SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number: 001-14162
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,
Suite 1100, San Mateo, California
(650) 343-9300 94402-1708
(Address of principal executive offices (Zip Code)
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
7.75% Series A Convertible
Preferred Stock, $.001 par value New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No___
As of August 14, 1998, 31,702,947 shares of Common Stock ($.001 par value) and
11,500,000 shares of 7.75% Series A Convertible Preferred Stock ($.001 par
value) were outstanding.
1
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INDEX
GLENBOROUGH REALTY TRUST INCORPORATED
Page No.
PART I FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements of Glenborough Realty
Trust Incorporated (Unaudited except for the Consolidated
Balance Sheet at December 31, 1997):
Consolidated Balance Sheets at June 30, 1998 and
December 31, 1997 4
Consolidated Statements of Operations for the six months
ended June 30, 1998 and 1997 5
Consolidated Statements of Operations for the three months
ended June 30, 1998 and 1997 6
Consolidated Statement of Stockholders' Equity for the six
months ended June 30, 1998 7
Consolidated Statements of Cash Flows for the six months
ended June 30, 1998 and 1997 8-9
Notes to Consolidated Financial Statements 10-21
Consolidated Financial Statements of Glenborough Hotel Group
(Unaudited except for the Consolidated Balance Sheet at
December 31, 1997):
Consolidated Balance Sheets at June 30, 1998 and
December 31, 1997 22
Consolidated Statements of Income for the six months ended
June 30, 1998 and 1997 23
Consolidated Statements of Income for the three months ended
June 30, 1998 and 1997 24
Consolidated Statement of Stockholders' Equity for the six
months ended June 30, 1998 25
Consolidated Statements of Cash Flows for the six months
ended June 30, 1998 and 1997 26
Notes to Consolidated Financial Statements 27-29
2
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Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations:
Glenborough Realty Trust Incorporated 30-36
Glenborough Hotel Group 37-38
PART II OTHER INFORMATION
Item 1. Legal Proceedings 39-40
Item 2. Changes in Securities 40-41
Item 4. Submission of Matters to a Vote of Security Holders 41
Item 5. Other Information 41
Item 6. Exhibits and Reports on Form 8-K 42
SIGNATURES 43
EXHIBIT INDEX 44
3
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Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
<TABLE>
<CAPTION>
GLENBOROUGH REALTY TRUST INCORPORATED
CONSOLIDATED BALANCE SHEETS
(in thousands, except share amounts)
June 30, December 31,
1998 1997
(Unaudited) (Audited)
-------------- -------------
ASSETS
<S> <C> <C>
Rental property, net of accumulated depreciation of
$61,182 and $41,213 in 1998 and 1997, respectively $ 1,698,554 $ 825,218
Investments in Associated Companies 11,134 10,948
Mortgage loans receivable 41,269 3,692
Cash and cash equivalents 7,028 5,070
Other assets 77,790 20,846
--------------- -------------
TOTAL ASSETS $ 1,835,775 $ 865,774
=============== =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Mortgage loans $ 451,084 $ 148,139
Unsecured senior notes 150,000 --
Unsecured loan 142,170 --
Unsecured bank line 125,152 80,160
Other liabilities 29,786 11,091
--------------- -------------
Total liabilities 898,192 239,390
--------------- -------------
Commitments and contingencies -- --
Minority interest 89,992 46,261
Stockholders' Equity:
Common stock, 31,685,322 and 31,547,256 shares issued
and outstanding at June 30, 1998 and
December 31, 1997, respectively 31 31
Preferred stock, 11,500,000 shares issued and outstanding
at June 30, 1998 11 --
Additional paid-in capital 865,286 593,702
Deferred compensation (226) (210)
Retained earnings (deficit) (17,511) (13,400)
--------------- -------------
Total stockholders' equity 847,591 580,123
--------------- -------------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY $ 1,835,775 $ 865,774
=============== =============
See accompanying notes to consolidated financial statements
</TABLE>
4
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<TABLE>
<CAPTION>
GLENBOROUGH REALTY TRUST INCORPORATED
CONSOLIDATED STATEMENTS OF OPERATIONS
For the six months ended June 30, 1998 and 1997
(in thousands, except per share amounts)
(Unaudited)
1998 1997
-------------- -------------
REVENUE
<S> <C> <C>
Rental revenue $ 97,582 $ 19,691
Fees and reimbursements from affiliate 1,232 367
Interest and other income 603 613
Equity in earnings of Associated Companies 1,061 603
Net gain on sales of rental properties 2,139 570
Gain on collection of mortgage loan receivable -- 652
-------------- -------------
Total revenue 102,617 22,496
-------------- -------------
EXPENSES
Property operating expenses 30,589 6,045
General and administrative 4,825 1,374
Depreciation and amortization 20,943 4,044
Interest expense 18,852 3,800
-------------- -------------
Total expenses 75,209 15,263
-------------- -------------
Income from operations before minority interest 27,408 7,233
Minority interest (1,274) (629)
--------------- -------------
Net income $ 26,134 $ 6,604
-------------- -------------
Preferred dividend requirement (9,480) --
-------------- -------------
Net income available to Common Stockholders $ 16,654 $ 6,604
============== =============
Basic Earnings Per Share Data:
Net income available to Common Stockholders $ 0.53 $ 0.57
============== =============
Basic weighted average shares outstanding 31,598,648 11,647,479
============== =============
Diluted Earnings Per Share Data:
Net income available to Common Stockholders $ 0.52 $ 0.56
============== =============
Diluted weighted average shares outstanding 34,612,985 11,852,810
============== =============
See accompanying notes to consolidated financial statements
</TABLE>
5
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<TABLE>
<CAPTION>
GLENBOROUGH REALTY TRUST INCORPORATED
CONSOLIDATED STATEMENTS OF OPERATIONS
For the three months ended June 30, 1998 and 1997
(in thousands, except per share amounts)
(Unaudited)
1998 1997
-------------- -------------
REVENUE
<S> <C> <C>
Rental revenue $ 51,619 $ 11,784
Fees and reimbursements from affiliate 759 180
Interest and other income 246 269
Equity in earnings of Associated Companies 709 458
Net gain on sales of rental properties 693 570
Gain on collection of mortgage loan receivable -- 498
-------------- -------------
Total revenue 54,026 13,759
-------------- -------------
EXPENSES
Property operating expenses 16,265 3,663
General and administrative 2,603 723
Depreciation and amortization 10,934 2,507
Interest expense 9,707 2,227
-------------- -------------
Total expenses 39,509 9,120
-------------- -------------
Income from operations before minority interest 14,517 4,639
Minority interest (596) (398)
--------------- -------------
Net income $ 13,921 $ 4,241
-------------- -------------
Preferred dividend requirement (5,570) --
-------------- -------------
Net income available to Common Stockholders $ 8,351 $ 4,241
============== =============
Basic Earnings Per Share Data:
Net income available to Common Stockholders $ 0.26 $ 0.32
============== =============
Basic weighted average shares outstanding 31,648,041 13,188,504
============== =============
Diluted Earnings Per Share Data:
Net income available to Common Stockholders $ 0.26 $ 0.32
============== =============
Diluted weighted average shares outstanding 34,868,905 13,432,442
============== =============
See accompanying notes to consolidated financial statements
</TABLE>
6
<PAGE>
<TABLE>
<CAPTION>
GLENBOROUGH REALTY TRUST INCORPORATED
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
For the six months ended June 30, 1998
(in thousands)
(Unaudited)
Common Stock Preferred Stock
--------------------- -------------------
Additional Deferred Retained
Par Par Paid-in Compen- Earnings
Shares Value Shares Value Capital sation (Deficit) Total
---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1997 31,547 $ 31 $ -- $ -- $ 593,702 $ (210) $ (13,400) $ 580,123
Issuance of preferred stock, net of
offering costs of $12,885 -- -- 11,500 11 274,604 -- -- 274,615
Issuance of common stock related to
acquisitions -- -- -- -- 3,389 -- -- 3,389
Exercise of stock options 1 -- -- -- 10 -- -- 10
Amortization of deferred compensation -- -- -- -- -- 46 -- 46
Issuance of common stock to director 2 -- -- -- 62 (62) -- --
Unrealized gain on marketable
securities -- -- -- -- -- -- 165 165
Adjustment to fair value of minority
interest -- -- -- -- (6,481) -- -- (6,481)
Distributions -- -- -- -- -- -- (30,410) (30,410)
Net income -- -- -- -- -- -- 26,134 26,134
---------------------------------------------------------------------------------------------
Balance at June 30, 1998 31,550 $ 31 11,500 $ 11 $ 865,286 $ (226) $ (17,511) $ 847,591
=============================================================================================
See accompanying notes to consolidated financial statements
</TABLE>
7
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<TABLE>
<CAPTION>
GLENBOROUGH REALTY TRUST INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the six months ended June 30, 1998 and 1997
(in thousands)
(Unaudited)
1998 1997
--------------- ---------------
Cash flows from operating activities:
<S> <C> <C>
Net income $ 26,134 $ 6,604
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation and amortization 20,943 4,044
Amortization of loan fees, included in
interest expense 592 128
Minority interest in income from operations 1,274 629
Equity in earnings of Associated
Companies (1,061) (603)
Gain on collection of mortgage loan receivable -- (652)
Net gain on sales of rental properties (2,139) (570)
Amortization of deferred compensation 46 95
Changes in certain assets and liabilities, net (13,186) (1,102)
--------------- ---------------
Net cash provided by operating activities 32,603 8,573
--------------- ---------------
Cash flows from investing activities:
Net proceeds from sales of rental properties 37,804 11,889
Additions to rental property (570,536) (144,157)
Additions to mortgage loans receivable (38,084) (2,344)
Principal receipts on mortgage loans receivable 507 9,354
Distributions from Associated Companies 875 1,178
Other investments (included in other assets) (26,006) --
--------------- ---------------
Net cash used for investing activities (595,440) (124,080)
--------------- ---------------
continued
See accompanying notes to consolidated financial statements
</TABLE>
8
<PAGE>
<TABLE>
<CAPTION>
GLENBOROUGH REALTY TRUST INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS -- continued
For the six months ended June 30, 1998 and 1997
(in thousands)
(Unaudited)
1998 1997
--------------- --------------
Cash flows from financing activities:
<S> <C> <C>
Proceeds from borrowings $ 530,321 $ 166,675
Repayment of borrowings (207,741) (107,371)
Distributions to minority interest holders (2,000) (525)
Distributions (30,410) (7,314)
Exercise of stock options 10 --
Proceeds from issuance of preferred stock, net of
offering costs 274,615 66,039
--------------- --------------
Net cash provided by financing activities 564,795 117,504
--------------- --------------
Net increase in cash and cash equivalents 1,958 1,997
Cash and cash equivalents at beginning of period 5,070 1,355
--------------- --------------
Cash and cash equivalents at end of period $ 7,028 $ 3,352
=============== ==============
Supplemental disclosure of cash flow information:
Cash paid for interest $ 12,165 $ 3,539
=============== ==============
Supplemental disclosure of Non-Cash Investing and Financing
Activities:
Acquisition of real estate through assumption of first
trust deed notes payable $ 317,527 $ 17,486
=============== ==============
Acquisition of real estate through issuance of shares
of common stock and Operating Partnership units $ 41,365 $ 7,351
=============== ==============
See accompanying notes to consolidated financial statements
</TABLE>
9
<PAGE>
GLENBOROUGH REALTY TRUST INCORPORATED
Notes to Consolidated Financial Statements
June 30, 1998
Note 1. ORGANIZATION
Glenborough Realty Trust Incorporated (the "Company") was organized in the State
of Maryland on August 26, 1994. The Company has elected 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 through an exchange of assets 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.
Subsequent to the Consolidation on December 31, 1995, and through June 30, 1998,
the following Common Stock transactions occurred: (i) 37,000 shares of Common
Stock were issued to officers and directors as stock compensation; (ii)
25,446,000 shares were issued in four separate public equity offerings; (iii)
448,172 shares were issued in connection with various acquisitions; (iv) 500
shares were issued in connection with the exercise of employee stock options;
and (v) 59 shares were retired, resulting in total shares of Common Stock issued
and outstanding at June 30, 1998, of 31,685,322. Fully converted shares of
common stock issued and outstanding (including 3,843,956 partnership units in
the Operating Partnership) totaled 35,529,278 at June 30, 1998.
In January 1998, the Company completed a public offering of 11,500,000 shares of
7.75% Series A Convertible Preferred Stock (the "January 1998 Convertible
Preferred Stock Offering"). The shares are convertible at any time at the option
of the holder thereof into shares of Common Stock at an initial conversion price
of $32.83 per share of Common Stock (equivalent to a conversion rate of 0.7615
shares of Common Stock for each share of Series A Convertible Preferred Stock),
subject to adjustment in certain circumstances. Shares of Preferred Stock issued
and outstanding at June 30, 1998 totaled 11,500,000.
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 Articles of Incorporation provide 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
88.15% limited partner interest at June 30, 1998, is Glenborough Properties,
L.P. (the "Operating Partnership"). As of June 30, 1998, the Operating
Partnership, directly and through various subsidiaries in which it and the
Company own 100% of the ownership interests, controls a total of 179 real estate
projects.
As of June 30, 1998, the Company also holds 100% of the non-voting preferred
stock of the following two Associated Companies (the "Associated Companies"):
Glenborough Corporation ("GC") is the general partner of several real
estate limited partnerships and provides asset and property management
services for these partnerships (the "Controlled Partnerships"). It also
provides partnership administration, asset management, property management
and development services under a long term contract to a group of
unaffiliated partnerships which include five public 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"). The services to the Rancon
Partnerships were previously provided by Glenborough Inland Realty
Corporation ("GIRC"), a California corporation, which merged with GC
effective June 30, 1997. GC also provides property management services for
a limited portfolio of property owned by other unaffiliated third parties.
In the merger between GC and GIRC, the Company received preferred stock of
GC in exchange for its preferred stock of GIRC, on a one-for-one basis.
Following the merger, the Company holds the same preferences with respect
to dividends and liquidation distributions paid by GC as it previously held
with respect to GC and GIRC combined.
10
<PAGE>
GLENBOROUGH REALTY TRUST INCORPORATED
Notes to Consolidated Financial Statements
June 30, 1998
Glenborough Hotel Group ("GHG"), through June 1998, leased the five Country
Suites by Carlson hotels owned by the Company and operated them for its own
account. In June 1998, as discussed further below, two of the hotels were
sold and three of the hotels have been leased to another operator. GHG also
operated two Country Suites by Carlson hotels through June 30, 1998, and
two resort condominium hotels through April 30, 1998, under separate
contracts.
Note 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying financial statements present the consolidated financial
position of the Company as of June 30, 1998, and December 31, 1997, and the
consolidated results of operations and cash flows of the Company for the six
months ended June 30, 1998 and 1997. All intercompany transactions, receivables
and payables have been eliminated in consolidation.
In the opinion of management, the accompanying unaudited financial statements
contain all adjustments (consisting of only normal accruals) necessary to
present fairly the financial position and results of operations of the Company
as of June 30, 1998, and for the period then ended.
Reclassification
Certain 1997 balances have been reclassified to conform to the current year
presentation.
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 June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131 (SFAS 131), "Disclosures about Segments
of an Enterprise and Related Information," which will be effective for financial
statements issued for fiscal years beginning after December 15, 1997. SFAS 131
will require the Company to report certain financial and descriptive information
about its reportable operating segments, segments for which separate financial
information is available that is evaluated regularly by management in deciding
how to allocate resources and in assessing performance. For these segments, SFAS
131 will require the Company to report profit and loss, certain specific revenue
and expense items and assets. It also requires disclosures about each segment's
products and services, geographic areas of operation and major customers. The
Company will adopt the disclosures required by SFAS 131 in the financial
statements for the year ended December 31, 1998.
Investments in Real Estate
Investments in real estate 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; and (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. 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.
11
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GLENBOROUGH REALTY TRUST INCORPORATED
Notes to Consolidated Financial Statements
June 30, 1998
The useful lives are as follows:
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.
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 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.
Marketable Securities
In accordance with Statement of Financial Accounting Standards No. 115 (SFAS
115), "Accounting for Certain Investments in Debt and Equity Securities," the
Company records its marketable securities at fair value. Accordingly, unrealized
gains and losses on these securities are reported as a separate component of
stockholders' equity and realized gains and losses are included in net income.
As of June 30, 1998, marketable securities with a fair value of approximately
$26,000,000 were included in other assets on the accompanying consolidated
balance sheet.
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, certificates of deposit
and short-term investments 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 10.85% limited partner interests in the
Operating Partnership not held by the Company.
12
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GLENBOROUGH REALTY TRUST INCORPORATED
Notes to Consolidated Financial Statements
June 30, 1998
Revenues
All leases are classified as operating leases. Rental revenue is recognized as
earned over the terms of the related leases.
For the six months ended June 30, 1998, 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,
refinancing, 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.
Scheduled rent increases are based primarily on the Consumer Price Index or a
similar factor. Material incentives paid, if any, by the Company to a tenant are
amortized as a reduction of rental income over the life of the related lease.
The Company recognizes contingent rental income after the related target is
achieved, consistent with EITF 98-9, "Accounting for Contingent Rent in Interim
Financial Periods."
Income Taxes
The Company has made 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.
Earnings Per Share
In 1997, the Company adopted the disclosure requirements of SFAS No. 128,
"Earnings per Share." SFAS 128 requires the disclosure of basic earnings per
share and modified existing guidance for computing diluted earnings per share.
Earnings per share for all periods presented have been restated to conform to
the new standard. For additional required disclosures, see Note 8.
Reference to 1997 Audited Financial Statements
These unaudited financial statements should be read in conjunction with the
Notes to Consolidated Financial Statements included in the 1997 audited
financial statements.
Note 3. INVESTMENTS IN REAL ESTATE
In June 1998, the Company acquired a portfolio of multi-family properties (the
"Galesi Portfolio") from the Galesi Group, a privately owned company. The Galesi
Portfolio includes 21 properties with 6,536 units located primarily in Houston,
Austin, Dallas and San Antonio. Four properties are located outside of Texas:
two in Atlanta, one in Nashville and one in Colorado Springs. The total
acquisition cost, including capitalized costs, was approximately $275.8 million,
comprising: (i) approximately $169.4 million of net assumed debt (including an
unamortized premium totaling approximately $3.1 million, which results in an
effective interest rate on these instruments of 6.75%); (ii) approximately $21.2
million of equity in the form of 806,393 partnership units in the Operating
Partnership (based on an agreed per unit value of $26.2315); and (iii) the
balance in cash. The cash portion was financed through advances under a $150
million Bridge Loan from a commercial bank as discussed in Note 6.
13
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GLENBOROUGH REALTY TRUST INCORPORATED
Notes to Consolidated Financial Statements
June 30, 1998
In June 1998, the Company acquired a 133,090 square foot office property and a
229,352 square foot industrial property, both located in northern New Jersey
(the "Donau/Gruppe Portfolio") from a German partnership. The total acquisition
cost, including capitalized costs, was approximately $28.5 million, which was
comprised of: (i) approximately $10.5 million of assumed debt; and (ii) the
balance in cash. The cash portion was financed through advances under a $150
million Bridge Loan from a commercial bank. In addition, the Company is under
contract to acquire from the seller another 85,765 square foot office building
for $12.4 million. This acquisition is expected to close in August 1998.
In June 1998, the Company acquired a 263,610 square foot office/flex property
located in Indianapolis, Indiana (the "Covance Property") from Eaton & Lauth.
The total acquisition cost, including capitalized costs, was approximately $16.5
million, comprising: (i) approximately $4 million of equity in the form of
161,492 partnership units in the Operating Partnership (based on an agreed per
unit value of $25.00); (ii) approximately $220,000 of equity in the form of
8,802 shares of Common Stock of the Company (based on an agreed per share value
of $25.00); and (iii) the balance in cash. The cash portion was financed through
advances under the Acquisition Credit Facility.
In June 1998, the Company sold two hotel properties for $6,100,000. The sales
generated a net gain of approximately $253,000 and net proceeds of approximately
$2,327,000. In conjunction with the sale of one of the hotels, the Company
agreed to loan $3,600,000 to the buyer for a term of six months at a fixed
interest rate of 9% (see Note 5). As the buyer contributed cash (approximately
$460,000) to the purchase of this hotel, the historical operations of the hotel
are sufficient to service the loan and the Company has no other continuing
obligations or involvement with this property, the Company recognized the sale
under the full accrual method of accounting.
In May 1998, the Company acquired a 125,507 square foot office building and a
5.45 acre parcel of land located in Omaha, Nebraska ("One and Three Pacific")
from Shorenstein Company, L.P. The total acquisition cost, including capitalized
costs, was approximately $20.1 million which was paid entirely in cash,
including cash from borrowings under the Acquisition Credit Facility and
proceeds from the sales of two office/flex properties as discussed above.
In April 1998, the Company acquired a portfolio of three office properties and
four retail properties aggregating 417,745 square feet and three multi-family
properties containing 670 units (the "Eaton & Lauth Portfolio") from a number of
partnerships in which affiliates of Eaton & Lauth serve as general partners. The
total acquisition cost, including capitalized costs, was approximately $70.0
million, comprising: (i) approximately $32.0 million of net assumed debt; (ii)
approximately $15.9 million of equity which consisted of (a) approximately $3.2
million in the form of 126,764 shares of Common Stock of the Company (based on
an agreed per share value of $25.00); and (b) approximately $12.7 million in the
form of 506,788 partnership units in the Operating Partnership (based on an
agreed per unit value of $25.00); and (iii) the balance in cash. The cash
portion was financed through advances under the Acquisition Credit Facility. The
Eaton & Lauth Portfolio properties are located in Indiana.
In April 1998, the Company sold an office/flex property for $3,600,000. The sale
generated a net gain of approximately $452,000 and net proceeds of approximately
$1,571,000. The proceeds from the sale were deposited into a deferred exchange
account and were applied to the acquisition of One and Three Pacific on a
tax-deferred basis pursuant to Section 1031 of the Internal Revenue Code.
In March 1998, the Company acquired a portfolio of seven properties (the "BGK
Portfolio") from BGK Development. The BGK Portfolio properties aggregate 515,445
net rentable square feet, located in Boston, Massachusetts and Kansas City,
Kansas, and consist of four office properties, two industrial properties and one
office/flex property. The total acquisition cost, including capitalized costs,
was approximately $50.2 million, comprised of (i) approximately $13.3 million in
assumption of debt; and (ii) the balance in cash, including cash from borrowings
under the Acquisition Credit Facility.
In March 1998, the Company acquired a 15-story office property located in San
Mateo, California ("400 El Camino Real"), which contains 139,109 square feet and
currently houses the Company's corporate headquarters in approximately 30,000
square feet, from Prudential Insurance Company of America. The total acquisition
cost,
14
<PAGE>
GLENBOROUGH REALTY TRUST INCORPORATED
Notes to Consolidated Financial Statements
June 30, 1998
including capitalized costs, was approximately $34.7 million and was paid in
cash, including cash from borrowings under the Acquisition Credit Facility.
In March 1998, the Company sold an office/flex property for $1,368,000. The sale
generated a net gain of approximately $106,000 and net proceeds of approximately
$696,000. The proceeds from the sale were deposited into a deferred exchange
account and were applied to the acquisition of One and Three Pacific (as defined
below) on a tax-deferred basis pursuant to Section 1031 of the Internal Revenue
Code.
In February 1998, the Company acquired a 161,468 square foot office complex
("Capitol Center") located in Des Moines, Iowa. The total acquisition cost,
including capitalized costs, was approximately $12.3 million, comprising: (i)
$116,000 in the form of 3,874 partnership units in the Operating Partnership
(based on an agreed per unit value of $30.00) and (ii) the balance in cash.
In February 1998, the Company sold an industrial property for $930,000. The sale
generated a net gain of approximately $246,000 and net proceeds of approximately
$359,000. The proceeds from the sale were deposited into a deferred exchange
account and were applied to the acquisition of 400 El Camino Real on a
tax-deferred basis pursuant to Section 1031 of the Internal Revenue Code.
In 1997, the Company issued approximately $14.1 million in the form of 433,362
partnership units in the Operating Partnership and 72,564 shares of Common Stock
(based on an agreed per unit and per share value of $27.896, respectively, which
was equal to the average closing price of the Company's Common Stock for the ten
business days preceding the closing) and paid approximately $200,000 in cash to
acquire all of the limited partnership interests of GRC Airport Associates, a
California limited partnership ("GRCAA"). GRCAA's sole asset consisted of one
industrial property ("Skypark") that was subject to a binding sales agreement.
By virtue of interests held directly or indirectly in GRCAA, Robert Batinovich
received consideration of approximately $2.2 million and GC (as defined in Note
1) received consideration of approximately $1.7 million for the GRCAA limited
partnership interests in the form of partnership units in the Operating
Partnership. Consistent with the Company's Board of Directors' policy, neither
Robert Batinovich nor Andrew Batinovich voted when the Board of Directors
considered and acted to approve this transaction. In February 1998, the sale of
the Skypark property was completed for a price of $22 million. This sale
generated a net gain of approximately $134,000 and net proceeds of approximately
$14.1 million. The proceeds from the sale of the property were deposited into a
deferred exchange account and were applied to the acquisition of 400 El Camino
Real on a tax-deferred basis pursuant to Section 1031 of the Internal Revenue
Code.
In January 1998, the Company acquired a portfolio of 13 suburban office
properties and one office/flex property (the "Windsor Portfolio") located in
eight states. The Company acquired the Windsor Portfolio from Windsor Realty
Fund II, L.P., of which Windsor Advisor, LLC is the general partner and DuPont
Pension Fund Investments and Gid/S&S Limited Partnership are limited partners,
and other entities affiliated with Windsor Realty Fund II, L.P. The Windsor
Portfolio properties aggregate 3,383,240 net rentable square feet, located in
the eastern and mid-western United States and are concentrated in suburban
Washington, D.C., Chicago, Atlanta, Boston, Philadelphia, Tampa, Florida and
Cary, North Carolina. The total acquisition cost, including capitalized costs,
was approximately $423.2 million, comprised of (i) approximately $167.2 million
in assumption of debt; (ii) $150.0 million in borrowings under a $150 million
loan agreement with a commercial bank (the "Interim Loan" as defined in Note 6);
and (iii) the balance in cash, including cash from borrowings under the
Acquisition Credit Facility (as defined in Note 6). Subsequent to the
acquisition, approximately $68 million of the assumed debt was paid off with
proceeds from the January 1998 Convertible Preferred Stock Offering (as defined
in Note 1).
In January 1998, the Company sold a multi-family property for $4.95 million.
This sale generated a net gain of approximately $948,000 and net proceeds of
approximately $2.1 million. The proceeds from the sale were deposited into a
deferred exchange account and were applied to the acquisition of 400 El Camino
Real (as defined below) on a tax-deferred basis pursuant to Section 1031 of the
Internal Revenue Code.
15
<PAGE>
GLENBOROUGH REALTY TRUST INCORPORATED
Notes to Consolidated Financial Statements
June 30, 1998
The Company has entered into a definitive agreement to sell the Shannon Crossing
retail property for $9.3 million. The property is currently undergoing a $6.2
million renovation and expansion. As of the date of this filing, approximately
$2.6 million of the project budget for the renovation and expansion has been
funded. The sale of Shannon Crossing will not be completed until the first
quarter of 1999.
The Company has entered into three short-term lease agreements on the hotel
properties located in Arlington, Texas, Tucson, Arizona and Ontario, California,
with three prospective purchasers of these properties. These prospective
purchasers have entered into purchase agreements for these properties, with
closing dates of December 30, 1998. These leases all terminate on that closing
date for the sale of the properties.
Note 4. INVESTMENTS IN ASSOCIATED COMPANIES
The Company owns 100% of the non-voting preferred stock and none of the voting
stock of each of the Associated Companies (as defined in Note 1). The
investments in the Associated Companies are accounted for using the equity
method as the Company does not control the entities. 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.
As of June 30, 1998, the Company had the following investments in the Associated
Companies (in thousands):
GC GHG Total
--------- ---------- ---------
Investment at December 31, 1997 $ 8,519 $ 2,429 $ 10,948
Distributions (758) (117) (875)
Equity in earnings 850 211 1,061
--------- ---------- ----------
Investment at June 30, 1998 $ 8,611 $ 2,523 $ 11,134
========= ========== ==========
Note 5. MORTGAGE LOANS RECEIVABLE
The Company's mortgage loans receivable consist of the following as of June 30,
1998, and December 31, 1997 (dollars in thousands):
<TABLE>
<CAPTION>
1998 1997
--------------- ---------------
<S> <C> <C>
Note secured by an industrial property in Los Angeles, CA, with a fixed
interest rate of 9% and a maturity date of June 2001. This note was paid off
early in June 1998. $ -- $ 507
Note secured by an office property in Phoenix, AZ, with a fixed interest rate
of 11% and a maturity date of November 1999. The Partnership is committed to
additional advances totaling $530 as of June 30, 1998, for tenant
improvements and other leasing costs. 3,320 3,185
Note secured by a hotel property in Dallas, TX, with a fixed interest rate of
9%, monthly interest-only payments and a maturity date of December 1998. 3,600 --
Note secured by land located in Aurora, CO, with a fixed interest rate of
13%, quarterly interest-only payments and a maturity date of July 2005. 34,349 --
--------------- ---------------
Total $ 41,269 $ 3,692
=============== ===============
</TABLE>
16
<PAGE>
GLENBOROUGH REALTY TRUST INCORPORATED
Notes to Consolidated Financial Statements
June 30, 1998
Note 6. SECURED AND UNSECURED LIABILITIES
The Company had the following mortgage loans, bank lines, unsecured notes and
notes payable outstanding as of June 30, 1998, and December 31, 1997 (dollars in
thousands):
1998 1997
---------- -----------
Unsecured $250,000 line of credit with a bank
("Acquisition Credit Facility") with a variable
interest rate ranging between LIBOR plus 1.10% and
LIBOR plus 1.30% (6.89% and 7.07% at June 30, 1998
and December 31, 1997, respectively), monthly
interest only payments and a maturity date of
December 22, 2000, with one option to extend for
10 years. $ 125,152 $ 80,160
Unsecured loan with a bank ("$150 Million Bridge
Loan") with a variable interest rate of LIBOR plus
1.3% (6.99% at June 30, 1998), monthly interest
only payments and a maturity date of December 31,
1998. See below for further discussion. 142,170 --
Secured loan with a bank with a fixed interest
rate of 7.50%, monthly principal and interest
payments of $443 and a maturity date of October 1,
2022. The loan is secured by ten properties with
an aggregate net carrying value of $110,933 and
$111,372 at June 30, 1998 and December 31, 1997,
respectively. 59,394 59,724
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 $38,998 and
$37,711 at June 30, 1998 and December 31, 1997,
respectively. 19,285 19,444
Secured loans with various lenders, bearing
interest at fixed rates between 7.25% and 9.25%
(approximately $169,440 of these loans includes an
unamortized premium of approximately $3,118 which
reduces the effective interest rate on those
instruments to 6.75%), with monthly principal and
interest payments ranging between $8 and $371 and
maturing at various dates through October 1, 2010.
These loans are secured by properties with an
aggregate net carrying value of $397,128 and
$66,353 at June 30, 1998 and December 31, 1997,
respectively. 223,560 30,519
Secured loans with various banks bearing interest
at variable rates (ranging between 6.75% and 8.18%
at June 30, 1998), monthly principal and interest
payments ranging between $4 and $773 and maturing
at various dates through May 1, 2017. These loans
are secured by properties with an aggregate net
carrying value of $170,877 and $17,246 at June 30,
1998 and December 31, 1997, respectively. 118,389 7,806
17
<PAGE>
GLENBOROUGH REALTY TRUST INCORPORATED
Notes to Consolidated Financial Statements
June 30, 1998
1998 1997
---------- -----------
Secured loans with various lenders, bearing
interest at fixed rates between 7.25% and 7.85%,
with monthly principal and interest payments
ranging between $5 and $55 and maturing at various
dates through December 1, 2030. These loans are
secured by multi-family properties with an
aggregate net carrying value of $41,773 and
$41,862 at June 30, 1998 and December 31, 1997,
respectively. $ 30,456 $ 30,646
Unsecured Senior Notes with a fixed interest rate
of 7.625%, interest payable semiannually on March
15 and September 15, commencing September 15,
1998, and a maturity date of March 15, 2005. See
below for further discussion. 150,000 --
---------- -----------
Total $ 868,406 $ 228,299
========== ===========
In January 1998, the Company closed a $150 million loan agreement with a
commercial bank (the "Interim Loan"). The Interim Loan had a term of three
months with interest at LIBOR plus 1.75%. The purpose of the Interim Loan was to
fund the acquisition of the Windsor Portfolio as discussed in Note 3. The
Interim Loan was paid off in March 1998 with proceeds from the $150 million of
unsecured Senior Notes as discussed below.
In March 1998, the Operating Partnership issued $150 million of 7 5/8% unsecured
Senior Notes (the "Notes") in an unregistered 144A offering. The Notes mature on
March 15, 2005, unless previously redeemed. Interest on the Notes will be
payable semiannually on March 15 and September 15, commencing September 15,
1998. The Notes may be redeemed at any time at the option of the Operating
Partnership, in whole or in part, at a redemption price equal to the sum of (i)
the principal amount of the Notes being redeemed plus accrued interest to the
redemption date and (ii) the Make-Whole Amount, as defined, if any. The Notes
will be general unsecured and unsubordinated obligations of the Operating
Partnership, and will rank pari passu with all other unsecured and
unsubordinated indebtedness of the Operating Partnership. The Notes will be
subordinated to secured borrowing arrangements that the Operating Partnership
has and from time to time may enter into with various banks and other lenders,
and to the prior claims of each secured mortgage lender to any specific property
which secures any lender's mortgage. As of June 30, 1998, such secured
arrangements and mortgages aggregated approximately $451.1 million.
In June 1998, the Company obtained a $150 million unsecured loan from a
commercial bank (the "Bridge Loan") which bears interest at a variable rate of
LIBOR plus 1.3%, and has a maturity date of December 31, 1998. As of the date of
this filing, approximately $147.7 million has been drawn under the Bridge Loan
to fund acquisitions, including the Galesi Portfolio and the Donau/Gruppe
Portfolio (as discussed in Note 3) and the Pauls Portfolio (as discussed in Note
12), and to fund development advances.
The required principal payments on the Company's debt for the next five years
and thereafter, as of June 30, 1998, are as follows (in thousands):
Year Ending
December 31,
1998 $ 148,078
1999 123,822
2000 186,249
2001 12,841
2002 11,503
Thereafter 385,913
Total $ 868,406
18
<PAGE>
GLENBOROUGH REALTY TRUST INCORPORATED
Notes to Consolidated Financial Statements
June 30, 1998
Note 7. RELATED PARTY TRANSACTIONS
Fee and reimbursement income earned by the Company from related parties totaled
$1,232,000 and $367,000 for the six months ended June 30, 1998 and 1997,
respectively, and consisted of property management fees, asset management fees
and other fee income. In addition, for the six months ended June 30, 1998, the
Company paid GC property management fees and salary reimbursements of $608,000
for management of a portfolio of residential properties owned by the Company.
Note 8. EARNINGS PER SHARE
In March 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128 (SFAS 128), "Earnings Per Share." SFAS
No. 128 requires the disclosure of basic earnings per share and modifies
existing guidance for computing diluted earnings per share. Under the new
standard, basic earnings per share is computed as earnings divided by weighted
average shares, excluding the dilutive effects of stock options and other
potentially dilutive securities. The effective date of SFAS No. 128 is December
15, 1997. Earnings per share for all periods presented have been restated to
conform to the new standard as follows (in thousands, except for weighted
average shares and per share amounts):
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
-------------------------------- --------------------------------
1998 1997 1998 1997
------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Net income available to common
stockholders - Basic 8,351 4,241 16,654 6,604
Minority interest 596 -- (1) 1,274 -- (1)
------------- -------------- -------------- --------------
Net income available to common
stockholders - Diluted 8,947 4,241 17,928 6,604
------------- -------------- -------------- --------------
Weighted average shares:
Basic 31,648,041 13,188,504 31,598,648 11,647,479
Stock options 438,686 243,938 438,686 205,331
Convertible Operating Partnership Units 2,782,178 -- (1) 2,575,651 -- (1)
------------- -------------- -------------- --------------
Diluted 34,868,905 13,432,442 34,612,985 11,852,810
------------- -------------- -------------- --------------
Basic earnings per share 0.26 0.32 0.53 0.57
Diluted earnings per share 0.26 0.32 0.52 0.56
</TABLE>
(1) Diluted earnings per share for the three and six months ended June 30, 1997,
does not include the conversion of units of the Operating Partnership into
common stock (930,522 and 788,112 weighted average units outstanding,
respectively) as the effect is anti-dilutive.
Note 9. 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. Certain amendments to the Plan were ratified and approved by the
stockholders of the Company at the Company's 1997 Annual Meeting of
Stockholders. The Plan, as amended, provides for the grant of (i) shares of
Common Stock of the Company, (ii) options, stock appreciation rights ("SARs") or
similar rights with an exercise or conversion privilege at a fixed or variable
price related to the Common Stock and/or the passage of time, the occurrence of
one or more events, or the satisfaction of performance
19
<PAGE>
GLENBOROUGH REALTY TRUST INCORPORATED
Notes to Consolidated Financial Statements
June 30, 1998
criteria or other conditions, or (iii) any other security with the value derived
from the value of the Common Stock of the Company or other securities issued by
a related entity. Such awards include, without limitation, options, SARs, sales
or bonuses of restricted stock, dividend equivalent rights ("DERs"), Performance
Units or Preference Shares. The total number of shares of Common Stock available
under the Plan is equal to the greater of 1,140,000 shares or 8% of the number
of shares outstanding determined as of the day immediately following the most
recent issuance of shares of Common Stock or securities convertible into shares
of Common Stock; provided that the maximum aggregate number of shares of Common
Stock available for issuance under the Plan may not be reduced. For purposes of
calculating the number of shares of Common Stock available under the Plan, all
classes of securities of the Company and its related entities that are
convertible presently or in the future by the security holder into shares of
Common Stock or which may presently or in the future be exchanged for shares of
Common Stock pursuant to redemption rights or otherwise, shall be deemed to be
outstanding shares of Common Stock. Notwithstanding the foregoing, the aggregate
number of shares as to which incentive stock options, one type of security
available under the Plan, may be granted under the Plan may not exceed 1,140,000
shares. The Company accounts for the fair value of the options and bonus grants
in accordance with APB Opinion No. 25. As of June 30, 1998, 37,000 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 that range from 2 to 5 years. As of June 30, 1998, 2,070,700
options to purchase shares of Common Stock were outstanding. The exercise price
of each incentive stock option granted is greater than or equal to the per-share
fair market value of the Common Stock on the date the option is granted. To
date, all incentive stock options granted have been at exercise prices equal to
or higher than 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.
Note 10. DISTRIBUTIONS
Common Stock Preferred Stock
---------------- ----------------
Distributions per share:
First Quarter $ 0.42 $ 0.34 (1)
Second Quarter 0.42 0.48
================ ================
Year-to-Date Total $ 0.84 $ 0.82
================ ================
(1) Distribution was prorated for the number of days the stock was outstanding
during the first quarter of 1998.
Note 11. PUBLIC STOCK OFFERING
In January 1998, the Company completed a public offering of 11,500,000 shares of
7.75% Series A Convertible Preferred Stock (the "January 1998 Convertible
Preferred Stock Offering"). The 11,500,000 shares were sold at a per share price
of $25.00 for net proceeds of approximately $276 million. The shares are
convertible at any time at the option of the holders thereof into shares of
Common Stock at an initial conversion price of $32.83 per share of Common Stock
(equivalent to a conversion rate of 0.7615 shares of Common Stock for each share
of Series A Convertible Preferred Stock), subject to adjustment in certain
circumstances. Except in certain instances relating to the preservation of the
Company's status as a REIT, the 7.75% Series A Convertible Preferred Stock is
not redeemable prior to January 16, 2003. On and after January 16, 2003, the
Series A Preferred Stock may be redeemed at the option of the Company, in whole
or in part, initially at 103.88% of the liquidation preference per share, and
thereafter at prices declining to 100% of the liquidation preference on and
after January 16, 2008, plus in each case accumulated, accrued and unpaid
dividends, if any, to the redemption date. A portion of this additional capital
was used to repay the outstanding balance under the Company's Acquisition Credit
Facility (as defined in Note 6). The remaining proceeds were used to fund the
acquisitions discussed in Note 3 and for general corporate purposes.
Approximately $705,000 in other costs have been incurred in connection with the
January 1998 Convertible Preferred Stock Offering.
20
<PAGE>
GLENBOROUGH REALTY TRUST INCORPORATED
Notes to Consolidated Financial Statements
June 30, 1998
Note 12. SUBSEQUENT EVENTS
In July 1998, the Company acquired a portfolio of ten properties (the "Pauls
Portfolio") from The Pauls Corporation, a premier national developer
headquartered in Denver, Colorado. The Pauls Portfolio properties aggregate
1,128,785 square feet located in Aurora, Colorado, and consist of one office,
three office/flex and six industrial buildings. The total acquisition cost,
including capitalized costs, was approximately $54.9 million, comprising: (i)
approximately $41.3 million of net assumed debt; (ii) approximately $11.3
million of equity in the form of 423,843 partnership units in the Operating
Partnership (based on an agreed per unit value of $26.556); and (iii) the
balance in cash. The cash portion was financed through advances under the Bridge
Loan from a commercial bank as discussed in Note 6. In addition to the
acquisition of the Pauls Portfolio, the Company has entered into a development
alliance with The Pauls Corporation. Under this development alliance, the
Company has committed approximately $34 million to continue the build-out of
Gateway Park, including 1.6 million square feet of office space, 945,000 square
feet of office/flex space, 395,000 square feet of industrial space and 1,600
apartment units. Additionally, the Company has committed $20 million to the
development alliance for the following Class A office building properties: a
292,000 square foot project in Kansas City, Kansas; an 84,000 square foot
project in Auburn Hills, Michigan; a 158,000 square foot project in Farmington
Hills, Michigan; a 168,000 square foot project in Southfield, Michigan, and a
209,000 square foot project in Troy, Michigan. In this development alliance, the
Company has certain rights under certain conditions and subject to certain
contingencies to purchase the properties upon completion of development and,
thus, through this alliance, the Company could acquire up to 3.8 million square
feet of office, office/flex, industrial and multi-family properties over the
next five years.
In July 1998, the Company's Board of Directors adopted a shareholder rights plan
(the "Plan"). The Plan is intended to protect the Company's shareholders in the
event of coercive or unfair takeover tactics, or an unsolicited attempt to
acquire control of the Company in a transaction the Board of Directors believes
is not in the best interests of the shareholders. Under the Plan, the Company
declared a dividend of Rights on its Common Stock. The rights issued under the
Plan will be triggered, with certain exceptions, if and when any person or group
acquires, or commences a tender offer to acquire, 15% or more of the Company's
shares.
In August 1998, the Company acquired a 85,765 square foot office building
located in northern New Jersey ("3 Executive Drive") from a German partnership.
The total acquisition cost, including capitalized costs, was approximately $12.4
million which was paid entirely in cash. The cash portion was financed through
advances under the Acquisition Credit Facility.
In October 1997, the Company entered into an agreement to purchase all of the
real estate assets of Prudential-Bache/Equitec Real Estate Partnership (the
"Partnership"), in which the managing general partner is Prudential-Bache
Properties, Inc., and in which GC and Robert Batinovich have served as
co-general partners since 1994 but do not hold a material equity or economic
interest. The agreed purchase price was $47,145,000, subject to certain
adjustments, and the Company made an earnest money deposit of $1 million in
cash. In July 1998, the Company received notice that the sale had been approved
by the requisite majority of the Partnership's limited partners. In June 1998, a
class action lawsuit was filed on behalf of all limited partners in the
Partnership, alleging among other things that the price to be paid was
inadequate and that the sale violated the terms of the Partnership Agreement
prohibiting transactions with affiliates of the Partnership's general partners.
The class action named all the general partners, as well as certain officers and
directors of the corporate general partners, as defendants; the Company was not
named as a defendant. GC and Robert Batinovich have advised the Company that
they believe the allegations in the action are completely without merit.
However, in light of the uncertainties created by the litigation, in August
1998, the Company notified the Partnership in writing that it had exercised its
right not to proceed with the purchase of the Partnership's properties. The
Company has requested a return of the earnest money deposit.
21
<PAGE>
<TABLE>
<CAPTION>
GLENBOROUGH HOTEL GROUP
CONSOLIDATED BALANCE SHEETS
(in thousands, except share amounts)
June 30, December 31,
1998 1997
(Unaudited) (Audited)
ASSETS
<S> <C> <C>
Cash and cash equivalents $ 2,742 $ 2,632
Accounts receivable 214 472
Investments in management contracts, net -- 354
Rental property and equipment, net of
accumulated depreciation of $120 and $129
in 1998 and 1997, respectively 94 154
Prepaid expenses 220 119
Other assets 307 4
TOTAL ASSETS $ 3,577 $ 3,735
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Accrued lease expense $ 429 $ 557
Mortgage loan -- 37
Other liabilities 556 405
Total liabilities 985 999
Stockholders' Equity:
Common stock (1,000 shares authorized,
issued and outstanding) 20 20
Non-voting preferred stock (50 shares
authorized, issued and outstanding) -- --
Additional paid-in capital 1,568 1,568
Retained earnings 1,004 1,148
Total stockholders' equity 2,592 2,736
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 3,577 $ 3,735
See accompanying notes to consolidated financial statements
</TABLE>
22
<PAGE>
<TABLE>
<CAPTION>
GLENBOROUGH HOTEL GROUP
CONSOLIDATED STATEMENTS OF INCOME
For the six months ended June 30, 1998 and 1997
(in thousands)
(Unaudited)
1998 1997
REVENUE
<S> <C> <C>
Hotel revenue $ 6,904 $ 6,137
Fees and reimbursements 645 1,113
Other revenue 62 --
Total revenue 7,611 7,250
EXPENSES
Leased Hotel Properties:
Room expenses 1,508 1,473
Lease payments to affiliates 2,520 2,207
Sales and marketing 717 619
Property general and administrative 511 578
Other operating expenses 904 675
Managed Hotel Properties:
Salaries and benefits 445 743
Other Expenses:
General and administrative 520 525
Depreciation and amortization 34 49
Interest expense 1 2
Total expenses 7,160 6,871
Income from operations before extraordinary item
and provision for income taxes 451 379
Loss on sale of investment (261) --
Provision for income taxes (183) (162)
Net income $ 7 $ 217
See accompanying notes to consolidated financial statements
</TABLE>
23
<PAGE>
<TABLE>
<CAPTION>
GLENBOROUGH HOTEL GROUP
CONSOLIDATED STATEMENTS OF INCOME
For the three months ended June 30, 1998 and 1997
(in thousands)
(Unaudited)
1998 1997
------------- -------------
REVENUE
<S> <C> <C>
Hotel revenue $ 3,100 $ 3,219
Fees and reimbursements 255 546
Other revenue 26 --
Total revenue 3,381 3,765
EXPENSES
Leased Hotel Properties:
Room expenses 760 836
Lease payments to affiliates 1,121 1,159
Sales and marketing 361 347
Property general and administrative 280 346
Other operating expenses 476 389
Managed Hotel Properties:
Salaries and benefits 203 343
Other Expenses:
General and administrative 246 255
Depreciation and amortization 10 25
Interest expense -- 1
Total expenses 3,457 3,701
Income (loss) from operations before extraordinary item
and provision for income taxes (76) 64
Loss on sale of investment (261) --
Benefit (provision) for income taxes 28 (26)
Net income (loss) $ (309) $ 38
See accompanying notes to consolidated financial statements
</TABLE>
24
<PAGE>
<TABLE>
<CAPTION>
GLENBOROUGH HOTEL GROUP
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
For the six months ended June 30, 1998
(in thousands, except shares)
(Unaudited)
Addi-
Preferred Stock Common Stock tional 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, 1997 50 $ -- 1,000 $ 20 $ 1,568 $ 1,148 $ 2,736
Dividends -- -- -- -- -- (151) (151)
Net income -- -- -- -- -- 7 7
BALANCE at
June 30, 1998 50 $ -- 1,000 $ 20 $ 1,568 $ 1,004 $ 2,592
See accompanying notes to consolidated financial statements
</TABLE>
25
<PAGE>
<TABLE>
<CAPTION>
GLENBOROUGH HOTEL GROUP
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the six months ended June 30, 1998 and 1997
(in thousands)
(Unaudited)
1998 1997
Cash flows from operating activities:
<S> <C> <C>
Net income $ 7 $ 217
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 34 49
Loss on sale of investment 261 --
Changes in certain assets and liabilities (124) 280
Net cash provided by operating activities 178 546
Cash flows from investing activities:
Sale of RGI's net assets 157 --
Additions to equipment (74) (2)
Net cash provided by (used for) investing activities 83 (2)
Cash flows from financing activities:
Dividends (151) (68)
Repayment of borrowings -- (12)
Net cash used for financing activities (151) (80)
Net increase in cash and cash equivalents 110 464
Cash and cash equivalents at beginning of period 2,632 461
Cash and cash equivalents at end of period $ 2,742 $ 925
Supplemental disclosure of cash flow information:
Cash paid for interest $ 1 $ 2
See accompanying notes to consolidated financial statements
</TABLE>
26
<PAGE>
GLENBOROUGH HOTEL GROUP
Notes to Consolidated Financial Statements
June 30, 1998
Note 1. ORGANIZATION
Glenborough Hotel Group ("GHG") was organized in the State of Nevada on
September 23, 1991. Through June 1998, GHG operated hotel properties owned by
Glenborough Realty Trust Incorporated ("GLB") under six separate percentage
leases and managed one hotel property owned by an unaffiliated company. It
should be noted that effective April 1998, one hotel that was previously under a
management contract with GHG, was involved in an exchange transaction between
its owner and GLB. Simultaneous with the exchange, the hotel was leased by GHG.
In June 1998, two of the hotel properties owned by GLB were sold. In addition,
the four remaining hotel properties owned by GLB were leased to unaffiliated
entities. These unaffiliated entities will manage the hotel properties through
the end of 1998, at which time they will purchase three of the properties from
GLB. One hotel will continue to be held by GLB and leased by the unaffiliated
company.
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.
Through April 30, 1998, GHG also owned approximately 80% of the common stock of
Resort Group, Inc. ("RGI"). GHG consolidated its financial statements with RGI
and recognized its joint venture partner's interest as minority interest. RGI
manages homeowners associations and rental pools for two beachfront resort
condominium hotel properties and owns six units at one of the properties. As of
May 1, 1998, GHG sold its interest in RGI to a partnership affiliated with GLB.
In the opinion of management, the accompanying unaudited financial statements
contain all adjustments (consisting only of normal accruals) necessary to
present fairly, the consolidated financial position and consolidated results of
operations of GHG as of June 30, 1998, and for the period then ended.
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, 1997, and of
GHG only as of June 30, 1998. The consolidated results of operations and cash
flows of GHG and RGI are presented for the six months ended June 30, 1997, while
for the six months ended June 30, 1998, the results of operations and cash flows
include RGI amounts only through April 30, 1998. 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.
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.
Income Taxes - Provision for income taxes is based on financial accounting
income. Certain items are reported in different periods for tax and financial
reporting purposes. Timing differences arising from such items are recorded as
deferred tax assets, net of related valuation reserves, or liabilities, as
appropriate.
27
<PAGE>
GLENBOROUGH HOTEL GROUP
Notes to Consolidated Financial Statements
June 30, 1998
Note 3. INVESTMENTS IN MANAGEMENT CONTRACTS, NET
At December 31, 1997, investments in management contracts reflected the
unamortized portion of the management contracts RGI held with the two beachfront
resort condominium hotel properties for both management of the homeowners
associations and the rental pool programs. As of June 30, 1998, the RGI balances
are no longer consolidated.
Note 4. RENTAL PROPERTY
Rental property and equipment represents furniture and fixtures in GHG's
corporate offices, as well as, as of June 30, 1997, interests in six condominium
hotel units owned by RGI. The six units owned by RGI participate in a resort
rental program on an "at will" basis, whereby there is no fixed term of
participation. Such participation generated approximately $6,000 and $11,000 of
cash flow after deductions for capital reserves for the six months ended June
30, 1998 and 1997, respectively.
Note 5. MORTGAGE LOAN
The mortgage loan of $37,000 at June 30, 1997, represented the debt secured by
the six condominium hotel units owned by RGI. As of June 30, 1998, the RGI
balances are no longer consolidated.
Note 6. THE PERCENTAGE LEASES
GHG was leasing the six hotels owned by GLB for a term of five years pursuant to
individual percentage leases ("Percentage Leases") which provided 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 was separately
leased to GHG (the "lessee"). The lessee's ability to make rent payments has, to
a large degree, depended on its ability to generate cash flow from the
operations of the hotels. Each Percentage Lease contained the provisions
described below.
Each Percentage Lease had 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 had one five-year
renewal option at the then current fair market rent.
During the term of each Percentage Lease, the lessee was obligated to pay the
greater of Base Rent or Percentage Rent. Base Rent was required to be paid
monthly in advance. Percentage Rent was calculated by multiplying fixed
percentages by room revenues for each of the five hotels; the applicable
percentage changed when revenue exceeded a specified threshold, and the
threshold was to be adjusted annually in accordance with changes in the
applicable Consumer Price Index. Percentage Rent was due quarterly.
The table below sets forth the annual Base Rent and the Percentage Rent formulas
for each of the six hotels.
<TABLE>
<CAPTION>
Hotel Lease Rent Provisions
Percentage Rent
incurred for the six
Annual months ended Annual Percentage
Hotel Base Rent June 30, 1998 Rent Formulas
<S> <C> <C> <C>
Ontario, CA $ 240,000 $ 139,000 24% of the first $1,711,000 of room revenue plus
40% of room revenue above $1,711,000 and 5% of other revenue
Arlington, TX $ 360,000 $ 85,000 27% of the first $1,738,000 of room revenue plus
42% of room revenue above $1,738,000 and 5% of other revenue
continued
</TABLE>
28
<PAGE>
GLENBOROUGH HOTEL GROUP
Notes to Consolidated Financial Statements
June 30, 1998
<TABLE>
<CAPTION>
Hotel Lease Rent Provisions - continued
Percentage Rent
incurred for the six
Annual months ended Annual Percentage
Hotel Base Rent June 30, 1998 Rent Formulas
<S> <C> <C> <C>
Tucson, AZ $ 600,000 $ 464,000 40% of the first $1,467,000 of room revenue plus
46% of room revenue above $1,467,000 and 5% of other revenue
San Antonio, TX (1) $ 312,000 $ 1,000 33% of the first $1,272,000 of room revenue plus
40% of room revenue above $1,272,000 and 5% of other revenue
Scottsdale, AZ $ 720,000 $ 558,000 45% of the first $3,200,000 of room revenue plus
60% of room revenue above $3,200,000 and 5% of other revenue
Dallas, TX (1) $ 600,000 $ 4,000 32% of the first $1,700,000 of room revenue plus
45% of room revenue above $1,700,000 and 5% of other revenue
(1) Hotel was sold in June 1998.
</TABLE>
Other than real estate and personal property taxes, casualty insurance, a fixed
capital improvement allowance and maintenance of underground utilities and
structural elements, which were the responsibility of GLB, the Percentage Leases
required the lessees to pay rent, insurance, salaries, utilities and all other
operating costs incurred in the operation of the Hotels.
Note 7. DECLARATION OF DIVIDENDS
The board of directors of GHG declared and paid the following dividends for the
first and second quarters of 1998:
Preferred Stock Common Stock Total
Q1 1998 $ 78,375 $ 23,625 $ 102,000
Q2 1998 78,375 23,625 102,000
Total $ 156,750 $ 47,250 $ 204,000
29
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
GLENBOROUGH REALTY TRUST INCORPORATED
Background
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 June 30, 1998, the Company owned and operated
179 income-producing properties (the "Properties," and each a "Property"). The
Properties are comprised of 53 office Properties, 45 office/flex Properties, 27
industrial Properties, 13 retail Properties, 37 multi-family Properties and 4
hotel Properties, located in 24 states.
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 ("GC"), a California corporation, and eight
public limited partnerships (the "Partnerships") 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"), two of which merged on June 30, 1997,
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 84.76% limited partner interest. The Company operates
the assets acquired in the Consolidation and in subsequent 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
has elected to qualify as a REIT under the Internal Revenue Code of 1986, as
amended. The common and preferred stock of the Company (the "Common Stock" and
the "Preferred Stock", respectively) are listed on the New York Stock Exchange
("NYSE") under the trading symbols "GLB" and "GLB Pr A", respectively.
Since the Consolidation, and consistent with its strategy for growth, the
Company has completed the following transactions:
Acquired 20 properties in the third and fourth quarters of 1996, 90
properties in 1997 and 69 properties in 1998. The total acquired Properties
consist of an aggregate of approximately 15.7 million rentable square feet,
9,353 multi-family units and 227 hotel suites and had aggregate acquisition
costs, including capitalized costs, of approximately $1.8 billion.
From January 1, 1996 to the date of this filing, sold four industrial
properties, 16 retail properties, two office/flex properties, one
multi-family property and two hotel properties to redeploy capital into
properties the Company believes have characteristics more suited to its
overall growth strategy and operating goals.
Entered into a $250 million unsecured line of credit (the "Acquisition
Credit Facility") with a commercial bank which replaced its $50 million
secured line of credit and closed a $150 million unsecured loan agreement
(the "Interim Loan") with a commercial bank.
Completed four offerings of Common Stock in October 1996, March 1997, July
1997 and October 1997 (respectively, the "October 1996 Offering," the
"March 1997 Offering," the "July 1997 Offering," and the "October 1997
Offering"), resulting in aggregate gross proceeds of approximately $562
million.
Completed an offering of 7.75% Series A Convertible Preferred Stock (the
"January 1998 Convertible Preferred Stock Offering") for total gross
proceeds of approximately $287.5 million.
Issued $150 million of 7 5/8% unsecured Senior Notes which are due on March
15, 2005.
Paid off the Interim Loan with proceeds from the issuance of $150 million
of 7 5/8% unsecured Senior Notes.
Closed a $150 million unsecured loan agreement (the "Bridge Loan") with a
commercial bank.
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.
30
<PAGE>
Results of Operations
Comparison of the six months ended June 30, 1998 to the six months ended June
30, 1997.
Rental Revenues. Rental revenues increased $77,891,000, or 366%, to $97,582,000
for the six months ended June 30, 1998, from $19,691,000 for the six months
ended June 30, 1997. The increase included growth in revenues from the office,
industrial, office/flex, retail and multi-family Properties of $49,728,000,
$4,331,000, $15,778,000, $2,385,000 and $5,896,000, respectively. Of the rental
revenue for the six months ended June 30, 1998, $8,768,000 represented rental
revenues generated from the acquisition of 20 properties in the third and fourth
quarters of 1996 (the "1996 Acquisitions"), $48,715,000 represented rental
revenues generated from the acquisition of 90 properties in 1997 (the "1997
Acquisitions") and $34,596,000 represented rental revenues generated from the
acquisition of 58 properties during the six months ended June 30, 1998 (the
"1998 Acquisitions").
Fees and Reimbursements. Fees and reimbursements revenue consists primarily of
property management fees, asset management fees and lease commissions paid to
the Company under property and asset management agreements. This revenue
increased $865,000, or 236%, to $1,232,000 for the six months ended June 30,
1998, from $367,000 for the six months ended June 30, 1997. The increase
primarily consisted of increased lease commissions and sales fees from the
managed portfolio.
Equity in Earnings of Associated Companies. Equity in earnings from Associated
Companies increased $458,000, or 76%, to $1,061,000 for the six months ended
June 30, 1998, from $603,000 for the six months ended June 30, 1997. The
increase is primarily due to transaction fees earned by GC related to the
disposition of several of the managed properties.
Net Gain on Sales of Rental Properties. The net gain on sales of rental
properties of $2,139,000 during the six months ended June 30, 1998, resulted
from the sales of one multi-family property, two industrial properties, two
office/flex properties and two hotel properties from the Company's portfolio.
The net gain on sales of rental properties of $570,000 during the six months
ended June 30, 1997, resulted from the sales of 15 retail properties from the
Company's portfolio.
Gain on Collection of Mortgage Loan Receivable. The gain on collection of
mortgage loan receivable of $652,000 during the six months ended June 30, 1997
resulted from the collection of a mortgage loan receivable which had a net
carrying value of $6,700,000. The payoff amount totaled $6,863,000, plus a
$500,000 note receivable, which, net of legal costs, resulted in a gain of
$652,000.
Property Operating Expenses. Property operating expenses increased $24,544,000,
or 406%, to $30,589,000 for the six months ended June 30, 1998, from $6,045,000
for the six months ended June 30, 1997. Of this increase, $24,380,000 represents
increases in property operating expenses attributable to the 1997 Acquisitions
and the 1998 Acquisitions.
General and Administrative Expenses. General and administrative expenses
increased $3,451,000, or 251%, to $4,825,000 for the six months ended June 30,
1998, from $1,374,000 for the six months ended June 30, 1997. The increase is
primarily due to increased salary and overhead costs resulting from the 1997
Acquisitions and 1998 Acquisitions.
Depreciation and Amortization. Depreciation and amortization increased
$16,899,000, or 418%, to $20,943,000 for the six months ended June 30, 1998,
from $4,044,000 for the six months ended June 30, 1997. The increase is
primarily due to depreciation and amortization associated with the 1997
Acquisitions and 1998 Acquisitions.
Interest Expense. Interest expense increased $15,052,000, or 396%, to
$18,852,000 for the six months ended June 30, 1998, from $3,800,000 for the six
months ended June 30, 1997. Substantially all of the increase was the result of
higher average borrowings during the six months ended June 30, 1998, as compared
to the six months ended June 30, 1997, due to new debt and the assumption of
debt related to the 1997 Acquisitions and 1998 Acquisitions.
Net Income and Earnings Per Share (EPS). Net income increased $19,530,000, or
296%, to $26,134,000 for the six months ended June 30, 1998, from $6,604,000 for
the six months ended June 30, 1997. However, both Basic EPS
31
<PAGE>
and Diluted EPS decreased $0.04 per share, respectively, for the six months
ended June 30, 1998, from the six months ended June 30, 1997. The decreases in
Basic and Diluted EPS are due to a decrease in Net Income Available to Common
Stockholders resulting from the dividends paid to preferred stockholders in
1998. There were no preferred stock dividends paid in 1997 as there was no
preferred stock outstanding until January 1998.
Comparison of the three months ended June 30, 1998 to the three months ended
June 30, 1997.
Rental Revenues. Rental revenues increased $39,835,000, or 338%, to $51,619,000
for the three months ended June 30, 1998, from $11,784,000 for the three months
ended June 30, 1997. The increase included growth in revenues from the office,
industrial, office/flex, retail and multi-family Properties of $26,015,000,
$2,088,000, $7,585,000, $1,463,000 and $3,264,000, respectively. Of the rental
revenue for the three months ended June 30, 1998, $4,389,000 represented rental
revenues generated from the acquisition of 20 properties in the third and fourth
quarters of 1996 (the "1996 Acquisitions"), $24,821,000 represented rental
revenues generated from the acquisition of 90 properties in 1997 (the "1997
Acquisitions") and $19,908,000 represented rental revenues generated from the
acquisition of 58 properties during the six months ended June 30, 1998 (the
"1998 Acquisitions").
Fees and Reimbursements. Fees and reimbursements revenue consists primarily of
property management fees, asset management fees and lease commissions paid to
the Company under property and asset management agreements. This revenue
increased $579,000, or 322%, to $759,000 for the three months ended June 30,
1998, from $180,000 for the three months ended June 30, 1997. The increase was
primarily due to a disposition fee from GC of $581,000 related to the sale of
one of the managed properties.
Equity in Earnings of Associated Companies. Equity in earnings from Associated
Companies increased $251,000, or 55%, to $709,000 for the three months ended
June 30, 1998, from $458,000 for the three months ended June 30, 1997. The
increase is primarily due to transaction fees earned by GC related to the
disposition of several of the managed properties.
Net Gain on Sales of Rental Properties. The net gain on sales of rental
properties of $693,000 during the three months ended June 30, 1998, resulted
from the sales of one office/flex property and two hotel properties from the
Company's portfolio. The net gain on sales of rental properties of $570,000
during the three months ended June 30, 1997, resulted from the sales of 15
retail properties from the Company's portfolio.
Gain on Collection of Mortgage Loan Receivable. The gain on collection of
mortgage loan receivable of $498,000 during the three months ended June 30,
1997, resulted from the collection of a mortgage loan receivable. The payoff
amount included a $500,000 note receivable, which was recorded as deferred
income to be recognized as cash was received. Payments received in the three
months ended March 31, 1997, totaled $2,000. The remaining balance of the note
receivable was assigned to a third party in June 1997 which resulted in a gain
of $498,000 during the three months ended June 30, 1997.
Property Operating Expenses. Property operating expenses increased $12,602,000,
or 344%, to $16,265,000 for the three months ended June 30, 1998, from
$3,663,000 for the three months ended June 30, 1997. Of this increase,
$12,685,000 represents increases in property operating expenses attributable to
the 1997 Acquisitions and the 1998 Acquisitions. This increase is partially
offset by decreases in property operating expenses due to the 1997 and 1998
sales of properties.
General and Administrative Expenses. General and administrative expenses
increased $1,880,000, or 260%, to $2,603,000 for the three months ended June 30,
1998, from $723,000 for the three months ended June 30, 1997. The increase is
primarily due to increased salary and overhead costs resulting from the 1997
Acquisitions and 1998 Acquisitions.
Depreciation and Amortization. Depreciation and amortization increased
$8,427,000, or 336%, to $10,934,000 for the three months ended June 30, 1998,
from $2,507,000 for the three months ended June 30, 1997. The increase is
primarily due to depreciation and amortization associated with the 1997
Acquisitions and 1998 Acquisitions.
Interest Expense. Interest expense increased $7,480,000, or 336%, to $9,707,000
for the three months ended June 30, 1998, from $2,227,000 for the three months
ended June 30, 1997. Substantially all of the increase was the result of higher
32
<PAGE>
average borrowings during the three months ended June 30, 1998, as compared to
the three months ended June 30, 1997, due to new debt and the assumption of debt
related to the 1997 Acquisitions and 1998 Acquisitions.
Net Income and Earnings Per Share (EPS). Net income increased $9,680,000, or
228%, to $13,921,000 for the three months ended June 30, 1998, from $4,241,000
for the three months ended June 30, 1997. However, both Basic EPS and Diluted
EPS decreased $0.06 per share, respectively, for the three months ended June 30,
1998, from the three months ended June 30, 1997. The decreases in Basic and
Diluted EPS are due to a decrease in Net Income Available to Common Stockholders
resulting from the dividends paid to preferred stockholders in 1998. There were
no preferred stock dividends paid in 1997 as there was no preferred stock
outstanding until January 1998.
Liquidity and Capital Resources
For the six months ended June 30, 1998, cash provided by operating activities
increased by $24,030,000 to $32,603,000 as compared to $8,573,000 for the same
period in 1997. The increase is primarily due to an increase in net income of
$35,969,000 (before depreciation and amortization, minority interest and net
gain on sales of rental properties) due to the 1997 Acquisitions and 1998
Acquisitions. The increase is partially offset by an increase in investments in
development alliances. Cash used for investing activities increased by
$471,360,000 to $595,440,000 for the six months ended June 30, 1998, as compared
to $124,080,000 for the same period in 1997. The increase is primarily due to
the 1998 Acquisitions, additions to mortgage loans receivable and other
investments. This increase was partially offset by the collection of a mortgage
loan receivable in 1997 and the proceeds from the 1998 sales of properties. Cash
provided by financing activities increased by $447,291,000 to $564,795,000 for
the six months ended June 30, 1998, as compared to $117,504,000 for the same
period in 1997. This increase was primarily due to the net proceeds from the
January 1998 Convertible Preferred Stock Offering (as defined below), the net
proceeds from an issuance of Notes (as defined below) and the proceeds from new
debt. This increase was partially offset by increased distributions to
stockholders resulting from an increase in the number of shares of common stock
outstanding and the issuance of preferred stock in January 1998.
The Company expects to meet its short-term liquidity requirements generally
through its working capital, its Acquisition Credit Facility (as defined below)
and cash generated by operations. Planned capital improvements consist of tenant
improvements and expenditures necessary to lease and maintain the Properties.
The Company believes that its cash generated by operations will be adequate to
meet 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 Acquisition Credit Facility 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's principal sources of funding for acquisitions, development,
expansion and renovation of properties include an unsecured Acquisition Credit
Facility, permanent secured debt financing, public unsecured debt financing,
public and private equity and debt issuances, the issuance of partnership units
in the Operating Partnership and cash flow provided by operations.
Mortgage loans payable increased from $148,139,000 at December 31, 1997, to
$451,084,000 at June 30, 1998. This increase primarily resulted from the
assumption of mortgage loans totaling $317,527,000 in connection with the 1998
Acquisitions. These increases were partially offset by the payoff of $13,581,000
of mortgage loans in connection with 1998 sales of properties and scheduled
principal payments on other mortgage debt.
The Company has a $250,000,000 unsecured line of credit provided by a commercial
bank (the "Acquisition Credit Facility"). Outstanding borrowings under the
Acquisition Credit Facility increased from $80,160,000 at December 31, 1997, to
$125,152,000 at June 30, 1998. The $80,160,000 balance outstanding at December
31, 1997, was paid off in January 1998 with proceeds from the January 1998
Convertible Preferred Stock Offering. The $125,152,000 balance outstanding at
June 30, 1998 consists of draws for 1998 Acquisitions. Borrowings under the
Acquisition Credit Facility currently bear interest at an annual rate of LIBOR
plus 1.2%.
In January 1998, the Company closed a $150 million loan with a commercial bank
(the "Interim Loan"). The Interim Loan had a term of three months with interest
at LIBOR plus 1.75%. The purpose of the Interim Loan was to fund acquisitions.
33
<PAGE>
The Interim Loan was paid off in March 1998 with proceeds from the issuance of
$150 million of unsecured Senior Notes (discussed below).
In March 1998, the Operating Partnership, as to which the Company is general
partner, issued $150 million of 7 5/8% unsecured Senior Notes (the "Notes") in
an unregistered 144A offering. The Notes mature on March 15, 2005, unless
previously redeemed. Interest on the Notes is payable semiannually on March 15
and September 15, commencing September 15, 1998. The Operating Partnership used
the net proceeds of the offering to repay the outstanding balance under the
Interim Loan.
In June 1998, the Company obtained a $150 million unsecured loan from a
commercial bank (the "Bridge Loan") which bears interest at a variable rate of
LIBOR plus 1.3%, and has a maturity date of December 31, 1998. As of the date of
this filing, approximately $147.7 million has been drawn under the Bridge Loan
to fund acquisitions and development activities.
At June 30, 1998, the Company's total indebtedness included fixed-rate debt of
$482,696,000 (including $139,008,000 subject to cross-collateralization) and
floating-rate indebtedness of $385,710,000 (including $115,589,000 subject to
cross-collateralization). Approximately 41.4% of the Company's total assets,
comprising 74 properties, is encumbered by debt at June 30, 1998.
In January 1997 and May 1997, the Company filed shelf registration statements
with the Securities and Exchange Commission (the "SEC") to register $250 million
and $350 million, respectively, of equity securities of the Company. In November
1997, the Company filed a shelf registration statement with the SEC to register
an additional $1 billion of equity securities of the Company (the "November 1997
Shelf Registration Statement"). The November 1997 Shelf Registration Statement
was declared effective by the SEC on December 18, 1997. After the completion of
the March 1997, July 1997, October 1997 and January 1998 Offerings, the Company
has the capacity pursuant to the November 1997 Shelf Registration Statement to
issue up to approximately $801.2 million in equity securities.
In January 1998, the Company completed a public offering of 11,500,000 shares of
7.75% Series A Convertible Preferred Stock (the "January 1998 Convertible
Preferred Stock Offering" or the "January 1998 Offering"). The 11,500,000 shares
were sold at a per share price of $25.00 for net proceeds of approximately $276
million, which were used to repay the outstanding balance under the Company's
Acquisition Credit Facility, to fund certain subsequent property acquisitions
and for general corporate purposes. The shares are convertible at any time at
the option of the holder thereof into shares of Common Stock at an initial
conversion price of $32.83 per share of Common Stock (equivalent to a conversion
rate of 0.7615 shares of Common Stock for each share of Series A Convertible
Preferred Stock), subject to adjustment in certain circumstances.
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 multi-family
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 may
permit the Company to increase rental rates or other charges to tenants in
response to rising prices and therefore, serve to reduce the Company's exposure
to the adverse effects of inflation.
Funds from Operations and Cash Available for Distribution
Funds from Operations ("FFO"), as defined by NAREIT, represents income (loss)
before minority interests and extraordinary items, adjusted for real estate
related depreciation and amortization and gains (losses) from the disposal of
properties. The Company believes that FFO is an important and widely used
measure of the financial performance of equity REITs which provides a relevant
basis for comparison among other REITs. 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, developments and other
capital expenditures. FFO does not represent net income or cash flows from
operations as defined by GAAP, and should not be considered as an alternative to
net income (determined in accordance with GAAP) as an indicator of the Company's
operating performance or as an
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<PAGE>
alternative to cash flows from operating, investing and financing activities
(determined in accordance with GAAP) as a measure of liquidity. FFO 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. Further, FFO as disclosed by other REITs may not
be comparable to the Company's calculation of FFO. The Company calculates FFO in
accordance with the White Paper on FFO approved by the Board of Governors of
NAREIT in March 1995.
Cash Available for Distribution ("CAD") represents income (loss) before minority
interests and extraordinary items, adjusted for depreciation and amortization
including amortization of deferred financing costs and gains (losses) from the
disposal of properties, less lease commissions and recurring capital
expenditures, consisting of tenant improvements and normal expenditures intended
to extend the useful life of the property such as roof and parking lot repairs.
CAD should not be considered an alternative to net income (computed in
accordance with GAAP) as a measure of the Company's financial performance or as
an alternative 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.
Further, CAD as disclosed by other REITs may not be comparable to the Company's
calculation of CAD.
The following table sets forth the Company's calculation of FFO and CAD for the
three months ended March 31 and June 30, 1998 (in thousands, except weighted
average shares and per share amounts):
<TABLE>
<CAPTION>
March 31, June 30, YTD
1998 1998 1998
------------- ------------- -------------
<S> <C> <C> <C>
Net income before minority interest $ 12,891 $ 14,517 $ 27,408
Preferred dividend requirement (3,910) (5,570) (9,480)
Net gain on sales of rental properties (1,446) (693) (2,139)
Depreciation and amortization 10,009 10,934 20,943
Adjustment to reflect FFO of Associated Companies(1) 210 173 383
------------- ------------- -------------
FFO $ 17,754 $ 19,361 $ 37,115
============= ============= =============
Amortization of deferred financing fees 418 174 592
Capital reserve (983) -- (983)
Capital expenditures (1,227) (3,200) (4,427)
------------- ------------- -------------
CAD $ 15,962 $ 16,335 $ 32,297
============= ============= =============
Distributions per share (2) $ 0.42 $ 0.42 $ 0.84
============= ============= =============
Diluted weighted average shares outstanding 34,372,364 34,868,905 34,612,985
============= ============= =============
</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 June 30, 1998, were paid on
July 10, 1998.
Forward Looking Statements; Factors That May Affect Operating Results
This Report on Form 10-Q 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. It is
important to note that the Company's actual results could differ materially from
those stated or implied in such forward-looking statements.
35
<PAGE>
Factors which may cause the Company's results to differ include the inability to
complete anticipated future acquisitions, defaults or non-renewal of leases,
increased interest rates and operational costs, failure to obtain necessary
outside financing, difficulties in identifying properties to acquire and in
effecting acquisitions, failure to qualify as a real estate investment trust
under the Internal Revenue Code of 1986, environmental uncertainties, risks
related to natural disasters, financial market fluctuations, changes in real
estate and zoning laws, increases in real property tax rates and other factors
discussed under the caption "Forward Looking Statements; Factors That May Affect
Operating Results" in the "Management's Discussion and Analysis of Financial
Condition and Results of Operations" section of the Company's Annual Report on
Form 10-K for the year ended December 31, 1997, and other risk factors set forth
in the Company's other Securities and Exchange Commission filings. In addition,
past performance of the Company's Common Stock is not necessarily indicative of
results that will be obtained in the future from an investment in the Company's
Common Stock. Furthermore, the Company makes distributions to stockholders if,
as and when declared by its Board of Directors, and expects to continue its
policy of paying quarterly distributions, however, there can be no assurance
that distributions will continue or be paid at any specific level.
Year 2000 Compliance
The Company utilizes a number of computer software programs and operating
systems across its entire organization, including applications used in financial
business systems and various administrative functions. To the extent that the
Company's software applications contain source code that is unable to
appropriately interpret the upcoming calendar year "2000" and beyond, some level
of modification, or replacement of such applications will be necessary. The
Company has completed its identification of applications that are not yet "Year
2000" compliant and has commenced modification or replacement of such
applications, as necessary. Given information known at this time about the
Company's systems that are non-compliant, coupled with the Company's ongoing,
normal course-of-business efforts to upgrade or replace critical systems, as
necessary, management does not expect Year 2000 compliance costs to have any
material adverse impact on the Company's liquidity or ongoing results of
operations. No assurance can be given, however, that all of the Company's
systems will be Year 2000 compliant or that compliance costs or the impact of
the Company's failure to achieve substantial Year 2000 compliance will not have
a material adverse effect on the Company's future liquidity or results of
operations.
Stockholders or potential stockholders should read the "Risk Factors" section of
the Company's latest annual report on Form 10-K/A filed with the Securities and
Exchange Commission ("SEC") in conjunction with this quarterly report on Form
10-Q to better understand the factors affecting the Company's results of
operations and the Company's common stock share price. The fact that some of the
risk factors may be the same or similar to the Company's past filings means only
that the risks are present in multiple periods. The Company believes that many
of the risks detailed here and in the Company's other SEC filings are part of
doing business in the real estate industry and will likely be present in all
periods reported. The fact that certain risks are endemic to the industry does
not lessen the significance of the risk.
36
<PAGE>
GLENBOROUGH HOTEL GROUP
Background
Glenborough Hotel Group ("GHG") was organized in the state of Nevada on
September 23, 1991. Through June 1998, GHG operated hotel properties owned by
Glenborough Realty Trust Incorporated (the "Company") under six separate
percentage leases and managed one hotel property owned by an unaffiliated
company. In June 1998, two of the hotel properties owned by the Company were
sold. In addition, the four remaining hotel properties owned by the Company were
leased to unaffiliated entities. These unaffiliated entities will manage three
of the hotel properties through the end of 1998, at which time they will
purchase the properties from the Company.
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.
Through April 30, 1998, GHG also owned approximately 80% of the common stock of
Resort Group, Inc. ("RGI"). GHG consolidated its financial statements with RGI
and recognized its joint venture partner's interest as minority interest. RGI
manages homeowners associations and rental pools for two beachfront resort
condominium hotel properties and owns six units at one of the properties. As of
May 1, 1998, GHG sold its interest in RGI to a partnership affiliated with the
Company.
Liquidity and Capital Resources
Through June 30, 1998, GHG's primary source of funding was the cash generated by
the operations of the six hotels leased from the Company and fees received for
(i) managing hotels and (ii) managing the homeowners associations and rental
pools for the resort condominium hotel properties as discussed above.
The board of directors of GHG declared and paid the following quarterly
dividends for the three months ended March 31 and June 30, 1998:
<TABLE>
<CAPTION>
1st Quarter 2nd Quarter Year to Date
-------------- -------------- --------------
<S> <C> <C> <C>
Preferred dividends to the Company $ 7,500 $ 7,500 $ 15,000
Additional dividends to the Company 70,875 70,875 141,750
-------------- -------------- --------------
Total dividends to the Company 78,375 78,375 156,750
Dividends to others 23,625 23,625 47,250
-------------- -------------- --------------
Total dividends $ 102,000 $ 102,000 $ 204,000
============== ============== ==============
</TABLE>
Results of Operations
Hotel revenue, which represents the revenue earned on the six hotels leased from
the Company, increased $767,000, or 12%, to $6,904,000 for the six months ended
June 30, 1998, from $6,137,000 for the six months ended June 30, 1997. This
increase is primarily due to the commencement of the Scottsdale Hotel lease in
February 1997 and the commencement of the Irving Hotel lease in April 1998.
Fee revenue and salary reimbursements of $645,000 represents the fees earned for
managing hotels and resort condominium hotels. The decrease from the six months
ended June 30, 1997, to the six months ended June 30, 1998, is primarily due to
a change in ownership of one of the managed hotels, which resulted in GHG no
longer managing this hotel as of April 1997.
The primary expenses associated with the leased hotels are room expenses, lease
payments, sales and marketing and other operating expenses, including utilities,
maintenance and insurance. All of these leased hotel expenses increased from the
six months ended June 30, 1997, to the six months ended June 30, 1998, due to
the commencement of the Scottsdale Hotel and Irving Hotel leases as discussed
above.
The only direct expenses incurred in connection with the management of the two
hotels and two resort condominium hotel properties are salaries and benefits
which decreased $298,000 from the six months ended June 30, 1997, to the six
months ended June 30, 1998. This decrease is primarily due to a change in
ownership of one of the managed hotel properties which resulted in GHG no longer
managing this hotel as of April 1997.
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<PAGE>
General and administrative costs 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.
These costs remained relatively stable with a decrease of $5,000, or 1%, to
$520,000 for the six months ended June 30, 1998, from $525,000 for the six
months ended June 30, 1997.
Depreciation and amortization decreased $15,000, or 31%, to $34,000 for the six
months ended June 30, 1998, from $49,000 for the six months ended June 30, 1997.
Depreciation expense relates to the depreciation of building improvements and
furniture, fixtures and equipment at the leased hotels. Amortization expense
primarily relates to the amortization of RGI's investment in management
contracts. The decrease is primarily due to the sale of GHG's interest in RGI to
an affiliate of the Company, effective May 1, 1998.
On May 1, 1998, GHG sold its 80% interest in RGI to an affiliate of the Company
for $340,000 and recognized a $261,000 loss which is included in GHG's
consolidated statements of income for the six months ended June 30, 1998.
38
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Blumberg. On February 17, 1998, the California state court of appeals affirmed
the Company's settlement of a class action complaint filed on February 21, 1995
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, one of the Partnerships included in the Consolidation, 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 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. All parties filed
their briefs and a hearing was held on February 3, 1998. On February 17, 1998,
the Court of Appeals rejected the objectors' contentions and upheld the
settlement. The objectors filed with the California Supreme Court a petition for
review, which was denied on May 21, 1998.
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
39
<PAGE>
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 certain of the Partnerships included in the Consolidation 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. Plaintiffs in the BEJ Action
voluntarily stayed the action pending resolution of the Blumberg Action; such
plaintiffs can revive their lawsuit.
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. In view of the denial of the
objector's petition for review in the Blumberg Action, among other things, the
Company believes that it is very unlikely that this litigation would result in a
liability that would exceed the accrued liability by a material amount. 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.
Certain other claims and lawsuits have arisen against the Company in its normal
course of business. The Company believes that such other claims and lawsuits
will not have a material adverse effect on the Company's financial position,
cash flow or results of operations.
Item 2. Changes in Securities
(a) Rights of Holders of Registered Securities
On July 7, 1998, the Company's Board of Directors adopted a Stockholder Rights
Plan and pursuant thereto declared a dividend of one preferred share purchase
right for each outstanding share of the Company's Common Stock. A Form 8-A
relating to such plan was filed with the Securities and Exchange Commission on
July 16, 1998. Said Form 8-A is incorporated herein by reference.
(c) Sales of Unregistered Securities
In February 1998, the Company acquired the Capitol Center property in Des
Moines, Iowa, for a total acquisition cost, including capitalized costs, of
approximately $12.3 million. In connection with this acquisition, Glenborough
Properties, L.P., a California limited partnership (the "Operating Partnership,"
as to which the Company is general partner), issued to Hubbell Realty
Corporation, the seller of the Capitol Center Property, 3,874 units ("Units") of
partnership interest in Glenborough Properties, L.P. (with an agreed upon per
Unit value of $30.00, or an aggregate value of $116,000) as partial payment for
the Capitol Center Property. The Units are redeemable for cash, or, at the
election of the Company, for shares of Common Stock of the Company on a
one-for-one basis. The Units were issued by the Operating Partnership in
reliance on the exemption provided by Section 4(2) of the Securities Act of
1933, as amended.
In April 1998, the Company acquired the Eaton & Lauth portfolio of properties
for a total acquisition cost, including capitalized costs, of approximately $70
million. In connection with this acquisition, the Company and the Operating
Partnership issued approximately $15.9 million in the form of 506,788
partnership units in the Operating Partnership and 126,764 unregistered shares
of Common Stock of the Company (based on an agreed per unit and per share value
of $25.00) as partial payment for the Eaton & Lauth portfolio. The Units are
redeemable for cash, or, at the election of the Company, for shares of Common
Stock of the Company on a one-for-one basis. The Units and shares were issued by
the Operating Partnership and the Company in reliance on the exemption provided
by Section 4(2) of the Securities Act of 1933, as amended.
40
<PAGE>
In June 1998, the Company acquired the Covance Property for a total acquisition
cost, including capitalized costs, of approximately $16.5 million. In connection
with this acquisition, the Company and the Operating Partnership issued
approximately $4.3 million in the form of 161,492 partnership units in the
Operating Partnership and 8,802 unregistered shares of Common Stock of the
Company (based on an agreed per unit and per share value of $25.00) as partial
payment for the Covance Property. The Units are redeemable for cash, or, at the
election of the Company, for shares of Common Stock of the Company on a
one-for-one basis. The Units and shares were issued by the Operating Partnership
and the Company in reliance on the exemption provided by Section 4(2) of the
Securities Act of 1933, as amended.
In June 1998, the Company acquired the Galesi Portfolio for a total acquisition
cost, including capitalized costs, of approximately $275.8 million. In
connection with this acquisition, the Operating Partnership issued approximately
$21.2 million in the form of 806,393 partnership units in the Operating
Partnership (based on an agreed per unit value of $26.2315) as partial payment
for the Galesi Portfolio. The Units are redeemable for cash, or, at the election
of the Company, for shares of Common Stock of the Company on a one-for-one
basis. The Units were issued by the Operating Partnership in reliance on the
exemption provided by Section 4(2) of the Securities Act of 1933, as amended.
Item 4. Submission of Matters to a Vote of Security Holders
At the Company's annual meeting, held on May 14, 1998 in Redwood City,
California, the following votes of security holders occurred:
(a) The following persons were duly elected by the holders of the Company's
Common Stock to serve as directors, each for the term of their respective
Class as indicated below and until their successors are elected and
qualified:
(1) As a Class I director (for a one year term; until 1999), Richard C.
Blum, 24,566,510 votes for and 123,123 votes withheld;
(2) As a Class I director (for a one year term; until 1999), Richard A.
Magnuson, 24,568,385 votes for and 121,248 votes withheld;
(3) As a Class II director (for a two year term; until 2000), Robert
Batinovich, 24,566,995 votes for and 122,638 votes withheld;
(4) As a Class II director (for a two year term; until 2000), Patrick
Foley, 24,566,978 votes for and 122,655 votes withheld;
(5) As a Class III director (for a three year term; until 2001), Andrew
Batinovich, 24,567,892 votes for and 121,741 votes withheld;
(6) As a Class III director (for a three year term; until 2001), Laura
Wallace, 24,566,551 votes for and 123,082 votes withheld.
(b) The holders of Common Stock ratified the appointment of Arthur Andersen LLP
as the Company's independent auditors for the fiscal year ending December
31, 1998, by a vote of 24,643,409 votes for and 10,078 votes against and
36,146 votes abstaining.
Item 5: Other Information
Any stockholder proposal submitted with respect to the Company's 1999 Annual
Meeting of Stockholders, which proposal is submitted outside the requirements of
Rule 14a-8 under the Securities Exchange Act of 1934, will be considered
untimely for purposes of Rule 14a-4 and 14a-5 if notice thereof is received by
the Company after March 1, 1999.
41
<PAGE>
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
The Exhibit Index attached hereto is hereby incorporated by
reference to this item.
(b) Reports on Form 8-K:
On April 29, 1998, the Company filed a report on Form 8-K with
respect to Supplemental Information as of March 31, 1998.
On May 7, 1998, the Company filed a report on Form 8-K with
respect to the acquisition of the Eaton & Lauth Portfolio and the
BGK Portfolio.
On May 15, 1998, the Company filed a report on Form 8-K/A with
respect to the acquisition of the Eaton & Lauth Portfolio and the
BGK Portfolio.
On May 15, 1998, the Company filed a report on Form 8-K/A,
Amendment No. 2, with respect to the acquisition of the Eaton &
Lauth Portfolio and the BGK Portfolio.
On July 10, 1998, the Company filed a report on Form 8-K with
respect to its adoption of a stockholder rights plan.
On July 15, 1998, the Company filed a report on Form 8-K with
respect to the acquisition of the Galesi Portfolio, the
Donau/Gruppe Portfolio, the Pauls Portfolio and One and Three
Pacific and the Bridge Loan.
On July 22, 1998, the Company filed a report on Form 8-K with
respect to Supplemental Information as of June 30, 1998.
On August 13, 1998, the Company filed a report on Form 8-K/A with
respect to the acquisition of the Galesi Portfolio, the
Donau/Gruppe Portfolio, the Pauls Portfolio and One and Three
Pacific and the Bridge Loan.
42
<PAGE>
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: August 14, 1998 /s/ Andrew Batinovich
Andrew Batinovich
Director, President
and Chief Operating Officer
(Principal Operating Officer)
Date: August 14, 1998 /s/ Stephen Saul
Stephen Saul
Executive Vice President
and Chief Financial Officer
(Principal Financial Officer)
Date: August 14, 1998 /s/ Terri Garnick
Terri Garnick
Senior Vice President,
Chief Accounting Officer,
Treasurer
(Principal Accounting Officer)
43
<PAGE>
EXHIBIT INDEX
Exhibit No. Exhibit Title
3.1 Amended Bylaws of the Company.
3.2 Articles Supplementary of the Series B Preferred Stock (relating to
the Rights Plan).
10.1 Rights Agreement, dated as of July 20, 1998, between the Company and
the Registrar and Transfer Company, together with Exhibit A Form of
Rights Certificate; Exhibit B Summary of Rights to Purchase Preferred
Stock; and Exhibit C Form of Articles Supplementary of the Series B
Preferred Stock (incorporated herein by reference to Exhibit 1 to the
Company's Form 8-A, filed July 16, 1998).
10.2 Term Credit Agreement, dated as of June 29, 1998, between the Company
and a commercial bank with respect to the $150 Million Bridge Loan
(incorporated by reference to Exhibit 10.1 to the Company's Form
8-K/A, filed August 13, 1998).
11.1 Statement re: Computation of Per Share Earnings is shown in Note 8 of
the Consolidated Financial Statements of the Company in Item 1.
12.1 Computation of Ratios.
27.1 Financial Data Schedule.
44
<PAGE>
Exhibit 3.1
GLENBOROUGH REALTY TRUST INCORPORATED
BYLAWS
as amended by actions of the Board of Directors
at Meetings held on October 28, 1996 and January 26, 1998
ARTICLE I
STOCKHOLDERS
1.1 Annual Meetings. The Corporation shall hold an annual meeting of its
stockholders to elect directors and transact any other business within its power
either at 10:00 a.m. on the last Thursday of May in each year if not a legal
holiday, or at such other time on such other day falling on or before the 30th
day thereafter as shall be set by the Board of Directors. Except as otherwise
permitted by applicable law, any business may be considered at an annual meeting
without the purpose of the meeting having been specified in the notice. Failure
to hold an annual meeting does not invalidate the Corporation's existence or
affect any otherwise valid corporate acts.
1.2 Special Meetings. The Chairman of the Board, the President or a
majority of the Board of Directors may call special meetings of the
stockholders. Special meetings of stockholders shall also be called by the
Secretary of the Corporation upon the written request of the holders of shares
entitled to cast not less than 10% of all the votes entitled to be cast at such
meeting. Such request shall state the purpose of such meeting and the matters
proposed to be acted on at such meeting. The Secretary shall inform such
requesting stockholders of the reasonably estimated cost of preparing and
mailing notice of the meeting and, upon payment to the Corporation of such
costs, the Secretary shall give notice to each stockholder entitled to notice of
the meeting. Unless requested by stockholders entitled to cast a majority of all
the votes entitled to be cast at such meeting, a special meeting need not be
called to consider any matter which is substantially the same as a matter voted
on at any special meeting of the stockholders held during the preceding twelve
months.
1.3 Place of Meetings. Meetings of stockholders shall be held at such place
in the United States as is set from time to time by the Board of Directors.
1.4 Notice of Meetings: Waiver of Notice. Not less than 10 nor more than 90
days before each stockholders' meeting, the Secretary shall give written notice
of the meeting to each stockholder entitled to vote at the meeting and each
other stockholder entitled to notice of the meeting. The notice shall state the
time and place of the meeting and, if the meeting is a special meeting or notice
of the purpose is required by statute, the purpose of the meeting. Notice is
given to a stockholder when it is personally delivered to him, left at his
residence or usual place of business, or mailed to him at his address as it
appears on the records of the Corporation. Notwithstanding the foregoing
provisions, each person who is entitled to notice waives notice if he before or
after the meeting signs a waiver of the notice which is filed with the records
of stockholders' meetings, or is present at the meeting in person or by proxy.
1.5 Quorum: Voting. Unless statute or the charter of the Corporation (the
"Charter") provides otherwise, at a meeting of stockholders the presence in
person or by proxy of stockholders entitled to cast a majority of all the votes
entitled to be cast at the meeting constitutes a quorum, and a majority of all
the votes cast at a meeting at which a quorum is present is sufficient to
approve any matter which properly comes before the meeting, except that a
plurality of all the votes cast at a meeting at which a quorum is present is
sufficient to elect a director.
1.6 Adjournments. Whether or not a quorum is present, a meeting of
stockholders convened on the date for which it was called may be adjourned from
time to time without further notice to a date not more than 120 days after the
original record date. Any business which might have been transacted at the
meeting as originally notified may be deferred and transacted at any such
adjourned meeting at which a quorum shall be present.
1.7 General Right to Vote: Proxies. Unless the Charter provides for a
greater or lesser number of votes per share or limits or denies voting rights,
each outstanding share of stock, regardless of class, is entitled to one vote on
each matter submitted to a vote at a meeting of stockholders. A stockholder may
vote the stock he owns of record
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either in person or by written proxy signed by the stockholder or by his duly
authorized attorney in fact. Unless a proxy provides otherwise, it is not valid
more than 11 months after its date. Shares of Common Stock shall not have
cumulative voting rights.
1.8 List of Stockholders. At each meeting of stockholders, a true and
complete list of all stockholders entitled to vote at such meeting, showing the
number and class of shares held by each and certified by the transfer agent for
such class or by the Secretary, shall be furnished by the Secretary.
1.9 Conduct of Business and Voting. At all meetings of stockholders, unless
the voting is conducted by inspectors, the proxies and ballots shall be
received, and all questions touching the qualification of votes and the validity
of proxies, the acceptance or rejection of votes and procedures for the conduct
of business not otherwise specified by these Bylaws, the Charter or law, shall
be decided or determined by the chairman of the meeting. If demanded by
stockholders, present in person or by proxy, entitled to cast at least 10% of
all the votes entitled to be cast at the meeting, or if ordered by the chairman,
the vote upon any election or question shall be taken by ballot and, upon like
demand or order, the voting shall be conducted by two inspectors, in which event
the proxies and ballots shall be received, and all questions touching the
qualification of voters and the validity of proxies, the acceptance or rejection
of votes and procedures for the conduct of business not otherwise specified by
these Bylaws, the Charter or law shall be decided, by such inspectors. Unless so
demanded or ordered, no vote need be by ballot and voting need not be conducted
by inspectors. The stockholders at any meeting may choose an inspector or
inspectors to act at such meeting, and in default of such election the chairman
of the meeting may appoint an inspector or inspectors. No candidate for election
as a director at a meeting shall serve as an inspector thereat.
1.10 Informal Action by Stockholders. Any action required or permitted to
be taken at a meeting of stockholders may be taken without a meeting if there is
filed with the records of stockholders' meetings a unanimous written consent
which sets forth the action and is signed by each stockholder entitled to vote
on the matter and a written waiver of any right to dissent signed by each
stockholder entitled to notice of the meeting but not entitled to vote at it.
1.11 Annual Meetings and Stockholder Proposals. Nominations of individuals
for election to the Board of Directors and the proposal of business to be
considered by the stockholders may be made at an annual meeting of stockholders
(i) pursuant to the Corporation's notice of meeting, (ii) by or at the direction
of the Board of Directors or (iii) by any stockholder of the Corporation who was
a stockholder of record at the time of giving of notice provided for this in
this Section 1.11, who is entitled to vote at the meeting and who complied with
the notice procedures set forth in this Section 1.11.
For nominations or other business to be properly brought before an annual
meeting by a stockholder pursuant to clause (iii) of the preceding paragraph of
this Section 1.11, the stockholder must have given timely notice thereof in
writing to the Secretary of the Corporation. To be timely, a stockholder's
notice shall be delivered to the secretary at the principal executive offices of
the Corporation not less than 60 days nor more than 90 days prior to the first
anniversary of the preceding year's annual meeting. For purposes of applying
this minimum to the 1995 annual meeting, the previous year's annual meeting
shall be deemed to have taken place on May 20, 1994; provided that this sentence
shall cease to be a part of the Bylaws after the holding of the 1995 annual
meeting and any adjournment thereof. In the event that the date of the annual
meeting is advanced by more than 30 days or delayed by more than 60 days from
such anniversary date, notice by the stockholder to be timely must be so
delivered not earlier than the 90th day prior to such annual meeting and not
later than the close of business on the later of the 60th day prior to such
annual meeting or the tenth day following the day on which public announcement
of the date of such meeting is first made. Such stockholder's notice shall set
forth (i) as to each person whom the stockholder proposes to nominate for
election or reelection as a director all information relating to such person
that is required to be disclosed in solicitations of proxies for election of
directors, or is otherwise required, in each case pursuant to Regulation 14A
under the Securities Exchange Act of 1934, as amended (the "Exchange Act")
(including such person's written consent to being named in the proxy statement
as a nominee and to serving as a director if elected); (ii) as to any other
business that the stockholder proposes to bring before the meeting, a brief
description of the business desired to be brought before the meeting, the
reasons for conducting such business at the meting and any material interest in
such business of such stockholder and of the beneficial owner, if any, on whose
behalf the proposal is made; and (iii) as to the stockholder giving the notice
and the beneficial owner, if any, on whose behalf the nomination or proposal is
made, (x) the name and address of such stockholder, as they appear on the
Corporation's books and of such beneficial owner and (y) the number of shares of
each class of stock of the Corporation which are owned beneficially and of
record by such stockholder and such beneficial owner.
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Notwithstanding anything in the second sentence of the preceding paragraph
of this Section 1.11 to the contrary, in the event that the number of directors
to be elected to the Board of Directors is increased and there is no public
announcement naming all of the nominees for director or specifying the size of
the increased Board of Directors made by the Corporation at least 70 days prior
to the first anniversary of the preceding year's annual meeting, a stockholder's
notice required by this Section 1.1 shall also be considered timely, but only
with respect to nominees for any new positions created by such increase, if it
shall be delivered to the secretary at the principal executive offices of the
Corporation not later than the close of business on the tenth day following on
which such public announcement is first made by the Corporation.
Notwithstanding the foregoing, to the extent any of the provisions of this
Section 1.11 are inconsistent with the provisions of Rule 14a-8 of the Exchange
Act, the provisions of Rule 14a-8 shall govern.
1.12 Business at Special Meetings of Stockholders. Only such business shall
be conducted at a special meeting of stockholders as shall have been brought
before the meeting pursuant to the Corporation's notice of meeting. Nominations
of persons for election to the Board of Directors may be made at a special
meeting of stockholders at which directors are to be elected (i) pursuant to the
Corporation's notice of meeting, (ii) by or at the direction of the Board of
Directors or (iii) provided that the Board of Directors had determined that
directors shall be elected at such special meeting, by any stockholder of the
Corporation who is a stockholder of record at the time of giving of notice
provided for in this Section 1.12, who is entitled to vote at the meeting and
who has complied with the notice procedures set forth in this Section 1.12. In
the event the Corporation calls a special meeting of stockholders for the
purpose of electing one or more directors to the Board of Directors, any such
stockholder may nominate a person or persons (as the case may be) for election
to such position as specified in the Corporation's notice of meeting, if the
stockholder's notice required by the second paragraph of Section 1.11 shall be
delivered to the Secretary at the principal executive offices of the Corporation
not earlier than the 90th day prior to such special meeting and not later than
the close of business on the later of the 60th day prior to such special meeting
or the tenth day following the day on which public announcement is first made of
the date of the special meeting and of the nominees proposed by the directors to
be elected at such meeting.
ARTICLE II
BOARD OF DIRECTORS
2.1 Function of Directors. The business and affairs of the Corporation
shall be managed under the direction of its Board of Directors. All powers of
the Corporation may be exercised by or under authority of the Board of
Directors, except as conferred on or reserved to the stockholders by statute or
by the Charter or Bylaws.
2.2 Number of Directors. The Corporation shall have at least three
directors; provided that, if there is no stock outstanding, the number of
directors may be less than three but not less than one, and, if there is stock
outstanding and so long as there are less than three stockholders, the number of
directors may be less than three but not less than the number of stockholders,
provided that the number thereof shall never be less than the minimum number
required by statute. The Corporation shall have the number of directors provided
in the Charter until changed as herein provided. A majority of the entire Board
of Directors may alter the number of directors set by the Charter or these
Bylaws to not more than seven nor less than the minimum number then permitted
herein, but the action may not affect the tenure of office of any director.
2.3 Election and Tenure of Directors. Effective January 26, 1998, Directors
are divided into three classes, as nearly equal in number as possible, with
respect to the times for which they shall severally hold office. Directors of
the First Class first chosen shall hold office for one year or until the annual
election occurring in the year 1999; Directors of the Second Class first chosen
shall hold office for two years or until the annual election occurring in the
year 2000; Directors of the Third Class first chosen shall hold office for three
years or until the annual election occurring in the year 2001; and, in each
case, until their successors shall be duly elected and shall qualify. At each
future annual meeting of the stockholders, the successors to the Class of
Directors whose terms shall expire at that time shall be elected to hold office
for a term of three years, so that the term of office of one Class of Directors
shall expire in each year.
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2.4 Removal of Director. Any director may be removed with or without cause
and only by the affirmative vote of stockholders holding 66 2/3% of all the
votes entitled to be cast for the election of directors.
2.5 Vacancy on Board. Except in the case of a vacancy on the Board of
Directors among the directors elected by a class or series of capital stock
other than Common Stock, newly created directorships resulting from any increase
in the authorized number of directors shall be filled by a majority of the
entire Board of Directors; any vacancies on the Board of Directors resulting
from death, resignation, retirement, disqualification or other causes, except
removal from office, shall be filled by a majority of the directors then in
office, whether or not sufficient to constitute a quorum; and any vacancies on
the Board of Directors resulting from removal from office shall be filled by a
vote of the stockholders. A director so elected by the stockholders or by the
remaining directors shall hold office until the next annual meeting of
stockholders and until his successor is elected and qualified.
2.6 Regular Meetings. After each meeting of stockholders at which directors
shall have been elected, the Board of Directors shall meet as soon as
practicable for the purpose of organization and the transaction of other
business. In the event that no other time and place are specified by resolution
of the Board or by the President or the Chairman, with notice in accordance with
Section 2.8, the Board of Directors shall meet immediately following the close
of, and at the place of, such stockholders' meeting. Any other regular meeting
of the Board or Directors shall be held on such date and at any place as may be
designated from time to time by the Board of Directors.
2.7 Special Meetings. Special meetings of the Board of Directors may be
called at any time by the Chairman of the Board or the President or by a
majority of the Board of Directors by vote at a meeting, or in writing with or
without a meeting. A special meeting of the Board of Directors shall be held at
such time and place as may be designated from time to time by the Board of
Directors. In the absence of designation such meeting shall be held at such time
and place as may be designated in the call.
2.8 Notice of Meeting. Except as provided in Section 2.6, the Secretary
shall give written notice to each director of each regular and special meting of
the Board of Directors. The notice shall state the time and place of the
meeting. Notice is given to a director when it is delivered personally to him,
left at his residence or usual place of business, or sent by telegraph,
facsimile transmission or telephone, at least 24 hours before the time of the
meeting or, in the alternative, by mail to his address as it shall appear on the
records of the Corporation, at least 72 hours before the time of the meeting.
Unless the Bylaws or a resolution of the Board of Directors provides otherwise,
the notice need not state the business to be transacted at or the purposes of
any regular or special meeting of the Board of Directors. No notice of any
meeting of the Board of Directors need be given to any director who is present
at the meeting except where a director attends a meeting for the express purpose
of objecting to the transaction of any business because the meeting is not
lawfully called or convened, or to any director who, in writing executed and
filed with the records of the meeting either before or after the holding
thereof, waives such notice. Any meeting of the Board of Directors, regular or
special, may adjourn from time to time to reconvene at the same or some other
place, and no notice need be given of any such adjourned meeting other than by
announcement.
2.9 Action by Directors. Unless statute or the Charter or By laws require a
greater proportion, the action of a majority of the directors present at a
meeting at which a quorum is present is the action of the Board of Directors. A
majority of the entire Board of Directors shall constitute a quorum for the
transaction of business. In the absence of a quorum, the directors present by
majority vote and without notice other than by announcement may adjourn the
meeting from time to time until a quorum shall attend. At any such adjourned
meeting at which a quorum shall be present, any business may be transacted which
might have been transacted at the meeting as originally notified. Any action
required or permitted to be taken at a meeting of the Board of Directors may be
taken without a meeting, if a unanimous written consent which sets forth the
action is signed by each member of the Board and filed with the minutes of
proceedings of the Board.
2.10 Meeting by Conference Telephone. Members of the Board of Directors may
participate in a meeting by means of a conference telephone or similar
communications equipment if all persons participating in the meeting can hear
each other at the same time. Participation in a meeting by these means
constitutes presence in person at a meeting.
2.11 Compensation. By resolution of the Board of Directors a fixed sum and
expenses, if any, for attendance at each regular or special meeting of the Board
of Directors or of committees thereof, and other compensation for their services
as such or on committees of the Board of Directors, may be paid to directors
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other than directors who are full-time employees of the Corporation. A director
who serves the Corporation in any other capacity also may receive compensation
for such other services pursuant to a resolution of the Board of Directors.
2.12 Restrictions on Investments. For so long a period of time as the
Corporation shall be qualified as real estate investment trust under the
Internal Revenue Code, the Board of Directors shall not authorize the
Corporation to engage in any of the following investment practices or
activities: (a) invest in commodities or commodity future contracts; (b) invest
more than 10% of its total assets in unimproved real property or indebtedness
secured by a deed of trust or mortgage loans on unimproved real property; (c)
invest in indebtedness (herein called "junior debt") secured by a mortgage on
real property which is subordinate to the lean of the other indebtedness (herein
called "senior debt"), except where the amount of such junior debt, plus the
outstanding amount of the senior debt, does not exceed 90% of the appraised
value of such property, if after giving effect thereto, the value of all such
investments by the Corporation (as shown on the books of the Corporation in
accordance with generally accepted accounting principals after all reasonable
reserves but before provision for depreciation) would not then exceed 25% of the
tangible assets of the Corporation; provided, however, the restrictions in this
subparagraph (c) shall not apply to investments in junior debt which do not in
the aggregate exceed 10% of the Corporation's tangible assets provided such
excluded investments are included within the 25% limitation; (d) invest in
contracts for the sale of real estate but nothing herein shall prevent the
Corporation from entering into contracts for the sale of real estate which it
may own; (e) engage in trading, as compared with investment activities; (f)
acquire securities in any company holding investments or engaging in activities
prohibited by this section; or (g) engage in underwriting or the agency
distribution of securities issued by others. The foregoing restrictions shall
not apply to any assets that are acquired by the Corporation prior to or
concurrently with its qualification as a real estate investment trust.
2.13 Transactions with Interested Directors and Officers. No contract or
transaction between the Corporation and one or more of its directors or
officers, or between the Corporation and any other corporation, partnership,
association or other entity in which one or more of its directors or officers
are directors or officers of this Corporation or in which one or more of the
directors or officers of this Corporation are financially interested, shall be
either void or voidable for this reason alone, or solely because the interested
director or directors of this Corporation is present at or participates in the
meeting of the Board of Directors or of the committee thereof which authorizes
the contract or transaction, or solely because his or their votes are counted
for such purpose, if the material facts as to the relationship or interest of
such interested director or officer and as to the contract or transaction are
disclosed or are known to the Board of Directors or committee, and the Board of
Directors or committee in good faith authorizes, approves or ratifies the
contract or transaction by the affirmative vote of a majority of the
disinterested directors, even though the disinterested directors be less than a
quorum, and such majority of disinterested directors determines in good faith
that (a) the contract or transaction is fair and reasonable to the Corporation
and its shareholders; (b) the terms of the contract or transaction are at least
as favorable as the terms of any comparable contract or transaction made on an
arms length basis and known to such disinterested directors; (c) the total
consideration, if applicable, is not in excess of the appraised value of any
property being acquired; (d) and, if the contract or transaction involves the
rendering of services to the Corporation or any of its affiliates, that the
compensation is not in excess of the compensation then being paid by the
Corporation for any comparable services and the compensation is not greater than
the charges for comparable services then known to such disinterested directors
for comparable services available from others who are competent and not
affiliated with any of the parties.
ARTICLE III
COMMITTEES
3.1 Committees. The Board of Directors may appoint from among its members
an Executive Committee and other committees composed of one or more directors
and delegate to these committees any of the powers of the Board of Directors,
except as prohibited by law. If the Board of Directors has given authorization
for the issuance of stock, a committee of the Board, in accordance with a
general formula or method specified by the Board by resolution or by adoption of
a stock option or other plan, may fix the terms of stock subject to
classification and reclassification and the terms on which any stock may be
issued, including all terms and conditions required or permitted to be
established or authorized by the Board of Directors under Sections 2-203 and
2-208 of the Corporations and Associations Article of the Annotated Code of
Maryland.
3.2 Committee Procedure Each committee may fix rules of procedure for its
business. A majority of the members of a committee shall constitute a quorum for
the transaction of business, and the action of a majority of those present at a
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meeting at which a quorum is present shall be the action of the committee. The
members of a committee present at any meeting, whether or not they constitute a
quorum, may appoint a director to act in the place of an absent member. Any
action required or permitted to be taken at a meeting of a committee may be
taken without a meeting, if a unanimous written consent which sets forth the
action is signed by each member of the committee and filed with the minutes of
proceedings of the committee. The members of a committee may conduct any meeting
thereof by conference telephone in accordance with the provisions of Section
2.10.
3.3 Emergency. In the event of a state of disaster of sufficient severity
to prevent the conduct and management of the affairs and business of the
Corporation by its directors and officers as contemplated by the Charter and the
By-Laws, any two or more available members of the then incumbent Executive
Committee shall constitute a quorum of that Committee for the full conduct and
management of the affairs and business of the Corporation in accordance with the
provisions of Section 3.1. In the event of the unavailability, at such time, of
a minimum of two members of the then incumbent Executive Committee, the
available directors shall elect an Executive Committee consisting of any two
members of the Board of Directors, whether or not they be officers of the
Corporation, which two members shall constitute the Executive Committee for the
full conduct and management of the affairs of the Corporation in accordance with
the foregoing provisions of this Section. This Section shall be subject to
implementation by resolution of the Board of Directors passed from time to time
for that purpose, and any provisions of the By-Laws (other than this Section)
and any resolutions which are contrary to the provisions of this Section or to
the provisions of any such implementing resolutions shall be suspended until it
shall be determined by any interim Executive Committee acting under this Section
that it shall be to the advantage of the Corporation to resume the conduct and
management of its affairs and business under all the other provisions of the
By-Laws.
ARTICLE IV
OFFICERS
4.1 Executive and Other Officers. The Corporation shall have a President, a
Secretary, and a Treasurer. It may also have a Chairman of the Board. The
Corporation may also have one or more Vice-Presidents, including Executive Vice
Presidents, as well as one or more assistant officers, and subordinate officers
as may be established by the Board of Directors. A person may hold more than one
office in the Corporation except that no person may serve concurrently as both
President and Vice-President of the Corporation. The Chairman of the Board shall
be a director; the other officers may be directors. The Board of Directors shall
designate who shall serve as chief executive officer and who shall have general
supervision of the business and affairs of the Corporation, and may designate a
chief operating officer, who shall have supervision of the operations of the
Corporation, and a chief financial officer, who, among other functions, shall
have supervision of the finance, treasury and accounting functions of the
Corporation. In the absence of any designation, the Chairman of the Board, if
there be one, shall serve as chief executive officer and the President, if not
the same person, shall serve as chief operating officer. If the Chairman of the
Board and the President are the same person, any Executive Vice President or
Vice President may serve as chief operating officer. In the absence of the
Chairman of the Board, or if there be none, the President shall be the chief
executive officer and any Executive Vice President or Vice President may serve
as chief operating officer.
4.2 Chairman of the Board. The Chairman of the Board, if one be elected,
shall preside at all meetings of the Board of Directors and of the stockholders
at which he shall be present. Unless otherwise provided by resolution of the
Board of Directors, he shall be the chief executive officer of the Corporation
and shall perform the duties customarily performed by chief executive officers,
and may perform any duties of the President. In general, he shall perform all
such duties as are from time to time assigned to him by the Board of Directors.
4.3 President. Unless otherwise provided by resolution of the Board of
Directors, the President, in the absence of the Chairman of the Board, shall
preside at all meetings of the Board of Directors and of the stockholders at
which he shall be present. Unless otherwise provided by resolution of the Board
of Directors, the President shall be the chief operating officer of the
Corporation and shall perform the duties customarily performed by chief
operating officers. He may sign and execute, in the name of the Corporation, all
authorized deeds, mortgages, bonds, contracts or other instruments, except in
cases in which the signing and execution thereof shall have been expressly
delegated to some other officer or agent of the Corporation. In general, he
shall perform such other duties usually performed by a president of a
corporation and such other duties as are from time to time assigned to him by
the Board of Directors or the chief executive officer of the Corporation.
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4.4 Vice-Presidents. The Vice-President or Vice-Presidents designated by
the Board of Directors of the Corporation as Executive Vice-Presidents, at the
request of the chief executive officer or the President, or in the President's
absence or during his inability to act, shall perform the duties and exercise
the functions of the President, and when so acting shall have the powers of the
President. If there be more than one Executive Vice-President, the Board of
Directors may determine which one or more of the Executive Vice-Presidents shall
perform any of such duties or exercise any of such functions, of if such
determination is not made by the Board of Directors, the chief executive officer
or the President may make such determination; otherwise any of the Executive
Vice-Presidents may perform any of such duties or exercise any of such
functions. If there be no Vice-President or Vice-Presidents designated as
Executive Vice-President, the Vice-President or Vice-Presidents, at the request
of the chief executive officer or the President, or in the President's absence
or during his inability to act, shall perform the duties and exercise the
functions of the President, and when so acting shall have the powers of the
President. If there be more than one Vice-President, the Board of Directors may
determine which one or more of the Vice-Presidents shall perform any of such
duties or exercise any of such functions, or if such determination is not made
by the Board of Directors, the chief executive officer or the President may make
such determination; otherwise, any of the Vice-Presidents may perform any of
such duties or exercise any of such functions. The Vice-President or
Vice-Presidents, including the Executive Vice-Presidents, shall have such other
powers and perform such other duties, and have such additional descriptive
designations in their titles (if any), as are from time to time assigned to them
by the Board of Directors, the chief executive officer, or the President.
4.5 Secretary. The Secretary shall keep the minutes of the meetings of the
stockholders, of the Board of Directors and of any committees; he shall see that
all notices are duly given in accordance with the provisions of the Bylaws or as
required by law; he shall be custodian of the records of the Corporation; he may
witness any document on behalf of the Corporation, the execution of which is
duly authorized, see that the corporate seal is affixed where such document is
required or desired to be under the Corporation's seal, and, when so affixed,
may attest the same; and, in general, he shall perform all duties incident to
the office of a secretary of a corporation, and such other duties as are from
time to time assigned to him by the Board of Directors, the chief executive
officer, or the President.
4.6 Treasurer. The Treasurer shall have charge of and be responsible for
all funds, securities, receipts and disbursements of the Corporation, and shall
deposit, or cause to be deposited, in the name of the Corporation, all moneys or
other valuable effects in such banks, trust companies or depositories as shall,
from time to time, be selected by the Board of Directors; he shall render to the
President and to the Board of Directors, whenever requested, an account of the
financial condition of the Corporation; and, in general, he shall perform all
duties incident to the office of a treasurer of a corporation, and such other
duties as are from time to time assigned to him by the Board of Directors, the
chief executive officer, or the President.
4.7 Assistant and Subordinate Officers. The assistant and subordinate
officers of the Corporation are all officers below the office of Vice-President,
Secretary, or Treasurer. The assistant or subordinate officers shall have such
duties as are from time to time assigned to them by the Board of Directors, the
chief executive officer, the President or any person designated as their
superior officer by the committee or person electing them.
4.8 Election, Tenure and Removal of Officers. The Board of Directors shall
elect the officers. The Board of Directors may from time to time authorize any
committee or officer to appoint assistant and subordinate officers. Unless
otherwise provided herein, an officer serves for one year and until his
successor is elected and qualified. Notwithstanding the foregoing, officers
shall serve at the will of the Board of Directors. Election or appointment of an
officer, employee or agent shall not of itself create contract rights. All
officers shall be elected or appointed to hold their offices, respectively, at
the pleasure of the Board. The Board of Directors (or, as to any assistant or
subordinate officer, any committee or officer authorized by the Board) may
remove an officer at any time, if the Board (or any committee or officer
authorized by the Board, as the case may be) in its judgment finds that the best
interests of the Corporation will be served thereby. The removal of an officer
does not prejudice any of his contract rights. The Board of Directors (or, as to
any assistant or subordinate officer, any committee or officer authorized by the
Board) may fill a vacancy which occurs in any office for the unexpired portion
of the term.
4.9 Compensation. The Board of Directors shall have power to fix the
salaries and other compensation and remuneration, of whatever kind, of all
officers of the Corporation. No officer shall be prevented from receiving such
salary by reason of the fact that he is also a director of the Corporation. The
Board of Directors may authorize any committee or officer, upon whom the power
of appointing assistant and subordinate officers may have been conferred, to fix
the salaries, compensation and remuneration of such assistant and subordinate
officers.
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ARTICLE V
DIVISIONAL TITLES
5.1 Conferring Divisional Titles. The Board of Directors may from time to
time confer upon any employee of a division of the Corporation the title of
President, Vice-President, Treasurer or Controller of such division or any other
title or titles deemed appropriate or may authorize the Chairman of the Board or
the President to do so. Any such titles so conferred may be discontinued and
withdrawn at any time by the Board of Directors, or by the Chairman of the Board
or the President if so authorized by the Board of Directors. Any employee of a
division designated by such a divisional title shall have the powers and duties
with respect to such division as shall be prescribed by the Board of Directors,
the Chairman of the Board or the President.
5.2 Effect of Divisional Titles. The conferring of divisional titles shall
not create an office of the Corporation under Article IV unless specifically
designated as such by the Board of Directors; but any person who is an officer
of the Corporation may also have a divisional title.
ARTICLE VI
STOCK
6.1 Certificates for Stock. Except as otherwise proved by statute, each
stockholder is entitled to certificates which represent and certify the shares
of stock he holds in the Corporation. Each stock certificate shall include on
its face the name of the Corporation, the name of the stockholder or other
person to whom it is issued, and the class of stock and number of shares it
represents. Each stock certificate shall be signed by the Chairman of the Board,
the President, or a Vice-President, and countersigned by the Secretary, an
Assistant Secretary, the Treasurer, or an Assistant Treasurer. Each certificate
may be sealed with the actual corporate seal or a facsimile of it or in any
other form, and the signatures may be either manual or facsimile signatures. A
certificate is valid and may be issued whether or not an officer who signed it
is still an officer when it is issued.
6.2 Transfers. The Board of Directors shall have power and authority to
make such rules and regulations as it may deem expedient concerning the issue,
transfer and registration of certificates of stock; and may appoint transfer
agents and registrars thereof. The duties of transfer agent and registrar may be
combined.
6.3 Record Dates and Closing of Transfer Books. Except as otherwise
provided in Section 1.6, the Board of Directors may set a record date or direct
that the stock transfer books be closed for a stated period for the purpose of
making any proper determination with respect to stockholders, including which
stockholders are entitled to notice of a meeting, vote at a meeting, receive a
dividend or other distribution, or be allowed other rights. Except as otherwise
provided in Section 1.6, the record date may not be prior to the close of
business on the day the record date is fixed; the record date may not be more
than 90 days before the date on which the action requiring the determination
will be taken; the transfer books may not be closed for a period longer than 20
days; and, in the case of a meeting of stockholders, the record date or the
closing of the transfer books shall be at least ten days before the date of the
meeting.
6.4 Stock Ledger. The Corporation shall maintain a stock ledger which
contains the name and address of each stockholder and the number of shares of
stock of each class which the stockholder holds. The stock ledger may be in
written form or in any other form which can be converted within a reasonable
time into written form for visual inspection. The original or a duplicate of the
stock ledger shall be kept at the offices of a transfer agent for the particular
class of stock, or, if none, at the principal office in the State of Maryland or
the principal executive offices of the Corporation.
6.5 Certification of Beneficial Owners. The Board of Directors may adopt by
resolution a procedure by which a stockholder of the Corporation may certify in
writing to the Corporation that any shares of stock registered in the name of
the stockholder are held for the account of a specified person other than the
stockholder. The resolution shall set forth the class of stockholders who may
certify; the purpose for which the certification may be made; the form of
certification and the information to be contained in it; if the certification is
with respect to a record date or closing of the stock transfer books, the time
after the record date or closing of the stock transfer books within which the
certification must be received by the Corporation; and any other provisions with
respect to the procedure which the Board considers necessary or desirable. On
52
<PAGE>
receipt of a certification which complies with the procedure adopted by the
Board in accordance with this Section, the person specified in the certification
is, for the purpose set forth in the certification, the holder of record of the
specified stock in place of the stockholder who makes the certification.
6.6 Replacement Stock Certificates. The Board of Directors of the
Corporation may determine the conditions for issuing a new stock certificate in
place of one which is alleged to have been lost, stolen, or destroyed, or the
Board of Directors may delegate such power to any officer or officers of the
Corporation. In their discretion, the Board of Directors or such officer or
officers may refuse to issue a new certificate (a) unless the owner of the lost,
stolen or destroyed certificate gives a bond, with sufficient surety, to
indemnify the Corporation against any loss or claim arising as the result of the
issuance of the new certificate or (b) unless a court having jurisdiction in the
premises orders the Corporation to issue a new certificate.
ARTICLE VII
FINANCE
7.1 Checks, Drafts, Etc. All checks, drafts and orders for the payment of
money, notes and other evidences of indebtedness, issued in the name of the
Corporation, shall, unless otherwise provided by resolution of the Board of
Directors, be signed by the President, a Vice-President or an Assistant
Vice-President and countersigned by the Treasurer, and Assistant Treasurer, the
Secretary or an Assistant Secretary.
7.2 Annual Statement of Affairs. The President or chief accounting officer
shall prepare annually a full and correct statement of the affairs of the
Corporation, to include a balance sheet and a financial statement of operations
for the preceding fiscal year. The statement of affairs shall be submitted at
the annual meeting of the stockholders and, within 20 days after the meeting,
placed on file at the Corporation's principal office.
7.3 Fiscal Year. The fiscal year of the Corporation shall be the twelve
calendar months period ending December 31 in each year, unless otherwise
provided by the Board of Directors.
7.4 Dividends and Other Distributions. If authorized and declared by the
Board of Directors at any meeting thereof, the Corporation may pay dividends and
other distributions on its shares in cash, property, or in shares of the stock
of the Corporation, unless such dividend or other distribution is contrary to
law or to a restriction contained in the Charter.
7.5 Contracts. To the extent permitted by applicable law, and except as
otherwise prescribed by the Charter or these Bylaws with respect to certificates
for shares, the Board of Directors may authorize any officer, employee, or agent
of the Corporation to enter into any contract or execute and deliver any
instrument in the name of and on behalf of the Corporation. Such authority may
be general or confined to specific instances.
ARTICLE VIII
SUNDRY PROVISIONS
8.1 Books and Records. The Corporation shall keep correct and complete
books and records of its accounts and transactions and minutes of the
proceedings of its stockholders and Board of Directors and of any executive or
other committee when exercising any of the powers of the Board of Directors. The
books and records of the Corporation may be in written form or in any other form
which can be converted within a reasonable time into written form for visual
inspection. Minutes shall be recorded in written form but may be maintained in
the form of a reproduction. The original or a certified copy of the Bylaws,
including any amendments to them, shall be kept at the principal office of the
Corporation.
8.2 Corporate Seal. The Board of Directors shall provide a suitable seal,
bearing the name of the Corporation, which shall be in the charge of the
Secretary. The Board of Directors may authorize one or more duplicate seals and
provide for the custody thereof. If the Corporation is required to place its
corporate seal to a document, it is sufficient to meet the requirement of any
law, rule or regulation relating to a corporate seal to place the word "(Seal)"
adjacent to the signature of the person authorized to sign the document on
behalf of the Corporation.
53
<PAGE>
8.3 Bonds. The Board of Directors may require any officer, agent or
employee of the Corporation to give a bond to the Corporation, conditioned upon
the faithful discharge of his duties, with one or more sureties and in such
amount as may be satisfactory to the Board of Directors.
8.4 Voting upon Shares in Other Corporations. Stock of other corporations
or associations, registered in the name of the Corporation, may be voted by the
President, a Vice-President, or a proxy appointed by either of them. The Board
of Directors, however, may by resolution appoint some other person to vote such
shares, in which case such person shall be entitled to vote such shares upon the
production of a certified copy of such resolution.
8.5 Execution of Documents. A person who holds more than one office in the
Corporation may not act in more than one capacity to execute, acknowledge, or
verify an instrument required by law to be executed, acknowledged, or verified
by more than one officer.
8.6 Amendments. Subject to the special provisions of Section 2.2, these
By-Laws may be altered, amended, repealed or added to by a majority vote of a
quorum present at any regular or special meeting of the stockholders or of the
Board of Directors.
8.7 Designated Attendees. The Board of Directors may by resolution appoint
individuals as designated advisors ("Designated Advisors") to the Board of
Directors, who shall have the right to notice of and attend as set forth in
Article II all meetings of the Board of Directors and shall receive such
compensation and reimbursement as the Board of Directors shall provide.
Designated Advisors shall not have any right to vote as directors.
ARTICLE IX
INDEMNIFICATION AND
ADVANCE FOR EXPENSES
9.1 To the maximum extent permitted by Maryland law in effect from time to
time, the Corporation shall indemnify, and shall pay or reimburse reasonable
expenses in advance of final disposition of a proceeding to, (1) any individual
who is a present, former or proposed director or officer of the Corporation and
who is made a party to the proceeding by reason of his service in that capacity
or (2) any individual who, while a director of the Corporation and at the
request of the Corporation, serves or has served another corporation,
partnership, joint venture, trust, employee benefit plan or any other enterprise
as a director, officer, partner or trustee of such corporation, partnership,
joint venture, trust, employee benefit plan or other enterprise and who is made
a party to the proceeding by reasons of his service in that capacity. The
Corporation may, with the approval of its Board of Directors, provide such
indemnification and advancement of expenses to a person who served as a
predecessor of the Corporation in any of the capacities described in (1) or (2)
above and to any employee or agent of the Corporation or a predecessor of the
Corporation. This Article shall not apply to any proceeding brought by a present
or former director or officer.
Neither the amendment nor repeal of this Article, nor the adoption or
amendment of any other provision of these Bylaws or Charter of the Corporation
inconsistent with this Article, shall apply to or affect in any respect the
applicability of the preceding paragraph with respect to any act or failure to
act which occurred prior to such amendment, repeal or adoption.
I, Frank E. Austin, do hereby certify that I am the duly elected and acting
Secretary of Glenborough Realty Trust Incorporated, and that the foregoing
By-Laws were originally adopted by the Board of Directors of the corporation at
a meeting held on August 31, 1994 and the foregoing provisions reflect all
amendments through May 18, 1998.
____________________________
Frank E. Austin, Secretary
Attest:
___________________________
Robert Batinovich, Chairman
54
<PAGE>
Exhibit 3.2
GLENBOROUGH REALTY TRUST INCORPORATED
ARTICLES SUPPLEMENTARY
SERIES B PREFERRED STOCK
Glenborough Realty Trust Incorporated, a Maryland corporation, having
its principal office in the City of Baltimore, Maryland (the "Corporation"),
hereby certifies to the State Department of Assessments and Taxation of Maryland
that:
FIRST: Under a power contained in Article SIXTH of the Articles of
Incorporation, as amended (the "Charter"), the Board of Directors of the
Corporation (the "Board of Directors"), has duly reclassified and designated
shares (the "Shares") of the Common Stock, par value $.001 per share (as defined
in the Charter), as shares of Series B Preferred Stock, par value $.001 per
share, of the Corporation (the "Series B Preferred Stock")
SECOND: Subject in all cases to the provisions of Article NINTH of the
Charter of the Corporation with respect to Share-in-Trust, the following is a
description of the preferences, conversion and other rights, voting powers,
restrictions, limitations as to dividends qualifications and terms and
conditions of redemption of Series B Preferred Stock of the Corporation:
1. Designation and Amount. The designation of Series B Preferred Stock
described in Article FIRST hereof shall be "Series B Preferred Stock (par value
$.001 per share)." The number of shares of Series B Preferred Stock to be
authorized shall be Five Hundred Thousand (500,000). Such number of shares may
be increased or decreased by resolution of the Board of Directors; provided that
no decrease shall reduce the number of shares of Series B Preferred Stock to a
number less than the number of shares then outstanding plus the number of shares
reserved for issuance upon the exercise of outstanding options, rights or
warrants or upon the conversion of any outstanding securities issued by the
Corporation convertible into Series B Preferred Stock.
2. Dividends and Distributions. (A) Subject to the prior and superior
rights of the holders of any shares of any other series of Preferred Stock or
any other shares of stock of the Corporation ranking prior and superior to the
shares of Series B Preferred Stock with respect to dividends, including, without
limitation, the Corporation's 7-3/4% Series A Convertible Preferred Stock (the
"Series A Preferred Shares"), each holder of one one-hundredth (1/100) of a
share (a "Unit") of Series B Preferred Stock shall be entitled to receive, when,
as and if declared by the Board of Directors out of funds legally available for
that purpose, (i) quarterly dividends payable in cash on the last day of March,
June, September, and December in each year (each such date being a "Quarterly
Dividend Payment Date"), commencing on the first Quarterly Dividend Payment Date
after the first issuance of such Unit of Series B Preferred Stock, in an amount
per Unit (rounded to the nearest cent) equal to the greater of (a) $.01 or (b)
subject to the provision for adjustment hereinafter set forth, the aggregate per
share amount of all cash dividends declared on shares of the Common Stock since
the immediately preceding Quarterly Dividend Payment Date, or, with respect to
the first Quarterly Dividend Payment Date, since the first issuance of a Unit of
Series B Preferred Stock, and (ii) subject to the provision for adjustment
hereinafter set forth, quarterly distributions (payable in kind) on each
Quarterly Dividend Payment Date in an amount per Unit equal to the aggregate per
share amount of all non-cash dividends or other distributions (other than a
dividend payable in shares of Common Stock or a subdivision of the outstanding
shares of Common Stock, by reclassification or otherwise) declared on shares of
Common Stock since the immediately preceding Quarterly Dividend Payment Date, or
with respect to the first Quarterly Dividend Payment Date, since the first
issuance of a Unit of Series B Preferred Stock. In the event that the
Corporation shall at any time after July 20, 1998 (the "Rights Declaration
Date") (i) declare any dividend on outstanding shares of Common Stock payable in
shares of Common Stock, (ii) subdivide outstanding shares of Common Stock or
(iii) combine outstanding shares of Common Stock into a smaller number of
shares, then in each such case the amount to which the holder of a Unit of
Series B Preferred Stock was entitled immediately prior to such event under
clause (b) of the preceding sentence shall be adjusted by multiplying such
amount by a fraction the numerator of which shall be the number of shares of
55
<PAGE>
Common Stock that are outstanding immediately after such event and the
denominator of which shall be the number of shares of Common Stock that were
outstanding immediately prior to such event.
(B) The Corporation shall declare a dividend or distribution on Units of
Series B Preferred Stock as provided in paragraph (A) above immediately after it
declares a dividend or distribution on the shares of Common Stock (other than a
dividend payable in shares of Common Stock); provided, however, that, in the
event no dividend or distribution shall have been declared on the Common Stock
during the period between any Quarterly Dividend Payment Date and the next
subsequent Quarterly Dividend Payment Date, a dividend of $.01 per Unit on the
Series B Preferred Stock shall nevertheless be payable on such subsequent
Quarterly Dividend Payment Date.
(C) Dividends shall begin to accrue and shall be cumulative on each
outstanding Unit of Series B Preferred Stock from the Quarterly Dividend Payment
Date next preceding the date of issuance of such Unit of Series B Preferred
Stock, unless the date of issuance of such Unit is prior to the record date for
the first Quarterly Dividend Payment Date, in which case, dividends on such Unit
shall begin to accrue from the date of issuance of such Unit, or unless the date
of issuance is a Quarterly Dividend Payment Date or is a date after the record
date for the determination of holders of Units of Series B Preferred Stock
entitled to receive a quarterly dividend and before such Quarterly Dividend
Payment Date, in either of which events such dividends shall begin to accrue and
be cumulative from such Quarterly Dividend Payment Date. Accrued but unpaid
dividends shall not bear interest. Dividends paid on Units of Series B Preferred
Stock in an amount less than the aggregate amount of all such dividends at the
time accrued and payable on such Units shall be allocated pro rata on a
unit-by-unit basis among all Units of Series B Preferred Stock at the time
outstanding. The Board of Directors may fix a record date for the determination
of holders of Units of Series B Preferred Stock entitled to receive payment of a
dividend or distribution declared thereon, which record date shall be no more
than 30 days prior to the date fixed for the payment thereof.
3. Voting Rights. The holders of Units of Series B Preferred Stock shall
have the following voting rights:
(A) Subject to the provision for adjustment hereinafter set forth, each
Unit of Series B Preferred Stock shall entitle the holder thereof to one vote on
all matters submitted to a vote of the stockholders of the Corporation. In the
event the Corporation shall at any time after the Rights Declaration Date (i)
declare any dividend on outstanding shares of Common Stock payable in shares of
Common Stock, (ii) subdivide outstanding shares of Common Stock or (iii) combine
the outstanding shares of Common Stock into a smaller number of shares, then in
each such case the number of votes per Unit to which holders of Units of Series
B Preferred Stock were entitled immediately prior to such event shall be
adjusted by multiplying such number by a fraction the numerator of which shall
be the number of shares of Common Stock outstanding immediately after such event
and the denominator of which shall be the number of shares of Common Stock that
were outstanding immediately prior to such event; and
(B) Except as otherwise provided herein, in the Charter or the Bylaws of
the Corporation or as required by law, the holders of Units of Series B
Preferred Stock and the holders of shares of Common Stock shall vote together as
one class on all matters submitted to a vote of stockholders of the Corporation,
and such holders shall have no special voting rights and their consents shall
not be required for taking any corporate action.
4. Certain Restrictions. (A) Whenever quarterly dividends or other
dividends or distributions payable on Units of Series B Preferred Stock as
provided herein are in arrears, thereafter and until all accrued and unpaid
dividends and distributions, whether or not declared, on outstanding Units of
Series B Preferred Stock shall have been paid in full, the Corporation shall not
(i) declare or pay dividends on, make any other distributions on, or redeem or
purchase or otherwise acquire for consideration any shares of junior stock; (ii)
declare or pay dividends on or make any other distributions on any shares of
parity stock, except dividends paid ratably on Units of Series B Preferred Stock
and shares of all such parity stock on which dividends are payable or in arrears
in proportion to the total amounts to which the holders of such Units and all
such shares are then entitled; (iii) redeem or purchase or otherwise acquire for
consideration shares of any parity stock, provided, however, that the
Corporation may at any time redeem, purchase or otherwise acquire shares of any
such parity stock in exchange for shares of any junior stock; (iv) purchase or
otherwise acquire for consideration any Units of Series B Preferred Stock,
56
<PAGE>
except in accordance with a purchase offer made in writing or by publication (as
determined by the Board of Directors) to all holders of such Units.
(B) The Corporation shall not permit any subsidiary of the Corporation to
purchase or otherwise acquire for consideration any shares of stock of the
Corporation unless the Corporation could, under paragraph (A) of this Section 3,
purchase or otherwise acquire such shares at such time and in such manner.
5. Reacquired Shares. Any Units of Series B Preferred Stock purchased or
otherwise acquired by the Corporation in any manner whatsoever shall be retired
and cancelled promptly after the acquisition thereof. All such Units shall, upon
their cancellation, become authorized but unissued shares (or fractions of
shares) of Preferred Stock and may be reissued as part of a new series of
Preferred Stock to be created by resolution or resolutions of the Board of
Directors, subject to the conditions and restrictions on issuance set forth
herein, in the Charter, or in any other articles supplementary creating a series
of Preferred Stock or any other similar stock or as otherwise required by law.
6. Liquidation, Dissolution or Winding Up. (A) Upon any voluntary or
involuntary liquidation, dissolution or winding up of the Corporation, no
distribution shall be made (i) to the holders of shares of junior stock unless
the holders of Units of Series B Preferred Stock shall have received, subject to
adjustment as hereinafter provided in paragraph (B), the greater of either (a)
$.01 per Unit plus an amount equal to accrued and unpaid dividends and
distributions thereon, whether or not earned or declared, to the date of such
payment, or (b) the amount equal to the aggregate per share amount to be
distributed to holders of shares of Common Stock, or (ii) to the holders of
shares of parity stock, unless simultaneously therewith distributions are made
ratably on Units of Series B Preferred Stock and all other shares of such parity
stock in proportion to the total amounts to which the holders of Units of Series
B Preferred Stock are entitled under clause (i)(a) of this sentence and to which
the holders of shares of such parity stock are entitled, in each case upon such
liquidation, dissolution or winding up.
(B) In the event the Corporation shall at any time after the Rights
Declaration Date (i) declare any dividend on outstanding shares of Common Stock
payable in shares of Common Stock, (ii) subdivide outstanding shares of Common
Stock, or (iii) combine outstanding shares of Common Stock into a smaller number
of shares, then in each such case the aggregate amount to which holders of Units
of Series B Preferred Stock were entitled immediately prior to such event
pursuant to clause (i)(b) of paragraph (A) of this Section 5 shall be adjusted
by multiplying such amount by a fraction the numerator of which shall be the
number of shares of Common Stock that are outstanding immediately after such
event and the denominator of which shall be the number of shares of Common Stock
that were outstanding immediately prior to such event.
7. Consolidation, Merger, etc. In case the Corporation shall enter into any
consolidation, merger, combination or other transaction in which the shares of
Common Stock are exchanged for or converted into other stock or securities, cash
and/or any other property, then in any such case Units of Series B Preferred
Stock shall at the same time be similarly exchanged for or converted into an
amount per Unit (subject to the provision for adjustment hereinafter set forth)
equal to the aggregate amount of stock, securities, cash and/or any other
property (payable in kind), as the case may be, into which or for which each
share of Common Stock is converted or exchanged. In the event the Corporation
shall at any time after the Rights Declaration Date (i) declare any dividend on
outstanding shares of Common Stock payable in shares of Common Stock, (ii)
subdivide outstanding shares of Common Stock, or (iii) combine outstanding
Common Stock into a smaller number of shares, then in each such case the amount
set forth in the immediately preceding sentence with respect to the exchange or
conversion of Units of Series B Preferred Stock shall be adjusted by multiplying
such amount by a fraction the numerator of which shall be the number of shares
of Common Stock that are outstanding immediately after such event and the
denominator of which shall be the number of shares of Common Stock that were
outstanding immediately prior to such event.
8. Redemption. The Units of Series B Preferred Stock and shares of Series B
Preferred Stock shall not be redeemable.
57
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9. Ranking. The Units of Series B Preferred Stock and shares of Series B
Preferred Stock shall rank, with respect to the payment of dividends and the
distribution of assets, junior to the Series A Preferred Shares and to all other
series of the Preferred Stock and to any other class of Preferred Stock that
hereafter may be issued by the Corporation as to the payment of dividends and
the distribution of assets, unless the terms of any such series or class shall
provide otherwise.
10. Fractional Shares. The Series B Preferred Stock may be issued in Units
or other fractions of a share, which Units or fractions shall entitle the
holder, in proportion to such holder's units or fractional shares, to exercise
voting rights, receive dividends, participate in distributions and to have the
benefit of all other rights of holders of Series B Preferred Stock.
11. Certain Definitions. As used in this resolution with respect to the
Series B Preferred Stock, the following terms shall have the following meanings:
(A) The term "Common Stock" shall mean the class of stock designated as the
common stock, par value $.001 per share, of the Corporation at the date hereof
or any other class of stock resulting from successive changes or
reclassification of the common stock.
(B) The term "junior stock" (i) as used in Section 3 shall mean the Common
Stock and any other class or series of capital stock of the Corporation
hereafter authorized or issued over which the Series B Preferred Stock has
preference or priority as to the payment of dividends and (ii) as used in
Section 5, shall mean the Common Stock and any other class or series of capital
stock of the Corporation over which the Series B Preferred Stock has preference
or priority in the distribution of assets on any liquidation, dissolution or
winding up of the Corporation.
(C) The term "parity stock" (i) as used in Section 3 shall mean any class
or series of stock of the Corporation hereafter authorized or issued ranking
pari passu with the Series B Preferred Stock as to dividends and (ii) as used in
Section 5, shall mean any class or series of capital stock ranking pari passu
with the Series B Preferred Stock in the distribution of assets on any
liquidation, dissolution or winding up.
58
<PAGE>
<TABLE>
<CAPTION>
Exhibit 12.1
GLENBOROUGH REALTY TRUST INCORPORATED
Computation of Ratios
For the five years ended December 31, 1997
and the three months ended March 31 and June 30, 1998
GRT Predecessor Entities, Combined The Company
------------------------------------ -----------------------------------------------------
Three Three
Months Months
Ended March Ended June
Year Ended December 31, 31, 30,
---------------------------------------------------------------- ------------- -----------
1993 1994 1995 1996 1997 1998 1998
---------- ---------- ---------- ----------- ----------- ------------- -----------
EARNINGS, AS DEFINED
<S> <C> <C> <C> <C> <C> <C> <C>
Net Income (Loss) before Preferred
Dividends 4,418 1,580 524 (1,609) 19,368 12,213 13,921
Extraordinary and non-recurring items (2,274) -- -- 186 843 -- --
Federal & State income taxes 24 176 357 -- -- -- --
Minority Interest 5 43 -- 292 1,119 678 596
Fixed Charges 1,301 1,140 2,129 3,913 9,668 9,145 9,707
---------- ---------- ---------- ----------- ----------- ------------- -----------
3,474 2,939 3,010 2,782 30,998 22,036 24,224
---------- ---------- ---------- ----------- ----------- ------------- -----------
FIXED CHARGES AND PREFERRED DIVIDENDS, AS
DEFINED
Interest Expense 1,301 1,140 2,129 3,913 9,668 9,145 9,707
Capitalized Interest -- -- -- -- -- -- 131
Preferred Dividends -- -- -- -- -- 3,910 5,570
---------- ---------- ---------- ----------- ----------- ------------- -----------
1,301 1,140 2,129 3,913 9,668 13,055 15,408
RATIO OF EARNINGS TO FIXED CHARGES 2.67 2.58 1.41 0.71 (1) 3.21 2.41 2.46
---------- ---------- ---------- ----------- ----------- ------------- -----------
RATIO OF EARNINGS TO FIXED CHARGES AND
PREFERRED DIVIDENDS 2.67 2.58 1.41 0.71 (1) 3.21 1.69 1.57
---------- ---------- ---------- ----------- ----------- ------------- -----------
<FN>
(1) For the twelve months ended December 31, 1996, earnings were insufficient to cover fixed charges and fixed charges plus
preferred dividends by $1,131.
</FN>
</TABLE>
59
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<EXCHANGE-RATE> 1.000
<CASH> 7,028
<SECURITIES> 26,006
<RECEIVABLES> 6,002
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 39,036
<PP&E> 1,759,736
<DEPRECIATION> 61,182
<TOTAL-ASSETS> 1,835,775
<CURRENT-LIABILITIES> 20,861
<BONDS> 0
0
11
<COMMON> 31
<OTHER-SE> 847,549
<TOTAL-LIABILITY-AND-EQUITY> 1,835,775
<SALES> 0
<TOTAL-REVENUES> 102,617
<CGS> 0
<TOTAL-COSTS> 30,589
<OTHER-EXPENSES> 27,042
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 18,852
<INCOME-PRETAX> 26,134
<INCOME-TAX> 0
<INCOME-CONTINUING> 26,134
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 26,134
<EPS-PRIMARY> 0.53
<EPS-DILUTED> 0.52
</TABLE>
