<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10/K/A
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (FEE REQUIRED)
For the fiscal year ended December 31, 1995
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For the transition period from _________ to ________
Commission file number 1-12546
PACIFIC GULF PROPERTIES INC.
(Exact name of registrant as specified in its charter)
Maryland 33-0577520
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
363 San Miguel Drive
Newport Beach, California 92660
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (714) 721-2700
Securities Registered Pursuant to Section 12(b) of the Act:
Name of each exchange
Title of Stock on which registered
-------------- -------------------
Common Stock, $0.01 par value American Stock Exchange
8.375% Convertible Subordinated American Stock Exchange
Debentures due 2001
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 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 [ ].
The aggregate market value of Common Stock held by non-affiliates of
the registrant as of March 15, 1996 was approximately $85,012,146.
On March 15, 1996, the registrant had 4,857,351 shares of Common Stock
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
NONE
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TABLE OF CONTENTS*
<TABLE>
<CAPTION>
Page
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<S> <C>
PART I
Item 1. Business.................................................................. 1
Item 2. Properties................................................................ 9
Item 3. Legal Proceedings......................................................... 9
Item 4. Submission of Matters to a Vote of Securities Holders..................... 9
PART II
Item 5. Market for the Company's Common Equity and Related
Stockholder Matters................................................... 10
Item 6. Selected Financial and Operating Data..................................... 10
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations................................... 14
Item 8. Financial Statements and Supplementary Data............................... 21
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure................................ 22
PART III
Item 10. Directors and Management.................................................. 23
Item 11. Executive Compensation.................................................... 25
Item 12. Security Ownership of Certain Beneficial Owners
and Management........................................................ 32
Item 13. Certain Relationships and Related Transactions............................ 34
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports
on Form 8-K........................................................... 35
</TABLE>
* The Company hereby amends and restates its Annual Report for the year ended
December 31, 1995 on Form 10-K/A, dated May 7, 1996, and Form 10-K, dated
March 21, 1996. The changes from the Form 10-K/A, dated May 7, 1996, made
hereby are as follows:
(1) Page 10, Second Paragraph;
(2) Pages 11 and F-4 and related Management's Discussion
and Analysis on Pages 15, 16, 17 and 18;
(3) Page 19, First Full Paragraph and Page F-19, Second
Full Paragraph;
(4) Page F-6 and related footnote 1 sections labeled
"Financing Costs" and "Interest" on pages F-8 and F-9;
and
(5) Page F-13, Second Full Paragraph.
i
<PAGE> 3
PART I
ITEM 1. BUSINESS
Pacific Gulf Properties Inc. (together with its consolidated operating
partnership, PGP Inland Communities, L.P., collectively the "Company") was
incorporated in August 1993 in the State of Maryland and completed its initial
public offerings on February 18, 1994 (the "Offerings"). Prior to February 18,
1994, the Company was a wholly owned subsidiary of Santa Anita Realty
Enterprises, Inc. ("Realty"). Its executive offices are located at 363 San
Miguel Drive, Newport Beach, California 92660-7805.
At December 31, 1995, the Company operates as a self-administered and fully
integrated equity real estate investment trust ("REIT") which owns and operates
21 multifamily properties, containing 3,945 apartments, located in Southern
California and the Pacific Northwest (the "Multifamily Properties"), and 10
industrial properties, containing an aggregate of 2,902,000 leasable square feet
located in Southern California and the State of Washington (the "Industrial
Properties").
In addition to operating its current portfolio of properties, the Company's
investment objectives are to acquire well located multifamily and industrial
properties at prices equal to or less than replacement cost which provide
attractive initial returns and opportunities to increase cash flow through
active management and/or rehabilitation of the property. The Company intends to
continue its acquisition activity, with special concentration in the near term
on industrial properties located in California and Washington. The Company
believes that the industrial segment is entering a growth cycle and that
favorable acquisitions in the near future at less than replacement cost will
become more difficult to obtain as the cycle advances. The Company will continue
to pursue multifamily property opportunities in California and the Pacific
Northwest, where it believes such to be to its advantage.
During 1995, the Company acquired three additional multifamily properties
that focus on active seniors as tenants. The properties provide seniors with an
environment where they can enjoy the companionship of individuals their own age
and recreational activities they desire. The Company believes that the active
senior rental market is a growing market and will provide attractive investment
opportunities in the upcoming years.
The following table presents information on the composition of the
Company's properties based on the net book value at December 31, 1995:
<TABLE>
<CAPTION>
PERCENTAGE OF
NUMBER OF REAL ESTATE
PROPERTY TYPE PROPERTIES ASSETS
-----------------------------------------------------------------------
<S> <C> <C>
Multifamily 21 63%
Industrial 10 37%
-----------------------------------
Total 31 100%
===================================
GEOGRAPHIC LOCATION
-------------------
Southern California 20 68%
Pacific Northwest 11 32%
-----------------------------------
Total 31 100%
===================================
</TABLE>
1
<PAGE> 4
SUMMARY FINANCIAL INFORMATION
The following table and footnote set forth summary financial information
with respect to the Company from February 18, 1994, the date of the Offerings,
and for the combined historical operations of the assets and liabilities
acquired from Realty (the "Predecessor Multifamily and Industrial Operations")
prior to that date:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------------------------------------
1995 1994 (a) 1993 1992 1991
----------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Net rental property earnings:
Multifamily properties $ 14,683 $ 10,102 $ 7,889 $ 6,129 $ 4,702
Industrial properties 9,626 5,666 757 679 566
----------------------------------------------------------------
$ 24,309 $ 15,768 8,646 $ 6,808 $ 5,268
================================================================
Income (loss) before gain
on sale of properties
extraordinary item and $ 1,739 $ 2,158 $(12,036) $ (1,620) $ (1,207)
================================================================
Net income (loss) ................. $ 8,403 $ (832) $(12,036) $ (1,620) $ (1,207)
================================================================
Funds From Operations (b):
Old Definition ....... $ 8,829 $ 6,502 $ 1,657 $ 705 $ 520
================================================================
New Definition ....... $ 7,820 $ 5,879 $ 1,572 $ 662 $ 480
================================================================
Cash flow information:
Operating ............ $ 7,138 $ 3,950 $ 1,307 $ (348) $ (367)
================================================================
Investing ............ (84,480) (99,504) (15,323) (27,660) (18,084)
================================================================
Financing ............ 76,674 98,649 13,798 28,318 18,398
================================================================
</TABLE>
(a) Includes the combined historical operations of the Predecessor Multi-
family and Industrial Operations for the period January 1, 1994 to
February 17, 1994 (see Item 14(A)1 Financial Statements).
(b) Funds From Operations ("FFO") is defined by the National Association of
Real Estate Investment Trusts ("NAREIT") to mean net income, computed
in accordance with generally accepted accounting principles ("GAAP"),
excluding gains (or losses) from debt restructuring and sales of
property, plus depreciation and amortization, and after adjustments for
unconsolidated partnerships and joint ventures ("Old Definition").
Management generally considers FFO to be a useful financial performance
measure of the operating performance of an equity REIT because,
together with net income and cash flows, FFO provides investors with an
additional basis to evaluate the ability of a REIT to incur and service
debt and to fund acquisitions and other capital expenditures. FFO does
not represent cash flow from operations as defined by GAAP, should not
be considered as an alternative to net income or as an indicator of the
Company's operating performance and is not indicative of cash available
to fund all cash flow needs. FFO does not measure whether cash flow is
sufficient to fund all of the Company's cash needs, including principal
amortization, capital improvements and distributions to stockholders.
FFO also does not represent cash flows generated from operating,
investing or financing activities as defined by GAAP. Further, FFO as
disclosed by other REITs may not be comparable to the Company's
calculation of FFO. On March 3, 1995, NAREIT modified the calculation
of FFO to, among other things, eliminate amortization of deferred
financing costs and depreciation of non-real estate assets as items
added back to net income ("New Definition") when computing FFO. See
Item 6. "Selected Financial and Operating Data."
2
<PAGE> 5
MULTIFAMILY PROPERTIES
The following table presents information concerning the Multifamily
Properties, including average gross scheduled rents per unit and percentage of
units leased and occupied as of December 31, 1995:
<TABLE>
<CAPTION>
AVERAGE INITIAL AVERAGE
DATE UNIT SIZE COST RENT PERCENT PERCENT
PROPERTY LOCATION COMPLETED UNITS (SQ FT) (IN $000S) PER UNIT LEASED OCCUPIED
-------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Applewood(a) Santa Ana, CA 1972 406 801 $ 25,566 $697 91% 89%
Park Place Santa Ana, CA 1990 196 799 7,252 632 99 96
Inn at Laguna Hills(b) Laguna Hills, CA 1994 140 500 7,779 599 97 95
Daisy V(a)(c) Covina, CA 1977 38 897 2,024 703 97 95
Daisy VII (a)(c) Diamond Bar, CA 1978/79 204 950 12,006 771 100 98
Daisy XII (a)(c) San Dimas, CA 1979 102 952 5,215 693 85 82
Daisy XVI (a)(c) West Covina, CA 1981 250 986 13,704 718 86 84
Daisy XVII (a)(c) San Dimas, CA 1981 156 962 8,513 695 86 84
Lariat (a)(c) San Dimas, CA 1981 30 970 1,744 762 93 83
Daisy XIX (a)(c) Ontario, CA 1983 125 1,019 7,899 722 92 88
Daisy XX (a)(c) Ontario, CA 1982 155 1,000 8,325 669 90 86
Sunnyside I(a)(b)(c) San Dimas, CA 1984 164 495 6,754 513 95 94
Sunnyside II(a)(b)(c) Ontario, CA 1983 60 493 2,554 505 93 93
Sunnyside III(a)(b)(c) Ontario, CA 1985 84 504 3,608 518 93 93
Fulton's Landing Everett, WA 1988 248 745 10,175 505 96 96
Fulton's Crossing Everett, WA 1986 256 803 10,425 531 90 90
Lora Lakes Burien, WA 1987 234 907 8,595 603 99 99
Holly Ridge Burien, WA 1987 146 946 5,792 627 98 97
Hampton Bay Kent, WA 1987 304 884 13,344 614 96 94
Heatherwood (a) Federal Way, WA 1985/86 368 741 12,522 521 97 97
Waterhouse Beaverton, OR 1990 279 937 10,150 643 95 94
----- --------
3,945 $183,946
===== ========
</TABLE>
---------------
(a) Under rehabilitation
(b) Properties serving active senior tenants (tenants 55 and older).
(c) Properties owned by PGP Inland Communities, L.P.
All of the Multifamily Properties provide tenants with attractive amenities,
including a swimming pool (except Inn at Laguna Hills) and clubhouse, and many
include jacuzzis, tennis courts, sports courts and saunas. Many offer additional
features such as vaulted ceilings, fireplaces, washers and dryers, cable
television and limited access gates.
During 1995, the Company made the following acquisitions and dispositions of
apartment communities:
PGP Inland Communities, L.P. In August of 1995, the Company acquired from
unrelated third parties a majority interest in 11 multifamily properties
consisting of 1,368 apartment units in Southern California (listed above as the
Daisy, Lariat and Sunnyside properties). The properties were contributed by the
unrelated third parties to a new limited partnership, PGP Inland Communities,
L.P. (the "Partnership"), in which the Company is the sole general partner with
an initial ownership interest of approximately 78%. The partners contributing
the properties received limited partnership units for approximately 22%.
3
<PAGE> 6
The total value negotiated for the properties was $71,469,000. The
Partnership assumed existing tax-exempt indebtedness of $24,850,000 and
conventional indebtedness of $30,263,000 (all such indebtedness secured by the
properties). The partners contributing the properties received approximately
226,000 limited partnership units and the Company received its general
partnership interest in exchange for its cash contribution of approximately
$12,800,000.
The terms of the partnership agreement provide that all cash flow from the
properties shall be distributed to the Company until the properties have
achieved a threshold net operating income each year and cumulatively. Cash flow
in any given year after the Partnership has achieved its threshold net operating
income will then be distributed to the limited partners until the limited
partners have received, on a unit-for-unit basis, distributions equivalent to
the then current dividend rate on the Company's common stock. All cash in excess
of this amount in any given year will be distributed to the Company.
The Partnership units owned by the limited partners may be tendered by the
holders to the Company at any time after August of 1997, subject to certain
exceptions. Upon tender, the Company, at its election, must either issue shares
of its common stock for the units on a one-for-one basis, or pay cash for the
units based on the then fair market value of the Company's common stock. The
limited partners have certain registration rights with regard to common stock
received upon such tender.
Heatherwood Apartments. In November of 1995, the Company acquired the
368-unit Heatherwood apartment community in Federal Way, Washington for
approximately $12,522,000. The Company plans to spend approximately $800,000 to
make needed improvements to the property.
Sale of Texas Portfolio. In November of 1995, the Company sold its Texas
apartment portfolio to four entities controlled by Capitol Investment Associates
Corporation. The Texas apartment portfolio consisted of four properties
containing 1,085 apartment units in San Antonio, Austin and Houston, and
represented the Company's entire holdings in the state of Texas. The Company
received total consideration of $31,125,000: $30,125,000 in cash and four notes
receivable totaling $1,000,000 from the purchasing entities. The notes
receivable mature in seven years, bear interest at 9%, require monthly
interest-only payments and are secured by limited partnership interests in the
purchasing entities. In conjunction with the sale, the Company repaid the
mortgage notes payable secured by the Texas apartment portfolio which totaled
$14,438,000 and $2,000,000 of the Company's revolving line of credit.
4
<PAGE> 7
INDUSTRIAL PROPERTIES
The following table presents information concerning the Industrial
Properties, including the actual average rent per square foot and percentage of
the leasable square footage leased and occupied by tenants as of December 31,
1995:
<TABLE>
<CAPTION>
LEASABLE NUMBER INITIAL AVERAGE
DATE SQUARE OF COST RENT PER PERCENT
PROPERTY LOCATION COMPLETED FOOTAGE TENANTS (IN $000s) SQ. FT. LEASED
----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Seattle I Seattle, WA 1968 42,240 3 $ 1,545 $0.51 100%
Seattle II Seattle, WA 1981 64,077 10 1,429 0.56 96
Seattle III Seattle, WA 1981 78,720 13 3,471 0.46 86
Pacific Gulf Business
Park (a) Tukwila, WA 1975-79 475,629 180 17,361 0.60 89
Etiwanda Ontario, CA 1991 576,327 4 16,111 0.29 100
Golden West Rancho Cucamonga, CA 1990 296,821 90 9,806 0.38 93
Vista Vista, CA 1990 356,800 9 11,361 0.39 93
Baldwin Industrial
Park Baldwin Park, CA 1986 623,261 14 28,877 (b) 0.38 100
Garden Grove Industrial
Park Garden Grove, CA 1979 251,927 10 8,794 0.37 100
Crescent Business Rancho Cucamonga, CA
Center 1981 136,066 24 5,033 0.39 93
--------- --------
2,901,868 $103,788
========= ========
</TABLE>
---------------
(a) Under rehabilitation.
(b) Amount does not include the cost of purchasing the land underlying
Baldwin Industrial Park or the increased purchase price paid by the
Company after settlement of arbitration, both events which occurred
subsequent to December 31, 1994.
During 1995, the Company made the following acquisitions of industrial
properties:
Baldwin Industrial Park . In February 1995, the Company acquired the land
underlying Baldwin Industrial Park for $3,454,000 in cash and repaid to an
unrelated third party an $889,000 loan that bore interest at 11.1% and was
secured by a portion of the land. The Company already owned the improvements,
consisting of approximately 623,000 leasable square feet.
Home Savings of America ("Home Savings"), the current lessee of an
undeveloped ten-acre parcel in the industrial park and of a 55,656 square foot
building in the industrial park, has options to purchase both the ten-acre
parcel and the building and land underlying the building under the terms of its
leases. Home Savings has exercised its options under both agreements. Pursuant
to the leases, as amended, the sale of these parcels is required to close by
July 4, 1996. If the sale closes, the purchase price for the ten-acre parcel is
$4,500,000, while the price of the building is $3,195,000. The Company will
receive the proceeds from the sale of the land and building to Home Savings upon
consummation of those transactions. Subsequent to its exercise, Home Savings
proposed a restructuring of the existing leases to defer the purchase and to
continue leasing the properties. Current annual rentals received from the leases
on these two parcels are approximately $721,000 and $278,000, respectively.
For each of the last five years at Baldwin Industrial Park, occupancy and
average monthly rent per square foot have been as follows: 100% and $.38 (1995);
90% and $.39 (1994); 90% and $.38 (1993); 95% and $.40 (1992); and 96% and $.37
(1991). The property tax expense for 1995 was $370,192 assessed at a 1.37% rate
per assessed valuation. The Company depreciates the property
5
<PAGE> 8
for federal income tax purposes on a straight-line basis over a 40-year life.
The following table presents the scheduled lease expirations at Baldwin
Industrial Park for each of the next 10 years:
<TABLE>
<CAPTION>
NUMBER OF LEASABLE SQUARE ANNUAL PERCENT OF ANNUAL
YEAR TENANTS FOOTAGE RENTS (a) RENTS (a)
----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1996 3 214,842 $996,000 35%
1997 3 94,590 331,000 12
1998 3 133,545 538,000 19
1999 2 81,735 460,000 16
2000 - - - -
2001 3 98,549 498,000 18
2002 - - - -
2003 - - - -
2004 - - - -
2005 - - - -
</TABLE>
---------------
(a) Excludes ground lease rent in gross rental.
The following table presents information regarding the principal tenants of
Baldwin Industrial Park.
<TABLE>
<CAPTION>
LEASABLE
SQUARE
TENANT PRIMARY USE FOOTAGE LEASE EXPIRATION DATE
-----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Home Savings of America Data processing/office/warehouse 101,071(a) October 1996 and August 1999(a)
Taylor Corporation Thermographic printing 54,860 March 1998
Aeroquip Corporation Distribution 42,642 April 1996
Sue, Young & Brown Distribution 38,420 October 1996
</TABLE>
-------------
(a) Home Savings of America has two separate leases: (1) a lease expiring in
August 1999 for 45,415 leasable square feet and (2) a lease expiring in
October 1996 for 55,656 leasable square feet.
Other large tenants of Baldwin Industrial Park include Thomas & Betts Corp.
(36,320 sq. ft.), The Los Angeles Times (30,665 sq. ft.) and Federal Express
(26,366 sq. ft.)
Pacific Gulf Business Park . In December 1995, the Company acquired a
475,000 square foot business park in Tukwila, Washington for approximately
$17,361,000. The park was renamed PGP Business Park, and the Company anticipates
spending $800,000 on capital improvements and deferred maintenance items.
6
<PAGE> 9
INDEBTEDNESS
The following table presents information on indebtedness encumbering the
Multifamily and Industrial Properties, excluding borrowings outstanding under
the Company's revolving line of credit, as of December 31, 1995:
<TABLE>
<CAPTION>
PRINCIPAL BALANCE
PROPERTY (IN $000s) MATURITY DATE INTEREST RATE
----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
MULTIFAMILY
Inn at Laguna Hills $ 4,787 August 2024 7.250%
Applewood/Park Place (a) 11,932 March 1999 8.490%
Daisy V 1,310 September 2025 7.479%(d)
Daisy VII 8,865 August 1998 8.000%
Daisy XII 3,733 September 2025 7.479%(d)
Daisy XVI 9,170 August 1998 8.000%
Daisy XVII 5,897 August 1998 8.000%
Lariat 1,207 September 2025 7.479%(d)
Daisy XIX (b) 6,700 March 2018 (c)
Daisy XX (b) 7,690 November 2004 (c)
Sunnyside I (b) 5,670 March 2018 (c)
Sunnyside II (b) 1,830 March 2018 (c)
Sunnyside III (b) 2,960 March 1996 (f)
Lora Lakes, Fulton's Landing and
Fulton's Crossing (a) 14,914 March 1998 8.420%
Holly Ridge 3,336 March 2002 Libor + 1.5%
Waterhouse 7,310 June 1997 8.250%
--------
Total Multifamily 97,311
--------
INDUSTRIAL
Baldwin Park Industrial Park 11,975 October 2005 8.150%
Etiwanda 6,943 May 2000 8.740%
Crescent Business Center 1,000 December 1996 7.500%
Seattle I, II, III 4,684 November 1996 8.000%
Pacific Gulf Business Park 11,765 December 2002 Libor + 1.5%(e)
--------
Total Industrial 36,367
--------
$133,678
========
</TABLE>
---------------
(a) Applewood and Park Place jointly collateralize the $11,932,000 note payable,
and Lora Lakes, Fulton's Landing and Fulton's Crossing jointly collateralize
the $14,914,000 note payable.
(b) These properties are subject to restrictions requiring that a specified
percentage of the apartment units in such properties be made available to
persons with lower and moderate income. In addition, state and local
authorities in some cases impose certain restrictions on the amount of rent
that can be charged.
(c) Tax-exempt mortgage notes provide for floating rates of interest, which
adjust weekly or monthly, and include a margin over the applicable Kenny
Rate or 11th District Cost of Funds. The weighted average rate at
December 31, 1995 was 5.51%.
(d) Interest rate is subject to periodic adjustments beginning March 10, 1996
based on the monthly weighted average 11th District Cost of Funds plus 2.8%.
(e) Subsequent to December 31, 1995, the Company entered into an interest rate
swap agreement that fixes the interest rate on $11,500,000 of the principal
balance at 7.35% for five years commencing July 1, 1996.
(f) This tax-exempt mortgage note provides for a floating rate of interest based
on the 11th District Cost of Funds plus 3.5%, adjusted monthly.
7
<PAGE> 10
CORPORATE OFFICES
The Corporate offices are located in Newport Beach, California in a building
that contains approximately 7,000 square feet fully occupied by the Company.
PROPERTY MANAGEMENT
Multifamily Properties. The Company currently manages all of its Multifamily
Properties in each of its regions. The Company either directly or through Realty
has managed its Multifamily Properties in the Pacific Northwest since August
1993 and in California since October 1993. Management services by Realty ended
in 1994.
Each of the regions is managed by a Regional Manager who reports directly to
the Vice President of Operations - Apartments. Within each region, each of the
Multifamily Properties is operated by a staff of approximately six to seven
individuals, including a manager, assistant manager and/or leasing agents, and a
maintenance and apartment preparation staff. The Company locates prospective
tenants for its Multifamily Properties primarily by advertising in magazines
listing available rentals and by using firms that assist tenants in locating
apartments. The Company also does magazine and direct mail advertising. Policies
and procedures utilized at the property sites, including procedures concerning
lease contracts, on-site marketing, credit collection standards and eviction
standards, follow established federal and state laws.
Individual property lease programs are structured to respond to local market
conditions. The Company attempts to balance rent increases with high occupancy
and low turnover. None of the Multifamily Properties are currently subject to
rent control or rent stabilization regulations. However, certain of these
properties are subject to restrictions based on tax-exempt loan requirements.
Standard lease terms stipulate due dates for rent payments, late charges, no
offset or withholding provisions, security deposits and damage reimbursement
clauses, as well as many other provisions considered favorable to the property
owner. Nonpayment of rent is generally handled at the properties within 15 days
from the beginning of the month, with either commencement of collection or
eviction proceedings occurring within that time period.
Industrial Properties. The Company manages its existing Industrial
Properties in California, before 1996, and has retained a local property
management firm for management of its existing Seattle industrial portfolio.
With the acquisition of the PGP Business Park in the Pacific Northwest, the
Company assumed in 1996 the direct management of its Industrial Properties
with staff employed by the Company.
The Company offers industrial leases in the one- to five-year range. Lease
terms include, in most cases, annual adjustments based on changes in the
consumer price index and from one to three months' free rent. The standard lease
also includes some refurbishing and tenant improvement allowance with the amount
varying depending upon the length of the lease, the size of the space leased and
the use. The Company will seek tenants primarily involved in warehouse,
distribution, assembly and light manufacturing activities. Standard lease terms
include a stipulated due date for rent payment, late charges (typically with no
grace period), no offset or withholding provisions, security deposit clause, as
well as many other provisions considered favorable to the landlord.
8
<PAGE> 11
EMPLOYEES
At December 31, 1995, the Company employed approximately 135 persons, of
which 110 were onsite or property related and 25 were executive office
employees.
COMPETITIVE AND OTHER CONDITIONS
Competition. Within its geographic areas of operation, the Company is
subject to competition from a variety of investors, including insurance
companies, pension funds, corporate and individual real estate developers and
investors and other REITs with investment objectives similar to those of the
Company. Some of these competitors have more substantial financial resources and
longer operating histories than the Company. As an owner of apartment and
industrial real estate properties, the Company competes with other owners of
similar properties in connection with their financing, sale, lease or other
disposition and use.
Many regions of the United States, including regions in which the Company
owns properties, have in the past experienced economic recessions. Factors which
have contributed to economic downturns in the Company's markets include
downturns in the national economy and reductions and downsizing in the
aerospace and defense industries. Adverse changes in general or local economic
conditions could result in the inability of some existing tenants to the
Company to meet their lease obligations and could adversely affect the
Company's ability to attract or retain tenants.
Insurance. The Company carries comprehensive liability, fire, extended
coverage and rental loss insurance with respect to its Multifamily Properties
and Industrial Properties, with policy specifications, insured limits and
deductibles customarily carried for similar properties which the Company
believes are adequate and appropriate under the circumstances. These are certain
types of losses, such as those arising from acts of war, that are not generally
insured because they are either uninsurable or not economically insurable.
Presently the Company carries earthquake disaster insurance on its California
properties which comprise 68% of the Company's total portfolio (as a percentage
of real estate assets); however, such insurance may not be available in the
future or may only be available at rates that, in the opinion of the Company,
are prohibitive. In the event that an uninsured disaster or a loss in excess of
insured limits should occur, the Company could suffer a substantial loss,
including loss of anticipated future revenues, while remaining obligated on
related mortgage indebtedness. The Company believes its properties were
constructed in compliance with applicable construction standards in effect at
the time of construction. The Company obtained customary title insurance
insuring fee title to its properties upon their acquisition.
ITEM 2. PROPERTIES
Information concerning property owned by the Company is included under "Item
1. Business."
ITEM 3. LEGAL PROCEEDINGS
The Company is not presently subject to any litigation nor is any litigation
threatened against the Company, other than routine litigation arising in the
ordinary course of business.
ITEM 4. SUBMISSIONS OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
9
<PAGE> 12
PART II
ITEM 5. MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The common stock of the Company began trading on the American Stock Exchange
under the symbol "PAG" on February 10, 1994. The following sets forth the
high and low closing prices for the common stock on the American Stock Exchange.
<TABLE>
<CAPTION>
CASH RECORD DATE
HIGH LOW DISTRIBUTION DATE PAID
----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1994
1st Quarter(1) $18 1/2 $17 1/4 $.18(2) April 15, 1994 May 13, 1994
2nd Quarter 17 7/8 16 1/8 .39(2) July 15, 1994 August 15, 1994
3rd Quarter 17 1/2 15 1/2 .39(2) October 7, 1994 November 15, 1994
4th Quarter 16 7/8 12 3/4 .39(3) January 16, 1995 February 15, 1995
1995
1st Quarter 16 1/4 14 5/8 .39(3) April 14, 1995 May 12, 1995
2nd Quarter 16 1/4 14 1/2 .39(3) July 14, 1995 August 15, 1995
3rd Quarter 16 5/8 14 5/8 .39(3) October 16, 1995 November 14, 1995
4th Quarter 16 3/4 13 .40 January 2, 1996 January 10, 1996
</TABLE>
(1) The Company's common stock commenced trading on February 10, 1994.
(2) 35% of the distributions paid to beneficial owners in 1994 represented a
return of capital.
(3) 68% of the distributions paid to beneficial owners in 1995 represented a
return of capital.
The minimum distribution requirement to maintain REIT status was
approximately $2,500,000 for 1994 and $2,300,000 for 1995 ($.58 and $.48
per common share, respectively).
A regular quarterly distribution of $.40 per share was paid January 10,
1996. The closing price of the common stock on the American Stock Exchange on
March 15, 1996 was $18.00 per share. As of March 15, 1996, there were
approximately 3,800 beneficial owners of common stock.
The statement on the face of this Annual Report on Form 10-K/A regarding the
aggregate market value of voting stock of the Company held by non-affiliates of
the Company is based on the assumption that all directors and officers of the
Company were, for purposes of this calculation only (and not for any other
purpose), affiliates of the Company.
ITEM 6. SELECTED FINANCIAL AND OPERATING DATA
The following table and footnotes set forth selected historical financial
information for the Company and for the Predecessor Multifamily and Industrial
Operations (See Part I - Summary Financial Information) prior to the Company's
Offerings. The historical information for the Company reflects the actual
operations of the Company from February 18, 1994, the date of the Company's
initial public offerings, and the combined historical operating data of the
Predecessor Multifamily and Industrial Operations prior to that date.
10
<PAGE> 13
<TABLE>
<CAPTION>
Years Ended December 31,
----------------------------------------------------------------------------
1995 1994 (a) 1993 1992 1991
----------- ----------- ----------- ----------- -----------
(Dollars in thousands, except share data)
<S> <C> <C> <C> <C> <C>
OPERATING DATA
Rental income:
Multifamily properties .......................... $ 24,898 $ 18,937 $ 15,150 $ 10,768 $ 7,607
Industrial properties ........................... 12,193 7,207 1,002 885 785
----------- ----------- ----------- ----------- -----------
37,091 26,144 16,152 11,653 8,392
----------- ----------- ----------- ----------- -----------
Expenses:
Rental property expenses:
Multifamily properties .......................... 10,215 8,835 7,261 4,639 2,905
Industrial properties ........................... 2,567 1,541 245 206 219
----------- ----------- ----------- ----------- -----------
12,782 10,376 7,506 4,845 3,124
Depreciation ...................................... 6,081 3,721 2,634 2,282 1,687
Interest (including amortization of
financing costs) ................................ 14,066 8,164 6,028 5,398 4,180
General and administrative ........................ 2,423 1,725 1,538 1,394 1,286
Minority interest in losses of
combined partnerships ........................... -- -- (492) (646) (678)
Reduction in carrying value of Predecessor
properties ...................................... -- -- 10,974 -- --
----------- ----------- ----------- ----------- -----------
35,352 23,986 28,188 13,273 9,599
----------- ----------- ----------- ----------- -----------
Income (loss) before gain on sale of
properties and extraordinary item ............... 1,739 2,158 (12,036) (1,620) (1,207)
Gain on sale of real estate ..................... 6,664 -- -- -- --
Extraordinary item .............................. -- (2,990) -- -- --
----------- ----------- ----------- ----------- -----------
Net income (loss) ................................. $ 8,403 $ (832) $ (12,036) $ (1,620) $ (1,207)
=========== =========== =========== =========== ===========
Net income (loss) per common share ................ $ 1.74 $ (.07)(b) -- -- --
Weighted average common shares .................... 4,830,723 4,273,337 (b) -- -- --
BALANCE SHEET DATA
Real estate, net of accumulated depreciation:
Multifamily properties .......................... $ 175,879 $ 113,706 $ 90,375 $ 88,519 $ 62,811
Industrial properties ........................... 102,813 79,751 7,323 7,395 7,470
----------- ----------- ----------- ----------- -----------
Total real estate ................................. 278,692 193,457 97,698 95,914 70,281
Total assets ...................................... 288,591 202,519 99,984 100,186 73,944
Senior debt ....................................... 149,847 69,480 88,740 78,613 52,824
Convertible subordinated debentures ............... 55,659 55,526 -- -- --
Total equity ...................................... 71,980 70,860 9,501 23,200 22,112
PROPERTY DATA (end of period)
Total multifamily properties ...................... 21 13 10 9 5
Total apartment units ............................. 3,945 3,292 2,654 2,398 1,290
Apartment units occupied .......................... 92% 93% 92% 93% 95%
Total industrial properties ....................... 10 9 3 3 3
Industrial leasable area (sq. ft.) ................ 2,902,000 2,426,000 185,000 185,000 185,000
Industrial leasable area leased ................... 96% 97% 95% 97% 89%
</TABLE>
11
<PAGE> 14
<TABLE>
<CAPTION>
Years Ended December 31,
----------------------------------------------------------------------------
1995 1994 (a) 1993 1992 1991
----------- ----------- ----------- ----------- -----------
(Dollars in thousands, except share data)
<S> <C> <C> <C> <C> <C>
SUPPLEMENTAL DATA
Funds From Operations (c) -
Old Definition .......................... $ 8,829 $ 6,502 $ 1,657 $ 705 $ 520
New Definition .......................... 7,820 5,879 1,572 662 480
Cash flow information:
Operating ............................... 7,138 3,950 1,307 (348) (367)
Investing ............................... (84,480) (99,504) (15,323) (27,660) (18,084)
Financing ............................... 76,674 98,649 13,798 28,318 18,398
</TABLE>
-------------------
(a) Includes the combined historical operations of the Company (from
February 18 through December 31, 1994) and the Predecessor's
Multifamily and Industrial Operations (prior to February 18, 1994). See
Part IV - Financial Statements.
(b) Per share data for 1994 was based on the weighted average common shares
outstanding for the period February 18, 1994 (the closing date of the
Company's initial public offering) through December 31, 1994 and the
Company's net loss for that period.
(c) Funds From Operations ("FFO") is defined by the National Association of
Real Estate Investment Trusts ("NAREIT") to mean net income, computed
in accordance with generally accepted accounting principles ("GAAP"),
excluding gains (or losses) from debt restructuring and sales of
property, plus depreciation and amortization, and after adjustments for
unconsolidated partnerships and joint ventures (the "Old Definition").
Management generally considers FFO to be a useful financial performance
measure of the operating performance of an equity REIT because,
together with net income and cash flows, FFO provides investors with an
additional basis to evaluate the ability of a REIT to incur and service
debt and to fund acquisitions and other capital expenditures. FFO does
not represent cash flow from operations as defined by GAAP, should not
be considered as an alternative to net income as an indicator of the
Company's operating performance and is not indicative of cash available
to fund all cash flow needs. FFO does not measure whether cash flow is
sufficient to fund all of the Company's cash needs, including principal
amortization, capital improvements and distributions to stockholders.
FFO also does not represent cash flows generated from operating,
investing or financing activities as defined by GAAP. Further, FFO as
disclosed by other REITs may not be comparable to the Company's
calculation of FFO. On March 3, 1995, NAREIT modified the calculation
of FFO to, among other things, eliminate amortization of deferred
financing costs and depreciation of non-real estate assets as items
added back to net income (the "New Definition") when computing FFO.
12
<PAGE> 15
Below is the calculation of FFO consistent with the methodology
historically used by the Company reconciled to the revised calculation
adopted by NAREIT which the Company adopted as of January 1, 1996:
<TABLE>
<CAPTION>
Years Ended December 31,
----------------------------------------------------------------------------
1995 1994 (1) 1993 1992 1991
----------- ----------- ----------- ----------- -----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Net income (loss) ........................ $ 8,403 $ (832) (12,036) (1,620) (1,207)
Depreciation and amortization ............ 7,090 4,344 2,719 2,325 1,727
Gain on sale of properties ............... (6,664) -- -- -- --
Reduction in carrying value of
Predecessor's properties .............. -- -- 10,974 -- --
Extraordinary item ....................... -- 2,990 -- -- --
-------- -------- -------- -------- --------
Funds From Operations -
Old Definition ........................ 8,829 6,502 1,657 705 520
Amortization
Debenture discount and costs .......... (552) (464) -- -- --
Costs related to financing
assumed
from Predecessor and line
of credit costs .................... (302) (159) (85) (43) (40)
Long-term financing costs ............. (155)
-------- -------- -------- -------- --------
Funds From Operations -
New Definition ........................ $ 7,820 $ 5,879 $ 1,572 $ 662 $ 480
======== ======== ======== ======== ========
</TABLE>
---------------
(1) Reference refers to (a) above.
13
<PAGE> 16
ITEM 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
The following discussion should be read in conjunction with "Selected
Financial Data" and the financial statements and notes thereto of the Company
and the Predecessor Multifamily and Industrial Operations appearing elsewhere in
this report. Such financial statements and information have been prepared to
reflect the Company's initial period of operations and its financial condition
as of December 31, 1995 together with the combined historical financial
statements of the Predecessor Multifamily and Industrial Operations prior to the
consummation of the Offerings.
The combined historical financial statements are comprised of the
Company and the operations, assets and liabilities of certain properties which
prior to the Offerings were owned and operated by Realty. These properties were
acquired by the Company in February 1994 in connection with consummation of the
Offerings and related formation transactions.
The comparability of the financial information discussed below is
impacted by the following: the acquisition of twelve multifamily properties
containing 1,736 apartment units, the acquisition of one industrial property
containing approximately 476,000 square feet, and the disposition of four
multifamily properties consisting of 1,085 apartment units during 1995; the
Offerings and other acquisition transactions during 1994, including the
acquisition of three multifamily properties containing 638 apartment units and
three industrial properties containing 2,241,000 square feet; the acquisition of
one multifamily property containing 256 apartment units in 1993; and four
multifamily properties containing an aggregate of 1,108 apartment units during
the last eight months of 1992. The changes in operating results from period to
period discussed below are primarily the result of increases in the number of
multifamily properties and related apartment units and in the leased square
footage of additional industrial properties acquired.
RESULTS OF OPERATIONS
For comparison purposes, the Company's operating results for the period
February 18, 1994 through December 31, 1994 have been added to the operating
results of the Predecessor Multifamily and Industrial Operations for the period
January 1, 1994 through February 17, 1994 to present the results of operations
for the year ended December 31, 1994 used in the following comparisons.
Comparison of the year ended December 31, 1995 to the year ended
December 31, 1994
Multifamily rental income increased by $5,961,000 or 31%, from
$18,937,000 in 1994 to $24,898,000 in 1995. This increase was primarily
attributable to the acquisition of twelve multifamily properties containing
1,736 apartment units in 1995 offset by the disposition of four multifamily
properties containing 1,085 apartment units during the last quarter of 1995.
Industrial rental income increased by $4,986,000 or 69%, from $7,207,000 in 1994
to $12,193,000 in 1995. This increase was primarily attributable to the
acquisition of three industrial parks during the last half of 1994 containing
approximately 1,011,000 square feet of space. As a result of these changes,
total revenues increased by $10,947,000, or 42% from $26,144,000 in 1994 to
$37,091,000 in 1995.
14
<PAGE> 17
Multifamily rental income for the year ended December 31, 1995 totaled
$24,898,000 and included $3,990,000 related to 12 multifamily properties
acquired during 1995 and $5,987,000 related to four multifamily properties sold
during the last quarter of 1995.
Industrial rental income for the year ended December 31, 1995 totaled
$12,193,000 and included $192,000 related to industrial properties acquired
during 1995.
Multifamily rental property expenses increased by $1,380,000, or 16%,
from $8,835,000 in 1994 to $10,215,000 in 1995. This increase was primarily
attributable to the acquisition of twelve multifamily properties containing
1,736 apartment units in 1995. Industrial rental property expenses increased by
$1,026,000, or 67%, from $1,541,000 in 1994 to $2,567,000 in 1995. This increase
was primarily attributable to the acquisition of three industrial parks during
the last half of 1994.
Multifamily rental property expenses for the year ended December 31,
1995 totaled $10,215,000 and included $1,779,000 related to 12 multifamily
properties acquired during 1995 and $2,403,000 related to the four multifamily
properties sold during the last quarter of 1995.
Industrial rental property expenses for the year ended December 31,
1995 totaled $2,567,000 and included $25,000 related to the industrial
properties acquired during 1995.
Depreciation increased by $2,360,000, or 63%, from $3,721,000 in 1994
to $6,081,000 in 1995 as a result of the acquisition of the twelve multifamily
properties in 1995, the three industrial properties acquired in late 1994, and
the capital improvements made to rehabilitate existing properties. Interest
expense (including amortization of financing costs) increased by $5,902,000, or
72%, from $8,164,000 in 1994 to $14,066,000 in 1995. This increase was
attributable to increased borrowings outstanding during 1995, as compared to
1994, pursuant to new borrowings of $55,517,000 relating to the acquisition of
twelve multifamily properties and one industrial park during the last half of
1995 and $24,850,000 of tax-exempt mortgage indebtedness assumed with the
Company's recent acquisitions.
Interest expense (including amortization of financing costs) increased
by $5,902,000, or 72%, from $8,164,000 in 1994 to $14,066,000 in 1995. This
increase was attributable to increased borrowings outstanding during 1995, as
compared to 1994, pursuant to new borrowings of $55,517,000 relating to the
acquisition of twelve multifamily properties and one industrial park during the
last half of 1995 and $24,850,000 of tax-exempt mortgage indebtedness assumed
with the Company's recent acquisitions. Interest resulting from the amortization
of financing costs increased by $386,000 or 62% from $623,000 in 1994 to
$1,009,000 in 1995. This increase is attributable primarily to the additional
amortization relating to the convertible subordinated debentures issued on
February 18, 1994 and accordingly being outstanding for the entire year in 1995
and amortization of loan fees associated with borrowings used to finance
acquisitions completed during late 1994 and 1995.
General and administrative expenses increased by $698,000, or 40%, from
$1,725,000 in 1994 to $2,423,000 in 1995. This increase was primarily
attributable to personnel increases related to the 1994 and 1995 acquisitions
made during the second half of each year, respectively.
For the year ended December 31, 1995, the Company incurred net income
of $8,403,000 compared to a net loss of $832,000 in 1994. These improved
results are attributable to the foregoing, and are offset partially by a
$6,664,000 net gain from the sale of the Texas multifamily portfolio in 1995
and a $2,990,000 loss from the extinguishment of debt in 1994 relating to the
acquisition of certain of the properties from Realty.
15
<PAGE> 18
Comparison of the year ended December 31, 1994 to the year ended
December 31, 1993
Multifamily rental income increased by $3,787,000, or 25%, from
$15,150,000 in 1993 to $18,937,000 in 1994. The increase was primarily
attributable to the acquisition of three multifamily properties containing 638
apartment units in 1994. Industrial rental income increased by $6,205,000, or
619%, from $1,002,000 in 1993 to $7,207,000 in 1994. This increase was primarily
attributable to the acquisition of six industrial parks containing approximately
2,241,000 square feet of space. As a result of these changes, total revenues
increased by $9,992,000, or 62% from $16,152,000 in 1993 to $26,144,000 in 1994.
Multifamily rental income for the year ended December 31, 1994 totaled
$18,937,000 and included $2,389,000 related to three multifamily properties
acquired during 1994.
Industrial rental income for the year ended December 31, 1994 totaled
$7,207,000 and included $4,912,000 related to six industrial properties acquired
during 1994.
Multifamily rental property expenses increased by $1,574,000, or 22%,
from $7,261,000 in 1993 to $8,835,000 in 1994. This increase was primarily
attributable to the acquisition of three multifamily properties in 1994.
Industrial rental expenses increased by $1,296,000, or 529%, from $245,000 in
1993 to $1,541,000 in 1994. This increase was primarily attributable to the
acquisition of six industrial parks.
Multifamily rental property expenses for the year ended December 31,
1994 totaled $8,835,000 and included $1,250,000 related to the multifamily
properties acquired during 1994.
Industrial rental property expenses for the year ended December 31,
1994 totaled $1,541,000 and included $909,000 related to the industrial
properties acquired during 1994.
Depreciation increased by $1,087,000, or 41%, from $2,634,000 in 1993
to $3,721,000 in 1994 as a result of the acquisition of three multifamily
properties and six industrial properties in 1994, and capital improvements made
to rehabilitate existing properties.
16
<PAGE> 19
Interest expense (including amortization of financing costs
increased by $2,136,000, or 35%, from $6,028,000 in 1993 to $8,164,000 in 1994.
This increase was attributable to increased borrowings outstanding during 1994,
as compared to 1993, resulting from significant changes in the Predecessor
Multifamily and Industrial Operations and the Company's debt structure. Such
changes in 1994 included the issuance of $56.5 million principal amount of
convertible subordinated debentures (net of debenture discount), borrowings of
$39,100,000 under the Company's new variable rate revolving credit facility, new
mortgage notes of $15,200,000 relating to the acquisition of one multifamily
property and two industrial parks during 1994, offset by the repayment of
$73,300,000 of the Predecessor's indebtedness using proceeds from the Offerings.
In addition, the increase in interest expense was attributable to a higher
borrowing rate in the Company's variable rate credit facility during 1994 as
compared to 1993, which resulted from overall increases in the prime rate and
LIBOR rates. Interest resulting from the amortization of financing costs
increased by $538,000, or 632%, from $85,000 in 1993 to $623,000 related
primarily to the amortization of debenture discount and costs, in 1994
associated with the debentures issued upon Company's initial public offering
in February 1994.
General and administrative expenses increased by $187,000, or
12%, from $1,538,000 in 1993 to $1,725,000 in 1994. This was primarily
attributable to the growth related to the 1994 acquisitions.
For the year ended December 31, 1994, the Company incurred a
net loss of $832,000, compared to a net loss of $12,036,000 in 1993. These
improved results are attributable to the foregoing, the nonrecurring loss of
$10,974,000 recognized in 1993 by Realty as a result of the formation
transactions which reduced the carrying value of the Predecessor's properties,
and are partially offset by a $2,990,000 extraordinary loss from the
extinguishment of debt in 1994.
Comparison of the year ended December 31, 1993 to the year
ended December 31, 1992
Multifamily rental income increased by $4,382,000, or 41%,
from $10,768,000 in 1992 to $15,150,000 in 1993. This increase was primarily
attributable to rental revenues from the five multifamily properties acquired
during 1992 and 1993. Industrial rental income (rent from the Seattle Industrial
Buildings) increased $117,000, or 13%, from $885,000 in 1992 to $1,002,000 in
1993. This increase was primarily attributable to increases in rental rates. As
a result of the above changes, total revenues increased by $4,499,000, or 39%,
from $11,653,000 in 1992 to $16,152,000 in 1993.
Multifamily rental income for the year ended December 31, 1993
totaled $15,150,000 and included $6,465,000 related to five multifamily
properties acquired during 1993.
Multifamily rental property expenses increased by $2,622,000,
or 57%, from $4,639,000 in 1992 to $7,261,000 in 1993. This increase was
primarily attributable to the acquisition of five multifamily properties during
1992 and 1993.
Multifamily rental property expenses for the year ended
December 31, 1993 totaled $7,261,000 and included $3,332,000 related to the
multifamily properties acquired during 1993.
17
<PAGE> 20
Depreciation increased by $394,000, or 17%, from $2,325,000 in
1992 to $2,719,000 in 1993. This increase was primarily attributable to
additional depreciation relating to the multifamily properties acquired during
1993 and late 1992.
Interest expense (including amortization of financing costs)
increased by $630,000, or 12%, from $5,398,000 in 1992 to $6,028,000 in 1993.
This increase was primarily attributable to increased borrowings relating to the
acquisition of five multifamily properties during 1992 and 1993. Interest
resulting from the amortization of financing costs increased by $42,000, or 98%
from $43,000 in 1992 to $85,000 in 1993 related primarily to loan fee
amortization associated with additional borrowings in early 1993.
General and administrative expenses increased by $144,000, or
10%, from $1,394,000 in 1992 to $1,538,000 in 1993. This was primarily the
result of increased accounting, professional and director fees.
For the year ended December 31, 1993, a net loss of
$12,036,000, including a nonrecurring loss of $10,974,000 resulting from the
formation transactions which was recognized by Realty in 1993, was incurred,
compared to a net loss of $1,620,000 in 1992. Excluding the nonrecurring loss,
the Predecessor incurred a loss of $1,062,000 for the year ended December 31,
1993, compared to a net loss of $1,620,000 in 1992. These improved results are
attributable to the foregoing.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1995, the Company had $2,847,000 of cash to
meet its immediate short term liquidity requirements. Future short-term
liquidity requirements are anticipated to be met through the net cash flow from
operations, existing working capital and, if necessary, funding from the
Company's revolving line of credit.
On February 18, 1994, the Company completed its initial public
offerings of 3,900,000 shares of common stock (4,008,500 shares after exercise
of over allotment option) and $50,000,000 aggregate principal amount of 8.375%
convertible subordinated debentures ($56,551,000 after exercise of over
allotment option). Prior to that date, the Company was a wholly owned subsidiary
of Realty. Proceeds raised by the Company totaled $64,214,000 (net of fees and
costs) from the stock offering and $55,420,000 (net of discount) from the
debenture offering.
On February 18, 1994, the Company acquired the Predecessor
Multifamily and Industrial Operations from Realty pursuant to a Purchase and
Sale Agreement between Realty and the Company dated November 15, 1993. The
Predecessor Multifamily and Industrial Operations consisted of ten multifamily
properties containing 2,654 apartment units and three industrial properties
containing an aggregate of 185,000 leasable square feet and certain other assets
and liabilities of Realty, including the Company's headquarters. In connection
with the acquisitions from Realty, the Company paid $44,425,000 in cash
(representing the repayment of indebtedness outstanding on Realty's lines of
credit related to the Predecessor Multifamily and Industrial Operations),
assumed $44,290,000 in debt and other obligations (of which $29,025,000 was
repaid with proceeds from the Offerings) and issued 149,900 shares of common
stock. In October 1994, the Company acquired Realty's interest in the
partnership that owned Baldwin Industrial Park, which contains 623,000 leasable
square feet of industrial space, for 559,748 shares of common stock and issued
74,671 of common stock shares to Realty as payment for the Company's corporate
offices
18
<PAGE> 21
and certain other assets. (The Company also acquired the interest of the
other partners in Baldwin Industrial Park for $9,760,000 of which $6,362,000 was
paid in 1994.) As a result of these transactions, Realty's ownership interest in
the Company was reduced to 16%. In connection with the extinguishment of
$29,500,000 mortgage indebtedness referred to above, the Company incurred
nonrecurring debt repayment costs totaling $2,990,000 which have been reflected
as an extraordinary item in the consolidated statement of operations for the
year ended December 31, 1994. Immediately following the Offerings, the Company
also acquired three industrial properties containing approximately 1,230,000
leasable square feet and a multifamily property containing 196 apartments from
unrelated third parties using proceeds from the Offerings.
The formation transactions with Realty discussed in the
preceding paragraphs were part of a strategic decision by Realty in 1993 to
concentrate on its horse racing and real estate operations located in Arcadia,
California by disposing of its multifamily and industrial properties. The
formation of the Company and its related acquisition of the Predecessor
Multifamily and Industrial Operations from Realty on February 18, 1994 resulted
in Realty's disposal of all of its multifamily and industrial properties. As a
result of its 1993 strategic decision to dispose of these properties, Realty
recognized a loss of $10,974,000 for the year ended December 31, 1993. The loss
reduced Realty's December 31, 1993 carrying value of the net assets to be
transferred as part of the formation transactions to their market value, as
determined by the Company's initial public offering in February, 1994. The
nonrecurring loss of $10,974,000 has been reflected in the Company's 1993
combined statement of operations for the Predecessor Multifamily and Industrial
Operations and the properties acquired in the formation transactions have been
recorded by the Company at Realty's historical cost basis which includes
Realty's loss on the formation transactions.
The Company has a $35,000,000 secured revolving line of credit
from a bank which expires in June 1997. As of December 31, 1995, the Company had
borrowed $16,169,000 under the revolving line of credit.
During the quarter ended March 31, 1995, the Company
restructured its original line of credit facility. Under the new credit
agreement, the Company replaced approximately $42,000,000 of the original line
of credit with three term loans. Each term loan is secured by certain of the
Company's properties. Two of the term loans total approximately $27,000,000 and
are at fixed rates of interest for three- and four-year terms. The third term
loan which totals approximately $15,000,000 has a seven-year term and bears a
floating rate of interest equal to 1.50 over either the three- or six-month
LIBOR rate. As of December 31, 1995, the Company had repaid approximately
$11,818,000 of these loans.
During August of 1995, the Company acquired from unrelated
third parties a majority interest in 11 projects consisting of 1,368 apartment
units located in Southern California (the "Properties"). The Company completed
the acquisition through PGP Inland Communities, L.P. (the "Partnership"), a
newly formed limited partnership to which the unrelated parties contributed the
Properties. The total value negotiated for the Properties was $71,469,000. The
Partnership assumed existing tax-exempt indebtedness of $24,850,000 and obtained
new indebtedness of $30,263,000 (all such indebtedness secured by the
Properties). The partners contributing the Properties received approximately
226,000 limited partnership units and the Company received its general
partnership interest in exchange for its cash contribution of approximately
$12,800,000.
In November of 1995, the Company sold its Texas apartment
portfolio consisting of four properties containing 1,085 apartment units. (See
Item 1 regarding sale of Texas portfolio.) The Company received total
consideration of $31,125,000; $30,125,000 in cash and four notes receivable
totaling $1,000,000 from the purchasing entities. In conjunction with the sale,
the Company repaid the mortgage notes payable secured by the Texas apartment
portfolio which totaled $14,438,000 and $2,000,000 of the Company's revolving
line of credit.
The Company acquired a 368-unit apartment community in Federal
Way, Washington for approximately $12,522,000 in November of 1995 and a 476,000
square foot industrial project in Tukwila, Washington in December of 1995 for
approximately $17,361,000. The purchase was funded by the remaining sales
proceeds, additional funding from mortgage notes payable and the Company's line
of credit.
The Company intends to acquire additional properties and may
seek to fund these acquisitions through a combination of equity offerings or
debt financing. The Company anticipates that adequate cash will be available to
fund its operating and administrative expenses, continuing debt service
obligations and the payment of dividends in accordance with REIT requirements in
the foreseeable future.
19
<PAGE> 22
Cash provided by operating activities increased from
$1,307,000 for the year ended December 31, 1993 to $3,950,000 for the year ended
December 31, 1994 and $7,138,000 for the year ended December 31, 1995. The
primary reason for these increases related to the additional rental income
contributed by properties acquired during 1994 and 1995.
Cash used in investing activities increased from $15,323,000
for the year ended December 31, 1993 to $99,504,000 for the year ended December
31, 1994 and then decreased to $84,480,000 for the year ended December 31, 1995
primarily as a result of acquisitions which increased from $15,323,000 in 1993
to $99,504,000 in 1994 and to $113,663,000 in 1995, net of $29,183,000 of
proceeds from the sale of the Texas apartment portfolio in 1995.
Cash provided by financing activities increased from
$13,798,000 for the year ended December 31, 1993 to $98,649,000 for the year
ended December 31, 1994 and then decreased to $76,674,000 for the year ended
December 31, 1995 primarily as a result of the issuance of $124,098,000 of
common stock and debentures, the formation transactions pursuant to the
Offerings in 1994, and borrowings of $54,336,000 and $116,370,000 in 1994 and
1995, respectively.
In order to qualify as a REIT for federal income tax purposes,
the Company is required to make distributions to its shareholders of at least
95% of REIT taxable income. The Company expects to use its cash flow from
operating activities for distributions to shareholders and for payment of
other expenditures. The Company intends to invest amounts accumulated for
distribution in short-term investments.
CAPITAL EXPENDITURES
The Company capitalizes the direct and indirect cost of
expenditures for the acquisition or rehabilitation of its multifamily and
industrial properties. The Company also capitalizes the direct cost of capital
expenditures which are considered revenue producing ("Revenue Producing") and
other expenditures which increase the service life of the Company's properties
("Restorations").
Revenue Producing expenditures are improvements which
significantly increase the revenue-producing capability of the asset including
tenant improvements at industrial properties, installation of washers and dryers
at multifamily properties, and other value-added additions.
Rehabilitation expenditures are costs the Company determines
are necessary during the due diligence phase immediately preceding the
acquisition of a property. At newly acquired properties, the Company often finds
it necessary to upgrade the physical appearance of such properties and to
complete the maintenance and repair work which had been deferred by prior
owners.
Restorations are nonrevenue-producing capital expenditures
which recur on a regular basis, and have estimated useful lives of more than one
year.
Make ready costs incurred after a property's rehabilitation,
such as carpet and appliance replacement, interior painting and window coverings
are expensed.
20
<PAGE> 23
The following table summarizes capital expenditures incurred
by the Company (excluding costs incurred related to the Texas multifamily
portfolio sold in 1995) for the years ended December 31, 1995 and 1994 (all
amounts are in thousands):
<TABLE>
<CAPTION>
1995 1994
-----------------------
<S> <C> <C>
Multifamily
Acquisitions $ 85,726 $ 28,375
Revenue-Producing 272 --
Rehabilitation 1,514 1,115
Restorations 58 19
-----------------------
87,570 29,509
-----------------------
Industrial
Acquisitions 24,591 69,667
Revenue-Producing 865 226
Rehabilitation 162 --
Restorations 99 --
-----------------------
25,717 69,893
-----------------------
$113,287 $ 99,402
=======================
</TABLE>
The Company anticipates incurring similar capital expenditures
in 1996. The Company expects such expenditures will be funded from available
cash balances, revolving lines of credit and proceeds from refinancing.
ECONOMIC CONDITIONS
All of the Company's leases on its Multifamily Properties are
for a period of one year or less. Substantially all of the Company's leases on
its Industrial Properties, which have terms generally ranging from one to five
years, contain provisions providing for rental increases based either on fixed
increases or on increases in the Consumer Price Index. Management believes the
nature of its multifamily leases and the provisions contained in its industrial
leases provide for increases in the tenants' base rent and tend to mitigate the
adverse impact of inflation.
Many regions of the United States, including regions in which
the Company owns properties, have in the past experienced an economic recession.
Adverse changes in general or local economic conditions could result in the
inability of some existing tenants of the Company to meet their lease
obligations and could otherwise adversely affect the Company's ability to
attract or retain tenants.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Index to Financial Statements for a listing of the
financial statements and supplementary data filed with this report.
21
<PAGE> 24
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None
22
<PAGE> 25
PART III
ITEM 10. DIRECTORS AND MANAGEMENT.
The directors, executive officers and key employees of the
Company are:
NAME AGE POSITION
--------------------------------------------------------------------------------
Glenn L. Carpenter.................... 53 Chairman of the Board, President,
Chief Executive Officer and
Director
Donald G. Herrman..................... 39 Executive Vice President, Chief
Financial Officer and Secretary
Lonnie P. Nadal....................... 40 Vice President of Acquisitions
Robert A. Dewey....................... 36 Vice President of Industrial
Operations
Kimberly G. Brown..................... 40 Vice President of Apartment
Operations
Angela M. Wixted...................... 41 Treasurer/Controller
Stewart W. Bowie...................... 71 Director
Peter L. Eppinga...................... 54 Director
John F. Kooken........................ 64 Director
Royce B. McKinley..................... 75 Director
Robert E. Morgan...................... 76 Director
Keith W. Renken....................... 60 Director
The following is a biographical summary of experience for the executive
officers, key employees and directors of the Company:
GLENN L. CARPENTER has been President, Chief Executive Officer
and a director of the Company since its formation in 1993. Mr. Carpenter served
as Chief Executive Officer of Santa Anita Realty Enterprises, Inc. ("Realty")
from January 1992 until February 1994, and as President of Realty from December
1989 until February 1994. He was Chief Operating Officer of Realty from 1989
until 1991, and was Executive Vice President of Realty from 1988 until 1989.
From 1986 until 1988, Mr. Carpenter served as Senior Vice President-Operations
of Realty, and had held a number of other positions with Realty since 1979. Mr.
Carpenter has been a member of the National Association of Real Estate
Investment Trusts ("NAREIT") since 1980 and served on NAREIT's board of
governors.
DONALD G. HERRMAN has been Executive Vice President since May
of 1995, Senior Vice President, Secretary, and Chief Financial Officer of the
Company since its formation in 1993, and served as Treasurer from February 1994
to October 1994. Mr. Herrman served as Vice President-Finance and Secretary of
Realty from January 1992 until February 1994, and as Realty's Treasurer from
1989 until February 1994. From 1985 until 1990, Mr. Herrman served as Controller
of Realty. Mr. Herrman is a certified public accountant in California.
LONNIE P. NADAL has been Vice President of Acquisitions of
PAG since its formation in 1993. Mr. Nadal served as Vice
President-Acquisitions of Realty from January 1992 to February 1994, and as a
Director of Operations from August 1991 until February 1994. From 1983 until
1991, Mr. Nadal was a partner of Lincoln Property Company, a development and
property management company.
ROBERT A. DEWEY has served as Vice President of Industrial
Operations of PAG since January of 1995, and Vice President of Operations of the
Company since its formation in 1993. Mr. Dewey served as Director of Asset
Management for Realty from 1992 until February 1994. From 1991 to 1992, he was
oversight manager of the Newport Beach office of the Resolution Trust
Corporation. From 1988 to 1990, Mr. Dewey was a Commercial Manager for a
development company.
KIMBERLY G. BROWN has served as Vice President of Apartment
Operations of PAG since January 1, 1996. Ms. Brown served as Director of
Apartment Operations and Regional Manager for the Pacific Northwest apartment
communities owned by the Company from August 1993 to December 1995. From 1991 to
August of 1993, Ms. Brown served as a district manager for Lexford Properties,
Irving Texas.
ANGELA M. WIXTED has served as Treasurer and Controller of
PAG since October 1994. Ms. Wixted served as a financial consultant for various
clients from 1993 to 1994. From 1992 to 1993, Ms. Wixted was controller for
O'Donnell Property Services. From 1986 to 1992, Ms. Wixted served as
CFO/Controller of SDC Investments, Inc. Ms. Wixted is a certified public
accountant in California.
The Board of Directors has created and delegated certain
authority to its Executive Committee, Audit Committee, Compensation Committee
and Nominations Committee as follows:
Executive Committee. The Executive Committee consists of
Messrs. McKinley, Eppinga, Bowie and Kooken. The Executive Committee has the
authority to perform all functions of the full Board, subject to certain
limitations prescribed by the Board and by Maryland law, including approval of
all real estate investments. The Executive Committee held three meetings during
the year ended December 31, 1995.
Audit Committee. The Audit Committee consists of Messrs.
Renken, Kooken and Morgan. The Audit Committee performs numerous functions,
including review of the annual financial statements with both management and the
independent auditors. The Audit Committee also recommends the engagement of the
independent accounting firm and meets with the independent accountants regarding
the scope and conduct of the annual audit. In addition, the Committee may
inquire about and discuss policies and procedures with respect to principles of
business conduct, financial and accounting controls, compliance with the Foreign
Corrupt Practices Act of 1977, areas of special concern and other related
matters. The Audit Committee met four times during the year ended December 31,
1995.
Compensation Committee. The Compensation Committee consists of
Messrs. Morgan, McKinley and Renken. The Compensation Committee reviews the
performance and effectiveness of the Chief Executive Officer and recommends an
annual compensation level for the Chief Executive Officer to the Board of
Directors. The Committee also sets the compensation level of all
23
<PAGE> 26
other officers, approves all grants of stock options and administers the
Company's stock option and other employee benefit programs and plans. The
Compensation Committee met five times during the year ended December 31, 1995.
Nominating Committee. The Nominating Committee consists of
Messrs. Carpenter, Eppinga and Morgan. The Nominating Committee makes
recommendations to the Board for committee assignments and chairmanships of the
committees. The Nominating Committee also considers candidates for appointment
to the Board and other such duties delegated to it. The Nominating Committee met
once during the year ended December 31, 1995.
During the year ended December 31, 1995, all directors
attended at least 75%, in the aggregate, of the meetings of the Board and
Committees of which they were members during the periods they were members.
During the past year, the Board of Directors met eight times.
COMPENSATION OF DIRECTORS
The Company pays its directors who are not officers of the
Company fees for their services as directors. Directors receive annual
compensation of $12,000 plus a fee of $750 ($1,000 for the Chairman of each
meeting) for attendance (in person or by telephone) at each meeting of the Board
of Directors and committee meetings. Officers of The Company who are directors
are not paid director fees.
Each director of the Company who is not otherwise an employee
of the Company or any of its subsidiaries or affiliates will, on each December
31, commencing December 31, 1995, automatically receive an annual grant of
options to purchase 500 common shares at an exercise price equal to 100% of the
fair market value of the Common Shares on the date of grant of such option.
Non-employee directors received at the closing of the Company's initial public
offering options to purchase 2,500 common shares at an exercise price equal to
the fair market value of the common shares on the date of grant. Mr. Stewart
Bowie, upon joining the Board of Directors in June 1994, received an initial
grant of options to purchase 2,500 common shares at an exercise price equal to
100% of the fair market value of the common shares as of the date he joined the
Board.
COMPLIANCE WITH SECTION 16(A) OF THE SECURITIES EXCHANGE ACT OF 1934
Section 16(a) of the Securities Exchange Act of 1934 requires
the Company's directors and officers, and persons who own more than ten percent
(10%) of a registered class of its equity securities, to file with the
Securities and Exchange Commission and the American Stock Exchange initial
reports of ownership and reports of changes in ownership of common stock and
other equity securities of the Company. Such officers, directors and beneficial
owners are also required by Securities and Exchange Commission rules and
regulations to furnish the Company with copies of all Section 16(a) forms they
file.
To the Company's knowledge, based solely on a review of the
copies of such reports furnished to the Company and written representations that
no other reports were required during the year ended December 31, 1995, all
Section 16(a) filing requirements applicable to each of its officers and
directors were complied with.
24
<PAGE> 27
ITEM 11. EXECUTIVE COMPENSATION.
COMPENSATION
The following table sets forth the annualized base salary the
Company paid for 1995 to its Chief Executive Officer and to each of the other
most highly compensated officers and key employees of the Company (whose cash
compensation exceeded $100,000 on an annualized basis during the year ending
December 31, 1995). Prior to February 18, 1994, the Company did not pay any
compensation to its officers.
<TABLE>
<CAPTION>
ANNUALIZED LONG-TERM
ANNUALIZED COMPENSATION (1) LONG-TERM COMPENSATION
--------------------------- ----------------------------------------
RESTRICTED
STOCK
AWARDS/OPTIONS GRANTED ALL OTHER
NAME CAPACITIES YEAR SALARY BONUS GRANTED COMPENSATION
-----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Glenn L. Carpenter Chairman of the Board, Chief 1995 $300,000 $ 86,250 10,000 (2) $613,000 (3) $ 5,085 (4)
Executive Officer and President 1994 280,000 49,000 65,000 (5) 6,750 (4)
Donald G. Hermann Executive Vice President, 1995 150,000 37,250 5,000 (2) 215,000 (3) 5,085 (4)
Chief Financial Officer and 1994 145,000 18,125 45,000 (5) 6,308 (4)
Secretary
Lonnie P. Nadal Vice President of Acquisitions 1995 130,000 29,750 5,000 (2) 93,000 (3) 4,407 (4)
1994 125,000 14,100 30,000 (5) 5,505 (4)
Robert A. Dewey Vice President of Industrial 1995 110,000 17,250 5,000 (2) 59,000 (3) 3,729 (4)
Operations 1994 95,000 11,875 10,000 (5) 4,314 (4)
</TABLE>
------------------------------
(1) The Company provides automobiles and club memberships to certain key
employees, including certain officers listed above, the value of which
is not included in the table above and which in any case did not exceed
the lesser of $50,000 or 10% of the annual salary and bonus of any
individual for the year.
(2) The amount shown represents the number of shares purchasable upon
exercise of an option granted under the Company's 1993 Share Option
Plan. The options were granted effective December 5, 1995 with an
exercise price of $15.00 with vesting occurring in equal installments
on each of the first five anniversaries of the date of grant.
25
<PAGE> 28
(3) Restricted Common Stock. The following table sets forth information
regarding the restricted common stock issued during 1995 to each of the
named officers and key employees (all of which grants were made under
the Share Option Plan).
RESTRICTED COMMON STOCK GRANTS
IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
DATE NUMBER OF
SHARES SHARES VESTING
NAME GRANTED GRANTED PERIOD
---- ------- ------- ------
<S> <C> <C> <C>
Glenn L. Carpenter 2/95 3,563 36 months
6/95 35,800 25% every three years
Donald G. Herrman 2/95 1,318 36 months
6/95 12,500 20% annually
Lonnie P. Nadal 2/95 1,025 36 months
6/95 5,000 20% annually
Robert A. Dewey 2/95 863 36 months
6/95 3,000 20% annually
Angela M. Wixted 2/95 527 36 months
</TABLE>
The shares granted in February of 1995 were issued as performance-based
compensation. The shares granted in June of 1995 were to replace the
Company's liability to named officers or key employees accrued under
existing deferred compensation agreements (see "Deferred Compensation
Plan"). Distributions will be paid on the shares of restricted common
stock issued.
(4) The amounts shown are those expensed for financial reporting purposes
under the Company's Thrift Plan. See "Thrift Plan" below for a
description of such Plan.
(5) The amount shown represents the number of shares purchasable upon
exercise of an option granted in 1994 under the Company's 1993 Share
Option Plan. The options were granted effective immediately prior to
the effectiveness of the Company's registration under the Securities
Exchange Act of 1934 with an exercise price equal to the initial public
offering price of $18.25, with vesting occurring, in the case of
Messrs. Carpenter and Herrman, on the date of grant, and in the case of
Messrs. Nadal and Dewey, in equal installments on each of the first
five anniversaries of the date of grant.
SHARE OPTION PLAN
The Company adopted the 1993 Share Option Plan (the "Share Option
Plan") to provide incentives to attract and retain officers and employees (the
"Amendment"). The Company is proposing to amend the Share Option Plan to
increase the number of shares for which options may be granted from 350,000
shares to 700,000 shares; this proposal will be voted upon at the Company's
annual meeting of shareholders seduled for May 8, 1996. The Share Option Plan
provides for grants of options to purchase a specified number of shares of
common stock, awards of restricted common stock, and grants of stock
appreciation rights. Under the Share Option Plan the total number of shares
available to be granted is 350,000 Common Shares (700,000 shares if Amendment is
approved), 45,000 of which have been reserved for awards to non-employee
directors. Participants in the Share Option Plan who are officers or any other
employees of the Company are selected by the Compensation Committee. Directors
of the Company are also eligible to participate, but, in the case of directors
who are not also employees, only pursuant to automatic grants under a specified
formula set forth in the Share Option Plan. No employee may receive a grant of
options for more than 100,000 shares of Common Stock in any calendar year.
26
<PAGE> 29
STOCK OPTIONS. The following table sets forth (i) all individual grants
of stock options made by the Company during 1995 to each of the named officers
and key employees (all of which grants were made under the Share Option Plan),
(ii) the ratio that the number of options granted to each individual bears to
the total number of options granted to all employees of the Company, (iii) the
exercise price and expiration date of these options, and (iv) the estimated
potential realizable values assuming either a 5% or 10% annualized rate of
appreciation from the relevant date of grant.
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
NUMBER OF % OF TOTAL VALUE AT ASSUMED
COMMON OPTIONS ANNUAL RATES OF STOCK
SHARES GRANTED TO PRICE APPRECIATION FOR
UNDERLYING EMPLOYEES OPTION TERM (1)
OPTIONS IN FISCAL EXERCISE EXPIRATION ------------------------
NAME GRANTED (2) YEAR PRICE ($/SH) DATE 5% 10%
---- ----------- ---- ------------ ---- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Glenn L. Carpenter 10,000 27% $15.00 12/04/05 $ 94,500 $ 238,500
Donald G. Herrman 5,000 13% 15.00 12/04/05 47,250 119,250
Lonnie P. Nadal 5,000 13% 15.00 12/04/05 47,250 119,250
Robert A. Dewey 5,000 13% 15.00 12/04/05 47,250 119,250
Angela M. Wixted 5,000 13% 15.00 12/04/05 47,250 119,250
</TABLE>
---------------------------
(1) The amounts shown in these columns are based upon assumed rates of
appreciation over the option term which are prescribed by applicable SEC
regulations. Actual gains, if any, on stock option exercises are dependent on
the future performance of the Company's common stock, overall market conditions
and the option holder's continued employment through the applicable vesting
periods.
(2) In each case, the amounts shown relate to option grants made December 5,
1995.
27
<PAGE> 30
AGGREGATED OPTIONS EXERCISED IN FISCAL 1995
AND FISCAL YEAR-END OPTION VALUES
The following table sets forth the total number of all outstanding
unexercised options held by the named officers and key employees as of the end
of 1995. None of the named officers exercised any options during 1995. On
December 31, 1995, the fair market value per share of common stock was $16.25.
<TABLE>
<CAPTION>
NUMBER OF COMMON SHARES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS
OPTIONS AT DECEMBER 31, 1995 AT DECEMBER 31, 1995(A)
---------------------------- --------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Glenn L. Carpenter 65,000 10,000 (b) $ 12,500
Donald G. Herrman 45,000 5,000 (b) 6,250
Lonnie P. Nadal 6,000 29,000 --- 6,250
Robert A. Dewey 2,000 13,000 --- 6,250
Angela M. Wixted 1,000 9,000 --- 6,250
</TABLE>
(a) Market value of underlying securities at December 31, 1995, minus the
exercise price of "in-the-money" options.
(b) Per share option price is greater than fair market value per share as
of December 31, 1995.
DEFERRED COMPENSATION PLAN
The Company had established or agreed to establish deferred
compensation arrangements (the "Deferred Compensation Plan") with certain
officers -- Messrs. Carpenter, Herrman, Nadal and Dewey -- whereby they were or
would be entitled, if they had five years of service, to a monthly benefit
starting at the later of age 55 or retirement, equal to 50% (plus 2% for each
year of service in excess of 25 years) of their last monthly salary less a
monthly benefit payable under the Retirement Income Plan. In June 1995, the
Company issued 20,500 shares of restricted common stock to replace all of its
liability under the deferred compensation agreements with Messrs. Herrman, Nadal
and Dewey. In June 1995, the Company issued 35,800 shares of restricted common
stock to replace one-half of its liability under the deferred compensation
agreement with Mr. Carpenter. (See "Share Option Plan - Restricted Common
Stock.")
Mr. Carpenter received credit under the Deferred Compensation Plan for
years of service with Realty. The Company assumed the obligations of Realty and
Mr. Carpenter is fully vested. Annualized examples of the benefits, commencing
at age 65, are set forth below. The examples assume retirement as of December
31, 1995 after assumed years of service.
28
<PAGE> 31
YEARS OF SERVICE
<TABLE>
<CAPTION>
SALARY 5 10 15 20 25 30
------ ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
$100,000 $20,421 $15,843 $11,264 $ 6,685 $ 2,106 $ 2,106
125,000 25,421 19,593 13,764 7,935 2,106 2,106
150,000 30,421 23,343 16,264 9,185 2,106 2,106
175,000 36,671 29,593 22,514 15,435 8,356 9,606
200,000 42,921 35,843 28,764 21,685 14,606 17,106
225,000 49,171 42,093 35,014 27,935 20,856 24,606
250,000 55,421 48,343 41,264 34,185 27,106 32,106
275,000 61,671 54,593 47,514 40,435 33,356 39,606
300,000 67,921 60,843 53,764 46,685 39,606 47,106
325,000 74,171 67,093 60,014 52,935 45,856 54,606
</TABLE>
29
<PAGE> 32
RETIREMENT INCOME PLAN
The Company has established a defined benefit retirement
income plan (the "Retirement Income Plan") that is non-contributory. Benefits
are determined regardless of position under a formula applied uniformly to all
employees of the Company (except as otherwise required under the Code's
"top-heavy" rules relating to "key" employees), and depend upon the employee's
length of service, and the employee's highest consecutive five year average
earnings up to $150,000 less certain social security benefits.
Employees are eligible to participate in the plan after
attaining age 21 and completing one year of service. The plan currently provides
for 100% vesting of an employee's interest after five years of service, except
to the extent faster vesting is required under the Code's "top-heavy" rules.
The following table illustrates the estimated annual
retirement benefit payable under the Retirement Income Plan at age 65, after
reduction for certain social security benefits, for participants with
compensation and credited years of service shown. The benefits shown assume
retirement at age 65 as of December 31, 1995, subject to the maximum annual
benefit of $120,000 shown below. This maximum annual amount is actuarially
increased to participants who retire after age 65.
YEARS OF SERVICE
<TABLE>
<CAPTION>
SALARY 5 10 15 20 25 30
-------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
$100,000 $ 9,158 $18,315 $27,473 $36,630 $45,788 $55,788
125,000 11,658 23,315 34,973 46,630 58,288 70,788
150,000 14,158 28,315 42,473 56,630 70,788 85,788
175,000 14,158 28,315 42,473 56,630 70,788 85,788
200,000 14,158 28,315 42,473 56,630 70,788 85,788
225,000 14,158 28,315 42,473 56,630 70,788 85,788
250,000 14,158 28,315 42,473 56,630 70,788 85,788
275,000 14,158 28,315 42,473 56,630 70,788 85,788
300,000 14,158 28,315 42,473 56,630 70,788 85,788
325,000 14,158 28,315 42,473 56,630 70,788 85,788
</TABLE>
Participants will receive credit under the Retirement Income Plan for
employment by Realty. The officers and their salaries covered under these plans
and their years of service for purposes of these plans are as follows:
<TABLE>
<CAPTION>
DEFERRED
ANNUAL YEARS OF RETIREMENT COMPENSATION
NAME SALARY SERVICE(1) INCOME PLAN AGREEMENT
---- ------ ---------- ----------- ---------
<S> <C> <C> <C> <C>
Mr. Carpenter $300,000 24 Yes Yes
Mr. Herrman 150,000 11 Yes No
Mr. Nadal 130,000 5 Yes No
</TABLE>
--------------------------------
(1) Includes years of service at Realty.
30
<PAGE> 33
THRIFT PLAN
The Company has established a thrift plan under which
employees may elect to contribute up to 21% of their annual compensation on a
combination before-and-after tax basis, excluding bonuses. Contributions by the
employee are matched by the Company at a 75% rate with total matching
contributions not exceeding a maximum of 4-1/2% of the contributing employee's
annual compensation. Matching contributions are in the form of cash, which is
used by the trustee to purchase common shares of the Company. Employee
contributions are invested in a fixed income fund, various growth funds, or a
combination thereof, according to the employee's choice. The Plan provides for
20% vesting of contributions by the Company for each full year of service,
increasing to 100% vesting after five years of service. (See "Compensation"
above for the amounts contributed by the Company during 1995 for the benefit of
its officers.)
EMPLOYMENT CONTRACTS
Each of Messrs. Carpenter, Herrman, Nadal and Dewey has an
employment contract with the Company for a term of two years (four years in the
case of Mr. Carpenter) commencing February of 1995. The contracts provide for
annual base compensation, subject to any increases in base compensation
recommended by the Compensation Committee and approved by the Board of
Directors. Messrs. Carpenter, Herrman, Nadal and Dewey, and the other officers
of the Company will also receive incentive compensation in accordance with
criteria to be established by the Compensation Committee and approved by the
Board of Directors, which the Company expects will be determined primarily on
the basis of Funds from Operations growth per common share and in some cases on
the basis of division or other performance goals. Each of the employment
contracts provides for certain severance payments in the event of death or
disability or upon termination by the Company without good cause and provides
for certain payments (twice the sum of current annual salary plus prior year
bonus in the case of Mr. Carpenter and no time the sum of current annual salary
plus prior year bonus in all other cases) in the event that employment is
terminated following a change in control.
31
<PAGE> 34
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth information regarding the beneficial
ownership of the Common Shares of the Company as of March 31, 1996 by each
person known by the Company to be the beneficial owner of more than five percent
(5%) of the Company's outstanding common shares, each director of the Company,
the officers of the Company, and by all directors and officers as a group. To
the Company's knowledge, each person named in the table has sole voting and
investment power with respect to all shares shown as beneficially owned by such
person, and the address of each person named is the same as the Company's unless
otherwise indicated in the accompanying notes.
<TABLE>
<CAPTION>
COMMON SHARES BENEFICIALLY
OWNED
-------------------------
PERCENT OF
BENEFICIAL OWNER AMOUNT CLASS (1)
---------------- ------ ---------
<S> <C> <C>
Santa Anita Realty Enterprises, Inc. 784,419(2) 16.4%
Investment Counselors of Maryland 405,500(3) 8.3
Glenn L. Carpenter 120,077(4) 2.4
Donald G. Herrman 65,876(5) 1.3
Lonnie P. Nadal 42,016(6) *
Robert A. Dewey 19,198(7) *
Angela M. Wixted 10,527(8) *
Kimberly G. Brown 9,350(9) *
Royce B. McKinley 10,500(10) *
Robert E. Morgan 26,854(10)(11) *
Stewart W. Bowie 41,795(10)(12) *
Peter L. Eppinga 11,529(10)(13) *
John F. Kooken 11,800(10) *
Keith W. Renken 4,300(10) *
All officers and directors as a group (12 persons) 373,822 7.4
</TABLE>
--------------------
* Less than 1%.
(1) Except as otherwise stated in the notes below, all percentages shown are
without assuming conversion of any of the Company's Convertible Subordinated
Debentures into Common Shares.
(2) Santa Anita Realty Enterprises, Inc.'s ("Realty") address is 301 W.
Huntington Drive, Arcadia, California 91007-3471. Information regarding
ownership of common shares by Realty is included herein in reliance upon
information set forth in an Amended Schedule 13D filed on February 13, 1996 by
Realty. According to such Schedule 13D, Realty intends to sell all of its shares
in an orderly manner pursuant to privately negotiated or open market
transactions.
(3) Investment Counselors of Maryland, Inc.'s ("ICM") address is 803 Cathedral
Street, Baltimore, Maryland 21201. Information regarding ownership of common
shares by ICM is included herein in reliance upon information set forth in an
Amended Schedule 13G filed on February 12, 1996 by ICM. ICM has indicated in the
Schedule 13G that all shares are owned by various investment advising clients of
ICM and that ICM is deemed to be the beneficial owner pursuant to Rule 13d-3 of
the Securities Exchange Act of 1934.
(4) Includes 75,000 shares purchasable upon exercise of options granted under
the Company's 1993 Share Option Plan, 3,563 shares of restricted stock granted
in February of 1995 and 35,800 shares of restricted stock granted in June of
1995 under the Company's 1993 Share Option Plan, and 3,537 shares allocated to
Mr.
32
<PAGE> 35
Carpenter in the Company's Thrift Plan. (See "EXECUTIVE COMPENSATION--Share
Option Plan" and "Thrift Plan.")
(5) Includes 50,000 shares purchasable upon exercise of options granted under
the Company's 1993 Share Option Plan, 1,318 shares of restricted stock granted
in February of 1995 and 12,500 shares of restricted stock granted in June of
1995 under the Company's 1993 Share Option Plan, and 2,058 shares allocated to
Mr. Herrman in the Company's Thrift Plan. (See "EXECUTIVE COMPENSATION--Share
Option Plan" and "Thrift Plan.")
(6) Includes 35,000 shares purchasable upon exercise of options granted under
the Company's 1993 Share Option Plan, 1,025 shares of restricted stock granted
in February of 1995 and 5,000 shares of restricted stock granted in June of 1995
under the Company's 1993 Share Option Plan, and 491 shares allocated to Mr.
Nadal in the Company's Thrift Plan. (See "EXECUTIVE COMPENSATION--Share Option
Plan" and "Thrift Plan.")
(7) Includes 15,000 shares purchasable upon exercise of options granted under
the Company's 1993 Share Option Plan, 863 shares of restricted stock granted in
February of 1995 and 3,000 shares of restricted stock granted in June of 1995
under the Company's 1993 Share Option Plan, and 335 shares allocated to Mr.
Dewey in the Company's Thrift Plan. (See "EXECUTIVE COMPENSATION--Share Option
Plan" and "Thrift Plan.")
(8) Includes 10,000 shares purchasable upon exercise of options granted under
the Company's 1993 Share Option Plan and 527 shares of restricted stock granted
in February of 1995 under the Company's 1993 Share Option Plan. (See "EXECUTIVE
COMPENSATION--Share Option Plan.")
(9) Includes 9,250 shares purchasable upon exercise of options granted under the
Company's 1993 Share Option Plan. (See "EXECUTIVE COMPENSATION--Share Option
Plan.")
(10) Includes 3,000 shares purchasable upon exercise of options granted under
the Company's 1993 Share Option Plan. (See "EXECUTIVE COMPENSATION--Share
Option Plan.")
(11) Includes 4,994 shares issuable upon conversion of the Company's 8.375%
Convertible Subordinated Debentures owned by Mr. Morgan.
(12) Includes 18,795 shares issuable upon conversion of the Company's 8.375%
Convertible Subordinated Debentures owned by Mr. Bowie. Excludes 1,611 shares
issuable upon conversion of the Company's 8.375% Convertible Subordinated
Debentures and 2,000 shares of common stock owned by Mr. Bowie's adult
step-daughter; Mr. Bowie disclaims beneficial ownership of such debentures, the
underlying shares, and the directly owned shares. Also excludes 1,074 shares
issuable upon conversion of the Company's 8.375% Convertible Subordinated
Debentures and 2,000 shares of common stock owned by Mr. Bowie's adult step-son;
Mr. Bowie disclaims beneficial ownership of such debentures, the underlying
shares, and the directly owned shares.
(13) Includes 3,329 shares issuable upon conversion of the Company's 8.375%
Convertible Subordinated Debentures owned by Mr. Eppinga.
33
<PAGE> 36
ITEM 13. CERTAIN RELATIONSHIPS AND OTHER TRANSACTIONS.
NONE
34
<PAGE> 37
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this report
1. Financial Statements
See Index to Financial Statements
2. Financial Statement Schedules
See Index to Financial Statements
3. Exhibits
See Exhibit Index
(b) Reports on Form 8-K.
The Company filed a report on Form 8-K dated August 30, 1995,
describing under Item 2 the acquisition of a majority interest in eleven
multifamily properties consisting of 1,368 apartment units located in
Southern California. The Company filed an amendment to this report dated
October 27, 1995, including therein financial statements relating to such
acquisition.
The Company filed a report on Form 8-K dated November 28, 1995,
describing under Item 2 the sale of the Company's Texas portfolio of
multifamily properties.
35
<PAGE> 38
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Company has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
PACIFIC GULF PROPERTIES INC.
By: /s/ GLENN L. CARPENTER
-------------------------------------
Glenn L. Carpenter
Chairman of the Board of Directors
President and Chief Executive Officer
By: /s/ DONALD G. HERRMAN
-------------------------------------
Donald G. Herrman
Executive Vice President, Secretary,
and Chief Financial Officer (Principal
Financial and Accounting Officer)
Date: May 20, 1996
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the Company
and in the capacities and on the date indicated.
<TABLE>
<S> <C>
GLENN L. CARPENTER Chairman of the Board of Directors
-------------------------------- President, Chief Executive Officer
Glenn L. Carpenter (Principal Executive Officer)
</TABLE>
36
<PAGE> 39
EXHIBIT INDEX
<TABLE>
<S> <C>
3.1 Amended and Restated Articles of Incorporation*
3.2 Bylaws*
4.1 Indenture between the Company and Harris Trust Company of California,
as trustee.*
10.1 Purchase and Sale Agreement between Santa Anita Realty Enterprises,
Inc. and the Company*
10.2 Amended and Restated Employment Agreement between the Company and Glenn
L. Carpenter+
10.3 Amended and Restated Employment Agreement between the Company and
Donald G. Herrman+
10.4 Amended and Restated Employment Agreement between the Company and
Lonnie P. Nadal+
10.5 Employment Agreement between the Company and Robert A. Dewey+
10.6 1993 Share Option Plan*
10.7 Park Place Acquisition Agreement*
10.8 Management Agreement between Santa Anita Realty Enterprises, Inc. and
the Company*
10.9 Purchase and Sale Agreement and Joint Escrow Instructions among Golden
West Equity Properties, Inc., Golden West Ontario Associates, Golden
West Vista Associates and Pacific Gulf Properties Inc.*
10.10 Registration Rights Agreement between Santa Anita Realty Enterprises,
Inc. and the Company*
10.11 Amendment Nos. 1 and 2 to the Purchase and Sale Agreement and Joint
Escrow Instructions among Golden West Equity Properties, Inc., Gold
West Ontario Associates, Golden West Vista Associates and Pacific Gulf
Properties Inc.*
10.12 Revolving Credit Agreement, dated as of June 10, 1994, between Pacific
Gulf Properties Inc. and Bank of America National Trust and Savings
Association**
10.13 Master Agreement, dated September 30, 1994, between Pacific Gulf
Properties, Inc., PGP Baldwin, Inc., Santa Anita Realty Enterprises,
Inc., Baldwin Associates, Ltd. and Wm. P. Willman & Associates
regarding Baldwin Park Acquisition**
10.14 Closing Agreement, dated October 1, 1994, between Pacific Gulf
Properties Inc. and Santa Anita Realty Enterprises, Inc. regarding
Baldwin Park Acquisition**
10.15 Settlement Agreement and Mutual General Release, effective as of
January 30, 1995, between Pacific Gulf Properties Inc., PGP Baldwin,
Inc., Baldwin Industrial Properties, Ltd., Baldwin Associates, Ltd.,
W.T. Grant, et al. regarding Baldwin Park Acquisition**
10.16 Award of Arbitration dated March 15, 1995 regarding Baldwin Park
Acquisition**
10.17 Stipulation and Order Confirming Arbitration Award dated March 22,
1995 regarding Baldwin Park Acquisition**
10.18 Term Loan Agreement, dated March 3, 1995, between Pacific Gulf
Properties Inc. and Bank of America National Trust and Savings
Association**
10.19 Term Loan Agreement, dated March 3, 1995, between Pacific Gulf
Properties Inc. and Bank of America National Trust and Savings
Association**
10.20 Term Loan Agreement, dated March 3, 1995, between Pacific Gulf
Properties Inc. and Bank of America National Trust and Savings
Association**
10.21 Exchange Agreement, dated April 15, 1995, between the Company and Glenn
L. Carpenter, regarding Deferred Compensation Agreement+
10.22 Exchange Agreement, dated April 15, 1995, between the Company and
Donald G. Herrman, regarding Deferred Compensation Agreement+
10.23 Exchange Agreement, dated April 15, 1995, between the Company and
Lonnie P. Nadal, regarding Deferred Compensation Agreement+
10.24 Exchange Agreement, dated April 15, 1995, between the Company and
Robert A. Dewey, regarding Deferred Compensation Agreement+
10.25 Amended and Restated Agreement of Limited Partnership of PGP Inland
Communities, L.P., dated as of August 15, 1995+
</TABLE>
37
<PAGE> 40
<TABLE>
<S> <C>
10.26 Master Contribution Agreement, dated as of August 15, 1995, regarding
formation of PGP Inland Communities, L.P.+
10.27 Purchase Agreement and Escrow Instructions, dated September 15, 1995,
by and between Capitol Investment Associates Corp. and Pacific Gulf
Properties Trust, regarding sale of Texas apartment portfolio+
10.28 Modification Agreement, dated as of April 21, 1995, between Company and
Bank of America National Trust and Savings Association, which modifies
Revolving Credit Agreement dated June 10, 1994.+
10.29 Dividend Reinvestment Plan of the Company dated May 9, 1995***
21.01 Subsidiaries**
23.01 Consent of Ernst & Young LLP
27.00 Financial Data Schedule
</TABLE>
-----------------------
* Incorporated by reference from the Company's registration statement on
Form S-11 (33- 69382) declared effective by the Securities and Exchange
Commission on February 10, 1994.
** Incorporated by reference from the Company's Annual Report on Form 10-K
of the Company for the year ended December 31, 1994.
*** Incorporated by reference from the Company's registration statement on
Form S-3 (33- 92082) filed on May 9, 1995.
+ Incorporated by reference from the Company's Annual Report on Form 10-K
for the year ended December 31, 1995.
38
<PAGE> 41
PACIFIC GULF PROPERTIES INC.
INDEX TO FINANCIAL STATEMENTS AND SCHEDULE
<TABLE>
<CAPTION>
PAGE
------
<S> <C>
FINANCIAL STATEMENTS FILED AS PART OF THIS REPORT
Report of Independent Auditors ............................... F-2
Consolidated Balance Sheets
as of December 31, 1995 and 1994 ......................... F-3
Consolidated and Combined Statements of Operations
for the years ended December 31, 1995, 1994 and 1993 ..... F-4
Consolidated and Combined Statements of Equity
for the years ended December 31, 1995, 1994 and 1993 ..... F-5
Consolidated and Combined Statements of Cash Flows
for the years ended December 31, 1995, 1994 and 1993 ..... F-6
Notes to Consolidated and Combined Financial Statements ...... F-7
SCHEDULE FILED AS PART OF THIS REPORT
Schedule III - Real Estate and Accumulated Depreciation ...... F-20
</TABLE>
F-1
<PAGE> 42
Report of Independent Auditors
To the Board of Directors and Shareholders
Pacific Gulf Properties Inc.
We have audited the accompanying consolidated balance sheets of Pacific
Gulf Properties Inc. (the "Company") as of December 31, 1995 and 1994, and the
related consolidated and combined statements of operations, equity, and cash
flows of the Company and the multifamily and industrial operations acquired from
Santa Anita Realty Enterprises, Inc. (the "Predecessor Multifamily and
Industrial Operations") for the year ended December 31, 1995, for the periods
February 18, 1994 through December 31, 1994 and January 1, 1994 through February
17, 1994, and for the year ended December 31, 1993. Our audits also included the
financial statement schedule listed in the Index on page F-1. These financial
statements and schedule are the responsibility of the Company's and
Predecessor's management. Our responsibility is to express an opinion on these
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 financial statements referred to above present
fairly, in all material respects, the consolidated financial position of the
Company at December 31, 1995 and 1994, and the consolidated and combined results
of operations and cash flows of the Company and the Predecessor Multifamily and
Industrial Operations for the year ended December 31, 1995, for the periods
February 18, 1994 through December 31, 1994 and January 1, 1994 through February
17, 1994, and for the year ended December 31, 1993, in conformity with generally
accepted accounting principles. Also, in our opinion, the related financial
statement schedule, when considered in relation to the basic financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.
ERNST & YOUNG LLP
Newport Beach, California
February 9, 1996
F-2
<PAGE> 43
PACIFIC GULF PROPERTIES INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1995 1994
--------------------
<S> <C> <C>
ASSETS
Real estate assets (Notes 2 and 3)
Land $ 75,011 $ 47,089
Buildings 225,142 163,507
--------------------
300,153 210,596
Accumulated depreciation (21,461) (17,139)
--------------------
278,692 193,457
Cash and cash equivalents 2,847 3,515
Accounts receivable 959 701
Other assets 6,093 4,846
--------------------
$288,591 $202,519
====================
LIABILITIES AND SHAREHOLDERS' EQUITY
Loans payable (Notes 2 and 3) $149,847 $ 69,480
Accounts payable and accrued liabilities (Note 5) 5,644 4,784
Dividends payable 1,943 1,869
Convertible subordinated debentures (Note 4) 55,659 55,526
--------------------
213,093 131,659
Minority interests in consolidated partnership (Note 6) 3,518 -
Commitments and contingencies (Note 7)
Shareholders' equity
Preferred shares, $.01 par value; 5,000,000
shares authorized; no shares outstanding - -
Common shares, $.01 par value; 25,000,000
shares authorized; shares issued and outstanding
4,856,937 (1995) and 4,792,919 (1994) 49 48
Excess shares, $.01 par value; 30,000,000
shares authorized; no shares outstanding - -
Outstanding restricted stock (Note 5) (669) -
Additional paid-in capital 77,979 76,990
Distributions in excess of earnings (5,379) (6,178)
--------------------
71,980 70,860
--------------------
$288,591 $202,519
====================
</TABLE>
See accompanying notes.
F-3
<PAGE> 44
PACIFIC GULF PROPERTIES INC.
CONSOLIDATED AND COMBINED STATEMENTS OF OPERATIONS
(in thousands, except share data)
<TABLE>
<CAPTION>
PREDECESSOR
MULTIFAMILY AND
COMPANY INDUSTRIAL OPERATIONS
---------------------------- ----------------------------
FEBRUARY 18 JANUARY 1
YEAR ENDED THROUGH THROUGH YEAR ENDED
DECEMBER 31, DECEMBER 31, FEBRUARY 17, DECEMBER 31,
1995 1994 1994 1993
----------------------------------------------------------
<S> <C> <C> <C> <C>
REVENUES
Rental income
Multifamily properties $ 24,898 $ 16,783 $2,154 $ 15,150
Industrial properties 12,193 7,074 133 1,002
-------------------------------------------------------
37,091 23,857 2,287 16,152
EXPENSES
Rental property expenses
Multifamily properties 10,215 7,524 1,311 7,261
Industrial properties 2,567 1,475 66 245
-------------------------------------------------------
12,782 8,999 1,377 7,506
Depreciation 6,081 3,331 390 2,634
Interest (including amortization of
financing costs of $1,009, 606,
17 and 85, respectively) 14,066 7,332 832 6,028
General and administrative 2,423 1,522 203 1,538
Minority interests (Note 6) - - - (492)
Reduction in carrying value of Predecessor's
properties (Note 9) - - - 10,974
-------------------------------------------------------
35,352 21,184 2,802 28,188
-------------------------------------------------------
INCOME (LOSS) BEFORE GAIN ON SALE
OF PROPERTIES AND EXTRAORDINARY
ITEM 1,739 2,673 (515) (12,036)
Gain on sale of properties (Note 8) 6,664 - - -
-------------------------------------------------------
INCOME (LOSS) BEFORE EXTRAORDINARY
ITEM 8,403 2,673 (515) (12,036)
Extraordinary item
Loss from extinguishment of debt - 2,990 - -
-------------------------------------------------------
NET INCOME (LOSS) $ 8,403 $ (317) $ (515) $(12,036)
=======================================================
WEIGHTED AVERAGE COMMON SHARES 4,830,723 4,273,337
=========================
PER COMMON SHARE DATA (Note 1)
Income before extraordinary item $ 1.74 $ .63
Extraordinary item - (.70)
-------------------------
Net income (loss) $ 1.74 $ (.07)
=========================
DISTRIBUTIONS DECLARED PER COMMON
SHARE $ 1.57 $ 1.35
=========================
</TABLE>
See accompanying notes.
F-4
<PAGE> 45
PACIFIC GULF PROPERTIES INC.
CONSOLIDATED AND COMBINED STATEMENTS OF EQUITY
(in thousands)
<TABLE>
<S> <C>
EQUITY, December 31, 1992 (a) $ 23,200
Net distributions (1,664)
Net loss (12,036)
Common shares issued 1
--------
EQUITY, December 31, 1993 (a) 9,501
Net distributions (626)
Net loss (515)
--------
EQUITY, February 18, 1994 (a) 8,360
Common shares issued (Note 9) 68,678
Distributions declared (5,861)
Net loss (317)
--------
EQUITY, December 31, 1994 70,860
Common shares issued 988
Outstanding restricted stock (Note 5) (669)
Distributions declared (7,602)
Net income 8,403
--------
EQUITY, December 31, 1995 $ 71,980
========
</TABLE>
(a) Amounts presented prior to February 18, 1994 represent the combined
equity of the Predecessor Multifamily and Industrial Operations.
See accompanying notes.
F-5
<PAGE> 46
Pacific GULF PROPERTIES INC.
CONSOLIDATED AND COMBINED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
PREDECESSOR
MULTIFAMILY AND
COMPANY INDUSTRIAL OPERATIONS
------------------------------- --------------------------------
Year Ended February 18 January 1 Year Ended
December 31, through through December 31,
1995 December 31, 1994 February 17, 1994 1993
-----------------------------------------------------------------
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ 8,403 $ (317) $(515) $(12,036)
---------------------------------------------------------------
Adjustments to reconcile net earnings to net cash
provided by operating activities
Depreciation 6,081 3,331 390 2,634
Amortization of financing costs 1,009 606 17 85
Compensation recognized relating to restricted stock 83 - - -
Gain on sale of real estate properties (6,664) - - -
Reduction in carrying value of Predecessor's properties - - - 10,974
Loss from extinguishment of debt - 2,990 - -
Minority interests - - - (492)
Net (increase) decrease in accounts receivable (258) - - 255
Net (increase) decrease in certain other assets (2,295) (1,762) 594 59
Net increase (decrease) in certain liabilities 779 (1,130) (254) (172)
---------------------------------------------------------------
Net cash provided by operating activities 7,138 3,718 232 1,307
---------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Net additions to real estate assets (113,663) (99,504) - (15,323)
Proceeds from sale of real estate properties 29,183 - -
---------------------------------------------------------------
Net cash used in investing activities (84,480) (99,504) - (15,323)
---------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from mortgage notes payable 112,070 15,189 - -
Proceeds from revolving line of credit 4,300 39,147 - 10,275
Repayment of mortgage notes payable (8,725) (29,146) (25) (148)
Repayment of revolving line of credit (27,278) (44,425) - -
Net proceeds from issuance of convertible subordinated
debentures - 55,420 - -
Increase in deferred debenture costs - (3,006) - -
Issuance of common shares 317 68,678 - 1
Net increase in liabilities associated with issuance of common
shares and convertible debentures - 4,425 - -
Payment of costs associated with extinguishment of debt - (2,990) - -
Distributions paid (7,528) (3,992) - -
Contributions from minority interest in combined partnerships - - - 4,034
Minority interest contributions 3,518 - - 1,300
Net distributions to Predecessor - - (626) (1,664)
---------------------------------------------------------------
Net cash provided by (used in) financing activities 76,674 99,300 (651) 13,798
---------------------------------------------------------------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS (668) 3,514 (419) (218)
CASH AND CASH EQUIVALENTS - beginning of period 3,515 1 420 638
---------------------------------------------------------------
CASH AND CASH EQUIVALENTS - end of period $ 2,847 $ 3,515 $ 1 $ 420
===============================================================
</TABLE>
See accompanying notes.
F-6
<PAGE> 47
PACIFIC GULF PROPERTIES INC.
Notes to Consolidated and Combined Financial Statements
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization
Pacific Gulf Properties Inc. was incorporated in Maryland and operates as a Real
Estate Investment Trust ("REIT") under the Internal Revenue Code of 1986, as
amended. Pacific Gulf Properties Inc. commenced operations on February 18, 1994
upon the receipt of proceeds from its initial public offerings (Note 9).
Basis of Presentation
The consolidated and combined financial statements include the accounts of
Pacific Gulf Properties Inc., and all subsidiaries and partnerships over which
it has control (the "Company") in addition to the combined accounts of the
assets and liabilities acquired from Santa Anita Realty Enterprises, Inc.
("Realty") on a combined historical cost basis (the "Predecessor Multifamily and
Industrial Operations"). The combined financial statements for periods prior to
February 18, 1994 are not intended to present the financial position, results
of operations or cash flows of either the Company or Realty. All intercompany
accounts and transactions have been eliminated in consolidation.
Real Estate Assets
The properties are carried at their historical cost which consists of land,
buildings and related improvements. The properties acquired from Realty were
recorded at Realty's historical cost basis. Depreciation is generally provided
on a straight-line basis over the estimated useful lives of the buildings and
improvements, ranging primarily from 15 to 40 years.
In 1995, the Company adopted Statement 121, Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of, which requires
that long-lived assets used in operations be written down to fair value and
impairment losses recognized when indicators of impairment are present and the
assets' carrying amount is greater than the sum of the future undiscounted cash
flows estimated to be generated by those assets. At December 31, 1995, no
indicators of impairment exist. Accordingly, the properties are carried at cost
less accumulated depreciation.
Expenditures which increase the service life of properties are capitalized; the
cost of maintenance and repairs is charged to expense as incurred. When
depreciable property is retired or disposed of, the related costs and
accumulated depreciation are removed from the accounts and any gain or loss
reflected in operations.
Cash and Cash Equivalents
Certificates of deposit and short-term investments with remaining maturities of
three months or less when acquired are considered cash equivalents.
F-7
<PAGE> 48
PACIFIC GULF PROPERTIES INC.
Notes to Consolidated and Combined Financial Statements (continued)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Financing Costs
Financing costs are included in other assets and consist of loan fees, other
loan costs and deferred debenture costs. Loan fees and other loan costs are
amortized over the term of the respective loan. Costs relating to the
convertible subordinated debentures offering are amortized over the term of
the debentures using a method which approximates the effective interest method.
Amortization of financing costs is included in interest expense.
Concentration of Credit Risk
Financial instruments which potentially subject the Company to a concentration
of credit risk are primarily cash investments and accounts receivable. Cash is
invested in investment-grade short-term instruments and the amount of credit
exposure to any one commercial issuer is limited. Concentration of credit risk
with respect to accounts receivable is limited due to the number of multifamily
and industrial tenants.
Fair Value of Financial Instruments
The carrying amounts of the Company's short-term investments and loans payable
approximate their fair values as of December 31, 1995.
The fair value as of December 31, 1995 of the Company's convertible subordinated
debentures, based on the closing price of the debentures on the last trading day
in 1995 on the American Stock Exchange, was $52,592,000.
Dividend Reinvestment Plan
In May 1995 the Company established a dividend reinvestment and stock purchase
plan. For the year ended December 31, 1995, the Company issued 422 shares under
the plan.
Rental Income
Rental income from residential leases is recognized when due from tenants.
Apartment units are rented under lease agreements with terms of one year or
less.
Rental income from industrial leases is recognized on a straight-line basis over
the related lease term. As a result, deferred rent is created when rental income
is recognized during free rent periods of a lease. The deferred rent is included
in other assets, evaluated for collectibility and amortized over the lease term.
F-8
<PAGE> 49
PACIFIC GULF PROPERTIES INC.
Notes to Consolidated and Combined Financial Statements (continued)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Interest
Interest expense incurred for the years ended December 31, 1995, 1994 and 1993
(including amortization of financing costs) totaled $14,066,000, $8,164,000 and
$6,028,000, respectively. Interest expense for 1995 and 1994 includes $5,288,000
and $4,516,000 related to the Company's debentures (Note 4). Interest paid for
the years ended December 31, 1995, 1994 and 1993 totaled $11,785,000, $4,764,000
and $5,868,000, respectively.
Income Taxes
The Company has elected to be taxed as a REIT. As a REIT, the Company is
generally not subject to income taxes. To maintain its REIT status, the Company
is required to distribute annually as dividends at least 95% of its REIT taxable
income, as defined by the Internal Revenue Code, to its shareholders, and also
to satisfy certain other requirements. The Company has estimated that
approximately 68% (unaudited) of the dividends paid to shareholders in 1995
represented a return of capital for income tax purposes.
Per Share Data
Per share amounts are calculated based upon weighted average common shares
outstanding and common share equivalents for the year ended December 31, 1995
and the period February 18, 1994 (date of initial public offering) through
December 31, 1994. Common stock equivalents include stock options which are
considered dilutive for purposes of computing primary earnings per share.
The debentures, if fully converted, would require the issuance of an additional
3,036,710 common shares (Note 4). If fully converted, the net income
attributable to each common share would not be diluted.
Use of Estimates
The preparation of the Company's financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of the assets and liabilities
as of December 31, 1995 and 1994 and revenues and expenses for each of the three
years in the period ended December 31, 1995. Accordingly, actual results could
differ from those estimates in the near term.
Reclassifications
Certain financial statement amounts have been reclassified to conform to the
current year presentation.
F-9
<PAGE> 50
PACIFIC GULF PROPERTIES INC.
Notes to Consolidated and Combined Financial Statements (continued)
2. REAL ESTATE ASSETS
The Company's multifamily and industrial portfolio consists of the following at
December 31:
<TABLE>
<CAPTION>
1995 1994
------------------------------
<S> <C> <C>
Multifamily properties
Land $ 45,785,000 $ 28,001,000
Buildings 141,997,000 95,942,000
------------------------------
187,782,000 123,943,000
Accumulated depreciation (11,903,000) (10,237,000)
------------------------------
175,879,000 113,706,000
------------------------------
Industrial properties
Land 29,226,000 19,088,000
Buildings 83,145,000 67,565,000
------------------------------
112,371,000 86,653,000
Accumulated depreciation (9,558,000) (6,902,000)
------------------------------
102,813,000 79,751,000
------------------------------
Total
Land 75,011,000 47,089,000
Buildings 225,142,000 163,507,000
------------------------------
300,153,000 210,596,000
Accumulated depreciation (21,461,000) (17,139,000)
------------------------------
$278,692,000 $193,457,000
==============================
</TABLE>
Multifamily Properties
At December 31, 1995, the Company owns and operates 21 multifamily properties
containing 3,945 apartment units located in Southern California and the Pacific
Northwest. During 1995, the Company disposed of four multifamily properties
comprising its entire Texas portfolio (Note 8). Additionally, the Company
purchased a multifamily property containing 368 apartment units located in the
Pacific Northwest.
Industrial Properties
At December 31, 1995, the Company owns and operates ten industrial properties,
containing an aggregate of 2,902,000 leasable square feet located in Southern
California and in the state of Washington. In 1995, the Company purchased an
industrial property in the state of Washington containing approximately 475,000
leasable square feet.
F-10
<PAGE> 51
PACIFIC GULF PROPERTIES INC.
Notes to Consolidated and Combined Financial Statements (continued)
2. REAL ESTATE ASSETS (continued)
Industrial Properties (continued)
The Company's industrial properties are leased to tenants under operating leases
with terms ranging from 1 to 5 years. The minimum future lease payments to be
received from noncancelable industrial leases for each of the next five years
ending December 31 and thereafter, are as follows:
<TABLE>
<S> <C>
1996 $10,435,000
1997 6,327,000
1998 4,689,000
1999 3,144,000
2000 2,349,000
Thereafter -
-----------
$26,944,000
===========
</TABLE>
3. LOANS PAYABLE
Loans payable consist of mortgage notes and a revolving line of credit at
December 31 as follows:
<TABLE>
<CAPTION>
1995 1994
----------------------------
<S> <C> <C>
Mortgage notes $133,678,000 $30,333,000
Revolving line of credit 16,169,000 39,147,000
----------------------------
$149,847,000 $69,480,000
============================
</TABLE>
Mortgage notes payable at December 31, 1995 consist of conventional mortgage
notes and tax-exempt mortgage notes totaling $108,828,000 and $24,850,000,
respectively.
The Company's conventional mortgage notes consist of 19 notes at December 31,
1995 which are secured by multifamily and industrial properties, due in monthly
installments and mature at various dates through September 2025. Approximately
$87,477,000 or 14 conventional mortgage notes bear fixed rates of interest
ranging from 7.25% to 8.74% per annum. The remaining five conventional mortgage
notes include two notes payable totaling $15,101,000 which bear interest at
LIBOR plus 1.5% and three other notes payable totaling $6,250,000 which bear
interest based on the Federal Home Loan Bank - 11th District Rate plus 2.8%. The
weighted average interest rate of the Company's conventional mortgage notes at
December 31, 1995 was 7.99%. Subsequent to December 31, 1995, the Company
entered into an interest rate swap agreement with a bank which fixes the
interest rate at 7.35% for five years on one of the variable rate mortgage notes
in the amount of $11,500,000, commencing July 1, 1996. During the year ended
December 31, 1995, the LIBOR rate ranged from 5.69% to 6.19% and was 5.69% at
December 31, 1995.
F-11
<PAGE> 52
PACIFIC GULF PROPERTIES INC.
Notes to Consolidated and Combined Financial Statements (continued)
3. LOANS PAYABLE (continued)
The Company's tax-exempt mortgage notes consist of five notes totaling
$24,850,000 at December 31, 1995 which are secured by multifamily properties and
bank letters of credit. The Company makes monthly interest payments on these
notes to a trustee who in turn pays the bondholders when interest is due. The
tax-exempt mortgage notes provide for floating interest rates, which adjust
weekly or monthly based on applicable indices. These floating interest rates
which ranged from 3.46% and 8.62% during the year ended December 31, 1995 were
based on indices such as the Kenny Rate and the Federal Home Loan Bank - 11th
District Rate. At December 31, 1995 both of these indices were 5.12%. The
weighted average interest rate of the Company's tax-exempt mortgage notes at
December 31, 1995 was 5.51%. The bank letters of credit mature at various dates
through April 1996. The tax-exempt mortgage notes mature at various dates
through 2018 and are callable should the supporting letters of credit not be
replaced upon their maturity.
The revolving line of credit as of December 31, 1995, which is payable to a
bank, is secured by certain of the Company's real estate properties and matures
in 1997. Under the terms of this revolving bank line of credit, the Company may
borrow funds up to $35,000,000 at LIBOR plus 1.75%. For the year ended December
31, 1995, the weighted average interest rate the revolving line of credit was
8.58%.
The Company's revolving line of credit agreement contains certain debt
covenants. The most significant covenants, as defined in the agreement, require
the Company to maintain a minimum tangible net worth, a debt coverage ratio in
excess of 1.45 (measured as a four quarter trailing average) and a debt-to-total
capitalization ratio of less than 80%. In addition, the revolving line of credit
agreement contains a provision restricting the payment of dividends in any
fiscal quarter to 92% of that quarter's Funds from Operations determined
utilizing the National Real Estate Investment Trust's Old Definition of Funds
From Operations. As of December 31, 1995, the Company was in compliance with all
debt covenants.
Principal payments due on loans payable as of December 31, are as follows:
<TABLE>
<S> <C>
1996 $ 6,692,000
1997 24,279,000
1998 27,491,000
1999 12,228,000
2000 7,022,000
Thereafter 72,135,000
------------
$149,847,000
============
</TABLE>
F-12
<PAGE> 53
PACIFIC GULF PROPERTIES INC.
Notes to Consolidated and Combined Financial Statements (continued)
4. CONVERTIBLE SUBORDINATED DEBENTURES
The Company's $56,551,000 of convertible subordinated debentures are reflected
in the accompanying consolidated balance sheets net of unamortized discount of
$892,000 and $1,025,000 at December 31, 1995 and 1994, respectively, bear
interest at 8.375% annually (payable in semiannual installments due in February
and August of each year) and mature February 2001.
Debenture discount is amortized into expense producing an effective interest
rate of 8.76%. Costs incurred by the Company to issue the debentures were
capitalized and included in other assets. Deferred debenture costs upon issuance
totaled $3,006,000 of which $429,000 and $358,000 have been amortized and
included in amortization of financing costs as part of interest expense in the
consolidated and combined statements of operations for the years ended December
31, 1995 and 1994, respectively.
The debentures are convertible into common shares at any time prior to maturity
at a conversion rate of 53.6986 common shares per thousand dollars of debenture
principal subject to certain restrictions, including ownership limits and other
adjustments more fully described in the debentures' indenture agreement. In
addition, the debentures are subordinate to all senior indebtedness of the
Company and are redeemable by the Company, at their outstanding principal
amount, at any time on or after February 15, 1999.
At December 31, 1995, the Company was in compliance with the debentures
covenants which impose certain restrictions on the payment of dividends by the
Company in the event of certain defaults, except when the Company is required to
pay such dividends in order to maintain its REIT status.
5. BENEFIT PLANS
Share Option Plan
The Company has a share option plan (the "Share Option Plan") to provide
incentives to attract and retain officers and employees. The Share Option Plan
provides for grants of options to purchase a specified number of common shares,
awards of restricted common shares and grants of stock appreciation rights. The
total number of shares available to the Share Option Plan for such purposes is
350,000 Common Shares (45,000 of which have been reserved for awards to
non-employee directors). Options for 40,500 Common Shares were granted to
officers, directors and employees during 1995 with an exercise price of $15.00
per share. Options for a total of 190,050 Common Shares were granted to officers
and employees effective upon the consummation of initial public offerings. The
options are exercisable at the initial stock offering price of $18.25 per share
and are subject to varying vesting periods. No options were exercised during
1995 and 1994.
In February of 1995, 7,296 shares of restricted stock were issued to employees
as performance-based compensation. At the time the shares were issued, the
market price of the stock was $13.75 per share. The shares vest over a
three-year period.
F-13
<PAGE> 54
PACIFIC GULF PROPERTIES INC.
Notes to Consolidated and Combined Financial Statements (continued)
5. BENEFIT PLANS (continued)
Share Option Plan (continued)
In June of 1995, the Company issued 56,300 shares of restricted stock to certain
employees to replace substantially all of its liability to those employees
accrued under the existing deferred compensation agreements. Under the
restricted stock program, the 56,300 shares of stock issued vest over five to
twelve years and the Company's original obligation to the employees will be
satisfied through dividends and targeted appreciation in the value of the
shares. The value of the shares, totaling approximately $887,000 at the date of
grant, is being charged to compensation expense over the vesting period with the
unamortized portion reflected as outstanding restricted stock in the
shareholders' equity section. At the time the shares were issued, the market
price of the stock was $15.75 per share.
As of December 31, 1995, the unamortized amount of outstanding restricted stock
issued to employees which will be charged to compensation expense in future
periods totaled $669,000.
Retirement Income Plan
The Company has a defined benefit retirement plan for year-round employees who
are at least 21 years of age with one or more years of service. Plan assets
consist of investments in a life insurance group annuity contract. Plan benefits
are based primarily on years of service and qualifying compensation during the
final years of employment. Funding requirements comply with federal requirements
that are imposed by law. The Company assumed, in conjunction with the
establishment of it's Retirement Income Plan, the retirement plan obligations
attributable to employees associated with the Predecessor Multifamily and
Industrial Operations who were previously employed by Realty. The information
set forth below relates to the Company's retirement income plan.
The Company's net periodic pension cost includes amortization of past service
cost over a remaining period of 27 years. Based upon actuarial valuation dates
as of December 31, 1995 and 1994, the present values of accumulated plan
benefits were $459,000 and $436,000 (calculated using a discount rate of 7.5
percent), respectively, and the plan's net assets available for benefits were
$490,000 in 1995 and $385,000 in 1994.
F-14
<PAGE> 55
PACIFIC GULF PROPERTIES INC.
Notes to Consolidated and Combined Financial Statements (continued)
5. BENEFIT PLANS (continued)
Retirement Income Plan (continued)
The Company's net periodic pension cost for the year ended December 31, 1995 and
for the period February 18, 1994 through December 31, 1994 included the
following components:
<TABLE>
<CAPTION>
1995 1994
----------------------
<S> <C> <C>
Service cost $ 64,000 $ 33,000
Interest cost on projected benefit obligation 41,000 35,000
Expected return on plan assets (34,000) (23,000)
Amortization of unrecognized prior service costs
and unrecognized net obligation 8,000 6,000
----------------------
Net periodic pension cost $ 79,000 $ 51,000
======================
</TABLE>
The following table sets forth the funded status of the Company's retirement
income plan and the related amounts recognized in the December 31, 1995 and 1994
consolidated balance sheets:
Actuarial present value of accumulated benefit obligations as of December 31:
<TABLE>
<CAPTION>
1995 1994
------------------------
<S> <C> <C>
Vested $ 417,000 $ 413,000
Nonvested 42,000 23,000
------------------------
459,000 436,000
Additional amounts related to projected future
compensation levels 199,000 164,000
------------------------
Total actuarial projected benefit obligations for service rendered 658,000 600,000
Plan assets at fair value as of December 31 490,000 385,000
------------------------
Projected benefit obligations in excess of plan assets (168,000) (215,000)
Unrecognized net actuarial gain from difference in actual
experience from that assumed (18,000) 6,000
Initial unrecognized transition obligation being recognized
over 27 years 181,000 188,000
Additional minimum liability - (30,000)
------------------------
Accrued pension liability $ (5,000) $ (51,000)
========================
</TABLE>
F-15
<PAGE> 56
PACIFIC GULF PROPERTIES INC.
Notes to Consolidated and Combined Financial Statements (continued)
5. BENEFIT PLANS (continued)
Retirement Income Plan (continued)
Assumptions used in determining the status of the Company's retirement
income plan are as follows:
Weighted average discount rate 7.5%
Weighted average rate of increase in compensation levels 5.0%
Expected long-term rate of return on plan assets 8.5%
Deferred Compensation Agreements
At December 31, 1994, the Company had defined benefit deferred compensation
agreements which provided selected management employees with a fixed benefit at
retirement. The plan benefits were based primarily on years of service and
qualifying compensation during the final years of employment. In conjunction
with its initial public offerings, the Company assumed the deferred compensation
obligations attributable to employees who were previously employed by Realty.
During 1995, the deferred compensation agreements were substantially replaced
with restricted stock. (See "Share Option Plan.")
6. CONSOLIDATED REAL ESTATE PARTNERSHIP
In August 1995, the Company formed PGP Inland Communities, L.P., a Delaware
limited partnership (the "Partnership") for the purpose of acquiring and
operating 11 multifamily properties consisting of 1,368 apartment units located
in Southern California (the "Properties") which were contributed by unrelated
parties. In exchange for contributing the Properties to the Partnership, the
unrelated parties received limited partnership units representing an ownership
interest of approximately 22%. The Company is the sole general partner in the
Partnership and holds an ownership interest of approximately 78%. The terms of
the Partnership agreement provide that all net income (and cash flow) from the
Properties are to be allocated (distributed) to the Company until the Properties
have achieved a threshold net operating income of $6,200,000 for any given year,
and cumulatively for all prior years. The Partnership's results of operations in
1995 have been fully allocated to the Company.
F-16
<PAGE> 57
PACIFIC GULF PROPERTIES INC.
Notes to Consolidated and Combined Financial Statements (continued)
6. CONSOLIDATED REAL ESTATE PARTNERSHIP (continued)
Condensed financial information for the Partnership as of December 31, 1995 and
for the period August 16, 1995 (inception) through December 31, 1995 follows:
<TABLE>
<S> <C>
Real estate assets (multifamily properties)
Land $19,827,000
Buildings 52,149,000
-----------
71,976,000
Accumulated depreciation (442,000)
-----------
71,534,000
Cash and other assets 658,000
-----------
$72,192,000
===========
Liabilities (primarily tax-exempt mortgage debt of $24,850,000 and
mortgage notes of $30,182,000) $56,305,000
Partners' equity
The Company 12,369,000
Minority interests 3,518,000
-----------
15,887,000
-----------
$72,192,000
===========
Revenues 3,722,000
Expenses (including depreciation and amortization of
financing costs totaling $472,000) 3,537,000
-----------
Net income $ 185,000
===========
</TABLE>
7. COMMITMENTS AND CONTINGENCIES
The Company's commitments and contingencies include the usual obligations
of real estate owners and operators in the normal course of business. In
the opinion of management, these matters will not have a material adverse
effect on the Company's consolidated financial statements.
The current lessee of an undeveloped ten-acre parcel and of a 55,656 square foot
building in one of the Company's industrial parks, has options to purchase both
the ten-acre parcel and the building and land underlying the building under the
terms of its leases. The lessee has exercised its options under both agreements.
Pursuant to the leases, as amended, the sale of these properties is required to
close by July 4, 1996. If the sale closes, the anticipated sales prices for the
ten-acre parcel and the building are $4,500,000 and $3,195,000, respectively.
Subsequent to its exercise, the lessee has proposed a restructuring of existing
leases to defer the purchase and continue leasing the properties. Current annual
rentals received from the existing leases are approximately $721,000 and
$278,000, respectively.
F-17
<PAGE> 58
PACIFIC GULF PROPERTIES INC.
Notes to Consolidated and Combined Financial Statements (continued)
8. GAIN ON SALE OF PROPERTIES
In November 1995, the Company sold its Texas apartment portfolio to four
entities controlled by the same buyer. The Texas apartment portfolio consisted
of four properties containing 1,085 apartment units in San Antonio, Austin and
Houston, and represented the Company's entire holdings in the state of Texas.
The Company received consideration totaling $31,125,000: $30,125,000 in cash and
four notes receivable totaling $1,000,000. The notes receivable mature in seven
years, bear interest at 9%, require monthly interest-only payments and are
secured by limited partnership interests in the purchasing entities. Proceeds
from the sale were used to repay the mortgage notes payable secured by the Texas
apartment portfolio which totaled $14,438,000 and $2,000,000 of the Company's
revolving line of credit.
Gains on sales of properties are recognized by the Company when title to the
real estate passes to the buyer, an adequate down payment is received, the
collectibility of notes received from buyers is reasonably assured, and other
conditions necessary for gain recognition have been satisfied. Accordingly, the
Company recognized a gain utilizing the cost recovery method on the sale of the
Texas apartment portfolio totaling $6,664,000 (net of $1,000,000 deferred
gain). The deferred gain is presented as a reduction of the notes receivable
in the consolidated balance sheet.
9. INITIAL PUBLIC OFFERINGS AND FORMATION TRANSACTIONS
On February 18, 1994, the Company completed its initial public offerings of
3,900,000 shares of common stock (4,008,500 shares after exercise of
overallotment option) and $50,000,000 aggregate principal amount of 8.375%
Convertible Subordinated Debentures ($56,551,000 after exercise of overallotment
option). Prior to that date, the Company was a wholly owned subsidiary of
Realty. Proceeds raised by the Company totaled $64,214,000 (net of fees and
costs) from the stock offering and $55,420,000 (net of discount) from the
debenture offering.
On February 18, 1994, the Company acquired the Predecessor Multifamily and
Industrial Operations from Realty pursuant to a Purchase and Sale Agreement
between Realty and the Company dated November 15, 1993. The Predecessor
Multifamily and Industrial Operations consisted of ten multifamily properties
containing 2,654 apartments and three industrial properties containing an
aggregate of 185,000 leasable square feet and certain other assets and
liabilities of Realty, including the Company's headquarters. In connection with
the acquisitions from Realty, the Company paid $44,425,000 in cash (representing
the repayment of indebtedness outstanding on Realty's lines of credit related to
the Predecessor Multifamily and Industrial Operations), assumed $44,290,000 in
debt and other obligations (of which $29,025,000 was repaid with proceeds from
the initial public offerings) and issued 149,900 shares of common stock. In
October 1994, the Company acquired Realty's interest in the partnership that
owned Baldwin Industrial Park, which contains 623,000 leasable square feet of
industrial space, for 559,748 shares of common stock and issued 74,671 of common
stock shares to Realty as payment for the Company's corporate offices and
certain other assets. (The Company also acquired the interest of the other
partners in Baldwin Industrial Park for $9,760,000 of which $6,362,000 was paid
in 1994.) As a result of these transactions, Realty's
F-18
<PAGE> 59
PACIFIC GULF PROPERTIES INC.
Notes to Consolidated and Combined Financial Statements (continued)
9. INITIAL PUBLIC OFFERINGS AND FORMATION TRANSACTIONS (continued)
ownership interest in the Company was reduced to 16%. In connection with the
extinguishment of $29,500,000 of mortgage indebtedness referred to above, the
Company incurred nonrecurring debt repayment costs totaling $2,990,000 which
have been reflected as an extraordinary item in the consolidated and combined
statement of operations for the year ended December 31, 1994.
In February of 1995, the Company acquired the land underlying Baldwin Industrial
Park building and improvements for $3,454,000 in cash. At the time, the Company
also repaid a $889,000 loan to an unrelated third party which bore interest at
11.1% and was secured by a portion of the land. The Company's land acquisition
was pursuant to an option available under the Baldwin Industrial Park
partnership agreement.
The transactions discussed in the preceding paragraphs were part of a
strategic decision by Realty in 1993 to concentrate on its horse racing and
real estate operations located in Arcadia, California by disposing of its
multifamily and industrial properties. The formation of the Company and its
related acquisition of the Predecessor Multifamily and Industrial Operations
from Realty on February 18, 1994 resulted in Realty's disposal of all of its
multifamily and industrial properties. As a result of its 1993 strategic
decision to dispose of these properties, Realty recognized a loss of
$10,974,000 for the year ended December 31, 1993. The loss reduced Realty's
December 31, 1993 carrying value of the net assets to be transferred as part
of the formation transactions to their market value as determined by the
Company's initial public offering in February, 1994. The nonrecurring loss of
$10,974,000 has been reflected in the Company's 1993 combined statement of
operations for the Predecessor Multifamily and Industrial Operations and
the properties acquired in the formation transactions have been recorded by the
Company at Realty's historical cost basis which includes Realty's loss on the
formation transactions.
The Company also entered into a one-year management agreement with Realty, as
part of the formation transactions, under which the Company managed certain
properties owned by Realty that were not transferred to the Company. During
1994, the Company received $61,000 from Realty as payment for services performed
thereunder, which is shown in the consolidated financial statements as a
reduction of general and administrative expense. The Company terminated the
agreement in November 1994.
F-19
<PAGE> 60
PACIFIC GULF PROPERTIES INC.
Notes to Consolidated and Combined Financial Statements (continued)
10. SELECTED QUARTERLY DATA (UNAUDITED)
The following tables set forth the quarterly results of operations of the
Company for the year ended December 31, 1995 and for the period February 18,
1994 (the date the Company commenced operations upon completion of its initial
public offerings) through December 31, 1994:
<TABLE>
<CAPTION>
1995
--------------------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
--------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues $8,428,000 $8,409,000 $9,544,000 $10,710,000
Income before gain on sale of
properties $ 544,000 $ 529,000 $ 366,000 $ 300,000
Gain on sale of properties $ - $ - $ - $ 6,664,000
Net income $ 544,000 $ 529,000 $ 366,000 $ 6,964,000
Per common share data:
Income before gain on sale
of properties $ .11 $ .11 $ .08 $ .05
Net income $ .11 $ .11 $ .08 $ 1.44
</TABLE>
<TABLE>
<CAPTION>
1994
-----------------------------------------------------------
February 18
through Second Third Fourth
March 31, 1994 Quarter Quarter Quarter
-----------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues $ 2,733,000 $6,072,000 $6,838,000 $8,214,000
Income before extraordinary
item $ 458,000 $ 854,000 $ 794,000 $ 567,000
Extraordinary item -
extinguishment of debt $(2,990,000) $ - $ - $ -
Net income (loss) $(2,532,000) $ 854,000 $ 794,000 $ 567,000
Per common share data:
Income before
extraordinary item $ .11 $ .21 $ .19 $ .12
Net income (loss) $ (.61) $ .21 $ .19 $ .12
</TABLE>
F-20
<PAGE> 61
SCHEDULE III
PAGE 1 OF 2
PACIFIC GULF PROPERTIES INC.
REAL ESTATE AND ACCUMULATED DEPRECIATION
DECEMBER 31, 1995
(IN $000s)
<TABLE>
<CAPTION>
COSTS
CAPITALIZED
INITIAL COST SUBSEQUENT TO
TO COMPANY ACQUISITION GROSS AMOUNTS AT WHICH CARRIED AT CLOSE OF PERIOD
-------------------- LAND AND -------------------------------------------------
BUILDINGS AND BUILDING BUILDINGS AND ACCUMULATED
DESCRIPTION ENCUMBRANCES LAND IMPROVEMENTS IMPROVEMENTS LAND IMPROVEMENTS TOTAL DEPRECIATION
----------- ------------ ------- ------------- ------------ ---- ------------- --------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Multifamily Properties
California
Laguana Hills $ 4,787 $ 1,798 $ 5,981 $ 409 $ 1,798 $ 6,390 $ 8,188 $ 231
Santa Ana(h) 11,932 6,985 18,581 834 6,985 19,415 26,400 4,895
Santa Ana(h) -- 1,488 5,764 813 1,488 6,577 8,065 299
Covina 1,310 558 1,466 19 569 1,485 2,054 12
Diamond Bar 8,865 3,958 8,048 104 4,034 8,152 12,186 68
San Dimas 3,733 1,695 3,520 39 1,727 3,559 5,286 30
West Covina 9,170 3,856 9,848 124 3,930 9,972 13,902 82
San Dimas 5,897 2,390 6,123 90 2,436 6,213 8,649 52
San Dimas 1,207 432 1,312 20 440 1,332 1,772 11
Ontario 6,700 2,273 5,626 68 2,316 5,694 8,010 47
Ontario 7,690 2,654 5,671 60 2,705 5,731 8,436 47
San Dimas 5,670 1,306 5,448 48 1,331 5,496 6,827 46
Ontario 1,830 322 2,232 24 326 2,256 2,582 18
Ontario 2,960 385 3,223 33 391 3,256 3,646 29
Washington
Burien(i) 14,914 1,419 7,176 20 1,419 7,196 8,615 1,040
Burien 3,336 956 4,836 5 956 4,841 5,797 701
Everett(i) -- 3,254 7,171 34 3,254 7,205 10,459 1,494
Everett(i) -- 3,181 6,994 18 3,181 7,012 10,193 1,449
Kent(d) -- 2,635 10,709 244 2,635 10,953 13,588 438
Federal Way(d)(e) -- 2,876 9,646 64 2,895 9,710 12,605 21
Oregon
Beaverton 7,310 970 9,180 372 970 9,552 10,522 893
-------- ------- -------- ------- ------- --------- -------- -------
Total Multifamily 97,311 45,391 138,555 3,442 45,785 141,997 187,782 11,903
-------- ------- -------- ------- ------- --------- -------- -------
Industrial Properties
California
Baldwin Park 11,975 999 27,878 7,344(f) 4,453 31,868 36,321 6,612
Garden Grove(d) -- 4,230 4,564 230 4,230 4,794 9,024 189
Ontario 6,943 5,310 10,801 49 5,310 10,850 16,160 518
Rancho Cucamonga(d) -- 1,610 8,196 268 1,610 8,464 10,074 471
Rancho Cucamonga 1,000 1,666 3,367 110 1,666 3,477 5,143 95
Vista(d) -- 3,465 7,896 333 3,465 8,229 11,694 418
Washington
Seattle 4,684 1,808 4,637 149 1,808 4,786 6,594 1,233
Tukwila(e) 11,765 6,684 10,677 106 6,684 10,677 17,361 22
-------- ------- -------- ------- ------- --------- -------- -------
Total Industrial 36,367 25,772 78,016 8,589 29,226 83,145 112,371 9,558
-------- ------- -------- ------- ------- --------- -------- -------
Total Portfolio $133,678 $71,163 $216,571 $12,031 $75,011 $225,142 $300,153 $21,461
======== ======= ======== ======= ======= ========= ======== =======
<CAPTION>
Maximum
Life on Which
Depreciation in
Latest Income
Date of Date Statement is
Description Construction Acquired Computed
----------- ------------ -------- ---------------
<S> <C> <C> <C>
Multifamily Properties
California
Laguna Hills 1994 1994 40 Years
Santa Ana(h) 1972 1994 33 Years
Santa Ana(h) 1990 1994 40 Years
Covina 1977 1995 40 Years
Diamond Bar 1978-79 1995 40 Years
San Dimas 1979 1995 40 Years
West Covina 1981 1995 40 Years
San Dimas 1981 1995 40 Years
San Dimas 1981 1995 40 Years
Ontario 1983 1995 40 Years
Ontario 1982 1995 40 Years
San Dimas 1984 1995 40 Years
Ontario 1983 1995 40 Years
Ontario 1985 1995 40 Years
Washington
Burien(i) 1987 1994 37 Years
Burien 1987 1994 37 Years
Everett(i) 1986 1994 29 Years
Everett(i) 1988 1994 29 Years
Kent(d) 1987 1994 40 Years
Federal Way(d)(e) 1985, 1986 1995 40 Years
Oregon
Beaverton 1990 1994 38 Years
Total Multifamily
Industrial Properties
California
Baldwin Park 1986 1994 30 Years
Garden Grove(d) 1979 1994 40 Years
Ontario 1991 1994 40 Years
Rancho Cucamonga(d) 1990 1994 40 Years
Rancho Cucamonga 1981 1994 40 Years
Vista(d) 1990 1994 40 Years
Washington
Seattle 1968, 1981 1994 24 Years
Tukwila(e) 1975-1979 1995 40 Years
Total Industrial
Total Portfolio
</TABLE>
F-21
<PAGE> 62
<PAGE> 63
Schedule III
Page 2 of 2
PACIFIC GULF PROPERTIES INC.
REAL ESTATE AND ACCUMULATED DEPRECIATION
December 31, 1995
(in $000s)
<TABLE>
<CAPTION>
1995 1994 1993
-------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
(a) The changes in total real estate for the years ended December 31,
1995, 1994, and 1993 are as follows:
Balance at beginning of period $210,596 $106,601 $102,218
Acquisition of Baldwin Park(f) 7,228 28,877 --
Acquisition of PGP Inland portfolio 73,718 -- --
Other acquisitions and improvements(e) 32,717 75,500 15,323
Sale of Texas multifamily portfolio(g) (24,106) -- --
Reduction in carrying value of
Predecessor's properties(c) -- -- (10,862)
Other (382) (78)
-------- ------- -------
Balance at end of period $300,153 $210,596 $106,601
======== ======== ========
(b) The changes in accumulated depreciation for the years ended December 31, 1995,
1994 and 1993 are as follows:
Balance at beginning of period $ 17,139 $ 8,903 $ 6,304
Additions -- depreciation expense 5,908 3,745 2,719
Accumulated depreciation Baldwin Park at date of acquisition -- 4,873
Retirements -- Texas multifamily portfolio(g) (1,586) -- --
Other (382) (120)
-------- -------- --------
Balance at end of period $ 21,461 $ 17,139 $ 8,903
======== ======== ========
</TABLE>
(c) Excludes $112 relating to the Company's corporate offices acquired from
Realty which is included in other assets.
(d) These properties collateralize borrowings under the Company's revolving
bank line of credit which has an outstanding balance of $16,169 as of
December 31, 1995.
(e) During 1995, the Company purchased two new properties including a
multifamily property located in Federal Way, Washington and an
industrial property located in Tukwila, Washington.
(f) Includes $3,954 of costs relating to the purchase of land at Baldwin
Park (Note 9).
(g) During 1995, the Company disposed of its Texas apartment portfolio
(Note 8).
(h) These properties collateralize borrowings under the same mortgage note
payable totaling $11,932.
(i) These properties collateralize borrowings under the same mortgage note
payable totaling $14,914.
F-22
<PAGE> 1
CONSENT OF INDEPENDENT AUDITORS
Exhibit 23.1
We consent to the use of our report dated February 9, 1996, included in the
Annual Report (Form 10-K/A) of Pacific Gulf Properties Inc. for the year ended
December 31, 1995, with respect to the consolidated and combined financial
statements and related financial statement schedule, as amended, included in
this Form 10-K/A.
We also consent to the incorporation by reference in; (a) the Registration
Statement (Form S-8, No. 33-73688) pertaining to the Pacific Gulf Properties
Inc. Share Option Plan, and (b) the Registration Statement (Form S-3, No.
33-92082) pertaining to the Pacific Gulf Properties Inc. Dividend Reinvestment
Plan, of our report dated February 9, 1996, included in the Annual Report (Form
10-K/A) of Pacific Gulf Properties Inc. for the year ended December 31, 1995,
with respect to the consolidated and combined financial statements and related
financial statement schedule, as amended, referred to above.
Ernst & Young LLP
Newport Beach, California
May 20, 1996
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEUDLE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEETS AND CONSOLIDATED AND COMBINED STATEMENTS OF
OPERATIONS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS AS INCLUDED IN FORM 10-K/A.
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> DEC-31-1995
<EXCHANGE-RATE> 1
<CASH> 2,847
<SECURITIES> 0
<RECEIVABLES> 1,959
<ALLOWANCES> 1,000
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 300,153
<DEPRECIATION> 21,461
<TOTAL-ASSETS> 288,591
<CURRENT-LIABILITIES> 7,587
<BONDS> 205,506
0
0
<COMMON> 49
<OTHER-SE> 71,931
<TOTAL-LIABILITY-AND-EQUITY> 288,591
<SALES> 0
<TOTAL-REVENUES> 37,091
<CGS> 0
<TOTAL-COSTS> 21,743
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 13,609
<INCOME-PRETAX> 1,739
<INCOME-TAX> 0
<INCOME-CONTINUING> 1,739
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 8,403
<EPS-PRIMARY> 1.74
<EPS-DILUTED> 1.74
</TABLE>
