPERTY:
Revenues....................................................................... -- -- 6,111
Operating expenses............................................................. -- (93) (4,695)
Interest expense............................................................... -- -- (403)
Depreciation and amortization.................................................. -- -- --
--------- --------- ---------
Hotel property income (loss)................................................. -- (93) 1,013
--------- --------- ---------
INVESTMENT IN PARTNERSHIP:
Reversal of debt related to investment in RCA.................................. -- -- 2,940
--------- --------- ---------
Investment in partnership.................................................... -- -- 2,940
--------- --------- ---------
General and administrative expenses.............................................. (1,360) (1,250) (1,603)
Other income (expense)........................................................... 196 192 540
--------- --------- ---------
Income (loss) before settlement obligation, property transactions, income taxes
and extraordinary item....................................................... 1,040 (552) 1,709
Provision for settlement of reimbursement obligation............................. (58) (2,200) --
Gain on sale of real estate assets, net.......................................... -- -- 16,714
--------- --------- ---------
Income (loss) before income taxes and extraordinary items........................ 982 (2,752) 18,423
Income tax (provision) benefit................................................... (389) 1,026 (7,835)
--------- --------- ---------
Income (loss) before extraordinary items......................................... 593 (1,726) 10,588
Extraordinary gain from extinguishment of debt................................... -- -- 766
--------- --------- ---------
Net income (loss).............................................................. $ 593 $ (1,726) $ 11,354
--------- --------- ---------
Preferred dividends.............................................................. (15) -- --
--------- --------- ---------
Net income (loss) available to common stockholders............................... $ 578 $ (1,726) $ 11,354
--------- --------- ---------
--------- --------- ---------
Income (loss) per common share, basic:
Income (loss) before extraordinary items....................................... $ 0.15 $ (0.44) $ 2.72
Extraordinary items............................................................ -- -- 0.20
--------- --------- ---------
Net income (loss) available to common stockholders........................... $ 0.15 $ (0.44) $ 2.92
--------- --------- ---------
--------- --------- ---------
Income (loss) per common share, diluted:
Income (loss) before extraordinary items....................................... $ 0.14 $ (0.44) $ 2.58
Extraordinary items............................................................ -- -- 0.19
--------- --------- ---------
Net income (loss) available to common stockholders........................... $ 0.14 $ (0.44) $ 2.77
--------- --------- ---------
--------- --------- ---------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
24
<PAGE>
PACIFIC GATEWAY PROPERTIES, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE THREE YEARS ENDED DECEMBER 31, 1998
(IN THOUSANDS EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
SERIES 1
CONVERTIBLE WARRANTS
COMMON PREFERRED PAID-IN- RETAINED TREASURY FOR COMMON
STOCK STOCK DEFICIT EARNINGS STOCK STOCK TOTAL
----------- ------------- --------- ----------- ----------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
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
Net loss............................ -- -- -- (1,726) -- -- (1,726)
Issuance of common stock from
exercise of stock options......... 7 -- 15 -- -- -- 22
Return of profit from shareholder
short-swing sale.................. -- -- 184 -- -- -- 184
----------- ------ --------- ----------- ----------- ----------- ---------
Balance at December 31, 1997.......... $ 4,018 $ -- $ (10,023) $ 6,800 $ (2,037) $ 1,890 $ 648
Net income.......................... -- 15 -- 578 -- -- 593
Dividend payment.................... -- (15) -- (197) -- -- (212)
Repurchase of warrants.............. -- -- 883 -- -- (1,890) (1,007)
Issuance of 300,000 shares of
preferred stock................... -- 2,889 -- -- -- -- 2,889
Tax benefit from exercise of stock
options........................... -- -- 104 -- -- -- 104
Issuance of common stock from
exercise of stock options......... 34 -- 65 -- -- -- 99
Return of profit from shareholder
short-swing sale.................. -- -- 3 -- -- -- 3
----------- ------ --------- ----------- ----------- ----------- ---------
Balance at December 31, 1998.......... $ 4,052 $ 2,889 $ (8,968) $ 7,181 $ (2,037) $ -- $ 3,117
----------- ------ --------- ----------- ----------- ----------- ---------
----------- ------ --------- ----------- ----------- ----------- ---------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
25
<PAGE>
PACIFIC GATEWAY PROPERTIES, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
DECEMBER 31,
-------------------------------
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Cash flow from operating activities:
Net income (loss).................................................................. $ 593 $ (1,726) $ 11,354
Non-cash revenues and expenses included in net income (loss):
Depreciation and amortization.................................................... 3,684 3,109 2,632
Provision for settlement of reimbursement obligation............................. 58 2,200 --
Gain on sale of real estate assets, net.......................................... -- -- (16,714)
Reversal of debt related to investment in RCA.................................... -- -- (2,940)
Extraordinary items.............................................................. -- -- (766)
Deferred taxes, net.............................................................. 278 (1,049) 7,146
Changes in assets and liabilities:
Accounts receivable and other current assets....................................... 22 927 89
Accounts payable and other current liabilities..................................... 775 1,187 (1,290)
--------- --------- ---------
NET CASH GENERATED BY (USED IN) OPERATING ACTIVITIES................................. 5,410 4,648 (489)
--------- --------- ---------
Cash flow from investing activities:
Additions to building and other improvements, capitalized lease commissions, rent
concessions and other deferred costs............................................. (4,176) (4,161) (1,876)
Acquisition of investment properties............................................... -- (10,797) --
Proceeds from sale of properties................................................... -- -- 39,432
--------- --------- ---------
NET CASH GENERATED BY (USED IN) INVESTING ACTIVITIES................................. (4,176) (14,958) 37,556
--------- --------- ---------
Cash flow from financing activities:
Borrowings under debt related to investment properties............................. 4,273 2,112 14,300
Payments on debt................................................................... (3,026) (835) (38,460)
Payment of loan costs and fees..................................................... (60) (236) (450)
Repurchase of warrants............................................................. (1,007) -- --
Proceeds from sale of preferred stock, net of issuance costs....................... 2,889 -- --
Payment of dividends............................................................... (212) -- --
Proceeds from stock options exercised.............................................. 99 22 --
Tax benefit from exercise of stock options......................................... 104 -- --
Proceeds from shareholder short-swing sale......................................... 3 184 --
(Increase) decrease in restricted cash............................................. 173 8,229 (9,734)
--------- --------- ---------
NET CASH GENERATED BY (USED IN) FINANCING ACTIVITIES................................. 3,236 9,476 (34,344)
--------- --------- ---------
Increase (decrease) in cash and cash equivalents..................................... 4,470 (834) 2,723
Balance at beginning of year......................................................... 2,065 2,899 176
--------- --------- ---------
Balance at end of year............................................................... $ 6,535 $ 2,065 $ 2,899
--------- --------- ---------
--------- --------- ---------
SUPPLEMENTARY DISCLOSURES:
Cash paid for interest............................................................. $ 3,791 $ 3,673 $ 4,495
--------- --------- ---------
--------- --------- ---------
Cash paid for taxes................................................................ $ 1 $ -- $ 510
--------- --------- ---------
--------- --------- ---------
Non-cash transactions:
Portion of acquisition of investment properties funded by assumption of mortgage
debt............................................................................. $ -- $ 10,203 $ --
--------- --------- ---------
--------- --------- ---------
Increase in debt related to investment properties in connection with reimbursement
obligation....................................................................... $ 58 $ 2,200 $ --
--------- --------- ---------
--------- --------- ---------
Reduction of debt related to investment properties due to Statement of Accounting
Standards No. 15................................................................. $ -- $ -- $ 956
--------- --------- ---------
--------- --------- ---------
Decrease in paid-in-deficit from repurchase of warrants............................ $ 883 $ -- $ --
--------- --------- ---------
--------- --------- ---------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
26
<PAGE>
PACIFIC GATEWAY PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE YEARS ENDED DECEMBER 31, 1998
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 create operational efficiencies.
PRINCIPLES OF CONSOLIDATION
The Company's Consolidated Financial Statements include the accounts of the
Company and all wholly owned subsidiaries. Significant intercompany accounts and
transactions have been eliminated in consolidation. The investment in RCA in
which the Company has a 22.8% partnership interest and has no management
control, is 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.
RESTRICTED CASH
As of December 31, 1998, restricted cash is comprised of the following (in
thousands):
<TABLE>
<S> <C>
Capital, tenant improvement and lease commission reserves........... $ 824
Security deposits from certain tenants.............................. 485
Debt service, property tax and insurance reserves................... 264
---------
Total............................................................... $ 1,573
---------
---------
</TABLE>
INVESTMENT PROPERTIES, PROPERTY HELD FOR SALE, AND OTHER DEFERRED COSTS
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 10 to 40 years. At December 31, 1998, the Company had
classified the 410 First Avenue property as held for sale. This property was
sold in January 1999 as further discussed in Note 2.
27
<PAGE>
PACIFIC GATEWAY PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE THREE YEARS ENDED DECEMBER 31, 1998
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The following table summarizes the condensed results of operations of the
property held for disposition for the years ended December 1998, 1997, and 1996
(in thousands):
<TABLE>
<CAPTION>
1998 1997 1996
--------- ---------- ---------
<S> <C> <C> <C>
Rental revenues................................................. $ 301 $ 302 $ 223
Operating expenses.............................................. 96 44 25
Interest expense................................................ 414 226 --
Depreciation and amortization................................... 11 78 155
Provision for reimbursement obligation.......................... 58 2,200 --
--------- ---------- ---------
Investment property income (loss)............................... $ (278) $ (2,246) $ 43
--------- ---------- ---------
--------- ---------- ---------
</TABLE>
Capitalized loan costs consist of loan fees, legal, accounting, engineering,
appraisal, and other costs associated with financings and are amortized using
the straight-line method over the primary term of related debt instrument. Lease
commissions and rent concessions are amortized over the term of the lease. The
remaining deferred costs are amortized using the straight-line method over the
estimated useful life of the asset to which they relate. Repairs and maintenance
are charged to expense as incurred.
The Company periodically reviews its long-lived assets for impairment
whenever events or changes in circumstances indicate that the carrying amount of
an asset may not be recoverable. An impairment loss would be recognized when
expected cash flows (not discounted) are less than the carrying value of the
asset. Measurement of impairment is based upon the fair value of the asset.
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 statutory
marginal tax rate.
GAIN ON SALE OF REAL ESTATE ASSETS, NET
Gain on sale of real estate assets consists of the following (in thousands):
<TABLE>
<CAPTION>
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Radisson Suites Hotel........................................ $ -- $ -- $ 5,814
Village Commons Shopping Center.............................. $ -- $ -- 10,900
--------- --------- ---------
Total........................................................ $ -- $ -- $ 16,714
--------- --------- ---------
--------- --------- ---------
</TABLE>
EARNINGS PER SHARE
Basic earnings per share is computed as earnings divided by weighted average
shares, excluding the dilutive effects of stock options and other potentially
dilutive securities. Outstanding warrants and stock options enter into the
weighted average shares outstanding when computing diluted earnings per share
28
<PAGE>
PACIFIC GATEWAY PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE THREE YEARS ENDED DECEMBER 31, 1998
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
using the Treasury Stock Method. The number of weighted average common shares
and potential common shares used in the earnings per share calculations are as
follows:
<TABLE>
<CAPTION>
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Basic............................................... 3,916,612 3,893,133 3,892,596
Stock options, warrants and convertible stock....... 187,166 -- 207,504
------------ ------------ ------------
Diluted............................................. 4,103,778 3,893,133 4,100,100
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
In 1997, due to the Company's loss position, the inclusion of stock options
and warrants would have been anti-dilutive, and accordingly the number of
outstanding shares used in calculating basic and diluted earnings per share for
that year are the same.
RISKS AND UNCERTAINTIES AND USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities,
disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenues and expenses during the
reporting period. Actual results will differ from those estimates.
The Company's ability to (i) meet its debt obligations, (ii) provide
dividends either from operations, or the ultimate disposition of the Company's
properties or (iii) continue as a going concern may be impacted by changes in
interest rates, property values, geographic economic conditions, or the entry of
other competitors to the market. The Company's wholly owned San Francisco Bay
Area properties do not maintain earthquake insurance. The accompanying
Consolidated Financial Statements do not provide for any adjustments with regard
to these uncertainties.
RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform with the
current year presentation.
2. REAL ESTATE PARTNERSHIP INVESTMENTS
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
represent 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. Except
for the provision for settlement of reimbursement obligation and deferred income
tax liabilities related to the tax that would result from any gain recognized
from the
29
<PAGE>
PACIFIC GATEWAY PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE THREE YEARS ENDED DECEMBER 31, 1998
2. REAL ESTATE PARTNERSHIP INVESTMENTS (CONTINUED)
Company's negative tax basis in its partnership interest, the accompanying
financial statements do not include any adjustments for these uncertainties.
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 was 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. As of
January 1, 1998, no new long term financing commitment had been secured although
negotiations with the current lender were in progress. In order to allow those
discussions to continue, Chrysler agreed to temporarily delay the enforcement of
the purchase requirements. RCA can make no assurances about the outcome of
these negotiations. As a result of the current loan negotiations, RCA has
written-down the carrying value of the assets related to this segment of the
property by $17,150,000 in 1997 to the estimated net realizable value. On June
30, 1997, RCA filed a lawsuit against Chrysler in Superior Court in the State of
California, County of San Francisco. The lawsuit's primary cause of action
alleges that Chrysler has breached the master lease and a certain letter
agreement because the rent payments due from RCA after the 1993 refinancing of
Rincon Center Phase One, resulted in an increase in Chrysler's after tax rate of
return from rent payments. The lawsuit states that such excessive rent
recalculations directly contravene both the letter and the spirit of the master
lease.
In September 1993, RCA completed a refinancing of Rincon Center Phase Two
with Citibank. The residential portion of Rincon Center Phase Two is being
financed with redevelopment bonds from the Redevelopment Agency of the City and
County of San Francisco, California, which are due December 1, 2006. The bonds
are secured by an irrevocable letter-of-credit issued by Citibank in the name of
RCA. In the event that drawings are made on the letter-of-credit, RCA has agreed
to reimburse Citibank for such drawings pursuant to the terms of the
Reimbursement Agreement which is secured by a deed of trust on Rincon Center
Phase Two and other guarantees. During 1997, the irrevocable letter-of-credit
was due to expire. RCA is currently in negotiations with Citibank to extend the
letter-of-credit and no assurances can be made about the outcome of this
negotiation. Currently, the letter-of-credit has been extended to May 1, 1999.
The commercial portion of Rincon Center Phase Two was financed pursuant to a
Construction Loan Agreement between RCA and Citibank. The Construction Loan
Agreement is secured by a deed of trust on the commercial portion of Rincon
Center Phase Two. RCA is currently in negotiations with Citibank to extend the
loan and no assurances can be made about the outcome of this negotiation. A
portion of the security for the Construction Loan Agreement was a $3.65 million
letter-of-credit issued by Bank of America National Trust and Savings
Association (the Issuing Bank) on behalf of the Company in favor of Citibank.
The letter-of-credit for $3.65 million was drawn by Citibank prior to its
expiration date of June 23, 1997. Citibank is currently holding the $3.65
million in a separate restricted account on behalf of RCA and has not applied
said funds to any outstanding debt of RCA. The Issuing Bank made a demand on the
Company to reimburse them for the $3.65 million drawn on the letter-of-credit
and also notified the Company it is in default with respect to the reimbursement
obligation. In accordance with generally
30
<PAGE>
PACIFIC GATEWAY PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE THREE YEARS ENDED DECEMBER 31, 1998
2. REAL ESTATE PARTNERSHIP INVESTMENTS (CONTINUED)
accepted accounting principles, effective June 30, 1997, the Company recorded a
"provision for settlement of reimbursement obligation" in the amount of $2.2
million to provide for the ultimate settlement of the reimbursement obligation.
On or about August 18, 1997, the Issuing Bank commenced an action against the
Company in the Land Court Department of the Trial Court of Massachusetts (the
Land Court), to obtain a conditional judgment in the full amount of the
Company's indebtedness to the Issuing Bank. The Company filed a complaint
against the Issuing Bank on November 21, 1997 in the Superior Court Department
of the Trial Court of the Commonwealth of Massachusetts (the Superior Court)
seeking damages, equitable relief and a jury trial for causes of action flowing
from the Issuing Bank's conduct regarding the letter of credit.
The Company and the Issuing Bank settled the Land and Superior Court actions
on January 15, 1999. Pursuant to the terms of a mutual release and settlement
agreement, the Company paid the Issuing Bank the sum of $4.2 million and
released the Issuing Bank from all claims raised in the Superior Court action.
The Issuing Bank, meanwhile, executed discharges of mortgage and rent
assignment, and released the Company from all claims raised in the Land Court
action. Concurrent with the mutual release and settlement between the Company
and the Issuing Bank, the Company closed on the sale of the 410 First Avenue
property on January 20, 1999, for approximately $3,950,000. In connection with
this property disposition, the Company recorded a provision of approximately
$58,000 in its 1998 Consolidated Statement of Income (Loss). The net proceeds
from the sale were utilized to partially fund the $4.2 million settlement with
the Issuing Bank.
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.
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. 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. During 1998, 1997 and 1996, RCA
incurred net losses of approximately $18,164,000, $37,923,000 and $16,451,000,
respectively. The RCA Advances amount to $8,525,000 at December 31, 1998 and as
noted above, are not recorded on the Company's consolidated financial statements
since (i) the RCA Advances are only required to be repaid from the Company's
share of future distributions from RCA, if any,(ii) 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 (iii) the Company does not anticipate any
material cash distributions by RCA in the foreseeable future.
During 1997, the Company 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.
31
<PAGE>
PACIFIC GATEWAY PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE THREE YEARS ENDED DECEMBER 31, 1998
2. REAL ESTATE PARTNERSHIP INVESTMENTS (CONTINUED)
Summary financial statement data for RCA is as follows (in thousands):
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1998 1997
----------- -----------
<S> <C> <C> <C>
Investment properties, net.............................. $ 109,320 $ 107,045
Other assets............................................ 2,734 6,857
---------- ----------- -----------
$ 112,054 $ 113,902
---------- ----------- -----------
---------- ----------- -----------
Debt.................................................... $ 45,788 $ 49,228
Amounts due to partners................................. 201,118 185,208
Other liabilities....................................... 16,569 12,723
Partners' deficit....................................... (151,421) (133,257)
$ 112,054 $ 113,902
---------- ----------- -----------
---------- ----------- -----------
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31, 1998 1997 1996
---------- ----------- -----------
<S> <C> <C> <C>
Revenue................................................. $ 19,032 $ 16,772 $ 20,705
---------- ----------- -----------
Expenses:
Operating and lease expenses........................ 19,826 19,429 18,519
Provision for write-down of note receivable......... -- 17,150 --
Financing........................................... 14,664 15,017 14,712
Depreciation and amortization....................... 2,706 3,099 3,925
---------- ----------- -----------
37,196 54,695 37,156
---------- ----------- -----------
---------- ----------- -----------
Net loss $ (18,164) $ (37,923) $ (16,451)
---------- ----------- -----------
---------- ----------- -----------
</TABLE>
32
<PAGE>
PACIFIC GATEWAY PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE THREE YEARS ENDED DECEMBER 31, 1998
3. DEBT
As of December 31, 1998 and 1997, the Company had the following debt related
to investment properties outstanding (in thousands):
<TABLE>
<CAPTION>
1998 1997
--------- ---------
<S> <C> <C>
South Bay Office Tower, interest fixed at 8.66%, due January 2007....... $ 9,228 $ 9,348
Walnut Creek Executive Park, interest fixed at 7.85%, due June 2005..... 18,531 19,002
Weston Office Building, interest fixed at 8.45%, due October 2001....... 918 959
North Tucson Business Center, interest fixed at 9.62%, due October
2006.................................................................. 3,757 3,801
West Valley Executive Park (4000-4040 buildings), interest fixed at
9.13%, due June 2005.................................................. 9,759 10,000
West Valley Executive Park (4050 building), interest at 8.375% as of
December 31, 1998 (floating rate of 3% over the one year treasury bond
rate adjustable every six months),
due July 2008......................................................... 1,567 --
930 Montgomery Street, interest at 8.375% as of December 31, 1998
(floating rate of 3% over the one year treasury bond rate adjustable
every six months), due September 2008................................. 2,689 2,092
410 First Avenue (See Note 2)........................................... 2,258 2,200
--------- ---------
$ 48,707 $ 47,402
--------- ---------
--------- ---------
</TABLE>
MORTGAGES ON REAL ESTATE
SOUTH BAY OFFICE TOWER
In December 1996, the Company completed the refinancing of $9.45 million of
debt related to South Bay Office Tower. The loan bears interest at 8.66% through
maturity and requires fixed monthly payments of $77,000. The loan is amortized
over 25 years and matures on January 2007. This 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. The loan is non-recourse to the
Company. Concurrent with the closing, the Company deposited $701,000 with the
lender to fund future capital improvements. As of December 31, 1998, $634,000
has been reimbursed to the Company by the lender. Also, the loan requires an
additional $22,100 per month to be deposited for future tenant improvements and
leasing commissions until the reserve equals a maximum of $668,000. The portion
of reserves funded and unspent through December 31, 1998, including interest,
amounted to approximately $216,000 and is classified as restricted cash on the
Company's Consolidated Balance Sheet.
33
<PAGE>
PACIFIC GATEWAY PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE THREE YEARS ENDED DECEMBER 31, 1998
3. DEBT (CONTINUED)
WALNUT CREEK EXECUTIVE PARK
In June 1995, the Company completed the refinancing of $20,000,000 of debt
related to Walnut Creek Executive Park. The loan carries a 7.85% annual interest
rate until maturity with fixed monthly payments of approximately $162,000. The
loan is amortized over 20 years and matures on June 2005. The loan has a
prepayment penalty and is non-recourse to the Company. In addition, the loan
requires the Company to fund a reserve for future tenant improvements of $17,600
per month through month sixty-eight (68) of the loan or until the reserve,
including interest, reaches a balance of $1,000,000. The balance of the reserve
as of December 31, 1998, including interest, amounted to approximately $546,000
and is classified as restricted cash on the Company's Consolidated Balance
Sheet.
WESTON OFFICE BUILDING
In October 1996, the Company completed the refinancing of $1,000,000 of debt
related to Weston Office Building in Florida. The loan carries an 8.45% annual
interest rate until maturity with fixed monthly payments of approximately
$9,800. The loan is amortized over 15 years and matures on October 2001. The
loan has no prepayment penalty. This loan is an obligation of a subsidiary of
the Company and the Company has provided a guarantee of the lessor of $500,000
or 50% of the outstanding loan balance.
NORTH TUCSON BUSINESS CENTER
In September 1996, the Company completed the refinancing of $3,850,000 of
debt related to North Tucson Business Center in Arizona. The loan carries a
9.62% annual interest rate until maturity with fixed monthly payments of
approximately $34,000. The loan is amortized over 25 years and matures on
October 2006. The loan is non-recourse to the Company. Concurrent with the
closing, the Company deposited $40,800 with the lender to fund future tenant
improvements and leasing commissions during the term of the loan. The loan also
requires an additional $3,400 per month to be deposited for future tenant
improvements and leasing commissions and $1,100 per month to be deposited in a
replacement reserve during the term of the loan. In addition, the Company is
required to fund a debt service reserve of $8,200 per month until $295,000 has
been funded. The debt service, tenant improvement and leasing commission
reserves may be reduced if certain tenant renewals occur. The portion of the
reserves funded and unspent through December 31, 1998, including interest,
amounted to approximately $283,000 and is classified as restricted cash on the
Company's Consolidated Balance Sheet.
WEST VALLEY EXECUTIVE PARK
In connection with the January 17, 1997 acquisition of this property, the
Company assumed approximately $10,203,000 in non-recourse mortgage debt related
to buildings 4000-4040 at West Valley Executive Park in San Jose, California.
The loan carries a 9.13% annual interest rate until maturity with fixed monthly
payments of approximately $95,300. The loan is amortized over 20 years and
matures on June 2005. The debt continues to be assumable and is subject to a
prepayment penalty if paid off prior to July 1, 2000.
In June 1998, the Company completed the financing of $1,575,000 of mortgage
debt from Redwood Bank related to the 4050 Moorpark building at West Valley
Executive Park. The new loan carries a variable
34
<PAGE>
PACIFIC GATEWAY PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE THREE YEARS ENDED DECEMBER 31, 1998
3. DEBT (CONTINUED)
interest rate of 2.875% over the one year treasury bond rate, adjustable
semi-annually (8.375% at December 31, 1998). The loan has fixed monthly payments
of approximately $12,500. The loan is amortized over 25 years and matures on
July 2008. This debt is nonrecourse and can be prepaid at any time without a
penalty. This debt contains a cross default provision with the loan on the
Company's 930 Montgomery Street property in San Francisco, California.
930 MONTGOMERY STREET
In July 1998, the Company completed the refinancing of $2,076,000 of
mortgage debt from Redwood bank related to its 930 Montgomery Street property in
San Francisco, California. The new loan of $2,697,500 carries a variable
interest rate of 2.875% over the one year treasury bond rate, adjustable semi-
annually (8.375% at December 31, 1998). The loan has fixed monthly payments of
approximately $21,500. The loan is amortized over 25 years and matures on
September 2008. This debt is nonrecourse and can be prepaid at any time without
a penalty. This debt contains a cross default provision with the loan on the
Company's 4050 Moorpark building at West Valley Executive Park property in San
Jose, California.
410 FIRST AVENUE
See Note 2 to the Consolidated Financial Statements for discussion of the
$2,258,000 estimated settlement obligation.
CORPORATE DEBT
In December 1993, the Company completed a restructuring of its non-revolving
line-of-credit, letter-of-credit, unsecured bonds, and certain mortgages. This
debt was paid in full in 1996 using the proceeds from the sale of the Radisson
Suites Hotel.
In connection with this restructuring, the Company issued to Citicorp Real
Estate, Inc. (Citicorp) warrants to acquire up to two million shares of the
Company's common stock at an exercise price of $2.875 per share. One million of
the warrants were canceled leaving one million exercisable warrants outstanding,
which the Company recorded in the stockholders' equity section of the Company's
Consolidated Balance Sheet at a carrying value of $1,890,000.
On March 31, 1998, the Company completed the repurchase of the 1,000,000
outstanding warrants to purchase 1,000,000 shares of the Company's common stock
from Citicorp, for $1,000,000. As a result of this transaction, the Company has
recorded the difference between the carrying value of the warrants and the net
purchase price, which amounts to $883,000, as additional paid-in-capital in the
Company's Consolidated Balance Sheet as of December 31, 1998.
Statement of Financial Accounting Standards No. 15 required the Company to
account for future interest resulting from the debt restructuring using an
imputed interest rate versus the stated rates on the Notes A and B. In addition,
Citicorp's cancellation of debt of $4 million at the time of the restructuring
was effectively amortized for financial reporting purposes. In connection with
the retirement of Notes A and B in 1996, the Company recorded an extraordinary
gain on extinguishment of debt of $766,000 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.
35
<PAGE>
PACIFIC GATEWAY PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE THREE YEARS ENDED DECEMBER 31, 1998
3. DEBT (CONTINUED)
LOAN MATURITIES
The maturities of debt outstanding as of December 31, 1998, and required
minimum principal payments in each of the next five years and thereafter are
summarized as follows (in thousands):
<TABLE>
<CAPTION>
CURRENT
---------
<S> <C>
1999............................................................................... $ 3,312
2000............................................................................... 1,149
2001............................................................................... 2,034
2002............................................................................... 1,304
2003............................................................................... 1,418
Thereafter......................................................................... 39,490
---------
$ 48,707
---------
---------
</TABLE>
The 1999 scheduled principal maturities of $3,312,000 includes the
$2,258,000 liability related to the reimbursement obligation, which was repaid
in January 1999, as previously discussed in Note 2.
4. ACQUISITION AND DISPOSITION OF INVESTMENT PROPERTIES
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 office park in San Jose, California, that was acquired for $17,500,000. The
second acquisition was 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. See Note 3 for discussion of the mortgage debt assumed and borrowed
in connection with these acquisitions.
In April 1996, the Company sold the Village Commons Shopping Center property
to an unrelated party for $19,300,000 and recognized a gain for financial
reporting purposes of $10,900,000. In December 1996, the Company sold the
Radisson Suites Hotel property to an unrelated party for $21,307,000 and
recognized a gain for financial reporting purposes of $5,814,000.
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. As of December 31, 1998, the Company has a tax net
operating loss carryover for Federal income tax purposes of approximately $17.2
million, which will expire between 2006 and 2013. 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 $0.9 million which
can be carried forward indefinitely.
36
<PAGE>
PACIFIC GATEWAY PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE THREE YEARS ENDED DECEMBER 31, 1998
5. INCOME TAXES (CONTINUED)
The components of the deferred tax assets and deferred tax liabilities are
as follows at December 31, 1998 (in thousands):
<TABLE>
<CAPTION>
FEDERAL STATE TOTAL
--------- --------- ---------
<S> <C> <C> <C>
Deferred tax assets:
Net operating loss carryover.................................. $ 5,370 $ 901 $ 6,271
Tax credits carryover......................................... 2,344 -- 2,344
State deferred tax............................................ 1,315 -- 1,315
Unearned rental revenue....................................... 145 37 182
Stock options exercise........................................ 83 21 104
--------- --------- ---------
$ 9,257 $ 959 $ 10,216
--------- --------- ---------
--------- --------- ---------
Deferred tax liabilities:
Excess tax depreciation $ 4,261 $ 1,075 $ 5,336
Excess parnership losses from RCA............................. 9,323 2,351 11,674
Debt relating to the RCA Advances............................. 2,383 601 2,984
Straight-line rent............................................ 224 56 280
--------- --------- ---------
$ 16,191 $ 4,083 $ 20,274
--------- --------- ---------
--------- --------- ---------
</TABLE>
The table below reconciles the difference between the statutory Federal
income tax rate and the effective rate in the Company's Consolidated Statement
of Income (Loss).
<TABLE>
<CAPTION>
(PROVISION) BENEFIT PERCENTAGES
<S> <C> <C> <C>
1998 1997 1996
--------- --------- ---------
Statutory Federal income tax rate............................ (34%) 34% (34%)
State income tax............................................. (6) 6 (7)
Taxable items not recognized for financial reporting purposes -- (3) --
--------- --------- ---------
Effective tax rate (provision) benefit....................... (40%) 37% (41%)
--------- --------- ---------
--------- --------- ---------
</TABLE>
The components of the (provision) benefit for income taxes were as follows
(in thousands):
<TABLE>
<CAPTION>
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Federal -- current $ -- $ (17) $ (142)
Federal -- deferred (81) 992 (5,977)
State -- current (6) (6) (376)
--------- --------- ---------
State -- deferred (302) 57 (1,340)
--------- --------- ---------
--------- --------- ---------
$ (389) $ 1,026 $ (7,835)
--------- --------- ---------
--------- --------- ---------
</TABLE>
37
<PAGE>
PACIFIC GATEWAY PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE THREE YEARS ENDED DECEMBER 31, 1998
6. LESSOR ARRANGEMENTS
As of December 31, 1998, approximately 881,000 of a total of approximately
920,000 square feet or 96% of the Company's wholly owned commercial space was
leased. The terms of the leases generally require tenants to pay base rent plus
their proportionate share of certain operating expenses or expense increases.
Minimum rental amounts due to the Company pursuant to these operating leases
through expiration are as follows (in thousands):
<TABLE>
<CAPTION>
CURRENT
---------
<S> <C>
1999........................................................... $ 14,711
2000........................................................... 13,857
2001........................................................... 10,098
2002........................................................... 7,075
2003........................................................... 3,599
2004........................................................... 1,642
2005........................................................... 1,128
2006........................................................... 1,006
2007........................................................... 970
2008........................................................... 76
Thereafter..................................................... --
---------
$ 54,162
---------
---------
</TABLE>
7. STOCK OPTIONS, 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. During 1998, options to
purchase 19,940 shares were exercised and options to purchase 1,235 shares were
canceled. During 1997, options to purchase 4,000 shares were exercised and
options to purchase 11,000 shares were canceled. As of December 31, 1998, a
total of 21,175 options were outstanding under the 1985 Plan and no additional
grants may be made. Of such outstanding options, 15,000 are exercisable in equal
cumulative installments over five years beginning in 1993 at the price of $3.13
per share and 6,175 outstanding options are exercisable in equal cumulative
installments over five years beginning in 1995 at prices ranging from $3.69 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 150,000 shares were granted at an exercise price of
$2.56. During 1997, options to purchase an aggregate of 30,000 shares were
granted at an exercise price of $4.94. During 1998, options to purchase 45,000
shares were granted at exercise prices ranging from $6.06 to $6.69 per share.
During 1997, options to purchase 3,000 shares were exercised, and options to
purchase 12,000 shares were canceled. During 1998, options to purchase 14,000
shares were exercised, and options to purchase 21,000 shares were canceled. As
of December 31, 1998, a total of 175,000 options were
38
<PAGE>
PACIFIC GATEWAY PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE THREE YEARS ENDED DECEMBER 31, 1998
7. STOCK OPTIONS, WARRANTS AND EMPLOYEE BENEFIT PLANS (CONTINUED)
outstanding under the 1996 plan. Of such options outstanding under the 1996
Plan, 40,000 were exercisable in 1996, 40,000 were exercisable in 1997, 26,000
were exercisable in 1998, 31,000 are exercisable in 1999, 11,000 are exercisable
in 2000, 2001 and 2002, respectively, and 5,000 are exercisable in 2003.
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 will be recognized. The additional compensation
expense that would have been recorded if the Company had adopted SFAS 123 is
$77,000, $39,000, and $25,000 in 1998, 1997 and 1996, respectively. 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 the grants for October 29, 1998 and March 16, 1998,
respectively: expected dividend yield of 2.96% and 3.17%; expected volatility of
47.6% and 46.9%; risk-free interest rates of 4.54% and 5.54%, and expected lives
of 10 years for both grants.
A summary of the status of the Company's two stock option plans and stock
warrants at December 31, 1998, 1997, and 1996 and changes during the years then
ended is presented in the table below:
<TABLE>
<CAPTION>
1998 1997 1996
---------------------------- ------------------- -------------------
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............. 1,207,350 * $2.91 1,207,350* $2.86 1,182,850* $2.97
Granted...................................... 45,000 6.41 30,000 4.94 150,000 2.56
Exercised.................................... (33,940) 2.79 (7,000) 3.13 -- --
Expired...................................... (1,022,235)* 2.87 (23,000) 2.91 (125,500) 3.58
-------------- --------- ---------
Outstanding at end of year................... 196,175 $3.91 1,207,350 $2.91 1,207,350 $2.86
-------------- --------- ---------
-------------- --------- ---------
Exercisable at end of year................... 125,940 1,124,410 1,076,940
-------------- --------- ---------
-------------- --------- ---------
Weighted Average Fair Value of Options
Granted.................................... $ 2.72 $ 3.30 $ 1.68
-------------- --------- ---------
-------------- --------- ---------
</TABLE>
- ------------------------
* Included in this amount are one million warrants related to the 1993 debt
restructuring. These warrants were repurchased on March 31, 1998. (See Note
3 to the Consolidated Financial Statements for further discussion.)
401(K) PLAN
Effective January 1, 1996, the Company adopted a discretionary
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. The Board of Directors approved a 1998
contribution of three percent of qualified employee compensation which amounted
to $31,000. A contribution of $27,800 was made in 1997. No contribution was made
in 1996.
39
<PAGE>
PACIFIC GATEWAY PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE THREE YEARS ENDED DECEMBER 31, 1998
8. PREFERRED STOCK
An amendment to the Certificate of Incorporation to provide for issuance of
300,000 shares of Series 1 Convertible Preferred Stock, $1.00 par value, (the
Preferred Stock) to GEM Value/PGP, L.L.C. (GEM), was approved by unanimous
written consent of the Company's Board of Directors on September 10, 1998.
Proceeds from the sale of the Preferred Stock to GEM were approximately
$2,889,000, net of issuance costs of $111,000. These funds are currently being
held in short-term investments pending potential future acquisitions and/or
reduction of debt obligations.
GEM's 300,000 shares of the Preferred Stock are convertible at any time, at
the option of the holder, into the Company's common stock on a one for one basis
and have the same voting rights as the Company's common stock.
The Preferred Stock will receive dividends, if any, from the Company's cash
flow on a pari passu basis with common shareholders. The agreement with GEM does
not require the Company to make any distributions. In the event of a full or
partial liquidation of the Company, GEM will be entitled to a liquidation
preference of $10.00 per share. GEM also received customary registration rights
for the common stock issuable upon conversion of the Preferred Stock.
In addition, GEM has entered into an agreement with the Company and three
entities controlled by the Company's Chairman, Richard Osborne, whereby GEM has
a "tag along" right to sell its preferred shares, or common shares if converted,
on a pro rata basis with these entities. This right is exercisable should any of
the Osborne controlled entities sell cumulatively in excess of 200,000 shares of
the Company's common stock. A complete description of the Preferred Stock is set
forth in a current report on Form 8-K, filed by the Company on September 28,
1998.
9. PAID-IN-DEFICIT
On July 16, 1998, the Company received approximately $3,000 in cash from a
shareholder as a result of their compliance with the Securities Exchange Act's
requirement that profits from the sale of certain securities of a company that
were held less than six months by certain officers, directors and principal
stockholders must be returned to the company. In accordance with generally
accepted accounting principles, the Company recorded such proceeds as a credit
to the Company's paid-in-deficit.
The Company received approximately $184,000 in cash on June 18, 1997 from a
shareholder as a return of profit from the sale of certain securities. This
amount has been recorded as a credit to the Company's paid-in-deficit.
40
<PAGE>
PACIFIC GATEWAY PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE THREE YEARS ENDED DECEMBER 31, 1998
10. 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, 1998 and December 31, 1997:
<TABLE>
<CAPTION>
BY QUARTER
-----------------------------------------------------
1998 FIRST SECOND THIRD FOURTH TOTAL
- ---------------------------------------------------------------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Investment properties income.................................... $ 196 $ 889 $ 449 $ 670 $ 2,204
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Provision for settlement of reimbursement obligation............ -- -- -- (58) (58)
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Net income (loss) available to common stockholders.............. $ (137) $ 390 $ 162 $ 163 $ 578
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Income (loss) per share, basic:................................. $ (0.04) $ 0.10 $ 0.05 $ 0.04 $ 0.15
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Income (loss) per share, diluted:............................... $ (0.04) $ 0.10 $ 0.04 $ 0.04 $ 0.14
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
<CAPTION>
BY QUARTER
-----------------------------------------------------
1997 FIRST SECOND THIRD FOURTH TOTAL
- ---------------------------------------------------------------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Investment properties income (loss)............................. $ 471 $ 135 $ (165) $ 158 $ 599
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Hotel property income (loss).................................... (94) 1 -- -- (93)
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Provision for settlement of reimbursement obligation............ -- (2,200) -- -- (2,200)
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Net income (loss) available to common stockholders.............. $ 6 $ (1,450) $ (245) $ (37) $ (1,726)
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Income (loss) per share, basic:................................. $ -- $ (0.37) $ (0.06) $ (0.01) $ (0.44)
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Income (loss) per share, diluted:............................... $ -- $ (0.37) $ (0.06) $ (0.01) $ (0.44)
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
11. SUBSEQUENT EVENTS
On January 20, 1999, the Company sold its 410 First Avenue property located
in Needham, Massachusetts to an unrelated party for approximately $3,950,000 as
more fully discussed in Note 2.
41
<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, 1998 and 1997, 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, 1998. These consolidated financial
statements and the schedule referred to below are the responsibility of the
company's management. Our responsibility is to express an opinion on these
consolidated financial statements and schedule 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, 1998 and 1997, and
the results of their operations and their cash flows for each of the three years
in the period ended December 31, 1998, 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 schedule listed in the
index of financial statements is presented for purposes of additional analysis
and not a required part of the basic consolidated financial statements. This
information has been subjected to the auditing procedures applied in our audits
of the basic consolidated financial statements and, in our opinion, is fairly
stated in all material respects in relation to the basic consolidated financial
statements taken as a whole.
ARTHUR ANDERSEN LLP
San Francisco, California
February 26, 1999
42
<PAGE>
PACIFIC GATEWAY PROPERTIES, INC.
SCHEDULE III--REAL ESTATE AND ACCUMULATED DEPRECIATION
AS OF DECEMBER 31, 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
INITIAL COST TO
GROSS CARRYING AMOUNT AT
COMPANY DECEMBER 31, 1998
--------------------- SUBSEQUENT ------------------------
BUILDINGS COSTS, BUILDINGS
ENCUMBRANCES AND CAPITALIZED AND TOTAL
DESCRIPTION (NOTE 3) LAND IMPROVEMENTS IMPROVEMENTS IMPROVEMENTS (NOTE 1)
- ----------------------------------- ------------ ------ ------------ ------------ ------------ --------
<S> <C> <C> <C> <C> <C> <C>
Walnut Creek
Executive Park................... $18,531 $1,357 $12,086 $ 8,717 $20,803 $ 22,160
South Bay Office
Tower............................ 9,228 3,439 13,754 3,681 17,435 20,874
North Tucson
Business Center.................. 3,757 147 621 623 1,244 1,391
Weston Office Building............. 918 44 299 5 304 348
410 First Avenue
(Note 4 and 5)................... 2,258 494 4,006 364 4,370 4,864
West Valley Executive Park......... 11,326 3,500 14,187 2,150 16,337 19,837
930 Montgomery Street.............. 2,689 650 2,597 210 2,807 3,457
Corporate Leasehold Improvements... -- -- -- 71 71 71
------------ ------ ------------ ------------ ------------ --------
TOTAL.............................. $48,707 $9,631 $47,550 $15,821 $63,371 $ 73,002
------------ ------ ------------ ------------ ------------ --------
------------ ------ ------------ ------------ ------------ --------
<CAPTION>
ACCUMULATED
DEPRECIATION
AND
PROVISION
FOR
WRITE-DOWN
TO NET
REALIZABLE
VALUE 1998 DATE OF
(NOTE 2 AND PROJECTED CONSTRUCTION/
DESCRIPTION 5) TAX BASIS ACQUISITION
- ----------------------------------- ------------ --------- -------------
<S> <C> <C> <C>
Walnut Creek 1975 to
Executive Park................... $ 7,543 $17,899 1986/1988
South Bay Office
Tower............................ 6,832 11,271 1972/1985
North Tucson
Business Center.................. 481 1,564 1987/1988
Weston Office Building............. 81 331 1986/1988
410 First Avenue
(Note 4 and 5)................... 2,702 1,923 1961/1984
West Valley Executive Park......... 1,032 9,187 1978/1997
930 Montgomery Street.............. 197 1,973 1985/1997
Corporate Leasehold Improvements... 39 34 N/A
------------ ---------
TOTAL.............................. $18,907 $44,182
------------ ---------
------------ ---------
</TABLE>
43
<PAGE>
PACIFIC GATEWAY PROPERTIES, INC.
SCHEDULE III--REAL ESTATE AND ACCUMULATED DEPRECIATION--(CONTINUED)
DECEMBER 31, 1998
(IN THOUSANDS)
NOTE 1 The changes in the total cost of land, buildings, and
improvements for the three years ended December 31, are as
follows:
<TABLE>
<CAPTION>
1998 1997 1996
--------- --------- ----------
<S> <C> <C> <C>
Balance at beginning of period $ 70,656 $ 46,632 $ 76,684
Additions 3,104 3,245 1,527
Cost of acquired properties -- 20,934 --
Write-off of fully amortized items (758) (155) (526)
Cost of disposed properties -- -- (31,053)
--------- --------- ----------
Balance at end of period $ 73,002 $ 70,656 $ 46,632
--------- --------- ----------
--------- --------- ----------
</TABLE>
NOTE 2 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>
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Balance at beginning of period............................... $ 16,431 $ 13,835 $ 20,882
Depreciation expense......................................... 3,234 2,751 2,239
Write-off of fully amortized items........................... (758) (155) (526)
Relief of accumulated balances related to disposed
properties................................................. -- -- (8,760)
--------- --------- ---------
Balance at end of period..................................... $ 18,907 $ 16,431 $ 13,835
--------- --------- ---------
--------- --------- ---------
</TABLE>
NOTE 3 Refer to Note 3 in the Registrant's Consolidated Financial
Statements.
NOTE 4 This property was pledged in support of a $3.65 million
letter-of-credit in favor of the lender on Rincon Center. Prior
to its expiration date of June 23, 1997, the letter-of-credit
was drawn by the refinancing lender. The Registrant sold this
property in January 1999, as further discussed in Note 2 in the
Registrant's Consolidated Financial Statements.
NOTE 5 The total reserve for write-down to net realizable value
pertains to 410 First Avenue property in Needham,
Massachusetts.
44
<PAGE>
EXHIBIT 21
PACIFIC GATEWAY PROPERTIES, INC.
SUBSIDIARIES OF THE REGISTRANT
<TABLE>
<CAPTION>
PERCENTAGE
INTEREST OF
VOTING SECURITIES
NAME PLACE OF ORGANIZATION OWNED
- ------------------------------------------------------------------------- --------------------- -----------------
<S> <C> <C>
Pacific Gateway Properties, Inc. New York 100%
Pacific Gateway Properties Management Corporation California 100%
Pacific Gateway Properties Hotels, Inc. California 100%
Perini Investment Properties Executive Suites, Inc. California 100%
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 Limited 22.8%
Partnership
</TABLE>
45
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 8,108
<SECURITIES> 0
<RECEIVABLES> 148
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 8,338
<PP&E> 73,351
<DEPRECIATION> 18,938
<TOTAL-ASSETS> 75,551
<CURRENT-LIABILITIES> 3,453
<BONDS> 48,707
2,889
0
<COMMON> 4,052
<OTHER-SE> (3,824)
<TOTAL-LIABILITY-AND-EQUITY> 75,551
<SALES> 0
<TOTAL-REVENUES> 16,528
<CGS> 0
<TOTAL-COSTS> 6,340
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 4,300
<INCOME-PRETAX> 982
<INCOME-TAX> 389
<INCOME-CONTINUING> 578
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 578
<EPS-PRIMARY> 0.15
<EPS-DILUTED> 0.14
</TABLE>
