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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, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES ACT OF 1934
Commission file number 0-28354
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GREAT LAKES REIT, INC.
(Exact Name of Registrant as Specified in Its Charter)
Maryland 36-3844714
(State or Other Jurisdiction of (I.R.S. Employer Identification Number)
Incorporation or Organization)
823 Commerce Drive
Suite 300
Oak Brook, Illinois 60521
(630) 368-2900
(Address and telephone number of principal executive offices)
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 par value
(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [x] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [x]
As of March 1, 1997, there was no established trading market for the
Registrant's Common Stock, $.01 par value.
The number of shares of the Registrant's Common Stock, $.01 par value,
outstanding as of March 1, 1997 was 8,938,040.
Documents Incorporated by Reference:
None.
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GREAT LAKES REIT, INC.
Form 10-K Annual Report -- 1996
Table of Contents
PART I Page
Item 1. Business................................................ 3
Item 2. Properties.............................................. 11
Item 3. Legal Proceedings....................................... 21
Item 4. Submission of Matters to a Vote of Security Holders..... 21
PART II
Item 5. Market for Registrant's Common Equity
and Related Stockholder Matters....................... 22
Item 6. Selected Financial Data................................. 23
Item 7. Management's Discussion and Analysis
of Financial Condition and Results of Operations...... 25
Item 8. Financial Statements and Supplementary Data............. 29
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure................ 29
PART III
Item 10. Directors and Executive Officers of the Registrant...... 30
Item 11. Executive Compensation.................................. 33
Item 12. Security Ownership of Certain Beneficial
Owners and Management................................. 39
Item 13. Certain Relationships and Related Transactions.......... 40
PART IV
Item 14. Exhibits, Financial Statement Schedules
and Reports on Form 8-K............................... 43
Signatures................................................................ 47
Index to Financial Statements............................................. F-1
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PART I
ITEM 1--BUSINESS
General
Great Lakes REIT, Inc., a Maryland corporation formed in 1992 ("the
Company"), is a fully integrated, self-administered and self-managed real estate
company focused on acquiring, renovating, owning and operating suburban office
properties located within an approximate 500-mile radius of metropolitan Chicago
(the "Midwest Region"). The Company acquired six, three, seven and ten
properties in 1993, 1994, 1995 and 1996, respectively. The Company currently
owns and operates 27 properties (the "Properties") in suburban Chicago,
Milwaukee, Minneapolis, Detroit, Columbus and Cincinnati (the "Current
Markets"). The Properties contain approximately 2.8 million rentable square feet
leased to approximately 300 tenants. As of December 31, 1996, the Properties had
a weighted average occupancy rate of approximately 92%. The Company's five
executive officers have an average of 17 years experience in the real estate
industry. The Company has elected to be treated for federal income tax purposes
as a real estate investment trust ("REIT").
In 1996, the Company organized Great Lakes REIT, L.P. (the "Operating
Partnership") and transferred 15 of the Properties to the Operating Partnership.
The Company intends to transfer its remaining Properties to the Operating
Partnership after receipt of necessary consents from mortgage lenders or
repayment of amounts owed under the related mortgages. These transfers are
expected to occur by June 30, 1997. As the sole general partner of the Operating
Partnership, the Company has exclusive power to manage and conduct the business
of the Operating Partnership, subject to certain limited exceptions. Although
the Company and the Operating Partnership are separate entities, unless the
context otherwise requires, all references in this Report on Form 10-K to the
"Company" refer to the Company and the Operating Partnership, collectively.
Effective April 1, 1996, the Company became a self-administered and
self-managed REIT upon the consummation of the merger (the "Merger") of the
Company with Equity Partners, Ltd. (the "Advisor"). Prior to the Merger, the
Advisor provided services to the Company relating to the selection, purchase,
financing and operation of the Company's properties. Certain executive officers
and other employees of the Company were previously employed by the Advisor and
owned a substantial interest in the Advisor.
The Company's primary business strategy is to acquire well-located,
underperforming suburban office properties in the Midwest Region at attractive
yields and to increase cash flow and property value by implementing a
comprehensive operating strategy. The Company's operating strategy includes: (i)
investment in value-enhancing renovation and refurbishment programs; (ii)
aggressive leasing efforts; (iii) reduction and containment of operating costs;
and (iv) a strong emphasis on tenant services and satisfaction. This value-added
operating strategy is intended to establish the Company as one of the suburban
office owner/operators of choice in the markets it serves and to maximize tenant
retention. The Company's commitment to tenant satisfaction and retention is
evidenced by its retention rate of approximately 85% (based on 264,530 square
feet renewed) from January 1, 1993 to December 31, 1996. In addition, the
Company believes it has been successful in implementing its operating strategy
as evidenced by increased occupancy rates and rental income at the Properties.
The Company generally focuses on acquiring properties (i) with less than
250,000 rentable square feet and (ii) that are available at purchase prices
below $20 million. Management believes that assets of this size are too small to
be efficiently acquired on a stand-alone basis by most institutional and public
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sector buyers; as a result, competition for these properties is primarily
limited to privately-held real estate companies and private single-purpose
entities. The Company's recent acquisition activities during the last 12 months
demonstrate the Company's ability to make acquisitions consistent with its
strategy for growth. During 1996, the Company acquired 10 Properties at an
aggregate cost of $97.6 million.
The Company believes that the economic fundamentals in the Current Markets
and certain other markets within the Midwest Region provide an attractive
environment for owning, acquiring and operating suburban office properties.
Since 1990, there has been limited construction of suburban office properties in
the Midwest Region. The Company believes that the limited supply of new suburban
office properties, together with the increased demand caused by a growing
economy, will continue to result in increased occupancies and rental rates for
suburban office space in the Midwest Region.
Competitive Advantages
The Company believes it enjoys certain competitive advantages in pursuing
its business and growth strategies.
Experienced Management Team. The Company's five executive officers have an
average of 17 years of real estate experience, primarily in suburban office
properties located in the Midwest Region. Management's market knowledge and
long-standing relationships with tenants, brokers and institutions lead to
numerous investment and leasing opportunities.
Focus on Suburban Office Properties in the Midwest Region. The Company's
geographic and property-specific focus enables the Company to rapidly review and
respond to acquisition opportunities as well as to anticipate and efficiently
address the needs of existing and prospective tenants, resulting in favorable
lease renewals, tenant expansions and new acquisition opportunities.
Fully Integrated Organization. The Company utilizes an integrated approach
to acquisition, management, leasing and renovation activities. This approach
allows the Company to offer a full range of alternatives (including expansions
and redevelopment of existing facilities, acquisitions and build-to-suit
projects) to satisfy the space needs of existing and prospective tenants.
Access to Capital. The Company has a $75 million secured bank credit
facility (the "Credit Facility") with The First National Bank of Boston, as
Agent to fund additional acquisitions and operations.
Organization
The Company is a Maryland corporation, its principal executive offices are
located at 823 Commerce Drive, Oak Brook, Illinois 60521, and its telephone
number is (630) 368-2900. The Company is organized into four functional areas
with each such area being managed by a vice president or more senior member of
the Company's management, and, ultimately, the Company's President and Chief
Executive Officer, Richard A. May. The responsibilities of the four functional
areas are summarized below.
Acquisitions and Dispositions. The acquisition and disposition area, headed
by Raymond M. Braun, is responsible for all of the Company's acquisition and
disposition activities, including identifying and analyzing prospective
acquisitions, supervising third-party due diligence contractors, conducting the
Company's purchase and sale negotiations and reviewing offers to purchase the
Company's Properties.
Asset and Property Management. The asset and property management area,
headed by Kim S. Mills, is responsible for all of the Company's leasing
activities, including communicating and negotiating
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with existing and prospective tenants, coordinating with outside leasing agents
and developing leasing strategies, as well as the Company's property management
activities, which include maintaining the physical properties and ensuring
tenant satisfaction.
Finance. The finance area, headed by James Hicks, is responsible for the
Company's financial matters, including internal accounting and recordkeeping,
cash management, oversight of the Company's indebtedness, projections and
employee benefits.
Administration and Legal. The administrative and legal area, headed by
Richard L. Rasley, is responsible for all legal matters, including those related
to: acquisitions, leasing, property management and dispositions, and ongoing
reporting matters as well as all administrative matters, including personnel,
internal management and investor relations.
Business and Growth Strategies
The Company's primary business objectives are to maximize growth in cash
flow per share and to enhance the value of its portfolio in order to maximize
total return to its stockholders. The Company believes it can achieve these
objectives by continuing to implement its business strategies and capitalizing
on the internal and external growth opportunities described below. The Company
also believes, based on its evaluation of market conditions, that a number of
factors will enhance its ability to achieve its business objectives, including
opportunities to maximize occupancy rates, rental rates and overall portfolio
value. These factors include the continuing economic improvement in the Midwest
Region as well as the limited construction of new suburban office properties in
the Midwest Region, due to the cost to develop such properties relative to their
current acquisition prices.
Business Strategies
The Company's primary business strategy is to acquire well-located,
underperforming suburban office properties in the Midwest Region at attractive
yields and to increase cash flow and property value by implementing a
comprehensive value-added operating strategy. This strategy includes: (i)
investment in value-enhancing renovation and refurbishment programs; (ii)
aggressive leasing efforts; (iii) reduction and containment of operating costs;
and (iv) a strong emphasis on tenant services and satisfaction. This strategy is
intended to establish the Company as one of the suburban office owner/operators
of choice in the markets it serves and to maximize tenant retention.
Based on its historical activities and its knowledge of various local
marketplaces, the Company believes that the Midwest Region offers opportunities
for companies that are well-capitalized, experienced owners of real estate with
extensive local market expertise. In addition, based on this experience and
knowledge, the Company believes that the existence of a public market for its
securities will enhance its access to capital, thereby allowing it to take
advantage of opportunities to acquire additional suburban office properties at
attractive prices and develop office properties, when feasible, at attractive
returns. The Company implements its business strategies by: (i) emphasizing
tenant satisfaction and retention and employing intensive property marketing
programs; (ii) utilizing an integrated approach to acquisition, management,
leasing and renovation activities that is designed to coordinate decision-making
and enhance responsiveness to market opportunities and tenant needs; and (iii)
implementing cost control management and systems that capitalize on economies of
scale arising from the size and location of the Company's portfolio. The Company
believes that the implementation of these operating practices has led to the
increased occupancy rates and rental revenue of its existing portfolio.
Aggressive Leasing. The Company implements an aggressive leasing strategy
based on its knowledge of the Current Markets and its tenants' needs. The
Company's relationships with the tenant
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and brokerage communities provide the Company with information to enhance its
leasing and marketing efforts. The Company's policies of maintaining
communications, delivering a high level of service and offering leasing
flexibility provide existing tenants greater control over existing space and
future space planning and serve to enhance tenant retention.
As part of this aggressive leasing strategy, property-specific marketing
plans are prepared at the time of acquisition and are constantly monitored and
updated to pro-actively position each Property within its respective market. The
Company enhances its leasing efforts by retaining leasing brokers that are
specifically selected for their market knowledge, tenant relationships and
historic ability to generate leases. This strategy enables the Company to
attract and lease office space to a greater number of tenants by improving the
Company's visibility in the tenant community. The Company believes its
broad-based market presence in certain Current Markets provides a wide variety
of Class A and Class B space alternatives for prospective tenants and existing
tenants whose facility requirements evolve as their businesses grow.
As part of its leasing strategy, the Company reviews the financial
statements and other financial information on prospective tenants to assess the
creditworthiness of tenants as compared to the rents required to be paid under
the tenants' leases and the aggregate dollar investment required by the Company
for tenant improvements and leasing commissions. The Company may require credit
enhancements from tenants in the form of increased security deposits, letters of
credit, and personal or corporate guarantees of lease obligations.
Active Property Management. The Company believes that active property
management is a critical aspect of the Company's activities, and it is the
objective of management to intensely manage its Properties to provide a high
level of service and maximum flexibility to the Company's tenants. The Company
currently employs 15 individuals in its property management division, including
a Vice President of Property Management who is a Certified Property Manager and
has been in the industry for approximately ten years. The Company employs six
property managers, primarily located at the Properties, and eight maintenance
personnel.
Integrated Decision-making and Responsiveness. In addition to the location
and quality of its Properties, management generally credits its ability to
maintain its Properties at above-average market occupancy levels to the
coordination of its decision-making team. Acquisition, renovation and leasing
activities are coordinated to enhance responsiveness to market opportunities and
tenant needs. The acquisition, leasing and renovation teams work closely with
the Company's senior management from the initial meeting with prospective
tenants or sellers through the negotiation process. This integrated approach
permits the Company to analyze the economic terms and costs (including tenant
build-out and retrofitting costs) for each lease on a timely and efficient basis
throughout lease negotiations. With respect to acquisitions, the Company can
quickly analyze the costs of upgrades and lease-up potential. The Company is
able to commit to leasing and acquisition terms quickly, facilitating timely
transaction execution and build-out of tenant space, and minimizing lost income
from lease rollovers.
Economies of Scale and Leasing Flexibilities. The Company seeks to enhance
portfolio value by lowering total operating costs and expenses compared to
single-site ownership and management and by capitalizing on its ability to offer
a range of leasing options in certain markets. The Company also strives to
minimize overhead by controlling corporate general and administrative expenses.
Growth Strategies
Internal Growth. The Company believes that opportunities exist to increase
cash flow from its existing portfolio and that such opportunities will be
enhanced as the suburban office markets in the
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Midwest Region continue to improve. The Company intends to pursue internal
growth by (i) realizing fixed contractual base rental increases; (ii) re-leasing
expiring leases at increasing market rents which are expected to result from
increased demand for and decreased supply of available space in the Midwest
Region; (iii) continuing to maintain and improve occupancy rates through active
management and aggressive leasing; and (iv) controlling operating expenses
through the implementation of cost control management and systems.
Contractual base rental increases. The Company expects to achieve
internal growth in cash flow through leases which contain provisions
for fixed contractual rental increases. For leases in place at January 1,
1997, 63% (on a weighted average basis) contain fixed contractual rental
increases. In 1996, the contractual annualized increases in base rents
under leases at the Company's existing Properties totaled approximately
$437,000 and, for 1997, such increases are expected to total approximately
$750,000.
Re-leasing expiring leases to increasing market rents. Many of the
Company's tenants entered into leases at favorable rental rates, compared to the
current prevailing market rates, at times when the market for suburban office
space was depressed and when the Company did not own the Property. As a result,
as those leases expire, the Company believes that it will be able to re-lease
the space at higher effective rental rates.
Maintaining and improving occupancy rates. The Company believes that it has
been successful in attracting, expanding and retaining a diverse tenant base by
actively managing its Properties with an emphasis on tenant retention and
satisfaction. The Company strives to be responsive to the needs of individual
tenants through its on-site professional management staff and by providing
tenants with leasing alternatives within the Company's portfolio to accommodate
their changing space requirements. The Company's success in maintaining and
improving occupancy rates is demonstrated, in part, by the number of existing
tenants which have renewed or released their space, leased additional space to
support their expansion needs or moved to other space within the Company's
portfolio. The Company has achieved a tenant retention rate of approximately 85%
(based on square feet renewed) from January 1, 1993 through December 31, 1996.
The Company also seeks to improve occupancies by aggressively marketing
available space within its portfolio. As of December 31, 1996, the Properties
had a weighted average occupancy rate of 92% compared to 86.3% as of December
31, 1995 (or, for Properties acquired during 1996, the date of acquisition).
External Growth. Based on its historical activities and its knowledge of
the Midwest Region, the Company believes that opportunities continue to exist to
acquire additional office properties in the Midwest Region that: (i) provide
attractive initial yields with potential for growth in cash flow; (ii) are in
desirable locations within submarkets in the Midwest Region that exhibit strong
growth characteristics; (iii) have purchase prices that represent a significant
discount to replacement cost; and (iv) are underperforming or need renovation,
thereby providing opportunities for the Company to increase the cash flow and
value of such properties through active management, rehabilitation and
aggressive leasing.
Acquisition Strategy. The Company's strategy is to acquire well-located,
well-constructed suburban office properties containing 250,000 square feet or
less that are less than 15 years old with purchase prices of less than $20
million. The Company believes that most institutional and public-sector buyers
have tended to focus their acquisition activities on substantially larger
properties in terms of square footage and purchase price. As a result of the
purchasing bias of these institutional and public-sector buyers, the Company has
encountered few well-capitalized competitors for the Company's target properties
in its target markets. The Company believes it has been able to achieve more
favorable pricing because it has been able to contract for the purchase of
properties without financing and other contingencies that are generally required
by less well-capitalized local buyers of these property types. In addition, the
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Company has established a long and successful track record and reputation for
closing on properties it has contracted to purchase.
The Company believes that attractive opportunities exist to acquire
well-located suburban office properties in the Midwest Region at a discount to
replacement cost. Each acquisition opportunity is reviewed to evaluate whether
it meets one or more of the following criteria: (i) potential for higher
occupancy levels and/or rents as well as for lower turnover and/or operating
expenses; (ii) ability to generate returns in excess of the Company's weighted
average cost of capital, taking into account the estimated costs associated with
tenant turnover (i.e., tenant improvements, leasing commissions and the loss of
income due to vacancy) and property rehabilitation; and (iii) availability for
purchase at a price at or below estimated replacement cost. The Company intends
to focus its investment activities on properties that are in one or more of the
following categories:
* Under-managed properties: properties that have below market rents
and/or occupancies. For example, Princeton Hill Corporate Center, a
Class A office building in Springdale, Ohio, was acquired on April 17,
1996. At the time, the occupancy was 31%. Within 41 days of taking
title, the Company identified and signed as a tenant, and leased the
entire unleased portion of the building.
* Yield-oriented acquisitions: properties purchased below estimated
replacement cost at attractive yields. For example, in December 1996
the Company completed the acquisition of 40 Oak Hollow, a three-story
building located in Southfield, Michigan, which is currently 97.3%
occupied. The acquisition cost of the Property was $91 per square foot
while the Company's estimate of the Property's replacement cost is
$133 per square foot.
* Redevelopment or renovation opportunities: well located and
fundamentally sound properties that may require physical renovation or
cosmetic improvement to achieve their full potential performance. The
Company recently completed a $3.0 million renovation of 823 Commerce
Drive in Oak Brook, Illinois, which was 36% occupied at acquisition in
November 1995. The Property is currently 100% occupied.
* Opportunistic investments: opportunities to acquire under-valued
assets using the Company's local market knowledge and expertise. For
example, in August 1995 the Company purchased 10 Oak Hollow in
Southfield, Michigan at a purchase price of $6.9 million, which
reflected the pending vacancy of the entire second floor of the
building. However, the Company was aware of a tenant in a nearby
non-Company owned property which was in need of expansion space. The
Company ultimately sold 10 Oak Hollow to that tenant for $9.3 million
14 months after its purchase of the Property. The Company used the
proceeds from the sale to acquire an additional property utilizing a
like-kind exchange, thereby achieving tax deferral of the gain. In
addition to realizing a profit on the sale, the Company continues to
manage 10 Oak Hollow and, as leases expire and the new owner takes
over space for its own use, the Company may have the opportunity to
re-locate displaced tenants to the two Company-owned Properties
located within the same campus if any vacancies exist at that time.
The Company believes that it possesses a competitive advantage in
identifying and capitalizing on acquisition opportunities for targeted office
properties due to (i) its broad-based market presence in certain of the Current
Markets, (ii) the experience of its management team; (iii) its conservative
capital structure and its available liquidity, including amounts available under
its $75 million secured credit facility (the "Credit Facility") with The First
National Bank of Boston, as Agent; and (iv) its strong relationships with
certain of the region's institutional property owners and investment real estate
brokers.
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Disposition Strategy. The Company also seeks to enhance stockholder value
through the strategic disposition of its Properties. The Company will consider
disposing of Properties on a tax-deferred basis and re-deploying any proceeds
from sales into properties with higher yield potential. Generally, the Company
seeks to dispose of its Properties when one or more of the following conditions
apply: (i) market prices are at or near replacement cost; (ii) occupancy is high
and the potential to increase cash flow and property value within a reasonable
period is limited; (iii) the Company believes the capital received can be more
efficiently redeployed; or (iv) ownership of the Property is no longer
consistent with the Company's operating strategies.
In 1996, the Company sold two properties, 830 West End Court, Vernon
Hills, Illinois and 10 Oak Hollow, Southfield, Michigan, aggregating
approximately 110,000 square feet. The Company's weighted average holding
period for the two properties was approximately 19 months. As a result of the
Company's value-added operating strategy during the time the Company owned
the Vernon Hills and the 10 Oak Hollow properties, the weighted average
occupancy rate increased from 90.4% to 99.4%. The total sale price of $12.1
million reflected a 36% increase over the Company's aggregate cost of
these properties (including leasing commissions). Both properties were sold
on a tax-deferred basis using like-kind exchanges.
Financing Strategy. The Company seeks to maintain a well-balanced,
conservative and flexible capital structure by: (i) targeting a total debt to
total market capitalization ratio of no greater than 50%; and (ii) limiting the
use of the Credit Facility to short term financing of acquisitions and working
capital requirements. The Company is currently negotiating to expand the
borrowing capacity under the Credit Facility from $75 million to $100 million;
however, the Company does not expect to consummate such increase until it
determines such additional capacity is needed.
Development. The Company intends to enhance its leasing flexibility by
providing build-to-suit development to accommodate current and prospective
tenants requiring space that is otherwise unavailable in the marketplace. The
Company will also continue its redevelopment activities of older buildings which
have desirable locations.
Competition
The Company may be competing with other owners and developers that have
greater resources and more experience than the Company. In addition, an increase
in the number of competitive properties in any particular market in which the
Properties are located could have a material adverse effect on (i) the Company's
ability to lease space at the Properties or any newly-acquired property and (ii)
the rents charged at the Properties. The Company believes that the number of
real estate developers has decreased as a result of the recessionary market
conditions and tight credit markets during the early 1990s and the reluctance on
the part of more conventional financing sources to fund acquisition projects.
Insurance
The Company carries comprehensive liability, fire, extended coverage and
rental loss insurance covering all of the Properties, with policy specifications
and insured limits that the Company believes are adequate and appropriate under
the circumstances. There are, however, certain types of losses that are not
generally insured because they are either uninsurable or not economically
feasible to insure. Should an uninsured loss or a loss in excess of insured
limits occur, the Company could lose its capital invested in any of the
Properties, as well as the anticipated future revenues from such Property and,
in the case of recourse debt, the Company would remain obligated for any
mortgage debt or other financial obligations related to such Property. Any such
loss would adversely affect the Company. Moreover, as a general partner of the
Operating Partnership, the Company will generally be liable for any of the
Operating Partnership's unsatisfied obligations other than non-recourse
obligations. The Company believes that the
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Properties are adequately insured; however, no assurance can be given that
material losses in excess of insurance proceeds will not occur in the future.
Environmental Regulations
Under various federal, state and local environmental laws, ordinances and
regulations, a current or previous owner or operator of real estate may be
required to investigate and clean up hazardous or toxic substances or petroleum
product releases at such property and may be held liable to a governmental
entity or to third parties for property damage and for investigation and
clean-up costs incurred by such parties in connection with the contamination.
Such laws typically impose clean-up responsibility and liability without regard
to whether the owner knew of or caused the presence of the contaminants, and the
liability under such laws has been interpreted to be joint and several unless
the harm is divisible and there is a reasonable basis for allocation of
responsibility. The costs of investigation, remediation or removal of such
substances may be substantial, and the presence of such substances, or the
failure to properly remediate the contamination on such property, may adversely
affect the owner's ability to sell or rent such property or to borrow using such
property as collateral. Persons who arrange for the disposal or treatment of
hazardous or toxic substances at a disposal or treatment facility also may be
liable for the costs of removal or remediation of a release of hazardous or
toxic substances at such disposal or treatment facility, whether or not such
facility is owned or operated by such person. In addition, some environmental
laws create a lien on the contaminated site in favor of the government for
damages and costs incurred in connection with the contamination. Finally, the
owner of a site may be subject to common law claims by third parties based on
damages and costs resulting from environmental contamination emanating from such
site.
During the last year, independent environmental consultants have conducted
or updated Phase I Environmental Assessments ("Phase I Assessments") at each of
the Properties. In addition, a limited-scope Phase II Assessment ("Phase II
Assessment") has been conducted at the University Office Plaza property (the
Phase I Assessments and the Phase II Assessment are collectively referred to as
the "Environmental Assessments"). The Phase I Assessments have included, among
other things, a visual inspection of the Properties and the surrounding area and
a review of relevant state, federal and historical documents. Except for the
Phase II Assessment and certain limited sampling in connection with underground
tank and/or piping removals at The Arlington Ridge Service Center and One Park
Plaza properties, no invasive techniques such as soil or groundwater sampling
were performed at any of the Properties. The Company's Environmental Assessments
of the Properties have not revealed any condition giving rise to an
environmental liability that the Company believes would have a material adverse
effect on the Company's business, assets or results of operations taken as a
whole, nor is the Company otherwise aware of any such condition. There can be no
assurance, however, that the Company's Environmental Assessments would reveal
all conditions giving rise to environmental liabilities. Moreover, there can be
no assurance that (i) future laws, ordinances or regulations will not impose any
material environmental liability or (ii) the current environmental condition of
the Properties will not be affected by tenants, by the condition of land or
operations in the vicinity of the Properties (such as the presence of
underground storage tanks), or by third parties unrelated to the Company.
Employees
As of December 31, 1996, the Company had 34 employees, none of whom is
represented by a collective bargaining unit.
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ITEM 2--PROPERTIES
General
The Company owns 27 Properties containing approximately 2.8 million square
feet. The Properties consist primarily of Class A and Class B suburban office
properties, which range in size from approximately 15,000 to 260,000 rentable
square feet. The Properties consist of 20 suburban office properties, two light
industrial distribution facilities and five office/service centers (generally
single-story buildings with both finished office and unfinished storage area).
The 27 Properties are located in the suburban areas of Chicago (15), Milwaukee
(4), Minneapolis (3), Detroit (3), Columbus (1) and Cincinnati (1). Many of the
Properties offer amenities, including indoor and outdoor parking, loading dock
facilities, on-site property management, in-house conference facilities and
lounge areas with food and beverage service.
Management believes that the location and quality of construction of the
Properties, as well as the Company's reputation for providing superior tenant
service, enable the Company to attract and retain a diverse tenant base. As of
December 31, 1996, the Properties were leased to approximately 300 tenants, no
single tenant accounted for more than 3.3% of the aggregate Annualized Base Rent
of the Company's portfolio and only 19 tenants individually represented more
than 1% of such aggregate Annualized Base Rent. Over 60% of the occupied space
is leased to tenants that occupy 10,000 square feet or more.
The Company or the Operating Partnership holds fee simple title to each of
the Properties. The following table sets forth certain of the information as of
January 1, 1997 regarding the Properties.
<TABLE>
<CAPTION>
Percentage
of Total
Portfolio Percentage
Approximate Rentable Annualized of Portfolio
Year Built/ Rentable Square Percent Base Rent Annualized Encumbrance
Submarket/Property Location Renovated Square Feet Feet Leased ($000s)(1) Base Rent ($000s)
- ------------------ -------- --------- ----------- ---- ------ ---------- --------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Suburban Chicago
- ----------------
Centennial Center.............. Schaumburg 1980/1993 259,730 9.3% 95.2% $1,973 6.3% (2)
Highpoint Business Center...... Wood Dale 1986 113,911 4.1% 88.3% 1,026 3.3 $2,689
Arlington Ridge Service Center. Arlington Heights 1987 96,219 3.4% 87.4% 1,047 3.3 1,404
1251 Plum Grove Road........... Schaumburg 1986/1996 43,301 1.5% 43.1% 217 0.7 --
1011 East Touhy Avenue......... Des Plaines 1978/1995 155,657 5.6% 91.1% 2,311 7.4 2,429
2800 River Road................ Des Plaines 1983 100,527 3.6% 76.5% 1,253 4.0 (2)
Kensington Corporate Center.... Mount Prospect 1989 85,874 3.1% 77.3% 792 2.5 (2)
565 Lakeview Parkway........... Vernon Hills 1991 84,808 3.0% 68.4% 618 2.0 (2)
One Hawthorn Place............. Vernon Hills 1987 84,065 3.0% 91.5% 1,344 4.3 3,145
Two Marriott Drive............. Lincolnshire 1985 41,500 1.5% 100.0% 337 1.1 (2)
3400 Corporate Center.......... Northbrook 1986 74,884 2.7% 100.0% 1,246 4.0 2,061
3010 and 3020 Woodcreek Drive.. Downers Grove 1985-86 127,713 4.6% 92.5% 1,339 4.2 (2)
823 Commerce Drive............. Oak Brook 1969/1996 45,162 1.6% 80.9% 622 2.0 (2)
1675 Holmes Road............... Elgin 1990 101,286 3.6% 100.0% 473 1.5 2,237
Court Office Center............ Markham 1984 15,000 0.5% 100.0% 224 0.7 688
--------- ----- ------ ------ ----- --------
Subtotal/Weighted Average 1,429,637 51.1% 88.0% 14,822 47.3% 14,653
Suburban Milwaukee
- ------------------
One Park Plaza................ Milwaukee 1984 197,122 7.0% 94.8% 2,191 7.0% (2)
Park Place VII................ Milwaukee 1989 36,069 1.3% 100.0% 602 1.9 1,173
Lincoln Center II and III..... West Allis 1984-87 121,508 4.5% 96.1% 1,718 5.4 (2)
Brookfield Lakes Corporate
Center..................... Brookfield 1987 117,615 4.4% 98.4% 1,275 4.1 3,349
------- ----- ------ ----- ----- --------
Subtotal/Weighted Average 472,314 16.8% 96.5% 5,786 18.4% 4,522
Suburban Minneapolis
- --------------------
Court International II........ St. Paul 1916/1985 199,670 7.1% 95.5% 1,913 6.1% (2)
University Office Plaza....... Minneapolis 1979/1997 97,658 3.5% 100.0% 1,176 3.7 5,235
11100 Hampshire Avenue........ Bloomington 1980 50,625 1.8% 100.0% 219 .7 824
-------- ----- ------ ------ ----- -------
Subtotal/Weighted Average 347,953 12.4% 97.4% 3,308 10.5% 6,059
Suburban Detroit
- ----------------
Long Lake Crossings........... Troy 1988 169,959 6.1% 91.4% 2,776 8.8% (2)
40 Oak Hollow................. Southfield 1989 80,281 2.9% 97.3% 1,211 3.9 (2)
Oak Hollow Gateway............ Southfield 1987 79,546 2.8% 98.2% 1,206 3.8 (2)
-------- ----- ----- ------ ----- -------
Subtotal/Weighted Average 329,786 11.8% 94.5% 5,193 16.5% --
Suburban Columbus
- -----------------
Dublin Techmart............... Dublin 1986 124,929 4.5% 100.0% 1,211 3.9% (2)
Suburban Cincinnati
- -------------------
Princeton Hill Corporate
Center...................... Springdale 1988 95,910 3.4% 100.0% 1,057 3.4% (2)
------- ------ ------ ------- ----- ---------
Total / Weighted Average.................................. 2,800,529 100.0% 92.3% $31,377 100.0% $25,234
</TABLE>
(1) Annualized Base Rent is the monthly contractual base rent as of January 1,
1997 under existing leases, multiplied by 12.
(2) The Property is pledged as security for the Credit Facility, which totalled
$63,802,368 at December 31, 1996.
11
<PAGE>
Tenants
The Properties are leased to over 300 tenants which are engaged in a
variety of regional, national and international businesses, including healthcare
providers such as Health Partners, United Health Care Services of Minnesota,
Inc., CNR HEALTH, INC. and Health Direct, Inc., insurance companies such as
Metropolitan Life, Community Insurance Co., Employers Insurance of Wausau and
St. Paul Fire and Marine Insurance Company, and high-tech firms such as Aksys,
Ltd., Bay Networks, Inc. and WorldCom, Inc.
Tenant Diversification. The following table sets forth information
regarding the Company's leases with its 20 largest tenants based upon Annualized
Base Rent as of January 1, 1997:
<TABLE>
<CAPTION>
Percentage of Percentage
Remaining Aggregate Aggregate of
Number Lease Annualized Portfolio Rentable Aggregate
of Term in Base Rents Annualized Square Leased
Leases Months(1) (000s) Base Rent Feet Square Feet
------ ------ ------ --------- ---- -----------
<S> <C> <C> <C> <C> <C> <C>
Metropolitan Life Insurance
Company............................ 3 19 $ 984 3.14% 83,511 3.23%
Health Partners...................... 1 49 981 3.13 82,817 3.20
United HealthCare Services
of Minnesota, Inc.................. 1 66 795 2.53 105,949 4.10
Community Insurance Company.......... 1 53 747 2.38 68,573 2.65
American Honda Motor
Company, Inc....................... 2 41 606 1.93 50,062 1.94
Employers Insurance of
Wausau............................. 1 106 601 1.92 48,798 1.89
Howard Needles Tammen
& Bergendoff....................... 1 47 586 1.87 33,177 1.28
St. Paul Fire and Marine
Insurance Company................. 1 19 577 1.84 27,091 1.05
Interim Technology................... 2 39 509 1.62 30,448 1.18
Health Direct, Inc................... 3 6 436 1.39 29,490 1.14
A.O. Smith Corporation............... 2 105 406 1.29 51,012 1.97
CNR HEALTH, INC...................... 1 75 398 1.27 30,550 1.18
Crawford & Company................... 1 43 396 1.26 58,100 2.25
Sisters of The Sorrowful Mother
Ministry Corporation.............. 1 53 374 1.19 22,987 0.89
Midwest Re-employment
Consultants, Inc................... 1 8 374 1.19 19,789 0.77
Walsh College of
Accountancy and Business
Administration..................... 1 20 372 1.19 20,836 0.81
Aksys, Ltd........................... 1 116 338 1.08 41,500 1.61
Bay Networks, Inc.................... 1 51 326 1.04 20,532 0.79
WorldCom, Inc........................ 1 55 309 0.98 18,700 0.72
The Lutheran General Medical
Group, S.C......................... 1 65 300 0.96 19,239 0.74
-- --- ------ ------ ------- ------
Total/Weighted Average 27 54 $10,415 33.19% 86,161 33.39%
</TABLE>
(1) Weighted average calculation based on aggregate leased square footage
for each tenant.
12
<PAGE>
Leases
The Company's leases are typically structured for terms of five years. The
Company's leases are a mixture of net leases (whereby tenants pay their pro rata
share of real estate tax and operating expenses) and full service, gross leases
under which tenants typically pay for all real estate tax and operating expenses
above those for an established base year or expense stop. Leases on a
significant portion of the rentable square feet in the Company's portfolio are
net leases that were in existence upon the Company's acquisition of the
Properties. However, whether structured as net leases or gross leases with base
year or expense stop expense reimbursement clauses, virtually all leases entered
into by the Company require tenants to reimburse the Company for the tenant's
pro-rata share of real estate tax and operating expense increases.
Leases often contain provisions permitting tenants to renew at prevailing
market rates. Under the Company's leases, the Company is generally responsible
for structural repairs. Certain leases contain provisions which permit the
tenant to terminate its lease upon written notice to the Company, subject to the
tenant's obligation to pay a termination penalty. Such termination penalties are
generally negotiated with a tenant when a lease is executed and are usually
calculated to compensate the Company for unamortized tenant improvements and
leasing commissions at the termination date, and, in certain instances, for rent
on the space for a period of months after the termination date.
Lease Distributions. The following table sets forth information relating to
the distribution of the Company's leases based on rentable square feet under
lease, as of January 1, 1997.
<TABLE>
<CAPTION>
Percentage of
Percentage of Aggregate
Aggregate Annualized Portfolio
Square Feet Number of Portfolio Leased Base Rent Annualized
Under Lease Leases Square Feet (000s) Base Rent
- ----------- ------ ----------- ------ ---------
<S> <C> <C> <C> <C>
2,500 or Less................ 116 6.59% 2,532 8.07%
2,501 - 5,000................ 85 11.92 4,252 13.55
5,001 - 7,500................ 46 10.96 3,693 11.77
7,501 - 10,000............... 26 8.85 2,869 9.14
10,001 - 20,000.............. 37 20.20 6,925 22.07
20,001 - 40,000.............. 16 15.68 5,137 16.37
40,001 +..................... 11 25.80 5,969 19.03
--- ------ ------ ------
Total..................... 337 100.00% $31,377 100.00%
=== ====== ======= ======
</TABLE>
13
<PAGE>
Lease Expirations -- Portfolio Total. The following table sets forth a
summary schedule of the lease expirations for the Properties for leases in place
as of January 1, 1997, assuming that none of the tenants exercise renewal
options or termination rights, if any, at or prior to the scheduled expirations.
<TABLE>
<CAPTION>
Annualized Percentage of
Square Percentage of Base Rent of Total
Number of Footage of Total Leased Expiring Portfolio
Year of Leases Expiring Square Feet of Leases (000s) Base Rent of
Lease Expiration Expiring Leases Expiring Leases at 1/1/97 Expiring Leases
- ---------------- -------- ------ --------------- --------- ---------------
<S> <C> <C> <C> <C> <C>
1997................... 76 389,961 15.09% $ 4,569 14.56%
1998................... 61 496,525 19.21 5,967 19.02
1999................... 57 279,262 10.80 3,568 11.37
2000................... 61 389,997 15.09 5,355 17.07
2001................... 51 494,435 19.12 6,535 20.83
2002................... 16 271,420 10.50 2,508 7.99
2003................... 5 53,089 2.05 767 2.44
2004................... 4 35,658 1.38 403 1.29
2005................... 3 76,968 2.98 694 2.21
2006................... 3 97,634 3.78 1,011 3.22
--- ------- ----- ------ -----
Total............... 337 2,584,949 100.00% $31,377 100.00%
=== ========= ====== ======= ======
</TABLE>
14
<PAGE>
Lease Expirations - Property By Property. The following table sets forth
detailed lease expiration information for each of the Properties for leases in
place as of January 1, 1997, assuming that none of the tenants exercises renewal
options or termination rights, if any, at or prior to the scheduled expirations.
<TABLE>
<CAPTION>
Year of Lease Expiration
------------------------
PROPERTY 1997 1998 1999 2000 2001 2002
- -------- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
SUBURBAN CHICAGO
CENTENNIAL CENTER
Square Footage of Expiring Leases 38,229 4,406 2,973 13,646 19,056 166,515
Percentage of Total Leased Sq. Ft 15.47% 1.78% 1.20% 5.52% 7.71% 67.37%
Annualized Base Rent of Expiring Leases $346,384 $ 50,272 $ 30,102 $ 83,514 $ 178,687 $1,273,150
Percentage of Total Annualized Base Rent 17.56% 2.55% 1.53% 4.23% 9.06% 64.53%
Number of Leases Expiring 3 1 2 1 4 5
Annual base rent per square foot of expiring leases $ 9.06 $ 11.41 $ 10.13 $ 6.12 $ 9.38 $ 7.65
1675 HOLMES ROAD
Square Footage of Expiring Leases 101,286
Percentage of Total Leased Sq. Ft 100.00%
Annualized Base Rent of Expiring Leases $473,063
Percentage of Total Annualized Base Rent 100.00%
Number of Leases Expiring 3
Annual base rent per square foot of expiring leases $ 4.67
ARLINGTON RIDGE SERVICE CENTER
Square Footage of Expiring Leases 61,980
Percentage of Total Leased Sq. Ft 73.72%
Annualized Base Rent of Expiring Leases $771,166
Percentage of Total Annualized Base Rent 73.63%
Number of Leases Expiring 3
Annual base rent per square foot of expiring leases $ 12.44
1251 PLUM GROVE ROAD
Square Footage of Expiring Leases 5,085 9,195 4,373
Percentage of Total Leased Sq. Ft 27.26% 49.30% 23.44%
Annualized Base Rent of Expiring Leases $ 43,223 $114,711 $ 59,036
Percentage of Total Annualized Base Rent 19.92% 52.87% 27.21%
Number of Leases Expiring 1 2 1
Annual base rent per square foot of expiring leases $ 8.50 $ 12.48 $ 13.50
</TABLE>
<TABLE>
<CAPTION>
PROPERTY 2003 2004 2005 2006 Total
- -------- ---- ---- ---- ---- -----
<S> <C> <C> <C> <C> <C>
SUBURBAN CHICAGO
CENTENNIAL CENTER
Square Footage of Expiring Leases 2,357 247,182
Percentage of Total Leased Sq. Ft 0.95% 100.00%
Annualized Base Rent of Expiring Leases $10,607 $1,972,716
Percentage of Total Annualized Base Rent 0.54% 100.00%
Number of Leases Expiring 1 17
Annual base rent per square foot of expiring leases $ 4.50
1675 HOLMES ROAD
Square Footage of Expiring Leases 101,286
Percentage of Total Leased Sq. Ft 100.00%
Annualized Base Rent of Expiring Leases $ 473,063
Percentage of Total Annualized Base Rent 100.00%
Number of Leases Expiring 3
Annual base rent per square foot of expiring leases
ARLINGTON RIDGE SERVICE CENTER
Square Footage of Expiring Leases 22,097 84,077
Percentage of Total Leased Sq. Ft 26.28% 100.00%
Annualized Base Rent of Expiring Leases $276,248 $1,047,414
Percentage of Total Annualized Base Rent 26.37% 100.00%
Number of Leases Expiring 2 5
Annual base rent per square foot of expiring leases $ 12.50
1251 PLUM GROVE ROAD
Square Footage of Expiring Leases 18,653
Percentage of Total Leased Sq. Ft 100.00%
Annualized Base Rent of Expiring Leases $ 216,970
Percentage of Total Annualized Base Rent 100.00%
Number of Leases Expiring 4
Annual base rent per square foot of expiring leases
</TABLE>
15
<PAGE>
<TABLE>
<CAPTION>
Year of Lease Expiration
------------------------
PROPERTY 1997 1998 1999 2000 2001 2002
- -------- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
1011 EAST TOUHY AVENUE
Square Footage of Expiring Leases 55,260 9,472 9,355 6,132 22,108 19,239
Percentage of Total Leased Sq. Ft. 38.98% 6.68% 6.60% 4.33% 15.59% 13.57%
Annualized Base Rent of Expiring Leases $855,681 $189,160 $139,345 $89,129 $378,328 $299,698
Percentage of Total Annualized Base Rent 37.03% 8.19% 6.03% 3.86% 16.37% 12.96%
Number of Leases Expiring 14 3 5 1 5 1
Annual base rent per square foot of expiring leases $15.48 $19.97 $14.90 $14.54 $17.11 $15.58
HIGHPOINT BUSINESS CENTER
Square Footage of Expiring Leases 41,535 9,628 3,376 2,958 16,935
Percentage of Total Leased Sq. Ft. 41.28% 9.57% 3.36% 2.94% 16.83%
Annualized Base Rent of Expiring Leases $427,557 $105,234 $43,888 $26,659 $178,664
Percentage of Total Annualized Base Rent 41.68% 10.26% 4.28% 2.60% 17.42%
Number of Leases Expiring 5 1 1 1 1
Annual base rent per square foot of expiring leases $10.29 $10.93 $13.00 $9.01 $10.55
2800 RIVER ROAD
Square Footage of Expiring Leases 12,837 1,341 15,446 11,551 35,696
Percentage of Total Leased Sq. Ft. 16.70% 1.74% 20.09% 15.03% 46.44%
Annualized Base Rent of Expiring Leases $188,829 $24,138 $275,133 $190,854 $573,725
Percentage of Total Annualized Base Rent 15.07% 1.93% 21.96% 15.24% 45.80%
Number of Leases Expiring 4 1 3 5 5
Annual base rent per square foot of expiring leases $14.71 $18.00 $17.81 $16.52 $16.07
KENSINGTON CORPORATE CENTER
Square Footage of Expiring Leases 66,419
Percentage of Total Leased Sq. Ft. 100.00%
Annualized Base Rent of Expiring Leases $791,886
Percentage of Total Annualized Base Rent 100.00%
Number of Leases Expiring 1
Annual base rent per square foot of expiring leases $11.92
3010 AND 3020 WOODCREEK DRIVE
Square Footage of Expiring Leases 12,351 15,323 17,107 29,668 43,741
Percentage of Total Leased Sq. Ft. 10.45% 12.96% 14.47% 25.10% 37.02%
Annualized Base Rent of Expiring Leases $154,681 $220,365 $159,625 $292,908 $511,420
Percentage of Total Annualized Base Rent 11.55% 16.46% 11.92% 21.88% 38.19%
Number of Leases Expiring 3 2 2 3 3
Annual base rent per square foot of expiring leases $12.52 $14.38 $9.33 $9.87 $11.69
</TABLE>
<TABLE>
PROPERTY 2003 2004 2005 2006 Total
- -------- ---- ---- ---- ---- -----
<S> <C> <C> <C> <C> <C>
1011 EAST TOUHY AVENUE
Square Footage of Expiring Leases 12,867 7,336 141,769
Percentage of Total Leased Sq. Ft. 9.08% 5.17% 100.00%
Annualized Base Rent of Expiring Leases $234,823 $124,712 $2,310,876
Percentage of Total Annualized Base Rent 10.16% 5.40% 100.00%
Number of Leases Expiring 1 1 31
Annual base rent per square foot of expiring leases $18.25 $17.00
HIGHPOINT BUSINESS CENTER
Square Footage of Expiring Leases 7,939 18,241 100,612
Percentage of Total Leased Sq. Ft. 7.89% 18.13% 100.00%
Annualized Base Rent of Expiring Leases $79,239 $164,397 $1,025,638
Percentage of Total Annualized Base Rent 7.73% 16.03% 100.00%
Number of Leases Expiring 1 1 11
Annual base rent per square foot of expiring leases $9.98 $9.01
2800 RIVER ROAD
Square Footage of Expiring Leases 76,871
Percentage of Total Leased Sq. Ft. 100.00%
Annualized Base Rent of Expiring Leases $1,252,679
Percentage of Total Annualized Base Rent 100.00%
Number of Leases Expiring 18
Annual base rent per square foot of expiring leases
KENSINGTON CORPORATE CENTER
Square Footage of Expiring Leases 66,419
Percentage of Total Leased Sq. Ft. 100.00%
Annualized Base Rent of Expiring Leases $791,886
Percentage of Total Annualized Base Rent 100.00%
Number of Leases Expiring 1
Annual base rent per square foot of expiring leases
3010 AND 3020 WOODCREEK DRIVE
Square Footage of Expiring Leases 118,190
Percentage of Total Leased Sq. Ft. 100.00%
Annualized Base Rent of Expiring Leases $1,338,999
Percentage of Total Annualized Base Rent 100.00%
Number of Leases Expiring 13
Annual base rent per square foot of expiring leases
</TABLE>
16
<PAGE>
<TABLE>
<CAPTION>
Year of Lease Expiration
------------------------
PROPERTY 1997 1998 1999 2000 2001 2002
- -------- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
823 COMMERCE DRIVE
Square Footage of Expiring Leases 14,026 22,515
Percentage of Total Leased Sq. Ft. 38.38% 61.62%
Annualized Base Rent of Expiring Leases $203,377 $418,779
Percentage of Total Annualized Base Rent 32.69% 67.31%
Number of Leases Expiring 1 2
Annual base rent per square foot of expiring leases $14.50 $18.60
565 LAKEVIEW PARKWAY
Square Footage of Expiring Leases 28,223 8,942 17,133
Percentage of Total Leased Sq. Ft. 48.65% 15.42% 29.54%
Annualized Base Rent of Expiring Leases $284,206 $101,134 $164,820
Percentage of Total Annualized Base Rent 46.00% 16.37% 26.68%
Number of Leases Expiring 1 1 1
Annual base rent per square foot of expiring leases $10.07 $11.31 $9.62
ONE HAWTHORN PLACE
Square Footage of Expiring Leases 17,469 13,053 19,889 17,658 6,039 2,822
Percentage of Total Leased Sq. Ft. 22.71% 16.97% 25.85% 22.95% 7.85% 3.67%
Annualized Base Rent of Expiring Leases $297,669 $233,587 $335,568 $314,934 $108,137 $53,619
Percentage of Total Annualized Base Rent 22.16% 17.39% 24.97% 23.44% 8.05% 3.99%
Number of Leases Expiring 9 5 4 3 3 1
Annual base rent per square foot of expiring leases $17.04 $17.90 $16.87 $17.84 $17.91 $19.00
3400 CORPORATE CENTER
Square Footage of Expiring Leases 2,716 17,867 20,349 16,140 8,655 3,535
Percentage of Total Leased Sq. Ft. 3.63% 23.86% 27.17% 21.55% 11.56% 4.72%
Annualized Base Rent of Expiring Leases $29,187 $320,869 $401,225 $287,464 $107,124 $51,967
Percentage of Total Annualized Base Rent 2.34% 25.76% 32.22% 23.08% 8.60% 4.17%
Number of Leases Expiring 2 7 3 7 3 1
Annual base rent per square foot of expiring leases $10.75 $17.96 $19.72 $17.81 $12.38 $14.70
TWO MARRIOTT DRIVE
Square Footage of Expiring Leases
Percentage of Total Leased Sq. Ft.
Annualized Base Rent of Expiring Leases
Percentage of Total Annualized Base Rent
Number of Leases Expiring
Annual base rent per square foot of expiring leases
</TABLE>
<TABLE>
<CAPTION>
PROPERTY 2003 2004 2005 2006 Total
- -------- ---- ---- ---- ---- -----
<S> <C> <C> <C> <C> <C>
823 COMMERCE DRIVE
Square Footage of Expiring Leases 36,541
Percentage of Total Leased Sq. Ft. 100.00%
Annualized Base Rent of Expiring Leases $622,156
Percentage of Total Annualized Base Rent 100.00%
Number of Leases Expiring 3
Annual base rent per square foot of expiring leases
565 LAKEVIEW PARKWAY
Square Footage of Expiring Leases 3,704 58,002
Percentage of Total Leased Sq. Ft. 6.39% 100.00%
Annualized Base Rent of Expiring Leases $67,654 $617,814
Percentage of Total Annualized Base Rent 10.95% 100.00%
Number of Leases Expiring 1 4
Annual base rent per square foot of expiring leases $ 18.27
ONE HAWTHORN PLACE
Square Footage of Expiring Leases 76,930
Percentage of Total Leased Sq. Ft. 100.00%
Annualized Base Rent of Expiring Leases $1,343,514
Percentage of Total Annualized Base Rent 100.00%
Number of Leases Expiring 25
Annual base rent per square foot of expiring leases
3400 CORPORATE CENTER
Square Footage of Expiring Leases 5,622 74,884
Percentage of Total Leased Sq. Ft. 7.51% 100.00%
Annualized Base Rent of Expiring Leases $47,715 $1,245,551
Percentage of Total Annualized Base Rent 3.83% 100.00%
Number of Leases Expiring 1 24
Annual base rent per square foot of expiring leases $8.49
TWO MARRIOTT DRIVE
Square Footage of Expiring Leases 41,500 41,500
Percentage of Total Leased Sq. Ft. 100.00% 100.00%
Annualized Base Rent of Expiring Leases $337,500 $337,500
Percentage of Total Annualized Base Rent 100.00% 100.00%
Number of Leases Expiring 1 1
Annual base rent per square foot of expiring leases $8.13
</TABLE>
17
<PAGE>
<TABLE>
<CAPTION>
Year of Lease Expiration
------------------------
PROPERTY 1997 1998 1999 2000 2001 2002
- -------- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
COURT OFFICE CENTER
Square Footage of Expiring Leases 2,385 12,615
Percentage of Total Leased Sq. Ft. 15.90% 84.10%
Annualized Base Rent of Expiring Leases $33,716 $190,427
Percentage of Total Annualized Base Rent 15.04% 84.96%
Number of Leases Expiring 2 3
Annual base rent per square foot of expiring leases $14.14 $15.10
SUBURBAN MILWAUKEE
ONE PARK PLAZA
Square Footage of Expiring Leases 5,797 12,361 23,053 35,482 11,162 16
Percentage of Total Leased Sq. Ft. 3.10% 6.61% 12.33% 18.98% 5.97% 0.01%
Annualized Base Rent of Expiring Leases $94,790 $133,707 $269,122 $608,742 $136,810 $300
Percentage of Total Annualized Base Rent 4.33% 6.10% 12.28% 27.78% 6.24% 0.01%
Number of Leases Expiring 3 5 7 3 2 1
Annual base rent per square foot of expiring leases $16.35 $10.82 $11.67 $17.16 $12.26 $18.75
PARK PLACE VII
Square Footage of Expiring Leases 4,013 9,069 22,987
Percentage of Total Leased Sq. Ft. 11.13% 25.14% 63.73%
Annualized Base Rent of Expiring Leases $71,752 $156,380 $373,769
Percentage of Total Annualized Base Rent 11.92% 25.98% 62.10%
Number of Leases Expiring 1 2 1
Annual base rent per square foot of expiring leases $17.88 $17.24 $16.26
LINCOLN CENTER II & III
Square Footage of Expiring Leases 8,892 27,106 10,776 19,762 11,243
Percentage of Total Leased Sq. Ft. 7.61% 23.21% 9.23% 16.92% 9.63%
Annualized Base Rent of Expiring Leases $132,669 $417,040 $169,788 $300,978 $168,060
Percentage of Total Annualized Base Rent 7.72% 24.29% 9.88% 17.52% 9.78%
Number of Leases Expiring 4 5 5 3 2
Annual base rent per square foot of expiring leases $14.92 $15.39 $15.76 $15.23 $14.95
BROOKFIELD LAKES CORPORATE CENTER
Square Footage of Expiring Leases 7,762 23,966 39,820 20,588 14,358 9,277
Percentage of Total Leased Sq. Ft. 6.70% 20.70% 34.41% 17.78% 12.40% 8.01%
Annualized Base Rent of Expiring Leases $103,413 $286,412 $382,213 $216,323 $205,683 $80,895
Percentage of Total Annualized Base Rent 8.11% 22.46% 29.98% 16.97% 16.13% 6.35%
Number of Leases Expiring 2 3 5 4 3 1
Annual base rent per square foot of expiring leases $13.32 $11.95 $9.60 $10.51 $14.33 $8.72
</TABLE>
<TABLE>
<CAPTION>
PROPERTY 2003 2004 2005 2006 Total
- -------- ---- ---- ---- ---- -----
<S> <C> <C> <C> <C> <C>
COURT OFFICE CENTER
Square Footage of Expiring Leases 15,000
Percentage of Total Leased Sq. Ft. 100.00%
Annualized Base Rent of Expiring Leases $224,143
Percentage of Total Annualized Base Rent 100.00%
Number of Leases Expiring 5
Annual base rent per square foot of expiring leases
SUBURBAN MILWAUKEE
ONE PARK PLAZA
Square Footage of Expiring Leases 50,262 48,798 186,931
Percentage of Total Leased Sq. Ft. 26.90% 26.10% 100.00%
Annualized Base Rent of Expiring Leases $398,591 $548,978 $2,191,040
Percentage of Total Annualized Base Rent 18.19% 25.07% 100.00%
Number of Leases Expiring 1 1 23
Annual base rent per square foot of expiring leases $7.93 $11.25
PARK PLACE VII
Square Footage of Expiring Leases 36,069
Percentage of Total Leased Sq. Ft. 100.00%
Annualized Base Rent of Expiring Leases $601,901
Percentage of Total Annualized Base Rent 100.00%
Number of Leases Expiring 4
Annual base rent per square foot of expiring leases
LINCOLN CENTER II & III
Square Footage of Expiring Leases 30,550 8,465 116,794
Percentage of Total Leased Sq. Ft. 26.15% 7.25% 100.00%
Annualized Base Rent of Expiring Leases $398,067 $131,208 $1,717,810
Percentage of Total Annualized Base Rent 23.17% 7.64% 100.00%
Number of Leases Expiring 1 1 21
Annual base rent per square foot of expiring leases $13.03 $15.50
BROOKFIELD LAKES CORPORATE CENTER
Square Footage of Expiring Leases 115,771
Percentage of Total Leased Sq. Ft. 100.00%
Annualized Base Rent of Expiring Leases $1,274,939
Percentage of Total Annualized Base Rent 100.00%
Number of Leases Expiring 18
Annual base rent per square foot of expiring leases
</TABLE>
18
<PAGE>
<TABLE>
<CAPTION>
Year of Lease Expiration
------------------------
PROPERTY 1997 1998 1999 2000 2001 2002
- -------- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
SUBURBAN MINNEAPOLIS
COURT INTERNATIONAL II
Square Footage of Expiring Leases 18,423 27,601 69,910 26,678 41,381 6,754
Percentage of Total Leased Sq. Ft. 9.66% 14.47% 36.65% 13.99% 21.69% 3.54%
Annualized Base Rent of Expiring Leases $148,946 $325,757 $669,884 $251,721 $443,852 $72,600
Percentage of Total Annualized Base Rent 7.79% 17.03% 35.02% 13.16% 23.20% 3.80%
Number of Leases Expiring 5 3 9 5 7 1
Annual base rent per square foot of expiring leases $8.08 $11.80 $9.58 $9.44 $10.73 $10.75
UNIVERSITY OFFICE PLAZA
Square Footage of Expiring Leases 9,967 3,437 1,437 82,817
Percentage of Total Leased Sq. Ft. 10.21% 3.52% 1.47% 84.80%
Annualized Base Rent of Expiring Leases $103,005 $73,464 $18,268 $981,392
Percentage of Total Annualized Base Rent 8.76% 6.25% 1.55% 83.44%
Number of Leases Expiring 6 1 1 1
Annual base rent per square foot of expiring leases $10.33 $21.37 $12.71 $11.85
11100 HAMPSHIRE AVENUE
Square Footage of Expiring Leases 50,625
Percentage of Total Leased Sq. Ft. 100.00%
Annualized Base Rent of Expiring Leases $219,357
Percentage of Total Annualized Base Rent 100.00%
Number of Leases Expiring 1
Annual base rent per square foot of expiring leases $4.33
SUBURBAN DETROIT
LONG LAKE CROSSINGS
Square Footage of Expiring Leases 10,176 66,781 13,583 35,315 28,627 917
Percentage of Total Leased Sq. Ft. 6.55% 42.97% 8.74% 22.73% 18.42% 0.59%
Annualized Base Rent of Expiring Leases $158,132 $1,269,838 $227,720 $639,178 $465,552 $16,047
Percentage of Total Annualized Base Rent 5.70% 45.73% 8.20% 23.02% 16.77% 0.58%
Number of Leases Expiring 4 9 3 6 4 1
Annual base rent per square foot of expiring leases $15.54 $19.01 $16.77 $18.10 $16.26 $17.50
40 OAK HOLLOW
Square Footage of Expiring Leases 27,361 20,788 4,913 21,448
Percentage of Total Leased Sq. Ft. 35.03% 26.61% 6.29% 27.45%
Annualized Base Rent of Expiring Leases $485,731 $317,962 $84,749 $266,572
Percentage of Total Annualized Base Rent 40.11% 26.26% 7.00% 22.01%
Number of Leases Expiring 3 3 1 2
Annual base rent per square foot of expiring leases $17.75 $15.30 $17.25 $12.43
</TABLE>
<TABLE>
<CAPTION>
PROPERTY 2003 2004 2005 2006 Total
- -------- ---- ---- ---- ---- -----
<S> <C> <C> <C> <C> <C>
SUBURBAN MINNEAPOLIS
COURT INTERNATIONAL II
Square Footage of Expiring Leases 190,747
Percentage of Total Leased Sq. Ft. 100.00%
Annualized Base Rent of Expiring Leases $1,912,760
Percentage of Total Annualized Base Rent 100.00%
Number of Leases Expiring 30
Annual base rent per square foot of expiring leases
UNIVERSITY OFFICE PLAZA
Square Footage of Expiring Leases 97,658
Percentage of Total Leased Sq. Ft. 100.00%
Annualized Base Rent of Expiring Leases $1,176,129
Percentage of Total Annualized Base Rent 100.00%
Number of Leases Expiring 9
Annual base rent per square foot of expiring leases
11100 HAMPSHIRE AVENUE
Square Footage of Expiring Leases 50,625
Percentage of Total Leased Sq. Ft. 100.00%
Annualized Base Rent of Expiring Leases $219,357
Percentage of Total Annualized Base Rent 100.00%
Number of Leases Expiring 1
Annual base rent per square foot of expiring leases
SUBURBAN DETROIT
LONG LAKE CROSSINGS
Square Footage of Expiring Leases 155,399
Percentage of Total Leased Sq. Ft. 100.00%
Annualized Base Rent of Expiring Leases $2,776,467
Percentage of Total Annualized Base Rent 100.00%
Number of Leases Expiring 27
Annual base rent per square foot of expiring leases
40 OAK HOLLOW
Square Footage of Expiring Leases 3,611 78,121
Percentage of Total Leased Sq. Ft. 4.62% 100.00%
Annualized Base Rent of Expiring Leases $55,971 $1,210,985
Percentage of Total Annualized Base Rent 4.62% 100.00%
Number of Leases Expiring 1 10
Annual base rent per square foot of expiring leases $15.50
</TABLE>
19
<PAGE>
<TABLE>
<CAPTION>
Year of Lease Expiration
------------------------
PROPERTY 1997 1998 1999 2000 2001 2002
- -------- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
OAK HOLLOW GATEWAY
Square Footage of Expiring Leases 15,294 3,019 3,613 27,095 29,058
Percentage of Total Leased Sq. Ft. 19.59% 3.87% 4.63% 34.70% 37.21%
Annualized Base Rent of Expiring Leases $256,023 $46,794 $57,808 $417,598 $428,147
Percentage of Total Annualized Base Rent 21.22% 3.88% 4.79% 34.62% 35.49%
Number of Leases Expiring 2 1 2 4 2
Annual base rent per square foot of expiring leases $16.74 $15.50 $16.00 $15.41 $14.73
SUBURBAN COLUMBUS
DUBLIN TECHMART
Square Footage of Expiring Leases 19,574 61,605 4,442 15,346 23,962
Percentage of Total Leased Sq. Ft. 15.67% 49.31% 3.56% 12.28% 19.18%
Annualized Base Rent of Expiring Leases $205,527 $594,341 $43,087 $154,648 $213,988
Percentage of Total Annualized Base Rent 16.96% 49.06% 3.56% 12.76% 17.66%
Number of Leases Expiring 2 6 1 4 1
Annual base rent per square foot of expiring leases $10.50 $9.65 $9.70 $10.08 $8.93
SUBURBAN CINCINNATI
PRINCETON HILL CORPORATE CENTER
Square Footage of Expiring Leases 8,633 18,704 68,573
Percentage of Total Leased Sq. Ft. 9.00% 19.50% 71.50%
Annualized Base Rent of Expiring Leases $93,236 $216,203 $747,446
Percentage of Total Annualized Base Rent 8.82% 20.46% 70.72%
Number of Leases Expiring 1 2 1
Annual base rent per square foot of expiring leases $10.80 $11.56 $10.90
PORTFOLIO TOTALS
Square Footage of Expiring Leases 389,961 496,525 279,262 389,997 494,435 271,420
Percentage of Total Leased Sq. Ft. 15.09% 19.21% 10.80% 15.09% 19.13% 10.50%
Annualized Base Rent of Expiring Leases $4,568,726 $5,967,251 $3,567,821 $5,354,629 $6,535,516 $2,507,500
Percentage of Total Annualized Base Rent 14.56% 19.02% 11.37% 17.07% 20.83% 7.99%
Number of Leases Expiring 76 61 57 61 51 16
</TABLE>
<TABLE>
<CAPTION>
PROPERTY 2003 2004 2005 2006 Total
- -------- ---- ---- ---- ---- -----
<S> <C> <C> <C> <C> <C>
OAK HOLLOW GATEWAY
Square Footage of Expiring Leases 78,079
Percentage of Total Leased Sq. Ft. 100.00%
Annualized Base Rent of Expiring Leases $1,206,370
Percentage of Total Annualized Base Rent 100.00%
Number of Leases Expiring 11
Annual base rent per square foot of expiring leases
SUBURBAN COLUMBUS
DUBLIN TECHMART
Square Footage of Expiring Leases 124,929
Percentage of Total Leased Sq. Ft. 100.00%
Annualized Base Rent of Expiring Leases $1,211,591
Percentage of Total Annualized Base Rent 100.00%
Number of Leases Expiring 14
Annual base rent per square foot of expiring leases
SUBURBAN CINCINNATI
PRINCETON HILL CORPORATE CENTER
Square Footage of Expiring Leases 95,910
Percentage of Total Leased Sq. Ft. 100.00%
Annualized Base Rent of Expiring Leases $1,056,885
Percentage of Total Annualized Base Rent 100.00%
Number of Leases Expiring 4
Annual base rent per square foot of expiring leases
PORTFOLIO TOTALS
Square Footage of Expiring Leases 53,089 35,658 76,968 97,634 2,584,949
Percentage of Total Leased Sq. Ft. 2.05% 1.38% 2.98% 3.78% 100.00%
Annualized Base Rent of Expiring Leases $767,122 $403,202 $694,196 $1,011,190 $31,377,153
Percentage of Total Annualized Base Rent 2.44% 1.29% 2.21% 3.22% 100.00%
Number of Leases Expiring 5 4 3 3 337
</TABLE>
20
<PAGE>
Historic Lease Renewals
The following table sets forth certain historical information regarding
tenants at the Properties that renewed an existing lease at or prior to the
expiration of the existing lease:
<TABLE>
<CAPTION>
Total/Weighted
Average
1993 1994 1995 1996 1993 - 1996
---- ---- ---- ---- -----------
<S> <C> <C> <C> <C> <C>
Number of leases expired during calendar year................. 3 7 25 34 69
Number of leases renewed...................................... 3 4 18 26 51
Percentage of leases renewed.................................. 100% 57% 72% 76% 74%
Aggregate rentable square footage of expiring leases (1)...... 54,157 26,716 92,205 139,615 312,693
Aggregate rentable square footage of lease renewals........... 54,157 19,645 72,586 118,142 264,530
Percentage of expiring rentable square footage renewed........ 100% 74% 79% 85% 85%
</TABLE>
(1) The aggregate rentable square footage of expiring leases excludes the
square feet for tenants where the tenant had vacated the Property prior to
the Company's acquisition date or disclosed plans in the Company's tenant
due diligence to move from the Property within twelve months of the
Company's acquisition date.
ITEM 3--LEGAL PROCEEDINGS
As of January 31, 1997, the Company was not a party to any material legal
proceedings.
ITEM 4--SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to stockholders during the fourth quarter of the
fiscal year ended December 31, 1996.
21
<PAGE>
PART II
ITEM 5--MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
As of December 31, 1996, there was no established trading market for the
Company's Common Stock, $.01 par value (the "Common Stock").
As of December 31, 1996, there were approximately 630 holders of record of
the Common Stock.
The Company currently has two classes of equity securities outstanding: one
class of Common Stock and one class of Preferred Stock, $.01 par value
("Preferred Stock").
During the past three years, the Company has made quarterly distributions
with respect to its Common Stock, as follows:
Distributions
Calendar Period Per Share
--------------- ---------
1994:
First Quarter............... $0.20
Second Quarter.............. $0.23
Third Quarter............... $0.26
Fourth Quarter.............. $0.27
1995:
First Quarter............... $0.27
Second Quarter.............. $0.27
Third Quarter............... $0.29
Fourth Quarter.............. $0.30
1996:
First Quarter............... $0.30
Second Quarter.............. $0.30
Third Quarter............... $0.30
Fourth Quarter.............. $0.30
The Company, in order to qualify as a REIT under the Code, is required to
make distributions (other than capital gain distributions) to its stockholders
with respect to each taxable year in amounts at least equal to (i) the sum of
(A) 95% of its "REIT taxable income" (computed without regard to the dividends
paid deduction and its net capital gain) and (B) 95% of the net income (after
tax), if any, from foreclosure property, minus (ii) the sum of certain items of
non-cash income. The Company's distribution strategy is to distribute what it
believes is a conservative percentage of its cash flow, permitting the Company
to retain funds for capital improvements and other investments while funding its
distributions.
For federal income tax purposes, distributions may consist of ordinary
income dividends, nontaxable return of capital, capital gains or a combination
thereof. Distributions in excess of the Company's current and accumulated
earnings and profits (calculated for tax purposes) will constitute a nontaxable
return of capital rather than a dividend and will reduce the stockholder's basis
in his or her shares of Common Stock for tax purposes. To the extent that a
distribution exceeds both the Company's current and accumulated earnings and
profits and
22
<PAGE>
the stockholder's basis in his or her shares, the amount of such excess will
generally be treated as gain from the sale or exchange of that stockholder's
shares. The Company annually notifies stockholders of the taxability of
distributions paid during the preceding year. The following table sets forth the
taxability of distributions paid in 1996, 1995 and 1994:
1996 1995 1994
---- ---- ----
Ordinary income..................... 88.3% 87.4% 93.0%
Non-taxable return of capital....... 11.7% 12.6% 7.0%
----- ----- ----
Total............................... 100.0% 100.0% 100.0%
====== ====== ======
Recent Sales of Unregistered Securities
The following table is a summary of certain information relating to all
securities of the Company sold by the Company during the period covered by this
Report on Form 10-K that were not registered under the Securities Act (the
"Private Placements"):
Type of Total Issuance
Security Sold Offering Period Shares Sold Proceeds Costs
- ------------- --------------- ----------- -------- -----
Common Stock April 1, 1996 $ 130,000 $ 1,710,000 $ 219,428
Common Stock August 20, 1996 3,867,000 50,268,899 2,866,550
Preferred Stock(1) August 20, 1996 210,128 2,101 (2)
(1) The Preferred Stock that was sold in the August 20, 1996 Private
Placement is convertible into Common Stock on a one-for-one basis
depending on the Company's attainment of certain objectives related
to the timing, pricing and size of a public offering of additional
Common Stock by September 30, 1998.
(2) The costs associated with the issuance of the Preferred Stock are included
in the cost of the issuance of the contemporaneous issuance of Common Stock
that occurred on August 20, 1996.
The Company conducted the Private Placements pursuant to Section 4(2) of
the Securities Act of 1933, including in reliance upon the exemption provided by
Regulation D promulgated thereunder to "accredited investors" in those states in
which it was authorized to do so. Each of the Private Placements was conducted
on a best-efforts basis, and there was no underwriter involved in any of the
Private Placements.
The placement agent fees paid in connection with the August 20, 1996
Private Placement were $2,513,550. Such placement agent fee is included in the
"Issuance Costs" listed in the table above. No placement agent fees were paid in
connection with the April 1, 1996 Private Placement.
ITEM 6--SELECTED FINANCIAL DATA
The following sets forth selected financial and operating information for
the Company (i) on a historical basis for each of the periods and dates
indicated and (ii) on a pro forma basis at and for the year ended December 31,
1996. The following information should be read in conjunction with the financial
statements and notes thereto of the Company included elsewhere in this report.
The selected historical financial and operating information for the Company at
December 31, 1996, 1995 and 1994, and for each of the three years in the period
ended December 31, 1996 has been derived from the Company's historical financial
statements audited by Ernst & Young LLP, independent auditors, whose report with
respect thereto is included elsewhere in this Prospectus. The selected
historical financial and operating information for the Company at December 31,
1993 and 1992 and for the period June 22, 1992 to December 31, 1992 has been
derived from the Company's historical audited financial statements.
23
<PAGE>
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------
Historical
----------
1996 1995 1994 1993 1992(1)
---- ---- ---- ---- ----
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Income Statement Data:
Revenue
Rental........................... $ 20,250 $ 12,410 $ 6,647 $ 1,230 $ --
Reimbursement.................... 4,814 2,355 884 --
Interest......................... 168 201 52 63 16
-------- -------- -------- -------- -------
Total revenue................. 25,232 14,966 7,583 1,293 16
-------- -------- -------- -------- -------
Expenses:
Real estate taxes................ 3,954 2,625 1,418 292
Other property operating......... 6,549 3,967 1,944 181
General and administrative....... 2,242 923 561 177 10
Interest......................... 3,778 2,296 911 73
Depreciation and amortization 4,000 1,955 761 160
-------- -------- -------- ------- -------
Total expenses................ 20,523 11,766 5,595 883 10
-------- -------- -------- -------- -------
Income before gain or sale
of properties.................... 4,709 3,200 1,988 410 6
Gain on sale of properties......... 3,140 -- -- --
-------- -------- -------- -------- -------
Net income......................... $ 7,849 $ 3,200 $ 1,988 $ 410 $ 6
======== ======== ======== ======== =======
Net income per common share and
common share equivalent.......... $ 1.32 $ 0.88 $ 0.96 $ 0.38 $ 0.02
======== ======== ======== ======== =======
Weighted average common share and
common share equivalent.......... 5,927 3,650 2,070 1,081 316
Balance Sheet Data (end of period):
Properties - net of accumulated
depreciation..................... $184,122 $ 91,858 $ 37,234 $ 17,409 $ --
Total assets....................... $194,149 $ 98,978 $ 42,522 $ 21,919 $ 2,784
Total long-term debt............... $ 86,111 $ 48,307 $ 15,955 $ 3,777 $ --
Total liabilities.................. $ 97,554 $ 54,013 $ 18,460 $ 5,420 $ 3
Stockholders' equity............... $ 96,595 $ 44,965 $ 24,062 $ 16,498 $ 2,781
Operating Data:
EBITDA (2)......................... $ 12,487 $ 7,451 $ 3,660 $ 643 $ 6
Funds from Operations (3):
Net income....................... $ 7,849 $ 3,200 $ 1,988 $ 410 $ 6
Gain on sale of properties....... (3,140)
Depreciation and amortization.... 3,741 1,824 718 160 --
-------- -------- -------- ------- ----
Funds from Operations............ 8,450 5,024 2,706 570 6
Cash dividends per share........... $ 1.20 $ 1.13 $ 0.96 $ 0.47 $ --
Cash flows from operating activities 12,828 5,650 1,977 1,569 9
Cash flows from investing activities (91,211) (51,650) (20,493) (17,558) (45)
Cash flows from financing activities 78,768 44,626 17,420 17,021 2,776
Number of properties owned
at period end.................... 25 16 9 6 --
Aggregate square feet of
properties owned at period end... 2,684 1,529 758 441 --
Occupancy at period end of
properties owned at period end... 92% 86% 84% 78% --
</TABLE>
- ---------------------
(1) Represents the period from June 22, 1992 (the date of the Company's
inception) to December 31, 1992.
(2) EBITDA is defined as net income before interest, gain on sale of
properties, taxes, depreciation and amortization expenses. Because of the
Company's REIT status, the Company does not pay income taxes. EBITDA should
not be considered as an alternative to net income (determined in accordance
with GAAP) as an indicator of the Company's financial performance or to
cash flow from operating activities (determined in accordance with GAAP) as
a measure of the Company's liquidity, nor is it indicative of funds
available to fund the Company's cash needs, including its ability to make
distributions.
24
<PAGE>
(3) The White Paper on Funds From Operations approved by the Board of Governors
of the National Association of Real Estate Investment Trusts ("NAREIT") in
March 1995 (the "White Paper") defines Funds from Operations as net income
(loss) (computed in accordance with GAAP), excluding gains (or losses) from
debt restructuring and sales of property, plus real estate related
depreciation and amortization and after adjustments for unconsolidated
partnerships and joint ventures. Management considers Funds from Operations
an appropriate measure of performance of an equity REIT because it is
predicated on cash flow analyses. The Company computes Funds from
Operations in accordance with standards established by the White Paper
which may differ from the methodology for calculating Funds from Operations
utilized by other equity REITs and, accordingly, may not be comparable to
such other REITs. Funds from Operations should not be considered as an
alternative to net income (determined in accordance with GAAP) as an
indicator of the Company's financial performance or to cash flow from
operating activities (determined in accordance with GAAP) as a measure of
the Company's liquidity, nor is it indicative of funds available to fund
the Company's cash needs, including its ability to make distributions.
ITEM 7--MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Recent Events
Since July 1, 1996, the Company acquired ten Properties at an
aggregate cost of $95.3 million. In addition, in the fourth quarter of
1996, the Company disposed of two properties, with a weighted average
holding period of 19 months, in tax-deferred transactions. The total
sales price of $12.1 million represented a 36% increase over the aggregate
cost of these properties (including leasing commissions).
On April 1, 1996, the Advisor was merged into the Company in exchange for
100,000 shares of Common Stock. Pursuant to several agreements between the
Advisor and the Company, the Advisor had provided various services to the
Company, including administrative and management services relating to the
Company's day-to-day operations, day-to-day property management services and
various support services.
During 1996, the Company issued approximately 3.9 million shares of Common
Stock in a private placement to six institutional investors, raising net
proceeds of approximately $47.4 million. These proceeds were used to acquire
Properties and to repay indebtedness. In addition, the Company entered into the
Credit Facility, which amended and restated the Company's prior bank credit
facility. Among other things, this amendment increased the maximum borrowing
limit under the Credit Facility from $50 million to $75 million.
Results of Operations
Year Ended December 31, 1996 Compared to 1995. The changes in the income
statement items in 1996 compared to 1995 are as follows:
Increase (Decrease)
Rents and reimbursements........................... $10,299,000
Interest and other................................. (33,000)
----------
Total Revenues............................. 10,266,000
----------
Real estate taxes.................................. 1,330,000
Other property operating........................... 2,581,000
General and administrative......................... 1,319,000
Interest........................................... 1,482,000
Depreciation and amortization...................... 2,045,000
----------
Total expenses............................. 8,757,000
----------
Income before gain on sale of properties... 1,509,000
Gain on sale of properties................. 3,140,000
----------
Net income................................. $4,649,000
==========
25
<PAGE>
In analyzing the operating results for the year ended December 31, 1996,
the increases in rental income, real estate taxes and other property operating
expenses (which include management fees (through the date of the Merger),
repairs and maintenance, janitorial and other services related to the operation
of the Properties) compared to 1995 are due principally to three factors: (i)
the addition of operating results from properties acquired in 1996 from the
dates of their respective acquisitions, (ii) a complete year's operating results
attributable to properties acquired in 1995 compared to the partial period of
operating results from the dates of their respective acquisitions in 1995 and
(iii) improved operations of properties during 1996 compared to 1995.
During the year ended December 31, 1996, the Company acquired 10
properties. The operating results of these properties have been included in the
Company's financial statements from the dates of their respective acquisitions.
In 1995, the Company acquired seven properties, and in 1996 a full year of
operations of these properties has been included in the Company's financial
statements.
A summary of these changes as they impact rental income, real estate
taxes and other property operating expenses for 1996 follows:
<TABLE>
<CAPTION>
Rental and Other Property
Reimbursement Real Estate Operating
Income Taxes Expenses
------ ----- --------
<S> <C> <C> <C>
Increase due to 1996 acquisitions........ $ 3,392,000 $ 462,000 $ 940,000
Increase due to inclusion of results of
properties acquired during 1995....... 5,413,000 1,040,000 1,220,000
Increase due to operations of properties
sold in 1996.......................... 801,000 58,000 239,000
1996 operations compared to 1995 for
properties owned at 12/31/95.......... 693,000 (230,000) 182,000
------------- ------------- -------------
Total increase in 1996................... $ 10,299,000 $ 1,330,000 $ 2,581,000
============= ============= =============
</TABLE>
Interest expense during the year ended December 31, 1996 increased by
$1,482,000 as the Company had greater amounts of long and short-term debt
outstanding in 1996. This debt was used to finance the acquisition of properties
acquired in 1995 and 1996.
General and administrative expenses increased by $1,319,000 due to the
increase in the size of the Company ($875,000), increased audit and legal fees
($174,000), increased directors fees ($41,000), and the increase in amortization
of deferred compensation ($229,000).
Depreciation and amortization increased in 1996 by $2,045,000 as the
Company incurred these expenses on 25 properties in 1996 compared to 16
properties in 1995.
26
<PAGE>
Year Ended December 31, 1995 Compared to 1994. The changes in the income
statement items in 1995 compared to 1994 are as follows:
Increase (Decrease)
Rents and reimbursements..................... $ 7,234,000
Interest..................................... 149,000
----------
Total Revenues....................... 7,383,000
----------
Real estate taxes............................ 1,207,000
Other property operating..................... 2,024,000
General and administrative................... 362,000
Interest..................................... 1,385,000
Depreciation and amortization................ 1,193,000
----------
Total expenses....................... 6,171,000
----------
Net income........................... $1,212,000
==========
During 1995, the Company acquired seven properties. The operating results
of these properties have been included in the Company's financial statements
from the dates of their respective acquisitions. In 1994, the Company acquired
three properties, and in 1995 a full year of operations of these properties has
been included in the Company's financial statements as compared to the operating
results of these three properties only from the respective dates of their
acquisitions in 1994. In analyzing the 1995 operating results of the Company,
the changes in rental income, real estate taxes, and other property operating
expenses from 1994 are due principally to: (i) the addition of operating results
from properties acquired during 1995 from the dates of their respective
acquisition; (ii) the addition of a full year's operating results in 1995 of
properties acquired in 1994 compared to the partial year's operating results
from the dates of their respective acquisitions in 1994 and (iii) improved
operations of properties during 1995 compared to 1994. A summary of these
changes as they impact rental income, real estate taxes and other property
operating expenses for 1995 follows:
<TABLE>
<CAPTION>
Rental and Other Property
Reimbursement Real Estate Operating
Income Taxes Expenses
------ ----- --------
<S> <C> <C> <C>
Increase due to 1995 property
acquisitions.......................... $ 4,744,000 $ 1,000,000 $ 1,413,000
Increase due to inclusion of results for
properties acquired 1994.............. 1,603,000 177,000 535,000
1995 operations compared to 1994 for
properties owned at 12/31/94.......... 887,000 30,000 76,000
------------- ----------- -------------
Total increase in 1995................... $ 7,234,000 $ 1,207,000 $ 2,024,000
============= =========== =============
</TABLE>
Interest expense increased by $1,385,000 in 1995 compared to 1994 as the
Company increased its short-and long-term mortgage debt to partially finance the
acquisition of investment properties in 1995. Depreciation and amortization
increased by $1,193,000 as the Company incurred depreciation and amortization
expense on 16 properties in 1995, as compared to nine properties in 1994.
General and administrative expenses increased by $362,000 due to increased
advisory fees paid to the Advisor ($314,000) and increased professional fees
($48,000).
27
<PAGE>
Forward-Looking Statements
Certain statements in this document constitute "forward-looking statements"
within the meaning of Section 27A of the Securities Act of 1933 and Section 21E
of the Securities Exchange Act of 1934, and the Company intends that such
"forward-looking statements" be subject to the safe harbors created thereby.
The words "believe", "expect" and "anticipate" and similar expressions
identify forward-looking statements. These forward-looking statements reflect
the Company's current views with respect to future events and financial
performance, but are subject to many uncertainties and factors relating to the
Company's operations and business environment that may cause the actual results
of the Company to be materially different from any future results expressed
or implied by such forward-looking statements. Examples of such uncertainties
include, but are not limited to, changes in interest rates, increased
competition for acquisition of new properties, unanticipated expenses and delays
in acquiring properties or increasing occupancy rates and regional economic and
business conditions.
Liquidity and Capital Resources
The Company's Credit Facility is currently $75 million. In addition, the
Company is negotiating to increase the maximum amount available under the Credit
Facility to $100 million; however, the Company does not expect to consummate
such an increase until the Company anticipates that such additional amounts will
be needed. The Company anticipates that the Credit Facility will be used
primarily to acquire additional properties and for general working capital
purposes. The Credit Facility contains financial covenants including
requirements for a minimum tangible net worth, maximum liabilities to asset
values, debt service coverage and property operating net income (all calculated
in accordance with the Credit Facility). The Credit Facility also contains
restrictions on, among other things, indebtedness, investments, distributions,
liens, mergers and development activities of the Company. The Company also has a
$5 million revolving credit facility with The American National Bank and Trust
Company of Chicago that expires in June 1997 and under which no amounts are
outstanding.
The Company expects to meet its short-term liquidity requirements generally
through its available working capital and net cash provided by operations. The
Company believes that its net cash provided by operations will be sufficient to
allow the Company to make any distributions necessary to enable the Company to
continue to qualify as a REIT under the Code. The Company also believes that the
foregoing sources of liquidity will be sufficient to fund its short-term
liquidity needs for the foreseeable future, including capital expenditures,
tenant improvements and leasing commissions.
The Company expects to meet certain long-term liquidity requirements such
as property acquisitions, scheduled debt maturities, renovations, expansions and
other non-recurring capital improvements through long-term secured and unsecured
indebtedness and the issuance of additional equity securities. The Company also
expects to use funds available under the Credit Facility to fund acquisitions,
development activities and capital improvements on an interim basis.
Statements of Cash Flows
Year Ended December 31, 1996 Compared to 1995. Cash flows from operating
activities increased by $7.2 million as the Company owned 25 properties during
1996 compared to 16 properties during 1995.
Cash used by investing activities increased by $39.6 million in 1996
compared to 1995 as the Company acquired 10 properties during 1996 compared to
seven properties in 1995.
Cash provided by financing activities increased by $34.1 million as
proceeds from equity offerings increased by $28.6 million, proceeds from bank
and mortgage loans increased by $12.0 million, dividends paid increased by $3.4
million, dividends reinvested decreased by $2.6 million and cash provided by
other items declined by $0.5 million.
Year Ended December 31, 1995 Compared to 1994. Cash flows from operating
activities increased by $3.7 million in 1995 compared to 1994 as the Company
owned 16 properties in 1995 compared to nine properties in 1994.
Cash flows used by investing activities increased by $31.2 million in 1995
compared to 1994 as the Company acquired seven properties in 1995 compared to
three properties in 1994. Cash flows from financing activities increased by
$27.2 million in 1995 compared to 1994 as the Company raised $18.8 million
through the private placement of Common Stock in 1995 compared to $6 million in
1994. In addition, the Company's borrowings increased by $15 million in 1995.
28
<PAGE>
ITEM 8--FINANCIAL STATEMENTS
The financial statements and supplementary data required by Regulation S-X
are included in this Report on Form 10-K commencing on Page F-1.
ITEM 9--CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
For the year ended December 31, 1995, the Company selected Ernst & Young
LLP as its independent accountant. For the years ended December 31, 1994 and
1993, the Company's independent accountant had been Coopers & Lybrand L.L.P. The
change in independent accountants was recommended by the Audit Committee of the
Board of Directors of the Company (the "Board of Directors") and approved by the
Board of Directors on August 14, 1995. The decision of the Board of Directors to
dismiss Coopers & Lybrand L.L.P. was made notwithstanding that there were no
disagreements with the Company's former independent accountant on any matter of
accounting principles or practices, financial statement disclosures, or auditing
scope or procedure for the two most recent fiscal years and the subsequent
interim period preceding the dismissal. The opinion on the Company's financial
statements for the years ended December 31, 1994 and 1993 expressed by the
former independent accountant was unqualified. However, Coopers & Lybrand L.L.P.
considered the reissuance and inclusion of its reports on the Company's 1993 and
1994 financial statements in this Report on Form 10-K as a new engagement, and
has declined to accept this engagement. Therefore, the Company engaged Ernst &
Young LLP to conduct audits of its financial statements for the years ended
December 31, 1993 and 1994. The report of Ernst & Young LLP regarding 1994 is
included herein.
29
<PAGE>
PART III
ITEM 10--DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Executive Officers and Directors
The Board of Directors consists of seven directors, all of whom are elected
for one-year terms at each annual meeting of stockholders. The Company's bylaws
(the "Bylaws") require that a majority of the Board of Directors be comprised of
persons who are not officers or employees of the Company (each such person
serving on the Board of Directors being an "Independent Director"). Holders of
shares of Common Stock have no right to cumulative voting in the election of
directors. Consequently, at each annual meeting, a majority of the stockholders
will be able to elect all of the directors. The Company's executive officers are
elected annually by the Board of Directors; however, they may be removed at any
time by the Board of Directors.
The following table sets forth certain information with respect to the
executive officers and directors of the Company:
Name Age Position
---- --- --------
Richard A. May 52 Chairman of the Board, President
and Chief Executive Officer
Richard L. Rasley 40 Executive Vice President, Secretary,
General Counsel and Director
James Hicks 41 Senior Vice President - Finance, Chief
Financial Officer and Treasurer
Raymond M. Braun 39 Senior Vice President - Acquisitions
Kim S. Mills 48 Senior Vice President - Asset Management
and Leasing
James J. Brinkerhoff 46 Director
Daniel E. Josephs 65 Director
Edward Lowenthal 52 Director
Donald E. Phillips 64 Director
Walter H. Teninga 69 Director
RICHARD A. MAY. Mr. May co-founded the Company in 1992 and has served as
Chairman and President of the Company and as a member of the Board of Directors
since its inception. Mr. May is currently the Chairman of the Board, President
and Chief Executive Officer of the Company. In 1986, Mr. May co-founded the
Advisor and, from 1987 until April 1, 1996, Mr. May was an officer and
shareholder of the Advisor. Mr. May is a licensed real estate broker in the
States of Illinois and Indiana and holds several inactive NASD licenses. He is
also a member of NAREIT. Mr. May received his Bachelor's Degree in mechanical
engineering from the University of Illinois and received his M.B.A. degree from
The University of Chicago.
RICHARD L. RASLEY. Mr. Rasley co-founded the Company in 1992 and has served
as Secretary of the Company and a member of the Board of Directors since its
inception. Mr. Rasley is currently the Executive Vice President, General Counsel
and Secretary of the Company and has general supervisory responsibility for
administrative and legal matters. From 1987 until April l, 1996, Mr. Rasley was
employed by the Advisor; he was an officer and shareholder of the Advisor. Mr.
Rasley is a Certified Public Accountant, holds several inactive NASD licenses,
and is a member of the Illinois Bar and NAREIT. Mr. Rasley received his
Bachelor's Degree from the University of Iowa and received his M.B.A. and J.D.
degrees from the University of Illinois.
30
<PAGE>
JAMES HICKS. Mr. Hicks joined the Advisor in 1994 and currently has general
supervisory responsibility for the finance and accounting activities of the
Company. From 1989 to 1993, Mr. Hicks was employed by JMB Institutional Realty
Corporation, which was a real estate adviser to pension funds and other
institutional investors, as a vice president of portfolio management with
responsibility for overall asset management of a portfolio of international and
domestic commercial real estate properties. He received his Bachelor's Degree in
Accounting and Mathematics from Augustana College and his M.B.A. degree from
Northwestern University. Mr. Hicks is a Certified Public Accountant and is a
member of the Illinois CPA Society and American Institute of Certified Public
Accountants.
RAYMOND M. BRAUN. Mr. Braun joined the Advisor in May 1990 and currently
has primary responsibility for all of the Company's real estate acquisition
activities. Prior to joining the Advisor, Mr. Braun was employed from 1986 to
1990 by The Balcor Company, a major real estate investment company involved in
all aspects of real estate including development, management, syndication and
mortgage lending. Mr. Braun received his Bachelor's Degree from the University
of Illinois. Mr. Braun is a member of the National Association of Industrial and
Office Park Realtors.
KIM S. MILLS. Mr. Mills joined the Advisor in January 1996. Mr. Mills has
primary responsibility for all of the Company's asset management, property
management and leasing activities. Prior to joining the Advisor, Mr. Mills was
employed by Simon Property Group REIT, a commercial property REIT, from 1992 to
1995 as a regional manager with responsibility for overall portfolio management
of high rise office buildings totalling over four million square feet. Mr. Mills
received his Bachelor's Degree from Ohio Northern University and has a Real
Property Administrator designation from the Building Owners and Managers
Association.
JAMES J. BRINKERHOFF. Mr. Brinkerhoff has served as a member of the Board
of Directors since August 1996. Mr. Brinkerhoff was appointed to the Board of
Directors pursuant to Fortis Benefits Insurance Company's right to nominate one
director under the Stock Purchase Agreement dated as of August 20, 1996 (the
"Stock Purchase Agreement") by and among the Company, Fortis Benefits Insurance
Company; Morgan Stanley Institutional Fund, Inc. - U.S. Real Estate Portfolio;
Morgan Stanley SICAV Subsidiary S.A., Wellsford Karpf Zarrilli Ventures, L.L.C.;
Logan, Inc.; and Pension Trust Account No. 104972 Held by Bankers Trust Company
as Trustee. Mr. Brinkerhoff is Senior Vice President, Real Estate, of Fortis
Advisers, Inc. ("Fortis Advisers"), the New York-based investment management arm
of Fortis, Inc. Prior to joining Fortis Advisers in 1994, he was Senior Vice
President and Portfolio Manager with Aldrich, Eastman & Waltch, responsible for
managing the United States Real Estate Portfolio of the Church Commissioners for
England. From 1983 to 1993, he was an officer and partner of Chesterton
International, a London-based real estate adviser, where he was responsible for
the creation and management of the Church Commissioners' United States Real
Estate Portfolio. Mr. Brinkerhoff received his M.B.A. degree from the Wharton
School, University of Pennsylvania, and his Bachelor's Degree from Boston
University. He is a full member of the Urban Land Institute.
DANIEL E. JOSEPHS. Mr. Josephs has served as a member of the Board of
Directors since March 1993. Mr. Josephs is currently an independent business
consultant. From 1985 through 1995, Mr. Josephs served as the President, Chief
Operating Officer and Director of Dominick's Finer Foods of Northlake, Illinois,
a major Chicago-area retail grocery company. Mr. Josephs currently serves on the
Board of Directors of Grand Union Company, a regional grocery firm, and the
Board of Directors of Options for People, Inc., a Chicago-area non-profit
concern. Mr. Josephs received his Bachelor's Degree from Northwestern University
and received his M.B.A. degree from The University of Chicago.
EDWARD LOWENTHAL. Mr. Lowenthal has served as a member of the Board of
Directors since August 1996. Mr. Lowenthal was nominated to the Board of
Directors pursuant to Wellsford Karpf Zarrilli Ventures, L.L.C.'s right to
appoint one director under the Stock Purchase Agreement. Mr. Lowenthal is a
Founder, Director and President of Wellsford Residential Property Trust ("WRP"),
a NYSE-listed multi-family REIT. On January 17, 1997, Equity Residential
Properties Trust ("Equity Residential"), a publicly traded apartment properties
REIT,
31
<PAGE>
announced that it had agreed to acquire WRP and that such acquisition was
expected to be completed by May 1997, subject to shareholder approval. Upon
completion of Equity Residential's acquisition of WRP, it is expected that Mr.
Lowenthal will (i) join the Board of Directors of Equity Residential and (ii)
serve as President of Wellsford Real Properties Inc., a newly formed real estate
investment company. Mr. Lowenthal is a member of the Board of Governors of
NAREIT and was Co-chair of its 1993 Annual Meeting. Mr. Lowenthal currently
serves as a member of the Boards of Directors of Omega Healthcare Investors,
Inc., an investment company and Corporate Renaissance Partners, a securities
mutual fund. Mr. Lowenthal is also a member of the Board of Trustees of
Corporate Realty Income Trust, a private REIT that invests in triple-net leased
commercial and industrial properties. He received his Bachelor's Degree from
Case Western University and received his J.D. degree from Georgetown University
Law Center.
DONALD E. PHILLIPS. Mr. Phillips has served as a member of the Board of
Directors since September 1992. Mr. Phillips is currently retired. From 1960
until 1980, Mr. Phillips served as a corporate executive in a variety of
capacities for International Minerals & Chemicals Corporation of Northbrook,
Illinois and, from 1976 to 1980, he was Group President & CEO of IMC Industry
Group, Inc. ("IMC"), a chemical and minerals firm. From 1980 until 1988, he
served as Group President & CEO of Pitman Moore, Inc., then a wholly owned
subsidiary of IMC. Mr. Phillips presently serves as Chairman of the Board of
Directors of Synbiotics Corporation of Rancho Bernardo, California, a
manufacturer and distributor of veterinary devices and products. Mr. Phillips is
also a member of the Board of Directors of Potash Corporation of Saskatchewan,
Canada, a miner and distributer of minerals for agricultural application. Mr.
Phillips received his Bachelor's Degree from Mississippi College and received
his M.B.A. degree from the University of Mississippi. He is also a graduate of
the Executive Program in Business Administration in the Graduate School of
Business, Columbia University and he is a recipient of an Honorary Doctor of
Laws degree from Mississippi College.
WALTER H. TENINGA. Mr. Teninga has served as a member of the Board of
Directors since September 1992. From 1991 to 1993, Mr. Teninga served as the
President and Chief Executive Officer of American Club Stores, Inc., a wholly
owned subsidiary of American Stores Company, a grocery and food distribution
business. Prior to 1991, Mr. Teninga served as Chairman, Chief Executive Officer
and Director of the Warehouse Club, a wholesale cash-and-carry warehouse
business that he founded in 1982. Mr. Teninga is currently a member of the Board
of Directors of Developers Diversified Realty Corporation, a NYSE-listed real
estate investment trust and Solo Serve Corporation, an off-price apparel
retailer. Mr. Teninga received his Bachelor's Degree from the University of
Michigan and his M.B.A. degree from Michigan State University.
Committees of the Board of Directors
AUDIT COMMITTEE. The Audit Committee was established by the Board of
Directors in 1993 and is responsible for making recommendations concerning the
engagement of independent public accountants, reviewing with the independent
accountants the plans and results of the audit engagement, approving
professional services provided by the independent public accountants,
considering the range of audit and non-audit professional fees and reviewing
with the independent accountants and management the adequacy of the Company's
internal accounting controls. The Audit Committee is required to be comprised of
two or more Independent Directors. The current members of the Audit Committee
are Messrs. Josephs (Chairman), Brinkerhoff and Teninga.
COMPENSATION COMMITTEE. The Compensation Committee was established by the
Board of Directors in 1995 and is responsible for establishing remuneration
levels for executive officers of the Company and administering the Company's
Stock Incentive Plan and any other incentive programs. The Compensation
Committee is required to be comprised of three or more Independent Directors.
The Compensation Committee currently consists of Messrs. Phillips (Chairman),
Josephs, Lowenthal and Teninga.
32
<PAGE>
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 requires the
Company's executive officers and directors and holders of 10% or more of the
outstanding Common Stock to file an initial report of ownership (Form 3) and
reports of changes of ownership (Forms 4 and 5) of Common Stock with the
Securities and Exchange Commission. Such persons are required to furnish the
Company with copies of all Section 16(a) forms that they file. Based upon a
review of these filings, the Company notes that no Section 16 reports related
to 1996 were delinquent.
ITEM 11--EXECUTIVE COMPENSATION
Until April 1, 1996, the Company had no employees and all services were
provided by the Advisor pursuant to various fee-for-service agreements. The
table below sets forth the summary compensation of the Chief Executive Officer
and the four other most highly paid executive officers of the Company (the
"Named Executive Officers") based on the aggregate compensation paid to such
officers in 1996 (i) by the Company for the period beginning on April 1, 1996
and (ii) by the Advisor for the period from January 1, 1996 to April 1, 1996 and
for the years ended December 31, 1994 and 1995. All of the 1995 options to
purchase Common Stock and a portion of the 1996 options to purchase Common Stock
held by the Named Executive Officers were granted to the Advisor pursuant to
various services agreements and the Advisor then transferred such options to its
employees pursuant to the Advisor Plan.
33
<PAGE>
<TABLE>
<CAPTION>
Long-Term
Annual Compensation Compensation Awards
------------------- -------------------
Restricted Securities
Stock Underlying All Other
Name and Principal Position Year Salary($)(1) Bonus($) Awards($)(2) Options(#)(3) Compensation ($)(4)
- --------------------------- ---- ------------ -------- ------------ ------------- -------------------
<S> <C> <C> <C> <C> <C> <C>
Richard A. May 1996 180,000 72,000 -- 49,578 4,038
Chairman 1995 150,000 15,000 -- 229,568 4,432
1994 128,750 15,000 -- -- 4,432
Richard L. Rasley 1996 115,000 34,500 102,852 20,785 4,007
Executive Vice President 1995 100,000 10,000 -- 86,310 4,438
1994 93,133 17,300 -- -- 4,352
Raymond M. Braun 1996 105,000 36,750 222,852 18,800 4,224
Senior Vice President - 1995 86,875 9,000 -- 36,300 4,421
Acquisitions 1994 70,333 13,000 -- -- 4,525
James Hicks 1996 100,000 30,000 51,432 14,800 4,213
Senior Vice President, 1995 86,875 9,000 -- 18,200 4,421
Chief Financial Officer 1994 47,470 4,850 -- -- 2,278
Kim S. Mills 1996 100,000 30,000 -- 12,000 255
Senior Vice President -
Asset Management (5)
</TABLE>
- ---------------------
(1) The salary information for 1996 represents the individual's salary
compensation for the period from January 1, 1996 to April 1, 1996 as paid
by the Advisor and for the period from April 1, 1996 to December 31, 1996
as paid by the Company.
(2) Effective April 1, 1996 and in connection with the Merger, Messrs. Rasley,
Braun and Hicks received 8,571, 8,571 and 4,286 restricted shares of Common
Stock, respectively, as an inducement to accept employment with the
Company. Effective May 1, 1996, Mr. Braun received an additional 10,000
restricted shares as an inducement to remain employed with the Company.
Such restricted shares were valued at prices equal to the fair market value
on the dates of grant, which in all cases was deemed to be $12.00 (the Net
Asset Value as of such date). As of December 31, 1996, the number of
restricted shares of Common Stock held by Messrs. Rasley, Braun and Hicks
was 8,571, 18,571 and 4,286, respectively. As of December 31, 1996, the
value of the restricted shares held by Messrs. Rasley, Braun and Hicks was
$111,423, $241,423 and $55,718, respectively (based upon a Net Asset Value
of $13.00). Dividends will be paid on all restricted shares held by Messrs.
Rasley, Hicks and Braun. On April 1, 1997, the restrictions will lapse with
respect to 4,285.5 restricted shares held by Messrs. Rasley and Braun and
with respect to 2,143 restricted shares held by Mr. Hicks. On April 1, 1998
and provided that the recipient is still employed by the Company, the
restrictions will lapse with respect to the remaining restricted shares
held by Messrs. Rasley and Hicks and with respect to 4,285.5 restricted
shares held by Mr. Braun. Notwithstanding anything to the contrary
contained in this note (3), the restrictions with respect to all restricted
shares held by Messrs. Rasley and Hicks and with respect to 8,571
restricted shares held by Mr. Braun will lapse upon the earlier of (i) the
employee's death, (ii) the employee's total and permanent disability, (iii)
the completion of a public offering of the Common Stock or (iv) the
dismissal of the employee other than for cause.
(3) Options granted during 1996 were issued at exercise prices equal to the
fair market value on the dates of grant, which was the Net Asset Value as
of such date. Options granted during 1995 and options to purchase 17,578,
6,785, 2,800 and 2,800 shares of Common Stock deemed to have been granted
to Messrs. May, Rasley, Braun and Hicks, respectively, in 1996 represent
Advisor Options that were assigned to such individuals by the Advisor
during 1995 from a pool of options that had been granted to the Advisor by
the Company pursuant to service agreements at various times during the
period from the Company's incorporation through December 31, 1995. Advisor
Options were exercisable on the date of grant. Options granted under the
1996 Option Plan expire upon the earliest of (i) September 24, 2006, (ii)
one year after the termination of the optionee for death or disability or
(iii) three months after the termination of the optionee for cause. Options
granted under the 1996 Option Plan become exercisable at the rate of
one-third of the shares covered thereby on September 24 in each of 1997,
1998 and 1999. See "-- Stock Option Plans."
(4) These amounts represent group life and health insurance premiums paid by
the Advisor (for 1995) and the Advisor and Company (for 1996).
(5) Mr. Mills became an employee of the Advisor in January 1996; therefore, no
information is presented for 1994 or 1995.
34
<PAGE>
Stock Option Plans
1996 Incentive Stock Option Plan
The Company has adopted the 1996 Incentive Stock Option Plan (the "1996
Option Plan") for the purpose of attracting and retaining certain key employees.
The 1996 Option Plan is administered by the Compensation Committee and provides
for the granting of options with respect to up to 500,000 shares of Common Stock
to executives or other key employees of the Company. Options may be granted in
the form of "incentive stock options," as defined in Section 422 of the Code, or
non-statutory stock options and are exercisable for up to ten years following
the date of grant (five years in certain cases involving incentive stock
options). The exercise price and other terms, including vesting provisions, of
each option will be set by the Compensation Committee; provided, however, that
in no event will the price per share be less than the fair market value of the
Common Stock on the date of grant, or 110% of the fair market value of the
Common Stock on the date of grant if the option is granted to an individual who
at the time the option is granted owns stock possessing more than 10% of the
total combined voting power of all classes of stock of the Company or its parent
or subsidiary; provided further that no option can vest until the first
anniversary of the date of grant. Vested options granted under the 1996 Option
Plan expire the earlier of (i) ten years from the date of grant (five years in
certain cases involving incentive stock options), (ii) one year after the
termination of the optionee for death or disability or (iii) three months after
the termination of the optionee for cause.
Effective September 24, 1996, 94,000 options were granted under the 1996
Option Plan. Such options become exercisable at the rate of one-third of the
shares covered thereby on September 24 in each of 1997, 1998 and 1999.
Advisor Stock Option Plan
Effective July 2, 1992, the Company adopted the Advisor Stock Option Plan
(the "Advisor Plan") pursuant to which the Advisor was granted options to
purchase Common Stock ("Advisor Options"), which the Advisor could transfer to
key employees or affiliates of the Advisor. All Advisor Options have an exercise
price at least equal to the fair market value of the Common Stock on the date of
grant and terminate ten years after the date of grant. In connection with the
merger of the Company and the Advisor, the Advisor Plan was terminated effective
April 1, 1996, subject to the rights of holders of Advisor Options granted prior
to the termination of the Advisor Plan.
During the period of 30 days after any "change in control," a person
entitled to exercise an option granted under the Advisor Plan may elect to
require the Company to purchase all or any portion of such option at a purchase
price equal to the difference between the fair market value and the option
exercise price. For purposes of the Advisor Plan, a "change in control" means
(i) certain consolidations or mergers of the Company, (ii) certain sales of all
or substantially all of the assets of the Company, (iii) the filing of a
Schedule 13D or Schedule 14D-1 under the Exchange Act disclosing that any person
has become the beneficial owner of 20% or more of the issued and outstanding
shares of voting securities of the Company or (iv) during any period of two
consecutive years, individuals who at the beginning of any such period
constitute the Board of Directors cease for any reason to constitute at least a
majority thereof unless the election, or the nomination for election by the
Company's stockholders, of each new member of the Board of Directors was
approved by a vote of at least two-thirds of the members of the Board of
Directors then still in office at the beginning of any such period.
Under the Advisor Plan, the Advisor was granted annually options to
purchase Common Stock equal to 1% of the average total outstanding shares for
each 1% that the Operations Yield (as defined in the Advisory Agreement)
exceeded 10%. Options granted under the Advisor Plan were exercisable on the
date of grant. For the three months ended March 31, 1996, the Advisor was
granted options to purchase 41,424 shares of Common Stock at an exercise price
of $12.00 per share. These options expire March 31, 2006. The Advisor has
assigned
35
<PAGE>
a total of 29,963 of these options to Messrs. May, Rasley, Braun and Hicks. For
the year ended December 31, 1995, the Advisor was granted (i) options to
purchase 143,777 shares of Common Stock at an exercise price of $12.00 per share
and an expiration date of December 31, 2005, (ii) options to purchase 77,949
shares of Common Stock at an exercise price of $12.25 per share and an
expiration date of June 30, 2000 and (iii) options to purchase 20,783 shares of
Common Stock at an exercise price of $13.50 per share and an expiration date of
December 31, 2000. The Advisor assigned a total of 180,397 of these options to
Messrs. May, Rasley, Braun and Hicks. For the year ended December 31, 1994, the
Advisor was granted options to purchase 60,150 shares of Common Stock at an
exercise price of $10.75 per share and an expiration date of December 31, 2004.
The Advisor assigned a total of 44,887 of these options to Messrs. May, Rasley,
Braun and Hicks.
The following tables set forth certain information regarding stock options
granted to and exercised by the Named Executive Officers during 1996 and the
stock options held by them as of December 31, 1996:
<TABLE>
<CAPTION>
Option Grants in Last Fiscal Year
Individual Grants
-----------------
% of Total
Number of Options Potential Realizable Value at
Securities Granted to Assumed Annual Rates of
Underlying Employees Exercise Stock Price Appreciation for
Options in Fiscal Price Expiration Option Term
Name Granted Year ($/sh) Date 5% ($)(3) 10% ($)(3)
- -------------------- ------------- ------------ ------------ ------------ ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
Richard A. May...... 17,578(1) 12.98% $12.00 3/31/06 $132,657 $336,178
32,000(2) 23.63% 13.00 9/24/06 261,620 662,997
Richard L. Rasley... 6,785(1) 5.01% 12.00 3/31/06 51,205 129,763
14,000(2) 10.34% 13.00 9/24/06 114,459 290,061
Raymond M. Braun.... 2,800(1) 2.07% 12.00 3/31/06 21,131 53,550
16,000(2) 11.81% 13.00 9/24/06 130,810 331,498
James Hicks......... 2,800(1) 2.07% 12.00 3/31/06 21,131 53,550
12,000(2) 8.86% 13.00 9/24/06 98,108 248,624
Kim S. Mills........ 12,000(2) 8.86% 13.00 9/24/06 98,108 248,624
</TABLE>
- ---------------------
(1) Options were assigned under the Advisor Plan and vested on March 31, 1996,
the date of grant.
(2) Options were granted under the 1996 Option Plan and become exercisable at
the rate of one-third of the shares covered thereby on September 24 in each
of 1997, 1998 and 1999.
(3) Assumed annual rates of stock price appreciation for illustrative purposes
only as required by the rules of the SEC. The actual price of Common Stock
will vary from time to time based upon market factors and the Company's
financial performance. No assurance can be given that such rates will be
achieved.
36
<PAGE>
Aggregated Option Exercises in Last
Fiscal Year and Fiscal Year-End Option Values
<TABLE>
<CAPTION>
Number of Securities Value of Unexercised
Underlying Unexercised In-The-Money
Options at Fiscal Options at
Year-End (#) Fiscal Year-End ($)
Shares Acquired Value Exercisable/ Exercisable/
Name on Exercise (#) Realized Unexercisable Unexercisable (1)
- --------------------------- --------------- -------- ------------------------- -----------------------
<S> <C> <C> <C> <C>
Richard A. May............. 192,637 $415,754 54,509/32,000 $37,023/0
Richard L. Rasley.......... 0 0 93,095/14,000 $175,031/0
James Hicks................ 13,400 $16,000 7,600/12,000 $4,825/0
Raymond M. Braun........... 8,075 $24,975 31,025/16,000 $48,525/0
Kim S. Mills............... 0 0 0/12,000 0/0
</TABLE>
- ---------------------
(1) Value was calculated by subtracting the exercise price from the Net Asset
Value as of December 31, 1996.
Compensation of Directors
Members of the Board of Directors and committees thereof who are not also
officers of the Company receive an annual retainer fee of $10,000 plus fees of
$1,000 for each day on which they attend a meeting of the Board of Directors,
$500 for each day on which they attend a meeting of a Committee of the Board of
Directors and $250 for each day in which they participate telephonically in a
meeting of the Board of Directors or a Committee thereof. The Company reimburses
each director for expenses incurred in attending meetings. In addition,
directors who are not also officers of the Company are currently eligible to be
granted options to acquire up to 5,000 shares of Common Stock under the Stock
Option Plan for Independent Directors and Brokers (the "Directors Plan") at the
Company's Net Asset Value as determined by the Board of Directors as of the end
of each fiscal year. As compensation for services performed during 1996, each of
Messrs. Brinkerhoff, Josephs, Lowenthal, Phillips and Teninga received an option
to purchase 5,000 shares of Common Stock at an exercise price of $13.00 per
share. Mr. Brinkerhoff assigned his stock option to Fortis Benefits Insurance
Company. Such options were exercisable when granted and will expire on December
31, 2006 or six months after a director is removed by the stockholders for cause
pursuant to the Bylaws.
During the period of 30 days after any "change in control," a person
entitled to exercise an option granted under the Directors Plan may elect to
require the Company to purchase all or any portion of such option at a purchase
price equal to the difference between the fair market value and the option
exercise price. For purposes of the Directors Plan, a "change in control" means
(i) certain consolidations or mergers of the Company, (ii) certain sales of all
or substantially all of the assets of the Company, (iii) the filing of a
Schedule 13D or Schedule 14D-1 under the Exchange Act disclosing that any person
had become the beneficial owner of 20% or more of the issued and outstanding
shares of voting securities of the Company or (iv) during any period of two
consecutive years, individuals who at the beginning of any such period
constitute the Board of Directors cease for any reason to constitute at least a
majority thereof unless the election, or the nomination for election by the
Company's stockholders, of each new member of the Board of Directors was
approved by a vote of at least two-thirds of the members of the Board of
Directors then still in office at the beginning of any such period.
Change in Control Agreements
The Company has entered into change in control agreements with Messrs. May,
Rasley, Braun, Hicks and Mills providing for the payment of specified benefits
under the circumstances described below after a "change in control." If a
"change in control" occurs, the executive will receive an amount equal to two
times the sum of his base salary plus two times the amount that would otherwise
be earned under certain existing executive compensation plans and arrangements
if within the period commencing on the date of a "change in control" and
37
<PAGE>
ending on the last day of the month in which occurs the second anniversary
of the "change in control" of the Company (the "Employment Period"), the
executive's employment with the Company is terminated (a "Termination")
other than for death, disability or "cause" or termination by the executive
for "good reason," defined as (i) the executive's resignation or retirement
is requested by the Company other than for cause; (ii) any significant change
in the nature or scope of the executive's duties or level of authority and
responsibility; (iii) any reduction in the executive's applicable total
compensation or benefits other than a reduction in compensation or benefits
applicable to substantially all of the Company's employees; (iv) a breach by
the Company of any other material provision of the change in control
agreement; or (v) a reasonable determination by the executive that, as a
result of a change in control of the Company and a change in circumstances
thereafter significantly affecting the executive's position, the
executive is unable to exercise the prior level of the executive authority and
responsibility. A "change in control" is deemed to occur under the change in
control agreements if (i) any person other than certain "excluded persons"
becomes the beneficial owner of 50% or more of the Company's
outstanding Common Stock (a "50% Beneficial Owner"), (ii) during any
twenty-four-month period, individuals who at the beginning of such period
constitute the Board of Directors (the "Incumbent Board") cease for any reason
to constitute at least a majority of the Board of Directors; provided, however,
that any individual becoming a director during such period whose election, or
nomination for election by the Company's stockholders, was approved by a vote of
at least a majority of the directors then comprising the Incumbent Board shall
be considered as though such individual were a member of the Incumbent Board,
but excluding for this purpose any such individual whose initial assumption of
office is in connection with an actual or threatened contest for the election of
directors (as such terms are used in Rule 14a-11 of Regulation 14A promulgated
under the Exchange Act, or any successor rule) or other actual or threatened
solicitation of proxies or consents by or on behalf of a person other than the
Board of Directors, (iii) certain consolidations or mergers of the Company or
(iv) certain sales, leases, exchanges or other transfers of all, or
substantially all, of the assets of the Company. An executive subject to a
Termination will be subject to a non-competition agreement for the Employment
Period.
Limited Purpose Employee Loan Program
The Company has established the Limited Purpose Employee Loan Program (the
"Employee Loan Program") for the purpose of attracting and retaining certain key
employees by facilitating their ability to exercise options to purchase Common
Stock. Under the Employee Loan Program, the Compensation Committee may authorize
the Company to make loans and loan guarantees to, or for the benefit of, any
employee of the Company to whom options to purchase Common Stock have been
granted. Under the Employee Loan Program, employees may borrow up to 90% of the
cost of exercising stock options held by the employee. Such loans bear interest
at the interest rate for borrowings under the Credit Facility, are recourse to
the employees and are secured by a pledge of the stock acquired by the employee
through this program. The loan expires on the earlier of the fifth anniversary
of the loan date and the date such employee's employment with the Company
ceases. As of December 31, 1996, employees had acquired an aggregate of 119,892
shares of Common Stock through this program with aggregate outstanding loan
amounts of $1.2 million due the Company. Such amount is reflected as a reduction
of stockholders' equity until the loans are repaid. Richard A. May, Chairman of
the Board, President and Chief Executive Officer of the Company, borrowed
$1,067,764 under the Employee Loan Program, all of which was outstanding at
December 31, 1996.
Compensation Committee Interlocks and Insider Participation
The Compensation Committee currently consists of Messrs. Phillips
(Chairman), Josephs, Lowenthal and Teninga. None of the members of the
Compensation Committee is or has ever been an officer or employee of the Company
or had any other relationship with the Company, except as a member of the Board
of Directors and as a stockholder.
38
<PAGE>
ITEM 12--SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding the
beneficial ownership of Common Stock as of January 31, 1997 by (i) each
director, (ii) each of the Named Executive Officers, (iii) all directors and
executive officers of the Company as a group and (iv) each other person who is
known by the Company to be the beneficial owner of 5% or more of the outstanding
shares of Common Stock. Except as indicated below, all such shares of Common
Stock are owned directly, and the indicated person has sole voting and
investment power.
<TABLE>
<CAPTION>
Number of Shares of Percentage
Common Stock as of
Name and Address of Beneficial Owner (1) Beneficially Owned(2) January 31, 1997
- ---------------------------------------- ------------------ ----------------
<S> <C> <C>
Fortis Benefits Insurance Company (3)(4)................ 1,005,000(5) 11.40%
One Chase Manhattan Plaza
41st Floor
New York, New York 10005
Morgan Stanley Asset Management Inc. (3)(4)............. 1,005,000(6) 11.40%
1221 Avenue of the Americas
21st Floor
New York, New York 10020
Wellsford Karpf Zarrilli Ventures, L.L.C. (3)(4)........ 1,000,000 11.35%
201 Hamilton Road
Ridgewood, New Jersey 07450
Logan, Inc. (4)......................................... 482,000 5.75%
720 East Wisconsin Avenue
Milwaukee, Wisconsin 53202
Raymond M. Braun (7).................................... 57,671 --
James J. Brinkerhoff.................................... -- *
James Hicks (8)......................................... 26,286 *
Daniel E. Josephs (9)................................... 64,856 *
Edward Lowenthal (10)................................... 1,005,000 11.40%
Richard A. May (11)..................................... 320,781 3.62%
Kim S. Mills ........................................... -- --
Donald E. Phillips (12)................................. 43,981 *
Richard L. Rasley (13).................................. 115,115 1.29%
Walter H. Teninga (14).................................. 44,424 *
All directors and executive officers
as a group (10 persons) (15)............................ 1,683,114 18.61%
</TABLE>
- --------------------------
* Less than 1%
(1) Except as otherwise noted, the address for each of the persons listed is
823 Commerce Drive, Suite 300, Oak Brook, Illinois 60521.
(2) Except as otherwise noted, all persons have sole voting and investment
power with respect to their shares.
(3) Based on the most recent Schedule 13D on file with the SEC, except as
discussed in footnote (4) below.
(4) The Number of Shares of Common Stock Beneficially Owned excludes (i) 54,339
shares of Common Stock held by each of Fortis Benefits Insurance Company,
Morgan Stanley Asset Management Inc. ("MSAM") and Wellsford Karpf Zarrilli
Ventures, L.L.C. ("WKZV") and (ii) 26,191 shares of Common Stock held by
Logan, Inc. that are issuable pursuant to the conversion of outstanding
shares of Preferred Stock. Upon the completion of the Offering, all of the
Company's outstanding Preferred Stock will be cancelled.
(5) Includes options exercisable within 60 days to purchase 5,000 shares of
Common Stock, which options were granted to Mr. Brinkerhoff as director
compensation and assigned by Mr. Brinkerhoff to Fortis.
(6) As reported in Amendment No. 2 to a Schedule 13D filed by MSAM on December
2, 1996, (i) MSAM has shared voting power as to 1,054,339 shares of Common
Stock and shared dispositive power as to 1,054,339 shares of Common Stock,
(ii) Morgan Stanley Institutional Fund, Inc. ("MSIF") has shared voting
power as to 643,150 shares of Common Stock and shared dispositive power as
to 643,150 shares of Common Stock, (iii) Morgan Stanley SICAV Subsidiary
S.A. (the "SICAV Subsidiary") has shared voting power as to 411,189 shares
of Common Stock and shared dispositive power
39
<PAGE>
as to 411,189 shares and (iv) Morgan Stanley Group Inc. has shared voting
power as to 1,054,339 shares of Common Stock and shared dispositive power
as to 1,054,339 shares of Common Stock. MSAM acts as investment adviser to
MSIF and the SICAV Subsidiary. Includes options exercisable within 60 days
to purchase 5,000 shares of Common Stock, which options were granted to Mr.
Platt as director compensation and assigned by Mr. Platt to MSAM.
(7) Includes options exercisable within 60 days to purchase 23,100 shares of
Common Stock.
(8) Includes options exercisable within 60 days to purchase 7,600 shares of
Common Stock.
(9) Includes options exercisable within 60 days to purchase 80,394 shares of
Common Stock.
(10) Includes options exercisable within 60 days to purchase 14,000 shares of
Common Stock.
(11) Mr. Lowenthal is a member of WKZV and may be deemed to beneficially own the
1,000,000 shares of Common Stock that are beneficially owned by WKZV. Mr.
Lowenthal disclaims beneficial ownership of all but 19,231 of such shares.
Includes options exercisable within 60 days to purchase 5,000 shares of
Common Stock.
(12) Includes options exercisable within 60 days to purchase 54,509 shares of
Common Stock and Indemnification Shares held in escrow pursuant to the
terms of the Merger.
(13) Includes options exercisable within 60 days to purchase 8,000 shares of
Common Stock.
(14) Includes options exercisable within 60 days to purchase 93,095 shares of
Common Stock and Indemnification Shares held in escrow pursuant to the
terms of the Merger.
(15) Includes options exercisable within 60 days to purchase 15,000 shares of
Common Stock. Also includes 13,952 shares owned by Mr. Teninga's spouse.
(16) Includes options exercisable within 60 days to purchase an aggregate of
313,623 shares of Common Stock.
ITEM 13--CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Advisor Relationship
Effective April 1, 1996, the Company became a self-administered REIT upon
the consummation of the merger (the "Merger") of Equity Partners, Ltd. (the
"Advisor") with and into the Company in exchange for 100,000 shares of Common
Stock. Messrs. May and Rasley, who are directors and executive officers of the
Company, owned 70.5% of the outstanding shares of Common Stock of the Advisor
and received 58,330 and 11,760 shares of Common Stock, respectively, in the
Merger. In connection with the Merger, EVEREN Securities, Inc. ("EVEREN")
rendered an opinion that the Merger was fair, from a financial point of view, to
the Company. The Merger was approved by the members of the Board of Directors
who were not also employees of the Company, affiliates of the Advisor or
employees of EVEREN. The Merger was approved by the Company's stockholders at a
special meeting of stockholders held on February 27, 1996.
From the Company's incorporation until the completion of the Merger, the
Advisor provided various services to the Company pursuant to an Advisory
Agreement dated July 2, 1992 as restated July 1, 1994, relating to the
selection, purchase, financing and operation of the Company's properties (the
"Advisory Agreement"), and pursuant to other agreements regarding property
management and offering administration activities. The Advisory Agreement and
the other agreements obligated the Advisor to manage and conduct the Company's
day-to-day operations in consideration for certain fees which were based in part
on the Company's funds from operations. Under the terms of the Advisory
Agreement and other agreements, the Advisor was paid $566,320, $791,103 and
$2,139,826 in 1993, 1994 and 1995, respectively, and $767,425 in 1996 prior to
the Merger. The Advisor also received Advisor Options under the Advisor Plan.
In connection with the Merger, the shareholders of the Advisor received
100,000 shares of Common Stock, 15,000 of which were placed in escrow to secure
the indemnification obligations of the shareholders of the Advisor (the
"Indemnification Shares"). Indemnification Shares that are not applied to
indemnifiable damages will be distributed to the shareholders of the Advisor
upon the later of (a) April 1, 2001 or (b) the expiration of the last applicable
statute of limitations within which tax-based claims can be made. In addition,
certain employees of the Advisor received restricted shares of Common Stock as
an inducement to accept employment with the Company, including 8,571, 8,571 and
4,286 restricted shares of Common Stock issued to Messrs. Rasley, Braun and
Hicks, respectively. The restrictions on these shares lapse upon the completion
of
40
<PAGE>
the Offering. In addition, effective May 1, 1996, Mr. Braun received an
additional 10,000 restricted shares of Common Stock that vest in equal annual
installments on May 1 of each of the years 1999 through 2002 provided that Mr.
Braun is then employed by the Company.
Management Loans
Pursuant to the terms of the Company's Employee Loan Program, Mr. May
borrowed $1,067,764 million in 1996, the proceeds of which were used, together
with other funds supplied by Mr. May, to pay the exercise price for options
covering 102,064 shares of Common Stock. Mr. Braun borrowed $71,325 in 1997, the
proceeds of which were used to pay the exercise price for options covering 7,925
shares of Common Stock. Such loans bear interest at the interest rate for
borrowings under the Credit Facility and are payable quarterly.
Transactions with EVEREN
In connection with rendering a fairness opinion with respect to the Merger,
EVEREN received a fee of $200,000 in 1996. The Company also agreed to reimburse
EVEREN for its reasonable out-of-pocket expenses (approximately $19,500),
including the reasonable fees and expenses of EVEREN's counsel, and to indemnify
EVEREN for certain liabilities to which it may be subject in connection with its
engagement. The Company also retained EVEREN to act as agent for the private
placement of shares of Common Stock effected pursuant to the Stock Purchase
Agreement. In connection with that private placement EVEREN received a placement
agent fee and expense reimbursements aggregating $2.2 million. Jon K. Haahr, a
Managing Director of EVEREN, was a member of the Board of Directors at the time
EVEREN was engaged by the Company to provide the fairness opinion and act as
agent with respect to the private placement of Common Stock. Mr. Haahr declined
to stand for re-election as a director when his term expired effective September
24, 1996.
Consultant Arrangement
Beginning in December 1996, the Company retained Karpf, Zarrilli & Co.
Incorporated ("Karpf Zarrilli") as a consultant in connection with certain
matters. In its capacity as consultant, the Company will pay Karpf Zarrilli up
to $25,000 per month, plus reasonable expenses. Steven A. Karpf and Frederick P.
Zarrilli are (i) Principals of Karpf Zarrilli and (ii) members of Wellsford
Karpf Zarrilli Ventures, L.L.C. ("WKZV"). WKZV is the beneficial owner of
1,054,339 shares of Common Stock and has certain registration rights with
respect to such shares of Common Stock. WKZV also has the right to designate one
individual to be nominated as a member of the Board of Directors under certain
circumstances.
Rights to Nominate Directors
Pursuant to the Stock Purchase Agreement, for so long as they own at
least 750,000 shares of Common Stock or 5% of the issued and outstanding
shares of Common Stock, each of (i) Fortis Benefits Insurance Company
("Fortis"), (ii) Morgan Stanley Asset Management Inc. and (iii) WKZV is
entitled to designate one individual to be nominated as a member of the
Board of Directors. As a result of this agreement, Messrs. Brinkerhoff
and Lowenthal were nominated by Fortis and WKZV, respectively, and joined
the Board of Directors effective August 20, 1996. They were each
renominated and elected to serve as directors for a one-year term by the
stockholders at the Company's annual meeting of stockholders that was held
on September 24, 1996.
41
<PAGE>
Registration Rights
Pursuant to the Registration Rights Agreement dated as of August 20, 1996
(the "Registration Rights Agreement") by and among the Company and Fortis
Benefits Insurance Company ("Fortis"); Morgan Stanley Institutional Fund, Inc. -
U.S. Real Estate Portfolio ("MSIF"); Morgan Stanley SICAV Subsidiary S.A. ("MS
SICAV"); Wellsford Karpf Zarrilli Ventures, L.L.C. ("WKZV"); Logan, Inc.
("Logan"); and Pension Trust Account No. 104972 Held by Bankers Trust Company as
Trustee ("Pension Trust Account No. 104972;" Fortis, MSIF, MS SICAV, WKZV, Logan
and Pension Trust Account No. 104972 are collectively referred to herein as the
"Institutional Investors") the Company has granted the Institutional Investors
certain registration rights with respect to the 3,867,000 shares of Common Stock
acquired by them pursuant to the Stock Purchase Agreement. Certain of the
Institutional Investors are principal stockholders of the Company.
42
<PAGE>
PART IV
ITEM 14--EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) 1. See Index to Financial Statements.
2. See Index to Financial Statements.
All other schedules are not submitted because the required
criterias not been met, or because the required information is
included in the consolidated financial statements or notes
thereto.
3. Exhibits:
Exhibit
Number Description of Document
------- -----------------------
3.1 Articles of Incorporation of the Company dated June 22, 1992
(Incorporated by reference from the Company's Registration
Statement on Form 10 filed with the Securities and Exchange
Commission (the "SEC") on April 29, 1996 (the "Form 10"))
3.2 Articles of Merger of Equity Partners, Ltd. (the "Advisor") into
the Company dated April 1, 1996 (Incorporated by reference from
the Form 10)
3.3 Articles Supplementary of the Company dated August 20, 1996
(Incorporated by reference from the Company's Current Report on
Form 8-K dated August 28, 1996 (the "August 1996 8-K"))
3.4 Amended and restated bylaws of the Company dated February 25,
1997 (Incorporated by reference from the Company's Registration
Statement on Form S-11 filed with the SEC on February 28, 1997
(No. 333-22619) (the "S-11")
4.1 Specimen of certificate representing shares of Common Stock
(Incorporated by reference from the Form 10)
10.1 Merger Agreement dated January 26, 1996 between the Company and
the Advisor (Incorporated by reference from the Form 10)
10.2 Amended and Restated Agreement of Limited Partnership of Great
Lakes REIT, L.P., dated December 27, 1996 (Incorporated by
reference from the Company's Current Report on Form 8-K dated
January 14, 1997 (the "January 1997 8-K"))
10.3 First Amendment to the Amended and Restated Agreement of Limited
Partnership of Great Lakes REIT, L.P., dated February 6, 1997
(Incorporated by reference from the S-11)
10.4 Offering Services Agreement dated August 15, 1995 between the
Company and the Advisor (Incorporated by reference from the Form
10)
10.5 Managing Dealer & Wholesaling Agreement dated August 20, 1995
between the Company and Chauner Securities, Inc. (Incorporated by
reference from the Form 10)
10.6 Agreement dated August 24, 1995 between the Company and EVEREN
Securities, Inc. regarding offering services (Incorporated by
reference from the Form 10)
43
<PAGE>
10.7 Indemnification Escrow Agreement dated April 1, 1996 between the
Company, Richard A. May, Richard L. Rasley, Tim A. Grodrian, and
American National Bank and Trust Company of Chicago (Incorporated
by reference from the Form 10)
*10.8.1 Restricted Stock Agreement dated April 1, 1996 between the
Company and Richard L. Rasley (Incorporated by reference from the
Form 10)
*10.8.2 Restricted Stock Agreement dated April 1, 1996 between Great
Lakes REIT and James Hicks (Incorporated by reference from the
Form 10)
*10.8.3 Restricted Stock Agreement dated April 1, 1996 between Great
Lakes REIT and Raymond Braun (Incorporated by reference from the
Form 10)
*10.8.4 Restricted Stock Agreement dated April 1, 1996 between Great
Lakes REIT and Edith M. Scurto (Incorporated by reference from
the Form 10)
*10.8.5 Restricted Stock Agreement dated April 1, 1996 between Great
Lakes REIT and Brett R. Brown (Incorporated by reference from the
Form 10)
*10.8.6 Restricted Stock Agreement dated May 1, 1996 between the
Company and Raymond Braun (Incorporated by reference from the
S-11)
10.9 Agreement dated August 24, 1995 between the Company and EVEREN
Securities, Inc. regarding fairness opinion (Incorporated by
reference from the Form 10)
*10.10 Stock Option Plan for Independent Directors and Brokers (the
"Directors Plan") dated July 2, 1992 as amended July 15, 1994
(Incorporated by reference from the Form 10)
*10.11.1 Non-qualified Stock Option Certificate dated December 31,
1995 from the Company to Jon K. Haahr (Incorporated by reference
from the Form 10)
*10.11.2 Non-qualified Stock Option Certificate dated December 31,
1995 from the Company to Wayne M. Janus (Incorporated by
reference from the Form 10)
*10.11.3 Non-qualified Stock Option Certificate dated December 31,
1995 from the Company to Daniel E. Josephs (Incorporated by
reference from the Form 10)
*10.11.4 Non-qualified Stock Option Certificate dated December 31,
1995 from the Company to Donald E. Phillips (Incorporated by
reference from the Form 10)
*10.11.5 Non-qualified Stock Option Certificate dated December 31,
1995 from the Company to Walter H. Teninga (Incorporated by
reference from the Form 10)
*10.11.6 Non-qualified Stock Option Certificate dated December 31,
1995 from the Company to Richard A. May (Incorporated by
reference from the Form 10)
*10.11.7 Non-qualified Stock Option Certificate dated December 31,
1995 from the Company to Richard L. Rasley (Incorporated by
reference from the Form 10)
*10.11.8 Non-qualified Stock Option Certificate dated December 31,
1995 from the Company to Raymond M. Braun (Incorporated by
reference from the Form 10)
*10.11.9 Non-qualified Stock Option Certificate dated December 31,
1995 from the Company to James Hicks (Incorporated by reference
from the Form 10)
*10.11.10 Non-qualified Stock Option Certificate dated December 31,
1995 from the Company to Edith M. Scurto (Incorporated by
reference from the Form 10)
44
<PAGE>
*10.11.11 Non-qualified Stock Option Certificate dated December 31,
1995 from the Company to Brett A. Brown (Incorporated by
reference from the Form 10)
*10.11.12 Form of Non-Qualified Stock Option Certificate for use in
connection with options issued pursuant to the Directors Plan
(Incorporated by reference from the S-11)
10.12 Amended and Restated Secured Revolving Loan Agreement dated
September 28, 1994 between the Company and American National Bank
and Trust Company of Chicago (Incorporated by reference from the
Form 10)
10.13 First Amendment to Amended and Restated Secured Revolving Loan
Agreement dated September 29, 1995 between the Company and
American National Bank and Trust Company of Chicago (Incorporated
by reference from the Form 10)
10.14 Second Amendment to Amended and Restated Secured Revolving Loan
Agreement dated December 27, 1995 between the Company and
American National Bank and Trust Company of Chicago (Incorporated
by reference from the Form 10)
10.15 Revolving Note dated December 27, 1995 between the Company and
American National Bank and Trust Company of Chicago for
$25,000,000 (Incorporated by reference from the Form 10)
10.16 Stock Purchase Agreement dated as of August 20, 1996 by and
among the Company, Fortis Benefits Insurance Company, Morgan
Stanley Institutional Fund, Inc. - U.S. Real Estate Portfolio,
Morgan Stanley SICAV Subsidiary SA, Wellsford Karpf Zarrilli
Ventures, L.L.C., Logan, Inc.; and Pension Trust Account 104972
Held by Bankers Trust Company as Trustee (Incorporated by
reference from the August 1996 8-K)
10.17 Registration Rights Agreement dated as of August 20, 1996 by and
among the Company, Fortis Benefits Insurance Company, Morgan
Stanley Institutional Fund, Inc. - U.S. Real Estate Portfolio,
Morgan Stanley SICAV Subsidiary SA, Wellsford Karpf Zarrilli
Ventures, L.L.C., Logan, Inc.; and Pension Trust Account 104972
Held by Bankers Trust Company as Trustee (Incorporated by
reference from the August 1996 8-K)
*10.18 Form of Change in Control Agreement between the Company and
Messrs. May, Rasley, Braun, Hicks and Mills (Incorporated by
reference from the Company's Registration Statement on Form 10/A
filed with the SEC on January 9, 1997 (the "Form 10/A")
*10.19 Form of Change in Control Agreement between the Company and Mr.
Brown and Ms. Scurto (Incorporated by reference from the Form
10/A)
*10.20 1996 Incentive Stock Option Plan of the Company (Incorporated
by reference from the Form 10/A)
*10.21 Form of Stock Option Agreement for use in connection with
incentive stock option and pursuant to the 1996 Incentive Stock
Option Plan of the Company; Richard A. May, Richard L. Rasley,
James Hicks, Raymond Braun and Kim S. Mills entered into
agreements in 1996 that evidenced 32,000, 14,000, 12,000, 16,000
and 12,000 options, respectively under the 1996 Incentive Stock
Option Plan effective September 24, 1996 (Incorporated by
reference from the Form 10/A)
*10.22 Limited Purpose Employee Loan Program of the Company
(Incorporated by reference from the Form 10/A)
*10.23 Form of Limited Purpose Employee Loan Program Promissory Note
for use in connection with limited purpose employee loans
(Incorporated by reference from the Form 10/A)
45
<PAGE>
10.24 Amended and Restated Revolving Credit Agreement (the "Amended
and Restated Revolving Credit Agreement") Dated as of December
27, 1996 among the Operating Partnership and the Company and The
First National Bank of Boston and Bank of America Illinois and
First Bank National Association and Other Banks Which May Become
Parties to the Agreement and The First National Bank of Boston as
Agent (Incorporated by reference from the January 1997 8-K)
10.25 Form of Amendment to the Amended and Restated Revolving Credit
Agreement dated as of March 1, 1997 (Incorporated by reference
from the S-11)
24.1 Powers of Attorney
27.1 Financial Data Schedule
- -----------------------------
* Management contract or compensation plan or arrangement.
(b) Reports on Form 8-K:
During the fourth quarter ended December 31, 1996, the Company filed
the following reports on Form 8-K.
Report on Form 8-K dated December 6, 1996 reporting the following
item:
Item 2. Acquisition or Disposition of Assets
Report on Form 8-K dated December 20, 1996 reporting the
following item:
Item 2. Acquisition or Disposition of Assets
46
<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,
in the City of Chicago, State of Illinois on the 28th day of March, 1997.
GREAT LAKES REIT, INC.
By: /s/ Richard A. May
-----------------------------------
Richard A. May
Chairman of the Board of Directors,
President and Chief Executive Officer
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 indicated and on the 28th day of March,
1997.
Title
/s/ Richard A. May Chairman of the Board of Directors, President
---------------- and Chief Executive Officer (Principal Executive
Richard A. May Officer)
/s/ Richard L. Rasley Executive Vice President,
----------------- Secretary, General Counsel and Director
Richard L. Rasley
/s/ James Hicks Senior Vice President-Finance,
------------------ Chief Financial Officer and Treasurer
James Hicks (Principal Financial Officer and
Principal Accounting Officer)
/s/ James J. Brinkerhoff Director
---------------------
James J. Brinkerhoff
/s/ Daniel E. Josephs Director
--------------------
Daniel E. Josephs
/s/ Edward Lowenthal Director
------------------
Edward Lowenthal
/s/ Donald E. Phillips Director
---------------------
Donald E. Phillips
/s/ Walter H. Teninga Director
---------------------
Walter H. Teninga
47
<PAGE>
Great Lakes REIT, Inc.
Index to Financial Statements
(Item 14(a))
Financial Statements
Report of Independent Auditors. F-2
Consolidated Balance Sheets as of December 31, 1996 and 1995. F-3
Consolidated Statements of Income for the years ended
December 31, 1996, 1995 and 1994. F-4
Consolidated Statements of Changes in Stockholders' Equity for the
years ended December 31, 1996, 1995 and 1994. F-5
Consolidated Statements of Cash Flows for the years ended
December 31, 1996, 1995 and 1994. F-6
Notes to Consolidated Financial Statements. F-7
Financial Statement Schedules
Schedule III - Real Estate and Accumulated Depreciation as of
December 31, 1996 S-1
Schedules, other than as listed above, are omitted for the reason that they are
not applicable or equivalent information has been included elsewhere herein.
F-1
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Great Lakes REIT, Inc.
We have audited the accompanying consolidated balance sheets of Great Lakes
REIT, Inc. as of December 31, 1996 and 1995 and the related consolidated
statements of income, changes in stockholders' equity, and cash flows for each
of the three years in the period ended December 31, 1996. Our audit also
included the financial statement schedule listed in the Index at Item 14. These
financial statements and schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Great Lakes
REIT, Inc. at December 31, 1996 and 1995, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1996 in conformity with generally accepted accounting principles.
Also, in our opinion, the related financial statement schedule, when considered
in relation to the basic financial statements taken as a whole, presents fairly
in all material respects the information set forth therein.
Ernst & Young LLP
Chicago, Illinois
January 28, 1997
F-2
<PAGE>
GREAT LAKES REIT, INC
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
ASSETS
December 31,
------------
1996 1995
---- ----
<S> <C> <C>
Properties:
Land $ 31,529,000 $ 18,673,750
Buildings, improvements, and equipment 157,902,629 75,667,086
------------- -------------
189,431,629 94,340,836
Less accumulated depreciation 5,309,666 2,482,844
------------- -------------
184,121,963 91,857,992
Cash and cash equivalents 1,688,173 1,302,728
Real estate tax escrows 1,065,182 1,424,159
Rents receivable 2,130,935 1,284,316
Deferred financing and leasing costs,
net of accumulated amortization 2,976,902 1,492,149
Goodwill, net of accumulated amortization 1,433,194
Other assets 732,533 1,617,092
------------- -------------
Total assets $ 194,148,882 $ 98,978,436
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Bank loan payable $ 63,802,368 $ 24,253,148
Mortgage loans payable 17,073,979 18,634,022
Bonds payable 5,235,000 5,420,000
Accounts payable and accrued liabilities 4,153,800 1,128,692
Accrued real estate taxes 5,423,160 3,200,570
Prepaid rent 1,170,101 469,763
Security deposits 695,570 402,480
Distributions/dividends payable 504,564
------------- -------------
Total liabilities 97,553,978 54,013,239
------------- -------------
Commitments and Contingencies:
Preferred Stock ($0.01 par value per share,
10,000,000 authorized, 210,128 issued) 2,101
Common Stock ($0.01 par value per share,
20,000,000 authorized; 8,832,268 and 4,520,896 shares
issued in 1996 and 1995, respectively) 88,323 45,209
Paid-in-capital 98,096,085 45,861,352
Retained earnings (deficit) 177,320 (785,953)
Employee stock loans (1,247,351)
Deferred compensation (251,335)
Treasury stock, at cost (21,784 and 12,951
shares in 1996 and 1995, respectively) (270,239) (155,411)
------------- -------------
Total stockholders' equity 96,594,904 44,965,197
------------- -------------
Total liabilities and stockholders' equity $ 194,148,882 $ 98,978,436
============= =============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE>
GREAT LAKES REIT, INC.
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
Revenues
Rental $20,249,565 $12,410,510 $ 6,647,362
Reimbursements 4,814,005 2,354,598 884,073
Interest and other 168,739 200,818 51,404
----------- ----------- -----------
Total revenues 25,232,309 14,965,926 7,582,839
----------- ----------- -----------
Expenses
Real estate taxes 3,954,144 2,624,588 1,417,679
Other property operating (including
$217,971, $564,369 and $273,671 of
property management earned by affiliates
in 1996, 1995 and 1994, respectively) 6,548,057 3,967,543 1,943,584
General and administrative (including
$203,697, $608,612 and $294,530 of
advisory fees earned by affiliates in
1996, 1995 and 1994, respectively) 2,242,165 922,652 561,124
Interest 3,778,065 2,296,457 911,381
Depreciation and amortization 4,000,736 1,954,885 761,284
----------- ----------- -----------
Total expenses 20,523,167 11,766,125 5,595,052
----------- ----------- -----------
Income before gain on sale of properties 4,709,142 3,199,801 1,987,787
Gain on sale of properties 3,139,892
----------- ----------- -----------
Net income $ 7,849,034 $ 3,199,801 $ 1,987,787
=========== =========== ===========
Earnings per common share
and common share equivalent $ 1.32 $ 0.88 $ 0.96
=========== =========== ===========
Weighted average number of common
shares and common share equivalents
outstanding 5,927,208 3,650,133 2,070,221
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE>
GREAT LAKES REIT, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
For the Years Ended December 31, 1996, 1995, and 1994
<TABLE>
<CAPTION>
Preferred Stock Common Stock Paid Retained
Shares Shares in Earnings Employee
Outstanding Amount Outstanding Amount Capital (Deficit) Stock Loans
----------- ------ ----------- ------ ------- --------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at 1/1/94 1,839,352 $ 18,394 $ 16,632,663 $ (152,649)
Net proceeds from the sale
of common stock 580,043 5,800 5,963,812
Net income 1,987,787
Distributions
($0.96 per share) (1,920,436)
Distributions
reinvested 142,023 1,420 1,525,331
------- ----- --------- -----------
Balance at 12/31/94 2,561,418 25,614 24,121,806 (85,298)
Net proceeds from the sale
of common stock 1,698,610 16,986 18,810,244
Exercise of stock options 32,410 324 322,571
Net income 3,199,801
Distributions
($1.13 per share) (3,900,456)
Distributions reinvested 228,458 2,285 2,606,731
Purchase of treasury stock (12,951)
------- ----- --------- -----------
Balance at 12/31/95 4,507,945 45,209 45,861,352 (785,953)
Net proceeds from the sale
of stock 210,128 2,101 3,867,000 38,670 47,378,490
Exercise of stock options 304,372 3,044 3,247,071 (1,247,351)
Net income 7,849,034
Distributions
($1.20 per share) (6,885,761)
Issuance of shares in
acquisition of Advisor, net
of issuance costs of $219,428 100,000 1,000 1,129,572
Restricted stock awards 40,000 400 479,600
Purchase of treasury stock (8,833)
Amortization of deferred
compensation
------- ------- --------- -------- ------------ --------- -------------
Balance at 12/31/96 210,128 $ 2,101 8,810,484 $ 88,323 $ 98,096,085 $ 177,320 $ (1,247,351)
======= ======= ========= ======== ============ ========= =============
</TABLE>
Total
Deferred Treasury Stockholders'
Compensation Stock Equity
------------ ----- ------
Balance at 1/1/94 $ 16,498,408
Net proceeds from the sale
of common stock 5,969,612
Net income 1,987,787
Distributions
($0.96 per share) (1,920,436)
Distributions
reinvested 1,526,751
---------
Balance at 12/31/94 24,062,122
Net proceeds from the sale
of common stock 18,827,230
Exercise of stock options 322,895
Net income 3,199,801
Distributions
($1.13 per share) (3,900,456)
Distributions reinvested 2,609,016
Purchase of treasury stock (155,411) (155,411)
-------- --------
Balance at 12/31/95 (155,411) 44,965,197
Net proceeds from the sale
of stock 47,419,261
Exercise of stock options 2,002,764
Net income 7,849,034
Distributions
($1.20 per share) (6,885,761)
Issuance of shares in
acquisition of Advisor, net
of issuance costs of $219,428 1,130,572
Restricted stock awards (480,000)
Purchase of treasury stock (114,828) (114,828)
Amortization of deferred
compensation 228,665 228,665
------- -------- -------
Balance at 12/31/96 (251,335) (270,239) $ 96,594,904
======== ======== ============
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE>
GREAT LAKES REIT, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years Ended December 31,
1996 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 7,849,034 $ 3,199,801 $ 1,987,787
Adjustments to reconcile net income to cash
flows from operating activities:
Depreciation and amortization 4,000,736 1,954,885 761,284
Amortization of deferred compensation 228,665
Gain on sale of properties (3,139,892)
Net changes in assets and liabilities:
Rents receivable (846,619) (714,156) (499,425)
Real estate tax escrows 358,977 (489,937) (703,972)
Other assets (65,441) (563,333) 80,761
Accounts payable and accrued expenses 3,025,108 657,258 353,534
Accrued real estate taxes 2,222,590 1,699,512 411,604
Payment of deferred leasing costs (1,293,616) (561,373) (454,215)
Other liabilities 488,864 466,850 39,941
------------ ------------ -----------
Net cash provided by operating activities 12,828,406 5,649,507 1,977,299
------------ ------------ -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of properties (97,563,034) (47,838,629) (18,196,369)
Additions to buildings, improvements and equipment (6,305,673) (2,861,135) (2,296,522)
Proceeds from property sales, net 11,707,438
Decrease (increase) in earnest money deposits 950,000 (950,000)
------------ ------------ ------------
Net cash used by investing activities (91,211,269) (51,649,764) (20,492,891)
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from sale of preferred stock 2,101
Proceeds from sale of common stock 50,268,899 20,628,232 6,734,492
Payment of stock offering costs (2,851,739) (1,801,002) (764,880)
Proceeds from exercise of stock options 2,002,764 322,895
Proceeds from bank and mortgage
loans payable 39,549,220 27,503,148 12,500,000
Distributions/dividends (6,885,761) (3,523,211) (1,863,438)
Distributions/dividends reinvested 2,609,016 1,526,751
Purchase of treasury stock (114,828) (155,411)
Payment of mortgage notes and bonds (1,745,043) (740,996) (322,170)
Payment of deferred financing costs (1,022,151) (216,280) (390,868)
Acquisition of Advisor (435,154)
------------ ------------ ------------
Net cash provided by financing
activities 78,768,308 44,626,391 17,419,887
------------ ------------ -----------
Net increase (decrease) in cash and
cash equivalents 385,445 (1,373,866) (1,095,705)
Cash and cash equivalents,
beginning of year 1,302,728 2,676,594 3,772,299
------------ ------------ -----------
Cash and cash equivalents,
end of year $ 1,688,173 $ 1,302,728 $ 2,676,594
============ ============ ============
Supplemental disclosure of cash flow:
Interest paid $ 3,542,064 $ 2,311,568 $ 896,270
============ ============ ============
Non cash financing transactions:
Bonds payable assumed with purchase
of property $ 5,590,000
============
Issuance of shares to acquire Advisor $ 1,350,000
============
Restricted stock awards $ 480,000
============
Employee stock loans $ 1,247,351
============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE>
GREAT LAKES REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies
Nature of Activities
GreatLakes REIT, Inc., ( the "Company"), a Maryland corporation, was formed
on June 22, 1992 to invest in income-producing real property. The principal
business of the Company is the ownership, management, leasing, renovation and
acquisition of suburban office and industrial properties located in the Midwest.
At December 31, 1996, the Company owned and operated 25 properties located in
suburban areas of Chicago, Detroit, Milwaukee, Cincinnati, Columbus and
Minneapolis. The Company leases office and industrial space to over 300 tenants
in a variety of businesses.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries and partnership, each of which was formed in
1996. Significant intercompany accounts and transactions have been eliminated in
consolidation.
Properties
Costs incurred for the acquisition, development, construction and
improvement of properties are capitalized. Certain costs of yet-to-be acquired
properties, including deposits and professional fees, are capitalized as other
assets. These costs are subsequently capitalized as property acquisition costs
or charged to expense when it becomes apparent that acquisition of a particular
property is not probable. Maintenance and repairs are charged to expense when
incurred.
Depreciation of buildings is computed using the straight-line method over
the estimated useful lives of the assets, generally 40 years. Depreciation of
tenant improvements is computed using the straight-line method over the shorter
of the lease term or useful life. For the years ended December 31, 1996, 1995
and 1994, depreciation expense amounted to $3,169,182, $1,665,730 and $667,509,
respectively.
Properties are carried at cost, which is not in excess of net realizable
value. The Company recognizes impairment losses for its properties when
indicators of impairment are present and a property's expected undiscounted cash
flows are not sufficient to recover the property's carrying amount.
Deferred Costs
Deferred costs consist principally of financing fees and leasing
commissions that are amortized over the terms of the respective agreements.
Revenue Recognition
Minimum rentals are recognized on a straight-line basis over the term of
the related leases. Additional rents from expense reimbursements for common area
maintenance expenses and real estate taxes are recognized in the period in which
the related expenses are incurred.
F-7
<PAGE>
GREAT LAKES REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
1. Summary of Significant Accounting Policies (continued)
Cash and Cash Equivalents
The Company considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents. At December
31, 1996 and 1995, the Company had $418,528 and $1,300,265, respectively, in a
money market fund.
Income Taxes
The Company has elected to be treated as a real estate investment trust
("REIT") under the applicable provisions of the Internal Revenue Code of 1986,
as amended. In order to qualify as a REIT, the Company is required to distribute
to stockholders at least 95% of its taxable income and to meet certain asset and
income tests as well as certain other requirements. Accordingly, no provision
for income taxes has been reflected in the financial statements.
As of December 31, 1996, properties, rents receivable and prepaid rent have
a federal income tax basis of $182,530,510, $491,921 and $0, respectively.
Stock Options
The Company has elected to follow Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees" (APB 25) in accounting for its
stock options. Under APB 25, no compensation expense is recognized because the
exercise price of the Company's employee stock options equals the market price
of the underlying stock at the date of grant.
Fair Value of Financial Instruments
The Company discloses information concerning the fair value of financial
instruments for which it is practical to estimate such fair values. The carrying
amounts reported for cash and cash equivalents in the accompanying consolidated
balance sheets approximate its fair value. The carrying amount of the Company's
long-term debt approximates its fair value at December 31, 1996 and 1995 based
upon (a) the fixed interest rates on mortgage loans payable are comparable to
interest rates offered in the market as of the respective balance sheet dates
and (b) the variable interest rates on other long-term debt.
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 amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
Reclassification
Certain reclassifications have been made to the 1995 and 1994 financial
statements to conform to the 1996 presentation. Such reclassifications did not
affect the results of operations.
F-8
<PAGE>
GREAT LAKES REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
2. Deferred Costs
Deferred costs consisted of the following at December 31, 1996 and 1995:
1996 1995
-------------- ------------
Deferred financing costs $ 1,526,503 $ 739,773
Deferred leasing costs 2,345,455 1,146,076
-------------- ------------
3,871,958 1,885,849
Less accumulated amortization 895,056 393,700
-------------- ------------
$ 2,976,902 $ 1,492,149
============== ============
During the years ended December 31, 1996, 1995 and 1994 amortization of
financing costs was $427,375, $130,500 and $33,744, respectively, and
amortization of leasing costs was $348,340, $158,655, and $60,031, respectively.
3. Long-Term Debt
Mortgage loans payable aggregated $17,073,979 and $18,634,022 at December
31, 1996 and 1995, respectively. The mortgage loans payable require monthly
payments of principal and interest and mature at various dates through 2009.
Interest rates at December 31, 1996 ranged from 7.875% to 8.95%.
In 1995 the Company acquired an office building located in Minneapolis,
Minnesota subject to Variable Rate Demand Commercial Development Revenue Bonds
(the "Bonds") issued by the City of Minneapolis with an outstanding principal
amount of $5,235,000 and $5,420,000 at December 31, 1996 and 1995, respectively.
The Company has obtained a bank letter of credit to secure repayment of the
Bonds in an amount of approximately $5.3 million. The Company has guaranteed
repayment of the letter of credit to the issuing bank as well as granted the
issuing bank a first mortgage on the property. The interest rate on the Bonds
(4.3% per annum at December 31, 1996) is reset weekly by the bond placement
agent. The Bonds mature June 1, 2009 and require the Company to make annual
principal payments on June 1 of each year at a stipulated amount so that the
Bonds will be fully retired on June 1, 2009.
As of December 31, 1996, the following is a summary of principal maturities
of mortgage loans and bonds payable over the next five years:
Year Ending
December 31, Amount
------------ ------
1997 $ 855,847
1998 937,395
1999 1,018,869
2000 3,933,600
2001 1,116,792
The Company has obtained credit facilities from banks aggregating $80
million at December 31, 1996. The borrowings under the credit facilities are
limited by certain loan-to-value covenants related to the Company's
F-9
<PAGE>
GREAT LAKES REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
3. Long-Term Debt (continued)
properties. At December 31, 1996, amounts outstanding were $63,802,368 on the
$75 million secured bank credit facility (the "Credit Facility") with the First
National Bank of Boston, as Agent and none on the $5 million credit facility
(the "ANB Facility") with The American National Bank and Trust Company of
Chicago. Interest accrues on the Credit Facility at LIBOR plus 1.875% per annum
(7.543% at December 31, 1996). Interest accrues on the ANB Facility at prime
plus 0.5% per annum. The amounts outstanding at December 31, 1996 are due April
12, 1998.
At December 31, 1996, properties with a carrying amount of approximately
$182.7 million were pledged as collateral under the various debt agreements.
4. Dividend Reinvestment and Share Redemption Plans
Until December 31, 1995 the Company maintained a dividend reinvestment plan
whereby shareholders were able to reinvest dividends and receive additional
shares of the Company's Common Stock, $.01 par value per share (the "Common
Stock") priced at the Net Asset Value per share, as defined in the dividend
reinvestment plan, as set by the Board of Directors. Subsequent to December 31,
1995, the Company suspended the dividend reinvestment plan.
Shareholders have the right to redeem their shares at the then Net Asset
Value per share (as defined in the plan) subject to approval of the Board of
Directors and certain other limitations. As of December 31, 1996, the aggregate
amount subject to share redemptions was approximately $4.5 million. During the
years ended December 31, 1996 and 1995, 8,833 and 12,951 shares were redeemed at
a cost of $114,828 and $155,411, respectively.
5. Related Parties
On April 1, 1996, the Company acquired all the outstanding shares of Equity
Partners Ltd. (the "Advisor") in exchange for 100,000 shares of Common Stock
(the "Merger"). The Merger has been accounted for as a purchase. Of the total
purchase price of $1,565,726, $1,489,033 was assigned to goodwill and $76,693 to
the net tangible assets of the Advisor acquired by the Company. Goodwill
amortization is computed on a straight-line basis over a 20 year period. As of
April 1, 1996, the Company employed the employees of the Advisor and is now
self-managed and self-advised. Certain employees of the Advisor have received
40,000 restricted shares of Common Stock. Certain restricted shares (30,000
shares) vest to the recipients in equal amounts on April 1, 1997 and April 1,
1998 provided the recipients are still employed by the Company. The other
restricted shares (10,000 shares) vest 25% on May 1, 1999 and 25% on May 1 of
the next three years (2000-2002) provided the recipient is still employed by the
Company. The fair value of the restricted shares at the dates of grant
($480,000) was deferred and is being recognized as compensation expense over the
vesting periods.
F-10
<PAGE>
GREAT LAKES REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Pursuant to various advisory and management agreements, the following fees
were incurred with respect to the Advisor, or affiliates prior to the Merger.
Two directors of the Company were shareholders of the Advisor.
1996 1995 1994
-------- -------- --------
Property acquisition fees $ 15,750 $787,256 $ 93,045
Stock offering fees -- 131,747 42,551
Stock selling commissions (a) -- 217,046 67,065
Advisory fees (b) 203,697 608,612 294,530
Property management fees (b) 217,971 564,369 273,671
Construction management fees 107,717 73,549 67,525
Other, primarily legal fees 17,712 30,703 19,781
(a) Selling commissions were paid to owners and/or employees of the Advisor who
are registered representatives.
(b) Advisory fees are classified as general and administrative expenses in
these financial statements. Property management fees are classified as
property operating expenses in these financial statements.
Certain computer hardware and software owned by the Company was leased to
the Advisor under a five year lease that would have expired April 1, 1999.
Semi-annual rental payments of $9,103 were made to the Company from the Advisor
until the lease agreement was terminated on the date of the Merger.
6. Stock Options
The Company had two stock option plans, the Plan for Independent Directors
and Brokers (the "Directors Plan"), and the Advisor Stock Option Plan (the
"Advisor Plan"). Under the plans, options have been granted to purchase shares
of Common Stock at values which have been determined to be fair market value on
the date of grant. In connection with the acquisition of the Advisor, the
Advisor Plan was canceled, and currently options under the Directors Plan are
only granted to non-employee Directors. At December 31, 1996 options on 155,590
shares were available for future grant.
In September, 1996, the Company adopted the 1996 Incentive Stock Option
Plan (the "1996 Option Plan"), which authorizes the issuance of up to 500,000
shares of the Company's common stock to key employees. In September 1996,
options on 94,000 shares were granted to certain employees under the 1996 Option
Plan. At December 31, 1996, options on 406,000 shares are available for future
grant under this plan. The exercise price of options granted in 1996 under the
1996 Option Plan is $13 per share, the fair value of the Common Stock as
determined by the Board of Directors at the date of grant. Accordingly, no
compensation expense has been recognized for the year ended December 31, 1996.
These options have a term of ten years and vest in equal installments over a
three year period commencing on the first anniversary date of the grant.
F-11
<PAGE>
GREAT LAKES REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
6. Stock Options (continued)
A summary of the Company's stock option activity and related information
for the years ended December 31, 1996, 1995 and 1994 is as follows:
<TABLE>
<CAPTION>
1996 1995 1994
Weighted Weighted Weighted
Average Average Average
1996 Exercise 1995 Exercise 1994 Exercise
Options Price Options Price Options Price
-------- --------- ------- --------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
Balance 1/1 735,576 $ 11.02 451,129 $ 10.10 375,979 $ 9.96
Granted 170,424 $ 12.76 316,857 $ 12.24 75,150 $ 10.75
Exercised 304,372 $ 10.68 32,410 $ 9.96
-------- --------- ------- --------- ------- --------
Balance 12/31 601,628 $ 11.69 735,576 $ 11.02 451,129 $ 10.10
======== ========= ======= ========= ======= ========
Exercisable 507,628 $ 11.45 735,576 $ 11.02 451,129 $ 10.10
======== ========= ======= ========= ======= ========
</TABLE>
The weighted average fair value of options granted in 1996 where the stock
price equals the exercise price is $0.13 per share. The weighted average fair
value of options granted in 1995 where the stock price equals the exercise price
at date of grant is $0.12 per share. The weighted average fair value of options
granted in 1995 where the stock price is less than the exercise price at the
date of grant is $0.02 per share. The weighted average life of options
outstanding at December 31, 1996 was 5.81 years.
Pro forma information regarding net income and earnings per share is
required by FASB Statement 123 "Accounting for Stock-Based Compensation," and
has been determined as if the Company had accounted for its employee stock
options under the fair value method of that Statement. The fair value for these
options was estimated at the date of grant using a Black-Scholes option pricing
model with the following weighted-average assumptions for 1993 to 1996:
risk-free interest rates of 6%; dividend yields of 9%; volatility factors of the
expected market price of the Common Stock of 0.8%; and a weighted-average
expected life of the options of 5 years.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options that have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock options.
The effects on 1996 and 1995 pro forma net income and pro forma earnings
per common share and common share equivalent of amortizing to expense the
estimated fair value of stock options are not necessarily representative of the
effects on net income to be reported in future years due to such things as the
vesting period of the stock options, and the potential for issuance of
additional stock options in future years.
F-12
<PAGE>
GREAT LAKES REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
6. Stock Options (continued)
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The Company's
pro forma information follows for the years ended December 31, 1996 and 1995:
1996 1995
------------ -----------
Pro forma net income $ 7,838,767 $ 3,178,067
Pro forma earnings per common
share and common share equivalent $ 1.32 $ 0.87
In September 1996, the Company adopted a limited purpose employee loan
program whereby employees may borrow up to 90% of the cost of exercising stock
options held by the employee. Such loans bear interest at LIBOR plus 2.375% per
annum payable quarterly, are recourse to the employees, have a term of five
years provided the employee remains employed by the Company, and are secured by
a pledge of the Common Stock acquired by the employee through this program. As
of December 31, 1996, employees had acquired 119,892 shares through this program
with outstanding loan amounts of $1,247,351 due the Company. Such amount is
reflected as a reduction of stockholders' equity until the loans are repaid.
7. Stock Offering
In 1996, the Company sold 3,867,000 shares of Common Stock at $13 per share
and issued 210,128 shares of Class A Convertible Preferred Stock (the "Preferred
Shares"). The Company received proceeds of $47.4 million (net of offering costs
of $2,851,739) from the sale of these shares. The Preferred Shares carry no
dividend or voting rights, and shall be converted to Common Stock on a
one-for-one basis or canceled, depending on the Company's attainment of certain
objectives related to the timing, pricing and size of a public offering of
additional Common Stock by September 30, 1998.
8. Leases
The Company leases office and industrial properties to tenants under
noncancelable operating leases that expire at various dates through 2006. The
lease agreements typically provide for a specific monthly payment plus
reimbursement of certain operating expenses. The following is a summary of
minimum future rental revenue under noncancelable operating leases:
Year ending
December 31,
------------
1997 $ 29,196,272
1998 24,997,815
1999 20,416,268
2000 16,232,073
2001 9,624,788
Thereafter 13,094,436
----------
$ 113,561,652
=============
Minimum future rentals do not include amounts that are received from
tenants as a reimbursement of property operating expenses.
F-13
<PAGE>
GREAT LAKES REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
9. Distributions
The Company declared periodic distributions of $6,885,761, $3,900,456 and
$1,920,436 to stockholders of record during the calendar years 1996, 1995 and
1994, respectively. Of the $3,900,456 and $1,920,436 of distributions for 1995
and 1994, $504,564 and $127,319 were paid in January of the next calendar year,
respectively. The Company has determined the stockholders' treatment for Federal
income tax purposes to be as follows:
1996 1995 1994
----------- ----------- -----------
Ordinary income $ 6,078,061 $ 3,410,249 $ 1,785,429
Return of capital 807,700 490,207 135,007
----------- ----------- -----------
Total $ 6,885,761 $ 3,900,456 $ 1,920,436
=========== =========== ===========
F-14
<PAGE>
GREAT LAKES REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
10. Property Acquisitions
The following properties were acquired in 1996 and 1995 and the results of
their operations are included in the statements of income from their respective
dates of acquisition.
Total Acquisition Price
-----------------------
Location Date Acquired 1996 1995
--------------------------- ------------- ----------- -----------
2800 River Rd
Des Plaines, IL 02/09/95 $ 4,761,053
Minneapolis, MN 05/04/95 8,190,374
Mt. Prospect, IL 08/22/95 5,402,526
10 Oak Hollow & Gateway
Southfield, MI 08/29/95 12,756,163
One Park Plaza
Milwaukee, WI 09/29/95 15,675,908
Oak Brook, IL 11/28/95 1,760,930
565 Lakeview Pkwy
Vernon Hills, IL 12/27/95 4,881,675
1251 Plum Grove Rd
Schaumburg, IL 01/01/96 $ 1,080,911
Springdale, OH 04/17/96 6,145,650
Lincolnshire, IL 07/24/96 2,840,378
Dublin, OH 09/25/96 8,382,268
Downers Grove, IL 11/01/96 9,373,393
West Allis, WI 11/08/96 7,994,581
Troy, MI 11/22/96 16,100,416
St. Paul, MN 12/13/96 14,327,418
40 Oak Hollow
Southfield, MI 12/18/96 7,306,200
Centennial Center
Schaumburg, IL 12/27/96 24,011,819
F-15
<PAGE>
GREAT LAKES REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
11. Property Dispositions
In October 1996, the Company sold for cash its property located at 10 Oak
Hollow, Southfield, Michigan for a contract price of $9,300,000 (less selling
costs of approximately $278,771) resulting in a gain on sale of $2,273,800. The
proceeds from the sale were invested in the Downers Grove, Illinois property
(see Note 10) via a tax-deferred exchange.
In December 1996, the Company sold for cash its property located at 830
West End Court in Vernon Hills, Illinois for a contract price of $2,778,000
(less selling costs of approximately $91,791) resulting in a gain on sale of
$866,092. Long term debt in an amount of $926,051 was retired concurrent with
the sale. The proceeds from the sale were invested in the St. Paul, Minnesota
property (see Note 10) via a tax-deferred exchange.
12. Quarterly Financial Data (Unaudited)
<TABLE>
<CAPTION>
Quarter
Ended 3/31/96 6/30/96 9/30/96 12/31/96
----- ------- ------- ------- --------
<S> <C> <C> <C> <C>
Revenues $5,543,783 $5,927,282 $6,141,521 $7,619,723
Net income 971,412 939,374 1,001,779 4,936,469
Net income per common share
and common share equivalent $ 0.21 $ 0.19 $ 0.17 $ 0.58
Quarter
Ended 3/31/95 6/30/95 9/30/95 12/31/95
----- ------- ------- ------- --------
Revenues $2,619,990 $3,146,709 $3,878,343 $5,320,884
Net income 624,832 713,109 991,424 870,436
Net income per common share
and common share equivalent $ 0.23 $ 0.21 $ 0.24 $ 0.20
</TABLE>
13. Pro Forma Financial Statement (unaudited)
The unaudited consolidated pro forma statement of income for the year ended
December 31, 1996 is presented as if the acquisition and disposition of
properties subsequent to December 31, 1995, the Company's private equity
offering in 1996, and the Merger had all occurred as of January 1, 1996.
The pro forma financial statements are not necessarily indicative of what
the Company's result of operations would have been assuming the above events
actually occurred as of the dates indicated, nor do they purport to project the
Company's financial position or results of operations at any future date or for
any future period.
F-16
<PAGE>
Great Lakes REIT, Inc.
Consolidated Pro Forma Statement of Income
(Unaudited)
<TABLE>
<CAPTION>
Pro Forma Pro Forma
Historical (1) Advisor (1) Acquisitions (2) Dispositions(3) Adjustments 12/31/96
-------------- ----------- ---------------- --------------- ----------- --------
<S> <C> <C> <C> <C> <C> <C>
Revenues
Rental $20,249,565 $ 10,181,410 $ (1,522,795) $28,908,180
Reimbursements 4,814,005 4,196,142 (172,833) 8,837,314
Interest and other 168,739 567,620 472,579 0 (562,847) 646,091
------- ------- ------- --- ------- -------
Total revenues 25,232,309 567,620 14,850,131 (1,695,628) (562,847) 38,391,585
---------- ------- ---------- --------- ------- ----------
Expenses
Real estate taxes 3,954,144 2,853,267 (160,166) 6,647,245
Other property
operating 6,548,057 144,436 4,264,742 (449,311) (217,971)(5) 10,289,953
General and
administrative 2,242,165 339,220 0 0 (203,697)(5) 2,377,688
Interest 3,778,065 0 (105,902) 2,882,725 (7) 6,554,888
Depreciation and
amortization 4,000,736 1,766,144 (221,246) (37,715)(6) 5,507,919
--------- ----- --------- -------- ------ ---------
Total expenses 20,523,167 483,656 8,884,153 (936,625) 2,423,342 31,377,693
---------- ------- --------- -------- --------- ----------
Income before gain on
sale of properties 4,709,142 83,964 5,965,978 (759,003) (2,986,189) 7,013,892
Gain on sale of
properties 3,139,892 (3,139,892)(8)
----------- --------- ---------- -------------- ----------- ------------
Net income $ 7,849,034 $ 83,964 $ 5,965,978 $ (759,003) $ (6,126,081) $ 7,013,892
=========== ========= ============ ============ ============ ===========
Earnings per common
share and common
share equivalent $ 1.32 $ 0.79
====== ===========
Weighted average
number of common
shares and common
share equivalents
outstanding 5,927,208 8,871,484
=========== ==========
</TABLE>
See notes to consolidated pro forma statement of income.
F-17
<PAGE>
GREAT LAKES REIT, INC.
NOTES TO CONSOLIDATED PRO FORMA STATEMENT OF INCOME
(Unaudited)
1. Represents the historical operations of the Company and the Advisor for the
period described. See Note 5 of Notes to Consolidated Financial Statements
regarding the acquisition of the Advisor.
2. Represents the historical operations of properties acquired subsequent to
December 31, 1995 as if the properties were acquired by the Company at the
beginning of 1996. Depreciation is computed on a straight-line basis over
40 years based on the purchase price paid by the Company for the
properties. Additionally, based on preacquisition discussions with local
assessors and tax counsel, the Company has concluded that no adjustment to
historical real estate taxes is appropriate. See Note 10 of Notes to
Consolidated Financial Statements for details of the properties acquired
during 1996.
3. Represents the actual historical results of the properties sold in 1996 for
the period prior to disposition. See Note 11 of Notes to Consolidated
Financial Statements for details of 1996 property disposals.
4. As more fully described in Note 5 to the Consolidated Financial Statements,
on April 1, 1996, the Company acquired all of the outstanding shares of the
Advisor in exchange for 100,000 shares of the Common Stock. Income earned
in 1996 by the Advisor from the Company prior to the Merger is eliminated
from the pro forma income statements:
Acquisition fees $ 15,750
Advisory fees 203,697
Property management fees 217,971
Construction fees 107,717
Other 17,712
------------
$ 562,847
============
Amounts not eliminated represent income earned by the Advisor from third
parties that would have been earned by the Company had the Merger occurred
at the beginning of 1996.
5. Expenses incurred by the Company that are paid to the Advisor prior to the
merger are eliminated from the pro forma income statement:
1996
----
Other property operating expenses:
Property management fees $ 217,971
===========
General and administrative costs:
Advisory fees $ 203,697
===========
As a consequence of this elimination, the accompanying consolidated pro
forma statement of income includes the property operating and general and
administrative expenses of the Advisor for the period prior to the Merger.
6. Acquisition, construction, and certain other fees paid by the Company to
the Advisor were capitalized by the Company into buildings and
improvements. If the Merger had occurred January 1, 1996, these
F-18
<PAGE>
fees would not have been incurred and depreciation and amortization
expenses would have decreased by $56,328 in 1996. Costs incurred by the
Advisor for acquisition and construction activities during 1996 are
primarily salary costs and are reflected as general and administrative
expenses in the historical operations of the Advisor.
Goodwill amortization is increased by $18,613 in 1996 as the Merger is
assumed to have occurred on January 1, 1996 in this consolidated pro forma
statement of income which represents an additional three months of goodwill
amortization.
7. As the acquisitions subsequent to December 31, 1995, the dispositions in
1996, and the 1996 private equity offering are all assumed to have occurred
on January 1, 1996, the Company would need to borrow approximately
$38,436,335 to fund the property acquisitions calculated as follows:
Cost of properties acquired in 1996 $97,563,034
less: Proceeds of 1996 private
equity offering 47,419,261
less: Proceeds of property sales 11,707,438
----------
Borrowings needed to acquire properties $38,436,335
===========
Interest expense is calculated on this amount at 7.5% per annum, the
interest rate during 1996 resulting in additional interest expense in 1996
of $2,882,725.
8. The Consolidated Pro Forma Statement of Income excludes gains on sale of
properties of $3,139,892.
9. The transfer of the Company's properties to the Operating Partnership would
have had no effect on this Consolidated Pro Forma Statement of Income.
F-19
<PAGE>
<TABLE>
<CAPTION>
Costs Capitalized Gross Amount
Subsequent at which Carried
Initial Cost to the Company to Acquisition at December 31, 1996
------------------------------------ ----------------- -----------------------
Buildings & Buildings & Buildings &
Encumbrance Land Improvements Land Improvements Land Improvements Total
----------- ---- ------------ ---- ------------ ---- ------------ -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
11100 Hampshire Avenue $ 823,741 $ 310,000 $1,123,932 -- $ 5,873 $ 310,000 $ 1,129,805 $ 1,439,805
Bloomington, MN
601 Campus Drive 1,404,381 900,000 2,263,967 -- 1,009,768 900,000 3,273,735 4,173,735
Arlington Heights, IL
11925 W. Lake Park Drive 1,172,513 318,750 1,819,058 -- 260,754 318,750 2,079,812 2,398,562
Milwaukee, WI
3400 Dundee Road 2,061,559 607,500 3,475,923 -- 675,363 607,500 4,151,286 4,758,786
Northbrook, IL
1011 Touhy Avenue 2,428,821 720,000 3,932,248 -- 1,899,875 720,000 5,832,123 6,552,123
Des Plaines, IL
160-185 Hansen Court 2,688,990 2,100,000 3,210,289 -- 893,474 2,100,000 4,103,763 6,203,763
Wood Dale, IL
150, 175, 250 Patrick Blvd 3,349,302 2,600,000 3,964,742 -- 681,432 2,600,000 4,646,174 7,246,174
Brookfield, WI
175 Hawthorn Parkway 3,144,672 1,600,000 4,721,338 -- 625,505 1,600,000 5,346,843 6,946,843
Vernon Hills, IL
2800 River Road (B) 1,300,000 3,461,053 -- 511,849 1,300,000 3,972,902 5,272,902
Des Plaines, IL
2221 University Avenue SE 5,235,000 1,100,000 7,090,374 -- 46,590 1,100,000 7,136,964 8,236,964
Minneapolis, MN
1660 Feehanville Drive (B) 1,100,000 4,302,526 -- 32,347 1,100,000 4,334,873 5,434,873
Mount Prospect, IL
24800 Denso Drive (B) 1,400,000 4,546,305 -- 534,010 1,400,000 5,080,315 6,480,315
Southfield, MI
11270 W. Park Place (B) 940,000 14,735,908 -- 320,932 940,000 15,056,840 15,996,840
Milwaukee, WI
823 Commerce Drive (B) 500,000 1,260,930 -- 2,147,211 500,000 3,408,141 3,908,141
Oak Brook, IL
565 Lakeview Parkway (B) 1,300,000 3,581,675 -- 200,196 1,300,000 3,781,871 5,081,871
Vernon Hills, IL
1251 Plum Grove Road -- 372,750 708,161 -- 123,983 372,750 832,144 1,204,894
Schaumbrug, IL
30 Merchant Street (B) 650,000 5,495,650 -- 1,121,588 650,000 6,617,238 7,267,238
Springdale, OH
</TABLE>
Accumulated Date Method of
Depreciation Acquired Depreciation
------------ -------- ------------
11100 Hampshire Avenue $113,545 Jan-93 (A)
Bloomington, MN
601 Campus Drive 462,620 May-93 (A)
Arlington Heights, IL
11925 W. Lake Park Drive 215,204 Jun-93 (A)
Milwaukee, WI
3400 Dundee Road 552,809 Oct-93 (A)
Northbrook, IL
1011 Touhy Avenue 521,797 Dec-93 (A)
Des Plaines, IL
160-185 Hansen Court 503,024 Jan-94 (A)
Wood Dale, IL
150, 175, 250 Patrick Blvd 473,263 Jun-94 (A)
Brookfield, WI
175 Hawthorn Parkway 441,638 Sep-94 (A)
Vernon Hills, IL
2800 River Road 260,312 Feb-95 (A)
Des Plaines, IL
2221 University Avenue SE 293,682 May-95 (A)
Minneapolis, MN
1660 Feehanville Drive 148,052 Aug-95 (A)
Mount Prospect, IL
24800 Denso Drive 262,108 Aug-95 (A)
Southfield, MI
11270 W. Park Place 499,201 Sep-95 (A)
Milwaukee, WI
823 Commerce Drive 64,856 Nov-95 (A)
Oak Brook, IL
565 Lakeview Parkway 95,463 Dec-95 (A)
Vernon Hills, IL
1251 Plum Grove Road 29,970 Jan-96 (A)
Schaumbrug, IL
30 Merchant Street 97,347 Apr-96 (A)
Springdale, OH
S-1
<PAGE>
<TABLE>
<CAPTION>
Costs Capitalized Gross Amount
Subsequent at which Carried
Initial Cost to the Company to Acquisition at December 31, 1996
------------------------------------- ----------------- -------------------------
Buildings & Buildings & Buildings &
Encumbrance Land Improvements Land Improvements Land Improvements Total
----------- ---- ------------ ---- ------------ ---- ------------ -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Two Marriott Drive (B) 610,000 2,230,378 -- 26,656 610,000 2,257,034 2,867,034
Lincolnshire, IL
4860-5000 Blazer Memorial Pkwy (B) 1,340,000 7,042,268 -- 74,200 1,340,000 7,116,468 8,456,468
Dublin, OH
3010 & 3020 Woodcreek Drive (B) 2,385,000 6,988,393 -- 0 2,385,000 6,988,393 9,373,393
Downers Grove, IL
2514 S. 102nd Street & (B) 975,000 7,019,581 -- 0 975,000 7,019,581 7,994,581
10150 W. National Avenue
West Allis, WI
1301 W. Long Lake Road (B) 2,500,000 13,600,416 -- 0 2,500,000 13,600,416 16,100,416
Troy, MI
2550 University Avenue West (B) 850,000 13,477,418 -- 48,510 850,000 13,525,928 14,375,928
St. Paul, MN
No. 40 Oak Hollow (B) 1,250,000 6,056,200 -- (0) 1,250,000 6,056,200 7,306,200
Southfield, MI
1900 East Golf Road (B) 3,800,000 20,211,819 -- 24,000 3,800,000 20,235,819 24,035,819
------------ ----------- ------------ ------- ----------- ----------- ------------ ------------
Schaumburg, IL
Totals $ 22,308,979 $31,529,000 $146,320,552 $ 0 $11,264,116 $31,529,000 $157,584,668 $189,113,668
============ =========== ============ ======= =========== =========== ============ ============
</TABLE>
Accumulated Date Method of
Depreciation Acquired Depreciation
------------ -------- ------------
Two Marriott Drive 25,584 Jul-96 (A)
Lincolnshire, IL
4860-5000 Blazer Memorial Pkwy 51,427 Sep-96 (A)
Dublin, OH
3010 & 3020 Woodcreek Drive 21,839 Nov-96 (A)
Downers Grove, IL
2514 S. 102nd Street & 21,936 Nov-96 (A)
10150 W. National Avenue
West Allis, WI
1301 W. Long Lake Road 42,501 Nov-96 (A)
Troy, MI
2550 University Avenue West 14,090 Dec-96 (A)
St. Paul, MN
No. 40 Oak Hollow 6,309 Dec-96 (A)
Southfield, MI
1900 East Golf Road 21,079 Dec-96 (A)
-----------
Schaumburg, IL
Totals $5,239,656
==========
(A) Depreciation of buildings is computed over a 40 year life on a straight
line basis. Tenant improvements are depreciated over the shorter of the
estimated useful life of the improvements or the term of the lease.
(B) These properties are pledged as security for the Company's line of credit
which totalled $63,802,368 at December 31, 1996.
(C) At December 31, 1996, the aggregate cost of land, buildings, and
improvements for Federal income tax purposes was approximately
$185,974,000.
(D) Reconciliation of Real Estate Owned and Accumulated Depreciation.
Real Estate Owned:
1996 1995 1994
------------ ------------ ------------
Balance at beginning of year $ 94,265,979 $ 37,976,215 $ 17,558,181
Property acquisitions 97,563,034 53,428,629 18,196,369
Additions 6,136,428 2,861,135 2,221,665
Disposals 8,851,773 -- --
------------ ------------ ------------
Balance end of year $189,113,668 $ 94,265,979 $37,976,215
============ ============ ===========
Accumulated Depreciation:
1996 1995 1994
------------ ----------- -----------
Balance beginning of year $2,462,187 $ 817,114 $ 149,605
Depreciation expense 3,119,829 1,645,073 667,509
Retirements -- -- --
Disposals 342,360 -- --
------------ ------------ --------
Balance end of year $5,239,656 $2,462,187 $ 817,114
========== ========== =========
S-2
<PAGE>
==============================================================================
- ------------------------------------------------------------------------------
Securities and Exchange Commission
Washington, D.C. 20549
--------------------
EXHIBITS
To
ANNUAL REPORT ON FORM 10-K
FOR THE YEAR ENDED
DECEMBER 31, 1996
--------------------
GREAT LAKES REIT, INC.
- ------------------------------------------------------------------------------
==============================================================================
<PAGE>
Exhibit
Number Description of Document
------ -----------------------
3.1 Articles of Incorporation of the Company dated June 22, 1992
(Incorporated by reference from the Company's Registration
Statement on Form 10 filed with the Securities and Exchange
Commission (the "SEC") on April 29, 1996 (the "Form 10"))
3.2 Articles of Merger of Equity Partners, Ltd. (the "Advisor") into
the Company dated April 1, 1996 (Incorporated by reference from
the Form 10)
3.3 Articles Supplementary of the Company dated August 20, 1996
(Incorporated by reference from the Company's Current Report on
Form 8-K dated August 28, 1996 (the "August 1996 8-K"))
3.4 Amended and restated bylaws of the Company dated February 25,
1997 (Incorporated by reference from the Company's Registration
Statement on Form S-11 filed with the SEC on February 28, 1997
(No. 333-22619) (the "S-11")
4.1 Specimen of certificate representing shares of Common Stock
(Incorporated by reference from the Form 10)
10.1 Merger Agreement dated January 26, 1996 between the Company and
the Advisor (Incorporated by reference from the Form 10)
10.2 Amended and Restated Agreement of Limited Partnership of Great
Lakes REIT, L.P., dated December 27, 1996 (Incorporated by
reference from the Company's Current Report on Form 8-K dated
January 14, 1997 (the "January 1997 8-K"))
10.3 First Amendment to the Amended and Restated Agreement of Limited
Partnership of Great Lakes REIT, L.P., dated February 6, 1997
(Incorporated by reference from the S-11)
10.4 Offering Services Agreement dated August 15, 1995 between the
Company and the Advisor (Incorporated by reference from the Form
10)
10.5 Managing Dealer & Wholesaling Agreement dated August 20, 1995
between the Company and Chauner Securities, Inc. (Incorporated by
reference from the Form 10)
10.6 Agreement dated August 24, 1995 between the Company and EVEREN
Securities, Inc. regarding offering services (Incorporated by
reference from the Form 10)
<PAGE>
10.7 Indemnification Escrow Agreement dated April 1, 1996 between the
Company, Richard A. May, Richard L. Rasley, Tim A. Grodrian, and
American National Bank and Trust Company of Chicago (Incorporated
by reference from the Form 10)
*10.8.1 Restricted Stock Agreement dated April 1, 1996 between the
Company and Richard L. Rasley (Incorporated by reference from the
Form 10)
*10.8.2 Restricted Stock Agreement dated April 1, 1996 between Great
Lakes REIT and James Hicks (Incorporated by reference from the
Form 10)
*10.8.3 Restricted Stock Agreement dated April 1, 1996 between Great
Lakes REIT and Raymond Braun (Incorporated by reference from the
Form 10)
*10.8.4 Restricted Stock Agreement dated April 1, 1996 between Great
Lakes REIT and Edith M. Scurto (Incorporated by reference from
the Form 10)
*10.8.5 Restricted Stock Agreement dated April 1, 1996 between Great
Lakes REIT and Brett R. Brown (Incorporated by reference from the
Form 10)
*10.8.6 Restricted Stock Agreement dated May 1, 1996 between the
Company and Raymond Braun (Incorporated by reference from the
S-11)
10.9 Agreement dated August 24, 1995 between the Company and EVEREN
Securities, Inc. regarding fairness opinion (Incorporated by
reference from the Form 10)
*10.10 Stock Option Plan for Independent Directors and Brokers (the
"Directors Plan") dated July 2, 1992 as amended July 15, 1994
(Incorporated by reference from the Form 10)
*10.11.1 Non-qualified Stock Option Certificate dated December 31,
1995 from the Company to Jon K. Haahr (Incorporated by reference
from the Form 10)
*10.11.2 Non-qualified Stock Option Certificate dated December 31,
1995 from the Company to Wayne M. Janus (Incorporated by
reference from the Form 10)
*10.11.3 Non-qualified Stock Option Certificate dated December 31,
1995 from the Company to Daniel E. Josephs (Incorporated by
reference from the Form 10)
*10.11.4 Non-qualified Stock Option Certificate dated December 31,
1995 from the Company to Donald E. Phillips (Incorporated by
reference from the Form 10)
*10.11.5 Non-qualified Stock Option Certificate dated December 31,
1995 from the Company to Walter H. Teninga (Incorporated by
reference from the Form 10)
*10.11.6 Non-qualified Stock Option Certificate dated December 31,
1995 from the Company to Richard A. May (Incorporated by
reference from the Form 10)
*10.11.7 Non-qualified Stock Option Certificate dated December 31,
1995 from the Company to Richard L. Rasley (Incorporated by
reference from the Form 10)
*10.11.8 Non-qualified Stock Option Certificate dated December 31,
1995 from the Company to Raymond M. Braun (Incorporated by
reference from the Form 10)
*10.11.9 Non-qualified Stock Option Certificate dated December 31,
1995 from the Company to James Hicks (Incorporated by reference
from the Form 10)
*10.11.10 Non-qualified Stock Option Certificate dated December 31,
1995 from the Company to Edith M. Scurto (Incorporated by
reference from the Form 10)
<PAGE>
*10.11.11 Non-qualified Stock Option Certificate dated December 31,
1995 from the Company to Brett A. Brown (Incorporated by
reference from the Form 10)
*10.11.12 Form of Non-Qualified Stock Option Certificate for use in
connection with options issued pursuant to the Directors Plan
(Incorporated by reference from the S-11)
10.12 Amended and Restated Secured Revolving Loan Agreement dated
September 28, 1994 between the Company and American National Bank
and Trust Company of Chicago (Incorporated by reference from the
Form 10)
10.13 First Amendment to Amended and Restated Secured Revolving Loan
Agreement dated September 29, 1995 between the Company and
American National Bank and Trust Company of Chicago (Incorporated
by reference from the Form 10)
10.14 Second Amendment to Amended and Restated Secured Revolving Loan
Agreement dated December 27, 1995 between the Company and
American National Bank and Trust Company of Chicago (Incorporated
by reference from the Form 10)
10.15 Revolving Note dated December 27, 1995 between the Company and
American National Bank and Trust Company of Chicago for
$25,000,000 (Incorporated by reference from the Form 10)
10.16 Stock Purchase Agreement dated as of August 20, 1996 by and
among the Company, Fortis Benefits Insurance Company, Morgan
Stanley Institutional Fund, Inc. - U.S. Real Estate Portfolio,
Morgan Stanley SICAV Subsidiary SA, Wellsford Karpf Zarrilli
Ventures, L.L.C., Logan, Inc.; and Pension Trust Account 104972
Held by Bankers Trust Company as Trustee (Incorporated by
reference from the August 1996 8-K)
10.17 Registration Rights Agreement dated as of August 20, 1996 by and
among the Company, Fortis Benefits Insurance Company, Morgan
Stanley Institutional Fund, Inc. - U.S. Real Estate Portfolio,
Morgan Stanley SICAV Subsidiary SA, Wellsford Karpf Zarrilli
Ventures, L.L.C., Logan, Inc.; and Pension Trust Account 104972
Held by Bankers Trust Company as Trustee (Incorporated by
reference from the August 1996 8-K)
*10.18 Form of Change in Control Agreement between the Company and
Messrs. May, Rasley, Braun, Hicks and Mills (Incorporated by
reference from the Company's Registration Statement on Form 10/A
filed with the SEC on January 9, 1997 (the "Form 10/A")
*10.19 Form of Change in Control Agreement between the Company and Mr.
Brown and Ms. Scurto (Incorporated by reference from the Form
10/A)
*10.20 1996 Incentive Stock Option Plan of the Company (Incorporated
by reference from the Form 10/A)
*10.21 Form of Stock Option Agreement for use in connection with
incentive stock option and pursuant to the 1996 Incentive Stock
Option Plan of the Company; Richard A. May, Richard L. Rasley,
James Hicks, Raymond Braun and Kim S. Mills entered into
agreements in 1996 that evidenced 32,000, 14,000, 12,000, 16,000
and 12,000 options, respectively under the 1996 Incentive Stock
Option Plan effective September 24, 1996 (Incorporated by
reference from the Form 10/A)
*10.22 Limited Purpose Employee Loan Program of the Company
(Incorporated by reference from the Form 10/A)
*10.23 Form of Limited Purpose Employee Loan Program Promissory Note
for use in connection with limited purpose employee loans
(Incorporated by reference from the Form 10/A)
<PAGE>
10.24 Amended and Restated Revolving Credit Agreement (the "Amended
and Restated Revolving Credit Agreement") Dated as of December
27, 1996 among the Operating Partnership and the Company and The
First National Bank of Boston and Bank of America Illinois and
First Bank National Association and Other Banks Which May Become
Parties to the Agreement and The First National Bank of Boston as
Agent (Incorporated by reference from the January 1997 8-K)
10.25 Form of Amendment to the Amended and Restated Revolving Credit
Agreement dated as of March 1, 1997 (Incorporated by reference
from the S-11)
24.1 Powers of Attorney
27.1 Financial Data Schedule
- -----------------------------
* Management contract or compensation plan or arrangement.
<PAGE>
Exhibit 24.1
POWER OF ATTORNEY
The undersigned, as a director of Great Lakes REIT, Inc. (the "Company"),
does hereby constitute and appoint Richard A. May, Richard L. Rasley and James
Hicks, and each of them, as his true and lawful attorney-in-fact and agent, with
full power of substitution and resubstitution, for him and in his name, place
and stead, in any and all capacities, to sign the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 1996 and any and all amendments
thereto, and to file the same, with exhibits and schedules thereto, and other
documents therewith, with the Securities and Exchange Commission, granting unto
said attorney-in-fact, full power and authority to do and perform each and every
act and thing necessary or desirable to be done in and about the premises, as
fully to all intents and purposes as he might or could do in person, thereby
ratifying and confirming all that said attorney-in-fact, or his substitute, may
lawfully do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, I have hereunto set my hand this 28th day of March,
1997.
/s/ James J. Brinkerhoff
------------------------
James J. Brinkerhoff
<PAGE>
POWER OF ATTORNEY
The undersigned, as a director of Great Lakes REIT, Inc. (the "Company"),
does hereby constitute and appoint Richard A. May, Richard L. Rasley and James
Hicks, and each of them, as his true and lawful attorney-in-fact and agent, with
full power of substitution and resubstitution, for him and in his name, place
and stead, in any and all capacities, to sign the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 1996 and any and all amendments
thereto, and to file the same, with exhibits and schedules thereto, and other
documents therewith, with the Securities and Exchange Commission, granting unto
said attorney-in-fact, full power and authority to do and perform each and every
act and thing necessary or desirable to be done in and about the premises, as
fully to all intents and purposes as he might or could do in person, thereby
ratifying and confirming all that said attorney-in-fact, or his substitute, may
lawfully do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, I have hereunto set my hand this 28th day of March,
1997.
/s/ Daniel E. Josephs
---------------------
Daniel E. Josephs
<PAGE>
POWER OF ATTORNEY
The undersigned, as a director of Great Lakes REIT, Inc. (the "Company"),
does hereby constitute and appoint Richard A. May, Richard L. Rasley and James
Hicks, and each of them, as his true and lawful attorney-in-fact and agent, with
full power of substitution and resubstitution, for him and in his name, place
and stead, in any and all capacities, to sign the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 1996 and any and all amendments
thereto, and to file the same, with exhibits and schedules thereto, and other
documents therewith, with the Securities and Exchange Commission, granting unto
said attorney-in-fact, full power and authority to do and perform each and every
act and thing necessary or desirable to be done in and about the premises, as
fully to all intents and purposes as he might or could do in person, thereby
ratifying and confirming all that said attorney-in-fact, or his substitute, may
lawfully do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, I have hereunto set my hand this 28th day of March,
1997.
/s/ Edward Lowenthal
--------------------
Edward Lowenthal
<PAGE>
POWER OF ATTORNEY
The undersigned, as a director of Great Lakes REIT, Inc. (the "Company"),
does hereby constitute and appoint Richard A. May, Richard L. Rasley and James
Hicks, and each of them, as his true and lawful attorney-in-fact and agent, with
full power of substitution and resubstitution, for him and in his name, place
and stead, in any and all capacities, to sign the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 1996 and any and all amendments
thereto, and to file the same, with exhibits and schedules thereto, and other
documents therewith, with the Securities and Exchange Commission, granting unto
said attorney-in-fact, full power and authority to do and perform each and every
act and thing necessary or desirable to be done in and about the premises, as
fully to all intents and purposes as he might or could do in person, thereby
ratifying and confirming all that said attorney-in-fact, or his substitute, may
lawfully do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, I have hereunto set my hand this 28th day of March,
1997.
/s/ Donald E. Phillips
----------------------
Donald E. Phillips
<PAGE>
POWER OF ATTORNEY
The undersigned, as a director of Great Lakes REIT, Inc. (the "Company"),
does hereby constitute and appoint Richard A. May, Richard L. Rasley and James
Hicks, and each of them, as his true and lawful attorney-in-fact and agent, with
full power of substitution and resubstitution, for him and in his name, place
and stead, in any and all capacities, to sign the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 1996 and any and all amendments
thereto, and to file the same, with exhibits and schedules thereto, and other
documents therewith, with the Securities and Exchange Commission, granting unto
said attorney-in-fact, full power and authority to do and perform each and every
act and thing necessary or desirable to be done in and about the premises, as
fully to all intents and purposes as he might or could do in person, thereby
ratifying and confirming all that said attorney-in-fact, or his substitute, may
lawfully do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, I have hereunto set my hand this 28th day of March,
1997.
/s/ Walter H. Teninga
---------------------
Walter H. Teninga
<TABLE> <S> <C>
<PAGE>
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<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 1,688,173
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<CURRENT-ASSETS> 4,884,290
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<BONDS> 86,111,347
0
2,101
<COMMON> 88,323
<OTHER-SE> 96,504,480
<TOTAL-LIABILITY-AND-EQUITY> 194,148,882
<SALES> 25,063,570
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