<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 28, 1997
REGISTRATION NO. 333-24911
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
AMENDMENT NO. 1
TO
FORM S-11
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
----------------
G & L REALTY CORP.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
MARYLAND 95-449388
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)
439 N. BEDFORD DRIVE
BEVERLY HILLS, CALIFORNIA 90210
(310) 273-9930
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
----------------
DANIEL M. GOTTLIEB
G & L REALTY CORP.
439 N. BEDFORD DRIVE
BEVERLY HILLS, CALIFORNIA 90210
(310) 273-9930
(NAME, ADDRESS, INCLUDING ZIP CODE AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF AGENT FOR SERVICE)
----------------
COPIES TO:
DHIYA EL-SADEN, ESQ. MICHAEL J. CONNELL, ESQ.
GIBSON, DUNN & CRUTCHER LLP MORRISON & FOERSTER LLP
333 SOUTH GRAND AVENUE 555 WEST FIFTH STREET
LOS ANGELES, CALIFORNIA 90071-3197 LOS ANGELES, CALIFORNIA 90013-1024
(213) 229-7000 (213) 892-1024
----------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
AS SOON AS PRACTICABLE AFTER THE EFFECTIVE DATE OF THIS REGISTRATION
STATEMENT.
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement from the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_] ________
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
----------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(a) OF THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE
REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE SECURITIES
AND EXCHANGE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a), MAY DETERMINE.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
SUBJECT TO COMPLETION, DATED APRIL 28, 1997
PROSPECTUS
1,200,000 SHARES
G & L REALTY CORP.
% SERIES A CUMULATIVE PREFERRED STOCK
(LIQUIDATION PREFERENCE $25 PER SHARE)
[LOGO OF G&L REALTY CORP.]
Dividends on the % Series A Cumulative Preferred Stock, par value $.01 per
share (the "Series A Preferred Stock"), of G & L Realty Corp. (the "Company")
are cumulative from the date of original issue and are payable monthly,
commencing on June 15, 1997, to shareholders of record on the first day of each
month at the rate of % per annum of the $25 liquidation preference (the
"Liquidation Preference") per share (equivalent to a fixed annual amount of
$ per share). See "Description of Series A Preferred Stock--Dividends."
Except in certain circumstances relating to preservation of the Company's
qualification as a real estate investment trust (a "REIT"), the Series A
Preferred Stock is not redeemable prior to June 1, 2001. On and after that
date, the Company may redeem Series A Preferred Stock for cash in whole, or in
part, at a redemption price of $25 per share, plus accrued and unpaid dividends
thereon, if any, up to the redemption date. The Series A Preferred Stock has no
stated maturity and will not be subject to any sinking fund or mandatory
redemption and will not be convertible into any other security of the Company.
See "Description of Series A Preferred Stock--Maturity" and "--Redemption."
In order to ensure that the Company satisfies certain requirements for
qualification as a REIT under the Internal Revenue Code of 1986, as amended
(the "Code"), shares of Series A Preferred Stock shall be subject to
restrictions on transferability to ensure that no holder owns or is deemed to
own more than 9.8% in number of shares or value, whichever is more restrictive
(the "Ownership Limit"), of the Company's outstanding capital stock. Any
transfer or other event that would result in ownership of the Company's capital
stock in excess of the Ownership Limit is void ab initio, and in certain events
the shares subject to the transfer or other event will be converted into
"Excess Stock" pursuant to the Company's Articles of Amendment and Restatement
of the Charter ("Articles of Incorporation"). Excess Stock will be subject to a
right of repurchase by the Company and to other terms that may result in the
person who attempted to acquire capital stock in excess of the Ownership Limit
receiving less than the fair market value for such capital stock. See
"Description of Series A Preferred Stock--Restrictions on Ownership and
Transfer."
All of the shares of Series A Preferred Stock to be sold in this Offering
(the "Offering") are being offered by the Company. The Company has applied to
list the Series A Preferred Stock on the New York Stock Exchange ("NYSE") under
the symbol "GLR PrA." If approved, trading of the Series A Preferred Stock is
expected to commence within a thirty-day period after the initial delivery of
the Series A Preferred Stock. See "Underwriting."
THE SERIES A PREFERRED STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK.
SEE "RISK FACTORS" BEGINNING ON PAGE 8 HEREIN.
----------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC DISCOUNT(1) COMPANY(2)
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share................................... $ $ $
- --------------------------------------------------------------------------------
Total(3).................................... $ $ $
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
</TABLE>
(1) The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended (the "Securities Act"). See "Underwriting."
(2) Before deducting expenses payable by the Company estimated at $450,000.
(3) The Company has granted the Underwriters an option for 30 days to purchase
up to an additional 180,000 shares of Series A Preferred Stock to cover
over-allotments, if any. If all such shares are purchased, the total Price
to Public, Underwriting Discount and Proceeds to Company will be $ ,
$ and $ , respectively. See "Underwriting."
----------
The shares of Series A Preferred Stock are offered by the several
Underwriters, subject to prior sale, when, as and if delivered to and accepted
by them, subject to approval of certain legal matters by counsel for the
Underwriters. The Underwriters reserve the right to withdraw, cancel or modify
such offer and to reject orders in whole or in part. It is expected that the
shares of Series A Preferred Stock will be ready for delivery in book-entry
form through the facilities of The Depository Trust Company ("DTC"), New York,
New York, on or about , 1997 against payment therefor in immediately
available funds.
----------
SUTRO & CO. INCORPORATED MCDONALD & COMPANY
SECURITIES, INC.
THE DATE OF THIS PROSPECTUS IS , 1997
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF
ANY SUCH STATE.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary........................................................ 1
Risk Factors.............................................................. 8
Use of Proceeds........................................................... 14
Capitalization............................................................ 14
Selected Consolidated Financial and Operating Data........................ 15
Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................... 18
The Company............................................................... 24
Organizational Structure.................................................. 29
Business and Properties................................................... 30
Policies with Respect to Certain Activities............................... 45
Price Range of Common Stock and Distributions............................. 48
Management................................................................ 49
Principal Stockholders of the Company..................................... 54
Formation Transactions.................................................... 56
The Partnership Agreement................................................. 56
Certain Transactions...................................................... 58
Description of Series A Preferred Stock................................... 59
Federal Income Tax Considerations......................................... 69
Employee Plans and Individual Retirement Accounts......................... 80
Underwriting.............................................................. 82
Experts................................................................... 83
Legal Matters............................................................. 83
Available Information..................................................... 83
Glossary.................................................................. 84
Index to Financial Statements............................................. F-1
</TABLE>
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE MARKET PRICE OF THE SERIES A
PREFERRED STOCK INCLUDING OVER-ALLOTMENT, STABILIZING TRANSACTIONS, SYNDICATE
SHORT COVERING TRANSACTIONS AND PENALTY BIDS. FOR A DESCRIPTION OF THESE
ACTIVITIES, SEE "UNDERWRITING."
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information appearing elsewhere in this Prospectus. The information contained
in this Prospectus assumes that the Underwriters' over-allotment option is not
exercised. All references to the "Company" include the business and properties
of G&L Realty Partnership, L.P. (the "Operating Partnership") and other related
entities directly or indirectly controlled by the Company. Information
contained in this Prospectus may contain forward-looking statements within the
meaning of the Private Securities Litigation Reform Act of 1995 (the "Reform
Act"). These statements can be identified by the use of forward-looking
terminology such as "may," "will," "expect," "anticipate," "estimate," or
"continue" or the negative thereof or other comparable terminology. Certain
other factors noted under the heading "Risk Factors" and throughout this
Prospectus constitute cautionary statements identifying important factors with
respect to any such forward-looking statements, including certain risks and
uncertainties, that could cause the Company's actual results to differ
materially from those contained in any such forward-looking statements. Certain
capitalized terms used throughout this Prospectus are defined in the
"Glossary."
THE COMPANY
The Company is a self-administered and self-managed REIT that finances,
acquires, develops, manages and leases health care properties. The Company's
business currently consists of investments, either directly or through joint
ventures, in health care properties (primarily through its Medical Office
Building Division) and in debt obligations secured by health care properties
(primarily through its Senior Care Division).
Medical Office Building Division
The Medical Office Building ("MOB") Division's business strategy is to
acquire, develop, manage and lease a portfolio of medical office buildings and
related health care facilities, parking facilities and retail space. The
Company's MOB Division currently seeks growth opportunities nationwide in major
population centers through acquisition or development of additional medical
office properties directly or through strategic joint ventures. The MOB
Division's portfolio currently consists of approximately 725,000 rentable
square feet located in Southern California. The Company directly owns 15
properties exclusive of vacant land (the "Properties"), including 13 high
quality medical office buildings, an adjacent parking facility and one
hospital. Several of the Properties include retail space on the ground level.
As of February 1, 1997, the Properties were approximately 80.8% leased to over
280 tenants. In June 1996, the Company acquired Tustin Medical Plaza in Tustin,
California. Tustin Medical Plaza includes two medical office buildings, a
parcel of vacant land and a hospital (the "Tustin Properties") which was vacant
when purchased. Leases for the Tustin Hospital are currently being negotiated.
As of February 1, 1997, the Company's Properties, excluding Tustin Hospital,
had an occupancy rate of approximately 93.8%.
The Company recently entered into an operating agreement with PHP Healthcare
Corporation, a NYSE listed company ("PHP"), forming a new joint venture named
GL/PHP, LLC, a Delaware limited liability company, (the "PHP Joint Venture").
The Company holds an 80.5% interest in the unconsolidated joint venture, which
owns six primary health care facilities located in New Jersey consisting of
approximately 80,000 aggregate rentable square feet. Until May 31, 1997, PHP
has an option to purchase the Company's interest in the PHP Joint Venture. See
"Business and Properties--Description of the Properties and Tenants" and
"Certain Transactions."
Senior Care Division
The Senior Care Division's business strategy is to originate short term loans
(typically 6-24 months) secured by senior care facilities throughout the United
States. Since its inception in June 1995, the Senior Care Division has made
seven loans totaling $26.9 million, four of which have been repaid through the
issuance of revenue bonds. As of February 1, 1997, the Senior Care Division had
three loans aggregating $12.5 million outstanding. In October 1995, the Company
invested $19.9 million to acquire outstanding Series A and Series B bonds with
1
<PAGE>
an aggregate face value of $26.0 million issued by the Massachusetts Industrial
Finance Agency and secured by three nursing homes in Massachusetts. In March
1997 the Company sold these bonds. These loans and bonds generate cash flow
from principal and interest payments received from outstanding loans. The
Company may receive future revenues in the form of subordinated notes in lieu
of interest or loan fees.
In November 1996, the Company expanded its activities in the Senior Care
Division by entering into an unconsolidated operating venture with Nomura Asset
Capital Corporation ("Nomura"), named GLN Capital Co., LLC (the "GLN Venture"),
having an anticipated maximum leveraged investment capacity for short term
loans of $200.0 million. GMAC Commercial Mortgage ("GMAC-CM") has previously
funded four loans with the Company and has committed to provide a credit line
to the GLN Venture of up to $50.0 million, which will be secured by loans
originated by the GLN Venture.
The Company's Senior Care Division currently seeks growth opportunities
nationwide through short term financing and participating loans to facilitate
the purchase of senior care facilities. Sellers of senior care facilities
generally fall into one of two categories: (a) small independent operators who
are struggling to maintain operating margins in a consolidating industry and
(b) large owner-operators seeking to divest themselves of real estate
operations and concentrate on facility management and ancillary services. The
Company believes that the extensive operating requirements and budgetary
constraints of Federal, state and local governments have caused competitive
pressures that particularly impact small operators and which in turn are
causing a consolidation of the senior care industry. Large operators have also
been affected by the consolidation of the senior care industry and often seek
to sell their senior care facilities while retaining management service
contracts, providing these large operators with ongoing revenues in connection
with their management services.
Nonprofit entities are particularly attracted to investments in senior care
facilities because of their unique ability to finance acquisitions through the
issuance of tax-exempt bonds, providing nonprofit entities with a relatively
lower cost of capital as compared to for-profit purchasers. In addition, in
certain states health care facilities owned by nonprofit entities are exempt
from taxes on real property.
General
Daniel M. Gottlieb and Steven D. Lebowitz, the two senior officers and
founders of the Company, have over 40 years of combined experience in
acquiring, developing, managing and leasing medical office properties. Messrs.
Gottlieb and Lebowitz own, in the aggregate, approximately 22.6% of the equity
of the Company, inclusive of their interests ("Units") in the Operating
Partnership, of which the Company is sole general partner and in which it has
an 89.1% partnership interest. See "Principal Stockholders of the Company."
Substantially all of the Company's assets are held by, and operations are
conducted through, the Operating Partnership or other entities created for
financing purposes.
The Company's executive offices are located at 439 North Bedford Drive,
Beverly Hills, California 90210, and its telephone number is (310) 273-9930.
The Company is a Maryland corporation that was incorporated on September 15,
1993.
RECENT DEVELOPMENTS
In February 1997, the Company formed the PHP Joint Venture which purchased
six primary health care facilities located throughout New Jersey consisting of
approximately 80,000 aggregate square feet for $22.4 million. The Company
funded its 80.5% equity contribution to the PHP Joint Venture with a loan
provided by the GLN Venture and secured by the Company's interest in the PHP
Joint Venture. The Company does not hold the requisite level of control and
therefore does not consolidate the PHP Joint Venture in its financial
statements. Until May 31, 1997, PHP has an option to purchase the Company's
interest in the PHP Joint Venture. PHP has leased the properties from the PHP
Joint Venture for 25 years and has a three year contract as a
2
<PAGE>
preferred provider to Blue Cross/Blue Shield of New Jersey. Charles P. Reilly,
a director of the Company and Chairman of the Compensation Committee of the
Board of Directors of the Company, is Chairman of the Board of Directors of
PHP. See "Certain Transactions."
In February 1997, the Company funded its first senior care loan through the
GLN Venture, a $6.4 million participating loan to CoreCare Behavioral
Management. The loan has a term of 18 months and is secured by a first deed of
trust on the Institute of Pennsylvania Hospital in Philadelphia, Pennsylvania,
which CoreCare acquired in connection with the loan by the GLN Venture.
In March 1997, the Company sold Series A and B bonds issued by the
Massachusetts Industrial Finance Agency to the GLN Venture for $7.7 million and
assigned $14 million of indebtedness owed to GMAC-CM. The bonds, which were
purchased for $19.9 million in October 1995, had an outstanding balance of
$27.7 million, including principal and accrued, unpaid interest, at the time of
sale.
On April 28, 1997 the Company announced preliminary results for the quarter
ended March 31, 1997. For the quarter ended March 31, 1997, the Company
recorded total revenue of approximately $6.7 million, net income of
approximately $1.1 million and funds from operations of approximately $2.0
million. For a discussion of funds from operations as a measure of the
Company's performance, see "--Summary Consolidated Financial Data."
THE OFFERING
<TABLE>
<C> <S>
Securities Offered............... 1,200,000 shares of % Series A
Cumulative Preferred Stock (1,380,000
shares if the Underwriters' over-allotment
option is exercised in full). The Company
has applied to list the Series A Preferred
Stock on the NYSE under the symbol "GLR
PrA."
Maturity......................... The Series A Preferred Stock has no stated
maturity and will not be subject to any
sinking fund or mandatory redemption.
Use of Proceeds.................. The net proceeds from the sale of the
Series A Preferred Stock, approximately
$28.4 million, will be used to repay
indebtedness of the Company.
Ranking.......................... With respect to the payment of dividends
and amounts upon liquidation, the Series A
Preferred Stock will rank senior to the
Common Stock of the Company, par value $.01
per share (the "Common Stock"), which is
the only capital stock of the Company
currently outstanding, on a parity with all
future issuances of capital stock the terms
of which specifically provide that such
stock ranks on a parity with the Series A
Preferred Stock with respect to the payment
of dividends and amounts upon liquidation,
and junior to all existing and future
indebtedness of the Company.
Dividends........................ Dividends on the Series A Preferred Stock
are cumulative from the date of original
issue and are payable monthly on or before
the 15th day of each month commencing on
June 15, 1997, to shareholders of record on
the first day of such month, at the rate of
% per annum of the original stated
Liquidation Preference of $25 per share.
Liquidation Preference........... The original stated Liquidation Preference
is equal to $25 per share. Upon a
liquidation of the Company, holders of
Series A Preferred Stock are also entitled
to receive accrued and unpaid dividends
(whether or not declared).
</TABLE>
3
<PAGE>
<TABLE>
<C> <S>
Redemption....................... Except in certain circumstances relating to
preservation of the Company's status as a
REIT, the Series A Preferred Stock is not
redeemable prior to June 1, 2001. On and
after such date, the Series A Preferred
Stock will be redeemable for cash at the
option of the Company, in whole or in part,
at a redemption price of $25 per share,
plus dividends accrued and unpaid to the
redemption date (whether or not declared)
without interest.
Voting Rights.................... Holders of Series A Preferred Stock
generally will have no voting rights.
However, whenever dividends on any shares
of Series A Preferred Stock are in arrears
for 18 or more months, the holders of such
shares (voting separately as a class with
all other series of parity preferred stock
upon which like voting rights have been
conferred and are exercisable) will be
entitled to vote for the election of two
directors of the Company until all
dividends accumulated on such shares of
Series A Preferred Stock have been fully
paid or declared and a sum sufficient for
the payment thereof set aside for payment.
In addition, certain changes to the terms
of the Series A Preferred Stock that would
be materially adverse to the rights of
holders of the Series A Preferred Stock
cannot be made without the affirmative vote
of holders of at least two-thirds of the
outstanding shares of Series A Preferred
Stock.
Conversion....................... The Series A Preferred Stock is not
convertible into or exchangeable for any
other property or securities of the
Company.
</TABLE>
RISK FACTORS
An investment in the Series A Preferred Stock involves various risks, and
investors should carefully consider the matters discussed under "Risk Factors."
Some of the significant risks include:
. a decline in the economy in Southern California, where all of the
Properties directly owned by the Company are located, and a
corresponding reduction in the value of the Properties and the ability
of tenants to make lease payments;
. risks associated with lending to senior care facilities, including the
risk that a borrower will be unable to obtain permanent financing or
that a borrower's residents will be unable to pay for services;
. risks associated with the burdens of compliance with health care
regulations and restrictions on the Company's tenants and the effect of
these burdens on the tenants' and borrowers' ability to make lease
payments;
. general real estate investment risks such as the effect of economic and
other conditions on real estate values, the ability of tenants to make
lease payments and the need to renovate, maintain and relet space and
pay the cost thereof;
. taxation of the Company as a regular corporation if it fails to qualify
as a REIT, and the resulting decrease in the funds available to pay
dividends;
. the potential liability of the Company for unknown or future
environmental liabilities;
. potential conflicts of interest between the Company and its principal
executive officers, Messrs. Gottlieb and Lebowitz; and
. potential losses that are not insured, not insurable or not economically
insurable, such as losses from seismic activity.
4
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL DATA
The following table sets forth summary consolidated financial information for
the Company and its predecessor. Data presented as of December 31, 1996, 1995,
1994 and 1993 and for each of the years ended December 31, 1996, 1995 and 1994
is for the Company. Data presented for the year ended December 31, 1993
includes data for the six Properties located in Beverly Hills (the "G&L
Development Properties") for January 1, 1993 through December 16, 1993 and for
the Company for December 16, 1993 through December 31, 1993. Data presented as
of December 31, 1992 and for the year ended December 31, 1992 is for the G&L
Development Properties. For comparison purposes only, the G&L Development
Properties are considered the predecessor entity to the Company. The unaudited
pro forma data reflects the completion of the Offering as if it had occurred on
January 1, 1996, with the net proceeds being utilized to pay down borrowings
bearing interest at rates from 7% to 9 3/4%. See "Use of Proceeds." The pro
forma data is not necessarily indicative of what the actual data would have
been as of the date or for the period indicated, nor does it purport to
represent or project the data for future periods. The following information
should be read in conjunction with all of the financial statements and notes
thereto included in this Prospectus. This data also should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" included elsewhere in this Prospectus. The summary
consolidated financial information as of December 31, 1996, 1995, 1994, 1993
and 1992 and for each of the years ended December 31, 1996, 1995, 1994, 1993
and 1992 have been derived from audited financial statements.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------
1996 1995 1994 1993 1992
------- ------- ------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE
AMOUNTS)
OPERATING DATA:
- ---------------
<S> <C> <C> <C> <C> <C>
Revenue:
Rental.......................... $15,796 $16,801 $14,740 $10,170 $ 9,620
Tenant reimbursements........... 728 732 587 465 426
Parking......................... 1,251 1,388 1,196 1,029 1,026
Interest, loan fees and other... 6,712 1,835 113 58 --
Other........................... 549 652 650 77 93
------- ------- ------- ------- -------
Total revenues................ 25,036 21,408 17,286 11,799 11,165
Expenses:
Property operations............. 5,696 5,199 4,317 3,084 3,488
Earthquake costs
(reimbursements)............... -- (133) 635 -- --
Depreciation and amortization... 3,276 4,047 3,697 2,503 2,464
Interest........................ 8,819 6,372 3,625 5,050 6,263
General and administrative...... 1,787 1,640 1,298 43 --
Loss on disposition of real
estate......................... 4,874 -- -- -- --
------- ------- ------- ------- -------
Total expenses................ 24,452 17,125 13,572 10,680 12,215
------- ------- ------- ------- -------
Income from operations before
minority interests and
extraordinary gains (losses)... 584 4,283 3,714 1,119 (1,050)
Minority interest in
consolidated partnership....... (129) (131) (167) (211) (247)
Minority interest in Operating
Partnership.................... (65) (418) (353) (18) --
------- ------- ------- ------- -------
Income before extraordinary
gains (losses)................. 390 3,734 3,194 890 (1,297)
Extraordinary gains (losses)
(net of minority interest)..... 9,311 (393) 0 (352)
------- ------- ------- ------- -------
Net income.................... $ 9,701 $ 3,341 $ 3,194 $ 538 $(1,297)
======= ======= ======= ======= =======
Per share data:
Net income before extraordinary
gains (losses)................. $ 0.10 $ 0.91 $ 0.77 $ -- $ --
Extraordinary gains (losses).... 2.23 (0.09) -- -- --
------- ------- ------- ------- -------
Net income.................... $ 2.33 $ 0.82 $ 0.77 $ -- $ --
======= ======= ======= ======= =======
</TABLE>
5
<PAGE>
<TABLE>
<CAPTION>
AT OR FOR THE YEAR ENDED DECEMBER 31,
------------------------------------------------
1996 1995 1994 1993 1992
-------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
FUNDS FROM OPERATIONS:
- ----------------------
Operating Partnership funds
from operations............ $ 8,028 $ 7,397 $ 7,042 $ -- $ --
Minority interest in
Operating Partnership...... (847) (747) (700) -- --
-------- -------- -------- -------- --------
Funds from operations(1).... $ 7,181 $ 6,650 $ 6,342 $ -- $ --
======== ======== ======== ======== ========
Distributions paid.......... $ 5,525 $ 5,067 $ 6,821 $ 291 $ --
======== ======== ======== ======== ========
Payout ratio................ 76.9% 76.2% 107.6% N/A N/A
Weighted Averages:
Units outstanding......... 4,541.7 4,550.1 4,618.3 4,618.3 --
Shares outstanding........ 4,171.5 4,090.8 4,159.0 4,159.0 --
Distributions declared per
share...................... $ 1.36 $ 1.24 $ 1.64 $ 0.07 $ --
CASH FLOW DATA:
- ---------------
Net cash provided by
operating activities....... $ 5,726 $ 7,862 $ 7,632 $ 2,094 $ 1,054
Net cash used in investing
activities................. (23,413) (37,037) (31,552) (17,724) (1,100)
Net cash provided by
financing activities....... 18,639 29,286 21,849 18,871 46
BALANCE SHEET DATA:
- -------------------
Land, buildings and
improvements, net.......... $ 93,231 $ 92,147 $ 92,715 $ 51,908 $ 44,885
Mortgage loans and bonds
receivable, net............ 34,549 33,634 -- 12,200 --
Total investments........... 127,780 125,781 92,715 64,108 44,885
Total assets................ 135,996 133,347 98,384 71,840 48,578
Total debt.................. 109,025 111,627 74,018 45,500 89,472
Total stockholders' equity.. 22,448 18,267 21,311 25,038 (40,297)
OTHER DATA:
- -----------
Ratio of earnings to fixed
charges(2)................. 1.59x 1.61x 1.83x -- --
Pro forma ratio of earnings
to fixed charges and
preferred dividends(3)..... 1.55x -- -- -- --
Ratio of funds from
operations to fixed
charges(4)................. 1.88x 2.09x 2.66x -- --
Pro forma ratio of funds
from operations to fixed
charges and preferred
dividends(5)............... 1.84x -- -- -- --
Ratio of total debt to total
capitalization(6).......... 58.4% 70.3% 55.2% 35.1% --
Pro forma ratio of total
debt to total
capitalization(7).......... 42.8% --
Number of properties........ 15 12 12 7 6
</TABLE>
- --------
(1) Funds from operations ("FFO") represents net income (computed in accordance
with generally accepted accounting principles, consistently applied
("GAAP")), excluding gains (or losses) from debt restructuring and sales of
property, plus depreciation of real property, less preferred stock
dividends and after adjustments for consolidated and unconsolidated
entities in which the Company holds a partial interest. FFO is computed in
accordance with the definition adopted by the National Association of Real
Estate Investment Trusts ("NAREIT"). FFO should not be considered as an
alternative to net income or any other indicator developed in compliance
with GAAP, including measures of liquidity such as cash flows from
operating, investing and financing activities. FFO is helpful in evaluating
the performance of a real estate portfolio considering the fact that
historical cost accounting assumes that the value of real estate diminishes
predictably over time. FFO is only one of a range of indicators which
should be considered in determining a company's operating performance. The
methods of calculating FFO among different companies are subject to
variation; therefore, FFO may be an invalid measure for purposes of
comparing companies. Also,
6
<PAGE>
the elimination of depreciation and gains and losses on sales of property
may not be a true indication of an entity's ability to recover its
investment in properties. The Company implemented the new method of
calculating FFO effective as of the NAREIT-suggested adoption date of
January 1, 1996. FFO has been restated for all prior periods under the new
method.
(2) For purposes of these computations, earnings consist of net income plus
fixed charges. Fixed charges consist of interest expense, capitalized
interest and amortization of deferred financing costs.
(3) Pro forma ratio of earnings to fixed charges and preferred dividends is
computed as defined in Note (2) and also assumes payment of dividends on
the Series A Preferred Stock offered hereby and application of the net
proceeds of the Offering to reduce the Company's borrowings and related
interest and amortization expenses effective January 1, 1996.
(4) For purposes of these computations, the ratio of FFO to fixed charges
consists of FFO as defined in Note (1) plus fixed charges. Fixed charges
consist of interest expense, capitalized interest and amortization of
deferred financing costs.
(5) Pro forma ratio of funds from operations to fixed charges and preferred
dividends is computed as defined in Note (4) and also assumes payment of
dividends on the Series A Preferred Stock offered hereby and use of the
proceeds of the Offering to reduce the Company's borrowings and related
interest and amortization expenses effective January 1, 1996.
(6) Total capitalization as of the dates presented is total debt plus the
aggregate market value of the Company's Common Stock and Operating
Partnership Units not owned by the Company, assuming one Unit is
equivalent in value to one share of Common Stock.
(7) Pro forma ratio of total debt to total capitalization is computed as
defined in Note (6) except that the proceeds of the Series A Preferred
Stock offered hereby have been reflected in stockholders' equity at market
value and the net proceeds of the Series A Preferred Stock offered hereby
have been used to reduce debt.
7
<PAGE>
RISK FACTORS
An investment in the Series A Preferred Stock involves various risks,
including those described below. Investors should carefully consider these
risk factors together with all of the information set forth in this Prospectus
in determining whether to purchase shares of Series A Preferred Stock.
Information contained in this Prospectus may contain forward-looking
statements within the meaning of the Reform Act. These statements can be
identified by the use of forward-looking terminology such as "may," "will,"
"expect," "anticipate," "estimate," or "continue" or the negative thereof or
other comparable terminology. The following matters and other factors noted
throughout this Prospectus constitute cautionary statements identifying
important factors with respect to forward-looking statements, including
certain risks and uncertainties, that could cause the Company's actual results
to differ materially from those contained in any forward-looking statements.
LACK OF DIVERSIFICATION IN PROPERTY TYPE AND LOCATION
The earnings generated by the Company's MOB Division are derived from a
relatively small number of properties. In addition, all of the Properties
directly owned by the Company are located in Southern California (the Company
indirectly owns six properties located in New Jersey through the PHP Joint
Venture, of which the Company owns 80.5%). The operating results of the
Company's MOB Division, therefore, may be significantly impacted by the
performance of one of its Properties and by factors that affect the medical
profession or the Southern California economy.
SPECIFIC RISKS RELATING TO INVESTMENTS IN TRUST DEEDS SECURED BY SENIOR CARE
FACILITIES
The earnings generated by the Company's Senior Care Division are derived
mainly from loans secured by senior care facilities originated by the Company
or its affiliates. The operating results of the Company's Senior Care
Division, therefore, will be significantly impacted by the yield of its loans,
which may be adversely impacted by factors that affect its borrowers' ability
to repay loans made by the Company or its affiliates, as follows:
Inability of Borrowers to Obtain Permanent Financing. The inability of the
borrowers to obtain replacement financing, permanent financing or, in some
cases, to obtain tax-exempt status required to complete certain financing
transactions could adversely affect the timing of repayment of the Company's
loans or the borrowers' ability to repay in general, and could adversely
affect the Company's results of operations and its ability to make
distributions to stockholders.
Dependence on Attracting Seniors With Sufficient Resources to Pay. The
borrowers derive most of their revenues from payments received from their
residents. Inflation or other circumstances that adversely affect the ability
of such residents to pay for services could adversely affect a borrower's
ability to meet its obligations under the indebtedness held by the Company and
could adversely affect the Company's results of operations and its ability to
make distributions to stockholders.
GOVERNMENT REGULATION
The health care industry is highly regulated by Federal, state and local law
and is directly affected by state and local licensure, fines, and loss of
certification required to participate in the Medicare and Medicaid programs,
as well as potential criminal penalties. Failure of the Company's borrowers or
tenants to comply with governing laws, requirements and regulations could
adversely affect the operation of the healthcare facility or medical practice
and could diminish a borrower's or tenant's capacity to make debt or lease
payments to the Company.
In the past several years, due to rising health care costs, there has been
an increased emphasis on detecting and eliminating fraud and abuse in the
Medicare and Medicaid programs. Payment of any consideration in exchange for
referral of Medicare and Medicaid patients is generally prohibited by Federal
law, which subjects violators to severe penalties, including exclusion from
the Medicare and Medicaid programs, fines, and even prison sentences. In
recent years, both Federal and state governments have significantly increased
investigation and enforcement activity to detect and punish wrongdoers. In
addition, legislation has been adopted at both state
8
<PAGE>
and Federal levels that severely restricts the ability of physicians to refer
patients to entities in which they have a financial interest.
It is anticipated that the trend toward increased investigation and
informant activity in the area of fraud and abuse, as well as self-referral,
will continue in future years. If any borrower or tenant were to be found in
violation of laws regarding fraud, abuse or self-referral, that borrower's or
tenant's ability to operate a health care facility could be jeopardized, which
could adversely affect the borrower's or tenant's capacity to make debt or
lease payments to the Company and, thereby, adversely affect the Company's
financial condition and results of operations.
Health Care Reform. The health care industry is facing various challenges,
including increased government and private payor pressure on health care
providers to control costs, the migration of patients from acute care
facilities into extended care and home care settings and the vertical and
horizontal consolidation of health care providers. The pressure to control
health care costs intensified during 1993 and 1994 as a result of the national
health care reform debate and has continued into 1997 as Congress attempts to
slow the rate of growth of Federal health care expenditures as part of its
effort to balance the Federal budget.
The Company believes that government and private efforts to contain and
reduce health care costs will continue. These trends are likely to lead to
reduced or slower growth in reimbursement for certain services provided by
some of the Company's borrowers and tenants. The Company cannot predict
whether governmental reforms will be adopted; if adopted the implementation of
these reforms may have a material adverse effect on the Company's financial
condition or results of operations.
Cost of Compliance with Americans with Disabilities Act. All of the
Properties are required to comply with the Americans with Disabilities Act
(the "ADA"). The ADA generally requires that buildings be made accessible to
people with disabilities. Compliance with the ADA requirements could require
removal of access barriers, and noncompliance could result in imposition of
fines by the U.S. government or an award of damages to private litigants. The
Company believes it is in substantial compliance with the ADA and that it will
not be required to make substantial capital expenditures to address the
requirements of the ADA. If required changes involve a greater expenditure
than the Company currently anticipates, the Company's ability to make expected
distributions could be adversely affected.
GENERAL REAL ESTATE INVESTMENT CONSIDERATIONS
General Risks. Investments in the Company are subject to the risks generally
incident to the ownership and operation of real estate, including risks
associated with changes in general economic or local market conditions,
competition for tenants, changes in market rental rates, inability to collect
rents and other payments from tenants due to bankruptcy, insolvency or other
financial difficulties of tenants or otherwise and the need to periodically
renovate, repair and relet space and to pay the costs thereof. In addition,
real estate investments are relatively illiquid which may tend to limit the
ability of the Company to react promptly in response to changes in economic or
other conditions.
Leverage; Adverse Impact of Rising Interest Rates. The Company is subject to
the risks normally associated with debt financing, including the risk that the
Company's cash flow will be insufficient to meet required payments of
principal and interest, the risk that existing indebtedness on the Properties
cannot be refinanced or that the terms of such refinancing will not be as
favorable as the terms of existing indebtedness and the risk that necessary
capital expenditures for such purposes as renovations and reletting space
cannot be financed on favorable terms, if at all. If a Property is mortgaged
to secure payment of indebtedness and the Company is unable to meet mortgage
payments, the Property could be lost through foreclosure or transfer to the
mortgagee with a consequent loss of income and asset value to the Company.
Approximately $16.0 million of the Company's indebtedness that will be
outstanding after completion of this Offering has variable interest rates, and
the Company is subject to the significant risk that interest rates may
increase, which could adversely affect its results of operations and ability
to make distributions to stockholders. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Liquidity and
Capital Resources--Debt Structure."
9
<PAGE>
Lease Terminations. The Company is subject to the normal risks associated
with leasing property, including the risk that upon expiration of leases for
space located in the Properties, the leases may not be renewed, the space may
not be relet or the terms of renewal or leasing (including any cost of required
renovations or concessions to tenants) may be less favorable than current lease
terms. If the Company is unable promptly to relet or renew leases for a
significant portion of its space or if the rental rates upon renewal or
reletting are significantly lower than expected rates, then the Company's
earnings and ability to make expected distributions to stockholders may be
adversely affected. Leases constituting approximately 34% of the Properties'
annual rent will expire by their terms before the end of 1998, excluding leases
that are month-to-month. See "Business and Properties--Leases."
Proximity to Hospitals. Because the Properties are healthcare facilities,
they are in close proximity to one or more hospitals. The relocation or closure
of a hospital could make the Company's nearby Properties (particularly those
outside of the Beverly Hills area) less desirable to doctors affiliated with
the hospital and affect the Company's ability to collect rent due under
existing leases, renew leases and attract new tenants.
Other Operating Risks. Other operating risks include possible changes in tax,
real estate, environmental and zoning laws and the enforcement of and
compliance with laws pertaining to safety systems and handicapped access.
Substantial unanticipated operating expenses or capital expenditures relating
to these matters that cannot be passed through to tenants could adversely
affect the Company's earnings and its ability to make expected distributions to
stockholders. In addition, while the Company anticipates that it will purchase
fee interests in properties, it may participate, on a selective basis, in joint
venture transactions or acquire partnership interests as the Board of Directors
may determine to be in the best interest of the Company. Such investments may
be subject to existing mortgage financing and other indebtedness that have
priority over the equity interest of the Company and may not afford the Company
with the operating control it has with respect to the Properties.
COMPETITION
The Company competes with other REITs, real estate partnerships, health care
providers and other investors, including but not limited to banks and insurance
companies, many of which have greater financial resources than the Company, in
the acquisition, leasing and financing of health care facilities. There can be
no assurance that suitable investments will be identified or that additional
investments can be consummated on commercially reasonable terms.
ADVERSE IMPACT ON DISTRIBUTIONS RESULTING FROM THE FAILURE TO QUALIFY AS A REIT
The Company intends to continue to operate as a REIT under the Code. Although
management of the Company believes that the Company is organized and is able to
operate in such a manner, no assurance can be given that the Company will
continue to qualify as a REIT. Qualification as a REIT involves the application
of highly technical and complex Code provisions for which there are only
limited judicial or administrative interpretations and the determination of
various factual matters and circumstances not entirely within the Company's
control may impact its ability to qualify as a REIT. In addition, no assurance
can be given that legislation, new regulations, administrative interpretations
or court decisions will not significantly change the tax laws with respect to
the Company's qualification as a REIT or the Federal income tax consequences of
such qualification. The Company, however, is not aware of any proposal to amend
the tax laws that would significantly and adversely affect the Company's
ability to operate as a REIT.
If the Company fails to qualify as a REIT, the Company would be subject to
Federal income tax (including any applicable alternative minimum tax) on its
taxable income at regular corporate rates. In addition, unless entitled to
relief under certain statutory provisions, the Company will also be
disqualified from treatment as a REIT for the four taxable years following the
year during which qualification was lost. This treatment would significantly
reduce the net earnings of the Company available for investment or distribution
to stockholders because of the additional tax liability to the Company for the
year or years involved. In addition, the Company would no longer be required to
make distributions. See "Federal Income Tax Considerations." Even if the
10
<PAGE>
Company qualifies as a REIT, it will be subject to certain Federal, state and
local taxes on its income and property. See "Federal Income Tax
Considerations."
CONFLICTS OF INTEREST
Messrs. Gottlieb and Lebowitz participate in the Company in a number of
capacities and have significant influence over its activities. As the principal
executive officers of the Company, Messrs. Gottlieb and Lebowitz receive
salaries and are eligible for bonuses. In addition, as the beneficial owners of
a combined total of 611,000 shares of Common Stock (representing approximately
15.0% of the shares of Common Stock outstanding) and as participants in the
Company's 1993 Stock Incentive Plan, they also participate in any increase in
the share value of the Company. As owners of Units, they participate in any
increase in the value of the Properties directly or indirectly owned by the
Operating Partnership and in any increase in the income generated by such
Properties. It is possible that the interests of Messrs. Gottlieb and Lebowitz,
as the owners of an aggregate of 9.6% interest in the Operating Partnership,
could diverge from the interest of the Company and from their own interest as
officers and directors and as significant holders of shares of Common Stock.
Holders of Units may suffer different and more adverse tax consequences than
the Company upon the sale of the properties owned directly or indirectly by the
Operating Partnership and, therefore, such holders, including Messrs. Gottlieb
and Lebowitz and Reese L. Milner II, a director of the Company, may have
different objectives than the Company regarding the appropriate pricing and
timing of the sale of any of the Company's Properties. While the Company, as
the sole general partner of the Operating Partnership, has the authority as to
whether and on what terms to sell wholly owned or majority owned properties,
these directors may influence the Company not to sell any of the Company's
Properties, even though a sale might otherwise be financially advantageous to
the Company.
The Company has adopted certain policies designed to eliminate or minimize
potential conflicts of interest. These policies include a policy that all
transactions in which officers or directors have a conflicting interest must be
approved by a majority of the disinterested directors of the Company. However,
there can be no assurance that these policies always will be successful in
eliminating the influence of such conflicts, and if they are not successful,
decisions could be made that might fail to reflect fully the interests of all
stockholders. See "Policies with Respect to Certain Activities--Conflict of
Interest Policies."
POSSIBLE LIABILITY RELATING TO ENVIRONMENTAL MATTERS
Under various Federal, state and local laws, ordinances and regulations, an
owner or operator of real estate is liable for the costs of removal or
remediation of certain hazardous or toxic substances on or in its property.
These laws impose liability without regard to whether the owner knew of, or was
responsible for, the presence of any hazardous or toxic substances. The
presence of such substances, or the failure to properly remediate these
substances, may adversely affect the owner's ability to borrow using the real
estate as collateral and may subject the owner to material remediation costs.
All of the Properties have been subject to Phase I environmental assessments
(which involve inspection of the subject property, but no soil sampling or
groundwater analysis) by independent environmental consultants. Although
restricted in scope, these independent assessments revealed no material
evidence of existing environmental liability, and the Company has not been
notified by any governmental authority of any non-compliance by, liability for,
or other claim against the Company in connection with environmental matters
related to the Properties. While the Company is not aware of any environmental
liability that it believes would have a material adverse effect on its
business, assets or results of operations, no assurance can be given that the
environmental assessments revealed all potential environmental liabilities or
that no prior owner created any material environmental condition not known to
the Company or that future uses or conditions (including changes in applicable
environmental laws and regulations) will not result in imposition of
environmental liability which could adversely affect the Company's ability to
make distributions to stockholders.
The independent environmental assessments included selective sampling for
asbestos where the age of the buildings or the types of materials warranted
such sampling. Limited quantities of non-friable asbestos were discovered in
the Sherman Oaks Medical Plaza. However, the Company removed this asbestos at a
cost of approximately $300,000 in connection with the renovation of this
building in 1994.
11
<PAGE>
As part of the normal practice of doctors, medical waste is generated. The
Company's leases require the individual tenants to make arrangements for the
disposal of medical waste and require all tenants to provide proof that they
have contracted with a third party service to remove it from the premises each
night. The handling and disposal of this waste is the responsibility of the
tenants; however, the Company remains responsible as the owner of the
property. There can be no assurances that all such medical waste will be
properly handled and disposed of or that the Company will not incur costs in
connection with improper disposal of medical waste by its tenants.
UNINSURED LOSS
The Company carries comprehensive liability, fire, flood, extended coverage
and rental loss insurance with respect to the Properties. There are certain
types of losses which may be either uninsurable or not economically insurable;
however, there can be no assurance that policies maintained by the Company
will be adequate in the event of a loss. The Company carries earthquake
insurance with respect to eight of its Properties. All of the Properties
directly owned by the Company are located in Southern California (the Company
indirectly owns six properties located in New Jersey through the PHP Joint
Venture, of which the Company owns 80.5%), which has a history of seismic
activity, including the 1994 Northridge earthquake, which damaged the Holy
Cross Medical Plaza property. Should an uninsured loss occur, the Company
could lose its investment in, and anticipated earnings and cash flow from, a
Property, which would adversely affect its ability to make distributions to
stockholders.
RISKS ASSOCIATED WITH DEBT FINANCING
The Company currently uses and intends to continue to use debt financing for
new investments. Debt financing may include the Company's credit facility or
permanent secured or unsecured long-term debt. The Company's use of debt
financing presents the risk to holders of the Series A Preferred Stock that
payments of principal and interest on borrowings will leave the Company with
insufficient cash resources to pay dividends required by the terms of the
Series A Preferred Stock or distributions in respect of capital stock required
to be paid in order for the Company to maintain its qualification as a REIT.
Upon consummation of this Offering, the Company's debt to total capitalization
ratio will be approximately 42.8%.
RISKS RELATED TO ISSUANCE OF ADDITIONAL PREFERRED STOCK
The Company's Articles of Incorporation do not limit the issuance of
additional series of preferred stock ranking in parity with the Series A
Preferred Stock. The issuance of additional preferred stock in parity with the
Series A Preferred Stock could have the effect of diluting the ability of
holders of the Series A Preferred Stock to receive their respective
Liquidation Preferences.
OWNERSHIP LIMIT; PRECLUSION OF ACQUISITION OF CONTROL BY A THIRD PARTY
In order to maintain its qualification as a REIT, not more than 50% in value
of the outstanding capital stock of the Company may be owned, directly or
indirectly, by five or fewer individuals (which as defined in the Code
includes certain entities). Direct or constructive ownership of more than 9.8%
of the capital stock (in value or in number) by any single stockholder has
been restricted for the purpose of maintaining the Company's qualification as
a REIT. See "Description of Series A Preferred Stock--Restrictions on
Ownership and Transfer." The constructive ownership rules are complex and may
cause Common Stock or Preferred Stock owned, directly or constructively, by a
group of related individuals and/or entities to be constructively owned by one
individual or entity. As a result, the acquisition of less than 9.8% of either
of the Common Stock and Preferred Stock (or the acquisition of an interest in
an entity which owns Common Stock or Preferred Stock) by an individual or
entity could cause that individual or entity (or another individual and/or
entity) to own constructively in excess of 9.8% of the capital stock of the
Company and thus subject such capital stock to the ownership limitations. This
ownership limitation may have the effect of precluding the acquisition of
control of the Company by a third party unless the Board of Directors
determines that maintenance of REIT status is no longer in the best interests
of the Company.
12
<PAGE>
DEPENDENCE ON SENIOR MANAGEMENT
The Company's future performance will depend to a large extent upon the
efforts of Messrs. Gottlieb and Lebowitz. The loss of the services of either
Messrs. Gottlieb or Lebowitz could have a material adverse effect upon the
Company. The Company maintains key man life insurance with respect to Messrs.
Gottlieb and Lebowitz in the amount of $3.0 million each. In December 1993,
each of Messrs. Gottlieb and Lebowitz entered into a three-year employment
agreement with the Company, renewable automatically for additional one-year
terms. The employment agreements of Messrs. Gottlieb and Lebowitz were last
renewed on December 16, 1996. See "Management--Employment Agreements and
Arrangements."
CHANGES IN POLICIES WITHOUT A VOTE OF STOCKHOLDERS
The policies of the Company with respect to acquisitions, financing,
borrowing and certain other activities, including its growth, debt-to-capital
ratio, distributions, REIT status and investment and operating policies, are
determined by the Board of Directors. Although it has no present intention to
do so, these policies may be amended or revised from time to time at the
discretion of the Board of Directors without a vote of the stockholders of the
Company. Accordingly, the stockholders have no control over changes in
policies of the Company, and changes in the Company's policies may not fully
serve the interests of all stockholders.
13
<PAGE>
USE OF PROCEEDS
The net cash proceeds to the Company from the sale of Series A Preferred
Stock in the Offering, after payment of expenses of the Offering including the
underwriting discount, are estimated to be approximately $28.4 million ($32.7
million if the Underwriters' over-allotment option is exercised in full). The
Company will contribute the net proceeds to the Operating Partnership in
exchange for a new series of Units having terms identical to those of the
Series A Preferred Stock. All of these proceeds will be used by the Operating
Partnership to repay $28.4 million of indebtedness that currently bears
interest at rates ranging from 7.5% to 12%, as follows: (i) $4.1 million under
a note due June 17, 1997 that carries interest at the prime lending rate (or
approximately 8.5% as of March 1, 1997), (ii) $3 million under a note due May
31, 1997 that carries interest at the prime lending rate (or approximately
8.5% as of March 1, 1997), (iii) $3.7 million under a note due August 28, 1997
that carries interest at 12% per annum, and (iv) $17.6 million under a credit
line that carries interest at the rate of LIBOR plus 1.75% (or approximately
7.5% as of March 1, 1997). The indebtedness to be repaid has maturities
between 1996 and 1998 but can be prepaid without a prepayment charge or
penalty. Pending application of the net proceeds of the Offering, the
Operating Partnership will invest such net proceeds in interest-bearing
accounts and short-term, interest-bearing securities. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Liquidity and Capital Resources."
CAPITALIZATION
The following table sets forth the capitalization of the Company as of
December 31, 1996 and as adjusted to give effect to the sale by the Company of
the Series A Preferred Stock offered hereby and the use of the net proceeds
therefrom. See "Use of Proceeds." This capitalization table should be read in
conjunction with the Company's consolidated financial statements and related
notes thereto incorporated by reference in this Prospectus.
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1996
---------------------------
ACTUAL AS ADJUSTED
----------- --------------
(IN THOUSANDS OF DOLLARS
EXCEPT PER SHARE
AMOUNTS)
<S> <C> <C>
DEBT:
Borrowings under lines of credit.................. $ 15,400 $ 8,125
Other notes payable............................... 93,625 72,500
----------- -----------
Total debt...................................... 109,025 80,625
Minority interest in consolidated partnership....... (2,718) (2,718)
Minority interest in Operating Partnership.......... 3,103 3,103
STOCKHOLDERS' EQUITY:
Preferred Stock, $.01 par value: 10,000,000 shares
authorized, none outstanding; 1,200,000 shares of
Series A Preferred Stock, as adjusted............ -- 12
Common Stock, $.01 par value: 50,000,000 shares
authorized, 4,062,500 shares outstanding......... 41 41
Additional paid-in capital........................ 23,710 52,098
Distributions in excess of net income............. (1,303) (1,303)
----------- -----------
Total stockholders' equity...................... 22,448 50,848
----------- -----------
TOTAL CAPITALIZATION............................ $ 131,858 $ 131,858
=========== ===========
</TABLE>
14
<PAGE>
SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA
The following table sets forth selected consolidated financial information
for the Company and its predecessor. Data presented as of December 31, 1996,
1995, 1994 and 1993 and for each of the years ended December 31, 1996, 1995
and 1994 is for the Company. Data presented for the year ended December 31,
1993 includes data for the G&L Development Properties for January 1, 1993
through December 16, 1993 and for the Company for December 16, 1993 through
December 31, 1993. Data presented as of December 31, 1992 and for the year
ended December 31, 1992 is for the G&L Development Properties. For comparison
purposes only, the G&L Development Properties are considered the predecessor
entity to the Company. The unaudited pro forma data reflects the completion of
the Offering as if it had occurred on January 1, 1996, with the net proceeds
being utilized to pay down borrowings bearing interest at rates from 7% to 9
3/4%. See "Use of Proceeds." The pro forma data is not necessarily indicative
of what the actual data would have been as of the date or for the period
indicated, nor does it purport to represent or project the data for future
periods. The following information should be read in conjunction with all of
the financial statements and notes thereto included in this Prospectus. This
data also should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations" included elsewhere
in this Prospectus. The selected consolidated financial information as of
December 31, 1996, 1995, 1994, 1993 and 1992 and for each of the years ended
December 31, 1996, 1995, 1994, 1993 and 1992 have been derived from audited
financial statements.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------
1996 1995 1994 1993 1992
------- ------- ------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE
AMOUNTS)
<S> <C> <C> <C> <C> <C>
OPERATING DATA:
- ---------------
Revenue:
Rental.......................... $15,796 $16,801 $14,740 $10,170 $ 9,620
Tenant reimbursements........... 728 732 587 465 426
Parking......................... 1,251 1,388 1,196 1,029 1,026
Interest, loan fees and other... 6,712 1,835 113 58 --
Other........................... 549 652 650 77 93
------- ------- ------- ------- -------
Total revenues................ 25,036 21,408 17,286 11,799 11,165
Expenses:
Property operations............. 5,696 5,199 4,317 3,084 3,488
Earthquake costs
(reimbursements)............... -- (133) 635 -- --
Depreciation and amortization... 3,276 4,047 3,697 2,503 2,464
Interest........................ 8,819 6,372 3,625 5,050 6,263
General and administrative...... 1,787 1,640 1,298 43 --
Loss on disposition of real
estate......................... 4,874 -- -- -- --
------- ------- ------- ------- -------
Total expenses................ 24,452 17,125 13,572 10,680 12,215
------- ------- ------- ------- -------
Income from operations before
minority interests and
extraordinary gains (losses)... 584 4,283 3,714 1,119 (1,050)
Minority interest in
consolidated partnership....... (129) (131) (167) (211) (247)
Minority interest in Operating
Partnership.................... (65) (418) (353) (18) --
------- ------- ------- ------- -------
Income before extraordinary
gains (losses)................. 390 3,734 3,194 890 (1,297)
Extraordinary gains (losses)
(net of minority interest)..... 9,311 (393) -- (352) --
------- ------- ------- ------- -------
Net income.................... $ 9,701 $ 3,341 $ 3,194 $ 538 $(1,297)
======= ======= ======= ======= =======
Per share data:
Net income before extraordinary
gains (losses)................. $ 0.10 $ 0.91 $ 0.77 $ -- $ --
Extraordinary gains (losses).... 2.23 (0.09) -- -- --
------- ------- ------- ------- -------
Net income.................... $ 2.33 $ 0.82 $ 0.77 $ -- $ --
======= ======= ======= ======= =======
</TABLE>
15
<PAGE>
<TABLE>
<CAPTION>
AT OR FOR THE YEAR ENDED DECEMBER 31,
------------------------------------------------
1996 1995 1994 1993 1992
-------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
FUNDS FROM OPERATIONS:
- ----------------------
Operating Partnership funds
from operations............. $ 8,028 $ 7,397 $ 7,042 $ -- $ --
Minority interest in
Operating Partnership....... (847) (747) (700) -- --
-------- -------- -------- -------- --------
Funds from operations(1)..... $ 7,181 $ 6,650 $ 6,342 $ -- $ --
======== ======== ======== ======== ========
Distributions paid........... $ 5,525 $ 5,067 $ 6,821 $ 291 $ --
======== ======== ======== ======== ========
Payout ratio................. 76.9% 76.2% 107.6% N/A N/A
Weighted Averages:
Units outstanding.......... 4,541.7 4,550.1 4,618.3 4,618.3 --
Shares outstanding......... 4,171.5 4,090.8 4,159.0 4,159.0 --
Distributions declared per
share....................... $ 1.36 $ 1.24 $ 1.64 $ 0.07 $ --
CASH FLOW DATA:
- ---------------
Net cash provided by
operating activities........ $ 5,726 $ 7,862 $ 7,632 $ 2,094 $ 1,054
Net cash used in investing
activities.................. (23,413) (37,037) (31,552) (17,724) (1,100)
Net cash provided by
financing activities........ 18,639 29,286 21,849 18,871 46
BALANCE SHEET DATA:
- -------------------
Land, buildings and
improvements, net........... $ 93,231 $ 92,147 $ 92,715 $ 51,908 $ 44,885
Mortgage loans and bonds
receivable, net............. 34,549 33,634 -- 12,200 --
Total investments............ 127,780 125,781 92,715 64,108 44,885
Total assets................. 135,996 133,347 98,384 71,840 48,578
Total debt................... 109,025 111,627 74,018 45,500 89,472
Total stockholders' equity... 22,448 18,267 21,311 25,038 (40,297)
OTHER DATA:
- -----------
Ratio of earnings to fixed
charges(2).................. 1.59x 1.61x 1.83x -- --
Pro forma ratio of earnings
to fixed charges and
preferred dividends(3)...... 1.55x -- -- -- --
Ratio of funds from
operations to fixed
charges(4).................. 1.88x 2.09x 2.66x -- --
Pro forma ratio of funds from
operations to fixed charges
and preferred dividends(5).. 1.84x -- -- -- --
Ratio of total debt to total
capitalization(6)........... 58.4% 70.3% 55.2% 35.1% --
Pro forma ratio of total debt
to total capitalization(7).. 42.8% --
Number of properties......... 15 12 12 7 6
</TABLE>
- --------
(1) FFO represents net income (computed in accordance with GAAP), excluding
gains (or losses) from debt restructuring and sales of property, plus
depreciation of real property, less preferred stock dividends and after
adjustments for consolidated and unconsolidated entities in which the
Company holds a partial interest. FFO is computed in accordance with the
definition adopted by NAREIT. FFO should not be considered as an
alternative to net income or any other indicator developed in compliance
with GAAP, including measures of liquidity such as cash flows from
operating, investing and financing activities. FFO is helpful in evaluating
the performance of a real estate portfolio considering the fact that
historical cost accounting assumes that the value of real estate diminishes
predictably over time. FFO is only one of a range of indicators which
should be considered in determining a company's operating performance. The
methods of calculating FFO among different companies are subject to
variation; therefore, FFO may be an invalid measure for purposes of
comparing companies. Also, the elimination of depreciation and gains and
losses on sales of property may not be a true indication of an entity's
ability to recover its investment in properties. The Company implemented
the new method of calculating FFO effective as of the NAREIT-suggested
adoption date of January 1, 1996. FFO has been restated for all prior
periods under the new method.
16
<PAGE>
(2) For purposes of these computations, earnings consist of net income plus
fixed charges. Fixed charges consist of interest expense, capitalized
interest and amortization of deferred financing costs.
(3) Pro forma ratio of earnings to fixed charges and preferred dividends is
computed as defined in Note (2) and also assumes payment of dividends on
the Series A Preferred Stock offered hereby and application of the net
proceeds of the Offering to reduce the Company's borrowings and related
interest and amortization expenses effective January 1, 1996.
(4) For purposes of these computations, the ratio of FFO to fixed charges
consists of FFO as defined in Note (1) plus fixed charges. Fixed charges
consist of interest expense, capitalized interest and amortization of
deferred financing costs.
(5) Pro forma ratio of funds from operations to fixed charges and preferred
dividends is computed as defined in Note (4) and also assumes payment of
dividends on the Series A Preferred Stock offered hereby and use of the
proceeds of the Offering to reduce the Company's borrowings and related
interest and amortization expenses effective January 1, 1996.
(6) Total capitalization as of the dates presented is total debt plus the
aggregate market value of the Company's Common Stock and Operating
Partnership Units not owned by the Company, assuming one Unit is
equivalent in value to one share of Common Stock.
(7) Pro forma ratio of total debt to total capitalization is computed as
defined in Note (6) except that the proceeds of the Series A Preferred
Stock offered hereby have been reflected in stockholders' equity at market
value and the net proceeds of the Series A Preferred Stock offered hereby
have been used to reduce debt.
17
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the Selected
Consolidated Financial and Operating Data and the Company's Consolidated
Financial Statements and Notes thereto included elsewhere in this Prospectus.
RESULTS OF OPERATIONS
Comparison of the Year Ended December 31, 1996 Versus the Year Ended December
31, 1995
Net income for the year ended December 31, 1996 increased approximately $6.4
million, or 190%, from the previous year. The major component of this increase
was the $9.3 million extraordinary gain which resulted from the surrender of
the property located at 436 North Bedford Drive in Beverly Hills, California
to the holder of the $28.5 million lien on the property. The book value of the
land, buildings and related assets associated with the 436 North Bedford
property was approximately $22.9 million at the time of the transaction. In
conjunction with the transfer, the Company recorded a $4.9 million loss on
disposition of the property which was the difference between the $22.9 million
book value and the estimated market value of $18.0 million. At the same time,
the Company recorded a $10.5 million extraordinary gain resulting from the
elimination of debt, which represented the difference between the $28.5
million loan balance and the estimated $18.0 million market value of the
property. The $10.5 million extraordinary gain was partially offset by
$134,000 of other extraordinary net losses resulting from the early retirement
of three other notes payable. For reporting purposes, the net extraordinary
gain was adjusted to approximately $9.3 million to reflect the portion of the
gain attributable to the minority interest partners.
Rents, tenant reimbursements and parking revenues as a group declined
approximately $1.2 million from an aggregate of approximately $19.0 million
for the year ended December 31, 1995 to $17.8 million for the same period in
1996. This decline was mainly attributed to the 436 North Bedford Drive
property which the Company surrendered to the noteholder on May 24, 1996.
Subsequent to that date, the noteholder put the property on the market for
sale and on August 30, 1996, the Company, through the Medical Partnership,
reacquired the property. During the period from May 24, 1996 to August 30,
1996, the property generated $778,000 in rents, tenant reimbursements and
parking revenues which were earned by the entity that owned the property
during that time. The remaining $368,000 decline is attributable to rents
received on leases that expired during 1995 and 1996 and renewed at lower
rates.
Interest, loan fees and related revenues are primarily the result of
investments in short term loans secured by senior care facilities. The senior
loan program, started in June 1995, has continued to expand since its
inception. Investments made in 1995 combined with new loans in 1996
contributed to the 265% increase in such revenues for the year ended December
31, 1996 as compared to the same period in 1995. In February 1996, the Company
completed a transaction whereby the Company provided the initial capital and
management expertise to facilitate the purchase of a newly constructed but
vacant hospital and medical office facility in Rancho Cucamonga, California by
Heritage Rancho Healthcare, Inc., a Nebraska nonprofit corporation
("Heritage"). Heritage converted the hospital into a long term care facility
to benefit the local community. In conjunction with the closing of this
transaction, the Company recognized cash revenues of $320,000 and received a
$840,000 ten year subordinated note, which the Company sold during the fourth
quarter of 1996 for approximately $665,000 plus accrued interest.
Property operating expense increased $497,000, or approximately 10.0%, from
approximately $5.2 million for the year ended December 31, 1995 to
approximately $5.7 million for the year ended December 31, 1996. Recurring
operating expenses declined as a result of the 436 North Bedford Drive
transactions as previously discussed. This decline was more than offset by
increases in real property taxes, the increased expense of earthquake
insurance and the acquisition of the Tustin Properties. In June 1996, the Los
Angeles County Assessor's Office notified the Company that it was increasing
its valuation on four of the Bedford Drive
18
<PAGE>
properties as a result of a transfer of ownership in conjunction with the
Company's initial public offering (the "IPO") on December 16, 1993. The
Company retained consultants specializing in property valuation appeals and,
as of March 21, 1997, obtained partial reductions in the increased assessments
on two of the four properties. Although there can be no assurances, management
believes that the Company will be able to obtain further reductions in these
increased assessments.
The addition of earthquake insurance partially contributed to the rise in
operating expense. In 1995, earthquake coverage was added on four properties,
and in 1996, coverage was added on four additional properties. As of December
31, 1996, the Sherman Oaks, Regents and Cigna HealthCare properties all had
coverage for certain losses resulting from seismic activity, as do the five
properties located on Bedford Drive.
The acquisition of the Tustin Properties also contributed to an increase in
the Company's operating expense during 1996. At the time of the acquisition,
the hospital was vacant and the medical office buildings were approximately
50% occupied by doctors who were affiliated with the hospital before its
closure. The Company's management is currently working to revitalize these
assets. The Company is currently involved in discussions with several health
care organizations to lease the hospital and additional space in the medical
office buildings. Although there can be no assurance that these discussions
will be successfully completed, management believes the Company will obtain a
lease for the vacant hospital under favorable terms during 1997.
Depreciation and amortization expenses declined from approximately $4.0
million during 1995 to approximately $3.3 million in 1996. The decline is
primarily the result of the 436 North Bedford Drive transactions discussed
above. Prior to its transfer in May 1996, the property had a depreciable cost
basis of approximately $21.1 million. When the property was reacquired in
August 1996, the depreciable cost basis dropped to approximately $15.4
million. Also, no depreciation was recorded for the period during which the
Company did not own the property. The decline in depreciation and amortization
was partially offset by the acquisition of the Tustin Properties in June 1996.
Interest expense increased from approximately $6.4 million for the 12 months
ended December 31, 1995 to approximately $8.8 million for the same period in
1996, an increase of approximately 38%. Funding of the senior care loan
program was the primary reason for the increase. The increase would have been
larger had it not been for the decline in interest expense which was realized
when a $28.5 million loan was extinguished in May 1996 by the transfer of the
436 North Bedford Drive property to the noteholder.
General and administrative expenses increased approximately $147,000, from
approximately $1.6 million for the year ended December 31, 1995 to
approximately $1.8 million for the same period in 1996, as a result of added
travel and professional fees resulting from the expansion of the senior loan
program.
Comparison of the Year Ended December 31, 1995 Versus the Year Ended December
31, 1994
Net income for the year ended December 31, 1995, before an extraordinary
item, was $3.7 million, or $0.91 per share, an increase of 16.9% from $3.2
million, or $0.77 per share, reported in the previous year, based on 4,091,000
and 4,159,000 average shares outstanding, respectively. Net income after the
effect of an extraordinary item of $393,000, or $0.09 per share, was $3.3
million or $0.82 per share. The extraordinary item related to a one-time
charge in the third quarter for repayment of approximately $31 million in
variable rate debt with a $30 million 7.89% fixed rate 10-year loan, and the
replacement of the Company's credit line.
Revenues increased $4.1 million, or 24%, in 1995, as a result of the
properties acquired during 1994 and added revenues from the newly created
Senior Care Division. Rent revenues including tenant reimbursements and
parking fees increased $2.4 million from $16.5 million to $18.9 million. This
increase was due primarily to the acquisition of the following five properties
in 1994: Holy Cross Medical Plaza in January, Regents Medical Center in June,
Sherman Oaks Medical Plaza in June, Cigna HealthCare Building in July and 1095
Irvine Boulevard in October. Operations for the year ended December 31, 1994,
included only partial year revenues for all of the five properties except for
the 1095 Irvine Boulevard building. The 1995 revenues benefited from a full
19
<PAGE>
year of operations except for the 1095 Irvine Boulevard building which was
placed in service in August of 1995. The MOB Division also benefited from
higher occupancy rates: 94% for 1995, up from an average of 92% in 1994.
In late 1994, the Company changed its collection practices and made a
deliberate effort to pursue all delinquent accounts. Some were resolved in
direct negotiations with tenants while others were litigated. By the end of
1995, substantially all delinquencies were resolved through judgments, payment
plans or dissolutions. The previous backlog of uncollected rents has been
reduced through a combination of collections and write-offs.
Under generally accepted accounting principals, the Company is required to
average the billable rent due over the term of its leases and include a
portion of future years' billable rent increases in the current year's rent
revenues. This accounting practice creates an "unbilled rent receivable" from
the Company's tenants. In conjunction with the preparation of its financial
statements, the Company reviews all receivable accounts, including its
unbilled rent receivable for purposes of determining the collectability of
such receivables. Management believes that the overall trend toward larger
medical provider groups has contributed toward the financial stability of the
existing tenant population which, in turn, has led to improved collections of
monthly rent billings. This improved collections rate has allowed the Company
to decrease its allowance for doubtful accounts including the corresponding
allowance for unbilled rent receivable. The Company believes that the current
level of allowance is appropriate.
Beginning late in the second quarter of 1995, the Company began recognizing
revenues from its new Senior Care Division. Interest and loan fees totaled
$1.8 million in 1995 versus $113,000 in 1994.
Total 1995 expenses increased approximately $3.5 million, or 26%, from $13.6
million in 1994 to $17.1 million in 1995. The majority of the increase was the
result of added interest expense which climbed $2.8 million from $3.6 million
in 1994 to $6.4 million in 1995. Two factors fueled the increase: higher debt
and increased rates of interest. Outstanding debt increased from $74.0 million
to $111.6 million at December 31, 1994 and 1995, respectively. In general,
1995 interest rates were up from 1994 and this was amplified by the fact that
rate caps on the Company's interest rate protection agreements also increased
from 4% in 1994 to 5% in 1995.
Property operating expense and depreciation also increased from 1994 to
1995. The overall increase of $1.2 million is primarily the result of showing
a full year of expense for the acquired properties. The effect of increased
operating expense was partially offset by a $768,000 difference relating to
costs and reimbursements from the 1994 Northridge earthquake.
General and administrative costs increased $342,000, at about the same rate
as revenues, largely as a result of investments in consulting services,
travel, professional and other fees related to creating the new Senior Care
Division.
LIQUIDITY AND CAPITAL RESOURCES
The Company obtains its liquidity from multiple internal and external
sources. Internally, funds are derived from the operation of medical office
buildings and senior care lending activities and primarily consist of FFO less
dividends. Since the IPO, external sources have primarily consisted of various
secured loans and lines of credit. The Company's ability to expand its medical
office and senior care lending operations requires continued access to capital
to fund new acquisitions and loans. During 1996, the Company's payout ratio
was approximately 77% of its funds from operations. Undistributed FFO were
used internally to fund maintenance capital expenditures necessary to maintain
the Company's existing properties. All of the Company's properties secure
existing notes payable.
20
<PAGE>
Debt Structure
As of December 31, 1996, the Company had $109.0 million of debt, of which
$44.6 million, or 40.9%, was floating rate and $64.4 million, or 59.1%, was
fixed rate. The seven loans comprising the $109.0 million in debt are
described below.
In August 1995 the Company borrowed $30 million from Nomura for ten years at
a fixed rate of 7.89%. The note had an outstanding balance of approximately
$29.5 million as of December 31, 1996 and amortizes on a 25-year schedule. The
following Properties have been pledged as security for the $30 million blanket
first trust deed: 405 North Bedford, 415 North Bedford, 416 North Bedford and
435 North Bedford Drive.
Concurrently with the above described fixed rate loan from Nomura, the
Company obtained a new $20 million credit line from Tokai Bank of California.
The loan is secured by a blanket first trust deed on Holy Cross, St. Joseph's
Professional Building in Burbank, St. Joseph's Medical Center of Orange, and
the recently acquired Tustin Properties. The credit line requires monthly
interest payments at 30-day LIBOR plus 1.75% and is due August 17, 1998. At
any time prior to maturity, and upon 30 days' notice, the Company may convert
the outstanding balance or increments thereof into a five year term loan. Upon
conversion, the new term loan would bear interest at the variable rate of
prime plus 50 basis points or LIBOR plus 175 basis points. As of December 31,
1996 the Company owed $15.4 million and was paying interest at the rate of
7.3% per annum. As of March 21, 1997, $18.0 million in principal is
outstanding at a rate of 7.55% per annum. This credit line is currently under
review by the lender in light of recent Company transactions. Although there
can be no assurances, the Company anticipates that the credit line will either
be maintained or increased.
In May 1996, the Company repaid loans of $6.2 million, $6.4 million and $6.9
million secured by the Cigna HealthCare property, Sherman Oaks Medical Plaza,
and Regents Medical Center, respectively with the proceeds of a new loan from
Nomura. These loans were retired with the proceeds of a new $19.8 million ten
year fixed rate loan bearing interest at 8.5%. When the Company reacquired the
436 North Bedford Drive property, the Company borrowed an additional $15.2
million as part of the purchase price and increased the $19.8 million loan to
$35.0 million with a due date of August 10, 2006. As of December 31, 1996, the
note had an outstanding balance of approximately $34.9 million and amortizes
on a 25 year schedule. The following properties have been pledged as security
for the $35 million blanket first trust deed: Sherman Oaks Medical Plaza,
Regents Medical Center, Cigna HealthCare Building and 436 North Bedford Drive.
The 435 North Roxbury Drive property is security for the $8.1 million loan
from Citibank, N.A. ("Citibank"). The mortgagor on this loan is 435 North
Roxbury Drive, Ltd. (the "Roxbury Partnership"), of which the Operating
Partnership is the sole general partner with a 61.75% interest. The Citibank
loan came due on June 1, 1996 at which time the loan had a $9.0 million
balance. Under the terms of the extension agreement, Citibank required the
Roxbury Partnership to make two principal payments aggregating $650,000 and,
effective June 1, 1996, to begin making monthly principal reductions of
$35,000 per month plus accrued interest. The agreement extended the loan's
maturity date from June 1, 1996 to May 31, 1999. In addition, pursuant to the
loan extension agreement, the Roxbury Partnership is also required to make
additional semiannual principal reductions equal to the amount of excess cash
flow from the 435 North Roxbury Drive property. The interest rate is adjusted
monthly to 30-day LIBOR plus 1.50%. In order to comply with the terms of the
loan extension agreement, the Operating Partnership made a $350,000 unsecured
loan to the Roxbury Partnership to enable it to meet the principal repayments
required by the loan extension. As of March 31, 1997 the interest rate on the
Citibank loan was 7.4%.
In December 1995, the Company obtained a one-year $14.0 million term loan
from GMAC-CM which is secured by $21.0 million of face value, Series A Health
Care Revenue Bonds issued by the Massachusetts Industrial Finance Agency. The
loan was originally due on December 6, 1996 and required monthly interest only
payments, in arrears, at prime plus 1.5%. As of December 31, 1996 interest was
accruing at a rate of 9.75%. The Company exercised its option to extend the
loan for six months to June 6, 1997. In March 1997 the Company sold the Series
A Health Care Revenue Bonds to the GLN Venture, pursuant to which the GLN
Venture assumed the $14 million debt to GMAC-CM. See "Business and
Properties--Investments in Bonds."
21
<PAGE>
During 1996, the Company obtained three new loans from GMAC-CM secured by
the Company's senior care notes receivable. The three loans provided the
Senior Care Division with $12.0 million in cash which was used to fund new
senior care loans secured by The Phoenix, a senior care facility in Olathe,
Kansas, Beacon Manor in Indiana Township, Pennsylvania and Carroll Manor in
Hyattsville, Maryland. As of December 31, 1996, two loans totaling $7.1
million remained outstanding, including a $3.0 million one-year term loan due
May 31, 1997 and a $4.1 million one-year term loan due June 17, 1997. Both of
these one-year term loans require interest only monthly payments at the prime
rate of interest as established by Citibank (8.25% as of December 31, 1996).
Capital Commitments
In November 1996, the Company entered into the GLN Venture with Nomura to
expand the Senior Care Division's activities. The Company and Nomura have
agreed to contribute $10.0 million and $30.0 million, respectively, to the GLN
Venture, and GMAC-CM has agreed to provide the GLN Venture with a credit line
of up to $50.0 million secured by loans originated by the GLN Venture.
The Company is responsible for administering the short term loans originated
by the GLN Venture and will receive reimbursement from the GLN Venture for its
general and administrative expenses associated with the GLN Venture. Due to
its structure, the operations of the GLN Venture do not appear on the
Company's balance sheet and there is no recourse to the Company for the GLN
Venture. Cash flow generated by each loan made through the GLN Venture is
distributed in the following order: (i) to repay GMAC-CM's outstanding
principal and interest; (ii) to repay capital of the loan allocated to Nomura;
(iii) to repay capital of the loan allocated to the Company; (iv) to pay
Nomura a 9% return on its capital; (v) to pay the Company a 9% return on its
capital. After cash generated by loans made through the GLN Venture is
distributed as described above, Nomura and the Company share equally in any
further distributions.
In February 1997, the Company also entered into the PHP Joint Venture, which
purchased six primary health care facilities in New Jersey, totaling
approximately 80,000 rentable square feet, at a purchase price of
approximately $22.4 million. The Company and PHP funded the $4.4 million down
payment in proportion to their ownership interests in the PHP Joint Venture
(80.5% for the Operating Partnership and 19.5% for PHP), with the Company's
contribution financed by a loan from the GLN Venture to the Company and
secured by the Company's interest in the PHP Joint Venture. The balance of the
purchase price was financed by two loans from PHP and secured by first and
second deeds of trust. Subject to certain conditions, PHP has an option to
acquire the Company's interest in the PHP Joint Venture at any time prior to
May 31, 1997. PHP has leased the properties from the PHP Joint Venture
pursuant to a 25 year net operating lease and has a three-year contract as a
preferred provider to Blue Cross/Blue Shield of New Jersey (the seller of the
properties) whereby PHP will provide medical services on the properties to
Blue Cross/Blue Shield of New Jersey insurance plan members. Charles P.
Reilly, a director of the Company and Chairman of the Compensation Committee
of the Board of Directors of the Company, is Chairman of the Board of
Directors of PHP.
The Company owes approximately $21.1 million on notes payable that are due
in 1997. All of the Company's loans due in 1997 are secured by bonds or loans
related to senior care facilities. Management believes that the notes and
bonds receivables of the Company will be paid or sold and a portion of the
proceeds will be used to extinguish the related notes payable prior to their
due dates and in the ordinary course of business.
The Company expects to continue meeting its short term liquidity and
operating requirements, as well as providing sufficient funds to maintain
stockholder distributions in accordance with REIT requirements, in the short
and long term through, among other things, its working capital and cash flow
provided by operations. The Company expects to continue meeting its long-term
liquidity requirements, such as refinancing mortgages, financing acquisitions
and financing major capital improvement projects through, among other things,
long-term borrowings, the issuance of debt securities and the offering of
additional equity securities.
22
<PAGE>
As of March 21, 1997, the Company had $49.3 million of outstanding debt at
variable rates ranging from 7% to 9 3/4%. The interest rates on these loans
may be affected by inflationary conditions and economic factors.
Distributions
In 1996, the Company announced two distribution increases. During the first
quarter of 1996 the Company increased the quarterly dividend from $0.31 per
share in the fourth quarter of 1995 to $0.32 per share for the first quarter
of 1996. In the third quarter, the Company again increased the dividend to
$0.36 per share from its first and second quarter levels of $0.32 per share.
The effective dividend for the year ended December 31, 1996 was $1.36 per
share as compared to $1.24 per share for the year ended December 31, 1995. The
Company declared a quarterly distribution for the first quarter of 1997 in the
amount of $0.36 per share to be paid on April 16, 1997 to stockholders of
record as of March 31, 1997, which is equal to an annualized distribution of
$1.44 per share. See "Price Range of Common Stock and Distributions."
Financing Policies
Upon consummation of the Offering, the Company's debt to total
capitalization ratio will be approximately 42.8%. The debt to total
capitalization ratio is based on the total debt of the Operating Partnership,
assuming that the net proceeds from the Series A Preferred Stock offered
hereby have been used to reduce the Company's debt, plus (i) the aggregate
market value of the Company's Common Stock and Operating Partnership Units not
owned by the Company assuming one Unit is equivalent in value to one share of
Common Stock, and (ii) the market value of the Series A Preferred Stock
offered hereby.
To the extent that the Board of Directors of the Company decides to seek
additional funding, the Company may raise such capital using various means,
including retention of internally generated funds (subject to the distribution
requirements in the Code with respect to REITs), existing working capital and
possibly the issuance of additional debt (secured or unsecured) or equity
securities or any combination of the above. If, as is the case with this
Offering, the Board of Directors determines to raise additional equity capital
to fund investments by the Operating Partnership, the Company will contribute
such funds to the Operating Partnership as a contribution to capital and
purchase of additional interests in the Operating Partnership. It is
anticipated that borrowings will continue to be made through the Operating
Partnership or other entities, although the Company may also incur
indebtedness that may be re-borrowed by the Operating Partnership on the same
terms and conditions as are applicable to the Company's borrowing of such
funds. The Company has not established any limit on the number or amount of
mortgages or unsecured debt that may be placed on any single property or on
its portfolio as a whole.
The Board of Directors also has the authority to cause the Operating
Partnership to issue additional Units in any manner (and subject to certain
limitations in the Partnership Agreement on such terms and for such
consideration) as it deems appropriate.
The Board of Directors of the Company may also decide to seek financing for
the purposes of managing the Company's balance sheet by adjusting the
Company's existing capitalization. The refinancing of the Company's balance
sheet may entail the issuance and/or retirement of debt, equity or hybrid
securities.
23
<PAGE>
THE COMPANY
COMPANY OVERVIEW
The Company is a self-administered and self-managed REIT that finances,
acquires, develops, manages and leases health care properties. The Company's
business currently consists of investments, either directly or through joint
ventures, in health care properties (primarily through its MOB Division) and
in debt obligations secured by health care properties (primarily through its
Senior Care Division).
Medical Office Building Division
The MOB Division's business strategy is to acquire, develop, manage and
lease a portfolio of medical office buildings and related health care
facilities, parking facilities and retail space. The Company's MOB Division
currently seeks growth opportunities nationwide in major population centers
through acquisition or development of additional medical office properties
directly or through strategic joint ventures. The MOB Division's portfolio
currently consists of approximately 725,000 rentable square feet located in
Southern California. The Company directly owns 15 Properties exclusive of
vacant land, including 13 high quality medical office buildings, an adjacent
parking facility and one hospital. Several of the Properties include retail
space on the ground level. As of February 1, 1997, the Properties were
approximately 80.8% leased to over 280 tenants. In June 1996, the Company
acquired the Tustin Properties in Tustin, California, consisting of two
medical office buildings, a parcel of vacant land and a hospital which was
vacant when purchased. Leases for the Tustin Hospital are currently being
negotiated. As of February 1, 1997, the Company's Properties, excluding Tustin
Hospital, had an occupancy rate of approximately 93.8%.
The Company recently entered into an operating agreement with PHP forming a
new joint venture named GL/PHP, LLC, a Delaware limited liability company,
referred to as the PHP Joint Venture. The Company holds an 80.5% interest in
the unconsolidated joint venture, which owns six primary health care
facilities located in New Jersey consisting of approximately 80,000 aggregate
rentable square feet. Until May 31, 1997 PHP has an option to purchase the
Company's interest in the PHP Joint Venture. See "Business and Properties--
Description of the Properties and Tenants" and "Certain Transactions."
Senior Care Division
The Senior Care Division's business strategy is to originate short term
loans (typically 6-24 months) secured by senior care facilities throughout the
United States. Since its inception in June 1995, the Senior Care Division has
made seven loans totaling $26.9 million, four of which have been repaid
through the issuance of revenue bonds. As of February 1, 1997, the Senior Care
Division had three loans outstanding aggregating $12.5 million. In October
1995, the Company invested $19.9 million to acquire outstanding Series A and
Series B bonds with an aggregate face value of $26.0 million issued by the
Massachusetts Industrial Finance Agency and secured by three nursing homes in
Massachusetts. In March 1997 the Company sold these bonds to the GLN Venture
for $7.7 million in cash and assigned to the GLN Venture $14.0 million in
indebtedness owed to GMAC-CM. These loans and bonds generate cash flow from
principal and interest payments received from outstanding loans. The Company
may receive future revenues in the form of subordinated notes in lieu of
interest or loan fees.
In November 1996, the Company expanded its activities in the Senior Care
Division by entering into an unconsolidated operating venture with Nomura,
named GLN Capital Co., LLC and referred to as the GLN Venture, having an
anticipated maximum leveraged investment capacity for short term loans of
$200.0 million. GMAC-CM has previously funded four loans with the Company and
has committed to provide a credit line to the GLN Venture of up to $50.0
million, which will be secured by loans originated by the GLN Venture.
The Company's Senior Care Division currently seeks growth opportunities
nationwide through short term financing and participating loans to facilitate
the purchase of senior care facilities. Sellers of senior care facilities
24
<PAGE>
generally fall into one of two categories: (a) small independent operators who
are struggling to maintain operating margins in a consolidating industry and
(b) large owner-operators seeking to divest themselves of real estate
operations and concentrate on facility management and ancillary services. The
Company believes that the extensive operating requirements and budgetary
constraints of Federal, state and local governments have caused competitive
pressures that particularly impact small operators and which in turn are
causing a consolidation of the senior care industry. Large operators have also
been affected by the consolidation of the senior care industry and often seek
to sell their senior care facilities while retaining management service
contracts, providing these large operators with ongoing revenues in connection
with their management services.
Nonprofit entities are particularly attracted to investments in senior care
facilities because of their unique ability to finance acquisitions through the
issuance of tax-exempt bonds, providing nonprofit entities with a relatively
lower cost of capital as compared to for-profit purchasers. In addition, in
certain states health care facilities owned by nonprofit entities are exempt
from taxes on real property.
BUSINESS AND OPERATING STRATEGY
The Company's primary business objective is to maximize the total return to
stockholders through increases in dividends and appreciation in the value of
the Company's capital stock through long-term investment in medical office
properties, either directly or through affiliates, and short-term investment in
loans secured by senior care facilities located throughout the United States,
either directly or through affiliates. The Company seeks to achieve this
objective by enhancing the operating performance of its existing properties as
well as through the selective acquisition of medical office buildings and by
originating loans secured by senior care facilities. Key elements of the
Company's MOB Division's operating strategy include: (i) improving rental
income and cash flow by aggressively marketing available space; (ii) designing
and renovating tenant space to meet the diverse needs of medical practitioners;
(iii) actively managing renovation costs and minimizing other operating
expenses such as leasing commissions by conducting management, leasing,
maintenance and marketing activities internally; (iv) maintaining a diversified
tenant base consisting of a cross section of medical specialties; and
(v) emphasizing regular maintenance, periodic renovation and capital
improvements to maximize long-term returns. Key elements of the Company's
Senior Care Division's operating strategy include (i) making short-term secured
bridge loans, typically to nonprofit entities; (ii) monitoring the issuance of
tax-exempt bonds by a political subdivision with which the nonprofit entity has
contracted; and (iii) negotiating the repayment of the Company's loan through a
combination of cash payments and permanent loan replacement.
ACQUISITIONS AND INVESTMENTS
Medical Office Building Division. In its acquisition analysis, management
reviews certain factors including: (i) location of the property, particularly
its proximity to major hospitals; (ii) construction quality and design of the
property; (iii) historical, current and projected cash flow of the property;
(iv) potential for increased cash flow and capital appreciation of the
property; (v) tenant mix and terms of the tenant leases, including the
potential for rent increases; (vi) occupancy rates and demand for medical
office properties in the vicinity; and (vii) prospects for liquidity through
sale, financing or refinancing of the property. The Company anticipates that
the Operating Partnership will continue to purchase fee interests in
properties; however, the Company may participate, on a selective basis, in
joint venture transactions, such as the PHP Joint Venture, or acquire
partnership interests as the Board of Directors may determine from time to time
to be in the best interests of the Company. Such investments may be subject to
existing mortgage financing and other indebtedness that have priority over the
equity interest of the Company and may not afford the Company with the
operating control it has with respect to the Properties. See "Policies with
Respect to Certain Activities--Investment Objectives and Acquisition Policies."
Senior Care Division. In its mortgage loan analysis, management reviews
certain factors including: (i) investment history of the organization acquiring
the property; (ii) present value of the target property; (iii) location of the
property, particularly its proximity to shops, markets and other health care
facilities; and (iv) anticipated potential for short-term gain and long-term
profits from investment in the target property. The
25
<PAGE>
Company anticipates that it will continue to provide financing for senior care
facilities; however, the Company may participate, on a selective basis, in
joint venture transactions, such as the GLN Venture, or acquire partnership
interests as the Board of Directors may determine from time to time to be in
the best interests of the Company.
COMPETITIVE STRENGTHS
In addition to the MOB Division's investments in existing properties and the
PHP Joint Venture, the Company seeks to make selective acquisitions of
additional medical office properties. From time to time hospital owners sell
their medical office buildings to raise capital. These sales create
opportunities for the Company to acquire medical office buildings on
attractive terms. The Company believes that its successful history of
operating medical office properties provides it with a competitive advantage
in the acquisition, development and management of medical office buildings as
hospitals will often seek a buyer with the operating skill necessary to meet
the needs of the medical practitioners located in the building.
Through its Senior Care Division and indirectly through the GLN Venture, the
Company provides short-term secured financing (typically 6-24 months) to
entities seeking to acquire senior care facilities. The Company believes that
it enjoys a competitive advantage in this market due to its experience in the
healthcare real estate market and the combined 20-year professional experience
of Mark H. Hamermesh, Senior Vice President, and Mitcheal C. Word, Vice
President, who are responsible for the operations of the Senior Care Division.
Additionally, the Company believes that there are few lenders focused on this
niche and that traditional REITs have been unwilling to fund similar short-
term loans. Finally, the Company believes the size of this market is large in
comparison to the Company's and competing lenders' present activities, thus
presenting opportunities for future growth.
Financing for new acquisitions and investments may be provided through
existing or new joint ventures with third parties, third-party financing in
the form of secured or unsecured debt or equity or from the sale of
securities. The Company's access to the public capital markets facilitates its
ability to acquire additional medical office buildings and to invest in loans
secured by senior care facilities. However, no assurance can be given that the
Company, or its investment affiliates, will be able to make acquisitions on
favorable terms, that such properties will be profitably operated or that the
Company, or its investment affiliates, will continue to make favorable
investments in mortgages secured by senior care facilities. In addition, the
Company and its investment affiliates will likely incur additional
indebtedness in connection with future acquisitions. See "Risk Factors--
General Real Estate Investment Considerations--Leverage; Adverse Impact of
Rising Interest Rates."
PROPERTY MANAGEMENT
The Company provides a full range of management services for the operation
of medical office buildings. The ability of the Company to manage medical
office properties to meet the unique needs of medical practitioners has been
critical to its success to date. The Company has experienced lease renewal
rates of approximately 88.5% and 91.1% for the years ended December 31, 1995
and 1996, respectively, with respect to medical office space in the Properties
based on the medical office space leases available for renewal in these
periods. Developing and managing medical office properties differs from
general office properties due to special requirements of the tenants and their
patients. Medical office buildings generally have higher maintenance
requirements in the public areas due to heavy foot traffic, many short
appointments which increase demand on parking facilities, the use of
sophisticated medical equipment requiring increased plumbing and electrical
capacity and expanded environmental regulations that impose more stringent
restrictions on the disposal of medical waste. Management of medical office
properties also generally requires experience in specialized tenant
improvements and higher levels of responsiveness required by medical
practitioners.
Additional important management functions include the placement of tenants
within medical office properties to accommodate increased space needs and
managing the tenant mix at properties so that referrals by
26
<PAGE>
practitioners with different specialties within the building are facilitated.
The Company stresses meeting these and other special demands of medical
property tenants.
INVESTMENT DEVELOPMENT
Through March 1, 1997, the Company's Senior Care Division has funded
approximately $20.8 million in loans and investments and acquired approximately
$20.0 million in existing bonds, all secured by nursing homes or other types of
senior care facilities. Loans made by the Company through its Senior Care
Division and the GLN Venture generate cash flow from principal and interest
payments made on outstanding loans. The Company may receive future revenues in
the form of subordinated notes in lieu of interest or loan fees.
In addition to its loan management function, the Company's management also
facilitates the purchase of targeted properties by the Senior Care Division's
nonprofit borrowers. All of the Company's administrative functions for property
and loan management are centralized in the Company's principal executive
offices in Beverly Hills, California.
In February 1997, the Company funded its first investment through the GLN
Venture, a $6.4 million loan to CoreCare Behavioral Management. The loan has a
term of 18 months and is secured by a first deed of trust on the Institute of
Pennsylvania Hospital in Philadelphia, Pennsylvania, which CoreCare acquired in
connection with the loan by the GLN Venture.
EMPLOYEES
As of March 15, 1997, the Company (including the Operating Partnership)
employed 28 persons. The Company employs on-site building employees who
presently provide maintenance services for the Properties. The Company also
employs professional employees engaged in leasing, asset management and
administration.
LEGAL PROCEEDINGS
Neither the Company nor the Operating Partnership is currently a party to any
legal proceedings other than certain legal proceedings arising in the ordinary
course of business, which are not expected to have a material adverse effect on
the Company.
TAX STATUS
The Company believes that it has operated in such a manner as to qualify for
taxation as a REIT under Sections 856 through 860 of the Code, commencing with
its taxable year ended December 31, 1993, and the Company intends to continue
to operate in such a manner. As long as the Company qualifies for taxation as a
REIT under the Code, the Company generally will not be taxed at the corporate
level. If the Company fails to qualify as a REIT in any taxable year, the
Company will be subject to Federal income tax (including any applicable
alternative minimum tax) on its taxable income at regular corporate rates. Even
if the Company qualifies for taxation as a REIT, the Company may be subject to
certain state and local taxes on its income and property and to Federal income
and excise taxes on its undistributed income.
THE OPERATING PARTNERSHIP
The Company owns an 89.1% interest in the Operating Partnership of which 1%
is held as the sole general partner and 88.1% of which is held as a limited
partner. All of the Properties (except those six properties located in New
Jersey of which the Company owns an 80.5% interest through the PHP Joint
Venture) or interests therein are held by, and the Company's operations are
conducted through, the Operating Partnership or other entities created for
financing purposes.
The net proceeds of this Offering will be contributed by the Company to the
Operating Partnership in exchange for newly issued Units in the Operating
Partnership which will have identical terms to the Series A Preferred Stock.
27
<PAGE>
At the 1997 Annual Meeting of the Company's stockholders to be held on May
28, 1997, the Board of Directors will seek approval by the stockholders of a
proposal to authorize the issuance of additional Units to directors of the
Company (or entities in which they have interests) that are convertible into
up to 5% of the outstanding shares of Common Stock of the Company. These
additional Units may be issued to the directors (or related entities) only in
exchange for real property in transactions approved as fair to the Company by
a committee of independent directors. Each Unit will be valued at a premium of
$0.25 over the market value of a share of Common Stock. The Board of Directors
is seeking approval for this proposal to provide the Company with the
flexibility to acquire desirable properties through equity financing with
reduced cash outlays and without the expense and delay involved in seeking
purchase money financing.
As the general partner of the Operating Partnership, the Company has the
power and authority under the Agreement of Limited Partnership of the
Operating Partnership (the "Partnership Agreement") to manage and conduct the
business of the Operating Partnership, subject, in certain circumstances, to
the consent of a majority of or all the outstanding percentage interest of the
limited partners. See "The Partnership Agreement--Limited Partner Approval
Rights." In addition, as the general partner, the Company owes fiduciary
duties to the limited partners of the Operating Partnership. See "Policies
With Respect to Certain Activities--Conflict of Interest Policies." The Board
of Directors of the Company manages the affairs of the Company and thereby the
affairs of the Operating Partnership. No special compensation is paid to the
Company for its services as general partner. All of the operating expenses are
incurred at the Operating Partnership level and the limited partners of the
Partnership therefore share in the expenses of operation. The Company is
entitled to share in cash distributions from, and in the profits and losses
of, the Operating Partnership in proportion to the Company's percentage
interest therein. See "The Partnership Agreement--Distributions and
Allocations."
28
<PAGE>
ORGANIZATIONAL STRUCTURE
The current structure of the Company and the ownership of interests in the
Operating Partnership and other related entities directly or indirectly
controlled by the Company, through which the Company does business, are shown
in the following chart.
[ORGANIZATIONAL STRUCTURE CHART APPEARS HERE]
- --------
(1) G&L Realty Financing II, Inc. is the sole general partner and 1% owner of
the Realty Financing Partnership.
(2) G&L Medical, Inc. is the sole general partner and 1% owner of the Medical
Partnership.
(3) The Operating Partnership is the sole limited partner and 99% owner of the
Medical Partnership.
(4) The Operating Partnership is the sole limited partner and 99% owner of the
Realty Financing Partnership.
(5) The Company is the sole general partner and 89.1% owner of the Operating
Partnership. Of its 89.1% interest, 1% is held as general partner and 88.1%
is held as a limited partner. The Operating Partnership's remaining 10.9%
partnership interest is owned by individual limited partners. Upon
completion of the offering hereby, the Company will contribute the net
proceeds to the Operating Partnership in exchange for additional Units
having terms and conditions identical to those of the Series A Preferred
Stock offered hereby.
29
<PAGE>
BUSINESS AND PROPERTIES
The Properties are 13 high quality medical office buildings, an adjacent
parking facility, one hospital and retail space. As of February 1, 1997, the
Properties were approximately 80.8% leased to over 280 tenants. In June 1996,
the Company acquired Tustin Hospital, for which leases are currently being
negotiated. The Company's Properties, not including Tustin Hospital, had an
occupancy rate of approximately 93.8% as of February 1, 1997. The Company's
tenants are primarily established medical practitioners representing a cross
section of medical practices.
DESCRIPTION OF THE PROPERTIES AND TENANTS
Company Properties
The Company, through the MOB Division, acquires, develops, manages and
leases medical office buildings and related health care facilities. Developing
and managing medical office properties differs from developing and managing
conventional office buildings due to the special requirements of the tenants
and their patients. As a variety of medical procedures are now performed in
doctors' offices, many medical office buildings have become sophisticated
ambulatory centers that allow for out-patient surgery and procedures. In
addition, medical office buildings generally have higher maintenance
requirements in the public areas due to heavy foot traffic, many short
appointments which increase demand on parking facilities, the use of
sophisticated medical equipment requiring increased plumbing and electrical
capacity and expanded environmental regulations that impose more stringent
restrictions on the disposal of medical waste. The management of medical
office properties also generally requires experience in specialized tenant
improvements and higher levels of responsiveness required by medical
practitioners. Additional important management functions include the placement
of tenants within medical office properties to accommodate increased space
needs and managing the tenant mix at properties so that referrals by
practitioners with different specialties within the building is facilitated.
The Company stresses meeting these and other special demands of medical
property tenants.
The health care industry is facing various challenges, including increased
government and private payor pressure to reduce medical delivery costs.
Substantially all of the Company's tenants are in the medical profession and
could be adversely affected by cost containment and other health care reform
proposals. Proposals that limit access to medical care or reduce the
reimbursement of physicians' services may impact the ability of the Company's
tenants to pay rent. The Company believes that the aging population in the
United States combined with other recent trends in the health care industry
such as the performance of non-acute procedures outside of hospitals could
spur increased demand for space in full service medical office buildings which
contain surgicenters and out-patient facilities, such as those owned by the
Company.
30
<PAGE>
The following table sets forth certain information regarding each of the
Properties as of February 1, 1997. The Operating Partnership owns a 100% fee
simple interest in all of the Properties, other than 435 North Roxbury in
which it owns an indirect 61.8% interest.
PROPERTIES--SUMMARY DATA
<TABLE>
<CAPTION>
YEAR RENTABLE RENTED TOTAL AVERAGE
CONSTRUCTED OR SQUARE SQUARE ANNUALIZED RENT PER
PROPERTY(1) REHABILITATED FEET(2) FEET(3) OCCUPANCY(3) RENT(4) SQ. FT.(5)
----------- -------------- -------- ------- ------------ ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
405 N. Bedford, Beverly
Hills, CA.............. 1947/1987 49,037 49,037 100.0% $ 2,182,612 $44.51
415 N. Bedford, Beverly
Hills(6)............... 1955 5,977 5,977 100.0% 216,859 36.28
416 N. Bedford, Beverly
Hills.................. 1946/1986 40,776 39,803 97.6% 1,468,230 36.89
435 N. Bedford, Beverly
Hills.................. 1950/1963/1984 55,116 51,306 93.1% 1,718,281 33.49
435 N. Roxbury, Beverly
Hills.................. 1956/1983 42,455 39,719 93.6% 1,449,840 36.50
436 N. Bedford, Beverly
Hills.................. 1990 78,799 77,548 98.4% 3,089,602 39.84
Holy Cross Medical
Plaza.................. 1985 72,575 67,539 93.1% 1,895,920 28.07
11550 Indian Hills Road
Mission Hills, CA
St. Joseph's
Professional Building.. 1987 25,684 25,684 100.0% 694,250 27.03
2031 West Alameda Ave.
Burbank, CA(7)
Sherman Oaks Medical
Plaza.................. 1969/1993 69,422 60,183 86.7% 1,377,910 22.90
4955 Van Nuys Blvd.
Sherman Oaks, CA
Regents Medical Center.. 1989 62,377 62,377 100.0% 1,555,245 24.93
4150 Regents Park Row
La Jolla, CA
Cigna HealthCare
Building............... 1992 47,604 47,604 100.0% 1,096,796 23.04
12701 Schabarum Ave.
Irwindale, CA
1095 Irvine Boulevard... 1995 10,125 10,125 100.0% 197,080 19.46
Tustin, CA
Tustin--Medical Office
I...................... 1969 16,446 8,156 49.6% 119,576 14.66
14591 Newport Avenue
Tustin, CA
Tustin--Medical Office
II..................... 1985 47,954 40,826 85.1% 503,653 12.34
14642 Newport Avenue
Tustin, CA
Tustin Hospital......... 1969 101,000 -- 0.0% -- 0.00
14662 Newport Avenue
Tustin, CA
Tustin--Vacant land(8).. -- -- -- -- -- --
1101 Sycamore Avenue
Tustin, CA
------- ------- -----------
Total/Weighted average
of all properties...... 725,347 585,894 80.8% $17,565,877 $29.98
======= ======= ===========
</TABLE>
- --------
(1) The Operating Partnership or the Realty Financing Partnership owns a 100%
fee simple interest in all of the Properties except 435 North Roxbury,
which is a owned by 435 North Roxbury Drive, Ltd., of which the Operating
Partnership owns a 61.8% partnership interest and is the sole general
partner.
(2) Rentable square feet includes space used for management purposes but does
not include storage space.
(3) Occupancy includes occupied space and space used for management purposes.
Rented square feet includes space that is leased but not yet occupied.
(4) Rent is based on third-party leased space billed in February 1997; no rent
is assumed from management space.
31
<PAGE>
(5) Average rent per square foot is calculated based upon third-party leased
space, excluding management space.
(6) This property includes retail space and parking facilities.
(7) The total annualized rent reflects a rental guarantee from the Sisters of
Providence discussed below, which expires October 31, 1998.
(8) This property consists of a vacant lot.
Beverly Hills, California Properties
Six of the Properties are located on North Bedford and North Roxbury Drives
in the "Golden Triangle" area of Beverly Hills, California, near three major
hospitals--Cedars Sinai Medical Center, Century City Hospital and UCLA Medical
Center. The buildings feature high quality interior improvements, including
rich wood paneling and brass hardware appointments, both in the common areas
and in most of the doctors' offices. These six Properties include ten
operating rooms, two of which are located in the Saint John's Hospital
surgicenter at 405 North Bedford Drive. The 405, 416 and 436 North Bedford
Drive buildings each have emergency back-up generators. Parking for these six
Properties is provided in the 415 North Bedford garage and in subterranean
parking at 436 North Bedford and 435 North Roxbury Drives. Each of these
medical office buildings has copper insulated pipe with sufficient capacity
for medical use, electrical systems designed for extra load requirements and
extensive security systems.
405 North Bedford Drive, Beverly Hills
The 405 North Bedford Drive medical office building, built in 1947 and
extensively remodeled in 1988, consists of four stories plus a penthouse and a
basement. The reinforced brick building, with ground floor retail space,
features cherry wood paneled walls and brass hardware in the common areas and
decorative concrete trim on the exterior.
Saint John's Hospital is the only tenant leasing more than 10% of the
rentable square footage of 405 North Bedford, occupying 36,787 square feet
(approximately 75%) of the rentable square footage in that building. Its lease
expires on March 31, 1998 and provides for a monthly rental of $144,015. The
lease contains an option to renew for two consecutive five-year terms. Saint
John's Hospital subleases much of the space to doctors affiliated with the
hospital. Management anticipates that the Company will enter into new leases
with the existing sublease tenants at the expiration of Saint John's lease in
March 1998.
415 North Bedford Drive, Beverly Hills
The 415 North Bedford Drive building is a four-level parking structure with
approximately 5,700 square feet of ground floor retail space for seven
tenants. The parking structure contains 316 tandem-striped spaces and is valet
operated.
416 North Bedford Drive, Beverly Hills
The 416 North Bedford Drive property is a four-story reinforced brick
medical office building with a basement and ground floor retail space. Built
in 1946 and extensively remodeled in 1987, the building features oak paneled
walls and molding, brass hardware, tinted concrete borders on the exterior,
and fourth floor skylights that provide an open, airy atmosphere in the
hallway and some of the suites.
A plastic surgeon leases more than 10% of the rentable square footage of 416
North Bedford, occupying 4,622 square feet or 11.3% of the rentable square
footage of the building. The monthly rental is $17,293. The lease expires on
November 30, 2002 and contains a five-year renewal option.
435 North Bedford Drive, Beverly Hills
The 435 North Bedford Drive property is a four-story, reinforced brick and
masonry medical office building with a penthouse, basement, and ground floor
retail space. Built in 1959 and extensively remodeled in 1984, the
32
<PAGE>
building features oak molding, wall sconces and paneling in the hallways plus
stained runner boards and built-in stained hardwood cabinets in some of the
medical office suites.
435 North Roxbury Drive, Beverly Hills
The 435 North Roxbury Drive property is a four-story medical office building
with a penthouse, subterranean parking and retail space on the ground floor.
The building, which was built in 1956 and extensively remodeled in 1983,
features a reinforced brick and masonry exterior and raised, oak-stained
paneling and molding in the hallways.
Two tenants in 435 North Roxbury each occupy more than 10% of the rentable
square footage. A dermatologist occupies 5,291 square feet (12.5% of the
rentable square footage) pursuant to a lease which provides for a monthly
rental of $16,667. The lease expires September 30, 2001 and contains a
provision for a five-year renewal option. An internist occupies 6,183 square
feet (14.6% of the rentable square footage) pursuant to a lease which provides
for a monthly rental of $18,549. The lease expires on November 30, 1999.
436 North Bedford Drive, Beverly Hills
The 436 North Bedford Drive property is a three-story medical office
building with three levels of subterranean parking. Built in 1990, the
building features ground floor retail and office space surrounding a central
courtyard and balconies at selected locations on the second and third floors.
The exterior is clad in rose color sandstone with cast stone and granite trim.
The central courtyard features a cascading waterfall sculpture and stone
pavers with intricate marble and stone patterns. Cherry wood paneled walls
also line the elevator lobbies on all floors and portions of the hallways.
Holy Cross Medical Plaza, Mission Hills
The Holy Cross Medical Plaza is situated on approximately 2.6 acres of the
15-acre campus of Holy Cross Medical Plaza, a 316-bed hospital. The campus
also includes the Villa de la Santa Cruz skilled nursing facility, another
medical office building, a magnetic resonance imaging center, and an
outpatient diagnostic center. Built in 1984, the Holy Cross Medical Plaza is a
three-story office building occupied primarily by medical and dental
practitioners. A two-story parking structure and an open asphalt-paved lot can
accommodate a total of 333 vehicles. The surrounding site is landscaped with
grass, trees, shrubs, and planter boxes.
Two tenants occupy more than 10% of the rentable square footage in the Holy
Cross Medical Plaza property. Holy Cross Surgical Center occupies 12,456
square feet (17.247% of the rentable square footage) pursuant to a lease that
provides for monthly rent of $37,040. The lease expires October 31, 2006 and
provides for a ten-year renewal option. Dialysis Center occupies 10,639 square
feet (14.66% of the rentable square footage) pursuant to a lease that provides
for monthly rent of $19,633.00. The lease expires March 31, 2006 and provides
for two, five-year renewal options.
St. Joseph's Professional Building, Burbank
The Saint Joseph's Professional Building is a steel frame, brick-facade
building, constructed in 1987, that features two floors of office space over
three levels of subterranean parking which can accommodate up to 100 vehicles.
The building is located one-quarter of a mile from Saint Joseph's Hospital and
is directly across the street from the Walt Disney Company's world
headquarters campus. Saint Joseph's Hospital includes 658 beds and is owned by
the Sisters of Providence, an organization which owns other hospitals
throughout North America. The Saint Joseph's Professional Building was
acquired from the Sisters of Providence, who have guaranteed up to an annual
gross rent of $765,000 per year through October 31, 1998; however, the
guarantee is limited to a maximum annual reimbursement of $225,000. Currently,
the office building is fully leased. Since the acquisition, the Company has
negotiated with the existing tenants to extend their leases beyond the rent
guarantee period.
33
<PAGE>
Two tenants in St. Joseph's Professional Building occupy more than 10% of
the rentable square footage. Total Renal Care occupies 9,067 square feet
(35.3% of the rentable square footage) pursuant to a lease which provides for
a monthly rental of $21,403 plus expense reimbursements for excess utility
consumption. Its lease expires October 31, 2000 and provides for one, five-
year renewal option. A doctors' group occupies five medical suites totaling
8,942 square feet (34.82% of the rentable square footage) pursuant to leases
which provide for aggregate monthly rents of $19,145. The leases expire
beginning on various dates between October 31, 1998 and October 31, 2001.
Sherman Oaks Medical Plaza, Sherman Oaks
The Sherman Oaks Medical Plaza is a seven-story office building, constructed
in 1968, that is adjacent to the Sherman Oaks Hospital and Health Center, a
156-bed hospital which includes the major burn center for the San Fernando
Valley. A $1 million capital improvement program renovating the building
systems and common areas of the Sherman Oaks Medical Plaza was completed in
1994. The Company also owns the adjacent air rights and three-level parking
structure behind the property which provides a total of 426 parking spaces.
The land beneath the parking structure is owned by Sherman Oaks Hospital which
also leases 150 parking spaces in the structure. As of December 31, 1996, the
Sherman Oaks Medical Plaza was 86.7% occupied.
Regents Medical Center, La Jolla
The Regents Medical Center is a three story building situated on
approximately 2.6 acres in the University Town Center area of San Diego, near
the University of California, San Diego. The building, which was constructed
in 1989, has ground level retail spaces, two upper floors of medical offices,
and subterranean and ground level parking that can accommodate a total of 285
vehicles. As of December 31, 1996, the building was 100% occupied.
UCSD Orthomed, an affiliate of the University of California, occupies 14,036
square feet (approximately 21%) of the rentable area of the building pursuant
to leases which provide for an aggregate monthly rental of $27,167. The leases
expire at various dates between January 31, 2000 and January 31, 2002.
Cigna HealthCare Building, Irwindale
The Cigna HealthCare Building in Irwindale, California is a two story
medical office building, constructed in 1992, on a site that provides two
parking areas with a total of 244 spaces. This property was 100% leased to
Cigna HealthCare of California, Inc., which subsequently assigned the lease to
Caremark International, Inc., effective January 1, 1996. The Company gave its
conditional approval of the assignment on April 5, 1996 subject to certain
conditions. Rent obligations under the lease are guaranteed by Cigna
HealthCare, Inc. The lease, which provides for monthly rent of $91,399 triple
net, expires November 30, 2004 and provides for two, five-year options.
1095 Irvine Boulevard, Tustin
The 1095 Irvine Boulevard building in Tustin, California was redeveloped in
1995 as a primary healthcare center for physicians who are part of the St.
Joseph Hospital of Orange healthcare network. The property is leased to St.
Joseph Hospital, Inc. under a net lease with a 15 year term, which began in
August 1995, and provides for annual cost of living rent escalations. The
lease provides for a monthly rental of $16,087 and expires on July 31, 2010.
Tustin Medical Plaza, Tustin
In June 1996, the Company acquired the Tustin Properties in Tustin,
California. Tustin Medical Plaza consists of two medical office buildings, a
parcel of vacant land and a hospital which was vacant when purchased. Leases
for the hospital are currently being negotiated.
34
<PAGE>
Tustin Hospital, Tustin
The 14662 Newport Avenue building in Tustin, California is a single-story,
183-bed, 101,000 square foot hospital that was developed in two phases
beginning in 1969 and ending in 1974. The hospital includes a full service
emergency room, five operating rooms, an intensive care ward, administrative
offices, conference rooms, kitchen and cafeteria, pharmacy, gift shop, x-ray
facilities and a basement service area. The hospital has an emergency back-up
generator with a 10,000 gallon underground fuel tank that complies with
current environmental requirements. In addition, all of the hospital's medical
equipment and supplies are still located within the hospital. The hospital was
vacant when the Company acquired the property on June 14, 1996.
The Company is engaged in lease negotiations with respect to the hospital
and the vacant space in the adjacent buildings. Although there can be no
assurances, management anticipates that a lease will be signed in the near
future. The hospital facility was leased to a television production company
from January 31, 1997 through March 9, 1997.
Tustin--MOB I
The 14591 Newport Avenue building in Tustin, California is a two-story
medical office building that was constructed in 1975 on a 1.2-acre site. The
site is landscaped with grass lawns, shrubs, and trees and includes an
asphalt-paved parking lot with approximately 105 parking spaces, representing
a parking ratio of 6.4 parking spaces per 1,000 square feet of building area.
The office building was approximately 49.6% leased as of December 1996.
Tustin--MOB II
The 14642 Newport Avenue building in Tustin, California is a four-story
medical office building, developed in 1985, that features a surgery center
with three operating rooms, a pharmacy, and an industrial clinic on the first
floor. Medical offices are located on all of the other floors. The occupancy
rate was approximately 85.1% as of December 1996.
One tenant occupies more than 10% of the rentable square footage in the
14642 Newport Avenue Building. Pacific Health Corporation leases the surgery
center and occupies 7,444 square feet (14% of the rentable square footage)
pursuant to a lease that provides for a monthly rental of $16,749.00. The
lease expires on November 30, 2001 and provides for one, five-year renewal
option.
PHP JOINT VENTURE PROPERTIES
In February 1997, the Company entered into the PHP Joint Venture. The PHP
Joint Venture subsequently purchased six medical office properties in New
Jersey having a total of 80,415 square feet at a purchase price of $22.4
million. The Company and PHP funded the $4.4 million down payment in
proportion to their ownership interests in the PHP Joint Venture (80.5% for
the Company and 19.5% for PHP), with the Company's contribution financed by a
loan from the GLN Venture to the Company and secured by the Company's interest
in the PHP Joint Venture. The balance of the purchase price was financed by
two loans from PHP, secured by first and second deeds of trust. The greater of
the two loans, at $16 million, carries a term of six months and gives PHP a
right upon default to purchase the Company's interest in the new entity. Until
May 31, 1997, PHP has an option to purchase the Company's interest in the PHP
Joint Venture. PHP has leased the properties from the PHP Joint Venture
pursuant to a 25-year net operating lease and has entered into a three-year
contract as a preferred provider to Blue Cross/Blue Shield of New Jersey.
35
<PAGE>
The following table sets forth certain information regarding each of the PHP
properties as of March 1, 1997. Each of the following properties is 100%
leased by the PHP Joint Venture to PHP under the terms of a 25-year net
operating lease.
<TABLE>
<CAPTION>
YEAR RENTABLE TOTAL AVERAGE
CONSTRUCTED OR SQUARE ANNUALIZED RENT PER
PROPERTY REHABILITATED FEET(1) RENT(2) SQ. FT.(3)
-------- -------------- -------- ---------- ----------
<S> <C> <C> <C> <C>
2103 Mt. Holly Rd.............. 1994 12,560 $ 414,000 $32.96
Burlington, NJ
150 Century Parkway............ 1995 12,560 371,450 29.57
Mt. Laurel, NJ
274 Highway 35, South.......... 1995 12,560 457,930 36.46
Eatontown, NJ
80 Eisenhower Drive............ 1994 12,675 401,465 31.67
Paramus, NJ
16 Commerce Drive.............. 1963 17,500 468,740 26.79
Cranford, NJ
4622 Black Horse Pike.......... 1994 12,560 416,415 33.15
Mays Landing, NJ
------ ---------- ------
Total/Weighted average....... 80,415 $2,530,000 $31.46
====== ========== ======
</TABLE>
- --------
(1) Rentable square feet includes space used for management purposes but does
not include storage space.
(2) Rent is based on third-party leased space billed in February 1997; no rent
is assumed from management space.
(3) Average rent per square foot is calculated based upon third-party leased
space, excluding management space.
LEASES
The Company's Properties
As of February 1, 1997, the Properties were approximately 81% leased. New
leases and extensions are normally granted for a minimum of five years and
provide for annual rent increases. Office tenants generally have gross leases
whereby rents may be adjusted for a tenant's proportionate share of any
increases in the cost of operating the building. Most retail tenants have net
leases and pay their share of all operating expenses including property taxes
and insurance. The following is a lease expiration table setting forth the
number, square feet, and associated annual rent for those leases expiring in
future years.
<TABLE>
<CAPTION>
NUMBER OF APPROXIMATE % OF
LEASES TOTAL RENTED ANNUAL TOTAL ANNUAL
YEAR OF LEASE EXPIRATION EXPIRING(1) SQUARE FEET(1) RENT RENT(2)
------------------------ ----------- -------------- --------- ------------
<S> <C> <C> <C> <C>
1997.................... 43 56,055 1,772,146 10.09%
1998.................... 55 116,966 4,211,218 23.97%(3)
1999.................... 37 54,869 1,655,215 9.42%
2000.................... 39 66,911 2,206,450 12.56%
2001.................... 33 49,530 1,570,882 8.94%
2002.................... 14 36,223 1,100,800 6.27%
2003.................... 6 8,397 260,094 1.48%
2004.................... 5 53,348 1,241,556 7.07%
2005.................... 10 25,291 889,111 5.06%
2006.................... 12 30,677 1,054,756 6.00%
2007 or later........... 5 23,882 699,227 3.98%
</TABLE>
- --------
(1) Does not include month-to-month leases, management space or vacant space.
(2) % of Total Annual Rent is based upon annualized revenues of $17,565,877.
(3) Includes the 36,787 sq. ft. lease with St. John's Hospital. St. John's
Hospital has subleased the majority of this space to third-party doctors.
The Company will enter into new leases with the existing sublease tenants
when the lease with Saint John's Hospital expires in 1998 if St. John's
does not exercise its option to renew.
36
<PAGE>
The Company has been successful in obtaining lease renewals, achieving a
weighted average renewal rate of approximately 91.1% on medical office leases
expiring during the 12 month period ended December 31, 1996. Although there
can be no assurances that such renewal level can be maintained, the Company
believes this high renewal rate is due in part to the tendency of medical
practitioners to continue to practice in the same space over a number of
years. Also, the Company's tenants frequently invest large sums of money in
equipment and fixtures for their offices. Furthermore, relocating a doctor's
office can be disruptive to the patients who are familiar with the doctor's
office location.
The following table sets forth the scheduled annual rent increases for the
leases with respect to the Properties in effect at December 31, 1996.
<TABLE>
<CAPTION>
% OF
TOTAL
RENTABLE
SQUARE SQUARE
SCHEDULED ANNUAL RENT INCREASES FEET(1) FEET(1)
------------------------------- ------- --------
<S> <C> <C>
None...................................................... 132,128 22.20%
Consumer Price Index related.............................. 190,182 31.96%
2%........................................................ 16,680 2.80%
3%........................................................ 35,986 6.05%
4%........................................................ 42,876 7.20%
5%........................................................ 136,165 22.88%
8%........................................................ 3,830 0.64%
</TABLE>
- --------
(1) Does not include 6.3% of the total rental square feet which is leased on a
month-to-month basis, vacant space, space used for building management and
space used for management of the Company.
The historical occupancy of the Properties is shown in the following table:
<TABLE>
<CAPTION>
PROPERTY 1996 1995 1994 1993 1992
-------- ----- ----- ----- ----- ----
<S> <C> <C> <C> <C> <C>
405 N. Bedford............................ 100.0% 100.0% 96.2% 97.8% 96.3%
415 N. Bedford(1)......................... 100.0% 100.0% 100.0% 100.0% 84.0%
416 N. Bedford............................ 97.6% 100.0% 100.0% 97.2% 97.3%
435 N. Bedford............................ 93.1% 89.2% 85.3% 97.7% 97.9%
435 N. Roxbury............................ 93.6% 95.6% 91.7% 94.5% 98.6%
436 N. Bedford............................ 98.4% 90.0% 92.8% 100.0% 91.3%
Holy Cross Medical Plaza(2)............... 93.1% 94.7% 87.7% N/A N/A
St. Joseph's Professional Building(3)..... 100.0% 100.0% 100.0% N/A N/A
Sherman Oaks Medical Plaza(2)............. 86.7% 90.0% 79.8% N/A N/A
Regents Medical Center(2)................. 100.0% 90.9% 87.6% N/A N/A
Cigna HealthCare Building(2).............. 100.0% 100.0% 100.0% N/A N/A
1095 Irvine Boulevard(4).................. 100.0% 100.0% N/A N/A N/A
14591 Newport Avenue, Medical Office I(5). 49.6% N/A N/A N/A N/A
14642 Newport Avenue, Medical Office
II(5).................................... 85.1% N/A N/A N/A N/A
14662 Newport Avenue, Hospital(5)......... 0.0% N/A N/A N/A N/A
----- ----- ----- ----- ----
Weighted average........................ 80.8% 94.2% 90.9% 97.9% 95.4%
===== ===== ===== ===== ====
</TABLE>
- --------
(1) Retail space and parking facilities
(2) Acquired in 1994
(3) Acquired in December 1993
(4) Placed in service in 1995
(5) Acquired in June 1996
37
<PAGE>
The following tables set forth the base rent per square foot and annualized
base rent for the Properties for the past five years.
BASE RENT PER SQUARE FOOT
<TABLE>
<CAPTION>
PROPERTY 1996 1995 1994 1993 1992
-------- ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
405 N. Bedford........................... $44.51 $41.64 $42.01 $37.87 $37.02
415 N. Bedford(1)........................ 36.28 36.21 36.79 36.41 33.30
416 N. Bedford........................... 36.89 37.04 40.88 39.31 38.25
435 N. Bedford........................... 33.49 34.35 39.25 39.03 39.07
435 N. Roxbury........................... 36.50 37.11 38.39 38.12 36.02
436 N. Bedford........................... 39.84 42.13 44.71 44.17 44.34
Holy Cross Medical Plaza(2).............. 28.07 25.91 28.77 N/A N/A
St. Joseph's Professional Building(3).... 27.03 29.12 29.92 N/A N/A
Sherman Oaks Medical Plaza(2)............ 22.90 23.32 23.57 N/A N/A
Regents Medical Center(2)................ 24.93 27.11 28.38 N/A N/A
Cigna HealthCare Building(2)............. 23.04 23.04 23.01 N/A N/A
1095 Irvine Boulevard(4)................. 19.46 17.14 N/A N/A N/A
14591 Newport Avenue, Medical Office
I(5).................................... 14.66 N/A N/A N/A N/A
14642 Newport Avenue, Medical Office
II(5)................................... 12.34 N/A N/A N/A N/A
14662 Newport Avenue, Hospital(5)........ 0.00 N/A N/A N/A N/A
------ ------ ------ ------ ------
Weighted average....................... $29.98 $31.70 $34.01 $40.15 $39.50
====== ====== ====== ====== ======
</TABLE>
- --------
(1) Retail space and parking facilities
(2) Acquired in 1994
(3) Acquired in December 1993
(4) Placed in service in 1995
(5) Acquired in June 1996
38
<PAGE>
ANNUALIZED BASE RENT
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
PROPERTY 1996 1995 1994 1993 1992
-------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
405 N. Bedford............... $ 2,182.6 $ 2,033.3 $ 1,904.2 $ 1,914.2 $ 1,740.8
415 N. Bedford(1)............ 216.9 216.4 210.4 205.2 167.2
416 N. Bedford............... 1,468.2 1,510.5 1,658.0 1,598.9 1,517.6
435 N. Bedford............... 1,718.3 1,689.6 1,660.3 2,043.6 2,108.2
435 N. Roxbury............... 1,449.8 1,506.8 1,494.9 1,597.7 1,507.8
436 N. Bedford............... 3,089.6 2,987.7 3,221.9 3,433.8 3,189.9
Holy Cross Medical Plaza(2).. 1,895.9 1,749.2 1,784.5 N/A N/A
St. Joseph's Professional
Building(3)................. 694.3 757.5 764.4 N/A N/A
Sherman Oaks Medical
Plaza(2).................... 1,377.9 1,457.3 1,276.9 N/A N/A
Regents Medical Center(3).... 1,555.2 1,639.6 1,531.0 N/A N/A
Cigna HealthCare Building(2). 1,096.8 1,096.8 1,096.8 N/A N/A
1095 Irvine Boulevard(4)..... 197.0 173.5 N/A N/A N/A
14591 Newport Avenue, Medical
Office I(5)................. 119.6 N/A N/A N/A N/A
14642 Newport Avenue, Medical
Office II(5)................ 503.7 N/A N/A N/A N/A
14662 Newport Avenue,
Hospital (5)................ 0.0 N/A N/A N/A N/A
--------- --------- --------- --------- ---------
Total...................... $17,565.8 $16,818.3 $16,603.3 $10,793.4 $10,231.5
========= ========= ========= ========= =========
</TABLE>
- --------
(1) Retail space and parking facilities
(2) Acquired in 1994
(3) Acquired in December 1993
(4) Placed in service in 1995
(5) Acquired in June 1996
39
<PAGE>
The Company's medical offices include a broad mix of medical specialties and
other uses as shown in the table below:
<TABLE>
<CAPTION>
% OF TOTAL
NUMBER LEASED MEDICAL
PRACTICE AREA OF SUITES OFFICE SPACE
------------- --------- --------------
<S> <C> <C>
Allergist......................................... 1 0.27%
Chiropractic...................................... 2 0.55%
Dentistry......................................... 52 13.51%
Dialysis.......................................... 4 1.93%
Dermatology....................................... 15 5.15%
Ear/Nose/Throat................................... 4 1.44%
General Practice.................................. 5 1.79%
General Surgery................................... 11 8.47%
Hospital.......................................... 6 12.84%
Internal Medicine................................. 39 14.41%
Laboratory........................................ 5 0.92%
Nephrology........................................ 1 0.41%
Neurology......................................... 1 0.20%
Obstetrics/Gyn.................................... 9 2.53%
Ophthalmology..................................... 10 3.73%
Other............................................. 10 2.36%
Pediatrics........................................ 2 1.02%
Pharmacy.......................................... 4 1.22%
Physical Therapy.................................. 9 2.99%
Plastic Surgery................................... 17 6.95%
Podiatry.......................................... 4 0.65%
Psychiatry........................................ 10 1.74%
Psychology........................................ 19 3.48%
Retail............................................ 40 10.01%
Urology........................................... 3 1.43%
--- ------
Total........................................... 280 100.00%
=== ======
</TABLE>
40
<PAGE>
PHP Joint Venture Properties
As of March 1, 1997, the PHP Joint Venture properties were 100% leased to
PHP pursuant to 25-year net operating leases. Each property is subject to a
single lease for 100% of the space. Each lease provides for a fixed rent
through August 31, 1999 and thereafter provides for increases (but not
decreases) related to the Consumer Price Index.
The following table sets forth the base rent per square foot and annualized
base rent for the PHP properties pursuant to leases with the PHP Venture.
BASE RENT PER SQUARE FOOT
<TABLE>
<CAPTION>
BASE RENT
PER ANNUAL
PROPERTY SQUARE FOOT BASE RENT
-------- ----------- ----------
<S> <C> <C>
2103 Mt. Holly Rd. ................................... $32.96 $ 414,000
Burlington, NJ
150 Century Parkway................................... 29.57 371,450
Mt. Laurel, NJ
274 Highway 35, South................................. 36.46 457,930
Eatontown, NJ
80 Eisenhower Drive................................... 31.67 401,465
Paramus, NJ
16 Commerce Drive..................................... 26.79 468,740
Cranford, NJ
4622 Black Horse Pike................................. 33.15 416,415
Mays Landing, NJ
------ ----------
Total/Weighted average.............................. $31.46 $2,530,000
====== ==========
</TABLE>
LENDING
Senior Care Division
The Company, through the Senior Care Division, makes first mortgage loans
for the purpose of acquiring independent senior care facilities, which loans
are secured by the facilities acquired. The loans typically are intended to
serve as bridge or interim financing (typically 6 to 24 months) for the
acquisition of senior care facilities by unrelated parties. The maturity of
the loan made by the Company is determined primarily by the timing of the sale
of tax exempt bonds or the completion of other permanent financing. Some of
the proceeds received from the sale of newly issued bonds are used to repay
the first mortgage loan issued by the Company. The Company has from time to
time extended the maturity dates of the outstanding loans to give borrowers
additional time to obtain tax exempt financing and taken a participation
interest in such loans upon maturity in lieu of full debt repayment in the
form of cash. The loans generally bear interest at fixed rates, with the per
annum interest rate increasing under certain circumstances in which an
extension of the original maturity date is required due to the timing and
availability of financing. The Company may receive fees and certain other
consideration for making the loans. From June 1995 through December 31, 1996,
the Company made a total of seven loans in an aggregate principal amount of
approximately $26.9 million for the purpose of acquiring senior care
facilities and acquired $20.0 million in existing bonds, all of which are
secured by first mortgages on the facilities acquired.
41
<PAGE>
The following table sets forth certain information regarding the loans
secured by senior care facilities made by the Company's Senior Care Division
from its inception in June 1995 through March 1, 1997:
<TABLE>
<CAPTION>
LOAN MORTGAGE MATURITY
PROPERTY SECURING LOAN DATE AMOUNT DATE DEBT SERVICE
---------------------- ---- ---------- -------- ------------
<C> <C> <C> <C> <S>
93-bed nursing home located
in Huntingdon County,
Pennsylvania............... 6/23/95 $1,472,500 8/22/96(1) Monthly interest-only
payments in arrears at
12% per annum. The
loan included an
origination fee of
$72,500.
72-unit assisted living
facility located in Berlin, 6/30/95 4,042,500 5/15/96(1) Monthly interest-only
Maryland................... payments in arrears at
12% per annum. The
loan included an
origination fee of
$192,500.
58-bed nursing home located
in Richfield, Pennsylvania
and a 48-bed nursing home
located in Eldred, 9/1/95 2,215,000 8/22/96(1) Monthly interest-only
Pennsylvania............... payments in arrears at
12% per annum. The
loan included an
origination fee of
$125,000.
60-bed intermediate care
nursing home and 16
Alzheimer's apartments
capable of accommodating 38
residents, located in 10/13/95 4,466,000 7/31/97 Monthly interest-only
Phoenix, Arizona........... payments in arrears at
12% per annum. The
loan included an
origination fee of
$204,000.
235-bed nursing facility
located in Olathe, Kansas.. 4/25/96
third trust deed........ 1,067,500 9/9/97 Monthly interest-only
payments in arrears at
10.55% per annum for
each of the third and
fifth trust deeds. The
third trust deed
included an
origination fee of
$67,500.
fifth trust deed........ 750,000 9/9/97
122-bed nursing facility
located in Indiana County, 5/29/96 6,682,240 8/22/96(1) Monthly interest-only
Pennsylvania............... payments in arrears at
12% per annum. The
loan included an
origination fee of
$267,240.
225-bed intermediate and
skilled care facility
located in Hyattsville, 4/3/96 6,175,000 6/7/97 Monthly interest-only
Maryland................... payments in arrears at
12% per annum. The
loan included an
origination fee of
$250,000.
</TABLE>
- --------
(1) Date of repayment
42
<PAGE>
Medical Office Building Division
In May 1995, the Company entered into an agreement to loan $1.2 million to
an unaffiliated partnership for use in redeveloping a 120,000 square foot
medical center in Beverly Hills, California. The loan, which was originally
secured by a second deed of trust on the medical center, is personally
guaranteed by the general partner of this partnership. The guaranty is secured
by a pledge of 1.0 million shares of common stock issued by a publicly traded
company, which shares had an aggregate value of approximately $700,000 as of
April 21, 1997. The loan, which bears interest at the rate of 10% per annum,
had an original maturity date of June 1, 1996; the maturity date was
subsequently extended to May 31, 1997. Under the terms of the extension
agreement, the medical center in Beverly Hills, California was released as
security for the loan, and a hospital facility located in Fort Worth, Texas
valued at approximately $3.0 million was pledged as replacement security.
GLN Venture
The GLN Venture markets two different loan products: a short term loan and a
participating loan. The short term loan is a purchase-money mortgage designed
for stabilized facilities that enables buyers to close an acquisition quickly
without the delays inherent in a bond financing transaction. The typical loan
is for approximately 12 months and is generally repaid from the proceeds of a
bond offering. The GLN Venture earns points as well as interest on these
loans. The participating loans generally have a 24-month horizon and involve
facilities in which management believes there is an opportunity to create
value in a project, in many cases a turnaround situation. The participating
loans enable the GLN Venture to participate in gains resulting from a
turnaround in addition to the standard points and interest.
The GLN Venture funded its first loan in February 1997, providing $6.4
million for the acquisition of the Institute of Pennsylvania Hospital in
Philadelphia, Pennsylvania. The loan is a participating mortgage that carries
an 18-month term, has an interest rate of 30-day LIBOR plus 6.5% and is
secured by a first deed of trust. The borrower, CoreCare Behavioral
Management, expects to operate a 162-bed psychiatric facility on the property
and lease the balance of the property, with the exception of a portion of the
land which will be sold. Pursuant to the terms of the loan, the borrower will
be required to pay an additional participation amount of up to approximately
$700,000 when the loan is repaid.
The GLN Venture funded its second loan in March 1997 in the principal amount
of approximately $3.7 million to the Company for purposes of funding the
Company's contribution to the PHP Joint Venture. The loan carries a term of
six months and an interest rate of 12%. The loan may be extended for
additional six-month periods, provided, however, that during each month that
the loan is outstanding after the first six-month term the interest rate is
increased by 1% per month. The loan may be prepaid at any time after the first
four months and is secured by the Company's interest in the PHP Joint Venture.
INVESTMENTS IN BONDS
In October 1995, the Company acquired $20.9 million face value of tax-exempt
1989 Series A Health Care Bonds issued by the Massachusetts Industrial Finance
Agency due 2017 (the "Series A Bonds") and $5 million face value of 1989
Series B Health Care Revenue Bonds issued by the Massachusetts Industrial
Finance Agency due 2019 (the "Series B Bonds") for an aggregate purchase price
of $19.9 million. The Series A Bonds and Series B Bonds are secured by three
nursing homes owned by Hampden Nursing Homes, Inc., a Massachusetts nonprofit
corporation. Principal and interest payments due on these unrated bonds are
paid by the bond trustee out of the debt service payments received from the
underlying mortgages. The State of Massachusetts has not guaranteed the bonds
and the underlying mortgages are not insured in the event of default. Interest
on the Series A and Series B Bonds is payable at the rates of 9.75% and 9.5%,
respectively. At the time of acquisition, there was approximately $1.4 million
of unpaid interest accrued on the Series B Bonds. The Series A Bonds are not
callable and the Series B Bonds are subordinated in right of payment to the
Series A Bonds.
43
<PAGE>
The three senior care facilities pledged as security for the bonds are
Riverdale Gardens Nursing Home located in West Springfield, Massachusetts,
Chestnut Hill Nursing Home in East Longmeadow, Massachusetts and Mary Lyon
Nursing Home in Hampden, Massachusetts.
Riverdale Gardens Nursing Home is a 168-bed nursing facility currently
licensed for 84 skilled care and 84 intermediate care beds with 16 private and
76 double occupancy rooms. Constructed in various stages between 1957 and
1975, the property consists of a single story 54,451 square foot masonry
building on a 3.85 acre site with a 3,366 square foot single family residence
on an adjacent 30,000 square foot lot.
Chestnut Hill Nursing Home is a 123-bed nursing home consisting of 82
skilled nursing and 41 intermediate care beds in 15 private and 54 double
occupancy rooms. The facility is a 49,198 square foot single story brick
building constructed in 1984 on approximately 11.9 acres of land.
Mary Lyon Nursing Home occupies a 28,940 square foot building situated on
3.7 acres and was originally constructed in 1959 and renovated in 1986. The
facility is licensed for 100 beds of which 40 are skilled nursing and 60 are
intermediate beds. The bed compliment consists of ten private rooms, 39 double
occupancy and three quadruple occupancy rooms.
In March 1997, the Company sold the Series A and Series B Bonds, which
collectively had an outstanding face value of $25.6 million plus an additional
$2.0 million of accrued and unpaid interest, to the GLN Venture for
$7.7 million in cash and assigned to the GLN Venture $14.0 million in
indebtedness owed to GMAC-CM.
INSURANCE
The Company carries comprehensive liability, fire, flood, extended coverage
and rental loss insurance with respect to the Properties. There are certain
types of losses which may either be uninsurable or not economically insurable.
There can be no assurance that policies maintained by the Company will be
adequate in the event of a loss. The Company carries earthquake insurance with
respect to eight of its Properties. All of the Properties directly owned by
the Company are located in Southern California (the Company indirectly owns
six properties located in New Jersey through the PHP Joint Venture of which
the Company owns approximately 80%), which has a history of seismic activity
including the 1994 Northridge earthquake, which damaged the Holy Cross Medical
Plaza property. Should an uninsured loss occur, the Company could lose its
investment in, and anticipated earnings and cash flow from, a Property. See
"Risk Factors--Uninsured Loss."
GOVERNMENT REGULATION
Environmental Matters. Under various Federal, state and local laws,
ordinances and regulations, an owner or operator of real estate is liable for
the costs of removal or remediation of certain hazardous or toxic substances
on or in its property. These laws impose liability without regard to whether
the owner knew of, or was responsible for, the presence of any hazardous or
toxic substances. The presence of such substances, or the failure to properly
remediate these substances, may adversely affect the owner's ability to borrow
using the real estate as collateral and may subject the owner to material
remediation costs. All of the Properties have been subject to Phase I
environmental assessments (which involve inspection of the subject property,
but no soil sampling or groundwater analysis) by independent environmental
consultants. Although restricted in scope, these independent assessments
revealed no material evidence of existing environmental liability, and the
Company has not been notified by any governmental authority of any
noncompliance by, liability for, or other claim against the Company in
connection with environmental matters related to the Properties. While the
Company is not aware of any environmental liability that it believes would
have a material adverse effect on its business, assets or results of
operations, no assurance can be given that the environmental assessments
revealed all potential environmental liabilities or that no prior owner
created any material environmental condition not known to the Company or that
future uses or conditions (including changes in applicable environmental laws
and regulations) will not result in imposition of environmental liability.
44
<PAGE>
The independent environmental assessments include selective sampling for
asbestos where the age of the buildings or the types of materials warranted
such sampling. Limited quantities of non-friable asbestos were present in the
Sherman Oaks Medical Plaza. The Company removed the asbestos in 1994 in
connection with the renovation of this building.
As part of the normal practice of doctors, medical waste is generated. The
Company's leases require the individual tenants to make arrangements for the
disposal of medical waste and requires all tenants to provide proof that they
have contracted with a third party service to remove waste from the premises
each night. The handling and disposal of this waste is the responsibility of
the tenants; however, the Company remains responsible as the owner of the
property. There can be no assurances that all such medical waste will be
properly handled and disposed of or that the Company will not incur costs in
connection with improper disposal of medical waste by its tenants.
Americans with Disabilities Act. All of the Properties are required to
comply with the ADA. The ADA generally requires that buildings be made
accessible to people with disabilities. Compliance with the ADA requirements
could require removal of access barriers and noncompliance could result in
imposition of fines by the U.S. government or an award of damages to private
litigants. The Company believes it is in substantial compliance with the ADA
and that it will not be required to make substantial capital expenditures to
address the requirements of the ADA. If required changes involve a greater
expenditure than the Company currently anticipates, the Company's ability to
make expected distributions could be adversely affected. See "Risk Factors--
Government Regulation; Cost of Compliance with Americans with Disabilities
Act."
POLICIES WITH RESPECT TO CERTAIN ACTIVITIES
The following is a discussion of the Company's investment objectives and
acquisition policies, financing policies, conflict of interest policies and
policies with respect to certain other activities. The Company's policies with
respect to these activities have been determined by the Board of Directors and
may be amended or revised from time to time at the discretion of the Board of
Directors without a vote of the stockholders of the Company. As the sole
general partner of the Operating Partnership, the Company also determines the
policies of the Operating Partnership.
INVESTMENT OBJECTIVES
The Company's primary business objective is to maximize the total return to
stockholders through increases in dividends and appreciation in the value of
the Company's capital stock through long-term investment in medical office
properties, either directly or through affiliates, and short term investment
in loans secured by senior care facilities located throughout the United
States, either directly or through affiliates. The Company seeks to achieve
this objective by enhancing the operating performance of its existing
properties as well as through the selective acquisition of medical office
buildings and by originating loans secured by senior care facilities. Key
elements of the Company's MOB Division's operating strategy include: (i)
improving rental income and cash flow by aggressively marketing available
space; (ii) designing and renovating tenant space to meet the diverse needs of
medical practitioners; (iii) actively managing renovation costs and minimizing
other operating expenses such as leasing commissions by conducting management,
leasing, maintenance and marketing activities internally; (iv) maintaining a
diversified tenant base consisting of a cross section of medical specialties;
and (v) emphasizing regular maintenance, periodic renovation and capital
improvements to maximize long-term returns. Key elements of the Company's
Senior Care Division's operating strategy include (i) making short-term
secured bridge loans typically to nonprofit entities; (ii) monitoring the
issuance of tax-exempt bonds by a political subdivision with which the
nonprofit entity has contracted; and (iii) negotiating the repayment of the
Company's loans through a combination of cash payments and permanent loan
replacement.
45
<PAGE>
ACQUISITION POLICIES
The Company intends to continue to acquire existing medical office properties
from numerous types of owners including hospital owners, government agencies
and lending institutions which have taken control of such properties. The
Company believes that its expertise in managing medical office buildings
provides it with opportunities to acquire medical office buildings on favorable
economic terms. In its acquisition analysis, management reviews certain factors
including: (i) location of the property, particularly its proximity to major
hospitals; (ii) construction quality and design of the property; (iii)
historical, current and projected cash flow of the property; (iv) potential for
increased cash flow and capital appreciation of the property; (v) tenant mix
and terms of the tenant leases, including the potential for rent increases;
(vi) occupancy and demand by tenants for medical office properties in the
vicinity; and (vii) prospects for liquidity through sale, financing or
refinancing of the property. The Company's strategy is to seek properties that
are available at prices below estimated replacement cost and are expected to
produce a total return that will enhance stockholder returns. No assurance can
be given that the Company will be able to continue to make acquisitions on
favorable terms or that the yield to the Company from future acquisitions will
compare favorably with yields currently realized on the existing Properties.
Subject to the percentage of ownership limitations and gross income tests
necessary for REIT qualification, the Company also may invest in securities of
entities engaged in real estate activities or securities of other issuers
(including capital stock or debt securities), including for the purpose of
exercising control over such entities, although it has not done so in the past
and has no present intention to do so. The Company may acquire all or
substantially all of the securities or assets of other REITs or similar
entities where such investments would be consistent with the Company's
investment policies. See "Federal Income Tax Considerations--Taxation of the
Company."
There are no limitations on the percentage of the Company's assets that may
be invested in any one property or venture. The Board of Directors may
establish limitations as it deems appropriate from time to time. No limitations
have been set on the number of properties in which the Company will seek to
invest or on the concentration of investments in any one geographic region.
Except for the vacant parcel of land on Sycamore Avenue in Tustin,
California, the Company has no current intention to dispose of any of the
Properties, although it may do so if the Board of Directors determines that a
disposition would be in the best interests of the Company.
LENDING POLICIES
The Company intends to continue to make loans for the purchase of senior care
facilities located throughout the United States. These short term loans are
typically for a 6-24 month period. Since its inception in June 1995, the Senior
Care Division has made seven loans aggregating $26.9 million, of which four
have been repaid through the issuance of revenue bonds. As of March 1, 1997,
the Senior Care Division had three loans outstanding aggregating $12.5 million.
These loans generate cash flow from principal and interest payments received
from outstanding loans. The Company may receive future revenues in the form of
subordinated notes in lieu of interest or loan fees.
In November 1996, the Company expanded its activities in the Senior Care
Division by entering into the GLN Venture having an anticipated maximum
leveraged investment capacity for short term loans of $200.0 million. GMAC-CM,
which had previously funded four loans to the Company, has committed to provide
a credit line to the GLN Venture of up to $50.0 million, which will be secured
by loans originated by the GLN Venture.
In its short term and bridge financing analysis, management reviews certain
factors including: (i) present value of the target property; (ii) location of
the property, particularly its proximity to other health care facilities, shops
and markets; (iii) investment history of the entities seeking to acquire the
property; and (iv) anticipated potential for short-term gain and long-term
profits from the investment in and development of the target property.
46
<PAGE>
No assurance can be given that the Company will be able to continue to make
short term loans on terms favorable
to the Company or that the yield to the Company from future short term loans
will compare favorably with yields currently being realized on similar loans.
CONFLICT OF INTEREST POLICIES
The conflict of interest policies of the Company prohibit any officer from
participating directly or indirectly in the management of any medical office
building and in the ownership of any medical office building located in an area
where the Company has or may have an interest in owning such properties. In
addition, the executive employment contracts between each of Messrs. Gottlieb
and Lebowitz and the Company and the Operating Partnership require these
individuals to be full time executives of the Company and to dedicate
substantially all of their business time to the management of the Company and
the Operating Partnership. See "Management--Employment Agreements."
The conflict of interest policy also prohibits, without the approval of a
majority of the independent members of the Board of Directors, the entering
into of any contract or agreement between the Company and/or the Operating
Partnership, on the one hand, and any officer, director or principal
stockholder (stockholder owning beneficially 5% or more of the outstanding
voting securities of the Company) of the Company (or any affiliate of any such
person), on the other hand, or the entering into of any other transaction in
which any such person has a conflicting interest. To the extent that an actual
conflict is created with respect to a matter requiring Board approval, the
approval of a majority of the independent members of the Board of Directors
will be required under the Company's conflict of interest policy. At the 1997
Annual Meeting of the Company's stockholders, the Board of Directors intends to
seek approval of certain types of transactions involving directors of the
Company that would come within this policy. See "The Company--Operating
Partnership."
POLICIES WITH RESPECT TO OTHER ACTIVITIES
At all times, the Company intends to make investments in such a manner as to
be consistent with the requirements of the Code for the Company to qualify as a
REIT unless, because of changing circumstances or changes in the Code (or the
Treasury Regulations), the Board of Directors of the Company determines that it
is no longer in the best interests of the Company to qualify as a REIT.
The Company intends to operate in a manner that will not subject it to
regulation under the Investment Company Act of 1940. The Company does not
intend to underwrite securities of other issuers or to trade actively in loans
or other investments.
The Company may make investments other than as previously described,
including the purchase and sale of investments, although it does not currently
intend to do so. The Company has authority to repurchase or otherwise reacquire
Common Stock or any other securities it may issue and may engage in such
activities in the future. Any such action would be taken only in conformity
with applicable Federal and state laws and the requirements for qualifying as a
REIT under the Code and the Treasury Regulations.
The Company furnishes its stockholders with annual reports containing
consolidated financial statements audited by its independent certified public
accountants and with quarterly reports containing unaudited consolidated
financial statements for each of the first three quarters of each fiscal year.
47
<PAGE>
PRICE RANGE OF COMMON STOCK AND DISTRIBUTIONS
The Company's Common Stock is listed on the NYSE under the symbol GLR. It
has been the Company's policy to declare quarterly distributions to holders of
the Company's Common Stock so as to comply with applicable sections of the
Code governing REITs. Units and shares of Common Stock receive equal
distributions. Distributions are declared and paid at the discretion of the
Company's Board of Directors and generally depend on the Company's cash flow,
its financial condition, capital requirements, the distribution requirements
under the REIT provisions of the Code and such other factors as the Company's
Board of Directors deem relevant. Although the Company intends to continue to
make quarterly distributions to its stockholders, no assurance can be given as
to the amount to be distributed in the future.
The table below sets forth the high and low sales prices of the Company's
stock for each full quarterly period since January 1, 1995 and for the interim
period from April 1, 1997 to April 25, 1997 as reported by the NYSE. The table
also includes, on a per share basis, the quarterly cash dividends declared and
paid to holders of the Company's common stock for each of the last two fiscal
years.
<TABLE>
<CAPTION>
UNIT AND
COMMON STOCK
HIGH LOW DISTRIBUTION
------- ------- ------------
<S> <C> <C> <C>
1997
Second quarter (through April 25, 1997)..... $17 7/8 $16
First quarter............................... 19 16 0.36
1996
Fourth quarter.............................. 17 5/8 15 1/2 0.36
Third quarter............................... 16 1/4 12 5/8 0.36
Second quarter.............................. 14 12 5/8 0.32
First quarter............................... 13 3/4 10 1/2 0.32
1995
Fourth quarter.............................. 10 7/8 9 5/8 0.31
Third quarter............................... 10 5/8 9 1/8 0.31
Second quarter.............................. 10 5/8 8 1/8 0.31
First quarter............................... 13 1/2 8 1/2 0.31
</TABLE>
The number of holders of record of the shares of Common Stock was 162 as of
March 21, 1997. Such number does not include the total number of beneficial
holders of Common Stock.
48
<PAGE>
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The following table sets forth certain information with respect to the
directors and executive officers of the Company. All directors of the Company
will be elected each year at the annual meeting of stockholders. Subject to
rights pursuant to any employment agreements, officers of the Company serve at
the pleasure of the Board of Directors.
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Daniel M. Gottlieb...... 56 Chief Executive Officer, Co-Chairman of the Board and Director
Steven D. Lebowitz...... 56 President, Co-Chairman of the Board and Director
Richard L. Lesher....... 63 Director
Leslie D. Michelson..... 46 Director
Reese L. Milner......... 48 Director
Charles P. Reilly....... 54 Director
S. Craig Tompkins....... 46 Director
Gary Grabel............. 47 Senior Vice President
Mark H. Hamermesh....... 40 Senior Vice President
John H. Rauch........... 66 Senior Vice President, Operations
Quentin Thompson........ 40 Treasurer, Secretary and Chief Accounting Officer
Mitcheal C. Word........ 36 Vice President
</TABLE>
The following is a biographical summary of the experience of the directors
and executive officers of the Company.
MR. GOTTLIEB is the Chief Executive Officer and Co-Chairman of the Board of
the Company and has been such since the Company commenced operations. Mr.
Gottlieb co-founded G&L Development in 1976 and has been a general partner of
G&L Development and active in commercial real estate management and
development since that time. Mr. Gottlieb received his B.A. with honors from
the University of Southern California and earned a J.D. from Boalt Hall School
of Law at the University of California at Berkeley. Prior to forming G&L
Development, Mr. Gottlieb first served as a Los Angeles County Deputy District
Attorney for Beverly Hills and later entered private practice specializing in
real estate law and business management. Mr. Gottlieb has also served on the
Board of Directors of the United States Chamber of Commerce, Washington, D.C.
since February 1996.
MR. LEBOWITZ is the President and Co-Chairman of the Board of the Company
and has been such since the Company commenced operations. Mr. Lebowitz is the
co-founder and a general partner of G&L Development and has been active in the
development, management and ownership of a wide range of real estate
properties since 1968. Mr. Lebowitz received a B.S. in Accounting from the
University of Southern California, where he also received his MBA with highest
honors in 1965. From 1962 to 1964, Mr. Lebowitz worked for Deloitte & Touche
and was licensed as a Certified Public Accountant in 1964. From 1965 to 1968,
Mr. Lebowitz worked with the U.S. Department of Commerce and the Brookings
Institution in Washington D.C. Mr. Lebowitz served on the Board of Directors
of the United States Chamber of Commerce, Washington, D.C. from 1989 to 1994.
DR. LESHER has served as a director of the Company since the Company
commenced operations. Dr. Lesher has been the President and a member of the
Board of Directors of the United States Chamber of Commerce, Washington D.C.
since 1975. He serves on numerous committees of the Board, including the
Executive and Budget committees. In addition, Dr. Lesher is a member of the
Board of Directors of World Heart Corporation (Ottawa, Canada), an artificial
heart research and development company and AIT Corporation, a high-tech
company. Dr. Lesher received a B.B.A. from the University of Pittsburgh in
1958, an M.S. from Pennsylvania State University in 1960 and a D.B.A. from
Indiana University in 1963.
49
<PAGE>
MR. MICHELSON has served as a director of the Company since November, 1995.
Mr. Michelson is a co-founder and the Chairman and Co-Chief Executive Officer
of Value Health Sciences, Inc., a vendor of sophisticated clinical software
programs and consulting services for the managed care industry. Value Health
Sciences, Inc. is a member of the Value Health family of companies, which
serve over 64 million people and hundreds of clients in virtually every state,
including 58 of the nation's 250 largest corporations. Value Health Sciences,
Inc. is traded on the New York Stock Exchange. Prior to forming Value Health
Sciences, Inc. in 1988, Mr. Michelson served as Special Assistant to the
General Counsel of the United States Department of Health and Human Services.
He subsequently spent eight years with a private investment firm creating,
acquiring and building entrepreneurial companies primarily in the health care
arena. Mr. Michelson holds a law degree from Yale Law School and a bachelor's
degree from The Johns Hopkins University.
MR. MILNER has served as a director of the Company since the Company
commenced operations. Mr. Milner is a private real estate developer and
investor. Mr. Milner received a B.A. from the University of California at
Berkeley and a joint JD/MBA from Stanford University. Mr. Milner practiced law
from 1975 through 1979 before entering the real estate industry in 1980.
MR. REILLY has served as a director of the Company since the Company
commenced operations. Mr. Reilly is the managing general partner of Shamrock
Investments, an investment and merchant banking firm that specializes in the
health care industry. Prior to forming Shamrock Investments in 1987, Mr.
Reilly served as Senior Executive Vice President and Chief Development Officer
for American Medical International. In this position, Mr. Reilly was
responsible for growth through the acquisition and development of new health
care facilities and related business in the United States and abroad. Mr.
Reilly was a member of American Medical International's Board of Directors and
served on its Finance, Management, and Executive Committees. Mr. Reilly is
currently the Chairman of the Board of PHP which is an owner/operator of
primary care clinics for sponsored beneficiary populations. He also serves as
Chairman of the Board of Dynamic Health, Inc., an owner/operator of acute care
hospitals; and former Chairman of the Board of Paragon Ambulatory Surgery
Centers, Inc., an owner/operator of freestanding ambulatory surgery centers.
Mr. Reilly holds a law degree from the University of Pennsylvania and a
bachelor's degree in accounting and finance from Pennsylvania State
University. He has served as a director, trustee, or governing council member
of the Federation of American Healthcare Systems, the National Committee for
Quality Health Care and the American Hospital Association and is a past
President of the Beverly Hills Chamber of Commerce.
MR. TOMPKINS has served as a director of the Company since the Company
commenced operations. Mr. Tompkins is the President and a Director of The
Craig Corporation, a New York Stock Exchange company engaged in the ownership
and strategic management of its controlling interests in other operating
companies, including a 77.4% voting interest in Reading Entertainment, Inc.
Reading Entertainment, whose shares are quoted on the NASDAQ/NMS, is
principally in the beyond-the-home entertainment business, primarily through
its Cine Vista Conventional multi-plex cinema chain in Puerto Rico, its 83.3%
ownership interest in the Angelika Film Center in the Soho district of New
York City and its developmental Reading Cinema operations in Australia.
Reading also owns a 26% interest in Citadel Holding Corporation, an American
Stock Exchange company, whose assets consist primarily of office buildings in
California and Arizona. Mr. Tompkins also serves on the Boards of Reading
Entertainment (where he is Vice-Chairman) and Citadel Holding Corporation
(where he is also Vice-Chairman). Mr. Tompkins has served, since the third
quarter of 1994, as the Secretary, Treasurer and Principal Accounting Officer
of Citadel Holding Corporation. Beginning in 1984 and prior to joining Craig
and Reading in March 1993, Mr. Tompkins was a partner specializing in
corporate and real estate law in the law firm of Gibson, Dunn & Crutcher. Mr.
Tompkins holds a bachelor's degree from Claremont McKenna College and a J.D.
from Harvard Law School.
MR. GRABEL has been a Senior Vice President of the Company since 1996. Mr.
Grabel, who has over 20 years of experience in commercial and medical real
estate, is responsible for financing activities for healthcare facilities and
medical office buildings in the Company's portfolio. From 1994 to 1996 he was
principal of Grabel Financial, a Beverly Hills-based company that arranged
debt and equity funding for real estate developments, and from 1987 to 1994 he
was a principal in Grabel Zimbler, Inc., a mortgage banking firm, where he
arranged
50
<PAGE>
over $600 million in debt and equity for commercial and residential real
estate projects. Mr. Grabel received his law degree from Albany Law School in
1975 and graduated Summa Cum Laude from Lehigh University in 1972 with a
bachelor's degree in accounting and finance.
MR. HAMERMESH has been a Senior Vice President of the Company since 1996.
Mr. Hamermesh additionally serves as Chief Executive Officer of GLN Capital
Co., LLC, in which the Company holds a minority interest. Mr. Hamermesh is
responsible for the Company's senior care loan origination and for arranging
credit enhancement for the Company's mortgage loans. From 1991 to 1996, he
served as executive vice president of American Capital Resource, a commercial
lender specializing in FHA insured financing for health care and multifamily
properties, where he managed the firm's nationwide loan origination network.
From 1986 to 1991, he was co-founder and president of The Real Estate
Advisors, a national mortgage and real estate brokerage firm. Mr. Hamermesh
received his master's degree in business administration with distinction from
Harvard Business School in 1982 and his bachelor's degree in political science
from the University of California, Los Angeles, graduating Magna Cum Laude in
1978.
MR. RAUCH has been Senior Vice President, Operations for the Company since
1996. Mr. Rauch is responsible for the asset management of all of the
Company's medical office buildings. From 1975 to 1996 he was founder and
President of Camden Consultants, Inc., an economic consulting firm providing
clients with real estate and corporate planning information. Mr. Rauch
received his law degree from the University of Southern California with honors
in 1961 and his bachelor's degree in economics from the University of
California, Los Angeles in 1954.
MR. THOMPSON has been controller of the Company since 1995 and Secretary,
Treasurer and Chief Accounting Officer of the Company since 1996. Mr. Thompson
has been actively engaged in the real estate industry since 1979. He has been
Vice President-Controller (1983-1989) and Chief Financial Officer (1990-1995)
of Sovereign/Ring Management, which prior to its acquisition was a fee only
management company with a $1 billion portfolio of properties under management.
He also served as Chairman for the Real Estate Committee for the Los Angeles
Chapter of the California Society of CPAs from 1989 to 1993. He graduated from
the University of California, Santa Barbara, Magna Cum Laude in 1979 with a
bachelor of arts degree in business economics and is a registered Certified
Public Accountant.
MR. WORD has been a Vice President of the Company since 1996. Mr. Word is
responsible for loan origination, underwriting, asset management and HUD
processing for the Company's Senior Care Division. From 1990 to 1996 he served
as an independent consultant in the processing and closing of HUD insured
health care financing nationwide. He worked in the San Diego offices of
Deloitte & Touche LLP from 1984 to 1987 and was registered as a Certified
Public Accountant in 1987. Mr. Word graduated Cum Laude from San Diego State
University in 1984 with a bachelor's degree in accounting.
COMMITTEES OF THE BOARD OF DIRECTORS
The Executive Committee of the Board of Directors consists of Messrs.
Gottlieb, Lebowitz, Milner, Reilly and Tompkins. The Audit Committee consists
of Messrs. Michelson, Milner and Tompkins. The Compensation Committee consists
of Messrs. Michelson, Lesher and Reilly. The Company does not have a
nominating committee.
The primary function of the Executive Committee is to authorize the
acquisition and disposition of real property and to authorize the execution of
certain contracts and agreements.
The function of the Audit Committee is to make recommendations concerning
the engagement of independent public accountants, review with the independent
public accountants the plans and results of the audit engagement, approve
professional services provided by the independent public accountants, review
the independence of the independent public accountants, consider the range of
audit and non-audit fees and review the adequacy of the Company's internal
accounting controls.
51
<PAGE>
The Compensation Committee determines officers' salaries and bonuses and
administers the Company's 1993 Stock Incentive Plan.
EXECUTIVE COMPENSATION
Summary Compensation Table
The following table sets forth certain information with respect to the chief
executive officer of the Company and each of the executive officers of the
Company whose cash compensation exceeded $100,000 during the fiscal year ended
December 31, 1996 (collectively, the "Named Officers"). The Company did not
grant any restricted stock awards or stock appreciation rights or make any
long-term incentive plan payouts during such period.
<TABLE>
<CAPTION>
LONG TERM
COMPENSATION
ANNUAL COMPENSATION AWARDS
------------------------------------ ------------
SECURITIES
FISCAL YEAR UNDERLYING
NAME AND PRINCIPAL ENDED OTHER ANNUAL OPTIONS/
POSITION(1) DECEMBER 31 SALARY($) BONUS($) COMPENSATION($) SARS(#)
- ------------------ ----------- --------- -------- --------------- ------------
<S> <C> <C> <C> <C> <C>
Daniel M. Gottlieb..... 1996 $181,125 $15,000 $275,000(2) --
Chief Executive
Officer, 1995 157,500 63,000 -- 100,500(3)
Co-Chairman of the
Board 1994 150,000 -- -- --
and Director
Steven D. Lebowitz..... 1996 181,125 15,000 225,000(2) --
President, Co-Chairman 1995 157,500 63,000 -- 100,500(3)
of the Board and
Director 1994 150,000 -- -- --
</TABLE>
- --------
(1) The Named Officers do not include Messrs. Grabel, Hamermesh and Rauch,
none of whom received cash compensation of more than $100,000 in 1996. Mr.
Grabel joined the Company in May 1996, Mr. Hamermesh joined the Company in
June 1996 and Mr. Rauch joined the Company in July 1996. Had Messrs.
Grabel, Hamermesh and Rauch been with the Company for the entire year then
it is likely that each would have received cash compensation of more than
$100,000 based on their respective annual compensation rates ($100,000 for
Mr. Grabel, $120,000 for Mr. Hamermesh and $95,000 for Mr. Rauch) and on
bonuses actually paid to them ($15,000 for Mr. Grabel, $15,000 for Mr.
Hamermesh and $5,000 for Mr. Rauch).
(2) Such amounts were paid to Messrs. Gottlieb and Lebowitz partially to
defray tax liabilities imposed on them as a result of the transfer by the
Company of the property at 436 North Bedford Drive, Beverly Hills,
California (which was contributed by Messrs. Gottlieb and Lebowitz to the
Company in exchange for Units in 1993) to the lender in satisfaction of
the loan on the property. See "Certain Transactions."
(3) Issued pursuant to the Company's 1993 Stock Incentive Plan.
Aggregated Option/Exercises In Last Fiscal Year And Fiscal Year End
Options/Values
The following table sets forth information with respect to unexercised
options held by the Named Officers as of the end of the fiscal year ended
December 31, 1996. All options were granted pursuant to the Company's 1993
Stock Incentive Plan. No options were granted to or exercised by the Named
Officers during such fiscal year.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY
OPTIONS AT OPTIONS AT
FISCAL YEAR END FISCAL YEAR END(1)
------------------------- -------------------------
NAME AND PRINCIPAL
POSITION EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
------------------ ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Daniel M. Gottlieb...... 33,500 67,000(2) $247,063 $494,125
Steven D. Lebowitz...... 33,500 67,000(2) $247,063 $494,125
</TABLE>
- --------
(1) Each option has an exercise price of $9.625. The closing price of the
Common Stock on the NYSE on December 31, 1996 was $17.
(2) The unexercisable options vest in increments of 33,500 on December 18,
1997 and 1998 respectively.
52
<PAGE>
EMPLOYMENT AGREEMENTS AND ARRANGEMENTS
In December 1993, each of Daniel M. Gottlieb and Steven D. Lebowitz entered
into separate but identical employment agreements with the Company and the
Operating Partnership for a term of three years. The agreements provide for
automatic renewal for succeeding terms of one year unless the Company or
Messrs. Gottlieb or Lebowitz gives notice at least three months prior to
expiration of any term. The agreements each provide for annual base
compensation of $150,000 with an annual increase of 5%, with the first such
increase having occurred on January 1, 1995. The Compensation Committee of the
Board of Directors may review the annual base compensation every twelve months
in light of various factors, and following each such review, the annual base
compensation may be increased. Based on the 1996 annual review of the
Compensation Committee of the Board of Directors each of Messrs. Gottlieb and
Lebowitz were granted a base salary increase of 27% effective January 1, 1997.
In addition, each of Messrs. Gottlieb and Lebowitz shall be entitled to
receive an annual bonus equal to 20% of base salary based on a 5% increase in
FFO per share above the prior year's amount and an additional 8% of base
salary for each additional one percentage point increase in FFO per share
above the prior year's amount, up to a maximum of 100% of annual base
compensation. Furthermore, each agreement provides that Messrs. Gottlieb and
Lebowitz are entitled: (i) to participate in all medical, dental, life
insurance, retirement, profit sharing, stock incentive, disability and bonus
plans of the Company which may be made available to executives of the Company
(only medical plans presently exist), and (ii) to receive severance payments,
under certain circumstances, equal to two times their then-current annual
compensation. The agreements require Messrs. Gottlieb and Lebowitz to devote
substantially all of their working time and best efforts to performance of
their duties for the Company and, during the term of their employment,
prohibits them, with certain exceptions, from directly or indirectly owning or
operating or otherwise investing or participating in any other business that
is in competition with the business of the Company without the prior approval
of a majority of the independent members of the Board of Directors of the
Company. At its December 18, 1995 meeting, the Compensation Committee voted to
supplement the bonus program contained in the employment agreements between
the Company and Messrs. Gottlieb and Lebowitz. The supplemental program
provides for annual incentive bonuses of up to 50% of base salary based upon
the accomplishment of specific performance objectives as outlined in the
Company's annual business plan and approved by the Compensation Committee.
Under this supplemental incentive compensation program, the annual bonus
available to Messrs. Gottlieb and Lebowitz is equal to the greater of (x) the
annual bonus as determined by the percentage point increase in the Company's
FFO, or (y) the incentive compensation associated with specific objectives
outlined in the Company's business plan.
In June 1996, the Company entered into an employment agreement with Mr.
Hamermesh that provides for annual base compensation of $120,000 and bonuses
in the discretion of the Compensation Committee. The agreement does not
provide for a term of employment but provides that in the event the Company
terminates Mr. Hamermesh's employment prior to June 17, 1997 he will be paid
the difference between $150,000 and the amount of salary and bonus paid as of
the date of termination. Pursuant to the terms of the agreement, the Company
granted Mr. Hamermesh options to purchase 20,000 shares of Common Stock on
June 18, 1996 pursuant to the 1993 Stock Incentive Plan, which options have an
exercise price of $13.75 per share and vest in three equal installments on
each anniversary following the date of grant; provided, however, that all such
options vest immediately upon a change in control of the Company.
53
<PAGE>
PRINCIPAL STOCKHOLDERS OF THE COMPANY
The following table sets forth information as of April 20, 1997 regarding
the beneficial ownership of Common Stock and Units by (i) each person or
company known by the Company to be the beneficial owner of more than 5% of the
Company's outstanding shares, (ii) each director of the Company, (iii) each
officer of the Company and (iv) the directors and officers of the Company as a
group. Each person named in the table has sole voting and investment power
with respect to all shares shown as beneficially owned by such person except
as set forth in the notes below.
<TABLE>
<CAPTION>
NUMBER OF PERCENTAGE OF PERCENTAGE
SHARES OF SHARES OF INTEREST IN PERCENTAGE
NAME AND ADDRESS COMMON COMMON STOCK NUMBER OF OPERATING OWNERSHIP IN
OF BENEFICIAL OWNER STOCK(1) OUTSTANDING(2) UNITS(3) PARTNERSHIP(4) COMPANY(5)
------------------- --------- -------------- --------- -------------- ------------
<S> <C> <C> <C> <C> <C>
Daniel M. Gottlieb(6)... 344,332 8.4% 262,748(7) 5.8% 13.0%
439 N. Bedford Drive
Beverly Hills, CA 90210
Gary Grabel............. 7,600(8) * -- -- *
439 N. Bedford Drive
Beverly Hills, CA 90210
Mark H. Hamermesh....... 7,636 * -- -- *
439 N. Bedford Drive
Beverly Hills, CA 90210
Steven D. Lebowitz(6)... 266,668 6.5 175,166(9) 3.8 9.6
439 N. Bedford Drive
Beverly Hills, CA 90210
Richard Lesher.......... 5,000(10) * -- * *
1615 H Street, N.W.
Washington, DC 20062
Leslie D. Michelson..... 3,500 * -- * *
2400 Broadway, Suite
100
Santa Monica, CA 90404
Reese L. Milner......... 4,000 * 47,486(11) 1.0 1.1
439 N. Bedford Drive
Beverly Hills, CA 90210
John H. Rauch........... 5,000 * -- -- *
439 N. Bedford Drive
Beverly Hills, CA 90210
Charles P. Reilly....... 4,000 * -- -- *
2049 Century Park East
Suite 3330
Los Angeles, CA 90067
Quentin Thompson........ 16,333(12) * -- -- *
439 N. Bedford Drive
Beverly Hills, CA 90210
S. Craig Tompkins....... 7,000(13) * -- -- *
550 South Hope Street
Suite 1825
Los Angeles, CA 90071
Mitcheal C. Word........ -- -- -- -- --
439 N. Bedford Drive
Beverly Hills, CA 90210
Directors and Officers.. 671,069 16.1% 485,400 10.6% 24.8%
as a group (12 persons)
</TABLE>
54
<PAGE>
- --------
* Less than 1%
(1) The number of shares beneficially owned includes shares that the
following individuals have the right to acquire within 60 days of April
20, 1997 upon exercise of stock options, but not shares that such
individuals have the right to acquire upon exchange of Units, in the
following amounts: (a) 33,500 shares as to each of Messrs. Gottlieb and
Lebowitz, (b) 6,666 shares as to Mr. Hamermesh, (c) 5,333 shares as to
Mr. Thompson, (d) 5,000 shares as to each of Messrs. Grabel and Rauch,
(e) 4,000 shares as to each of Messrs. Lesher, Milner, Reilly and
Tompkins and (f) 3,500 shares as to Mr. Michelson.
(2) For the purposes of determining the percentage of outstanding Common
Stock held by each person or group set forth in the table, the number of
shares is divided by the sum of the number of outstanding shares of
Common Stock as of April 20, 1997 plus the number of shares of Common
Stock subject to options exercisable currently or within 60 days of April
20, 1997 by such person or group, in accordance with Rule 13d-3(d)(1)
under the Securities Exchange Act of 1934, as amended (the "Exchange
Act"). The ownership percentages do not consider Units which are
exchangeable for shares of Common Stock currently or within 60 days of
April 20, 1997.
(3) Units in the Operating Partnership (other than those held by the Company)
are exchangeable at the option of the holder for shares of Common Stock
or cash, at the election of the Company, at the date one year from the
date of issuance. All Units are currently exchangeable except 23,529
Units and 15,686 Units beneficially owned by Messrs. Gottlieb and
Lebowitz, respectively, which are exchangeable beginning June 28, 1997.
The initial exchange ratio is one Unit for one share of Common Stock.
(4) Based on the total number of Units outstanding, including those held by
the Company.
(5) Assuming all Units, other than those held by the Company, are exchanged
for shares of Common Stock at the initial exchange ratio of one Unit for
one share of Common Stock, and assuming all options exercisable currently
or within 60 days of April 20, 1997 by such person or group are exercised
for shares of Common Stock.
(6) Messrs. Gottlieb and Lebowitz have pledged 239,219 and 159,480 of their
Units, respectively, and 110,000 and 105,000 shares of Common Stock,
respectively, to Mr. Milner, members of the Milner family and related
entities to secure certain indebtedness. In addition, Messrs. Gottlieb
and Lebowitz have pledged 23,529 and 15,686 Units, respectively, and
200,832 and 128,168 shares of Common Stock, respectively, to a financial
institution to secure certain indebtedness.
(7) Includes 23,529 Units owned by 445 Bedford, LLC, a California limited
liability company ("445 LLC") of which Mr. Gottlieb is a member,
attributable to Mr. Gottlieb in proportion to his interest in 445 LLC.
(8) Includes 1,000 shares held by MMG, Incorporated, of which Mr. Grabel is a
principal shareholder, director and officer, plus an additional 100
shares held in a custodial account for the benefit of Mr. Grabel's son,
of which Mr. Grabel is the custodian.
(9) Includes 15,686 Units owned by 445 LLC, of which Mr. Lebowitz is a
member, attributable to Mr. Lebowitz in proportion to his interest in 445
LLC.
(10) Includes 1,000 shares held in an individual retirement account for the
benefit of Dr. Lesher's spouse.
(11) Includes 13,128 Units held by Milner Investment Corporation, which is
controlled by Mr. Milner. Does not include 13,128 Units held by Mr.
Milner's sister, as to which Mr. Milner disclaims beneficial ownership.
(12) Includes 1,000 shares held in an individual retirement account for the
benefit of Mr. Thompson's spouse.
(13) Includes 500 shares held by a trust for the benefit of Mr. Tompkins'
daughter, of which Mr. Tompkins is the Trustee.
55
<PAGE>
FORMATION TRANSACTIONS
The Company was formed as a Maryland corporation on September 15, 1993 by
Daniel M. Gottlieb and Steven D. Lebowitz to continue the acquisition,
development, ownership and management operations of medical office buildings
carried on previously by G&L Development, a California general partnership
that was the Company's predecessor.
In connection with the IPO on December 9, 1993, the Company, through the
Operating Partnership, engaged in the following transactions:
. acquired substantially all of the medical office buildings owned by G&L
Development including four medical office buildings, a parking facility
with ground floor retail space and a 61.8% partnership interest in 435
North Roxbury Drive, Ltd.;
. acquired Saint Joseph's Professional Building at a price of approximately
$5.2 million;
. loaned $12.2 million to the owner of the Holy Cross Medical Plaza and
exercised its option to acquire Holy Cross Medical Plaza at a price of
approximately $12.8 million (the acquisition was consummated on January
14, 1994, with the outstanding amount of the loan credited against the
purchase price);
. on June 28, 1994, exercised its option to acquire Sherman Oaks Medical
Plaza at a price of approximately $3.2 million plus the assumption of
$6.5 million of indebtedness secured by the property; and
. sold 3,680,000 shares of Common Stock to the public in connection with
the IPO at a price of $18.25 per share, whereby the proceeds derived
from the IPO, net of related transaction costs of approximately $6.5
million, totaling $60.4 million, were used primarily to repay
indebtedness relating to certain of the properties, to fund purchases of
real estate and to fund the $12.2 million loan secured by the Holy Cross
Medical Plaza.
THE PARTNERSHIP AGREEMENT
Terms of the Partnership Agreement are summarized below and are qualified in
their entirety by reference to the Partnership Agreement, which is an exhibit
to the Registration Statement of which this Prospectus is a part. Copies of
the Partnership Agreement may be obtained without charge upon written or oral
request to the Secretary of the Company at 439 North Bedford Drive, Beverly
Hills, California 90210, (310) 273-9930.
MANAGEMENT
The Operating Partnership is organized as a Delaware limited partnership
pursuant to the terms of the Partnership Agreement. The Company, as the sole
general partner of the Operating Partnership, generally has the power and
authority under the Partnership Agreement to manage and conduct the business
and affairs of the Operating Partnership, subject, in certain circumstances,
to the consent of the limited partners of the Operating Partnership. The Board
of Directors of the Company manages the affairs of the Company and thereby the
affairs of the Operating Partnership. No special compensation is paid to the
Company for its services as general partner. All operating expenses are
incurred at the Operating Partnership level and the limited partners are
therefore share in the expenses of operation.
LIMITED PARTNER APPROVAL RIGHTS
Under the terms of the Partnership Agreement, the general partner shall not,
without the consent of a majority of the outstanding percentage interest of
the limited partnership interests (including those held by the general
partner) undertake, on behalf of the Operating Partnership, any of the
following actions or enter into any transaction which would have the effect of
such transactions: (i) make a general assignment for the benefit of
56
<PAGE>
creditors or appoint or acquiesce in the appointment of a custodian, receiver
or trustee for all or any part of the assets of the Operating Partnership;
(ii) institute any proceeding for bankruptcy on behalf of the Operating
Partnership; (iii) transfer the partnership interest of the general partner or
admit into the Operating Partnership any additional or substitute general
partner, and (iv) sell or otherwise transfer all or substantially all of the
assets of the Operating Partnership. The Company owns over 89% of the limited
partnership interest in the Operating Partnership and therefore has the power
to consent or withhold consent with respect to such actions. Notwithstanding
the above, the general partner cannot, without the consent of the limited
partners (for this purpose excluding limited partnership interests held by the
general partner) with certain exceptions, amend, modify or terminate the
Partnership Agreement other than to reflect the admission, substitution,
termination or withdrawal of partners pursuant to the terms of the Partnership
Agreement.
REMOVAL OF GENERAL PARTNER
The Company may not be removed as general partner of the Operating
Partnership by the limited partners with or without cause.
DISTRIBUTIONS AND ALLOCATIONS
All distributions under the Partnership Agreement will be made in accordance
with the respective percentage interests of the partners in the Partnership.
The Operating Partnership's taxable income and tax losses for each fiscal year
are allocated generally in accordance with the respective percentage interests
of the partners in the Operating Partnership.
TRANSFER OF PARTNERSHIP INTERESTS
The Partnership Agreement provides that no limited partner shall transfer
all or any portion of its Units without the consent of the general partner,
which consent may be withheld in its sole and absolute discretion; provided,
however, that any limited partner may at any time, without the consent of the
general partner, (i) make certain transfers for estate planning purposes, or
(ii) transfer its Units to the Company pursuant to the conversion right
described below. In addition, Messrs. Gottlieb and Lebowitz are permitted to
pledge their Units to Milner family members and certain related entities in
connection with indebtedness of G&L Development and Messrs. Gottlieb and
Lebowitz to such persons and entities. No transfer of Units by the limited
partners of the Operating Partnership may be made in violation of certain
regulatory and other restrictions set forth in the Partnership Agreement.
CONVERSION OF UNITS
As of the date one year from the date of issuance, limited partners have the
right to convert all or a portion of their Units into shares of Common Stock
or cash equal to the fair market value of such shares of Common Stock, at the
election of the Company. Each Unit is initially convertible into one share of
Common Stock. Such conversion ratio is subject to adjustment upon the
occurrence of certain events such as stock splits, reverse stock splits and
stock dividends. The consummation of a conversion will be subject to the
expiration or termination of the applicable waiting period, if any, under the
Hart-Scott-Rodino Antitrust Improvements Act of 1976 and the stock ownership
limitations set forth in the Company's Articles of Incorporation. In addition,
without the prior written consent of the general partner, a limited partner
may not exercise its conversion rights with respect to all of its Units
unless, after such conversion, there shall be at least one limited partner of
the Operating Partnership. The Company anticipates that it will elect to issue
shares of Common Stock in connection with each such transfer rather than
paying cash.
ISSUANCE OF ADDITIONAL UNITS
As general partner of the Operating Partnership, the Company has the ability
to cause the Operating Partnership to issue additional Units. The Partnership
Agreement provides that additional Units may not be
57
<PAGE>
issued for consideration that is less, on a per-Unit basis, than the average
closing per-share price of the Common Stock on the NYSE for the ten business
days immediately preceding the date of such issuance.
FUNDING OF INVESTMENTS
The Partnership Agreement provides that if the Operating Partnership
requires additional funds to pursue its investment objectives, the Company may
fund such investments by raising additional equity capital and making a
capital contribution to the Operating Partnership or by borrowing such funds
and lending the net proceeds thereof to the Operating Partnership on the same
terms and conditions as are applicable to the Company's borrowing of such
funds. If the Company raises such funds by issuing shares of Common Stock, it
will receive, upon contribution of such funds to the Operating Partnership,
additional Units equal to the number of shares of Common Stock so issued with
appropriate adjustments to reflect certain events such as stock splits,
reverse stock splits and stock dividends.
TERM OF THE OPERATING PARTNERSHIP
The Operating Partnership has a term of fifty years, unless it is earlier
terminated in accordance with the terms of the Partnership Agreement.
CERTAIN TRANSACTIONS
The Company has adopted a policy pursuant to which material transactions
between the Company and its executive officers, directors and principal
stockholders (i.e., stockholders owning beneficially 5% or more of the
outstanding voting securities of the Company) shall be submitted to the Board
of Directors for approval by a disinterested majority of the directors voting
with respect to the transaction. For this purpose, a transaction is deemed
material if such transaction, alone or together with a series of similar
transactions during the same fiscal year, involves an amount which exceeds
$60,000.
A corporation owned by Messrs. Gottlieb and Lebowitz receives approximately
$52,000 per year from Saint John's Hospital for providing certain management
and leasing services to Saint John's Hospital with respect to the space it
leases and subleases in the Company's property at 405 North Bedford Drive,
Beverly Hills, California.
Prior to April 1996, Messrs. Milner, Gottlieb and Lebowitz were beneficial
owners of 445 LLC, having equity interests of 59.0%, 24.6% and 16.4%,
respectively. 445 LLC's primary asset was an office building located at 445 N.
Bedford Drive in Beverly Hills, California. On April 26, 1996, the Company
acquired Mr. Milner's interest in 445 LLC for $808,000. On June 14, 1996, 445
LLC completed a tax-deferred exchange transaction whereby it sold the office
building and acquired, along with the Operating Partnership as tenants-in-
common, the Tustin Properties. Subsequently, 445 LLC redeemed the Company's
interest in 445 LLC in exchange for a portion of 445 LLC's interest in the
Tustin Properties. On June 28, 1996, Messrs. Gottlieb and Lebowitz caused 445
LLC to contribute its remaining interest in the Tustin Properties to the
Operating Partnership in exchange for 39,215 newly issued Units in the
Operating Partnership. The new Units were valued at a price of $14.00 per
Unit, which reflected a premium of $1.00 over the closing price of a share of
the Company's Common Stock on the date the Company's Board of Directors
approved the exchange. The contributed interest in the Tustin Properties was
valued according to the net cash contributed on behalf of 445 LLC toward the
purchase price of the Tustin Properties in connection with the exchange
transaction involving the Tustin Properties.
In 1996 the Compensation Committee approved the payment to Messrs. Gottlieb
and Lebowitz of $275,000 and $225,000, respectively, to partially defray tax
liabilities imposed on them as a result of the transfer by the Company of 436
North Bedford Drive, Beverly Hills, California (which was contributed by
Messrs. Gottlieb and Lebowitz to the Company in exchange for Units in 1993) to
the lender in satisfaction of the loan on the property.
58
<PAGE>
The transfer of the property back to the lender caused Messrs. Gottlieb and
Lebowitz to realize a capital gain of approximately $5.0 million (allocated
60% to Mr. Gottlieb and 40% to Mr. Lebowitz), equal to the difference between
(x) the amount of the outstanding loan at the time of transfer and (y) Messrs.
Gottlieb's and Lebowitz's basis in the property. The transfer significantly
reduced the Company's overall indebtedness, and the Company subsequently
negotiated the purchase of 436 North Bedford Drive for an amount that was
approximately $10.4 million less than the debt that previously was secured by
that property. In contrast, other than the indirect benefit resulting from
their stock ownership in the Company, Messrs. Gottlieb and Lebowitz received
no benefit. The taxable gain allocated to the two executive officers
represented an allocation of tax consequences with no corresponding cash or
other financial benefit. For the 1996 calendar year, Messrs. Gottlieb and
Lebowitz were faced with an immediate and severe tax burden in excess of their
combined 1996 gross salaries and bonuses. The Compensation Committee, in
awarding such amounts to Messrs. Gottlieb and Lebowitz, noted that, in order
for the Company to achieve its business objectives in transferring such
property, it was necessary for Messrs. Gottlieb and Lebowitz to realize such
negative tax consequences.
In February 1997, the Board of Directors approved a transaction with PHP, of
which Mr. Reilly is the Chairman of the Board of Directors. Mr. Reilly, a
director of the Company and chairman of the Compensation Committee of the
Board of Directors, was not present and did not participate in the Board's
consideration of the proposal and did not vote with respect thereto. The
transaction involved the formation of the PHP Joint Venture which purchased
six medical office properties in New Jersey having a total of 80,415 square
feet at a purchase price of $22.4 million. The Company and PHP funded the $4.4
million down payment in proportion to their ownership interests in the PHP
Joint Venture (80.5% for the Company, 19.5% for PHP), with the Company's
contribution financed by the GLN Venture and secured by the Company's interest
in the PHP Joint Venture. The balance of the purchase price was financed by
two loans from the PHP Joint Venture, secured by first and second deeds of
trust. The greater of the two loans, at $16.0 million, carries a term of six
months and gives PHP a right, upon default, to purchase the Company's interest
in the new entity. Until May 31, 1997, PHP has an option to purchase the
Company's interest in the PHP Joint Venture. PHP has leased the properties
from the PHP Joint Venture pursuant to a 25-year net operating lease and has
entered into a three-year contract with Blue Cross/Blue Shield of New Jersey
(the seller of the properties) to provide medical services on the properties.
See "Business and Properties--Description of the Properties and Tenants."
DESCRIPTION OF SERIES A PREFERRED STOCK
The authorized capital stock of the Company consists of 50,000,000 shares of
Common Stock, par value $.01 per share (the "Common Stock"), 10,000,000 shares
of Preferred Stock, par value $.01 per share (the "Preferred Stock"), and
30,000,000 shares of Excess Stock, par value $.01 per share (the "Excess
Stock").
The following description is qualified in all respects by reference to the
Articles of Incorporation and the Bylaws of the Company, copies of which are
filed as exhibits to the Registration Statement of which this Prospectus is a
part.
GENERAL
Pursuant to the Company's Articles of Incorporation, the Company is
authorized to issue up to 10,000,000 shares of Preferred Stock in one or more
series, with such designations, powers, preferences, conversion or other
rights, voting powers, restrictions, limitations as to dividends or other
distributions, qualifications and terms or conditions of redemption, in each
case, if any, as are permitted by Maryland law and as the Board of Directors
may determine by adoption of Articles Supplementary to the Articles of
Incorporation without any further vote or action by the Company's
shareholders. As of the date of this Prospectus, no shares of Preferred Stock
were outstanding.
The following summary of the terms and provisions of the Series A Preferred
Stock does not purport to be complete and is qualified in its entirety by
reference to the pertinent sections in the Articles of Incorporation and
Articles Supplementary with respect to the Series A Preferred Stock, which are
available from the Company
59
<PAGE>
without cost by request to the Secretary of the Company at 439 North Bedford
Drive, Beverly Hills, California 90210, (310) 273-9930.
MATURITY
The Series A Preferred Stock has no stated maturity and will not be subject
to any sinking fund or mandatory redemption.
RANK
The Series A Preferred Stock will, with respect to dividend rights and
rights upon liquidation, dissolution or winding up of the Company, rank (i)
senior to all classes or series of Common Stock of the Company, and to all
equity securities issued by the Company the terms of which specifically
provide that such equity securities rank junior to the Series A Preferred
Stock with respect to dividend rights or rights upon liquidation, dissolution
or winding up of the Company; (ii) on a parity with all equity securities
issued by the Company the terms of which specifically provide that such equity
securities rank on a parity with the Series A Preferred Stock with respect to
dividend rights or rights upon liquidation, dissolution or winding up of the
Company, and (iii) junior to all existing and future indebtedness of the
Company. The term "equity securities" does not include convertible debt
securities, which will rank senior to the Series A Preferred Stock prior to
conversion.
DIVIDEND RIGHTS
Holders of shares of the Series A Preferred Stock are entitled to receive,
when and as declared by the Board of Directors (or a duly authorized committee
thereof), out of funds legally available for the payment of dividends,
preferential cumulative cash dividends at the rate of % per annum of the
Liquidation Preference per share (equivalent to a fixed annual amount of $
per share).
Dividends on the Series A Preferred Stock shall be cumulative from the date
of original issue and shall be payable monthly in arrears on or before the
15th day of each month, or, if not a business day, the next succeeding
business day (each, a "Dividend Payment Date"). The first dividend, which will
be paid on June 15, 1997, will be for less than a full month. Such dividend
and all subsequent dividends payable on the Series A Preferred Stock will be
computed on the basis of a 360-day year consisting of twelve 30-day months.
Dividends will be payable to holders of record as they appear in the stock
records of the Company at the close of business on the applicable record date,
which shall be the first day of the calendar month in which the applicable
Dividend Payment Date falls or on such other date designated by the Board of
Directors of the Company for the payment of dividends that is not more than 30
nor less than 10 days prior to such Dividend Payment Date (each, a "Dividend
Record Date").
No dividends on shares of Series A Preferred Stock shall be declared by the
Board of Directors or paid or set apart for payment by the Company at such
time as the terms and provisions of any agreement of the Company, including
any agreement relating to its indebtedness, prohibits such declaration,
payment or setting apart for payment or provides that such declaration,
payment or setting apart for payment would constitute a breach thereof or a
default thereunder, or if such declaration or payment shall be restricted or
prohibited by law.
Notwithstanding the foregoing, dividends on the Series A Preferred Stock
will accrue whether or not the Company has earnings, whether or not there are
funds legally available for the payment of such dividends and whether or not
such dividends are declared. Accrued but unpaid dividends on the Series A
Preferred Stock will not bear interest and holders of the Series A Preferred
Stock will not be entitled to any distributions in excess of full cumulative
distributions described above. Except as set forth in the next sentence, no
dividends will be declared or paid or set apart for payment on any capital
stock of the Company or any other series of Preferred Stock ranking, as to
dividends, on a parity with or junior to the Series A Preferred Stock (other
than a dividend in shares of the Company's Common Stock or in shares of any
other class of stock ranking junior to the Series A Preferred Stock as to
dividends and upon liquidation) for any period unless full cumulative
dividends have been
60
<PAGE>
or contemporaneously are declared and paid or declared and a sum sufficient
for the payment thereof is set apart for such payment on the Series A
Preferred Stock for all past dividend periods and the then current dividend
period. When dividends are not paid in full (or a sum sufficient for such full
payment is not so set apart) upon the Series A Preferred Stock and the shares
of any other series of Preferred Stock ranking on a parity as to dividends
with the Series A Preferred Stock, all dividends declared upon the Series A
Preferred Stock and any other series of Preferred Stock ranking on a parity as
to dividends with the Series A Preferred Stock shall be declared pro rata so
that the amount of dividends declared per share of Series A Preferred Stock
and such other series of Preferred Stock, shall in all cases bear to each
other the same ratio that accrued dividends per share on the Series A
Preferred Stock and such other series of Preferred Stock (which shall not
include any accrual in respect of unpaid dividends for prior dividend periods
if such Preferred Stock does not have a cumulative dividend) bear to each
other.
Except as provided in the immediately preceding paragraph, unless full
cumulative dividends on the Series A Preferred Stock have been or
contemporaneously are declared and paid or declared and a sum sufficient for
the payment thereof is set apart for payment for all past dividend periods and
the then current dividend period, no dividends (other than in shares of Common
Stock or other shares of capital stock ranking junior to the Series A
Preferred Stock as to dividends and upon liquidation) shall be declared or
paid or set aside for payment nor shall any other distribution be declared or
made upon the Common Stock, or any other capital stock of the Company ranking
junior to or on a parity with the Series A Preferred Stock as to dividends or
upon liquidation, nor shall any shares of Common Stock, or any other shares of
capital stock of the Company ranking junior to or on a parity with the Series
A Preferred Stock as to dividends or upon liquidation be redeemed, purchased
or otherwise acquired for any consideration (or any moneys be paid to or made
available for a sinking fund for the redemption of any such shares) by the
Company (except by conversion into or exchange for other capital stock of the
Company ranking junior to the Series A Preferred Stock as to dividends and
upon liquidation or redemptions for the purpose of preserving the Company's
qualification as a REIT). Holders of shares of the Series A Preferred Stock
shall not be entitled to any dividend, whether payable in cash, property or
stock, in excess of full cumulative dividends on the Series A Preferred Stock
as provided above. Any dividend payment made on shares of the Series A
Preferred Stock shall first be credited against the earliest accrued but
unpaid dividend due with respect to such shares which remains payable.
LIQUIDATION PREFERENCES
Upon any voluntary or involuntary liquidation, dissolution or winding up of
the affairs of the Company, the holders of shares of Series A Preferred Stock
are entitled to be paid out of the assets of the Company legally available for
distribution to its shareholders a Liquidation Preference of $25 per share,
plus an amount equal to any accrued and unpaid dividends to the date of
payment, but without interest, before any distribution of assets is made to
holders of Common Stock or any other class or series of capital stock of the
Company that ranks junior to the Series A Preferred Stock as to liquidation
rights. Holders of Series A Preferred Stock will be entitled to written notice
of any event triggering the right to receive such Liquidation Preference.
After payment of the full amount of the Liquidation Preference, plus any
accrued and unpaid dividends to which they are entitled, the holders of Series
A Preferred Stock will have no right or claim to any of the remaining assets
of the Company. The consolidation or merger of the Company with or into any
other corporation, trust or entity or of any other corporation with or into
the Company, or the sale, lease or conveyance of all or substantially all of
the property or business of the Company, shall not be deemed to constitute a
liquidation, dissolution or winding up of the Company.
In determining whether a distribution (other than upon voluntary or
involuntary liquidation) by dividend, redemption or other acquisition of
shares of stock of the Company or otherwise is permitted under the Maryland
General Corporation Law, as amended (the "Maryland GCL"), and if permitted by
the Maryland GCL, no effect shall be given to amounts that would be needed, if
the Company were to be dissolved at the time of the distribution, to satisfy
the preferential rights upon distribution of holders of shares of stock of the
Company whose preferential rights upon distribution are superior to those
receiving the distribution.
61
<PAGE>
REDEMPTION
The Series A Preferred Stock is not redeemable prior to June 1, 2001.
However, in order to ensure that the Company will continue to meet the
requirements for qualification as a REIT, the Series A Preferred Stock will be
subject to provisions in the Articles of Incorporation pursuant to which
capital stock of the Company owned by a shareholder in excess of 9.8% of the
number of shares or value (whichever is more restrictive) of the outstanding
capital stock (the "Ownership Limit") may in certain circumstances be
converted into Excess Stock, and the Company will have the right to purchase
such Excess Stock from the holder. See "--Restrictions on Ownership and
Transfer." On and after June 1, 2001, the Company, at its option, upon not
less than 30 nor more than 60 days' written notice, may redeem shares of the
Series A Preferred Stock, in whole or in part, at any time or from time to
time, for cash at a redemption price of $25 per share, plus all accrued and
unpaid dividends thereon to the date fixed for redemption (except with respect
to Excess Stock previously exchanged for Series A Preferred Stock pursuant to
the Articles of Incorporation. See "--Restrictions on Ownership and
Transfer."), without interest. Holders of Series A Preferred Stock to be
redeemed shall surrender such Series A Preferred Stock at the place designated
in such notice and shall be entitled to the redemption price and any accrued
and unpaid dividends payable upon such redemption following such surrender. If
notice of redemption of any shares of Series A Preferred Stock has been given
and if the funds necessary for such redemption have been set aside by the
Company in trust for the benefit of the holders of any shares of Series A
Preferred Stock so called for redemption, then from and after the redemption
date dividends will cease to accrue on such shares of Series A Preferred
Stock, such shares of Series A Preferred Stock shall no longer be deemed
outstanding and all rights of the holders of such shares will terminate,
except the right to receive the redemption price. If less than all of the
outstanding Series A Preferred Stock is to be redeemed, the Series A Preferred
Stock to be redeemed shall be selected pro rata (as nearly as may be
practicable without creating fractional shares).
Unless full cumulative dividends on all shares of Series A Preferred Stock
shall have been or contemporaneously are declared and paid or declared and a
sum sufficient for the payment thereof set apart for payment for all past
dividend periods and the then current dividend period, no shares of Series A
Preferred Stock shall be redeemed unless all outstanding shares of Series A
Preferred Stock are simultaneously redeemed and the Company shall not purchase
or otherwise acquire directly or indirectly any shares of Series A Preferred
Stock (except by exchange for capital stock of the Company ranking junior to
the Series A Preferred Stock as to dividends and upon liquidation); provided,
however, that the foregoing shall not prevent the purchase by the Company of
Excess Stock previously exchanged for Series A Preferred Stock pursuant to the
Articles of Incorporation in order to ensure that the Company continues to
meet the requirements for qualification as a REIT, or the purchase or
acquisition of shares of Series A Preferred Stock pursuant to a purchase or
exchange offer made on the same terms to holders of all outstanding shares of
Series A Preferred Stock. So long as no dividends are in arrears, the Company
shall be entitled at any time and from time to time to repurchase shares of
Series A Preferred Stock in open-market transactions duly authorized by the
Board of Directors and effected in compliance with applicable laws.
Notice of redemption will be given by publication in a newspaper of general
circulation in the City of New York, such publication to be made once a week
for two successive weeks commencing not less than 30 nor more than 60 days
prior to the redemption date. A similar notice will be mailed by the Company,
postage prepaid, not less than 30 nor more than 60 days prior to the
redemption date, addressed to the respective holders of record of the Series A
Preferred Stock to be redeemed at their respective addresses as they appear on
the stock transfer records of the Company. No failure to give such notice or
any defect therein or in the mailing thereof shall affect the validity of the
proceedings for the redemption of any shares of Series A Preferred Stock
except as to the holder to whom notice was defective or not given. Each notice
shall state: (i) the redemption date; (ii) the redemption price; (iii) the
number of shares of Series A Preferred Stock to be redeemed; (iv) the place or
places where the Series A Preferred Stock is to be surrendered for payment of
the redemption price; and (v) that dividends on the shares to be redeemed will
cease to accrue on such redemption date. If less than all of the Series A
Preferred Stock held by any holder is to be redeemed, the notice mailed to
such holder shall also specify the number of shares of Series A Preferred
Stock held by such holder to be redeemed.
62
<PAGE>
Immediately prior to any redemption of Series A Preferred Stock, the Company
shall pay, in cash, any accumulated and unpaid dividends through the
redemption date, unless a redemption date falls after a Dividend Record Date
and prior to the corresponding Dividend Payment Date, in which case each
holder of Series A Preferred Stock at the close of business on such Dividend
Record Date shall be entitled to the dividend payable on such shares on the
corresponding Dividend Payment Date notwithstanding the redemption of such
shares before such Dividend Payment Date.
Excess Stock previously exchanged for Series A Preferred Stock pursuant to
the Articles of Incorporation may be redeemed, in whole or in part, at any
time when outstanding shares of Series A Preferred Stock are being redeemed,
for cash at a redemption price of $25 per share, but excluding accrued and
unpaid dividends on such Excess Stock, without interest. Such Excess Stock
shall be redeemed in such proportion and in accordance with such procedures as
shares of Series A Preferred Stock are being redeemed.
The Series A Preferred Stock has no stated maturity and will not be subject
to any sinking fund or mandatory redemption.
VOTING RIGHTS
Holders of the Series A Preferred Stock will not have any voting rights,
except as set forth below.
Whenever dividends on any shares of Series A Preferred Stock shall be in
arrears for 18 or more months (a "Preferred Dividend Default"), the number of
directors then constituting the Board of Directors shall automatically be
increased in accordance with the Bylaws of the Company by two (if not already
increased by reason of a similar arrearage with respect to any Parity
Preferred (as hereinafter defined)), and the holders of such shares of Series
A Preferred Stock (voting separately as a class with all other series of
Preferred Stock ranking on a parity with the Series A Preferred Stock as to
dividends or upon liquidation ("Parity Preferred") upon which like voting
rights have been conferred and are exercisable) will be entitled to vote
separately as a class, in order to fill the vacancies thereby created, for the
election of two directors of the Company (the "Preferred Stock Directors") at
a special meeting called by the holders of record of at least 20% of the
Series A Preferred Stock or the holders of record of at least 20% of any
series of Parity Preferred so in arrears (unless such request is received less
than 90 days before the date fixed for the next annual or special meeting of
shareholders) or at the next annual meeting of shareholders, and at each
subsequent annual meeting until all dividends accumulated on such shares of
Series A Preferred Stock for the past dividend periods and the dividend for
the then current dividend period shall have been fully paid or declared and a
sum sufficient for the payment thereof set aside for payment. In the event the
directors of the Company are divided into classes, each such vacancy shall be
apportioned among the classes of directors to prevent stacking in any one
class and to insure that the number of directors in each of the classes of
directors are as equal as possible. Each Preferred Stock Director, as a
qualification for election as such (and regardless of how elected) shall
submit to the Board of Directors of the Company a duly executed, valid,
binding and enforceable letter of resignation from the Board of Directors, to
be effective upon the date upon which all dividends accumulated on such shares
of Series A Preferred Stock and Parity Preferred for the past dividend periods
and the dividend for the then current dividend period shall have been fully
paid or declared and a sum sufficient for the payment thereof set aside for
payment, whereupon the terms of office of all persons elected as Preferred
Stock Directors by the holders of the Series A Preferred Stock and any Parity
Preferred shall, upon the effectiveness of their respective letters of
resignation, forthwith terminate, and the number of directors then
constituting the Board of Directors shall be reduced accordingly. A quorum for
any such meeting shall exist if at least a majority of the outstanding shares
of Series A Preferred Stock and shares of Parity Preferred upon which like
voting rights have been conferred and are exercisable are represented in
person or by proxy at such meeting. Such Preferred Stock Directors shall be
elected upon the affirmative vote of a plurality of the shares of Series A
Preferred Stock and such Parity Preferred present and voting in person or by
proxy at a duly called and held meeting at which a quorum is present. If and
when all accumulated dividends and the dividend for the then current dividend
period on the Series A Preferred Stock shall have been paid in full or
declared and set aside for payment in full, the holders thereof shall be
divested of the foregoing voting rights (subject to revesting in the event of
each and every Preferred Dividend Default) and,
63
<PAGE>
if all accumulated dividends and the dividend for the then current dividend
period have been paid in full or declared and set aside for payment in full on
all series of Parity Preferred upon which like voting rights have been
conferred and are exercisable, the term of office of each Preferred Stock
Director so elected shall terminate. Any Preferred Stock Director may be
removed at any time with or without cause by, and shall not be removed
otherwise than by, the vote of the holders of record of a majority of the
outstanding shares of the Series A Preferred Stock when they have the voting
rights described above (voting separately as a class with all series of Parity
Preferred upon which like voting rights have been conferred and are
exercisable). So long as a Preferred Dividend Default shall continue, any
vacancy in the office of a Preferred Stock Director may be filled by written
consent of the Preferred Stock Director remaining in office, or if none remains
in office, by a vote of the holders of record of a majority of the outstanding
shares of Series A Preferred Stock when they have the voting rights described
above (voting separately as a class with all series of Parity Preferred upon
which like voting rights have been conferred and are exercisable). The
Preferred Stock Directors shall each be entitled to one vote per director on
any matter.
So long as any shares of Series A Preferred Stock remain outstanding, the
Company will not, without the affirmative vote or consent of the holders of at
least two-thirds of the shares of the Series A Preferred Stock outstanding at
the time, given in person or by proxy, either in writing or at a meeting
(voting separately as a class), amend, alter or repeal the provisions of the
Articles of Incorporation or Articles Supplementary, whether by merger,
consolidation or otherwise (an "Event"), so as to materially and adversely
affect any right, preference, privilege or voting power of the Series A
Preferred Stock or the holders thereof; provided, however, that with respect to
the occurrence of any Event set forth above, so long as the Series A Preferred
Stock (or any equivalent class or series of stock issued by the surviving
corporation in any merger or consolidation to which the Company became a party)
remains outstanding with the terms thereof materially unchanged, the occurrence
of any such Event shall not be deemed to materially and adversely affect such
rights, preferences, privileges or voting power of holders of the Series A
Preferred Stock and provided, further that (i) any increase in the amount of
the authorized Preferred Stock or the creation or issuance of any other series
of Preferred Stock, or (ii) any increase in the amount of authorized shares of
such series, in each case ranking on a parity with or junior to the Series A
Preferred Stock with respect to payment of dividends or the distribution of
assets upon liquidation dissolution or winding up, shall not be deemed to
materially and adversely affect such rights, preferences, privileges or voting
powers.
The foregoing voting provisions will not apply if, at or prior to the time
when the act with respect to which such vote would otherwise be required shall
be effected, all outstanding shares of Series A Preferred Stock shall have been
redeemed or called for redemption upon proper notice and sufficient funds shall
have been deposited in trust to effect such redemption.
Except as expressly stated in the Articles Supplementary, the Series A
Preferred Stock will not have any relative, participating, optional or other
special voting rights and powers, and the consent of the holders thereof shall
not be required for the taking of any corporate action, including but not
limited to, any merger or consolidation involving the Company or a sale of all
or substantially all of the assets of the Company, irrespective of the effect
that such merger, consolidation or sale may have upon the rights, preferences
or voting power of the holders of the Series A Preferred Stock.
CONVERSION
The Series A Preferred Stock is not convertible into or exchangeable for any
other property or securities of the Company.
RESTRICTIONS ON OWNERSHIP AND TRANSFER
For the Company to qualify as a REIT under the Code, among other things, not
more than 50% in value of its outstanding capital stock may be owned, actually
or constructively, by five or fewer individuals (defined in the Code to include
certain entities) during the last half of a taxable year, and such capital
stock must be beneficially owned by 100 or more persons during at least 335
days of a taxable year of 12 months or during a
64
<PAGE>
proportionate part of a shorter taxable year. To ensure that the Company
continues to meet the requirements for qualification as a REIT, the Articles
of Incorporation, subject to certain exceptions, provides that no holder may
own, or be deemed to own by virtue of the attribution provisions of the Code,
shares of the Company's capital stock in excess of more than 9.8% in number of
shares or value, whichever is more restrictive (the "Ownership Limit") of the
Company's outstanding capital stock. The Articles of Incorporation provide
further that if shares of capital stock are issued or transferred to any
person and such transfer would (i) result in beneficial or constructive
ownership of capital stock in excess of the Ownership Limit, (ii) cause the
capital stock to be beneficially owned by less than 100 persons, or (iii)
result in the corporation being "closely held" within the meaning of Section
856(h) of the Code, such issuance or transfer shall be void ab initio, and the
intended transferee would acquire no rights to the stock. The Board of
Directors, with a ruling from the Internal Revenue Service or an opinion of
counsel, may waive the Ownership Limit with respect to a shareholder if such
person is not an individual for purposes of applying the "five or fewer" rule
described above, the Board of Directors obtains such representations and
undertakings as are reasonably necessary to ascertain that no individual's
actual or deemed ownership of capital stock will violate the Ownership Limit,
such person agrees that, if an Internal Revenue Service ruling satisfactory to
the Company regarding the effect of issuing Excess Stock on the Company's REIT
status (the "IRS Ruling") has been obtained, a violation or attempted
violation of such representations and undertakings will result in capital
stock being exchanged for Excess Stock, and the Board of Directors is
otherwise satisfied that the waiver will not then or in the future jeopardize
the Company's REIT status.
If the Company obtains the IRS Ruling, shares of capital stock that are
subject to an attempted issuance or transfer in violation of these
restrictions will be exchanged automatically for shares of Excess Stock that
will be transferred by operation of law to the Company as trustee for the
exclusive benefit of the person or persons to whom the shares may ultimately
be transferred. While these shares are held in trust, they are not entitled to
vote or to share in any dividends. The shares may be retransferred by the
intended transferee at a price not to exceed the price paid by the intended
transferee, at which point the shares will automatically be exchanged for
Common Stock. In addition, it is expected that any such shares of Excess Stock
held in trust will be redeemable by the Company for a 90-day period at a price
equal to the redemption price (excluding any accrued and unpaid dividends) of
the Series A Preferred Stock that was converted into such Excess Stock, or the
lesser of the price paid for the stock by the intended transferee and the
market price for the stock on the date the Company accepts the offer to
purchase the stock. This period commences on the date of the violative
transfer if the intended transferee gives notice to the Company of the
transfer, or the date the Board of Directors determines that a violative
transfer has occurred if no notice is provided.
All certificates representing shares of Series A Preferred Stock will bear a
legend referring to the restrictions described above.
All persons who own, directly or by virtue of the constructive ownership
provisions of the Code, more than a specified percentage of the outstanding
shares of capital stock must file an affidavit with the Company containing the
information specified in the Articles of Incorporation within 30 days after
January 1 of each year. In addition, each stockholder shall upon demand be
required to disclose to the Company in writing such information with respect
to the direct, indirect and constructive ownership of shares as the Board of
Directors deems necessary to comply with the provisions of the Code applicable
to a REIT or to comply with the requirements of any taxing authority or
governmental agency.
As the Ownership Limit applies to ownership of more than 9.8% of the
Company's capital stock, any shares of Series A Preferred Stock that may be
issued will be aggregated with a stockholder's ownership of Common Stock for
purposes of compliance with the Ownership Limit.
The Ownership Limit may have the effect of precluding the acquisition of
control of the Company.
TRANSFER AND DIVIDEND PAYING AGENT
Chase Mellon Shareholder Services will act as the transfer and dividend
payment agent in respect of the Series A Preferred Stock.
65
<PAGE>
BOOK ENTRY, DELIVERY AND FORM
The depositary for the Series A Preferred Stock will be DTC and its nominee
will be Cede & Co. ("Cede"). Accordingly, Cede is expected to be the initial
registered holder of the Series A Preferred Stock which will be represented by
one or more global certificates issued in the name of Cede (the "Global
Preferred Security"). No person who acquires an interest in such Series A
Preferred Stock will be entitled to receive a certificate representing such
person's interest in such Series A Preferred Stock except as set forth herein.
Unless and until definitive Series A Preferred Stock is issued under the
limited circumstances described herein, all references to actions by holders
of Series A Preferred Stock issued in global form shall refer to actions taken
by DTC upon instructions from its Participants (as defined below), and all
references herein to payments and notices to such holders shall refer to
payments and notices to DTC or Cede, as the registered holder of such Series A
Preferred Stock.
DTC is a limited purpose trust company organized under the New York Banking
Law, a "banking organization" within the meaning of the New York Banking Law,
a member of the Federal Reserve System, a "clearing corporation" within the
meaning of the New York Uniform Commercial Code and a "clearing agency"
registered pursuant to Section 17A of the Exchange Act, and was created to
hold securities for its participating organizations ("Participants") and to
facilitate the clearance and settlement of securities transactions among
Participants through electronic book-entry, thereby eliminating the need for
physical movement of certificates. Participants include securities brokers and
dealers, banks, trust companies and clearing corporations, and may include
certain other organizations. Indirect access to the DTC system also is
available to others such as banks, brokers, dealers and trust companies that
clear through or maintain a custodial relationship with a Participant, either
directly or indirectly ("Indirect Participants").
Holders that are not Participants or Indirect Participants but that desire
to purchase, sell or otherwise transfer ownership of, or other interests in,
Series A Preferred Stock may do so only through Participants and Indirect
Participants. Under a book-entry format, holders may experience some delay in
their receipt of payments, as such payments will be forwarded by the agent
designated by the Transfer Agent to Cede, as nominee for DTC. DTC will forward
such payments. to its Participants, which thereafter will forward them to
Indirect Participants or holders. Holders will not be recognized by the
Company as registered holders of the Series A Preferred Stock entitled to the
benefits of the terms of the Series A Preferred Stock. Holders that are not
Participants will be permitted to exercise their rights as such only
indirectly through and subject to the procedures of Participants and, if
applicable, Indirect Participants.
Under the rules, regulations and procedures creating and affecting DTC and
its operations as currently in effect (the "Rules"), DTC will be required to
make book-entry transfers of Series A Preferred Stock among Participants and
to receive and transmit payments to Participants. Participants and Indirect
Participants with which holders have accounts with respect to the Series A
Preferred Stock similarly are required by the Rules to make book-entry
transfers and receive and transmit such payments on behalf of their respective
holders.
Because DTC can act only on behalf of Participants, who in turn act only on
behalf of holders or Indirect Participants, and on behalf of certain banks,
trust companies and other persons approved by it, the ability of a holder to
pledge Series A Preferred Stock to persons or entities that do not participate
in the DTC system, or to otherwise act with respect to such Series A Preferred
Stock, may be limited due to the absence of physical certificates for such
Series A Preferred Stock.
DTC will take any action permitted to be taken by a registered holder of any
Series A Preferred Stock under the terms of the Series A Preferred Stock only
at the direction of one or more Participants to whose accounts with DTC such
Series A Preferred Stock are credited.
GLOBAL PREFERRED SECURITIES; CERTIFICATED SECURITIES
A Global Preferred Security will be exchangeable for the relevant definitive
Series A Preferred Stock registered in the names of persons other than DTC or
its nominee only if (i) any person having a beneficial
66
<PAGE>
interest in the Global Preferred Security requests that the transfer and
dividend paying agent exchange such beneficial interest for Series A Preferred
Stock in definitive form, (ii) DTC notifies the Company that it is unwilling
or unable to continue as depository for such Global Preferred Security or if
at any time DTC ceases to be a clearing agency registered under the Exchange
Act at a time when DTC is required to be so registered in order to act as such
depository and, (iii) the Company in its sole discretion determines that the
Global Preferred Security will be so exchangeable. Any Global Preferred
Security that is exchangeable pursuant to the preceding sentence will be
exchangeable for definitive certificates registered in such names as DTC
directs. If Series A Preferred Stock is issued in definitive form, such Series
A Preferred Stock will be in denominations of $25 and integral multiples
thereof and may be transferred or exchanged at the offices described below.
Upon the occurrence of any event described in the immediately preceding
paragraph, DTC is generally required to notify all Participants of the
availability through DTC of definitive Series A Preferred Stock. Upon
surrender by DTC of the Global Preferred Security representing the Series A
Preferred Stock and delivery of instructions for re-registration, the Transfer
Agent will reissue the Series A Preferred Stock as definitive Series A
Preferred Stock, and thereafter the Company will recognize the holders of such
definitive Series A Preferred Stock as registered holders of Series A
Preferred Stock entitled to the benefits of the terms of the Series A
Preferred Stock.
Except as described above, the Global Preferred Security may not be
transferred except as a whole by DTC to a nominee of DTC or by a nominee of
DTC to DTC or another nominee of DTC or to a successor depository appointed by
the Company. Except as described above, DTC may not sell, assign, transfer or
otherwise convey any beneficial interest in a Global Preferred Security
evidencing all or part of the Series A Preferred Stock unless such beneficial
interest is in an amount equal to an authorized denomination for the Series A
Preferred Stock.
PAYMENT AND PAYING AGENCY
Payments in respect of the Series A Preferred Stock will be made to the
depository, which will credit the relevant accounts at the depository on the
applicable Distribution Dates or, if any Series A Preferred Stock is not held
by the depository, such payments will be made by check mailed to the address
of the holder entitled thereto as such address shall appear on the securities
register relating to the Series A Preferred Stock.
Payments on Series A Preferred Stock represented by a Global Preferred
Security will be made to DTC, as the depository for the Series A Preferred
Stock. If Series A Preferred Stock is issued in definitive form, the amounts
payable in respect of the Series A Preferred Stock will be payable, the
transfer of the Series A Preferred Stock will be registrable, and Series A
Preferred Stock will be exchangeable for Series A Preferred Stock of other
denominations of a like aggregate Liquidation Amount, at the offices of any
paying agent or transfer agent appointed by the Company, provided that payment
of any Distributions may be made at the option of the Company by check mailed
to the address of the persons entitled thereto or by wire transfer.
CERTAIN CHARTER AND BYLAW PROVISIONS
Limitation on Liability for Monetary Damages. The Maryland GCL permits the
charter of a Maryland corporation to include a provision limiting the
liability of its directors and officers to the corporation and its
stockholders for money damages, except to the extent that (i) it is proven
that the person actually received an improper benefit or profit in money,
property or services, or (ii) a judgment or other final adjudication is
entered in a proceeding based on a finding that the person's action, or
failure to act, was the result of active and deliberate dishonesty and was
material to the cause of action adjudicated in the proceeding. The Company's
Articles of Incorporation contain a provision providing for elimination of the
liability of its directors and officers to the Company and its stockholders
for money damages to the maximum extent permitted by Maryland law from time to
time.
Advance Notice of Director Nominations; New Business and Special
Meetings. The Bylaws of the Company provide that for any stockholder proposal
to be presented in connection with an annual meeting of stockholders of the
Company, including any proposal relating to the nomination of a director to be
elected to the
67
<PAGE>
Board of Directors of the Company, the stockholders must have given timely
written notice in compliance with the advance notice provisions of the Bylaws.
Pursuant to the Company's Bylaws and Section 2-502 of the Maryland GCL,
calling a special meeting to act upon any proposal substantially the same as a
matter voted on at any special meeting of stockholders held during the
preceding 12 months requires the approval of the holders of a majority of the
shares of Common Stock.
BUSINESS COMBINATIONS UNDER THE MARYLAND GENERAL CORPORATION LAW
The Maryland GCL prohibits certain "business combinations" (including a
merger, consolidation, share exchange or, in certain circumstances, an asset
transfer or issuance or reclassification of equity securities) between a
Maryland corporation and any person (i) who beneficially owns, directly or
indirectly, 10% or more of the voting power of the corporation's shares or
(ii) who is an affiliate or associate of the corporation and, at any time
within the two-year period prior to the date in question, was the beneficial
owner of 10% or more of the voting power of the then-outstanding voting stock
of the corporation (an "Interested Stockholder") or an affiliate or an
associate thereof. Such business combinations are prohibited for five years
after the most recent date on which the Interested Stockholder became an
Interested Stockholder. Any business combination not prohibited above must be
recommended by the Board of Directors of such corporation and approved by the
affirmative vote of at least (a) 80% of the votes entitled to be cast by all
holders of voting shares of the corporation, and (b) 66.6% of the votes
entitled to be cast by all holders of voting shares of the corporation other
than voting shares held by the Interested Stockholder or an affiliate or
associate of the Interested Stockholder, with whom the business combination is
to be effected, unless, among other things, the corporation's stockholders
receive a minimum price (as provided for in the Maryland GCL) for their shares
and the consideration is received in cash or in the same form as Previously
paid by the Interested Stockholder for its shares. These provisions of
Maryland law do not apply, however, to business combinations that are approved
or exempted by the Board of Directors of the corporation prior to the time
that the Interested Stockholder becomes an Interested Stockholder. The Board
of Directors has exempted from these provisions of the Maryland GCL any
business combination with Daniel M. Gottlieb, Steven D. Lebowitz, G&L
Development and all present or future affiliates or associates of theirs or
any other person acting in concert or as a group with any of the foregoing
persons. Furthermore, the Articles of Incorporation of the Company contain a
provision exempting the Company from these provisions as to other persons,
which, pursuant to the Maryland GCL, became effective 18 months from October
29, 1993, the date of filing.
CONTROL SHARE ACQUISITIONS
The Maryland GCL provides that "control shares" of a Maryland corporation
acquired in a "control share acquisition" have no voting rights except to the
extent approved by a vote of two-thirds of the votes entitled to be cast on
the matter, excluding shares of stock owned by the acquirer or by officers or
directors who are employees of the corporation. "Control shares" are voting
shares of stock which, if aggregated with all other shares of stock previously
acquired by such a person, would entitle the acquirer to exercise voting power
in electing directors within one of the following ranges of voting power: (i)
one-fifth or more but less than one-third, (ii) one-third or more but less
than a majority, or (iii) a majority or more of all voting power. "Control
shares" do not include shares of stock the acquiring person is then entitled
to vote as a result of having previously obtained stockholder approval. A
"control share acquisition" means, subject to certain exceptions, the
acquisition of, ownership of, or the power to direct the exercise of voting
power with respect to, control shares.
A person who has made or proposes to make a "control share acquisition,"
upon satisfaction of certain conditions (including an undertaking to pay
expenses), may compel the Board of Directors to call a special meeting of
stockholders to be held within 50 days of demand to consider the voting rights
of the shares. If no request for a meeting is made, the corporation may itself
present the question at any stockholders meeting. If voting rights are not
approved at the meeting or if the acquiring person does not deliver an
acquiring person statement as permitted by the statute, then, subject to
certain conditions and limitations, the corporation may redeem any or all of
the "control shares" (except those for which voting rights have previously
been approved) for fair value determined, without regard to voting rights, as
of the date of the last control share acquisition or of any meeting of
stockholders at which the voting rights of such shares are considered and not
approved. If voting
68
<PAGE>
rights for "control shares" are approved at a stockholders meeting and the
acquirer becomes entitled to vote a majority of the shares entitled to vote,
all other stockholders may exercise appraisal rights. The fair value of the
stock as determined for purposes of such appraisal rights may not be less than
the highest price per share paid in the control share acquisition, and certain
limitations and restrictions otherwise applicable to the exercise of
dissenters' rights do not apply in the context of "control share acquisition."
The "control share acquisition" statute does not apply to stock acquired in a
merger, consolidation or share exchange if the corporation is a party to the
transaction, or to acquisitions approved or exempted by the Articles of
Incorporation or bylaws of the corporation.
The Company's Bylaws contain a provision exempting the Company's capital
stock from the "control share acquisition" statute.
OTHER
If the Company's equity securities are held by less than 800 stockholders and
the Company's securities are no longer listed on the NYSE or the American Stock
Exchange, it is possible, under certain circumstances, that the Company may
become subject to Section 2115 of the California Corporations Code. In such
event, certain provisions of the Company's charter would be governed by
California law, including, without limitation, the stockholders' right to
cumulate votes at elections of directors (cumulative voting), the stockholders'
right to remove directors without cause (which are subject to the stockholders'
rights to cumulative votes), and the Company's ability to indemnify its
officers, directors and employees (which is generally more restrictive than in
Maryland).
If either the exemption in the Articles of Incorporation with respect to
business combinations or the exemption in the Bylaws with respect to the
"control share acquisition" statute is rescinded, such provisions of the
Maryland GCL could have the effect of discouraging offers to acquire the
Company and of increasing the difficulty of consummating any such offer.
Furthermore, the Articles of Incorporation of the Company contain a provision
that authorizes a director of the Company in determining what is in the best
interests of the Company to consider, in addition to the interests of the
stockholders, the interests of certain other constituencies (e.g., employees,
creditors and customers), community and societal interests and other factors
that may lead the director to oppose a transaction which, as an exclusively
financial matter, might be attractive to some, or a majority, of the Company's
stockholders.
FEDERAL INCOME TAX CONSIDERATIONS
The following summary of certain Federal income tax considerations to holders
of Series A Preferred Stock is based on current law, is for general information
only, and is not tax advice. The tax treatment of a holder of Series A
Preferred Stock will vary depending upon such holder's particular situation,
and this discussion does not purport to deal with all aspects of taxation that
may be relevant to particular shareholders in light of their personal
investment or tax circumstances, or to certain types of shareholders subject to
special treatment under the Federal income tax laws, including, without
limitation, life insurance companies, certain financial institutions, dealers
in securities or currencies, stockholders holding Series A Preferred Stock as
part of a conversion transaction, as part of a hedge or hedging transaction, or
as a position in a straddle for tax purposes, tax-exempt organizations, foreign
corporations, foreign partnerships and persons who are not citizens or
residents of the United States. In addition, the summary below does not
consider the effects of any foreign, state, local or other tax laws that may be
applicable to prospective stockholders.
EACH PROSPECTIVE PURCHASER IS ADVISED TO CONSULT HIS OWN TAX ADVISOR
REGARDING THE SPECIFIC TAX CONSEQUENCES TO HIM OR HER OF THE PURCHASE,
OWNERSHIP AND SALE OF THE SERIES A PREFERRED STOCK AND OF THE COMPANY'S
ELECTION TO BE TAXED AS A REAL ESTATE INVESTMENT TRUST, INCLUDING THE FEDERAL,
STATE, LOCAL, FOREIGN AND OTHER TAX CONSEQUENCES OF SUCH PURCHASE, OWNERSHIP,
SALE AND ELECTION AND OF POTENTIAL CHANGES IN APPLICABLE TAX LAWS.
69
<PAGE>
PROSPECTIVE PURCHASERS SHOULD NOTE THAT THE PROVISIONS OF THE CODE DEALING
WITH REITS ARE SUBJECT TO CHANGE AT ANY TIME BY FUTURE TAX LEGISLATION. SUCH
LEGISLATION COULD REPEAL OUTRIGHT THE REIT PROVISIONS OR MODIFY THEM IN VARIOUS
WAYS AND SUCH REPEAL OR MODIFICATION COULD HAVE RETROACTIVE EFFECT.
TAXATION OF THE COMPANY
General. The Company has elected to be taxed as a REIT under Sections 856 and
860 of the Code, commencing with its taxable year ending December 31, 1993. The
Company believes that it is organized and operates in such a manner as to
qualify for taxation as a REIT under the Code, and the Company intends to
continue to operate in such a manner, but no assurance can be given that it
will operate in a manner so as to qualify or remain qualified.
It is the opinion of Gibson, Dunn & Crutcher LLP that, commencing with the
Company's taxable year ending December 31, 1993, the Company is organized in
conformity with the requirements for qualification as a REIT, and that its
proposed method of operation will enable it to meet the requirements for
qualification and taxation as a REIT under the Code. Counsel's opinion is based
on various assumptions and is conditioned upon representations made by the
Company and the Operating Partnership as to certain relevant factual matters.
Counsel's opinion is also based on the factual representations of the Company
concerning its business and properties as described in this Prospectus.
Moreover, such qualification and taxation as a REIT will depend upon the
Company's ability to meet, on a continuing basis, distribution levels,
diversity of stock ownership and the various other qualification tests imposed
under the Code discussed below. Counsel will not review compliance with these
tests on a continuing basis. Accordingly, no assurance can be given that the
actual results of the Company's operation for any particular taxable year will
satisfy the REIT requirements.
If the Company qualifies for taxation as a REIT, it will generally compute
its taxable income as does a regular corporation except that it will be
eligible for a deduction for dividends paid to shareholders. Accordingly, the
Company generally will not be subject to Federal corporate income taxes on net
income that it currently distributes to stockholders. Since the Company will
receive its income as an allocable share of the income of the Operating
Partnership, the rules on partnership taxation will apply to determine the
Company's income and deductions. See "--Partnership Tax Considerations."
Treatment of the Company as a REIT, therefore, substantially eliminates the
"double taxation" (i.e., tax at both the corporate and stockholder levels) that
generally results from an investment in a corporation. However, the Company
will be subject to Federal income tax in the following circumstances. First,
the Company will be taxed at regular corporate rates on any undistributed REIT
taxable income, including undistributed net capital gains. Second, under
certain circumstances, the Company may be subject to the "alternative minimum
tax" on its items of tax preference. Third, if the Company has (i) net income
from the sale or other disposition of "foreclosure property" that is held
primarily for sale to customers in the ordinary course of business or (ii)
other nonqualifying income from foreclosure property, it will be subject to tax
at the highest corporate rate on such income. Fourth, if the Company has net
income from prohibited transactions (which are, in general, certain sales or
other dispositions of property (other than foreclosure property) held primarily
for sale to customers in the ordinary course of business), such income will be
subject to a 100% tax. Fifth, if the Company should fail to satisfy the 75%
gross income test or the 95% gross income test (as discussed below), and has
nonetheless maintained its qualification as a REIT because certain other
requirements have been met, it will be subject to a 100% tax on the net income
attributable to the greater of the amount by which the Company fails the 75% or
95% test, multiplied by a fraction intended to reflect the Company's
profitability. Sixth, if the Company should fail to be treated as having
distributed during each calendar year at least the sum of (i) 85% of its REIT
ordinary income for such year, (ii) 95% of its REIT capital gain net income for
such year, and (iii) any undistributed taxable income from prior years, the
Company would be subject to a 4% excise tax on the excess of such required
distribution over the amounts treated as having been so distributed. Seventh,
if the Company acquires any asset from a "C" corporation (i.e., a corporation
generally subject to full corporate level tax) in a transaction in which
70
<PAGE>
the basis of the asset in the Company's hands is determined by reference to
the basis of the asset (or any other property) in the hands of the
corporation, and the Company recognizes gain on the disposition of such asset
during the 10-year period beginning on the date on which such asset was
acquired by the Company, then, to the extent of such property's "built-in"
gain (the excess of the fair market value of such property at the time of
acquisition by the Company over the adjusted basis in such property at such
property at such time), such gain will be subject to tax at the highest
regular corporate rate applicable (as provided in Treasury Regulations that
have not yet been promulgated).
Requirements for Qualification. The Code defines a REIT as a corporation,
trust or association (i) which is managed by one or more trustees or
directors; (ii) the beneficial ownership of which is evidenced by transferable
shares or by transferable certificates of beneficial interest; (iii) which
would be taxable as a domestic corporation but for Sections 856 through 859 of
the Code; (iv) which is neither a financial institution nor an insurance
company subject to certain provisions of the Code; (v) the beneficial
ownership of which is held by 100 or more persons; (vi) during the last half
of each taxable year not more than 50% in value of the outstanding stock of
which is owned, directly or indirectly, by five or fewer individuals (as
defined in the Code to include certain entities); and (vii) which meets
certain other tests, described below, regarding the nature of its income and
assets. The Code provides that conditions (i) to (iv), inclusive, must be met
during the entire taxable year and that condition (v) must be met during at
least 335 days of a taxable year of 12 months, or during a proportionate part
of a taxable year of less than 12 months.
The Company believes that it has issued sufficient shares of capital stock
in sufficient proportions to allow the Company to satisfy requirements (v) and
(vi). In addition, the Company's Articles of Incorporation provide for
restrictions regarding the transfer and ownership of its shares that are
intended to assist the Company in continuing to satisfy the share ownership
requirements described in (v) and (vi) above. See "Description of Series A
Preferred Stock--Restrictions on Ownership and Transfer."
To monitor the Company's compliance with the share ownership requirements,
the Company is required to maintain records regarding the actual ownership of
its shares of stock. To do so, the Company must demand written statements each
year from the record holders of certain percentages of its shares of stock in
which the record holders are to disclose the actual owners of the shares
(i.e., the persons required to include in gross income the REIT dividends). (A
REIT with 2,000 or more record shareholders must demand statements from record
holders of 5% or more of its shares, one with less that 2,000, but more than
200 record shareholders must demand statements from record holders of 1% or
more of the shares, while a REIT with 200 or fewer record shareholders must
demand statements from record holders of 0.5% or more of the shares.) A list
of those persons failing or refusing to comply with this demand must be
maintained as part of the Company's records. A shareholder who fails or
refuses to comply with the demand must submit a statement with his tax return
disclosing the actual ownership of the shares of stock and certain other
information.
In addition, a corporation may not elect to become a REIT unless its taxable
year is the calendar year. The Company has a calendar year taxable year.
Ownership of a Partnership Interest. In the case of a REIT which is a
partner in a partnership, Treasury Regulations provide that the REIT will be
deemed to own its proportionate share of the assets of the partnership and
will be deemed to be entitled to the income of the partnership attributable to
such share. In addition, the character of the assets and gross income of the
partnership shall retain the same character in the hands of the REIT for
purposes of Section 856 of the Code, including satisfying the gross income
tests and asset tests described below. Thus, the Company's proportionate share
of the assets, liabilities and items of income of the various partnerships and
limited liability companies in which the Company holds direct or indirect
interest will be treated as assets, liabilities and items of the Company for
purposes of applying the requirements described herein.
Income Tests. In order to maintain qualification as a REIT, there are three
gross income requirements that must be satisfied annually. First, at least 75%
of the REIT's gross income (excluding gross income from prohibited
transactions) for each taxable year must be derived directly or indirectly
from investments relating to
71
<PAGE>
real property or mortgages on real property (including "rents from real
property" and, in certain circumstances, interest) or from certain types of
temporary investments. Second, at least 95% of the REIT's gross income
(excluding gross income from prohibited transactions) for each taxable year
must be derived from such real property investments, and from dividends,
interest and gain from the sale or disposition of stock or securities, or from
any combination of the foregoing. Third, short-term gain from the sale or
other disposition of stock or securities, gains from prohibited transactions
and gain on the sale or other disposition of real property held for less than
four years (apart from involuntary conversions and sales of foreclosure
property) must represent less than 30% of the REIT's gross income (including
gross income from prohibited transactions) for each taxable year.
Rents received by the Company will qualify as "rents from real property" in
satisfying the gross income requirements for a REIT described above only if
several conditions are met. First, the amount of rent must not be based in
whole or in part on the income or profits of any person. However, an amount
received or accrued generally will not be excluded from the term "rents from
real property" solely by reason of being based on a fixed percentage or
percentages of receipts or sales. Second, the Code provides that rents
received from a tenant will not qualify as "rents from real property" in
satisfying the gross income tests if the Company, or an owner of 10% or more
of the Company, directly or constructively owns 10% or more of such tenant (a
"Related Party Tenant"). Third, if rent attributable to personal property,
leased in connection with a lease of real property, is greater than 15% of the
total rent received under the lease, then the portion of rent attributable to
such personal property will not qualify as "rents from real property."
Finally, for rents received to qualify as "rents from real property," the
Company generally must not operate or manage the property or furnish or render
services to tenants, other than through an "independent contractor" from whom
the Company derives no revenue. The "independent contractor" requirement,
however, does not apply to the extent the services provided by the Company are
"usually or customarily rendered" in connection with the rental of space for
occupancy only and are not otherwise considered "rendered to the occupant."
The Company has represented that it does not and will not (i) charge rent for
any property that is based in whole or in part on the income or profits of any
person (except by reason of being based on a percentage of receipts or sales,
as described above), (ii) rent any property to a Related Party Tenant, (iii)
derive rental income attributable to personal property (other than personal
property leased in connection with the lease of real property, the amount of
which is less than 15% of the total rent received under the lease), or (iv)
perform services considered to be rendered to the occupant of the property,
other than through an independent contractor from whom the Company derives no
revenue.
The Company uses the services of independent contractors in certain areas. A
company owned by Messrs. Gottlieb and Lebowitz provides certain administrative
and leasing services to a major tenant in the 405 North Bedford Drive medical
building. The Company has contracted with an independent parking facility
operator to manage and operate the parking lots in certain G&L Development
Properties. The Company also anticipates engaging parking lot operators and
other independent contractors as needed with respect to the Properties. The
status of these contractors as independent contractors under the REIT
provisions of the Code requires, among other things, that the Company may not
determine how the contractor performs its activities, but it may specify the
functions to be performed and the standards to be met. The Company intends to
handle its relationship with its independent contractors to satisfy this
requirement.
The Company and the Operating Partnership receive fees in consideration of
the performance of management and administrative services with respect to
Properties that are not owned at all or are owned only partially by the
Operating Partnership. Although some part or all of such management and
administrative fees generally will not qualify under the 75% or 95% gross
income tests, the Company believes that the aggregate amount of such fees (and
any other non-qualifying income) in any taxable year will not cause the
Company to exceed the limits on non-qualifying income under the 75% and 95%
gross income tests.
Under both the 75% and 95% gross income tests, "interest" generally does not
include any amount received or accrued (directly or indirectly) if the
determination of such amount depends in whole or in part on the income or
profits of any person. However, an amount received or accrued generally will
not be excluded from the term "interest" solely by reason of being based on a
fixed percentage or percentages of gross receipts or sales.
72
<PAGE>
Although the Company intends to acquire interests in participating loans, the
Company intends to participate in loans the interest on which qualifies as
interest for purposes of the 75% and 95% gross income tests.
If the Company fails to satisfy one or both of the 75% or 95% gross income
tests for any taxable year, it may qualify as a REIT for such year if it is
entitled to relief under certain provisions of the Code. These relief
provisions generally will be available if (i) the Company's failure to meet
such tests was due to reasonable cause and not due to willful neglect, (ii) the
Company attaches a schedule of the sources of its income to its return, and
(iii) any incorrect information on the schedules was not due to fraud with
intent to evade tax. It is not possible, however, to state whether in all
circumstances the Company would be entitled to the benefit of these relief
provisions. As discussed above in "General," even if these relief provisions
apply, a tax would be imposed with respect to the excess net income.
Asset Tests. The Company, at the close of each quarter of its taxable year,
must also satisfy three tests relating to the nature of its assets. First, at
least 75% of the value of the Company's total assets must be represented by
real estate assets (including (i) its allocable share of real estate assets
held by the Operating Partnership and partnerships in which the Operating
Partnership owns an interest or held by "qualified REIT subsidiaries" of the
Company and (ii) stock or debt instruments held for not more than one year
purchased with the proceeds of a stock offering or long-term (at least five
years) debt offering of the Company), cash, cash items and government
securities. For this purpose, loans secured by real property, such as loans
acquired by the Company's Senior Care Division directly or through the GLN
Venture, generally constitute real estate assets. Second, not more than 25% of
the Company's total assets may be represented by securities other than those in
the 75% asset class. Third, of the investments included in the 25% asset class,
the value of any one issuer's securities owned by the Company may not exceed 5%
of the value of the Company's total assets, and the Company may not own more
than 10% of any one issuer's outstanding voting securities.
Under Section 856(i) of the Code, a "qualified REIT subsidiary" means any
corporation if 100 percent of the stock of such corporation is held by the REIT
at all times during the period such corporation was in existence. Under the
Code, a corporation which is a qualified REIT subsidiary shall not be treated
as a separate corporation for Federal income tax purposes, and all assets,
liabilities, and items of income, deduction, and credit of the corporation
shall be treated as assets, liabilities, and such items (as the case may be) of
the REIT. The Company has owned all the outstanding stock of both G&L Realty
Financing II, Inc. and G&L Medical, Inc. since their existence, and,
accordingly, both corporations are qualified REIT subsidiaries of the Company.
Annual Distribution Requirements. The Company, in order to qualify as a REIT,
is required to distribute dividends (other than capital gain dividends) to its
stockholders in an amount at least equal to (A) the sum of (i) 95% of the
Company's "REIT taxable income" (computed without regard to the dividends paid
deduction and the REIT's net capital gain) and (ii) 95% of the net income
(after tax), if any, from foreclosure property, minus (B) the sum of certain
items of noncash income. Such distributions must be paid in the taxable year to
which they relate, or in the following taxable year if declared before the
Company timely files its tax return for such year and if paid on or before the
first regular dividend payment after such declaration. To the extent that the
Company does not distribute all of its net capital gain or distributes at least
95%, but less than 100%, of its "REIT taxable income," as adjusted, or it does
not distribute income attributable to certain non-cash income items, it will be
subject to tax on the undistributed amount at regular capital gains and
ordinary corporate tax rates. Furthermore, if the Company should fail to
distribute during each calendar year at least the sum of (i) 85% of its REIT
ordinary income for such year, (ii) 95% of its REIT capital gain income for
such year, and (iii) any undistributed taxable income from prior periods, the
Company will be subject to a 4% excise tax on the excess of such required
distribution over the amounts actually distributed.
The Company intends to make timely distributions sufficient to satisfy the
annual distribution requirements. In this regard, the Partnership Agreement
authorizes the Company, as general partner, to take such steps as may
be necessary to cause the Operating Partnership to distribute to its partners
an amount sufficient to permit the Company to meet these distribution
requirements. It is possible, however, that the Company, from time to time, may
not have sufficient cash or other liquid assets to meet the 95% distribution
requirement due to timing
73
<PAGE>
differences between the actual receipt of income and actual payment of
deductible expenses and the inclusion of such income and deduction of such
expenses in arriving at taxable income of the Company, or if the amount of
nondeductible expenses such as principal amortization or capital expenditures
exceed the amount of noncash deductions. In the event that such timing
differences occur, in order to meet the 95% distribution requirement, the
Company may arrange or cause the Operating Partnership to arrange, for short-
term, or possibly long-term, borrowing to permit the payment of required
dividends.
Under certain circumstances, the Company may be able to rectify a failure to
meet the distribution requirement for a year by paying "deficiency dividends"
to stockholders in a later year that may be included in the Company's
deduction for dividends paid for the earlier year. Thus, the Company may be
able to avoid being taxed on amounts distributed as deficiency dividends;
however, the Company will be required to pay to the IRS interest based upon
the amount of any deduction taken for deficiency dividends.
Failure to Qualify. If the Company fails to qualify for taxation as a REIT
in any taxable year and the relief provisions do not apply, the Company will
be subject to tax (including any applicable alternative minimum tax) on its
taxable income at regular corporate rates. Distribution to stockholders in any
year in which the Company fails to qualify will not be deductible by the
Company, nor will they be required to be made. In such event, to the extent of
current and accumulated earnings and profits, all distributions to
stockholders will be taxable as ordinary income, and, subject to certain
limitations in the Code, corporate distributees may be eligible for the
dividends received deduction. Unless entitled to relief under specific
statutory provisions, the Company also will be disqualified from taxation as a
REIT for the four taxable years following the year during which qualification
was lost and could not reelect REIT status until it distributes out all
current and accumulated earnings and profits from the non-REIT period. In
addition, it may be subject to tax on "built-in gains," as described above. It
is not possible to state whether in all circumstances the Company would be
entitled to such statutory relief.
TAXATION OF DOMESTIC STOCKHOLDERS
Taxation of Taxable Stockholders. As long as the Company qualifies as a
REIT, distributions made to the Company's taxable stockholders out of current
or accumulated earnings and profits (and not designated as capital gain
dividends) will be taken into account by them as ordinary income and will not
be eligible for the dividends received deduction for corporations.
Distributions that are designated as capital gain dividends will be taxed as
long-term capital gains (to the extent they do not exceed the Company's actual
net long-term capital gain for the taxable year) without regard to the period
for which the stockholder has held its stock. However, corporate stockholders
may be required to treat up to 20% of certain capital gain dividends as
ordinary income. Distributions in excess of current and accumulated earnings
and profits will not be taxable to a stockholder to the extent that they do
not exceed the adjusted basis of the stockholder's shares of Series A
Preferred Stock, but rather will reduce the adjusted basis of such shares. To
the extent that such distributions exceed the adjusted basis of a
stockholder's shares of Series A Preferred Stock, they will be included in
income as long-term capital gain (or short-term capital gain if the shares
have been held for one year or less), assuming the shares are a capital asset
in the hands of the stockholder. In addition, any dividend declared by the
Company in October, November or December of any year payable to a stockholder
of record on a specific date in any such month shall be treated as both paid
by the Company and received by the stockholder on December 31 of such year,
provided that the dividend is actually paid by the Company during January of
the following calendar year. Stockholders may not include in their individual
income tax returns any net operating losses or capital losses of the Company.
In general, any loss upon a sale or exchange of shares of Series A Preferred
Stock by a stockholder who has held such shares for six months or more (after
applying certain holding period rules) will be treated as a long-term capital
loss to the extent of distributions from the Company required to be treated by
each stockholder as long-term capital gain.
Cash Redemption of Series A Preferred Stock. A cash redemption of shares of
the Series A Preferred Stock will be treated under Section 302 of the Code as
a distribution taxable as a dividend (to the extent of the Company's current
and accumulated earnings and profits) at ordinary income rates unless the
redemption satisfies
74
<PAGE>
one of the tests set forth in Section 302(b) of the Code and is therefore
treated as a sale or exchange of the redeemed shares. The cash redemption will
be treated as a sale or exchange if it (i) is "substantially disproportionate"
with respect to the holder, (ii) results in a "complete termination" of the
holder's stock interest in the Company, or (iii) is "not essentially equivalent
to a dividend" with respect to the holder, all within the meaning of Section
302(b) of the Code. In determining whether any of these tests have been met,
shares of capital stock (including Common Stock and other equity interests in
the Company) considered to be owned by the holder by reason of certain
constructive ownership rules set forth in the Code, as well as shares of
capital stock actually owned by the holder, must generally be taken into
account. Because the determination as to whether any of the alternative tests
of Section 302(b) of the Code will be satisfied with respect to any particular
holder of the Series A Preferred Stock depends upon the facts and circumstances
at the time that the determination must be made, prospective holders of the
Series A Preferred Stock are advised to consult their own tax advisors to
determine such tax treatment.
If a cash redemption of shares of the Series A Preferred Stock is not treated
as a distribution taxable as a dividend to a particular holder, it will be
treated, as to that holder, as a taxable sale or exchange. As a result, such
holder will recognize gain or loss for Federal income tax purposes in an amount
equal to the difference between (i) the amount of cash and the fair market
value of any property received (less any portion thereof attributable to
accumulated and declared but unpaid dividends, which will be taxable as a
dividend to the extent of the Company's current and accumulated earnings and
profits), and (ii) the holder's adjusted basis in the shares of the Series A
Preferred Stock for tax purposes. Such gain or loss will be capital gain or
loss if the shares of the Series A Preferred Stock have been held as a capital
asset, and will be long-term gain or loss if such shares have been held for
more than one year.
If a cash redemption of shares of the Series A Preferred Stock is treated as
a distribution taxable as a dividend, the amount of the distribution will be
measured by the amount of cash and the fair market value of any property
received by the holder. The holder's adjusted basis in the redeemed shares of
the Series A Preferred Stock for tax purposes will be transferred to the
holder's remaining shares of capital stock in the Company, if any. If the
holder owns no other shares of capital stock in the Company, such basis may,
under certain circumstances, be transferred to a related person or it may be
lost entirely.
Redemption Premium. Under Section 305(c) of the Code and applicable Treasury
Regulations, if the redemption price of the Series A Preferred Stock exceeds
its issue price the difference ("redemption premium") may be taxable as a
constructive distribution of additional Series A Preferred Stock to the holder
(treated as a dividend to the extent of the Company's current and accumulated
earnings and profits and otherwise subject to the treatment described above for
distributions) over a certain period. Because Series A Preferred Stock provides
for an optional right of redemption by the Company at a price that may exceed
the issue price, stockholders could be required to recognize such redemption
premium under a constant interest rate method similar to that for accruing
original issue discount if, based on all of the facts and circumstances, the
optional redemption is more likely than not to occur. If stock may be redeemed
at more than one time, the time and price at which such redemption is most
likely to occur must be determined based on all of the facts and circumstances.
Applicable Treasury Regulations provide a "safe harbor" under which a right to
redeem will not be treated as more likely than not to occur if (i) the issuer
and the stockholder are not related within the meaning of such regulations;
(ii) there are no plans, arrangements, or agreements that effectively require
or are intended to compel the issuer to redeem the stock (disregarding, for
this purpose, a separate mandatory redemption), and (iii) exercise of the right
to redeem would not reduce the yield of the stock, as determined under the
regulations. Regardless of whether the optional redemption is more than likely
not to occur, constructive dividend treatment will not result if the redemption
premium does not exceed a de minimis amount. The Company intends to take the
position that the existence of the Company's optional redemption right does not
result in a constructive distribution to the holders of Series A Preferred
Stock.
Backup Withholding. The Company will report to its stockholders and the IRS
the amount of dividends paid during each calendar year, and the amount of tax
withheld, if any, with respect thereto. Under the backup withholding rules, a
stockholder may be subject to backup withholding at the rate of 31% with
respect to
75
<PAGE>
dividends paid and redemption proceeds unless such holder (a) is a corporation
or comes within certain other exempt categories and, when required,
demonstrates this fact, or (b) provides a taxpayer identification number,
certifies as to no loss of exemption from backup withholding, and otherwise
complies with applicable requirements of the backup withholding rules. The
Company may nonetheless institute backup withholding with respect to a
stockholder if it is advised to do so by the IRS. A stockholder who does not
provide the Company with its correct taxpayer identification number may also be
subject to penalties imposed by the IRS. Any amount paid as backup withholding
will be creditable against the stockholder's income tax liability.
Taxation of Tax-Exempt Stockholders. Distributions by the Company to a tax-
exempt employee pension trust or other domestic tax-exempt shareholder
generally under IRS rulings will not constitute "unrelated business taxable
income" ("UBTI") unless the shareholder has borrowed to acquire or carry shares
of Series A Preferred Stock. For taxable years beginning after December 31,
1993, however, qualified pension trusts owning in excess of 10% of stock of
certain REITs may be required to treat a certain percentage of such a REIT's
distributions as UBTI. The restrictions on ownership of Common Stock in the
Company's Articles of Incorporation will generally prevent any shareholder,
including a pension trust, from acquiring sufficient shares of Series A
Preferred Stock to trigger this provision, absent approval by the Board of
Directors. See "Description of Series A Preferred Stock--Restrictions on
Ownership and Transfer."
TAXATION OF FOREIGN STOCKHOLDERS
The rules governing United States Federal income taxation of nonresident
alien individuals, foreign corporations, foreign partnerships and other foreign
stockholders (collectively, "Non-U.S. Stockholders") are complex and no attempt
will be made here to provide more than a summary of such rules. A prospective
Non-U.S. Stockholder should consult with its own tax advisors to determine the
impact of Federal, state and local income tax laws with regard to an investment
in Common Stock of the Company, including any reporting requirements.
Distributions by the Company that are neither attributable to gain from sales
or exchanges by the Company of United States real property interests nor
designated by the Company as capital gains dividends will be treated as
dividends of ordinary income to the extent that they are made out of current or
accumulated earnings and profits of the Company. Such distributions ordinarily
will be subject to a tax equal to 30% of the gross amount of the distribution
unless an applicable tax treaty reduces or eliminates that tax. However, if
income from the investment in the shares is treated as effectively connected
with the conduct by the Non-U.S. Stockholder of a United States trade or
business (or, if an income tax treaty applies, is attributable to a United
States permanent establishment of the Non-U.S. Stockholder), the Non-U.S.
Stockholder generally will be subject to a tax at graduated rates, in the same
manner as U.S. Stockholders are taxed with respect to such dividends (and may
also be subject to the 30% branch profits tax in the case of a stockholder that
is a foreign corporation). United States income tax must be withheld at the
rate of 30% on the gross amount of any such dividends made to a Non-U.S.
Stockholder unless (i) a lower treaty rate applies or (ii) the Non-U.S.
Stockholder files an IRS Form 4224 with the withholding agent certifying that
the investment to which the distribution relates is effectively connected with
a United States trade or business of such Non-U.S. Stockholder (or, if an
income tax treaty applies, is attributable to a United States permanent
establishment of the Non-U.S. Stockholder). Lower treaty rates generally
applicable to dividend income do not, however, necessarily apply to dividends
from a REIT such as the Company. Pursuant to current Treasury Regulations,
dividends paid to an address in a country outside the United States are
generally presumed to be paid to a resident of such country for purposes of
ascertaining the requirement of withholding discussed above and the
applicability of a tax treaty rate. Under proposed Treasury Regulations not
currently in effect, however, a Non-U.S. Stockholder who seeks to claim the
benefit of an applicable treaty rate would be required to satisfy certain
certification and other requirements.
Unless the Company's stock constitutes a "USRPI" (as defined below),
distributions in excess of current and accumulated earnings and profits of the
Company and that are neither attributable to gain from sales or exchanges by
the Company of United States real property interests nor designated by the
Company as capital gains dividends will not be taxable to a stockholder to the
extent that they do not exceed the adjusted basis of
76
<PAGE>
the stockholder's shares, but rather will reduce the adjusted basis of such
shares. To the extent that such distributions exceed the adjusted basis of a
Non-U.S. Stockholder's shares, they will give rise to tax liability if the
Non-U.S. Stockholder otherwise is subject to tax on any gain from the sale or
disposition of shares in the Company (as described below). Under current
Treasury Regulations, if it cannot be determined at the time a distribution is
made whether or not such distribution will be in excess of current and
accumulated earnings and profits, the distribution will be subject to
withholding at the rate applicable to dividends. If, however, the Company's
stock is treated as a USRPI, then unless otherwise treated as a dividend for
withholding purposes as described below, any distribution in excess of current
or accumulated earnings and profits will be subject to 10% withholding and, to
the extent such distributions in excess of the Company's current and
accumulated earnings and profits exceed the adjusted basis of a Non-U.S.
Stockholder's stock, they will give rise to gain from the sale or exchange of
the stock, the tax treatment of which is described below. Amounts withheld
generally are refundable if it is subsequently determined that such amounts
are in excess of the Non-U.S. Stockholder's U.S. tax liability.
Distributions that are designated by the Company at the time of distribution
as capital gains dividends (other than those arising from the disposition of a
United States real property interest) generally will not be subject to
taxation, unless (i) investment in the shares is effectively connected with
the Non-U.S. Stockholder's United States trade or business (or, if an income
tax treaty applies, is attributable to a United States permanent establishment
of the Non-U.S. Stockholder), in which case the Non-U.S. Stockholder will be
subject to the same treatment as U.S. stockholders with respect to such gain
(except that a stockholder that is a foreign corporation may also be subject
to the 30% branch profits tax), or (ii) the Non-U.S. Stockholder is a
nonresident alien individual who was present in the United States for 183 days
or more during the taxable year and either has a "tax home" in the United
States or sold his shares under circumstances that the sale was attributable
to a U.S. office, in which case the nonresident alien individual will be
subject to a 30% tax on the individual's capital gains.
For any year in which the Company qualifies as a REIT, distributions that
are attributable to gain from sales or exchanges by the Company of United
States real property interests will be taxed to a Non-U.S. Stockholder under
the provisions of the Foreign Investment in Real Property Tax Act of 1980, as
amended ("FIRPTA"). Under FIRPTA, these distributions are taxed to a Non-U.S.
Stockholder as gain effectively connected with a United States trade or
business. Non-U.S. Stockholders would thus be taxed at the same capital gain
rates applicable to U.S. stockholders (subject to applicable alternative
minimum tax and a special alternative minimum tax in the case of nonresident
alien individuals). Also, distributions subject to FIRPTA may be subject to a
30% branch profits tax in the hands of a foreign corporate stockholder not
entitled to treaty exemption or rate reduction. Applicable Treasury
Regulations require withholding of 35% of any distribution that could be
designated by the Company as a capital gains dividend. This amount is
creditable against the Non-U.S. Stockholder's FIRPTA tax liability and
refundable if it exceeds the U.S. tax liability of the Non-U.S. Stockholder.
Gain recognized by a Non-U.S. Stockholder upon a sale of shares of the
Company generally will not be taxed under FIRPTA if the shares do not
constitute a United States real property interest ("USRPI"). Shares of the
Company will not be considered a USRPI if the Company is a "domestically
controlled REIT," or if the shares sold are part of a class of stock that is
regularly traded on an established securities market and the holder owned less
than 5% of the class of stock sold during a specified testing period. A
"domestically controlled REIT" is defined generally as a REIT in which at all
times during a specified testing period less than 50% in value of the stock
was held directly or indirectly by foreign persons. The Company currently
anticipates that it will be a "domestically controlled REIT," although since
the Company's stock is publicly traded no assurances can be given to that
effect. However, gain not subject to FIRPTA will be taxable to a Non-U.S.
Stockholder if (i) the investment in the shares is effectively connected with
the Non-U.S. Stockholder's United States trade or business (or, if an income
tax treaty applies, is attributable to a United States permanent establishment
of the Non-U.S. Stockholder), in which case the Non-U.S. Stockholder will be
subject to the same treatment as U.S. stockholders with respect to such gain
(except that a stockholder that is a foreign corporation may also be subject
to the 30% branch profits tax), or (ii) the Non-U.S. Stockholder is a
nonresident alien individual who was present
77
<PAGE>
in the United States for 183 days or more during the taxable year and either
has a "tax home" in the United States or sold his shares under circumstances
that the sale was attributable to a U.S. office, in which case the nonresident
alien individual will be subject to a 30% tax on the individual's net capital
gains. If the gain on the sale of shares were to be subject to taxation under
FIRPTA, the Non-U.S. Stockholder will be subject to the same treatment as U.S.
stockholders with respect to such gain (subject to applicable alternative
minimum tax and a special alternative minimum tax in the case of nonresident
alien individuals and, in the case of foreign corporations, subject to the
possible application of the 30% branch profits tax).
The Company must report annually to the IRS and to each Non-U.S. Stockholder
the amount of dividends (including any capital gain dividends) paid to, and
the tax withheld with respect to, each Non-U.S. Stockholder. These reporting
requirements apply regardless of whether withholding was reduced or eliminated
by an applicable tax treaty. Copies of these returns may also be made
available under the provisions of a specific treaty or agreement with the tax
authorities in the country in which the Non-U.S. Stockholder resides.
U.S. backup withholding, which generally is imposed at the rate of 31% on
certain payments to persons that fail to furnish the information required
under the U.S. information reporting requirements, will generally not apply to
dividends (including any capital gain dividends) paid on stock of the Company
to a Non-U.S. Stockholder at an address outside the United States. However,
the payment of the proceeds from the disposition of stock of the Company to or
through a U.S. office of a broker will be subject to information reporting and
backup withholding unless the owner, under penalty of perjury, certifies,
among other things, its status as a Non-U.S. Stockholder, or otherwise
establishes an exemption. The payment of the proceeds from the disposition of
stock to or through a non-U.S. office of a non-U.S. broker generally will not
be subject to backup withholding and information reporting.
PARTNERSHIP TAX CONSIDERATIONS
Partnership Allocations. Although a partnership agreement will generally
determine the allocation of income and losses among partners, such allocations
will be disregarded for tax purposes if they do not comply with the provisions
of Section 704(b) of the Code and the Treasury Regulations promulgated
thereunder. Generally, Section 704(b) and the relevant Treasury Regulations
require that partnership allocations respect the economic arrangement of the
partners. If an allocation is not recognized for Federal income tax purposes,
the item subject to the allocation will be reallocated in accordance with the
partners, interests in the partnership, which will be determined by taking
into account all of the facts and circumstances relating to the economic
arrangement of the partners with respect to such item. The Partnership
Agreement contains a number of provisions that are intended to comply with the
requirements of Section 704(b) of the Code and the Treasury Regulations
promulgated thereunder.
Tax Allocations with Respect to Contributed Properties. Pursuant to Section
704(c) of the Code, income, gain, loss and deduction attributable to
appreciated or depreciated property that is contributed to a partnership in
exchange for an interest in the partnership must be allocated in a manner such
that the contributing partner is charged with, or benefits from, respectively,
the unrealized gain or unrealized loss associated with the property at the
time of the contribution. The amount of such unrealized gain or unrealized
loss is generally equal to the difference between the fair market value of
contributed property at the time of contribution and the adjusted tax basis of
such property at the time of contribution (a "Book-Tax Difference"). Such
allocations are solely for Federal income tax purposes and do not affect the
book capital accounts or other economic or legal arrangements among the
partners. The Operating Partnership was formed by way of contributions of
appreciated property and as a result, the Partnership Agreement requires
allocations to be made in a manner consistent with Section 704(c) of the Code.
In general, the contributing entity will be allocated depreciation
deductions for tax purposes which are lower than such deductions would be if
determined on a pro rata basis. In addition, in the event of the disposition
of any of the G&L Development Properties which have a Book-Tax Difference, all
income attributable to such Book-Tax Difference will generally be allocated to
the contributing entity and the Company will generally be allocated only its
share of capital gains attributable to appreciation, if any, occurring after
the contribution of the
78
<PAGE>
asset. Application of these rules to the Operating Partnership will tend to
eliminate the Book-Tax Difference over the life of the Operating Partnership.
However, the special allocation rules of Section 704(c) do not always entirely
eliminate Book-Tax Differences on an annual basis or with respect to a
specific taxable transaction such as a sale. Thus, the carryover basis of any
properties contributed to the Operating Partnership may cause the Company to
be allocated lower depreciation and other deductions, and possibly an amount
of taxable income in the event of a sale of such properties in excess of the
economic or book income allocated to it as a result of such sale. This may
cause the Company to recognize taxable income in excess of cash proceeds,
which might adversely affect the Company's ability to comply with the REIT
distribution requirements. See "--Taxation of the Company; Annual Distribution
Requirements."
Any property purchased by the Operating Partnership at the Closing or
subsequent thereto will initially have a tax basis equal to its fair market
value, and Section 704(c) of the Code will not apply.
Basis in Operating Partnership Interest. The Company's adjusted tax basis in
its interest in the Operating Partnership generally (i) will be equal to the
amount of cash and the basis of any other property contributed to the
Operating Partnership by the Company, (ii) will be increased by (a) its
allocable share of the Operating Partnership's income and (b) its allocable
share of indebtedness of the Operating Partnership and (iii) will be reduced,
but not below zero, by the Company's allocable share of (a) losses suffered by
the Operating Partnership, (b) the amount of cash distributed to the Company
and (c) by constructive distributions resulting from a reduction in the
Company's share of indebtedness of the Operating Partnership.
If the allocation of the Company's distributive share of the Operating
Partnership's loss exceeds the adjusted tax basis of the Company's partnership
interest in the Operating Partnership, the recognition of such excess loss
will be deferred until such time and to the extent that the Company has
adjusted tax basis in its interest in the Operating Partnership. To the extent
that the Operating Partnership's distributions, or any decrease in the
Company's share of the indebtedness of the Operating Partnership (such
decreases being considered a cash distribution to the partners), exceed the
Company's adjusted tax basis, such excess distributions (including such
constructive distributions) constitute taxable income to the Company. Such
taxable income will normally be characterized as a capital gain and if the
Company's interest in the Operating Partnership has been held for longer than
the long-term capital gain holding period (currently one year), the
distributions and constructive distributions will constitute long-term capital
gain. Under current law, capital gains and ordinary income of corporations are
generally taxed at the same marginal rates.
Sale of the Properties. The Company's share of any gain realized by the
Operating Partnership on the sale of any property held by the Operating
Partnership as inventory or other property held primarily for sale to
customers in the ordinary course of the Operating Partnership's trade or
business will be treated as income from a prohibited transaction that is
subject to a 100% penalty tax. See "Requirements for Qualification--Income
Tests." Such prohibited transaction income may also have an adverse effect
upon the Company's ability to satisfy the income test for qualification as a
REIT. See "Requirements for Qualification--Income Tests." Under existing law,
whether property is held as inventory or primarily for sale to customers in
the ordinary course of a partnership's trade or business is a question of fact
that depends on all the facts and circumstances with respect to the particular
transaction. The Operating Partnership intends to hold the Properties for
investment with a view to long-term appreciation, to engage in the business of
acquiring, developing, owning, and operating the Properties and to make such
occasional sales of the Properties as are consistent with the Operating
Partnership's investment objectives.
Possible Legislative or Other Actions Affecting Tax Consequences.
Prospective investors should recognize that the present Federal income tax
treatment of an investment in the Company may be modified by legislative,
judicial or administrative action at any time, and that any such action may
affect investments and commitments previously made. The rules dealing with
Federal income taxation are constantly under review by persons involved in the
legislative process and by the IRS and the U.S. Treasury Department, resulting
in revisions of regulations and revised interpretations of established
concepts as well as statutory changes. Revisions in Federal tax laws and
interpretations thereof could adversely affect the tax consequences of an
investment in the Company. For example, a recent Federal budget proposal
contains language which, if enacted in its present form,
79
<PAGE>
would result in the immediate taxation of all gain inherent in a C
corporation's assets upon an election by the corporation to become a REIT, and
thus would effectively preclude the Company from re-electing REIT status
following a termination of its REIT qualification.
State and Local Taxes. The Company and its stockholders may be subject to
state or local taxation in various jurisdictions, including those in which it
or they transact business or reside. The state and local tax treatment of the
Company and its stockholders may not conform to the Federal income tax
consequences discussed above. Consequently, prospective stockholders should
consult their own tax advisers regarding the effect of state and local tax laws
on an investment in the Series A Preferred Stock of the Company.
EMPLOYEE PLANS AND INDIVIDUAL RETIREMENT ACCOUNTS
A fiduciary of a pension, profit-sharing or other employee benefit plan (an
"Employee Plan") subject to the Employee Retirement Income Security Act of
1974, as amended ("ERISA"), should consider fiduciary standards under ERISA in
the context of the Employee Plan's particular circumstances before authorizing
an investment of all or any portion of such Employee Plan's assets in the
Series A Preferred Stock. Under ERISA, a fiduciary must discharge his duties
with respect to an Employee Plan solely in the interest of the participants and
beneficiaries of such plan. Among other factors, such fiduciary should consider
(i) whether the investment satisfies the prudence requirements of Section
404(a)(1)(B) of ERISA, (ii) whether the investment satisfies the
diversification requirements of Section 404(a)(1)(C) of ERISA, and (iii)
whether the investment is in accordance with the documents and instruments
governing the plan as required by Section 404(a)(1)(D) of ERISA. In addition,
persons who control the investments of individual retirement accounts ("IRAs")
should consider that IRAs may only make investments that are authorized by the
appropriate governing documents and under applicable state law. In addition to
the general civil liability imposed on fiduciaries who violate the fiduciary
responsibility rules of ERISA, Section 502(l) of ERISA also imposes civil
penalties on fiduciaries who breach any of such rules and on individuals who
knowingly participate in any such breach.
In addition to the imposition of general fiduciary standards of investment
prudence and diversification, ERISA, and the corresponding provisions of the
Code, prohibit a wide range of transactions involving the assets of an Employee
Plan or IRA and persons who have certain specified relationships to the
Employee Plan or IRA ("parties in interest" within the meaning of ERISA or
"disqualified persons" within the meaning of the Code). Such transactions are
treated as "prohibited transactions" under Section 406 of ERISA and Sections
4975 and 408(e)(2) of the Code and civil penalties are imposed upon such
persons by Section 502(i) of ERISA or excise taxes are imposed under
Section 4975 of the Code. Thus, a fiduciary of an Employee Plan or a person
making the investment decision for an IRA should consider whether the
acquisition or the continued holding of the Series A Preferred Stock might
constitute or give rise to a direct or indirect non-exempt prohibited
transaction.
The Department of Labor (the "DOL") has issued final regulations (the "DOL
Regulations") as to what constitutes assets of an employee benefit plan under
ERISA. Under the DOL Regulations, if an Employee Plan or IRA acquires an equity
interest in an entity, which interest is neither a "publicly offered security"
nor a security issued by an investment company registered under the Investment
Company Act of 1940, as amended, the Employee Plan's or IRA's assets would
include, for purposes of the fiduciary responsibility provisions of ERISA, both
the equity interest and an undivided interest in each of the entity's
underlying assets unless certain specified exceptions apply. The DOL
Regulations define "equity interest" as any interest in an entity other than an
instrument that is treated as indebtedness under applicable local law and which
has no substantial equity features. The Company believes the Series A Preferred
Stock constitutes an "equity interest" for purposes of the DOL Regulations.
The DOL Regulations define a publicly offered security as a security that is
"widely held," "freely transferable," and either (i) part of a class of
securities registered under Section 12(b) or 12(g) of the Exchange Act, or (ii)
sold to the plan pursuant to an effective registration statement under the
Securities Act, if the class of securities of which such security is a part is
registered under the Exchange Act within 120 days after the end of
80
<PAGE>
the fiscal year of the issuer during which an offering occurs. The Company's
Series A Preferred Stock will be sold pursuant to an effective registration
statement under the Securities Act and will be registered under the 1934 Act.
The DOL Regulations provide that a security is "widely held" only if it is
part of a class of securities that is owned by 100 or more investors
independent of the Company and of one another. A class of securities will not
fail to be "widely held" because the number of independent investors falls
below 100 subsequent to an offering as a result of events beyond the Company's
control. The Company expects the Series A Preferred Stock to be "widely held"
upon completion of this Offering.
The DOL Regulations provide that whether a security is "freely transferable"
is a factual question to be determined on the basis of all relevant facts and
circumstances. The DOL Regulations further provide that when a security is
part of an offering in which the minimum investment is $10,000 or less, as is
the case with this Offering, certain restrictions ordinarily will not, alone
or in combination, affect the finding that such securities are freely
transferable. Employee Plan and IRA fiduciaries should be aware that the
Company's Articles of Incorporation contain certain restrictions on any
transfer of shares of Series A Preferred Stock that would create a beneficial
owner of more than 9.8% in value of the Company's outstanding capital stock.
See "Description of Series A Preferred Stock--Restrictions on Transfer." While
the Company has no reason to believe that such a restriction is likely to
result in the failure of the shares of Common Stock to be "freely
transferable" under the DOL Regulations, no assurance can be given that the
DOL and the U.S. Treasury Department will not reach a contrary conclusion.
Assuming that the Series A Preferred Stock will be "widely held" and "freely
transferable," the Company believes that the Series A Preferred Stock will
constitute "publicly offered securities" for purposes of the DOL Regulations
and that the assets of the Company will not be deemed to be "plan assets" of
any Employee Plan or IRA that invests in the Series A Preferred Stock.
EMPLOYEE PLANS AND IRAS AND THEIR FIDUCIARIES ARE STRONGLY URGED TO CONSULT
WITH THEIR ADVISORS BEFORE ACQUIRING SHARES OF SERIES A PREFERRED STOCK OF THE
COMPANY.
81
<PAGE>
UNDERWRITING
Sutro & Co., Incorporated and McDonald & Company Securities, Inc. (the
"Underwriters") have severally agreed, subject to the terms and conditions
contained in an Underwriting Agreement among the Company and the Underwriters
(the "Underwriting Agreement"), to purchase from the Company the number of
shares of Series A Preferred Stock set forth opposite their respective names
below:
<TABLE>
<CAPTION>
NUMBER
UNDERWRITER OF SHARES
----------- ---------
<S> <C>
Sutro & Company Incorporated......................................
McDonald & Company Securities, Inc. ..............................
-------
Total.........................................................
=======
</TABLE>
The Underwriting Agreement provides that the Underwriters are obligated to
purchase all of the shares of Series A Preferred Stock offered hereby (other
than those covered by the over-allotment option described below) if any such
shares are purchased. The Company has been advised by the Underwriters that
the Underwriters propose to offer the Series A Preferred Stock to the public
at the offering price set forth on the cover page of this Prospectus and to
certain dealers at such price less a concession not in excess of $ per
share of Series A Preferred Stock. The Underwriters may allow, and such
dealers may reallow, a discount not in excess of $ per share to other
dealers. The public offering price and the concessions and discount to dealers
may be changed by the Underwriters after the initial offering.
In order to facilitate the offering of the Series A Preferred Stock, the
Underwriters may engage in transactions that stabilize, maintain or otherwise
affect the price of the Series A Preferred Stock. Specifically, the
Underwriters may overallot in connection with the offering, creating a short
position in the Series A Preferred Stock for their own account. In addition,
to cover overallotments or to stabilize the price of the Series A Preferred
Stock, the Underwriters may bid for, and purchase, the Series A Preferred
Stock in the open market. Finally, the underwriting syndicate may reclaim
selling concessions allowed to an underwriter or a dealer for distributing the
Series A Preferred Stock in the offering, if the syndicate repurchases
previously distributed Series A Preferred Stock in transactions to cover
syndicate short positions, in stabilization transactions or otherwise. Any of
these activities may stabilize or maintain the market price of the Series A
Preferred Stock above independent market levels. The Underwriters are not
required to engage in these activities and may end any of these activities at
any time.
The Underwriters have reserved the right to reclaim selling concessions in
order to encourage underwriters and dealers to distribute the Series A
Preferred Stock for investment, rather than short-term profit taking.
Increasing the proportion of the offering held for investment may reduce the
supply of Series A Preferred Stock available for short-term trading.
The Company has agreed to indemnify the several Underwriters or to
contribute to losses arising out of certain liabilities, including liabilities
under the Securities Act.
The Company has applied to list the Series A Preferred Stock on the NYSE
under the symbol "GLR PrA." Prior to the Offering, there has been no public
market for the shares of Series A Preferred Stock. The Underwriters have
advised the Company that each intends to make a market in the Series A
Preferred Stock prior to the commencement of trading on the NYSE, but is not
obligated to do so and may discontinue market making at any time without
notice.
82
<PAGE>
EXPERTS
The financial statements included in this Prospectus and elsewhere in this
Registration Statement, have been audited by Deloitte & Touche LLP,
independent auditors, as stated in their reports appearing herein and
elsewhere in the Registration Statement of which this Prospectus is a part and
are included in reliance upon the reports of such firm given upon their
authority as experts in auditing and accounting.
LEGAL MATTERS
Certain legal and tax matters will be passed upon for the Company by Gibson,
Dunn & Crutcher LLP, Los Angeles, California, and certain legal matters will
be passed upon for the Underwriters by Morrison & Foerster LLP. Certain legal
matters regarding Maryland law, including the legality of the shares of Series
A Preferred Stock, will be passed upon by Piper & Marbury L.L.P., Baltimore,
Maryland.
AVAILABLE INFORMATION
The Company has filed with the Commission a Registration Statement (of which
this Prospectus is a part) on Form S-11 under the Securities Act, with respect
to the securities offered hereby. This Prospectus does not contain all the
information set forth in the Registration Statement and the exhibits and
schedules thereto. Statements contained in this Prospectus as to the content
of any contract or other document are not necessarily complete, and in each
instance reference is made to the copy of such contract or other document
filed as an exhibit to the Registration Statement, each such statement being
qualified in all respects by such reference and the exhibits and schedules
hereto. Additionally, the Company is subject to the informational requirements
of the Exchange Act and in accordance therewith files reports and other
information with the Securities and Exchange Commission (the "Commission").
The Registration Statement, including the exhibits and schedules thereto, as
well as reports, proxy and information statements and other information filed
by the Company may be inspected and copied at the public reference facilities
maintained by the Commission at its principal office located at 450 Fifth
Street, N.W., Judiciary Plaza, Washington, D.C. 20549, the New York Regional
Office located at 75 Park Place, New York, New York 10007, and the Chicago
Regional Office located at Northwest Atrium Center, 500 West Madison Street,
Room 1204, Chicago, Illinois 60661-2511, and copies of such material can be
obtained from the Public Reference Section of the Commission at 450 Fifth
Street, N.W., Washington, D.C. 20549 at prescribed rates. Electronics filings
made by the Company through the Commission's Electronic Data Gathering,
Analysis and Retrieval System are publicly available through the Commission's
World Wide Web site (http://www.sec.gov), which contains reports, proxy and
information statements and other information regarding registrants that file
electronically with the Commission. The Company's Common Stock is listed on
the NYSE and the reports, proxy and information statements and other
information filed by the Company with the NYSE can also be inspected at the
offices of the NYSE at 20 Broad Street, New York, New York 10005.
83
<PAGE>
GLOSSARY
Following are certain terms used throughout this Prospectus. Unless the
context requires otherwise, the following capitalized terms shall have the
meanings set forth below for purposes of this Prospectus:
"ADA" means the Americans with Disabilities Act.
"Articles of Incorporation" means the Articles of Amendment and Restatement
of the Charter of the Company.
"Articles Supplementary" means the Articles Supplementary Classifying
1,380,000 Shares of % Series A Cumulative Preferred Stock.
"Audit Committee" means the Committee of the Board of Directors of the
Company established to make recommendations as to certain accounting matters.
"Bylaws" means the Amended and Restated Bylaws of the Company.
"Code" means the Internal Revenue Code of 1986, as amended.
"Commission" means the Securities and Exchange Commission.
"Common Stock" means the Company's Common Stock, par value $.01 per share.
"Company" means G&L Realty Corp., a Maryland corporation.
"Compensation Committee" means the committee of the Board of Directors of
the Company that determines officers' salaries and bonuses and administer the
Plan.
"DOL" means the Department of Labor.
"DOL Regulations" means final regulations, issued by the DOL, defining what
constitutes assets of an employee benefit plan under ERISA.
"Employee Plan" means a pension, profit-sharing, or other employee benefit
plan subject to ERISA.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended.
"Excess Shares" means the shares owned by a holder in excess of the
Ownership Limit.
"Exchange Act" means the Securities and Exchange Act of 1934, as amended.
"Executive Committee" means the Committee of the Board of Directors with
authority as described under the caption "Management--Committees of the Board
of Directors."
"Formation Transactions" has the meaning ascribed to it under the caption
"Formation Transactions."
"G&L Development Properties" means six of the Properties with parking and
ground floor retail space in Beverly Hills, California.
"GECC" means General Electric Capital Corporation.
"GLN Venture" means GLN Capital Co., LLC, a Delaware limited liability
company.
"GMAC-CM" means GMAC Commercial Mortgage.
"Indemnitees" means those directors and officers of the Company who are
parties to the Indemnity Agreements.
"Indemnity Agreements" means indemnity agreements between the Company and
each of its directors and certain of its officers.
84
<PAGE>
"IRAs" means individual retirement accounts.
"IRS" means the Internal Revenue Service.
"Maryland GCL" means the Maryland General Corporation Law.
"Medical Partnership" means G&L Medical Partnership, L.P., a Delaware
limited partnership.
"MOB" means medical office building.
"Nomura" means Nomura Asset Capital Corporation.
"NYSE" means the New York Stock Exchange.
"Ownership Limit" means the ownership of more than 9.8% in number of shares
or value of the capital stock of the Company pursuant to its Articles of
Incorporation.
"Operating Partnership" means G&L Realty Partnership, L.P., a Delaware
limited partnership.
"Partnership Agreement" means the Agreement of Limited Partnership of the
Operating Partnership.
"PHP" means PHP Healthcare Corporation, a Delaware corporation.
"PHP Joint Venture" means GL/PHP, LLC, a Delaware limited liability company.
"Plan" means the Company's 1993 Stock Incentive Plan.
"Properties" means 15 properties exclusive of vacant land including 13 high
quality medical office buildings, an adjacent parking facility and one
hospital.
"Realty Financing Partnership" means G&L Realty Financing Partnership II,
L.P., a Delaware limited partnership.
"REIT" means a real estate investment trust as defined pursuant to Sections
856 through 860 of the Code.
"Rule 144" means Rule 144 as promulgated under the Securities Act.
"Securities Act" means the Securities Act of 1933, as amended.
"Series A Preferred Stock" means the Company's Series A Cumulative Preferred
Stock, par value $.01 per share.
"Treasury Regulations" means the Income Tax Regulations promulgated under
the Code.
"Tustin Properties" means the Tustin Medical Plaza properties acquired by
the Company on June 14, 1996 in conjunction with 445 Bedford, LLC, which
includes two medical office buildings, a hospital and a parcel of vacant land.
"Underwriters" means the underwriters named in this Prospectus.
"Units" means ownership interests in the Operating Partnership.
85
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
--------
<S> <C>
Independent Auditors' Report..................................... F-2
Consolidated Balance Sheets...................................... F-3
Consolidated Statements of Operations............................ F-4
Consolidated Statement of Stockholders' Equity................... F-5
Consolidated Statements of Cash Flows............................ F-6-F-7
Notes to Consolidated Financial Statements....................... F-8-F-21
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders
G&L Realty Corp.:
We have audited the accompanying consolidated balance sheets of G&L Realty
Corp. and subsidiaries (the Company) as of December 31, 1996 and 1995, and the
related consolidated statements of operations, stockholders' equity, and cash
flows for each of the three years in the period ended December 31, 1996. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits 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, such consolidated financial statements present fairly, in
all material respects, the financial position of the Company as of December
31, 1996 and 1995, and the 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.
/s/ Deloitte & Touche LLP
Los Angeles, California
February 10, 1997
F-2
<PAGE>
G&L REALTY CORP.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1996 1995
------------ ------------
ASSETS
------
<S> <C> <C>
Rental properties (Notes 3, 7, 16, 17 and 20):
Land............................................. $ 17,095,674 $ 15,262,221
Building and improvements, net................... 76,135,387 76,884,946
------------ ------------
Total rental properties........................ 93,231,061 92,147,167
Cash and cash equivalents (Note 2)................. 2,231,913 1,280,191
Other receivables, net (Note 6).................... 681,772 129,265
Tenant rent and reimbursements receivable, net
(Note 5).......................................... 1,048,428 709,436
Unbilled rent receivable, net (Note 11)............ 1,477,527 2,581,756
Mortgage loans and bonds receivable, net (Note 8).. 14,358,181 33,633,635
Assets available for sale (Note 9)................. 20,522,652 --
Deferred charges and other assets, net (Note 4).... 2,444,751 2,865,707
------------ ------------
TOTAL ASSETS................................... $135,996,285 $133,347,157
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
LIABILITIES:
Notes payable (Note 7)........................... $109,025,417 $111,626,872
Accounts payable and other liabilities........... 1,462,210 1,766,718
Distributions payable............................ 1,641,970 1,401,607
Tenant security deposits......................... 1,033,580 1,032,437
------------ ------------
Total liabilities.............................. 113,163,177 115,827,634
Commitments and Contingencies (Note 13)............ -- --
Minority interest in consolidated partnership...... (2,718,474) (2,846,777)
Minority interest in Operating Partnership......... 3,103,479 2,099,204
STOCKHOLDERS' EQUITY (Notes 12 and 15):
Preferred shares--$.01 par value, 10,000,000
shares authorized, no shares issued............. -- --
Common shares--$.01 par value, 50,000,000 shares
authorized, 4,062,500 and 4,062,000 shares
issued and outstanding as of December 31, 1996
and 1995, respectively.......................... 40,625 40,620
Additional paid-in capital....................... 23,710,054 23,705,496
Distributions in excess of net income............ (1,302,576) (5,479,020)
------------ ------------
Total stockholders' equity..................... 22,448,103 18,267,096
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY..... $135,996,285 $133,347,157
============ ============
</TABLE>
See accompanying notes to Consolidated Financial Statements
F-3
<PAGE>
G&L REALTY CORP.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
REVENUES:
Rental (Note 11)...................... $15,796,163 $16,801,193 $14,740,358
Tenant reimbursements................. 727,874 731,860 586,974
Parking............................... 1,250,760 1,388,042 1,196,264
Interest, loan fees and other......... 6,711,900 1,834,558 113,268
Other................................. 548,851 651,884 650,009
----------- ----------- -----------
Total revenues ..................... 25,035,548 21,407,537 17,286,873
----------- ----------- -----------
EXPENSES:
Property operations................... 5,695,802 5,198,933 4,317,016
Earthquake costs (reimbursements)..... -- (133,162) 635,075
Depreciation and amortization......... 3,276,287 4,047,277 3,696,993
Interest.............................. 8,819,270 6,372,002 3,625,316
General and administrative............ 1,786,319 1,639,678 1,297,694
Loss on disposition of real estate
(Note 16)............................ 4,873,788 -- --
----------- ----------- -----------
Total expenses...................... 24,451,466 17,124,728 13,572,094
----------- ----------- -----------
Income from operations before minority
interests and
extraordinary gains (losses)........... 584,082 4,282,809 3,714,779
Minority interest in consolidated
partnership............................ (128,303) (130,987) (167,494)
Minority interest in Operating
Partnership............................ (65,065) (417,016) (352,794)
----------- ----------- -----------
Income before extraordinary gains
(losses)............................... 390,714 3,734,806 3,194,491
Extraordinary gains (losses) (net of
minority interest) (Note 16)........... 9,310,730 (393,401) --
----------- ----------- -----------
Net income ............................. $ 9,701,444 $ 3,341,405 $ 3,194,491
=========== =========== ===========
Per share data:
Income before extraordinary gains
(losses)............................. $ 0.10 $ 0.91 $ 0.77
Extraordinary gains (losses).......... 2.23 (0.09) 0.00
----------- ----------- -----------
Net income............................ $ 2.33 $ 0.82 $ 0.77
=========== =========== ===========
Weighted average number of outstanding
shares................................. 4,171,535 4,090,769 4,159,000
</TABLE>
See accompanying notes to Consolidated Financial Statements
F-4
<PAGE>
G&L REALTY CORP.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL DISTRIBUTIONS TOTAL
------------------ PAID-IN IN EXCESS OF STOCKHOLDERS'
SHARES AMOUNT CAPITAL NET INCOME EQUITY
--------- ------- ----------- ------------- -------------
<S> <C> <C> <C> <C> <C>
BALANCE JANUARY 1, 1994. 4,159,000 $41,590 $25,123,557 $ (127,206) $25,037,941
Adjustments to
accumulated deficit.... (100,736) (100,736)
Net income.............. 3,194,491 3,194,491
Distributions declared.. (6,820,760) (6,820,760)
--------- ------- ----------- ----------- -----------
BALANCE DECEMBER 31,
1994................... 4,159,000 41,590 25,022,821 (3,753,475) 21,310,936
Adjustment to
accumulated deficit.... (503,763) (503,763)
Repurchase of common
stock.................. (97,000) (970) (813,562) (814,532)
Net income.............. 3,341,405 3,341,405
Distributions declared.. (5,066,950) (5,066,950)
--------- ------- ----------- ----------- -----------
BALANCE DECEMBER 31,
1995................... 4,062,000 40,620 23,705,496 (5,479,020) 18,267,096
Additional shares
issued................. 500 5 4,558 4,563
Net income.............. 9,701,444 9,701,444
Distributions declared.. (5,525,000) (5,525,000)
--------- ------- ----------- ----------- -----------
BALANCE DECEMBER 31,
1996................... 4,062,500 $40,625 $23,710,054 $(1,302,576) $22,448,103
========= ======= =========== =========== ===========
</TABLE>
See accompanying notes to Consolidated Financial Statements
F-5
<PAGE>
G&L REALTY CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------
1996 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net income.......................... $ 9,701,444 $ 3,341,405 $ 3,194,491
Adjustments to reconcile net income
to net cash provided by operating
activities:
Extraordinary (gains) losses on
retirement of debt............... (9,310,730) 393,401 --
Loss on disposition of rental
property......................... 4,873,788 -- --
Depreciation and amortization..... 3,276,287 4,047,277 3,696,993
Minority interests................ 193,368 548,003 520,288
Unbilled rent receivable.......... (5,053) (116,879) (232,402)
Allowance for doubtful notes,
bonds and accounts receivable.... 876,925 (310,074) 55,090
(Increase) decrease in:
Prepaid expense.................. (152,558) 73,720 37,374
Other receivables................ (891,165) 576,351 (263,040)
Tenant rent and reimbursements
receivable...................... (842,483) (117,456) 39,424
Accrued interest receivable and
loan fees....................... (1,102,005) (629,244) --
Increase (decrease) in:
Accounts payable and other
liabilities..................... (893,157) 11,347 316,636
Tenant security deposits......... 1,143 44,468 266,772
------------ ------------ ------------
Net cash provided by operating
activities......................... 5,725,804 7,862,319 7,631,626
------------ ------------ ------------
CASH FLOWS FROM INVESTING
ACTIVITIES:
Additions to rental properties...... (2,220,278) (1,872,508) (1,830,716)
Purchases of real estate assets..... (21,549,954) (800,000) (41,713,637)
Acquisition of assets available for
sale............................... (307,050) -- --
Pre-acquisition costs............... (1,010,749) (1,203,838) --
Return of pre-acquisition deposits.. 2,011,727 -- --
Leasing commissions................. (148,819) (156,541) (208,015)
Investment in notes and bonds
receivable......................... (14,755,383) (33,004,391) --
Principal payments received from
notes and bonds receivable......... 14,567,240 -- 12,200,000
------------ ------------ ------------
Net cash used in investing
activities......................... (23,413,266) (37,037,278) (31,552,368)
------------ ------------ ------------
CASH FLOWS FROM FINANCING
ACTIVITIES:
Notes payable proceeds.............. 47,000,000 82,156,447 28,652,248
Repayment of notes payable.......... (21,018,432) (44,547,752) (134,069)
Deferred financing costs............ (1,396,858) (1,775,674) (397,070)
Sale (purchase) of common stock and
partnership units.................. 4,563 (814,532) --
Distributions....................... (5,950,089) (5,732,322) (6,272,447)
------------ ------------ ------------
Net cash provided by financing
activities......................... 18,639,184 29,286,167 21,848,662
------------ ------------ ------------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS................... 951,722 111,208 (2,072,080)
BEGINNING CASH AND CASH EQUIVALENTS. 1,280,191 1,168,983 3,241,063
------------ ------------ ------------
ENDING CASH AND CASH EQUIVALENTS.... $ 2,231,913 $ 1,280,191 $ 1,168,983
============ ============ ============
SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid during the year for
interest........................... $ 8,874,008 $ 6,200,777 $ 3,600,365
============ ============ ============
</TABLE>
See accompanying notes to Consolidated Financial Statements
F-6
<PAGE>
G&L REALTY CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------
1996 1995 1994
----------- ---------- ----------
<S> <C> <C> <C>
NONCASH INVESTING ACTIVITIES:
Property acquired in exchange for
partnership units (Note 17).............. $ 549,010
===========
NONCASH FINANCING ACTIVITIES:
Net cost of assets transferred to lien
holder (Note 16):
Land...................................... $ 2,046,547
Buildings and improvements................ 21,600,736
Tenant improvements....................... 477,245
Accumulated depreciation................ (3,557,101)
-----------
Total rental property................. 20,567,427
Unbilled rent receivable, net............. 1,109,282
Other receivables, net.................... 90,658
Tenant rent and reimbursements receivable,
net...................................... 249,566
Leasing commissions, net.................. 180,782
Deferred charges and other assets......... 87,424
Accounts payable and other liabilities.... 588,649
-----------
Net cost of assets transferred to lien
holder..................................... 22,873,788
Nonrecourse debt extinguished............... 28,500,000
-----------
Excess of nonrecourse debt over net cost of
assets surrendered......................... $ 5,626,212
===========
Noncash gain from transfer of property to
lien holder:
Extraordinary gain on retirement of debt.. $ 9,310,730
Minority interest share of extraordinary
gain..................................... 1,055,650
-----------
Extraordinary gain on retirement of debt.. 10,366,380
Extraordinary loss related to other
refinancing transactions................. 133,620
-----------
Extraordinary gain on transfer of property
to lien holder........................... 10,500,000
Loss on disposition of rental property.... (4,873,788)
-----------
Net noncash gain from transfer of property
to lien holder............................. $ 5,626,212
===========
Distributions declared not yet paid......... $ 1,462,500 $1,401,607 $1,604,706
=========== ========== ==========
</TABLE>
See accompanying notes to Consolidated Financial Statements
F-7
<PAGE>
G&L REALTY CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. GENERAL
G&L Realty Corp. (the "Company") was formed as a Maryland corporation on
September 15, 1993 by Daniel M. Gottlieb and Steven D. Lebowitz to continue
the ownership, management, acquisition and development operations of medical
office buildings conducted previously by G&L Development, the Company's
predecessor. All of the Company's assets are held by, and all of its
operations are conducted through, the following Delaware limited partnerships:
G&L Realty Partnership, L.P. (the "Operating Partnership")
G&L Realty Financing Partnership II, L.P. (the "Realty Financing
Partnership")
G&L Medical Partnership, L.P. (the "Medical Partnership")
The Company, as the sole general partner and as owner of an approximately
89% ownership interest, controls the Operating Partnership. The Company also
controls the Realty Financing Partnership through its wholly owned subsidiary
G&L Realty Financing II, Inc., a Delaware corporation, which is the sole
general partner and 1% owner of the Realty Financing Partnership. The sole
limited partner and 99% owner of the Realty Financing Partnership is the
Operating Partnership. In May 1996 and in conjunction with a financing
transaction, the Company transferred three buildings into a newly formed
limited partnership, the Medical Partnership, a Delaware limited partnership.
The sole limited partner and 99% owner of the Medical Partnership is the
Operating Partnership. The Company controls the Medical Partnership through
its wholly owned subsidiary, G&L Medical, Inc., a Delaware corporation, which
is the sole general partner and 1% owner of the Medical Partnership.
References, in these consolidated financial statements, to the Company, its
operations, assets and liabilities includes the operations, assets and
liabilities of its wholly owned subsidiaries, the Operating Partnership, the
Realty Financing Partnership, the Medical Partnership and 435 North Roxbury
Drive, Ltd., (the "Roxbury Partnership"), a California limited partnership in
which the Operating Partnership owns a 61.75% partnership interest and is the
sole general partner.
Prior to August 1995, the Company, through its wholly owned subsidiary, G&L
Financing, Inc., a Delaware corporation, was the sole general partner and 1%
owner of G&L Realty Financing Partnership, L.P. (the "Financing Partnership"),
a Delaware limited partnership. The Operating Partnership was the sole limited
partner and 99% owner of the Financing Partnership which owned six medical
office buildings. These six buildings were security for a $42.5 million credit
line which was paid off on August 17, 1995. Thereafter, the Financing
Partnership was liquidated and the assets were transferred to its partners.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business. The Company is a health care Real Estate Investment Trust ("REIT")
with two major areas of operation: (a) the Medical Office Building Division,
which owns, develops and manages high-quality, strategically located
properties, and (b) the Senior Care Division, which provides loan funds to
facilitate the sale of skilled nursing and assisted living facilities to
various entities throughout the United States.
Basis of presentation. The accompanying consolidated financial statements
include the accounts of the Company, the Operating Partnership, the Realty
Financing Partnership, the Medical Partnership and, prior to its liquidation,
the Financing Partnership. The interests in the Operating Partnership and
Roxbury Partnership not owned by the Company have been reflected in minority
interests. All significant intercompany accounts and transactions have been
eliminated in consolidation. Prior year amounts have been reclassified to
conform to the current year's presentation.
Properties. The Operating Partnership, the Realty Financing Partnership, the
Medical Partnership and the Roxbury Partnership own a 100% fee simple interest
in all of the properties.
F-8
<PAGE>
G&L REALTY CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Income taxes. The Company qualified and elected to be taxed as a REIT for
federal income tax purposes. Such qualification and taxation as a REIT depends
upon the Company's ability to meet, on a continuing basis, various REIT
qualification requirements. As a REIT, the Company is eligible for a deduction
for dividends paid to shareholders. For the years ended December 31, 1996,
1995 and 1994, the Company paid dividends to its stockholders in excess of its
earnings and profits (See Note 12). Therefore, no provisions for federal
income taxes are included in the accompanying financial statements.
Real estate and depreciation. Rental property is recorded at cost less
accumulated depreciation. Depreciation is computed on a straight-line basis
over the estimated useful lives of the assets as follows:
<TABLE>
<S> <C>
Buildings and improvements.................................. 40 years
Tenant improvements......................................... Life of lease
Furniture, fixtures and equipment........................... 5 years
</TABLE>
Expenditures for maintenance and repairs are charged to operations as
incurred. Significant renovations and all costs directly related to
acquisitions are capitalized.
Revenue recognition. Base rental income is recognized on a straight-line
basis over the term of the lease regardless of when payments are due. Certain
leases include rent concessions and escalation clauses creating an effective
rent which is included in unbilled rent receivable (Note 11).
Cash and cash equivalents. All demand and money market accounts and short-
term investments in governmental funds with a maturity of three months or less
are considered to be cash and cash equivalents. Cash equivalents are carried
at cost which approximates fair value due to the short period of time to
maturity. As of December 31, 1996, the Company had $1,966,993 in a segregated
interest bearing account to be used for debt service due in January 1997,
current property taxes, insurance and property improvements. Throughout the
year, the Company maintained balances in various operating and money market
accounts in excess of federally insured limits.
Deferred charges and other assets. Deferred charges and other assets consist
of leasing commissions, deferred loan fees, financing costs, investments,
deposits and prepaid expenses.
Leasing commissions are amortized on a straight-line basis over the lives of
the leases which range typically from five to ten years. Deferred loan fees
are amortized over the terms of the respective agreements.
The Company incurred costs relating to new loans and certain refinancings,
interest rate protection agreements and a $20 million credit facility (Note
7). Refinancing costs are capitalized and amortized over the term of the
related loan. Interest rate protection agreement fees are capitalized and
amortized over the term of the agreements.
Minority interest in consolidated partnership. The Operating Partnership, as
sole general partner, has a 61.75% ownership interest in the Roxbury
Partnership which owns the property located at 435 North Roxbury Drive. The
minority interest is a debit balance that resulted from depreciation
allocations and cash distributed to minority interest partners in excess of
their original investment and subsequent accumulated earnings. It is
management's opinion that the deficit is adequately secured by the
unrecognized appreciated value of the Roxbury property and will be recovered
through an accumulation of undistributed earnings or sale of the property.
Use of estimates. The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
F-9
<PAGE>
G&L REALTY CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Long-lived assets. The Company reviews long-lived assets for impairment
whenever events or changes in circumstances indicate that an asset's book
value exceeds the undiscounted expected future cash flows to be derived from
that asset. Whenever undiscounted expected future cash flows are less than the
book value, the asset will be reduced to a value equal to the net present
value of the expected future cash flows and an impairment loss will be
recognized. Management believes that the expected future cash flows of its
long-lived assets exceeded the related book values as of December 31, 1996 and
1995.
Per share data. Earnings per share are computed based upon the weighted
average number of common shares of the Company's Common Stock, $.01 par value
(the "Common Stock") outstanding during the period. The treasury stock method
is used to determine the number of incremental common equivalent shares
resulting from options granted under the Company's stock incentive plan.
Computation of the number of shares is included in Note 15.
3. BUILDINGS AND IMPROVEMENTS
Buildings and improvements consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1996 1995
------------ ------------
<S> <C> <C>
Buildings and improvements................... $ 81,676,782 $ 84,638,984
Tenant improvements.......................... 4,708,425 3,450,249
Furniture, fixtures and equipment............ 358,798 296,070
------------ ------------
86,744,005 88,385,303
Less accumulated depreciation and
amortization................................ (10,608,618) (11,500,357)
------------ ------------
Total...................................... $ 76,135,387 $ 76,884,946
============ ============
</TABLE>
4. DEFERRED CHARGES AND OTHER ASSETS
Deferred charges and other assets consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1996 1995
---------- ----------
<S> <C> <C>
Loan fees......................................... $2,060,620 $1,459,051
Pre-acquisition costs............................. 17,194 1,203,838
Leasing commissions............................... 462,071 1,115,595
Prepaid expense and other assets.................. 272,004 46,643
---------- ----------
2,811,889 3,825,127
Less accumulated amortization..................... (367,138) (959,420)
---------- ----------
Total........................................... $2,444,751 $2,865,707
========== ==========
</TABLE>
F-10
<PAGE>
G&L REALTY CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
5. TENANT RENT AND REIMBURSEMENTS RECEIVABLE
Tenant rent and reimbursements receivable are net of the allowance for
uncollectible amounts of $261,425, $7,500 and $107,556 as of December 31,
1996, 1995 and 1994, respectively. The activity in the allowance for
uncollectible tenant accounts consisted of the following:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
Balance, beginning of year............... $ 7,500 $ 107,556 $ 213,107
Additions................................ 498,888 110,284 55,090
Charge-offs.............................. (244,963) (210,340) (160,641)
--------- --------- ---------
Balance, end of year..................... $ 261,425 $ 7,500 $ 107,556
========= ========= =========
</TABLE>
6. OTHER RECEIVABLES
Other receivables consist of all outstanding balances due to the Company
other than amounts due from current tenants and are net of the allowance for
uncollectible amounts of $248,000 as of December 31, 1996. There was no
balance in the allowance account as of December 31, 1994 and 1995 and no
activity during the years then ended. The activity in the allowance for
uncollectible accounts for the year ended December 31, 1996 was as follows:
<TABLE>
<S> <C>
Balance, beginning of year...................................... $ --
Additions....................................................... 248,000
Charge-offs..................................................... --
--------
Balance, end of year............................................ $248,000
========
</TABLE>
F-11
<PAGE>
G&L REALTY CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
7. NOTES PAYABLE
Notes payable consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1996 1995
------------ ------------
<S> <C> <C>
Note due August 14, 1995, collateralized by deed
of trust, interest payable monthly at 30-day
LIBOR plus 1.25% per annum (retired May 24,
1996)............................................ -- $ 28,500,000
Note due May 31, 1999, collateralized by deed of
trust, interest payable monthly at 30-day LIBOR
plus 1.50% per annum, note requires monthly
principle payments of $35,000 plus semiannual
payments equal to excess cash flow, as defined in
the loan extension agreement..................... $ 8,070,000 9,000,000
Note due June 6, 1997, collateralized by a
security interest in $20,655,000 face value of
unrated bonds, interest payable monthly at the
Prime rate of interest plus 1.5% per annum....... 14,000,000 14,000,000
Note due January 1, 1998, collateralized by deed
of trust, monthly payments of $67,908 of
principal and interest, interest at 8.75% per
annum (retired May 24, 1996)..................... -- 6,065,375
Note due February 23, 1998, collateralized by deed
of trust, monthly payments of $41,807 of
principal and interest, interest at 7.55% per
annum (retired May 24, 1996)..................... -- 5,806,821
Note due February 23, 1998, collateralized by deed
of trust, interest payable monthly at 7.55% per
annum (retired May 24, 1996)..................... -- 921,090
Credit line due August 17, 1998, collateralized by
deeds of trust, $20 million available, interest
payable monthly at 30-day LIBOR plus 1.75% per
annum............................................ 15,400,000 17,450,000
Note due June 17, 1997 collateralized by note
receivable and deed
of trust, interest payable monthly at the
Citibank Prime rate of interest ................. 4,125,000 --
Note due May 31, 1997 collateralized by note
receivable and deed of trust, interest payable
monthly at the Citibank Prime rate of interest... 3,000,000 --
Note due August 10, 2006, collateralized by deed
of trust, monthly payments of $281,641 of
principal and interest, interest at 8.515% per
annum............................................ 34,915,383 --
Note due August 10, 2005, collateralized by deed
of trust, monthly payments of $229,263 of
principal and interest, interest at 7.89% per
annum............................................ 29,515,034 29,883,586
------------ ------------
Total........................................... $109,025,417 $111,626,872
============ ============
</TABLE>
As of December 31, 1996, 30-day LIBOR was 5.53% and the Citibank Prime rate
was 8.25%.
F-12
<PAGE>
G&L REALTY CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Aggregate future principal payments as of December 31, 1996 are as follows:
<TABLE>
<CAPTION>
YEAR ENDING
DECEMBER 31
-----------
<S> <C>
1997........................................... $ 22,339,735
1998........................................... 16,675,042
1999........................................... 8,158,845
2000........................................... 994,008
2001........................................... 1,094,840
Thereafter..................................... 59,762,949
------------
Total........................................ $109,025,417
============
</TABLE>
As of December 31, 1996, the Company had a $300,000 letter of credit
outstanding in favor of a secured lender. The letter of credit is held as
additional collateral for tenant security deposits outstanding in the event of
a default on the secured loan.
8. MORTGAGE LOANS AND BONDS RECEIVABLE
Mortgage loans and bonds receivable consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1996 1995
----------- -----------
<S> <C> <C>
Note due December 31, 1996, collateralized by deed
of trust, interest payable monthly at 12% per
annum............................................. $ -- $ 1,472,500
Note due May 1, 1997, collateralized by deed of
trust, interest payable monthly at 12% per annum.. -- 4,042,500
Note due December 31, 1996, collateralized by deed
of trust, interest payable monthly at 12% per
annum............................................. -- 2,215,000
Note due July 31, 1997, collateralized by deed of
trust, interest accrues monthly at 12% per annum.
Interest payable in monthly installments of
$40,800........................................... 4,466,008 4,080,000
Note due May 31, 1997, construction loan,
collateralized by deed of trust and pledged stock,
interest accrues monthly at 10% per annum. Loan
commitment for $1,225,000......................... 1,185,597 1,135,597
Unsecured note due April 1, 2008, interest payable
semiannually at 10% per annum..................... 150,000 --
Note due September 9, 1997, collateralized by deed
of trust, interest payable monthly at 12% per
annum............................................. 1,285,500 --
Note due June 30, 1997, collateralized by deed of
trust, interest payable monthly at 12% per annum.. 6,175,000 --
Unrated Series A tax-exempt Industrial Revenue
Bonds due October 1, 2017, collateralized by deed
of trust, interest payable semiannually on April 1
and October 1 at the rate of 9.75% per annum...... -- 20,970,000
Unrated Series B Industrial Revenue Bonds due
October 1, 2019, collateralized by deed of trust,
interest payable semiannually on April 1 and
October 1 at the rate of 9.5% per annum........... 5,000,000 5,000,000
----------- -----------
Total mortgage loans and bonds receivable.......... $18,262,105 $38,915,597
=========== ===========
</TABLE>
F-13
<PAGE>
G&L REALTY CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1996 1995
----------- -----------
<S> <C> <C>
Mortgage loans and bonds receivable (balance from
previous page).................................. $18,262,105 $38,915,597
Accrued interest................................. 2,783,602 2,561,125
Reimbursable loan fees and costs advanced........ 100,651 161,056
Loan impound deposits............................ 326,635 --
Discount on Series A and B bonds................. (6,739,812) (8,004,143)
Allowance for uncollectible amounts.............. (375,000) --
----------- -----------
Total mortgage loans and bonds interest
receivable...................................... $14,358,181 $33,633,635
=========== ===========
</TABLE>
Aggregate future principal pay-downs as of December 31, 1996 are as follows:
<TABLE>
<CAPTION>
YEAR ENDING
DECEMBER 31
-----------
<S> <C>
1997.......................................................... $13,112,105
2000.......................................................... 11,785
2001.......................................................... 12,860
After 2001.................................................... 5,125,355
-----------
Total....................................................... $18,262,105
===========
</TABLE>
The activity in the allowance for uncollectible notes receivable for the
year ended December 31, 1996 was as follows:
<TABLE>
<S> <C>
Balance, beginning of year...................................... $ --
Additions....................................................... 375,000
Charge-offs..................................................... --
--------
Balance, end of year............................................ $375,000
========
</TABLE>
9. ASSETS AVAILABLE FOR SALE
Assets available for sale as of December 31, 1996 consist of the following:
<TABLE>
<S> <C>
Unrated Series A tax-exempt Industrial Revenue Bonds due October
1, 2017, collateralized by deed of trust, interest payable
semiannually at 9.75% per annum (including accrued interest of
$503,466)...................................................... $20,190,602
Land............................................................ 280,000
Unsecured subordinated notes receivable due February 1, 2006,
interest payable semiannually at 12.0% per annum (including
accrued interest of $2,050).................................... 27,050
Miscellaneous supplies and equipment............................ 25,000
-----------
Total assets available for sale................................. $20,522,652
===========
</TABLE>
10. FINANCIAL INSTRUMENTS
The estimated fair value of the Company's financial instruments is
determined using available market information and appropriate valuation
methodologies. However, considerable judgment is necessary to interpret market
data and develop the related estimates of fair value. The use of different
market assumptions or estimation methodologies may have a material impact on
the estimated fair value amounts.
F-14
<PAGE>
G&L REALTY CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Cash, cash equivalents, tenant rent and other accounts receivable, accounts
payable and other liabilities. The carrying amount of these instruments
approximates fair value due to their short-term maturities.
Notes payable. The carrying amount approximates fair value because the
interest rates are comparable to rates currently being offered to the Company.
Mortgage loans and bonds receivable. The estimated fair values of these
assets are based upon market values of loans and bonds receivable with similar
characteristics adjusted for risk inherent in the underlying transactions.
Management estimates the fair value of these assets to approximate their
amortized cost basis and, as such, there are no realized or unrealized gains
or losses to report.
11. FUTURE MINIMUM RENT
The Company has operating leases with tenants that expire at various dates
through 2010. The minimum rents due under these leases are subject to either
scheduled fixed increases or adjustments based on the Consumer Price Index. In
general, the retail leases require tenants to pay their pro-rata share of
property taxes, insurance and common area operating costs, while the medical
office leases require tenants to reimburse the Company for annual increases in
property taxes, insurance and specified operating expenses over a base year
amount.
Generally accepted accounting principles require that rents due under
operating leases with fixed increases be averaged over the life of the lease.
This practice, known as "straight-line rents," creates an unbilled rent
receivable in any period during which the amount of straight-line rent exceeds
the actual rent billed (this occurs primarily at the inception of the lease
period). As the lease approaches its expiration date, billed rent will
eventually exceed the amount of straight-line rent causing the unbilled rent
receivable to decline. The straight-line rent calculation assumes no new or
renegotiated rents or extension periods during the life of the lease and
excludes operating cost reimbursements. The following table summarizes future
rents due under existing leases and the corresponding straight-line rent
calculation:
<TABLE>
<CAPTION>
STRAIGHT- UNBILLED
YEAR ENDING LINE BILLABLE RENT
DECEMBER 31 RENT RENT RECEIVABLE
----------- ----------- ----------- ----------
<S> <C> <C> <C>
1997.................................. $12,724,855 $12,619,101 $ (105,754)
1998.................................. 10,158,365 10,103,768 (54,597)
1999.................................. 8,072,534 8,056,632 (15,902)
2000.................................. 6,652,884 6,782,225 129,340
2001.................................. 5,138,925 5,309,823 170,899
Thereafter............................ 15,170,613 16,938,142 1,767,529
----------- ----------- ----------
Total............................... $57,918,176 $59,809,691 $1,891,515
=========== =========== ==========
</TABLE>
The activity in the allowance for unbilled rent, recorded as a reduction of
rental revenue, consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------
1996 1995 1994
--------- ---------- ----------
<S> <C> <C> <C>
Balance, beginning of the year......... $ 967,150 $1,177,168 $1,333,543
Additions.............................. -- -- --
Charge-offs............................ (553,162) (210,018) (156,375)
--------- ---------- ----------
Balance, end of the year............... $ 413,988 $ 967,150 $1,177,168
========= ========== ==========
</TABLE>
F-15
<PAGE>
G&L REALTY CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
12. STOCKHOLDERS' EQUITY
Distributions in excess of net income. As described in Note 2, the Company
has elected to be treated as a REIT for federal income tax purposes. As such,
the Company is required to distribute at least 95% of its annual taxable
income. In reporting periods for which distributions exceed net income,
stockholders' equity will be reduced by the excess of distributions over net
income. Conversely, net income in excess of distributions increases
stockholders' equity. The following table reconciles distributions in excess
of net income for the years ended December 31, 1996 and 1995:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1996 1995
----------- -----------
<S> <C> <C>
Distributions in excess of net income at
beginning of year............................... $(5,479,020) $(3,753,475)
Net income during the year....................... 9,701,444 3,341,405
Distributions declared........................... (5,525,000) (5,066,950)
----------- -----------
Distributions in excess of net income at end of
year............................................ $(1,302,576) $(5,479,020)
=========== ===========
</TABLE>
For years ended December 31, 1996, 1995 and 1994, cash distributed to
shareholders exceeded the Company's taxable income and is therefore considered
to be a return of capital. Approximately 42.25%, 47.66% and 64.58% of the
distributions paid for the years ended December 31, 1996, 1995 and 1994,
respectively, represent a return of capital to shareholders.
The Company declared a quarterly distribution for the first quarter of 1997
in the amount of $0.36 per share to be paid on April 16, 1997 to stockholders
of record on March 31, 1997. This distribution is equal to an annualized
distribution of $1.44 per share.
13. COMMITMENTS AND CONTINGENCIES
Neither the Company, the Operating Partnership, the Realty Financing
Partnership, the Medical Partnership, the Roxbury Partnership nor any of the
assets within their portfolios of medical office buildings, parking
facilities and retail space (the "Properties") is currently a party to any
material litigation.
14. CONCENTRATION OF CREDIT RISK
All of the Company's medical office buildings are located in southern
California, other than the properties owned by GL/PHP, LLC in which the
Company holds an 80.5% interest (see Note 18). Most of the tenants in these
properties provide specialized health care services. The customers of the
tenants primarily reside in the nearby area. The ability of the tenants to
honor the terms of their respective leases is dependent upon the economic,
regulatory and social factors affecting the communities and industry in which
the tenants operate.
A substantial portion of the Company's assets are invested in debt
instruments secured by long-term senior care or skilled nursing facilities.
The ability of the facility owners to pay their obligations as they come due,
as well as their ability to obtain other permanent financing through the sale
of bonds or other forms of long-term financing, is dependent upon their
ability to attract patients who are able to pay for the services they require.
These facilities have complex licensing requirements as do the professionals
they employ. The majority of the services rendered are paid by various
Federal, state and local agencies. Each of these facilities function in a
complex web of changing government regulations which have a significant impact
on economic viability.
F-16
<PAGE>
G&L REALTY CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
15. STOCK INCENTIVE PLAN
As of December 31, 1996, the Company had a stock incentive plan under which
an aggregate of 520,000 shares of the Company's Common Stock are reserved for
issuance. Options are granted at per share amounts not less than fair market
value at the date of grant and expire ten years thereafter. Granted options
vest in even increments over a two or three year period beginning one year
from the grant date. The Company does not charge the estimated compensation
cost of options granted against income. Compensation cost is estimated to be
the fair value of all options granted based on the Binary option-pricing
model. The costs associated with options granted in each of the years ended
December 31, 1996 and 1995 are $353,132, and $392,067, respectively. No
options were issued during 1994. If the compensation costs had been charged
against income at the time of vesting, the Company's net income and earnings
per share would have been reduced to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER
31,
--------------------
1996 1995 1994
------ ------ ------
(IN THOUSANDS,
EXCEPT
PER SHARE AMOUNTS)
<S> <C> <C> <C>
Net Income
As reported......................................... $9,701 $3,341 $3,194
Pro forma........................................... $9,577 $3,289 $3,137
Earnings per share
As reported......................................... $ 2.33 $ 0.82 $ 0.77
Pro forma........................................... $ 2.30 $ 0.80 $ 0.75
</TABLE>
In December 1995, the Company canceled all outstanding options for 218,800
shares of Common Stock which were originally issued at the time of the
Company's initial public offering at an average exercise price of $18.25 per
share. Concurrently, the Company issued new unvested options for the same
aggregate amount with exercise prices of $9.625 per share, the market price on
the date the new options were granted.
A summary of the status of the Company's stock incentive plan as of December
31, 1996, 1995 and 1994, and changes during the years ending on those dates is
presented in the following table. The average price presented below represents
the weighted average exercise price based upon the market value at the grant
date.
<TABLE>
<CAPTION>
1996 1995 1994
---------------- ----------------- ----------------
AVERAGE AVERAGE AVERAGE
SHARES PRICE SHARES PRICE SHARES PRICE
------- ------- -------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Outstanding, beginning of
year...................... 256,500 $10.10 238,000 $18.20 240,000 $18.20
Granted.................. 142,600 15.00 241,500 9.65 -- --
Exercised................ (500) 9.15 -- -- -- --
Forfeited or canceled.... (31,500) $10.70 (223,000) $18.25 (2,000) $18.25
------- ------ -------- ------ ------- ------
Outstanding, end of year... 367,100 $11.95 256,500 $10.10 238,000 $18.20
======= ====== ======== ====== ======= ======
Options exercisable at
year-end.................. 89,433 10.80 20,500 15.50 126,400 18.20
Weighted-average fair value
of options granted during
the year.................. $ 2.50 $ 1.30 $ --
</TABLE>
F-17
<PAGE>
G&L REALTY CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The following table summarizes information relating to the Company's stock
incentive plan as of December 31, 1996:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
----------------------
AVERAGE
REMAINING LIFE NUMBER
EXERCISE PRICE NUMBER (IN MONTHS) EXERCISABLE
-------------- ------- -------------- -----------
<S> <C> <C> <C>
$ 9.15................................. 2,000 101 2,000
9.65................................. 206,800 108 68,933
10.00................................. 2,000 102 1,000
10.40................................. 3,000 107 3,000
13.65................................. 61,800 113 2,500
13.75................................. 20,000 114 --
15.65................................. 2,000 118 --
15.90................................. 7,500 116 --
17.00................................. 50,000 120 --
17.65................................. 12,000 84 12,000
</TABLE>
Fair value of the plan. As of December 31, 1996, the Company estimated the
fair value of all options granted to be $726,291, calculated based on the
following assumptions:
<TABLE>
<S> <C>
Weighted average grant price of stock............................ $11.95
Risk-free interest rate.......................................... 6.43%
Expected life of the option...................................... 5 years
Expected volatility of Stock..................................... 25.12%
Expected Dividends............................................... $ 1.44
</TABLE>
The Company assumes that the equivalent risk-free interest rate is the
closing market rate, on the last trading day of the year, for ten-year
treasury bills.
The Company's stock incentive plan was introduced in conjunction with its
initial public offering on December 16, 1993. As indicated earlier, most of
the options issued in 1993 were repriced and reissued in December 1995;
therefore, there is insufficient historical data to provide an accurate
indicator as to the expected life of the options. For purposes of computing
the estimated life of the outstanding option agreements, the Company has
assumed the life to be five years.
The Company uses the treasury stock method for purposes of determining the
number of shares to be issued to in conjunction with the Company's stock
incentive plan. At a weighted average exercise price of $11.95 and a market
price of $17.00 per share as of December 31, 1996, the number of shares to be
issued is 109,050.
16. LOSS ON DISPOSITION OF REAL PROPERTY AND EXTRAORDINARY GAIN
In May 1996, the Company transferred ownership of the property located at
436 North Bedford Drive in Beverly Hills, California (the "Bedford Property")
to the holder of the $28.5 million non-recourse lien in satisfaction of the
debt ( the "deed-in-lieu transaction"). In August, the Medical Partnership
reacquired the Bedford Property for approximately $18,100,000 which was funded
by a $15,200,000 loan from Nomura Asset Capital Corporation ("Nomura") and
$2,900,000 in cash.
As a result of the deed-in-lieu transaction, the Company recorded a
$4,873,788 loss on disposition of the property (the difference between book
value and market value) and a $10,500,000 extraordinary gain from retirement
of the related $28,500,000 lien.
F-18
<PAGE>
G&L REALTY CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
During 1996, the Company refinanced three properties and obtained a new
$19,800,000 loan from Nomura. The properties, pledged as collateral for the
new loan, were subsequently transferred to the Medical Partnership along with
the related $19,800,000 loan. In conjunction with the refinancing transaction,
the Company negotiated a $350,000 discount on one note, and incurred other
costs and prepayment penalties totaling $483,620. In conjunction with the
$19,800,000 refinancing, the Company incurred a net extraordinary loss of
$133,620. The net extraordinary gain was adjusted to $9,310,730 to reflect the
portion of the gain attributable to the minority interest.
In August 1996, Nomura increased the Medical Partnership's original
$19,800,000 loan by $15,200,000 in conjunction with the reacquisition of the
Bedford Property. Consequently, the repayment terms were adjusted to reflect
the new principal balance of $35,000,000.
17. ACQUISITION OF ASSETS AND RELATED PARTY TRANSACTION
On June 14, 1996 the Partnership and 445 Bedford, LLC, a California limited
liability company ("445 LLC"), acquired undivided tenant-in-common interests
in two medical office buildings, a hospital and a parcel of vacant land in
Tustin, California (the "Tustin Properties"). The Tustin Properties were
acquired for a sum of $4,633,957, of which $1,357,010 was contributed in cash
by 445 LLC. Daniel M. Gottlieb and Steven D. Lebowitz, both directors and
officers of the Company, and Reese L. Milner II, a director of G&L Realty,
have financial interests in 445 LLC.
The Partnership acquired Mr. Milner's interest in 445 LLC for $808,000,
after which 445 LLC redeemed the Partnership's interest in 445 LLC for an
increased interest in the Tustin Properties. On June 28, 1996, 445 LLC
contributed its remaining interest in the Tustin Properties to the Partnership
in exchange for 39,215 newly issued Partnership units, valued at $549,010. The
newly issued Partnership units are convertible into G&L Realty common stock
one year from the date of issuance on a one-for-one basis. These new units
were issued at an effective rate of $14.00 per unit which included a premium
over the $13.00 closing price of G&L Realty's common stock on May 1, 1996, the
commitment date.
The funds contributed by 445 LLC toward the purchase of the Tustin Property
were obtained as part of a tax deferred exchange involving the sale of real
estate previously held by 445 LLC to an unrelated third party.
18. SUBSEQUENT EVENT
On February 28, 1997, the Partnership entered into a joint venture with PHP
Healthcare Corporation ("PHP"). GL/PHP, LLC is a newly formed Delaware limited
liability company which recently purchased six medical buildings in New
Jersey. The properties, acquired from Blue Cross/Blue Shield of New Jersey for
approximately $22.4 million, will be leased to PHP under the terms of a 25
year net operating lease which provides fixed rent escalations during the term
of the lease. PHP retained a 19.5% interest in GL/PHP, LLC and has the right
to acquire the Company's 80.5 percent interest in the new venture at any time
prior to May 31, 1997. Mr. Charles P. Reilly, a director of the Company and
Chairman of the Compensation Committee of the Board of Directors of the
Company, is Chairman of the Board of Directors of PHP.
F-19
<PAGE>
G&L REALTY CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
19. UNAUDITED SUMMARIZED CONSOLIDATED QUARTERLY INFORMATION
Summarized consolidated quarterly financial information for the periods as
follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-----------------------------------------------
DECEMBER 31 SEPTEMBER 30 JUNE 30 MARCH 31
----------- ------------ ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C>
1996
Revenues.................... $6,677,826 $6,298,937 $5,821,560 $6,237,225
Expenses.................... 5,315,865 4,921,002 9,520,456 4,694,143
Income before extraordinary
gain....................... 1,195,457 1,195,452 (3,353,313) 1,353,118
Extraordinary gain.......... -- -- 9,310,730 --
---------- ---------- ---------- ----------
Net income.................. $1,195,457 $1,195,452 $5,957,417 $1,353,118
========== ========== ========== ==========
Per share data:
Before extraordinary gain. $ 0.29 $ 0.29 $ (0.80) $ 0.32
Extraordinary gain........ -- -- 2.23 --
---------- ---------- ---------- ----------
Net income................ $ 0.29 $ 0.29 $ 1.43 $ 0.32
========== ========== ========== ==========
Weighted average number of
shares outstanding......... 4,171,550 4,171,550 4,171,550 4,171,490
1995
Revenues.................... $6,141,991 $5,340,606 $5,037,020 $4,887,920
Expenses.................... 4,976,026 4,090,633 4,225,701 3,832,368
Income before extraordinary
loss....................... 1,028,583 1,089,792 689,903 926,528
Extraordinary loss.......... -- (393,401) -- --
---------- ---------- ---------- ----------
Net income.................. $1,028,583 $ 696,391 $ 689,903 $ 926,528
========== ========== ========== ==========
Per share data:
Before extraordinary loss. $ 0.25 $ 0.27 $ 0.17 $ 0.22
Extraordinary loss........ -- (0.10) -- --
---------- ---------- ---------- ----------
Net income................ $ 0.25 $ 0.17 $ 0.17 $ 0.22
========== ========== ========== ==========
Weighted average number of
shares outstanding......... 4,062,000 4,062,000 4,080,077 4,159,000
</TABLE>
F-20
<PAGE>
G&L REALTY CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
20. CONSOLIDATED REAL ESTATE AND ACCUMULATED DEPRECIATION AS OF DECEMBER 31,
1996
<TABLE>
<CAPTION>
COST CAPITALIZED
INITIAL COST TO COMPANY SUBSEQUENT TO ACQUISITION
------------------------ --------------------------
ENCUMBRANCES BUILDING AND BUILDING AND
DESCRIPTION (SEE NOTES) LAND IMPROVEMENTS LAND IMPROVEMENT
----------- ------------ ----------- ------------ ----------- --------------
<S> <C> <C> <C> <C> <C>
405 North Bedford
Drive............ (See Note A) $ 2,186,188 $ 4,076,313 $ 451,640 $ 9,527,242
415 North Bedford
Drive............ (See Note A) 292,120 572,705 -- 545,769
416 North Bedford
Drive............ (See Note A) 427,087 247,475 -- 2,276,228
435 North Bedford
Drive............ (See Note A) 1,143,512 2,853,168 -- 2,263,812
435 North Roxbury
Drive............ $ 8,070,000 161,652 390,494 39,149 2,353,142
436 North Bedford
Drive............ (See Note B) 2,675,000 15,317,406 -- 164,729
439 North Bedford
Drive............ -- -- 108,689 -- 31,987
Holy Cross
Medical Plaza.... (See Note C) 2,556,200 10,255,679 -- 862,308
St. Joseph's
Professional
Building......... (See Note C) 1,300,000 3,935,536 -- 132,110
Sherman Oaks
Medical Plaza.... (See Note B) 1,453,826 8,278,226 -- 1,356,672
Regents Medical
Center........... (See Note B) 1,470,000 8,389,545 -- 882,040
Cigna HealthCare
Bldg. ........... (See Note B) 1,260,000 7,282,341 -- --
1095 Irvine
Boulevard........ (See Note C) 474,300 663,465 -- 452,797
14662 Newport
Avenue........... (See Note C) 645,000 1,899,556 -- --
14591 Newport
Avenue........... (See Note C) 160,000 35,845 -- --
14642 Newport
Avenue........... (See Note C) 400,000 1,032,547 -- 197,381
------------ ----------- ------------ ----------- --------------
Total........... $ 8,070,000 $16,604,885 $65,338,990 $ 490,789 $ 21,046,217
============ =========== ============ =========== ==============
Realty Financing
Partnership
(See Note A)..... 29,515,034
Medical
Partnership
(See Note B)..... 34,915,383
Credit Line (See
Note C).......... 15,400,000
Other Notes (See
Note D).......... 21,125,000
------------
Total
encumbrances..... $109,025,417
============
<CAPTION>
GROSS AMOUNT AT WHICH CARRIED
AT CLOSE OF PERIOD (SEE NOTE E) DATE OF
-------------------------------------------------- CONSTRUCTION
BUILDING AND ACCUMULATED OR
DESCRIPTION LAND IMPROVEMENTS TOTAL DEPRECIATION REHABILITATION
----------- ----------- ------------ ------------ ------------ --------------
<S> <C> <C> <C> <C> <C>
405 North Bedford
Drive............ $ 2,637,828 $13,603,555 $ 16,241,383 $ 2,924,138 1947/1987
415 North Bedford
Drive............ 292,120 1,118,474 1,410,594 457,927 1955
416 North Bedford
Drive............ 427,087 2,523,703 2,950,790 683,314 1946/1986
435 North Bedford
Drive............ 1,143,512 5,116,980 6,260,492 1,934,553 1950/1963/1984
435 North Roxbury
Drive............ 200,801 2,743,636 2,944,437 953,588 1956/1983
436 North Bedford
Drive............ 2,675,000 15,482,135 18,157,135 140,414 1980
439 North Bedford
Drive............ -- 140,676 140,676 17,048 1956/1983
Holy Cross
Medical Plaza.... 2,556,200 11,117,987 13,674,187 961,374 1985
St. Joseph's
Professional
Building......... 1,300,000 4,067,646 5,367,646 325,935 1987
Sherman Oaks
Medical Plaza.... 1,453,826 9,634,898 11,088,724 860,721 1969/1993
Regents Medical
Center........... 1,470,000 9,271,585 10,741,585 685,659 1989
Cigna HealthCare
Bldg. ........... 1,260,000 7,282,341 8,542,341 439,975 1992
1095 Irvine
Boulevard........ 474,300 1,116,262 1,590,562 81,653 1994
14662 Newport
Avenue........... 645,000 1,899,556 2,544,556 10,689 1969/1974
14591 Newport
Avenue........... 160,000 35,845 195,845 455 1969
14642 Newport
Avenue........... 400,000 1,229,928 1,629,928 22,832 1985
----------- ------------ ------------ ------------
Total........... $17,095,674 $86,385,207 $103,480,881 $10,500,275
=========== ============ ============ ============
</TABLE>
Depreciation is computed on the straight-line basis over the estimated useful
lives of the assets, as follows:
Building and improvements.............. 40 years
Tenant improvements.................... Life of lease
The changes in total real estate assets and accumulated depreciation for the
years ended December 31, are as follows:
<TABLE>
<CAPTION>
TOTAL REAL ESTATE ASSETS
----------------------------------------
1996 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
Balance at beginning
of year............. $103,351,455 $106,057,031 $ 63,553,568
Improvements,
acquisition......... 24,256,513 2,997,234 42,503,463
Dispositions........ (24,127,087) (5,702,810) --
------------ ------------ ------------
Balance at end of
year................ $103,480,881 $103,351,455 $106,057,031
============ ============ ============
<CAPTION>
ACCUMULATED DEPRECIATION
-------------------------------------
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
Balance at
beginning of year. $11,449,613 $13,946,965 $11,270,565
Depreciation...... 2,606,373 3,202,929 2,676,400
Dispositions...... (3,555,711) (5,700,281) --
----------- ----------- -----------
Balance at end of
year.............. $10,500,275 $11,449,613 $13,946,965
=========== =========== ===========
</TABLE>
- ------------
Note A: The Realty Financing Partnership owns the following properties, which
are each security for a blanket first trust deed: 405 North Bedford, 415
North Bedford, 416 North Bedford and 435 North Bedford.
Note B: The Medical Partnership owns the following properties, which are each
security for a blanket first trust deed: Sherman Oaks Medical Plaza,
Cigna HealthCare Building, Regents Medical Center and 436 North
Bedford.
Note C: The Operating Partnership owns the following properties, which are
each security for a blanket first trust deed for the Credit Line: Holy
Cross Medical Plaza, St. Joseph's Professional Building, St. Joseph's
of Orange-Medical Office Building and the Tustin Hospital properties
on Newport Avenue which include a hospital, an adjacent parcel of
vacant land and two medical office buildings.
Note D: Total debt as of December 31, 1996 includes $14,000,000 which is
secured by unrated, tax-exempt Series A and B bonds and two term loans
totaling $7,125,000 which are secured by notes receivable.
Note E: The aggregate costs for federal income tax purposes were $111,635,622
as of December 31, 1996.
F-21
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
NO DEALER, SALESPERSON OR OTHER INDIVIDUAL HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS IN
CONNECTION WITH THE OFFERING COVERED BY THIS PROSPECTUS. IF GIVEN OR MADE,
SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AU-
THORIZED BY THE COMPANY OR THE UNDERWRITERS. THIS PROSPECTUS DOES NOT CONSTI-
TUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, THE SERIES A PRE-
FERRED STOCK IN ANY JURISDICTION WHERE, OR TO ANY PERSON TO WHOM, IT IS UNLAW-
FUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPEC-
TUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE AN IM-
PLICATION THAT THERE HAS BEEN ANY CHANGE IN THE FACTS SET FORTH IN THIS PRO-
SPECTUS OR IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF.
----------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary........................................................ 1
Risk Factors.............................................................. 8
Use of Proceeds........................................................... 14
Capitalization............................................................ 14
Selected Consolidated Financial and Operating Data........................ 15
Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................... 18
The Company............................................................... 24
Organizational Structure.................................................. 29
Business and Properties................................................... 30
Policies with Respect to Certain Activities............................... 45
Price Range of Common Stock and Distributions............................. 48
Management................................................................ 49
Principal Stockholders of the Company..................................... 54
Formation Transactions.................................................... 56
The Partnership Agreement................................................. 56
Certain Transactions...................................................... 58
Description of Series A Preferred Stock................................... 59
Federal Income Tax Considerations......................................... 69
Employee Plans and Individual Retirement Accounts......................... 80
Underwriting.............................................................. 82
Experts................................................................... 83
Legal Matters............................................................. 83
Available Information..................................................... 83
Glossary.................................................................. 84
Index to Financial Statements............................................. F-1
</TABLE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
1,200,000 SHARES
[LOGO OF G&L REALTY CORP.]
G & L
REALTY CORP.
% SERIES A
CUMULATIVE PREFERRED STOCK
(LIQUIDATION PREFERENCE
$25 PER SHARE)
----------------
PROSPECTUS
----------------
SUTRO & CO. INCORPORATED
MCDONALD & COMPANY
SECURITIES, INC.
, 1997
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 30. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following expenses will be paid by the Company.
<TABLE>
<S> <C>
SEC Registration Fee.............................................. $ 8,713
NYSE Listing Application Fee...................................... 20,356
NASD Fee.......................................................... 3,375
Legal fees and expenses........................................... 200,000*
Accounting fees and expenses...................................... 65,000*
Transfer agent fees............................................... 5,000*
Blue sky fees and expenses........................................ 1,000*
Printing expenses................................................. 100,000*
Miscellaneous..................................................... 46,556*
--------
Total........................................................... $450,000*
========
</TABLE>
- --------
* Estimated
ITEM 31. SALES TO SPECIAL PARTIES
Not applicable.
ITEM 32. RECENT SALES OF UNREGISTERED SECURITIES
Prior to April 1996, Messrs. Milner, Gottlieb and Lebowitz were beneficial
owners of 445 LLC, having equity interests of 59.0%, 24.6% and 16.4%,
respectively. 445 LLC's primary asset was an office building located at 445 N.
Bedford Drive in Beverly Hills, California. On April 26, 1996, the Company
acquired Mr. Milner's interest in 445 LLC for $808,000. On June 14, 1996, 445
LLC completed a tax-deferred exchange transaction whereby it sold the office
building and acquired, along with the Operating Partnership as tenants-in-
common, the Tustin Properties. Subsequently, 445 LLC redeemed the Company's
interest in 445 LLC in exchange for a portion of 445 LLC's interest in the
Tustin Properties. On June 28, 1996, 445 LLC contributed its remaining
interest in the Tustin Properties to the Operating Partnership in exchange for
39,215 newly issued Units in the Operating Partnership. The new Units were
valued at a price of $14.00 per Unit, which reflected a premium of $1.00 over
the closing price of a share of the Company's common stock on the date the
Company's Board of Directors approved the exchange. The contributed interest
in the Tustin Properties was valued according to the price paid by the
purchaser of the office building at 445 N. Bedford in connection with the
exchange transaction involving the Tustin Properties. The Company believes
that the sale of Units to Messrs. Gottlieb and Lebowitz was exempt from
registration under the Securities Act pursuant to Section 4(2) and therefore
did not file a registration statement for the registration of these Units
under the Securities Act.
ITEM 33. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Company's Articles of Incorporation and Bylaws require the Company to
indemnify its directors and officers to the fullest extent permitted from time
to time by Maryland law. The Articles of Incorporation also permit the Company
to indemnify employees, agents and other persons acting on behalf of or at the
request of the Company. The Maryland GCL permits a corporation to indemnify
its directors, officers and certain other parties against judgments,
penalties, fines, settlements and reasonable expenses actually incurred by
them in connection with any proceeding to which they may be made a party by
reason of their service to or at the request of the corporation, unless it is
established that the act or omission of the indemnified party was material to
the matter giving rise to the proceeding and (i) was committed in bad faith or
was the result of active and deliberate dishonesty, (ii) the indemnified party
actually received an improper personal benefit, or (iii) in the case of any
II-1
<PAGE>
criminal proceeding, the indemnified party had reasonable cause to believe that
the act or omission was unlawful. Indemnification may be made against
judgments, penalties, fines, settlements and reasonable expenses actually
incurred by the director or officer in connection with the proceeding;
provided, however, that if the proceeding is one by or in the right of the
corporation, indemnification may not be made with respect to any proceeding in
which the director or officer has been adjudged to be liable to the
corporation. In addition, a director or officer may not be indemnified with
respect to any proceeding charging improper personal benefit to the director or
officer in which the director or officer was adjudged to be liable on the basis
that personal benefit was improperly received. The termination of any
proceeding by conviction, or upon a plea of nolo contendere or its equivalent,
or an entry of any order of probation prior to judgment, creates a rebuttable
presumption that the director or officer did not meet the requisite standard of
conduct required for indemnification to be permitted. It is the position of the
Commission that indemnification of directors and officers for liabilities
arising under the Securities Act is against public policy and is unenforceable
pursuant to Section 14 of the Securities Act.
The Maryland GCL permits the charter of a Maryland corporation to include a
provision limiting the liability of its directors and officers to the
corporation and its stockholders for money damages, except to the extent that
(i) it is proved that the person actually received an improper benefit or
profit in money, property or services, or (ii) a judgment or other final
adjudication is entered in a proceeding based on a finding that the person's
action, or failure to act, was the result of active and deliberate dishonesty
and was material to the cause of action adjudicated in the proceeding. The
Company's Articles of Incorporation contain a provision providing for
elimination of the liability of its directors or officers to the Company or its
stockholders for money damages to the maximum extent permitted by Maryland law
from time to time.
The Agreement of Limited Partnership of the Operating Partnership also
provides for indemnification of the Company, or any director or officer of the
Company, in its capacity as general partner of the Operating Partnership, from
and against all losses, claims, damages, liabilities, joint or several,
expenses (including legal fees), fines, settlements and other amounts incurred
in connection with any actions relating to the operations of the Operating
Partnership as set forth in the Operating Partnership Agreement.
The Company has entered into indemnification agreements with each of its
executive officers and directors. The indemnification agreements require, among
other things, that the Company indemnify its officers and directors to the
fullest extent permitted by the Maryland GCL, and advance to the officers and
directors all related expenses, subject to reimbursement if it is subsequently
determined that indemnification is not permitted. The Company must also
indemnify and advance all expenses incurred by officers and directors seeking
to enforce their rights under the indemnification agreements, and cover
officers and directors under the Company's directors and officers' liability
insurance. Although the form of indemnification agreement offers substantially
the same scope of coverage afforded by provisions in the Articles of
Incorporation and the Bylaws, it provides greater assurance to directors and
officers that indemnification will be available, because, as a contract, it
cannot be modified unilaterally in the future by the Board of Directors or by
the shareholders to eliminate the rights it provides.
ITEM 34. TREATMENT OF PROCEEDS FROM STOCK BEING REGISTERED
Not applicable.
ITEM 35. FINANCIAL STATEMENTS AND EXHIBITS
(a) Financial Statements
See the information set forth on pages F-1 through F-21 in Part I of this
Registration Statement. All such information and financial statements are
included in the Prospectus.
II-2
<PAGE>
(b) The following is a complete list of exhibits filed as part of the
Registration Statement. Exhibit numbers correspond to the numbers in the
Exhibit Table of Item 601 of Regulation S-K.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
*1 Form of Underwriting Agreement
3.1(1) Amended and Restated Articles of Incorporation of G&L Realty Corp.
3.2(3) Amended and Restated Bylaws of G&L Realty Corp.
4.1 Form of Articles Supplementary relating to the Series A Preferred
Stock
4.2 Form of certificate of Series A Preferred Stock
*5.1 Opinion of Piper & Marbury L.L.P. as to the legality of the
Offering.
*8.1 Opinion of Gibson, Dunn & Crutcher LLP as to Federal income tax
consequences of the Offering.
10.1(2) Executive Employment Agreement between G&L Realty Corp. and Daniel
M. Gottlieb
10.2(2) Executive Employment Agreement between G&L Realty Corp. and Steven
D. Lebowitz
10.3(2) Agreement of Limited Partnership of G&L Realty Partnership, L.P.
10.4(1) 1993 Stock Incentive Plan
10.5(1) Form of Indemnity Agreement between G&L Realty Corp. and directors
and certain officers.
10.6(1) Option Agreement for Purchase and Sale of 4955 Van Nuys Boulevard
("Sherman Oaks Medical Plaza") by and between G&L Development and
Arthur Gilbert, as Trustee of the Arthur Gilbert and Rosalinde
Gilbert 1982 Trust, dated as of October 29, 1993
10.7(2) Option Notice with respect to Sherman Oaks Medical Plaza
10.8(1) Agreement for Purchase and Sale of Limited Partnership Interests
(435 North Roxbury Drive, Ltd.) between the Selling Partner (as
defined therein) and G&L Development, dated as of October 29, 1993
10.9(1) Agreement for Transfer of Partnership Interests and Other Assets by
and between G&L Realty Corp. and Reese Milner, Helen Milner and
Milner Development Corp., dated as of October 29, 1993
10.10(1) Nomura Commitment Letter with respect to the Acquisition Facility
10.11(3) Amended and Restated Mortgage Loan Agreement dated as of January 11,
1995 among G&L Financing Partnership, L.P., Nomura Asset Capital
Corporation and Bankers Trust Company of New York
10.12(1) Office Building Lease I between 405 North Bedford Drive, Ltd. and
Saint John's Hospital and Health Center dated October 12, 1987
10.13(1) Office Building Lease II between 405 North Bedford Drive, Ltd. and
Saint John's Hospital and Health Center dated as of October 12, 1987
10.14(1) Office Building Lease III between 405 North Bedford Drive, Ltd. and
Saint John's Hospital and Health Center dated as of December 1, 1987
10.15(1) Investment Banking and Financial Advisory Agreement between G&L
Development and Gruntal & Co., Incorporated
10.16(1) Security Agreement dated as of December 16, 1993 by and between
Daniel M. Gottlieb, Steven D. Lebowitz and Milner Investment
Corporation
10.17(2) Security Agreement dated as of December 16, 1993 by and between
Daniel M. Gottlieb, Steven D. Lebowitz and Reese L. Milner II
10.18(2) Security Agreement dated as of December 16, 1993 by and between
Daniel M. Gottlieb, Steven D. Lebowitz and Reese L. Milner II
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
10.19(2) Security Agreement dated as of December 16, 1993 by and between
Daniel M. Gottlieb, Steven D. Lebowitz and Reese L. Milner II, Helen
Milner, and John Milner, as Trustees of the Milner Trust
10.20(2) Security Agreement dated as of December 16, 1993 by and between
Daniel M. Gottlieb, Steven D. Lebowitz and Reese L. Milner II
10.21(4) Amended and Restated Mortgage Loan Agreement by and between G&L
Realty Financing Partnership II, L.P., as Borrower, and Nomura Asset
Capital Corporation, as Lender, dated as of October 31, 1995
10.22(4) Revolving Loan Agreement by and between G&L Realty Partnership, L.P.
and Tokai Bank of California dated as of August 11, 1995
10.23(4) Property Management Agreement between G&L Realty Financing
Partnership II, L.P., as owner, and G&L Realty Partnership, L.P., as
agent, made August 10, 1995
10.24(5) Commitment Letter between G&L Realty Partnership, L. P. and Nomura
Asset Capital Corporation, dated as of September 29, 1995
10.25(5) Loan and Security Agreement between G&L Realty Partnership, L. P. and
GMAC Commercial Mortgage Corporation, dated as of December 5, 1995
10.26(5) Note in the amount of $14,000,000 executed by G&L Realty Partnership,
L. P. in favor of GMAC Commercial Mortgage Corporation, dated as of
December 5, 1995
10.27(5) Notification and Consent Agreement among G&L Realty Partnership, L.
P., GMAC Commercial Mortgage Corporation, and Nomura International
Trust Company, dated as of December 5, 1995
10.28(5) Assignment of Bond executed by G&L Realty Partnership, L. P., in
favor of GMAC Commercial Mortgage Corporation
10.27(6) Agreement of Purchase and Sale of Membership Interest dated April 26,
1996, between Milner Investment Corporation and G&L Realty
Partnership, L.P.
10.28(7) Agreement for Deed in Lieu of Foreclosure by and among G&L Realty
Partnership, L.P., a Delaware Limited Partnership, and Loan Asset
Structured Trust I, a Delaware trust, dated as of May 24, 1996
10.29(7) Property Management Agreement by and between Loan Asset Structured
Trust I, a Delaware trust, and G&L Realty Partnership, L.P., a
Delaware Limited Partnership, dated as of May 24, 1996
10.30(8) Mortgage Loan Agreement dated as of May 24, 1996 by and between G&L
Medical Partnership, L.P. as Borrower and Nomura Asset Capital
Corporation as Lender
10.31(8) Agreement of Purchase and Sale of Membership Interest dated April 26,
1996 by and between Milner Investment Corporation as Seller and G&L
Realty Partnership, L.P. as Buyer
10.32(8) Letter of Agreement regarding purchase of Tustin Hospital to 445
North Bedford Drive, LLC from G&L Realty Partnership, L.P., dated
June 12, 1996
10.33(8) Redemption Agreement by and between G&L Realty Partnership, L.P. and
445 Bedford, LLC, dated as of June 27, 1996
10.34(8) Property Contribution Agreement by and between G&L Realty
Partnership, L.P. as Purchaser and 445 Bedford, LLC as Seller, dated
as of June 28, 1996
10.35(8) Deed of Trust, Assignment of Rents, Security Agreement and Fixture
Filing between 445 Bedford, LLC and G&L Realty Partnership, L.P. as
tenants in common ("Trustor"), Chicago Title Company ("Trustee"), and
Tokai Bank of California ("Beneficiary"), made to be effective on
June 12, 1996
</TABLE>
II-4
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
10.36(9) Agreement of Purchase and Sale by and between Loan Asset Structured
Trust I, a Delaware trust ("Seller") and G&L Medical Partnership,
L.P., a Delaware limited partnership ("Buyer"), dated August 29,
1996
10.37(9) Grant Deed in which Loan Asset Structured Trust I, a Delaware trust
("Grantor"), grants certain real property to G&L Medical
Partnership, L.P., a Delaware limited partnership ("Grantee"),
recorded August 30, 1996
10.38(10) Limited Liability Company Agreement by and between G&L Realty
Partnership, L.P., a Delaware limited partnership, and Property
Acquisition Trust I, a Delaware business trust, for the purpose of
creating a limited liability company to be named GLN Capital Co.,
LLC, dated as of November 25, 1996
10.39(10) Limited Liability Company Agreement by and between G&L Realty
Partnership, L.P., a Delaware limited partnership, and PHP
Healthcare Corporation, a Delaware corporation, for the purpose of
creating a limited liability company to be named GL/PHP, LLC, dated
as of February 26, 1997
10.40(10) First Amendment To Limited Liability Company Agreement entered into
as of March 31, 1997 by and between G&L Realty Partnership, L.P., a
Delaware limited partnership, and Property Acquisition Trust I, a
Delaware business trust, for the purpose of amending that certain
Limited Liability Company Agreement of GLN Capital Co., LLC dated
as of November 25, 1996
10.41(10) Bond Purchase Agreement dated as of March 31, 1997 by and between
GLN Capital Co., LLC (as Buyer) and G&L Realty Partnership, L.P.
(as Seller)
10.42 Option Agreement, dated February 28, 1997, by and among G&L Realty
Partnership L.P., GLN Capital Co., LLC and PHP Healthcare
Corporation
**12 Computation of ratio of earnings to fixed charges
21(5) List of subsidiaries
*23.1 Consent of Piper & Marbury L.L.P. (included in their opinion to be
filed as Exhibit 5.1)
*23.2 Consent of Gibson, Dunn & Crutcher LLP (included in their opinion
to be filed as Exhibit 8.1)
23.3 Consent of Deloitte & Touche LLP, independent public accountants
**24 Power of Attorney (included on pages II-7 and II-8 of the Company's
Registration Statement on Form S-11, filed on April 10, 1997)
**27 Financial Data Schedule
</TABLE>
- --------
* To be filed by amendment.
** Previously filed.
(1) Filed as an exhibit to the Company's Registration Statement on Form S-11
and amendments thereto (File No. 33-68984) and incorporated herein by
reference.
(2) Filed as an exhibit to the Company's Annual Report on Form 10-K for the
year ended December 31, 1993 and incorporated herein by reference.
(3) Filed as an exhibit to the Company's Annual Report on Form 10-K for the
year ended December 31, 1994 and incorporated herein by reference.
(4) Filed as an exhibit to the Company's Quarterly Report on Form 10-Q for
the quarter ended September 30, 1995 and incorporated herein by
reference.
(5) Filed as an exhibit to the Company's Annual Report on Form 10-K for the
year ended December 31, 1995 and incorporated herein by reference.
(6) Filed as an exhibit to the Company's Quarterly Report on Form 10-Q for
the quarter ended March 31, 1996 and incorporated herein by reference.
(7) Filed as an exhibit to the Company's Form 8-K dated May 24, 1996 and
incorporated herein by reference.
II-5
<PAGE>
(8) Filed as an exhibit to the Company's Quarterly Report on Form 10-Q for
the quarter ended June 30, 1996 and incorporated herein by reference.
(9) Filed as an exhibit to the Company's Form 8-K dated August 30, 1996 and
incorporated herein by reference.
(10) Filed as an exhibit to the Company's Annual Report on Form 10-K for the
year ended December 31, 1996 and incorporated herein by reference.
ITEM 36. UNDERTAKINGS
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Commission such indemnification is
against public policy as expressed in the Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the Registrant of expenses incurred or
paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities
being registered, the Registrant will, unless in the opinion of its counsel
the matters have been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Act and will be governed by the
final adjudication of such issue.
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act, the
information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h)
under the Securities Act shall be deemed to be part of this registration
statement as of the time it was declared effective.
(2) For purposes of determining any liability under the Securities Act, each
post-effective amendment that contains a form of prospectus shall be deemed to
be a new registration statement relating to the securities offered therein,
and the offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof.
II-6
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1993, as amended, the
Registrant certifies that it has reasonable grounds to believe that it meets
all of the requirements for filing on Form S-11 and has duly caused this
Amendment No. 1 to this Registration Statement to be signed on its behalf by
the undersigned, thereunto duly authorized, in the City of Beverly Hills,
State of California, on this 28th day of April, 1997.
G & L REALTY CORP.
By /s/ Daniel M. Gottlieb
-----------------------------
Daniel M. Gottlieb
Chief Executive Officer,
Co-Chairman of the Board and
Director
(Principal Executive Officer)
Pursuant to the requirements of the Securities Act of 1933, as amended, this
Amendment No. 1 to this Registration Statement has been signed below by the
following persons in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ Daniel M. Gottlieb Chief Executive Officer, April 28, 1997
____________________________________ Co-Chairman of the Board
Daniel M. Gottlieb and Director (Principal
Executive Officer)
* President, Co-Chairman of April 28, 1997
____________________________________ the Board and Director
Steven D. Lebowitz
* Chief Accounting Officer, April 28, 1997
____________________________________ Treasurer and Secretary
Quentin Thompson (Principal Financial and
Accounting Officer)
* Director April 28, 1997
____________________________________
Richard L. Lesher
* Director April 28, 1997
____________________________________
Leslie D. Michelson
* Director April 28, 1997
____________________________________
Reese L. Milner
* Director April 28, 1997
____________________________________
Charles P. Reilly
* Director April 28, 1997
____________________________________
S. Craig Tompkins
</TABLE>
*By: /s/ Daniel M. Gottlieb
-------------------------------
Daniel M. Gottlieb
As Attorney-in-Fact
II-7
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
*1 Form of Underwriting Agreement
3.1(1) Amended and Restated Articles of Incorporation of G&L Realty Corp.
3.2(3) Amended and Restated Bylaws of G&L Realty Corp.
4.1 Form of Articles Supplementary relating to the Series A Preferred
Stock
4.2 Form of certificate of Series A Preferred Stock
*5.1 Opinion of Piper & Marbury L.L.P. as to the legality of the
Offering.
*8.1 Opinion of Gibson, Dunn & Crutcher LLP as to Federal income tax
consequences of the Offering
10.1(2) Executive Employment Agreement between G&L Realty Corp. and Daniel
M. Gottlieb
10.2(2) Executive Employment Agreement between G&L Realty Corp. and Steven
D. Lebowitz
10.3(2) Agreement of Limited Partnership of G&L Realty Partnership, L.P.
10.4(1) 1993 Stock Incentive Plan
10.5(1) Form of Indemnity Agreement between G&L Realty Corp. and directors
and certain officers
10.6(1) Option Agreement for Purchase and Sale of 4955 Van Nuys Boulevard
("Sherman Oaks Medical Plaza") by and between G&L Development and
Arthur Gilbert, as Trustee of the Arthur Gilbert and Rosalinde
Gilbert 1982 Trust, dated as of October 29, 1993
10.7(2) Option Notice with respect to Sherman Oaks Medical Plaza
10.8(1) Agreement for Purchase and Sale of Limited Partnership Interests
(435 North Roxbury Drive, Ltd.) between the Selling Partner (as
defined therein) and G&L Development, dated as of October 29, 1993
10.9(1) Agreement for Transfer of Partnership Interests and Other Assets by
and between G&L Realty Corp. and Reese Milner, Helen Milner and
Milner Development Corp., dated as of October 29, 1993
10.10(1) Nomura Commitment Letter with respect to the Acquisition Facility
10.11(3) Amended and Restated Mortgage Loan Agreement dated as of January 11,
1995 among G&L Financing Partnership, L.P., Nomura Asset Capital
Corporation and Bankers Trust Company of New York
10.12(1) Office Building Lease I between 405 North Bedford Drive, Ltd. and
Saint John's Hospital and Health Center dated October 12, 1987
10.13(1) Office Building Lease II between 405 North Bedford Drive, Ltd. and
Saint John's Hospital and Health Center dated as of October 12, 1987
10.14(1) Office Building Lease III between 405 North Bedford Drive, Ltd. and
Saint John's Hospital and Health Center dated as of December 1, 1987
10.15(1) Investment Banking and Financial Advisory Agreement between G&L
Development and Gruntal & Co., Incorporated
10.16(1) Security Agreement dated as of December 16, 1993 by and between
Daniel M. Gottlieb, Steven D. Lebowitz and Milner Investment
Corporation
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
10.17(2) Security Agreement dated as of December 16, 1993 by and between
Daniel M. Gottlieb, Steven D. Lebowitz and Reese L. Milner II
10.18(2) Security Agreement dated as of December 16, 1993 by and between
Daniel M. Gottlieb, Steven D. Lebowitz and Reese L. Milner II
10.19(2) Security Agreement dated as of December 16, 1993 by and between
Daniel M. Gottlieb, Steven D. Lebowitz and Reese L. Milner II, Helen
Milner, and John Milner, as Trustees of the Milner Trust
10.20(2) Security Agreement dated as of December 16, 1993 by and between
Daniel M. Gottlieb, Steven D. Lebowitz and Reese L. Milner II
10.21(4) Amended and Restated Mortgage Loan Agreement by and between G&L
Realty Financing Partnership II, L.P., as Borrower, and Nomura Asset
Capital Corporation, as Lender, dated as of October 31, 1995
10.22(4) Revolving Loan Agreement by and between G&L Realty Partnership, L.P.
and Tokai Bank of California dated as of August 11, 1995
10.23(4) Property Management Agreement between G&L Realty Financing
Partnership II, L.P., as owner, and G&L Realty Partnership, L.P., as
agent, made August 10, 1995
10.24(5) Commitment Letter between G&L Realty Partnership, L. P. and Nomura
Asset Capital Corporation, dated as of September 29, 1995
10.25(5) Loan and Security Agreement between G&L Realty Partnership, L. P. and
GMAC Commercial Mortgage Corporation, dated as of December 5, 1995
10.26(5) Note in the amount of $14,000,000 executed by G&L Realty Partnership,
L. P. in favor of GMAC Commercial Mortgage Corporation, dated as of
December 5, 1995
10.27(5) Notification and Consent Agreement among G&L Realty Partnership, L.
P., GMAC Commercial Mortgage Corporation, and Nomura International
Trust Company, dated as of December 5, 1995
10.28(5) Assignment of Bond executed by G&L Realty Partnership, L. P., in
favor of GMAC Commercial Mortgage Corporation
10.27(6) Agreement of Purchase and Sale of Membership Interest dated April 26,
1996, between Milner Investment Corporation and G&L Realty
Partnership, L.P.
10.28(7) Agreement for Deed in Lieu of Foreclosure by and among G&L Realty
Partnership, L.P., a Delaware Limited Partnership, and Loan Asset
Structured Trust I, a Delaware trust, dated as of May 24, 1996
10.29(7) Property Management Agreement by and between Loan Asset Structured
Trust I, a Delaware trust, and G&L Realty Partnership, L.P., a
Delaware Limited Partnership, dated as of May 24, 1996
10.30(8) Mortgage Loan Agreement dated as of May 24, 1996 by and between G&L
Medical Partnership, L.P. as Borrower and Nomura Asset Capital
Corporation as Lender
10.31(8) Agreement of Purchase and Sale of Membership Interest dated April 26,
1996 by and between Milner Investment Corporation as Seller and G&L
Realty Partnership, L.P. as Buyer
10.32(8) Letter of Agreement regarding purchase of Tustin Hospital to 445
North Bedford Drive, LLC from G&L Realty Partnership, L.P., dated
June 12, 1996
10.33(8) Redemption Agreement by and between G&L Realty Partnership, L.P. and
445 Bedford, LLC, dated as of June 27, 1996
10.34(8) Property Contribution Agreement by and between G&L Realty
Partnership, L.P. as Purchaser and 445 Bedford, LLC as Seller, dated
as of June 28, 1996
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
10.35(8) Deed of Trust, Assignment of Rents, Security Agreement and Fixture
Filing between 445 Bedford, LLC and G&L Realty Partnership, L.P. as
tenants in common ("Trustor"), Chicago Title Company ("Trustee"),
and Tokai Bank of California ("Beneficiary"), made to be effective
on June 12, 1996
10.36(9) Agreement of Purchase and Sale by and between Loan Asset Structured
Trust I, a Delaware trust ("Seller") and G&L Medical Partnership,
L.P., a Delaware limited partnership ("Buyer"), dated August 29,
1996
10.37(9) Grant Deed in which Loan Asset Structured Trust I, a Delaware trust
("Grantor"), grants certain real property to G&L Medical
Partnership, L.P., a Delaware limited partnership ("Grantee"),
recorded August 30, 1996
10.38(10) Limited Liability Company Agreement by and between G&L Realty
Partnership, L.P., a Delaware limited partnership, and Property
Acquisition Trust I, a Delaware business trust, for the purpose of
creating a limited liability company to be named GLN Capital Co.,
LLC, dated as of November 25, 1996
10.39(10) Limited Liability Company Agreement by and between G&L Realty
Partnership, L.P., a Delaware limited partnership, and PHP
Healthcare Corporation, a Delaware corporation, for the purpose of
creating a limited liability company to be named GL/PHP, LLC, dated
as of February 26, 1997
10.40(10) First Amendment To Limited Liability Company Agreement entered into
as of March 31, 1997 by and between G&L Realty Partnership, L.P., a
Delaware limited partnership, and Property Acquisition Trust I, a
Delaware business trust, for the purpose of amending that certain
Limited Liability Company Agreement of GLN Capital Co., LLC dated
as of November 25, 1996
10.41(10) Bond Purchase Agreement dated as of March 31, 1997 by and between
GLN Capital Co., LLC (as Buyer) and G&L Realty Partnership, L.P.
(as Seller)
10.42 Option Agreement, dated as of February 28, 1997, by and among G&L
Realty Partnership L.P., GLN Capital Co., LLC and PHP Healthcare
Corporation
**12 Computation of ratio of earnings to fixed charges
21(5) List of subsidiaries
*23.1 Consent of Piper & Marbury L.L.P. (included in their opinion to be
filed as Exhibit 5.1)
*23.2 Consent of Gibson, Dunn & Crutcher LLP (included in their opinion
to be filed as Exhibit 8.1)
23.3 Consent of Deloitte & Touche LLP, independent public accountants
**24 Power of Attorney (included on pages II-7 and II-8 of the Company's
Registration Statement on Form S-11, filed on April 10, 1997)
**27 Financial Data Schedule
</TABLE>
- --------
* To be filed by amendment.
** Previously filed.
(1) Filed as an exhibit to the Company's Registration Statement on Form S-11
and amendments thereto (File No. 33-68984) and incorporated herein by
reference.
(2) Filed as an exhibit to the Company's Annual Report on Form 10-K for the
year ended December 31, 1993 and incorporated herein by reference.
(3) Filed as an exhibit to the Company's Annual Report on Form 10-K for the
year ended December 31, 1994 and incorporated herein by reference.
(4) Filed as an exhibit to the Company's Quarterly Report on Form 10-Q for
the quarter ended September 30, 1995 and incorporated herein by
reference.
(5) Filed as an exhibit to the Company's Annual Report on Form 10-K for the
year ended December 31, 1995 and incorporated herein by reference.
<PAGE>
(6) Filed as an exhibit to the Company's Quarterly Report on Form 10-Q for the
quarter ended March 31, 1996 and incorporated herein by reference.
(7) Filed as an exhibit to the Company's Form 8-K dated May 24, 1996 and
incorporated herein by reference.
(8) Filed as an exhibit to the Company's Quarterly Report on Form 10-Q for the
quarter ended June 30, 1996 and incorporated herein by reference.
(9) Filed as an exhibit to the Company's Form 8-K dated August 30, 1996 and
incorporated herein by reference.
(10) Filed as an exhibit to the Company's Annual Report on Form 10-K for the
year ended December 31, 1996 and incorporated herein by reference.
<PAGE>
EXHIBIT 4.1
FORM OF
G&L REALTY CORP.
ARTICLES SUPPLEMENTARY CLASSIFYING
1,380,000 SHARES OF
% SERIES A CUMULATIVE PREFERRED STOCK
Pursuant to Section 2-105 of the Maryland General Corporation Law (the
"MGCL"), G&L Realty Corp., a corporation organized and existing under the MGCL
(the "Company"), and having its principal office in the State of Maryland at c/o
CSC-Lawyers Incorporating Service Company, 11 East Chase Street, Suite 9E,
Baltimore, Maryland 21202, does hereby certify to the Maryland State Department
of Assessments and Taxation (the "Department") that:
FIRST: Pursuant to the authority granted to and vested in the Board of
Directors of the Company by Article IV of the Company's Articles of Amendment
and Restatement of the Charter filed with the Department on October 29, 1993
(the "Charter") and Section 2-105 of the MGCL, the Board of Directors has, at a
meeting duly called and noticed at which a quorum of directors was present and
acting throughout, adopted resolutions classifying and designating a separate
series of authorized but unissued Preferred Stock of the Company as "___% Series
A Cumulative Preferred Stock, par value $.01 per share" and setting the
preferences, conversion and other rights, voting powers, restrictions and
limitations as to dividends, qualifications and terms and conditions of
redemption of such ___% Series A Cumulative Preferred Stock and authorizing the
issuance of up to 1,380,000 shares of ___% Series A Cumulative Preferred Stock.
SECOND: The series of Preferred Stock of the Company created by the
resolutions duly adopted by the Board of Directors of the Company referred to in
Article I of these Articles Supplementary shall have the following designation,
number of shares, preferences, conversion and other rights, voting powers,
restrictions and limitations as to dividends, qualifications, terms and
conditions of redemption and other terms and conditions.
1. Designation and Number. A series of Preferred Stock, designated the
----------------------
"___% Series A Cumulative Preferred Stock" (the "Series A Preferred Stock"), is
hereby established. The number of shares of the Series A Preferred Stock shall
be 1,380,000.
2. Maturity. The Series A Preferred Stock has no stated maturity and will
--------
not be subject to any sinking fund or mandatory redemption.
3. Rank. The Series A Preferred Stock will, with respect to dividend
----
rights and rights upon liquidation, dissolution or winding up of the Company,
rank (i) senior to all classes or series of Common Stock of the Company, and to
all equity securities issued by the Company the terms of which specifically
provide that such equity securities rank junior to the Series A Preferred Stock
with respect to dividend rights or rights upon liquidation, dissolution or
winding up of the Company; (ii) on a parity with all equity securities issued by
the Company the terms of
<PAGE>
which specifically provide that such equity securities rank on a parity with the
Series A Preferred Stock with respect to dividend rights or rights upon
liquidation, dissolution or winding up of the Company; and (iii) junior to all
existing and future indebtedness of the Company. The term "equity securities"
does not include convertible debt securities, which will rank senior to the
Series A Preferred Stock prior to conversion.
4. Dividend Rights.
---------------
(a) Holders of shares of the Series A Preferred Stock are entitled to
receive, when and as declared by the Board of Directors (or a duly authorized
committee thereof), out of funds legally available for the payment of dividends,
preferential cumulative cash dividends at the rate of ___% per annum of the
Liquidation Preference (as defined below) per share (equivalent to a fixed
annual amount of $_____ per share). Dividends on the Series A Preferred Stock
shall be cumulative from the date of original issue and shall be payable monthly
in arrears on or before the 15th day of each month, or, if not a business day,
the next succeeding business day (each, a "Dividend Payment Date"), commencing
on June 15, 1997. Such dividend and all subsequent dividends payable on the
Series A Preferred Stock will be computed on the basis of a 360-day year
consisting of twelve 30-day months. Dividends will be payable to holders of
record as they appear in the stock records of the Company at the close of
business on the applicable record date, which shall be the first day of the
calendar month in which the applicable Dividend Payment Date falls or on such
other date designated by the Board of Directors of the Company for the payment
of dividends that is not more than 30 nor less than 10 days prior to such
Dividend Payment Date (each, a "Dividend Record Date").
(b) No dividends on shares of Series A Preferred Stock shall be
declared by the Board of Directors or paid or set apart for payment by the
Company at such time as the terms and provisions of any agreement of the
Company, including any agreement relating to its indebtedness, prohibits such
declaration, payment or setting apart for payment or provides that such
declaration, payment or setting apart for payment would constitute a breach
thereof or a default thereunder, or if such declaration or payment shall be
restricted or prohibited by law.
(c) Notwithstanding the foregoing, dividends on the Series A Preferred
Stock will accrue whether or not the Company has earnings, whether or not there
are funds legally available for the payment of such dividends and whether or not
such dividends are declared. Accrued but unpaid dividends on the Series A
Preferred Stock will not bear interest and holders of the Series A Preferred
Stock will not be entitled to any distributions in excess of full cumulative
distributions described above. Except as set forth in the next sentence, no
dividends will be declared or paid or set apart for payment on any capital stock
of the Company or any other series of Preferred Stock ranking, as to dividends,
on a parity with or junior to the Series A Preferred Stock (other than a
dividend in shares of the Company's Common Stock or in shares of any other class
of stock ranking junior to the Series A Preferred Stock as to dividends and upon
liquidation) for any period unless full cumulative dividends have been or
contemporaneously are declared and paid or declared and a sum sufficient for the
payment thereof is set apart for such payment on the Series A Preferred Stock
for all past dividend periods and the then current dividend period. When
dividends are not paid in full (or a sum sufficient for such full payment is not
so set apart) upon the Series A Preferred Stock and the shares of any other
series of Preferred Stock ranking on a
2
<PAGE>
parity as to dividends with the Series A Preferred Stock, all dividends declared
upon the Series A Preferred Stock and any other series of Preferred Stock
ranking on a parity as to dividends with the Series A Preferred Stock shall be
declared pro rata so that the amount of dividends declared per share of Series A
Preferred Stock and such other series of Preferred Stock shall in all cases bear
to each other the same ratio that accrued dividends per share on the Series A
Preferred Stock and such other series of Preferred Stock (which shall not
include any accrual in respect of unpaid dividends for prior dividend periods if
such Preferred Stock does not have a cumulative dividend) bear to each other.
(d) Except as provided in the immediately preceding paragraph, unless
full cumulative dividends on the Series A Preferred Stock have been or
contemporaneously are declared and paid or declared and a sum sufficient for the
payment thereof is set apart for payment for all past dividend periods and the
then current dividend period, no dividends (other than in shares of Common Stock
or other shares of capital stock ranking junior to the Series A Preferred Stock
as to dividends and upon liquidation) shall be declared or paid or set aside for
payment nor shall any other distribution be declared or made upon the Common
Stock, or any other capital stock of the Company ranking junior to or on a
parity with the Series A Preferred Stock as to dividends or upon liquidation,
nor shall any shares of Common Stock, or any other shares of capital stock of
the Company ranking junior to or on a parity with the Series A Preferred Stock
as to dividends or upon liquidation be redeemed, purchased or otherwise acquired
for any consideration (or any moneys be paid to or made available for a sinking
fund for the redemption of any such shares) by the Company (except by conversion
into or exchange for other capital stock of the Company ranking junior to the
Series A Preferred Stock as to dividends and upon liquidation or redemptions for
the purpose of preserving the Company's qualification as a real estate
investment trust ("REIT")). Holders of shares of the Series A Preferred Stock
shall not be entitled to any dividend, whether payable in cash, property or
stock, in excess of full cumulative dividends on the Series A Preferred Stock as
provided above. Any dividend payment made on shares of the Series A Preferred
Stock shall first be credited against the earliest accrued but unpaid dividend
due with respect to such shares which remains payable.
5. Liquidation Preference. Upon any voluntary or involuntary liquidation,
----------------------
dissolution or winding up of the affairs of the Company, the holders of shares
of Series A Preferred Stock are entitled to be paid out of the assets of the
Company legally available for distribution to its shareholders a liquidation
preference of $25 per share (the "Liquidation Preference"), plus an amount equal
to any accrued and unpaid dividends to the date of payment, but without
interest, before any distribution of assets is made to holders of Common Stock
or any other class or series of capital stock of the Company that ranks junior
to the Series A Preferred Stock as to liquidation rights. The Company will
promptly provide to the holders of Series A Preferred Stock written notice of
any event triggering the right to receive such Liquidation Preference. After
payment of the full amount of the Liquidation Preference, plus any accrued and
unpaid dividends to which they are entitled, the holders of Series A Preferred
Stock will have no right or claim to any of the remaining assets of the Company.
The consolidation or merger of the Company with or into any other corporation,
trust or entity or of any other corporation with or into the Company, or the
sale, lease or conveyance of all or substantially all of the property or
business of the Company, shall not be deemed to constitute a liquidation,
dissolution or winding up of the Company.
3
<PAGE>
In determining whether a distribution (other than upon voluntary or
involuntary liquidation) by dividend, redemption or other acquisition of shares
of stock of the Company or otherwise is permitted under the Maryland General
Corporation Law, as amended (the "MGCL"), and if permitted by the MGCL, no
effect shall be given to amounts that would be needed, if the Company were to be
dissolved at the time of the distribution, to satisfy the preferential rights
upon distribution of holders of shares of stock of the Company whose
preferential rights upon distribution are superior to those receiving the
distribution.
6. Redemption.
----------
(a) The Series A Preferred Stock is not redeemable prior to June 1,
2001. On and after June 1, 2001, the Company, at its option upon not less than
30 nor more than 60 days' written notice, may redeem shares of the Series A
Preferred Stock, in whole or in part, at any time or from time to time, for cash
at a redemption price of $25 per share, plus all accrued and unpaid dividends
thereon to the date fixed for redemption (except with respect to Excess Stock
(as defined in the Charter) previously exchanged for Series A Preferred Stock
pursuant to the Charter), without interest. Holders of Series A Preferred Stock
to be redeemed shall surrender such Series A Preferred Stock at the place
designated in such notice and shall be entitled to the redemption price and any
accrued and unpaid dividends payable upon such redemption following such
surrender. If notice of redemption of any shares of Series A Preferred Stock
has been given and if the funds necessary for such redemption have been set
aside by the Company in trust for the benefit of the holders of any shares of
Series A Preferred Stock so called for redemption, then from and after the
redemption date dividends will cease to accrue on such shares of Series A
Preferred Stock, such shares of Series A Preferred Stock shall no longer be
deemed outstanding and all rights of the holders of such shares will terminate,
except the right to receive the redemption price. If less than all of the
outstanding Series A Preferred Stock is to be redeemed, the Series A Preferred
Stock to be redeemed shall be selected pro rata (as nearly as may be practicable
without creating fractional shares).
(b) Unless full cumulative dividends on all shares of Series A
Preferred Stock shall have been or contemporaneously are declared and paid or
declared and a sum sufficient for the payment thereof set apart for payment for
all past dividend periods and the then current dividend period, no shares of
Series A Preferred Stock shall be redeemed unless all outstanding shares of
Series A Preferred Stock are simultaneously redeemed and the Company shall not
purchase or otherwise acquire directly or indirectly any shares of Series A
Preferred Stock (except by exchange for capital stock of the Company ranking
junior to the Series A Preferred Stock as to dividends and upon liquidation);
provided, however, that the foregoing shall not prevent the purchase by the
- -------- -------
Company of Excess Stock previously exchanged for Series A Preferred Stock
pursuant to the Charter in order to ensure that the Company continues to meet
the requirements for qualification as a REIT, or the purchase or acquisition of
shares of Series A Preferred Stock pursuant to a purchase or exchange offer made
on the same terms to holders of all outstanding shares of Series A Preferred
Stock. So long as no dividends are in arrears, the Company shall be entitled at
any time and from time to time to repurchase shares of Series A Preferred Stock
in open-market transactions duly authorized by the Board of Directors and
effected in compliance with applicable laws.
4
<PAGE>
(c) Notice of redemption will be given by publication in a newspaper
of general circulation in the City of New York, such publication to be made once
a week for two successive weeks commencing not less than 30 nor more than 60
days prior to the redemption date. A similar notice will be mailed by the
Company, postage prepaid, not less than 30 nor more than 60 days prior to the
redemption date, addressed to the respective holders of record of the Series A
Preferred Stock to be redeemed at their respective addresses as they appear on
the stock transfer records of the Company. No failure to give such notice or
any defect therein or in the mailing thereof shall affect the validity of the
proceedings for the redemption of any shares of Series A Preferred Stock except
as to the holder to whom notice was defective or not given. Each notice shall
state: (i) the redemption date; (ii) the redemption price; (iii) the number of
shares of Series A Preferred Stock to be redeemed; (iv) the place or places
where the Series A Preferred Stock is to be surrendered for payment of the
redemption price; and (v) that dividends on the shares to be redeemed will cease
to accrue on such redemption date. If less than all of the Series A Preferred
Stock held by any holder is to be redeemed, the notice mailed to such holder
shall also specify the number of shares of Series A Preferred Stock held by such
holder to be redeemed.
(d) Immediately prior to any redemption of Series A Preferred Stock,
the Company shall pay, in cash, any accumulated and unpaid dividends through the
redemption date, unless a redemption date falls after a Dividend Record Date and
prior to the corresponding Dividend Payment Date, in which case each holder of
Series A Preferred Stock at the close of business on such Dividend Record Date
shall be entitled to the dividend payable on such shares on the corresponding
Dividend Payment Date notwithstanding the redemption of such shares before such
Dividend Payment Date.
(e) Excess Stock previously exchanged for Series A Preferred Stock
pursuant to the Charter may be redeemed, in whole or in part, at any time when
outstanding shares of Series A Preferred Stock are being redeemed, for cash at a
redemption price of $25 per share, but excluding accrued and unpaid dividends on
such Excess Stock, without interest. Such Excess Stock shall be redeemed in
such proportion and in accordance with such procedures as shares of Series A
Preferred Stock are being redeemed.
7. Voting Rights.
-------------
(a) Holders of the Series A Preferred Stock will not have any voting
rights, except as set forth below.
(b) Whenever dividends on any shares of Series A Preferred Stock shall
be in arrears for eighteen or more months (a "Preferred Dividend Default"), the
number of directors then constituting the Board of Directors shall automatically
be increased in accordance with the Bylaws of the Company by two (if not already
increased by reason of a similar arrearage with respect to any Parity Preferred
(as hereinafter defined)). The holders of such shares of Series A Preferred
Stock (voting separately as a class with all other series of Preferred Stock
ranking on a parity with the Series A Preferred Stock as to dividends or upon
liquidation ("Parity Preferred") upon which like voting rights have been
conferred and are exercisable) will be entitled to vote separately as a class,
in order to fill the vacancies thereby created, for the election of two
directors
5
<PAGE>
of the Company (the "Preferred Stock Directors") at a special meeting called by
the holders of record of at least 20% of the Series A Preferred Stock or the
holders of record of at least 20% of any series of Parity Preferred so in
arrears (unless such request is received less than 90 days before the date fixed
for the next annual or special meeting of the shareholders) or at the next
annual meeting of shareholders, and at each subsequent annual meeting until all
dividends accumulated on such shares of Series A Preferred Stock for the past
dividend periods and the dividend for the then current dividend period shall
have been fully paid or declared and a sum sufficient for the payment thereof
set aside for payment. In the event the directors of the Company are divided
into classes, each such vacancy shall be apportioned among the classes of
directors to prevent stacking in any one class and to insure that the number of
directors in each of the classes of directors, are as equal as possible. Each
Preferred Stock Director, as a qualification for election as such (and
regardless of how elected) shall submit to the Board of Directors of the Company
a duly executed, valid, binding and enforceable letter of resignation from the
Board of Directors, to be effective upon the date upon which all dividends
accumulated on such shares of Series A Preferred Stock and Parity Preferred for
the past dividend periods and the dividend for the then current dividend period
shall have been fully paid or declared and a sum sufficient for the payment
thereof set aside for payment, whereupon the terms of office of all persons
elected as Preferred Stock Directors by the holders of the Series A Preferred
Stock and any Parity Preferred shall, upon the effectiveness of their respective
letters of resignation, forthwith terminate, and the number of directors then
constituting the Board of Directors shall be reduced accordingly. A quorum for
any such meeting shall exist if at least a majority of the outstanding shares of
Series A Preferred Stock and shares of Parity Preferred upon which like voting
rights have been conferred and are exercisable are represented in person or by
proxy at such meeting. Such Preferred Stock Directors shall be elected upon the
affirmative vote of a plurality of the shares of Series A Preferred Stock and
such Parity Preferred present and voting in person or by proxy at a duly called
and held meeting at which a quorum is present. If and when all accumulated
dividends and the dividend for the then current dividend period on the Series A
Preferred Stock shall have been paid in full or declared and set aside for
payment in full, the holders thereof shall be divested of the foregoing voting
rights (subject to revesting in the event of each and every Preferred Dividend
Default) and, if all accumulated dividends and the dividend for the then current
dividend period have been paid in full or declared and set aside for payment in
full on all series of Parity Preferred upon which like voting rights have been
conferred and are exercisable, the term of office of each Preferred Stock
Director so elected shall terminate. Any Preferred Stock Director may be removed
at any time with or without cause by, and shall not be removed otherwise than
by, the vote of the holders of record of a majority of the outstanding shares of
the Series A Preferred Stock when they have the voting rights described above
(voting separately as a class with all series of Parity Preferred Upon which
like voting rights have been conferred and are exercisable). So long as a
Preferred Dividend Default shall continue, any vacancy in the office of a
Preferred Stock Director may be filled by written consent of the Preferred Stock
Director remaining in office, or if none remains in office, by a vote of the
holders of record of a majority of the outstanding shares of Series A Preferred
Stock when they have the voting rights described above (voting separately as a
class with all series of Parity Preferred upon which like voting rights have
been conferred and are exercisable). The Preferred Stock Directors shall each be
entitled to one vote per director on any matter.
6
<PAGE>
(c) So long as any shares of Series A Preferred Stock remain
outstanding, the Company will not, without the affirmative vote or consent of
the holders of at least two-thirds of the shares of the Series A Preferred Stock
outstanding at the time, given in person or by proxy, either in writing or at a
meeting (voting separately as a class), amend, alter or repeal the provisions of
the Charter or the Articles Supplementary, whether by merger, consolidation or
otherwise (an "Event"), so as to materially and adversely affect any right,
preference, privilege or voting power of the Series A Preferred Stock or the
holders thereof; provided, however, that with respect to the occurrence of any
-------- -------
Event set forth above, so long as the Series A Preferred Stock (or any
equivalent class or series of stock issued by the surviving corporation in any
merger or consolidation to which the Company became a party) remains outstanding
with the terms thereof materially unchanged, the occurrence of any such Event
shall not be deemed to materially and adversely affect such rights, preferences,
privileges or voting power of holders of the Series A Preferred Stock and
provided, further, that (i) any increase in the amount of the authorized
Preferred Stock or the creation or issuance of any other series of Preferred
Stock, or (ii) any increase in the amount of authorized shares of such series,
in each case ranking on a parity with or junior to the Series A Preferred Stock
with respect to payment of dividends or the distribution of assets upon
liquidation, dissolution or winding up, shall not be deemed to materially and
adversely affect such rights, preferences, privileges or voting powers.
(d) The foregoing voting provisions will not apply if, at or prior to
the time when the act with respect to which such vote would otherwise be
required shall be effected, all outstanding shares of Series A Preferred Stock
shall have been redeemed or called for redemption upon proper notice and
sufficient funds shall have been deposited in trust to effect such redemption.
(e) Except as expressly stated in these Articles Supplementary, the
Series A Preferred Stock shall not have any relative, participating, optional or
other special voting rights and powers and the consent of the holders thereof
shall not be required for the taking of any corporate action, including but not
limited to, any merger or consolidation involving the Company or a sale of all
or substantially all of the assets of the Company, irrespective of the effect
that such merger, consolidation or sale may have upon the rights, preferences or
voting power of the holders of the Series A Preferred Stock.
8. Conversion. The Series A Preferred Stock is not convertible into or
----------
exchangeable for any other property or securities of the Company.
9. Restrictions of Transfer. The shares of Series A Preferred Stock shall
------------------------
be subject to the limitations on ownership and transfer set forth in Article IV
of the Charter of the Company.
THIRD: These Articles Supplementary have been approved by the Board of
Directors in the manner and by the vote required by law.
FOURTH: The undersigned President of the Company acknowledges these
Articles Supplementary to be the corporate act of the Company and, as to all
matters or facts required to be verified under oath, the undersigned President
of the Company acknowledges that to the best
7
<PAGE>
of his knowledge, information and belief, these matters and facts are true in
all material respects and that this statement is made under the penalties for
perjury.
8
<PAGE>
IN WITNESS WHEREOF, G&L REALTY CORP. has caused these Articles
Supplementary to be executed under seal in its name and on its behalf by its
President and attested to by its Secretary on this ___ day of _____, 1997.
G&L REALTY CORP.
By:
--------------------------------
Steven D. Lebowitz
President
THE UNDERSIGNED, Chief Accounting Officer, Treasurer and Secretary of G&L
Realty Corp., who executed on behalf of said corporation the foregoing Articles
Supplementary, of which this certificate is made a part, hereby acknowledges, in
the name and on behalf of said corporation, the foregoing Articles Supplementary
to be the corporate act of said corporation and further certify that, to the
best of his knowledge, information and belief, the matters and facts set forth
therein with respect to the approval thereof or otherwise required to be
verified under oath are true in all material respects, under the penalties of
perjury.
By:_________________________________________________
Quentin Thompson
Chief Accounting Officer, Treasurer
and Secretary
9
<PAGE>
EXHIBIT 4.2
[FORM OF PREFERRED STOCK CERTIFICATE]
[FRONT OF CERTIFICATE]
<TABLE>
<CAPTION>
_____% SERIES A _____% SERIES A
CUMULATIVE PREFERRED STOCK CUMULATIVE PREFERRED
LIQUIDATION PREFERENCE STOCK
$25 PER SHARE LIQUIDATION PREFERENCE
$25 PER SHARE
Number Shares
------ ------
<C> <S>
The shares evidenced hereby are subject
to restrictions on ownership and
transfer as more fully described on the
reverse side hereof.
[LOGO] This Certificate is transferrable in
----------------------- Los Angeles, California or New York,
Incorporated Under the New York
Laws of the State of Maryland
</TABLE>
CUSIP
See reverse for certain definitions
G&L REALTY CORP
This is to certify that ________________________________ is the owner of
___________ fully paid and non-assessable shares of the ______% Series A
Cumulative Preferred Stock Liquidation Preference $25 per share of G&L REALTY
CORP. (the "Corporation") transferrable on the books of the Corporation in
person or by duly authorized attorney upon surrender of this Certificate
properly endorsed. This Certificate and the shares represented hereby are issued
and shall be held subject to all of the provisions of the Articles of Amendment
and Restatement (the "Charter") of the Corporation and its Bylaws, as amended,
to all of which the holder, by acceptance hereof, assents. This Certificate is
not valid unless countersigned and registered by the Transfer Agent and
Registrar. Witness the facsimile seal of the Corporation and the facsimile
signatures of its duly authorized officers.
Dated:
<TABLE>
<CAPTION>
<S> <C>
Countersigned and registered: [Facsimile Signature]
CHASE MELLON SHAREHOLDER SERVICES ------------------------
Chief Executive Officer
Transfer Agent and Registrar
By:
-------------------------
Authorized Signature
[Facsimile Signature]
------------------------
Chief Accounting Officer,
Treasurer and Secretary
</TABLE>
<PAGE>
[REVERSE OF CERTIFICATE]
G&L REALTY CORP.
CLASSES OF STOCK
The Corporation is authorized to issue more than one class of capital stock
consisting of Common Stock, Excess Stock and one or more series of Preferred
Stock. The Board of Directors of the Corporation is authorized to determine the
designations and any preferences, conversion and other rights, voting powers,
restrictions, limitations as to dividends, terms and conditions of redemption of
any class or series of Preferred Stock before the issuance of such class or
series. The Corporation will furnish, without charge, to any shareholder making
a written request therefore, a written statement of the designations and any
preferences, conversion and other rights, voting powers, restrictions,
limitations as to dividends, qualifications and terms and conditions of
redemption of each class or series of stock which the Corporation is authorized
to issue. Requests for such written statements may be directed to the secretary
of the Corporation at the principal office of the Corporation.
RESTRICTIONS ON OWNERSHIP AND TRANSFER
The shares represented by this certificate are subject to restrictions on
ownership and transfer for the purpose of the Corporation's maintenance of its
status as a "real estate investment trust" under the Internal Revenue Code of
1986, as amended. Except as otherwise provided pursuant to the Charter of the
Corporation, no person may beneficially own or constructively own in excess of
9.8% of the number or value (whichever is more restrictive) of the then-
outstanding shares of capital stock of the Corporation, with certain further
restrictions and exceptions set forth in the Corporation's Charter. Transfer or
ownership of shares in violation of the foregoing restrictions causes such
shares to be automatically converted into Excess Stock. Shares of Excess Stock
have limited economic rights and no voting rights, and the Corporation has an
option to redeem Excess Stock under certain circumstances. In addition,
notwithstanding any other provision of the Charter of the Corporation to the
contrary, any purported acquisition of shares of stock of the Corporation that
would result in the disqualification of the Corporation as a real estate
investment trust shall be null and void ab initio. All capitalized terms in this
legend have the meanings ascribed to them in the Charter of the Corporation, a
copy of which, including the restrictions on transfer and ownership, will be
furnished, without charge, to each holder of shares of stock of the Corporation
who directs a request therefore to the secretary of the Corporation at the
principal office of the Corporation.
The following abbreviations, when used in the inscription of the face of
this Certificate, shall be construed as though they were written out in full
according to applicable laws and regulations:
<TABLE>
<S> <C>
TEN COMM -- as tenants in common UNIF GIFT MIN ACT ______ (Cust) Custodian_______
TEN ENT -- as tenants by the entireties (Minor) under Uniform Gifts to
JT TEN -- as joint tenants with Minors Act _________ (State)
rights of survivorship
and not as tenants in UNIF TRF MIN ACT ______ (Cust) Custodian (until age ___)
common _____________(Minor) under Uniform
Transfers to Minors Act _____________
(State)
</TABLE>
Additional abbreviations may also be used though not in the above list.
FOR VALUE RECEIVED, _____________________________ hereby sell, assign and
transfer unto
PLEASE INSERT SOCIAL SECURITY NUMBER OR OTHER
<PAGE>
IDENTIFYING NUMBER OF ASSIGNEE
- ----------------------------------------------------
- --------------------------------------------------------------------------------
(Please print or typewrite name and address including postal zip code of
assignee)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
shares represented by this Certificate, and do hereby irrevocably
- -------------
constitute and appoint attorney to transfer the said
-----------------------------
shares on the books of the Corporation with full power in substitution in the
premises.
Date: X
---------------------------- -----------------------------------
X
-----------------------------------
NOTICE: The signature(s) to this assignment
must correspond with the name(s) as
written upon the face of the
certificate in every particular,
without alteration or enlargement or
any change whatever.
Signature(s) Guaranteed
By
--------------------------------------------------
The signature(s) should be guaranteed by an eligible
guarantor institution (banks, stockbrokers, savings
and loan associations and credit unions with membership
in an approved signature guarantee medallion program),
pursuant to S.E.C. Rule 17Ad-15.
<PAGE>
EXHIBIT 10.42
OPTION AGREEMENT
OPTION AGREEMENT, dated as of February 28, 1997, by and among G&L Realty
Partnership, L.P., a Delaware limited partnership ("G&L"). GLN Capital Co., LLC,
a ________________________ limited liability company and joint venture between
an affiliate of G&L and Nomura Asset Capital Corporation ("G&L"), and PHP
Healthcare Corporation, a Delaware corporation ("PHP").
RECITALS
--------
A. G&L, GLN, and PHP are the sole members of GL/PHP, LLC, a Delaware
limited liability company (the "Company"), formed pursuant to a Certificate of
Formation, dated February ___, 1997, and governed by a Limited Liability Company
Agreement between G&L and PHP, dated February 26, 1997, being entered into
simultaneously herewith (the "LLC Agreement").
B. G&L has assigned its membership interest in the Company to GLN as
security for a loan by GLN to G&L.
C. Simultaneously with the execution of this Option Agreement, PHP is
making a six-month bridge loan in the amount of $16,000,000 to the Company (the
"Bridge Loan"), evidenced by a promissory note and secured by a first deed of
trust on all real property owned by the Company.
D. G&L and GLN wish to grant to PHP an option to acquire G&L's, GLN's
and/or their affiliate's membership interests in the Company on the terms set
forth herein.
<PAGE>
AGREEMENT
---------
NOW, THEREFORE, in order to induce PHP to enter into the LLC Agreement and
make the Bridge Loan and for other good and valuable consideration, the receipt
and sufficiency of which are hereby acknowledged, the parties hereto hereby
agree as follows:
1. Option. G&L and GLN hereby grant to PHP an irrevocable option (the
------
"Option") to purchase, on the terms and subject to the conditions herein, all
membership interests in the Company owned by G&L, GLN, and/or any of their
affiliates (the "Membership Interests").
2. Exercise. PHP may exercise the Option by written notice to G&L and GLN
--------
(the "Exercise Notice") at any time on or before May 31, 1997, after which date,
the Option shall be null and void.
3. Purchase Price. If PHP exercises the Option, the purchase price to be
--------------
paid by PHP for the Membership Interests shall be equal to the sum of (x) 109%
of the aggregate amount of cash previously contributed to the Company in
respect of the Membership Interests, plus (y) reasonable out of pocket expenses
incurred by G&L and GLN in connection with the Company's activities, less (z)
amounts actually distributed to G&L and/or GLN with respect to such Membership
Interests.
4. Closing. Closing of the purchase by PHP of the Membership Interests
-------
shall take place at the place, date and time designated in the Exercise Notice
but not later than June 30, 1997 (subject to reasonable extension if necessary
to obtain governmental approvals). It is a condition to the purchase that PHP
shall have obtained a Federal Trade Commission staff interpretation to the
effect that G&L's acquisition and sale (viewed as a single transaction) of its
Membership Interest does not result in violation of the filing requirements of
the Hart Scott Rodino Antitrust
-2-
<PAGE>
Improvement Act (or, in the alternative, make a filing under such Act), and PHP
shall indemnify and save harmless G&L and GLN from and against any and all loss,
cost or liability arising from the absence of a Hart Scott Rodino filing.
5. Adjustments. (a) In the event the Option is not exercised before its
-----------
expiration and the Bridge Loan is refinanced on or before August 28, 1997, G&L
---
will pay PHP an amount calculated as follows: 3% per annum from February 28,
1997 to the date of such refinancing on $3,542,000.
(b) After the closing costs associated with the Company's acquisition,
leasing and financing of the Company's properties is known, (i) such costs shall
be allocated among the six properties in proportion to the price referred to in
paragraph 13 of the leases between the Company and PHP, (ii) such allocated
costs shall be added to the price referred to in such paragraph 13, (iii) the
initial fixed annual rent under such lease shall be increased by 11.5% of such
allocated amount, and (iv) the aggregate amount of the second mortgage
indebtedness of the Company to PHP shall be (x) increased by the excess of such
closing costs over $400,000, or (y) decreased by the excess of $400,000 over
such closing costs, and the notes and mortgages representing such indebtedness
modified accordingly.
6. Miscellaneous. The parties will cooperate and use their best efforts
-------------
to obtain any consents required to be obtained in order to consummate the
purchase of the Membership Interests by PHP. Any notices required hereunder
shall be provided in the manner set forth in Section 19 of the LLC Agreement.
This Agreement (i) shall be governed by Delaware law, (ii) may not be amended or
modified except by a written instrument signed by each of the parties hereto,
(iii) may
-3-
<PAGE>
not be assigned (except that PHP may assign its rights to its affiliates), (iv)
is binding on and inures to the benefit of the successors and permitted assigns
of the parties, (v) may be executed in two or more counterparts each of which
shall constitute an original and all of which shall be deemed to constitute one
and the same instrument.
IN WITNESS WHEREOF, each of the parties hereto has caused this Option
Agreement to be duly executed on its behalf as of the date first written above.
G&L REALTY PARTNERSHIP, L.P.
By: G&L Realty Corp., its General Partner
By: /s/ Gary Grabel
------------------------
Name: Gary Grabel
Title: Senior Vice President
PHP HEALTHCARE CORPORATION
By: /s/ Anthony M. Picini
-----------------------------
Name: Anthony M. Picini
Title: Chief Financial Officer
GLN Capital Co., LLC
By: /s/ Quentin Thompson
-----------------------------
Name: Quentin Thompson
Title: Treasurer
-4-
<PAGE>
EXHIBIT 23.3
CONSENT OF INDEPENDENT AUDITORS
We consent to the use in this Registration Statement of G & L Realty Corp.
on Form S-11 of our report dated February 10, 1997, appearing in the
Prospectus, which is part of this Registration Statement.
We also consent to the reference to us under the heading "Experts" in such
Prospectus.
/s/ Deloitte & Touche LLP
Los Angeles, California
April 25, 1997
