<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
for the quarterly period ended June 30, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES AND EXCHANGE ACT OF 1934
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 of Incorporation (I.R.S. Employer Identification No.)
4220 VON KARMAN, SECOND FLOOR, NEWPORT BEACH
CALIFORNIA 92660-2002 (Address of principal
executive offices, including zip code)
714-223-5000
(Registrant's telephone number, including area code)
COMMON STOCK, PAR VALUE $.01 PER SHARE, 14,261,754 SHARES
WERE OUTSTANDING AS OF August 1, 1997
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
----- -----
<PAGE> 2
PACIFIC GULF PROPERTIES INC.
FORM 10-Q
PART I: FINANCIAL INFORMATION
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
Item 1. Financial Statements
INDEX TO FINANCIAL STATEMENTS
Consolidated Balance Sheets as of June 30, 1997 and
December 31, 1996 1
Consolidated Statements of Operations for the Six
Months ended June 30, 1997 and June 30, 1996 2
Consolidated Statements of Operations for the Three
Months ended June 30, 1997 and June 30, 1996 3
Consolidated Statements of Cash Flows for the Six
Months ended June 30, 1997 and June 30, 1996 4
Notes to Financial Statements 5
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 7
PART II: OTHER INFORMATION 9
SIGNATURES 10
</TABLE>
<PAGE> 3
PACIFIC GULF PROPERTIES INC.
CONSOLIDATED BALANCE SHEETS
(in thousands except share data)
<TABLE>
<CAPTION>
June 30, December 31,
1997 1996
--------- ---------
(Unaudited) (Audited)
<S> <C> <C>
ASSETS
Real estate assets
Land $ 131,329 $ 111,253
Buildings 331,488 270,458
--------- ---------
462,817 381,711
Accumulated depreciation (33,691) (28,844)
--------- ---------
429,126 352,867
Cash and cash equivalents 14,008 1,523
Accounts receivable 2,266 2,125
Other assets 12,719 8,125
--------- ---------
$ 458,119 $ 364,640
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Loans payable $ 197,211 $ 197,401
Accounts payable and accrued liabilities 5,946 5,671
Dividends payable 5,962 4,001
Convertible subordinated debentures 12,959 14,227
--------- ---------
222,078 221,300
Minority interest in consolidated partnerships 8,395 3,518
Commitments and contingencies -- --
Shareholders' equity
Preferred shares, $.01 par value; 5,000,000 shares
authorized; 270,270 shares outstanding at June 30, 1997
and no shares outstanding at December 31, 1996 3 --
Common shares, $.01 par value; 25,000,000 shares
authorized; 14,261,453 at June 30, 1997 and 9,757,917
shares outstanding at December 31, 1996 143 98
Excess shares, $.01 par value; 30,000,000 shares
authorized; no shares outstanding -- --
Outstanding restricted stock (795) (877)
Additional paid-in capital 249,955 157,895
Distributions in excess of net earnings (21,660) (17,294)
--------- ---------
227,646 139,822
--------- ---------
$ 458,119 $ 364,640
========= =========
</TABLE>
See accompanying notes
1
<PAGE> 4
PACIFIC GULF PROPERTIES INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands except share data)
(UNAUDITED)
<TABLE>
<CAPTION>
Six Months Ended
June 30
--------------------
1997 1996
------- -------
<S> <C> <C>
REVENUES
Rental income
Industrial properties $15,230 $ 8,399
Multifamily properties 15,502 14,301
------- -------
30,732 22,700
EXPENSES
Rental property expenses
Industrial properties 3,679 2,078
Multifamily properties 5,996 5,693
------- -------
9,675 7,771
Depreciation 4,934 3,805
Interest (including amortization of debenture discount and
financing costs of $443 and $599 respectively) 7,952 8,831
General and administrative expenses 1,472 1,348
Minority partners' interest in earnings of consolidated
partnerships 20 --
------- -------
24,053 21,755
------- -------
INCOME BEFORE LOSS ON SALE OF REAL ESTATE 6,679 945
Loss on sale of real estate 111 --
------- -------
NET INCOME 6,568 945
Less: Preferred dividend requirements 115 --
------- -------
INCOME AVAILABLE TO COMMON SHAREHOLDERS $ 6,453 $ 945
======= =======
INCOME AVAILABLE PER COMMON SHARE $ 0.53 $ 0.18
======= =======
DIVIDENDS DECLARED PER COMMON SHARE $ 0.82 $ 0.80
======= =======
</TABLE>
See accompanying notes
2
<PAGE> 5
PACIFIC GULF PROPERTIES INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands except share data)
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months
Ended June 30
--------------------
1997 1996
------- -------
<S> <C> <C>
REVENUES
Rental income
Industrial properties $ 7,998 $ 4,614
Multifamily properties 7,921 7,250
------- -------
15,919 11,864
EXPENSES
Rental property expenses
Industrial properties 1,863 1,130
Multifamily properties 3,078 2,907
------- -------
4,941 4,037
Depreciation 2,578 1,969
Interest (including amortization of debenture discount and
financing costs of $221 and $322 respectively) 3,999 4,505
General and administrative expenses 784 701
Minority partners' interest in earnings of consolidated
partnerships 20 --
------- -------
12,322 11,212
------- -------
INCOME BEFORE LOSS ON SALE OF REAL ESTATE 3,597 652
Loss on sale of real estate 111 --
------- -------
NET INCOME 3,486 652
Less: Preferred dividend requirements 115 --
------- -------
INCOME AVAILABLE TO COMMON SHAREHOLDERS $ 3,371 $ 652
======= =======
INCOME AVAILABLE PER COMMON SHARE $ 0.27 $ 0.12
======= =======
DIVIDENDS DECLARED PER COMMON SHARE $ 0.41 $ 0.40
======= =======
</TABLE>
See accompanying notes
3
<PAGE> 6
PACIFIC GULF PROPERTIES INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(UNAUDITED)
<TABLE>
<CAPTION>
Six Months Ended
June 30
-----------------------
1997 1996
-------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Income available to common shareholders $ 6,453 $ 945
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation 4,934 3,805
Amortization of debenture discount
and financing costs 443 599
Compensation recognized related to restricted stock
issued to employees 82 61
Net decrease in other assets (1,813) (983)
Net increase in liabilities 275 1,707
-------- --------
Net cash provided by operating activities 10,374 6,134
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Net additions to real estate assets (81,106) (55,412)
Property and equipment, net (3,452) --
-------- --------
Net cash used in investing activities (84,558) (55,412)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from revolving line of credit 32,033 24,475
Repayment of revolving line of credit (45,719) (2,000)
Proceeds from mortgage notes payable 26,017 8,000
Repayment of mortgage notes payable (12,521) (3,564)
Debentures converted to common shares (1,267) --
Issuance of common shares 87,883 36,521
Issuance of preferred shares 4,224 --
Minority partners' interest in consolidated partnerships 4,877 --
Distributions paid (8,858) (3,886)
-------- --------
Net cash provided by financing activities 86,669 59,546
-------- --------
NET INCREASE IN CASH AND CASH
EQUIVALENTS 12,485 10,268
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 1,523 2,847
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 14,008 $ 13,115
======== ========
</TABLE>
See accompanying notes
4
<PAGE> 7
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
1. INTERIM FINANCIAL STATEMENTS
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. The consolidated financial statements include
the accounts of Pacific Gulf Properties Inc. (the "Company") and its
consolidated partnerships, PGP Inland Communities, L.P., PGP Von Karman
Properties, Terrace Gardens-PGP L.P. and Morning View Terrace-PGP L.P.
(the "Partnerships"). The information furnished has been prepared in
accordance with generally accepted accounting principles for interim
financial reporting and the instructions to Form 10-Q and Rule 10-01 of
Regulation S-X. Accordingly, certain information and footnote
disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been
condensed or omitted. Certain prior year amounts have been reclassified
to conform to the current year presentation. In the opinion of
management, all adjustments considered necessary for the fair
presentation of the Company's financial position, results of operations
and cash flows have been included. These financial statements should be
read in conjunction with the Company's Annual Report on Form 10-K for
the year ended December 31, 1996.
2. REAL ESTATE ACQUISITIONS AND DISPOSITIONS
In the first quarter of 1997, the Company used proceeds from a January
1997 public offering of its Common Shares to acquire four industrial
properties consisting of 1,091,372 leasable square feet for an
aggregate purchase price of $36,806,000. (See Note 5.) The properties
consist of two industrial locations in Southern California with
320,971 leasable square feet, one in Woodland, California with 570,000
leasable square feet, and one in Algona, Washington with 200,401
leasable square feet.
In May 1997, the Company acquired the Algona Distribution Center, a
vacant industrial distribution facility containing approximately
263,000 leasable square feet located in Algona, Washington for
approximately $8,750,000, which the Company financed with borrowings
under the Acquisition Facility (as defined in Note 9). The Company
anticipates spending up to $1,300,000 for capital improvements which
may include, subject to future tenant needs, installation of additional
dock-high doors, rehabilitation of the existing loading dock area and
tenant improvements. The Center is adjacent to the PGP Distribution
Center, which the Company acquired in January 1997.
Also in May 1997, the Company acquired a 12.8 acre land parcel located
in the Pacific Commerce Center in Lake Forest, California for
$3,500,000, which it financed with borrowings under the Acquisition
Facility. The Company anticipates that the site will be developed into
a multi-tenant industrial complex of buildings housing tenants in
spaces ranging in size from 3,500 to 15,000 square feet. The
preliminary plans anticipate approximately 204,000 leasable square feet
of 24 foot clear height buildings including both grade level loading
and dock-high loading. The Company has budgeted approximately
$8,800,000 million for development costs.
In June 1997, the Company acquired a controlling general partner
interest in two partnerships that own two active senior apartment
communities adjacent to each other located in Escondido, California.
The properties contain an aggregate of 551 studio, one-, and
two-bedroom apartment units. Following the acquisition, the Company
became the sole general partner of the existing limited partnerships
that own and manage the properties. The existing partners of the
partnerships received an aggregate of approximately 265,000 units of
limited partnership interests in such partnerships, which may be
tendered for redemption to the Company any time beginning, in most
cases, two years after the closing of the transaction. Upon tender, the
Company, at its election, may either issue common shares for the units
on a one-for-one basis (subject to certain adjustments) or pay cash for
the units based on the then fair market value of the common shares.
In June 1997, the Company sold its 7,000 square foot Corporate Office
in Newport Beach, California and relocated to a newly acquired 28,000
square foot facility also located in Newport Beach, California.
5
<PAGE> 8
In July 1997, the Company acquired a 1,532,000 square foot portfolio of
five industrial/distribution properties (the "LPIF Properties") for a
total purchase price of $67,250,000. See Note 9 for further discussion.
3. LOANS PAYABLE
The Company's loans payable at June 30, 1997 and December 31, 1996
consist of the following (in thousands):
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
Mortgage notes payable $195,523 $183,682
Construction loan 1,688 33
Revolving line of credit -- 13,686
-------- --------
$197,211 $197,401
======== ========
</TABLE>
4. CONVERTIBLE SUBORDINATED DEBENTURES
As of June 30, 1997, the Company's outstanding convertible subordinated
debentures totaled $12,959,000, net of unamortized discount of
$152,000. Conversion of all the outstanding debentures, which are
convertible into common shares at a rate of 53.6986 common shares per
$1,000 of principal amount of debentures, would require the issuance of
an additional 704,042 common shares. If the debentures were fully
converted, the net income attributable to each common share would not
be diluted. During the six months ended June 30, 1997, $1,326,000 in
aggregate principal amount of debentures ($1,267,000 net of discount)
were converted into 71,182 common shares.
5. SHAREHOLDERS' EQUITY
In January 1997, the Company received gross proceeds of approximately
$47,200,000 from the issuance of 2,300,000 common shares (including
proceeds from the issuance of 300,000 common shares pursuant to the
exercise of the underwriter's overallotment option) at a price of
$20.50 per share. The Company used the proceeds to fund the acquisition
of certain properties, to repay debt and for general corporate
purposes.
On December 31, 1996, the Company entered into an agreement to issue
1,351,351 shares of Class A Senior Cumulative Convertible Preferred
Stock (the "Class A Preferred Stock") to Five Arrows Realty Securities
L.L.C. ("Five Arrows") at a price of $18.50 per share over the course
of 1997 in a maximum of three separate issuances, the timing of which
may be specified by the Company. The Class A Preferred Stock is
convertible into common shares, on a one-for-one basis, subject to
adjustment upon certain events. The annual dividend per share on the
Class A Preferred Stock is $1.70 ($0.425 per share per quarter) from
the date of issuance until December 31, 1997 and thereafter, the
greater of $1.70 per share or 104% of the then current dividend on the
Company's common stock. At its option, the Company may redeem the Class
A Preferred Stock beginning December 31, 2001 for cash at a premium of
6% over the initial $18.50 per share liquidation value decreasing to
zero by December 31, 2009. The Class A Preferred Stock, or any shares
of common stock into which such Class A Preferred Stock could be
converted, are nontransferable until December 31, 1997. In April 1997,
the Company completed the sale of 270,270 shares of Class A Preferred
Stock at a price of $18.50 per share for aggregate proceeds of
$5,000,000.
On April 11, 1997, the Company's shelf registration statement on Form
S-3, which was filed in March 1997, was declared effective. The shelf
registration statement covers a maximum aggregate offering price of
$250,000,000 in Common Stock, Preferred Stock, debt securities and
warrants to purchase such securities.
In June 1997, the Company received gross proceeds of approximately
$44,800,000 from the issuance of 2,131,700 shares of Common Stock
(including proceeds from the issuance of 31,700 shares of Common Stock
sold pursuant to the exercise of the underwriter's overallotment
option) at a price of $21.00 per share. The Company used the proceeds
to repay debt and for general corporate purposes. See Note 9 for use of
proceeds related to the acquisition of the LPIF Properties purchased
subsequent to June 1997.
6
<PAGE> 9
In May 1997, the Company entered into a second agreement with Five
Arrows to issue 1,411,765 shares of Class B Senior Cumulative
Convertible Preferred Stock (the "Class B Preferred Stock") to Five
Arrows at a price of $21.25 per share over the course of 1997 in a
maximum of three separate issuances, the timing of which may be
specified by the Company. Upon each issuance of Class B Preferred
Stock, the Company is required to pay a transaction fee of $.75 per
share being issued. The terms of the Class B Preferred Stock are
substantially similar to those of the Class A Preferred Stock, except
that (i) the liquidation preference of the Class B Preferred Stock is
$21.25 per share (plus accumulated, accrued and unpaid dividends) and
(ii) Five Arrows will not be entitled to designate any additional
representatives to the Company's Board of Directors while it owns both
the Class A Preferred Stock and the Class B Preferred Stock. In July
1997, the Company completed the sale of 470,588 shares of Class B
Preferred Stock at a price of $21.25 per share for aggregate proceeds
of $10,000,000.
During the six months ended June 30, 1997, 654 shares of Common Stock
were issued through the Company's Dividend Reinvestment Program.
6. PER COMMON SHARE DATA
Per common share amounts are calculated based upon weighted average
common shares outstanding and common share equivalents of 12,089,603
and 5,263,212 for the six months ended June 30, 1997 and 1996,
respectively and 12,639,648 and 5,663,153 for the three months ended
June 30, 1997 and 1996, respectively. Common share equivalents include
stock options which are considered dilutive for the purposes of
computing primary earnings per share.
7. COMMON SHARE DISTRIBUTIONS AND PREFERRED STOCK DIVIDENDS
On June 11, 1997, the Company declared its quarterly distribution of
$.41 per common share covering shares outstanding at June 30, 1997.
Assuming the Board continues to declare quarterly distributions the
estimated annual distribution based on this amount would be $1.64. The
distribution was paid on July 11, 1997 to holders of record on July 1,
1997.
Preferred stock dividends of $115,000 related to the 270,270 shares of
Class A Preferred Stock issued by the Company in April 1997 have been
accrued through June 30, 1997 at the rate of $0.425 per share per
quarter.
8. INTEREST
Interest incurred for the six months ended June 30 consists of the
following (in thousands):
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Interest $7,509 $8,232
Amortization:
Debenture discount and costs 71 285
Costs related to financing assumed from the
Company's Predecessor and line of credit costs 205 184
Long-term financing costs 167 130
------ ------
$7,952 $8,831
====== ======
</TABLE>
7
<PAGE> 10
9. SUBSEQUENT EVENTS
On July 18, 1997, the Company purchased five industrial/distribution
properties containing approximately 1,532,000 leasable square feet
located in California markets where the Company has existing
management. The properties were purchased from Lincoln Pacific
Industrial Fund for a total consideration of $67,250,000. The Company
funded the purchase with $41,625,000 in borrowings under an unsecured
credit facility established by the Company for acquisition purposes
(the "Acquisition Facility"), and $12,000,000 in borrowings under the
Company's revolving line of credit together with $10,000,000 in net
proceeds from the issuance of 470,588 shares of Class B Preferred Stock
shares and available cash. (See Note 5) See Current Report on Form 8-K
filed in August 1997 for further discussion.
8
<PAGE> 11
PACIFIC GULF PROPERTIES INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion addresses the consolidated financial statements of the
Company for the three and six months ended June 30, 1997 and 1996, together with
liquidity and capital resources as of June 30, 1997.
COMPARISON OF THE SIX MONTHS ENDED JUNE 30, 1997 TO THE SIX MONTHS ENDED JUNE
30, 1996
Industrial rental income increased by $6,831,000, or 81%, from $8,399,000 in
1996 to $15,230,000 in 1997. This increase was primarily attributable to the
acquisition of sixteen industrial parks containing approximately 3,145,000
square feet of leasable area in 1996 and 1997. Multifamily rental income
increased by $1,201,000, or 8%, from $14,301,000 in 1996 to $15,502,000 in 1997.
This increase was primarily attributable to an increase in rental rates and to
the acquisition of multifamily properties containing 716 apartment units during
the fourth quarter of 1996 and the second quarter of 1997. As a result of these
changes, total revenues increased by $8,032,000, or 35%, from $22,700,000 in
1996 to $30,732,000 in 1997.
Industrial rental income for the six months ended June 30, 1997 totaled
$15,230,000 and included $7,466,000 related to the acquisition of industrial
parks since June of 1996.
Multifamily rental income for the six months ended June 30, 1997 totaled
$15,502,000 and included $715,000 related to multifamily properties acquired
during the fourth quarter of 1996 and second quarter of 1997.
Industrial rental property expenses increased $1,601,000, or 77%, from
$2,078,000 in 1996 to $3,679,000 in 1997. This increase was primarily
attributable to the acquisition of the above referenced industrial parks.
Multifamily rental property expenses increased by $303,000, or 5%, from
$5,693,000 in 1996 to $5,996,000 in 1997. This increase was primarily
attributable to the acquisition of multifamily properties containing 716
apartment units during the fourth quarter of 1996 and the second quarter of
1997.
Industrial rental property expenses for the six months ended June 30, 1997
totaled $3,679,000 and included $1,870,000 related to industrial parks acquired
since June 30, 1996.
Multifamily rental property expenses for the six months ended June 30, 1997
totaled $5,996,000 and included $262,000 related to multifamily properties
acquired during the fourth quarter of 1996 and the second quarter of 1997.
Total depreciation increased by $1,129,000, or 30%, from $3,805,000 in 1996 to
$4,934,000 in 1997. This increase was primarily attributable to additional
depreciation relating to the acquisition of sixteen industrial parks, three
multifamily properties, and capital improvements made to rehabilitate existing
properties.
Interest expense (including amortization of debenture discount and financing
costs) decreased by $879,000, or 10%, from $8,831,000 in 1996 to $7,952,000 in
1997. This decrease was primarily attributable to a decrease in convertible
subordinated debentures outstanding, offset by an increase in outstanding
borrowings due to new acquisitions made during 1996 and 1997.
General and administrative expenses increased by $124,000, or 9%, from
$1,348,000 in 1996 to $1,472,000 in 1997. This increase was primarily
attributable to personnel increases related to acquisitions made during the
second half of 1996 and in 1997.
Minority partners' interest in earnings of consolidated partnerships was $20,000
in 1997 due to the June 1997 acquisition of a controlling general partner
interest in the two partnerships that own the senior apartments (see Note 2).
A loss on the sale of real estate in the amount of $111,000 was recorded in the
1997 period, with no corresponding charge in the comparable period for 1996 (see
Note 2).
9
<PAGE> 12
COMPARISON OF THE THREE MONTHS ENDED JUNE 30, 1997 TO THE THREE MONTHS ENDED
JUNE 30, 1996
Industrial rental income increased by $3,384,000, or 73%, from $4,614,000 in
1996 to $7,998,000 in 1997. This increase was primarily attributable to the
acquisition of sixteen industrial parks containing approximately 3,145,000
square feet of leasable area in 1996 and 1997. Multifamily rental income
increased by $671,000, or 9%, from $7,250,000 in 1996 to $7,921,000 in 1997.
This increase was primarily attributable to an increase in rental rates and to
the acquisition of multifamily properties containing 716 apartment units during
the fourth quarter of 1996 and the second quarter of 1997. As a result of these
changes, total revenues increased by $4,055,000, or 34%, from $11,864,000 in
1996 to $15,919,000 in 1997.
Industrial rental income for the three months ended June 30, 1997 totaled
$7,998,000 and included $4,095,000 related to the acquisitions of industrial
parks since June of 1996.
Multifamily rental income for the three months ended June 30, 1997 totaled
$7,921,000 and included $454,000 related to the multifamily properties acquired
during the fourth quarter of 1996 and the second quarter of 1997.
Industrial rental property expenses increased $733,000, or 65%, from $1,130,000
in 1996 to $1,863,000 in 1997. This increase was primarily attributable to the
acquisition of the above referenced industrial parks. Multifamily rental
property expenses increased by $171,000, or 6%, from $2,907,000 in 1996 to
$3,078,000 in 1997. This increase was primarily attributable to the acquisition
of multifamily properties containing 716 apartment units during the fourth
quarter of 1996 and the second quarter of 1997.
Industrial rental property expenses for the three months ended June 30, 1997
totaled $1,863,000 and included $956,000 related to industrial parks acquired
since June 30, 1996.
Multifamily rental property expenses for the three months ended June 30, 1997
totaled $3,078,000 and included $150,000 related to multifamily properties
acquired during the fourth quarter of 1996 and the second quarter of 1997.
Total depreciation increased by $609,000, or 31%, from $1,969,000 in 1996 to
$2,578,000 in 1997. This increase was primarily attributable to additional
depreciation relating to the acquisition of sixteen industrial parks, three
multifamily properties, and capital improvements made to rehabilitate existing
properties.
Interest expense (including amortization of debenture discount and financing
costs) decreased by $506,000, or 11%, from $4,505,000 in 1996 to $3,999,000 in
1997. This decrease was primarily attributable to a decrease in convertible
subordinated debentures outstanding, offset by an increase in outstanding
borrowings due to new acquisitions made during 1996 and 1997.
General and administrative expenses increased by $83,000, or 12%, from $701,000
in 1996 to $784,000 in 1997. This increase was primarily attributable to
personnel increases related to acquisitions made during the second half of 1996
and in 1997.
Minority partners' interest in earnings of consolidated partnerships was $20,000
in 1997 due to the June 1997 acquisition of a controlling general partner
interest in the two partnerships that own the senior apartments (see Note 2).
A loss on the sale of real estate in the amount of $111,000 was recorded in the
1997 period, with no corresponding charge in the comparable period for 1996 (see
Note 2).
10
<PAGE> 13
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 1997, the Company had $14,008,000 of cash to meet its immediate
short-term liquidity requirements and to fund the purchase of future
acquisitions. Future short-term liquidity requirements are anticipated to be met
through net cash flow from operations, existing working capital, Preferred Stock
issuances to Five Arrows and, if necessary, funding from the Company's revolving
line of credit. The Company has a secured revolving line of credit ("Line of
Credit") from Bank of America (the "Bank") for a maximum amount of $65,000,000
which expires in July, 1998. As of June 30, 1997, the Company had no outstanding
balance under the revolving line of credit.
The Company has obtained an unsecured credit facility (the "Acquisition
Facility") from Bank of America which provides up to $35,000,000 for the
acquisition of qualifying properties and $33,625,000 for the acquisition of LPIF
Properties. The Acquisition Facility has a term of six months, bears interest at
a rate of LIBOR plus 2.00% and provides that up to 50% of the acquisition costs
actually paid by the Company may be funded by the facility. The Acquisition
Facility also provides that the proceeds will be repaid, at the Company's
option, either by drawings on the existing Line of Credit and adding the related
property to the Line of Credit's collateral pool or by the company obtaining
real estate financing or other funds to repay the Acquisition Facility. Any
amounts borrowed under the Acquisition Facility, excluding the borrowing related
to the LPIF Properties acquisition, reduce amounts available under the Line of
Credit. As of June 30, 1997, the Acquisition Facility had no outstanding
balance.
The Company intends to acquire additional properties and may seek to fund these
acquisitions through proceeds received from a combination of its Line of Credit,
Acquisition Facility, Class A Preferred Stock, Class B Preferred Stock,
equity offerings or debt financings, but no assurance can be given that any
acquisitions will be completed.
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.
Cash provided by operating activities increased from $6,134,000 for the period
ended June 30, 1996 to $10,374,000 for the period ended June 30, 1997. The
primary reason for these increases related to the additional rental income
contributed by properties acquired during 1996 and 1997.
Cash used in investing activities increased from $55,412,000 for the period
ended June 30, 1996 to $84,558,000 for the period ended June 30, 1997 as a
result of acquisitions, offset by the disposal of property.
Cash provided by financing activities increased from $59,546,000 for the period
ended June 30, 1996 to $86,669,000 for the year ended June 30, 1997 primarily as
a result of the issuance of Common Stock from a stock offering and the
conversion of debentures in 1997.
The Company has an agreement with an investor to issue 1,351,351 shares of Class
A Senior Cumulative Convertible Preferred Stock at a price of $18.50. During
April 1997, the Company, pursuant to this agreement, issued 270,270 shares of
Class A Senior Cumulative Convertible Preferred Stock raising gross proceeds of
$5,000,000 (see Note 5 for additional information). The proceeds were used to
pay off a portion of a mortgage note totaling $7,200,000 and general corporate
purposes.
In May 1997, the Company entered into a second agreement with an investor to
issue 1,411,765 shares of Class B Senior Cumulative Convertible Preferred Stock
at a price of $21.25. During July 1997, the Company, pursuant to this agreement,
issued 470,588 shares of Class B Senior Cumulative Convertible Preferred Stock
raising gross proceeds of $10,000,000 (see Note 5 for additional information).
The proceeds were used together with funds from other sources to acquire an
industrial portfolio consisting of five properties with over 1.5 million square
feet.
The immediately preceding paragraphs contain forward looking information
involving risks and uncertainties that could significantly impact the Company's
expected liquidity requirements in the short and long term. While it is
impossible to itemize the many factors and specific events that could affect the
Company's outlook for its liquidity requirements, such factors would include the
11
<PAGE> 14
actual timing of and costs associated with the Company's acquisitions, the
actual capital expenditures associated therewith, and the strength of the local
economies of the submarkets in which the Company operates. Higher than expected
acquisition, rental and/or rehabilitation costs, delays in the rehabilitation of
properties, a downturn in the local economies, competition and/or the lack of
growth of such economies could reduce the Company's revenues and increase its
expenses, resulting in a greater burden on the Company's liquidity than that
which the Company has described above.
12
<PAGE> 15
PART II: OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES
The Company has entered into agreements to issue 1,351,351
shares of Class A Senior Cumulative Convertible Preferred
Stock and 1,411,765 shares of Class B Senior Cumulative
Convertible Preferred Stock as more fully discussed in
footnote 5 of this Form 10-Q, Form 8-K/A filed on January 17,
1997 and Form 8-K filed on June 26, 1997.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Annual Meeting of Shareholders of the Company was held May
7, 1997, for the purpose of electing three members to the
Board of Directors and to approve an amendment to the
Company's 1993 Share Option Plan to (i) increase the aggregate
number of Common Shares authorized for issuance under such
plan by 350,000 shares (105,000 of which will be reserved for
issuance to non-employee directors) to 1,050,000 shares; (ii)
increase the size of the stock option awarded to non-employee
directors upon their initial election or appointment to the
Board from an option to purchase 2,500 shares of the Company's
Common Stock to an option to purchase 5,000 shares of the
Company's Common Stock; (iii) increase the size of the
automatic stock option annually awarded to each non-employee
directors from an option to purchase 500 shares of the
Company's Common Stock to an option to purchase 4,000 shares
of the Company's Common Stock; and (iv) grant incumbent
directors a one time option to purchase 2,500 shares of the
Company's Common Stock (the "Amendment"). Present in person
and represented by proxy were 10,761,296 shares.
Management's nominees for directors as listed in the proxy
statement were elected with the following vote:
<TABLE>
<CAPTION>
Shares Voted Shares
"For" "Withheld"
---------- ----------
<S> <C> <C>
Peter L. Eppinga 10,667,105 94,191
John F. Kooken 10,667,030 94,266
Robert E. Morgan 10,664,330 94,966
</TABLE>
Continuing directors are as follows:
Glenn L. Carpenter
Keith Renken
Royce B. McKinley
James E. Quigley, 3rd
Carl C. Gregory, 3rd
The Amendment was approved with the following vote:
<TABLE>
<CAPTION>
Shares Voted Shares Voted Shares Voted
"For" "Against" "Abstained" Non-Votes
----- --------- ----------- ---------
<S> <C> <C> <C>
9,036,763 843,609 89,740 791,184
</TABLE>
13
<PAGE> 16
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit 10.35 - Articles Supplementary, dated June 1997, classifying
1,411,765 shares of Preferred Stock as Class B Senior
Cumulative Convertible Preferred Stock of the Company
(Incorporated by reference from the Company's Current
Report on Form 8-K filed on June 26, 1997).
Exhibit 27 - Financial Data Schedule.
(b) Reports on Form 8-K
During the quarter ended June 30, 1997, the Company filed five Current
Reports on Form 8-K. On April 16, 1997, the Company filed a Report on
Form 8-K, reporting under Item 7. On May 29, 1997, the Company filed a
Report on Form 8-K, reporting under Items 2 and 7. On June 9, 1997, the
Company filed a Report on form 8-K/A, reporting under Items 2, 5 and 7.
On June 10, 1997, the Company filed a Report on Form 8-K reporting
under Items 5 and 7. On June 26, 1997, the Company filed a Report on
form 8-K reporting under Items 5 and 7.
14
<PAGE> 17
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PACIFIC GULF PROPERTIES INC.
/s/ Glenn L. Carpenter /s/ Donald G. Herrman
- ------------------------------------ ------------------------------------
Glenn L. Carpenter Donald G. Herrman
Chairman and Chief Executive Officer Chief Financial Officer and Secretary
DATED: August 13, 1997
----------------
15
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<CASH> 14,008
<SECURITIES> 0
<RECEIVABLES> 3,266
<ALLOWANCES> 1,000
<INVENTORY> 0
<CURRENT-ASSETS> 16,274
<PP&E> 462,817
<DEPRECIATION> 33,691
<TOTAL-ASSETS> 458,119
<CURRENT-LIABILITIES> 11,908
<BONDS> 210,170
0
3
<COMMON> 143
<OTHER-SE> 227,500
<TOTAL-LIABILITY-AND-EQUITY> 458,119
<SALES> 0
<TOTAL-REVENUES> 30,732
<CGS> 0
<TOTAL-COSTS> 16,081
<OTHER-EXPENSES> 20
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 7,952
<INCOME-PRETAX> 6,679
<INCOME-TAX> 0
<INCOME-CONTINUING> 6,679
<DISCONTINUED> 0
<EXTRAORDINARY> 111
<CHANGES> 0
<NET-INCOME> 6,453
<EPS-PRIMARY> 0.53
<EPS-DILUTED> 0.53
</TABLE>
