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Filed under Rule 424(b)(3)
File No. 333-67071
PACIFIC GATEWAY PROPERTIES, INC.
930 MONTGOMERY STREET, 4TH FLOOR
SAN FRANCISCO, CA 94133
March 22, 1999
Dear Shareholder:
You are cordially invited to attend the Special in Lieu of Annual Meeting of
Shareholders of Pacific Gateway Properties, Inc., a New York corporation, to be
held on April 26, 1999, at The Ritz-Carlton Chicago, 160 East Pearson Street,
Chicago, Illinois.
While the meeting begins promptly at 9:00 a.m., the doors will be open at
8:30 a.m. Members of the Board of Directors and the officers of the Company
welcome the opportunity to visit with shareholders on an informal basis during
the time preceding the meeting.
At the meeting you will be asked:
- To elect directors for the coming year;
- To consider a proposal to reincorporate the Company as a Maryland
corporation by merging into a newly formed, wholly owned Maryland
corporation;
- To consider a proposal to convert the Company to a real estate investment
trust ("REIT") by making the appropriate elections under federal tax laws;
- To ratify the selection of Arthur Andersen LLP as the Company's
independent auditors for 1998 and 1999; and
- To consider and vote on such other business as may properly come before
the meeting.
These matters are described in the accompanying Proxy Statement/Prospectus.
In addition, there will be a discussion of corporate events followed by a
question and answer period. The Company presently contemplates that this will be
the only meeting of the Company's shareholders during 1999. Accordingly, the
Company's next annual meeting will be held during the year 2000.
One of the requirements for REIT status relates to the percentage ownership
of the Company by the five largest shareholders of the Company. If you (either
directly or constructively, as described below) own more than 2.0% of the
outstanding Common Stock (about 78,000 shares), significant limitations may
apply to any shares owned in excess of the 2.0% limit. It is extremely important
for any shareholder who owns more than 78,000 shares to contact the Company as
soon as possible in order to allow time to discuss whether these limitations can
be waived as to a particular shareholder. For these purposes, shares owned by
corporations, partnerships, trusts and limited liability companies may be
treated as owned by their shareholders, partners, members and beneficiaries,
respectively, and vice versa. Furthermore, the share ownership of one or more
family members, such as siblings and spouses, may be aggregated, and treated as
owned by one person.
At this time, I would like to recognize the contributions of Marshall A.
Jacobs, a director of the Company and friend, who resigned from our Board of
Directors in August 1998. Mr. Jacobs served as a member of the Board of
Directors since the Company's inception in 1984. His contributions as a board
member, legal counsel, and advisor to many of the Company's Chief Executives
have been invaluable. On behalf of the Company's shareholders, board, management
and staff we wish him continued success in his future endeavors, and many years
of good health and happiness during his retirement.
It is important that your shares are represented at the meeting whether or
not you plan to attend. Accordingly, please take a moment now to fill in, sign,
date and mail the enclosed proxy in the envelope provided.
Your cooperation is appreciated.
Sincerely,
Raymond V. Marino,
PRESIDENT AND CHIEF EXECUTIVE OFFICER
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PACIFIC GATEWAY PROPERTIES, INC.
930 MONTGOMERY STREET, 4TH FLOOR
SAN FRANCISCO, CA 94133
------------------------
NOTICE OF MEETING OF SHAREHOLDERS
TO BE HELD ON APRIL 26, 1999
------------------------
To the Shareholders of Pacific Gateway Properties, Inc.:
A Special in Lieu of Annual Meeting of Shareholders of Pacific Gateway
Properties, Inc. (the "Company") will be held on April 26, 1999 at 9:00 a.m. at
The Ritz-Carlton Chicago, 160 East Pearson Street, Chicago, Illinois, for the
following purposes:
(a) To elect seven directors;
(b) To consider a proposal to reincorporate the Company as a Maryland
corporation by merging into a newly formed, wholly owned Maryland
corporation;
(c) To consider a proposal to convert the Company to a real estate
investment trust ("REIT") by making the appropriate elections under
federal tax laws;
(d) To ratify the selection of Arthur Andersen LLP as the Company's
independent auditors for 1998 and 1999; and
(e) To consider such other business as may properly come before the meeting.
The Board of Directors has fixed the close of business on March 8, 1999 as
the record date for the determination of shareholders entitled to vote at the
meeting.
Shareholders who do not expect to attend in person and who wish their shares
to be voted are urged to fill in, sign, date and return the accompanying form of
proxy in the enclosed envelope, to which no postage need be affixed if mailed in
the United States.
By Order of the Board of Directors,
Stephen J. LoPresti,
SECRETARY
March 22, 1999
San Francisco, California
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PACIFIC GATEWAY PROPERTIES, INC.
930 MONTGOMERY STREET, 4TH FLOOR
SAN FRANCISCO, CA 94113
------------------------
PROXY STATEMENT
MEETING OF SHAREHOLDERS
APRIL 26, 1999
PROSPECTUS
COMMON STOCK, PAR VALUE $1.00 PER SHARE
This Proxy Statement/Prospectus is furnished to the holders of Common Stock
(the "Common Stock") and Series 1 Preferred Stock (the "Series 1 Preferred
Stock"), of Pacific Gateway Properties, Inc., a New York corporation (the
"Company"), in connection with the solicitation of proxies on behalf of the
Board of Directors of the Company to be voted at the Special in Lieu of Annual
Meeting of Shareholders to be held at 9:00 a.m., local time, at The Ritz-Carlton
Chicago, 160 East Pearson Street, Chicago, Illinois, on April 26, 1999 and at
any adjournment or adjournments thereof (the "Annual Meeting") for the purposes
set forth in the accompanying Notice of Annual Meeting of Shareholders.
This Proxy Statement/Prospectus relates to the solicitation of proxies by
the Board of Directors of the Company for use at the Annual Meeting to vote in
favor of: (1) the election of the individuals named herein as Directors of the
Company, (2) the reincorporation of the Company in the State of Maryland (the
"Reincorporation"), (3) the Company's proposed election to be treated as a real
estate investment trust ("REIT") for federal income tax purposes and its
adoption of an umbrella partnership real estate investment trust ("UPREIT")
structure (the "REIT Election") and (4) the ratification of the selection of
Arthur Andersen LLP as the Company's independent auditors for 1998 and 1999.
To effect the Reincorporation, the existing Company, currently organized as
a corporation under the laws of New York (the "New York Company"), will be
merged into a new corporation organized under the laws of Maryland (the
"Maryland Company") (the "Merger"), pursuant to an Agreement and Plan of Merger
by and between the New York Company and the Maryland Company (the
"Reincorporation Agreement"). The Board of Directors has unanimously approved
the Reincorporation Agreement. If the Merger becomes effective, (i) the New York
Company will cease to exist, (ii) the Maryland Company will succeed, to the
fullest extent permitted by law, to all of the business, assets and liabilities
of the New York Company, and (iii) each share of Common Stock of the New York
Company (the "New York Common") will be converted into the right to receive one
share of common stock of the Maryland Company (the "Maryland Common"), and each
share of Series 1 Preferred Stock of the New York Company (the "New York
Preferred" or the "Series 1 Preferred") will be converted into the right to
receive one share of Series 1 Preferred Stock of the Maryland Company (the
"Maryland Preferred"). The Reincorporation will not result in a change in the
Company's management, capitalization, assets, liabilities or net worth, but will
result in certain ownership and transfer restrictions being applicable to the
Maryland Company's capital stock. In addition, the Maryland Company will be
required to meet certain asset and income tests, and other requirements, in
order to maintain its REIT status. See "The REIT Election--Taxation of the
Company." The Maryland Common will continue to be listed on the American Stock
Exchange ("AMEX"). The Board of Directors will retain discretion to delay,
abandon or terminate the Reincorporation after receipt of shareholder approval.
As a REIT, the only business of the Company will be the Company's present
business.
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This Proxy Statement/Prospectus also relates to the issuance of up to
3,933,536 shares of Maryland Common in exchange for shares of the New York
Common. After the Reincorporation, the Maryland Common will be listed on the
AMEX under the symbol "PGP."
This Proxy Statement/Prospectus consists of this document, which includes
Annex A (Agreement and Plan of Merger), Annex B (Articles of Incorporation of
the Maryland Company), Annex C (By-Laws of the Maryland Company), Annex D
(Agreement of Limited Partnership of Pacific Gateway Operating Partnership,
L.P.), Annex E (the Company's Annual Report on Form 10-K for the year ended
December 31, 1997 (and the amendment to the Company's Form 10-K on Form 10-K/A))
and Annex F (the Company's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1998).
Returning your completed proxy will not prevent you from attending and
voting at the Annual Meeting. You may revoke your proxy at any time before its
exercise by filing a notice of revocation or a later-dated proxy with the
Company's secretary or by voting at the Annual Meeting. All properly executed,
unrevoked proxies in the enclosed form which are received in time will be voted
in accordance with the shareholders' directions and, unless contrary directions
are given, will be voted for: (1) the election as Directors of the nominees
named below, (2) the approval of the Reincorporation, (3) the approval of the
REIT Election and (4) the ratification of the selection of Arthur Andersen LLP
as the Company's independent auditors for 1998. Under applicable law, dissenting
shareholders may have the right to seek to obtain payment for the fair value of
their shares. See "The Reincorporation-- Rights of Dissenting New York Company
Shareholders."
PLEASE SEE "RISK FACTORS" ON PAGE 5, WHICH DISCUSSES IMPORTANT FACTORS YOU
SHOULD CONSIDER.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED THESE SECURITIES OR PASSED UPON
THE ADEQUACY OF THIS PROXY STATEMENT/PROSPECTUS. ANY CONTRARY
REPRESENTATION IS A CRIMINAL OFFENSE.
------------------------
This Proxy Statement/Prospectus is dated March 22, 1999 and is being mailed to
holders of the Company's Common Stock and Series 1 Preferred Stock beginning
around March 22, 1999.
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TABLE OF CONTENTS
<TABLE>
<S> <C>
Voting Matters....................................................... 4
Cautionary Statement Regarding Forward-Looking Statements............ 4
Risk Factors......................................................... 5
Recent Developments.................................................. 9
Election of Directors................................................ 10
Ownership of Common Stock............................................ 12
Executive Compensation............................................... 14
Performance Graph.................................................... 17
The Reincorporation.................................................. 18
The REIT Election.................................................... 41
Ratification of Independent Auditors................................. 62
Other Matters........................................................ 63
Voting Procedures.................................................... 63
Shareholder Proposals for the 1999 Annual Meeting.................... 63
Solicitation of Proxies.............................................. 63
Legal Matters........................................................ 64
Experts.............................................................. 64
Annex A: Agreement and Plan of Merger
Annex B: Pacific Gateway Properties, Inc. Articles of Incorporation
Annex C: By-Laws of Pacific Gateway Properties, Inc.
Annex D: Agreement of Limited Partnership of Pacific Gateway
Operating Partnership, L.P.
Annex E: Form 10-K for the year ended December 31, 1997 (and the
amendment to Form 10-K on Form 10-K/A)
Annex F: Form 10-Q for the quarterly period ended September 30, 1998
</TABLE>
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VOTING MATTERS
The Board of Directors has fixed the close of business on March 8, 1999 as
the record date for the determination of shareholders entitled to receive notice
of and vote at the Annual Meeting. As of March 8, 1999, the Company had
outstanding 3,933,536 shares of Common Stock and 300,000 shares of Series 1
Preferred Stock. Each share of Common Stock and Series 1 Preferred Stock is
entitled to one vote on all matters being considered at the Annual Meeting. The
Preferred Stock and the Common Stock will vote as a single class on the election
of directors, the REIT Election and ratification of the selection of auditors
and as separate classes on the Reincorporation.
The principal executive offices of the Company are located at 930 Montgomery
Street, 4th Floor, San Francisco, CA 94133. The telephone number of the Company
at such address is (415) 398-4800.
VOTES REQUIRED. The holders of a majority of the number of shares of New
York Common and New York Preferred issued, outstanding and entitled to vote on
any matter constitutes a quorum at the Annual Meeting. Shares of New York Common
and New York Preferred present in person or represented by proxy (including
shares which abstain or do not vote with respect to the matters presented for
shareholder approval) will be counted for purposes of determining whether a
quorum is present. The approval of the Reincorporation requires the affirmative
votes of the holders of two-thirds of the outstanding shares of New York Common
and New York Preferred, voting as a single class, and two thirds of the New York
Preferred. The REIT Election and the ratification of the selection of auditors
require a majority vote of the New York Common and the New York Preferred,
voting as a single class. Directors are elected by a plurality vote. Shares
which abstain from voting, and shares held in street name by brokers or nominees
who indicate on their proxy that they do not have discretionary authority to
vote such shares as to the Reincorporation, will not be counted as votes in
favor of such matter. Accordingly, abstentions and "broker non-votes" with
respect to voting on the Reincorporation and the REIT Election proposals will
have the effect of a vote against the proposal. Shareholders have no right to
cumulate votes.
Richard M. Osborne and his affiliates and other members of the Board of
Directors of the Company, who hold in the aggregate 56% of the outstanding
Common Stock entitled to vote at the Annual Meeting, have indicated that they
intend to vote for the Reincorporation, the REIT Election and the transactions
related thereto. GEM Value/PGP LLC, which owns all the Series 1 Preferred Stock,
has agreed to vote for the Reincorporation, the REIT Election and the
transactions related thereto.
CAUTIONARY STATEMENT REGARDING
FORWARD-LOOKING STATEMENTS
THIS PROXY STATEMENT/PROSPECTUS CONTAINS FORWARD-LOOKING STATEMENTS WITHIN
THE MEANING OF SECTION 27A OF THE SECURITIES ACT. ALL STATEMENTS OTHER THAN
STATEMENTS OF HISTORICAL FACT INCLUDED IN THIS PROXY STATEMENT/PROSPECTUS
INCLUDING, WITHOUT LIMITATION, THE STATEMENTS OF THE COMPANY'S FUTURE FINANCIAL
RESULTS, FINANCIAL POSITION, BUSINESS STRATEGY, BUDGETS, PROJECTED COSTS AND
PLANS AND OBJECTIVES OF MANAGEMENT ARE FORWARD-LOOKING STATEMENTS. ALTHOUGH THE
COMPANY BELIEVES ITS EXPECTATIONS ARE BASED UPON REASONABLE ASSUMPTIONS, NO
ASSURANCE CAN BE GIVEN THAT ACTUAL RESULTS WILL NOT DIFFER MATERIALLY FROM THOSE
IN THE FORWARD-LOOKING STATEMENTS. IN ADDITION, WHEN USED IN THIS PROXY
STATEMENT/PROSPECTUS, THE WORDS "BELIEVES," "ANTICIPATES," "EXPECTS" AND SIMILAR
TERMS ARE INTENDED TO IDENTIFY FORWARD-LOOKING STATEMENTS. SUCH STATEMENTS ARE
SUBJECT TO A NUMBER OF RISKS AND UNCERTAINTIES. ACTUAL RESULTS IN THE FUTURE
COULD DIFFER MATERIALLY FROM THOSE DESCRIBED IN THE FORWARD-LOOKING STATEMENTS
AS A RESULT OF THE RISK FACTORS SET FORTH IN THIS PROXY STATEMENT/PROSPECTUS AND
THE MATTERS SET FORTH IN THIS PROXY STATEMENT/PROSPECTUS GENERALLY. FOR A MORE
DETAILED DISCUSSION OF CERTAIN FACTORS THAT COULD CAUSE ACTUAL RESULTS TO VARY,
SEE "RISK FACTORS."
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RISK FACTORS
Prospective investors should carefully consider the following information in
conjunction with the other information contained in this Proxy
Statement/Prospectus. References below in this section entitled "Risk Factors"
to the "Company" mean the New York Company before the Reincorporation, or the
Maryland Company following the Reincorporation, as the context requires; and to
the "Common Stock" mean the New York Common before the Reincorporation, or the
Maryland Common following the Reincorporation, as the context requires.
GENERAL REAL ESTATE INVESTMENT RISKS
VOLATILITY OF VALUE AND INCOME COULD ADVERSELY AFFECT THE COMPANY'S
INVESTMENTS. Real property investments are subject to varying degrees of risk.
The yields available from equity investments in real estate depend on the amount
of income and capital appreciation generated by the related properties. If the
properties do not generate sufficient income to meet operating expenses,
including debt service, ground lease payments, tenant improvements, third-party
leasing commissions and other capital expenditures, the Company's income and
ability to make distributions to its shareholders will be adversely affected.
Income from the properties may be adversely affected by the general economic
climate, local economic conditions in which the properties are located, such as
oversupply of space or a reduction in demand for rental space, the
attractiveness of the properties to tenants, competition from other available
space, the ability of the Company to provide for adequate maintenance and
insurance and increased operating expenses. There is also the risk that as
leases on the properties expire, tenants will enter into new leases on terms
that are less favorable to the Company. Income and real estate values may also
be adversely affected by such factors as applicable laws (e.g., ADA and tax
laws), interest rate levels and the availability of financing. In addition, real
estate investments are relatively illiquid and, therefore, will tend to limit
the ability of the Company to vary its portfolio promptly in response to changes
in economic or other conditions.
SIGNIFICANT COMPETITION MAY ADVERSELY AFFECT THE COMPANY'S ABILITY TO
ACQUIRE ASSETS AT FAVORABLE COSTS. Numerous industrial, office and R&D
properties compete with the Company's properties in attracting tenants to lease
space. Some of these competing properties are newer, better located or better
capitalized than the Company's properties. The number of competitive commercial
properties in a particular area could have a material adverse effect on the
Company's ability to lease space in the properties or at newly developed or
acquired properties and on the rents charged.
THE COMPANY'S DEPENDENCE ON RENTAL INCOME FROM REAL PROPERTY COULD ADVERSELY
AFFECT ITS FINANCIAL CONDITION. Since substantially all of the Company's income
is derived from rental income from real property, the Company's income and funds
available for distribution would be adversely affected if a significant number
of the Company's tenants were unable to meet their obligations to the Company or
if the Company were unable to lease a significant amount of space in its
properties on economically favorable lease terms. In the event of default by a
tenant, the Company may experience delays in enforcing its rights as landlord
and may incur substantial costs in protecting its investment. The bankruptcy or
insolvency of a major tenant may have an adverse effect on the income produced
by such properties. While various of the Company's tenants from time to time
have failed to make scheduled rental payments, in no such case did the failure
have a material adverse effect on the Company's financial position or results of
operations.
ILLIQUIDITY OF REAL ESTATE INVESTMENTS COULD ADVERSELY AFFECT THE COMPANY'S
ABILITY TO SELL ITS PROPERTIES. Equity real estate investments are relatively
illiquid and, therefore, tend to limit the ability of the Company to vary its
portfolio promptly in response to changes in economic or other conditions. All
of the Company's properties are in the same line of business and the Company has
no present intention of varying the types of real estate in its portfolio. In
addition, certain significant expenditures associated with each equity
investment (such as mortgage payments, real estate taxes and maintenance costs)
are
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generally not reduced when circumstances cause a reduction in income from the
investment. Should such events occur, the Company's income and funds for
distribution would be adversely affected.
INABILITY TO SERVICE MORTGAGE DEBT COULD ADVERSELY AFFECT THE COMPANY'S
FINANCIAL POSITION. A portion of the Company's properties is mortgaged to
secure payment of indebtedness, and if the Company were to be unable to meet
mortgage payments, a loss could be sustained as a result of foreclosure on the
properties by the mortgagee. With respect to certain mortgages, the Company may
be liable for a deficiency if the amount realized upon foreclosure is less than
the mortgage amount. See Note 2 to the financial statements in the Company's
Form 10-Q for the quarterly period ended September 30, 1998, which is included
in this Proxy Statement/Prospectus as Annex F.
UNINSURED LOSSES COULD ADVERSELY AFFECT THE COMPANY'S FINANCIAL
POSITION. There are certain types of losses (generally of a catastrophic
nature, such as earthquakes and wars) which may be either uninsurable or
insurable only at a cost which is not economically justifiable. Should an
uninsured loss occur, the Company could lose both its invested capital in and
anticipated profits from the property, and would continue to be obligated to
repay any mortgage indebtedness on the property.
LIABILITY FOR ENVIRONMENTAL MATTERS COULD ADVERSELY AFFECT THE COMPANY'S
FINANCIAL POSITION. Under various federal, state and local laws, ordinances and
regulations, the Company may be considered an owner or operator of real property
or may have arranged for the disposal or treatment of hazardous or toxic
substances and, therefore, may become liable for the costs of removal or
remediation of certain hazardous substances released on or in its property or
disposed of by it, as well as certain other potential costs which could relate
to hazardous or toxic substances (including governmental fines and injuries to
persons and property). Such liability may be imposed whether or not the Company
knew of, or was responsible for, the presence of such hazardous or toxic
substances. The presence of such substances, or the failure to properly
remediate such substances, may adversely affect the owner's ability to sell such
real estate or to borrow using such real estate as collateral. Such costs or
liabilities may exceed the value of such real estate.
Some, but not all, of the Company's properties have been subject to
preliminary environmental audits (which generally involve site and records
inspection without soil sampling or ground water analysis) or other
environmental reports. None of these reports or studies has revealed, nor is the
Company aware of, any environmental liability (including asbestos-related
liability) that management believes would have a material adverse effect on the
Company's business, assets or results of operations. No assurance can be given,
however, that these preliminary studies revealed all environmental liabilities
(or that environmental liabilities have not developed since such studies were
prepared), that studies which have not been conducted would not reveal
environmental liabilities, or that no prior owner or use created any material
adverse environmental condition not known to the Company.
DEBT FINANCING; UNCERTAINTY OF ABILITY TO REFINANCE PAYMENTS ON DEBT
The Company will be subject to the risks normally associated with debt
financing, including the risk that the Company's cash flow will be insufficient
to meet required payments of principal and interest, the risk that existing
indebtedness on the properties cannot be refinanced or that the terms of such
refinancing will not be as favorable as the terms of existing indebtedness.
THE COMPANY WILL BE CONTROLLED BY ITS DIRECTORS AND EXECUTIVE OFFICERS
Directors and executive officers will beneficially own a majority of the
Common Stock outstanding after the Reincorporation. Accordingly, such persons
will have substantial influence over the Company and on the outcome of any
matters submitted to the Company's stockholders for approval.
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LIMITATIONS ON ACQUISITION AND CHANGE IN CONTROL
OWNERSHIP LIMIT MAY RESTRICT BUSINESS COMBINATION OPPORTUNITIES. The
Ownership Limit described below is likely to have the effect of precluding
acquisition of control of the Maryland Company by a third party without consent
of the Board of Directors even if a change in control were in the shareholders'
best interest. See "The REIT Election--Restrictions on Transfer and Ownership."
PREFERRED SHARES MAY PREVENT A CHANGE IN CONTROL. The Company's Articles of
Incorporation authorize the Board of Directors to issue from time to time shares
of preferred stock in one or more classes or series, which may have such rights
and preferences as the Board may determine. The issuance of preferred stock
could have the effect of delaying or preventing a change in control of the
Company, even if the change in control were in the shareholders' best interest.
MARYLAND ANTI-TAKEOVER STATUTE MAY RESTRICT BUSINESS COMBINATION
OPPORTUNITIES. As a Maryland corporation, the Company will be subject to
various provisions of Maryland law that impose restrictions and require certain
procedures with respect to certain stock purchases and business combinations.
These restrictions and procedures could have the effect of restricting the
Company's business combination opportunities.
NO LIMITATION IN ORGANIZATIONAL DOCUMENTS ON INCURRENCE OF DEBT
The organizational documents of the Company do not contain any limitation on
the amount or percentage of indebtedness the Company might incur. Accordingly,
the Board of Directors could alter or eliminate the current policy on borrowing
without a vote of the Company's shareholders, although the Board of Directors
has no present intention to do so. The Company could become more highly
leveraged, resulting in an increase in debt service that could adversely affect
the Company's funds from operations and ability to make expected distributions
to shareholders and in an increased risk of default on its obligations.
SHARES AVAILABLE FOR FUTURE SALE COULD ADVERSELY AFFECT THE PRICE OF OUTSTANDING
COMMON STOCK
No prediction can be made as to the effect, if any, of future sales of
shares, or the availability of shares for future sale, on the market price of
the Common Stock prevailing from time to time. Sales of substantial amounts of
Common Stock (including shares issued upon the exercise of stock options), or
the perception that such sales could occur, could adversely affect prevailing
market prices for the Common Stock.
INCREASES IN MARKET INTEREST RATES COULD ADVERSELY AFFECT SHARE PRICE
One of the factors that may influence the price of the Company's shares in
public markets will be the annual distribution by the Company. An increase in
market interest rates may lead purchasers of shares of Common Stock to demand a
higher annual distribution, which could adversely affect the market price of the
shares of Common Stock. In addition, the market value of the Common Stock can be
adversely impacted by changes in general market conditions or fluctuations in
the markets for equity securities.
THE COMPANY'S BOARD OF DIRECTORS WILL BE ABLE TO CHANGE POLICY WITHOUT
SHAREHOLDER APPROVAL
The major policies of the Company, including its policies with respect to
development, acquisitions, financing, growth, debt capitalization and
distributions, will be determined by the Board of Directors. Although it has no
present intention to do so, the Board may amend or revise those and other
policies, from time to time, subject to certain limitations, without the
approval of stockholders. The Board of Directors intends to retain the ability
to raise additional capital, including additional debt, to pursue attractive
investment opportunities that may arise and to otherwise act in a manner that it
believes to
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be in the best interests of the Company and its shareholders. The organizational
documents of the Company do not impose a limit on the level of debt that the
Company may incur. Accordingly, shareholders will have little control over
changes in policies of the Company.
RELIANCE ON KEY PERSONNEL
The Company is currently dependent upon the ability and experience of its
executive officers, particularly Raymond V. Marino, and there can be no
assurance that the Company will be able to retain all of such officers. If, for
any reason, such officers do not remain active in the Company's management, the
Company's operations could be adversely affected.
LEGAL AND TAX RISKS
ADVERSE CONSEQUENCES OF FAILURE TO MAINTAIN REIT STATUS MAY INCLUDE THE
MARYLAND COMPANY BEING SUBJECT TO TAXATION AS A REGULAR CORPORATION. The
Maryland Company believes that it currently operates and intends to continue to
operate in a manner so as to qualify as a REIT for federal income tax purposes.
A REIT that satisfies all REIT qualification tests generally is exempt from
federal taxation on its income with certain limited exceptions. Although the
Maryland Company does not intend to request a ruling from the Internal Revenue
Service as to its REIT status, the Maryland Company has received an opinion of
its legal counsel to the effect that commencing with its taxable year ending
December 31, 1999 the Maryland Company will be organized in conformity with the
requirements for qualification as a REIT and its proposed method of operation
will enable it to meet the requirements for qualification and taxation as a
REIT. See "The REIT Election--Taxation of the Maryland Company." Such legal
opinion, however, is based on certain assumptions and factual representations by
the Company, the Maryland Company and certain other persons as to factual
matters regarding the Maryland Company's business and assets and the Company's
ability to meet various requirements for qualification as a REIT, and no
assurance can be given that actual operating results will meet these
requirements. In addition, investors should be aware that opinions of counsel
are not binding on the Internal Revenue Service or any court. The REIT
qualification opinion only represents the view of counsel as to the status of
the Maryland Company based on the counsel's review and analysis of existing law.
Furthermore, both the validity of the opinion and the continued qualification of
the Maryland Company as a REIT will depend on the Maryland Company's
satisfaction of certain asset, income, organizational, distribution, and
stockholder ownership requirements on a continuing basis. If the Maryland
Company were to fail to qualify as a REIT in any taxable year, the Maryland
Company would be subject to federal income tax (including any applicable
alternative minimum tax) on all of its taxable income at regular corporate
rates, and distributions to stockholders would not be deductible by the Maryland
Company in computing its taxable income but generally would remain taxable to
the stockholders to the extent of the Maryland Company's earnings. Any such
corporate tax liability could be substantial and would reduce the amount of cash
available for distribution to stockholders, which in turn could have an adverse
impact on the value of, and trading prices for, the Maryland Common. Unless
entitled to relief under certain Code provisions, the Maryland Company also
would be disqualified from taxation as a REIT for the four taxable years
following the year during which the Maryland Company ceased to qualify as a
REIT.
THE MARYLAND COMPANY MAY BE REQUIRED TO BORROW MONEY OR SELL ASSETS IN ORDER
TO MAKE REQUIRED DISTRIBUTIONS. The Maryland Company must distribute annually
at least 95% of its taxable income including income from foreclosure property
net of any tax imposed on such property, (but excluding any net capital gain and
excess net income) in order to avoid corporate income taxation of the earnings
that it distributes. In addition, the Maryland Company will be subject to a 4%
nondeductible excise tax on the amount, if any, by which certain distributions
paid by it with respect to any calendar year are less than the sum of (i) 85% of
its ordinary income for that year, (ii) 95% of its net capital gain for that
year and (iii) 100% of its undistributed taxable income from prior years.
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<PAGE>
The Maryland Company intends to make distributions to its stockholders to
comply with the 95% distribution requirement and to avoid the nondeductible
excise tax. However, there may be differences in timing between the recognition
of taxable income and the actual receipt of cash, requiring the Maryland Company
to borrow funds, issue capital stock or sell assets on a short-term basis to
meet the 95% distribution requirement and to avoid the nondeductible excise tax.
The requirement to distribute a substantial portion of the Maryland Company's
taxable income could cause the Maryland Company (i) to sell assets in adverse
market conditions, (ii) to distribute amounts that represent a return of
capital, or (iii) to distribute amounts that would otherwise be spent on future
acquisitions, unanticipated capital expenditures or repayment of debt. Gain from
disposition of any assets sold to provide adequate funds to meet the
distributions requirement could subject the Maryland Company to the 100% tax on
the net income from prohibited transactions. See "The REIT Election--Taxation of
the Company--Income Tests."
THE MARYLAND COMPANY'S ABILITY TO INVEST IN VARYING TYPES OF ASSETS WILL BE
RESTRICTED. In addition, in order to qualify as a REIT, the Maryland Company
must satisfy certain requirements concerning the nature of its assets and
income, which may restrict the Maryland Company's ability to invest in various
types of assets. See "The REIT Election--Taxation of the Company--Asset Tests."
Without limiting the generality of the foregoing, the Maryland Company will not
be able to acquire securities (other than securities which are treated as an
interest in real property) of any single issuer which would represent either
more than 5% of the total value of the Maryland Company's assets or 10% of the
voting securities of such issuer. In addition, in order to satisfy the income
requirements of a REIT, the Maryland Company generally will be restricted to
acquiring assets which generate qualifying income for purposes of certain income
tests. See "The REIT Election--Taxation of the Company--Income Tests." These
restrictions could affect adversely the Maryland Company's ability to optimize
its portfolio of assets.
RECENT DEVELOPMENTS
On January 15, 1999, the Company settled an action (the "Land Court Action")
commenced against the Company by Bank of America National Trust and Savings
Association (the "Issuing Bank") in the Land Court Department of the Trial Court
of the Commonwealth of Massachusetts, and an action (the "Superior Court
Action") commenced by the Company against the Issuing Bank in the Superior Court
Department of the Trial Court of the Commonwealth of Massachusetts. These
actions are described in Note 2 to the Company's Unaudited Condensed
Consolidated Financial Statements for the quarter and nine months ended
September 30, 1998, which is included in Annex F to this Proxy
Statement/Prospectus.
Pursuant to the terms of their settlement agreement, the Company paid the
Issuing Bank the sum of $4.2 million and released the Issuing Bank from all
claims raised in the Superior Court Action. The Issuing Bank executed discharges
of mortgage and rent assignment and released the Company from all claims raised
in the Land Court Action. In connection with the settlement, the Company sold
its property located at 410 First Avenue, Needham, Massachusetts, on January 20,
1999, for approximately $3,950,000, realizing a loss of approximately $58,000,
which will be reported by the Company on its 1998 Consolidated Statement of
Income (Loss). The net proceeds from the sale were utilized to partially fund
the settlement with the Issuing Bank.
ELECTION OF DIRECTORS
Seven directors are to be elected at the Meeting, each to hold office until
the next Annual Meeting of Shareholders and until his successor is chosen and
qualified. The Board of Directors does not contemplate that any nominee will be
unable to serve as a director for any reason; however, if that should occur
prior to the Annual Meeting, the proxy holders may select another nominee to
stand for election in his place and stead. For so long as the holders of the New
York Preferred retain at least
9
<PAGE>
20% of the New York Preferred (or the New York Common issuable upon conversion
thereof) or until a change of control of the Company, which ever first occurs,
the Company has agreed to use its best efforts to nominate a person selected by
the holders of the New York Preferred to serve on the Company's Board of
Directors. The holder of the New York Preferred has not designated a nominee to
the Company's Board of Directors as its representative. Each director elected at
the Annual Meeting will serve as a director of the Maryland Company following
the Reincorporation.
The following table sets forth certain information concerning the nominees
for director:
<TABLE>
<CAPTION>
NOMINEES
- ------------------------------------------
<S> <C>
Steven A. Calabrese....................... Age 38; director of the Company since June 1997; since prior to 1994,
managing partner of Calabrese, Racek and Markos, Inc., CRM
Construction Inc. and CRM Environmental Services, Inc., firms which
specialize in evaluations, management, construction and environmental
assessment services for commercial and industrial real estate; owner
and manager of a real estate portfolio; director of Meridian Point
Realty Trust '83. (A)
Mark D. Grossi............................ Age 45; director of the Company since June 1997; Executive Vice
President and director of Charter One Financial, Inc., a savings and
loan holding company, and Executive Vice President and Chief Retail
Banking Officer of its subsidiary, Charter One Bank; since prior to
1994, holder of various senior executive positions with Charter One
Bank and its predecessor; director of JB Oxford Holdings, Inc.;
director of Meridian Point Realty Trust '83. (A)
Lawrence B. Helzel........................ Age 50; director of the Company since May 1995; since prior to 1994,
member, Pacific Stock Exchange, Inc. (self employed market maker,
options floor); co-founder Buylar Investments, Inc., a real estate
investment company; director of Mission West Properties. (A)
Christopher L. Jarratt.................... Age 37; director of the Company since May 1997; since prior to 1994,
President, Jarratt Associates, Inc., a company engaged in investment
activities and since September 1996, Chief Executive Officer of Third
Capital, LLC, a company engaged in various investment and advisory
activities; Chairman, director and Chief Executive Officer of JB
Oxford Holdings, Inc.
Raymond V. Marino......................... Age 40; director of the Company since March 1996 and President and
Chief Executive Officer since January 1996; prior thereto from August
1994, Vice President of the Company; prior thereto, Vice President of
Finance and Controller, Hunting Gate Investments, Inc., a real estate
investment and management company.
</TABLE>
10
<PAGE>
<TABLE>
<CAPTION>
NOMINEES
- ------------------------------------------
<S> <C>
Richard M. Osborne........................ Age 53; director and Chairman of the Board of Directors of the
Company since May 1997; since prior to 1994 President and Chief
Executive Officer of OsAir, Inc., a manufacturer of industrial gases
for pipeline delivery and a real property developer; director of GLB
Bancorp, Inc.; director of Ceres Group, Inc.; director, Chairman of
the Board and Chief Executive Officer of Meridian Point Realty Trust
'83; director of USP Real Estate Investment Trust; director of NuMED
Home Health Care, Inc. (B)
Martin S. Roher........................... Age 49; director of the Company since May 1995; since prior to 1994,
general partner and managing partner of MSR Capital Partners, a
limited partnership engaged in securities investments. (B)
</TABLE>
- ------------------------
(A) Member of the Audit Committee.
(B) Member of the Compensation Committee
THE BOARD OF DIRECTORS RECOMMENDS THAT YOU VOTE FOR THE ELECTION OF ALL
SEVEN NOMINEES AS DIRECTORS.
Directors who are not officers of the Company receive an annual fee of
$7,500 and supplemental fees of $750 for each meeting of the Board or a
committee thereof attended, and $375 for each telephone meeting, plus
out-of-pocket expenses incurred in connection with services rendered to the
Company and travel and lodging for each Board meeting.
The Board of Directors of the Company held five meetings in 1997. The Board
does not have a Nominating Committee. The duties of the Audit Committee of the
Board are to oversee the audit function of the Company's independent certified
public accountants, to periodically review significant financial information
relating to the Company and to act as a communication link between the Board and
such certified public accountants. The duties of the Compensation Committee of
the Board are to make recommendations to the Board with respect to the
compensation package of the Chief Executive Officer, to review the Chief
Executive Officer's recommendations as to the compensation packages of the other
officers of the Company and to award grants under and otherwise administer the
Company's stock option plans. The Audit Committee met two times in 1997. The
Compensation Committee met once in 1997. During 1997, each director attended all
of the meetings of the Board of Directors and committees of which he was a
member.
11
<PAGE>
OWNERSHIP OF COMMON STOCK
The following table sets forth certain information concerning the beneficial
ownership of shares of Common Stock of the Company by persons who the Company
knows to own beneficially more than 5% of the outstanding Common Stock (assuming
conversion of the outstanding New York Preferred) and by the directors, nominees
for election as directors and executive officers of the Company.
<TABLE>
<CAPTION>
SHARES PERCENT
BENEFICIALLY OF
NAME AND ADDRESS OWNED(1) CLASS
- ------------------------------------------------------------ ------------ -------
<S> <C> <C>
GEM Value/PGP LLC........................................... 401,700(2) 9.2
900 North Michigan Avenue
Suite 1900
Chicago, Illinois 60611
Richard M. Osborne Trust.................................... 1,576,938(3) 36.1
Turkey Vulture Fund XIII, Ltd.
and Liberty Self Store, Ltd.
7001 Center Street
Mentor, OH 44060
Third Capital, LLC.......................................... 200,000(4) 4.6
314 Church Street
Nashville, TN 37201
Steven A. Calabrese......................................... 47,100(5) 1.0
Mark D. Grossi.............................................. 264,800 6.1
30962 Riviera Lane
Westlake, OH 44145
Lawrence B. Helzel.......................................... 50,800 1.2
Christopher L. Jarratt...................................... 200,000(4) 4.6
Stephen J. LoPresti......................................... -- *
Raymond V. Marino........................................... 130,370(6) 3.0
Richard M. Osborne.......................................... 1,576,938(3) 36.1
Martin S. Roher............................................. 175,000(7) 4.0
All directors, nominees and executive officers (8 persons)
as a group................................................ 2,245,008 51.4%
</TABLE>
- ------------------------
* Less than 1%
(1) Beneficial ownership is the direct or indirect ownership of Common Stock of
the Company including the right to control the vote or investment of or
acquire such Common Stock within the meaning of Rule 13d-3 under the
Securities Exchange Act of 1934, as amended (the "Exchange Act"). Unless
otherwise indicated, each beneficial owner has sole voting and investment
power with respect to the shares shown and reported ownership is as of
November 6, 1998.
(2) Consists of 300,000 shares of New York Preferred and 101,700 of New York
Common.
(3) According to information provided in Amendment No. 1 to Schedule 13D dated
April 28, 1997 and Amendment No. 2 to Schedule 13D dated September 2, 1997
filed by the Richard M. Osborne Trust (the "Trust"), Turkey Vulture Fund
XIII, Ltd. (the "Fund") and Liberty Self-Stor, Ltd.
12
<PAGE>
("Liberty") as a group, and other information provided to the Company, the
Trust beneficially owns 100 shares, the Fund beneficially owns 305,432
shares and Liberty beneficially owns 1,271,406 shares. Richard M. Osborne as
sole trustee of the Trust, sole manager of the Fund and sole managing member
of Liberty may be deemed to beneficially own all of said 1,576,938 shares.
(4) Based upon information provided in Schedule 13D dated May 19, 1997 filed by
Third Capital, LLC. Represents shares of Common Stock issuable upon exercise
of presently exercisable warrants issued to Third Capital, LLC by the
Richard M. Osborne Trust and related entities. Christopher L. Jarratt is
Chief Executive Officer of Third Capital, LLC and may be deemed to
beneficially own said securities.
(5) Includes 33,100 shares held by CCAG Limited, a family limited partnership of
which Mr. Calabrese is the managing partner; 6,500 shares held by Mr.
Calabrese's wife (as to which he disclaims beneficial ownership); and 5,700
shares held by Mr. Calabrese as custodian for his children.
(6) Represents shares issuable upon exercise of options to purchase Common Stock
which were exercisable at August 31, 1998 or which may become exercisable
within 60 days thereafter.
(7) The shares are owned by MSR Capital Partners. Mr. Roher is the sole general
partner of MSR Capital Partners and may be considered to beneficially own
such shares.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Based upon reports it has received and other information, the Company
believes that, except for one inadvertent late filing by Mr. Calabrese due in
October 1998, all of its security holders, directors and officers who were
required to file reports of beneficial ownership of the Company's Common Stock
under Section 16(a) of the Exchange Act in respect of 1998 and prior periods
have done so and their filings for 1998 were on a timely basis.
13
<PAGE>
EXECUTIVE COMPENSATION
The Summary Compensation Table below sets forth individual compensation
information for each of the Company's last three fiscal years of the Chief
Executive Officer ("CEO") and other most highly paid executive officers who were
serving as such at the end of the Company's fiscal year ended December 31, 1997,
and whose total annual salary and bonus for such fiscal year exceeded $100,000.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM
COMPENSATION
AWARDS
ANNUAL COMPENSATION -------------
-------------------------------- STOCK ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS OPTIONS COMPENSATION(1)
- -------------------------------------------------- --------- ---------- --------- ------------- ----------------
<S> <C> <C> <C> <C> <C>
Raymond V. Marino(2) ............................. 1997 $ 150,000 $ 25,000 -- $ --
President and CEO 1996 150,000 50,000 100,000 --
1995 95,000 30,000 -- 2,850
Christopher M. Watson(3) ......................... 1997 $ 100,000 -- -- 95,687
Executive Vice President 1996 70,000 30,000 35,000 34,906
1995 70,000 30,000 -- 22,459
</TABLE>
- ------------------------
(1) Other compensation in the form of personal benefits to the named person has
been omitted because it does not exceed the lesser of $50,000 or 10% of the
total annual salary and bonus to each.
(2) Mr. Marino became President and CEO as of January 1996. Mr. Marino had been
a Vice President of the Company since August 1992. His other compensation in
1995 is a simplified employee pension contribution.
(3) Mr. Watson joined the Company as a Vice President in September 1992 and
became Executive Vice President as of January 1996. His other compensation
consisted of lease commissions of $92,687 in 1997, $31,906 in 1996 and
$17,359 in 1995 and an auto allowance of $3,000 in each year, and $2,100 for
a simplified employee pension contribution in 1995. Mr. Watson resigned as
an officer in July 1998.
OPTION TABLES
There were no options to purchase Common Stock of the Company granted to the
two officers named above during 1997.
The following table sets forth the values at the end of 1997 of the options
to purchase Common Stock of the Company held by the two officers named above.
None of these officers exercised any options in 1997. Mr. Stephen J. LoPresti
was hired as Vice President of Finance in November 1997 following the
resignation of Andrew T. Gorayeb. Mr. LoPresti was granted options to purchase
30,000 shares of Common Stock on November 10, 1997 at $4.938 per share. None of
Mr. LoPresti's options were exercisable at December 31, 1997.
14
<PAGE>
FISCAL YEAR END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF
SHARES OF
COMMON STOCK VALUES OF
UNDERLYING UNEXERCISED
UNEXERCISED IN-THE-MONEY
OPTIONS AT OPTIONS AT
12/31/97 12/31/97 $(1)
--------------- ----------------
EXERCISABLE/ EXERCISABLE/
NAME UNEXERCISABLE UNEXERCISABLE
- ---------------------------------------------------------- --------------- ----------------
<S> <C> <C>
Raymond V. Marino......................................... 98,705/22,470 213,743/47,848
Christopher M. Watson(2).................................. 25,705/30,470 49,210/67,753
</TABLE>
- ------------------------
(1) The closing sale price for the Company's Common Stock on December 31, 1997
as reported on the AMEX consolidated reporting system was $4.88 per share.
(2) Mr. Watson resigned as an officer in July, 1998. Upon his resignation, Mr.
Watson exercised options covering 33,940 shares of Common Stock with an
aggregate exercise price of $98,611 (approximately $2.91 per share). The
closing price of the Common Stock of the Company on the date he exercised
the options was $10.19 per share.
EMPLOYMENT CONTRACT WITH EXECUTIVE. Raymond V. Marino was employed by the
Company in 1996 under an employment agreement which was renewed on slightly
modified terms to apply to future years and pursuant to which Mr. Marino is to
be the chief executive officer, president and a director of the Company at an
annual base salary of $150,000 plus a bonus determined by the Board of
Directors. The current employment agreement is for an initial term of two years
commencing January 2, 1997, and will automatically be extended for additional
one-year terms unless either party elects not to extend the term. If the Company
makes the election, Mr. Marino will be entitled (i) to receive his base salary
for a period of 24 months following expiration and a bonus equal to the average
of any annual bonuses he may have earned with respect to the immediately
preceding two full calendar years of his employment or, if greater, the bonus,
if any, Mr. Marino has received in respect of his 1996 employment, and (ii) to
exercise all vested options which have been granted to him for a period of 12
months from the date of expiration. If the Company otherwise terminates the
employment agreement without cause or if Mr. Marino terminates the employment
agreement because of a reduction in his responsibilities or compensation or a
change in his employment location, Mr. Marino will be entitled to receive the
termination compensation described above and the vesting period of any unvested
options granted to Mr. Marino will accelerate and such options and all
previously vested options will be exercisable for a period of 12 months from the
date of termination. In the event of a termination of Mr. Marino's employment at
his election within 12 months following a change in control of the Company (as
defined in the employment agreement), he will be entitled to receive the
termination compensation described above, including the acceleration of the
vesting of his options, but the period for exercising any options will be three
months from termination. If, following change in control, Mr. Marino agrees to
remain employed under different terms of employment than those contained in his
employment agreement, he will be entitled to be paid in addition to his
compensation under the new employment arrangement his base salary for the
remainder of his then current employment term. In March 1998, the Board of
Directors extended the term of Mr. Marino's employment agreement through January
1, 2000 and increased his base salary, effective as of January 1, 1998, to
$175,000. Mr. Marino was granted an option to purchase 20,000 shares of Common
Stock in March 1998 at an exercise price of $6.06 per share and exercisable in
two equal cumulative installments on January 1, 1999 and December 31, 1999.
Mr. LoPresti has a severance arrangement with the Company under which he is
entitled to receive one year's base salary if the Company terminates his
employment within one year following a change in control.
15
<PAGE>
REPORT OF THE COMPENSATION COMMITTEE ON EXECUTIVE COMPENSATION
The responsibilities of the Compensation Committee include making
recommendations to the Board concerning the compensation package of the chief
executive officer and reviewing his recommendations concerning compensation of
other Company officers. The Committee also administers the Company's stock
option plans.
The Committee favors the fairly typical structure of a compensation package
for executive officers comprised of a base salary, short-term incentive
compensation in the form of an annual bonus and long-term incentive compensation
through the grant of Common Stock purchase options. The Company is relatively
small with only two executive officers and the levels of compensation for them
have been fixed largely based upon perceptions of compensation levels of
comparable personnel in the San Francisco Bay area.
CHIEF EXECUTIVE OFFICER COMPENSATION. In March 1998, the Company reached
agreement with Mr. Marino concerning his employment as chief executive officer
retroactive to January 1998 in recognition of the positive performance of the
Company and extended the agreement on a slightly modified basis through January
1, 2000. The terms of the agreement as now in effect are described above under
the caption "EMPLOYMENT CONTRACT WITH EXECUTIVE". Mr. Marino's base salary and
option grant were established through arm's length negotiations at levels which
were believed, without independent study, to be comparable to what would have
been available to Mr. Marino at a company similar to the Company.
Mr. Marino's bonus in 1997 ($25,000, which was 16.7% of his base salary) was
based upon the Board's assessment of his efforts in achieving improved rentals
for the Company's properties, and in identifying and completing the acquisition
of two new properties for the Company. The Company does not have a formal bonus
plan.
Section 162(m) of the Internal Revenue Code of 1986 (the "Code"), enacted in
1993, generally disallows a tax deduction to public companies for compensation
over $1,000,000 paid to each of the company's chief executive officer and the
four other most highly compensated executive officers. Because of the range of
compensation paid by the Company to its executive officers, the Compensation
Committee has not established any policy regarding annual compensation to such
executive officers in excess of $1,000,000.
THE COMPENSATION COMMITTEE
Richard M. Osborne, CHAIRMAN
Marshall A. Jacobs (former director)
Martin S. Roher
16
<PAGE>
PACIFIC GATEWAY PROPERTIES, INC. (PGP)
PERFORMANCE GRAPH
COMPARISON OF FIVE YEAR CUMULATIVE TOTAL RETURN*
AMONG PGP, DOW JONES GLOBAL MARKET INDEX-US AND DOW JONES REAL
ESTATE INVESTMENT INDEX-US**
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
PACIFIC GATEWAY
PROPERTIES DOW JONES GLOBAL-US INDEX DOW JONES REAL ESTATE MARKET INDEX
<S> <C> <C> <C>
1992 $100 $100 $100
1993 $143 $110 $117
1994 $152 $111 $111
1995 $110 $152 $138
1996 $124 $188 $185
1997 $183 $251 $221
</TABLE>
- ------------------------
Assumes $100 invested on 12/31/92 in New York Common, the Dow Jones Global
Market Index-US and the Dow Jones Real Estate Investment Index-US.
* Total return assumes reinvestment of dividends.
** Fiscal year ending December 31.
The above graph compares the performance of the Company with that of the Dow
Jones Global Market Index-US (formerly the Dow Jones Equity Market Index) and
the Dow Jones Real Estate Investment Index-US.
17
<PAGE>
THE REINCORPORATION
The following discussion summarizes all material aspects of the proposed
Reincorporation pursuant to the Reincorporation Agreement. This summary is not
intended to be complete and is subject to, and is qualified in its entirety by
reference to, the Maryland General Corporation Law ("MGCL"), the New York
Business Corporation Law (the "NYBCL"), the New York Company's Articles of
Incorporation (the "Articles"), the New York Company's Bylaws (the "Bylaws"),
the Agreement and Plan of Merger (the "Reincorporation Agreement"), a copy of
which is included in this Proxy Statement/Prospectus as Annex A, the Articles of
Incorporation of the Maryland Company (as such articles may be amended and
supplemented, the "Maryland Articles"), a copy of which is included in this
Proxy Statement/ Prospectus as Annex B, and the Bylaws of the Maryland Company
(the "Maryland Bylaws"), a copy of which is included in this Proxy
Statement/Prospectus as Annex C. The Board of Directors of the Maryland Company,
and the Company as the sole stockholder of the Maryland Company before the
Reincorporation, reserve the right to amend or amend and restate the Maryland
Articles before consummation of the Reincorporation, as long as such amendment
or amendment and restatement would not be materially adverse to the Company's
shareholders. References to the "Company" in this section entitled "The
Reincorporation" mean the New York Company before the Reincorporation and the
Maryland Company after the Reincorporation, as the context requires.
THE BOARD OF DIRECTORS RECOMMENDS THAT THE SHAREHOLDERS VOTE FOR APPROVAL OF
THE REINCORPORATION.
BACKGROUND
Commencing operations in April 1984, the Company historically has acquired,
held, managed and disposed of income-producing real estate located throughout
the United States. The Company's portfolio of commercial properties currently
includes: (1) Walnut Creek Executive Park, a 419,000 square foot office park;
(2) South Bay Office Tower, a 161,000 square foot office building; (3) North
Tucson Business Center, a 91,000 square foot office/industrial building; (4)
Weston Office Building, a 15,000 square foot office building; (5) 410 First
Avenue, a 38,000 square foot office/industrial building; (6) West Valley
Executive Park, a 164,000 square foot office park; and (7) 930 Montgomery
Street, a 23,000 square foot office building. In addition, the Company owns a
22.8% interest in a partnership formed to develop Rincon Center, a mixed-use
(retail, office and apartment) complex in downtown San Francisco. The Company
only engages in the management of its own properties.
PROPERTIES
GENERAL
As of September 30, 1998, the Company's portfolio of properties consisted of
office income-producing properties located in California, Arizona, Florida and
Massachusetts. The total rentable square footage of the properties at September
30, 1998, was approximately 921,000 rentable square feet. As of September 30,
1998, the weighted average occupancy rate of the properties was approximately
97%.
For the nine months ended September 30, 1998, three of the
properties--Walnut Creek Executive Park, West Valley Executive Park and South
Bay Office Tower--had net book values equal to 10% or more of the Company's
total assets or had gross revenue that amounted to 10% or more of the Company's
aggregate gross revenue.
Each of the properties is held by the Company in fee simple, except for the
Rincon Center, which is owned in fee simple by a partnership, of which the
Company holds 22.8% of the limited partnership and non-managing general partner
interests. Substantially all of the income from the Company's properties
consists of rent received under long term leases. These leases generally provide
for the
18
<PAGE>
payment of rent in advance and for the payment by the tenants of a pro-rata
share of taxes, insurance and utilities. For the nine months ended September 30,
1998, no individual tenants in any of the Company's wholly owned properties
contributed 15% or more to consolidated investment property revenues.
Management believes that all of the wholly owned properties and property
owned in partnership with others are adequately covered by insurance. The
Company's wholly owned San Francisco Bay Area properties do not maintain
earthquake insurance. Information relating to mortgages, notes and loans payable
is set forth in Management's Discussion and Analysis of Financial Condition and
Results of Operations and Note 3 to the Consolidated Financial Statements of the
Company.
Within its geographic area of operation, the Company is subject to
competition from a variety of investors, including insurance companies, pension
funds, corporate and individual real estate developers, real estate investment
trusts and investors with similar investment objectives to those of the Company.
Some of these competitors have greater financial resources, larger staffs and
longer operating histories than the Company. As an owner of commercial real
estate properties, the Company competes with other owners of similar properties
in connection with their financing, sale or lease transactions.
The following table sets forth certain information regarding the Company's
properties that were owned as of September 30, 1998:
<TABLE>
<CAPTION>
# OF UNITS
PROPERTY GENERAL AND/OR # OF TENANTS % REGISTRANT
NAME DESCRIPTION LOCATION LEASABLE SQ. FT. AND OCCUPANCY % OWNED BY OWNERSHIP
- --------------- ---------------- -------------- ---------------- ---------------- ---------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Walnut Creek 11 two-story Walnut Creek, 420,000 sq.ft. 60 tenants; 98% Registrant 100%
Executive Park wood framed California occupancy
garden office
buildings, and
one three- story
structural steel
frame office
building
South Bay Twelve-story San Jose, 170,000 sq.ft. 40 tenants; 96% Registrant 100%
Office Tower office building California occupancy
North Tucson Single-story Tucson, 91,000 sq. ft. 3 tenants; 100% Registrant 100%
Business Center office/ Arizona occupancy
industrial
building
Weston Office Three-story Ft. 14,000 sq. ft. 3 tenants; 100% Registrant 100%
Building office building Lauderdale, occupancy
Florida
410 First Single-story Needham, 38,000 sq. ft. 1 tenant; 100% Registrant 100%
Avenue office/ Massachusetts occupancy
industrial
building
West Valley Campus style San Jose, 165,000 sq. ft. 73 tenants; 94% Registrant 100%
Executive Park office park with California occupancy
five two-story
and one single-
story wood frame
buildings
930 Montgomery Six-story, steel San Francisco, 23,000 sq. ft. 8 tenants; 100% Registrant 100%
Street frame office California occupancy
building
Rincon Center Major mixed-use San Francisco, 63,000 sq. ft. Retail Space--35 Rincon Center 22.8%
project in California of retail tenants; 100% Associates LP
downtown San space; 414,000 occupancy Office
Francisco sq. ft. of Space--9
office space; tenants; 100%
320 apartments, occupancy
200,000 sq. ft. Apartments-- 99%
of residential occupancy
space
</TABLE>
19
<PAGE>
CAPITAL IMPROVEMENTS, TENANT IMPROVEMENTS, LEASING COMMISSIONS AND OTHER
DEFERRED COSTS
While maintaining high occupancy levels in each of its properties and
markets, the Company also focuses on controlling the expenditures associated
with leasing, renewing or re-leasing space. The following table sets forth
information related to new and renewal leasing activity and expenditures for the
nine month period ended September 30, 1998.
<TABLE>
<CAPTION>
PERCENTAGE
WEIGHTED CHANGE IN
WEIGHTED AVERAGE WEIGHTED WEIGHTED
NUMBER AVERAGE COSTS PER AVERAGE AVERAGE
OF SQUARE LEASE SQ. FOOT EFFECTIVE EFFECTIVE
TYPE LEASES FEET TERM (MO.) (1) RENTAL RATE RENTAL RATE(2)
- ---------------------------------- ------------- --------- --------------- ----------- ------------- -------------------
<S> <C> <C> <C> <C> <C> <C>
New Leases........................ 48 163,980 55 $ 10.21 $ 2.06 58%
Renewals.......................... 28 63,003 39 $ 3.35 $ 2.07 31%
<CAPTION>
TENANTS
TYPE RETAINED (3)
- ---------------------------------- ---------------
<S> <C>
New Leases........................ N/A
Renewals.......................... 73%
</TABLE>
- ------------------------
(1) Represents tenant improvements and commission costs per square foot.
(2) Measured as the difference between net weighted average effective rents on
new and renewal leases in 1998 compared to 1997.
(3) Based upon occupied square footage, percentage of tenants retained by the
Company at lease expiration, tenants the Company chose not to renew to
accommodate the expansion of existing tenants and tenants that renewed, but
moved to another space.
During the three and nine months ended September 30, 1998, there were
additions to investment properties amounting to approximately $401,000 and
$3,272,000, respectively, for tenant improvements, capital improvements and
other deferred costs, which includes leasing commissions. The Company
anticipates further additions to investment properties of approximately
$1,157,000 during the remainder of 1998.
WALNUT CREEK EXECUTIVE PARK
Walnut Creek Executive Park is a 420,000 square foot office park consisting
of 12 low-rise (two and three story) office buildings in Walnut Creek,
California. Tenants of this property include banking, healthcare,
telecommunications, research and development enterprises and professional
companies.
For the nine months ending September 30, 1998, the average occupancy rate
for the property was 95%, and the average rental rate was $1.45 per square foot.
As of September 30, 1998, the property was approximately 98% leased and two
tenants occupied 10% or more of the rentable square footage, Airtouch
Communications, Inc. and Kaiser Foundation, whose principal businesses are
telecommunications and healthcare, respectively. Their leases provide for
$2,848,000 rent per year, expire on March 2001 and September 2003, respectively,
and each of these tenants have options to renew their leases.
20
<PAGE>
The following table shows lease expiration data as of September 30, 1998 for
the Walnut Creek Property assuming that no tenants exercise renewal options:
<TABLE>
<CAPTION>
PERCENTAGE OF
TOTAL REVENUE
EXPIRING REPRESENTED
NUMBER SQUARE ANNUAL BY EXPIRING
YEAR TENANTS EXPIRING FOOTAGE REVENUE LEASES
- ------------------------------------------------------- ------------------- --------- ------------ -------------
<S> <C> <C> <C> <C>
1999................................................... 22 93,969 $ 485,731 19.6%
2000................................................... 15 23,537 263,971 10.7%
2001................................................... 8 158,230 514,830 20.8%
2002................................................... 4 27,822 293,153 11.9%
2003................................................... 7 60,796 682,366 27.6%
2004................................................... 2 8,154 101,523 4.1%
2005................................................... 1 8,367 53,549 2.2%
2006................................................... 0 0 0 0.0%
2007................................................... 0 0 0 0.0%
2008................................................... 1 23,689 75,805 3.1%
Totals................................................. 60 404,564 $ 2,470,928 100.0%
</TABLE>
The Walnut Creek property's federal tax basis is $17,752,000. Land,
buildings and improvements are recorded at cost. Depreciation for federal income
tax purposes on investment properties is provided using the Modified Accelerated
Cost Recovery System (MACRS) method over statutory useful lives ranging from 7
to 39 years. Capitalized loan costs consist of loan fees, legal, accounting,
engineering, appraisal, and other costs associated with financings and are
amortized using the straight-line method over the primary term of related debt
instrument. Costs associated with a lease are amortized over the statutory
period required. Repairs and maintenance are charged to expense as incurred.
WEST VALLEY EXECUTIVE PARK
West Valley Executive Park is a 165,000 square foot campus style office park
comprised of five two-story buildings and one single-story building in San Jose,
California. Tenants of this property include healthcare, high-tech and software
related companies, financial services and other professional services companies.
For the nine months ending September 30, 1998, the average occupancy rate
for the property was 80% and the average rental rate was $1.60 per square foot.
As of September 30, 1998, the property was approximately 94% leased, and no
tenants occupied 10% or more of the rentable square footage.
21
<PAGE>
The following table shows lease expiration data as of September 30, 1998 for
the West Valley
Property assuming that no tenants exercise renewal options:
<TABLE>
<CAPTION>
PERCENTAGE OF
TOTAL REVENUE
EXPIRING REPRESENTED
NUMBER SQUARE ANNUAL BY EXPIRING
YEAR TENANTS EXPIRING FOOTAGE REVENUE LEASES
- ------------------------------------------------------- ------------------- --------- ------------ -------------
<S> <C> <C> <C> <C>
1999................................................... 6 5,408 $ 68,870 3.9%
2000................................................... 11 13,167 308,317 17.3%
2001................................................... 21 40,854 528,520 29.7%
2002................................................... 11 34,268 468,730 26.4%
2003................................................... 9 37,674 353,885 19.9%
2004................................................... 1 6,352 49,927 2.8%
2005................................................... 0 0 0 0.0%
2006................................................... 0 0 0 0.0%
2007................................................... 0 0 0 0.0%
2008................................................... 0 0 0 0.0%
Totals................................................. 59 137,723 $ 1,778,249 100.0%
</TABLE>
The West Valley Executive Park property's federal tax basis is $8,914,000.
Land, buildings and improvements are recorded at cost. Depreciation for federal
income tax purposes on investment properties is provided using the MACRS method
over statutory useful lives ranging from 7 to 39 years. Capitalized loan costs
consist of loan fees, legal, accounting, engineering, appraisal, and other costs
associated with financings and are amortized using the straight-line method over
the primary term of related debt instrument. Costs associated with a lease are
amortized over the statutory period required. Repairs and maintenance are
charged to expense as incurred.
SOUTH BAY OFFICE TOWER
South Bay Office Tower is a 170,000 square foot twelve story office building
in San Jose, California. Tenants of this property include healthcare,
telecommunications, research and development enterprises, and professional
service companies.
For the nine months ending September 30, 1998, the average occupancy rate
for the property was 91% and the average rental rate was $1.92 per square foot.
As of September 30, 1998, the property was approximately 96% leased, and two
tenants occupied 10% or more of the rentable square footage, Synacom Technology,
Inc. and Netcom On Line Communications, whose principal businesses are
telecommunications, with their leases expiring on February 2003 and August 1999,
respectively.
22
<PAGE>
The following table shows lease expiration data as of September 30, 1998 for
South Bay Office Tower assuming that no tenants exercise renewal options:
<TABLE>
<CAPTION>
PERCENTAGE OF
TOTAL REVENUE
EXPIRING REPRESENTED
NUMBER SQUARE ANNUAL BY EXPIRING
YEAR TENANTS EXPIRING FOOTAGE REVENUE LEASES
- ------------------------------------------------------- ------------------- --------- ------------ -------------
<S> <C> <C> <C> <C>
1999................................................... 9 38,973 482,516 18.4%
2000................................................... 8 12,530 203,610 7.7%
2001................................................... 12 40,450 639,153 24.3%
2002................................................... 8 35,320 783,523 29.8%
2003................................................... 6 28,951 421,337 16.0%
2004................................................... 0 0 0 0.0%
2005................................................... 1 5,194 98,686 3.8%
2006................................................... 0 0 0 0.0%
2007................................................... 0 0 0 0.0%
2008................................................... 0 0 0 0.0%
Totals................................................. 44 161,418 $ 2,628,825 100.0%
</TABLE>
The South Bay Office Tower property's federal tax basis is $11,447,000.
Land, buildings and improvements are recorded at cost. Depreciation for federal
income tax purposes on investment properties is provided using the MACRS method
over statutory useful lives ranging from 7 to 39 years. Capitalized loan costs
consist of loan fees, legal, accounting, engineering, appraisal, and other costs
associated with financings and are amortized using the straight-line method over
the primary term of related debt instrument. Costs associated with a lease are
amortized over the statutory period required. Repairs and maintenance are
charged to expense as incurred.
PRINCIPAL REASONS FOR THE REINCORPORATION AND REIT ELECTION
The Company is currently taxable as a "C corporation" for federal income tax
purposes, and accordingly, its income is subject to a corporate-level tax when
earned and also to a shareholder-level tax on any distribution of those
earnings. For a number of years, however, the Company has been able to utilize
net operating losses ("NOLs") to eliminate most of this corporate-level tax.
Thus, the Company's earnings were effectively subject to only a
shareholder-level tax. The Company has not paid any dividends since the third
quarter of 1990. The Company anticipates that its NOLs may be fully utilized
over the next several years, and thus, unless the Company restructures, the
Company's earnings will potentially become subject to two levels of taxation.
Because REITs generally are not subject to entity-level taxation, the Company's
Board has determined that the Company's qualification and election to be taxed
as a REIT for federal income tax purposes would be economically beneficial to
the Company and its shareholders. The Company believes that after the
Reincorporation it will be organized and will operate in such a manner as to
qualify for taxation as a REIT under the Code. The Reincorporation is not
required, however, for the Company to qualify as a REIT.
Management also believes that other benefits will result from the Company's
election of REIT status. Specifically, management believes that investors
currently consider investments in REITs more favorably than investments in other
entities that own real estate (such as C corporations or limited partnerships).
Because REITs must distribute to their shareholders at least 95% of their
taxable income (with certain adjustments), election of REIT status will result
in the commencement of distributions by the Company. Additionally, based upon
the large amounts of capital raised by REITs during the past several years, the
potentially greater level of holdings by institutional investors and the greater
number of research analysts and brokerage firms following REITs than in the
past, depending on market and general economic conditions, the Company may have
greater access to public and private sources of
23
<PAGE>
debt and equity capital than it now has, potentially enabling the Company to
raise capital on more favorable terms than are now available. Because the
Company's strategy is to continue to acquire properties to increase earnings and
dividends, the ability to access more, lower cost capital should facilitate the
Company's growth plans. Finally, following the Reincorporation, the Company
intends to transfer a majority of the assets currently held in its operating
subsidiaries to an umbrella limited partnership (an "Operating Partnership") and
adopt an "UPREIT" structure, as described below. The limited partnership
interests ("Units") in the Operating Partnership could be issued to acquire
property in transactions that would not trigger immediate tax obligations for
certain sellers and, as a result, the Company's opportunities for acquisitions
may be expanded. See "The REIT Election--Tax Aspects of Interests in
Partnerships and Qualified REIT Subsidiaries--UPREIT Structure." It is expected
that, in order to comply with the requirements imposed by the Company's lenders,
the Company will retain two properties, the North Tucson Business Center and the
South Bay Office Tower, in directly owned operating subsidiaries.
The REIT Election will result in application of ownership requirements and
transfer restrictions to the Company's capital stock, and maintenance of REIT
status will require compliance with certain asset, income, organizational and
distribution requirements. See "The REIT Election--Consequences of REIT
Election." These requirements could, for instance, restrict the Company's
flexibility in disposing of certain assets and limit the extent to which the
Company can retain earnings. Nonetheless, the Company believes that the tax
benefits of REIT status outweigh any disadvantages of REIT status. See "The REIT
Election--Failure of the Company to Qualify as a REIT."
Because the State of Maryland has for a number of years encouraged REITs to
incorporate in that state and has adopted comprehensive, modern and flexible
corporate laws which are periodically updated and revised to meet changing
business needs, and based upon recent industry practice and advice of its
advisers, management of the Company believes that it would be beneficial to the
Company and its shareholders to change its domicile to Maryland in connection
with its election of REIT status. The MGCL was recently amended to expressly
permit corporations incorporated under the laws of the State of Maryland to
include provisions in their charters providing for restrictions on
transferability for any purpose--including restrictions designed to permit a
corporation to qualify as a REIT under the Code. In addition, Maryland
corporations are not subject to annual franchise or similar taxes imposed by
other states on corporate entities. As a result of these and other factors, a
number of REITs have been incorporated in Maryland. The Board of Directors
believes that reincorporation in Maryland should provide greater predictability
with respect to the Company's corporate affairs as a REIT.
To take advantage of the benefits of REIT status, management has proposed
that the Company effect the Reincorporation and elect to be treated as a REIT
for federal income tax purposes. The Board of Directors of the Company
considered and unanimously approved the Reincorporation Agreement pursuant to
which the Reincorporation will be effected. The Board has also authorized the
Company's REIT Election. Accordingly, the Maryland Company has been duly
incorporated and the New York Company and the Maryland Company have entered into
the Reincorporation Agreement, which provides for the consummation of the
Reincorporation, subject to the approval of the shareholders.
As noted above, the Reincorporation, providing for the Merger and
contemplating the REIT Election, has been unanimously approved by the Board of
Directors. The Reincorporation Agreement provides, however, that the Board of
Directors may terminate the Reincorporation Agreement and abandon or delay the
implementation of the Merger if for any reason, including, but not limited to,
changes in legislation affecting REITs, negotiations regarding the debt
restructuring of Rincon Center (see the discussion regarding Rincon in the
Company's Form 10-K, included in this Proxy Statement/ Prospectus as Annex E,
under Item 3, Legal Proceedings and Note 2 to the Company's Consolidated
Financial Statements and updated information in the Company's Form 10-Q
quarterly report, included in this Proxy Statement/Prospectus as Annex F) and
the number of shares for which appraisal rights
24
<PAGE>
have been exercised and the cost to the Company thereof, the Board of Directors
determines that it is inadvisable to proceed with the Reincorporation or that
the implementation of the Reincorporation should be delayed. See "Rights of
Dissenting New York Company Shareholders" below. If the Reincorporation is not
consummated, management believes that it is unlikely that the Company will
consummate the REIT Election.
CONDITIONS TO THE REINCORPORATION
The obligations of the Company and the Maryland Company to effect the
Reincorporation are each subject to (i) no statute, rule, regulation, executive
order, decree, injunction or other order having been executed, entered,
promulgated or enforced by any court or governmental authority which is in
effect and has the effect of prohibiting consummation of the Reincorporation and
(ii) the approval of the shareholders by an affirmative vote of two-thirds of
the outstanding shares of stock entitled to vote at the Annual Meeting or
subsequent special meeting called to continue the business of the Annual
Meeting. The Company and the Maryland Company are not aware of any regulatory
approvals required in connection with the Reincorporation. If any such
regulatory approvals are required, the Company and the Maryland Company intend
to seek such approvals as promptly as practicable.
CERTAIN CONSEQUENCES OF THE MERGER
The Reincorporation will be effected by the Merger of the New York Company
with and into the Maryland Company, a wholly owned subsidiary of the Company,
which will be incorporated under Maryland law for purposes of the Merger. The
Maryland Company will be the surviving corporation in the Merger and will
continue under the name Pacific Gateway Properties, Inc. The New York Company
will cease to exist as a result of the Merger.
The Merger will not become effective until the later of the time that the
Articles of Merger are accepted by the State Department of Assessments and
Taxation of Maryland and a Certificate of Merger is accepted by the Department
of State of the State of New York (such time, the "Effective Time"). At the
effective time of the Merger, the Company will be governed by the Maryland
Articles, the Maryland Bylaws and the MGCL.
Upon completion of the Merger, each outstanding share of New York Common
will be converted automatically into the right to receive one share of common
stock of the Maryland Company and each share of New York Preferred will be
converted automatically into the right to receive one share of Preferred. As a
result, the New York Company will cease to exist and the Maryland Company will
continue to operate the business of the Company under the name Pacific Gateway
Properties, Inc.
Promptly after the Effective Time, the New York Company will cause an
exchange agent (the "Exchange Agent") to mail to each person who was, at the
Effective Time, a holder of record of shares of New York Common, a letter of
transmittal to be used by such holders in forwarding the certificates and
instructions for effecting the surrender of the certificates in exchange for
certificates representing the shares of Maryland Common to which such holders
are entitled pursuant to the Merger. Upon surrender to the Exchange Agent of a
certificate for cancellation, together with a duly executed and completed letter
of transmittal, the holder of such certificate will be entitled to receive
certificates representing that number of shares of Maryland Common to which such
holder is entitled pursuant to the Merger and unpaid dividends and
distributions, if any, which such holder has the right to receive in respect of
the certificate surrendered, after giving effect to any required withholding
tax, and the certificate so surrendered will be cancelled. HOLDERS OF NEW YORK
COMMON SHOULD NOT SEND IN THEIR CERTIFICATES UNTIL THEY RECEIVE A LETTER OF
TRANSMITTAL FROM THE EXCHANGE AGENT.
25
<PAGE>
At or after the Effective Time, there will be no transfers on the transfer
books of the New York Company of shares of New York Common which were
outstanding immediately prior to the Effective Time.
In the event that any certificate has been lost, stolen or destroyed, upon
the making of an affidavit of that fact by the person claiming such certificate
to be lost, stolen or destroyed and, if required by the Maryland Company, the
posting by such person of a bond in such reasonable amount as the Maryland
Company may direct as indemnity against any claim that may be made against it
with respect to such certificate, the Exchange Agent will issue in exchange for
such lost, stolen or destroyed certificate (subject to the Maryland Articles)
the shares of Common Stock of the Maryland Company to which such holders are
entitled pursuant to the Merger and any unpaid dividends and distributions on
the shares of Common Stock of the Maryland Company to which such holders are
entitled pursuant to the Merger, as described above.
Similar procedures will apply with respect to the holders of Preferred Stock
of the New York Company.
The Reincorporation will result in no changes in the Company's management,
capitalization, assets, liabilities or net worth; however, to maintain REIT
status, certain ownership, distribution, asset and income tests must be
satisfied and certain transfer restrictions will apply to capital stock of the
Maryland Company. See "The REIT Election--Taxation of the Company" and "The REIT
Election-- Failure of the Company to Qualify as a REIT." The Merger will be
accounted for as a transfer of interests between entities under common control
in accordance with U.S. generally accepted accounting principles. Therefore, the
assets and liabilities transferred in connection with the Merger will be
recorded at historical cost. The consolidated financial condition and results of
operations of the Company immediately after the consummation of the
Reincorporation will be identical to that of the Company immediately prior to
the Reincorporation. All outstanding shares of the New York Company capital
stock will be converted upon the Merger on a one-for-one basis into the right to
receive shares of Maryland Company capital stock having the same rights and
privileges, except for the restrictions on ownership and transfer included in
the Maryland Articles in order to permit the Maryland Company to preserve REIT
status. See "The REIT Election--Restrictions on Transfer and Ownership." In
addition, at the Effective Time of the Merger, the Board of Directors of the
Maryland Company will consist of those persons serving as Directors of the
Company immediately before the Merger, who are the persons described in this
Proxy
26
<PAGE>
Statement/Prospectus. The individuals serving as executive officers of the
Company immediately before the Merger will serve as executive officers of the
Maryland Company upon effectiveness of the Merger. The Maryland Company will
assume the existing stock option plans of the New York Company, and outstanding
options to acquire New York Company capital stock will be converted into options
to acquire Maryland Company capital stock on a one-for-one basis. The Maryland
Company will also assume the New York Company's 401(k) plan and other employee
benefit plans.
EFFECTS OF THE REINCORPORATION ON THE RIGHTS OF SHAREHOLDERS; CHANGES TO THE
ARTICLES AND BYLAWS
The Maryland Articles contain certain provisions intended to assist the
Company in complying with Code requirements applicable to REITs. A discussion of
the material similarities and differences to the Company and its shareholders,
directors and officers resulting from the Reincorporation appears below. This
discussion does not address each difference between Maryland and New York law,
but focuses on those differences that the Board of Directors believes are most
relevant to existing shareholders. This discussion is not intended to be
complete and is qualified in its entirety by reference to the Maryland Articles
and Maryland Bylaws, attached hereto as Annex B and Annex C respectively, and to
the MGCL, the NYBCL, the Articles and the Bylaws. The Board of Directors of the
Company has the right, prior to consummating the Reincorporation, to make
ministerial changes and such other changes as the Board determines in order to
permit the Company to comply fully with Maryland law and the laws and rules
relating to qualification as a REIT for federal income tax purposes, and to
conform to the provisions of the Articles.
<TABLE>
<CAPTION>
NEW YORK MARYLAND
<S> <C> <C>
GENERAL Under the Articles, the Company is The Maryland Articles define the
formed for the purpose of engaging in purpose of the Company to engage in the
any lawful act or activity under New business of a REIT. Accordingly, the
York law. Since its formation, with the Maryland Company will need to restrict
exception of its prior ownership of a its ownership to particular types of
hotel and provision of management properties and limit the provision of
services to third parties, the third party management services. Under
Company's operations have substantially the Maryland Articles, however, the
consisted and continue to consist of Maryland Company also is permitted to
investments and activities that would engage in any lawful act or activity
be suitable for a REIT, as that term is permitted of Maryland corporations. As
now defined by the Code. a result, the Board of Directors of the
Maryland Company will have latitude to
determine the appropriate investments
and activities for the Maryland
Company, including, if the Board of
Directors believes it is in the best
interests of the shareholders,
undertaking activities or investments
that may cause the Company to fail to
qualify as a REIT.
LIABILITY OF Under the NYBCL, a shareholder or Similarly, under the MGCL, in most
SHAREHOLDERS subscriber of shares is not liable to cases, a shareholder or subscriber for
the corporation, except for the shares is not obligated or liable to a
obligation to pay any unpaid portion of Maryland corporation or its creditors
his subscription. except for any unpaid subscription
price or unpaid consideration or unless
liability is imposed pursuant to
another provision of the MGCL. This
limitation of liability of
</TABLE>
27
<PAGE>
<TABLE>
<CAPTION>
NEW YORK MARYLAND
<S> <C> <C>
shareholders of Maryland corporations
is recognized in all jurisdictions in
which the Company conducts operations.
Common law theories of "piercing the
corporate veil" may, however, be used
to impose liability on shareholders in
certain instances.
INSPECTION The Articles do not explicitly provide The Maryland Articles do not explicitly
RIGHTS shareholders a right of inspection of provide shareholders a right of
the Company's books and records, inspection of the Company's books and
although under the NYBCL, shareholders records. Under Maryland law, one or
owning at least 5% of the outstanding more shareholders who together have
stock of any class of a New York been shareholders of record for at
corporation have certain rights to least six months and who together hold
inspect the books and records. at least 5% of the outstanding stock of
any class may inspect the corporation's
books of account and stock ledger,
request a statement of the
corporation's affairs and request a
shareholders list. Any shareholder may
inspect the bylaws, minutes of
proceedings of the shareholders, annual
statement of affairs and voting trust
agreements on file of a Maryland
corporation and may request a statement
showing all stock and securities issued
by the corporation during a specified
period of not more than 12 months
before the date of the request.
SPECIAL The Bylaws provide that with the Under the Maryland Articles, a special
MEETINGS OF exception of a special meeting called meeting of shareholders of the Maryland
SHAREHOLDERS for the purpose of electing directors, Company may be called by the Chairman
a special meeting of shareholders may of the Board, the President, the Board
be called only by a majority vote of of Directors pursuant to a resolution
the entire Board of Directors. adopted by a majority of the directors
or the Secretary upon the written
request of holders of not less than a
majority of all shares of stock then
outstanding and entitled to vote at
such meeting.
SHAREHOLDER The Bylaws provide that shareholders The Maryland Bylaws provide that
ACTION may take action without a meeting only shareholders may take action without a
WITHOUT A by unanimous written consent of the meeting only by unanimous written
MEETING holders of all outstanding shares of consent of the holders of all
stock entitled to vote on such matter. outstanding shares of stock entitled to
vote on such matter. This is consistent
with the MGCL, which provides that
shareholders may take such action only
upon unanimous written consent, a
requirement unattainable by a public
company in most circumstances. This
provision of Maryland law may deter
</TABLE>
28
<PAGE>
<TABLE>
<CAPTION>
NEW YORK MARYLAND
<S> <C> <C>
hostile takeovers, as a holder or group
of holders controlling a majority in
interest of the Maryland Company's
stock will probably not be able to
amend the Maryland Bylaws or remove
directors pursuant to a shareholders'
written consent. The Company does not
believe that this provision will have
any material effect on the Company's
operation, however, because the AMEX
rules limit listed companies in using
written consents in lieu of shareholder
meetings.
PREEMPTIVE The Articles do not provide any The Maryland Articles do not provide
RIGHTS shareholder with any preemptive right any shareholder with any preemptive
to subscribe for any newly issued stock right to subscribe for any newly issued
or other securities of the Company. stock or other securities of the
Accordingly, the Company does not offer Maryland Company. Accordingly, the
shareholders a prior right to purchase Maryland Company does not offer
any new issue of the New York Common in shareholders a prior right to purchase
order to maintain their proportionate any new issue of the Maryland Common in
ownership. order to maintain their proportionate
ownership.
VOTE FOR The Articles and Bylaws do not contain The MGCL provides that the affirmative
EXTRA- specific provisions regarding the vote of two-thirds of all the votes
ORDINARY approval of extraordinary transactions, entitled to be cast is required to
TRANSACTIONS but the NYBCL provides that a merger, approve a consolidation, merger, share
consolidation, dissolution or exchange or transfer of assets, subject
disposition of substantially all of a to certain exceptions. But the MGCL
corporation's assets must be approved also allows a corporation to reduce the
by the holders of two-thirds of all proportion necessary to approve such a
outstanding shares entitled to vote transaction, except that the proportion
thereon. Under the NYBCL, the holders cannot be less than a majority of all
of the New York Preferred vote as a the votes entitled to be cast on the
separate class on certain transactions, matter. Accordingly, the Maryland
such as the Reincorporation. Articles expressly require a majority
of the aggregate voting power of the
outstanding shares to approve certain
extraordinary transactions. The MGCL
does not require a separate class vote
in on transactions such as the
Reincorporation. The holders of the
Maryland Preferred will vote with the
Common Stock on all matters as a single
class, except for amendments affecting
only the Maryland Preferred.
AUTHORIZED The Articles authorize the Company to The MGCL does not permit a corporation
CAPITAL issue 12,000,000 shares of stock, to issue an unlimited number of shares
divided into 2,000,000 shares of of stock, and requires a corporation's
Preferred Stock and 10,000,000 shares articles of incorporation to include
of Common Stock. The Articles give the the total number shares of stock of all
Board of Directors authority to issue classes which the corporation has
the Preferred Stock in authority to issue and
</TABLE>
29
<PAGE>
<TABLE>
<CAPTION>
NEW YORK MARYLAND
<S> <C> <C>
one or more series and to fix the the number of shares comprising each
number, rights, preferences, class. The Maryland Articles authorize
privileges, voting rights and the Maryland Company to issue
restrictions of any such series. Of the 10,000,000 shares of Maryland Common
shares of Preferred Stock authorized by and 2,000,000 shares of preferred stock
the Articles, 300,000 shares have been in one or more classes or series, with
designated Series 1 Preferred Stock. As such rights, preferences, privileges
of the date hereof, 300,000 shares of and restrictions as designated by the
Series 1 Preferred Stock have been Board of Directors. The Maryland
issued by the Company. The Series 1 Articles authorize the Board of
Preferred Stock has a liquidation Directors to classify or reclassify any
preference of $10 per share. unissued stock by designating or
amending the designation of the
preferences, conversion or other
rights, voting powers, restrictions
(including restrictions on transfer),
dividend rights, qualifications and
redemption rights of such unissued
stock.
The Series 1 Preferred Stock also is Of the 2,000,000 shares initially
entitled to receive preferential classified as preferred stock, 300,000
distributions from sale or refinancing shares have been designated in the
proceeds (as defined in the Articles) Maryland Articles as Series 1 Preferred
up to the amount of the liquidation Stock, having rights, preferences and
preference. Upon payment of the privileges substantially identical to
liquidation preference, additional the outstanding Series 1 Preferred
distributions from sale or refinancing Stock. Like the outstanding Series 1
proceeds in an equivalent amount per Preferred Stock the Maryland Preferred
share are payable to the holders of the generally will vote as a single class
Common Stock. Any additional with the Maryland Common, except for
distributions from sale or refinancing certain amendments affecting the par
proceeds are payable ratably to the value, rights, preferences and
holders of the Series 1 Preferred Stock privileges of the Maryland Preferred;
and the Common Stock on an as-converted amendments changing the number of
basis. The Articles do not require the authorized shares of Series 1 Preferred
Company to make any such distributions, Stock; and amendments relating to the
but the Company may not make authorization or issuance of other
distributions to shareholders from sale shares of capital stock having a
or refinancing proceeds until the preference equal to or senior to the
liquidation preference on the Series 1 Series 1 Preferred Stock. In addition,
Preferred Stock has been paid. although the NYBCL may require a class
Distributions from other sources are vote in certain circumstances, the MGCL
not prohibited. The Series 1 Preferred contains no similar requirement and the
Stock is convertible into Common Stock Maryland Articles provide that the
initially on a one-for-one basis. The holders of the Maryland Preferred have
conversion ratio is subject to no voting rights other than as
adjustment for stock splits, specifically set forth in the Maryland
combinations, stock dividends and Articles.
recapitalizations. Upon conversion of
the Series 1 Preferred Stock into
Common Stock, the holders of the Series
1 Preferred Stock are required to repay
any preferential distribution received
back to the Company net of any
distributions from sale or refinancing
</TABLE>
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<CAPTION>
NEW YORK MARYLAND
<S> <C> <C>
proceeds to the holders of the Common
Stock. The Company has agreed to use
its best efforts to nominate a
representative of the holders of the
Series 1 Preferred Stock to serve as a
member of the Company's Board of
Directors until the earlier of a change
of control of the Company (as defined
in the Articles) or such time as the
holders of the Series 1 Preferred Stock
beneficially own less than 60,000
shares of Series 1 Preferred Stock (or
shares Common Stock issued upon
conversion thereof).
The Series 1 Preferred Stock is
entitled to receive dividends on an
as-converted basis with the Common
Stock. The holders of the Series 1
Preferred Stock have demand and
piggyback registration rights. The
holders of the Series 1 Preferred Stock
and certain major holders of the
Company's Common Stock have entered
into an agreement permitting the
holders to participate, on a
proportionate basis, in any sale by the
major holders. If a change of control
transaction is proposed prior to the
Reincorporation, then to the extent the
holders of the Series 1 Preferred Stock
are entitled to a class vote under New
York law, the holders of the Series 1
Preferred Stock have agreed to vote
their shares of Series 1 Preferred
Stock (voting as a separate class) in
the same proportion as the vote of the
holders of the Common Stock with
respect to the proposed transaction.
This provision permits the holders of
the Series 1 Preferred Stock to cast
their vote as they wish voting as a
single class with the Common Stock. The
effect of this provision is that if the
transaction is approved by the
requisite percentage of the shares
voting on the proposed transaction, the
holders of the Series 1 Preferred Stock
could not defeat the transaction
through a separate class vote. In
connection with the sale of the Series
1 Preferred Stock, an affiliate of the
purchaser was relieved of certain
contractual restrictions on the
acquisition of additional stock of the
Company.
</TABLE>
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NEW YORK MARYLAND
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REDEMPTION The Articles are silent with respect to Under the MGCL, a corporation may
AND the Company's ability to repurchase its purchase or acquire its own stock,
RETIREMENT own stock. The NYBCL permits unless (i) the corporation would not be
repurchases of shares out of surplus able to pay its debts as they become
except when the corporation is due in the usual course of business or
insolvent or would be made insolvent (ii) the corporation's total assets
thereby and permits a corporation to would be less than the sum of the
purchase its own shares out of stated corporation's total liabilities plus
capital, except when the corporation is the amount that would be needed, if the
insolvent or would be made insolvent corporation were to be dissolved at the
thereby, if the purchase is made for time of the purchase or acquisition, to
the purpose of (i) eliminating satisfy the preferential rights upon
fractions of shares; (ii) collecting or dissolution of shareholders whose
compromising indebtedness to the preferential rights on dissolution are
corporation; or (iii) paying superior to those whose shares are
shareholders entitled to receive purchased or acquired. Under the
payment for their shares under the Maryland Articles, the Maryland Company
appraisal provisions of the NYBCL. is granted a 90-day option to purchase
stock in excess of the ownership
limits, as provided in the Maryland
Articles.
DIVIDENDS The Articles contain no limitation on The Maryland Articles provide that the
the amount and timing of dividend holders of shares of Common Stock are
payments, although the NYBCL places entitled to receive dividends, out of
certain restrictions on dividend the assets legally available, as
payments. declared by the Board of Directors. The
MGCL permits the payment of dividends
unless (i) the corporation would not be
able to pay its debts as they become
due in the usual course of business or
(ii) the corporation's total assets
would be less than the sum of the
corporation's total liabilities plus,
unless the charter provides otherwise
(which the Maryland Articles do not),
the amount that would be needed, if the
corporation were to be dissolved at the
time of payment of such dividends, to
satisfy the preferential rights upon
dissolution of shareholders whose
preferential rights upon dissolution
are superior to those receiving the
dividends.
DISSENTER'S The NYBCL provides that a dissenting Subject to certain exceptions, the MGCL
RIGHTS shareholder has the right to receive gives a shareholder the right to
the fair value of his shares if he receive the payment of the fair value
objects to: (i) certain mergers and of his shares if he objects to: (i) a
consolidations; (ii) certain merger or consolidation; (ii) a share
dispositions of assets requiring exchange; (iii) a transfer of
shareholder approval; (iii) certain substantially all of a corporation's
share exchanges; or (iv) certain assets; (iv) amendment of the charter
amendments to the certificate of in a way which alters the contract
incorporation which adversely affect rights of any outstanding stock, unless
the rights of such shareholder. The the right to do so is reserved by the
availability of appraisal charter; or (v) a
</TABLE>
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<CAPTION>
NEW YORK MARYLAND
<S> <C> <C>
rights to shareholders of the New York transaction governed by the
Company who dissent from the Merger is supermajority vote provisions for
discussed under "Rights of Dissenting certain business combinations.
New York Company Shareholders" below.
BOARD OF DIRECTORS
NUMBER AND The Articles provide that the number of Under Maryland law, the Maryland
ELECTION Directors initially is eight and may be Articles and the Maryland Bylaws,
increased or decreased by the Bylaws. Directors also are elected by a
The Bylaws provide for the election of plurality vote of the shareholders. The
Directors by a plurality of the votes Maryland Articles provide that the
cast, which means that those nominees number of Directors will be no fewer
receiving the greatest number of votes than three and no more than 13. The
are elected as Directors, whether or Bylaws require that at least two
not any nominee for Director receives a members of the Board of Directors be
majority of the votes entitled to be Independent Directors. Independent
cast on the matter and present in Directors are defined as persons who
person or represented by proxy. are not officers of the Maryland
Company or its subsidiaries or
significant shareholders of the
Maryland Company or close relatives of
any such persons.
REMOVAL AND The Articles provide that, subject to The Maryland Articles provide that
VACANCIES the right of any holders of any series Directors can be removed only for cause
of Preferred Stock to elect additional by the affirmative vote of the
directors (or remove such additional shareholders holding two-thirds of the
directors, once elected), a Director aggregate voting power of the
may be removed from office only for outstanding shares of stock of the
cause and only with the authorization Corporation entitled to vote thereon,
by the affirmative vote of the holders except that when, by the provisions of
of two-thirds of the outstanding shares the Maryland Articles, the holders of
of stock of the Company entitled to shares of Preferred Stock or any series
vote thereon. thereof voting as a class are entitled
to elect any one or more directors, the
directors so elected may be removed
only by the applicable vote of the
holders of the Preferred Stock of such
series voting as a class. This
provision could make it difficult to
remove a director even if a majority of
shareholders supports such removal.
The Maryland Articles provide that
vacancies resulting from death,
resignation, removal or an increase in
the size of the Board of Directors may
be filled by the affirmative vote of a
majority of the entire Board of
Directors. Under both the Maryland
Bylaws and the Maryland Articles,
directors selected by the Board of
Directors to fill vacancies serve until
the next annual meeting of shareholders
and until their successors are elected
and qualified.
</TABLE>
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<CAPTION>
NEW YORK MARYLAND
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LIMITATIONS The Articles provide that generally no The Maryland Articles protect Directors
ON LIABILITY Director will be liable to the Company and officers from liability to the
for any act or omission arising from extent permissible under Maryland law
the performance of his or her duty to and specifically provide that no
the Company. Under the Articles, Director or officer will be liable to
however, a Director may be held liable the Company or to its shareholders for
for his intentional misconduct, bad money damages. Maryland law provides
faith, action for illegal personal gain for limitation on liability except for:
or for certain other specific actions (i) actual receipt of an improper
enumerated in the NYBCL, including the personal benefit in money, property or
declaration of an improper dividend or service; and (ii) active and deliberate
distribution, the making of an improper dishonesty established by a final
loan to a director or an improper judgment as being material to the cause
redemption of shares. of action. The Maryland Articles
provide that neither amendment nor
repeal of the liability limitation, nor
adoption of any charter or bylaw
provision inconsistent with the
liability limitation, will apply to or
affect in any respect the applicability
of the liability limitation to any act
or omission which occurred prior to
such amendment, repeal or adoption.
INDEMNIFICA- The Bylaws provide for indemnification The Maryland Articles and the Maryland
TION of Directors, officers, employees and Bylaws provide for indemnification of
agents of the Company against claims or Directors, officers, employees and
liabilities, as provided in the Bylaws agents of the Maryland Company to the
and to the extent allowed by the NYBCL. extent authorized by applicable law, as
The Bylaws provide that any Director or currently in effect and thereafter
officer of the Company who is made a amended, and the Maryland Articles
party to any action by or in the right provide that neither amendment nor
of the Company is indemnified against repeal of the indemnification provision
the reasonable expenses actually and contained therein, nor adoption of any
necessarily incurred by him in charter or bylaw provision inconsistent
connection with the defense of such with that provision, will apply to or
action or in connection with an appeal, affect in any respect the
except where such director is adjudged indemnification right applicable to any
to have breached his statutory duty to act or omission which occurred prior to
the Company. The Bylaws also provide such amendment, repeal or adoption. The
that any Director or officer of the Maryland Articles and the Maryland
Company who is made a party to any Bylaws state that the indemnification
action, suit or proceeding or against provisions found in those documents are
whom a claim or liability is asserted nonexclusive.
as a result of such person acting on The MGCL provides that a corporation
behalf of the Company other than one by may indemnify any director made a party
or in the right of the Company will be to any proceeding by reason of service
indemnified and held harmless by the in that capacity against judgments,
Company against judgments, fines, penalties, fines, settlements and
amounts paid in settlement and reasonable expenses actually incurred
reasonable expenses, including by the director in connection with the
attorneys' fees, actually and proceeding unless it is established
necessarily incurred as a result of that: (i) the act or omission of the
such action, suit or proceeding or director was material to the matter
appeal
</TABLE>
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<TABLE>
<CAPTION>
NEW YORK MARYLAND
<S> <C> <C>
therein, if such Director or officer giving rise to the proceeding and (A)
acted in good faith for a purpose which was committed in bad faith or (B) was
he reasonably believed to be in the the result of active and deliberate
best interests of the Company and, in dishonesty; or (ii) the director
the case of a criminal proceeding, had actually received an improper personal
no reasonable cause to believe that his benefit in money, property or services;
conduct was unlawful. or (iii) in the case of a criminal
The indemnification provisions are proceeding, the director had reasonable
consistent with the NYBCL. The statute cause to believe that the act or
also prohibits indemnification to cover omission was unlawful. The MGCL also
any amount paid in settlement without prohibits indemnification if the person
court approval or expenses incurred in has been adjudged liable to the
connection with a matter that settled corporation in a proceeding brought by
without court approval. The NYBCL or in the right of the corporation. The
provides that the termination of any MGCL provides that the termination of
action by judgment, settlement, any proceeding by judgment, order or
conviction or upon a plea of NOLO settlement does not create a
CONTENDERE shall not in itself create a presumption that the director did not
presumption that the director did not meet the requisite standard of conduct
act in good faith or in the interest of to be indemnified, and the termination
the corporation. A director is entitled of any proceeding by conviction or plea
to indemnification if he has been of NOLO CONTENDERE, or its equivalent,
successful on the merits or otherwise. or an entry of an order of probation
In other cases, a director may be prior to judgment, creates a rebuttable
indemnified, in the absence of a court presumption that the director did not
order, only if the Board of Directors meet the requisite standard of conduct
acting by a quorum approves it (not to be indemnified.
including the votes of the involved
directors), or, if a quorum is
unobtainable or a quorum of
disinterested directors so directs, the
Board receives written advice from
independent legal counsel that the
indemnification is proper or the
shareholders find that the director met
the applicable standard of care.
ADVANCEMENT Consistent with the NYBCL, the Bylaws The MGCL and the Maryland Bylaws
OF EXPENSES provide for advancement of expenses to provide for advancement of expenses
any indemnified person, provided that actually and reasonably incurred by an
such person has delivered to the indemnified person upon receipt of an
Company a written undertaking to undertaking by or on behalf of the
reimburse the Company in the event it authorized representative to repay such
is determined that such person was not amount if it shall ultimately be
entitled to indemnification. determined that such person is not
entitled to be indemnified by the
corporation.
AMENDMENT OF CHARTER AND BYLAWS
AMENDMENT OF The Articles provide that an amendment In order to amend the charter, the MGCL
CHARTER thereto must receive: (i) in the case requires both: (i) the Board of
of an Directors to
</TABLE>
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<TABLE>
<CAPTION>
NEW YORK MARYLAND
<S> <C> <C>
amendment, alteration, modification, adopt a resolution recommending any
change or repeal of Article IV thereof amendment to the corporation's articles
(relating to the number of authorized of incorporation and (ii) a vote of
shares of stock) the affirmative vote two-thirds of all votes entitled to be
of such percentage (not less than a cast on the matter by shareholders of
majority) as the Board of Directors the corporation approving any such
shall determine of any series of the amendment after receiving proper notice
authorized Preferred Stock in addition of the proposed amendment. The charter
to any other required vote; (ii) in the may provide for shareholder approval by
case of an amendment, repeal or a lower percentage, but not less than a
adoption of any provision inconsistent majority of all the votes entitled to
with Article VIII (relating to approval be cast on the matter. The Maryland
of certain Interested Shareholder Articles generally require approval of
transactions), the affirmative vote of any amendment by the affirmative vote
the holders of 80% or more of the of shareholders holding a majority of
shares of then outstanding Voting Stock the aggregate voting power of the
(as defined in the Articles); or (iii) outstanding shares of the Maryland
in the case of an amendment or change Company, except that an affirmative
to Articles VI (relating to the number vote of shareholders holding at least
of directors), VII (relating to the 70% of the outstanding shares of stock
removal of directors for cause), IX of the Maryland Company entitled to
(relating to the amendment of the vote thereon is required to amend the
Bylaws), X (establishing the power to provisions of the Maryland Articles
call special meetings) and XIII relating to the number and removal of
(establishing these amendment directors, certain amendments to the
requirements), the affirmative vote of Maryland Bylaws, amendments relating to
the holders of at least 70% of all special meetings of shareholders and
outstanding shares of the Company. If amendments to the provisions relating
the Board of Directors is authorized to to amendment of the Maryland Articles.
amend or change any provision of the These provisions of the Maryland
Articles, such amendment or change Articles may make it more difficult for
would require the vote of a majority of minority shareholders to effect these
the entire Board of Directors. kinds of changes.
AMENDMENT OF Generally, the Bylaws grant the Board Under the MGCL the power to adopt,
BYLAWS of Directors the power to adopt, amend amend or repeal bylaws is vested in the
or repeal the Bylaws by the vote of a shareholders, except to the extent the
majority of the entire Board. However, articles of incorporation confer such
an amendment or repeal of certain power to the Board of Directors. The
sections of the Bylaws relating to the Maryland Articles expressly confer that
power to call special meetings of the authority to the Board of Directors
shareholders, nominations of subject to the provisions of the MGCL.
individuals for election as Directors The Maryland Bylaws also grant both the
and filling vacancies on the Board of shareholders and the Board of Directors
Directors requires the affirmative vote the authority to repeal, alter or amend
of at least 70% of all outstanding the Bylaws or adopt new Bylaws by a
shares of the Company. In addition, the majority vote of the voting power of
Bylaws also provide, with the exception the stock entitled to vote or of the
of the enumerated provisions, that the entire Board of Directors,
Bylaws can be amended or repealed, or respectively. The Maryland Articles and
new Bylaws adopted, by the vote of the Bylaws, however, do limit the ability
holders of a majority of all of shareholders, in certain
outstanding shares. circumstances, to alter the number of
votes required for
</TABLE>
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<TABLE>
<CAPTION>
NEW YORK MARYLAND
<S> <C> <C>
shareholder action pursuant to the
Bylaws or an amendment to the Bylaws.
BUSINESS COMBINATIONS
INTERESTED The NYBCL contains provisions regarding The MGCL establishes special
SHAREHOLDER business combinations with interested requirements with respect to "business
TRANSACTIONS shareholders. Accordingly, the Articles combinations" (including a merger,
have provisions (the "Interested consolidation, share exchange or, in
Shareholder Provisions") which require certain circumstances, an asset
that certain transactions involving transfer or issuance of
Interested Shareholders (defined in the reclassification of equity securities)
Articles as the beneficial owners of between a Maryland corporation and any
10% or more of the outstanding Voting person who is the beneficial owner,
Stock or an Affiliate of the Company directly or indirectly, of 10% or more
that was at any time within the of the outstanding voting power of the
two-year period immediately prior to corporation's shares or is an affiliate
the relevant date the beneficial owner or associate of the corporation and
of 10% or more of the then outstanding was, at any time during the two-year
Voting Stock) be approved by the period prior to the date in question,
affirmative vote of 80% of the then the beneficial owner, either directly
outstanding Voting Stock. Certain or indirectly, of 10% or more of the
transactions otherwise covered by the outstanding voting power of the
Interested Shareholder Provisions are corporation's shares (an "Interested
exempted under certain circumstances, Shareholder"), subject to certain
and then require only the affirmative exemptions. In general, an Interested
vote required elsewhere in the Articles Shareholder or any "affiliate" thereof
or by law. may not engage in a "business
combination" with the corporation for a
period of five years following the date
the Interested Shareholder becomes an
Interested Shareholder. Thereafter,
such transactions must be (i)
recommended by the Board of Directors
of such corporation and (ii) approved
by the affirmative vote of at least (a)
80% of the votes entitled to be cast by
holders of the outstanding voting
shares of the corporation and (b) two-
thirds of the votes entitled to be cast
by holders of the outstanding voting
shares of the corporation other than
the shares held by the Interested
Shareholder who will (or whose
affiliate or associate will) be a party
to the business combination. These
provisions of the MGCL do not apply,
however, to business combinations where
shareholders receive certain
statutorily determined value for their
shares or business combinations that
are approved or exempted by the Board
of Directors of such corporation prior
to the time that the Interested
Shareholder becomes an Interested
Shareholder. These provisions of
</TABLE>
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<CAPTION>
NEW YORK MARYLAND
<S> <C> <C>
the MGCL do not apply to Richard
Osborne, the Richard M. Osborne Trust,
Turkey Vulture Fund XIII, Ltd., Liberty
Self Store, Ltd., Third Capital, LLC,
Mark Grossi, Raymond V. Marino and GEM
Value/PGP LLC, or to any other
shareholder that may be exempted
therefrom from time to time by the
Board of Directors.
CONTROL The NYBCL does not contain "control The MGCL provides that "control shares"
SHARE share" provisions and thus there will of a Maryland corporation acquired in a
ACQUISITIONS be additional impediments to a change "control share acquisition" have no
of control of the Maryland Company, as voting rights except to the extent
compared to the New York Company. approved by a vote of two-thirds of the
votes entitled to be cast by
shareholders, excluding shares owned by
the acquirer and officers and directors
who are employees of the corporation.
"Control shares" are shares which, if
aggregated with all other shares
previously acquired which the person is
entitled to vote, would entitle the
acquirer to vote (i) 20% or more but
less than one-third; (ii) one-third or
more but less than a majority; or (iii)
a majority of the total voting power of
outstanding shares. Control shares do
not include shares that the acquiring
person is entitled to vote on the basis
of prior shareholder approval. A
"control share acquisition" means the
acquisition of control shares subject
to certain exemptions.
Under Maryland law, a person who has
made or proposes to make a control
share acquisition, upon satisfaction of
certain conditions (including an
undertaking to pay expenses), may
compel the Board of Directors to call a
special meeting of shareholders to be
held within 50 days of demand to
consider the voting rights of the
shares. If no request for a meeting is
made, the corporation may itself
present the question at any
shareholders' meeting. If voting rights
are not approved at the meeting or if
the acquiring person does not deliver
an acquiring person statement as
required by the statute, then, subject
to certain conditions and limitations,
the corporation may redeem any or all
of the control shares (except those for
which
</TABLE>
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<TABLE>
<CAPTION>
NEW YORK MARYLAND
<S> <C> <C>
voting rights have previously been
approved) for fair value determined,
without regard to voting rights, as of
the date of the last control share
acquisition or of any meeting of
shareholders at which the voting rights
of such are considered and not
approved. If voting rights for control
shares are approved at a shareholders'
meeting and the acquirer becomes
entitled to vote a majority of the
shares entitled to vote, all other
shareholders may exercise appraisal
rights. The fair value of the shares as
determined for purposes of such
appraisal rights may not be less than
the highest price per share paid in the
control share acquisition, and certain
limitations and restrictions otherwise
applicable to the exercise of
dissenters' rights do not apply in the
context of a control share acquisition.
The control share acquisition statute
does not apply to shares acquired in a
merger, consolidation or share exchange
if the corporation is a party to the
transaction, or to acquisitions
approved or exempted by the charter or
bylaws of the corporation. The control
share acquisition statute could have
the effect of discouraging offers to
acquire the Maryland Company and of
increasing the difficulty of
consummating any such offers.
</TABLE>
There is no pending or, to the Company's knowledge, threatened litigation to
which any of its Directors or officers is a party in which the rights of the
Company or its shareholders would be affected if the Company already were
subject to the provisions of Maryland law rather than New York law.
RIGHTS OF DISSENTING NEW YORK COMPANY SHAREHOLDERS
Because the Company will not be technically the "surviving corporation" in
the Merger, shareholders of the Company who do not vote in favor of the
Reincorporation may have the right to seek to obtain payment in cash of the fair
value of their shares by complying with the requirements of Section 623 of the
NYBCL. The dissenting shareholders must file with the Company before a taking of
the vote on the Reincorporation a written objection including a statement of
intention to demand payment for shares and stating such shareholder's name and
residence address, the number of shares of stock as to which dissent is made and
a demand for payment of the fair value of such shares if the Merger is
consummated. Such shareholder may not dissent as to less than all shares owned.
Within 10 days after the vote of shareholders authorizing the Reincorporation,
the Company must give written notice of such authorization to each such
dissenting shareholder. Within 20 days after the filing of such notice, any
shareholder to whom the Company failed to give notice of the Annual Meeting who
elects to dissent from the Merger must file with the Company a written notice of
such election, stating such
39
<PAGE>
shareholder's name and residence address, the number of shares of stock as to
which dissent is made and a demand for payment of the fair value of the shares.
Such shareholder may not dissent as to less than all shares owned. At the time
of filing the notice of election to dissent or within one month thereafter,
dissenting shareholders must submit certain certificates representing shares to
the Company or its transfer agent for notation thereon of the election to
dissent, after which such certificates will be returned to the shareholder.
Failure to submit the certificates may result in the loss of dissenter's
rights. Within 15 days after the expiration of the period within which
shareholders may file their notices of election to dissent, or within 15 days
after consummation of the Merger, whichever is later (but not later than 90 days
after the shareholders' vote authorizing the Merger), the Company must make a
written offer (which, if the Merger has not been consummated, may be conditioned
upon such consummation) to each shareholder who has filed such notice of
election to pay for the shares at a specified price which the Company considers
to be their fair value. The Company anticipates that fair value for the capital
stock will be predicated on then-current market trading prices. If the Company
and the dissenting shareholder are unable to agree as to such value, Section 623
provides for judicial determination of value. A negative vote on the
Reincorporation does not constitute a written objection required to be filed by
an objecting shareholder. Failure by a shareholder to vote against the
Reincorporation, however, will not constitute a waiver of rights under Section
623 provided that a written objection has a been properly filed and such
shareholder has not voted in favor of the Reincorporation.
The foregoing does not purport to be a complete statement of the provisions
of Section 623 and is qualified in its entirety by reference to said Section.
Management hopes that no shareholder will exercise dissenter's right.
However, under the Reincorporation Agreement, the Board of Directors may abandon
the Merger, even after shareholder approval, if for any reason the Board of
Directors determines that it is inadvisable to proceed with the Merger,
including considering the number of shares for which appraisal rights have been
exercised and the cost to the Company thereof. THE BOARD OF DIRECTORS CURRENTLY
INTENDS TO ABANDON THE MERGER IN THE EVENT THAT ITS CONSUMMATION WOULD RESULT IN
SHAREHOLDERS REPRESENTING MORE THAN A RELATIVELY NOMINAL NUMBER OF SHARES BEING
ENTITLED TO APPRAISAL RIGHTS.
THE BOARD OF DIRECTORS RECOMMENDS THAT YOU VOTE FOR THE REINCORPORATION.
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<PAGE>
THE REIT ELECTION
The following discussion summarizes all material aspects of the proposed
REIT Election. This summary is not intended to be complete and is subject to,
and is qualified in its entirety by reference to, the Code and rules and
regulations promulgated thereunder, the Maryland Articles (as they may be
amended or supplemented from time to time) and any other document referenced
herein. References to the "Company" in this section entitled "The REIT Election"
mean the New York Company before the Reincorporation and the Maryland Company
after the Reincorporation, as the context requires.
THE MARYLAND COMPANY'S BOARD OF DIRECTORS RESERVES THE RIGHT TO DELAY OR NOT
CONSUMMATE THE REIT ELECTION. THE BOARD OF DIRECTORS RECOMMENDS THAT THE
SHAREHOLDERS VOTE FOR THE REIT ELECTION.
CONSEQUENCES OF REIT ELECTION
As a REIT, the Company will operate in a manner intended to maintain REIT
status for federal income tax purposes. The continued qualification of the
Company as a REIT will depend on the Company's continued satisfaction of certain
asset, income, organizational, distribution and shareholder ownership
requirements. See "--Taxation of the Company--Requirements for Qualification"
and "--Failure of the Company to Qualify as a REIT." The REIT rules require that
most of the Company's income be derived from real estate-related sources, such
as "rents from real property", and from other sources of passive income.
Furthermore, as a REIT, the Company would generally be prohibited from providing
more than a DE MINIMIS amount of non-customary services to tenants and may be
limited in its ability to dispose of properties, including properties acquired
through foreclosure or deed in lieu of foreclosure. In addition, the Company
will be required to distribute annually at least 95% of its taxable income
(excluding any net capital gain) in order to avoid corporate income taxation of
the earnings distributed.
In order to qualify as a REIT, for all taxable years beginning with the
Company's second taxable year as a REIT, the beneficial ownership of the Company
must be held by 100 or more persons, and not more than 50% in value of the
outstanding shares may be owned, directly or indirectly, by five or fewer
individuals (as defined in the Code) during the last half of each taxable year
(the "5/50 Test"). To monitor compliance with the ownership requirements, the
Company will be required to maintain records regarding actual ownership of
shares of Common Stock. In addition, the Maryland Articles provides for certain
restrictions on the ownership of shares which are designed to keep the Company
in compliance with the stock ownership tests. See "--Restrictions on Transfer
and Ownership." The Maryland Articles provide that, subject to certain specified
exceptions, no person or entity may own or be deemed to own, by virtue of the
applicable constructive ownership provisions of the Code: (i) more than the
"Ownership Limit," which is either 2% with respect to Maryland Common (by value
or number of shares, whichever is more restrictive) (the "General Ownership
Limit") or 2.5% of the value of the outstanding shares of Capital Stock (the
"Aggregate Ownership Limit"), whichever is more restrictive, or (ii) any amount
of Maryland Common or Maryland Preferred which would cause the Company to be
"closely held" within the meaning of Section 856(h) of the Code. Furthermore,
the Maryland Articles prohibit the transfer of shares of stock of the Company if
such transfer would result in shares of stock of the Company's being owned by
fewer than 100 persons. The Board of Directors may, but in no event will be
required to, waive the Ownership Limit with respect to a particular stockholder
if it determines that such stockholder's ownership will not jeopardize the
Company's status as a REIT, and the Board of Directors otherwise decides that
such action would be in the best interests of the Company. Although the Board of
Directors currently expects to waive the ownership limit as to (1) Richard M.
Osborne Trust (the "Trust"); (2) Turkey Vulture Fund XIII, Ltd. (the "Fund");
(3) Liberty Self Store, Ltd. ("Liberty"); (4) GEM Value/PGP LLC ("GEM LLC"); (5)
Richard M. Osborne; (6) Mark D. Grossi; (7) Raymond V. Marino, (8) Lawrence B.
Helzel, together with members of his family, and (9) GEM Value Fund L.P. ("GEM
L.P.") such waivers will be conditioned upon the receipt
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of undertakings and representations from these shareholders which are reasonably
necessary to conclude that such ownership will not cause the Company to fail to
qualify as a REIT. Nevertheless, no other shareholders should plan to acquire
shares in the Company that would violate the Ownership Limit.
The Ownership Limit may have the effect of preventing acquisition of control
of the Company by a third party without the consent of the Board of Directors.
To the extent shares of the Company's capital stock are acquired in excess of
the Ownership Limit, the transfer will be considered null and void and will not
be reflected on the books of the Company. In addition, dividends and other
distributions will not be paid on such shares, nor may such shares be voted. Any
purported transfer of the Company's capital stock that would cause a person to
violate the Ownership Limit will be ineffective, and capital stock subject to
any such purported transfer will be instead transferred to a trust for the
benefit of one of more designated charitable beneficiaries. In the event that
the restrictions on ownership and transfer in the Maryland Articles require an
action by the Board of Directors of the Maryland Company, and the Maryland
Articles fail to provide specific guidance with respect to such action, the
Board of Directors shall have the power to determine the action to be taken,
which power shall include the power to apply the restrictions on ownership and
transfer in the Maryland Articles to a current or future shareholder only if the
application of such provisions to one or more other shareholders would not
eliminate the violation of the provisions of the Ownership Limit. See
"--Restrictions on Transfer and Ownership."
If the Company were to fail to qualify as a REIT in any taxable year, the
Company would be subject to federal income tax on its taxable income at regular
corporate rates, and distributions to shareholders would not be deductible in
computing the Company's taxable income. Thus, distributions to shareholders
could be significantly less than if the Company were a REIT.
REORGANIZATION AS AN UPREIT
GENERAL. Upon completion of the Reincorporation, the Company plans to
reorganize itself as an UPREIT. The reorganization is expected to be
accomplished through the contribution of a majority of the assets currently held
in the Company's operating subsidiaries to the Operating Partnership in a tax-
free transaction (other than certain state transfer taxes). In exchange for
their assets, the Company and the subsidiaries will receive Units in the
Operating Partnership. The North Tucson Business Center and the South Bay Office
Tower will continue to be held in wholly-owned operating subsidiaries of the
Company. The Company plans to make all future purchases of investment properties
through the Operating Partnership. Upon the initial formation of the Operating
Partnership, the Company will be the sole general partner and will own, directly
or indirectly, all of the interests in the Operating Partnership. As additional
limited partners are admitted to the Operating Partnership in exchange for the
contribution of properties, the Company's percentage ownership in the Operating
Partnership will decline.
After the reorganization, the Operating Partnership will be the entity
through which the Company conducts substantially all of its business and owns
substantially all of its assets (either directly or though subsidiaries). The
Board of Directors of the Company will manage the affairs of the Operating
Partnership by directing the affairs of the Company as general partner of the
Operating Partnership. The Company's limited and general partnership interests
in the Operating Partnership will entitle it to share in cash distributions
from, and in the profits and losses of, the Operating Partnership in proportion
to its percentage interest therein and will entitle the Company to vote on all
matters requiring a vote of the limited partners.
RISKS OF UPREIT CONVERSION. To ensure that a seller is able to contribute
properties to the Operating Partnership on a tax-deferred basis, the seller of
such properties may require the Company to agree to maintain a certain level of
minimum debt at the Operating Partnership level and refrain from
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selling such properties for a period of time. Adoption of the UPREIT structure,
therefore, could inhibit the Company from selling properties or retiring debt
that would otherwise be in the best interest of the Company.
Upon the admission of additional limited partners to the Operating
Partnership, the Company (as general partner) would owe a fiduciary obligation
to the limited partners. In most cases, the interests of the limited partners
would coincide with the interests of the Company and its shareholders because
(i) the Company would own a majority of the limited partner interests in the
Operating Partnership and (ii) the limited partners will generally receive
shares of the Company's Common Stock upon redemption of their Units.
Nevertheless, under certain circumstances, the interests of the limited partners
might conflict with those of the shareholders. For example, the sale of certain
properties or the sale or merger of the Company could cause adverse tax
consequences to particular limited partners.
ANTICIPATED FORM OF PARTNERSHIP AGREEMENT OF THE OPERATING PARTNERSHIP
THE FOLLOWING SUMMARY OF THE PROPOSED PARTNERSHIP AGREEMENT OF THE OPERATING
PARTNERSHIP (THE "OPERATING PARTNERSHIP AGREEMENT") AND THE DESCRIPTION OF
CERTAIN PROVISIONS SET FORTH ELSEWHERE IN THIS PROXY STATEMENT/PROSPECTUS ARE
QUALIFIED IN THEIR ENTIRETY BY REFERENCE TO SUCH FORM OF OPERATING PARTNERSHIP
AGREEMENT, WHICH MAY BE MODIFIED AND AMENDED AND IS ATTACHED AS ANNEX D TO THIS
PROXY STATEMENT. THE OPERATING PARTNERSHIP WILL BE FORMED UNDER THE DELAWARE
REVISED UNIFORM LIMITED PARTNERSHIP ACT, AS AMENDED.
MANAGEMENT. As the sole general partner of the Operating Partnership, the
Company generally will have the exclusive right, responsibility and discretion
in the management and control of the Operating Partnership. The limited partners
of the Operating Partnership generally will have no authority to transact
business or take any action on behalf of, or make any decision for, the
Operating Partnership.
ALLOCATION OF DISTRIBUTIONS, PROFITS AND LOSSES. The Operating Partnership
Agreement provides that, except as set forth below, the net operating cash of
the Operating Partnership available for distribution will be distributed from
time to time as determined by the Company, pro rata in accordance with the
partners' percentage interests. Profits and losses for tax purposes also
generally will be allocated among the partners in accordance with their
percentage interests, subject to compliance with certain requirements of the
Code.
TRANSFERABILITY OF INTERESTS. The Operating Partnership Agreement generally
provides that the Company may not withdraw from the Operating Partnership, or
transfer or assign its interest in the Operating Partnership. The limited
partners generally may transfer all or a portion of their interests in the
Operating Partnership to a transferee. No transferee, however, will be admitted
to the Operating Partnership as a substitute limited partner having the rights
of a limited partner without the consent of the Company and the satisfaction of
other conditions, including agreeing to be bound by the terms and conditions of
the Operating Partnership Agreement. Notwithstanding the foregoing, no transfer
shall be effective to the extent it would, by treating the Units so transferred
as if they had been exchanged for shares of Common Stock, violate the
limitations on ownership set forth in the Articles of Incorporation in order to
protect and preserve the Company's status as a REIT.
ADDITIONAL CAPITAL CONTRIBUTIONS. No limited partner is required under the
terms of the Operating Partnership Agreement to make additional capital
contributions to the Operating Partnership.
INDEMNIFICATION AND FIDUCIARY STANDARDS. The Operating Partnership
Agreement provides that the general partner and each person designated or
delegated by the general partner will discharge its duties in a manner
reasonably believed to be in the best interest of the Operating Partnership. The
Operating Partnership Agreement also provides that all such individuals will be
indemnified and held harmless by
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the Operating Partnership for any act performed for or on behalf of the
Operating Partnership, or in furtherance of the Operating Partnership's
business, provided that such individual acted in a manner believed to be in or
not opposed to the best interests of the Operating Partnership, and with respect
to any criminal action, as to which such individual had no reasonable cause to
believe the conduct was unlawful. The Operating Partnership Agreement also
provides that no such individual will have a personal liability to the Operating
Partnership or its partners for monetary damages for breach of fiduciary duty
except for acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law.
TERM. The term of the Operating Partnership continues until December 31,
2098, or until sooner dissolved pursuant to the terms of the Operating
Partnership Agreement.
RESTRICTIONS ON TRANSFER AND OWNERSHIP. For the Company to qualify as a
REIT under the Code, no more than 50% in value of its outstanding shares of
stock (both Maryland Common and Maryland Preferred, the "Capital Stock") may be
owned, actually or constructively, by five or fewer individuals (as defined in
the Code to include certain entities) during the last half of a taxable year
(other than the first year for which an election to be treated as a REIT has
been made) (the "5/50 Test"). In addition, if the Company, or an owner of 10% or
more of the Company, actually or constructively owns 10% or more of a tenant of
the Company (or a tenant of any partnership in which the Company is a partner),
the rent received by the Company (either directly or through any such
partnership) from such tenant will not be qualifying income for purposes of the
gross income tests for REITs contained in the Code. A REIT's stock must also be
beneficially owned by 100 or more persons during at least 335 days of a taxable
year of twelve months or during a proportionate part of a shorter taxable year
(other than the first year for which an election to be treated as a REIT has
been made). Because the Company expects to qualify as a REIT, the Maryland
Articles contain restrictions on the ownership and transfer of shares of
Maryland Common which are intended to assist the Maryland Company in complying
with these requirements. Such provisions are common among REITs, and are
designed, among other things, to ensure that no five or fewer individual
shareholders may own more than 50% of the outstanding shares of stock of a REIT,
by prohibiting any one shareholder from owning more than a specified percentage
of the REIT's shares of stock. The Maryland Articles provide that no shareholder
may own, directly or indirectly: (i) more than the "Ownership Limit," which is
initially established in the Maryland Articles as 2.0% with respect to Maryland
Common (the "General Ownership Limit") or 2.5% of the value of the outstanding
shares of Capital Stock (the "Aggregate Ownership Limit"), whichever is more
restrictive, or (ii) any amount of Maryland Common or Maryland Preferred which
would cause the Maryland Company to be "closely held" within the meaning of
Section 856(h) of the Code. The constructive ownership rules are complex, and
may cause shares of the Maryland Common or Maryland Preferred to be owned
actually or constructively by a group of related individuals and/or entities to
be constructively owned by one individual or entity. As a result, the
acquisition of less than 2.0% of the shares of the Maryland Common (or the
acquisition of an interest in an entity that owns, actually or constructively,
shares of the Maryland Common or Maryland Preferred) by the individual or
entity, could, nevertheless cause that individual or entity, or another
individual or entity, to own constructively in excess of the 2.0% limit as
applicable and thus violate the Aggregate Ownership Limit, or such other limit
set forth by the Board of Directors.
The Ownership Limit will not apply if the Board of Directors determines that
it is no longer in the best interests of the Company to attempt to qualify, or
to continue to qualify, as a REIT or that compliance with the restrictions and
limitations on ownership and transfers and acquisitions of Maryland Common or
Maryland Preferred set forth in the Maryland Articles no longer is required for
the Company to qualify as a REIT.
Pursuant to the Maryland Articles, commencing with the second business day
following the effective date of the Formation Transaction (the "Beginning
Date"), if any purported transfer of shares of Capital Stock of the Maryland
Company or any other event would otherwise result in any person
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violating the Ownership Limit or such other limit as permitted by the Board of
Directors, then any such purported transfer will be void and of no force or
effect with respect to the purported transferee (the "Prohibited Transferee") as
to that number of shares of Capital Stock in excess of the Ownership Limit or
such other limit, and the Prohibited Transferee shall acquire no right to
interest (or, in the case of any event other than a purported transfer, the
person or entity holding record title to any such excess shares of Capital Stock
(the "Prohibited Owner") shall cease to own any right or interest) in such
excess shares. The Maryland Articles further provide that any such excess shares
described above will be transferred automatically, by operation of law, to a
trust, the beneficiary of which will be a qualified charitable organization
selected by the Maryland Company (the "Beneficiary"). Such automatic transfer
shall be deemed to be effective as of the close of business on the business day
prior to the date of such violative transfer. Within 20 days of receiving notice
from the Maryland Company of the transfer of shares of Capital Stock to the
trust, the trustee of the trust (who shall be designated by the Maryland Company
and be unaffiliated with the Company and any Prohibited Transferee or Prohibited
Owner) will be required to sell such excess shares of Capital Stock to a person
or entity who could own such shares without violating the Ownership Limit, or
such other limit as permitted by the Board of Directors, and distribute to the
Prohibited Transferee or Prohibited Owner, as applicable, an amount equal to the
lesser of the price paid by the Prohibited Transferee or Prohibited Owner for
such excess shares or the sales proceeds received by the trust for such excess
shares, except that, in the case of a Prohibited Owner who becomes a Prohibited
Owner on the Beginning Date but who would have become a Prohibited Owner on the
effective date of the Formation Transaction had the Ownership Limit been
immediately effective, such Prohibited Owner shall be distributed the Market
Price of such shares on the effective date of the Formation Transaction. In the
case of any excess shares of Capital Stock resulting from any event other than a
transfer, or from a transfer for no consideration (such as a gift), the trustee
will be required to sell such excess shares to a qualified person or entity and
distribute to the Prohibited Owner or Prohibited Transferee, as applicable, an
amount equal to the lesser of the Market Price (as defined in the Maryland
Articles) of such excess shares of Common Stock as of the date of such event or
the sales proceeds received by the trust for such excess shares, except that in
the case of a Prohibited Owner who becomes a Prohibited Owner on the Beginning
Date but who would have become a Prohibited Owner on the Effective Date of the
Formation Transaction had the Ownership Limit been immediately effective, such
Prohibited Owner shall be distributed the Market Price of such shares on the
effective date of the Formation Transaction. In either case, any proceeds in
excess of the amount distributable to the Prohibited Transferee or Prohibited
Owner, as applicable, will be distributed to the Beneficiary. Prior to a sale of
any such excess shares of Capital Stock by the trust, the trustee will be
entitled to receive, in trust for the Beneficiary, all dividends and other
distributions paid by the Maryland Company with respect to such excess shares,
and also will be entitled to exercise all voting rights with respect to such
excess shares. Subject to Maryland law, effective as of the date that such
shares of Capital Stock have been transferred to the trust, the trustee shall
have the authority (at the trustee's sole discretion) (i) to rescind as void any
vote cast by a Prohibited Transferee or Prohibited Owner, as applicable, prior
to the discovery by the Maryland Company that such shares of Capital Stock
should have been automatically transferred to the trust and (ii) to recast such
vote in accordance with the desires of the trustee acting for the benefit of the
Beneficiary. However, if the Maryland Company has already taken irreversible
corporate action, then the trustee shall not have the authority to rescind and
recast such vote. Any dividend or other distribution paid to the Prohibited
Transferee or Prohibited Owner (prior to the discovery by the Company that such
shares of Capital Stock had been automatically transferred to a trust as
described above) will be required to be repaid to the trustee upon demand for
distribution to the Beneficiary. In the event that the transfer to the trust as
described above is not automatically effective (for any reason) to prevent
violation of the Ownership Limit or such other limit as provided in the Maryland
Articles or as otherwise permitted by the Board of Directors, then the Maryland
Articles provide that the transfer of the excess shares will be void AB INITIO.
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In addition, shares of Capital Stock held in the trust shall be deemed to
have been offered for sale to the Maryland Company, or its designee, at a price
per share equal to the lesser of (i) the price per share in the transaction that
resulted in such transfer to the trust (or, in the case of a devise or gift, the
market price at the time of such devise or gift) and (ii) the Market Price on
the date the Maryland Company, or its designee, accepts such offer except that
in the case of a Prohibited Transferee who becomes a Prohibited Transferee on
the Beginning Date but who would have become a Prohibited Owner on the Effective
Date had the Ownership Limit been immediately effective, at a price per share
equal to the Market Price on the effective date of the Reincorporation. The
Maryland Company shall have the right to accept such offer until the trustee has
sold the shares held in the trust. Upon such a sale to the Maryland Company, the
interest of the Beneficiary in the shares sold shall terminate and the trustee
shall distribute the net proceeds of the sale to the Prohibited Transferee or
Prohibited Owner.
If any purported transfer of shares would cause the Maryland Company to be
beneficially owned by fewer than 100 persons, such transfer will be null and
void in its entirety and the intended transferee will acquire no rights to the
stock. In the case of an ambiguity in the application of the restrictions on
ownership and transfer contained in the Maryland Articles, the Maryland
Company's Board of Directors shall have the power to determine the application
of these provisions and any such determination by such Board of Directors shall
be final and conclusive for all purposes. In the event that the restrictions on
ownership and transfer in the Maryland Articles require an action by the Board
of Directors and the Maryland Articles fail to provide specific guidance with
respect to such action, the Board of Directors shall have the power to determine
the action to be taken. The Board of Directors is expressly authorized to (or to
cause the Maryland Company to) enter into one or more existing or future
agreements with one or more shareholders of the Maryland Company which provide
relief to specifically identified or unidentified shareholders, then or
thereafter existing, from the application of some or all of the limitations and
restrictions in connection with the Ownership Limit, including without
limitation any agreement to the effect that some or all of the limitations and
restrictions in connection with the Ownership Limit shall apply to such
shareholder or shareholders only if the application of such provisions to one or
more other shareholders would not eliminate the violation of the provisions of
the Ownership Limit. Absent a decision to the contrary by the Board of Directors
(which the Board may make in its sole and absolute discretion), if a shareholder
would have acquired beneficial or constructive ownership of the Maryland
Company's Capital Stock in violation of the Ownership Limit, the restrictions on
ownership and transfer (including the transfer of "excess shares" to a trust)
shall apply first to the shares of Capital Stock which, but for such remedies,
would have been actually owned by the Prohibited Owner, and second to shares of
Capital Stock which, but for such remedies, would have been beneficially or
constructively owned (but not actually owned) by the Prohibited Owner, pro rata
among the persons who actually attempted to acquire (through a transfer or other
event) such shares of Capital Stock based upon the relative value of what would
have been the Prohibited Owner's beneficial or constructive ownership interest
in the shares such person attempted to acquire (through a transfer or other
event), third to other shares that are actually owned by the Prohibited Owner,
and fourth to shares that are actually owned by such other Persons whose
ownership of shares is attributed to the Prohibited Owner, pro rata among such
persons based upon the relative value of the Prohibited Owner's beneficial or
constructive ownership interest in the shares so owned.
The New York Company has agreed to exempt GEM LLC, the holder of the New
York Preferred, and GEM L.P., the holder of 100,000 shares of the New York
Common, as well as several other individuals and entities, from the Ownership
Limit in the Maryland Articles. The exemptions with respect to GEM LLC and GEM
L.P. are conditioned upon certain representations and covenants made by GEM LLC
and GEM L.P. regarding their respective investments and investors. In the event
that a breach of such covenants occurred, and as a result, the Company were to
fail the 5/50 Test, these exemptions shall cease to be effective, but only to
the extent necessary such that the Company would not fail the 5/50 Test.
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All certificates representing shares will bear a legend referring to the
restrictions described above. The foregoing ownership limitations could delay,
defer or prevent a transaction or a change in control of the Maryland Company
that might involve a premium price for the shares or otherwise be in the best
interest of stockholders.
Under the Maryland Articles, every owner of at least a specified percentage
of the outstanding shares must file a completed questionnaire with the Maryland
Company containing information regarding ownership of such shares, as set forth
in the Treasury Regulations. Under current Treasury Regulations, the percentage
will be set between 0.5% and 5% depending upon the number of record holders of
the Maryland Common. In addition, each stockholder shall upon demand be required
to disclose to the Maryland Company in writing such information as the Maryland
Company may request in order to determine the effect, if any, of such
stockholder's actual and constructive ownership of shares of Maryland Common on
the Maryland Company's status as a REIT and to ensure compliance with the
Ownership Limit, or such other limit as provided in the Articles of
Incorporation or as otherwise permitted by the Board of Directors.
The Maryland Articles grant the Directors discretion to waive or modify the
Ownership Limit under certain conditions. The Board of Directors may, but in no
event will be required to, waive the Ownership Limit with respect to a
particular shareholder if it determines that such ownership will not jeopardize
the Maryland Company's status as a REIT and the Board of Directors otherwise
decides such action would be in the best interests of the Maryland Company. As a
condition of such waiver, the Board of Directors may require an opinion of
counsel satisfactory to it and/or undertakings or representations from the
applicant with respect to preserving the REIT status of the Maryland Company.
The Board of Directors is expected to exempt, subject to certain conditions
designed to insure compliance with the REIT requirements, the following persons
from the Ownership Limit: (1) the Trust; (2) the Fund; (3) Liberty; (4) GEM LLC;
(5) Richard M. Osborne; (6) Mark D. Grossi; (7) Raymond V. Marino, (8) Lawrence
B. Helzel, together with members of his family and (9) GEM L.P. However, such
waiver will be conditioned upon the receipt of undertakings or representations
from these shareholders requested by the Board of Directors which are reasonably
necessary to conclude that such ownership will not cause the Maryland Company to
fail to qualify as a REIT.
The Reincorporation and Merger is intended to be tax-free under the Code.
Accordingly, no gain or loss will be recognized by the holders of shares of the
Company's Common Stock as a result of the Reincorporation, and no gain or loss
will be recognized by the Company or the Maryland Company. Each former holder of
shares of the Company's stock will have the same tax basis in the Maryland stock
received by such holder pursuant to the Merger and Reincorporation as such
holder has in the shares of the Company's stock held by such holder at the
effective time of the Merger. Each shareholder's holding period with respect to
the Maryland Common or Maryland Preferred will include the period during which
such holder held the shares of Common Stock or Preferred Stock, so long as the
latter were held by such holder as a capital asset at the effective time of the
Merger. The Company has not obtained, and does not intend to obtain, a ruling
from the IRS with respect to the tax consequences of the Merger and
Reincorporation.
Pursuant to the Merger, the Maryland Company will succeed to the assets and
liabilities of the New York Company, including the potential tax liabilities.
While the Company structured the Merger to qualify as a tax-free reorganization
under the Code, there can be no assurance that the Merger qualifies as such. If
the Merger does not qualify as a tax-free reorganization under the Code, it
would be treated as a taxable sale by the New York Company of its assets to the
Maryland Company in exchange for shares of the Maryland Common, followed by the
New York Company's distribution to its shareholders of such shares in a taxable
liquidation of the New York Company. In this case, the New York Company would
recognize gain on this deemed taxable sale. The Company will receive an opinion
from Gibson, Dunn & Crutcher LLP that the Merger will qualify as a tax-free
reorganization within the meaning of Section 368(a) of the Code, subject to
certain assumptions and qualifications. No rulings or
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opinions have been requested from the IRS with respect to any aspects of the
Reincorporation and Merger, and an opinion of counsel is not binding on the IRS.
THE BOARD OF DIRECTORS RECOMMENDS THAT YOU VOTE FOR THE REIT ELECTION.
TAXATION OF THE COMPANY
GENERAL. Assuming the Reincorporation and Merger are approved by the
shareholders representing at least two-thirds of the outstanding shares entitled
to vote, the Company presently intends to make an election to be taxed as a REIT
under Sections 856 through 860 of the Code, commencing with its taxable year
ending December 31, 1999. As noted above, the Company may decide to defer the
Reincorporation and Merger under certain circumstances. Subject to the above,
the Company believes that, commencing with its taxable year ending December 31,
1999, it will be organized and will operate in such a manner as to qualify for
taxation as a REIT under the Code, and the Company intends to continue to
operate in such a manner, but no assurance can be given that it will operate in
a manner so as to qualify or remain qualified.
The sections of the Code and the corresponding Treasury Regulations dealing
with REITs are highly technical and complex. The following sets forth the
material aspects of the rules that govern the federal income tax treatment of a
REIT and its shareholders. This summary is qualified in its entirety by the
applicable Code provisions, rules and regulations promulgated thereunder, and
administrative and judicial interpretations thereof.
Gibson, Dunn & Crutcher LLP has acted as tax counsel to the Company in
connection with the Reincorporation and Merger and the Company's election to be
taxed as a REIT. In the opinion of Gibson, Dunn & Crutcher LLP, commencing with
the Company's taxable year ending December 31, 1999, the Company will be
organized in conformity with the requirements for qualification as a REIT, and
its proposed method of operation will enable it to meet the requirements for
qualification and taxation as a REIT under the Code. With respect to certain
matters of Maryland law, Gibson, Dunn & Crutcher LLP has relied on the opinion
of Ballard Spahr Andrews & Ingersoll, LLP, special Maryland counsel for the
Company. It must be emphasized that this opinion is based on various assumptions
and is conditioned upon certain representations made by the Company, the
Maryland Company and certain other persons as to factual matters. In addition,
this opinion is based upon the factual representations of the Company concerning
its and the Maryland Company's business and properties as set forth in this
Proxy Statement/Prospectus, and assumes that the actions described in this Proxy
Statement/Prospectus are completed in a timely fashion. Moreover, such
qualification and taxation as a REIT depends upon the Company's ability to meet
(through actual annual operating results, distribution levels and diversity of
share ownership) the various qualification tests imposed under the Code
discussed below, the results of which have not been and will not be reviewed by
Gibson, Dunn & Crutcher LLP. Accordingly, no assurance can be given that the
actual results of the Company's operations for any particular taxable year will
satisfy such requirements. Further, the anticipated income tax treatment
described in this Proxy Statement/Prospectus may be changed, perhaps
retroactively, by legislative, administrative or judicial action at any time.
See "--Failure of the Company to Qualify as a REIT."
If the Company qualifies for taxation as a REIT, it generally will not be
subject to federal corporate income taxes on its net income that is currently
distributed to shareholders. This treatment substantially eliminates the "double
taxation" (at the corporate and shareholder levels) that generally results from
investment in a regular corporation. However, the Company will be subject to
federal income tax as follows. First, the Company will be taxed at regular
corporate rates on any undistributed "REIT taxable income," including
undistributed net capital gains. However, provided that the Company properly
elects to retain and pay tax on its net capital gains, shareholders will receive
a credit or refund, as the case may be, for their proportionate share of the tax
liability attributable to such undistributed net capital gains. Second, under
certain circumstances, the Company may be subject to
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the "alternative minimum tax" on its items of tax preference to the extent that
tax exceeds its regular tax. Third, if the Company has (i) net income from the
sale or other disposition of "foreclosure property" (defined generally as
property acquired by the Company through foreclosure or otherwise after a
default on a loan secured by the property or a lease of the property) which is
held primarily for sale to customers in the ordinary course of business or (ii)
other nonqualifying income from foreclosure property, it will be subject to tax
at the highest corporate rate on such income. Fourth, if the Company has net
income from prohibited transactions (which are, in general, certain sales or
other dispositions of property held primarily for sale to customers in the
ordinary course of business other than foreclosure property), such income will
be subject to a 100% tax. Fifth, if the Company should fail to satisfy the 75%
gross income test or the 95% gross income test (as discussed below), but has
nonetheless maintained its qualification as a REIT because certain other
requirements have been met, it will be subject to a 100% tax on an amount equal
to (a) the gross income attributable to the greater of the amount by which the
Company fails the 75% or 95% test multiplied by (b) a fraction intended to
reflect the Company's profitability. Sixth, if the Company should fail to
distribute during each calendar year at least the sum of (i) 85% of its REIT
ordinary income for such year, (ii) 95% of its REIT capital gain net income for
such year and (iii) any undistributed taxable income from prior periods, the
Company would be subject to a 4% excise tax on the excess of such required
distribution over the amounts actually distributed. Seventh, with respect to any
appreciated asset (a "Built-In Gain Asset") acquired by the Company from a
corporation which is or has been a C corporation (i.e., generally a corporation
subject to full corporate-level tax) in a transaction in which the basis of the
Built-In Gain Asset in the hands of the Company is determined by reference to
the basis of the asset in the hands of the C corporation, if the Company
recognizes gain on the disposition of such asset during the 10-year period (the
"Recognition Period") beginning on the date on which such asset was acquired by
the Company, then, to the extent of the Built-In Gain (i.e., the excess of (a)
the fair market value of such asset over (b) the Company's adjusted basis in
such asset, determined as of the beginning of the Recognition Period), such gain
will be subject to tax at the highest regular corporate rate pursuant to
Treasury Regulations that have not yet been promulgated. The results described
above with respect to the recognition of Built-In Gain assume that the Company
will make an election pursuant to IRS Notice 88-19. The New York Company, a C
Corporation, currently owns significantly appreciated assets. Assuming the
Reincorporation and Merger qualifies as a tax-free reorganization, the basis of
these assets acquired from the New York Company will be determined by reference
to the basis of the asset in the hands of the New York Company. Because the
Maryland Company will be acquiring substantially appreciated Built-In Gain
Assets from the New York Company, the Maryland Company will make a protective
election pursuant to IRS Notice 88-19 in order to avoid having to recognize such
appreciation upon the occurrence of the Reincorporation and Merger.
On February 1, 1999, the Clinton Administration proposed legislation that,
if enacted, would result in the elimination of the election under Notice 88-19
for those corporations, such as the Company, that are worth more than $5 million
and that elect to be taxed as REITs for taxable years beginning after January 1,
2000 (or the tax year 2001 for calendar year taxpayers). In such a case, the
Company would be required to pay tax on any unrealized appreciation attributable
to its Built-In Gain Assets upon the occurrence of the Reincorporation and
Merger. Because the unrealized appreciation of the Company's Built-In Gain
Assets is substantial, such tax would also be significant. Accordingly, if the
proposed legislation is enacted, and if the Reincorporation and Merger occurs
after the effective date of the legislation, the Company might incur a
substantial tax liability on the recognition of the Built-In Gain associated
with the Built-In Gain Assets.
REQUIREMENTS FOR QUALIFICATION. The Code defines a REIT as a corporation,
trust or association (i) which is managed by one or more trustees or directors;
(ii) the beneficial ownership of which is evidenced by transferable shares, or
by transferable certificates of beneficial interest; (iii) which would be
taxable as a domestic corporation, but for Sections 856 through 859 of the Code;
(iv) which is neither a financial institution nor an insurance company subject
to certain provisions of the Code;
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(v) the beneficial ownership of which is held by 100 or more persons; (vi)
during the last half of each taxable year not more than 50% in value of the
outstanding stock of which is owned, actually or constructively, by five or
fewer individuals (as defined in the Code to include certain entities); and
(vii) which meets certain other tests, described below, regarding the nature of
its income and assets and the amount of its distributions. The Code provides
that conditions (i) to (iv), inclusive, must be met during the entire taxable
year and that condition (v) must be met during at least 335 days of a taxable
year of 12 months, or during a proportionate part of a taxable year of less than
12 months. Conditions (v) and (vi) will not apply until after the first taxable
year for which an election is made to be taxed as a REIT. For purposes of
conditions (v) and (vi), pension funds and certain other tax-exempt entities are
treated as individuals, subject to a "look-through" exception in the case of
condition (vi).
The Company believes that following the Reincorporation and Merger it will
have issued sufficient shares of Common Stock with sufficient diversity of
ownership to allow it to satisfy conditions (v) and (vi). In addition, the
Maryland Articles provide for restrictions regarding the transfer and ownership
of shares, which restrictions, among other things, prevent a shareholder of the
Company from owning more than (a) 2% of the outstanding shares of any class of
Common Stock (the "General Ownership Limit") or (b) 2.5% of the value of the
outstanding shares of Capital Stock of the Company (the "Aggregate Ownership
Limit"), whichever limit is more restrictive. Waivers from such limits will only
be issued if the Board of Directors determines that continued compliance with
the share ownership requirements described in (v) and (vi) above will not be
threatened. Such ownership and transfer restrictions are described under "The
REIT Election--Restrictions on Transfer and Ownership." These restrictions,
however, may not ensure that the Company will, in all cases, be able to satisfy
the share ownership requirements described above.
To monitor the Company's compliance with the share ownership requirements,
the Company is required to maintain records regarding the actual ownership of
its shares. To do so, the Company must demand written statements each year from
the record holders of certain percentages of its shares of stock in which the
record holders are to disclose the actual owners of the shares (i.e., the
persons required to include in gross income the REIT dividends). A REIT with
2,000 or more record shareholders must demand statements from record holders of
5% or more of its shares, one with less than 2,000, but more than 200 record
shareholders must demand statements from record holders of 1% or more of the
shares, while a REIT with 200 or fewer record shareholders must demand
statements from record holders of 0.5% or more of the shares. A list of those
persons failing or refusing to comply with this demand must be maintained as
part of the Company's records. A shareholder who fails or refuses to comply with
the demand must submit a statement with its tax return disclosing the actual
ownership of the shares and certain other information. If the Company fails to
satisfy the share ownership requirements, the Company's status as a REIT will
terminate unless the Company complies with the demand letter and recordkeeping
requirements described above, and if it does not know, and exercising reasonable
diligence would not have known, whether it failed to meet the requirement in
condition (vi) above. In addition, a corporation may not elect to become a REIT
unless its taxable year is the calendar year. The Company will have a calendar
taxable year.
INCOME TESTS. In order to maintain qualification as a REIT, the Company
annually must satisfy two gross income requirements. First, at least 75% of the
Company's gross income (excluding gross income from prohibited transactions) for
each taxable year must be derived directly or indirectly from investments
relating to real property or mortgages on real property (including "rents from
real property" and, in certain circumstances, interest) or from certain types of
temporary investments. Second, at least 95% of the Company's gross income
(excluding gross income from prohibited transactions) for each taxable year must
be derived from such real property investments, dividends, interest and gain
from the sale or disposition of stock or securities (or from any combination of
the foregoing).
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Rents received by the Company will qualify as "rents from real property" in
satisfying the gross income requirements for a REIT described above only if
several conditions are met. First, the amount of rent must not be based in whole
or in part on the income or profits of any person. However, an amount received
or accrued generally will not be excluded from the term "rents from real
property" solely by reason of being based on a fixed percentage or percentages
of receipts or sales. Second, the Code provides that rents received from a
tenant will not qualify as "rents from real property" in satisfying the gross
income tests if the REIT, or an owner of 10% or more of the REIT, actually or
constructively owns 10% or more of such tenant (a "Related Party Tenant").
Third, if rent attributable to personal property leased in connection with a
lease of real property is greater than 15% of the total rent received under the
lease, then the portion of rent attributable to such personal property will not
qualify as "rents from real property." Finally, for rents received to qualify as
"rents from real property," the REIT generally must not operate or manage the
property or furnish or render services to the tenants of such property, other
than through an independent contractor from whom the REIT derives no revenue
(subject to a 1% DE MINIMIS exception); provided, however, the Company may
directly perform certain services that are "usually or customarily rendered" in
connection with the rental of space for occupancy only and are not otherwise
considered "rendered to the occupant" of the property. The Company will not, and
as general partner of the Operating Partnership, will not permit the Operating
Partnership (or any subsidiary partnerships) to (i) charge rent for any property
that is based in whole or in part on the income or profits of any person (except
by reason of being based on a percentage of receipts or sales, as described
above), (ii) rent any property to a Related Party Tenant, (iii) derive rental
income attributable to personal property (other than personal property leased in
connection with the lease of real property, the amount of which is less than 15%
of the total rent received under the lease), or (iv) perform services considered
to be rendered to the occupant of the property, other than through an
independent contractor from whom the Company derives no revenue. Notwithstanding
the foregoing, the Company may take certain of the actions set forth in (i)
through (iv) above to the extent such actions will not, based on the advice of
tax counsel to the Company, jeopardize the Company's status as a REIT.
The term "interest" generally does not include any amount received or
accrued (directly or indirectly) if the determination of such amount depends in
whole or in part on the income or profits of any person. However, an amount
received or accrued generally will not be excluded from the term "interest"
solely by reason of being based on a fixed percentage or percentages of receipts
or sales. The Company does not expect to derive significant amounts of interest
that will not qualify under the 75% and 95% gross income tests.
The Company owns an approximately 22.8 percent interest in Rincon Center
Associates ("RCA") that it intends to transfer to the Operating Partnership. RCA
may provide certain management or leasing services to the Operating Partnership
as well as to third parties. The fees derived by these services, however, will
be nonqualifying income to the Company under both the 95% and 75% REIT income
tests. The Company will determine the amount of nonqualifying income derived
from RCA based upon its proportionate interest in RCA. While RCA currently
offers an insignificant amount of non-customary services to tenants of the
Rincon Towers corporate suites, payments received with respect to this property
are included as "rents from real property" because such services are provided
through an independent contractor (from whom neither RCA nor the Company derives
any revenue). The Company will monitor the amount of such nonqualifying income
as described above, and will attempt to take actions to keep this income (and
any other nonqualifying income) within the limitations of the REIT income tests.
However, since the Company does not control RCA, there can be no assurance that
RCA will not take actions that could jeopardize the Company's status as a REIT.
Accordingly, there can be no assurance that such actions will in all cases
prevent the Company from violating a REIT requirement.
If the Company fails to satisfy one or both of the 75% or 95% gross income
tests for any taxable year, it may nevertheless qualify as a REIT for such year
if it is entitled to relief under certain
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provisions of the Code. These relief provisions will be generally available if
the Company's failure to meet such tests was due to reasonable cause and not due
to willful neglect, the Company attaches a schedule of the sources of its income
to its federal income tax return, and any incorrect information on the schedule
was not due to fraud with intent to evade tax. It is not possible, however, to
state whether in all circumstances the Company would be entitled to the benefit
of these relief provisions. For example, if the Company fails to satisfy the
gross income tests because nonqualifying income that the Company intentionally
incurs exceeds the limits on such income, the IRS could conclude that the
Company's failure to satisfy the tests was not due to reasonable cause. If these
relief provisions are inapplicable to a particular set of circumstances
involving the Company, the Company would not qualify as a REIT. As discussed
above in "Taxation of the Company--General," even if these relief provisions
apply, a 100% tax would be imposed on an amount equal to (a) the gross income
attributable to the greater of the amount by which the Company failed the 75% or
95% test multiplied by (b) a fraction intended to reflect the Company's
profitability.
Any gain realized by the Company on the sale of any property held as
inventory or other property held primarily for sale to customers in the ordinary
course of business (including the Company's share of any such gain realized by
the Operating Partnership or any subsidiary partnership thereof) will be treated
as income from a prohibited transaction that is subject to a 100% penalty tax.
Such prohibited transaction income may also have an adverse effect upon the
Company's ability to satisfy the income tests for qualification as a REIT. Under
existing law, whether property is held as inventory or primarily for sale to
customers in the ordinary course of a trade or business is a question of fact
that depends on all the facts and circumstances with respect to the particular
transaction. The Company expects to hold directly or indirectly real properties
which are, or have been, subject to a lease from which the Company has derived
or is deriving revenue whether directly or indirectly ("Properties") for
investment with a view to long-term appreciation. The Company also expects to
engage in the business of acquiring, developing, owning, and operating the
Properties (and other properties) and to make such occasional sales of the
Properties as are consistent with the Company's investment objectives. There can
be no assurance, however, that the IRS might not contend that one or more of
such sales is subject to the 100% penalty tax.
ASSET TESTS. The Company, at the close of each quarter of its taxable year,
must also satisfy three tests relating to the nature of its assets. First, at
least 75% of the value of the Company's total assets must be represented by real
estate assets (including (i) its allocable share of real estate assets held by
partnerships in which the Company owns an interest and (ii) stock or debt
instruments held for not more than one year purchased with the proceeds of a
stock offering or long-term (at least five years) debt offering of the Company),
cash, cash items and government securities. Second, not more than 25% of the
Company's total assets may be represented by securities other than those in the
75% asset class. Third, of the investments included in the 25% asset class, the
value of any one issuer's securities owned by the Company may not exceed 5% of
the value of the Company's total assets and the Company may not own more than
10% of any one issuer's outstanding voting securities.
After initially meeting the asset tests at the close of any quarter, the
Company will not lose its status as a REIT for failure to satisfy the asset
tests at the end of a later quarter solely by reason of changes in asset values.
If the failure to satisfy the asset tests results from an acquisition of
securities or other property during a quarter (including as a result of the
Company increasing its interest in the Operating Partnership), the failure can
be cured by the disposition of sufficient nonqualifying assets within 30 days
after the close of that quarter. The Company intends to maintain adequate
records of the value of its assets to ensure compliance with the asset tests and
to take such other actions within 30 days after the close of any quarter as may
be required to cure any noncompliance. If the Company fails to cure
noncompliance with the asset tests within such time period, the Company would
cease to qualify as a REIT.
ANNUAL DISTRIBUTION REQUIREMENTS. The Company, in order to qualify as a
REIT, is required to distribute dividends (other than capital gain dividends) to
its shareholders in an amount at least equal
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to (i) the sum of (a) 95% of the Company's "REIT taxable income" (computed
without regard to the dividends paid deduction and by excluding the Company's
net capital gain) and (b) 95% of the excess of the net income, if any, from
foreclosure property over the tax imposed on such income, minus (ii) the excess
of the sum of certain items of non-cash income over 5% of "REIT taxable income."
In addition, if the Company disposes of any Built-In Gain Asset during its
Recognition Period, the Company will be required, pursuant to Treasury
Regulations which have not yet been promulgated, to distribute at least 95% of
the Built-In Gain (after tax), if any, recognized on the disposition of such
asset. Such distributions must be paid in the taxable year to which they relate,
or in the following taxable year if declared before the Company timely files its
tax return for such year and if paid on or before the first regular dividend
payment after such declaration. Such distributions are taxable to holders of
Common Stock and Preferred Stock (other than tax-exempt entities, as discussed
below) in the year in which paid, even though such distributions relate to the
prior year for purposes of the Company's 95% distribution requirement. The
amount distributed must not be preferential within a class--e.g., each holder of
shares of Common Stock and Preferred Stock must receive the same distribution
per share as other shares of Common Stock and Preferred Stock, respectively. To
the extent that the Company does not distribute all of its net capital gain or
distributes at least 95%, but less than 100%, of its "REIT taxable income," as
adjusted, it will be subject to tax thereon at regular ordinary and capital gain
corporate tax rates. The Company expects to make timely distributions sufficient
to satisfy these annual distribution requirements.
It is expected that the Company's REIT taxable income will be less than its
cash flow due to the allowance of depreciation and other non-cash charges in
computing REIT taxable income. Accordingly, the Company anticipates that it will
generally have sufficient cash or liquid assets to enable it to satisfy the
distribution requirements described above. It is possible, however, that the
Company, from time to time, may not have sufficient cash or other liquid assets
to meet these distribution requirements due to timing differences between (i)
the actual receipt of income and actual payment of deductible expenses and (ii)
the inclusion of such income and deduction of such expenses in arriving at
taxable income of the Company. In the event that such timing differences occur,
in order to meet the distribution requirements, the Company may find it
necessary to arrange for short-term, or possibly long-term, borrowings or to pay
dividends in the form of taxable stock dividends.
Under certain circumstances, the Company may be able to rectify a failure to
meet the distribution requirement described above for a year by paying
"deficiency dividends" to shareholders in a later year, which may be included in
the Company's deduction for dividends paid for the earlier year. Thus, the
Company may be able to avoid being taxed on amounts distributed as deficiency
dividends; however, the Company will be required to pay interest based upon the
amount of any deduction taken for deficiency dividends.
Furthermore, if the Company should fail to distribute during each calendar
year (or in the case of distributions with declaration and record dates falling
in the last three months of the calendar year, by the end of January immediately
following such year) at least the sum of (i) 85% of its REIT ordinary income for
such year, (ii) 95% of its REIT capital gain income for such year and (iii) any
undistributed taxable income from prior periods, the Company would be subject to
a 4% excise tax on the excess of such required distribution over the amounts
actually distributed. Any REIT taxable income and net capital gain on which this
excise tax is imposed for any year is treated as an amount distributed during
that year for purposes of calculating such tax.
EARNINGS AND PROFITS DISTRIBUTION REQUIREMENT. In order to qualify as a
REIT, the Company cannot have at the end of any taxable year any undistributed
"earnings and profits" that are attributable to a "C corporation" taxable year.
In the Merger, the Maryland Company will succeed to various tax attributes of
the New York Company (if the Reorganization is treated as a tax-free
organization under the Code), including any undistributed C corporation earnings
and profits of such corporation. The Company must then distribute any non-REIT
earnings and profits by the end of the Company's taxable year ending December
31, 1999. If such earnings and profits are not distributed by the end of the
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Company's first taxable year as a REIT, the Company would fail to qualify as a
REIT. Currently, the Company does not have any current or accumulated earnings
and profits, but rather, has negative earnings and profits, for tax purposes.
Accordingly, since the Company did not generate any current earnings and profits
prior to the end of the taxable year ending December 31, 1999, the Company is
not required to make any distributions for such taxable year.
If the Internal Revenue Service were to challenge successfully the Company's
calculation that its earnings and profits were negative, although not free from
doubt, it appears pursuant to Treasury Regulations that the Company may be able
to use certain "deficiency dividend" procedures to distribute any earnings and
profits deemed to have been acquired in the Merger and not distributed by the
Company prior to the end of its first taxable year as a REIT. In order to use
this procedure, the Company would have to make an additional dividend
distribution to its shareholders (in addition to distributions made for purposes
of satisfying the normal REIT distribution requirements) within 90 days of an
IRS determination. In addition, the Company would have to pay to the IRS an
interest charge on 50% of the acquired earnings and profits that were not
distributed prior to the end of the taxable year in which the Merger occurred.
The availability of this deficiency dividend procedure under these circumstances
is not entirely clear, and there can be no assurance that this procedure would
be available (in which case the Company would fail to qualify as a REIT for each
year in which it failed to satisfy the earnings and profits distribution
requirement). In addition, even if the procedure is available, if the Company
had C corporation earnings and profits at the end of the taxable year in which
the Merger occurred, such a distribution may only allow the Company to qualify
as a REIT for subsequent years (and it may not be permitted to qualify as a REIT
in the year of the Merger).
TAX ASPECTS OF INTERESTS IN PARTNERSHIPS AND QUALIFIED REIT SUBSIDIARIES
PROPORTIONATE OWNERSHIP THROUGH PARTNERSHIP INTEREST. In the future, the
majority of the Company's investments may be held indirectly through the
Operating Partnership. If so, the Operating Partnership may hold certain of its
investments indirectly through subsidiary partnerships or limited liability
companies. In general, partnerships are "pass-through" entities which are not
subject to federal income tax. Rather, partners are allocated their
proportionate shares of the items of income, gain, loss, deduction and credit of
a partnership, and are potentially subject to tax thereon, without regard to
whether the partners receive a distribution from the partnership. The Company
will include in its income its proportionate share of the foregoing partnership
items for purposes of the various REIT income tests and in the computation of
its REIT taxable income. Moreover, for purposes of the REIT asset tests, the
Company will include its proportionate share of assets and interests held
through the Operating Partnership.
In addition, the character of the assets and gross income of the partnership
shall retain the same character in the hands of the REIT for purposes of section
856 of the Code, including the satisfaction of the gross income tests and assets
tests. The rules described above will also apply to a REIT's membership interest
in a limited liability company which is taxable as a partnership for income tax
purposes. Accordingly, references to partnerships and their partners in this
discussion of certain federal income tax consequences shall include limited
liability companies and their members, respectively. Thus, the Company will be
deemed to own its proportionate share of the assets and income of any
partnerships in which it directly or indirectly holds an interest, including but
not limited to the Operating Partnership and RCA (hereafter, the
"Partnerships"). Since the Company does not control RCA in which it indirectly
holds an interest, there can be no assurance that RCA will not take actions that
could jeopardize the Company's status as a REIT.
Although partnerships are generally treated as "pass-through" entities, if
any of the Partnerships are deemed to be publicly traded, such entity will be
treated under the Code as an association taxable as a corporation. Such
classification may preclude the Company from satisfying certain REIT
requirements. The Company does not intend to cause, directly or indirectly, any
of the Partnerships to be classified as a publicly traded partnership under the
Code.
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ALLOCATION OF OPERATING PARTNERSHIP INCOME, GAIN, LOSS AND
DEDUCTION. Although a partnership agreement will generally determine the
allocation of income and loss among partners, such allocations will be
disregarded for tax purposes if they do not comply with the provisions of
Section 704(b) of the Code and the Treasury Regulations promulgated thereunder.
Generally, Section 704(b) and the Treasury Regulations promulgated thereunder
require that partnership allocations respect the economic arrangement of the
partners. If an allocation is not respected for federal income tax purposes, the
item subject to the allocation will be reallocated in accordance with the
partners' interest in the partnership, which will be determined by taking into
account all of the facts and circumstances relating to the economic arrangement
of the partners with respect to such item. The allocations of taxable income and
loss provided for in the Partnership Agreement of the Operating Partnership are
intended to comply with the requirements of Section 704(b) of the Code and the
Treasury Regulations promulgated thereunder.
TAX ALLOCATIONS WITH RESPECT TO CONTRIBUTED PROPERTIES. Pursuant to Section
704(c) of the Code, income, gain, loss and deduction attributable to appreciated
or depreciated property that is contributed to a partnership in exchange for an
interest in the partnership, must be allocated in a manner such that the
contributing partner is charged with, or benefits from, respectively, the
unrealized gain or unrealized loss associated with the property at the time of
the contribution. The amount of such unrealized gain or unrealized loss is
generally equal to the difference between the fair market value of contributed
property at the time of contribution and the adjusted tax basis of such property
at such time (a "Book-Tax Difference"). Such allocations are solely for federal
income tax purposes and do not affect the book capital accounts or other
economic or legal arrangements among the partners. The Operating Partnership
will be formed by way of contributions of property by the Company and its
subsidiaries. None of the Company or its subsidiaries will recognize gain or
loss on the contribution of this property to the Operating Partnership.
Consequently, the Partnership Agreement of the Operating Partnership requires
that such allocations be made in a manner consistent with Section 704(c) of the
Code.
In general, the contributing partner will be allocated depreciation
deductions for tax purposes which are lower than such deductions would be if
determined on a pro rata basis. In addition, in the event of the disposition of
any of the contributed assets which have such a Book-Tax Difference, all income
attributable to such Book-Tax Difference generally will be allocated to such
contributing partners. These allocations will tend to eliminate the Book-Tax
Difference over the life of the Operating Partnership. However, the special
allocation rules of Section 704(c) do not always entirely eliminate the Book-Tax
Difference on an annual basis or with respect to a specific taxable transaction
such as a sale. Thus, the carryover basis of the contributed assets in the hands
of the Operating Partnership may cause the Company or other partners to be
allocated lower depreciation and other deductions, and possibly an amount of
taxable income in the event of a sale of such contributed assets in excess of
the economic or book income allocated to it as a result of such sale. Such an
allocation might cause the Company or other partners to recognize taxable income
in excess of cash proceeds, which might adversely affect the Company's ability
to comply with the REIT distribution requirements.
BASIS IN OPERATING PARTNERSHIP INTEREST. The Company's adjusted tax basis
in its interest in the Operating Partnership generally (i) will be equal to the
amount of cash and the basis of any other property contributed to the Operating
Partnership by the Company, (ii) will be increased by (a) its allocable share of
the Operating Partnership's income and (b) its allocable share of indebtedness
of the Operating Partnership and (iii) will be reduced, but not below zero, by
the Company's allocable share of (a) losses suffered by the Operating
Partnership, (b) the amount of cash distributed to the Company and (c) by
constructive distributions resulting from a reduction in the Company's share of
indebtedness of the Operating Partnership.
If the allocation of the Company's distributive share of the Operating
Partnership's loss exceeds the adjusted tax basis of the Company's partnership
interest in the Operating Partnership, the recognition of such excess loss will
be deferred until such time and to the extent that the Company has
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sufficient adjusted tax basis in its interest in the Operating Partnership to
offset the loss. To the extent that the Operating Partnership's distributions,
or any decrease in the Company's share of the indebtedness of the Operating
Partnership (such decreases being considered a constructive cash distribution to
the partners), exceeds the Company's adjusted tax basis in the Operating
Partnership, such excess distributions (including such constructive
distributions) will constitute taxable income to the Company.
QUALIFIED REIT SUBSIDIARY. The Company owns 100% of the stock of a number
of subsidiaries, each of which is expected to qualify as a qualified REIT
subsidiary (a "QRS"), and may acquire stock of one or more new subsidiaries. A
corporation will qualify as a QRS if 100% of its stock is held by the Company. A
QRS will not be treated as a separate corporation, but rather, all assets,
liabilities, and items of income, deduction, and credit of a QRS will be treated
as assets, liabilities and such items (as the case may be) of the Company for
all purposes of the Code including the REIT qualification tests. For this
reason, references under "Taxation of the Company" to the income and assets of
the Company include the income and assets of any QRS. A QRS will not violate the
restrictions against ownership of securities of any one issuer which constitute
more than 10% of such issuer's voting securities or more than 5% of the value of
the Company's total assets, described above under "Taxation of the
Company--Requirements for Qualification."
FAILURE OF THE COMPANY TO QUALIFY AS A REIT
Qualification as a REIT involves the application of technical and complex
provisions of the Code for which there are only limited judicial or
administrative interpretations. In addition, the determination of various
factual matters and circumstances not entirely within the Company's control may
affect its ability to qualify as a REIT. No assurance can also be given that the
legislation, regulations, administrative interpretations or court decisions will
not significantly change the rules with respect to qualification as a REIT or
the federal income tax consequences of such qualification.
If the Company fails to qualify for taxation as a REIT in any taxable year,
and the relief provisions do not apply, the Company will be subject to tax
(including any applicable alternative minimum tax) on its taxable income at
regular corporate rates. Distributions to shareholders in any year in which the
Company fails to qualify will not be deductible by the Company nor will they be
required to be made. As a result, the Company's failure to qualify as a REIT
would substantially reduce the cash available for distribution to shareholders.
In addition, if the Company fails to qualify as a REIT, all distributions to
shareholders will be taxable as ordinary income to the extent of current and
accumulated earnings and profits, and, subject to certain limitations of the
Code, corporate distributions may be eligible for the dividends received
deduction. Unless entitled to relief under specific statutory provisions, the
Company would also be disqualified from taxation as a REIT for the four taxable
years following the year during which qualification was lost. It is not possible
to state whether in all circumstances the Company would be entitled to such
statutory relief.
TAXATION OF TAXABLE U.S. SHAREHOLDERS GENERALLY
The information set forth below does not purport to deal with all aspects of
taxation that may be relevant to particular shareholders in light of their
personal investment or tax circumstances, or to certain types of shareholders
subject to special treatment under the federal income tax laws. Shareholders
should consult with their own tax advisors to determine the impact of federal,
state, local and foreign income tax laws with regard to an investment in the New
York Common, New York Preferred, Maryland Common or Maryland Preferred.
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As used herein, the term "U.S. Shareholder" means a holder of shares of
Common Stock or Preferred Stock who (for United States federal income tax
purposes) (i) is a citizen or resident of the United States, (ii) is a
corporation, partnership, or other entity created or organized in or under the
laws of the United States or of any political subdivision thereof, (iii) is an
estate the income of which is subject to United States federal income taxation
regardless of its source or (iv) is a trust whose administration is subject to
the primary supervision of a United States court and which has one or more
United States persons who have the authority to control all substantial
decisions of the trust. Notwithstanding the preceding sentence, to the extent
provided in regulations, certain trusts in existence on August 20, 1996, and
treated as United States persons prior to such date that elect to continue to be
treated as United States persons, shall also be considered U.S. Shareholders.
As long as the Company qualifies as a REIT, distributions made by the
Company out of its current or accumulated earnings and profits (and not
designated as capital gain dividends) will constitute dividends taxable to its
taxable U.S. Shareholders as ordinary income. Such distributions will not be
eligible for the dividends received deduction otherwise available with respect
to dividends received by U.S. Shareholders that are corporations. Distributions
made by the Company that are properly designated by the Company as capital gain
dividends will be taxable to taxable U.S. Shareholders as gains (to the extent
that they do not exceed the Company's actual net capital gain for the taxable
year) from the sale or disposition of a capital asset. Depending on the period
of time the Company held the assets which produced such gains, and on certain
designations, if any, which may be made by the Company, such gains may be
taxable to non-corporate U.S. Shareholders at lower capital gains rates. U.S.
Shareholders that are corporations may, however, be required to treat up to 20%
of certain capital gain dividends as ordinary income. To the extent that the
Company makes distributions (not designated as capital gain dividends) in excess
of its current and accumulated earnings and profits, such distributions will be
treated first as a tax-free return of capital to each U.S. Shareholder, reducing
the adjusted basis which such U.S. Shareholder has in his shares of Common Stock
or Preferred Stock for tax purposes by the amount of such distribution (but not
below zero), with distributions in excess of a U.S. Shareholder's adjusted basis
in his shares taxable as capital gain, provided that the shares have been held
as a capital asset (which, with respect to a non-corporate U.S. Shareholder,
will be taxable as long-term capital gain if the shares have been held for more
than twelve months, or short-term capital gain if the shares have been held for
one year or less). Dividends declared by the Company in October, November, or
December of any year and payable to a shareholder of record on a specified date
in any such month shall be treated as both paid by the Company and received by
the shareholder on December 31st of such year, provided that the dividend is
actually paid by the Company on or before January 31st of the following calendar
year. Shareholders may not include in their own income tax returns any net
operating losses or capital losses of the Company.
Distributions made by the Company and gain arising from the sale or exchange
by a U.S. Shareholder of shares of Common Stock or Preferred Stock will not be
treated as passive activity income, and, as a result, U.S. Shareholders
generally will not be able to apply any "passive losses" against such income or
gain. Distributions made by the Company (to the extent they do not constitute a
return of capital) generally will be treated as investment income for purposes
of computing the investment interest limitation. Gain arising from the sale or
other disposition of Common Stock or Preferred Stock (or distributions treated
as such), however, will not be treated as investment income unless a shareholder
makes a special election to treat such gain as investment income. The amount of
gain so included is taxed at ordinary income rates.
The Company may elect to retain, rather than distribute as a capital gain
dividend, its net long-term capital gains. In such event, the Company would pay
tax on such retained net long-term capital gains. In addition to the extent
designated by the Company, a U.S. Shareholder generally would (i) include its
proportionate share of such undistributed long-term capital gains in computing
its long-term capital gains in its return for its taxable year in which the last
day of the Company's taxable year
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falls (subject to certain limitations as to the amount so includible), (ii) be
deemed to have paid the capital gains tax imposed on the Company on the
designated amounts included in such U.S. Shareholder's long-term capital gains,
(iii) receive a credit or refund for such amount of tax deemed paid by it, (iv)
increase the adjusted basis of its shares by the difference between the amount
of such includible gains and the tax deemed to have been paid by it, and (v), in
the case of a U.S. Shareholder that is a corporation, appropriately adjust its
earnings and profits for the retained capital gains in accordance with Treasury
Regulations to be prescribed by the IRS. The Company must pay tax on its
designated long-term capital gain within 30 days of the close of any taxable
year in which it designates long-term capital gain pursuant to this rule, and it
must mail a written notice of its designation to its shareholders within 60 days
of the close of the taxable year.
Upon any sale or other disposition of Common Stock or Preferred Stock, a
U.S. Shareholder will recognize gain or loss for federal income tax purposes in
an amount equal to the difference between (i) the amount of cash and the fair
market value of any property received on such sale or other disposition and (ii)
the holder's adjusted basis in such shares of Common Stock or Preferred Stock
for tax purposes. Such gain or loss will be capital gain or loss if the shares
have been held by the U.S. Shareholder as a capital asset and, with respect to a
non-corporate U.S. Shareholder, will be treated as long-term capital gain or
loss if held for more than one year and otherwise as short-term capital gain or
loss. In general, any loss recognized by a U.S. Shareholder upon the sale or
other disposition of shares of Common Stock or Preferred Stock that have been
held for six months or less (after applying certain holding period rules) will
be treated as a long-term capital loss, to the extent of capital gain dividends
received by such U.S. Shareholder from the Company which were required to be
treated as long-term capital gains.
BACKUP WITHHOLDING
The Company reports to its U.S. Shareholders and the IRS the amount of
dividends paid during each calendar year, and the amount of tax withheld, if
any. Under the backup withholding rules, a shareholder may be subject to backup
withholding at the rate of 31% with respect to dividends paid unless such holder
(i) is a corporation or comes within certain other exempt categories and, when
required, demonstrates this fact, or (ii) provides a taxpayer identification
number, certifies as to no loss of exemption from backup withholding, and
otherwise complies with applicable requirements of the backup withholding rules.
A U.S. Shareholder that does not provide the Company with his correct taxpayer
identification number may also be subject to penalties imposed by the IRS. Any
amount paid as backup withholding will be creditable against the shareholder's
income tax liability. In addition, the Company may be required to withhold a
portion of capital gain distributions to any shareholders who fail to certify
their non-foreign status to the Company. See "--Taxation of Non-U.S.
Shareholders."
TAXATION OF TAX-EXEMPT SHAREHOLDERS
The IRS has ruled that amounts distributed as dividends by a qualified REIT
do not constitute unrelated business taxable income ("UBTI") when received by a
tax-exempt entity. Based on that ruling, provided that a tax-exempt shareholder
(except certain tax-exempt shareholders described below) has not held its shares
of Common Stock as "debt financed property" within the meaning of the Code and
such shares are not otherwise used in a trade or business, the dividend income
from the Company will not be UBTI to a tax-exempt shareholder. Similarly, income
from the sale of Common Stock will not constitute UBTI unless such tax-exempt
shareholder has held such shares as "debt financed property" within the meaning
of the Code or has used the shares in a trade or business.
For tax-exempt shareholders which are social clubs, voluntary employee
benefit associations, supplemental unemployment benefit trusts, and qualified
group legal services plans exempt from federal income taxation under Code
Sections 501(c)(7), (c)(9), (c)(17) and (c)(20), respectively, income from an
investment in the Company will constitute UBTI unless the organization is able
to properly deduct
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amounts set aside or placed in reserve for certain purposes so as to offset the
income generated by its investment in the Company. Such prospective investors
should consult their own tax advisors concerning these "set aside" and reserve
requirements.
Notwithstanding the above, however, a portion of the dividends paid by a
"pension held REIT" shall be treated as UBTI as to any trust which (i) is
described in Section 401(a) of the Code, (ii) is tax-exempt under Section 501(a)
of the Code and (iii) holds more than 10% (by value) of the interests in the
REIT. Tax-exempt pension funds that are described in Section 401(a) of the Code
are referred to below as "qualified trusts."
A REIT is a "pension held REIT" if (i) it would not have qualified as a REIT
but for the fact that Section 856(h)(3) of the Code provides that stock owned by
qualified trusts shall be treated, for purposes of the "not closely held"
requirement, as owned by the beneficiaries of the trust (rather than by the
trust itself), and (ii) either (a) at least one such qualified trust holds more
than 25% (by value) of the interests in the REIT, or (b) one or more such
qualified trusts, each of which owns more than 10% (by value) of the interests
in the REIT, hold in the aggregate more than 50% (by value) of the interests in
the REIT. The percentage of any REIT dividend treated as UBTI is equal to the
ratio of (i) the UBTI earned by the REIT (treating the REIT as if it were a
qualified trust and therefore subject to tax on UBTI) to (ii) the total gross
income of the REIT. A DE MINIMIS exception applies where the percentage is less
than 5% for any year. The provisions requiring qualified trusts to treat a
portion of REIT distributions as UBTI will not apply if the REIT is able to
satisfy the "not closely held" requirement without relying upon the
"look-through" exception with respect to qualified trusts. As a result of
certain limitations on transfer and ownership of Capital Stock contained in the
Articles of Incorporation, the Company does not expect to be classified as a
"pension held REIT."
TAXATION OF NON-U.S. SHAREHOLDERS
The rules governing United States federal income taxation of the ownership
and disposition of stock by persons that are, for purposes of such taxation,
nonresident alien individuals, foreign corporations, foreign partnerships or
foreign estates or trusts (collectively, "Non-U.S. Shareholders") are complex,
and no attempt is made herein to provide more than a brief summary of such
rules. Accordingly, the discussion does not address all aspects of United States
federal income tax and does not address state, local or foreign tax consequences
that may be relevant to a Non-U.S. Shareholder in light of its particular
circumstances, including, for example, if the investment in the Company is
connected to the conduct by a Non-U.S. Shareholder of a U.S. trade or business.
In addition, this discussion is based on current law, which is subject to
change, and assumes that the Company qualifies for taxation as a REIT. Non-U.S.
Shareholders should consult with their own tax advisors to determine the impact
of federal, state, local and foreign income tax laws with regard to an
investment in the New York Common, New York Preferred, Maryland Common or
Maryland Preferred, including any reporting requirements.
DISTRIBUTIONS. Distributions by the Company to a Non-U.S. Shareholder that
are neither attributable to gain from sales or exchanges by the Company of
United States real property interests nor designated by the Company as capital
gains dividends will be treated as dividends of ordinary income to the extent
that they are made out of current or accumulated earnings and profits of the
Company. Such distributions ordinarily will be subject to withholding of United
States federal income tax on a gross basis (that is, without allowance of
deductions) at a 30% rate or such lower rate as may be specified by an
applicable income tax treaty, unless the dividends are treated as effectively
connected with the conduct by the Non-U.S. Shareholder of a United States trade
or business or, if an income tax treaty applies, as attributable to a United
States permanent establishment of the Non-U.S. Shareholder. Dividends that are
effectively connected with such a trade or business (or, if an income tax treaty
applies, that are attributable to a United States permanent establishment of the
Non-U.S. Shareholder) will be subject to tax on a net basis (that is, after
allowance of deductions) at graduated rates, in the same manner as domestic
shareholders are taxed with respect to such dividends and are generally not
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subject to withholding. Any such dividends received by a Non-U.S. Shareholder
that is a corporation may also be subject to an additional branch profits tax at
a 30% rate or such lower rate as may be specified by an applicable income tax
treaty.
Pursuant to current Treasury Regulations, dividends paid to an address in a
country outside the United States are generally presumed to be paid to a
resident of such country for purposes of determining the applicability of
withholding discussed above and the applicability of a tax treaty rate. Under
certain treaties, lower withholding rates generally applicable to dividends do
not apply to dividends from a REIT, such as the Company. Certain certification
and disclosure requirements must be satisfied to be exempt from withholding
under the effectively connected income and permanent establishment exemptions
discussed above.
Distributions in excess of current or accumulated earnings and profits of
the Company will not be taxable to a Non-U.S. Shareholder to the extent that
they do not exceed the adjusted basis of the shareholder's Common Stock or
Preferred Stock, but rather will reduce the adjusted basis of such stock. To the
extent that such distributions exceed the adjusted basis of a Non-U.S.
Shareholder's Common Stock or Preferred Stock, they will give rise to gain from
the sale or exchange of his stock, the tax treatment of which is described
below. If it cannot be determined at the time a distribution is made whether or
not such distribution will be in excess of current or accumulated earnings and
profits, the distribution will generally be treated as a dividend for
withholding purposes. However, amounts thus withheld are generally refundable if
it is subsequently determined that such distribution was, in fact, in excess of
current or accumulated earnings and profits of the Company. A Non-U.S.
Shareholder may obtain such a refund by filing the appropriate claim for refund
with the IRS.
Distributions to a Non-U.S. Shareholder that are designated by the Company
at the time of distribution as capital gains dividends (other than those arising
from the disposition of a United States real property interest) generally will
not be subject to United States federal income taxation, unless (i) investment
in the Common Stock or Preferred Stock is effectively connected with the
Non-U.S. Shareholder's United States trade or business (or, if an income tax
treaty applies, is attributable to a United States permanent establishment of
the Non-U.S. Shareholder), in which case the Non-U.S. Shareholder will be
subject to the same treatment as domestic shareholders with respect to such gain
(except that a shareholder that is a foreign corporation may also be subject to
the 30% branch profits tax, as discussed above) or (ii) the Non-U.S. Shareholder
is a nonresident alien individual who is present in the United States for 183
days or more during the taxable year and has a "tax home" in the United States,
in which case the nonresident alien individual will be subject to a 30% tax on
the individual's capital gains.
Distributions to a Non-U.S. Shareholder that are attributable to gain from
sales or exchanges by the Company of United States real property interests will
cause the Non-U.S. Shareholder to be treated as recognizing such gain as income
effectively connected with a United States trade or business. A Non-U.S.
Shareholder would thus generally be entitled to offset its gross income by
allowable deductions and would pay tax on the resulting taxable income at the
same rates applicable to domestic shareholders (subject to a special alternative
minimum tax in the case of nonresident alien individuals). Also, such gain may
be subject to a 30% branch profits tax in the hands of a Non-U.S. Shareholder
that is a corporation and is not entitled to treaty relief or exemption, as
discussed above. The Company is required to withhold 35% of any such
distribution. That amount is creditable against the Non-U.S. Shareholder's
United States federal income tax liability. To the extent that such withholding
exceeds the actual tax owed by the Non-U.S. Shareholder, the Non-U.S.
Shareholder may claim a refund from the IRS.
The Company or any nominee (e.g., a broker holding shares in street name)
may rely on a certificate of non-foreign status on Form W-8 or Form W-9 (or a
successor form) to determine whether withholding is required on gains realized
from the disposition of United States real property interests.
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A domestic person who holds shares of Common Stock or Preferred Stock on behalf
of a Non-U.S. Shareholder will bear the burden of withholding, provided that the
Company has properly designated the appropriate portion of a distribution as a
capital gain dividend.
SALE OF COMMON STOCK OR PREFERRED STOCK. Gain recognized by a Non-U.S.
Shareholder upon the sale or exchange of shares of Common Stock or Preferred
Stock generally will not be subject to United States taxation unless such shares
constitute a "United States real property interest" within the meaning of the
Foreign Investment in Real Property Tax Act of 1980 ("FIRPTA"). The Common Stock
or Preferred Stock will not constitute a "United States real property interest"
so long as the Company is a "domestically controlled REIT." A "domestically
controlled REIT" is a REIT in which at all times during a specified testing
period less than 50% in value of its stock is held directly or indirectly by
Non-U.S. Shareholders. The Company believes that it will be a "domestically
controlled REIT," and therefore that the sale of shares of Common Stock or
Preferred Stock will not be subject to taxation under FIRPTA. However, because
the shares of Common Stock are publicly traded, no assurance can be given that
the Company will continue to be a "domestically-controlled REIT."
Notwithstanding the foregoing, gain from the sale or exchange of shares of
Common Stock or Preferred Stock not otherwise subject to FIRPTA will be taxable
to a Non-U.S. Shareholder if (i) its investment in the stock is effectively
connected with the Non-U.S. Shareholder's United States trade or business (or,
if an income tax treaty applies, is attributable to a United States permanent
establishment of the Non-U.S. Shareholder) , in which case the Non-U.S.
Shareholder will be subject to tax in the same manner as U.S. Shareholders with
respect to such gain, or (ii) the Non-U.S. Shareholder is a nonresident alien
individual who is present in the United States for 183 days or more during the
taxable year and has a "tax home" in the United States, in which case, the
nonresident alien individual will be subject to a 30% tax on the amount of such
individual's gain.
If the Company does not qualify as or ceases to be a
"domestically-controlled REIT," gain arising from the sale or exchange by a
Non-U.S. Shareholder of shares of Common Stock would be subject to United States
taxation under FIRPTA as a sale of a "United States real property interest"
unless the shares are "regularly traded" (as defined by applicable Treasury
Regulations) on an established securities market (e.g., the American Stock
Exchange) and the selling Non-U.S. Shareholder held no more than 5% (after
applying certain constructive ownership rules) of the shares of Common Stock
during the shorter of (i) the period during which the taxpayer held such shares
or (ii) the 5-year period ending on the date of the disposition of such shares.
If gain on the sale or exchange of shares of Common Stock or Preferred Stock
were subject to taxation under FIRPTA, the Non-U.S. Shareholder would be subject
to regular United States income tax with respect to such gain in the same manner
as a U.S. Shareholder (subject to any applicable alternative minimum tax, a
special alternative minimum tax in the case of nonresident alien individuals and
the possible application of the 30% branch profits tax in the case of foreign
corporations), and the purchaser of the stock would be required to withhold and
remit to the IRS 10% of the purchase price. The 10% withholding tax will not
apply if the shares are "regularly traded" on an established securities market.
BACKUP WITHHOLDING TAX AND INFORMATION REPORTING. Backup withholding tax
(which generally is a withholding tax imposed at the rate of 31% on certain
payments to persons that fail to furnish certain information under the United
States information reporting requirements) and information reporting will
generally not apply to distributions paid to Non-U.S. Shareholders outside the
United States that are treated as (i) dividends subject to the 30% (or lower
treaty rate) withholding tax discussed above, (ii) capital gains dividends or
(iii) distributions attributable to gain from the sale or exchange by the
Company of United States real property interests. As a general matter, backup
withholding and information reporting will not apply to a payment of the
proceeds of a sale of Common Stock or Preferred Stock by or through a foreign
office of a foreign broker. Information reporting (but not backup withholding)
will apply, however, to a payment of the proceeds of a sale of Common Stock or
Preferred Stock by a foreign office of a broker that (a) is a United States
person, (b) derives 50% or more
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of its gross income for certain periods from the conduct of a trade or business
in the United States or (c) is a "controlled foreign corporation" (generally, a
foreign corporation controlled by United States shareholders) for United States
tax purposes, unless the broker has documentary evidence in its records that the
holder is a Non-U.S. Shareholder and certain other conditions are met, or the
shareholder otherwise establishes an exemption. Payment to or through a United
States office of a broker of the proceeds of a sale of Common Stock or Preferred
Stock is subject to both backup withholding and information reporting unless the
shareholder certifies under penalty of perjury that the shareholder is a
Non-U.S. Shareholder, or otherwise establishes an exemption. Backup withholding
is not an additional tax. A Non-U.S. Shareholder may obtain a refund of any
amounts withheld under the backup withholding rules by filing the appropriate
claim for refund with the IRS.
NEW WITHHOLDING REGULATIONS. Final regulations dealing with withholding tax
on income paid to foreign persons and related matters (the "New Withholding
Regulations") were recently promulgated. In general, the New Withholding
Regulations do not significantly alter the substantive withholding and
information reporting requirements, but unify current certification procedures
and forms and clarify reliance standards. For example, the New Withholding
Regulations adopt a certification rule which was in the proposed regulations
under which a foreign shareholder who wishes to claim the benefit of an
applicable treaty rate with respect to dividends received from a United States
corporation will be required to satisfy certain certification and other
requirements. In addition, the New Withholding Regulations require a corporation
that is a REIT to treat as a dividend the portion of a distribution that is not
designated as a capital gain dividend or return of basis and apply the 30%
withholding tax (subject to any applicable deduction or exemption) to such
portion, and to apply the FIRPTA withholding rules (discussed above) with
respect to the portion of the distribution designated by the REIT as capital
gain dividend. The New Withholding Regulations will generally be effective for
payments made after December 31, 1999, subject to certain transition rules. THE
DISCUSSION SET FORTH ABOVE IN "TAXATION OF NON-U.S. SHAREHOLDERS" DOES NOT TAKE
THE NEW WITHHOLDING REGULATIONS INTO ACCOUNT. NON-U.S. SHAREHOLDERS ARE STRONGLY
URGED TO CONSULT THEIR OWN TAX ADVISORS WITH RESPECT TO THE NEW WITHHOLDING
REGULATIONS.
OTHER TAX CONSEQUENCES
The Company and its shareholders may be subject to state or local taxation
in various state or local jurisdictions, including those in which it or they
transact business or reside. The state and local tax treatment of the Company
and its shareholders may not conform to the federal income tax consequences
discussed above. Consequently, prospective shareholders should consult their own
tax advisors regarding the effect of state and local tax laws on an investment
in the Company.
PARTIES; SURVIVING CORPORATION; ACCOUNTING TREATMENT
In the Reincorporation, the New York Company will be merged with and into
the Maryland Company, whereupon the separate existence of the New York Company
will cease. The Maryland Company will be the surviving corporation in the
Reincorporation and will continue its existence under the laws of the State of
Maryland. In accordance with generally accepted accounting principles, the
Company expects that the Merger will be accounted for as a reorganization of
entities under common control at historical cost.
RATIFICATION OF INDEPENDENT AUDITORS
The Board has selected Arthur Andersen LLP, Certified Public Accountants, as
the Company's independent auditors for the fiscal year ending December 31, 1998
and the fiscal year ending December 31, 1999. In the event that the Board's
selection of auditors is not ratified by a majority of the shares of Common
Stock voting thereon, the Board will review its future selection of auditors.
The
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consolidated financial statements of the Company and its subsidiaries included
in the Company's 1997 Annual Report on Form 10-K have been examined by Arthur
Andersen LLP. No representative of Arthur Andersen LLP is expected to attend the
Annual Meeting.
The affirmative vote of the holders of a majority of the outstanding shares
of New York Common and New York Preferred present and entitled to vote at the
Annual Meeting is necessary to ratify the Board's selection of Arthur Andersen
LLP as the Company's independent auditors.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE RATIFICATION OF THE
SELECTION OF ARTHUR ANDERSEN LLP AS THE COMPANY'S INDEPENDENT AUDITORS FOR THE
YEAR ENDING DECEMBER 31, 1998 AND THE YEAR ENDING DECEMBER 1999.
OTHER MATTERS
The Board of Directors knows of no matters which will be presented for
consideration at the Annual Meeting other than the election of directors,
approval of the Reincorporation Agreement and Merger, approval of the REIT
Election and ratification of the selection of auditors, each as described in
this Proxy Statement/Prospectus. Should any other matters properly come before
the Annual Meeting, it is the intention of the person named in the accompanying
proxy to vote such proxy in accordance with his best judgment.
VOTING PROCEDURES
Under the Company's current Articles of Incorporation, directors are elected
by a plurality of the votes cast by the holders of shares of New York Common and
New York Preferred present in person or represented by proxy at the meeting, at
which a quorum is present. For purposes of the election of directors,
abstentions and broker non-votes (i.e., where the broker does not receive
instructions from beneficial owners and does not exercise discretionary
authority to vote) are considered present for quorum purposes, but are not
considered to be votes cast and do not affect the plurality vote required for
directors. The affirmative vote of the holders of two-thirds of the New York
Common and New York Preferred, voting as a single class, and two-thirds of the
New York Preferred present in person or represented by proxy and entitled to
vote at the meeting, with a quorum present, is required for approval of the
Reincorporation. For purposes of approval of the Reincorporation, abstentions
are treated as present and entitled to vote on the matter and have the effect of
a vote against the proposal, and broker non-votes are not considered to be votes
cast. The affirmative vote of the holders of a majority of the holders of New
York Common and New York Preferred, voting as a single class, is required for
approval of the REIT Election and the ratification of the selection of auditors.
For purposes of these proposals, abstentions and broker non-votes are considered
present for quorum purposes, but are not considered to be votes cast and do not
affect the majority vote needed for approval.
SHAREHOLDER PROPOSALS FOR THE 2000 ANNUAL MEETING
Under the rules of the Securities and Exchange Commission any proposal of a
shareholder intended to be presented at the Company's 2000 Annual Meeting of
Shareholders must be received by the Company for inclusion in the proxy
statement and form of proxy a reasonable time before the Company begins to print
and mail its proxy materials.
SOLICITATION OF PROXIES
The Company will bear the cost of this solicitation of proxies. In addition
to solicitation of proxies by mail, the Company will reimburse brokers and other
nominees for the expense of forwarding proxy materials to the beneficial owners
of stock held in their names. Directors, officers and employees of the
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Company may also solicit proxies on behalf of the Board of Directors but will
not receive any additional compensation therefor.
LEGAL MATTERS
The validity of the securities offered hereby, and certain federal income
tax matters set forth under the heading "Federal Income Tax Consequences of the
Reincorporation, Merger and REIT Election," will be passed upon for the Company
by Gibson, Dunn & Crutcher LLP, Palo Alto, California.
EXPERTS
The audited financial statements and schedule included in this prospectus
and elsewhere in the registration statement to the extent and for the periods
indicated in their report have been audited by Arthur Andersen LLP, independent
public accountants, and are included herein in reliance upon the authority of
said firm as experts in accounting and auditing in giving said reports.
IT IS IMPORTANT THAT PROXIES BE RETURNED PROMPTLY. THEREFORE, SHAREHOLDERS
ARE URGED TO FILL IN, SIGN, DATE AND RETURN THE ACCOMPANYING FORM OF PROXY IN
THE ENCLOSED ENVELOPE.
By order of the Board of Directors
Stephen J. LoPresti,
SECRETARY
San Francisco, California
March 22, 1999
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ANNEX A
AGREEMENT AND PLAN OF MERGER
AGREEMENT AND PLAN OF MERGER dated as of , , 1999 (the
"Agreement"), between PACIFIC GATEWAY PROPERTIES, INC., a New York corporation
(the "New York Corporation"), and PACIFIC GATEWAY PROPERTIES, INC., a Maryland
corporation (the "Company").
BACKGROUND
The New York Corporation is a corporation duly organized and existing under
the laws of the State of New York.
The Company is a corporation duly organized and existing under the laws of
the State of Maryland, and a wholly owned subsidiary of the New York Company.
The respective Boards of Directors of the New York Corporation and the
Company have determined that it is advisable and in the best interests of each
corporation that the New York Corporation merge with and into the Company upon
the terms and subject to the conditions of this Agreement to effect a
reincorporation of the New York Corporation in the State of Maryland.
The respective Boards of Directors of the New York Corporation and the
Company have, by resolutions duly adopted, approved and adopted this Agreement.
The Board of Directors of the New York Corporation will seek shareholder
approval of the Agreement at the Special in Lieu of Annual Meeting of
Shareholders, to be held on April 26, 1999.
The parties intend by this Agreement to effect a "reorganization" under
Section 368 of the Internal Revenue Code of 1986, as amended.
NOW, THEREFORE, the New York Corporation and the Company hereby agree as
follows:
ARTICLE I
THE MERGER
Section 1.01 THE MERGER. Upon the terms and subject to the conditions
hereof, and in accordance with the relevant provisions of the Maryland General
Corporation Law (the "MGCL") and the New York Business Corporation Law (the
"NYBCL"), the New York Corporation shall be merged with and into the Company as
soon as practicable following the satisfaction or waiver, if permissible, of the
conditions set forth in Article II. Following the Merger, the Company will
continue its existence under the laws of the State of Maryland, and the separate
existence of the New York Corporation will cease.
Section 1.02 EFFECTIVE TIME. As soon as practicable following the
satisfaction or waiver of the conditions set forth in Article II, the Merger
shall be consummated by filing with the State Department of Assessments and
Taxation of the State of Maryland ("SDAT") articles of merger or other
appropriate documents (in any case, the "Articles of Merger") in accordance with
the MGCL. The Merger shall become effective at the later of such time as the
Articles of Merger are accepted by the SDAT (the time the Merger becomes
effective being the "Effective Time") and a Certificate of Merger is accepted by
the Department of State of the State of New York.
Section 1.03 EFFECTS OF THE MERGER. The Merger will have the effects set
forth in Section 3-114 of the MGCL.
Section 1.04 CERTIFICATE OF INCORPORATION AND BY-LAWS. The Certificate of
Incorporation and the By-Laws of the Company will remain in effect until
thereafter changed or amended as provided therein or by applicable law. The name
of the surviving corporation will be Pacific Gateway Properties, Inc.
Section 1.05 DIRECTORS AND OFFICERS. The directors and officers of the
Company immediately prior to the Effective Time will remain the directors and
officers of the Company until the earlier of their resignation or removal or
until their respective successors are duly elected and qualified.
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ARTICLE II
NEW YORK CORPORATION STOCK
Section 2.01 CONVERSION OF NEW YORK CORPORATION COMMON STOCK.
(a) At the Effective Time, in accordance with Section 2.03, each share
of Common Stock, par value $1.00 per share, of the New York Corporation,
issued and outstanding immediately prior to the Effective Time, shall, by
virtue of the Merger and without any further action on the part of the
holder thereof, be converted into the right to receive one share of Common
Stock, par value $1.00 per share, of the Company (subject to the Charter of
the Company), upon surrender of the certificate formerly representing such
share (a "Certificate"). The Common Stock of the Company to be received as
consideration pursuant to the Merger by each holder of New York Corporation
Common Stock is referred to herein as the "Merger Consideration."
(b) As a result of the Merger and without any action on the part of the
holder thereof, all shares of the New York Corporation Common Stock shall
cease to be outstanding and shall be cancelled and retired and shall cease
to exist, and each holder of a Certificate representing any share of New
York Corporation Common Stock shall thereafter cease to have any rights with
respect to such shares of New York Corporation Common Stock, except the
right to receive, without interest, the Merger Consideration (subject to the
Charter of the Company) in accordance with Section 2.01(a) hereof upon the
surrender of such Certificate.
Section 2.02 CONVERSION OF NEW YORK CORPORATION SERIES 1 PREFERRED STOCK.
(a) At the Effective Time, in accordance with Section 2.04, each share
of Series 1 Preferred Stock, par value $1.00 per share, of the New York
Corporation ("New York Corporation Preferred Stock"), issued and outstanding
immediately prior to the Effective Time, shall, by virtue of the Merger and
without any further action on the part of the holder thereof, be converted
into the right to receive one share of Series 1 Preferred Stock, par value
$1.00 per share, of the Company (subject to the Charter of the Company),
upon surrender of the certificate formerly representing such share (a
"Preferred Stock Certificate").
(b) As a result of the Merger and without any action on the part of the
holder thereof, all shares of the New York Corporation Preferred Stock shall
cease to be outstanding and shall be cancelled and retired and shall cease
to exist, and each holder of a Preferred Stock Certificate representing any
share of New York Corporation Preferred Stock shall thereafter cease to have
any rights with respect to such shares of New York Corporation Preferred
Stock, except the right to receive, without interest, shares of Preferred
Stock of the Company in accordance with Section 2.02(a) hereof (subject to
the Charter of the Company) upon the surrender of such Preferred Stock
Certificate.
Section 2.03 EXCHANGE OF CERTIFICATES REPRESENTING NEW YORK CORPORATION
COMMON STOCK.
(a) As of the Effective Time, the Company shall deposit, or shall cause
to be deposited, with an exchange agent (the "Exchange Agent"), for the
benefit of the holders of shares of the New York Corporation Common Stock,
for exchange in accordance with this Article II, certificates representing
the Merger Consideration.
(b) At and after the Effective Time, there shall be no transfers on the
stock transfer books of the New York Corporation of the shares of New York
Corporation Common Stock which were outstanding immediately prior to the
Effective Time. If, after the Effective Time, Certificates are presented to
the Company, subject to the Charter of the Company they shall be cancelled
and exchanged for certificates of shares of the Merger Consideration and
unpaid dividends and distributions deliverable in respect thereof pursuant
to this Agreement in accordance with the procedures set forth in this
Article II.
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(c) Any portion of the Merger Consideration held by the Exchange Agent
that remains unclaimed by the former stockholders of the New York
Corporation one year after the Effective Time shall be delivered to the
Company. Any former stockholders of the New York Corporation who have not
theretofore complied with this Article II shall thereafter look only to the
Company for payment of their shares constituting the Merger Consideration
(subject to the Charter of the Company), and unpaid dividends and
distributions on the Merger Consideration deliverable in respect of each
share of New York Corporation Common Stock such stockholder holds as
determined pursuant to this Agreement, in each case, without any interest
thereon.
(d) None of the Company, the New York Corporation, the Exchange Agent or
any other person shall be liable to any former holder of shares of New York
Corporation Common Stock for any amount properly delivered to a public
official pursuant to applicable abandoned property, escheat or similar laws.
(e) In the event any Certificate shall have been lost, stolen or
destroyed, upon the making of an affidavit of that fact by the person
claiming such Certificate to be lost, stolen or destroyed and if required by
the Company, the posting by such person of a bond in such reasonable amount
as the Company may direct as indemnity against any claim that may be made
against it with respect to such Certificate, the Exchange Agent or the
Company will issue in exchange for such lost, stolen or destroyed
Certificate the Merger Consideration (subject to the Charter of the Company)
and unpaid dividends and distributions on shares of the Merger Consideration
as provided in Section 2.03(c), deliverable in respect thereof pursuant to
this Agreement.
Section 2.04 EXCHANGE OF CERTIFICATES REPRESENTING NEW YORK CORPORATION
PREFERRED STOCK.
(a) As of the Effective Time, the Company shall deposit, or shall cause
to be deposited, with an exchange agent (the "Exchange Agent"), for the
benefit of the holders of shares of the New York Corporation Preferred
Stock, for exchange in accordance with this Article II, certificates
representing the shares of Series 1 Preferred Stock of the Company to be
issued pursuant to Section 2.02 in exchange for outstanding shares of New
York Corporation Preferred Stock.
(b) At and after the Effective Time, there shall be no transfers on the
stock transfer books of the New York Corporation of the shares of New York
Corporation Preferred Stock which were outstanding immediately prior to the
Effective Time. If after the Effective Time, New York Corporation Preferred
Stock Certificates are presented to the Company, subject to the Charter of
the Company, they shall be cancelled and exchanged for shares of Preferred
Stock of the Company in accordance with Section 2.03 hereof, plus any
declared and unpaid dividends and distributions deliverable in respect
thereof pursuant to this Agreement in accordance with the procedures set
forth in this Article II.
(c) Any portion of the shares of Series 1 Preferred Stock of the Company
issuable to the former stockholders of the Company under this Agreement that
are held by the Exchange Agent that remain unclaimed by the former
stockholders of the New York Corporation one year after the Effective Time
shall be delivered to the Company. Any former holders of Preferred Stock of
the New York Corporation who have not theretofore complied with this Article
II shall thereafter look only to the Company for payment of their shares
constituting the shares of Preferred Stock of the Company to which such
stockholders are entitled pursuant to this Agreement and unpaid dividends
and distributions on the shares of Preferred Stock of the Company (subject
to the Charter of the Company) deliverable in respect of each share of New
York Corporation Preferred Stock such stockholder holds as determined
pursuant to this Agreement, in each case, without any interest thereon.
(d) None of the Company, the New York Corporation, the Exchange Agent or
any other person shall be liable to any former holder of shares of New York
Corporation Preferred Stock for
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any amount properly delivered to a public official pursuant to applicable
abandoned property, escheat or similar laws.
(e) In the event any Preferred Stock Certificate shall have been lost,
stolen or destroyed, upon the making of an affidavit of that fact by the
person claiming such Preferred Stock Certificate to be lost, stolen or
destroyed and if required by the Company, the posting by such person of a
bond in such reasonable amount as the Company may direct as indemnity
against any claim that may be made against it with respect to such Preferred
Stock Certificate, the Exchange Agent or the Company will issue in exchange
for such lost, stolen or destroyed Certificate the shares of Series 1
Preferred Stock of the Company issuable to the holder of such Preferred
Stock Certificate under this Agreement (subject to the Charter of the
Company) and unpaid dividends and distributions on such shares of Series 1
Preferred Stock of the company as provided in Section 2.04(c), deliverable
in respect thereof pursuant to this Agreement.
ARTICLE III
CONDITIONS TO CONSUMMATION OF THE MERGER
Section 3.01 CONDITIONS TO EACH PARTY'S OBLIGATION TO EFFECT THE
MERGER. The respective obligations of each party to effect the Merger are
subject to the satisfaction or waiver, where permissible, prior to the Effective
Time, of the following conditions:
(a) no statute, rule, regulation, executive order, decree, injunction or
other order has been enacted, entered, promulgated or enforced by any court
or governmental authority that is in effect and has the effect of
prohibiting the consummation of the Merger; and
(b) all approvals and consents necessary or desirable, if any, in
connection with consummation of the Merger have been obtained.
ARTICLE IV
MISCELLANEOUS
Section 4.01 AMENDMENT. This Agreement may not be amended except by an
instrument in writing signed on behalf of all the parties.
Section 4.02 ENTIRE AGREEMENT; ASSIGNMENT. This Agreement constitutes the
entire agreement and supersedes all prior agreements and understandings, both
written and oral, among the parties with respect to the subject matter hereof.
Neither this Agreement nor any right, interest or obligation under this
Agreement may be assigned, in whole or in part, by operation of law or
otherwise, without the prior written consent of the other parties.
Section 4.03 GOVERNING LAW. This Agreement will be governed by and
construed in accordance with the substantive laws of the State of Maryland
regardless of the laws that might otherwise govern under principles of conflicts
of laws applicable thereto.
Section 4.04 PARTIES IN INTEREST. Nothing in this Agreement, express or
implied, is intended to confer upon any other person any rights or remedies of
any nature whatsoever under or by reason of this Agreement.
Section 4.05 COUNTERPARTS. This Agreement may be executed in one or more
counterparts, each of which will be deemed to be an original, but all of which
will constitute one and the same agreement, and will become effective when one
or more counterparts have been signed by each of the parties and delivered to
the other parties.
Section 4.06 DEFERRAL OR ABANDONMENT. At any time before the Effective
Time, this Agreement may be terminated and the Merger may be abandoned or the
time or consummation of the Merger
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may be deferred for a reasonable time by the Board of Directors of either the
New York Corporation or the Company.
Section 4.07 FURTHER ASSURANCES. From time to time, as and when required
or requested by either the New York Corporation or the Company, as applicable,
or its respective successors and assigns, such deeds, assignments and other
instruments, and there will be taken or caused to be taken by it all such
further and other action, as may be appropriate or necessary to vest, perfect or
confirm in the Company the title to and possession of all property, interests,
assets, rights, powers, franchises and authority of the New York Corporation and
otherwise to carry out the purposes of this Agreement, and the officers and
directors of each corporation are fully authorized to take any and all such
action and to execute and deliver any and all such deeds, assignments and other
instruments.
IN WITNESS WHEREOF, each of the parties has caused this Agreement to be
executed on its behalf by its respective officers thereunto duly authorized, all
as of the day and year first above written.
PACIFIC GATEWAY PROPERTIES, INC., a
New York Corporation
By:
--------------------------------------
Name:
Title:
PACIFIC GATEWAY PROPERTIES, INC., a
Maryland Corporation
By:
--------------------------------------
Name:
Title:
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ANNEX B
PACIFIC GATEWAY PROPERTIES, INC.
ARTICLES OF INCORPORATION
I.
INCORPORATOR
The undersigned, , whose address is 11 E. Chase
Street, Baltimore, Maryland 21202, being at least 18 years of age, acting as
incorporator, does hereby form a corporation under and by virtue of the General
Laws of the State of Maryland ("GLM").
II.
NAME
The name of the corporation (hereinafter called the "Corporation") is:
Pacific Gateway Properties, Inc.
III.
PURPOSES AND POWERS
The purposes for which the Corporation is formed and the business or objects
to be transacted, carried on and promoted by it are to engage in the business of
a real estate investment trust ("REIT") as that phrase is defined in the
Internal Revenue Code of 1986, as amended (the "Code"), and any lawful act or
activity for which corporations may be organized under the Maryland General
Corporation Law, as amended from time to time ("MGCL").
The foregoing enumerated purposes and objects shall be in no way limited or
restricted by reference to, or inference from, the terms of any other clause of
this or any other Article of the Charter of the Corporation, and each shall be
regarded as independent; and they are intended to be and shall be construed as
powers as well as purposes and objects of the Corporation and shall be in
addition to and not in limitation of the general powers of corporations under
the GLM.
IV.
PRINCIPAL OFFICE AND RESIDENT AGENT
The principal address of the Corporation in the State of Maryland is 11 E.
Chase Street, Baltimore, Maryland 21202. The name and address of the
Corporation's resident agent, which is a Maryland corporation, is National
Registered Agents, Inc. of MD, 11 E. Chase Street, Baltimore, Maryland 21202.
V.
STOCK
(A) TOTAL AUTHORIZED SHARES. The total number of shares of stock of all
classes which the Corporation has authority to issue is Twelve Million
(12,000,000) shares, having an aggregate par value of Twelve Million Dollars
($12,000,000), of which Ten Million (10,000,000) shares of the par value of one
dollar ($1.00) per share, amounting in aggregate par value to Ten Million
Dollars ($10,000,000) shall be initially classified as Common Stock ("Common
Stock") and Two Million (2,000,000) shares of the par value of one dollar
($1.00) per share, amounting in aggregate par value to Two Million Dollars
($2,000,000) shall be initially classified as Preferred Stock ("Preferred
Stock"), of which three hundred thousand shares are classified hereinbelow as
Series 1 Preferred Stock, par value $1.00 per share.
<PAGE>
(B) SPECIAL MEETINGS OF THE STOCKHOLDERS. Special meetings of stockholders
may be called upon the request of the Chairman of the Board of Directors, the
President or a majority of the Board of Directors or by the Secretary of the
Corporation upon the written request of stockholders holding not less than a
majority of all votes entitled to be cast at the meeting.
(C) POWER OF THE BOARD OF DIRECTORS TO AUTHORIZE AND ISSUE STOCK.
(1) The Board of Directors hereby is empowered to authorize the issuance
from time to time of shares of stock of the Corporation of any class or
series, whether now or hereafter authorized, or securities or rights
convertible into shares of its stock of any class or series, whether now or
hereafter authorized, without any action by the stockholders, for such
consideration as the Board of Directors may deem advisable (or without
consideration in the case of a stock split or stock dividend).
(2) The Board of Directors is authorized to classify or to reclassify
any unissued stock by setting or changing in any one or more respects, from
time to time before issuance of such stock, the designations, preferences,
conversion or other rights, voting powers, restrictions (including
restrictions on transfers of stock), limitations as to dividends or other
distributions, qualifications, and terms or conditions of redemption of such
stock. Prior to the issuance of classified or reclassified shares of any
class or series, the Board of Directors by resolution shall insofar as
required by applicable law: (a) designate that class or series to
distinguish it from all other classes and series of stock of the
Corporation; (b) specify the number of shares to be included in the class or
series; (c) set or change the preferences, conversion or other rights,
voting powers, restrictions, limitations as to dividends or other
distributions, qualifications and terms and conditions of redemption for
each class or series; and (d) cause the Corporation to file articles
supplementary with the State Department of Assessments and Taxation of
Maryland ("SDAT"). Any of the terms of any class or series of stock set or
changed pursuant to clause (c) of this subparagraph (2) may be made
dependent upon facts or events ascertainable outside the Charter (including
determinations by the Board of Directors or other facts or events within the
control of the Corporation) and may vary among the holders thereof, provided
that the manner in which such facts, events or variations shall operate upon
the terms of such class or series of stock is clearly and expressly set
forth in the articles supplementary filed with the SDAT in substance and
form as prescribed by the MGCL.
(3) The Board of Directors is hereby authorized to issue from time to
time the shares of Preferred Stock in one or more classes or series of any
number of shares, and with distinctive designations, all as shall hereafter
be stated and expressed in the resolution or resolutions providing for the
issue of such shares of Preferred Stock from time to time adopted by the
Board of Directors pursuant to authority so to do which is hereby vested in
the Board of Directors and all as shall be reflected in the articles
supplementary filed with the SDAT in substance and form as prescribed by the
MGCL. Each class or series of shares of Preferred Stock (a) may have such
voting powers, full or limited, or may be without voting powers; (b) may be
subject to redemption at such time or times and at such prices; (c) may be
entitled to receive dividends (which may be cumulative or non-cumulative) at
such rate or rates, on such conditions and at such times, and payable in
preference to, or in such relation to, the dividends payable on any other
class or classes or series of stock; (d) may have such rights upon the
dissolution of, or upon any distribution of the assets of, the Corporation;
(e) may be made convertible into or exchangeable for, shares of any other
class or classes or of any other series of the same or any other class or
classes of shares of the Corporation at such price or prices or at such
rates of exchange and with such adjustments; (f) may be entitled to the
benefit of a sinking fund to be applied to the purchase or redemption of
shares of such class or series in such amount or amounts; (g) may be
entitled to the benefit of conditions and restrictions upon the creation of
indebtedness of the Corporation or any subsidiary, upon the issue of any
additional shares (including additional shares of such class or series or of
any other class or series) and upon the payment of dividends or the making
of other distributions
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on, and the purchase, redemption or other acquisition by the Corporation or
any subsidiary of, any outstanding shares of the Corporation and (h) may
have such other relative, participating, optional or other special rights,
qualifications, limitations or restrictions thereof, all as shall be stated
in said resolution or resolutions providing for the issue of such shares of
Preferred Stock and as reflected in the articles supplementary. Shares of
Preferred Stock of any class or series that have been redeemed (whether
through the operation of a sinking fund or otherwise) or that, if
convertible or exchangeable, have been converted into or exchanged for
shares of any other class or classes shall have the status of authorized and
unissued shares of Preferred Stock of the same class or series and may be
reissued as a part of the class or series of which they were originally a
part or may be reclassified and reissued as part of a new class or series of
shares of Preferred Stock to be created by resolution or resolutions of the
Board of Directors or as part of any other class or series of shares of
Preferred Stock, all subject to the conditions or restrictions on issuance
set forth in the resolution or resolutions adopted by the Board of Directors
providing for the issue of any class or series of shares of Preferred Stock.
Notwithstanding any provision to the contrary contained in the Charter, each
outstanding share of each class or series of Preferred Stock shall be
entitled to receive, and shall receive, a dividend with respect to any
dividend record date equal to the dividend paid with respect to each other
share of such class or series of Preferred Stock that is outstanding on such
date.
(D) NO PREEMPTIVE RIGHTS. Except as may be provided by the Board of
Directors in setting the terms of classified or reclassified shares of stock, or
as may otherwise be provided by contract, no stockholder, as such, shall have
any preemptive or similar right to have first offered to him any part of any
presently or hereafter authorized shares, or bonds, debentures or securities
convertible into shares, of the Corporation which may at any time or times be
issued, optioned or sold by the Corporation.
(E) COMMON STOCK. Each share of Common Stock shall be of equal rank and
shall entitle the holders thereof to the same rights and privileges, except as
expressly provided in, or established pursuant to the provisions of this Article
V or in Article VI hereof. The Board of Directors may reclassify any unissued
shares of Common Stock from time to time in one or more classes or series of
stock. The designation and the relative, participating, optional or other
rights, and the qualifications, limitations or restrictions thereof, in addition
to those set forth above in this Article and elsewhere in the Charter of the
Corporation and as otherwise provided by the MGCL, are as follows:
(1) DIVIDENDS. The holders of shares of Common Stock shall be entitled
to receive dividends, out of the assets of the Corporation legally available
therefor, when and as declared by the Board of Directors.
(2) RIGHTS ON LIQUIDATION, DISSOLUTION OR WINDING UP. In the event of
any liquidation, dissolution or winding up of the Corporation, whether
voluntary or involuntary, the holders of shares of Common Stock then
outstanding shall be entitled to receive their portion of the remaining
assets of the Corporation available, after payment of liabilities and
expenses and amounts payable to holders of Preferred Stock, for distribution
to its stockholders, in cash or in kind, in accordance with the terms of the
Charter and the MGCL; provided, however, that as to any Common Stock which
is subject to subparagraph (A)(2)(b) of Article VI hereof, holders shall
only be entitled to receive a portion as provided in Article VI hereof.
(3) VOTING. Subject to the provisions of any applicable law or of the
Bylaws of the Corporation, as from time to time amended, with respect to the
closing of the transfer books or the fixing of a record date for the
determination of stockholders entitled to vote and except as otherwise
provided by law and subject to the rights, if any, of holders of any series
of shares of Preferred Stock, the holders of outstanding shares of Common
Stock shall exclusively possess voting power
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for the election of directors and for all other purposes, each holder of
record of shares of Common Stock being entitled to one vote for each share
of Common Stock standing in his or her name on the books of the Corporation.
(4) IDENTICAL RIGHTS. Except as provided elsewhere or established
pursuant to any term or provision of the Charter (including subparagraph
(A)(8) of Article VI hereof), each share of Common Stock shall have the same
relative rights and preferences as, and shall be identical in all respects
with, all other shares of Common Stock.
(5) CERTIFICATES. The Board of Directors may determine that Common
Stock shall be issued in certificated or uncertificated form, or both. So
long as any certificated shares of Common Stock are outstanding, there shall
be set forth on the face or back of each stock certificate evidencing shares
of Common Stock issued by the Corporation a statement that the Corporation
shall furnish without charge to each stockholder who so requests, the
powers, preferences and rights of such stock or series thereof and the
qualifications, limitations or restrictions on such preferences or rights.
(6) MISCELLANEOUS. The shares of Common Stock shall, upon issuance and
payment therefor, be fully paid and non-assessable, will not be subject to
redemption or repurchase at the option of the Corporation (except as
expressly provided in the Charter of the Corporation, including without
limitation Article VI of these Articles of Incorporation) and will have no
cumulative voting rights.
(F) SERIES 1 PREFERRED STOCK. Shares of the Corporation's Preferred Stock
are hereby classified as a separate class of Preferred Stock, designated Series
1 Preferred Stock, which class of Preferred Stock shall have the rights,
privileges and preferences set forth below.
(1) DESIGNATION AND AMOUNT. The shares of this class of Preferred
Stock shall be designated as "Series 1 Preferred Stock," and the number of
shares constituting this class shall be Three Hundred Thousand (300,000)
shares, with a par value of $1.00 per share. The relative rights,
preferences, restrictions and other matters relating to the Series 1
Preferred Stock are contained in this paragraph (F) of Article V.
(2) DIVIDEND PROVISIONS.
(a) Whenever the Corporation pays dividends or other distributions on
its Common Stock or any convertible securities, in cash, assets,
evidences of indebtedness or in kind, except for dividends of Common
Stock or Common Stock Equivalents (as defined below) without payment of
any consideration by such holder for the additional shares of Common
Stock or the Common Stock Equivalents (including the additional shares of
Common Stock issuable upon conversion or exercise thereof), the holders
of record on the record date of outstanding shares of Series 1 Preferred
Stock shall be entitled to receive dividends in such amount as they would
be entitled to receive if, as of the record date, their shares of Series
1 Preferred Stock had been converted into shares of Common Stock pursuant
to subparagraph (5) hereof. Except as otherwise provided below, no such
dividend or other distribution shall be paid or set aside with respect to
shares of Common Stock until and unless all dividends or other
distributions then payable to the holders of the Series 1 Preferred Stock
shall have been paid or declared and set aside for payment in full.
(b) Except in a Liquidation (as defined in subparagraph (3) below),
without the affirmative vote or written consent of the holders of a
majority of the outstanding shares of Series 1 Preferred Stock, the
Corporation shall not declare or pay any Dividend (as defined below)
unless the funds used to make such Dividend are from a source other than
Sale or Refinancing Proceeds (as defined below). Notwithstanding the
foregoing, the Corporation may declare or pay a Dividend without any vote
of the holders of outstanding shares of Series 1 Preferred Stock if (x)
the amount of such Dividend which is deemed to be from Sale or
Refinancing
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Proceeds is paid solely to the holders of outstanding shares of Series 1
Preferred Stock on a pro rata basis (a "Partial Liquidation Payment") or
(y) the Liquidation Preference (as defined below) has been reduced to
zero in accordance with subparagraph (3) below.
(c) After the Liquidation Preference has been reduced to zero in
accordance with subparagraph (3) below, the Corporation shall not declare
or pay further Dividends with respect to the Series 1 Preferred Stock if
the source of such Dividend is Sale or Refinancing Proceeds until holders
of shares of Common Stock have received Dividends from a source which is
Sale or Refinancing Proceeds equal in the aggregate (and not on a per
share basis) to the Equalization Amount (as defined below).
(d) After holders of shares of Common Stock have received Dividends
equal in the aggregate to the Equalization Amount, the holders of shares
of Series 1 Preferred Stock and shares of Common Stock shall be entitled
to receive dividends or other distributions ratably in proportion to the
number of shares of Common Stock held by each such Common Stock holder
and the number of shares of Common Stock into which the shares of Series
1 Preferred Stock held by each such Series 1 Preferred Stock holder are
then convertible pursuant to subparagraph (4) below, regardless of the
source of the funds for such dividends or distributions.
(e) Nothing contained in subparagraphs (b), (c) or (d) above shall be
deemed to prohibit the Corporation from declaring or paying any dividend
or other distributions in accordance with subparagraph (a) above, or from
making any Dividend which would not be subject to subparagraph (a) above,
if the funds used to make such Dividend are from a source other than Sale
or Refinancing Proceeds.
(f) The Board of Directors of the Corporation shall determine in good
faith, the amount, if any, of any Dividend which is from Sale or
Refinancing Proceeds.
(g) Certain definitions:
"Dividend" means any (i) repurchase, redemption or other acquisition
or retirement for value by the Corporation or any of its subsidiaries of
any shares of Common Stock or any convertible securities other than (x)
pursuant to the provisions of Article VI hereof (including, without
limitation, subparagraph (A)(3)(e) thereof), but only if, and to the
extent, required to cause the Corporation to continue to qualify as a
REIT under the Code and if not effected with an intent to avoid the
payment of the Liquidation Preference (as defined below), or (y) pursuant
to contractual rights to repurchase shares of Common Stock or any
convertible securities held solely by current or former officers,
employees, directors or consultants of the Corporation or any of its
subsidiaries pursuant to a compensatory stock grant, stock option plan or
purchase plan or other employee stock incentive plan or agreement which
is customary in nature and amount and which is approved by the Board of
Directors or (ii) declaration or payment by the Corporation of any
dividend or any other payment or distribution of cash, assets or
evidences of indebtedness with respect to shares of Common Stock or any
convertible securities.
"Equalization Amount" means the (i) Original Series 1 Issue Price
multiplied by (ii) the number of shares of Common Stock outstanding on
the date on which the Liquidation Preference becomes equal to zero
(subject to adjustment to reflect any split, subdivision or combination
in the outstanding shares of Common Stock or any dividend or other
distribution payable in additional shares of Common Stock or Common Stock
Equivalents (as defined below) with a record date or effective date after
the Issue Date (as defined below)).
"Original Series 1 Issue Price" means $10.00.
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"Sale or Refinancing Proceeds" means the proceeds (whether in cash,
assets or any other form), net of repayment of debt, taxes and closing
costs after the date hereof, from (i) any sale, exchange, transfer or
other disposition of any assets of the Corporation or any of its
subsidiaries (other than in complete liquidation, dissolution or winding
up of the Corporation), (ii) any mortgage, pledge, financing or
refinancing of any assets of the Corporation or any of its subsidiaries,
(iii) any borrowings by the Corporation or any of its subsidiaries, or
(iv) any sale or issuance of any Common Stock or other equity or debt
securities of the Corporation or any of its subsidiaries other than
shares of Common Stock or other securities issued solely to current or
former officers, directors, employees, or consultants of the Corporation
or any of its subsidiaries pursuant to a compensatory stock grant, stock
option plan or purchase plan or other employee stock incentive program or
agreement which is customary in nature and amount and which is approved
by the Board of Directors.
(h) Notwithstanding any provision to the contrary contained in the
Charter, each outstanding share of each Series 1 Preferred Stock shall be
entitled to receive, and shall receive, a dividend with respect to any
dividend record date equal to the dividend paid with respect to each
other share of the Series 1 Preferred Stock that is outstanding on such
date.
(i) If for any year the Corporation elects to designate as a "capital
gains dividend" (as defined in Section 857 of the Code), any portion (the
"Capital Gains Amount") of the dividends paid or made available for the
year to holders of any class or series of stock of the Corporation, the
amount of the Capital Gains Amount that shall be allocable to holders of
the Series 1 Preferred Stock shall be proportionate to the amount that
the total dividends (as determined for Federal income tax purposes) paid
or made available to the holders of the Series 1 Preferred Stock for the
year bears to the aggregate amount of dividends (as determined for
Federal income tax purposes) paid or made available to the holders of all
classes or series of stock of the Corporation for such year.
(3) LIQUIDATION PREFERENCE.
(a) In the event of any Liquidation (as defined below), subject to
the rights of any other class or series of Preferred Stock which may from
time to time come into existence, the holders of the Series 1 Preferred
Stock shall be entitled to receive, prior and in preference to any
distribution of any of the assets of the Corporation to the holders of
Common Stock by reason thereof, and the Corporation's Board of Directors
shall take the necessary steps to assure that the holder of each share of
Series 1 Preferred Stock shall receive, an amount per share equal to
$10.00 minus any Partial Liquidation Payments previously made with
respect to such share (the "Liquidation Preference"); provided, however,
that in no event shall the Liquidation Preference be deemed to be less
than zero. If the assets and funds thus distributed among holders of the
Series 1 Preferred Stock shall be insufficient to permit payment to such
holders of the full Liquidation Preference, then, subject to the rights
of any other class or series of Preferred Stock that may from time to
time come into existence, the entire assets and funds of the Corporation
legally available for distribution shall be distributed ratably among the
holders of Series 1 Preferred Stock in proportion to the amount of such
stock held by each such holder.
(b) Upon the completion of the distribution required by subparagraph
(a) of this subparagraph (3) and any other distribution which may be
required with respect to any other class or series of Preferred Stock
which may from time to time come into existence, if assets remain in the
Corporation, the holders of the Common Stock of the Corporation shall be
entitled to receive an amount per share equal to the lesser of: (i)
$10.00 for each outstanding share of Common Stock (subject to adjustment
to reflect any split, subdivision or combination in the outstanding
shares of Common Stock or any dividend or other distribution payable in
additional shares of Common Stock or Common Stock Equivalents with a
record date or effective
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date after the Issue Date (as defined below)), or, if applicable, (ii)
the Equalization Amount less the aggregate amount of any Dividends
theretofore paid to holders of shares of Common Stock pursuant to
subparagraph (2)(c) above, in each case, divided by the number of shares
of Common Stock outstanding on the date of such distribution (or the
record date for determination of holders entitled to receive such
distribution, if applicable). If any assets remain in the Corporation
after such distribution, subject to the rights of any other class or
series of Preferred Stock, the holders of the Common Stock and the
holders of the Series 1 Preferred Stock shall receive all of the
remaining assets of the Corporation ratably in proportion to the number
of shares of Common Stock held by each such Common Stock holder and the
number of shares of Common Stock into which the shares of Series 1
Preferred Stock held by each such Series 1 Preferred Stock holder are
then convertible pursuant to subparagraph (4) below.
(c) The term "Liquidation" shall mean (i) any complete liquidation,
dissolution or winding up of the Corporation, either voluntary or
involuntary, (ii) any consolidation or merger of the Corporation with or
into any other entity or entities that results in a change in the
beneficial ownership (within the meaning contemplated by Rule 13d-3 under
the Securities Exchange Act of 1934, as amended) of 50% or more of the
voting power of the Corporation, or (iii) any sale, conveyance or
disposition of all or substantially all of the assets of the Corporation.
(d) The term "Partial Liquidation Payments" shall mean Dividends or
other distributions to holders of Series 1 Preferred Stock made from Sale
or Refinancing Proceeds.
(4) CONVERSION. The holders of the Series 1 Preferred Stock shall have
conversion rights as follows (the "Conversion Rights"):
(a) RIGHT TO CONVERT. Each share of Series 1 Preferred Stock shall
be convertible, at the option of the holder thereof, at any time after
the date of issuance of such share, at the office of the Corporation or
any transfer agent for the Series 1 Preferred Stock, into such number of
fully paid and nonassessable shares of Common Stock as is determined by
dividing $10.00 (the "Original Series 1 Issue Price") by the Conversion
Price at the time in effect for such share. The initial Conversion Price
per share for shares of Series 1 Preferred Stock shall be the Original
Series 1 Issue Price; provided, however, that the Conversion Price for
the Series 1 Preferred Stock shall be subject to adjustment as set forth
in subparagraph (4)(c).
At the date of any conversion of any share of Series 1 Preferred
Stock pursuant to this subparagraph (4) (the "Conversion Date") the
holder of such share shall, as a condition of such conversion, pay to the
Corporation the Preference Repayment Amount (as defined below).
If, on or prior to the Conversion Date, the Corporation has paid any
Sale or Refinancing Proceeds to the holders of shares of Series 1
Preferred Stock pursuant to subparagraph (2)(b) above but the Liquidation
Preference is still greater than zero, then the "Preference Repayment
Amount" with respect to each share of Series 1 Preferred Stock shall be
equal to the amount of Sale or Refinancing Proceeds previously
distributed. If, on or prior to the Conversion Date, the Liquidation
Preference has been reduced to zero and holders of shares of Common Stock
have not yet received Dividends from a source which is Sale or
Refinancing Proceeds equal in the aggregate to the Equalization Amount
then the "Preference Repayment Amount" with respect to each share of
Series 1 Preferred Stock shall be equal to (i) the Equalization Amount
minus the aggregate amount of Dividends theretofore received by holders
of shares of Common Stock from a source which is Sale or Refinancing
Proceeds divided by (ii) the number of shares of Common Stock outstanding
immediately prior to the Conversion Date. If, on or prior to the
Conversion Date, the Liquidation Preference has been reduced to zero and
the holders of shares of Common Stock have received Dividends from a
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source which is Sale or Refinancing Proceeds equal in the aggregate to at
least the Equalization Amount then the "Preference Repayment Amount" with
respect to each share of Series 1 Preferred Stock shall be equal to zero.
(b) MECHANICS OF CONVERSION. Before any holder of Series 1
Preferred Stock shall be entitled to convert the same into shares of
Common Stock, he shall (1) surrender the certificate or certificates
therefor, duly endorsed, at the office of the Corporation or of any
transfer agent for the Series 1 Preferred Stock, (2) pay any Preference
Repayment Amount to the Corporation, and (3) give written notice by mail,
postage prepaid, to the Corporation at its principal corporate office, of
the election to convert the same and shall state therein the name or
names in which the certificate or certificates for shares of Common Stock
are to be issued. The Corporation shall, as soon as practicable
thereafter, issue and deliver at such office to such holder of Series 1
Preferred Stock, or to the nominee or nominees of such holder, a
certificate or certificates for the number of shares of Common Stock to
which such holder shall be entitled as aforesaid. Such conversion shall
be deemed to have been made immediately prior to the close of business on
the date of such surrender of the shares of Series 1 Preferred Stock to
be converted, and the person or persons entitled to receive the shares of
Common Stock issuable upon such conversion shall be treated for all
purposes as the record holder or holders of such shares of Common Stock
as of such date. Notwithstanding the foregoing, in the event of any
merger, consolidation, sale of assets or other similar transaction
involving the Corporation in connection with which the holders of the
Series 1 Preferred Stock desire to convert the Series 1 Preferred Stock
into shares of Common Stock, the Corporation shall negotiate in good
faith with the holders of the shares of Series 1 Preferred Stock to agree
on a transaction structure which would allow for a tax efficient
conversion of shares of Series 1 Preferred Stock into shares of Common
Stock provided that such structure would not adversely affect the
Corporation or the holders of shares of Common Stock or otherwise prevent
any benefit from accruing to the Corporation or the holders of shares of
Common Stock.
(c) CONVERSION PRICE ADJUSTMENTS OF PREFERRED STOCK. The Conversion
Price of the Series 1 Preferred Stock shall be subject to adjustment from
time to time as follows:
(i) In the event the Corporation should at any time or from time
to time after the date on which the first share of Series 1 Preferred
Stock is issued (the "Issue Date") fix a record date for the
effectuation of a split or subdivision of the outstanding shares of
Common Stock or the determination of holders of Common Stock entitled
to receive a dividend or other distribution payable in additional
shares of Common Stock or other securities or rights convertible
into, or entitling the holder thereof to receive, directly or
indirectly, additional shares of Common Stock (hereinafter referred
to as "Common Stock Equivalents") without payment of any
consideration by such holder for the additional shares of Common
Stock or the Common Stock Equivalents (including the additional
shares of Common Stock issuable upon conversion or exercise thereof),
then, as of such record date (or the date of such dividend,
distribution, split or subdivision if no record date is fixed), the
Conversion Price of the Series 1 Preferred Stock shall be
appropriately decreased so that the number of shares of Common Stock
issuable on conversion of each share of such class or series shall be
increased in proportion to such increase of the aggregate of shares
of Common Stock outstanding and those issuable with respect to such
Common Stock Equivalents.
(ii) If the number of shares of Common Stock outstanding at any
time after the Issue Date is decreased by a combination of the
outstanding shares of Common Stock, then, following the record date
of such combination, the Conversion Price for the Series 1 Preferred
Stock shall be appropriately increased so that the number of shares
of Common
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Stock issuable on conversion of each share of such class or series
shall be decreased in proportion to such decrease in outstanding
shares.
(d) OTHER DISTRIBUTIONS. In the event the Corporation shall declare
a distribution payable in securities of other persons, evidences of
indebtedness issued by the Corporation or other persons, assets
(excluding cash dividends) or options or rights not referred to in
subparagraph (2) or subparagraph (4)(c)(i), then, in each such case for
the purpose of this subparagraph (4)(d), the holders of the Series 1
Preferred Stock shall be entitled to a proportionate share of any such
distribution as though they were the holders of the number of shares of
Common Stock of the Corporation into which their shares of Series 1
Preferred Stock are convertible as of the record date fixed for the
determination of the holders of Common Stock of the Corporation entitled
to receive such distribution.
(e) RECAPITALIZATIONS; RIGHTS OFFERINGS.
(i) If at any time or from time to time there shall be a
recapitalization of the Common Stock (other than a subdivision or
combination provided for elsewhere in this subparagraph (4)),
provision shall be made so that the holders of the Series 1 Preferred
Stock shall thereafter be entitled to receive upon conversion of the
Series 1 Preferred Stock the number of shares of stock or other
securities or property of the Corporation or otherwise to which a
holder of Common Stock deliverable upon conversion would have been
entitled on such recapitalization. In any such case, appropriate
adjustment shall be made in the application of the provisions of this
subparagraph (4) with respect to the rights of the holders of the
Series 1 Preferred Stock after the recapitalization to the end that
the provisions of this subparagraph (4) (including adjustment of the
Conversion Price then in effect and the number of shares purchasable
upon conversion of the Series 1 Preferred Stock) shall be applicable
after that event as nearly equivalent as may be practicable.
(ii) If at any time or from time to time the Corporation shall
make any rights offering or similar arrangement generally available
to the holders of shares of Common Stock (whether through the
dividend or distribution of any rights or other securities or
otherwise) to purchase additional securities of the Corporation or
any of its subsidiaries for value, then the Corporation shall make
such rights offering or similar arrangement available to holders of
shares of Series 1 Preferred Stock on the same basis as if such
shares of the Series 1 Preferred Stock had been converted into shares
of Common Stock immediately prior to the earlier of (a) the making of
such rights offering or similar arrangement and (b) any record date
for the determination of holders entitled to participate therein.
(f) NO IMPAIRMENT. The Corporation will not, by amendment of its
Charter or through any reorganization, recapitalization, transfer of
assets, consolidation, merger, dissolution, issue or sale of securities
or any other voluntary action, avoid or seek to avoid the observance or
performance of any of the terms to be observed or performed hereunder by
the Corporation, but will at all times in good faith assist in the
carrying out of all the provisions of this Article V and in the taking of
all such action as may be necessary or appropriate in order to protect
the Conversion Rights of the holders of the Series 1 Preferred Stock
against impairment.
(g) NO FRACTIONAL SHARES AND CERTIFICATE AS TO ADJUSTMENTS.
(i) No fractional shares shall be issued upon conversion of the
Series 1 Preferred Stock, and the number of shares of Common Stock to
be issued shall be rounded down to the nearest whole share.
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(ii) Upon the occurrence of each adjustment or readjustment of
the Conversion Price of Series 1 Preferred Stock pursuant to this
subparagraph (4), the Corporation, at its expense, shall promptly
compute such adjustment or readjustment in accordance with the terms
hereof and prepare and furnish to each holder of Series 1 Preferred
Stock a certificate setting forth such adjustment or readjustment and
showing in detail the facts upon which such adjustment or
readjustment is based. The Corporation shall, upon the written
request at any time of any holder of Series 1 Preferred Stock,
furnish or cause to be furnished to such holder a like certificate
setting forth (1) such adjustment and readjustment, (2) the
Conversion Price at the time in effect, and (3) the number of shares
of Common Stock and the amount, if any, of other property which at
the time would be received upon the conversion of a share of Series 1
Preferred Stock.
(h) NOTICES OF RECORD DATE. In the event of any taking by the
Corporation of a record of the holders of any class of securities for the
purpose of determining the holders thereof who are entitled to receive
any dividend (other than a cash dividend) or other distribution, any
right to subscribe for, purchase or otherwise acquire any shares of stock
of any class or any other securities or property, or to receive any other
right, the Corporation shall mail to each holder of Series 1 Preferred
Stock, at least 20 days prior to the date specified therein, a notice
specifying the date on which any such record is to be taken for the
purpose of such dividend, distribution or right, and the amount and
character of such dividend, distribution or right.
(i) RESERVATION OF STOCK ISSUABLE UPON CONVERSION. The Corporation
shall at all times reserve and keep available out of its authorized but
unissued shares of Common Stock solely for the purpose of effecting the
conversion of the shares of the Series 1 Preferred Stock such number of
its shares of Common Stock as shall from time to time be sufficient to
effect the conversion of all outstanding shares of the Series 1 Preferred
Stock; and if at any time the number of authorized but unissued shares of
Common Stock shall not be sufficient to effect the conversion of all then
outstanding shares of the Series 1 Preferred Stock, in addition to such
other remedies as shall be available to the holder of such Preferred
Stock, the Corporation will take such corporate action at its own expense
as may, in the opinion of its counsel, be necessary to increase its
authorized but unissued shares of Common Stock to such number of shares
as shall be sufficient for such purposes.
(j) NOTICES. Any notice required by the provisions of this Section
4 to be given to the holders of shares of Series 1 Preferred Stock shall
be deemed given if deposited in the United States mail, postage prepaid,
and addressed to each holder of record at his address appearing on the
books of the Corporation.
(5) VOTING RIGHTS.
(a) The Series 1 Preferred Stock shall have voting rights as provided
herein. The holder of each share of Series 1 Preferred Stock shall have
the right to one vote for each share of Common Stock into which such
Series 1 Preferred Stock could then be converted (with any fractional
share determined on an aggregate conversion basis being rounded down to
the nearest whole share), and with respect to such vote, such holder
shall have full voting rights and powers equal to the voting rights and
powers of the holders of Common Stock, and shall be entitled,
notwithstanding any provision hereof, to notice of any stockholders'
meeting in accordance with the Bylaws of the Corporation, and shall be
entitled to vote, together with holders of Common Stock, with respect to
any questions upon which holders of Common Stock have the right to vote,
as though part of the same class as holders of the Common Stock.
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(b) Except as expressly stated in this paragraph (F) of Article V,
the Series 1 Preferred Stock will not have any relative, participating,
optional or other special voting rights and powers, and the consent of
the holders thereof, acting as a class or otherwise, shall not be
required for the taking of any corporate action, including but not
limited to, any merger or consolidation of the Corporation or sale of
all, or substantially all, of the assets of the Corporation, irrespective
of the effect that such merger, consolidation or sale may have upon the
rights, preferences or voting power of the holders of the Series 1
Preferred Stock.
(6) PROTECTIVE PROVISIONS. So long as any shares of the Series 1
Preferred Stock are outstanding, the Corporation shall not, without first
obtaining the approval of at least a majority of the then outstanding shares
of Series 1 Preferred Stock, as a class, together with any other outstanding
shares of Preferred Stock similarly affected:
(a) reduce the par value of such shares of Series 1 Preferred Stock;
(b) increase or decrease (other than by conversion) the total number
of authorized shares of Series 1 Preferred Stock;
(c) change or abolish any of the rights, privileges, preferences and
limitations of the Series 1 Preferred Stock if such action would
adversely affect the holders thereof;
(d) alter the terms and conditions upon which shares of Series 1
Preferred Stock are convertible or change the shares issuable upon
conversion of the Series 1 Preferred Stock if such action would adversely
affect the holders thereof; or
(e) authorize or issue any other shares of capital stock having a
preference equal to or senior to the Series 1 Preferred Stock with
respect to voting (other than Common Stock), dividends or liquidation.
(7) STATUS OF CONVERTED STOCK. In the event any shares of Series 1
Preferred Stock shall be converted pursuant to subparagraph (4), the shares
so converted shall be retired and shall resume the status of authorized and
unissued shares of Preferred Stock.
(8) RESTRICTIONS ON OWNERSHIP AND TRANSFER. The Series 1 Preferred
Stock constitutes a class of Preferred Stock of the Corporation and thus
constitutes Capital Stock of the Corporation as defined in Article VI
hereof. The Series 1 Preferred Stock therefore is subject to the
limitations, terms and conditions (including exceptions and exemptions) of
Article VI hereof applicable to Capital Stock.
VI.
RESTRICTIONS ON OWNERSHIP AND TRANSFER TO PRESERVE TAX BENEFIT
(A) RESTRICTIONS ON OWNERSHIP AND TRANSFER.
(1) DEFINITIONS. The following terms shall have the following
meanings:
"Aggregate Ownership Limit" shall mean, subject to subparagraph (A)(10)
of this Article VI, 2.5% in value of the aggregate of the outstanding shares
of Capital Stock. The value of the outstanding Capital Stock shall be
determined by the Board of Directors of the Corporation in good faith, which
determination shall be conclusive for all purposes hereof.
"Beneficial Ownership" shall mean ownership of Capital Stock by a Person
who is or would be treated as an owner of such shares of Capital Stock
either directly or constructively through the application of Section 544 of
the Code, as modified by Section 856(h)(1)(B) of the Code. The terms
"Beneficial," "Beneficial Owner," "Beneficially Owns" and "Beneficially
Owned" shall have correlative meanings.
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"Board of Directors" shall mean the Board of Directors of the
Corporation.
"Capital Stock" shall mean shares of stock that are Common Stock or
Preferred Stock.
"Charitable Beneficiary" shall mean one or more organizations described
in Code Sections 170(b), 170(c), or 501(c)(3) as shall be designated by
resolution of the Board of Directors pursuant to subparagraph (A)(3)(f) of
this Article VI. At any one time there shall be at least one such Charitable
Beneficiary so designated.
"Code" shall mean the Internal Revenue Code of 1986, as amended from
time to time. All section references to the Code shall include any successor
provisions thereof as may be adopted from time to time.
"Constructive Ownership" shall mean ownership of Capital Stock by a
Person who is or would be treated as an owner of such shares of Capital
Stock either directly or indirectly through the application of Section 318
of the Code, as modified by Section 856(d)(5) of the Code. The terms
"Constructive," "Constructive Owner," "Constructively Owns" and
"Constructively Owned" shall have correlative meanings.
"Formation Transaction" shall mean the reincorporation of the New York
Company in Maryland by merger of the New York Company into the Corporation.
The effective date of Formation Transaction shall be the later of the date
on which the Articles of Merger are accepted by the Department of
Assessments and Taxation of the State of Maryland and a Certificate of
Merger is accepted by the Department of State of the State of New York.
"General Ownership Limit" shall initially mean, subject to subparagraph
(A)(10) of this Article VI, 2% (by value or number of shares, whichever is
more restrictive) of the outstanding shares of Common Stock of the
Corporation. The value of the outstanding Common Stock shall be determined
by the Board of Directors of the Corporation in good faith, which
determination shall be conclusive for all purposes hereof.
"Individual" shall have the meaning set forth in Section 542(a)(2) of
the Code as used in determining whether a REIT is "closely held" under
Section 856(h) of the Code.
"Market Price" shall mean the average of the high and low reported sales
prices reported on the American Stock Exchange of the Common Stock or
Preferred Stock on the trading day immediately preceding the relevant date,
or if the shares of such class of Common Stock or Preferred Stock are not
then traded on the American Stock Exchange, the average of the high and low
reported sales prices of the Common Stock or Preferred Stock on the trading
day immediately preceding the relevant date as reported on any national
securities exchange or automated inter-dealer quotation system over which
the Common Stock or Preferred Stock may be traded, or if the Common Stock or
Preferred Stock is not then traded over any exchange or quotation system,
then the market price of the Common Stock or Preferred Stock on the relevant
date as determined in good faith by the Board of Directors of the
Corporation.
"MGCL" shall mean the Maryland General Corporation Law, as amended from
time to time, and any successor statute hereafter enacted.
"New York Company" shall mean Pacific Gateway Properties, Inc., a New
York corporation, prior to the effective date of the Formation Transaction.
"Operating Partnership" shall mean Pacific Gateway Properties Operating
Partnership, L.P., a Delaware limited partnership.
"OP Units" shall have the meaning set forth in paragraph E of Article VI
hereof.
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"Ownership Limit" shall mean the General Ownership Limit or the
Aggregate Ownership Limit, whichever is more restrictive.
"Partnership Agreement" shall mean the Agreement of Limited Partnership
of Pacific Gateway Properties Operating Partnership, L.P., as such agreement
may exist on or as of the date of the Formation Transaction and as it may be
amended from time to time.
"Person" shall mean an individual, corporation, partnership, limited
liability company, estate, trust (including a trust qualified under Section
401(a) or 501(c)(17) of the Code), a portion of a trust permanently set
aside for or to be used exclusively for the purposes described in Section
642(c) of the Code, association, private foundation within the meaning of
Section 509(a) of Code, joint stock company or other entity.
"Purported Beneficial Transferee" shall mean, with respect to any
purported Transfer or other event that results in a transfer of Capital
Stock to a Trust, as provided in subparagraph (A)(2)(b) of Article VI
hereof, the purported beneficial transferee or owner for whom the Purported
Record Transferee would have acquired shares of Capital Stock if such
Transfer or other event had been permitted under subparagraph (A)(2) of this
Article VI.
"Purported Record Transferee" shall mean, with respect to any purported
Transfer or other event that results in a transfer of Capital Stock to a
Trust, as provided in subparagraph (A)(2)(b) of this Article VI, the record
holder of such Capital Stock if such Transfer or other event had been
permitted under subparagraph (A)(2) of this Article VI.
"Restriction Termination Date" shall mean the first day after the second
business day following the effective date of the Formation Transaction on
which the Board of Directors of the Corporation determines, pursuant to
subparagraph (A)(2)(e) of this Article VI, that it is no longer in the best
interests of the Corporation to attempt to qualify, or to continue to
qualify, as a REIT or that compliance with the restrictions and limitations
on Beneficial Ownership, Constructive Ownership and Transfers of shares of
Capital Stock set forth herein is no longer required in order for the
Corporation to qualify as a REIT.
"Transfer" shall mean any sale, transfer, gift, assignment, devise or
other disposition of Capital Stock (other than the Formation Transaction) or
the right to vote or receive dividends (including (i) the granting of any
option or entering into any agreement for the sale, transfer or other
disposition of Capital Stock or the right to vote or receive dividends or
(ii) the sale, transfer, assignment or other disposition of any securities
or rights convertible into or exchangeable for Capital Stock, whether
voluntary or involuntary), in each case whether of record, Constructively or
Beneficially and whether by operation of law or otherwise and whether the
result of a transaction entered into through the facilities of a stock
exchange on which any Common Stock or Preferred Stock is then listed. A
Transfer also includes any transfer of interests in other entities, or any
change in the relationship between two or more Persons, that results in a
change in Beneficial Ownership or Constructive Ownership of Capital Stock,
whether by operation of law or otherwise.
"Trust" shall mean the trust created pursuant to subparagraph (A)(3) of
this Article VI.
"Trustee" shall mean a Person unaffiliated with (i) the Corporation,
(ii) the Purported Beneficial Transferee, and (iii) the Purported Record
Transferee, acting as trustee for the Trust, or any successor trustee
appointed by the Corporation.
(2) RESTRICTION ON OWNERSHIP AND TRANSFERS.
(a) Except as provided in subparagraph (A)(10) of this Article VI,
commencing with the second business day following the effective date of
the Formation Transaction, and continuing until the Restriction
Termination Date:
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(i) no Person shall Beneficially Own Capital Stock in excess of
the Ownership Limit;
(ii) no Person shall Constructively Own Capital Stock in excess
of the Ownership Limit; and
(iii) on Person shall Beneficially or Constructively Own Capital
Stock to the extent that such Beneficial or Constructive Ownership
would result in the Corporation's being "closely held" within the
meaning of Section 856(h) of the Code, or otherwise failing to
qualify as a REIT (including but not limited to ownership that would
result in the Corporation's owning (actually or Constructively) an
interest in a tenant that is described in Section 856(d)(2)(B) of the
Code if the income derived by the Corporation (either directly or
indirectly) from such tenant would cause the Corporation to fail to
satisfy any of the gross income requirements of Section 856(c) of the
Code).
(b) If, at any time prior to the Restriction Termination Date, any
Transfer or other event (whether or not such Transfer or other event is
the result of a transaction entered into through the facilities of
national securities exchange or automated inter-dealer quotation system)
that, if effective, would result in any Person's Beneficially or
Constructively Owning Capital Stock in violation of subparagraph
(A)(2)(a) of this Article VI, (1) then the Common Stock or Preferred
Stock purportedly being Transferred (or in the case of an event other
than a Transfer, the Common Stock or Preferred Stock that would be
Beneficially Owned or Constructively Owned) and that otherwise would
cause such Person to violate subparagraph (A)(2)(a) of this Article VI
(rounded up to the nearest whole share) shall be automatically
transferred to a Trust for the benefit of a Charitable Beneficiary, as
described in subparagraph (A)(3) of this Article VI, effective as of the
close of business on the business day prior to the date of such Transfer
or other event, and such Purported Beneficial Transferee shall thereafter
have no rights in such shares or (2) if, for any reason, the transfer to
the Trust described in clause (1) of this sentence is not automatically
effective as provided therein to prevent any Person from Beneficially or
Constructively Owning Capital Stock in violation of subparagraph
(A)(2)(a) of this Article VI, then the Transfer of that number of shares
of Capital Stock that otherwise would cause any Person to violate
subparagraph (A)(2)(a) of this Article VI shall be void ab initio, and
the Purported Beneficial Transferee shall have no rights in such shares.
(c) Subject to subparagraph (C) of this Article VI and
notwithstanding any other provisions contained herein, any Transfer, or
other event (whether or not as a result of a transaction entered into
through the facilities of a national securities exchange or automated
inter-dealer quotation system) that, if effective, would result in
Beneficial Ownership of Capital Stock by fewer than 100 Persons
(determined without reference to any rules of attribution) shall be void
ab initio as to the Transfer of that number of shares which would result
in Beneficial Ownership of Capital Stock by fewer than 100 Persons, and
the intended transferee or acquiror shall acquire no rights in such
shares of Capital Stock.
(d) It is expressly intended that the restrictions on ownership and
transfer described in this subparagraph (A)(2) of this Article VI shall
apply to the redemption/exchange rights provided in Section 8.05 (or any
successor provision) of the Partnership Agreement. Notwithstanding any of
the provisions of the Partnership Agreement to the contrary, a partner of
the Operating Partnership shall not be entitled to effect an exchange of
an interest in the Operating Partnership for Capital Stock if the actual
or beneficial or Beneficial or Constructive ownership of Capital Stock
would be prohibited under the provisions of this Article VI.
(e) The Ownership Limit will not apply if the Board of Directors
determines that it is no longer in the best interests of the Corporation
to attempt to qualify, or to continue to qualify, as a REIT or that
compliance with the restrictions and limitations on Beneficial Ownership,
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Constructive Ownership and Transfers of shares of Capital Stock set forth
herein is no longer required in order for the Corporation to qualify as a
REIT.
(3) TRANSFERS OF CAPITAL STOCK IN TRUST.
(a) If, notwithstanding the other provisions contained in this
Article VI, upon any purported Transfer or other event described in
subparagraph (A)(2)(b) of this Article VI, such Capital Stock shall be
deemed to have been transferred to the Trustee in his capacity as trustee
of a Trust for the exclusive benefit of one or more Charitable
Beneficiaries. Such transfer to the Trustee shall be deemed to be
effective as of the close of business on the business day prior to the
purported Transfer or other event that results in a transfer to the Trust
pursuant to subparagraph (A)(2)(b) of this Article IV. The Trustee shall
be appointed by the Corporation and shall be a Person unaffiliated with
the Corporation, any Purported Beneficial Transferee, or any Purported
Record Transferee. Each Charitable Beneficiary shall be designated by the
Corporation as provided in subparagraph (A)(3)(f) of this Article VI.
(b) Capital Stock held by the Trustee shall be issued and outstanding
Capital Stock of the Corporation. The Purported Beneficial Transferee or
Purported Record Transferee shall have no rights in the shares of Capital
Stock held by the Trustee. The Purported Beneficial Transferee or
Purported Record Transferee shall not benefit economically from ownership
of any shares held in trust by the Trustee, shall have no rights to
dividends and shall not possess any rights to vote or other rights
attributable to the shares of Capital Stock held in the Trust.
(c) The Trustee shall have all voting rights and rights to dividends
with respect to Capital Stock held in the Trust, which rights shall be
exercised for the exclusive benefit of the Charitable Beneficiary. Any
dividend or distribution paid prior to the discovery by the Corporation
that shares of Capital Stock have been transferred to the Trustee shall
be paid to the Trustee upon demand, and any dividend or distribution
declared but unpaid shall be paid when due to the Trustee with respect to
such Capital Stock. Any dividends or distributions so paid over to the
Trustee shall be held in trust for the Charitable Beneficiary.
The Purported Record Transferee and Purported Beneficial Transferee
shall have no voting rights with respect to the Capital Stock held in the
Trust and, subject to Maryland law, effective as of the date the Capital
Stock has been transferred to the Trustee, the Trustee shall have the
authority (at the Trustee's sole discretion) (i) to rescind as void any
vote cast by a Purported Record Transferee with respect to such Capital
Stock prior to the discovery by the Corporation that the Capital Stock
has been transferred to the Trustee and (ii) to recast such vote in
accordance with the desires of the Trustee acting for the benefit of the
Charitable Beneficiary; provided, however, that if the Corporation has
already taken irreversible corporate action, then the Trustee shall not
have the authority to rescind and recast such vote. Notwithstanding any
other provision of the Charter to the contrary, until the Corporation has
received notification that the Capital Stock has been transferred into a
Trust, the Corporation shall be entitled to rely on its share transfer
and other stockholder records for purposes of preparing lists of
stockholders entitled to vote at meetings, determining the validity and
authority of proxies and otherwise conducting and determining the
validity of votes of stockholders.
(d) Within 20 days of receiving notice from the Corporation that
shares of Capital Stock have been transferred to the Trust, the Trustee
of the Trust shall sell the shares of Capital Stock held in the Trust to
a Person, designated by the Trustee, whose ownership of the shares of
Capital Stock will not violate the ownership limitations set forth in
subparagraph (A)(2)(b) of this Article IV. Upon such sale, the interest
of the Charitable Beneficiary in the shares of Capital Stock sold shall
terminate and the Trustee shall distribute the net proceeds of the sale
to the Purported Record Transferee and to the Charitable Beneficiary as
provided
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in this subparagraph (A)(3)(d). The Purported Record Transferee shall
receive the lesser of (1) the price paid by the Purported Record
Transferee for the shares of Capital Stock in the transaction that
resulted in such transfer to the Trust (or, if the event which resulted
in the transfer to the Trust did not involve a purchase of such shares of
Capital Stock at Market Price, the Market Price of such shares of Capital
Stock on the day of the event which resulted in the transfer of such
shares of Capital Stock to the Trust) and (2) the price per share
received by the Trustee (net of any commissions and other expenses of
sale) from the sale or other disposition of the shares of Capital Stock
held in the Trust, except becomes a Purported Record Transferee upon the
provisions of subparagraph (A)(2) of this Article VI becoming effective
on the second business day following the Formation Transaction, and who
would have become a Purported Record Transferee immediately upon the
occurrence of and as a result of the Formation Transaction had the
provisions of subparagraph (A)(2) of this Article VI become effective
immediately upon the occurrence of the Formation Transaction and assuming
that any right to receive Capital Stock in connection with or as a result
of the Formation Transaction constitutes upon the occurrence of the
Formation Transaction Beneficial Ownership or Constructive Ownership of
the Capital Stock to which such right relates, in which case at a price
per share equal to the Market Price of such shares of Capital Stock on
the effective date of the Formation Transaction. Any net sales proceeds
in excess of the amount payable to the Purported Record Transferee shall
be immediately paid to the Charitable Beneficiary together with any
dividends or other distributions thereon. If, prior to the discovery by
the Corporation that shares of such Capital Stock have been transferred
to the Trustee, such shares of Capital Stock are sold by a Purported
Record Transferee then (i) such shares of Capital Stock shall be deemed
to have been sold on behalf of the Trust and (ii) to the extent that the
Purported Record Transferee received an amount for such shares of Capital
Stock that exceeds the amount that such Purported Record Transferee was
entitled to receive pursuant to this subparagraph (A)(3)(d), such excess
shall be paid to the Trustee upon demand.
(e) Capital Stock transferred to the Trustee shall be deemed to have
been offered for sale to the Corporation, or its designee, at a price per
share equal to the lesser of (i) the price paid by the Purported Record
Transferee for the shares of Capital Stock in the transaction that
resulted in such transfer to the Trust (or, if the event which resulted
in the transfer to the Trust did not involve a purchase of such shares of
Capital Stock at Market Price, the Market Price of such shares of Capital
Stock on the day of the event which resulted in the transfer of such
shares of Capital Stock to the Trust) and (ii) the Market Price on the
date the Corporation, or its designee, accepts such offer, except in the
case of Capital Stock of a Purported Record Transferee who becomes a
Purported Record Transferee upon the provisions of subparagraph (A)(2) of
this Article VI becoming effective on the second business day following
the Formation Transaction, and who would have become a Purported Record
Transferee immediately upon the occurrence of and as a result of the
Formation Transaction had the provisions of subparagraph (A)(2) of this
Article VI become effective immediately upon the occurrence of the
Formation Transaction and assuming that any right to receive Capital
Stock in connection with or as a result of the Formation Transaction
constitutes upon the occurrence of the Formation Transaction Beneficial
Ownership or Constructive Ownership of the Capital Stock to which such
right relates, in which case at a price per share equal to the Market
Price of such shares of Capital Stock on the second business day
following the Formation Transaction. The Corporation shall have the right
to accept such offer until the Trustee has sold the shares of Capital
Stock held in the Trust pursuant to subparagraph (A)(3)(d) of this
Article VI. Upon such a sale to the Corporation, the interest of the
Charitable Beneficiary in the shares of Capital Stock sold shall
terminate and the Trustee shall distribute the net proceeds of the sale
to the Purported Record Transferee and any dividends or other
distributions held
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by the Trustee with respect to such Capital Stock shall thereupon be paid
to the Charitable Beneficiary.
(f) By written notice to the Trustee, the Corporation shall designate
one or more nonprofit organizations to be the Charitable Beneficiary of
the interest in the Trust such that the Capital Stock held in the Trust
would not violate the restrictions set forth in subparagraph (A)(2)(a) of
Article VI hereof in the hands of such Charitable Beneficiary. At all
times at least one such Charitable Beneficiary shall be designated by the
Board of Directors.
(4) REMEDIES FOR BREACH. If the Board of Directors, a committee
thereof, or the designees of the Board of Directors, if permitted by the
MGCL, shall at any time determine in good faith that a Transfer or other
event has taken place in violation of subparagraph (A)(2) of this Article VI
or that a Person intends to acquire or has attempted to acquire beneficial
ownership (determined without reference to any rules of attribution),
Beneficial Ownership or Constructive Ownership of any shares of Capital
Stock in violation of subparagraph (A)(2) of this Article VI, the Board of
Directors, a committee thereof, or the designees of the Board of Directors
shall take such action as it or they deem advisable to refuse to give effect
to or to prevent such Transfer or other event including, but not limited to,
causing the Corporation to redeem shares of Capital Stock, refusing to give
effect to such Transfer, or other event on the books of the Corporation or
instituting proceedings to enjoin or rescind such Transfer or other event;
provided, however, any Transfer (or, in the case of events other than a
Transfer, ownership or Constructive Ownership or Beneficial Ownership) in
violation of subparagraph (A)(2)(a) of this Article VI, shall automatically
result in the transfer to a Trust as described in subparagraph (A)(2)(b) of
this Article VI, and any Transfer in violation of subparagraph (A)(2)(c) of
this Article VI shall automatically be void ab initio irrespective of any
action (or non-action) by the Board of Directors.
(5) NOTICE OF RESTRICTED TRANSFER. Any Person who acquires or attempts
to acquire shares of Capital Stock in violation of subparagraph (A)(2) of
this Article VI, or any Person who is a Purported Beneficial Transferee such
that an automatic transfer to a Trust results under subparagraph (A)(2)(b)
of this Article VI, shall immediately give written notice to the Corporation
of such event and shall provide to the Corporation such other information as
the Corporation may request in order to determine the effect, if any, of
such Transfer or other event or attempted Transfer or other event on the
Corporation's status as a REIT.
(6) OWNERS REQUIRED TO PROVIDE INFORMATION. From the effective date of
the Formation Transaction and prior to the Restriction Termination Date,
each Person who is a beneficial owner or Beneficial Owner or Constructive
Owner of shares of Capital Stock and each Person (including the stockholder
of record) who is holding shares of Capital Stock for a beneficial owner or
Beneficial Owner or Constructive Owner shall, on demand, provide to the
Corporation a completed questionnaire containing the information regarding
their ownership of such shares, as set forth in the regulations (as in
effect from time to time) of the U.S. Department of Treasury under the Code.
In addition, each Person who is a beneficial owner or Beneficial Owner or
Constructive Owner of shares of Capital Stock and each Person (including the
stockholder of record) who is holding shares of Capital Stock for a
beneficial owner or Beneficial Owner or Constructive Owner shall, on demand,
be required to disclose to the Corporation in writing such information as
the Corporation may request in order to determine the effect, if any, of
such stockholder's actual and constructive ownership of shares of Capital
Stock on the Corporation's status as a REIT and to ensure compliance with
the Ownership Limit, or such other limit as provided from time to time in
the Charter of the Corporation or as otherwise permitted by the Board of
Directors.
(7) REMEDIES NOT LIMITED. Subject to the provisions of subparagraph
(C) of this Article VI, nothing contained in this Article VI shall limit the
authority of the Board of Directors to take such
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other action as it deems necessary or advisable to protect the Corporation
and the interests of its stockholders by preservation of the Corporation's
status as a REIT.
(8) AMBIGUITY AND APPLICATION OF OWNERSHIP LIMITS. In the case of an
ambiguity in the application of any of the provisions of subparagraph (A) of
this Article VI, including any definition contained in subparagraph (A)(1),
the Board of Directors shall have the power to determine the application of
the provisions of this subparagraph (A) with respect to any situation based
on the facts known to it (subject to the provisions subparagraph (C) of this
Article VI) and any such determination by the Board of Directors shall be
final and conclusive for all purposes. In the event that this Article VI
requires an action by the Board of Directors and the Charter fails to
provide specific guidance with respect to such action, the Board of
Directors shall have the power to determine the action to be taken so long
as such action is not contrary to the provisions of this Article VI.
(9) PRIORITY OF APPLICATION OF OWNERSHIP LIMITS. The Board of
Directors is expressly authorized to (or to cause the Corporation to) enter
into one or more existing or future agreements with one or more shareholders
of the Corporation which provide relief to specifically identified or
unidentified shareholders, then or thereafter existing, from the application
of some or all of the limitations and restrictions provided for under this
Article VI, including without limitation any agreement to the effect that
some or all of the provisions of subparagraph (A) of this Article VI shall
apply to such shareholder or shareholders only if the application of such
provisions to one or more other shareholders would not eliminate the
violation of the provisions of subparagraph (A)(2)(a) of Article VI hereof.
Absent any such agreement or a decision by the Board of Directors to the
contrary (which the Board may make in its sole and absolute discretion), if
a Person would have (but for the remedies set forth in subparagraph (A)(2)
of this Article VI) acquired Beneficial or Constructive Ownership of Capital
Stock in violation of subparagraph (A)(2)(a) of this Article VI, such
remedies (as applicable) shall apply first to the shares of Capital Stock
which, but for such remedies, would have been actually owned by the
Purported Beneficial Owner, and second to shares of Capital Stock which, but
for such remedies, would have been Beneficially Owned or Constructive Owned
(but not actually owned) by the Purported Beneficial Owner, pro rata among
the Persons who actually attempted to acquire (through a Transfer or other
event) such shares of Capital Stock based upon the relative value of what
would have been the Purported Beneficial Owner's Beneficial Ownership or
Constructive Ownership interest in the shares such Person attempted to
acquire (through a Transfer or other event), third to other shares that are
actually owned by the Purported Beneficial Owner, and fourth to shares that
are actually owned by such other Persons whose ownership of shares is
attributed to the Purported Beneficial Owner, pro rata among such Persons
based upon the relative value of the Purported Beneficial Owner's Beneficial
Ownership or Constructive Ownership interest in the shares so owned.
(10) MODIFICATIONS OF OWNERSHIP LIMIT.
(a) The Board of Directors may from time to time increase or decrease
the Ownership Limit as applied to a particular Person, provided, however,
that:
(i) Except as otherwise provided pursuant to any agreement or
action taken pursuant to or comtemplated by subparagraph (A)(9) of
this Article VI, any decrease may be made only prospectively as to
subsequent holders or, with respect to existing holders, subsequent
Transfers (other than a decrease in such limits as a result of a
retroactive change in existing law, in which case such decrease shall
be effective immediately);
(ii) The Ownership Limit may not be increased if, after giving
effect to such increase, five Persons could Beneficially Own or
Constructively Own, in the aggregate, more than 50.0% in value of the
shares of Capital Stock then outstanding.
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(b) Subject to subparagraph (A)(2)(a)(iii) of this Article VI, the
Board of Directors, in its sole and absolute discretion, may exempt a
Person from the limitation on a Person's Beneficially Owning shares of
Capital Stock in violation of subparagraph (A)(2)(a)(i) of this Article
VI if the Board of Directors obtains any representations and undertakings
from such Person as are reasonably necessary in the opinion of the Board
of Directors to ascertain that no individual's Beneficial Ownership of
such shares of Capital Stock will violate subparagraph (A)(2)(a)(i) of
this Article VI, or that any such violation will not cause the
Corporation to fail to qualify as a REIT under the Code, and that any
violation of such representations or undertakings (or other action which
is contrary to the restrictions contained in subparagraph (A)(2) of this
Article VI) or attempted violation will result in such shares of Capital
Stock's being subject to subparagraph (A)(2)(b) of this Article VI, in
which case an "other event" shall be deemed to have occurred within the
meaning of subparagraph (A)(2)(b) of this Article VI that causes such
Person to Beneficially or Constructively Own Capital Stock in violation
of subparagraph (A)(2)(a) of this Article VI.
(c) Subject to subparagraph (A)(2)(a)(iii) of this Article VI, the
Board of Directors, in its sole and absolute discretion, may exempt a
Person from the limitation on a Person's Constructively Owning Capital
Stock in violation of subparagraph (A)(2)(a)(ii) of this Article VI, if
the Corporation obtains any representations and undertakings from such
Person as are reasonably necessary in the opinion of the Board of
Directors to ascertain that such Person does not and will not own,
actually or Constructively, an interest in a tenant of the Corporation
(or a tenant of any entity owned in whole or in part by the Corporation)
that would cause the Corporation to own, actually or Constructively, more
than a 9.8% interest (as determined under Section 856(d)(2)(B) of the
Code) in such tenant and that any violation or attempted violation will
result in such shares of Capital Stock being transferred to a Trust in
accordance with subparagraph (A)(2)(b) of this Article VI.
Notwithstanding the foregoing, the inability of a Person to make the
certification described in this subparagraph (A)(10) of this Article VI
shall not prevent the Board of Directors, in its sole discretion, from
exempting such Person from the limitation on a Person's Constructively
Owning Capital Stock in violation of subparagraph (A)(2)(a)(ii) of this
Article VI if the Board of Directors determines that the resulting
application of Section 856(d)(2)(B) of the Code would affect the
characterization of less than 0.5% of the gross income (as such term is
used in Section 856(c)(2) of the Code) of the Corporation in any taxable
year, after taking into account the effect of this sentence with respect
to all other Capital Stock to which this sentence applies.
(d) Prior to any modification of the Ownership Limit, the Board of
Directors may require a ruling from the Internal Revenue Service, or such
opinions of counsel, affidavits, undertakings or agreements, in any case
in form and substance satisfactory to the Board of Directors in its sole
discretion, as it may deem necessary or advisable in order to determine
or ensure the Corporation's status as a REIT. Notwithstanding the receipt
or contents of any ruling or opinion, the Board of Directors may impose
such conditions or restrictions as it may deem appropriate in connection
with granting such exception.
(e) An underwriter that participates in a public offering or a
private placement of Capital Stock (or securities convertible into or
exchangeable for Capital Stock) may Beneficially Own or Constructively
Own shares of Capital Stock (or securities convertible into or
exchangeable for Capital Stock) in excess of the Ownership Limit, but
only to the extent necessary to facilitate such public offering or
private placement and provided that the ownership of such shares of
Capital Stock by such underwriter would not result in the Corporation's
being "closely held" within the meaning of Section 856(h) of the Code, or
otherwise result in the Corporation failing to qualify as a REIT.
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(B) LEGEND. Each certificate, if any, for Capital Stock or securities
convertible into Capital Stock shall bear substantially the following legend:
"THE SHARES OF CAPITAL STOCK REPRESENTED BY THIS CERTIFICATE ARE SUBJECT
TO RESTRICTIONS ON BENEFICIAL AND CONSTRUCTIVE OWNERSHIP AND TRANSFER
FOR THE PURPOSE OF THE CORPORATION'S MAINTENANCE OF ITS STATUS AS A REAL
ESTATE INVESTMENT TRUST UNDER THE INTERNAL REVENUE CODE OF 1986, AS
AMENDED (THE "CODE"). SUBJECT TO CERTAIN FURTHER RESTRICTIONS AND EXCEPT
AS EXPRESSLY PROVIDED IN THE CHARTER OF THE CORPORATION, (i) NO PERSON
MAY BENEFICIALLY OWN SHARES OF THE CORPORATION'S CAPITAL STOCK IN EXCESS
OF THE THEN APPLICABLE OWNERSHIP LIMIT WITH RESPECT TO THE CAPITAL
STOCK, WHICH OWNERSHIP LIMIT MAY BE INCREASED OR DECREASED FROM TIME TO
TIME BY THE BOARD OF DIRECTORS OF THE CORPORATION AS TO A PARTICULAR
PERSON; (ii) NO PERSON MAY CONSTRUCTIVELY OWN SHARES OF THE
CORPORATION'S CAPITAL STOCK IN EXCESS OF THEN APPLICABLE OWNERSHIP LIMIT
WITH RESPECT TO THE CAPITAL STOCK, WHICH OWNERSHIP LIMIT MAY BE
INCREASED OR DECREASED FROM TIME TO TIME BY THE BOARD OF DIRECTORS OF
THE CORPORATION AS TO A PARTICULAR PERSON; (iii) NO PERSON MAY
BENEFICIALLY OR CONSTRUCTIVELY OWN SHARES OF THE CORPORATION'S CAPITAL
STOCK THAT, TAKING INTO ACCOUNT ANY OTHER CAPITAL STOCK OF THE
CORPORATION BENEFICIALLY OR CONSTRUCTIVELY OWNED BY SUCH PERSON, WOULD
RESULT IN THE CORPORATION'S BEING "CLOSELY HELD" UNDER SECTION 856(h) OF
THE CODE OR OTHERWISE CAUSE THE CORPORATION TO FAIL TO QUALIFY AS A
REIT; AND (iv) NO PERSON MAY TRANSFER SHARES OF CAPITAL STOCK IF SUCH
TRANSFER WOULD RESULT IN THE CAPITAL STOCK OF THE CORPORATION BEING
OWNED BY FEWER THAN 100 PERSONS. ANY PERSON WHO BENEFICIALLY OR
CONSTRUCTIVELY OWNS OR ATTEMPTS TO BENEFICIALLY OR CONSTRUCTIVELY OWN
CAPITAL STOCK WHICH CAUSES OR WILL CAUSE A PERSON TO BENEFICIALLY OR
CONSTRUCTIVELY OWN CAPITAL STOCK IN EXCESS OF THE ABOVE LIMITATIONS MUST
IMMEDIATELY NOTIFY THE CORPORATION, OR IN THE EVENT OF A PROPOSED OR
ATTEMPTED TRANSFER OR ACQUISITION OR PURPORTED CHANGE IN THE BENEFICIAL
OWNERSHIP OR CONSTRUCTIVE OWNERSHIP, MUST GIVE WRITTEN NOTICE TO THE
CORPORATION OF AT LEAST FIFTEEN (15) DAYS PRIOR TO THE PROPOSED OR
ATTEMPTED TRANSFER, TRANSACTION OR OTHER EVENT. IF ANY OF THE
RESTRICTIONS ON TRANSFER OR OWNERSHIP ARE VIOLATED, THE CAPITAL STOCK
REPRESENTED HEREBY WILL BE AUTOMATICALLY TRANSFERRED TO THE TRUSTEE OF A
TRUST FOR THE BENEFIT OF ONE OR MORE CHARITABLE BENEFICIARIES. IN
ADDITION, THE CORPORATION MAY REDEEM SHARES UPON THE TERMS AND
CONDITIONS SPECIFIED BY THE BOARD OF DIRECTORS IN ITS SOLE DISCRETION IF
THE BOARD OF DIRECTORS DETERMINES THAT OWNERSHIP OR A TRANSFER OR OTHER
EVENT MAY VIOLATE THE RESTRICTIONS DESCRIBED ABOVE. FURTHERMORE, UPON
THE OCCURRENCE OF CERTAIN EVENTS, ATTEMPTED TRANSFERS IN VIOLATION OF
THE RESTRICTIONS DESCRIBED ABOVE MAY BE VOID AB INITIO. ALL TERMS IN
THIS LEGEND WHICH ARE DEFINED IN THE CHARTER OF THE CORPORATION SHALL
HAVE THE MEANINGS ASCRIBED TO THEM IN SUCH CHARTER, AS THE SAME MAY BE
AMENDED FROM TIME TO TIME, A COPY OF WHICH, INCLUDING THE RESTRICTIONS
ON TRANSFER AND OWNERSHIP, WILL BE FURNISHED TO EACH HOLDER OF CAPITAL
STOCK ON REQUEST AND
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WITHOUT CHARGE. REQUESTS FOR SUCH A COPY MAY BE DIRECTED TO THE
SECRETARY OF THE CORPORATION AT ITS PRINCIPAL OFFICE."
(C) AMERICAN STOCK EXCHANGE; OTHER TRADING FACILITIES. Nothing in this
Article VI precludes the settlement of transactions entered into through the
facilities of the American Stock Exchange, or any other national securities
exchange or automated inter-dealer quotation system. The shares of Capital Stock
that are the subject of such transaction shall continue to be subject to the
provisions of this Article VI after such settlement.
(D) SEVERABILITY. If any provision of this Article VI or any application
of any such provision is determined in a final and unappealable judgment to be
void, invalid or unenforceable by any Federal or state court having jurisdiction
over the issue, the validity and enforceability of the remaining provisions
shall not be affected and other applications of such provisions shall be
affected only to the extent necessary to comply with the determination of such
court.
(E) EXCHANGE OF OP UNITS. So long as the Corporation remains the General
Partner of the Operating Partnership, the Board of Directors of the Corporation
is hereby expressly vested with authority (subject to the restrictions on
ownership, transfer and redemption of Capital Stock set forth in this Article
VI) to issue, and shall issue to the extent provided in the Partnership
Agreement, Common Stock in exchange for the units into which partnership
interests of the Operating Partnership are divided (the "OP Units"), and as the
same may be adjusted, as provided in the Partnership Agreement.
VII.
DIRECTORS
(A) POWER; NUMBER. The business and affairs of the Corporation shall be
managed by, or under the direction of, the Directors. The number of Directors of
the Corporation shall be no fewer than three and no greater than thirteen, and
initially shall be eight, which number may be increased or decreased from time
to time by the Bylaws of the Corporation, but shall never be less than the
minimum number required by the MGCL.
(B) The names of the initial Directors are set forth below:
Steven A. Calabrese
Mark D. Grossi
Lawrence B. Helzel
Christopher L. Jarratt
Raymond V. Marino
Richard M. Osborne
Martin S. Roher
Norman S. Geller
(C) TERM. In the event of any decrease in the authorized number of
Directors, each Director then serving as such shall nevertheless continue as a
Director until the expiration of his or her current term, or his or her prior
death, retirement, resignation or removal.
(D) REMOVAL. Any or all of the directors may be removed only for cause and
only if such removal is authorized by the affirmative vote of the holders of
two-thirds of the outstanding shares of stock of the Corporation entitled to
vote thereon, except that when, by the provisions of the Charter, the holders of
shares of Preferred Stock or any class or series thereof voting as a class are
entitled to elect any one or more directors, the directors so elected may be
removed only by the applicable vote of the holders of the Preferred Stock or
such series voting as a class.
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VIII.
PROVISIONS FOR DEFINING, LIMITING AND REGULATING
CERTAIN POWERS OF THE CORPORATION AND
OF THE DIRECTORS AND STOCKHOLDERS
The following provisions are hereby adopted for the purpose of defining,
limiting and regulating the powers of the Corporation and of the Directors and
stockholders:
(A) AUTHORITY OF THE BOARD.
(1) The determination as to any of the following matters, made in good
faith by or pursuant to the direction of the Board of Directors consistent
with these Articles of Incorporation and in absence of actual receipt of an
improper benefit in money, property or services or active and deliberate
dishonesty established by a court, shall be final and conclusive and shall
be binding upon the Corporation and every holder of shares of its stock: the
amount of net income of the Corporation for any period and the amount of
assets at any time legally available for the payment of dividends,
redemption of its stock or the payment of other distributions on its stock;
the amount of annual or other net profits, earnings, paid-in or other
surplus, net assets, net assets in excess of capital, undivided profits or
excess of profits over losses on sales of assets; the amount purpose, time
of creation, increase or decrease, alteration or cancellation of any
reserves or charges and the propriety thereof (whether or not any obligation
or liability for which such reserves or charges shall have been created
shall have been paid or discharged); the fair value, or any sale, bid or
asked price to be applied in determining the fair value, of any asset owned
or held by the Corporation; any matter relating to the acquisition, holding
and disposition of any assets by the Corporation; or any matter relating to
the business and affairs of the Corporation.
(2) The Board of Directors of the Corporation may establish in its
absolute discretion the basis or method for determining the value of the
assets belonging to any class or series, and the net asset value of each
share of stock of each series and class for purposes of sales, redemptions,
repurchases of shares or otherwise and any such determination shall be final
and conclusive and shall be binding upon the Corporation and every holder of
shares of its stock.
(B) REMOVAL OF AN OFFICER OR EMPLOYEE. Unless the Bylaws otherwise
provide, any officer or employee of the Corporation (other than a director) may
be removed at any time with or without cause by the Board of Directors or by any
committee or superior officer upon whom such power of removal may be conferred
by the Bylaws or by authority of the Board of Directors.
(C) STOCKHOLDERS RATIFICATION OF ACTIONS. Any contract, transaction or act
of the Corporation or of the Board of Directors which shall be ratified by a
majority of the aggregate voting power of the shares held by stockholders
representing a quorum at any annual meeting, or at any special meeting called
for such purpose, shall so far as permitted by law be as valid and as binding as
though ratified by every stockholder of the Corporation.
(D) ACTIONS BY STOCKHOLDER VOTE. Notwithstanding any provision of law
requiring the affirmative vote of a greater percentage of votes entitled to be
cast on the matter, the affirmative vote of a majority of the votes entitled to
be cast on the matter shall be sufficient to approve any of the following
actions, after due authorization, approval or advice of the Board of Directors:
(i) amendment to the Corporation's Charter; (ii) adoption of articles of merger,
consolidation, transfer or share exchange; and (iii) dissolution of the
Corporation; and provided further, that the amendment of Articles V.C., VII.A,
VII.D, VIII.I and VIII.D of these Articles of Incorporation shall require the
affirmative vote of at least seventy percent (70%) of the outstanding shares of
stock of the Corporation entitled to vote thereon, after due authorization,
approval or advice of the Board of Directors of the Corporation.
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(E) REIT QUALIFICATION. The Board of Directors shall use its best efforts
to cause the Corporation and its stockholders to maintain qualification for U.S.
federal income tax treatment in accordance with the provisions of the Code
applicable to a REIT. In furtherance of the foregoing, the Board of Directors
shall use its best efforts to take such actions as are necessary, and may take
such actions as it deems desirable (in its sole discretion) to preserve the
status of the Corporation as a REIT; provided, however, that in the event that
the Board of Directors determines, in its sole discretion, that it is no longer
in the best interests of the Corporation to qualify as a REIT, the Board of
Directors may revoke or otherwise terminate the Corporation's REIT election
pursuant to Section 856(g) of the Code.
(F) DIRECTOR AND OFFICER LIABILITY; INDEMNIFICATION OF DIRECTORS AND
OFFICERS.
(1) The Corporation shall indemnify (1) its Directors to the full extent
provided by Maryland law now or hereafter in effect, including the advance
of legal expenses and other reasonable costs under the procedures provided
by such laws; (2) its officers to the same extent it shall indemnify its
Directors; and (3) its officers who are not Directors to such further extent
as shall be authorized by the Board of Directors and be consistent with law.
The Corporation also shall have the power, to fullest extent provided by
Maryland law now or hereafter in effect, to obligate itself to indemnify,
and to advance legal expenses and reasonable costs to (a) any individual who
is a former Director or officer of the Corporation, and (b) any individual
who, while a Director of the Corporation and at the request of the
Corporation, serves or has served as a Director, officer, partner or trustee
of another corporation, real estate investment trust, partnership, joint
venture, trust, employee benefit plan or any other enterprise from and
against any claim or liability to which such person may become subject or
which such person may incur by reason of his status with the Corporation.
The foregoing shall not limit the authority of the Corporation to indemnify
other employees and agents consistent with law. Any indemnification by the
Corporation shall be consistent with the requirements of law. The foregoing
shall not be exclusive of any other rights to which a person seeking
indemnification may be entitled under any insurance policy, agreement or
otherwise and shall inure to the benefit of the heirs, executors and
personal representatives of such person.
(2) To the fullest extent permitted by Maryland statutory or decisional
law, as amended or interpreted, no Director or officer of this Corporation
shall be personally liable to the Corporation or its stockholders for money
damages. Neither the amendment or repeal of this subparagraph, nor the
adoption or amendment of any other provision of the Charter or Bylaws
inconsistent with this subparagraph, shall apply to or affect in any respect
the applicability of the preceding sentence with respect to any act or
failure to act which occurred prior to such amendment, repeal or adoption.
(3) The Directors may take such action as is necessary to carry out the
preceding indemnification and limitation of liability provisions and are
expressly empowered to adopt, approve and amend from time to time the
Bylaws, resolutions or contracts implementing such provisions or such
further indemnification arrangements as may be permitted by law. No
amendment of the Articles of Incorporation of the Corporation or repeal of
any of its provisions shall limit or eliminate the benefits provided to
Directors and officers under this and the two preceding paragraphs with
respect to any act or omission which occurred prior to such amendment or
repeal, or shall limit or eliminate the rights granted under indemnification
agreements entered into by the Corporation and its directors, officers,
agents and employees.
(G) INTERESTED DIRECTOR TRANSACTIONS. Without limiting any other
procedures available by law or otherwise to the Corporation, the Board of
Directors may authorize any agreement or other transaction with any person,
corporation, association, company, trust, partnership (limited or general) or
other organization, although one or more of the directors or officers of the
Corporation may be a party to any such agreement or an officer, director,
stockholder or member of such other party, and no such
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agreement or transaction shall be invalidated or rendered void or voidable
solely by reason of the existence of any such relationship if: (1) the existence
is disclosed or known to (a) the Board of Directors, and the contract or
transaction is approved by the affirmative vote of a majority of the
disinterested directors, even if they constitute less than a quorum of the
Board; or (b) the stockholders entitled to vote, and the contract or transaction
is authorized, approved or ratified by a majority of the votes cast by the
stockholders entitled to vote other than the votes of shares owned of record or
beneficially by the interested director or corporation, firm or other entity, or
(2) the contract or transaction is fair and reasonable to the Corporation. Any
interested directors or the stock owned by them or by an interested corporation,
firm, or other entity may be counted in determining the presence of a quorum at
a meeting of the Board of Directors or at a meeting of the stockholders at which
the contract or transaction is authorized, approved or ratified.
(H) AMENDMENTS. The Corporation reserves the right from time to time to
make any amendments of its Charter (including these Articles of Incorporation)
which may now or hereafter be authorized by law and subject to any requirements
of the Charter, including any amendment changing the terms or contract rights,
as expressly set forth in its Charter, of any of its outstanding stock by
classification, reclassification or otherwise; provided, however, that neither
repeal nor amendment of, nor adoption of any provision inconsistent with,
Article VIII.F hereof shall adversely affect the rights of any person entitled
to indemnification or advancement of expenses under Article VIII.F or the Bylaws
of the Corporation with respect to any act or omission to act which occurred
prior to such repeal, amendment or adoption.
(I) AMENDMENT TO THE BYLAWS. In furtherance and not in limitation of the
powers conferred by statute, the Board of Directors is expressly authorized to
make, alter or repeal the Bylaws of the Corporation.
(J) MISCELLANEOUS.
(1) The Board of Directors may authorize, subject to such approval of
stockholders and other conditions, if any, as may be required by applicable
statute, bylaw, rule or regulation, the execution and performance by the
Corporation of one or more agreements with any person, corporation,
association, company, trust, partnership (limited or general) or other
organization whereby, subject to the supervision and control of the Board of
Directors, any such other person, corporation, association, company, trust,
partnership (limited or general) or other organization (including, without
limitation, any affiliate of the Corporation and/or its directors) shall
render or make available to the Corporation managerial, investment, advisory
and/or related services, office space and other services and facilities
(including the management or supervision of the investments of the
Corporation) under such terms and conditions as may be provided in such
agreement or agreements (including the compensation payable thereunder by
the Corporation).
(2) In addition to the powers and authority hereinbefore, hereinafter or
by statute expressly conferred upon them, the Board of Directors may
exercise all such powers and do all such acts and things as may be exercised
or done by the Corporation, subject, nevertheless, to the express provisions
of the MGCL, and the Charter and Bylaws of the Corporation.
(3) The enumeration and definition of particular powers of the Board of
Directors included in the foregoing shall in no way be limited or restricted
by reference to or inference from the terms of any other clause of this or
any other Article of the Corporation's Charter or construed as or deemed by
inference or otherwise in any manner to exclude or limit any powers
conferred upon the Board of Directors under the MGCL.
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IX.
DURATION OF THE CORPORATION
The duration of the Corporation shall be perpetual.
IN WITNESS WHEREOF, I have signed these Articles of Incorporation,
acknowledging the same to be my act, on November 5, 1998.
- --------------------------------------------
Incorporator
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ANNEX C
BYLAWS
OF
PACIFIC GATEWAY PROPERTIES, INC.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
ARTICLE I OFFICES.......................................................................................... 1
Section 1 Registered Office............................................................................. 1
Section 2 Other Offices................................................................................. 1
ARTICLE II STOCKHOLDERS.................................................................................... 1
Section 1 Place of Meetings............................................................................. 1
Section 2 Annual Meetings............................................................................... 1
Section 3 Special Meetings.............................................................................. 1
Section 4 Notice of Meetings; Waiver of Notice.......................................................... 1
Section 5 Conduct of Meetings; Quorum; Adjournment...................................................... 2
Section 6 Voting Rights; Proxies........................................................................ 2
Section 7 List of Stockholders.......................................................................... 3
Section 8 Action Without Meeting........................................................................ 3
Section 9 Stockholder Proposals......................................................................... 3
Section 10 Inspector of Election........................................................................ 4
ARTICLE III DIRECTORS...................................................................................... 4
Section 1 Number and Term of Office..................................................................... 4
Section 2 Powers........................................................................................ 4
Section 3 Vacancies..................................................................................... 4
Section 4 Resignations and Removals..................................................................... 4
Section 5 Meetings...................................................................................... 5
Section 6 Quorum and Voting............................................................................. 5
Section 7 Action Without Meeting........................................................................ 5
Section 8 Fees and Compensation......................................................................... 6
ARTICLE IV COMMITTEES...................................................................................... 6
Section 1 General....................................................................................... 6
Section 2 Term.......................................................................................... 6
Section 3 Meetings...................................................................................... 6
ARTICLE V OFFICERS......................................................................................... 7
Section 1 Officers Designated........................................................................... 7
Section 2 Tenure and Duties of Officers................................................................. 7
(a) General............................................................................................ 7
(b) Duties of the Chairman of the Board of Directors................................................... 7
(c) Duties of the President............................................................................ 7
(d) Duties of the Vice-Presidents...................................................................... 7
(e) Duties of the Treasurer............................................................................ 7
(f) Duties of the Secretary............................................................................ 8
(g) Duties of other officers........................................................................... 8
Section 3 Bonds......................................................................................... 8
ARTICLE VI EXECUTION OF CORPORATE INSTRUMENTS, AND VOTING OF SECURITIES OWNED BY THE CORPORATION........... 8
Section 1 Execution of Corporate Instruments............................................................ 8
Section 2 Transfer of Securities Owned by the Corporation............................................... 8
Section 3 Voting of Securities Owned by the Corporation................................................. 8
ARTICLE VII SHARES OF STOCK................................................................................ 9
Section 1 Form and Execution of Certificates............................................................ 9
Section 2 Lost, Stolen or Destroyed Certificates........................................................ 9
Section 3 Transfers..................................................................................... 9
Section 4 Transfer Agents, Registrars and Dividend Disbursing Agents.................................... 10
Section 5 Fixing Record Dates........................................................................... 10
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Section 6 Registered Stockholders....................................................................... 10
Section 7 Stock Ledger.................................................................................. 10
Section 8 Fractional Stock.............................................................................. 10
Section 9 Protection of the Corporation................................................................. 10
ARTICLE VIII INDEMNIFICATION............................................................................... 11
Section 1 Indemnification of Authorized Representatives in Third Party Proceedings...................... 11
Section 2 Indemnification of Authorized Representatives in Corporate Proceedings........................ 11
Section 3 Mandatory Indemnification of Authorized Representatives....................................... 11
Section 4 Determination of Entitlement to Indemnification............................................... 11
Section 5 Advancing Expenses............................................................................ 12
Section 6 Employee Benefit Plans........................................................................ 12
Section 7 Scope of Article.............................................................................. 12
Section 8 Reliance on Provisions........................................................................ 12
Section 9 Insurance..................................................................................... 12
Section 10 Survival of Rights........................................................................... 12
Section 11 Effect of Amendment.......................................................................... 12
Section 12 Notice to Stockholders....................................................................... 12
ARTICLE IX MISCELLANEOUS................................................................................... 13
Section 1 Notices....................................................................................... 13
Section 2 Amendments.................................................................................... 13
Section 3 Execution of Papers........................................................................... 13
Section 4 Fiscal Year................................................................................... 13
Section 5 Corporate Records............................................................................. 13
Section 6 Corporate Seal................................................................................ 14
Section 7 Consistency with Articles of Incorporation.................................................... 14
</TABLE>
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ARTICLE I
OFFICES
Section 1. REGISTERED OFFICE. The registered office of the Corporation in
the State of Maryland shall be 300 East Lombard Street, Suite 1400, Baltimore,
Maryland 21202.
Section 2. OTHER OFFICES. The Corporation shall also have and maintain an
executive office or principal place of business at such place, within or without
the State of Maryland, and such other offices, as the Board of Directors may
from time to time determine or the business of the Corporation may from time to
time require.
ARTICLE II
STOCKHOLDERS
Section 1. PLACE OF MEETINGS. Meetings of the stockholders of the
Corporation shall be held at such place, either within or without the State of
Maryland, as may be designated from time to time by the Board of Directors, or,
if not so designated, then at the principal office of the Corporation.
Section 2. ANNUAL MEETINGS. The annual meetings of the stockholders of the
Corporation for the purpose of election of directors and for the transaction of
such other business as may lawfully come before it. The annual meetings shall be
held at ten o'clock in the forenoon on the first Tuesday in May of each year, or
on such other date within thirty (30) days thereafter as designated by the Board
of Directors. If that day be a Saturday, Sunday or legal holiday at the place
where the meeting is to be held, the meeting shall be held on the next
succeeding day not a Saturday, Sunday or legal holiday at such place and hour.
Except as the Charter of the Corporation, as the same may be amended or restated
from time to time (the "Charter"), or statute provides otherwise, any business
may be considered at an annual meeting without the purpose of the meeting having
been specified in the notice. Failure to hold an annual meeting does not
invalidate the Corporation's existence or affect any otherwise valid corporate
acts.
Section 3. SPECIAL MEETINGS. At any time in the interval between annual
meetings, a special meeting of the stockholders may be called by the Chairman of
the Board or the President or by a majority of the Board of Directors by vote at
a meeting or in writing (addressed to the Secretary of the Corporation) with or
without a meeting. Special meetings of the stockholders shall be called by the
Secretary on the written request of stockholders entitled to cast not less than
a majority of all the votes entitled to be cast at such meeting. A request for a
special meeting shall state the purpose of the meeting and the matters proposed
to be acted on at such meeting. The Secretary shall inform the stockholders who
make the request of the reasonable estimated costs of preparing and mailing a
notice of the meeting and, on payment of these costs to the Corporation, notify
each stockholder entitled to notice of the meeting. Unless requested by
stockholders entitled to cast a majority of all the votes entitled to be cast at
the meeting, a special meeting need not be called to consider any matter which
is substantially the same as a matter voted on at any special meeting of
stockholders held in the preceding 12 months. Notwithstanding the foregoing,
whenever holders of one or more classes or series of Preferred Stock shall have
the right, voting separately as a class or series, to elect directors, such
holders may call special meetings of such holders pursuant to the terms of such
classes or series.
Section 4. NOTICE OF MEETINGS; WAIVER OF NOTICE. Written notice, stating
the place, day and hour of the meeting and, in the case of a special meeting or
if notice of the purpose is required by statute, the purpose or purposes for
which the meeting is called, shall be prepared and delivered by the Secretary of
the Corporation, not less than ten (10) days nor more than ninety (90) days
before the date of the meeting, personally, by mail, or by leaving it at his
residence or usual place of business, to each stockholder of record entitled to
vote at such meeting and to each other stockholder or other person, if any,
entitled to notice of the meeting. If mailed, such notice shall be deemed to be
delivered when
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deposited in the United States mail with postage thereon prepaid, addressed to
the stockholder at his or her address as it appears on the records of the
Corporation. Notwithstanding the foregoing provisions, each person who is
entitled to notice waives notice if he or she before or after the meeting signs
a waiver of the notice which is filed with the records of stockholders'
meetings, or is present at the meeting in person or by proxy, except that where
a person attends a meeting for the express purpose of objecting to the
transaction or any business because the meeting was not lawfully called to
convene.
Section 5. CONDUCT OF MEETINGS; QUORUM; ADJOURNMENT. (a) The Chairman or,
in his absence, the President, shall preside at any stockholders' meeting. The
Secretary of the Corporation, or, in his absence or by his designation, an
Assistant Secretary, or, in the absence of both, a person appointed by the
chairman of the meeting, which person need not be an officer of the Corporation,
shall act as secretary of the meeting and shall make and keep a record of the
proceedings thereat. Meetings of stockholders shall generally follow reasonable
and fair procedure. Subject to any specific provisions of law, the Charter or
these Bylaws, and unless otherwise determined by the Board of Directors prior to
the meeting, the chairman of the meeting shall determine the order of business
and shall have the authority in his discretion to regulate the conduct of the
meeting and determine the procedure and rules for the meeting, including: (i)
asking or requiring that anyone not a bona fide stockholder or proxy leave the
meeting; (ii) proposing any motion for vote; and (iii) imposing any reasonable
limits with respect to participation in the meeting by stockholders, including,
but not limited to, determining when the polls for the taking of any stockholder
vote at the meeting shall be closed, limiting the amount of time at the meeting
taken up by the remarks or questions of any stockholder, limiting the number of
questions per stockholder, and limiting the subject matter and timing of
questions and remarks by stockholders.
(b) At all meetings of stockholders the presence, in person or by proxy, of
the holders of a majority of the voting power of the outstanding shares of stock
entitled to vote shall constitute a quorum for the transaction of business,
except as otherwise provided by statute, the Charter or these Bylaws.
(c) Whether or not a quorum is present, any meeting of stockholders convened
on the date for which it was called may be adjourned, from time to time, by (a)
the Chairman of the meeting, (b) the Board of Directors (c) a vote of the
holders of a majority of the voting power of the shares represented thereat, in
each case to a date not more than 120 days after the original record date. At
such adjourned meeting at which a quorum is present or represented any business
may be transacted which might have been transacted at the original meeting. The
stockholders present at a duly called or convened meeting, at which a quorum is
present, may continue to transact business until adjournment, notwithstanding
the withdrawal of enough stockholders to leave less than a quorum.
Section 6. VOTING RIGHTS; PROXIES. (a) Except as otherwise provided by
law, only the stockholder of record on the stock records of the Corporation on
the record date for determining the stockholders entitled to vote at a meeting
shall be entitled to vote in person or by proxy at such meeting. Shares standing
in the names of two or more persons shall be voted or represented in accordance
with the determination of the majority of such persons, or, if only one of such
persons is present in person or represented by proxy, such person shall have the
right to vote such shares and such shares shall be deemed to be represented for
the purpose of determining a quorum.
(b) Every person entitled to vote or execute consents or dissents shall have
the right to do so either in person or by an agent or agents authorized by a
written proxy executed by such person or his duly authorized agent, which proxy
shall be filed with the Secretary of the Corporation at or before the meeting at
which it is to be used. Any proxy so appointed need not be a stockholder. No
proxy shall be voted after eleven months from its date unless the proxy
expressly provides for a longer period. Every proxy is revocable at the pleasure
of the stockholder executing it, except as otherwise provided by law.
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(c) Each stockholder of record shall be entitled to the number of votes for
each share of stock held by him or her as is specified in the Charter.
(d) Except as otherwise provided by law, the Charter or these Bylaws, all
action taken by the holders of a majority of the votes cast at any meeting at
which a quorum is present shall be valid and binding upon the Corporation.
(e) A plurality of all the votes cast at a meeting of the stockholders duly
called and at which a quorum is present shall be sufficient to elect a director.
Each share may be voted for as many individuals as there are directors to be
elected and for whose election the share is entitled to be voted.
Section 7. LIST OF STOCKHOLDERS. At each meeting of stockholders, a full,
true and complete list of all stockholders entitled to vote at such meeting,
showing the number and class of shares held by each and certified by the
transfer agent for such class or by the Secretary, shall be furnished by the
Secretary.
Section 8. ACTION WITHOUT MEETING. Unless otherwise provided in the
Charter, any action required by statute to be taken at any annual or special
meeting of stockholders of the Corporation, or any action which may be taken at
any annual or special meeting of such stockholders, may be taken without a
meeting, without prior notice and without a vote, if a consent or consents in
writing, setting forth the action so taken, are signed by the holders of all the
outstanding stock entitled to vote on the matter and a written waiver of the
right to dissent is signed by each stockholder entitled to notice of the meeting
but not entitled to vote at the meeting. To be effective, a written consent must
be delivered to the Corporation by delivery to its registered office in
Maryland, its principal place of business, or an officer or agent of the
Corporation having custody of the book in which proceedings of meetings of
stockholders are recorded. Delivery made to the Corporation's registered office
shall be by hand or by certified or registered mail, return receipt requested.
Every written consent shall bear the date of signature of each stockholder who
signs the consent.
Section 9. STOCKHOLDER PROPOSALS. For any stockholder proposal to be
presented in connection with an annual meeting of stockholders of the
Corporation, including any proposal relating to the nomination of a director to
be elected to the Board of Directors of the Corporation, the stockholders must
have given timely notice thereof in writing to the Secretary of the Corporation.
To be timely, a stockholder's notice shall be delivered to the Secretary at the
principal executive offices of the Corporation at least seventy-five (75) days
prior to the first anniversary of the preceding year's annual meeting; provided,
however, that in order to be timely, a stockholder's notice of business to be
brought before any annual meeting or special meeting of stockholders must in any
event be received not later than the close of business on the 15th day following
the day on which notice of the date of the annual meeting or any special meeting
is mailed or public disclosure of such date is made, whichever first occurs.
Such stockholder's notice shall set forth (a) as to each person whom the
stockholder proposes to nominate for election or reelection as a director all
information relating to such person that is required to be disclosed in
solicitations of proxies for election of directors, or is otherwise required, in
each case pursuant to Regulation 14A under the Securities Exchange Act of 1934,
as amended (the "Exchange Act") (including such person's written consent to
being named in the proxy statement as a nominee and to serving as a director if
elected); (b) as to any other business that the stockholder proposes to bring
before the meeting, a brief description of the business desired to be brought
before the meeting, the reasons for conducting such business at the meeting and
any material interest in such business of such stockholder and of the beneficial
owner, if any, on whose behalf the proposal is made; and (c) as to the
stockholder giving the notice and the beneficial owner, if any, on whose behalf
the nomination or proposal is made, (i) the name and address of such
stockholder, as they appear on the Corporation's books, and of such beneficial
owner and (ii) the class and number of shares of stock of the Corporation which
are owned beneficially and of record by such stockholders and such beneficial
owner.
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Notwithstanding anything in these Bylaws to the contrary, nothing in this
Article II.9 shall be deemed to preclude discussion by any stockholder as to any
business properly brought before any meeting. The Chairman of the Board of the
Corporation shall, if the facts warrant, determine and declare at any meeting of
the stockholders that business was not properly brought before the meeting, and
if he should so determine, he shall so declare to the meeting, and any such
business not properly brought before the meeting shall not be transacted or
considered.
Section 10. INSPECTOR OF ELECTION. The Board of Directors in advance of
any meeting of stockholders may appoint one or more inspectors to act at the
meeting or any adjournment thereof. If inspectors are not so appointed, the
person presiding at a meeting of stockholders may, and on the request of any
stockholder entitled to vote thereat shall appoint one or more inspectors. In
case any person appointed as inspector fails to appear or act, the vacancy may
be filled by the Board of Directors in advance of the meeting or at the meeting
by the person presiding thereat. Each inspector, before entering upon the
discharge of his duties shall take and sign an oath to faithfully execute the
duties of inspector at such meeting with strict impartiality and according to
the best of his ability.
ARTICLE III
DIRECTORS
Section 1. NUMBER AND TERM OF OFFICE. The number of directors which shall
constitute the whole of the Board of Directors shall be established by
resolution adopted by an affirmative vote of a majority of the entire Board of
Directors from time to time but shall not be less than three (3), nor more than
eleven (11) and shall initially be eight. With the exception of the first Board
of Directors, which shall be set forth in the Charter, and except as provided in
the Charter and in Section 3 of this Article III, each director shall be elected
by the vote of a plurality of the voting power of the shares represented in
person or by proxy, at the stockholders' annual meeting in each year and
entitled to vote on the election of directors. Duly elected directors will hold
office until the next annual meeting of stockholders and until their successors
are elected and qualify. Directors need not be stockholders of the Corporation
nor residents of the State of Maryland. No reduction in the number of directors
shall of itself have the effect of shortening the term of any incumbent
director. The Board of Directors shall include at least two Independent
Directors, as defined in the Charter.
Section 2. POWERS. The business and affairs of the Corporation shall be
managed under the direction of its Board of Directors. All powers of the
Corporation may be exercised by or under authority of the Board of Directors,
except as conferred on or reserved to the stockholders by statute or by the
Charter or Bylaws.
Section 3. VACANCIES. Any vacancy on the Board of Directors, however
occurring, may be filled by (1) a majority vote of the stockholders entitled to
vote or (2) a majority vote of the entire Board of Directors.
Section 4. RESIGNATIONS AND REMOVALS. (a) Any director may resign at any
time by delivering his written resignation to the Secretary, such resignation to
specify whether it will be effective at a particular time or upon receipt by the
Secretary. If no such specification is made it shall be deemed effective upon
receipt.
(b) At any meeting of stockholders, the Board of Directors or any individual
director may be removed from office only with cause and only by the affirmative
vote of two-thirds of the aggregate voting power of the outstanding shares of
stock of the Corporation, except that when the holders of shares of Preferred
Stock or any series thereof voting as a class are entitled to elect any one or
more directors, the directors so elected may be removed only by the applicable
vote of the holders of the Preferred Stock or such series voting as a class.
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Section 5. MEETINGS. (a) The annual meeting of the Board of Directors
shall be held as soon as is practicable after the stockholders' annual meeting
and no notice to the newly elected directors of such meeting shall be necessary
for such meeting to be lawful, provided a quorum is present.
(b) Regular meetings of the Board of Directors may also be held at any place
within or without the State of Maryland which has been designated in advance by
resolutions of the Board of Directors or the written consent of all directors.
After the place and time of regular meetings of the Board of Directors shall
have been determined and notice thereof shall have been once given to each
member of the Board of Directors, regular meetings at such place and time may be
held without further notice being given.
(c) Special meetings of the Board of Directors may be held at any time and
place within or without the State of Maryland whenever called by the Chairman of
the Board or a majority of the directors upon proper notice as provided for in
paragraph (d) of this section. Unless otherwise indicated in the notice thereof,
any and all business may be transacted at the special meeting.
(d) Written notice of the time and place of all special meetings of the
Board of Directors shall be delivered personally to each director or sent by
telegram or facsimile, telephonically confirmed, at least 48 hours before the
start of the meeting, or sent by first class mail at least 120 hours before the
start of the meeting. Notice of any meeting may be waived in writing at any time
before or after the meeting and will be waived by any director by attendance
thereat, unless such director provides the Chairman with a written protest prior
to the taking of any action at the meeting.
(e) The Chairman of the Board, or any director designated by the Chairman of
the Board, shall preside at any meeting thereof. In the event that the Chairman
of the Board or his or her designee shall not be present at any such meeting,
then the directors present, by majority vote, may choose from among themselves a
director to preside at such meeting.
Section 6. QUORUM AND VOTING. (a) A quorum of the Board of Directors shall
consist of a majority of the number of directors comprising the entire Board,
but not less than one; provided, however, at any meeting whether a quorum be
present or otherwise, a majority of the directors present may adjourn from time
to time until the time fixed for the next regular meeting of the Board of
Directors, without notice other than by announcement at the meeting.
(b) At each meeting of the Board at which a quorum is present all questions
and business shall be determined by a vote of a majority of the number of
directors present, unless a different vote be required by law, the Charter or
these Bylaws.
(c) Any member of the Board of Directors, or of any committee thereof may
participate in a meeting by means of conference telephone or similar
communication equipment by means of which all persons participating in the
meeting can hear each other, and participation in a meeting by such means shall
constitute presence in person at such meeting.
(d) The transaction of any business at a meeting of the Board of Directors,
or any committee thereof however called or noticed, or wherever held, shall be
as valid as though conducted at a meeting duly held after regular call and
notice, if a quorum be present and if either before or after the meeting, each
of the directors not present shall sign a written waiver of notice, or a consent
to holding such meeting, or an approval of the minutes thereof. All such
waivers, consents or approvals shall be filed with the corporate records or made
a part of the minutes of the meeting.
Section 7. ACTION WITHOUT MEETING. Unless otherwise restricted by the
Charter or these Bylaws, any action required or permitted to be taken at any
meeting of the Board of Directors or of any committee thereof may be taken
without a meeting, if all members of the Board or of such committee, as the case
may be, consent thereto in writing, and such writing or writings are filed with
the minutes of proceedings of the Board or committee.
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Section 8. FEES AND COMPENSATION. Directors may receive reasonable
compensation, as set from time to time by the Board of Directors, for their
services as directors and may be allowed a fee for attendance at each meeting
and at each meeting of any committee of the Board of Directors. Nothing herein
contained shall be construed to preclude any director from serving the
Corporation in any other capacity as an officer, agent, employee or otherwise,
and receiving compensation therefor. Directors shall be reimbursed for all
reasonable out-of- pocket expenses incurred in attending meetings of the Board
of Directors or any committee thereof.
ARTICLE IV
COMMITTEES
Section 1. GENERAL. The Board of Directors may, by resolution passed by a
majority of the whole Board, from time to time appoint such standing or ad hoc
committees of the Board of Directors or other committees, which may or may not
be comprised exclusively of directors, as may be permitted by law. The Board of
Directors may abolish any committee at any time. The Board of Directors shall
have an Audit Committee, and at least a majority of the members of the Audit
Committee shall be "Independent Directors," as defined in the Charter. Such
committees appointed by the Board of Directors shall have such powers and
perform such duties as may be prescribed by the resolution or resolutions
creating such committee, but in no event shall any such committee have the power
or authority to amend these Bylaws or otherwise take action not delegable to a
committee under applicable law.
Section 2. TERM. The members of all committees of the Board of Directors
shall continue as such for as long as they remain directors of the Corporation
unless removed or unless they resign from such committee. The members of all
other committees shall remain as such for so long as they remain directors or
officers of the Corporation unless removed or unless they resign from such
committee. The Board of Directors may at any time increase or decrease the
number of members of a committee or terminate the existence of a committee;
provided, that no committee shall consist of less than one member. The
membership of a committee member shall terminate on the date of his or her death
or voluntary resignation, but the Board may at any time, with or without cause,
remove any individual committee member and the Board may fill any committee
vacancy created by death, resignation, removal or increase in the number of
members of the committee.
Section 3. MEETINGS. Unless the Board of Directors shall otherwise
provide, regular meetings of any committee of the Board of Directors or any
other committee appointed pursuant to this Article IV shall be held at such
times and places as are determined by the Board of Directors, or by any such
committee, and when notice thereof has been given to each member of such
committee, no further notice of such regular meetings need be given thereafter.
Special meetings of any such committee may be held at the principal office of
the Corporation, or at any place which has been designated from time to time by
resolution of such committee or by written consent of all members thereof and
may be called by any member of such committee, upon written notice to the
members of such committee of the time and place of such special meeting given in
the manner provided for the giving of written notice to members of the Board of
Directors of the time and place of special meetings of the Board of Directors.
Notice of any special meeting of any committee may be waived in writing at any
time after the meeting and will be waived by any member by attendance thereat,
unless such member provides the chairman of the committee with a written protest
prior to the taking of any action at the meeting. A majority of the authorized
number of members of any such committee shall constitute a quorum for the
transaction of business, and the act of a majority of those present at any
meeting at which a quorum is present shall be the act of such committee. Such
committee shall maintain minutes of all meetings and report to the Board of
Directors.
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ARTICLE V
OFFICERS
Section 1. OFFICERS DESIGNATED. The officers of the corporation shall be a
Chairman of the Board of Directors, a President, one or more Vice Presidents, a
Secretary, a Treasurer and such other officers as the directors from time to
time may in their discretion elect or appoint. The Board of Directors may assign
such additional titles to one or more of the officers as they shall deem
appropriate. Any one person may hold any number of offices of the Corporation at
any one time unless specifically prohibited therefrom by law. The salaries and
other compensation of the officers of the Corporation shall be fixed by or in
the manner designated by the Board of Directors.
Section 2. TENURE AND DUTIES OF OFFICERS. (a) GENERAL: All officers shall
hold office at the pleasure of the Board of Directors and until their successors
shall have been duly elected and qualified or until earlier removal or
resignation. Subject to the specific provisions of these Bylaws, all officers,
as between themselves and the Corporation, shall respectively have such
authority and perform such duties as are customarily incident to their
respective offices, and as may be specified from time to time by the Board of
Directors, regardless of whether such authority and duties are customarily
incident to such office. In the absence of any officer of the Corporation, or
for any other reason the Board of Directors may deem sufficient, the Board of
Directors may delegate from time to time the powers or duties of such officer,
or any of them, to any other officer or to any Director. Any officer elected or
appointed by the Board of Directors may be removed at any time by the Board of
Directors with or without cause. If the office of any officer becomes vacant for
any reason, the vacancy may be filled by the Board of Directors. Nothing in
these Bylaws shall be construed as creating any kind of contractual right to
employment with the Corporation.
(b) DUTIES OF THE CHAIRMAN OF THE BOARD OF DIRECTORS: The Chairman of the
Board of Directors shall be authorized to preside at all meetings of the
Corporation's stockholders and the Board of Directors. The Chairman of the Board
of Directors shall perform such other duties and have such other powers as the
Board of Directors shall designate from time to time.
(c) DUTIES OF THE PRESIDENT: The President shall be the chief executive
officer of the Corporation. The President shall preside at meetings of
stockholders in the event the Chairman of the Board is absent or chooses not to
preside at such meetings. Subject to the direction of the directors, the
President shall have general charge of the property and business of the
Corporation and of all its operations and shall direct and supervise the
administration of the business and affairs of the Corporation, shall employ and
remove at pleasure and fix the duties and compensation of managers, agents,
salesmen, clerks, workmen and other subordinate employees of the Corporation,
and shall have such other duties and powers as shall be prescribed from time to
time by the directors.
(d) DUTIES OF THE VICE-PRESIDENTS. The Vice-Presidents shall have such
duties and powers as shall be prescribed for them respectively from time to time
by the directors or by the President. The directors or the President may from
time to time designate one or more Vice-Presidents as Executive Vice-President,
Financial Vice-President, Administrative Vice-President, Senior Vice-President,
or otherwise, or may otherwise fix or indicate the order of their rank, and, in
their or his discretion, may from time to time change or revoke any such
designation. One or more Vice-Presidents may be designated by the Board of
Directors to perform all or part of the duties of the President or Chairman of
the Board in the event of the death or disability of the President or Chairman
of the Board.
(e) DUTIES OF THE TREASURER. The Treasurer shall, subject to the direction
and under the supervision of the Board of Directors, have general charge of the
financial concerns of the Corporation and of its funds and valuable papers, and
shall have such other duties and powers as may be prescribed from time to time
by the Board of Directors or the President. The Treasurer shall report to the
Board of Directors but in the ordinary conduct of the Corporation's business
shall be under the supervision of the President or such other officer as the
Board of Directors from time to time may determine.
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(f) DUTIES OF THE SECRETARY. The Secretary shall keep the minutes of all
meetings of the stockholders and of the Board of Directors and committees
thereof, in books provided for that purpose. He shall give, or cause to be
given, all notices required by law or by these Bylaws. He shall be custodian of
the records and of the seal or seals of the Corporation. He shall, when
authorized by the Board of Directors or the President, affix the seal of the
Corporation to all documents requiring it, and he may attest the same. In
general, he shall perform all duties incident to the office of a secretary of a
corporation, and such other duties as from time to time may be assigned to him
by the Board of Directors.
(g) DUTIES OF OTHER OFFICERS: The Assistant Vice Presidents, Assistant
Secretaries, Assistant Treasurers, if any, and any other subordinate officers
shall be appointed and removed by the President or the Board of Directors at
whose pleasure each shall serve and shall have such powers and duties as they
may prescribe.
Section 3. BONDS. If required by the Board of Directors, any and every
officer or agent shall give the Corporation a bond in a sum and with one or more
sureties satisfactory to the Board of Directors for the faithful performance of
the duties of his office and for the restoration to the Corporation, in case of
his death, resignation, retirement or removal from office, of all books, papers,
vouchers, money and other property of whatever kind in his possession or under
his control belonging to the Corporation.
ARTICLE VI
EXECUTION OF CORPORATE INSTRUMENTS, AND
VOTING OF SECURITIES OWNED BY THE CORPORATION
Section 1. EXECUTION OF CORPORATE INSTRUMENTS. (a) The Board of Directors
may, in its discretion, determine the method and designate the signatory officer
or officers, or other person or persons, to execute any corporate instrument or
document, or to sign the corporate name without limitation, except where
otherwise provided by law, and such execution or signature shall be binding upon
the Corporation.
(b) Unless otherwise specifically determined by the Board of Directors or
otherwise required by law, formal contracts of the Corporation, promissory
notes, deeds of trust, mortgages and other evidences of indebtedness of the
Corporation, and other corporate instruments or documents requiring the
corporate seal, and certificates of shares of stock owned by the Corporation,
shall be executed, signed or endorsed by the Chairman of the Board or by the
President. Such documents may also be executed by any Vice President, the
Secretary or Treasurer or any assistant secretary or assistant treasurer. All
other instruments and documents requiring the corporate signature, but not
requiring the corporate seal, may be executed as aforesaid or in such other
manner as may be directed by the Board of Directors.
(c) All checks and drafts drawn on banks or other depositories on funds to
the credit of the Corporation, or in special accounts of the Corporation, shall
be signed by such person or persons as the Board of Directors shall authorize so
to do.
Section 2. TRANSFER OF SECURITIES OWNED BY THE CORPORATION. All
endorsements, assignments, transfers, share powers or other instruments of
transfer of securities standing in the name of the Corporation shall be executed
for and in the name of the Corporation by the President or by any Vice
President, or by the Secretary or Treasurer or by any additional person or
Persons as may be thereunto authorized by the Board of Directors.
Section 3. VOTING OF SECURITIES OWNED BY THE CORPORATION. All stock and
other securities of other corporations owned or held by the Corporation for
itself or for other parties in any capacity, shall be voted, and all proxies
with respect thereto shall be executed, by the person authorized so to do by
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resolution of the Board of Directors or, in the absence of such authorization,
by the Chairman of the Board or by the President.
ARTICLE VII
SHARES OF STOCK
Section 1. FORM AND EXECUTION OF CERTIFICATES. (a) The Board of Directors,
as provided in the Charter, may determine to issue certificated or
uncertificated shares of stock and other securities issued by the Corporation.
(b) Each stockholder who has fully paid for any certificated shares of the
Corporation shall be entitled to a certificate or certificates which shall
represent and certify the number of shares of each class of stock held by him or
her in the Corporation. It shall be in such form, not inconsistent with law or
with the Charter, as shall be approved by the Board of Directors or any officer
or officers designated for such purpose by resolution of the Board of Directors.
Each stock certificate shall include on its face the name of the Corporation,
the name of the stockholder or other person to whom it is issued, the number and
class (and series, if any) of the shares it represents, a full statement or
summary of the designations and any preferences, conversion and other rights,
voting powers, restrictions, limitations as to dividends, qualifications, and
terms and conditions of redemption of the stock of each class which the
Corporation is authorized to issue, the differences in the relative rights and
preferences between the shares of each series to the extent they have been set,
and the authority of the Board to set relative rights and preferences of
subsequent series. In lieu of such statement or summary, the Corporation may set
forth upon the face or back of the certificate a statement that the Corporation
will furnish to any stockholder, upon request and without charge, a full
statement of such information. Each certificate shall be signed by the Chairman
of the Board, the President or a Vice President and countersigned by the
Secretary or an assistant secretary or the Treasurer or an assistant treasurer
and may be sealed with the actual corporate seal or a facsimile of it or in any
other form. The signatures may be either manual or facsimile. In case any
officer, transfer agent or registrar who has signed or whose facsimile signature
has been placed upon a certificate shall have ceased to be such officer,
transfer agent or registrar before such certificate is issued, the certificate
shall be deemed to have been issued with the same effect as if he were such
officer, transfer agent or registrar at the date of issue. Each certificate
representing shares which are subject to restrictions on transfer or other
restrictions shall have a full statement of such restriction plainly stated on
the certificate. In lieu of such statement, the Corporation may set forth upon
the face or back of the certificate a statement that the Corporation will
furnish to any stockholder, upon request and without charge, a full statement of
such information.
(c) If the Corporation issues uncertificated shares, the Corporation shall,
at the time of issue of transfer of such shares without certificates, send the
stockholder a written statement of the information required on the certificates
by law as described in paragraph (b) of this section.
Section 2. LOST, STOLEN OR DESTROYED CERTIFICATES. In the case of the
alleged loss or destruction or the mutilation of a certificate of stock, a
duplicate certificate may be issued in place thereof, upon such terms as the
Board of Directors may prescribe, including requiring the owner of such lost,
stolen or destroyed certificate or certificates, or his legal representatives,
to attest the same in such manner as it shall require and to indemnify the
Corporation, its directors, officers, employees, agents and representatives, and
in connection therewith to give the Corporation a bond in such sum and
containing such terms as the Board of Directors or such executive officer may
direct, against any claim that may be made against the Corporation with respect
to the certificate or certificates alleged to have been lost, stolen or
destroyed or the issuance of the new certificate.
Section 3. TRANSFERS. Upon surrender to the Corporation or the transfer
agent of the Corporation of a stock certificate duly endorsed or accompanied by
proper evidence of succession, assignment or authority to transfer, the
Corporation shall issue a new certificate to the person entitled thereto,
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cancel the old certificate and record the transaction upon its books. The
Corporation shall be entitled to treat the holder of record of any share of
stock as the holder in fact thereof and, accordingly, shall not be bound to
recognize any equitable or other claim to or interest in such share on the part
of any other person, whether or not it shall have express or other notice
thereof, except as otherwise provided by the laws of the State of Maryland.
Notwithstanding the foregoing, transfers of shares of any class of stock will be
subject in all respects to the Charter of the Corporation and all of the terms
and conditions contained therein.
Section 4. TRANSFER AGENTS, REGISTRARS AND DIVIDEND DISBURSING AGENTS. The
Board of Directors may from time to time by resolution appoint one or more
incorporated transfer agents and registrars (which may or may not be the same
corporation) for the shares of the Corporation, and the Board of Directors from
time to time by resolutions may appoint a dividend disbursing agent to disburse
any and all dividends authorized by the Board of Directors payable upon the
shares of the Corporation.
Section 5. FIXING RECORD DATES. In order that the Corporation may
determine the stockholders entitled (i) to notice of or to vote at any meeting
of stockholders or any adjournment thereof, (ii) to receive payment of any
dividend or other distribution or allotment of any rights or (iii) to exercise
any rights in respect of any change, conversion or exchange of stock or for the
purpose of any other lawful action, the Board of Directors, in advance, may fix
a record date, which record date shall not precede the date upon which the
resolution fixing the record date is adopted by the Board of Directors, and
which record date shall not be more than ninety (90) nor less than ten (10) days
before the date of such meeting nor more than ninety (90) days prior to the date
of any other action. If no record date is fixed by the Board of Directors, the
record date for determining stockholders will be determined in accordance with
applicable law.
Section 6. REGISTERED STOCKHOLDERS. The Corporation shall be entitled to
recognize the exclusive right of a person registered on its books as the owner
of shares to receive dividends, and to vote as such owner, and to hold liable
for calls and assessments a person registered on its books as the owner of
shares, and shall not be bound to recognize any equitable or other claim to or
interest in such share or shares on the part of any other person, whether or not
it shall have express or other notice thereof except as otherwise provided by
law.
Section 7. STOCK LEDGER. The Corporation shall maintain at its principal
office or at the office of its counsel, accountants or transfer agent, an
original or duplicate stock ledger containing the name and address of each
stockholder and the number of shares of each class held by such stockholder. The
stock ledger may be in written form or in any other form which can be converted
within a reasonable time into written form for visual inspection.
Section 8. FRACTIONAL STOCK. The Corporation shall not issue fractional
shares of stock, but may issue in registered or bearer form which entitle the
holder to receive a certificate for a full share upon surrender of such scrip
aggregating a full share, the terms and conditions and manner of issue of such
scrip to be fixed by the Board of Directors.
Section 9. PROTECTION OF THE CORPORATION. The Corporation may treat a
fiduciary as having capacity and authority to exercise all rights of ownership
in respect of shares of record in the name of the decedent holder, person, firm
or corporation in conservation, receivership or bankruptcy, minor, incompetent
person, or person under disability, as the case may be, for whom he is acting,
or a fiduciary acting as such, and the Corporation, its transfer agent and
registrar, upon presentation of evidence of appointment of such fiduciary shall
be under no duty to inquire as to the powers of such fiduciary and shall not be
liable to any firm, person or corporation for loss caused by any act done or
omitted to be done by the Corporation or its transfer agent or registrar in
reliance thereon.
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ARTICLE VIII
INDEMNIFICATION
Section 1. INDEMNIFICATION OF AUTHORIZED REPRESENTATIVES IN THIRD-PARTY
PROCEEDINGS. The Corporation shall indemnify any person who was or is an
"authorized representative" of the Corporation (which shall mean for purposes of
this Article a director or officer of the Corporation, or a person serving at
the request of the Corporation as a director, officer, employee, agent or
trustee, of another corporation, partnership, joint venture, trust or other
enterprise, including employee benefit plans) and who was or is a "party" (which
shall include, for purposes of this Article, the giving of testimony or similar
involvement) or is threatened to be made a party to any "third-party proceeding"
(which shall mean for purposes of this Article any threatened, pending or
completed action, suit or proceeding, whether civil, criminal, administrative,
or investigative, other than an action by or in the right of the Corporation) by
reason of the fact that such person was or is an authorized representative of
the Corporation, from and against expenses (which shall include, for purposes of
this Article, attorneys' fees), judgments, penalties, fines and amounts paid in
settlement actually and reasonably incurred by such person in connection with
such third-party proceeding if such person acted in good faith and in a manner
such person reasonably believed to be in or not opposed to the best interests of
the Corporation and, with respect to any criminal third-party proceedings (which
could or does lead to a criminal third-party proceeding) had no reasonable cause
to believe such conduct was unlawful. The termination of any third-party
proceeding by judgment, order, settlement, conviction or upon a plea of nolo
contendere or its equivalent, shall not, of itself, create a presumption that
the authorized representative did not act in good faith and in a manner which
such person reasonably believed to be in, or not opposed to, the best interests
of the Corporation, and, with respect to any criminal third-party proceeding,
had reasonable cause to believe that such conduct was unlawful.
Section 2. INDEMNIFICATION OF AUTHORIZED REPRESENTATIVES IN CORPORATE
PROCEEDINGS. The Corporation shall indemnify any person who was or is an
authorized representative of the Corporation and who was or is a party or is
threatened to be made a party to any "corporate proceeding" (which shall mean,
for purposes of this Article, any threatened, pending or completed action or
suit by or in the right of the Corporation to procure a judgment in its favor or
investigative proceeding by the Corporation) by reason of the fact that such
person was or is an authorized representative of the Corporation, against
expenses actually and reasonably incurred by such person in connection with the
defense or settlement of such corporate proceeding if such person acted in good
faith and in a manner such person reasonably believed to be in or not opposed to
the best interests of the Corporation, except that no indemnification shall be
made in respect of any claim, issue or matter as to which such person shall have
been adjudged to be liable to the Corporation unless and only to the extent that
the court in which such corporate proceeding was pending shall determine upon
application that, despite the adjudication of liability but in view of all the
circumstances of the case, such authorized representative is fairly and
reasonably entitled to indemnity for such expenses that such court shall deem
proper.
Section 3. MANDATORY INDEMNIFICATION OF AUTHORIZED REPRESENTATIVES. To the
extent that an authorized representative of the Corporation has been successful
on the merits or otherwise in defense of any third-party or corporate
proceedings or in defense of any claim, issue or matter therein, such person
shall be indemnified against expenses actually and reasonably incurred by such
person in connection therewith.
Section 4. DETERMINATION OF ENTITLEMENT TO INDEMNIFICATION. Any
indemnification under Section 1, 2 or 3 of this Article VIII (unless ordered by
a court) shall be made by the Corporation only as authorized in the specific
case upon a determination that indemnification of the authorized representative
is proper in the circumstances because such person has either met the applicable
standard of conduct set forth in Section 1 or 2 or has been successful on the
merits or otherwise as set forth in
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Section 3 and that the amount requested has been actually and reasonably
incurred. Such determination shall be made: (i) by the Board of Directors by a
majority of a quorum consisting of directors who were not parties to such
third-party or corporate proceedings; or (ii) if such a quorum is not
obtainable, or, even if obtainable, a majority vote of such a quorum so directs,
by independent legal counsel in a written opinion; or (iii) by the stockholders.
Section 5. ADVANCING EXPENSES. Expenses actually and reasonably incurred
in defending a third-party or corporate proceeding shall be paid on behalf of an
authorized representative by the Corporation in advance of the final disposition
of such third-party or corporate proceeding upon receipt of an undertaking by or
on behalf of the authorized representative to repay such amount if it shall
ultimately be determined that such person is not entitled to be indemnified by
the Corporation as authorized in this Article VIII.
Section 6. EMPLOYEE BENEFIT PLANS. For purposes of this Article, the
Corporation shall be deemed to have requested an authorized representative to
serve an employee benefit plan where the performance by such person of duties to
the Corporation also imposes duties on, or otherwise involves services by, such
person to the plan or participants or beneficiaries of the plan; excise taxes
assessed on an authorized representative with respect to an employee benefit
plan pursuant to applicable law shall be deemed "fines"; and action taken or
omitted by such person with respect to an employee benefit plan in the
performance of duties for a purpose reasonably believed to be in the interest of
the participants and beneficiaries of the plan shall be deemed to be for a
purpose that is not opposed to the best interests of the Corporation.
Section 7. SCOPE OF ARTICLE. The indemnification of and the advancement of
expenses to authorized representatives, provided by, or granted pursuant to,
this Article, shall (i) not be deemed exclusive of any other rights to which
those seeking indemnification or advancement of expenses may be entitled under
any statute, agreement, vote of stockholders or disinterested directors or
otherwise, both as to action in an official capacity and as to action in other
capacities, (ii) continue as to a person who has ceased to be an authorized
representative, and (iii) inure to the benefit of the heirs, personal
representatives, executors, and administrators of such person.
Section 8. RELIANCE ON PROVISIONS. Each person who shall act as an
authorized representative of the Corporation shall be deemed to be doing so in
reliance upon rights of indemnification provided by this Article VIII.
Section 9. INSURANCE. The Corporation shall have the power to purchase and
maintain insurance on behalf of any person who is or was a director, officer,
employee, trustee or agent of or for the Corporation, or is or was serving at
the request or with the prior approval of the Corporation as a director,
officer, employee, trustee or agent of another corporation, partnership, joint
venture, trust or other enterprise (including employee benefit plans), against
any liability asserted against him and incurred by him in any capacity or
arising out of his status as such, whether or not the corporation would have the
power to indemnify him against such liability under the provisions of these
Bylaws.
Section 10. SURVIVAL OF RIGHTS. The rights provided by this Article shall
continue as to a person who has ceased to be an Agent and shall inure to the
benefit of the heirs, executors and administrators of such a person.
Section 11. EFFECT OF AMENDMENT. Any amendment, repeal or modification of
this Article shall not adversely affect any right or protection of any Agent
existing at the time of such amendment, repeal or modification.
Section 12. NOTICE TO STOCKHOLDERS. If, under this Article, any expenses
or other amounts are paid or advanced to a director by way of indemnification
arising out of a proceeding by or in the right of the Corporation, the
Corporation shall, report such indemnification or advance to the stockholders in
writing with the notice of the next stockholders' meeting or prior to the
meeting.
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ARTICLE IX
MISCELLANEOUS
Section 1. NOTICES. Whenever, under any provisions of these Bylaws, notice
is required to be given to any stockholder, the same shall be given in writing,
timely and duly deposited in the United States Mail, postage prepaid, and
addressed to his last known post office address as shown by the stock record of
the Corporation or the Transfer Agent. Any notice required to be given to any
director may be given by the method hereinabove stated, or by telegram or
confirmed telefacsimile, except that such notice other than one which is
delivered personally, shall be sent to such address as such director shall have
filed in writing with the Secretary of the Corporation, or, in the absence of
such filing, to the last known post office address of such director. If no
address of a stockholder or director be known, such notice may be sent to the
office of the Corporation required to be maintained pursuant to Section 2 of
Article I hereof. An affidavit of mailing, executed by a duly authorized and
competent employee of the Corporation or the Transfer Agent appointed with
respect to the class of stock affected, specifying the name and address or the
names and addresses of the stockholder or stockholders, director or directors,
to whom any such notice or notices was or were given, and the time and method of
giving the same, shall be conclusive evidence of the statements therein
contained. All notices given by mail, as above provided, shall be deemed to have
been given at the time of mailing and all notices given by telegram or confirmed
facsimile shall be deemed to have been given at the sending time recorded by the
telegraph company transmitting the same or the time confirmed. It shall not be
necessary that the same method of giving notice be employed in respect of all
directors. The period or limitation of time within which any stockholder may
exercise any option or right, or enjoy any privilege or benefit, or be required
to act, or within which any director may exercise any power or right, or enjoy
any privilege, pursuant to any notice sent him in the manner above provided,
shall not be affected or extended in any manner by the failure of such a
stockholder or such director to receive such notice. Whenever any notice is
required to be given under the provisions of the statutes or of the Charter, or
of these Bylaws, a waiver thereof in writing signed by the person or persons
entitled to said notice, whether before or after the time stated therein, shall
be deemed equivalent thereto.
Section 2. AMENDMENTS. These Bylaws may be repealed, altered or amended or
new Bylaws may be adopted by written consent of stockholders in the manner
authorized by Article II or at any meeting of the stockholders, either annual or
special, by the affirmative vote of a majority of the voting power of the stock
entitled to vote at such meeting; provided, however, that such stockholder
action may not decrease the number of votes required for stockholder action
pursuant to these Bylaws. The Board of Directors shall also have the authority
to repeal, alter or amend these Bylaws (including, without limitation, the
amendment of any Bylaws setting forth the number of directors who shall
constitute the entire Board of Directors) or adopt new Bylaws by unanimous
written consent or by the affirmative vote of a majority of the directors
comprising the entire Board of Directors at any annual, regular or special
meeting, subject to the power of the stockholders to change or repeal such
Bylaws.
Section 3. EXECUTION OF PAPERS. Except as the directors may generally or
in particular cases authorize the execution thereof in some other manner, all
deeds, leases, transfers, contracts, bonds, notes, checks, drafts and other
obligations made, accepted or endorsed by the Corporation shall be signed by the
President.
Section 4. FISCAL YEAR. Except as from time to time provided by the Board
of Directors, the fiscal year of the Corporation shall end on the 31st day of
December.
Section 5. CORPORATE RECORDS. The Corporation shall keep correct and
complete books and records of its accounts and transactions and minutes of the
proceedings of its stockholders and Board of Directors and of any committee when
exercising the powers of the Board of Directors. The books and records of the
Corporation may be in written form or in any other form which can be converted
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within a reasonable time into written form for visual inspection. Minutes shall
be recorded in written form but may be maintained in the form of a reproduction.
Section 6. CORPORATE SEAL. The Corporation may, but shall not be required
to, have a corporate seal, which shall have inscribed thereon the name of the
Corporation, the year of its organization and the words "Incorporated Maryland."
The seal may be used by causing it or a facsimile thereof to be impressed or
affixed or reproduced or otherwise. The Secretary shall have custody of the
corporate seal of the Corporation and shall have authority to affix the same to
any instrument requiring it and when so affixed, it may be attested by the
Secretary's signature. The Board of Directors may give general authority to any
other officer to affix the seal of the Corporation and to attest the affixing by
his signature. Whenever the Corporation is permitted or required to affix its
seal to a document, it shall be sufficient to meet the requirements of any law,
rule or regulation relating to a seal to place the word "(SEAL)" adjacent to the
signature of the person authorized to execute the document on behalf of the
Corporation.
Section 7. CONSISTENCY WITH ARTICLES OF INCORPORATION. If any provision of
these Bylaws shall be inconsistent with the Corporation's Charter (and as it may
be amended from time to time), the Charter (as so amended at the time) shall
govern.
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CERTIFICATE OF SECRETARY
The undersigned, Secretary of PACIFIC GATEWAY PROPERTIES, INC., a Maryland
corporation, hereby certifies that the foregoing is a full, true and correct
copy of the Bylaws of the corporation with all amendments to date of this
Certificate.
WITNESS the signature of the undersigned this day of .
--------------------------------------
, SECRETARY
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ANNEX D
AGREEMENT
OF LIMITED PARTNERSHIP
OF
PACIFIC GATEWAY PROPERTIES OPERATING PARTNERSHIP, L.P.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<C> <S> <C> <C> <C>
ARTICLE I DEFINED TERMS...................................................................... 1
ARTICLE II PARTNERSHIP CONTINUATION AND IDENTIFICATION........................................ 6
2.01 ORGANIZATION....................................................................... 6
2.02 NAME, OFFICE AND REGISTERED AGENT.................................................. 7
2.03 PARTNERS........................................................................... 7
2.04 TERM AND DISSOLUTION............................................................... 7
2.05 FILING OF CERTIFICATE AND PERFECTION OF LIMITED PARTNERSHIP........................
8
2.06 CERTIFICATES DESCRIBING PARTNERSHIP UNITS.......................................... 8
ARTICLE III BUSINESS OF THE PARTNERSHIP........................................................ 8
ARTICLE IV CAPITAL CONTRIBUTIONS AND ACCOUNTS................................................. 8
4.01 CAPITAL CONTRIBUTIONS.............................................................. 8
4.02 ADDITIONAL CAPITAL CONTRIBUTIONS AND ISSUANCE OF ADDITIONAL PARTNERSHIP
INTERESTS.......................................................................... 8
(a) ISSUANCES OF ADDITIONAL PARTNERSHIP INTERESTS........................... 8
(i) GENERAL...................................................... 8
(ii) UPON ISSUANCE OF ADDITIONAL SECURITIES....................... 9
(b) CERTAIN DEEMED CONTRIBUTIONS OF PROCEEDS OF ISSUANCE OF REIT SHARES.....
10
4.03 ADDITIONAL FUNDING................................................................. 10
4.04 CAPITAL ACCOUNTS................................................................... 10
4.05 PERCENTAGE INTERESTS............................................................... 11
4.06 NO INTEREST ON CONTRIBUTIONS....................................................... 11
4.07 RETURN OF CAPITAL CONTRIBUTIONS.................................................... 11
4.08 NO THIRD PARTY BENEFICIARY......................................................... 11
ARTICLE V PROFITS AND LOSSES; DISTRIBUTIONS.................................................. 11
5.01 ALLOCATION OF PROFIT AND LOSS...................................................... 11
(a) GENERAL................................................................. 11
(b) MINIMUM GAIN CHARGEBACK................................................. 12
(c) QUALIFIED INCOME OFFSET................................................. 12
(d) CAPITAL ACCOUNT DEFICITS................................................ 12
(e) ALLOCATIONS BETWEEN TRANSFEROR AND TRANSFEREE........................... 12
(f) DEFINITION OF PROFIT AND LOSS........................................... 13
5.02 DISTRIBUTION OF CASH............................................................... 13
5.03 REIT DISTRIBUTION REQUIREMENTS..................................................... 14
5.04 DISTRIBUTIONS IN KIND.............................................................. 14
5.05 LIMITATIONS ON RETURN OF CAPITAL CONTRIBUTIONS..................................... 14
</TABLE>
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<TABLE>
<C> <S> <C> <C> <C>
5.06 DISTRIBUTIONS UPON LIQUIDATION..................................................... 14
5.07 SUBSTANTIAL ECONOMIC EFFECT........................................................ 15
ARTICLE VI RIGHTS, OBLIGATIONS AND POWERS OF THE GENERAL PARTNER.............................. 15
6.01 MANAGEMENT OF THE PARTNERSHIP...................................................... 15
6.02 DELEGATION OF AUTHORITY............................................................ 17
6.03 INDEMNIFICATION AND EXCULPATION OF INDEMNITEES..................................... 17
6.04 LIABILITY OF THE GENERAL PARTNER................................................... 18
6.05 REIMBURSEMENT OF GENERAL PARTNER................................................... 19
6.06 OUTSIDE ACTIVITIES................................................................. 20
6.07 EMPLOYMENT OR RETENTION OF AFFILIATES.............................................. 20
6.08 GENERAL PARTNER PARTICIPATION...................................................... 20
6.09 TITLE TO PARTNERSHIP ASSETS........................................................ 20
6.10 MISCELLANEOUS...................................................................... 21
ARTICLE VII CHANGES IN GENERAL PARTNER......................................................... 21
7.01 TRANSFER OF THE GENERAL PARTNER'S PARTNERSHIP INTEREST............................. 21
7.02 ADMISSION OF A SUBSTITUTE OR ADDITIONAL GENERAL PARTNER............................ 22
7.03 EFFECT OF BANKRUPTCY, WITHDRAWAL, DEATH OR DISSOLUTION OF A GENERAL PARTNER........
23
7.04 REMOVAL OF A GENERAL PARTNER....................................................... 23
ARTICLE VIII RIGHTS AND OBLIGATIONS............................................................. 24
8.01 MANAGEMENT OF THE PARTNERSHIP...................................................... 24
8.02 POWER OF ATTORNEY.................................................................. 24
8.03 LIMITATION ON LIABILITY OF LIMITED PARTNERS........................................ 24
8.04 OWNERSHIP BY LIMITED PARTNER OF CORPORATE GENERAL PARTNER OR AFFILIATE.............
25
8.05 REDEMPTION RIGHT................................................................... 25
ARTICLE IX TRANSFER OF LIMITED PARTNERSHIP INTERESTS.......................................... 26
9.01 PURCHASE FOR INVESTMENT............................................................ 26
9.02 RESTRICTIONS ON TRANSFER OF LIMITED PARTNERSHIP INTERESTS..........................
27
9.03 ADMISSION OF SUBSTITUTE LIMITED PARTNER............................................ 28
9.04 RIGHTS OF ASSIGNEES OF PARTNERSHIP INTERESTS....................................... 29
9.05 EFFECT OF BANKRUPTCY, DEATH, INCOMPETENCE OR TERMINATION OF A LIMITED PARTNER......
29
9.06 JOINT OWNERSHIP OF INTERESTS....................................................... 29
ARTICLE X DISSOLUTION, LIQUIDATION AND TERMINATION........................................... 30
10.01 DISSOLUTION........................................................................ 30
10.02 WINDING UP......................................................................... 30
10.03 COMPLIANCE WITH TIMING REQUIREMENTS OF REGULATIONS................................. 31
</TABLE>
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<TABLE>
<C> <S> <C> <C> <C>
10.04 DEEMED DISTRIBUTION AND RECONTRIBUTION............................................. 32
10.05 RIGHTS OF LIMITED PARTNERS......................................................... 32
10.06 NOTICE OF DISSOLUTION.............................................................. 32
10.07 TERMINATION OF PARTNERSHIP AND CANCELLATION OF CERTIFICATE OF LIMITED
PARTNERSHIP........................................................................ 32
10.08 REASONABLE TIME FOR WINDING-UP..................................................... 32
10.09 WAIVER OF PARTITION................................................................ 32
ARTICLE XI BOOKS AND RECORDS; ACCOUNTING; TAX MATTERS......................................... 32
11.01 BOOKS AND RECORDS.................................................................. 32
11.02 CUSTODY OF PARTNERSHIP FUNDS; BANK ACCOUNTS........................................ 33
11.03 FISCAL AND TAXABLE YEAR............................................................ 33
11.04 ANNUAL TAX INFORMATION AND REPORT.................................................. 33
11.05 TAX MATTERS PARTNER; TAX ELECTIONS; SPECIAL BASIS ADJUSTMENTS......................
33
11.06 REPORTS TO LIMITED PARTNERS........................................................ 33
11.07 MEETINGS OF THE PARTNERS........................................................... 34
ARTICLE XII AMENDMENT OF AGREEMENT; MERGER..................................................... 34
12.01 AMENDMENT OF AGREEMENT............................................................. 34
ARTICLE XIII GENERAL PROVISIONS................................................................. 35
13.01 NOTICES............................................................................ 35
13.02 SURVIVAL OF RIGHTS................................................................. 35
13.03 ADDITIONAL DOCUMENTS............................................................... 35
13.04 SEVERABILITY....................................................................... 35
13.05 ENTIRE AGREEMENT................................................................... 35
13.06 PRONOUNS AND PLURALS............................................................... 35
13.07 HEADINGS........................................................................... 35
13.08 COUNTERPARTS....................................................................... 36
13.09 GOVERNING LAW...................................................................... 36
</TABLE>
EXHIBITS:
EXHIBIT A--Partners, Capital Contributions and Percentage Interests
EXHIBIT B--Notice of Exercise of Redemption Right
EXHIBIT C--List of Initial Limited Partners
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AGREEMENT OF LIMITED PARTNERSHIP
OF
PACIFIC GATEWAY PROPERTIES OPERATING PARTNERSHIP, L.P.
RECITALS
Pacific Gateway Properties Operating Partnership, L.P. (the "Partnership")
is being formed as a limited partnership under the laws of the State of Delaware
pursuant to a Certificate of Limited Partnership filed with the Office of the
Secretary of State of the State of Delaware effective as of , 1998.
This Agreement of Limited Partnership (the "Agreement") is entered into this
day of 1998 among Pacific Gateway Properties, Inc., a Maryland
corporation (the "General Partner") and THE INITIAL LIMITED PARTNERS LISTED ON
EXHIBIT A ATTACHED HERETO AND INCORPORATED HEREIN BY THIS REFERENCE, (the
"Initial Limited Partners").
AGREEMENT
NOW, THEREFORE, in consideration of the foregoing, of mutual covenants
between the parties hereto, and of other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the parties hereto
agree as follows:
ARTICLE I
DEFINED TERMS
The following defined terms used in this Agreement shall have the meanings
specified below:
"Act" means the Delaware Revised Uniform Limited Partnership Act, as it may
be amended from time to time.
"Additional Funds" has the meaning set forth in Section 4.03 hereof.
"Additional Limited Partner" means any Person admitted to the Partnership as
a Limited Partner pursuant to Section 4.02 hereof.
"Additional Securities" means any additional REIT Shares (other than REIT
Shares issued in connection with a redemption pursuant to Section 8.05 hereof)
or rights, options, warrants or convertible or exchangeable securities
containing the right to subscribe for or purchase REIT Shares, as set forth in
Section 4.02(a)(ii).
"Administrative Expenses" means (i) all administrative and operating costs
and expenses incurred by the Partnership, (ii) those administrative costs and
expenses of the General Partner, including any salaries or other payments to
directors, trustees, officers or employees of the General Partner, and any
accounting and legal expenses of the General Partner, which expenses, the
Partners agree, are expenses of the Partnership and not the General Partner, and
(iii) to the extent not included in clause (ii) above, REIT Expenses; PROVIDED,
HOWEVER, that Administrative Expenses shall not include any administrative costs
and expenses incurred by the General Partner that are attributable to Properties
or partnership interests in a Subsidiary Partnership that are owned by the
General Partner directly.
"Affiliate" means, (i) any Person that, directly or indirectly, controls or
is controlled by or is under common control with such Person, (ii) any other
Person that owns, beneficially, directly or indirectly, 10% or more of the
outstanding capital stock, shares or equity interests of such Person, or (iii)
any officer, director, trustee, employee, partner or trustee of such Person or
any Person controlling, controlled by or under common control with such Person
(excluding trustees and persons serving in similar capacities who are not
otherwise an Affiliate of such Person). For the purposes of this definition,
"control" (including the correlative meanings of the terms "controlled by" and
"under common control with"), as used with respect to any Person, shall mean the
possession, directly or indirectly, of the
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power to direct or cause the direction of the management and policies of such
Person, through the ownership of voting securities or partnership interests or
otherwise.
"Agreed Value" means the fair market value of a Partner's non-cash Capital
Contribution as of the date of contribution as agreed to by such Partner and the
General Partner. The names and addresses of the Partners, number of Partnership
Units issued to each Partner, and the Agreed Value of non-cash Capital
Contributions as of the date of contribution is set forth on EXHIBIT A.
"Agreement" means this Agreement of Limited Partnership.
"AMEX" means the American Stock Exchange.
"Capital Account" has the meaning provided in Section 4.04 hereof.
"Capital Contribution" means the total amount of cash, cash equivalents, and
the Agreed Value of any Property or other asset contributed or agreed to be
contributed, as the context requires, to the Partnership by each Partner
pursuant to the terms of the Agreement. Any reference to the Capital
Contribution of a Partner shall include the Capital Contribution made by a
predecessor holder of the Partnership Interest of such Partner.
"Cash Amount" means an amount of cash per Partnership Unit equal to the
Value of the REIT Shares Amount on the date of receipt by the General Partner of
a Notice of Redemption.
"Certificate" means any instrument or document that is required under the
laws of the State of Delaware, or any other jurisdiction in which the
Partnership conducts business, to be signed or sworn to by the Partners of the
Partnership (either by themselves or pursuant to the power-of-attorney granted
to the General Partner in Section 8.02 hereof) and filed for recording in the
appropriate public offices in the State of Delaware or such other jurisdiction
to perfect or maintain the Partnership as a limited partnership, to effect the
admission, withdrawal, or substitution of any Partner of the Partnership, or to
protect the limited liability of the Limited Partners as limited partners under
the laws of the State of Delaware or such other jurisdiction.
"Charter" means the Charter of the General Partner filed with the Maryland
State Department of Assessments and Taxation, as amended or restated from time
to time.
"Code" means the Internal Revenue Code of 1986, as amended, and as hereafter
amended from time to time. Reference to any particular provision of the Code
shall mean that provision in the Code at the date hereof and any successor
provision of the Code.
"Commission" means the U.S. Securities and Exchange Commission.
"Common Stock" means the common stock of the General Partner, $1.00 par
value per share.
"Conversion Factor" means 1.0, PROVIDED THAT, (a) in the event that the
General Partner (i) declares or pays a dividend on its outstanding REIT Shares
in REIT Shares or makes a distribution to all holders of its outstanding REIT
Shares in REIT Shares, (ii) subdivides its outstanding REIT Shares, or (iii)
combines its outstanding REIT Shares into a smaller number of REIT Shares, the
Conversion Factor shall be adjusted by multiplying the Conversion Factor by a
fraction, the numerator of which shall be the number of REIT Shares issued and
outstanding on the record date for such dividend, distribution, subdivision or
combination (assuming for such purposes that such dividend, distribution,
subdivision or combination has occurred as of such time), and the denominator of
which shall be the actual number of REIT Shares (determined without the above
assumption) issued and outstanding on such date; and (b) in the event that the
General Partner declares or pays a dividend or other distribution on its
outstanding REIT Shares (other than (A) cash dividends payable in the ordinary
course of the General Partner's business or (B) dividends payable in REIT Shares
that give rise to an adjustment in the Conversion Factor under subsection (a)
hereof) and the Value of the REIT Shares on the 20th trading day following the
record date ("Record Date") for such dividend or distribution (the "Post-
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Distribution Value") is less than the Value of the REIT Shares on the business
day immediately preceding such Record Date (the "Pre-Distribution Value"), then
the Conversion Factor in effect after the Record Date shall be adjusted by
multiplying the Conversion Factor in effect prior to the Record Date by a
fraction, the numerator of which is the Pre-Distribution Value and the
denominator of which is the Post-Distribution Value, PROVIDED, HOWEVER, that no
adjustment shall be made if (x) with respect to any cash dividend or
distribution with respect to REIT Shares, the Partnership distributes with
respect to each Partnership Unit an amount equal to the amount of such dividend
or distribution multiplied by the Conversion Factor or (y) with respect to any
dividend or distribution of securities or property other than cash, the
Partnership distributes with respect to each Partnership Unit an amount of
securities or other property equal to the amount distributed with respect to
each REIT Share multiplied by the Conversion Ratio or a partnership interest or
other security readily convertible into such securities or other property. Any
adjustment to the Conversion Factor shall become effective immediately after the
effective date of such event retroactive to the record date, if any, for such
event; PROVIDED, HOWEVER, that if the General Partner receives a Notice of
Redemption after the record date, but prior to the effective date of such
dividend, distribution, subdivision or combination, the Conversion Factor shall
be determined as if the General Partner had received the Notice of Redemption
immediately prior to the record date for such dividend, distribution,
subdivision or combination.
"Event of Bankruptcy" as to any Person means the filing of a petition for
relief as to such Person as debtor or bankrupt under the Bankruptcy Code of
1978, as amended, or similar provision of law of any jurisdiction (except if
such petition is contested by such Person and has been dismissed within 90
days); insolvency or bankruptcy of such Person as finally determined by a court
proceeding; filing by such Person of a petition or application to accomplish the
same or for the appointment of a receiver or a trustee for such Person or a
substantial part of his assets; commencement of any proceedings relating to such
Person as a debtor under any other reorganization, arrangement, insolvency,
adjustment of debt or liquidation law of any jurisdiction, whether now in
existence or hereinafter in effect, either by such Person or by another,
PROVIDED, HOWEVER, that if such proceeding is commenced by another, such Person
indicates his approval of such proceeding, consents thereto or acquiesces
therein, or such proceeding is contested by such Person and has not been finally
dismissed within 90 days.
"Exchange" means the exchange of shares of Pacific Gateway Properties, Inc.,
a New York corporation for shares of Pacific Gateway Properties, Inc., a
Maryland corporation.
"General Partner" means Pacific Gateway Properties, Inc., a Maryland
corporation, and any Person who becomes a substitute or additional General
Partner as provided herein, and any of their successors as General Partner.
"General Partnership Interest" means a Partnership Interest held by the
General Partner that is a general partnership interest.
"Indemnitee" means (i) any Person made a party to a proceeding by reason of
its status as the General Partner or a director, trustee, officer or employee of
the Partnership or the General Partner, and (ii) such other Persons (including
the Manager and Affiliates of the General Partner or the Partnership) as the
General Partner may designate from time to time, in its sole and absolute
discretion.
"Independent Director" means a person who is (i) independent of management
of the General Partner and the Manager, (ii) not employed by or an officer of
the Company or the Manager, (iii) not an "affiliate" (as defined in Rule 405
under the Securities Act of 1933, as amended) of the Company, the Manager, or of
any subsidiary of the Company or the Manager, and (iv) not a person who acts on
a regular basis as an individual or representative of an organization serving as
a professional advisor, legal counsel or consultant to the management of the
Company or the Manager.
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"Initial Limited Partners" means Pacific Gateway Properties Management
Corporation, a California corporation, Maritime Plaza Associates, a California
corporation, Pacific Gateway Properties Hotels, Inc., a California corporation,
and PGP Weston, Inc., a California corporation.
"Limited Partner" means any Person named as a Limited Partner on EXHIBIT A
attached hereto, and any Person who becomes a Substitute or Additional Limited
Partner, in such Person's capacity as a Limited Partner in the Partnership.
"Limited Partnership Interest" means the ownership interest of a Limited
Partner in the Partnership at any particular time, including the right of such
Limited Partner to any and all benefits to which such Limited Partner may be
entitled as provided in this Agreement and in the Act, together with the
obligations of such Limited Partner to comply with all the provisions of this
Agreement and of such Act.
"Loss" has the meaning provided in Section 5.01(f) hereof.
"Manager" means PGP Management Company, a California corporation.
"Notice of Redemption" means the Notice of Exercise of Redemption Right
substantially in the form attached as EXHIBIT B hereto.
"Offer" has the meaning set forth in Section 7.01(c) hereof.
"Partner" means any General Partner or Limited Partner.
"Partner Nonrecourse Debt Minimum Gain" has the meaning set forth in
Regulations Section 1.704-2(i). A Partner's share of Partner Nonrecourse Debt
Minimum Gain shall be determined in accordance with Regulations Section
1.704-2(i)(5).
"Partnership Interest" means an ownership interest in the Partnership held
by either a Limited Partner or the General Partner and includes any and all
benefits to which the holder of such a Partnership Interest may be entitled as
provided in this Agreement, together with all obligations of such Person to
comply with the terms and provisions of this Agreement.
"Partnership Minimum Gain" has the meaning set forth in Regulations Section
1.704-2(d). In accordance with Regulations Section 1.704-2(d), the amount of
Partnership Minimum Gain is determined by first computing, for each Partnership
nonrecourse liability, any gain the Partnership would realize if it disposed of
the property subject to that liability for no consideration other than full
satisfaction of the liability, and then aggregating the separately computed
gains. A Partner's share of Partnership Minimum Gain shall be determined in
accordance with Regulations Section 1.704-2(g)(l).
"Partnership Record Date" means the record date established by the General
Partner for the distribution of cash pursuant to Section 5.02 hereof, which
record date shall be the same as the record date established by the General
Partner for a distribution to its shareholders of some or all of its portion of
such distribution.
"Partnership Unit" means a fractional, undivided share of the Partnership
Interests of all Partners issued hereunder. The allocation of Partnership Units
among the Partners shall be as set forth on EXHIBIT A, as may be amended from
time to time.
"Percentage Interest" means the percentage ownership interest in the
Partnership of each Partner, as determined by dividing the Partnership Units
owned by a Partner by the total number of Partnership Units then outstanding.
The Percentage Interest of each Partner shall be as set forth on EXHIBIT A, as
may be amended from time to time.
"Person" means any individual, partnership, corporation, joint venture,
trust or other entity.
"Profit" has the meaning provided in Section 5.01(f) hereof.
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"Property" means any loan, real property or other investment in which the
Partnership holds an ownership interest.
"Prospectus" means the final prospectus delivered to purchasers of REIT
Shares in the Exchange.
"Redeeming Partner" has the meaning provided in Section 8.05(a) hereof.
"Redemption Amount" means either the Cash Amount or the REIT Shares Amount,
as selected by the General Partner in its sole and absolute discretion pursuant
to Section 8.05(b) hereof.
"Redemption Right" has the meaning provided in Section 8.05(a) hereof.
"Regulations" means the Federal Income Tax Regulations issued under the
Code, as amended and as hereafter amended from time to time. Reference to any
particular provision of the Regulations shall mean that provision of the
Regulations on the date hereof and any successor provision of the Regulations.
"REIT" means a real estate investment trust under Sections 856 through 860
of the Code.
"REIT Expenses" means (i) costs and expenses relating to the formation and
continuity of existence and operation of the General Partner and any
Subsidiaries thereof (which Subsidiaries shall, for purposes hereof, be included
within the definition of General Partner), including taxes, fees and assessments
associated therewith, any and all costs, expenses or fees payable to any
trustee, officer, or employee of the General Partner, (ii) costs and expenses
relating to any public offering and registration of securities by the General
Partner and all statements, reports, fees and expenses incidental thereto,
including, without limitation, underwriting discounts and selling commissions
applicable to any such offering of securities, and any costs and expenses
associated with any claims made by any holders of such securities or any
underwriters or placement agents thereof, (iii) costs and expenses associated
with any repurchase of any securities by the General Partner, (iv) costs and
expenses associated with the preparation and filing of any periodic or other
reports and communications by the General Partner under federal, state or local
laws or regulations, including filings with the Commission, (v) costs and
expenses associated with compliance by the General Partner with laws, rules and
regulations promulgated by any regulatory body, including the Commission and any
securities exchange, (vi) costs and expenses associated with any 401(k) plan,
incentive plan, share incentive plan, bonus plan or other plan providing for
compensation for the employees of the General Partner, (vii) costs and expenses
incurred by the General Partner relating to any issuing or redemption of
Partnership Interests, (viii) costs and expenses associated with the management
of the General Partner by the Manager, and (ix) all other operating or
administrative costs of the General Partner incurred in the ordinary course of
its business on behalf of or in connection with the Partnership.
"REIT Share" means a share of Common Stock of the General Partner (or
successor Entity, as the case may be).
"REIT Shares Amount" means a number of REIT Shares equal to the product of
the number of Partnership Units offered for redemption by a Redeeming Partner,
multiplied by the Conversion Factor as adjusted to and including the Specified
Redemption Date; PROVIDED THAT in the event the General Partner issues to all
holders of REIT Shares rights, options, warrants or convertible or exchangeable
securities entitling the shareholders to subscribe for or purchase REIT Shares,
or any other securities or property (collectively, the "rights"), and the rights
have not expired at the Specified Redemption Date, then the REIT Shares Amount
shall also include the rights issuable to a holder of the REIT Shares Amount of
REIT Shares on the record date fixed for purposes of determining the holders of
REIT Shares entitled to rights.
"Securities Act" means the Securities Act of 1933, as amended.
"Service" means the Internal Revenue Service.
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"Share Incentive Plans" means the 1985 Incentive Stock Option Plan and the
1996 Stock Option Plan, or any stock incentive plan adopted in the future by the
General Partner.
"Specified Redemption Date" means (i) with respect to any Notice of
Redemption received by the General Partner after one year following the closing
of the Exchange and before one year and one month following the closing of
Exchange, the first business day that is at least 30 calendar days after the
receipt by the General Partner of the Notice of Redemption and (ii) with respect
to any Notice of Redemption received by the General Partner after one year and
one month following the closing of Exchange, the first business day that is at
least 15 calendar days after the receipt by the General Partner of the Notice of
Redemption.
"Subsidiary" means, with respect to any Person, any corporation or other
entity of which a majority of (i) the voting power of the voting equity
securities or (ii) the outstanding equity interests is owned, directly or
indirectly, by such Person.
"Subsidiary Partnership" means any partnership of which the partnership
interests therein are owned by the General Partner or a wholly-owned subsidiary
of the General Partner.
"Substitute Limited Partner" means any Person admitted to the Partnership as
a Limited Partner pursuant to Section 9.03 hereof.
"Surviving General Partner" has the meaning set forth in Section 7.01(d)
hereof.
"Transaction" has the meaning set forth in Section 7.01(c) hereof.
"Transfer" has the meaning set forth in Section 9.02(a) hereof.
"Value" means, with respect to any security, the average of the daily market
price of such security for the ten consecutive trading days immediately
preceding the date of such valuation. The market price for each such trading day
shall be: (i) if security is listed or admitted to trading on any securities
exchange or the AMEX, the last reported sale price, regular way, on such day, or
if no such sale takes place on such day, the average of the closing bid and
asked prices, regular way, on such day, (ii) if security is not listed or
admitted to trading on any securities exchange or the AMEX takes place on such
day, the average of the closing bid and asked prices on such day, as reported by
a reliable quotation source designated by the General Partner, or (iii) if
security is not listed or admitted to trading on any securities exchange or the
AMEX and no such last reported sale price or closing bid and asked prices are
available, the average of the reported high bid and low asked prices on such
day, as reported by a reliable quotation source designated by the General
Partner, or if there shall be no bid and asked prices on such day, the average
of the high bid and low asked prices, as so reported, on the most recent day
(not more than ten days prior to the date in question) for which prices have
been so reported; PROVIDED THAT if there are no bid and asked prices reported
during the ten days prior to the date in question, the value of the security
shall be determined by the General Partner acting in good faith on the basis of
such quotations and other information as it considers, in its reasonable
judgment, appropriate. In the event the security includes any additional rights,
then the value of such rights shall be determined by the General Partner acting
in good faith on the basis of such quotations and other information as it
considers, in its reasonable judgment, appropriate.
ARTICLE II
PARTNERSHIP CONTINUATION AND IDENTIFICATION
2.01 ORGANIZATION. The Partners hereby agree to organize the Partnership
pursuant to the Act and upon the terms and conditions set forth in this
Agreement.
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2.02 NAME, OFFICE AND REGISTERED AGENT. The name of the Partnership is
Pacific Gateway Properties Operating Partnership, L.P. The specified office and
place of business of the Partnership shall be 930 Montgomery Street, Suite 400,
San Francisco, California 94133. The General Partner may at any time change the
location of such office, PROVIDED the General Partner gives notice to the
Partners of any such change. The initial registered agent is The Corporation
Trust Company, Corporation Trust Center, 1209 Orange Street, Wilmington, New
Castle County, Delaware 19801. The sole duty of the registered agent as such is
to forward to the Partnership any notice that is served on him as registered
agent.
2.03 PARTNERS.
(a) The General Partner of the Partnership is Pacific Gateway
Properties, Inc., a Maryland corporation. Its principal place of business is
the same as that of the Partnership.
(b) The Initial Limited Partners are Pacific Gateway Properties
Management Corporation, a California corporation, Maritime Plaza Associates,
a California corporation, Pacific Gateway Properties Hotels, Inc., a
California corporation, and PGP Weston, Inc., a California corporation and
the Limited Partners are those Persons identified as Limited Partners on
EXHIBIT A hereto, as amended from time to time.
2.04 TERM AND DISSOLUTION.
(a) The term of the Partnership shall continue in full force and effect
until January 1, 2054, except that the Partnership shall be dissolved upon
the first to occur of any of the following events:
(i) The occurrence of an Event of Bankruptcy as to a General Partner
or the dissolution, death, removal or withdrawal of a General Partner
unless the business of the Partnership is continued pursuant to Section
7.03(b) hereof; PROVIDED THAT if a General Partner is on the date of such
occurrence a partnership, the dissolution of such General Partner as a
result of the dissolution, death, withdrawal, removal or Event of
Bankruptcy of a partner in such partnership shall not be an event of
dissolution of the Partnership if the business of such General Partner is
continued by the remaining partner or partners, either alone or with
additional partners, and such General Partner and such partners comply
with any other applicable requirements of this Agreement;
(ii) The passage of 90 days after the sale or other disposition of
all or substantially all of the assets of the Partnership (PROVIDED THAT
if the Partnership receives an installment obligation as consideration
for such sale or other disposition, the Partnership shall continue,
unless sooner dissolved under the provisions of this Agreement, until
such time as such note or notes are paid in full); or
(iii) At any time after thirteen months following the closing of the
Exchange, the election by the General Partner that the Partnership should
be dissolved.
(b) Upon dissolution of the Partnership (unless the business of the
Partnership is continued pursuant to Section 7.03(b) hereof), the General
Partner (or its trustee, receiver, successor or legal representative) shall
amend or cancel the Certificate and liquidate the Partnership's assets and
apply and distribute the proceeds thereof in accordance with Section 5.06
hereof. Notwithstanding the foregoing, the liquidating General Partner may
either (i) defer liquidation of; or withhold from distribution for a
reasonable time, any assets of the Partnership (including those necessary to
satisfy the Partnership's debts and obligations), or (ii) distribute the
assets to the Partners in kind.
2.05 FILING OF CERTIFICATE AND PERFECTION OF LIMITED PARTNERSHIP. The
General Partner shall execute, acknowledge, record and file at the expense of
the Partnership, the Certificate and any and all amendments thereto and all
requisite fictitious name statements and notices in such places and
jurisdictions as may be necessary to cause the Partnership to be treated as a
limited
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partnership under, and otherwise to comply with, the laws of each state or other
jurisdiction in which the Partnership conducts business.
2.06 CERTIFICATES DESCRIBING PARTNERSHIP UNITS. At the request of a
Limited Partner, the General Partner, at its option, may issue a certificate
summarizing the terms of such Limited Partner's interest in the Partnership,
including the number of Partnership Units owned and the Percentage Interest
represented by such Partnership Units as of the date of such certificate. Any
such certificate (i) shall be in form and substance as approved by the General
Partner, (ii) shall not be negotiable and (iii) shall bear a legend to the
following effect:
THIS CERTIFICATE IS NOT NEGOTIABLE. THE PARTNERSHIP UNITS REPRESENTED BY
THIS CERTIFICATE ARE GOVERNED BY AND TRANSFERABLE ONLY IN ACCORDANCE WITH
THE PROVISIONS OF THE AGREEMENT OF LIMITED PARTNERSHIP OF PACIFIC GATEWAY
PROPERTIES OPERATING PARTNERSHIP, L.P., AS AMENDED FROM TIME TO TIME.
ARTICLE III
BUSINESS OF THE PARTNERSHIP
The purpose and nature of the business to be conducted by the Partnership is
(i) to conduct any business that may be lawfully conducted by a limited
partnership organized pursuant to the Act, PROVIDED, HOWEVER, that such business
shall be limited to and conducted in such a manner as to permit the General
Partner at all times to qualify as a REIT, unless the General Partner otherwise
ceases to qualify as a REIT, (ii) to enter into any partnership, joint venture
or other similar arrangement to engage in any of the foregoing or the ownership
of interests in any entity engaged in any of the foregoing and (iii) to do
anything necessary or incidental to the foregoing. In connection with the
foregoing, and without limiting the General Partner's right in its sole and
absolute discretion to cease qualifying as a REIT, the Partners acknowledge that
the General Partner's current status as a REIT and the avoidance of income and
excise taxes on the General Partner inures to the benefit of all the Partners
and not solely to the General Partner. Notwithstanding the foregoing, the
Limited Partners agree that the General Partner may terminate its status as a
REIT under the Code at any time to the full extent permitted under its Charter.
The General Partner shall also be empowered to do any and all acts and things
necessary or prudent to ensure that the Partnership will not be classified as a
"publicly traded partnership" for purposes of Section 7704 of the Code.
ARTICLE IV
CAPITAL CONTRIBUTIONS AND ACCOUNTS
4.01 CAPITAL CONTRIBUTIONS. The General Partner and the Limited Partners
have made capital contributions to the Partnership in exchange for the
Partnership Interests set forth opposite their names on EXHIBIT A, as amended
from time to time.
4.02 ADDITIONAL CAPITAL CONTRIBUTIONS AND ISSUANCES OF ADDITIONAL
PARTNERSHIP INTERESTS. Except as provided in this Section 4.02 or in Section
4.03, the Partners shall have no right or obligation to make any additional
Capital Contributions or loans to the Partnership. The General Partner may
contribute additional capital to the Partnership, from time to time, and receive
additional Partnership Interests in respect thereof, in the manner contemplated
in this Section 4.02.
(a) ISSUANCES OF ADDITIONAL PARTNERSHIP INTERESTS.
(i) GENERAL. The General Partner is hereby authorized to cause the
Partnership to issue such additional Partnership Interests in the form of
Partnership Units for any Partnership purpose at any time or from time to
time, to the Partners (including the General Partner)
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or to other Persons for such consideration and on such terms and
conditions as shall be established by the General Partner in its sole and
absolute discretion, all without the approval of any Limited Partners.
Any additional Partnership Interests issued thereby may be issued in one
or more classes, or one or more series of any of such classes, with such
designations, preferences and relative, participating, optional or other
special rights, powers and duties, including rights, powers and duties
senior to Limited Partnership Interests, all as shall be determined by
the General Partner in its sole and absolute discretion and without the
approval of any Limited Partner, subject to Delaware law, including,
without limitation: (i) the allocations of items of Partnership income,
gain, loss, deduction and credit to each such class or series of
Partnership Interests; (ii) the right of each such class or series of
Partnership Interests to share in Partnership distributions; and (iii)
the rights of each such class or series of Partnership Interests upon
dissolution and liquidation of the Partnership; PROVIDED, HOWEVER, that
no additional Partnership Interests shall be issued to the General
Partner unless:
(A) (1) the additional Partnership Interests are issued in connection with
an issuance of REIT Shares of or other interests in the General Partner, which
shares or interests have designations, preferences and other rights, all such
that the economic interests are substantially similar to the designations,
preferences and other rights of the additional Partnership Interests issued to
the General Partner by the Partnership in accordance with this Section 4.02 and
(2) the General Partner shall make a Capital Contribution to the Partnership in
an amount equal to the proceeds raised in connection with the issuance of such
shares of stock of or other interests in the General Partner;
(B) the additional Partnership Interests are issued in exchange for property
(including cash) owned by the General Partner with a fair market value, as
determined by the General Partner, in good faith, equal to the value of the
Partnership Interests; or
(C) the additional Partnership Interests are issued to all Partners in
proportion to their respective Percentage Interests.
Without limiting the foregoing, the General Partner is expressly authorized to
cause the Partnership to issue Partnership Units for less than fair market
value, so long as the General Partner concludes in good faith that such issuance
is in the best interests of the General Partner and the Partnership.
(ii) UPON ISSUANCE OF ADDITIONAL SECURITIES. The General Partner
shall not issue any additional REIT Shares (other than REIT Shares issued
in connection with a redemption pursuant to Section 8.06 hereof) or
rights, options, warrants or convertible or exchangeable securities
containing the right to subscribe for or purchase REIT Shares
(collectively, "Additional Securities") other than to all holders of REIT
Shares, unless (A) the General Partner shall cause the Partnership to
issue to the General Partner Partnership Interests or rights, options,
warrants or convertible or exchangeable securities of the Partnership
having designations, preferences and other rights, all such that the
economic interests are substantially similar to those of the Additional
Securities, and (B) the General Partner contributes the proceeds from the
issuance of such Additional Securities and from any exercise of rights
contained in such Additional Securities to the Partnership; PROVIDED,
HOWEVER, that the General Partner is allowed to issue Additional
Securities in connection with an acquisition of a property to be held
directly by the General Partner, but if and only if, such direct
acquisition and issuance of Additional Securities have been approved and
determined to be in the best interests of the General Partner and the
Partnership by a majority of the Independent Directors. Without limiting
the foregoing, the General Partner is expressly authorized to issue
Additional Securities for less than fair market value, and to cause the
Partnership to issue to the General Partner corresponding Partnership
Interests, so long as (x) the General Partner concludes in good faith
that such issuance is in the best interests of the General Partner and
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the Partnership, including without limitation, the issuance of REIT
Shares and corresponding Partnership Units pursuant to an employee share
purchase plan providing for employee purchases of REIT Shares at a
discount from fair market value or employee stock options that have an
exercise price that is less than the fair market value of the REIT
Shares, either at the time of issuance or at the time of exercise, and
(y) the General Partner contributes all proceeds from such issuance to
the Partnership. For example, in the event the General Partner issues
REIT Shares for a cash purchase price and contributes all of the proceeds
of such issuance to the Partnership as required hereunder, the General
Partner shall be issued a number of additional Partnership Units equal to
the product of (A) the number of such REIT Shares issued by the General
Partner, the proceeds of which were so contributed, multiplied by (B) a
fraction, the numerator of which is 100%, and the denominator of which is
the Conversion Factor in effect on the date of such contribution.
(b) CERTAIN DEEMED CONTRIBUTIONS OF PROCEEDS OF ISSUANCE OF REIT
SHARES. In connection with any and all issuances of REIT Shares, the
General Partner shall make Capital Contributions to the Partnership of the
proceeds therefrom, PROVIDED THAT if the proceeds actually received and
contributed by the General Partner, are less than the gross proceeds of such
issuance as a result of any underwriter's discount or other expenses paid or
incurred in connection with such issuance, then the General Partner shall be
deemed to have made Capital Contributions to the Partnership in the
aggregate amount of the gross proceeds of such issuance and the Partnership
shall be deemed simultaneously to have paid such offering expenses in
accordance with Section 6.05 hereof and in connection with the required
issuance of additional Partnership Units to the General Partner for such
Capital Contributions pursuant to Section 4.02(a) hereof.
(c) If the General Partner shall repurchase shares of any class of the
General Partner's capital stock, the purchase price thereof and all costs
incurred in connection with such repurchase shall be reimbursed to the
General Partner by the Partnership pursuant to Section 6.05 hereof and the
General Partner shall cause the Partnership to cancel a number of
Partnership Interests of the appropriate class held by the General Partner
equal to the quotient of the number of such shares of the General Partner's
capital stock divided by the Conversion Factor.
4.03 ADDITIONAL FUNDING. If the General Partner determines that it is in
the best interests of the Partnership to provide for additional Partnership
funds ("Additional Funds") for any Partnership purpose, the General Partner may
(i) cause the Partnership to obtain such funds from outside borrowings, or (ii)
elect to have the General Partner provide such Additional Funds to the
Partnership through loans or otherwise.
4.04 CAPITAL ACCOUNTS. A separate capital account (a "Capital Account")
shall be established and maintained for each Partner in accordance with
Regulations Section 1.704-1(b)(2)(iv). If (i) a new or existing Partner acquires
an additional Partnership Interest in exchange for more than a de minimis
Capital Contribution, (ii) the Partnership distributes to a Partner more than a
de minimis amount of Partnership property as consideration for a Partnership
Interest, or (iii) the Partnership is liquidated within the meaning of
Regulation Section 1.704-1(b)(2)(ii)(g), the General Partner shall revalue the
property of the Partnership to its fair market value (as determined by the
General Partner, in its sole and absolute discretion, and taking into account
Section 7701(g) of the Code) in accordance with Regulations Section
1.704-l(b)(2)(iv)(f). When the Partnership's property is revalued by the General
Partner, the Capital Accounts of the Partners shall be adjusted in accordance
with Regulations Sections l.704-l(b)(2)(iv)(f) and (g), which generally require
such Capital Accounts to be adjusted to reflect the manner in which the
unrealized gain or loss inherent in such property (that has not been reflected
in the Capital Accounts previously) would be allocated among the Partners
pursuant to Section 5.01 if there were a taxable disposition of such property
for its fair market value (as determined by
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the General Partner, in its sole and absolute discretion, and taking into
account Section 7701(g) of the Code) on the date of the revaluation.
4.05 PERCENTAGE INTERESTS. If the number of outstanding Partnership Units
increases or decreases during a taxable year, each Partner's Percentage Interest
shall be adjusted by the General Partner effective as of the effective date of
each such increase or decrease to a percentage equal to the number of
Partnership Units held by such Partner divided by the aggregate number of
Partnership Units outstanding after giving effect to such increase or decrease.
If the Partners' Percentage Interests are adjusted pursuant to this Section
4.05, the Profits and Losses for the taxable year in which the adjustment occurs
shall be allocated between the part of the year ending on the day when the
Partnership's property is revalued by the General Partner and the part of the
year beginning on the following day either (i) as if the taxable year had ended
on the date of the adjustment or (ii) based on the number of days in each part.
The General Partner, in its sole and absolute discretion, shall determine which
method shall be used to allocate Profits and Losses for the taxable year in
which the adjustment occurs. The allocation of Profits and Losses for the
earlier part of the year shall be based on the Percentage Interests before
adjustment, and the allocation of Profits and Losses for the later part shall be
based on the adjusted Percentage Interests.
4.06 NO INTEREST ON CONTRIBUTIONS. No Partner shall be entitled to
interest on its Capital Contribution.
4.07 RETURN OF CAPITAL CONTRIBUTIONS. Except pursuant to the right of
redemption set forth in Section 8.05, no Partner shall be entitled to withdraw
any part of its Capital Contribution or its Capital Account or to receive any
distribution from the Partnership, except as specifically provided in this
Agreement. Except as otherwise provided herein, there shall be no obligation to
return to any Partner or withdrawn Partner any part of such Partner's Capital
Contribution for so long as the Partnership continues in existence.
4.08 NO THIRD PARTY BENEFICIARY. No creditor or other third party having
dealings with the Partnership shall have the right to enforce the right or
obligation of any Partner to make Capital Contributions or loans or to pursue
any other right or remedy hereunder or at law or in equity, it being understood
and agreed that the provisions of this Agreement shall be solely for the benefit
of; and may be enforced solely by, the parties hereto and their respective
successors and assigns. None of the rights or obligations of the Partners herein
set forth to make Capital Contributions or loans to the Partnership shall be
deemed an asset of the Partnership for any purpose by any creditor or other
third party, nor may such rights or obligations be sold, transferred or assigned
by the Partnership or pledged or encumbered by the Partnership to secure any
debt or other obligation of the Partnership or of any of the Partners. In
addition, it is the intent of the parties hereto that no distribution to any
Limited Partner shall be deemed a return of money or other property in violation
of the Act. However, if any court of competent jurisdiction holds that,
notwithstanding the provisions of this Agreement, any Limited Partner is
obligated to return such money or property, such obligation shall be the
obligation of such Limited Partner and not of the General Partner. Without
limiting the generality of the foregoing, a deficit Capital Account of a Partner
shall not be deemed to be a liability of such Partner nor an asset or property
of the Partnership.
ARTICLE V
PROFITS AND LOSSES; DISTRIBUTIONS
5.01 ALLOCATION OF PROFIT AND LOSS.
(a) GENERAL. Profit and Loss of the Partnership for each fiscal year
of the Partnership shall be allocated among the Partners in accordance with
their respective Percentage Interests.
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(b) MINIMUM GAIN CHARGEBACK. Notwithstanding any provision to the
contrary, (i) any expense of the Partnership that is a "nonrecourse
deduction" within the meaning of Regulations Section 1.704-2(b)(1) shall be
allocated in accordance with the Partners' respective Percentage Interests,
(ii) any expense of the Partnership that is a "partner nonrecourse
deduction" within the meaning of Regulations Section 1.704-2(i)(2) shall be
allocated to the Partner that bears the "economic risk of loss" of such
deduction in accordance with Regulations Section 1.704-2(i)(1), (iii) if
there is a net decrease in Partnership Minimum Gain within the meaning of
Regulations Section 1.704-2(f)(1) for any Partnership taxable year, then,
subject to the exceptions set forth in Regulations Section
1.704-2(f)(2),(3), (4) and (5), items of gain and income shall be allocated
among the Partners in accordance with Regulations Section 1.704-2(f) and the
ordering rules contained in Regulations Section 1.704-2(j), and (iv) if
there is a net decrease in Partner Nonrecourse Debt Minimum Gain within the
meaning of Regulations Section 1.704-2(i)(4) for any Partnership taxable
year, then, subject to the exceptions set forth in Regulations Section
1.704(2)(g), items of gain and income shall be allocated among the Partners
in accordance with Regulations Section 1.704-2(i)(4) and the ordering rules
contained in Regulations Section 1.704-2(j). A Partner's "interest in
partnership profits" for purposes of determining its share of the
nonrecourse liabilities of the Partnership within the meaning of Regulations
Section 1.752-3(a)(3) shall be such Partner's Percentage Interest.
(c) QUALIFIED INCOME OFFSET. If a Partner receives in any taxable year
an adjustment, allocation, or distribution described in subparagraphs (4),
(5), or (6) of Regulations Section 1.704-1(b)(2)(ii)(d) that causes or
increases a deficit balance in such Partner's Capital Account that exceeds
the sum of such Partner's shares of Partnership Minimum Gain and Partner
Nonrecourse Debt Minimum Gain, as determined in accordance with Regulations
Sections 1.704-2(g) and 1.704-2(i), such Partner shall be allocated
specially for such taxable year (and, if necessary, later taxable years)
items of income and gain in an amount and manner sufficient to eliminate
such deficit Capital Account balance as quickly as possible as provided in
Regulations Section 1.704-1(b)(2)(ii)(d). After the occurrence of an
allocation of income or gain to a Partner in accordance with this Section
5.01(c), to the extent permitted by Regulations Section 1.704-1(b), items of
expense or loss shall be allocated to such Partner in an amount necessary to
offset the income or gain previously allocated to such Partner under this
Section 5.01(c).
(d) CAPITAL ACCOUNT DEFICITS. Loss shall not be allocated to a Limited
Partner to the extent that such allocation would cause a deficit in such
Partner's Capital Account (after reduction to reflect the items described in
Regulations Section 1.704-1(b)(2)(ii)(d)(4), (5) and (6)) to exceed the sum
of such Partner's shares of Partnership Minimum Gain and Partner Nonrecourse
Debt Minimum Gain. Any Loss in excess of that limitation shall be allocated
to the General Partner. After the occurrence of an allocation of Loss to the
General Partner in accordance with this Section 5.01(d), to the extent
permitted by Regulations Section 1.704-1(b), Profit shall be allocated to
such Partner in an amount necessary to offset the Loss previously allocated
to each Partner under this Section 5.01(d).
(e) ALLOCATIONS BETWEEN TRANSFEROR AND TRANSFEREE. If a Partner
transfers any part or all of its Partnership Interest, the distributive
shares of the various items of Profit and Loss allocable among the Partners
during such fiscal year of the Partnership shall be allocated between the
transferor and the transferee Partner either (i) as if the Partnership's
fiscal year had ended on the date of the transfer, or (ii) based on the
number of days of such fiscal year that each was a Partner without regard to
the results of Partnership activities in the respective portions of such
fiscal year in which the transferor and the transferee were Partners. The
General Partner, in its sole and absolute discretion, shall determine which
method shall be used to allocate the distributive shares of the various
items of Profit and Loss between the transferor and the transferee Partner.
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(f) DEFINITION OF PROFIT AND LOSS. "Profit" and "Loss" and any items
of income, gain, expense, or loss referred to in this Agreement shall be
determined in accordance with federal income tax accounting principles, as
modified by Regulations Section 1.704-1(b)(2)(iv), except that Profit and
Loss shall not include items of income, gain and expense that are specially
allocated pursuant to Sections 5.01(b), 5.01(c), or 5.01(d). All allocations
of income, Profit, gain, Loss, and expense (and all items contained therein)
for federal income tax purposes shall be identical to all allocations of
such items set forth in this Section 5.01, except as otherwise required by
Section 704(c) of the Code and Regulations Section 1.704-1(b)(4). The
General Partner shall have the authority to elect the method to be used by
the Partnership for allocating items of income, gain, and expense as
required by Section 704(c) of the Code including a method that may result in
a Partner receiving a disproportionately larger share of the Partnership tax
depreciation deductions, and such election shall be binding on all Partners.
5.02 DISTRIBUTION OF CASH.
(a) The Partnership shall distribute cash on an annual (or, at the
election of the General Partner, more frequent) basis, in an amount
determined by the General Partner in its sole and absolute discretion, to
the Partners who are Partners on the Partnership Record Date with respect to
such quarter (or other distribution period) in accordance with their
respective Percentage Interests on the Partnership Record Date; PROVIDED,
HOWEVER, that if a new or existing Partner acquires an additional
Partnership Interest in exchange for a Capital Contribution on any date
other than a Partnership Record Date, the cash distribution attributable to
such additional Partnership Interest relating to the Partnership Record Date
next following the issuance of such additional Partnership Interest shall be
reduced in the proportion to (i) the number of days that such additional
Partnership Interest is held by such Partner bears to (ii) the number of
days between such Partnership Record Date and the immediately preceding
Partnership Record Date. The General Partner shall use its reasonable
discretion to distribute an amount of cash on a quarterly (or, at the
election of the General Partner, more frequent) basis so that each Limited
Partner receives under this Section 5.02, with respect to each quarter or
more frequent period, a cash amount equal in value to the aggregate cash
dividends that would have been payable to such Limited Partner in the event
that such Limited Partner owned REIT Shares equal in number to the REIT
Shares Amount during such period of the Partnership (which REIT Shares
Amount shall be determined as if the Specified Redemption Date had occurred
prior to the dividends paid on any REIT Shares during such period) reduced,
as provided in the first sentence of this Section 5.02(a), to take into
account cash distributions attributable to any Partnership Interests
acquired in exchange for a Capital Contribution on any date other than a
Partnership Record Date; PROVIDED, HOWEVER, that in the event that the
number of Partnership Units held by the General Partner and any Limited
Partner that is a Subsidiary of the General Partner is less than the number
of outstanding REIT Shares of the General Partner, then all distributions of
cash shall be paid first to those Limited Partners pro rata based upon such
Limited Partner's Partnership Units) that are not Subsidiaries of the
General Partner until the amount distributed to such Limited Partners equals
the aggregate cash dividends that would have been payable to such Limited
Partners in the event that such Limited Partners owned REIT Shares equal in
number to the REIT Shares Amount during such period of the Partnership.
(b) Notwithstanding any other provision of this Agreement, the General
Partner is authorized to take any action that it determines to be necessary
or appropriate to cause the Partnership to comply with any withholding
requirements established under the Code or any other federal, state or local
law including, without limitation, pursuant to Sections 1441, 1442, 1445 and
1446 of the Code. To the extent that the Partnership is required to withhold
and pay over to any taxing authority any amount resulting from the
allocation or distribution of income to the Partner or assignee (including
by reason of Section 1446 of the Code), either (i) if the actual amount to
be
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distributed to the Partner (the "Distributable Amount") equals or exceeds
the amount required to be withheld by the Partnership (the "Withheld
Amount"), the Withheld Amount withheld shall be treated as a distribution of
cash in the amount of such withholding to such Partner, or (ii) if the
Distributable Amount is less than the Withheld Amount no amount shall be
distributed to the Partner, the Distributable Amount shall be treated as a
distribution of cash to such Partner, and the excess of the Withheld Amount
over the Distributable Amount shall be treated as a loan (a "Partnership
Loan") from the Partnership to the Partner on the day the Partnership pays
over such excess to a taxing authority. A Partnership Loan may be repaid, at
the election of the General Partner in its sole discretion, either (i)
through withholding by the Partnership with respect to subsequent
distributions to the applicable Partner or assignee, or (ii) at any time
more than 12 months after a Partnership Loan arises, by cancellation of
Partnership Units with a value equal to the unpaid balance of the
Partnership Loan (including accrued interest). Any amounts treated as a
Partnership Loan pursuant to this Section 5.02(b) shall bear interest at the
lesser of (i) the base rate on corporate loans at large United States money
center commercial banks, as published from time to time in The Wall Street
Journal (or an equivalent successor publication), or (ii) the maximum lawful
rate of interest on such obligation, such interest to accrue from the date
the Partnership is deemed to extend the loan until such loan is repaid in
full.
(c) In no event may a Partner receive a distribution of cash with
respect to a Partnership Unit if such Partner is entitled to receive a cash
dividend as the holder of record of a REIT Share for which all or part of
such Partnership Unit has been or will be redeemed.
5.03 REIT DISTRIBUTION REQUIREMENTS. The General Partner shall use its
reasonable efforts to cause the Partnership to distribute amounts sufficient to
enable the General Partner to pay shareholder dividends that will allow the
General Partner to (i) meet its distribution requirement for qualification as a
REIT as set forth in Section 857 of the Code and (ii) avoid any federal income
or excise tax liability imposed by the Code.
5.04 DISTRIBUTIONS IN KIND.
(a) Subject to Subsection (b) hereof, no Partner shall be entitled to
demand property other than cash in connection with any distributions by the
Partnership.
(b) If the General Partner decides to securitize mortgage loans through
the issuance of collateralized mortgage obligations, the General Partner has
the right to redeem a portion of its Partnership Interest in exchange for
the mortgage loans to be securitized. The portion of a Partnership Interest
redeemed pursuant to this Section will be determined based on the fair
market value of the mortgage loans and/or leases distributed to the General
Partner. Such fair market value will be determined by the General Partner,
but will be subject to the review of the Independent Directors.
5.05 LIMITATIONS ON RETURN OF CAPITAL CONTRIBUTIONS. Notwithstanding any
of the provisions of this Article V, no Partner shall have the right to receive
and the General Partner shall not have the right to make, a distribution that
includes a return of all or part of a Partner's Capital Contributions, unless
after giving effect to the return of a Capital Contribution, the sum of all
Partnership liabilities, other than the liabilities to a Partner for the return
of his Capital Contribution, does not exceed the fair market value of the
Partnership's assets.
5.06 DISTRIBUTIONS UPON LIQUIDATION. Upon liquidation of the Partnership,
after payment of, or adequate provision for, debts and obligations of the
Partnership, including any Partner loans, any remaining assets of the
Partnership shall be distributed to all Partners with positive Capital Accounts
in accordance with their respective positive Capital Account balances. For
purposes of the preceding sentence, the Capital Account of each Partner shall be
determined after all adjustments made in accordance with Sections 5.01 and 5.02
resulting from Partnership operations and from all sales and dispositions of all
or any part of the Partnership's assets. Any distributions pursuant to this
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Section 5.06 shall be made by the end of the Partnership's taxable year in which
the liquidation occurs (or, if later, within 90 days after the date of the
liquidation). To the extent deemed advisable by the General Partner, appropriate
arrangements (including the use of a liquidating trust) may be made to assure
that adequate funds are available to pay any contingent debts or obligations.
5.07 SUBSTANTIAL ECONOMIC EFFECT. It is the intent of the Partners that
the allocations of Profit and Loss under the Agreement have substantial economic
effect (or be consistent with the Partners' interests in the Partnership in the
case of the allocation of losses attributable to nonrecourse debt) within the
meaning of Section 704(b) of the Code as interpreted by the Regulations
promulgated pursuant thereto. Article V and other relevant provisions of this
Agreement shall be interpreted in a manner consistent with such intent.
ARTICLE VI
RIGHTS, OBLIGATIONS AND POWERS OF THE GENERAL PARTNER
6.01 MANAGEMENT OF THE PARTNERSHIP.
(a) Except as otherwise expressly provided in this Agreement, the
General Partner shall have full, complete and exclusive discretion to manage
and control the business of the Partnership for the purposes herein stated,
and shall make all decisions affecting the business and assets of the
Partnership. The General Partner may not be removed by the Limited Partners
with or without cause. In addition to the powers now or hereafter granted a
general partner of a limited partnership under applicable law, or which are
granted to the General Partner under any other provision of this Agreement,
the General Partner, subject to the restrictions specifically contained in
this Agreement, shall have the full power and authority to do all things
necessary and desirable by it to conduct the business of the Partnership
including, without limitation, the authority to take the following actions
on behalf of the Partnership:
(i) to acquire, purchase, own, develop, operate, lease and dispose
of any real property and any other property or assets including, but not
limited to notes and mortgages, that the General Partner determines are
necessary or appropriate or in the best interests of the business of the
Partnership
(ii) to construct buildings and make other improvements on the
properties owned or leased by the Partnership;
(iii) to authorize, issue, sell, redeem or otherwise purchase any
Partnership Interests or any securities (including secured and unsecured
debt obligations of the Partnership, debt obligations of the Partnership
convertible into any class or series of Partnership Interests, or
options, rights, warrants or appreciation rights relating to any
Partnership Interests) of the Partnership;
(iv) to borrow or lend money for the Partnership, issue or receive
evidences of indebtedness in connection therewith, refinance, increase
the amount of, modify, amend or change the terms of, or extend the time
for the payment of, any such indebtedness, and secure such indebtedness
by mortgage, deed of trust, pledge or other lien on the Partnership's
assets;
(v) to pay, either directly or by reimbursement, for all operating
costs and general administrative expenses of the Partnership to third
parties or to the General Partner or its Affiliates as set forth in this
Agreement,
(vi) to guarantee or become a comaker of indebtedness of the General
Partner or any Subsidiary thereof, refinance, increase the amount of,
modify, amend or change the terms of, or extend the time for the payment
of, any such guarantee or indebtedness, and secure such
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guarantee or indebtedness by mortgage, deed of trust, pledge or other
lien on the Partnership's assets;
(vii) to use assets of the Partnership (including, without
limitation, cash on hand) for any purpose consistent with this Agreement,
including, without limitation, payment, either directly or by
reimbursement, of all operating costs and general administrative expenses
of the General Partner, the Partnership or any Subsidiary of either, to
third parties or to the General Partner as set forth in this Agreement;
(viii) to lease all or any portion of any of the Partnership's assets,
whether or not the terms of such leases extend beyond the termination
date of the Partnership and whether or not any portion of the
Partnership's assets so leased are to be occupied by the lessee, or, in
turn, subleased in whole or in part to others, for such consideration and
on such terms as the General Partner may determine;
(ix) to prosecute, defend, arbitrate, or compromise any and all
claims or liabilities in favor of or against the Partnership, on such
terms and in such manner as the General Partner may reasonably determine,
and similarly to prosecute, settle or defend litigation with respect to
the Partners, the Partnership, or the Partnership's assets; PROVIDED,
HOWEVER, that the General Partner may not, without the consent of all of
the Partners, confess a judgment against the Partnership that is in
excess of $100,000 or is not covered by insurance;
(x) to file applications, communicate, and otherwise deal with any
and all governmental agencies having jurisdiction over, or in any way
affecting, the Partnership's assets or any other aspect of the
Partnership business;
(xi) to make or revoke any election permitted or required of the
Partnership by any taxing authority;
(xii) to maintain such insurance coverage for public liability, fire
and casualty, and any and all other insurance for the protection of the
Partnership, for the conservation of Partnership assets, or for any other
purpose convenient or beneficial to the Partnership, in such amounts and
such types, as it shall determine from time to time;
(xiii) to determine whether or not to apply any insurance proceeds for
any property to the restoration of such property or to distribute the
same;
(xiv) to establish one or more divisions of the Partnership, to hire
and dismiss employees of the Partnership or any division of the
Partnership, and to retain legal counsel, accountants, consultants, real
estate brokers, and such other persons, as the General Partner may deem
necessary or appropriate in connection with the Partnership business and
to pay therefor such reasonable remuneration as the General Partner may
deem reasonable and proper;
(xv) to retain other services of any kind or nature in connection
with the Partnership business, and to pay therefor such remuneration as
the General Partner may deem reasonable and proper;
(xvi) to negotiate and conclude agreements on behalf of the
Partnership with respect to any of the rights, powers and authority
conferred upon the General Partner;
(xvii) to maintain accurate accounting records and to file promptly
all federal, state and local income tax returns on behalf of the
Partnership;
(xviii) to distribute Partnership cash or other Partnership assets in
accordance with this Agreement;
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(xix) to form or acquire an interest in, and contribute property to,
any further limited or general partnerships, joint ventures or other
relationships that it deems desirable (including, without limitation, the
acquisition of interests in, and the contributions of property to, its
Subsidiaries and any other Person in which it has an equity interest from
time to time);
(xx) to establish Partnership reserves for working capital, capital
expenditures, contingent liabilities, or any other valid Partnership
purpose; and
(xxi) to merge, consolidate or combine the Partnership with or into
another Person (to the extent permitted by applicable law);
(xxii) to do any and all acts and things necessary or prudent to
ensure that the Partnership will not be classified as a "publicly traded
partnership" for purposes of Section 7704 of the Code; and
(xxiii) to take such other action, execute, acknowledge, swear to or
deliver such other documents and instruments, and perform any and all
other acts that the General Partner deems necessary or appropriate for
the formation, continuation and conduct of the business and affairs of
the Partnership (including, without limitation, all actions consistent
with allowing the General Partner at all times to qualify as a REIT
unless the General Partner voluntarily terminates its REIT status) and to
possess and enjoy all of the rights and powers of a general partner as
provided by the Act.
(b) Except as otherwise provided herein, to the extent the duties of the
General Partner require expenditures of funds to be paid to third parties,
the General Partner shall not have any obligations hereunder except to the
extent that partnership funds are reasonably available to it for the
performance of such duties, and nothing herein contained shall be deemed to
authorize or require the General Partner, in its capacity as such, to expend
its individual funds for payment to third parties or to undertake any
individual liability or obligation on behalf of the Partnership.
(c) In exercising its authority under this Agreement, the General
Partner may, but shall be under no obligation to, take into account the tax
consequences to any Partner of any action taken by it. The General Partner
and the Partnership shall not have liability to a Limited Partner under any
circumstances as a result of an income tax liability incurred by such
Limited Partner as a result of an action (or inaction) by the General
Partner taken pursuant to its authority under this Agreement.
6.02 DELEGATION OF AUTHORITY. The General Partner may delegate any or all
of its powers, rights and obligations hereunder, and may appoint, employ,
contract or otherwise deal with any Person for the transaction of the business
of the Partnership, which Person may, under supervision of the General Partner,
perform any acts or services for the Partnership as the General Partner may
approve.
6.03 INDEMNIFICATION AND EXCULPATION OF INDEMNITEES.
(a) The Partnership shall indemnify, to the fullest extent permitted by
Delaware law, an Indemnitee from and against any and all losses, claims,
damages, liabilities, joint or several, expenses (including reasonable legal
fees and expenses), judgments, fines, settlements, and other amounts arising
from any and all claims, demands, actions, suits or proceedings, civil,
criminal, administrative or investigative, that relate to the operations of
the Partnership as set forth in this Agreement in which any Indemnitee may
be involved, or is threatened to be involved, as a party or otherwise,
unless it is established that: (i) the act or omission of the Indemnitee was
material to the matter giving rise to the proceeding and either was
committed in bad faith or was the result of active and deliberate
dishonesty; (ii) the Indemnitee actually received an improper personal
benefit in money, property or services; or (iii) in the case of any criminal
proceeding, the Indemnitee had
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reasonable cause to believe that the act or omission was unlawful. The
termination of any proceeding by judgment, order or settlement does not
create a presumption that the Indemnitee did not meet the requisite standard
of conduct set forth in this Section 6.03(a). The termination of any
proceeding by conviction or upon a plea of nolo contendere or its
equivalent, or an entry of an order of probation prior to judgment, creates
a rebuttable presumption that the Indemnitee acted in a manner contrary to
that specified in this Section 6.03(a). Any indemnification pursuant to this
Section 6.03 shall be made only out of the assets of the Partnership and
neither the General Partner nor any Limited Partner shall have any
obligation to contribute to the captial of the Partnership, or otherwise
provide funds, to enable the Partnership to fund its obligations under this
Section 6.03.
(b) The Partnership shall reimburse an Indemnitee for reasonable
expenses incurred by an Indemnitee who is a party to a proceeding in advance
of the final disposition of the proceeding upon receipt by the Partnership
of (i) a written affirmation by the Indemnitee of the Indemnitee's good
faith belief that the standard of conduct necessary for indemnification by
the Partnership as authorized in this Section 6.03 has been met, and (ii) a
written undertaking by or on behalf of the Indemnitee to repay the amount if
it shall ultimately be determined that the standard of conduct has not been
met.
(c) The indemnification provided by this Section 6.03 shall be in
addition to any other rights to which an Indemnitee or any other Person may
be entitled under any agreement, pursuant to any vote of the Partners, as a
matter of law or otherwise, and shall continue as to an Indemnitee who has
ceased to serve in such capacity.
(d) The Partnership may purchase and maintain insurance, on behalf of
the Indemnitees and such other Persons as the General Partner shall
determine, against any liability that may be asserted against or expenses
that may be incurred by such Person in connection with the Partnership's
activities, regardless of whether the Partnership would have the power to
indemnify such Person against such liability under the provisions of this
Agreement.
(e) For purposes of this Section 6.03, the Partnership shall be deemed
to have requested an Indemnitee to serve as fiduciary of an employee benefit
plan whenever the performance by it of its duties to the Partnership also
imposes duties on, or otherwise involves services by, it to the plan or
participants or beneficiaries of the plan; excise taxes assessed on an
Indemnitee with respect to an employee benefit plan pursuant to applicable
law shall constitute fines within the meaning of this Section 6.03, and
actions taken or omitted by the Indemnitee with respect to an employee
benefit plan in the performance of its duties for a purpose reasonably
believed by it to be in the interest of the participants and beneficiaries
of the plan shall be deemed to be for a purpose which is not opposed to the
best interests of the Partnership.
(f) In no event may an Indemnitee subject any of the Partners to
personal liability by reason of the indemnification provisions set forth in
this Agreement.
(g) An Indemnitee shall not be denied indemnification in whole or in
part under this Section 6.03 because the Indemnitee had an interest in the
transaction with respect to which the indemnification applies if the
transaction was otherwise permitted by the terms of this Agreement.
(h) The provisions of this Section 6.03 are for the benefit of the
Indemnitees, their heirs, successors, assigns and administrators and shall
not be deemed to create any rights for the benefit of any other Persons.
6.04 LIABILITY OF THE GENERAL PARTNER.
(a) Notwithstanding anything to the contrary set forth in this
Agreement, the General Partner shall not be liable for monetary damages to
the Partnership or any Partners for losses sustained or liabilities incurred
as a result of errors in judgment or of any act or omission if the General
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Partner acted in good faith. The General Partner shall not be in breach of
any duty that the General Partner may owe to the Limited Partners or the
Partnership or any other Persons under this Agreement or of any duty stated
or implied by law or equity provided the General Partner, acting in good
faith, abides by the terms of this Agreement.
(b) The Limited Partners expressly acknowledge that the General Partner
is acting on behalf of the Partnership, the General Partner and the General
Partner's shareholders collectively, that the General Partner is under no
obligation to consider the separate interests of the Limited Partners
(including, without limitation, the tax consequences to Limited Partners or
the tax consequences of same, but not all, of the Limited Partners) in
deciding whether to cause the Partnership to take (or decline to take) any
actions. In the event of a conflict between the interests of the
shareholders of the General Partner on one hand and the Limited Partners on
the other, the General Partner shall endeavor in good faith to resolve the
conflict in a manner not adverse to either the shareholders of the General
Partner or the Limited Partners; PROVIDED, HOWEVER, that for so long as the
General Partner owns a controlling interest in the Partnership, any such
conflict that the General Partner, in its sole and absolute discretion,
determines cannot be resolved in a manner not adverse to either the
shareholders of the General Partner or the Limited Partners shall be
resolved in favor of the shareholders of the General Partner. The General
Partner shall not be liable for monetary damages for losses sustained,
liabilities incurred, or benefits not derived by Limited Partners in
connection with such decisions, PROVIDED that the General Partner has acted
in good faith.
(c) Subject to its obligations and duties as General Partner set forth
in Section 6.01 hereof, the General Partner may exercise any of the powers
granted to it under this Agreement and perform any of the duties imposed
upon it hereunder either directly or by or through its agents. The General
Partner shall not be responsible for any misconduct or negligence on the
part of any such agent appointed by it in good faith.
(d) Notwithstanding any other provisions of this Agreement or the Act,
any action of the General Partner on behalf of the Partnership or any
decision of the General Partner to refrain from acting on behalf of the
Partnership, undertaken in the good faith belief that such action or
omission is necessary or advisable in order (i) to protect the ability of
the General Partner to continue to qualify as a REIT or (ii) to prevent the
General Partner from incurring any taxes under Section 857, Section 4981, or
any other provision of the Code, is expressly authorized under this
Agreement and is deemed approved by all of the Limited Partners.
(e) Any amendment, modification or repeal of this Section 6.04 or any
provision hereof shall be prospective only and shall not in any way affect
the limitations on the General Partner's liability to the Partnership and
the Limited Partners under this Section 6.04 as in effect immediately prior
to such amendment, modification or repeal with respect to matters occurring,
in whole or in part, prior to such amendment, modification or repeal,
regardless of when claims relating to such matters may arise or be asserted.
6.05 REIMBURSEMENT OF GENERAL PARTNER.
(a) Except as provided in this Section 6.05 and elsewhere in this
Agreement (including the provisions of Articles 5 and 6 regarding
distributions, payments, and allocations to which it may be entitled), the
General Partner shall not be compensated for its services as general partner
of the Partnership.
(b) In addition to the expenses that are directly attributable to the
Partnership, the REIT Expenses and Administrative Expenses shall be
obligations of the Partnership, and the Partnership shall pay the REIT
Expenses and Administrative Expenses. If any REIT Expenses or Administrative
Expenses are paid by the General Partner, the General Partner shall be
reimbursed by the Partnership therefor.
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6.06 OUTSIDE ACTIVITIES. The Partners and any officer, director, employee,
agent, trustee, Affiliate, Subsidiary, or shareholder of any Partner shall be
entitled to and may have business interests and engage in business activities in
addition to those relating to the Partnership, including business interests and
activities substantially similar or identical to those of the Partnership.
Neither the Partnership nor any of the Limited Partners shall have any rights by
virtue of this Agreement in any such business ventures, interest or activities.
None of the Limited Partners nor any other Person shall have any rights by
virtue of this Agreement or the partnership relationship established hereby in
any such business ventures, interests or activities, and the General Partner
shall have no obligation pursuant to this Agreement to offer any interest in any
such business ventures, interests and activities to the Partnership or any
Limited Partner, even if such opportunity is of a character which, if presented
to the Partnership or any Limited Partner, could be taken by such Person.
6.07 EMPLOYMENT OR RETENTION OF AFFILIATES.
(a) Any Affiliate of the General Partner may be employed or retained by
the Partnership and may otherwise deal with the Partnership (whether as a
buyer, lessor, lessee, manager, furnisher of goods or services, broker,
agent, lender or otherwise) and may receive from the Partnership any
compensation, price, or other payment therefor which the General Partner
determines to be fair and reasonable.
(b) The Partnership may lend or contribute to its Subsidiaries or other
Persons in which it has an equity investment, and such Persons may borrow
funds from the Partnership, on terms and conditions established in the sole
and absolute discretion of the General Partner. The foregoing authority
shall not create any right or benefit in favor of any Subsidiary or any
other Person.
(c) The Partnership may transfer assets to joint ventures, other
partnerships, corporations or other business entities in which it is or
thereby becomes a participant upon such terms and subject to such conditions
as the General Partner deems are consistent with this Agreement and
applicable law.
(d) Except as expressly permitted by this Agreement, neither the General
Partner nor any of its Affiliates shall sell, transfer or convey any
property to, or purchase any property from, the Partnership, directly or
indirectly, except pursuant to transactions that are on terms that the
General Partner deems are fair and reasonable to the Partnership.
6.08 GENERAL PARTNER PARTICIPATION. The General Partner agrees that all
business activities of the General Partner shall generally be conducted through
the Partnership or one or more Subsidiary Partnerships, unless otherwise
determined by the Independent Directors.
6.09 TITLE TO PARTNERSHIP ASSETS. Title to Partnership assets, whether
real, personal or mixed and whether tangible or intangible, shall be deemed to
be owned by the Partnership as an entity, and no Partner, individually or
collectively, shall have any ownership interest in such Partnership assets or
any portion thereof. Title to any or all of the Partnership assets may be held
in the name of the Partnership, the General Partner or one or more nominees, as
the General Partner may determine, including Affiliates of the General Partner.
The General Partner hereby declares and warrants that any Partnership assets for
which legal title is held in the name of the General Partner or any nominee or
Affiliate of the General Partner shall be held by the General Partner for the
use and benefit of the Partnership in accordance with the provisions of this
Agreement; PROVIDED, HOWEVER, that the General Partner shall use its best
efforts to cause beneficial and record title to such assets to be vested in the
Partnership as soon as reasonably practicable. All Partnership assets shall be
recorded as the property of the Partnership in its books and records,
irrespective of the name in which legal title to such Partnership assets is
held.
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6.10 MISCELLANEOUS. In the event the General Partner redeems any REIT
Shares, then the General Partner shall cause the Partnership to purchase from
the General Partner a number of Partnership Units as determined based on the
application of the Conversion Factor on the same terms that the General Partner
exchanged such REIT Shares. Moreover, if the General Partner makes a cash tender
offer or other offer to acquire REIT Shares, then the General Partner shall
cause the Partnership to make a corresponding offer to the General Partner to
acquire an equal number of Partnership Units held by the General Partner. In the
event any REIT Shares are exchanged by the General Partner pursuant to such
offer, the Partnership shall redeem an equivalent number of the General
Partner's Partnership Units for an equivalent purchase price based on the
application of the Conversion Factor.
ARTICLE VII
CHANGES IN GENERAL PARTNER
7.01 TRANSFER OF THE GENERAL PARTNER'S PARTNERSHIP INTEREST.
(a) The General Partner shall not transfer all or any portion of its
General Partnership Interest or withdraw as General Partner except as
provided in or in connection with a transaction contemplated by Section
7.01(c), (d) or (e).
(b) The General Partner agrees that its Percentage Interest will at all
times be at least 1%.
(c) Except as otherwise provided in Section 6.04(b) or Section 7.01(d)
or (e) hereof, the General Partner shall not engage in any merger,
consolidation or other combination with or into another Person or sale of
all or substantially all of its assets, (other than in connection with a
change in the General Partner's state of incorporation or organizational
form) in each case which results in a change of control of the General
Partner (a "Transaction"), unless:
(i) the consent of Limited Partners (other than the General Partner
or any Subsidiary) holding more than 50% of the Percentage Interests of
the Limited Partners (other than those held by the General Partner or any
Subsidiary) is obtained;
(ii) as a result of such Transaction all Limited Partners will
receive for each Partnership Unit an amount of cash, securities, or other
property equal to the product of the Conversion Factor and the greatest
amount of cash, securities or other property paid in the Transaction to a
holder of one REIT Share in consideration of one REIT Share, PROVIDED
THAT if, in connection with the Transaction, a purchase, tender or
exchange offer ("Offer") shall have been made to and accepted by the
holders of more than 50% of the outstanding REIT Shares, each holder of
Partnership Units shall be given the option to exchange its Partnership
Units for the greatest amount of cash, securities, or other property
which a Limited Partner would have received had it (A) exercised its
Redemption Right and (B) sold, tendered or exchanged pursuant to the
Offer the REIT Shares received upon exercise of the Redemption Right
immediately prior to the expiration of the Offer; or
(iii) the General Partner is the surviving entity in the Transaction
and either (A) the holders of REIT Shares do not receive cash,
securities, or other property in the Transaction or (B) all Limited
Partners (other than the General Partner or any Subsidiary) receive an
amount of cash, securities, or other property (expressed as an amount per
REIT Share) that is no less than the product of the Conversion Factor and
the greatest amount of cash, securities, or other property (expressed as
an amount per REIT Share) received in the Transaction by any holder of
REIT Shares.
(d) Notwithstanding Section 7.01(c), the General Partner may merge with
or into or consolidate with another entity if immediately after such merger
or consolidation (i) substantially all of
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the assets of the successor or surviving entity (the "Surviving General
Partner"), other than Partnership Units held by the General Partner, are
contributed, directly or indirectly, to the Partnership as a Capital
Contribution in exchange for Partnership Units with a fair market value
equal to the value of the assets so contributed as determined by the
Surviving General Partner in good faith and (ii) the Surviving General
Partner expressly agrees to assume all obligations of the General Partner
hereunder. Upon such contribution and assumption, the Surviving General
Partner shall have the right and duty to amend this Agreement as set forth
in this Section 7.01(d). The Surviving General Partner shall in good faith
arrive at a new method for the calculation of the Cash Amount, the REIT
Shares Amount and Conversion Factor for a Partnership Unit after any such
merger or consolidation so as to approximate the existing method for such
calculation as closely as reasonably possible. Such calculation shall take
into account, among other things, the kind and amount of securities, cash
and other property that was receivable upon such merger or consolidation by
a holder of REIT Shares or options, warrants or other rights relating
thereto, and to which a holder of Partnership Units could have acquired had
such Partnership Units been exchanged immediately prior to such merger or
consolidation. Such amendment to this Agreement shall provide for adjustment
to such method of calculation, which shall be as nearly equivalent as may be
practicable to the adjustments provided for with respect to the Conversion
Factor. The Surviving General Partner also shall in good faith modify the
definition of REIT Shares and make such amendments to Section 8.05 hereof so
as to approximate the existing rights and obligations set forth in Section
8.05 as closely as reasonably possible. The above provisions of this Section
7.01(d) shall similarly apply to successive mergers or consolidations
permitted hereunder.
In respect of any transaction described in the preceding paragraph, the
General Partner is required to use its commercially reasonable efforts to
structure such transaction to avoid causing the Limited Partners to recognize a
gain for federal income tax purposes by virtue of the occurrence of or their
participation in such transaction, PROVIDED such efforts are consistent with the
exercise of the Board of Directors' fiduciary duties to the shareholders of the
General Partner under applicable law.
(e) Notwithstanding Section 7.01(c),
(i) a General Partner may transfer all or any portion of its General
Partnership Interest to (A) a wholly-owned Subsidiary of such General
Partner or (B) the owner of all of the ownership interests of such
General Partner, and following a transfer of all of its General
Partnership Interest, may withdraw as General Partner; and the General
Partner may engage in a transaction not required by law or by the rules
of any national securities exchange on which the REIT Shares are listed
to be submitted to the vote of the holders of the REIT Shares.
7.02 ADMISSION OF A SUBSTITUTE OR ADDITIONAL GENERAL PARTNER. A Person
shall be admitted as a substitute or additional General Partner of the
Partnership only if the following terms and conditions are satisfied:
(a) the Person to be admitted as a substitute or additional General
Partner shall have accepted and agreed to be bound by all the terms and
provisions of this Agreement by executing a counterpart thereof and such
other documents or instruments as may be required or appropriate in order to
effect the admission of such Person as a General Partner, and a certificate
evidencing the admission of such Person as a General Partner shall have been
filed for recordation and all other actions required by Section 2.05 hereof
in connection with such admission shall have been performed;
(b) if the Person to be admitted as a substitute or additional General
Partner is a corporation or a partnership it shall have provided the
Partnership with evidence satisfactory to counsel for the Partnership of
such Person's authority to become a General Partner and to be bound by the
terms and provisions of this Agreement; and
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(c) counsel for the Partnership shall have rendered an opinion (relying
on such opinions from other counsel and the state or any other jurisdiction
as may be necessary) that the admission of the person to be admitted as a
substitute or additional General Partner is in conformity with the Act, that
none of the actions taken in connection with the admission of such Person as
a substitute or additional General Partner will cause (i) the Partnership to
be classified other than as a partnership for federal income tax purposes,
or (ii) the loss of any Limited Partner's limited liability.
7.03 EFFECT OF BANKRUPTCY, WITHDRAWAL, DEATH OR DISSOLUTION OF A GENERAL
PARTNER.
(a) Upon the occurrence of an Event of Bankruptcy as to a General
Partner (and its removal pursuant to Section 7.04(a) hereof) or the death,
withdrawal, removal or dissolution of a General Partner (except that, if a
General Partner is on the date of such occurrence a partnership, the
withdrawal, death, dissolution, Event of Bankruptcy as to, or removal of a
partner in, such partnership shall be deemed not to be a dissolution of such
General Partner if the business of such General Partner is continued by the
remaining partner or partners), the Partnership shall be dissolved and
terminated unless the Partnership is continued pursuant to Section 7.03(b)
hereof. The merger of the General Partner with or into any entity that is
admitted as a substitute or successor General Partner pursuant to Section
7.02 hereof shall not be deemed to be the withdrawal, dissolution or removal
of the General Partner.
(b) Following the occurrence of an Event of Bankruptcy as to a General
Partner (and its removal pursuant to Section 7.04(a) hereof) or the death,
withdrawal, removal or dissolution of a General Partner (except that, if a
General Partner is on the date of such occurrence a partnership, the
withdrawal, death, dissolution, Event of Bankruptcy as to, or removal of a
partner in, such partnership shall be deemed not to be a dissolution of such
General Partner if the business of such General Partner is continued by the
remaining partner or partners), the Limited Partners, within 90 days after
such occurrence, may elect to continue the business of the Partnership for
the balance of the term specified in Section 2.04 hereof by selecting,
subject to Section 7.02 hereof and any other provisions of this Agreement, a
substitute General Partner by consent of a majority in interest of the
Limited Partners. If the Limited Partners elect to continue the business of
the Partnership and admit a substitute General Partner, the relationship
with the Partners and of any Person who has acquired an interest of a
Partner in the Partnership shall be governed by this Agreement.
7.04 REMOVAL OF A GENERAL PARTNER.
(a) Upon the occurrence of an Event of Bankruptcy as to, or the
dissolution of, a General Partner, such General Partner shall be deemed to
be removed automatically; PROVIDED, HOWEVER, that if a General Partner is on
the date of such occurrence a partnership, the withdrawal, death,
dissolution, Event of Bankruptcy as to or removal of a partner in such
partnership shall be deemed not to be a dissolution of the General Partner
if the business of such General Partner is continued by the remaining
partner or partners. The Limited Partners may not remove the General
Partner, with or without cause.
(b) If a General Partner has been removed pursuant to this Section 7.04
and the Partnership is continued pursuant to Section 7.03 hereof, such
General Partner shall promptly transfer and assign its General Partnership
Interest in the Partnership to the substitute General Partner approved by a
majority in interest of the Limited Partners in accordance with Section
7.03(b) hereof and otherwise admitted to the Partnership in accordance with
Section 7.02 hereof. At the time of assignment, the removed General Partner
shall be entitled to receive from the substitute General Partner the fair
market value of the General Partnership Interest of such removed General
Partner as reduced by any damages caused to the Partnership by such General
Partner. Such fair market value shall be determined by an appraiser mutually
agreed upon by the
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General Partner and a majority in interest of the Limited Partners within 10
days following the removal of the General Partner. In the event that the
parties are unable to agree upon an appraiser, the removed General Partner
and a majority in interest of the Limited Partners each shall select an
appraiser. Each such appraiser shall complete an appraisal of the fair
market value of the removed General Partner's General Partnership Interest
within 30 days of the General Partner's removal, and the fair market value
of the removed General Partner's General Partnership Interest shall be the
average of the two appraisals; PROVIDED, HOWEVER, that if the higher
appraisal exceeds the lower appraisal by more than 20% of the amount of the
lower appraisal, the two appraisers, no later than 40 days after the removal
of the General Partner, shall select a third appraiser who shall complete an
appraisal of the fair market value of the removed General Partner's General
Partnership Interest no later than 60 days after the removal of the General
Partner. In such case, the fair market value of the removed General
Partner's General Partnership Interest shall be the average of the two
appraisals highest in value.
(c) The General Partnership Interest of a removed General Partner,
during the time after default until transfer under Section 7.04(b), shall be
converted to that of a special Limited Partner; PROVIDED, HOWEVER, such
removed General Partner shall not have any rights to participate in the
management and affairs of the Partnership, and shall not be entitled to any
portion of the income, expense, profit, gain or loss allocations or cash
distributions allocable or payable, as the case may be, to the Limited
Partners. Instead, such removed General Partner shall receive and be
entitled only to retain distributions or allocations of such items that it
would have been entitled to receive in its capacity as General Partner,
until the transfer is effective pursuant to Section 7.04(b).
(d) All Partners shall have given and hereby do give such consents,
shall take such actions and shall execute such documents as shall be legally
necessary and sufficient to effect all the foregoing provisions of this
Section.
ARTICLE VIII
RIGHTS AND OBLIGATIONS OF THE LIMITED PARTNERS
8.01 MANAGEMENT OF THE PARTNERSHIP. The Limited Partners shall not
participate in the management or control of Partnership business nor shall they
transact any business for the Partnership, nor shall they have the power to sign
for or bind the Partnership, such powers being vested solely and exclusively in
the General Partner.
8.02 POWER OF ATTORNEY. Each Limited Partner hereby irrevocably appoints
the General Partner, any Liquidator, and authorized officers and
attorneys-in-fact of each as its true and lawful attorney-in-fact, who may act
for each Limited Partner and in its name, place and stead, and for its use and
benefit, to sign, acknowledge, swear to, deliver, file or record, at the
appropriate public offices, any and all documents, certificates, and instruments
as may be deemed necessary or desirable by the General Partner to carry out
fully the provisions of this Agreement and the Act in accordance with their
terms, which power of attorney is coupled with an interest and shall survive the
death, dissolution or legal incapacity of the Limited Partner, or the transfer
by the Limited Partner of any part or all of its Partnership Interest.
8.03 LIMITATION ON LIABILITY OF LIMITED PARTNERS. No Limited Partner shall
be liable for any debts, liabilities, contracts or obligations of the
Partnership. A Limited Partner shall be liable to the Partnership only to make
payments of its Capital Contribution, if any, as and when due hereunder. After
its Capital Contribution is fully paid, no Limited Partner shall, except as
otherwise required by the Act, be required to make any further Capital
Contributions or other payments or lend any funds to the Partnership.
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8.04 OWNERSHIP BY LIMITED PARTNER OF CORPORATE GENERAL PARTNER OR
AFFILIATE. No Limited Partner shall at any time, either directly or indirectly,
own any stock or other interest in the General Partner or in any Affiliate
thereof; if such ownership by itself or in conjunction with other stock or other
interests owned by other Limited Partners would, in the opinion of counsel for
the Partnership, jeopardize the classification of the Partnership as a
partnership for federal income tax purposes. The General Partner shall be
entitled to make such reasonable inquiry of the Limited Partners as is required
to establish compliance by the Limited Partners with the provisions of this
Section.
8.05 REDEMPTION RIGHT.
(a) Subject to Sections 8.05(b), 8.05(c), 8.05(d) and 8.05(e) and the
provisions of any agreements between the Partnership and one or more Limited
Partners with respect to Partnership Units held by them, on or after the
date which is one year after the closing of the Exchange, each Limited
Partner, other than the General Partner, shall have the right (the
"Redemption Right") to require the Partnership to redeem on a Specified
Redemption Date all or a portion of the Partnership Units held by such
Limited Partner at a redemption price equal to and in the form of the Cash
Amount to be paid by the Partnership. The Redemption Right shall be
exercised pursuant to a Notice of Redemption delivered to the Partnership
(with a copy to the General Partner) by the Limited Partner who is
exercising the Redemption Right (the "Redeeming Partner"); PROVIDED,
HOWEVER, that the Partnership shall not be obligated to satisfy such
Redemption Right if the Company and/or the General Partner elects to
purchase, and does purchase, the Partnership Units subject to the Notice of
Redemption pursuant to Section 8.05(b); and PROVIDED, FURTHER, that no
Limited Partner may deliver more than two Notices of Redemption during each
calendar year. A Limited Partner may not exercise the Redemption Right for
less than 1,000 Partnership Units or, if such Limited Partner holds less
than 1,000 Partnership Units, all of the Partnership Units held by such
Partner. The Redeeming Partner shall have no right, with respect to any
Partnership Units so redeemed, to receive any distribution paid with respect
to Partnership Units if the record date for such distribution is on or after
the Specified Redemption Date.
(b) Notwithstanding the provisions of Section 8.05(a), a Limited Partner
that exercises the Redemption Right shall be deemed to have offered to sell
the Partnership Units described in the Notice of Redemption to the General
Partner, and the General Partner may, in its sole and absolute discretion,
elect to purchase directly and acquire such Partnership Units by paying to
the Redeeming Partner either the Cash Amount or the REIT Shares Amount, as
elected by the General Partner (in its sole and absolute discretion), on the
Specified Redemption Date, whereupon the General Partner shall acquire for
the Cash Amount or the REIT Shares Amount, as determined by the General
Partner (as set forth above), the Partnership Units offered for redemption
by the Redeeming Partner and shall be treated for all purposes of this
Agreement as the owner of such Partnership Units. If the General Partner
shall elect to exercise its right to purchase Partnership Units under this
Section 8.05(b) with respect to a Notice of Redemption, it shall so notify
the Redeeming Partner within five business days after the receipt by the
General Partner of such Notice of Redemption. Unless the General Partner (in
its sole and absolute discretion) shall exercise its right to purchase
Partnership Units from the Redeeming Partner pursuant to this Section
8.05(b), the General Partner shall have no obligation to the Redeeming
Partner or the Partnership with respect to the Redeeming Partner's exercise
of the Redemption Right. In the event the General Partner shall exercise its
right to purchase, and does purchase, Partnership Units with respect to the
exercise of a Redemption Right in the manner described in the first sentence
of this Section 8.05(b), the Partnership shall have no obligation to pay any
amount to the Redeeming Partner with respect to such Redeeming Partner's
exercise of such Redemption Right, and each of the Redeeming Partner, the
Partnership, and the General Partner shall treat the transaction between the
General Partner and the Redeeming Partner for federal income tax purposes as
a sale
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of the Redeeming Partner's Partnership Units to the General Partner. Each
Redeeming Partner agrees to execute such documents as the General Partner
may reasonably require in connection with the issuance of REIT Shares upon
exercise of the Redemption Right.
(c) Notwithstanding the provisions of Section 8.05(a) and 8.05(b), a
Redeeming Partner shall be paid the Cash Amount if the delivery of REIT
Shares to such Partner on the Specified Redemption Date by the General
Partner pursuant to Section 8.06(b) (regardless of whether or not the
General Partner would in fact exercise its rights under Section 8.06(b))
would: (i) result in such Partner or any other person owning, directly or
indirectly, REIT Shares in excess of the Ownership Limit (as defined in the
Charter) and calculated in accordance therewith, except as provided in the
Charter, (ii) result in REIT Shares being owned by fewer than 100 persons
(determined without reference to any rules of attribution), (iii) result in
the General Partner being "closely held" within the meaning of Section
856(h) of the Code, (iv) cause the General Partner to own, directly or
constructively, 10% or more of the ownership interests in a tenant of the
General Partner's, the Partnership's, or a Subsidiary Partnership's, real
property, within the meaning of Section 856(d)(2)(B) of the Code, or (v)
cause the acquisition of REIT Shares by such Partner to be "integrated" with
any other distribution of REIT Shares for purposes of complying with the
registration provisions of the Securities Act.
(d) Any REIT Shares Amounts to be paid to a Redeeming Partner pursuant
to this Section 8.05 shall be paid on the Specified Redemption Date. Any
Cash Amount to be paid to a Redeeming Partner pursuant to this Section 8.06
shall be paid on the Specified Redemption Date; PROVIDED, HOWEVER, that, if
the Notice of Redemption is received by the General Partner after 13 months
following the closing of the Exchange and if the Cash Amount is to be paid,
the General Partner may elect to cause the Specified Redemption Date to be
delayed for up to an additional 30 calendar days by providing notice to the
Redeeming Partner. If the General Partner elects to cause the Specified
Redemption Date to be delayed, the General Partner shall pay the Redeeming
Partner interest for the period of the delay at a rate equal to (i) 3-month
LIBOR plus (ii) 250 basis points. For this purpose, LIBOR shall mean
"ISD-LIBOR-ISDA" as that term is defined in the 1991 ISDA Definitions
published by the International Swap Dealers Association, Inc.
Notwithstanding the foregoing, the General Partner agrees to use its best
efforts to cause the closing of the acquisition of redeemed Partnership
Units hereunder to occur as quickly as reasonably possible.
(e) Notwithstanding any other provision of this Agreement, after
thirteen months following the closing of the Exchange, the General Partner
shall place appropriate restrictions on the ability of the Limited Partners
to exercise their Redemption Rights as and if deemed necessary to ensure
that the Partnership does not constitute a "publicly traded partnership"
under section 7704 of the Code. If and when the General Partner determines
that imposing such restrictions is necessary, the General Partner shall give
prompt written notice thereof (a "Restriction Notice") to each of the
Limited Partners, which notice shall be accompanied by a copy of an opinion
of counsel to the Partnership which states that, in the opinion of such
counsel, restrictions are necessary in order to avoid the Partnership being
treated as a "publicly traded partnership" under section 7704 of the Code.
ARTICLE IX
TRANSFERS OF LIMITED PARTNERSHIP INTERESTS
9.01 PURCHASE FOR INVESTMENT.
(a) Each Limited Partner hereby represents and warrants to the General
Partner and to the Partnership that the acquisition of his Partnership
Interests is made as a principal for his account
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for investment purposes only and not with a view to the resale or
distribution of such Partnership Interest.
(b) Each Limited Partner agrees that he will not sell, assign or
otherwise transfer his Partnership Interest or any fraction thereof; whether
voluntarily or by operation of law or at judicial sale or otherwise, to any
Person who does not make the representations and warranties to the General
Partner set forth in Section 9.01(a) above and similarly agree not to sell,
assign or transfer such Partnership Interest or fraction thereof to any
Person who does not similarly represent, warrant and agree.
9.02 RESTRICTIONS ON TRANSFER OF LIMITED PARTNERSHIP INTERESTS.
(a) Subject to the provisions of 9.02(b), (c) and (d), no Limited
Partner may offer, sell, assign, or otherwise transfer all or any portion of
his Limited Partnership Interest, or any of such Limited Partner's economic
rights as a Limited Partner, whether voluntarily or by operation of law or
at judicial sale or otherwise (collectively, a "Transfer") without the
consent of the General Partner, which consent may be granted or withheld in
its sole and absolute discretion. Any such purported transfer undertaken
without such consent shall be considered to be null and void AB INITIO and
shall not be given effect. The General Partner may require, as a condition
of any Transfer to which it consents, that the transferor assume all costs
incurred by the Partnership in connection therewith. A Transfer shall not
include any pledge, grant of a security interest in, or other hypothecation
of all or any portion of a Limited Partnership Interest.
(b) No Limited Partner may withdraw from the Partnership other than as a
result of a permitted Transfer (i.e., a Transfer consented to as
contemplated by clause (a) above or clause (c) below or a Transfer pursuant
to 9.05 below) of all of his Partnership Units pursuant to this Article IX
or pursuant to a redemption of all of his Partnership Units pursuant to
8.06. Upon the permitted Transfer or redemption of all of a Limited
Partner's Partnership Units, such Limited Partner shall cease to be a
Limited Partner.
(c) Subject to 9.02(d), (e) and (f) below, a Limited Partner may
Transfer, with the consent of the General Partner, all or a portion of his
Partnership Units to (i) a spouse, a parent or parent's spouse, natural or
adopted descendant or descendants, spouse of such descendant, or brother or
sister, or a trust created by such Limited Partner for the benefit of such
Limited Partner and/or any such person(s), of which trust such Limited
Partner or any such person(s) is a trustee, (ii) a corporation, a general
partnership, a limited partnership, or a limited liability company
controlled by a Person or Persons named in (i) above, or (iii) if the
Limited Partner is an entity, its beneficial owners.
(d) No Limited Partner may effect a Transfer of its Limited Partnership
Interest, in whole or in part, if, in the opinion of legal counsel for the
Partnership, such proposed Transfer would require the registration of the
Limited Partnership Interest under the Securities Act, or would otherwise
violate any applicable federal or state securities or blue sky law
(including investment suitability standards).
(e) No Transfer by a Limited Partner of its Partnership Units, in whole
or in part, may be made to any Person if (i) in the opinion of legal counsel
for the Partnership, the transfer would result in the Partnership's being
treated as an association taxable as a corporation (other than a qualified
REIT subsidiary within the meaning of Section 856(i) of the Code), (ii) in
the opinion of legal counsel for the Partnership, it would adversely affect
the ability of the General Partner to continue to qualify as a REIT or
subject the General Partner to any additional taxes under Section 857 or
Section 4981 of the Code, or (iii) such transfer is effectuated through an
"established securities market" or a "secondary market (or the substantial
equivalent thereof)" within the meaning of Section 7704 of the Code.
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(f) No transfer of any Partnership Units may be made to a lender to the
Partnership or any Person who is related (within the meaning of Regulations
Section 1.752-4(b)) to any lender to the Partnership whose loan constitutes
a nonrecourse liability (within the meaning of Regulations Section
1.752-1(a)(2)), without the consent of the General Partner, which may be
withheld in its sole and absolute discretion, PROVIDED THAT as a condition
to such consent the lender will be required to enter into an arrangement
with the Partnership and the General Partner to exchange or redeem for the
Cash Amount any Partnership Units in which a security interest is held
simultaneously with the time at which such lender would be deemed to be a
partner in the Partnership for purposes of allocating liabilities to such
lender under Section 752 of the Code.
(g) Any Transfer in contravention of any of the provisions of this
Article IX shall be void and ineffectual and shall not be binding upon, or
recognized by, the Partnership.
(h) Prior to the consummation of any Transfer under this Article IX, the
transferor and/or the transferee shall deliver to the General Partner such
opinions, certificates and other documents as the General Partner shall
request in connection with such Transfer.
9.03 ADMISSION OF SUBSTITUTE LIMITED PARTNER.
(a) Subject to the other provisions of this Article IX, an assignee of
the Limited Partnership Interest of a Limited Partner (which shall be
understood to include any purchaser, transferee, donee, or other recipient
of any disposition of such Limited Partnership Interest) shall be deemed
admitted as a Limited Partner of the Partnership only with the consent of
the General Partner and upon the satisfactory completion of the following:
(i) The assignee shall have accepted and agreed to be bound by the
terms and provisions of this Agreement by executing a counterpart or an
amendment thereof, including a revised EXHIBIT A, and such other
documents or instruments as the General Partner may require in order to
effect the admission of such Person as a Limited Partner.
(ii) To the extent required, an amended Certificate evidencing the
admission of such Person as a Limited Partner shall have been signed,
acknowledged and filed for record in accordance with the Act.
(iii) The assignee shall have delivered a letter containing the
representation set forth in Section 9.01(a) hereof and the agreement set
forth in Section 9.01(b) hereof.
(iv) If the assignee is a corporation, partnership or trust, the
assignee shall have provided the General Partner with evidence
satisfactory to counsel for the Partnership of the assignee's authority
to become a Limited Partner under the terms and provisions of this
Agreement.
(v) The assignee shall have executed a power of attorney containing
the terms and provisions set forth in Section 8.02 hereof.
(vi) The assignee shall have paid all legal fees and other expenses
of the Partnership and the General Partner and filing and publication
costs in connection with its substitution as a Limited Partner.
(vii) The assignee has obtained the prior written consent of the
General Partner to its admission as a Substitute Limited Partner, which
consent may be given or denied in the exercise of the General Partner's
sole and absolute discretion.
(b) For the purpose of allocating Profits and Losses and distributing
cash received by the Partnership, a Substitute Limited Partner shall be
treated as having become, and appearing in the records of the Partnership
as, a Partner upon the filing of the Certificate described in Section
9.03(a)(ii) hereof or, if no such filing is required, the later of the date
specified in the transfer
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documents or the date on which the General Partner has received all
necessary instruments of transfer and substitution.
(c) The General Partner shall cooperate with the Person seeking to
become a Substitute Limited Partner by preparing the documentation required
by this Section and making all official filings and publications. The
Partnership shall take all such action as promptly as practicable after the
satisfaction of the conditions in this Article IX to the admission of such
Person as a Limited Partner of the Partnership.
9.04 RIGHTS OF ASSIGNEES OF PARTNERSHIP INTERESTS.
(a) Subject to the provisions of Sections 9.01 and 9.02 hereof, except
as required by operation of law, the Partnership shall not be obligated for
any purposes whatsoever to recognize the assignment by any Limited Partner
of its Partnership Interest until the Partnership has received notice
thereof.
(b) Any Person who is the assignee of all or any portion of a Limited
Partner's Limited Partnership Interest, but does not become a Substitute
Limited Partner and desires to make a further assignment of such Limited
Partnership Interest, shall be subject to all the provisions of this Article
IX to the same extent and in the same manner as any Limited Partner desiring
to make an assignment of its Limited Partnership Interest.
9.05 EFFECT OF BANKRUPTCY, DEATH, INCOMPETENCE OR TERMINATION OF A LIMITED
PARTNER. The occurrence of an Event of Bankruptcy as to a Limited Partner, the
death of a Limited Partner or a final adjudication that a Limited Partner is
incompetent (which term shall include, but not be limited to, insanity) shall
not cause the termination or dissolution of the Partnership, and the business of
the Partnership shall continue if an order for relief in a bankruptcy proceeding
is entered against a Limited Partner, the trustee or receiver of his estate or,
if he dies, his executor, administrator or trustee, or, if he is finally
adjudicated incompetent, his committee, guardian or conservator, shall have the
rights of such Limited Partner for the purpose of settling or managing his
estate property and such power as the bankrupt, deceased or incompetent Limited
Partner possessed to assign all or any part of his Partnership Interest and to
join with the assignee in satisfying conditions precedent to the admission of
the assignee as a Substitute Limited Partner.
9.06 JOINT OWNERSHIP OF INTERESTS. A Partnership Interest may be acquired
by two individuals as joint tenants with right of survivorship, PROVIDED that
such individuals either are married or are related and share the same home as
tenants in common. The written consent or vote of both owners of any such
jointly held Partnership Interest shall be required to constitute the action of
the owners of such Partnership Interest; PROVIDED, HOWEVER, that the written
consent of only one joint owner will be required if the Partnership has been
provided with evidence satisfactory to the counsel for the Partnership that the
actions of a single joint owner can bind both owners under the applicable laws
of the state of residence of such joint owners.
Upon the death of one owner of a Partnership Interest held in a joint
tenancy with a right of survivorship, the Partnership Interest shall become
owned solely by the survivor as a Limited Partner and not as an assignee. The
Partnership need not recognize the death of one of the owners of a jointly-held
Partnership Interest until it shall have received notice of such death. Upon
notice to the General Partner from either owner, the General Partner shall cause
the Partnership Interest to be divided into two equal Partnership Interests,
which shall thereafter be owned separately by each of the former owners.
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ARTICLE X
DISSOLUTION, LIQUIDATION AND TERMINATION
10.01 DISSOLUTION. The Partnership shall not be dissolved by the admission
of Substituted Limited Partners or Additional Limited Partners or by the
admission of a successor General Partner in accordance with the terms of this
Agreement. Upon the withdrawal of the General Partner, any successor General
Partner shall continue the business of the Partnership. The Partnership shall
dissolve, and its affairs shall be wound up, only upon the first to occur of any
of the following ("Liquidating Events"):
(a) the expiration of its term as provided in Section 2.04 hereof;
(b) an event of withdrawal of the General Partner, as defined in the Act
(other than an event of bankruptcy), unless, within ninety (90) days after
such event of withdrawal a majority in interest of the remaining Partners
agree in writing to continue the business of the Partnership and to the
appointment, effective as of the date of withdrawal, of a successor General
Partner
(c) from and after the date of this Agreement through December 31, 2010,
an election to dissolve the Partnership made by the General Partner with the
Consent of Partners holding 85% of the Percentage Interests of the Limited
Partners (including Limited Partner Interests held by the Company);
(d) on or after January 1, 2011, an election to dissolve the Partnership
made by the General Partner, in its sole and absolute discretion;
(e) entry of a decree of judicial dissolution of the Partnership
pursuant to the provisions of the Act;
(f) the sale of all or substantially all of the assets and properties of
the Partnership; or
(g) a final and non-appealable judgment is entered by a court of
competent jurisdiction ruling that the General Partner is bankrupt or
insolvent, or a final and non-appealable order for relief is entered by a
court with appropriate jurisdiction against the General Partner, in each
case under any federal or state bankruptcy or insolvency laws as now or
hereafter in effect, unless prior to the entry of such order or judgment all
of the remaining Partners agree in writing to continue the business of the
Partnership and to the appointment, effective as of a date prior to the date
of such order or judgment, of a substitute General Partner.
10.02 WINDING UP
(a) Upon the occurrence of a Liquidating Event, the Partnership shall
continue solely for the purposes of winding up its affairs in an orderly
manner, liquidating its assets, and satisfying the claims of its creditors
and Partners. No Partner shall take any action that is inconsistent with, or
not necessary to or appropriate for, the winding up of the Partnership's
business and affairs. The General Partner, or, in the event there is no
remaining General Partner, any Person elected by a majority in interest of
the Limited Partners (the General Partner or such other Person being
referred to herein as the "Liquidator"), shall be responsible for overseeing
the winding up and dissolution of the Partnership and shall take full
account of the Partnership's liabilities and property and the Partnership
property shall be liquidated as promptly as is consistent with obtaining the
fair value thereof, and the proceeds therefrom (which may, to the extent
determined by the General Partner, include shares of common stock in the
Company) shall be applied and distributed in the following order:
(i) First, to the payment and discharge of all of the Partnership's
debts and liabilities to creditors other than the Partners;
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(ii) Second, to the payment and discharge of all of the
Partnership's debts and liabilities to the General Partner;
(iii) Third, to the payment and discharge of all of the Partnership's
debts and liabilities to the other Partners; and
(iv) The balance, if any, to the General Partner and Limited
Partners in accordance with their Capital Accounts, after giving effect
to all contributions, distributions, and allocations for all periods. The
General Partner shall not receive any additional compensation for any
services performed pursuant to this Article X.
(b) Notwithstanding the provisions of Section 10.02(a) hereof which
require liquidation of the assets of the Partnership, but subject to the
order of priorities set forth therein, if prior to or upon dissolution of
the Partnership the Liquidator determines that an immediate sale of part or
all of the Partnership's assets would be impractical or would cause undue
loss to the Partners, the Liquidator may, in its sole and absolute
discretion, defer for a reasonable time the liquidation of any assets except
those necessary to satisfy liabilities of the Partnership (including to
those Partners as creditors) and/or distribute to the Partners, in lieu of
cash, as tenants in common and in accordance with the provisions of Section
10.02(a) hereof, undivided interests in such Partnership assets as the
Liquidator deems not suitable for liquidation. Any such distributions in
kind shall be made only if, in the good faith judgment of the Liquidator,
such distributions in kind are in the best interest of the Partners, and
shall be subject to such conditions relating to the disposition and
management of such properties as the Liquidator deems reasonable and
equitable and to any agreements governing the operation of such properties
at such time. The Liquidator shall determine the fair market value of any
property distributed in kind using such reasonable method of valuation as it
may adopt.
(c) In the discretion of the Liquidator, a pro rata portion of the
distributions that would otherwise be made to the General Partner and
Limited Partners pursuant to this Article X may be:
(i) distributed to a trust established for the benefit of the
General Partner and Limited Partners for the purposes of liquidating
Partnership assets, collecting amounts owed to the Partnership, and
paying any contingent or unforeseen liabilities or obligations of the
Partnership or the General Partner arising out of or in connection with
the Partnership. The assets of any such trust shall be distributed to the
General Partner and Limited Partners from time to time, in the reasonable
discretion of the Liquidator, in the same proportions as the amount
distributed to such trust by the Partnership would otherwise have been
distributed to the General Partner and Limited Partners pursuant to this
Agreement; or
(ii) withheld or escrowed to provide a reasonable reserve for
Partnership liabilities (contingent or otherwise) and to reflect the
unrealized portion of any installment obligations owed to the
Partnership, provided that such withheld or escrowed amounts shall be
distributed to the General Partner and Limited Partners in the manner and
order of priority set forth in Section 10.02(a) as soon as practicable.
10.03 COMPLIANCE WITH TIMING REQUIREMENTS OF REGULATIONS. In the event the
Partnership is "liquidated" within the meaning of Regulations Section
1.704-1(b)(2)(ii)(g), distributions shall be made pursuant to this Article X to
the General Partner and Limited Partners who have positive Capital Accounts in
compliance with Regulations Section 1.704-1(b)(2)(ii)(b)(2). If any Partner has
a deficit balance in his Capital Account (after giving effect to all
contributions, distributions and allocations for all taxable years, including
the year during which such liquidation occurs), such Partner shall have no
obligation to make any contribution to the capital of the Partnership with
respect to such deficit, and such deficit shall not be considered a debt owed to
the Partnership or to any other Person for any purpose whatsoever.
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10.04 DEEMED DISTRIBUTION AND RECONTRIBUTION. Notwithstanding any other
provision of this Article X, in the event the Partnership is considered
"liquidated" within the meaning of Regulations Section 1.704-1(b)(2)(ii)(g), but
no Liquidating Event has occurred, the Partnership's property shall not be
liquidated, the Partnership's liabilities shall not be paid or discharged, and
the Partnership's affairs shall not be wound up. Instead, for federal income tax
purposes and for purposes of maintaining Capital Accounts, the Partnership shall
be deemed to have distributed the property in kind to the General Partner and
Limited Partners, who shall be deemed to have assumed and taken such property
subject to all Partnership liabilities, all in accordance with their respective
Capital Accounts. Immediately thereafter, the General Partner and Limited
Partners shall be deemed to have recontributed the Partnership property in kind
to the Partnership, which shall be deemed to have assumed and taken such
property subject to all such liabilities.
10.05 RIGHTS OF LIMITED PARTNERS. Except as otherwise provided in this
Agreement, each Limited Partner shall look solely to the assets of the
Partnership for the return of its Capital Contributions and shall have no right
or power to demand or receive property other than cash from the Partnership.
Except as otherwise provided in this Agreement, no Limited Partner shall have
priority over any other Partner as to the return of its Capital Contributions,
distributions, or allocations.
10.06 NOTICE OF DISSOLUTION. In the event a Liquidating Event occurs or an
event occurs that would, but for the provisions of an election or objection by
one or more Partners pursuant to Section 10.01, result in a dissolution of the
Partnership, the General Partner shall, within thirty (30) days thereafter,
provide written notice thereof to each of the Partners.
10.07 TERMINATION OF PARTNERSHIP AND CANCELLATION OF CERTIFICATE OF LIMITED
PARTNERSHIP. Upon the completion of the liquidation of the Partnership's
assets, as provided in Section 10.02 hereof, the Partnership shall be
terminated, a certificate of cancellation shall be filed, and all qualifications
of the Partnership as a foreign limited partnership in jurisdictions other than
the State of Delaware shall be cancelled and such other actions as may be
necessary to terminate the Partnership shall be taken.
10.08 REASONABLE TIME FOR WINDING-UP. A reasonable time shall be allowed
for the orderly winding-up of the business and affairs of the Partnership and
the liquidation of its assets pursuant to Section 10.02 hereof, in order to
minimize any losses otherwise attendant upon such winding-up, and the provisions
of this Agreement shall remain in effect between the Partners during the period
of liquidation.
10.09 WAIVER OF PARTITION. Each Partner hereby waives any right to
partition of the Partnership property.
ARTICLE XI
BOOKS AND RECORDS; ACCOUNTING; TAX MATTERS; MEETINGS
11.01 BOOKS AND RECORDS. At all times during the continuance of the
Partnership, the Partners shall keep or cause to be kept at the Partnership's
specified office true and complete books of account in accordance with generally
accepted accounting principles, including: (a) a current list of the full name
and last known business address of each Partner, (b) a copy of the Certificate
of Limited Partnership and all certificates of amendment thereto, (c) copies of
the Partnership's federal, state and local income tax returns and reports, (d)
copies of the Agreement and any financial statements of the Partnership for the
three most recent years and (e) all documents and information required under the
Act. Any Partner or its duly authorized representative, upon paying the costs of
collection, duplication and mailing, shall be entitled to inspect or copy such
records during ordinary business hours.
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11.02 CUSTODY OF PARTNERSHIP FUNDS; BANK ACCOUNTS.
(a) All funds of the Partnership not otherwise invested shall be
deposited in one or more accounts maintained in such banking or brokerage
institutions as the General Partner shall determine, and withdrawals shall
be made only on such signature or signatures as the General Partner may,
from time to time, determine.
(b) All deposits and other funds not needed in the operation of the
business of the Partnership may be invested by the General Partner in
investment grade instruments (or investment companies whose portfolio
consists primarily thereof), government obligations, certificates of
deposit, bankers' acceptances and municipal notes and bonds or such other
investments as shall be permitted by applicable law. The funds of the
Partnership shall not be commingled with the funds of any other Person
except for such commingling as may necessarily result from an investment in
those investment companies permitted by this Section 11.02(b).
11.03 FISCAL AND TAXABLE YEAR. The fiscal and taxable year of the
Partnership shall be the calendar year.
11.04 ANNUAL TAX INFORMATION AND REPORT. Within 75 days after the end of
each fiscal year of the Partnership, the General Partner endeavor to furnish to
each person who was a Limited Partner at any time during such year the tax
information necessary to file such Limited Partner's individual tax returns as
shall be reasonably required by law.
11.05 TAX MATTERS PARTNER; TAX ELECTIONS; SPECIAL BASIS ADJUSTMENTS.
(a) The General Partner shall be the Tax Matters Partner of the
Partnership within the meaning of Section 623(a)(7) of the Code. As Tax
Matters Partner, the General Partner shall have the right and obligation to
take all actions authorized and required, respectively, by the Code for the
Tax Matters Partner. The General Partner shall have the right to retain
professional assistance in respect of any audit of the Partnership by the
Service and all out-of-pocket expenses and fees incurred by the General
Partner on behalf of the Partnership as Tax Matters Partner shall constitute
Partnership expenses. In the event the General Partner receives notice of a
final Partnership adjustment under Section 6223(a)(2) of the Code, the
General Partner shall either (i) file a court petition for judicial review
of such final adjustment within the period provided under Section 6226(a) of
the Code, a copy of which petition shall be mailed to all Limited Partners
on the date such petition is filed, or (ii) mail a written notice to all
Limited Partners, within such period, that describes the General Partner's
reasons for determining not to file such a petition.
(b) All elections required or permitted to be made by the Partnership
under the Code or any applicable state or local tax law shall be made by the
General Partner in its sole and absolute discretion.
(c) In the event of a transfer of all or any part of the Partnership
Interest of any Partner, the Partnership, at the option of the General
Partner, may elect pursuant to Section 754 of the Code to adjust the basis
of the Properties. Notwithstanding anything contained in Article V of this
Agreement, any adjustments made pursuant to Section 754 shall affect only
the successor in interest to the transferring Partner and in no event shall
be taken into account in establishing, maintaining or computing Capital
Accounts for the other Partners for any purpose under this Agreement. Each
Partner will furnish the Partnership with all information necessary to give
effect to such election.
11.06 REPORTS TO LIMITED PARTNERS.
(a) As soon as practicable after the close of each fiscal quarter (other
than the last quarter of the fiscal year), the General Partner shall cause
to be mailed to each Limited Partner a quarterly report containing financial
statements of the Partnership, or of the General Partner if such statements
are prepared solely on a consolidated basis with the General Partner, for
such fiscal quarter,
33
<PAGE>
presented in accordance with generally accepted accounting principles. As
soon as practicable after the close of each fiscal year, the General Partner
shall cause to be mailed to each Limited Partner an annual report containing
financial statements of the Partnership, or of the General Partner if such
statements are prepared solely on a consolidated basis with the General
Partner, for such fiscal year, presented in accordance with generally
accepted accounting principles. The annual financial statements shall be
audited by accountants selected by the General Partner.
(b) Any Partner shall further have the right to a private audit of the
books and records of the Partnership, provided such audit is made for
Partnership purposes, at the expense of the Partner desiring it and is made
during normal business hours.
11.07 MEETINGS OF THE PARTNERS.
(a) Meetings of the Partners may be called by the General Partner and
shall be called upon the receipt by the General Partner of a written request
by Limited Partners (other than the Company) holding twenty percent (20%) or
more of the Partnership Interests. The request shall state the nature of the
business to be transacted. Notice of any such meeting shall be given to all
Partners not less than seven (7) days nor more than thirty (30) days prior
to the date of such meeting. Partners may vote in person or by proxy at such
meeting. Whenever the vote or Consent of the Partners is permitted or
required under this Agreement, such vote or Consent may be given at a
meeting of the Partners or may be given in accordance with the procedure
prescribed in Section 13.01(a) hereof. Except as otherwise expressly
provided in this Agreement, the Consent of holders of a majority of the
Percentage Interests held by Limited Partners (including Limited Partnership
Interests held by the Company) shall control.
(b) Any action required or permitted to be taken at a meeting of the
Partners may be taken without a meeting if a written consent setting forth
the action so taken is signed by a majority of the Percentage Interests of
the Partners (or such other percentage as is expressly required by this
Agreement). Such consent may be in one instrument or in several instruments,
and shall have the same force and effect as a vote of a majority of the
Percentage Interests of the Partners (or such other percentage as is
expressly required by this Agreement). Such consent shall be filed with the
General Partner. An action so taken shall be deemed to have been taken at a
meeting held on the effective date so certified.
(c) Each Limited Partner may authorize any Person or Persons to act for
him by proxy on all matters in which a Limited Partner is entitled to
participate, including waiving notice of any meeting, or voting or
participating at a meeting. Every proxy must be signed by the Limited
Partner or his attorney-in-fact. No proxy shall be valid after the
expiration of eleven (11) months from the date thereof unless otherwise
provided in the proxy. Every proxy shall be revocable at the pleasure of the
Limited Partner executing it, such revocation to be effective upon the
Partnership's receipt of written notice of such revocation from the Limited
Partner executing such proxy.
(d) Each meeting of the Partners shall be conducted by the General
Partner or such other Person as the General Partner may appoint pursuant to
such rules for the conduct of the meeting as the General Partner or such
other Person deems appropriate. Without limitation, meetings of Partners may
be conducted in the same manner as meetings of the shareholders of the
Company and may be held at the same time, and as part of, meetings of the
shareholders of the Company.
ARTICLE XII
AMENDMENT OF AGREEMENT; MERGER
12.01. AMENDMENT OF AGREEMENT. The General Partner's consent shall be
required for any amendment to this Agreement. The General Partner, without the
consent of the Limited Partners, may amend this Agreement in any respect or
merge or consolidate the Partnership with or into any
34
<PAGE>
other partnership or business entity (as defined in Section 17-211 of the Act)
in a transaction pursuant to Section 7.01(c), (d) or (e) hereof; PROVIDED,
HOWEVER, that the following amendments shall require the consent of Limited
Partners (other than the General Partner and any Limited Partner that is a
Subsidiary of the General Partner) holding more that two-thirds of the
Partnership Units held by such Limited Partners:
(a) any amendment affecting the operation of the Conversion Factor or
the Redemption Right (except as provided in Section 8.06(e) or 7.01(d), as
in effect on the date hereof) in a manner adverse to the Limited Partners;
(b) any amendment that would adversely affect the rights of the Limited
Partners to receive the distributions payable to them hereunder, except that
the Partnership may issue additional Partnership Units in accordance with
Section 4.02 hereof;
(c) any amendment that would alter the Partnership's allocations of
Profit and Loss to the Limited Partners (except that the Partnership may
issue additional Partnership Units in accordance with Section 4.02 hereof;
(d) any amendment that would impose on the Limited Partners any
obligation to make additional Capital Contributions to the Partnership; or
(e) any amendment to Section 2.03(a)(iii), 8.07, 9.02, or Article XII
hereof.
ARTICLE XIII
GENERAL PROVISIONS
13.01 NOTICES. All communications required or permitted under this
Agreement shall be in writing and shall be deemed to have been given when
delivered personally or upon deposit in the United States mail, registered,
postage prepaid return receipt requested, to the Partners at the addresses set
forth in EXHIBIT A attached hereto; PROVIDED, HOWEVER, that any Partner may
specify a different address by notifying the General Partner in writing of such
different address. Notices to the Partnership shall be delivered at or mailed to
its specified office.
13.02 SURVIVAL OF RIGHTS. Subject to the provisions hereof limiting
transfers, this Agreement shall be binding upon and inure to the benefit of the
Partners and the Partnership and their respective legal representatives,
successors, transferees and assigns.
13.03 ADDITIONAL DOCUMENTS. Each Partner agrees to perform all further
acts and execute, swear to, acknowledge and deliver all further documents which
may be reasonable, necessary, appropriate or desirable to carry out the
provisions of this Agreement or the Act.
13.04 SEVERABILITY. If any provision of this Agreement shall be declared
illegal, invalid, or unenforceable in any jurisdiction, then such provision
shall be deemed to be severable from this Agreement (to the extent permitted by
law) and in any event such illegality, invalidity or unenforceability shall not
affect the remainder hereof.
13.05 ENTIRE AGREEMENT. This Agreement and exhibits attached hereto
constitute the entire Agreement of the Partners and supersede all prior written
agreements and prior and contemporaneous oral agreements, understandings and
negotiations with respect to the subject matter hereof.
13.06 PRONOUNS AND PLURALS. When the context in which words are used in
the Agreement indicates that such is the intent, words in the singular number
shall include the plural and the masculine gender shall include the neuter or
female gender as the context may require.
13.07 HEADINGS. The Article headings or sections in this Agreement are for
convenience only and shall not be used in construing the scope of this Agreement
or any particular Article.
35
<PAGE>
13.08 COUNTERPARTS. This Agreement may be executed in several
counterparts, each of which shall be deemed to be an original copy and all of
which together shall constitute one and the same instrument binding on all
parties hereto, notwithstanding that all parties shall not have signed the same
counterpart.
13.09 GOVERNING LAW. This Agreement shall be governed by and construed in
accordance with the laws of the State of Delaware.
IN WITNESS WHEREOF, the parties hereto have hereunder affixed their
signatures to this Agreement of Limited Partnership, all as of the day of
1998.
GENERAL PARTNER
PACIFIC GATEWAY PROPERTIES, INC.
By: __________________________________
Name: ________________________________
Title: _______________________________
INITIAL LIMITED PARTNER:
By: __________________________________
Name: ________________________________
Title: _______________________________
36
<PAGE>
EXHIBIT A
<TABLE>
<CAPTION>
AGREED
VALUE OF
CASH CAPITAL PARTNERSHIP PERCENTAGE
PARTNER CONTRIBUTION CONTRIBUTION UNITS INTEREST
- ------------------------------------------------------------ ------------ ------------ ----------- -----------
<S> <C> <C> <C> <C>
GENERAL PARTNER:
INITIAL LIMITED PARTNER:
- ------------------------------------------------------------
- ------------------------------------------------------------
- ------------------------------------------------------------
LIMITED PARTNERS:
- ------------------------------------------------------------
- ------------------------------------------------------------
- ------------------------------------------------------------
- ------------------------------------------------------------
</TABLE>
37
<PAGE>
ANNEX E
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-K
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ______________ TO ______________
COMMISSION FILE NUMBER 1-8692
------------------------
PACIFIC GATEWAY PROPERTIES, INC.
(Exact name of Registrant as specified in its charter)
NEW YORK 04-2816560
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
930 MONTGOMERY STREET, SUITE 400
SAN FRANCISCO, CALIFORNIA 94133
(Address of principal executive offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (415) 398-4800
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
---------------------------------------- ---------------------------------
Common Stock, $1.00 par value American Stock Exchange
per share
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: NONE
------------------------
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes /X/ No / /
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K (Section229.405 of this chapter) is not contained herein,
and will not be contained, to the best of Registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K / /.
State the aggregate market value of the voting stock held by non-affiliates
of the Registrant as of March 20, 1998: Common Stock, Par Value
$1.00--$13,880,229.
Indicate the number of shares outstanding of each of the Registrant's
classes of common stock, as of March 20, 1998: Common Stock, Par Value
$1.00--3,899,596 shares.
DOCUMENT INCORPORATED BY REFERENCE
Portions of the Registrant's definitive Proxy Statement for its 1998 annual
meeting of shareholders, are incorporated by reference into Part III.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART I
ITEM 1. BUSINESS
GENERAL
Pacific Gateway Properties, Inc. (the Registrant) was incorporated under the
laws of the State of New York in January 1984 and began its operations in April
1984 upon the transfer to it of certain assets formerly owned by Perini
Corporation and the distribution of shares of the Registrant's Common Stock to
the stockholders of Perini Corporation in May 1984.
The Registrant holds interests in income producing real estate. As of
December 31, 1997, the Registrant's portfolio of operating properties consists
of economic interests in the following:
(i) Walnut Creek Executive Park, Walnut Creek, California--a 419,000
square foot office park consisting of twelve low-rise (two- and three-story)
office buildings--100% owned;
(ii) South Bay Office Tower, San Jose, California--a 161,000 square
foot, twelve-story office building--100% owned;
(iii) North Tucson Business Center, Tucson, Arizona--a 91,000 square
foot, single-story office/ industrial building--100% owned;
(iv) Weston Office Building, Fort Lauderdale, Florida--a 15,000 square
foot, three-story office building--100% owned;
(v) 410 First Avenue, Needham, Massachusetts--a 38,000 square foot,
single-story office/ industrial building located in a suburb of Boston--100%
owned;
(vi) West Valley Executive Park, San Jose, California--a 164,000 square
foot, campus style office park comprised of five two-story buildings and one
single-story building--100% owned;
(vii) 930 Montgomery Street, San Francisco, California--a 23,000 square
foot, six-story, steel frame office building--100% owned; and
(viii) Rincon Center, San Francisco, California--a mixed-use (retail,
office, apartment) complex in downtown San Francisco. This two phase project
contains 63,000 square feet of retail space, 414,000 square feet of office
space and 320 apartment units. The Registrant owns general (non-managing)
and limited partnership interests totaling approximately 22.8% in the
partnership that in turn owns Rincon Center. See "Item 3--Legal Proceedings"
and Note 2 to the Registrant's Consolidated Financial Statements for
information regarding pending litigation and other risks associated with
this project.
MANAGEMENT OF PROPERTIES
The Registrant manages its 100% owned operating properties directly or
through third party management companies. During 1996, the Registrant also
provided leasing, construction and/or property management services to Rincon
Center and other third party owned properties.
PROPERTY OWNED IN PARTNERSHIP WITH OTHERS
The Registrant's portfolio includes its general (non-managing) and limited
partnership interests in Rincon Center Associates, a California limited
partnership (RCA). RCA owns Rincon Center. The Registrant is not the managing
general partner of RCA. Operating and other decisions with respect to RCA and
Rincon Center are generally controlled by the managing general partner, an
entity that is unrelated to the Registrant; therefore, the Registrant has less
flexibility with respect to such asset, than if it owned it outright.
2
<PAGE>
BUSINESS PLAN AND POLICIES
The Registrant's overall business plan has been to assemble a substantial
portfolio of income producing properties. The Registrant has historically
focused its property acquisitions in four markets: Northern California, Arizona,
Florida and Massachusetts. The Registrant's long-term objectives continue to be
maximizing net cash flow from operations and achieving growth through
appreciation of asset values. The current strategic plan of the Registrant is to
focus on real estate investment on the West Coast with specific emphasis on the
San Francisco Bay Area. The current investment emphasis is on commercial
properties which require aggressive management and leasing in order to maximize
their potential. This strategy is influenced by the following factors: (1) the
Registrant's current property portfolio is concentrated on the West Coast; and
(2) the Registrant believes that geographic concentration will enhance
operational efficiencies.
The Registrant regularly examines each asset in its portfolio, focusing on
each property's current cash flow, anticipated cash requirements, the economics
of its local marketplace, as well as the asset's position in that market and the
potential for sale, refinancing and return on additional investment. In
conjunction with this process, the Registrant from time to time offers for sale
certain assets to reduce its involvement in certain markets, create liquidity
and advance the geographic and property type concentration and efficiency of the
Registrant's operations. In 1996, the Registrant sold its hotel property in
Arizona and its shopping center property in Florida, and completed the
refinancing of $14.3 million of mortgage debt on the Weston Office Building,
North Tucson Business Center and South Bay Office Tower. In 1997, the Registrant
acquired two office properties in California. These transactions are more fully
discussed in the pages that follow. The Registrant intends to continue to make
use of borrowed money or leveraging, as is customary with the types of
properties it intends to own. The amount of mortgage debt supported by each
project depends on, among other factors, its cash flow available to service such
debt.
COMPETITION
Within its geographic areas of operation, the Registrant is subject to
competition from a variety of investors, including insurance companies, pension
funds, corporate and individual real estate developers, real estate investment
trusts, and investors with similar investment objectives to those of the
Registrant. Some of these competitors have greater financial resources, larger
staffs and longer operating histories than the Registrant. As an owner of
commercial real estate properties, the Registrant competes with other owners of
similar properties in connection with their financing, sale, or leasing
transactions.
EMPLOYEES
As of December 31, 1997, the Registrant had 13 full-time employees and one
part-time
employee, compared to 12 full-time employees and no part-time employees as of
December 31, 1996. The increase in personnel is primarily related to the
acquisition of two additional properties in January 1997.
FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS, SEASONALITY AND OTHER FACTORS
The Registrant is engaged in the business of owning and managing income
producing real estate. The requirement for industry segment presentation is not
applicable. The Registrant's business is not affected by seasonal factors,
except for its former hotel property investment. All of the Registrant's
operations are located in the United States.
3
<PAGE>
PROPERTY INSURANCE
The Registrant believes that all of the wholly owned properties and property
owned in partnership with others are adequately covered by insurance. The
Registrant's wholly owned San Francisco Bay Area properties do not maintain
earthquake insurance.
TENANTS
There are no individual tenants in any of the Registrant's wholly owned
properties that contributed 15% or more to consolidated investment property
revenues for the year ended December 31, 1997. For the years ended December 31,
1996 and 1995, one tenant, AirTouch Communications, Inc. (a tenant at Walnut
Creek Executive Park), contributed 16.8% and 17.2% respectively, to consolidated
investment property revenues. Generally, lease terms range from one to five
years. Leases of approximately 73,800 square feet of rental space, or
approximately 9% of the leases in the Registrant's investment portfolio as of
December 31, 1997, will expire in 1998.
ITEM 2. PROPERTIES
As of December 31, 1997, the Registrant had an economic interest in eight
operating properties.
For information concerning encumbrances on the Registrant's properties,
reference is made to "Other Matters Relating to Properties" below and to Note 3
of the Notes to the Registrant's Consolidated Financial Statements included
elsewhere in this annual report.
4
<PAGE>
The following table sets forth certain information regarding the
Registrant's properties which were owned as of December 31, 1997:
<TABLE>
<CAPTION>
GENERAL # OF UNITS AND/OR # OF TENANTS
PROPERTY NAME DESCRIPTION LOCATION LEASABLE SQ. FT. AND OCCUPANCY %
- ---------------------------------- ---------------------------- ----------------- ------------------- -------------------
<S> <C> <C> <C> <C>
Walnut Creek Executive Park 11 two-story wood framed Walnut Creek, 419,000 sq. ft. 67 tenants;
garden office buildings, and California 91% occupancy
one three-story structural
steel frame office building
South Bay Office Tower Twelve-story office building San Jose, 161,000 sq. ft. 47 tenants;
California 89% occupancy
North Tucson Business Center Single-story office/ Tucson, Arizona 91,000 sq. ft. 2 tenants;
industrial building 100% occupancy
Weston Office Building Three-story office building Ft. Lauderdale, 15,000 sq. ft. 3 tenants;
Florida 100% occupancy
410 First Avenue Single-story office/ Needham, 38,000 sq. ft. 1 tenant;
industrial building Massachusetts 100% occupancy
West Valley Executive Park Campus style office park San Jose, 164,000 sq. ft. 71 tenants;
with five two-story and one California 61% occupancy
single-story wood frame
buildings
930 Montgomery Street Six-story, steel frame San Francisco, 23,000 sq. ft. 7 tenants;
office building California 98% occupancy
Rincon Center Major mixed-use project in San Francisco, 63,000 sq. ft. of Retail Space--
downtown San Francisco California retail space; 31 tenants;
88% occupancy
414,000 sq. ft. of Office Space--
office space; 9 tenants;
100% occupancy
320 apartments Apartments--
99% occupancy
<CAPTION>
OWNED % REGISTRANT
PROPERTY NAME BY OWNERSHIP
- ---------------------------------- ------------ -------------
<S> <C> <C>
Walnut Creek Executive Park Registrant 100%
South Bay Office Tower Registrant 100%
North Tucson Business Center Registrant 100%
Weston Office Building Registrant 100%
410 First Avenue Registrant 100%
West Valley Executive Park Registrant 100%
930 Montgomery Street Registrant 100%
Rincon Center RCA 22.8%
</TABLE>
5
<PAGE>
OTHER MATTERS RELATING TO PROPERTIES
WEST VALLEY EXECUTIVE PARK (WVEP) ACQUISITION
On January 17, 1997, the Registrant completed the purchase of WVEP which is
a multi-tenant, six building campus style office park located at 4000-4050
Moorpark Avenue, San Jose, California for $17,500,000 or $106.70 per square
foot. WVEP's six buildings contain approximately 164,000 square feet and are
situated on 7.7 acres. The Registrant purchased WVEP from Peter Paulsen. In
connection with this acquisition, the Registrant assumed approximately
$10,203,000 in debt from Sun Life Assurance Company of Canada (U.S.) which is
amortized over 20 years at a fixed annual interest rate of 9.13%, and matures on
June 30, 2005. The debt continues to be assumable and is subject to a prepayment
penalty if repaid prior to maturity.
930 MONTGOMERY STREET ACQUISITION
On January 17, 1997, the Registrant completed the purchase of 930 Montgomery
Street which is a multi-tenant, 23,000 square foot, six-story, steel frame
office building located at 930 Montgomery Street, San Francisco, California for
$3,250,000 or $141.30 per square foot. The Registrant purchased 930 Montgomery
Street from Donlon H. Gabrielsen and Agnes H. Gabrielsen. In connection with
this acquisition, the Registrant obtained new debt of $2,112,500 from Redwood
Bank which is amortized over 25 years at a floating annual interest rate of 3%
over the one year treasury bond rate, adjustable every six months, and maturing
on February 1, 2002. This debt may be prepaid at any time without a penalty and
is non-recourse to the Registrant.
PRINCIPAL BUSINESS CARRIED ON IN OR FROM THE PROPERTIES
Walnut Creek Executive Park tenants include banking, healthcare,
telecommunications, research and development enterprises, and professional
service companies. South Bay Office Tower tenants include healthcare,
telecommunications, research and development enterprises, and professional
service companies. North Tucson Business Center tenants include printing and
telemarketing companies.
Weston Office Building tenants include banking, financial services and real
estate development companies. 410 First Avenue's tenant is a computer hardware
and software products company. West Valley Executive Park tenants include
healthcare, high-tech and software related companies, financial services and
other professional service companies. 930 Montgomery Street tenants include
multi-media, software products and professional service companies.
ITEM 3. LEGAL PROCEEDINGS
On March 20, 1997, the Registrant filed a Complaint in the San Francisco
Superior Court, Case No. 985464, against Rincon Center Associates and Perini
Land and Development Company seeking to recover approximately $812,000 in
commissions due for leasing and construction services performed for Rincon
Center. The Complaint has been answered and a Cross-Complaint has been filed.
The Cross-Complaint seeks indemnity concerning the claim for leasing commissions
on the ground that the Registrant is also a general partner of RCA, and further
seeks to rescind or otherwise avoid the effect of a letter agreement of June 22,
1993, regarding non-recourse loans from Perini Land and Development Company to
the Registrant, together with restitution of amounts loaned to the Registrant
pursuant to such letter agreement. A trial date has been set for August 3, 1998,
however the case is only in the beginning stages of discovery, and the
Registrant is not in a position at this time to opine as to the likelihood or
remoteness of liability, or the amount of damages should liability be
established.
See Note 2 to the Registrant's Consolidated Financial Statements concerning
the $3.65 million letter of credit issued by the Bank of America National Trust
and Savings Association (the Issuing Bank) as a portion of the security for the
refinancing of Rincon Center, Phase Two. On August 18, 1997, the Issuing Bank
commenced an action against the Registrant in the Land Court Department of
6
<PAGE>
the Trial Court of Massachusetts, to obtain a conditional judgement in the full
amount of the Registrant's indebtedness to the Issuing Bank, which the Issuing
Bank alleges is in excess of $3.7 million. In the event that the Registrant
fails to pay such conditional judgement, the complaint seeks, among other
remedies, to foreclose on the 410 First Avenue property and obtain a deficiency
judgement. Under Massachusetts law, such foreclosure cannot take place until at
least three years and two months after the issuance of a conditional judgement.
However, if the Issuing Bank should obtain a conditional judgement, the Issuing
Bank could take possession of the property and receive rents paid thereon during
the three-year period preceding foreclosure. The Registrant is vigorously
defending the action. The Registrant filed a complaint against the Issuing Bank
on November 21, 1997 in the Superior Court Department of the Trial Court of the
Commonwealth of Massachusetts seeking damages, equitable relief and a jury trial
for causes of action flowing from the Issuing Bank's conduct regarding the
letter of credit. The result of the action brought by the Issuing Bank against
the Registrant is uncertain, and it is not possible at this time to project a
likely outcome of the proceeding.
The Registrant is involved in various other claims and lawsuits incidental
to its business. In the opinion of the Registrant, these other claims and
lawsuits in the aggregate will not have a material adverse impact on the
Registrant's financial condition.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
EXECUTIVE OFFICERS OF THE REGISTRANT
Set forth below is certain information concerning persons who are executive
officers of the Registrant.
RAYMOND V. MARINO (AGE 39). Mr. Marino has been Chief Executive Officer and
President of the Registrant since January 1996 and a Director since March 1996.
Mr. Marino had been Vice President and Chief Financial Officer of the Registrant
since August 1992. Previously, he was with Hunting Gate Investments, a private
British real estate investment and management company, as Vice President of
Finance and Controller. Mr. Marino has a Bachelor of Science degree in
Accounting from Santa Clara University and a Masters degree in Taxation from
Golden Gate University. Mr. Marino maintains an active license as a California
Certified Public Accountant, and is a member of the American Institute of CPA's,
California Society of CPA's, and National Association of Real Estate Investment
Trusts.
CHRISTOPHER M. WATSON (AGE 39). Mr. Watson had been Vice President of the
Registrant since September 1992, and became Executive Vice President as of
January 1996. His responsibilities include the management of personnel in the
marketing and leasing operations of the Registrant. Previously, he was Vice
President for Coldwell Banker Commercial Real Estate Services Inc., as a
licensed real estate agent representing both property owners and investors in
commercial real estate leasing and acquisitions. Mr. Watson has a Bachelor of
Arts degree from the University of California at Berkeley.
STEPHEN J. LOPRESTI (AGE 37). Mr. LoPresti has been Vice President, Finance
of the Registrant since November 1997. His responsibilities include financings,
acquisitions and dispositions. Previously, Mr. LoPresti worked as a consultant
for Ernst & Young Kenneth Leventhal Real Estate Group. Prior to obtaining his
masters degree, Mr. LoPresti was the principal and founder of LoPresti and
Associates. Mr. LoPresti has a Bachelor of Arts degree from Harvard University
and a Masters in Business Administration from the Anderson School at U.C.L.A.
Mr. LoPresti maintains an active real estate license in the Commonwealth of
Massachusetts.
Each executive officer holds office at the discretion of the Board of
Directors.
7
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
COMMON STOCK
On March 20, 1998, there were approximately 1,073 holders of record of the
Registrant's Common Stock. The Registrant's Common Stock is traded on the
American Stock Exchange under the symbol "PGP".
The table below sets forth, for the indicated periods, the high and low
prices per share of the Registrant's Common Stock as reported on the American
Stock Exchange Consolidated Reporting System.
<TABLE>
<CAPTION>
HIGH LOW
-------- ---------
<S> <C> <C>
1998
First Quarter (through March 20, 1998)..................................... $ 8 $ 4 1/4
1997
First Quarter.............................................................. 4 1/2 3 1/4
Second Quarter............................................................. 6 4 1/4
Third Quarter.............................................................. 5 7/8 4 5/8
Fourth Quarter............................................................. 5 3/8 4 3/4
1996
First Quarter.............................................................. 3 7/16 2 1/2
Second Quarter............................................................. 4 3/4 2 7/8
Third Quarter.............................................................. 4 3/4 3 1/4
Fourth Quarter............................................................. 3 3/4 2 3/8
</TABLE>
During the third quarter of 1990, the Registrant's Board of Directors
determined to suspend dividend payments until operating cash flows can again
support such payments. The Registrant has not paid dividends since the third
quarter of 1990 and will continue to periodically review its ability to resume
dividends.
8
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA.
The selected financial data should be read in conjunction with the
Consolidated Financial Statements of the Registrant and related notes listed in
Item 14 of this annual report and included elsewhere herein. The selected
financial data is not covered by the report of the independent public
accountants. (In thousands, except per share data)
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
------------------------------------------------------
1997 1996 1995 1994 1993
--------- --------- --------- --------- ----------
<S> <C> <C> <C> <C> <C>
FINANCIAL POSITION
Investment properties, net................................ $ 54,225 $ 32,797 $ 33,572 $ 58,359 $ 75,786
Properties held for sale, net............................. -- -- 22,230 -- --
Equity investment and loans to RCA........................ -- -- -- 4,020 6,491
Deferred tax asset........................................ 8,203 4,183 6,831 6,845 --
Other assets.............................................. 6,283 15,413 3,254 2,210 2,313
--------- --------- --------- --------- ----------
Total assets.............................................. $ 68,711 $ 52,393 $ 65,887 $ 71,434 $ 84,590
--------- --------- --------- --------- ----------
--------- --------- --------- --------- ----------
Debt...................................................... $ 47,402 $ 33,722 $ 61,778 $ 63,099 $ 98,916
--------- --------- --------- --------- ----------
--------- --------- --------- --------- ----------
Deferred tax liability.................................... $ 17,983 $ 15,012 $ 10,514 $ 12,209 $ --
--------- --------- --------- --------- ----------
--------- --------- --------- --------- ----------
Excess of cash distributions received over equity in
earnings of Golden Gateway Center....................... $ -- $ -- $ -- $ -- $ 18,126
--------- --------- --------- --------- ----------
--------- --------- --------- --------- ----------
Stockholders' equity (deficit)............................ $ 648 $ 2,168 $ (9,186) $ (6,502) $ (35,321)
--------- --------- --------- --------- ----------
--------- --------- --------- --------- ----------
Stockholders' equity (deficit) per share.................. $ 0.17 $ 0.56 $ (2.36) $ (1.68) $ (9.11)
--------- --------- --------- --------- ----------
--------- --------- --------- --------- ----------
</TABLE>
9
<PAGE>
The selected financial data should be read in conjunction with the
Consolidated Financial Statements of the Registrant and related notes listed in
Item 14 of this annual report and included elsewhere herein. The selected
financial data is not covered by the report of the independent public
accountants. (In thousands, except share and per share data)
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
-----------------------------------------------------
1997 1996 1995 1994 1993
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
INCOME RESULTS
Revenue from investment properties......................... $ 13,721 $ 11,011 $ 12,200 $ 11,027 $ 14,193
Revenue from hotel property................................ $ -- $ 6,111 $ 7,009 $ 7,357 $ 7,837
Investment in partnership, net............................. $ -- $ 2,940 $ (4,090) $ (1,298) $ (1,719)
Gain on redemption of partnership interests................ $ -- $ -- $ -- $ 39,078 $ 3,602
Provision for settlement of reimbursement obligation....... $ (2,200) $ -- $ -- $ -- $ --
Gain on sale of real estate assets, net.................... $ -- $ 16,714 $ 177 $ 664 $ 1,045
Provision for write-down to estimated net
realizable value......................................... $ -- $ -- $ (540) $ (1,000) $ (1,000)
Extraordinary items........................................ $ -- $ 766 $ (233) $ (325) $ 4,850
Net income (loss).......................................... $ (1,726) $ 11,354 $ (2,729) $ 28,817 $ 4,583
Income (loss) per share, basic:
Income (loss) before extraordinary items................. $ (0.44) $ 2.72 $ (0.64) $ 7.51 $ (0.07)
Extraordinary items...................................... -- 0.20 (0.06) (0.08) 1.25
--------- --------- --------- --------- ---------
Net income (loss)........................................ $ (0.44) $ 2.92 $ (0.70) $ 7.43 $ 1.18
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Number of common shares and share equivalents
outstanding, basic..................................... 3,893 3,893 3,893 3,880 3,879
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Income (loss) per share, diluted:
Income (loss) before extraordinary items................. $ (0.44) $ 2.58 $ (0.64) $ 7.09 $ (0.07)
Extraordinary items...................................... -- 0.19 (0.06) (0.08) 1.25
--------- --------- --------- --------- ---------
Net income (loss)........................................ $ (0.44) $ 2.77 $ (0.70) $ 7.01 $ 1.18
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Number of common shares and share equivalents
outstanding, diluted................................... 3,893 4,100 3,893 4,111 3,881
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FINANCIAL CONDITION
CAPITAL IMPROVEMENTS, TENANT IMPROVEMENTS AND OTHER DEFERRED COSTS--In
January 1997, the Registrant acquired two investment properties for a total cost
of approximately $21,000,000, including capitalized acquisitions fees. In 1997,
there were other additions to investment properties amounting to approximately
$4,161,000 for tenant improvements, capital improvements and other deferred
costs which includes leasing commissions. Additionally, the Registrant incurred
$236,000 in 1997 relating to loan costs. The Registrant anticipates additions to
investment properties will amount to approximately $3,500,000 in 1998.
FINANCING--In connection with the acquisition of investment properties in
January 1997, the Registrant assumed and borrowed mortgage notes totaling
approximately $12,315,000. A total of approximately $835,000 of debt principal
was repaid in 1997 as scheduled debt amortization. Lastly, a liability of $2.2
million was recorded as a result of recording an estimated settlement obligation
related to a drawn letter-of-credit. Accordingly, at December 31, 1997, the
Registrant has fixed rate mortgage debt of approximately $43.1 million bearing
interest at a weighted average rate of 8.49%, one floating rate mortgage of
approximately $2.1 million bearing interest at a rate of 8.75%, and a secured
estimated
10
<PAGE>
settlement obligation recorded at $2.2 million (accruing interest at a rate of
prime plus 3% on the stated settlement obligation of $3.65 million). The
estimated settlement obligation is more fully discussed in Note 2 to the
Registrant's Consolidated Financial Statements.
NET INCOME (LOSS)
INVESTMENT PROPERTIES--During 1997, income from investment properties was
$599,000 compared to a loss of $1,181,000 for 1996. The increase in rental
revenues for 1997 compared to 1996 is due to the acquisition of two investment
properties and increased rental rates at various properties. The increase in
operating expenses for 1997 compared to 1996 is due to the acquisition of two
investment properties, offset by decreased payroll costs and a property tax
refund received in 1997. Interest expense decreased slightly from $4,092,000 in
1996 to $4,058,000 in 1997. Included in interest expense for 1997 is $227,000 of
interest recorded on the settlement obligation as described above. Depreciation
and amortization expense increased as a result of commencing depreciation on
expenditures capitalized during 1997 relating to leasing activities and capital
improvement projects, and new investment property acquisitions completed in
January 1997.
During 1996, the loss from investment properties was $1,181,000 compared to
income of $747,000 during 1995. The decrease in rental revenues for 1996
compared to 1995 is due to the sale of Village Commons Shopping Center (VCSC)and
decreased occupancy at Walnut Creek Executive Park (WCEP). The decrease in
operating expenses for 1996 compared to 1995 is primarily attributed to the sale
of VCSC and reduced costs at WCEP. The increase in interest expense for 1996
compared to 1995 is the result of the Registrant's 1996 debt refinancings. The
increase in depreciation and amortization expense for 1996 compared to 1995 is
the result of increased capital expenditures in 1996. This additional expense
was partially offset by the cessation of depreciation on the VCSC property which
was held for sale.
11
<PAGE>
The following table identifies the impact of certain investment property
dispositions, acquisitions, and properties owned in the three years ended
December 31, 1997, 1996 and 1995, respectively (in thousands):
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
INVESTMENT PROPERTIES OWNED IN 1997, 1996 AND 1995:
Rental revenues............................................ $ 10,747 $ 10,305 $ 9,539
Operating expenses......................................... (4,618) (5,371) (4,478)
Interest expense........................................... (3,002) (3,823) (2,235)
Depreciation expense....................................... (2,597) (2,632) (2,399)
--------- --------- ---------
530 (1,521) 427
--------- --------- ---------
INVESTMENT PROPERTIES ACQUIRED IN JANUARY 1997:
Rental revenues............................................ 2,974 -- --
Operating expenses......................................... (1,337) -- --
Interest expense........................................... (1,056) -- --
Depreciation expense....................................... (512) -- --
--------- --------- ---------
69 -- --
--------- --------- ---------
INVESTMENT PROPERTY SOLD IN APRIL 1996:
Rental revenues............................................ -- 706 2,661
Operating expenses......................................... -- (97) (1,039)
Interest expense........................................... -- (269) (1,120)
Depreciation expense....................................... -- -- (182)
--------- --------- ---------
-- 340 320
--------- --------- ---------
TOTAL INVESTMENT PROPERTIES:
Rental revenues............................................ 13,721 11,011 12,200
Operating expenses......................................... (5,955) (5,468) (5,517)
Interest expense........................................... (4,058) (4,092) (3,355)
Depreciation expense....................................... (3,109) (2,632) (2,581)
--------- --------- ---------
TOTAL INVESTMENT PROPERTIES INCOME (LOSS).................... $ 599 $ (1,181) $ 747
--------- --------- ---------
--------- --------- ---------
</TABLE>
HOTEL PROPERTY--The Registrant sold the hotel property in December 1996 and,
accordingly, a comparison of operations from 1996 to 1997 is not meaningful.
During 1996, income from the hotel property was $1,013,000 compared to
$1,158,000 during 1995. The decrease in revenues for 1996 compared to 1995 is
due to the decrease in occupancy which was offset in part by an increase in the
average daily room rate. Operating expenses were constant between 1996 and 1995.
However, operating expenses in 1996 included an asset management fee of $446,745
which was paid to the buyer of the hotel as consideration for the one year
extended close of escrow during 1996. The decrease in interest expense for 1996
compared to 1995 is the result of the Registrant's debt restructuring. The
decrease in depreciation and amortization expense is the result of the cessation
of depreciation since this property was held for sale.
INVESTMENT IN PARTNERSHIP--Subsequent to 1994, the Registrant's partnership
interests consisted of its 22.8% combined general (non-managing) and limited
partnership interests in RCA. In 1996, the Registrant ceased recording any
activity related to its interest in RCA because (i) in 1995, it had written-down
its equity investment in and loans to RCA to zero, and (ii) the Registrant
currently has no obligation, prospects or plans to invest further in or on
behalf of RCA.
During 1995, the Registrant recorded its 22.8% equity interest in RCA's net
loss which amounted to $4,090,000. Additionally, in 1995, the Registrant
recorded a $540,000 provision for net realizable
12
<PAGE>
value to write-down the remaining balance of its equity investment in and loans
to RCA to zero as the Registrant attributed no value to its equity investment in
RCA.
In 1993, the Registrant entered into an agreement with RCA's managing
general partner whereby such managing general partner agreed to advance funds to
RCA on behalf of the Registrant on an unsecured non-recourse basis, subject to
interest at prime plus 2% and certain annual fees (principal, unpaid interest
and fees are collectively referred to as the RCA Advances). The agreement does
not reduce the level of the Registrant's general and limited partnership
interests in RCA. The RCA Advances are only required to be repaid from the
Registrant's share of future distributions from RCA, if any. During 1996, the
Registrant recorded a credit to income ("Reversal of debt related to investment
in RCA" on the Registrant's Consolidated Statement of Income (Loss)) to
eliminate the previously recorded liability for the RCA Advances of $2,940,000.
During 1997, 1996 and 1995, RCA incurred net losses of approximately
$37,923,000, $16,451,000 and $17,924,000, respectively. The RCA Advances amount
to approximately $6,748,000 at December 31, 1997 and as noted above, are not
recorded on the Registrant's financial statements since (i) the RCA Advances are
only required to be repaid from the Registrant's share of future distributions,
if any, (ii) the Registrant has no intent or legal obligation to repay the RCA
Advances other than from its share of distributions from RCA, if any, and (iii)
the Registrant does not anticipate any material cash distributions by RCA in the
foreseeable future.
The Registrant projects a negative tax basis for its partnership investment
in RCA of approximately $22,261,000, as of December 31, 1997, since the
Registrant's share of tax losses exceeds its investment in RCA. The Registrant's
negative tax basis in RCA indicates that the Registrant will face a substantial
taxable gain if and when its interest in RCA is ever disposed of.
GENERAL AND ADMINISTRATIVE EXPENSES--General and administrative expenses
decreased from $1,603,000 in 1996 to $1,250,000 in 1997. This decrease is
primarily attributable to a decrease in professional services and personnel
costs including severance to a former executive. General and administrative
expenses increased to $1,603,000 in 1996 from $1,476,000 in 1995. The increase
in general and administrative expenses for 1996 compared to 1995 is attributable
to increased professional fees offset by a reduction in payroll costs.
INTEREST EXPENSE ON PARTNERSHIP AND OTHER CORPORATE DEBT--During 1995, the
Registrant recorded interest and fees related to the RCA Advances of $340,000,
as previously discussed.
OTHER INCOME (EXPENSE)--Other income was $192,000 in 1997 compared to
$540,000 in 1996. Other income was $540,000 in 1996 compared to an expense of
$15,000 in 1995. In 1997, other income consists primarily of interest earned,
net of depreciation on corporate fixed assets. Other income for 1996 included
the gain from the sale of vacant land in Colorado and business advisory fees,
net of depreciation on corporate fixed assets. In 1995, other expense consisted
primarily of depreciation on corporate fixed assets.
PROVISION FOR SETTLEMENT OF REIMBURSEMENT OBLIGATION--The Registrant
recorded a provision of $2,200,000 for the ultimate settlement of a
letter-of-credit reimbursement obligation, as more fully discussed in Note 2 to
the Registrant's Consolidated Financial Statements.
GAIN ON SALE OF REAL ESTATE ASSETS, NET--In December 1996, the Registrant
sold the Radisson Suites Hotel in Tucson, Arizona to an unrelated party and
realized a gain for financial reporting purposes of $5,814,000. In April 1996,
the Registrant sold the Village Commons Shopping Center in West Palm Beach,
Florida, to an unrelated party and realized a gain for financial reporting
purposes of $10,900,000. In June 1995, the Registrant disposed of a parcel of
land in Walnut Creek, California, to an unrelated party and realized a gain of
$177,000.
13
<PAGE>
PROVISION FOR WRITE-DOWN TO ESTIMATED NET REALIZABLE VALUE--In 1995, the
Registrant recorded a provision of approximately $540,000 for the write-down to
zero of its investment in RCA, as previously discussed.
INCOME TAX (PROVISION) BENEFIT--In 1997, the Registrant recorded an income
tax benefit of 37% of loss before taxes. This amount was less than the 41%
effective rate recorded in 1996 and 1995, due to certain 1997 taxable items
which were not included in income for financial statement purposes.
EXTRAORDINARY GAIN (LOSS) FROM EXTINGUISHMENT OF DEBT--In December 1996, the
Registrant completed the sale of the Radisson Suites Hotel. As a result of this
sale, the Registrant was able to pay off debt to the hotel's mortgage lender
resulting in an extraordinary gain on extinguishment of debt of $766,000 which
results from the difference between the face value of the debt principal and the
amount required to extinguish the related obligation, net of the related write
off of loan fees. In June 1995, the Registrant completed the refinancing of $20
million of debt related to WCEP. As a result of this refinancing, the Registrant
had written off the unamortized loan fees of $233,000.
LIQUIDITY AND CAPITAL RESOURCES
REGULATION AND SUPERVISION
Many jurisdictions have adopted laws and regulations relating to the
ownership of real estate. Compliance with these requirements from time to time
may require capital expenditures by the Registrant (for example, expenditures
necessary in order to comply with the Americans with Disabilities Act or changes
in local building or other codes). In addition, the Registrant may from time to
time have to expend capital for environmental control facilities. While the
ownership of real estate may entail environmental risks and liabilities to the
owner, the Registrant's management is sensitive to environmental issues and is
not currently aware of and does not expect any material effects on current or
future capital expenditures, earnings or competitive position resulting from
compliance with present federal, state or local environmental control
provisions.
DISCUSSION OF KNOWN TRENDS, EVENTS AND UNCERTAINTIES
The economic climate for commercial real estate has shown signs that rental
rates and property values have stabilized and in selected markets has improved.
Notwithstanding a stabilizing real estate market, tenants may or may not
continue to renew leases as they expire or may renew on less favorable terms.
Conditions differ in each market in which the Registrant's properties are
located. Because of the continuing uncertainty of future economic developments
in each market, the impact these developments will have on the Registrant's
future cash flow and results of operations is uncertain.
Inflation, inflationary expectations and their effect on interest rates may
affect the Registrant in the future by changing the underlying value of the
Registrant's real estate or by impacting the costs of financing the Registrant's
operations.
LIQUIDITY AND CAPITAL RESOURCES
The bulk of the Registrant's resources are committed to relatively
non-liquid real estate assets. These assets, due to their value and cash flow,
have provided the Registrant with an ability to generate capital as required,
both internally and externally, through asset-based financings. In addition,
since 1992, assets or portions thereof were sold to provide further liquidity.
The Registrant has taken several actions to generate and conserve cash as
discussed below and continues to review and analyze alternative actions. At the
same time, the Registrant is seeking to retain value and identify future
opportunities for investment. At December 31, 1997, the Registrant had
approximately $2.1 million of unrestricted cash, $1.7 million of restricted
cash, investment properties with a net book value of approximately $54.2 million
(including the 410 First Avenue property recorded
14
<PAGE>
at its estimated net realizable value of $2.2 million), total non-recourse
mortgage debt and secured estimated settlement obligation of approximately $47.4
million and stockholders' equity of approximately $.6 million. Given the
Registrant's desire to increase its liquidity, the Registrant has actively
pursued the sale of selected real estate assets in the past, has restructured
and refinanced its mortgage debt, and has entered into an agreement with the
managing general partner of RCA to limit the Registrant's cash obligations to
RCA. The Registrant continues to evaluate various alternatives to improve its
liquidity through debt refinancing and the sale of properties which do not fit
within its long term strategy. Funds raised in the preceding fashion would be
used for tenant improvements and other capital requirements, certain mandatory
debt reductions, and possible new investments.
As of December 31, 1997, the Registrant's mortgage debt had scheduled annual
principal maturities as follows (in thousands):
<TABLE>
<CAPTION>
CURRENT
---------
<S> <C>
1998............................................................................... $ 3,152
1999............................................................................... 1,025
2000............................................................................... 1,115
2001............................................................................... 1,997
2002............................................................................... 1,265
Thereafter......................................................................... 38,848
---------
$ 47,402
---------
---------
</TABLE>
The 1998 scheduled principal maturities of $3,152,000 includes the
$2,200,000 liability related to the reimbursement obligation as described below.
As discussed in the Registrant's Consolidated Financial Statements, the
Registrant is also obligated to fund reserves for building, tenant improvements
and leasing commissions in connection with its mortgage loans on Walnut Creek
Executive Park, North Tucson Business Center, and South Bay Office Tower.
Scheduled funding under the various mortgage loan agreements over the twelve
months ending December 31, 1998, amounts to approximately $597,000.
The Registrant's 410 First Avenue property is pledged as collateral for a
$3.65 million letter-of-credit that was drawn as of June 30, 1997. As discussed
in Note 2 of the Registrant's Consolidated Financial Statements, the Issuing
Bank made a demand on the Registrant to reimburse them for the $3.65 million
drawn on the letter-of-credit and also notified the Registrant that it is in
default with respect to the reimbursement obligation. The reimbursement
obligation of the Registrant to the Issuing Bank is full recourse to the
Registrant and is secured by the 410 First Avenue property. On August 21, 1997,
the Issuing Bank commenced an action for conditional judgement seeking, among
other remedies, to foreclose on the 410 First Avenue property. Under
Massachusetts law, such foreclosure could not take place until at least three
years and two months after the issuance of the conditional judgement. However,
if the Registrant does not pay the amount of the conditional judgement within
two months after its issuance, the Issuing Bank could take possession of the
property during the three year period preceding foreclosure. If the Issuing Bank
completes a foreclosure on the 410 First Avenue property, the Registrant will
eliminate $3.65 million in secured debt (currently recorded at $2.2 million) on
a property that is producing approximately $240,000 in annual cash flow. In such
action, the Issuing Bank is seeking to assert a deficiency claim against the
Registrant for any alleged difference between the value of the foreclosed
property and the $3.65 million drawn on the letter-of-credit including
outstanding interest and fees. The Registrant intends to vigorously defend any
such deficiency claim. In accordance with generally accepted accounting
principles, effective June 30, 1997, the Registrant recorded a "provision for
settlement of reimbursement obligation" in the amount of $2.2 million. The
accrued amount is equal to the net book value at June 30, 1997, of the 410 First
Avenue property that
15
<PAGE>
serves as collateral for the reimbursement obligation, resulting in an effective
discount of the $3.65 million face value of the reimbursement obligation. The
Registrant has recorded rental revenue and operating expenses related to this
property, as well as accrued interest on the $3.65 million settlement obligation
at the prime rate plus three percent. Any difference between the provision for
settlement of reimbursement obligation and the amount ultimately settled upon
may be charged or credited to the Registrant's operations as such difference
becomes determinable. Management can provide no assurances as to the ultimate
settlement amount or method (and the timing thereof) relating to the
reimbursement obligation.
The Registrant's minority, general (non-managing) and limited partnership
interests in RCA represent significant potential financial exposure. This
exposure includes, and may not be limited to, the potential tax liability
associated with the Registrant's negative tax basis, the joint and several
guarantees provided by the Registrant to the mortgage lender on Rincon Center
Phase Two and the master lessor on Rincon Center Phase One, and the potential
tax liability that would exist from the cancellation of debt in connection with
a possible debt restructuring. Additionally, RCA's managing general partner
agreed to advance funds to RCA on behalf of the Registrant on an unsecured
non-recourse basis, subject to interest at the prime rate plus 2% and certain
fees (principal, unpaid interest and fees are collectively referred to as the
RCA Advances). As indicated previously, RCA's managing general partner is
seeking to void the letter agreement under which these loans were made and is
also seeking restitution of the loans advanced. The RCA Advances amount to
$6,748,000 at December 31, 1997, and are not recorded by the Registrant since
(i) the RCA Advances are only required to be repaid from the Registrant's share
of future distributions from RCA, if any, (ii) the Registrant has no intention
or legal obligation to repay the RCA Advances other than from its share of
distributions from RCA, if any, and (iii) the Registrant does not anticipate any
material cash distributions by RCA in the foreseeable future. The managing
general partner of RCA is currently in negotiations to refinance the debt on
Rincon Center Phases One and Two as more fully described in Note 2 to the
Registrant's Consolidated Financial Statements. The proposed refinancing is
subject to a number of conditions and approvals among the parties involved in
the refinancing. The managing general partner of RCA and the Registrant can make
no assurances that the refinancing will be completed.
Except as described above, at December 31, 1997, the Registrant's material
capital expenditures over the next twelve months and beyond are expected to be
funded from restricted cash or future cash flow generated by operating
activities. Ongoing repair and maintenance expenditures are expected to be
funded from cash flow generated by operating activities. Future tenant
improvements and leasing commissions will be funded from restricted cash, cash
flow generated by operating activities and funds generated from future debt
refinancings or property sales, if any.
The Registrant continued to experience more stabilized operating results in
its wholly owned properties during 1997, and, except for RCA, expects this trend
to continue. In addition, the completion of certain leasing transactions has
continued to reduce the level of vacancy in the Registrant's portfolio and the
Registrant is continuing to aggressively pursue new leases on currently
available space and renew existing leases as they expire.
YEAR 2000 COMPLIANCE
To the extent that the Registrant's software applications contain source
code that is unable to appropriately interpret the upcoming calendar year "2000"
and beyond, some level of modification or replacement of such applications will
be necessary. The Registrant has received notification from its primary software
vendor indicating that the software application used by the Registrant will be
Year 2000 compliant by the end of 1998, at a minimal cost to the Registrant.
16
<PAGE>
FORWARD-LOOKING STATEMENTS; FACTORS THAT MAY AFFECT OPERATING RESULTS
Certain information included in this Form 10-K and other materials filed or
to be filed by the Registrant with the Securities and Exchange Commission may
constitute forward-looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995. Such forward-looking information
involves known and unforeseen risks, uncertainties and other factors that may
cause actual results or performance to be materially different from those
expressed or implied by such forward-looking statements. These risks and
uncertainties include, but are not limited to, uncertainties affecting the real
estate business generally, such as lease renewals and the financial stability of
tenants, general economic conditions and conditions in the Registrant's markets,
risks relating to acquisitions and dispositions of properties, risks relating to
interest rate levels and fluctuations, the availability of financing, and
regulatory risks. Given these and other risks described elsewhere in this Form
10-K, investors are cautioned not to place undue reliance on any forward-looking
statements.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and supplementary data required by this Item 8 are
included in Part IV as indexed under Items 14(a)1 and 2.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
The information called for by Part III is hereby incorporated by reference
from the information set forth under the captions "Election of Directors",
"Ownership of Common Stock" and "Executive Compensation" in Pacific Gateway
Properties, Inc.'s (the Company) definitive Proxy Statement for its 1998 Annual
Meeting of Shareholders, which meeting involves the election of directors, such
definitive Proxy Statement to be filed with the Securities and Exchange
Commission pursuant to Regulation 14A within 120 days after the end of the
fiscal year covered by this Annual Report on Form 10-K. In addition, information
on Registrant's executive officers has been included in Part I above under the
caption "Executive Officers of the Registrant".
17
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a)1. The following financial statements and supplementary financial
information are filed as part of this report:
<TABLE>
<CAPTION>
FINANCIAL STATEMENTS OF THE REGISTRANT PAGES
- -------------------------------------------------------------------------------------------------------- ---------
<S> <C>
Consolidated Balance Sheet as of December 31, 1997 and 1996............................................. 21
Consolidated Statement of Income (Loss) for the three years ended December 31, 1997, 1996 and 1995...... 22
Consolidated Statement of Stockholders' Equity (Deficit) for the three years ended December, 1997, 1996
and 1995.............................................................................................. 23
Consolidated Statement of Cash Flows for the three years ended December 31, 1997, 1996 and 1995......... 24 - 25
Notes to Consolidated Financial Statements.............................................................. 26 - 40
Report of Independent Public Accountants................................................................ 42
(a)2. The following financial statement schedule is filed as part of this report:
Schedule III-- Real Estate and Accumulated Depreciation as of December 31, 1997......................... 43 - 44
</TABLE>
All other schedules are omitted because of the absence of the conditions
under which they are required or because the required information is included in
the Consolidated Financial Statements or in the Notes thereto.
<TABLE>
<S> <C>
(a)3. Exhibits
This section to be completed by amendment.
21. Subsidiaries of the Registrant............................................... 45
(b) The Registrant filed a Form 8-K dated January 30, 1997, reporting under Items
2 and 7.
The Registrant filed a Form 8-K/A dated March 24, 1997, reporting under Items
2 and 7.
The Registrant filed a Form 10-Q/A dated November 13, 1997, reporting under
Part I, Items 1 and 2, and Part II, Items 3, 4 and 6.
The Registrant filed a Form 10-K/A dated November 25, 1997, reporting under
Items 2, 7 and 8.
The Registrant filed a Form S-8 dated August 28, 1997.
The Registrant filed a Post-effective Amendment No. 1 to Form S-8 dated
November 26, 1997.
</TABLE>
18
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
PACIFIC GATEWAY PROPERTIES, INC.
(Registrant)
By: /s/ RAYMOND V. MARINO
-----------------------------------------
Raymond V. Marino
PRESIDENT AND CHIEF EXECUTIVE OFFICER
Dated: March 16, 1998
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
- ------------------------------ --------------------------- -------------------
Director, President and
RAYMOND V. MARINO Chief Executive Officer
- ------------------------------ and Chief Financial March 16, 1998
Raymond V. Marino Officer
MELANIE L. ADKINS
- ------------------------------ Controller (Principal March 16, 1998
Melanie L. Adkins Accounting Officer)
STEVEN A. CALABRESE
- ------------------------------ Director March 16, 1998
Steven A. Calabrese
MARK D. GROSSI
- ------------------------------ Director March 16, 1998
Mark D. Grossi
LAWRENCE B. HELZEL
- ------------------------------ Director March 16, 1998
Lawrence B. Helzel
MARSHALL A. JACOBS
- ------------------------------ Director March 16, 1998
Marshall A. Jacobs
CHRISTOPHER L. JARRATT
- ------------------------------ Director March 16, 1998
Christopher L. Jarratt
RICHARD M. OSBORNE
- ------------------------------ Director March 16, 1998
Richard M. Osborne
MARTIN S. ROHER
- ------------------------------ Director March 16, 1998
Martin S. Roher
19
<PAGE>
PACIFIC GATEWAY PROPERTIES, INC.
CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1997 AND 1996
AND FOR THE YEARS ENDED
DECEMBER 31, 1997, 1996 AND 1995
20
<PAGE>
PACIFIC GATEWAY PROPERTIES, INC.
CONSOLIDATED BALANCE SHEET
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
----------------------
1997 1996
---------- ----------
<S> <C> <C>
ASSETS
Cash and cash equivalents................................................................. $ 2,065 $ 2,899
Restricted cash........................................................................... 1,746 9,975
Accounts receivable....................................................................... 112 359
Prepaid taxes............................................................................. 54 280
Other current assets...................................................................... 86 540
Investment properties:
Land.................................................................................... 9,631 5,481
Buildings............................................................................... 49,665 31,847
Building and other improvements......................................................... 11,360 9,304
---------- ----------
Subtotal investment properties........................................................ 70,656 46,632
Less-accumulated depreciation and reserve for write-down to net realizable value........ (16,431) (13,835)
---------- ----------
Investment properties, net............................................................ 54,225 32,797
---------- ----------
Deferred tax asset........................................................................ 8,203 4,183
Capitalized loan costs, net of accumulated amortization of $134 and $46 at December 31,
1997 and 1996, respectively............................................................. 818 670
Capitalized lease commissions, rent concessions and other deferred costs, net of
accumulated amortization of $1,476 and $1,351 at December 31, 1997 and 1996,
respectively............................................................................ 1,402 690
---------- ----------
Total assets...................................................................... $ 68,711 $ 52,393
---------- ----------
---------- ----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable.......................................................................... $ 1,109 $ 612
Accrued payroll, property and sales taxes................................................. 195 195
Accrued interest on debt.................................................................. 385 --
Unearned rental revenue................................................................... 286 418
Tenant security deposits.................................................................. 703 266
Debt related to investment properties..................................................... 47,402 33,722
Deferred tax liability.................................................................... 17,983 15,012
---------- ----------
Total liabilities................................................................... 68,063 50,225
---------- ----------
Stockholders' equity:
Common stock $1.00 par value--
Authorized--10,000,000 shares; Issued--4,018,150 shares at December 31, 1997 and
4,011,150 shares at December 31, 1996................................................. 4,018 4,011
Paid-in-deficit........................................................................... (10,023) (10,222)
Retained earnings......................................................................... 6,800 8,526
Treasury stock, at cost--118,554 common shares at December 31, 1997 and December 31,
1996.................................................................................... (2,037) (2,037)
Warrants for common stock................................................................. 1,890 1,890
---------- ----------
Total stockholders' equity.......................................................... 648 2,168
---------- ----------
Total liabilities and stockholders' equity........................................ $ 68,711 $ 52,393
---------- ----------
---------- ----------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements
21
<PAGE>
PACIFIC GATEWAY PROPERTIES, INC.
CONSOLIDATED STATEMENT OF INCOME (LOSS)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
DECEMBER 31,
-------------------------------
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
INVESTMENT PROPERTIES:
Rental revenues............................................................... $ 13,721 $ 11,011 $ 12,200
Operating expenses............................................................ (5,955) (5,468) (5,517)
Interest expense.............................................................. (4,058) (4,092) (3,355)
Depreciation and amortization................................................. (3,109) (2,632) (2,581)
--------- --------- ---------
Investment properties income (loss)......................................... 599 (1,181) 747
--------- --------- ---------
HOTEL PROPERTY:
Revenues...................................................................... -- 6,111 7,009
Operating expenses............................................................ (93) (4,695) (4,697)
Interest expense.............................................................. -- (403) (491)
Depreciation and amortization................................................. -- -- (663)
--------- --------- ---------
Hotel property income (loss)................................................ (93) 1,013 1,158
--------- --------- ---------
INVESTMENT IN PARTNERSHIP:
Equity in partnership losses, net............................................. -- -- (4,090)
Reversal of debt related to investment in RCA................................. -- 2,940 --
--------- --------- ---------
Investment in partnership................................................... -- 2,940 (4,090)
--------- --------- ---------
General and administrative expenses............................................... (1,250) (1,603) (1,476)
Interest expense on partnership and other corporate debt.......................... -- -- (340)
Other income (expense)............................................................ 192 540 (15)
--------- --------- ---------
Income (loss) before settlement obligation, property transactions,
write-downs, income taxes and extraordinary items........................... (552) 1,709 (4,016)
Provision for settlement of reimbursement obligation.............................. (2,200) -- --
Gain on sale of real estate assets, net........................................... -- 16,714 177
Provision for write-down to estimated net realizable value........................ -- -- (540)
--------- --------- ---------
Income (loss) before income taxes and extraordinary items......................... (2,752) 18,423 (4,379)
Income tax (provision) benefit.................................................... 1,026 (7,835) 1,883
--------- --------- ---------
Income (loss) before extraordinary items.......................................... (1,726) 10,588 (2,496)
Extraordinary gain (loss) from extinguishment of debt............................. -- 766 (233)
--------- --------- ---------
Net income (loss)............................................................. $ (1,726) $ 11,354 $ (2,729)
--------- --------- ---------
--------- --------- ---------
Income (loss) per share, basic:
Income (loss) before extraordinary items........................................ $ (0.44) $ 2.72 $ (0.64)
Extraordinary items............................................................. -- 0.20 (0.06)
--------- --------- ---------
Net income (loss)............................................................. $ (0.44) $ 2.92 $ (0.70)
--------- --------- ---------
--------- --------- ---------
Income (loss) per share, diluted:
Income (loss) before extraordinary items........................................ $ (0.44) $ 2.58 $ (0.64)
Extraordinary items............................................................. -- 0.19 (0.06)
--------- --------- ---------
Net income (loss)............................................................. $ (0.44) $ 2.77 $ (0.70)
--------- --------- ---------
--------- --------- ---------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements
22
<PAGE>
PACIFIC GATEWAY PROPERTIES, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE THREE YEARS ENDED DECEMBER 31, 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
WARRANTS
RETAINED FOR
COMMON PAID-IN- EARNINGS TREASURY COMMON
STOCK DEFICIT (DEFICIT) STOCK STOCK TOTAL
----------- ---------- ----------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1994............................. $ 4,011 $ (10,222) $ (99) $ (2,082) $ 1,890 $ (6,502)
Net loss............................................... -- -- (2,729) -- -- (2,729)
Issuance of treasury stock............................. -- -- -- 45 -- 45
----------- ---------- ----------- --------- ----------- ---------
Balance at December 31, 1995............................. 4,011 (10,222) (2,828) (2,037) 1,890 (9,186)
Net income............................................. -- -- 11,354 -- -- 11,354
----------- ---------- ----------- --------- ----------- ---------
Balance at December 31, 1996............................. $ 4,011 $ (10,222) $ 8,526 $ (2,037) $ 1,890 $ 2,168
Net loss............................................... -- -- (1,726) -- -- (1,726)
Issuance of common stock from exercise of stock
options.............................................. 7 15 -- -- -- 22
Return of profit from shareholder short-swing sale..... -- 184 -- -- -- 184
----------- ---------- ----------- --------- ----------- ---------
Balance at December 31, 1997............................. $ 4,018 $ (10,023) $ 6,800 $ (2,037) $ 1,890 $ 648
----------- ---------- ----------- --------- ----------- ---------
----------- ---------- ----------- --------- ----------- ---------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements
23
<PAGE>
PACIFIC GATEWAY PROPERTIES, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
----------------------------------
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Cash flow from operating activities:
Net income (loss)........................................................... $ (1,726) $ 11,354 $ (2,729)
Non-cash revenues and expenses included in income:
Depreciation and amortization............................................. 3,109 2,632 3,275
Equity in partnership losses.............................................. -- -- 4,090
Provision for settlement of reimbursment obligation....................... 2,200 -- --
Provision for write-down to estimated net realizable value................ -- -- 540
Gain on sale of real estate assets, net................................... -- (16,714) (177)
Reversal of debt related to investment in RCA............................. -- (2,940) --
Extraordinary items....................................................... -- (766) 233
Deferred taxes, net....................................................... (1,049) 7,146 (1,681)
Changes in assets and liabilities:
Accounts receivable, prepaid taxes and other assets......................... 927 89 (14)
Accounts payable and other current liabilities.............................. 1,187 (1,290) 154
---------- ---------- ----------
NET CASH GENERATED BY (USED IN) OPERATING ACTIVITIES.......................... 4,648 (489) 3,691
---------- ---------- ----------
Cash flow from investing activities:
Additions to building and other improvements, capitalized lease commissions,
rent concessions and other deferred costs................................. (4,161) (1,876) (2,768)
Acquisition of investment properties........................................ (10,797) -- --
Proceeds from sale of properties............................................ -- 39,432 510
Contributions to RCA........................................................ -- -- (1,035)
Distributions from RCA...................................................... -- -- 424
---------- ---------- ----------
NET CASH GENERATED BY (USED IN) INVESTING ACTIVITIES.......................... (14,958) 37,556 (2,869)
---------- ---------- ----------
Cash flow from financing activities:
Borrowings under debt related to investment properties...................... 2,112 14,300 20,986
Borrowings in connection with investment in RCA, net........................ -- -- 990
Payments on debt............................................................ (835) (38,460) (23,297)
Payment of loan costs and fees.............................................. (236) (450) (85)
Proceeds from shareholder short-swing sale reimbursement.................... 184 -- --
(Increase) decrease in restricted cash...................................... 8,229 (9,734) 356
Purchase of treasury stock.................................................. -- -- 45
Proceeds from exercise of stock options..................................... 22 -- --
---------- ---------- ----------
NET CASH GENERATED BY (USED IN) FINANCING ACTIVITIES.......................... 9,476 (34,344) (1,005)
---------- ---------- ----------
Increase (decrease) in cash and cash equivalents.............................. (834) 2,723 (183)
Balance at beginning of year.................................................. 2,899 176 359
---------- ---------- ----------
Balance at end of year........................................................ $ 2,065 $ 2,899 $ 176
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
24
<PAGE>
PACIFIC GATEWAY PROPERTIES, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS (CONTINUED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
----------------------------------
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
SUPPLEMENTARY DISCLOSURES:
Cash paid for interest...................................................... $ 3,673 $ 4,495 $ 4,486
---------- ---------- ----------
---------- ---------- ----------
Cash paid for taxes......................................................... $ -- $ 510 $ 483
---------- ---------- ----------
---------- ---------- ----------
Non-cash transactions:
Portion of acquisition of investment properties funded by assumption of debt
related to investment properties.......................................... $ 10,203 $ -- $ --
---------- ---------- ----------
---------- ---------- ----------
Increase in debt related to investment properties in connection with
reimbursement obligation.................................................. $ 2,200 $ -- $ --
---------- ---------- ----------
---------- ---------- ----------
Reduction of debt related to investment properties due to Statement of
Accounting Standards No. 15............................................... $ -- $ 956 $ --
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
25
<PAGE>
PACIFIC GATEWAY PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE YEARS ENDED DECEMBER 31, 1997
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
Pacific Gateway Properties, Inc., (the Company) is a New York corporation
formed in 1984 for the purpose of investing and managing income producing real
estate. The Company's overall business plan has been to assemble a substantial
portfolio of income producing properties. The Company historically focused its
property acquisitions in four markets: Northern California, Arizona, Florida and
Massachusetts. The Company's long-term objectives continue to be maximizing net
cash flow from operations and achieving growth through appreciation of asset
values. The current strategic plan of the Company is to focus on real estate
investments on the West Coast with a specific emphasis on the San Francisco Bay
Area. The current investment emphasis is on commercial properties which require
aggressive management and leasing in order to maximize their potential. This
strategy is influenced by the following factors: (1) the Company's current
property portfolio is concentrated on the West Coast; and (2) the Company
believes that geographic concentration will create operational efficiencies.
PRINCIPLES OF CONSOLIDATION
The Company's Consolidated Financial Statements include the accounts of the
Company and all wholly owned subsidiaries. Significant intercompany accounts and
transactions have been eliminated in consolidation. The investment in RCA in
which the Company has a 22.8% interest and has no management control, is
accounted for using the equity method.
REVENUE RECOGNITION
Rental revenues are recognized on a straight-line basis over the term of
occupancy in accordance with the provisions of the leases.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include cash, commercial paper and money market
accounts, all of which have original maturities of three months or less.
RESTRICTED CASH
As of December 31, 1997, restricted cash is comprised of the following (in
thousands):
<TABLE>
<S> <C>
Capital, tenant improvement and lease commission reserves........... $ 1,316
Security deposits from certain tenants.............................. 196
Debt service, property tax and insurance reserves................... 234
---------
Total............................................................... $ 1,746
---------
---------
</TABLE>
INVESTMENT PROPERTIES AND OTHER DEFERRED COSTS
Land, buildings and improvements are recorded at cost. Depreciation on
investment properties is provided using the straight-line method over estimated
useful lives ranging from 28 to 40 years. Capitalized loan costs consist of loan
fees, legal, accounting, engineering, appraisal, and other costs associated with
financings and are amortized using the straight-line method over the primary
term of related
26
<PAGE>
PACIFIC GATEWAY PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE THREE YEARS ENDED DECEMBER 31, 1997
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
debt instrument. Costs associated with a lease are amortized over the term of
the lease. The remaining deferred costs are amortized using the straight-line
method over the estimated useful life of the asset to which they relate. Repairs
and maintenance are charged to expense as incurred.
The Company periodically reviews its long-lived assets for impairment
whenever events or changes in circumstances indicate that the carrying amount of
an asset may not be recoverable. An impairment loss would be recognized when
expected undiscounted cash flows are less than the carrying value of the asset.
Measurement of impairment is based upon the fair value of the asset.
INCOME TAXES
The Company accounts for taxes under Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes" (SFAS 109). Under SFAS 109,
deferred taxes are computed based on the difference between the financial
statement and income tax basis of assets and liabilities using the enacted
marginal tax rate.
GAIN ON SALE OF REAL ESTATE ASSETS, NET
Gain on sale of real estate assets consists of the following (in thousands):
<TABLE>
<CAPTION>
1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
Radisson Suites Hotel............................. $ -- $ 5,814 $ --
Village Commons Shopping Center................... -- 10,900 --
Walnut Creek parcel of land....................... -- -- 177
------- ------- -------
Total............................................. $ -- $16,714 $ 177
------- ------- -------
------- ------- -------
</TABLE>
EARNINGS PER SHARE
In March 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128 (SFAS No. 128), "Earnings Per Share".
SFAS No. 128 requires the disclosure of basic earnings per share and modifies
existing guidance for computing diluted earnings per share. Under the new
standard, basic earnings per share is computed as earnings divided by weighted
average shares, excluding the dilutive effects of stock options and other
potentially dilutive securities. Outstanding warrants and stock options enter
into the weighted average shares outstanding when computing diluted earnings per
share using the Treasury Stock Method. The effective date of SFAS No. 128 is
December 15, 1997. Earnings per share for all periods presented have been
restated to conform to the new standard. The number of weighted average common
shares and potential common shares used in the earnings per share calculations
are as follows:
<TABLE>
<CAPTION>
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Basic.................................................. 3,893,133 3,892,596 3,892,596
Stock options and warrants............................. -- 207,504 --
---------- ---------- ----------
Diluted................................................ 3,893,133 4,100,100 3,892,596
</TABLE>
27
<PAGE>
PACIFIC GATEWAY PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE THREE YEARS ENDED DECEMBER 31, 1997
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
In 1997 and 1995, due to the Company's loss position, the inclusion of stock
options and warrants would have been anti-dilutive, and accordingly the number
of outstanding shares used in calculating basic and diluted earnings per share
for these years are the same.
RISKS AND UNCERTAINTIES AND USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities,
disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenues and expenses during the
reporting period. Actual results will differ from those estimates.
The Company's ability to (i) meet its debt obligations, (ii) provide
dividends either from operations, or the ultimate disposition of the Company's
properties or (iii) continue as a going concern may be impacted by changes in
interest rates, property values, geographic economic conditions, or the entry of
other competitors to the market. The Company's wholly owned San Francisco Bay
Area properties do not maintain earthquake insurance. The accompanying
Consolidated Financial Statements do not provide for any adjustments with regard
to these uncertainties.
RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform with the
current year presentation.
2. REAL ESTATE PARTNERSHIP INVESTMENTS
RINCON CENTER ASSOCIATES PARTNERSHIP (RCA)--SAN FRANCISCO, CALIFORNIA
The Company owns general (non-managing) and limited partnership interests in
RCA totaling approximately 22.8% and, subject to the funding agreement entered
into with RCA's managing general partner, Perini Land & Development Company (a
wholly owned subsidiary of Perini Corporation), discussed below, is responsible
for 20% of cash requirements in excess of available financing. The Company's
minority, general (non-managing) and limited partnership interests in RCA
represent significant potential financial exposure. This exposure includes, and
may not be limited to, the potential tax liability associated with the Company's
negative tax basis, the joint and several guarantees provided by the Company to
the mortgage lender on Rincon Center Phase Two and the master lessor on Rincon
Center Phase One, and the potential tax liability that would exist from the
cancellation of debt in connection with a possible debt restructuring. Except
for the provision for settlement of reimbursement obligation and deferred income
tax liabilities related to the tax that would result from any gain recognized
from the Company's negative tax basis in its partnership interest, the
accompanying financial statements do not include any adjustments for these
uncertainties.
RCA sold Rincon Center Phase One to Chrysler MacNally Corporation (Chrysler)
in June 1988; subsequently, RCA leased the property back under a master lease
which is treated as an operating lease for financial reporting purposes. In July
1993, Chrysler completed a refinancing of Rincon Center Phase One. The maturity
date of this debt is July 1, 1998. Payments under the master lease agreement may
be adjusted to reflect adjustments in the rate of interest payable by Chrysler
on the Rincon Center Phase One debt. The master lease also permits Chrysler to
put the property back to RCA at stipulated
28
<PAGE>
PACIFIC GATEWAY PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE THREE YEARS ENDED DECEMBER 31, 1997
2. REAL ESTATE PARTNERSHIP INVESTMENTS (CONTINUED)
prices beginning January 1998 if long-term financing meeting certain conditions
is not obtained. As of January 1, 1998, no new commitment had been secured
although negotiations with the current lender were in progress. In order to
allow those discussions to continue, Chrysler agreed to temporarily delay the
enforcement of the purchase requirements. RCA can make no assurances about the
outcome of this negotiation. As a result of the current loan negotiations, RCA
has written-down the carrying value of the assets related to this segment of the
property by $17,150,000 in 1997 to the estimated net realizable value. On June
30, 1997, RCA filed a lawsuit against Chrysler in Superior Court in the State of
California, County of San Francisco. The lawsuit's primary cause of action
alleges that Chrysler has breached the master lease and a certain letter
agreement because the rent payments due from RCA after the 1993 refinancing of
Rincon Center Phase One, resulted in an increase in Chrysler's after tax rate of
return from rent payments. The lawsuit states that such excessive rent
recalculations directly contravene both the letter and the spirit of the master
lease.
In September 1993, RCA completed a refinancing of Rincon Center Phase Two
with Citibank. The residential portion of Rincon Center Phase Two is being
financed with redevelopment bonds from the Redevelopment Agency of the City and
County of San Francisco, California, which are due December 1, 2006. The bonds
are secured by an irrevocable letter-of-credit issued by Citibank in the name of
RCA. In the event that drawings are made on the letter-of-credit, RCA has agreed
to reimburse Citibank for such drawings pursuant to the terms of the
Reimbursement Agreement which is secured by a deed of trust on Rincon Center
Phase Two and other guarantees. During 1997, the irrevocable letter-of-credit
was due to expire. RCA is currently in negotiations with Citibank to extend the
letter-of-credit and no assurances can be made about the outcome of this
negotiation. Currently, the letter-of-credit has been extended to June 1, 1998.
The commercial portion of Rincon Center Phase Two was financed pursuant to a
Construction Loan Agreement between RCA and Citibank. The Construction Loan
Agreement is secured by a deed of trust on the commercial portion of Rincon
Center Phase Two. In 1993, RCA extended the loan to October 1, 1998. RCA is
currently in negotiations with Citibank to extend the loan and no assurances can
be made about the outcome of this negotiation. A portion of the security for the
Construction Loan Agreement was a $3.65 million letter-of-credit issued by Bank
of America National Trust and Savings Association (the Issuing Bank) on behalf
of the Company in favor of Citibank.
The reimbursement obligation of the Company to the Issuing Bank is full
recourse to the Company and is secured by the Company's 410 First Avenue
property located in Needham, Massachusetts. The letter-of-credit for $3.65
million was drawn by Citibank prior to its expiration date of June 23, 1997.
Citibank is currently holding the $3.65 million in a separate restricted account
on behalf of RCA and has not applied said funds to any outstanding debt of RCA.
The Issuing Bank made a demand on the Company to reimburse them for the $3.65
million drawn on the letter-of-credit and also notified the Company it is in
default with respect to the reimbursement obligation. On August 21, 1997, the
Issuing Bank commenced an action for conditional judgement seeking, among other
remedies, to foreclose on the 410 First Avenue property. Under Massachusetts
law, such foreclosure could not take place until at least three years and two
months after the issuance of the conditional judgement. However, if the Company
does not pay the amount of the conditional judgement within two months after its
issuance, the Issuing Bank could take possession of the property during the
three year period preceding
29
<PAGE>
PACIFIC GATEWAY PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE THREE YEARS ENDED DECEMBER 31, 1997
2. REAL ESTATE PARTNERSHIP INVESTMENTS (CONTINUED)
foreclosure. In such action, the Issuing Bank is seeking to assert a deficiency
claim against the Company for any alleged difference between the value of the
foreclosed property and the $3.65 million drawn on the letter-of-credit
including outstanding interest and fees. The Company intends to vigorously
defend such deficiency claim. Since any assets of the Company which are applied
to the reimbursement obligation would constitute additional investment in RCA,
which the Company considers of no value, the net book value of such assets would
be written off and charged to the earnings of the Company when said assets were
applied to the reimbursement obligation. In accordance with generally accepted
accounting principles, effective June 30, 1997, the Company recorded a
"provision for settlement of reimbursement obligation" in the amount of $2.2
million to provide for the ultimate settlement of the reimbursement obligation.
The accrued amount is equal to the net book value at June 30, 1997, of the 410
First Avenue property that serves as collateral for the reimbursement
obligation, resulting in an effective discount of the $3.65 million face value
of the reimbursement obligation. The Company has continued to record rental
revenue and operating expenses related to this property, as well as accrued
interest on the $3.65 million reimbursement obligation at a rate of prime plus
three percent. Any difference between the provision for settlement of
reimbursement obligation and the amount ultimately settled upon may be charged
or credited to the Company's operations as such difference becomes determinable.
Management can provide no assurances as the ultimate settlement amount or method
(and the timing thereof) relating to the reimbursement obligation.
In 1996, the Company ceased recording any activity related to its interest
in RCA because (i) it had previously written-down its equity investment in and
loans to RCA to zero in 1995 and (ii) the Company currently has no obligation,
prospects or plans to invest further in or on behalf of RCA. During 1995, the
Company recorded its 22.8% equity interest in RCA's net loss which amounted to
$4,090,000. Additionally, in 1995, the Company recorded a $540,000 provision for
net realizable value to write-down the remaining balance of its equity
investment in and loans to RCA to zero as the Company attributed no value to its
equity investment in RCA.
In 1993, the Company entered into an agreement with RCA's managing general
partner whereby such managing general partner agreed to advance funds to RCA on
behalf of the Company on an unsecured non-recourse basis, subject to interest at
prime plus 2% and certain annual fees (principal, unpaid interest and fees are
collectively referred to as the RCA Advances). This agreement does not reduce
the level of the Company's general and limited partnership interests in RCA. The
RCA Advances are only required to be repaid from the Company's share of future
distributions from RCA, if any. At December 31, 1995, the RCA Advances amounted
to $2,940,000. During 1996, the Company recorded a credit to income ("Reversal
of Debt Related to Investment in RCA" on the Company's Consolidated Statement of
Income (Loss)) to eliminate the previously recorded liability for the RCA
Advances of $2,940,000. During 1997, 1996 and 1995, RCA incurred net losses of
approximately $37,923,000, $16,451,000 and $17,924,000, respectively. The RCA
Advances amount to $6,748,000 at December 31, 1997 and as noted above, are not
recorded on the Company's consolidated financial statements since (i) the RCA
Advances are only required to be repaid from the Company's share of future
distributions from RCA, if any, (ii) the Company has no intention or legal
obligation to repay the RCA Advances other than from its share of distributions
from RCA, if any, and (iii) the Company does not anticipate any material cash
distributions by RCA in the foreseeable future.
30
<PAGE>
PACIFIC GATEWAY PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE THREE YEARS ENDED DECEMBER 31, 1997
2. REAL ESTATE PARTNERSHIP INVESTMENTS (CONTINUED)
During 1995, the Company recorded interest and fees related to the RCA
Advances of $340,000. As previously discussed, the Company ceased recording any
activity relating to RCA in 1996.
During 1997, the Company asserted certain claims against RCA for payment to
the Company by RCA for leasing services provided to RCA by the Company during
1996. The Company has not accrued for such claims pending resolution of this
matter with RCA's managing general partner.
Summary financial statement data for RCA is as follows (in thousands):
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1997 1996
- -------------------------------------------------------------------- ----------- ----------
<S> <C> <C>
Investment properties, net.......................................... $ 107,045 $ 110,495
Other assets........................................................ 6,857 21,042
----------- ----------
----------- ----------
$ 113,902 $ 131,537
----------- ----------
Debt................................................................ $ 49,228 $ 56,012
Amounts due to partners............................................. 185,208 158,156
Other liabilities................................................... 12,723 12,703
Partners' deficit................................................... (133,257) (95,334)
----------- ----------
$ 113,902 $ 131,537
----------- ----------
----------- ----------
</TABLE>
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31, 1997 1996 1995
- ---------------------------------------------------------- ---------- ---------- ----------
<S> <C> <C> <C>
Revenue................................................... $ 16,772 $ 20,705 $ 20,165
---------- ---------- ----------
Expenses:
Operating and lease expenses............................ 19,429 18,519 19,572
Provision for write-down of note receivable............. 17,150 -- --
Financing............................................... 15,017 14,712 14,402
Depreciation and amortization........................... 3,099 3,925 4,115
---------- ---------- ----------
54,695 37,156 38,089
---------- ---------- ----------
Net loss.................................................. $ (37,923) $ (16,451) $ (17,924)
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
31
<PAGE>
PACIFIC GATEWAY PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE THREE YEARS ENDED DECEMBER 31, 1997
3. DEBT
As of December 31, 1997 and 1996, the Company had the following debt related
to investment properties outstanding (in thousands):
<TABLE>
<CAPTION>
1997 1996
--------- ---------
<S> <C> <C>
South Bay Office Tower, interest fixed at 8.66%, due January 2007....... $ 9,348 $ 9,450
Walnut Creek Executive Park, interest fixed at 7.85%, due June 2005..... 19,002 19,438
Weston Office Building, interest fixed at 8.45%, due October 2001....... 959 993
North Tucson Business Center, interest fixed at 9.62%, due October
2006.................................................................. 3,801 3,841
West Valley Executive Park, interest fixed at 9.13%, due June 2005...... 10,000 --
930 Montgomery Street, interest at 8.75% as of December 31, 1997
(floating rate of 3% over the one year treasury bond rate adjustable
every six months), due February 2002.................................. 2,092 --
410 First Avenue (See Note 2)........................................... 2,200 --
--------- ---------
$ 47,402 $ 33,722
--------- ---------
--------- ---------
</TABLE>
MORTGAGES ON REAL ESTATE
SOUTH BAY OFFICE TOWER
In December 1996, the Company completed the refinancing of $9.45 million of
debt related to South Bay Office Tower. The loan bears interest at 8.66% through
maturity and requires fixed monthly payments of $77,000. The loan is amortized
over 25 years and is due January 2007. This loan may be prepaid any time after
the first day of the fifth (5th) loan year with a 30-day written notice to the
lender. A prepayment consideration of the greater of one percent of the loan
balance, or the present value of all remaining payments of principal and
interest is payable on the prepayment date. The loan is non-recourse to the
Company. Concurrent with the closing, the Company deposited $701,000 with the
lender to fund future capital improvements. As of December 31, 1997, $458,000
has been reimbursed to the Company by the lender. In addition, the lender held
in escrow additional debt proceeds of $940,000 to be released to the Company
upon the completion of certain leasing transactions that were in process as of
December 31, 1996. These transactions were completed in 1997 and the funds were
returned to the Company. Also, the loan requires an additional $22,100 per month
to be deposited for future tenant improvements and leasing commissions until the
reserve equals $668,000. The Company is then required to maintain this minimum
balance of $668,000 during the term of the loan. The portion of reserves funded
and unspent through December 31, 1997, including interest, amounted to
approximately $537,000 and is classified as restrictd cash on the Company's
Consolidated Balance Sheet.
32
<PAGE>
PACIFIC GATEWAY PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE THREE YEARS ENDED DECEMBER 31, 1997
3. DEBT (CONTINUED)
WALNUT CREEK EXECUTIVE PARK
In June 1995, the Company completed the refinancing of $20,000,000 of debt
related to Walnut Creek Executive Park. The new loan carries a 7.85% annual
interest rate until maturity with fixed monthly payments of approximately
$162,000. The loan is amortized over 20 years and is due June 2005. The new loan
has a prepayment penalty and is non-recourse to the Company. In addition, the
new loan requires the Company to fund a reserve for future tenant improvements
of $9,300 per month in the first twenty-four (24) months of the loan, and
increasing to $17,600 per month in months twenty-five (25) through sixty-eight
(68) of the loan. The balance of the reserve as of December 31, 1997, including
interest, amounted to approximately $316,000 and is classified as restricted
cash on the Company's Consolidated Balance Sheet. As a result of this
refinancing, the Company wrote-off the unamortized portion of the loan fees
associated with the debt that was retired, which amounted to $233,000 and is
recorded as an extraordinary item in 1995.
WESTON OFFICE BUILDING
In October 1996, the Company completed the refinancing of $1,000,000 of debt
related to Weston Office Building in Florida. The loan carries an 8.45% annual
interest rate until maturity with fixed monthly payments of approximately
$9,800. The loan is amortized over 15 years and is due October 2001. The loan
has no prepayment penalty. This loan is an obligation of a subsidiary of the
Company and the Company has provided a guarantee of the lessor of $500,000 or
50% of the outstanding loan balance.
NORTH TUCSON BUSINESS CENTER
In September 1996, the Company completed the refinancing of $3,850,000 of
debt related to North Tucson Business Center in Arizona. The loan carries a
9.62% annual interest rate until maturity with fixed monthly payments of
approximately $34,000. The loan is amortized over 25 years and is due October
2006. The loan is non-recourse to the Company. Concurrent with the closing, the
Company deposited $40,800 with the lender to fund future tenant improvements and
leasing commissions during the term of the loan. The loan also requires an
additional $3,400 per month to be deposited for future tenant improvements and
leasing commissions and $1,100 per month to be deposited in a replacement
reserve during the term of the loan. In addition, the Company is required to
fund a debt service reserve of $8,200 per month until $295,000 has been funded.
The debt service, tenant improvement and leasing commission reserves may be
reduced if certain tenant renewals occur. The portion of the reserves funded and
unspect through December 31, 1997, including interest, amounted to approximately
$236,000 and is classified as restricted cash on the Company's Consolidated
Balance Sheet.
WEST VALLEY EXECUTIVE PARK
In connection with the January 17, 1997 acquisition of this property, the
Company assumed approximately $10,203,000 in non-recourse mortgage debt. The
loan carries a 9.13% annual interest rate until maturity. The loan is amortized
over 20 years and is due June 2005. The debt continues to be assumable and is
subject to a prepayment penalty if paid off prior to maturity.
33
<PAGE>
PACIFIC GATEWAY PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE THREE YEARS ENDED DECEMBER 31, 1997
3. DEBT (CONTINUED)
930 MONTGOMERY STREET
In connection with the January 17, 1997 acquisition of this property, the
Company obtained $2,112,500 in mortgage debt. The loan is amortized over
twenty-five (25) years at a floating annual interest rate of 3% over the one
year treasury bond rate, adjustable every six months, and is due February 2002.
This debt can be prepaid at any time without a penalty and is non-recourse to
the Company.
410 FIRST AVENUE
See Note 2 to the Consolidated Financial Statements for discussion of the
$2.2 million estimated settlement obligation.
CORPORATE DEBT
In December 1993, the Company completed a restructuring of its non-revolving
line-of-credit, letter-of-credit, unsecured bonds, and certain mortgages. This
debt was paid in full in 1996 using the proceeds from the sale of the Radisson
Suites Hotel.
In connection with the 1993 restructuring, the Company issued to the primary
lender warrants to acquire up to two million shares of the Company's common
stock. One million of the warrants have been canceled leaving one million
exercisable warrants outstanding at December 31, 1997. The exercise price for
the warrants is $2.875 per share. The outstanding warrants expire December 11,
1998. The warrants have customary anti-dilution protection that addresses stock
splits, stock dividends, recombinations and reclassifications, and certain other
issuances of additional common stock. The Company also has a right of first
offer to acquire the shares of common stock or warrants prior to any transfer
thereof. The Company has valued the one million warrants at $1.89 million which
is recorded as equity in the Company's Consolidated Balance Sheet.
Statement of Financial Accounting Standards No. 15 required the Company to
account for future interest resulting from the debt restructuring using an
imputed interest rate versus the stated rates on the Notes A and B. In addition,
the primary lender's cancellation of debt of $4 million at the time of the
restructuring was effectively amortized for financial reporting purposes. In
connection with the retirement of Notes A and B in 1996, the Company recorded an
extraordinary gain on extinguishment of debt of $766,000 resulting from the
difference in the face value and the amount required to extinguish the debt, net
of the write-off of related loan fees.
34
<PAGE>
PACIFIC GATEWAY PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE THREE YEARS ENDED DECEMBER 31, 1997
3. DEBT (CONTINUED)
LOAN MATURITIES
The maturities of debt outstanding as of December 31, 1997, and required
minimum principal payments in each of the next five years and thereafter are
summarized as follows (in thousands):
<TABLE>
<CAPTION>
CURRENT
---------
<S> <C>
1998............................................................................... $ 3,152
1999............................................................................... 1,025
2000............................................................................... 1,115
2001............................................................................... 1,997
2002............................................................................... 1,265
Thereafter......................................................................... 38,848
---------
$ 47,402
---------
---------
</TABLE>
The 1998 scheduled principal maturities of $3,152,000 includes the
$2,200,000 liability related to the reimbursement obligation, as discussed in
Note 2 to the Consolidated Financial Statements.
4. ACQUISITION AND DISPOSITION OF INVESTMENT PROPERTIES
On January 17, 1997, the Company purchased two properties to complete a tax
deferred exchange in accordance with Section 1031 of the Internal Revenue Code,
in connection with the sale of the Radisson Suites Hotel. The first acquisition
was West Valley Executive Park, a multi-tenant, six building, 164,000 square
foot campus style office park in San Jose, California, that was acquired for
$17,500,000. The second acquisition was a multi-tenant, 23,000 square foot,
six-story steel frame office building located at 930 Montgomery Street, San
Francisco, California, for $3,250,000. See Note 3 for discussion of the mortgage
debt assumed and borrowed in connection with these acquisitions.
In April 1996, the Company sold the Village Commons Shopping Center property
to an unrelated party for $19,300,000 and recognized a gain for financial
reporting purposes of $10,900,000. In December 1996, the Company sold the
Radisson Suites Hotel property to an unrelated party for $21,307,000 and
recognized a gain for financial reporting purposes of $5,814,000.
35
<PAGE>
PACIFIC GATEWAY PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE THREE YEARS ENDED DECEMBER 31, 1997
4. ACQUISITION AND DISPOSITION OF INVESTMENT PROPERTIES (CONTINUED)
The following unaudited pro forma information reflects adjustments to the
Company's historical results from these acquisitions and dispositions as if they
had occurred on January 1, 1996 (in thousands, except per share and share
amounts):
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
DECEMBER 31, 1996
------------------
<S> <C>
Revenues.................................................................. $ 13,578
----------
Net income................................................................ 953
----------
Net income per common share--
Basic................................................................... $ 0.24
----------
Diluted................................................................. $ 0.23
----------
Weighted average common shares outstanding--
Basic................................................................... 3,892,596
----------
----------
Diluted................................................................. 4,100,100
----------
----------
</TABLE>
5. INCOME TAXES
The Company provides for income taxes under the liability method in
accordance with Statement of Financial Accounting Standards No. 109, "Accounting
for Income Taxes" (SFAS 109).
The deferred income tax (provision) benefit represents the tax effect of
temporary differences between income (loss) determined for financial reporting
and for income tax purposes. As of December 31, 1997, the Company has a tax net
operating loss carryover for Federal income tax purposes of approximately $13.0
million, which will expire between 2006 and 2012. The Company has an investment
tax credit carryover totaling approximately $1.5 million which will expire
between 2000 and 2003. The Company also has an alternative minimum tax credit
carryover for Federal income tax purposes of approximately $.9 million which can
be carried forward indefinitely.
36
<PAGE>
PACIFIC GATEWAY PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE YEARS ENDED DECEMBER 31, 1997
5. INCOME TAXES (CONTINUED)
The components of the deferred tax assets and deferred tax liabilities are
as follows at December 31, 1997 (in thousands):
<TABLE>
<CAPTION>
FEDERAL STATE TOTAL
------- ------ -------
<S> <C> <C> <C>
Deferred tax assets:
Net operating loss carryover........................ $ 3,966 $ 730 $ 4,696
Tax credits carryover............................... 2,344 -- 2,344
State deferred tax.................................. 1,038 -- 1,038
Unearned rental revenue............................. 100 25 125
------- ------ -------
$ 7,448 $ 755 $ 8,203
------- ------ -------
------- ------ -------
Deferred tax liabilities:
Excess tax depreciation............................. $ 4,400 $1,101 $ 5,501
Debt relating to the RCA Advances................... 2,081 521 2,602
Excess partnership losses from RCA.................. 7,791 1,950 9,741
Straight-line rent.................................. 112 27 139
------- ------ -------
$14,384 $3,599 $17,983
------- ------ -------
------- ------ -------
</TABLE>
The table below reconciles the difference between the statutory Federal
income tax rate and the effective rate in the Company's Consolidated Statement
of Income (Loss).
<TABLE>
<CAPTION>
(PROVISION) BENEFIT
PERCENTAGES
-----------------------
<S> <C> <C> <C>
1997 1996 1995
----- ----- -----
Statutory Federal income tax rate...................... 34% (34)% 34%
State income tax....................................... 6 (7) 7
Taxable items not recognized for financial reporting
purposes............................................. (3) -- --
----- ----- -----
Effective tax rate (provision) benefit................. 37% (41)% 41%
----- ----- -----
----- ----- -----
</TABLE>
The components of the (provision) benefit for income taxes were as follows
(in thousands):
<TABLE>
<CAPTION>
1997 1996 1995
------ ------- ------
<S> <C> <C> <C>
Federal--current....................................... $ (17) $ (142) $ --
Federal--deferred...................................... 992 (5,977) 1,608
State--current......................................... (6) (376) --
State--deferred........................................ 57 (1,340) 275
------ ------- ------
$1,026 $(7,835) $1,883
------ ------- ------
------ ------- ------
</TABLE>
6. LESSOR ARRANGEMENTS
As of December 31, 1997, approximately 792,000 of a total of approximately
911,000 square feet or 87% of the Company's wholly owned commercial space was
leased. The terms of the leases generally
37
<PAGE>
PACIFIC GATEWAY PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE THREE YEARS ENDED DECEMBER 31, 1997
6. LESSOR ARRANGEMENTS (CONTINUED)
require tenants to pay base rent plus their proportionate share of certain
operating expenses or expense increases. Minimum rental amounts due to the
Company pursuant to these operating leases through expiration are as follows (in
thousands):
<TABLE>
<CAPTION>
CURRENT
---------
<S> <C>
1998............................................................................... $ 11,410
1999............................................................................... 9,542
2000............................................................................... 7,842
2001............................................................................... 4,571
2002............................................................................... 2,885
Thereafter......................................................................... 6,264
---------
$ 42,514
---------
---------
</TABLE>
7. STOCK OPTIONS, WARRANTS AND EMPLOYEE BENEFIT PLANS
INCENTIVE STOCK OPTION PLAN
The Company has two stock option plans, the 1985 Incentive Stock Option Plan
(the "1985 Plan") and the 1996 Stock Option Plan (the "1996 Plan"). Under the
1985 Plan, 200,000 shares of the Company's common stock were reserved for
issuance. This plan provides for options to be granted at fair market value on
the date of grant for terms not exceeding ten years. During 1997, under the 1985
Plan, options to purchase 4,000 shares were exercised and options to purchase
11,000 shares were canceled. As of December 31, 1997, a total of 42,350 options
were outstanding under the 1985 Plan and no additional grants may be made. Of
such outstanding options, 30,000 are exercisable in equal cumulative
installments over five years beginning in 1993 at prices ranging from $2.97 to
$3.13 per share and 12,350 outstanding options are exercisable in equal
cumulative installments over five years beginning in 1995 at prices ranging from
$3.69 to $4.56 per share.
Under the 1996 Plan, a total of 200,000 shares of Common Stock have been
reserved for issuance. This plan provides for options to be granted at fair
market value on the date of grant for terms not exceeding ten years. During
1996, options to purchase an aggregate of 150,000 shares of Common Stock were
granted at an exercise price of $2.56. During 1997, options to purchase an
aggregate of 30,000 shares of Common Stock were granted at an exercise price of
$4.94. During 1997, options to purchase 3,000 shares were exercised, and options
to purchase 12,000 shares were canceled. As of December 31, 1997, a total of
165,000 options were outstanding under the 1996 plan. Of such options
outstanding under the 1996 Plan, 40,000 were exercisable in 1996, 47,000 were
exercisable in 1997, 33,000 are exercisable in 1998, 13,000 are exercisable in
1999, 2000 and 2001, respectively, and 6,000 are exercisable in 2002.
In October 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standard No. 123 "Accounting for Stock Based
Compensation" (SFAS 123), which establishes financial accounting and reporting
standards for stock based compensation plans. As permitted by SFAS 123, the
Company will continue to account for these plans under APB Opinion No. 25, under
which no compensation expense will be recognized. The additional compensation
expense that would have been recorded if the Company had adopted SFAS 123 is not
material in 1997 and 1996. The fair
38
<PAGE>
PACIFIC GATEWAY PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE THREE YEARS ENDED DECEMBER 31, 1997
7. STOCK OPTIONS, WARRANTS AND EMPLOYEE BENEFIT PLANS (CONTINUED)
value of each option grant is estimated on the date of grant using the
Black-Scholes option-pricing model with the following weighted-average
assumptions used for grants during 1997: expected dividend yield of 0%, expected
volatility of 46.6%, risk-free interest rate of 5.97% and expected life of 10
years.
A summary of the status of the Company's two stock option plans and stock
warrants at December 31, 1997, 1996, and 1995 and changes during the years then
ended is presented in the table and narrative below:
<TABLE>
<CAPTION>
1997 1996 1995
------------------------- ------------------------- -------------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
------------ ----------- ------------ ----------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year................ 1,207,350* $ 2.86 1,182,850* $ 2.97 1,182,850* $ 2.97
Granted......................................... 30,000 4.94 150,000 2.56 -- --
Exercised....................................... (7,000) 3.13 -- -- -- --
Expired......................................... (23,000) 2.91 (125,500) 3.58 -- --
------------ ------------ ------------
Outstanding at end of year...................... 1,207,350 $ 2.91 1,207,350 $ 2.86 1,182,850 $ 2.97
------------ ------------ ------------
------------ ------------ ------------
Exercisable at end of year...................... 1,124,410 1,076,940 92,570
------------ ------------ ------------
------------ ------------ ------------
Weighted Average Fair Value of Options
Granted....................................... $ 3.30 $ 1.68 $ 0.00
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
* Included in this amount are one million warrants related to the 1993 debt
restructuring. These warrants will expire on December 11, 1998. (See Note 3
to the Consolidated Financial Statements for further discussion.)
401(k) PLAN
Effective January 1, 1996, the Company adopted a discretionary
non-contributory 401(k) Plan. All 401(k) Plan contributions are fully vested.
The level of any Company contributions are subject to annual review and approval
of the Company's Board of Directors. The Board of Directors approved a 1997
contribution of three percent of qualified employee compensation which amounted
to $27,836. No contribution was made in 1996.
39
<PAGE>
PACIFIC GATEWAY PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE THREE YEARS ENDED DECEMBER 31, 1997
8. QUARTERLY FINANCIAL DATA (UNAUDITED)
The following tables set forth unaudited quarterly financial data (in
thousands, except per share amounts) for each of the two years ended December
31, 1997 and December 31, 1996:
<TABLE>
<CAPTION>
BY QUARTER
-----------------------------------------------------
1997 FIRST SECOND THIRD FOURTH TOTAL
- ---------------------------------------------------------------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Investment properties income (loss)............................. $ 471 $ 135 $ (165) $ 158 $ 599
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Hotel property income (loss).................................... (94) 1 -- -- (93)
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Provision for settlement of reimbursement obligation............ -- (2,200) -- -- (2,200)
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Net income (loss)............................................... $ 6 $ (1,450) $ (245) $ (37) $ (1,726)
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Income (loss) per share, basic:
Income (loss) before extraordinary items...................... $ -- $ (0.37) $ (0.06) $ (0.01) $ (0.44)
Extraordinary items........................................... -- -- -- -- --
--------- --------- --------- --------- ---------
Net income (loss)............................................. $ -- $ (0.37) $ (0.06) $ (0.01) $ (0.44)
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Income (loss) per share, diluted:
Income (loss) before extraordinary items...................... $ -- $ (0.37) $ (0.06) $ (0.01) $ (0.44)
Extraordinary items........................................... -- -- -- -- --
--------- --------- --------- --------- ---------
Net income (loss)............................................. $ -- $ (0.37) $ (0.06) $ (0.01) $ (0.44)
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
40
<PAGE>
PACIFIC GATEWAY PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE THREE YEARS ENDED DECEMBER 31, 1997
8. QUARTERLY FINANCIAL DATA (UNAUDITED) (CONTINUED)
<TABLE>
<CAPTION>
BY QUARTER
-----------------------------------------------------
1996 FIRST SECOND THIRD FOURTH TOTAL
- ---------------------------------------------------------------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Investment properties income (loss)............................. $ 401 $ (27) $ (79) $ (1,476) $ (1,181)
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Hotel property income (loss).................................... 954 192 (108) (25) 1,013
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Gain on sale of real estate assets, net......................... -- 10,900 -- 5,814 16,714
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Extraordinary gain from extinguishment of debt.................. -- -- -- 766 766
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Net income (loss)............................................... $ 589 $ 6,379 $ (549) $ 4,935 $ 11,354
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Income (loss) per share, basic:
Income (loss) before extraordinary items...................... $ 0.15 $ 1.64 $ (0.14) $ 1.07 $ 2.72
Extraordinary items........................................... -- -- -- 0.20 0.20
--------- --------- --------- --------- ---------
Net income (loss)............................................. $ 0.15 $ 1.64 $ (0.14) $ 1.27 $ 2.92
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Income (loss) per share, diluted:
Income (loss) before extraordinary items...................... $ 0.15 $ 1.51 $ (0.14) $ 1.03 $ 2.58
Extraordinary items........................................... -- -- -- 0.19 0.19
--------- --------- --------- --------- ---------
Net income (loss)............................................. $ 0.15 $ 1.51 $ (0.14) $ 1.22 $ 2.77
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
41
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Pacific Gateway Properties, Inc.:
We have audited the accompanying consolidated balance sheets of Pacific
Gateway Properties, Inc. (a New York corporation) and subsidiaries as of
December 31, 1997 and 1996, and the related consolidated statements of income
(loss), stockholders' equity (deficit) and cash flows for each of the three
years in the period ended December 31, 1997. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Pacific
Gateway Properties, Inc. and subsidiaries as of December 31, 1997 and 1996, and
the results of their operations and their cash flows for each of the three years
in the period ended December 31, 1997, in conformity with generally accepted
accounting principles.
Our audits were made for the purpose of forming an opinion on the basic
consolidated financial statements taken as a whole. The schedule listed in the
index of financial statements is presented for purposes of complying with the
Securities and Exchange Commission's rules and is not part of the basic
consolidated financial statements. The schedule has been subject to the auditing
procedures applied in the audit of the basic consolidated financial statements
and, in our opinion, fairly states in all material respects the financial data
required to be set forth therein in relation to the basic consolidated financial
statements taken as a whole.
ARTHUR ANDERSEN LLP
San Francisco, California
March 2, 1998
42
<PAGE>
PACIFIC GATEWAY PROPERTIES, INC.
SCHEDULE III--REAL ESTATE AND ACCUMULATED DEPRECIATION
AS OF DECEMBER 31, 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
ACCUMULATED
DEPRECIATION
AND PROVISION
INITIAL COST GROSS CARRYING AMOUNT AT FOR WRITE- DOWN
TO COMPANY SUBSEQUENT DECEMBER 31, 1997 TO NET
---------------------- COSTS, ------------------------ REALIZABLE 1997
ENCUMBRANCES BUILDINGS AND CAPITALIZED BUILDINGS AND TOTAL VALUE PROJECTED
DESCRIPTION (NOTE 3) LAND IMPROVEMENTS IMPROVEMENTS IMPROVEMENTS (NOTE 1) (NOTE 2 AND 5) TAX BASIS
- --------------- ------------- ------- ------------- ------------- ------------- --------- -------------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Walnut Creek
Executive
Park......... $19,002 $1,357 $12,086 $ 8,009 $20,095 $ 21,452 $ 6,559 $16,748
South Bay
Office
Tower........ 9,348 3,439 13,754 3,547 17,301 20,740 6,200 11,477
North Tucson
Business
Center....... 3,801 147 621 628 1,249 1,396 431 1,205
Weston Office
Building..... 959 44 299 5 304 348 73 295
410 First
Avenue (Note
4 and 5)..... 2,200 494 4,006 364 4,370 4,864 2,702 2,099
West Valley
Executive
Park......... 10,000 3,500 14,187 680 14,867 18,367 357 7,712
930 Montgomery
Street....... 2,092 650 2,597 180 2,777 3,427 86 1,961
Corporate
Leasehold
Improvements... -- -- -- 62 62 62 23 40
------------- ------- ------------- ------------- ------------- --------- ------- ----------
TOTAL.......... $47,402 $9,631 $47,550 $13,475 $61,025 $ 70,656 $16,431 $41,537
------------- ------- ------------- ------------- ------------- --------- ------- ----------
------------- ------- ------------- ------------- ------------- --------- ------- ----------
<CAPTION>
DATE OF
CONSTRUCTION/
DESCRIPTION ACQUISITION
- --------------- -------------
<S> <C>
Walnut Creek
Executive
Park......... 1975 to
1986/1988
South Bay
Office
Tower........ 1972/1985
North Tucson
Business
Center....... 1987/1988
Weston Office
Building..... 1986/1988
410 First
Avenue (Note
4 and 5)..... 1961/1984
West Valley
Executive
Park......... 1978/1997
930 Montgomery
Street....... 1927/1997
Corporate
Leasehold
Improvements...
TOTAL..........
</TABLE>
43
<PAGE>
PACIFIC GATEWAY PROPERTIES, INC.
SCHEDULE III--REAL ESTATE AND ACCUMULATED DEPRECIATION--(CONTINUED)
DECEMBER 31, 1997
(IN THOUSANDS)
NOTE 1 The changes in the total cost of land, buildings, and improvements for
the three years ended December 31, are as follows:
<TABLE>
<CAPTION>
1997 1996 1995
--------- ---------- ---------
<S> <C> <C> <C>
Balance at beginning of period.......................... $ 46,632 $ 76,684 $ 76,500
Additions............................................... 3,245 1,527 2,177
Cost of acquired properties............................. 20,934 -- --
Write-off of fully amortized items...................... (155) (526) (1,679)
Cost of disposed properties............................. -- (31,053) (314)
--------- ---------- ---------
Balance at end of period................................ $ 70,656 $ 46,632 $ 76,684
--------- ---------- ---------
--------- ---------- ---------
</TABLE>
NOTE 2 The changes in accumulated depreciation and amortization and the
provision for write-down to net realizable value for the three years
ended December 31, are as follows:
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Balance at beginning of period........................... $ 13,835 $ 20,882 $ 19,807
Depreciation expense..................................... 2,751 2,239 2,795
Write-off of fully amortized items....................... (155) (526) (1,679)
Relief of accumulated balances related to disposed
properties............................................. -- (8,760) (41)
--------- --------- ---------
Balance at end of period................................. $ 16,431 $ 13,835 $ 20,882
--------- --------- ---------
--------- --------- ---------
</TABLE>
NOTE 3 Refer to Note 3 in the Registrant's Consolidated Financial Statements.
NOTE 4 This property was pledged in support of a $3.65 million letter-of-credit
in favor of the lender on Rincon Center. Prior to its expiration date of
June 23, 1997, the letter-of-credit was drawn by the refinancing lender.
Refer to Note 2 in the Registrant's Consolidated Financial Statements.
NOTE 5 The total reserve for write-down to net realizable value pertains to 410
First Avenue property in Needham, Massachusetts.
44
<PAGE>
EXHIBIT 21
PACIFIC GATEWAY PROPERTIES, INC.
SUBSIDIARIES OF THE REGISTRANT
<TABLE>
<CAPTION>
PERCENTAGE
INTEREST OF
PLACE OF VOTING
NAME ORGANIZATION SECURITIES OWNED
- ------------------------------------------------------------------------- --------------------- -----------------
<S> <C> <C>
Pacific Gateway Properties, Inc.......................................... New York 100%
Pacific Gateway Properties Management Corporation........................ California 100%
Pacific Gateway Properties Hotels, Inc................................... California 100%
Perini Investment Properties Executive Suites, Inc....................... California 100%
Maritime Plaza Associates................................................ California 100%
PGP--South Bay Office Tower, Inc......................................... California 100%
PGP--North Tucson Business Center, Inc................................... California 100%
PGP--Weston, Inc......................................................... California 100%
Rincon Center Associates................................................. California Limited 22.8%
Partnership
</TABLE>
45
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-K/A
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ______________ TO ______________
COMMISSION FILE NUMBER 1-8692
------------------------
PACIFIC GATEWAY PROPERTIES, INC.
(Exact name of Registrant as specified in its charter)
NEW YORK 04-2816560
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
930 MONTGOMERY ST., SUITE 400
SAN FRANCISCO, CALIFORNIA 94133
(Address of principal executive offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (415) 398-4800
SECURITIES REGISTERED PURSUANT TO SECTION 12 (b) OF THE ACT:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
---------------------------------------- ---------------------------------
Common Stock, $1.00 par value American Stock Exchange
SECURITIES REGISTERED PURSUANT TO SECTION 12 (g) OF THE ACT: NONE
------------------------
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes /X/ No / /
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K (Section 229.405 of this chapter) is not contained herein,
and will not be contained, to the best of Registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K / /.
State the aggregate market value of the voting stock held by non-affiliates
of the Registrant as of March 20, 1998: Common Stock, Par Value
$1.00--$13,880,229.
Indicate the number of shares outstanding of each of the Registrant's
classes of common stock as of March 20, 1998: Common Stock, Par Value
$1.00--3,899,596 shares.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART III
OF
ANNUAL REPORT ON FORM 10-K
OF
PACIFIC GATEWAY PROPERTIES, INC.
FOR THE YEAR ENDED DECEMBER 31, 1997
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The following table sets forth certain information as of April 15, 1998
concerning the directors and the executive officers of Pacific Gateway
Properties, Inc. (the "Company").
<TABLE>
<CAPTION>
NOMINEES
- ------------------------------
<S> <C>
Steven A. Calabrese........... Age 37; director of the Company since July 1997; since prior to 1993, managing
partner of Calabrese, Racek and Markos, Inc., CRM Construction Inc. and CRM
Environmental Services, Inc., firms which specialize in evaluations, management,
construction and environmental assessment services for commercial and industrial
real estate; owner and manager of a real estate portfolio. (A)
Mark D. Grossi................ Age 44; director of the Company since July 1997; Executive Vice President and
director of Charter One Financial, Inc., a savings and loan holding company, and
Executive Vice President and Chief Retail Banking Officer of its subsidiary,
Charter One Bank; since prior to 1993, holder of various senior executive
positions with Charter One Bank and its predecessor. (A)
Lawrence B. Helzel............ Age 50; director of the Company since May 1995; since prior to 1993, member,
Pacific Stock Exchange, Inc. (self employed market maker, options floor);
co-founder Buylar Investments, Inc., a real estate investment company. (A)
Marshall A. Jacobs............ Age 78; director of the Company since February 1984; since January 1992, Of
Counsel to the law firm of Jacobs Persinger & Parker, prior thereto, senior
partner in the firm. (B)
Christopher L. Jarratt........ Age 36; director of the Company since May 1997; since September 1996, Chief
Executive Officer of Third Capital, LLC, a company engaged in various real estate
investment and advisory activities; since prior to 1993, President, Jarratt
Associates, Inc., a company engaged in commercial mortgage banking and commercial
real estate investment activities; director of TIS Mortgage Investment Company.
Raymond V. Marino............. Age 39; director of the Company since March 1996 and President and Chief
Executive Officer since January 1996; prior thereto, Vice President of the
Company.
Richard M. Osborne............ Age 52; director and Chairman of the Board of Directors of the Company since May
1997; since prior to 1993 President and Chief Executive Officer of OsAir, Inc., a
manufacturer of industrial gases for pipeline delivery and a real property
developer; director of Brandywine Realty Trust, Great Lakes Bank, TIS Mortgage
Investment Company and Meridian Point Realty Trust VIII. (B)
</TABLE>
<PAGE>
<TABLE>
<S> <C>
Martin S. Roher............... Age 48; director of the Company since May 1995; since prior to 1993, general
partner and managing partner of MSR Capital Partners, a limited partnership
engaged in securities investments. (B)
<CAPTION>
EXECUTIVE OFFICERS
- ------------------------------
<S> <C>
Christopher M. Watson......... Age 39; Executive Vice President of the Company since January 1996; prior
thereto, Vice President of the Company.
Stephen J. LoPresti........... Age 37; Vice President, Finance of the Company since November 1997; prior
thereto, consultant for Ernst & Young Kenneth Leventhal Real Estate Group; prior
thereto, principal and founder of LoPresti & Associates.
</TABLE>
- ------------------------
(A) Member of the Audit Committee
(B) Member of the Compensation Committee
Directors hold office until the next Annual Meeting of Shareholders.
Officers hold their positions at the discretion of the Board of Directors.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Based upon reports it has received and other information, the Company
believes that all of its security holders, directors and officers who were
required to file reports of beneficial ownership of the Company's Common Stock
under Section 16(a) of the Securities Exchange Act of 1934 (the "Exchange Act")
in respect of 1997 and prior periods have done so and their filings for 1997
were on a timely basis, except that Steven A. Calabrese was late in filing one
report of one sale in 1997 of an aggregate of 36,600 shares of Common Stock; and
Richard M. Osborne was late in filing one report of one purchase in 1997 of an
aggregate of 36,600 shares of Common Stock.
ITEM 11. EXECUTIVE COMPENSATION.
The Summary Compensation Table below sets forth individual compensation
information for each of the Company's last three fiscal years of the Chief
Executive Officer ("CEO") and other most highly paid executive officers who were
serving as such at the end of the Company's fiscal year ended December 31, 1997,
and whose total annual salary and bonus for such fiscal year exceeded $100,000.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM
COMPENSATION
AWARDS
ANNUAL COMPENSATION ---------------------------
--------------------- STOCK ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS OPTIONS COMPENSATION(1)
- ------------------------------------------------------ --------- ---------- --------- --------- ----------------
<S> <C> <C> <C> <C> <C>
Raymond V. Marino(2) 1997 $ 150,000 $ 25,000 -- $ 4,800
President and CEO 1996 150,000 50,000 100,000 --
1995 95,000 30,000 -- 2,850
Christopher M. Watson 1997 100,000 -- -- 100,487
1996 70,000 30,000 35,000 34,906
1995 70,000 30,000 -- 22,459
</TABLE>
- ------------------------
(1) Other compensation in the form of personal benefits to the named persons has
been omitted because it does not exceed the lesser of $50,000 or 10% of the
total annual salary and bonus to each.
(2) Mr. Marino became President and CEO as of January 1996. Mr. Marino had been
Vice President and Chief Executive Officer of the Company since August 1992.
Mr. Marino was granted options
<PAGE>
for 20,000 shares of Common Stock as more fully described below in
"EMPLOYMENT CONTRACT WITH EXECUTIVE". His other compensation in 1997 is a
401(k) contribution and in 1995 is a simplified employee pension
contribution.
(3) Mr. Watson joined the Company as a Vice President in September 1992 and
became Executive Vice President as of January 1996. His other compensation
consisted of lease commissions of $92,687 in 1997, $31,906 in 1996 and
$17,359 in 1995, an auto allowance of $3,000 in each year, a $4,800 401(k)
contribution in 1997, and $2,100 for a simplified employee pension
contribution in 1995.
OPTION TABLES
There were no options to purchase Common Stock of the Company granted to the
two officers named above during 1997. Mr. Stephen J. LoPresti was hired as Vice
President of Finance in November 1997 following the resignation of Andrew T.
Gorayeb. Mr. LoPresti was granted options to purchase 30,000 shares of Common
Stock on November 10, 1997 at $4.938 per share. Mr. LoPresti's options will vest
equally over a five year period commencing November 10, 1998. None of Mr.
LoPresti's options were exercisable at December 31, 1997.
The following table sets forth the values at the end of 1997 of the options
to purchase Common Stock of the Company held by two of the officers named above.
None of these officers exercised any options in 1997.
FISCAL YEAR END OPTION VALUES
<TABLE>
<CAPTION>
VALUES OF
NUMBER OF UNEXERCISED IN-
UNEXERCISED THE-MONEY
OPTIONS AT OPTIONS AT
12/31/97 12/31/97(1)
EXERCISABLE/ EXERCISABLE/
NAME UNEXERCISABLE UNEXERCISABLE
- ---------------------------------------------------------------------------- --------------- -------------------
<S> <C> <C>
Raymond V. Marino 98,705/22,470 $ 213,743/$47,848
Christopher M. Watson 25,705/30,470 $ 49,210/$67,753
</TABLE>
- ------------------------
(1) The closing sale price for the Company's Common Stock on December 31, 1997,
as reported on the American Stock Exchange consolidated reporting system was
$4.88 per share.
EMPLOYMENT CONTRACT WITH EXECUTIVE. Raymond V. Marino was employed by the
Company in 1996 under an employment agreement which was renewed on slightly
modified terms to apply to future years and pursuant to which Mr. Marino is to
be the Chief Executive Officer, President and a director of the Company at an
annual base salary of $150,000 plus a bonus determined by the Board of
Directors. The current employment agreement is for an initial term of two years
commencing January 2, 1997, and will automatically be extended for additional
one-year terms unless either party elects not to extend the term. If the Company
makes the election, Mr. Marino will be entitled (i) to receive his base salary
for a period of 24 months following expiration and a bonus equal to the average
of any annual bonuses he may have earned with respect to the immediately
preceding two full calendar years of his employment or, if greater, the bonus,
if any, Mr. Marino has received in respect of his 1996 employment, and (ii) to
exercise all vested options which have been granted to him for a period of 12
months from the date of expiration. If the Company otherwise terminates the
employment agreement without cause or if Mr. Marino terminates the employment
agreement because of a reduction in his responsibilities or compensation or a
change in his employment location, Mr. Marino will be entitled to receive the
termination compensation described above and the vesting period of any unvested
options granted to Mr. Marino will accelerate and such options and all
previously vested options will be exercisable for a period of 12 months from the
date of termination. In the event of a termination of Mr. Marino's employment at
his election within 12 months following a change in control of the Company (as
defined in the employment agreement), he will be entitled to receive the
termination compensation described
<PAGE>
above, including the acceleration of the vesting of his options, but the period
for exercising any options will be three months from termination. If, following
a change in control, Mr. Marino agrees to remain employed under different terms
of employment than those contained in his employment agreement, he will be
entitled to be paid in addition to his compensation under the new employment
arrangement his base salary for the remainder of his then current employment
term. On March 16, 1998, the Board of Directors notified Mr. Marino that his
employment agreement would be extended until January 1, 2000. In addition,
effective January 1, 1998, Mr. Marino's base salary would be $175,000 plus a
bonus determined by the Board of Directors. Mr. Marino was also granted
additional options to purchase 20,000 shares of Common Stock on March 16, 1998
at $6.0625 per share. According to the amendment to the employment agreement
options to purchase 10,000 shares of Common Stock will be exercisable on January
1, 1999 and December 31, 1999, respectively.
Mr. Watson and Mr. LoPresti have a severance arrangement with the Company
under which they are entitled to receive one year's base salary if the Company
terminates their employment within one year following a change in its control.
Directors who are not officers of the Company receive an annual fee of
$7,500 and supplemental fees of $750 for each meeting of the Board or a
committee thereof attended, and $375 for each telephone meeting, plus
out-of-pocket expenses incurred in connection with services rendered to the
Company and travel and lodging for each board meeting.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION. Mr. Jacobs is
Of Counsel to the law firm of Jacobs Persinger & Parker. Such law firm has
performed services for the Company for which it was paid $101,271 in 1997 and
may perform services for the Company in 1998.
PACIFIC GATEWAY PROPERTIES, INC. (PGP)
PERFORMANCE GRAPH
COMPARISON OF FIVE YEAR CUMULATIVE TOTAL RETURN*
AMONG PGP, DOW JONES GLOBAL MARKET INDEX-US AND DOW JONES REAL
ESTATE INVESTMENT INDEX-US
FISCAL YEAR ENDING DECEMBER 31ST
<TABLE>
<CAPTION>
1992 1993 1994 1995 1996 1997
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Pacific Gateway Properties $ 100 $ 143 $ 152 $ 110 $ 124 $ 183
--------- --------- --------- --------- --------- ---------
Dow Jones Equity Market Index $ 100 $ 110 $ 111 $ 152 $ 188 $ 251
--------- --------- --------- --------- --------- ---------
Dow Jones Real Estate Market Index $ 100 $ 117 $ 111 $ 138 $ 185 $ 221
--------- --------- --------- --------- --------- ---------
</TABLE>
Assumes $100 invested on 12/31/92 in PGP
Common Stock, the Dow Jones Global Market Index-US
* Total return assumes reinvestment of dividends
** Fiscal year ending December 31.
The above graph compares the performance of the Company with that of the Dow
Jones Global Market Index-US (Formerly the Dow Jones Equity Market Index) and
the Dow Jones Real Estate Investment Index-US.
<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth certain information concerning the beneficial
ownership of shares of Common Stock of the Company by persons who the Company
knows to own beneficially more than 5% of the outstanding Common Stock and by
the directors and executive officers of the Company.
<TABLE>
<CAPTION>
<S> <C> <C>
Richard M. Osborne Trust ............................................... 1,576,938(2) 40.4
Turkey Vulture Fund XIII, Ltd.
and Liberty Self Stor, Ltd.
7001 Center Street
Mentor, OH
44060
Mark D. Grossi ......................................................... 264,800 6.8
30962 Riviera Lane Westlake, OH 44145
Third Capital, LLC ..................................................... 200,000(3) 5.1
314 Church Street
Nashville, TN
37201
</TABLE>
<TABLE>
<CAPTION>
DIRECTORS AND EXECUTIVE OFFICERS
- ------------------------------------------------------------------------
<S> <C> <C>
Steven A. Calabrese..................................................... 39,800 1.0
Mark D. Grossi.......................................................... 264,800 6.8
Lawrence B. Helzel...................................................... 40,000 *
Marshall A. Jacobs...................................................... 200 *
Christopher L. Jarratt.................................................. 200,000(3) 5.1
Raymond V. Marino....................................................... 98,705(4) 2.5
Richard M. Osborne...................................................... 1,576,938(2) 40.4
Martin S. Roher......................................................... 175,000(5) 4.5
Christopher M. Watson................................................... 25,705(4) *
All directors and executive officers (9 persons) as a group............. 2,221,148 57.0
</TABLE>
- ------------------------
* Less than 1%
(1) Beneficial ownership is the direct or indirect ownership of Common Stock of
the Company including the right to control the vote or investment of or
acquire such Common Stock within the meaning of Rule 13d-3 under the
Securities Exchange Act of 1934. Unless otherwise indicated, each beneficial
owner has sole voting and investment power with respect to the shares shown
and reported ownership is as of March 2, 1998.
(2) According to information provided in Form 5, Annual Statement of Changes in
Beneficial Ownership dated February 10, 1998, filed by the Richard M.
Osborne Trust (the "Trust"), Turkey Vulture Fund XIII, Ltd. (the "Fund") and
Liberty Self Stor, Ltd. ("Liberty") as a group, and other information
provided to the Company, the Trust beneficially owns 100 shares, the Fund
beneficially owns 305,432 shares (7.8%) and Liberty beneficially owns
1,271,406 shares (32.6%). Richard M. Osborne as sole trustee of the Trust,
sole manager of the Fund and sole managing member of Liberty may be deemed
to beneficially own all of said 1,576,938 shares.
(3) Based upon information provided in Schedule 13D dated May 19, 1997 filed by
Third Capital, LLC. Represents shares of Common Stock issuable upon exercise
of presently exercisable warrants issued to Third Capital, LLC by the
Richard M. Osborne Trust. Christopher L. Jarratt is Chief Executive Officer
of Third Capital, LLC and may be deemed to beneficially own said securities.
<PAGE>
(4) Represents shares issuable upon exercise of options to purchase Common Stock
which were exercisable at March 2, 1998 or which may become exercisable
within 60 days thereafter.
(5) The shares are owned by MSR Capital Partners. Mr. Roher is the sole general
partner of MSR Capital Partners and may be considered to beneficially own
such shares.
(6) Represents 27,600 shares held by CCAG Limited, a family limited partnership
("CCAG"); 6,500 shares beneficially owned by Mr. Calabrese's wife as to
which shares Mr. Calabrese disclaims beneficial ownership; and 5,700 shares
held by Mr. Calabrese as custodian for his children. Mr. Calabrese is
managing partner of CCAG and may be deemed to beneficially own said shares.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
See Item 11 for information concerning the relationship between the Company
and the law firm of Jacobs Persinger & Parker, to which Marshall A. Jacobs, a
director of the Company, is Of Counsel.
The Board of Directors of the Company held five meetings in 1997. The Board
does not have a Nominating Committee. The duties of the Audit Committee of the
Board are to oversee the audit function of the Company's independent certified
public accountants, to periodically review significant financial information
relating to the Company and to act as a communication link between the Board and
such certified public accountants. The duties of the Compensation Committee of
the Board are to make recommendations to the Board with respect to the
compensation package of the Chief Executive Officer, to review the Chief
Executive Officer's recommendations as to the compensation packages of the other
officers of the Company and to award grants under and otherwise administer the
Company's stock option plans. The Audit Committee met two times in 1997. The
Compensation Committee met once in 1997. During 1997, each director attended all
of the meetings of the Board of Directors and committees of which he was a
member.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Company has duly caused this amendment to be signed by
the undersigned thereunto duly authorized.
<TABLE>
<S> <C> <C>
PACIFIC GATEWAY PROPERTIES, INC.
(REGISTRANT)
By: /s/ RAYMOND V. MARINO
-----------------------------------------
Raymond V. Marino, President and Chief
Executive Officer
April 24, 1998
-----------------------------------------
Date
</TABLE>
<PAGE>
ANNEX F
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-Q
(MARK ONE)
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1998
COMMISSION FILE NUMBER 1-8692
------------------------
PACIFIC GATEWAY PROPERTIES, INC.
(Exact name of registrant as specified in its charter)
NEW YORK 04-2816560
(State of incorporation) (IRS Employer Identification No.)
930 MONTGOMERY STREET, SUITE 400, SAN 94133
FRANCISCO, CALIFORNIA (zip code)
(Address of principal executive offices)
(415) 398-4800
Registrant's telephone number, including area code
NOT APPLICABLE
(Former name, former address and former fiscal year, if changed since last
report)
------------------------
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 the number of shares outstanding of each of the issuer's classes of
stock, as of the latest practicable date of November 2, 1998:
3,933,536 shares of Common Stock, $1.00 par value and 300,000 shares of
Series 1 Convertible Preferred Stock, $1.00 par value.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PACIFIC GATEWAY PROPERTIES, INC.
INDEX
<TABLE>
<CAPTION>
PAGE NUMBER
<S> <C> <C> <C>
Part I--Financial Information:
Item 1. Consolidated Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets as of September 30, 1998 and December 31, 1997 3
Condensed Consolidated Statements of Operations for the Three and Nine Months Ended
September 30, 1998 and 1997 4
Condensed Consolidated Statement of Stockholders' Equity for the Nine Months Ended
September 30, 1998 5
Condensed Consolidated Statements of Cash Flows for the Three and Nine Months Ended
September 30, 1998 and 1997 6
Notes to Condensed Consolidated Financial Statements 7-13
Item 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations 13-18
Part II--Other Information:
Item 1. Legal Proceedings 19
Item 2. Changes in Security 19
Item 3. Defaults Upon Senior Securities None
Item 4. Submission of Matters to a Vote of Security Holders None
Item 5. Other Information None
Item 6. Exhibits and Reports on Form 8-K 20
Signatures 21
</TABLE>
2
<PAGE>
PACIFIC GATEWAY PROPERTIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
AS OF AS OF
SEPTEMBER 30, DECEMBER 31,
1998 1997
------------- -------------
<S> <C> <C>
ASSETS
Cash and cash equivalents........................................................... $ 6,240 $ 2,065
Restricted cash..................................................................... 1,711 1,746
Accounts receivable, prepaid taxes and other current assets......................... 186 252
Investment properties............................................................... 72,252 70,656
Less--accumulated depreciation and reserve for write-down to net realizable
value........................................................................... (18,101) (16,431)
------------- -------------
Investment properties, net...................................................... 54,151 54,225
------------- -------------
Deferred tax asset.................................................................. 11,679 8,203
Capitalized loan costs, net......................................................... 771 818
Capitalized lease commissions, rent concessions and other deferred costs, net....... 2,109 1,402
------------- -------------
Total assets.................................................................... $ 76,847 $ 68,711
------------- -------------
------------- -------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable, prepaid rent, tenant security deposits, accrued interest and other
current liabilities............................................................... $ 3,176 $ 2,678
Debt related to investment properties............................................... 48,867 47,402
Deferred tax liability.............................................................. 21,653 17,983
------------- -------------
Total liabilities............................................................... 73,696 68,063
------------- -------------
STOCKHOLDERS' EQUITY
Common stock $1.00 par value:
Authorized--10,000,000 shares
Issued--4,052,090 and 4,018,150 shares at September 30, 1998 and December 31,
1997, respectively.............................................................. 4,052 4,018
Series 1 Convertible Preferred Stock $1.00 par value, $3,000,000 preference in
liquidation:
Authorized and issued--300,000 shares............................................. 2,889 --
Paid-in-deficit..................................................................... (8,968) (10,023)
Treasury stock, at cost--118,554 common shares at September 30, 1998 and December
31, 1997.......................................................................... (2,037) (2,037)
Warrants for common stock........................................................... -- 1,890
Retained earnings................................................................... 7,215 6,800
------------- -------------
Total stockholders' equity........................................................ 3,151 648
------------- -------------
Total liabilities and stockholders' equity...................................... $ 76,847 $ 68,711
------------- -------------
------------- -------------
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
3
<PAGE>
PACIFIC GATEWAY PROPERTIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS FOR THE NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
-------------------- --------------------
1998 1997 1998 1997
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
INVESTMENT PROPERTIES:
Rental revenues.................................................. $ 4,133 $ 3,274 $ 12,197 $ 10,152
Operating expenses............................................... (1,658) (1,557) (4,703) (4,410)
Interest expense................................................. (1,088) (1,089) (3,212) (2,989)
Depreciation and amortization.................................... (938) (793) (2,748) (2,300)
--------- --------- --------- ---------
Investment properties income................................... 449 (165) 1,534 453
General and administrative expenses................................ (223) (250) (917) (950)
Other income, net.................................................. 49 30 103 131
--------- --------- --------- ---------
Income (loss) before hotel operations, settlement obligation and
taxes............................................................ 275 (385) 720 (366)
Income (loss) from hotel operations................................ -- -- -- (93)
--------- --------- --------- ---------
Income (loss) before settlement obligation and taxes............... 275 (385) 720 (459)
Provision for settlement of reimbursement obligation............... -- -- -- (2,200)
--------- --------- --------- ---------
Income (loss) before taxes......................................... 275 (385) 720 (2,659)
Income tax benefit (provision)..................................... (113) 140 (305) 970
--------- --------- --------- ---------
Net income (loss).............................................. $ 162 $ (245) $ 415 $ (1,689)
--------- --------- --------- ---------
--------- --------- --------- ---------
Income (loss) per share of common stock, basic..................... $ 0.04 $ (0.06) $ 0.11 $ (0.43)
--------- --------- --------- ---------
--------- --------- --------- ---------
Income (loss) per share of common stock, diluted................... $ 0.04 $ (0.06) $ 0.10 $ (0.43)
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
4
<PAGE>
PACIFIC GATEWAY PROPERTIES, INC.
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (UNAUDITED)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
SERIES 1
CONVERTIBLE
COMMON PREFERRED PAID-IN- RETAINED TREASURY
STOCK STOCK DEFICIT EARNINGS STOCK
----------- ------------- --------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1997............................... $ 4,018 $ -- $ (10,023) $ 6,800 $ (2,037)
Net income................................................ -- -- -- 415 --
Repurchase of warrants.................................... -- -- 883 -- --
Issuance of preferred stock............................... -- 2,889 --
Tax benefit from exercise of stock options................ -- -- 104 -- --
Issuance of common stock from exercise of stock options... 34 -- 65 -- --
Return of profit from shareholder short-swing sale........ -- -- 3 -- --
----------- ------ --------- ----------- -----------
Balance at September 30, 1998.............................. $ 4,052 $ 2,889 $ (8,968) $ 7,215 $ (2,037)
----------- ------ --------- ----------- -----------
----------- ------ --------- ----------- -----------
<CAPTION>
WARRANTS
FOR COMMON
STOCK TOTAL
----------- ---------
<S> <C> <C>
Balance at December 31, 1997............................... $ 1,890 $ 648
Net income................................................ -- 415
Repurchase of warrants.................................... (1,890) (1,007)
Issuance of preferred stock............................... 2,889
Tax benefit from exercise of stock options................ -- 104
Issuance of common stock from exercise of stock options... -- 99
Return of profit from shareholder short-swing sale........ -- 3
----------- ---------
Balance at September 30, 1998.............................. $ -- $ 3,151
----------- ---------
----------- ---------
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
5
<PAGE>
PACIFIC GATEWAY PROPERTIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS FOR THE NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
-------------------- --------------------
1998 1997 1998 1997
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Cash flow from operating activities:
Net income (loss).................................................................... $ 162 $ (245) $ 415 $ (1,689)
Non-cash revenues and expenses included in net income (loss):
Depreciation and amortization...................................................... 938 793 2,748 2,300
Deferred taxes, net................................................................ 9 (140) 194 (970)
Provision for settlement of reimbursement obligation............................... -- -- -- 2,200
Change in assets and liabilities:
Accounts receivable, prepaid taxes and other current assets........................ 94 132 66 670
Accounts payable and other current liabilities..................................... (134) 365 498 301
--------- --------- --------- ---------
NET CASH GENERATED BY OPERATING ACTIVITIES........................................... 1,069 905 3,921 2,812
Cash flow from investing activities:
Additions to building and other improvements, capitalized lease commissions, rent
concessions, and other deferred costs............................................. (401) (878) (3,272) (2,337)
Acquisition of investment properties................................................. -- -- -- (10,975)
--------- --------- --------- ---------
NET CASH USED IN INVESTING ACTIVITIES................................................ (401) (878) (3,272) (13,312)
--------- --------- --------- ---------
Cash flow from financing activities:
Borrowings under debt related to investment properties............................... 2,697 -- 4,272 2,112
Payments on debt..................................................................... (2,307) (219) (2,807) (622)
Payments of loan costs and fees...................................................... (21) -- (62) --
Repurchase of warrants............................................................... -- -- (1,007) --
Proceeds from sale of preferred stock, net of issuance costs......................... 2,889 -- 2,889 --
Proceeds from stock options exercised................................................ 99 -- 99 --
Tax benefit from exercise of stock options........................................... 104 -- 104 --
Proceeds from shareholder short-swing sale........................................... 3 -- 3 184
Decrease in restricted cash.......................................................... 55 377 35 8,443
--------- --------- --------- ---------
NET CASH GENERATED BY FINANCING ACTIVITIES........................................... 3,519 158 3,526 10,117
--------- --------- --------- ---------
Increase (decrease) in cash and cash equivalents....................................... 4,187 185 4,175 (383)
Balance at beginning of period......................................................... 2,053 2,331 2,065 2,899
--------- --------- --------- ---------
Balance at end of period............................................................... $ 6,240 $ 2,516 $ 6,240 $ 2,516
--------- --------- --------- ---------
--------- --------- --------- ---------
Supplementary disclosures:
Cash paid for interest............................................................... $ 952 $ 968 $ 2,944 $ 2,868
--------- --------- --------- ---------
--------- --------- --------- ---------
Cash paid for taxes.................................................................. $ -- $ -- $ 7 $ --
--------- --------- --------- ---------
--------- --------- --------- ---------
Non-cash transactions:
Portion of acquisition of investment properties funded by assumption of mortgage
debt.............................................................................. $ -- $ -- $ -- $ 10,203
--------- --------- --------- ---------
--------- --------- --------- ---------
Increase in debt related to investment properties in connection with reimbursement
obligation........................................................................ $ -- $ -- $ -- $ 2,200
--------- --------- --------- ---------
--------- --------- --------- ---------
Decrease in paid-in-deficit from repurchase of warrants.............................. $ -- $ -- $ 883 $ --
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
6
<PAGE>
PACIFIC GATEWAY PROPERTIES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE QUARTER AND NINE MONTHS ENDED SEPTEMBER 30, 1998
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accompanying unaudited condensed consolidated financial statements
should be read in conjunction with the Registrant's 1997 Form 10-K and Form 10-Q
for the quarter and nine months ended September 30, 1997. These statements have
been prepared in accordance with the instructions of the Securities and Exchange
Commission Form 10-Q and do not include all of the information and footnotes
required by generally accepted accounting principles for complete financial
statements.
In the opinion of the Registrant, all material adjustments of a normal
recurring nature considered necessary for a fair presentation of results of
operations for the interim periods have been included. The results of
consolidated operations for the three and nine months ended September 30, 1998
are not necessarily indicative of the results that may be expected for the year
ending December 31, 1998.
RECLASSIFICATIONS
Certain prior period amounts have been reclassified to be consistent with
current period classifications.
ESTIMATES AND ASSUMPTIONS
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities,
disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenues and expenses during the
reporting period. Actual results may differ from those estimates.
2. RINCON CENTER ASSOCIATES PARTNERSHIP (RCA)--SAN FRANCISCO, CALIFORNIA
The Registrant owns general (non-managing) and limited partnership interests
in RCA totaling approximately 22.8% and, subject to the funding agreement
entered into with RCA's managing general partner, Perini Land & Development
Company (PL&D), (a wholly owned subsidiary of Perini Corporation), discussed
below, is responsible for 20% of cash requirements in excess of available
financing. The Registrant's minority, general (non-managing) and limited
partnership interests in RCA represent significant potential financial exposure.
This exposure includes and may not be limited to the potential tax liability
associated with the Registrant's negative tax basis in the partnership and the
potential tax liability that would exist from the cancellation of debt in
connection with a possible debt restructuring and potential liability as a
general partner of RCA under the master lease described below. The Registrant
has provided certain joint and several guarantees with PL&D to the mortgage
lender on Rincon Center Phase Two. However, the Registrant has been advised by
legal counsel that guarantees provided by the Registrant to the mortgage lender
on Rincon Center Phase Two are not enforceable because (i) the Registrant's
status as a general partner would make it primary obligor, and (ii) the debt is
non-recourse debt. As a result, a guaranty by a primary obligor of non-recourse
debt is not enforceable. Except for the provision for settlement of the
reimbursement obligation (discussed below) and deferred income tax liabilities
related to the tax that would result from any gain recognized from the
Registrant's negative tax basis in its partnership interest, the accompanying
financial statements do not include any further adjustments for these
uncertainties.
7
<PAGE>
PACIFIC GATEWAY PROPERTIES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE QUARTER AND NINE MONTHS ENDED SEPTEMBER 30, 1998
2. RINCON CENTER ASSOCIATES PARTNERSHIP (RCA)--SAN FRANCISCO, CALIFORNIA
(CONTINUED)
RCA sold Rincon Center Phase One to Chrysler MacNally Corporation (Chrysler)
in June 1988; subsequently, RCA leased the property back under a master lease
which is treated as an operating lease for financial reporting purposes.
Payments under the master lease agreement may be adjusted to reflect adjustments
in the rate of interest payable by Chrysler on the Rincon Center Phase One debt.
The future minimum lease payments based on scheduled payments under RCA's
master lease agreement are as follows (in thousands):
<TABLE>
<S> <C>
1998............................................................... $ 5,634
1999............................................................... 5,875
2000............................................................... 5,875
2001............................................................... 5,875
2002............................................................... 5,875
Thereafter......................................................... $ 61,622
---------
Total.............................................................. $ 90,756
---------
---------
</TABLE>
The master lease also permits Chrysler to put the property back to RCA at
stipulated prices beginning January 1998 if long-term financing meeting certain
conditions is not obtained. On June 30, 1997, RCA filed a lawsuit against
Chrysler in Superior Court in the State of California, County of San Francisco.
The lawsuit's primary cause of action alleges that Chrysler has breached the
master lease and a certain letter agreement because the rent payments due from
RCA after the 1993 refinancing of Rincon Center Phase One, resulted in an
increase in Chrysler's after tax rate of return from rent payments. The lawsuit
states that such excessive rent recalculations directly contravene both the
letter and the spirit of the master lease.
In July 1993, Chrysler completed a refinancing of Rincon Center Phase One.
This debt matured on July 1, 1998. While the loan to Chrysler on Rincon Center
Phase One has matured, the current lender has deferred enforcement of any
remedies pending completion of the restructuring discussions. In addition,
Chrysler has continued to defer enforcement of the purchase requirement
provisions under the master lease during the loan negotiations. The Registrant
can make no assurances about the outcome of these negotiations. As a result of
the loan negotiations, RCA wrote down the carrying value of the assets related
to this segment of the property by $17,150,000 in 1997 to its estimated net
realizable value.
In September 1993, RCA completed a refinancing of Rincon Center Phase Two
with Citibank. The residential portion of Rincon Center Phase Two is being
financed with redevelopment bonds from the Redevelopment Agency of the City and
County of San Francisco, California, which are due December 1, 2006. The bonds
are secured by an irrevocable letter-of-credit issued by Citibank in the name of
RCA. In the event that drawings are made on the letter-of-credit, RCA has agreed
to reimburse Citibank for such drawings pursuant to the terms of the
Reimbursement Agreement which is secured by a deed of trust on Rincon Center
Phase Two and other guarantees. During 1997, the irrevocable letter-of-credit
was due to expire. RCA is currently in negotiations with Citibank to extend the
letter-of-credit and no assurances can be made about the outcome of these
negotiations.
8
<PAGE>
PACIFIC GATEWAY PROPERTIES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE QUARTER AND NINE MONTHS ENDED SEPTEMBER 30, 1998
2. RINCON CENTER ASSOCIATES PARTNERSHIP (RCA)--SAN FRANCISCO, CALIFORNIA
(CONTINUED)
The commercial portion of Rincon Center Phase Two was financed pursuant to a
Construction Loan Agreement between RCA and Citibank. The Construction Loan
Agreement is secured by a deed of trust on the commercial portion of Rincon
Center Phase Two. In 1993, RCA extended the loan to October 1, 1998. RCA is
currently in negotiations with Citibank to extend the loan and no assurances can
be made about the outcome of this negotiation. A portion of the security for the
Construction Loan Agreement was a $3.65 million letter-of-credit issued by Bank
of America National Trust and Savings Association (the Issuing Bank) on behalf
of the Registrant in favor of Citibank.
The letter-of-credit for $3.65 million was drawn by Citibank prior to its
expiration date of June 23, 1997. Citibank is currently holding the $3.65
million in a separate restricted account on behalf of RCA and has not applied
said funds to any outstanding debt of RCA. The Issuing Bank made a demand on the
Registrant to reimburse them for the $3.65 million drawn on the letter-of-credit
and has also notified the Registrant it is in default with respect to the
reimbursement obligation. The reimbursement obligation of the Registrant to the
Issuing Bank is full recourse to the Registrant and is secured by the
Registrant's 410 First Avenue property located in Needham, Massachusetts.
On or about August 18, 1997, the Issuing Bank commenced an action against
the Registrant in the Land Court Department of the Trial Court of Massachusetts
(the Land Court) to obtain conditional judgement in the full amount of the
Registrant's indebtedness to the Issuing Bank. In such action, the Issuing Bank
is seeking to assert a deficiency claim against the Registrant for any alleged
difference between the value of the foreclosed property and the $3.65 million
drawn on the letter-of-credit including outstanding interest and fees. On
October 28, 1998, the Land Court issued a conditional judgement in favor of the
Issuing Bank in the principal amount of $3.65 million, together with interest as
set forth in the Amended and Restated Standby Letter of Credit Agreement dated
as of November 8, 1991, expenses in the amount of $36,273 and attorneys fees and
disbursements in the amount of $50,756. Including contractual interest, the
amount of the conditional judgement is in excess of $4.2 million. Pursuant to
the Land Court's order, the Registrant has sixty days from entry of the order to
pay the Issuing Bank the amount of the conditional judgement, plus statutory
interest of 12% from the date of the Land Court's order. Unless the Registrant
makes such payment to the Issuing Bank within sixty days of the order, the
Issuing Bank is entitled to enter and take possession of the Registrant's 410
First Avenue property, and collect all rents derived therefrom, for a period of
three years from the date of entry on the property. If the balance of the
conditional judgement has not been repaid at the end of that three year period,
the property shall be deemed foreclosed and title passes to the Issuing Bank.
The Registrant is appealing the Land Court's entry of the conditional judgement.
The Registrant is also continuing to pursue its claims in a companion action
against the Issuing Bank in the Massachusetts Superior Court. The Registrant
filed a complaint against the Issuing Bank on November 21, 1997 in the Superior
Court Department of the Trial Court of the Commonwealth of Massachusetts seeking
damages, equitable relief and a jury trial for causes of action flowing from the
Issuing Bank's conduct regarding the letter-of-credit. The Registrant's damages
claim in the Superior Court action could offset or exceed all or some of the
damages that the Issuing Bank is likely to be awarded in the Land Court action.
However, there is no assurance whatsoever that this result will be achieved.
Discovery has commenced and no trial date has been set.
Since any assets of the Registrant which are applied to the reimbursement
obligation would constitute additional investment in RCA, which the Registrant
considers of no value (as discussed below), the
9
<PAGE>
PACIFIC GATEWAY PROPERTIES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE QUARTER AND NINE MONTHS ENDED SEPTEMBER 30, 1998
2. RINCON CENTER ASSOCIATES PARTNERSHIP (RCA)--SAN FRANCISCO, CALIFORNIA
(CONTINUED)
net book value of such assets would be written off and charged to the earnings
of the Registrant when said assets were applied to the reimbursement obligation.
In accordance with generally accepted accounting principles, effective June 30,
1997, the Registrant recorded a "provision for settlement of reimbursement
obligation" in the amount of $2.2 million to provide for the ultimate settlement
of the reimbursement obligation, since the Registrant believes that the fair
market value of the 410 First Avenue property is equal to or greater than $3.65
million. The accrued amount is equal to the net book value at June 30, 1997 of
the 410 First Avenue property that serves as collateral for the reimbursement
obligation, resulting in an effective discount of the $3.65 million face value
of the reimbursement obligation. The Registrant has continued to record rental
revenue and operating expenses related to this property, as well as accrued
interest on the $3.65 million settlement obligation at a rate of prime plus
three percent. Any difference between the provision for settlement of
reimbursement obligation and the amount ultimately settled upon may be charged
or credited to the Registrant's operations as such difference becomes
determinable. Management can provide no assurances as to the ultimate settlement
amount or method (and the timing thereof) relating to the reimbursement
obligation.
In 1996, the Registrant ceased recording any activity related to its
interest in RCA because (i) it had previously written-down its equity investment
in and loans to RCA to zero in 1995, and (ii) the Registrant currently has no
obligation, prospects or plans to invest further in or on behalf of RCA.
In 1993, the Registrant entered into an agreement with RCA's managing
general partner whereby such managing general partner agreed to advance funds to
RCA on behalf of the Registrant on an unsecured non-recourse basis, subject to
interest at prime plus 2% and certain annual fees (principal, unpaid interest
and fees are collectively referred to as the RCA Advances). This agreement does
not reduce the level of the Registrant's general and limited partnership
interests in RCA. During the first nine months of 1998 and 1997, RCA incurred
net losses of approximately $11,673,000 and $16,355,000, respectively. RCA's
managing general partner is seeking to void the letter agreement under which
these loans were made and is also seeking restitution of the loans advanced. As
indicated previously, RCA's managing general partner continues to advance funds
to RCA under this agreement with the Registrant. The RCA Advances amount to
approximately $8,032,000 at September 30, 1998 and as noted above, are not
recorded on the Registrant's financial statements since (i) the RCA Advances are
only required to be repaid from the Registrant's share of future distributions
from RCA, if any, (ii) the Registrant has no intention or legal obligation to
repay the RCA Advances other than from its share of distributions from RCA, if
any, and (iii) the Registrant does not anticipate any material cash
distributions by RCA in the foreseeable future.
During 1997, the Registrant asserted certain claims against RCA for payment
of leasing services provided to RCA by the Registrant during 1996. The
Registrant has not recorded a receivable for these claims pending resolution of
this matter with RCA's managing general partner.
10
<PAGE>
PACIFIC GATEWAY PROPERTIES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE QUARTER AND NINE MONTHS ENDED SEPTEMBER 30, 1998
2. RINCON CENTER ASSOCIATES PARTNERSHIP (RCA)--SAN FRANCISCO, CALIFORNIA
(CONTINUED)
Summary unaudited financial statement data for RCA is as follows (in
thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
AS OF 1998 1997
------------- ------------
<S> <C> <C>
Investment properties, net...................................... $ 103,332 $ 107,045
Other assets.................................................... 3,917 6,857
------------- ------------
$ 107,249 $ 113,902
------------- ------------
------------- ------------
Debt............................................................ $ 42,483 $ 49,228
Amounts due to partners......................................... 196,799 185,208
Other liabilities............................................... 12,897 12,723
Partners' deficit............................................... (144,930) (133,257)
------------- ------------
$ 107,249 $ 113,902
------------- ------------
------------- ------------
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED
NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------- ----------------------
<S> <C> <C> <C> <C>
1998 1997 1998 1997
--------- --------- ---------- ----------
Revenue.............................................................. $ 4,743 $ 4,439 $ 13,970 $ 12,166
Expenses:
Operating and lease expenses....................................... 3,645 6,177 10,142 15,192
Interest expense................................................... 4,150 3,890 13,303 11,129
Depreciation expense............................................... 630 769 2,198 2,200
--------- --------- ---------- ----------
8,425 10,836 25,643 28,521
--------- --------- ---------- ----------
Net loss............................................................. $ (3,682) $ (6,397) $ (11,673) $ (16,355)
--------- --------- ---------- ----------
--------- --------- ---------- ----------
</TABLE>
3. PER SHARE DATA
Basic earnings per share is computed as earnings divided by weighted average
shares, excluding the dilutive effects of stock options and other potentially
dilutive securities. Outstanding stock options enter into the weighted average
shares outstanding calculation when computing diluted earnings per share using
the Treasury Stock Method.
The number of weighted average common shares and potential common shares
used in the earnings per share calculations for the three and nine months ended
September 30, 1998 and 1997, are as follows:
<TABLE>
<CAPTION>
FOR THE THREE MONTHS FOR THE NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
---------------------- ----------------------
<S> <C> <C> <C> <C>
1998 1997 1998 1997
---------- ---------- ---------- ----------
Basic......................................................... 3,933,167 3,892,596 3,910,868 3,892,596
Stock options................................................. 111,096 -- 100,164 --
---------- ---------- ---------- ----------
Diluted....................................................... 4,044,263 3,892,596 4,011,032 3,892,596
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
</TABLE>
11
<PAGE>
PACIFIC GATEWAY PROPERTIES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE QUARTER AND NINE MONTHS ENDED SEPTEMBER 30, 1998
3. PER SHARE DATA (CONTINUED)
In the three and nine months ended September 30, 1997, due to the
Registrant's loss position, the inclusion of stock options would have been
anti-dilutive, and accordingly the number of outstanding shares used in
calculating dilutive earnings per share for this quarter and nine month period
exclude the stock options.
4. DEBT RELATED TO INVESTMENT PROPERTIES
In July 1998, the Registrant completed the refinancing of $2,076,000 of
mortgate debt from Redwood Bank related to its 930 Montgomery Street property in
San Francisco, California. The new loan of $2,697,500 carries a variable
interest rate of 2.875% over the one year treasury bond rate, adjustable
semi-annually (8.375% at September 30, 1998). The loan has fixed monthly
amortization payments of principal and interest of approximately $21,500. The
loan is amortized over 25 years but matures on September 1, 2008. This debt is
nonrecourse and can be prepaid at any time without a penalty. This debt contains
a cross default provision with the loan on the Registrant's 4050 Moorpark Avenue
building at West Valley Executive Park in San Jose, California.
5. PREFERRED STOCK
An amendment to the Certificate of Incorporation to provide for the issuance
of 300,000 shares of Series 1 Convertible Preferred Stock, $1.00 par value, (the
Preferred Stock) was approved by unanimous written consent of the Registrant's
Board of Directors on September 10, 1998. A certificate of amendment was filed
with the State of New York on September 13, 1998. The Registrant's Board of
Directors approved the sale of 300,000 shares of the Preferred Stock to GEM
Value/PGP, L.L.C.(GEM), an affiliate of GEM Value Fund, L.P. Proceeds from the
sale of the Preferred Stock were approximately $2,889,000, net of issuance costs
of $111,000. These funds are currently being held in short-term investments
pending potential future acquisitions and/or reduction of debt obligations.
GEM's 300,000 shares of Preferred Stock are convertible at any time, at the
option of GEM, into the Registrant's common stock on a one for one basis and
have identical voting rights. GEM Value Fund, L.P. also owns 101,700 shares of
the Registrant's common stock which it had acquired in open market purchases
prior to entering into discussions to purchase the Preferred Stock. As of
September 21, 1998, GEM's common and preferred stock holdings in the Registrant
represented 9.5% of the Registrant's total preferred and common shares
outstanding and entitled to vote.
The Preferred Stock will receive dividends, if any, from the Registrant's
operating cash flow on a PARI PASSU basis with common shareholders. The
agreement with GEM does not require the Registrant to make any distributions. In
the event of a full or partial liquidation of the Registrant, GEM will be
entitled to a liquidation preference of $10.00 per share. GEM also received
customary registration rights for the common stock issuable upon conversion of
the Preferred Stock.
In addition, GEM has entered into an agreement with the Registrant and three
entities controlled by the Registrant's Chairman, Richard Osborne, whereby GEM
has a "tag along" right to sell its preferred shares, or common shares if
converted, on a pro rata basis with these entities. This right is exercisable
should any of the Osborne controlled entities sell cumulatively in excess of
200,000 shares of the Registrant's common stock.
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6. PAID-IN-DEFICIT
During the quarter ended September 30, 1998, the Registrant received
approximately $3,000 in cash from a shareholder as a result of their compliance
with the Securities Exchange Act's requirement that profits from the sale of
certain securities of a company that were held less than six months by certain
officers, directors and principal stockholders must be returned to the
Registrant. In accordance with generally accepted accounting principles, the
Registrant recorded such proceeds as a credit to the Registrant's
paid-in-deficit.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
INTRODUCTION
The Registrant is a New York corporation formed in 1984 for the purpose of
investing and managing income producing real estate. The Registrant's overall
business plan has been to assemble a substantial portfolio of income producing
properties. The Registrant historically focused its property acquisitions in
four markets: Northern California, Arizona, Florida and Massachusetts. The
Registrant's long-term objectives continue to be maximizing net cash flow from
operations and achieving growth through appreciation of asset values. The
current strategic plan of the Registrant is to focus on real estate investments
on the West Coast with a specific emphasis on the San Francisco Bay Area. The
current investment emphasis is on commercial properties which require aggressive
management and leasing in order to maximize their potential. This strategy is
influenced by the following factors: (1) the Registrant's current property
portfolio is concentrated on the West Coast; and (2) the Registrant believes
that geographic concentration will enhance operational efficiencies.
The following discussion should be read in conjunction with the Registrant's
Form 10-K for 1997, quarterly report on Form 10-Q for the quarter and nine
months ended September 30, 1997, and in conjunction with the Unaudited Condensed
Consolidated Balance Sheets, Statements of Operations and Cash Flows and the
notes thereto. Unless otherwise defined in this report, or unless the context
otherwise requires, the capitalized words or phrases used in this section either
(i) describe accounting terms that are used as line items in such financial
statements, or (ii) have the meanings ascribed to them in such financial
statements and the notes thereto.
FINANCIAL CONDITION
CAPITAL IMPROVEMENTS, TENANT IMPROVEMENTS AND OTHER DEFERRED COSTS-- During
the three and nine months ended September 30, 1998, there were additions to
investment properties amounting to approximately $401,000 and $3,272,000,
respectively, for tenant improvements, capital improvements and other deferred
costs which includes leasing commissions. The Registrant anticipates further
additions to investment properties of approximately $1,157,000 during the
remainder of 1998.
FINANCING-- Approximately $231,000 and $731,000 of debt principal was
repaid in the three and nine months ended September 30, 1998, respectively, as
scheduled debt amortization. In connection with the refinancing of $2,076,000 of
mortgage debt on the Registrant's 930 Montgomery Street building in San
Francisco, California, during the three months ended September 30, 1998, the
Registrant borrowed $2,697,500 under a floating rate mortgage note. The proceeds
from this financing are currently being held in short-term investments pending
potential future acquisitions and/or reduction of debt obligations. Accordingly,
at September 30, 1998, the Registrant had fixed rate mortgage debt of
approximately $42.4 million bearing interest at a weighted average rate of
8.49%, two floating rate mortgages for the sum of approximately $4.3 million,
each bearing interest at the rate of 8.38% as of September 30, 1998, and a
secured estimated settlement obligation recorded at $2.2 million (accruing
interest at a rate of prime plus 3% on the stated settlement obligation of $3.65
million). The estimated
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settlement obligation is more fully discussed in Note 2 to the Registrant's
Unaudited Condensed Consolidated Financial Statements.
MATERIAL CHANGES IN RESULTS OF OPERATIONS
INVESTMENT PROPERTIES-- During the first nine months of 1998, the income
from investment properties was $1,534,000 compared to income of $453,000 during
the first nine months of 1997. During the third quarter of 1998 the income from
investment properties was $449,000 compared to a loss of $165,000 for the third
quarter of 1997. Rental revenue increased from $10,152,000 during the first nine
months of 1997 to $12,197,000 during the first nine months of 1998, as a result
of an increase in both occupancy and rental rates. Also included in rental
revenues for the first nine months of 1998 is a $340,000 lease buyout from a
tenant at Walnut Creek Executive Park which is being reinvested in re-tenanting
the space during the fourth quarter of 1998. Interest expense increased from
$2,989,000 during the first nine months of 1997 to $3,212,000 during the first
nine months of 1998, primarily as a result of recording $314,000 of interest on
the settlement obligation during the first nine months of 1998, as described
above, compared to $121,000 of interest that was recorded during the first nine
months of 1997. Depreciation and amortization expense increased as a result of
commencing depreciation of expenditures capitalized during 1998 relating to the
Registrant's leasing activities and capital improvement projects.
GENERAL AND ADMINISTRATIVE EXPENSES-- General and administrative expenses
in the first nine months of 1998 amounted to $917,000 compared to $950,000 for
the first nine months of 1997. General and administrative expenses for the third
quarter of 1998 and 1997 were $223,000 and $250,000, respectively. The decrease
is primarily attributable to a decrease in personnel costs offset by an increase
in professional services.
OTHER INCOME, NET-- Other income, net, consisting primarily of interest
income, was $103,000 and $131,000 during the first nine months of 1998 and 1997,
respectively. The decrease is primarily due to the reduction of cash invested as
a result of the repurchase of the warrants in the first quarter of 1998.
HOTEL PROPERTY-- The Registrant sold its hotel property in December 1996
and, accordingly, a comparison of the operations from the first nine months and
third quarter of 1997 to the first nine months and third quarter of 1998 is not
meaningful.
PROVISION FOR SETTLEMENT OF REIMBURSEMENT OBLIGATION-- Effective June 30,
1997, the Registrant recorded a provision of $2,200,000 for the ultimate
settlement of a letter-of-credit reimbursement obligation, as more fully
discussed in Note 2 to the Registrant's Unaudited Condensed Consolidated
Financial Statements.
INCOME TAX BENEFIT (PROVISION)-- A tax provision of $113,000 and $305,000
has been recorded in connection with the net income for the three and nine
months ended September 30, 1998, respectively, at rates that approximate the
effective statutory rate. A tax benefit of $140,000 and $970,000 was recorded in
connection with the net loss for the three and nine months ended September 30,
1997, respectively.
LIQUIDITY AND CAPITAL RESOURCES
REGULATION AND SUPERVISION
Many jurisdictions have adopted laws and regulations relating to the
ownership of real estate. Compliance with these requirements from time to time
may require capital expenditures by the Registrant (for example, expenditures
necessary in order to comply with the Americans with Disabilities Act or changes
in local building or other codes). In addition, the Registrant may from time to
time have to
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expend capital for environmental control facilities. While the ownership of real
estate may entail environmental risks and liabilities to the owner, the
Registrant's management is sensitive to environmental issues and is not
currently aware of and does not expect any material effects on current or future
capital expenditures, earnings or competitive position resulting from compliance
with present federal, state or local environmental control provisions.
DISCUSSION OF KNOWN TRENDS, EVENTS AND UNCERTAINTIES
The economic climate for commercial real estate has shown signs that rental
rates and property values have stabilized and in selected markets has improved.
Notwithstanding a stabilizing real estate market, tenants may or may not
continue to renew leases as they expire or may renew on less favorable terms.
Conditions differ in each market in which the Registrant's properties are
located. Because of the continuing uncertainty of future economic developments
in each market, the impact these developments will have on the Registrant's
future cash flow and results of operations is uncertain.
Inflation, inflationary expectations and their effect on interest rates may
affect the Registrant in the future by changing the underlying value of the
Registrant's real estate or by impacting the costs of financing the Registrant's
operations.
LIQUIDITY AND CAPITAL RESOURCES
The bulk of the Registrant's resources are committed to relatively
non-liquid real estate assets. These assets, due to their value and cash flow,
have provided the Registrant with an ability to generate capital as required,
both internally and externally, through asset-based financings. In addition,
since 1992, assets or portions thereof were sold to provide further liquidity.
An amendment to the Certificate of Incorporation to provide for the issuance
of 300,000 shares of Series 1 Convertible Preferred Stock, $1.00 par value, (the
Preferred Stock) was approved by unanimous written consent of the Registrant's
Board of Directors on September 10, 1998. A certificate of amendment was filed
with the State of New York on September 13, 1998. The Registrant's Board of
Directors approved the sale of 300,000 shares of the Preferred Stock to GEM
Value/PGP, L.L.C. (GEM), an affiliate of GEM Value Fund, L.P. Proceeds from the
sale of the Preferred Stock were approximately $2,889,000, net of issuance costs
of $111,000. These funds are currently being held in short-term investments
pending potential future acquisitions and/or reduction of debt obligations.
GEM's 300,000 shares of Preferred Stock are convertible at any time, at the
option of GEM, into the Registrant's common stock on a one for one basis, and
have identical voting rights. GEM Value Fund, L.P. also owns 101,700 shares of
the Registrant's common stock which it had acquired in open market purchases
prior to entering into discussions to purchase the Preferred Stock. As of
September 21, 1998, GEM's common and preferred stock holdings in the Registrant
represented 9.5% of the Registrant's total preferred and common shares
outstanding and entitled to vote.
The Preferred Stock will receive dividends, if any, from the Registrant's
operating cash flow on a pari passu basis with common shareholders. The
agreement with GEM does not require the Registrant to make any distributions. In
the event of a full or partial liquidation of the Registrant, GEM will be
entitled to a liquidation preference of $10.00 per share. GEM also received
customary registration rights for the common stock issuable upon conversion of
the Preferred Stock.
In addition, GEM has entered into an agreement with the Registrant and three
entities controlled by the Registrant's Chairman, Richard Osborne, whereby GEM
has a "tag along" right to sell its preferred shares, or common shares if
converted, on a pro rata basis with these entities. This right is exercisable
should any of the Osborne controlled entities sell cumulatively in excess of
200,000 shares of the Registrant's common stock.
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The Registrant has taken several actions to generate and conserve cash, and
continues to review and analyze alternative actions. At the same time, the
Registrant is seeking to retain value and identify future opportunities for
investment. At September 30, 1998, the Registrant had approximately $6.2 million
of unrestricted cash, approximately $1.7 million of restricted cash, investment
properties with a net book value of approximately $54.1 million, (including the
410 First Avenue property recorded at its estimated net realizable value of $2.2
million), total non-recourse mortgage debt and secured settlement obligation of
approximately $48.9 million and stockholders' equity of approximately $3.1
million. Given the Registrant's desire to increase its liquidity, the Registrant
has actively pursued the sale of selected real estate assets in the past, has
restructured and refinanced its mortgage debt, and has entered into an agreement
with the managing general partner of RCA to limit the Registrant's cash
obligations to RCA. The Registrant continues to evaluate various alternatives to
improve its liquidity through debt refinancing and the sale of properties which
do not fit within its long term strategy. Funds raised in the preceding fashion
would be used for tenant improvements and other capital requirements, certain
mandatory debt reductions, and possible new investments.
The Registrant is also obligated to fund reserves for building, tenant
improvements, leasing commissions and debt service in connection with its
mortage loans on Walnut Creek Executive Park, North Tucson Business Center and
South Bay Office Tower. Scheduled funding under the various loan agreements
during the twelve month period ending September 30, 1999, will amount to
approximately $695,000.
Scheduled principal maturities on the above described debt during the twelve
month period ending September 30, 1999, will amount to approximately $3,193,000.
This amount includes the $2,200,000 liability related to the reimbursement
obligation as described below.
The Registrant's 410 First Avenue property is pledged as collateral for a
$3.65 million letter-of-credit that was drawn as of June 30, 1997. As discussed
in Note 2 of the Registrant's Unaudited Condensed Consolidated Financial
Statements, the Issuing Bank made a demand on the Registrant to reimburse them
for the $3.65 million drawn on the letter-of-credit and has also notified the
Registrant it is in default with respect to the reimbursement obligation. The
reimbursement obligation of the Registrant to the Issuing Bank is full recourse
to the Registrant and is secured by the 410 First Avenue property.
On or about August 18, 1997, the Issuing Bank commenced an action against
the Registrant in the Land Court to obtain conditional judgement in the full
amount of the Registrant's indebtedness to the Issuing Bank. In such action, the
Issuing Bank is seeking to assert a deficiency claim against the Registrant for
any alleged difference between the value of the foreclosed property and the
$3.65 million drawn on the letter-of-credit, including outstanding interest and
fees. On October 28, 1998, the Land Court issued a conditional judgement in
favor of the Issuing Bank in the principal amount of $3.65 million, together
with interest as set forth in the Amended and Restated Standby Letter of Credit
Agreement dated as of November 8, 1991, expenses in the amount of $36,273 and
attorneys fees and disbursements in the amount of $50,756. Including contractual
interest, the amount of the conditional judgement is in excess of $4.2 million.
Pursuant to the Land Court's order, the Registrant has sixty days from entry of
the order to pay the Issuing Bank the amount of the conditional judgement, plus
statutory interest of 12% from the date of the Land Court's order. Unless the
Registrant makes such payment to the Issuing Bank within sixty days of the
order, the Issuing Bank is entitled to enter and take possession of the
Registrant's 410 First Avenue property, and collect all rents derived therefrom,
for a period of three years from the date of entry on the property. If the
balance of the conditional judgement has not been repaid at the end of that
three year period, the property shall be deemed foreclosed and title passes to
the Issuing Bank. The Registrant is appealing the Land Court's entry of the
conditional judgement.
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The Registrant is also continuing to pursue its claims in a companion action
against the Issuing Bank in the Massachusetts Superior Court. The Registrant
filed a complaint against the Issuing Bank on November 21, 1997 in the Superior
Court Department of the Trial Court of the Commonwealth of Massachusetts seeking
damages, equitable relief and a jury trial for causes of action flowing from the
Issuing Bank's conduct regarding the letter-of-credit. The Registrant's damages
claim in the Superior Court action could offset or exceed all or some of the
damages that the Issuing Bank is likely to be awarded in the Land Court action.
However, there is no assurance whatsoever that this result will be achieved.
Discovery has commenced and no trial date has been set.
In accordance with generally accepted accounting principles, effective June
30, 1997, the Registrant recorded a "provision for settlement of reimbursement
obligation" in the amount of $2.2 million since the Registrant believes that the
fair market value of the 410 First Avenue property is equal to or greater than
$3.65 million. The accrued amount is equal to the net book value at June 30,
1997, of the 410 First Avenue property that serves as collateral for the
reimbursement obligation, resulting in an effective discount of the $3.65
million face value of the reimbursement obligation. The Registrant has recorded
rental revenue and operating expenses related to this property, as well as
accrued interest on the $3.65 million settlement obligation at a rate of prime
plus three percent. Any difference between the provision for settlement of
reimbursement obligation and the amount ultimately settled upon may be charged
or credited to the Registrant's operations as such difference becomes
determinable. Management can provide no assurances as to the ultimate settlement
amount or method (and the timing thereof) relating to the reimbursement
obligation.
The Registrant's minority, general (non-managing) and limited partnership
interests in RCA represent significant potential financial exposure. This
exposure includes, and may not be limited to, the potential tax liability
associated with the Registrant's negative tax basis in the partnership and the
potential tax liability that would exist from the cancellation of debt in
connection with a possible debt restructuring and potential liability as a
general partner of RCA under the master lease as previously discussed. The
Registrant has provided certain joint and several guarantees with PL&D to the
mortgage lender on Rincon Center Phase Two. However, the Registrant has been
advised by legal counsel that guarantees provided by the Registrant to the
mortgage lender on Rincon Center Phase Two are not enforceable because (i) the
Registrant's status as a general partner would make it primary obligor, and (ii)
the debt is non-recourse debt. As a result, a guaranty by a primary obligor of
non-recourse debt is not enforceable. Additionally, RCA's managing general
partner agreed to advance funds to RCA on behalf of the Registrant on an
unsecured non-recourse basis, subject to interest at prime plus 2% and certain
annual fees (principal, unpaid interest, and fees are collectively referred to
as the RCA Advances). This agreement does not reduce the level of the
Registrant's general and limited partnership interests in RCA. RCA's managing
general partner is seeking to void the letter agreement under which these loans
were made and is also seeking restitution of the loans advanced. As indicated
previously, RCA's managing general partner continues to advance funds to RCA
under this agreement with the Registrant. The RCA Advances amount to
approximately $8,032,000 at September 30, 1998, and are not recorded by the
Registrant since (i) the RCA Advances are only required to be repaid from the
Registrant's share of future distributions from RCA, if any, (ii) the Registrant
has no intention or legal obligation to repay the RCA Advances other than from
its share of distributions from RCA, if any, and (iii) the Registrant does not
anticipate any material cash distributions by RCA in the foreseeable future. The
managing general partner of RCA is currently in negotiations to refinance the
debt on Rincon Center Phases One and Two as more fully described in Note 2 to
the Registrant's Unaudited Condensed Consolidated Financial Statements. The
proposed refinancing is subject to a number of conditions and approvals among
the parties involved in the refinancing. The managing general partner of RCA and
the Registrant can make no assurances that the refinancing will be completed.
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Except as described above, at September 30, 1998, the Registrant's material
capital expenditures over the next twelve months or beyond are expected to be
funded from restricted cash or future cash flow generated by operating
activities. Ongoing repair and maintenance expenditures are expected to be
funded from cash flow generated by operating activities. Future tenant
improvements and leasing commissions will be funded from restricted cash, cash
flow generated by operating activities and funds generated from future debt
refinancings or property sales, if any.
The Registrant continued to experience more stabilized operating results in
its wholly owned properties during the first three quarters of 1998, and except
for RCA, expects this trend to continue. In addition, the completion of certain
leasing transactions has continued to reduce the level of vacancy in the
Registrant's portfolio and the Registrant is continuing to aggressively pursue
new leases on currently available space and renew existing leases as they
expire.
YEAR 2000 COMPLIANCE
THE REGISTRANT'S STATE OF READINESS. The Registrant utilizes a number of
computer software programs and operating systems across its entire organization
including applications used in financial business systems and various
administrative functions. To the extent that the Registrant's software
applications contains source code that is unable to appropriately interpret the
upcoming calendar year "2000" and beyond, some level of modification or
replacement of such applications will be necessary. The Registrant currently
believes that its "Year 2000" issues are limited to information technology
("IT") systems (i.e., software programs and computer operating systems). There
are no non-IT systems (i.e., embedded systems such as devices used to control,
monitor or assist the operation of equipment and machinery), the failure of
which would have a material effect on the Registrant's operation that the
Registrant is presently aware of.
The Registrant, employing a team made up of internal personnel, has
completed its identification of IT systems that are not yet Year 2000 compliant
and has commenced modification or replacement of such systems as necessary. The
Registrant is currently communicating with third parties with whom it does
significant business, such as financial institutions and vendors to determine
their readiness for Year 2000 compliance. The Registrant has also completed its
assessment of the Year 2000 compliance issues presented by its hardware
components.
COSTS OF ADDRESSING THE REGISTRANT'S YEAR 2000 ISSUES. Given the
information known at this time about the Registrant's systems that are
non-compliant, coupled with the Registrant's ongoing, normal course-of-business
efforts to upgrade or replace critical systems, as necessary, management does
not expect Year 2000 compliance costs to have any material adverse impact on the
Registrant's liquidity or ongoing results of operations. The costs of such
assessment and remediation will be paid out of the Registrant's general and
administrative expenses.
RISKS OF THE REGISTRANT'S YEAR 2000 ISSUES. In light of the Registrant's
assessment and remediation efforts to date, and the planned, normal
course-of-business upgrades, management believes that any residual Year 2000
risk is limited to non-critical business applications and support hardware. No
assurance can be given, however, that all of the Registrant's systems will be
Year 2000 compliant or that compliance will not have a material adverse effect
on the Registrant's future liquidity or results of operations or ability to
service debt.
THE REGISTRANT'S CONTINGENCY PLANS. The Registrant is currently developing
its contingency plan for all operations to address the most reasonably likely
worst case scenarios regarding Year 2000 compliance. Management expects such
contingency plan to be completed by the end of the year.
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FORWARD-LOOKING STATEMENTS; FACTORS THAT MAY AFFECT OPERATING RESULTS
Certain information included in this Form 10-Q and other materials filed or
to be filed by the Registrant with the Securities and Exchange Commission may
constitute forward-looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995. Such forward-looking information
involves known and unforeseen risks, uncertainties and other factors that may
cause actual results or performance to be materially different from those
expressed or implied by such forward-looking statements. These risks and
uncertainties include, but are not limited to, uncertainties affecting the real
estate business generally, such as lease renewals and the financial stability of
tenants, general economic conditions and conditions in the Registrant's markets,
risks relating to acquisitions and dispositions of properties, risks relating to
interest rate levels and fluctuations, the availability of financing, and
regulatory risks. Given these and other risks described elsewhere in this Form
10-Q, investors are cautioned not to place undue reliance on any forward-looking
statements.
ITEM 1. LEGAL PROCEEDINGS.
On March 20, 1997, the Registrant filed a Complaint in the San Francisco
Superior Court, Case No. 985464, against Rincon Center Associates and Perini
Land and Development Company seeking to recover approximately $812,000 in
commissions due for leasing and construction services performed for Rincon
Center. The Complaint has been answered and a Cross-Complaint has been filed.
The Cross-Complaint seeks indemnity concerning the claim for leasing commissions
on the ground that the Registrant is also a general partner of RCA, and further
seeks to rescind or otherwise avoid the effect of a letter agreement of June 22,
1993, regarding non-recourse loans from Perini Land and Development Company to
the Registrant, together with restitution of amounts loaned to the Registrant
pursuant to such letter agreement. The trial date has been rescheduled for June
7, 1999, however the case is only in the beginning stages of discovery, and the
Registrant is not in a position at this time to opine as to the likelihood or
remoteness of liability, or the amount of damages should liability be
established.
See Note 2 to the Registrant's Unaudited Condensed Consolidated Financial
Statements concerning the $3.65 million letter-of-credit issued by the Bank of
America National Trust and Savings Association (the Issuing Bank) as a portion
of the security for the refinancing of Rincon Center Phase Two. On or about
August 18, 1997, the Issuing Bank commenced an action against the Registrant in
the Land Court Department of the Trial Court of Massachusetts (the Land Court)
to obtain a conditional judgement in the full amount of the Registrant's
indebtedness to the Issuing Bank. On October 28, 1998, the Land Court issued a
conditional judgement in favor of the Issuing Bank in the principal amount of
$3.65 million, together with interest as set forth in the Amended and Restated
Standby Letter of Credit Agreement dated as of November 8, 1991, expenses in the
amount of $36,273 and attorneys fees and disbursements in the amount of $50,756.
Including contractual interest, the amount of the conditional judgement is in
excess of $4.2 million. Pursuant to the Land Court's order, the Registrant has
sixty days from entry of the order to pay the Issuing Bank the amount of the
conditional judgement, plus statutory interest of 12% from the date of the Land
Court's order. Unless the Registrant makes such payment to the Issuing Bank
within sixty days of the order, the Issuing Bank is entitled to enter and take
possession of the Registrant's 410 First Avenue property, and collect all rents
derived therefrom, for a period of three years from the date of entry on the
property. If the balance of the conditional judgement has not been repaid at the
end of that three year period, the property shall be deemed foreclosed and title
passes to the Issuing Bank. The Registrant is appealing the Land Court's entry
of the conditional judgement. The Registrant is also continuing to pursue its
claims in the companion action against the Issuing Bank pending in the
Massachusetts Superior Court as discussed below. The Registrant filed a
complaint against the Issuing Bank on November 21, 1997 in the Superior Court
Department of the Trial Court of the Commonwealth of Massachusetts seeking
damages, equitable relief and a jury trial for causes of action flowing from the
Issuing Bank's conduct regarding the letter-of-credit. The Registrant's damages
claim in the Superior Court action could offset or exceed all
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or some of the damages that the Issuing Bank is likely to be awarded in the Land
Court action. However, there is no assurance whatsoever that this result will be
achieved. Discovery has commenced and no trial date has been set.
The Registrant is involved in various other claims and lawsuits incidental
to its business. In the opinion of the Registrant, these other claims and
lawsuits in the aggregate will not have a material adverse impact on the
Registrant's financial condition.
ITEM 2. CHANGES IN SECURITIES
On September 10, 1998, the Board of Directors of the Registrant approved the
sale of 300,000 shares of Preferred Stock to GEM. See Note 2 to the Registrant's
Unaudited Condensed Consolidated Financial Statements for further discussion.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibits:
<TABLE>
<CAPTION>
NO.
-- DESCRIPTION
----------------------------------------------------------------------------------------------------
<S> <C> <C>
27 Financial Data Schedule
</TABLE>
b) Reports on Form 8-K:
On September 29, 1998, the Company filed a report on Form 8-K reporting
under Item 5.
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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 GATEWAY PROPERTIES, INC.
Registrant
/s/ RAYMOND V. MARINO
-----------------------------------------
Raymond V. Marino
President and Chief Executive Officer
(Principal Executive and Financial
Date: November 9, 1998 Officer)
/s/ MELANIE L. ADKINS
-----------------------------------------
Melanie L. Adkins
Controller--Corporate
Date: November 9, 1998 (Principal Accounting Officer)
/s/ NEIL C. MARCK
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Neil C. Marck
Controller--Management Company
Date: November 9, 1998 (Principal Accounting Officer)
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PROXY
PACIFIC GATEWAY PROPERTIES, INC.
PROXY SOLICITED BY THE BOARD OF DIRECTORS FOR SPECIAL IN LIEU OF ANNUAL
MEETING--APRIL 26, 1999
Each of the undersigned, revoking all other proxies heretofore given, hereby
constitutes and appoints Raymond V. Marino, with full power of substitution, as
proxy to represent and vote all shares of Common Stock, par value $1.00 per
share (the "Common Stock"), and all shares of Series 1 Preferred Stock, par
value $1.00 per share (the "Preferred Stock), of Pacific Gateway Properties,
Inc. (the "Company") owned by the undersigned at the Meeting and any
adjournments or postponements thereof.
THE SHARES REPRESENTED HEREBY WILL BE VOTED IN ACCORDANCE WITH THE
DIRECTIONS GIVEN IN THIS PROXY. IF NOT OTHERWISE DIRECTED HEREIN, SHARES
REPRESENTED BY THIS PROXY WILL BE VOTED FOR ITEM 1 (ELECTION OF DIRECTORS), FOR
ITEM 2 (APPROVAL OF THE REINCORPORATION OF THE COMPANY AS A MARYLAND
CORPORATION), FOR ITEM 3 (APPROVAL OF THE CONVERSION OF THE COMPANY INTO A
REIT), AND FOR ITEM 4 (RATIFICATION OF THE APPOINTMENT OF INDEPENDENT AUDITORS).
IF ANY OTHER MATTERS ARE PROPERLY BROUGHT BEFORE THE MEETING, AND WITH RESPECT
TO MATTERS INCIDENT TO THE CONDUCT OF THE MEETING, PROXIES WILL BE VOTED ON SUCH
MATTERS AS THE PROXY NAMED HEREIN, IN HIS SOLE DISCRETION, MAY DETERMINE.
PLEASE MARK, SIGN, DATE AND MAIL PROMPTLY IN THE ENCLOSED ENVELOPE
SEE REVERSE SIDE SEE REVERSE SIDE
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/X/ PLEASE MARK VOTES AS IN THIS EXAMPLE.
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THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR ITEMS 1, 2, 3 AND 4 TO BE VOTED
UPON AT THE MEETING:
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1. To elect all nominees listed to the Board of Directors, except as noted (write the
names of the nominee(s), if any, for whom you withhold authority to vote). Nominees:
Steven A. Calabrese; Mark D. Grossi; Lawrence B. Helzel; Christopher L. Jarratt; FOR
Raymond V. Marino; Richard M. Osborne; Martin E. Roher. all WITHHELD
For all nominees except as noted above: nominees from all nominees
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2. To approve the reincorporation of the Company as a Maryland corporation. FOR AGAINST ABSTAIN
3. To approve the conversion of the Company into a REIT. FOR AGAINST ABSTAIN
4. To ratify the appointment of Arthur Andersen LLP as the Company's independent auditors
for 1998 and 1999.
FOR AGAINST ABSTAIN
Mark here if you plan to attend
the meeting. / /
Mark here for address change and
note at left. / /
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NOTE: Please sign exactly as name appears hereon. PLEASE
MANUALLY DATE THIS CARD. Joint owners should each sign. When
signing as attorney, executor, administrator, trustee or
guardian, please give full title as such.
Signature: Date: Signature: Date:
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