<PAGE>
FILED PURSUANT TO RULE 424(b)(1)
REGISTRATION NO. 333-38843
PROSPECTUS
1,200,000 SHARES
G & L REALTY CORP.
9.8% SERIES B CUMULATIVE PREFERRED STOCK
(LIQUIDATION PREFERENCE $25 PER SHARE)
LOGO
Dividends on the 9.8% Series B Cumulative Preferred Stock, par value $.01
per share (the "Series B Preferred Stock"), of G & L Realty Corp. (the
"Company") are cumulative from the date of original issue and are payable
monthly, commencing on January 15, 1998, to shareholders of record on the
first day of each month at the rate of 9.8% per annum of the $25 liquidation
preference (the "Liquidation Preference") per share (equivalent to a fixed
annual amount of $2.45 per share). See "Description of Series B 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 B
Preferred Stock is not redeemable prior to January 1, 2002. On and after that
date, the Company may redeem Series B 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 B 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 B 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 B 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 B Preferred Stock--Restrictions on Ownership and
Transfer."
All of the shares of Series B Preferred Stock to be sold in this Offering
(the "Offering") are being offered by the Company. The Series B Preferred
Stock has been approved for listing on the New York Stock Exchange ("NYSE")
under the symbol "GLR PrB" subject to official notice of issuance. Trading of
the Series B Preferred Stock is expected to commence within a thirty-day
period after the initial delivery of the Series B Preferred Stock. See
"Underwriting."
SEE "RISK FACTORS" BEGINNING ON PAGE 8 HEREIN FOR A DISCUSSION OF CERTAIN
RISKS THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE SERIES B
PREFERRED STOCK OFFERED HEREBY.
---------------
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................................. $25 $1 $24
- --------------------------------------------------------------------------------
Total(3).................................. $30,000,000 $1,200,000 $28,800,000
</TABLE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
(1) The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under 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 B 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
$34,500,000, $1,380,000 and $33,120,000, respectively. See "Underwriting."
---------------
The shares of Series B 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
delivery of certificates for the shares of Series B Preferred Stock will be
made on or about November 18, 1997 against payment therefor in immediately
available funds.
---------------
SUTRO & CO. INCORPORATED
MCDONALD & COMPANY
SECURITIES, INC. TUCKER ANTHONY
INCORPORATED
THE DATE OF THIS PROSPECTUS IS NOVEMBER 12, 1997
<PAGE>
TABLE OF CONTENTS
<TABLE>
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PAGE
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<S> <C>
Prospectus Summary........................................................ 1
Risk Factors.............................................................. 8
Recent Developments....................................................... 16
Use of Proceeds........................................................... 20
Capitalization............................................................ 20
Selected Consolidated Financial and Operating Data........................ 21
Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................... 23
The Company............................................................... 31
Organizational Structure.................................................. 35
Business and Properties................................................... 36
Policies with Respect to Certain Activities............................... 54
Price Range of Common Stock and Distributions............................. 55
Management................................................................ 56
Principal Stockholders of the Company..................................... 61
The Partnership Agreement................................................. 63
Certain Transactions...................................................... 64
Description of Series B Preferred Stock................................... 66
Federal Income Tax Considerations......................................... 75
Employee Plans and Individual Retirement Accounts......................... 87
Underwriting.............................................................. 90
Experts................................................................... 91
Legal matters............................................................. 91
Available Information..................................................... 91
Glossary.................................................................. 92
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 B
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 in this
Prospectus contains forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995, as amended (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, made either directly or through
joint ventures, in health care properties and in debt obligations secured by
health care properties. The Company's operations currently focus primarily on
opportunities to acquire or finance Medical Office Buildings (each an "MOB")
through its MOB operations, or senior care facilities through its Senior Care
operations.
The MOB business strategy is to acquire, develop, manage and lease a
portfolio of medical office buildings and related health care facilities. The
Company 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 portfolio
currently consists of approximately 703,000 rentable square feet. The Company
directly owns 20 MOB properties, exclusive of vacant land (the "Properties"),
including 19 high quality medical office buildings and an adjacent parking
facility. Fourteen of the Properties are located in California and six of the
Properties are located in New Jersey. Several of the Properties include retail
space on the ground level. As of September 30, 1997, the Properties were
approximately 94.0% leased to over 300 tenants.
The Senior Care business strategy is to capitalize on consolidation
opportunities in the senior care industry by providing short-term secured loans
to facilitate third-party acquisitions and by making selected equity
investments. The Company, directly and through an unconsolidated operating
venture with Nomura Asset Capital Corporation ("Nomura"), GLN Capital Co., LLC
(the "GLN Venture"), provides short-term financing and participating loans
secured by senior care facilities throughout the United States. The Company
also seeks to acquire direct ownership interests in senior care facilities. The
Company believes the extensive operating requirements and budgetary constraints
of Federal, state and local governments have created competitive pressures that
have caused a consolidation of the senior care industry. The Company's Senior
Care portfolio currently consists of (i) five loans secured by first deeds of
trust on senior care facilities located in California, Oregon, Idaho and
Maryland and (ii) direct ownership interests in a senior care facility located
in Arizona and a hospital located in California, consisting of an aggregate of
281 beds. The GLN Venture's Senior Care portfolio currently consists of two
secured loans with an aggregate outstanding balance of approximately $8.0
million including principal (at face value) and accrued, unpaid interest.
The Company intends to continue to grow by enhancing the operating
performance of its existing properties, by selectively acquiring MOB properties
and senior care facilities and by originating loans secured by senior care
facilities that meet the Company's underwriting criteria. Among the key
elements of the Company's growth strategy are improving rental income by
aggressively marketing available space and applying its rigorous investment
analysis to proposed acquisitions and short-term loans.
1
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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 21.8% 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% 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
The Company has recently (i) acquired or entered into agreements to acquire
13 properties located in four states, representing an aggregate potential
investment of approximately $58.1 million including estimated acquisition costs
of approximately $750,000; (ii) loaned or entered into agreements to loan money
for third party acquisitions of six senior care facilities located in three
states; (iii) leased a previously closed community hospital which the Company
acquired in June 1996; and (iv) received authorization from the Department of
Housing and Urban Development ("HUD") to originate and service HUD-insured
loans.
ACQUISITIONS
The Company, through consolidated affiliates, has recently acquired or
entered into negotiations to acquire several MOBs and senior care facilities.
In October 1997, the Company acquired three senior care facilities located in
Massachusetts (the "Hampden Properties") for a total consideration of
approximately $20.1 million. The GLN Venture previously held bonds which were
secured by these properties (the "Hampden Bonds"). See "Business and
Properties--Senior Care Lending--GLN Venture." The Company also has formed a
limited liability company, in which it has a 50% membership interest, in
anticipation of acquiring and renovating a 123-bed senior care facility located
in El Centro, California (the "El Centro Facility"). In addition, the Company
has (i) acquired the remaining 19.5% ownership interest in GL/PHP, LLC, a
Delaware limited liability company ("GL/PHP"), from its former joint venture
partner, PHP Healthcare Corporation, a NYSE listed company ("PHP"), for
$919,000, making GL/PHP a consolidated subsidiary on the Company's consolidated
financial statements; (ii) taken title to a 98-bed senior care facility located
in Phoenix, Arizona (the "Maryland Gardens Facility") through a deed in lieu of
foreclosure; (iii) acquired, through a newly formed limited liability company,
AV Medical Associates, LLC ("AV Medical"), a vacant parcel of land in
Aliso Viejo, California for approximately $2.2 million, on which AV Medical
will develop an MOB that has been preleased to an investment grade tenant; and
(iv) in conjunction with that property acquisition, directly acquired another
parcel of land in Aliso Viejo, California on which a retail building is to be
constructed and has been preleased to a nationally recognized retail operator.
See "Recent Developments--Acquisitions."
FINANCING
The Company has recently loaned or entered into agreements to loan money for
third-party acquisitions of several senior care facilities. The Company has
funded three loans totaling an aggregate of approximately $2.9 million, each of
which is secured by a senior care facility. One of these facilities is in
Oregon and the other two are located in Idaho. In addition, the Company has
entered into negotiations to fund a short-term loan for approximately $4.2
million secured by three senior care facilities in California. Concurrent with
the acquisition
2
<PAGE>
of the Hampden Properties, the Company assigned its participation interest in
promissory notes which were secured by third and fifth trust deeds on a senior
care facility in Kansas to the operator of that facility. In return, the
Company received an unsecured 7-year 10.0% note for $800,000 (the "$800,000
Note") from the operator and title to the accounts receivable of the former
owner of the facility, which had served as additional collateral for the
promissory notes and which the Company estimated to have a net realizable value
of approximately $400,000. The outstanding balance of the promissory notes was
approximately $1.3 million at September 30, 1997. See "Recent Developments--
Financing."
The Company has also received authorization to originate and service loans
financed by HUD, which the Company expects will improve its ability to provide
long-term financing for third party acquisitions of health care facilities. See
"Recent Developments--Financing."
OTHER ACTIVITIES
In addition to these acquisitions and financing activities, the Company has
also recently signed an agreement to lease the 183-bed hospital (the "Tustin
Hospital") to Pacific Health Corporation ("Pacific Health") pursuant to a 62-
month net lease, which provides for three five-year renewal options. The Tustin
Hospital along with two adjacent MOBs and a parcel of vacant land forms the
Tustin Hospital Medical Center (the "Tustin Properties"). See "Recent
Developments--Other Activities."
THE OFFERING
Securities Offered.......... 1,200,000 shares of 9.8% Series B Cumulative
Preferred Stock (1,380,000 shares if the
Underwriters' over-allotment option is exercised
in full). The Series B Preferred Stock has been
approved for listing on the NYSE under the symbol
"GLR PrB" subject to official notice of issuance.
Maturity.................... The Series B 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 B
Preferred Stock, approximately $28,350,000, will
be used to repay indebtedness of the Company,
fund new property acquisitions and provide
capital for short-term financing ventures.
Ranking..................... With respect to the payment of dividends and
amounts upon liquidation, the Series B Preferred
Stock will rank senior to the Common Stock of the
Company, par value $.01 per share (the "Common
Stock"), on a parity with the 10.25% Series A
Cumulative Preferred Stock of the Company, par
value $.01 per share (the "Series A Preferred
Stock") and 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 B Preferred Stock and junior to all
existing and future indebtedness of the Company.
Dividends................... Dividends on the Series B Preferred Stock are
cumulative from the date of original issuance and
are payable monthly on or before the 15th day of
each month commencing on January 15, 1998, to
stockholders of record on the first day of such
month, at the rate of 9.8% per annum of the
original stated Liquidation Preference of $25 per
share.
3
<PAGE>
Liquidation Preference...... The original stated Liquidation Preference is
equal to $25 per share. Upon a liquidation of the
Company, holders of Series B Preferred Stock are
also entitled to receive accrued and unpaid
dividends (whether or not declared).
Redemption.................. Except in certain circumstances relating to
preservation of the Company's status as a REIT,
the Series B Preferred Stock is not redeemable
prior to January 1, 2002. On and after such date,
the Series B 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 B Preferred Stock generally
will have no voting rights. However, whenever
dividends on any shares of Series B 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 B 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 B Preferred Stock that would be materially
adverse to the rights of holders of the Series B
Preferred Stock cannot be made without the
affirmative vote of holders of at least two-
thirds of the outstanding shares of Series B
Preferred Stock.
Conversion.................. The Series B Preferred Stock is not convertible
into or exchangeable for any other property or
securities of the Company.
4
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RISK FACTORS
An investment in the Series B 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 15 out of 22 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 loans secured by deeds of trust, including the
risk that a borrower will be unable to obtain permanent financing or
that a borrower's tenants will be unable to pay the rent or residents
will be unable to pay for services;
. the Company's dependence on the ability of certain tenants to make their
lease payments, which account for a significant portion of the Company's
revenues;
. risks associated with the burdens of compliance with health care
regulations and restrictions on the Company's tenants and borrowers and
the effect of these burdens on the tenants' and borrowers' ability to
make lease and loan payments;
. risks associated with leasing senior care facilities to operators,
including the risk that an operator might experience delays in obtaining
reimbursement from Medicare or Medicaid, and the effect of such delays
on the 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 and
senior care facility operators to make lease payments and the need to
renovate, maintain and relet space and pay the cost thereof;
. the need to secure continued access to capital in order to finance the
Company's investments and the increasing competition among lenders and
potential purchasers regarding attractive health care property
investments;
. 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;
. potential conflicts of interest between the Company and its principal
executive officers, Messrs. Gottlieb and Lebowitz;
. the potential liability of the Company for unknown or future
environmental liabilities; and
. potential losses that are not insured, not insurable or not economically
insurable, such as losses from seismic activity.
5
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SUMMARY CONSOLIDATED FINANCIAL DATA
The following table sets forth summary consolidated financial information for
the Company and its predecessor. Data presented as of September 30, 1997 and
1996 and as of December 31, 1996, 1995, 1994 and 1993 and for each of the nine
months ended September 30, 1997 and 1996 and 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 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 and for each of the years ended December 31, 1996, 1995,
1994, 1993 and 1992 has been derived from audited financial statements.
<TABLE>
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NINE MONTHS ENDED
SEPTEMBER 30, YEAR ENDED DECEMBER 31,
------------------ -------------------------------------------
1997 1996 1996 1995 1994 1993 1992
-------- -------- ------- ------- ------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C>
OPERATING DATA:
- ---------------
Revenue:
Rental................. $ 14,614 $ 11,396 $15,796 $16,801 $14,740 $10,170 $ 9,620
Tenant reimbursements.. 584 381 728 732 587 465 426
Parking................ 1,048 922 1,251 1,388 1,196 1,029 1,026
Interest, loan fees and
other................. 3,444 5,342 6,712 1,835 113 58 --
Other.................. 221 317 549 652 650 77 93
-------- -------- ------- ------- ------- ------- -------
Total revenues......... 19,911 18,358 25,036 21,408 17,286 11,799 11,165
Expenses:
Property operations.... 4,657 3,833 5,696 5,199 4,317 3,084 3,488
Earthquake costs
(reimbursements)...... -- -- -- (133) 635 -- --
Depreciation and
amortization.......... 2,947 2,434 3,276 4,047 3,697 2,503 2,464
Interest............... 6,749 6,573 8,819 6,372 3,625 5,050 6,263
General and
administrative........ 1,509 1,422 1,787 1,640 1,298 43 --
Loss on disposition of
real estate........... -- 4,874 4,874 -- -- -- --
-------- -------- ------- ------- ------- ------- -------
Total expenses......... 15,862 19,136 24,452 17,125 13,572 10,680 12,215
-------- -------- ------- ------- ------- ------- -------
Income (loss) from
operations before
equity in earnings of
unconsolidated
affiliate, minority
interests and
extraordinary gains
(losses).............. 4,049 (778) 584 4,283 3,714 1,119 (1,050)
Equity in earnings of
unconsolidated
affiliate............. 866 -- -- -- -- -- --
Minority interest in
consolidated
affiliates............ (135) (104) (129) (131) (167) (211) (247)
Minority interest in
Operating Partnership. (400) 77 (65) (418) (353) (18) --
-------- -------- ------- ------- ------- ------- -------
Income (loss) before
extraordinary gains
(losses).............. 4,380 (805) 390 3,734 3,194 890 (1,297)
Extraordinary gains
(losses) (net of
minority interest).... -- 9,311 9,311 (393) -- (352) --
-------- -------- ------- ------- ------- ------- -------
Net income (loss)...... $ 4,380 $ 8,506 $ 9,701 $ 3,341 $ 3,194 $ 538 $(1,297)
======== ======== ======= ======= ======= ======= =======
Per share data:
Net income (loss)
before extraordinary
gains (losses)........ $ 0.78 $ (0.20) $ 0.10 $ 0.91 $ 0.77 $ -- $ --
Extraordinary gains
(losses).............. -- 2.29 2.23 (0.09) -- -- --
-------- -------- ------- ------- ------- ------- -------
Net income............. $ 0.78 $ 2.09 $ 2.33 $ 0.82 $ 0.77 $ -- $ --
======== ======== ======= ======= ======= ======= =======
</TABLE>
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NINE MONTHS ENDED
SEPTEMBER 30, YEAR ENDED DECEMBER 31,
------------------ ------------------------------------------------
1997 1996 1996 1995 1994 1993 1992
-------- -------- -------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
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FUNDS FROM OPERATIONS:
Operating Partnership
funds from operations.. $ 6,030 $ 5,977 $ 8,028 $ 7,397 $ 7,042 $ -- $ --
Minority interest in
Operating Partnership.. (665) (622) (847) (747) (700) -- --
-------- -------- -------- -------- -------- -------- --------
Funds from
operations(1).......... $ 5,365 $ 5,355 $ 7,181 $ 6,650 $ 6,342 $ -- $ --
======== ======== ======== ======== ======== ======== ========
Distributions paid...... $ 4,347 $ 4,063 $ 5,525 $ 5,067 $ 6,821 $ 291 $ --
======== ======== ======== ======== ======== ======== ========
Payout ratio............ 81.0% 75.9% 76.9% 76.2% 107.6% N/A N/A
Weighted Average Units:
Owned by Company(2).... 4,024 4,063 4,063 4,091 4,159 4,159 --
Owned by others........ 499 472 479 459 459 459 --
-------- -------- -------- -------- -------- -------- --------
Total Units............ 4,523 4,535 4,542 4,550 4,618 4,618 --
Distributions declared
per share.............. $ 1.08 $ 1.00 $ 1.36 $ 1.24 $ 1.64 $ 0.07 --
CASH FLOW DATA:
Net cash provided by
operating activities... $ 4,490 $ 5,318 $ 5,726 $ 7,862 $ 7,632 $ 2,094 $ 1,054
Net cash (used) in
investing activities... (40,555) (24,699) (23,413) (37,037) (31,552) (17,724) (1,100)
Net cash provided by
financing activities... 36,370 18,700 18,639 29,286 21,849 18,871 46
BALANCE SHEET DATA:
Land, buildings and
improvements, net...... $118,638 $ 91,105 $ 93,231 $ 92,147 $ 92,715 $ 51,908 $ 44,885
Mortgage loans and bonds
receivable, net........ 30,224 15,217 34,549 33,634 -- 12,200 --
Total investments....... 148,862 106,322 127,780 125,781 92,715 64,108 44,885
Total assets............ 164,346 136,403 135,996 133,347 98,384 71,840 48,578
Total debt.............. 103,939 108,936 109,025 111,627 74,018 45,500 89,472
Total stockholders'
equity (deficit)....... 55,824 22,715 22,448 18,267 21,311 25,038 (40,297)
OTHER DATA:
Ratio of earnings to
combined fixed charges
and preferred stock
dividends(3)........... 1.45x 1.59x 1.59x 1.61x 1.83x -- --
Ratio of funds from
operations to combined
fixed charges and
preferred stock
dividends(4)........... 1.75x 1.88x 1.88x 2.09x 2.66x -- --
Ratio of total debt to
total market
capitalization(5)...... 49.4% 66.0% 63.8% 79.0% 62.4% 36.9% --
Number of properties.... 22 15 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. Management believes that 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.
(2) Also represents number of shares of the Company's Common Stock outstanding.
(3) 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.
(4) For purposes of these computations, the ratio of FFO to fixed charges
consists of FFO as defined in Note 1 plus fixed charges and preferred stock
dividends. Fixed charges consist of interest expense, capitalized interest
and amortization of deferred financing costs.
(5) Total market capitalization as of the dates presented is long-term debt
plus the liquidation value of preferred stock plus the aggregate market
value of the Company's Common Stock and Units not owned by the Company,
assuming one Unit is equivalent in value to one share of Common Stock.
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RISK FACTORS
An investment in the Series B 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 B Preferred Stock.
Information in this Prospectus contains 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 operations are derived from a
relatively small number of properties. In addition, 15 of the 22 properties
directly owned by the Company are located in Southern California, six are
located in New Jersey and one is located in Arizona. The operating results of
the Company's operations, therefore, may be significantly impacted by the
performance of one of its properties and by factors that affect the health
care industry or the economies of those states.
SPECIFIC RISKS RELATING TO INVESTMENTS IN SECURED LOANS
The earnings generated by the Company's operations are derived in part from
loans secured by deeds of trust originated by the Company or its affiliates.
The operating results of the Company, therefore, will be impacted by the yield
of its loans, which may be adversely impacted by factors that affect a
borrower's ability to repay loans made by the Company or its affiliates,
including but not limited to the following:
Inability of Borrowers to Obtain Permanent Financing. Many of the properties
on which the Company has originated purchase money loans have a relatively
high ratio of debt to appraised value and therefore there is a risk that
alternative financing may not provide sufficient funds to repay the Company's
loan. The inability of the Company's borrowers to obtain replacement
financing, permanent financing or, in some cases, to obtain the 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 Tenants or Seniors With Sufficient Resources to
Pay. The borrowers derive most of their revenues from payments received from
their tenants or residents. Inflation or other circumstances that adversely
affect the ability of such tenants to pay rent or such residents to pay for
services could adversely affect the 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.
DEPENDENCE ON CERTAIN TENANTS
Dependence on PHP. The Company leases the six MOB properties located in New
Jersey (the "New Jersey Properties") to PHP under a 17-year net lease. The
annualized rent paid to the Company by PHP is approximately $2.7 million or
13.0% of the Company's total annualized rental income, excluding the rental
income to be derived from the recently acquired Hampden Properties. Taking
into account rents anticipated to be received from the recently acquired
Hampden Properties, the rental income derived from the New Jersey Properties
will represent approximately 11.5% of the Company's total annualized rental
income. The Company believes that the current management of PHP is experienced
and that PHP will be able to continue to pay its obligations as they become
due. Notwithstanding management's belief, however, the financial position of
the Company and its ability to make expected distributions to stockholders may
be adversely affected by financial difficulties experienced by PHP, including
bankruptcy, insolvency or a general downturn in PHP's business.
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Dependence on Iatros. Iatros Health Networks, Inc. ("Iatros") is expected
to become the operator of the Hampden Properties following its receipt of
regulatory licenses, currently expected by January 31, 1998. The total
annualized rent on the Hampden Properties is approximately $2.7 million, or
approximately 11.5% of the Company's total annualized rental income based on
current rental rates. Iatros has recently experienced problems in operating
certain senior care facilities and has reported financial difficulties, as
described below.
. Operating History. Certain senior care facilities operated by Iatros or its
affiliates, in which the Company has financial interests, have recently
experienced operating problems. In August 1997, the Company took title to a
98-bed facility located in Phoenix, Arizona (the "Maryland Gardens
Facility") through a deed in lieu of foreclosure on a first trust deed the
Company had previously funded on this property. At the time the Company
acquired title to the facility, the note had an outstanding balance of
approximately $4.7 million, which was approximately the same as the
appraised value on this facility at that time.
In April 1996, the Company entered into a loan participation agreement
with Iatros to fund two loans secured by third and fifth trust deeds for
the acquisition of a 235-bed facility located in Olathe, Kansas (the
"Crystal Park Facility"). Following its acquisition of the Crystal Park
Facility, the borrower engaged an affiliate of Iatros, New Health
Management Systems, Inc., to manage the facility. In May 1997, the borrower
filed for bankruptcy and engaged a new manager for the Crystal Park
Facility, which has since been closed. The Company assigned its interest in
the third and fifth trust deeds to Iatros in exchange for the $800,000 Note
from Iatros and title to the receivables of the former owner of the
facility.
In addition, the owner of a 225-bed facility located in Hyattsville,
Maryland (the "Carroll Manor Facility") is currently in default on its
payments under a loan made by the Company for the acquisition of that
facility. Greenbrier Healthcare Services, Inc., an affiliate of Iatros,
managed the Carroll Manor Facility from June 1996 (the acquisition date of
the property by the non-profit owner) until April 1997 at which time the
borrower transferred management to Future Care, Inc., a Maryland based
operator of nursing home facilities.
In light of such events, Iatros has recently hired a new management team
with the intent of improving its senior care facility operating
capabilities. Although the Company believes that this new management team
will be able to operate senior care facilities profitably, there can be no
assurance that Iatros' facility operations will improve under this new
management team. See "Business and Properties--Description of Properties
and Tenants" and "--Senior Care Operations."
. Financial History. For the year ended December 31, 1996 and for the six
months ended June 30, 1997, Iatros reported net losses of approximately
$10.3 million and $8.7 million, respectively. Iatros has also reported in
public filings that it is operating with limited cash reserves. For
additional information regarding the financial position of Iatros, see
certain Iatros financial statements contained in this Prospectus. Iatros
presently owes the Company approximately $1.1 million, comprised of the
$800,000 Note and $300,000 in certain unpaid fees. As a result of the
financial obligations of Iatros to the Company and the significant portion
of total annualized rental income that will be attributable to the lease
with Iatros for the Hampden Properties, continued financial and/or
operating problems experienced by Iatros could materially and adversely
affect the Company's results of operations and its ability to make expected
distributions to stockholders.
Dependence on Hampden Nursing Homes. Until Iatros receives the necessary
licenses to operate the Hampden Properties, Hampden Nursing Homes, Inc., a
Massachusetts nonprofit corporation ("Hampden Nursing Homes"), will be the
lessee thereof under a lease with the Company on the same initial payment
terms as those in the Company's lease with Iatros. Iatros will operate the
facilities for Hampden Nursing Homes. Hampden Nursing Homes was the owner of
the Hampden Properties prior to their acquisition by the Company. While owner
of the Hampden Properties, Hampden Nursing Homes experienced serious financial
difficulties and was unable to generate sufficient cash flow from the
properties to meet the debt service requirements relating to approximately
$25.3 million (face value), excluding accrued interest, of outstanding
indebtedness encumbering the properties.
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Risks Associated with Carroll Manor. On June 17, 1996, the Company funded a
loan secured by a first deed of trust of approximately $6.1 million (the "$6.1
Million Loan") to Heritage Care, Inc. ("Heritage Care") for the acquisition of
the Carroll Manor Facility. The former owner of that facility, Carroll Manor,
Inc. ("Carroll Manor"), holds a second deed of trust on this property which
secures a $500,000 loan made by Carroll Manor to Heritage Care (the "Carroll
Manor Loan"). Heritage Care is currently in default on the $6.1 Million Loan,
and the Company has recently made additional cash advances totalling
approximately $2.3 million (the "Additional Advances") to enable Heritage Care
to meet its payroll and other current expenses necessary to remain in
operation and thereby protect the value of the Company's security interest in
the Carroll Manor Facility. The Additional Advances are secured by the
Company's first deed of trust pursuant to the language thereof and are
therefore secured loans, although they are subordinate in priority to the
Carroll Manor Loan. Despite the fact that the Additional Advances are secured
by the Company's first deed of trust, there can be no assurance that the value
of the Carroll Manor Facility will be sufficient to satisfy Heritage Care's
obligations to the Company (including principal and interest outstanding under
the $6.1 Million Loan and all Additional Advances) and the Carroll Manor Loan.
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 health care facility or medical practice
and could also diminish a borrower's or tenant's capacity to make debt or
lease payments to the Company.
Fraud Prevention. 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 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.
Failure to Obtain or Delay in Obtaining Operating Licenses. Operators of
senior care facilities are required to obtain governmental licenses in order
to legally operate and manage senior care facilities. When the Company acts as
a lender, it receives debt service payments from property owners who derive
income from the operation of senior care facilities. If an operator failed to
obtain, or lost, its operating license, the operations of its senior care
facility may be delayed or shut down, adversely affecting the operator's
ability to make debt service payments to the Company. When the Company owns
the senior care facility, failure of a new operator to obtain an operating
license, or the loss of an operating license by an existing operator, could
adversely affect the operator's ability to make lease payments to the Company,
which in turn may adversely affect the Company's results of operations and its
ability to make distributions to stockholders. See "Business and Properties--
Senior Care 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.
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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 such 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 the 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.
Reimbursement by Government Agencies. A significant portion of the revenues
of the operators of senior care facilities is derived from government-funded
reimbursement programs, such as Medicare and Medicaid. Government delays in
reimbursement of the Company's tenants or borrowers, or any change in
reimbursement policies that results in reductions in the levels of
reimbursement under such programs to the industry, to an individual operator
or to a specific facility, could adversely affect the ability of such
operators to timely pay their lease or loan payments to the Company. Failure
of operators to timely pay their lease or loan payments could adversely impact
the Company's results of operations and its ability to make expected
distributions to stockholders. See "Business and Properties--Senior Care
Operations."
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 the
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 $7.7 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."
Lease Terminations. The Company is subject to the normal risks associated
with leasing property, including, with regard to the Company's MOB operations,
the risk that upon the 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
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and ability to make expected distributions to stockholders may be adversely
affected. Excluding leases that are month-to-month, representing 5.3% of the
annual base rent of the Company, leases constituting approximately 24.0% of
the Properties' annual rent will expire by their terms before the end of 1998.
See "Business and Properties--Leases."
Proximity to Hospitals of the Company's Properties. Because the properties
are health care 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 MOB 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 has priority over the equity interest of the Company and may
not afford the Company 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.
The successful operation of the Company's MOB and senior care operations
requires it to compete with other health care investors. Among other things,
the Company must secure continued access to capital to fund new health care
property acquisitions and loans for the acquisition by third parties of such
properties, identify and successfully pursue opportunities for investment in
health care properties and offer loans to potential borrowers with attractive
yields and on terms that are favorable to the Company, but which also have
interest rates and maturities that are competitive with those available to
prospective borrowers from other lenders. Given the competition in the MOB and
senior care marketplace, there can be no assurance that suitable investments
will be identified or that additional investments can be consummated on terms
favorable to the Company.
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.
Ownership by the Company of senior care facilities involves special
considerations in applying the various REIT qualification tests. Because the
Company would not qualify as a REIT if it provides certain services to its
tenants, the Company leases its senior care facilities to operators who
provide the required services at these facilities, or to other lessees who
engage operators to provide these services. It is material to the Company's
qualification as a REIT that these arrangements be respected as leases for
federal income tax purposes. See
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"Federal Income Tax Considerations--Taxation of the Company--Income Tests." In
the event of a default on either a lease of, or a mortgage secured by, a
senior care facility, the Company could be required to find a new unrelated
lessee to lease the property in order to continue to qualify as a REIT. This
requirement could deter the Company from exercising its remedies under the
lease or mortgage when such actions otherwise would be in the best interests
of the Company.
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 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 679,500 shares of Common Stock (representing
approximately 16.4% 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 interest of 9.7%
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.
At the Company's 1997 Annual Meeting, the stockholders of the Company
approved 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 new 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 new Unit will be purchased at a
premium of $0.25 over the market value of a share of Common Stock. An issuance
of convertible Units pursuant to this authorized proposal has the effect of
providing the Company with real estate investments, instead of cash in
exchange for a sale of the Company's equity, which investments are relatively
illiquid and may tend to limit the ability of the Company to react promptly in
response to changes in economic or other conditions. The Company is not
currently discussing any real estate transactions that would be subject to
this plan.
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."
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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 as well as the Hampden Properties and the Maryland
Gardens Facility, 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. Limited quantities of non-friable asbestos were also
discovered in the Maryland Gardens Facility and Riverdale Gardens Nursing
Home. Management believes that it has undertaken adequate measures to ensure
that the asbestos will remain undisturbed and that it does not pose a current
health risk. Management plans to continue to monitor this situation.
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 either be uninsurable or not economically insurable;
moreover, there can be no assurance that policies maintained by the Company
will be adequate in the event of a loss. The Company carries earthquake and
flood insurance for coverage of losses up to $20.0 million on its portfolio of
properties located in California and Arizona. This coverage is subject to a
10.0% deductible up to the amount of insured loss. Fifteen of the 22
properties directly owned by the Company are located in Southern California,
which has a history of seismic activity, including the 1994 Northridge
earthquake that damaged the Holy Cross Medical Plaza property. One of the
properties directly owned by the Company is located in Phoenix, Arizona, which
is located in an area with a history of flood activity. 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."
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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 B 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 B 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 market
capitalization ratio will be approximately 37.4% based upon the closing market
price of the Company's Common Stock on November 3, 1997 and using the
liquidation value for the Series A Preferred Stock and the Series B Preferred
Stock offered hereby.
RISKS RELATED TO ISSUANCE OF ADDITIONAL STOCK
The Company currently has outstanding 1,495,000 shares of Series A Preferred
Stock which ranks in parity with the Series B Preferred Stock offered by this
Registration Statement with respect to the payment of dividends and amounts
due upon liquidation. The Company's Articles of Incorporation do not limit the
issuance of additional series of preferred stock ranking in parity with the
Series B Preferred Stock without the consent of holders of Series B Preferred
Stock. The rights of the holders of the Series A Preferred Stock as well as
the issuance of additional preferred stock in parity with the Series B
Preferred Stock could adversely affect the ability of holders of the Series B
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 B 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.
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
Mr. Gottlieb or Mr. 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.
15
<PAGE>
RECENT DEVELOPMENTS
The Company has recently (i) acquired or entered into agreements to acquire
13 properties located in four states, representing an aggregated potential
investment of approximately $58.1 million including estimated acquisition
costs of approximately $750,000; (ii) loaned or entered into agreements to
loan money for third party acquisitions of six senior care facilities located
in three states; (iii) leased a previously closed community hospital which the
Company acquired in June 1996; and (iv) received authorization from HUD to
originate and service HUD-insured loans.
ACQUISITIONS
Hampden Properties. The Company and the Operating Partnership have created
two new entities for the purpose of acquiring the Hampden Properties. The
Company has formed G&L Hampden, Inc., a Delaware corporation and wholly owned
subsidiary of the Company. The Operating Partnership and G&L Hampden, Inc.
have entered into an operating agreement and have formed G&L Hampden, LLC
("G&L Hampden"), a Delaware limited liability company which is 99% owned by
the Operating Partnership and 1% owned by G&L Hampden, Inc., its sole managing
member. In October 1997, G&L Hampden acquired the Hampden Properties from
Hampden Nursing Homes for total consideration of approximately $20.1 million.
Of this amount, G&L Hampden borrowed $6.0 million from Nomura at an interest
rate of 8.62% per annum. The Hampden Properties secure repayment of this loan.
Under this loan, the Company may, at any time during the next two years, make
up to two additional draws of not less than $2.0 million each, up to an
aggregate loan amount of $14.0 million (including the initial draw under the
loan). In the event the Company makes an additional loan draw, the interest
rate on such draw will be 2.5% per annum above the prevailing market rate on
U.S. Treasury Securities of equivalent maturity. The loan agreement with
Nomura provides for a term of 12 years and requires monthly interest and
principal payments based upon a 27-year amortization schedule. At the end of
12 years, any unpaid principal and interest will be due in full. The Company
has the option to prepay this loan at any time upon the payment of a premium
that, when added to the remaining principal amount of the note, will be
sufficient to purchase non-callable obligations of the U.S. Government
sufficient to provide for the scheduled payments remaining under the note. As
a condition of the loan, Nomura has required G&L Hampden to place $400,000
into a reserve account which may be used to fund unspecified maintenance
capital reserves.
In conjunction with the acquisition of the Hampden Properties, the Company
entered into a 15-year net-operating lease with Iatros. Although Iatros is the
current operator of the Hampden Properties, the licenses necessary to operate
the Hampden Properties are currently held by Hampden Nursing Homes. Iatros has
applied for state authorization to operate the Hampden Properties without the
participation of Hampden Nursing Homes. Although this transfer will be handled
in the normal course of business, the parties anticipate that it will take
approximately 90 days to transfer the licenses. Until the licenses are
transferred, the Company has leased the facilities to Hampden Nursing Homes,
which has engaged Iatros to manage the facilities until the licenses are
transferred. The lease between the Company and Hampden Nursing Homes requires
monthly lease payments of $225,000 and expires upon transfer of the operating
licenses from Hampden Nursing Homes to Iatros. The Company's lease with Iatros
for the Hampden Properties provides for monthly lease payments of $225,000 and
fixed annual increases of 2.0% per year at the end of each of the first seven
years. Thereafter, the annual increase is based upon the greater of 2.0% of
the previous year's rent or 2.5% of the increase in gross receipts derived
from the operation of the Hampden Properties in excess of $17,750,000.
Although management believes that Iatros will receive approval for the
transfer of the operating license from Hampden Nursing Homes in a timely
manner, there can be no assurance that the license will be transferred or, if
it is, that the transfer will occur within the expected 90-day time period.
16
<PAGE>
The Hampden Properties are Riverdale Gardens Nursing Home, located in West
Springfield, Massachusetts, Chestnut Hill Nursing Home, located in East
Longmeadow, Massachusetts and Mary Lyon Nursing Home, located in Hampden,
Massachusetts. To the Company's knowledge, the Hampden Properties have never
been leased.
Riverside 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 building on
approximately 3.85 acres as well as 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 with 15 private and 54 double
occupancy rooms. The facility is a 49,198 square foot single story 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 care beds with ten private rooms, 39 double occupancy rooms and
three quadruple occupancy rooms.
The following table sets forth certain information regarding the Hampden
Properties as of September 30, 1997.
<TABLE>
<CAPTION>
YEAR
CONSTRUCTED TOTAL AVERAGE
OR NUMBER PURCHASE ANNUALIZED ANNUAL RENT
PROPERTY REHABILITATED OF BEDS PRICE RENT PER BED
-------- ------------- ------- ----------- ---------- -----------
<S> <C> <C> <C> <C> <C>
Riverdale Gardens
Nursing Home........... 1957-1975 168 $ 5,760,000 $ 762,420 $ 4,538
Chestnut Hill Nursing
Home................... 1984 123 10,825,000 1,432,800 11,649
Mary Lyon Nursing Home.. 1986 100 3,815,000 504,780 5,048
----------- ----------
$20,400,000 $2,700,000
</TABLE>
The following table sets forth occupancy statistics for the Hampden
Properties for the past five years.
<TABLE>
<CAPTION>
PROPERTY 1997(1) 1996 1995 1994 1993
-------- ------- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Riverdale Gardens Nursing Home.................. 92.4% 87.6% 90.3% 96.3% 95.4%
Chestnut Hill Nursing Home...................... 92.5 93.2 95.3 96.1 95.9
Mary Lyon Nursing Home.......................... 94.3 93.7 97.6 97.6 95.8
</TABLE>
- --------
(1) 1997 contains information only through June 30, 1997.
El Centro. The Company has a 50% membership interest in Valley Convalescent,
LLC ("Valley Convalescent"), a limited liability company formed by the Company
and Continuum Health Incorporated ("Continuum Health"). The Company formed
Valley Convalescent in anticipation of purchasing the El Centro Facility.
Valley Convalescent has entered into an acquisition agreement to purchase the
El Centro Facility for an aggregate acquisition price of approximately $3.6
million, $400,000 of which would be used for facility renovations. The Company
and Continuum Health contributed approximately $300,000 and $344,000,
respectively, to Valley Convalescent and the Company will fund a loan secured
by a first deed of trust on the El Centro Facility for approximately $2.8
million. This loan will bear interest at a rate of 12.0% per annum, mature on
September 1, 2002, and provide for monthly payments of interest only. At
maturity, assuming no prepayments, $2.8 million will be due on this loan. This
loan permits prepayment on any monthly payment date of all or any portion of
the outstanding principal amount of the loan, without penalty, upon not less
than five days' prior written notice to the Company of the borrower's intent
to repay.
Concurrently with the consummation of this acquisition, it is contemplated
that Stefan Health Care, Inc. ("Stefan Health Care"), a newly formed entity
controlled by Mitcheal C. Word, an officer and current employee
17
<PAGE>
of the Company, will execute a five-year net operating lease for the El Centro
Facility. The terms of this lease are currently being negotiated. The funds
for the acquisition of the El Centro Facility are presently being held in
escrow pending the receipt by Stefan Health Care of authorization from the
state licensing agency to operate the facility. There can be no assurance,
however, that Stefan Health Care will receive such authorization and the
acquisition of the El Centro Facility will be consummated or, if consummated,
that the Company will be able to lease the facility on favorable terms. See
"Certain Transactions."
GL/PHP. On August 15, 1997, the Company acquired the remaining 19.5%
ownership interest in GL/PHP from PHP for an aggregate purchase price of
$919,000. Concurrent with this acquisition, the Company refinanced the New
Jersey Properties. As a result of these activities, GL/PHP, previously an
unconsolidated affiliate of the Company, is now wholly owned by the Company
and as such the assets, liabilities and operations of GL/PHP are reflected on
the consolidated financial statements of the Company, which are included as a
part of this Prospectus. Charles P. Reilly, a director and Chairman of the
Compensation Committee of the Board of Directors of the Company, is Chairman
of the Board of Directors of PHP. Mr. Reilly was not present and did not
participate in the Board's consideration of this proposal and did not vote
with respect thereto. See "Business and Properties--Description of the
Properties and Tenants" and "Certain Transactions."
Maryland Gardens. In August 1997, the Company took title to the Maryland
Gardens Facility through a deed in lieu of foreclosure on a loan secured by a
first trust deed the Company had previously funded on this property. At the
time the Company took title to this facility the outstanding balance on this
loan was approximately $4.7 million, which was also the appraised value of
this facility at that time. The Maryland Gardens Facility is currently leased
to Capital Senior Management I, Inc. ("Capital Senior Management"), a
nationally recognized senior care facility operator which has been operating
this facility since 1996. Management believes that Capital Senior Management
is continuing to operate this facility profitably and effectively under its
14-month operating lease, which provides for triple net rental payments in the
amount of $30,000 in September 1997. The monthly rental payment will be
increased to $35,000 per month from October 1997 through April 1998 and June
through July 1998. No rental payments were due in August 1997 or will be due
in May 1998. See "Business and Properties--Description of the Properties and
Tenants."
Aliso Viejo MOB. The Company, through AV Medical, has acquired a vacant
parcel of land located in Aliso Viejo, California for approximately $2.2
million. AV Medical intends to build a 33,000 square foot, three-story MOB on
this property. Management believes that, upon completion of construction, the
total investment in land and buildings will be approximately $6.5 million.
Concurrent with the acquisition of the vacant land, AV Medical preleased the
entire MOB to an investment grade hospital operator. Under the terms of this
10-year net operating lease with this hospital tenant, rent payments will
commence upon issuance of a Certificate of Occupancy at the rate of $750,000
per annum. The tenant has an option to acquire the MOB from AV Medical for
approximately $9.5 million after four years of tenancy. There can be no
assurance, however, that the Company will be able to develop the Aliso Viejo
MOB property or, if developed, that the lease will prove favorable to the
Company.
Retail Property. In conjunction with the Aliso Viejo MOB acquisition, the
Company directly acquired a second parcel of land in Aliso Viejo, California
for $814,000. Prior to closing escrow on this second parcel, the Company
signed a lease with a nationally recognized retailer who has agreed to occupy
and lease the 9,100 square foot building to be constructed on this parcel. The
Company has an agreement with this future tenant for construction of the
building for a cost not to exceed $720,000. The lease, which is anticipated to
commence on August 1, 1998, is a ten-year triple net lease with annual net
lease payments of $182,000 for the first five years and $200,000 per annum
thereafter. While management believes that this land will be successfully
developed and leased, there can be no assurance that this transaction will
prove favorable to the Company.
18
<PAGE>
FINANCING
Senior Care Lending. In the normal course of its business, the Company has
funded three loans secured by deeds of trust totalling an aggregate of
approximately $2.9 million. The first of these loans is secured by a 92-bed
senior care facility (the "Coos Bay Facility") located in Coos Bay, Oregon.
The second and third of these are secured by a 63-bed senior care facility and
a 68-bed senior care facility (the "Idaho Facilities") located in Idaho Falls
and Burley, Idaho, respectively. See "Business and Properties--Senior Care
Operations."
In October 1997, the Company assigned its participation interest in
promissory notes which were previously secured by third and fifth trust deeds
on the Crystal Park Facility to Iatros. In return, the Company received the
$800,000 Note from Iatros and title to the accounts receivable of the former
owner of the facility, which had served as additional collateral for the
promissory notes and which the Company estimated to have a net realizable
value of approximately $400,000. The outstanding balance on these promissory
notes was approximately $1.3 million at September 30, 1997.
The Company has also entered into negotiations to fund a short-term first
deed of trust loan of approximately $4.2 million secured by three senior care
facilities located in California. It is contemplated that this loan will bear
interest at a rate of 12.0% per annum and will mature six months after the
loan's commencement, with the option of the borrower to extend the loan for up
to six months upon the payment of certain interest rate increases. It is
currently contemplated that the prospective borrower under this loan would
also be the operator of the facilities securing the loan. There can be no
assurance that the Company will consummate this transaction or, if it does,
that the final terms of this transaction will be as currently contemplated.
HUD Loan Servicing. The Company has received authorization from HUD to
originate and service HUD-insured loans. The HUD program provides loan
guarantees for the long-term financing of health care properties, including
senior care facilities. The Company believes that this authorization enhances
the Company's ability to assist its borrowers in obtaining long-term financing
which it does not provide through the GLN Venture. The Company believes that
this new source of financing provides an important exit strategy in its
existing Senior Care loan program by providing permanent financing vehicles at
competitive interest rates.
OTHER ACTIVITIES
Tustin Hospital. In May 1997, the Company leased Tustin Hospital to Pacific
Health pursuant to a 62-month net lease, which provides for three five-year
renewal options. Payments under this lease will commence in January 1998 when
renovations are scheduled to be completed. The renovations on this facility
are fully financed by Pacific Health. In July 1997, the Company granted
Pacific Health an option, which expires July 1, 2001, to purchase Tustin
Hospital for $5.0 million. Tustin Hospital, along with the two adjacent MOBs,
totals approximately 167,000 square feet. The lease for Tustin Hospital is
expected to generate approximately $396,000 in annual net income for the
Company. See "Business and Properties--Description of the Properties and
Tenants."
In addition to the transactions described in this Prospectus, the Company is
investigating other investments in health care properties.
19
<PAGE>
USE OF PROCEEDS
The net cash proceeds to the Company from the sale of Series B Preferred
Stock in the Offering, after payment of expenses of the Offering including the
underwriting discount, are estimated to be approximately $28.3 million ($32.7
million if the Underwriters' over-allotment option is exercised in full). The
Company will contribute the net proceeds of this Offering to the Operating
Partnership in exchange for a new series of Units having terms substantially
similar to those of the Series B Preferred Stock. The proceeds will be used by
the Operating Partnership to repay approximately $18.8 million of indebtedness
under a credit line that carries interest at the rate of LIBOR plus 1.75% (or
approximately 7.5% as of October 24, 1997). The indebtedness to be repaid is
due in August 1998, but can be repaid without prepayment charge or penalty.
Pending identification of new acquisitions, the Operating Partnership will
invest such excess net proceeds of $9.6 million 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
September 30, 1997 and as adjusted to give effect to the sale by the Company
of the Series B 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 SEPTEMBER 30, 1997
----------------------------
ACTUAL AS ADJUSTED
------------ --------------
(IN THOUSANDS)
<S> <C> <C>
DEBT:
Borrowing under lines of credit(1).............. $ 14,350 $ --
Other notes payable............................. 89,589 89,589
------------ ------------
Total debt.................................... 103,939 89,589
Minority interest in consolidated partnership..... (2,645) (2,645)
Minority interest in Operating Partnership........ 2,966 2,966
STOCKHOLDERS' EQUITY:
Preferred Stock, $.01 par value 10,000,000 stock
authorized:
Series A Preferred Stock, $.01 par value:
1,495,000 shares outstanding................. 15 15
Series B Preferred Stock, $.01 par value: none
outstanding; 1,200,000 shares outstanding, as
adjusted..................................... -- 12
Common Stock, $.01 par value: 50,000,000 shares
authorized, 4,062,500 shares outstanding........ 40 40
Additional paid-in capital....................... 58,186 86,524
Distributions in excess of net income............ (2,417) (2,417)
------------ ------------
Total stockholders' equity.................... 55,824 84,174
------------ ------------
TOTAL CAPITALIZATION............................. $ 160,084 $ 174,084
============ ============
</TABLE>
- --------
(1) The outstanding balance under the Company's lines of credit as of November
3, 1997 was approximately $18.8 million.
20
<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 September 30, 1997
and 1996 and as of December 31, 1996, 1995, 1994 and 1993 and for each of the
nine months ended September 30, 1997 and 1996 and 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 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 and for each of the years ended December 31, 1996,
1995, 1994, 1993 and 1992 has been derived from audited financial statements.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30, YEAR ENDED DECEMBER 31,
------------------ -------------------------------------------
1997 1996 1996 1995 1994 1993 1992
-------- -------- ------- ------- ------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C>
OPERATING DATA:
- ---------------
Revenue:
Rental................. $ 14,614 $ 11,396 $15,796 $16,801 $14,740 $10,170 $ 9,620
Tenant reimbursements.. 584 381 728 732 587 465 426
Parking................ 1,048 922 1,251 1,388 1,196 1,029 1,026
Interest, loan fees and
other................. 3,444 5,342 6,712 1,835 113 58 --
Other.................. 221 317 549 652 650 77 93
-------- -------- ------- ------- ------- ------- -------
Total revenues......... 19,911 18,358 25,036 21,408 17,286 11,799 11,165
Expenses:
Property operations.... 4,657 3,833 5,696 5,199 4,317 3,084 3,488
Earthquake costs (reim-
bursements)........... -- -- -- (133) 635 -- --
Depreciation and amor-
tization.............. 2,947 2,434 3,276 4,047 3,697 2,503 2,464
Interest............... 6,749 6,573 8,819 6,372 3,625 5,050 6,263
General and administra-
tive.................. 1,509 1,422 1,787 1,640 1,298 43 --
Loss on disposition of
real estate........... -- 4,874 4,874 -- -- -- --
-------- -------- ------- ------- ------- ------- -------
Total expenses......... 15,862 19,136 24,452 17,125 13,572 10,680 12,215
-------- -------- ------- ------- ------- ------- -------
Income (loss) from
operations before
equity in earnings of
unconsolidated
affiliate, minority
interests and
extraordinary gains
(losses).............. 4,049 (778) 584 4,283 3,714 1,119 (1,050)
Equity in earnings of
unconsolidated affili-
ate................... 866 -- -- -- -- -- --
Minority interest in
consolidated affili-
ates.................. (135) (104) (129) (131) (167) (211) (247)
Minority interest in
Operating Partnership. (400) 77 (65) (418) (353) (18) --
-------- -------- ------- ------- ------- ------- -------
Income (loss) before
extraordinary gains
(losses).............. 4,380 (805) 390 3,734 3,194 890 (1,297)
Extraordinary gain
(loss) (net of minor-
ity interest)......... -- 9,311 9,311 (393) -- (352) --
-------- -------- ------- ------- ------- ------- -------
Net income (loss)...... $ 4,380 $ 8,506 $ 9,701 $ 3,341 $ 3,194 $ 538 $(1,297)
======== ======== ======= ======= ======= ======= =======
Per share data:
Net income (loss) be-
fore extraordinary
gains (losses)........ $ 0.78 $ (0.20) $ 0.10 $ 0.91 $ 0.77 $ -- $ --
Extraordinary gains
(losses).............. -- 2.29 2.23 (0.09) -- -- --
-------- -------- ------- ------- ------- ------- -------
Net income............. $ 0.78 $ 2.09 $ 2.33 $ 0.82 $ 0.77 $ -- $ --
======== ======== ======= ======= ======= ======= =======
</TABLE>
21
<PAGE>
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30, YEAR ENDED DECEMBER 31,
------------------ ------------------------------------------------
1997 1996 1996 1995 1994 1993 1992
-------- -------- -------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C>
FUNDS FROM OPERATIONS:
- ----------------------
Operating Partnership
funds from operations.. $ 6,030 $ 5,977 $ 8,028 $ 7,397 $ 7,042 $ -- $ --
Minority interest in
Operating Partnership.. (665) (622) (847) (747) (700) -- --
-------- -------- -------- -------- -------- -------- --------
Funds from
operations(1).......... $ 5,365 $ 5,355 $ 7,181 $ 6,650 $ 6,342 $ -- $ --
======== ======== ======== ======== ======== ======== ========
Distributions paid...... $ 4,347 $ 4,063 $ 5,525 $ 5,067 $ 6,821 $ 291 $ --
======== ======== ======== ======== ======== ======== ========
Payout ratio............ 81.0% 75.9% 76.9% 76.2% 107.6% N/A N/A
Weighted Average Units:
Owned by Company(2).... 4,024 4,063 4,063 4,091 4,159 4,159 --
Owned by others........ 499 472 479 459 459 459 --
Total Units............ 4,523 4,535 4,542 4,550 4,618 4,618 --
Distributions declared
per share.............. $ 1.08 $ 1.00 $ 1.36 $ 1.24 $ 1.64 $ 0.07 --
CASH FLOW DATA:
- ---------------
Net cash provided by
operating activities... $ 4,490 $ 5,318 $ 5,726 $ 7,862 $ 7,632 $ 2,094 $ 1,054
Net cash (used) in
investing activities... (40,555) (24,699) (23,413) (37,037) (31,552) (17,724) (1,100)
Net cash provided by
financing activities... 36,370 18,700 18,639 29,286 21,849 18,871 46
BALANCE SHEET DATA:
- -------------------
Land, buildings and
improvements, net...... $118,638 $ 91,105 $ 93,231 $ 92,147 $ 92,715 $ 51,908 $ 44,885
Mortgage loans and bonds
receivable, net........ 30,224 15,217 34,549 33,634 -- 12,200 --
Total investments....... 148,862 106,322 127,780 125,781 92,715 64,108 44,885
Total assets............ 164,346 136,403 135,996 133,347 98,384 71,840 48,578
Total debt.............. 103,939 108,936 109,025 111,627 74,018 45,500 89,472
Total stockholders'
equity (deficit)....... 55,824 22,715 22,448 18,267 21,311 25,038 (40,297)
OTHER DATA:
- -----------
Ratio of earnings to
combined fixed charges
and preferred stock
dividends (3).......... 1.45x 1.59x 1.59x 1.61x 1.83x -- --
Ratio of funds from
combined operations to
fixed charges and
preferred stock
dividends (4).......... 1.75x 1.88x 1.88x 2.09x 2.66x -- --
Ratio of total debt to
total market
capitalization(5)...... 49.4% 66.0% 63.8% 79.0% 62.4% 36.9% --
Number of properties.... 22 15 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 the 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. Management believes that
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.
(2) Also represents number of shares of the Company's Common Stock
outstanding.
(3) 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.
(4) For purposes of these computations, the ratio of FFO to fixed charges
consists of FFO as defined in Note (1) plus fixed charges and preferred
stock dividends. Fixed charges consist of interest expense, capitalized
interest and amortization of deferred financing costs.
(5) Total market capitalization as of the dates presented is long-term debt
plus the liquidation value of preferred stock 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.
22
<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 Financial
Statements and Notes thereto included elsewhere in this Prospectus.
RESULTS OF OPERATIONS
Comparison of the Nine Month Period Ended September 30, 1997 versus the Nine
Month Period Ended September 30, 1996
Net income declined $4,126,000 from $8,506,000 for the nine months ended
September 30, 1996 to $4,380,000 during the same period in 1997 primarily due
to non-recurring gains and losses resulting from the disposition of one of the
Company's properties. The primary components affecting this decline were the
$4,874,000 loss on disposition of rental property and the associated
$9,311,000 extraordinary gain on retirement of the debt secured the related
rental property.
Revenues increased approximately 8% or $1,553,000 from $18,358,000 for the
nine months ended September 30, 1996 to $19,911,000 during the same period in
1997. This increase in revenues was the result of a $3,547,000 or 28% increase
in rents, tenant reimbursements and parking revenues which was partially
offset by a $1,898,000 or 36% decline in interest, loan fees and related
revenues. The $3,547,000 increase resulted from several events, including the
addition, on February 28, 1997, of the six New Jersey properties, the
commencement on May 1, 1997, of the Tustin Hospital lease, the leasing, in
August 1997, of the Maryland Gardens facility to a nursing home operator and
the reacquisition, in August 30, 1996, of the property located at 436 North
Bedford Drive.
During the first nine months of 1997, the Company made new investments in
short-term secured loans through GLN Capital, an unconsolidated affiliate.
Interest, loan fees and related revenues declined $1,898,000 from $5,342,000
during the nine months ended September 30, 1996 to $3,444,000 during the same
period in 1997, reflecting management's decision to make investments in
secured trust deeds through GLN Capital for which the Company reports its pro-
rata share of net income from GLN Capital but no revenues. The Company
accounts for its investments in unconsolidated affiliates, such as GLN
Capital, using the equity method; therefore, the Company's pro-rata share of
net income from investment in such unconsolidated affiliates is reported after
income from operations. The Company's pro-rata share of net income from GLN
Capital totaled $866,000 for the nine months ended September 30, 1997.
Excluding the 1996 loss on disposition of rental property of $4,874,000,
operating expense increased $1,600,000 or 11% from $14,262,000 during the nine
months ended September 30, 1996 to $15,862,000 in 1997. Property operations
increased $824,000 or 21% from $3,833,000 in 1996 to $4,657,000 for the same
period of 1997. This increase is the result of the acquisition of the Tustin
Hospital and adjacent medical office buildings and the reacquisition of the
436 North Bedford Drive property in August 1996. The Company has also
increased earthquake coverage on its properties located in Southern California
which has partially contributed to the rise in property operations expense.
Depreciation and amortization expense increased 21% or $513,000 from
$2,434,000 to $2,947,000 during the nine months ended September 30, 1996 and
1997, respectively. This increase in depreciation and amortization expense is
the result of depreciation expense related to the six New Jersey properties,
the Tustin Hospital and adjacent medical office buildings, the Maryland
Gardens facility and 436 North Bedford Drive. Interest expense increased
$176,000 from $6,573,000 in 1996 to $6,749,000 for the nine months ended
September 30, 1997. The increase in interest expense is related to the added
interest expense from the additional debt used to acquire the six New Jersey
properties. This increase in interest expense was offset, in part, by lower
interest costs which resulted from the Company's reduction of its debt with
the proceeds from the sale of Series A Preferred Stock in the second quarter
of 1997.
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
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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 attributable 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 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 September 30, 1997,
obtained partial reductions in the increased assessments on three 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,
Tustin Hospital was vacant and the two adjacent MOBs were
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approximately 50% and 85% occupied by doctors who were affiliated with the
hospital before its closure. As of May 1, 1997, the Company leased the Tustin
Hospital to Pacific Health pursuant to a 62-month net lease, which provides
for three five-year renewal options. The lease for this hospital will generate
approximately $396,000 of annual income for the Company.
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 depreciation of the Tustin Properties acquired 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 operations. 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
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 collectibility of
such receivables.
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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 operations. 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
As of September 30, 1997, the Company's investment in real estate assets
totaled approximately $118.6 million, which included $111.1 million related to
13 medical office buildings and an adjacent parking structure in California
and six medical office buildings in New Jersey, and $7.3 million related to
two senior care facilities in California and Arizona. The Company also had
$30.5 million invested in five secured notes (before allowance for doubtful
accounts of $350,000) secured by senior care facilities located in Oregon,
California, Idaho and Maryland.
During the first nine months of 1997, the Company completed the $22.4
million acquisition of the New Jersey Properties which are 100% leased to PHP
subject to a 17-year net operating lease which includes annual rent
adjustments equal to increases in the Consumer Price Index up to a maximum of
5.0%. Effective May 1, 1997, the Company leased the previously closed Tustin
Hospital, which was vacant when acquired in June 1996. In September 1997, the
Company directly loaned an aggregate of $5.7 million in secured first deeds of
trust to facilitate the acquisition of four senior care facilities located in
California, Oregon and Idaho.
As of December 31, 1996, the Company had a reserve for doubtful notes
receivable of $375,000. Due to the uncertainties surrounding various notes,
the Company increased its reserves for doubtful notes receivable to $630,000
as of June 30, 1997. During the third quarter, management reduced the reserves
from $630,000 to $350,000. Based upon the receipt of the $800,000 Note from
Iatros, the assignment of $400,000 accounts receivable from the Crystal Park
facility and appraisals on the Maryland Gardens and Carroll Manor facilities,
management believes that $350,000 is appropriate.
In May 1997, the Company issued 1,495,000 shares of the Series A Preferred
Stock, from which it received net proceeds of $35.4 million. Of these
proceeds, approximately $28.7 million was used to repay indebtedness which
carried interest at rates ranging from 7.5% to 12%. The Company has a $20.0
million secured and $3.0 million unsecured line of credit. As of September 30,
1997, the Company had $4.5 million available under its secured credit line and
$3.0 million available under its unsecured credit line. At various times
during the
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second quarter, which ended on June 30, 1997, the Company repurchased a total
of 56,800 shares of the Company's Common Stock at an average price of
approximately $16.30 per share.
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 Funds
from Operations ("FFO") less dividends (see discussion below of FFO). In
addition to the recently completed preferred stock offering, the Company's
external sources of capital consist 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
investments.
The Company declared a quarterly distribution payable to holders of the
Company's Common Stock for the third quarter of 1997 in the amount of $0.36
per share which was paid on October 15, 1997 to stockholders of record on
September 30, 1997. The Company also paid a monthly dividend to holders of the
Company's Series A Preferred Stock on the fifteenth day of each of July,
August, September and October to stockholders of record on the first day of
each month. Undistributed FFO was used internally to fund maintenance and
capital expenditures necessary to maintain the Company's existing properties.
In general, the Company expects to continue meeting its short-term liquidity
requirements through its working capital, cash flow provided by operations
and, if necessary, from its lines of credit. The Company considers its ability
to generate cash to be good and expects to continue meeting all operating
requirements as well as providing sufficient funds to maintain stockholder
distributions in accordance with REIT requirements. Long-term liquidity
requirements such as refinancing mortgages, financing acquisitions and
financing capital improvements will be accomplished through long-term
borrowings, the issuance of debt securities and the offering of additional
equity securities.
Debt Structure
As of September 30, 1997, the Company had $103.9 million of debt, of which
approximately $22.1 million, or 21.3%, was floating rate, and approximately
$81.8 million, or 78.7%, was fixed rate. The six loans comprising the $103.9
million in debt are described below.
In August 1995, the Company borrowed $30.0 million from Nomura for ten years
at a fixed rate of 7.89%. As of September 30, 1997, the outstanding balance
under this loan was approximately, $29.2 million, requiring monthly principal
and interest payments of approximately $229,000 (25-year amortization), and
will have a balance of $2.7 million on August 11, 2005, when the note is due.
Pursuant to the loan agreement, the Company has the option to prepay this loan
at any time upon the payment of a premium which, when added to the remaining
principal amount of the note, will be sufficient to purchase non-callable
obligations of the U.S. government sufficient to provide for the scheduled
payments remaining under the note. No prepayment premium is required during
the 90-day period prior to the note's due date. The properties located at 405
North Bedford, 415 North Bedford, 416 North Bedford and 435 North Bedford have
been pledged as security for this note.
Concurrently with this fixed rate loan from Nomura, the Company obtained a
new $20.0 million credit line from Tokai Bank of California ("Tokai Bank"),
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 Tustin
Properties. The Company may draw up to $19.2 million under this line of credit
without providing additional security to Tokai Bank. The Company has the
option to prepay the outstanding balance, or increments thereof, at any time
upon not less than 30 days' notice to Tokai Bank. The credit line requires
monthly interest payments at 30-day LIBOR plus 1.75% and is due on August 17,
1998. At any time prior to maturity, and upon at least 30 days' notice, the
Company may convert the outstanding balance or increments thereof into a five-
year term loan. Upon conversion, and at the option of the Company, the new
term loan would bear interest at a variable rate of either prime plus
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50 basis points or LIBOR plus 175 basis points (at the Company's option). As
of September 30, 1997, the Company owed $14.4 million under this line of
credit and was paying interest at the rate of 7.5% per annum. This line of
credit is currently under review by the lender in light of recent Company
transactions. Although there can be no assurance, the Company anticipates that
the line of credit will be maintained.
During 1996, the Company borrowed $35.0 million from Nomura at a fixed rate
of 8.515%. This note had an outstanding balance of approximately $34.6 million
as of September 30, 1997, requires monthly principal and interest payments of
approximately $282,000 (25-year amortization), and will have a balance of
$29.4 million on August 11, 2006, when the note is due. Pursuant to this loan
agreement, the Company has the option to prepay this loan at any time after
August 30, 1999 upon the payment of a premium which, when added to the
remaining principal amount of the note, will be sufficient to purchase non-
callable obligations of the U.S. government sufficient to provide for the
scheduled payments remaining under this note. The Sherman Oaks Medical Plaza,
Regents Medical Center, Cigna HealthCare Building and office building at 436
North Bedford Drive have been pledged as security for this note.
The 435 North Roxbury Drive property is pledged as security for a $8.5
million loan from Citibank, N.A. ("Citibank"), which had an outstanding
balance as of September 30, 1997 of $7.8 million. 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 an ownership interest
of approximately 61.8%. This Citibank loan, which bears interest at the rate
of 30-day LIBOR plus 1.5%, requires monthly payments of accrued interest plus
principal of $35,000. The Citibank loan is due on May 1, 1999, at which time
the loan will have an estimated balance of approximately $7.1 million. On June
1, 1996, Citibank and the Roxbury Partnership amended the loan agreement to
require the Roxbury Partnership to make additional semiannual principal
reductions equal to excess cash flow, as defined in the amended loan
agreement, from operation of the 435 North Roxbury Drive property. The Roxbury
Partnership has the right to prepay the loan at any time without penalty. At
September 30, 1997 the interest rate on the Citibank loan was 7.15%.
On August 15, 1997, the Company borrowed $16.0 million from Nomura at a
fixed rate of 8.98%, the proceeds of which were used to repay a loan made by
PHP in connection with the purchase of the New Jersey Properties. On October
11, 1997, the Company began making monthly principal and interest payments on
this loan of approximately $155,000 (16 1/2-year amortization). This note,
which will have a balance at maturity of $6.9 million, is due March 11, 2014,
however the note may be prepaid, at the option of the Company, at any time
after the third anniversary of the note upon the payment of a premium which,
when added to the remaining principal amount of the note, will be sufficient
to purchase non-callable obligations of the U.S. government sufficient to
provide for the scheduled payments remaining under the note. The note provides
for certain interest rate increases if the Company chooses to prepay it after
December 11, 2009. The New Jersey Properties have been pledged as security for
this note.
Concurrently with the $16.0 million loan from Nomura, the Operating
Partnership obtained a new $2.0 million loan from PHP. The loan is unsecured
and requires interest-only payments quarterly at the end of October, January,
April and July at the rate of 8.5%. The full $2.0 million is due on July 31,
2007, but may be prepaid at any time prior to maturity without penalty. The
Company's obligation with respect to this note is conditioned upon PHP's
performance of its obligations under the lease related to the New Jersey
Properties.
Capital Commitments
As of September 30, 1997, the Company was in various stages of negotiations
to acquire, either directly or through joint ventures, the Hampden Properties,
the El Centro Facility, two undeveloped parcels in Aliso Viejo, California,
and, through its GLN Venture, to loan money for the acquisition of three
nursing homes in California. Although there can be no assurance that any of
these transactions which have not yet been consummated will be consummated,
the Company is prepared to commit approximately $33.0 million to these
transactions if they can be completed on terms favorable to the Company. See
"Recent Developments--Acquisitions."
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In November 1996, the Company entered into the GLN Venture with Nomura to
expand the Company's Senior Care Operations. The Company and Nomura have
agreed to contribute $10.0 million and $30.0 million, respectively, to the GLN
Venture. 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. As of
September 30, 1997, the Company had contributed approximately $5.0 million to
this venture. See "Business and Properties--Senior Care Operations--GLN
Venture."
The Company is responsible for administering the short-term loans originated
by the GLN Venture and will receive reimbursement for its general and
administrative expenses associated with the GLN Venture. Due to its structure,
the assets and liabilities 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 the return of capital of the loan allocated to Nomura; (iii)
to pay Nomura a 9.0% return on its capital; and (iv) to pay the Company a 9.0%
return on its capital. After cash generated by loans made through the
GLN Venture is distributed as described above, Nomura and the Company share
50.1% and 49.9% respectively in any further distributions.
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 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
funding of major capital improvement projects, through long-term borrowings,
the issuance of debt securities and the offering of additional equity
securities.
As of September 30, 1997, the Company had $22.1 million of outstanding debt
at variable rates ranging from 7.15% to 7.5%. 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 third quarter of 1997 in the
amount of $0.36 per share to be paid on October 15, 1997 to stockholders of
record as of September 30, 1997, which is equal to an annualized distribution
of $1.44 per share. In September 1997, the Company declared and paid a monthly
distribution of approximately $0.214 per share to holders of the Company's
newly issued Series A Preferred Stock. See "Price Range of Common Stock and
Distributions."
Financing Policies
Upon consummation of the Offering, the Company's debt to total market
capitalization ratio will be approximately 37.4% based on the closing price of
the Common Stock as of November 3, 1997 and using the liquidation value for
the Series A Preferred Stock and the Series B Preferred Stock offered hereby.
The debt to total market capitalization ratio is based on the total debt of
the Operating Partnership, assuming that the net proceeds from the Series B
Preferred Stock offered hereby have been used to reduce the Company's
indebtedness on its lines of credit, 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 aggregate liquidation value of the Series A Preferred Stock and
the Series B Preferred Stock offered hereby.
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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.
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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, made either directly or through
joint ventures, in health care properties and in debt obligations secured by
health care properties. The Company's operations currently focus primarily on
opportunities to acquire or finance MOBs through its MOB operations, or senior
care facilities through its senior care operations.
The MOB business strategy is to acquire, develop, manage and lease a
portfolio of medical office buildings and related health care facilities. The
Company 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 portfolio
currently consists of approximately 703,000 rentable square feet. The Company
directly owns the Properties, including 19 high quality medical office
buildings and an adjacent parking facility. Fourteen of the Properties are
located in California and six of the Properties are located in New Jersey.
Several of the Properties include retail space on the ground level. As of
September 30, 1997, the Properties were approximately 94.0% leased to over 300
tenants.
The Senior Care business strategy is to capitalize on consolidation
opportunities in the senior care industry by providing short-term secured
loans to facilitate third-party acquisitions and by making selected equity
investments. The Company, directly and through an unconsolidated operating
venture with Nomura, the GLN Venture, provides short-term financing and
participating loans secured by health care properties throughout the United
States. The Company also seeks to acquire direct ownership interests in senior
care facilities. The Company believes the extensive operating requirements and
budgetary constraints of Federal, state and local governments have created
competitive pressures that have caused a consolidation of the senior care
industry. The Company's Senior Care portfolio currently consists of (i) five
loans secured by first deeds of trust on senior care facilities located in
California, Oregon, Idaho and Maryland and (ii) direct ownership interests in
a senior care facility located in Arizona and a hospital located in
California, consisting of an aggregate of 281 beds. The GLN Venture's Senior
Care portfolio currently consists of two secured loans with an aggregate
outstanding balance of approximately $8.0 million including principal (at face
value) and accrued, unpaid interest.
The Company intends to continue to grow by enhancing the operating
performance of its existing properties by selectively acquiring MOBs and
senior care facilities and by originating loans secured by senior care
facilities that meet the Company's underwriting criteria. Among the key
elements of the Company's growth strategy are improving rental income by
aggressively marketing available space and applying its rigorous investment
analysis to proposed acquisitions and short term loans.
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 and senior care facilities, either directly or through affiliates
and short-term investments in loans secured by senior care facilities located
throughout the United States, either directly or through affiliates. The
Company seeks to achieve these objectives by enhancing the operating
performance of its existing properties as well as through the selective
acquisition of medical office buildings and senior care facilities and by
originating loans secured by health care properties in which the Company has
an investment interest. Key elements of the Company's MOB 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 operating strategy include: (i)
making short-term secured loans, typically to nonprofit entities; (ii)
monitoring the issuance of tax-exempt bonds by a political subdivision with
which a
31
<PAGE>
nonprofit entity has contracted; (iii) negotiating the repayment of the
Company's loans through a combination of cash payments and permanent loan
replacement; and (iv) locating high-quality operators who will effectively and
efficiently operate the senior care facilities in which the Company has an
investment interest to maximize their value.
ACQUISITIONS AND INVESTMENTS
Medical Office Building Operations. 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, 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 Operations. In connection with its acquisition of senior care
facilities and funding of short-term mortgage loans, management analyzes and
reviews certain factors including: (i) the operating history of the entity and
managers who will be responsible for operating the senior care facility; (ii)
the value of the target property; (iii) the location of the property,
particularly its proximity to shops, markets and other health care facilities;
and (iv) the anticipated potential for short-term gain and long-term profits
from investment in the target property. In its mortgage loans analysis,
management also reviews, among other factors, the investment history of the
organization acquiring the senior care facility. The Company anticipates that
it will continue to acquire ownership interests in, and provide financing for,
senior care facilities.
COMPETITIVE STRENGTHS
In addition to the Company's investments in existing MOB properties, the
Company seeks to make selective acquisitions of 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, because 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 operations, and indirectly through the GLN Venture,
the Company initially provided short-term financing (typically 6-24 months)
secured by senior care facilities. The Company has expanded its Senior Care
operations and currently also seeks to selectively acquire ownership interests
in senior care facilities which have characteristics consistent with the
Company's growth strategy. The Company believes that the aging population in
the United States has increased the demand for efficiently operated senior
care facilities. The Company believes that it is in a position to capitalize
on this increased demand for senior care facilities by selectively acquiring
ownership interests in attractively situated senior care facilities and by
funding secured short-term mortgage loans to facilitate the acquisition of
senior facilities by third-party investors. In addition, the Company's ability
to originate and service HUD-insured loans enhances its ability to secure
long-term financing for owners of senior care facilities, providing the
Company with an important exit strategy option in its existing Senior Care
loan program. The Company also believes that there is potential for the
Company to make additional acquisitions of senior care facilities and to fund
new secured short-term loans for the acquisition of senior care facilities by
third parties. See "Recent Developments," "Risk Factors--Specific Risks
Relating to Investments in Trust Deeds Secured by Senior Care Facilities" and
"Business and Properties--Senior Care Operations."
32
<PAGE>
Financing for new acquisitions of medical office building properties and
senior care facilities 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 ownership interests in additional medical office buildings and senior
care facilities and to invest in loans secured by senior care facilities.
However, notwithstanding any business policies or objectives of the Company
described in this Prospectus, 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%, 91.1% and 85.7% for the years ended December 31,
1995 and 1996 and for the nine months ended September 30, 1997, 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 developing and managing
general office properties due to the 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. 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 are facilitated. The Company
stresses meeting these and other special demands of medical property tenants.
EMPLOYEES
As of September 30, 1997, the Company (including the Operating Partnership)
employed 28 persons, 7 of whom are on-site building employees who provide
maintenance services for the Properties and 6 of whom are 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.
33
<PAGE>
THE OPERATING PARTNERSHIP
The Company owns an 89% interest in the Operating Partnership of which 1% is
held as the sole general partner and 88% of which is held as a limited
partner. All of the properties 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 substantially similar terms to the Series B
Preferred Stock offered hereby.
At the 1997 Annual Meeting of the Company's stockholders held on May 28,
1997, the stockholders approved 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 purchased at a premium of $0.25 over the market
value of a share of Common Stock. This authorization provides 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."
34
<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.
[CHART APPEARS HERE]
(1) The Company is the sole general partner and 89% owner of the Operating
Partnership. Of its 89% interest, 1% is held as general partner and 88% is
held as a limited partner. The Operating Partnership's remaining 11%
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 B Preferred
Stock offered hereby.
(2) The Company does not have voting control of the GLN Venture and therefore
it is an unconsolidated operating affiliate of the Company.
(3) G&L Hampden, Inc., a Delaware Corporation and a wholly owned subsidiary of
the Company is the managing member and the owner of a 1% membership
interest of Hampden.
(4) G&L Medical, Inc., a Delaware Corporation and a wholly owned subsidiary of
the Company, is the sole general partner and 1% owner of the Medical
Partnership.
(5) G&L Realty Financing II, Inc., a Delaware Corporation and a wholly owned
subsidiary of the Company, is the sole general partner and 1% owner of the
Realty Financing Partnership.
(6) G&L Delaware Management Corp., a Delaware Corporation and a wholly owned
subsidiary of the Company, is the managing member and the owner of a 1%
membership interest of the PHP Venture.
(7) G&L Senior Care, Inc., a Delaware Corporation and a wholly owned subsidiary
of the Company, is the managing member and the owner of a 1% membership
interest of G&L Gardens.
35
<PAGE>
BUSINESS AND PROPERTIES
The Properties consist of 19 high quality medical office buildings and an
adjacent parking facility. As of September 30, 1997, the Properties were
approximately 94.0% leased to over 300 tenants. 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 its MOB operations, 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. Because doctors now perform a variety of medical
procedures in their 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 to facilitate referrals by
practitioners with different specialties within the building. 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.
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<PAGE>
The following table sets forth certain information regarding each of the
Properties as of September 30, 1997.
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>
SOUTHERN CALIFORNIA
- -------------------
405 N. Bedford, Beverly Hills, CA............. 1947/1987 46,463 44,655 96.1% $ 2,142,550 $47.98
415 N. Bedford, Beverly Hills(6).............. 1955 5,720 5,720 100.0 216,564 37.86
416 N. Bedford, Beverly Hills................. 1946/1986 40,111 36,324 90.6 1,380,630 38.01
435 N. Bedford, Beverly Hills................. 1950/63/84 54,047 50,637 93.7 1,658,200 32.75
435 N. Roxbury, Beverly Hills................. 1956/1983 42,360 39,624 93.5 1,396,522 35.24
436 N. Bedford, Beverly Hills................. 1990 76,348 76,348 100.0 3,102,826 40.64
Holy Cross Medical Plaza...................... 1985 72,457 66,773 92.1 1,832,869 27.45
11550 Indian Hills
Road Mission Hills, CA
St. Joseph's Medical Office Bldg. ............ 1987 25,684 25,684 100.0 698,446 27.19
2031 West Alameda Ave.
Burbank, CA(7)
Sherman Oaks Medical Plaza.................... 1969/1993 69,571 64,282 92.4 1,415,506 22.02
4955 Van Nuys Blvd.
Sherman Oaks, CA
Regents Medical Center........................ 1989 65,879 63,085 95.8 1,517,621 24.06
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
Tustin--Medical Office I...................... 1969 18,091 8,972 49.6 132,193 14.73
14591 Newport Avenue
Tustin, CA
Tustin--Medical Office II..................... 1985 47,954 40,150 83.7 511,398 12.74
14642 Newport Avenue
Tustin, CA
1095 Irvine Boulevard......................... 1995 10,125 10,125 100.0 197,080 19.46
Tustin, CA
NEW JERSEY
- ----------
2103 Mt. Holly Rd............................. 1994 12,560 12,560 100.0 434,950 34.63
Burlington, NJ
150 Century Parkway........................... 1995 12,560 12,560 100.0 391,310 31.16
Mt. Laurel, NJ
274 Highway 35, South......................... 1995 12,560 12,560 100.0 481,030 38.30
Eatontown, NJ
80 Eisenhower Drive........................... 1994 12,675 12,675 100.0 421,800 33.28
Paramus, NJ
16 Commerce Drive............................. 1963 17,500 17,500 100.0 491,670 28.10
Cranford, NJ
4622 Black Horse Pike......................... 1994 12,560 12,560 100.0 437,490 34.83
May Landing, NJ
------- ------- -----------
Total/Weighted average
of all properties............................. 702,829 660,398 94.0% $19,957,451 $30.22
======= ======= ===========
</TABLE>
37
<PAGE>
- --------
(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 owned by 435 North Roxbury Drive, Ltd., of which the Operating
Partnership owns a 61.75% 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.
Occupancy figures have been rounded to the nearest tenth of one percent.
(4) Rent is based on third-party leased space billed in September 1997; no
rent is assumed from management space.
(5) Average rent per square foot is calculated based upon third-party leased
space, excluding management space.
(6) This property consists of retail space and parking facilities.
(7) 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.
SENIOR CARE FACILITIES--SUMMARY DATA
<TABLE>
<CAPTION>
AVERAGE
YEAR PERCENTAGE TOTAL ANNUAL
CONSTRUCTED OR DATE NUMBER OF OF BEDS PURCHASE ANNUALIZED RENT PER
PROPERTY REHABILITATED LEASED BEDS OCCUPIED PRICE RENT BED
-------- -------------- ------ --------- ---------- ---------- ---------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Southern California
- -------------------
Tustin Hospital(2)..... 1969 5/1/97 183 0.0%(3) $1,900,000 $396,000 $2,164
14662 Newport Avenue
Tustin, CA
Arizona
- -------
Maryland Gardens....... 1951-1957 6/1/97 98 98.0% 4,600,000 351,429 3,586
31 West Maryland
Avenue
Phoenix, AZ
</TABLE>
- --------
(1) Occupancy is on a per-bed basis.
(2) Rent is due to commence January 1998. Rent for the months of October,
November and December 1997 is deferred until July 1998, at which time the
monthly rent is increased from $33,000 to $35,062.50 for the remaining
term of the lease.
(3) Tustin Hospital is currently under renovation at the tenant's expense and
is due to open in January 1998.
(4) The lease provides for triple net rental payments in the amount of $30,000
in September 1997. The monthly rental payment will be increased to $35,000
per month from October 1997 through April 1998 and June through July 1998.
No rental payments will be due in May 1998.
PROPERTIES
Southern 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.
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<PAGE>
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 $147,144. 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 5,720 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 $16,853. 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 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
39
<PAGE>
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 (17.2% of the rentable square footage) pursuant to a lease that
provides for monthly rent of $35,548. The lease expires October 31, 2006 and
provides for a ten-year renewal option. Dialysis Center occupies 10,639 square
feet (14.7% 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.
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.
40
<PAGE>
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.
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. 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.
Tustin--MOB I
The 14591 Newport Avenue building in Tustin, California is a two-story
medical office building that was constructed in 1969 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.
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.
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 who also
leases the Tustin Hospital. The lease expires on November 30, 2001 and
provides for one, five-year renewal option.
1095 Irvine Boulevard, Tustin
The 1095 Irvine Boulevard building in Tustin, California was redeveloped in
1995 as a primary health care center for physicians who are part of the St.
Joseph Hospital of Orange health care 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.
New Jersey Properties
As of August 15, 1997, PHP leases 100% of the following properties from
GL/PHP under the terms of a 17-year net operating lease that provides for rent
increases equal to the annual increase in the Consumer Price Index, subject to
a 5% maximum annual increase.
41
<PAGE>
150 Century Parkway, Mount Laurel Township
The property is located in Burlington County and consists of a one-story
medical center containing a net rentable area of approximately 12,560 square
feet. The building is situated on approximately 2.50 acres and is currently
occupied by an affiliate of PHP. The existing operation consists of medical
personnel providing primary care services to members of various HMO
organizations.
80 Eisenhower Drive, Paramus Borough
The property is located in Bergen County and consists of a one-story medical
building containing a net rentable area of approximately 12,675 square feet.
The building is situated on approximately 2.27 acres and is currently occupied
by an affiliate of PHP. The existing operations consist of medical personnel
providing primary care services to members of various HMO organizations.
16 Commerce Drive, Cranford Township
The property is located in Union County and consists of a two level medical
center containing a net rentable area of approximately 17,500 square feet. The
building is situated on approximately 3.059 acres and is currently occupied by
an affiliate of PHP. The existing operation consists of medical personnel
providing primary care services to members of various HMO organizations.
4622 Black Horse Pike, Hamilton Township
The property is located in Atlantic County and consists of a one level
medical center containing a net rentable area of approximately 12,560 square
feet. The building is situated on approximately 2.73 acres and is currently
occupied by an affiliate of PHP. The existing operation consists of medical
personnel providing primary care services to members of various HMO
organizations.
2103 Mount Holly Road, Burlington Township
The property is located in Burlington County and consists of a one level
medical center containing a net rentable area of approximately 12,560 square
feet. The building is situated on approximately 2.43 acres and is currently
occupied by an affiliate of PHP. The existing operation consists of medical
personnel providing primary care services to members of various HMO
organizations.
274 Route 35, Eaton Town Borough
The property is located in Monmouth County and consists of a one level
medical center containing a net rentable area of approximately 12,560 square
feet. The building is situated on approximately 4.66 acres and is currently
occupied by an affiliate of PHP. The existing operation consists of medical
personnel providing primary care services to members of various HMO
organizations.
SENIOR CARE FACILITIES
Southern California Facility
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 facilities, 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. The hospital was vacant when
the Company acquired the property on June 14, 1996. As of May 1, 1997, the
hospital has been 100% leased to Pacific Health. The lease provides for triple
net rental payments which are due to commence January 1998. Rental payments
for the months of October through December 1997, are deferred until July 1998,
at which time the monthly rent is increased from $33,000 to approximately
$35,000. The lease expires June 30, 2002 and provides for three, five-year
renewal options. In July 1997, the Company granted Pacific Health an option,
which expires on July 1, 2001, to purchase the hospital for $5.0 million.
42
<PAGE>
Although there can be no assurance, the Company expects that the anticipated
January 1998 reopening of the hospital will assist in efforts to lease the
vacant space in the Company's adjacent MOB's.
Arizona Facility
Maryland Gardens
The property is located in Phoenix and consists of a total of 98 beds. The
facility is situated on approximately 1.84 acres and is currently leased to
Capital Senior Management. This operating lease expires in July 1998 and
provides for triple net rental payments in the amount of $30,000 in September
1997. The monthly rental payment will be increased to $35,000 per month from
October 1997 through April 1998 and June through July 1998. No rental payments
will be due in August 1997 and May 1998.
LEASES
Medical Office Building Properties
As of September 30, 1997, the Properties were approximately 94.0% 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..................... 10 15,918 482,574 2.4%
1998..................... 56 118,748(3) 4,317,546 21.6%
1999..................... 36 57,827 1,676,535 8.4%
2000..................... 48 71,399 2,022,879 10.1%
2001..................... 36 57,728 1,830,760 9.2%
2002..................... 24 52,293 1,568,577 7.9%
2003..................... 6 9,065 254,007 1.3%
2004..................... 5 53,348 1,243,616 6.2%
2005..................... 9 18,344 655,950 3.3%
2006..................... 14 43,015 1,340,055 6.7%
2007 or later............ 12 107,509 3,482,511 17.5%
</TABLE>
- --------
(1) Does not include month-to-month leases, management space or vacant space.
(2) Percentage of Total Annual Rent is based upon annualized revenues of
$19,957,000. Percent of Total Annual Rent has been rounded to the nearest
tenth of one percent.
(3) Includes the 36,787 sq. ft. lease with St. John's Hospital. St. John's
Hospital has subleased approximately 75% of this space to third-party
doctors. These subleases constitute an aggregate of approximately $101,000
in current monthly rental payments. If St. John's does not extend its
option to renew, the Company will assume these existing subleases when the
lease with Saint John's Hospital expires in 1998. All of these subleases
will expire in 1998.
43
<PAGE>
The Company has been successful in obtaining lease renewals, achieving a
weighted average renewal rate of approximately 85.7% on medical office leases
expiring during the nine month period ended September 30, 1997. 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 September 30, 1997.
<TABLE>
<CAPTION>
% OF
TOTAL
RENTED
SQUARE SQUARE
SCHEDULED ANNUAL RENT INCREASES FEET(1) FEET(1)(2)
------------------------------- ------- ----------
<S> <C> <C>
None.................................................... 148,283 22.5%
Consumer Price Index related............................ 270,597 41.9%
2%...................................................... 17,759 2.7%
3%...................................................... 37,380 5.7%
4%...................................................... 45,282 6.9%
5%...................................................... 137,239 20.8%
8%...................................................... 3,830 0.6%
</TABLE>
- --------
(1) Does not include 5.1% of the total rental square feet which is vacant
space or management space.
(2) Percent of Total Rented Square Feet has been rounded to the nearest tenth
of one percent.
44
<PAGE>
The historical occupancy, rounded to the nearest tenth of one percent, of
the MOB Properties is shown in the following table:
PROPERTIES--HISTORICAL OCCUPANCY
<TABLE>
<CAPTION>
PROPERTY 1997(1) 1996 1995 1994 1993
-------- ------- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
SOUTHERN CALIFORNIA
- -------------------
405 N. Bedford............................ 96.1% 100.0% 100.0% 96.2% 97.8%
415 N. Bedford(2)......................... 100.0 100.0 100.0 100.0 100.0
416 N. Bedford............................ 90.6 97.6 100.0 100.0 97.2
435 N. Bedford............................ 93.7 93.1 89.2 85.3 97.7
435 N. Roxbury............................ 93.5 93.6 95.6 91.7 94.5
436 N. Bedford............................ 100.0 98.4 90.0 92.8 100.0
Holy Cross Medical Plaza(3)............... 92.1 93.1 94.7 87.7 N/A
St. Joseph's Medical Bldg.(4)............. 100.0 100.0 100.0 100.0 N/A
Sherman Oaks Medical Plaza(3)............. 92.4 86.7 90.0 79.8 N/A
Regents Medical Center(3)................. 95.8 100.0 90.9 87.6 N/A
Cigna HealthCare Building(3).............. 100.0 100.0 100.0 100.0 N/A
1095 Irvine Boulevard(5).................. 100.0 100.0 100.0 N/A N/A
14591 Newport Avenue, Medical Office I(6). 49.6 49.6 N/A N/A N/A
14642 Newport Avenue, Medical Office II(6) 83.7 85.1 N/A N/A N/A
NEW JERSEY
- ----------
2103 Mt. Holly Rd.(7)..................... 100.0 N/A N/A N/A N/A
Burlington, NJ
150 Century Parkway(7).................... 100.0 N/A N/A N/A N/A
Mt. Laurel, NJ
274 Highway 35, South(7).................. 100.0 N/A N/A N/A N/A
Eatontown, NJ
80 Eisenhower Drive(7).................... 100.0 N/A N/A N/A N/A
Paramus, NJ
16 Commerce Drive(7)...................... 100.0 N/A N/A N/A N/A
Cranford, NJ
4622 Black Horse Pike(7).................. 100.0 N/A N/A N/A N/A
May Landing, NJ
----- ----- ----- ----- -----
Weighted average........................... 94.0% 93.7% 94.2% 90.9% 97.9%
===== ===== ===== ===== =====
</TABLE>
- --------
(1) 1997 contains information only through September 30, 1997.
(2) Retail space.
(3) Acquired in 1994.
(4) Acquired in December 1993.
(5) Placed in service in 1995.
(6) Acquired in June 1996 from a creditors committee. Previous operating
statistics were not available.
(7) Acquired in February 1997. Prior to acquisition the facilities were
operated as an acute care medical office building by the previous owner.
45
<PAGE>
The following tables set forth the annualized base rent per square foot for
the MOB Properties for the past five years.
PROPERTIES--ANNUALIZED BASE RENT PER SQUARE FOOT
<TABLE>
<CAPTION>
PROPERTY 1997(1) 1996 1995 1994 1993
-------- ------- ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Southern California
- -------------------
405 N. Bedford............................ $47.98 $44.51 $41.64 $42.01 $37.87
415 N. Bedford(2)......................... 37.86 36.28 36.21 36.79 36.41
416 N. Bedford............................ 38.01 36.89 37.04 40.88 39.31
435 N. Bedford............................ 32.75 33.49 34.35 39.25 39.03
435 N. Roxbury............................ 35.24 36.50 37.11 38.39 38.12
436 N. Bedford............................ 40.64 39.84 42.13 44.71 44.17
Holy Cross Medical Plaza(3)............... 27.45 28.07 25.91 28.77 N/A
St. Joseph's Medical Bldg.(4)............. 27.19 27.03 29.12 29.92 N/A
Sherman Oaks Medical Plaza(3)............. 22.02 22.90 23.32 23.57 N/A
Regents Medical Center(3)................. 24.06 24.93 27.11 28.38 N/A
Cigna HealthCare Building(3).............. 23.04 23.04 23.04 23.01 N/A
1095 Irvine Boulevard(5).................. 19.46 19.46 17.14 N/A N/A
14591 Newport Avenue, Medical Office I(6). 14.73 14.66 N/A N/A N/A
14642 Newport Avenue, Medical Office
II(6).................................... 12.74 12.34 N/A N/A N/A
New Jersey
- ----------
2103 Mt. Holly Rd(7)...................... 34.63 N/A N/A N/A N/A
Burlington, NJ
150 Century Parkway(7).................... 31.16 N/A N/A N/A N/A
Mt. Laurel, NJ
274 Highway 35, South(7).................. 38.30 N/A N/A N/A N/A
Eatontown, NJ
80 Eisenhower Drive(7).................... 33.28 N/A N/A N/A N/A
Paramus, NJ
16 Commerce Drive(7)...................... 28.10 N/A N/A N/A N/A
Cranford, NJ
4622 Black Horse Pike(7).................. 34.83 N/A N/A N/A N/A
May Landing, NJ
------ ------ ------ ------ ------
Weighted average........................ $30.22 $29.81 $31.70 $34.01 $40.15
====== ====== ====== ====== ======
</TABLE>
- --------
(1) 1997 contains information only through September 30, 1997.
(2) Retail space.
(3) Acquired in 1994.
(4) Acquired in December 1993.
(5) Placed in service in 1995.
(6) Acquired in June 1996.
(7) Acquired in August 1997.
46
<PAGE>
PROPERTIES--ANNUALIZED BASE RENT
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
PROPERTY 1997(1) 1996 1995 1994 1993
-------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Southern California
- -------------------
405 N. Bedford........................ $ 2,142 $ 2,183 $ 2,033 $ 1,904 $ 1,914
415 N. Bedford(2)..................... 217 217 216 210 205
416 N. Bedford........................ 1,381 1,468 1,511 1,658 1,599
435 N. Bedford........................ 1,658 1,718 1,690 1,660 2,044
435 N. Roxbury........................ 1,397 1,450 1,507 1,495 1,598
436 N. Bedford........................ 3,103 3,090 2,988 3,222 3,434
Holy Cross Medical Plaza(3)........... 1,833 1,896 1,749 1,785 N/A
St. Joseph's Medical Bldg.(4)......... 698 694 758 764 N/A
Sherman Oaks Medical Plaza(3)......... 1,416 1,378 1,457 1,277 N/A
Regents Medical Center(3)............. 1,517 1,555 1,640 1,531 N/A
Cigna HealthCare Building(3).......... 1,097 1,097 1,097 1,097 N/A
1095 Irvine Boulevard(5).............. 197 197 174 N/A N/A
14591 Newport Avenue, Medical Office
I(6)................................. 132 120 N/A N/A N/A
14642 Newport Avenue, Medical Office
II(6)................................ 511 504 N/A N/A N/A
New Jersey
- ----------
2103 Mt. Holly Rd(7).................. 435 N/A N/A N/A N/A
Burlington, NJ
150 Century Parkway(7)................ 391 N/A N/A N/A N/A
Mt. Laurel, NJ
274 Highway 35, South(7).............. 481 N/A N/A N/A N/A
Eatontown, NJ
80 Eisenhower Drive(7)................ 422 N/A N/A N/A N/A
Paramus, NJ
16 Commerce Drive(7).................. 492 N/A N/A N/A N/A
Cranford, NJ
4622 Black Horse Pike(7).............. 437 N/A N/A N/A N/A
May Landing, NJ
------- ------- ------- ------- -------
Total............................... $19,957 $17,567 $16,820 $16,603 $10,794
======= ======= ======= ======= =======
</TABLE>
- --------
(1) 1997 contains information only through September 30, 1997.
(2) Retail space.
(3) Acquired in 1994.
(4) Acquired in December 1993.
(5) Placed in service in 1995.
(6) Acquired in June 1996 from a creditors committee. Previous operating
statistics were not available
(7) Acquired in February 1997 and operated as an acute care medical office
building by the previous owner.
47
<PAGE>
As of September 30, 1997, the Company's medical offices included a broad mix
of medical specialties and other uses as shown in the table below:
<TABLE>
<CAPTION>
% OF TOTAL LEASED
PRACTICE AREA NUMBER OF SUITES MEDICAL OFFICE SPACE
------------- ---------------- --------------------
<S> <C> <C>
Allergy.............................. 1 0.20%
Chiropractic......................... 2 0.37%
Dentistry............................ 48 9.62%
Dermatology.......................... 11 3.20%
Dialysis............................. 4 3.16%
Ear/Nose/Throat...................... 5 1.38%
General Practice..................... 17 5.27%
Internal Medicine.................... 35 10.61%
Lab.................................. 8 0.89%
Nephrology........................... 1 0.10%
Neurology............................ 3 0.39%
OB/GYN............................... 5 1.21%
Ophthalmology........................ 9 2.51%
Orthopedic........................... 5 2.96%
Other................................ 15 2.13%
Pediatrics........................... 2 0.75%
Pharmacy............................. 4 0.62%
Physical Therapy..................... 4 1.80%
Plastic Surgery...................... 17 5.50%
Podiatry............................. 4 0.48%
Primary Care......................... 9 21.45%
Psychiatry........................... 10 1.30%
Psychology........................... 21 2.15%
Retail............................... 41 8.97%
Surgery.............................. 18 11.92%
Urology.............................. 4 1.06%
--- ------
Total.............................. 303 100.00%
=== ======
</TABLE>
- --------
* Percent of Total Leased Medical Office Space has been rounded to the nearest
tenth of one percent.
Senior Care Facilities
The following lease expiration table sets forth the number, square feet,
number of beds and associated annual rent for the Company's leased senior care
facilities that have leases expiring in future years.
<TABLE>
<CAPTION>
% OF
NUMBER OF APPROXIMATE NUMBER TOTAL
LEASES TOTAL RENTED OF ANNUAL
YEAR OF LEASE EXPIRATION EXPIRING(1) SQUARE FEET(1) BEDS ANNUAL RENT RENT(2)
------------------------ ----------- -------------- ------ ----------- -------
<S> <C> <C> <C> <C> <C>
1998.................... 1 24,862 98 351,429 53%
2002.................... 1 101,000 183 396,000 47%
</TABLE>
- --------
(1) Does not include month-to-month leases, management space or vacant space.
(2) Percentage of Total Annual Rent is based upon annualized revenues of
$747,429. Percent of Total Annual Rent has been rounded to the nearest
tenth of one percent.
48
<PAGE>
The historical occupancy, rounded to the nearest tenth of one percent, of
the senior care facilities is shown in the following table:
SENIOR CARE FACILITIES--HISTORICAL OCCUPANCY(1)
<TABLE>
<CAPTION>
PROPERTY 1997(2) 1996 1995 1994 1993
-------- ------- ----- ---- ---- ----
<S> <C> <C> <C> <C> <C>
SOUTHERN CALIFORNIA
- -------------------
Tustin Hospital(3)............................. 0.0% 0.0% (4) (4) (4)
ARIZONA
- -------
31 West Maryland............................... 98.0% 96.0% 97.0% 92.9% 88.8%
</TABLE>
- --------
(1) Occupancy is on a per-bed basis.
(2) 1997 contains information only through September 30, 1997.
(3) Tustin Hospital (acquired in 1996 and leased in 1997) is currently
undergoing renovations and is due to reopen in December, 1997.
(4) Previously a full service community hospital, which was closed in March,
1996 and acquired in June 1996 from a creditors committee. Previous
operating statistics are not available.
The following tables set forth the annualized base rent per bed for the
senior care facilities for the past five years.
SENIOR CARE FACILITIES--ANNUALIZED BASE RENT PER BED
<TABLE>
<CAPTION>
PROPERTY 1997(1) 1996 1995 1994 1993
-------- ------- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Southern California
- -------------------
Tustin Hospital(2)................................. $2,164 (4) (4) (4) (4)
Arizona
- -------
31 West Maryland Avenue(3)......................... 3,586 (4) (4) (4) (4)
Phoenix, AZ
------ --- --- --- ---
Weighted average................................. $2,660 -- -- -- --
====== === === === ===
</TABLE>
- --------
(1) 1997 contains information only through September 30, 1997.
(2) Rent is due to commence January 1998. Rent for the months of October,
November and December of 1997 is deferred until July 1998, at which time
the monthly rent is increased from $33,000 to approximately $35,000 for
the remaining term of the lease.
(3) The lease provides for triple net rental payments in the amount of $30,000
in June, July and September 1997. The monthly rental payment will be
increased to $35,000 per month from October 1997 through April 1998 and
June through July 1998. No rental payments were due in August 1997 or will
be due in May 1998.
(4) This facility was previously managed by the owner and was not subject to a
lease.
As of September 30, 1997, the Company's senior care facilities included the
uses shown in the following table.
<TABLE>
<CAPTION>
% OF TOTAL
PRACTICE AREA NUMBER OF BEDS LEASED BEDS
------------- -------------- ------------
<S> <C> <C>
Hospital....................................... 183 65.1%
Primary Care................................... 98 34.9%
</TABLE>
- --------
* Percent of Total Leased Beds has been rounded to the nearest tenth of one
percent.
49
<PAGE>
SENIOR CARE OPERATIONS
Lending Operations
The Company, through its Senior Care operations, makes mortgage loans
secured by senior care facilities. Many of the loans are intended to serve as
bridge or interim financing (generally 6 to 24 months) for the acquisition of
such facilities by joint ventures in which the Company participates or by
third 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
permanent financing by the buyer. The Company has from time to time extended
the maturity dates of outstanding loans to give borrowers additional time to
obtain permanent financing and taken a participation interest in such loans
upon maturity in lieu of full debt repayment in the form of cash. Loans made
by the Company 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 September 30, 1997, the Company made
a total of ten 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, which are, in most instances, secured by first
mortgages on the facilities acquired.
Of the ten mortgage loans made by the Company as of September 30, 1997,
three remain outstanding, one is currently in default and the Company is
reviewing its available options, and two have been exchanged for other
interests in lieu of full debt repayment in the form of cash.
The Company funded a short-term loan secured by a deed of trust in the
amount of approximately $1.9 million secured by the Coos Bay Facility. This
loan bears interest at a rate of LIBOR plus 650 basis points per annum and
matures on February 1, 1998, subject to extensions. This loan provides for
monthly interest-only payments. At maturity, assuming no prepayments, $1.9
million will be due on this loan. This loan permits prepayment on any monthly
payment date of all or any portion of the outstanding principal amount of the
loan, without penalty, upon not less than five days' prior written notice to
the Company of the borrower's intent to repay. As of September 30, 1997, the
Coos Bay Facility was 93.0% occupied and leased to Coos Bay Rehabilitation,
Inc. under a 10-year net operating lease that provides for two five-year
extension options. The operator of this facility possesses all licenses
necessary for its operation.
The Company has also funded two short-term loans secured by first deeds of
trusts for an aggregate amount of approximately $1.0 million secured by the
Idaho Facilities. These loans bear interest at a rate of LIBOR plus 650 basis
points per annum and mature on April 1, 1998, subject to extensions. These
loans provide for monthly interest-only payments. At maturity, assuming no
prepayments, approximately $870,000 and $115,000, respectively, will be due on
these loans. These loans permit prepayment on any monthly payment date of all
or any portion of the outstanding principal amount of the loan without
penalty, upon not less than five days' prior written notice to the Company of
the borrower's intent to repay. As of September 30, 1997, the Idaho Facilities
were 92.0% and 90.0% occupied, respectively, and leased to Kimburida
Management Group under five-year net operating leases that provide for two
five-year extension options. The operators of these facilities possess all
licenses necessary for their operation.
The Company owns a 50% membership interest in Valley Convalescent, which was
formed in anticipation of purchasing the El Centro Facility. Valley
Convalescent has entered into an acquisition agreement to purchase the El
Centro Facility for an aggregate acquisition price of approximately $3.6
million, $400,000 of which would be used for facility renovation. The Company
and Continuum Health contributed approximately $300,000 and $344,000,
respectively, to Valley Convalescent. In addition, the Company will fund a
loan secured by a first deed of trust on the El Centro Facility for
approximately $2.8 million at the close of escrow. Concurrently with the
consummation of this acquisition, it is contemplated that Stefan Health Care
will execute a five-year net operating lease for the El Centro Facility. The
terms of this lease are still being negotiated. The funds for the acquisition
of the El Centro Facility are presently being held in escrow pending the
receipt by Stefan Health Care of authorization from the state licensing agency
to operate the facility. There can be no assurance, however,
50
<PAGE>
that Stefan Health Care will receive such authorization and the acquisition of
the El Centro Facility will be consummated or, if consummated, that the
Company will be able to lease the facility on favorable terms. See "Recent
Developments--Acquisitions."
On April 25, 1996, the Company entered into a loan participation agreement
with Iatros to fund two loans secured by third and fifth trust deeds in the
amount of approximately $750,000 and $1.1 million, respectively, to facilitate
the purchase of the Crystal Park Facility. Following the acquisition of the
Crystal Park Facility, the borrower engaged an affiliate of Iatros to operate
the facility. On May 16, 1997, the borrower filed for bankruptcy under Chapter
11 of the U.S. Bankruptcy Code and engaged a new operator for the Crystal Park
Facility, which has since closed. As of September 30, 1997, the Company's
interest in the third and fifth trust deeds was approximately $1.3 million,
including principal (at face value) and accrued, unpaid interest. In October
1997, the Company assigned its remaining interest in the participation
agreement and the promissory notes to Iatros in exchange for the $800,000 Note
and title to the accounts receivable of the former owner of the facility which
had served as additional collateral for the promissory notes and which the
Company estimates to have a net realizable value of approximately $400,000.
On June 17, 1996, the Company funded the $6.1 Million Loan for the
acquisition of the Carroll Manor Facility by Heritage Care. The Company holds
a first deed of trust in that facility and Carroll Manor holds a second deed
of trust which secures its $500,000 loan to Heritage Care. Heritage Care is
currently in default under the $6.1 Million Loan, which matured on November
30, 1996 and which currently bears interest at a rate of 15.0% per annum (the
default rate). In addition to the $6.1 Million Loan, the Company recently made
the Additional Advances, which total $2.3 million, to enable Heritage Care to
meet its payroll and other current expenses necessary to remain in operation
and thereby protect the value of the Company's security interest in the
Carroll Manor Facility. The Additional Advances are secured by the Company's
first deed of trust pursuant to the language thereof and are therefore secured
loans, although they are subordinate in priority to the Carroll Manor Loan.
Despite the fact that the Additional Advances are secured by the Company's
first deed of trust, there can be no assurance that the value of the Carroll
Manor Facility will be sufficient to satisfy Heritage Care's obligations to
the Company (including principal and interest outstanding under the $6.1
Million Loan and the Additional Advances) and the Carroll Manor Loan. The
Company is currently reviewing its exit strategies with respect to the loan to
Heritage Care, which include the possibility of (i) causing the transfer of
the Carroll Manor Facility to another non-profit entity that could obtain
long-term financing to replace the existing indebtedness or (ii) taking title
to the facility through foreclosure and subsequently leasing it to an operator
or selling it to a third party.
HUD Loan Servicing
The Company has received authorization from HUD to originate and service
HUD-insured loans. The HUD program provides loan guarantees for the long-term
financing of health care properties, including senior care facilities. The
Company believes that this authorization enhances the Company's ability to
fund long-term financing which it is not able to provide through the GLN
Venture. The Company believes that this new source of financing provides an
important exit-strategy for its own Senior Care loan program by providing
long-term financing vehicles at competitive interest rates.
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, often because the facilities are in 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.
51
<PAGE>
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.
In March 1997, the Company sold Series A and B bonds issued by the
Massachusetts Industrial Finance Agency, Inc., which were secured by the
Hampden Properties, to the GLN Venture for $21.7 million. The Hampden Bonds,
which were purchased for $19.9 million in October 1995, had an outstanding
balance of $27.7 million at the time of the sale, including principal (at face
value) and accrued unpaid interest. In October 1997, the Company acquired the
Hampden Properties for approximately $20.1 million. Concurrently with this
transaction, the seller of the Hampden Properties paid $22.7 million, a
discount of approximately $5.0 million, to the GLN Venture in full
satisfaction of the outstanding balance on the Hampden Bonds. See "Recent
Developments--Acquisitions."
In May 1997 the GLN Venture acquired a 50% limited partnership interest in a
limited partnership created to acquire a recreational vehicle ("RV") park in
Florida. The RV park was acquired by the limited partnership for approximately
$1.2 million. In connection with the acquisition of the RV park, the GLN
Venture funded a secured loan of approximately $1.5 million to the limited
partnership. This loan bears interest at a rate of approximately 9.0% per
annum, matures on May 1, 1999, and provides for monthly payments of interest
only. At maturity, the full $1.5 million will be due. The RV park is operated
by Camper Clubs of America, Inc., ("Camper Clubs") the largest RV park
operator in the U.S. and a limited partner in the limited partnership,
pursuant to a management agreement under which Camper Clubs receives a fee
equal to 5% of gross revenues generated by the RV park. This management
agreement is terminable at will by either party, upon thirty days' written
notice to the other party.
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;
moreover, there can be no assurance that policies maintained by the Company
will be adequate in the event of a loss. The Company carries earthquake and
flood insurance for coverage of losses up to $20 million on its portfolio of
properties located in California and Arizona. This coverage is subject to a
10% deductible up to the amount of insured loss. Fifteen of the 22 properties
directly owned by the Company are located in Southern California, which has a
history of seismic activity, including the 1994 Northridge earthquake that
damaged the Holy Cross Medical Plaza property. One property directly owned by
the Company is located in Phoenix, Arizona, which is located in an area with a
history of flood activity. 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."
52
<PAGE>
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.
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. Limited quantities of non-
friable asbestos were also discovered in the Maryland Gardens Facility and
Riverdale Gardens Nursing Home. Management believes that it has undertaken
adequate measures to ensure that the asbestos will remain undisturbed and that
it does not pose a current health risk. Management plans to continue to
monitor this situation.
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."
53
<PAGE>
POLICIES WITH RESPECT TO CERTAIN ACTIVITIES
CONFLICT OF INTEREST POLICIES
The executive employment contracts between each of Mr. Gottlieb and Mr.
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 approved
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. 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.
54
<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 October 1, 1997 to November 3, 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 and each of the first three quarters of 1997.
<TABLE>
<CAPTION>
UNIT AND COMMON
STOCK
HIGH LOW DISTRIBUTION
------ ------ ---------------
<S> <C> <C> <C>
1997
Fourth quarter (through November 3, 1997)....... 18 3/8 17 1/8 (1)
Third quarter................................... 19 15 3/4 $0.36
Second quarter.................................. 17 7/8 15 3/8 0.36
First quarter................................... 19 16 0.36
1996
Fourth quarter.................................. 17 5/8 15 1/2 0.36
Third quarter................................... 16 3/8 12 1/2 0.36
Second quarter.................................. 14 1/4 12 3/8 0.32
First quarter................................... 13 7/8 10 3/8 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>
- --------
(1) The Company's Board of Directors has not yet declared a Unit and Common
Stock distribution for the fourth quarter of 1997.
The number of holders of record of the shares of Common Stock was 167 as of
September 30, 1997. Such number does not include the total number of
beneficial holders of Common Stock.
55
<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...... 57 Chief Executive Officer, Co-Chairman of the Board and Director
Steven D. Lebowitz...... 57 President, Co-Chairman of the Board and Director
Richard L. Lesher....... 63 Director
Leslie D. Michelson..... 46 Director
Reese L. Milner II...... 49 Director
Charles P. Reilly....... 55 Director
S. Craig Tompkins....... 46 Director
Joseph Carroll.......... 41 Senior Vice President
Mark H. Hamermesh....... 41 Senior Vice President
John H. Rauch........... 67 Senior Vice President, Operations
Quentin Thompson........ 41 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 has
been active in the development, management and ownership of a wide range of
real estate properties since 1968, co-founded G&L Development in 1976 and has
been a general partner since that time. 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 LLP 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.
56
<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. ("VHS"), a vendor of sophisticated clinical
software programs and consulting services for the managed care industry. VHS
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. VHS is traded on the New York Stock
Exchange. Prior to forming VHS 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 multiplex 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. CARROLL has been a Senior Vice President of the Company since 1997. Mr.
Carroll is responsible for the acquisition of health care properties for the
Company. From 1987 to 1997 he was President of Triad Partners, Inc., a Costa
Mesa-based company that develops shopping centers, with responsibilities that
included the acquisition of property for development, the arrangement of debt
and equity capital, property management, and disposition of completed centers.
From 1994 to 1995, Mr. Carroll served as Senior Vice President of Caesars
57
<PAGE>
World, Inc. where he directed resort and gaming expansion in the United States
and South America. Mr. Carroll received his bachelor's degree in business
administration from the University of Southern California in 1981.
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.
The Compensation Committee determines officers' salaries and bonuses and
administers the Company's 1993 Stock Incentive Plan.
58
<PAGE>
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 $100,000 during the fiscal year ended
December 31, 1996 (collectively, the "Named Officers"). The Company did not
grant any restricted stock awards or stock appreciation rights or make any
long-term incentive plan payouts during such period.
<TABLE>
<CAPTION>
LONG TERM
COMPENSATION
AWARDS
------------
ANNUAL COMPENSATION SECURITIES
FISCAL YEAR ---------------------------------- UNDERLYING
NAME AND PRINCIPAL ENDED OTHER ANNUAL OPTIONS/
POSITION(1) DECEMBER 31 SALARY($) BONUS($) COMPENSATION($) SARS(#)
------------------ ----------- --------- -------- --------------- ------------
<S> <C> <C> <C> <C> <C>
Daniel M. Gottlieb...... 1996 $181,125 $15,000 $275,000(2) --
Chief Executive
Officer, Co-Chairman of 1995 157,500 63,000 -- 100,500(3)
the Board and Director 1994 150,000 -- -- --
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. Hamermesh and Rauch, neither of
whom received cash compensation of more than $100,000 in 1996. Mr.
Hamermesh joined the Company in June 1996 and Mr. Rauch joined the Company
in July 1996. Had Messrs. 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 ($120,000 for Mr. Hamermesh and $95,000 for Mr. Rauch)
and on bonuses actually paid to them ($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 for the quarter ended September 30, 1997.
All options were granted pursuant to the Company's 1993 Stock Incentive Plan.
No options have been granted to or exercised by the Named Officers since
December 31, 1996.
<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) $297,313 $594,625
Steven D. Lebowitz...... 33,500 67,000(2) $297,313 $594,625
</TABLE>
- --------
(1) Each option has an exercise price of $9.625. The closing price of the
Common Stock on the NYSE on September 30, 1997 was $18.50.
(2) The unexercisable options vest in increments of 33,500 on December 18,
1997 and 1998 respectively.
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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.
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PRINCIPAL STOCKHOLDERS OF THE COMPANY
The following table sets forth information as of October 31, 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>
Joseph Carroll ......... 1,000 * -- -- *
439 N. Bedford Drive
Beverly Hills, CA 90210
Daniel M. Gottlieb(6)... 379,332 9.3% 262,748(7) 5.8% 14.0%
439 N. Bedford Drive
Beverly Hills, CA 90210
Mark H. Hamermesh....... 14,303 * -- -- *
439 N. Bedford Drive
Beverly Hills, CA 90210
Steven D. Lebowitz(6)... 300,168 7.4 175,166(8) 3.9 10.4
439 N. Bedford Drive
Beverly Hills, CA 90210
Richard Lesher.......... 9,500(9) * -- -- *
1615 H Street, N.W.
Washington, DC 20062
Leslie D. Michelson..... 4,000 * -- -- *
2400 Broadway, Suite
100
Santa Monica, CA 90404
Reese L. Milner......... 4,500 * 47,486(10) 1.1 1.2
439 N. Bedford Drive
Beverly Hills, CA 90210
John H. Rauch........... 6,000 * -- -- *
439 N. Bedford Drive
Beverly Hills, CA 90210
Charles P. Reilly....... 4,500 * -- -- *
2049 Century Park East
Suite 3330
Los Angeles, CA 90067
Quentin Thompson........ 18,000(11) * -- -- *
439 N. Bedford Drive
Beverly Hills, CA 90210
S. Craig Tompkins....... 8,700(12) * -- -- *
550 South Hope Street
Suite 1825
Los Angeles, CA 90071
Mitcheal C. Word........ 3,333 * -- -- *
439 N. Bedford Drive
Beverly Hills, CA 90210
Directors and Officers
as a group
(12 persons)........... 753,336 18.0% 485,400 10.8% 26.4%
</TABLE>
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- --------
* 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 October
31, 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) 67,000 shares as to each of Messrs. Gottlieb and
Lebowitz, (b) 13,333 shares as to Mr. Hamermesh, (c) 6,333 shares as to
Mr. Thompson, (d) 6,000 shares as to Mr. Rauch, (e) 4,500 shares as to
each of Messrs. Lesher, Milner, Reilly and Tompkins and (f) 4,000 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 October 31, 1997 plus the number of shares of Common
Stock subject to options exercisable currently or within 60 days of
October 31, 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 October 31, 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 exchangeable currently or within 60 days
of October 31, 1997. The initial exchange ratio is one Unit for one share
of Common Stock.
(4) Based on the total number of Units outstanding (excluding Series A
Preferred Stock Units), 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 October 31, 1997 by such person or group are
exercised for shares of Common Stock. These figures exclude Series A
Preferred Stock Units.
(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 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.
(9) Includes 1,000 shares held in an individual retirement account for the
benefit of Dr. Lesher's spouse.
(10) 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.
(11) Includes 1,000 shares held in an individual retirement account for the
benefit of Mr. Thompson's spouse.
(12) Includes 700 shares held by a trust for the benefit of Mr. Tompkins'
daughter, of which Mr. Tompkins is the Trustee.
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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 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
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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 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.
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<PAGE>
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.
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 August 1997, the Board of Directors approved a transaction with GL/PHP,
of which PHP held a 19.5% membership interest. Mr. Reilly is the Chairman of
the Board of Directors of PHP and a director of the Company and chairman of
the Compensation Committee of the Board of Directors. Mr. Reilly 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
acquisition, through the Operating Partnership, of an additional 18.5%
ownership interest in GL/PHP from PHP. PHP's remaining 1% ownership interest
in GL/PHP was acquired by G&L Management. PHP's 19.5% ownership interest was
acquired for an aggregate purchase price of $919,000. Concurrent with the
acquisition, GL/PHP obtained a 12-year, $16.0 million fixed rate loan that
bears interest at 8.98% per annum and requires monthly principal and interest
payments of approximately $155,000 per month. See "Business and Properties--
Description of the Properties and Tenants."
In conjunction with the Company's acquisition of PHP's interest in GL/PHP,
the Operating Partnership borrowed $2.0 million from PHP and contributed the
loan proceeds to GL/PHP. GL/PHP used the funds to retire the $2.0 million
second trust deed payable to PHP. The Operating Partnership's new $2.0 million
loan from PHP requires quarterly interest only payments at 8.5% per annum with
all unpaid interest and principal due July 31, 2007.
In connection with the Company's purchase of PHP's ownership interest in
GL/PHP, the initial 25-year net operating lease was renegotiated and the
properties are now leased to PHP under the terms of a 17-year net
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operating lease that provides for rent increases equal to the annual increase
in the Consumer Price Index, subject to a maximum annual increase of 5%.
The Company owns a 50% membership interest in Valley Convalescent, which was
formed in anticipation of purchasing the El Centro Facility. Valley
Convalescent has entered into an acquisition agreement to purchase the El
Centro Facility for an aggregate acquisition price of approximately $3.4
million, $400,000 of which would be used for facility renovation. The Company
and Continuum Health contributed approximately $300,000 and $344,000,
respectively, to Valley Convalescent. In addition, the Company will fund a
loan secured by a first deed of trust on the El Centro Facility for
approximately $2.8 million at the close of escrow. Concurrently with the
consummation of this acquisition, it is contemplated that Stefan Health Care
will execute a five-year net operating lease for the El Centro Facility, the
terms of which are still being negotiated. Stefan Health Care is controlled by
Mitcheal C. Word, an officer of the Company. Management believes that the
terms of this lease will be at least as favorable to the Company as would be
the terms of a lease negotiated for the same space with an unrelated party in
an arms' length transaction. There can be no assurance, however, that the
acquisition of the El Centro Facility will be consummated or, if consummated,
that the Company will be able to lease the facility on favorable terms.
At the Company's 1997 Annual Meeting, the stockholders of the Company
approved 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 new 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 new Unit will be purchased at a
premium of $0.25 over the market value of a share of Common Stock. An issuance
of convertible Units pursuant to this authorized proposal has the effect of
providing the Company with real estate investments, instead of cash in
exchange for a sale of the Company's equity, which investments are relatively
illiquid and may tend to limit the ability of the Company to react promptly in
response to changes in economic or other conditions. The Company is not
currently discussing any real estate transactions that would be subject to
this plan.
DESCRIPTION OF SERIES B 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") and 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 Series B
Preferred Stock were outstanding.
The following summary of the terms and provisions of the Series B 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 B Preferred Stock, which are
available from the Company without cost by request to the Secretary of the
Company at 439 North Bedford Drive, Beverly Hills, California 90210, (310)
273-9930.
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MATURITY
The Series B Preferred Stock has no stated maturity and will not be subject
to any sinking fund or mandatory redemption.
RANK
The Series B 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 B Preferred
Stock with respect to dividend rights or rights upon liquidation, dissolution
or winding up of the Company; (ii) on a parity with the Series A Preferred
Stock with respect to the payment of dividends and amounts due upon
liquidation; (iii) 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 B Preferred Stock with respect to dividend
rights or rights upon liquidation, dissolution or winding up of the Company,
and (iv) 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 B Preferred Stock prior to conversion.
DIVIDEND RIGHTS
Holders of shares of the Series B Preferred Stock are entitled to receive,
when and as declared by the Board of Directors, out of funds legally available
for the payment of dividends, preferential cumulative cash dividends at the
rate of 9.8% per annum of the Liquidation Preference per share (equivalent to
a fixed annual amount of $2.45 per share).
Dividends on the Series B 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 January 15, 1998, will be for more than a full month. Such dividend
and all subsequent dividends payable on the Series B 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 B 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 B 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 B
Preferred Stock will not bear interest and holders of the Series B 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 B 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 B 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 B 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
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the Series B Preferred Stock and the shares of any other series of Preferred
Stock ranking on a parity as to dividends with the Series B Preferred Stock,
all dividends declared upon the Series B Preferred Stock and any other series
of Preferred Stock ranking on a parity as to dividends with the Series B
Preferred Stock shall be declared pro rata so that the amount of dividends
declared per share of Series B 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 B 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 B 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 B
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 B 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
B 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 B 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 B 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 B Preferred Stock
as provided above. Any dividend payment made on shares of the Series B
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 B 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 B Preferred Stock as to liquidation
rights. Holders of Series B 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
B 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.
REDEMPTION
The Series B Preferred Stock is not redeemable prior to January 1, 2002.
However, in order to ensure that the Company will continue to meet the
requirements for qualification as a REIT, the Series B Preferred Stock
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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 January 1, 2002, the Company, at its option, upon not
less than 30 nor more than 60 days' written notice, may redeem shares of the
Series B 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 B Preferred Stock pursuant to
the Articles of Incorporation. See "--Restrictions on Ownership and
Transfer."), without interest. Holders of Series B Preferred Stock to be
redeemed shall surrender such Series B 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 B 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 B
Preferred Stock so called for redemption, then from and after the redemption
date dividends will cease to accrue on such shares of Series B Preferred
Stock, such shares of Series B 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 B Preferred Stock is to be redeemed, the Series B 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 B 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 B
Preferred Stock shall be redeemed by the Company unless all outstanding shares
of Series B Preferred Stock are simultaneously redeemed (except by exchange
for capital stock of the Company ranking junior to the Series B 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 B 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 B Preferred Stock pursuant to a purchase or exchange offer
made on the same terms to holders of all outstanding shares of Series B
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 B
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 B
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 B 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 B Preferred Stock to be redeemed; (iv) the place or
places where the Series B 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 B
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 B Preferred
Stock held by such holder to be redeemed.
Immediately prior to any redemption of Series B 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 B Preferred Stock at the close of business on such Dividend
Record Date shall be entitled to the dividend payable
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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 B Preferred Stock pursuant to
the Articles of Incorporation may be redeemed, in whole or in part, at any
time when outstanding shares of Series B 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 B Preferred Stock are being redeemed.
The Series B Preferred Stock has no stated maturity and will not be subject
to any sinking fund or mandatory redemption.
VOTING RIGHTS
Holders of the Series B Preferred Stock will not have any voting rights,
except as set forth below.
Whenever dividends on any shares of Series B 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
B Preferred Stock (voting separately as a class with all other series of
Preferred Stock ranking on a parity with the Series B 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 B 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 B 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 B 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 B 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 B 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 B
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 B 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
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otherwise than by, the vote of the holders of record of a majority of the
outstanding shares of the Series B 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 B 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 B 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 B 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 B
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 B
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 B 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 B 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 B 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 B
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 B Preferred Stock.
CONVERSION
The Series B 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 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
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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
capital stock of the same class that was exchanged for Excess 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 capital
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 B 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 B 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
ChaseMellon Shareholder Services, L.L.C. will act as the transfer and
dividend payment agent in respect of the Series B Preferred Stock.
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PAYMENT AND PAYING AGENCY
Payments in respect of the Series B Preferred Stock 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 B Preferred Stock.
The amounts payable in respect of the Series B Preferred Stock will be
payable, the transfer of the Series B Preferred Stock will be registrable, and
Series B Preferred Stock will be exchangeable for Series B 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
personal 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 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
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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 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 effective pursuant to the Maryland
GCL if the corporation is a party to the transaction, or to acquisitions of
stock approved or exempted by the charter 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
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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 B 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 B 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 B 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 B 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.
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.
The REIT provisions of the Code are highly technical and complex. The
following sets forth the material aspects of the sections that govern the
Federal income tax treatment of a REIT and its stockholders. This summary is
qualified in its entirety by the applicable Code provisions, rules and
regulations promulgated thereunder, and administrative and judicial
interpretations thereof. In the opinion of Gibson, Dunn & Crutcher LLP, whose
opinion has been filed as an exhibit to the Registration Statement of which
this Prospectus is a part, 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 its proposed method of operation
will enable it to meet the requirements for continued qualification and
taxation as a REIT under the Code. Counsel's opinion
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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 and discussed below. Compliance with these requirements
is not entirely within the control of the Company due to the Company's direct
or indirect participation in entities that it does not control or manage,
market conditions and other reasons. 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 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). The results
described above with respect to the recognition of "built-in" gain assume that
the Company will make an election pursuant to IRS Notice 88-19 if the Company
acquires such an asset.
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
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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)
(the "5/50 Rule"); 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 B
Preferred Stock--Restrictions on Ownership and Transfer."
For taxable years of the Company beginning on or after January 1, 1998, the
Company will be treated as satisfying the 5/50 Rule if it complies with the
demand letter and recordkeeping requirements described below, and if it does
not know, and exercising reasonable diligence would not have known, whether it
failed to satisfy the 5/50 Rule. 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 than 2,000, but more than 200 record shareholders must
demand statements from record holders of 1% or more of the shares, while a
REIT with 200 or fewer record shareholders must demand statements from record
holders of 0.5% or more of the shares.) A list of those persons failing or
refusing to comply with this demand must be maintained as part of the
Company's records. A shareholder who fails or refuses to comply with the
demand must submit a statement with his tax return disclosing the actual
ownership of the shares of stock and certain other information. For taxable
years of the Company beginning prior to January 1, 1998, failure to comply
with the foregoing requirements could have resulted in the Company's
disqualification as a REIT. The Company believes that it has complied with
these requirements for such taxable years. For taxable years of the Company
beginning on or after January 1, 1998, failure by the Company to comply with
these demand and recordkeeping requirements could result in the imposition of
a penalty against the Company of $25,000 (or more if the failure is due to
intentional disregard of such requirements).
In addition, a corporation may not elect to become a REIT unless its taxable
year is the calendar year. The Company's taxable year is the calendar 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. Since the Company does
not control or manage certain of the partnerships and limited liability
companies in which it holds a direct or indirect interest, there can be no
assurance that such entities will not take actions that could jeopardize the
Company's status as a REIT.
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
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prohibited transactions) for each taxable year must be derived directly or
indirectly from investments relating to real property or mortgages on real
property (including "rents from real property" and, in certain circumstances,
interest) or from certain types of temporary investments. Second, at least 95%
of the 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 (the "30% Test"). The 30% Test does not
apply to taxable years of the Company beginning on or after January 1, 1998.
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 of
the property (such impermissible services, "Disqualified Services"). For
taxable years of the Company beginning on or after January 1, 1998, however,
the performance of Disqualified Services with respect to any property will not
cause rents from the property to fail to be treated as "rents from real
property" if the amount received or accrued for such Disqualified Services is
less than, or equal to, one percent of all amounts received or accrued,
directly or indirectly, by the Company with respect to such property. For
purposes of the preceding sentence, the amount treated as received for any
Disqualified Services shall not be less than 150% of the direct cost of the
Company in furnishing or rendering the Disqualified Services. 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 Disqualified Services, other than through an independent contractor
from whom the Company derives no revenue.
In addition, in order for rents under the Company's leases to constitute
"rents from real property," the leases must be respected as true leases for
federal income tax purposes and not as partnerships, service contracts or some
other type of arrangement. The determination of whether a lease is a true
lease for federal income tax purposes depends on an analysis of a variety of
factors, including the intent of the parties, the form of the agreement, the
degree of control over the property that is retained by the property owner
(e.g., whether the lessee has substantial control over the property or whether
the lessee is required simply to use its best efforts to perform its
obligations under the agreement), and the extent to which the property owner
retains the risk of loss with respect to the property (e.g., whether the
lessee bears the risk of increases in operating expenses or the risk of damage
to the property) or the potential for economic gain (e.g., appreciation) with
respect to the property. Furthermore, Section 7701(e) of the Code provides
that a contract that purports to be a service contract (or a partnership
agreement) is treated instead as a lease of property if the contract is
properly treated as such, taking
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into account all relevant factors, including whether or not: (i) the service
recipient is in physical possession of the property; (ii) the service
recipient controls the property; (iii) the service recipient has a significant
economic or possessory interest in the property; (iv) the service provider
does not bear any risk of substantially diminished receipts or substantially
increased expenditures if there is nonperformance under the contract; (v) the
service provider does not use the property concurrently to provide significant
services to entities unrelated to the service recipient; and (vi) the total
contract price does not substantially exceed the total rental value of the
property for the contract period. Since the determination whether a service
contract should be treated as a lease is inherently factual, the presence or
absence of any single factor may not be dispositive in every case.
The Company's leases have been structured with the intent to qualify as true
leases for federal income tax purposes. Investors should be aware, however,
that there are no controlling authorities involving leases with terms or
surrounding facts that are substantially the same as each of the Company's
leases. Therefore, there can be no assurance that the IRS would not take a
contrary position. If one or more leases of the Company's properties were
recharacterized as service contracts or partnerships, rather than true leases,
part or all of the payments that the Operating Partnership receives from the
lessee would not be considered rent or would not otherwise qualify as "rents
from real property." In that case the Company likely would not be able to
satisfy the gross income tests and, as a result, could lose its REIT status.
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 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. 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
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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. For taxable years that began prior to January 1, 1998, the stock of such
corporation must have been 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 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.
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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. As a result, the Company's
failure to qualify as a REIT would substantially reduce the cash available for
distribution to stockholders. 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 used herein, the term "Domestic
Stockholder" means a holder of shares of Series B Preferred Stock who (for
United States Federal income tax purposes): (i) is a citizen or resident of
the United States; (ii) is a corporation, partnership, or other entity created
or organized in or under the laws of the United States; (iii) is an estate,
the income of which is subject to United States Federal income taxation
regardless of its source or (iv) is a trust, if a court within the United
States is able to exercise primary supervision over the administration of the
trust and one or more United States persons have the authority to control all
substantial decisions of the trust. As long as the Company qualifies as a
REIT, distributions made to the Company's taxable Domestic 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
gains (to the extent they do not exceed the Company's actual net long-term
capital gain for the taxable year) from the sale or disposition of a capital
asset held for more than one year without regard to the period for which the
stockholder has held its stock. However, corporate Domestic 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 Domestic Stockholder to the extent that they
do not exceed the adjusted basis of the stockholder's shares of Series B
Preferred Stock, but rather will reduce the adjusted basis of such shares. To
the extent that such distributions exceed the adjusted basis of a Domestic
Stockholder's shares of Series B Preferred Stock, they will be included in
income as capital gain assuming the shares are a capital asset in the hands of
the stockholder. The taxation of such capital gain is discussed below. 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 Domestic 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.
Distributions made by the Company and gain arising from the sale of exchange
by a Domestic Stockholder of shares of Series B Preferred Stock will not be
treated as passive activity income, and, as a result, Domestic Stockholders
generally will not be able to apply any "passive losses" against such income
or gain. Distributions made by the Company (to the extent that they do not
constitute a return of capital) generally will be treated as investment income
for purposes of computing the investment interest limitation. Gain arising
from the sale or other disposition of Series B Preferred Stock (or
distributions treated as such), however, will not be treated as investment
income under certain circumstances.
Pursuant to the Taxpayer Relief Act of 1997 (the "1997 Act") for taxable
years of the Company beginning on or after January 1, 1998, the Company may
elect to retain, rather than distribute as a capital gain dividend, its net
long-term capital gains. In such event, the Company would pay tax on such
retained net long-term capital gains. If the Company makes this election, a
Domestic Stockholder generally would (i) include its proportionate
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share of such undistributed long-term capital gains in computing its long-term
capital gains in its return for its taxable year in which the last day of the
Company's taxable year falls (subject to certain limitations as to the amount
so includible), (ii) be deemed to have paid the capital gains tax imposed on
the Company on the designated amounts included in such Domestic Stockholder's
long-term capital gains, (iii) receive a credit or refund for such amount of
tax deemed paid by it, (iv) increase the adjusted basis of its shares of
Series B Preferred Stock by the difference between the amount of such included
capital gains and the tax deemed to have been paid by it, and (v) in the case
of a Domestic Stockholder that is a corporation, appropriately adjust its
earnings and profits for the retained capital gains in accordance with
Treasury Regulations to be prescribed by the IRS.
Upon any sale or other disposition of Series B Preferred Stock, a Domestic
Stockholder will recognize gain or loss for Federal income tax purposes in an
amount equal to the difference between (i) the amount of cash and the fair
market value of any property received on such sale or other disposition and
(ii) the holder's adjusted basis in such shares of Series B Preferred Stock
for tax purposes. Such gain or loss will be capital gain or loss if the shares
have been held by the Domestic Stockholder as a capital asset. The taxation of
such capital gain is discussed below.
In general, any loss upon a sale or exchange of shares of Series B Preferred
Stock by a Domestic 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.
The 1997 Act also created several new categories of capital gains applicable
to noncorporate taxpayers. Under prior law, noncorporate taxpayers were
generally taxed at a maximum rate of 28% on net capital gain (generally, the
excess of net long-term capital gain over net short-term capital loss).
Noncorporate taxpayers are now generally taxed at a maximum rate of 20% on net
capital gain attributable to gains realized on the sale of property held for
greater than 18 months, and a maximum rate of 28% on net capital gain
attributable to gain realized on the sale of property held for greater than
one year and 18 months or less. In addition, a maximum rate of 25% now applies
to noncorporate taxpayers on certain gains realized on the sale of real
property. The 1997 Act retained the treatment of short term capital gain or
loss (generally, gain or loss attributable to capital assets held for 1 year
or less) and did not affect the taxation of capital gains in the hands of
corporate taxpayers. Although the 1997 Act did not make conforming changes to
other provisions of the Code, the 1997 Act authorizes the Treasury Department
to issue regulations for the application of the reduced capital gains tax
rates to pass-through entities including REITs and partnerships (such as the
Operating Partnership). The IRS recently issued Notice 97-64, which states
generally that such regulations, when issued, will permit (but not require)
the Company to designate the portion of its capital gain dividends, if any, to
which the 28%, 25% and 20% rates apply, based on the net amount of each class
of capital gain recognized by the Company, determined as if the Company were
an individual subject to a marginal tax rate on ordinary income of at least
28%.
Cash Redemption of Series B Preferred Stock. A cash redemption of shares of
the Series B 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 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 B Preferred Stock depends upon
the facts and circumstances at the time that the determination must be made,
prospective holders of the Series B Preferred Stock are advised to consult
their own tax advisors to determine such tax treatment.
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If a cash redemption of shares of the Series B 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. The taxation of such capital gain is discussed above.
If a cash redemption of shares of the Series B 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 B 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 B Preferred Stock exceeds
its issue price, the difference ("redemption premium") may be taxable as a
constructive distribution of additional Series B 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 B 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 minimus 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 B 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 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 B 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 B Preferred Stock to trigger this provision, absent approval by the
Board of Directors. See "Description of Series B Preferred Stock--Restrictions
on Ownership and Transfer."
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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 the Series B Preferred 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 (or such lower rate as may
be specified by an applicable income tax treaty) in the case of a stockholder
that is a foreign corporation).
Under new Treasury Regulations that are not effective until January 1, 1999,
the gross amount of any distribution by the Company to a Non-U.S. Stockholder
will generally be subject to withholding tax at a 30% or lower treaty rate,
unless the distribution is designated as a capital gain dividend or a return
of basis or is effectively connected with the Non-U.S. Stockholder's conduct
of a U.S. trade or business. Any tax withheld in excess of the Non-U.S.
Stockholder's U.S. federal income tax liability may be refundable. These
Treasury Regulations will also require, beginning in 1999, that a Non-U.S.
Stockholder satisfy certain certification and other requirements when claiming
the benefit of an applicable treaty with respect to withholding on the
Company's distributions. (Under current law, distributions paid to an address
in a foreign country are generally presumed to paid to a resident of such
country for purposes of determining withholding and the applicability of a
treaty tax rate.)
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 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). 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
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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 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 would 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
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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 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
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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 capital gain.
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
contained language which, if enacted, would have resulted 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 have effectively precluded
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 B 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 B 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
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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 B 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 B
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 the
fiscal year of the issuer during which an offering occurs. The Company's
Series B 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 B 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 B 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 B 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.
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Assuming that the Series B Preferred Stock will be "widely held" and "freely
transferable," the Company believes that the Series B 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 B Preferred Stock.
EMPLOYEE PLANS AND IRAS AND THEIR FIDUCIARIES ARE STRONGLY URGED TO CONSULT
WITH THEIR ADVISORS BEFORE ACQUIRING SHARES OF SERIES B PREFERRED STOCK OF THE
COMPANY.
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UNDERWRITING
Sutro & Co., Incorporated, McDonald & Company Securities, Inc. and Tucker
Anthony Incorporated (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 B Preferred Stock set forth
opposite their respective names below:
<TABLE>
<CAPTION>
NUMBER
UNDERWRITER OF SHARES
----------- ----------
<S> <C>
Sutro & Company Incorporated...................................... 540,000
McDonald & Company Securities, Inc. .............................. 480,000
Tucker Anthony Incorporated....................................... 180,000
---------
Total......................................................... 1,200,000
=========
</TABLE>
The Underwriting Agreement provides that the Underwriters are obligated to
purchase all of the shares of Series B 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 B 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 $0.55 per
share of Series B Preferred Stock. The Underwriters may allow, and such
dealers may reallow, a discount not in excess of $0.30 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 B Preferred Stock, the
Underwriters may engage in transactions that stabilize, maintain or otherwise
affect the price of the Series B Preferred Stock. Specifically, the
Underwriters may overallot in connection with the offering, creating a short
position in the Series B Preferred Stock for their own account. In addition,
to cover overallotments or to stabilize the price of the Series B Preferred
Stock, the Underwriters may bid for, and purchase, the Series B 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 B Preferred Stock in the offering, if the syndicate repurchases
previously distributed Series B 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 B
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 B
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 B 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 Series B Preferred Stock has been approved for listing on the NYSE under
the symbol "GLR PrB" subject to official notice of issuance. Prior to the
Offering, there has been no public market for the shares of Series B Preferred
Stock. The Underwriters have advised the Company that each intends to make a
market in the Series B 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.
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EXPERTS
The financial statements of the Company included in this Prospectus and
elsewhere in this Registration Statement, have been audited by Deloitte &
Touche LLP, independent auditors of the Company, as stated in its report
appearing herein and elsewhere in the Registration Statement of which this
Prospectus is a part and are included in reliance upon the report of such firm
given upon its authority as experts in auditing and accounting. The financial
statements of Iatros included in this Prospectus and elsewhere in this
Registration Statement, have been audited by Asher & Company, Ltd.,
independent auditors of Iatros, as stated in its report appearing herein and
elsewhere in the Registration Statement of which this Prospectus is a part and
are included in reliance upon the report of such firm given upon its 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, Los Angeles,
California. Certain legal matters regarding Maryland law, including the
legality of the shares of Series B Preferred Stock, will be passed upon by
Piper & Marbury L.L.P., Baltimore, Maryland.
AVAILABLE INFORMATION
The Company has filed with the Securities and Exchange Commission (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 Securities and
Exchange Act of 1934, as amended, and in accordance therewith files reports
and other information with 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. Electronic 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.
91
<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.
"Ab Initio" means from the beginning.
"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 9.8% Series B 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. Throughout this
Registration Statement, of which this Prospectus forms a part, references to
the "Company" include the business and properties of G & L Realty Corp., the
Operating Partnership and other related entities directly or indirectly
controlled by G & L Realty Corp.
"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."
"FFO" means funds from operations, which represents net income, computed in
accordance with GAAP, excluding gains (or losses) from debt restructuring and
sales of properties 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.
92
<PAGE>
"G&L Development Properties" means six of the Properties with parking and
ground floor retail space in Beverly Hills, California.
"G&L Gardens" means G&L Gardens, LLC, an Arizona limited liability company.
"G&L Management" means G&L Management Delaware Corp., a Delaware
corporation.
"GECC" means General Electric Capital Corporation.
"GLN Venture" means GLN Capital Co., LLC, a Delaware limited liability
company.
"GMAC-CM" means GMAC Commercial Mortgage.
"Hampden Bonds" means the Series A and Series B bonds issued by the
Massachusetts Industrial Finance Agency, Inc.
"Iatros" means Iatros Health Network, Inc., a Delaware corporation.
"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.
"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.
"NAREIT" means the National Association of Real Estate Investment Trusts.
"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.
"GL/PHP" means GL/PHP, LLC, a Delaware limited liability company.
"Plan" means the Company's 1993 Stock Incentive Plan.
"Properties" means 20 properties exclusive of vacant land including 19 high
quality medical office buildings and an adjacent parking facility.
93
<PAGE>
"Realty Financing Partnership" means G&L Realty Financing Partnership II,
L.P., a Delaware limited partnership.
"Reform Act" means the Private Securities Litigation Reform Act of 1995, as
amended.
"REIT" means a real estate investment trust as defined pursuant to Sections
856 through 860 of the Code.
"Roxbury Partnership" means 435 N. Roxbury Drive, Ltd., a California limited
partnership.
"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 10.25% Series A Cumulative
Preferred Stock, par value $.01 per share.
"Series B Preferred Stock" means the Company's 9.8% Series B 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.
94
<PAGE>
G&L REALTY CORP.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----------
<S> <C>
AUDITED YEAR END FINANCIAL STATEMENTS
Independent Auditors' Report................................. F-2
Consolidated Balance Sheets as of December 31, 1996 and 1995. F-3
Consolidated Statements of Operations for the years ended
December 31, 1996, 1995 and 1994............................ F-4
Consolidated Statement of Stockholders' Equity for the years
ended December 31, 1994, 1995 and 1996...................... F-5
Consolidated Statements of Cash Flows for the years ended
December 31, 1996, 1995 and 1994............................ F-6--F-7
Notes to Consolidated Financial Statements................... F-8--F-22
UNAUDITED INTERIM FINANCIAL STATEMENTS
Condensed Consolidated Balance Sheets as of September 30,
1997 (unaudited) and December 31, 1996...................... F-23
Condensed Consolidated Statements of Operations for the nine
month period ended September 30, 1997 and 1996 (unaudited).. F-24
Condensed Consolidated Statements of Cash Flows for the nine
month period ended September 30, 1997 and 1996 (unaudited).. F-25--F-26
Notes to Condensed Consolidated Financial Statements
(unaudited)................................................. F-27--F-36
IATROS HEALTH NETWORK, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULES
<CAPTION>
PAGE
----------
<S> <C>
AUDITED YEAR END FINANCIAL STATEMENTS
Report of Independent Certified Public Accountants........... F-37
Consolidated Balance Sheets.................................. F-38
Consolidated Statements of Operations........................ F-39
Consolidated Statements of Changes in Stockholders' Equity... F-40--F-41
Consolidated Statements of Cash Flows........................ F-42
Notes to Consolidated Financial Statements................... F-43--F-59
Report of Independent Certified Public Accountants on
Financial Statement Schedule................................ F-60
Schedule II--Valuation and Qualifying Accounts............... F-61
UNAUDITED INTERIM FINANCIAL STATEMENTS
Consolidated Balance Sheets as of June 30, 1997 and December
31, 1996.................................................... F-62
Consolidated Statement of Operations for the six months ended
June 30, 1997 and 1996 (unaudited).......................... F-63
Consolidated Statement of Cash Flows for the six months ended
June 30, 1997 and 1996 (unaudited).......................... F-64
Notes to Consolidated Financial Statements (unaudited)....... F-65--F-67
</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 (Note 2)...................................... 264,920 669,123
Restricted cash (Note 2)........................... 1,966,993 611,068
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 EXCESS OF STOCKHOLDERS'
SHARES AMOUNT IN 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)
Increase in restricted cash............ (1,355,925) (611,068)
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............................ 17,283,259 28,675,099 21,848,662
----------- ----------- -----------
NET DECREASE IN CASH AND CASH
EQUIVALENTS........................... (404,203) 499,860 (2,072,080)
BEGINNING CASH......................... 669,123 1,168,983 3,241,063
----------- ----------- -----------
ENDING CASH............................ $ 264,920 $ 669,123 $ 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
lienholder................................. 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.
F-8
<PAGE>
G&L REALTY CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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.
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 restricted cash. 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. As of December 31, 1996 and
1995, the Company had $1,966,993 and $669,123, respectively, 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.
F-9
<PAGE>
G&L REALTY CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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.
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
principal 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
------------
Balance, end of year......................... $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 B 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>
UNBILLED
YEAR ENDING STRAIGHT- BILLABLE RENT
DECEMBER 31 LINE 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
---------------------- ----------------------- ----------------------
SHARES AVERAGE PRICE SHARES AVERAGE PRICE SHARES AVERAGE 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
=========== ============ ============ ============
Realty Financing
Partnership
(See Note A)....
Medical
Partnership
(See Note B)....
Credit Line (See
Note C).........
Other Notes (See
Note D).........
Total
encumbrances....
</TABLE>
Depreciation is computed on the straight-line basis
over the estimated useful lives of the assets, as
follows:
<TABLE>
<S> <C>
Building and
improvements............ 40 years
Tenant improvements..... Life of lease
</TABLE>
F-21
<PAGE>
G&L REALTY CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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
============ ============ ============
</TABLE>
<TABLE>
<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 B 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-22
<PAGE>
G&L REALTY CORP.
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1997 1996
------------ ------------
(UNAUDITED)
ASSETS
------
<S> <C> <C>
Rental properties:
Land............................................. $ 23,521,000 $ 17,096,000
Buildings and improvements, net.................. 95,117,000 76,135,000
------------ ------------
Total rental properties........................ 118,638,000 93,231,000
Cash............................................... 570,000 265,000
Restricted cash.................................... 2,566,000 1,967,000
Other receivables, net............................. 1,013,000 682,000
Tenant rent and reimbursements receivable, net..... 1,581,000 1,048,000
Unbilled rent receivable, net...................... 1,722,000 1,477,000
Investments in unconsolidated affiliates........... 5,391,000 --
Mortgage loans and bonds receivable, net........... 15,871,000 14,358,000
Note receivable, related party..................... 14,353,000 --
Assets available for sale.......................... 287,000 20,523,000
Deferred charges and other assets, net............. 2,354,000 2,445,000
------------ ------------
TOTAL ASSETS..................................... $164,346,000 $135,996,000
============ ============
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
<S> <C> <C>
Liabilities:
Notes payable.................................... $103,939,000 $109,025,000
Accounts payable and other liabilities........... 1,617,000 1,462,000
Distributions payable............................ 1,601,000 1,642,000
Tenant security deposits......................... 1,044,000 1,034,000
------------ ------------
Total liabilities.............................. 108,201,000 113,163,000
Commitments and contingencies...................... -- --
Minority interest in consolidated partnership...... (2,645,000) (2,718,000)
Minority interest in Operating Partnership......... 2,966,000 3,103,000
Stockholders' equity:
Preferred shares--$.01 par value, 10,000,000
shares authorized:
Series A Cumulative Preferred--1,495,000 and
zero shares issued and outstanding as of 9/30/97
and 12/31/96 respectively....................... 15,000 --
Common shares--$.01 par value, 50,000,000 shares
authorized, 4,005,700 and 4,062,500 shares
issued and outstanding as of 9/30/97 and
12/31/96 respectively........................... 40,000 41,000
Additional paid-in capital....................... 58,186,000 23,710,000
Distributions in excess of net income............ (2,417,000) (1,303,000)
------------ ------------
Total stockholders' equity..................... 55,824,000 22,448,000
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY......... $164,346,000 $135,996,000
============ ============
</TABLE>
See accompanying notes to Condensed Consolidated Financial Statements.
F-23
<PAGE>
G&L REALTY CORP.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE NINE MONTH
PERIODS ENDED SEPTEMBER
30,
------------------------
1997 1996
----------- -----------
<S> <C> <C>
REVENUES:
Rental............................................. $14,614,000 $11,396,000
Tenant reimbursements.............................. 584,000 381,000
Parking............................................ 1,048,000 922,000
Interest, loan fees and related income............. 3,444,000 5,342,000
Other.............................................. 221,000 317,000
----------- -----------
Total revenues................................... 19,911,000 18,358,000
----------- -----------
EXPENSES:
Property operations................................ 4,657,000 3,833,000
Depreciation and amortization...................... 2,947,000 2,434,000
Interest........................................... 6,749,000 6,573,000
General and administrative......................... 1,509,000 1,422,000
Loss on disposition of rental property............. -- 4,874,000
----------- -----------
Total expenses................................... 15,862,000 19,136,000
----------- -----------
Income (loss) from operations........................ 4,049,000 (778,000)
Equity in earnings of unconsolidated affiliate....... 866,000 --
Minority interest in consolidated affiliates......... (135,000) (104,000)
Minority interest in Operating Partnership........... (400,000) 77,000
----------- -----------
Income (loss) before extraordinary gain.............. 4,380,000 (805,000)
Extraordinary gain on retirement of debt............. -- 9,311,000
----------- -----------
Net income........................................... $ 4,380,000 $ 8,506,000
=========== ===========
Per share data:
Income (loss) before extraordinary gain............ $ 0.78 $ (0.20)
Extraordinary gain................................. -- 2.29
----------- -----------
Net income....................................... $ 0.78 $ 2.09
=========== ===========
Weighted average number of outstanding shares........ 4,135,000 4,063,000
</TABLE>
See accompanying notes to Condensed Consolidated Financial Statements.
F-24
<PAGE>
G&L REALTY CORP.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE NINE MONTH
PERIODS
ENDED SEPTEMBER 30,
--------------------------
1997 1996
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income........................................ $ 4,380,000 $ 8,506,000
Adjustments to reconcile net income to net cash
provided by operating activities:
Extraordinary gain on retirement of debt........ -- (9,311,000)
Loss on disposition of rental property.......... -- 4,874,000
Depreciation and amortization................... 2,947,000 2,434,000
Minority interests.............................. 535,000 27,000
Undistributed equity in income from affiliates.. (700,000) --
Gain on sale of assets held for sale, related
party.......................................... (556,000) --
Unbilled rent receivable........................ (307,000) 122,000
Allowance for doubtful notes and receivables.... (134,000) 410,000
(Increase) decrease in:
Accounts receivable............................ (206,000) (101,000)
Tenant rent and reimbursements receivable...... (362,000) (152,000)
Prepaid expense and other assets............... (146,000) 466,000
Accrued interest receivable and loan fees...... (939,000) (1,183,000)
Increase (decrease) in:
Accounts payable and other liabilities......... (32,000) (774,000)
Tenant security deposits....................... 10,000 11,000
------------ ------------
Net cash provided by operating activities......... 4,490,000 5,318,000
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to rental properties.................... (724,000) (1,500,000)
Purchase of rental properties..................... (22,452,000) (19,428,000)
Purchase of assets available for sale............. -- (3,273,000)
Proceeds from sale of assets held for sale,
related party.................................... 4,475,000 --
Pre-acquisition costs............................. (46,000) (50,000)
Return of pre-acquisition deposits................ -- 1,115,000
Leasing commissions............................... (114,000) (99,000)
Investment in notes and bonds receivable.......... (19,656,000) (1,464,000)
Net investment in affiliate....................... (2,038,000) --
------------ ------------
Net cash used in investing activities............. (40,555,000) (24,699,000)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Notes payable proceeds............................ 42,878,000 47,000,000
Deferred financing costs.......................... (301,000) (1,114,000)
Repayments of notes payable....................... (33,964,000) (21,020,000)
Sale of preferred stock and preferred partnership
units............................................ 35,415,000 --
Sale (purchase) of common stock and partnership
units............................................ (925,000) 5,000
Increase in restricted cash....................... (599,000) (1,863,000)
Distributions..................................... (6,134,000) (4,308,000)
------------ ------------
Net cash provided by financing activities......... 36,370,000 18,700,000
------------ ------------
NET INCREASE (DECREASE) IN CASH................... 305,000 (681,000)
BEGINNING CASH.................................... 265,000 932,000
------------ ------------
ENDING CASH....................................... $ 570,000 $ 251,000
============ ============
SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid during the period for interest.......... $ 6,647,000 $ 6,636,000
============ ============
</TABLE>
See accompanying notes to Condensed Consolidated Financial Statements.
F-25
<PAGE>
G&L REALTY CORP.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE NINE MONTH
PERIODS ENDED SEPTEMBER
30,
-----------------------
1997 1996
----------- -----------
<S> <C> <C>
NONCASH INVESTING ACTIVITIES:
Property acquired in exchange for partnership units. $ 549,000
===========
Property acquired in satisfaction of note
receivable......................................... $ 4,650,000
===========
During the period, the Company sold Series A and B
Bonds to a related party for the following noncash
consideration:
Assignment of note payable........................ $14,000,000
Investment in affiliate........................... 3,165,000
-----------
$17,165,000
===========
NONCASH FINANCING ACTIVITIES:
Net cost of assets transferred to lien holder:
Land................................................ $ 2,047,000
Buildings and improvements.......................... 21,601,000
Tenant improvements................................. 477,000
Accumulated depreciation.......................... (3,557,000)
-----------
Total rental property........................... 20,568,000
Unbilled rent receivable, net....................... 1,109,000
Tenant and other accounts receivable................ 340,000
Leasing commissions, net............................ 181,000
Deferred charges and other assets................... 87,000
Accounts payable and other liabilities.............. 589,000
-----------
Net cost of assets transferred to lien holder......... 22,874,000
Nonrecourse debt extinguished......................... 28,500,000
-----------
Excess of nonrecourse debt over net cost of assets
surrendered.......................................... $ 5,626,000
===========
Noncash gain from transfer of property to lien holder:
Extraordinary gain on retirement of debt............ $ 9,311,000
Minority interest share of extraordinary gain....... 1,055,000
-----------
Extraordinary gain on retirement of debt.......... 10,366,000
Extraordinary loss related to other refinancing
transactions....................................... 134,000
-----------
Extraordinary gain on transfer of property to lien
holder........................................... 10,500,000
Loss on disposition of rental property.............. (4,874,000)
-----------
Noncash gain from transfer of property to lien holder. $ 5,626,000
===========
Distributions declared not yet paid................... $ 1,601,000 $ 1,642,000
</TABLE>
See accompanying notes to Condensed Consolidated Financial Statements.
F-26
<PAGE>
G&L REALTY CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. GENERAL
G&L Realty Corp. (the "Company") was formed as a Maryland corporation on
September 15, 1993 to continue the ownership, management, acquisition and
development operations of medical office buildings conducted previously by G&L
Development, a California partnership, the Company's predecessor. All of the
Company's assets are held by, and all of its operations are conducted through,
the following entities:
G&L Realty Partnership, L.P., a Delaware limited partnership (the
"Operating Partnership")
G&L Realty Financing Partnership II, L.P., a Delaware limited partnership
(the "Realty Financing Partnership")*
G&L Medical Partnership, L.P., a Delaware limited partnership (the "Medical
Partnership")*
G&L Gardens, LLC, an Arizona limited liability company ("Maryland Gardens")
435 North Roxbury Drive, Ltd., a California limited partnership (the
"Roxbury Partnership")
GL/PHP, LLC, a Delaware limited liability company ("GL/PHP")*
- --------
* The Realty Financing Partnership and the Medical Partnership, Maryland
Gardens and GL/PHP are herein defined collectively as the "Financing
Entities" and individually as a "Financing Entity".
The Company, as the sole general partner and as owner of an approximately
89% ownership interest, controls the Operating Partnership. The Company
controls the Financing Entities through wholly owned subsidiaries incorporated
in the State of Delaware (collectively, the "Subsidiaries" and individually, a
"Subsidiary"). Each Subsidiary owns, as sole general partner or sole managing
member, a 1% ownership interest in its related Financing Entity. The remaining
99% ownership interest in each Financing Entity is owned by the Operating
Partnership, acting as sole limited partner or member.
References in these consolidated financial statements to the Company, its
operations, assets and liabilities include the operations, assets and
liabilities of the Operating Partnership, the Subsidiaries, the Financing
Entities and the Roxbury Partnership (in which the Operating Partnership owns
a 61.75% partnership interest and is the sole general partner).
The Company also owns interests in various unconsolidated affiliates.
Although the Company's investment represents a significant portion of the
capital of such affiliates and the Company exercises significant influence
over the activities of these entities, the Company does not have the requisite
level of voting control to include the assets, liabilities and operating
activities of these affiliates in the consolidated financial statements of the
Company. The Company has unconsolidated financial interests in the following
entities:
. GLN Capital Co., LLC ("GLN Capital"), a Delaware limited liability company
formed in 1996. GLN Capital, an unconsolidated affiliate, is owned 49.9% by
the Operating Partnership and 50.1% by an affiliate of Nomura Asset Capital
Corp. ("Nomura"). The purpose of GLN Capital is to fund loans to the senior
care industry.
. Valley Convalescent, LLC ("Valley Convalescent") is a California limited
liability company formed by the Company, through the Operating Partnership,
and Continuum Health Incorporated, a Delaware corporation ("Continuum"),
who each hold a 50% ownership interest. Continuum is the managing member of
Valley Convalescent which was formed for the purpose of acquiring Valley
Convalescent Center located in El Centro, California.
. AV Medical Associates, LLC ("AV Medical") is a California limited liability
company formed by the Company through the Operating Partnership, and M&Z
Aliso Associates, LLC, a California limited liability company, who each
hold a 50% ownership interest. The M&Z Aliso Associates, LLC is the
managing
F-27
<PAGE>
G&L REALTY CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED)
member of AV Medical which was formed for the purpose of acquiring a vacant
parcel of land in Aliso Viejo, California upon which AV Medical intends to
build a 33,000 square foot, three story medical office building which has
been preleased to an investment grade hospital owner/operator.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business. The Company is a self-administered and self-managed real estate
investment trust ("REIT") that finances, acquires, develops, manages and
leases health care properties. The Company's business currently consists
primarily of investments, either directly or through joint ventures, in health
care properties (primarily through its Medical Office Building ("MOB")
operations) and in debt obligations secured by health care properties
(primarily through its Senior Care operations).
Basis of Presentation. The accompanying condensed consolidated financial
statements include the accounts of the Company. The interests in 435 North
Roxbury Drive, Ltd. not owned by the Company have been reflected in minority
interests. All significant intercompany accounts and transactions have been
eliminated in consolidation. Prior period amounts have been reclassified to
conform to the current period's financial statement presentation.
The information presented as of and for the three and nine month periods
ended September 30, 1997 and 1996 has not been audited by independent
accountants, but includes all adjustments (consisting of normal recurring
adjustments) which are, in the opinion of management, necessary for a fair
presentation of the results for such periods. The results of operations for
the three and nine months ended September 30, 1997 are not necessarily
indicative of results that might be expected for the full fiscal year.
Certain information and footnote disclosures normally included in annual
financial statements have been omitted. The Company believes that the
disclosures included in these financial statements are adequate for a fair
presentation and conform to reporting requirements established by the
Securities and Exchange Commission ("SEC"). The condensed consolidated
financial statements as presented herein should be read in conjunction with
the audited consolidated financial statements and notes thereto included in
the Company's annual report on Form 10-K as filed with the SEC.
The Condensed Consolidated Balance Sheets reflect the combined assets and
liabilities of the Company. The Condensed Consolidated Statements of
Operations include the operating results of the Company for the three and nine
months ended September 30, 1997 and 1996. The Condensed Consolidated
Statements of Cash Flows have been prepared to reflect the operations of the
Company for the nine months ended September 30, 1997 and 1996.
Cash and Restricted Cash - As of September 30, 1997, the Company had
$2,566,000 in a segregated interest bearing account to be used for debt
service due in October 1997, current property taxes, insurance and property
improvements.
Assets Available for Sale - The Company is currently involved in
negotiations to sell certain assets. The associated cost of these assets is
included in the Company's balance sheet as assets available for sale. No
adjustment has been made to the cost basis of these assets as Management
believes that the net realizable value of the assets available for sale
approximate their original cost.
Per Share Data - Earnings per share are computed based upon the weighted
average number of common shares 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 1993 Stock Incentive
Plan. As
F-28
<PAGE>
G&L REALTY CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED)
of September 30, 1997, there were approximately 341,500 stock options
outstanding with a weighted average exercise price of $11.85. Using the
closing market price of $18.50 on September 30, 1997, the number of shares
which may be issued pursuant to the Plan is 122,755.
3. BUILDINGS AND IMPROVEMENTS
Buildings and improvements consist of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1997 1996
------------- ------------
(UNAUDITED)
<S> <C> <C>
Buildings and improvements................... $102,674,000 $ 81,677,000
Tenant improvements.......................... 5,123,000 4,708,000
Furniture, fixtures and equipment............ 372,000 359,000
------------ ------------
108,169,000 86,744,000
Less accumulated depreciation and
amortization................................ (13,052,000) (10,609,000)
------------ ------------
Total...................................... $ 95,117,000 $ 76,135,000
============ ============
</TABLE>
4. DEFERRED CHARGES AND OTHER ASSETS
Deferred charges and other assets consist of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1997 1996
------------- ------------
(UNAUDITED)
<S> <C> <C>
Deferred financing costs....................... $1,760,000 $2,061,000
Pre-acquisition costs.......................... 63,000 17,000
Leasing commissions............................ 576,000 462,000
Prepaid expense and other assets............... 397,000 272,000
---------- ----------
2,796,000 2,812,000
Less accumulated amortization.................. (442,000) (367,000)
---------- ----------
Total........................................ $2,354,000 $2,445,000
========== ==========
</TABLE>
5. STOCKHOLDERS' EQUITY AND DEBT OUTSTANDING
As described in Note 2, the Company has elected to be treated, for federal
income tax purposes, as a REIT. As such, the Company is required to distribute
annually, in the form of distributions to its stockholders, at least 95% of
its taxable income. In reporting periods in which distributions exceed net
income, stockholders' equity will be reduced by the distributions in excess of
net income in such period and will be increased by the excess of net income
over distributions in reporting periods in which net income exceeds
distributions. For tax reporting purposes, a portion of the dividends declared
represents a return of capital. The following table reconciles net income and
distributions in excess of net income for the nine month period ended
September 30, 1997 and for the year ended December 31, 1996:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1997 1996
------------- ------------
(UNAUDITED)
<S> <C> <C>
Distributions in excess of net income at
beginning of period......................... $(1,303,000) $(5,479,000)
Net income during period..................... 4,380,000 9,701,000
Less: Distributions declared................. (5,494,000) (5,525,000)
----------- -----------
Distributions in excess of net income........ $(2,417,000) $(1,303,000)
=========== ===========
</TABLE>
F-29
<PAGE>
G&L REALTY CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED)
The Company issued 1,495,000 shares (including an over allotment of 195,000
shares) of 10.25% Series A Cumulative Preferred Stock, par value $.01 (the
"Series A Preferred Stock") in May 1997. Dividends on the Series A Preferred
Stock are cumulative from the date of issue and are payable monthly to
shareholders of record on the first day of each month. The dividends, which
commenced on June 15, 1997, are payable at the rate of $2.5625 per share,
yielding 10.25% per annum based upon the $25 per share liquidation preference.
The Company may redeem the Series A Preferred Stock at the redemption price of
$25 per share plus any accumulated, unpaid dividends at any time after June 1,
2001.
Upon consummation of the offering, the Company received net proceeds of
$35.4 million. The Company contributed the net proceeds of the Series A
Preferred Stock offering to the Operating Partnership in exchange for a new
series of preferred partnership units having terms substantially similar to
those of the Series A Preferred Stock. Approximately $28.7 million of the
proceeds were used by the Operating Partnership to repay, without prepayment
charges or penalties, the following notes payable:
<TABLE>
<S> <C>
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 (7.5% at pay-off)............... $16,900,000
Unsecured credit line due December 11, 1997. $3.0 million
available, interest payable monthly at the prime rate plus 2.0%
(10.5% at pay-off)............................................. 1,000,000
Note due June 17, 1997, collateralized by note receivable and
deed of trust, interest payable monthly at the Citibank Prime
rate of interest (8.5% at pay-off)............................. 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 (8.5% at pay-off)............................. 3,000,000
Note due August 28, 1997, collateralized by equity investment in
affiliate, interest payable at 12% per annum................... 3,700,000
</TABLE>
The excess proceeds (approximately $6.7 million) were invested in interest-
bearing accounts.
At various times during the second quarter, the Company repurchased a total
of 56,800 shares of the Company's Common Stock at an average price of
approximately $16.30 per share.
6. INVESTMENTS IN UNCONSOLIDATED AFFILIATES
On November 25, 1996, the Company expanded its activities in the Senior Care
Division by entering into an unconsolidated operating venture, GLN Capital,
which commenced operations in January 1997. Subsequent to the formation of GLN
Capital, GMAC Commercial Mortgage ("GMAC-CM"), which has previously funded
four loans to the Company, committed to provide to GLN Capital a $50.0 million
credit line that will be secured by loans originated by GLN Capital.
In March 1997, the Company sold Series A and B Industrial Revenue Bonds (the
"Bonds") issued by the Massachusetts Industrial Finance Agency to GLN Capital
for total consideration of $21.7 million. The Bonds, which had a book value of
$20.6 million at the time of sale, were purchased in October 1995 for $19.9
million. At the time of sale, the Series A and B Bonds had a combined
outstanding balance of $27.7 million, including principal (at face value) and
accrued interest. Total consideration included $4.5 million in cash, a $3.2
million capital contribution to GLN Capital, and an assumption of the $14.0
million note due and payable to GMAC-CM (the "GMAC Loan"). The Company
included $556,000 of gain from the sale of the Bonds in interest, loan fees
and related income. The unrecognized portion of the gain, which is
proportional to the Company's allocated share of net income from GLN Capital,
is reflected in the Company's investment in GLN Capital.
On June 1, 1997 the Operating Partnership provided a loan in the amount of
$14.0 million (the "Loan") to GLN Capital, the proceeds of which were used to
retire the GMAC Loan. Pursuant to the terms of the Security Agreement, the
Loan will mature on June 1, 1998 and will bear interest at the prime lending
rate plus 1.5%
F-30
<PAGE>
G&L REALTY CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED)
adjusted monthly. Subject to the Security Agreement, GLN Capital assigned a
security interest in the Bonds to the Operating Partnership as collateral for
the Loan.
The following table provides a summary of the Company's investment in GLN
Capital, as of September 30, 1997.
<TABLE>
<S> <C>
Cash contributions............................................... $2,038,000
Non-Cash contributions........................................... 3,165,000
Equity in earnings............................................... 866,000
Unrecognized gain................................................ (512,000)
Cash distributions............................................... (166,000)
----------
BALANCE September 30, 1997....................................... $5,391,000
==========
</TABLE>
Following is a summary of the condensed financial information, as of
September 30, 1997, for GLN Capital.
<TABLE>
<S> <C>
Financial Position:
Notes and bonds receivable, net.............................. $ 31,748,000
Other Assets................................................. 258,000
Notes payable................................................ (21,134,000)
Other liabilities............................................ (993,000)
------------
Net Assets:.................................................... $ 9,879,000
============
Partner's equity:
G&L Realty Partnership, L.P.................................. $ 5,203,000
Others....................................................... 3,522,000
Current earnings............................................. 1,629,000
Cash distributions........................................... (475,000)
------------
$ 9,879,000
============
Operations:
Revenues..................................................... $ 2,960,000
Expenses..................................................... 1,331,000
------------
Net Income..................................................... $ 1,629,000
============
Allocation of net income:
G & L Realty Partnership, L.P................................ $ 866,000
Others....................................................... 763,000
------------
$ 1,629,000
============
</TABLE>
7. INVESTMENT IN RENTAL PROPERTIES AND SECURED NOTES RECEIVABLE
On February 26, 1997 the Company, through the Operating Partnership, entered
into a joint venture by forming GL/PHP with PHP. At the time of its formation,
the Operating Partnership and PHP contributed $4.4 million of equity in
proportion to their 80.5% and 19.5% respective interests in GL/PHP. Subject to
restrictions in the operating agreement, the Operating Partnership was the
sole manager of GL/PHP. On February 28, 1997, GL/PHP acquired six primary care
facilities in New Jersey, totaling 80,415 square feet, at a cost of
approximately $22.4 million. GL/PHP used the $4.4 million equity contribution
together with the proceeds of two new loans obtained from PHP to fund the
acquisition. The PHP loans were secured by first and second deeds of trust
with the greater of the two loans, at $15,735,000, due on August 28, 1997 and
giving PHP a right, upon default, to purchase the Company's 80.5% interest in
GL/PHP. The properties, which were acquired from Blue Cross/Blue Shield of New
Jersey, were initially leased to PHP pursuant to the terms of a 25-year net
lease which provided for fixed rent escalations during the term of the lease.
Mr. Charles P. Reilly, a director of the Company and chairman of the
Compensation Committee of the Company's Board of Directors, is Chairman of the
Board of Directors of PHP.
F-31
<PAGE>
G&L REALTY CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED)
On August 15, 1997, the Company acquired PHP's interest in GL/PHP for a
total consideration of $919,000. Concurrent with the transfer of ownership,
the following transactions were completed:
. GL/PHP redeemed PHP's 18.5% ownership interest in GL/PHP.
. PHP's remaining 1% ownership interest in GL/PHP was assigned to G&L
Management Delaware Corp., a newly formed Delaware corporation and
wholly owned subsidiary of the Company.
. G&L Management Delaware Corp. assumed responsibilities as the managing
member of GL/PHP from the Operating Partnership.
. GL/PHP obtained a new 10-year, $16.0 million fixed rate loan from Nomura
that bears interest at 8.98% per annum and requires monthly principal
and interest payments of approximately $155,000 per month.
. The Operating Partnership borrowed $2.0 million from PHP and contributed
the loan proceeds to GL/PHP. GL/PHP used the funds to retire the $2.0
million second trust deed payable to PHP. The Operating Partnership's
new $2.0 million loan from PHP is unsecured and requires quarterly
interest only payments at 8.5% per annum with all unpaid interest and
principal due July 31, 2007.
. The original 25-year lease between GL/PHP and PHP was renegotiated,
effective as of August 15, 1997. Under the terms of the new 17-year net
operating lease, PHP is required to make monthly payments of
approximately $221,500. The lease provides for rent increases equal to
the annual increase in the Consumer Price Index subject to a maximum
annual increase of 5%.
The table on the following page sets forth certain information regarding
each of the New Jersey properties and the respective leases at August 15,
1997.
<TABLE>
<CAPTION>
YEAR
CONSTRUCTED RENTABLE TOTAL AVERAGE
OR SQUARE ANNUALIZED RENT PER
PROPERTY REHABILITATED FEET(1) RENT(2) SQ. FT.(3)
-------- ------------- -------- ---------- ----------
<S> <C> <C> <C> <C>
2103 Mt. Holly Rd. Burlington, NJ. 1994 12,560 $ 434,950 $34.63
150 Century Parkway Mt. Laurel,
NJ............................... 1995 12,560 391,310 31.16
274 Highway 35, South Eatontown,
NJ............................... 1995 12,560 481,030 38.30
80 Eisenhower Drive Paramus, NJ... 1994 12,675 421,800 33.28
16 Commerce Drive Cranford, NJ.... 1963 17,500 491,670 28.10
4622 Black Horse Pike Mays
Landing, NJ...................... 1994 12,560 437,490 34.83
------ ----------
Total............................. 80,415 $2,658,250 $33.06
====== ==========
</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.
Prior to the Company's acquisition of PHP's 19.5% interest on August 15,
1997, the Company did not have the requisite level of voting control required
by Financial Accounting Standard 94 to account for its interests on a
consolidated basis. As a result of the terms of the August 15, 1997
acquisition, the Company gained voting control of GL/PHP and is therefore
required to include the assets, liabilities and operating activities of GL/PHP
in the Company's consolidated financial statements.
F-32
<PAGE>
G&L REALTY CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED)
The Company views each interim period as being an integral part of the
annual period, and, as a result of the August 15, 1997 transaction, the
Company will be required to report the activities of GL/PHP on a consolidated
basis for the year ending December 31, 1997. Therefore, these interim
financial statements for the nine months ended September 30, 1997, include the
assets, liabilities and operating activities of GL/PHP, on a consolidated
basis.
In August of 1997, the Company took title to the Maryland Gardens Facility
through a deed in lieu of foreclosure on a loan secured by a first trust deed
the Company had previously funded on this property. At the time the Company
took title to this facility the outstanding balance on this loan was
approximately $4.7 million, which was also the appraised value on this
facility at that time. The Maryland Gardens Facility is currently leased to
Capital Senior Management I, Inc. ("Capital Senior Management"), a nationally
recognized senior care facility operator which has been operating this
facility since 1996. Management believes that Capital Senior Management is
continuing to operate this facility profitably and effectively under its
operating lease, which provides for triple net rental payments in the amount
of $30,000 in September 1997. The monthly rental payment will be increased to
$35,000 per month from October 1997 through April 1998 and June through July
1998. No rental payments were due in August 1997 or will be due in May 1998.
In the normal course of its business, the Company has funded three loans
secured by deeds of trust totaling an aggregate of approximately $2.9 million.
The first of these loans is secured by a 92-bed senior care facility (the
"Coos Bay Facility") located in Coos Bay, Oregon. The second and third of
these are secured by a 63-bed senior care facility and a 68-bed senior care
facility (the "Idaho Facilities") located in Idaho Falls and Burley, Idaho,
respectively.
In October 1997, the Company assigned to Iatros Health Network, Inc.
(Iatros) its participation interest in promissory notes secured by third and
fifth trust deeds on the Crystal Park Facility in exchange for an unsecured 7-
year 10% note for $800,000 from Iatros. As part of the assignment agreement
with Iatros, the Company retained title to the accounts receivable of the
former owner of the facility, which had served as additional collateral for
the promissory notes, and which the Company believes have a net realizable
value of approximately $400,000. The outstanding balance on these promissory
notes was approximately $1.3 million at September 30, 1997.
8. SUBSEQUENT EVENTS
On October 15, 1997, the Company and the Operating Partnership created two
new entities for the purpose of acquiring three nursing homes in Massachusetts
(the "Hampden Properties."). The Hampden Properties previously secured the
Bonds held by GLN Capital (see note 6). The Company has formed G&L Hampden,
Inc., a Delaware corporation and wholly owned subsidiary of the Company. The
Operating Partnership and G&L Hampden, Inc. have entered into an operating
agreement and have formed G&L Hampden, LLC ("G&L Hampden"), a Delaware limited
liability company which is 99% owned by the Operating Partnership and 1% owned
by G&L Hampden, Inc. its sole managing member. On October 28, 1997, G&L
Hampden acquired the Hampden Properties from Hampden Nursing Homes, Inc.
("Hampden Nursing"), for a total aggregate consideration of approximately
$20.4 million. Of this amount, G&L Hampden will borrow $6.0 million from
Nomura at an interest rate of 8.62% per annum. The Hampden Properties will
secure repayment of this loan. Under this loan, the Company may, at any time
during the next two years, make up to two additional draws of not less than
$2.0 million each, up to an aggregate loan amount of 14.0 million (including
the initial draw under the loan). In the event the Company makes an additional
loan draw, the interest rate on such draw will be 2.5%; per annum above the
prevailing market rate on U.S. Treasury Securities of equivalent maturity. The
loan agreement with Nomura provides for a term of 12 years and requires
monthly
F-33
<PAGE>
G&L REALTY CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED)
interest and principal payments based upon a 27-year amortization schedule. At
the end of 12 years, all unpaid principal and interest will be due in full.
The Company has the option to prepay this loan at any time upon the payment of
a premium that, when added to the remaining principal amount of the note, will
be sufficient to purchase non-callable obligations of the U.S. Government
sufficient to provide for the schedule payments remaining under the note. As a
condition of the loan, Nomura has required G&L Hampden to place $400,000 into
a reserve account which may be used to fund unspecified maintenance capital
reserves.
In conjunction with the acquisition of the Hampden Properties, the Company
entered into a 15-year net operating lease with Iatros. Although Iatros is the
current operator of the Hampden Properties, the licenses necessary to operate
the Hampden Properties are currently held by Hampden Nursing. Iatros has
applied for state authorization to operate the Hampden Properties without the
participation of Hampden Nursing. Although this transfer will be handled in
the normal course of business, the parties anticipate that it will take
approximately 90 days to transfer the licenses. Until the licenses are
transferred, the Company has leased the facilities to Hampden Nursing which
has engaged Iatros to manage the facilities until the licenses are
transferred. The lease between the Company and Hampden Nursing requires
monthly lease payments of $225,000 and expires upon transfer of the operating
licenses from Hampden Nursing to Iatros. The Company's lease with Iatros for
the Hampden Properties provides for the monthly lease payments of $225,000 and
fixed annual increases of 2.0% per year at the end of each of the first seven
years. Thereafter, the annual increase is based upon the greater of 2.0% of
the previous year's rent or 2.5% of the increase in gross receipts derived
from the operation of the Hampden Properties in excess of $17,750,000.
Although management believes that Iatros will receive approval for the
transfer of the operating license from Hampden Nursing in a timely manner,
there can be no assurance that the license will be transferred or, if it is,
that the transfer will occur within the expected 90-day time period.
The Hampden Properties are Riverdale Gardens Nursing Home, located in West
Springfield, Massachusetts, Chestnut Hill Nursing Home, located in East
Longmeadow, Massachusetts and Mary Lyon Nursing Home, located 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 building on
approximately 3.85 acres as well as a 3,366 square foot 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 with 15 private and 54 double
occupancy rooms. The facility is a 49,198 square foot single story 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 care beds with ten private rooms, 39 double occupancy and three
quadruple occupancy rooms.
The following table sets forth certain information regarding the Hampden
Properties as of October 28, 1997.
<TABLE>
<CAPTION>
YEAR
CONSTRUCTED TOTAL AVERAGE
OR NUMBER OF PURCHASE ANNUALIZED ANNUAL RENT
PROPERTY REHABILITATED BEDS PRICE RENT PER BED
-------- ------------- --------- ----------- ---------- -----------
<S> <C> <C> <C> <C> <C>
Riverdale Gardens
Nursing Home........... 1957-1975 168 $ 5,760,000 $ 762,420 $ 4,538
Chestnut Hill Nursing
Home................... 1984 123 10,825,000 1,432,800 11,649
Mary Lyon Nursing Home.. 1986 100 3,815,000 504,780 5,048
</TABLE>
F-34
<PAGE>
G&L REALTY CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED)
The total annualized rent expected to be derived from the Hampden Properties
is approximately $2.7 million, or approximately 11.5% of the Company's total
annualized rental income, based on current rental rates. This rental income
will be derived from Hampden Nursing until the transfer of the licenses to
Iatros, at which time Iatros will be responsible for the rent on the Hampden
Properties. Iatros has recently experienced problems in operating certain
senior care facilities and had reported financial difficulties which could
materially and adversely affect the Company's results of operations and its
ability to make expected distributions to stockholders. In light of such
difficulties, Iatros has recently hired a new management team to improve its
senior care facility operating capabilities. Although the Company believes
that this new management team will be able to operate senior care facilities
profitably, there can be no assurance that Iatros' facility operations will
improve under this new management team.
On October 24, 1997, the Company, through AV Medical, has acquired a vacant
parcel of land located in Aliso Viejo, California for approximately $2.2
million. AV Medical intends to build a 33,000 square foot, three-story MOB on
this property. Management believes that, upon completion of construction, the
total investment in land and building will be approximately $6.5 million.
Concurrent with the acquisition of the vacant land, AV Medical pre-leased the
entire MOB to an investment grade hospital operator. Under the terms of this
10-year net operating lease with this hospital tenant, rent payments will
commence upon issuance of a Certificate of Occupancy at the rate of $750,000
per annum. The tenant has an option to acquire the MOB from AV Medical for
approximately $9.5 million after four years of tenancy. There can be no
assurance, however, that the Company will be able to develop the Aliso Viejo
MOB property or, if developed, that the lease will prove favorable to the
Company.
In conjunction with the October 24, 1997 acquisition of land, the Company
directly acquired a second parcel of land in Aliso Viejo, California for
$814,000. Prior to closing escrow on this second parcel, the Company signed a
lease with a nationally recognized retailer who has agreed to occupy and lease
the 9,100 square foot building to be constructed on this parcel. The Company
has an agreement with this future tenant for construction of the building for
a cost not to exceed $720,000. The lease, which is anticipated to commence on
August 1, 1998, is a ten-year triple net lease with annual net lease payments
of $182,000 for the first five years and $200,000 per annum thereafter. While
management believes that this land will be successfully developed and leased,
there can be no assurance that this transaction will prove favorable to the
Company.
The Company has a 50% membership interest in Valley Convalescent, a limited
liability company formed by the Company and Continuum, which was formed in
anticipation of the purchase of Valley Convalescent Hospital, Valley Living
Center and Mountain View Care Center located in El Centro, California (the "El
Centro Properties") for an aggregate acquisition price of approximately $3.6
million, $400,000 of which would be used for facility renovations. The Company
and Continuum contributed approximately $300,000 and $344,000, respectively,
to Valley Convalescent and the Company funded a loan secured by a first deed
of trust on the El Centro Properties for approximately $2.8 million. This loan
bears interest at a rate of 12.0% per annum, matures on September 1, 2002, and
provides for monthly payments of interest only. At maturity, assuming no
prepayments, $2.8 million will be due on this loan. This loan permits
prepayments on any monthly payment date of all or any portion of the
outstanding principal amount of the loan, without penalty, upon not less than
five day's prior written notice to the Company of the borrower's intent to
repay. Although no assurances can be given, the Company anticipates that the
sale of these properties will close during the fourth quarter upon the receipt
of certain regulatory licenses by the proposed operator of the properties.
9. DEPENDENCE ON CERTAIN TENANTS
The Company leases the six MOB properties located in New Jersey to PHP under
a 17-year lease pursuant to which PHP will pay approximately $2.7 million
annually. The Company also leases the Hampden Properties
F-35
<PAGE>
G&L REALTY CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED)
to Hampden Nursing pursuant to a short-term lease which provides for monthly
aggregate rent payments of $225,000. Hampden Nursing has engaged Iatros to
manage the facilities until such time as the operating licenses for these
facilities are transferred to Iatros. Upon transfer of the operating licenses,
the Company's 15-year lease with Iatros will commence, under which the Company
will receive rent of approximately $2.7 million per annum. The rent revenues
to be received pursuant to these leases, individually and collectively, is
significant to the Company's operations.
10. COMMITMENTS AND CONTINGENCIES
Neither the Company, any of its consolidated or unconsolidated affiliates
nor any of the assets within their portfolios of medical office buildings,
Senior care facilities, parking facilities, and retail space is currently a
party to any material litigation.
F-36
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The Board of Directors and Stockholders
Iatros Health Network, Inc. and Subsidiaries
Atlanta, Georgia
We have audited the accompanying consolidated balance sheets of Iatros
Health Network, Inc. and Subsidiaries as of December 31, 1996 and 1995 and the
related consolidated statements of operations, changes in 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
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the consolidated financial
statements are free of material misstatements. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the
consolidated financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation. We believe
that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Iatros
Health Network, Inc. and Subsidiaries as of December 31, 1996 and 1995 and the
results of their operations and their cash flows for each of the three years
in the period ended December 31, 1996 in conformity with generally accepted
accounting principles.
Asher & Company, Ltd.
Philadelphia, Pennsylvania
April 2, 1997
F-37
<PAGE>
IATROS HEALTH NETWORK, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
1996 1995
------------ -----------
ASSETS
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents........................... $ 1,134,125 $ 682,505
Accounts receivable, net............................ 5,888,205 4,237,452
Note receivable..................................... 200,000 1,000,000
Inventory........................................... 453,119 460,344
Prepaid expenses and other current assets........... 1,940,114 1,579,186
Deferred tax asset, net............................. 2,700,000 1,520,000
------------ -----------
Total current assets................................ 12,315,563 9,479,487
PROPERTY AND EQUIPMENT, net......................... 1,249,763 965,289
OTHER ASSETS
Cash and cash equivalents, restricted............... -- 375,000
Deposits............................................ 1,208,849 368,762
Contract rights, net of accumulated amortization of
$187,234 and $7,995 in 1996 and 1995, respectively. 1,346,052 631,710
Excess of cost over net assets acquired, net of
accumulated amortization of $372,128 and $310,582
in 1996 and 1995, respectively..................... 3,885,767 8,418,078
Notes receivable.................................... 4,423,324 2,535,295
Organization costs, net of accumulated amortization
of $35,793 and $112,396 1996 and 1995,
respectively....................................... 221,843 1,002,301
Loans receivable and other assets................... 3,344,070 250,526
------------ -----------
14,429,905 13,581,672
------------ -----------
Total Assets........................................ $ 27,995,231 $24,026,448
============ ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Notes payable, banks................................ $ 792,663 $ 879,811
Current portion of long-term debt................... 374,881 1,052,017
Current portion of capital lease obligations........ 230,761 127,001
Accounts payable.................................... 2,690,260 1,188,650
Accrued payroll and related liabilities............. 685,505 353,017
Accrued expenses and other current liabilities...... 854,522 1,857,661
Preferred stock dividends payable................... 390,000 230,000
Net current liabilities of discontinued operations.. 500,000 500,000
------------ -----------
Total current liabilities........................... 6,518,592 6,188,157
LONG-TERM DEBT...................................... 328,138 545,041
SUBORDINATED CONVERTIBLE DEBENTURES................. 600,000 --
CAPITAL LEASE OBLIGATIONS........................... 232,721 209,329
------------ -----------
7,679,451 6,942,527
COMMITMENTS AND CONTINGENCIES....................... -- --
STOCKHOLDERS' EQUITY
Preferred Stock, $.001 par value, 5,000,000 shares
authorized; Series A, 533,333 shares issued and
outstanding........................................ 533 533
Series B, 100,000 shares issued and outstanding..... 100 100
Common Stock, $.001 par value, 25,000,000 shares
authorized; 15,931,500 and 11,351,745 issued and
outstanding in 1996 and 1995, respectively......... 15,931 11,351
Additional Paid-In Capital.......................... 34,142,970 20,441,130
Accumulated Deficit................................. (13,843,754) (3,369,193)
------------ -----------
20,315,780 17,083,921
------------ -----------
Total Liabilities and Stockholders' Equity.......... $ 27,995,231 $24,026,448
============ ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-38
<PAGE>
IATROS HEALTH NETWORK, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
1996 1995 1994
------------ ----------- -----------
<S> <C> <C> <C>
Revenue
Ancillary services................... $ 9,759,337 $ 6,763,472 $ 2,331,786
Management services.................. 9,920,758 4,343,684 534,307
Development services................. 2,426,720 5,521,108 --
------------ ----------- -----------
22,106,815 16,628,264 2,866,093
Operating expenses
Ancillary services................... 8,966,378 6,417,471 2,090,436
Management services.................. 12,097,877 3,560,932 --
General and administrative........... 4,653,758 2,897,482 1,846,722
------------ ----------- -----------
25,718,013 12,875,885 3,937,158
------------ ----------- -----------
Income (loss) from continuing
operations before other income
(expense), income tax benefit and
discontinued operations............... (3,611,198) 3,752,379 (1,071,065)
Other income (expense)
Interest income...................... 550,416 63,816 15,863
Interest expense..................... (699,895) (254,574) (38,737)
Depreciation and amortization........ (1,234,018) (576,433) (78,096)
Write-down of intangible assets...... (6,697,974) -- --
Other income......................... 198,108 -- 254,684
------------ ----------- -----------
(7,883,363) (767,191) 153,714
------------ ----------- -----------
Income (loss) from continuing
operations before income tax benefit
and discontinued operations........... (11,494,561) 2,985,188 (917,351)
Income tax benefit, net................ 1,180,000 670,000 526,036
------------ ----------- -----------
Income (loss) from continuing
operations before discontinued
operations............................ (10,314,561) 3,655,188 (391,315)
Discontinued operations
Loss from operations................... -- -- (511,186)
Loss on disposal....................... -- -- (294,108)
------------ ----------- -----------
-- -- (805,294)
------------ ----------- -----------
Net Income (loss)...................... $(10,314,561) $ 3,655,188 $(1,196,609)
============ =========== ===========
Primary earnings (loss) per common
share:
Earnings (loss) per common and common
equivalent share:
Continuing operations.............. $ (.74) $ .29 $ (.06)
Discontinued operations............ -- -- (.13)
------------ ----------- -----------
Net Income (loss)...................... $ (.74) $ .29 $ (.19)
============ =========== ===========
Weighted average number of shares of
common stock and equivalents
outstanding........................... 13,946,359 12,054,741 6,281,584
============ =========== ===========
Fully diluted earnings per common
share:
Earnings per common and common
equivalent share.................... $ -- $ .28 $ --
------------ ----------- -----------
Net Income............................. $ -- $ .28 $ --
============ =========== ===========
Weighted average number of shares of
common stock and equivalents
outstanding........................... -- 13,248,133 --
============ =========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-39
<PAGE>
IATROS HEALTH NETWORK, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
PREFERRED
STOCK COMMON STOCK ADDITIONAL
-------------- ----------------- PAID-IN ACCUMULATED
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT TOTAL
------- ------ --------- ------ ---------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, JANUARY 1,
1994................... -- -- 5,678,000 $5,678 $5,292,634 $(5,597,772) $ (299,460)
Issuance of Common Stock
on July 25, 1994 in
connection with an
unregistered sale of
securities............. -- -- 2,000,000 2,000 1,498,000 -- 1,500,000
Issuance of Series A
Preferred Stock on July
25, 1994 in connection
with an unregistered
sale of securities..... 533,333 $533 -- -- 1,999,467 -- 2,000,000
Issuance of Series B
Preferred Stock in
exchange for common
stock on July 25, 1994
in connection with an
unregistered sale of
securities............. 300,000 300 (666,667) (667) 367 -- --
Costs of Issuance
incurred on July 25,
1994 in connection with
an unregistered sale of
securities............. -- -- -- -- (575,000) -- (575,000)
Related party loan
outstanding on July 25,
1994 and contributed to
capital................ -- -- -- -- 250,000 -- 250,000
Issuance of Common Stock
on September 30, 1994
in connection with an
unregistered sale of
securities............. -- -- 100,000 100 224,900 -- 225,000
Issuance of Common Stock
on December 28, 1994 in
connection with a
leased property
transaction............ -- -- 158,333 158 349,842 -- 350,000
Issuance of Common Stock
on December 31, 1994 in
connection with
obtaining a property
purchase commitment.... -- -- 166,667 167 371,708 -- 371,875
Series A Preferred Stock
dividends declared..... -- -- -- -- -- (70,000) (70,000)
Net loss................ -- -- -- -- -- (1,196,609) (1,196,609)
------- ---- --------- ------ ---------- ----------- -----------
BALANCE, DECEMBER 31,
1994................... 833,333 833 7,436,333 7,436 9,411,918 (6,864,381) 2,555,806
Issuance of Common Stock
on January 23, 1995 in
connection with an
unregistered sale of
securities............. -- -- 1,000,000 1,000 1,750,250 -- 1,751,250
Issuance of Common Stock
on April 12, 1995 in
connection with an
unregistered sale of
securities............. -- -- 14,060 14 99,986 -- 100,000
Issuance of Common Stock
on June 30, 1995 in
connection with the
termination of a lease
and assignment of a
purchase option........ -- -- 30,489 30 149,969 -- 149,999
Issuance of Common Stock
on August 29, 1995 in
connection with an
unregistered sale of
securities............. -- -- 170,000 170 1,019,830 -- 1,020,000
Issuance of Common Stock
on August 31, 1995 in
connection with an
unregistered sale of
securities............. -- -- 100,000 100 224,900 -- 225,000
Issuance of Common Stock
on September 28, 1995
in connection with
conversion of debt..... -- -- 189,941 190 664,605 -- 664,795
Issuance of Common Stock
on September 28, 1995
in connection with an
unregistered sale of
securities............. -- -- 400,000 400 1,399,600 -- 1,400,000
Issuance of Common Stock
on September 29, 1995
in connection with an
unregistered sale of
securities............. -- -- 316,667 317 1,899,683 -- 1,900,000
</TABLE>
F-40
<PAGE>
IATROS HEALTH NETWORK, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY--(CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK ADDITIONAL
---------------- ------------------ PAID-IN ACCUMULATED
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT TOTAL
-------- ------ ---------- ------- ----------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Costs of issuance
incurred during 1995,
in connection with
unregistered sales of
securities............. -- $-- -- $ -- $ (542,270) $ -- $ (542,270)
Redemption of Series B
Preferred Stock on
November 30, 1995...... (200,000) (200) -- -- -- -- (200)
Issuance of Common Stock
on December 29, 1995 in
connection with
exercise of warrants
held by a Company
Director............... -- -- 30,000 30 86,220 -- 86,250
Issuance of Common Stock
during 1995 in
connection with
exercise of public
warrants............... -- -- 1,664,255 1,664 3,842,439 -- 3,844,103
Compensation incurred
during 1995, in
connection with an
unregistered sale of
securities............. -- -- -- -- 419,000 -- 419,000
Director compensation
incurred during 1995,
in connection with an
unregistered sale of
securities............. -- -- -- -- 15,000 -- 15,000
Series A Preferred Stock
dividends declared.... -- -- -- -- -- (160,000) (160,000)
Net Income.............. -- -- -- -- -- 3,655,188 3,655,188
-------- ---- ---------- ------- ----------- ------------ ------------
BALANCE, DECEMBER 31,
1995................... 633,333 633 11,351,745 11,351 20,441,130 (3,369,193) 17,083,921
Issuance of Common Stock
during 1996 in
connection with the
conversion of a
registered sale of
convertible debt
securities............. -- -- 3,815,020 3,815 12,707,394 -- 12,711,209
Costs of Issuance
incurred on January 26,
1996 in connection with
a registered sale of
convertible debt
securities............. -- -- -- -- (683,466) -- (683,466)
Issuance of Common Stock
during 1996 in
connection with
exercise of public
warrants............... -- -- 92,572 93 267,522 -- 267,615
Issuance of Common Stock
during 1996 in
connection with the
exercise of warrants
and options............ -- -- 619,325 619 1,147,393 -- 1,148,012
Issuance of Common Stock
on April 1, 1996 in
connection with an
unregistered sale of
securities............. -- -- 52,838 53 214,997 -- 215,050
Compensation incurred
during 1996, in
connection with an
unregistered sale of
securities............. -- -- -- -- 18,000 -- 18,000
Director compensation
incurred during 1996,
in connection with an
unregistered sale of
securities............. -- -- -- -- 30,000 -- 30,000
Series A Preferred Stock
dividends declared.... -- -- -- -- -- (160,000) (160,000)
Net Loss................ -- -- -- -- -- (10,314,561) (10,314,561)
-------- ---- ---------- ------- ----------- ------------ ------------
BALANCE, DECEMBER 31,
1996................... 633,333 $633 15,931,500 $15,931 $34,142,970 $(13,843,754) $ 20,315,780
======== ==== ========== ======= =========== ============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-41
<PAGE>
IATROS HEALTH NETWORK, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
1996 1995 1994
------------ ----------- -----------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss)...................... $(10,314,561) $ 3,655,188 $(1,196,609)
Adjustments to reconcile net
income(loss) to net cash utilized by
operating activities:
Loss from discontinued operations.... -- -- 511,186
Loss on disposal of discontinued
operations.......................... -- -- 294,108
Net cash utilized by discontinued
operations.......................... -- (681,544) (315,063)
Depreciation and amortization........ 1,234,018 576,433 130,425
Provision for doubtful accounts
receivable.......................... 2,036,003 79,217 34,332
Write-off of uncollectible notes and
loans receivable.................... 1,200,000 -- --
Write-down of intangible assets...... 6,697,974 -- --
Loss on disposal of property and
equipment........................... 12,217 -- --
Common stock issued for services
rendered............................ 48,000 99,750 --
Third party settlements.............. -- -- (129,684)
Deferred taxes....................... (1,180,000) (870,000) (526,036)
Changes in:
Accounts receivable.................. (3,686,755) (2,794,121) (852,308)
Notes and loans receivable........... (2,820,369) (2,175,000) --
Inventory............................ 7,225 (216,257) (45,162)
Prepaid expenses and other........... (360,928) (1,302,379) 10,628
Accounts payable..................... 1,501,608 463,850 (71,888)
Accrued expenses and other........... (59,458) 766,181 397,886
------------ ----------- -----------
Net cash utilized by operating
activities............................ (5,685,026) (2,398,682) (1,758,185)
------------ ----------- -----------
INVESTING ACTIVITIES
Purchase of property and equipment..... (305,497) (147,319) (120,971)
Acquisition of businesses.............. (215,050) (2,074,219) --
Acquisition of contract rights......... (2,364,478) (639,705) --
Proceeds from sale of property and
equipment............................. -- -- 140,000
Loans to third parties................. (3,185,541) (710,295) --
Repayment of loans to third parties.... 445,555 -- --
Deposits, net.......................... (1,110,000) (73,636) 5,580
Restricted cash and cash equivalents... 375,000 (25,000) (350,000)
Organization costs..................... (42,067) (597,106) (111,403)
------------ ----------- -----------
Net cash utilized by investing
activities............................ (6,402,078) (4,267,280) (436,794)
------------ ----------- -----------
FINANCING ACTIVITIES
Net proceeds from issuance of capital
stock and other capital contributions. 1,415,627 5,087,332 3,400,000
Proceeds from issuance of convertible
debentures............................ 12,900,000 -- --
Fees paid on issuance of convertible
debentures............................ (876,331) -- --
Short term borrowings, net............. (87,148) 1,342,761 --
Payments of long-term debt............. (242,258) (606,586) (162,306)
Stockholders' loan borrowings
(payments), net....................... (686,664) 761,759 (201,775)
Redemption of Preferred Stock.......... -- (200) --
Payments of capital lease obligations.. (154,413) (67,626) (15,832)
Security deposits, net................. 269,911 (16,376) --
------------ ----------- -----------
Net cash provided by financing
activities............................ 12,538,724 6,501,064 3,020,087
------------ ----------- -----------
INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS........................... 451,620 (164,898) 825,108
Cash and cash equivalents, beginning of
year.................................. 682,505 847,403 22,295
------------ ----------- -----------
Cash and cash equivalents, end of year. $ 1,134,125 $ 682,505 $ 847,403
============ =========== ===========
</TABLE>
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
The Company paid $720,552, $177,398 and $331,526 in cash for interest during
1996, 1995 and 1994, respectively.
The accompanying notes are an integral part of these consolidated financial
statements.
F-42
<PAGE>
IATROS HEALTH NETWORK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995 AND 1994
NOTE 1: NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A summary of the Company's significant accounting policies consistently
applied in the preparation of the accompanying consolidated financial
statements is as follows:
Business
Iatros Health Network, Inc. and Subsidiaries (the "Company") is a Delaware
Corporation organized in June 1988. The Company is engaged in providing
services to the long-term care industry. The Company's principal markets
include the metropolitan areas of Philadelphia, Pennsylvania; Baltimore,
Maryland; and, New England.
Principles of consolidation
The consolidated financial statements include the accounts of Iatros Health
Network, Inc. and its wholly-owned subsidiaries. All intercompany transactions
and accounts have been eliminated in consolidation.
Cash and cash equivalents
The Company considers all highly liquid debt instruments purchased with an
original maturity of three months or less to be cash equivalents.
The Company maintains cash accounts which at times may exceed federally
insured limits. The Company has not experienced any losses from maintaining
cash accounts in excess of federally insured limits. Management believes that
the Company does not have significant credit risk related to its cash
accounts.
Revenue and accounts receivable
Ancillary services revenue is reported at the estimated net realizable
amounts due from residents, third party payors, and others. Management
services revenue is reported pursuant to the terms and amounts provided by the
associated management service contracts. Development services revenue is
generally realized on a fee for service basis recognized upon completion of
the service transaction.
The Company's credit risk with respect to accounts receivable is
concentrated in services related to the healthcare industry, which is highly
influenced by governmental regulations. This concentration of credit risk is
limited due to the number and types of entities comprising the Company's
customer base and their geographic distribution. The Company routinely
monitors its exposure to credit losses and maintains an allowance for doubtful
accounts.
The allowance for doubtful accounts is maintained at a level determined to
be adequate by management to provide for potential losses based upon an
evaluation of the accounts receivable. This evaluation considers such factors
as the age of receivables, the contract terms and the nature of the contracted
services.
Certain ancillary revenues are recorded based on standard charges applicable
to patients. Under Medicare, Medicaid and other cost-based reimbursement
programs, the provider is reimbursed for services rendered to covered program
patients as determined by reimbursement formulas. The differences between
established billing rates and the amounts reimbursable by the programs and
patient payments are recorded as contractual adjustments and deducted from
revenues.
Inventory
Inventory is principally comprised of pharmaceutical and medical supplies
and is valued at the lower of cost (first-in, first-out method) or market.
F-43
<PAGE>
IATROS HEALTH NETWORK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Property and equipment
Property and equipment is stated at cost. The cost of property and equipment
is depreciated over the estimated useful lives of the respective assets using
primarily the straight-line method. Property and equipment under capital
leases is amortized over the lives of the respective leases or over the
service lives of the assets. Leasehold improvements are amortized over the
lesser of the term of the related lease or the estimated useful lives of the
assets.
Normal maintenance and repair costs are charged against income. Major
expenditures for renewals and betterment which extend useful lives are
capitalized. When property and equipment is sold or otherwise disposed of, the
asset accounts and related accumulated depreciation or amortization accounts
are relieved, and any gain or loss is included in operations.
The useful lives of property and equipment for purposes of computing
depreciation and amortization are:
<TABLE>
<S> <C>
Leasehold improvements........................................ 3-10 Years
Property and equipment held under capital leases.............. 5-7 Years
Equipment..................................................... 5 Years
Furniture and fixtures........................................ 3-7 Years
</TABLE>
Intangible assets
The Company evaluates the carrying value of its long-lived assets and
identifiable intangibles including, contract rights, excess of cost over net
assets acquired and organization costs when events or changes in circumstances
indicate that the carrying amount of such assets may not be recoverable. The
review includes an assessment of industry factors, contract retentions, cash
flow projections and other factors the Company believes are relevant.
Contract rights
Contract rights represent the value assigned to management contracts
obtained by the Company. Management contracts provide for a management fee in
exchange for management, marketing and development services provided to the
facilities. Contract rights are being amortized over the term of the related
contracts which range from 5 to 10 years.
Excess of cost over net assets acquired
The excess of cost over net assets acquired relates to the acquisition of
the Company's operating subsidiaries. The excess of cost over net assets
acquired is being amortized over the lives of 15 to 20 years.
Organization costs
Organization costs incurred in connection with the acquisition or formation
of new business activities for the Company are being amortized using the
straight-line method over five years.
Income taxes
The Company employs the asset and liability method in accounting for income
taxes pursuant to Statement of Financial Accounting Standards (SFAS) No. 109
"Accounting for Income Taxes." Under this method, deferred tax assets and
liabilities are determined based on temporary differences between the
financial reporting and tax bases of assets and liabilities and net operating
loss carryforwards, and are measured using enacted tax rates and laws that are
expected to be in effect when the differences are reversed.
F-44
<PAGE>
IATROS HEALTH NETWORK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Earnings per share
Both primary and fully diluted earnings per share of common stock and common
stock equivalents are computed based on the weighted average number of shares
of common stock and common stock equivalents outstanding in each period. For
1996 and 1994, fully diluted loss per share amounts are not computed because
they are antidilutive.
In 1995, Common Stock equivalents include additional shares assuming the
exercise of stock options and warrants and Convertible Series A Preferred
Stock when their effect is dilutive. The inclusion of additional shares for
conversion of Preferred Series A Stock, in primary earnings per share
calculations, would have been antidilutive for 1995.
Net earnings used in the computation of primary earnings per share for 1995
are reduced by Preferred Stock dividend requirements.
The weighted average number of shares of Common Stock and Common Stock
equivalents was determined as follows:
<TABLE>
<CAPTION>
1996 1995 1994
---------- ---------- ---------
<S> <C> <C> <C>
Primary earnings per share:
Weighted average common shares outstanding... 13,946,359 9,002,561 6,281,584
Weighted average Common Stock equivalents
assuming the exercise of outstanding
warrants and options........................ -- 3,052,180 --
---------- ---------- ---------
13,946,359 12,054,741 6,281,584
========== ========== =========
Fully diluted earnings per share:
Weighted average common shares outstanding... -- 9,002,561 --
Weighted average Common Stock equivalents
assuming the exercise of outstanding
warrants, options and conversion of
convertible Series A Preferred Stock........ -- 4,245,572 --
---------- ---------- ---------
-- 13,248,133 --
========== ========== =========
</TABLE>
During 1996, the Company issued Common Stock in connection with the
conversion of its 10% Subordinated Convertible Debentures and with the
exercise of its Redeemable Common Stock Purchase Warrants. In addition, all of
the outstanding 10% Subordinated Convertible Debentures as of December 31,
1996 have subsequently been converted. Had all exercises and conversions
occurred on January 1, 1996, the reported primary loss per common share would
have been antidilutive.
During 1995, the Company issued Common Stock in connection with the exercise
of its Redeemable Common Stock Purchase Warrants and the conversion of
convertible debt during the year. In addition, all of the outstanding
Redeemable Common Stock Purchase Warrants as of December 31, 1995 were
exercised in 1996. Had all exercises and conversions occurred on January 1,
1995, the reported primary earnings per common and common equivalent share
would have decreased $0.02 to $0.27.
F-45
<PAGE>
IATROS HEALTH NETWORK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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 dates of the financial
statements and the reported amounts of revenue and expenses during the
reporting periods. Actual results could differ from those estimates.
Reclassifications
Certain amounts have been reclassified in 1995 and 1994 to conform with the
1996 presentation.
NOTE 2: SIGNIFICANT CAPITAL STOCK TRANSACTIONS
During 1996 and 1995, the Company completed a number of Capital Stock
transactions. Significant transactions included the following:
In January 1996, the Company completed the sale of $12,900,000 of its 10%
Subordinated Convertible Debentures. The Debentures pay interest in quarterly
installments at the rate of 10% per annum. The Debentures are convertible into
shares of the Company's Common Stock, with the conversion rate determined by a
formula based upon the share price of the Company's Common Stock. Costs
associated with the issuance of the Debentures totaled $876,331. Through
December 31, 1996, $12,300,000 were converted into a total of 3,815,020 shares
of Common Stock.
On May 31, 1996, Oasis HealthCare, Inc., a long-term care management company
located in Chestnut Hill, Massachusetts was merged into the Company's wholly
owned subsidiary, OHI Acquisition Corporation. The shareholders of Oasis
HealthCare, Inc. received a total of 52,828 shares of Common Stock and
$215,050 in cash in exchange for their shares in Oasis HealthCare, Inc. In
addition, an amount will be paid to the former shareholders of Oasis
HealthCare, Inc. within thirty days of the execution of agreements with
respect to any of twelve management contract opportunities specifically
identified in the Merger Agreement. Each amount (half of which will be payable
in cash and half in Common Stock) will be determined based upon a percentage
of the value of each such agreement, the aggregate of which will not exceed
$1,500,000. As part of the transaction OHI Acquisition Corporation entered
into a five year employment agreement with the former president of Oasis
HealthCare, Inc. The name of the subsidiary has been changed to OHI
Corporation.
In January 1995, the Company, through a newly-created subsidiary, Iatros
Respiratory Corporation ("IRC"), merged with King Care Respiratory Services,
Inc. ("King Care"), with IRC being the surviving entity. King Care, located in
Los Angeles, California, manages and provides respiratory therapy services to
skilled long-term care facility patients and managed out-patient respiratory
therapy programs for acute care hospitals. All of the outstanding shares of
King Care were converted into the right to receive 1,000,000 shares of the
Company's Common Stock and the right to receive a deferred payment of up to
$480,000, plus simple interest on such payment of nine percent (9%) payable in
January 2000. The 1,000,000 shares of Common Stock issued by the Company in
connection with this transaction were valued at $1,751,250. In 1996, the
intangible assets related to this transaction were reviewed for impairment.
(See Note 17)
In April 1995, the Company through its newly-created subsidiary, Iatros
Therapy Corporation, acquired the business operations and assets of Physical
Therapy and Restorative Care Associates, P.C. and Therapyworks, P.C., a
rehabilitation agency and out-patient clinic which provides physical,
occupational and speech therapy services in Philadelphia, Pennsylvania. The
purchase price of the acquisition totaled $550,000.
F-46
<PAGE>
IATROS HEALTH NETWORK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
In August 1995, the Company, through a newly-created subsidiary, Greenbrier
Healthcare Services, Inc. ("Greenbrier") merged with Greenbrier Health Care
Management, Inc., with Greenbrier being the surviving entity. Greenbrier
serves as the manager of several health care facilities located in Maryland.
At the effective date of the merger, the outstanding shares of the Common
Stock of Greenbrier Health Care Management, Inc. were converted into the right
to receive: (i) 170,000 shares of Common Stock of the Company, (ii) $574,219,
and (iii) payments of $100,000 within 30 days after the execution of each of
five anticipated management contracts. The 170,000 shares issued by the
Company in connection with this transaction were valued at $1,020,000. In
1996, the intangible assets related to this transaction were reviewed for
impairment. (See Note 17)
In September 1995, New Health Management Systems, Inc., a Pennsylvania
corporation ("New Health") was merged into NHMS Acquisition Corp. ("NHMS"), a
wholly owned subsidiary of the Company, pursuant to an Agreement and Plan of
Merger (the "Merger"). At the effective date of the merger, the outstanding
shares of New Health were converted into the right to receive (i) 316,667
shares of Common Stock of the Company and (ii) $1,900,000, in cash and (iii)
short-term notes payable totaling $500,000. The 316,667 shares issued by the
Company were valued at $ 1,900,000. In 1996, the intangible assets related to
this transaction were reviewed for impairment. (See Note 17)
In November 1995, the Company expended $1,350,000 in connection with
acquiring the contract rights to three nursing facilities representing
approximately 400 beds located in the Massachusetts market area. Of the amount
expended, $710,295 was provided as a long term loan to the corporate owner of
the facilities while $639,705 was attributable to acquiring contract rights to
the facilities. The contract rights to these facilities secured by the Company
included a five year contract commencing on November 1, 1995. The costs
associated with acquiring these contract rights are being amortized over the
contract term.
NOTE 3: CASH AND CASH EQUIVALENTS
At December 31, 1996, cash and cash equivalents totals $1,134,125 and
includes a certificate of deposit held by a financial institution in the
amount of approximately $520,000. This certificate was redeemed in March 1997
and was utilized to satisfy an outstanding credit obligation totaling $516,000
which is included in notes payable, banks, at December 31, 1996.
Cash and cash equivalents at December 31, 1995 totaled $1,057,505 and was
comprised of unrestricted amounts of $682,505 and restricted amounts of
$375,000. Restricted cash of $275,000 represented funds received from a third
party as security for future payment obligations pursuant to a management
subcontract agreement, which was satisfied in the fourth quarter of 1996. The
balance of restricted funds totaling $100,000 related to escrowed funds
associated with contractual obligations involving the Company's development
activities which were satisfied in 1996.
At December 31, 1995, cash and cash equivalents included two certificates of
deposit held by separate financial institutions in amounts aggregating
approximately $707,000. These certificates matured in March 1996 and served as
collateral for two outstanding credit obligations totaling $691,000 which are
included in notes payable, banks at December 31, 1995.
F-47
<PAGE>
IATROS HEALTH NETWORK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 4: SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND FINANCING ACTIVITIES
During 1996, the Company acquired property and equipment and incurred a note
payable in the amount of $34,882.
During 1996, the Company acquired one business, recording excess of cost
over net assets acquired of $430,100 in connection with the acquisition. As
consideration for the net assets acquired, the Company issued 52,838 shares of
Common Stock in the amount of $215,050 to the related parties.
During 1996, the Company issued 10% Subordinated Convertible Debentures in
the amount of $12,900,000. As of December 31, 1996, $12,300,000 of the
Debentures were converted into 3,815,020 shares of Common Stock. Accrued
interest on the Debentures converted into Common Stock during 1996 resulted in
an increase to Additional Paid-In Capital in the amount of $411,209.
During 1996 and 1995, annual dividends on shares of Preferred Stock of
$160,000 were declared but not paid.
During 1996, 1995 and 1994, the Company acquired property and equipment
under capital leases and incurred capital lease obligations in the amounts of
$281,564, $230,822 and $29,000, respectively.
During 1995, the Company acquired property and equipment from a related
party and incurred a note payable in the amount of $112,850.
During 1995, the Company acquired three businesses, recording excess of cost
over net assets acquired of $6,147,030 in connection with the acquisitions. As
consideration for the net assets acquired, the Company issued 1,501,000 shares
of Common Stock and notes payable in the amount of $1,200,000 to the
principals of the acquired companies. Various assets and liabilities were
assumed in connection with the acquisitions.
During 1995, the Company issued 331,438 warrants to purchase shares of
Common Stock as compensation to a third party corporation whose principal
officer serves on the Company's Board of Directors. In addition, in January
1995, this officer assumed the position of President and Chief Executive
Officer of the Company, resulting in the capitalization of organization costs
of $410,000.
During 1995, the Company issued 189,941 shares of Common Stock and 514,941
warrants to purchase shares of Common Stock in connection with the conversion
of long-term debt in the amount of $664,795.
During 1995, the Company incurred a note receivable from a related party in
the amount of $240,000 as consideration for accrued payments to be made in the
future.
During 1995, the Company received notes receivable of $650,000 and incurred
accrued expenses of $200,000 as a return of property deposits of $450,000.
During 1996, the Company offset $200,000 of the notes receivable against the
accrued expense due to the termination of the contractual obligation.
NOTE 5: ACCOUNTS RECEIVABLE
Accounts receivable consists of the following at December 31:
<TABLE>
<CAPTION>
1996 1995
----------- ----------
<S> <C> <C>
Ancillary services................................ $ 4,761,263 $2,275,092
Management services............................... 2,901,242 1,105,760
Development services.............................. -- 1,000,000
----------- ----------
7,662,505 4,380,852
Allowance for doubtful accounts................... (1,774,300) (143,400)
----------- ----------
$ 5,888,205 $4,237,452
=========== ==========
</TABLE>
F-48
<PAGE>
IATROS HEALTH NETWORK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 6: PREPAID EXPENSES AND OTHER CURRENT ASSETS
Prepaid expenses and other current assets at December 31, 1996 and 1995
include approximately $800,000 and $1,150,000, respectively, of project costs
advanced in connection with transactions involving the Company in a
development capacity. These amounts include legal and professional as well as
financing issue costs which are recoverable upon completion of the property
acquisition and project financing or development activity for which such costs
were advanced. The Company routinely advances project costs associated with
its development services as it deems necessary to secure business prospects
and complete transactions.
NOTE 7: PROPERTY AND EQUIPMENT
Property and equipment consists of the following at December 31:
<TABLE>
<CAPTION>
1996 1995
---------- ----------
<S> <C> <C>
Leasehold improvements............................... $ 74,254 $ 54,076
Property and equipment held under capital leases..... 686,236 378,164
Equipment............................................ 826,487 623,568
Furniture and fixtures............................... 590,858 513,596
---------- ----------
2,177,835 1,569,404
Less: Accumulated depreciation and amortization...... 928,072 604,115
---------- ----------
$1,249,763 $ 965,289
========== ==========
</TABLE>
Depreciation and amortization expense charged to continuing operations was
$347,320, $175,858 and $114,921 in 1996, 1995 and 1994, respectively.
Additionally, depreciation and amortization expense charged to discontinued
operations was $159,614 in 1994.
NOTE 8: DEPOSITS
Deposits at December 31, 1996 include a purchase deposit of $1,000,000
associated with the planned acquisition of a long-term care nursing facility,
and a $100,000 deposit on land associated with the future development of a
long-term care or assisted living facility.
NOTE 9: NOTES RECEIVABLE
At December 31, 1996 and 1995, notes receivable result from development,
financial advisory, and consulting services which the Company has provided to
several long-term care properties. The notes, which are generally formalized
as long-term, mature over a period not to exceed ten years, bear simple
interest ranging between eight and ten percent per annum and are secured by a
mortgage position on the properties to which they relate. Further, the notes
are generally subordinated to senior debt and other priority operating
obligations associated with the properties.
During 1995, the Company provided development and marketing services to a
third party corporation in the amount of $1,000,000. Payment for such services
was made in the form of a promissory note. During 1996, the full amount of
this note was written-off.
F-49
<PAGE>
IATROS HEALTH NETWORK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 10: FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107, "Disclosures About Fair
Value of Financial Instruments", requires that the Company disclose estimated
fair values of financial instruments.
Cash and cash equivalents, accounts receivable, prepaid expenses and other
current assets, accounts payable, accrued expenses and other current
liabilities are carried at amounts that approximate their fair values because
of the short-term maturity of these instruments.
The Company believes that the carrying value of notes and loans receivable
and long-term debt approximates fair value.
NOTE 11: LOANS RECEIVABLE AND OTHER ASSETS
At December 31, 1996, loans receivable and other assets include $2,329,000
advanced by the Company pursuant to the terms of operating deficits agreements
for the operating needs of properties managed by the Company. Such advances
generally accrue interest at market rates and are recoverable from permanent
financing proceeds anticipated from the properties.
In addition, other assets include approximately $530,000 representing a loan
receivable due from an officer in connection with the merger transaction with
King Care Respiratory Services, Inc. The loan accrues interest at 9% and
matures in January 2000. The Company expects to partially realize this loan in
connection with satisfying its deferred purchase obligation of approximately
$240,000 plus accrued interest which is also payable in January 2000. At
December 31, 1995, this loan receivable totaled $250,526.
NOTE 12: INCOME TAXES
The effective income tax rate differs each year from the statutory Federal
income tax rate due to graduated Federal income tax rates, state income taxes,
utilization of net operating loss carryforwards, certain permanently non-
deductible charges to net income and certain temporary differences between the
financial and income tax bases. The reconciliation of these differences is as
follows:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Federal income tax rate................................. (34)% 34% (34)%
State income taxes, net of Federal tax benefit.......... (1) 2 --
Tax benefit of prior years' net operating losses........ (11) (75) (92)
Deferred tax asset valuation allowance.................. 10 19 98
Writedown of intangible assets, non-deductible for tax.. 14 -- --
Current year provision for doubtful accounts, non-
deductible for tax in current year..................... 6 -- --
Other................................................... 6 (2) (3)
--- --- ---
(10)% (22)% (31)%
=== === ===
</TABLE>
F-50
<PAGE>
IATROS HEALTH NETWORK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Deferred income taxes arise primarily as a result of differences between the
financial and income tax basis of reporting principally for differences in the
bases of allowances for doubtful accounts, property and equipment, contract
rights, excess of cost over net assets acquired, organization costs and
capital lease obligations as well as the effects of future benefits to be
realized from net operating losses for financial reporting purposes.
Deferred tax assets at December 31, 1996 and 1995 are comprised of the
following:
<TABLE>
<CAPTION>
1996 1995
----------- ----------
<S> <C> <C>
Deferred tax assets
Tax benefit of net operating loss carryforwards.... $ 3,159,000 $1,495,000
Capitalized lease obligations...................... -- 114,000
Allowance for doubtful accounts.................... 605,000 49,000
Organization costs................................. 120,000 --
Excess of costs over net assets acquired and
contract rights................................... 15,000 --
Total deferred tax assets.......................... 3,899,000 1,658,000
----------- ----------
Less: valuation allowance.......................... (1,150,000) (60,000)
Net deferred tax assets............................ 2,749,000 1,598,000
Deferred tax liabilities Property and equipment.... 49,000 42,000
Excess of cost over net assets acquired............ -- 36,000
----------- ----------
Total deferred tax liabilities..................... 49,000 78,000
----------- ----------
Net deferred tax asset............................. $ 2,700,000 $1,520,000
=========== ==========
</TABLE>
During 1996, the deferred tax asset valuation allowance increased by
$1,090,000, and during 1995, the valuation allowance decreased by $1,633,000.
At December 31, 1996, the Company has available net operating loss
carryforwards for Federal income tax purposes of approximately $8,116,000,
which can be offset against future earnings of the Company. These net
operating losses expire from 2008 through 2011, and are subject to annual
limitations. In addition the Company has available various state net operating
loss carryforwards of approximately $5,932,000 at December 31, 1996, which
expire from 1997 to 2011.
The provision for (benefit of) income taxes include:
<TABLE>
<CAPTION>
1996 1995 1994
----------- --------- ---------
<S> <C> <C> <C>
Current:
State................................. $ 200,000
Deferred:
Federal............................... $(1,030,000) (820,000) $(526,036)
State................................. (150,000) (50,000) --
----------- --------- ---------
$(1,180,000) $(670,000) $(526,036)
=========== ========= =========
</TABLE>
F-51
<PAGE>
IATROS HEALTH NETWORK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 13: NOTES PAYABLE, BANKS
<TABLE>
<CAPTION>
1996 1995
-------- --------
<S> <C> <C>
Note payable to bank, due on demand, bearing interest at the
bank's one year certificate of deposit rate plus 1.5% (6%,
at December 31, 1996),secured by a certificate of deposit.. $516,000 $491,000
Note payable to bank, due on demand, bearing interest at the
bank's prime rate plus 1% (9.5% at December 31, 1995),
secured by accounts receivable, property and equipment;
satisfied in 1996.......................................... -- 150,000
Note payable to bank, due in 1996, bearing interest at the
bank's prime rate plus 1/2% (9% at December 31, 1995),
secured by a certificate of deposit; satisfied in 1996..... -- 200,000
Note payable to bank, due on demand, bearing interest at the
bank's prime rate plus 1% (9.25% at December 31, 1996),
secured by accounts receivable and property and equipment.. 26,874 38,811
Note payable to bank, due on demand, bearing interest at the
bank's prime rate plus 2.5% (10.75% at December 31, 1996),
secured by accounts receivable and property and equipment.. 99,774 --
Note payable to bank, due on demand, bearing interest at the
bank's prime rate plus 1.5% (9.75% at December 31, 1996),
secured by accounts receivable and property and equipment.. 150,015 --
-------- --------
$792,663 $879,811
======== ========
</TABLE>
The weighted average rate of interest charged to the Company during 1996 and
1995 was approximately 9% and 9.5%, respectively.
NOTE 14: ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
Accrued expenses and other current liabilities reported at December 31, 1996
include accrued legal and professional fees of approximately $400,000 and
other current liabilities totaling $454,522.
Accrued expenses and other liabilities reported at December 31, 1995 include
placement fees due to underwriter of $430,000; commissions associated with
respiratory services of $285,000; legal and professional costs of $300,000;
resident refund obligations of $200,000 and state income taxes payable of
$200,000 and other current liabilities totaling $442,661.
F-52
<PAGE>
IATROS HEALTH NETWORK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 15: LONG-TERM DEBT
<TABLE>
<CAPTION>
1996 1995
-------- ----------
<S> <C> <C>
Notes payable to third parties, due between 1997 and 1999,
payable in monthly installments of $2,684, bearing
interest at approximately 10%, secured by accounts
receivable and property and equipment..................... $ 43,525 $ 69,085
Note payable to a third party, due on demand, bearing
interest at 8%, unsecured................................. 37,500 250,000
Notes payable to Stockholders, due during 1997, non-
interest bearing, unsecured............................... 140,812 383,793
Notes payable to a third party, due in 1999, payable in
monthly installments of $1,139, including interest at the
banks' prime rate plus 1.5%, (9.75% at December 31, 1996),
secured by equipment...................................... 30,684 --
Notes payable to Stockholders, due 1997 through 2000,
bearing interest at 8% to 10%, unsecured.................. 450,498 894,180
-------- ----------
703,019 1,597,058
======== ==========
Less current portion....................................... 374,881 1,052,017
-------- ----------
$328,138 $ 545,041
======== ==========
</TABLE>
Annual maturities of long-term debt in the next four years are as follows:
<TABLE>
<CAPTION>
YEAR ENDING
DECEMBER 31, AMOUNT
------------ --------
<S> <C>
1997............................................................ $374,881
1998............................................................ 22,225
1999............................................................ 17,975
2000............................................................ 287,938
</TABLE>
NOTE 16: LEASES
The Company leases its executive offices, operating facilities and certain
equipment accounted for as operating leases. Rent expense under these leases
charged to continuing operations was $823,516, $563,303, and $121,260 for the
years ended December 31, 1996, 1995 and 1994, respectively. Additionally, rent
expense under these leases charged to discontinued operations was $330,909 in
1994.
The following represents future minimum rental payments required under
operating leases with remaining noncancelable lease terms in excess of one
year as of December 31, 1996:
<TABLE>
<CAPTION>
YEAR ENDING
DECEMBER 31, AMOUNT
------------ ----------
<S> <C>
1997.......................................................... $ 612,974
1998.......................................................... 556,234
1999.......................................................... 388,791
2000.......................................................... 327,036
2001.......................................................... 160,000
----------
$2,045,035
==========
</TABLE>
The Company also leases property and equipment under capital leases. The
assets and liabilities under capital leases are recorded at the lower of the
present value of the minimum lease payments or the fair value of the assets.
The assets are amortized over the lesser of their related lease terms or their
estimated useful lives. Amortization under capital leases charged to
continuing operations was $78,688, $48,786 and $11,003 in 1996, 1995 and 1994,
respectively. Additionally, amortization under capital leases charged to
discontinued operations was $80,000 in 1994.
F-53
<PAGE>
IATROS HEALTH NETWORK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The following is a summary of property held under capital leases as of
December 31, 1996 and 1995:
<TABLE>
<CAPTION>
1996 1995
-------- --------
<S> <C> <C>
Equipment............................................... $686,236 $378,164
Less: Accumulated amortization.......................... 142,645 63,957
-------- --------
$543,591 $314,207
======== ========
</TABLE>
Minimum future lease payments under capital leases for the three years
subsequent to December 31, 1996 are as follows:
<TABLE>
<CAPTION>
YEAR ENDING
DECEMBER 31, AMOUNT
------------ --------
<S> <C>
1997............................................................ $289,214
1998............................................................ 198,535
1999............................................................ 58,420
Total minimum lease payments.................................... 546,169
Less: Amount representing interest.............................. 82,687
Present value of net minimum lease payments..................... 463,482
Less: current portion........................................... 230,761
--------
$232,721
========
</TABLE>
Interest rates on capitalized leases range from 9% to 15% and are imputed
based upon the lower of the Company's incremental borrowing rate at the
inception of each lease or the lessor's implicit rate of return.
NOTE 17: IMPAIRMENT OF INTANGIBLE ASSETS
In 1995, the Company adopted Statement of Financial Accounting Standards No.
121, "Accounting for the impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of" ("SFAS No. 121"). In accordance with SFAS No. 121,
the Company is required to analyze the value of its recorded intangible assets
on an ongoing basis to determine that the recorded amounts are reasonable and
are not impaired. In 1996, the Company determined that the value of its
recorded intangible assets had been impaired, based upon historical operating
deficits with respect to the related subsidiaries and the uncertainty that the
Company will be able to generate sufficient future cash flows to recover the
recorded amounts of the intangible assets. The total impairment loss of
$6,697,974 which is included in the results of operations for 1996, was
determined by evaluating the net realizable value of the intangible assets as
of December 31, 1996 based upon the projected results of future operations. Of
this total impairment loss, $4,504,476 relates to excess of cost over net
assets acquired, $1,233,178 relates to organization costs, and $960,320
relates to contract rights.
NOTE 18: RELATED PARTY TRANSACTIONS
During 1995 and 1994, the Company had a consulting agreement with a third
party corporation whose principal officer serves on the Company's Board of
Directors. In addition, in January 1995, this officer assumed the position of
President and Chief Executive Officer of the Company. Fees paid during 1995
and 1994 for financial advisory and development services totaled approximately
$112,000 and $122,000, respectively. In addition, for services rendered during
1995, this officer was granted Common Stock purchase warrants of the Company
as incentive compensation pursuant to this consulting agreement. This
consulting agreement was terminated effective December 31, 1995.
In connection with a private offering of its securities in July 1994, the
Company paid $70,000 to the underwriter, as placement agent, and issued
warrants to the placement agent to purchase 400,000 shares of the
F-54
<PAGE>
IATROS HEALTH NETWORK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Company's Common Stock for a five year period at an exercise price of $.75 per
share. A member of the Company's Board of Directors is an Executive Officer of
the placement agent.
During October 1995, the Company reached a settlement with the principals of
prior management involving numerous obligations that existed between the
parties. The settlement agreement resulted in payments by the Company to a
former principal totaling approximately $533,000. Of this amount, $300,000
represents a prepayment of a consulting agreement with one of prior
management's principals which terminates in June 1997.
NOTE 19: COMMITMENTS
The Company has entered into several executive employment agreements with
executive officers, providing for terms ranging between three and five years.
Aggregate annual compensation provided by these agreements totals $2,493,150.
In addition, certain of these agreements provide options and warrants for the
executives to purchase an aggregate of 1,390,000 shares of the Company's
Common Stock at prices ranging from $.75 to $2.38 per share.
During 1996 and 1995, the Company was involved in a number of project
financings wherein the Company was contracted to provide development,
marketing and management services. In connection therewith, the Company
committed to loan working capital as may be required in the form of operating
deficit agreements. Aggregate amounts committed to date by the Company
relating to project financings total $4,980,000 of which approximately
$2,329,000 has been advanced by the Company and approximately $2,651,000
remains outstanding at December 31, 1996.
In February 1996, the Company had granted a put option exercisable by
Courtland Health Care, Inc. for the Company to purchase all of the issued and
outstanding shares of Courtland II, Inc., a third party services corporation,
for not less than $2,000,000. In anticipation of this service transaction, the
Company had entered into a series of service agreements involving several
long-term care facilities affiliated with Courtland II, Inc. In December 1996,
the Company consummated a termination and settlement agreement with respect to
all such service agreements. In addition, the put option purchase granted by
the Company has expired.
In June 1996, the Company agreed to purchase a long-term care facility in
Maine with approximately 120 beds and 91 congregate and assisted living units.
The purchase price of this facility is $10,800,000. The facility is in
proximity to other long-term care facilities currently managed by the Company.
Completion of this transaction is pending regulatory approval by the State of
Maine.
In September 1996, the Company agreed to purchase a long-term care facility
in Maine with 50 licensed ICF beds, 18 of which are skilled care beds, 84
congregate care apartment units, a 17 ICF licensed bed skilled care unit and a
15 unit child day care center. The purchase price of this facility is
$16,200,000. Completion of this transaction is pending regulatory approval by
the State of Maine.
The Company guarantees aggregate debt service relating to approximately
$30,000,000 of long-term debt and working capital financing associated with
long-term care facilities for which it provides management services on a long-
term basis.
NOTE 20: CONTINGENCIES
The Company is a defendant in certain lawsuits involving third- party
creditors whose claims arise from transactions which occurred under prior
management. Management believes that it has sufficiently reserved for these
claims in its financial statements at December 31, 1996. Management does not
believe that the outcome of these matters will have a material adverse affect
on the Company's financial position, results of operations or cash flows.
F-55
<PAGE>
IATROS HEALTH NETWORK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The Company is a defendant in a lawsuit relating to the termination of a
former employee for cause under the terms of an employment agreement. The
former employee seeks damages alleging that the Company breached its
obligations under the employment agreement and a stock option agreement. The
Company has denied these allegations and is vigorously defending this action.
Further, the Company has filed a counter suit against this individual.
Management does not believe that the outcome of this matter will have a
material adverse affect on the Company's financial position, results of
operations or cash flows.
NOTE 21: PREFERRED STOCK
On July 25, 1994 in connection with implementing a business plan for
redirection, the Company sold 533,333 shares of Series A Senior Convertible
Preferred Stock include voting rights, cumulative dividends at $.30 per annum
for each share and conversion rights to Common Stock at the conversion price
of $3.75 per share. The liquidation preference of each Senior Preferred
Convertible share is $3.75 per share plus unpaid dividends, which amounts to
$2,390,000 at December 31, 1996. The Company had the option, prior to July 1,
1996, to pay the preferred stock dividends by issuance of Common Stock in lieu
of cash. The Company did not exercise their option. At December 31, 1996,
dividends in arrears on the 8% Cumulative Series A Senior Convertible
Preferred Stock totaled $390,000.
On July 25, 1994, the Company exchanged 666,667 shares of Common Stock owned
by certain stockholders of the Company for 300,000 shares of Series B
Preferred Stock. The Series B Preferred Stock is nonvoting and pays no
dividends. During 1995, 200,000 shares of the Series B Preferred Stock were
redeemed.
NOTE 22: STOCK OPTION PLAN AND COMMON STOCK PURCHASE WARRANTS
The Company has a Stock Option Plan (the Plan) which provides for the
granting of incentive and nonqualified stock options and stock appreciation
rights to certain officers, directors, key employees and consultants.
Currently, a maximum of 750,000 shares of Common Stock may be issued under the
Plan.
Stock Options are granted at a price not less than 100% of the fair market
value of the Common Stock at the date of grant and must be exercised within 10
years from the date of grant, with certain restrictions. Nonqualified Stock
Options will be granted on terms determined by the Board of Directors.
Transactions involving the Plan are summarized as follows:
<TABLE>
<CAPTION>
WEIGHTED WEIGHTED
AVERAGE PRICE AVERAGE PRICE
OPTIONS SHARES 1996 PER SHARE 1995 PER SHARE
-------------- -------- ------------- ------- -------------
<S> <C> <C> <C> <C>
Outstanding January 1.......... 688,153 $2.21 688,153 $2.21
Granted........................ 50,000 $1.00 -- --
Exercised...................... -- -- -- --
Canceled....................... (25,000) $1.50 -- --
Expired........................ (213,153) $5.10 -- --
-------- ----- ------- -----
Outstanding December 31........ 500,000 $ .90 688,153 $2.21
======== ===== ======= =====
Exercisable December 31........ 500,000 $ .90 490,000 $1.10
======== ===== ======= =====
</TABLE>
The options outstanding on December 31 1996 expire from 1997 through 1998.
F-56
<PAGE>
IATROS HEALTH NETWORK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Common Stock Purchase Warrants
In addition to options granted under its Stock Option Plan, the Company has
issued Common Stock Purchase Warrants to the public and underwriter in
connection with its initial public offering and to officers, directors and
employees as compensation for past and future services, all of which are
outside of the Stock Option Plan.
Redeemable Common Stock Purchase Warrants
The Company, in connection with its initial public offering in 1992, issued
Redeemable Common Stock Purchase Warrants for 1,145,000 shares of the
Company's Common Stock, with an exercise price of $4.00 and an expiration date
of April 21, 1996.
<TABLE>
<CAPTION>
WARRANTS 1996 1995
-------- -------- ---------
<S> <C> <C>
Outstanding January 1................................... 184,150 1,145,000
Exercised............................................... (52,301) (960,850)
Canceled................................................ (131,849) --
-------- ---------
Outstanding December 31................................. -- 184,150
======== =========
</TABLE>
Underwriter's Unit Purchase Warrants
The Company sold to the Underwriter, for a price of $.0001 per Warrant, an
amount of warrants (the "Underwriter's Unit Purchase Warrants") equal to 10%
of the aggregate number of Units (90,000) in connection with the Company's
initial public offering.
<TABLE>
<CAPTION>
COMMON STOCK
PURCHASE
UNDERWRITER'S WARRANTS
UNIT PURCHASE EFFECTIVE EXERCISE EXERCISE EXPIRATION
WARRANTS ISSUED DATE PRICE/UNIT PRICE/SHARE DATE
--------------- --------- ---------- ----------- ------------
<S> <C> <C> <C> <C>
90,000.................. 4/26/92 $8.70 $5.80 4/20/97
</TABLE>
None of these warrants have been exercised as of December 31, 1996.
During 1995 and 1994, the Company consummated a series of transactions
whereby its securities were sold for less than fair market value. Accordingly,
the exercise price of the Underwriter's Unit Purchase Warrants remains at
$5.80 per unit, however, the number of shares of Common Stock issuable upon
exercise of the warrants has increased from 1.00 to 1.77 shares per warrant.
Accordingly, the total Underwriters Unit Purchase Warrants outstanding upon
exercise would aggregate 159,300 shares of Common Stock.
Non-Redeemable Common Stock Purchase Warrants
During 1994, the Company privately issued Non-Redeemable Common Stock
Purchase Warrants for 1,600,000 shares of the Company's Common Stock.
<TABLE>
<CAPTION>
WARRANTS EFFECTIVE EXERCISE EXPIRATION
ISSUED DATE PRICE DATE
-------- --------- -------- ----------
<S> <C> <C> <C>
800,000.................................. 7/25/94 $ .75 7/25/99
500,000.................................. 7/25/94 $1.50 7/25/04
200,000.................................. 7/25/94 $1.00 7/25/99
100,000.................................. 7/25/94 $3.50 7/25/99
---------
1,600,000
---------
</TABLE>
F-57
<PAGE>
IATROS HEALTH NETWORK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
None of these warrants were exercised as of December 31, 1996.
Private Warrants
Transactions involving private warrants are summarized as follows:
<TABLE>
<CAPTION>
WEIGHTED WEIGHTED
AVERAGE PRICE AVERAGE PRICE
WARRANTS 1996 PER SHARE 1995 PER SHARE
-------- --------- ------------- --------- -------------
<S> <C> <C> <C> <C>
Outstanding January 1....... 2,175,375 $5.11 809,086 $7.98
Granted..................... 730,000 $3.17 1,366,289 $3.41
Exercised................... (370,529) $3.29 -- --
Canceled.................... (100,000) -- -- --
--------- ----- --------- -----
Outstanding December 31..... 2,434,846 $4.88 2,175,375 $5.11
========= ===== ========= =====
Exercisable December 31..... 2,370,178 $4.88 2,175,375 $5.11
========= ===== ========= =====
</TABLE>
The warrants outstanding on December 31 1996 expire from 1997 through 2006.
During 1995, the Company granted as compensation 150,000 warrants to
purchase Common Stock of the Company to members of the Company's Board of
Directors. These warrants were issued with an exercise price of $.35. In
December 1995, 30,000 of these warrants were exercised resulting in a charge
to earnings for the quarter ended December 31, 1995 of $75,000. The remaining
value attributed to these warrants totals $300,000 and is being amortized over
ten years, which is the exercise period of the warrants.
Under Statement of Financial Accounting Standards ("SFAS") No. 123,
"Accounting for Stock-Based Compensation," the Company is permitted to
continue accounting for the issuance of stock options and warrants in
accordance with Accounting Principles Board ("APB") Opinion No. 25, which does
not require recognition of compensation expense for option and warrant grants
unless the exercise price is less than the market price on the date of grant.
As a result, the Company has recognized compensation cost for stock options
and warrants for 1996 and 1995 of $48,000 and 75,000, respectively. If the
Company had recognized compensation cost for the "fair value" of option grants
under the provisions of SFAS No. 123, the pro forma financial results for 1996
and 1995 would have differed from the actual results as follows:
<TABLE>
<CAPTION>
1996 1995
------------ ----------
<S> <C> <C>
Net income (loss)
As reported....................................... $(10,314,561) $3,655,188
Proforma.......................................... $(10,711,154) $1,184,643
Earnings (loss) per share
As reported....................................... $ (.74) $ .29
Proforma.......................................... $ (.77) $ .09
</TABLE>
The per share weighted average fair value of the stock options and warrants
granted during 1996 and 1995 was $3.30 and $7.20, respectively. The fair value
was estimated at the date of grant using the Modified Black-Scholes Stock
Option Pricing Model with the following average assumptions for 1996 and 1995,
respectively: risk free interest rates of approximately 6% for both years;
expected volatility factors of 116.2% and 96.9% and expected lives of 3-10
years and 1-10 years and expected dividends rate of 0% for both years.
Under SFAS 123, the fair value of stock options issued in any given year is
expensed as compensation over the vesting period, which for substantially all
of the Company's options is three to ten years; therefore, the
F-58
<PAGE>
IATROS HEALTH NETWORK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
pro forma net earnings and net earnings per share do not reflect the total
compensation cost for options granted in the respective years. Furthermore,
the pro forma results only include the effect of options granted in 1996 and
1995; options granted prior to 1995 were not considered.
NOTE 23: RETIREMENT SAVINGS PLAN
The Company has a savings plan available to substantially all employees,
under Section 401(k) of the Internal Revenue Code. The Company's contributions
to this plan are discretionary. Employee contributions are generally limited
to 10% of their compensation subject to Internal Revenue Code limitations. The
Company made no contributions to this plan during the three year period ended
December 31, 1996.
NOTE 24: SUBSEQUENT EVENTS
During March 1997, the Company entered into a ten year lease agreement,
including two long-term care facilities located in the Commonwealth of
Massachusetts, representing a total of 229 beds. The lease agreement includes
a purchase option to acquire the facilities during the lease term for a
purchase price totaling $10,000,000. Annualized operating revenue represented
by these facilities is projected to be approximately $10,000,000.
During March 1997, the Company secured a working capital line of credit from
a financial institution in the amount of $1,500,000. The line is secured by
various notes receivable and management contract rights associated with one of
the Company's operating subsidiaries. The line is due on demand and accrues
interest at the bank's base rate plus 1% on amounts drawn and outstanding. The
Company intends to utilize this financing to support working capital and
development activities of its operating subsidiary.
During March 1997, the Company executed a letter of intent to acquire the
stock of a management company having long-term management contracts. This
purchase would represent management services revenue for the Company and
provide an opportunity for securing ancillary services revenue. The Company is
currently performing its due diligence and is seeking to secure purchase
financing for the transaction.
NOTE 25: ADOPTION OF NEW ACCOUNTING PRINCIPLES
The Company will be required to implement Statement of Financial Accounting
Standards No. 128, "Earnings Per Share" ("SFAS 128") in the fourth quarter of
1997. The effects of the implementation of SFAS No. 128 have not been
determined.
F-59
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC
ACCOUNTANTS ON FINANCIAL STATEMENT SCHEDULE
The Board of Directors
Iatros Health Network, Inc. and Subsidiaries
Atlanta, Georgia
We have audited the consolidated financial statements of Iatros Health
Network, Inc. and Subsidiaries, referred to in our report dated April 2, 1997.
In connection with our audit of these consolidated financial statements, we
also have audited the accompanying related financial statement schedule for
1996, 1995 and 1994. In our opinion, such financial statement schedule for
1996, 1995 and 1994, when considered in relation to the basic consolidated
financial statements taken as a whole, presents fairly, in all material
respects, the information set forth therein.
/s/ Asher & Company, Ltd.
Philadelphia, Pennsylvania
April 2, 1997
F-60
<PAGE>
IATROS HEALTH NETWORK, INC. AND SUBSIDIARIES
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
BALANCE ADDITIONS
AT CHARGED TO BALANCE AT
BEGINNING OPERATING END OF
OF YEAR EXPENSES(1) DEDUCTIONS(2) YEAR(3)
--------- ----------- ------------- ----------
<S> <C> <C> <C> <C>
Year Ended December 31, 1996
Allowance for doubtful accounts
(deducted from
accounts receivable).......... $143,400 $2,036,003 $405,103 $1,774,300
Year Ended December 31, 1995
Allowance for doubtful accounts
(deducted from
accounts receivable).......... $319,183 $ 79,217 $255,000 $ 143,400
Year Ended December 31, 1994
Allowance for doubtful accounts
(deducted from
accounts receivable).......... $496,566 $ 324,120 $501,503 $ 319,183
</TABLE>
- --------
(1) Amounts charged to continuing operations were $2,036,003, $79,217 and
$34,332 for 1996, 1995 and 1994, respectively. The amount charged to
discontinued operations was $289,788 for 1994.
(2) Amounts deemed to be uncollectible. $501,503 was charged to discontinued
operations for 1994.
(3) Included in the allowance for doubtful accounts at December 31, 1994 is a
balance related to discontinued operations in the amount of $255,000.
F-61
<PAGE>
IATROS HEALTH NETWORK, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JUNE 30, 1997 AND DECEMBER 31, 1996
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1997 1996
------------ ------------
(UNAUDITED)
ASSETS
------
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents........................ $ 549,429 $ 1,134,125
Accounts receivable, net of allowance for
doubtful accounts of $2,573,275 and $1,774,300
in 1997 and 1996, respectively.................. 6,751,475 5,888,205
Notes Receivable................................. -- 200,000
Inventory........................................ 453,380 453,119
Prepaid expenses and other assets................ 1,637,351 1,940,114
Deferred tax asset............................... -- 2,700,000
------------ ------------
Total current assets........................... 9,391,635 12,315,563
PROPERTY AND EQUIPMENT, net........................ 9,699,961 1,249,763
OTHER ASSETS
Deposits......................................... 59,429 1,208,849
Restricted cash.................................. 435,750 --
Contract rights, net of accumulated amortization
of $269,744 and $187,234 in 1997 and 1996,
respectively.................................... 903,304 1,346,052
Excess of costs over net assets acquired, net of
accumulated amortization of $482,131 and
$372,128 in 1997 and 1996, respectively......... 3,079,879 3,885,767
Notes Receivable................................. 2,773,904 4,423,324
Organization costs, net of accumulated
amortization of $71,865 and $37,066 in 1997 and
1996, respectively.............................. 216,590 221,843
Loans receivable and other assets................ 1,446,548 3,344,070
Deferred tax asset............................... 2,700,000 --
------------ ------------
11,615,404 14,429,905
------------ ------------
Total Assets................................... $ 30,707,000 $ 27,995,231
============ ============
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
<S> <C> <C>
CURRENT LIABILITIES
Notes payable, banks and other................... $ 3,038,960 $ 792,663
Current portion of long-term debt................ 10,876 374,881
Current portion of capital lease obligations..... 197,404 230,761
Accounts Payable................................. 2,755,172 2,690,260
Accrued payroll and related liabilities.......... 853,174 685,505
Accrued expenses and other current liabilities... 635,763 854,522
Preferred stock dividends payable................ 470,000 390,000
Net current liabilities of discontinued
operations...................................... 650,000 500,000
------------ ------------
Total current liabilities...................... 8,611,349 6,518,592
LONG-TERM DEBT..................................... 9,585,099 328,138
SUBORDINATED CONVERTIBLE DEBENTURES................ -- 600,000
CAPITAL LEASE OBLIGATIONS.......................... 248,420 232,721
COMMITMENT AND CONTINGENCIES
------------ ------------
18,444,868 7,679,451
STOCKHOLDERS' EQUITY
Preferred Stock, $.001 par value, 5,000,000
shares authorized; Series A, 533,333 shares
issued and outstanding.......................... 533 533
Series B, 100,000 shares issued and outstanding.. 100 100
Common Stock, $.001 par value, 25,000,000 shares
authorized; 16,718,608 and 15,931,500 shares
issued or to be issued and outstanding in 1997
and 1996, respectively.......................... 16,719 15,931
Additional Paid-In Capital....................... 34,896,631 34,142,970
Accumulated deficit.............................. (22,651,851) (13,843,754)
------------ ------------
12,262,132 20,315,780
------------ ------------
Total Liabilities and Stockholders' Equity..... $ 30,707,000 $ 27,995,231
============ ============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements
F-62
<PAGE>
IATROS HEALTH NETWORK, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
--------------------------
1997 1996
------------ ------------
<S> <C> <C>
Revenue
Nursing home operations.......................... $ 3,693,764 $ --
Ancillary services............................... 5,631,176 4,190,756
Management services.............................. 4,358,571 4,532,092
Development services............................. 100,000 5,022,720
------------ ------------
13,783,511 13,745,568
Operating expenses
Nursing home operations.......................... 3,643,076 --
Ancillary services............................... 5,046,813 4,043,137
Management services.............................. 4,331,242 4,612,980
General and administrative....................... 2,212,979 1,640,318
------------ ------------
15,234,110 10,296,435
Income/(loss) from operations before other income
(expenses) and income tax expenses................ (1,450,599) 3,449,133
Other income (expense)
Interest income.................................. 157,360 210,632
Interest expense................................. (122,353) (508,346)
Depreciation and Amortization.................... (414,822) (555,318)
Write-down of assets............................. (6,742,162) --
Other income (expense)........................... (155,523) 17,009
------------ ------------
(7,277,500) (836,023)
------------ ------------
Income/(loss) from operations before tax expense... (8,728,099) 2,613,110
Income tax expense................................. -- 1,062,405
------------ ------------
Net income (loss).................................. $ (8,728,099) $ 1,550,705
============ ============
Earnings (loss) per common and common equivalent
share............................................. $ (0.53) $ 0.10
------------ ------------
Net Income (loss)................................ $ (0.53) $ 0.10
============ ============
Weighted average number of shares of common stock
and equivalents outstanding...................... 16,328,621 14,993,302
============ ============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements
F-63
<PAGE>
IATROS HEALTH NETWORK, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 1997 AND 1996
(UNAUDITED)
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
OPERATING ACTIVITIES
Net Income (loss).................................. $(8,728,099) $ 1,550,705
Adjustments to reconcile net income (loss) to net
cash utilized by operating activities:
Depreciation and amortization.................... 414,822 555,318
Provision for doubtful accounts.................. 411,658 --
Write-off of uncollectible notes, loans and
deposits receivable............................. 5,690,608 --
Write-down of intangible assets.................. 1,051,554 --
Loss on disposal of property and equipment....... 92,114 --
Deferred taxes................................... -- 937,405
Changes in (net of disposals):
Accounts receivable.............................. (1,874,928) (1,616,281)
Notes and loans receivable....................... 166,518 (5,342,428)
Inventory........................................ (261) 7,702
Prepaid expenses and other current assets........ (197,421) (335)
Accounts payable................................. 64,912 675,353
Accrued expenses and other current liabilities... 98,910 (763,204)
----------- -----------
Net cash utilized by operating activities.......... (2,809,613) (3,995,765)
INVESTING ACTIVITIES
Purchase of property and equipment................. (8,725,252) (60,910)
Acquisition of business............................ -- (626,937)
Acquisition of contracts rights.................... -- (249,634)
Loans to third parties............................. -- (1,250,000)
Deposits, net...................................... 139,420 (719,241)
Restricted cash and cash equivalents............... (435,750) 150,000
Organization costs................................. (29,546) (1,508,194)
----------- -----------
Net cash utilized by investing activities.......... (9,051,128) (4,264,916)
FINANCING ACTIVITIES
Net proceeds from issuance of capital stock and
other capital contributions....................... 154,449 1,667,499
Proceeds from issuance of subordinated convertible
debentures........................................ -- 12,900,000
Fees paid on issuance of debentures................ -- (876,331)
Short-term borrowings (payments), net.............. 2,246,297 (30,985)
Long-term debt borrowings (payments), net.......... 8,892,957 (917,949)
Payments of capital lease obligations.............. (17,658) (23,803)
----------- -----------
Net cash provided by financing activities.......... 11,276,045 12,718,431
----------- -----------
INCREASE (DECREASE) IN CASH...................... (584,696) 4,457,750
Cash and cash equivalents, beginning of period....... 1,134,125 682,505
----------- -----------
Cash and cash equivalents, end of period............. $ 549,429 $ 5,140,255
=========== ===========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements
F-64
<PAGE>
IATROS HEALTH NETWORK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1: NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A summary of the Company's significant accounting policies consistently
applied in the preparation of the accompanying consolidated financial
statements is as follows:
Business
Iatros Health Network, Inc. and Subsidiaries (the "Company") is a Delaware
Corporation organized in June 1988. The Company is engaged in providing
services to the long-term care industry. The Company's principal markets
include the metropolitan areas of Philadelphia, Pennsylvania; Baltimore,
Maryland, and; New England.
Principles of consolidation
The consolidated financial statements include the accounts of Iatros Health
Network, Inc. and its wholly-owned subsidiaries. All intercompany transactions
and accounts have been eliminated in consolidation.
Cash and cash equivalents
The Company considers all highly liquid debt instruments purchased with an
original maturity of three months or less to be cash equivalents.
The Company maintains cash accounts which at times may exceed federally
insured limits. The Company has not experienced any losses from maintaining
cash accounts in excess of federally insured limits. Management believes that
the Company does not have significant credit risk related to its cash
accounts.
Revenue and accounts receivable
Ancillary services revenue is reported at the estimated net realizable
amounts due from residents, third party payors, and others. Management
services revenue is reported pursuant to the terms and amounts provided by the
associated management service contracts. Development services revenue is
generally realized on a fee for service basis recognized upon completion of
the service transaction.
The Company's credit risk with respect to accounts receivable is
concentrated in services related to the health care industry, which is highly
influenced by governmental regulations. This concentration of credit risk is
limited due to the number and types of entities comprising the Company's
customer base and their geographic distribution. The Company routinely
monitors its exposure to credit losses and maintains an allowance for doubtful
accounts.
The allowance for doubtful accounts is maintained at a level determined to
be adequate by management to provide for potential losses based upon an
evaluation of the accounts receivable. This evaluation considers such factors
as the age of receivables, the contract terms and the nature of the contracted
services.
Certain ancillary revenues are recorded based on standard charges applicable
to patients. Under Medicare, Medicaid and other cost-based reimbursement
programs, the provider is reimbursed for services rendered to covered program
patients as determined by reimbursement formulas. The differences between
established billing rates and the amounts reimbursable by the programs and
patient payments are recorded as contractual adjustments and deducted from
revenues.
Inventory
Inventory is principally comprised of pharmaceutical and medical supplies
and is valued at the lower of cost (first-in, first-out method) or market.
F-65
<PAGE>
IATROS HEALTH NETWORK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Property and equipment
Property and equipment is stated at cost. The cost of property and equipment
is depreciated over the estimated useful lives of the respective assets using
primarily the straight-line method. Property and equipment under capital
leases is amortized over the lives of the respective leases or over the
service lives of the assets. Leasehold improvements are amortized over the
lesser of the term of the related lease or the estimated useful lives of the
assets.
Normal maintenance and repair costs are charged against income. Major
expenditures for renewals and betterment which extend useful lives are
capitalized. When property and equipment is sold or otherwise disposed of, the
asset accounts and related accumulated depreciation or amortization accounts
are relieved, and any gain or loss is included in operations.
The useful lives of property and equipment for purposes of computing
depreciation and amortization are:
<TABLE>
<S> <C>
Buildings....................................................... 40 Years
Leasehold improvements.......................................... 3-10 Years
Property and equipment held under capital leases................ 5-7 Years
Equipment....................................................... 5 Years
Furniture and fixtures.......................................... 3-7 Years
</TABLE>
Intangible assets
The Company evaluates the carrying value of its long-lived assets and
identifiable intangibles including, contract rights, excess of cost over net
assets acquired and organization costs when events or changes in circumstances
indicate that the carrying amount of such assets may not be recoverable. The
review includes an assessment of industry factors, contract retentions, cash
flow projections and other factors the Company believes are relevant.
Contract rights
Contract rights represent the value assigned to management contracts
obtained by the Company. Management contracts provide for a management fee
in exchange for management, marketing and development services provided to
the facilities. Contract rights are being amortized over the term of the
related contracts which range from 5 to 10 years.
Excess of cost over net assets acquired
The excess of cost over net assets acquired relates to the acquisition of
the Company's operating subsidiaries. The excess of cost over net assets
acquired is being amortized over the lives of 15 to 20 years.
Organization costs
Organization costs incurred in connection with the acquisition or
formation of new business activities for the Company are being amortized
using the straight-line method over five years.
Income taxes
The Company employs the asset and liability method in accounting for income
taxes pursuant to Statement of Financial Accounting Standards (SFAS) No. 109
"Accounting for Income Taxes." Under this method, deferred tax assets and
liabilities are determined based on temporary differences between the
financial reporting
F-66
<PAGE>
IATROS HEALTH NETWORK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
and tax bases of assets and liabilities and net operating loss carryforwards,
and are measured using enacted tax rates and laws that are expected to be in
effect when the differences are reversed.
Earnings per share
Both primary and fully diluted earnings per share of common stock and common
stock equivalents are computed based on the weighted average number of shares
of common stock and common stock equivalents outstanding in each period. For
1997, fully diluted loss per share amounts are not computed because they are
antidilutive.
In 1996, Common Stock equivalents include additional shares assuming the
exercise of stock options and warrants and Convertible Series A Preferred
Stock when their effect is dilutive. The inclusion of additional shares for
conversion of Preferred Series A Stock, in primary earnings per share
calculations, would have been antidilutive for 1996.
Net earnings used in the computation of primary earnings per share for 1996
are reduced by Preferred Stock dividend requirements.
During 1997 and 1996, the Company issued Common Stock in connection with the
conversion of its 10% Subordinated Convertible Debentures and with the
exercise of its Redeemable Common Stock Purchase Warrants. Had all exercises
and conversions occurred on January 1, 1997, the reported primary loss per
common share would have been antidilutive.
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 dates of the financial
statements and the reported amounts of revenue and expenses during the
reporting periods. Actual results could differ from those estimates.
Adoption of New Accounting Principles
The Company will be required to implement Statement of Financial Accounting
Standards No. 128, "Earnings Per Share" ("SFAS 128") in the fourth quarter of
1997. The effects of the implementation of SFAS No. 128 have not been
determined.
NOTE 2: SUBSEQUENT EVENT.
In September 1997, the Company is in final stages of negotiations with
officers and shareholders of two subsidiaries to effect split-offs of these
subsidiaries effective July 1, 1997. For the six month period ended June 30,
1997, these two subsidiaries accounted for approximately 8% ($1,130,000) of
total revenues, and generated operating losses of approximately $945,000.
These divestitures will likely result in a one-time charge to earnings in the
1997 third quarter in an amount that has not yet been determined.
F-67
<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 B 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
Recent Developments....................................................... 16
Use of Proceeds........................................................... 20
Capitalization............................................................ 20
Selected Consolidated Financial and Operating Data........................ 21
Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................... 23
The Company............................................................... 31
Organizational Structure.................................................. 35
Business and Properties................................................... 36
Policies with Respect to Certain Activities............................... 54
Price Range of Common Stock and Distributions............................. 55
Management................................................................ 56
Principal Stockholders of the Company..................................... 61
The Partnership Agreement................................................. 63
Certain Transactions...................................................... 64
Description of Series B Preferred Stock................................... 66
Federal Income Tax Considerations......................................... 75
Employee Plans and Individual Retirement Accounts......................... 87
Underwriting.............................................................. 90
Experts................................................................... 91
Legal matters............................................................. 91
Available Information..................................................... 91
Glossary.................................................................. 92
Index to Financial Statements............................................. F-1
</TABLE>
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1,200,000 SHARES
[LOGO OF G & L REALTY CORP.]
G & L REALTY CORP.
9.8% SERIES B
CUMULATIVE PREFERRED STOCK (LIQUIDATION PREFERENCE $25 PER SHARE)
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PROSPECTUS
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SUTRO & CO. INCORPORATED
MCDONALD & COMPANY SECURITIES, INC.
TUCKER ANTHONY
INCORPORATED
NOVEMBER 12, 1997
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