SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X]QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1996
OR
[ ]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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.)
ONE RINCON CENTER, 101 SPEAR STREET, SUITE 215, SAN FRANCISCO, CALIFORNIA
94105
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (415) 543-8600
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 common stock, as of March 31, 1996:
$1.00 Par Value Common Stock 3,892,596
(Title of Class) (Number of Shares
Outstanding)
<PAGE>
PACIFIC GATEWAY PROPERTIES, INC.
INDEX
Part I - Financial Information: Page Number
Item 1. Financial Statements
Consolidated Balance Sheets as of March 31, 1996
and December 31, 1995 3
Consolidated Statements of Income for the
Three Months Ended March 31, 1996
and 1995 4
Consolidated Statements of Cash Flows for the
Three Months Ended March 31, 1996 5
and 1995
Notes to Financial Statements 6-8
Item 2. Management's Discussion and
Analysis of Financial Condition
and Results of Operations 8-12
Part II - Other Information
Item 1. Legal Proceedings None
Item 2. Changes in Security None
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 12
Signatures 13
<PAGE>
PACIFIC GATEWAY PROPERTIES, INC.
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(In Thousands, Except Share Amounts)
As of As of
March 31, December 31,
1996 1995
ASSETS
Cash and short-term investments $ 779 $ 176
Cash reserved for capital improvements 74 241
Accounts receivable 316 577
Prepaid taxes 459 459
Other current assets 178 7
Investment properties:
Land 5,481 5,481
Buildings 31,847 31,847
Furniture, fixtures and equipment 8,541 8,350
Subtotal investment properties 45,869 45,678
Less-accumulated depreciation and net
realizable value reserve (12,615) (12,106)
Investment properties, net 33,254 33,572
Properties held for sale, net of accumulated
depreciation of $8,776 at March 31, 1996 and
December 31, 1995 22,223 22,230
Deferred tax asset 6,842 6,831
Note receivable 228 225
Capitalized loan costs, net of accumulated amortization
of $1,264 and $1,210 at March 31, 1996 and December
31, 1995, respectively 684 816
Capitalized lease commissions, net of accumulated
amortization of $1,562 and $1,521 at March 31, 1996
and December 31, 1995, respectively 824 753
Total assets $65,861 $65,887
LIABILITIES AND STOCKHOLDERS' DEFICIT
Accounts payable $ 514 $ 1,293
Accrued payroll, property and sales taxes 761 513
Prepaid rent 282 133
Accrued interest on debt 295 298
Other current liabilities 159 127
Tenant security deposits 444 417
Debt related to corporate, investment
and hotel properties 58,164 58,838
Other debt related to equity investment
in Rincon Center Associates 2,940 2,940
Deferred tax liability 10,899 10,514
Total liabilities 74,458 75,073
Stockholders' deficit
Common stock $1.00 par value--
Authorized--10,000,000 shares
Issued--4,011,150 shares 4,011 4,011
Paid-in-deficit (10,222) (10,222)
Accumulated deficit (2,239) (2,828)
Treasury stock, at cost--118,554 common shares at
March 31, 1996 and December 31, 1995 (2,037) (2,037)
Warrants for common stock 1,890 1,890
Total stockholders' deficit (8,597) (9,186)
Total liabilities and stockholders' deficit $65,861 $65,887
The accompanying notes are an integral part of these consolidated
financial statements<PAGE>
PACIFIC GATEWAY PROPERTIES, INC.
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(In Thousands, Except Per Share Amounts)
For the Three Months
Ended March 31,
1996 1995
Investment Properties
Rental revenues $3,174 $3,178
Operating expenses (1,266) (1,262)
Interest expense (903) (855)
Depreciation and amortization (604) (590)
Investment properties income 401 471
Hotel Property
Revenues 2,491 2,616
Operating expenses (1,444) (1,393)
Interest expense (93) (224)
Depreciation and amortization -- (156)
Hotel income 954 843
Equity in Partnership Loss -
Rincon Center Associates (RCA) -- (785)
General and administrative expenses (396) (353)
Interest and fee expense for debt related to equity
investment in RCA -- (58)
Interest income 12 5
Other expense ( 8) (1)
Income before income taxes 963 122
Income tax provision (374) (50)
Net income $ 589 $ 72
Income per share, primary $ 0.15 $ 0.02
Income per share, fully diluted $ 0.14 $ 0.02
The accompanying notes are an integral part of these consolidated
financial statements
<TABLE>
<PAGE>
PACIFIC GATEWAY PROPERTIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(In Thousands)
<CAPTION>
For the Three Months
Ended March 31,
1996 1995
Cash flow from operating activities:
<S> <C> <C>
Net income $ 589 $ 72
Non-cash revenues and expenses included in net income:
Provision for depreciation and amortization 604 746
Equity in partnership loss -- 785
Change in assets and liabilities:
Accounts receivable, prepaid taxes
and other current assets 87 (189)
Other assets, net -- 69
Accounts payable and other current liabilities (353) (10)
Current tax liability -- 305
Deferred taxes 374 (395)
Other liabilities 27 (27)
Net cash generated by operating activities 1,328 1,356
Cash flow from investing activities:
Additions to investment properties, properties held for
sale, capitalized loan costs (net) and capitalized
lease commissions (net) (218) (1,174)
Contributions to Rincon Center Associates -- (400)
Distribution from Rincon Center Associates -- 85
Net cash used in investing activities (218) (1,489)
Cash flow from financing activities:
Borrowings under property and corporate debt -- 972
Borrowings in connection with equity investment, net -- 398
Payments on debt (674) (1,289)
Issuance of treasury stock -- 45
Decrease in cash reserved for capital improvements 167 113
Net cash generated by (used in) financing activities (507) 239
Increase in cash and short-term investments 603 106
Balance at beginning of period 176 359
Balance at end of period $ 779 $ 465
Supplementary disc
Cash paid for interest $ 1,074 $1,327
Cash paid for taxes $ 1 $ 140
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements<PAGE>
PACIFIC GATEWAY PROPERTIES, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
For the Quarter Ended March 31, 1996
1. Organization and Summary of Significant Accounting Policies
The accompanying unaudited consolidated financial statements
should be read in conjunction with the 1995 Form 10-K of the
Registrant. 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
consolidated 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 months ended March 31, 1996 are not necessarily indicative
of the results that may be expected for the year ending December
31, 1996.
Reclassifications
Certain prior year amounts have been reclassified to be
consistent with current year classifications.
2. Rincon Center Associates Partnership (RCA)--San Francisco,
California
The Registrant owns general (non-managing) and limited
partnership interests in RCA totaling approximately 23%, and is
responsible for 20% of RCA's cash requirements in excess of
available financing, subject to the agreement with the managing
general partner discussed below.
The Registrant earns a fee from RCA for posting a $3.65
million letter-of-credit and earns a preferred return at the prime
rate plus 2% on its advances to RCA. Since December 1994, the
Registrant has recorded any letter-of-credit fees and interest on
advances paid by RCA as a reduction to equity investment in and
loans to RCA. In December 1995, the Registrant recorded a
provision for the write down of its equity investment and loans to
RCA to zero reflecting the fact that RCA has experienced ongoing
operating losses which made realization of the Registrant's
investment and loans to RCA unlikely. Additionally, commencing
January 1, 1996, the Registrant (i) ceased recording its allocable
share of RCA's net loss as recording such losses would result in
"negative equity" in RCA for the Registrant which would not
properly reflect the Registrant's economic interest in RCA, (ii)
ceased recording additional advances to RCA made on the
Registrant's behalf by RCA's managing general partner in
recognition of the fact that, as discussed below, such advances are
non-recourse to the Registrant and are only required to be repaid
from future cash distributions to the Registrant by RCA, if any,
and (iii) ceased accruing interest on the $2,940,000 of advances
recorded through December 31, 1995. The Registrant's share of any
distributions from RCA will be used to reduce the amount
outstanding under a funding arrangement with the managing general
partner of RCA, as more fully described below. During the first
three months of 1996, no letter-of-credit fees or interest on
advances were paid by the Registrant to RCA. The letter-of-credit
has been renewed until December 23, 1996.
The Registrant entered into an agreement in June 1993 with
the managing general partner in RCA. This agreement provides the
Registrant with the flexibility to borrow funds from the managing
general partner to limit its future cash obligations to RCA. Under
this funding arrangement, all amounts advanced, related fees and
accrued interest are non-recourse to the Registrant. This
agreement does not reduce the level of the Registrant's general and
limited partnership interests in RCA. Interest accrues on the
unpaid portion of both the principal amount advanced and related
fees at the Bank of America prime rate plus 2%. Amounts advanced under
this funding arrangement, plus related
fees and accrued interest, are required to be repaid from future
cash distributed by RCA to the Registrant, if any. The total
amount outstanding under this funding arrangement as of March 31,
1996 was $3,324,000.
Summary financial statement data for RCA is as follows (in
thousands):
<TABLE>
<CAPTION>
As of March 31, December 31,
1996 1995
<S> <C> <C>
Investment Properties, net $112,771 $113,502
Other assets 22,008 22,623
$134,779 $136,125
Debt $58,232 $ 58,720
Amounts due to partners 148,312 144,035
Other liabilities 10,824 12,253
Partners' deficit (82,589) (78,883)
$134,779 $136,125
</TABLE>
Three Months Ended
March 31,
1996 1995
<TABLE>
Registrant's share of cash
<S> <C> <C>
distributions from RCA, net $ -- $ --
Registrant's share of
contributions to
RCA, net $ 385 $ 315
Loss from operations:
Revenue $5,341 $5,374
Expenses:
Operating and
lease expenses 3,391 3,021
Financing 4,712 4,766
Depreciation and
amortization 944 1,025
9,047 8,812
Net loss ($3,706) ($3,438)
Registrant's share of
net loss of RCA ($ 846) ($ 785)
</TABLE>
3. Note Receivable - In July 1993, the Registrant sold a 6,000
square foot building located in Longwood, Florida, to an unrelated
party. The Registrant received a $25,000 down payment and a note
receivable collateralized by the property in the original principal
amount of $245,000. In February 1996, the Registrant filed a
notice of default in Circuit Court in Seminole County, Florida, and
is proceeding with foreclosing on the property. The Registrant
believes that the value of the property exceeds the balance of the
note receivable and, therefore, has not recorded any provision for
the write down of this asset.
4. Per Share Data - Per share data is based on the weighted
average number of the Registrant's common shares and common share
equivalents. Outstanding warrants and stock options enter into the
common shares outstanding using the Treasury Stock Method. The
number of common share and common share equivalents used in the
earnings per share calculations are as follows:
As of March 31, 1996 1995
Primary 4,020,729 4,106,282
Fully diluted 4,093,404 4,106,282
5. Debt Secured by Mortgages on Real Estate From Primary Lender
- - In December 1993, the Registrant completed a restructuring of its
non-revolving line-of-credit, letter-of-credit, unsecured bonds,
and certain mortgages with its primary lender. Statement of
Financial Accounting Standards No. 15 requires the Registrant to
account for future interest resulting from this transaction using
an imputed interest rate versus the stated rates on the debt from
the primary lender. In addition, the primary lender's cancellation
of debt of $4 million, at the time of the restructuring, is not
recognized for financial reporting purposes. The imputed interest
rate as of March 31, 1996, was approximately 4.4%. As a result,
the amount of interest recorded for financial reporting purposes
is lower than the stated interest on the face amount of the debt
by approximately $37,000 for the first three months of 1996. The
face amount of the debt with the primary lender as of March 31,
1996, and December 31, 1995, was approximately $16.8 million and
$17.3 million, respectively.
6. Subsequent Event - On April 4, 1996, the Registrant sold the
Village Commons Shopping Center, located in West Palm Beach,
Florida, to an unrelated party for $19,300,000. In connection
with this property disposition, the Registrant will realize a gain
for financial reporting purposes of approximately $10,900,000. The
pre-tax net cash proceeds, after estimated repayment of $15,234,000
of mortgage debt and other costs of the sale, will amount to
approximately $3,856,000.
The following summarizes the land, fixed assets, and other
deferred costs of the Village Commons Shopping Center which are
included in the Registrant's Consolidated Balance Sheet as of March
31, 1996:
Land $6,105,000
Building 2,032,000
Furniture, fixtures and equipment 450,000
Subtotal investment 8,587,000
Accumulated depreciation and
amortization (696,000)
Investment, net 7,891,000
Other deferred costs, net 290,000
Total investment and
deferred costs - net $8,181,000
<PAGE>
ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Liquidity and Capital Resources
The bulk of the Registrant's resources are committed to
relatively non-liquid real estate assets. Traditionally, these
assets, due to their value and cash flow, 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 aggressive actions to
generate and conserve cash, and continues to review and analyze
additional potential actions. At the same time, the Registrant is
seeking to retain value and identify future opportunities for
investment. At March 31, 1996, the Registrant has $779,000 in
unrestricted cash, investment properties and properties held for
sale with a net book value of $55.5 million, total fixed and
variable mortgage debt with a book value of $58.2 million and a
stockholders' deficit of $8.6 million. Accordingly, given the
Registrant's desire to increase its liquidity, the Registrant has
actively pursued potential sales 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 alternatives to improve its
liquidity through debt refinancings and the sale of properties
which do not fit within its long term strategy. Funds raised in
the preceding fashion would be used for such things as tenant
improvements and other capital requirements, certain mandatory debt
reductions, and possible new investments.
At March 31, 1996, the Registrant has the following debt
outstanding:
- Fixed rate, nonrecourse mortgage notes with a face
value of $32.1 million at a quarter end weighted
average stated interest rate of 8.9% per annum.
- Variable rate mortgage notes with a face value of
$26.1 million at a quarter end weighted average stated
interest rate of 7.4% per annum. The variable rate
notes provide for certain guarantees and recourse
provisions applicable to the Registrant.
- Nonrecourse loans from the managing general partner in
RCA in the principal amount of $2.9 million, interest
at prime plus 2% (10.25% at March 31, 1996), with
principal and interest payable from future cash
distributions to the Registrant by RCA, if any.
Scheduled principal maturities on the above described debt
over the next twelve months ending March 31, 1997 amount to
approximately $16.7 million. Of this amount $15.2 million was
repaid on April 4, 1996 upon the sale of Village Commons Shopping
Center as described in the footnotes to the accompanying financial
statements. The Registrant is also obligated to fund a reserve for
tenant improvements in connection with one of its debt agreements.
Scheduled funding under such agreement over the twelve months
ending March 31, 1997 amounts to approximately $112,000.
Additionally, the Registrant is contingently liable under a
bank letter-of-credit posted on behalf of RCA and other mortgage
debt in the amount of $4.5 million. The letter-of-credit is
undrawn at March 31, 1996, and matures on December 23, 1996. The
Registrant's Massachusetts property is pledged as collateral for
the letter-of-credit.
The Registrant's minority, non-managing partnership interest
in RCA represents 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.
Except as described above, at March 31, 1996, the Registrant
has no contractual commitments for any material capital
expenditures over the next twelve months or beyond that are not
expected to be funded from the $74,000 in cash reserved for capital
improvements 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, in
part, from the reserve described above, the proceeds from the
Village Commons Shopping Center sale, cash flow generated by
operating activities and funds generated from future debt
refinancings or property sales, if any.
The Registrant is in escrow to sell the Radisson Suites Hotel
in Tucson, Arizona. Under the terms of the sale agreement, the
Registrant exercised its option to extend the close of escrow until
December 1996. The Registrant has the right to close the escrow
within 90 days after delivering a written notice to the buyers,
during the extended close of escrow period. During the extended
close of escrow period, the Registrant will be reviewing potential
acquisitions of one or more properties in order to reinvest all or
a portion of the proceeds from the sale of the hotel. If the sale
doesn't close until December 1996, the Registrant expects to
realize a gain of approximately $5.9 million. The pre-tax net cash
proceeds, after repayment of $13.7 million of mortgage debt
(assuming refinancing of North Tucson Business Center for $4.0
million) comprising principal payments of $7.7 million variable and
$6.0 million fixed rate mortgage debt with the Registrant's primary
lender and other costs of the sale, are expected to amount to
approximately $6.5 million.
The following summarizes the land, fixed assets, and other
deferred costs of the hotel which are included in the Registrant's
Consolidated Balance Sheet as of March 31, 1996.
Land $ 3,584,000
Building 12,645,000
Furniture, fixtures and equipment 6,183,000
$22,412,000
Accumulated depreciation and
amortization (8,080,000)
14,332,000
Other deferred costs, net 32,000
$14,364,000
As previously discussed, the Registrant has entered into a
purchase agreement with an unrelated third party to sell its
Radisson Suite Hotel in Tucson, Arizona. Due to the hotel's low
tax basis, the Registrant is evaluating whether or not to complete
a tax deferred exchange. If the Registrant does not complete a tax
deferred exchange, there will be excess cash proceeds after payment
of taxes, debt and cost of the sale which will be used for future
capital improvements, leasing costs and possible acquisitions. In
addition, the Registrant has loan applications in process to
refinance its San Jose office building and the industrial building
in Tucson which, if accomplished, will provide excess debt proceeds
to the Registrant, and reduce and fix the mortgage interest rate
at these properties, respectively. The excess debt proceeds will
be used to provide reserves for future capital improvements and
leasing costs anticipated throughout 1996. The Registrant can make
no assurances that the sale of the hotel or refinancings will be
completed.
On January 1, 1996, a mandatory principal payment of $250,000
was due to Citicorp Real Estate, Inc.(CREI) which was made on March
21, 1996. The face amount of CREI's debt as of December 31, 1995
was $17.3 million and is cross-collateralized by the Registrant's
hotel property, an industrial building in Tucson, Arizona, and an
office building in Weston, Florida. Under the terms of the loan
agreement with CREI, the Registrant's non-payment of this January
1, 1996, mandatory principal payment of $250,000 does not
constitute an "Event of Default" if, during the existing calender
quarter and prior three (3) calender quarters, the Registrant has
made payments to CREI under the terms of the loan equal to at least
one million dollars. Since the Registrant made the $250,000
payment in March 1996 and, the Registrant has made pricipal
payments of $750,000 during the prior three quarters, the March
payment did not constitute an "Event of Default". On April 1,
1996, a mandatory principal payment of $250,000 was due to CREI
which was paid on April 15, 1996.
Material Changes in Results of Operations
Investment Properties - During the first three months of 1996,
the income from investment properties was $401,000 compared to
income of $471,000 during the first three months of 1995. Rental
revenues and operating expenses remained relatively stable between
1995 and 1996. Interest expense increased from $855,000 during the
first three months of 1995 to $903,000 during the first three
months of 1996 as a result of an increase in interest rates on the
Registrant's variable rate mortgage debt. Depreciation and
amortization expense increased as a result of commencing
depreciation of expenditures capitalized during 1995 and early 1996
relating to the Registrant's leasing activities and capital
improvement projects offsetting the cessation of depreciation on
the Village Commons Shopping Center which is classified as held for
sale.
Hotel Property - The hotel property income was $954,000 in the
first three months of 1996 compared to $843,000 in the first three
months of 1995. The increase in income was the result of the
cessation of depreciation expense during the first three months of
1996 since the property is classified as held for sale, and a
decrease in interest expense. Total hotel revenues in the first
three months of 1996 decreased when compared to the first three
months of 1995 primarily as a result of the difference in
restaurant revenues. The restaurant was leased to an unrelated
party in 1995 and, as a result, no restaurant revenues are
reflected in the first quarter of 1996. Hotel room revenues
increased as a result of an increase in the average daily rate from
$98.45 for the first three months of 1995 to $104.24 for the first
three months of 1996. This increase was offset by a decrease in
average occupancy from 85.4% for the first three months of 1995 to
83.2% for the first three months of 1996. Expenses increased by
$51,000 in the first three months of 1996 compared to the first
three months of 1995 primarily as the result of incurring an asset
management fee of $188,000 in connection with the extended close
of escrow on the sale of the hotel in 1996. Interest expense
decreased from $224,000 during the first three months of 1995 to
$93,000 for the first three months of 1996, primarily as a result
of the effects of the lower principal balance on the hotel's debt.
Effective January 1, 1996, the Registrant ceased recording
depreciation on the hotel since it is classified as an asset held
for sale in accordance with Statement of Financial Accounting
Standards No. 121. Had the Registrant computed depreciation on the
hotel, such depreciation would have approximated $160,000 for the
first three months of 1996.
Equity in Partnership Loss - Rincon Center Associates (RCA) - The
net loss for RCA increased from $3,438,000 in the first three
months of 1995 to an estimated $3,706,000 in the first three months
of 1996. The increase in the loss is primarily the result of an
increase in operating expenses. The Registrant's equity share of
the RCA loss amounted to $846,000 and $785,000 during the first
three months of 1996 and 1995, respectively. As of December 31,
1995, the Registrant recorded a provision for the write down of its
equity investment and loans to RCA to zero reflecting the fact that
RCA has experienced ongoing operating losses which made realization
of the Registrant's investment and loans to RCA unlikely.
Additionally, commencing January 1, 1996, the Registrant (i) ceased
recording is allocable share of RCA's net loss as recording such
losses would result in "negative equity" in RCA for the Registrant
which would not properly reflect the Registrant's economic interest
in RCA, (ii) ceased recording additional advances to RCA made on
the Registrant's behalf by RCA's managing general partner in
recognition of the fact that, as discussed below, such advances are
non-recourse to the Registrant and are only required to be repaid
from future cash distributions to the Registrant by RCA, if any,
and (iii) ceased accruing interest on the $2,940,000 of advances
recorded through December 31, 1995.
General and Administrative Expenses - General and administrative
expenses in the first three months of 1996 amounted to $396,000
compared to $353,000 for the first three months of 1995. The
increase is primarily attributable to an increase in legal fees,
Directors fees, insurance and other professional service fees.
Interest and Fee Expense for Debt Related to Equity Investment
in RCA - During the first three months of 1995, the Registrant
incurred $58,000 in interest and fee expense related to the funding
arrangement with the managing general partner on RCA, as previously
discussed.
Interest Income - Interest income actually received on the note
receivable was $12,000 and $5,000 during the first three months of
1996 and 1995, respectively.
Other Expense - Other expense was $8,000 and $1,000 during the
first three months of 1996 and 1995, respectively.
Income Tax Provision - A tax provision is recorded in connection
with the net income for the three months ended March 31, 1995 and
1996 in accordance with Statement of Financial Accounting Standards
No. 109. In the first three months of 1995 and 1996, the
Registrant recorded provisions for income taxes of $50,000 and
$374,000, respectively.
ITEM 6. Exhibits and Reports on Form 8-K
a) Exhibits
10. Agreement dated March 21, 1996 between Registrant and Raymond
V. Marino (Management Contract).
b) Report on Form 8-K -- On April 19, 1996, the Registrant filed
Form 8-K to report the sale of Village Commons Shopping Center
(VCSC). On April 23, 1996 the Registrant filed form 8-K/A
(Amendment #1) to the Form 8-K to include the purchase and sale
agreement on the sale of VCSC.
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
Date: May 14, 1996 Raymond V. Marino
Raymond V. Marino
President and Chief Executive Officer
Date: May 14, 1996 Gary W. Furney
Gary Furney
Vice President and Controller
(Principal Accounting Officer)
<PAGE>
EXHIBIT
EMPLOYMENT AGREEMENT
This Employment Agreement, dated as of March 21, 1996, for reference
purposes, is entered into between PACIFIC GATEWAY PROPERTIES, INC.,
a New York corporation (the "Company"), and RAYMOND V. MARINO, II
("Executive"), and sets forth the terms and conditions of the Company's
employment of Executive, as follows:
1. Titles; Duties. Executive shall be employed as the Chief
Executive Officer and President of the Company. Executive's duties and
responsibilities shall be those customarily attendant to such a position, and
Executive shall faithfully and to the best of his ability discharge such duties.
Consistent with the foregoing Executive shall devote his full-time energy and
skill
to such employment, except that he may continue his participation as a director,
officer or member of a reasonable number of non-profit organizations. Executive
shall be appointed to the Board of Directors of the Company to fill the vacancy
currently existing and he will be nominated by the Board of Directors for re-
election at the next annual meeting of the shareholders of the Company and
thereafter at each subsequent annual meeting of the shareholders during the
Extension Term (as defined below). Upon termination of his employment
hereunder, and upon the request of the Board of Directors of the Company,
Executive will promptly submit his resignation from the Board of Directors.
2. Employment Term. The term of Executive's employment
initially shall be for a period of one year (the "Initial Term") commencing as
of January 2, 1996 (the "Commencement Date") and expiring on January 1, 1997.
Following the Initial Term, Executive's employment by the Company will
automatically be extended for additional one (1) year terms ("Extension Terms")
until terminated in the manner prescribed in this paragraph. Either party may
terminate Executive's employment at the end of the Initial Term or any Extension
Term by giving to the other party written notice of such termination no later
than October 1 of such Initial or Extension Term. Notice of termination that
does not comply with the preceding sentence shall be ineffective and the
employment term will be automatically extended as provided above. Prior to
expiration of the Initial Term or any Extension Term, Executive's employment
may be terminated by the Company only for "cause", as that term is defined in
paragraph 6, below. If the Company terminates Executive's employment hereunder
by providing written notice to Executive as provided in this paragraph 2,
Executive will be entitled to receive all of the severance benefits set forth
in paragraph 6(c), except that no acceleration of vesting of any unvested
options under subparagraph 6(c)(iv) will occur and Executive will have the
right to exercise all vested options for a period of twelve (12) months from
the date of termination.
3. Base Compensation. For his services, the Company will pay
Executive a base salary at the rate of One Hundred Fifty Thousand Dollars
($150,000.00) per year (the "Base Salary"), payable in accordance with the
Company's general practices for the payment of base salary to its executives.
Executive's Base Salary will be reviewed annually and will be subject to
adjustment by the Board of Directors, but it may not be decreased. The
Company will give Executive written notice of any such adjustment no later than
September 21 of each year.
4. Bonuses. As additional compensation for performance of the
services by Executive during the term of this Agreement, Executive shall be
entitled to participate in any incentive pay or bonus programs established by
the Company from time to time. Such participation shall be on terms at least
as favorable as those enjoyed by any other executive officers of the Company.
In addition, the Company will pay to Executive an annual bonus, the amount of
which will be determined in the sole discretion of the Board of Directors of
the Company acting in good faith, provided that the Board of Directors will
take into consideration Executive's contributions and/or accomplishments with
respect to improving the operations of the Company and enhancing the values
of the properties owned, either directly or indirectly, by the Company. The
annual bonus amount will be paid to Executive no later than thirty (30) days
after the end of the fiscal year of the Company.
5. Stock Options.
(a) Subject to any requirement that a new incentive stock
option plan be approved by the shareholders of the Company, options to acquire
100,000 shares of common stock of Company have been or will be granted to
Executive. The foregoing options will be granted as incentive stock options to
the maximum extent allowed under IRC Section 422(d). The exercise price of
such options will be $2.5625 per share. The options will expire on the tenth
anniversary of the date of grant, and the options will vest as follows:
(i) options to purchase 40,000 shares will be exercisable upon the date of
grant, and (ii) options to purchase 20,000 shares will become exercisable on
January 1, 1997, options to purchase 20,000 shares will become exercisable on
December 31,1997, and options to purchase 20,000 shares will become exercisable
on December 31, 1998, provided that Executive's employment has not been
terminated by the Company for cause (as defined below) and Executive has not
voluntarily terminated his employment before the vesting date. The Company
will use its best efforts to cause the new incentive stock option plan to be
approved by the shareholders of the Company, and will submit a new incentive
stock option plan to its shareholders at the next annual meeting and will
recommend to the shareholders that they approve the plan at that meeting.
(b) Until a new incentive stock option plan is approved by the
shareholders, or if a new plan is not approved by the shareholders and the
option grant described in (a) above becomes null and void, Executive will be
entitled to receive a special bonus in the event of (i) a sale of all or
substantially all of the assets of the Company, (ii) a merger or any other
combination or consolidation in which the Company is not the surviving entity
(or if the Company is the surviving entity but the shareholders of the Company
immediately prior to such merger do not own at least 51% of the voting stock of
the Company immediately after such merger or combination or consolidation),
(iii) 50% or more of the common stock is acquired by a third party in a tender
offer or other acquisition of stock in a single transaction or series of related
transactions, or (iv) a full or partial liquidation or a dissolution of the
Company. If any of the foregoing events occur during the term of his employment
hereunder, Executive will be
paid, upon the consummation or completion of the transaction, an amount equal
to the cash payment per share or value of the consideration per share received
by the shareholders of the Company, less $2.5625 per share, multiplied by
100,000.
For example, if the shareholders receive cash or securities worth a $5.00 per
share, Executive would receive a lump sum cash payment of $243,750 ($5.00 -
$2.5625 = $2.4375 x 100,000 = $243,750).
6. Termination of Employment.
(a) Termination by Company Without Cause. If the
Company at any time terminates Executive's employment hereunder without
"cause" (as defined in paragraph (b) below), the Company will provide to
Executive the Severance Benefits described in paragraph (c) below. Without
limiting the foregoing, Executive's employment with the Company shall be
deemed terminated without "cause" for the purposes of this Agreement if his
employment termination occurs voluntarily or involuntarily following (i) a
change
in Executive's position with the Company which materially reduces Executive's
level of responsibility, (ii) a reduction in Executive's level of compensation
(including Base Salary, fringe benefits, and any incentive or bonus plan(s) for
which Executive may become eligible in the future); or (iii) a relocation in the
principal place for the performance of Executive's duties of more than twenty
- -five (25) miles (i.e., any relocation more than 25 miles from San Francisco),
provided and only if such change, reduction or relocation is effected without
Executive's written concurrence.
(b) Termination by Executive, or Termination by Company
for Cause. If the Executive voluntarily terminates his employment hereunder,
or if the Company terminates Executive's employment for cause, such
employment will terminate on the date fixed by Executive or the Company (as the
case may be), and thereafter the Company will not be obligated to pay Executive
any additional compensation, other than compensation due and owing through the
date of termination (and Executive shall not be obligated to refund any bonus
amount previously paid to him by the Company or previously specifically
awarded to him by the Company's Board of Directors), subject only to the rights
of Executive under paragraph 8 below in the case of a voluntary termination by
Executive following a "change in control." Upon the occurrence of either of
such termination events, Executive will have the right to exercise any or all
of his vested stock options for a period of ninety (90) days after the date
of such termination as provided in his stock option agreement. "Cause," for
purposes of this Agreement, only shall mean any of the following:
(i) self-dealing by Executive resulting in personal profit
to him;
(ii) the commission of a criminal act by Executive
relating to the performance of his duties hereunder;
(iii) habitual intoxication of Executive by alcohol or
drugs during working hours; or
(iv) failure to follow the duly authorized directions of
the Board of Directors, if Executive does not remedy such failure within 60 days
of receiving written notice from the Board of such failure.
(c) Severance Benefits. If Executive's employment is
terminated by the Company without cause the Executive shall be entitled to the
following benefits ("Severance Benefits"):
(i) The Company will continue to pay to Executive his
then-effective Base Salary for a period of the remainder of the Initial Term
or the Extension Term, as applicable, plus for an additional period of
eighteen (18) months from the date of termination.
(ii) The Company shall continue to provide Executive
with medical, dental, vision, long-term disability and life insurance coverage
as generally available to executives of the Company, together with the all
other benefits described in paragraph 7, below, until the Company is no longer
obligated to make Base Salary payments pursuant to the preceding subparagraph
(i).
(iii) The Company will pay to Executive an amount
equal to the average of his annual bonuses earned with respect to the
immediately preceding two full calendar years of his employment.
(iv) The vesting period of any unvested options granted
to Executive will accelerate and will become exercisable, and Executive will
have the right to exercise all vested options for a period of twelve (12)
months from the date of termination.
7. Additional Benefits.
(a) Vacation. In addition to the Company's paid vacation days,
Executive shall be entitled to twenty (20) vacation days with full pay in each
year of employment, subject to scheduling with the Company's Board of Directors
so as to not unreasonably disrupt the Company's business operations.
(b) Insurance Benefits. The Company shall provide Executive
with medical, dental, vision, long-term disability and life insurance coverage
commensurate with like coverage provided to other executives of the Company,
but in no event less comprehensive than the coverage provided by the Company
to Executive prior to execution of this Agreement.
(c) Other Benefits. Executive also will be entitled to all other
benefits generally available to other executive and managerial employees of the
Company as he becomes eligible for them.
8. Change In Control. If during Executive's employment
hereunder, a "change in control" of the Company occurs, Executive will have the
option of either terminating his employment hereunder or continuing his
employment with the Company in accordance with the terms of this Agreement,
such option will be exercisable at any time until the first anniversary date of
the occurrence of any "change in control" of the Company. If Executive elects
to terminate his employment at any time during that one (1) year period, he
will be entitled to receive all of the severance benefits set forth in
paragraph 6(c), except that the period for exercising any vested options will
be for a period of three (3) months from the date of termination of his
employment. If Executive does not elect to terminate his employment, but if
Executive agrees to remain employed under different terms of employment than
those contained in this Agreement, he will be entitled to be paid, in addition
to his compensation pursuant to any new employment arrangement, his Base Salary
for the remainder of the Initial Term or any Extension Term, as applicable.
For the purpose of this Agreement, a "change in control" of the Company shall
only be deemed to have occurred if (I) in a single transaction or series of
related transactions a transfer of ownership of the Company's common stock
occurs as a result of which the stockholders immediately prior to such
transaction or series of transactions no longer control,
directly or indirectly, fifty percent (50%) or more of the voting stock of the
Company, or (ii) the Company merges or consolidates with another corporation
(other than a subsidiary of the Company or sells all or substantially all of
its
assets and at least fifty percent (50%) of the voting stock of the surviving or
purchasing entity is not controlled, directly or indirectly, by stockholders who
were stockholders of the Company immediately prior to such transaction or (iii)
the composition of the Board of Directors changes such that a majority of the
then Board of Directors are no longer persons who were serving as directors of
the Company on January 1, 1996. A public distribution by the Company of its
common stock shall not be a "change in control" within the meaning of this
Agreement.
9. Payment of 1995 Bonus. Company and Executive acknowledge
and agree that Executive earned a cash compensation bonus of Thirty Thousand
Dollars ($30,000) for the Company's fiscal year ended December 31, 1995, of
which he has been paid Five Thousand Dollars ($5,000), leaving Twenty-Five
Thousand Dollars ($25,000) due and owing. Company and Executive further
agree that Company will pay that remaining balance in full within ten (10) days
of the first to occur of any one of the following transactions: (I) the
closing of the sale of Company's Radisson Hotel property; (ii) the closing of
the sale of the Company's Village Common Shopping Center property; (iii) the
completion of the refinancing of the debt on the Company's South Bay Office
Tower property; or (iv) the completion of the refinancing of the debt on the
Company's North Tucson Business Center property.
10. Other Provisions.
(a) Company will reimburse Executive for all actual legal fees
and expenses incurred by Executive in connection with the negotiation of the
terms of this Agreement up to an amount not to exceed Five Thousand Dollars
($5,000).
(b) Upon presentation of appropriately itemized documentation,
the Company shall pay or reimburse Executive for all reasonable and necessary
expenses incurred by him in the performance of his duties hereunder.
(c) The Company shall be obligated to defend and indemnify
Executive from and against liabilities arising out of performance of his duties
hereunder, to the fullest extent permissible under New York law, and the
Company will maintain its present Directors and Officers Insurance and Company
Reimbursement policy at not less than its present limits of liability and not
more than its present deductible level throughout the Initial Term and any
Extension Terms.
(d) In the event that any provision or portion of this Agreement
shall be determined to be invalid or unenforceable for any reason by final
judgment of a court of competent jurisdiction, (I) the remaining provisions or
portions of this Agreement shall be unaffected thereby and shall remain in full
force and effect to the fullest extent permitted by law, and (ii) if the effect
of a determination that such provision is either invalid or unenforceable is
to modify to Executive's detriment, reduce or eliminate any payment or benefit
provided under this Agreement, the company shall promptly negotiate and enter
into an Agreement with Executive containing alternative provisions (reasonably
acceptable to Executive), that will restore to Executive (to the extent legally
permissible) substantially the same economic, substantive and income tax
benefits that Executive would have enjoyed had any such provision of this
Agreement been upheld as valid and enforceable. Failure to insist upon strict
compliance with any provision of this Agreement shall not be deemed a waiver of
such provision or of any other provision of this Agreement.
(e) This Agreement embodies the entire Agreement between
the parties relating to the subject matter hereof, and supersedes all previous
agreements or understandings, including that certain letter dated September 24,
1994, signed by Roger D. Snell on behalf of the Company and addressed to
Executive. No provision of this Agreement may be amended or waived, except
by a writing signed by the parties.
(f) In the event of any dispute with respect to or otherwise
arising out of or relating to this Agreement, the prevailing party shall be
reimbursed by the other for all costs and expenses, including attorney fees
(including those fees incurred in connection with any appeal) reasonably
incurred by the prevailing party in enforcing its rights hereunder. Any
legal proceeding to resolve such a dispute shall be brought in either the
Superior Court of the State of California for San Francisco County, or the
United States District Court for the Northern District of California, as
appropriate.
(g) This Agreement shall be governed in all respects, including
validity, interpretation and effect, by the laws of the State of California,
excluding its choice of law rules.
(h) The Company represents and warrants to Executive that this
Agreement has been, or will be as soon as practicable after its execution and
delivery, duly authorized and approved, ratified or confirmed by the Board of
Directors of the Company, and the execution and delivery of this Agreement by
and on behalf of the Company by not less than two (2) members of the
Compensation Committee of the Board of Directors likewise has been or will be
authorized and approved, ratified or confirmed.
(i) This Agreement may be executed in one or more
counterparts, all of which shall be considered one and the same agreement and
shall become effective when one or more counterparts have been signed by each
of the parties and delivered to the other party, it being understood that all
parties need not sign the same counterpart.
IN WITNESS WHEREOF, the parties have executed this Agreement as
of the date first above written.
PACIFIC GATEWAY PROPERTIES, INC.
By: Marshall A. Jacobs Raymond V. Marino, II
Marshall A. Jacobs Raymond V. Marino, II
Director
By: Martin S. Roher
Martin S. Roher
Director
By: John V. Winfield
John V. Winfield
Director
