Exhibit 99.2
Report of Independent Public Accountants
To the Partners of Rincon Center Associates,
a California Limited Partnership:
We have audited the accompanying balance sheets of Rincon Center Associates (a
California Limited Partnership) as of December 31, 1998 and 1997, and the
related statements of operations, changes in partners' deficit and cash flows
for each of the three years ended December 31, 1998. These financial statements
are the responsibility of the Partnership's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Rincon Center Associates, a
California Limited Partnership as of December 31, 1998 and 1997, and the results
of its operations and its cash flows for each of the three years ended
December 31, 1998, in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Boston, Massachusetts
February 23, 1999
Exhibit 99.2
Rincon Center Associates
A California Limited Partnership
Balance Sheets December 31, 1998 and 1997
Assets
1998 1997
---- ----
Cash $ 4,925,000 $ 4,720,000
Accounts Receivable 80,000 219,000
Deferred Rent Receivable 272,000 259,000
Notes Receivable, net of reserves of $14,214,000 at December 31, 1997 and 1998 - 23,000
Real Estate Used in Operations, net 104,043,000 107,045,000
Other Assets, net 2,734,000 1,636,000
--------------- ---------------
Total assets $ 112,054,000 $ 113,902,000
=============== ===============
Liabilities and Partners'Deficit
Construction Notes Payable $ 45,788,000 $ 49,228,000
Accounts Payable and Accrued Liabilities 9,913,000 5,666,000
Accrued Ground Rent Liability, net 5,773,000 6,011,000
Accrued Lease Liability, net - 101,000
Deferred Income 883,000 945,000
Accrued Interest due to General Partners 82,456,000 70,776,000
Due to Perini Land and Development Company 92,550,000 89,296,000
Due to Pacific Gateway Properties, Inc. 26,112,000 25,136,000
--------------- ---------------
Total liabilities 263,475,000 247,159,000
Commitments and Contingencies (Notes 3, 5 and 6)
Partners' Deficit (151,421,000) (133,257,000)
--------------- ---------------
Total liabilities and partners' deficit $ 112,054,000 $ 113,902,000
=============== ===============
The accompanying notes are an integral part of these financial statements.
1
Exhibit 99.2
RINCON CENTER ASSOCIATES
A CALIFORNIA LIMITED PARTNERSHIP
Statements of Operations
for the Three Years Ended December 31, 1998, 1997 and 1996
1998 1997 1996
---- ---- ----
Revenue:
Rental income $ 17,374,000 $ 13,862,000 $ 17,891,000
Parking and other income 1,615,000 1,469,000 1,304,000
--------------- --------------- ---------------
Total revenue 18,989,000 15,331,000 19,195,000
--------------- --------------- ---------------
Expenses:
Operating 5,120,000 4,520,000 4,668,000
Administrative and other 909,000 1,665,000 1,447,000
Property taxes and insurance 2,868,000 2,424,000 2,115,000
Leases 6,318,000 6,168,000 6,128,000
Ground rent 4,611,000 4,652,000 4,656,000
Interest and letter-of-credit fees 14,664,000 15,017,000 14,217,000
Depreciation and amortization 2,706,000 3,160,000 3,925,000
--------------- --------------- ---------------
Total expenses 37,196,000 37,606,000 37,156,000
--------------- --------------- ---------------
Net loss from operations (18,207,000) (22,275,000) (17,961,000)
Write-Down of Assets Related to Rincon I, operating lease - (17,150,000) -
Interest Income 43,000 1,502,000 1,510,000
--------------- --------------- ---------------
Net loss $ (18,164,000) $ (37,923,000) $ (16,451,000)
=============== =============== ===============
The accompanying notes are an integral part of these financial statements.
3
Exhibit 99.2
Rincon Center Associates
A California Limited Partnership
Statements of Changes in Partners' Deficit
for the Three Years Ended December 31, 1998, 1997 and 1996
General Limited
Partners Partners Total
-------- -------- -----
Balance, December 31, 1995 $ (39,386,000) $ (39,497,000) $ (78,883,000)
Net loss (8,242,000) (8,209,000) (16,451,000)
---------------- ---------------- ----------------
Balance, December 31, 1996 (47,628,000) (47,706,000) (95,334,000)
Net loss (19,134,000) (18,789,000) (37,923,000)
---------------- ---------------- ----------------
Balance, December 31, 1997 (66,762,000) (66,495,000) (133,257,000)
Net loss (9,100,000) (9,064,000) (18,164,000)
---------------- ---------------- ----------------
Balance, December 31, 1998 $ (75,862,000) $ (75,559,000) $ (151,421,000)
================ ================ ================
Partners' Percentage Interest 50.1% 49.9% 100.0%
===== ===== ======
The accompanying notes are an integral part of these financial statements.
4
Exhibit 99.2
Rincon Center Associates
A California Limited Partnership
Statements of Cash Flows
for the Three Years Ended December 31, 1998, 1997 and 1996
1998 1997 1996
---- ---- ----
Cash Flows from Operating Activities:
Net loss $ (18,164,000) $ (37,923,000) $ (16,451,000)
Adjustments to reconcile net loss to net cash used in
operating activities -
Write-off/disposition of Rincon I - 17,150,000 -
Depreciation and amortization 2,706,000 3,160,000 3,925,000
Amortization of deferred income (62,000) (61,000) (62,000)
Decrease in accounts receivable 139,000 455,000 47,000
(Increase) decrease in deferred rent receivable (13,000) 2,372,000 2,363,000
Increase in other assets (1,098,000) (281,000) (1,596,000)
Increase in accounts payable and accrued liabilities 4,247,000 848,000 551,000
Decrease in accrued ground rent liability (238,000) (159,000) (209,000)
(Decrease) increase in accrued lease liability (101,000) (607,000) 170,000
Increase in accrued interest due to general partners 11,680,000 10,792,000 9,167,000
---------------- ---------------- ---------------
Net cash used in operating activities (904,000) (4,254,000) (2,095,000)
---------------- ---------------- ---------------
Cash Flows from Investing Activities:
Reimbursement of (expenditure) on real estate used in
operations, net 296,000 (909,000) (408,000)
Additions to leasehold improvements - (143,000) (61,000)
Payments on notes receivable 23,000 398,000 331,000
---------------- ---------------- ---------------
Net cash provided by (used in) investing activities 319,000 (654,000) (138,000)
---------------- ---------------- ---------------
Cash Flows from Financing Activities:
Payments on construction notes payable (3,440,000) (6,784,000) (2,708,000)
Advances from general partners 4,230,000 16,260,000 4,954,000
---------------- ---------------- ---------------
Net cash provided by financing activities 790,000 9,476,000 2,246,000
Increase in Cash 205,000 4,568,000 13,000
Cash, beginning of year 4,720,000 152,000 139,000
---------------- ---------------- ---------------
Cash, end of year $ 4,925,000 $ 4,720,000 $ 152,000
================ ================ ================
The accompanying notes are an integral part of these financial statements.
5
Exhibit 99.2
RINCON CENTER ASSOCIATES
A CALIFORNIA LIMITED PARTNERSHIP
Notes to Financial Statements
December 31, 1998
(1) Partnership Organization
Rincon Center Associates, a California Limited Partnership (the
Partnership), was formed on September 18, 1984 to lease and develop land
and buildings located in the Rincon Point-South Beach Redevelopment
Project Area in the City and County of San Francisco, California. The
Rincon Center Project (the Project) comprises commercial and retail
space, 320 rental housing units and associated off-street parking. The
Project was developed in two distinct segments: Rincon I and Rincon II.
Profits and losses are shared by the partners in accordance with their
percentage interest as provided in the partnership agreement and as
shown in the accompanying statements of changes in partners' deficit.
Cash profits, as determined by the managing general partner, are
distributed to the partners in the same percentage interest.
Perini Land and Development Company (PL&D) is the managing general
partner of the Partnership and has the responsibility for general
management, administration and control of the Partnership's property,
business and affairs. In addition, PL&D provides project and general
accounting services to the Partnership (Note 7). Pacific Gateway
Properties, Inc. (PGP), formerly Perini Investment Properties, Inc., is
the other general partner.
(2) Summary of Significant Accounting Policies
Basis of Accounting
The accompanying financial statements have been prepared using the
accrual basis of accounting.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. The most significant estimates with regard
to these financial statements relate to the estimating of net realizable
value of real estate used in operations and the potential liability in
conjunction with certain contingencies and commitments. Actual results
could differ from these estimates.
6
Exhibit 99.2
RINCON CENTER ASSOCIATES
A CALIFORNIA LIMITED PARTNERSHIP
Notes to Financial Statements
December 31, 1998
(Continued)
Real Estate Used in Operations
Real estate used in operations includes all costs capitalized during the
development of the Project. These costs include interest and financing
costs, ground rent expense during construction, property taxes, tenant
improvements and other capitalizable overhead costs. This real estate
investment is stated at the lower of cost or market when there is a
permanent impairment in the carrying value of the investment. Impairment
in the carrying value of the properties is measured by estimating the
future cash flows expected to result from the properties in the ordinary
course of business and the eventual sale of the properties.
Depreciation and Amortization
The Partnership uses the straight-line method of depreciation. The
significant asset groups and their estimated useful lives are comprised
of the following:
Structural components of buildings 60 years
Nonstructural components of buildings 25 years
All other depreciable assets 3-30 years
Leasehold improvements are amortized using the straight-line method over
the shorter of their useful lives or the lease terms.
Income Taxes
In accordance with federal and state income tax regulations, no income
taxes are levied on the Partnership; rather, such taxes are levied on
the individual partners. Consequently, no provision or liability for
federal or state income taxes is reflected in the accompanying financial
statements.
Rental Income
Certain lease agreements provide for periods of free rent or stepped
increases in rent over the lease term. In such cases, revenue is
recognized at a constant rate over the term of the lease. Amounts
recognized as income but not yet due under the terms of the leases are
shown in the accompanying balance sheets as deferred rent receivable.
Statements of Cash Flows
7
Exhibit 99.2
RINCON CENTER ASSOCIATES
A CALIFORNIA LIMITED PARTNERSHIP
Notes to Financial Statements
December 31, 1998
(Continued)
Cash paid for interest was $1,986,000, $2,312,000 and $2,372,000 in
1998, 1997 and 1996, respectively.
Accrued Lease Liability
The Partnership is leasing Rincon I from Chrysler McNally (Chrysler)
over a 25-year lease term (Note 3). In connection with this lease, the
Partnership was granted a free rent concession for one year. The intent
of Chrysler's free rent provision was to match a similar provision
granted by the Partnership to an anchor sublease tenant of Rincon I,
whose lease is for 10 years. The Partnership expensed rent in the first
year of the lease and amortized the accrued lease liability related to
Rincon I over 10 years through 1993 and is amortizing the remaining
balance over 50 months effective January 1, 1994 to match the expense
with the revenue recorded on the sublease.
Three amendments to the master lease agreement were made in 1993 in
connection with the extension of Chrysler's existing financing on the
property (Note 3). The rent schedule was revised, which resulted in
adjustments to the accrued lease liability in order to normalize the
rent expense over the remaining lease term.
Other Assets
Other assets include prepaid expenses, deferred lease commissions and
fixed assets. Deferred lease commissions are amortized over the life of
the lease. Fixed assets are depreciated over the life of the asset,
which is generally five years.
(3) Operating Lease, Rincon I
On June 24, 1988, the Partnership sold Rincon I to Chrysler and
subsequently leased the property back under a master lease with a basic
term of 25 years, with four five-year renewal options at the
Partnership's discretion. The transaction was accounted for as a sale
and operating leaseback, and the gain on the sale of $1,540,000 was
deferred and is currently being amortized over a 25-year period, which
is recorded as a reduction to expenses-leases in the accompanying
statements of operations.
As part of the sale operating lease-back of Rincon I, the Partnership
agreed to obtain a financial commitment on behalf of the lessor to
replace at least $43 million of long-term financing by July 1, 1993. To
satisfy this obligation, the Partnership successfully extended existing
financing to July 1, 1998. To complete the extension, the Partnership
had to advance funds to the lessor sufficient to reduce the financing
from $46.5 million to $40.5 million. Subsequent payments through 1998
have further reduced the loan to $33.1 million. Under the master lease,
if by January 1, 1998, a further extension or new commitment for
financing on the property for at least $33 million had not been
arranged, then the Partnership is deemed to have offered to purchase the
property for approximately $18.8 million in excess of the then
outstanding debt. As of that date, no new commitment had been secured
although negotiations with the current lender were in progress. In order
to allow those discussions to continue, the lessor agreed to temporarily
delay the enforcement of the purchase requirement. The lessor has issued
a notice of default in order to preserve its rights, but has agreed
temporarily to delay the exercise of any remedies in order to facilitate
a continuation of the parties' discussions. Since January 1, 1998, the
Partnership, the lessor and the lender have reached a nonbinding
agreement on a restructure of the existing financing. The agreement is
subject to final documentation and final approvals of several parties.
The agreement provides, among other things, that the Partnership give up
all of its economic interest in the commercial and retail portion of the
property identified as Rincon I, and that the Partnership make a
one-time payment of $7.5 million to the lessor of Rincon I (which
includes a final loan payment of $6.5 million to the lenders of Rincon
I). The agreement would also release the Partnership from all future
liabilities under the master lease, including the obligation to
repurchase that segment of the property. As a result, the Partnership
has written-down the carrying value of the assets related to this
segment of the property by $17,150,000 in 1997 to the estimated net
realizable value.
Payments under the master lease agreement, if it is not terminated, may
be adjusted to reflect adjustments in the rate of interest payable by
Chrysler on the Rincon I debt. Future minimum lease payments based on
scheduled payments under the master lease agreement are as follows:
1999 $ 5,875,000
2000 5,875,000
2001 5,875,000
2002 5,875,000
2003 5,875,000
Thereafter 55,747,000
(4) Notes Receivable
At December 31, 1998 and 1997, the Partnership had the following notes
receivable:
8
Exhibit 99.2
RINCON CENTER ASSOCIATES
A CALIFORNIA LIMITED PARTNERSHIP
Notes to Financial Statements
December 31, 1998
(Continued)
1998 1997
---- ----
Two notes due from Chrysler secured by second deed of trust on
Rincon I, bearing interest at 10%, with monthly principal and
interest payments of $150,285; unpaid balance due July 2013, net
of reserve of $14,214,000 in 1997 and 1998 $ - $ -
Notes from tenants secured by tenant improvements, bearing
interest at 8% to 11%, due in monthly installments - 23,000
----------- ----------
$ - $ 23,000
=========== ==========
(5) Ground Lease
The Partnership entered into a 65-year ground lease with the United
States Postal Service for the Project property on April 19, 1985. On
June 24, 1988, this lease was bifurcated into two leases (Rincon I and
Rincon II). Under the terms of the leases, the Partnership must make
monthly lease payments (Basic Rent) of $140,415 and $239,085 for Rincon
I and Rincon II, respectively. In April 1994, and every six years
thereafter, the monthly base payments can be increased based on the
increase in the Consumer Price Index, subject to a minimum of 5% per
year and a maximum of 8% per year. In addition, the Basic Rent can be
increased based on reappraisal of the underlying property on the
occurrence of certain events if those events occur prior to the regular
reappraisal dates of April 19, 2019, and each 12th year thereafter for
the remainder of the lease term.
The lease agreement calls for the payment of certain percentage rents
based on revenues received from the subleasing of the Rincon I building.
Percentage rents paid in 1998, 1997 and 1996 were $273,000, $286,000 and
$283,000, respectively.
This lease has been accounted for as an operating lease, with the
following minimum future lease payments:
9
Exhibit 99.2
RINCON CENTER ASSOCIATES
A CALIFORNIA LIMITED PARTNERSHIP
Notes to Financial Statements
December 31, 1998
(Continued)
1999 $ 4,554,000
2000 5,507,000
2001 5,920,000
2002 5,920,000
2003 5,920,000
Thereafter 918,845,000
Under the provisions of the original lease, no lease payments were to be
made from the inception of the lease (April 19, 1985) until April 18,
1987, and one-half of the regular monthly payment was due for the period
from April 19, 1987 to April 18, 1988. The remaining deferred ground
rent related to the free rent period amounted to $5,773,000 and
$6,011,000 at December 31, 1998 and 1997, respectively, and is being
amortized over the lease term.
(6) Construction Notes Payable
Residential
The residential portion of the Project is being financed with a
$36,000,000 loan from the Redevelopment Agency of the City and County of
San Francisco (the Agency), of which $30,600,000 and $31,500,000 was
outstanding at December 31, 1998 and 1997, respectively. The Agency
raised these funds through the issuance of Variable Rate Demand
Multifamily Housing Revenue Bonds (Rincon Center Project) 1985 Issue B
(the Bonds).
The interest rate on the Bonds is variable at the rate required to
produce a market value for the Bonds equal to their par value. At
December 31, 1998, 1997 and 1996, the effective interest rate on the
Bonds was 3.3%, 3.6% and 3.0%, respectively. Interest payments are to be
made on the first business day of each March, June, September and
December.
The Partnership has the option to convert the Bonds to a fixed interest
rate at any of the above interest payment dates. The fixed rate will be
the rate required to produce a market value for the Bonds equal to their
par value. After conversion to a fixed rate, interest payments must be
made on each June 1 and December 1.
The Partnership must repay the residential loan as the Bonds become due.
The Bonds shall be redeemed in at least the minimum amounts set forth
below:
10
Exhibit 99.2
RINCON CENTER ASSOCIATES
A CALIFORNIA LIMITED PARTNERSHIP
Notes to Financial Statements
December 31, 1998
(Continued)
1999 $ 1,000,000
2000 1,000,000
2001 1,100,000
2002 1,200,000
2003 1,300,000
Thereafter 25,000,000
The Bonds are due December 1, 2006. The Bonds are secured by an
irrevocable letter of credit issued by Citibank in the name of the
Partnership in the amount of approximately $31,556,000. In the event
that drawings are made on the letter of credit, the Partnership has
agreed to reimburse Citibank for such drawings pursuant to the terms of
a Reimbursement Agreement. During 1997, the irrevocable letter of credit
was due to expire. The Partnership, however, reached an agreement with
Citicorp to extend the letter of credit. Currently, the letter of credit
has been extended to March 1, 1999, with a preliminary agreement subject
to various approvals, to further extend the letter of credit to
December 1, 2000. The Partnership obligations under the Reimbursement
Agreement are secured by a deed of trust on the Project and other
guarantees described below.
At December 1, 1998, Citibank extended a loan, pursuant to the
Reimbursement Agreement, to the Partnership in the amount of $900,000 to
meet the redemption obligation on the Bonds. The loan bears interest at
a variable rate (7.5% at December 31, 1998), is due on demand and is
expected to be repaid upon the closing of the refinancing of the
commercial loan.
Commercial
The development and construction of the commercial portion of the
Project was financed pursuant to a Construction Loan Agreement between
the Partnership and Citibank, of which $14,288,000 and $17,728,000 was
outstanding at December 31, 1998 and 1997, respectively. The loan and
the irrevocable letters of credit supporting the residential bond are
secured by a deed of trust on the Project and cash in lieu of an equity
letter of credit currently in the aggregate amount of $3,650,000, held
by Citibank on behalf of the general partners. During 1997, a $3,650,000
letter of credit, which had been issued as security for the project
borrowings, was allowed by RCA and PL&D to be drawn and the funds
applied to reduce the loan balance. This draw of the letter of credit
was part of an agreement to extend the letter of credit issued by
Citibank as security for the Bonds as described above. An annual fee
equal to prime plus 1% of the aggregate amount is due to PGP and PL&D
for the use of letters of credit or cash as security. The loan is also
secured by the guarantees described in Note 7. The total fee in 1998,
1997 and 1996 was $450,000, $651,000 and $742,000, respectively.
In 1993, the Partnership extended this loan through October 1, 1998. At
the same time that it reached an agreement on the proposed extension of
financing under the Rincon I sale operating lease-back transaction
discussed in Note 3, the Partnership also reached an agreement covering
the extension of this financing to December 15, 2001. The terms of this
proposed extension include a $1.5 million interest payment, a $2.8
million principal payment, amortization of the commercial loan of
$20,000 per month, a new letter of credit in the amount of $2.0 million
issued to secure the remaining borrowings at Rincon II and the
elimination of further Company or Joint Venture Guarantees. The terms of
the proposed extension still require additional final documentation and
final approval. If the current financing agreements are approved and
implemented, any requirement of the partners to provide additional cash
to the Partnership, after 1998, will be significantly reduced or
eliminated.
(7) Transaction with General Partners
PL&D has guaranteed the payment of both interest on the financing of the
Project and operating deficits, if any. It has also guaranteed the
master lease under the sale and operating lease-back transaction
(Note 3).
In accordance with the Construction Loan Agreement (Note 6), the general
partners have advanced monies to the Partnership to fund project costs.
At December 31, 1998 and 1997, the general partners had advanced
$118,662,000 and $114,432,000, respectively. The advances accrue
interest at a rate of prime plus 2%. For the years ended December 31,
1998, 1997 and 1996, interest expense on partner advances was
$11,680,000, $10,792,000 and $9,897,000, respectively.
11