<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934 For
the year ended December 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 1-14162
GLENBOROUGH REALTY TRUST INCORPORATED
(Exact name of Registrant as specified in its charter)
Maryland 94-3211970
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
400 South El Camino Real, 94402-1708
Suite 1100 San Mateo, California - (415) 343-9300 (Zip Code)
(Address of principal executive offices
and telephone number)
Securities registered under Section 12(b) of the Act:
Name of Exchange
Title of each class: on which registered:
Common Stock, $.001 par value New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K [ X ]
As of February 26, 1997, the aggregate market value of the voting stock
held by nonaffiliates of the registrant was $159,112,061. The aggregate market
value was computed with reference to the closing price on the New York Stock
Exchange on such date. This calculation does not reflect a determination that
persons are affiliates for any other purpose.
As of February 26, 1997, 9,661,553 shares of Common Stock ($.001 par value)
were outstanding.
DOCUMENTS INCORPORATED:
Part III: Portions of the Registrant's definitive proxy statement to be issued
in conjunction with the Registrant's annual stockholder's meeting to be held on
May 15, 1997.
EXHIBITS: The index of exhibits is contained in Part IV herein on page number
81.
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page No.
<S> <C>
PART I
Item 1 Business 3
Item 2 Properties 6
Item 3 Legal Proceedings 15
Item 4 Submission of Matters to a Vote of Security Holders 16
PART II
Item 5 Market for Registrant's Common Stock and Related Stockholder Matters 17
Item 6 Selected Financial Data 17
Item 7 Management's Discussion and Analysis of Financial Condition and
Results of Operations 20
Item 8 Financial Statements and Supplementary Data 35
Item 9 Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure 35
PART III
Item 10 Directors and Executive Officers of the Registrant 35
Item 11 Executive Compensation 35
Item 12 Security Ownership of Certain Beneficial Owners and Management 35
Item 13 Certain Relationships and Related Transactions 35
PART IV
Item 14 Exhibits, Financial Statements, Schedules and Reports on Form 8-K 36
</TABLE>
2
<PAGE> 3
PART I
ITEM 1. BUSINESS
General Development and Description of Business
Glenborough Realty Trust Incorporated (the "Company") is a self-administered and
self-managed real estate investment trust ("REIT") engaged primarily in the
ownership, operation, management, leasing and acquisition of various types of
income-producing properties. As of December 31, 1996, the Company owned and
operated 54 income-producing properties (the "Properties," and each a
"Property") and held three mortgage receivables. The Properties are comprised of
14 industrial Properties, 21 retail Properties, 3 multifamily Properties, 5
hotel Properties and 11 office Properties, located in 17 states. Included in the
54 income-producing properties are three properties in which the Company holds a
participating first mortgage interest, not fee title. The properties consist of
one retail Property, one industrial Property and one Hotel which are owned by
AFP Partners. See Item 2 for further discussion.
The Company was incorporated in the State of Maryland on August 26, 1994. On
December 31, 1995, the Company completed a consolidation (the "Consolidation")
in which Glenborough Corporation, a California corporation, and eight public
limited partnerships (the "Partnerships") collectively, the "GRT Predecessor
Entities", merged with and into the Company. The Company (i) issued 5,753,709
shares (the "Shares") of the $.001 par value Common Stock of the Company to the
Partnerships in exchange for the net assets of the Partnerships; (ii) merged
with Glenborough Corporation, with the Company being the surviving entity; (iii)
acquired an interest in three companies (the "Associated Companies") that
provide asset and property management services, as well as other services; and
(iv) through a subsidiary operating partnership, Glenborough Properties, L.P.
(the "Operating Partnership"), acquired interests in certain warehouse
distribution facilities from GPA, Ltd., a California limited partnership
("GPA"). A portion of the Company's operations are conducted through the
Operating Partnership, of which the Company is the sole general partner, and in
which the Company holds a 90.79% limited partner interest. The Company operates
the assets acquired in the Consolidation and in the 1996 acquisitions (see
further discussion below) and intends to invest in income property directly and
through joint ventures. In addition, the Associated Companies may acquire
general partner interests in other real estate limited partnerships. The Company
expects to qualify as a REIT under the Internal Revenue Code of 1986, as
amended. The common stock of the Company (the "Common Stock") is listed on the
New York Stock Exchange ("NYSE") under the trading symbol "GLB".
The Company seeks to achieve sustainable long-term growth in Funds from
Operations primarily through the following strategies:
- Acquiring portfolios or individual properties on attractive terms often
from public and private partnerships;
- Acquiring properties from entities controlled by the Associated
Companies;
- Improving the performance of Properties in the Company's portfolio; and
- Constantly reviewing the Company's current portfolio for opportunities to
redeploy capital from certain existing Properties into other properties
which the Company believes have characteristics more suited to its
overall growth strategy and operating goals.
Consistent with the Company's strategy for growth, the Company has, during 1996
and during the first quarter of 1997 through the date of this Form 10-K,
acquired, or entered into agreements to acquire, 40 properties in 10 states,
aggregating approximately 2.6 million rentable square feet, 762 apartment units,
and 227 hotel rooms, for an aggregate total purchase price of approximately $170
million. In June 1996, the Company sold two industrial properties to redeploy
capital into properties the Company believes have characteristics more suited to
its overall growth strategy and operating goals. In addition, in July 1996, the
Company entered into a $50 million line of credit (the "Line of Credit") with
Wells Fargo Bank N.A. and in October 1996, the Company completed a public
offering of 3,666,000 of its shares of Common Stock.
The Company's principal business objectives are to achieve a stable and
increasing source of cash flow available for distribution to stockholders. By
achieving these objectives, the Company will seek to raise stockholder value
over time.
The Associated Companies
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Glenborough Corporation. Glenborough Corporation ("GC"), a California
corporation formerly known as Glenborough Realty Corporation, serves as general
partner of several real estate limited partnerships (the "Controlled
Partnerships") for whom it provides management services, asset management and
property management services. It also provides property management services for
a limited portfolio of property owned by unaffiliated third parties.
The Company owns 100% of the 19,000 shares (representing 95% of total
outstanding shares) of non-voting preferred stock of GC. Three individuals, one
of whom, Sandra L. Boyle, is an executive officer of the Company, each own 33
1/3% of the 1,000 shares (representing 5% of total outstanding shares) of voting
common stock of GC. The Company and GC intend that the Company's interest in GC
comply with REIT qualification standards.
The Company, through its ownership of preferred stock of GC, is entitled to
receive cumulative, preferred annual dividends of $1.465 per share, which GC
must pay before it pays any dividends with respect to the common stock of GC.
Once GC pays the required cumulative preferred dividend, it will pay any
additional dividends in equal amounts per share on both the preferred stock and
the common stock at 95% and 5%, respectively. Through the preferred stock, the
Company is also entitled to receive a preferred liquidation value of $174.00 per
share plus all cumulative and unpaid dividends. The preferred stock is subject
to redemption at the option of GC after December 31, 2005, for a redemption
price of $174.00 per share. As the holder of preferred stock of GC, the Company
has no voting power with respect to the election of the directors of GC; all
power to elect directors of GC is held by the owners of the common stock of GC.
This structure is intended to provide the Company with a significant portion of
the economic benefits of the operations of GC. The Company accounts for the
financial results of GC using the equity method.
Glenborough Inland Realty Corporation. Glenborough Inland Realty Corporation
("GIRC") provides management services for certain partnerships sponsored by
Rancon Financial Corporation, an unaffiliated corporation which has significant
real estate assets in the Inland Empire region of Southern California (the
"Rancon Partnerships"). These services include asset management, property
development, Securities and Exchange Commission reporting, accounting, investor
relations, property management services, and may in the future also include
general partner services.
The Company owns 100% of the 19,000 shares (representing 95% of total
outstanding shares) of non-voting preferred stock of GIRC. Three individuals,
one of whom, Frank E. Austin, is an executive officer of the Company, each own
33 1/3% of the 1,000 shares (representing 5% of total outstanding shares) of
voting common stock of GIRC. The Company and GIRC intend that the Company's
interest in GIRC comply with REIT qualification standards.
The Company, through its ownership of preferred stock, is entitled to receive
cumulative, preferred annual dividends of $0.80 per share, which GIRC must pay
before it pays any dividends with respect to the common stock. Once GIRC pays
the required cumulative preferred dividend, it will pay any additional dividends
in equal amounts per share on both the preferred stock and the common stock at
95% and 5%, respectively. Through the preferred stock, the Company is also
entitled to receive a preferred liquidation value of $55.00 per share plus all
cumulative and unpaid dividends. The preferred stock is subject to redemption at
the option of GIRC after December 31, 2005, for a redemption price of $55.00 per
share plus cumulative and unpaid dividends. As the holder of preferred stock of
GIRC, the Company has no voting power with respect to the election of the
directors of GIRC; all power to elect directors of GIRC is held by the owners of
the common stock of GIRC.
This structure is intended to provide the Company with a significant portion of
the economic benefits of the operations of GIRC. The Company accounts for the
financial results of GIRC using the equity method.
Glenborough Hotel Group. The Operating Partnership leases its hotel properties
to Glenborough Hotel Group ("GHG"). The Operating Partnership holds a first
mortgage on another hotel, which is managed by GHG under a contract with its
owner. GHG also manages two other hotels owned by Outlook Income Fund 9, a
partnership whose general partner is GC, as well as two resort condominium
hotels.
The Company owns 100% of the 50 shares of non-voting preferred stock of GHG.
Three individuals, one of whom, Terri Garnick, is an executive officer of the
Company, each own 33 1/3% of the 1,000 shares of voting common stock of GHG. The
Company and GHG intend that the Company's interest in GHG comply with REIT
qualification standards.
The Company, through its ownership of preferred stock, is entitled to receive
cumulative, preferred annual dividends of $600 per share, which GHG must pay
before it pays any dividends with respect to the common stock. Once GHG pays the
required cumulative preferred dividend, it will pay 75% of any additional
dividends to holders of the preferred stock,
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and 25% to holders of the common stock. Through the preferred stock, the Company
is also entitled to receive a preferred liquidation value of $40,000 per share
plus all cumulative and unpaid dividends. The preferred stock will be subject to
redemption at the option of GHG after December 31, 1999, for a redemption price
of $40,000 per share. As the holders of preferred stock of GHG, the Company has
no voting power with respect to the election of the directors of GHG; all power
to elect directors of GHG is held by the owners of the common stock of GHG.
This structure is intended to provide the Company with a significant portion of
the economic benefits of the operations of GHG. The Company accounts for the
financial results of GHG using the equity method.
GHG owns approximately 80% of the common stock of Resort Group, Inc. ("RGI").
RGI manages homeowners associations and rental pools for two beachfront resort
condominium hotel properties and owns six units at one of the properties. GHG
receives 100% of the earnings of RGI and consolidates its operations with its
own.
GHG also owns 94% of the outstanding common stock of Atlantic Pacific Holdings,
Ltd., the sole owner of 100% of the common stock of Atlantic Pacific Assurance
Company, Limited (APAC), a Bermuda corporation formed to underwrite certain
insurable risks of certain of the Company's predecessor partnerships and related
entities. APAC no longer underwrites any business and is expected to be
liquidated in 1997. GHG accounts for its investment in APAC using the cost
method due to its anticipated liquidation.
Employees
As of December 31, 1996, the Company and the Associated Companies had
approximately 430 full-time employees.
Competition
The Company's Properties compete for tenants (or guests, in the case of hotels)
with similar properties located in their markets. Management believes that
characteristics influencing the competitiveness of a real estate project include
the geographic location of the property, the professionalism of the property
manager and the maintenance and appearance of the property, in addition to
external factors such as general economic circumstances, trends, and the
existence of new competing properties in the general area in which the Company
competes for tenants (or guests, in the case of hotels).
Additional competitive factors with respect to commercial properties include the
ease of access to the property, the adequacy of related facilities, such as
parking, and the ability to provide rent concessions and additional tenant
improvements commensurate with local market conditions. Such competition may
lead to rent concessions that could adversely affect the Company's cash flow.
Although the Company believes its Properties are competitive with comparable
properties as to those factors within the Company's control, continued
over-building and other external factors could adversely affect the ability of
the Company to attract and retain tenants. The marketability of the Properties
may also be affected (either positively or negatively) by these factors as well
as by changes in general or local economic conditions, including prevailing
interest rates.
The Company also experiences competition when attempting to acquire equity
interests in desirable real estate, including competition from domestic and
foreign financial institutions, other REITs, life insurance companies, pension
funds, trust funds, partnerships and individual investors.
Working Capital
The Company's practice is to maintain cash reserves for normal repairs,
replacements, improvements, working capital and other contingencies while
minimizing interest expense. Therefore, cash on hand is kept to a minimum by
frequently paying down on the Wells Fargo line of credit and drawing on the
Wells Fargo line of credit when necessary.
Other Factors
Compliance with laws and regulations regarding the discharge of materials into
the environment, or otherwise relating to the protection of the environment, is
not expected to have any material effect upon the capital expenditures, earnings
and competitive position of the Company.
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The Properties have each been subject to Phase I Environmental Assessments
("Phase I Reports") and, where such an assessment indicated it was appropriate,
Phase II Environmental Assessments ("Phase II Reports" and, collectively, the
"Environmental Reports") have been conducted. These reports have not indicated
any significant environmental issues.
In the event that pre-existing environmental conditions not disclosed in the
Environmental Reports which require remediation are subsequently discovered, the
cost of remediation will be borne by the Company. Additionally, no assurances
can be given that (i) future laws, ordinances, or regulations will not impose
any material environmental liability, (ii) the current environmental condition
of the Properties has not been or will not be affected by tenants and occupants
of the Properties, by the condition of properties in the vicinity of the
Properties or by third parties unrelated to the Company or (iii) that the
Company will not otherwise incur significant liabilities associated with costs
of remediation relating to the Properties.
ITEM 2. PROPERTIES
The Location and Type of the Company's Properties
The Company's 54 Properties are diversified by type (office, industrial, retail,
multifamily and hotel) and are located in four geographic regions and 17 states
within the United States comprising numerous local markets. The following table
sets forth the location, type and size of the Properties (by rentable square
feet and/or units) along with average occupancy for the year ended December 31,
1996.
<TABLE>
<CAPTION>
Square Square Square
Feet Feet Feet Units Units # of
Region Office Industrial Retail Multifamily Hotel Properties
- ------ ------ ---------- ------ ----------- ----- ----------
<S> <C> <C> <C> <C> <C> <C>
East -- 274,000 -- -- -- 1
South -- 629,829 223,678 -- 286 22
Midwest 383,497 813,776 12,800 -- -- 12
West 258,426 308,763 394,222 642 277 19
------- --------- ------- --- --- --
Total 641,923 2,026,368 630,700 642 563 54
======= ========= ======= === === ==
No. of Properties 11 14 21 3 5
Average Occupancy 94% 99% 96% 94% 72%
</TABLE>
For the years ended December 31, 1995 and 1994, rental revenue from the two
Properties leased to Navistar International contributed approximately 10% of the
combined total rental revenue of the GRT Predecessor Entities. For the year
ended December 31, 1996, no tenant contributed 10% or more of the rental revenue
of the Company. A complete listing of Properties owned by the Company at
December 31, 1996 is included as part of Schedule III in Item 14.
Office Properties
The Company owns eleven office Properties with total rentable square footage of
641,923. The leases for the office Properties have terms ranging from one to ten
years. The office leases generally require the tenant to reimburse the Company
for increases in building operating costs over a base amount. Many of the leases
provide for rent increases that are either fixed or based on a consumer price
index ("CPI"). As of December 31, 1996, the office Properties were approximately
93% leased.
The following table sets forth, for the periods specified, the total rentable
area, aggregate average occupancy, average effective base rent per leased square
foot and total effective annual base rent.
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OFFICE PROPERTIES
HISTORICAL RENT AND OCCUPANCY
<TABLE>
<CAPTION>
Total Average Average Effective Total Effective
Rentable Occupancy Rate Base Rent per Annual Base
Year Area (Sq. Ft) for the Period Leased Sq. Ft. (1) Rent ($000s) (2)
- ---- ------------- -------------- ------------------ ----------------
<C> <C> <C> <C> <C>
1996 641,923 94% $ 13.19 $ 7,918
1995 106,076 97 11.91 1,228
1994 105,770 88 11.44 1,065
1993 104,666 80 12.04 1,008
1992 104,754 80 11.10 930
</TABLE>
(1) Total Effective Annual Base Rent divided by average occupancy in square
feet. As used herein, "Effective Base Rent" represents base rent less
concessions.
(2) Total Effective Annual Base Rent adjusted for any free rent given for the
period.
The following table sets forth the contractual lease expirations for leases for
the office Properties as of December 31, 1996.
OFFICE PROPERTIES
LEASE EXPIRATIONS
<TABLE>
<CAPTION>
Number Rentable Square Annual Base Percentage of Total
of Footage Subject Rent Under Annual Base Rent
Expiration Expiring to Expiring Expiring Represented by
Year Leases Leases Leases ($000s) Expiring Leases (1)
---- ------ ------ -------------- -------------------
<C> <C> <C> <C> <C>
1997 (4) 147 143,834 $ 2,305 25.75%
1998 44 132,455 2,052 22.92
1999 41 90,026 1,453 16.23
2000 18 57,532 967 10.80
2001 27 63,800 1,094 12.22
Thereafter 9 107,846 1,082 12.08
--- ------- ------- ------
Total 286 595,493 (2) $ 8,953 (3) 100.00%
=== ======= ======= ======
</TABLE>
(1) Annual base rent expiring during each period, divided by total annual base
rent (both adjusted for contractual increases).
(2) This figure is based on square footage actually leased (which excludes
vacant space), which accounts for the difference between this figure and
"Total Rentable Area" in the preceding table (which includes vacant space).
(3) This figure is based on square footage actually leased and incorporates
contractual rent increases arising after 1996, and thus differs from "Total
Effective Annual Base Rent" in the preceding table, which is based on 1996
rents.
(4) Includes leases that have initial terms of less than one year.
Industrial Properties
The Company owns 14 industrial Properties aggregating 2,026,368 square feet.
During June 1996, the Company sold two other industrial properties, which had
97,200 square feet. The industrial Properties are designed for warehouse,
distribution and light manufacturing, ranging in size from 37,200 square feet to
474,426 square feet. As of December 31, 1996, seven of the industrial Properties
were leased to multiple tenants, seven were leased to single tenants, and all
seven of the single-tenant Properties are adaptable in design to multi-tenant
use. As of December 31, 1996, the warehouse Properties were approximately 99%
leased.
Four of the single-tenant Properties have eight years remaining on leases whose
original terms were 20 years and include rent increases every three years based
on all or a percentage of the change in the CPI. Under these leases the tenants
are required to pay for all of the Properties' operating costs, such as common
area maintenance, property taxes, insurance, and all repairs including
structural repairs. These four Properties are leased to Navistar International
Transportation Corporation ("Navistar"), but two of the leases have been assumed
by Case Equipment Corporation ("Case"). Navistar has options under its leases to
purchase either or both of the Properties on March 1, 1999, and 2002. The option
price is equal to the lesser of (i) the greater of the appraised value or a
specified option floor price; or (ii) a price derived by
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applying a specified capitalization rate to a specified rental amount. The Case
leases give the tenant a purchase option exercisable on March 1, 1999, and 2002
for an amount equal to the greater of the appraised value or a specified minimum
price. Management believes, based on discussions with both tenants, that neither
tenant has any present intention to exercise any option to purchase.
The remaining warehouse Properties have leases whose terms range from one to
eight years. Most of the leases are "triple net" leases whereby the tenants are
required to pay their pro rata share of the Properties' operating costs, common
area maintenance, property taxes, insurance, and non-structural repairs. Some of
the leases are "industrial gross" leases whereby the tenant pays as additional
rent its pro rata share of common area maintenance and repair costs and its
share of the increase in taxes and insurance over a specified base year cost.
Many of these leases call for fixed or CPI-based rent increases.
The Company holds fee title to all of the industrial Properties except a 41,657
square-foot warehouse facility in Seattle known as Sea Tac II. This property is
owned by a partnership managed by one of the Associated Companies. The Company
holds a participating first mortgage interest in Sea Tac II. In accordance with
GAAP, the Company accounts for the property as though it held fee title, as
substantially all risks and rewards of ownership have been transferred to the
Company as a result of the terms of the mortgage.
The following table sets forth, for the periods specified, the total rentable
area, aggregate average occupancy, average effective base rent per leased square
foot and total effective annual base rent for the Industrial Properties.
INDUSTRIAL PROPERTIES
HISTORICAL RENT AND OCCUPANCY
<TABLE>
<CAPTION>
Total Average Average Effective Total Effective
Rentable Occupancy Rate Base Rent per Annual Base
Year Area (Sq. Ft) for the Period Leased Sq. Ft. (1) Rent ($000s) (2)
- ---- ------------- -------------- ------------------ ----------------
<C> <C> <C> <C> <C>
1996(3) 2,026,368 99% $ 2.70 $ 5,414
1995 1,491,827 100 2.29 3,405
1994 1,491,827 100 2.29 3,401
1993 1,491,827 98 2.24 3,294
1992 1,491,827 96 2.14 3,075
</TABLE>
(1) Total Effective Annual Base Rent divided by average occupancy in square
feet.
(2) Total Effective Annual Base Rent adjusted for any free rent given for the
period.
(3) Includes the TRP Properties. For these Properties, occupancy rates are
presented as of December 31, 1996, and base rents are presented on an
annualized basis based on results since the acquisition as this information
is not available for the year ended December 31, 1996.
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<PAGE> 9
The following table sets forth the contractual lease expirations for leases for
the industrial Properties as of December 31, 1996.
INDUSTRIAL PROPERTIES
LEASE EXPIRATIONS
<TABLE>
<CAPTION>
Number Rentable Square Annual Base Percentage of Total
of Footage Subject Rent Under Annual Base Rent
Expiration Leases to Expiring Expiring Represented by
Year Expiring Leases Leases ($000s) Expiring Leases (1)
---- -------- ------ -------------- -------------------
<C> <C> <C> <C> <C>
1997(4) 27 336,867 $ 1,229 22.07%
1998 11 130,461 564 10.12
1999 15 143,265 536 9.61
2000 6 78,206 324 5.81
2001 4 59,757 324 5.81
Thereafter 5 1,256,170 2,594 46.58
--- --------- ------- ------
Total 68 2,004,726 (2) $ 5,571 (3) 100.00%
=== ========= ======= ======
</TABLE>
(1) Annual base rent expiring during each period, divided by total annual base
rent (both adjusted for contractual increases).
(2) This figure is based on square footage actually leased (which excludes
vacant space), which accounts for the difference between this figure and
"Total Rentable Area" in the preceding table (which includes vacant space).
(3) This figure is based on square footage actually leased (which excludes
vacant space) and incorporates contractual rent increases arising after
1996, and thus differs from "Total Effective Annual Base Rent" in the
preceding table, which is based on 1996 rents.
(4) Includes leases that have initial terms of less than one year.
Retail Properties
The retail portfolio consists of 21 Properties with a total of 630,700 square
feet. As of December 31, 1996, the occupancy of the retail Properties was 97%.
Five of the retail Properties, representing 543,950 square feet or 86% of the
total rentable area, are anchored community shopping centers. The anchor tenants
of these centers are national or regional supermarkets and drug stores.
Ten of the retail Properties are leased to QuikTrip Corporation on long-term
leases expiring after 2008. QuikTrip is a regional convenience store operator
with over 300 stores in six states. The leases require the tenant to pay for all
Property costs and provide for periodic fixed increases of base rent. Under such
leases, the tenant has one five-year option to renew at specified rental rates.
Six of the retail Properties are located in the Atlanta metropolitan area and
are leased to tenants in the automotive care industry.
The leases for the retail Properties (excluding the above described QuikTrip
leases) generally include fixed or CPI-based rent increases and some include
provisions for the payment of additional rent based on a percentage of the
tenants' gross sales that exceed specified amounts. Retail tenants also
typically pay as additional rent their pro rata share of the Properties'
operating costs including common area maintenance, property taxes, insurance and
non-structural repairs. Some leases contain options to renew at market rates or
specified rates.
The Company holds fee title to all of the retail Properties except the Park
Center community center. Park Center is owned by a partnership managed by one of
the Associated Companies. The Company holds a participating first mortgage
interest in Park Center. In accordance with GAAP, the Company accounts for Park
Center as though it held fee title, as substantially all risks and rewards of
ownership have been transferred to the Company as a result of the terms of the
mortgage.
The following table sets forth, for the periods specified, the total rentable
area, aggregate average occupancy, average effective base rent per leased square
foot and total effective annual base rent for the retail properties.
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<PAGE> 10
RETAIL PROPERTIES
HISTORICAL RENT AND OCCUPANCY
<TABLE>
<CAPTION>
Total Average Average Effective Total Effective
Rentable Occupancy Base Rent per Annual Base
Year Area (Sq. Ft) for the Period Leased Sq. Ft. (1) Rent ($000s) (2)
- ---- ------------- -------------- ------------------ ----------------
<C> <C> <C> <C> <C>
1996(3) 630,700 96% $ 7.82 (4) $ 4,726
1995 285,658 95 10.76 2,915
1994 285,722 94 10.76 2,890
1993 285,722 90 11.11 2,858
1992 285,722 88 11.12 2,823
</TABLE>
(1) Total Effective Annual Base Rent divided by average occupancy in square
feet.
(2) Total Effective Annual Base Rent adjusted for any free rent given for the
period.
(3) Includes the Carlsberg Properties and the TRP Properties. For these
Properties, occupancy rates are presented as of December 31, 1996, and base
rents are presented on an annualized basis based on results since the
acquisition as this information is not available for the year ended
December 31, 1996.
(4) Average effective base rent per leased square foot declined in 1996 due to
the acquisition of properties with lower base rents.
The following table sets forth the contractual lease expirations for the retail
Properties as of December 31, 1996.
RETAIL PROPERTIES
LEASE EXPIRATIONS
<TABLE>
<CAPTION>
Rentable Square Annual Base Percentage of Total
Number of Footage Subject Rent Under Annual Base Rent
Expiration Leases to Expiring Expiring Represented by
Year Expiring Leases Leases ($000s) Expiring Leases (1)
---- -------- ------ -------------- -------------------
<C> <C> <C> <C> <C>
1997(4) 14 25,889 $ 302 5.65%
1998 19 55,488 418 7.82
1999 29 59,201 633 11.83
2000 18 40,175 456 8.53
2001 18 70,423 595 11.12
Thereafter 28 361,044 2,944 55.05
--- ------- ------- ------
Total 126 612,220 (2) $ 5,348 (3) 100.00%
=== ======= ======= ======
</TABLE>
(1) Annual base rent expiring during each period, divided by total annual base
rent (both adjusted for contractual increases).
(2) This figure is based on square footage actually leased (which excludes
vacant space), which accounts for the difference between this figure and
"Total Rentable Area" in the preceding table (which includes vacant space).
(3) This figure is based on square footage actually leased (which excludes
vacant space) and incorporates contractual rent increases arising after
1996, and thus differs from "Total Effective Annual Base Rent" in the
preceding table which is based on 1996 rents.
(4) Includes leases that have initial terms of less than one year.
10
<PAGE> 11
Tenant Improvements and Leasing Commissions
The following table summarizes by year the capitalized tenant improvement and
leasing commission expenditures incurred in the renewal or re-leasing of
previously occupied space since January 1, 1992.
CAPITALIZED TENANT IMPROVEMENTS AND LEASING COMMISSIONS
<TABLE>
<CAPTION>
1992 1993 1994 1995 1996
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
INDUSTRIAL PROPERTIES
Square footage renewed or re-leased 52,491 66,500 89,000 141,523 69,000
Capitalized tenant improvements and
commissions($000s) $ 21 $ 64 $ 60 $ 114 $ 74
Average per square foot of renewed or
re-leased space $ 0.40 $ 0.96 $ 0.67 $ 0.81 $ 1.07
OFFICE PROPERTIES
Square footage renewed or re-leased 26,989 23,909 18,384 79,745 39,706
Capitalized tenant improvements and
commissions ($000s) $ 192 $ 59 $ 58 $ 468(1) $ 617 (2)
Average per square foot of renewed or
re-leased space $ 7.12 $ 2.47 $ 3.18 $ 5.87 $ 15.54 (2)
RETAIL PROPERTIES
Square footage renewed or re-leased 26,403 31,443 46,833 33,294 32,998
Capitalized tenant improvements and
commissions ($000s) $ 63 $ 59 $ 59 $ 98 $ 83
Average per square foot of renewed or
re-leased space $ 2.38 $ 1.87 $ l.87 $ 2.94 $ 2.53
ALL PROPERTIES
Square footage renewed or re-leased 105,883 121,852 154,217 254,562 141,704
Capitalized tenant improvement and
leasing commission expenditures ($000s) $ 276 $ 182 $ 177 $ 680 $ 774
Average per square foot of renewed or
re-leased space $ 2.61 $ 1.49 $ 1.14 $ 1.73 $ 5.46 (2)
</TABLE>
(1) The significant increase in capitalized tenant improvements and commissions
in 1995 over the previous year is primarily the result of re-leasing 15,491
sq. ft. at Regency Westpointe. The re-lease is for a term of ten years.
There were no commissions paid in this transaction. Tenant improvements
totaled $405,000. This tenant occupies 43% of Regency Westpointe.
(2) The significant increase in capitalized tenant improvements and commissions
in 1996 over the previous years is primarily the result of tenant
improvements provided in connection with a lease extension of space for the
principal tenant of the UCT Property. The lease was extended 10 years and
expires in 2010.
Multifamily Properties
The Company owns three multi-family Properties, aggregating 642 units, and
542,710 square feet of space. All of the units are rented to residential tenants
on either a month-to-month basis or for terms of one year or less. As of
December 31, 1996, the multifamily properties were approximately 95% leased.
11
<PAGE> 12
The following table sets forth, for the periods specified, total units, average
occupancy, monthly average effective base rent per unit and total effective
annual base rent for the multifamily Properties.
MULTIFAMILY PROPERTIES
HISTORICAL RENT AND OCCUPANCY
<TABLE>
<CAPTION>
Average Monthly Average Total Effective
Total Occupancy Effective Base Rent Annual Base
Year Units for the Period per Leased Unit (1) Rent ($000s) (2)
- ---- ----- -------------- ------------------- ----------------
<C> <C> <C> <C> <C>
1996(4) 642 94% $ 598 (4) $ 4,328
1995 104 94 630 739
1994 104 98 632 774
1993 104 93 632 734
1992 104 98 633 758
</TABLE>
(1) Total Effective Annual Base Rent divided by average occupied unit.
(2) Total Effective Annual Base Rent adjusted for any free rent given for the
period.
(3) Includes the TRP Properties. For these Properties, occupancy rates are
presented as of December 31, 1996, and base rents are presented on an
annualized basis based on results since the acquisition as this information
is not available for the year ended December 31, 1996.
(4) Average effective monthly base rent per unit declined in 1996 due to the
acquisition of properties with lower base rents.
Hotels
Overview. The Hotel portfolio consists of five hotels (the "Hotels," and each a
"Hotel") ranging from 64 to 157 rooms each. Four of the Hotels are all-suite
Hotels which consist primarily of one-bedroom suites, but each also includes
some studio suites and two-bedroom suites. All of the Hotels are currently
operating under license agreements with Country Lodging by Carlson, Inc. The
four all-suite Hotels are marketed as Country Suites by Carlson ("Country
Suites") and the fifth Hotel is marketed as Country Inns and Suites by Carlson.
Country Lodging is part of the Carlson Companies, based in Minneapolis,
Minnesota. The Carlson Companies own, operate and franchise Radisson Hotels, TGI
Friday's Restaurants, Country Kitchen Restaurants and the Carlson Travel Agency
Network. Currently there are a total of more than 85 Country Inns and Suites,
with 30 additional under construction.
The Company holds fee title to four of the five Hotels. The fifth Hotel, the
Country Suites in Irving, Texas is owned by a partnership managed by one of the
Associated Companies. The Company holds a participating first mortgage interest
in the Property. In accordance with GAAP, the Company accounts for the Property
as though it holds fee title, as substantially all risks and rewards of
ownership have been transferred to the Company as a result of the terms of the
mortgage. The hotels owned in fee title are currently leased to GHG (see "The
Percentage Leases," discussed below). The Irving, Texas hotel is managed by GHG
under terms of a pre-existing contract.
12
<PAGE> 13
The following table contains, for the periods indicated, occupancy, average
daily rate ("ADR") and revenue per available room ("REVPAR") information for the
Company's Hotels as well as comparative information for all U.S. Hotels and all
Country Lodging hotels.
<TABLE>
<CAPTION>
Year Ended December 31: 1992 1993 1994 1995 1996
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
IRVING, TX
Occupancy 66.1% 76.3% 77.5% 76.0% 75.2%
ADR $ 53.53 $ 50.22 $ 58.52 $ 66.55 $ 76.56
REVPAR $ 35.37 $ 38.33 $ 45.36 $ 50.57 $ 57.28
ONTARIO, CA
Occupancy 59.3% 59.6% 56.4% 65.5% 71.6%
ADR $ 52.93 $ 51.61 $ 52.02 $ 48.38 $ 54.89
REVPAR $ 31.42 $ 30.74 $ 29.35 $ 31.67 $ 38.95
SAN ANTONIO, TX (3)
Occupancy -- -- -- 53.3% (4) 54.6% (5)
ADR -- -- -- $ 57.80 (4) $ 58.68 (5)
REVPAR -- -- -- $ 30.79 (4) $ 32.03 (5)
ARLINGTON, TX
Occupancy 67.6% 61.0% 63.4% 70.2% 68.7%
ADR $ 57.85 $ 51.58 $ 62.73 $ 64.96 $ 67.61
REVPAR $ 39.14 $ 31.46 $ 39.79 $ 45.63 $ 45.75
TUCSON, AZ
Occupancy 71.8% 77.4% 77.4% 79.0% 81.4%
ADR $ 54.38 $ 54.46 $ 57.21 $ 58.93 $ 63.85
REVPAR $ 39.05 $ 42.16 $ 44.29 $ 46.53 $ 50.42
ALL U.S. HOTELS (1)
Occupancy 61.8% 63.7% 65.2% 66.0% 65.7%
ADR $ 59.65 $ 60.99 $ 63.63 $ 66.88 $ 71.66
REVPAR $ 37.04 $ 38.85 $ 41.49 $ 44.14 $ 47.06
COUNTRY LODGING SYSTEM (2)
Occupancy 67.1% 71.4% 75.0% 75.4% 73.0%
ADR $ 50.62 $ 50.00 $ 53.00 $ 56.00 $ 62.42
REVPAR $ 33.94 $ 35.72 $ 39.75 $ 41.00 $ 45.45
</TABLE>
(1) Source: Smith Travel Research and Country Hospitality.
(2) Source: Country Hospitality. Data for all years is limited to U.S.
properties.
(3) The San Antonio Hotel opened in 1995.
(4) Information supplied for historical comparison only as this hotel was not
acquired by the Company until August 1996. Source: Unaudited operating
statements provided by previous owner of the hotel.
(5) Information represents a full year of operations including operations prior
to the Company's acquisition of the hotel in August 1996.
THE PERCENTAGE LEASES
In order for the Company to qualify as a REIT, neither the Company nor the
Operating Partnership can operate the Hotels. Therefore, the Operating
Partnership has leased four of the Hotels to GHG each for a term of five years
pursuant to percentage leases ("Percentage Leases"), which provide for rent
equal to the greater of the Base Rent (as defined in the Percentage Leases) or a
specified percentage of room revenues (the "Percentage Rent"). Each Hotel is
separately leased to GHG. GHG's ability to make rent payments will, to a large
degree, depend on its ability to generate cash flow from the operations of the
Hotels. Each Percentage Lease contains the provisions described below.
Each Percentage Lease has a non-cancelable term of five years, subject to
earlier termination upon the occurrence of certain contingencies described in
the Percentage Lease. The lessee under the Percentage Lease has one five-year
renewal option at the then current fair market rent.
13
<PAGE> 14
During the term of each Percentage Lease, the lessee is obligated to pay the
greater of Base Rent or Percentage Rent. Base Rent accrues and is required to be
paid monthly in advance. Percentage Rent is calculated by multiplying fixed
percentages by room revenues for each of the four Hotels owned by the Company.
The applicable percentage changes when revenue exceeds a specified threshold,
and the threshold may be adjusted annually in accordance with changes in the
applicable CPI. Percentage Rent accrues and is due quarterly.
The table below sets forth the annual Base Rent and the Percentage Rent formulas
for each of the four Hotels owned by the Company.
<TABLE>
<CAPTION>
Percentage Rent Incurred
Hotel Initial Annual for the year ended
Location Base Rent December 31, 1996 Annual Percentage Rent Formulas
-------- --------- ----------------- -------------------------------
<S> <C> <C> <C>
Ontario, CA $ 240,000 $ 192,000 24% of the first $1,575,000 of room revenue plus
40% of room revenue above $1,575,000 and 5% of
other revenue
Arlington, TX $ 360,000 $ 328,000 27% of the first $1,600,000 of room revenue plus
42% of room revenue above $1,600,000 and 5% of
other revenue
Tucson, AZ $ 600,000 $ 656,000 40% of the first $1,350,000 of room revenue plus
46% of room revenue above $1,350,000 and 5% of
other revenue
San Antonio, TX $ 312,000 (1) $ 0 (1) 33% of the first $1,200,000 of room revenue plus
40% of room revenue above $1,200,000 and 5% of
other revenue
</TABLE>
(1) Hotel was acquired in August 1996, therefore, rent incurred for the year
ended December 31, 1996 was less than a full year's rent.
Other than real estate and personal property taxes, casualty insurance, a fixed
capital improvement allowance and maintenance of underground utilities and
structural elements, which are the responsibility of the Company, the Percentage
Leases require the lessee to pay rent, insurance, salaries, utilities and all
other operating costs incurred in the operation of the Hotels.
Under the Percentage Leases, the Company is required to maintain the underground
utilities and the structural elements of the improvements, including exterior
walls (excluding plate glass) and roof. In addition, the Company must fund
periodic capital improvements to the buildings and grounds, and the periodic
repair, replacement and refurbishment of furniture, fixtures and equipment, up
to the following amounts per quarter for the first year of the Percentage Lease:
Arlington-$25,000; Ontario-$22,750, Tucson-$28,500, and San Antonio-$10,500.
These amounts increase annually in accordance with the CPI. These obligations
carry forward to the extent not expended, and any unexpended amounts will remain
the property of the Company upon termination of the Percentage Leases. Except
for capital improvements and maintenance of structural elements and underground
utilities, GHG will be required, at its expense, to maintain the Hotels in good
order and repair, except for ordinary wear and tear, and to make non-structural,
foreseen and unforeseen, and ordinary and extraordinary, repairs which may be
necessary and appropriate to keep the Hotels in good order and repair. GHG will
not be permitted to sublet all or any part of the Hotels or to assign its
interest under any of the Percentage Leases, other than to an affiliate, without
the prior written consent of the Company. No assignment or subletting will
release GHG from any of its obligations under the Percentage Leases.
If the Company enters into an agreement to sell or otherwise transfer a Hotel,
the Company has the right to terminate the Percentage Lease with respect to such
Hotel upon paying GHG the fair market value of its leasehold interest in the
remaining term of the Percentage Lease to be terminated.
GHG is the licensee under the franchise licenses on the Hotels. The franchise
agreements are assignable to the Company, another lessee, or a new owner, with a
payment of $2,500 per Hotel.
14
<PAGE> 15
Mortgage Loans Receivable
Although the Company does not intend to engage in the business of making real
estate loans, the Company holds three notes receivable, secured by first
priority real property liens, which had a total outstanding principal balance
of $10,678,000 and a net carrying value of $9,905,000 at December 31, 1996.
The financial statement carrying value of the Hovpark loan at December 31, 1996
is $6,700,000, the estimated fair value of the underlying collateral. Effective
February 1, 1997, as a result of repayment of principal by the borrower, the
principal balance of this loan was reduced to $500,000 and the maturity was
extended to February 1, 2009. As of February 28, 1997, all payments are current.
In connection with the Grunow loan, the Company entered into an Option Agreement
which provides the Operating Partnership the option to purchase the Grunow
Medical building based upon an agreed upon formula. See Note 6 in Item 14 for
further discussion. The following table summarizes these three mortgages.
SUMMARY OF MORTGAGE LOANS RECEIVABLE
<TABLE>
<CAPTION>
Collateral Property Principal
- ---------------------------------------- Balance at Interest
Name Type 12/31/96 Rate Maturity
---- ---- -------- ---- --------
<S> <C> <C> <C> <C>
Hovpark (1) Industrial/Office $ 7,563,000 8.00% 2/1/97
Laurel Cranford Industrial $ 511,000 9.00% 6/1/01
Grunow Medical Office $ 2,694,000 11.00% 11/19/99
</TABLE>
(1) This loan is currently secured by a pledge of partnership interests in the
borrower.
ITEM 3. LEGAL PROCEEDINGS
BLUMBERG. On February 21, 1995, a class action complaint was filed in the
Superior Court of the State of California in and for San Mateo County in
connection with the Consolidation. The plaintiff is Anthony E. Blumberg, an
Investor in Equitec B, on behalf of himself and all others (the "Blumberg
Action") similarly situated. The defendants are GC (formerly known as
Glenborough Realty Corporation), Glenborough Realty Corporation ("GRC"), Robert
Batinovich, the Partnerships and the Company.
The complaint alleged breaches by the defendants of their fiduciary duty and
duty of good faith and fair dealing to investors in the Partnerships. The
complaint sought injunctive relief and compensatory damages. The complaint
alleged that the valuation of GC was excessive and was done without appraisal of
GC's business or assets. The complaint further alleged that the interest rate
for the Notes to be issued to investors in lieu of shares of Common Stock, if
they so elected was too low for the risk involved and that the Notes would
likely sell, if at all, at a substantial discount from their face value (as a
matter entirely distinct from the litigation and subsequent settlement, the
Company, as it had the option to, paid in full the amounts due plus interest in
lieu of issuing Notes).
On October 9, 1995 the parties entered into an agreement to settle the action.
The defendants, in entering into the settlement agreement, did not acknowledge
any fault, liability or wrongdoing of any kind and continue to deny all material
allegations asserted in the litigation. Pursuant to the settlement agreement,
the defendants will be released from all claims, known or unknown, that have
been, could have been, or in the future might be asserted, relating to, among
other things, the Consolidation, the acquisition of the Company's shares
pursuant to the Consolidation, any misrepresentation or omission in the
Registration Statement on Form S-4, filed by the Company on September 1, 1994,
as amended, or the prospectus contained therein ("Prospectus/Consent
Solicitation Statement"), or the subject matter of the lawsuit. In return, the
defendants agreed to the following: (a) the inclusion of additional or expanded
disclosure in the Prospectus Consent Solicitation Statement, and (b) the
placement of certain restrictions on the sale of the stock by certain insiders
and the granting of stock options to certain insiders following consummation of
the Consolidation. Plaintiff's counsel indicated that it would request that the
court award it $850,000 in attorneys' fees, costs and expenses. In addition,
plaintiffs' counsel indicated it would request the court for an award of $5,000
payable to Anthony E. Blumberg as the class representative. The defendants
agreed not to oppose such requests.
On October 11, 1995, the court certified the class for purposes of settlement,
and scheduled a hearing to determine whether it should approve the settlement
and class counsel's application for fees. A notice of the proposed settlement
was distributed
15
<PAGE> 16
to the members of the class on November 15, 1995. The notice specified that, in
order to be heard at the hearing, any class member objecting to the proposed
settlement must, by December 15, 1995, file a notice of intent to appear, and a
detailed statement of the grounds for their objection.
Objections were received from a small number of class members. The objections
reiterated the claims in the original Blumberg complaint, and asserted that the
settlement agreement did not adequately compensate the class for releasing those
claims. One of the objections was filed by the same law firm that brought the
BEJ Action described below.
At a hearing on January 17, 1996, the court heard the arguments of the objectors
seeking to overturn the settlement, as well as the arguments of the plaintiffs
and the defendants in defense of the settlement. The court granted all parties a
period of time in which to file additional pleadings. On June 4, 1996, the court
granted approval of the settlement, finding it fundamentally fair, adequate and
reasonable to the respective parties to the settlement. However, the objectors
gave notice of their intent to appeal the June 4 decision, and filed their
opening brief with the court of appeals on November 15, 1996. The Company and
the other defendants filed their answering brief on January 17, 1997.
BEJ EQUITY PARTNERS. On December 1, 1995, a second class action complaint
relating to the Consolidation was filed in Federal District Court for the
Northern District of California (the "BEJ Action"). The plaintiffs are BEJ
Equity Partners, J/B Investment Partners, Jesse B. Small and Sean O'Reilly as
custodian f/b/o Jordan K. O'Reilly, who as a group held limited partner
interests in the California limited partnerships known as Outlook Properties
Fund IV, Glenborough All Suites Hotels, L.P., Glenborough Pension Investors,
Equitec Income Real Estate Investors-Equity Fund 4, Equitec Income Real Estate
Investors C and Equitec Mortgage Investors Fund IV, on behalf of themselves and
all others similarly situated. The defendants are GRC, GC, the Company, GPA,
Ltd., Robert Batinovich and Andrew Batinovich. The Partnerships are named as
nominal defendants.
This action alleges the same disclosure violations and breaches of fiduciary
duty as were alleged in the Blumberg Action. The complaint sought injunctive
relief, which was denied at a hearing on December 22, 1995. At that hearing, the
court also deferred all further proceedings in this case until after the
scheduled January 17, 1996 hearing in the Blumberg Action. Following several
stipulated extensions of time for the Company to respond to the complaint, the
Company filed a motion to dismiss the case. The Company has since withdrawn its
motion to dismiss the case, and the plaintiffs have agreed to apply for an order
from the court staying all proceedings in this action pending final resolution
of the Blumberg action.
It is management's position that the BEJ Action, and the objections to the
settlement of the Blumberg Action, are without merit, and management intends to
pursue a vigorous defense in both matters. However, given the inherent
uncertainties of litigation, there can be no assurance that the ultimate outcome
in these two legal proceedings will be in the Company's favor.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The company did not submit any matters to a vote of security holders in the
fourth quarter of the year ended December 31, 1996.
16
<PAGE> 17
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
Market Information
On January 31, 1996, the Company's Common Stock began trading on the NYSE at
$12.00 per share under the symbol "GLB". On December 31, 1996, the closing price
was $17.625. On February 26, 1997, the last reported sales price per share of
the Company's Common Stock on the NYSE was $19.00. The following table sets
forth the high and low sales price per share of the Company's Common Stock for
the periods indicated, as reported on the NYSE composite tape.
<TABLE>
<CAPTION>
Quarterly Period High Low
---------------- ---- ---
<S> <C> <C>
1996
First Quarter (1) $ 14 3/8 $ 12
Second Quarter 15 1/4 13 3/8
Third Quarter 14 5/8 13 3/8
Fourth Quarter 17 5/8 13 5/8
1997
First Quarter (2) $ 19 7/8 $ 16 3/4
</TABLE>
(1) Although the Consolidation occurred on December 31, 1995 and the Company
began paying distributions on its Common Stock based on earnings in the
first quarter of 1996, the Common Stock did not begin trading on the NYSE
until January 31, 1996.
(2) High and low stock prices through February 26, 1997.
Holders
The approximate number of holders of record of the shares of the Company's
common stock was 5,355 as of February 26, 1997.
Distributions
Since the Consolidation, the Company has paid regular quarterly distributions to
holders of its Common Stock. During the year ended December 31, 1996, the
Company declared and/or paid the following quarterly distributions:
<TABLE>
<CAPTION>
Distributions Total
Quarterly Period per share Distributions
---------------- --------- -------------
<S> <C> <C>
1996
First Quarter $ 0.30 $ 1,726,000
Second Quarter $ 0.30 $ 1,737,000
Third Quarter $ 0.30 $ 2,891,000
Fourth Quarter $ 0.32 (1) $ 3,298,000 (1)
</TABLE>
(1) Distributions for the fourth quarter of 1996 were paid on February 19,
1997.
The Company intends to declare regular quarterly distributions to its
stockholders. Federal income tax law requires that a REIT distribute annually at
least 95% of its REIT taxable income. Future distributions by the Company will
be at the discretion of the Board of Directors and will depend upon the actual
Funds from Operations of the Company, its financial condition, capital
requirements, the annual distribution requirements under the REIT provisions of
the Internal Revenue Code, applicable legal restrictions and such other factors
as the Board of Directors deems relevant. The Company intends to continue its
policy of paying quarterly distributions, but there can be no assurance that
distributions will continue or be paid at any specific level.
ITEM 6. SELECTED FINANCIAL DATA
Set forth below are selected financial data for:
17
<PAGE> 18
Glenborough Realty Trust Incorporated: Consolidated balance sheet data is
presented as of December 31, 1996 and 1995. Consolidated operating data is
presented for the year ended December 31, 1996, and As Adjusted
consolidated operating data is presented for the years ended December 31,
1995 and 1994, and assumes the Consolidation and related transactions
occurred on January 1, 1994.
The GRT Predecessor Entities: Combined operating data is presented for the
years ended December 31, 1995, 1994, 1993 and 1992. The combined balance
sheet data is presented as of December 31, 1994, 1993 and 1992.
This selected financial data should be read in conjunction with financial
statements of Glenborough Realty Trust Incorporated, including the notes
thereto, included in Item 14.
<TABLE>
<CAPTION>
AS OF AND FOR THE YEAR ENDED DECEMBER 31,
-----------------------------------------
HISTORICAL AS ADJUSTED HISTORICAL AS ADJUSTED HISTORICAL HISTORICAL HISTORICAL
1996 1995 1995 1994 1994 1993 1992
---- ---- ---- ---- ---- ---- ----
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
OPERATING DATA:
Rental Revenue .............. $ 17,943 $ 13,495 $ 15,454 $ 12,867 $ 13,797 $ 13,546 $ 13,759
Fees and reimbursements ..... 311 260 16,019 260 13,327 15,439 14,219
Interest and other income ... 1,080 982 2,698 1,109 3,557 3,239 3,150
Equity in earnings of
Associated Companies .... 1,598 1,691 -- 1,649 -- -- --
Total Revenues(1) ........... 21,253 16,428 34,171 15,885 30,681 32,224 31,128
Property operating expenses.. 5,266 4,084 8,576 3,673 6,782 7,553 8,692
General and administrative... 1,393 983 15,947 954 13,454 14,321 13,496
Interest expense ............ 3,913 2,767 2,129 2,767 1,140 1,301 1,466
Depreciation and
Amortization .............. 4,575 3,654 4,762 3,442 4,041 4,572 4,933
Income (loss) from operations
before minority interest
and extraordinary items.... (1,131) 4,077 524 4,516 1,580 2,144 (2,139)
Net income (loss)(2) ........ (1,609) 3,796 524 (3,093) 1,580 4,418 (2,681)
Per share (3):
Net income (loss) before
extraordinary items...... $ (0.21) $ 0.66 -- $ 0.72 -- -- --
Net income (loss) ......... (0.24) 0.66 -- (0.54) -- -- --
Distributions(4) .......... 1.22 1.20 -- 1.20 -- -- --
BALANCE SHEET DATA:
Net investment in real
estate .................... 161,945 -- $ 77,574 -- $ 63,994 $ 70,245 $ 75,022
Mortgage loans receivable,
net ....................... 9,905 -- 7,465 -- 19,953 18,825 18,967
Total assets ................ 185,520 -- 105,740 -- 117,321 102,635 108,168
Total debt .................. 79,089 -- 36,168 -- 17,906 12,172 15,350
Stockholders' equity ........ 97,600 -- 55,628 -- 80,558 85,841 87,172
OTHER DATA:
EBIDA(5) .................... $ 14,273 $ 11,361 $ 9,291 $ 11,258 $ 10,269 $ 10,326 $ 8,815
Cash flow provided by (used
for):
Operating activities ...... 4,138 4,656 (10,608) 5,742 22,426 12,505 6,891
Investing activities ...... (61,833) 3,263 8,656 1,710 (1,947) (2,002) (1,437)
Financing activities ...... (54,463) (7,933) (17,390) (6,408) (2,745) (8,927) (9,476)
FFO(6) ...................... 11,491 9,638 7,162 9,536 9,129 9,025 7,349
CAD(7),(8) .................. 10,497 8,856 3,237 8,754 6,919 6,921 4,731
Debt to total market
capitalization(9) ......... 29.5% -- -- -- -- -- --
</TABLE>
(1) Certain revenues which are included in the historical combined amounts for
1995 and prior are not included on an as adjusted basis. These revenues
are included in three unconsolidated Associated Companies, GHG, GC
and GIRC, on an as adjusted basis, from which the
Company receives lease payments and dividend income.
(2) Historical 1996 and as adjusted 1994 net losses reflect $7,237 of
Consolidation and litigation costs incurred in connection with the
Consolidation. As adjusted 1994 data give effect to the Consolidation and
related transactions as if such transactions had occurred on January 1,
1994, whereas historical 1996 data reflect such transactions in the periods
they were expensed. The Consolidation and litigation costs were expensed on
January 1, 1996, the Company's first day of operations. Net loss in 1992
includes a non-recurring writedown of $4,282 on GPI's investment in the
master agreement that resulted from GPI's in-substance foreclosure on the
AFP Partners' properties.
(3) As adjusted net income per share is based upon as adjusted weighted average
shares outstanding of 5,753,709 for 1995 and 1994.
18
<PAGE> 19
(4) Consists of distributions declared for the period then ended.
(5) EBIDA represents and is computed as earnings before interest expense,
depreciation, amortization, loss provisions and minority interests. The
Company believes that in addition to cash flows and net income, EBIDA is a
useful financial performance measurement for assessing the operating
performance of an equity REIT because, together with net income and cash
flows, EBIDA provides investors with an additional basis to evaluate the
ability of a REIT to incur and service debt and to fund acquisitions and
other capital expenditures. To evaluate EBIDA and the trends it depicts,
the components of EBIDA, such as rental revenues, rental expenses, real
estate taxes and general and administrative expenses, should be considered.
See "Management's Discussion and Analysis of Financial Condition and
Results of Operations." Excluded from EBIDA are financing costs such as
interest as well as depreciation and amortization, each of which can
significantly affect a REIT's results of operations and liquidity and
should be considered in evaluating a REIT's operating performance. Further,
EBIDA does not represent net income or cash flows from operating, financing
and investing activities as defined by generally accepted accounting
principles and does not necessarily indicate that cash flows will be
sufficient to fund cash needs. It should not be considered as an
alternative to net income as an indicator of the Company's operating
performance or to cash flows as a measure of liquidity.
(6) Funds from Operations represents income (loss) from operations before
minority interests and extraordinary items plus depreciation and
amortization except amortization of deferred financing costs and loss
provisions. In 1996, consolidation and litigation costs were also added
back to net income to determine FFO. Management generally considers FFO to
be a useful financial performance measure of the operating performance of
an equity REIT because, together with net income and cash flows, FFO
provides investors with an additional basis to evaluate the ability of a
REIT to incur and service debt and to fund acquisitions and other capital
expenditures. FFO does not represent net income or cash flows from
operations as defined by GAAP and does not necessarily indicate that cash
flows will be sufficient to fund cash needs. It should not be considered as
an alternative to net income as an indicator of the Company's operating
performance or to cash flows as a measure of liquidity. FFO does not
measure whether cash flow is sufficient to fund all of the Company's cash
needs including principal amortization, capital improvements and
distributions to stockholders. FFO also does not represent cash flows
generated from operating, investing or financing activities as defined by
GAAP. Further, FFO as disclosed by other REITs may not be comparable to the
Company's calculation of FFO.
(7) Cash available for distribution ("CAD") represents net income (loss)
(computed in accordance with GAAP), excluding extraordinary gains or losses
or loss provisions, plus depreciation and amortization including
amortization of deferred financing costs, less lease commissions and
capital expenditures. CAD should not be considered an alternative to net
income as a measure of the Company's financial performance or to cash flow
from operating activities (computed in accordance with GAAP) as a measure
of the Company's liquidity, nor is it necessarily indicative of sufficient
cash flow to fund all of the Company's cash needs.
(8) CAD for the year ended December 31, 1995 excludes approximately $6,782 that
represents the net proceeds received from the prepayment of the Finley
mortgage loan and the repayment of the wrap note payable.
(9) Debt to total market capitalization is calculated as total debt at period
end divided by total debt plus the market value of the Company's
outstanding common stock, on a fully converted basis, based upon the
closing price of the Common Stock of $17.625 on December 31, 1996.
FUNDS FROM OPERATIONS
The Company believes that FFO is a measure of cash flow which, when considered
in conjunction with other measures of operating performance, affects the value
of equity REITs such as the Company. FFO means income (loss) from operations
before minority interests and extraordinary items plus depreciation and
amortization, except amortization of deferred financing costs and loss
provisions. In the first quarter of 1996, consolidation and litigation costs
that were charged to net income have also been added back to determine FFO.
FFO is not necessarily indicative of cash flow available to fund cash needs and
is not the same as cash flow from operations as defined by GAAP, and should not
be considered as an alternative to net income (loss) as an indicator of the
Company's operating performance, or as an alternative to cash flows from
operating, investing and financing activities as a measure of liquidity or
ability to make distributions. Management generally considers FFO to be a useful
financial performance measure of the operating performance of an equity REIT
because, together with net income and cash flows, FFO provides investors with an
additional basis to evaluate the ability of a REIT to incur and service debt and
to fund acquisitions and other capital expenditures. FFO does not represent net
income or cash flows from operations as defined by GAAP and does not necessarily
indicate that cash flows will be sufficient to fund all of the Company's cash
needs including principal amortization, capital improvements and distributions
to stockholders. FFO also does not represent cash flows generated from
operating, investing or financing activities as defined by GAAP. FFO as
disclosed by other REITs may not be comparable to the Company's calculation of
FFO.
In February 1995, NAREIT established new guidelines for calculating FFO that
clarify previous guidelines. The primary change from the old definition to the
new definition is the treatment of amortization of deferred financing fees.
Under the new definition, the amortization of deferred financing fees is no
longer added back to net income in calculating FFO. The new guidelines were
effective beginning in 1996.
Beginning with the first quarter of 1996, the Company calculates its FFO based
upon the new NAREIT definition and, accordingly, does not add back amortization
of deferred financing fees and costs. The change does not affect the Company's
CAD.
The following table sets forth the Company's calculation of FFO and CAD for the
three months ended March 31, June 30, September 30 and December 31, 1996 and the
year ended December 31, 1996 (dollars in thousands):
19
<PAGE> 20
<TABLE>
<CAPTION>
March 31, June 30, September 30, December 31, Total
1996 1996 1996 1996 1996
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Net income (loss) before provisions for income taxes,
minority interest and extraordinary item $ (5,883) $ 1,714 $ 1,258 $ 1,780 $ (1,131)
Consolidation costs 6,082 -- -- -- 6,082
Litigation costs 1,155 -- -- -- 1,155
Depreciation and amortization 897 862 935 1,881 4,575
Gain on sale of rental property -- (321) -- -- (321)
Adjustment to reflect FFO of Associated
Companies (1) 284 311 251 285 1,131
----------- ----------- ----------- ------------ -----------
FFO $ 2,535 $ 2,566 $ 2,444 $ 3,946 $ 11,491
=========== =========== =========== =========== ===========
Amortization of deferred financing fees 36 36 69 52 193
Capital reserve (185) (106) 229 81 19
Capital expenditures (54) (133) (477) (542) (1,206)
----------- ----------- ----------- ------------ -----------
CAD $ 2,332 $ 2,363 $ 2,265 $ 3,537 $ 10,497
=========== =========== =========== =========== ===========
Distributions per share (2) $ 0.30 $ 0.30 $ 0.30 $ 0.32 $ 1.22
=========== =========== =========== ============ ===========
Fully converted weighted average
shares outstanding 6,296,042 6,303,542 6,342,206 10,148,526 7,203,071
=========== =========== =========== ============ ===========
</TABLE>
(1) Reflects the adjustments to FFO required to reflect the FFO of the
Associated Companies allocable to the Company. The Company's investments in
the Associated Companies are accounted for using the equity method of
accounting.
(2) The distributions for the three months ended December 31, 1996, were paid
on February 19, 1997.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the selected data in
Item 6 and the Consolidated Financial Statements of Glenborough Realty Trust
Incorporated and the GRT Predecessor Entities, including the notes thereto,
included in Item 14.
BACKGROUND
The Company commenced operations on December 31, 1995 through the merger of
eight public limited partnerships and a management company with and into the
Company. A portion of the Company's operations is conducted through the
Operating Partnership in which the Company holds a 1% interest as the sole
general partner and an approximate 91% limited partner interest. The Company
intends to elect treatment as a REIT when it files its tax return for the year
ended December 31, 1996.
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<PAGE> 21
The statements of operations, equity and cash flows for the years ended
December 31, 1995, 1994 and 1993 of the GRT Predecessor Entities include the
historical operations of GC and the Partnerships. These statements have been
adjusted to reflect the consolidation of two joint ventures which were, in
aggregate, wholly owned by the Partnerships. The statements of operations,
equity and cash flows for the years ended December 31, 1995, 1994 and 1993 of
the GRT Predecessor entities are included as the Consolidation of these entities
to form the Company did not occur until December 31, 1995.
Certain components of the Company's results of operations are not
comparable to those of the GRT Predecessor Entities. The primary reason for the
difference is the segregation in 1996 of the operations (management fees and
reimbursements, as well as related expenses) of the Associated Companies, all of
which were combined in the GRT Predecessor Entities 1995 financial statements.
Effective January 1, 1996, the Company owns 100% of the preferred stock in each
of the Associated Companies and accounts for its interests under the equity
method. Also, contributing to the comparability difference is the change in the
operational structure of three original hotel properties, not including the San
Antonio Hotel which was acquired in 1996 and the Irving, Texas Hotel, (the
"Hotels"). The Hotels were wholly owned by the GRT Predecessor Entities and,
thus, the operations of the Hotels were included in the financial statements of
the GRT Predecessor Entities. In order for the Company to qualify as a REIT,
neither the Company nor the Operating Partnership can operate the Hotels. Under
the current structure, the Company owns the Hotels but leases them to GHG. The
Company includes only the related lease payments earned from GHG in its
statement of operations. When comparing historical year ended December 31, 1996
to historical years ended December 31, 1995 and 1994, the decreases in fees and
reimbursements, property operating expenses and general and administrative
expenses are the primary components affected by these changes in structure.
RESULTS OF OPERATIONS
COMPARISON OF THE HISTORICAL YEAR ENDED DECEMBER 31, 1996 TO THE AS ADJUSTED
YEAR ENDED DECEMBER 31, 1995.
Set forth below is a discussion comparing the historical results of
operations for the year ended December 31, 1996 to the results of operations for
the year ended December 31, 1995 adjusted to reflect the Consolidation as if the
Consolidation had occurred on January 1, 1994.
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<PAGE> 22
Following is a table of net operating income by property type, for
comparative purposes, presenting the results for the year ended December 31,
1996 and the as adjusted year ended December 31, 1995.
RESULTS OF OPERATIONS BY PROPERTY TYPE
HISTORICAL YEAR ENDED DECEMBER 31, 1996 AND AS ADJUSTED YEAR ENDED DECEMBER 31,
1995
<TABLE>
<CAPTION>
MULTI- PROPERTY ELIMINATING TOTAL
OFFICE INDUSTRIAL RETAIL FAMILY HOTEL TOTAL ENTRY(1) REPORTED
---------- ---------- ---------- ---------- ---------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1996 HISTORICAL
Revenue................ $3,905,000 $4,260,000 $3,746,000 $1,519,000 $4,513,000 $17,943,000 $17,943,000
Operating Expenses..... 1,697,000 744,000 991,000 601,000 1,698,000 5,731,000 ($465,000) 5,266,000
Net Operating Income... 2,208,000 3,516,000 2,755,000 918,000 2,815,000 12,212,000 465,000 12,677,000
Percentage of Total
NOI.............. 18% 29% 23% 7% 23% 100%
1995 AS ADJUSTED
Revenue................ $1,280,000 $4,133,000 $3,366,000 $ 782,000 $3,934,000 $13,495,000 $13,495,000
Operating Expenses..... 599,000 775,000 814,000 448,000 1,718,000 4,354,000 ($270,000) 4,084,000
Net Operating Income... 681,000 3,358,000 2,552,000 334,000 2,216,000 9,141,000 270,000 9,411,000
Percentage of Total
NOI.............. 7% 37% 28% 4% 24% 100%
</TABLE>
- ---------------
(1) Eliminating entry represents internal market level property management fees
included in operating expenses to provide comparison to industry
performance.
Rental Revenues. Rental Revenues increased by $4,448,000, or 33%, to
$17,943,000 for the year ended December 31, 1996 from $13,495,000 for the as
adjusted year ended December 31, 1995. The increase consisted of increases in
revenues from the Office, Industrial, Retail, Multi-Family and Hotel properties
of $2,625,000, $127,000, $380,000, $737,000 and $579,000, respectively.
Moreover, of this increase, $4,442,000 represents rental revenues generated from
the acquisition in 1996 of 22 properties (the "1996 Acquisitions"). The increase
was offset by the elimination of revenues from the All American Industrial
Properties due to the sale of such properties in June 1996. These properties
represented annual revenues of approximately $600,000.
Fees and Reimbursements. Fees and reimbursements revenue consists
primarily of asset management fees paid to the Company by a controlled
partnership and increased slightly to $311,000 in 1996 from $260,000 in 1995.
Interest and Other Income. Interest and other income consists primarily of
interest on mortgage loans receivable and increased slightly to $1,080,000 in
1996 from $982,000 in 1995.
Equity in Earnings of Associated Companies. Equity in earnings of
Associated Companies decreased slightly from $1,691,000 in 1995 to $1,598,000 in
1996, primarily resulting from the acquisition of the UCT Property and Bond
Street Properties by the Company from entities controlled by the Associated
Companies. Prior to the acquisition by the Company of these Properties, the
partnerships owning these Properties paid all their fees and reimbursed all
their related salary costs to GC.
Property Operating Expenses. Property operating expenses increased by
$1,182,000, or 29%, to $5,266,000 in the year ended December 31, 1996 from
$4,084,000 for the as adjusted year ended December 31, 1995. Of this increase,
$1,722,000 represents expenses of the 1996 Acquisitions, offset in part by the
reduction in expenses resulting from the sale of the All American Industrial
properties.
General and Administrative Expenses. General and administrative expenses
increased $410,000, or 42%, from $983,000 in 1995 to $1,393,000 in 1996. The
increase is due in part to increased overhead costs resulting from the 1996
Acquisitions, including a portion of the transaction costs relating to the 1996
Acquisitions.
Interest Expense. Interest expense increased by $1,146,000, or 41%, to
$3,913,000 in the year ended December 31, 1996 from $2,767,000 in the as
adjusted year ended December 31, 1995. Substantially all of the
22
<PAGE> 23
increase was the result of higher average borrowings during 1996 as compared to
1995. The increased borrowings in 1996 were used to finance the cash portion of
the 1996 Acquisitions.
Depreciation and Amortization. Depreciation and amortization increased
$921,000, or 25%, to $4,575,000 in 1996 from $3,654,000 in 1995. The increase
was primarily due to depreciation and amortization associated with the 1996
Acquisitions.
Gain on Sale of Rental Properties. Gain on sale of rental properties of
$321,000 during 1996 resulted from the sale of the All American Industrial
Properties held in the Company's industrial portfolio.
Consolidation Costs. Consolidation costs in 1996 consist of the costs
associated with preparing, printing and mailing the Prospectus/Consent
Solicitation Statement and other documents related to the Consolidation, and all
other costs incurred in the forwarding of the Prospectus/Consent Solicitation
Statement to investors.
Litigation Costs. Litigation costs consist of the legal fees incurred in
connection with defending two class action complaints filed by investors in
certain of the GRT Predecessor Entities as well as an accrual for the proposed
settlement in one case.
Loss on Debt Refinancing. Loss on debt refinancing of $186,000 during the
year ended December 31, 1996 resulted from the write-off of unamortized loan
fees when the $10,000,000 Imperial Bank line of credit was paid off with
proceeds from the Wells Fargo Bank Line of Credit.
COMPARISON OF THE AS ADJUSTED YEAR ENDED DECEMBER 31, 1995 TO THE AS ADJUSTED
YEAR ENDED DECEMBER 31, 1994
Set forth below is a discussion comparing the as adjusted results of
operations for the year ended December 31, 1995 to the as adjusted results of
operations for the year ended December 31, 1994, each adjusted to reflect the
Consolidation as if the Consolidation had occurred on January 1, 1994.
Rental Revenues. Rental revenues increased $628,000, or 5%, to $13,495,000
in 1995 from $12,867,000 in 1994. The increase was primarily due to a net
increase in occupancy at certain commercial properties and a small increase in
lease payments from the hotel properties.
Fees and Reimbursements. Fees and reimbursements remained unchanged from
1994 to 1995 and consist primarily of asset management fees paid to the Company
by a controlled partnership.
Interest and Other Income. Interest and other income decreased $127,000,
or 11%, to $982,000 in 1995 from $1,109,000 in 1994. The decrease was primarily
due to a decrease in interest earned on cash balances.
Equity in Earnings of Associated Companies. Equity in earnings of
Associated Companies increased slightly to $1,691,000 in 1995 from $1,649,000 in
1994. As Adjusted amounts for both 1995 and 1994 include the effect of the
Rancon contracts as if such contracts commenced on January 1, 1994, as well as
the loss of certain other contracts which occurred in 1994 as if such losses
occurred prior to January 1, 1994. The portfolio of properties and partnerships
managed or controlled by the Associated Companies was otherwise unchanged from
1994 to 1995.
Property Operating Expenses. Property operating expenses increased by
$411,000, or 11%, to $4,084,000 in 1995 from $3,673,000 in 1994. The increase
was primarily due to expenses related to increased occupancy at certain
commercial properties.
General and Administrative. General and administrative expenses increased
slightly to $983,000 in 1995 from $954,000 in 1994. The number of properties
owned by the Company remained consistent.
Interest Expense. Interest expense remained unchanged from 1994 to 1995.
Depreciation and Amortization. Depreciation and amortization expense
increased $212,000, or 6%, in 1995 to $3,654,000 from $3,442,000 in 1994. The
increase was due to the depreciation and amortization of newly capitalized
costs.
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<PAGE> 24
Loss Provision. During the year ended December 31, 1995, the Company had
recorded a loss provision of $863,000 to reduce the carrying value of its
mortgage loan receivable secured by the Eatontown, New Jersey property to its
estimated realizable value, which is equal to the value used for consolidation
purposes, in anticipation of a renegotiation of the terms of the note upon its
maturity on November 1, 1996. For the year ended December 31, 1994, the Company
had recorded a loss provision of $533,000 to reduce its investment in
Glenborough Partners to estimated fair market value.
COMPARISON OF THE HISTORICAL YEAR ENDED DECEMBER 31, 1996 TO THE HISTORICAL
YEAR ENDED DECEMBER 31, 1995.
Rental Revenue. Rental Revenue increased by $2,489,000, or 16%, to
$17,943,000 in 1996 from $15,454,000 in 1995. Of this increase, $4,442,000
represents rental revenues generated from the 1996 Acquisitions. The increase in
1996 revenues was offset by the elimination of revenues from the All American
Industrial Properties due to the sale of such properties in June 1996. The
increase in rental revenues was also offset by a decrease in hotel revenues due
to the change in the operational structure of the Hotels. As discussed above,
three of the original Hotels were owned and operated by the GRT Predecessor
entities prior to 1996 and accordingly, the revenues of the Hotels are included
in the 1995 statement of operations. However, under the current structure, the
Company owns the Hotels but leases them to GHG and accordingly, the 1996
statement of operations reflects only the lease payments due under the operating
leases. For the year ended December 31, 1996, each of the four originally owned
hotels increased their ADR (Average Daily Rate) and REVPAR (Revenue Per
Available Room).
Fees and Reimbursements and Equity in Earnings of Associated
Companies. Fees and reimbursements revenue decreased to $311,000 for the year
ended December 31, 1996 from $16,019,000 for the year ended December 31, 1995;
equity in earnings of the Associated Companies increased to $1,598,000 for the
year from the year ended December 31, 1996 from zero for the year ended December
31, 1995. As previously discussed, the primary reason for the difference between
1996 and 1995 results is the segregation in 1996 of the operations of the
Associated Companies, and the resulting recognition of earnings from them using
the equity method by the Company. In 1995, the earnings of the Associated
Companies were consolidated with the partnerships participating in the
Consolidation.
Interest and Other Income. Interest and other income decreased $1,618,000,
or 60%, in 1996 to $1,080,000 from $2,698,000 in 1995. This decrease resulted
primarily from the lower note receivable balance in 1996, primarily as a result
of the early prepayment of a note receivable in April 1995 and the early
repayment in January and June of 1995 of three of the four notes received from
the sale of the Laurel Cranford buildings. Also, in 1996, cash balances
decreased primarily as a result of the prepayment of the investor notes payable,
payment of declared dividends and the payment of costs associated with the
Consolidation.
Property Operating Expenses. Property operating expenses decreased
$3,310,000, or 39%, to $5,266,000 in 1996 from $8,576,000 in 1995. Of the
decrease, $4,993,000 is primarily the result of the change in the operational
structure of the hotels, as previously discussed. The decrease was offset by an
increase of $1,722,000 associated with the operating expenses of the 1996
Acquisitions.
General and Administrative. General and administrative expenses decreased
to $1,393,000 in 1996 from $15,947,000 in 1995. The decrease is due primarily to
the segregation in 1996 of the operations of the Associated Companies, as
previously discussed.
Interest Expense. Interest expense increased $1,784,000, or 84%, to
$3,913,000 in 1996 from $2,129,000 in 1995. Substantially all of the increase
was the result of higher average borrowings during 1996 as compared to 1995. The
increased borrowings were used to finance the 1996 Acquisitions.
Depreciation and Amortization. Depreciation and amortization remained
relatively constant, decreasing to $4,575,000 in 1996 from $4,762,000 in 1995.
Depreciation and amortization in 1995 includes the amortization of the
management contracts, which are now reflected in the results of the Associated
Companies in 1996. Depreciation and amortization in 1996 includes depreciation
and amortization related to the 1996 Acquisitions.
24
<PAGE> 25
COMPARISON OF THE HISTORICAL YEAR ENDED DECEMBER 31, 1995 TO THE HISTORICAL
YEAR ENDED DECEMBER 31, 1994
Rental Revenue. Rental Revenue increased by $1,657,000, or 12%, to
$15,454,000 in 1995 from $13,797,000 in 1994. This increase was primarily due to
a net increase in occupancy at certain commercial properties, the acquisition of
the Summerbreeze apartment complex and a significant increase in hotel revenues
due to overall increases in occupancy and average daily room rates.
Fees and Reimbursements. Fees and reimbursements increased by $2,692,000,
or 20%, to $16,019,000 in 1995 from $13,327,000 in 1994. The increase was
primarily due to an increase in property and asset management fees and related
expense reimbursements due to the acquisition of the Rancon and RGI management
contracts.
Interest and Other Income. Interest and other income decreased $859,000,
or 24%, to $2,698,000 in 1995 from $3,557,000 in 1994. Substantially all of the
decrease resulted from the early repayment of the Finley Square note receivable
in April 1995 and the early repayment in January and June of 1995 of three of
the four notes from the sale of the Laurel Cranford buildings.
Property Operating Expenses. Property operating expenses increased
$1,794,000, or 26%, to $8,576,000 in 1995 from $6,782,000 in 1994. The increase
was primarily due to the higher expenses related to increased occupancy rates
and to the acquisition of the Summerbreeze apartment complex in January 1995.
General and Administrative. General and administrative expenses, including
salaries, increased $2,493,000, or 19%, to $15,947,000 in 1995 from $13,454,000
in 1994. Substantially all of this increase resulted from expenses incurred by
Glenborough Realty Corporation in concluding its business as a stand alone
corporation prior to merging with the Company. Such expenses will not be
incurred again by the Company or the Associated Companies. In the same period,
general and administrative cost reductions resulting from property sales in 1994
were offset by increased general and administrative costs associated with the
Rancon and RGI management contracts acquired in 1995.
Interest Expense. Interest expense increased $989,000, or 87%, to
$2,129,000 in 1995 from $1,140,000 in 1994. Substantially all of the increase
was the result of increased debt levels primarily related to the financing of
the acquisition of the Rancon management contracts and a first deed of trust on
the Summerbreeze apartment complex acquired in 1995.
Depreciation & Amortization. Depreciation and amortization increased by
$721,000, or 18%, to $4,762,000 in 1995 from $4,041,000 in 1996, due primarily
to the acquisition of the Rancon and RGI management contracts on January 1,
1995.
LIQUIDITY AND CAPITAL RESOURCES
The Company expects to meets its short-term liquidity requirements
generally through its working capital and cash generated by operations. As of
December 31, 1996, the Company had no material commitments for capital
improvements other than certain expansion related improvements estimated at
approximately $1,750,000 at its existing shopping center in Tampa, Florida.
Other planned capital improvements consist of tenant improvements, expenditures
necessary to lease and maintain the Properties and expenditures for furniture
and fixtures and building improvements at the Hotel Properties. The Company
believes that its cash generated by operations will be adequate to meet both
operating requirements and to make distributions in accordance with REIT
requirements in both the short and the long-term. In addition to cash generated
by operations, the Line of Credit provides for working capital advances.
However, there can be no assurance that the Company's results of operations will
not fluctuate in the future and at times affect (i) its ability to meet its
operating requirements and (ii) the amount of its distributions.
The Company expects to meet certain of its long-term liquidity
requirements, such as scheduled debt maturities and possible acquisitions,
through a combination of short and long-term borrowings and the issuance of debt
and equity securities of the Company.
Mortgage loans payable and secured bank lines increased from $33,685,000 at
December 31, 1995 to $75,891,000 at December 31, 1996. This increase was
primarily due to new borrowings in 1996 to fund the
25
<PAGE> 26
1996 Acquisitions. The $10,000,000 Imperial Bank line of credit that existed at
December 31, 1995 was replaced with the $50,000,000 Line of Credit provided by
Wells Fargo Bank that is secured by first mortgages on certain of the Company's
properties. The proceeds from the Line of Credit were used to retire the
$10,000,000 Imperial line of credit and to fund the 1996 Acquisitions. The Line
of Credit had an outstanding balance of $21,307,000 at December 31, 1996. In
addition to increased borrowings under the Line of Credit, approximately
$25,000,000 of new debt was assumed in connection with the 1996 Acquisitions and
a $6,120,000 term loan was obtained to partially finance a 1996 Acquisition.
In October 1996, the Company completed a public equity offering of
3,666,000 shares of Common Stock at an offering price of $13.875 per share. The
net proceeds from the offering of approximately $47.8 million were used to fund
certain of the 1996 Acquisitions and to repay outstanding indebtedness.
At December 31, 1996, the Company's total indebtedness included fixed-rate
debt of $44,657,000, or 59% of the Company's aggregate indebtedness, and
floating-rate indebtedness of $31,234,000, or 41% of the Company's aggregate
indebtedness. The Company's total market capitalization as of December 31, 1996
was $257,528,000 resulting in a ratio of debt to total market capitalization of
approximately 29.5%.
In January 1997, the Company filed a shelf registration statement (the
"January 1997 Shelf Registration Statement") with the Securities and Exchange
Commission to register $250.0 million of equity securities. The January 1997
Shelf Registration Statement was declared effective by the Securities and
Exchange Commission on February 25, 1997.
INFLATION
Substantially all of the leases at the retail Properties provide for
pass-through to tenants of certain operating costs, including real estate taxes,
common area maintenance expenses, and insurance. Leases at the multifamily
Properties generally provide for an initial term of one month or one year and
allow for rent adjustments at the time of renewal. Leases at the office
properties typically provide for rent adjustment and pass-through of certain
operating expenses during the term of the lease. All of these provisions permit
the Company to increase rental rates or other charges to tenants in response to
rising prices and therefore, serve to minimize the Company's exposure to the
adverse effects on inflation.
FORWARD LOOKING STATEMENTS; FACTORS THAT MAY AFFECT OPERATING RESULTS
This Report on Form 10-K contains forward looking statements within the
meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities and Exchange Act of 1934, including statements regarding the
Company's expectations, hopes, intentions, beliefs and strategies regarding the
future. Forward looking statements include statements regarding potential
acquisitions, the anticipated performance of future acquisitions, recently
completed acquisitions and existing properties, and statements regarding the
Company's financing activities. All forward looking statements included in this
document are based on information available to the Company on the date hereof,
and the Company assumes no obligation to update any such forward looking
statements. It is important to note that the Company's actual results could
differ materially from those stated or implied in such forward looking
statements. Some of the factors that could cause actual results to differ
materially are set forth below.
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<PAGE> 27
LITIGATION RELATED TO CONSOLIDATION
Recent business reorganizations sponsored by others involving the
conversion of partnerships into corporations have given rise to a number of
investor lawsuits. These lawsuits have included claims against the general
partners of the participating partnerships, the partnerships themselves and
related persons involved in the structuring of or benefiting from the conversion
or reorganization, as well as claims against the surviving entity and its
directors and officers. The lawsuits have included, among others, claims that
the structure of the reorganizations, as well as the manner in which they were
submitted for investor approval, involved violations of federal and state
securities laws, common law fraud and negligent misrepresentations, breaches of
fiduciary duty, unfair and deceptive trade practices, negligence and waste,
breaches of the partnership documents of the participating partnerships, failure
to comply with applicable reporting requirements, violations of the rules of the
NASD on suitability and fair practices, and violations of the Racketeer
Influenced and Corrupt Organizations Act. Two lawsuits have been filed
contesting the fairness of the Consolidation, one in California state court and
one in federal court. A settlement of the state court action has been approved
by the court, but objectors to the settlement have appealed that approval.
The Company and the other defendants in the state court action have filed a
responsive brief and the appeal is now pending. Plaintiffs in the federal court
action have agreed voluntarily to take the action off calendar pending
resolution of the state court action.
From time to time the Company is involved in other litigation arising out
of its business activities. It is possible that this litigation and the other
litigation previously described could result in significant losses in excess of
amounts reserved, which could have an adverse effect on the Company's results of
operations and the financial condition of the Company.
CHAPTER 11 REORGANIZATION OF PARTNERSHIP CONSOLIDATION BY SENIOR MANAGEMENT
Robert and Andrew Batinovich, two of the senior officers of the Company,
were also senior members of a management team that formed a publicly registered
limited partnership in 1986 to consolidate a number of predecessor partnerships.
That public partnership was involved in litigation with its primary creditor and
in order to prevent foreclosure filed a petition for reorganization under
Chapter 11 of the United States Bankruptcy Code in May of 1992. The public
partnership, the primary subsidiary of which is GPA, Ltd., which owns an
approximately 14% limited partner interest in the Operating Partnership along
with other substantial real estate assets, settled the litigation and obtained
confirmation of a plan of reorganization in January 1994. Investors in the
Offered Securities should consider that the consolidation of partnerships into
GPA, Ltd.'s parent partnership did not achieve all of the objectives stated at
the time and should further consider the relevance of that fact to their
investment in the Offered Securities of the Company.
RISKS ASSOCIATED WITH ACQUISITIONS
Acquisitions Could Adversely Affect Operations or Stock Value
Consistent with its growth strategy, the Company is continually pursuing
and evaluating potential acquisition opportunities, and is from time to time
actively considering the possible acquisition of specific properties, which may
include properties managed or controlled by one of the Associated Companies or
owned by affiliated parties. It is possible that one or more of such possible
future acquisitions, if completed, could adversely affect the Company's funds
from operations or cash available for distribution, in the short term or the
long term or both, or increase the Company's debt, or be perceived negatively
among investors such that such an acquisition could be followed by a decline in
the market value of the Common Stock.
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Expansion Risk
The Company is experiencing a period of rapid expansion, which management
expects will continue in the near future. This growth has increased the
operating complexity of the Company as well as the level of responsibility for
both existing and new management personnel. The Company's ability to manage its
expansion effectively will require it to continue to update its operational and
financial systems and to expand, train and manage its employee base. The
Company's inability to effectively manage its expansion could have an adverse
effect on the Company's results of operations and financial condition.
Conflict of Interest
The Company has acquired, and from time to time may acquire, properties
from partnerships that Robert Batinovich, the Company's Chief Executive Officer,
and Andrew Batinovich, the Company's Chief Operating Officer, control, and in
which they and members of their families have substantial interests. It is also
possible that the Company may enter into transactions to acquire other
properties controlled by these individuals or in which they or members of their
families have substantial interests in the future. These transactions involve or
will involve conflicts of interest. These transactions may provide substantial
economic benefits such as the payments or unit issuances, relief or deferral of
tax liabilities, relief of primary or secondary liability for debt, and
reduction in exposure to other property-related liabilities. Despite the
presence of appraisals or fairness opinions or review by parties who have no
interest in the transactions, the transactions will not be the product of
arm's-length negotiation and there can be no assurance that these transactions
will be as favorable to the Company as transactions that the Company negotiates
with unrelated parties or will not result in undue benefit to Robert and Andrew
Batinovich and members of their families. Neither Robert Batinovich nor Andrew
Batinovich has guaranteed that any properties acquired from entities they
control or in which they or their families have a significant interest will be
as profitable as other investments made by the Company or will not result in
losses.
Assumption of General Partner Liabilities
The Company and its predecessors have acquired a number of their properties
by acquiring partnerships that own the properties or by first acquiring general
partnership interests and at a later date acquiring the properties, and the
Company may pursue acquisitions in this manner in the future. When the Company
uses this acquisition technique, a subsidiary of the Company becomes a general
partner. As a general partner the Company's subsidiary becomes generally liable
for the debts and obligations of the partnership, including debts and
obligations that may be contingent or unknown at the time of the acquisition. In
addition, the Company's subsidiary assumes obligations under the partnership
agreements, which may include obligations to make future contributions for the
benefit of other partners. The Company undertakes detailed due diligence reviews
to ascertain the nature and extent of obligations that its subsidiary will
assume when it becomes a general partner, but there can be no assurance that the
obligations assumed will not exceed the Company's estimates or that the assumed
liabilities will not have an adverse effect on the Company's results of
operations or financial condition. In addition, an Associated Company may enter
into management agreements pursuant to which it assumes certain obligations as
manager of properties. There can be no assurance that these obligations will not
have an adverse effect on the Associated Companies' results of operations or
financial condition, which could adversely affect the value of the Company's
preferred stock interest in those companies.
Risks Relating to Tender Offers
The Company may, as part of its growth strategy, acquire properties and
portfolio of properties through tender offer acquisitions of interests in public
and private partnerships. Tender offers often result in competing tender offers,
as well as litigation initiated by limited partners in the subject partnerships
or by competing bidders. Due to the inherent uncertainty of litigation, the
Company could be subject to adverse judgments in substantial amounts. As the
Company has not yet attempted an acquisition through the tender offer process,
and because of competing offers and possible litigation, there can be no
assurance that, if undertaken, the
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Company would be successful in acquiring properties through a tender offer or
that the tender offer process would not result in litigation and a significant
judgment adverse to the Company.
CERTAIN TAX RISKS
Consequences of Failure to Qualify as a REIT
The Company intends to elect to be treated as a REIT under the Code
commencing with its taxable year ending December 31, 1996. No assurance can be
given, however, that the Company will be able to operate in a manner which would
permit it to qualify to make this election. Qualification as a REIT involves the
satisfaction of numerous requirements (some on an annual and quarterly basis)
established under highly technical and complex Code provisions for which only
limited judicial or administrative interpretation exists, and involves the
determination of various factual matters and circumstances not entirely within
the Company's control. The Company will receive nonqualifying management fee
income and will own nonqualifying preferred stock in the Associated Companies.
As a result, the Company may approach the income and asset test limits imposed
by the Code and could be at risk of not satisfying those tests. In order to
avoid exceeding the asset test limit, for example, the Company may have to
reduce its interest in the Associated Companies. The Company is relying on the
opinion of its tax counsel regarding its ability to qualify as a REIT. This
legal opinion is not binding on the IRS. See "Federal Income Tax
Consequences -- Taxation of the Company."
If the Company were to fail to qualify as a REIT in any taxable year, the
Company would be subject to federal income tax (including any applicable
alternative minimum tax) on its taxable income at corporate rates. Moreover,
unless entitled to relief under certain statutory provisions, the Company would
also be disqualified from treatment as a REIT for the four taxable years
following the year during which qualification is lost. This treatment would
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
years involved. In addition, distributions to stockholders would no longer be
required to be made. See "Federal Income Tax Consequences -- Failure to
Qualify."
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 Consequences -- Taxation of the Company."
Consequences of Failure of the Operating Partnership to Qualify as a
Partnership
The Company expects that the Operating Partnership, which is organized as a
limited partnership, will qualify for treatment as such under the Code. If the
Operating Partnership, or any of the other partnerships owned by the Operating
Partnership, fails to qualify for treatment as a partnership under the Code, the
Company would cease to qualify as a REIT, and both the Company and the Operating
Partnership would be subject to federal income tax (including any alternative
minimum tax on the Company's income, at corporate rates). See "Federal Income
Tax Consequences -- Failure to Qualify."
Possible Changes in Tax Laws
Income tax treatment of REITs may be modified, prospectively or
retroactively, by legislative, judicial or administrative action at any time. No
assurance can be given that legislation, regulations, administrative
interpretations or court decisions will not significantly change the tax laws
with respect to the qualification as a REIT or the federal income tax
consequences of this qualification. In addition to any direct effects the
changes might have, the changes might also indirectly affect the market value of
all real estate investments, and consequently the ability of the Company to
realize its investment objectives.
RISKS RELATING TO REAL ESTATE
Environmental Matters
All of the Properties presently owned by the Company have been subject to
Phase I environmental assessments by independent environmental consultants. Some
of the Phase I environmental assessments recommended further investigations in
the form of Phase II environmental assessments, including soil and
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<PAGE> 30
groundwater sampling, and all of these investigations have been completed by the
Company or are in the process of being completed. Certain of the Properties
owned by the Company have been found to contain ACMs. The Company believes that
these materials have been adequately contained and that an ACM operations and
maintenance program has been implemented or is in the process of being
implemented for the Properties found to contain ACMs.
Some, but not all, of the properties owned by partnerships managed by the
Associated Companies have been subject to Phase I environmental assessments by
independent environmental consultants. The Associated Companies determine on a
case-by-case basis whether to obtain Phase I environmental assessments on these
properties and whether to undertake further investigation or remediation.
Certain of these properties contain ACMs. In each case the responsible
Associated Company believes that these materials have been adequately contained
and that an ACM operations and maintenance program has been implemented for the
properties found to contain ACMs.
Six of the Properties owned by the Company are leased in whole or in part
to an operator of auto care centers which include oil change and tune-up
facilities, and ten of the Properties are leased to operators of convenience
stores which sell petroleum-based fuels. These Properties and other of the
Properties contain, and/or may have contained in the past, underground storage
tanks for the storage of petroleum products and/or other hazardous or toxic
substances which create a potential for release of petroleum products and/or
other hazardous or toxic substances. Some of the Properties owned by the Company
are adjacent to or near properties that have contained in the past or currently
contain, underground storage tanks used to store petroleum products or other
hazardous or toxic substances. Several of the Properties have been contaminated
with petroleum products or other hazardous or toxic substances from on-site
operations or operations on adjacent or nearby properties. In addition, certain
of the Properties are on, adjacent to or near properties upon which others have
engaged or may in the future engage in activities that may release petroleum
products or other hazardous or toxic substances.
Although tenants of the Properties owned by the Company generally are
required by their leases to operate in compliance with all applicable federal,
state and local environmental laws, ordinances and regulations and to indemnify
the Company against any environmental liability arising from the tenants'
activities on the Properties, the Company could nevertheless be subject to
environmental liability relating to its management of the Properties or strict
liability by virtue of its ownership interest in the Properties and there can be
no assurance that the tenants would satisfy their indemnification obligations
under the leases. There can be no assurance that any environmental assessments
of the Properties owned by the Company, properties being considered for
acquisition by the Company, or the properties owned by the partnerships managed
by the Associated Companies have revealed all potential environmental
liabilities, that any prior owner or prior or current operator of such
properties did not create an environmental condition not known to the Company or
that an environmental condition does not otherwise exist as to any one or more
of such properties that could have an adverse effect on the Company's results of
operations and financial condition, either directly (with respect to properties
owned by the Company), or indirectly (with respect to properties owned by
partnerships managed by an Associated Company) by adversely affecting the
financial condition of the Associated Company and thus the value of the
Company's preferred stock interest in the Associated Company. Moreover, there
can be no assurance that (i) future environmental laws, ordinances or
regulations will not have an adverse effect on the Company's results of
operations and financial condition or (ii) the current environmental condition
of such properties will not be affected by tenants and occupants of such
properties, by the condition of land or operations in the vicinity of the
properties (such as the presence of underground storage tanks), or by third
parties unrelated to the Company.
Risks Related to Ownership and Financing of Real Estate
The Company is subject to risks generally incidental to the ownership of
real estate, including changes in general economic or local conditions, changes
in supply of or demand for similar or competing properties in an area, the
impact of environmental protection laws, changes in interest rates and
availability of financing which may render the sale or financing of a property
difficult or unattractive, changes in tax, real estate and zoning laws, and the
creation of mechanics' liens or similar encumbrances placed on the property by a
lessee or other
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parties without the Company's knowledge and consent. Should any of these events
occur, there could be an adverse effect on the Company's results of operations
and financial condition.
Availability of Real Estate for Acquisitions
The Company's growth is dependent upon acquisitions. There can be no
assurance that properties will be available for acquisition or, if available,
that the Company will be able to purchase such properties on favorable terms. If
such acquisitions are not available it could have a negative impact on the
growth of the Company, which could have an adverse effect on the performance of
the Company's Common Stock.
Competition for Acquisition of Real Estate
The Company faces competition from other businesses, individuals, fiduciary
accounts and plans and other entities in the acquisition, operation and sale of
its properties. Some of the Company's competitors are larger and have greater
financial resources than the Company. This competition may result in a higher
cost for properties the Company wishes to purchase.
Competition for Tenants
The Company is subject to the risk that when space becomes available at its
properties the leases may not be renewed, the space may not be let or relet, or
the terms of the renewal or reletting (including the cost of required
renovations or concessions to tenants) may be less favorable to the Company.
Although the Company has established annual property budgets that include
estimates of costs for renovation and reletting expenses that it believes are
reasonable in light of each property's situation, no assurance can be given that
these estimates will sufficiently cover these expenses. If the Company is unable
to promptly lease all or substantially all of the space at its properties, if
the rental rates are significantly lower than expected, or if the Company's
reserves for these purposes prove inadequate, then there could be an adverse
effect on the Company's results of operations and financial condition.
Tenants' Defaults
The ability of the Company to manage its assets is subject to federal
bankruptcy laws and state laws affecting creditors' rights and remedies
available to real property owners. In the event of the financial failure or
bankruptcy of a tenant, there can be no assurance that the Company could
promptly recover the tenant's premises from the tenant or from a trustee or
debtor-in-possession in any bankruptcy proceeding filed by or against that
tenant, or that the Company would receive rent in the proceeding sufficient to
cover its expenses with respect to the premises. In the event of the bankruptcy
of a tenant, the Company will be subject to the provisions of the federal
bankruptcy code, which in some instances may restrict the amount and
recoverability of claims held by the Company against the tenant. If any tenant
defaults on its obligations to the Company, there could be an adverse effect on
the Company's results of operations and financial condition.
Management, Leasing and Brokerage Risks; Lack of Control of Associated
Companies
The Company is subject to the risks associated with the property
management, leasing and brokerage businesses. These risks include the risk that
management contracts or service agreements may be terminated, that contracts
will not be renewed upon expiration or will not be renewed on terms consistent
with current terms, and that leasing and brokerage activity generally may
decline. Acquisition of properties by the Company from the Associated Companies
could result in a decrease in revenues to the Associated Companies and a
corresponding decrease in dividends received by the Company from the Associated
Companies. Each of these developments could have an adverse effect on the
Company's results of operations and financial condition.
To qualify for and to maintain the Company's status as a REIT while
realizing income from the Company's third-party management business, the capital
stock of Glenborough Hotel Group, a Nevada corporation ("GHG"), Glenborough
Corporation, a California corporation ("GC") and Glenborough Inland Realty
Corporation, a California corporation ("GIRC," and collectively with GHG and GC,
the "Associated Companies") (which conduct the Company's third-party management,
leasing and brokerage businesses) is divided into two classes. All of the voting
common stock of the Associated Companies, representing 5% of the
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total equity of GC and GIRC, and 25% of the total equity of GHG, is held by
individual stockholders. Nonvoting preferred stock representing the remaining
equity of each Associated Company is held entirely by the Company. Although the
Company holds a majority of the equity interest in each Associated Company, the
Company is not able to elect directors of any Associated Company and,
consequently, the Company has no ability to influence the day-to-day decisions
of each entity.
Uninsured Loss
The Company or in certain instances tenants of the properties carry
comprehensive liability, fire and extended coverage with respect to the
Company's properties, with policy specification and insured limits customarily
carried for similar properties. There are, however, certain types of losses
(such as from earthquakes and floods) that may be either uninsurable or not
economically insurable. Further, certain of the properties are located in areas
that are subject to earthquake activity and floods. Should a property sustain
damage as a result of an earthquake or flood, the Company may incur losses due
to insurance deductibles, co-payments on insured losses or uninsured losses.
Should an uninsured loss occur, the Company could lose some or all of its
capital investment, cash flow and anticipated profits related to one or more
properties, which could have an adverse effect on the Company's results of
operations and financial condition.
Illiquidity of Real Estate
Real estate investments are relatively illiquid and, therefore, will tend
to limit the ability of the Company to vary its portfolio promptly in response
to changes in economic or other conditions. In addition, the Internal Revenue
Code of 1986, as amended (the "Code"), and individual agreements with sellers of
properties place limits on the Company's ability to sell properties, which may
adversely affect returns to holders of Common Stock. Eighteen of the properties
owned by the Operating Partnership were acquired on terms and conditions under
which they be disposed of only in a like-kind exchange or other non-taxable
transaction.
Potential Liability Under the Americans With Disabilities Act
As of January 26, 1992, all of the Company's properties were required to be
in compliance with the Americans With Disabilities Act (the "ADA"). The ADA
generally requires that places of public accommodation be made accessible to
people with disabilities to the extent readily achievable. Compliance with the
ADA requirements could require removal of access barriers and non-compliance
could result in imposition of fines by the federal government, an award of
damages to private litigants and/or a court order to remove access barriers.
Because of the limited history of the ADA, the impact of its application to the
Company's properties, including the extent and timing of required renovations,
is uncertain. Pursuant to certain lease agreements with tenants in certain of
the "single-tenant" Properties, the tenants are obligated to comply with the ADA
provisions. If the Company's costs are greater than anticipated or tenants are
unable to meet their obligations, there could be an adverse effect on the
Company's results of operations and financial condition.
ADDITIONAL CAPITAL REQUIREMENTS
The Company's future growth depends in large part upon its ability to raise
additional capital on satisfactory terms or at all. There can be no assurance
that the Company will be able to raise sufficient capital to achieve its
objectives. If the Company were to raise additional capital through the issuance
of additional equity securities or securities convertible into or exercisable
for equity securities, the interests of holders of the Offered Securities, could
be diluted. Likewise, the Company's Board of Directors is authorized to cause
the Company to issue Preferred Stock in one or more classes or series and to
determine the distributions and voting and other rights of the Preferred Stock.
Accordingly, the Board of Directors may authorize the issuance of Preferred
Stock with voting, distribution and other similar rights which could be dilutive
to or otherwise adversely affect the interests of holders of the Offered
Securities. If the Company were to raise additional capital through debt
financing, the Company will be subject to the risks described below, among
others.
LIMITATION ON OWNERSHIP OF COMMON STOCK MAY PRECLUDE ACQUISITION OF CONTROL
Provisions of the Company's Articles of Incorporation are designed to
assist the Company in maintaining its qualification as a REIT under the Code by
preventing concentrated ownership of the Company which
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might jeopardize REIT qualification. Among other things, these provisions
provide that (a) any transfer or acquisition of Common Stock that would result
in the disqualification of the Company as a REIT under the Code will be void,
and (b) if any person attempts to acquire shares of Common Stock that after the
acquisition would cause the person to own or to be deemed to own, by operation
of certain attribution rules set out in the Code, an amount of Common Stock in
excess of a predetermined limit, which, pursuant to Board action, currently is
8.8% of the outstanding shares of Common Stock (the "Ownership Limitation" and
as to the Common Stock, the transfer of which would cause any person to actually
own Common Stock in excess of the Ownership Limitation, the "Excess Shares"),
the transfer shall be void and the Common Stock subject to the transfer shall
automatically be transferred to an unaffiliated trustee for the benefit of a
charitable organization designated by the Board of Directors of the Company
until sold by the trustee to a third party or purchased by the Company. Robert
Batinovich and individuals or entities whose ownership of Common Stock is
attributed to Robert Batinovich in determining the number of shares of Common
Stock owned by him for purposes of compliance with Section 856 of the Code (the
"Attributed Owners"), are exempt from these restrictions, but are prohibited
from acquiring shares of Common Stock if, after the acquisition, they would own
in excess of 14% of the outstanding shares of Common Stock. This limitation on
the ownership of Common Stock may have the effect of precluding the acquisition
of control of the Company by a third party without the consent of the Board of
Directors. If the Board of Directors waives the Ownership Limitation for any
person, the Ownership Limitation shall be proportionally and automatically
reduced with regard to all other persons such that no five persons may own more
than 49% of the Common Stock (the aggregate Ownership Limitations as to all of
these persons, as adjusted, the "Adjusted Ownership Limitation"). See
"Description of Common Stock -- Restrictions on Ownership and Transfer of Common
Stock" and "Federal Income Tax Consequences."
OTHER RISKS
Debt Financing
The Company intends to incur additional indebtedness in the future,
including through borrowings under a credit facility, if a credit facility is
available, to finance property acquisitions. As a result, the Company expects to
be subject to risks associated with debt financing, including the risk that
interest rates may increase, the risk that the Company's cash flow will be
insufficient to meet required payments on its debt and the risk that the Company
may be unable to refinance or repay the debt as it comes due. The Company's
current $50 million secured revolving line of credit with Wells Fargo Bank, N.A.
provides that distributions may not exceed 90% of funds from operations and
that, in the event of a failure to pay principal or interest on borrowings
thereunder when due (subject to any applicable grace period), the Company and
its subsidiaries may not pay any distributions on the Common Stock or the
Preferred Stock. If the Company is unable to obtain acceptable financing to
repay indebtedness at maturity, the Company may have to sell properties to repay
indebtedness or properties may be foreclosed upon, which could have an adverse
effect on the Company's results of operations and financial condition.
Dependence on Executive Officers
The Company is dependent on the efforts of Robert and Andrew Batinovich,
its President and Chief Executive Officer and its Executive Vice President,
Chief Financial Officer and Chief Operating Officer, respectively, and of its
other executive officers. The loss of the services of any of them could have an
adverse effect on the results of operations and financial condition of the
Company.
Board of Directors May Change Investment Policies
The descriptions in this Prospectus of the major policies and the various
types of investments to be made by the Company reflect only the current plans of
the Company's Board of Directors. The Company's Board of Directors may change
the investment policies of the Company without a vote of the stockholders. If
the Company changes its investment policies, the risks and potential rewards of
an investment in the Company may also change. In addition, the methods of
implementing the Company's investment policies may vary as new investment
techniques are developed. See "Business and Properties -- Investment Policies."
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Effect of Market Interest Rates on Price of Common Stock
One of the factors that may influence the market price of the shares of
Common Stock in public markets will be the annual yield on the price paid for
shares of Common Stock from distributions by the Company. An increase in market
interest rates may lead prospective purchasers of the Common Stock to seek a
higher annual yield from their investments. Such circumstances may adversely
affect the market price of the Common Stock.
Shares Available for Future Sale
No prediction can be made as to the effect, if any, that future sales of
shares of Common Stock or future conversions or exercises of securities into or
for shares of Common Stock, or the availability of such securities for future
sales, including shares of Common Stock issuable upon exchange of Operating
Partnership units, will have on the market price of the Common Stock prevailing
from time to time. Sales of substantial amounts of Common Stock, or the
perception that such sales could occur, may adversely affect the prevailing
market price for the Common Stock.
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The response to this item is submitted as a separate section of this Form 10-K.
See Item 14.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by Item 10 is incorporated by reference from the
Company's definitive proxy statement for its annual stockholders' meeting to be
held on May 15, 1997.
ITEM 11. EXECUTIVE COMPENSATION
The information required by Item 11 is incorporated by reference from the
Company's definitive proxy statement for its annual stockholders' meeting to be
held on May 15, 1997.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by Item 12 is incorporated by reference from the
Company's definitive proxy statement for its annual stockholders' meeting to be
held on May 15, 1997.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by Item 13 is incorporated by reference from the
Company's definitive proxy statement for its annual stockholders meeting to be
held on May 15, 1997.
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PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K
<TABLE>
<CAPTION>
Page No.
<S> <C>
(a) (1) Financial Statements
Report of Independent Public Accountants 38
Glenborough Realty Trust Incorporated Consolidated Balance Sheets 39
Glenborough Realty Trust Incorporated and GRT Predecessor
Entities Consolidated and Combined Statements of Operations 40
Glenborough Realty Trust Incorporated and GRT Predecessor 41
Entities Statements of Equity
Glenborough Realty Trust Incorporated and GRT Predecessor
Entities Consolidated and Combined Statements of Cash Flows 42, 43
Notes to Financial Statements 44
(2) Financial Statement Schedules
Schedule III - Real Estate and Accumulated Depreciation 59
Schedule IV - Mortgage Loans Receivable, Secured by Real Estate 63
Exhibits to Financial Statements
Glenborough Hotel Group, Consolidated Financial Statements as of
December 31, 1996 67
Atlantic Pacific Assurance Company Limited, Financial Statements
as of December 31, 1996 and 1995 75
Glenborough Inland Realty Corporation, Financial Statements as of
December 31, 1996 81
(3) The Exhibit Index attached hereto is hereby incorporated by reference
to this Item 89
</TABLE>
(b) Reports on Form 8-K (incorporated herein by reference)
On October 28, 1996, the Company filed a report on Form 8-K to make
available additional ownership and operation information
concerning the Company and the properties owned or managed by it
as of September 30, 1996, in the form of a Supplemental
Information package.
On November 1, 1996, the Company filed a report on Form 8-K to
document the acquisition of the TRP Properties.
On December 4, 1996, the Company filed a report on Form 8-K to
document the acquisition of the Carlsberg Properties.
On December 30, 1996, the Company filed reports on Form 8-K/A to
document the acquisition of the TRP Properties and the acquisition
of the Carlsberg Properties.
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On February 5, 1997, the Company filed a report on Form 8-K to make
available additional ownership and operation information
concerning the Company and the properties owned or managed by it
as of December 31, 1996, in the form of a Supplemental Information
package.
On February 24, 1997, the Company filed reports on Form 8-K/A,
Amendment No. 2, to document the acquisitions of the UCT, TRP and
Carlsberg Properties.
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REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders of
GLENBOROUGH REALTY TRUST INCORPORATED:
We have audited the accompanying consolidated balance sheets of GLENBOROUGH
REALTY TRUST INCORPORATED, as of December 31, 1996 and 1995, the related
consolidated statements of operations, stockholders' equity and cash flows for
the year ended December 31, 1996, and the combined statements of operations,
stockholders' equity and cash flows of the GRT Predecessor Entities for each of
the two years in the period ended December 31, 1995. These consolidated and
combined financial statements and the schedules referred to below are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated and combined financial statements and schedules
based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of GLENBOROUGH REALTY
TRUST INCORPORATED, as of December 31, 1996 and 1995, the consolidated results
of its operations and its cash flows for the year ended December 31, 1996, and
the combined results of operations and cash flows of the GRT Predecessor
Entities for each of the two years in the period ended December 31, 1995, in
conformity with generally accepted accounting principles.
Our audits were made for the purpose of forming an opinion on the basic
consolidated and combined financial statements taken as a whole. The
accompanying schedules listed in the index to financial statements and schedules
are presented for the purpose of complying with the Securities and Exchange
Commission's rules and are not a required part of the basic consolidated and
combined financial statements. These schedules have been subjected to the
auditing procedures applied in our audits of the basic consolidated and combined
financial statements and, in our opinion, are fairly stated in all material
respects in relation to the basic consolidated and combined financial statement
taken as a whole.
ARTHUR ANDERSEN LLP
San Francisco, California
January 27, 1997
38
<PAGE> 39
GLENBOROUGH REALTY TRUST INCORPORATED
CONSOLIDATED BALANCE SHEETS
December 31, 1996 and 1995
(in thousands, except share amounts)
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
ASSETS
Rental property, net of accumulated depreciation of
$28,784 and $24,877 in 1996 and 1995, respectively $ 161,945 $ 77,574
Investments in Associated Companies and Glenborough
Partners 7,350 5,763
Investment in management contract 322 484
Mortgage loans receivable, net of reserve for loss of
$863 in 1996 and 1995 9,905 7,465
Cash and cash equivalents 1,355 4,587
Prepaid consolidation costs -- 6,082
Prepaid litigation costs -- 1,155
Other assets 4,643 2,630
--------- --------
TOTAL ASSETS $ 185,520 $105,740
========= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Mortgage loans $ 54,584 $ 23,685
Secured bank lines 21,307 10,000
Investor notes payable -- 2,483
Other liabilities 3,198 5,982
--------- --------
Total liabilities 79,089 42,150
--------- --------
Minority interest 8,831 7,962
Stockholders' Equity:
Common Stock, 9,661,553 and 5,753,709 shares
issued and outstanding at December 31, 1996
and 1995 respectively 10 6
Additional paid-in capital 105,952 55,622
Deferred compensation (399) --
Retained earnings (deficit) (7,963) --
--------- --------
Total stockholders' equity 97,600 55,628
--------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 185,520 $105,740
========= ========
</TABLE>
See accompanying notes to consolidated financial statements.
39
<PAGE> 40
GLENBOROUGH REALTY TRUST INCORPORATED
AND GRT PREDECESSOR ENTITIES
CONSOLIDATED AND COMBINED STATEMENTS OF OPERATIONS
For the years ended December 31, 1996, 1995 and 1994
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Historical Historical
Actual Combined Combined
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
REVENUE
Rental revenue $ 17,943 $ 15,454 $ 13,797
Fees and reimbursements, including $311,
$2,995 and $2,858 from affiliates in 1996,
1995 and 1994, respectively 311 16,019 13,327
Interest and other income 1,080 2,698 3,557
Equity in earnings of Associated Companies 1,598 -- --
Gain on sale of rental properties 321 -- --
----------- -------- --------
Total revenue 21,253 34,171 30,681
----------- -------- --------
EXPENSES
Property operating expenses 5,266 8,576 6,782
General and administrative 1,393 15,947 13,454
Depreciation and amortization 4,575 4,762 4,041
Interest expense 3,913 2,129 1,140
Provision for loss on investments in real estate,
real estate partnerships and mortgage loans
receivable -- 1,876 3,508
Consolidation costs 6,082 -- --
Litigation costs 1,155 -- --
----------- -------- --------
Total expenses 22,384 33,290 28,925
----------- -------- --------
Income (loss) from operations before provision for
income taxes, minority interest and
extraordinary item (1,131) 881 1,756
Provision for income taxes -- (357) (176)
Minority interest (292) -- --
----------- -------- --------
Net income (loss) before extraordinary item (1,423) 524 1,580
Extraordinary item:
Loss on debt refinancing (186) -- --
----------- -------- --------
Net income (loss) $ (1,609) $ 524 $ 1,580
=========== ======== ========
Per share:
Net loss before extraordinary item $ (0.21)
Extraordinary item (0.03)
-----------
Net loss $ (0.24)
===========
Weighted average shares outstanding 6,632,707
===========
</TABLE>
See accompanying notes to consolidated financial statements.
40
<PAGE> 41
GLENBOROUGH REALTY TRUST INCORPORATED
AND GRT PREDECESSOR ENTITIES
STATEMENTS OF EQUITY
For the Years Ended December 31, 1996, 1995 and 1994
(in thousands)
<TABLE>
<CAPTION>
GRT Predecessor Entities Combined
------------------------------------------------------------------------------
Additional Receivable Retained
General Limited Common Paid-in from Earnings
Partner Partners Stock Capital Stockholder (Deficit) Total
------- -------- ----- ------- ----------- --------- -----
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT
DECEMBER 31, 1993 $(1,761) $ 87,897 $ 2 $ 6,276 $(7,312) $ 739 $ 85,841
Contributions 55 -- 3 337 -- -- 395
Distributions (37) (3,770) -- -- -- (2,000) (5,807)
Advances to
Stockholder, net -- -- -- -- (1,451) -- (1,451)
Net income 13 1,210 -- -- -- 357 1,580
------------------------------------------------------------------------------
BALANCE AT
DECEMBER 31, 1994 (1,730) 85,337 5 6,613 (8,763) (904) 80,558
------------------------------------------------------------------------------
Distributions (117) (10,507) -- -- -- -- (10,624)
Redemption of shares -- -- (2) (6,613) -- (6,533) (13,148)
Repayment of
Stockholder advances, net -- -- -- -- 8,763 -- 8,763
Net income (loss) 17 1,751 -- -- -- (1,244) 524
Issuance of investor
notes in exchange
for units of limited
partnership interest -- (2,483) -- -- -- -- (2,483)
Equity in
consolidation
attributable to
minority interest -- (7,962) -- -- -- -- (7,962)
Consolidation and
issuance of shares 1,830 (66,136) (3) -- -- 8,681 (55,628)
------------------------------------------------------------------------------
BALANCE AT
DECEMBER 31, 1995 -- -- -- -- -- -- --
------------------------------------------------------------------------------
Issuance of common stock to
directors and officers -- -- -- -- -- -- --
Issuance of common stock ,
net of offering costs of
$ 4,046 -- -- -- -- -- -- --
Distributions ($0.90 per share
paid in 1996) -- -- -- -- -- -- --
Net loss -- -- -- -- -- -- --
------------------------------------------------------------------------------
BALANCE AT
DECEMBER 31, 1996 $ -- $ -- $ -- $ -- $ -- $ -- $ --
==============================================================================
</TABLE>
<TABLE>
<CAPTION>
Glenborough Realty Trust Incorporated
---------------------------------------------------------------------
Common Stock Additional Deferred Retained
------------------- Paid-in Compen- Earnings
Shares Par Value Capital sation (Deficit) Total
------ --------- ------- ------ --------- -----
<S> <C> <C> <C> <C> <C> <C>
BALANCE AT
DECEMBER 31, 1993 -- $ -- $ -- $-- $ -- $ --
Contributions -- -- -- -- -- --
Distributions -- -- -- -- -- --
Advances to
Stockholder, net -- -- -- -- -- --
Net income -- -- -- -- -- --
---------------------------------------------------------------------
BALANCE AT
DECEMBER 31, 1994 -- -- -- -- -- --
---------------------------------------------------------------------
Distributions -- -- -- -- -- --
Redemption of shares -- -- -- -- -- --
Repayment of
Stockholder advances, net -- -- -- -- -- --
Net income (loss) -- -- -- -- -- --
Issuance of investor
notes in exchange
for units of limited
partnership interest -- -- -- -- -- --
Equity in
consolidation
attributable to
minority interest -- -- -- -- -- --
Consolidation and
issuance of shares 5,754 6 55,622 -- -- 55,628
---------------------------------------------------------------------
BALANCE AT
DECEMBER 31, 1995 5,754 6 55,622 -- -- 55,628
---------------------------------------------------------------------
Issuance of common stock to
directors and officers 35 -- 525 (399) -- 126
Issuance of common stock ,
net of offering costs of
3,873 4 49,805 -- -- 49,809
Distributions ($0.90 per share
paid in 1996) -- -- -- -- (6,354) (6,354)
Net loss -- -- -- -- (1,609) (1,609)
---------------------------------------------------------------------
BALANCE AT
DECEMBER 31, 1996 9,662 $ 10 $105,952 $(399) $ (7,963) $ 97,600
=====================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
41
<PAGE> 42
GLENBOROUGH REALTY TRUST INCORPORATED
AND GRT PREDECESSOR ENTITIES
CONSOLIDATED AND COMBINED STATEMENTS OF CASH FLOWS
For the years ended December 31, 1996, 1995 and 1994
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Glenborough GRT GRT
Realty Trust Predecessor Predecessor
Incorporated Entities Entities
Consolidated Combined Combined
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (1,609) $ 524 $ 1,580
Adjustments to reconcile net
income (loss) to net cash provided
by (used for) operating activities:
Depreciation and amortization 4,575 4,762 4,041
Amortization of loan fees, included
in interest expense 193 -- --
Provision for loss on investments
in real estate, real estate partnerships
and mortgage loans receivable -- 1,876 3,508
Gain on sale of rental property (321) -- --
Minority interest in income
from operations 292 -- --
Equity in earnings of
Associated Companies (1,598) -- --
Loss on debt refinancing 186 -- --
Consolidation costs 6,082 -- --
Litigation costs 1,155 -- --
Changes in certain assets
and liabilities, net (4,817) (17,770) 13,297
-------- -------- --------
Net cash provided by (used for)
operating activities 4,138 (10,608) 22,426
-------- -------- --------
Cash flows from investing activities:
Proceeds from sale of rental property 2,882 -- 277
Additions to rental property (62,286) (3,925) (2,210)
Principal receipts on mortgage loans
receivable 254 12,581 1,328
Increase in mortgage loans receivable (2,694) -- --
Purchase of minority interest -- -- (1,342)
Contributions to Associated Companies (1,890) -- --
Distributions from Associated Companies 1,901 -- --
-------- -------- --------
Net cash provided by (used for)
investing activities (61,833) 8,656 (1,947)
-------- -------- --------
</TABLE>
(continued)
See accompanying notes to consolidated financial statements.
42
<PAGE> 43
GLENBOROUGH REALTY TRUST INCORPORATED
AND GRT PREDECESSOR ENTITIES
CONSOLIDATED AND COMBINED STATEMENTS OF CASH FLOWS - CONTINUED
For the years ended December 31, 1996, 1995 and 1994
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Glenborough GRT GRT
Realty Trust Predecessor Predecessor
Incorporated Entities Entities
Consolidated Combined Combined
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Cash flows from financing activities:
Proceeds from borrowings $ 52,599 $ 8,910 $ 6,165
Repayment of borrowings (35,593) (14,050) (2,047)
Payment of investor notes (2,483) -- --
Distributions to minority interest holders (526) -- --
Advances to/repayments from Stockholder, net -- 8,763 (1,451)
Distributions (6,354) (10,624) (5,807)
Redemption of shares -- (10,389) --
Proceeds from issuance of stock, net of
offering costs 46,820 -- 395
-------- -------- --------
Net cash provided by (used for)
financing activities 54,463 (17,390) (2,745)
-------- -------- --------
Net increase (decrease) in cash and cash equivalents (3,232) (19,342) 17,734
Cash and cash equivalents at beginning of year 4,587 23,929 6,195
-------- -------- --------
Cash and cash equivalents at end of year $ 1,355 $ 4,587 $ 23,929
-------- -------- --------
Supplemental disclosure of cash flow information:
Cash paid for interest $ 3,270 $ 1,951 $ 1,119
======== ======== ========
Supplemental Disclosure of Non-Cash
Investing and Financing activities:
Acquisition of real estate through assumption of
first trust deed notes payable $ 25,200 $ -- $ --
======== ======== ========
Acquisition of real estate through issuance of
shares of common stock and Operating
Partnership units $ 3,749 $ -- $ --
======== ======== ========
Conversion of shares of common stock into
investor notes payable $ -- $ 2,483 $ --
======== ======== ========
Conversion of equity to minority interest $ $ 7,962 $ --
======== ======== ========
Consolidation and issuance of shares of common
stock in exchange for limited partnership units
and common stock in GRT Predecessor Entities $ -- $ 55,628 $ --
======== ======== ========
Refinancing of debt of GRT Predecessor entities
by Glenborough Realty Trust Incorporated $ -- $ 28,200 $ --
======== ======== ========
Acquisition of real estate through foreclosure and
assumption of first trust deed note payable $ -- $ 3,908 $ --
======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
43
<PAGE> 44
GLENBOROUGH REALTY TRUST INCORPORATED
AND GRT PREDECESSOR ENTITIES
Notes to Consolidated Financial Statements
December 31, 1996 and 1995
NOTE 1. ORGANIZATION
Glenborough Realty Trust Incorporated (the "Company") was organized in the State
of Maryland on August 26, 1994. It is the intent of the Company to qualify as a
real estate investment trust ("REIT") under the Internal Revenue Code of 1986,
as amended (the "Code"). The Company completed a Consolidation with certain
public California limited partnerships and other entities (the "Consolidation")
engaged in real estate activities (the "GRT Predecessor Entities") through an
exchange of assets of the GRT Predecessor Entities for 5,753,709 shares of
Common Stock of the Company. The Consolidation occurred on December 31, 1995,
and the Company commenced operations on January 1, 1996.
To maintain the Company's qualification as a REIT, no more than 50% in value of
the outstanding shares of the Company may be owned, directly or indirectly, by
five or fewer individuals (defined to include certain entities), applying
certain constructive ownership rules. To help ensure that the Company will not
fail this test, the Company's Charter provides for certain restrictions on the
transfer of the Common Stock to prevent further concentration of stock
ownership.
The Company, through several subsidiaries, is engaged primarily in the
ownership, operation, management, leasing, acquisition, expansion and
development of various income-producing properties. The Company's major
consolidated subsidiary, in which it holds a 1% general partner interest and a
90.79% limited partner interest, is Glenborough Properties, L.P. (the "Operating
Partnership"). The Operating Partnership, directly and through various
subsidiaries in which it and the Company own 100% of the ownership interests,
controls a total of 54 real estate projects and 3 notes receivable.
The Company also holds 100% of the non-voting preferred stock of the following
three Associated Companies (the "Associated Companies"):
- - Glenborough Corporation (formerly known as Glenborough Realty Corporation)
("GC") is the general partner of nine partnerships and provides asset and
property management services for these nine partnerships and one
partnership for which an affiliate serves as general partner (the
"Controlled Partnerships"). It also provides property management services
for a limited portfolio of property owned by unaffiliated third parties.
- - Glenborough Inland Realty Corporation ("GIRC") provides partnership
administration, asset management, property management and development
services under a long term contract to an additional group of unaffiliated
partnerships which include seven public partnerships.
- - Glenborough Hotel Group ("GHG") leases the four Country Suites By Carlson
hotels owned by the Company and operates them for its own account. It also
operates three Country Suites By Carlson hotels owned by the Controlled
Partnerships, and two resort condominium hotels.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The accompanying financial statements present the consolidated financial
position of the Company as of December 31, 1996 and 1995, the consolidated
results of operations and cash flows of the Company for the year ended December
31, 1996, and the combined results of operations and cash flows of the GRT
Predecessor Entities for the years ended December 31, 1995 and 1994, as the
Consolidation transaction discussed in Note 1 above was not effective until
December 31, 1995. All intercompany transactions, receivables and payables have
been eliminated in consolidation and combination.
RECLASSIFICATION
Certain 1995 balances have been reclassified to conform with the current year
presentation.
44
<PAGE> 45
GLENBOROUGH REALTY TRUST INCORPORATED
AND GRT PREDECESSOR ENTITIES
Notes to Consolidated Financial Statements
December 31, 1996 and 1995
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 results of operations during the reporting period. Actual results could
differ from those estimates.
NEW ACCOUNTING PRONOUNCEMENTS
In March 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 121 (SFAS 121), "Accounting for Impairment of
Long-Lived Assets and Long-Lived Assets to be Disposed Of." The Company adopted
SFAS 121 in the fourth quarter of 1995. SFAS 121 requires that an evaluation of
an individual property for possible impairment must be performed whenever events
or changes in circumstances indicate that an impairment may have occurred. There
was no impact from the initial adoption of SFAS 121.
In 1996, the Company adopted the disclosure requirements of SFAS No. 123,
"Accounting for Stock Based Compensation." SFAS No. 123 calls for a new method
of recognizing the cost of compensating employees with stock options and similar
instruments. At its option, the Company has elected not to adopt this method of
accounting, but rather has provided additional required disclosures in Note 13
to the consolidated financial statements which indicate the impact such
accounting would have on its reported results of operations if SFAS No. 123 had
been fully implemented by the Company.
RENTAL PROPERTY
Rental properties are stated at cost unless circumstances indicate that cost
cannot be recovered, in which case, the carrying value of the property is
reduced to estimated fair value. Estimated fair value: (i) is based upon the
Company's plans for the continued operation of each property; (ii) is computed
using estimated sales price, as determined by prevailing market values for
comparable properties and/or the use of capitalization rates multiplied by
annualized rental income based upon the age, construction and use of the
building, and (iii) does not purport, for a specific property, to represent the
current sales price that the Company could obtain from third parties for such
property. The fulfillment of the Company's plans related to each of its
properties is dependent upon, among other things, the presence of economic
conditions which will enable the Company to continue to hold and operate the
properties prior to their eventual sale. Due to uncertainties inherent in the
valuation process and in the economy, it is reasonably possible that the actual
results of operating and disposing of the Company's properties could be
materially different than current expectations.
Depreciation is provided using the straight line method over the useful lives of
the respective assets.
The useful lives are as follow:
Buildings and improvements 10 to 40 years
Tenant Improvements Term of the related lease
Furniture and Equipment 5 to 7 years
INVESTMENTS IN ASSOCIATED COMPANIES
The Company's investments in the Associated Companies are accounted for using
the equity method, as discussed further in Note 4.
INVESTMENTS IN MANAGEMENT CONTRACTS
Investments in management contracts are recorded at cost and are amortized on a
straight-line basis over the term of the contracts.
MORTGAGE LOANS RECEIVABLE
The Company monitors the recoverability of its loans and notes receivable
through ongoing contact with the borrowers to ensure timely receipt of interest
and principal payments, and where appropriate, obtains financial
45
<PAGE> 46
GLENBOROUGH REALTY TRUST INCORPORATED
AND GRT PREDECESSOR ENTITIES
Notes to Consolidated Financial Statements
December 31, 1996 and 1995
information concerning the operation of the properties. Interest on mortgage
loans is recognized as revenue as it accrues during the period the loan is
outstanding. Mortgage loans receivable will be evaluated for impairment if it
becomes evident that the borrower is unable to meet its debt service obligations
in a timely manner and cannot satisfy its payments using sources other than the
operations of the property securing the loan. If it is concluded that such
circumstances exist, then the loan will be considered to be impaired and its
recorded amount will be reduced to the fair value of the collateral securing it.
Interest income will also cease to accrue under such circumstances. Due to
uncertainties inherent in the valuation process, it is reasonably possible that
the amount ultimately realized from the Company's collection on these
receivables will be different than the recorded amounts.
CASH EQUIVALENTS
The Company considers short-term investments (including certificates of deposit)
with a maturity of three months or less at the time of investment to be cash
equivalents.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107 requires disclosure about
fair value for all financial instruments. Based on the borrowing rates currently
available to the Company, the carrying amount of debt approximates fair value.
Cash and cash equivalents consist of demand deposits and certificates of deposit
with financial institutions. The carrying amount of cash and cash equivalents as
well as the mortgage notes receivable described above, approximates fair value.
DEFERRED FINANCING AND OTHER FEES
Fees paid in connection with the financing and leasing of the Company's
properties are amortized over the term of the related notes payable or leases
and are included in other assets.
MINORITY INTEREST
Minority interest represents the 8.21% limited partner interests in the
Operating Partnership not held by the Company.
REVENUES
All leases are classified as operating leases. Rental revenue is recognized on a
straight-line basis over the terms of the leases.
For the years ended December 31, 1995 and 1994, rental revenue from the two
properties leased to Navistar International represented approximately 10% of the
Company's total rental revenue. For the year ended December 31, 1996, no tenants
represented 10% or more of rental revenue of the Company.
Fees and reimbursement revenue consists of property management fees, overhead
administration fees, and transaction fees from the acquisition, disposition,
refinance, leasing and construction supervision of real estate.
Revenues are recognized only after the Company is contractually entitled to
receive payment, after the services for which the fee is received have been
provided, and after the ability and timing of payments are reasonably assured
and predictable.
INCOME TAXES
The Company will make an election to be taxed as a REIT under Sections 856
through 860 of the Code. As a REIT, the Company generally will not be subject to
Federal income tax to the extent that it distributes at least 95% of its REIT
taxable income to its shareholders. REITs are subject to a number of
organizational and operational requirements. 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 tax 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.
46
<PAGE> 47
GLENBOROUGH REALTY TRUST INCORPORATED
AND GRT PREDECESSOR ENTITIES
Notes to Consolidated Financial Statements
December 31, 1996 and 1995
Certain of the Company's predecessors were subject to income taxes, the
provisions for which have been included in the accompanying combined results of
operations of the GRT Predecessor Entities.
NOTE 3. RENTAL PROPERTY
The cost and accumulated depreciation of real estate investments as of December
31, 1996 and 1995 are as follows (in thousands):
<TABLE>
<CAPTION>
Buildings and Total Accumulated Net
1996: Land Improvements Cost Depreciation Recorded Value
- ----- ---- ------------- ----- ------------ --------------
<S> <C> <C> <C> <C> <C>
Retail properties $ 16,578 $ 30,681 $ 47,259 $ (6,164) $ 41,095
Industrial properties 6,619 32,796 39,415 (6,157) 33,258
Office properties 9,721 39,582 49,303 (4,224) 45,079
Hotel properties 5,586 26,074 31,660 (11,729) 19,931
Multifamily properties 5,652 17,440 23,092 (510) 22,582
---------- --------- ---------- ----------- -----------
Total $ 44,156 $ 146,573 $ 190,729 $ (28,784) $ 161,945
========== ========= ========== =========== ===========
1995:
- -----
Retail properties $ 13,036 $ 17,149 $ 30,185 $ (5,042) $ 25,143
Industrial properties 4,481 24,507 28,988 (5,665) 23,323
Office properties 1,653 9,097 10,750 (3,427) 7,323
Hotel properties 4,803 23,685 28,488 (10,619) 17,869
Multifamily property 1,857 2,183 4,040 (124) 3,916
---------- --------- ---------- ---------- -----------
Total $ 25,830 $ 76,621 $ 102,451 $ (24,877) $ 77,574
========== ========= ========== ========== ===========
</TABLE>
In June 1996, the Company sold the two self-storage facilities held in its
industrial portfolio. The sales price for these two facilities was $2,900. The
sales generated a gain of $321 and cash proceeds of $2,882. From these proceeds,
$790 was paid down on the Company's secured bank line. The sale was an all-cash
sale and the Company has no continuing obligations or involvement with these
properties. Accordingly, the Company recognized the sale of the two self-storage
facilities under the full accrual method of accounting.
In July 1996, the Company acquired a 23-story, 272,443 square foot office
building (the "UCT Property"), in St. Louis, Missouri. The total acquisition
cost, including capitalized costs, was approximately $18,844, which consisted of
$350 in the form of 23,333 partnership units in the Operating Partnership (based
on a per unit value of $15.00), and the balance paid in cash. The cash portion
was financed through advances under the Line of Credit.
In August 1996, the Company acquired a 64-room hotel property (the " the San
Antonio Hotel"), which is located in San Antonio, Texas. The total acquisition
cost, including capitalized costs, was approximately $2,805, which was paid in
cash. The acquisition was financed with an advance on the Line of Credit.
In August 1996, the Company also expanded an existing shopping center in Tampa,
Florida through a purchase-leaseback transaction with the anchor tenant. The
Company's initial acquisition cost, including capitalized costs, was
approximately $1,617, all of which was paid in cash which was financed through
advances under the Line of Credit, and in addition the Company committed an
additional $1,800 for future expansion and tenant improvements, which the
Company expects will also be paid in cash. The cash portion was financed through
advances under the Line of Credit.
In September 1996, the Company acquired a two-story, 40,595 square foot office
building (the "the Bond Street Property"), in Farmington Hills, Michigan. The
total acquisition cost, including capitalized costs, was approximately $3,185,
which consisted of $391 in the form of 26,067 partnership units in the Operating
Partnership (based on a per unit value of $15.00), and the balance paid in cash.
The cash portion was financed through advances under the Line of Credit.
47
<PAGE> 48
GLENBOROUGH REALTY TRUST INCORPORATED
AND GRT PREDECESSOR ENTITIES
Notes to Consolidated Financial Statements
December 31, 1996 and 1995
In October 1996, the Company acquired a portfolio of 12 properties, aggregating
approximately 784,000 square feet and 538 multi-family units, together with
associated management interests (the "TRP Properties"). The total acquisition
cost, including capitalized costs, was approximately $43,798, which consisted of
(i) approximately $16,300 of mortgage debt assumed, (ii) approximately $760 in
the form of 52,387 partnership units in the Operating Partnership (based on a
per unit value of $14.50), (iii) approximately $2,600 in the form of 182,000
shares of Common Stock of the Company (based on a per share value of $14.50) and
(iv) the balance in cash. The cash portion was financed through advances under
the Line of Credit. The TRP Properties consist of three office, six industrial,
one retail and two multi-family Properties, located in six states..
In November 1996, the Company acquired from various partnerships and their
general partner, a Southern California syndicator, a portfolio of six Properties
(including one property on which the Company made a mortgage loan which included
a purchase option), aggregating approximately 342,000 square feet, together with
associated management interests (the "the Carlsberg Properties"). The total
acquisition cost including the mortgage loan and capitalized costs, was
approximately $23,152, which consisted of (i) approximately $8,900 of mortgage
debt assumed, (ii) approximately $350 in the form of 24,844 shares of Common
Stock of the Company (based on a per share value of $14.09) and (iii) the
balance in cash. The cash portion was financed through advances under the Line
of Credit. The Carlsberg Properties consist of five office Properties and one
retail Property, located in two states. Concurrently with the Company's
acquisition of the Carlsberg Properties, one of the Associated Companies assumed
management of a portfolio of 13 additional properties with an aggregate of one
million square feet under a venture with an affiliate of the seller.
The Company leases its commercial and industrial property under non-cancelable
operating lease agreements. Future minimum rents to be received as of December
31, 1996 are as follows (in thousands):
<TABLE>
<CAPTION>
Year Ending
December 31,
------------
<S> <C>
1997 $ 17,900
1998 15,221
1999 12,632
2000 10,071
2001 8,645
Thereafter 41,014
----------
$ 105,483
</TABLE>
NOTE 4. INVESTMENTS IN ASSOCIATED COMPANIES AND GLENBOROUGH PARTNERS
The Company's investments in the Associated Companies are accounted for using
the equity method as the Company has significant ownership interests through its
100% preferred stock ownership but does not own any voting interests. The
Company records earnings on its investments in the Associated Companies equal to
its cash flow preference, to the extent of earnings, plus its pro rata share of
remaining earnings, based on cash flow allocation percentages. Distributions
received from the Associated Companies are recorded as a reduction of the
Company's investments.
The Company's investment in Glenborough Partners ("GP") is accounted for using
the cost method as the Company holds only a 3.9% limited partnership interest.
48
<PAGE> 49
GLENBOROUGH REALTY TRUST INCORPORATED
AND GRT PREDECESSOR ENTITIES
Notes to Consolidated Financial Statements
December 31, 1996 and 1995
As of December 31, 1996 and 1995, the Company had the following investments in
the Associated Companies and GP (in thousands):
<TABLE>
<CAPTION>
GC GIRC GHG GP Total
-- ---- --- -- -----
<S> <C> <C> <C> <C> <C>
Investment at December 31, 1995 $ (109) $ 3,919 $ 1,368 $ 585 $ 5,763
Cash contributions 1,595 95 200 -- 1,890
Distributions (601) (1,209) (91) -- (1,901)
Equity in earnings 501 1,070 27 -- 1,598
--------- --------- --------- --------- ---------
Investment at December 31, 1996 $ 1,386 $ 3,875 $ 1,504 $ 585 $ 7,350
========= ========= ========= ========= =========
</TABLE>
Summary condensed balance sheet information as of December 31, 1996, and the
condensed statements of operations for the year then ended are as follows (in
thousands):
Balance Sheets as of December 31, 1996
<TABLE>
<CAPTION>
GC GIRC GHG
-- ---- ---
<S> <C> <C> <C>
Investments in management contracts, net $ 1,018 $ 5,738 $ 430
Other assets 1,426 754 1,825
--------- -------- ---------
Total assets $ 2,444 $ 6,492 $ 2,255
========= ======== =========
Notes payable $ -- $ 2,383 $ 61
Other liabilities 1,044 222 692
--------- -------- ---------
Total liabilities 1,044 2,605 753
Stockholders' equity 1,400 3,887 1,502
--------- -------- ---------
Total liabilities and Stockholders' equity $ 2,444 $ 6,492 $ 2,255
========= ======== =========
</TABLE>
Statements of Operations
For the Year Ended December 31, 1996
<TABLE>
<CAPTION>
GC GIRC GHG
-- ---- ---
<S> <C> <C> <C>
Revenue $ 6,852 $ 5,856 $ 9,952
Expenses 6,325 4,731 9,925
--------- -------- ---------
Net Income $ 527 $ 1,125 $ 27
========= ======== =========
</TABLE>
NOTE 5. INVESTMENT IN MANAGEMENT CONTRACT
Investment in management contract included in the Company's balance sheet as of
December 31, 1996 and 1995, represents the unamortized portion of the asset
management agreement for the Glenborough Institutional Fund I partnership. The
contract is being amortized on a straight-line basis over eleven years.
NOTE 6. MORTGAGE LOANS RECEIVABLE
The Company held a first mortgage loan with a principal balance of $7,563,000
and a carrying value of $6,700,000 at December 31, 1996, secured by an office
and research complex in Eatontown, New Jersey. The loan had an original maturity
date of November 1, 1996 with interest only payable monthly at the fixed rate of
eight percent
49
<PAGE> 50
GLENBOROUGH REALTY TRUST INCORPORATED
AND GRT PREDECESSOR ENTITIES
Notes to Consolidated Financial Statements
December 31, 1996 and 1995
(8%) per annum. The borrower was additionally obligated to pay cash flow equal
to 75% of all annual net cash flow of the property until the Company received
the equivalent of ten percent (10%) interest for the year in issue, and
thereafter fifty percent (50%) of all additional net cash flow of the property
(if any) for the year in issue. In 1995, due to the uncertainty surrounding the
borrower's ability to payoff the note receivable upon its November 1996
maturity, the Company recorded a $863,000 loss provision on this mortgage loan
receivable to reduce its carrying value to the estimated fair value of the
underlying property. The terms of the note were renegotiated in December 1996
with the maturity date extended to February 1, 1997. The interest rate continued
at 8% per annum. The borrower had the right to payoff the loan at a discount
between January 10 and January 31, 1997. The discounted payoff was i) $6,863,000
in cash and ii) a note for $500,000 payable over a term of twelve years at six
percent (6%) interest amortized over twenty-five years. On January 28, 1997, the
borrower paid off the note at the above discounted terms, resulting in a gain to
the Company of $658,000 of which $158,000 will be recognized in the Company's
1997 Statement of Operations and the remaining gain associated with the $500,000
note receivable will be recorded as income when cash is received.
At December 31, 1996, the Company held a first mortgage loan in the amount of
$511,000 secured by an industrial property in Los Angeles, California. The terms
of the note include interest accruing at eight percent (8%) per annum for the
first twenty-four months (ending June 1996) and at nine percent (9%) per annum
for the next sixty months until the note matures in June 2001. Monthly payments
of principal and interest, computed based on a thirty year amortization
schedule, commenced January 1995 and continue until maturity.
On November 19, 1996, the Operating Partnership entered into a Loan Agreement
and Option Agreement with Carlsberg Properties, LTD. ("the Borrower"). The loan
amount is for $3,600,000, of which $2,694,000 was initially disbursed to the
Borrower and $906,000 was held by the Operating Partnership as leasing and
interest reserves. At December 31, 1996, the loan balance was $2,694,000. The
loan is secured by a 48,000 square foot medical building in Phoenix, Arizona
(the "Secured Property"), and matures on November 19, 1999, with interest only
payable monthly at the fixed rate of eleven percent (11%) per annum calculated
on the full amount of the loan. The Option Agreement provides the Operating
Partnership the option to purchase the Secured Property on either the second or
third anniversary of the closing date of November 19, 1996, for the greater of
i) the then outstanding loan balance plus $50,000 or ii) the value of the
Secured Property as defined in the Option Agreement.
Contractually due principal payments of the mortgage loans receivable are as
follows (in thousands):
<TABLE>
<CAPTION>
Year Ending
December 31,
------------
<S> <C>
1997 $ 7,567
1998 5
1999 2,699
2000 5
2001 492
Thereafter --
---------
Total 10,768
Loss Provision (863)
----------
Net carrying value $ 9,905
==========
</TABLE>
NOTE 7. SECURED LIABILITIES
The Company had the following mortgage loans, bank lines, and notes payable
outstanding as of December 31, 1996 and 1995 (in thousands):
50
<PAGE> 51
GLENBOROUGH REALTY TRUST INCORPORATED
AND GRT PREDECESSOR ENTITIES
Notes to Consolidated Financial Statements
December 31, 1996 and 1995
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Secured $50,000,000 line of credit with a bank with variable interest rates of
LIBOR plus 2.375% and prime rate plus 0.50% (8.00% and 8.75%, respectively at
December 31, 1996), monthly interest only payments and a maturity date of July
14, 1998, with an option to extend for 10 years. The line is secured by nineteen
properties and a mortgage note receivable with an aggregate net carrying value
of $67,118 at December 31, 1996. $ 21,307 $ --
Secured loan with a bank with variable interest rates of LIBOR plus 2.375% and
prime rate plus 0.50% (8.00% and 8.75%, respectively at December 31, 1996),
monthly interest only payments and a maturity date of July 14, 1998. The loan is
secured by ten properties with an aggregate net carrying value of $8,112 at
December 31, 1996. 6,120 --
Secured loan with an investment bank with a fixed interest rate of 7.57%,
monthly principal (based upon a 25 year amortization) and interest payments of
$149 and a maturity date of January 1, 2006. The loan is secured by nine
properties with an aggregate net carrying value of $39,298 and $39,082 at
December 31, 1996 and 1995, respectively. 19,744 20,000
Secured loans with various lenders, bearing interest at fixed rates between
7.75% and 9.25%, with monthly principal and interest payments ranging between
$13 and $62 and maturing at various dates through January 1, 2006. These loans
are secured by properties with an aggregate net carrying value of $30,441 and
$7,972 at December 31, 1996 and 1995, respectively. 17,581 3,685
Secured loans with various banks bearing interest at variable rates (ranging
between 7.87% and 8.18% at December 31, 1996), monthly principal and interest
payments ranging between $15 and $16 and maturing at various dates through
August 15, 2015. These loans are secured by properties with an aggregate net
carrying value of $6,975 at December 31, 1996. 3,807 --
Secured loan with an investment company with a fixed interest rate of 7.50%,
monthly principal and interest payments of $55 and a maturity date of March 1,
2021. The loan is secured by a Housing and Urban Development property with a net
carrying value of $9,491 at December 31, 1996. 7,332 --
Secured line of credit with a bank with a variable interest rate of LIBOR plus
2.365% (7.88% at December 31, 1995), monthly interest only payments and original
maturity dates of November 29, 1998 and December 29, 1998. The line was paid off
in July 1996. -- 10,000
--------- --------
Total $ 75,891 $ 33,685
========= ========
</TABLE>
Of the loans outstanding at December 31, 1995, the $10,000,000 line of credit
was paid off with proceeds from the new line of credit discussed above. A
$186,000 loss on debt refinancing resulted from the write-off of the
51
<PAGE> 52
unamortized loan fees related to the $10,000,000 line of credit and is reflected
as an extraordinary item on the accompanying 1996 Statement of Operations.
The required principal payments on the Company's debt for the next five years
and thereafter are as follows (in thousands):
<TABLE>
<CAPTION>
Year Ending
December 31,
------------
<S> <C>
1997 757
1998 35,640
1999 2,145
2000 2,850
2001 872
Thereafter 33,627
---------
Total $ 75,891
=========
</TABLE>
NOTE 8. INVESTOR NOTES PAYABLE
Included in the proxy to approve or disapprove the Consolidation, was the option
to choose notes in lieu of shares of Common Stock. Upon successful completion of
the Consolidation, notes in the amount of $2,483,000 were issued to the limited
partners whose votes indicated such election. The notes were unsecured
obligations of the Company, bearing a variable rate of interest payable
quarterly until their maturity date, November 1, 2002. In January 1996, the
Company paid the notes in full, along with accrued interest, thereon.
NOTE 9. PREPAID CONSOLIDATION COSTS
The prepaid consolidation costs included in the Company's December 31, 1995
consolidated balance sheet included accounting fees as well as the costs of
mailing and printing the Prospectus/Consent Solicitation Statement, any
supplements thereto or other documents related to the Consolidation, the costs
of the Information Agent, Investor brochure, telephone calls, broker-dealer fact
sheets, printing, postage, travel, meetings, legal and other fees related to the
solicitation of consents, as well as reimbursement of costs incurred by brokers
and banks in forwarding the Prospectus/Consent Solicitation Statement to
Investors. The entire balance of prepaid consolidation costs was expensed in the
accompanying 1996 Statement of Operations.
Prepaid litigation costs at December 31, 1995 included the legal fees incurred
in connection with defending two class action complaints filed by investors in
certain of the GRT Predecessor Entities as well as an accrual for the amount of
the settlement that the plaintiff's counsel in one case was requesting be
awarded by the court. The entire balance in prepaid litigation costs was
expensed in the accompanying 1996 Statement of Operations (see Note 14).
NOTE 10. RELATED PARTY TRANSACTIONS
Fee and reimbursement income earned by the Company and the GRT Predecessor
Entities from related partnerships totaled $311,000, $2,995,000 and $2,858,000
for the years ended December 31, 1996, 1995 and 1994, respectively, and
consisted of asset management fees for the year ended December 31, 1996 and
property management fees, asset management fees, reimbursements and related
expenses for the years ended December 31, 1995 and 1994.
NOTE 11. CAPITAL CONTRIBUTION FROM GRT PREDECESSOR ENTITY SHAREHOLDERS
During the year ended December 31, 1994, the two major shareholders of GC
contributed to GC cash of approximately $16 million, along with an obligation to
return $17 million of November 1995 one year Treasury Bills that had an
approximate market value of $16 million (included in other liabilities at
December 31, 1994) at the time of the contribution. This investment was viewed
as a hedge against the Company's exposure to rising interest
52
<PAGE> 53
GLENBOROUGH REALTY TRUST INCORPORATED
AND GRT PREDECESSOR ENTITIES
Notes to Consolidated Financial Statements
December 31, 1996 and 1995
rates because of its floating rate debt. This position was closed in February
1995 at a total loss of approximately $116,000.
NOTE 12. PROVISION FOR LOSS ON INVESTMENTS IN REAL ESTATE, REAL ESTATE
PARTNERSHIPS AND MORTGAGE LOANS RECEIVABLE
The loss provisions recorded during the years ended December 31 are as follows:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Reduction in the carrying value of the New
Jersey note receivable to the value of collateral $ -- $ 863 $ --
Loss on sale of real estate -- -- 2,360
Reduction in value of the GC investments in real
estate partnerships to estimated net realizable value -- 955 557
Loss on sale of investments -- -- 591
Other -- 58 --
------ ------- -----
$ -- $ 1,876 $ 3,508
====== ======= ======
</TABLE>
NOTE 13. STOCK COMPENSATION PLAN
In May 1996, the Company adopted an employee stock incentive plan (the "Plan")
to provide incentives to attract and retain high quality executive officers and
key employees. The Plan provides for options to purchase shares of the Company's
Common Stock ("Stock") and for the sale or bonus grant of Stock to eligible
individuals. The number of shares of Stock reserved for issuance under the Plan
equals ten percent of the outstanding shares of Stock as of each December 31st
for the ensuing twelve month period (199,567 as of December 31, 1996). The
Company accounts for the fair value of the options and bonus grants in
accordance with APB Opinion No. 25. As of December 31, 1996, 35,000 shares of
bonus grants have been issued under the Plan. The fair value of the shares
granted have been recorded as deferred compensation in the accompanying
financial statements and will be charged to earnings ratably over the respective
vesting periods which range from 2 to 5 years. As of December 31, 1996, 796,000
options to purchase shares of Stock have been granted. The exercise price of
each option granted is equal to the per-share fair market value of the Stock on
the date the option is granted. To date all options granted have been at the
fair market value of the shares on the grant date, and as such, no compensation
expense has been recognized as accounted for under APB Opinion No. 25.
The options vest over periods between 1 and 6 years, and have a maximum term of
10 years.
In October 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 123 "Accounting for Stock-based Compensation"
(FAS 123). As permitted by FAS 123, the Company will not change its method of
accounting for stock options but has provided the additional required
disclosures in the table below. The additional compensation expense that would
have been recorded if the Company had adopted FAS 123 is not material.
53
<PAGE> 54
GLENBOROUGH REALTY TRUST INCORPORATED
AND GRT PREDECESSOR ENTITIES
Notes to Consolidated Financial Statements
December 31, 1996 and 1995
A summary of the status of the Company's stock option plan as of December 31,
1996 and changes during the year then ended is presented below:
<TABLE>
<CAPTION>
Weighted Average
Shares Weighted Average Remaining
(000)'s Exercise Price Contractual Life
------- ---------------- -----------------
<S> <C> <C> <C>
Outstanding, beginning of year -- $ --
Granted 796 15
Forfeited -- --
-----
Outstanding, end of year 796 15 9.65 years
=====
Options exercisable at year end -- --
Weighted average fair value of
options granted during the year $ 0.02
</TABLE>
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option-pricing model with the following weighted-average
assumptions used for grants during 1996: expected distribution yield of 8.5%,
expected volatility of 5.0%, risk-free interest rate of 6.3% and expected lives
of 10, 7 and 5 years.
NOTE 14. COMMITMENTS AND CONTINGENCIES
Environmental Matters. The Company follows a policy of monitoring its properties
for the presence of hazardous or toxic substances. The Company is not aware of
any environmental liability with respect to the properties that would have a
material adverse effect on the Company's business, assets or results of
operations. There can be no assurance that such a material environmental
liability does not exist. The existence of any such material environmental
liability could have an adverse effect on the Company's results of operations
and cash flow.
General Uninsured Losses. The Company carries comprehensive liability, fire,
flood, extended coverage and rental loss insurance with policy specifications,
limits and deductibles customarily carried for similar properties. There are,
however, certain types of extraordinary losses which may be either uninsurable,
or not economically insurable. Further, certain of the properties are located in
areas that are subject to earthquake activity. Should a property sustain damage
as a result of an earthquake, the Company may incur losses due to insurance
deductibles, co-payments on insured losses or uninsured losses. Should an
uninsured loss occur, the Company could lose its investment in, and anticipated
profits and cash flows from, a property.
Litigation. Prior to the completion of the Consolidation, two lawsuits were
filed in 1995 contesting the fairness of the Consolidation, one in California
State court and one in federal court. The complaints in both actions alleged,
among other things, breaches by the defendants of fiduciary duties and
inadequate disclosures. The State court action was settled, and the settlement
was approved by the State court despite objections by certain members of the
class, who subsequently filed an appeal. Pursuant to the terms of the settlement
in the State court action, pending the appeal the Company has paid one-third of
the $855,000 settlement amount and the remaining two-thirds is being held in
escrow. In the federal action, the court in December of 1995 deferred all
further proceedings pending a ruling in the State court action. Following the
State court decision approving the settlement, the defendants filed a motion to
dismiss the federal court action. Given the inherent uncertainties of
litigation, there can be no assurance that the ultimate outcomes of these
actions will be favorable to the Company.
NOTE 15. PUBLIC STOCK OFFERING
In October 1996, the Company completed the October 1996 Offering of 3,666,000
shares of Common Stock. The 3,666,000 shares were sold at a per share price of
$13.875 for total proceeds of $47,814,000 (net of 6% underwriting fee of
$3,052,000). This additional capital was used to acquire the TRP Properties and
to repay $24,000,000 of the outstanding balance under the Company's Line of
credit with Wells Fargo which was then available to fund the
54
<PAGE> 55
acquisition of the Carlsberg Properties. In addition, approximately $1,100,000
in other costs were incurred in connection with the offering.
Following is a proforma statement of operations of the Company giving effect to
the 1996 offering and related acquisitions (including the acquisitions discussed
in Note 3) as if they had been completed on January 1, 1996:
<TABLE>
<S> <C>
REVENUES
Rental revenue $ 29,626
Equity in earnings of Associated Companies 1,544
Fees, interest and other income 1,738
-----------
Total Revenue 32,908
-----------
OPERATING EXPENSES
Operating expenses 9,462
General and administrative 1,551
Depreciation and amortization 5,637
Interest expense 6,417
Consolidation and litigation costs 7,237
-----------
Total Operating Expenses 30,304
-----------
Income from operations before minority interests
and extraordinary item 2,604
Minority Interests (584)
-----------
Net income before extraordinary item $ 2,020
===========
Net income, per share, before extraordinary item $ 0.21
===========
Weighted average common shares outstanding 9,661,553
</TABLE> ===========
NOTE 16. SUBSEQUENT EVENTS
In January 1997, the Company entered into a definitive agreement with two
limited partnerships organized by affiliates of CIGNA Corp. to acquire a
portfolio of six properties, aggregating approximately 616,000 square feet and
224 multi-family units (the "CIGNA Properties"). The total acquisition cost,
including capitalized costs, is expected to be approximately $45.5 million,
which will be paid entirely in cash from the proceeds of the Offering. The CIGNA
Properties consist of two office properties, two office/R&D properties, a
neighborhood shopping center and a multi-family property, located in four
states. These acquisitions are subject to a number of contingencies, including
approval of the acquisition by a majority in interest of the voting power of the
limited partners of each of the selling partnerships, satisfactory completion of
environmental and engineering due diligence and customary closing conditions.
Accordingly, there can be no assurance that any or all of these acquisitions
will be completed.
In February 1997, the Company entered into definitive agreements with various
partnerships and their general partner, a Southern California syndicator, to
acquire a portfolio of up to 11 properties, aggregating approximately 524,000
square feet, together with associated management interests (the "E&L
Properties"). The total acquisition cost, including capitalized costs, is
expected to be approximately $22.2 million, which will consist of (i)
approximately $9.5 million of mortgage debt assumed, (ii) approximately $7.8
million in the form of approximately 412,000 partnership units in the Operating
Partnership (based on an assumed per unit value of $19.00), (iii) approximately
$650,000 in the form of approximately 34,000 shares of Common Stock of the
Company (based on an assumed per share value of $19.00) to be issued in
connection with the acquisition of the management interests relating to the E&L
Properties, and (iv) the balance in cash. The cash portion of the acquisition
cost will be funded
55
<PAGE> 56
GLENBOROUGH REALTY TRUST INCORPORATED
AND GRT PREDECESSOR ENTITIES
Notes to Consolidated Financial Statements
December 31, 1996 and 1995
with proceeds of the Offering. The E&L Properties consist of one office and ten
industrial properties, all located in Southern California. These acquisitions
are subject to a number of contingencies, including the approval of the
acquisition by a majority of the voting power of the limited partners of each of
the selling partnerships, satisfactory completion of environmental and
engineering due diligence and customary closing conditions. Accordingly, there
can be no assurance that any or all of these acquisitions will be completed, and
it is possible that fewer than all of these acquisitions may be completed.
In February 1997, the Company acquired a 163-suite hotel Property (the
"Scottsdale Hotel"), which began operations in January 1996 and is located in
Scottsdale, Arizona. The total acquisition cost, including capitalized costs,
was approximately $12.1 million, which consisted of approximately $4.7 million
of mortgage debt assumed, and the balance in cash. The cash portion was financed
through advances under the Company's Line of Credit. Like four of the Company's
other hotel Properties, the Scottsdale Hotel is marketed as a Country Suites by
Carlson.
56
<PAGE> 57
GLENBOROUGH REALTY TRUST INCORPORATED
AND GRT PREDECESSOR ENTITIES
Notes to Consolidated Financial Statements
December 31, 1996 and 1995
NOTE 17. UNAUDITED QUARTERLY RESULTS OF OPERATIONS
The following represents an unaudited summary of quarterly results of operations
for the year ended December 31, 1996:
<TABLE>
<CAPTION>
Quarter Ended
-----------------------------------------------------
March 31, June 30, September 30, December 31,
1996 1996 1996 1996
--------- -------- ------------- ------------
<S> <C> <C> <C> <C>
REVENUE
Rental revenue $ 3,589 $ 3,450 $ 4,242 $ 6,662
Fees and reimbursements 66 67 66 112
Interest and other income 191 179 253 457
Equity in earnings of
Associated Companies 425 544 394 235
Gain on sale of rental properties -- 321 -- --
-------- -------- ------------- ---------
Total revenue 4,271 4,561 4,955 7,466
-------- -------- ------------- ----------
EXPENSES
Property operating expenses 1,017 892 1,335 2,022
General and administrative 281 394 302 416
Depreciation and amortization 897 862 935 1,881
Interest expense 722 699 1,125 1,367
Consolidation costs 6,082 -- -- --
Litigation costs 1,155 -- -- --
-------- -------- ------------- ---------
Total expenses 10,154 2,847 3,697 5,686
-------- -------- ------------- ----------
Income (loss) from operations before
provision for income taxes, minority
interest and extraordinary item (5,883) 1,714 1,258 1,780
Provision for income taxes -- -- -- --
Minority interest (101) (142) (69) 20
--------- -------- -------------- ----------
Net income (loss) before extraordinary item (5,984) 1,572 1,189 1,800
Extraordinary item:
Loss on debt refinancing -- -- (186) --
-------- -------- -------------- ----------
Net income (loss) $ (5,984) $ 1,572 $ 1,003 $ 1,800
======== ======== ============ =========
Net income (loss) per share before
extraordinary item $ (1.04) $ 0.27 $ 0.21 $ 0.19
======== ====== ============ ==========
</TABLE>
57
<PAGE> 58
GLENBOROUGH REALTY TRUST INCORPORATED
AND GRT PREDECESSOR ENTITIES
Notes to Consolidated Financial Statements
December 31, 1996 and 1995
<TABLE>
<CAPTION>
Quarter Ended
-----------------------------------------------------------------
March 31, June 30, September 30, December 31,
1996 1996 1996 1996
--------- -------- ------------- ------------
<S> <C> <C> <C> <C>
Net income (loss) per share $ (1.04) $ 0.27 $ 0.17 $ 0.19
============= ============= ============= =============
Weighted average shares outstanding 5,753,709 5,761,209 5,778,545 9,513,517
============= ============= ============= =============
</TABLE>
Per share amounts do not necessarily sum to per share amounts for the year as
weighted average shares outstanding are measured for each period presented,
rather than solely for the entire year.
58
<PAGE> 59
GLENBOROUGH REALTY TRUST INCORPORATED
SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION
December 31, 1996
(in thousands)
<TABLE>
<CAPTION>
COLUMN A COLUMN B COLUMN C COLUMN D
Cost Capitalized (Reduced)
Initial Cost to Subsequent to
Company (1) Acquisition (6)
Buildings
and
Description Encumbrances Land Improvements Improvements
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Office Properties:
4500 Plaza, UT (8) $ 955 $ 1,192 $ 4,606 $ 595
Regency Westpointe, NE (8) (5) 530 3,147 763
Warner Village, CA (4) 558 2,232 5
Globe Building, WA (4) 375 1,501 --
One Professional Square, NE (4) 285 1,142 --
Vintage Pointe, AZ 2,106 738 2,950 --
Tradewinds Financial, AZ -- 303 1,214 --
Dallidet Center, CA 1,701 676 2,703 --
Hillcrest Office Plaza, CA -- 330 1,319 --
Bond Street, MI (4) 716 2,147 56
University Club Tower, MO (4) 4,087 14,519 614
- -----------------------------------------------------------------------------------------------
Office Total 9,790 37,480 2,033
- -----------------------------------------------------------------------------------------------
Industrial Properties
Benicia Industrial Park, CA (8) (5) 1,037 4,787 (279)
Case Equipment Corp.:
Kansas City, KS (4) 383 3,264 (1,397)
Memphis, TN (4) 305 2,583 (1,106)
Rancho Bernardo, CA (4) 518 2,072 --
Mercantile I, TX (4) 783 3,133 12
Quaker Industrial, TX (4) 103 412 --
Pinewood Industrial, TX (4) 144 577 --
Hoover Industrial, AZ (4) 322 1,290 1
Walnut Creek Industrial. TX 1,440 773 3,093 --
Navistar International:
W. Chicago, IL (5) 1,289 10,941 (4,618)
Baltimore, MD (5) 577 4,911 (2,100)
Park 100 - Building 42 & 46, IN (8) (4) 712 3,286 (378)
Sea Tac II, WA (2) (8) (4) 712 1,474 (201)
- -----------------------------------------------------------------------------------------------
Industrial Total 7,658 41,823 (10,066)
- -----------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
COLUMN A COLUMN E COLUMN F COLUMN G COLUMN H
Gross Amount Carried
at December 31, 1996
Buildings (1) Life
and (3) Accumulated Date Depreciated
Description Land Improvements Total Depreciation Acquired Over
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Office Properties:
4500 Plaza, UT (8) 1,123 $ 5,270 $ 6,393 $ 2,456 3/86 5-30 yrs.
Regency Westpointe, NE (8) 530 3,910 4,440 1,313 6/87 5-30 yrs.
Warner Village, CA 558 2,237 2,795 37 10/96 5-30 yrs.
Globe Building, WA 375 1,501 1,876 25 10/96 30 yrs.
One Professional Square, NE 285 1,142 1,427 19 10/96 30 yrs.
Vintage Pointe, AZ 738 2,950 3,688 48 11/96 30 yrs.
Tradewinds Financial, AZ 303 1,214 1,517 20 11/96 30 yrs.
Dallidet Center, CA 676 2,703 3,379 44 11/96 30 yrs.
Hillcrest Office Plaza, CA 330 1,319 1,649 21 11/96 5-30 yrs.
Bond Street, MI 716 2,203 2,919 30 9/96 3-40 yrs.
University Club Tower, MO 4,087 15,133 19,220 211 7/96 1-40 yrs.
- ----------------------------------------------------------------------------------------------------------------------------
Office Total 9,721 39,582 49,303 4,224
- ----------------------------------------------------------------------------------------------------------------------------
Industrial Properties
Benicia Industrial Park, CA (8) 979 4,566 5,545 1,715 7/86 5-30 yrs.
Case Equipment Corp.:
Kansas City, KS 236 2,014 2,250 517 3/84 50 yrs.
Memphis, TN 187 1,595 1,782 410 3/84 50 yrs.
Rancho Bernardo, CA 518 2,072 2,590 35 10/96 30 yrs.
Mercantile I, TX 783 3,145 3,928 53 10/96 3-30 yrs.
Quaker Industrial, TX 103 412 515 7 10/96 30 yrs.
Pinewood Industrial, TX 144 577 721 10 10/96 30 yrs.
Hoover Industrial, AZ 323 1,290 1,613 21 10/96 30 yrs.
Walnut Creek Industrial. TX 773 3,093 3,866 52 10/96 30 yrs.
Navistar International:
W. Chicago, IL 793 6,819 7,612 1,744 3/84 50 yrs.
Baltimore, MD 356 3,032 3,388 778 3/84 50 yrs.
Park 100 - Building 42 & 46, IN (8) 712 2,908 3,620 571 10/86 5-25 yrs.
Sea Tac II, WA (2) (8) 712 1,273 1,985 244 2/86 5-25 yrs.
- ----------------------------------------------------------------------------------------------------------------------------
Industrial Total 6,619 32,796 39,415 6,157
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
(continued)
59
<PAGE> 60
<TABLE>
<CAPTION>
COLUMN A COLUMN B COLUMN C COLUMN D
Cost Capitalized (Reduced)
Initial Cost to Subsequent to
Company (1) Acquisition (6)
Buildings
and
Description Encumbrances Land Improvements Improvements
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Retail Properties:
Atlanta Auto Centers:
College Park, GA (8) $ -- $ 266 $ 489 $ (55)
Marietta, GA (8) -- 404 701 (127)
Norcross, GA (8) -- 287 641 (70)
Roswell, GA (8) -- 206 332 (53)
Smyrna, GA (8) -- 240 479 (73)
Snellville, GA (8) -- 433 551 (59)
Park Center, CA (2) (8) (4) 1,748 3,296 (549)
QuickTrips:
#668 - Granite City, IL (8) (7) 599 475 (1)
#722 - Lithonia, GA (8) (7) 581 450 106
#718 - Norcross, GA (8) (7) 416 445 146
#711 - Fulton, GA (8) (7) 618 616 6
#75R - Tulsa, OK (8) (7) 181 442 8
#738 - Mableton, GA (8) (7) 293 470 59
#712 - Atlanta, GA (8) (7) 549 495 12
#698 - Godfrey, IL (8) (7) 523 568 --
#691 - Madison, IL (8) (7) 356 430 --
#609 - St. Louis, MO (8) (7) 451 617 7
Shannon Crossing, GA (8) (5) 2,488 2,075 346
Westwood Plaza, FL (8) (5) 2,599 5,110 409
Auburn North, WA (4) 1,099 4,397 5
Sonora Plaza, CA 5,033 1,945 7,781 --
- -----------------------------------------------------------------------------------------------
Retail Total 16,282 30,860 117
- -----------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
COLUMN A COLUMN E COLUMN F COLUMN G COLUMN H
Gross Amount Carried
at December 31, 1996
Buildings (1) Life
and (3) Accumulated Date Depreciated
Description Land Improvements Total Depreciation Acquired Over
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Retail Properties:
Atlanta Auto Centers:
College Park, GA (8) $ 266 $ 434 $ 700 $ 79 12/86 5-25 yrs.
Marietta, GA (8) 404 574 978 103 12/86 5-25 yrs.
Norcross, GA (8) 287 571 858 104 12/86 5-25 yrs.
Roswell, GA (8) 206 279 485 51 12/86 5-25 yrs.
Smyrna, GA (8) 240 406 646 73 12/86 5-25 yrs.
Snellville, GA (8) 419 506 925 97 12/86 5-25 yrs.
Park Center, CA (2) (8) 1,748 2,747 4,495 503 9/86 5-25 yrs.
QuickTrips:
#668 - Granite City, IL (8) 598 475 1,073 149 9/90 5-20 yrs.
#722 - Lithonia, GA (8) 687 450 1,137 141 9/90 20 yrs.
#718 - Norcross, GA (8) 562 445 1,007 139 9/90 20 yrs.
#711 - Fulton, GA (8) 618 622 1,240 258 10/88 5-20 yrs.
#75R - Tulsa, OK (8) 181 450 631 189 10/88 20 yrs.
#738 - Mableton, GA (8) 353 469 822 147 9/90 5-20 yrs.
#712 - Atlanta, GA (8) 548 508 1,056 214 10/88 20 yrs.
#698 - Godfrey, IL (8) 523 568 1,091 177 9/90 20 yrs.
#691 - Madison, IL (8) 356 430 786 134 9/90 20 yrs.
#609 - St. Louis, MO (8) 451 624 1,075 258 10/88 5-20 yrs.
Shannon Crossing, GA (8) 2,488 2,421 4,909 1,393 10/88 3-14 yrs.
Westwood Plaza, FL (8) 2,599 5,519 8,118 1,754 1/88 3-23 yrs.
Auburn North, WA 1,099 4,402 5,501 74 10/96 3-30 yrs.
Sonora Plaza, CA 1,945 7,781 9,726 127 11/96 30 yrs.
- ----------------------------------------------------------------------------------------------------------------------------
Retail Total 16,578 30,681 47,259 6,164
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
(continued)
60
<PAGE> 61
GLENBOROUGH REALTY TRUST INCORPORATED
SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION - CONTINUED
December 31, 1996
(in thousands)
<TABLE>
<CAPTION>
COLUMN A COLUMN B COLUMN C COLUMN D
Cost Capitalized (Reduced)
Initial Cost to Subsequent to
Company (1 ) Acquisition (6)
Buildings
and
Description Encumbrances Land Improvements Improvements
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Multifamily Properties:
Sahara Gardens, NV $ 7,536 $ 1,871 $ 7,500 $ --
Villas de Mission, NV 7,332 1,924 7,695 --
Summer Breeze, CA (8) 2,617 1,857 2,138 107
- ----------------------------------------------------------------------------------------------
Multifamily Total 5,652 17,333 107
- ----------------------------------------------------------------------------------------------
Hotel Properties:
Country Suites by Carlson:
San Antonio, TX (4) 784 2,032 71
Arlington, TX (8) (5) 1,527 5,346 1,235
Irving, TX (2) (8) (4) 972 3,850 (1,132)
Ontario, CA (8) (5) 1,224 5,576 330
Tucson, AZ (8) (5) 1,048 7,600 1,197
- -----------------------------------------------------------------------------------------------
Hotel Total 5,555 24,404 1,701
- -----------------------------------------------------------------------------------------------
COMBINED TOTAL $ 75,891 $ 44,937 $ 151,900 $ (6,108)
- -----------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
COLUMN A COLUMN E COLUMN F COLUMN G COLUMN H
Gross Amount Carried
at December 31, 1996
Buildings (1) Life
and (3) Accumulated Date Depreciated
Description Land Improvements Total Depreciation Acquired Over
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Multifamily Properties:
Sahara Gardens, NV $ 1,871 $ 7,500 $ 9,371 $ 125 10/96 30 yrs.
Villas de Mission, NV 1,924 7,695 9,619 128 10/96 30 yrs.
Summer Breeze, CA (8) 1,857 2,245 4,102 257 1/95 3-18 yrs.
- ---------------------------------------------------------------------------------------------------------------------------
Multifamily Total 5,652 17,440 23,092 510
- ---------------------------------------------------------------------------------------------------------------------------
Hotel Properties:
Country Suites by Carlson:
San Antonio, TX 784 2,103 2,887 41 8/96 3-30 yrs.
Arlington, TX (8) 1,610 6,498 8,108 3,454 12/86 7-25 yrs.
Irving, TX (2) (8) 954 2,736 3,690 588 10/86 5-25 yrs.
Ontario, CA (8) 1,145 5,985 7,130 3,060 11/86 5-30 yrs.
Tucson, AZ (8) 1,093 8,752 9,845 4,586 12/86 7-25 yrs.
- ----------------------------------------------------------------------------------------------------------------------------
Hotel Total 5,586 26,074 31,660 11,729
- ----------------------------------------------------------------------------------------------------------------------------
COMBINED TOTAL $ 44,156 $ 146,573 $ 190,729 $ 28,784
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Initial Cost and Date Acquired by Participating Partnerships, where
applicable.
(2) The Company holds a participating first mortgage interest in the property.
In accordance with GAAP, the Company is accounting for the property as
though it holds fee title.
(3) The aggregate cost for Federal income tax purposes is $158,343.
(4) Pledged as security for Wells Fargo Bank Line of Credit - $21,307.
(5) Pledged as security for loan with an investment bank -- $19,744.
(6) Bracketed amounts represent reductions to carrying value in prior years.
(7) Pledged as security for Wells Fargo Bank Term Loan - $6,120.
(8) Initial Cost represents original book value carried forward from the
financial statements of the GRT Predecessor Entities.
61
<PAGE> 62
GLENBOROUGH REALTY TRUST INCORPORATED
SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION - CONTINUED
December 31, 1996
(in thousands)
Reconciliation of gross amount at which real estate was carried for the years
ended December 31:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Investments in real estate:
Balance at beginning of year $ 102,451 $ 83,449 $ 86,400
Additions during year:
Property acquisitions 89,653 17,151 206
Improvements 1,572 1,851 2,464
Retirements/sales (2,947) -- (5,621)
----------- --------- ----------
Balance at end of year $ 190,729 $ 102,451 $ 83,449
========== ========== ==========
Accumulated Depreciation:
Balance at beginning of year $ 24,877 $ 19,455 $ 16,945
Additions during year:
Depreciation 4,305 2,254 3,489
Acquisitions -- 3,168 --
Retirements/sales (398) -- (979)
---------- ---------- ----------
Balance at end of year $ 28,784 $ 24,877 $ 19,455
========== ========== ==========
</TABLE>
62
<PAGE> 63
GLENBOROUGH REALTY TRUST INCORPORATED
SCHEDULE IV - MORTGAGE LOANS RECEIVABLE, SECURED BY REAL ESTATE
December 31, 1996
(in thousands)
<TABLE>
<CAPTION>
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
Description of Loan Maturity Periodic
and Securing Property Interest Rate Date Payment Terms Prior Liens
--------------------- ------------- -------------- -------------------------- -----------
<S> <C> <C> <C> <C>
First Mortgage Loan 8% 2/1/97 (1) Monthly interest only payments
Office and research Principal due upon maturity
complex, Decreasing prepayment penalty None
Eatontown, NY of between $76 and $380
First Mortgage Loan 8%-9% 6/1/01 Monthly interest and principal None
Industrial property, payments, based on a thirty
Los Angeles, CA year amortization
First Mortgage Loan 11% 11/19/99 Monthly interest only payments None
Medical building commencing January 1, 1997
Phoenix, AZ Principal due upon maturity
</TABLE>
<TABLE>
<CAPTION>
COLUMN A COLUMN F COLUMN G COLUMN H
Principal Amount
of Loans Subject
Description of Loan Face Carrying to Delinquent
and Securing Property Amount Amount Principal or Interest
--------------------- ------ -------- ---------------------
<S> <C> <C> <C>
First Mortgage Loan
Office and research
complex, $ 7,600 $ 6,700 None
Eatontown, NY
First Mortgage Loan 553 511 None
Industrial property,
Los Angeles, CA
First Mortgage Loan 3,600 2,694 (2) None
----- -----
Medical building
Phoenix, AZ
$ 11,753 $ 9,905
====== =====
</TABLE>
(1) Paid off on January 28, 1997
(2) The loan amount is $3,600,000, of which $2,694,000 was initially disbursed
to the borrower and $906,000 was held by the Company as leasing and interest
reserves.
63
<PAGE> 64
GLENBOROUGH REALTY TRUST INCORPORATED
SCHEDULE IV - MORTGAGE LOANS RECEIVABLE, SECURED BY REAL ESTATE
December 31, 1996
(in thousands)
The following is a summary of changes in the carrying amount of mortgage loans
for the years ended December 31, 1996, 1995 and 1994 (in thousands):
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Balance at beginning of year $ 7,465 $ 19,953 $ 18,825
Additions during year:
New mortgage loans 2,694 7 2,122
Deductions during year:
Loss provision -- (863) --
Collections of principal (254) (11,632) (994)
-------- -------- -------
Balance at end of year $ 9,905 $ 7,465 $ 19,953
======== ======== ========
</TABLE>
64
<PAGE> 65
SIGNIFICANT SUBSIDIARIES
GHG and GIRC each independently qualify as a significant subsidiary, as defined
in Rule 3-09 of Regulation S-X. Accordingly, the separate financial statements
of GHG and GIRC have been included in the December 31, 1996 Form 10-K of the
Company following the Company's Consolidated Financial Statements in Item 14.
GLENBOROUGH HOTEL GROUP
BACKGROUND
GHG was organized in the state of Nevada on September 23, 1991. GHG currently
operates hotel properties owned by the Company under four separate percentage
leases and manages three hotel properties owned by two partnerships whose
managing general partner is Glenborough Corporation. The Company owns 100% of
the 50 shares of non-voting preferred stock of GHG and three individuals,
including Terri Garnick, an executive officer of the Company, each own 33 1/3%
of the 1,000 shares of voting common stock of GHG.
GHG also owns approximately 80% of the common stock of RGI. RGI manages
homeowners associations and rental pools for two beachfront resort condominium
hotel properties and owns six rental units at one of the properties. GHG
receives 100% of the earnings of RGI and consolidates their operations with its
own.
GHG also owns 94% of the outstanding common stock of Atlantic Pacific Holdings,
Ltd., the sole owner of 100% of the common stock of APAC. APAC was formed to
underwrite certain insurable risks, however, it no longer underwrites any
business and is expected to be liquidated in 1997. GHG accounts for its
investment in APAC using the cost method due to its anticipated liquidation.
LIQUIDITY AND CAPITAL RESOURCES
GHG's primary source of funding is the cash generated by the operations of the
four hotels leased from the Company and fees received for (i) managing three
hotels owned by two partnerships and (ii) managing the homeowners associations
and rental pools for the resort condominium hotel properties as discussed above.
The boards of directors of GHG declared and paid the following quarterly
dividends for the year ending December 31, 1996:
<TABLE>
<CAPTION>
1st Quarter 2nd Quarter 3rd Quarter 4th Quarter Total
----------- ----------- ----------- ----------- ----------
<S> <C> <C> <C> <C> <C>
Preferred dividends to the Company $ 7,000 $ 7,000 $ 7,000 $ 8,000 $ 28,000
Additional dividends to the Company 32,000 20,000 17,000 9,000 79,000
--------- --------- --------- --------- ----------
Total dividends to the Company 39,000 27,000 24,000 17,000 107,000
Dividends to others 11,000 6,000 6,000 3,000 26,000
--------- --------- --------- --------- ----------
Total dividends $ 50,000 $ 33,000 $ 30,000 $ 20,000 $ 133,000
========= ========= ========= ========= ==========
</TABLE>
(1) Dividends for the fourth quarter of 1996 were declared and paid in January
1997.
RESULTS OF OPERATIONS
Room revenue of $7,463,000 represents the revenue earned on the four hotels
leased from the Company.
Fee revenue and salary reimbursements of $2,417,000 represents the fees earned
for managing three hotels and two resort condominium hotels.
The primary expenses associated with the leased hotels are room expenses of
$2,000,000, lease payments of $2,507,000, sales and marketing of $770,000 and
other operating expenses of $1,036,000, including utilities, maintenance and
insurance.
The only direct expenses incurred in connection with the management of the three
hotels and two resort condominium hotel properties are salaries and benefits of
$1,640,000.
65
<PAGE> 66
General and administrative costs of $995,000 represent the overhead costs
associated with administering the business of GHG. Such costs primarily consist
of administrative salaries and benefits, rent, legal fees and accounting fees.
66
<PAGE> 67
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders of
GLENBOROUGH HOTEL GROUP
We have audited the accompanying consolidated balance sheet of GLENBOROUGH HOTEL
GROUP as of December 31, 1996, and the related consolidated statements of
income, stockholders' equity and cash flows for the year then ended. 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 audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides 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 GLENBOROUGH HOTEL
GROUP as of December 1996, and the results of its operations and its cash flows
for the year then ended in conformity with generally accepted accounting
principles.
ARTHUR ANDERSEN LLP
San Francisco, California
January 27, 1997
67
<PAGE> 68
GLENBOROUGH HOTEL GROUP
CONSOLIDATED BALANCE SHEET
As of December 31, 1996
(in thousands, except share amounts)
<TABLE>
<S> <C>
ASSETS
Cash $ 461
Accounts receivable 247
Investments in management contracts, net 430
Rental property and equipment, net of
accumulated depreciation of $111 170
Investment in Atlantic Pacific Assurance Company, Limited 755
Prepaid expenses 156
Other assets 36
----------
TOTAL ASSETS $ 2,255
==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Accrued lease expense $ 285
Mortgage loan 61
Other liabilities 407
----------
Total liabilities 753
----------
Stockholders' Equity:
Common stock (1,000 shares authorized,
issued and outstanding) 20
Non-Voting preferred stock (50 shares
authorized, issued and outstanding) --
Additional paid-in capital 1,568
Retained earnings (86)
----------
Total stockholders' equity 1,502
----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 2,255
==========
</TABLE>
See accompanying notes to consolidated financial statements
68
<PAGE> 69
GLENBOROUGH HOTEL GROUP
CONSOLIDATED STATEMENT OF INCOME
For the year ended December 31, 1996
(in thousands)
<TABLE>
<S> <C>
REVENUE
Hotel revenue $ 7,463
Fees and reimbursements 2,417
Other revenue 72
----------
Total revenue 9,952
----------
EXPENSES
Leased Hotel Properties:
Room expenses 2,000
Lease payments to an affiliate 2,507
Sales and marketing to an affiliate 770
Property general and administrative 855
Other operating expenses 1,036
Managed Hotel Properties:
Salaries and benefits 1,640
Other Expenses:
General and administrative 995
Depreciation and amortization 99
Interest expense 6
----------
Total expenses 9,908
----------
Income from operations before provision
for income taxes 44
Provision for income taxes (17)
----------
Net income $ 27
==========
</TABLE>
See accompanying notes to consolidated financial statements
69
<PAGE> 70
GLENBOROUGH HOTEL GROUP
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
For the year ended December 31, 1996
(in thousands, except shares)
<TABLE>
<CAPTION>
Add -
Preferred Stock Common Stock itional Retained
Par Par Paid-in Earnings
Shares Value Shares Value Capital (Deficit) Total
------ ----- ------ ----- ------- ---------- -----
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE at
December 31, 1995 50 $ -- 1,000 $ 20 $ 1,368 $ -- $ 1,388
Additional paid-in capital -- -- -- -- 200 -- 200
Dividends -- -- -- -- -- (113) (113)
Net income -- -- -- -- -- 27 27
------- ------- ------- ------- --------- --------- ---------
BALANCE at
December 31, 1996 50 $ -- 1,000 $ 20 $ 1,568 $ (86) $ 1,502
======= ======= ======= ======= ========= ========== =========
</TABLE>
See accompanying notes to consolidated financial statements
70
<PAGE> 71
GLENBOROUGH HOTEL GROUP
CONSOLIDATED STATEMENT OF CASH FLOWS
For the year ended December 31, 1996
(in thousands)
<TABLE>
<S> <C>
Cash flows from operating activities:
Net income $ 27
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization 99
Changes in certain assets and liabilities 246
------
Net cash provided by operating activities 372
------
Cash flows from investing activities:
Additions to equipment (7)
------
Net cash used for investing activities (7)
------
Cash flows from financing activities:
Capital contributions 200
Dividends (113)
Repayment of borrowings (24)
------
Net cash provided by financing activities 63
------
Net increase in cash 428
Cash and cash equivalents at beginning of year 33
------
Cash and cash equivalents at end of year $ 461
======
Supplemental disclosure of cash flow information:
Cash paid for interest $ 6
======
</TABLE>
See accompanying notes to consolidated financial statements
71
<PAGE> 72
GLENBOROUGH HOTEL GROUP
Notes to Consolidated Financial Statements
December 31, 1996
NOTE 1. ORGANIZATION
Glenborough Hotel Group ("GHG") was organized in the state of Nevada on
September 23, 1991. GHG currently operates hotel properties owned by Glenborough
Realty Trust Incorporated ("GLB") under four separate percentage leases and
manages three hotel properties owned by two partnerships whose managing general
partner is Glenborough Corporation. GLB owns 100% of the 50 shares of non-voting
preferred stock of GHG and three individuals, including Terri Garnick, an
executive officer of GLB, each own 33 1/3% of the 1,000 shares of voting common
stock of GHG.
GHG also owns approximately 80% of the common stock of Resort Group, Inc.
("RGI"). RGI manages homeowners associations and rental pools for two beachfront
resort condominium hotel properties and owns six units at one of the properties.
GHG receives 100% of the earnings of RGI and consolidates its operations with
its own.
GHG also owns 94% of the outstanding common stock of Atlantic Pacific Holdings,
Ltd., the sole owner of 100% of the common stock of Atlantic Pacific Assurance
Company, Limited ("APAC"), a Bermuda corporation formed to underwrite certain
insurable risks of certain of GLB's predecessor partnerships and related
entities. APAC no longer underwrites any business and is expected to be
liquidated in 1997. GHG accounts for its investment in APAC using the cost
method due to its anticipated liquidation.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation - The accompanying financial statements present the
consolidated financial position of GHG and RGI as of December 31, 1996 and the
consolidated results of operations and cash flows of GHG and RGI for the year
ended December 31, 1996. All intercompany transactions, receivables and payables
have been eliminated in the consolidation.
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 results of operations during the reporting period. Actual
results could differ from those estimates.
Rental Property - Rental properties are stated at cost unless circumstances
indicate that cost cannot be recovered, in which case, the carrying value of the
property is reduced to estimated fair value.
Depreciation is provided using the straight line method over the useful lives of
the respective assets.
Investments in Management Contracts - Investments in management contracts are
recorded at cost and are amortized on a straight-line basis over the term of the
contracts.
Cash Equivalents - GHG considers short-term investments (including certificates
of deposit) with a maturity of three months or less at the time of investment to
be cash equivalents.
NOTE 3. INVESTMENTS IN MANAGEMENT CONTRACTS, NET
Investments in management contracts reflects the unamortized portion of the
management contracts RGI holds with the two beachfront resort condominium hotel
properties for both management of the homeowners associations and the rental
pool programs.
NOTE 4. RENTAL PROPERTY
Rental property and equipment represents the six condominium hotel units owned
by RGI as well as furniture and fixtures in GHG's corporate offices. The six
units owned by RGI participate in a resort rental program on an "at will"
72
<PAGE> 73
GLENBOROUGH HOTEL GROUP
Notes to Consolidated Financial Statements
December 31, 1996
basis, whereby there is no fixed term of participation. Such participation
generated approximately $19,000 of cash flow after deductions for capital
reserves for the year ended December 31, 1996.
NOTE 5. MORTGAGE LOAN
Mortgage loan of $61,000 represents the debt secured by the six condominium
hotel units owned by RGI. Such debt bears interest at 7%, payable in monthly
installments of principal and interest totaling $2,304, and matures June 30,
1999.
NOTE 6. THE PERCENTAGE LEASES
GHG is leasing the four hotels owned by GLB for a term of five years pursuant to
individual percentage leases ("Percentage Leases") which provide for rent equal
to the greater of the Base Rent (as defined in the lease) or a specified
percentage of room revenues (the "Percentage Rent"). Each hotel is separately
leased to GHG (the "lessee"). The lessee's ability to make rent payments will,
to a large degree, depend on its ability to generate cash flow from the
operations of the hotels. Each Percentage Lease contains the provisions
described below.
Each Percentage Lease has a non-cancelable term of five years, subject to
earlier termination upon the occurrence of certain contingencies described in
the Percentage Lease. The lessee under the Percentage Lease has one five-year
renewal option at the then current fair market rent.
During the term of each Percentage Lease, the lessee is obligated to pay the
greater of Base Rent or Percentage Rent. Base Rent is required to be paid
monthly in advance. Percentage Rent is calculated by multiplying fixed
percentages by room revenues for each of the four hotels; the applicable
percentage changes when revenue exceeds a specified threshold, and the threshold
may be adjusted annually in accordance with changes in the applicable CPI.
Percentage Rent is due quarterly.
The table below sets forth the annual Base Rent and the Percentage Rent formulas
for each of the four hotels.
HOTEL LEASE RENT PROVISIONS
<TABLE>
<CAPTION>
Percentage Rent incurred
Initial Annual for the year ended Annual Percentage
Hotel Base Rent December 31, 1996 Rent Formulas
- ----- -------------- ------------------------ -----------------
<S> <C> <C> <C>
Ontario, CA $ 240,000 $ 192,000 24% of the first $1,575,000 of room revenue plus 40% of room
revenue above $1,575,000 and 5% of other revenue
Arlington, TX $ 360,000 $ 328,000 27% of the first $1,600,000 of room revenue plus 42% of room
revenue above $1,600,000 and 5% of other revenue
Tucson, AZ $ 600,000 $ 656,000 40% of the first $1,350,000 of room revenue plus 46% of room
revenue above $1,350,000 and 5% of other revenue
San Antonio, TX $ 312,000(1) $ 0 33% of the first $1,200,000 of room revenue plus 40% of room
revenue above $1,200,000 and 5% of other revenue
</TABLE>
73
<PAGE> 74
GLENBOROUGH HOTEL GROUP
Notes to Consolidated Financial Statements
December 31, 1996
(1) The San Antonio hotel was acquired in August 1996, therefore, rent incurred
for the year ended December 31, 1996 was less than a full year's base rent.
Other than real estate and personal property taxes, casualty insurance, a fixed
capital improvement allowance and maintenance of underground utilities and
structural elements, which are the responsibility of GLB, the Percentage Leases
require the lessees to pay rent, insurance, salaries, utilities and all other
operating costs incurred in the operation of the Hotels.
NOTE 7. INCOME TAXES
The 1996 provision for income taxes consists of the following (in thousands):
<TABLE>
<CAPTION>
Federal State Total
------- ----- -----
<S> <C> <C> <C>
Current $ 29 $ 8 $ 37
Deferred (16) (4) (20)
------ ----- ------
Total $ 13 $ 4 $ 17
====== ===== ======
</TABLE>
The deferred tax provision results from temporary differences in the recognition
of depreciation and amortization expense for tax and financial reporting
purposes. As such amounts will be deductible for tax purposes in future periods,
a corresponding deferred tax asset has been and is included in prepaid expenses
in the accompanying balance sheet.
NOTE 8. DECLARATION OF DIVIDENDS
The board of directors of GHG declared the following dividends:
<TABLE>
<CAPTION>
Preferred Stock Common Stock Total
--------------- ------------ ------------
<S> <C> <C> <C>
April, 1996 $ 39,000 $ 11,000 $ 50,000
July, 1996 27,000 6,000 33,000
October, 1996 24,000 6,000 30,000
-------------- ------------ ------------
Total paid in 1996 90,000 23,000 113,000
January, 1997 17,000 3,000 20,000
-------------- ------------ ------------
Total paid from 1996 earnings $ 107,000 $ 26,000 $ 133,000
============== ============ ============
</TABLE>
74
<PAGE> 75
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholder of
Atlantic Pacific Assurance Company Limited:
We have audited the accompanying balance sheets of Atlantic Pacific Assurance
Company Limited (a Bermuda company) as of December 31, 1996 and 1995, and the
related statements of income and retained earnings and cash flows for the years
then ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Atlantic Pacific Assurance
Company Limited as of December 31, 1996 and 1995, and the results of its
operations and its cash flows for the years then ended in conformity with
accounting principles generally accepted in the United States.
ARTHUR ANDERSEN LLP
Hamilton, Bermuda
February 15, 1997
75
<PAGE> 76
ATLANTIC PACIFIC ASSURANCE COMPANY LIMITED
BALANCE SHEETS
AS OF DECEMBER 31, 1996 AND 1995
(Expressed in U.S. Dollars)
<TABLE>
<CAPTION>
1996 1995
---------- ----------
ASSETS:
<S> <C> <C>
Cash and cash equivalents $ 130,488 $ 107,143
Restricted time deposits 1,418,827 1,418,827
Funds withheld 815,704 815,819
Accrued interest receivable 5,214 1,872
Prepaid expenses 12,733 10,355
---------- ----------
$2,382,966 $2,354,016
========== ==========
LIABILITIES:
Reserve for outstanding losses and loss related expenses $ 99,222 $ 102,859
Losses and loss related expenses payable 20,850 17,982
Accounts payable and accrued liabilities 13,359 14,122
---------- ----------
133,431 134,963
---------- ----------
SHAREHOLDER'S EQUITY:
Share capital-
Authorized, issued and fully paid-
1,000,000 common shares with a par value of $1 each 1,000,000 1,000,000
Additional paid in capital 154,570 154,570
Retained earnings 1,094,965 1,064,483
---------- ----------
2,249,535 2,219,053
---------- ----------
$2,382,966 $2,354,016
========== ==========
</TABLE>
The accompanying notes are an integral part of these balance sheets.
76
<PAGE> 77
ATLANTIC PACIFIC ASSURANCE COMPANY LIMITED
STATEMENTS OF INCOME AND RETAINED EARNINGS
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
(Expressed in U.S. Dollars)
<TABLE>
<CAPTION>
1996 1995
----------- -----------
OPERATING EXPENSE-
<S> <C> <C>
Letter of credit charges $ (4,815) $ (10,971)
INVESTMENT INCOME 78,701 97,064
GENERAL AND ADMINISTRATIVE EXPENSES (43,404) (44,844)
----------- -----------
NET INCOME 30,482 41,249
RETAINED EARNINGS, beginning of year 1,064,483 1,023,234
----------- -----------
RETAINED EARNINGS, end of year $ 1,094,965 $ 1,064,483
=========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
77
<PAGE> 78
ATLANTIC PACIFIC ASSURANCE COMPANY LIMITED
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
(Expressed in U.S. Dollars)
<TABLE>
<CAPTION>
1996 1995
--------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Losses and loss related expenses paid $ (654) $(320,444)
Operating expenses paid (4,815) (10,971)
Investment income received 75,359 100,722
General and administrative expenses paid (46,545) (47,900)
--------- ---------
Net cash provided by (used in) operating activities 23,345 (278,593)
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITY-
Decrease in restricted time deposits -- 320,443
--------- ---------
NET INCREASE IN CASH AND CASH EQUIVALENTS 23,345 41,850
CASH AND CASH EQUIVALENTS, beginning of year 107,143 65,293
--------- ---------
CASH AND CASH EQUIVALENTS, end of year $ 130,488 $ 107,143
========= =========
RECONCILIATION OF NET INCOME TO NET CASH PROVIDED BY
(USED IN) OPERATING ACTIVITIES:
Net income $ 30,482 $ 41,249
Add (deduct) net changes in assets and liabilities:
Funds withheld 115 --
Accrued interest receivable (3,342) 3,658
Prepaid expenses (2,378) (7,153)
Reserve for outstanding losses and loss related expenses (3,637) (29,505)
Losses and loss related expenses payable 2,868 (290,939)
Accounts payable and accrued liabilities (763) 4,097
--------- ---------
Net cash provided by (used in) operating activities $ 23,345 $(278,593)
========= =========
</TABLE>
The accompanying notes are an integral part of these statements.
78
<PAGE> 79
ATLANTIC PACIFIC ASSURANCE COMPANY LIMITED
NOTES TO FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1996 AND 1995
(Expressed in U.S. Dollars)
NOTE 1. INSURANCE BUSINESS
Atlantic Pacific Assurance Company Limited (the Company) was incorporated in
Bermuda on November 3, 1987 and is a wholly owned subsidiary of Atlantic Pacific
Holdings Limited (the Parent), which is incorporated in Bermuda.
The Parent was formerly owned by Equitec partnerships and the Company insured
the risks of those partnerships. During 1994 and 1995, limited partnerships
which were affiliated with Glenborough Realty Corporation acquired a majority of
ownership in the Parent. On December 31, 1995, a majority of the Glenborough
Realty Corporation limited partnerships were consolidated into a Real Estate
Investment Trust (REIT). The REIT subsequently transferred its ownership in the
Parent to Glenborough Hotel Group, a Nevada corporation of which the REIT owns
100% of the non-voting preferred stock.
The Company insured or assumed liability of the owners up to limits of $100,000
per occurrence for various automobile, general liability, and property exposure
which covered physical loss or damage to all real and personal property; and up
to $500,000 per occurrence for workers' compensation exposures. All policies
under the program expired April 30, 1990, and none have been renewed.
NOTE 2. SIGNIFICANT ACCOUNTING POLICIES
These financial statements have been prepared in accordance with accounting
principles generally accepted in the United States. 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 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. The significant accounting policies are
summarized as follows:
a) Cash and cash equivalents
Cash and cash equivalents include amounts held in banks and time deposits
having maturities within three months of the date of purchase by the
Company. The carrying value of cash and cash equivalents approximates fair
value because of the short maturity of these investments. As of December
31, 1996, all of the Company's cash and cash equivalents are on deposit
with one financial institution.
b) Reserve for outstanding losses and loss related expenses
The reserve for outstanding losses and loss related expenses and the
related provision for losses and loss related expenses includes estimates
for losses pending settlement. Generally accepted accounting principles
require that the reserve for outstanding losses and loss related expenses
be recorded at the ultimate cost of settling losses, using past experience
adjusted for current trends and any other factors that would modify past
experience. The reserve for outstanding losses and loss related expenses
are based on a May, 1991 independent actuarial study using industry
reporting statistics. No new losses were reported during 1996 and 1995.
79
<PAGE> 80
Although management believes that the amounts recorded are adequate, there
can be no assurance that the ultimate settlement of losses will not vary
significantly from the reserves provided. Future adjustments to the
estimates recorded as of December 31, 1996, resulting from the continual
review process and differences between estimates and ultimate settlements,
will be reflected in the statements of income of future years when such
adjustments become known.
c) Investment income
Interest income is accrued to the balance sheet date.
NOTE 3. LETTERS OF CREDIT
As of December 31, 1996, the Company has outstanding letters of credit of
approximately $1,419,000 (1995 - $1,419,000) to secure the future payment of
losses. Time deposits of a similar amount have been pledged to secure these
letters of credit.
NOTE 4. RESERVE FOR OUTSTANDING LOSSES AND LOSS RELATED EXPENSES
As the Company has not renewed any policies since 1990, all activity in the
reserve for outstanding losses and loss related expenses relates to years prior
to and including 1990. There was no additional development on prior year claims
in 1996 and 1995. Losses paid in 1996 were $654 (1995 - $320,444). No additional
premiums are due as a result of the prior year effects.
NOTE 5. STATUTORY CAPITAL AND SURPLUS
The Company is registered under The Bermuda Insurance Act 1978 and Related
Regulations (the Act) and is obliged to comply with various provisions of the
Act regarding solvency and liquidity. These provisions have been met and the
required minimum statutory capital and surplus as of December 31, 1996 is
approximately $120,000 (1995 - $120,000). The Company's actual statutory capital
and surplus as of that date is approximately $2,206,000 (1995 - $2,209,000) and
accordingly, all retained earnings are available for distribution to the
shareholder.
NOTE 6. TAXES
At the present time, no income, profit, capital or capital gain taxes are levied
in Bermuda and, accordingly, no provision for such taxes has been recorded by
the Company. In the event that such taxes are levied, the Company has received
an undertaking from the Bermuda Government exempting it from all such taxes
until March 28, 2016.
80
<PAGE> 81
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders of
GLENBOROUGH INLAND REALTY CORPORATION
We have audited the accompanying balance sheet of GLENBOROUGH INLAND REALTY
CORPORATION as of December 31, 1996, and the related statements of income,
stockholders' equity and cash flows for the year then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of GLENBOROUGH INLAND REALTY
CORPORATION as of December 1996, and the results of its operations and its cash
flows for the year then ended in conformity with generally accepted accounting
principles.
ARTHUR ANDERSEN LLP
San Francisco, California
January 27, 1997
81
<PAGE> 82
GLENBOROUGH INLAND REALTY CORPORATION
BALANCE SHEET
As of December 31, 1996
(in thousands, except share amounts)
<TABLE>
ASSETS
<S> <C>
Cash and cash equivalents $ 73
Note receivable 80
Investments in management contracts, net 5,738
Prepaid expenses 236
Deposits 250
Other assets 115
-------
TOTAL ASSETS $ 6,492
=======
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Line of credit $ 2,383
Other liabilities 222
-------
Total liabilities 2,605
-------
Stockholders' Equity
Common stock (1,000 shares authorized,
issued and outstanding) 20
Non-voting preferred stock (19,000 shares
authorized, issued and outstanding) --
Additional paid-in capital 4,014
Retained earnings (deficit) (147)
-------
Total stockholders' equity 3,887
-------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 6,492
=======
</TABLE>
The accompanying notes are an integral part of these statements.
82
<PAGE> 83
GLENBOROUGH INLAND REALTY CORPORATION
STATEMENT OF INCOME
For the year ended December 31, 1996
(in thousands)
<TABLE>
REVENUE
<S> <C>
Fees and reimbursements $ 5,836
Other revenue 20
-------
Total revenue 5,856
-------
EXPENSES
General and administrative 3,113
Depreciation and amortization 717
Interest expense 151
-------
Total expenses 3,981
-------
Income from operations before provision
for income taxes 1,875
Provision for income taxes (750)
-------
Net income $ 1,125
=======
</TABLE>
The accompanying notes are an integral part of these statements.
83
<PAGE> 84
GLENBOROUGH INLAND REALTY CORPORATION
STATEMENT OF STOCKHOLDERS' EQUITY
For the year ended December 31, 1996
(in thousands, except shares)
<TABLE>
<CAPTION>
Preferred Stock Common Stock Additional Retained
Par Par Paid-in Earnings
Shares Value Shares Value Capital (Deficit) Total
------- ----- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE at
December 31, 1995 19,000 $ -- -- $ -- $ 3,919 $ -- $ 3,919
Additional paid-in
capital -- -- 1,000 20 95 -- 115
Dividends -- -- -- -- -- (1,272) (1,272)
Net income -- -- -- -- -- 1,125 1,125
------- ---- ------- ------- ------- ------- -------
BALANCE at
December 31, 1996 19,000 $ -- 1,000 $ 20 $ 4,014 $ (147) $ 3,887
======= ==== ======= ======= ======= ======= =======
</TABLE>
The accompanying notes are an integral part of these statements.
84
<PAGE> 85
GLENBOROUGH INLAND REALTY CORPORATION
STATEMENT OF CASH FLOWS
For the year ended December 31, 1996
(in thousands)
<TABLE>
Cash flows from operating activities:
<S> <C>
Net income $ 1,125
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization 717
Changes in certain assets and liabilities (378)
-------
Net cash provided by operating activities 1,464
-------
Cash flows from investing activities:
Increase in note receivable (80)
-------
Net cash used for investing activities (80)
-------
Cash flows from financing activities:
Capital contributions 115
Dividends (1,272)
Proceeds from borrowings 620
Repayment of borrowings (774)
-------
Net cash used for financing activities (1,311)
-------
Net increase in cash 73
Cash and cash equivalents at beginning of year --
-------
Cash and cash equivalents at end of year $ 73
=======
Supplemental disclosure of cash flow information:
Cash paid for interest $ 151
=======
</TABLE>
The accompanying notes are an integral part of these statements.
85
<PAGE> 86
GLENBOROUGH INLAND REALTY CORPORATION
Notes to Financial Statements
December 31, 1996
NOTE 1. ORGANIZATION
Glenborough Inland Realty Corporation ("GIRC") was organized in the State of
California on January 1, 1995. GIRC provides management services for certain
partnerships sponsored by Rancon Financial Corporation ("RFC"), an unaffiliated
corporation. These services include asset management, property development,
Securities and Exchange Commission reporting, accounting, investor relations and
property management services, and may in the future also include general partner
services.
GLB owns 100% of the 19,000 shares of non-voting preferred stock of GIRC, and
three individuals, including Frank Austin, an executive officer of GLB, each own
33 1/3% of the 1,000 shares of voting common stock of GIRC.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation - The accompanying financial statements present the
financial position of GIRC as of December 31, 1996 and the results of operations
and cash flows of GIRC for the year ended December 31, 1996.
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 results of operations during the reporting period. Actual
results could differ from those estimates.
Investments in Management Contracts - Investments in management contracts are
recorded at cost and are amortized on a straight-line basis over the term of the
contracts.
Cash Equivalents - GIRC considers short-term investments (including certificates
of deposit) with a maturity of three months or less at the time of investment to
be cash equivalents.
Income Taxes - Provision for income taxes in based on financial accounting
income.
NOTE 3. INVESTMENTS IN MANAGEMENT CONTRACTS
Investments in management contracts reflects the unamortized portion of the
management contracts GIRC holds with RFC for management of certain partnerships.
The contracts are being amortized on a straight-line basis over ten years.
NOTE 4. NOTE RECEIVABLE
The note receivable of $80,000 represents a loan made by GIRC to Green Meadows
Partners, Ltd., an affiliate of Glenborough Corporation. The note bears interest
at the rate of eight percent (8%) per annum with a maturity date of August 22,
1997. All payments on this note are deferred until maturity.
NOTE 5. LINE OF CREDIT
The line of credit of $2,383,000 represents debt with a bank which has
availability up to $2,700,000. Such debt bears interest at the variable rate of
Prime or LIBOR plus 2.75% (8.25% at December 31, 1996). The debt requires
monthly interest only payments and has a maturity date of December 31, 1998. The
line of credit is secured by the Management, Administration and Consulting
Agreement for the RFC partnerships.
86
<PAGE> 87
NOTE 6. INCOME TAXES
The 1996 provision for income taxes consists of the following (in thousands):
<TABLE>
<CAPTION>
Federal State Total
<S> <C> <C> <C>
Current $ 730 $ 200 $ 930
Deferred (141) (39) (180)
----- ----- -----
Total $ 589 $ 161 $ 750
===== ===== =====
</TABLE>
The deferred tax provision results from a temporary difference in the
recognition of amortization expense for tax and financial reporting purposes.
The investments in management contracts are being amortized on a straight-line
basis over 10 years for financial reporting purposes and 15 years for tax
purposes. As such items will be deductible for tax purposes in future periods,
the corresponding deferred tax asset has been recorded and is included in
prepaid expenses in the accompanying balance sheet.
NOTE 7. DECLARATION OF DIVIDENDS
The board of directors of GIRC declared the following dividends:
<TABLE>
<CAPTION>
Preferred Common
Stock Stock Total
---------- ---------- ----------
<S> <C> <C> <C>
April, 1996 $ 485,000 $ 25,000 $ 510,000
July, 1996 321,000 17,000 338,000
October, 1996 403,000 21,000 424,000
---------- ---------- ----------
Total paid in 1996 1,209,000 63,000 1,272,000
January, 1997 403,000 21,000 424,000
---------- ---------- ----------
Total paid from 1996 earnings $1,612,000 $ 84,000 $1,696,000
========== ========== ==========
</TABLE>
87
<PAGE> 88
SIGNATURES
Pursuant to the requirements of Section l3 or l5(d) of the Securities Exchange
Act of l934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
GLENBOROUGH REALTY TRUST INCORPORATED
By: Glenborough Realty Trust Incorporated,
Date: March 5, 1997 /s/ Robert Batinovich
---------------------
Robert Batinovich
Chairman of the Board,
President and Chief Executive Officer
Date: March 5, 1997 /s/ Andrew Batinovich
---------------------
Andrew Batinovich
Director, Executive Vice President,
Chief Operating Officer
and Chief Financial Officer
(Principal Financial Officer)
Date: March 5, 1997 /s/ Terri Garnick
------------------
Terri Garnick
Senior Vice President,
Chief Accounting Officer,
Treasurer
(Principal Accounting Officer)
Date: March 5, 1997 /s/ Laura Wallace
-----------------
Laura Wallace
Director
88
<PAGE> 89
EXHIBIT INDEX
Exhibit
Number Exhibit Title
- ------- ----------------------------------------------------------
2.01 Articles and Plan of Merger dated December 28, 1995, by
and among the Company and the Partnerships. (3)
2.02 Articles and Plan of Merger dated December 28, 1995, by
and among the Company and Glenborough Corporation. (3)
3.01 Articles of Amendment and Restatement of Incorporation of
Glenborough Realty Trust Incorporated. (1)
3.02 Bylaws of Glenborough Realty Trust Incorporated. (1)
3.10 Second Amended and Restated Agreement of Limited
Partnership of Glenborough Properties, L.P. (5)
4.02 Form of Common Stock Certificate of the Company. (1)
10.01 First Amended and Restated Agreement of Limited
Partnership of Glenborough Properties, L.P. (4)
10.02 Form of Indemnification Agreement for existing Officers
and Directors of Glenborough Realty Trust Incorporated.
(1)
10.04* Form of 1996 Employee Stock Incentive Plan. (4)
10.05* Form of 1995 Non-Employee and Director Stock Incentive
Plan. (1)
10.06 Lease Agreements between Glenborough Properties, L.P. and
Glenborough Hotel Group for Country Suites-Tucson, Country
Suites-Ontario and Country Suites- Arlington. (2)
10.07* Employment Agreement between Glenborough Realty Trust
Incorporated and Robert Batinovich. (2)
10.08* Employment Agreement between Glenborough Realty Trust
Incorporated and Andrew Batinovich. (2)
10.14 Management, Administration and Consulting Agreement dated
as of December 20, 1994 between Glenborough Inland Realty
Corporation and the General Partners of nine Rancon
Partnerships. (1)
10.15 Amendment to Management, Administration and Consulting
Agreement dated March 30, 1995 between Glenborough Inland
Realty Corporation and the General Partners of nine Rancon
Partnerships. (1)
10.18 Agreement between Glenborough Corporation and Bear,
Stearns & Co., Inc., dated October 7, 1994. (1)
10.19* Employment Agreement between Glenborough Realty
Corporation and Robert Batinovich. (2)
10.20* Employment Agreement between Glenborough Realty
Corporation and Andrew Batinovich. (2)
10.21* Employment Agreement between Glenborough Inland Realty
Corporation and Robert Batinovich. (2)
89
<PAGE> 90
EXHIBIT INDEX - CONTINUED
Exhibit
Number Exhibit Title
- ------- -------------------------------------------------
10.22* Employment Agreement between Glenborough Inland Realty
Corporation and Andrew Batinovich. (2)
10.23* Employment Agreement between Glenborough Hotel Group and
Andrew Batinovich. (2)
10.24 Form of Indemnification Agreement for Existing Officers
and Directors of Glenborough Hotel Group. (1)
10.25 Form of Indemnification Agreement for Existing Officers
and Directors of Glenborough Realty Corporation. (1)
10.26 Form of Indemnification Agreement for Existing Officers
and Directors of Glenborough Inland Realty Corporation.
(1)
10.27 Registration Agreement between Glenborough Realty Trust
Incorporated and GPA, Ltd. (2)
10.28 Lock Up Agreements. (2)
10.29 Subscription Agreement between Glenborough Properties,
L.P. and GPA, Ltd. (2)
10.30 Form of Agreement for Purchase and Sale of Real Estate to
be entered into by and between Glenborough Realty Trust
Incorporated and Outlook Income Fund 9. (1)
10.31 Indemnification Agreement for Glenborough Realty
Corporation and Glenborough Realty Trust Incorporated,
with Robert Batinovich as indemnitor. (2)
10.32 Amendment to First Amended and Restated Agreement of
Limited Partnership of Glenborough Properties, L.P. (6)
10.33 Agreement for contribution of Partnership Interests for
the University Club Tower Property. (7)
10.34 Credit agreement with Wells Fargo Bank N.A. related to the
$50,000,000 secured revolving line of credit. (8)
10.35 Credit agreement with Wells Fargo Bank N.A. related to the
$6,120,000 2-year secured term loan. (9)
10.36 Purchase Agreement related to the acquisition of Carlsberg
Plaza, one of the Carlsberg Properties. (10)
10.37 Purchase Agreement related to the acquisition of Dallidet
Professional Center, one of the Carlsberg Properties. (11)
10.38 Purchase Agreement related to the acquisition of Hillcrest
Office Building, one of the Carlsberg Properties. (12)
10.39 Purchase Agreement related to the acquisition of
Tradewinds Office Building, one of the Carlsberg
Properties. (13)
10.40 Purchase Agreement related to the acquisition of Sonora
Plaza, one of the Carlsberg Properties. (14)
10.41 Loan Agreement between Glenborough Properties, L.P. and
Carlsberg Properties, Ltd. for the $3,600,000 Grunow
mortgage loan receivable. (15)
10.42 Option Agreement between Glenborough Properties, L.P. and
Carlsberg Properties, Ltd. for the Grunow Medical
Building. (16)
90
<PAGE> 91
EXHIBIT INDEX - CONTINUED
Exhibit
Number Exhibit Title
- ------- ----------------------------------------------------------
10.43 Contribution Agreement related to the acquisition of the
TRP Properties. (17)
10.44 Agreement for Contribution of Partnership Interests
related to the acquisition of the Bond Street Property.
(18)
10.45 Second Amendment to First Amended and Restated Agreement
of Limited Partnership of Glenborough Properties, L.P.
(19)
10.46 Second Amendment to Agreement of Limited Partnership of
GPA Bond, a California Limited Partnership. (20)
10.47 Lease Agreement between Glenborough Properties, L.P. and
Glenborough Hotel Group for Country Suites - San Antonio.
(21)
10.48 Purchase Agreement related to the purchase of the
Scottsdale Hotel.
10.49 The First Amendment to the Agreement of Purchase of Sale
related to the purchase of the Scottsdale Hotel.
23.1 Consent of Arthur Andersen LLP, independent public
accountants.
27.1 Financial Data Schedule
* Indicates management contract or compensatory plan or arrangement.
(1) Incorporated by reference to the identically numbered exhibit to the
Company's Registration Statement on Form S-4 (Registration No.
33-83506), which became effective October 26, 1995.
(2) Incorporated by reference to the identically numbered exhibit to the
Company's Annual Report on Form 10-K for the year ended December 31,
1995.
(3) Incorporated by reference to the identically numbered exhibits to the
Company's Current Report on Form 8-K which was filed on January 16,
1996.
(4) Incorporated by reference to the identically numbered exhibit to the
Company's Registration Statement on Form S-11 (Registration No.
333-09411), which was filed on August 1, 1996.
(5) Incorporated by reference to the identically numbered exhibit to the
Company's Current Report on Form 8-K which was filed on November 1,
1996.
(6) Incorporated by reference to Exhibit 10.02 to the Company's
Registration Statement on Form S-11 (Registration No. 333-09411), which
was filed on August 1, 1996.
(7) Incorporated by reference to Exhibit 10.39 to the Company's
Registration Statement on Form S-11 (Registration No. 333-09411), which
was filed on August 1, 1996.
(8) Incorporated by reference to Exhibit 10.31 to the Company's
Registration Statement on Form S-11 (Registration No. 333-09411), which
was filed on August 1, 1996.
(9) Incorporated by reference to Exhibit 10.30 to the Company's
Registration Statement on Form S-11 (Registration No. 333-09411), which
was filed on August 1, 1996.
(10) Incorporated by reference to Exhibit 10.1 to the Company's Current
Report on Form 8-K which was filed on November 1, 1996.
(11) Incorporated by reference to Exhibit 10.2 to the Company's Current
Report on Form 8-K which was filed on November 1, 1996.
(12) Incorporated by reference to Exhibit 10.3 to the Company's Current
Report on Form 8-K which was filed on November 1, 1996.
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EXHIBIT INDEX - CONTINUED
(13) Incorporated by reference to Exhibit 10.4 to the Company's Current
Report on Form 8-K which was filed on November 1, 1996.
(14) Incorporated by reference to Exhibit 10.5 to the Company's Current
Report on Form 8-K which was filed on November 1, 1996.
(15) Incorporated by reference to Exhibit 10.6 to the Company's Current
Report on Form 8-K which was filed on November 1, 1996.
(16) Incorporated by reference to Exhibit 10.7 to the Company's Current
Report on Form 8-K which was filed on November 1, 1996.
(17) Incorporated by reference to Exhibit 99. to the Company's Current
Report on Form 8-K filed on December 30, 1996.
(18) Incorporated by reference to Exhibit 10.01 to the Company's Quarterly
Report on Form 10Q/A for the quarter ended September 30, 1996.
(19) Incorporated by reference to Exhibit 10.02 to the Company's Quarterly
Report on Form 10Q/A for the quarter ended September 30, 1996.
(20) Incorporated by reference to Exhibit 10.03 to the Company's Quarterly
Report on Form 10Q/A for the quarter ended September 30, 1996.
(21) Incorporated by reference to Exhibit 10.04 to the Company's Quarterly
Report on Form 10Q/A for the quarter ended September 30, 1996.
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EXHIBIT 10.48
AGREEMENT OF PURCHASE AND SALE
(Country Suites Hotel - Scottsdale, Arizona)
This Agreement of Purchase and Sale ("Agreement") is made and executed
this ____ day of February, 1997, by and between Suites of Arizona, L.L.C., an
Arizona limited liability company ("Suites") and/or Nominee (herein
collectively called "Seller") and Glenborough Properties, L.P., a California
limited partnership ("Buyer").
This Agreement is made with reference to the following facts:
A. Seller is the tenant under that certain Lease Agreement dated on
or about December 2, 1994, (the "Ground Lease") between Edwards Family
Properties of Arizona, Inc., as Lessor, and Suites, as Tenant (the Lessor's
interest in the Ground Lease having been transferred to Shea-Edwards Limited
Partnership ("Landlord")) and the owner of the improvements constructed on the
leased premises, which premises are commonly known as 10801 North 89th Place,
Scottsdale, Arizona 85260, comprising approximately 3.5 acres of land upon
which are constructed a hotel facility containing 164 guest rooms included in
approximately 83,000 square feet of improvements and more particularly
described in Exhibit "A" hereto (the "Project").
B. Seller desires to sell and Buyer desires to purchase the
Project together with the personal property described on Exhibit "B" hereto
("Personal Property"), public licenses and permits owned by Seller to the
extent transferable used in connection with the maintenance and operation of
the Project, the rights under Seller's franchise ("Franchise") with Country
Hospitality Corporation to operate the Project as a Country Suites Hotel, and
all plans and reports relating to the construction, maintenance and operation
of the Project.
NOW, THEREFORE, in consideration of the mutual covenants herein
contained, the parties hereto agree as follows:
1. Sale and Purchase
1.1 Assets to be Sold and Purchased. At the Closing, Seller agrees
to sell and Purchaser agrees to purchase the following:
(a) The Project, including, but not being limited to the
Ground Lease;
(b) All Personal Property excluding Seller's cash and
accounts receivable.
(c) To the extent owned by Seller and to the extent
transferable, all public licenses, permits, certificates of occupancy,
approvals, dedications, subdivision maps and entitlements issued by all
cognizant government agencies in connection with the ownership, operation or
construction of the Project ("Licenses and Permits");
(d) The Franchise;
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(e) On a non-exclusive basis, and to the extent
transferable, copies of all (i) books, records and other financial information
reflecting the operation of the Project; (ii) the preliminary, final and
proposed building plans and specifications respecting the Project that are
described on Exhibit C; and (iii) the appraisals, structural reviews,
architectural drawings and other documents and engineering, soils, seismic,
geologic and architectural reports, studies, certificates and other documents
pertaining to the Project which are described on Exhibit C ("Reports and
Plans"); and
(f) All of Seller's rights under all warranties, whether
express or implied, which relate to the construction of the Project and the
acquisition and condition of the Personal Property (including all similar
rights under the construction contracts for the construction of the Project)
(the "Construction Warranties").
(g) All benefits and obligations from and after the Closing
under (i) the equipment leases and maintenance and service contracts, described
on Exhibit D ("Operating Agreements") and (ii) all occupancy leases and
bookings ("Bookings").
The Project, the Personal Property, the Licenses and Permits, the
Franchise, the Reports and Plans, the Construction Warranties and the Operating
Agreements are herein sometimes referred to as the "Property").
2. Purchase Price and Payment Thereof.
2.1 Purchase Price. The purchase price for the Property (the
"Purchase Price") shall be $12,000,000, plus or minus applicable prorations and
credits provided for herein, plus assumption of the obligations under the
Operating Agreements that accrue after the Closing Date.
2.2 Payment of Purchase Price. Buyer shall pay the Purchase Price as
follows:
(a) On the Opening of Escrow, Buyer shall deposit with the
Escrow Holder (as defined in Section 4.1) the sum of $200,000, which is herein
referred to as the "Deposit". Timely deposit of the Deposit shall be a
condition to the efficacy of this Agreement and of Seller's obligations
hereunder. The Deposit shall be held in an interest bearing account with
interest to accrue for the benefit of Buyer, unless Buyer shall default, in
which event accrued interest shall be deemed to be part of the Deposit and
delivered to Seller as part of the Deposit as hereinafter provided. The Escrow
Holder shall disburse the Deposit as part of the payment of the Purchase Price
in accordance with Section 6.4 (d) and such amount disbursed shall constitute a
credit in favor of Buyer against the Purchase Price. In the event that the
Closing fails to occur on or before the Closing Date (as defined in Section
6.1) through Seller's default, then Escrow Holder shall return the Deposit,
together with all accrued interest thereon, to Buyer subject to the provisions
of Section 6.2. In the event that the Closing fails to occur on or before the
Closing Date by reason of the default of Buyer under this Agreement, then
Escrow Holder shall deliver the Deposit to Seller as its full and complete
liquidated damages and its sole and exclusive remedy for the breach by Buyer,
but excluding Buyer's indemnities which shall survive termination of or the
Closing under this Agreement in the manner and to the extent provided in
Article 13. BUYER AND SELLER
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ACKNOWLEDGE AND AGREE THAT (1) THE DEPOSIT IS A REASONABLE ESTIMATE OF AND
BEARS A REASONABLE RELATIONSHIP TO THE DAMAGES THAT WOULD BE SUFFERED BY SELLER
IN THE EVENT OF A DEFAULT OR BREACH BY BUYER IN ITS OBLIGATIONS HEREUNDER; (2)
THE ACTUAL DAMAGES SUFFERED BY SELLER WOULD BE EXTREMELY DIFFICULT AND
IMPRACTICABLE TO DETERMINE; AND (3) BUYER DESIRES TO LIMIT ITS LIABILITY
HEREUNDER TO THE DEPOSIT IN THE EVENT OF A DEFAULT OR BREACH OF THIS AGREEMENT
BY BUYER. BUYER'S FAILURE TO APPROVE ANY CONTINGENCY THAT IS SUBJECT TO
BUYER'S APPROVAL UNDER THE PROVISIONS OF SECTION 5.1 SHALL NOT CONSTITUTE A
DEFAULT BY BUYER.
THE PARTIES HAVE SET FORTH THEIR INITIALS BELOW TO INDICATE THEIR
AGREEMENT WITH THE LIQUIDATED DAMAGE PROVISION CONTAINED IN THIS SECTION 2.2
(a).
BUYER: ________________ SELLER: ___________________
(Initials) (Initials)
(b) Balance of Purchase Price.
(i) At the Closing, Buyer will assume the unpaid
principal balance due the Arizona State Retirement System under that certain
promissory note in the original principal sum of $4,800,000 executed under date
of December 7, 1995, by Seller (the "Note") which is secured by a deed of trust
executed by Seller as Trustor, in favor of the Arizona State Retirement System
as beneficiary (the "Deed of Trust").
(ii) Prior to the Closing, Buyer shall deliver to
Escrow Holder in the form of cash, cashier's check or wire transfer, all
additional sums which are required to pay in full the balance of the Purchase
Price and which Buyer is obligated to pay as a result of prorations or the
allocation of costs as hereinafter set forth.
3. Escrow
3.1 Escrow Instructions. The purchase and sale of the Property will
be consummated through an escrow (the "Escrow") at Chicago Title Insurance
Company, 2020 North Central Avenue, Suite 300, Phoenix, AZ 85004-4598 (the
"Escrow Holder" or "Title Company"). Escrow shall be opened ("Opening of
Escrow") not later than three business days following the execution of this
Agreement by delivery to Escrow Holder of a fully executed copy of this
Agreement which shall constitute Escrow Holder's instructions. Escrow Holder
shall promptly deliver written notice to Seller and Buyer of the date of the
Opening of Escrow. The General Provisions applicable to escrows handled by
Escrow Holder are incorporated herein by this reference and made a part hereof.
Seller and Buyer agree to execute and deliver to Escrow Holder such additional
and supplemental instructions as Escrow Holder may require in order to clarify
Escrow Holder's duties under this Agreement; however, in the event of any
conflict or inconsistency between this
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Agreement and any instructions delivered to Escrow Holder or such General
Provisions, the terms of this Agreement shall govern the duties of Escrow
Holder and the rights and obligations of Seller and Buyer. Specifically, any
terms of the General Provisions which provide for a 13 day cancellation period
shall not be effective as between Seller and Buyer.
3.2 Definition of "Close of Escrow". For purposes of this Agreement,
the term "Close of Escrow" shall mean the time when Escrow Holder shall have
recorded all of the instruments to be recorded as set forth in Section 6.4 (b)
below.
4. Condition of Title
4.1 Seller shall convey to Buyer title to the Project subject only to
the Deed of Trust and the following (the "Permitted Exceptions"): Standard
printed title policy exceptions and exclusions and those exceptions set forth
in the Preliminary Title Report ("PTR") issued by Title Company (which Seller
shall cause Title Company to issue and deliver to Buyer within ten (10) days
after the Opening of Escrow together with copies of all recorded instruments
referenced in the exceptions set forth therein) which are approved by Buyer
pursuant to Section 4.3 below.
4.2 Title Insurance Policy. At the close of Escrow, Title Company
shall issue to Buyer an ALTA extended coverage owner's policy as to the Project
in an amount equal to the Purchase Price showing title vested in Buyer subject
only to the Deed of Trust and the Permitted Exceptions and such other matters
to which Buyer may consent in writing (the "Title Policy") insuring Buyer as
the owner of the Project. The Title Policy shall include such endorsements as
Buyer may reasonably request, including endorsements covering the subdivision
map act, survey, access, contiguity and no violations of covenants and
restrictions. It is understood that the Title Policy will insure the title to
the lessee's interest under the Ground Lease and not the fee title to the real
property described in the Ground Lease. To the extent the same is not
currently available, Seller shall furnish to Title Company (with a copy to
Seller) an ALTA survey in form approved by the Title Company within ten (10)
days after the Opening of Escrow.
4.3 Procedure for Approval of Title. Buyer shall have until the last
to occur of five (5) business days after the Opening of Escrow or ten (10) days
following the date of Buyer's receipt of the PTR, the ALTA survey and copies
the documents referenced as recorded exceptions therein within which to approve
or disapprove (i) any exception to title set forth in the PTR and (ii) the ALTA
survey. The failure by Buyer to give Seller written approval of the ALTA
survey and the exceptions set forth in the PTR within such time shall be deemed
to be Buyer's disapproval of the survey and of all matters shown on the PTR.
If Buyer disapproves any exceptions to title set forth in the PTR, Seller shall
have the opportunity, within five business days following receipt of Buyer's
disapproval ("Cure Period"), to attempt to remove or cause to be removed such
disapproved exceptions to title (the "Disapproved Exceptions"). If Seller
elects not to attempt to remove the Disapproved Exceptions or fails to remove
any Disapproved Exception within the Cure Period, Buyer may in writing elect to
waive its objection to any remaining Disapproved Exceptions or to terminate
Escrow and the funds deposited by Buyer shall be applied and returned as
provided in Section 6.2. In the event the PTR is supplemented at any time
after Buyer's approval thereof, then the same approval and cure procedure shall
be applicable to any additional exceptions or
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modifications to previous exceptions which materially and adversely affect the
value and utility of the Project in Buyer's reasonable, good faith judgment
that are set forth in said supplemental report as is set forth in this Section
4.3 for the approval of the original PTR except that Buyer shall have five (5)
days after receipt thereof to approve or disapprove the exceptions contained in
such supplemental report. The exceptions to title approved by Buyer pursuant
to this Section 4.3 shall become the Permitted Exceptions, as set forth in
Section 4.1.
5. Conditions Precedent to Close of Escrow
5.1 Contingencies; Investigation of Property; Financials; Title.
(a) Contingencies. Anything contained in this Agreement to
the contrary notwithstanding, Buyer's obligation to purchase the Project and to
close the Escrow hereunder is subject to Buyer's written approval or waiver of
all of the following conditions within the time periods set forth below, which
approval or waiver shall be in Buyer's sole and absolute discretion:
Approval of Title. Buyer shall have approved the
condition of the title to the Project in the manner provided in Section 4.3.
(b) Termination, If Buyer has not given written approval of
any of the matters set forth in Section 5.1 (a) within the time provided
therein after the Opening of Escrow, this Agreement shall terminate, Escrow
Holder shall return the Deposit to Buyer, as provided in Section 6.2, Buyer
shall return to Seller all Work Product and related documents previously
delivered by Seller to Buyer, and the Parties shall have no further obligation
or liability hereunder or otherwise in connection with the execution of this
Agreement. However, in the event Buyer provides written approval or waiver of
all of the contingencies set forth under Section 5.1 (a), within the times
provided therein, the Deposit shall become non-refundable, unless the Closing
does not occur and this Agreement is terminated by Buyer because of the
failure, through no fault of Buyer, of any condition described in Sections 5.3
(b), (c), (d), (e), (f), or (g) in which event the foregoing provisions
relating to the return of the Deposit shall apply.
5.2 Seller's Conditions. The following shall constitute conditions
precedent to the obligations of Seller to close the Escrow, and may be waived
only by a written waiver executed by Seller and delivered to Escrow Holder:
(a) Funds. Buyer shall have deposited with Escrow Holder
immediately available funds in an amount sufficient to cover the portion of the
Purchase Price described in Section 2.2 (b) and Buyer's share of prorations and
costs as described herein.
(b) Representations and Warranties. All of Buyer's
representations and warranties as set forth herein shall be true as of the
Close of Escrow as if the same were made on and as of said date.
(c) No Default. On the Closing Date, Buyer shall not be in
material default under this Agreement.
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5.3 Buyer's Conditions. The following shall constitute conditions
precedent to the obligations of Buyer to close the Escrow, and may be waived
only by a written waiver executed by Buyer and delivered to the Escrow Holder:
(a) Buyer shall have approved all of the matters set forth in
Section 5.1 ("Contingencies") within the times therein provided;
(b) The representations and warranties of the Seller
contained in Section 9 of this Agreement shall be true on and as of the Close
of Escrow as if the same were made on and as of said date;
(c) Seller shall have performed and complied with all
agreements and covenants required by this Agreement to be performed or complied
with by Seller prior to or at the time of the Close of Escrow;
(d) The Title Company shall be unconditionally committed to
issue the Title Policy to Buyer upon the Close of Escrow; and
(e) On or before the close of business on February 27, 1997,
Country Hospitality Corporation shall have consented to the assignment of the
Franchise to Buyer with such modifications thereto as Buyer may reasonably
request, or granted Buyer a new franchise to operate the Project as a Country
Suites Hotel on terms acceptable to Buyer.
(f) On or before the close of business on February 27, 1997,
the Arizona State Retirement System shall have consented to Buyer's assumption
of the Note and the obligations of Seller under the Deed of Trust without
modification thereto, subject to the Buyer's payment of an assumption fee in an
amount not to exceed 1% of the outstanding principal balance of the Note at the
Closing.
(g) Buyer shall have received an estoppel certificate from
the Landlord dated not more than ten (10) days prior to the Closing with a true
and correct copy of the Ground Lease attached substantially in the form of
Exhibit D-1.
6. Close of Escrow
6.1 Date of Close. Escrow Holder shall close the Escrow upon (i)
February 28, 1997, or as soon thereafter as practicable but in no event later
than March 17, 1997, or (ii) such earlier or later time as the parties may
agree in writing (the "Closing Date"), provided that all of the conditions to
the Close of Escrow have been satisfied or waived. If the Closing does not
occur on or before March 3, 1997, Buyer shall pay Seller interest on the cash
portion of the Purchase Price due under Section 2.2(b)(ii) at the rate of 10%
per annum from the Effective Date, as defined in Section 8.2, to the Closing
Date.
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6.2 Escrow Cancellation. In the event that the Close of Escrow does
not occur within the time prescribed in this Agreement, for any reason other
than the default of one of the parties hereto, Escrow Holder shall return to
the parties so delivering same all funds and instruments which are then held by
Escrow Holder. If Escrow fails to close for any reason other than Seller's or
Buyer's default, Seller and Buyer shall each bear one-half of any Escrow
cancellation charges and, in such event, neither party shall be liable to the
other hereunder. If Escrow fails to close by reason of Seller's default
hereunder, Seller shall pay all Escrow cancellation charges and Escrow Holder
shall return to Buyer all funds deposited by Buyer. If Escrow fails to close
by reason of Buyer's default hereunder, Buyer shall pay all Escrow cancellation
charges and any funds deposited under Section 2.2 shall be delivered to Seller.
6.3 Items to be Delivered into Escrow.
(a) Seller. On or prior to the date set for the Close of
Escrow, Seller shall deposit in Escrow the following documents, executed and
acknowledged by Seller, where necessary:
(i) The Assignment and Assumption of Ground Lease in
the form of Exhibit E, conveying title to the Project to Buyer or Buyer's
assignee, subject only to the Deed of Trust and the Permitted Exceptions.
(ii) An Assignment of Rights and Assumption of
Certain Obligations in the form of Exhibit F covering the assignment of the
Work Product, the Franchise, the Licenses and Permits, the Reports and Plans,
the Construction Warranties and the bookings.
(iii) A Bill of Sale in the form of Exhibit G
transferring title to the improvements constructed on the premises covered by
the Ground Lease and the Personal Property to Buyer, including the transfer of
such certificates of title as may be required to transfer title to motor
vehicles included in the Personal Property, if any;
(iv) A certification duly executed by Seller under
penalty of perjury certifying that Seller is not a "foreign person" in
accordance with and for the purpose of the provisions of Sections 7701 and 1445
of the Internal Revenue Code of 1986, as amended, and any regulations
promulgated thereunder (the "FIRPTA Affidavit");
(v) Any amounts in excess of the Purchase Price
which Escrow Holder estimates are required to be paid by Seller under this
Agreement.
(b) Buyer. On or before one business day prior to the date
set for the Close of Escrow, Buyer shall deposit in Escrow:
(i) Immediately available funds in an amount
sufficient to cover the balance of the Purchase Price to the extent Buyer has
not previously deposited the same pursuant to the requirements of Section 2.2
(b) plus Buyer's share of costs and prorations pursuant to Section 2.2 (b)
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(ii) The Assignment of Rights and Assumption of
Certain Obligations in the form of Exhibit F hereto.
(iii) The Assignment and Assumption of Ground Lease
in the form attached hereto as Exhibit E.
6.4 Instructions. At the Closing, the Escrow Holder shall:
(a) Date all instruments calling for a date as of the date of
the Close of Escrow.
(b) Record the Assignment and Assumption of Ground Lease in
the Office of the County Recorder of Maricopa County, Arizona;
(c) Deliver to Buyer the Bill of Sale to the improvements
constructed on the premises covered by the Ground Lease and the Personal
Property, together with the certificates of Title to the vehicles, if any, the
Assignment of Rights and Assumption of Certain Obligations and the FIRPTA
Affidavit.
(d) Deliver to Seller the Purchase Price and other sums due
Seller (after deduction of Seller's share of prorations and costs as set forth
in Section 7) and Buyer's assumption of the Franchise, Operating Agreements and
bookings.
(e) Issue to Buyer the Title Policy with liability in the
amount of the Purchase Price insuring Buyer's title to the Project subject only
to the Permitted Exceptions;
(f) Prepare and deliver to both Buyer and Seller one signed
copy of the Escrow Holder's closing statement showing all receipts and
disbursements.
6.5 Additional Instructions to Escrow Holder. Escrow Holder shall
instruct the County Recorder to return all recorded documents to the Escrow
Holder. Upon receipt thereof, Escrow Holder shall:
(a) Deliver to Seller a copy as recorded of the Assignment
and Assumption of Ground Lease.
(b) Deliver to Buyer the original of the Assignment and
Assumption of Ground Lease.
7. Costs and Prorations
7.1 Prorations. Escrow Holder shall prorate real and personal
property taxes and other assessments relating to the Project and the ground
rents due under the Ground Lease between Seller and Buyer as of the Effective
Date (as defined in Section 8.2) based upon the latest available tax bill.
Interest on the Note shall be prorated as of the Effective Date.
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Insurance premiums on any insurance coverages which Buyer, at its
option, may elect to acquire and continue and room rents shall be prorated
between Seller and Buyer as of the Effective Date outside of Escrow and Escrow
Holder shall have no responsibility in connection therewith.
With respect to the proration of the real property taxes, the parties
acknowledge that the premises covered by the Ground Lease are part of a larger
parcel owned by the Landlord and that pursuant to the provisions of the Ground
Lease, there is an allocation of the real property taxes assessed against the
entire parcel based upon the Seller's pro rata share of the real property taxes
as defined in the Ground Lease. The parties acknowledge that Suites obtained a
reduction in the real property values assessed against the improvements
included in the Project for the year 1996 on the basis that the improvements
were not available for occupancy until after January 1, 1996. The Ground Lease
provides that Seller's pro rata share of the real property taxes assessed
against the improvements located on the entire parcel owned by Landlord shall
be proportionate to the square footage of the completed and assessed buildings.
The Landlord allocated the entire reduction to Suites as the tenant under the
Ground Lease. If any of the other tenants of the Landlord object to this
allocation, Seller agrees to hold Buyer free and harmless from any such claim,
including any liability, loss, cost, damage or expense, including reasonable
attorneys fees, that Buyer may suffer or incur as a consequence thereof.
Notwithstanding the specific reference to the property tax reduction for the
calendar year 1996, it is understood and agreed that Seller shall be and remain
responsible for any additional real property tax which is levied or assessed or
otherwise allocated to the land and improvements covered by the Ground Lease
for the period prior to the Effective Date.
Buyer and Seller acknowledge that a portion of the rent payable under
the Ground Lease is an amount equal to two and one-half percent (2 1/2%) of the
"Gross Room Charges" (as that term is defined in the Ground Lease)(the
"Percentage Rent"). Buyer and Seller further acknowledge that a
disproportionate amount of the Percentage Rent is paid in the winter months of
the year. Accordingly, Buyer and Seller have agreed to estimate the Percentage
Rent payable in 1997 as ________________________Dollars ($_______) (the
"Estimate Percentage Rent"). At Closing, the Estimate Percentage Rent shall be
divided between Buyer and Seller with ___________________Dollars ($_________)
to be charged to Buyer and __________________Dollars ($_________) to be charged
to Seller. After the Closing, and within five (5) days of such amount being
available to Buyer, Buyer shall provide Seller with a statement of the actual
Percentage Rent paid to Landlord under the Ground lease in 1997 (the "Actual
Percentage Rent"). If the Actual Percentage Rent differs from the Estimated
Percentage Rent, then the Actual Percentage Rent shall be allocated between the
parties based upon the respective Gross Room Charges that each party generates
during 1997 and the party which was undercharged at Closing for its share of
the Percentage Rent for 1997 shall make such payments to the other party as are
necessary to conform to an accurate proration of Percentage Rent for 1997. The
provisions of this paragraph of this Section are expressly intended to survive
the Closing.
Any deposit or credit card information or charge authorization in
Seller's possession which relate to any bookings or room reservations for
periods subsequent to the Effective Date, shall be credited or delivered to
Buyer outside of the Escrow Holder and the Escrow Holder shall have no
responsibility in connection therewith.
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7.2 Costs and Obligations to be Paid by Seller. Seller shall pay the
following costs:
(a) The premium for the Title Policy to the extent of ALTA
standard coverage owner's policy.
(b) One-half of the fees for recording and filing all
documents required by this Agreement.
(c) One-half of the Escrow fee.
(d) The full amount required to release all liens against the
Project and the Personal Property except for the obligations secured by the
Deed of Trust and that are assumed by Buyer under the Operating Agreements and
bookings.
7.3 Costs and Obligations to be Paid by Buyer. Buyer shall pay the
following costs:
(a) The premium for the Title Policy to the extent of any
coverages, including endorsements, in excess of ALTA standard coverage owner's
policy.
(b) One-half of the Escrow fee.
(c) It is understood that Buyer will be responsible for
establishing utilities in its own name and Seller shall be entitled to the
return of its utility deposits.
8. Personal Property and Transfer and Conversion of Operations.
8.1 Personal Property. Attached hereto as Exhibit C is a complete
inventory of the Personal Property owned by Seller and included in the sale.
In addition to the items set forth on Exhibit C, the Personal Property to be
acquired by Buyer shall include all linens, supplies and all items of
expendable inventory used in the operation of the Project wherever the same may
be located. Seller agrees that between the date hereof and the Closing that
Seller shall continue to operate the Project in the ordinary course of business
in accordance with the requirements of the Franchise and purchase, at Seller's
expense, and in a normal and customary manner, replacements for damaged
furniture and fixtures and continue to purchase replacements for inventory so
that at the Closing, the items included in inventory that are expendable shall
be at the levels customarily included in the normal course of Seller's
operation of the Project. Seller shall maintain the Personal Property
substantially in the same condition as prevailed at the time of Buyer's
inspection thereof, reasonable wear and tear and casualty excepted.
8.2 Transfer of Operations. The operations of the Project shall be
transferred to Buyer as of the Effective Date. If the Closing shall occur
before February 28, 1997, the Effective Date shall be at 3:00 P.M. on the day
of the Closing. If the Closing shall occur on or after February 28, 1997, the
Effective Date shall be the opening of business on March 1, 1997. Seller shall
be responsible for all obligations incurred by Seller in connection with the
operation of the Project prior to the Effective Date, including all payroll,
payroll taxes and accounts payable, including those incurred in
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connection with the purchase of inventory and all obligations that have accrued
prior to said date under the Franchise and the Operating Agreements.
Notwithstanding the fact that the operations of the Project are transferred for
accounting purposes as of the Effective Date, Seller shall terminate or
reassign all of Seller's employees engaged in the operation of the Project on
the Closing Date and shall be responsible for the payment of all termination
pay or other benefits due Seller's employees as a consequence of such
termination even though the Effective Date and the Closing Date may fall on
different days. Buyer shall be free to hire such employees of Seller as Buyer,
in the exercise of its discretion, may elect. All amounts due for the night's
lodging immediately preceding the Effective Date shall be the property of
Seller and Buyer and Seller shall arrange for the proration of any charges for
any guests who do not check out on the Effective Date. Except as may be
provided above, Buyer is not acquiring any of Seller's accounts receivable.
Buyer shall be permitted to have representatives on site during the two (2)
weeks preceding the Closing to observe operations and facilitate the transfer.
9. Representations, Warranties and Covenants
of Seller
In consideration of Buyer's entering into this Agreement and as an
inducement to Buyer to purchase the Property, Seller makes the following
representations and warranties, each of which is material and is being relied
upon by Buyer and further represents and warrants that the same shall be true
and correct at and as of the Closing as if made at and as of the Closing.
9.1 Brokers Commission. Seller has not had any contract with any
finder or broker or any other person, firm or corporation, as a consequence of
which Buyer will be liable for the payment of any commission or any broker's or
finder's fee in connection with the transactions contemplated by this
Agreement.
9.2 Authorization. This Agreement and the transaction contemplated
herein have been duly and validly authorized, executed and delivered by Seller
and no other action by Seller is requisite to the valid and binding execution,
delivery and performance of this Agreement by Seller, except as otherwise
expressly set forth herein.
9.3 Title and Third Party Consents. Subject to the receipt of the
third-party consents hereinafter referenced, at the Closing Buyer will acquire
title to the Project, the Franchise and the Personal Property free and clear of
all liens, encumbrances and adverse claims, save and except for the rights of
the lessor under the Ground Lease, the Deed of Trust, the Permitted Exceptions,
and any lien assumed by Buyer which is encompassed by the Operating Agreements.
No consents or waivers of or by any third party (including any governmental
entity) are necessary to permit Buyer's purchase of the Property pursuant to
this Agreement except for the consent of Country Hospitality Corporation to the
assignment of the Franchise, the Landlord's consent to the Assignment and
Assumption of Ground Lease and the lender's consent to the assumption of the
Note and the Deed of Trust.
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9.4 Compliance With Law. To the best of Seller's knowledge, the
Property and the condition and operation thereof comply with all laws, rules
and regulations applicable to the Property.
9.5 Threatened Actions. To the best of Seller's knowledge, there are
no actions, suits, proceedings or litigation (in law or in equity) pending
against or threatened or affecting the Property, including zoning permits or
entitlements with respect to the Property.
9.6 No Notices. Other than as disclosed to Buyer through a copy of
that certain memorandum from the Landlord's counsel to Seller's counsel dated
February 4, 1997, Seller has not received any notice of any change contemplated
in any applicable laws, ordinances or restrictions, or any judicial or
administrative action, or any action by adjacent landowners, or natural or
artificial conditions upon the Project which would materially impact the
Project.
9.7 Condemnation. There are no pending, or, to the best of Seller's
knowledge, threatened proceedings in eminent domain or otherwise, which would
affect the Project, or any portion thereof.
9.8 Documents. To the best of Seller's knowledge, (i) all documents
and materials delivered to Buyer pursuant to this Agreement or prior to the
date of this Agreement are true and correct copies of originals, and (ii) the
information contained therein is materially true and accurate.
9.9 Agreements. Attached hereto as Exhibit H is a full and complete
list of all of the Construction Warranties.
9.10 Maintenance Contracts. There are no maintenance, service or
similar agreements (whether oral or written) affecting or relating to the
Property which will continue in effect past the Close of Escrow, except for the
Operating Agreements described on Exhibit D hereto and room reservation
bookings for periods after the Closing.
9.11 Utilities. To the best of Seller's knowledge, all water, sewer,
gas, electric, and drainage facilities, if any, connected to the Project are
fully and legally permitted.
9.12 Hazardous Wastes. To the best knowledge of Seller, no Hazardous
Materials are located on, at, under or about the Project, nor have any
Hazardous Materials ever been used, stored, disposed or produced on, at, under
or about the Project. Seller does not keep, nor has Seller permitted anyone
else to keep, whether temporarily or permanently, any Hazardous Materials on,
at, under, or about the Project except in accordance with applicable laws.
There have not been any releases, emissions or discharges, direct or indirect,
of any Hazardous Materials into the environment, including ground water, on or
from the Project, nor has any such release been threatened. To Seller's
knowledge, there are no aboveground or underground storage tanks located on or
about the Project. As used in this subsection, "Hazardous Materials" shall
mean and refer to any hazardous or toxic substances, chemicals, wastes, or
materials (as defined in any applicable federal or state law, rule or
regulation relating to health and safety and the environment), but
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excluding chemicals and supplies of the type and in the quantities customarily
used in motel operations.
9.13 Condition of the Project. To the best of Seller's knowledge,
there exists no material defects in the roofs, walls or soils of the Project or
any other material defects or material deficiencies in any building system in
the buildings included in the Project, including, but not limited to,
electrical and mechanical systems, and all such systems are in good working
order, ordinary wear and tear excepted.
9.14 Construction of Improvements. To the best of Seller's
knowledge, the improvements included in the Project were built in all material
respects according to the plans and specifications furnished by Seller to Buyer
and were designed and constructed to satisfy the requirements of the local
building code, including any seismic standards contained therein, in effect at
the time of such design and construction.
9.15 Personal Property. To the best of Seller's knowledge, the
Personal Property, together with all mechanical equipment included in the
Project, is in good working order and condition, reasonable wear and tear
excepted.
9.16 Foreign Person. Seller is not a "foreign person" within the
meaning of Section 1445 (f)(3) of the Internal Revenue Code, and no portion of
the Purchase Price is required to be withheld by Buyer pursuant to Section 1445
of the Code and the regulations promulgated thereunder.
9.17 Taxes. Seller has duly filed all returns which are required to
be filed by Seller with any Federal or State agency, including, but not being
limited to, the Internal Revenue Service, the Arizona Department of Revenue,
the City of Scottsdale, and the Arizona Department of Economic Security and has
paid in a timely manner all taxes due thereon to any such agency, including,
but not being limited to, all payroll and withholding taxes, sales tax and room
taxes. Seller agrees to file all final returns which may be due to any such
agencies and pay all taxes which may be due any such agency, within fifteen
(15) days after the Closing, or within such shorter period of time as may be
required by law.
9.18 Accuracy of Due Diligence Information. Seller has delivered to
Buyer true and correct copies of all of the due diligence materials pertaining
to the Project which are in possession or control of Seller. To the best of
Seller's knowledge, all financial information, including all income and expense
records, included in such due diligence materials, or otherwise furnished to
Buyer pursuant to the provisions of this Agreement, is true and correct.
In the event that any representation or warranty was or is untrue in
any material respect, Buyer shall not be deemed to have waived any claim for
breach of any representation or warranty made by Seller herein unless Buyer has
actual knowledge of such breach prior to the Closing or such knowledge could
have been obtained from information contained in the documents embodying the
Reports and Plans, the Construction Warranties, the Operating Agreements, and
the financial statements which have been furnished to Buyer. For this purpose,
"actual knowledge" of Buyer shall be deemed to mean the present actual
knowledge of Mr. Andrew Batinovich, Mr.
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Stephen Saul and Mr. Frank E. Austin, without any duty of further investigation
or inquiry on their part. In the event that Buyer does have actual knowledge
of or is otherwise charged with knowledge of any such breach of any
representation or warranty of Seller made herein, as its sole and exclusive
remedy, Buyer shall have the right to terminate this Agreement prior to the
Closing, in which event all monies deposited with the Escrow Holder shall be
returned to the parties depositing the same, and Seller shall bear all
cancellation charges due Title Company and Escrow Holder. After the Closing,
Buyer shall have no recourse against Seller with respect to any breach of any
representation or warranty of Seller as to which Buyer had actual knowledge or
is otherwise charged with knowledge pursuant to the above provisions, provided,
however, nothing herein contained shall limit or restrict any right which Buyer
may have for recourse against Seller for any amount for which Seller is
responsible under the provisions contained in Section 7.1 or for the allocation
of expenses and other charges pursuant to the provisions of Section 8.2.
Notwithstanding the foregoing, the representations and warranties set forth in
this Section 9 shall be limited by the provisions of Section 13 hereof.
10. Representations, Warranties and Covenants of Buyer.
Buyer represents and warrants to and covenants with Seller as follows:
10.1 Authorization. This Agreement has been duly authorized by all
necessary action on the part of Buyer and this Agreement represents a valid and
binding obligation of Buyer in accordance with its terms subject to the effect
of the Bankruptcy laws and the rights of creditors generally.
10.2 Agreement With Broker. Buyer has not had any contact with any
finder or broker or with any other person, firm or corporation, as a
consequence of which Seller may be liable for the payment of any commission or
any broker's or finder's fee in connection with the transactions contemplated
by this Agreement.
10.3 No Default. Neither the execution of this Agreement nor the
consummation of the transactions contemplated hereunder and the fulfillment of
the terms hereof will result in any breach of any of the terms, provisions,
conditions of or constitute a default under, invalidate, or give any other
legal person any rights of acceleration of performance, cancellation or
termination or any other rights not theretofore existing with respect to any
contract, agreement, instrument, or decree, order, statute, rule or regulation
of any court or of any Federal, State or local governmental or regulatory body
or administrative agency to which Buyer is a party, or, to Buyer's knowledge,
without further inquiry, to which Buyer is subject to or bound by.
10.4 Operating Agreements. Buyer at the Closing agrees to assume all
obligations that accrue after the Closing under the Operating Agreements and
all bookings and reservations for periods after the Closing. To the extent that
Buyer is not permitted to assume any of the Operating Agreements at the
Closing, Buyer shall arrange to pay off these obligations at the Closing.
10.5 Transfer of Reports. Buyer shall furnish Seller free of
charge with any third party environmental inspection reports, soil studies,
soil tests, and inspection reports Buyer obtains or
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obtained respecting the Property to the extent the same are deliverable without
the consent of a third party. Buyer agrees to use reasonable efforts to obtain
such consent. In the event Buyer fails to close hereunder, Buyer shall return
to Seller all copies of documents and reports received from Seller.
10.6 Buyer's Inspections. Buyer hereby acknowledges that its
representatives have inspected the Property and Seller's records regarding the
Property, and is satisfied with the current condition of the same, and is
buying and accepting the same based upon its own inspection of the Property and
Seller's limited express warranties. Buyer further represents and warrants
that it is not relying upon any statement or representation made by any of
Seller's employees or agents, or by any other third party or entity with regard
to the condition or operation of the subject Property not expressly set out in
this Agreement, and that it understands that no Broker has been authorized as
agent of the Seller hereunder to represent the subject Property to Buyer on
behalf of Seller.
10.7 Right of First Refusal. This Agreement has been executed
pursuant to a right of first refusal that Seller has granted to Buyer. If this
Agreement is terminated by Seller because of any default by Buyer in the
performance of its obligations hereunder, Seller's obligations under said right
of first refusal shall be deemed satisfied and the Buyer shall have no further
rights thereunder.
11. Possession and Right of Entry and Use; Condition of Project.
Possession of the Property shall be delivered to Buyer upon the
Closing subject to the Ground Lease, the Deed of Trust, the Permitted
Exceptions and the rights of registered guests. Buyer and its authorized
agents, representatives and consultants shall have reasonable access to the
Project prior to the Closing for purposes of observing and familiarizing itself
with the operations of the Project and any such entry shall not be deemed the
delivery or acceptance of possession of the Property.
Buyer shall indemnify Seller against all loss, claims, damage, injury,
judgments and liens resulting from or related to Buyer's inspections of or
entries onto the Property, whether by or through Buyer, its employees, or
agents, and including upon allegation of negligence by the indemnitee, which
indemnity shall survive Closing under, or termination of, this Agreement.
12. Taking by Eminent Domain and Casualty Loss.
12.1 Eminent Domain. If all or a substantial portion of the Project
is taken by eminent domain prior to the Close of Escrow, Buyer shall have the
option either:
(a) By written notice to Seller, given within ten (10) days after
Buyer is notified in writing of such taking, to require Seller to perform under
this Agreement, to close the sale of the Property, and to assign and deliver to
Buyer all of Seller's right and interest in any and all awards for such taking;
or
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(b) By failure to give such notice to Seller within such ten (10) day
period, to terminate all obligations of the parties under this Agreement and to
require the return of the Deposit and any interest that has accrued thereon.
12.2 Casualty Loss. Risk of loss by damage or destruction to the
Property prior to Closing shall be borne by Seller. In the event any such
damage or destruction in excess of $50,000 not caused by Buyer's agents is not
fully repaired prior to the Closing, Buyer may, at its option, either (i)
terminate this Agreement, in which event the Deposit shall be refunded to Buyer
and neither party shall have any further obligation to the other hereunder, or
(ii) elect to close this transaction, in which event Seller's right to all
insurance proceeds resulting from such damage or destruction shall be assigned
to Buyer and the Purchase Price reduced in an amount equal to any applicable
deductible under the insurance policy.
13. Representations, Warranties, Agreements and Covenants to
Survive Closing
Subject to the provisions of Section 10.6, all covenants, agreements,
representations and warranties made hereunder and in any certificates delivered
at the Closing pursuant hereto shall be deemed to have been relied upon by
Buyer and Seller and shall survive the Closing for a period of one (1) year,
and the fact that the Closing has taken place shall not constitute a waiver of
any breach thereof. The one-year limitation provided for herein shall not
apply to any claim which is made with respect to any obligations for which any
party is responsible under the provisions of Sections 7.1, 8.2, 15.14, 15.17 or
any other covenant or agreement which, by its context, is to extend beyond such
period.
14. Indemnity.
14.1 General. Subject to the limitation in Section 13, in addition
to any other rights which a party may be entitled by reason of the
incorrectness or breach of any of the representations, warranties, covenants or
agreements made by the breaching party, each party agrees to indemnify the
other party against any loss incurred by such other party by reason of such
breach and against all loss, cost, damage and expense (including but not
limited to reasonable accountants' and attorneys' fees) reasonably incurred by
such other party in defending any claim, action or proceeding arising by reason
of the incorrectness or breach of or any alleged incorrectness or breach of any
such representations, warranties, covenants or agreements.
14.2 Specific Indemnification by Seller. Subject to Buyer's
performance of all Buyer's representations, warranties, covenants and
agreements contained herein, Seller agrees to indemnify and hold Buyer free and
harmless from any liability, loss, cost, damage or expense, including
reasonable attorneys' fees, which Buyer may suffer or incur as a consequence of
any claim which may be made against Buyer by any creditor or alleged creditor
of Seller, save and except for any liability expressly assumed by Buyer
pursuant to the provisions of this Agreement.
14.3 Specific Indemnification by Buyer. Subject to Seller's
performance of all Seller's representations, warranties, covenants and
agreements contained herein, Buyer agrees to indemnify
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and hold Seller free and harmless from any liability, loss, cost, damage or
expense, including reasonable attorneys fees, that Seller may suffer or incur
as a consequence of any claim which may be made against Seller for the
non-payment of any of the obligations which Buyer expressly assumes pursuant to
the provisions hereof.
14.4 General Indemnity Provisions. Promptly after the receipt by any
indemnitee of a claim in writing from a third party which is the subject of
indemnification under this Agreement or of notice of the commencement of any
action against such indemnitee which is the subject of indemnification under
this Agreement, and in any event before payment or agreement to pay any such
claim, the indemnitee(s) shall, if a claim in respect of such third-party claim
or action is to be made against indemnitor(s) pursuant to the foregoing
indemnification provisions, notify indemnitor(s) in writing of such claim or
the commencement of such action, as the case may be, and supply indemnitor(s)
with copies of any written information received by the indemnitee(s) with
respect thereto which may be requested by the indemnitor(s). Upon such notice,
the indemnitor(s) shall be entitled to participate in the defense of such claim
or in such action and, to the extent that it wishes, to assume the defense
thereof with counsel reasonably satisfactory to the indemnitee (provided that
the indemnitee may participate in such defense with counsel of its own
selection, which participation shall be at the expense of the indemnitee if the
indemnitor(s) has retained counsel reasonably satisfactory to the
indemnitee(s). Whether or not the indemnitor(s) elects to assume the defense
of any such claim or action, the indemnitee(s) shall have the right to pay,
settle or compromise any such claim or action; provided, however, that no such
payment, settlement or compromise, without the written consent of the
indemnitor(s) shall in and of itself establish the indemnitor(s)' liability to
the indemnitee(s).
If a responsive pleading is due before the indemnitor(s) make the
election to defend, the indemnitee(s) shall take all action which is reasonably
necessary to preserve the indemnitor(s)'s right to defend the action
(including, but not limited to, employing attorneys to, among other things,
obtain an extension to reply to the responsive pleading). All reasonable
expenses of the indemnitee(s) in taking such action shall be indemnified by
indemnitor(s) (unless it is ultimately determined that the indemnitee(s) was
not entitled to be indemnified). If the indemnitor(s) assume the defense of
any claim or litigation resulting therefrom, the obligations of the
indemnitor(s) hereunder as to such claim shall be limited to taking all steps
necessary in the defense or settlement of such claim or litigation resulting
therefrom and to hold the indemnitee(s) harmless from and against any and all
losses, damages and liabilities caused by or arising out of any settlement
approved by the indemnitee(s) or any judgment in connection with such claim or
litigation resulting therefrom. The indemnitor(s) shall not, in the defense of
such claim or any litigation resulting therefrom, consent to entry of any
judgment, except with the consent of the indemnitee(s), or enter into any
settlement (except with the consent of the indemnitee(s)), or enter into any
settlement which does not include as an unconditional term thereof the giving
by the claimant or the plaintiff to the indemnitee(s) a release from all
liability in respect to such claim or litigation.
15. Miscellaneous.
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15.1 Notices. All notices or other communications between Seller and
Buyer required or permitted hereunder shall be in writing and personally
delivered or sent by express mail or certified mail, return receipt requested,
postage prepaid, to the following address:
If to Seller:
Douglas E. Heltne
9801 E. Dynamite Rd., #28
Scottsdale, AZ 85262
Telephone: (602) 515-0299
Fax: (602) 515-0298
Copy To:
Titus, Brueckner & Berry P.C.
7373 N. Scottsdale Rd., #B252
Scottsdale, AZ 95253
Attn: Scott Risley
Telephone: (602) 483-9600
Fax: (602) 483-3215
If to Buyer:
Glenborough Properties, L.P.
400 South El Camino Real, 11th Floor
San Mateo, CA 94402-1708
Attn: Stephen R. Saul
Telephone: (415) 343-9300
FAX: (415) 343-7438
Copy to:
Irsfeld, Irsfeld & Younger LLP
100 West Broadway, Suite 900
Glendale, CA 91210
Attn: John H. Brink, Esq.
Telephone: (818) 242-6859
FAX: (818) 240-7728
If to Escrow Holder
Chicago Title Insurance Company
2020 North Central Ave., Suite 300
Phoenix, AR 85004-4598
Attn: Sam R. Adkins
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Telephone
FAX:
A notice shall be effective on the date of personal delivery if personally
delivered or refused before 3:00 p.m., otherwise on the day following personal
delivery, or two business days following the date the notice is postmarked, if
mailed.
15.2 Time of the Essence. Time is of the essence of this Agreement
and each and every term and provision hereof.
15.3 Interpretation; Governing Law. As used herein, "business days"
refers to all days excluding Saturdays, Sundays and Federal holidays. This
Agreement shall be construed as if prepared by both parties. This Agreement
shall be construed, interpreted and governed by the laws of the State of
Arizona.
15.4 Attorneys' Fees. In any action or proceeding between the
parties regarding this Agreement or the Property, the prevailing party shall be
entitled to the payment by the losing party of its reasonable attorneys' fees
and costs as determined by the arbitrator or court, as the case may be.
15.5 Further Assurances, Survival. Each party will, whenever and as
often as it shall be requested to do so by the other party, execute,
acknowledge and deliver, or cause to be executed, acknowledged and delivered
any and all such further conveyances, assignments, approvals, consents and any
and all documents and do any and all other acts as may be necessary to carry
out the intent and purpose of this Agreement. All covenants and obligations
contained in this Agreement which imply or require performance after the
Closing shall survive the Close of Escrow.
15.6 Pendency of Closing. Pending the Closing, Seller shall not
enter into any agreement pertaining to the sale, rental or management of the
Project without the prior written consent of Buyer, except for the rental of
rooms in the ordinary course of business. Nothing herein contained shall
restrict Seller from entering into any transaction of the type described above
which is in the nature of a "back-up offer" and which is subject to all of the
rights of Buyer that are contained herein.
15.7 Entire Agreement; Amendments. This Agreement together with the
other written agreements referred to herein represent the entire understanding
of the parties hereto with respect to the subject matter hereof and supersede
any prior understanding between the parties, whether oral or written Any
amendments to this Agreement shall be in writing and shall be signed by both
parties hereto.
15.8 No Waiver. A waiver by either party hereto of a breach of any
of the covenants or agreements hereof to be performed by the other party shall
not be construed as a waiver of any succeeding breach of the same or other
covenants, agreements, restrictions or conditions hereof.
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15.9 Assignment. This Agreement shall be binding upon and inure to
the benefit of each of the Parties hereto and to their respective successors,
assigns and personal representatives. Without limiting the generality of the
foregoing, Buyer shall have the right at any time prior to the Closing to
assign its interest under this Agreement to any other entity or party without
Seller's consent, including without limitation to a general or limited
partnership or to a joint venture of which Buyer is a partner or co-venturer.
Any assignment shall not relieve Buyer of its obligations hereunder, provided,
however, nothing herein shall constitute Buyer as a guarantor of the Note if
the Note is executed by an assignee.
15.10 Complimentary Rooms. Subject to the Closing, Buyer agrees to
make available to Seller or such persons as Seller may designate, on a
space-available basis, one or more rooms in the Project for an aggregate of 15
room days during the first 12 months following the Closing at no cost to Seller
or the person or persons utilizing such rooms, except for the payment of room
tax and incidental charges incurred for the use of the telephone and other
services that may be requested by the occupants.
15.10 Binding Effect. This Agreement shall be binding upon and inure
to the benefit of the parties hereto and their respective heirs,
representatives, successors and permitted assigns.
15.11 Headings. The headings and captions used in this Agreement are
for convenience and ease of reference only and shall not be used to construe,
interpret, expand or limit the terms of this Agreement.
15.12 Access to Information After Closing. For a period of three
years after the Closing, Seller will give Buyer access to the historical
financial and property records of Seller relating to its acquisition, ownership
and operation of the Project and Seller agrees that it will not destroy any of
the records during any such period of time without the prior written consent of
Buyer. During the first year after the Closing, Seller will provide to Buyer
such historical financial information with respect to the acquisition,
ownership and operation of the Project as Buyer may reasonably request in
connection with any reports which its general partner is required to file with
the Securities & Exchange Commission or the New York Stock Exchange.
15.13 Termination of Right of First Refusal. This Agreement has been
executed in part pursuant to the provisions of a Right of First Refusal dated
June 1, 1996, to which Seller and Buyer are parties. If this Agreement is
terminated because of any default by Buyer in the performance of its
obligations hereunder solely or because of the failure of the condition in
Section 5.3(e), the parties agree that said Right of First Refusal shall have
terminated and Buyer shall have no further rights thereunder.
15.14 Covenant Not to Compete. Douglas E. Heltne ("Heltne"), the
President and a member Seller and John N. Allen, a member of Seller, each in
their individual capacities, do each hereby agree that for a period of three
(3) years following the Closing, that he will not, individually, or as a
member, employee or agent of any partnership, or as an officer, agent,
employee, director, stockholder (except of not more than 5% of the outstanding
stock of any company listed on a national securities exchange or quoted on the
NASDAQ National Markets List), member, or
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investor of or in any corporation or limited liability company or other form of
business entity, directly or indirectly, own, manage, operate, join, control or
participate in the ownership, management, operation or control of, or work for
or consult with or permit the use of his name by or extend credit to or be
connected in any manner with any business entity located within a five-mile
radius of the Project which is engaged in the ownership, management or
operation of a facility located within such area which offers overnight
accommodations to the public of the type and at rates which are competitive to
the Project. Notwithstanding any provision herein to the contrary, this
Section 15.14 shall not apply to the Courtyard by Marriott and the Fairfield
Inn by Marriott which Heltne is currently promoting for construction and
operation within such area.
15.15 Determination of Material Accuracy. Notwithstanding any
provision herein to the contrary, the parties agree that the sum of $10,000 in
damages shall represent a material amount for the purpose of assessing whether
or not there has been a material breach of any of the representations,
warranties or covenants of Seller herein.
15.16 Counterparts. This Agreement may be executed by the parties
hereto in separate and distinct counterparts and delivered to each other by
facsimile transmission, which, when taken together shall constitute the
complete, original agreement of the parties. Nevertheless, the parties will as
expeditiously as possible exchange originally executed counterparts hereof to
further confirm their agreements, but in the absence of the actual exchange or
originally executed counterparts, such facsimile counterparts are intended as
binding originals.
15.17 1031 Exchange. Buyer and Seller acknowledge that this
transaction may become part of a tax-deferred exchange under Internal Revenue
Code Section 1031. Buyer and Seller agree that the rights and obligations
under this Agreement may be assigned to facilitate such exchange and that this
Agreement may become part of an integrated, interdependent exchange agreement.
Buyer and Seller agree to cooperate in any manner necessary to qualify for such
exchange, at the sole cost and expense of Seller as long as it does not delay
the Closing. Seller shall indemnify Buyer from any liability, loss, cost,
damage or expense, including reasonable attorneys fees, that Buyer may suffer
or incur as a consequence of cooperating in any such exchange. Suites agrees
that notwithstanding any assignment to any nominee for the purpose of effecting
a Section 1031 exchange, Suites shall be and remain liable for all obligations
of Seller under this Agreement.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the date and year set forth above. Each of the signatories hereto
individually represent and warrant that he has full right and authority to
execute this Agreement on behalf of the principal named herein, and that this
Agreement is a valid and binding obligation of such principal, enforceable in
accordance with its terms.
"Seller"
SUITES OF ARIZONA, L.L.C.,
an Arizona limited liability
company
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By_________________________
Douglas E. Heltne
Member
By_________________________
Nancy O. Heltne
Member
"Buyer"
GLENBOROUGH PROPERTIES, L.P.,
a California limited partnership
By: Glenborough Realty Trust
Incorporated, a Maryland
corporation, its General
Partner
By________________________
Its_______________________
"Heltne"
______________________________
Douglas E. Heltne
______________________________
John N. Allen
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EXHIBITS
Agreement of Purchase and Sale
(Country Suites Hotel - Scottsdale, Arizona)
Exhibit A Description of Ground Lease, including a legal
description of the land subject to the Ground Lease.
Exhibit B Inventory of Personal Property
Exhibit C Reports and Plans described in 1.1 (e)(ii) and (iii).
Exhibit D Operating Agreements.
Exhibit D-1 Landlord Estoppel
Exhibit E Assignment and Assumption of Ground Lease.
Exhibit F Assignment of Rights and Assumption of Certain
Obligations
Exhibit G Bill of Sale for Personal Property.
Exhibit H Description of Construction Warranties.
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EXHIBIT 10.49
FIRST AMENDMENT TO
AGREEMENT OF PURCHASE AND SALE
(Country Suites Hotel - Scottsdale, Arizona)
This is the First Amendment to the Agreement of Purchase and Sale
("Agreement") and executed this ____ day of February, 1997, by and between
Suites of Arizona, L.L.C., an Arizona limited liability company ("Suites")
and/or Nominee (herein collectively called "Seller") and Glenborough
Properties, L.P., a California limited partnership ("Buyer").
The fourth full paragraph of Section 7.1 of the Agreement shall be
deleted and the following shall be substituted therefore:
"The Ground Lease provides for the payment of percentage rent
("Percentage Rent") which is defined in the Ground Lease as the amount by
which two and one-half percent of the "Gross Room Charges" exceed the "Base
Rent", as those terms are defined in the Ground Lease. The Percentage Rent is
payable monthly with an adjustment at the end of each calendar year. Seller
shall pay any Percentage Rent which is due for the months of January and
February, 1997 based upon the "Gross Room Charges" that are realized during
such months. There will be no adjustment to the amount paid by Seller. The
rents and security deposit under the telephone equipment lease with Bank One
described on Exhibit D shall be prorated as of the Closing."
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the date and year set forth above. Each of the signatories hereto
individually represent and warrant that he has full right and authority to
execute this Agreement on behalf of the principal named herein, and that this
Agreement is a valid and binding obligation of such principal, enforceable in
accordance with its terms.
"Seller"
SUITES OF ARIZONA, L.L.C.,
an Arizona limited liability
company
By_________________________
Douglas E. Heltne
Member
By_________________________
Nancy O. Heltne
Member
<PAGE> 2
"Buyer"
GLENBOROUGH PROPERTIES, L.P.,
a California limited partnership
By: Glenborough Realty Trust
Incorporated, a Maryland
corporation, its General
Partner
By________________________
Its_______________________
"Heltne"
______________________________
Douglas E. Heltne
______________________________
John N. Allen
2
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to the
use of our reports dated January 27, 1997, with respect to the consolidated
financial statements of Glenborough Realty Trust Incorporated, the combined
financial statements of the GRT Predecessor Entities, the consolidated
financial statements of Glenborough Hotel Group, and the financial statements
of Glenborough Inland Realty Corporation on Form 10-K for the year ended
December 31, 1996, incorporated by reference into this Prospectus Supplement of
Glenborough Realty Trust Incorporated.
We also consent to the inclusion of our report dated February 15, 1997, with
respect to the financial statements of Atlantic Pacific Assurance Company
Limited included on Form 10-K for the year ended December 31, 1996 of
Glenborough Realty Trust Incorporated, incorporated by reference into this
Prospectus Supplement.
We also consent to the inclusion of our report dated January 31, 1997, with
respect to the statement of revenues and certain expenses of the E & L
Properties, which report is included in this Prospectus Supplement.
We also consent to the inclusion of our report dated February 11, 1997, with
respect to the statement of revenues and certain expenses of the CIGNA
Properties, which report is included in this Prospectus Supplement.
ARTHUR ANDERSEN LLP
San Francisco, California
March 5, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 1,355
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 1,355
<PP&E> 190,729
<DEPRECIATION> 28,784
<TOTAL-ASSETS> 185,520
<CURRENT-LIABILITIES> 3,198
<BONDS> 0
0
0
<COMMON> 10
<OTHER-SE> 97,590
<TOTAL-LIABILITY-AND-EQUITY> 185,520
<SALES> 0
<TOTAL-REVENUES> 21,253
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 18,471
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,913
<INCOME-PRETAX> (1,131)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,131)
<DISCONTINUED> 0
<EXTRAORDINARY> (186)
<CHANGES> 0
<NET-INCOME> (1,609)
<EPS-PRIMARY> (.24)
<EPS-DILUTED> 0
</TABLE>
