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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
______________
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________ to ____________
Commission file number 1-12566
______________
G & L REALTY CORP.
(Exact name of Registrant as specified in its charter)
Maryland 95-4449388
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
439 N. Bedford Drive
Beverly Hills, California 90210
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (310) 273-9930
______________
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 ___.
-
The number of shares outstanding of the Registrant's Common Stock as of
July 31, 2001 was 2,333,800 shares.
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G&L REALTY CORP.
INDEX
Page
Part I Financial Information Number
Item 1 Financial Statements
Condensed Consolidated Balance Sheets as of June 30, 2001 (unaudited) and December
31, 2000............................................................................. 3
Condensed Consolidated Statements of Operations for the Three and Six Month Periods
Ended June 30, 2001 and 2000 (unaudited)............................................. 4
Condensed Consolidated Statements of Cash Flows for the Six Month Periods Ended June
30, 2001 and 2000 (unaudited)........................................................ 5 - 6
Notes to Condensed Consolidated Financial Statements (unaudited).......................... 7 - 19
Item 2 Management's Discussion and Analysis of Financial Condition and Results of Operations..... 20 - 26
Item 3 Quantitative and Qualitative Disclosures About Market Risk................................ 27
Part II Other Information
Item 1 Legal Proceedings......................................................................... 28
Item 2 Changes in Securities..................................................................... 28
Item 3 Defaults Upon Senior Securities........................................................... 28
Item 4 Submission of Matters to a Vote of Security Holders....................................... 28
Item 5 Other Information......................................................................... 28
Item 6 Exhibits and Reports on Form 8-K.......................................................... 29 - 33
Signature................................................................................................... 34
Page 2
G&L REALTY CORP.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
June 30, December 31,
2001 2000
---------------------------------------------
(Unaudited)
ASSETS
------
Rental properties (Note 3):
Land $ 28,599 $ 28,599
Buildings and improvements, net 138,121 139,510
Projects under development --- 171
-------- --------
Total rental properties 166,720 168,280
Cash and cash equivalents 1,341 2,791
Restricted cash 4,966 4,624
Tenant rent and reimbursements receivable, net 5,860 6,669
Unbilled rent receivable, net 2,493 2,412
Other receivables, net 60 46
Mortgage loans and notes receivable, net 11,644 11,244
Investments in unconsolidated affiliates (Note 6) 4,438 4,851
Deferred charges and other assets, net (Note 4) 5,857 4,549
-------- --------
TOTAL ASSETS $203,379 $205,466
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
LIABILITIES:
Notes payable $157,634 $158,942
Accounts payable and other liabilities 5,408 6,099
Distributions payable 462 433
Tenant security deposits 1,543 1,367
-------- --------
Total liabilities 165,047 166,841
Commitments and Contingencies (Note 8) --- ---
Minority interest in consolidated affiliates (1,364) (1,266)
Minority interest in Operating Partnership --- ---
STOCKHOLDERS' EQUITY (Note 5):
Preferred shares - $.01 par value, 10,000,000 shares authorized,
liquidation preference of $25.00 per share
. Series A Preferred - 1,495,000 shares issued and 1,487,000 shares
outstanding as of June 30, 2001 and December 31, 2000 15 15
. Series B Preferred - 1,380,000 shares issued and 1,376,000 shares
outstanding as of June 30, 2001 and December 31, 2000 14 14
Common shares - $.01 par value, 50,000,000 shares authorized,
2,333,800 shares issued and outstanding as of June 30, 2001 and
December 31, 2000 23 23
Additional paid-in capital 72,285 72,441
Distributions in excess of net income (32,641) (32,602)
-------- --------
Total stockholders' equity 39,696 39,891
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $203,379 $205,466
======== ========
See accompanying notes to Condensed Consolidated Financial Statements
Page 3
G&L REALTY CORP.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)
For the Three Month For the Six Month
Periods Ended June 30, Periods Ended June 30,
2001 2000 2001 2000
---------------------------------------------------
REVENUES:
Rent $ 6,509 $ 6,295 $13,090 $13,085
Patient revenues 5,353 5,418 10,361 6,316
Tenant reimbursements 614 371 1,023 726
Parking 435 307 781 610
Interest and loan fees 489 898 999 1,382
Net gain on sale of assets --- --- --- 1,263
Lease termination income --- --- 2,613 ---
Other income 149 123 586 232
------------ -------- ------- -------
Total revenues 13,549 13,412 29,453 23,614
------------ -------- ------- -------
EXPENSES:
Property operations 2,343 2,044 4,520 3,898
Skilled nursing operations 4,753 4,973 9,283 5,792
Depreciation and amortization 1,495 1,533 2,968 3,066
Interest 3,242 3,421 6,540 6,844
Provision for doubtful accounts and notes
receivable --- --- --- 2,288
General and administrative 860 768 1,708 1,468
------------ -------- ------- -------
Total expenses 12,693 12,739 25,019 23,356
------------ -------- ------- -------
Income from operations before minority interests,
equity in loss of unconsolidated affiliates and
extraordinary loss 856 673 4,434 258
Equity in loss of unconsolidated affiliates (92) (205) (175) (348)
Minority interest in consolidated affiliates (71) (39) (133) (106)
Minority interest in Operating Partnership --- 83 --- 616
------------ -------- ------- -------
Income before extraordinary loss 693 512 4,126 420
Extraordinary loss on early retirement of
long-term debt --- --- --- (158)
------------ -------- ------- -------
Net income 693 512 4,126 262
Dividends on preferred stock (1,791) (1,790) (3,581) (3,583)
------------ -------- ------- -------
Net (loss) income available to common stockholders $ (1,098) $ (1,278) $ 545 $(3,321)
============ ======== ======= =======
Per common share data:
Basic:
------
(Loss) income before extraordinary loss $ (0.47) $ (0.55) $ 0.23 $ (1.30)
Extraordinary loss --- --- --- (0.07)
------------ -------- ------- -------
Net (loss) income $ (0.47) $ (0.55) $ 0.23 $ (1.37)
============ ======== ======= =======
Fully diluted:
--------------
(Loss) income before extraordinary loss $ (0.47) $ (0.55) $ 0.23 $ (1.30)
Extraordinary loss --- --- --- (0.07)
------------ -------- ------- -------
Net (loss) income $ (0.47) $ (0.55) $ 0.23 $ (1.37)
============ ======== ======= =======
Weighted average shares outstanding:
Basic 2,334 2,337 2,334 2,424
============ ======== ======= =======
Fully diluted 2,381 2,337 2,365 2,425
============ ======== ======= =======
See accompanying notes to Condensed Consolidated Financial Statements
Page 4
G&L REALTY CORP.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Six Months Ended June 30,
2001 2000
---------------------------------
(Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 4,126 $ 262
Adjustments to reconcile net income to net cash provided by
Operating activities:
Depreciation and amortization 2,968 3,066
Amortization of deferred loan costs 348 289
Extraordinary loss on early retirement of long-term debt --- 158
Net gain on sale of assets --- (1,263)
Minority interests 133 (510)
Equity in loss of unconsolidated affiliates 175 348
Provision for doubtful accounts and notes receivables --- 2,288
Unbilled rent receivable, net (81) (92)
(Increase) decrease in:
Other receivables (14) 110
Tenant rent and reimbursements receivable 809 (3,109)
Prepaid expense and other assets (1,158) (678)
Accrued interest receivable and loan fees (177) 176
Increase (decrease) in:
Amounts payable and other liabilities (692) 2,956
Tenant security deposits 176 6
------- --------
Net cash provided by operating activities 6,613 4,007
------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of real estate assets --- (10,385)
Sale of real estate assets --- 8,794
Additions to rental properties (1,015) (1,915)
Pre-acquisition costs, net (98) 385
Construction-in-progress 171 (99)
Leasing commissions (343) (69)
Investment in mortgage loans and notes receivable (292) (24)
Contributions to unconsolidated affiliates (160) (167)
Distributions from unconsolidated affiliates 398 1,262
Principal payments received from mortgage loans and notes receivable 69 308
------- --------
Net cash used in investing activities (1,270) (1,910)
------- --------
CASH FLOWS FROM FINANCING ACTIVITIES: 5,100 7,513
Notes payable proceeds (6,408) (9,660)
Repayment of notes payable (591) (251)
Payment of deferred loan costs (342) 1,468
Decrease (increase) in restricted cash --- 486
Minority interest equity contribution --- (2,974)
Purchase of common and preferred stock and partnership units (4,552) (5,094)
Distributions ------- --------
Net cash used in financing activities (6,793) (8,512)
------- --------
See accompanying notes to Consolidated Financial Statements
Page 5
G&L REALTY CORP.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Six Months Ended June 30,
2001 2000
-------------------------
(Unaudited)
NET DECREASE IN CASH AND CASH EQUIVALENTS (1,450) (6,415)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 2,791 7,545
----------- ---------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 1,341 $ 1,130
=========== =========
SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid during the period for interest $ 6,175 $ 6,894
=========== =========
NONCASH INVESTING AND FINANCING ACTIVITIES
Distributions declared not yet paid $ 370 $ 370
=========== =========
Preferred distributions due to minority partner $ 30 $ 28
=========== =========
Transfer from investments in unconsolidated affiliates to notes receivable --- $ 3,070
=========== =========
Transfer from projects under development to building $ 376 ---
=========== =========
Transfer note receivable to land and building:
Land $ 252
Building 1,009
---------
Total $ 1,261
=========
Notes receivable $ 1,261
=========
Concluded.
See accompanying notes in Consolidated Financial Statements
Page 6
G&L REALTY CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. GENERAL
G&L Realty Corp. (the "Company") was formed as a Maryland corporation to
continue the ownership, management, acquisition and development activities
previously conducted by G&L Development, a California general partnership, the
Company's predecessor. All of the Company's assets are held by, and all of its
operations are conducted through, the following entities:
G&L Realty Partnership, L.P., a Delaware limited partnership
(the "Operating Partnership")
G&L Realty Financing Partnership II, L.P., a Delaware limited
partnership (the "Realty Financing Partnership")*
G&L Medical Partnership, L.P., a Delaware limited partnership
(the "Medical Partnership")*
G&L Gardens, LLC, an Arizona limited liability company
("Maryland Gardens")*
435 North Roxbury Drive, Ltd., a California limited partnership
(the "Roxbury Partnership")
GL/PHP, LLC, a Delaware limited liability company ("GL/PHP")*
G&L Hampden, LLC, a Delaware limited liability company ("Hampden")*
G&L Valencia, LLC, a California limited liability company ("Valencia")
G&L Tustin, LLC, a California limited liability company ("Tustin")*
G&L Holy Cross, LLC, a California limited liability company ("Holy
Cross")*
G&L Burbank, LLC, a California limited liability company ("Burbank")*
GLH Pacific Gardens, LLC, a California limited liability company
("Pacific Gardens")
G&L Hoquiam, LLC, a California limited liability company ("Hoquiam")
G&L Lyon, LLC, a California limited liability company ("Lyon")
G&L Coronado (1998), LLC, a California limited liability company
("Coronado")
GLH Tarzana, LLC, a California limited liability company ("Tarzana")
G&L Heritage Care, LLC, a Delaware limited liability company
("Heritage")
G&L Massachusetts, LLC, a Delaware limited liability company
("Massachusetts")
G&L Aspen, LLC, a California limited liability company ("Aspen")
* The Realty Financing Partnership, the Medical Partnership, Maryland
Gardens, GL/PHP, Hampden, Tustin, Holy Cross, and Burbank are herein
collectively referred to as the "Financing Entities" and individually as
the "Financing Entity."
The Company, as the sole general partner and as owner of an approximately 79%
ownership interest, controls the Operating Partnership. The Company controls the
Financing Entities through wholly owned subsidiaries incorporated either in the
State of Delaware or the State of California (collectively, the "Subsidiaries"
and individually, a "Subsidiary"). Each Subsidiary either (i) owns, as sole
general partner or sole managing member, a 1% ownership interest in its related
Financing Entity or (ii) owns no interest and acts as the manager of the
Financing Entity. The remaining 99% ownership interest in each Financing Entity,
which is owned 1% by a Subsidiary, is owned by the Operating Partnership, acting
as sole limited partner or member. Financing Entities in which a Subsidiary owns
no interest are 100% owned by the Operating Partnership.
References in these condensed consolidated financial statements to the Company
include its operations, assets and liabilities including the operations, assets
and liabilities of the Operating Partnership, the Subsidiaries, the Financing
Entities, the Roxbury Partnership (in which the Operating Partnership owns a
61.75% partnership interest and is the sole general partner), Pacific Gardens
(in which the Operating Partnership owns a 93% membership interest and is a co-
managing
Page 7
G&L REALTY CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
member), Tarzana (in which the Operating Partnership owns a 85% membership
interest and is a co-managing member) and Valencia, Hoquiam, Lyon, Coronado,
Heritage, Massachusetts and Aspen (in which the Operating Partnership owns a
100% interest).
In addition to the Subsidiaries, the Company also owns interests in various
unconsolidated affiliates. Although the Company's investment represents a
significant portion of the capital of such unconsolidated affiliates and the
Company exercises significant influence over the activities of these entities,
the Company does not have the requisite level of voting control to include the
assets, liabilities and operating activities of these entities in the condensed
consolidated financial statements of the Company. The entities in which the
Company has unconsolidated financial interests are as follows:
. GLN Capital Co., LLC ("GLN") is a Delaware limited liability company formed
in 1996. GLN is owned 49.9% by the Operating Partnership and 50.1% by an
affiliate of Nomura Asset Capital Corp. ("Nomura"). GLN was formed to fund
loans to the senior care industry.
. G&L Grabel, San Pedro, LLC ("San Pedro") is a California limited liability
company formed on March 10, 1998 by the Company through the Operating
Partnership, and Gary Grabel, an experienced medical office building
("MOB") manager. The Company and Gary Grabel contributed to San Pedro 84%
and 16% of the equity, respectively. However, the initial ownership
interests of the parties will be adjusted to 50% as each partner receives a
return of its initial capital contribution plus a preferred return on their
initial contribution. San Pedro was formed for the purpose of acquiring
three MOBs located at 1360 West 6/th/ Street in San Pedro, California.
. G&L Penasquitos, LLC ("Penasquitos LLC") is a California limited liability
company, formed by the Company on April 24, 1998, through the Operating
Partnership, and Parsons House, LLC, a California limited liability company
("Parsons"). The Company and Parsons contributed to Penasquitos LLC 75% and
25% of the equity, respectively. However, the initial ownership interests
of the parties will be adjusted to 50% as each partner receives a return of
its initial capital contribution plus preferred distributions equal to 15%
per annum on their capital contribution. Penasquitos LLC was formed for the
purpose of acquiring and converting a building located in Rancho
Penasquitos, California into an assisted living facility.
. G&L Penasquitos, Inc. ("Penasquitos Inc.") is a California corporation
formed on April 21, 1998 by the Company, through the Operating Partnership,
and Parsons. The Company owns 75% of the total equity in Penasquitos Inc.
in the form of non-voting preferred stock. Parsons holds 25% of the total
equity and all of the voting common stock. Penasquitos Inc. was formed for
the purpose of operating an assisted living facility in Rancho Penasquitos,
California.
. GLH Pacific Gardens Corp. ("Pacific Gardens Corp.") is a California
corporation formed on June 25, 1998 by the Company, through the Operating
Partnership, and ASL Santa Monica, Inc., a California corporation ("ASL").
The Company owns 93% of the total equity in Pacific Gardens Corp. in the
form of non-voting preferred stock. ASL holds 7% of the total equity in the
form of common stock. Pacific Gardens Corp. was formed for the purpose of
operating an assisted living facility located in Santa Monica, California,
which was purchased by the Company. Since July 1, 1999, Pacific Gardens
Corp. has not operated the assisted living facility and a wholly owned
subsidiary of ASL assumed all of the assets and liabilities of Pacific
Gardens Corp. in order to operate the facility.
. G&L Parsons on Eagle Run, LLC ("Eagle Run") is a California limited
liability company, formed on December 29, 1998, through the Operating
Partnership and Parsons. The Company and Parsons each contributed 50% of
the total equity in Eagle Run. Eagle Run was formed for the purpose of
acquiring a vacant piece of land in Omaha, Nebraska upon which the members
developed an assisted living facility.
. G&L Parsons on Eagle Run, Inc. ("Eagle Run Inc.") is a California
corporation formed on December 20, 1998 by the Company, through the
Operating Partnership, and Parsons. Eagle Run Inc. was formed for the
purpose of operating an assisted living facility in Omaha, Nebraska on the
land acquired by Eagle Run.
. Lakeview Associates, LLC ("Lakeview") is a California limited liability
company, formed on September 2, 1999 by the Company, through the Operating
Partnership and D.D.&F. ("Prestige"), an Oregon general partnership. The
Company and Prestige each contributed 50% of the equity of Lakeview. The
Company contributed land and construction in progress in exchange for 50%
of the equity of Lakeview and two notes totaling $1.4 million. Prestige
contributed $250,000 for a 50% interest in Lakeview. Lakeview was formed
for the purpose of developing a two-story, 80 unit, 92 bed assisted living
facility in Yorba Linda, California.
Page 8
G&L REALTY CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
. Tustin Heritage Park, LLC ("Heritage Park") is a California limited
liability company in which the Company has a 25% equity ownership interest.
In June 1999, the Company sold a vacant piece of land in Tustin to Heritage
Park. In exchange, the Company received $75,000 in cash, a $425,000 first
deed of trust and a 25% equity ownership interest in Heritage Park. In
September 2000, the first deed of trust was increased to $675,000 in
exchange for unearned development fees and an extension of the note.
Heritage Park intends to develop a 53-unit senior apartment residence on
the land.
GLN, San Pedro, Penasquitos Inc., Penasquitos LLC, Pacific Gardens Corp., Eagle
Run, Eagle Run, Inc., Lakeview and Heritage Park are herein collectively
referred to as the "Unconsolidated Affiliates" and individually as
"Unconsolidated Affiliate".
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business - The Company is a self-managed Real Estate Investment Trust
("REIT") that acquires, develops, manages, finances and leases healthcare
properties. The Company's business currently consists of investments in
healthcare properties and in debt obligations secured by healthcare properties.
Investments in healthcare property consist of acquisitions, made either directly
or through joint ventures, in medical office buildings ("MOBs"), skilled nursing
facilities ("SNFs") or assisted living facilities ("ALFs"). The Company's
lending activities consist of providing short-term secured loans to facilitate
third party acquisitions of healthcare properties.
Basis of Presentation - The accompanying condensed consolidated financial
statements include the accounts of the Company and its Subsidiaries. The
interests in the Roxbury Partnership, Pacific Gardens, Pacific Park, Tarzana and
the Operating Partnership that are not owned by the Company, have been reflected
as minority interests in the Operating Partnership. All significant intercompany
accounts and transactions have been eliminated in consolidation.
The information presented as of and for the three-month and six-month
periods ended June 30, 2001 and 2000 have not been audited by independent
accountants, but include all adjustments (consisting of normal recurring
adjustments) which are, in the opinion of management, necessary for a fair
presentation of the results for such periods. The results of operations for the
six months ended June 30, 2001 are not necessarily indicative of results that
might be expected for the full fiscal year.
Certain information and footnote disclosures normally included in annual
financial statements have been omitted. The Company believes that the
disclosures included in these financial statements are adequate for a fair
presentation and conform to reporting requirements established by the Securities
and Exchange Commission ("SEC"). These condensed consolidated financial
statements should be read in conjunction with the audited consolidated financial
statements and the notes included in the Company's annual report on Form 10-K as
filed with the SEC.
Recent accounting pronouncements-- In June 1998, the Financial Accounting
Standards Board issued Statement of Financial Accounting Standards No. 133
"Accounting for Derivative Instruments and Hedging Activities," ("SFAS 133").
SFAS 133, as amended, is effective for fiscal years beginning after June 15,
2000 and requires all derivatives to be recorded on the balance sheet at fair
value as either assets or liabilities depending on the rights or obligations
under the contracts. SFAS 133 also establishes new accounting methodologies for
the following three classifications of hedges: fair value, cash flow and net
investment in foreign operations. The Company's adoption of SFAS 133 on January
1, 2001 did not have a material impact on the Company's financial position or
results of operations.
In July 2001, the Financial Accounting Standards Board issued SFAS No. 141,
"Business Combinations" and SFAS No. 142, "Goodwill and Other Intangible
Assets." SFAS No. 141 is effective immediately and SFAS No. 142 will be
effective in January 2002. The Company's adoption of these new standards is not
expected to have a material impact on the Company's financial position or
results of operations.
Page 9
G&L REALTY CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
3. BUILDINGS AND IMPROVEMENTS
Buildings and improvements consist of the following:
June 30, December 31,
2001 2000
---------------------------
(in thousands)
Buildings and improvements....................... $155,547 $155,224
Tenant improvements.............................. 10,180 9,214
Furniture, fixtures and equipment................ 3,382 3,280
-------- --------
169,109 167,718
Less accumulated depreciation and amortization... (30,988) (28,208)
-------- --------
Total....................................... $138,121 $139,510
======== ========
Rental property is recorded at cost less accumulated depreciation.
Depreciation is computed on a straight-line basis over the estimated useful
lives of the assets as follows:
Buildings and improvements................... 40 years
Tenant improvements.......................... Life of lease
Furniture, fixtures and equipment............ 5 years
Expenditures for maintenance and repairs are charged to operations as
incurred. Significant renovations and all external costs directly related to
acquisitions are capitalized.
4. DEFERRED CHARGES AND OTHER ASSETS
Deferred charges and other assets consist of the following:
June 30, December 31,
2001 2000
---------------------------
(in thousands)
Deferred loan costs.............................. $ 4,602 $ 4,011
Pre-acquisition costs............................ 248 150
Leasing commissions.............................. 1,829 1,486
Prepaid expense and other assets................. 1,632 914
------- -------
8,311 6,561
Less accumulated amortization.................... (2,454) (2,012)
------- -------
Total....................................... $ 5,857 $ 4,549
======= =======
Page 10
G&L REALTY CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
5. STOCKHOLDERS' EQUITY
Distributions in excess of net income-- The Company has elected to be treated,
for federal income tax purposes, as a REIT. As such, the Company is required to
distribute annually, in the form of distributions to its stockholders, at least
90% of its taxable income. In reporting periods in which distributions exceed
net income, stockholders' equity will be reduced by the distributions in excess
of net income in such period and will be increased by the excess of net income
over distributions in reporting periods in which net income exceeds
distributions. For tax reporting purposes, a portion of the dividends declared
represents a return of capital. The following table reconciles net income and
distributions in excess of net income for the six months ended June 30, 2001 and
for the year ended December 31, 2000:
June 30, December 31,
2001 2000
------------------------------
(in thousands)
Distributions in excess of net income at beginning of period......... $(32,602) $(25,412)
Net income during period............................................. 4,126 1,149
Less: Distributions declared......................................... (4,165) (8,339)
-------- --------
Distributions in excess of net income................................ $(32,641) $(32,602)
======== ========
Earnings per common share--Basic earnings per share is computed by dividing
net income less preferred stock dividends by the weighted average number of
common shares outstanding during each period. Fully diluted earnings per share
is computed by dividing net income less preferred stock dividends by the
weighted average number of common shares outstanding during each period plus the
incremental shares that would have been outstanding upon the assumed exercise of
dilutive stock options. The treasury stock method is used to determine the
number of incremental common equivalent shares resulting from options to
purchase shares of common stock granted under the Company's 1993 Stock Incentive
Plan, as amended. As of June 30, 2001 and 2000 there were approximately 227,500
and 250,500 stock options outstanding with weighted average exercise prices of
$10.55 and $11.31, respectively. For the three months ended June 30, 2001, the
incremental shares that would have been outstanding upon the assumed exercise of
stock options was 47,355 and have been included in the computation of fully
diluted earnings per share. For the three months ended June 30, 2000, the
incremental shares that would have been outstanding upon the assumed exercise of
stock options would have been anti-dilutive and, therefore, were not considered
in the computation of fully diluted earnings per share. For the six months ended
June 30, 2001 and 2000, the incremental shares that would have been outstanding
upon the assumed exercise of stock options was 31,104 and 935, respectively and
have been included in the computation of fully diluted earnings per share. The
following table reconciles the numerator and denominator of the basic and fully
diluted per share computations for net income for the three and six months ended
June 30, 2001 and 2000:
Page 11
G&L REALTY CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
Three months ended June 30, Six months ended June 30,
2001 2000 2001 2000
---------------------------------------------------------------------
(in thousands) (in thousands)
Numerator:
- ----------
Net income $ 693 $ 512 $ 4,126 $ 262
Preferred stock dividends (1,791) (1,790) (3,581) (3,583)
------- ------- ------- -------
Net (loss) income available to common
stockholders $(1,098) $(1,278) $ 545 $(3,321)
======= ======= ======= =======
Denominator:
- ------------
Weighted average shares - basic 2,334 2,337 2,334 2,424
Dilutive effect of stock options 47 --- 31 1
------- ------- ------- -------
Weighted average shares - fully diluted 2,381 2,337 2,365 2,425
======= ======= ======= ========
Per share:
- ----------
Basic $ (0.47) $ (0.55) $ 0.23 $ (1.37)
Dilutive effect of stock options --- --- --- ---
Fully diluted $ (0.47) $ (0.55) $ 0.23 $ (1.37)
======= ======= ======= ========
On May 10, 2001, the Board of Directors of the Company approved a
definitive merger agreement with Daniel M. Gottlieb and Steven D. Lebowitz, the
Chief Executive Officer and the President, repectively, of the Company, for the
acquisition of the Company's publicly-held Common Stock for a cash price of
$12.00 per share. The acquisition of the shares is to be effected through the
merger of an entity newly formed by Mr. Gottlieb and Mr. Lebowitz. The Series A
and Series B Preferred Stock would remain outstanding following the consummation
of the merger.
The merger is conditioned on the approval of the merger and the definitive
agreement by the affirmative vote of holders of a majority of the outstanding
shares of Common Stock; Houlihan Lokey Howard & Zukin Financial Advisors, Inc.,
financial advisor to the Special Committee of the Board of Directors, not
withdrawing or materially and adversely modifying the fairness opinion it has
delivered to the Special Committee; the receipt by Mr. Gottlieb and Mr. Lebowitz
of necessary financing; the receipt of applicable governmental and third party
consents and approvals; and other conditions that are customary for transactions
of this type. The definitive agreement also contains other provisions that are
common in agreements of this type, including reimbursement of certain expenses
incurred by Mr. Gottlieb and Mr. Lebowitz, standstill provisions and provisions
permitting the Company to terminate the agreement upon receipt of a superior
offer and under certain other circumstances upon payment of a termination fee.
In connection with this agreement, Messrs. Gottlieb and Lebowitz announced
that they intend to make a cash tender offer for up to approximately 16% of the
total number of outstanding shares of Preferred Stock at a price of $17.50 per
share of Series A and $17.00 per share of Series B. The tender offer would occur
during the period in which the Company solicits proxies for the stockholders
meeting to consider the proposed merger and would close concurrently with, and
be subject to, the closing of the merger. In addition, Mr. Gottlieb and Mr.
Lebowitz have advised the Company that, prior to the record date for the
stockholders meeting, they intend to convert Operating Partnership Units so that
they will own approximately 42% of the outstanding Common Stock entitled to vote
on the definitive agreement. Mr. Gottlieb and Mr. Lebowitz also own stock
options which, if exercised, would increase their ownership to approximately 45%
of the outstanding common stock.
On June 5, 2001, Lyle Weisman and certain of his associates (the "Weisman
Group") delivered to the special committee of the board of directors a proposal
to acquire, at the election of the Company, either (a) all of the
Page 12
G&L REALTY CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
issued and outstanding common stock of the Company (including common stock
issuable upon conversion of partnership units), but not less than a majority, at
a cash price equal to $15.00 per share of common stock, or (b) all of the assets
of the Company at an all cash purchase price equivalent to $15.00 per share of
common stock (the "Weisman Proposal").
On June 22, 2001, the Weisman Group delivered to the special committee a
first amendment (the "First Amendment") to the original Weisman Proposal,
increasing the price per share of common stock of the Company from $15.00 per
share to $15.25 per share and deleting Section B of the Weisman Proposal
referencing a purchase of the Company's assets. On July 6, 2001, the Weisman
Group delivered to the special committee a second amendment (the "Second
Amendment") to the Weisman proposal increasing the price per share of common
stock of the Company, if the Weisman Group acquires 100% of such common stock,
to $16.00 per share, subject to satisfactory due diligence, along with a
statement that the price per share would not be adjusted to less than $15.25 per
share. In addition, the second amendment offers to purchase less than all, but
not less than 50.1% of the Company's common stock at a price of $15.25 per
share, without a contingency for due diligence as well as to deliver a deposit
of $750,000 to counsel for the special committee if the Company accepts the
amended proposal.
On July 19, 2001, the Company announced that the special committee had
responded to the Weisman Group declaring that it would be prepared to support a
proposal by the Weisman Group to acquire the Company in which all common
stockholders receive a price of not less than $16.00 per share and that there
would be no contingencies for due diligence or financing. In addition, the
special committee declared that the Weisman Group must make a nonrefundable
payment of $2.5 million to the Company.
On July 31, 2001, the Company announced that the special committee had
received a further amendment to the Weisman Proposal that: (a) reaffirmed the
Weisman Group's desire to acquire all, but not less than 50.1%, of the Company's
common stock; (b) increased the proposed cash purchase price per share to $16.35
per share, subject to satisfactory completion of customary corporate and legal
due diligence, or $15.35 per share without a contingency for due diligence; (c)
conditioned the amended proposal on the negotiation and execution of a
definitive acquisition agreement and the termination of the agreement and plan
of merger dated as of May 10, 2001 between the Company and a company owned by
Daniel M. Gottlieb and Steven D. Lebowitz; (d) offered to deliver a deposit of
$750,000 to counsel for the special committee if the Company accepted the
amended proposal, and to increase the deposit by an additional $400,000 upon
execution of a definitive acquisition agreement, provided that the deposit is to
be refunded if the transaction is unable to close prior to October 30, 2001, for
any reason other than a breach of the acquisition agreement by the Weisman
Group; and (e) extended the expiration date of the proposal to 6:00 p.m.,
Pacific time, on Tuesday, August 7, 2001.
See also the Company's Current Reports on Form 8-K filed on December 1,
2000, February 22, 2001, April 16, 2001, May 11, 2001, May 25, 2001, June 4,
2001, June 7, 2001, June 14, 2001, June 26, 2001, July 11, 2001, July 20, 2001,
August 1, 2001 and August 9, 2001 for more information regarding the proposal
from Messrs. Gottlieb and Lebowitz and the agreement with them and the Weisman
Proposal.
Page 13
G&L REALTY CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
6. INVESTMENTS IN UNCONSOLIDATED AFFILIATES
The Company has investments in various unconsolidated affiliates as described in
Note 1. The following table provides a summary of the Company's investment in
each of these entities as of June 30, 2001. (In thousands).
San Penasquitos Penasquitos Heritage Pacific Eagle Run,
GLN Pedro LLC Inc. Park Gardens Corp. Inc. Eagle Run
------------------------------------------------------------------------------------
Opening balance at beginning
of period...................... $765 $1,144 $ 161 $ 20 $ --- $(312) $(370) $655
Equity in earnings (loss) of
affiliates..................... --- 123 (124) --- --- --- (126) (48)
Cash contributions................ 4 --- 70 --- --- --- --- ---
Cash distributions................ --- --- (398) --- --- --- --- ---
---- ------ ----- ---- ----- ----- ----- ----
Equity, before inter-company
adjustments.................... 769 1,267 (291) 20 --- (312) (496) 607
---- ------ ----- ---- ----- ----- ----- ----
Intercompany transactions:
Receivable (payable), net......... 66 57 248 (20) 14 110 9 47
---- ------ ----- ---- ----- ----- ----- ----
Investment in unconsolidated
affiliates........................ $835 $1,324 $ (43) $ --- $14 $(202) $(487) $654
==== ====== ===== ===== ===== ===== ===== ====
Lakeview Total
------------------
Opening balance at beginning
of period...................... 250 $2,313
Equity in earnings (loss) of
affiliates..................... --- (175)
Cash contributions................ 72 146
Cash distributions................ --- (398)
------ ------
Equity, before inter-company
adjustments.................... 322 1,886
------ ------
Intercompany transactions:
Receivable (payable), net......... 2,021 2,552
------ ------
Investment in unconsolidated
affiliates........................ $2,343 $4,438
====== ======
Page 14
G&L REALTY CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-CONTINUED
(Unaudited)
Following is a summary of the condensed financial information of each of the
unconsolidated affiliates as of and for the six months ended June 30, 2001.
(In thousands).
Pacific
San Penasquitos Penasquitos Heritage Gardens Eagle Run
GLN Pedro LLC Inc. Park Corp. Inc.
---------------------------------------------------------------------------------------
Financial Position:
- ------------------
Land................................... $ --- $ 1,882 $ 641 $ --- $ 750 $ --- $ ---
Buildings.............................. --- 4,225 6,306 --- --- --- ---
Notes receivable, net................. 1,585 --- --- --- --- --- ---
Other assets........................... --- 339 1,175 --- 238 --- 552
Notes payable.......................... --- (4,684) (8,444) --- (940) --- ---
Other liabilities...................... (60) (529) (92) (10) (48) (349) (1,543)
------ ------- ------- --------- ------- -------- -------
Net assets................................. $1,525 $ 1,233 $ (414) $ $(10) $ --- $ (349) $ (991)
======= ======= ======= ========= ======= ======== =======
Partner's equity:
- ----------------
G&L Realty Partnership, L.P............ $ 769 $ 1,267 $ (291) $ $ 20 $ --- $ (312) $ (496)
Others................................. 756 (34) (123) (30) --- (37) (495)
------ ------- ------- --------- ------- -------- -------
Total equity............................... $1,525 $ 1,233 $ (414) $ (10) $ --- $ (349) $ (991)
======= ======= ======= ========= ======= ======== =======
Operations:
- ----------
Revenues............................... $ --- $ 579 $ 243 $ --- $ --- $ --- $ 1,376
Expenses............................... --- (456) (490) --- --- --- (1,628)
------ ------- ------- --------- ------- -------- -------
Net income (loss).......................... $ --- $ 123 $ (247) $ --- $ --- $ --- $ (252)
======= ======= ======= ========= ======= ======== =======
Allocation of net income (loss):
- -------------------------------
G&L Realty Partnership, L.P............ $ --- $ 123 $ (124) $ --- $ --- $ --- $ (126)
Others................................. --- --- (123) --- --- --- (126)
------ ------- ------- --------- ------- -------- -------
Net income (loss).......................... $ --- $ 123 $ (247) $ --- $ --- $ --- $ (252)
======= ======= ======= ========= ======= ======== =======
Eagle Run Lakeview Total
-------------------------------------------
Financial Position:
- ------------------
Land................................... $ 1,191 $ 947 $ 5,411
Buildings.............................. 4,820 --- 15,351
Notes receivable, net................. 1,585 --- 1,585
Other assets........................... 1,033 4,279 7,616
Notes payable.......................... $(5,808) (3,859) $(23,735)
Other liabilities...................... (35) (812) (3,478)
------- -------- --------
Net assets................................. $ 1,201 $ 555 $ 2,750
======= ======== ========
Partner's equity:
- ----------------
G&L Realty Partnership, L.P............ $ 607 $ 322 $ 1,886
Others................................. 594 233 864
------- -------- --------
Total equity............................... $ 1,201 $ 555 $ 2,750
======= ======== ========
Operations:
- ----------
Revenues............................... 313 --- $ 2,511
Expenses............................... (409) --- $ (2,983)
------- -------- --------
Net income (loss).......................... $ (96) $ --- $ (472)
======= ======== ========
Allocation of net (loss) income:
- -------------------------------
G&L Realty Partnership, L.P............ $ (48) $ --- $ (175)
Others................................. (48) --- (297)
------- -------- --------
Net income (loss).......................... $ (96) --- $ (472)
======= ======== ========
Page 15
G&L REALTY CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
7. SEGMENT INFORMATION
The Company's business currently consists of the following segments:
. Medical office buildings - These investments consist of 24 high
quality MOBs, two retail facilities and one parking facility totaling
approximately 874,000 square feet and all located in Southern
California. These properties are owned either directly by the Company
or indirectly through joint ventures.
. Skilled nursing facilities - These investments consist of seven SNFs,
one senior apartment complex which is located adjacent to the SNF in
Phoenix, Arizona and one hospital located in Tustin, California. The
SNFs are located in Hampden, Massachusetts; Phoenix, Arizona; Hoquiam,
Washington and Chico and Paso Robles, California. Two of the SNFs were
acquired through foreclosure in the first quarter of 2000 and are
currently not operating. The five operating SNFs contain over 600 beds
that are typically occupied by residents who require a high level of
daily nursing care. The hospital consists of 183 beds and is 100%
leased to a third-party operator. All of the SNFs, the apartment
complex and the hospital are owned 100% by the Company. In addition,
the Company currently holds the operating license in four of the seven
SNFs. On March 15, 2000, the Company obtained licenses from the
Commonwealth of Massachusetts to operate the three SNFs owned by the
Company in Hampden, Massachusetts. The Company then entered into a
management agreement with a third-party company to manage the
facility. As a result, all of the assets, liabilities, revenues and
expenses of these SNFs are reflected in the condensed consolidated
financial statements of the Company and the segment information
provided below. The Company also holds the license to operate its SNF
located in Phoenix, Arizona. On April 1, 2000, the Company terminated
its lease with the operator of this SNF and entered into a management
agreement with a new manager. For the nine months ended December 31,
2000, the assets, liabilities, revenues and expenses of this SNF were
also included in the condensed consolidated financial statements of
the Company. On January 1, 2001, the Company entered into a new lease
with a new manager which entitles the Company to monthly lease
payments. As a result of this new lease, the assets, liabilities,
revenues and expenses of this SNF are no longer included in the
condensed consolidated financial statements of the Company. The
Company will be required to pay the applicable corporate income tax on
any net income produced by these SNFs located in Hampden,
Massachusetts, although the Company's REIT status will not be
affected. While the Company does not intend to hold these operating
licenses for the long term, the Company believes it is currently in
the best interests to own the licenses to operate these facilities.
. Assisted living facilities - These investments consist of four ALFs,
all owned through joint ventures. The four ALFs contain over 350 units
that are typically occupied by residents who require a less intense
level of care in comparison to the SNFs. The Company's joint venture
partner in each of these ALFs operates the facility.
. Debt obligations - These investments consist of short-term secured and
unsecured loans made to third parties to facilitate the acquisition of
healthcare facilities. As of June 30, 2001, the Company had eleven
loans outstanding with a net book value of $11.6 million.
The tables on the following pages reconcile the Company's income and
expense activity for the six months ended June 30, 2001 and 2000 and balance
sheet data as of June 30, 2001.
Page 16
G&L REALTY CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
2001 Reconciliation of Reportable Segment Information
For the six months ended June 30, 2001
Medical Skilled Assisted Debt
Office Nursing Living Obligations Other Total
------- ------- -------- ----------- ----- -----
(In thousands)
Revenue:
Rents, tenant reimbursements and parking..... $12,672 $ 844 $1,378 $ --- $ --- $14,894
Patient revenues............................. --- 10,361 --- --- --- 10,361
Interest and loan fees....................... 84 6 1 819 89 999
Lease termination income..................... 2,613 --- --- --- --- 2,613
Other income................................. 134 423 --- --- 29 586
------- ------- ------ ----------- -------- -------
Total revenues............................. 15,503 11,634 1,379 819 118 29,453
------- ------- ------ ----------- -------- -------
Expenses:
Property operations.......................... 3,926 422 88 84 --- 4,520
Skilled nursing operations................... --- 9,283 --- --- --- 9,283
Depreciation and amortization................ 2,170 516 256 --- 26 2,968
Interest..................................... 4,516 884 755 378 7 6,540
General and administrative................... --- --- --- --- 1,708 1,708
------- ------- ------ ----------- -------- -------
Total expenses............................. 10,612 11,105 1,099 462 1,741 25,019
------- ------- ------ ----------- -------- -------
Income (loss) from operations................. 4,891 529 280 357 (1,623) 4,434
Equity in earnings (loss) of unconsolidated
affiliates................................... 123 --- (298) --- --- (175)
------- ------- ------ ----------- -------- -------
Income (loss) from operations before
minority interests........................... $ 5,014 $ 529 $ (18) $ 357 $ (1,623) $ 4,259
======== ======= ====== =========== ======== =======
2000 Reconciliation of Reportable Segment Information
For the six months ended June 30, 2000
Medical Skilled Assisted Debt
Office Nursing Living Obligations Other Total
------- ------- -------- ----------- ----- -----
(In thousands)
Revenue:
Rents, tenant reimbursements and parking...... $12,148 $ 991 $1,282 $ --- $ --- $14,421
Patient revenues.............................. --- 6,316 --- --- --- 6,316
Interest and loan fees........................ 120 7 --- 1,167 88 1,382
Net gain on sale of assets.................... 1,405 (142) --- --- --- 1,263
Other income.................................. 164 36 --- --- 32 232
------- ------ ------ --------- -------- -------
Total revenues.............................. 13,837 7,208 1,282 1,167 120 23,614
------- ------ ------ --------- -------- -------
Expenses:
Property operations........................... 3,484 269 79 66 --- 3,898
Skilled nursing operations.................... --- 5,792 --- --- --- 5,792
Depreciation and amortization................. 2,334 458 237 --- 37 3,066
Provision for doubtful accounts and notes
receivable................................ --- 563 --- 1,725 --- 2,288
Interest...................................... 4,554 1,016 752 426 96 6,844
General and administrative.................... --- --- --- --- 1,468 1,468
------- ------ ------ --------- -------- -------
Total expenses.............................. 10,372 8,098 1,068 2,217 1,601 23,356
------- ------ ------ --------- -------- -------
Income (loss) from operations.................. 3,465 (890) 214 (1,050) (1,481) 258
Equity in earnings (loss) of unconsolidated
affiliates.................................... 22 (8) (359) (3) --- (348)
------- ------ ------ --------- -------- -------
Income (loss) from operations before
minority interests............................. $ 3,487 $ (898) $ (145) $ (1,053) $ (1,481) $ (90)
======= ====== ====== ========= ======== =======
Page 17
G&L REALTY CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
2001 Reconciliation of Reportable Segment Information
As of June 30, 2001
Medical Skilled Assisted Debt
Office Nursing Living Obligations Other Total
------ ------- -------- ----------- ----- -----
(In thousands)
Rental properties............................ $114,115 $30,808 $21,577 $ --- $ 220 $166,720
Mortgage loans and notes receivable, net..... --- 290 --- 11,354 --- 11,644
Other assets................................. 11,140 6,227 3,940 2,161 1,547 25,015
-------- ------- ------- --------- ------ --------
Total assets............................. $125,255 $37,325 $25,517 $ 13,515 $1,767 $203,379
======== ======= ======= ========= ====== ========
Other assets:
Cash and cash equivalents................... $ 506 $ 57 $ 306 $ --- $ 472 $ 1,341
Restricted cash............................. 3,279 725 47 915 --- 4,966
Tenant rent and reimbursement
receivable, net........................... 574 4,382 882 --- 22 5,860
Unbilled rent receivable, net............... 2,436 57 --- --- --- 2,493
Other receivables, net...................... 25 --- --- 35 --- 60
Investment in unconsolidated affiliates..... 1,324 --- 2,279 835 --- 4,438
Deferred financing costs, net............... 1,944 513 383 252 --- 3,092
Pre-acquisition costs....................... --- 49 --- 124 75 248
Deferred lease costs, net................... 877 8 --- --- --- 885
Prepaid expense and other................... 175 436 43 --- 978 1,632
-------- ------- ------- --------- ------ --------
Total other assets........................ $ 11,140 $ 6,227 $ 3,940 $ 2,161 $1,547 $ 25,015
======== ======= ======= ========= ====== ========
8. COMMITMENTS AND CONTINGENCIES
The Company is the guarantor on a $500,000 letter of credit in favor of
NVHF Affiliates, LLC, a non-profit low-income apartment owner. The Company holds
an unsecured promissory note from NVHF Affiliates, LLC in the same amount. The
Company at this time does not anticipate having to pay anything under this
letter of credit.
Neither the Company, the Operating Partnership, the Financing Entities, the
Subsidiaries, Maryland Gardens, the Roxbury Partnership, Valencia, Pacific
Gardens, Hoquiam, Lyons, Coronado, Tarzana, Heritage, Massachusetts, Aspen, the
Unconsolidated Affiliates nor any of the assets within their portfolios of MOBs,
parking facilities, and retail space (the "Properties") is currently a party to
any material litigation, except as discussed below.
On August 15, 1997, a subsidiary of the Company, GL/PHP, LLC ("GL/PHP")
borrowed $16 Million from Nomura Asset Capital Corp. ("Nomura"), the proceeds of
which were used to repay a loan made by PHP Healthcare Corporation ("PHP") in
connection with the purchase by GL/PHP of six New Jersey primary care centers
(the "New Jersey Properties"). Nomura received a first lien against the real
properties. The New Jersey Properties were leased by Pinnacle Health
Enterprises, LLC ("Pinnacle"), a subsidiary of PHP, and PHP guaranteed the
lease. Concurrently with the $16 million loan, the Operating Partnership
obtained a new $2 million loan from PHP evidenced by a $2 million promissory
note payable to PHP. The note by its terms was nonnegotiable and provides for a
right of offset against payments of interest and principal in an amount equal to
any losses sustained by reason of any defaults by Pinnacle under its lease with
GL/PHP, discussed below.
As of August 15, 1997, Pinnacle leased the New Jersey Properties from
GL/PHP under the terms of a 17-year net operating lease. PHP guaranteed the
obligations of its subsidiary under the lease. In November 1998, Pinnacle filed
a Chapter 11 bankruptcy petition in the United States Bankruptcy Court of the
District of Delaware and its case was voluntarily converted to a Chapter 7 case.
Also in November 1998, PHP filed a Chapter 11 bankruptcy petition in the United
States Bankruptcy Court of the District of Delaware. CapMark Services, L.P.
("CapMark"), the loan servicer and successor to Amresco Management Inc., has
foreclosed on its security and taken title to the New Jersey Properties.
Page 18
G&L REALTY CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
The Operating Partnership filed a declaratory relief action in the New
Jersey State Court seeking a determination that LaSalle National Bank
("LaSalle"), the successor to Nomura, as trustee for the holders of certain
obligations including the Nomura loan, did not have any rights against said $2
million note. LaSalle claims it is entitled to the $2 million borrowed from PHP
under the deed of trust and assignment of rent with GL/PHP. After proceedings in
both California and New Jersey, it was determined that this matter will be heard
in the Federal District Court in New Jersey. The Operating Partnership believes
that the lawsuit will be resolved with no adverse impact to the Company, however
no assurances can be given at this time that this result will be obtained.
In November 1999, Landmark Healthcare Facilities, LLC ("Landmark") filed a
lawsuit against Valencia, a subsidiary of the Company, claiming that Landmark is
entitled to approximately $600,000 plus interest under a development agreement
entered into between Valencia and Landmark for the development of an MOB in
Valencia, California. The Company is vigorously opposing the lawsuit and has
filed a counter suit to recover approximately $400,000 plus interest that was
already paid under the development agreement and for a judgment and declaration
that all of Landmark's rights, title and interest in Valencia have been
terminated or assigned to the Company. The litigation went to trial on March 12,
2001. On March 21, 2001, the court issued a tentative ruling on the matter in
favor of the Company. Final judgement by the court is pending.
A number of stockholder class actions have been filed against the Company
and its directors arising out of the proposal by Daniel M. Gottlieb, the Chief
Executive Officer of the Company, and Steven D. Lebowitz, the President of the
Company, to acquire all of the outstanding shares of the Company's common stock
not currently owned by them. The first suit, Lukoff v. G & L Realty Corp. et
al., case number BC 241251, was filed in the Superior Court for the State of
California, County of Los Angeles, on December 4, 2000. A second suit, Abrons v.
G & L Realty Corp. et al., case number 24-C-00-006109, was filed in the Circuit
Court for Baltimore City, Maryland, on December 14, 2000. This suit was
voluntarily dismissed without prejudice on June 7, 2001, although Abrons re-
filed in the Superior Court for the State of California, County of Los Angeles,
case number BC 251479, on May 31, 2001. Morse v. G & L Realty Corp. et al., case
number 221719-V, was filed in the Circuit Court for Montgomery County, Maryland,
on May 17, 2001. Another suit, Harbor Finance Partners v. Daniel M. Gottlieb et
al., case number BC 251593, was filed in the Superior Court for the State of
California, County of Los Angeles, on June 1, 2001. All these actions assert
claims for breach of fiduciary duty and seek, among other things, compensatory
damages and/or to enjoin the transaction. Defendants deny the claims, although
it is premature to predict the outcome of these actions.
In January 2001, the Company settled a lawsuit with Cigna Healthcare, Inc
and Cigna Healthcare of California ("Cigna") and received a settlement of $4.1
million. The settlement ended litigation against Cigna for delinquent rent,
future rent and other amounts owed under a lease at the Company's MOB located in
Irwindale, California. At the time of the settlement the total delinquent rent
was approximately $1.5 million. The Company recorded lease termination income of
$2.6 million in the first quarter for the remainder of the proceeds.
9. ACQUISITIONS, DISPOSITIONS AND FINANCINGS
In February 2001, the Company used the proceeds from a new $5.1 million
loan secured by two of its properties located in Tustin, California to repay
$5.0 million of the outstanding loan balance on an existing $7.5 million short-
term loan secured by three of its properties located in Tustin, California. The
new loan bears interest at prime plus 1.00% and is due on February 21, 2002.
The Company is under contract to purchase, with a local partner, an
approximately $6.0 million SNF located in Western Massachusetts. The purchase is
conditioned upon obtaining long-term financing.
Page 19
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the Company's
Unaudited Condensed Consolidated Financial Statements and Notes thereto included
elsewhere in this Quarterly Report on Form 10-Q and the Company's 2000 Annual
Report on Form 10-K as previously filed with the SEC.
Information contained in "Management's Discussion and Analysis of Financial
Condition and Results of Operations" contains forward-looking statements. These
statements can be identified by the use of forward-looking terminology such as
"may," "will," "expect," "anticipate," "estimate" or "continue" or the negative
thereof or other comparable terminology. Any one factor or combination of
factors could cause the Company's actual operating performance or financial
results to differ substantially from those anticipated by management. Factors
influencing the Company's operating performance and financial results include,
but are not limited to, changes in the general economy, the supply of, and
demand for, healthcare related real estate in markets in which the Company has
investments, the availability of financing, governmental regulations concerning,
but not limited to, new construction and development, the creditworthiness of
tenants and borrowers, environmental issues, healthcare services and government
participation in the financing thereof, and other risks and unforeseen
circumstances affecting the Company's investments which may be discussed
elsewhere in this Quarterly Report on Form 10-Q and the Company's 2000 Annual
Report on Form 10-K as previously filed with the SEC.
Results of Operations
- ---------------------
Comparison of the Six Month Period Ended June 30, 2001 versus the Six Month
Period Ended June 30, 2000.
Total revenues increased by $5.8 million, or 25%, from $23.6 million in the
first half of 2000, to $29.4 million for the same period in 2001. Patient
revenues relating to the skilled nursing facilities in which the Company
currently owns the license to operate accounted for $4.0 million of this
increase. On March 15, 2000, the Company obtained licenses from the Commonwealth
of Massachusetts to operate the three SNFs comprising 383 beds owned by the
Company and located in Hampden, Massachusetts. As a result of the license
transfer, all of the assets, liabilities, revenues and expenses of these SNFs
beginning March 15, 2000 are reflected in the condensed consolidated financial
statements of the Company. On April 1, 2000, the Company obtained the license to
operate its SNF located in Phoenix, Arizona. For the nine months ended December
31, 2000, the assets, liabilities, revenues and expenses of this SNF were also
included in the condensed consolidated financial statements of the Company. On
January 1, 2001, the Company entered into a new lease with a new manager which
entitles the Company to monthly lease payments. As a result of this new lease,
the assets, liabilities, revenues and expenses of this SNF are no longer
included in the condensed consolidated financial statements of the Company.
Rents, tenant reimbursements and parking revenues increased by $0.5
million, or 3%, from $14.4 million in the first two quarters of 2000, to $14.9
million for the same period in 2001. During the year 2000 and the first half of
2001, the Company increased the occupancy at its MOB properties by approximately
3.4% and increased its rental rates per the terms of its lease agreements
resulting in an increase in rental revenues of approximately $1.1 million. In
addition, new lease agreements at two of the Company's SNFs accounted for an
increase of $0.4 million in rental revenue. These increases were offset by the
loss of $0.5 million in rental revenue as a result of the termination of the
lease at the Company's MOB located in Irwindale, California and an additional
$0.5 million related to the loss of rental revenue from the SNFs discussed above
in which the Company now owns the license to operate. Previously, the Company
collected monthly rent for these facilities in the form of lease payments from
the prior operator.
Interest and loan fee income decreased approximately $0.4 million, or 29%,
from $1.4 million in the first two quarters of 2000, to $1.0 million for the
same period in 2001. $0.2 million of this decrease was due to a decrease in
interest income related to the financing by the Company in 1999 of an apartment
complex located in Tulsa, Oklahoma. The remaining $0.2 million decrease is the
result of the November 2000 repayment of a $3.1 million mortgage held by the
Company on a SNF in El Centro, California.
Page 20
The Company recognized a net gain on the sale of assets in the amount of
$1.3 million in the first two quarters of 2000. The sale, in January 2000, of a
33,000 square foot MOB located in Aliso Viejo, California to Hoag Memorial
Hospital accounted for $1.4 million of the gain. This gain was offset by the
loss of $142,000 on the sale of the Company's 50% interest in Valley
Convalescent, LLC, an unconsolidated affiliate.
The Company recognized lease termination income in the amount of $2.6
million in the first half of 2001. This was related to the settlement of a
lawsuit for delinquent rent, future rent and other amounts owed under a lease at
the Company's MOB located in Irwindale, California. The Company sued the tenant,
which had been in default on their rent since December 1999, to recover the
delinquent rent payments as well as all future rent through the end of the lease
which was to expire on November 30, 2004. In January 2001, the Company received
a settlement in the amount of $4.1 million. At the time of the settlement the
total delinquent rent was approximately $1.5 million. The Company recorded lease
termination income of $2.6 million for the remainder of the proceeds.
Total expenses increased by $1.6 million, or 7%, from $23.4 million for the
six months ended June 30, 2000, to $25.0 million for the same period in 2001.
The consolidation of the operating revenues and expenses of the three Hampden
SNFs as of March 15, 2000 as discussed above accounted for $3.5 million of this
increase in total expenses. This increase was offset by a $2.3 million decrease
in provisions for doubtful accounts, notes and bonds receivable.
Property operating expenses increased by $0.6 million, or 15%, from $3.9
million in the first half of 2000 to $4.5 million in the same period in 2001.
This increase is mainly due to additional utility, property tax and repairs and
maintenance costs at the Company's MOBs.
Depreciation and amortization expense decreased $0.1 million, or 3%, from
$3.1 million for the six months ended June 30, 2000, to $3.0 million for the
same period in 2001. This decrease was related to the foreclosure of the
Company's six MOBs located in New Jersey during 2000.
Interest expense decreased $0.3 million, or 4%, from $6.8 million for the
six months ended June 30, 2000, to $6.5 million for the same period in 2001.
This decrease was due to the August 2000 repayment of the Company's outstanding
line of credit balance of $1.6 million as well as decreased interest payments on
the Company's approximately $33 million of variable rate mortgage debt due to
lower interest rates.
General and administrative costs increased $0.2 million, or 13%, from $1.5
million for the six months ended June 30, 2000, to $1.7 million for the same
period in 2001. This increase was attributed to the write-off of acquisition and
construction costs associated with a discontinued development project and legal
fees related to the Company's defense in its lawsuit with Landmark.
Equity in loss of unconsolidated affiliates increased $0.2 million for the
six months ended June 30, 2001 compared to the same period in 2000. This
increase was primarily the result of increased occupancy rates at the facilities
associated with the Company's 50% investment in Penasquitos LLC and the
Company's 50% investment in Eagle Run Inc. In March 1999, The Arbors at Rancho
Penasquitos, an ALF owned by the Company through Penasquitos LLC, commenced
operations. The facility has been in a lease-up phase since opening in March
1999 and therefore had been producing a net loss. Eagle Run commenced operations
in November 1999 and also produced a net loss for the first two quarters of
2001. Occupancy rates at both facilities are increasing on a monthly basis and
are expected to stabilize during 2001, at which time both facilities are
expected to produce income for the Company.
During 2000, the Company recorded an extraordinary loss on the early
retirement of long-term debt in the amount of $0.2 million. This loss was a
result of pre-payment fees and the write-off of deferred loan fees relating to
the repayment of a $5.5 million loan secured by a 33,000 square foot MOB in
Aliso Viejo, California. The building was sold to Hoag Memorial Hospital
Presbyterian on January 25, 2000 for a price of $8.3 million. The Company used a
portion of the proceeds to repay the $5.5 million loan.
Net income increased $3.8 million, from $0.3 million for the six months
ended June 30, 2000 to $4.1 million for the same period in 2001. This increase
was primarily due to the $4.0 million increase in patient revenues, the $2.6
million increase in lease termination income and the $2.3 million decrease in
provisions for doubtful accounts and notes receivable. These were offset by the
$3.5 million increase in skilled nursing
Page 21
operation expenses, the $1.3 million decrease in net gains on sale of assets and
the $0.6 million increase in property operation expenses.
Comparison of the Three Month Period Ended June 30, 2001 versus the Three
Month Period Ended June 30, 2000.
Total revenues increased by $0.1 million, or 1%, from $13.4 million in the
three months ended June 30, 2000, to $13.5 million for the same period in 2001.
Rents, tenant reimbursements and parking revenues increased by $0.6
million, or 9%, from $7.0 million in the three months ended June 30, 2000, to
$7.6 million for the same period in 2001. During the second half of 2000 and the
first half of 2001, the Company increased the occupancy at its MOB properties by
approximately 3.4% and increased its rental rates per the terms of its lease
agreements resulting in an increase in rental revenues of $0.4 million. In
addition, new lease agreements at two of the Company's SNFs accounted for an
increase of $0.2 million in rental revenue.
Pateint revenues decreased by $0.1 million, or 2%, from $5.4 million in the
three months ended June 30, 2000, to $5.3 million for the same period in 2001.
$0.7 million of this decrease was due to a new lease agreement at the Company's
SNF located in Phoenix, Arizona which entitles the Company to monthly lease
payments. As a result of this new lease, the assets, liabilities, revenues and
expenses of this SNF are no longer included in the condensed consolidated
financial statements of the Company. This decrease was offset by a $0.6 million
increase in patient revenues at the three SNFs owned by the Company in Hampden,
Massachusetts.
Interest and loan fee income decreased approximately $0.4 million, or 44%,
from $0.9 million in the three months ended June 30, 2000 to $0.5 million for
the same period in 2001. $0.2 million of this decrease was due to a decrease in
interest income related to the financing by the Company in 1999 of an apartment
complex located in Tulsa, Oklahoma. The remaining $0.2 million decrease is the
result of the November 2000 repayment of a $3.1 million mortgage held by the
Company on a SNF in El Centro, California.
Total expenses decreased by $0.1 million, or 1%, from $12.8 million for the
three months ended June 30, 2000, to $12.7 million for the same period in 2001.
Property operating expenses increased by $0.3 million, or 15%, from $2.0
million for the three months ended June 30, 2000, to $ $2.3 million for the same
period in 2001. This increase is mainly due to additional utility, property tax
and repairs and maintenance costs at the Company's MOBs.
Skilled nursing operating expenses decreased by $0.2 million, or 4%, from
$4.9 million in the three months ended June 30, 2000, to $4.7 million for the
same period in 2001. $0.7 million of this decrease was due to a new lease
agreement at the Company's SNF located in Phoenix, Arizona which entitles the
Company to monthly lease payments. As a result of this new lease, the assets,
liabilities, revenues and expenses of this SNF are no longer included in the
condensed consolidated financial statements of the Company. This decrease was
offset by a $0.5 million increase in skilled nursing operating expenses at the
three SNFs owned by the Company in Hampden, Massachusetts.
Depreciation and amortization expense decreased by $0.1 million, or 7%,
from $1.5 million for the three months ended June 30, 2000, to $1.4 million for
the same period in 2001. This decrease was related to the foreclosure of the
Company's six MOBs located in New Jersey during 2000.
Interest expense decreased $0.2 million, or 6%, from $3.4 million for the
three months ended June 30, 2000, to $3.2 million for the same period in 2001.
This decrease was due to the August 2000 repayment of the Company's outstanding
line of credit balance of $1.6 million as well as decreased interest payments on
the Company's approximately $33 million of variable rate mortgage debt due to
lower interest rates.
General & administrative costs increased $0.1 million, or 13%, from $0.8
million for the three months ended June 30, 2000, to $0.9 million for the same
period in 2001. This increase was attributed to legal fees related to the
Company's defense in its lawsuit with Landmark.
Page 22
Equity in loss of unconsolidated affiliates increased $0.1 million for the
three months ended June 30, 2001 compared to the same period in 2000. This
increase was primarily the result of increased occupancy rates at the facilities
associated with the Company's 50% investment in Penasquitos LLC and the
Company's 50% investment in Eagle Run Inc. In March 1999, The Arbors at Rancho
Penasquitos, an ALF owned by the Company through Penasquitos LLC, commenced
operations. The facility has been in a lease-up phase since opening in March
1999 and therefore had been producing a net loss. Eagle Run commenced operations
in November 1999 and also produced a net loss for the first two quarters of
2001. Occupancy rates at both facilities are increasing on a monthly basis and
are expected to stabilize during 2001, at which time both facilities are
expected to produce income for the Company.
Net income increased $0.2 million, or 40% from $0.5 million for the three
months ended June 30, 2000 to $0.7 million for the same period in 2001. This
increase was primarily due to the $0.6 million increase in rental revenues, the
$0.2 million decrease in skilled nursing operation expenses and the $0.1 million
increase in equity in the loss of unconsolidated affiliates. These were offset
by the $0.4 million decrease in interest and loan fee income, the $0.3 million
increase in property operations and the $0.1 million increase in general &
administrative costs.
Liquidity and Capital Resources
- -------------------------------
As of June 30, 2001, the Company's direct investment in net real estate
assets totaled approximately $166.7 million, $4.4 million in joint ventures and
$11.6 million invested in mortgage loans and notes receivable. Debt outstanding
as of June 30, 2001 totaled $157.6 million.
The Company obtains its liquidity from multiple internal and external
sources. Internally, funds are derived from the operation of MOBs, SNFs, ALFs
and senior care lending activities. These funds primarily consist of Funds from
Operations ("FFO" - see discussion below of FFO). The Company's principal
external sources of capital consist of various secured loans. The Company's
ability to expand its MOB, ALF and SNF property operations requires continued
access to capital to fund new investments. During the first six months of 2001,
the Company received proceeds of $4.1 million related to the settlement of a
lawsuit for delinquent rent, future and other amounts owed under a lease at the
Company's MOB located in Irwindale, California. Total delinquent rent at the
time of the settlement was approximately $1.5 million. The Company recorded
lease termination income of $2.6 million in the first quarter of 2001 for the
remainder of the proceeds. On February 21, 2001, the Company used the proceeds
from a new $5.1 million loan secured by two of its properties located in Tustin,
California to repay $5.0 million of outstanding loan balance of an existing $7.5
million short-term loan secured by three of its properties located in Tustin,
California. Both Daniel M. Gottlieb and Steven D. Lebowitz, the Chief Executive
Officer and the President, respectively, of the Company, have personally
guaranteed this loan. The new loan bears interest at prime plus 1.00% and is due
on February 21, 2002. On June 29, 2001, Pacific Health Corporation, the tenant
at the Company's 101,000 square foot hospital located in Tustin, California,
exercised its option to purchase the building for $4.9 million. The Company
received a deposit in the amount of $0.2 million with the remaining proceeds to
be received in January 2002.
The Company declared a quarterly distribution payable to holders of the
Company's Common Stock for the first and second quarters of 2001 in the amount
of $0.125 per common share. These distributions were paid on April 15 and July
15 to stockholders of record on March 31, June 30, respectively. The Company
also paid monthly dividends of $0.6 million to holders of the Company's
Preferred Stock on the fifteenth day of each month during the first and second
quarters to holders of record on the first day of each month. The Company
distributed dividends of $0.7 million to holders of the Company's Common Stock
during the first six months of 2001 while the Company's FFO was $0.7 million for
the same period.
In general, the Company expects to continue meeting its short-term
liquidity requirements through its working capital and cash flow provided by
operations. The Company considers its ability to generate cash to be good and
expects to continue meeting all operating requirements as well as providing
sufficient funds to maintain stockholder distributions in accordance with REIT
requirements. Long-term liquidity requirements such as refinancing mortgages,
financing acquisitions and financing capital improvements will be accomplished
through long-term borrowings and the sale of assets.
Page 23
Historical Cash Flows
- ---------------------
The Company's net cash provided by operating activities increased 2.6
million, or 65%, from 4.0 million for the six months ended June 30, 2001 to $6.6
million for the same period in 2001. The increase is due primarily to a $3.8
million increase in net income, a $3.9 million decrease in tenant rent and
reimbursements receivable, a $1.3 million decrease in net gain on sale of assets
and a $0.6 million increase in minority interests. These were offset by a $3.6
million decrease in accounts payable and other liabilities, a $2.3 million
decrease in provisions for doubtful accounts and notes receivables, a $0.5
million increase in prepaid expenses and other assets and a $0.4 million
increase in accrued interest receivable.
Net cash used in investing activities decreased $0.6 million, or 32%, from
$1.9 million for the six months ended June 30, 2000 to $1.3 million for the same
period in 2001. The decrease was primarily due to a $10.4 million decrease in
purchases of real estate assets and a $0.9 million decrease in additions to
rental properties. These were offset by an $8.8 million decrease in the sale of
real estate assets, a $0.9 million decrease in distributions from unconsolidated
affiliates, a $0.5 million increase in pre-acquisition costs and a $0.3 million
increase in leasing commissions.
Cash flows used in financing activities decreased by approximately $1.7
million from $8.5 million for the six months ended June 30, 2000, to $6.8
million for the same period in 2001. The decrease is mainly due to a $3.3
million decrease in the repayment of notes payable as well as a $3.0 million
decrease in repurchases of the Company's common stock. These were offset by a
$2.4 million decrease in notes payable proceeds, a $1.8 million increase in
restricted cash and a $0.5 million decrease in minority interest contributions.
New Accounting Pronouncements
- -----------------------------
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133 "Accounting for Derivative Instruments
and Hedging Activities," ("SFAS 133"). SFAS 133, as amended, is effective for
fiscal years beginning after June 15, 2000 and requires all derivatives to be
recorded on the balance sheet at fair value as either assets or liabilities
depending on the rights or obligations under the contracts. SFAS 133 also
establishes new accounting methodologies for the following three classifications
of hedges: fair value, cash flow and net investment in foreign operations. The
Company's adoption of SFAS 133 on January 1, 2001 did not have a material impact
on the Company's financial position or results of operations.
In July 2001, the Financial Accounting Standards Board issued SFAS No. 141,
"Business Combinations" and SFAS No. 142, "Goodwill and Other Intangible
Assets." SFAS No. 141 is effective immediately and SFAS No. 142 will be
effective in January 2002. The Company's adoption of these new standards is not
expected to have a material impact on the Company's financial position or
results of operations.
Recent Developments
- -------------------
California has recently experienced energy shortages which have resulted in
"rolling black-outs" in certain instances in portions of the state. All of the
Company's MOBs and certain of the Company's SNFs and ALFs have back-up
generators in the event of electrical outages. The energy shortages have also
resulted in higher electricity rates. Depending on the terms of the lease
between the Company and its MOB tenant, in some cases, the Company is able to
pass all of the higher energy costs onto its MOB tenants; in other cases, the
Company is able to pass only a portion of the higher costs onto its MOB tenants,
with the Company paying the remainder. Generally, the operators of the Company's
SNFs and ALFs pay the electricity costs. The higher energy costs could affect
the ability of the MOB tenants and SNF and ALF operators to pay the Company
rent. However, the Company does not anticipate that the energy shortages and
higher energy costs will have a material adverse effect on the Company's
financial condition and results of operations.
Page 24
Funds from Operations
- ---------------------
Industry analysts generally consider FFO to be an appropriate measure of
the performance of a REIT. The Company's financial statements use the concept of
FFO as defined by the Board of Governors of the National Association of Real
Estate Investment Trusts ("NAREIT"). FFO is calculated to include the minority
interests' share of income from the Operating Partnership since the Operating
Partnership's net income is allocated proportionately among all owners of
Operating Partnership units. The number of Operating Partnership units held by
the Company is identical to the number of outstanding shares of the Company's
Common Stock, and owners of Operating Partnership units may, at their
discretion, convert their units into shares of Common Stock on a one-for-one
basis.
The Company believes that in order to facilitate a clear understanding of
the operating results of the Company, FFO should be examined in conjunction with
the Company's net income as presented in this Form 10-Q, the Selected Financial
Data and Consolidated Financial Statements and Notes thereto included in the
Company's 2000 Annual Report on Form 10-K and the additional data presented
below. The table on the following page presents an analysis of FFO and
additional data for the three and six-month periods ended June 30, 2001 and
2000.
Page 25
G&L REALTY CORP.
FUNDS FROM OPERATIONS AND ADDITIONAL DATA
(Unaudited)
For the Three Month For the Six Month
Periods Ended June 30, Periods Ended June 30,
2001 2000 2001 2000
---------------------------------------------------
(in thousands) (in thousands)
Funds from Operations/(1)/
- ---------------------------
Net income............................................ $ 693 $ 512 $ 4,126 $ 262
Minority interest in Operating Partnership............ --- (83) --- (616)
------- ------- ------- --------
Income (loss) for Operating Partnership............... 693 429 4,126 (354)
Depreciation of real estate assets.................... 1,292 1,352 2,564 2,694
Amortization of deferred lease costs.................. 65 73 132 152
Lease termination income.............................. --- --- (2,613) ---
Net gain on sale of assets............................ --- --- --- (1,263)
Depreciation from unconsolidated affiliates........... 73 107 143 256
Extraordinary loss on early retirement of debt........ --- --- --- 158
Adjustment for minority interest in consolidated
affiliates......................................... (40) (14) (80) (67)
Dividends on preferred stock.......................... (1,791) (1,790) (3,581) (3,583)
--------------------------------------------
Funds from Operations/(1)/............................ $ 292 $ 157 $ 691 $ (2,007)
============================================
Weighted average shares outstanding/(2)/
- ----------------------------------------
Basic 2,959 2,962 2,959 3,049
============================================
Fully diluted 3,006 2,962 2,990 3,050
============================================
Additional Data
- ---------------
Cash flows:
- -----------
Operating activities............................... $ 715 $ 1,921 $ 6,613 $ 4,007
Investing activities............................... (439) (847) (1,270) (1,910)
Financing activities............................... (2,953) (2,632) (6,793) (8,512)
Capital expenditures
- --------------------
Building improvements.............................. $ 109 $ 458 $ 324 $ 720
Tenant improvements................................ 388 489 966 1,102
Furniture, fixtures & equipment.................... 35 67 102 93
Leasing commissions................................ 165 30 343 69
Depreciation and amortization
- -----------------------------
Depreciation of real estate assets................. $ 1,292 $ 1,352 $ 2,564 $ 2,694
Depreciation of non-real estate assets............. 125 108 246 220
Amortization of deferred lease costs............... 65 73 132 152
Amortization of deferred licensing costs........... 13 --- 26 ---
Amortization of capitalized financing costs........ 178 153 348 289
Accrued rent in excess of billed rent $ 5 $ 21 $ 81 $ 92
1) Funds from operations ("FFO") represents net income (computed in accordance
with generally accepted accounting principles, consistently applied
("GAAP")), excluding gains (or losses) from debt restructuring and sales of
property, plus depreciation of real property, less preferred stock
dividends paid to holders of preferred stock during the period and after
adjustments for consolidated and unconsolidated entities in which the
Company holds a partial interest. FFO should not be considered as an
alternative to net income or any other indicator developed in compliance
with GAAP, including measures of liquidity such as cash flows from
operations, investing and financing activities. FFO is helpful in
evaluating the performance of a real estate portfolio considering the fact
that historical cost accounting assumes that the value of real estate
diminishes predictably over time. FFO is only one of a range of indicators
which should be considered in determining a company's operating
performance. The methods of calculating FFO among different companies are
subject to variation, and FFO therefore may be an invalid measure for
purposes of comparing companies. Also, the elimination of depreciation and
gains and losses on sales of property may not be a true indication of an
entity's ability to recover its investment in properties. The Company
implemented the new methods of calculating FFO effective as of the NAREIT-
suggested adoption date of January 1, 1996 and January 1, 2000,
respectively.
2) Assumes that all outstanding Operating Partnership units have been
converted to common stock.
Page 26
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The primary risk inherent in the Company's market sensitive instruments is
the risk of loss resulting from interest rate fluctuations. Approximately 10%
of the Company's notes payable bear interest at a rate indexed to the one-month
LIBOR rate. The table below provides information as of June 30, 2001 about the
Company's long-term debt obligations that are sensitive to changes in interest
rates, including principal cash flows by scheduled maturity, weighted average
interest rate and estimated fair value. The weighted average interest rates
presented are the actual rates as of June 30, 2001.
Fair Market
PRINCIPAL MATURING IN: Value
-----------------------------------------------------------
June 30,
2001 2002 2003 2004 2005 Thereafter Total 2001
---- ---- ---- ---- ---- ---------- ----- ----
(in thousands)
Liabilities:
Mortgage debt:
Fixed rate $ 880 $ 2,145 $2,307 $2,475 $9,253 $ 96,086 $113,146 $114,403
Average interest rate 7.73% 7.73% 7.73% 7.73% 7.73% 7.73% 7.73%
Variable rate 8,666 22,947 88 95 103 10,852 42,751 42,751
Average interest rate 6.63% 6.63% 6.63% 6.63% 6.63% 6.63% 6.63%
Line of credit:
Variable rate 1,737 1,737 1,737
Average interest rate 8.75% 8.75%
------- ------- ------ ------ ------ -------- -------- --------
$11,283 $25,092 $2,395 $2,570 $9,356 $106,938 $157,634 $158,891
======= ======= ====== ====== ====== ======== ======== ========
The Company's future earnings and cash flows relating to market sensitive
instruments are primarily dependent upon prevailing LIBOR market interest rate.
Based upon interest rates as of June 30, 2001, a 1% increase in the LIBOR rate
would decrease future earnings by $428,000, future cash flow would not be
affected. A 1% decrease in the LIBOR rate would increase future earnings by
$428,000, future cash flow would not be affected. A 1% change in the LIBOR rate
would not have a material impact on the fair value of the Company's debt.
Page 27
PART II OTHER INFORMATION
Item 1. Legal Proceedings.
Neither the Company or any of its consolidated or unconsolidated
affiliates nor any of the assets within their portfolios of MOBs,
SNFs, ALFs, parking facilities, and retail space is currently a party
to any material litigation, except as discussed in Note 8 to the
Consolidated Financial Statements.
Item 2 Changes in Securities.
On May 10, 2001, the Board of Directors of the Company waived the
ownership limitation found in the Company's Charter for Daniel M.
Gottlieb and Steven D. Lebowitz, the Chief Executive Officer and the
President, respectively, of the Company. The waiver is effective so
long as Messrs. Gottlieb and Lebowitz do not own more than 25% in the
aggregate in value of the outstanding equity stock of the Company. In
addition, the Board decreased the ownership limitation for all other
persons, other than Messrs. Gottlieb and Lebowitz, from 9.8% (in value
or in number of shares, whichever is more restrictive) to 8.0% (in
value or in number of shares, whichever is more restrictive) of the
outstanding shares of equity stock of the Company.
Item 3 Defaults Upon Senior Securities.
None.
Item 4 Submission of Matters to a Vote of Security Holders.
None.
Item 5 Other Information.
None.
Page 28
Item 6 Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit No. Note Description
----------- ------ ----------------------------------------------------
2.1 (16) The Agreement of Plan and Merger between G&L
Acquisition, LLC and G&L Realty Corp.
3.1 (1) Amended and Restated Articles of Incorporation of
G&L Realty Corp.
3.2 (3) Amended and Restated Bylaws of G&L Realty Corp.
10.1 (c) (2) Executive Employment Agreement between G&L Realty
Corp. and Daniel M. Gottlieb.
10.2 (c) (2) Executive Employment Agreement between G&L Realty
Corp. and Steven D. Lebowitz.
10.3 (2) Agreement of Limited Partnership of G&L Realty
Partnership, L.P.
10.4 (c) (1) 1993 Employee Stock Incentive Plan
10.5 (1) Form of Indemnity Agreement between G&L Realty Corp.
and directors and certain officers.
10.8.2 (2) Option Notice with respect to Sherman Oaks Medical
Plaza.
10.9.2 (1) Agreement for Purchase and Sale of Limited
Partnership Interests (435 North Roxbury Drive,
Ltd.) between the Selling Partner (as defined
therein) and G&L Development, dated as of October
29, 1993.
10.11 (1) Agreement for Transfer of Partnership Interests and
Other Assets by and between G&L Realty Corp. and
Reese Milner, Helen Milner and Milner Development
Corp., dated as of October 29, 1993.
10.12 (1) Nomura Commitment Letter with respect to the
Acquisition Facility.
10.12.2 (3) Amended and Restated Mortgage Loan Agreement dated
as of January 11, 1995 among G&L Financing
Partnership, L.P., Nomura Asset Capital Corporation
and Bankers Trust Company of New York.
10.16 (1) Investment Banking and Financial Advisory Agreement
between G&L Development and Gruntal & Co.,
Incorporated.
10.17 (1) Security Agreement dated as of December 16, 1993 by
and between Daniel M. Gottlieb, Steven D. Lebowitz
and Milner Investment Corporation.
10.18 (2) Security Agreement dated as of December 16, 1993 by
and between Daniel M. Gottlieb, Steven D. Lebowitz
and Reese L. Milner, II.
10.19 (2) Security Agreement dated as of December 16, 1993 by
and between Daniel M. Gottlieb, Steven D. Lebowitz
and Reese L. Milner, II.
10.20 (2) Security Agreement dated as of December 16, 1993 by
and between Daniel M. Gottlieb, Steven D. Lebowitz
and Reese L. Milner, II, Helen Milner and John
Milner, as Trustees of the Milner Trust.
10.21 (2) Security Agreement dated as of December 16, 1993 by
and between Daniel M. Gottlieb, Steven D. Lebowitz
and Reese L. Milner, II.
10.22 (4) Amended and Restated Mortgage Loan Agreement by and
between G&L Realty Financing Partnership II, L.P.,
as Borrower, and Nomura Asset Capital Corporation,
as Lender, dated as of October 31, 1995.
Page 29
(c) Exhibits - (continued from previous page)
Exhibit No. Note Description
----------- ------ ----------------------------------------------------
10.24 (4) Property Management Agreement between G&L Realty
Financing Partnership II, L.P., as owner, and G&L
Realty Partnership, L.P., as agent, made August 10,
1995
10.25 (5) Commitment Letter between G&L Realty Partnership, L.
P. and Nomura Asset Capital Corporation, dated as of
September 29, 1995.
10.30 (6) Mortgage Loan Agreement dated as of May 24, 1996 by
and between G&L Medical Partnership, L.P. as Borrower
and Nomura Asset Capital Corporation as Lender.
10.38 (7) Limited Liability Company Agreement by and between G&L
Realty Partnership, L.P., a Delaware limited
partnership, and Property Acquisition Trust I, a
Delaware business trust, for the purpose of creating a
Limited Liability Company to be named GLN Capital Co.,
LLC, dated as of November 25, 1996.
10.39 (7) Limited Liability Company Agreement by and between G&L
Realty Partnership, L.P., a Delaware limited
partnership, and PHP Healthcare Corporation, a
Delaware corporation, for the purpose of creating a
Limited Liability Company to be named GL/PHP, LLC,
dated as of February 26, 1997.
10.40 (7) First Amendment To Limited Liability Company Agreement
entered into as of March 31, 1997 by and between G&L
Realty Partnership, L.P., a Delaware limited
partnership, and Property Acquisition Trust I, a
Delaware business trust, for the purpose of amending
that certain Limited Liability Company Agreement of
GLN Capital Co., LLC dated as of November 25, 1996.
10.45 (10) First Amendment to GL/PHP, LLC Limited Liability
Company Agreement by and among G&L Realty Partnership,
L.P., a Delaware limited partnership (the "Retiring
Manager"), G&L Realty Partnership, L.P., a Delaware
limited partnership ("G&L Member"), and G&L Management
Delaware Corp., a Delaware corporation ("Manager
Member"), made as of August 15, 1997.
10.46 (10) Lease Agreement between GL/PHP, a Delaware limited
liability company (the "Landlord") and Pinnacle Health
Enterprises, LLC, a Delaware limited liability company
wholly owned by PHP Healthcare Corporation, a Delaware
corporation (the "Tenant"), dated August 15, 1997
10.47 (10) Guaranty of Lease by PHP Healthcare Corporation, a
Delaware corporation (the "Guarantor"), dated February
15, 1997.
10.48 (10) Non-Negotiable 8.5% Note Due July 31, 2007 in which
G&L Realty Partnership, L.P., a Delaware limited
partnership (the "Maker"), promises to pay to PHP
Healthcare Corporation (the "Payee") the principal sum
of $2,000,000.00, dated August 15, 1997.
10.49 (10) Mortgage Note in which GL/PHP, LLC a Delaware limited
liability company (the "Maker") promises to pay to the
order of Nomura Asset Capital Corporation, a Delaware
corporation, the principal sum of $16,000,000.00,
dated August 15, 1997.
10.50 (10) Mortgage, Assignment of Leases and Rents and Security
Agreement by GL/PHP, LLC a Delaware limited liability
company (the "Mortgagor") to Nomura Asset Capital
Corporation, a Delaware corporation (the "Mortgagee"),
dated August 15, 1997.
10.51 (10) Assignment of Leases and Rents by GL/PHP, LLC a
Delaware limited liability company (the "Assignor") to
Nomura Asset Capital Corporation, a Delaware
corporation (the "Assignee"), dated August 15, 1997.
Page 30
(c) Exhibits - (continued from previous page)
Exhibit No. Note Description
----------- ------ ---------------------------------------------------
10.52 (10) Environmental and Hazardous Substance
Indemnification Agreement by GL/PHP, LLC a Delaware
limited liability company (the "Borrower") to Nomura
Asset Capital Corporation, a Delaware corporation
(the "Lender"), dated August 15, 1997.
10.58 (11) Limited Liability Company Agreement of G&L Hampden,
LLC.
10.68 (12) Promissory Note in the Amount of $2,799,490.00 given
by Valley Convalescent, LLC in favor of G&L Realty
Partnership, L.P.
10.69 (12) Deed of Trust, Security Agreement, Fixture Filing
with Assignment of Rents and Agreements, dated as of
August 29, 1997, by and between Valley Convalescent,
LLC and G&L Realty Partnership, L.P.
10.70 (12) Assignment of Leases and Rents, dated as of August
29, 1997, by and between Valley Convalescent, LLC
and G&L Realty Partnership, L.P.
10.77 (13) Agreement for Transfer of Property by and among G&L
Coronado, LLC as Transferor and G&L Realty
Partnership, L.P. as Operating Partnership dated as
of December 30, 1998.
10.78 (13) Tenant Estoppel and Real Estate Lease between G&L
Coronado, LLC as Landlord and Coronado Managers
Corp. as Tenant dated December 1, 1998.
10.79 (13) Guaranty of Lease between Steven D. Lebowitz and
Daniel M. Gottlieb (collectively "Guarantor") in
favor of G&L Coronado, LLC ("Landlord").
10.80 (14) Promissory Note in the Amount of $2,000,000 given by
G&L Realty Corporation in favor of Reese L. Milner,
as Trustee of The Milner Trust.
10.81 (15) Loan Agreement in the amount of $13.92 million
between G&L Hampden, LLC, as Borrower, and GMAC
Commercial Mortgage Corporation, as Lender.
21 Subsidiaries of the registrant.
1) Previously filed as an exhibit of like number to the Registrant's
Registration Statement on Form S-11 and amendments thereto (File No. 33-
68984) and incorporated herein by reference.
2) Previously filed as an exhibit of like number to the Company's Annual Report
on Form 10-K for the year ended December 31, 1993 and incorporated herein by
reference.
3) Previously filed as an exhibit of like number to the Company's Annual Report
on Form 10-K for the year ended December 31, 1994 and incorporated herein by
reference.
4) Previously filed as Exhibits 10.1 (with respect to Exhibit 10.22), 10.2
(with respect to Exhibit 10.23), and 10.3 (with respect to Exhibit 10.24) to
the Registrant's Quarterly Report on Form 10-Q for the Quarter ended
September 30, 1995 and incorporated herein by reference.
5) Previously filed as an exhibit of like number to the Company's Annual Report
on Form 10-K for the year ended December 31, 1995 and incorporated herein by
reference.
6) Previously filed as an exhibit of like number to the Company's Quarterly
Report on Form 10-Q for the quarter ended June 30, 1996 and incorporated
herein by reference.
7) Filed as an exhibit to the Company's Annual Report on Form 10-K for the year
ended December 31, 1996 and incorporated herein by reference.
8) Filed as an exhibit to the Company's Registration Statement on Form S-11 and
amendments thereto (File No. 333-24911) and incorporated herein by
reference.
9) Filed as an exhibit to the Company's Quarterly Report on Form 10-Q for the
quarter ended June 30, 1997 and incorporated herein by reference.
Page 31
10) Filed as an exhibit to the Company's Current Report on Form 8-K (filed as
of August 15, 1997) and incorporated herein by reference.
11) Filed as an exhibit to the Company's Current Report on Form 8-K (filed as
of October 28, 1997) and incorporated herein by reference.
12) Filed as an exhibit to the Company's Quarterly Report on Form 10-Q (filed
as of November 5, 1997) for the quarter ended September 30, 1997 and
incorporated herein by reference.
13) Filed as an exhibit to the Company's Annual Report on Form 10-K (filed as
of April 9, 1999) for the year ended December 31, 1998 and incorporated
herein by reference.
14) Filed as an exhibit to the Company's Quarterly Report on Form 10-Q (filed
as of May 17, 1999) for the quarter ended March 31, 1999 and incorporated
herein by reference.
15) Filed as an exhibit to the Company's Quarterly Report on Form 10-Q (filed
as of November 12, 1999) for the quarter ended September 30, 1999 and
incorporated herein by reference.
16) Filed as an exhibit to the Company's Quarterly Report on Form 10-Q (filed
as of May 15, 2001) for the quarter ended March 31, 2001 and incorporated
herein by reference.
c) Management contract or compensatory plan or arrangement.
(b) Reports on Form 8-K
A report on Form 8-K dated April 13, 2001 was filed with the Securities and
Exchange Commission on April 16, 2001 for the purpose of announcing the
agreement in principle for the acquisition of the Company's publicly-held
common stock by Daniel M. Gottlieb and Steven D. Lebowitz, the Chief
Executive Officer and the President, respectively, of the Company.
A report on Form 8-K dated May 10, 2001 was filed with the Securities and
Exchange Commission on May 11, 2001 for the purpose of announcing the
agreement for the acquisition of the Company's publicly-held common stock
by Daniel M. Gottlieb and Steven D. Lebowitz, the Chief Executive Officer
and the President, respectively, of the Company.
A report on Form 8-K dated May 25, 2001 was filed with the Securities and
Exchange Commission on May 25, 2001 for the purpose of announcing that Lyle
Weisman indicated to the Company that he and his associates intend to
submit a proposal to the Company within two weeks at a price and upon terms
that they believe will be substantially better than the price and terms of
Messrs. Gottlieb and Lebowitz in the Agreement.
A report on Form 8-K dated June 4, 2001 was filed with the Securities and
Exchange Commission on June 4, 2001 for the purpose of announcing that Lyle
Weisman and his associates filed an amended Schedule 13D stating that they
intend to make a proposal within seven days to the special committee of the
board of directors at a price expected to be between $14.50 and $15.50 per
share to be financed through personal funds and funds from committed
financing sources.
A report on Form 8-K dated June 5, 2001 was filed with the Securities and
Exchange Commission on June 7, 2001 for the purpose of announcing that Lyle
Weisman and certain of his associates (the "Weisman Group") delivered to
the special committee of the board of directors a proposal to acquire, at
the election of the Company, either (a) all of the issued and outstanding
common stock of the Company, but not less than a majority, at a cash price
equal to $15.00 per share of common stock, or (b) all of the assets of the
Company at an all cash purchase price equivalent the $15.00 per share of
common stock (the"Weisman Proposal").
A report on Form 8-K dated June 12, 2001 was filed with the Securities and
Exchange Commission on June 14, 2001 for the purpose of announcing that
Weisman Proposal which was originally to expire on June 12, 2001 has been
extended by the Weisman Group to June 22, 2001.
Page 32
A report on Form 8-K dated June 22, 2001 was filed with the Securities and
Exchange Commission on June 26, 2001 for the purpose of announcing that the
Weisman Group delivered to the special committee a first amendment ( the
"First Amendment") to the original Weisman Proposal. The First Amendment
amends the Weisman Proposal as follows: (a) the price per share of common
stock of the Company is increased from $15.00 per share to $15.25 per
share; (b) Section B of the Weisman Proposal referencing a purchase of the
Company's assets is deleted; and (c) the expiration date of the proposal is
extended to 5:00 p.m., Pacific Time on Friday, July 6, 2001.
A report on Form 8-K dated July 6, 2001 was filed with the Securities and
Exchange Commission on July 11, 2001 for the purpose of announcing that the
Weisman Group delivered to the special committee a second amendment to the
Weisman Proposal that: (a) increased the price per share of common stock of
the Company, if the Weisman Group acquires 100% of such common stock, to
$16.00 per share, subject to satisfactory completion of corporate and legal
due diligence, and with a statement that the price per share would not be
adjusted to less than $15.25 per share if the Weisman Group elects to
continue with the transaction; (b) offers to purchase, at the Company's
election, less than all, but not less than 50.1% of the Company's common
stock on a fully diluted basis, at a price of $15.25 per share, without a
contingency for due diligence; (c) conditions the amended proposal on the
negotiation and execution of a definitive and customary acquisition
agreement and the termination of the agreement and plan of merger dated as
of May 10, 2001 between the Company and a company owned by Daniel M.
Gottlieb and Steven D. Lebowitz; (d) offers to deliver a deposit of
$750,000 to counsel for the special committee if the Company accepts the
amended proposal; and (e) extends the expiration date of the proposal to
6:00 p.m., Pacific time, on Friday, July 13, 2001.
A report on Form 8-K dated July 19, 2001 was filed with the Securities and
Exchange Commission on July 20, 2001 for the purpose of announcing that the
special committee had responded in a letter addressed to the Weisman Group
that it would be prepared to support a proposal by the Weisman Group to
acquire the Company in which: (a) all common stockholders receive a price
of not less than $16.00 per share; (b) there would be no contingencies for
due diligence or financing; (c) the Weisman Group would make a
nonrefundable payment of $2.5 million to the Company; and (d) other
requirements set forth in the response are met.
A report on Form 8-K dated July 31, 2001 was filed with the Securities and
Exchange Commission on August 1, 2001 for the purpose of announcing that
the special committee had received a further amendment to the Weisman
Proposal that (a) reaffirmed the Weisman Group's desire to acquire all, but
not less than 50.1%, of the Company's common stock; (b) increased the
proposed cash purchase price per share to $16.35 per share, subject to
satisfactory completion of customary corporate and legal due diligence, or
$15.35 per share without a contingency for due diligence; (c) conditioned
the amended proposal on the negotiation and execution of a definitive
acquisition agreement and the termination of the agreement and plan of
merger dated as of May 10, 2001 between the Company and a company owned by
Daniel M. Gottlieb and Steven D. Lebowitz; (d) offered to deliver a deposit
of $750,000 to counsel for the special committee if the Company accepted
the amended proposal, and to increase the deposit by an additional $400,000
upon execution of a definitive acquisition agreement, provided that the
deposit is to be refunded if the transaction is unable to close prior to
October 30, 2001, for any reason other than a breach of the acquisition
agreement by the Weisman Group; and (e) extended the expiration date of the
proposal to 6:00 p.m., Pacific time, on Tuesday, August 7, 2001. On August
7, 2001, the Weisman Group extended the expiration date of their proposal
to 7:00 P.M., Pacific time, on Tuesday, August 14, 2001.
A report on Form 8-K dated August 7, 2001 was filed with the Securities and
Exchange Commission on August 9, 2001 for the purpose of announcing that
the Third Amendment to the Weisman Proposal which was originally to expire
on August 7, 2001 has been extended by the Weisman Group to August 14,
2001.
Page 33
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, the Registrant has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
G&L REALTY CORP.
Date: August 14, 2001 By: /s/ David E. Hamer
--------------------------------
David E. Hamer
Chief Accounting Officer
Page 34