SCHEDULE 14A
(Rule 14a-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the Securities
Exchange Act of 1934
(Amendment No. 4)
Filed by the Registrant [X]
Filed by a Party other than the Registrant [_]
Check the appropriate box:
[X] Preliminary Proxy Statement
[_] Confidential, for Use of the Commission Only (as permitted by Rule
14a-6(e)(2))
[_] Definitive Proxy Statement
[_] Definitive Additional Materials
[_] Soliciting Material Under Rule 14a-12
G & L REALTY CORP.
------------------------------------------------
(Name of Registrant as Specified In Its Charter)
------------------------------------------------
N/A
------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if Other Than Registrant)
Payment of Filing Fee (Check the appropriate box):
[_] No fee required.
[X] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
(1) Title of each class of securities to which transaction applies:
Common stock, $0.01 par value per share; Options to acquire common
stock.
(2) Aggregate number of securities to which transaction applies:
2,871,654 shares of common stock; Options to acquire 180,000 shares
of common stock
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11: $12.00 per share
The filing fee was determined based upon the product of (a) the
2,871,654 shares of common stock outstanding, and (b) the merger
consideration of $12.00 per share of common stock, plus $502,500
payable to holders of options to purchase shares of common stock in
exchange for the cancellation of such options (the "Total
Consideration"). The payment of filing fee, calculated in accordance
with Rule 0-11(c) under the Securities Exchange Act of 1934, as
amended, equals one-fiftieth of one percent of the Total
Consideration.
(4) Proposed maximum aggregate value of transaction: $34,962,348
(5) Total fee paid: $6,992.47
[X] Fee paid previously with preliminary materials.
[_] Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee was
previously. Identify the previous filing by registration statement
number, or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
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(2) Form, Schedule or Registration Statement No.:
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(3) Filing Party:
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(4) Date Filed:
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[LOGO OF G & L REALTY CORP.]
G & L REALTY CORP.
439 N. Bedford Drive
Beverly Hills, CA 90210
September 28, 2001
Dear G & L Realty Corp. Stockholder:
You are cordially invited to attend the annual meeting of the common
stockholders of G & L Realty Corp. to be held at The Regent Beverly Wilshire,
9500 Wilshire Boulevard, Beverly Hills, California, on October __, 2001 at
10:00 a.m., local time.
At the annual meeting, you will be asked to consider and vote on a proposal
to approve the merger of G & L Acquisition, LLC, a Maryland limited liability
company (the "Acquiror"), and our company substantially on the terms set forth
in the Agreement and Plan of Merger, dated as of May 10, 2001, by and between
our company and the Acquiror, pursuant to which the Acquiror will merge with and
into our company, with our company as the surviving corporation. Daniel M.
Gottlieb, our company's Chief Executive Officer and co-Chairman of its board,
and Steven D. Lebowitz, our company's President and co-Chairman of its board,
are the sole owners of and control the Acquiror and are referred to in the proxy
statement as the "management stockholders."
If the merger is approved and consummated, you will receive $12.00 in cash
for each share of our common stock you own, without interest.
A special committee of disinterested directors formed by our company's
board of directors negotiated the merger consideration and other terms of the
transaction with the Acquiror. The special committee consists of four board
members who are neither employees of our company nor investors in the Acquiror.
Acting on the unanimous recommendation of the special committee, our board
of directors, including the four disinterested directors, with the two
management stockholder directors abstaining, has approved the proposed merger,
the terms of which are set forth in the merger agreement attached as Appendix A.
The special committee and the board of directors believe that the proposed
merger is in our best interest and in the best interest of our nonaffiliated
stockholders. Therefore, the board of directors recommends that you vote in
favor of approval of the merger.
The attached notice of meeting and proxy statement describe the merger and
the merger agreement and provide specific information concerning the annual
meeting. Please read these materials carefully.
At the annual meeting, you will also be asked to consider and vote on the
election of directors and to ratify the appointment of the accounting firm
Deloitte & Touche, LLP as our independent accountants for the year ending
December 31, 2001.
Whether or not you plan to attend the annual meeting, I urge you to
complete, date, sign and promptly return the enclosed proxy card to ensure that
your shares will be voted at the meeting. The merger is an important decision
for us and our common stockholders. The merger will only be approved upon the
affirmative vote of the holders of a majority of the total number of outstanding
shares of our common stock.
Sincerely,
/s/ Daniel M. Gottlieb
-----------------------------
Daniel M. Gottlieb
Chief Executive Officer and Co-Chairman of
the Board
The merger proposal has not been approved or disapproved by the Securities
and Exchange Commission or any state securities commission, nor has any such
commission passed upon the fairness or merits of such proposal nor upon the
accuracy or adequacy of the information contained in this document. Any
representation to the contrary is a criminal offense.
[LOGO OF G & L REALTY CORP.]
G & L REALTY CORP.
439 N. Bedford Drive
Beverly Hills, CA 90210
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD ON OCTOBER __, 2001
Notice is hereby given that the annual meeting of stockholders of G & L
Realty Corp., a Maryland corporation, will be held at The Regent Beverly
Wilshire, 9500 Wilshire Boulevard, Beverly Hills, California, on October __,
2001 at 10:00 a.m., local time, for the following purposes:
(1) To consider and vote upon a proposal to approve the merger of G & L
Acquisition, LLC, a Maryland limited liability company (the "Acquiror"), and our
company substantially on the terms set forth in the Agreement and Plan of
Merger, dated as of May 10, 2001, by and between our company and the Acquiror,
pursuant to which the Acquiror will merge with and into our company, with our
company as the surviving corporation. If the merger is approved by our
stockholders and the other conditions to the merger are satisfied or waived,
each outstanding share of our common stock, other than a portion of the shares
held by the management stockholders, will be converted into the right to receive
$12.00 in cash, without interest;
(2) To elect six directors to serve until the 2002 annual meeting of
stockholders and until their successors are duly elected and qualify;
(3) To consider and vote upon ratification of the appointment by the board
of directors of Deloitte & Touche, LLP as our independent accountants for the
year ending December 31, 2001;
(4) If a motion to adjourn the annual meeting is properly brought, to vote
upon the adjournment of the annual meeting for the purpose of soliciting
additional proxies; and
(5) To consider and vote upon any other matter that may be properly brought
before the annual meeting and at any adjournment or postponement thereof.
Only stockholders whose names appear of record on our books at the close of
business on August 27, 2001 are entitled to notice of, and to vote at, the
annual meeting or any adjournment or postponement thereof.
You are cordially invited to attend the annual meeting in person. Whether
or not you expect to attend this meeting, please sign and date the enclosed
proxy and return it as promptly as possible in the enclosed self-addressed,
postage-prepaid envelope. If you attend the annual meeting, you may vote your
shares in person, which will revoke any previously executed proxy. If your
shares are held of record by a broker, bank or other nominee and you wish to
vote your shares at the annual meeting, you must obtain from the record holder a
proxy issued in your name.
By Order of the Board of Directors
/s/ David E. Hamer
-----------------------------------
Secretary
Beverly Hills, California
September 28, 2001
G & L REALTY CORP.
439 N. Bedford Drive
Beverly Hills, CA 90210
_________________________
PROXY STATEMENT
FOR
ANNUAL MEETING OF STOCKHOLDERS
OCTOBER __, 2001
This proxy statement is furnished to the stockholders of G & L Realty
Corp., a Maryland corporation, in connection with the solicitation of proxies by
our board of directors for use at the annual meeting of stockholders to be held
at The Regent Beverly Wilshire, 9500 Wilshire Boulevard, Beverly Hills,
California at 10:00 a.m., local time, on October __, 2001. Our principal
executive offices are located at 439 North Bedford Drive, Beverly Hills,
California 90210. The approximate date on which this proxy statement and form of
proxy solicited on behalf of the board of directors is expected to be sent to
our stockholders is October 1, 2001.
At the annual meeting, our stockholders will be asked:
(1) To consider and vote upon a proposal to approve the merger of G & L
Acquisition, LLC, a Maryland limited liability company (the "Acquiror"), and our
company substantially on the terms provided for in the Agreement and Plan of
Merger, dated as of May 10, 2001, by and between our company and the Acquiror,
pursuant to which the Acquiror will merge with and into us, with our company as
the surviving corporation. Daniel M. Gottlieb, our company's Chief Executive
Officer and co-Chairman of its board, and Steven D. Lebowitz, our company's
President and co-Chairman of its board, own all of the interests in and control
the Acquiror. If the merger is approved by our stockholders and the other
conditions to the merger are satisfied or waived, each outstanding share of our
common stock, other than a portion of the shares held by the management
stockholders, will be converted into the right to receive $12.00 in cash,
without interest. The merger and the transactions contemplated by the merger
agreement are collectively referred to as the "merger proposal" in this proxy
statement;
(2) To elect six directors to serve until the 2002 annual meeting of
stockholders and until their successors are duly elected and qualify;
(3) To consider and vote upon ratification of the appointment by the board
of directors of Deloitte & Touche, LLP as our independent accountants for the
year ending December 31, 2001; and
(4) If a motion to adjourn the annual meeting is properly brought, to vote
upon the adjournment of the annual meeting for the purpose of soliciting
additional proxies; and
(5) To consider and vote upon any other matter that may be properly brought
before the annual meeting and at any adjournment or postponement thereof.
Daniel M. Gottlieb, Steven D. Lebowitz and David E. Hamer, the persons
named as proxies on the proxy card accompanying this proxy statement, were
selected by the board of directors to serve in such capacity. Messrs. Gottlieb
and Lebowitz are each directors of our company. Mr. Hamer is our Vice
President, Chief Accounting Officer and corporate secretary.
Unless contrary instructions are indicated on the proxy, all shares of
common stock represented by valid proxies received pursuant to this solicitation
(and not revoked before they are voted) will be voted at the annual meeting:
. FOR approval of the merger proposal;
. FOR each of the nominees named below for election as directors;
. FOR the ratification of the appointment of Deloitte & Touche, LLP as
our independent accountants; and
. as appropriate, FOR adjournment for the purpose of soliciting
additional proxies.
With respect to any other business which may properly come before the annual
meeting and be submitted to a vote of stockholders, proxies received by the
board of directors will be voted in the sole discretion of the designated proxy
holders. It is not anticipated that any matter other than those set forth in
the proxy statement will be presented at the annual meeting. A stockholder of
record may revoke his or her proxy at any time before exercise by delivering to
our Secretary a written notice of such revocation, by filing with our Secretary
a duly executed proxy bearing a later date, or by voting in person at the annual
meeting. Any stockholder of record as of the record date attending the annual
meeting may vote in person, whether or not a proxy has been previously given,
but the presence (without further action) of a stockholder at the annual meeting
will not constitute revocation of a previously given proxy.
The board of directors, based upon the unanimous recommendation of a
special committee consisting of four directors who are independent of our
management team, has approved the merger proposal. The board of directors
recommends that the stockholders vote for approval of the merger proposal.
Stockholders are urged to read and consider carefully the information
contained in this proxy statement and to consult with their personal financial
and tax advisors.
It is important that proxies be returned promptly. Therefore, whether or
not you plan to attend the annual meeting, please complete, date, sign and
return the proxy card in the enclosed postage-paid envelope.
The date of this proxy statement is September 28, 2001.
TABLE OF CONTENTS
Page
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SUMMARY TERM SHEET............................................................................... 1
Voting...................................................................................... 1
Purpose, Structure and Effects of the Merger................................................ 1
Recommendation of the Board of Directors and the Special Committee; Fairness of Merger to
Nonaffiliated Stockholders................................................................ 2
Houlihan Lokey's Fairness Opinion........................................................... 2
Position of Acquiror, Acquiror Sub and Management Stockholders.............................. 2
Weisman Proposal ........................................................................... 3
Potential Conflicts of Interest of Officers and Directors................................... 3
The Merger Consideration.................................................................... 4
Conditions to the Merger.................................................................... 4
Termination of the Merger Agreement......................................................... 4
Financing; Source of Funds.................................................................. 4
Federal Income Tax Consequences............................................................. 5
No Appraisal Rights......................................................................... 5
Election of Directors....................................................................... 5
Ratification of Independent Public Accountants.............................................. 5
Adjournment of the Annual Meeting........................................................... 5
QUESTIONS AND ANSWERS ABOUT THE MERGER........................................................... 5
CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS....................................... 7
INFORMATION CONCERNING THE ANNUAL MEETING........................................................ 8
Time, Place and Date........................................................................ 8
Purpose of the Annual Meeting............................................................... 8
Record Date; Quorum; Outstanding Common Stock Entitled to Vote.............................. 8
Vote Required............................................................................... 9
Action to be Taken Under the Proxy.......................................................... 9
Proxy Solicitation.......................................................................... 10
PROPOSAL 1: APPROVAL OF THE MERGER.............................................................. 10
GENERAL.......................................................................................... 10
The Company................................................................................. 10
The Acquiror, Acquiror Sub and Management Stockholders...................................... 10
SPECIAL FACTORS.................................................................................. 11
Background of the Merger.................................................................... 11
Purpose of the Merger; Structure of the Merger.............................................. 29
i
TABLE OF CONTENTS
Page
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Recommendation of the Special Committee and the Board of Directors; Fairness of the Merger
to Nonaffiliated Stockholders............................................................. 29
Benefits and Detriments to Nonaffiliated Stockholders....................................... 33
Benefits and Detriments of the Merger to Acquiror, Acquiror Sub and Management Stockholders. 33
Opinion of the Financial Advisor for the Special Committee.................................. 34
Position of the Acquiror, Acquiror Sub and the Management Stockholders...................... 39
Interests of Certain Persons in the Merger.................................................. 40
Certain Consequences of the Merger.......................................................... 41
Effects on Interests in Our Net Book Value and Net Loss..................................... 42
Plans for the Company After the Merger...................................................... 42
Conduct of the Business of the Company if the Merger is Not Consummated..................... 43
Material Tax Consequences................................................................... 43
Litigation Regarding the Merger............................................................. 44
THE MERGER....................................................................................... 44
The Merger.................................................................................. 44
Merger Consideration........................................................................ 44
Effective Time.............................................................................. 45
Exchange And Payment Procedures............................................................. 45
Transfer of Common Stock.................................................................... 45
Additional Agreements....................................................................... 46
Conduct of Business Pending the Merger...................................................... 47
Representations and Warranties.............................................................. 48
Conditions to the Merger.................................................................... 50
Termination of the Merger Agreement......................................................... 50
Termination Fees and Expenses............................................................... 51
Amendment and Waiver........................................................................ 52
Financing; Source of Funds.................................................................. 52
No Appraisal Rights......................................................................... 54
Fees and Expenses........................................................................... 54
Regulatory Requirements..................................................................... 55
SELECTED FINANCIAL DATA OF THE COMPANY........................................................... 56
PRO FORMA FINANCIAL INFORMATION.................................................................. 59
COMMON STOCK MARKET PRICE INFORMATION; DIVIDEND INFORMATION...................................... 63
CERTAIN FINANCIAL PROJECTIONS OF THE COMPANY..................................................... 64
ii
TABLE OF CONTENTS
Page
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COMMON STOCK PURCHASE INFORMATION................................................................ 66
Purchases by Our Company.................................................................... 66
PROPOSAL 2: ELECTION OF DIRECTORS............................................................... 67
Information Regarding Nominees and Directors................................................ 67
The Board of Directors and its Committees................................................... 69
Compensation of Directors................................................................... 70
SECURITIES OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT................................. 70
EXECUTIVE OFFICERS............................................................................... 73
EXECUTIVE COMPENSATION........................................................................... 74
s Summary Compensation Table.................................................................. 74
Employment Agreements and Arrangements...................................................... 74
Option Grants for 2000...................................................................... 75
Aggregated Option Exercises in 2000 and Options Values at December 31, 2000................. 75
COMPENSATION COMMITTEE REPORT.................................................................... 76
Compensation Philosophy..................................................................... 76
STOCK PERFORMANCE GRAPH.......................................................................... 78
CERTAIN RELATIONSHIPS AND TRANSACTIONS........................................................... 78
AUDIT COMMITTEE MATTERS.......................................................................... 79
Report of the Audit Committee............................................................... 79
Information Concerning Fees of Independent Accountants...................................... 80
PROPOSAL 3: RATIFICATION OF THE INDEPENDENT PUBLIC ACCOUNTANTS.................................. 80
PROPOSAL 4: ADJOURNMENT OF ANNUAL MEETING....................................................... 80
OTHER MATTERS.................................................................................... 81
WHERE YOU CAN FIND MORE INFORMATION.............................................................. 81
APPENDIX A--MERGER AGREEMENT
APPENDIX B--OPINION OF HOULIHAN LOKEY HOWARD & ZUKIN FINANCIAL ADVISORS, INC.
APPENDIX C--ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 2000.
APPENDIX D--QUARTERLY REPORT ON FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 2001.
APPENDIX E--QUARTERLY REPORT ON FORM 10-Q FOR THE QUARTER ENDED JUNE 30, 2001.
iii
SUMMARY TERM SHEET
This summary term sheet highlights the material information included in
this proxy statement. This summary term sheet may not contain all of the
information that is important to you. To understand the merger fully and for a
more complete description of the legal terms of the merger, you should read
carefully this entire document and the other documents to which we have referred
you. See "Where You Can Find More Information." The actual terms of the merger
are contained in the merger agreement, a copy of which is attached as Appendix A
to this proxy statement. In this proxy statement, the terms "company," "we,"
"us" and "our" refer to G & L Realty Corp., a Maryland corporation, and the term
"operating partnership" refers to our subsidiary, G & L Realty Partnership,
L.P., a Delaware limited partnership. In addition, the term "management
stockholders" refers to Messrs. Daniel M. Gottlieb and Steven D. Lebowitz, our
company's chief executive officer and co-chairman and president and co-chairman,
respectively. Messrs. Gottlieb and Lebowitz are the managers and sole owners of
the Acquiror.
All information contained in this proxy statement relating to the
management stockholders, the Acquiror and its subsidiary or to their respective
actions, purposes, beliefs, intentions or plans has been supplied by the
management stockholders for inclusion in this proxy statement and has not been
independently verified by us. This information includes, without limitation,
certain information relating to the management stockholders and their affiliates
set forth under the captions "Summary Term Sheet -- Purpose, Structure and
Effects of the Merger," "-- Position of Acquiror, Acquiror Sub and Management
Stockholders," "-- Financing; Source of Funds," "General -- the Acquiror,
Acquiror Sub and Management Stockholders," "Special Factors -- Background of the
Merger," "-- Purpose of the Merger; Structure of the Merger," "-- Benefits and
Detriments of the Merger to Acquiror, Acquiror Sub and Management Stockholders,"
"--Position of the Acquiror, Acquiror Sub and the Management Stockholders," "--
Interests of Certain Persons in the Merger," "-- Plans for the Company After the
Merger," "The Merger -- Financing; Source of Funds," "Securities Ownership of
Certain Beneficial Owners and Management" and "Certain Relationships and
Transactions."
Voting (Pages 8-9)
At the annual meeting, you will vote on a proposal to approve the merger.
Each share of common stock is entitled to one vote. The merger agreement
provides that the merger must be approved by the holders of a majority of the
total number of outstanding shares of common stock. A majority vote of the
nonaffiliated stockholders is not required to approve the merger. Failure to
return an executed proxy card or to vote in person at the annual meeting or
voting to abstain (or broker non-votes) will have the same effect as a vote
against approval of the merger proposal. You may also be asked to vote on
adjournment of the annual meeting for the purpose of soliciting additional
proxies if the board of directors determines that stockholders have not had
sufficient time to consider the merger proposal.
The record date for determining who is entitled to vote at the annual
meeting has been fixed as the close of business on August 27, 2001. On the
record date, there were 2,871,654 shares of common stock outstanding, held of
record by approximately 80 holders. Of such shares, an aggregate of 1,207,559
shares are beneficially owned by the management stockholders (approximately
42.1% of the outstanding shares), including 537,854 shares of common stock that
have been issued to the management stockholders in exchange for a portion of
their operating partnership units. We have been informed that the management
stockholders intend to vote in favor of approval of the merger proposal.
Purpose, Structure and Effects of the Merger (Pages 29 and 41-42)
The purpose of the merger is for the management stockholders to acquire the
entire common equity interest in our company, while providing the common
stockholders, including the management stockholders as to a portion of their
shareholdings, with the opportunity to liquidate their investment in our company
for cash at a price representing an approximately 55% premium over the average
closing price of the common stock on the New York Stock Exchange during the 10
day period prior to the announcement of the management stockholders' initial
merger proposal to our board of directors on November 30, 2000. The common
stockholders, other than the management stockholders, are referred to in this
proxy statement as the "nonaffiliated stockholders." Pursuant to the merger
agreement, following
1
approval of the merger and subject to the fulfillment or waiver of certain
conditions, the Acquiror will be merged with and into our company, and we will
continue as the surviving corporation in the merger.
Upon completion of the merger, holders of shares of common stock, other
than a portion of the shares owned by the management stockholders, will have the
right to receive $12.00 in cash per share, without interest. Also, upon
completion of the merger, nonaffiliated stockholders will cease to have any
ownership interest in our company and will cease to participate in future
earnings and growth, if any, of our company or to benefit from any increases, if
any, in our value. Moreover, upon completion of the merger, the common stock
held by nonaffiliated stockholders will be canceled, public trading of the
common stock will cease and the common stock will be delisted from the New York
Stock Exchange.
Pursuant to the terms of the merger, the Acquiror will pay $12.00 in cash
per share of common stock, without interest. The aggregate merger consideration
to nonaffiliated stockholders is approximately $20.2 million. In addition, the
management stockholders will receive approximately $6.2 million in consideration
for a portion of their shares of common stock and for their outstanding stock
options.
Recommendation of the Board of Directors and the Special Committee; Fairness of
Merger to Nonaffiliated Stockholders (Pages 29-33)
Acting on the unanimous recommendation of the special committee, our board
of directors, including all of the disinterested directors, has approved the
merger proposal and recommends that you vote to approve the merger proposal. Our
board of directors and the special committee believe that the merger is fair to,
and in the best interests of, our company's nonaffiliated stockholders, and that
the merger consideration is fair to our company's nonaffiliated stockholders. In
reaching their decision to recommend and approve the merger proposal, our board
of directors and the special committee considered a number of factors. See
"Special Factors -- Recommendation of the Special Committee and the Board of
Directors; Fairness of the Merger to Nonaffiliated Stockholders" for a
description of these factors.
Houlihan Lokey's Fairness Opinion (Pages 34-39)
Houlihan Lokey Howard & Zukin Financial Advisors, Inc. ("Houlihan Lokey"),
an investment banking firm, delivered to the special committee of the board of
directors an oral opinion on April 13, 2001, which was later confirmed in
writing, that the consideration of $11.25 per share (subject to adjustment to
not below $11.00 per share) is fair to the nonaffiliated stockholders from a
financial point of view. Subsequent to the date Houlihan Lokey delivered its
opinion, the management stockholders increased their offer from $11.25 per share
(subject to adjustment to not below $11.00 per share) to $12.00 per share in
exchange for the special committee's agreement not to condition the merger upon
the approval of a majority of votes cast by the shares held by nonaffiliated
stockholders. See "Special Factors --Background of the Merger" for a summary of
these events. On September 4, 2001, the special committee requested that
Houlihan Lokey update its opinion as to the fairness, from a financial point of
view, of the $12.00 per share to be paid by the Acquiror in the merger. On
September 6, 2001, Houlihan Lokey delivered to the special committee an oral
opinion, which was later confirmed in writing, that the consideration of $12.00
per share is fair to the nonaffiliated stockholders from a financial point of
view. Houlihan Lokey will receive a financial advisory fee of $600,000 plus
expenses. In addition, Houlihan Lokey may receive additional financial advisory
fees to provide certain other advisory services to our company. The full text of
Houlihan Lokey's opinion dated September 6, 2001 is attached as Appendix B to
this proxy statement. Please read this opinion. See "Special Factors -- Opinion
of the Financial Advisor for the Special Committee" for a description of
Houlihan Lokey's opinion and the analyses performed by it.
Position of Acquiror, Acquiror Sub and Management Stockholders (Pages 39-40)
The Acquiror, Acquiror Sub and the management stockholders have each
concluded that the merger is fair to the nonaffiliated stockholders based on a
number of factors. See "Special Factors--Position of the Acquiror, Acquiror Sub
and the Management Stockholders" for a description of these factors.
2
Weisman Proposal (Pages 21-29)
On June 5, 2001, Lyle Weisman and his associates, Asher Gottesman, Len
Fisch and Igor Korbatov (the "Weisman Group") submitted a proposal to acquire
the common stock or assets of our company. Subsequent to that date, the Weisman
Group submitted first, second, third, fourth, fifth and sixth amendments to its
original proposal. In the latest amendment, the Weisman Group set forth two
alternative proposals as follows:
. In Proposal A, the Weisman Group:
- offered to acquire all of the issued and outstanding common stock of
our company to be effected via a cash-out merger at a purchase price
of $15.50 per share of common stock,
- waived due diligence as a pre-condition to any transaction at $15.50
per share,
- offered to deliver an initial deposit of $750,000 to counsel for the
special committee within two business days after the special committee
accepts the Weisman Group's offer, and no later than three business
days following execution of a definitive acquisition agreement between
our company and the Weisman Group, to increase the deposit by
$1,750,000, for a total of $2,500,000 to be credited towards the
purchase price of our company's common stock (the "Good Faith
Deposit"),
- provided that the Good Faith Deposit will become non-refundable to the
Weisman Group and be paid to our company should no transaction whereby
holders of the common stock of our company receive aggregate
consideration of at least $12.00 for each share of our company's
common stock they own (regardless of the originator of such
transaction) close within 12 calendar months from the date of the
acquisition agreement with the Weisman Group,
- provided that the offer would not be subject to any financing
contingency, and
- conditioned the offer on the negotiation and execution of an
acquisition agreement, and termination of the merger agreement with
the Acquiror.
. In Proposal B, the Weisman Group asked the special committee and board of
directors of our company to approve and recommend a direct offer from the
Weisman Group to all common stockholders of our company containing the
following terms:
- the purchase price would be $15.50 per share of common stock,
- the acquiring party would be a new entity to be formed by the Weisman
Group and principally owned by them,
- the timing would be as soon as may be practicable, consistent with
applicable corporate and securities laws and exchange regulations,
- the maximum number of shares would be 100% of issued and outstanding
common stock,
- the minimum number of shares would be 40% of issued and outstanding
common stock, inclusive of shares owned by the Weisman Group,
- there would be no due diligence condition,
- if the Weisman Group acquires more than 50% of outstanding shares of
common stock as a result of the proposal, then it would as soon
thereafter seek to effect a cash-out merger between the acquiring
entity and our company upon the same terms and conditions,
- the merger agreement with the Acquiror would be terminated,
- the board of directors would issue a favorable recommendation in
support of the Weisman Group's offer to the common stockholders,
- our company would, upon completion of the tender offer, take such
steps as may be necessary or appropriate for delisting the shares of
common stock from trading, and
- the Good Faith Deposit would be non-refundable to the Weisman Group as
indicated in connection with Proposal A, except that a transaction
will be deemed to have occurred if the Weisman Group achieved at least
40% minimum ownership.
See "Special Factors -- Background of the Merger" for a description of the
Weisman Group's proposal, the amendments to the proposal, the special
committee's counterproposal and the reasons the special committee declined the
Weisman Group's proposal.
Potential Conflicts of Interest of Officers and Directors (Pages 40-41, 78-79)
Our officers and directors may have interests in the merger that are
different from your interests as a stockholder or relationships that may present
conflicts of interest, including the following:
. Mr. Gottlieb, our Chief Executive Officer and co-Chairman of our board,
and Mr. Lebowitz, our President and co-Chairman of our board, are the
founders and sole members of the Acquiror. Therefore, they may be
confronted by issues which present them with conflicts. As a result, we
established the special committee to represent the interests of the
nonaffiliated stockholders in connection with the merger proposal.
. Messrs. Gottlieb and Lebowitz will receive approximately $3.2 million
and $2.5 million, respectively, in consideration for a portion of their
shares of common stock.
. Our directors and executive officers will receive an aggregate of
$497,750 in payment for outstanding options, of which approximately
$235,813 will be paid to Mr. Gottlieb and approximately $235,813 will be
paid to Mr. Lebowitz.
See "Special Factors -- Interests of Certain Persons in the Merger" and
"Certain Relationships and Transactions" for a description of these and other
actual or potential conflicts.
3
The Merger Consideration (Pages 44-45)
If the merger is completed, you will receive $12.00 in cash per share for
your common stock, without interest. In the merger, the Acquiror will pay
approximately $20.2 million to the nonaffiliated stockholders. In addition, the
management stockholders will receive approximately $6.2 million in consideration
for a portion of their shares of common stock and for their outstanding stock
options.
Conditions to the Merger (Page 50)
The merger agreement and the transactions contemplated by the merger
agreement are subject to a number of conditions, including:
. approval of the merger by the holders of a majority of the total number
of outstanding shares of common stock;
. receipt by the Acquiror of necessary financing; and
. other specified conditions.
See "The Merger - Conditions to the Merger" for a description of the conditions
to the consummation of the merger under the merger agreement.
Termination of the Merger Agreement (Pages 50-51)
The merger agreement may be terminated by either party or one of the
parties in specified circumstances. These circumstances include:
. if the merger has not been completed by November __, 2001;
. if a final nonappealable order, decree or ruling from a court or other
governmental entity prohibits the merger;
. if the required stockholder vote is not obtained;
. if the board of directors or the special committee withdraws its
recommendation of the merger or approves a superior proposal; and
. other specified termination events.
See "The Merger - Termination of the Merger Agreement" for a description of the
termination events under the merger agreement. In addition, under certain
circumstances, in the event of termination, we will be required to pay a
termination fee of $750,000 plus all reasonable costs and expenses incurred by
the Acquiror in connection with the merger agreement. [Under certain other
circumstances, in the event of termination, we will be required to pay all
reasonable costs and expenses incurred by the Acquiror in connection with the
merger agreement.]
Financing; Source of Funds (Pages 52-54)
The total amount of funds required to pay the merger consideration to the
nonaffiliated stockholders is approximately $20.2 million. Approximately $6.2
million will be paid to the management stockholders for a portion of their
shares of common stock and for their outstanding stock options. In addition,
approximately $2.5 million will be used to pay the fees and expenses related to
the merger. The management stockholders will also borrow up to $5.29 million to
fund their purchase of up to approximately 7% of our preferred stock through a
tender offer and to repay personal debt. The Acquiror, its subsidiary and the
management stockholders intend to obtain these funds through borrowings from
GMAC Commercial Mortgage Corporation ("GMAC"). See "The Merger - Financing;
Source of Funds" for a description of these financing arrangements. The
management stockholders have received a commitment letter from GMAC and have
provided a copy of the commitment letter to our company. While the management
stockholders have received a commitment letter, we cannot assure you that the
management stockholders will be able to receive the funding on commercially
reasonable terms, if at all. Completion of the financing is a condition to the
merger. The commitment letter currently expires on October 15, 2001. The
management stockholders have had discussions with GMAC regarding extending the
expiration date of the commitment letter, and believe that GMAC will do so.
There can be no assurance however that the management stockholders can enter
into such an agreement with GMAC.
4
Federal Income Tax Consequences (Pages 43-44)
You generally will be taxed on your receipt of the merger consideration if
and to the extent that the amount you receive exceeds your tax basis in your
common stock. Determining the tax consequences of the merger can be complicated.
You should consult your financial and tax advisor in order to understand fully
how the merger will affect you.
No Appraisal Rights (Page 54)
Holders of common stock are not entitled to dissenting stockholders'
appraisal rights or other similar rights under the Maryland General Corporation
Law, and will be bound by the terms of the merger agreement. The Maryland
General Corporation Law does not provide appraisal rights or other similar
rights to stockholders of a corporation in connection with a merger if their
shares are listed on a national securities exchange, such as the New York Stock
Exchange, on the record date for determining stockholders entitled to vote on
such merger. All of the shares of common stock outstanding on the record date
for determining stockholders entitled to vote on the merger were listed on the
New York Stock Exchange.
Election of Directors (Pages 67-70)
The names of six nominees have been submitted for election to our board of
directors. The vote of a plurality of the votes cast in person or by proxy is
required to elect a nominee for director. The six nominees who receive the
greatest number of votes will be elected. Stockholders are not entitled to
cumulate their shares of common stock for the purpose of electing directors or
otherwise. Abstentions are not counted as votes cast and will have no effect on
the vote for election of directors.
Ratification of Independent Public Accountants (Page 80)
The board of directors has selected Deloitte & Touche, LLP as our
independent public accountants for the year ending December 31, 2001, subject to
ratification by our stockholders. The affirmative vote of a majority of all
votes cast is required for ratification of the appointment of Deloitte & Touche,
LLP to serve as our independent accountants. Abstentions are not counted as
votes cast and will have no effect on the vote for the ratification of the
appointment of Deloitte & Touche, LLP.
Adjournment of the Annual Meeting (Page 80)
If a motion to adjourn the annual meeting is properly brought, the
stockholders will be asked to vote upon the adjournment of the annual meeting.
Any proposal to adjourn the annual meeting for the purpose of soliciting
additional proxies must be approved by a majority of the stockholders present in
person or by proxy. Votes to abstain or broker non-votes will constitute, in
effect, votes against such adjournment. Failure to return an executed proxy card
will have no effect on whether the annual meeting is adjourned.
QUESTIONS AND ANSWERS ABOUT THE MERGER
Q: WHAT WILL I RECEIVE IN THE MERGER?
A: You will receive $12.00 in cash, without interest, in exchange for each
share of our common stock owned by you at the time of the merger. The
special committee formed by our board of directors negotiated this price
with the Acquiror. The record date for the annual meeting is earlier than
the expected date of the merger -- therefore, transferors of shares of
common stock after the record date but prior to the merger will retain
their right to vote at the annual meeting but the right to receive the
merger consideration will transfer with the shares of common stock.
5
Q: WHAT WILL HAPPEN TO MY DIVIDENDS?
A: The merger agreement permits the continued declaration and payment of
regular quarterly dividends of $0.125 per share on the common stock, in
accordance with past practice until the consummation of the merger. After
the merger is consummated, you will no longer receive dividends, unless the
record date for such dividend is prior to the date of completion of the
merger.
Q: WHAT DO I NEED TO DO NOW?
A: Please complete, date and sign your proxy card and then mail it in the
enclosed postage-paid envelope as soon as possible, so that your shares may
be represented at the annual meeting.
Q: SHOULD I SEND IN MY STOCK CERTIFICATES NOW?
A: No. After the merger is completed, we will send you written instructions
for exchanging your stock certificates.
Q: IF MY SHARES ARE HELD IN "STREET NAME" BY MY BROKER, WILL MY BROKER VOTE MY
SHARES FOR ME?
A: Your broker will vote your shares ONLY if you provide your broker with
instructions on how to vote. You should follow the directions provided by
your broker regarding how to instruct your broker to vote your shares.
Q: CAN I CHANGE MY VOTE AFTER I HAVE MAILED MY SIGNED PROXY CARD?
A: Yes. Just send in a later dated, signed proxy card before the annual
meeting or personally attend the annual meeting and vote.
Q: WHEN DO YOU EXPECT THE MERGER TO BE COMPLETED?
A: We are working to complete the merger as quickly as possible. We expect to
complete the merger (if it is approved) within several days of the annual
meeting.
Q: WHAT ARE THE CONDITIONS TO THE MERGER?
A: The conditions to the merger include stockholder approval, receipt by
the Acquiror of necessary financing and other specified conditions.
Q: WHAT FINANCING ARRANGEMENTS ARE IN PLACE?
A: The management stockholders have received a commitment letter for up to $35
million in borrowings from GMAC. The funds (1) will be used to pay the
merger consideration to the nonaffiliated stockholders and the management
stockholders as to a portion of their shares of common stock and the costs
and expenses of the merger, and (2) will be loaned to the management
stockholders to fund their tender offer of up to approximately 7% of our
preferred stock. These funds will be loaned by GMAC to a subsidiary of the
Acquiror, which simultaneously with the merger, will merge into our
operating partnership. After the merger, the operating partnership will
ultimately become the borrower and its assets will be used to secure its
payment obligations under the loan agreement.
Q: WHAT ARE THE TAX CONSEQUENCES OF THE MERGER?
A: The exchange of common stock for cash by a stockholder in the merger will
be a taxable transaction for federal income tax purposes, which generally
will cause you to recognize a taxable gain upon completion of the merger
if, and to the extent, the amount of cash you receive in the merger exceeds
your tax basis in your common stock. You should consult your own financial
and tax advisor for a full understanding of the tax consequences of the
merger. See "Special Factors -- Material Tax Consequences" for more
information regarding the tax consequences of the merger.
6
Q: WILL THE COMMON STOCK TRADE ON THE NYSE AFTER THE MERGER?
A: No. Once the merger is complete, the common stock will be delisted from the
NYSE and will no longer be registered under the Securities Exchange Act of
1934, as amended.
Q: WHAT WILL HAPPEN TO OUTSTANDING OPTIONS IN THE MERGER?
A: Each option will be cancelled and the holder of such option will be
entitled to receive an amount in cash equal to $12.00 less the exercise
price of such option for each share of common stock subject to the option.
Q: WHAT WILL HAPPEN TO THE EXISTING PUBLIC PREFERRED STOCK OF G & L REALTY
CORP.?
A: By itself, the merger will not have any effect on our preferred stock- it
will remain outstanding. We have been advised by the management
stockholders that they intend to make a cash tender offer through a newly
formed entity for up to approximately 7% of the total number of outstanding
shares of preferred stock at a price of $17.50 per share of Series A
preferred stock and $17.00 per share of Series B preferred stock. The
tender offer would commence about the time when we begin soliciting proxies
for the annual meeting and would close subject to the closing of the
merger, after the expiration of the statutory offer period (20 business
days after the commencement date of the tender offer), unless extended in
accordance with the rules of the SEC.
Q: WHAT OTHER MATTERS WILL BE VOTED ON AT THE ANNUAL MEETING?
A: At the annual meeting, you will also be asked to consider and vote on the
election of directors and to ratify the appointment of the accounting firm
of Deloitte & Touche, LLP as our independent accountants. If a motion is
made to adjourn the annual meeting, you may be asked to vote on adjournment
of the annual meeting.
WHO CAN HELP ANSWER YOUR QUESTIONS?
If you have more questions about the merger or would like additional copies
of this proxy statement, you should contact:
David E. Hamer
439 N. Bedford Drive
Beverly Hills, CA 90210
(310) 273-9930
CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS
We have made forward-looking statement in this proxy statement and the
documents incorporated by reference in this proxy statement that are not
historical facts but rather reflect expectations concerning future results and
events. When used in this proxy statement, the words "believes," "expects,"
"intends," "plans," anticipates," "likely," "will," and similar expressions
identify the forward-looking statements. These forward-looking statements are
subject to risks, uncertainties and other factors, some of which are beyond our
control, that could cause actual results and events to differ materially from
those forecast or anticipated in the forward-looking statements. These risks,
uncertainties and other factors include, but are not limited to, general
economic conditions, the supply of, and demand for, healthcare related real
estate in the markets in which we have our investments, the availability of
financing, governmental policies and regulations, potential delays in obtaining
approvals from stockholders, governmental authorities and other third parties,
the outcome of pending lawsuits against us relating to the merger, and other
factors discussed elsewhere in this proxy statement and in the documents that we
file with the Securities and Exchange Commission.
You are cautioned not to place undue reliance on forward-looking
statements, which reflect our company's view only as of the date of this proxy
statement or as of such earlier date as indicated in this proxy statement. All
forward-looking statements included in this proxy statement and all subsequent
forward-looking statements attributable to us or persons acting on our behalf
7
are expressly qualified in their entirety by these cautionary statements. We
undertake no obligation to release publicly any revisions to these forward-
looking statements to reflect events or circumstances after the date of this
proxy statement or to reflect the occurrence of unanticipated events.
Forward-looking statements include the information set forth under "Certain
Financial Projections of the Company." Such information has been included in
this proxy statement for the limited purpose of giving the stockholders access
to financial projections by our management that were furnished to our board of
directors, the special committee, Houlihan Lokey and the Acquiror. Such
information was prepared by our management for internal use and not with a view
to publication.
INFORMATION CONCERNING THE ANNUAL MEETING
Time, Place and Date
This proxy statement is being furnished to the holders of our outstanding
common stock in connection with the solicitation of proxies by the board of
directors for use at the annual meeting of our stockholders to be held on
October __, 2001 at 10:00 a.m. local time, at The Regent Beverly Wilshire, 9500
Wilshire Boulevard, Beverly Hills, California, including any adjournments or
postponements thereof.
Purpose of the Annual Meeting
At the annual meeting, you will consider and vote upon a proposal to
approve the merger. You may also be asked to vote on adjournment of the annual
meeting if a motion to adjourn the annual meeting is properly brought.
Additional information concerning the annual meeting and the merger agreement is
set forth below and a copy of the merger agreement is attached as Appendix A to
this proxy statement. The special committee has unanimously determined that the
terms of the merger proposal are fair to, and in the best interests of, the
nonaffiliated stockholders, and has recommended that the board of directors vote
for approval of the merger proposal. Acting on the unanimous recommendation of
the special committee, the board of directors has approved the merger proposal.
The board of directors, including the four disinterested directors, with the
management stockholder directors abstaining, recommends that stockholders vote
for approval of the merger proposal. However, stockholders should be aware that
certain of the members of the board of directors have conflicts of interest with
respect to the merger. See "Special Factors -- Interests of Certain Persons in
the Merger" and "Certain Relationships and Transactions" for a description of
these conflicts.
In addition, at the annual meeting, you will be asked to consider and vote
on the election of directors and to ratify the appointment of Deloitte & Touche,
LLP as our independent accountants for the year ending December 31, 2001.
Record Date; Quorum; Outstanding Common Stock Entitled to Vote
The record date for the annual meeting has been fixed as the close of
business on August 27, 2001. Only holders of record of common stock on the
record date are entitled to notice of and to vote at the annual meeting.
Holders of common stock on the record date are entitled to one vote on matters
properly presented at the annual meeting for each share of common stock
held.
On the record date, there were 2,871,654 shares of common stock
outstanding, held of record by approximately 80 holders. The presence in person
or by proxy of a majority of the shares of common stock entitled to vote will
constitute a quorum for the transaction of business at the annual meeting. Under
Maryland law, abstentions and broker non-votes (i.e. proxies from brokers or
nominees that disclaim their authority to vote such shares on a particular
matter) will count toward the presence of a quorum.
8
Vote Required
Pursuant to the merger agreement, the merger must be approved by the
affirmative vote of the holders of a majority of the total number of outstanding
shares of common stock. The management stockholders have advised us that they
and their affiliates intend to vote their shares of common stock for approval of
the merger proposal. As of the record date, the management stockholders
beneficially owned an aggregate of 1,207,559 shares of common stock
(approximately 42.1% of the outstanding common stock). The completion of the
merger is also subject to satisfaction of certain other conditions. See "The
Merger -Conditions to the Merger" for a description of these conditions.
Failure to return an executed proxy card or to vote in person at the annual
meeting or voting to abstain (or broker non-votes) will have the same effect as
a vote against approval of the merger proposal.
Any proposal to adjourn the annual meeting for the purpose of soliciting
additional proxies must be approved by a majority of the stockholders present in
person or by proxy. Votes to abstain or broker non-votes will constitute, in
effect, votes against such adjournment. Failure to return an executed proxy
card will have no effect on whether the annual meeting is adjourned.
The vote of a plurality of the votes cast in person or by proxy is required
to elect a nominee for director. With respect to the election of each director
at the annual meeting, each holder of common stock is entitled to vote the
number of shares owned by such stockholders. The six nominees who receive the
greatest number of votes will be elected. Stockholders are not entitled to
cumulate their shares of common stock for the purpose of electing directors or
otherwise. The affirmative vote of a majority of all votes cast is required for
ratification of the appointment of Deloitte & Touche, LLP to serve as our
independent accountants. Abstentions are not counted as votes cast and will
have no effect on the vote for election of directors or the ratification of the
appointment of Deloitte & Touche, LLP.
Action to be Taken Under the Proxy
All proxy cards in the enclosed form that are properly executed and
received in time for the annual meeting, and not revoked, will be voted at the
annual meeting or any adjournments or postponements thereof in accordance with
any instructions thereon, or, if no instructions are provided, will be voted:
. FOR approval of the merger proposal;
. FOR the nominees named below for election of directors;
. FOR the ratification of the appointment of Deloitte & Touche, LLP as our
independent accountants; and
. as appropriate, FOR adjournment of the annual meeting for the purpose
of soliciting additional proxies.
Any stockholder who has given a proxy pursuant to this solicitation may revoke
it by attending the annual meeting and voting in person, without compliance with
any other formalities. In addition, any proxy given pursuant to this
solicitation may be revoked prior to the annual meeting by delivering an
instrument revoking it or a duly executed proxy bearing a later date.
Our company is not aware of any matters other than those set forth in this
proxy statement which may come before the annual meeting. If any other matters
are properly presented at the annual meeting for action, it is intended that the
persons named in the enclosed form of proxy and acting thereunder will vote in
accordance with their discretion on such matters.
9
Proxy Solicitation
We will bear the cost of the solicitation of proxies. In addition to
solicitation by mail, our directors and officers, without receiving any
additional compensation, may solicit proxies personally or by telephone. We
will request brokerage houses, banks, and other custodians or nominees holding
stock in their names for others to forward proxy materials to their customers or
principals who are the beneficial owners of shares and will reimburse them for
their expenses in doing so.
PROPOSAL 1: APPROVAL OF THE MERGER
You are being asked to consider and vote upon a proposal to approve the
merger of the Acquiror and our company substantially on the terms set forth in
the Agreement and Plan of Merger, dated as of May 10, 2001, by and between our
company and the Acquiror, as it may be amended from time to time, pursuant to
which the Acquiror will merge with and into us, with our company as the
surviving corporation. In addition, G & L Partnership, LLC, a Delaware limited
liability company (the "Acquiror Sub"), of which Acquiror is the sole member,
will merge with and into the operating partnership, with the operating
partnership as the surviving entity. The Acquiror and Acquiror Sub are entities
formed by the management stockholders in order to implement the merger. If the
merger is approved by our stockholders and the other conditions to the merger
are satisfied or waived, each outstanding share of our common stock, other than
a portion of the shares held by the management stockholders, will be converted
into the right to receive $12.00 in cash, without interest.
GENERAL
The Company
We are a self-managed real estate investment trust ("REIT") that owns,
acquires, develops, manages and leases health care properties. Our business
currently consists of investments, made either directly or through joint
ventures, in medical office buildings, assisted living facilities, skilled
nursing facilities and in debt obligations secured by health care properties. We
were incorporated in Maryland on September 15, 1993. We were formed to continue
the ownership, management, acquisition and development activities previously
conducted by G & L Development, a California general partnership, our
predecessor. As of July 31, 2001, we owned 27 medical office buildings and
retail properties totaling approximately 874,000 rentable square feet, five
assisted living facilities, including a project under development, seven skilled
nursing facilities, one hospital, and two senior resident apartment complexes,
including one under development totaling approximately 1,242 beds/units.
We conduct our business through the operating partnership, which is a
Delaware limited partnership. Our company, as the sole general partner, controls
the operating partnership and owns approximately 97% of the operating
partnership. The limited partners own approximately 3% of the operating
partnership, with the management stockholders owning approximately 1% of the
operating partnership.
The principal executive offices for our company and the operating
partnership are located at 439 North Bedford Drive, Beverly Hills, CA 90210 and
the telephone number for our company and the operating partnership is (310) 273-
9930.
During the past five years, the operating partnership has not been
(1) convicted in a criminal proceeding, excluding traffic violations or similar
misdemeanors, or (2) a party to any civil proceeding of a judicial or
administrative body of competent jurisdiction and as a result of such proceeding
was or is subject to a judgment, decree or final order enjoining any future
violations of, or prohibiting activities subject to, federal or state securities
laws, or finding any violations with respect to such laws.
The Acquiror, Acquiror Sub and Management Stockholders
The Acquiror is a Maryland limited liability company recently formed by the
management stockholders for the purpose of effecting the merger. The Acquiror
currently has no material assets, does not own any shares of our common stock
and has not engaged in any activities except those incident to its formation and
in connection with the merger. The Acquiror will merge with and into us, with
our company as the surviving corporation. The capital structure of the Acquiror
consists of a single class of limited liability company membership units. The
management stockholders are the only members of the Acquiror and own all of the
units of the Acquiror. Daniel M. Gottlieb and Steven D. Lebowitz are the
managers of the Acquiror. Messrs. Gottlieb and Lebowitz are both citizens of
the United States. The principal business address and business telephone number
of the Acquiror and the managers of the Acquiror is c/o G & L Realty Corp., 439
N. Bedford Drive, Beverly Hills, California 90210, telephone (310) 273-9930.
10
Acquiror Sub is a Delaware limited liability company, the sole member of
which is the Acquiror. Acquiror Sub is also a transitory merger vehicle formed
for the purpose of merging into the operating partnership. Acquiror Sub intends
to borrow from GMAC up to approximately $35 million, of which approximately
$20.2 million will be used to pay the nonaffiliated stockholders, approximately
$2.5 million will be used to pay the costs and expenses of the merger,
approximately $6.2 million will be used to pay the management stockholders for a
portion of their shares of common stock and for their outstanding stock options,
and up to $5.29 million will be loaned to the management stockholders to fund
their purchase of up to approximately 7% of our preferred stock through a tender
offer and to repay personal debt. Acquiror Sub will distribute to the Acquiror
the funds necessary to pay the merger consideration to the nonaffiliated
stockholders and related costs, the purchase price to be paid to the management
stockholders and the amount, up to $5.29 million, to be loaned by the Acquiror
to the management stockholders for the purchase of preferred stock pursuant to a
tender offer and to repay personal debt. Acquiror Sub will merge with and into
the operating partnership, which will succeed to Acquiror Sub's indebtedness to
GMAC and the operating partnership's assets will secure the indebtedness. Daniel
M. Gottlieb is the manager of Acquiror Sub. The principal business address and
business telephone number of the Acquiror Sub and the manager of the Acquiror
Sub is c/o G & L Realty Corp., 439 N. Bedford Drive, Beverly Hills, California
90210, telephone (310) 273-9930. The principal business address and business
telephone number of the management stockholders is c/o G&L Realty Corp. 439 N.
Bedford Drive, Beverly Hills, California 90210, telephone (310) 273-9430.
During the past five years, none of the Acquiror, Acquiror Sub, or the
management stockholders has been (1) convicted in a criminal proceeding,
excluding traffic violations or similar misdemeanors, or (2) a party to any
civil proceeding of a judicial or administrative body of competent jurisdiction
and as a result of such proceeding was or is subject to a judgment, decree or
final order enjoining any future violations of, or prohibiting activities
subject to, federal or state securities laws, or finding any violations with
respect to such laws.
SPECIAL FACTORS
Background of the Merger
History of the Ownership Interest of Messrs. Gottlieb and Lebowitz
Our company was formed in 1993 to continue the business of G&L Development,
a partnership wholly owned by Messrs. Gottlieb and Lebowitz. Our company
completed its initial public offering on December 16, 1993, selling 4,159,000
shares of common stock at $18.25 per share, and reducing the beneficial
ownership of Messrs. Gottlieb and Lebowitz from 100% of G&L Development to 20.1%
of our company. The ownership interest of Messrs. Gottlieb and Lebowitz
immediately following the initial public offering consisted of 536,800 shares of
common stock and 398,699 operating partnership units in the operating
partnership controlled by our company. The operating partnership units are
convertible into, at the election of our company, (1) common stock of our
company on a one-for-one basis or (2) cash in an amount based on the value of
our common stock on the conversion date.
11
In March 1995, we adopted a stock repurchase program, granting management
the authority to acquire $1.5 million of our common stock in the open market
based on prevailing market prices. That program and the funding for the program
has been renewed from time to time. Since the program's inception, we have
repurchased 1,986,200 shares of our common stock (including the 1,000,000 shares
purchased in a self-tender as described below) through the program at an
aggregate cost of $21,275,115, or an average price of $10.71 per share. Set
forth below is a table setting forth the amounts of stock repurchased by quarter
and by average purchase price paid per share:
Average
Shares Price
------ -----
1995 1st Quarter - $ -
2nd Quarter 97,000 8.40
3rd Quarter - -
4th Quarter - -
1996 1st Quarter - -
2nd Quarter - -
3rd Quarter - -
4th Quarter - -
1997 1st Quarter - -
2nd Quarter 56,800 16.28
3rd Quarter - -
4th Quarter 19,600 18.01
1998 1st Quarter 8,900 18.37
2nd Quarter 24,000 17.65
3rd Quarter 58,100 15.93
4th Quarter 60,700 13.58
1999 1st Quarter 27,200 12.64
2nd Quarter 36,000 11.73
3rd Quarter 60,900 10.91
4th Quarter 1,235,200 10.23
2000 1st Quarter 237,800 9.18
2nd Quarter 64,000 9.36
3rd Quarter - -
4th Quarter - -
2001 1st Quarter - -
2nd Quarter - -
In June 1996, an aggregate of 39,215 operating partnership units were
issued to Messrs. Gottlieb and Lebowitz for a cash price of $14 per unit, which
represented a premium of 7.69% over the closing price of our company's common
stock on the day immediately preceding the day on which the executive committee
of our board of directors approved the transaction. At the time, the executive
committee was comprised of Messrs. Gottlieb and Lebowitz and three outside
directors.
In December 1997, Messrs. Gottlieb and Lebowitz exercised stock options to
acquire an aggregate 134,000 shares of our common stock at $9.625 per share.
In December 1998, the board of directors considered and approved, with
Messrs. Gottlieb and Lebowitz abstaining, the acquisition by our company of a
Southern California commercial property owned by Messrs. Gottlieb and Lebowitz
for $9.5 million, to be paid through the issuance to Messrs. Gottlieb and
Lebowitz of operating partnership units, priced at a 10% premium to the price of
our company's common stock. The transaction was closed on December 30, 1998,
12
through the issuance of 126,744 operating partnership units, priced at $14.87
per unit. As a consequence of this issuance of operating partnership units, the
beneficial ownership of Messrs. Gottlieb and Lebowitz in our company increased
from 24.9% to 26.9%, including their operating partnership units.
In October 1999, we made a self tender for 1,000,000 shares of our common
stock at $10.50 per share. The self tender was oversubscribed, with
approximately 2,048,000 shares tendered in the offering. As a result, we
purchased on a pro rata basis an aggregate of 1,000,000 shares. Messrs.
Gottlieb and Lebowitz sold 17,410 and 14,245 shares, respectively, as part of
this self tender. As a consequence of this self tender, the aggregate
beneficial ownership of Messrs. Gottlieb and Lebowitz in our company increased
from 28.3% to 35.6%, including their operating partnership units.
On February 29, 2000, the compensation committee of the board of directors
granted non-qualified stock options to purchase 50,000 shares of common stock to
each of Messrs. Gottlieb and Lebowitz. The per share exercise price of the
options was $8.875, the closing price of our company's common stock on February
29, 2000. The average closing price of our common stock on the New York Stock
Exchange for the 30 days prior to February 29, 2000 was $9.15. In connection
with the merger proposal, Messrs. Gottlieb and Lebowitz advised the board
of directors that they might exercise all of their stock options and intended to
exchange up to 94.7% of their operating partnership units for common stock.
On August 8, 2001, Mr. Gottlieb exchanged 272,159 operating partnership
units for 272,159 shares of common stock. On August 16, 2001, Mr. Gottlieb
exchanged an additional 14,138 operating partnership units for 14,138 shares of
common stock.
On August 8, 2001, Mr. Lebowitz exchanged 205,695 operating partnership
units for 205,695 shares of common stock. On August 16, 2001, Mr Lebowitz
exchanged an additional 45,862 operating partnership units for 45,862 shares of
common stock. As of the close of business on August 16, 2001, Messrs. Gottlieb
and Lebowitz owned approximately 42.1% of our company's outstanding common
stock.
Strategic Planning Committee
In September 1998, we formed a strategic planning committee, comprised of
Messrs. Gottlieb and Lebowitz, and S. Craig Tompkins as an outside director.
The purpose of the committee was to develop plans concerning the future growth
and opportunities of our company. During its tenure, the strategic planning
committee, among other things, met from time to time with investment bankers and
financial advisors, our company's auditors and attorneys, and considered various
strategic options, including:
. the combination of our company, either through merger or strategic
alliance, with other health oriented REITs,
. the acquisition of other REITs or other real estate entities,
. the sale of our company to another REIT,
. the development of a separate company to engage in certain types of health
care facility management and related services of the type not currently
permissible for REITs under currently applicable tax code provisions,
. the development of an opportunity fund to acquire distressed health care
properties, using primarily capital from institutional investors in an
investment partnership format,
. the refocusing of the efforts of our company on the development,
construction and turn-around aspects of our company's real estate business
and away from the acquisition of mature health care properties,
. the revision of our company's dividend policy, which had historically
resulted in the payment of dividends substantially in excess of our
company's taxable income, so as to provide more working capital to our
company,
. the continuation or expansion of our company's stock repurchase program,
including the possibility of a tender offer for a portion of our company's
outstanding shares,
. the possible acquisition by Messrs. Gottlieb and Lebowitz of all or
substantially all of the common stock not already owned by them in some
type of going private transaction, and
13
. the adoption of certain anti-takeover and stockholder rights plans.
Most of the strategic planning committee's activities took place in the
last fiscal quarter of 1998 and the first three fiscal quarters of 1999,
although the members of the strategic planning committee continued to meet
informally from time to time thereafter to discuss opportunities that might be
available to and issues facing our company.
On August 31, 1999, the strategic planning committee made a report to the
full board of directors. That report concluded that, in its opinion, the best
strategy for our company was to focus on the principal management strengths of
our company and to go forward as a growth oriented company, emphasizing the
development, construction and turn-around aspects of our company's real estate
business.
The strategic planning committee noted that the adoption of such a
development oriented strategy would necessitate a review of our company's
dividend policy, since there would likely be longer lead times between the
investment of capital and the realization of the returns resulting from
stabilized cash flow. The adoption of such a strategy would also mean that,
from time to time, profits would be taken in the form of the sale or other
disposition of developed assets, and that our company would not necessarily hold
our properties on an indefinite basis. This could result in material variations
in the amount of taxable income generated by our company from period to period,
mandating material fluctuations in dividend payout. Accordingly, the strategic
planning committee advised that, if a growth or development business plan were
to be adopted, it would be appropriate to couple that action with a material
reduction in the dividends being paid by our company.
The strategic planning committee further noted that given the dividend
expectation of our company's stockholder base, consideration should also be
given to the coupling of such a shift in business focus and dividend policy with
a tender offer, so as to provide a degree of liquidity to those stockholders who
did not want to continue their investment in our company. Following discussion,
the board of directors determined that the business focus suggested by the
strategic planning committee would be a commercially reasonable way for our
company to proceed, and that the board of directors should consider at its next
meeting a revision to our company's dividend policy and a possible tender offer
for a significant portion of our outstanding common stock.
While the strategic planning committee did not have any formal meetings in
2000, Messrs. Gottlieb and Lebowitz advised Mr. Tompkins in April 2000 that they
were seriously considering making an offer to purchase the common stock that
they did not own, although they were uncertain at that time as to whether (1)
such a transaction could be financed entirely with debt, (2) outside equity
financing would be needed and (3) such a transaction would be structured as a
tender offer for any and all shares or as a cash-out merger. In June 2000,
Messrs. Gottlieb and Lebowitz advised Mr. Tompkins that they had retained Heller
Ehrman White & McAuliffe LLP ("Heller Ehrman") as separate counsel to advise
them with respect to such a possible transaction and that they were in
conversations with several possible financing sources including GMAC. The
strategic planning committee was formally disbanded on January 9, 2001, because
of the formation of the special committee to review and consider the common
stock buy-out proposal presented by Messrs. Gottlieb and Lebowitz.
The 1999 Charter Amendment
Charters of REITs, including our charter, generally contain prohibitions on
the transfer of shares that would result in a person owning in excess of the
ownership limitation set forth in the charter. The purpose of this prohibition
is, among other things, to assure compliance with the five-or-fewer rule under
the Internal Revenue Code of 1986, as amended. Under this rule, in order for a
company to qualify as a REIT, the ownership of more than 50 percent of a
company's shares cannot be held by five or fewer individuals during the last
half of such company's taxable year. At our annual meeting of stockholders held
on August 31, 1999, our stockholders approved an amendment to our charter giving
the board of directors the authority (i) to waive the ownership limitation under
the charter for any person(s) and (ii) to decrease the ownership limit under the
charter for all other persons (the "Amendment").
14
The Amendment was approved by a 2,645,028 to 205,638 vote, with the holders
of 68,926 shares abstaining. As disclosed in our proxy materials pertaining to
that meeting, the intent of the Amendment is to:
. give the board of directors more flexibility in considering proposals by
individuals who wished to make a substantial investment in our company,
which would be in excess of the ownership limit,
. give the board of directors the ability to expand the number of potential
bidders interested in making a competitive proposal if there is an
interested bidder,
. permit our company to continue to repurchase our stock from time to time,
and
. permit Messrs. Gottlieb and Lebowitz to convert their operating partnership
units into common stock without exceeding the ownership limit.
On May 10, 2001, in order to permit the transactions contemplated by the
merger agreement, the board of directors (1) waived the ownership limitation
found in our charter for Messrs. Gottlieb and Lebowitz so long as Messrs.
Gottlieb and Lebowitz do not own more than 25% in the aggregate in value of the
outstanding equity stock of our company, and (2) decreased the ownership
limitation for all other "Persons" (which term includes any corporation,
partnership, trust, association or group as that term is used for purposes of
Section 13(d)(3) of the Securities Exchange Act of 1934), 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 equity stock of our company.
The 1999 Tender Offer
At its board meetings on August 31, 1999 and September 27, 1999, the board
of directors considered:
. our company's cash flow and earnings projections,
. the recommendation of the strategic planning committee that our company
focus on the development, construction and turn-around aspects of our real
estate business,
. the advisability of reducing our company's dividends in light of the
adoption of a growth or development oriented business plan to keep such
dividends more in line with our company's taxable earnings, and
. in light of the refocusing of our company's business efforts on real estate
development, the nature of the proposed dividend reduction and the view of
our board of directors that our company's common stock was at that time
under priced by the market, the advisability of offering those stockholders
wishing liquidity in their investment an opportunity to exit their
investment through a self tender.
On September 27, 1999, the board of directors determined to reduce our
company's regular quarterly dividend from $0.39 to $0.125, and to approve a self
tender offer to provide liquidity for those stockholders wishing to reduce their
interest in our company as a result of this change in dividend policy. On
October 1, 1999, we commenced a self tender offer for up to 1,000,000 shares of
our company's common stock at $10.50 per share, a 6.0% premium to the market
price of our common stock on September 16, 1999. The offer was substantially
oversubscribed (approximately 2,048,000 shares being tendered), and was closed
on October 29, 1999. Messrs. Gottlieb and Lebowitz sold 17,410 and 14,245
shares, respectively, as part of the self tender. As a result of the tender
offer, the aggregate beneficial ownership of Messrs. Gottlieb and Lebowitz in
our company increased from 28.3% to 35.6%.
15
The Merger Proposal
Introduction. On November 30, 2000, our board of directors received a
proposal from Messrs. Gottlieb and Lebowitz with respect to the acquisition by
them of all of the common stock of the company not owned by them. In response
to this proposal, our board of directors established a special committee
comprised entirely of disinterested board members to assist and advise our
company with respect to the proposal made by Messrs. Gottlieb and Lebowitz. In
the ten months since its inception, the special committee has retained legal
counsel and financial advisors, held numerous meetings to discuss the proposal
and the alternatives available to our company, through its chairman and its
financial advisor engaged in extensive negotiations with Messrs. Gottlieb and
Lebowitz, and discussed the possibility of alternative transactions with four
other potential acquirors. The special committee has been advised by three of
such potential acquirors that they do not currently have an interest in pursuing
an alternative transaction with our company. The fourth such potential acquiror
has submitted an alternative proposal which the special committee has declined
for the reasons described below. The special committee believes that its actions
led to an increase in the original purchase price of $10.00 to ultimately $12.00
per share. The following discussion sets forth in greater detail the background
of the merger.
Events Leading Up to the November 30th Proposal. During the first half of
2000, the market for our securities as well as for those of other public REITs,
particularly health care equity REITs, deteriorated while the S&P 500 index
increased significantly. During this period, the sales prices of our common
stock ranged from a low of $7.25 to a high of $9.56 on fairly light volume. In
light of these market conditions and Messrs. Gottlieb and Lebowitz's belief that
the self tender had failed to stabilize the price of our common stock, Messrs.
Gottlieb and Lebowitz began considering, in the first half of 2000, the
possibility of engaging in some type of "going private" transaction. While the
strategic planning committee did not have any formal meetings in 2000, Messrs.
Gottlieb and Lebowitz advised Mr. Tompkins in April 2000 that they were
considering making an offer to purchase the common stock that they did not own.
At that time, however, they were uncertain as to whether such a transaction
could be financed entirely with debt or whether outside equity financing would
be needed and how best to structure such a transaction. In June 2000, Messrs.
Gottlieb and Lebowitz advised Mr. Tompkins that they had retained separate
counsel to advise them with respect to such a possible transaction and that they
were in conversations with certain potential financing sources. In July 2000,
Messrs. Gottlieb and Lebowitz commenced discussions with GMAC which ultimately
led to the formulation of a plan of financing that would permit them to make a
proposal.
The November 30th Proposal and Events After the November 30th Proposal.
On November 30, 2000, we received a proposal from Daniel M. Gottlieb and Steven
D. Lebowitz, Chief Executive Officer and President, respectively, and the
principal stockholders of our company, to acquire by merger all the outstanding
shares of our common stock not already owned directly or indirectly by them for
a cash price of $10.00 per share. The proposal was conditioned upon, among other
things, approval of our board of directors and stockholders, the negotiation and
execution of mutually satisfactory definitive agreements, the receipt of
consents of third parties required under any of our material contracts, the
cancellation of all outstanding options, including those held by Messrs.
Gottlieb and Lebowitz, the receipt by Messrs. Gottlieb and Lebowitz of
satisfactory financing to complete the transaction and the satisfaction of all
applicable regulatory and governmental requirements. The proposal constituted an
approximately 29% premium over the average closing price of the common stock on
the New York Stock Exchange during the 10 trading days prior to the announcement
of the proposal.
After receiving the proposal from Messrs. Gottlieb and Lebowitz, our board
of directors met to discuss the proposed acquisition transaction. Messrs.
Gottlieb and Lebowitz recused themselves from the meeting during this
discussion. Given that Messrs. Gottlieb and Lebowitz were executive officers
and Co-Chairmen of the board of our company, the board of directors decided to
appoint a special committee comprised of our company's four disinterested
directors - S. Craig Tompkins, Richard L. Lesher, Leslie D. Michelson and
16
Charles P. Reilly - to review the proposal, consider alternatives and report
back its recommendation to the entire board of directors at such time as it
completed its investigation. The board of directors appointed Mr. Tompkins to
serve as the Chairman of the special committee. The members of the special
committee directed Mr. Tompkins to interview legal counsel and financial
advisors to represent the special committee, the members of the committee making
several recommendations as to suitable legal counsel and financial advisors.
Following the meeting, we issued a press release announcing the receipt of the
proposal from Messrs. Gottlieb and Lebowitz and the formation of the special
committee.
On December 4, 2000 and December 14, 2000, two purported class action
lawsuits were filed against our company and our directors. See "Special Factors
-Litigation Regarding the Merger" for a description of these lawsuits and the
status of each.
On December 8, 2000, the special committee received an inquiry from G.
Realco LLC, a newly-formed Delaware limited liability company. In a letter
addressed to the members of the special committee, G. Realco LLC indicated that
it had reviewed publicly available information concerning our company and was
confident that it would be able to present an offer to our common stockholders
in excess of the $10.00 per share offered by Messrs. Gottlieb and Lebowitz.
G. Realco LLC requested that the special committee prepare a confidentiality
agreement for execution so that it could commence due diligence procedures.
On December 21, 2000, the special committee met to discuss the retention of
legal and financial advisors to assist the special committee in evaluating the
proposed transaction between our company and Messrs. Gottlieb and Lebowitz. On
January 9, 2001, the special committee formally retained the services of Ballard
Spahr Andrews & Ingersoll, LLP ("Ballard Spahr") to act as counsel to the
special committee in connection with the proposed acquisition transaction.
Ballard Spahr is a large law firm with an office in Maryland which represents
clients in a broad range of matters, including mergers, acquisitions,
representation of boards of directors and board committees and other complex
corporate transactions. Specifically, the special committee retained the
services of James J. Hanks, Jr., a partner at Ballard Spahr, an adjunct
Professor of Law at Cornell Law School and author of the leading treatise on
Maryland corporation law. We are incorporated in Maryland and our internal
affairs are governed by Maryland law.
On January 9, 2001, after completing interviews with several financial
advisor candidates, the special committee engaged the services of Houlihan Lokey
to assist the special committee in understanding and evaluating the proposal
and, if requested by the special committee, to opine as to the fairness of the
consideration in the proposal. The engagement letter was subsequently amended to
reflect a potential expansion in the scope of Houlihan Lokey's engagement with
respect to its negotiations with certain other interested parties. Houlihan
Lokey is a nationally recognized investment banking firm that is engaged in
providing financial advisory services and rendering fairness opinions in
connection with mergers and acquisitions, leveraged buyouts, business and
securities valuations for a variety of regulatory and planning purposes,
recapitalizations, financial restructurings and private placements of debt and
equity securities. It was further determined that Mr. Tompkins, as the Chairman
of the special committee, should, on behalf of the special committee, lead the
negotiations with Messrs. Gottlieb and Lebowitz.
On January 12, 2001, we issued a press release announcing the retention by
the special committee of Houlihan Lokey to serve as its financial advisor.
Following its engagement, Houlihan Lokey performed a range of financial
analyses, based on its review of various internal and public information
regarding our company, in order to assist the special committee in evaluating
the proposed transaction between our company and Messrs. Gottlieb and Lebowitz.
On February 2, 2001, at a meeting of the special committee, Houlihan Lokey
provided an overview of the proposed transaction and reviewed certain financial
aspects of the proposed transaction. In addition, Houlihan Lokey discussed with
the special committee the current real estate capital market environment, the
various strategic alternatives available to our company and its conclusions as
to the net asset and per share values of our company.
17
At its February 2, 2001 meeting, the special committee discussed with
Houlihan Lokey the alternatives available to the special committee, and the
strategies it might employ in working to get the best possible price for
stockholders. During these discussions, it was noted that in light of the fact
that Messrs. Gottlieb and Lebowitz owned directly approximately 45.0% and
beneficially approximately 45.7% of the common stock of our company, in each
case assuming exercise of all stock options and conversion of all operating
partnership units held by Messrs Gottlieb and Lebowitz, it would be difficult to
consummate any transaction to which they were opposed. It was further noted
that Messrs. Gottlieb and Lebowitz had advised both Mr. Tompkins and Houlihan
Lokey that they would not be favorably inclined to sell their stock in our
company at that time. The special committee was also concerned that, if an
agreement were not reached with Messrs. Gottlieb and Lebowitz, the trading price
of our company's common stock would likely return to its historic trading
ranges. After discussion, the special committee concluded that, in light of the
foregoing considerations, it would not be advisable or a good use of our
company's resources to conduct a conventional auction of our company. Instead,
the special committee determined that the best strategy for obtaining the best
price for stockholders would be to attempt to negotiate definitive terms with
Messrs. Gottlieb and Lebowitz while at the same time preserving for our company
the ability to consider alternative acquisition proposals. Accordingly, the
special committee authorized Mr. Tompkins, together with Houlihan Lokey, to
enter into negotiations with Messrs. Gottlieb and Lebowitz regarding the price
and other terms of the proposed transaction, with the objective of increasing
the price proposed by Messrs. Gottlieb and Lebowitz, while preserving for our
company the ability to consider and accept other potentially superior proposals.
In addition, the special committee authorized Houlihan Lokey to communicate
to G.Realco LLC that the special committee was pursuing matters further with
Messrs. Gottlieb and Lebowitz but was interested in communicating with all other
interested parties, including G.Realco LLC, once negotiations with Messrs.
Gottlieb and Lebowitz were more advanced, at which time our company would
anticipate entering into a confidentiality agreement with G.Realco LLC.
Between February 2, 2001 and February 8, 2001, Mr. Tompkins and Houlihan
Lokey had various preliminary discussions with Messrs. Gottlieb and Lebowitz
concerning their proposal, during which they communicated to Messrs. Gottlieb
and Lebowitz the view of the special committee that the purchase price offered
needed to be increased. On February 8, 2001, the special committee met to
discuss the status of the negotiations with Messrs. Gottlieb and Lebowitz and to
consider certain additional information developed by Houlihan Lokey. Mr.
Tompkins and Houlihan Lokey advised the special committee that Messrs. Gottlieb
and Lebowitz were unwilling to increase their proposed purchase price, absent a
counteroffer from the special committee. Following discussion, the special
committee determined that Mr. Tompkins and Houlihan Lokey should refrain from
making a counteroffer and continue their negotiations with Messrs. Gottlieb and
Lebowitz, in an attempt to negotiate (1) an increase in the proposed purchase
price and (2) the right for the special committee to entertain and recommend any
competing offers that might be received.
On February 9, 2001, Mr. Tompkins and Houlihan Lokey met again with Messrs.
Gottlieb and Lebowitz. At this meeting, various issues were discussed,
including an increase in the proposed purchase price, the structure of the
proposed transaction, the special committee's right to consider and recommend
superior acquisition proposals, and the reimbursement of expenses incurred by
Messrs. Gottlieb and Lebowitz in connection with the proposed transaction in the
event that an alternative acquisition proposal was approved by the board of
directors.
In early February, Trans Healthcare Inc., a privately owned corporation
that develops and operates specialty hospitals, skilled nursing facilities and
outpatient post-acute network services, contacted Mr. Tompkins to express
interest in potentially entering into a transaction with us and seeking access
to non-public information to develop a more specific proposal. Mr. Tompkins
referred the call to Houlihan Lokey. On February 14, 2001, Houlihan Lokey
discussed with Trans Healthcare Inc. its interest in our company and in
acquiring non-public information regarding our company.
18
On February 15, 2001, the special committee received a term sheet from
Messrs. Gottlieb and Lebowitz outlining in general terms the proposed
transaction. The term sheet included an increase in the proposed purchase price
from $10.00 to $11.00 per share and provided, among other things, that we would
not initiate, solicit or encourage any acquisition proposal (although we would
retain the right to consider any unsolicited superior acquisition proposal),
that the proposed transaction would be subject to the approval of our
stockholders (including a majority of the shares of common stock voting on the
transaction not held by Messrs. Gottlieb and Lebowitz) and that, if the proposed
transaction were to be abandoned under circumstances to be agreed upon, we would
reimburse Messrs. Gottlieb and Lebowitz for fees and expenses of accountants,
financial advisors, attorneys and consultants relating to the transaction, as
well as any commitment and other fees, charges and expenses relating to the
proposed transaction.
Between February 15, 2001 and February 27, 2001, Mr. Tompkins and Houlihan
Lokey had various conversations with Messrs. Gottlieb and Lebowitz in order to
ask questions about the revised proposal. On February 20, 2001, we issued a
press release describing the revised proposal.
On February 27, 2001, the special committee met to consider Messrs.
Gottlieb and Lebowitz's revised proposal. After discussion, the special
committee concluded that Mr. Tompkins should continue negotiations with Messrs.
Gottlieb and Lebowitz and that those negotiations should focus on increasing the
purchase price while retaining for our company the right, even after an
agreement was reached with Messrs. Gottlieb and Lebowitz, to provide information
to and to conduct negotiations with G. Realco LLC and Trans Healthcare, Inc. and
the right to consider and accept any superior acquisition proposals. At this
meeting, Mr. Tompkins was also authorized to make a counteroffer at $13.00 per
share.
Between February 27, 2001 and March 3, 2001, Mr. Tompkins and Houlihan
Lokey had various discussions with Messrs. Gottlieb and Lebowitz regarding the
price and other terms of the proposed transaction. On March 1 and 2, 2001, Mr.
Tompkins also participated in two conference calls with representatives of GMAC
during which the status of the current stockholder litigation and the structure
of the proposed transaction were discussed and assurances were given to Mr.
Tompkins that a definitive loan commitment would be forthcoming. During the
discussions with Messrs. Gottlieb and Lebowitz, the price of $13.00 was put
forward by Mr. Tompkins as a price that would be acceptable to the special
committee. However, that price was rejected by Messrs. Gottlieb and Lebowitz.
Mr. Tompkins and Houlihan Lokey also explored with Messrs. Gottlieb and Lebowitz
possible purchase prices of $12.50 and $12.00, neither of which was acceptable
to Messrs. Gottlieb and Lebowitz.
On March 4, 2001, Mr. Tompkins met with Messrs. Gottlieb and Lebowitz for
approximately four hours in an attempt to work out a draft term sheet which
would be acceptable to Messrs. Gottlieb and Lebowitz and which Mr. Tompkins
would be prepared to present to the special committee for its consideration.
During the course of that meeting, a draft term sheet was developed, with the
understanding that it would not be presented to the special committee for
consideration until it had been reviewed by Ballard Spahr on behalf of the
special committee and Heller Ehrman on behalf of Messrs. Gottlieb and Lebowitz.
Thereafter, the proposed draft term sheet was reviewed and negotiated between
counsel for the special committee and counsel for Messrs. Gottlieb and Lebowitz.
The March 4 meeting and subsequent negotiations between counsel resulted in
a revised offer from Messrs. Gottlieb and Lebowitz in which the proposed
purchase price increased from $11.00 to $11.25 per share, subject to adjustment
if certain transaction costs exceeded an agreed upon amount. Messrs. Gottlieb
and Lebowitz also agreed not to acquire any additional shares of our common
stock (except through the exercise of existing options or conversion rights) for
a period of 18 months, provided that we agree not to issue any additional shares
of common stock or any debt or securities convertible into or exchangeable for
common stock during the same 18-month period. Under the revised offer, the
special committee would have the right to provide confidential information to,
and to negotiate potentially competitive transactions with, G. Realco LLC and
19
Trans Healthcare Inc. and to recommend to our stockholders any superior
acquisition proposal received from G. Realco LLC, Trans Healthcare Inc. or any
other interested party. In addition, if the proposed transaction between our
company and Messrs. Gottlieb and Lebowitz were to terminate because the special
committee recommended an alternative transaction to the stockholders, the
Company would pay Messrs. Gottlieb and Lebowitz a termination fee in an agreed
upon amount and reimburse Messrs. Gottlieb and Lebowitz for their out of pocket
expenses relating to the transaction, including any and all points, fees or cost
reimbursements paid to their lender, GMAC Commercial Mortgage Corporation. In
connection with their revised offer, Messrs. Gottlieb and Lebowitz indicated
their intention to make a tender offer, at a price not less than the then
current market, for approximately 20% of our outstanding preferred stock.
On March 6, 2001, the special committee met and was briefed by Mr. Tompkins
as to the general terms and structure of the transaction outlined in the draft
term sheet. On March 17, 2001, Mr. Tompkins, together with representatives of
Houlihan Lokey and Ballard Spahr, met with Messrs. Gottlieb and Lebowitz and
their counsel, Heller Ehrman, to discuss various open issues relating to the
revised proposal, including the mechanics of the proposed purchase price
adjustment, the amount of the proposed termination fee and the relationship
between the revised proposal and the preferred stock tender offer. During this
meeting, Mr. Tompkins and Houlihan Lokey again attempted to negotiate an
increase in the proposed purchase price, but were not successful.
On March 31, 2001 and April 7, 2001, the special committee and its counsel
met to discuss the terms of the revised proposal. Representatives of Houlihan
Lokey participated in the March 31, 2001 meeting. Houlihan Lokey informed the
special committee at the March 31, 2001 meeting that it had received a call on
March 27, 2001 from a representative of Lillibridge Health Trust, a Maryland
real estate investment trust, expressing an interest in obtaining non-public
information about our company and in potentially doing a transaction with our
company. The special committee determined that any agreement with Messrs.
Gottlieb and Lebowitz should treat Lillibridge Health Trust in the same manner
as G. Realco LLC and Trans Healthcare, Inc. Houlihan Lokey also reported that
G. Realco LLC continued to show interest. The special committee determined that
it should continue to attempt to finalize an agreement with Messrs. Gottlieb and
Lebowitz before pursuing discussions with other potential acquirors. Also
discussed at these meetings were, among other things, the amount of the
termination fee and the scope and extent of the cost reimbursement provisions
that the special committee would be willing to recommend. At the request of the
special committee, management of our company, including Messrs. Gottlieb,
Lebowitz and Hamer, participated in the April 7, 2001 meeting, in order to
respond to certain questions of the committee members as to the assets, business
and prospects of our company, and to review certain projections prepared by
management of our company.
During the period from March 31, 2001 to April 12, 2001, Mr. Tompkins and
Houlihan Lokey had various discussions with Messrs. Gottlieb and Lebowitz
regarding the expense reimbursement and termination issues, and on April 11,
2001, a proposed form of agreement in principle approved by Messrs. Gottlieb and
Lebowitz was distributed to the special committee.
On April 13, 2001, the special committee met to consider the proposed
agreement in principle between our company and Messrs. Gottlieb and Lebowitz as
circulated to the special committee, and to receive the oral opinion of Houlihan
Lokey as to the fairness, from a financial point of view, to our company's
nonaffiliated stockholders of the consideration of $11.25 per share (subject to
adjustment to not below $11.00 per share) to be received by them from Messrs.
Gottlieb and Lebowitz. Following Houlihan Lokey's presentation, the special
committee unanimously approved the terms and conditions of the proposed
transaction between our company and Messrs. Gottlieb and Lebowitz and
recommended to our board of directors that our company execute and deliver the
agreement in principle outlining such terms and conditions. Immediately
following the special committee meeting, our board of directors met and, based
upon Houlihan Lokey's fairness opinion and the special committee's
recommendation, approved, with Messrs. Gottlieb and Lebowitz abstaining, the
execution and delivery of the agreement in principle. At this point in time,
20
our company and Messrs. Gottlieb and Lebowitz were legally bound with respect to
the principal economic and business points of the merger transaction, subject to
execution of definitive agreements and other conditions. Our company had
reserved the right to provide non-public information to G. Realco LLC, Trans
Healthcare, Inc. and Lillibridge Health Trust if they entered into appropriate
confidentiality and standstill agreements and to consider any and all superior
proposals.
On April 13, 2001, we issued a press release announcing the agreement in
principle reached with Messrs. Gottlieb and Lebowitz pursuant to the term sheet.
Between April 13, 2001 and May 9, 2001, Messrs. Gottlieb and Lebowitz,
together with their counsel, and Mr. Tompkins, together with the special
committee's counsel, negotiated the terms and conditions of a definitive merger
agreement, based upon the approved agreement in principle, pursuant to which a
newly formed limited liability company owned by Messrs. Gottlieb and Lebowitz
would merge with and into our company, with our company being the surviving
entity in the merger and the common stockholders of our company, other than
Messrs. Gottlieb and Lebowitz as to a portion of their shareholdings, receiving
$11.25 per share of common stock, subject to adjustment downward (but not below
$11.00) if certain expenses incurred by the special committee in connection with
the proposed transaction exceeded $650,000.
During this period, Mr. Tompkins and Houlihan Lokey also conferred with
representatives of each of G. Realco LLC and Lillibridge Health Trust regarding
each entity's interest in obtaining confidential information about our company
for the purpose of pursuing a transaction with our company. Upon being
contacted by Houlihan Lokey, Trans Healthcare, Inc. advised that it was not
currently interested in pursuing a transaction with our company, and
accordingly, no further discussions have been held with Trans Healthcare, Inc.
Following their meetings with Mr. Tompkins and Houlihan Lokey, representatives
of each of G. Realco LLC and Lillibridge Health Trust met separately with
Messrs. Gottlieb and Lebowitz. After these meetings, each of G. Realco LLC and
Lillibridge Health Trust communicated to Houlihan Lokey that they were not, at
that time, interested in further pursuing a possible transaction with our
company. G.Realco LLC indicated that it would not be interested in further
pursuing a possible transaction with our company unless the special committee
was able to guarantee that a transaction between our company and G.Realco LLC at
a price higher than the price of Messrs. Gottlieb and Lebowitz's proposal would
be consummated. Lillibridge Health Trust communicated that it would only be
interested in pursuing a possible transaction with our company that would
include an acquisition of our company's medical office buildings but not our
company's skilled nursing and assisted living facilities. As a result, none of
G. Realco LLC, Trans Healthcare Inc. nor Lillibridge Health Trust has entered
into confidentiality and standstill agreements with our company.
On April 17, 2001, following our announcement of the agreement in principle
with Messrs. Gottlieb and Lebowitz, Lyle Weisman and Mr. Tompkins had an initial
conversation, in which Mr. Weisman stated that he was currently a stockholder in
our company, that he was interested in obtaining confidential information
regarding our company and that he might be interested in making a proposal for
the acquisition of our company. Mr. Tompkins explained to Mr. Weisman the
status of the transaction, and that under the terms of our company's agreement
with Messrs. Gottlieb and Lebowitz, the special committee could not provide
confidential information to him without first entering into a confidentiality
and standstill agreement with him. Although the providing of confidential
information to and the entering into of negotiations with Mr. Weisman would have
been prohibited by the "no solicitation" provision of the agreement in
principle, at the request of Mr. Tompkins, Messrs. Gottlieb and Lebowitz
consented to the treatment of Mr. Weisman in the same manner as G. Realco LLC,
Trans Healthcare, Inc. and Lillibridge Health Trust for purposes of the "no
solicitation" provision.
On April 20, 2001, Houlihan Lokey discussed with Mr. Weisman the execution
of a confidentiality and standstill agreement. Mr. Weisman advised Houlihan
Lokey that he was not prepared to enter into such an agreement at that time.
21
On May 3, 2001, Mr. Weisman and members of his group met with Messrs.
Gottlieb and Lebowitz, at which time Messrs. Gottlieb and Lebowitz advised Mr.
Weisman and the members of his group attending the meeting, among other things,
that they were not interested in selling their interest in our company at that
time. On May 4, 2001, Mr. Weisman, together with certain of his associates,
participated in a conference call with Mr. Tompkins, Houlihan Lokey and counsel
to the special committee, during which Mr. Weisman again declined to enter into
a confidentiality and standstill agreement, but stated his intention to continue
purchasing shares of our common stock with a view toward possibly presenting his
own proposal at a price and upon terms he believed would be superior to the
price and terms offered by Messrs. Gottlieb and Lebowitz. However, Mr. Weisman
did not, at that time, commit to submitting an alternative offer or proposal.
On May 9, 2001, Messrs. Gottlieb and Lebowitz contacted the special
committee and delivered a revised offer increasing the merger consideration to
$12.00 per share provided that the condition that the proposed transaction be
approved by a majority of the shares of common stock voting on the transaction
not held by Messrs. Gottlieb and Lebowitz be removed.
On May 10, 2001, following further negotiations with Mr. Tompkins, Messrs.
Gottlieb and Lebowitz agreed that the $12.00 price would not be subject to any
downward adjustment (the then current $11.25 price per share was subject to
adjustment downward under certain circumstances to not less than $11.00 per
share). Thereafter, the special committee met to discuss the revised offer
received from Messrs. Gottlieb and Lebowitz. The special committee determined
that the waiver of the condition requiring approval by a majority of the shares
of common stock voting on the transaction not held by Messrs. Gottlieb and
Lebowitz was in the best interests of the common stockholders in view of, among
other factors, the 9% increase above the previous minimum purchase price of
$11.00 and the fact that the $12.00 per share price was at the top of the range
of values indicated by Houlihan Lokey included in its analysis underlying the
financial opinion it rendered in connection with the definitive merger
agreement. It was also noted that three of the four potential alternative
acquirors had decided not to proceed further and that Mr. Weisman and his group
had thus far declined to enter into a confidentiality and standstill agreement.
The special committee noted that the trading price for the common stock was
currently above the proposed $12.00 purchase price, but was informed by Houlihan
Lokey that both the trading price and the recent high volume of trading in our
common stock were influenced by market speculation regarding a possible
strategic transaction involving our company. Following discussion with its legal
and financial advisors regarding the revised proposal, the special committee
unanimously recommended to our board of directors that our company execute and
deliver the definitive merger agreement prepared by counsel to Messrs. Gottlieb
and Lebowitz and counsel to the special committee, subject to such agreement
being modified by counsel to reflect the terms and conditions of the revised
offer. Immediately following the special committee meeting, the board of
directors of our company met and, based upon the special committee's
recommendation, approved, with Messrs. Gottlieb and Lebowitz abstaining, the
execution and delivery of the definitive merger agreement, subject to such
agreement being modified by counsel to reflect the terms and conditions of the
revised proposal. At this meeting, the board of directors also (1) waived the
ownership limitation contained in our charter with respect to Messrs. Gottlieb
and Lebowitz so long as Messrs. Gottlieb and Lebowitz do not own more than 25%
in the aggregate in value of the outstanding equity stock of our company, and
(2) 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 equity stock of our company.
On May 10, 2001, we issued a press release announcing the approval by the
board of directors of a definitive merger agreement with the Acquiror for the
acquisition of our publicly held stock.
On May 11, 2001, the Weisman Group, filed a Schedule 13D with the United
States Securities and Exchange Commission. The Schedule 13D indicated that the
Weisman Group had collectively purchased within the previous sixty days 170,910
shares of common stock of our company, bringing their collective number of
shares of our common stock to 227,410 (or approximately 9.7% of the issued and
outstanding shares of our common stock). In addition, the schedule stated that
the Weisman Group might explore the possibility of presenting their own offer at
22
a price and upon terms which might be superior to the price and terms offered by
Messrs. Gottlieb and Lebowitz. On May 17 and 18, 2001, the Weisman Group filed
amendments to their Schedule 13D to reflect additional common stock purchases.
On May 17, 2001, Mr. Weisman, his associates and his advisors met with Mr.
Tompkins and the special committee's legal and financial advisors. At this
meeting, Mr. Weisman again declined to enter into a confidentiality and
standstill agreement, but informed Mr. Tompkins that he and his associates
intended to submit a proposal within two weeks at a price and upon terms they
believed would be substantially better than the price and terms of Messrs.
Gottlieb and Lebowitz's proposal.
On May 17, 2001, a third purported class action lawsuit was filed against
our company and our directors. See "Special Factors -Litigation Regarding the
Merger" for a description of this lawsuit.
On May 25, 2001, we filed a Current Report on Form 8-K disclosing the
status of the discussions with the four entities that had expressed an interest
in a possible transaction with our company. Specifically, we disclosed that
each of G. Realco LLC, Trans Healthcare, Inc. and Lillibridge Health Trust had
indicated to us that it was not currently interested in pursuing an opportunity
with our company, and that on May 17, 2001, Mr. Weisman had indicated to our
company that he and his associates intended to submit a proposal within two
weeks at a price and upon terms that they believed would be substantially better
than the price and terms of Messrs. Gottlieb and Lebowitz in their proposal.
On May 31, 2001, the Weisman Group filed an amended Schedule 13D indicating
that they intended to make a proposal to the special committee within seven days
at a price they expected to be between $14.50 and $15.50 per share. According
to the amended Schedule 13D, the Weisman Group intended to finance their
proposal through a combination of personal funds and funds from committed
financing sources. On June 4, 2001, we filed a Current Report on Form 8-K
indicating that the Weisman Group had filed an amended Schedule 13D stating that
they intended to make such a proposal to the special committee.
On May 31, 2001, the purported class action lawsuit filed against our
company and our directors on December 14, 2000 in the Circuit Court for
Baltimore City, Maryland, was re-filed in the Superior Court for the State of
California, County of Los Angeles. See "Special Factors-Litigation Regarding
the Merger" for a description of this lawsuit.
On June 1, 2001, a fourth purported class action lawsuit was filed against
our company and our directors. See "Special Factors-Litigation Regarding the
Merger" for a description of this lawsuit.
On June 5, 2001, the special committee received a proposal from the Weisman
Group to acquire, at the election of our company, either (1) all of the issued
and outstanding common stock of our 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 (2) all of the assets of our
company at an all cash purchase price equivalent to $15.00 per share of common
stock (the "Weisman Proposal").
On June 6, 2001, the Weisman Group filed an amended Schedule 13D to reflect
the Weisman Proposal. On June 6, 2001, we issued a press release announcing
receipt of the Weisman Proposal and filed a Current Report on Form 8-K attaching
the Weisman Proposal.
On June 7, 2001, the purported class action lawsuit filed against our
company and our directors on December 14, 2000 in the Circuit Court for
Baltimore City, Maryland was voluntarily dismissed without prejudice. See
"Special Factors-Litigation Regarding the Merger" for a description of this
lawsuit.
23
On June 7, 2001, the special committee met immediately following a meeting
of the board of directors of our company. During the meeting, Mr. Tompkins
briefed the other committee members on the Weisman Proposal. He noted, among
other things, that the proposal was subject to a number of contingencies,
including the satisfactory completion of due diligence by the Weisman Group, and
that the special committee was limited by the definitive merger agreement with
the Acquiror in the ways in which it could respond to the Weisman Proposal. It
was determined that the special committee should meet as soon as possible with
its legal advisors to determine a proper response to the Weisman Proposal. The
special committee determined not to engage Houlihan Lokey to render financial
advice regarding the Weisman Proposal and limited its engagement of Houlihan
Lokey to rendering its financial opinion and financial advice in connection with
the definitive merger agreement with the Acquiror.
At a meeting held on June 11, 2001, the special committee reviewed the
Weisman Proposal with Ballard Spahr and discussed the options available to the
special committee under the definitive merger agreement with the Acquiror and
applicable Maryland law. It was noted that, while, under the definitive merger
agreement, the special committee was empowered to provide non-public information
to the Weisman Group provided that the Weisman Group entered into an appropriate
confidentiality and standstill agreement in a form acceptable to our company,
the special committee could not negotiate the terms of an offer with the Weisman
Group but, rather, could only seek clarification of any proposals that the
Weisman Group might make unless and until such time, if ever, as the Weisman
Group made an offer that was, in the view of the special committee, superior to
the transactions specified in the definitive merger agreement.
The members of the special committee noted, among other things, that the
Weisman Proposal was subject to contingencies, including an unrestricted and
unqualified due diligence contingency. The members of the special committee
further noted that the financing commitments referenced in the Weisman Proposal
were subject to the satisfaction of the due diligence contingency. Additionally,
no information had been provided to date by the Weisman Group detailing the
specific terms of such financing. In this regard, it was also noted that the
financing necessary to do an asset transaction would be substantially greater
than that needed to complete a stock transaction. It was finally noted that the
consideration of $12.00 per share to be paid to the nonaffiliated stockholders
by the Acquiror under the definitive merger agreement was, in the opinion of
Houlihan Lokey, at the top of the range of values for our company's common stock
indicated by Houlihan Lokey in its analysis underlying the financial opinion it
rendered in connection with the definitive merger agreement. Accordingly, there
was, in the view of the special committee, a high risk that, upon the completion
of due diligence, the Weisman Group would choose not to proceed. Houlihan Lokey
did not provide any advice with regard to the Weisman Proposal. When Houlihan
Lokey determined its range of values for our company's common stock on April 13,
2001, the Weisman Group had not then made a proposal.
After discussion, the special committee determined that it must make
certain not to lose the benefits provided under the definitive merger agreement
with the Acquiror unless it had a firm and financed offer from the Weisman
Group. Accordingly, the special committee delegated to Messrs. Reilly and
Tompkins the authority to meet with the Weisman Group to attempt to gain
clarification as to the terms of the Weisman Proposal and to attempt to work out
an arrangement pursuant to which the Weisman Group would be permitted to conduct
due diligence and the special committee would be able to obtain the information
it needed to assess the capability of the Weisman Group to perform financially.
During the period between June 11, 2001 and June 19, 2001, Ballard Spahr
had various conversations with counsel for the Weisman Group in an attempt to
work out the terms of a confidentiality and standstill agreement which would
permit the Weisman Group to have access to non-public information concerning our
company and the terms of a confidentiality agreement which would permit the
special committee to have access to non-public financial information regarding
the ability of the Weisman Group to finance an acquisition of our company.
On June 19, 2001, Messrs. Reilly and Tompkins, together with
representatives of Ballard Spahr, met for approximately two hours with
representatives of the Weisman Group and their counsel. During the meeting,
Messrs. Reilly and Tompkins reviewed with the representatives of the Weisman
Group the constraints imposed on the special committee and our company by the
definitive merger agreement and thereafter discussed with the representatives of
the Weisman Group:
. the possible parameters of a confidentiality and standstill agreement of
the type needed to permit the special committee to grant the Weisman Group
access to non-public information concerning our company;
24
. the type of financial information that the special committee would need to
receive in order to properly evaluate any offer made by the Weisman Group;
and
. the importance to the special committee of having a firm and fully financed
offer before it could consider terminating the definitive merger agreement.
Ultimately, the representatives of the special committee and the
representatives of the Weisman Group were unable to come to terms as to an
appropriate confidentiality and standstill agreement. The Weisman Group advised
the special committee that it intended to consider whether it needed to conduct
additional due diligence, whether it would be prepared to make a binding offer
not subject to any review or consideration of non-public information or whether,
in the alternative, there was a form of confidentiality and standstill agreement
that it would be willing to accept.
On June 20, 2001, Mr. Tompkins met with Messrs. Gottlieb and Lebowitz to
explore with them the flexibility that they might be willing to grant the
special committee to negotiate with the Weisman Group. Mr. Tompkins also
discussed with Messrs. Gottlieb and Lebowitz the possibility of an increase in
the price offered by them in light of the $15.00 per share price contemplated in
the Weisman Proposal. Messrs. Gottlieb and Lebowitz advised Mr. Tompkins that
they were not prepared to increase the purchase price provided for in the
definitive merger agreement.
On June 21, 2001 and June 22, 2001, meetings were held between Mr. Gottlieb
and Mr. Weisman. During these meetings, Mr. Gottlieb confirmed that he and Mr.
Lebowitz had no desire to sell their ownership in our company. He further
advised Mr. Weisman that he and Mr. Lebowitz believed that their $12.00 per
share proposal was fair and that they had no interest in paying more than the
$12.00 price offered to all the existing common stockholders of our company.
Also, in response to an inquiry by Mr. Weisman, Mr. Gottlieb informed Mr.
Weisman that he and Mr. Lebowitz had no desire to form a partnership with Mr.
Weisman and his group.
On June 22, 2001, the Weisman Group delivered to the special committee a
first amendment (the "First Amendment") to the Weisman Proposal. The First
Amendment amended the Weisman Proposal as follows:
. the price per share of common stock of our company was increased from
$15.00 to $15.25;
. the section of the Weisman Proposal referencing a purchase of our company's
assets was deleted; and
. the expiration of the proposal was extended to 5:00 p.m., Pacific Time, on
Friday, July 6, 2001.
On June 25, 2001, we filed a Current Report on Form 8-K attaching the First
Amendment.
On July 5, 2001, the special committee met to discuss the First Amendment
and to review the information that the Weisman Group had submitted to the
special committee regarding its financial capability to consummate a possible
transaction. The members of the special committee noted that, while the Weisman
Group appeared capable of obtaining the financing necessary to acquire our
company, the special committee could not provide the Weisman Group with the non-
public information about our company needed to satisfy the due diligence
contingency of the Weisman Proposal unless the Weisman Group would agree to
enter into an appropriate standstill agreement in a form acceptable to our
company.
On July 6, 2001, the Weisman Group delivered to the special committee a
second amendment (the "Second Amendment") to the Weisman Proposal that:
. increased the price per share of our company's common stock from $15.25 to
$16.00 (subject to adjustment following customary corporate and legal due
diligence to no less than $15.25), provided that the amount of our
company's common stock to be acquired by the Weisman Group would be 100%;
25
. offered to purchase less than all, but not less than 50.1% on a fully
diluted basis, of our company's common stock at a price per share of
$15.25, without a due diligence contingency;
. conditioned the Weisman Proposal upon the negotiation and execution of a
definitive and customary acquisition agreement between our company and the
Weisman Group and the termination of the definitive merger agreement
between our company and the Acquiror;
. provided that the Weisman Group deliver a deposit of $750,000 to the
special committee's counsel upon our company's acceptance of the Weisman
Proposal, but that the deposit would be refunded if an acquisition
agreement were not executed or if the transaction between our company and
the Weisman Group was unable to close prior to September 30, 2001, for any
reason other than a breach of the acquisition agreement by the Weisman
Group; and
. extended the expiration of the Weisman Proposal to 6:00 p.m., Pacific Time,
on Friday, July 13, 2001.
On July 10, 2001, the special committee met to consider the Second
Amendment. The members of the special committee expressed concern that, if our
company were to terminate the definitive merger agreement between our company
and the Acquiror and move forward with the Weisman Proposal, our stockholders
and company would bear the risk of a failed transaction.
On July 11, 2001, we filed a Current Report on Form 8-K attaching the Second
Amendment. Also, on July 11, 2001, Mr. Tompkins met with Messrs. Gottlieb and
Lebowitz, who provided Mr. Tompkins with a list of a small number of individual
stockholders of our company who, according to Messrs. Gottlieb and Lebowitz, had
advised them of their opposition to the Weisman Proposal and who, together
with Messrs. Gottlieb and Lebowitz, held more than 50.1% of our company's common
stock. In addition, Messrs. Gottlieb and Lebowitz indicated to Mr. Tompkins
that they might be willing to waive the provisions of the definitive merger
agreement between our company and the Acquiror preventing the special committee
from making a counterproposal to the Weisman Group, if the counterproposal set
forth a purchase price of not less than $16.00 per share for all of our
company's common stock, contained contract terms substantially similar to those
currently in place between our company and the Acquiror and required the Weisman
Group to deposit approximately $2.5 million to reimburse our company for its
costs and expenses in the event of a failed transaction.
On July 12, 2001, the special committee met to determine how to respond to
the Weisman Group. The members of the special committee discussed the
information that Messrs. Gottlieb and Lebowitz had provided to Mr. Tompkins
regarding the stockholders of our company who, according to Messrs. Gottlieb and
Lebowitz, had stated that they would not vote for the Weisman Proposal if the
Weisman Proposal were submitted for consideration by our company's common
stockholders. The committee members also discussed, among other things, (1) the
fact that the Weisman Group had not submitted a business plan with respect to
the manner in which our company would be operated were it to acquire control,
(2) the fact that, to date, the Weisman Group had been unwilling to move
forward on a basis other than one that assured it control of our company, and
(3) the time limits imposed on our company by the definitive merger agreement
between our company and the Acquiror and the term of the Acquiror's financing
commitment. The special committee members noted that the Acquiror was not
obliged under the merger agreement between our company and the Acquiror to
permit the special committee to make a counterproposal to the Weisman Group,
and that the willingness of the Acquiror to permit such a counteroffer was
indicative of the strength of the belief apparently held by Messrs. Gottlieb and
Lebowitz that our stockholders would not approve an acquisition of control of
our company by the Weisman Group.
Following discussion, the members of the special committee determined that
the special committee ought to provide this information to the Weisman Group so
that the Weisman Group could determine whether the Weisman Group was willing to
assume the financial risk of its failure to get the stockholder support
required for the consummation of its proposal. In light of these facts, the
special committee also determined that our company should not at this time
terminate the merger agreement or take any action that would give the Acquiror
the right to terminate the merger agreement. Accordingly, the special committee
authorized Mr. Tompkins, provided that the special committee received the
necessary waiver from
26
the Acquiror from compliance with the non-solicitation provisions of the
definitive merger agreement between our company and the Acquiror, to communicate
the special committee's concerns to the Weisman Group that the Weisman Proposal
was not reasonably capable of consummation and to make the following
counterproposal:
. all common stockholders of our company would receive a purchase price of
not less than $16.00 per share, payable all in cash;
. outstanding options would be purchased for a cash price equal to the excess
of the purchase price of not less than $16.00 over the exercise price of
the options (less required withholding of taxes);
. our company and the Weisman Group would promptly enter into a definitive
acquisition agreement setting forth the structure of a transaction and
containing terms substantially similar to those set forth in the definitive
merger agreement between our company and the Acquiror (except as otherwise
contemplated in the counterproposal);
. there would be no contingencies for due diligence or financing;
. the Weisman Group would deliver to our company a nonrefundable payment of
$2.5 million representing a portion of the fees and expenses that have been
incurred by our company to date in connection with the offer made by
Messrs. Gottlieb and Lebowitz and the additional fees and expenses that
would be incurred by our company and paid to the Acquiror upon the
termination of the definitive merger agreement between our company and the
Acquiror; and
. the Weisman Group would be entitled to a termination fee of $2.5 million in
the event that the Weisman Group's acquisition of our company did not take
place due to a material breach by our company of its obligations under the
acquisition agreement between our company and the Weisman Group, but under
no other circumstances.
On July 19, 2001, the special committee received a waiver from the Acquiror
from compliance with the non-solicitation provisions of the definitive merger
agreement between our company and the Acquiror for the purpose of delivering the
counterproposal to the Weisman Group and entering into discussions and
negotiations with the Weisman Group regarding the counterproposal. After
receiving the waiver, the special committee delivered the counterproposal to the
Weisman Group. In the letter setting forth the counterproposal, the special
committee advised the Weisman Group that, if the terms of the counterproposal
were satisfactory, it would be prepared to make its recommendation to our
company's board of directors upon:
. the execution and delivery of a mutually satisfactory, legally binding term
sheet incorporating the terms of the counterproposal;
. review and approval by the special committee of the Weisman Group's
business plan for our company so that the special committee could assure
itself that the contractual obligations of our company to holders of its
preferred stock and debt would be adequately provided for after the change
of control; and
. the payment of $2.5 million to our company.
In addition, the special committee reminded the Weisman Group that, under
the definitive merger agreement between our company and the Acquiror, our
company would be obligated to pay a termination fee of $750,000 plus the
reasonable fees and expenses of Messrs. Gottlieb and Lebowitz and the Acquiror
if our company's board of directors or the special committee approved or
recommended a competing proposal and the definitive merger agreement between our
company and the Acquiror were terminated, regardless of whether the competing
proposal led to a consummated transaction. The special committee also advised
the Weisman Group that, while the special committee had no independent knowledge
27
as to whether the information was accurate, there was a question as to whether
the proposed acquisition of our company by the Weisman Group could be
consummated because the special committee had been informed by Messrs. Gottlieb
and Lebowitz that:
. they did not intend to support the Weisman Group's proposal to acquire our
company;
. a small number of individual stockholders of our company had advised
Messrs. Gottlieb and Lebowitz that they did not intend to support the
Weisman Proposal; and
. these individual stockholders held a number of shares of our company's
common stock that, when aggregated with the shares of common stock and
common stock equivalents held by Messrs. Gottlieb and Lebowitz, could be
sufficient to prevent the Weisman Group from either obtaining the vote
necessary to approve a merger or acquiring 50.1% of the outstanding shares
of our company's common stock.
On July 19, 2001, we issued a press release announcing delivery of the
counterproposal to the Weisman Group. On July 20, 2001, we filed a Current
Report on Form 8-K attaching the counterproposal.
On July 30, 2001, the Weisman Group delivered to the special committee a
third amendment (the "Third Amendment") to the Weisman Proposal. In the Third
Amendment, the Weisman Group reaffirmed its desire to acquire all, but not less
than 50.1%, of our company's common stock. In addition, the Third Amendment:
. increased the proposed cash purchase price 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;
. conditioned the amended proposal on the negotiation and execution of a
definitive acquisition agreement between our company and the Weisman Group
and the termination of the definitive merger agreement between our company
and the Acquiror;
. provided that the Weisman Group would deliver a deposit of $750,000 to the
special committee's counsel if our company accepted the amended proposal
and would increase the deposit by an additional $400,000 upon execution of
a definitive acquisition agreement between our company and the Weisman
Group;
. provided that the deposit was to be refunded if the transaction between our
company and the Weisman Group was unable to close prior to October 30,
2001, for any reason other than a breach of the acquisition agreement by
the Weisman Group; and
. extended the expiration date of the Weisman Proposal to 6:00 p.m., Pacific
Time, on Tuesday, August 7, 2001.
On July 31, 2001, we issued a press release announcing receipt of the Third
Amendment. On August 1, 2001, we filed a Current Report on Form 8-K attaching
the Third Amendment.
On August 6, 2001, the special committee met to discuss the Third
Amendment. The members of the special committee noted that the Weisman Group had
failed to address the special committee's concern about the possibility of a
failed transaction, if the special committee were to terminate the definitive
merger agreement between our company and the Acquiror and to recommend to our
board of directors that the Weisman Proposal be submitted for consideration by
our common stockholders. The special committee members discussed at length the
fact that, while the Weisman Proposal was at a significant premium to the merger
consideration provided to the holders of our company's common stock in the
definitive merger agreement between our company and the Acquiror, there was
considerable uncertainty as to whether the Weisman Proposal could be
consummated and our company could not present the Weisman Proposal to our
common stockholders without either terminating or giving the Acquiror the
right to terminate the merger agreement. If the merger agreement were
terminated on such a basis, and if the Weisman Proposal were to fail to
28
obtain the support of the holders of more than 50% of the outstanding common
stock of our company, then our company and our stockholders would be responsible
for costs and expenses in excess of $2.5 million in addition to having lost the
opportunity to complete an agreed-to transaction. Additionally, in the absence
of a consummated transaction, the special committee had reason to believe that
the market price of shares of our company's common stock might return to levels
which had existed prior to the announcement of the offer by Messrs. Gottlieb and
Lebowitz to purchase all of the shares of our company's common stock which they
did not own. As a result, the special committee decided to request an extension
of the expiration date of the Weisman Proposal to 7:00 p.m., Pacific Time, on
Tuesday, August 14, 2001, to seek clarification from the Weisman Group as to
whether it understood that the Weisman Proposal did not address the special
committee's concern that the cost of a failed transaction not be imposed upon
our company and our stockholders, and to retain an independent expert to advise
the special committee on the likelihood, in light of the fact that Messrs.
Gottlieb and Lebowitz intended to oppose the Weisman Proposal and that a small
number of individual stockholders might also oppose the Weisman Proposal, that
the Weisman Group could obtain the vote necessary to approve a merger or acquire
50.1% of the outstanding shares of our company's common stock.
On August 7, 2001, counsel for the Weisman Group indicated that the Weisman
Group was aware of the special committee's concern regarding the cost of a
failed transaction and felt that those concerns should be largely mitigated by
what the Weisman Group perceived to be a liquidation value of our company's
assets in excess of the merger consideration. The Weisman Group did agree to
extend the expiration date of the Weisman Proposal to 7:00 p.m., Pacific Time,
on Tuesday, August 14, 2001.
On August 14, 2001, the special committee met again to discuss the Third
Amendment. At this meeting, D. F. King & Co., Inc. ("D. F. King"), a nationally
recognized proxy solicitation firm, advised the special committee that, if
Messrs. Gottlieb and Lebowitz remained opposed to an acquisition of control of
our company by the Weisman Group, the Weisman Group would have, at best, a 15%
to 25% chance of obtaining 50.1% of our company's outstanding common stock in a
tender offer and, at best, a 10% chance of obtaining the vote of 50.1% of our
company's outstanding common stock to approve a merger. D. F. King noted that,
while it had not considered the potential exercise by Messrs. Gottlieb and
Lebowitz of their stock options or the intentions of the individual stockholders
of our company who, according to Messrs. Gottlieb and Lebowitz, had expressed
their opposition to an acquisition of control of our company by the Weisman
Group, the consideration of this information would have probably had the effect
of further lowering the chances of success of the Weisman Proposal or a tender
offer by the Weisman Group. After D. F. King's presentation, the special
committee authorized Messrs. Tompkins and Michelson to contact the individual
stockholders of our company who, according to Messrs. Gottlieb and Lebowitz, had
expressed their opposition to an acquisition of control of our company by the
Weisman Group to verify whether they would vote their shares against the merger
contemplated by the Weisman Proposal, if given the opportunity to vote, and
whether they would choose not to participate in a potential tender offer by the
Weisman Group. The special committee also requested an extension of the
expiration date of the Weisman Proposal to 7:00 p.m., Pacific Time, on Monday,
August 20, 2001, to which the Weisman Group agreed.
Immediately following the special committee meeting, the board of directors
of our company met and called our annual meeting of stockholders for September
21, 2001, at 10:00 a.m., Pacific Time, at the Beverly Hilton Hotel in Beverly
Hills, California. The board set a record date of August 27, 2001 for
determining stockholders entitled to notice of, and to vote at, our annual
meeting.
During the next two days, Messrs. Tompkins and Michelson spoke with six
individual stockholders of our company who collectively hold approximately
271,500 shares of our company's common stock. While one of the six individual
stockholders, who owns approximately 128,000 shares of our company's outstanding
common stock, or approximately 4.5% of our outstanding common stock, suggested
that he would consider participating in a tender offer by the Weisman Group if
the tender offer were not conditioned on the Weisman Group acquiring a certain
percentage of our company's outstanding common stock (or if all conditions of
the tender offer were satisfied) and voting in favor of a merger between our
company and an entity controlled by the Weisman Group if he were certain that
his shares would be the difference between success and failure of the merger
proposal, the remaining five individual stockholders, who collectively own
approximately 143,500 shares of our company's outstanding common stock, or
approximately 5% of our outstanding common stock expressed an unwillingness to
support an acquisition of control of our company, by the Weisman Group under any
circumstances.
On August 17, 2001, the special committee met to determine how to respond
to the Third Amendment. At this meeting, the special committee discussed Messrs.
Tompkins and Michelson's conversations with the six individual stockholders of
our company and noted that, if Messrs. Gottlieb and Lebowitz were to exercise
their stock options entitling them to acquire up to an additional 167,000 shares
of our company's common stock, they would own 1,374,859 shares of our company's
common stock (or 45.2% of the then outstanding 3,038,654 shares of our company's
common stock) and be within 144,468 shares of a majority (just 968 shares more
than the 143,500 shares held by the five stockholders who seemed unlikely to
support an acquisition of control of our company by the Weisman Group). The
special committee members expressed their belief that the holders of a
sufficient number of shares opposed an acquisition of control of our company by
the Weisman Group to make consummation of the Weisman Proposal impossible.
Additionally, the special committee members expressed their concern that the
Third Amendment did not provide for reimbursement of our company for losses it
would incur in the event of a failed transaction. After discussion, the special
committee determined that it was unable to recommend to our company's full board
of directors that it proceed with the transaction outlined in the latest Weisman
Proposal. Additionally, the special committee authorized Mr. Tompkins, as
chairman of the special committee, to finalize the terms of a revised engagement
letter between the special committee and Houlihan Lokey, pursuant to which
Houlihan Lokey would deliver to the special committee an updated opinion with
respect to the fairness, from a financial point of view, of the $12.00 per share
to be received by the nonaffiliated stockholders of our company in connection
with the merger of the Acquiror with and into our company. Houlihan Lokey did
not provide financial advice to the special committee in connection with the
Weisman Proposal. The special committee has not utilized the services of
Houlihan Lokey as a financial advisor in its consideration of the Weisman
Proposal in an effort to minimize the total expenses incurred by our company in
connection with the merger of the Acquiror and our company. After the meeting,
the special committee delivered a letter to the Weisman Group informing the
Weisman Group of its decision with regard to the Weisman Proposal.
On August 17, 2001, we issued a press release announcing that the special
committee was unable to recommend that the board of directors proceed with the
transaction outlined in the latest Weisman Proposal. On August 20, 2001, we
filed a Current Report on Form 8-K attaching the letter that the special
committee delivered to the Weisman Group on August 17, 2001.
On August 21, 2001, the Weisman Group delivered to the special committee a
fourth amendment (the "Fourth Amendment") to the Weisman Proposal. The Fourth
Amendment:
. provided for delivery of a deposit of $750,000 to counsel for the
special committee, which would be credited towards the purchase price
of our company's common stock;
. provided for, no later than three business days following execution of
a definitive agreement between our company and the Weisman Group, an
increase to the deposit by $1,750,000 for a total of $2,500,000, to be
credited towards the purchase price of our company's common stock;
. provided that the $2,500,000 deposit would become non-refundable to
the Weisman Group and be paid to our company should no transaction
whereby holders of our company's common stock receive aggregate
consideration of $12.00 or more for each share of our company's common
stock they own (regardless of the originator of such transaction)
close within 12 calendar months from the date of execution of the
definitive agreement between our company and the Weisman Group; and
. extended the expiration date of the Weisman Proposal to 6:00 p.m.,
Pacific Time, on Friday, August 24, 2001.
On August 24, 2001, we filed a Current Report on Form 8-K
attaching the Fourth Amendment.
On August 24, 2001, the Weisman Group agreed to extend the
expiration date of the Weisman Proposal to 7:00 p.m., Pacific Time, on Friday,
August 31, 2001.
On August 30, 2001, the Weisman Group agreed to extend the expiration date
of the Weisman Proposal to 7:00 p.m., Pacific Time, on Thursday, September 6,
2001.
On August 31, 2001, we filed a Current Report on Form 8-K announcing this
extension.
On September 4, 2001, the special committee met to consider the Fourth
Amendment. At this meeting, the special committee members expressed their
continued belief that the Weisman Proposal was not reasonably capable of being
completed in light of the fact that Messrs. Gottlieb and Lebowitz had indicated
to the special committee that they would not support the Weisman Proposal and a
number of stockholders of our company had confirmed to certain special committee
members that they would not support an acquisition of control of our company by
the Weisman Group. Additionally, the special committee members noted that, if
the special committee were to terminate the definitive merger agreement between
our company and the Acquiror and to recommend that our board of directors
proceed with the transaction outlined in the Weisman Proposal, it was likely
that no transaction would be consummated whereby the nonaffiliated stockholders
would receive at least $12.00 per share. The special committee members discussed
changing conditions in the real estate market and noted that, if the Weisman
Proposal were to be submitted to our company's stockholders and the conditions
to closing included in the Weisman Proposal were not satisfied, there was no
assurance that Messrs. Gottlieb and Lebowitz would then be willing to acquire
the shares of common stock held by the nonaffiliated stockholders at a price of
$12.00 per share (if they were even willing to acquire the shares at all),
especially since Messrs. Gottlieb and Lebowitz's costs to complete the
acquisition might increase dramatically and since there would be no alternative
acquiror at that time. After discussion, the special committee determined that
it was unable to recommend to the full board of directors that it proceed with
the transaction set forth in the latest Weisman Proposal. At the meeting, the
special committee also approved the terms of a revised engagement letter with
Houlihan Lokey, pursuant to which Houlihan Lokey would render an opinion as to
the fairness, from a financial point of view, of the $12.00 per share to be
received by the nonaffiliated stockholders of our company in connection with the
merger of the Acquiror with and into our company.
After the meeting, the special committee delivered a letter to the Weisman
Group informing the Weisman Group of its decision with regard to the Weisman
Proposal. The special committee stated that it had concluded that there is no
reasonable possibility that the Weisman Group could complete the acquisition of
at least 50.1% of the outstanding common stock of our company. On September 5,
2001, we issued a press release announcing this decision and filed a Current
Report on Form 8-K attaching the letter delivered to the Weisman Group.
On September 5, 2001, the special committee received a further amendment
(the "Fifth Amendment") to the Weisman Proposal. The Fifth Amendment:
. increased the proposed cash purchase price to $16.50 per share with a
due diligence contingency, or $15.50 per share without a due diligence
contingency;
. reduced the minimum required threshold for completing the acquisition
of our company's common stock to 45.0% (inclusive of the common stock
owned by the Weisman Group);
. left unchanged the provision for delivery of the $2,500,000 deposit
more particularly described in the Fourth Amendment;
. provided that our company would promptly, upon completion of the
transaction contemplated by the Weisman Proposal, take the steps that
may be necessary or appropriate for delisting the shares of our common
stock from trading; and
. extended the expiration date of the Weisman Proposal to 7:00 p.m.,
Pacific Time, on Wednesday, September 12, 2001.
On September 6, 2001, at a meeting of the special committee to consider the
definitive merger agreement with the Acquiror, Houlihan Lokey discussed with the
special committee its conclusions as to the current net asset and per share
values of our company under five valuation methodologies - the build-up method,
the direct cap approach, the consolidated discounted cash flow approach, the
funds from operations approach and the yield approach. Representatives of
Houlihan Lokey gave detailed presentations regarding their views and analyses of
various aspects of the proposed merger, market conditions prevailing in the real
estate market and other matters affecting their review of the fairness, from a
financial point of view, of the $12.00 per share to be paid to the nonaffiliated
stockholders. At this meeting, Houlihan Lokey delivered its oral opinion, later
confirmed in writing, based on the matters presented to the special committee
and as set forth in its opinion as of September 6, 2001 that the $12.00 per
share to be paid to the nonaffiliated stockholders was fair from a financial
point of view. Houlihan Lokey also expressed its view to the special committee
that the real estate market conditions had become less favorable compared to the
real estate market conditions prevailing on April 13, 2001 when Houlihan Lokey
delivered its initial opinion.
At its September 6, 2001 meeting, the special committee also discussed the
Fifth Amendment. Houlihan Lokey did not provide any advice in connection with
the Weisman Proposal including the Fifth Amendment. The special committee
determined that it should obtain advice from D. F. King as to the likelihood
that the Weisman Group could acquire at least 45.0% of our company's common
stock in a tender offer, in light of the fact that Messrs. Gottlieb and Lebowitz
had indicated to the special committee that they would not support the Weisman
Proposal and a number of stockholders of our company had confirmed to certain
special committee members that they would not support an acquisition of control
of our company by the Weisman Group, and assuming the exercise by Messrs.
Gottlieb and Lebowitz of their 167,000 stock options.
After the September 6, 2001 meeting, Mr. Tompkins suggested to Mr. Gottlieb
that, despite the non-solicitation provisions in the definitive merger agreement
between our company and the Acquiror, the Acquiror allow the special committee
to negotiate with the Weisman Group with regard to the latest Weisman Proposal.
Mr. Gottlieb stated that he and Mr. Lebowitz intended to hold the special
committee to the terms and conditions of the definitive merger agreement and to
move forward with the transaction contemplated by the definitive merger
agreement, particularly given that the Acquiror's financing commitment is
scheduled to expire on October 15, 2001 and that any further delays would
subject our company to potential liability for termination fees and
reimbursement of expenses under the definitive merger agreement. Mr. Gottlieb
also stated that, in his and Mr. Lebowitz's view, the latest Weisman Proposal
contained a number of substantial deficiencies, including the condition that
our common stock be delisted from public trading even if the Weisman Group
acquires less than all of our outstanding stock.
On September 7, 2001, we filed a Current Report on Form 8-K attaching the
Fifth Amendment.
On September 7, 2001, the special committee met to consider the Fifth
Amendment. Mr. Tompkins briefed the other special committee members on his
conversations with Mr. Gottlieb. In addition, D.F. King presented to the special
committee its analysis as to the likelihood that the Weisman Group could acquire
at least 45.0% of our company's common stock pursuant to a tender offer. When
asked whether the Weisman Group could acquire at least 45.0% of our outstanding
common stock if the proposed transaction between our company and the Acquiror
were terminated and, despite the opposition of Messrs. Gottlieb and Lebowitz,
the special committee and our board of directors recommended consummation of the
Weisman Proposal, D.F. King responded that, under these circumstances, the
Weisman Group would have, at best, a 50% chance of acquiring at least 45.0% of
our outstanding common stock.
After D.F. King's presentation, the special committee members expressed
their concern that it was still more likely than not that the Weisman Group
would be unable to complete the acquisition of at least 45.0% of our outstanding
common stock. The special committee members noted that, if the proposed
transaction between our company and the Acquiror, whereby the nonaffiliated
holders of our common stock would receive $12.00, were terminated, there was
no assurance that our company would ever reach a binding agreement with the
Weisman Group. The special committee members also expressed their concern that,
if the special committee and our board of directors recommended the latest
Weisman Proposal and the conditions to closing included in that proposal were
not satisfied, there was no assurance that any transaction would be offered to
our common stockholders, which could lead to our common stock returning to its
historic trading levels preceding the announcement of the proposed transaction
between our company and Messrs. Gottlieb and Lebowitz or even lower trading
levels in view of the declining real estate market.
Following discussion, the special committee determined that it was unable
to recommend to our board of directors that it proceed with the transaction
contemplated by the latest Weisman Proposal. After this decision, the special
committee authorized Mr. Tompkins, as chairman of the special committee, to
deliver to the Weisman Group a letter explaining the special committee's
decision and noting, among other things, that:
. the Weisman Proposal is not yet in the form of a binding agreement
executed by the Weisman Group capable of acceptance by our company upon
execution of the agreement;
. the special committee is of the view that it is more likely than not
that the Weisman Group would be unable to complete the acquisition of at
least 45.0% of our outstanding common stock;
. the special committee is of the view that, if the proposed transaction
between our company and the Acquiror were terminated and the conditions
to closing set forth in the Weisman Proposal were not satisfied, our
common stock might return to its historic trading levels prior to the
announcement of the proposed transaction between our company and Messrs.
Gottlieb and Lebowitz; and
. despite the special committee's numerous requests, the Weisman Group
has not yet provided the special committee a business plan with respect
to the future management or operation of our company.
After its decision with regard to the latest Weisman Proposal, and after
noting that the purchase price of $12.00 per share to be received by our
company's nonaffiliated stockholders under the definitive merger agreement
between our company and the Acquiror is $2.00 per share greater than the top of
Houlihan Lokey's most recent range of values for our company's common stock
included in its analysis underlying the financial opinion it rendered in
connection with the definitive merger agreement, the special committee
unanimously concluded that the transaction contemplated by the definitive merger
agreement remains fair and reasonable to and in the best interests of our
company and its unaffiliated common stockholders and affirmed its recommendation
that our company consummate the transaction contemplated by the definitive
merger agreement.
On September 10, 2001, we issued a press release announcing that the
special committee was unable to recommend that the board of directors proceed
with the transaction outlined in the latest Weisman Proposal and had affirmed
its recommendation that our company consummate the transaction contemplated by
the definitive merger agreement between our company and the Acquiror. On
September 10, 2001, we also filed a Current Report on Form 8-K attaching the
letter that the special committee delivered to the Weisman Group after the
special committee's meeting on September 7, 2001.
On September 17, 2001, the board of directors moved the annual meeting of
stockholders from September 21, 2001 to October 11, 2001.
On September 17, 2001, the special committee received a further amendment
(the "Sixth Amendment") to the Weisman Proposal. The Sixth Amendment set forth
two alternative proposals - Proposal A and Proposal B - which were scheduled to
expire at 5:00 p.m., Pacific Time, on September 24, 2001. In Proposal A, the
Weisman Group:
. offered to acquire all of the issued and outstanding common stock of our
company via a cash-out merger at a purchase price of $15.50 per
share;
. waived due diligence as a pre-condition to any transaction at $15.50 per
share;
. offered to deliver an initial deposit of $750,000 to the special
committee's counsel within two business days after the special committee
accepted the offer and, no later than three business days following
execution of a definitive acquisition agreement between our company and
the Weisman Group, to increase the deposit by $1,750,000, for a total of
$2,500,000 to be credited towards the purchase price of our company's
common stock;
. provided that the $2,500,000 deposit would become non-refundable to the
Weisman Group and be paid to our company should no transaction whereby
holders of our common stock receive consideration of at least $12.00 for
each share of our company's common stock they own (regardless of the
originator of such transaction) close within twelve calendar months from
the date of the definitive acquisition agreement between our company and
the Weisman Group;
. provided that the offer would not be subject to any financing
contingency; and
. conditioned the offer on the negotiation and execution of a definitive
acquisition agreement between our company and the Weisman Group and the
termination of the definitive merger agreement between our company and
the Acquiror.
In Proposal B, the Weisman Group asked that the special committee and
our board of directors approve and recommend a direct offer from the Weisman
Group to all common stockholders of our company containing the following
terms:
. the purchase price would be $15.50 per share of our company's common
stock;
. the acquiring party would be a new entity to be formed by the Weisman
Group and principally owned by them;
. the timing would be as soon as practicable, consistent with applicable
corporate and securities laws and exchange regulations;
. the maximum number of shares of our company's common stock to be
purchased by the Weisman Group would be 100% of our company's issued and
outstanding stock;
. the minimum number of shares of our company's common stock to be
purchased by the Weisman Group would be 40% of our company's issued and
outstanding stock (inclusive of shares owned by the Weisman Group);
. there would be no due diligence condition;
. if the Weisman Group acquired more than 50% of our company's issued and
outstanding shares of common stock, then it would as soon thereafter as
practicable seek to effect a cash-out merger between the acquiring entity
and our company upon the same terms and conditions;
. the definitive merger agreement between our company and the Acquiror
would be terminated;
. our board of directors would issue a favorable recommendation in support
of the Weisman Group's offer to our company's common stockholders;
. our company would, upon completion of the tender offer, take the steps
necessary or appropriate for delisting the shares of our company's common
stock from trading; and
. the Weisman Group would deliver a $2,500,000 non-refundable deposit as
set forth in Proposal A, except that a transaction would be deemed to
have occurred if the Weisman Group achieved at least 40% minimum
ownership of our company.
On September 17, 2001, we issued a press release announcing receipt of
the Sixth Amendment. On September 18, 2001, we filed a Current Report on Form
8-K attaching the Sixth Amendment.
On September 20, 2001, the special committee met to consider the Sixth
Amendment. At the meeting, D. F. King presented to the special committee its
analysis of the likelihood that the Weisman Group could acquire at least 40.0%
of our company's common stock pursuant to a tender offer. D. F. King indicated
that, if the proposed transaction between our company and the Acquiror were
terminated and, despite the opposition of Messrs. Gottlieb and Lebowitz, the
special committee and our board of directors recommended consummation of the
proposed tender offer set forth in the latest Weisman Proposal, the Weisman
Group would have between a 65% and 75% chance of acquiring at least 40.0% of our
outstanding common stock. D. F. King noted that its analysis took into account
the intentions of the individual stockholders of our company who confirmed to
certain special committee members that they would not support an acquisition of
control of our company by the Weisman Group and assumed the exercise by Messrs.
Gottlieb and Lebowitz of their 167,000 stock options. When asked what chance the
Weisman Group would have of acquiring at least 40.0% of our outstanding common
stock if Messrs. Gottlieb and Lebowitz did not exercise their 167,000 stock
options, D. F. King responded that, under these circumstances, the Weisman Group
would have between a 75% and 80% chance of acquiring at least 40.0% of our
outstanding common stock.
After D. F. King's presentation, the special committee noted that
acceptance of either proposal set forth in the Sixth Amendment would permit the
Acquiror to terminate the definitive merger agreement, which would require
prompt payment of the termination fee and reasonable expenses of the Acquiror
(which, according to Messrs. Gottlieb and Lebowitz, now exceed $2,700,000). The
special committee members also noted that, if the proposed transaction between
our company and the Acquiror were terminated, there was no assurance that our
company would ever reach a binding agreement with the Weisman Group. The
special committee discussed the fact that the Weisman Group would not be
required to deliver the $1,750,000 balance of the deposit contemplated by the
Weisman Proposal until after the execution of a definitive acquisition agreement
between our company and the Weisman Group. The special committee members
expressed their continued concern about depriving our company's stockholders of
the benefits of the definitive merger agreement between our company and the
Acquiror and exposing our company to liability for the termination fees provided
for in that agreement unless that agreement could be simultaneously replaced by
an alternative agreement and the payment of the $2,500,000 deposit. The special
committee also noted that the Weisman Group had still not provided the special
committee a business plan with respect to the future management or operation of
our company. Following discussion, the special committee determined that it was
unable to recommend to our board of directors that it proceed with either
transaction contemplated by the latest Weisman Proposal. In connection with its
decision, the special committee authorized Mr. Tompkins, as chairman of the
special committee, to deliver to the Weisman Group a letter explaining that the
special committee could not recommend any proposal from the Weisman Group unless
that proposal was in the form of a definitive acquisition agreement executed by
the Weisman Group, which would become immediately binding upon execution and
delivery by our company, and accompanied by a deposit of not less than
$2,500,000.
On September 20, 2001, we issued a press release announcing the
special committee's decision with regard to the latest Weisman Proposal. On
September 21, 2001, we filed a Current Report on Form 8-K attaching the letter
that the special committee delivered to the Weisman Group after the special
committee's meeting on September 20, 2001.
On September 21, 2001, the special committee received a letter from
the Weisman Group acknowledging receipt of the special committee's letter dated
September 20, 2001 and indicating that the Weisman Group intended to have a
response to the special committee by the close of business on September 25,
2001.
On September 25, 2001, the special committee received a letter from the
Weisman Group which contained an executive summary of the Weisman Group's
strategic plan for our company. In the letter, the Weisman Group indicated that
it expected to send to the special committee by the end of the week a mark-up of
the definitive merger agreement between our company and the Acquiror and to
deliver to the special committee by the end of the business day on October 1,
2001 a revised proposal, as well as updated commitment letters regarding its
financing.
[On September __, 2001, the special committee met to consider an amendment
to the definitive merger agreement between our company and the Acquiror. The
amendment extended the deadline for holding a stockholders meeting to October
__, 2001 and extended the deadline for completion of the merger of the Acquiror
with and into our company to November __, 2001. In addition, the amendment
provided that our company would be required to pay all of the reasonable
expenses incurred by Messrs. Gottlieb and Lebowitz and the Acquiror if the
Acquiror or our company terminated the definitive merger agreement because the
merger was not completed by November __, 2001. After discussion, the special
committee recommended to our board of directors that our company execute and
deliver the amendment to the definitive merger agreement. Immediately following
the special committee meeting, the board of directors of our company met and,
based upon the special committee's recommendation, approved, with Messrs.
Gottlieb and Lebowitz abstaining, the execution and delivery of the amendment to
the definitive merger agreement. Our board of directors also rescheduled our
annual meeting of stockholders for October __, 2001, at 10:00 a.m., local time.]
We call your attention to the fact that, subsequent to our delivery of
this proxy statement to the holders of our outstanding common stock, events may
occur that prove relevant to your consideration of and vote upon the proposal to
approve the merger of the Acquiror with and into our company. If such subsequent
events occur, we will keep you informed through press releases as well as
through the documents that we file with the Securities and Exchange Commission.
In addition, for those of you who will be attending our annual meeting of
stockholders in person, we will provide a summary of such subsequent events
prior to the vote to approve the merger. It is important that you review our
press releases and the documents that we file with the Securities and Exchange
Commission between the date of delivery of this proxy statement and the date of
our annual meeting, even if you have already completed and returned your proxy.
You may revoke your proxy at any time before exercise by delivering to our
Secretary a written notice of such revocation, by filing with our Secretary a
duly executed proxy bearing a later date or by voting in person at the annual
meeting.
Purpose of the Merger; Structure of the Merger
Purpose. The purpose for our company in undertaking the merger at this time
is to provide our common stockholders the opportunity to liquidate their
investment in our company at an attractive price. The $12.00 per share price
represents an approximately 55% premium over the average closing price of the
common stock on the New York Stock Exchange during the 10 day period prior to
the announcement of the management stockholders' initial merger proposal to our
board of directors on November 30, 2000. The $12.00 per share price is also 18%
higher than the average price of $10.14 at which we repurchased our common stock
during the proceeding two years. The merger also provides liquidity to
stockholders who may not have otherwise been able to sell their shares due to
the low trading volume of our common stock. Although the Weisman Group has
offered a higher per share price than $12.00, the special committee believes
that the merger proposal by the Acquiror is fair because of the uncertainty that
the proposal by the Weisman Group can be consummated and the Weisman Group's
unwillingness to protect our company against significant out-of-pocket costs we
would incur if the Weisman Group's proposal failed to consummate. The special
committee believes that if the merger were not proposed to our stockholders, it
is likely that our stock price would decrease to the price levels preceding the
announcement of the merger proposal.
For the Acquiror, Acquiror Sub and the management stockholders, the purpose
of the merger is to allow them to become the beneficiaries of any future growth
of our company and increases in value of our company. Acquiror, Acquiror Sub and
the management stockholders determined that it was an appropriate time to make
the merger proposal based on their knowledge of the healthcare REIT and
healthcare industries, their belief that the trading price of our common stock
undervalued our company and our assets and their desire to take advantage of the
benefits described below under "-- Benefits and Detriments of the Merger to the
Acquiror, Acquiror Sub and Management Stockholders". Acquiror, Acquiror Sub and
management stockholders believe that the future growth of healthcare REITs that
primarily rely on owning and managing medical office buildings is limited and
that there are greater opportunities for long-term growth from owning senior
care facilities. These investments, which consist of skilled nursing facilities
and assisted living facilities, have a higher risk profile and may be
inconsistent with the typical investment objectives of common stockholders of a
publicly-traded REIT. Acquiror, Acquiror Sub and management stockholders believe
that the best way to maximize returns is to focus on owning long-term senior
care facilities with short term leases, often with operator-partners, that do
not rely on the credit of the tenant, and concentrate on financially distressed,
turn-around situations. This focus may lead to unpredictable cash flows and
material fluctuations in the cash available for dividends to the common
stockholders. In addition, licensure requirements, which could require our
company to own licenses for these facilities, could impose greater liability on
our company and thus increase the risk of an investment in our common stock.
Moreover, Acquiror, Acquiror Sub and management stockholders believe that the
future growth of our company will involve increasing debt financing and
leverage, which in turn may be inconsistent with the typical investment
objectives of common stockholders of a publicly traded REIT.
Structure. The transaction is structured as a merger of the Acquiror into
our company. We will survive the merger. In connection with financing the
transactions, Acquiror Sub will also merge into the operating partnership. The
operating partnership will survive the merger.
Recommendation of the Special Committee and the Board of Directors; Fairness of
the Merger to Nonaffiliated Stockholders
At a meeting held on May 10, 2001, the special committee unanimously
determined (1) to recommend that the board of directors approve the merger
proposal, and (2) that the terms of the merger proposal are fair to, and in the
best interests of, our company's nonaffiliated stockholders.
At a meeting of the board of directors held on May 10, 2001, at which all
of the directors were present, the board of directors, based on the unanimous
recommendation of the special committee, (1) declared that the transactions
contemplated by the merger agreement are advisable and approved the merger
proposal; (2) directed that the merger proposal be submitted for consideration
29
by our common stockholders and determined to recommend to the stockholders that
they vote to approve the merger proposal; and (3) determined that the terms of
the merger proposal are fair to, and in the best interests of, our company's
nonaffiliated stockholders. The management stockholders who are also directors
abstained from voting.
At a meeting held on September 7, 2001, the special committee unanimously
(1) determined that the transaction contemplated by the definitive merger
agreement between our company and the Acquiror remains fair and reasonable to
and in the best interests of our company and our company's nonaffiliated
stockholders and (2) affirmed its recommendation that our company consummate the
transaction contemplated by the definitive merger agreement.
The Special Committee. In determining to recommend to the board of
directors on May 10, 2001 that it approve the merger proposal and affirm that
recommendation on September 7, 2001, and in determining that the merger proposal
is fair to, and in the best interests of, our company's nonaffiliated
stockholders, the special committee considered a variety of factors, each of
which, in the special committee's view, supported the special committee's
determination to recommend the merger proposal and/or to affirm that
recommendation. The material supporting factors considered were :
. the opinion of Houlihan Lokey dated as of April 13, 2001 as to the
fairness from a financial point of view to our company's nonaffiliated
stockholders of the proposed consideration of $11.25 per share (subject
to adjustment to not below $11.00 per share) to be received by the
nonaffiliated common stockholders in the merger, the opinion of Houlihan
Lokey, dated as of September 6, 2001, as to the fairness from a
financial point of view to our company's nonaffiliated stockholders of
the proposed consideration of $12.00 per share to be received by the
nonaffiliated common stockholders in the merger, and the analyses of the
value of our company and comparisons with similar companies, details of
which are described under the section entitled "Special Factors--
Opinion of the Financial Advisor for the Special Committee," presented
to the special committee by Houlihan Lokey, including the analyses
adopted by the special committee on September 6, 2001. The written
opinion of Houlihan Lokey dated September 6, 2001 is included as
Appendix B to this proxy statement. Stockholders are urged to read the
opinion in its entirety. Without limiting the foregoing, the special
committee specifically reviewed and adopted the following valuation
methodologies and analyses which were included in the analysis and
presentation of Houlihan Lokey delivered to the special committee on
September 6, 2001, none of which may be considered independent of each
other methodology or analysis provided in that presentation:
- The build-up method of valuation included as part of Houlihan
Lokey's analysis which provides, assuming a one-year period to
realize the full value of each of our company's individual
properties and applying a three percent brokerage commission to the
assets, but without taking into account any tax consequences of the
liquidation, any discounts on the value of our company's properties
as a result of the adoption by our company of a plan of liquidation
or the value of any professional fees which would be incurred by our
company in connection with a liquidation that the market value
assuming an orderly liquidation of the assets of our company ranged
from a low of $4.97 per share to a high of $12.67 per share;
- Four methods of valuation (specifically, the direct cap approach,
the consolidated discounted cash flow approach, the funds from
operations approach and the yield approach), included as part of
Houlihan Lokey's analysis, each of which took into account current
market prices for comparable companies through the use of applied
capitalization rates and multiples to cash flow, indicating a going
concern value of our company ranging from speculative values to a
high of $17.13 per share;
. the confirmation by Houlihan Lokey to the special committee in its
presentation, which the special committee expressly adopted, that in its
view the net book value of our company available to common stockholders,
which as of December 31, 2000 was a negative $32 million, after
deducting preferred stock liquidation preference of $25.00 per preferred
share, is not an accurate methodology on a stand alone basis for valuing
our company. Our net book value of $39.9 million, or $17.09 per share as
reflected in our "Selected Financial Data of the Company," as of
December 31, 2000 is calculated by using the net book value from our
company's balance sheet, including the preferred stock liquidation
preference of $25.00 per preferred share, and dividing the net book
value by the total number of common stock shares outstanding at the
balance sheet date. While this calculation is an acceptable method of
computing book value per share, it does not represent the actual book
value available to common stockholders, which as of December 31, 2000
was negative $32 million. While negative $32 million is reflective of
the actual book value available to common stockholders, the special
committee believes that it is not reflective of the value of our
company.
. the advice of Houlihan Lokey included as part of its analysis that the
range of values of our common stock as of April 13, 2001 was between
$6.00 and $12.00 and that the range of values of our common stock as of
September 6, 2001 was between $5.00 and $10.00 (values that reflected no
discount for the fact that Messrs. Gottleib and Lebowitz appeared to
hold a controlling block of our company's common stock);
. the history of the negotiations with respect to the merger proposal
that, among other things, led to an increase in the management
stockholders' offer from $10.00 to $11.00 per share, then to $11.25 per
share (subject to adjustment downward to not below $11.00 per share),
and then ultimately to $12.00 per share, and the belief of the special
committee, after numerous discussions with the management stockholders,
that $12.00 per share was the best price reasonably available from the
management stockholders;
. that the average daily trading volume of our common stock for the year
ended December 31, 2000 was only 4,155 shares, that the institutional
ownership of our common stock is limited to approximately six percent,
that the public float of our common stock for the year ended December
31, 2000 ranged only from a high of 1,950,000 shares at the beginning of
the year to a low of 1,660,000 shares from April until the end of the
year, that our company has a market capitalization of only $39,991,777,
as of August 30, 2001 and that the most recent research report issued by
a research analyst on our company, which related solely to the company's
preferred equity, was by McDonald Investment's High Yield Group on July
17, 2000, all of which the special committee believed continue to
adversely affect the trading market for, and the market value of, our
common stock;
. that $12.00 per share represents a premium of approximately 55% over the
average closing price of $7.74 of the common stock on the New York
Stock Exchange during the 10 trading day period prior to the
announcement of the management stockholders' initial merger proposal to
our board of directors on November 30, 2000;
. that $12.00 per share is greater than the average price of $10.14 at
which our company had repurchased our common stock during the preceding
two years (See "Common Stock Purchase Information");
. the advice of Houlihan Lokey on May 10, 2001 which the special committee
specifically relied upon to the effect that, given the business
conditions at that time, if a transaction were not proposed to our
stockholders, it was likely that our stock price would decrease to the
price levels preceding the announcement of the merger proposal, and the
advice of Houlihan Lokey on September 6, 2001 to the effect that the
real estate market conditions were less favorable as compared to the
real estate market conditions prevailing on April 13, 2001 when
Houlihan Lokey delivered its initial opinion;
. the special committee's belief, following Houlihan Lokey's presentation
of its financial opinion on September 6, 2001, that both the average
closing price of $13.58 of our common stock on the New York Stock
Exchange since the announcement of the Weisman Proposal and the current
market price of $12.55, as of the close of business on September 5,
2001, of our common stock are aberrational and inflated due to public
speculation surrounding the Weisman Proposal and do not reflect a change
in the fundamental value of our company in the market, particularly in
light of the limited institutional ownership and public float of our
common stock;
. our ability to continue to declare regular quarterly dividends on our
shares of common stock consistent with past practice until consummation
of the merger as reflected in financial projections prepared by our
company, which the special committee has been advised by our company
have not changed in any material way through September 6, 2001;
. the terms and conditions of the merger agreement, including the merger
consideration, the scope of the parties' representations, warranties,
covenants and agreements, the number of conditions to the obligations of
the Acquiror and the rights of the special committee and the board of
directors, consistent with their duties, to withdraw or modify their
respective recommendations, subject to payment of a termination fee and
costs and expenses;
30
. the commitment for debt financing from GMAC, which expires on October
15, 2001;
. that the NAREIT index, despite increasing by approximately 8.5% for the
period from February 2, 2001 through September 6, 2001, had remained
virtually constant during the period commencing February 2, 2001 through
the approval of the merger on May 10, 2001, indicating that the increase
in the proposed purchase price to $12.00 as of May 10, 2001 was not
based on fluctuations in the market for REITs, but rather reflects an
increase in the underlying valuation of our business;
. that from the time of the management stockholders' initial acquisition
proposal which was publicly announced on November 30, 2000 through the
approval of the merger by the special committee and the board of
directors on May 10, 2001, the proposed transaction had been publicized
to the market through a number of press releases and public filings,
that four separate parties, G. Realco LLC, Trans Healthcare Inc.,
Lillibridge Health Trust and Lyle Weisman, had expressed interest in
discussing a transaction with us and that the merger agreement provides
that, if we receive a superior proposal from one of these parties or any
other entity, we are entitled to present and recommend to the
stockholders such proposal so long as we pay a termination fee and costs
and expenses;
. that, as of May 10, 2001, when the merger agreement was recommended by
the special committee and approved by our board of directors, three of
these potential acquirors had decided not to proceed further and the
fourth had declined to enter into a confidentiality and standstill
agreement with our company (such an agreement being required by the
agreement in principle before we could provide any non-public
information concerning our company);
. the special committee's conclusion on September 4, 2001 that there was
no reasonable possibility that an acquisition by the Weisman Group of at
least 50.1% of the outstanding common stock of our company could be
completed in light of the fact that Messrs. Gottlieb and Lebowitz had
indicated to the special committee that they would not support the
Weisman Proposal and a number of stockholders of our company who hold in
the aggregate approxmiately 5% of our outstanding common stock had
confirmed to certain special committee members that they would not
support an acquisition of control of our company by the Weisman Group;
. the special committee's conclusion on September 6, 2001 that it was more
likely than not that the Weisman Group would be unable to acquire 45.0%
of the outstanding common stock of our company in a tender offer in
light of the fact that Messrs. Gottlieb and Lebowitz had indicated to
the special committee that they would not support the Weisman Proposal
and a number of stockholders of our company had confirmed to certain
special committee members that they would not support an acquisition of
control of our company by the Weisman Group;
. the special committee's concern about depriving our company's
stockholders of the benefits of the definitive merger agreement between
our company and the Acquiror and exposing our company to liability for
the termination fees provided for in that agreement unless that
agreement could be simultaneously replaced by an alternative agreement
and the payment of the $2,500,000 deposit contemplated by the Weisman
Proposal;
. the special committee's knowledge of our business and the real estate
sector in which we operate, and based on this knowledge and other
factors considered by the special committee the conclusion that, from
the perspective of the nonaffiliated stockholders, it would be
preferable to receive $12.00 in cash per share than to continue to bear
the risk of any decreases in the trading price of our common stock as
seen prior to the November 30, 2000 announcement by Messrs. Gottlieb and
Lebowitz. See "-- Background of the Merger--The Merger Proposal."
In light of the number and variety of factors the special committee
considered in connection with its evaluation of the merger proposal, the special
committee did not find it practicable to assign relative weights to the
foregoing factors; accordingly, the special committee did not do so.
In determining to recommend to the board of directors that it approve the
merger proposal and in affirming the recommendation, and in determining that
the merger proposal is fair to, and in the best interests of, our company's
nonaffiliated stockholders, the special committee considered factors which did
not support the special committee's determination to recommend the merger
proposal. The material negative factors considered were:
. that, following the merger, nonaffiliated stockholders will cease to
participate in future earnings or growth, if any, of our company or
benefit from increases, if any, in our value;
31
. conflicts of interest of our officers and directors in connection with
the merger (see "-- Interests of Certain Persons in the Merger" and
"Certain Relationships and Transactions");
. that the special committee would not be able to provide confidential
information to or solicit alternative offers from future interested
parties, other than the four parties specified in the merger agreement,
unless a superior proposal was made;
. that, due to the significant ownership position of Messrs. Gottlieb and
Lebowitz, only a relatively small number of additional shares would be
required to approve the transaction; and
. the risk that the merger will not be consummated because the conditions
to the merger have not been satisfied or waived. See "The Merger - -
Conditions to the Merger" for a description of these conditions.
The special committee concluded that these negative factors were outweighed
by the supporting factors described above. The special committee consulted with
Houlihan Lokey during the course of Houlihan Lokey's work in connection with its
analysis of our company and evaluation of the proposed merger. The special
committee did not request Houlihan Lokey to conduct a separate liquidation
analysis of our company, although Houlihan Lokey did incorporate liquidation
analyses in arriving at a range of market value for our company through several
different methodologies and in its ultimate conclusion as to the fairness of the
consideration to be received by the nonaffiliated stockholders in the merger.
The special committee believes that the merger proposal is procedurally
fair because:
. the special committee consisted of disinterested directors appointed to
represent the interests of, and to negotiate on an arm's-length basis
with the management stockholders on behalf of, the nonaffiliated
stockholders;
. the special committee retained and was advised by outside legal counsel;
. the special committee retained Houlihan Lokey as financial advisor to
assist it in evaluating the proposed merger and Houlihan Lokey confirmed
that it had full and complete access to all of our records and officers
in conducting its due diligence;
. the merger consideration and the other terms and conditions of the
merger agreement resulted from active arm's-length bargaining between
the special committee and the management stockholders;
. the merger consideration is $2.00 higher than the top of the range of
values of our company's common stock determined by Houlihan Lokey in its
analysis underlying the financial opinion it rendered in connection with
the definitive merger agreement and provided by Houlihan Lokey to the
special committee on September 6, 2001;
. the terms of the proposal and the progress of the transaction were
publicized to the market through a number of press releases and public
filings; and
. our company has reserved the right to consider and accept superior
proposals.
The special committee's determination that the merger proposal is
procedurally fair was made in the absence of the following procedural
safeguards:
. the transaction was not structured so as to require the approval of a
majority of nonaffiliated stockholders. The special committee had
originally required that the transaction be approved by a majority of
the shares of common stock voting on the transaction not held by Messrs.
Gottlieb and Lebowitz but agreed to forgo it on May 10, 2001 in
consideration of an increase in the purchase price per share (See "--
Background of the Merger -- The Merger Proposal); and
32
. a majority of directors who are not employees of our company did not
retain an unaffiliated representative to act solely on behalf of the
nonaffiliated stockholders for purposes of negotiating the terms of the
transaction. The special committee believed its members were capable of
negotiating the terms of the transaction themselves.
The Board of Directors. The board of directors, at its May 10, 2001
meeting, considered the unanimous recommendation of the special committee and
adopted the analysis of the special committee, as well as the factors enumerated
above that were considered by the special committee, and determined that the
merger proposal is fair to, and in the best interests of, the nonaffiliated
stockholders, approved the merger proposal, and recommended that the
stockholders vote to approve the merger proposal. The nonaffiliated stockholders
should be aware in considering the recommendation of the special committee that
was adopted by the board of directors, that the management stockholders are also
members of the board of directors and pursuant to the terms of the merger
agreement will receive an aggregate of approximately $6.2 million in
consideration for a portion of their common stock and for their outstanding
stock options. Although each of the management stockholders abstained from
voting on the merger proposal, such relationships could present such members of
the board of directors with actual or potential conflicts of interest. The board
of directors and the special committee considered the actual or potential
conflicts of interest in making their recommendation and in approving the merger
proposal. The special committee was formed, in part, to address these conflicts
and to act on behalf of the nonaffiliated stockholders in relation to the
merger. See "Special Factors -- Interest of Certain Persons in the Merger" for a
discussion of these conflicts.
The operating partnership, through the board of directors of its general
partner, has concluded that the merger is fair to the nonaffiliated stockholders
based on the recommendation of the special committee, the analysis of the
special committee, which it adopted, and the factors enumerated above that were
considered by the special committee.
Benefits and Detriments to Nonaffiliated Stockholders
We believe that the merger will result in the following benefits to the
nonaffiliated stockholders: (1) realizing the value of their investment in our
company in cash at a price which represents a 55% premium over the average
closing price for the common stock during the 10 trading days prior to the
initial announcement of the management stockholders' offer to acquire all of our
common stock and (2) eliminating the risk of a decline in the value of their
investment in our company.
The primary detriment to nonaffiliated stockholders of the completion of
the merger is that they will cease to have any ownership interest in our company
and will cease to participate in future earnings or growth, if any, of our
company or benefit from increases, if any, in our value. In addition, the
nonaffiliated stockholders may recognize a taxable gain, or loss, upon the
completion of the merger.
Benefits and Detriments of the Merger to Acquiror, Acquiror Sub and Management
Stockholders
Following the merger, the management stockholders will become the
beneficiary of any future earnings growth and any increase in our value.
Acquiror, Acquiror Sub and the management stockholders believe the value of our
company will be enhanced following the merger by the following:
. by having all of our common stock owned by the management stockholders
(which will occur as a result of the merger), we will have access to
capital from our controlling investors rather than being dependent upon the
cyclical public capital markets;
. by having all of our common stock owned by the managing stockholders (which
will occur as a result of the merger), our company will have increased
operating flexibility, including the ability to pursue business
opportunities that may not be attractive to the typical investor in common
stock of a publicly-traded REIT; and
. by eliminating certain costs associated with the public ownership of our
common stock such as costs relating to preparation, printing and mailing of
proxy statements, the overall administrative costs of the surviving company
will be reduced. Although our company will remain a reporting company under
the reporting requirements of the Exchange Act, we will not be subject to
the proxy rules with respect to our common stock. The costs associated with
the public ownership of our common stock is approximately $200,000
annually.
The detriments of the completion of the merger to Acquiror, Acquiror Sub and
the management stockholders are:
. the significant costs and expenses of the transaction, currently
estimated to be at least $600,000, and the limited personal guarantees by
the management stockholders to be given to GMAC as a condition to
completing the financing required for the merger;
33
. the inability of the surviving company to pay for acquisitions with
publicly traded securities; and
. the inability of the surviving company to grant options to its employees
exercisable for publicly traded securities.
Opinion of the Financial Advisor for the Special Committee
The special committee retained Houlihan Lokey to render an opinion to the
special committee as to the fairness, from a financial point of view, of the
consideration to be received by the nonaffiliated stockholders in connection
with the merger. On April 13, 2001, Houlihan Lokey delivered its oral opinion to
the special committee to the effect that, as of the date of such opinion, on the
basis of its analysis and subject to the limitations described below, the
proposed consideration of $11.25 per share (subject to adjustment to not below
$11.00 per share) to be received by the nonaffiliated stockholders pursuant to
the merger is fair to the nonaffiliated stockholders from a financial point of
view. Subsequent to the date Houlihan Lokey delivered its opinion, the
management stockholders increased their offer from $11.25 per share (subject to
adjustment to not below $11.00 per share) to $12.00 per share. In light of the
time that has passed since April 13, 2001, and the possibility that market
conditions may have changed since that date, on September 4, 2001 the special
committee retained Houlihan Lokey to update its opinion as to the fairness, from
a financial point of view, of the $12.00 per share to be received by the
nonaffiliated stockholders. Houlihan Lokey was not engaged to, and did not,
provide any financial advice to the special committee in connection with the
Weisman Proposal.
The full text of the written opinion of Houlihan Lokey directed to the
special committee and dated as of September 6, 2001, which sets forth the
assumptions made, matters considered, procedures followed and limitations of the
review undertaken in connection with the opinion, is attached as Appendix B to
this proxy statement and is incorporated herein by reference. Houlihan Lokey's
opinion addresses only the fairness of the per share consideration of $12.00
proposed to be received by the nonaffiliated stockholders pursuant to the merger
from a financial point of view to such stockholders. The opinion of Houlihan
Lokey is directed to the special committee for its use in connection with its
consideration of the merger proposal. The Houlihan Lokey opinion does not
address the underlying business decision to effect the merger, nor does it
constitute a recommendation to any stockholder as to how they should vote at the
annual meeting with respect to the merger proposal. The summary of the opinion
of Houlihan Lokey set forth herein is qualified in its entirety by reference to
the full text of the opinion. The nonaffiliated stockholders are urged to, and
should, read the opinion carefully and in its entirety.
The special committee retained Houlihan Lokey based upon Houlihan Lokey's
experience in the valuation of businesses and their securities in connection
with recapitalizations and similar transactions, especially with respect to real
estate investment trusts and other real estate-related companies. Houlihan
Lokey is a nationally recognized investment banking firm that is engaged in
providing financial advisory services and rendering fairness opinions in
connection with mergers and acquisitions, leveraged buyouts, business and
securities valuations for a variety of regulatory and planning purposes,
recapitalizations, financial restructurings and private placements of debt and
equity securities.
As compensation to Houlihan Lokey for its services in connection with the
merger, we agreed to pay Houlihan Lokey an aggregate fee of $600,000 in addition
to Houlihan Lokey's expenses in connection therewith. No portion of Houlihan
Lokey's fee is contingent upon the successful completion of the merger, any
other related transaction, or the conclusions reached in the Houlihan Lokey
opinion. We also agreed to indemnify Houlihan Lokey and related persons against
certain liabilities, including liabilities under federal securities laws that
34
arise out of the engagement of Houlihan Lokey, and to reimburse Houlihan Lokey
for certain expenses. In addition, Houlihan Lokey may receive additional
financial advisory fees to provide certain other advisory services to our
company.
Houlihan Lokey was not asked to opine and does not express any opinion as
to: (1) the fairness of the merger to any of our company's security holders
other than the nonaffiliated stockholders, (2) the tax consequences of the
merger to either our company or any of our security holders, (3) the proposed
tender offer, or (4) any of our security holders' underlying business decision
to participate in the merger. Houlihan Lokey's opinion assumes that the special
committee rejected any alternative proposals for a transaction that it may have
received.
Houlihan Lokey has not been requested to, and did not, solicit third party
indications of interest in acquiring all or a part of our company or make any
recommendations with respect to the form or amount of consideration to be paid
in the merger. Houlihan Lokey understands that in addition to the special
committee's consideration of the merger, for which Houlihan Lokey has been
retained as set forth above, the special committee has conducted a series of
communications with the Weisman Group regarding the Weisman Group's desire to
acquire our company or our company's assets. Houlihan Lokey understands that the
Weisman Group has set forth various proposals to acquire not less than 50.1% of
our company's common stock. Houlihan Lokey further understands that the special
committee retained D.F. King & Co. to advise the special committee as to certain
matters regarding the Weisman Proposal. Houlihan Lokey has not advised the
special committee with respect to the Weisman Proposal. On September 4, 2001,
the special committee informed Houlihan Lokey that it rejected the Weisman
Proposal.
In arriving at its fairness opinion, among other things, Houlihan Lokey:
1) held discussions with certain members of the senior management of our
company regarding the operations, financial condition, future
prospects and projected operations and performance of our company;
2) reviewed our company's annual report to stockholders on Form 10-K for
the two fiscal years ended 2000 and quarterly reports on Form 10-Q for
the two quarters ended June 30, 2001, and company-prepared interim
financial statements for the period ended July 31, 2001, which our
management had identified as being the most current financial
statements available at the time;
3) reviewed forecasts and projections prepared by our management with
respect to our company and each of our individual properties for the
years ending December 31, 2001 through 2005 (the "Financial
Forecasts");
4) reviewed the historical market prices and trading volume for our
publicly traded securities;
5) reviewed certain other publicly available financial data for certain
companies that Houlihan Lokey deemed comparable to our company;
6) reviewed copies of the following documents and agreements delivered to
Houlihan Lokey by our company:
- Most recent draft letter to the Board of Directors from Messrs.
Gottlieb and Lebowitz regarding the current merger consideration
of $12.00 as of May 9, 2001;
- Draft minutes of the special committee meetings as of August 6,
2001, August 14, 2001 and August 17, 2001;
- Term sheet between our company and GMAC Commercial Mortgage
Corporation regarding the proposed financing dated as of April 3,
2001 and Amendment 1 dated August 21, 2001 of such financing term
sheet.
- Appraisals for the medical office properties and selected senior
care properties dated between January 2000 and June 2001;
- Company-prepared net asset value calculations as of July 31,
2001;
35
- A schedule of current stock ownership including common stock,
preferred stock, operating partnership units and stock options;
and
- The merger agreement between the Acquiror and our company dated
May 10, 2001.
7) reviewed certain other documents related to our company delivered to
Houlihan Lokey by us; and
8) conducted such other studies, analyses and inquiries as Houlihan Lokey
have deemed appropriate.
Analyses. The following is a summary of the material financial analyses
used by Houlihan Lokey in connection with providing its opinion. This summary
is qualified in its entirety by reference to the full text of Houlihan Lokey's
opinion, which is attached as Appendix B to this proxy statement. You are urged
to read the full text of the Houlihan Lokey opinion carefully and in its
entirety.
Houlihan Lokey used several methodologies to assess the fairness, from a
financial point of view, of the consideration to be received by our company's
nonaffiliated stockholders. Each methodology provided an estimate as to the
aggregate value of the enterprise equity.
Public Market Pricing: Houlihan Lokey considered our public market price
---------------------
to estimate the value of our company. Houlihan Lokey calculated the aggregate
market value of the common equity of our company by multiplying our stock price
on August 30, 2001 by our common shares outstanding on a fully diluted basis as
of August 20, 2001. The resulting market value of common equity and per share
indications, as calculated by Houlihan Lokey, totaled $40 million and $12.74,
respectively. However, Houlihan Lokey noted the relatively low trading volume
associated with our company's common stock.
Build-Up Method: Houlihan Lokey derived an indication of the range of
---------------
enterprise value for our company by: (1) applying capitalization rates to our
adjusted net operating income for the latest twelve month ("LTM") period ended
July 31, 2001, (2) applying capitalization rates to our projected adjusted net
operating income for the year ending December 31, 2002, (3) discounted cash flow
approaches on each of our individual properties based upon the Financial
Forecasts and (4) reviewing appraisals. Houlihan Lokey utilized publicly
available information regarding capitalization rates exhibited in transactions
involving assets similar in type and location to our properties. Houlihan Lokey
also considered the time required and the costs associated with realizing the
net asset values indicated from its analysis. Based on the above analysis,
Houlihan Lokey calculated a range of enterprise value indications of
approximately $248.6 million and $272.8 million.
Based on the above and after adding cash on hand as of July 31, 2001 and
subtracting interest-bearing debt and the liquidation value of our preferred
stock as of July 31, 2001 from the range of enterprise values, the resulting
indications of the market value of the common equity of our company ranged from
$15.6 million to $39.8 million or $4.97 to $12.67 per share, respectively.
Direct Cap Approach: Houlihan Lokey reviewed certain financial information
-------------------
of two sectors of publicly traded comparable REITs selected solely by Houlihan
Lokey: Healthcare REITs and Office REITs. The first sector of public comparable
Healthcare REITs included: Health Care Property Investors, Inc., Health Care
REIT, Inc., Healthcare Realty Trust, Inc., LTC Properties, Inc., National Health
Investors, Inc., and Omega Healthcare Investors, Inc. (collectively, the
"Healthcare REIT Comparables"). The second sector of public comparable Office
REITs included: Alexandria Real Estate Equities, Arden Realty, Inc., Great Lakes
REIT, Kilroy Realty Corporation, Koger
36
Equity, Inc., Prentiss Properties Trust, and Reckson Associates Realty
Corporation (collectively, the "Office REIT Comparables" and together with the
Healthcare REIT Comparables, the "Comparables"). Houlihan Lokey calculated
certain financial ratios of the Comparables based on the most recent publicly
available information. The analysis showed, among other things, the following:
(1) the percentage of net operating income ("NOI") to the LTM enterprise value
("EV") exhibited by the Healthcare REIT Comparables ranged from a low of 8.8% to
a high of 13.6%; (2) the percentage of NOI to the LTM EV exhibited by the Office
REIT Comparables ranged from a low of 7.0% to a high of 11.5%; (3) the
percentage of NOI to the next fiscal year ("NFY") EV exhibited by the Healthcare
REIT Comparables yielded one indication of 9.7%; and (4) the percentage of NOI
to the NFY EV exhibited by the Office REIT Comparables ranged from a low of 8.8%
to a high of 10.2%.
Houlihan Lokey derived enterprise value indications for our company by:
(1) applying a selected LTM NOI multiple to our representative NOI for the LTM
period ended July 31, 2001 and (2) applying a selected NFY NOI multiple to our
representative pro forma NOI for the fiscal year 2002. Houlihan Lokey calculated
indications of the range of enterprise values between $228.3 million and $255.3
million. Based on the above and after adding cash as of July 31, 2001 and
subtracting interest-bearing debt as of July 31, 2001 and the weighted average
value of our preferred stock as of August 24, 2001 from the range of enterprise
values, the resulting indications of the market value of the common equity of
our company ranged from speculative or nominal amounts to $18.8 million or
nominal value to $6.00 per share, respectively. Houlihan Lokey recognizes that
these conclusions reflect aggregate marketable minority values and any change of
control transaction would recognize a premium to these pricing conclusions.
Consolidated Discounted Cash Flow Approach. Houlihan Lokey utilized the
------------------------------------------
Financial Forecasts as prepared by management with respect to years 2001 through
2005. After calculating the net present value of cash flows for the applicable
periods using discount rates of 10.5% to 14.5%, a terminal value was calculated
based upon exit capitalization rates of 8.5% to 10.5%. Based on the Financial
Forecasts and this analysis, Houlihan Lokey calculated indications of the range
of enterprise values between $272.3 million and $291.3 million. Based on the
above and after adding cash as of July 31, 2001 and subtracting interest-bearing
debt as of July 31, 2001 and the weighted average value of our preferred stock
as of August 24, 2001 from the range of enterprise values, the resulting
indications of the market value of the common equity of our company ranged from
$35.3 million to $53.8 million or $11.25 to $17.13 per share, respectively.
Funds From Operations Approach: Houlihan Lokey reviewed certain
------------------------------
financial information of the Healthcare REIT Comparables and the Office REIT
Comparables. Houlihan Lokey calculated certain financial ratios of the
Comparables based on the most recent publicly available information. The
analysis showed, among other things, the following: (i) the ratio of the NFY
price to funds from operations ("FFO") exhibited by one indication from the
Healthcare REIT Comparables was 10.1x, and (ii) the ratio of the NFY price to
FFO exhibited by the Office REIT Comparables ranged from a low of 6.1x to a high
of 10.3x.
Because the adjusted FFO for our company for the LTM ended June 30, 2001
was negative, Houlihan Lokey derived market value of the equity indications for
our company by applying a selected NFY FFO multiple to our representative pro
forma FFO for the year 2002. Based on the above, the resulting indications of
the market value of the common equity of our company ranged from $14.8 million
to $17.8 million or $4.72 to $5.65 per share, respectively. Houlihan Lokey
recognizes that these conclusions reflect aggregate marketable minority values
and any change of control transaction would recognize a premium to these pricing
conclusions.
Yield Approach. Houlihan Lokey calculated the FFO payout ratios and
--------------
percentage yield for the dividends paid by the Healthcare REIT Comparables and
the Office REIT Comparables as of August 24, 2001. Houlihan Lokey then derived
an indication of the market value of the equity for our company by applying (1)
a required yield range to our projected FFO payout for NFY 2002 based on FFO
payout ratios demonstrated by the Comparables and (2) an optimal yield range as
determined by selected publicly traded company comparables to our implied common
dividends for projected fiscal year 2002 based on FFO payout ratios demonstrated
by the Comparables. Based on this analysis, the indications of the market value
of the common equity of our company ranged from $15.2 million to $23.7 million
or $4.83 to $7.55 per share, respectively. Houlihan Lokey recognizes that these
conclusions reflect aggregate marketable minority values and any change of
control transaction would recognize a premium to these pricing conclusions.
37
Conclusion. Based on the aforementioned Build-Up Approach, Direct Cap
Approach, Consolidated Discounted Cash Flow Approach, Funds From Operations
Approach, and Yield Approach, Houlihan Lokey determined that the appropriate
range of the market value of the common equity of our company was from
approximately $15.0 million to $30.0 million or $5.00 to $10.00 per share,
respectively. Based on the above analyses, Houlihan Lokey determined that the
proposed consideration of $12.00 per share to be received by the nonaffiliated
stockholders in the merger is fair, from a financial point of view, to the
nonaffiliated stockholders.
As a matter of course, we do not publicly disclose forward-looking
financial information. Nevertheless, in connection with its review, Houlihan
Lokey considered Financial Forecasts. These financial projections were prepared
by the management of our company. The Financial Forecasts were prepared under
market conditions as they existed as of approximately July 31, 2001 and
management does not intend to provide Houlihan Lokey with any updated or revised
Financial Forecasts in connection with the merger. The Financial Forecasts do
not take into account any circumstances or events occurring after the date they
were prepared. In addition, factors such as industry performance, general
business, economic, regulatory, market and financial conditions, as well as
changes to the business, financial condition or results of operation of our
company, may cause the Financial Forecasts or the underlying assumptions to be
inaccurate. As a result, the Financial Forecasts should not be relied upon as
necessarily indicative of future results, and readers of this proxy statement
are cautioned not to place undue reliance on such Financial Forecasts.
In arriving at its fairness opinion, Houlihan Lokey reviewed key economic
and market indicators, including, but not limited to, growth in the U.S. Gross
Domestic Product, inflation rates, interest rates, consumer spending levels,
manufacturing productivity levels, unemployment rates and general stock market
performance. Houlihan Lokey's opinion is based on the business, economic,
market and other conditions as they existed as of September 6, 2001 and on the
Financial Forecasts provided to Houlihan Lokey as of such September date.
In rendering its opinion, Houlihan Lokey has relied upon and assumed,
without independent verification, the accuracy and completeness of the financial
and other information provided to Houlihan Lokey, including, without limitation,
information furnished to it orally or otherwise discussed with it by our
management, or publicly available. In addition, Houlihan Lokey has relied upon
and assumed, without independent verification, that the Financial Forecasts were
reasonably prepared and reflect the best currently available estimates of the
financial results and condition of our company; and that no material changes
have occurred in the information reviewed between the date the information was
provided and the date of the Houlihan Lokey opinion. Houlihan Lokey did not
independently verify the accuracy or completeness of the information supplied to
it with respect to our company and does not assume responsibility for it.
38
Houlihan Lokey relied upon the assurances of our management that they were not
aware of any facts that would make such information inaccurate or misleading.
Furthermore, Houlihan Lokey did not make any independent appraisal of the
specific properties or assets of our company.
The summary set forth above describes the material points of more detailed
analyses performed by Houlihan Lokey in arriving at its fairness opinion. The
preparation of a fairness opinion is a complex analytical process involving
various determinations as to the most appropriate and relevant methods of
financial analysis and application of those methods to the particular
circumstances and is therefore not readily susceptible to summary description.
In arriving at its opinion, Houlihan Lokey made qualitative judgments as to the
significance and relevance of each analysis and factor. Accordingly, Houlihan
Lokey believes that its analyses and summary set forth herein must be considered
as a whole and that selecting portions of its analyses, without considering all
analyses and factors, or portions of this summary, could create an incomplete
and/or inaccurate view of the processes underlying the analyses set forth in
Houlihan Lokey's fairness opinion. In its analysis, Houlihan Lokey made
numerous assumptions with respect to our company, the merger, industry
performance, general business, economic, market and financial conditions and
other matters, many of which are beyond the control of the respective entities.
The estimates contained in such analyses are not necessarily indicative of
actual values or predictive of future results or values, which may be more or
less favorable than suggested by such analyses. Additionally, analyses relating
to the value of businesses or securities of our company are not appraisals.
Accordingly, such analyses and estimates are inherently subject to substantial
uncertainty.
Position of the Acquiror, Acquiror Sub and the Management Stockholders
The Acquiror, Acquiror Sub and the management stockholders have each
concluded that the merger is fair to the nonaffiliated stockholders based on the
following factors:
. the recommendation of and approval by the special committee described
under "-- Recommendation of the Special Committee and the Board of
Directors; Fairness of the Merger to Nonaffiliated stockholders";
. the receipt by the special committee of the opinion of Houlihan Lokey
that the consideration to be received by the nonaffiliated stockholders
in the merger is fair to such stockholders from a financial point of
view;
. that $12.00 per share represents a premium of approximately 55% over the
average closing price of the common stock on the New York Stock Exchange
during the 10 day period prior to the announcement of the management
stockholders' initial merger proposal to our board of directors on
November 30, 2000;
. the management stockholders' belief that the price of our common stock
during the period between the first announcement of a potential
transaction until the execution of the merger agreement reflected the
expectations of our investors based on the announcement of the proposed
merger and that if the merger is not completed, the common stock price
of our company would fall significantly;
. that the principal terms of the merger were established through arm's-
length negotiation between the special committee and its legal and
financial advisors and the management stockholders and their legal
advisors; and
. that during the negotiation of the merger agreement, the interests of
the nonaffiliated stockholders were represented by the special committee
and its legal and financial advisors.
In addition to the other factors considered by the Acquiror, Acquiror Sub
and the management stockholders in concluding that the merger is substantively
and procedurally fair to nonaffiliated stockholders, the Acquiror, Acquiror Sub
and the management stockholders
39
adopted the conclusion and analysis of the special committee described under
"--Recommendation of the Special Committee and the Board of Directors; Fairness
of the Merger to Nonaffiliated Stockholders" that the merger is fair to the
nonaffiliated stockholders. The Acquiror, Acquiror Sub and the management
stockholders did not attach relative weights to the specific factors considered
in reaching their conclusions as to the fairness of the merger to nonaffiliated
stockholders, although they considered the arm's-length negotiations between the
parties, the receipt by the special committee of the opinion of Houlihan Lokey
and the recommendation of the special committee to be the most significant.
Interests of Certain Persons in the Merger
General. In considering the recommendation of the special committee and
the board of directors, stockholders should be aware that our officers and
directors may have interests in the merger or relationships, including those
referred to below, that may present potential or actual conflicts of interest in
connection with the merger. The special committee and the board of directors
were aware of these potential or actual conflicts of interest and considered
them along with other matters described under "-- Recommendation of the Special
Committee and the Board of Directors; Fairness of the Merger to Nonaffiliated
Stockholders." See also "Certain Relationships and Transactions."
Messrs. Gottlieb and Lebowitz. Mr. Gottlieb is our Chief Executive Officer
and co-Chairman of our board. Mr. Lebowitz is our President and the co-Chairman
of our board. Messrs. Gottlieb and Lebowitz are also members of the Acquiror. In
the merger, the Acquiror will merge with and into us, with the nonaffiliated
stockholders receiving the right to receive $12.00 in cash for each share of our
common stock, without interest. In addition, Messrs. Gottlieb and Lebowitz will
receive an aggregate of approximately $6.2 million as merger consideration for a
portion of their shares of common stock and for their outstanding stock
options.
The management stockholders have advised us that they and their affiliates
intend to vote their shares of common stock for approval of the merger proposal.
As of the record date, the management stockholders beneficially owned an
aggregate of 1,207,559 shares of common stock (approximately 42.1% of the
outstanding common stock), including 537,854 shares of common stock issued in
exchange for their partnership units in the operating partnership.
After the merger, all of the outstanding shares of our common stock will be
held by Messrs. Gottlieb and Lebowitz. After Messrs. Gottlieb and Lebowitz
delivered their initial acquisition proposal to our board on November 30, 2000,
Messrs. Gottlieb and Lebowitz recused themselves from all discussions of our
board of directors involving the potential merger until the April 13, 2001
meeting of the board of directors. Messrs. Gottlieb and Lebowitz also abstained
from voting on the merger proposal. These events are described more fully in
"Special Factors -- Background of the Merger."
Treatment of Options. Certain of our directors, officers and employees have
received options to acquire common stock pursuant to our 1993 Stock Incentive
Plan.
Pursuant to the merger agreement, we will take all actions necessary to
cancel, immediately prior to the time the merger becomes effective, each
outstanding option. The merger agreement provides that we will take all actions
necessary to assure that, prior to the effective time of the merger, each option
holder will be entitled to receive a cash amount equal to $12.00 less the
exercise price for each share of common stock subject to the option, payable
after the effective time of the merger for a vested or unvested option. In
addition, upon the execution of the merger agreement, all unvested options held
by the management stockholders became fully vested and exercisable.
40
The table below shows the options currently held by each of our executive
officers and directors (and all other individuals as a group) and the amounts in
respect of such options such individuals (and such group) will be entitled to
receive at the effective time of the merger.
Options Payment at
Name Granted Effective Time
--------------------------------------------- ------------- ----------------
Independent Directors:
Richard L. Lesher.......................... 1,500 $ 2,812.50
Leslie D. Michelson........................ 5,500 7,687.50
Charles P. Reilly.......................... 6,000 4,250.00
S. Craig Tomkins........................... 6,000 4,250.00
Executive Officers:
Daniel M. Gottlieb......................... 83,500 235,812.50
Steven D. Lebowitz......................... 83,500 235,812.50
John H. Rauch.............................. 15,000 7,125.00
David E. Hamer............................. 8,000 ----
All Other Individuals as a Group........... 38,500 4,750.00
Indemnification and Insurance. Pursuant to the merger agreement, from and
after the effective time of the merger, our company, as the surviving
corporation, will indemnify and hold harmless our present and former officers
and directors in respect of acts or omissions occurring prior to the effective
time of the merger to the extent provided under our charter and bylaws in effect
on the date of the merger agreement. For five years after the effective time of
the merger, the surviving company will provide officers' and directors'
liability insurance in respect of acts or omissions occurring prior to the
effective time of the merger covering each such person currently covered by our
officers' and directors' liability insurance policy on terms with respect to
coverage and amount no less favorable than those of such policy in effect on the
date, provided that the surviving corporation shall not be obligated to make
premium payments in excess of 150% of the premiums on the date of the merger
agreement.
Position of Executive Officers, Directors and Affiliates of the Company.
Certain of our executive officers and directors hold shares of common stock. See
"Securities Ownership of Certain Beneficial Owners and Management." After
inquiry of these stockholders, we believe that they intend to vote their shares
in favor of the approval of the merger. Except as otherwise set forth in this
proxy statement (with respect to the management stockholders and their
affiliates), such stockholders have not informed us of the reasons for their
vote.
Certain Consequences of the Merger
Pursuant to the merger agreement, following approval of the merger proposal
and subject to the fulfillment or waiver of certain conditions, the Acquiror
will be merged with and into us. Our company will continue as the surviving
company in the merger.
Because all shares of common stock held by the nonaffiliated stockholders
will be cancelled in the merger, the nonaffiliated stockholders will cease to
participate in future earnings or growth, if any, of our company or benefit from
any increases, if any, in our value, and they no longer will bear the risk of
any decreases in our value. In addition, upon completion of the merger, public
trading of the common stock will cease and the common stock will be delisted
from the New York Stock Exchange.
Distributions by the surviving company after completion of the merger
(other than any distribution for which the record date is a date prior to the
date of completion of the merger) will be paid to the equity owners of the
surviving company and not to the nonaffiliated stockholders.
41
The common stock is currently registered under the Securities Exchange Act
of 1934, as amended (the "Exchange Act"). Following the merger, the common stock
will become eligible for termination of registration pursuant to Section
12(g)(4) of the Exchange Act, and its registration under the Exchange Act will
be terminated. Our preferred stock will remain outstanding following the
merger; thus our obligation to file reports pursuant to the Exchange Act will
continue.
After the merger, we will no longer be subject to the proxy rules under
Exchange Act Regulation 14A with respect to our common stock. Therefore, we
expect to save approximately $200,000 annually relating to the preparation,
printing and mailing of proxy statements and the holding of an annual meeting
for our public common stockholders. Also as a result of the merger, our company
will no longer have immediate access to public equity markets and will be highly
leveraged, with total debt of approximately $194.0 million and stockholder
equity (including preferred stock liquidation preference) of approximately $11.4
million on a pro forma basis as of December 31, 2000.
At the effective time of the merger, unexercised options to purchase common
stock with an exercise price of less than $12.00 will be converted into the
right to receive cash. See "-- Interests of Certain Persons in the Merger -
Treatment of Options" for a further description.
Our executive officers immediately prior to the merger will be the
executive officers of the surviving company immediately after the merger. Our
charter and bylaws in effect immediately prior to the merger will be the charter
and bylaws of the of the surviving company immediately after the merger.
Effects on Interests in Our Net Book Value and Net Loss
The Acquiror and Acquiror Sub do not currently have any interest in our
net book value or net loss and will not obtain any interest after the merger.
The following table sets forth the interest of each of the management
stockholders in our net book value, after the preferred stock liquidation
preference of $25.00 per share, in terms of both dollar amounts and percentages,
immediately prior to the merger and immediately following the merger. We have
used our net book value, after the preferred stock liquidation preference, of
negative $32.0 million as of December 31, 2000 and the equity interest of each
of the management stockholders as of that date to compute the amount prior to
the merger. To compute the amount following the merger, we adjusted our net book
value, after the preferred stock liquidation preference, as of December 31, 2000
to give effect to the merger and related transactions, which resulted in a
pro forma net book value, after the preferred stock liquidation preference, of
negative $60.0 million, and we adjusted the equity interest of each of the
management stockholders to give effect to the merger.
Interest in Net Book Value Interest in Net Book Value
After Preferred Stock After Preferred Stock
Liquidation Preference Liquidation Preference
Prior to the Merger Following the Merger
Name of Affiliate ($ in millions) ($ in millions)
----------------- --------------- ---------------
Daniel M. Gottlieb $ (7.4)/23% $ (32.4)/54%
Steven D. Lebowitz $ (6.0)/19% $ (27.6)/46%
The following table sets forth the interest of each of the management
stockholders in our net loss, after the payment of preferred stock dividends, in
terms of both dollar amounts and percentages, immediately prior to the merger
and immediately following the merger. We have used our net loss, after the
payment of preferred stock dividends, of $6.0 million for the year 2000 to
compute the amount prior to the merger and the equity interest of each of the
management stockholders as of that date to compute the amount prior to the
merger. To compute the amount following the merger, we adjusted our net loss,
after the payment of preferred stock dividends, for the year 2000 to give effect
to the merger and related transactions, which resulted in a pro forma net loss,
after the payment of preferred stock dividends, of $10.5 million, and we
adjusted the equity interest of each of the management stockholders to give
effect to the merger.
Interest in Net Loss After Interest in Net Loss After
Preferred Stock Dividend Preferred Stock Dividend
Prior to the Merger Following the Merger
Name of Affiliate ($ in millions) ($ in millions)
----------------- --------------- ---------------
Daniel M. Gottlieb $ (1.4)/23% $ (5.7)/54%
Steven D. Lebowitz $ (1.1)/19% $ (4.8)/46%
Plans for the Company After the Merger
As of the date of this proxy statement, we have not approved any specific
plans or proposals for any extraordinary corporate transaction involving the
surviving company after the completion of the merger or any sale or transfer of
a material amount of assets currently held by us after the completion of the
merger. In addition, we have been advised by the Acquiror that neither the
Acquiror nor the management stockholders have, as of the date of this proxy
statement, approved any such plans or proposals for any extraordinary corporate
transaction involving the surviving company after the completion of the merger.
We have been advised by the Acquiror that it is the Acquiror's and the
management stockholders' intention to hold their shares of our common stock as a
long term investment. Although the Acquiror deems it unlikely, it reserves the
right to change its plan at any time, and the Acquiror may elect to sell,
transfer or otherwise dispose of all or any portion of the assets currently held
by us to one or more of its affiliates or to any other parties as warranted by
future conditions. In addition, we have been advised by the Acquiror that it
currently plans to retain the members of our senior management, in their current
positions with the surviving company after the merger. The Acquiror reserves the
right to make whatever personnel changes with respect to the current members of
our management it deems necessary after completion of the merger.
The management stockholders have stated that they intend to make a cash
tender offer through a newly formed entity for up to approximately 7% of the
total number of outstanding shares of our preferred stock at a price of $17.50
per share of Series A preferred stock and $17.00 per share of Series B preferred
stock. On September 21, 2001, the closing prices of the Series A preferred stock
and the Series B preferred stock were $18.25 per share and $18.00 per share,
respectively. The tender offer would commence about the time when we begin
soliciting proxies for the annual meeting to consider, among other things, the
proposed merger and would close subject to the closing of the merger, after the
expiration of the statutory offer period (20 business days after the
commencement date of the tender offer), unless extended in accordance with the
rules of the SEC. The management stockholders' plans are subject to change, and
the management stockholders reserve the right to effect such changes.
If required by the terms of the financing with GMAC or another financing
source, we will prior to the effective time of the merger transfer to a newly
formed limited partnership the assets of the operating partnership that are not
related to medical office buildings.
42
Conduct of the Business of the Company if the Merger is not Consummated
If the merger is not consummated, our business and operations are expected
to continue to be conducted substantially as currently conducted. We anticipate
that the management stockholders will continue to be substantial stockholders.
Material Tax Consequences
The following discussion summarizes the material United States federal
income tax considerations of the merger to our stockholders based upon the law
as currently in effect. It does not address any state, local or foreign tax
consequences and does not address the tax consequences to any stockholder in
special circumstances.
EACH STOCKHOLDER SHOULD CONSULT HIS OR HER OWN FINANCIAL AND TAX ADVISOR
REGARDING THE TAX CONSEQUENCES OF THE MERGER TO HIM OR HER.
The exchange of common stock for cash by a stockholder in the merger will
be a taxable transaction under the Internal Revenue Code of 1986, as amended. In
general, a stockholder will recognize capital gain or loss equal to the
difference between the tax basis of his or her common stock and the amount of
cash received in exchange therefor if the common stock is a capital asset in the
hands of the stockholder. Such gain or loss will be long-term capital gain or
loss if the stockholder has held the common stock for more than one year as of
the effective time of the merger. In limited circumstances, certain stockholders
may receive a "dividend," taxed as ordinary income, for cash received in the
merger to the extent of our current or accumulated earnings and profits at the
effective time of the merger. We currently do not anticipate that there will be
such earnings and profits at the effective time of the merger.
These rules may not apply to stockholders who acquired their common stock
pursuant to the exercise of stock options or other compensation arrangements
with us or to stockholders who are not citizens or residents of the United
States or who are otherwise subject to special tax treatment under the Internal
Revenue Code.
Foreign Stockholders
A "Foreign Stockholder" is a person that, for United States federal income
tax purposes, is a non-resident alien individual or a foreign corporation.
Pursuant to the Foreign Investment in Real Property Tax Act of 1980 ("FIRPTA"),
a Foreign Stockholder will be subject to United States federal income tax at
regular graduated rates on gain realized with respect to the common stock
exchanged for cash in the merger, if such stock constitutes a "United States
real property interest." Furthermore, a Foreign Stockholder or other foreign
entities will be subject to withholding in respect of this tax at a rate of 10%
of the amount realized in the merger.
However, the stock will not be treated as a "United States real property
interest" and, as a result, any gain realized by a Foreign Stockholder on the
exchange of common stock for cash in the merger will not be subject to the
United States tax imposed by FIRPTA if (1) our company is a "domestically-
controlled REIT" within the meaning of the Internal Revenue Code; or (2) our
common stock is regularly traded on an established securities market within the
meaning of the Internal Revenue Code, except with respect to certain 5%
stockholders. We believe that the common stock is regularly traded on an
established securities market within the meaning of the Internal Revenue Code.
Backup Withholding
The disbursing agent will be required to file information returns with the
Internal Revenue Service with respect to payments made in connection with the
merger. In addition, certain United States persons may be subject to a 30.5%
backup withholding tax in respect of such payments if they do not provide their
taxpayer identification numbers to the disbursing agent or in certain other
situations. Our stockholders who are not United States persons may be required
to comply with applicable certification procedures to establish that they are
not United States persons in order to avoid the application of such information
reporting requirements and backup withholding tax.
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Backup withholding is not an additional tax. Any amounts withheld under
the backup withholding rules may be refunded or credited against the
stockholder's federal income tax liability, provided that the required
information is furnished to the Internal Revenue Service.
The federal income tax discussion set forth above is included for general
information only and is based upon present law. Due to the individual nature of
tax consequences, stockholders are urged to consult their tax advisors as to the
specific tax consequences to them of the merger, including the effects of
applicable state, local or other tax laws.
Litigation Regarding the Merger
A number of stockholder class actions have been filed against us and our
directors arising out of the proposal by Daniel M. Gottlieb, our Chief Executive
Officer, and Steven D. Lebowitz, our President, to acquire all of the
outstanding shares of our 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.
THE MERGER
The following is a summary of the material provisions of the merger
agreement. The following summary does not purport to be complete and is
qualified in its entirety by reference to the merger agreement which is attached
as Appendix A to this proxy statement and is incorporated herein by reference.
Stockholders are urged to read the merger agreement in its entirety and to
consider it carefully.
The Merger
The merger agreement provides for the merger of the Acquiror with and into
us. We will be the surviving company. At the effective time of the merger, the
separate corporate existence of the Acquiror will cease. The surviving company
will possess all the rights, privileges, immunities, powers and purposes of our
company, and it will assume and become liable for all liabilities and
obligations of the Acquiror.
Merger Consideration
In the merger, each outstanding share of common stock held by the
nonaffiliated stockholders will be converted, by virtue of the merger and
without any action on the part of the stockholders, into the right to receive
$12.00 in cash, without interest. In addition, 475,000 shares held by the
management stockholders will be converted into the right to receive $12.00 in
cash, without interest. Their remaining shares will not be converted and will
remain outstanding after the merger.
The merger agreement provides that, at the discretion of the management
stockholders, the management stockholders may increase the number of shares of
their common stock that convert into the right to receive the merger
consideration if the aggregate purchase price of the preferred stock tendered in
their tender offer is less than $7.75 million. We have been advised by the
management stockholders that they intend to make a cash tender offer through a
newly formed entity for up to 7% of the total number of outstanding shares of
preferred stock at a price of $17.50 per share of Series A preferred stock and
$17.00 per share of Series B preferred stock, or an aggregate purchase price of
$3.5 million. In addition, the management stockholders have advised our company
that they currently do not intend to increase the number of shares of their
common stock that convert into the right to receive the merger consideration if
their preferred stock tender offer is undersubscribed, but instead may, to the
extent that any portion of the $3.5 million is not used to purchase preferred
stock, repay additional personal loans in the amount of such
undersubscription.
In the merger, each option to purchase our common stock, whether or not
fully vested or exercisable, will be converted automatically into the right to
receive in cash the excess, if any, of $12.00 over the exercise price per share
of such option.
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The merger consideration was determined as the result of arm's-length
negotiations between the special committee and the Acquiror. See "Special
Factors -- Background of the Merger," "--Recommendation of the Special Committee
and the Board of Directors; Fairness of the Merger" and "-- Opinion of the
Financial Advisor for the Special Committee."
Effective Time
The merger will become effective at the time (1) of the filing with and
acceptance for record of the Articles of Merger by the State Department of
Assessments and Taxation of the State of Maryland or (2) at such time as we and
the Acquiror specify in the Articles of Merger (not to exceed 30 days after the
Articles of Merger are accepted for record by the Maryland Department). The
Articles of Merger will be filed as soon as practicable after the requisite
approval of the merger proposal by the stockholders at the annual meeting is
obtained and the other conditions precedent to the consummation of the merger
have been satisfied, or waived. We cannot assure you that all conditions to the
merger contained in the merger agreement will be satisfied or waived. See "--
Conditions to the Merger."
Exchange And Payment Procedures
As soon as practicable after the effective time of the merger, Mellon
Investor Services, the disbursing agent, will mail to each record holder of an
outstanding certificate representing common stock immediately prior to the
effective time, a letter of transmittal and instructions for use in effecting
the surrender of such certificate in exchange for the merger consideration. Upon
surrender to the disbursing agent of a certificate representing common stock,
together with such letter of transmittal, duly executed, and such other
documents as may reasonably be required by the disbursing agent, the holder of
such certificate shall be entitled to receive the merger consideration. Until
surrendered in accordance with the foregoing instructions, each certificate
representing common stock will represent for all purposes only the right to
receive the merger consideration.
Stockholders should not send their common stock certificates now; they
should send them only pursuant to instructions set forth in letters of
transmittal to be mailed to stockholders as soon as practicable after the
effective time. In all cases, the merger consideration will be provided only in
accordance with the procedures set forth in this proxy statement, the merger
agreement and such letters of transmittal.
We strongly recommend that certificates representing common stock and
letters of transmittal be transmitted only by registered United States mail,
return receipt requested, appropriately insured. Stockholders whose
certificates are lost will be required at the holder's expense to furnish a lost
certificate affidavit and bond acceptable in form and substance to the
disbursing agent.
Any merger consideration made available to the disbursing agent that
remains unclaimed by stockholders for nine months after the effective time of
the merger will be delivered to the surviving company, and any stockholders who
have not theretofore made an exchange must thereafter look to the surviving
company for payment of their claim for merger consideration.
The surviving company will pay all charges and expenses of the disbursing
agent in connection with the merger and the payment and issuance of the merger
consideration.
Transfer of Common Stock
No transfer of common stock will be made on our stock transfer books after
the effective time of the merger. If, at or after the effective time,
certificates of common stock are presented, they will be canceled and exchanged
for the right to receive the merger consideration as provided in "--Exchange and
Payment Procedures."
45
Additional Agreements
Preparation of SEC filings; Stockholders Meeting. We and the Acquiror have
agreed in the merger agreement to prepare and file with the Securities and
Exchange Commission this proxy statement and the Schedule 13E-3. We have agreed
to use all reasonable best efforts to cause this proxy statement to be mailed to
the stockholders at the earliest practicable date. We and the Acquiror have
agreed to cooperate with each other and use reasonable efforts to take or cause
to be taken all actions, and do or cause to be done all things, necessary,
proper or appropriate to consummate and make effective the merger and the other
transactions contemplated by the merger agreement.
The merger agreement provides that we will (1) as soon as practicable, call
and convene a stockholders meeting for the purpose of obtaining the required
stockholder approvals and (2) through the board of directors recommend to the
stockholders that they approve the merger proposal. Notwithstanding the
foregoing, the board of directors may at any time prior to the effective time of
the merger withdraw, modify or change any recommendation regarding the merger or
the merger agreement, or recommend any other offer or proposal, if the special
committee or the board of directors, after consultation with its counsel and
financial advisor, determines that taking any such action is required in
accordance with its duties to the stockholders under applicable law.
Access. The merger agreement provides that we will afford the
representatives of the Acquiror reasonable access to our and our subsidiaries'
properties, books, contracts, commitments, personnel and records.
Stock Option Plan. Pursuant to the merger agreement, we have agreed to take
all actions necessary to assure that, prior to the effective time of the merger,
our 1993 Stock Incentive Plan is terminated.
No Solicitation. The merger agreement provides that we will not, directly
or indirectly initiate, solicit or encourage any inquiries or the making or
implementation of any proposal or offer with respect to a merger, acquisition,
tender offer, exchange offer, consolidation, share exchange, sale of assets or
similar transaction (each an "acquisition proposal"), or engage in any
negotiations concerning or providing confidential information to any person
relating to an acquisition proposal. Notwithstanding the foregoing, the board or
the special committee, on our behalf, may undertake to engage in certain of the
above prohibited acts in connection with a superior proposal, which is a
written, bona fide acquisition proposal by a third party which the board or
special committee determines in its good faith judgment (1) to be superior from
a financial point of view to the holders of common stock than the transactions
contemplated by the merger agreement, after consultation with our financial
advisors, taking into account all of the terms and conditions of such
acquisition proposal and the merger agreement, including any proposal by
Acquiror to amend the terms of the merger agreement, and (2) is reasonably
capable of being completed, taking into account all financial, regulatory and
other aspects of such acquisition proposal. The merger agreement also permits us
to provide confidential information to G. Realco LLC, Trans Healthcare, Inc.,
Lillibridge Health Trust, and Lyle Weisman, each of which had expressed interest
in discussing a transaction with us, as long as they sign confidentiality
agreements with us.
Standstill. Until October 13, 2002, neither the management stockholders nor
any entity owned by them will acquire any additional shares of common stock
without the written approval of the special committee, other than through the
exercise of existing options, conversion rights with respect to operating
partnership units or exchange of operating partnership units for shares of our
common stock. This provision terminates in the event that a third party makes an
acquisition proposal, other than an acquisition proposal that has received the
recommendation of the board.
Until October 13, 2002, we will not issue any additional shares of common
stock, any debt securities or equity securities convertible into common stock,
or any new class of debt or equity securities having voting rights. This
provision does not apply to issuance of additional shares of common stock
through the exercise of existing options, conversions of operating partnership
units or exchange of operating partnership units for shares of common stock.
46
Tender Offer. The management stockholders propose to make a tender offer to
purchase up to approximately 7% of the aggregate number of preferred stock at a
purchase price of $17.50 per share of Series A preferred stock and $17.00 per
share of Series B preferred stock, subject to consummation of the merger. The
management stockholders intend to commence the tender offer and make the
required filings with the Securities and Exchange Commission as soon as
practicable following the mailing of this proxy statement.
Exchange of Partnership Units. We or our affiliates will exchange a portion
of our interest in 435 North Roxbury, Ltd., a California limited partnership,
for operating partnership units held by Reese L. Milner and his affiliates on
terms satisfactory to Mr. Milner and us. Mr. Milner is a former director of our
company.
Spinoff of Non-MOB Assets. If required by the terms of the GMAC financing,
we will, with the approval of the holders of operating partnership units, prior
to the effective time, transfer to a newly formed limited partnership the assets
of the operating partnership that are not related to medical office buildings.
Section 16 Matters. We have agreed to take all steps required to cause any
dispositions of our shares of common stock resulting from the transactions
contemplated by the merger agreement by our officers or directors to be exempt
under Rule 16b-3 promulgated under the Exchange Act in accordance with the
Securities and Exchange Commission's interpretations.
Conduct of Business Pending The Merger
Pursuant to the merger agreement, from the date of the merger agreement to
the effective time of the merger, we must, and cause our subsidiaries to:
. carry on our and our subsidiaries' business in the usual, regular and
ordinary course in all material respects and in substantially the same
manner as presently conducted and take all action necessary to continue
to qualify as a REIT;
. use all commercially reasonable efforts to preserve intact our and our
subsidiaries' business organization and goodwill, and keep available the
services of officers and key employees;
. maintain our and our subsidiaries' books and records in accordance with
generally accepted accounting principles consistently applied and not
change in any material manner any of our or our subsidiaries' methods,
principles or practices of accounting, except as may be required by the
Securities and Exchange Commission, applicable law or generally accepted
accounting principles;
. duly and timely file all material tax returns and other documents
required to be filed with federal, state, local and other tax
authorities, subject to timely extensions permitted by law, provided
such extensions do not adversely affect our status as a qualified REIT
under the Internal Revenue Code; and
. perform all agreements required to be performed by us and our
subsidiaries.
In addition, we may not, and may not permit any of our subsidiaries to:
. make, rescind or revoke any material express or deemed election relative
to taxes (unless required by law or necessary to preserve our status as
a REIT or the status of any subsidiary as a partnership for federal
income tax purposes or as a qualified REIT subsidiary under Section
856(i) of the Internal Revenue Code, as the case may be);
. amend our charter or bylaws, or the articles or certificate of
incorporation, bylaws, code of regulations, partnership agreement,
operating agreement or joint venture agreement or comparable charter or
organization document of any of our subsidiaries;
47
. make changes in the number of our or our subsidiaries' shares of capital
stock, membership interests or units of limited partnership interest, as
the case may be, issued and outstanding or reserved for issuance, other
than pursuant to the exercise of options;
. grant options or other rights or commitments relating to our or our
subsidiaries' shares of capital stock, membership interests or units of
limited partnership interest or any security convertible into or
exercisable for our or our subsidiaries' shares of capital stock,
membership interests or units of limited partnership interest, or any
security the value of which is measured by shares of capital stock, or
any security subordinated to the claim of our general creditors, and not
amend or waive any rights under any of the options;
. authorize, declare, set aside or pay any dividend or make any other
distribution or payment with respect to any shares of common stock or
preferred stock, except consistent with past practice, or directly or
indirectly redeem, purchase or otherwise acquire any shares of capital
stock, membership interests or units of partnership interest or any
option, warrant or right to acquire, or security convertible into or
exercisable for, shares of capital stock, membership interests, or units
of partnership interest, except in order to preserve our status as a
REIT under the Internal Revenue Code;
. guarantee the indebtedness of another person, enter into any "keep well"
or other agreement to maintain any financial statement condition of
another person or enter into any arrangement having the economic effect
of any of the foregoing;
. increase any compensation or enter into or amend any employment,
severance or other agreement with any of our officers, directors or
employees earning a base salary of more than $100,000 per annum, other
than as required by any contract or employee benefit plan or pursuant to
waivers by employees of benefits under such agreements;
. adopt any new employee benefit plan or amend or terminate or increase
the benefits under any existing plans or rights, and not grant any
additional options, warrants, rights to acquire stock, stock
appreciation rights, phantom stock, dividend equivalents, performance
units or performance stock to any officer, employee or director;
. accelerate, waive, amend or change the period of exercisability or
vesting with respect to any grant of shares of common stock or options
for the purchase of common stock, or authorize cash payments in exchange
for any options or other similar rights granted by us;
. enter into or amend or otherwise modify or waive any material rights
under any agreement or arrangement for the persons who are our executive
officers or directors or any of our subsidiaries; and
. amend, terminate or otherwise modify or waive any conversion rights with
respect to the operating partnership units.
Pursuant to the merger agreement, each party has agreed not to knowingly
take any action that would result in any representation or warranty made by it
in the merger agreement becoming untrue.
Representations And Warranties
Our material representations and warranties to the Acquiror contained in
the merger agreement relate to the following matters:
. the due organization and valid existence of our company and our
subsidiaries and similar corporate matters;
. the capitalization of our company and our subsidiaries;
. the due authorization, execution and delivery of the merger agreement by
us and its binding effect on us;
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. the lack of required regulatory filings and approvals for the
consummation of the merger, and the lack of conflicts between the merger
agreement (and the transactions contemplated thereby) and our charter or
bylaws, contracts to which we or our subsidiaries are parties, or any
law, rule, regulation, order or decree applicable to us or our
subsidiaries;
. the accuracy of the information provided by us for inclusion in this
proxy statement and the Schedule 13E-3;
. the absence of current material litigation or actions pending or
threatened in connection with our business;
. no default under our material contracts and indebtedness;
. the absence of any event that has or would have a material adverse
effect on us;
. the inapplicability to the merger of certain provisions of state
takeover law;
. the absence of brokers and finders (other than Houlihan Lokey) engaged
by us who would be entitled to payment in connection with the merger;
and
. the receipt by the special committee of Houlihan Lokey's opinion.
These representations and warranties are subject, in certain cases, to
specified exceptions and qualifications.
The merger agreement also contains representations and warranties of the
Acquiror to us, including with respect to the following matters:
. the due formation and valid existence of the Acquiror and similar
corporate matters;
. the due authorization, execution and delivery of the merger agreement by
the Acquiror and its binding effect on the Acquiror;
. the capital structure of the Acquiror;
. the lack of required regulatory filings and approvals for the
consummation of the merger, and the lack of conflicts between the merger
agreement (and the transactions contemplated thereby) and the articles
of organization or operating agreement of the Acquiror, contracts to
which it is a party, or any law, rule, regulation, order or decree
applicable to the Acquiror;
. the Acquiror's access to funds sufficient to consummate the transactions
contemplated by the merger agreement;
. the accuracy of the information provided by the Acquiror for inclusion
in this proxy statement and the Schedule 13E-3;
. the absence of brokers and finders entitled to payment from Acquiror;
and
. the absence of current material litigation pending or threatened against
the Acquiror.
These representations and warranties are subject, in certain cases, to
specified exceptions and qualifications.
49
Conditions To The Merger
There are a number of conditions that must be satisfied before we or the
Acquiror is obligated to complete the merger. These conditions are:
. the holders of a majority of the total number of outstanding shares of
common stock must approve the merger;
. required consents must be received; and
. the fairness opinion delivered by Houlihan Lokey shall not have been
withdrawn or adversely modified.
There are additional conditions that must be met before the Acquiror is
obligated to complete the merger. These conditions are:
. the representations and warranties we made in the merger agreement must
be true and correct in all material respects;
. we must comply in all material respects with the terms of the merger
agreement;
. the Acquiror must have obtained the necessary financing; and
. there shall have been no material adverse effect on our company.
There are additional conditions that must be met before we are obligated to
complete the merger. These conditions are:
. the representations and warranties the Acquiror made in the merger
agreement must be true and correct in all material respects;
. the Acquiror must comply in all material respects with the terms of the
merger agreement; and
. our guarantee of an aggregate $1 million line of credit to the
management stockholders from Tokai Bank must have been extinguished.
The mutual conditions can be waived if both parties agree. The additional
conditions to our obligations to complete the merger can be waived by us, and
the additional conditions to the Acquiror's obligations to complete the merger
can be waived by the Acquiror. Waivers by us require action by the board, with
the special committee's recommendation, and waivers by the Acquiror require
action by the members of Acquiror. If stockholder approval is obtained, no
condition can be waived if it would adversely affect the nonaffiliated
stockholders prior to the effectiveness of the merger without the further
approval of the nonaffiliated stockholders.
Termination of The Merger Agreement
Either we or the Acquiror may terminate the merger agreement and abandon
the merger, generally whether before or after approval by the stockholders:
. by mutual written consent;
. if the merger has not been completed by November __, 2001;
. if the other party has materially breached a representation or warranty
or failed to perform under the merger agreement;
. if a final nonappealable order, decree or ruling from a court or other
governmental entity prohibits the merger; or
. if the merger proposal is not approved by the holders of a majority of
the total number of outstanding shares of common stock.
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We may terminate the merger agreement:
. if the board or special committee determines that an acquisition
proposal constitutes a superior proposal and that failing to terminate
the merger agreement would be inconsistent with the board's or special
committee's duties under the Maryland General Corporation Law; or
. if the board or special committee has determined that continuing to
recommend approval of the merger would be reasonably likely to be a
breach of the board's duties under the Maryland General Corporation Law.
The Acquiror may terminate the merger agreement:
. if the special committee or the board of directors withdraws or modifies
its recommendation of the merger or the merger agreement or approves any
acquisition proposal by a party other than the Acquiror;
. if there has been a material adverse effect on our company; or
. if we fail to call and hold a stockholders meeting by October __, 2001
and any entity or group has become the beneficial owner of 15% of our
outstanding common stock or a third person disclosed its intention to
make a bona fide acquisition proposal.
Termination Fees And Expenses
We have agreed to pay or reimburse the management stockholders for up to
$400,000 of their expenses. Such expenses include any and all fees of
accountants, financial advisors, attorneys and consultants, as well as fees and
costs paid or owed to their financing source. The management stockholders have
agreed to refund such amounts if they materially breach their obligations under
the merger agreement.
We must pay all of the reasonable expenses incurred by the management
stockholders and the Acquiror, and pay a termination fee equal to $750,000 if:
. we terminate the merger agreement because, prior to the approval of the
merger proposal by the stockholders, the board or special committee
determines to accept a superior acquisition proposal from a third party;
. we terminate the merger agreement because the board or special committee
has determined that continuing to recommend approval of the merger would
reasonably likely be a breach of the board's duties to the stockholders;
. the Acquiror terminates the merger agreement because the special
committee or the board of directors withdraws or modifies its
recommendation of the merger or the merger agreement or approves any
acquisition proposal by a party other than the Acquiror; or
. the Acquiror terminates the merger agreement because we fail to call and
hold a stockholder meeting by October __, 2001 and any entity or group
has become the beneficial owner of 15% of the outstanding common stock
or a third person disclosed its intention to make a bona fide
acquisition proposal.
We must pay 50% of the reasonable expenses incurred by the management
stockholders and the Acquiror if the Acquiror terminates the merger agreement
because of a material adverse effect on our company and such material adverse
effect was caused by a force majeure event. Force majeure event means the
occurrence of an event that is beyond the reasonable control of the management
stockholders or our company, such as natural disasters, war, labor unrest, power
shortage or changes in law that would result in our company not qualifying as a
REIT. [In addition, we must pay all of the reasonable expenses incurred by the
management stockholders and the Acquiror if the Acquiror or our company
terminates the merger agreement because the merger has not been completed by
November __, 2001.]
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Amendment And Waiver
The merger agreement provides that it may be amended by the parties thereto
by an instrument in writing signed on behalf of each of the parties, at any time
before or after approval of the merger proposal by the stockholders. However,
after any such stockholder approval, no amendment may be made which reduces the
amount or changes the form of consideration to be received in the merger or
otherwise changes or effects any change which would adversely affect the
nonaffiliated stockholders prior to the effectiveness of the merger without the
further approval of the stockholders. It is not likely that the merger
agreement will be amended after approval of the merger in a manner materially
adverse to the nonaffiliated stockholders. However, if such an amendment is
made, the board of directors will resolicit proxies prior to consummating the
merger.
At any time prior to the effective time of the merger, the parties to the
merger agreement, by action taken by the board of directors, with the
recommendation of the special committee, or the Acquiror's members, as the case
may be, may (1) extend the time for the performance of any of the obligations or
other acts of the other party to the merger agreement, or (2) waive compliance
with any of the agreements or conditions contained in the merger agreement. The
ability of a party to waive compliance with an agreement or condition in the
merger agreement is subject to the provision described above requiring
stockholder approval if they are materially adversely affected.
Financing; Source of Funds
The total amount of funds required to pay the merger consideration to the
nonaffiliated stockholders is approximately $20.2 million. Approximately $2.5
million will be used to pay the fees and expenses related to the merger. In
addition, approximately $6.2 million will be used to pay the management
stockholders for a portion of their shares of common stock and for their
outstanding stock options. The management stockholders will also borrow up to
$5.29 million to fund their purchase of our preferred stock through a tender
offer and repay personal debt. In the merger agreement, the management
stockholders have agreed to apply any dividends paid on preferred stock
purchased by them in the tender offer, first to interest on any personal loans
secured by the preferred stock and next to their $5.29 million loan. These funds
will be loaned by GMAC to the Acquiror Sub, which will lend the funds to the
management stockholders directly or indirectly through the Acquiror. The
management stockholders have entered into a commitment letter with GMAC pursuant
to which GMAC has committed up to $35 million in borrowings.
Under the commitment letter, upon the consummation of the proposed merger,
the operating partnership will ultimately become the borrower. The commitment
letter provides that the financing will have a maturity date of ten years from
the initial funding. The interest rate on the loan will be the 30 day London
Interbank Offered Rate ("LIBOR") plus a spread of between 5.5% and 7.5%. As
interest rate protection, a LIBOR cap on such terms and covering such amounts as
GMAC shall request will be maintained by the operating partnership and all
rights relating to the LIBOR cap will be assigned to GMAC. The total of the
interest rate, plus any amortization payment, is due and payable monthly in
arrears. The commitment fees are 2.25% of the total loan amount, or $787,500.
The loan is secured by (1) unless prohibited by any existing first mortgage
documents, a second mortgage on the real properties included within our
portfolio of medical office buildings (other than the real property located at
435 North Roxbury Drive, Beverly Hills) (2) a lien on and assignment of the
excess cash flow after first mortgage debt service, reserves and operating
expenses for such properties, (3) a lien on all personal property, all rights,
contracts and agreements, including limited partnership and limited liability
operating agreements and insurance, and (4) a lien on and a pledge of the
ownership interests of our medical office building subsidiaries.
In addition to the pledged collateral described above, the Acquiror, and
upon consummation of the merger, we, as the surviving company, will guarantee
the obligations under the loan on a secured limited recourse basis. This
guaranty will be secured by our partnership interest in the operating
52
partnership, and to the extent permitted by existing debt, our shares in G & L
Medical, Inc. and G & L Realty Financing II, Inc. In addition, Messrs. Gottlieb
and Lebowitz will guarantee the obligations under the loan on a secured limited
recourse basis. This guaranty will be secured by Mr. Gottlieb's and Mr.
Lebowitz's common stock in our company and their partnership interests in the
operating partnership. Also, to the extent permitted by the terms of the
existing debt of the subsidiaries of the operating partnership, each subsidiary
of the operating partnership and G & L Realty Financing II, Inc. will guarantee
the loan on a secured basis. In addition, at GMAC's request, Messrs. Gottlieb
and Lebowitz will execute a bottom guaranty in an amount not to exceed $3
million in favor of GMAC in respect of the obligations under the loan documents.
Subject to limitations contained in existing first mortgage debt instrument
on our medical office building properties, all after debt cash flow and required
reserves from such properties will be placed in cash collateral accounts, with
GMAC as the pledgee of such accounts.
Until December 10, 2004 the operating partnership will be required, at its
option, to either (1) post a letter of credit in favor of GMAC in an amount
equal to approximately $860,000 or (2) post cash as collateral in the amount
equal to approximately $860,000.
Subject to the provisions described in the paragraph below, the loan may be
prepaid in whole or in part in multiples of $100,000 on any payment date
commencing with the 7/th/ month after the initial funding, upon 30 days prior
written notice. Any such prepayment must be accompanied by the applicable
prepayment premium, if any, and accrued interest on the amount prepaid. The
prepayment premium if the loan is prepaid in the 7/th/ through 12/th/ months
after the initial funding is 3.0% on amounts above $4.0 million. If the loan is
prepaid in the 13/th/ through 24/th/ months after initial funding, amounts above
a cumulative $8.0 million prepayment amount are subject to a prepayment premium
of 2.0%. If the loan is prepaid in the 25/th/ through 36/th/ months after the
initial funding, amounts above a cumulative $12.0 million prepayment amount are
subject to a prepayment premium of 1.0%. Finally, if the loan is prepaid in the
37/th/ month after the initial funding through the maturity date, unlimited
prepayments are allowed with no prepayment premium.
In addition, generally, the net proceeds from the sale or refinancing of
any individual medical office building property of our company must be applied
to reduce the principal balance of the loan, with a prepayment premium of 3.0%
in year 1, 2.0% in year 2, 1.0% in year 3 and no prepayment premium thereafter.
Generally, the loan may not be repaid with the proceeds of a refinancing of our
company or the operating partnership for two years following the closing of the
loan. After two years, the loan may be prepaid in full with the proceeds of a
refinancing by our company or the operating partnership of all or substantially
all of our portfolio of medical office buildings and/or our other properties, in
each case without a prepayment penalty, other than LIBOR breakage costs. The
loan must by prepaid in full upon the sale of all or any portion of the
management stockholders' equity interest in our company. Any such prepayment
occurring in the first two years of the term of the loan must be accompanied by
a prepayment premium equal to 2% of the amount prepaid.
The commitment letter requires that the proceeds of the loan be used to
provide financing for the mergers of the Acquiror and our company and the
Acquiror Sub and the operating partnership, including related transaction costs
and costs associated with the redemption or other acquisition of any outstanding
options to purchase common stock of our company.
The commitment letter provides for certain customary affirmative covenants
and negative covenants applicable to our company and the operating partnership,
including without limitation, limitation on other debt and encumbrances,
limitation on transfers of our properties, and limitations on equity offerings.
The financing commitment provided for in the commitment letter is subject
to a number of conditions, including the consummation of the merger of the
Acquiror with and into the company and the merger of the Acquiror Sub with and
into the operating partnership on terms satisfactory to GMAC, the receipt of all
necessary governmental, stockholder and third party consents and approvals, and
the receipt of certain legal opinions.
53
A copy of the commitment letter has been filed with the Commission as an
exhibit to the Schedule 13E-3.
The operating partnership plans to repay the loan with its cash flow from
operations and from proceeds received from the refinancing of its existing
properties. In addition, in the merger agreement, the management stockholders
have agreed to apply dividends paid on any preferred stock purchased by them
pursuant to the tender offer first to interest on any personal loans secured by
the preferred stock and next to the loan from the Acquiror or Acquiror Sub to
the management stockholders to fund the tender offer.
The management stockholders currently do not have any alternative financing
arrangements.
The commitment letter currently expires on October 15, 2001. The management
stockholders have had discussions with GMAC regarding extending the expiration
date of the commitment letter, and believe that GMAC will do so. There can be no
assurance however that the management stockholders can enter into such an
agreement with GMAC.
No Appraisal Rights
Holders of common stock are not entitled to dissenting stockholders'
appraisal rights or other similar rights under the Maryland General Corporation
Law and will be bound by the terms of the merger agreement. The Maryland General
Corporation Law does not provide appraisal rights or other similar rights to
stockholders of a corporation in connection with a merger if their shares are
listed on a national securities exchange, such as the New York Stock Exchange,
on the record date for determining stockholders entitled to vote on such merger.
All of the shares of common stock outstanding on the record date for determining
stockholders entitled to vote on the merger were listed on the New York Stock
Exchange.
Fees and Expenses
The estimated aggregate costs and fees of our company and the Acquiror in
connection with the merger and related transactions are as follows:
To be Paid by the To be Paid by the
Company Acquiror (1)
----------------- -----------------
Investment Banking Fees and Expenses............................ $ 600,000 $ - - -
Filing Fees..................................................... 7,000 - - -
Legal Fees and Expenses......................................... 650,000 1,000,000
Financing Fees and Services..................................... - - - 787,500
Accounting Fees and Advisory Services........................... 100,000 175,000
Printing, Mailing and Vote Solicitation Fees.................... 125,000 - - -
Miscellaneous Fees (2).......................................... 250,000 - - -
----------------- -----------------
Total...................................................... $1,732,000 $1,962,500
================= =================
__________________
(1) We have agreed to pay or reimburse the Acquiror for up to $400,000 of the
Acquiror's costs and expenses.
(2) Contingency for consultant fees and related costs.
The merger agreement calls for such fees and expenses to be paid by the
party that incurred them, except (1) for up to $400,000 in costs and expenses
that we will pay or reimburse the Acquiror for and (2) under certain
circumstances in which the merger agreement is terminated. See "-- Termination
Fees and Expenses" for a description of these circumstances.
54
Regulatory Requirements
Except for the filing of the Articles of Merger with the State Department
of Assessments and Taxation of the State of Maryland pursuant to the Maryland
General Corporation Law and the Maryland Limited Liability Company Act, and the
filing of the Certificate of Merger with the Secretary of State of the State of
Delaware pursuant to the Delaware Revised Uniform Limited Partnership Act with
respect to the partnership merger, after the approval of the merger proposal,
and compliance with federal and state securities laws, neither we nor the
Acquiror is aware of any material United States federal or state or foreign
governmental regulatory requirement necessary to be complied with or approval
that must be obtained in connection with the merger.
55
SELECTED FINANCIAL DATA OF THE COMPANY
The following table sets forth consolidated selected financial and
operating information for us for each of the years ended December 31, 2000,
1999, 1998, 1997 and 1996 and for the three and six month periods ended June 30,
2001 and 2000. The following information should be read in conjunction with all
of the financial statements and notes thereto included in our Annual Report on
Form 10-K for the year ended December 31, 2000 and our Quarterly Report on Form
10-Q for the quarter ended June 30, 2001. This data also should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" included in our Annual Report on Form 10-K for the
year ended December 31, 2000 and our Quarterly Report on Form 10-Q for the
quarter ended June 30, 2001. The consolidated selected financial and operating
data as of December 31, 2000, 1999, 1998, 1997 and 1996 and for each of the
years ended December 31, 2000, 1999, 1998, 1997 and 1996 have been derived from
audited financial statements. The consolidated selected financial and operating
data as of June 30, 2001 and 2000 and for three and six month periods ended June
30, 2001 and 2000 have been derived from unaudited financial statements.
Three Months Six Months
Ended June 30, Ended June 30, Year Ended December 31,
-------------------- ------------------- -----------------------------------------------
2001 2000 2001 2000 2000 1999 1998 1997 1996
------- -------- -------- -------- -------- -------- -------- -------- --------
(In thousands, except per share amounts)
Operating Data:
---------------
Revenues:
Rental.................................. $ 6,509 $ 6,295 $ 13,090 $ 13,085 $ 25,889 $ 27,928 $ 24,639 $ 20,307 $ 15,796
Patient revenues........................ 5,353 5,418 10,361 6,316 17,820 --- --- --- ---
Tenant reimbursements................... 614 371 1,023 726 1,495 1,275 781 707 728
Parking................................. 435 307 781 610 1,273 1,148 1,501 1,439 1,251
Interest and loan fees.................. 489 898 999 1,382 2,532 2,797 4,517 4,322 6,712
Net gain on sale of assets.............. --- --- --- 1,263 1,263 --- --- --- ---
Other income............................ 149 123 3,199 232 573 398 254 274 549
------- -------- -------- -------- ------- ------- ------- ------- -------
Total revenues........................ 13,549 13,412 29,453 23,614 50,845 33,546 31,692 27,049 25,036
------- -------- -------- -------- ------- ------- ------- ------- -------
Expenses:
Property operations..................... 2,343 2,044 4,520 3,898 7,854 7,569 6,171 6,280 5,696
Skilled nursing operations.............. 4,753 4,973 9,283 5,792 16,548 --- --- --- ---
Depreciation and amortization........... 1,495 1,533 2,968 3,066 6,015 5,690 4,597 3,570 2,773
Interest................................ 3,242 3,421 6,540 6,844 13,802 12,393 8,683 9,088 9,322
General and administrative.............. 860 768 1,708 1,468 2,892 3,196 2,554 2,044 1,787
Provision for doubtful accounts,
notes and bonds receivable............. --- --- --- 2,288 2,288 2,000 5,603 --- ---
Impairment of long-lived assets --- --- --- --- --- 6,400 --- --- ---
Loss on disposition of real estate...... --- --- --- --- --- --- --- --- 4,874
------- -------- -------- -------- ------- ------- ------- ------- -------
Total expenses........................ 12,693 12,739 25,019 23,356 49,399 37,248 27,608 20,982 24,452
------- -------- -------- -------- ------- ------- ------- ------- -------
Income (loss) from operations before
minority interests, equity in (loss)
earnings of unconsolidated affiliates
and extraordinary (losses) gains....... 856 673 4,434 258 1,446 (3,702) 4,084 6,067 584
Equity in (loss) earnings of
unconsolidated affiliates.............. (92) (205) (175) (348) (417) (269) 80 1,195 ---
56
Minority interest in consolidated
affiliates........................... (71) (39) (133) (106) (182) (175) (225) (156) (129)
Minority interest in Operating
Partnership.......................... --- 83 --- 616 460 2,202 404 (545) (65)
------- -------- -------- -------- ------- -------- -------- -------- --------
Income (loss) before extraordinary
gains (losses)....................... 693 512 4,126 420 1,307 (1,944) 4,343 6,561 390
Extraordinary (losses) gains (net of
minority interest)................... --- --- --- (158) (158) (171) --- --- 9,311
------- -------- -------- -------- ------- -------- -------- -------- --------
Net income (loss)........................ $ 693 $ 512 $ 4,126 $ (262) $ 1,149 $ (2,115) $ 4,343 $ 6,561 $ 9,701
======= ======== ======== ======== ======= ======== ======== ======== ========
Per common share data:....................
Basic:
Before extraordinary (losses) gains.. $ (0.47) $ (0.55) $ 0.23 $ (1.30) $ (2.46) $ (2.44) $ (0.70) $ 0.91 $ 0.10
Extraordinary (losses) gains......... --- --- --- (0.07) (0.07) (0.04) --- --- 2.29
------- ------- -------- -------- ------- -------- -------- -------- --------
Net income (loss).................... $ (0.47) $ (0.55) $ 0.23 $ (1.37) $ (2.53) $ (2.48) $ (0.70) $ 0.91 $ 2.39
======= ======= ======== ======== ======= ======== ======== ======== ========
Fully Diluted:
Before extraordinary (losses) gains.. $ (0.47) $ (0.55) $ 0.23 $ (1.30) $ (2.46) $ (2.44) $ (0.70) $ 0.89 $ 0.09
Extraordinary (losses) gains......... --- --- --- (0.07) (0.07) (0.04) --- --- 2.24
------- ------- -------- -------- ------- -------- -------- -------- --------
Net income (loss).................... $ (0.47) $ (0.55) $ 0.23 $ (1.37) $ (2.53) $ (2.48) $ (0.70) $ 0.89 $ 2.33
======= ======= ======== ======== ======= ======== ======== ======== ========
57
At and for the Six Months
ended June 30, At or for the Year ended December 31,
------------------------ -------------------------------------------------------
2001 2000 2000 1999 1998 1997 1996
----------- ----------- -------- ---------- ----------- ---------- --------
(In thousands, except per share amounts)
Cash Flow Data:
--------------
Net cash provided by operating activities..... $ 6,613 $ 4,007 $ 7,490 $ 8,708 $ 12,666 $ 9,045 $ 5,726
Net cash used in investing activities......... (1,270) (1,910) (373) (12,330) (51,094) (49,534) (23,413)
Net cash (used in) provided by financing
activities................................... (6,793) (8,512) (11,871) 9,788 26,198 53,833 17,283
Balance Sheet Data:
------------------
Land, buildings and improvements, net......... $166,720 $184,615 $168,280 $180,367 $186,751 $139,082 $ 93,231
Mortgage loans and bonds receivable, net...... 11,644 15,650 11,244 16,026 12,101 14,098 34,576
Total investments............................. 178,364 200,265 179,524 196,393 198,852 153,180 127,807
Total assets.................................. 203,379 225,408 205,466 232,396 219,499 189,380 135,996
Total debt.................................... 157,634 175,224 158,942 177,371 134,880 95,172 109,025
Total stockholders' equity.................... 39,696 43,168 39,891 51,385 79,584 88,924 22,448
Other Data:
----------
Ratio of earnings to fixed charges and
preferred dividends (1)...................... 1.05x 0.68x 0.71x 0.53x 0.82x 1.36x 1.59x
Ratio of funds from operations to fixed
charges and preferred dividends (2).......... 1.07x 0.81x 0.91x 0.70x 1.05x 1.77x 1.88x
Ratio of total debt to total market
capitalization (3)........................... 58.5% 65.2% 65.3% 63.8% 50.6% 35.9% 63.8%
Book value per common share (4)............... $ 17.01 $ 18.50 $ 17.09 $ 19.49 $ 19.92 $ 21.58 $ 5.35
Number of properties.......................... 40 46 40 45 36 25 15
____________________________________
1) For purposes of these computations, earnings consist of net income plus
fixed charge. Fund charges and preferred dividends consist of interest
expense capitalized interest, amortization of deferred financing costs and
preferred dividends paid to preferred stockholders during the period. The
deficit of earnings to fixed charges and preferred dividends for the six
months ended June 30, 2000 was $3,321,000 and for the years ended December
31, 2000 and 1999 was $6,015,000 and $9,327,000 respectively.
2) For purposes of these computations ratio of funds from operations to fixed
charges consists of FFO plus fixed charges and preferred dividends paid to
preferred stockholders during the period. FFO represents net income
(computed in accordance with GAAP consistently applied), 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 entitles in which our company holds a partial interest. See
our Annual Report on Form 10-K for the year ended December 31, 2000 for more
information on how FFO is computed. Fixed charges and preferred dividends
consist of interest expense capitalized interest amortization of deferred
financing costs and preferred dividends paid to preferred stockholders
during the period. The deficit of funds from operations to fixed charges for
the six months ended June 30, 2000 was $2,007,000 and for the years ended
December 31, 2000 and 1999 was $1,786,000 and $5,966,000 respectively.
3) Total market capitalization as of the dates presented is long-term debt plus
the aggregate market value of our common stock and operating partnership
units not owned by us, assuming one operating partnership unit is equivalent
in value to one share of common stock plus the liquidation value of the
preferred stock outstanding.
4) For purposes of these computations, book value per share is calculated using
the net book value from our company's balance sheet, including the preferred
stock liquidation preference of $25.00 per share of preferred stock, and
dividing the net book value by the total number of common stock shares
outstanding at the balance sheet date. Deducting the preferred stock
liquidation preference of $25.00 per preferred share from our company's net
book value per the balance sheet would result in a reduction of our
company's net book value by $71.9 million for all dates except December 31,
1996 and a net book value per common share of negative $13.79, negative
$12.30, negative $13.70, negative $7.70, $1.93, $4.14 and $5.35 as of June
30, 2001 and 2000 and December 31, 2000, 1999, 1998, 1997 and 1996,
respectively.
58
PRO FORMA FINANCIAL INFORMATION
The following table sets forth unaudited pro forma financial
information for us for the year ended December 31, 2000, which has been derived
by the application of pro forma adjustments to our historical consolidated
financial statements incorporated by reference in this proxy statement. The pro
forma balance sheet data give effect to the merger and related transactions as
if such transactions had occurred as of December 31, 2000. The pro forma results
of operations for the period presented gives effect to the merger and related
transactions as if such transactions were consummated as of January 1, 2000 for
the year ended December 31, 2000. The adjustments are described in the footnotes
that follow this table. You should not consider the pro forma financial
information indicative of actual results that would have been achieved had the
merger and related transactions been consummated on the date or for the periods
indicated and the pro forma financial information does not purport to indicate
balance sheet data or results of operations as of any future date or for any
future period. You should read these data in conjunction with our financial
statements and notes thereto included in our Annual Report on Form 10-K for the
year ended December 31, 2000.
59
G&L REALTY CORP.
CONSOLIDATED BALANCE SHEET
(In Thousands)
Actual Pro Forma
December 31, December 31,
2000 Adjustments 2000
---- ------------ ----
ASSETS:
-------
Rental properties:
Land 28,599 28,599
Building and improvements 167,718 167,718
Projects under development 171 171
--------- ----------
Total 196,488 196,488
Accumulated depreciation (28,208) (28,208)
--------- ----------
Total rental properties 168,280 168,280
Cash and cash equivalents 2,791 2,791
Restricted cash 4,624 4,624
Tenant rent and reimbursements receivable, net 6,669 6,669
Unbilled rent receivable, net 2,412 2,412
Other receivables, net 46 46
Mortgage loans and bonds receivable, net 11,244 5,289 (D) 16,533
Investments in unconsolidated affiliates 4,851 4,851
Deferred charges and other assets, net 4,549 1,288 (C) 5,837
--------- ----------
TOTAL ASSETS 205,466 212,042
========= ==========
LIABILITIES:
------------
Notes payable 158,942 35,000 193,942
Accounts payable and other liabilities 6,099 6,099
Distributions payable 433 433
Tenant security deposits 1,367 1,367
--------- ----------
Total liabilities 166,841 201,841
Minority interest in consolidated affiliates (1,266) 32 (E) (1,234)
Minority interest in Operating Partnership - 312 (H) 312
STOCKHOLDERS' EQUITY:
---------------------
Series A preferred stock 15 15
Series B preferred stock 14 14
Common stock 23 (16) (A) 7
Additional paid-in capital 72,441 (28,408) (B) 44,033
Distributions in excess of net income (32,602) (344) (L) (32,946)
--------- ----------
Total stockholders' equity 39,891 11,123
--------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY 205,466 212,042
========= ==========
60
G&L REALTY CORP.
CONSOLIDATED STATEMENT OF OPERATIONS
(In Thousands)
Actual Pro Forma
December 31, December 31,
2000 Adjustments 2000
---- ----------- ----
REVENUES:
Rental 25,889 25,889
Patient Revenues 17,820 17,820
Tenant reimbursements 1,495 1,495
Parking 1,273 1,273
Interest and loan fees 2,532 2,532
Gain on sale of assets 1,263 1,263
Other 573 573
------ ------
Total revenues 50,845 50,845
------ ------
EXPENSES:
Property operations 7,854 7,854
Skilled nursing operations 16,548 16,548
Depreciation and amortization 6,015 6,015
Interest 13,802 4,338 (F) 18,140
Provision for doubtful accounts, notes and bonds receivable 2,288 2,288
General and administrative 2,892 2,892
------ ------
Total expenses 49,399 53,737
------ ------
Income (loss) from continuing operations before minority interests
and earnings from unconsolidated affiliates 1,446 (2,892)
Equity in loss of unconsolidated affiliates (417) (417)
Minority interest in consolidated affiliates (182) (159) (G) (341)
Minority interest in Operating Partnership 460 (15) (I) 445
------ ------
Income (loss) from continuing operations before extraordinary item 1,307 (3,205)
Extraordinary loss on early extinguishment of debt (158) (158)
------ ------
Net income (loss) 1,149 (3,363)
Dividends on preferred stock (7,164) (7,164)
------ ------
Net loss available to common stockholders $ (6,015) $ (10,527)
------ ------
Per share earnings:
------------------
Basic:
-----
(Loss) income before extraordinary loss $ (2.46) $ (14.62)
Extraordinary loss (0.07) (0.22)
------ ------
Net (loss) income $ (2.53) $ (14.84)
------ ------
Fully diluted:
-------------
(Loss) income before extraordinary loss $ (2.46) $ (14.62)
Extraordinary loss (0.07) (0.22)
------ ------
Net (loss) income $ (2.53) $ (14.84)
------ ------
Weighted average common shares outstanding:
------------------------------------------
Basic 2,379 (1,670) (J) 709
Fully diluted 2,379 (1,670) (J) 709
Ratio of earnings to fixed charges and preferred dividends 0.71 (0.13) 0.58
Book value per share $ 16.77 $(1.09) (K) $ 15.68
61
FOOTNOTES
(A) Par value of common stock
Current common stock shares outstanding 2,334
Less: Nonaffiliated common stock shares (1,687)
---------
Common stock currently held by management stockholders 646
Plus: Management stockholder operating partnership units exchanged for common stock 538
Less: Management stockholder common stock to be sold to Company (475)
---------
Common stock outstanding held by management stockholders after merger 709
Multiply by $0.01 par value $ 0.01
---------
Par value of common stock outstanding after merger $ 7
Par value of common stock outstanding before merger 23
---------
Adjustment to par value of common stock $ (16)
---------
(B) Cost to purchase common stock
Purchase of outstanding common stock $ 25,949
Payment for employee options 500
Legal costs 650
Fairness opinion 600
Printing, SEC fees, and related costs 125
Accounting fees 100
Other (e.g. director fees, etc.) 500
---------
Total cost to purchase common stock $ 28,424
Less: Adjustment for par value of common stock (16)
---------
Adjustment to additional paid-in capital $ 28,408
---------
(C) Deferred loan fees
GMAC loan fees per loan agreement $ 788
Interest rate hedge 500
---------
Total loan fees $ 1,288
---------
(D) Represents note receivable to be given by management stockholders to the Company in
exchange for using $5.29 million of the loan proceeds to repurchase approximately $3.5
million of the Company's preferred stock and repay approximately $1.79 million of personal
debt.
(E) Minority interest in consolidated affiliates
Pro forma minority interest in 435 N. Roxbury Drive, Ltd. at December 31, 2000 $ (2,265)
Actual minority interest in 435 N. Roxbury Drive, Ltd. at December 31, 2000 (2,297)
---------
Adjustment to minority interest in consolidated affiliates $ 32
---------
(F) Interest expense and loan fee amortization
Interest expense for year one of GMAC loan $ 4,269
Loan fee amortization for year one of GMAC loan 69
---------
Adjustment to interest expense and loan fee amortization $ 4,338
=========
(G) Minority interest in consolidated affiliates
Limited partner interest in 435 N. Roxbury Drive, Ltd. after conversion of operating
partnership units held by limited partners into equity in 435 N. Roxbury Drive, Ltd. 52%
Current limited partnership interest in 435 N. Roxbury Drive, Ltd. 16%
---------
Increase in limited partner percentage interest in Roxbury 36%
Multiply by 435 N. Roxbury Drive, Ltd. net income for 2000 $ 441
---------
Increase in minority interest in consolidated affiliates $ 159
=========
(H) Minority interest in operating partnership
Minority interest at December 31, 1999 $ 772
Less: Dividends paid to limited partners during 2000 (15)
62
Less: Allocation of net loss to limited partners during 2000 (445)
---------
Adjusted minority interest at December 31, 2000 312
Less: Actual minority interest at December 31, 2000 -
---------
Adjustment to minority interest in operating partnership $ 312
=========
(I) Minority interest in income of operating partnership
Actual minority interest in income for 2000 $ 460
Adjusted minority interest in income for 2000 (445)
---------
Adjustment to minority interest in income of operating partnership $ 15
---------
(J) Weighted average shares outstanding
Current common stock shares outstanding 2,334
Plus: Management stockholder operating partnership units converted to common stock 538
Less: Nonaffiliated common stock shares (1,687)
Less: Management stockholder common stock to be sold to Company (475)
---------
Weighted average shares outstanding after merger 709
Weighted average shares outstanding as of December 31, 2000 2,379
---------
Adjustment to weighted average shares outstanding (1,670)
---------
(K) Book value per share
Pro forma stockholder's equity $ 11,123
Divided by pro forma weighted average shares outstanding 709
---------
Pro forma book value per share $ 15.68
Less: actual book value per share (16.77)
---------
Adjustment to book value per share $ (1.09)
---------
Book value per share is calculated using the net book value from our
company's balance sheet, including the preferred stock liquidation preference of
$25.00 per share of preferred stock. See Note 4 under "Selected Financial Data
of the Company."
(L) Distributions in excess of net income - Represents the sum of the adjustments in footnotes
(E) and (H).
COMMON STOCK MARKET PRICE INFORMATION; DIVIDEND INFORMATION
Our common stock is listed on the New York Stock Exchange under the symbol
"GLR." It has been our policy to declare quarterly distributions to holders of
our common stock so as to comply with applicable sections of the Internal
Revenue Code governing REITs. Operating partnership units and shares of common
stock receive equal distributions. Distributions are declared and paid at the
discretion of our board of directors and generally depend on our cash flow, our
financial condition, capital requirements, the distribution requirements under
the REIT provisions of the Internal Revenue Code and such other factors as our
directors deem relevant.
The table below sets forth the high and low sales prices of our common
stock for each full quarterly period from January 1, 1999 to June 30, 2001 and
for the period beginning July 1, 2001 to September 26, 2001, as reported by the
New York Stock Exchange. The table also includes, on a per share basis, the
quarterly cash distribution declared and paid to holders of our common stock and
operating partnership units for each of the last two fiscal years and the
current year to date.
High Low Distribution
---- --- ------------
2001 Third Quarter (through September 26, 2001)... $14.05 $12.25 $0.125
Second Quarter............................... 14.26 10.15 0.125
First Quarter................................ 10.75 8.88 0.125
2000 Fourth Quarter............................... 9.50 7.56 0.125
63
High Low Distribution
------ ----- ------------
Third Quarter.................... 7.94 6.63 0.125
Second Quarter................... 9.00 7.25 0.125
First Quarter.................... 9.56 8.63 0.125
1999 Fourth Quarter................... 9.75 7.50 0.125
Third Quarter.................... 12.13 8.81 0.125
Second Quarter................... 12.94 10.06 0.39
First Quarter.................... 15.19 11.88 0.39
If the merger is not consummated, the declaration of future dividends, if
any, will necessarily be dependent upon business conditions, our earnings and
financial position and our plans with respect to operating and capital
expenditures and such other matters as our board of directors deems relevant.
See "Questions and Answers About the Merger - What will happen to my dividends?"
CERTAIN FINANCIAL PROJECTIONS OF THE COMPANY
We do not as a matter of course publicly disclose internal budgets, plans,
estimates, forecasts or projections as to future revenues, earnings or other
financial information. The projected financial data set forth below reflect
information which was contained in projections prepared by our management. These
projections were based upon a variety of estimates and assumptions, the material
ones of which are set forth below. The estimates and assumptions underlying the
projections involved judgments with respect to, among other things, future
economic, competitive, and financial market conditions and future business
decisions which may not be realized and are inherently subject to significant
business, economic and competitive uncertainties, all of which are difficult to
predict and many of which are beyond our control. While we believe these
estimates and assumptions are reasonable, there can be no assurance that the
projections will be accurate, and actual results may vary materially from those
shown. In light of the uncertainties inherent in forward looking information of
any kind, the inclusion of these projections herein should not be regarded as a
representation by us, the Acquiror or any other person that the anticipated
results will be achieved and investors are cautioned not to place undue reliance
on such information.
We do not intend to update or otherwise revise the information set forth
below to reflect circumstances existing after the date of the most recent
financial statements incorporated by reference in this proxy statement or to
reflect the occurrence of unanticipated events. The information set forth below
should be read together with the information contained in our Annual Report on
Form 10-K for the year ended December 31, 2000 and the other information
included or incorporated by reference in this proxy statement. In addition, as
of the date of this proxy statement, our company is under contract to purchase,
with a local partner, an approximately $6 million skilled nursing facility
located in Western Massachusetts. This project which is conditioned on obtaining
long-term financing is not included in the below projections. Our company is
currently considering refinancing, through the Department of Housing and Urban
Development, its assisted living facility located in Tarzana, California. The
estimated net proceeds of approximately $2 million to $3 million from the
refinancing are also not included in the projections below. Furthermore, the
projections include an estimated monthly net operating income of $65,000 per
month, or $780,000 annually (before debt service of $20,000 per month) from the
Company's skilled nursing facility located in Hoquiam, Washington. In April
2001, the facility was issued deficiencies by the State of Washington and
incident to these deficiencies, a hold was placed on government pay for new
admissions. Thereafter, the facility voluntarily limited the number of new
admissions. Thereafter, the first restriction on payment was lifted but a second
restriction was placed on the facility beginning August 2, 2001 that also denied
payments from both Medicare and Medicaid. Due to this restriction on admissions,
the facility lost approximately $20,000 in July 2001 and $90,000 in August 2001
(before $20,000 per month debt service).
64
G&L REALTY CORP.
PROJECTED NET INCOME & FFO
YEARS ENDING DECEMBER 31, 2001 - 2007
YEAR YEAR YEAR YEAR YEAR YEAR YEAR
2001 2002 2003 2004 2005 2006 2007
Rent - Mob $25,684,817 $26,975,303 $27,898,565 $28,727,262 $29,565,444 $30,427,459 $31,299,786
Rent - Senior Care (3) 28,762,412 30,118,102 31,501,117 33,171,139 34,938,364 36,809,137 38,790,272
Interest and Loan Fees (1) 4,353,815 710,762 411,174 317,912 331,160 992,981 1,756,845
Other Income 164,848 165,270 166,791 168,331 169,890 171,468 173,066
Gain On Sale Of Assets - 2,500,000 - - - - -
Total Revenues $58,965,892 $60,469,436 $59,977,647 $62,384,644 $65,004,858 $68,401,045 $72,019,969
Property Operations (3) $28,518,384 $29,380,942 $30,380,260 $31,424,337 $32,515,015 $33,654,520 $34,845,189
Depreciation & 6,000,102 6,173,563 6,361,163 6,589,913 6,834,837 7,097,259 7,378,620
Amortization
Interest (2) 14,530,185 16,439,555 15,411,713 14,897,401 14,296,827 13,700,041 14,071,481
General & Administrative 2,926,017 2,982,027 2,984,431 2,986,860 2,989,312 2,991,789 2,994,291
Total Operating Expense $51,974,688 $54,976,087 $55,137,568 $55,898,510 $56,635,991 $57,443,609 $59,289,582
Operating Income $ 6,991,205 $ 5,493,349 $ 4,840,079 $ 6,486,133 $ 8,368,867 $10,957,436 $12,730,387
Earnings From Uncons. 138,217 405,773 578,663 765,886 970,037 1,197,665 1,439,051
Affiliates
Min Int in Cons. Affiliates (470,539) (523,685) (656,451) (808,332) (974,444) (1,154,610) (1,346,224)
Min Int in Oper. 14,128 - - - - - -
Partnership
Extraordinary Gain 2,727,566 - - - - - -
Net Income $ 9,400,577 $ 5,375,438 $ 4,762,292 $ 6,443,687 $ 8,364,460 $11,000,491 $12,823,214
Funds From Operations:
Net Income $ 9,400,577 $ 5,375,438 $ 4,762,292 $ 6,443,687 $ 8,364,460 $11,000,491 $12,823,214
Add Back:
Min Int In Oper. (14,128) - - - - - -
Partnership
Real Estate Depreciation 5,247,758 5,423,108 5,612,298 5,841,048 6,085,972 6,348,394 6,629,755
Amortization-Leasing 277,913 276,024 274,434 274,434 274,434 274,434 274,434
Comm
Gain On Sale Of Assets - (2,500,000) - - - - -
Extraordinary Gain (2,727,566)
Min Int In Cons. Affiliates (222,505) (264,814) (267,704) (270,706) (273,826) (277,069) (280,440)
Depr. From Uncons. 304,431 360,681 360,681 360,681 360,681 360,681 360,681
Affiliates
Funds From Operations $12,266,480 $ 8,670,436 $11,009,705 $12,649,143 $15,085,547 $17,706,931 $20,088,084
Dividends On Series A (3,653,727) (3,451,193) (3,451,193) (3,451,193) (3,451,193) (3,451,193) (3,451,193)
Preferred Stock (4)
Dividends On Series B (3,217,079) (3,012,628) (3,012,628) (3,012,628) (3,012,628) (3,012,628) (3,012,628)
Preferred Stock (4)
FFO To Common Stock (1)(2)(3) $ 5,395,674 $ 2,206,615 $ 4,545,884 $ 6,185,322 $ 8,621,726 $11,243,110 $13,624,263
__________________________
(1) Interest and Loan Fees in 2001 includes a projected $3 million in early
prepayment penalty interest on the projected repayment of our company's $10.5
million notes receivable on a skilled nursing facility located in Hyattsville,
Maryland. The prepayment will be used as partial consideration for our company
to purchase the aforementioned skilled nursing facility for approximately $15
million as part of a sale-leaseback transaction which is projected to occur
during 2001. As of September 24, 2001, the facility was over three months
delinquent on its mortgage payments to our company.
65
(2) These projections assume that the $35 million in debt to complete the
merger transaction is secured as of September 1, 2001 at an interest rate of
12.5% per annum with principal amortized over 10 years. Said note carries a
floating rate priced over 30-day LIBOR, which rate could change depending on
possible interest rate hedging by our company and principal paydowns. These
projections also assume that the principal balance, beyond the normal
amortization, is repaid as follows: $4 million in March 2002, $4 million in
September 2002, $1.5 million in September 2003, $333,000 per month from March
2005 through September 2005, $12 million in August 2005 and $4.4 million in
August 2006. The major source of repayment of principal is refinancings of our
company's existing properties. These projections also include net proceeds of
$1.7 million to our company from the refinancing of two medical office
buildings located in Tustin, California. We recently signed a term sheet to
refinance these buildings and could now potentially net up to $2 million from
the refinancing.
(3) Rent - Senior Care and Property Operations include the gross revenues and
gross expenses related to four of our company's skilled nursing facilities for
which we hold the operating license. During the first and second quarter of
2000, we took ownership of the licenses to operate four of our skilled nursing
facilities. Consequently, our projected financial statements reflect all of the
projected gross revenues and gross expenses of these facilities.
(4) These projections assume that Messrs. Gottlieb and Lebowitz purchase
approximately 20% of our company's outstanding preferred stock using the
proceeds from a $9 million loan from our company. These projections also assume
that Messrs. Gottlieb and Lebowitz would then assign approximately $700,000
annually in preferred dividend payments to our company. Note that the financial
projections do not reflect Messrs. Gottlieb and Lebowitz's current intention to
purchase approximately 7% of our company's preferred stock, rather than
20%.
COMMON STOCK PURCHASE INFORMATION
None of our company, our directors or executive officers, Acquiror or
Acquiror Sub, the management stockholders or their affiliates has engaged in any
transaction in our common stock within 60 days of the date of this proxy
statement. In addition, neither of the management stockholders has purchased
shares of our common stock during the past two years.
Purchases by Our Company
The following table sets forth purchases of our common stock by us during
the past two years, including, on a per quarter basis, the number of shares
purchased and the high, low and average price paid.
Price Per Share
Number of ---------------------------------------------
Shares High Low Average
------------------------------------------------------------------
Fiscal Year 1999
Second Quarter 36,000 12.44 10.92 11.73
Third Quarter 60,900 12.20 10.55 10.91
Fourth Quarter (1) 1,235,200 10.55 8.33 10.23
Fiscal Year 2000
First Quarter 237,800 9.78 8.71 9.18
Second Quarter 64,000 9.42 8.62 9.36
Third Quarter 0 -- -- --
Fourth Quarter 0 -- -- --
Fiscal Year 2001
First Quarter 0 -- -- --
Second Quarter 0 -- -- --
Third Quarter (through September 26, 2001) 0 -- -- --
(1) In the fourth quarter of 1999, we completed our tender offer for 1 million
shares of our common stock.
66
PROPOSAL 2: ELECTION OF DIRECTORS
Our board of directors is currently comprised of six members. All directors
are elected each year at the annual meeting.
The board of directors has nominated Daniel M. Gottlieb, Steven D.
Lebowitz, Richard D. Lesher, Leslie D. Michelson, Charles P. Reilly and S. Craig
Tompkins to continue to serve as directors of our company. Each of the nominees
is currently serving as our directors. Proxies cannot be voted for a greater
number of persons than the number of nominees named. Accordingly, proxies will
only be voted for six directors.
In the absence of instructions to the contrary, the persons named as proxy
holders in the accompanying proxy intend to vote in favor of the election of
each of the nominees designated below, to serve until the next annual meeting
and until their respective successors are elected and qualify. The board of
directors expects that each of the nominees will be available to serve as a
director, but if any such nominee should become unavailable for election, the
shares of common stock represented by the enclosed proxy may (unless such proxy
contains instructions to the contrary) be voted for such other person or persons
as may be determined by the holders of such proxies, or the board may amend the
bylaws to reduce the number of directors to be elected at the annual meeting.
Nominations of persons for election to the board at the annual meeting may
be made by a stockholder of record if the stockholder submits the nomination in
compliance with the requirements of our bylaws. If the merger is consummated,
nonaffiliated stockholders will no longer vote for the election of members to
our board of directors after this annual meeting.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE ELECTION OF EACH OF THE
NOMINEES. PROXIES RECEIVED WILL BE VOTED FOR EACH OF THE NOMINEES UNLESS
STOCKHOLDERS SPECIFY OTHERWISE IN THE PROXY.
Information Regarding Nominees and Directors
The following table sets forth certain information with respect to the
nominees for director, based on information furnished to us by each such
nominee.
Director
Name Age Position Since
---- --- -------- -----
Daniel M. Gottlieb 60 Chief Executive Officer, Co-Chairman of the Board 1993
and Director
Steven D. Lebowitz 60 President, Co-Chairman of the Board and Director 1993
Richard L. Lesher 67 Director 1993
Leslie D. Michelson 50 Director 1995
Charles P. Reilly 58 Director 1993
S. Craig Tompkins 50 Director 1993
The following is a biographical summary of the experience of our directors.
Each director is a United States citizen. None of our directors has been
convicted in a criminal proceeding during the past five years, or been a party
to any judicial or administrative proceeding, excluding traffic violations and
similar misdemeanors, during the past five years that resulted in a judgment,
decree or final order enjoining them from future violations of, or prohibiting
activities subject to, federal or state securities laws, or finding any
violation of federal or state securities law. Unless otherwise indicated below,
the principal business address of each of our directors is 439 North Bedford
Drive, Beverly Hills, CA 90210.
Mr. Gottlieb is our Chief Executive Officer and Co-Chairman of our board
and has held these positions since we commenced operations in 1993. Mr. Gottlieb
co-founded G & L Development in 1976 and has been a general partner of G & L
Development and active in commercial real estate management and development
67
since that time. Mr. Gottlieb received his B.A. with honors from the University
of Southern California and earned a J.D. from Boalt Hall School of Law at the
University of California at Berkeley. Prior to forming G & L Development, Mr.
Gottlieb first served as a Los Angeles County Deputy District Attorney and later
entered private practice specializing in real estate law and business
management. Mr. Gottlieb has also served on the board of directors of the United
States Chamber of Commerce, Washington, D.C. since February 1996.
Mr. Lebowitz is our President and Co-Chairman of our board and has held
these positions since we commenced operations in 1993. Mr. Lebowitz is the co-
founder and a general partner of G & L Development and has been active in the
development, management and ownership of a wide range of real estate properties
since 1968. Mr. Lebowitz received a B.S. in Accounting from the University of
Southern California, where he also received his MBA with highest honors in 1965.
From 1962 to 1964, Mr. Lebowitz worked for Deloitte & Touche, LLP and was
licensed as a Certified Public Accountant in 1964. From 1965 to 1968, Mr.
Lebowitz worked with the U.S. Department of Commerce and the Brookings
Institution in Washington D.C. Mr. Lebowitz served on the board of directors of
the United States Chamber of Commerce, Washington, D.C. from 1989 to 1994.
Mr. Lebowitz is currently a member of the Board of Counselors of the USC Ethel
Percy Andrus Gerontology Center.
Dr. Lesher has served as our director since we commenced operations in
1993. Dr. Lesher is currently retired. Dr. Lesher was President of the United
States Chamber of Commerce, Washington D.C. from 1975 to 1997, and has been a
member of its board of directors since 1975. He served on numerous committees of
the board, including the executive and budget committees. In addition, Dr.
Lesher is a member of the board of directors of World Heart Corporation (Ottawa,
Canada), an artificial heart research and development company and AIT
Corporation, a high-tech company. Dr. Lesher received a B.B.A. from the
University of Pittsburgh in 1958, a M.S. from Pennsylvania State University in
1960 and a D.B.A. from Indiana University in 1963 and holds four Honorary
Doctorates.
Mr. Michelson has served as our director since 1995 and serves as Chairman
of our compensation committee. Mr. Michelson has been active in the creation and
management of a number of health care companies. He co-founded Protocare, 2400
Broadway, Suite 100, Santa Monica, CA 90404, a clinical trials and disease
management company, and served as its Chairman and Co-CEO from 1998 to present.
Prior to forming Protocare, Mr. Michelson was a founder of Value Health
Sciences, Inc., a leading disease management company serving the pharmaceutical
and managed care industries, and served as its Chairman and co-Chief Executive
Officer from 1988 to 1998. Mr. Michelson is also a director of Catellus
Development Corporation, a New York Stock Exchange traded real estate developer.
He served as Special Assistant to the General Counsel of the U.S. Department of
Health and Human Services from 1979 to 1981. He received a B.A. from The Johns
Hopkins University and a J.D. from Yale Law School.
Mr. Reilly has served as our director since we commenced operations in
1993. Mr. Reilly is the managing general partner of Shamrock Investments, 2049
Century Park East, Suite 3300, Los Angeles, CA 90067, an investment and merchant
banking firm that specializes in the health care industry. Prior to forming
Shamrock Investments in 1987, Mr. Reilly served as Senior Executive Vice
President and Chief Development Officer for American Medical International, Inc.
In this position, Mr. Reilly was responsible for growth through the acquisition
and development of new health care facilities and related business in the United
States and abroad. Mr. Reilly was a member of American Medical International's
board of directors and served on its finance, management, and executive
committees. Mr. Reilly is the former Chairman of the board of directors of
Dynamic Health, Inc., an owner/operator of acute care hospitals, the former
Chairman of the board of directors of Paragon Ambulatory Surgery Centers, Inc.,
an owner/operator of freestanding ambulatory surgery centers, and the former
Chairman of the board of directors of PHP Healthcare Corp., a managed care
provider. Mr. Reilly holds a law degree from the University of Pennsylvania and
a bachelor's degree in accounting and finance from Pennsylvania State
University. He has served as a director, trustee, and governing council member
of the Federation of American Healthcare Systems, the National Committee for
Quality Health Care and the American Hospital Association and is a past
President of the Beverly Hills Chamber of Commerce.
68
Mr. Tompkins has served as our director since we commenced operations in
1993. Mr. Tompkins is the President and a director of The Craig Corporation, 550
South Hope Street, Suite 1825, Los Angeles, CA 90071, a New York Stock Exchange
company engaged in the ownership and strategic management of its controlling
interests in other operating companies, including a 78% voting interest in
Reading Entertainment, Inc. and a 33% interest in Citadel Holding Corporation.
Reading Entertainment, whose shares are quoted on the NASDAQ, is principally in
the beyond-the-home entertainment business, developing and operating multiplex
cinemas and cinema based entertainment centers in Australia, New Zealand and
Puerto Rico. Citadel Holding Corporation, is an American Stock Exchange company,
whose assets consist primarily of commercial and agricultural real estate in
California, the Manhattan based City Cinemas chain of movie theaters and off-
Broadway style live theaters in Manhattan and Chicago. Mr. Tompkins also serves
on the boards of directors of Reading Entertainment (where he is Vice-Chairman)
and Citadel Holding Corporation (where he is also Vice- Chairman). Since April
2000, Mr. Tomkins has served on the board of directors of Fidelity Federal Bank,
FSB, a Southern California based savings bank and as a member of the audit and
compensation committees of that company. Beginning in 1984 and prior to joining
Craig and Reading Entertainment in March 1993, Mr. Tompkins was a partner
specializing in corporate and real estate law in the law firm of Gibson, Dunn &
Crutcher LLP. Mr. Tompkins holds a bachelor's degree from Claremont McKenna
College and a J.D. from Harvard Law School.
The Board of Directors and its Committees
Board of Directors. We are managed under the direction of a board of
directors, a majority of whom are independent of our management. The board
currently consists of six members. The board of directors met five times in
2000. Each of the directors attended all of the meetings of the board of
directors and of each committee on which he served during the year, except for
one board meeting that was not attended by Mr. Michelson and one executive
committee meeting that was not attended by Mr. Tompkins. The board of directors
has executive, audit and compensation committees and until January 2001, had a
strategic planning committee. The board does not have a nominating committee. On
November 30, 2000, the board formed a special committee to review the proposal
by the management stockholders.
Executive Committee. The executive committee of the board of directors
consists of Messrs. Gottlieb, Lebowitz, Reilly and Tompkins. The executive
committee has such authority as is delegated by the board of directors,
including to authorize (1) the acquisition and disposition of real property and
(2) the execution of certain contracts and agreements.
Audit Committee. The audit committee consists of Messrs. Michelson and
Tompkins. The function of the audit committee is to make recommendations
concerning the engagement of independent public accountants, review with the
independent public accountants the plans and results of the audit engagement,
approve professional services provided by the independent public accountants,
review the independence of the independent public accountants, consider the
range of audit and non-audit fees and review the adequacy of our internal
accounting controls. The audit committee held one meeting in 2000. All audit
committee members attended this meeting.
Compensation Committee. The compensation committee consists of Messrs.
Michelson and Lesher. The compensation committee determines officers' salaries
and bonuses and administers our 1993 Stock Incentive Plan. The compensation
committee held one meeting in 2000. All compensation committee members attended
this meeting.
Strategic Planning Committee. Prior to its termination in January 2001,
the strategic planning committee consisted of Messrs. Gottlieb, Lebowitz and
Tompkins. The function of the strategic planning committee was to develop plans
concerning our future growth and opportunities.
Special Committee. The special committee consists of Messrs. Lesher,
Michelson, Reilly and Tompkins. The special committee was formed to consider
and negotiate the merger proposal submitted by the management stockholders. See
"Special Factors - Background of the Merger" for a summary of the meetings of
the special committee.
69
Compensation of Directors
We pay an annual fee of $12,500 plus a fee of $1,000 for attending regular
meetings and $500 for attending committee meetings to our directors who are not
our employees. In addition, for his services on the strategic planning
committee, Mr. Tompkins received an additional directors fee of $50,000 per
year. Our employees who are also directors are not paid any director fees.
Messrs. Gottlieb and Lebowitz are the only directors who are also our employees.
The reasonable expenses incurred by each director in connection with the
performance of the director's duties are also reimbursed by us. In addition,
pursuant to the 1993 Stock Incentive Plan, each nonemployee director is
automatically granted an option to purchase 500 shares of common stock each year
on the first business day after the date of the annual meeting and each person
who becomes a nonemployee director is granted an option to purchase 3,000 shares
of common stock upon joining the board of directors. The exercise price of these
option grants is equal to 100% of the fair market value of the common stock at
the date of grant.
On June 15, 2000, Messrs. Lesher, Michelson, Milner, Reilly and Tompkins
were each granted an option to purchase 500 shares of common stock at a price of
$7.875 per share. These options became fully exercisable on December 15, 2000.
The options generally expire on the earlier of the first anniversary of the date
upon which the director shall cease to be a director as a result of death or
total disability, the 90th day after the date upon which the director shall
cease to be a director for any other reason or ten years after the date of
grant.
SECURITIES OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information as of September 26, 2001
regarding the beneficial ownership of common stock and operating partnership
units by (1) each person or company known by us to be the beneficial owner of
more than 5% of our outstanding shares of common stock, (2) each of our
directors, (3) each of the Named Executive Officers (as defined under "Executive
Compensation") and (4) our directors and executive officers as a group. As of
September 26, 2001 we had 2,871,654 shares of common stock outstanding. In
addition there were 87,418 operating partnership units outstanding which were
not owned by us. Each person named in the table has sole voting and investment
power with respect to all shares shown as beneficially owned by such person
except as provided under applicable state marital property laws or as set forth
in the notes following the table.
Number of Percentage of Percentage Number of
Shares of Shares of Interest In Percentage Shares of
Name and address Common Common Stock Number of Operating Ownership in Preferred
of Beneficial Owner Stock(1) Outstanding(2) Units(3) Partnership(4) Company(5) Stock
------------------- --------- -------------- --------- -------------- ------------ ---------
Daniel M. Gottlieb(6)........... 751,119 24.2% 14,474 0.5% 24.5% --
439 N. Bedford Drive
Beverly Hills, CA 90210
Steven D. Lebowitz(7)........... 623,440 20.1 12,330 0.4 20.3 --
439 N. Bedford Drive
Beverly Hills, CA 90210
Lyle Weisman, Asher Gottesman, 339,960 11.0 -- -- 10.9
Len Fisch and Igor Korbatov(8)
70
Number of Percentage of Percentage Number of
Shares of Shares of Interest In Percentage Shares of
Name and address Common Common Stock Number of Operating Ownership in Preferred
of Beneficial Owner Stock(1) Outstanding(2) Units(3) Partnership(4) Company(5) Stock
------------------- --------- -------------- --------- -------------- ------------ ---------
Richard Abrons; Louise & Anne......... 222,196 7.2 -- -- 7.1 --
Abrons Foundation, Inc.;
Richard & Iris Abrons
Foundation, Inc.; Iris Abrons;
Richard & Mimi Abrons Trustees
Trust u/w/o Louis Abrons f/b/o
John Abrons u/w/o 6/3/75 (9)
First Manhattan Company
437 Madison Avenue
New York, NY 10017
Richard Lesher........................ 10,000 * -- * * --
1126 Cider Press Road
Chambersburg, PA 17201
Leslie D. Michelson................... 5,500 * -- * * --
2400 Broadway, Suite 100
Santa Monica, CA 90404
John H. Rauch......................... 15,000 * -- -- * --
439 N. Bedford Drive
Beverly Hills, CA 90210
Charles P. Reilly..................... 6,000 * -- -- * --
2049 Century Park East
Suite 3330
Los Angeles, CA 90067
S. Craig Tompkins (10)................ 11,500 * -- -- * 2,000
550 South Hope Street
Suite 1825
Los Angeles, CA 90071
David E. Hamer........................ 8,000 * -- -- * --
439 N. Bedford Drive
Beverly Hills, CA 90210
Directors and Executive............... 1,430,559 46.2% 26,804 0.9% 46.6% 2,000
Officers
as a group (8 persons)
* Less than 1%
See numbered footnotes.
(1) The number of shares beneficially owned includes shares that the following
individuals have the right to acquire within 60 days of September 26, 2001
upon exercise of stock options, but not shares that such individuals have
the right to acquire upon conversion or exchange of operating partnership
units, in the following amounts: (a) 83,500 shares as to each of Messrs.
Gottlieb and Lebowitz, (b) 1,500 shares as to Dr. Lesher, (c) 4,500 shares
as to Mr. Michelson, (d) 15,000 shares as to Mr. Rauch, (e) 6,000 shares as
to each of Messrs. Reilly and Tompkins and (f) 8,000 as to Mr. Hamer.
(2) For the purposes of determining the percentage of outstanding common stock
held by each person or group set forth in the table, the number of shares
indicated as beneficially owned by such person or group is divided by the
sum of the number of outstanding shares of common stock as of September 26,
2001 plus the number of shares of common stock subject to options
exercisable currently or within 60 days of September 26, 2001 by such
person or group, in accordance with Rule 13d-3(d)(1) under the Securities
Exchange Act of 1934, as amended. Assumes that none of the outstanding
operating partnership units are converted into shares of common stock.
71
(3) Units in the operating partnership (other than those held by us) are
convertible at the option of the holder for shares of common stock or cash,
at our election, at the date one year from the date of issuance. All
operating partnership units are currently convertible. The conversion ratio
is one operating partnership unit for one share of common stock.
(4) Based on a total of 2,959,072 operating partnership units outstanding
(excluding preferred units all of which are held by us), including the
2,871,654 operating partnership units held by our company as of September
26, 2001.
(5) Assumes that all operating partnership units held by the person or group
and all options exercisable within 60 days of September 26, 2001 held by
the person or group are converted for shares of common stock and that none
of the operating partnership units held by other persons are converted into
shares of common stock, notwithstanding the percentage limitations under
our charter that limits the number of shares that may be acquired by such
person.
(6) Mr. Gottlieb has pledged 338,809 shares of common stock to Reese L. Milner,
formerly a director of our company, members of the Milner family and
related entities to secure certain indebtedness. In addition his remaining
328,810 shares of common stock and 14,474 operating partnership units have
been pledged to various financial institutions to secure other
indebtedness. On August 8, 2001, Mr. Gottlieb exchanged 272,159 operating
partnership units for 272,159 shares of common stock. On August 16, 2001,
Mr. Gottlieb exchanged an additional 14,138 operating partnership units for
14,138 shares of common stock.
(7) Mr. Lebowitz has pledged 258,135 shares of common stock to Mr. Milner,
members of the Milner family and related entities to secure certain
indebtedness. In addition his remaining 279,345 shares of common stock and
12,330 operating partnership units have been pledged to various financial
institutions to secure other indebtedness. Also includes 2,460 shares of
common stock held in trust for the benefit of Mr. Lebowitz's children. On
August 8, 2001, Mr. Lebowitz exchanged 205,695 operating partnership units
for 205,695 shares of common stock. On August 16, 2001, Mr Lebowitz
exchanged an additional 45,862 operating partnership units for 45,862
shares of common stock.
(8) Based solely upon a Schedule 13D filed with the Securities and Exchange
Commission on May 11, 2001, as amended on May 17, 2001, May 18, 2001, May
31, 2001, June 4, 2001, June 13, 2001, June 25, 2001, July 10, 2001, August
1, 2001, August 8, 2001, August 22, 2001, August 31, 2001, September 6,
2001 and September 26, 2001. Such amended schedule indicates that Lyle
Weisman has sole voting and dispositive power for 93,700 shares, Asher
Gottesman has sole voting and dispositive power for 40,560 shares, and Len
Fisch and Igor Korbatov have joint voting and dispositive power for 205,700
shares. The address for Messrs. Weisman and Gottesman is 14001 Ventura
Boulevard, Los Angeles, California 91423, and for Messrs. Fisch and
Korbatov is 922 Santee Street, Los Angeles, California 90015.
(9) Based solely upon a Schedule 13G filed with the Securities and Exchange
Commission on May 20, 2000. Such schedule indicates that Richard Abrons,
the Louise & Anne Abrons Foundation, Inc., the Richard & Mimi Abrons
Trustees Trust have shared voting power for 222,196 shares.
(10) Includes 1,400 shares of common stock held in trust for the benefit of Mr.
Tompkins' child's trust account, as to which Mr. Tompkins disclaims
beneficial ownership.
72
EXECUTIVE OFFICERS
The following table sets forth the names, ages and positions of each of our
executive officers. Subject to rights pursuant to any employment agreements, our
officers serve at the pleasure of the board of directors. Each executive officer
is a United States citizen. None of our executive officers has been convicted in
a criminal proceeding during the past five years, or been a party to any
judicial or administrative proceeding, excluding traffic violations and similar
misdemeanors, during the past five years that resulted in a judgment, decree or
final order enjoining them from future violations of, or prohibiting activities
subject to, federal or state securities laws, or finding any violation of
federal or state securities law. The principal business address of each of our
executive officers is 439 North Bedford Drive, Beverly Hills, California 90210.
Officer
Name Age Position Since
---- --- -------- -----
Daniel M. Gottlieb 60 Chief Executive Officer, Co-Chairman of the Board 1993
Steven D. Lebowitz 60 President, Co-Chairman of the Board 1993
John H. Rauch 70 Senior Vice President, Operations 1996
David E. Hamer 27 Vice President, Chief Accounting Officer, and 1998
Secretary
The following is a biographical summary of the experience of our executive
officers. For the biographical summary of the experience of Messrs. Gottlieb and
Lebowitz, see the biographical summary of the experience of our directors.
Mr. Rauch has been our Senior Vice President, Operations since 1996. Mr.
Rauch is responsible for the asset management of all our medical office
buildings. From 1975 to 1996 he was founder and President of Camden Consultants,
Inc., an economic consulting firm providing clients with real estate and
corporate planning information. Mr. Rauch had been a consultant to our company
from 1985 to 1996. Mr. Rauch received his law degree from the University of
Southern California with honors in 1961 and his bachelor's degree in economics
from the University of California, Los Angeles in 1954.
Mr. Hamer has been our Controller and Chief Accounting Officer since 1998.
The board of directors elected Mr. Hamer as a Vice President in March 2000 and
as Secretary in May 2001. Mr. Hamer worked for Deloitte & Touche, LLP, 350 South
Grand Avenue, Suite 200, Los Angeles, California, 90071, from 1995 to 1998
specializing in real estate. He graduated from the University of California, Los
Angeles in 1995 with a Bachelor of Arts degree in political science and a
specialization in business administration. Mr. Hamer is a registered Certified
Public Accountant.
73
EXECUTIVE COMPENSATION
Summary Compensation Table
The following table sets forth certain information with respect to our
chief executive officer and our four other most highly compensated executive
officers whose cash compensation exceeded $100,000 during the year ended
December 31, 2000 (collectively, the "Named Executive Officers"). We did not
grant any restricted stock awards or stock appreciation rights or make any long-
term incentive plan payouts during the year ended December 31, 2000.
Long Term
Compensation
Awards
Annual Compensation Securities
Fiscal Year ------------------------------------------------- Underlying
Ended Other Annual Options/
Name and Principal Position December 31 Salary($) Bonus($) Compensation($) SARS(#)
--------------------------- ----------- --------- -------- --------------- -----------
Daniel M. Gottlieb............. 2000 $255,000 $35,000 --- 50,000
Chief Executive Officer, 1999 255,000 --- --- ---
Co-Chairman of the Board 1998 255,000 --- --- ---
and Director
Steven D. Lebowitz............. 2000 $255,000 $35,000 --- 50,000
President, Co-Chairman 1999 255,000 --- --- ---
of the Board and Director 1998 255,000 --- --- ---
John H. Rauch.................. 2000 $100,000 $25,000 --- ---
Senior Vice President 1999 80,000 20,000 --- ---
1998 108,864 10,000 --- ---
George I. Nagler............... 2000 $160,000 $10,000 --- ---
Vice President, General 1999 150,000 25,000 --- ---
Counsel and Secretary 1998 100,000(1) 25,000 --- 20,000
David E. Hamer................. 2000 $100,000 $15,000 --- ---
Vice President and Chief 1999 85,000 7,500 --- ---
Accounting Officer 1998 39,532(2) 5,000 --- 8,000
-------------------------------------------------------------------------------------------------------------------
___________________________
(1) Mr. Nagler joined us in March 1998. On an annualized basis, Mr. Nagler
would have earned a base salary of $120,000 in 1998. Mr. Nagler ceased to
be an employee of the company effective April 30, 2001.
(2) Mr. Hamer joined us in June 1998. On an annualized basis, Mr. Hamer would
have earned a base salary of $75,000 in 1998.
Employment Agreements and Arrangements
In December 1993, each of Daniel M. Gottlieb and Steven D. Lebowitz entered
into separate but identical employment agreements with us and the operating
partnership for a term of three years. The agreements provide for automatic
renewal for succeeding terms of one year unless we or Messrs. Gottlieb or
Lebowitz give notice at least three months prior to expiration of any term. The
employment agreements provide for automatic annual increases in base
compensation equal to 5% per annum; however, the compensation committee of the
board of directors may review the annual base compensation every twelve months
in light of various factors, and following each such review, the annual base
compensation may be increased above the 5% automatic increase.
74
In addition, each of Messrs. Gottlieb and Lebowitz are entitled to receive
an annual bonus as determined by the compensation committee in an amount not to
exceed a maximum of 100% of annual base compensation. Furthermore, each
agreement provides that Messrs. Gottlieb and Lebowitz are entitled: (1) to
participate in all of our medical, dental, life insurance, retirement, profit
sharing, stock incentive, disability and bonus plans which may be made available
to our executives (only medical plans presently exist) and (2) to severance
payments, under certain circumstances, equal to two times their then-current
annual compensation.
The agreements require Messrs. Gottlieb and Lebowitz to devote
substantially all of their working time and best efforts to performance of their
duties for us and, during the term of their employment, prohibit them, with
certain exceptions, from directly or indirectly owning or operating or otherwise
investing or participating in any other business that is in competition with our
business without the prior approval of a majority of the independent members of
our board of directors.
Option Grants for 2000
The following table sets forth information with respect to options granted
to the Named Executive Officers during the fiscal year ended December 31, 2000
pursuant to our 1993 Stock Incentive Plan, as amended. No options were granted
to Messrs. Rauch, Nagler and Hamer during 2000.
% of Total
Options
Number of Granted to
Name and Principal Options Granted Employees in Exercise Price Expiration Grant Date
Position (#) (1) Fiscal Year ($/Share) Date Value ($) (2)
-------------------- -------------- -------------- --------------- ----------- ---------------
Daniel M. Gottlieb
Chief Executive Officer,
Co-Chairman of the Board 50,000 50.0% $8.875 2/29/10 $130,500
Steven D. Lebowitz
President,
Co-Chairman of the Board 50,000 50.0% $8.875 2/29/10 $130,500
(1) All of these options became fully vested on May 10, 2001 in accordance with
the terms of the merger agreement.
(2) Calculated using the Binomial option pricing model. The following
variables were used in this model: risk-free interest rate of 4.98%, 5.7%
dividend yield, expected life of three years and expected volatility of
50.0%.
Aggregated Option Exercises in 2000 and Options Values at December 31, 2000
The following table sets forth information with respect to options
exercised and the value of unexercised options held by the Named Executive
Officers as of the end of the fiscal year ended December 31, 2000. All options
were granted pursuant to our 1993 Stock Incentive Plan, as amended.
Number of Securities Value of
Underlying Unexercised In-The-Money
Number of Options at Options at
Shares Fiscal Year End (#) Fiscal Year End ($) (1)
Name and Principal Acquired on Value Realized ------------------------------ ---------------------------
Position Exercise (#) ($) Exercisable Unexercisable Exercisable Unexercisable
--------------------------- ------------- -------------- ------------- --------------- ----------- -------------
Daniel M. Gottlieb......... --- --- 50,167 33,333(2) --- ---
Chief Executive Officer
and Co-Chairman of the Board
75
Steven D. Lebowitz........ --- --- 50,167 33,333(2) --- ---
President and Co-Chairman
of the Board
John H. Rauch............. --- --- 15,000 --- --- ---
Senior Vice President
George I. Nagler.......... --- --- 20,000 --- --- ---
Vice President, General
Counsel and Secretary
David E. Hamer............ --- --- 8,000 --- --- ---
Vice President and Chief
Accounting Officer
____________________
(1) This amount represents solely the difference between the market value at
December 31, 2000 ($8.8125) of those unexercised options which had an
exercise price below such market price (i.e., "in-the-money options") and
the respective exercise prices of the options. No assumptions or
representations regarding the "value" of such options are made or intended.
(2) The stock options for 33,333 shares of common stock at $8.875 per share
became fully exercisable on May 10, 2001 in accordance with the terms of
the merger agreement.
COMPENSATION COMMITTEE REPORT
The following report of the compensation committee and the stock
performance graph included in this proxy statement shall not be deemed filed
under the Securities Act of 1933, as amended, or the Securities Exchange Act of
1934, as amended, except to the extent we specifically incorporate this report
or the stock performance graph by reference therein, and shall not be deemed
soliciting material or otherwise deemed filed under either of such Acts.
The compensation committee is chartered to establish our general
compensation policy, to review and approve compensation of our executive
officers and to administer all of our employee benefit plans. The compensation
committee reviews the our overall compensation program to assure that it (1) is
reasonable and consistent with competitive practices, (2) adequately recognizes
performance, and (3) meets our overall compensation and business objectives.
Messrs. Lesher and Michelson are the two members of the compensation committee.
Compensation Philosophy
Objectives. The primary focus of our compensation program is to create
value for stockholders. The committee attempts to promote desired financial and
operational results by attracting, motivating and retaining key employees with
outstanding ability. In addition, the compensation program is designed to
promote teamwork, initiative and resourcefulness on the part of key employees
whose performance and responsibilities directly affect our profits. In this
regard, the compensation program is designed to balance short and long-term
incentive compensation to achieve desired results and above all to pay for
performance.
Elements. Our executive compensation is based on three components designed
in each case to accomplish our compensation philosophy.
76
Base Salary. Salaries for Messrs. Gottlieb and Lebowitz are reviewed by the
compensation committee on an annual basis and may be increased based upon an
assessment of each individual's contribution to the asset and financial growth
of our company as well as competitive pay levels. Based on our performance
during 1998 and 1999, Messrs. Gottlieb and Lebowitz waived their right to
receive the automatic 5% salary increase for 1999 and 2000 pursuant to their
employment agreements; thus, the compensation committee did not meet in 1999 or
2000 to review the salaries of Messrs. Gottlieb and Lebowitz. Messrs. Gottlieb
and Lebowitz both received their automatic 5% salary increase for 2001.
Bonus. In December 1995, the compensation committee adopted an annual
incentive program for Messrs. Gottlieb and Lebowitz based upon the
accomplishment of specific predetermined performance objectives which are linked
to our business plan and approved annually by the compensation committee. Under
this program, incentive compensation is associated with specific performance
objectives. In addition, pursuant to their employment agreements; each of
Messrs. Gottlieb and Lebowitz is entitled to receive an annual bonus equal to
20% of his base salary based on a 5% increase in funds from operations ("FFO")
per share above the prior year's amount and an additional 8% of base salary for
each additional 1% increase in FFO per share up to a maximum of 100% of annual
base compensation. The annual bonus available to Messrs. Gottlieb and Lebowitz
is equal to the greater of (x) the annual bonus as determined by the percentage
point increase in our FFO as contained in their employment agreements, or (y)
the incentive compensation associated with specific objectives outlined in our
business plan. Based on our performance during 2000, Messrs. Gottlieb and
Lebowitz were each granted $35,000 in bonuses for 2000. Our remaining executive
officers were given bonuses for 2000 based upon the evaluation of their
performances by Messrs. Gottlieb and Lebowitz.
Stock Options. The compensation committee may grant stock options and
restricted stock to our executives and other key employees pursuant to our 1993
Stock Incentive Plan. In determining the grants of stock options and restricted
stock the compensation committee will take into account, among other things, the
respective scope of responsibility and the anticipated performance requirements
and contributions to us of each proposed award recipient as well as the amount
of prior grants. Stock options are designed to align the interest of executives
with those of the stockholders. The committee is currently contemplating various
methods to provide additional incentives to our management and employees. The
compensation committee believes that significant equity interests in us held by
our management serve to retain and motivate management. However, if the merger
is consummated, our 1993 Stock Incentive Plan will be terminated, in which case
the committee will re-evaluate methods to provide incentives to management.
On February 29, 2000, the board of directors granted 50,000 non-qualified
common stock options to each of Messrs. Gottlieb and Lebowitz. The exercise
price of the options was $8.875, the closing price of our common stock on
February 29, 2000. The board determined that both officers were deserving of
such options because they are underpaid for the value they add to our company.
The board also noted that these two officers had been materially and adversely
affected by the new dividend policy adopted in the last quarter of 1999, neither
officer received any bonus during 1999 or 2000 and the two officers have agreed
to forgo any salary increase in 1999 and 2000 including waiving the automatic 5%
salary increase each is otherwise entitled to under their respective employment
agreements.
Section 162(m). The Commission requires that this report comment upon our
policy with respect to Section 162(m) of the Internal Revenue Code, which limits
the deductibility of compensation over $1 million to certain executive officers
unless, in general, the compensation is paid pursuant to a plan which is
performance related, non-discretionary and has been approved by our
stockholders. We did not pay any compensation in 2000 that would be subject to
the Section 162(m) limitation. The compensation committee intends to establish
policies regarding qualification of compensation under Section 162(m) of the
Internal Revenue Code to the extent it considers such policies appropriate.
Members of the Compensation Committee
Richard L. Lesher
Leslie D. Michelson
77
STOCK PERFORMANCE GRAPH
The graph below compares cumulative total return of our company, the S&P
500 Index and the Equity REIT Total Return Index ("REIT Equity Index") of the
National Association of Real Estate Investment Trusts ("NAREIT") from December
31, 1995 to December 31, 2000. The REIT Equity Index includes REITs with 75% or
more of their gross invested book value of assets invested directly or
indirectly in the equity ownership of real estate.
The graph assumes that the value of the investment in each of the common
stock and the indices was $100 at the beginning of the period. The graph further
assumes reinvestment of dividends.
Upon written request to the our Secretary, we will provide any stockholder
with a list of the REITs included in the REIT Equity Index. The historical
information set forth below is not necessarily indicative of future performance.
Data for the REIT Equity Index and the S&P 500 Index were provided to us by
McDonald & Co.
Period Ending
12/31/95 12/31/96 12/31/97 12/31/98 12/31/99 12/31/00
--------- --------- --------- --------- --------- ---------
G & L Realty Corp............ $ 100.00 $ 180.41 $ 244.08 $ 162.03 $ 121.55 $ 129.37
S&P 500...................... 100.00 122.95 163.99 210.85 255.19 229.32
REIT Equity Index............ 100.00 133.08 158.27 131.26 127.87 161.05
[Graph Appears Here]
CERTAIN RELATIONSHIPS AND TRANSACTIONS
We have adopted a policy pursuant to which material transactions between us
and our executive officers, directors and principal stockholders (i.e.,
stockholders owning beneficially 5% or more of our outstanding voting
securities) are submitted to the board of directors for approval by a
disinterested majority of the directors voting with respect to the transaction.
For this purpose, a transaction is deemed material if such transaction, alone or
together with a series of similar transactions during the same fiscal year,
involves an amount which exceeds $60,000.
On April 15, 1999, we borrowed $2.0 million from Reese L. Milner, a
director of our company at the time and an operating partnership unit holder of
our subsidiary. The loan bore interest at 12% per annum and was due on May 15,
1999. We also paid a loan fee of $20,000 to Mr. Milner. The loan was secured by
a first trust deed against a parcel of real property owned by us. On May 13,
1999, the loan was extended until new financing on the collateralized property
was obtained. We repaid the loan plus accrued interest on June 13, 1999.
On May 4, 1999, we sold a vacant parcel of real property for $1.6 million
to The Craig Corporation, whose president is S. Craig Tompkins, a director of
our company. We had the option to repurchase the property beginning on November
5, 1999 and ending on December 3, 1999 for $1.8 million plus any costs incurred
by The Craig Corporation with respect to the property. Beginning on January 24,
2000 and ending on January 31, 2000, The Craig Corporation had the option to
sell the property to us for $1.9 million. Thereafter, the option sale price
would have increased at a rate of 3% per month, adjusted pro rata for any
periods of less than one month. We accounted for this transaction in accordance
with FAS 66 "Accounting for Sales of Real Estate" and treated this sale as a
financing transaction. This amount was repaid on November 2, 1999 for $1.76
million.
On May 18, 1999, we entered into an agreement with The Craig Corporation,
whose president is S. Craig Tompkins, a director of our company, whereby The
Craig Corporation would purchase up to 36,000 shares of our common stock on the
open market and we would have the option to purchase these shares from The Craig
78
Corporation on or before December 3, 1999 at The Craig Corporation's cost plus a
premium of 20% per annum, less any dividends received. After December 3, 1999,
The Craig Corporation had the option to sell the shares to us between January 24
and January 31, 2000 at its cost plus a premium of 25% per annum. Thereafter,
the option sale price would have increased at a rate of 3% per month. The
exercise of our option was contingent upon the exercise of our option to
repurchase the vacant parcel of land from The Craig Corporation discussed above.
On December 29, 1999, we purchased from The Craig Corporation 34,400 shares of
our common stock for $404,000. This amount included $44,000 in interest.
On February 7, 2000, our board of directors unanimously approved the
guarantee of a $500,000 line of credit from Tokai Bank to each of Daniel M.
Gottlieb and Steven D. Lebowitz, both directors and officers of our company, for
a total of $1 million.
On May 10, 2001, we entered into the merger agreement with the Acquiror.
Daniel M. Gottlieb, our Chief Executive Officer and Co-Chairman of our board,
and Steven D. Lebowitz, our President and Co-Chairman of our board, are the
members of the Acquiror. Upon completion of the merger, Messrs. Gottlieb and
Lebowitz will own all of our outstanding common stock. Messrs. Gottlieb and
Lebowitz will also receive approximately $6.2 million in the aggregate in the
merger as consideration for a portion of their shares of common stock and for
their outstanding stock options. In addition, Messrs. Gottlieb and Lebowitz
announced that they intend to make a cash tender offer for up to approximately
7% 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 commence about the time when we begin soliciting proxies for the
stockholders meeting to consider the proposed merger and would close subject to
the closing of the merger, after the expiration of the statutory offer period
(20 business days after the commencement date of the tender offer), unless
extended in accordance with the rules of the SEC. Messrs. Gottlieb and Lebowitz
intend to borrow up to $5.29 million from the Acquiror to fund the tender offer
and to repay personal loans.
AUDIT COMMITTEE MATTERS
The audit committee consists of two members, Messrs. Michelson and
Tompkins. In 2000, the audit committee met one time. The audit committee and the
board of directors intend to adopt a charter for the audit committee in the near
future. Our securities are listed on the New York Stock Exchange and are
governed by its listing standards. All members of the audit committee meet the
independence standards of Section 303.01(B)(2)(a) of the New York Stock Exchange
Listing Company Manual.
Report of the Audit Committee
The following report of the audit committee shall not be deemed filed under
the securities act of 1933, as amended, or the securities exchange act of 1934,
as amended, except to the extent we specifically incorporate this report by
reference therein, and shall not be deemed soliciting material or otherwise
deemed filed under either of such acts.
The audit committee of the board of directors assists the board in
performing its oversight responsibilities for the company's financial reporting
process, audit process and internal controls.
The audit committee reviewed and discussed the company's audited financial
statements for the year ended December 31, 2000 with the company's management
and with the company's independent accountants. In addition, the committee
discussed with the company's independent accountants the matters required to be
discussed by Statement of Auditing Standards No. 61 (Codification of Statements
on Accounting Standards) which includes, among other items, matters related to
the conduct of the audit of the company's financial statements. The committee
has also received and reviewed the written disclosures and the letter from the
company's independent accountants required by Independence Standards Board
Standard No. 1 (Independence Discussions with Audit Committees) and discussed
with the accountants their independence from the company.
79
Based on the review and discussions with management and the independent
accountants described above, the audit committee recommended to the board of
directors that the audited financial statements be included in the company's
Annual Report on Form 10-K for the year ended December 31, 2000.
_____________________________________________
MEMBERS OF THE AUDIT COMMITTEE
Leslie D. Michelson
S. Craig Tompkins
Information Concerning Fees of Independent Accountants
For the year ended December 31, 2000, we paid fees to Deloitte & Touche,
LLP for services in the following categories:
Audit Fees........................................................................... $165,000
Financial Information
Systems Design & Implementation Fees................................................. --
All Other Fees....................................................................... $210,000
All Other Fees includes $144,000 for tax planning and compliance services. The
audit committee has considered whether the provision of the non-audit services
noted above is compatible with maintaining the independence of Deloitte &
Touche, LLP.
PROPOSAL 3: RATIFICATION OF THE INDEPENDENT PUBLIC ACCOUNTANTS
The board of directors, on the recommendation of the audit committee, has
appointed Deloitte & Touche, LLP, certified public accountants, as our
independent auditors for the fiscal year ending December 31, 2001. Deloitte &
Touche, LLP has served as our principal independent public accountants since our
formation in 1993. Deloitte & Touche, LLP has advised us that it has no direct
or indirect financial interest in our company or any of our subsidiaries, and
that it has had, since our organization, no connection with our company or any
of our affiliates other than as independent auditors and related activities.
Our financial statements for the period ended December 31, 2000, and report
of the auditors thereon, will be presented at the annual meeting. Deloitte &
Touche, LLP will have a representative present at the meeting who will have an
opportunity to make a statement if he or she so desires and to respond to
appropriate questions.
During 2000, Deloitte & Touche, LLP provided services consisting of the
audit of our financial statements for the year ended December 31, 2000,
consultations with respect to our quarterly financial statements, reports and
registration statements filed with the Securities and Exchange Commission,
consultation relating to tax matters including preparation of our tax returns
and other pertinent matters.
If our stockholders do not ratify the selection of Deloitte & Touche, LLP,
or if such firm should decline to act or otherwise become incapable of acting,
or if the employment should be discontinued, the board of directors, at the
recommendation of the audit committee, will appoint substitute independent
public accountants.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE PROPOSAL TO RATIFY THE
APPOINTMENT OF DELOITTE & TOUCHE, LLP AS OUR INDEPENDENT PUBLIC ACCOUNTANTS FOR
THE YEAR ENDING DECEMBER 31, 2001. PROXIES RECEIVED WILL BE SO VOTED UNLESS
STOCKHOLDERS SPECIFY OTHERWISE IN THE PROXY.
PROPOSAL 4: ADJOURNMENT OF ANNUAL MEETING
If a motion to adjourn the annual meeting is properly brought, the
stockholders will be asked to vote upon the adjournment of the annual meeting.
80
OTHER MATTERS
Submission of Stockholder Proposals. If the merger is consummated, we will
not have any public common stockholders and there will be no public
participation in any future meetings of our stockholders. However, if the merger
is not consummated, or is materially delayed, our public common stockholders
would continue to be entitled to attend and participate in our stockholder
meetings. If the merger is not completed, you will be informed, by press release
or other means determined reasonable by us, of the date by which stockholder
proposals must be received by us for inclusion in the proxy materials relating
to the annual meeting, which proposals must comply with the rules and
regulations of the Securities and Exchange Commission then in effect.
Section 16(a) Beneficial Ownership Reporting Compliance. Based solely upon
a review of Securities and Exchange Commission Forms 3, 4 and 5 furnished to us
and certain written representations, we believe that all reports required by
Section 16(a) of the Securities and Exchange Act of 1934 with respect to our
fiscal year ended December 31, 2000 have been filed by our officers and
directors.
Other Matters. Our board of directors knows of no matters to be presented
at the annual meeting other than those described in this proxy statement. Other
business may properly come before the meeting, and in that event it is the
intention of the persons named in the accompanying proxy to vote in accordance
with their discretion on such matters.
WHERE YOU CAN FIND MORE INFORMATION
As required by law, we file reports, proxy statements and other information
with the Commission. Because the merger is a "going private" transaction, we
have filed a Rule 13e-3 Transaction Statement on Schedule 13E-3 with respect to
the merger. The Schedule 13E-3 and such reports, proxy statements and other
information contain additional information about us. You can inspect and copy
these materials at the public reference facilities maintained by the Commission
at Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549, and at the
following Regional Offices of the Commission: 500 West Madison Street, Suite
1400, Chicago, Illinois 60661; and 7 World Trade Center, Suite 1300, New York,
New York 10048. For further information concerning the Commission's public
reference rooms, you may call the Commission at 1-800-SEC-0330. Some of this
information may also be accessed on the World Wide Web through the Commission's
Internet address at "http://www.sec.gov." The common stock is listed on the
NYSE, Inc., and materials may also be inspected at their offices, 20 Broad
Street, New York, New York 10005.
The information contained in our Annual Report on Form 10-K for the year
ended December 31, 2000, including the consolidated financial statements and
notes thereto, the report of Deloitte & Touche, LLP, our independent
accountants, thereon, selected financial data and management's discussion and
analysis of financial condition and results of operations included in such
Annual Report on Form 10-K for the year ended December 31, 2000, as amended by
our Form 10-K/A filed on April 27, 2001, is incorporated herein by reference.
The information contained in our Quarterly Reports on Form 10-Q for the quarter
ended March 31, 2001 and the quarter ended June 30, 2001, including the
consolidated financial statements and notes thereto and management's discussion
and analysis of financial condition and results of operations included therein,
are incorporated herein by reference. Copies of our Annual Report on Form 10-K
for the year ended December 31, 2000, our Quarterly Report on Form 10-Q for the
quarter ended March 31, 2001 and our Quarterly Report on Form 10-Q for the
quarter ended June 30, 2001 are attached as Appendix C, Appendix D and Appendix
E to this proxy statement.
81
You should rely only on the information contained in, or incorporated by
reference into, this proxy statement. We have not authorized anyone to give any
information different from the information contained in, or incorporated by
reference into, this proxy statement. This proxy statement is dated September
28, 2001. You should not assume that the information contained in this proxy
statement is accurate as of any later date, and the mailing of this proxy
statement to stockholders shall not create any implication to the contrary.
All stockholders are urged to complete, sign and return the accompanying
proxy card in the enclosed envelope.
By Order of the Board of Directors,
/s/ David E. Hamer
--- --------------
David E. Hamer
Secretary
Beverly Hills, California
September 28, 2001
82
AGREEMENT AND PLAN
OF
MERGER
dated as of May 10, 2001
by and between
G & L ACQUISITION, LLC
and
G & L REALTY CORP.
TABLE OF CONTENTS
Page
ARTICLE I. THE MERGER.................................................... 1
1.1 The Merger.................................................. 1
1.2 Closing..................................................... 2
1.3 Effective Time.............................................. 2
1.4 Effect of Merger on Acquiror and the Company................ 2
1.5 Effect on Securities........................................ 3
1.6 Disbursing Agent............................................ 4
1.7 Deposit of Funds............................................ 4
1.8 Transmittal Letter and Instructions......................... 4
1.9 Payment of Cash for Cancelled Shares........................ 4
1.10 Treatment of Options........................................ 5
1.11 Unclaimed Consideration..................................... 6
1.12 Delivery of Stock Certificates for Acquiror Units........... 6
1.13 Further Assurances.......................................... 6
ARTICLE II. REPRESENTATIONS AND WARRANTIES OF THE COMPANY................ 7
2.1 Organization and Good Standing.............................. 7
2.2 Subsidiaries; Investments................................... 7
2.3 Authorization; Binding Agreement............................ 8
2.4 Capitalization.............................................. 9
2.5 Absence of Certain Changes or Events........................ 10
2.6 Governmental Consents and Approvals......................... 10
2.7 No Violation................................................ 11
2.8 No Default.................................................. 11
2.9 Litigation.................................................. 11
2.10 Brokers and Finders......................................... 11
2.11 Fairness Opinion............................................ 12
2.12 Proxy and Schedule 13E-3 Information........................ 12
ARTICLE III. REPRESENTATIONS AND WARRANTIES OF ACQUIROR.................. 12
3.1 Formation and Good Standing................................. 12
3.2 Authorization; Binding Agreement............................ 12
3.3 Capital Structure........................................... 13
3.4 No Violation................................................ 13
3.5 Governmental Consents and Approvals......................... 13
3.6 Proxy and Schedule 13E-3 Information........................ 14
3.7 Brokers and Finders......................................... 14
3.8 No Prior Activities......................................... 14
3.9 Litigation.................................................. 14
3.10 Financing................................................... 14
ARTICLE IV. COVENANTS.................................................... 15
4.1 Acquisition Proposals....................................... 15
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Page
4.2 Termination of the Company's Stock Incentive Plan............. 17
4.3 Conduct of the Company's Business Pending Merger.............. 17
4.4 Conduct of Acquiror's Business Pending Merger................. 19
4.5 Other Actions................................................. 19
4.6 SEC Filings................................................... 19
4.7 Standstill Provisions......................................... 19
ARTICLE V. ADDITIONAL COVENANTS............................................ 20
5.1 Preparation of Proxy Statement; Stockholders Meeting.......... 20
5.2 Access to Information......................................... 21
5.3 Tender Offer.................................................. 21
5.4 Reasonable Efforts; Notification.............................. 22
5.5 Public Announcements.......................................... 23
5.6 Indemnification............................................... 24
5.7 Declaration of Dividends and Distributions.................... 25
5.8 Stockholder Claims............................................ 26
5.9 Cooperation with Proposed Financing........................... 26
5.10 Conversion of Partnership Units............................... 26
5.11 Exchange of Partnership Units................................. 26
5.12 Spinoff of Non-MOB Assets..................................... 26
5.13 Section 16 Matters............................................ 26
ARTICLE VI. CONDITIONS..................................................... 27
6.1 Conditions to Each Party's Obligation to Effect the Merger.... 27
6.2 Conditions to Obligations of the Company to Effect the Merger. 27
6.3 Conditions to Obligations of Acquiror to Effect the Merger.... 28
ARTICLE VII. TERMINATION................................................... 29
7.1 Termination................................................... 29
7.2 Effect of Termination......................................... 30
7.3 Expenses and Termination Fee.................................. 31
ARTICLE VIII. MISCELLANEOUS................................................ 32
8.1 Non-Survival of Representations and Warranties................ 32
8.2 Amendment..................................................... 32
8.3 Waiver........................................................ 32
8.4 Notice........................................................ 32
8.5 Entire Agreement.............................................. 33
8.6 Parties in Interest........................................... 33
8.7 Material Events............................................... 34
8.8 Headings...................................................... 34
8.9 Interpretation................................................ 34
8.10 Assignment.................................................... 34
8.11 Governing Law................................................. 34
8.12 Counterparts.................................................. 34
8.13 Severability.................................................. 34
ii
APPENDIX A - MERGER AGREEMENT
AGREEMENT AND PLAN OF MERGER
----------------------------
THIS AGREEMENT AND PLAN OF MERGER (this "Agreement"), dated as of May 10,
2001, is by and between G & L ACQUISITION, LLC, a Maryland limited liability
company ("Acquiror"), and G & L REALTY CORP., a Maryland corporation (the
"Company").
RECITALS
A. The Board of Directors of the Company (the "Board"), based upon the
recommendation of a special committee thereof (the "Special Committee"), has
determined that the Merger (as defined below) is advisable and in the best
interests of the stockholders of the Company, and the Board and the members of
Acquiror have approved the Merger upon the terms and subject to the conditions
set forth in this Agreement, whereby each issued and outstanding share of Common
Stock, par value $0.01 per share, of the Company (other than certain designated
shares) will be converted into the right to receive cash.
B. In order to effectuate the foregoing, Acquiror, upon the terms and
subject to the conditions set forth in this Agreement, and in accordance with
the Maryland General Corporation Law (the "MGCL") and the Maryland Limited
Liability Company Act (the "MLLCA"), will merge with and into the Company (the
"Merger").
C. The Special Committee has received a fairness opinion relating to the
transactions contemplated hereby as more fully described below and the Board has
resolved to recommend to the holders of Common Stock of the Company to vote to
approve the Merger.
D. G & L Partnership, LLC, a Delaware limited liability company of which
Acquiror is the sole member (the "Acquiror Sub"), G & L Realty Partnership,
L.P., a Delaware limited partnership ("G & L Operating Partnership"), Acquiror
and the Company have entered into a Partnership Merger Agreement of even date
herewith (the "Partnership Merger Agreement"), pursuant to which, and subject to
the terms and conditions thereof, Acquiror Sub will be merged with and into G &
L Operating Partnership (the "Partnership Merger") with G & L Operating
Partnership as the surviving entity.
NOW, THEREFORE, in consideration of the mutual covenants, agreements,
representations and warranties contained herein, and for the purpose of setting
forth certain terms and conditions of the Merger, and the manner of carrying the
same into effect, the parties hereto agree as follows:
ARTICLE I.
THE MERGER
1.1 The Merger. Upon the terms and subject to the conditions of this
Agreement, and in accordance with the MGCL and the MLLCA, Acquiror shall be
merged with and into the Company, with the Company as the surviving entity (the
surviving entity in the Merger is sometimes referred to as the "Surviving
Corporation").
1
1.2 Closing. On the terms and subject to the conditions of this
Agreement and provided that this Agreement has not been terminated pursuant to
Article VII, the closing of the transactions contemplated by this Agreement (the
"Closing") will take place at 10:00 a.m., local time, at the offices of
O'Melveny & Myers LLP, 400 S. Hope Street, Los Angeles, California, on the date
which is the third business day following satisfaction (or waiver by the parties
entitled to the benefit thereof) of the conditions set forth in Article VI
(other than conditions that by their terms cannot be satisfied until the Closing
Date), unless another time, date or place is agreed to in writing by the
parties. The date on which the Closing occurs is referred to herein as the
"Closing Date."
1.3 Effective Time. On the Closing Date, the parties shall execute and
file articles of merger (the "Articles of Merger") in accordance with the MGCL
and the MLLCA. The Merger shall become effective at the time (the "Effective
Time") the Articles of Merger are accepted for record by the State Department of
Assessments and Taxation of the State of Maryland (the "Maryland Department"),
or at such time as Acquiror and the Company shall specify in the Articles of
Merger (not to exceed 30 days after the Articles of Merger are accepted for
record by the Maryland Department). Unless otherwise agreed, the parties shall
cause the Effective Time to occur on the Closing Date.
1.4 Effect of Merger on Acquiror and the Company. The parties agree to
the following provisions with respect to the Merger:
(a) Name of Surviving Corporation. The name of the Surviving
Corporation shall from and after the Effective Time be and continue to be "G & L
Realty Corp." until changed in accordance with applicable law.
(b) Charter. The charter of the Company as in effect immediately
prior to the Effective Time shall from and after the Effective Time be and
continue to be the charter of the Surviving Corporation until changed or amended
in accordance with applicable law.
(c) Bylaws. The bylaws of the Company as in effect immediately
prior to the Effective Time shall from and after the Effective Time be and
continue to be the bylaws of the Surviving Corporation until changed or amended
in accordance with applicable law.
(d) Organization. At the Effective Time, the separate existence of
Acquiror shall cease, and the Company as the Surviving Corporation and successor
shall succeed to Acquiror in the manner of and as more fully set forth in
Section 3-114 of the MGCL and Section 4A-709 of the MLLCA.
(e) Directors and Officers. The directors of the Company
immediately prior to the Effective Time shall continue as the directors of the
Surviving Corporation, and the officers of the Company immediately prior to the
Effective Time shall continue as the officers of the Surviving Corporation.
2
1.5 Effect on Securities. At the Effective Time, pursuant to this
Agreement and by virtue of the Merger and without any action on the part of the
Company, Acquiror or the holders of any of the following securities:
(a) Each share of Common Stock, par value $.01 per share, of the
Company (collectively, the "Common Shares" and, individually, a "Common Share")
issued and outstanding immediately prior to the Effective Time (other than any
Common Shares to remain outstanding pursuant to Section 1.5(c)) shall be
converted into the right to receive an amount equal to $12.00 in cash, without
interest (the "Cash Merger Consideration"); the Common Shares being converted
into the right to receive the Cash Merger Consideration are hereinafter referred
to as "Cancelled Shares";
(b) Each issued and outstanding share of Preferred Stock, par value
$0.01 per share, of the Company (collectively, the "Preferred Shares") shall not
be converted, exchanged, cancelled or otherwise affected by the Merger and shall
remain issued and outstanding after the Merger;
(c) 96,671 of the 360,422 Common Shares that are, on the date of
this Agreement, registered in the name of, and specified by Daniel M. Gottlieb,
and 74,674 of the 285,923 Common Shares that are, on the date of this Agreement,
registered in the name of, and specified by Steven D. Lebowitz (such persons are
individually referred to as a "Continuing Stockholder" and collectively as the
"Continuing Stockholders," and such shares are collectively referred to as the
"Continuing Shares") shall not be converted, exchanged, cancelled or otherwise
affected by the Merger and shall remain issued and outstanding after the Merger,
provided that the Continuing Shares are, at the Effective Time, so registered in
the name of the applicable Continuing Stockholder, it being understood that
additional Common Shares may be issued to the Continuing Stockholders prior to
the Effective Time in exchange for Partnership Units (as defined below) and,
subject to Section 1.5(f) below, such Common Shares shall be deemed to be
Continuing Shares;
(d) Each option for the purchase of Common Shares issued by the
Company and outstanding immediately prior to the Effective Time (collectively,
the "Company Options" and individually, a "Company Option"), including those
held by the Continuing Stockholders, shall be terminated and converted into the
right to receive the Option Consideration as defined and set forth in Section
1.10;
(e) Each unit (as defined in the Acquiror's Operating Agreement
dated as of May 4, 2001) (collectively, the "Acquiror Units," and individually,
an "Acquiror Unit") of Acquiror outstanding immediately prior to the Effective
Time shall be converted automatically into one newly-issued, fully-paid and
nonassessable share of Common Stock of the Surviving Corporation and shall cease
to exist; and
(f) Notwithstanding Subsection (c) above, the aggregate number of
Continuing Shares held by the Continuing Stockholders may, at the sole
discretion of the each Continuing Stockholder, be decreased (and
correspondingly, the number of Common Shares held by the Continuing Stockholders
to be converted in the Merger shall be increased) if the aggregate
3
purchase price of the Preferred Stock (as defined in Section 2.4) tendered in
the Offer (as defined in Section 5.3) is less than $7,750,000.
1.6 Disbursing Agent. Prior to the Effective Time, Acquiror shall
appoint a disbursing agent reasonably acceptable to the Company (the "Disbursing
Agent") to act as agent for the payment of the Cash Merger Consideration upon
surrender of certificates formerly representing issued and outstanding Cancelled
Shares.
1.7 Deposit of Funds. At the Effective Time, the Surviving Corporation
shall irrevocably deposit or cause to be deposited with the Disbursing Agent,
cash in the amount of the Aggregate Cash Merger Consideration (as defined
below). Pending distribution pursuant to Section 1.9 of the cash deposited with
the Disbursing Agent, such cash shall be held in trust for the benefit of the
holders of Cancelled Shares, and shall not be used for any other purpose. The
Surviving Corporation may direct the Disbursing Agent to invest such cash,
provided that such investments (i) shall be in obligations of or guaranteed by
the United States of America, in commercial paper obligations receiving the
highest rating from either Moody's Investors Service or Standard & Poor's, or in
certificates of deposit, bank repurchase agreements or bankers acceptances of
domestic commercial banks with capital exceeding $250,000,000 (collectively,
"Permitted Investments") or in money market funds which are invested solely in
Permitted Investments, and (ii) shall have maturities that will not prevent or
delay payments to be made pursuant to Section 1.9.
1.8 Transmittal Letter and Instructions. Promptly after the Effective
Time, the Surviving Corporation shall cause the Disbursing Agent to mail to each
holder of record of a certificate or certificates which immediately prior to the
Effective Time represented outstanding Cancelled Shares (collectively, the
"Certificates" and individually, a "Certificate") (i) a letter of transmittal
(which shall specify that delivery shall be effected, and risk of loss and title
to the Certificates shall pass, only upon delivery of the Certificates to the
Disbursing Agent and shall be in such form and have such other provisions as
Acquiror may reasonably specify) and (ii) instructions for use in effecting
surrender of the Certificates in exchange for the Cash Merger Consideration.
Each holder of a Certificate representing Cancelled Shares may thereafter
surrender such Certificate to the Disbursing Agent to effect the exchange of
such Certificate on such holder's behalf for a period of nine months after the
Effective Time.
1.9 Payment of Cash for Cancelled Shares.
(a) After surrender to the Disbursing Agent of any Certificate which
prior to the Effective Time shall have represented Cancelled Shares in
accordance with the transmittal letter and instructions in Section 1.8, the
Surviving Corporation shall cause the Disbursing Agent to promptly distribute to
the person in whose name such Certificate shall have been registered, a check
representing the amount of cash into which such Cancelled Shares shall have been
converted at the Effective Time pursuant to Section 1.5(a). Until so surrendered
and exchanged, each such Certificate shall, after the Effective Time, be deemed
to represent only the right to receive such cash, and until such surrender and
exchange, no cash shall be paid to the holder of such outstanding Certificate in
respect thereof.
4
(b) No interest shall accrue or be payable with respect to any
amounts which any such holder shall be so entitled to receive.
(c) The Surviving Corporation or the Disbursing Agent shall be
authorized to pay the cash attributable to any Certificate theretofore issued
which has been lost or destroyed, upon receipt by the Surviving Corporation of
satisfactory evidence of ownership of the Cancelled Shares represented thereby
and, to the extent deemed appropriate, indemnification and/or a bond.
(d) If payment is to be made to a person other than the person in
whose name a surrendered Certificate, which prior to the Effective Time shall
have represented any Cancelled Shares, is registered, it shall be a condition to
such payment that the Certificate so surrendered shall be endorsed or shall
otherwise be in proper form for transfer, and that the person requesting such
payment shall have paid any transfer and other taxes required by reason of such
payment in a name other than that of the registered holder of the Certificate
surrendered or shall have established to the satisfaction of the Surviving
Corporation or the Disbursing Agent that such tax either has been paid or is not
payable.
(e) From and after the Effective Time, the holders of Cancelled
Shares outstanding immediately prior to the Effective Time shall cease to have
any rights with respect to such Cancelled Shares except as otherwise provided
herein.
(f) After the Effective Time, there shall be no transfers on the
stock transfer books of the Surviving Corporation of any Cancelled Shares which
were outstanding immediately prior to the Effective Time. If, after the
Effective Time, Certificates representing Cancelled Shares are presented to the
Surviving Corporation, they shall be cancelled and promptly exchanged for cash
as provided in Section 1.5(a) and this Section 1.9.
(g) All Cash Merger Consideration paid upon the surrender of
Certificates in accordance with the terms of this Section 1.9 shall be deemed to
have been paid in full satisfaction of all rights pertaining to the Cancelled
Shares formerly represented by such Certificates; provided, however, that the
Company shall transfer to the Disbursing Agent cash sufficient to pay all
dividends or make any other distributions with a record date on or prior to the
Effective Time which may have been declared or made by the Company on such
Cancelled Shares, in accordance with the terms of this Agreement or prior to the
date of this Agreement, including any dividends permitted by Section 5.7, and
which remain unpaid at the Effective Time and have not been paid prior to such
surrender.
1.10 Treatment of Options.
(a) Each outstanding Company Option shall be subject to the terms of
this Agreement.
(b) Immediately upon execution of this Agreement, the Company shall
cause all Company Options held by the Continuing Stockholders, whether or not
then fully vested or exercisable, to become fully vested and exercisable.
Nothing in this Agreement shall be
5
interpreted to prevent or hinder the Continuing Stockholders from exercising
their rights under such Company Options prior to the Effective Time.
(c) Immediately prior to the Effective Time, the Company shall cause
each outstanding Company Option, whether or not then fully vested or
exercisable, to be deemed fully vested and exercisable, and to be terminated and
converted into the right to receive from the Surviving Corporation an amount of
cash equal to the product of (i) the number of Common Shares subject to the
Company Option (which shall have been deemed to be fully vested and exercisable)
and (ii) the excess, if any, of the Cash Merger Consideration over the exercise
price per share of such Company Option (the "Option Consideration"), with no
payment being required when the difference is not a positive number. The
Surviving Corporation shall pay each holder of the Company Options, promptly
following the Effective Time, the Option Consideration for all Company Options
held by such holder. The Board or any committee thereof responsible for the
administration of the Company's Amended and Restated 1993 Stock Incentive Plan
(the "Stock Incentive Plan") shall take any and all action necessary to
effectuate the matters described in this Section 1.10 on or before the Effective
Time. Any amounts payable pursuant to this Section 1.10 shall be subject to any
required withholding of taxes and shall be paid without interest.
1.11 Unclaimed Consideration. None of the Company, Acquiror, the
Surviving Corporation or the Disbursing Agent shall be liable to any person in
respect of any of the Cash Merger Consideration or Option Consideration
delivered to a public official pursuant to any applicable abandoned property,
escheat or similar law. Any portion of the Cash Merger Consideration delivered
to the Disbursing Agent pursuant to this Agreement that remains unclaimed for
nine months after the Effective Time shall be redelivered by the Disbursing
Agent to the Surviving Corporation, upon demand, and any holders of Certificates
who have not theretofore complied with the procedures set forth in this
Agreement, and the transmittal letter and instructions referenced in Section
1.8, shall thereafter look only to the Surviving Corporation for delivery of any
Cash Merger Consideration, any unpaid dividends, or Option Consideration due, as
the case may be, subject to applicable abandoned property, escheat and other
similar laws.
1.12 Delivery of Stock Certificates for Acquiror Units. Immediately after
the Effective Time, the Surviving Corporation shall deliver to each former
holder of Acquiror Units, to each such former holder's address as it appears in
the books and records of the Acquiror, a share certificate, registered in the
name of such former holder, representing the number of Common Shares to which
such holder is so entitled by virtue of Section 1.5(e). Such certificates may,
at the discretion of the Surviving Corporation, bear a legend restricting the
transferability of the Common Shares represented thereby to the extent required
to assure the Surviving Corporation that these shares will not be offered or
sold in contravention of any federal or state securities laws. In addition, such
certificates will be imprinted with any legends required by the Surviving
Corporation's charter.
1.13 Further Assurances.
If, at any time after the Effective Time, the Surviving Corporation
shall determine or be advised that any assignments, assurances or any other
actions or things are necessary or desirable to vest, perfect or confirm of
record or otherwise in the Surviving Corporation the right, title or interest
in, to or under any of the rights, properties or
6
assets of the Company or Acquiror acquired or to be acquired by the Surviving
Corporation as a result of, or in connection with, the Merger or otherwise to
carry out this Agreement, the Surviving Corporation shall be authorized to
execute and deliver, in the name and on behalf of each of Acquiror and the
Company, all such assignments and assurances and to take and do, in the name and
on behalf of each of Acquiror and the Company or otherwise, all such other
actions and things as may be necessary or desirable to vest, perfect or confirm
any and all right, title and interest in, to and under such rights, properties
or assets in the Surviving Corporation or otherwise to carry out this Agreement.
ARTICLE II.
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
The Company represents and warrants to Acquiror, except as set forth in (i)
the reports, schedules, forms, statements and other documents filed by the
Company with the Securities and Exchange Commission (the "SEC") since December
31, 1999 (the "SEC Documents") to the extent it is reasonably clear from a
reading of the disclosure in such SEC Documents that such disclosure is
applicable to the relevant representation and warranty contained herein, or (ii)
the letter of even date herewith delivered to Acquiror prior to the execution
hereof (the "Disclosure Letter") (it being understood that the Disclosure Letter
shall be arranged in Parts corresponding to the Sections contained in this
Article II, and the disclosures in any Part of the Disclosure Letter shall
qualify the representations in the corresponding Section of this Article II) as
follows:
2.1 Organization and Good Standing. The Company is duly organized and
validly existing in good standing under the laws of the State of Maryland, with
all requisite corporate power and authority to own, lease and operate its
properties and conduct its business and is duly qualified or registered and in
good standing as a foreign corporation authorized to do business in each of the
jurisdictions in which the character of the properties owned or held under lease
by it or the nature of the business transacted by it makes such qualification or
registration necessary, except where the failure to be so qualified or
registered would not have a Company Material Adverse Effect (as defined below).
2.2 Subsidiaries; Investments.
(a) Section 2.2(a) of the Disclosure Letter sets forth as of the
date hereof (i) each Subsidiary (as defined below) of the Company, (ii) the
ownership interest therein of the Company, and (iii) if not wholly-owned by the
Company, the identity and ownership interest of each of the other owners of such
Subsidiary (it being understood that such representation with respect to
securities held by any entity other than the Company or a Subsidiary is made
only to the knowledge of the Company). As used in this Agreement, "Subsidiary"
means any corporation, partnership, limited liability company, joint venture,
trust or other legal entity of which the Company (either directly or through or
together with any other Subsidiary) owns 50% or more of the capital stock or
other equity interests of such corporation, partnership, limited liability
company, joint venture or other legal entity, including G & L Operating
Partnership, but does not include short-term money market investments and other
participation interests in short-term investments.
7
(b) (i) All the outstanding shares of capital stock of each
Subsidiary that is a corporation owned by the Company or a Subsidiary have been
validly issued and are (A) fully paid, nonassessable and free of any preemptive
rights, and (B) owned by the Company or by another Subsidiary free and clear of
all pledges, claims, liens, charges, encumbrances and security interests of any
kind or nature whatsoever (collectively, "Liens") or any other limitation or
restriction (including any contractual restriction on the right to vote or sell
the same) other than restrictions under applicable securities laws; and (ii) all
equity interests in each Subsidiary that is a partnership, joint venture,
limited liability company or trust which are owned by the Company, by another
Subsidiary or by the Company and another Subsidiary, are owned free and clear of
all Liens or any other limitation or restriction (including any contractual
restriction on the right to vote or sell the same) other than restrictions under
applicable securities laws. Each Subsidiary that is a corporation is duly
incorporated and validly existing under the laws of its jurisdiction of
incorporation and has the requisite corporate power and authority to carry on
its business as now being conducted, and each Subsidiary that is a partnership,
limited liability company or trust is duly formed and existing in good standing
under the laws of its jurisdiction of formation and has the requisite
partnership, limited liability company or trust power and authority to carry on
its business as now being conducted. Each Subsidiary is duly qualified or
registered and in good standing in each jurisdiction in which the character of
the properties owned or held under lease by it or the nature of the business
transacted by it makes such qualification or registration necessary, except
where the failure to be so qualified or registered, individually or in the
aggregate, would not have a Company Material Adverse Effect.
2.3 Authorization; Binding Agreement.
(a) The Company has all requisite corporate power and authority to
execute and deliver this Agreement and to consummate the transactions
contemplated hereby, subject to Stockholder Approval (as defined below). The
execution and delivery of this Agreement and the consummation of the
transactions contemplated hereby have been duly and validly authorized by the
Board and, except for Stockholder Approval in accordance with the MGCL, and the
charter and the bylaws of the Company, no other corporate proceedings on the
part of the Company are necessary to authorize this Agreement, the Partnership
Merger Agreement, the Merger, the Partnership Merger or the transactions
contemplated hereby or thereby. This Agreement has been duly and validly
executed and delivered by the Company, and constitutes the legal, valid and
binding agreement of the Company, enforceable against the Company in accordance
with its terms, except as such enforceability may be limited by (i) bankruptcy,
insolvency, reorganization, moratorium or other laws, now or hereafter in
effect, relating to or limiting creditors' rights generally, and (ii) general
principles of equity (whether considered in an action in equity or at law) which
provide, among other things, that the remedies of specific performance and
injunctive and other forms of equitable relief are subject to equitable defenses
and to the discretion of the court before which any proceedings therefor may be
brought.
(b) The Board, based upon the recommendation of the Special
Committee, has duly and validly approved and, subject to Stockholder Approval,
taken all corporate action required to be taken by it for the consummation of
the Merger and the Partnership Merger, and has adopted resolutions declaring the
advisability of this Agreement and the transactions contemplated hereby,
including the Merger and the Partnership Merger, and recommending that the
holders of Common Shares approve the Merger. The restrictions on "business
combinations"
8
(as defined in Subtitle 6 of Title 3 of the MGCL) between the Company (or any
affiliate thereof) and Acquiror (or any affiliate thereof) set forth in Subtitle
6 of Title 3 of the MGCL and the limitations on voting rights of shares of stock
acquired in a "control share acquisition" (as defined in Subtitle 7 of Title 3
of the MGCL) set forth in Subtitle 7 of Title 3 of the MGCL are inapplicable to
the Merger and this Agreement (and the transactions provided for herein).
2.4 Capitalization.
(a) The authorized capital stock of the Company consists of
50,000,000 Common Shares; 30,000,000 shares of Excess Stock, par value $0.01 per
share; and 10,000,000 Preferred Shares, of which 1,495,000 shares have been
designated as 10.25% Series A Cumulative Preferred Stock (the "Series A
Preferred Stock") and 1,380,000 shares have been designated as 9.8% Series B
Cumulative Preferred Stock (the "Series B Preferred Stock"). As of the date
hereof, 2,333,800 Common Shares, no shares of Excess Stock and 1,487,000 shares
of Series A Preferred Stock and 1,376,000 shares of Series B Preferred Stock are
outstanding. As of the date hereof, there are 247,500 Common Shares issuable
upon exercise of outstanding Company Options.
(b) Set forth in Part 2.4(b) of the Disclosure Letter is a true and
complete list of the following: (i) all outstanding Company Options, including
date of grant, number of shares purchasable, exercise price per share,
expiration date and vesting rate, (ii) each grant of Common Shares to employees
which are or were subject to any risk of forfeiture, (iii) all agreements for
the issuance of, or warrants or rights to purchase, Common Shares and the number
of shares which would be issuable upon the exercise of such agreements, warrants
or rights, and (iv) all other rights to acquire stock, all stock appreciation
rights, phantom stock, dividend equivalents, performance units and performance
shares granted under the Stock Incentive Plan or otherwise which are outstanding
as of the date hereof.
(c) All of the outstanding shares of capital stock of the Company
have been duly authorized and validly issued and are fully paid and
nonassessable and free of preemptive rights.
(d) As of the date hereof, 2,959,072 partnership units ("Partnership
Units") of G & L Operating Partnership, as defined in the Agreement of Limited
Partnership of G & L Operating Partnership dated November 13, 1993, as amended (
the "Partnership Agreement"), are validly issued and outstanding, fully paid and
nonassessable, except to the extent provided by applicable law or the
Partnership Agreement, of which 2,333,800 are owned by the Company. Part 2.4(d)
of the Disclosure Letter sets forth the name of each holder of Partnership Units
and the number of Partnership Units owned by each such holder. The Partnership
Units are not subject to any restriction established by the Company or G & L
Operating Partnership or under applicable law (other than restrictions on sale
imposed by applicable securities laws) except as set forth in the Partnership
Agreement. G & L Operating Partnership has not issued or granted and is not a
party to any outstanding commitments of any kind relating to, or any presently
effective agreements or understanding with respect to, issuing interests in or
securities convertible into or exercisable for interests in G & L Operating
Partnership.
9
(e) Except as contemplated by this Agreement or the Partnership
Merger Agreement, and except for the Company Options, the Series A Preferred
Stock and the Series B Preferred Stock, neither the Company nor any Subsidiary
has granted any outstanding option, warrant, subscription or other right, or
entered into any agreement or commitment which either (i) obligates the Company
or any Subsidiary to issue, sell or transfer any shares of its capital stock or
other equity interests, or (ii) restricts the transfer of, or otherwise
encumbers, shares of its capital stock or other equity interests.
2.5 Absence of Certain Changes or Events. Since December 31, 2000, and
except as set forth on Part 2.5 of the Disclosure Letter:
(i) there has not been any change or any development which has had
or, to the Company's knowledge, would have, a Company Material Adverse
Effect;
(ii) the Company and each of its Subsidiaries have conducted their
respective businesses only in the ordinary course;
(iii) neither the Company nor any of its Subsidiaries has entered
into any material transactions other than as approved by the Board or as
expressly permitted by this Agreement or the Partnership Merger Agreement;
(iv) the Company has not changed its accounting principles or
methods except insofar as may be required by a change in generally accepted
accounting principles ("GAAP") or by applicable law or the SEC; and
(v) the Company has not declared, paid or set aside for payment
any dividends except for regular quarterly dividends not in excess of
$0.125 per Common Share and monthly dividends on the Preferred Shares in
accordance with the terms of the Company's Articles Supplementary filed May
12, 1997 and November 17, 1997, as corrected June 19, 1999 ("Articles
Supplementary"), or as necessary to maintain REIT status, in each case
subject to rounding adjustments as necessary and with customary record and
payment dates.
As used in this Agreement, "Company Material Adverse Effect" shall mean (i) any
material adverse change in the business, properties, assets, condition
(financial or otherwise) or results of operations of the Company and its
Subsidiaries, taken as a whole, or (ii) any other change that would adversely
affect, prevent or delay the ability of the Company or G & L Operating
Partnership to consummate the Merger, the Partnership Merger or any of the
transactions contemplated hereby or thereby, but excluding in either case those
that arise out of a change or development in (i) general economic or market
conditions, (ii) the real estate development industry generally or (iii) any
applicable law or GAAP.
2.6 Governmental Consents and Approvals. No consent, waiver, approval,
license or authorization of, or designation, declaration or filing with, any
governmental agency or authority or other public persons or entities is required
in connection with the execution or delivery by the Company of this Agreement,
or the consummation by the Company of the Merger, the Partnership Merger or the
transactions contemplated hereby or thereby, other than (a) filing of
10
the Articles of Merger with, and the acceptance for record thereof by, the
Maryland Department in accordance with the MGCL and the MLLCA, (b) filings with
the Delaware Secretary of State for the Partnership Merger, (c) filings required
under the Exchange Act and (d) such other consents, waivers, approvals, licenses
or authorizations, if any, the failure of which to be obtained will not have a
Company Material Adverse Effect.
2.7 No Violation. The execution and delivery of this Agreement, assuming
the requisite approval of the holders of Common Shares, the filing by the
Company of Articles of Merger with, and the acceptance for record thereof by,
the Maryland Department in accordance with the MGCL and the MLLCA and the
consummation by the Company of the transactions contemplated hereby, will not:
(i) violate any provision of the charter or bylaws of the Company;
(ii) cause the Company to violate in any material respect (A) any
statute or law or any judgment, decree, order, regulation or rule of any
court or governmental authority applicable to the Company or any of its
Subsidiaries or any of their respective properties or (B) the award of any
arbitrator or panel of arbitrators;
(iii) cause the acceleration of the maturity of any material debt or
obligation of the Company or any of its Subsidiaries; or
(iv) violate, or be in conflict with, or constitute a default
under, or permit the termination of, or, except as contemplated by this
Agreement, require the consent of any person under, or result in the
creation of any Lien upon any property of the Company or any of its
Subsidiaries under, any agreement, indenture, lease or instrument to which
the Company or any of its Subsidiaries is a party or by which the Company
or any of its Subsidiaries may be bound, which, individually or in the
aggregate, would have a Company Material Adverse Effect.
2.8 No Default. Neither the Company nor any of its Subsidiaries is in
material noncompliance or default (without giving effect to any grace or cure
period or notice requirement) under any agreement, indenture or instrument
creating or evidencing indebtedness for borrowed money or under any capital
lease or under any agreement pursuant to which any of its securities were sold.
2.9 Litigation. There is no legal action, suit, arbitration or other
legal, administrative or governmental investigation, inquiry or proceeding
(whether federal, state, local or foreign) pending or, to the knowledge of the
Company, threatened against or affecting the Company or any of its Subsidiaries
or any of their properties, assets, business, franchises or governmental
approvals before any court or governmental body, department, commission, board,
bureau, agency, instrumentality or arbitrator, which, individually or in the
aggregate, could reasonably be expected to have a Company Material Adverse
Effect.
2.10 Brokers and Finders. Except for Houlihan Lokey Howard & Zukin
Financial Advisors, Inc. ("HLHZ"), which has been engaged, pursuant to an
engagement letter dated January 8, 2001, as amended, a true and complete copy of
which has been delivered to Acquiror,
11
to provide advice to the Special Committee with respect to whether the
consideration to be received by the holders of Common Shares held by other than
the Continuing Stockholders (the "Public Stockholders") is fair to the Public
Stockholders from a financial point of view, and to provide financial advisory
services to the Special Committee, no broker, finder or investment banker will
be entitled to any brokerage, finder's or other fee or commission in connection
with the Merger or in connection with any related transaction involving the
Company based upon arrangements made by or on behalf of the Company.
2.11 Fairness Opinion. The Special Committee has received a written
opinion from HLHZ, substantially to the effect that, from a financial point of
view, the consideration to be received by the Public Stockholders in the Merger
is fair to the Public Stockholders, a true and complete copy of which opinion
has been delivered to Acquiror.
2.12 Proxy and Schedule 13E-3 Information. The information contained in
the (preliminary and definitive) Proxy Statement (as defined below) and the
Schedule 13E-3 (as defined below), or any amendment or supplement thereto, or
any other documents filed with the SEC by the Company in connection with the
Merger, shall, with respect to the Proxy Statement at the time the Proxy
Statement is mailed and at the time of the Stockholders Meeting (as defined
below), and, with respect to the Schedule 13E-3 and such other documents, at the
time of filing with the SEC and at the time of the Stockholders Meeting, not
contain any untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary to make the statements therein, in
light of the circumstances under which they were made, not misleading; provided,
however, that the Company makes no representation or warranty with respect to
any information contained in the Proxy Statement, the Schedule 13E-3 or any such
other document, which was furnished in writing to the Company by Acquiror or its
affiliates.
ARTICLE III.
REPRESENTATIONS AND WARRANTIES OF ACQUIROR
Except as disclosed in writing by Acquiror to the Company immediately prior
to execution and delivery of this Agreement, Acquiror hereby represents and
warrants to the Company as follows:
3.1 Formation and Good Standing. Acquiror is a limited liability company
duly formed and existing in good standing under the laws of the State of
Maryland. Acquiror has heretofore delivered to the Company accurate and complete
copies of its articles of organization and operating agreement as currently in
effect. Except for the Acquiror Sub, Acquiror does not own or have any
Subsidiary or own or hold any capital stock, security or investment in any other
person or entity, other than bank accounts, certificates of deposit, money
market or similar short-term investments.
3.2 Authorization; Binding Agreement. Acquiror has all requisite limited
liability company power and authority to execute and deliver this Agreement and
to consummate the transactions contemplated hereby. The execution and delivery
of this Agreement and the consummation of the transactions contemplated hereby
have been duly and validly authorized by all necessary action on the part of
Acquiror, and no other limited liability company proceedings
12
on the part of Acquiror are necessary to authorize this Agreement, the
Partnership Merger Agreement, the Merger, the Partnership Merger or the
transactions contemplated hereby or thereby. This Agreement has been duly and
validly executed and delivered by Acquiror and constitutes the legal, valid and
binding agreement of Acquiror, enforceable against Acquiror in accordance with
its terms, except as such enforceability may be limited by (i) bankruptcy,
insolvency, reorganization, moratorium or other similar laws, now or hereafter
in effect, relating to or limiting creditors' rights generally, and (ii) general
principles of equity (whether considered in an action in equity or at law) which
provide, among other things, that the remedies of specific performance and
injunctive and other forms of equitable relief are subject to equitable defenses
and to the discretion of the court before which any proceedings therefor may be
brought.
3.3 Capital Structure. The capital structure of Acquiror consists of a
single class of Acquiror Units, all of which will be outstanding immediately
prior to the Effective Time. The Continuing Stockholders are the only members of
Acquiror and own all the Acquiror Units. Acquiror has not granted any rights, or
entered into any agreement or commitment which obligates Acquiror to issue,
sell, repurchase or transfer any Acquiror Units.
3.4 No Violation.
(a) The execution and delivery of this Agreement, the filing of
Articles of Merger with the Maryland Department or the consummation by Acquiror
of the transactions contemplated hereby, will not:
(i) violate any provision of the articles of organization or
operating agreement of Acquiror;
(ii) violate any statute or law or any judgment, decree,
order, regulation or rule of any court or governmental authority applicable
to Acquiror or any of its properties;
(iii) cause the acceleration of the maturity of any debt or
obligation of Acquiror; or
(iv) violate, or be in conflict with, or constitute a default
under, or permit the termination of, or except as contemplated by this
Agreement, require the consent of any person under, or result in the
creation of any Lien upon any property of Acquiror under, any agreement,
indenture, lease or instrument to which Acquiror is a party or by which
Acquiror (or its properties) may be bound, which in the aggregate would
have a material adverse effect on Acquiror.
(b) Acquiror is not in default (without giving effect to any grace
or cure period or notice requirement) under any agreement for borrowed money or
under any agreement pursuant to which any of its securities were sold.
3.5 Governmental Consents and Approvals. No consent, waiver, approval,
license or authorization of or designation, declaration or filing with any
governmental agency or authority or other public persons or entities is required
in connection with the execution or delivery by
13
Acquiror of this Agreement or the consummation by Acquiror of the Merger or the
transactions contemplated hereby, other than (i) filings with respect to the
Merger in the State of Maryland in accordance with the MGCL and the MLLCA, (ii)
filings with respect to the Partnership Merger in the State of Delaware in
accordance with the Delaware Revised Uniform Limited Partnership Act and the
Delaware Limited Liability Company Act, (iii) filings required under the
Exchange Act and (iv) such other consents, waivers, approvals, licenses or
authorizations, the failure of which to be obtained will not have a material
adverse effect on Acquiror or on the ability of Acquiror to consummate the
transactions contemplated hereby.
3.6 Proxy and Schedule 13E-3 Information. The written information
furnished to the Company by Acquiror specifically for inclusion in the Proxy
Statement and the Schedule 13E-3, or any amendment or supplement thereto, or
specifically for inclusion in any other documents filed with the SEC by the
Company in connection with the Merger, shall, with respect to the Proxy
Statement at the time the Proxy Statement is mailed and at the time of the
Stockholders Meeting, and, with respect to the Schedule 13E-3 and such other
documents, at the time of filing with the SEC and at the time of the
Stockholders Meeting, not contain any untrue statement of a material fact or
omit to state a material fact required to be stated therein or necessary to make
the statements therein, in light of the circumstances under which they were
made, not misleading.
3.7 Brokers and Finders. Acquiror has not engaged any broker, finder or
investment banker which engagement would require the payment of any brokerage,
finder's or other fees by Acquiror in connection with the transaction
contemplated hereby.
3.8 No Prior Activities. Acquiror is newly formed and has not incurred,
and will not incur, directly or through the Acquiror Sub, any liabilities or
obligations, except those incurred in connection with its organization or with
the negotiation of this Agreement, the Partnership Merger Agreement and the
Financing (as defined below). Except as contemplated by this Agreement, the
Partnership Merger Agreement and the Financing, neither Acquiror nor Acquiror
Sub has engaged in any business activities of any type or kind whatsoever, or
entered into any agreements or arrangements with any person or entity, or become
subject to or bound by any obligation or undertaking.
3.9 Litigation. There is no legal action, suit, arbitration or other
legal, administrative or governmental investigation, inquiry or proceeding
(whether federal, state, local or foreign) pending or, to the knowledge of
Acquiror, threatened against or affecting Acquiror or the Acquiror Sub or any of
their properties or assets before any court or governmental body, department,
commission, board, bureau, agency, instrumentality or arbitrator, which,
individually or in the aggregate, could reasonably be expected (i) to have a
material adverse effect upon Acquiror or (ii) to materially and adversely affect
the ability of Acquiror to carry out, or prevent or make unduly burdensome, the
Merger, the Partnership Merger or the transactions contemplated by this
Agreement.
3.10 Financing. After giving effect to up to $35,000,000 in borrowings
under a commitment letter dated April 10, 2001, between GMAC Commercial Mortgage
Corporation and the Continuing Stockholders (the "Financing Commitment"), which
Financing Commitment
14
is in full force and effect, the Surviving Corporation and G & L Operating
Partnership will have sufficient funds available (the "Financing") to:
(i) pay all amounts required to be paid pursuant to this
Agreement and the Partnership Merger Agreement;
(ii) pay all fees, costs and expenses incurred by the Company
and G & L Operating Partnership in connection with this Agreement, the
Partnership Merger Agreement and the transactions contemplated herein and
therein; and
(iii) pay all fees, costs and expenses incurred by Acquiror and
Acquiror Sub in connection with this Agreement, the Partnership Merger
Agreement, the Financing and the other transactions contemplated herein
(including the Offer as defined below) and therein.
The Financing Commitment also contemplates Acquiror or Acquiror Sub
loaning up to $7,750,000 to the Continuing Stockholders to purchase Preferred
Shares pursuant to the Offer and/or to reduce indebtedness of the Continuing
Stockholders.
ARTICLE IV.
COVENANTS
4.1 Acquisition Proposals. Since April 13, 2001, and continuing through
the Effective Time or the earlier termination of this Agreement in accordance
with its terms, the Company agrees that:
(i) neither it nor any of its Subsidiaries has initiated, solicited
or encouraged, directly or indirectly, or shall initiate, solicit or
encourage, directly or indirectly, any inquiries or the making or
implementation of any proposal or offer (including any proposal or offer to
its stockholders) with respect to a merger, acquisition, tender offer,
exchange offer, consolidation, share exchange, sale of assets or similar
transaction involving all or any significant portion of the assets or any
equity securities of the Company and its Subsidiaries, taken as a whole,
other than the transactions contemplated by this Agreement and the
Partnership Merger Agreement (any such proposal or offer being hereinafter
referred to as an "Acquisition Proposal") or has engaged or shall engage in
any negotiations concerning or provided or shall provide any confidential
information or data to, or had or shall have any discussions with, any
person relating to an Acquisition Proposal, or otherwise, has facilitated
or shall facilitate any effort or has attempted or shall attempt to make or
implement an Acquisition Proposal (for the avoidance of doubt, responding
to an unsolicited inquiry by informing such inquirer that the Company is
subject to this Section 4.1 and instructing such inquirer to review this
Section of the Agreement shall not be a violation of this Section 4.1);
provided, however, that the Company may provide confidential information to
G. Realco LLC, Trans Healthcare, Inc., Lillibridge Health Trust and Lloyd
Weisman (the "Existing Interested Parties"), so long as the Existing
Interested Parties have each entered into an appropriate confidentiality
and standstill agreement in a form satisfactory to the Company;
15
(ii) it has directed, and shall use its reasonable best efforts to
cause, its officers, directors, employees, agents or financial advisors not
to engage in any of the activities restricted by Section 4.1(i); provided,
however, that this shall not prevent the Continuing Stockholders from
taking any action prohibited by this Section 4.1 and that any such action
shall not constitute a violation of this Section 4.1;
(iii) except for providing confidential information to the Existing
Interested Parties as described in Section 4.1(i), it has ceased and caused
to be terminated any existing activities, discussions or negotiations
theretofore conducted with any person with respect to any Acquisition
Proposal and has taken the necessary steps to inform the individuals or
entities referred to in Section 4.1(i) of the obligations undertaken in
this Section 4.1; and
(iv) it will notify Acquiror promptly if the Company has received
or receives any such inquiries or proposals, or any requests for such
information, or if any such negotiations or discussions are sought to be
initiated or continued with it;
provided, however, that nothing contained in this Agreement shall restrict the
Board or Special Committee (or the officers, directors, employees, agents and
financial advisors of the Company acting at the direction of the Board or
Special Committee) from (i) prior to the Stockholders Meeting, entering into
discussions or negotiations with any person that makes a bona fide, written and
unsolicited Acquisition Proposal, if (A) the Board or Special Committee
determines in good faith, on advice of counsel, that the failure to take such
action would reasonably be expected to violate its duties under applicable law
and such proposal is, or is reasonably likely to be, a Superior Acquisition
Proposal (as defined below), (B) prior to entering into discussions or
negotiations with such person, the Company provides written notice to Acquiror
to the effect that it is entering into discussions with such person and (C) the
Company keeps Acquiror informed of the status (not the terms or identity of
parties) of any such discussions or negotiations; and (ii) to the extent
applicable, taking and disclosing to the Company's stockholders a position
contemplated by Rules 14d-9 and 14e-2 promulgated under the Exchange Act with
regard to an Acquisition Proposal; provided, however, that the Board or Special
Committee may not approve or recommend an Acquisition Proposal, or withdraw or
modify in a manner adverse to Acquiror its approval or recommendation of this
Agreement and the Merger, unless such Acquisition Proposal is a Superior
Acquisition Proposal.
Nothing in this Section 4.1 shall (x) permit the Company to terminate this
Agreement (except as specifically provided in Article VII hereof) or (y) permit
the Company to enter into an agreement with respect to an Acquisition Proposal
during the term of this Agreement; provided, however, that the Board or Special
Committee may approve and recommend a Superior Acquisition Proposal and, in
connection therewith, withdraw or modify its approval or recommendation of this
Agreement and the Merger. As used herein, "Superior Acquisition Proposal" means
a written, bona fide Acquisition Proposal made by one of the Existing Interested
Parties or any third party which the Board or the Special Committee determines
in its good faith judgment (i) to be superior from a financial point of view to
the holders of Common Shares than the transactions contemplated by this
Agreement (after consultation with the Company's financial advisor) taking into
account all of the terms and conditions of such Acquisition Proposal and of this
Agreement (including any proposal by Acquiror to amend the terms of the
transaction
16
contemplated by this Agreement) and (ii) is reasonably capable of being
completed, taking into account all financial, regulatory and other aspects of
such Acquisition Proposal.
4.2 Termination of the Company's Stock Incentive Plan. The Company shall
take all steps necessary to cause the Stock Incentive Plan to be terminated on
or prior to the Effective Time.
4.3 Conduct of the Company's Business Pending Merger. During the period
from the date hereof and continuing through the Effective Time, except as
consented to in writing by Acquiror or as contemplated by this Agreement or the
Partnership Merger Agreement, the Company shall, and shall cause each of its
Subsidiaries to:
(i) conduct its business only in the usual, regular and ordinary
course in all material respects and in substantially the same manner as
heretofore conducted and take all action necessary to continue to qualify
as a REIT;
(ii) use its commercially reasonable efforts to (i) preserve intact
its business (corporate or otherwise) organization and goodwill and (ii)
keep available the services of its officers and key employees;
(iii) maintain its books and records in accordance with GAAP
consistently applied and not change in any material manner any of its
methods, principles or practices of accounting, except as may be required
by the SEC, applicable law or GAAP;
(iv) duly and timely file all material Returns and other documents
required to be filed with federal, state, local and other tax authorities,
subject to timely extensions permitted by law, provided such extensions do
not adversely affect the Company's status as a qualified REIT under the
Code;
(v) not make, rescind or revoke any material express or deemed
election relative to taxes (unless required by law or necessary to preserve
the Company's status as a real estate investment trust (a "REIT")or the
status of any Subsidiary as a partnership for federal income tax purposes
or as a qualified REIT subsidiary under Section 856(i) of the Code, as the
case may be);
(vi) not amend its charter or bylaws, or the articles or
certificate of incorporation, bylaws, code of regulations, partnership
agreement, operating agreement or joint venture agreement or comparable
charter or organization document of any of its Subsidiaries;
(vii) make no change in the number of its shares of capital stock,
membership interests or units of limited partnership interest (as the case
may be) issued and outstanding or reserved for issuance, other than
pursuant to the exercise of options or other rights disclosed in Part 2.4
of the Disclosure Letter;
(viii) except as set forth in Part 2.4 of the Disclosure Letter,
grant no options or other rights or commitments relating to its shares of
capital stock, membership interests
17
or units of limited partnership interest or any security convertible into
or exercisable for its shares of capital stock, membership interests or
units of limited partnership interest, or any security the value of which
is measured by shares of capital stock, or any security subordinated to the
claim of its general creditors, and not amend or waive any rights under any
of the Company Options;
(ix) not (A) authorize, declare, set aside or pay any dividend or
make any other distribution or payment with respect to any Common Shares or
Preferred Shares, except as consistent with prior practice and Section 5.7,
or (B) directly or indirectly redeem, purchase or otherwise acquire any
shares of capital stock, membership interests or units of partnership
interest or any option, warrant or right to acquire, or security
convertible into or exercisable for, shares of capital stock, membership
interests, or units of partnership interest, except in order to preserve
the status of the Company as a REIT under the Code;
(x) not guarantee the indebtedness of another person, enter into
any "keep well" or other agreement to maintain any financial statement
condition of another person or enter into any arrangement having the
economic effect of any of the foregoing;
(xi) not increase any compensation or enter into or amend any
employment, severance or other agreement with any of its officers,
directors or employees earning a base salary of more than $100,000 per
annum, other than as required by any contract or employee benefit plan or
pursuant to waivers by employees of benefits under such agreements;
(xii) not adopt any new employee benefit plan or amend or terminate
or increase the benefits under any existing plans or rights, and not grant
any additional options, warrants, rights to acquire stock, stock
appreciation rights, phantom stock, dividend equivalents, performance units
or performance stock to any officer, employee or director;
(xiii) not accelerate, waive, amend or change the period of
exercisability or vesting with respect to any grant of Common Shares or
options for the purchase thereof, or authorize cash payments in exchange
for any options or other similar rights granted by the Company;
(xiv) not enter into or amend or otherwise modify or waive any
material rights under any agreement or arrangement for the persons who are
executive officers or directors of the Company or any of its Subsidiaries;
(xv) perform all agreements required to be performed by the
Company and its Subsidiaries (including G & L Operating Partnership under
the Partnership Merger Agreement);
(xvi) not amend, terminate or otherwise modify or waive any
conversion rights with respect to the Partnership Units; and
18
(xvii) not agree, commit or arrange to take any action prohibited
under this Section 4.3.
4.4 Conduct of Acquiror's Business Pending Merger. Prior to the
Effective Time, Acquiror shall use commercially reasonable efforts to obtain and
to close the funding contemplated by the Financing, or if the Financing is
terminated or such funds shall not otherwise be available, to obtain alternate
financing, in each case on financial and other terms no less favorable to the
Acquiror than those set forth in the Financing or to the extent not set forth
therein, on terms reasonably acceptable to the Company, and to cause such
funding to be made available to Acquiror and Acquiror Sub as and subject to the
conditions provided in the Financing.
4.5 Other Actions. Each of the Company, on the one hand, and Acquiror,
on the other hand, shall not knowingly take, and shall use commercially
reasonable efforts to cause their Subsidiaries not to take, any action that
would result in (i) any of the representations and warranties of such party
(without giving effect to any "knowledge" qualification) set forth in this
Agreement that are qualified as to materiality becoming untrue or (ii) any of
such representations and warranties (without giving effect to any "knowledge"
qualification) that are not so qualified becoming untrue in any material
respect. Acquiror and its affiliates (including the Continuing Stockholders)
shall not knowingly and intentionally take any action intended to cause the
Company's representations and warranties not to be true and correct at the
Effective Time.
4.6 SEC Filings. The Company shall deliver to Acquiror, as soon as
practicable, copies of all filings and submissions by the Company with, and all
written and material oral communications to, and all written and material oral
communications from, the SEC.
4.7 Standstill Provisions.
(a) Until October 13, 2002, neither of the Continuing Stockholders
nor any entity owned by one or both of them shall acquire any additional Common
Shares without the written approval of the Special Committee, other than through
the exercise of existing options, conversion rights held by such parties with
respect to Partnership Units or exchange of Partnership Units provided for in
Section 1.5(c); provided, however, that this subsection (a) shall not apply and
shall immediately terminate and be of no force and effect in the event that a
third party makes an Acquisition Proposal, other than an Acquisition Proposal
which has received the recommendation of the Board.
(b) Until October 13, 2002, except as otherwise provided in this
Agreement, the Company shall not issue (i) any additional Common Shares, (ii)
any debt or equity securities or other rights convertible into or exchangeable
for such Common Shares, or (iii) any new class of debt or equity security having
voting rights other than those of the type that are currently provided for in
the Articles Supplementary for the Preferred Shares.
(c) Notwithstanding subsection (b) above, if this Agreement shall
terminate for any reason, from and after such termination the Company may issue
any of the securities described in Section 4.7(b).
19
(d) The standstill provisions in this Section 4.7 shall terminate on
the Effective Time and shall thereafter have no force or effect.
ARTICLE V.
ADDITIONAL COVENANTS
5.1 Preparation of Proxy Statement; Stockholders Meeting.
(a) The parties shall cooperate and promptly prepare, and the
Company shall file with the SEC as soon as practicable, a proxy statement
("Proxy Statement") with respect to the Stockholders Meeting to be held in
connection with the Merger. The parties shall cooperate and promptly prepare and
the appropriate party shall file with the SEC as soon as practicable any other
filings required under the Exchange Act ("Additional Filings"), including a Rule
13e-3 Transaction Statement on Schedule 13E-3 ("Schedule 13E-3") with respect to
the Merger to be filed jointly by the Company and Acquiror, together with any
required amendments thereto. Each of the Company and Acquiror agrees that the
written information provided by it for inclusion in the Proxy Statement and
Additional Filings, and each amendment or supplement thereto, at the time of
mailing thereof and at the time of the Stockholders Meeting, will not include an
untrue statement of a material fact or omit to state a material fact required to
be stated therein or necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading.
(b) The Company will use its reasonable best efforts, and Acquiror
will cooperate with the Company, to (i) file a preliminary Proxy Statement with
the SEC and respond to the comments of the SEC thereon, and (ii) cause a
definitive Proxy Statement to be mailed to holders of Common Shares, in each
case, as promptly as practicable (including clearing the Proxy Statement with
the SEC). The Company will notify Acquiror promptly of the receipt of any
comments from the SEC and of any request by the SEC for amendments or
supplements to the Proxy Statement or the Additional Filings or for additional
information and will supply Acquiror with copies of all correspondence between
such party or any of its representatives and the SEC with respect to the Proxy
Statement or the Additional Filings. The parties shall cooperate to cause the
Proxy Statement and any Additional Filings to comply in all material respects
with all applicable requirements of law. Whenever any event occurs which is
required to be set forth in an amendment or supplement to the Proxy Statement or
the Additional Filings, the Company, on the one hand, and Acquiror, on the other
hand, shall promptly inform the other of such occurrence and cooperate in filing
with the SEC and/or mailing to holders of Common Shares, such amendment or
supplement to the Proxy Statement.
(c) The Company will, as soon as practicable following the date of
this Agreement, duly call, give notice of, convene and hold a meeting of its
stockholders, such meeting to be held no sooner than 20 days nor later than 45
days following the date the Proxy Statement is mailed to the holders of Common
Shares (the "Stockholders Meeting"), for the purpose of obtaining Stockholder
Approval (as defined below).
(d) If on the date for the Stockholders Meeting established pursuant
to subsection (c) above, the Company has not received duly executed proxies
which, when added to
20
the number of votes represented in person at the Stockholders Meeting by persons
who intend to vote to approve the Merger, will constitute a sufficient number of
votes to constitute Stockholder Approval (but holders of less than a majority of
the outstanding Common Shares have indicated their intention to vote against, or
have submitted duly executed proxies voting against, approval of the Merger),
then the Company, through the Board, shall recommend one or more adjournment(s)
of the Stockholders Meeting for up to 120 days after the record date as approved
by a majority vote of holders of Common Shares present in person or by proxy.
5.2 Access to Information. The Company shall, and the Company shall
cause each of its Subsidiaries to, afford to Acquiror and to the officers,
employees, accountants, financial advisors, attorneys, consultants, sources of
financing and other representatives of Acquiror, reasonable access during normal
business hours prior to the Effective Time to all the properties, books,
contracts, commitments, personnel and records and, during such period, the
Company shall, and the Company shall cause each of its Subsidiaries to, furnish
promptly to Acquiror and its financing sources all other information concerning
its business, properties and personnel as Acquiror may reasonably request.
Notwithstanding anything in this Section 5.2 to the contrary, all of Acquiror's
activities pursuant to this Section 5.2 must be conducted in a manner that does
not unreasonably interfere with the ongoing operations of the Company and its
Subsidiaries.
5.3 Tender Offer.
(a) The Continuing Stockholders, individually or through an entity
they will form, propose to make a tender offer (as it may be amended from time
to time, the "Offer") to purchase up to 16% of the aggregate number of Preferred
Shares, at a purchase price of $17.50 per share of Series A Preferred Stock and
$17.00 per share of Series B Preferred Stock, net to the seller in cash, without
interest, upon terms and subject to conditions determined by the Continuing
Stockholders and customary for such tender offers, provided that the acceptance
for payment and payment for the Preferred Shares shall close simultaneously
with, and be subject to consummation of, the Merger.
(b) As promptly as practicable following the mailing by the Company
of the Proxy Statement with the SEC, the Continuing Stockholders shall commence
the Offer, within the meaning of Rule 14d-2 under the Exchange Act, and shall
file with the SEC (i) a Tender Offer Statement on Schedule TO (the "Schedule
TO") with respect to the Offer, which shall contain as an exhibit or incorporate
by reference an offer to purchase and a related letter of transmittal and, if
required to commence the Offer, a summary advertisement (such Schedule TO and
the documents included therein pursuant to which the Offer will be made,
together with any supplements or amendments thereto, the "Offer Documents"). The
Continuing Stockholders shall cause the Offer Documents to be disseminated to
holders of Preferred Shares as and to the extent required by applicable federal
securities laws, and shall ensure that the Offer Documents comply in all
material respects with the provisions of applicable federal securities laws and,
on the date filed with the SEC and, if applicable, the date first published,
sent or given to the holders of the Preferred Shares, do not contain any untrue
statement of a material fact or omit to state any material fact required to be
stated therein or necessary in order to make the statements therein, in light of
the circumstances under which they are made, not misleading, except that no
representation is made with respect to any information supplied by the Company
in writing for inclusion in the Offer Documents.
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(c) The Company and its counsel shall be given a reasonable
opportunity to review and comment upon the Offer Documents prior to their filing
with the SEC or, if applicable, dissemination to the holders of Preferred
Shares. The Continuing Shareholders will notify the Company promptly of the
receipt of any comments from the SEC and of any request by the SEC for
amendments or supplements to the Offer Documents or for additional information
and will supply the Company with copies of all correspondence with the SEC with
respect to the Offer Documents. Whenever any event occurs which is required to
be set forth in an amendment or supplement to the Offer Documents, the Company,
on the one hand, and the Continuing Stockholders, on the other hand, shall
promptly inform the other of such occurrence and cooperate in filing with the
SEC and/or mailing to the holders of Preferred Shares, such amendment or
supplement.
(d) On or as soon as practicable after the date the Offer Documents
are filed with the SEC, the Company shall file with the SEC a
Solicitation/Recommendation Statement on Schedule 14D-9 with respect to the
Offer (such Schedule 14D-9, as amended from time to time, the "Schedule 14D-9")
containing (unless the Special Committee or the Board, after consultation with
counsel, determines in good faith that such action would be inconsistent with
its duties to Company stockholders under applicable law) a statement that
neither the Board nor the Special Committee is expressing an opinion with
respect to the Offer and each is remaining neutral toward the Offer. The
Continuing Stockholders and their counsel shall be given reasonable opportunity
to review and comment upon the Schedule 14D-9 prior to its filing with the SEC
or dissemination to holders of Preferred Shares.
(e) In connection with the Offer, the Company shall instruct its
transfer agent or agents to furnish the Continuing Stockholders promptly upon
request with mailing labels containing the names and addresses of the record
holders of Preferred Shares as of a recent date and of those persons becoming
record holders subsequent to such date, together with copies of any other
information in the Company's possession or control, as the Continuing
Stockholders may reasonably request, and, to the extent reasonably available to
the Company, regarding the beneficial owners of Preferred Shares, and shall
furnish to the Continuing Stockholders such information and assistance as the
Continuing Stockholders may reasonably request in communicating the Offer to the
holders of Preferred Shares. Subject to the requirements of applicable law, and
except for such steps as are necessary to disseminate the Offer Documents, the
Continuing Stockholders shall, and shall cause their agents to, hold in
confidence the information contained in any such labels, listings and files, and
use such information only in connection with the Offer.
(f) The Continuing Stockholders shall apply any dividends paid on
any Preferred Shares purchased by them pursuant to the Offer, first to interest
on any personal loans secured by the Preferred Shares and next to their loans
contemplated by Section 3.10.
5.4 Reasonable Efforts; Notification.
(a) Subject to the terms and conditions set forth in this Agreement,
the Company and Acquiror shall:
22
(i) use all reasonable efforts to cooperate with one another
in determining which filings are required to be made prior to the Effective
Time with, and which consents, approvals, permits or authorizations are
required to be obtained prior to the Effective Time from, governmental or
regulatory authorities and any third parties in connection with the
execution and delivery of this Agreement and the Partnership Merger
Agreement, and the consummation of the transactions contemplated hereby and
thereby, and to timely make all such filings and seek all such consents,
approvals, permits and authorizations;
(ii) use all reasonable efforts to obtain, in writing, any
lender consents listed in Part 5.4 of the Disclosure Letter (the "Lender
Consents") in the manner set forth therein, and the lessor consents listed
in Part 5.4 of the Disclosure Letter (the "Lessor Consents") (such Lender
Consents and Lessor Consents being referred to herein collectively as the
"Required Consents") in form reasonably satisfactory to the Company and
Acquiror; and
(iii) use all reasonable efforts to take, or cause to be taken,
all other action and do, or cause to be done, all other things necessary,
proper or appropriate to consummate and make effective the transactions
contemplated by this Agreement and the Partnership Merger Agreement,
subject in the case of the Company to the exercise by the Board or Special
Committee of its duties under applicable law; provided, however, that
nothing in this subsection (a) shall require Acquiror to pay or commit to
pay any money or other consideration or to incur any liability or other
obligation.
(b) The Company shall give prompt written notice to Acquiror (i) if
any representation or warranty made by the Company contained in this Agreement
that is qualified by Company Material Adverse Effect becomes untrue or incorrect
in any respect, or any such representation or warranty that is not so qualified
becomes untrue or incorrect in any material respect, or (ii) of the failure by
the Company to comply with or satisfy in any material respect any covenant,
condition or agreement to be complied with or satisfied by it under this
Agreement; provided, however, that no such notification shall affect the
representations, warranties, covenants or agreements of the parties or the
conditions to the obligations of the parties under this Agreement.
(c) Acquiror shall give prompt written notice to the Company (i) if
any representation or warranty made by Acquiror contained in this Agreement
becomes untrue or incorrect in any material respect, or (ii) of the failure by
Acquiror to comply with or satisfy in any material respect any covenant,
condition or agreement to be complied with or satisfied by Acquiror under this
Agreement; provided, however, that no such notification shall affect the
representations, warranties, covenants or agreements of the parties or the
conditions to the obligations of the parties under this Agreement.
5.5 Public Announcements. Acquiror and the Company will consult with
each other before issuing, and provide each other the opportunity to review and
comment upon, any press release or other written public statements with respect
to the transactions contemplated by this Agreement, and shall not issue any such
press release or make any such written public statement prior to such
consultation, except as may be required by applicable law, court process or by
23
obligations pursuant to any listing agreement with the New York Stock Exchange.
The parties agree that the press release to be issued with respect to this
Agreement will be in the form agreed to by the parties hereto prior to the
execution of this Agreement.
5.6 Indemnification.
(a) >From and after the Effective Time, the Surviving Corporation
shall provide exculpation and indemnification for each person who is now or has
been at any time prior to the date hereof or who becomes prior to the Effective
Time, an officer or director of the Company or any Subsidiary (the "Indemnified
Parties") which is the same as the exculpation and indemnification provided to
the Indemnified Parties by the Company and the Subsidiaries immediately prior to
the Effective Time in their respective charters, articles of incorporation,
bylaws or other organizational documents, as in effect on the date hereof;
provided, that such exculpation and indemnification covers actions on or prior
to the Effective Time, including all transactions contemplated by this Agreement
and the Partnership Merger Agreement.
(b) In addition to the rights provided in subsection (a) above, in
the event of any threatened or actual action, suit or proceeding, whether civil,
criminal, administrative or investigative, including any action by or on behalf
of any or all security holders of the Company, or any Subsidiary of the Company,
or by or in the right of the Company, or any Subsidiary of the Company, or any
claim, action, suit, proceeding or investigation (collectively, "Claims") in
which any Indemnified Party is, or is threatened to be, made a party based in
whole or in part on, or arising in whole or in part out of, or pertaining to (i)
the fact that he is or was an officer or director of the Company or any of the
Subsidiaries or any action or omission or alleged action or omission by such
person in his capacity as an officer or director, or (ii) this Agreement or the
Partnership Merger Agreement or the transactions contemplated by this Agreement
or the Partnership Merger Agreement, whether in any case asserted or arising
before or after the Effective Time, the Surviving Corporation (the "Indemnifying
Party") shall from and after the Effective Time indemnify and hold harmless the
Indemnified Parties from and against any losses, claims, liabilities, reasonable
expenses (including reasonable attorneys' fees and expenses), judgments, fines
or amounts paid in settlement arising out of or relating to any such Claims. The
Surviving Corporation and the Indemnified Parties hereby agree to use their
reasonable best efforts to cooperate in the defense of such Claims. In
connection with any such Claim, the Indemnified Parties shall have the right to
select and retain counsel, subject to the consent of the Indemnifying Party
(which consent shall not be unreasonably withheld or delayed). The Company shall
bear the fees and expenses of only one counsel on behalf of the Indemnifying
Parties, provided that if representation by the same counsel would involve
actual or potential conflict of interest for such counsel that an Indemnified
Party is not willing to waive, the Company shall bear the fees and expenses of
separate counsel for such Indemnified Party. In addition, after the Effective
Time, in the event of any such threatened or actual Claim, the Indemnifying
Party shall promptly pay and advance reasonable expenses and costs incurred by
each Indemnified Party as they become due and payable in advance of the final
disposition of the Claim to the fullest extent and in the manner permitted by
law. Notwithstanding the foregoing, the Indemnifying Party shall not be
obligated to advance any expenses or costs prior to receipt of a written
affirmation by the Indemnified Party of his or her good faith belief that the
standard of conduct necessary for indemnification under applicable law has been
met and an undertaking by or on behalf of the Indemnified Party, such
undertaking to be accepted without regard to the
24
creditworthiness of the Indemnified Party, to repay any expenses advanced if it
shall ultimately be determined that the Indemnified Party is not entitled to be
indemnified against such expense. Notwithstanding anything to the contrary set
forth in this Agreement, the Indemnifying Party (i) shall not be liable for any
settlement effected without its prior written consent (which consent shall not
be unreasonably withheld or delayed), and (ii) shall not have any obligation
hereunder to any Indemnified Parties to the extent that a court of competent
jurisdiction shall determine in a final and nonappealable order that such
indemnification is prohibited by applicable law. In the event of a final and
nonappealable determination by a court that any payment of expenses is
prohibited by applicable law, the Indemnified Parties shall promptly refund to
the Indemnifying Party the amount of all such expenses theretofore advanced
pursuant hereto. Any Indemnified Parties wishing to claim indemnification under
this Section 5.6, upon learning of any such Claim, shall promptly notify the
Indemnifying Party of such Claim and the relevant facts and circumstances with
respect thereto; provided that the failure to provide such notice shall not
affect the obligations of the Indemnifying Party except to the extent such
failure to notify materially prejudices the Indemnifying Party's ability to
defend such Claim; and provided further that no Indemnified Parties shall be
obligated to provide any notification pursuant to this Section 5.6 prior to the
Effective Time.
(c) For a period of five years after the Effective Time, the
Surviving Corporation shall use its reasonable efforts to maintain in effect the
current policies of directors' and officers' liability insurance maintained by
the Company (provided that the Surviving Corporation may substitute therefor
policies of at least the same amounts and comparable coverage containing terms
and conditions which are comparable thereto; and provided further that such
policies may have higher deductibles than the current policy) with respect to
claims arising from facts or events which occurred at or before the Effective
Time; provided, however, that the Surviving Corporation shall not be obligated
to make annual premium payments for such insurance to the extent such premiums
exceed 150% of the premiums paid as of the date of this Agreement by the Company
for such insurance but in such event shall use reasonable efforts to provide the
maximum coverage available at 150% of such premiums.
(d) This Section 5.6 is intended for the irrevocable benefit of, and
to grant third-party rights to, the Indemnified Parties and their successors,
assigns and heirs and shall be binding on all successors and assigns of
Surviving Corporation. Each of the Indemnified Parties shall be entitled to
enforce the covenants contained in this Section 5.6 and the Company acknowledges
and agrees that each Indemnified Party would suffer irreparable harm and that no
adequate remedy at law exists for a breach of such covenants and such
Indemnified Party shall be entitled to injunctive relief (without posting bond)
and specific performance in the event of any breach of any provision in this
Section 5.6.
(e) Notwithstanding anything to the contrary contained elsewhere in
this Agreement, the Surviving Corporation's agreement set forth in this Section
5.6 shall be limited to cover Claims only to the extent that those Claims are
not covered, paid and extinguished pursuant to the Company's directors' and
officers' insurance policies referenced in subsection (c) above (or any
substitute policies permitted by such subsection).
5.7 Declaration of Dividends and Distributions. From and after the date
of this Agreement, the Company shall not make any dividend or other distribution
to its stockholders
25
without the prior written consent of Acquiror, except for (i) payment of
dividends on Common Shares consistent with prior practice exemplified by the
last full quarter prior to the date of this Agreement, and (ii) payment of
monthly dividends on Preferred Shares in the amounts provided for in its
Articles Supplementary. From and after the date of this Agreement, G & L
Operating Partnership shall not make any distribution to its partners except a
distribution per Partnership Unit in the same amount as dividends on the Common
Shares and Preferred Shares with the same record and payment dates as such
dividends on the Common Shares and Preferred Shares. The foregoing restrictions,
and Section 4.3(ix), shall not apply, however, to the extent a distribution by
the Company is necessary for the Company to maintain REIT status or to prevent
the Company from having to pay federal income or excise tax.
5.8 Stockholder Claims. The Company shall not settle or compromise any
claim relating to the transactions contemplated by this Agreement or by the
Partnership Merger Agreement brought by any current, former or purported holder
of any securities of the Company or G & L Operating Partnership without the
prior written consent of Acquiror, which consent will not be unreasonably
withheld or delayed.
5.9 Cooperation with Proposed Financing. At the request of Acquiror, the
Company shall reasonably cooperate with Acquiror in connection with the proposed
Financing or alternative financing of the transactions contemplated by this
Agreement and the Partnership Merger Agreement, and execute and deliver at the
Closing the definitive financing agreements as contemplated by the Financing
Commitment or any alternative financing, provided that such requested actions do
not unreasonably interfere with the ongoing operations of the Company and its
Subsidiaries, taken as a whole.
5.10 Conversion of Partnership Units. The Company shall use its
reasonable commercial efforts to cooperate with the Continuing Stockholders with
respect to any exercise of the Continuing Stockholders' conversion rights in G&L
Operating Partnership, so as to facilitate their tax and estate planning
concerns, provided that it does not result in additional expense to the Company.
5.11 Exchange of Partnership Units. The Company or its affiliates shall
exchange a portion of its interest in 435 North Roxbury Drive, Ltd., a
California limited partnership, for Partnership Units held by Reese L. Milner
and his affiliates, on terms as shall be satisfactory to Mr. Milner and the
Company, considering that this is a noncash transaction and involves a minority
interest, provided that the remaining Partnership Units held by Mr. Milner and
his affiliates will entitle them on conversion to no more than 5% of the Common
Shares outstanding immediately after the Effective Time.
5.12 Spinoff of Non-MOB Assets. If required by the terms of the
Financing, the Company shall, with the approval of holders of Partnership Units,
and prior to the Effective Time, transfer to a newly-formed limited partnership
the assets of the Partnership that are not related to medical office buildings.
5.13 Section 16 Matters. Prior to the Effective Time, the Company shall
take all such steps as may be required to cause any dispositions of Common
Shares (including the issuance of shares pursuant to stock options, Partnership
Units and other derivative securities with respect to
26
Common Shares) resulting from the transactions contemplated by this Agreement by
each individual who is subject to the reporting requirements of Section 16(a) of
the Exchange Act with respect to the Company, to be exempt under Rule 16b-3
promulgated under the Exchange Act, such steps to be taken in accordance with
the No-Action letter dated January 12, 1999, issued by the SEC to Skadden, Arps,
Slate, Meagher & Flom LLP.
ARTICLE VI.
CONDITIONS
6.1 Conditions to Each Party's Obligation to Effect the Merger. The
respective obligations of each party to effect the Merger shall be subject to
the satisfaction, at or prior to the Effective Time, of each of the following
conditions:
(a) Stockholder Approval. The Merger shall have been approved by a
majority of all votes entitled to be cast by holders of Common Shares at the
Stockholders Meeting (the "Stockholder Approval").
(b) Consents. The Company and Acquiror shall have been furnished
with evidence satisfactory to them of the timely consent or approval of, or
notice to, each governmental authority or other person or entity whose consent
or approval (including the Required Consents), or to whom notice, is required in
connection with the execution or delivery by the Company or Acquiror of this
Agreement, the Partnership Merger Agreement or consummation of the transactions
contemplated hereby or thereby.
(c) Fairness Opinion. The fairness opinion delivered by HLHZ
referenced in Section 2.11 hereof shall not have been withdrawn or materially
and adversely modified.
6.2 Conditions to Obligations of the Company to Effect the Merger.
The obligations of the Company to effect the Merger shall be subject
to the satisfaction, at or prior to the Effective Time, of each of the following
additional conditions, unless waived by the Company in writing:
(a) Representations and Warranties. The representations and
warranties of Acquiror set forth in Article III that are qualified by
materiality shall be true and correct in all respects and the representations
and warranties of Acquiror set forth in Article III that are not so qualified
shall be true and correct in all material respects, as of the date of this
Agreement and, except as contemplated by the Merger or as otherwise contemplated
by this Agreement, as of the Effective Time as though made on and as of the
Effective Time, and the Company shall have received a certificate from Acquiror
signed by the members to that effect.
(b) Performance of Obligations. Acquiror shall have performed in
all material respects all obligations required to be performed by it under this
Agreement prior to the Effective Time, and the Company shall have received a
certificate from Acquiror signed by the members to that effect.
27
(c) Guarantee. The guarantee by the Company of indebtedness to
Tokai Bank shall have been extinguished.
6.3 Conditions to Obligations of Acquiror to Effect the Merger. The
obligations of Acquiror to effect the Merger shall be subject to the
satisfaction, at or prior to the Effective Time, of each of the following
additional conditions, unless waived by Acquiror in writing:
(a) Representations and Warranties. The representations and
warranties of the Company set forth in Article II that are qualified by Company
Material Adverse Effect shall be true and correct in all respects and the
representations and warranties of the Company set forth in Article II that are
not so qualified shall be true and correct in all material respects, as of the
date of this Agreement and, except as contemplated by the Merger or as otherwise
contemplated by this Agreement, as of the Effective Time as though made on and
as of the Effective Time by the Company, and Acquiror shall have received a
certificate from the Company signed by an executive officer to that effect.
(b) Performance of Obligations. The Company shall have performed in
all material respects all obligations required to be performed by it under this
Agreement prior to the Effective Time, and Acquiror shall have received a
certificate from the Company signed by an executive officer to that effect.
(c) Financing. Acquiror shall have obtained the Financing, or
alternative financing as contemplated by Section 4.4, on terms and conditions
satisfactory to Acquiror.
(d) Material Adverse Effect. Since the date of this Agreement
through and including the Closing Date, there shall have been no Company
Material Adverse Effect and Acquiror shall have received a certificate of the
Company signed by an executive officer to that effect. For purposes of this
subsection (d), it is understood and agreed that, notwithstanding the definition
in Section 2.5, a Company Material Adverse Effect also shall be deemed to have
occurred, without regard to any certificate provided pursuant to the first
sentence of this subsection (d), if, as a result of a change of law after the
date hereof, the Company would not qualify (at, prior to or after the Effective
Time) as a REIT. For this purpose, the term "change in law" shall mean any
amendment to or change (including any announced prospective change having a
proposed effective date at, prior to or after the Effective Time) in the federal
tax laws of the United States, including any statute, regulation or proposed
regulation or any official administrative pronouncement (consisting of the
issuance or revocation of any revenue ruling, revenue procedure, notice, private
letter ruling or technical advice memorandum) or any judicial decision
interpreting such federal tax laws (whether or not such pronouncement or
decision is issued to, or in connection with, a proceeding involving the Company
or a Subsidiary or is subject to review or appeal).
28
ARTICLE VII.
TERMINATION
7.1 Termination. This Agreement may be terminated, and the Merger
abandoned, at any time prior to the Effective Time, by:
(i) mutual written consent of the Company and Acquiror;
(ii) either party, by written notice to the other party, if the
Merger shall not have been consummated by October 15, 2001; provided,
however, that the right to terminate this Agreement under this clause (ii)
shall not be available to any party whose failure to perform any obligation
or to comply with any material agreement or covenant under this Agreement
has been the cause of, or resulted in, the failure of the Effective Time to
occur on or before that date;
(iii) Acquiror, by written notice to the Company, if prior to the
Stockholders Meeting, the Board or the Special Committee (A) shall withdraw
or modify in any manner adverse to Acquiror its approval or recommendation
of this Agreement or the Merger, (B) shall approve or recommend any
Acquisition Proposal by a party other than Acquiror, or (C) shall resolve
to take any of the actions specified in clause (A) or (B);
(iv) the Company, by written notice to Acquiror, if the Board or
the Special Committee determines that an Acquisition Proposal constitutes a
Superior Acquisition Proposal and, in its good faith judgment, after
consultation with counsel, that failing to terminate this Agreement would
be inconsistent with the Board's or the Special Committee's duties under
the MGCL, provided that the Company has complied in all material respects
with all the provisions of Section 4.1, including the notice provisions
therein;
(v) either party, by written notice to the other party, if at any
time (A) any of the representations or warranties of the other party set
forth in this Agreement that are qualified as to materiality shall not be
true and correct in any respect or any such representations or warranties
that are not so qualified shall not be true and correct in any material
respect, or (B) the other party shall have failed to perform in any
material respect any material obligation or to comply in any material
respect with any material agreement or covenant of the other party to be
performed or complied with by it under this Agreement and such untruth,
incorrectness or failure cannot be or has not been cured within 20 business
days after the giving of written notice to the other party; provided,
however, that the right to terminate this Agreement under clause (A) shall
not be available to Acquiror to the extent based on any representation or
warranty of the Company that a Continuing Stockholder actually knew was not
true or correct in a material respect when made, and the right to terminate
this Agreement under clause (B) shall not be available to Acquiror to the
extent based on a failure to perform any obligation or to comply with any
agreement or covenant caused by action taken by a Continuing Stockholder.
29
(vi) Acquiror, by written notice to the Company, if after the date
hereof there shall have occurred a Company Material Adverse Effect;
(vii) the Company, by written notice to Acquiror, if the Board or
Special Committee, in its good faith exercise of its business judgment
(based on the advice of counsel), has determined that the Board continuing
to recommend to the holders of Common Shares the approval of the Merger
would be reasonably likely to be a breach of the duties of the Board under
the MGCL;
(viii) the Company (unless the Company is in breach of its
obligations under Section 5.1) or Acquiror, by written notice to the other,
if upon a vote at the Stockholders Meeting, the Stockholder Approval shall
not have been obtained;
(ix) either party, by written notice to the other party, if any
court of competent jurisdiction or other governmental entity shall have
issued an order, decree or ruling or taken any other action permanently
enjoining, restraining or otherwise prohibiting the Merger and such order,
decree, ruling or other action shall have become final and nonappealable;
or
(x) Acquiror, by written notice to the Company, if the Company
shall have failed to hold the Stockholders Meeting by September 15, 2001,
and either of the following shall have occurred prior to such date: (A) any
corporation, partnership, person, other entity or "group" (as referred to
in Section 13(d)(3) of the Exchange Act) other than Acquiror or any of its
affiliates (collectively, "Third Persons") shall have become the beneficial
owner (as defined in Rule 13d-3 promulgated under the Exchange Act) of more
than 15% of the outstanding Common Shares; or (B) any Third Person shall
have made, proposed, communicated or disclosed in a manner which is or
becomes known: (i) by stockholders beneficially owning 5% or more of the
outstanding Common Shares or (ii) by any director or officer of the
Company, an intention to make a bona fide Acquisition Proposal, unless in
the case of the condition in clause (B), the Company is able to sustain the
burden of showing that the failure to hold the Stockholders Meeting was
caused primarily by factors other than knowledge of such intention to make
an Acquisition Proposal.
Any action to be taken to terminate this Agreement under this Section shall be
taken by, or pursuant to authority granted by, the Board (as recommended by the
Special Committee) or Acquiror's members, as the case may be.
7.2 Effect of Termination. In the event of the termination of this
Agreement under Section 7.1, this Agreement shall thereafter become void and
have no effect and no party hereto shall have any liability to any other party
hereto or its stockholders, members, directors or officers in respect thereof;
provided that the provisions of Article VIII, Sections 4.7, 5.10, 5.11, 7.3 and
this Section 7.2 shall remain in full force and effect and survive any
termination of this Agreement until the expiration of such provisions in
accordance with their terms.
30
7.3 Expenses and Termination Fee.
(a) Except as otherwise provided in this Section 7.3, the Company on
the one hand, and Acquiror, Acquiror Sub and the Continuing Stockholders
(collectively the "Acquiror Parties"), on the other hand, shall bear their own
fees and expenses in connection with the negotiation and performance of this
Agreement and the Partnership Merger Agreement, and the consummation of the
Merger and the transactions contemplated hereby (including the Offer) and
thereby, provided that as of the Closing the Company shall pay or reimburse the
Acquiror Parties for all their fees and expenses to the extent they have not
been paid or reimbursed under subsection (b) below.
(b) The Company agrees to pay or reimburse the Acquiror Parties,
promptly following receipt of reasonable supporting documentation, for up to
$400,000 of their fees and expenses incurred in connection with the negotiation
and performance of this Agreement and the Partnership Merger Agreement, and the
consummation of the transactions contemplated hereby (excluding the Offer) and
thereby, including any and all fees and expenses of accountants, financial
advisors, attorneys and consultants engaged by the Acquiror Parties or by any
persons or entities proposing to provide financing, as well as points, charges
for interest rate protection, fees or cost reimbursements paid or owed to the
financing sources of the Acquiror Parties. Such payment or reimbursement by the
Company shall be nonrefundable, except that Acquiror Parties will refund any
such amounts paid or reimbursed by the Company in the event they materially
breach their obligations under this Agreement.
(c) If the Company terminates this Agreement pursuant to Section
7.1(iv) or (vii), or if Acquiror terminates this Agreement pursuant to Section
7.1(iii) or (x), then the Company shall (A) pay to Acquiror, within two business
days, in immediately available funds, the sum of $750,000, and (B) promptly upon
receipt, but in no event later than two business days following receipt, of
reasonable supporting documentation, pay or reimburse Acquiror Parties for all
their reasonable fees and expenses, to the extent unpaid, in connection with the
negotiation and performance of this Agreement and the Partnership Merger
Agreement, and the consummation of the transactions contemplated hereby
(excluding the Offer) and thereby, including any and all reasonable fees and
expenses of accountants, financial advisors, attorneys and consultants engaged
by the Acquiror Parties or by any persons or entities proposing to provide
financing, as well as points, fees or cost reimbursements paid or owed to the
financing sources of the Acquiror Parties. If Acquiror terminates this Agreement
pursuant to Section 7.1(vi) and such Company Material Adverse Effect was caused
by a Force Majeure Event (as defined below), then the Company shall pay or
reimburse Acquiror Parties for 50% of their reasonable fees and expenses to the
extent set forth in clause (B) of this subsection (c). The Company's payment of
the termination fee and other fees and expenses set forth in this subsection (c)
shall be the sole and exclusive remedy of Acquiror against the Company and any
of its Subsidiaries, and their respective directors, officers, employees,
agents, advisors or other representatives in respect of the occurrence giving
rise to such payment.
31
ARTICLE VIII.
MISCELLANEOUS
8.1 Non-Survival of Representations and Warranties. The respective
representations and warranties of the Company and Acquiror contained herein or
in any certificate delivered pursuant hereto shall expire with, and be
terminated and extinguished upon, consummation of the Merger, and thereafter
none of the Company or Acquiror or any officer, director or member thereof shall
be under any liability whatsoever with respect to any such representation or
warranty. This Section 8.1 shall have no effect upon any other obligation of the
parties hereto, whether to be performed before or after consummation of the
Merger.
8.2 Amendment. This Agreement may not be amended except by an instrument
in writing signed on behalf of each of the parties hereto by action taken by the
Board (as recommended by the Special Committee) and by Acquiror's members;
provided, however, that (i) after Stockholder Approval, no amendment may be made
which reduces the amount or changes the form of consideration to be received by
the Public Stockholders in the Merger or otherwise changes or effects any change
which would adversely affect the Public Stockholders prior to the effectiveness
of the Merger without the further approval of the holders of Common Shares, and
(ii) after the Effective Time, no amendment may be made to Section 5.6.
8.3 Waiver. At any time prior to the Effective Time, whether before or
after the Stockholders Meeting, any party hereto, by action taken by the Board
(as recommended by the Special Committee) or Acquiror's members, as the case may
be, may (i) extend the time for the performance of any of the obligations or
other acts of any other party hereto or (ii) waive compliance with any of the
agreements of any other party or with any conditions to its own obligations;
provided, however, that after Stockholder Approval, no waiver may be made which
reduces the amount or changes the form of consideration to be received by the
Public Stockholders in the Merger or otherwise changes or effects any change
which would adversely affect the Public Stockholders prior to the effectiveness
of the Merger without the further approval of the holders of Common Shares.
8.4 Notice. All notices, requests and other communications required or
permitted under this Agreement shall be in writing and shall be delivered
personally or by courier guaranteeing delivery within the next day, or by
facsimile, addressed as follows or such other address as the party to be
notified has furnished in writing by notice in accordance with this Section 8.4:
(a) If to the Company, to:
G & L Realty Corp.
439 N. Bedford Drive
Beverly Hills, CA 90210
Attention: David Hamer
Facsimile: (310) 248-2222
with copies (which shall not constitute notice) to:
32
O'Melveny & Myers LLP
400 S. Hope Street
Los Angeles, CA 90071-2899
Attention: Frederick B. McLane, Esq.
Facsimile: (213) 430-6407
Ballard, Spahr, Andrews & Ingersoll, LLP
300 East Lombard Street, 19th Floor
Baltimore, MD 21202-3266
Attention: James J. Hanks, Jr., Esq.
Facsimile: (410) 528-5650
(b) If to Acquiror, to:
G & L Acquisition, LLC
c/o Daniel M. Gottlieb
439 N. Bedford Drive
Beverly Hills, CA 90210
Facsimile: (310) 248-2222
with a copy (which shall not constitute notice) to:
Heller Ehrman White & McAuliffe LLP
601 S. Figueroa Street, 40th Floor
Los Angeles, CA 90017-5758
Attention: Neal H. Brockmeyer, Esq.
Facsimile: (213) 614-1868
Any such notice, request or other communication shall be deemed to have been
given and received on the day on which it is delivered, if delivered personally,
on the day after the sending thereof, if by courier, or when transmission is
acknowledged, if by facsimile (or, if such day is not a business day in
California or if the notice, request or other communication is not sent by
facsimile during business hours at the place of receipt, on the next following
business day); provided that if any such notice, request or other communication
is given by facsimile, a copy shall also be sent by certified mail or by
overnight courier addressed as indicated above.
8.5 Entire Agreement. This Agreement (including the documents and
instruments referred to herein) constitutes the entire agreement, and supersedes
all other prior agreements and understandings, both written and oral, including
the Term Sheet dated April 13, 2001, between the Company and the Continuing
Stockholders, with respect to the subject matter hereof.
8.6 Parties in Interest. Except as otherwise provided in Sections 1.10,
4.7, 5.6, 5.10 and 5.11, this Agreement shall be binding upon and inure solely
to the benefit of each party hereto, and nothing in this Agreement, express or
implied, is intended to confer upon any other person (other than the Continuing
Stockholders, who shall be considered third party beneficiaries) any rights or
remedies of any nature whatsoever under or by reason of this Agreement.
33
8.7 Material Events. At all times prior to the Effective Time, each party
shall promptly notify the other party in writing of the occurrence of any event
of which it obtains knowledge which will or may reasonably be expected to result
in a failure to satisfy any of the conditions specified in Article VI hereof.
8.8 Headings. The headings contained in this Agreement are for reference
purposes only and shall not affect in any way the meaning or interpretation of
this Agreement.
8.9 Interpretation. As used herein, references to "knowledge" of the
Company and words of like import shall mean the actual knowledge of any
executive officer of the Company, and "knowledge" words of like import of
Acquiror shall mean the actual knowledge of either member of Acquiror. As used
herein, "person" means an individual, corporation, partnership, limited
liability company, joint venture, association, trust, unincorporated
organization or other entity. When a reference is made in this Agreement to an
Article, Section or subsection, such reference shall be to an Article, Section
or subsection of this Agreement unless otherwise indicated. Whenever the words
"include," "includes" or "including" are used in this Agreement, they shall be
deemed to be followed by the words "without limitation." "Or" is used in its
inclusive sense. The parties have participated jointly in the negotiation and
drafting of this Agreement. In the event of any ambiguity or any question of
intent or interpretation arises, this Agreement shall be construed as if drafted
jointly by the parties and no presumption or burden of proof shall arise
favoring or disfavoring any party by virtue of the authorship of any of the
provisions of this Agreement. As used in this Agreement, the term "Force Majeure
Event" means the occurrence of an event that is beyond the reasonable control of
the Continuing Stockholders or the Company, including, natural disasters, fire,
explosion, accident, flood, earthquake, tornadoes, hurricanes, seismic event,
war, civil unrest or strife, riot, civil commotion, labor strike, labor unrest,
power shortage or rationing, acts of God, other casualty, or a "change in law"
as described in Section 6.3(d).
8.10 Assignment. Neither this Agreement nor any of the rights, interests
or obligations under this Agreement shall be assigned or delegated, in whole or
in part, by operation of law or otherwise by either party without the prior
written consent of the other party.
8.11 Governing Law. Except to the extent that the MGCL and the MLLCA
shall govern the Merger, this Agreement shall be governed in all respects,
including validity, interpretation and effect, by the internal laws of the State
of California, without giving effect to the principles of conflict of laws
thereof.
8.12 Counterparts. This Agreement may be executed in any number of
counterparts, each of which shall be an original, but all of which together
shall constitute one and the same agreement.
8.13 Severability. If any term or provision of this Agreement is invalid
or unenforceable in any jurisdiction by reason of any law or public policy, all
other terms and provisions of this Agreement shall nevertheless remain in full
force and effect so long as the economic and legal substance of the transactions
contemplated hereby are not affected in any manner materially adverse to any
party. Upon such determination that any term is invalid or unenforceable, the
parties shall negotiate in good faith to modify this Agreement so as to effect
34
the original intent of the parties as closely as possible in a mutually
acceptable manner in order that the transactions contemplated hereby are
consummated as originally contemplated to the greatest extent possible.
[REMAINDER OF THIS PAGE LEFT BLANK INTENTIONALLY]
35
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first above written.
G & L ACQUISITION, LLC
By: /s/ Daniel M. Gottlieb
-------------------------------
Daniel M. Gottlieb
Member
By: /s/ Steven D. Lebowitz
-------------------------------
Steven D. Lebowitz
Member
G & L REALTY CORP.
By: /s/ John H. Rauch
-------------------------------
John H. Rauch
Senior Vice President
The undersigned, being the Continuing Stockholders designated in
Section 1.5(c) of the foregoing Agreement and Plan of Merger (the "Agreement"),
each agree to be bound by the provisions of the Agreement that purport to be
covenants and agreements of the Continuing Stockholders, such as in Sections
4.5, 4.7, 5.3 and 7.3, and further each agree to cause Acquiror and Acquiror Sub
(each as defined in the Agreement), or any other entity to be formed by them as
contemplated by Section 5.3, to comply with their respective covenants and
agreements as contained in the Agreement.
/s/ Daniel M. Gottlieb
------------------------------
Daniel M. Gottlieb
/s/ Steven D. Lebowitz
------------------------------
Steven D. Lebowitz
36
APPENDIX B - OPINION OF HOULIHAN LOKEY HOWARD & ZUKIN
[HOULIHAN LOKEY LETTERHEAD]
September 6, 2001
To the Special Committee of the Board of Directors of
G&L Realty Corp.
439 North Bedford Drive
Beverly Hills, CA 90210
Dear Members of the Special Committee
We understand that G&L Realty Corp. (the "Company") and G&L Acquisition, LLC, a
Maryland limited liability company (the "Acquiror"), beneficially owned by
Daniel M. Gottlieb and Steven D. Lebowitz, the Chief Executive Officer and the
President of the Company, respectively, have proposed to enter into a
transaction, the terms of which are set forth in the Agreement and Plan of
Merger dated as of May 10, 2001 (the "Merger Agreement") whereby the Acquiror
will merge with and into the Company (the "Merger"). Pursuant to the Merger
Agreement, each share of the Company's common stock (the "Common Stock")
outstanding immediately prior to the effective time of the Merger will be
converted into the right to receive $12.00 in cash per share, without interest
(the "Merger Consideration").
We have been informed by you that Daniel M. Gottlieb and Steven D. Lebowitz, the
Chief Executive Officer and the President of the Company, respectively
(collectively, "DGSL") directly own approximately 42 percent of the Common
Stock, and upon conversion of their fully-vested, in-the-money stock options to
Common Stock their holdings would constitute approximately 45 percent of the
Company's outstanding Common Stock. We also understand that DGSL may determine
to make a cash tender offer for up to approximately 16 percent of the Company's
Series A and Series B Preferred Stock (the "Tender Offer"), however the balance
of such preferred stock would remain outstanding following consummation of the
proposed Merger and Tender Offer.
You have requested our opinion (the "Opinion") as investment bankers as to
whether the Merger Consideration is fair, from a financial point of view, to the
unaffiliated holders of the Common Stock. This Opinion does not address: (i) the
fairness of the Merger to any of the Company's security holders other than the
unaffiliated holders of the Common Stock, (ii) the tax consequences of the
Merger to either the Company or any of its security holders (iii) the Tender
Offer or (iv) any of the Company's security holders' underlying business
decision to participate in the Merger. This Opinion assumes that any alternative
transaction that may have been presented to the Company and/or the special
committee was rejected. Moreover, this Opinion does not constitute a
recommendation to participate in the Merger. We have not been requested to, and
did not, solicit third party indications of interest in acquiring all or any
part of the Company or its assets.
In connection with this Opinion, we have made such reviews, analyses and
inquiries, as we have deemed necessary and appropriate under the circumstances.
Among other things, we have:
1. held discussions with certain members of the senior management of the
Company to discuss the operations, financial condition, future prospects
and projected operations and performance of the Company;
2. reviewed the Company's annual reports to shareholders and on Form 10-K for
the two fiscal years ended 2000 and quarterly reports on Form 10-Q for the
two quarters ended June 30, 2001,
B-1
and Company-prepared interim financial statements for the period ended
July 31, 2001, which the Company's management has identified as being
the most current financial statements available;
3. reviewed forecasts and projections prepared by the Company's management
with respect to the Company and each of its individual properties for the
years ended December 31, 2001 through 2005 (the "Financial Forecasts");
4. reviewed the historical market prices and trading volume for the Company's
publicly traded securities;
5. reviewed certain other publicly available financial data for certain
companies that we deem comparable to the Company;
6. reviewed copies of the following documents and agreements delivered to us
by the Company:
- Most recent draft letter to the Board of Directors from Messrs.
Gottlieb and Lebowitz regarding the current offer of $12.00 as of May
9, 2001;
- The Agreement and Plan of Merger dated as of May 10, 2001;
- Draft minutes of the Special Committee meetings as of August 6, 2001,
August 14, 2001 and August 17, 2001;
- Term sheet between the Company and GMAC Commercial Mortgage
Corporation regarding the proposed financing dated as of April 3,
2001 and Amendment 1 dated August 21, 2001 of such financing term
sheet;
- Appraisals for the medical office properties and selected senior care
properties dated between January 2000 and June 2001;
- Company-prepared net asset value calculations as of July 31, 2001; and
- A schedule of current stock ownership including common stock,
preferred stock, OP units and stock options.
7. reviewed certain other documents related to the Company delivered to us by
the Company; and
8. conducted such other studies, analyses and inquiries as we have deemed
appropriate.
We have relied upon and assumed, without independent verification, that the
Financial Forecasts and projections provided to us have been reasonably prepared
and reflect the best currently available estimates of the future financial
results and condition of the Company, and that there has been no material change
in the assets, financial condition, business or prospects of the Company since
the date of the most recent financial statements made available to us.
We have relied upon and assumed, without independent verification, that the
representations and warranties of the Company contained in the Merger Agreement
are true and correct, the Company and the Acquiror will each perform all of the
convents and agreements to be performed by it under the Merger Agreement
B-2
, and all conditions to the obligations of the Company to consummate the
Merger will be satisfied without any waiver thereof.
We have not independently verified the accuracy and completeness of the
information supplied to us with respect to the Company and do not assume any
responsibility with respect to it. We have not made any physical inspection or
independent appraisal of any of the properties or assets of the Company. Our
opinion is necessarily based on business, economic, market and other conditions
as they exist and can be evaluated by us at the date of this letter.
Based upon the foregoing, and in reliance thereon, it is our opinion that
the Merger Consideration to be received by the unaffiliated Common Stockholders
of the Company in connection with the Merger is fair to them from a financial
point of view.
HOULIHAN LOKEY HOWARD & ZUKIN FINANCIAL ADVISORS, INC.
B-3
APPENDIX C
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
____________________
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended December 31, 2000
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
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
____________________
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
------------------- -----------------------
Common Stock, $.01 par value New York Stock Exchange
Series A Preferred Stock, $.01 par value New York Stock Exchange
Series B Preferred Stock, $.01 par value New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No ____
---
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [_]
The aggregate market value of the voting stock held by non-affiliates of the
Registrant (based on the closing price of such stock, as reported on the New
York Stock Exchange, on March 30, 2001) was $17,007,000.
The number of shares outstanding of the Registrant's Common Stock, $.01 par
value (the "Common Stock"), as of March 30, 2001, was 2,333,800 shares.
================================================================================
ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2000
PART I
ITEM 1. BUSINESS............................................................................... 1
ITEM 2. PROPERTIES............................................................................. 7
ITEM 3. LEGAL PROCEEDINGS...................................................................... 24
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.................................... 25
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.................. 26
ITEM 6. CONSOLIDATED SELECTED FINANCIAL DATA................................................... 27
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.. 29
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK............................. 40
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA............................................. 41
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE... 41
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT..................................... 41
ITEM 11. EXECUTIVE COMPENSATION................................................................. 41
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT......................... 41
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS......................................... 41
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K........................ 42
i
PART I
ITEM 1. BUSINESS
General
The Company is a self-managed real estate investment trust ("REIT") that
owns, acquires, develops, manages and leases health care properties. The
Company's business currently consists of investments, made either directly or
through joint ventures, in medical office buildings ("MOB"), assisted living
facilities ("ALF"), skilled nursing facilities ("SNF") and in debt obligations
secured by health care properties. The Company was incorporated in Maryland on
September 15, 1993.
Acquisition of all Outstanding Shares of Common Stock
On November 30, 2000, the Company received a proposal from Daniel M.
Gottlieb and Steven D. Lebowitz, the Chief Executive Officer and the President,
respectively, of the Company, to acquire all the outstanding shares of Common
Stock of the Company not held by them for a cash price of $10.00 per share. The
proposal contemplates a merger of an entity newly formed by Messrs. Gottlieb and
Lebowitz with and into the Company. The Series A and Series B Preferred Stock
would remain outstanding following the consummation of the transaction. The
proposal was conditioned upon, among other things, approval of the Board of
Directors and stockholders of the Company, the negotiation of mutually
satisfactory definitive agreements, and the receipt by Messrs. Gottlieb and
Lebowitz of satisfactory financing to complete the transaction. Upon receipt of
the proposal, the Board of Directors of the Company formed a special committee
comprised of Craig Tompkins, as chairman, Dr. Richard Lesher, Charles Reilly and
Leslie Michelson to consider the proposal. The special committee was empowered
to evaluate and, if appropriate, negotiate with respect to the proposal and to
make a recommendation to the Board of Directors with respect to any proposed
transaction.
On February 16, 2001, the Company received a revised proposal from Messrs.
Gottlieb and Lebowitz under which they would acquire all the outstanding shares
of Common Stock of the Company not held by them for a cash price of $11.00 per
share. The revised proposal was submitted to the special committee of the
Company's Board of Directors for review.
Description of Business
The MOB business strategy is to acquire, develop, manage and lease a
portfolio of medical office buildings. The Company currently seeks growth
opportunities mainly in Southern California through acquisition and development
of additional MOBs directly or through strategic joint ventures. The MOB
portfolio currently consists of approximately 874,000 rentable square feet. The
Company directly owns 21 high quality MOBs, an adjacent parking facility and two
retail facilities and indirectly owns three additional MOBs (collectively, the
"MOB Properties"). All of the MOB Properties are located in California. Several
of the MOB Properties include retail space on the ground level. As of January
31, 2001, the MOB Properties were 95.7% leased.
The ALF and SNF business strategy is to capitalize on consolidation
opportunities in the assisted living and skilled nursing facility industry by
making selected equity investments in ALFs and SNFs. The Company directly and
indirectly owns five ALFs, including a project under development, seven SNFs,
one hospital, and two senior resident apartment complexes, including one under
development (collectively, the "ALF and SNF Properties"). Four of the five ALFs
are located in Southern California and one is located in Omaha, Nebraska. Three
of the SNFs are located in Massachusetts, two in California, one in Arizona and
one in Washington. The hospital is located in Southern California and the two
senior resident apartment complexes are located in Arizona and Southern
California, respectively. The ALF and SNF Properties have an aggregate of 1,266
beds or units. In addition to the
1
ALF and SNF Properties, the Company also holds a first deed of trust on a 196-
bed SNF located in Hyattsville, Maryland.
As part of its overall business strategy, the Company develops MOBs, ALFs
and SNFs, either directly or through joint ventures. The Company has a long
history of successful developments and believes that it can maximize growth
through a combination of development and acquisition. The Company currently has
two development projects in progress consisting of a 50,000 square foot, 92-bed
ALF located in Yorba Linda, California and a 53-unit senior resident apartment
complex located in Tustin, California. The ALF in Yorba Linda is a joint venture
with D.D.& F., Inc., who will operate the facility upon its completion. The
Company expects to complete this project within the next six months. The senior
resident apartment complex is also a joint venture with a local operator. This
project is expected to be completed in the next two to three years.
The Company's primary business objective is to maximize the total return to
stockholders through appreciation in the value of the Company's net assets and
capital stock through long-term investment in MOBs, ALFs and SNFs, either
directly or through affiliates. The Company seeks to achieve these objectives by
enhancing the operating performance of its existing properties as well as
through the selective acquisition and development of MOBs, ALFs and SNFs. Key
elements of the Company's MOB operating strategy include: (i) improving rental
income and cash flow by aggressively marketing available space; (ii) designing
and renovating tenant space to meet the unique needs of medical practitioners;
(iii) actively managing renovation costs and minimizing other operating expenses
such as leasing commissions by conducting management, leasing, maintenance and
marketing activities internally; (iv) maintaining a diversified tenant base
consisting of a cross section of medical specialties; and (v) emphasizing
regular maintenance, periodic renovation and capital improvements to maximize
long-term returns. Key elements of the Company's ALF and SNF operating strategy
include: (i) locating high-quality operators who will effectively and
efficiently operate the ALFs and SNFs in which the Company has an investment
interest to maximize their value and (ii) partnering with local operators to
develop and manage ALFs and SNFs in under-served communities throughout the
country.
Medical Office Building Operations. In its acquisition analysis, management
reviews certain factors including: (i) location, particularly proximity to major
hospitals; (ii) construction quality and design; (iii) historical, current and
projected cash flow; (iv) potential for increased cash flow and capital
appreciation; (v) tenant mix and terms of the tenant leases, including the
potential for rent increases; (vi) occupancy rates and demand for medical office
properties in the vicinity; and (vii) prospects for liquidity through sale,
financing or refinancing. The Company anticipates that G&L Realty Partnership,
L.P. (the "Operating Partnership"), the subsidiary through which the Company
conducts its business, will continue to purchase fee interests in MOB
Properties; however, the Company may participate, on a selective basis, in joint
venture transactions, or acquire partnership interests as the Board of Directors
may determine from time to time to be in the best interests of the Company. Such
investments may be subject to existing mortgage financing and other indebtedness
that have priority over the equity interest of the Company and may not afford
the Company with the operating control it has with respect to the MOB
Properties.
Assisted Living and Skilled Nursing Facility Operations. In connection
with its acquisition of ALFs and SNFs, management analyzes and reviews certain
factors including: (i) operating and financial history of the entity and the
managers who will be responsible for operating the ALF or SNF; (ii) value of the
property; (iii) location of the property, particularly proximity to shops,
markets and other health care facilities; and (iv) anticipated potential for
short-term gain and long-term profits from investment in the property. The
Company anticipates that it will continue to acquire ownership interests, either
directly or through joint ventures, in ALFs and SNFs.
Development Activities. In connection with its development projects,
management analyzes and reviews certain factors including: (i) location,
particularly proximity to major medical centers; (ii) demand for MOBs, ALFs or
SNFs in the area; (iii) cost of construction in relation to direct acquisition;
(iv) potential for capital appreciation; (v) potential for financing or sale;
(vi) operating and development capabilities of potential partners; and (vii)
estimated return on investment. The Company considers development to be a vital
part of its operations and anticipates that it will continue to seek development
opportunities in the future.
See Note 16 of Item 14 for financial information about the Company's four
main business segments: investments in (i) MOBs, (ii) ALFs, (iii) SNFs and (iv)
debt obligations secured by ALFs and SNFs.
2
Competitive Strengths
In addition to the Company's investments in its existing MOB Properties,
the Company also seeks to make selective acquisitions of MOBs. From time to time
hospital owners sell their MOBs to raise capital. These sales create
opportunities for the Company to acquire MOBs on attractive terms. Because
hospitals will often seek a buyer with the operating skills necessary to meet
the needs of the medical practitioners located in the building, the Company
believes that its successful history of operating MOBs provides it with a
competitive advantage in the acquisition, development and management of MOBs.
Through its ALF and SNF Properties, the Company seeks to selectively
acquire ownership interests in ALFs and SNFs that have characteristics
consistent with the Company's growth strategy. The Company believes that the
aging population in the United States has increased the demand for efficiently
operated ALFs and SNFs. The Company believes that it is in a position to
capitalize on this increased demand by selectively acquiring ownership interests
in attractively situated ALFs and SNFs. The Company also believes that there is
potential for the Company to make additional acquisitions of ALFs and SNFs.
Financing for new acquisitions of MOBs, ALFs and SNFs may be provided
through existing or new joint ventures with third parties or third-party
financing in the form of secured or unsecured debt. The Company's capacity to
obtain debt financing facilitates its ability to acquire ownership interests in
additional MOBs, ALFs and SNFs. However, notwithstanding any business policies
or objectives of the Company, no assurance can be given that the Company, or its
investment affiliates, will be able to make acquisitions on favorable terms or
that such properties will be profitably operated. In addition, the Company and
its investment affiliates will likely incur additional indebtedness in
connection with future acquisitions.
Property Management
The Company provides a full range of management services for the operation
of MOBs. The ability of the Company to manage MOBs to meet the unique needs of
medical practitioners has been critical to its success to date. The Company has
experienced lease renewal rates of approximately 85.2%, 76.2% and 86.7% for the
years ended December 31, 2000, 1999 and 1998, respectively, with respect to
medical office space in the MOB Properties based on the medical office space
leases available for renewal in these periods. Developing and managing MOBs
differs from developing and managing general office properties due to the
special requirements of the tenants and their patients. MOBs generally have
higher maintenance requirements in the public areas due to heavy foot traffic,
many short appointments which increase demand on parking facilities, the use of
sophisticated medical equipment requiring increased plumbing and electrical
capacity and expanded environmental regulations that impose more stringent
restrictions on the disposal of medical waste. The management of MOBs also
generally requires experience in specialized tenant improvements and higher
levels of responsiveness required by medical practitioners. Additional important
management functions include the placement of tenants within MOBs to accommodate
increased space needs and managing the tenant mix at properties so that
referrals by practitioners with different specialties within the building are
facilitated. The Company stresses meeting these and other special demands of
medical property tenants.
Tax Status
The Company believes that it has operated in such a manner as to qualify
for taxation as a REIT under Sections 856 through 860 of the Internal Revenue
Code of 1986, as amended (the "Code"), commencing with its taxable year ended
December 31, 1993, and the Company intends to continue to operate in such a
manner. As long as the Company qualifies for taxation as a REIT under the Code,
the Company generally will not be taxed at the corporate level. If the Company
fails to qualify as a REIT in any taxable year, the Company will be subject to
federal income tax (including any applicable alternative minimum tax) on its
taxable income at regular corporate rates. Even if the Company qualifies for
taxation as a REIT, the Company may be subject to certain state and local taxes
on its income and property and to federal income and excise taxes on its
undistributed income.
3
Employees
As of March 24, 2001, the Company (including the Operating Partnership)
employed 33 persons, 12 of whom are on-site building employees who provide
maintenance services for the MOB Properties and 9 of whom are professional
employees engaged in leasing, asset management and administration.
Dependence on Key Tenants
The Company's MOBs typically consist of several smaller tenants rather
than one or two large tenants. As of December 31, 2000, no MOB tenant accounted
for more than 10% of the Company's total revenues. Although no MOB tenant
accounts for more than 10% of the Company's total revenues, the risks associated
with smaller tenants include (i) less creditworthiness, (ii) greater tenant
turnover and (iii) greater property management needs.
The ALFs and SNFs are either leased to senior care companies or managed by
senior care companies that operate the facilities. During 2000, the Company
replaced lease agreements at four of its facilities with management contracts.
Because the Company replaced these leases with management contracts, all of the
revenues and expenses relating to the operations of these facilities are
reflected in the consolidated financial statements of the Company. Although all
of the Company's ALF and SNF properties are currently leased or under management
contracts, finding experienced senior care managers is a time-consuming and
difficult task. During 2000, due to the change from a lease to a management
agreement, revenue from the Company's three SNFs in Hampden, Massachusetts
accounted for approximately 31% of the Company's total revenues. Should these
three facilities or any of the Company's other ALFs or SNFs require a change in
manager, the Company's financial results could be materially impacted despite
the fact that no other ALF or SNF tenant or manager accounts for more than 10%
of the Company's total revenues.
Government Regulation
Environmental Matters. Under various federal, state and local laws,
ordinances and regulations, an owner or operator of real estate is liable for
the costs of removal or remediation of certain hazardous or toxic substances on
or in its property. These laws impose liability without regard to whether the
owner knew of, or was responsible for, the presence of any hazardous or toxic
substances. The presence of such substances, or the failure to properly
remediate these substances, may adversely affect the owner's ability to borrow
using the real estate as collateral and may subject the owner to material
remediation costs. All of the MOB Properties, ALFs and SNFs have been subject to
Phase I environmental assessments (which involve inspection of the subject
property, but no soil sampling or groundwater analysis) by independent
environmental consultants. Although restricted in scope, these independent
assessments revealed no material evidence of existing environmental liability,
and the Company has not been notified by any governmental authority of any
noncompliance by, liability for, or other claim against the Company in
connection with environmental matters related to the MOB Properties, ALFs or
SNFs. While the Company is not aware of any environmental liability that it
believes would have a material adverse effect on its business, assets or results
of operations, no assurance can be given that the environmental assessments
revealed all potential environmental liabilities or that a prior owner did not
create any material environmental condition not known to the Company or that
future uses or conditions (including changes in applicable environmental laws
and regulations) will not result in imposition of environmental liability.
The independent environmental assessments include selective sampling for
asbestos where the age of the buildings or the types of materials warranted such
sampling. Limited quantities of non-friable asbestos were present in the Sherman
Oaks Medical Plaza. The Company removed the asbestos in 1994 in connection with
the renovation of this building. Limited quantities of non-friable asbestos were
also discovered in the Maryland Gardens facility and Riverdale Gardens Nursing
Home. Management believes that it has undertaken adequate measures to ensure
that the asbestos will remain undisturbed and that it does not pose a current
health risk. Management plans to continue to monitor this situation.
4
Physicians generate medical waste in the normal course of their practice.
The Company's leases require the individual tenants to make arrangements for the
disposal of medical waste and require all tenants to provide proof that they
have contracted with a third party service to remove waste from the premises
each night. The handling and disposal of this waste is the responsibility of the
tenants; however, the Company remains responsible as the owner of the property.
There can be no assurance that all such medical waste will be properly handled
and disposed of or that the Company will not incur costs in connection with
improper disposal of medical waste by its tenants.
Healthcare Industry Regulation. Physicians and senior care operators are
subject to heavy government regulation including the determination of the level
of reimbursements for medical costs incurred and services provided under
government programs. Changes in government regulations regarding medical
reimbursements and other regulations affecting the healthcare industry can have
a dramatic impact on the operations of medical practitioners or senior care
operators under government programs. Both the federal government and many state
governments are exploring numerous reforms concerning the healthcare industry
that could have a significant impact on many healthcare-related businesses. If
legislation were enacted that decreased the level of government medical
reimbursements or increased the degree of regulatory oversight, thereby
increasing the expenses of healthcare businesses, the Company's tenant base
could be adversely affected. This, in turn, could negatively impact the ability
of the Company to make distributions.
Americans with Disabilities Act. All of the MOB Properties and ALF and SNF
Properties are required to comply with the Americans with Disabilities Act
("ADA"). The ADA generally requires that buildings be made accessible to people
with disabilities. Compliance with the ADA requirements could require removal of
access barriers and noncompliance could result in imposition of fines by the
federal government or an award of damages to private litigants. The Company
believes it is in substantial compliance with the ADA and that it will not be
required to make substantial capital expenditures to address the requirements of
the ADA. If required changes involve a greater expenditure than the Company
currently anticipates, the Company's ability to make distributions could be
adversely affected.
5
G & L Realty Corp.
Organizational Chart
[DIAGRAM]
6
ITEM 2. PROPERTIES
The MOB Properties consist of 21 high quality MOBs directly owned by the
Company, three MOBs indirectly-owned by the Company, an adjacent parking
facility and two retail facilities. The ALF and SNF Properties consist of five
ALFs, seven SNFs, one hospital and two senior resident apartment complexes. As
of January 31, 2001, the MOB Properties were 95.7% leased to over 425 tenants
and the ALF and SNF Properties were 100% leased to operators or under contracts
with management companies. The Company's MOB tenants are primarily established
medical practitioners representing a cross section of medical practices.
Description of the MOB Properties and ALF and SNF Properties
MOB Properties
The Company, through its MOB operations, acquires, develops, manages and
leases MOBs, a parking facility and two retail facilities. Developing and
managing MOBs differs from developing and managing conventional office buildings
due to the special requirements of physicians and their patients. Because
doctors now perform a variety of medical procedures in their offices, many MOBs
have become sophisticated ambulatory centers that allow for outpatient surgery
and procedures. In addition, MOBs generally have higher maintenance requirements
in the public areas due to heavy foot traffic, many short appointments that
increase demand on parking facilities, the use of sophisticated medical
equipment requiring increased plumbing and electrical capacity and expanded
environmental regulations that impose more stringent restrictions on the
disposal of medical waste. The management of MOBs also generally requires
experience in specialized tenant improvements and higher levels of
responsiveness required by medical practitioners. Additional important
management functions include the placement of tenants to accommodate increased
space needs and managing the tenant mix at properties to facilitate referrals by
practitioners with different specialties within the building. The Company
stresses meeting these and other special demands of MOB tenants.
ALF and SNF Properties
The Company, as part of its overall strategy, acquires, develops and leases
ALFs and SNFs. The Company leases its ALFs and SNFs to third party senior care
operators. The operation of ALFs and SNFs requires a high level of experience
and expertise due to the specific needs of the residents and the complex
administrative functions surrounding the admission and care of residents and the
administering of government programs. The operators of ALFs and SNFs must also
maintain a positive relationship with local hospitals and other medical
providers in order to attract new residents. The Company considers all of the
above factors when leasing its facilities to third party operators or hiring
managers to operate its facilities.
The health care industry is facing various challenges, including increased
government and private payor pressure to reduce medical delivery costs.
Substantially all of the Company's tenants are in the medical profession and
could be or have been adversely affected by the new Medicare prospective payment
system, cost containment and other health care reform proposals. In the past
twelve months, the Company has changed managers at two of its ALFs and six of
its SNFs in response to financial difficulties encountered by the managers or
dissatisfaction with the operating results of the managers. Any future proposals
that limit access to medical care or reduce reimbursement for physicians'
services may also impact the ability of the Company's tenants to pay rent.
However, the Company believes that the aging population in the United States,
combined with other recent trends in the health care industry, such as the
performance of non-acute procedures outside of hospitals, could spur increased
demand for space in full service MOBs that contain surgery centers and
out-patient facilities, such as those owned by the Company.
7
The following tables set forth certain information regarding each of the
.OB Properties and ALF and SNF Properties as of January 31, 2001. All of the MOB
Properties and ALF and SNF Properties are held in fee by the Company or, in the
case of jointly-owned properties, by the joint venture property partnership or
limited liability company.
MOB Properties--Summary Data
Number Year Rentable Rented Total Average
of Constructed or Square Square Annualized Rent per
Property Buildings Rehabilitated Feet(1) Feet(2) Occupancy(2) Rent(3) Sq. Ft.
------------------------------------------ --------- ------------- -------- ------- ------------ ---------- --------
405 N. Bedford, Beverly Hills,......... 1 1947/1987 42,197 42,197 100.0% $ 1,773,000 $42.01
415 N. Bedford, Beverly Hills.......... 1 1955 5,720 5,720 100.0 239,000 41.79
416 N. Bedford, Beverly Hills.......... 1 1946/1986 40,192 39,672 98.7 1,638,000 41.29
435 N. Bedford, Beverly Hills.......... 1 1950/63/84 51,580 51,580 100.0 1,716,000 33.28
435 N. Roxbury, Beverly Hills.......... 1 1956/1983 40,884 37,977 92.9 1,480,000 38.97
436 N. Bedford, Beverly Hills.......... 1 1987 73,892 73,892 100.0 3,275,000 44.32
Sherman Oaks Medical Plaza
4955 Van Nuys Blvd.
Sherman Oaks......................... 1 1969/1993 67,451 67,451 100.0 1,480,000 21.94
Irwindale Building
12701 Schabarum Ave.
Irwindale............................ 1 1992 47,604 47,604 100.0 571,000 12.00
Coronado Plaza
1330 Orange Ave, Coronado............ 1 1977/1985 39,534 37,094 93.8 1,105,000 29.78
Holy Cross Medical Plaza
11550 Indian Hills Road
Mission Hills........................ 1 1985 71,777 66,475 92.6 1,832,000 27.57
St. Joseph's Medical Office Bldg.
2031 West Alameda Ave.
Burbank.............................. 1 1987 25,769 25,769 100.0 676,000 26.23
Lyons Avenue Medical Building
24355 Lyons Avenue, Santa Clarita 1 1990 48,783 47,177 96.7 981,000 20.79
Tustin--Medical Office I
14591 Newport Avenue, Tustin......... 1 1969 18,092 18,092 100.0 296,000 16.37
Tustin--Medical Office II
14642 Newport Avenue, Tustin......... 1 1985 48,216 42,729 88.6 909,000 21.27
Pacific Park
5 Journey Road, Aliso Viejo.......... 1 1998/1999 23,080 23,080 100.0 583,000 25.24
Pier One Retail Center
26771 Aliso Creek Road, Aliso Viejo 1 1998 9,100 9,100 100.0 182,000 20.00
Regents Medical Center
4150 Regents Park Row , La Jolla..... 1 1989 65,313 61,214 93.7 1,654,000 27.03
San Pedro Medical Plaza
1360 West 6th Street, San Pedro...... 3 1963/1979 58,333 51,288 87.9 1,155,000 22.51
1095 Irvine Boulevard, Tustin.......... 1 1995 10,125 10,125 100.0 214,000 21.18
Santa Clarita Valley Medical Center
23861 McBean Pkwy, Santa Clarita..... 5 1981 42,640 38,281 89.8 775,000 20.25
Santa Clarita Valley Medical Center, F
23861 McBean Pkwy, Santa Clarita 1 1998/1999 43,912 40,389 92.0 1,006,000 24.90
-- ------- ------- -----------
Total/Weighted average of all MOB
Properties 27 874,194 836,906 95.7% $23,540,000 28.13
-- ------- ------- -----------
_____________________________
See footnotes on page 10
8
ALF and SNF Properties--Summary Data
Purchase
Number Year Price/ Total
of Constructed or Number of Development Annualized
Property Buildings Rehabilitated Beds/Units Occupancy(4) Cost Base Rent
--------------------------------- --------- ------------- ---------- ------------ ----------- ----------
Southern California
-------------------
Pacific Gardens Santa Monica
1437 Seventh Street,
Santa Monica................ 1 1990 92 U 100.0% $11,210,000 $1,260,000
Tustin Hospital
14662 Newport Avenue,
Tustin.(5).................. 1 1969 183 B N/A 2,545,000 421,000
The Arbors
12979 Rancho Penasquitos
Boulevard,
San Diego................... 1 1998/1999 91 U 88.5 4,200,000 767,000
Pacific Gardens Tarzana
18700 Burbank Boulevard 1 1989 80 U 100.0 10,300,000 1,100,000
Tarzana.....................
North Valley Nursing and
Rehabilitation Center
1645 Esplanade, Chico (6)... 1 1960 59 B 0 800,000 0
Paso Robles Convalescent
Center
321 12/th/ Street
Paso Robles (6)............. 1 1940 38 B 0 465,000 0
Arizona
-------
Maryland Gardens..............
31 West Maryland Avenue,
Phoenix..................... 1 1951-1957 98 B 78.0 4,647,000 180,000
Maryland Gardens II
39 West Maryland Avenue,
Phoenix..................... 1 1968 20 U 100.0 1,024,000 108,000
Massachusetts
-------------
Riverdale Gardens
42 Prospect Avenue,
West Springfield............ 1 1957-1975 168 B 94.4 5,655,000 762,000
Chestnut Hill
32 Chestnut Street,
East Longmeadow............. 1 1984 123 B 94.5 10,627,000 1,433,000
Mary Lyon
34 Main Street,
Hampden..................... 1 1986 100 B 88.1 3,744,000 505,000
Nebraska
--------
Parsons House on Eagle Run
14325 Eagle Run Drive,
Omaha....................... 1 1999 96 U 65.6 1,100,000 960,000
Washington
----------
Pacific Care Center
3035 Cherry Street,
Hoquiam..................... 1 1954 118 B 77.4 3,316,000 360,000
-- ----- ----------
Total of all ALF and SNF
Properties.................. 13 1,266 $7,856,000
-- ===== ==========
9
Developments
------------------------------
Lakeview Courtyards
4792 Lakeview Ave,
Yorba Linda.............. 1 2000/2001 80 U N/A 3,200,000 N/A
Heritage Park
1101 Sycamore Ave,
Tustin................... 1 2000-2002 53 U N/A 500,000 N/A
________________________
1) Rentable square feet includes space used for management purposes but does
not include storage space.
2) Occupancy includes occupied space and space used for management purposes.
Rented square feet includes space that is leased but not yet occupied.
Occupancy figures have been rounded to the nearest tenth of one percent.
3) Rent is based on third-party leased space billed in January 2001; no rent
is assumed from management space.
4) Occupancy is on a per-bed or unit basis.
5) Tustin Hospital is leased 100% to Pacific Health Corporation. Average
hospital census for January 2001 was not available.
6) The Company acquired this property through foreclosure of its first deed of
trust in March 2000. The facility is currently closed.
MOB Properties
Six of the MOB Properties are located on North Bedford and North Roxbury
Drives in the "Golden Triangle" area of Beverly Hills, California, near three
major hospitals--Cedars Sinai Medical Center, Century City Hospital and UCLA
Medical Center. The buildings feature high quality interior improvements,
including rich wood paneling and brass hardware appointments, both in the common
areas and in most of the doctors' offices. These six MOB Properties include
twenty-one operating rooms. The 405, 416 and 436 North Bedford Drive buildings
each have emergency back-up generators. Parking for these six MOB Properties is
provided in the 415 North Bedford garage and in subterranean parking at 436
North Bedford and 435 North Roxbury Drives. Each of these MOBs has copper
insulated pipe with sufficient capacity for medical use, electrical systems
designed for extra load requirements and extensive security systems.
405 North Bedford Drive, Beverly Hills
The 405 North Bedford Drive MOB, built in 1947 and extensively remodeled
in 1987, consists of 42,000 rentable square feet in four stories plus a
penthouse and a basement. The reinforced brick building, with ground floor
retail space, features cherry wood paneled walls and brass hardware in the
common areas and decorative concrete trim on the exterior.
Currently, only one tenant occupies more than 10% of the rentable square
footage of the building. A surgery center occupies 6,019 square feet
(approximately 14.3%) of the rentable square footage pursuant to a lease that
provides for monthly rent of $23,000. The lease expires on August 31, 2004 and
provides for a five-year renewal option.
415 North Bedford Drive, Beverly Hills
The 415 North Bedford Drive building is a four-level parking structure
with approximately 5,720 square feet of ground floor retail space for seven
tenants. The parking structure contains 316 spaces and is valet operated.
10
416 North Bedford Drive, Beverly Hills
The 416 North Bedford Drive property is a four-story, 40,000 rentable
square foot reinforced brick MOB with a basement and ground floor retail space.
Built in 1946 and extensively remodeled in 1986, the building features oak
paneled walls and moldings, brass hardware, tinted concrete borders on the
exterior, and fourth floor skylights that provide an open, airy atmosphere in
the hallway and in some of the suites.
A plastic surgeon occupies 5,141 square feet or 12.8% of the rentable
square footage of the building, pursuant to a lease that provides for monthly
rent of $23,000. The lease expires on November 30, 2002 and contains a five-year
renewal option.
435 North Bedford Drive, Beverly Hills
The 435 North Bedford Drive property is a four-story, 52,000 rentable
square foot reinforced brick and masonry MOB with a penthouse, basement, and
ground floor retail space. Built in 1950 and extensively remodeled in 1984, the
building features oak molding, wall sconces and paneling in the hallways plus
stained runner boards and built-in stained hardwood cabinets in some of the
medical office suites.
435 North Roxbury Drive, Beverly Hills
The 435 North Roxbury Drive property is a four-story, 41,000 rentable
square foot MOB with a penthouse, subterranean parking and retail space on the
ground floor. The building, which was built in 1956 and extensively remodeled in
1983, features a reinforced brick and masonry exterior and raised, oak-stained
paneling and molding in the hallways.
Two tenants in 435 North Roxbury each occupy more than 10% of the rentable
square footage. A dermatologist occupies 5,291 square feet (12.9% of the
rentable square footage) pursuant to a lease which provides for a monthly rental
of $18,000. The lease expires September 30, 2001 and contains a provision for a
five-year renewal option. An internist occupies 6,183 square feet (15.1% of the
rentable square footage) pursuant to a lease which provides for a monthly rental
of $20,000. The lease expires on November 30, 2004.
436 North Bedford Drive, Beverly Hills
The 436 North Bedford Drive property is a three-story, 74,000 rentable
square foot MOB with three levels of subterranean parking. Built in 1987, the
building features ground floor retail and office space surrounding a central
courtyard and balconies at selected locations on the second and third floors.
The exterior is clad in rose color sandstone with cast stone and granite trim.
The central courtyard features a cascading waterfall sculpture and stone pavers
with intricate marble and stone patterns. Cherry wood paneled walls also line
the elevator lobbies on all floors and portions of the hallways.
Sherman Oaks Medical Plaza, Sherman Oaks
The Sherman Oaks Medical Plaza is a seven-story, 67,000 rentable square
foot MOB, constructed in 1969, that is adjacent to the Sherman Oaks Hospital and
Health Center, a 156-bed hospital which includes the major burn center for the
San Fernando Valley. A $1 million capital improvement program renovating the
building systems and common areas of the Sherman Oaks Medical Plaza was
completed in 1993. The Company also owns the adjacent air rights and three-level
parking structure behind the property which provides a total of 426 parking
spaces. The land beneath the parking structure is owned by Sherman Oaks Hospital
which also leases 150 parking spaces in the structure.
11
Irwindale Building, Irwindale
The Irwindale Building in Irwindale, California is a two-story, 48,000
square foot MOB, constructed in 1992, on a site that provides two parking areas
with a total of 244 spaces. This property was 100% leased to Cigna Healthcare of
California ("Cigna"). Rent obligations under the lease were guaranteed by Cigna
Health Care, Inc., the parent company of Cigna. The property was vacated in
stages by Med Partners, a former sub-tenant of Cigna beginning in September
1998, but Med Partners continued to pay rent until December 1999. In December
1999, Cigna and Med Partners defaulted on the rent and the Company sued both
Cigna and Med Partners to recover the delinquent rent payments. Furthermore, the
Company received full possession of the building and re-leased the building to
Autronics Corporation, a British-based electronics company. The lease with
Autronics Corporation provides for monthly rent of $47,604 commencing July 1,
2001 with annual increases and expires on June 30, 2008. In January 2001, the
Company settled its lawsuit with Cigna in exchange for a payment from Cigna
totaling $4.1 million in settlement of all outstanding current and future
amounts owed.
Coronado Plaza
Coronado Plaza is a three-story, 40,000 rentable square foot office and
retail complex located in Coronado, California. The building is located on the
beach across the street from the Hotel Del Coronado and the majority of the
second and third floor suites have unobstructed ocean views. The building has
subterranean parking for 96 vehicles plus street parking surrounding the entire
property.
Two tenants each occupy more than 10% of the rentable square footage in
Coronado Plaza. Marie Calendar's Restaurant occupies 6,163 square feet
(approximately 15.6%) of the rentable area pursuant to a lease that provides for
monthly rent of $12,000. The lease expires on May 31, 2008 and provides for two,
five-year renewal options. G&L Coronado Managers Corp. occupies 7,596 square
feet (approximately 19.2%) of the rentable area pursuant to a lease that
provides for monthly rent of $20,000. The lease expires on December 31, 2008.
G&L Coronado Managers Corp. operates the third-floor executive suites in the
building. G&L Coronado Managers Corp. is owned by Daniel M. Gottlieb and Steven
D. Lebowitz, both officers and directors of the Company.
Holy Cross Medical Plaza, Mission Hills
The Holy Cross Medical Plaza is situated on approximately 2.6 acres of the
15-acre campus of Holy Cross Medical Plaza, a 316-bed hospital. The campus also
includes the Villa de la Santa Cruz SNF, another MOB, a magnetic resonance
imaging center, and an outpatient diagnostic center. Built in 1985, the Holy
Cross Medical Plaza is a three-story, 72,000 square foot MOB occupied primarily
by medical and dental practitioners. A two-story parking structure and an open
asphalt-paved lot can accommodate a total of 333 vehicles. The surrounding site
is landscaped with grass, trees, shrubs and planter boxes.
Two tenants each occupy more than 10% of the rentable square footage in the
Holy Cross Medical Plaza. Holy Cross Surgical Center occupies 12,456 square feet
(17.4% of the rentable square footage) pursuant to a lease that provides for
monthly rent of $44,000. The lease expires October 31, 2006 and provides for a
ten-year renewal option. Dialysis Center occupies 10,639 square feet (14.8% of
the rentable square footage) pursuant to a lease that provides for monthly rent
of $21,000. The lease expires March 31, 2006 and provides for two, five-year
renewal options.
St. Joseph's Professional Building, Burbank
The St. Joseph's Professional Building is a steel frame, brick-facade
building, constructed in 1987, that features 26,000 rentable square feet in two
floors of office space over three levels of subterranean parking which can
accommodate up to 100 vehicles. The building is located one-quarter of a mile
from St. Joseph's Hospital and is directly across the street from the Walt
Disney Company's world headquarters campus. Saint Joseph's Hospital
12
includes 658 beds and is owned by the Sisters of Providence, an organization
which owns other hospitals throughout North America.
Two tenants in the St. Joseph's Professional Building each occupy more
than 10% of the rentable square footage. Total Renal Care occupies 7,712 square
feet (29.9% of the rentable square footage) pursuant to a lease which provides
for a monthly rental of $16,000 plus direct payment of all utilities. In
December 2000, Total Renal Care renewed its lease for ten years. The lease
expires October 31, 2010. Two internists occupy an aggregate of 7,788 square
feet (30.2%) of the rentable square footage pursuant to three leases that
provide for aggregate monthly rent of $18,000. The leases expire on October 31,
2001, November 30, 2001 and October 31, 2004 and have five-year renewal options.
Lyons Avenue Medical Building
The Lyons Avenue Medical Building is a two-story, 49,000 rentable square
foot MOB located in Valencia, California only 1/2 mile from the Henry Mayo
Newhall Memorial Hospital. The building has subterranean parking and a two-story
atrium entry. The building's excellent market position provides first class
medical space for those doctors that do not need an association with the
hospital.
Three tenants each occupy more than 10% of the rentable square footage of
the building. Valencia Surgical Center occupies 7,212 square feet (approximately
14.8%) of the rentable area pursuant to a lease that provides for monthly rent
of $13,000. The lease expires on September 1, 2005. Santa Clarita Imaging
occupies 5,782 square feet (approximately 11.9%) of the rentable area pursuant
to a lease that provides for monthly rent of $9,000. The lease expires on June
30, 2009. Two orthopedists occupy 5,272 square feet (approximately 10.8%) of the
rentable area pursuant to a lease that provides for monthly rent of $9,000. The
lease expires on June 14, 2005 and provides for one, five-year renewal option.
Tustin--MOB I
The 14591 Newport Avenue building in Tustin, California is a two-story,
18,000 rentable square foot MOB that was constructed in 1969 on a 1.2-acre site.
The site is landscaped with grass lawns, shrubs, and trees and includes an
asphalt-paved parking lot with approximately 105 parking spaces, representing a
parking ratio of 5.8 parking spaces per 1,000 square feet of building area.
Four tenants each occupy more than 10% of the rentable square footage of
the building. A general practice physician occupies 2,604 square feet
(approximately 14.4%) of the rentable area of the building pursuant to a lease
that provides for monthly rent of $4,000. The lease expires on July 31, 2004. A
neurologist occupies 4,023 square feet (approximately 22.2%) of the rentable
area of the building pursuant to two leases that provide for monthly rent of
$6,000. One lease expires on February 28, 2001 and the other is month-to-month.
Tri-Therapy Rehab occupies 2,019 square feet (approximately 11.2%) of the
rentable area of the building pursuant to a lease that provides for monthly rent
of $3,000. The lease expires on February 28, 2002. NSR Medical occupies 4,322
square feet (approximately 23.9%) of the rentable area of the building pursuant
to two leases that provide for monthly rent of $5,000. The leases expire on June
30, 2001 and December 31, 2007.
Tustin--MOB II
The 14642 Newport Avenue building in Tustin, California is a four-story,
48,000 rentable square foot MOB, developed in 1985, that features a surgery
center with three operating rooms, a pharmacy, and an industrial clinic on the
first floor. Medical offices are located on all of the other floors.
Three tenants each occupy more than 10% of the rentable square footage in
the 14642 Newport Avenue Building. Pacific Health Corporation leases the surgery
center and occupies a total of 13,465 square feet (approximately 27.9%) of the
rentable area of the building pursuant to two leases that provide for monthly
rent of
13
$29,000. The leases expire on June 30, 2011 and March 31, 2003. In December
2000, Pacific Health Corporation renewed the surgery center lease for ten years
commencing July 1, 2001. Prospect Medical Systems, Inc. occupies 6,005 square
feet (approximately 12.5%) of the rentable area pursuant to a lease that
provides for monthly rent of $10,000. The leases expire on September 30, 2003.
Southern California Medical occupies 5,208 square feet (approximately 10.8%) of
the rentable area of the building pursuant to a lease that provides for monthly
rent of $9,000. The lease expires on December 31, 2004.
Regents Medical Center, La Jolla
The Regents Medical Center is a three-story, 65,000 rentable square foot
MOB situated on approximately 2.6 acres in the University Town Center area of
San Diego, near the University of California, San Diego. The building, which was
constructed in 1989, has ground level retail spaces, two upper floors of medical
offices, and subterranean and ground level parking that can accommodate a total
of 285 vehicles.
UCSD Orthomed, an affiliate of the University of California, occupies
12,189 square feet (approximately 18.7%) of the rentable area of the building
pursuant to a lease that provides for an aggregate monthly rent of $30,000. The
lease expires on January 31, 2002.
Pier One Retail Center
The Pier One Retail Center is a one-story, 9,100 rentable square foot
retail facility built by the Company in 1998 in Aliso Viejo, California. The
building is 100% leased to Pier One Imports, Inc. for ten years on a triple net
basis. The lease provides for monthly rent of $15,000.
Pacific Park
The Pacific Park building in Aliso Viejo, California is a 23,000 rentable
square foot MOB, developed by the Company in 1999. The building was completed in
December 1999 and opened in January 2000. A major not-for-profit medical
provider occupies 16,950 square feet (approximately 73.4%) of the rentable area
of the building pursuant to a lease that provides for monthly rent of $35,000.
The lease expires on December 31, 2009.
San Pedro Medical Plaza
The San Pedro Medical Plaza in San Pedro, California is a 58,000 rentable
square foot complex consisting of three MOBs. The buildings are located across
the street from the San Pedro Peninsula Hospital and are situated on 7.85 acres
incorporating a 383 space surface parking lot.
One tenant occupies more than 10% of the rentable square footage of the
building. Cor Healthcare Medical Associates occupies 6,470 square feet
(approximately 11.1%) of the rentable area pursuant to a lease that provides for
monthly rent of $9,000. The lease expires on March 31, 2004.
1095 Irvine Boulevard, Tustin
The 1095 Irvine Boulevard building in Tustin, California consists of
10,000 rentable square feet and was redeveloped in 1995 as a primary health care
center for physicians who are part of the St. Joseph Hospital of Orange health
care network. The property is leased to St. Joseph Hospital, Inc. under a net
lease with a 15-year term, which began in August 1995, and provides for annual
cost of living rent escalations limited to 3%. The lease provides for monthly
rent of $18,000 and expires on July 31, 2010.
14
Santa Clarita Valley Medical Center
The Santa Clarita Valley Medical Center in Valencia, California is a 43,000
square foot complex consisting of four one-story MOBs and one two-story MOB. The
buildings are located on the Henry Mayo Newhall Memorial Hospital Campus, the
only regional hospital in the area. The campus includes a 241-bed medical center
and another MOB. An adjacent parking lot can accommodate up to 435 vehicles. The
buildings are subject to a 60-year ground lease which includes payments of
$11,000 per month.
One tenant occupies more than 10% of the rentable square footage of the
buildings. A plastic surgeon occupies 4,428 square feet (approximately 10.4%) of
the rentable area of the buildings pursuant to a lease that provides for monthly
rent of $7,000. This space includes a surgery center. The lease expires on April
7, 2007.
Santa Clarita Valley Medical Center, Bldg F
Building F at the Santa Clarita Valley Medical Center is a two-story,
44,000 square foot MOB built by the Company in 1999. The building is located on
the Henry Mayo Newhall Memorial Hospital Campus and is adjacent to the other
five MOBs owned by the Company on the Hospital Campus. Building F is the premier
medical office building in the Santa Clarita Valley area. The building is
subject to a 60-year ground lease that includes payments of $11,000 per month.
Four tenants each occupy more than 10% of the rentable square footage of
the building. The Henry Mayo Newhall Memorial Hospital occupies 12,245 square
feet (approximately 27.9%) of the rentable area of the building pursuant to
three leases that provide for aggregate monthly rent of $26,000. All three
leases expire on May 31, 2009. Southern California Orthopedic Institute occupies
10,848 square feet (approximately 24.7%) of the rentable area of the building
pursuant to a lease that provides for monthly rent of $22,000. The lease expires
on February 28, 2009. An internist occupies 5,257 square feet (approximately
12.0%) of the rentable area of the building pursuant to a lease that provides
for monthly rent of $11,000. The lease expires on February 28, 2009. The Regents
of UCLA occupy 4,454 square feet (approximately 10.1%) of the rentable area of
the building pursuant to a lease that provides for monthly rent of $9,000. The
lease expires on March 28, 2005.
ALF and SNF Properties
Southern California Properties
------------------------------
Pacific Gardens Santa Monica
Pacific Gardens Santa Monica is a 92-unit, 61,000 square foot, four-story
ALF located in Santa Monica, California just two blocks from the beach. The
building contains a 3-story, subterranean parking garage for 112 vehicles. The
facility features a kitchen, 150-seat dining room, community room, TV lounges,
library, beauty parlor and guest laundry areas on each floor. The facility is in
close proximity to nearby shopping, restaurants and entertainment. Two major
hospitals, Santa Monica Hospital Medical Center and St. John's Hospital are
located within two miles of the property.
Tustin Hospital
The 14662 Newport Avenue building in Tustin, California is a single-story,
183-bed, 101,000 square foot hospital that was developed in two phases beginning
in 1969 and ending in 1974. The hospital includes a full service emergency room,
five operating rooms, an intensive care ward, administrative offices, conference
rooms, kitchen and cafeteria, pharmacy facilities, gift shop, x-ray facilities
and a basement service area. The hospital has
15
an emergency back-up generator with a 10,000-gallon underground fuel tank that
complies with current environmental requirements. The hospital was vacant when
the Company acquired the property on June 14, 1996. Starting May 1, 1997, the
hospital was 100% leased to Pacific Health Corporation. The lease provides for
triple net rental payments that commenced in January 1998. Rental payments for
the months of October through December 1997 were deferred until July 1998, at
which time the monthly rent was increased from $33,000 to approximately $35,000.
The lease expires June 30, 2002 and provides for three, five-year renewal
options. In July 1997, the Company granted Pacific Health Corporation an option,
which expires on July 1, 2001, to purchase the hospital during the first six
months of 2002 for $5.0 million.
The Arbors at Rancho Penasquitos
The Arbors at Rancho Penasquitos is a 91-unit, 52,000 square foot,
three-story ALF located in Rancho Penasquitos, California. The building was
originally built in 1988 as a Ramada Hotel. In 1998, the Company, in joint
venture with Parsons House, LLC, purchased the property and converted it into
The Arbors at Rancho Penasquitos. The facility opened in March 1999.
Each unit contains approximately 360 square feet and includes a small
kitchenette. The facility contains a kitchen, dining room, activity room and a
lounge. The 2.07-acre property also has a parking lot that can accommodate up to
114 cars.
Pacific Gardens Tarzana
Pacific Gardens Tarzana is a two-story, 80-unit, 44,117 square foot ALF
located in Tarzana, California. The facility features a formal dining room, two
living rooms, pharmaceutical services, daily maid service and personal laundry
service.
Lakeview Courtyards
Lakeview Courtyards is a to-be-constructed two story, 80-unit, 50,417
square foot ALF located in Yorba Linda, California. The project is a joint
venture with Prestige Care Inc., an experienced ALF operator. Construction began
on the facility in October 1999 and is expected to be complete in the third
quarter of 2001.
Arizona Properties
------------------
Maryland Gardens
Maryland Gardens is a 98-bed SNF located in Phoenix. The facility is
situated on approximately 1.84 acres and consists of a 60-bed SNF and a 38-unit
Alzheimers unit. On April 1, 2000, the Company terminated its lease with Stefan
Healthcare, Inc. to operate the facility and signed a management contract with
Campus Healthcare Group, a Phoenix, Arizona-based operator of SNFs. Because the
facility is now under a management contract, rather than leased to an operator,
all of the assets, liabilities, revenues and expenses of the facility have been
included in the consolidated financial results of the Company since April 1,
2000.
Maryland Gardens II
Maryland Gardens II is a 20-unit, 30,000 square foot apartment complex
acquired by the Company in May 1998. The building is located on a 1.0-acre lot
adjacent to the Maryland Gardens SNF. The building, named the
16
Winter Gardens Apartments, currently consists of residential tenants. The
property also includes a 1.0-acre vacant parcel of land and a duplex building.
Massachusetts Properties
------------------------
Hampden Properties
G&L Hampden, LLC, a wholly-owned subsidiary of the Company, acquired three
nursing home properties in Massachusetts on October 28, 1997 from Hampden
Nursing Homes, Inc. ("HNH"), a nonprofit corporation. Lenox Healthcare, Inc.
("Lenox") managed the three facilities from October 1998 through December 1999.
In November 1999, Lenox filed for bankruptcy protection. The Company immediately
moved to replace Lenox as the manager of the nursing homes. In January 2000, the
Company received the bankruptcy court's permission to replace Lenox as the
manager and a new management firm, a subsidiary of Roush & Associates ("Roush"),
was immediately retained. Since acquiring the properties from HNH, HNH has held
the licenses necessary to operate the facilities. In March 2000, the Company
successfully transferred the licenses to G&L Massachusetts, LLC, a subsidiary of
the Operating Partnership. G&L Massachusetts, LLC subsequently leased the three
facilities from the Company while Roush continued to manage them. The lease
requires monthly payments of $225,000 net of property taxes, insurance and costs
to maintain the facilities.
Riverdale Gardens
Riverdale Gardens Nursing Home, located in West Springfield,
Massachusetts, is a 168-bed nursing facility currently licensed for 84 skilled
care and 84 intermediate care beds with 16 private and 76 double occupancy
rooms. Constructed in various stages between 1957 and 1975, the property
consists of a single story 54,451 square foot building on approximately 3.85
acres as well as a 3,366 square foot single family residence on an adjacent
30,000 square foot lot.
Chestnut Hill
Chestnut Hill Nursing Home, located in East Longmeadow, Massachusetts, is
a 123 bed nursing home consisting of 82 skilled nursing and 41 intermediate care
beds with 15 private and 54 double occupancy rooms. The facility is a 49,198
square foot single story building constructed in 1984 on approximately 11.9
acres of land.
Mary Lyon
Mary Lyon Nursing Home, located in Hampden, Massachusetts, occupies a
28,940 square foot building situated on 3.7 acres and was originally constructed
in 1959 and renovated in 1986. The facility is licensed for 100 beds of which 40
are skilled nursing and 60 are intermediate care beds with ten private rooms, 39
double occupancy rooms and three quadruple occupancy rooms.
Nebraska Property
-----------------
Parsons House on Eagle Run
Parsons House on Eagle Run is an 96-unit ALF located in Omaha. The
facility was built through a joint venture between the Company and Parsons
House, LLC and was completed in October 1999. The facility features private
suites, dining room service, housekeeping and laundry services, transportation
and a wide range of activities
17
for its residents. The facility staff includes licensed nurses and caregivers
who provide assistance with medication, bathing and dressing twenty-four hours a
day.
Washington Property
-------------------
Pacific Care Center
Pacific Care Center is a 118-bed SNF located in Hoquiam. Prestige Care,
inc. a Vancouver, Washington-based owner and operator of ALFs, has managed this
facility since April 1, 2000. On December 1, 2000, after obtaining the license
to operate the facility, Prestige Care, Inc. signed a five-year lease with the
Company.
Leases
MOB Properties
As of January 31, 2001, the MOB Properties were approximately 95.7% leased.
New leases and extensions are normally granted for a minimum of three to five
years and provide for annual rent increases. Office tenants generally have gross
leases whereby rents may be adjusted for a tenant's proportionate share of any
increases in the cost of operating the building. However, the Company has
recently been leasing office space with provisions for the tenants to pay all
utility costs directly. Most retail tenants have net leases and pay their share
of all operating expenses including property taxes and insurance. The following
is a lease expiration table setting forth the number, square feet and associated
annual rent for those leases expiring in future years.
MOB Properties--Lease Expirations
Number of Approximate % of
Year of Lease Leases Total Rented Total Annual
Expiration Expiring (1) Square Feet (1) Annual Rent Rent
------------------- ------------ ---------------- ----------- ------------
2001............... 80 114,066 $ 3,314,000 14.9%
2002............... 65 104,143 3,094,000 13.9%
2003............... 59 96,572 2,879,000 13.0%
2004............... 46 91,700 2,611,000 11.8%
2005............... 54 94,541 2,918,000 13.1%
2006............... 22 59,288 1,843,000 8.3%
2007............... 16 43,276 1,580,000 7.1%
2008............... 8 79,004 1,453,000 6.6%
2009............... 11 58,449 1,490,000 6.7%
2010............... 6 30,132 774,000 3.5%
2011 or later...... 3 10,786 248,000 1.1%
--- ------- ----------- -----
Total............ 370 781,957 $22,204,000 100.0%
=== ======= =========== =====
_________________________
1) Does not include month-to-month leases or vacant space. There are 57 month-
to-month tenants who occupy approximately 55,000 square feet of space and
pay approximately $111,000 per month in rent.
The Company was successful in obtaining lease renewals, achieving a
weighted average renewal rate of approximately 85.2% on MOB leases that expired
during 2000. Although there can be no assurance that this renewal level will be
maintained, the Company believes this high renewal rate is due in part to the
tendency of medical practitioners to continue to practice in the same space over
a number of years. Also, the Company's tenants frequently invest large sums of
money in equipment and fixtures for their offices. Furthermore, relocating a
doctor's office can be disruptive to the patients who are familiar with the
doctor's office location.
18
The following table sets forth the scheduled annual rent increases for the
leases with respect to the MOB Properties in effect at January 31, 2001.
MOB Properties--Rent Increases
% of Total Rented
Scheduled Annual Rent Increases Square Feet(1) Square Feet(1)
------------------------------- -------------- -----------------
None (2)......................... 82,555 9.9%
Consumer Price Index............. 395,336 47.6%
2.00%............................ 5,266 0.6%
2.50%............................ 18,702 2.3%
2.75%............................ 3,251 0.4%
3.00%............................ 104,664 12.6%
3.20%............................ 1,201 0.2%
3.50%............................ 6,891 0.8%
4.00%............................ 67,949 8.2%
5.00%............................ 95,240 11.5%
6.00%............................ 47,604 5.7%
8.00%............................ 1,862 0.2%
------- -----
Total....................... 830,521 100.0%
======= =====
___________________________
1) Does not include 6,385 square feet, or 0.8% of the total rented square
feet, which is used as management space.
2) Approximately 74% of these leases are month-to-month.
The historical occupancy, rounded to the nearest tenth of one percent, of
the MOB Properties is shown in the following table:
MOB Properties--Historical Occupancy
MOB Property 2000 1999 1998 1997 1996
------------ ---- ---- ---- ---- ----
405 N. Bedford................................. 100.0% 96.4% 85.5% 97.4% 100.0%
415 N. Bedford(1).............................. 100.0 100.0 100.0 100.0 100.0
416 N. Bedford................................. 98.7 99.8 90.2 90.7 97.6
435 N. Bedford................................. 100.0 96.1 95.8 93.9 93.1
435 N. Roxbury................................. 92.9 91.9 96.7 93.5 93.6
436 N. Bedford................................. 100.0 98.3 100.0 100.0 98.4
Sherman Oaks Medical Plaza...................... 100.0 89.7 97.3 93.9 86.7
Irwindale Building.............................. 100.0 100.0 100.0 100.0 100.0
Coronado Plaza (2).............................. 93.8 91.1 89.2 N/A N/A
Holy Cross Medical Plaza........................ 92.6 91.0 88.8 92.2 93.1
St. Joseph's Medical Building................... 100.0 100.0 96.8 100.0 100.0
24355 Lyons Avenue (2).......................... 96.7 95.2 85.3 N/A N/A
14591 Newport Avenue, Medical Office I.......... 100.0 70.2 55.0 52.4 49.6
14642 Newport Avenue, Medical Office II......... 88.6 93.4 80.5 71.5 85.1
Pacific Park(4)................................. 100.0 73.8 N/A N/A N/A
Pier One Retail Center(3)....................... 100.0 100.0 100.0 N/A N/A
Regents Medical Center.......................... 93.7 100.0 100.0 100.0 100.0
San Pedro Medical Plaza (2)..................... 87.9 90.9 86.7 N/A N/A
1095 Irvine Boulevard........................... 100.0 100.0 100.0 100.0 100.0
Santa Clarita Valley Medical Center(2).......... 89.8 81.6 95.0 N/A N/A
Santa Clarita Valley Medical Center, Bldg F(4).. 92.0 88.6 62.3 N/A N/A
----- ----- ----- ----- -----
Weighted Average of MOB Properties................ 95.7% 93.1% 90.2% 93.0% 94.2%
----- ----- ----- ----- -----
________________________
1) Retail space.
2) Property acquired in 1998.
3) Property was built in 1998.
4) Property was built in 1999.
19
The following tables set forth the annualized base rent per square foot and
annualized base rent for the MOB Properties for the past five years.
MOB Properties--Annualized Average Base Rent Per Square Foot
MOB Property 2000 1999 1998 1997 1996
------------ ---- ---- ---- ---- ----
405 N. Bedford.................................. $42.24 $42.01 $40.86 $47.58 $44.51
415 N. Bedford(1)............................... 41.79 40.04 39.10 38.35 36.28
416 N. Bedford.................................. 41.29 38.27 37.72 38.05 36.89
435 N. Bedford.................................. 33.28 33.39 31.99 37.74 33.49
435 N. Roxbury.................................. 38.97 38.21 36.21 35.64 36.50
436 N. Bedford.................................. 44.32 43.53 41.12 42.08 39.84
Sherman Oaks Medical Plaza...................... 21.94 20.92 20.37 20.19 22.90
Irwindale Building.............................. 12.00 23.04 23.04 23.04 23.04
Coronado Plaza(2)............................... 29.78 28.50 27.01 N/A N/A
Holy Cross Medical Plaza........................ 27.57 26.66 28.44 28.04 28.07
St. Joseph's Medical Bldg....................... 26.23 27.11 26.82 27.19 27.03
24355 Lyons Avenue(2)........................... 20.79 20.22 20.39 N/A N/A
14591 Newport Avenue, Medical Office I.......... 16.37 15.80 15.13 13.39 14.66
14642 Newport Avenue, Medical Office II......... 21.27 21.19 16.54 13.19 12.34
Pacific Park(4)................................. 25.24 25.20 25.20 N/A N/A
Pier One Retail Center (3)...................... 20.00 20.00 20.00 N/A N/A
Regents Medical Center.......................... 27.03 26.27 24.77 24.18 24.93
San Pedro Medical Plaza(2)...................... 22.51 22.93 23.65 N/A N/A
1095 Irvine Boulevard........................... 21.18 20.73 20.30 19.87 19.46
Santa Clarita Valley Medical Center(2).......... 20.25 20.46 20.72 N/A N/A
Santa Clarita Valley Medical Center, Bldg F(4).. 24.90 24.62 24.96 N/A N/A
------ ------ ------ ------ ------
Weighted Average of all MOB Properties............ $28.13 $28.29 $27.76 $29.94 $29.81
------ ------ ------ ------ ------
_________________________
1) Retail space.
2) Property acquired in 1998
3) Property was built in 1998.
4) Property was built in 1999.
20
MOB Properties--Annualized Base Rent
(Amounts in Thousands)
MOB Property 2000 1999 1998 1997 1996
------------ ---- ---- ---- ---- ----
405 N. Bedford................................... $ 1,773 $ 1,630 $ 1,554 $ 2,125 $ 2,183
415 N. Bedford(1)................................ 239 229 224 219 217
416 N. Bedford................................... 1,638 1,540 1,380 1,399 1,468
435 N. Bedford................................... 1,716 1,673 1,683 1,630 1,718
435 N. Roxbury................................... 1,480 1,491 1,487 1,412 1,450
436 N. Bedford................................... 3,275 3,150 3,030 3,101 3,090
Sherman Oaks Medical Plaza....................... 1,480 1,275 1,364 1,291 1,378
Irwindale Building............................... 571 1,097 1,097 1,097 1,097
Coronado Plaza................................... 1,105 1,035 983 N/A N/A
Holy Cross Medical Plaza......................... 1,832 1,751 1,822 1,864 1,896
St. Joseph's Medical Bldg........................ 676 699 667 698 694
24355 Lyons Avenue(2)............................ 981 943 851 N/A N/A
14591 Newport Avenue, Medical Office I........... 296 200 151 127 120
14642 Newport Avenue, Medical Office II.......... 909 954 636 452 504
Pacific Park(4).................................. 583 427 427 N/A N/A
Pier One Retail Center (3)....................... 182 182 182 N/A N/A
Regents Medical Center........................... 1,654 1,716 1,618 1,570 1,555
San Pedro Medical Plaza(2)....................... 1,155 1,232 1,199 N/A N/A
1095 Irvine Boulevard............................ 214 210 206 201 197
Santa Clarita Valley Medical Center(2)........... 775 704 834 N/A N/A
Santa Clarita Valley Medical Center, Bldg F(4)... 1,006 958 668 N/A N/A
------- ------- ------- ------- -------
Total of all MOB Properties........................ $23,540 $23,097 $22,063 $17,186 $17,567
------- ------- ------- ------- -------
____________________________
1) Retail space.
2) Property acquired in 1998
3) Property built in 1998.
4) Property built in 1999.
21
Senior Care Loans
Lending Operations
As of December 31, 2000, the Company had ten loans outstanding that total
approximately $16.7 million before reserves of $5.5 million. The ten loans are
described in the following paragraphs.
In October 1999, the Company provided $1.65 million of bridge financing for
a $9.0 million apartment complex located in Tulsa, Oklahoma. The apartment
complex was purchased by G&L Realty Partners, LLC ("G&L Partners"), a company
controlled by Joe Carroll, a former Company employee, in which the Company has
no equity interest. G&L Partners sold the apartment complex in December 1999
through a tax-exempt bond offering to NVHF Park Chase, LLC ("NVHF"), a
not-for-profit company. As part of its loan repayment, the Company received
approximately $380,000 in cash. For the remaining balance, the Company received
$1.26 million in tax-exempt, subordinated B-bonds from the offering. The
tax-exempt bonds are due in December 2029 and bear interest at 8.75% per annum.
In addition, the Company received a 10-year, 10%, $500,000 unsecured note from
NVHF Affiliates, LLC, the parent company of NVHF. The Company is also the
guarantor on a $500,000 letter of credit in favor of NVHF Affiliates, LLC.
On June 17, 1996, the Company funded a $6.1 million loan for the
acquisition of a SNF in Hyattsville, Maryland (the "St. Thomas More facility")
by Heritage Care, Inc. ("Heritage Care"), a non-profit corporation. The Company
received a first deed of trust on that facility and Carroll Manor, Inc.
("Carroll Manor"), the seller, received a second deed of trust which secured its
$500,000 loan to Heritage Care. In addition to the $6.1 million, the Company
made additional advances in 1997, totaling $2.6 million, to enable Heritage Care
to meet its payroll and other current expenses necessary to remain in operation
and thereby protect the value of the Company's security interest in the St.
Thomas More facility. On March 31, 1999, the Company refinanced the $6.1 million
loan, the $2.6 million in additional advances and all accrued interest into a
$7.3 million,10-year, 12% promissory note secured by a first deed of trust on
the St. Thomas More facility and a $2.7 million, 10-year, 12% unsecured
promissory note. In September 1999, the Company purchased the $500,000 second
deed of trust from Carroll Manor for $503,000, including all unpaid interest and
late fees. In December 1999, the Company consolidated the $7.3 million first
deed of trust and the $500,000 second deed of trust into an $7.8 million
promissory note with the same terms and conditions as the previous $7.3 million
promissory note. Principal and interest payments on the $7.8 million and the
$2.7 million promissory notes due monthly total $135,000. The facility is
currently being operated by Future Care, an experienced Maryland operator of
nursing homes.
In December 1997, the Company funded $4.6 million into an escrow, to be
loaned to Aspen Paso Robles, Inc. ("Aspen") at the close of escrow. This loan
was to be secured by (i) a 59-bed nursing and rehabilitation center in Chico,
California; (ii) a 38-bed SNF in Paso Robles, California; and (iii) a 57-bed
intermediate care center in Beaumont, California. The loan closed on February
25, 1998 although certain funds were held in escrow pending the close of the
real estate in which the Chico and Beaumont facilities were located. The
purchase of the Chico real estate subsequently closed. The funds for the
Beaumont real estate remained in escrow until October 1998 at which time the
Company secured the return of those funds and applied them to pay down the loan
balance to $3.6 million. The borrower subsequently filed a Chapter 11 proceeding
under the U.S. Bankruptcy Code. As of December 31, 1999, the remaining $3.6
million balance of the loan was in default and the two facilities securing the
loan were closed. In March 2000, the Company obtained title to the two SNFs from
the bankruptcy court. Because these two SNFs were not operating, the Company
valued these two facilities at $1.2 million and an additional provision for
doubtful notes receivable of $1.7 million was recorded. The Company is currently
pursuing legal action against the borrower and other parties involved in the
transaction in order to recover the remaining outstanding balance.
22
In addition to the notes on the Tulsa, St. Thomas More and Aspen
facilities, the Company had five other loans outstanding at December 31, 2000,
with an aggregate face value of $1.97 million, excluding approximately $0.1
million of additional accrued, unpaid interest. The following is a summary of
the five other loans as of December 31, 2000:
. $675,000 note secured by a first deed of trust due June 30, 2001,
interest payable monthly at a rate of 10% per annum.
. $150,000 note secured by second deed of trust, interest payable
semiannually at a rate of 10.0% per annum. This note is currently in
default.
. $44,000 unsecured promissory note due June 30, 1999, interest payable
at 10.0% per annum. This amount is currently in default.
. $104,000 unsecured promissory note due July 1, 2000, interest payable
at 10.0% per annum. This note is currently in default.
. $1,000,000 unsecured promissory note due September 1, 2000, interest
payable at 10.0% per annum. This note is currently in default.
As of December 31, 2000, the Company had reserves of $5.5 million for
doubtful notes receivable. Management believes that $5.5 million is appropriate
in relation to the status of the loans in the Company's portfolio as of March
24, 2001.
GLN
GLN was formed with Nomura Asset Capital Corp. ("Nomura") for the purpose
of making short-term loans to third parties to purchase senior care facilities.
Due to market conditions and other financial constraints, it does not appear
likely that the Company or Nomura will use GLN to make future loans. As of
December 31, 2000, GLN had one loan outstanding. In May 1997, GLN funded a
secured loan of approximately $1.5 million to a limited partnership created to
acquire a recreational vehicle ("RV") park in Florida for approximately $1.2
million. This loan bears interest at a rate of approximately 9.0% per annum and
matured on May 1, 1999. The loan provided for monthly payments of interest only.
As of December 31, 2000, the borrower was in default on the mortgage payments.
Management is currently in the process of negotiating its exit strategy with the
borrower with respect to this loan.
Insurance
The Company carries comprehensive liability, fire, flood, extended coverage
and rental loss insurance with respect to the MOB Properties and ALF and SNF
Properties. There are certain types of losses that may either be uninsurable or
not economically insurable; moreover, there can be no assurance that policies
maintained by the Company will be adequate in the event of a loss. The Company
carries earthquake and flood insurance for coverage of losses up to $35 million
on the MOB Properties and the ALF and SNF Properties located in California and
Arizona, which amount represents approximately 25% of the net book value of
these properties. This coverage is subject to a 10% deductible up to the amount
of insured loss. The ALF and SNF Properties located in Washington and
Massachusetts do not carry earthquake or flood insurance. Thirty-two of the 45
properties directly or indirectly owned by the Company are located in Southern
California, which has a history of seismic activity, including the 1994
Northridge earthquake that damaged the Holy Cross Medical Plaza property. Two
ALF and SNF Properties owned by the Company are located in Phoenix, Arizona, in
an area with a history of flood activity. Should an uninsured loss occur, the
Company could lose its investment in, and anticipated earnings and cash flow
from, a property.
23
ITEM 3. LEGAL PROCEEDINGS
There is no material pending litigation to which the Company or its
consolidated or unconsolidated subsidiaries is a defendant or to which any of
their properties is subject other than routine litigation arising in the
ordinary course of business, most, if not all, of which is expected to be
covered by insurance, 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 is 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.
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 judgment is still pending.
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 under
a lease for a MOB in Irwindale, California. Due to this settlement, the Company
will record lease termination income of approximately $2.7 million in the first
quarter of 2001.
Two shareholder class actions have been filed against the Company and its
directors arising out of the proposal by Daniel M. Gottlieb and Steven D.
Lebowitz, the Chief Executive Officer and President, respectively, of the
Company, to acquire all of the outstanding shares of the Company's common stock
not currently owned by them (the "Pending Proposal"). The first suit, Lukoff v.
G&L Realty Corp. et al., case number BC 241251, was filed in the Superior Court
of the State of California, County of Los Angeles, on December 4, 2000. The
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.
Both actions assert claims for breach of fiduciary duty and seek, among other
24
things, compensatory damages and to enjoin the transaction. Defendants have not
yet answered or otherwise responded to the complaints. On February 6, 2001,
pursuant to a stipulation between the parties, the Lukoff action was stayed for
120 days or until the Company's board of directors takes action with respect to
the Pending Proposal, whichever occurs earlier.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to the stockholders of the Company during the
quarter ended December 31, 2000.
25
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock is listed on the New York Stock Exchange under
the symbol GLR. It has been the Company's policy to declare quarterly
distributions to holders of the Company's Common Stock so as to comply with
applicable sections of the Code governing REITs. Operating Partnership units
("Units") and shares of Common Stock receive equal distributions. Distributions
are declared and paid at the discretion of the Company's Board of Directors and
generally depend on the Company's cash flow, its financial condition, capital
requirements, the distribution requirements under the REIT provisions of the
Code and such other factors as the directors of the Company deem relevant.
The table below sets forth the high and low sales prices of the Company's
stock for each full quarterly period from January 1, 1999 to March 30, 2001 as
reported by the New York Stock Exchange. The table also includes, on a per share
basis, the quarterly cash distribution declared and paid to holders of the
Company's Common Stock and Units for each of the last two fiscal years and the
current year to date.
High Low Distribution
------------------------------------
2001 First quarter (to March 30, 2001)..... $ 10.75 $ 8.88 0.125
2000 Fourth quarter........................ 9.50 7.56 0.125
Third quarter......................... 7.94 6.63 0.125
Second quarter........................ 9.00 7.25 0.125
First quarter......................... 9.56 8.63 0.125
1999 Fourth quarter........................ 9.75 7.50 0.125
Third quarter......................... 12.13 8.81 0.125
Second quarter........................ 12.94 10.06 0.39
First quarter......................... 15.19 11.88 0.39
______________________
The Company also paid monthly dividends to holders of the Company's Series
A and Series B Preferred Stock on the fifteenth day of each month. Dividends are
paid monthly at the rate of $2.56 and $2.45 per annum on shares of the Company's
Series A and Series B Preferred Stock, respectively. Distributions on the
Company's Series A and Series B Preferred Stock are senior to all classes of the
Company's Common Stock.
At various times during the year ending December 31, 2000, the Company
repurchased a total of 301,800 shares of the Company's Common Stock at an
average price of approximately $9.22 per share. During 2000, the Company also
purchased 7,700 shares of its Series A Preferred Stock at an average price of
$15.03 and 4,600 shares of its Series B Preferred Stock at an average price of
$14.68. The approximate number of holders of record of the shares of Common
Stock was 94 as of December 31, 2000. This number does not represent the total
number of beneficial holders of Common Stock.
On November 30, 2000, the Company received a proposal from Daniel M.
Gottlieb and Steven D. Lebowitz, the Chief Executive Officer and the President,
respectively, of the Company, to acquire all the outstanding shares of Common
Stock of the Company not held by them for a cash price of $10.00 per share. On
February 16, 2001, the Company received a revised proposal from Messrs. Gottlieb
and Lebowitz under which they would acquire all the outstanding shares of Common
Stock of the Company not held by them for a cash price of $11.00 per share. The
proposal contemplates a merger of an entity newly formed by Messrs. Gottlieb and
Lebowitz with and into the Company. The Series A and Series B Preferred Stock
would remain outstanding following the consummation of the transaction.
26
ITEM 6. CONSOLIDATED SELECTED FINANCIAL DATA
The following table sets forth consolidated selected financial and
operating information for the Company for each of the years ended December 31,
2000, 1999, 1998, 1997 and 1996. The following information should be read in
conjunction with all of the financial statements and notes thereto included in
this Form 10-K. This data also should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
included elsewhere in this Form 10-K. The consolidated selected financial and
operating data as of December 31, 2000, 1999, 1998, 1997 and 1996 and for each
of the years ended December 31, 2000, 1999, 1998, 1997 and 1996 have been
derived from audited financial statements.
Year ended December 31,
--------------------------------------------------------
2000 1999 1998 1997 1996
-------- -------- -------- -------- --------
(In thousands, except per share amounts)
Operating Data:
--------------
Revenues:
Rental.......................................... $25,889 $27,928 $24,639 $20,307 $15,796
Patient revenues................................ 17,820 --- --- --- ---
Tenant reimbursements........................... 1,495 1,275 781 707 728
Parking......................................... 1,273 1,148 1,501 1,439 1,251
Interest and loan fees.......................... 2,532 2,797 4,517 4,322 6,712
Net gain on sale of assets...................... 1,263 --- --- --- ---
Other income.................................... 573 398 254 274 549
------- ------- ------- ------- -------
Total revenues............................... 50,845 33,546 31,692 27,049 25,036
------- ------- ------- ------- -------
Expenses:
Property operations............................. 7,854 7,569 6,171 6,280 5,696
Skilled nursing operations...................... 16,548 --- --- --- ---
Depreciation and amortization................... 6,015 5,690 4,597 3,570 2,773
Interest........................................ 13,802 12,393 8,683 9,088 9,322
General and administrative...................... 2,892 3,196 2,554 2,044 1,787
Provision for doubtful accounts, notes and
bonds receivable............................. 2,000 5,603 --- --- 2,288
Impairment of long-lived assets................. --- 6,400 --- --- ---
Loss on disposition of real estate.............. --- --- --- --- 4,874
------- ------- ------- ------- -------
Total expenses............................... 49,399 37,248 27,608 20,982 24,452
------- ------- ------- ------- -------
Income (loss) from operations before
minority interests, equity in (loss)
earnings of unconsolidated affiliates
and extraordinary (losses) gains.............. 1,446 (3,702) 4,084 6,067 584
Equity in (loss) earnings of unconsolidated
affiliates.................................... (417) (269) 80 1,195 ---
Minority interest in consolidated affiliates.... (182) (175) (225) (156) (129)
Minority interest in Operating Partnership...... 460 2,202 404 (545) (65)
------- ------- ------- ------- -------
Income (loss) before extraordinary gains
(losses)...................................... 1,307 (1,944) 4,343 6,561 390
Extraordinary (losses) gains (net of minority
interest)..................................... (158) (171) --- --- 9,311
------- ------- ------- ------- -------
Net income (loss)............................... $ 1,149 $(2,115) $ 4,343 $ 6,561 $ 9,701
======= ======= ======= ======= =======
Per share data:
Basic:
Before extraordinary (losses) gains......... $ (2.46) $ (2.44) $ (0.70) $ $0.91 $ 0.10
Extraordinary (losses) gains................ (0.07) (0.04) --- --- 2.29
------- ------- ------- ------- -------
Net (loss) income........................... $ (2.53) $ (2.48) $ (0.70) $ 0.91 $ 2.39
======= ======= ======= ======= =======
Fully Diluted:
Before extraordinary (losses) gains......... $ (2.46) $ (2.44) $ (0.70) $ 0.89 $ 0.09
Extraordinary (losses) gains................ (0.07) (0.04) --- --- 2.24
------- ------- ------- ------- -------
Net (loss) income........................... $ (2.53) $ (2.48) $ (0.70) $ 0.89 $ 2.33
======= ======= ======= ======= =======
27
At or for the Year ended December 31,
--------------------------------------------------------
2000 1999 1998 1997 1996
-------- -------- -------- -------- --------
(In thousands, except per share amounts)
Cash Flow Data:
--------------
Net cash provided by operating activities... $ 7,490 $ 8,708 $ 12,666 $ 9,045 $ 5,726
Net cash used in investing activities....... (373) (12,330) (51,094) (49,534) (23,413)
Net cash provided by financing activities... (11,871) 9,788 26,198 53,833 17,283
Balance Sheet Data:
------------------
Land, buildings and improvements, net....... $168,280 $180,367 $186,751 $139,082 $ 93,231
Mortgage loans and bonds receivable, net.... 11,244 16,026 12,101 14,098 34,576
Total investments........................... 179,524 196,393 198,852 153,180 127,807
Total assets................................ 205,466 232,396 219,499 189,380 135,996
Total debt.................................. 158,942 177,371 134,880 95,172 109,025
Total stockholders' equity.................. 39,891 51,385 79,584 88,924 22,448
Other Data:
----------
Ratio of earnings to fixed charges and
preferred dividends (1).................. 0.71x 0.53x 0.82x 1.36x 1.59x
Ratio of funds from operations to fixed
charges and preferred dividends (2)...... 0.91x 0.70x 1.05x 1.77x 1.88x
Ratio of total debt to total market
capitalization (3)....................... 65.3% 63.8% 50.6% 35.9% 63.8%
Number of properties........................ 40 45 36 25 15
______________________________
1) For purposes of these computations, earnings consist of net income plus
fixed charges. Fixed charges and preferred dividends consist of interest
expense, capitalized interest, amortization of deferred financing costs and
preferred dividends paid to preferred stockholders during the period. The
deficit of earnings to fixed charges and preferred dividends for the years
ended December 31, 2000, 1999 and 1998 was $6,015,000, $9,327,000 and
$3,038,000, respectively.
2) For purposes of these computations, ratio of funds from operations to fixed
charges consists of FFO as defined in note (1) on page 39 plus fixed
charges and preferred dividends paid to preferred stock holders during the
period. Fixed charges and preferred dividends consist of interest expense,
capitalized interest, amortization of deferred financing costs and
preferred dividends paid to preferred stockholders during the period. The
deficit of funds from operations to fixed charges for the years ended
December 31, 2000 and 1999 was $1,786,000 and $5,966,000, respectively.
3) Total market capitalization as of the dates presented is long-term debt
plus the aggregate market value of the Company's Common Stock and Units not
owned by the Company, assuming one Unit is equivalent in value to one share
of Common Stock plus the liquidation value of the Preferred Stock
outstanding.
28
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the
Consolidated Selected Financial Data and the Company's Consolidated Financial
Statements and Notes thereto included elsewhere in this Form 10-K.
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 Annual Report on Form 10-K.
Acquisition of all Outstanding Shares of Common Stock
On November 30, 2000, the Company received a proposal from Daniel M.
Gottlieb and Steven D. Lebowitz, the Chief Executive Officer and the President,
respectively, of the Company, to acquire all the outstanding shares of Common
Stock of the Company not held by them for a cash price of $10.00 per share. The
proposal contemplates a merger of an entity newly formed by Messrs. Gottlieb and
Lebowitz with and into the Company. The Series A and Series B Preferred Stock
would remain outstanding following the consummation of the transaction. The
proposal was conditioned upon, among other things, approval of the Board of
Directors and stockholders of the Company, the negotiation of mutually
satisfactory definitive agreements, and the receipt by Messrs. Gottlieb and
Lebowitz of satisfactory financing to complete the transaction. Upon receipt of
the proposal, the Board of Directors of the Company formed a special committee
comprised of S. Craig Tompkins, as chairman, Dr. Richard Lesher, Charles Reilly
and Leslie Michelson to consider the proposal. The special committee was
empowered to evaluate and, if appropriate, negotiate with respect to the
proposal and to make a recommendation to the Board of Directors with respect to
any proposed transaction.
On February 16, 2001, the Company received a revised proposal from Messrs.
Gottlieb and Lebowitz under which they would acquire all the outstanding shares
of Common Stock of the Company not held by them for a cash price of $11.00 per
share. The revised proposal was submitted to the special committee of the
Company's Board of Directors for review.
Results of Operations
Comparison of the Year Ended December 31, 2000 Versus the Year Ended December
31, 1999
Total revenues increased by $17.3 million, or 52%, from $33.5 million for
the year ended December 31, 1999, to $50.8 million in 2000. Patient revenues
relating to the skilled nursing facilities in which the Company currently owns
the license to operate accounted for $17.8 million of this increase. On March
15, 2000, the Company obtained licenses from the Commonwealth of Massachusetts
to operate the three SNFs comprising 391 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 for the period from
March 15, 2000 through December 31, 2000 are reflected in the consolidated
financial statements of the Company. In addition, the Company holds the license
to operate its 98-bed SNF located in Phoenix, Arizona. On April 1, 2000, the
Company terminated its lease with the previous
29
manager and entered into a management agreement with a new manager. As a result,
all of the assets, liabilities, revenues and expenses of this SNF for the period
of April 1, 2000 through December 31, 2000 are also reflected in the
consolidated financial statements of the Company. The consolidation of the
operating revenues related to the three SNFs in Massachusetts accounted for a
$15.8 million increase in patient revenues while the SNF in Arizona accounted
for an additional $2.0 million increase.
Rents, tenant reimbursements and parking revenues decreased by $1.7
million, or 6%, from a combined total of $30.4 million for the year ended
December 31, 1999, to $28.7 million in 2000. The loss of rental revenue from the
SNFs in which the Company now owns the licenses to operate accounted for $2.3
million of this decrease. Previously, the Company collected monthly rent for
these facilities in the form of lease payments from the prior operator.
Excluding the loss of these lease payments, rents, tenant reimbursements and
parking revenues actually increased by $0.6 million in the year 2000 compared to
the same period in 1999. Additional revenues from recently completed
construction projects in Valencia and Aliso Viejo accounted for $1.2 million of
this increase while the January 2000 acquisition of an 80-unit, 44,117 square
foot ALF located in Tarzana, California accounted for an additional $1.0
million. Also, increased occupancy at the Company's ALF located in Santa Monica,
California resulted in an increase of $0.4 million in rental revenues. These
increases were offset by a decrease of $2.0 million in rental revenue related to
the foreclosure of the Company's six MOBs located in New Jersey as discussed in
Footnote 12 of the Notes to the Consolidated Financial Statements.
Interest and loan fee income decreased by $0.3 million, or 11%, from $2.8
million for the year ended December 31, 1999, to $2.5 million for the same
period in 2000. This decrease was due to a $0.6 million decrease in loan fees
related to the March 31, 1999 long-term refinancing of the Company's note
receivable secured by the SNF in Hyattsville, Maryland. This decrease was offset
by an increase of $0.3 million in interest income related to the financing by
the Company in December 1999 of an apartment complex located in Tulsa, Oklahoma.
The Company recognized a net gain on the sale of assets in the amount of
$1.3 million during the year ended December 31, 2000. The January 2000 sale 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 $0.1 million on the sale of the Company's 50% interest in Valley
Convalescent, LLC, an unconsolidated affiliate.
Total expenses increased by $12.1 million, or 33%, from $37.2 million for
the year ended December 31, 1999, to $49.3 million in 2000. A portion of the
increase in expenses was due to an increase of $0.3 million in the Company's
allowance for doubtful accounts and notes receivable. In addition, a $6.4
million decrease resulted from the impairment of the Company's six MOBs located
in New Jersey in the third quarter of 1999. The consolidation of the operating
revenues and expenses of the three Hampden SNFs from March 15, 2000 through
December 31, 2000 and the Arizona SNF from April 1, 2000 through December 31,
2000 as discussed above accounted for $16.5 million of this increase in total
expenses.
Property operating expenses increased by $0.3 million, or 4%, from $7.6
million for the year ended December 31, 1999, to $7.9 million for the same
period in 2000. Development projects completed by the Company during 1999 and
2000 accounted for $0.2 million of this increase while the acquisition of an ALF
in Tarzana, California accounted for an additional $0.2 million. Additional
legal fees related to the Hampden license transfer accounted for an additional
$0.1 million. These increases were offset by a $0.2 million decrease in
management and overhead expenses associated with a wholly-owned subsidiary
formed by the Company in November 1998 for the purpose of making loans to obtain
healthcare facilities. This subsidiary ceased operations in April 1999.
Depreciation and amortization increased $0.3 million, or 5%, from $5.7
million for the year ended December 31, 1999, to $6.0 million for same period in
2000. This increase was attributable to the January 2000 acquisition of a 44,117
square foot ALF located in Tarzana, California as well as new property
developments in Valencia and Aliso Viejo, which were placed into service during
1999 and 2000.
Interest expense increased $1.4 million, or 11%, from $12.4 million for the
year ended December 31, 1999 to $13.8 million in 2000. This increase was mainly
due to interest incurred on net new borrowings of approximately $51.0 million
made by the Company in 1999 and 2000, as well as the assumption of $7.5 million
in debt associated with the acquisition of the ALF in Tarzana, California. The
$51.0 million in new borrowings consisted of four notes
30
totaling approximately $22.0 million secured by eleven MOBs, two notes totaling
approximately $18.0 million secured by four SNFs and one note in the amount of
approximately $11.0 million secured by an ALF.
General and administrative expenses decreased $0.3 million, or 9%, from
$3.2 million for the year ended December 31, 1999, to $2.9 million for the same
period in 2000. This decrease was attributed to lower payroll costs as well as
lower costs associated with the Company's annual report and other SEC filings.
Equity in loss of unconsolidated affiliates decreased $0.1 million for the
year ended December 31, 2000 compared to the same period in 1999. This decrease
was primarily the result of start-up losses associated with the Company's 50%
investment in G&L Penasquitos, LLC and the Company's 50% investment in G&L
Parsons House on Eagle Run, Inc. In March 1999, The Arbors at Rancho
Penasquitos, an ALF owned by the Company through G&L Penasquitos, LLC, commenced
operations. The facility has been in a lease-up phase since opening in March
1999 and therefore has been producing a net loss. Eagle Run, an ALF owned by the
Company through G&L Parsons House on Eagle Run, LLC, commenced operations in
November 1999 and also produced a net loss in 2000. Occupancy rates and net
operating income 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 the first quarter of 2000, the Company recorded a 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 $3.2 million from a net loss of $2.1 million for the
twelve months ended December 31, 1999 to net income of $1.1 million in 2000.
This increase was primarily due to a $6.4 million decrease in the impairment of
long-lived assets and a $1.3 million increase in net gains on sale of assets.
These increases were offset by a $1.4 million increase in interest expense, a
$1.7 million decrease in rents, tenant reimbursements and parking revenues, a
$0.3 million increase in depreciation and amortization expense, a $0.3 million
increase in operating expenses and a $0.3 million decrease in interest and loan
fee income.
Comparison of the Year Ended December 31, 1999 Versus the Year Ended December
31, 1998
Total revenues increased by $1.8 million, or 6%, from $31.7 million for the
year ended December 31, 1998, to $33.5 million in 1999. Rents, tenant
reimbursements and parking revenues increased an aggregate $3.5 million, or 13%,
from a combined total of $26.9 million for the year ended December 31, 1998, to
$30.4 million in 1999. The purchase of a 49,000 square foot MOB in Valencia,
California and a 40,000 square foot office and retail complex in Coronado,
California in December 1998 accounted for $2.4 million of this increase. The
purchase of two senior care facilities located in Santa Monica, California and
Hoquiam, Washington during June and August 1998, respectively, accounted for an
additional $0.9 million increase. In addition, recently completed construction
projects in Valencia and Aliso Viejo accounted for $0.8 million of this
increase. These increases were offset by a decrease of $0.7 million in rental
revenue due to the vacancy of the Company's six MOBs located in New Jersey.
Interest, loan fees and related revenues derived from loans secured by ALF and
SNF Properties decreased by $1.7 million, or 38%, from $4.5 million for the year
ended December 31, 1998, to $2.8 million for the same period in 1999. This
decrease was partially due to the repayment during 1998 of seven outstanding
loans, representing a total decrease of $0.5 million in interest and loan fee
income. An additional $0.9 million of this decrease was due to the loss of
interest, during 1999, on non-performing loans for which the Company had
previously reserved approximately $2.8 million in December 1998. Furthermore,
interest earned on cash on hand decreased during 1999 by approximately $0.3
million as the Company had an average of approximately $11.0 million in cash on
hand during 1998 and only $8.0 million during 1999. Other income increased by
$0.1 million, or 33%, from $0.3 million in 1998, to $0.4 million in 1999. This
increase was due to the gain on sale of a vacant parcel of land located in
Tustin, California by the Company of $0.2 million.
Total expenses increased by $9.6 million, or 35%, from $27.6 million for
the year increase was due to an impairment loss recognized during 1999 on the
Company's six MOBs located in New Jersey. Property operating expenses increased
by $1.4 million, or 23%, from
31
$6.2 million for the year ended December 31, 1998, to $7.6 million for the same
period in 1999. Property acquisitions and development projects completed by the
Company during 1998 and 1999 accounted for $1.0 million of this increase.
Management and overhead expenses associated with a wholly owned subsidiary
formed by the Company in November 1998 for the purpose of making loans to Senior
Care Facilities accounted for $0.2 million of this increase. The joint venture
ceased operations in April 1999. The remaining increase was due to legal and
administrative costs relating to the six MOBs located in New Jersey.
Depreciation and amortization increased $1.1 million, or 24%, from $4.6 million
for the year ended December 31, 1998, to $5.7 million for same period in 1999.
This increase was attributable to property acquisitions made by the Company
during 1998 and new building developments placed into service during 1999.
Interest expense increased $3.7 million, or 43%, from $8.7 million for the year
ended December 31, 1998 to $12.4 million in 1999. This increase was mainly due
to interest incurred on net new borrowings of approximately $45.9 million made
by the Company during 1999. General and administrative expenses increased $0.6
million, or 23%, from $2.6 million for the year ended December 31, 1998, to $3.2
million for the same period in 1999. This increase was related to the addition
of new administrative personnel, greater external accounting expenses, an
increase in costs associated with failed acquisitions and an increase in costs
associated with the Company's annual report and other SEC filings. These
increases were offset by a $3.6 million decrease in provisions for doubtful
accounts, notes and bonds receivable as the Company increased its bad debt
reserves by $2.0 million for the year ended December 31, 1999, and $5.6 million
for the same period in 1998.
Equity in earnings (loss) of unconsolidated affiliates decreased $0.4
million, or 400%, from $0.1 million for the year ended December 31, 1998 to
$(0.3) million for the same period in 1999. This decrease was primarily the
result of start-up losses associated with the Company's 75% investment in G&L
Penasquitos, Inc. and the Company's 50% investment in G&L Parsons on Eagle Run,
Inc. In March 1999, The Arbors at Rancho Penasquitos, an assisted living
facility operated by G&L Penasquitos, Inc., commenced operations. The facility
has been in a lease-up phase since its opening in March 1999 and therefore
produced a net operating loss. Eagle Run commenced operations in November 1999
and also produced a net loss for 1999. Occupancy rates at both facilities are
increasing on a monthly basis and are expected to stabilize during 2000, at
which time both facilities are expected to produce income for the Company.
Net income decreased $6.5 million, or 148%, from $4.4 million for the
twelve months ended December 31, 1998 to $(2.1) million in 1999. This decrease
was primarily due to the $6.4 million impairment of the Company's six MOBs in
New Jersey, the $3.7 million increase in interest expense, the $2.5 million
increase in property operating expenses and depreciation as well as the $1.7
million decrease in interest and loan fee income. These amounts were offset by a
$3.4 million increase in rents, tenant reimbursements and parking revenues and a
$3.6 million decrease in provisions for doubtful accounts, notes and bonds
receivable.
Liquidity and Capital Resources
The Company's goal is to create wealth through growth in cash flow from its
real estate investments. The Company believes that this goal is being realized
through its management expertise in the areas of acquisition, development,
financing, leasing and strategic management of the MOB Properties and ALF and
SNF Properties. The Company seeks to maximize cash flow from its existing
properties and make new investments that are accretive to cash flow over the
long-term. The Company's use of leverage is viewed as a means to grow its asset
base without diluting shareholder value.
As of December 31, 2000, the Company's direct investment in net real estate
assets totaled approximately $168.3 million, $4.9 million in joint ventures and
$11.2 million invested in notes receivable. Total debt outstanding at year-end
totaled $158.9 million.
In January 2000, the Company, in a joint venture with ASL Tarzana
Wedgewood, LLC, purchased an 80-unit, 44,117 square foot ALF located in Tarzana,
California for $10.3 million. The Company contributed $2.5 million to the joint
venture for an 85% equity interest in the newly formed company. However, the
Company's ownership interest will be reduced to 65% after the Company's initial
capital contribution, plus preferred returns which are equal to 12% per annum of
the Company's capital contribution, is repaid by the joint venture. ASL Tarzana,
Inc., an affiliate of ASL Tarzana Wedgewood, LLC, operates the facility. As part
of the acquisition, the Company
32
assumed three loans totaling $7.5 million. The loans, which are all due in 2006,
consist of a $5.75 million note secured by the ALF at an interest rate of 8.3%,
a $0.95 million note collateralized by a second deed of trust on the ALF bearing
interest at 8.5% and a $0.8 million unsecured note which bears interest at 7.5%.
During 2000, the Company contributed $1.2 million in construction costs
towards the development of a two-story, 80-unit, 92-bed ALF in Yorba Linda,
California. The project, owned by Lakeview Associates, LLC, in which the Company
has a 50% interest, is expected to be completed in 2001.
In January 2000, the Company sold a 33,000 square foot MOB located in Aliso
Viejo, California to Hoag Memorial Hospital Presbyterian for $8.3 million. The
Company used the proceeds to repay a $5.5 million loan that was secured by the
MOB and recognized a gain on sale of $1.4 million.
In March 2000, the Company sold its 50% interest in Valley Convalescent, a
joint venture that owned a 118-bed SNF located in El Centro, California, to its
joint venture partner. The transaction included a sale price of $500,000,
consisting of $200,000 in cash and a $300,000 mortgage note. The $300,000
mortgage note was consolidated with the $2.8 million existing mortgage that the
Company already had on the facility. The $3.1 million mortgage note was repaid
on November 21, 2000.
In November 1999, Lenox Healthcare, the manager of the Company's three SNFs
located in Hampden, Massachusetts, filed for bankruptcy. In December 1999, the
Company reserved $2.0 million related to delinquent rent and operating expense
reimbursements from these facilities. In January 2000, the bankruptcy court
approved the cancellation of the Lenox Healthcare management contract and the
Company selected a new manager to operate these facilities. On March 15, 2000,
the Company obtained licenses from the Commonwealth of Massachusetts to operate
these three SNFs. Previously, the Company rented these three facilities to the
prior license holder for monthly rent of $225,000. At the time of the license
transfers, the prior license holder owed delinquent rent of approximately $0.6
million to the Company. As a result, the Company reserved $0.6 million against
this unpaid rent receivable. Since the prior license holder no longer operates
these facilities, the Company believes its ability to collect these unpaid rent
obligations is doubtful and that the addition to the reserve is appropriate.
During the first quarter of 2000, the Company also established a reserve of
$1.7 million to reflect the impairment of a delinquent note receivable. Since
February 1998, the Company has held a $3.9 million note receivable secured by a
first mortgage on two SNFs located in Chico and Paso Robles, California. In
December 1998, the Company reserved $1.0 million with respect to the note
because of the borrower's financial instability. In April 1999, the borrower
filed for bankruptcy. However, the Company believed that it would recover the
remaining $2.9 million through foreclosure of the SNFs and litigation against
the various parties involved in the transaction. In March 2000, the Company
obtained title to the two SNFs from the bankruptcy court. Because these two SNFs
were not operating, the Company valued these two facilities at $1.2 million and
an additional reserve of $1.7 million was established. Although the Company is
currently pursuing legal action against the borrower and other parties involved
in the transaction in order to recover the remaining outstanding balance, the
Company believes that the outcome of these pursuits is not certain and the
addition to the reserve is appropriate.
At various times during the year ending December 31, 2000, the Company
repurchased a total of 301,800 shares of the Company's Common Stock at an
average price of approximately $9.22 per share. In addition, the Company
repurchased a total of 7,700 shares of its Series A Preferred Stock at an
average price of $15.03 per share and total of 4,600 shares of its Series B
Preferred Stock at an average price of $14.68 per share.
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. The Company's external sources of capital
consist of various secured loans. The Company's ability to expand its MOB and
ALF and SNF Property operations requires continued access to capital to fund new
investments.
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
33
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.
Historical Cash Flows
The Company's net cash from operating activities decreased $1.2 million, or
14%, from $8.7 million for the year ended December 31, 1999 to $7.5 million for
the same period in 2000. The decrease is due primarily to a $6.4 million
decrease in the impairment of long-lived assets, a $2.1 million increase in
tenant rent and reimbursements receivable and a $1.3 million increase in net
gains on sale of assets. These were offset by a $3.2 million increase in net
income, a $1.7 million decrease in minority interests, a $2.8 million increase
in accounts payable and other liabilities and a $0.9 million decrease in accrued
interest receivable.
Net cash used in investing activities decreased $11.9 million, or 97%, from
$12.3 million for the year ended December 31, 1999 to $0.4 million for the same
period in 2000. The decrease was primarily due to an $8.8 million increase in
the sale of real estate assets, a $5.3 million decrease in construction-in-
progress expenditures, a $0.9 million increase in distributions from
unconsolidated affiliates, a $1.0 million decrease in pre-acquisition costs, a
$3.2 million decrease in investments in mortgage loans and notes receivable, a
$0.7 million decrease in contributions to unconsolidated affiliates, and a $3.5
million increase in principal repayments on notes receivable These were offset
by a $10.4 million increase in purchases of real estate assets as well as a $1.8
million decrease in dipositions of assets available for sale.
Cash flows from financing activities decreased $21.7 million from cash
provided of $9.8 million for the twelve months ended December 31, 1999, to cash
used of $11.9 million for the same period in 2000. The decrease was due
primarily to a decrease in notes payable proceeds of $62.2 million as well as a
$0.8 million decrease in minority interest equity contribution. These were
offset by a decrease in repayments of notes payable of $16.7 million, a decrease
in purchases of the Company's Common Stock of $11.3 million, a decrease in
restricted cash of $8.7 million, a $1.0 million decrease in deferred loan costs
and a $3.5 million decrease in distributions.
Debt Structure
As of December 31, 2000, the Company had twenty-one loans totaling $158.9
million. The terms of these loans are described below.
In August 1995, the Company borrowed $30.0 million from Nomura for ten
years at a fixed rate of 7.89%. As of December 31, 2000, the outstanding balance
under this loan was approximately $27.7 million, requiring monthly principal and
interest payments of approximately $229,000 (25-year amortization), and will
have a balance of $24.7 million on August 11, 2005, when the note is due.
Pursuant to the loan agreement, the Company has the option to prepay this loan
at any time upon the payment of a premium which, when added to the remaining
principal amount of the note, will be sufficient to purchase non-callable
obligations of the U.S. government sufficient to provide for the scheduled
payments remaining under the note. No prepayment premium is required during the
90-day period prior to the note's due date. The properties located at 405 North
Bedford, 415 North Bedford, 416 North Bedford and 435 North Bedford have been
pledged as security for this note.
During 1996, the Company borrowed $35.0 million from Nomura for ten years
at a fixed rate of 8.492%. This note had an outstanding balance of approximately
$33.1 million as of December 31, 2000, requires monthly principal and interest
payments of approximately $282,000 (25-year amortization), and will have a
balance of $29.4 million on August 11, 2006, when the note is due. Pursuant to
this loan agreement, the Company has the option to prepay this loan at any time
after August 30, 1999 upon the payment of a premium which, when added to the
remaining principal amount of the note, will be sufficient to purchase
non-callable obligations of the U.S. government sufficient to provide for the
scheduled payments remaining under this note. The Sherman Oaks Medical Plaza,
Regents Medical Center, Cigna HealthCare Building and the 436 North Bedford
Drive MOB have been pledged as security for this note.
34
In August 1997, in connection with the purchase of six New Jersey primary
care centers by one of its subsidiaries, GL/PHP, LLC ("GL/PHP"), the Operating
Partnership obtained a new $2 Million loan from PHP Healthcare Corporation
("PHP"). The note by its terms is 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 PHP's subsidiary, Pinnacle Health
Enterprises, LLC ("Pinnacle"), under its lease with GL/PHP. The loan is
unsecured and requires interest-only payments quarterly at the end of October,
January, April and July at the rate of 8.5% a year. The full $2.0 million is due
on July 31, 2007, but may be prepaid at any time prior to maturity without
penalty. Since PHP filed a bankruptcy petition in December 1998, the Company has
made no payments on this note.
During the fourth quarter of 1999, the Company obtained a $13.92 million
loan from GMAC Commercial Mortgage Corp. ("GMAC") secured by the Hampden
Properties and repaid the existing $6.0 million Nomura loan. The loan bears
interest at LIBOR plus 2.75% and requires monthly principal and interest
payments of approximately $122,000. The loan, which matures on October 1, 2002
is also guaranteed by the Company. As of December 31, 2000 the outstanding
balance on this loan was $13.7 million.
On April 22, 1998, 435 North Roxbury Drive, Ltd. (the "Roxbury
Partnership"), of which the Operating Partnership is the sole general partner
with an ownership interest of 61.75%, refinanced the 435 North Roxbury Drive
property. The Roxbury Partnership refinanced the property with a new $7.83
million loan from Tokai Bank of California ("Tokai"). The Roxbury Partnership
repaid the remaining balance on the old loan of $7.5 million with the new loan,
which bears interest at a fixed rate of 7.05% and is due on April 1, 2008. This
loan, which had an outstanding balance of $7.5 million as of December 31, 2000,
requires monthly principal and interest payments of approximately $56,000
(25-year amortization), and will have a balance at maturity of $6.2 million. The
435 North Roxbury Drive property has been pledged as security for this loan.
On April 22, 1998, the Company borrowed an additional $12.7 million from
Tokai at a fixed rate of 7.05%. On June 1, 1998, the Company began making
monthly principal and interest payments on these loans of approximately $91,000
(25-year amortization). These notes, which will have a balance at maturity of
$10.0 million, are due on April 1, 2008. As of December 31, 2000, the balance on
these notes was $12.2 million. The Holy Cross Medical Plaza, the St. Joseph's
Medical Office Building and the Tustin Medical Plaza have been pledged as
security for these loans.
On June 30, 1998, the Company, through GLH Pacific Gardens, LLC, acquired
Pacific Gardens, a 92-unit senior care facility in Santa Monica, California for
$11.2 million. Of this amount, GLH Pacific Gardens, LLC borrowed $8.5 million
from GMAC at an interest rate of 30-day LIBOR plus 2.35%. The note required
monthly interest-only payments. In August 1999, the Company refinanced this
mortgage with an $11.4 million 35-year HUD loan at an interest rate of 8%. The
loan requires monthly principal and interest payments of approximately $77,000.
As of December 31, 2000, the unpaid balance on this loan was $11.3 million.
On August 6, 1998, the Company acquired a 110-bed skilled nursing facility
in Hoquiam, Washington for $3.3 million. Of this amount, the Company borrowed
$2.5 million from GMAC at a fixed rate of 7.49%. On October 1, 1998, the Company
began making monthly principal and interest payments of approximately $18,000
(25-year amortization). This note, which will have a balance at maturity of $2.0
million, is due on September 1, 2008. The Pacific Care Center has been pledged
as security for this note. As of December 31, 2000, the unpaid balance on this
note was $2.4 million.
On December 22, 1998, the Company acquired a 49,000 square foot MOB in
Valencia, California for $7.4 million. Of this amount, the Company borrowed $5.2
million from The Life Insurance Co. of Virginia at a fixed rate of 6.75%. On
February 1, 1999, the Company began making monthly principal and interest
payments of approximately $38,000 (25-year amortization). This note, which will
have a balance at maturity of $0.9 million, is due on January 1, 2019. The Lyons
Avenue Medical Building has been pledged as security for this note. As of
December 31, 2000, the unpaid balance on this note was $5.0 million.
On December 31, 1998, the Company acquired a 40,000 square foot office and
retail complex in Coronado, California for $9.5 million. Of this amount, the
Company borrowed $7.5 million from GMAC at a fixed rate of 6.90%. On February
10, 1999, the Company began making monthly principal and interest payments of
35
approximately $50,000 (25-year amortization). This note, which will have a
balance at maturity of $6.4 million, is due on December 11, 2008. The Coronado
Plaza has been pledged as security for this note. The unpaid balance on this
note was $7.3 million as of December 31, 2000.
On June 30, 1999, the Company obtained a $1.44 million loan from American
United Life Insurance Company. The loan, which is secured by the Pier One Retail
Center in Aliso Viejo, California, bears interest at a rate of 7.375% and is due
on July 1, 2009. On July 1, 1999, the Company began making monthly principal and
interest payments of approximately $11,000. As of December 31, 2000, the unpaid
balance on this note was $1.4 million.
On July 2, 1999, the Company obtained a $10 million long-term loan secured
by its six building portfolio of MOBs located at the Henry Mayo Newhall Hospital
campus in Valencia, California. The Company used $5.0 million of the total
proceeds to repay a short-term loan secured by these buildings while an
additional $2.5 million was escrowed by the lender until the Company meets
certain occupancy thresholds at the collateralized buildings. In April 2000, the
lender released to the Company $1.25 million of these escrow funds. The
remaining $1.25 milion was released to the Company in July 2000. The loan, which
is due on July 1, 2009, bears an interest rate of 6.85% and had an unpaid
balance of $9.7 million as of December 31, 2000.
On July 26, 1999, the Company obtained a $7.5 million short-term loan
secured by three of its properties located in Tustin, California, at an interest
rate of prime plus 0.75%. The loan is also guaranteed by the Company. On August
1, 1999, the Company began making monthly principal and interest payments of
approximately $64,000. A $5.0 million principal payment was due on January 21,
2001 and the remaining balance is due on January 21, 2002. The loan had an
unpaid balance of $7.4 million as of December 31, 2000. On February 21, 2001,
the Company repaid $5.0 million of the outstanding loan balance using the
proceeds from a new $5.1 million loan secured by two of its properties located
in Tustin, California. The new loan bears interest at prime plus 1.00% and is
due on February 21, 2002.
On October 22, 1999, the Company obtained a $4.2 million loan secured by a
newly-constructed 23,000 square foot MOB in Aliso Viejo, California. The loan is
also guaranteed by the Company. On October 1, 1999, the Company sold a 50%
tenants-in-common interest in this building to Triad Partners/SCP, LLC. The
purchase price included the assumption of 50% of the mortgage debt. The loan
bears an interest rate of LIBOR plus 3.40% and is due on November 1, 2002. As of
December 31, 2000, the Company's 50% portion of the unpaid balance of the loan
was $2.1 million.
On December 21, 1999, the Company obtained a loan in the amount of $8.5
million from GMAC secured by its first deed of trust on a SNF located in
Hyattsville, Maryland. The loan is also guaranteed by the Company. The loan,
which bears interest at LIBOR plus 2.75%, is due on July 1, 2001. On February 1,
2000, the Company began making monthly principal and interest payments of
approximately $71,000. As of December 31, 2000 the unpaid balance on this loan
was $8.4 million.
In January 2000, as part of its acquisition of a $10.3 million, 80-unit ALF
in Tarzana, California, the Company assumed one loan totaling $5.75 million and
obtained two other loans totaling $1.75 million. The Company assumed a $5.75
million note secured by the ALF at an interest rate of 8.3%. The note, which is
due in 2006, had an outstanding balance of $5.7 million as of December 31, 2000.
The Company also obtained a $0.95 million note collateralized by a second deed
of trust on the ALF bearing interest at 8.5%. As of December 31, 2000, the
unpaid balance of this note was $0.94 million. Finally, the Company obtained a
$0.8 million unsecured note which bears interest at a rate of 7.5% and is due in
2006. As of December 31, 2000, the unpaid balance on this note was $0.8 million.
In July 2000, the Company obtained a $2.0 million line of credit secured by
the accounts receivable at the Company's three SNFs located in Massachusetts.
The Company received net proceeds of $1.8 million from the line of credit. The
line of credit is guaranteed by the Company. The line of credit bears interest
at prime plus 2.0% and is due on July 13, 2003.
36
Capital Commitments
As of March 30, 2001, the Company had no commitments to acquire, either
directly of indirectly, any MOBs, ALFs or SNFs. However, the Company is
constantly searching for acquisitions that will be accretive to the Company's
stockholders. 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.
Distributions
The Company declared a quarterly distribution payable to holders of the
Company's Common Stock for each of the four quarters of 2000 in the amount of
$0.125 per common share. These distributions were paid on April 15, 2000, July
15, 2000, October 15, 2000 and January 15, 2001 to stockholders of record on
March 31, June 30, September 30 and December 31, 2000, respectively. The Company
also paid monthly dividends to holders of the Company's Series A and Series B
Preferred stock on the fifteenth day of each month at the rate of $2.56 and
$2.45 per share per annum, respectively. The Company distributed dividends of
$1.5 million to holders of the Company's Common Stock during the year 2000 while
the Company's FFO was a negative $1.8 million for the same period. However,
excluding the $2.3 million increase in the provision for doubtful accounts and
notes receivable, the Company's FFO was a positive $0.5 million for 2000.
Financing Policies
The Company's ratio of debt to total market capitalization was 65.3% based
upon the closing price of the Common Stock at December 31, 2000. Total market
capitalization is based on the long-term debt of the Operating Partnership, plus
(i) the aggregate market value of the Company's Common Stock and Operating
Partnership Units not owned by the Company assuming one Unit is equivalent in
value to one share of Common Stock, and (ii) the aggregate liquidation value of
the Series A Preferred Stock and the Series B Preferred Stock.
To the extent that the Board of Directors of the Company decides to seek
additional funding, the Company may raise such capital using various means,
including retention of internally generated funds (subject to the distribution
requirements in the Code with respect to REITs), existing working capital and
possibly the issuance of additional debt (secured or unsecured) or any
combination of the above. It is anticipated that borrowings will continue to be
made through the Operating Partnership or other entities, although the Company
may also incur indebtedness that may be re-borrowed by the Operating Partnership
on the same terms and conditions as are applicable to the Company's borrowing of
such funds. Except as required pursuant to existing financing agreements, the
Company has not established any limit on the number or amount of mortgages or
unsecured debt that may be placed on any single property or on its portfolio as
a whole.
The Board of Directors of the Company also has the authority to cause the
Operating Partnership to issue additional Units in any manner (and subject to
certain limitations in the Partnership Agreement on such terms and for such
consideration) as it deems appropriate and may also decide to seek financing for
the purposes of managing the Company's balance sheet by adjusting the Company's
existing capitalization. The refinancing of the Company's balance sheet may
entail the issuance and/or retirement of debt, equity or hybrid securities.
Inflation
The majority of the Company's leases are long-term leases designed to
mitigate the adverse effect of inflation. Approximately 50% of the Company's
leases contain provisions that call for annual rent increases equal to the
increase in the Consumer Price Index and the majority of the remaining leases
allow for specific annual rent
37
increases. Furthermore, many of the Company's leases require tenants to pay a
pro rata share of building operating expenses, including real estate taxes,
insurance and common area maintenance. The effect of such provisions is to
reduce the Company's exposure to increases in costs and operating expenses
resulting from inflation.
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
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 December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition in Financial
Statements." SAB 101 provides guidance on applying generally accepted accounting
principles to revenue recognition issues in financial statements. The Company
was required to adopt SAB 101 in the fourth quarter of 2000. The Company's
adoption of SAB 101 did not have a material impact on the Company's financial
position or results of operations.
In March 2000, the Financial Accounting Standards Board issued FASB
Interpretation No. 44 ("FIN 44"), "Accounting for Certain Transaction Involving
Stock Compensation." The Company was required to adopt FIN 44 effective July 1,
2000 with respect to certain provisions applicable to new awards, exchanges of
awards in a business combination, modifications to outstanding awards and
changes in grantee status that occur on or after that date. FIN 44 addresses
practice issues related to the application of Accounting Practice Bulletin
Opinion No. 25, "Accounting for Stock Issued to Employees." The Company's
adoption of FIN 44 did not have a material impact on its financial position or
results of operations.
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 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 the Selected Financial Data and
Consolidated Financial Statements and Notes thereto included elsewhere in this
Form 10-K and the additional data presented below. The table on the following
page presents an analysis of FFO and additional data for each of the four
quarters and the year ended December 31, 2000 for the Operating Partnership:
38
G&L REALTY CORP.
FUNDS FROM OPERATIONS
FOR THE FOUR QUARTERS AND YEAR ENDED DECEMBER 31, 2000
2000 Fiscal Quarter Year
-------------------------------------------- --------
1/st/ 2/nd/ 3/rd/ 4/th/ 2000
------- ------- ------- ------- --------
(In thousands, except per share data)
Funds from Operations (1):
-------------------------
Net (loss) income $ (250) $ 512 $ 412 $ 475 $ 1,149
Minority interest in Operating Partnership (533) (83) 78 78 (460)
------- ------- ------- ------- --------
Operating Partnership (loss) income (783) 429 490 553 689
Depreciation of real estate assets 1,342 1,352 1,285 1,273 5,252
------- ------- ------- ------- --------
Amortization of deferred lease costs 79 73 65 66 283
Net gain on sale of assets (1,263) --- --- --- (1,263)
Extraordinary loss on early retirement
of long-term debt 158 --- --- --- 158
Depreciation of real estate assets
from unconsolidated affiliates 149 107 70 76 402
Adjustment for minority interest in
consolidated affiliates (53) (14) (36) (40) (143)
Dividends paid on preferred stock (1,793) (1,790) (1,791) (1,790) (7,164)
------- ------- ------- ------- -------
Operating Partnership funds from operations (2,164) 157 83 138 (1,786)
Minority interest in Operating Partnership 448 (33) (18) (29) 368
------- ------- ------- ------- --------
Funds (used in) from operations $(1,716) $ 124 $ 65 $ 109 $ (1,418)
======= ======= ======= ======= ========
Dividends declared $ 0.125 $ 0.125 $ 0.125 $ 0.125 $ 0.50
Dividends paid on Common Stock $ 300 $ 292 $ 292 $ 292 $ 1,176
Pay-out ratio N/A 235.8% 446.1% 268.3% N/A
Weighted average shares/unit outstanding:
----------------------------------------
Basic 3,137 2,962 2,959 2,959 3,004
Fully Diluted 3,139 2,962 2,959 2,959 3,004
Additional Data
---------------
Cash Flows:
----------
Operating activities 2,086 1,921 1,792 1,691 7,490
Investing activities (1,063) (847) (893) 2,430 (373)
Financing activities (5,880) (2,632) (1,770) (1,589) (11,871)
Capital Expenditures:
--------------------
Building improvements 262 458 86 458 1,264
Tenant improvements 613 489 110 297 1,509
Furniture, fixtures & equipment 26 67 215 164 472
Leasing commissions 39 30 28 61 158
Depreciation and Amortization:
-----------------------------
Depreciation of real estate assets 1,342 1,352 1,285 1,273 5,252
Depreciation of non-real estate assets 112 108 122 103 445
Amortization of deferred lease costs 79 73 65 66 283
Amortization of deferred licensing costs -- 9 13 13 35
Amortization of capitalized financing costs 136 153 160 165 614
Rents:
-----
Straight-line rent 6,790 6,260 6,275 6,564 25,889
Billed rent 6,861 6,281 6,333 6,605 26,080
_______________________
1) FFO represents net income (computed in accordance with GAAP, consistently
applied), 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 is computed in accordance with the
definition adopted by NAREIT. FFO should not be considered as an
alternative to net income or any other indicator developed in compliance
with GAAP, including measures of liquidity such as cash flows from
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 dates of January 1, 1996 and January 1, 2000,
respectively.
39
ITEM 7A. 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 tables below provide information as of December 31, 2000 and
1999 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 December 31, 2000 and 1999.
PRINCIPAL MATURING IN: Fair Market
------------------------------------------------------------------ Value
December
2001 2002 2003 2004 2005 Thereafter Total 31, 2000
---- ---- ---- ---- ---- ---------- ----- --------
(in thousands)
Liabilities:
Mortgage debt:
Fixed rate $ 1,976 $ 2,145 $2,307 $2,475 $9,253 $ 96,086 $114,242 $105,337
Average interest rate 7.73% 7.73% 7.73% 7.73% 7.73% 7.73% 7.73%
Variable rate 8,818 22,947 88 95 103 10,852 42,903 42,903
Average interest rate 9.32% 9.32% 9.32% 9.32% 9.32% 9.32% 9.32%
Line of credit:
Variable rate 1,797 1,797 1,797
Average interest rate 11.50% 11.50%
------- ------- ------ ------ ------ -------- -------- --------
$12,591 $25,092 $2,395 $2,570 $9,356 $106,938 $158,942 $150,037
======= ======= ====== ====== ====== ======== ======== ========
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 December 31, 2000, a 1% increase in the LIBOR
rate would decrease future earnings by $429,000, future cash flow would not be
affected. A 1% decrease in the LIBOR rate would increase future earnings by
$429,000, 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.
PRINCIPAL MATURING IN: Fair Market
------------------------------------------------------------------ Value
December
2000 2001 2002 2003 2004 Thereafter Total 31, 1999
---- ---- ---- ---- ---- ---------- ----- --------
(in thousands)
Liabilities:
Mortgage debt:
Fixed rate $ 2,385 $ 2,602 $ 2,813 $ 3,049 $ 3,279 $121,201 $135,329 $130,738
Average interest rate 7.87% 7.87% 7.87% 7.87% 7.87% 7.87% 7.87%
Variable rate 283 14,327 22,832 37,442 37,442
Average interest rate 8.79% 8.79% 8.79% 8.79%
Line of credit:
Variable rate 4,600 4,600 4,600
Average interest rate 8.08% 8.08%
------- ------- ------- ------- ------- -------- -------- --------
$ 7,268 $16,929 $25,645 $ 3,049 $ 3,279 $121,201 $177,371 $172,780
======= ======= ======= ======= ======= ======== ======== ========
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 December 31, 1999, a 1% increase in the LIBOR
rate would decrease future earnings by $420,000 and future cash flow by
$101,000. A 1% decrease in the LIBOR rate would increase future earnings by
$420,000 and future cash flow by $101,000. A 1% change in the LIBOR rate would
not have a material impact on the fair value of the Company's debt.
40
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA
See Index to Consolidated Financial Statements and Schedules on Page 42.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item will be provided under the captions
"Election of Directors," "Executive Officers" and "Section 16 Reporting" of the
Company's definitive proxy statement for its 2001 annual meeting of stockholders
to be filed on or before April 30, 2001 and is incorporated herein by reference
or will be provided as an amendment to this Form 10-K.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item will be provided under the caption
of "Executive Compensation" of the Company's definitive proxy statement for its
2001 annual meeting of stockholders to be filed on or before April 30, 2001 and
is incorporated herein by reference or will be provided as an amendment to this
Form 10-K; provided, however, that neither the Report of the Compensation
Committee on executive compensation nor the Stock Performance Graph set forth
therein shall be incorporated by reference herein, in any of the Company's past
or future filings under the Securities Act of 1933, as amended, or the
Securities Act of 1934, as amended, except to the extent the Company
specifically incorporates such report or Stock Performance Graph by reference
therein and should not be otherwise deemed filed under either such Act.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item will be provided under the captions
"Principal Stockholders," "Information Regarding Nominees and Directors" and
"Executive Officers" of the Company's definitive proxy statement for its 2001
annual meeting of stockholders to be filed on or before April 30, 2001 and is
incorporated herein by reference or will be provided as an amendment to this
Form 10-K.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item will be provided under the caption
"Certain Transactions" of the Company's definitive proxy statement for its 2001
annual meeting of stockholders to be filed on or before April 30, 2001 and is
incorporated herein by reference or will be provided as an amendment to this
Form 10-K.
41
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) Index to Consolidated Financial Statements and Schedules:
Page
Reference
Form 10-K
---------
1. Consolidated Financial Statements:
Independent Auditors' Report F-1
Consolidated Balance Sheets as of December 31, 2000 and 1999 F-2
Consolidated Statements of Operations for the Years Ended
December 31, 2000, 1999 and 1998 F-3
Consolidated Statement of Stockholders' Equity
for the Years Ended December 31, 2000, 1999 and 1998 F-4
Consolidated Statements of Cash Flows for the Years Ended
December 31, 2000, 1999 and 1998 F-5 to 7
Notes to Consolidated Financial Statements F-8 to 37
2. Consolidated Financial Statement Schedules:
All schedules have been omitted because the required information
is not present in amounts sufficient to require submission of the
schedule or because the required information is included
elsewhere in the Consolidated Financial Statements or the Notes
thereto.
(b) Reports on Form 8-K
A report on Form 8-K dated December 1, 2000 was filed with the
Securities and Exchange Commission for the purpose of announcing the
receipt of a proposal from Daniel M. Gottlieb and Steven D. Lebowitz,
the Chief Executive Officer and the President, respectively, of the
Company, to acquire its publicly-held Common Stock.
42
(c) Exhibits
Exhibit No. Note Description
----------- ---- --------------------------------------------------
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.
10.9.2 (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.
10.12.2 (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.
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.
43
(c) Exhibits - (continued from previous page)
Exhibit No. Note Description
----------- ---- --------------------------------------------------
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.
10.42 (8) Option Agreement, dated February 28, 1997, by and
among G&L Realty Partnership, L.P., GLN Capital
Co., LLC and PHP Healthcare Corporation
10.44 (9) Loan and Security Agreement by GLN Capital Co.,
LLC, a Delaware limited liability Company, and G&L
Realty Partnership, L.P., a Delaware limited
partnership, dated as of June 1, 1997.
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.
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.
10.53 (11) Purchase and Sale Agreement, dated October 1,
1997, by and between Hampden Nursing Homes, Inc.
and G&L Senior Care, LLC.
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.
44
(c) Exhibits - (continued from previous page)
Exhibit No. Note Description
----------- ---- --------------------------------------------------
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 List of Subsidiaries
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.
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.
c) Management contract or compensatory plan or arrangement.
45
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders
G&L Realty Corp.:
We have audited the accompanying consolidated balance sheets of G&L
Realty Corp. and subsidiaries (the Company) as of December 31, 2000 and 1999,
and the related consolidated statements of operations, stockholders' equity, and
cash flows for each of the three years in the period ended December 31, 2000.
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly,
in all material respects, the financial position of G&L Realty Corp. and
subsidiaries as of December 31, 2000 and 1999, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2000 in conformity with accounting principles generally accepted in
the United States of America.
/s/ Deloitte & Touche LLP
Los Angeles, California
March 26, 2001
F-1
G&L REALTY CORP.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
December 31,
2000 1999
-------------------------
ASSETS
------
Rental properties (Notes 3, 18 and 20):
Land $ 28,599 $ 33,388
Building and improvements, net 139,510 146,821
Projects under development 171 158
---------- ----------
Total rental properties 168,280 180,367
Cash and cash equivalents 2,791 7,545
Restricted cash 4,624 8,763
Tenant rent and reimbursements receivable, net (Note 4) 6,669 2,478
Unbilled rent receivable, net (Note 5) 2,412 2,346
Other receivables, net (Note 6) 46 171
Mortgage loans and bonds receivable, net (Note 7) 11,244 16,026
Investments in unconsolidated affiliates (Note 8) 4,851 9,736
Deferred charges and other assets, net (Note 10) 4,549 4,964
---------- ----------
TOTAL ASSETS $ 205,466 $ 232,396
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
LIABILITIES:
Notes payable (Note 11) $ 158,942 $ 177,371
Accounts payable and other liabilities 6,099 3,279
Distributions payable 433 452
Tenant security deposits 1,367 1,329
---------- ----------
Total liabilities 166,841 182,431
Commitments and Contingencies (Note 12)
Minority interest in consolidated affiliates (1,266) (862)
Minority interest in Operating Partnership --- 772
STOCKHOLDERS' EQUITY (Notes 13 and 14):
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 December 31, 2000 and 1,495,000 shares
issued and outstanding as of December 31, 1999, respectively 15 15
. Series B Preferred - 1,380,000 shares issued and 1,376,000 shares
outstanding as of December 31, 2000 and 1,380,000 shares issued and
outstanding as of December 31, 1999, respectively 14 14
Common shares - $.01 par value, 50,000,000 shares authorized,
2,334,000 and 2,636,000 shares issued and outstanding as of
December 31, 2000 and 1999, respectively 23 26
Additional paid-in capital 72,441 75,412
Distributions in excess of net income (32,602) (25,412)
---------- ----------
Total stockholders' equity 39,891 50,055
---------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 205,466 $ 232,396
========== ==========
See accompanying notes to Consolidated Financial Statements
F-2
G&L REALTY CORP.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
Year Ended December 31,
2000 1999 1998
---------------------------------------------
REVENUES:
Rent (Notes 5 and 15) $ 25,889 $ 27,928 $ 24,639
Patient revenues 17,820 --- ---
Tenant reimbursements 1,495 1,275 781
Parking 1,273 1,148 1,501
Interest and loan fees 2,532 2,797 4,517
Net gain on sale of assets 1,263 --- ---
Other income 573 398 254
--------- --------- ---------
Total revenues 50,845 33,546 31,692
--------- --------- ---------
EXPENSES:
Property operations 7,854 7,569 6,171
Skilled nursing operations 16,548 --- ---
Depreciation and amortization 6,015 5,690 4,597
Interest 13,802 12,393 8,683
General and administrative 2,892 3,196 2,554
Provision for doubtful accounts, notes and
bonds receivable (Notes 4 and 7) 2,288 2,000 5,603
Impairment of long-lived assets (Note 3) --- 6,400 ---
--------- --------- ---------
Total expenses 49,399 37,248 27,608
--------- --------- ---------
Income (loss) from operations before minority interests,
equity in (loss) earnings of unconsolidated
affiliates and extraordinary loss 1,446 (3,702) 4,084
Equity in (loss) earnings of unconsolidated affiliates (417) (269) 80
Minority interest in consolidated affiliates (182) (175) (225)
Minority interest in Operating Partnership 460 2,202 404
--------- --------- ---------
Income (loss) before extraordinary loss 1,307 (1,944) 4,343
Extraordinary loss on early retirement of long-term debt
(net of minority interest) (Note 17) (158) (171) ---
--------- --------- ---------
Net income (loss) 1,149 (2,115) 4,343
Dividends on preferred stock (7,164) (7,212) (7,212)
--------- --------- ---------
Net loss available to common stockholders $ (6,015) $ (9,327) $ (2,869)
========= ========= =========
Per share data (Note 13):
Basic:
(Loss) income before extraordinary loss $ (2.46) $ (2.44) $ (0.70)
Extraordinary loss (0.07) (0.04) ---
--------- --------- ---------
Net (loss) income $ (2.53) $ (2.48) $ (0.70)
========= ========= =========
Fully diluted:
(Loss) income before extraordinary loss $ (2.46) $ (2.44) $ (0.70)
Extraordinary loss (0.07) (0.04) ---
--------- --------- ---------
Net (loss) income $ (2.53) $ (2.48) $ (0.70)
========= ========= =========
Weighted average outstanding shares:
Basic 2,379 3,760 4,092
Fully diluted 2,379 3,770 4,135
See accompanying notes to Consolidated Financial Statements
F-3
G&L REALTY CORP.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(In thousands)
Preferred Stock Preferred Stock Additional Distributions Total
Series A Series B Common Stock paid - in in excess of stockholders'
Shares Amount Shares Amount Shares Amount capital net income equity
---------------------------------------------------------------------------------------------------
BALANCE JANUARY 1, 1998 1,495 15 1,380 14 4,120 $41 $91,656 $(2,802) $88,924
Repurchase of common stock (152) (1) (2,336) (2,337)
Stock options exercised 27 389 389
Issuance of common stock 2,000 2,000
Net Income 4,343 4,343
Distributions declared (13,735) (13,735)
------ ---- ------ ---- ------ ---- ------- -------- -------
BALANCE DECEMBER 31, 1998 1,495 15 1,380 14 3,995 40 91,709 (12,194) 79,584
Repurchase of common stock (1,359) (14) (16,297) (16,311)
Net Loss (2,115) (2,115)
Distributions declared (11,103) (11,103)
------ ---- ------ ---- ------ ---- ------- -------- -------
BALANCE DECEMBER 31, 1999 1,495 15 1,380 14 2,636 26 75,412 (25,412) 50,055
Repurchase of common and
preferred stock (8) (4) (302) (3) (2,971) (2,974)
Net Income 1,149 1,149
Distributions declared (8,339) (8,339)
------ ---- ------ ---- ------ ---- ------- -------- -------
BALANCE DECEMBER 31, 2000 1,487 $15 1,376 $14 2,334 $23 $72,441 $(32,602) $39,891
====== ==== ====== ==== ====== ==== ======= ======== =======
See accompanying notes to Consolidated Financial Statements
F-4
G&L REALTY CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Year Ended December 31,
2000 1999 1998
-------------- --------------- --------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 1,149 $ (2,115) $ 4,343
Adjustments to reconcile net income (loss) to net cash provided by
operating activities:
Extraordinary loss on early retirement of long-term debt 158 171 ---
Depreciation and amortization 6,015 5,690 4,597
Amortization of deferred financing costs 614 394 188
Amortization of discount on marketable securities --- --- (152)
Impairment of long-lived assets --- 6,400 ---
Net gain on sale of assets (1,263) --- ---
Minority interests (278) (2,027) (179)
Unbilled rent receivable (176) (454) (77)
Equity in loss (earnings) of unconsolidated affiliates 417 269 (80)
Provision for doubtful accounts, notes and bonds receivables 2,288 2,210 5,603
(Increase) decrease in:
Prepaid expense and other assets (962) 419 (204)
Other receivables, net 125 (73) 489
Tenant rent and reimbursements receivable (4,790) (2,638) (1,594)
Accrued interest and loan fees receivable 333 (580) (875)
Increase (decrease) in:
Accounts payable and other liabilities 3,822 983 383
Tenant security deposits 38 59 224
------- -------- -------
Net cash provided by operating activities 7,490 8,708 12,666
------- -------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to rental properties (3,259) (3,656) (1,699)
Purchases of real estate assets (10,385) --- (37,790)
Sale of real estate assets 8,794 --- ---
Construction in progress (13) (5,297) (4,990)
Disposition of real estate assets available for sale --- 1,792 ---
Pre-acquisition costs, net 471 (571) (49)
Contributions to unconsolidated affiliates (482) (1,135) (11,996)
Distributions from unconsolidated affiliates 1,262 320 7,553
Investment in marketable securities --- --- (1,154)
Leasing commissions (158) (438) (441)
Investments in notes and bonds receivable (283) (3,496) (5,573)
Principal payments received from notes and bonds receivable 3,680 151 5,045
------- -------- -------
Net cash used in investing activities (373) (12,330) (51,094)
------- -------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Notes payable proceeds 9,310 71,550 48,832
Repayment of notes payable (12,427) (29,188) (9,124)
Payment of deferred loan costs (428) (1,434) (896)
Decrease (increase) in restricted cash 3,969 (4,756) 3,738
Minority interest equity contribution 486 1,237 195
Purchase of common and preferred stock and partnership units (2,974) (14,311) (2,337)
Exercise of common stock options --- --- 389
Distributions (9,807) (13,310) (14,599)
------- -------- -------
Net cash (used in) provided by financing activities (11,871) 9,788 26,198
------- -------- -------
Continued...
F-5
G&L REALTY CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (4,754) 6,166 (12,230)
BEGINNING CASH AND CASH EQUIVALENTS 7,545 1,379 13,609
------------- ------------- -----------
ENDING CASH AND CASH EQUIVALENTS $ 2,791 $ 7,545 $ 1,379
============= ============ ===========
SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid during the year for interest $ 12,178 $ 13,375 $ 9,028
============= ============ ===========
NONCASH INVESTING AND FINANCING ACTIVITIES
Year Ended December 31,
2000 1999 1998
------------- ------------- ------------
Distributions declared not yet paid $ 370 $ 407 $ 1,751
============= ============= ============
Transfers from projects under development to building $ --- $ 13,526 $ 1,185
============= ============= ============
Preferred distributions due to minority partner $ 63 $ 29 $ 17
============= ============= ============
Transfer from investments in unconsolidated affiliates
to notes receivable $ 3,070 $ --- $ ---
============= ============= ============
Net cost of assets transferred from the Company:
Land $ 5,640
Building and improvements, net 9,172
Restricted cash 170
Mortgage loans and bonds receivable, net 1,136
Deferred charges and other assets, net 197
-------------
$ 16,315
=============
Net cost of liabilities extinguished:
Notes payable $ 16,315
=============
The Company acquired an interest in an unconsolidated
affiliate for the following noncash consideration:
Land $ 947
Construction in progress $ 774
-------------
1,721
=============
The Company exchanged its interest in land and
construction in progress for the following noncash
consideration:
Investment in unconsolidated affiliates $ 1,721
=============
Net cost of assets transferred to Company (Note 18):
Accounts receivable $ 295
Land 1,751
Construction in progress 3,871
Deferred leasing costs 250
Deferred loan costs 20
Note receivable 44
Accounts payable 8
------------
$ 6,239
============
Continued...
F-6
G&L REALTY CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Year Ended December 31,
2000 1999 1998
--------------- -------------- --------------
Net cost of assets transferred from Company (Note 18):
Investment in unconsolidated affiliates $ 5,645
Note receivable 594
-------------
$ 6,239
=============
Property acquired in exchange for partnership units (Note 18)
$ 2,000
=============
Transfer note receivable to land and building:
Land $ 252
Building 1,009
-------------
Total $ 1,261
=============
Notes receivable $ 1,261
=============
Concluded
F-7
G&L REALTY CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE YEARS ENDED DECEMBER 31, 2000
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 Holy Cross, LLC, a California limited
liability company ("Holy Cross")*
G&L Burbank, LLC, a California limited liability company
("Burbank")*
G&L Tustin, LLC, a California limited liability company
("Tustin")*
GLH Pacific Gardens, LLC, a California limited liability company
("Pacific Gardens")
G&L Hoquiam, LLC, a California limited liability company
("Hoquiam")
G&L Lyons, LLC, a California limited liability company ("Lyons")
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, Holy Cross, Burbank and Tustin are herein defined
collectively 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 in either
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.
F-8
References in these 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 member), Tarzana (in which the Operating Partnership owns a 85%
membership interest and is a co-managing member) and Hoquiam, Lyons, 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
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
6th 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 House, LLC, a California limited liability
company. 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.
F-9
. 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
total 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.
. 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 LLC, Penasquitos Inc., Pacific Gardens Corp.,
Eagle Run, Eagle Run, Inc., Lakeview and Heritage Park are herein defined
collectively 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 health care
properties. The Company's business currently consists of investments in
healthcare properties and in debt obligations secured by healthcare properties.
Investments in healthcare property consists of acquisitions, made either
directly or through joint ventures, in 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 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.
Properties-- The Operating Partnership, the Realty Financing Partnership,
the Medical Partnership, Maryland Gardens, the Roxbury Partnership, GL/PHP,
Hampden, Valencia, Holy Cross, Burbank, Tustin, Pacific Gardens, Hoquiam, Lyons,
Heritage, Massachusetts, Aspen and Coronado own a 100% fee simple interest in
all of the properties.
Income taxes-- The Company expects to qualify as a REIT under Sections 856
through 860 of the Internal Revenue Code of 1986, as amended (the "Code"). As a
REIT, the Company is generally not subject to corporate Federal income taxes so
long as it distributes at least 95% of its taxable income to stockholders and
meets certain other requirements relating to its income and assets. For the
years ended December 31, 2000, 1999 and 1998, the Company met all of these
requirements. Therefore, no provisions for Federal income taxes are included in
the accompanying financial statements. State income tax requirements are similar
to Federal requirements.
F-10
Real estate and depreciation-- Rental property is recorded at cost less
accumulated depreciation. Depreciation is computed on a straight-line basis over
the estimated useful lives of the assets as follows:
Buildings and improvements ................... 40 years
Tenant improvements .......................... Life of lease
Furniture, fixtures and equipment ............ 5 years
Depreciation expense for the years ended December 31, 2000, 1999 and 1998
was $5,697,000, $5,424,000 and $4,432,000 respectively. Expenditures for
maintenance and repairs are charged to operations as incurred. Significant
renovations and all costs directly related to acquisitions are capitalized.
Revenue recognition-- Base rental income is recognized on a straight-line
basis over the term of the lease regardless of when payments are due. Certain
leases include rent concessions and escalation clauses creating an effective
rent that is included in unbilled rent receivable (Note 5). Patient revenue is
reported at the estimated net realizable amount from patients, third party
payors and others for services rendered, net of contractual adjustments.
Cash and cash equivalents-- All demand and money market accounts and short-
term investments in governmental funds with a maturity of three months or less
are considered to be cash and cash equivalents. Cash equivalents are carried at
cost, which approximates fair value due to the short period of time to maturity.
Throughout the year, the Company also maintained cash balances at banks in
excess of federally insured limits.
Restricted Cash-- Pursuant to various loan agreements, the Company is
required to fund segregated interest bearing accounts to be used for debt
service payments, tenant security deposits, property taxes, insurance premiums
and property improvements.
Deferred charges and other assets-- Deferred charges and other assets
consist of leasing commissions, deferred loan fees, financing costs,
construction-in-progress, investments, deposits and prepaid expenses. Leasing
commissions are amortized on a straight-line basis over the lives of the leases
which range typically from five to ten years. Deferred loan fees are amortized
over the terms of the respective loan agreements. Expenses incurred to obtain
financing are capitalized and amortized over the term of the related loan as a
yield adjustment.
Minority interest in consolidated affiliates-- The Operating Partnership,
as sole general partner, has a 61.75% ownership interest in the Roxbury
Partnership which owns the property located at 435 North Roxbury Drive. The
minority interest is a debit balance that resulted from depreciation allocations
and cash distributed to partners in excess of their original investment and
subsequent accumulated earnings. It is management's opinion that the deficit is
adequately secured by the unrecognized appreciated value of the Roxbury property
and will be recovered through an accumulation of undistributed earnings or sale
of the property. The Operating Partnership, as sole general partner, also owns a
93% interest in Pacific Gardens, a 50% interest in Pacific Park and an 85%
interest in Tarzana.
Long-lived assets-- The Company reviews long-lived assets for impairment
whenever events or changes in circumstances indicate that an asset's book value
exceeds the undiscounted expected future cash flows to be derived from that
asset. Whenever undiscounted expected future cash flows are less than the book
value, the asset will be reduced to estimated fair value and an impairment loss
will be recognized. During 1999, the Company recorded a $6.4 million impairment
loss related to its six New Jersey MOBs (See Note 3). The Company recorded no
impairment losses in 2000 and 1998.
Per share data-- Earnings per share are computed based upon the weighted
average number of shares of the Company's Common Stock, $.01 par value (the
"Common Stock") outstanding during the period. The treasury stock method is used
to determine the number of incremental common equivalent shares resulting from
options granted under the Company's stock incentive plan. Computation of the
number of shares is included in Note 13.
F-11
Financial instruments--The estimated fair value of the Company's financial
instruments is determined using available market information and appropriate
valuation methodologies. However, considerable judgment is necessary to
interpret market data and develop the related estimates of fair value. The use
of different market assumptions or estimation methodologies may have a material
impact on the estimated fair value amounts. The book value of cash, cash
equivalents, tenant rent and other accounts receivable, accounts payable and
other liabilities approximates fair value due to their short-term maturities.
The carrying amount of the Company's variable rate notes payable as of December
31, 2000 and 1999 approximate fair value because the interest rates are
comparable to rates currently being offered to the Company. The fair value of
the Company's fixed rate notes payable as of December 31, 2000 and 1999 was
$105.3 million and $130.7 million, respectively because the interest rates on
the Company's fixed rate notes payable were lower than the rates being offered
to the Company at that time. The estimated fair values of the Company's mortgage
loans and bonds receivable, are based upon market values of loans and bonds
receivable with similar characteristics adjusted for risk inherent in the
underlying transactions. Management estimates that the fair value of the
Company's mortgage loans and bonds receivable approximate their amortized cost
basis, after adjustment for the allowance for amounts deemed to be
uncollectible.
Use of estimates-- The preparation of financial statements in conformity
with accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates.
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 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 December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition in Financial
Statements." SAB 101 provides guidance on applying generally accepted accounting
principles to revenue recognition issues in financial statements. The Company
was required to adopt SAB 101 in the fourth quarter of 2000. The Company's
adoption of SAB 101 did not have a material impact on the Company's financial
position or results of operations.
In March 2000, the Financial Accounting Standards Board issued FASB
Interpretation No. 44 ("FIN 44"), "Accounting for Certain Transaction Involving
Stock Compensation." The Company was required to adopt FIN 44 effective July 1,
2000 with respect to certain provisions applicable to new awards, exchanges of
awards in a business combination, modifications to outstanding awards and
changes in grantee status that occur on or after that date. FIN 44 addresses
practice issues related to the application of Accounting Practice Bulletin
Opinion No. 25, "Accounting for Stock Issued to Employees." The Company's
adoption of FIN 44 did not have a material impact on its financial position or
results of operations.
F-12
3. Buildings and Improvements
Buildings and improvements consist of the following:
December 31,
2000 1999
----------------- -----------------
(in thousands)
Buildings and improvements $155,224 $160,360
Tenant improvements 9,214 7,705
Furniture, fixtures and equipment 3,280 2,668
----------------- -----------------
167,718 170,733
Less accumulated depreciation
and amortization (28,208) (23,912)
----------------- -----------------
Total $139,510 $146,821
================= =================
Impairment loss - In 1999, the Company recorded a non-cash impairment
charge related to six New Jersey medical office buildings owned by the Company
as required by SFAS 121, "Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to be Disposed Of." Recording these buildings at their
estimated fair market value resulted in a write down of the carrying value of
these buildings of $6.4 million.
4. Tenant Rent and Reimbursements Receivable
Tenant rent and reimbursements receivable are net of an allowance for
uncollectible amounts of $555,000 and $3,409,000 as of December 31, 2000 and
1999, respectively. The activity in the allowance for uncollectible tenant
accounts for the three years ending December 31, 2000, was as follows:
Year ended December 31,
2000 1999 1998
----------------- ----------------- ----------------
(in thousands)
Balance, beginning of year $ 3,409 $ 1,261 $ 88
Additions 1,007 2,210 1,210
Charge-offs (3,861) (62) (37)
----------------- ----------------- ----------------
Balance, end of year $ 555 $ 3,409 $ 1,261
================= ================= ================
During the year ended December 31, 2000, the Company wrote-off accounts
receivable in the amount of $3.9 million. These write-offs were mainly related
to delinquent rents and operating expense reimbursements due from the operators
of the Company's three skilled nursing facilities in Hampden, Massachusetts (See
Note 15) and its skilled nursing facility in Phoenix, Arizona.
5. Unbilled Rent Receivable
The Company has operating leases with tenants that expire at various dates
through 2011. The minimum rents due under these leases are subject to either
scheduled fixed increases or adjustments based on the Consumer Price Index. In
general, the retail leases require tenants to pay their pro-rata share of
property taxes, insurance and common area operating costs, while the medical
office leases require tenants to reimburse the Company for annual increases in
property taxes, insurance and specified operating expenses over a base year
amount.
F-13
Generally accepted accounting principles require that rents due under
operating leases with fixed increases be averaged over the life of the lease.
This practice, known as "straight-line rents" creates an unbilled rent
receivable in any period during which the amount of straight-line rent exceeds
the actual rent billed (this occurs primarily at the inception of the lease
period). As the lease approaches its expiration date, billed rent will
eventually exceed the amount of straight-line rent causing the unbilled rent
receivable to decline. The straight-line rent calculation assumes no new or
re-negotiated rents or extension periods during the life of the lease and
excludes operating cost reimbursements. The following table summarizes future
rents due under existing leases and the corresponding straight-line rent
calculation as of December 31, 2000:
Year Ending December 31, Future Minimum Straight-line Unbilled Rent
Rent Rent Receivable
----------------------------------- --------------------- ---------------------- ----------------------
(in thousands)
2001 ................ $ 17,248 $ 17,161 $ 87
2002 ................ 14,173 13,914 259
2003 ................ 11,498 11,133 365
2004 ................ 8,989 8,508 481
2005 ................ 6,778 6,276 502
Thereafter .......... 11,759 10,647 1,112
--------------------- ---------------------- ----------------------
Total ..................... $ 70,445 $ 67,639 $ 2,806
===================== ====================== ======================
The activity in the allowance for unbilled rent, recorded as a reduction of
rental revenue for the three years ending December 31, 2000, consisted of the
following:
Year ended December 31,
2000 1999 1998
----------------- ----------------- ----------------
(in thousands)
Balance, beginning of year $ 706 $ 474 $ 476
Additions 76 232 12
Charge-offs (388) --- (14)
----------------- ----------------- ----------------
Balance, end of year $ 394 $ 706 $ 474
================= ================= ================
6. Other Receivables
Other receivables consist of all outstanding balances due to the Company
other than amounts due from current tenants and are net of the allowance for
uncollectible amounts of $54,000 and $205,000 as of December 31, 2000 and 1999.
The activity in the allowance for uncollectible accounts for the three years
ending December 31, 2000, is as follows:
Year ended December 31,
2000 1999 1998
----------------- ----------------- ----------------
(in thousands)
Balance, beginning of year $ 205 $ 330 $ 248
Additions 20 --- 282
Charge-offs (171) (125) (200)
----------------- ----------------- ----------------
Balance, end of year $ 54 $ 205 $ 330
================= ================= ================
F-14
7. Mortgage Loans and Bonds Receivable
Mortgage loans and bonds receivable consist of the following:
December 31,
2000 1999
----------------- --------------
(in thousands)
Secured Promissory Note due March 31, 2009, collateralized by deed of
trust, principal and interest payable monthly at 12% per annum.................. $ 7,522 $ 7,751
Unsecured Promissory Note due March 31, 2009, principal and interest
payable monthly at 12% per annum................................................ 2,700 2,700
Secured Note due April 1, 2008, interest payable semiannually at 10%
per annum (This note is currently in default)................................... 150 150
Unsecured promissory note due September 1, 2000, interest payable at
10% per annum (This note is currently in default)............................... 1,000 ---
Unsecured promissory note due July 1, 2000, interest payable at 10% per
annum (This note is currently in default)....................................... 104 ---
Secured promissory note due August 25, 1998, interest payable at 12%
per annum (This note is currently in default)................................... 2,405 3,695
Secured promissory note due June 30, 2001, interest payable at 10% per
annum........................................................................... 675 425
Secured bond receivable due December 15, 2029, interest payable
semiannually at 8.75% per annum................................................. 1,218 1,218
Unsecured promissory note due January 31, 2010, principal and interest
payable monthly at 10% per annum................................................ 513 513
Unsecured promissory note receivable due June 30, 1999. (This note is
currently in default)........................................................... 44 44
Unsecured promissory note receivable due October 1, 2004........................... --- 800
Unsecured promissory note receivable due May 31, 1999.............................. --- 300
Unsecured promissory note receivable due January 23, 1998.......................... --- 47
Unsecured promissory note receivable due April 1, 2003............................. --- 300
Unsecured promissory notes receivable payable upon demand.......................... --- 1,356
Unsecured credit line receivable due May 31, 1998.................................. --- 115
------------- ----------------
Face value of mortgage loans and bonds receivable.................................. 16,331 19,414
Accrued interest................................................................... 440 1,188
Allowance for uncollectible amounts................................................ (5,527) (4,576)
------------- ----------------
Total mortgage loans and bonds interest receivable................................. $11,244 $16,026
============= =================
F-15
The activity in the allowance for uncollectible notes receivable for the
three years ending December 31, 2000, is as follows:
Year ended December 31,
2000 1999 1998
----------------- ----------------- ----------------
(in thousands)
Balance, beginning of year $ 4,576 $ 3,517 $ 825
Additions 2,861 1,059 2,792
Charge-offs (1,910) --- (100)
----------------- ----------------- ----------------
Balance, end of year $ 5,527 $ 4,576 $ 3,517
================= ================= =================
F-16
8. Investments In Unconsolidated Affiliates
The Company has investments in various unconsolidated affiliates as
described in Note 1. The following tables provide a summary of the Company's
investment in each of these entities as of December 31, 2000 and 1999 (in
thousands).
As of December 31, 2000
-------------------------------------------------------------------------------------------
Valley Pacific
Convalescent Penasquitos Penasquitos Heritage Gardens
GLN Capital (1) San Pedro LLC Inc. Park Corp.
-------------------------------------------------------------------------------------------
Opening balance at beginning of year $ 776 $ 323 $ 1,070 $ 1,379 $ 106 $ --- $ (312)
Equity in earnings (loss) of
affiliates (11) (8) 122 (90) --- --- ---
Cash contributions --- --- --- --- --- --- ---
Cash distributions --- (315) (48) (1,128) (86) --- ---
----------- ------------ ----------- ---------- ---------- ------------ ------------
Equity, before inter-company
adjustments 765 --- 1,144 161 20 --- (312)
Intercompany receivable (payable),
net 67 --- 80 245 (20) 13 110
----------- ------------ ----------- ---------- ---------- ------------ ------------
Investment in unconsolidated
affiliates $ 832 $ --- $ 1,224 $ 406 $ --- $ 13 $ (202)
=========== ============ =========== ========== ========== ============ ============
---------------------------------------------
Eagle
Run, Inc. EagleRun Lakeview Total
---------------------------------------------
Opening balance at beginning of year $ 61 $ 654 $ 250 $ 4,307
Equity in earnings (loss) of
affiliates (431) 1 --- (417)
Cash contributions --- --- --- ---
Cash distributions --- --- --- (1,577)
---------- ----------- --------- --------
Equity, before inter-company
adjustments (370) 655 250 2,313
Intercompany receivable (payable),
net 6 48 1,989 2,538
---------- ----------- --------- --------
Investment in unconsolidated
affiliates $ (364) $ 703 $ 2,239 $ 4,851
========== =========== ========= ========
As of December 31, 1999
-------------------------------------------------------------------------------------------
Valley Penasquitos Penasquitos Heritage Pacific
GLN Capital Convalescent San Pedro LLC Inc. Park Gardens
Corp.
-------------------------------------------------------------------------------------------
Opening balance at beginning of year $ 708 $ 76 $ 1,165 $ 1,229 $ 270 $ --- $ (149)
Equity in earnings of affiliates 62 (28) 202 25 (277) --- (163)
Contributions 6 312 --- 125 113 --- ---
Distributions --- (37) (297) --- --- --- ---
----------- ------------ ----------- ---------- ---------- ------------ -----------
Equity, net of inter-company
transactions 776 323 1,070 1,379 106 --- (312)
Intercompany receivable (payable),
net 61 3,370 8 219 (1) 13 110
----------- ------------ ----------- ---------- ---------- ------------ -----------
Investment in unconsolidated
affiliates $ 837 $ 3,693 $ 1,078 $ 1,598 $ 105 $ 13 $ (202)
=========== ============ =========== ========== ========== ============ ===========
----------------------------------------------
Eagle
Run, Inc. EagleRun Lakeview Total
----------------------------------------------
Opening balance at beginning of year $ 150 $ 650 $ --- $ 4,099
Equity in earnings of affiliates (89) (1) --- (269)
Contributions --- 5 250 811
Distributions --- --- --- (334)
Equity, net of inter-company
transactions 61 654 250 4,307
Intercompany receivable (payable),
net 6 47 1,596 5,429
--------- -------- ------- -------
Investment in unconsolidated
affiliates $ 67 $ 701 $ 1,846 $ 9,736
========= ======== ======= =======
(1) In March 2000, the Company sold its 50% interest in Valley Convalescent to
its joint venture partner. The transaction included a sales price of $500,000
consisting of $200,000 in cash and a $300,000 mortgage note. The $300,000
mortgage note was consolidated with the $2.8 million mortgage that the Company
already held on the facility. The $3.1 million mortgage was repaid in November
2000.
F-17
Following is a summary of the condensed financial information of each of the
unconsolidated affiliates as of and for the year ended December 31, 2000 (in
thousands).
-----------------------------------------------------------------------------------------
Pacific
Valley Penasquitos Penasquitos Heritage Gardens
GLN Capital Convalescent San Pedro LLC Inc. Park Corp.
-----------------------------------------------------------------------------------------
Financial Position:
------------------
Land $ --- $ --- $ 1,882 $ 641 $ --- $ 750 $ ---
Buildings --- --- 4,227 6,409 --- --- ---
Notes receivable, net 1,585 --- --- --- --- --- ---
Other Assets --- --- 294 1,260 --- 247 ---
Notes payable --- --- (4,730) (7,962) --- (910) ---
Other liabilities (60) --- (439) (260) (10) (87) (349)
------------ ------------- ------------ ----------- ----------- ------------- -----------
Net assets $1,525 $ --- $ 1,234 $ 88 $ (10) $ --- $ (349)
============ ============= ============ =========== =========== ============= ===========
Partner's equity:
----------------
G&L Realty Partnership, L.P. $ 765 $ --- $ 1,144 $ 161 $ 20 $ --- $(312)
Others 760 --- 90 (73) (30) --- (37)
------------ ------------- ------------ ----------- ----------- ------------- -----------
Total Equity $1,525 $ --- $ 1,234 $ 88 $ (10) $ --- $(349)
============ ============= ============ =========== =========== ============= ===========
Eagle Run
Inc. Eagle Run Lakeview Total
------------ -------------- ----------- ------------
Financial Position:
------------------
Land $ --- $ 1,191 $ 947 $ 5,411
Buildings --- 4,934 --- 15,570
Notes receivable, net --- --- --- 1,585
Other Assets 482 1,017 2,225 5,525
Notes payable --- (5,791) (1,954) (21,347)
Other liabilities (1,221) (50) (664) (3,140)
------------ -------------- ----------- ----------
Net assets $ (739) $ 1,301 $ 554 $ 3,604
============ ============== =========== ===========
Partner's equity:
----------------
G&L Realty Partnership, L.P. $ (370) $ 655 $ 250 $ 2,313
Others (369) 646 304 1,291
------------ -------------- ----------- ----------
Total Equity $ (739) $ 1,301 $ 554 $ 3,604
============ ============== =========== ===========
-----------------------------------------------------------------------------------------
Pacific
Valley Penasquitos Penasquitos Heritage Gardens
GLN Capital Convalescent San Pedro LLC Inc. Park Corp.
-----------------------------------------------------------------------------------------
Operations:
-----------
Revenues $ --- $ 83 $ 1,140 $ 892 $ --- $ --- $ ---
Expenses (22) (99) (1,018) (1,072) --- --- ---
------------ ------------- ------------ ----------- ----------- ------------- -----------
Net (loss) income $ (22) $ (16) $ 122 $ (180) $ --- $ --- $ ---
============ ============= ============ =========== =========== ============= ===========
Allocation of net (loss) income:
-------------------------------
G&L Realty Partnership, L.P. $ (11) $ (8) $ 122 $ (90) $ --- $ --- $ ---
Others (11) (8) --- (90) --- --- ---
------------ ------------- ------------ ----------- ----------- ------------- -----------
Net (loss) income $ (22) $ (16) $ 122 $ (180) $ --- $ --- $ ---
============ ============= ============ =========== =========== ============= ===========
Eagle Run
Inc. Eagle Run Lakeview Total
----------- ------------ ------------- -------------
Operations:
------------------
Revenues $ 1,803 $ 845 $ --- $ 4,772
Expenses (2,666) (851) --- (5,728)
----------- ------------ ------------- -------------
Net (loss) income $ (863) $ 3 $ --- $ (956)
=========== ============ ============= =============
Allocation of net (loss) income:
-------------------------------
G&L Realty Partnership, L.P. $ (431) $ 1 $ --- $ (417)
Others (432) 2 --- (539)
----------- ------------ ------------- -------------
Net (loss) income $ (863) $ 3 $ --- $ (956)
=========== ============ ============= =============
F-18
Following is a summary of the condensed financial information of each of the
unconsolidated affiliates as of and for the year ended December 31, 1999 (in
thousands).
-----------------------------------------------------------------------------------------
Pacific
Valley Penasquitos Penasquitos Heritage Gardens
GLN Capital Convalescent San Pedro LLC Inc. Park Corp.
-----------------------------------------------------------------------------------------
Financial Position:
-------------------
Land $ -- $ 382 $ 1,882 $ 641 $ -- $ 500 $ --
Buildings -- 2,636 4,315 6,678 -- -- --
Notes and bonds receivable,
net 1,585 -- -- -- -- -- --
Other Assets 38 720 172 732 -- 68 --
Notes payable -- (2,799) (4,814) (6,180) -- (554) --
Other liabilities (75) (331) (197) (523) (10) (14) (349)
------------ ------------- ------------ ----------- ----------- --------- ---------
Net assets $ 1,548 $ 608 $ 1,358 $ 1,348 $ (10) $ -- $ (349)
============ ============= ============ =========== =========== ========= =========
Partner's equity:
-----------------
G&L Realty Partnership, L.P. $ 776 $ 323 $ 1,070 $ 1,379 $ 106 $ -- $ (312)
Others 772 285 288 (31) (116) -- (37)
------------ ------------- ------------ ----------- ----------- --------- ---------
Total Equity $ 1,548 $ 608 $ 1,358 $ 1,348 $ (10) $ -- $ (349)
============ ============= ============ =========== =========== ========= =========
------------------------------------------------
Eagle Run
Inc. Eagle Run Lakeview Total
-------------------------------------------------
Financial Position:
-------------------
Land $ -- $ 1,191 $ 947 $ 5,543
Buildings -- 4,612 -- 18,241
Notes and bonds receivable,
net -- -- -- 1,585
Other Assets 193 688 996 3,607
Notes payable -- (4,986) (1,443) (20,776)
Other liabilities (167) (208) -- (1,874)
------------ ------------ ---------- ----------
Net assets $ 26 $ 1,297 $ 500 $ 6,326
============ ============ ========== ==========
Partner's equity:
-----------------
G&L Realty Partnership, L.P. $ 61 $ 654 $ 250 $ 4,307
Others (35) 643 250 2,019
------------ ------------ ---------- ----------
Total Equity $ 26 $ 1,297 $ 500 $ 6,326
============ ============ ========== ==========
-----------------------------------------------------------------------------------------
Pacific
Valley Penasquitos Penasquitos Heritage Gardens
GLN Capital Convalescent San Pedro LLC Inc. Park Corp.
-----------------------------------------------------------------------------------------
Operations:
-----------
Revenues $ 103 $ 600 $ 1,165 $ 629 $ 190 $ -- $ 1,371
Expenses (14) (668) (963) (578) (560) -- (1,546)
---------- ------------ ----------- ----------- ----------- ------------ ----------
Net income (loss) $ 89 $ (68) $ 202 $ 51 $ (370) $ -- $ (175)
========== ============= =========== =========== =========== ============ ==========
Allocation of net income (loss):
--------------------------------
G&L Realty Partnership, L.P. $ 62 $ (28) $ 202 $ 25 $ (277) $ -- $ (163)
Others 27 (40) -- 26 (93) -- (12)
---------- ------------ ----------- ----------- ----------- ------------ ----------
Net income (loss) $ 89 $ (68) $ 202 $ 51 $ (370) $ -- $ (175)
========== ============= =========== =========== =========== ============ ==========
---------------------------------------------------------
Eagle Run
Inc. Eagle Run Lakeview Total
---------------------------------------------------------
Operations:
-----------
Revenues $ 117 $ 118 $ -- $ 4,293
Expenses (293) (121) -- (4,743)
------------ ----------- ----------- ---------
Net income (loss) $ (176) $ (3) $ -- $ (450)
============ =========== =========== =========
Allocation of net income (loss):
G&L Realty Partnership, L.P. $ (89) $ (1) $ -- $ (269)
Others (87) (2) -- (181)
------------ ----------- ----------- ---------
Net income (loss) $ (176) $ (3) $ -- $ (450)
============ =========== =========== =========
Following is a summary of the condensed financial information of each of the
unconsolidated affiliates for the year ended December 31, 1998 (in thousands)
-----------------------------------------------------------------------------------------
Valley Aliso Penasquitos Penasquitos
GLN Capital Convalescent AV Medical Partners San Pedro LLC Inc.
-----------------------------------------------------------------------------------------
Operations:
-----------
Revenues $ 352 $ 603 $ -- $ -- $ 948 $ -- $ --
Expenses 170 437 -- -- 792 -- --
---------- ------------ ----------- ----------- ----------- ------------ ----------
Net income $ 182 $ 166 $ -- $ -- $ 156 $ -- $ --
========== ============= =========== =========== =========== ============ ==========
Allocation of net income:
--------------------------------
G&L Realty Partnership, L.P. $ 91 $ 83 $ -- $ -- $ 78 $ -- $ --
Others 91 83 -- -- 78 -- --
---------- ------------ ----------- ----------- ----------- ------------ ----------
$ 182 $ 166 $ -- $ -- $ 156 $ -- $ --
========== ============= =========== =========== =========== ============ ==========
-------------------------------------------
Pacific
Gardens Eagle Run,
Corp. LLC Total
-------------------------------------------
Operations:
-----------
Revenues $ 1,185 $ -- $ 3,088
Expenses 1,369 -- 2,768
------------ ----------- -----------
Net income $ (184) $ -- $ 320
============ =========== ===========
Allocation of net income:
G&L Realty Partnership, L.P. $ (172) $ -- $ 80
Others (12) -- 240
------------ ----------- -----------
$ (184) $ -- $ 320
============ =========== ===========
F-19
9. Marketable Securities
Marketable securities consist of the following:
December 31,
2000 1999
----------------- -----------------
(in thousands)
PHP Healthcare Corporation subordinated
debentures, $2,800,000 face value, interest
at 6.50%, due December 15, 2002, at cost $ 1,154 $ 1,154
Accrued interest 58 58
Amortized discount 152 152
------- -------
1,364 1,364
Less reserve for uncollectible amounts (1,364) (1,364)
------- -------
Total $ --- $ ---
======= =======
See Footnote 15 for additional discussion of marketable securities.
10. Deferred Charges and Other Assets
Deferred charges and other assets consist of the following:
December 31,
2000 1999
----------------- -----------------
(in thousands)
Deferred financing costs $4,011 $3,844
Pre-acquisition costs 150 621
Leasing commissions 1,486 1,711
Prepaid expense and other assets 914 57
------- -------
6,561 6,233
Less accumulated amortization (2,012) (1,269)
------- -------
Total $ 4,549 $ 4,964
======= =======
F-20
11. Notes Payable
December 31,
Notes payable consist of the following: 2000 1999
--------------- ---------------
(in thousands)
$7,831,000 Note due April 1, 2008 collateralized by deed of trust, monthly principal
and interest payments of $56,000, interest at 7.05% per annum. $ 7,502 $ 7,634
$7,500,000 Note due December 11, 2008, collateralized by deed of trust, monthly
principal and interest payments of $50,000, interest at 6.90% per annum. 7,343 7,423
$2,000,000 Secured line of credit due July 13, 2003, interest payable at Prime plus
2.0% per annum. 1,797 ---
$8,100,000 Note due April 1, 2008, collateralized by deed of trust, monthly
principal and interest payments of $58,000, interest at 7.05% per annum. 7,761 7,896
$2,475,000 Note due September 1, 2008 collateralized by deed of trust, monthly
principal and interest payments of $18,000, interest at 7.49% per annum. 2,391 2,428
$3,267,000 Note due April 1, 2008 collateralized by deed of trust, monthly principal
and interest payments of $23,000, interest at 7.05% per annum. 3,130 3,185
$5,225,000 Note due January 1, 2019 collateralized by deed of trust, monthly
principal and interest payments of $38,209, interest at 6.75% per annum. 4,983 5,113
$1,333,125 Note due April 1, 2008 collateralized by deed of trust, monthly principal
and interest payments of $9,554, interest at 7.05% per annum. 1,277 1,299
$35,000,000 Note due August 11, 2006, collateralized by deed of trust, monthly
payments of $282,000 of principal and interest, interest at 8.492% per annum. 33,133 33,629
$30,000,000 Note due August 11, 2005, collateralized by deed of trust, monthly
principal and interest payments of $229,000, interest at 7.89% per annum. 27,684 28,193
$11,400,000 Note due September 1, 2034, collateralized by deed of trust, monthly
principal and interest payments of $77,000, interest at 8% per annum. 11,296 11,373
$10,000,000 Note due July 1, 2009 collateralized by deed of trust, monthly principal
and interest payments of $58,000, interest at 6.85% per annum. 9,705 9,905
$1,440,000 Note due July 1, 2009 collateralized by deed of trust, monthly principal
and interest payments of $11,000, interest at 7.375% per annum. 1,408 1,430
$7,500,000 Note due January 21, 2002 collateralized by deed of trust, monthly
principal and interest payments of approximately $64,000, interest at Prime plus
0.75% per annum. 7,382 7,458
$13,920,000 Note due October 1, 2002 collateralized by deed of trust, monthly
principal and interest payments of approximately $122,000, interest at LIBOR
plus 2.75% per annum. 13,740 13,889
$8,500,000 Note due July 1, 2001, collateralized by deed of trust, monthly principal
and interest payments of approximately $71,000, interest at LIBOR plus 2.75% per
annum. 8,415 8,500
$2,100,000 Note due November 1, 2002, collateralized by deed of trust, monthly
principal and interest payments of approximately $17,000, interest at LIBOR
plus 3.40% per annum. 2,070 2,096
$800,000 Unsecured note due May 1, 2006, monthly principal and interest payments of
$5,593, interest at 7.50% per annum. 801 ---
$950,000 Note due May 1, 2006, collateralized by a second deed of trust, monthly
principal and interest payments of $7,305, interest at 8.50% per annum. 944 ---
$5,800,000 Note due in 2006, collateralized by deed of trust, monthly principal and
interest payments of $48,102, interest at 8.30% per annum. 5,672 ---
$2,000,000 Unsecured note due July 31, 2007, interest rate of 8.50% per annum. 508 508
$4,600,000 Unsecured line of credit due August 31, 2000, interest payable
monthly at LIBOR plus 2.25% per annum, repaid in 2000 --- 4,600
$5,500,000 Note due on February 1, 2001, collateralized by deed of trust, interest
payable monthly at LIBOR plus 3.0% per annum, repaid in 2000 --- 5,500
$16,000,000 Note due March 11, 2014, collateralized by deed of trust, monthly
principal and interest payments of $155,000, interest at 8.98% per annum --- 15,312
-------- --------
Total $158,942 $177,371
======== ========
F-21
As of December 31, 2000, 30-day LIBOR was 6.565% and the prime rate was
9.50%.
Aggregate future principal payments as of December 31, 2000 are as
follows:
Years Ending December 31
------------------------
(in thousands)
2001 ...................... $ 12,591
2002 ...................... 25,092
2003 ...................... 2,395
2004 ...................... 2,570
2005 ...................... 9,356
Thereafter ................ 106,938
---------
Total ................. $ 158,942
=========
During 2000 and 1999, the Company capitalized interest relating to
development projects, either directly owned by the Company or through joint
ventures of $17,000 and $430,000, respectively.
12 Commitments and Contingencies
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 is 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.
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.
F-22
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 judgment by the court is pending.
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.
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 under
a lease for a MOB in Irwindale, California. Due to this settlement, the Company
will record lease termination income of approximately $2.7 million in the first
quarter of 2001.
Two shareholder class actions have been filed against the Company and its
directors arising out of the proposal by Daniel M. Gottlieb and Steven D.
Lebowitz, the Chief Executive Officer and President, respectively, of the
Company, to acquire all of the outstanding shares of the Company's common stock
not currently owned by them (the "Pending Proposal"). The first suit, Lukoff v.
G&L Realty Corp. et al., case number BC 241251, was filed in the Superior Court
of the State of California, County of Los Angeles, on December 4, 2000. The
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.
Both actions assert claims for breach of fiduciary duty and seek, among other
things, compensatory damages and to enjoin the transaction. Defendants have not
yet answered or otherwise responded to the complaints. On February 6, 2001,
pursuant to a stipulation between the parties, the Lukoff action was stayed for
120 days or until the Company's board of directors takes action with respect to
the Pending Proposal, whichever occurs earlier.
13. Stockholders' Equity
In May 1997, the Company issued 1,495,000 shares of the 10.25% Series A
Preferred Stock, from which it received net proceeds of $35.4 million. In
November 1997, the Company issued 1,380,000 shares of 9.8% Series B Preferred
Stock and received net proceeds of $32.6 million. The Company's preferred stock
has no stated maturity, is not subject to any sinking fund requirements and is
not convertible into or exchangeable for any property or other securities of the
Company. The Company, at its sole discretion, may call the Series A and Series B
Preferred Stock at any time after June 1, 2001 and January 1, 2002,
respectively. All classes of the Company's preferred stock have a par value of
$0.01 and rank senior to the Company's common stock with respect to payment of
dividends and upon liquidation. All classes of Preferred Stock are on parity
with all other classes of the Company's Preferred Stock for payment of dividends
and liquidation purposes. In the event of liquidation, or if the Company elects
to call the Preferred Stock, holders of the Company's Preferred Stock are
entitled to receive $25.00 per share plus any accrued and unpaid dividends,
whether or not such dividends have been declared by the Company's Board of
Directors. Holders of the Company's Series A Preferred Stock are entitled to
receive monthly dividends at an annual rate of $2.56 per share. Series B
Preferred Stockholders are entitled to receive monthly dividends at an annual
rate of $2.45 per share.
At various times during the year ending December 31, 2000, the Company
repurchased a total of 301,800 shares of the Company's Common Stock at an
average price of approximately $9.22 per share. During 2000, the Company also
purchased 7,700 shares of its Series A Preferred Stock at an average price of
$15.03 and 4,600 shares of its Series B Preferred Stock at an average price of
$14.68.
Distributions in excess of net income-- As described in Note 2, the
Company has elected to be treated as a REIT for Federal income tax purposes. As
such, the Company is required to distribute at least 95% of its annual taxable
income.
For the years ended December 31, 2000, 1999 and 1998, cash distributed in
the form of dividends to holders of the Company's Common Stock exceeded the
Company's taxable income and is therefore considered to be a return of capital.
In 2000, 100% of the Company's dividend was considered a return of capital to
common stockholders. For 1999, 4.46% of the dividend was taxable as long-term
capital gains and the remaining 95.54% represented a return of capital. For
1998, 18.55% of the dividend was taxable as ordinary income and the remaining
81.45% represented
F-23
a return of capital. In 2000, dividends paid to holders of the Company's
preferred stock were considered a return of capital to preferred stockholders.
In previous years, the dividends paid to holders of the Company's Preferred
Stock were fully taxable as ordinary income.
Earnings per 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 year. 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 year plus the
incremental shares that would have been outstanding upon the assumed exercise of
dilutive stock options. In 2000, because the Company's stock price was below the
exercise price of all options, basic weighted average shares equals diluted
weighted average shares. In 1999 and 1998, 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. The following table reconciles the numerator and
denominator of the basic and fully diluted per-share computations for net income
for the years ended December 31, 2000, 1999 and 1998:
Years ended December 31,
2000 1999 1998
--------------- --------------- ------------
(in thousands)
Numerator:
----------
Net income (loss) $ 1,149 $ (2,115) $ 4,343
Preferred stock dividends (7,164) (7,212) (7,212)
-------- --------- --------
Net loss available to common
stockholders $ (6,015) $ (9,327) $ (2,869)
======== ========= ========
Denominator:
------------
Weighted average shares - basic 2,379 3,760 4,092
Dilutive effect of stock options --- 10 43
-------- --------- --------
Weighted average shares - fully diluted 2,379 3,770 4,135
======== ========= ========
Per share:
----------
Basic $(2.53) $(2.48) $(0.70)
Dilutive effect of stock options --- --- ---
-------- --------- --------
Fully diluted $ (2.53) $ (2.48) $ (0.70)
======== ========= ========
On March 6, 2001, the Company's board of directors declared a quarterly
distribution for the first quarter of 2001 in the amount of $0.125 per Common
share to be paid on April 15, 2001 to holders of the Company's Common Stock on
March 31, 2001. This quarterly dividend is equal to an annualized distribution
of $0.50 per share.
On November 30, 2000, the Company received a proposal from Daniel M.
Gottlieb and Steven D. Lebowitz, the Chief Executive Officer and the President,
respectively, of the Company, to acquire all the outstanding shares of Common
Stock of the Company not held by them for a cash price of $10.00 per share. The
proposal contemplates a merger of an entity newly formed by Messrs. Gottlieb and
Lebowitz with and into the Company. The Series A and Series B Preferred Stock
would remain outstanding following the consummation of the transaction. The
proposal was conditioned upon, among other things, approval of the Board of
Directors and stockholders of the Company, the negotiation of mutually
satisfactory definitive agreements, and the receipts by Messrs. Gottlieb and
Lebowitz of satisfactory financing to complete the transaction. Upon receipt of
the proposal, the Board of Directors of the Company formed a special committee
comprised of S. Craig Tompkins, as chairman, Dr. Richard Lesher, Charles Reilly
and Leslie Michelson to consider the proposal. The special committee was
empowered to evaluate and, if appropriate, negotiate with respect to the
proposal and to make a recommendation to the Board of Directors with respect to
any proposed transaction.
On February 16, 2001, the Company received a revised proposal from Messrs.
Gottlieb and Lebowitz under which they would acquire all the outstanding shares
of Common Stock of the Company not held by them for
F-24
a cash price of $11.00 per share. The revised proposal was submitted to the
special committee of the Company's Board of Directors for review.
14. Stock Incentive Plan
As of December 31, 2000, the Company had a stock incentive plan under
which an aggregate of 209,500 shares of the Company's Common Stock are reserved
for issuance. Options are granted at per share amounts not less than fair market
value at the date of grant and expire ten years thereafter. Granted options vest
in even increments over a two or three year period beginning one year from the
grant date. The Company does not charge the estimated compensation cost of
options granted against income. Compensation cost is estimated to be the fair
value of all options granted based on the Binomial option-pricing model. Based
upon the stock price at the date of grant, the costs associated with
options granted in each of the years ended December 31, 2000, 1999, and 1998 are
$265,000, $5,000, and $77,000, respectively. If the compensation costs had been
charged against income at the time of vesting, adjusted for shares exercised and
canceled during the period, the Company's net income and earnings per share
would have been reduced to the pro forma amounts indicated below:
Year Ended December 31,
2000 1999 1998
----------------- ---------------- -----------------
(in thousands, except per share amounts)
Net Income:
As reported $1,149 $(2,115) $4,343
Pro forma $1,061 $(2,120) $4,266
Earnings per share:
As reported:
Basic $(2.53) $(2.48) $(0.70)
Fully diluted $(2.53) $(2.48) $(0.70)
Pro forma:
Basic $(2.57) $(2.48) $(0.72)
Fully diluted $(2.57) $(2.48) $(0.72)
A summary of the status of the Company's stock incentive plan as of
December 31, 2000, 1999, 1998, and changes during the years ending on those
dates is presented in the following table. The average price presented below
represents the weighted average exercise price based upon the market value at
the grant date.
2000 1999 1998
------------------------ ------------------------ -------------------------
Average Average Average
Shares Price Shares Price Shares Price
------------ ----------- ----------- ------------ ------------- -----------
Outstanding,
Beginning of year 151,000 $12.88 214,000 $14.49 244,000 $14.25
Granted 102,000 8.85 2,000 10.50 49,000 17.34
Exercised --- --- --- --- (27,000) 14.66
Forfeited or canceled (3,000) 18.92 (65,000) 18.11 (52,000) 16.09
------- ------ -------- ------ -------- ------
Outstanding,
End of year 250,000 $11.16 151,000 $12.88 214,000 $14.49
======= ====== ======== ====== ======== ======
Options exercisable
At year-end 172,882 $16.11 130,998 $14.79 123,667 $12.34
Weighted-average fair
value of options
granted during
the year $2.60 $2.40 $2.44
F-25
The following table summarizes information relating to the Company's stock
incentive plan as of December 31, 2000:
Options Outstanding
-----------------------------------------
Average
Remaining life Number
Exercise Price Number (in months) Exercisable
---------------------- -------------------- -------------------- ---------------------
$ 7.875 2,000 114 2,000
8.875 100,000 110 27,778
9.125 1,000 53 1,000
9.625 72,000 60 72,000
10.375 3,000 59 3,000
10.500 2,000 104 2,000
12.917 1,000 96 666
13.099 1,000 96 666
13.625 22,000 64 22,000
15.750 1,000 77 1,000
16.750 1,000 77 1,000
17.375 20,000 87 17,777
17.500 10,000 89 8,667
17.625 6,000 36 6,000
18.125 6,000 87 5,328
20.125 2,000 84 2,000
-------- --------
250,000 172,882
======== ========
Fair value of options- The Company estimated the fair value of the
options granted in 2000, 1999 and 1998 based on the following assumptions:
Year Ended December 31,
2000 1999 1998
---- ---- ----
Risk-free interest rate..................... 4.98% 6.8% 5.01%
Expected life of the option............... 3 years 3 years 3 years
Expected volatility of stock.............. 50.00% 36.00% 24.00%
Expected dividends........................ $ 0.50 $ 0.50 $ 1.56
The Company assumes that the equivalent risk-free interest rate is the
closing market rate, on the last trading day of the year, for three-year
treasury bills.
The Company's stock incentive plan was introduced in conjunction with its
initial public offering on December 16, 1993. Based upon the number of options
exercised and cancelled since the inception of the plan, the Company assumes the
estimated life of the outstanding option agreements to be three years.
F-26
15. Concentration of Credit Risk
The Company is subject to the all risks associated with leasing property,
including but not limited to, the risk that upon the expiration of leases for
space located in the Company's properties, the leases may not be renewed, the
space may not be re-leased or the terms of renewal or re-leasing (including any
cost of required renovations or concessions to tenants) may be less favorable
than current lease terms. If the Company is unable to promptly re-lease or renew
leases for a significant portion of its space or if the rental rates upon
renewal or re-leasing are significantly lower than expected, the Company's
earnings and the ability to make distributions to stockholders may be adversely
affected. Most of the tenants in the Company's healthcare properties provide
specialized health care services. The ability of the tenants to honor the terms
of their respective leases is dependent upon the economic, regulatory and social
factors affecting the communities and industry in which the tenants operate.
Many of the Company's medical office properties are in close proximity to
one or more local hospitals. Relocation or closure of a local hospital could
make the Company's nearby properties (particularly those outside of the Beverly
Hills area) less desirable to doctors and healthcare providers affiliated with
the hospital and affect the Company's ability to collect rent due under existing
leases, renew leases and attract new business.
A portion of the Company's assets are invested in debt instruments secured
by long-term senior care or skilled nursing facilities. The ability of the
facility owners to pay their obligations as they come due, as well as their
ability to obtain other permanent financing through the sale of bonds or other
forms of long-term financing is dependent upon their ability to attract patients
who are able to pay for the services they require. These facilities have complex
licensing requirements as do the professionals they employ. The majority of the
services rendered are paid by various federal, state and local agencies. Each of
these facilities function in a complex environment of changing government
regulations which have a significant impact on economic viability.
G&L Hampden, LLC, a wholly owned subsidiary of the Company, acquired three
SNFs in Massachusetts on October 28, 1997 from Hampden Nursing Homes, Inc.
("HNH"), a nonprofit corporation. Lenox Healthcare, Inc. ("Lenox") managed the
three facilities from October 1998 through December 1999. In November 1999,
Lenox filed for bankruptcy protection. The Company immediately moved to replace
Lenox as the manager of the nursing homes. In January 2000, the Company received
the bankruptcy court's permission to replace Lenox as the manager and a new
management firm, a subsidiary of Roush & Associates ("Roush"), was immediately
retained. Although Lenox managed these Massachusetts nursing homes, HNH held the
licenses necessary to operate the facilities. In March 2000, the Company
successfully transferred the licenses to G&L Massachusetts, LLC, a subsidiary of
the Operating Partnership. Revenue from the three Massachusetts nursing homes
represented approximately 31.2% of the Company's total revenues in 2000. Roush
is an experienced skilled nursing facility operator and the Company's management
believes that Roush will be able to profitably manage these facilities for the
Company; however, the financial position of the Company, and its ability to make
expected distributions to stockholders, may be adversely affected in the event
that Roush experiences financial difficulties.
In addition to the nursing homes in Massachusetts, the Company owns other
ALF and SNF Properties that it leases to operators. In the event that the
operators of these facilities are unable to effectively operate the facilities,
the ability of the operators to make rental payments to the Company may become
impaired. If any of these operators experience financial difficulty, the
financial position of the Company and the ability of the Company to make
expected distributions may be adversely affected.
16. Segment Information
In prior years, the Company has presented segment information based on the
following types of investments: direct real estate investments in healthcare
properties and debt obligations secured by healthcare properties. The Company
believes that the composition of its direct real estate investments has changed
to the extent that greater segment disclosure is necessary. 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.
F-27
. 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 for the period from March 15, 2000 through
December 31, 2000 are reflected in the 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 are also
included in the consolidated financial statements of the Company.
Furthermore, the Company will be required to pay the applicable
corporate income tax on any taxable income produced by these SNFs,
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 December 31, 2000, the
Company had ten loans outstanding with a net book value of $11.2
million.
The tables on the following pages reconcile the Company's income and
expense activity for the years ending December 31, 2000, 1999 and 1998 and
balance sheet data as of December 31, 2000 and 1999. The Company has restated
the segment information for the years ending December 31, 1999 and 1998 and as
of December 31, 1999 to reflect the change in reportable segments.
F-28
2000 Reconciliation of Reportable Segment Information
Medical Skilled Assisted Debt
Office Nursing Living Obligations Other Total
------ ------- ------ ----------- ----- -----
(In thousands)
Revenue:
Rents, tenant reimbursements and
parking.............................. $ 24,741 $ 1,328 $ 2,588 $ --- $ --- $ 28,657
Patient revenues....................... --- 17,820 --- --- --- 17,820
Interest and loan fees................. 246 14 --- 2,198 74 2,532
Net gain (loss) on sale of assets...... 1,405 (142) --- --- --- 1,263
Other income........................... 147 366 --- --- 60 573
-------- --------- --------- --------- -------- ---------
Total revenues...................... 26,539 19,386 2,588 2,198 134 50,845
-------- --------- --------- --------- -------- ---------
Expenses:
Property operations.................... 6,999 531 150 174 --- 7,854
Skilled nursing operations............. --- 16,548 --- --- --- 16,548
Depreciation and amortization.......... 4,502 957 492 --- 64 6,015
Interest............................... 9,165 2,100 1,530 877 130 13,802
Provision for doubtful accounts and
notes receivable..................... --- 563 --- 1,725 --- 2,288
General and administrative............. --- --- --- --- 2,892 2,892
-------- --------- --------- --------- -------- ---------
Total expenses...................... 20,666 20,699 2,172 2,776 3,086 49,399
-------- --------- --------- --------- -------- ---------
Income (loss) from operations............. 5,873 (1,313) 416 (578) (2,952) 1,446
Equity in earnings (loss) of
unconsolidated affiliates.............. 122 (8) (520) (11) (417)
-------- --------- --------- --------- -------- ---------
Income (loss) from operations before
minority interests..................... $ 5,995 $ (1,321) $ (104) $ (589) $ (2,952) $ 1,029
======== ========= ========= ========= ======== =========
2000 Reconciliation of Reportable Segment Information
Medical Skilled Assisted Debt
Office Nursing Living Obligations Other Total
------ ------- ------ ----------- ----- -----
(In thousands)
Rental properties......................... $ 115,008 $ 31,040 $ 21,824 $ --- $ 237 $ 168,109
Mortgage loans and notes receivable, net.. --- --- --- 11,244 --- 11,244
Cash and cash equivalents................. 845 111 256 --- 1,579 2,791
Restricted cash .......................... 3,040 687 63 834 --- 4,624
Tenant rent and reimbursement
receivable, net....................... 2,008 3,908 633 71 49 6,669
Unbilled rent receivable, net............. 2,327 85 --- --- --- 2,412
Other receivables, net.................... 11 --- --- 35 --- 46
Investment in unconsolidated affiliates... 1,224 --- 2,795 832 --- 4,851
Deferred financing costs, net............. 1,590 632 363 232 --- 2,817
Pre-acquisition costs..................... --- 49 --- 101 --- 150
Construction in progress.................. 163 8 --- --- --- 171
Deferred lease costs, net................. 657 11 --- --- --- 668
Prepaid expense and other ................ 675 150 43 --- 46 914
--------- --------- -------- ---------- ------- ---------
Total assets........................... $ 127,548 $ 36,681 $ 25,977 $ 13,349 $ 1,911 $ 205,466
========= ========= ======== ========== ======= =========
F-29
1999 Reconciliation of Reportable Segment Information
Medical Skilled Assisted Debt
Office Nursing Living Obligations Other Total
------ ------- ------ ----------- ----- -----
(In thousands)
Revenue:
Rents,tenant reimbursements and
parking.............................. $ 25,301 $ 3,797 $ 1,253 $ --- $ --- $ 30,351
Interest and loan fees.................. 279 24 1 2,339 154 2,797
Other income............................ 138 --- --- --- 260 398
-------- -------- --------- --------- -------- --------
Total revenues....................... 25,718 3,821 1,254 2,339 414 33,546
-------- -------- --------- --------- -------- --------
Expenses:
Property operations..................... 7,081 338 29 121 --- 7,569
Depreciation and amortization........... 4,458 882 269 --- 81 5,690
Impairment of long-lived assets......... 6,400 --- --- --- --- 6,400
Provision for doubtful accounts and
notes receivable..................... --- 2,000 --- --- --- 2,000
Interest................................ 9,958 1,063 813 (8) 567 12,393
General and administrative.............. --- --- --- --- 3,196 3,196
-------- -------- --------- --------- -------- --------
Total expenses....................... 27,897 4,283 1,111 113 3,844 37,248
-------- -------- --------- --------- -------- --------
(Loss) income from operations.............. (2,179) (462) 143 2,226 (3,430) (3,702)
Equity in earnings (loss) of
unconsolidated affiliates............... 202 (28) (505) 62 --- (269)
-------- -------- --------- --------- -------- --------
(Loss) income from operations before
minority interests....................... $ (1,977) $ (490) $ (362) $ 2,288 $ (3,430) $ (3,971)
======== ======== ========= ========= ======== ========
1999 Reconciliation of Reportable Segment Information
Medical Skilled Assisted Debt
Office Nursing Living Obligations Other Total
------ ------- ------ ----------- ----- -----
(In thousands)
Rental properties........................... $ 138,288 $ 29,922 $ 11,701 $ --- $ 298 $ 180,209
Mortgage loans and notes receivable, net.... --- --- --- 16,026 --- 16,026
Cash and cash equivalents................... 597 --- 564 --- 6,384 7,545
Restricted cash ............................ 6,983 899 --- 881 --- 8,763
Tenant rent and reimbursement receivable,
net..................................... 889 371 412 408 398 2,478
Unbilled rent receivable, net............... 2,204 142 --- --- --- 2,346
Other receivables, net...................... 116 --- --- 55 --- 171
Investment in unconsolidated affiliates..... 1,078 3,693 4,128 837 --- 9,736
Deferred financing costs, net............... 1,994 690 290 202 --- 3,176
Pre-acquisition costs....................... --- 59 --- 70 492 621
Construction in progress.................... 158 --- --- --- --- 158
Deferred lease costs, net................... 1,093 17 --- --- --- 1,110
Prepaid expense and other .................. (19) 4 67 1 4 57
---------- --------- --------- ---------- ------- ---------
Total assets............................. $ 153,381 $ 35,797 $ 17,162 $ 18,480 $ 7,576 $ 232,396
========== ========= ========= ========== ======= =========
F-30
1998 Reconciliation of Reportable Segment Information
Medical Skilled Assisted Debt
Office Nursing Living Obligations Other Total
------ ------- ------ ----------- ----- -----
(In thousands)
Revenue:
Rents, tenant reimbursements and
parking .............................. $ 22,608 $ 3,775 $ 538 $ --- $ --- $ 26,921
Interest and loan fees.................. 483 37 3 3,002 992 4,517
Other income............................ 121 74 --- --- 59 254
--------- -------- -------- -------- -------- --------
Total revenues....................... 23,212 3,886 541 3,002 1,051 31,692
--------- -------- -------- -------- -------- --------
Expenses:
Property operations..................... 5,962 156 --- 53 --- 6,171
Depreciation and amortization........... 3,597 807 118 --- 75 4,597
Provision for doubtful accounts and
notes receivable...................... --- --- --- 5,603 --- 5,603
Interest................................ 7,904 588 352 (74) (87) 8,683
General and administrative.............. --- --- --- --- 2,554 2,554
--------- -------- -------- -------- -------- --------
Total expenses....................... 17,463 1,551 470 5,582 2,542 27,608
--------- -------- -------- -------- -------- --------
(Loss) income from operations.............. 5,749 2,335 71 (2,580) (1,491) 4,084
Equity in earnings (loss) of
unconsolidated affiliates............... 78 83 (172) 91 --- 80
--------- -------- -------- -------- -------- --------
(Loss) income from operations before
minority interests....................... $ 5,827 $ 2,418 $ (101) $ (2,489) $ (1,491) $ 4,164
========= ======== ======== ======== ======== ========
17. Extraordinary Loss on Early Retirement of Long-Term Debt
In January 2000, the Company sold a 33,000 square foot MOB in Aliso Viejo,
California for $8.3 million. A portion of the proceeds were used to repay a $5.5
million loan secured by the MOB. In repaying the loan, the Company incurred fees
of approximately $28,000 and wrote off an additional $130,000 in loan fees
relating to the loan. The amounts have been presented as an extraordinary loss
on the statement of operations.
On November 2, 1999, the Company obtained a $13.92 million short-term loan
secured by three skilled nursing facilities located in Massachusetts at an
interest rate of LIBOR plus 2.75%. The first portion of the loan closed on
October 4, 1999 and was used to repay a $6.0 million loan, the Company incurred
prepayment fees of approximately $129,000 and wrote off an additional $42,000 in
loan fees relating to the loan. These amounts have been presented as an
extraordinary loss on the statement of operations.
18. Related Party Transactions
On June 30, 1998, GLH Pacific Gardens, LLC, a joint venture between the
Company and American Senior Care, Inc., purchased a 92-unit senior care facility
located in Santa Monica, California. Upon acquisition, this facility was leased
to GLH Pacific Gardens Corp., an unconsolidated joint venture of the Company in
which the Company owns 93% of the equity in the form of non-voting preferred
stock. On July 1, 1999, the lease was transferred to ASL Santa Monica Inc., an
unaffiliated entity. During 1999 and 1998, GLH Pacific Gardens Corp. made lease
payments of $480,000 and $420,000 to the Company, respectively.
During 1998, the Company owned 50% of the equity in AV Medical, LLC ("AV
Medical") and G&L/M&Z Aliso Partners ("G&L/M&Z"), unconsolidated joint ventures
formed in 1997 with M&Z Aliso Associates, LLC ("M&Z") for the purposes of buying
undeveloped parcels of land in Aliso Viejo and building a 33,000 square foot MOB
and a retail complex, respectively. In December 1998, the Company exchanged its
50% interest in G&L/M&Z Aliso Partners for M&Z's 50% interest in AV Medical.
This transaction was treated as a non-taxable exchange of like-kind real estate
assets under Section 1031 of the Internal Revenue Service Tax Code. As part of
the exchange, M&Z paid the Company $295,000 in accrued distributions and accrued
interest due on loans made by the Company to AV Medical and G&L/M&Z and signed a
$44,000 promissory note due on June 30, 1999 for the remaining balance owed.
This note is currently in default. Upon closing the exchange, AV Medical was
dissolved and the property previously owned by AV Medical was owned 100% by the
Operating Partnership.
F-31
On December 31, 1998, the Company acquired a 40,000 square foot office and
retail complex located in Coronado, California. The property was acquired from a
limited liability company (the "LLC") owned by Daniel M. Gottlieb and Steven D.
Lebowitz, both directors and officers of the Company, who held interests in the
LLC of 30% and 70%, respectively. The property was acquired for an aggregate
purchase price of $9.5 million. The Company assumed $7.5 million in long-term
debt and issued 134,499 Partnership Units valued at $2,000,000. These new units
were issued at an effective rate of $14.87 per unit, a 15.5% premium over the
$12.875 closing price of the Company's stock on December 31, 1998, the closing
date of the transaction, effectively reducing the number of units issued to
Messrs. Gottlieb and Lebowitz. In connection with the purchase of the property,
G&L Coronado Managers Corp. ("Coronado Corp."), an entity owned 30% and 70% by
Messrs. Gottlieb and Lebowitz, respectively, signed a lease (the "Master Lease
Agreement") for the entire third floor of the building with the Company. Under
the terms of the Master Lease Agreement, Coronado Corp. will operate the
Executive Suites located on the third floor of the building on behalf of the
Company for lease payments starting at $19,000 per month and increasing on an
annual basis until November 30, 2010.
On April 15, 1999, the Company borrowed $2.0 million from Reese L. Milner,
a director and an Operating Partnership unit holder of the Company. The loan
bore interest at 12% per annum and was due on May 15, 1999. The Company also
paid a loan fee of $20,000 to Mr. Milner. The loan was secured by a first trust
deed against a parcel of real property owned by the Company. On May 13, 1999,
the loan was extended until new financing on the collateralized property was
obtained. The Company repaid the loan plus all accrued interest on June 13,
1999.
On May 4, 1999, the Company sold a vacant parcel of real property for $1.6
million to the Craig Corporation, whose president is S. Craig Tompkins, a
director of the Company. The Company had the option to repurchase the property
beginning on November 5, 1999 and ending on December 3, 1999 for $1.8 million
plus any costs incurred by the Craig Corporation with respect to the property.
Beginning on January 24, 2000 and ending on January 31, 2000, the Craig
Corporation had the option to sell the property to the Company for $1.9 million.
Thereafter, the option sale price would have increased at a rate of 3% per
month, adjusted pro rata for any periods of less than one month. The Company
accounted for this transaction in accordance with SFAS No. 66 "Accounting for
Sales of Real Estate" and treated this sale as a financing transaction. This
amount was repaid on November 2, 1999 for $1.76 million.
On May 18, 1999, the Company entered into an agreement with the Craig
Corporation, whose president is S. Craig Tompkins, a director of the Company,
whereby the Craig Corporation would purchase up to 36,000 shares of the
Company's common stock on the open market and the Company would have the option
to purchase these shares from the Craig Corporation on or before December 3,
1999 at the Craig Corporation's cost plus a premium of 20% per annum, less any
dividends received. After December 3, 1999, the Craig Corporation had the option
to sell the shares to the Company between January 24 and January 31, 2000 at its
cost plus a premium of 25% per annum. Thereafter, the option sale price would
have increased at a rate of 3% per month. The exercise of the Company's option
was contingent upon the exercise of the Company's option to repurchase the
vacant parcel of land from the Craig Corporation discussed above. On December
29, 1999, the Company purchased 34,400 shares of the Company's common stock for
$404,000. This amount included $44,000 in interest.
On February 7, 2000, the board of directors of the Company unanimously
approved the guarantee of a $500,000 line of credit from Tokai Bank to each of
Daniel M. Gottlieb and Steven D. Lebowitz, both directors and officers of the
Company, for a total of $1 million. In addition, on February 29, 2000, the board
of directors granted 50,000 non-qualified Common Stock options to each of
Messrs. Gottlieb and Lebowitz. The exercise price of the options was $8.875, the
closing price of the Company's Common Stock on February 29, 2000.
On November 30, 2000, the Company received a proposal from Daniel M.
Gottlieb and Steven D. Lebowitz, the Chief Executive Officer and the President,
respectively, of the Company, to acquire all the outstanding shares of Common
Stock of the Company not held by them for a cash price of $10.00 per share. The
proposal contemplates a merger of an entity newly formed by Messrs. Gottlieb and
Lebowitz with and into the Company. The Series A and Series B Preferred Stock
would remain outstanding following the consummation of the transaction. The
proposal was conditioned upon, among other things, approval of the Board of
Directors and stockholders of the Company, the negotiation of mutually
satisfactory definitive agreements, and the receipt by Messrs. Gottlieb and
Lebowitz of satisfactory financing to complete the transaction. Upon receipt of
the proposal, the Board of Directors of the Company formed a special committee
comprised of S. Craig
F-32
Tompkins, as chairman, Dr. Richard Lesher, Charles Reilly and Leslie Michelson
to consider the proposal. The special committee was empowered to evaluate and,
if appropriate, negotiate with respect to the proposal and to make a
recommendation to the Board of Directors with respect to any proposed
transaction.
On February 16, 2001, the Company received a revised proposal from Messrs.
Gottlieb and Lebowitz under which they would acquire all the outstanding shares
of Common Stock of the Company not held by them for a cash price of $11.00 per
share. The revised proposal was submitted to the special committee of the
Company's Board of Directors for review.
F-33
19. Unaudited Consolidated Quarterly Information
Unaudited consolidated quarterly financial information for the periods
as follows:
2000 Fiscal Quarter
--------------------------------------------
1st 2nd 3rd 4th
---------- --------- --------- ----------
(In thousands, except per share amounts)
Revenue:
Rental...................................... $ 6,789 $ 6,261 $ 6,275 $ 6,564
Patient revenues............................ 899 5,452 5,681 5,788
Tenant reimbursements....................... 355 371 401 368
Parking .................................... 303 307 322 341
Net gain on sale of assets.................. 1,263 --- --- ---
Interest and loan fees...................... 484 898 590 560
Other income................................ 109 123 99 242
---------- --------- --------- ----------
Total revenues........................... 10,202 13,412 13,368 13,863
---------- --------- --------- ----------
Expenses:
Property operations......................... 1,855 2,080 1,906 2,013
Skilled nursing operations.................. 818 4,937 5,235 5,558
Depreciation and amortization............... 1,533 1,533 1,472 1,477
Interest.................................... 3,423 3,421 3,491 3,467
General and administrative.................. 700 768 702 722
Provision for doubtful accounts............. 2,288 --- --- ---
---------- --------- --------- ----------
Total expenses........................... 10,617 12,739 12,806 13,237
---------- --------- --------- ----------
(Loss) income from operations before
minority interests.......................... (415) 673 562 626
Equity in (loss) earnings of
unconsolidated affiliates................. (143) (205) (45) (24)
Minority interest in consolidated
affiliates................................ (67) (39) (27) (49)
Minority interest in Operating Partnership.. 533 83 (78) (78)
---------- --------- --------- ----------
(Loss) income before extraordinary item..... (92) 512 412 475
---------- --------- --------- ----------
Extraordinary loss on early
extinguishment of debt...................... (158) --- --- ---
---------- --------- --------- ----------
Net (loss) income........................... (250) 512 412 475
Dividends on preferred stock................ (1,793) (1,790) (1,791) (1,790)
---------- --------- --------- ----------
Net loss available to common stockholders... $ (2,043) $(1,278) $(1,379) $ (1,315)
========== ========= ========= ==========
Per common share data:
Basic:
------
Loss before extraordinary loss $ (0.75) $ (0.55) $ (0.59) $ (0.56)
Extraordinary loss $ (0.06) --- --- ---
---------- --------- --------- ----------
Net loss $ (0.81) $ (0.55) $ (0.59) $ (0.56)
========== ========= ========= ==========
Fully diluted:
--------------
Loss before extraordinary loss $ (0.75) $ (0.55) $ (0.59) $ (0.56)
Extraordinary loss $ (0.06) --- --- ---
---------- --------- --------- ----------
Net loss $ (0.81) $ (0.55) $ (0.59) $ (0.56)
========== ========= ========= ==========
Weighted average shares outstanding:
Basic 2,512 2,337 2,334 2,334
Fully diluted 2,514 2,337 2,334 2,334
F-34
1999 Fiscal Quarter
--------------------------------------------
1st 2nd 3rd 4th
---------- --------- --------- ----------
(In thousands, except per share amounts)
Revenue:
Rental....................................................... $ 6,912 $ 7,064 $ 7,237 $ 6,715
Tenant reimbursements........................................ 371 239 335 330
Parking ..................................................... 264 274 313 297
Interest and loan fees....................................... 581 714 833 669
Other income................................................. 36 254 65 43
---------- --------- --------- ----------
Total revenues............................................ 8,164 8,545 8,783 8,054
---------- --------- --------- ----------
Expenses:
Property operations.......................................... 1,904 1,762 1,951 1,952
Depreciation and amortization................................ 1,333 1,402 1,473 1,482
Interest..................................................... 2,616 2,896 3,315 3,566
General and administrative................................... 641 816 857 882
Impairment of long-lived assets.............................. --- --- 6,400 ---
Provision for doubtful accounts, notes and bonds
Receivable............................................... --- --- --- 2,000
---------- --------- --------- ----------
Total expenses............................................ 6,494 6,876 13,996 9,882
---------- --------- --------- ----------
Income (loss) from operations before
minority interests......................................... 1,670 1,669 (5,213) (1,828)
Equity in earnings (loss) of unconsolidated affiliates....... 7 (277) 23 (22)
Minority interest in consolidated affiliates................. (50) (39) (46) (40)
Minority interest in Operating Partnership................... 24 62 986 1,130
---------- --------- --------- ----------
Income (loss) before extraordinary item...................... 1,651 1,415 (4,250) (760)
---------- --------- --------- ----------
Extraordinary loss on early extinguishment of debt........... --- --- --- (171)
---------- --------- --------- ----------
Net (loss) income ........................................... 1,651 1,415 (4,250) (931)
Dividends on preferred stock ............................... (1,803) (1,803) (1,803) (1,803)
---------- --------- --------- ----------
Net loss available to common stockholders.................... $ (152) $ (388) $(6,053) $ (2,734)
========== ========= ========= ==========
Per common share data:
Basic:
------
Loss before extraordinary loss $ (0.04) $ (0.10) $ (1.56) $ (0.79)
Extraordinary loss --- --- --- $ (0.05)
---------- ---------- --------- ----------
Net loss $ (0.04) $ (0.10) $ (1.56) $ (0.84)
========== ========= ========= ==========
Fully diluted:
--------------
Loss before extraordinary loss $ (0.04) $ (0.10) $ (1.56) $ (0.79)
Extraordinary loss --- --- --- $ (0.05)
---------- ---------- --------- ----------
Net loss $ (0.04) $ (0.10) $ (1.56) $ (0.84)
========== ========= ========= ==========
Weighted average shares outstanding:
Basic 3,976 3,937 3,889 3,245
Fully diluted 3,994 3,949 3,898 3,245
F-35
20. SCHEDULE OF CONSOLIDATED REAL ESTATE AND ACCUMULATED DEPRECIATION AS OF
DECEMBER 31, 2000. (In Thousands).
Cost Capitalized
Subsequent to
Initial Cost to Company Acquisition
------------------------ --------------------
Encumbrances Building and Building and
Description (See Notes) Land Improvements Land Improvement
-------------------------- ------------ ---------- ------------ ------ ------------
Medical Office Buildings
California Properties:
----------------------
405 North Bedford Drive (See Note A) $ 2,186 $ 4,076 $ 452 $ 10,262
415 North Bedford Drive (See Note A) 292 573 --- 607
416 North Bedford Drive (See Note A) 427 247 2,641
435 North Bedford Drive (See Note A) 1,144 2,853 --- 2,718
435 North Roxbury Drive $7,502 162 390 39 2,625
436 North Bedford Drive (See Note B) 2,675 15,317 --- 438
439 North Bedford Drive --- --- 109 --- 486
Holy Cross Medical Plaza 7,761 2,556 10,256 --- 1,333
St. Joseph's Professional 3,130 1,300 3,936 --- 275
Building.
Sherman Oaks Medical Plaza (See Note B) 1,454 8,278 --- 2,428
Regents Medical Center (See Note B) 1,470 8,390 --- 1,292
Cigna HealthCare Bldg. (See Note B) 1,260 7,282 --- 49
1095 Irvine Boulevard 1,277 474 663 --- 454
14662 Newport Avenue (See Note D) 645 1,900 --- 72
14591 Newport Avenue (See Note D) 160 36 --- 212
14642 Newport Avenue (See Note D) 400 1,033 --- 546
15225 Aliso Creek Road 1,408 585 --- (25) 1,328
23861 McBean Parkway 9,705 4,164 --- 7,758
24355 Lyons Avenue 4,983 623 6,752 --- 412
1330 Orange Avenue 7,343 809 8,753 --- 359
5 Journey Road 2,070 411 --- --- 1,559
Senior Care Facilities
Arizona Properties:
-------------------
31 West Maryland Avenue ---- 800 3,847 --- 534
39 West Maryland Avenue ---- 172 835 --- 114
California Properties:
----------------------
1437 Seventh Street 11,296 2,357 8,427 --- 1,300
321 12/th/ Street ---- 93 373 --- 2
1645 Esplanade ---- 159 636 --- 2
18700 Burbank Blvd. 6,616 2,350 8,035 --- 234
Massachusetts Properties:
-------------------------
42 Prospect Avenue (See Note C) 1,048 4,609 --- 1
32 Chestnut Street (See Note C) 1,319 9,307 --- 319
34 Main Street (See Note C) 702 3,040 --- ---
Gross amount at which carried
at close of Period
(See Note G)
-------------------------------- Date of
Building and Accumulated Acquisition Construction or
Description Land Improvements Total Depreciation Date Rehabilitation
-------------------------- ------- ------------ ------- ------------ ----------- ---------------
Medical Office Buildings
California Properties:
----------------------
405 North Bedford Drive $ 2,638 $ 14,338 $16,976 $ 4,389 1993 1947/1987
415 North Bedford Drive 292 1,180 1,472 583 1993 1955
416 North Bedford Drive 427 2,888 3,315 1,112 1993 1946/1986
435 North Bedford Drive 1,144 5,571 6,715 2,979 1993 1950/1963/1984
435 North Roxbury Drive 201 3,015 3,216 1,285 1993 1956/1983
436 North Bedford Drive 2,675 15,755 18,430 1,851 1990 1980
439 North Bedford Drive --- 595 595 355 1993 1956/1983
Holy Cross Medical Plaza 2,556 11,589 14,145 2,512 1994 1985
St. Joseph's Professional 1,300 4,211 5,511 804 1993 1987
Building.
Sherman Oaks Medical Plaza 1,454 10,706 12,160 2,684 1994 1969/1993
Regents Medical Center 1,470 9,682 11,152 2,250 1994 1989
Cigna HealthCare Bldg. 1,260 7,331 8,591 1,172 1994 1992
1095 Irvine Boulevard 474 1,117 1,591 327 1994 1994/1995
14662 Newport Avenue 645 1,972 2,617 219 1996 1969/1974
14591 Newport Avenue 160 248 408 46 1996 1969
14642 Newport Avenue 400 1,579 1,979 356 1996 1985
15225 Aliso Creek Road 560 1,328 1,888 72 1997 1998
23861 McBean Parkway --- 11,922 11,922 781 1998 1981/1999
24355 Lyons Avenue 623 7,164 7,787 443 1998 1990
1330 Orange Avenue 809 9,112 9,921 447 1998 1977/1985
5 Journey Road 411 1,559 1,970 51 1998 1998/1999
Senior Care Facilities
Arizona Properties:
-------------------
31 West Maryland Avenue 800 4,381 5,181 488 1997 1951-1957
39 West Maryland Avenue 172 949 1,121 72 1998 1968
California Properties:
----------------------
1437 Seventh Street 2,357 9,727 12,084 647 1998 1990
321 12/th/ Street 93 375 468 7 2000 1940
1645 Esplanade 159 638 797 13 2000 1960
18700 Burbank Blvd. 2,350 8,269 10,619 232 2000 1989
Massachusetts Properties:
-------------------------
42 Prospect Avenue 1,048 4,610 5,658 637 1997 1957/65/78/85
32 Chestnut Street 1,319 9,626 10,945 695 1997 1985
34 Main Street 702 3,040 3,742 418 1997 1965/1985
F-36
Cost Capitalized
Subsequent to
Initial Cost to Company Acquisition
------------------------ --------------------
Encumbrances Building and Building and
Description (See Notes) Land Improvements Land Improvement
-------------------------- ------------ ---------- ------------ ------ ------------
Washington Properties:
----------------------
3035 Cherry Street 2,391 100 3,216 --- 25
------------ ---------- ----------- ------ ------------
Total..... $ 65,482 $ 28,133 $ 127,333 $ 466 $ 40,385
============ ========== =========== ====== ============
Realty Financing Partnership
(See Note A) 27,684
Medical Partnership (See
Note B) 33,133
G&L Hampden, LLC
(See Note C) 13,740
G&l Realty Partnership
(See Note D) 7,382
Per Above 65,482
------------
Total encumbrances $ 147,421
============
Gross amount at which carried
at close of Period
(See Note G)
-------------------------------- Date of
Building and Accumulated Acquisition Construction or
Description Land Improvements Total Depreciation Date Rehabilitation
-------------------------- ------- ------------ -------- ------------ ----------- ---------------
Washington Properties:
----------------------
3035 Cherry Street 100 3,241 3,341 281 1998 1954
------- ------------ -------- ------------
Total..... $28,599 $ 167,718 $196,317 $ 28,208
======= ============ ======== ============
Realty Financing Partnership
(See Note A)
Medical Partnership (See
Note B)
G&L Hampden, LLC
(See Note C)
G&l Realty Partnership
(See Note D)
Per Above
Total encumbrances
The changes in total real estate assets and accumulated depreciation for the
years ended December 31 are as follows:
Total Real Estate Assets
----------------------------------------------------
2000 1999 1998
----------------------------------------------------
(in thousands)
Balance at beginning of year $ 204,121 $ 196,083 $ 151,214
Improvements and acquisitions 14,887 15,673 44,869
Impairment of long-lived assets --- (6,400) ---
Dispositions (22,691) (1,235) ---
--------------- -------------- ---------------
Balance at end of year $ 196,317 $ 204,121 $ 196,083
=============== ============== ===============
Accumulated Depreciation
---------------------------------------------
2000 1999 1998
-------------- -------------- ------------
(in thousands)
Balance at beg. of year $ 23,912 $ 18,493 $ 13,808
Depreciation 5,697 5,419 4,685
Dispositions (1,401) --- ---
-------------- -------------- ------------
Balance at end of year $ 28,208 $ 23,912 $ 18,493
============== ============== ============
----------------
Note A: The Realty Financing Partnership owns the following properties which are
security for a blanket first trust deed: 405 North Bedford, 415 North
Bedford, 416 North Bedford and 435 North Bedford.
Note B: The Medical Partnership owns the following properties, which are each
security for a blanket first trust deed: Sherman Oaks Medical
Plaza, and 436 North 65,482 Bedford Drive.
Note C: G&L Hampden, LLC owns the following properties, which are security for a
first trust deed: 42 Prospect Avenue, 32 Chestnut Street, and 34 Main
Street.
Note D: G&L Realty Partnership, L.P. owns the following properties which are
security for a first trust deed: 14662 Newport Avenue, 14591 Newport
Avenue, and 14642 Newport Avenue.
Note E: The aggregate costs for Federal income tax purposes were $194,923,000 as
of December 31, 2000.
F-37
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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: April 2, 2001 By: /s/ David E. Hamer
---------------------------------------
David E. Hamer
Controller and Chief Accounting Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, this report has been signed below by the following persons on behalf of
the Registrant and in the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/s/ Daniel M. Gottlieb Chief Executive Officer,
--------------------------------------- Co-Chairman of the Board and April 2, 2001
Daniel M. Gottlieb Director (Principal Executive
Officer)
/s/ Steven D. Lebowitz
---------------------------------------
Steven D. Lebowitz President, Co-Chairman of the April 2, 2001
Board and Director
/s/ Richard L. Lesher Director April 2, 2001
---------------------------------------
Richard L. Lesher
/s/ Leslie D. Michelson Director April 2, 2001
---------------------------------------
Leslie D. Michelson
/s/ Charles P. Reilly Director April 2, 2001
---------------------------------------
Charles P. Reilly
/s/ S. Craig Tompkins Director April 2, 2001
---------------------------------------
S. Craig Tompkins
APPENDIX D
================================================================================
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 March 31, 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 (Zip Code)
Offices)
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 May 11, 2001 was 2,333,800 shares.
================================================================================
G&L REALTY CORP.
INDEX
Page
Part I Financial Information Number
Item 1 Financial Statements
Condensed Consolidated Balance Sheets as of March 31, 2001 (unaudited) and December
31, 2000............................................................................. 3
Condensed Consolidated Statements of Operations for the Three Month Periods Ended
March 31, 2001 and 2000 (unaudited).................................................. 4
Condensed Consolidated Statements of Cash Flows for the Three Month Periods Ended
March 31, 2001 and 2000 (unaudited).................................................. 5 - 6
Notes to Condensed Consolidated Financial Statements (unaudited)..................... 7 - 18
Item 2 Management's Discussion and Analysis of Financial Condition and Results of
Operations........................................................................... 19 - 23
Item 3 Quantitative and Qualitative Disclosures About Market Risk........................... 24
Part II Other Information
Item 1 Legal Proceedings.................................................................... 25
Item 2 Changes in Securities................................................................ 25
Item 3 Defaults Upon Senior Securities...................................................... 25
Item 4 Submission of Matters to a Vote of Security Holders.................................. 25
Item 5 Other Information.................................................................... 25
Item 6 Exhibits and Reports on Form 8-K..................................................... 26 - 29
Signature............................................................................................... 30
Page 2
G&L REALTY CORP.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
March 31, December 31,
2001 2000
--------------------------------------
(Unaudited)
ASSETS
------
Rental properties (Note 3):
Land $ 28,599 $ 28,599
Buildings and improvements, net 138,993 139,510
Projects under development --- 171
-------- --------
Total rental properties 167,592 168,280
Cash and cash equivalents 4,018 2,791
Restricted cash 5,280 4,624
Tenant rent and reimbursements receivable, net 4,800 6,669
Unbilled rent receivable, net 2,488 2,412
Other receivables, net 48 46
Mortgage loans and notes receivable, net 11,398 11,244
Investments in unconsolidated affiliates (Note 6) 4,923 4,851
Deferred charges and other assets, net (Note 4) 4,579 4,549
-------- --------
TOTAL ASSETS $205,126 $205,466
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
LIABILITIES:
Notes payable $158,229 $158,942
Accounts payable and other liabilities 5,052 6,099
Distributions payable 448 433
Tenant security deposits 1,540 1,367
-------- --------
Total liabilities 165,269 166,841
Commitments and Contingencies (Note 8) --- ---
Minority interest in consolidated affiliates (1,308) (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 March 31, 2001 and December 31, 2000 15 15
. Series B Preferred - 1,380,000 shares issued and 1,376,000 shares
outstanding as of March 31, 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 March 31, 2001 and December 31,
2000 23 23
Additional paid-in capital 72,363 72,441
Distributions in excess of net income (31,250) (32,602)
-------- --------
Total stockholders' equity 41,165 39,891
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $205,126 $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
Periods Ended March 31,
2001 2000
----------------------------
REVENUES:
Rent $ 6,581 $ 6,789
Patient revenues 5,008 899
Tenant reimbursements 409 355
Parking 346 303
Interest and loan fees 510 484
Net gain on sale of assets --- 1,263
Lease termination income 2,613 ---
Other income 437 109
------- -------
Total revenues 15,904 10,202
------- -------
EXPENSES:
Property operations 2,177 1,855
Skilled nursing operations 4,530 818
Depreciation and amortization 1,473 1,533
Interest 3,298 3,423
Provision for doubtful accounts and notes receivable --- 2,288
General and administrative 848 700
------- -------
Total expenses 12,326 10,617
------- -------
Income (loss) from operations before minority interests,
equity in loss of unconsolidated affiliates and 3,578 (415)
extraordinary loss
Equity in loss of unconsolidated affiliates (83) (143)
Minority interest in consolidated affiliates (62) (67)
Minority interest in Operating Partnership --- 533
------- -------
Income before extraordinary loss 3,433 (92)
Extraordinary loss on early retirement of long-term debt --- (158)
------- -------
Net income (loss) 3,433 (250)
Dividends on preferred stock (1,790) (1,793)
------- -------
Net income (loss) available to common stockholders $ 1,643 $(2,043)
======= =======
Per common share data:
Basic:
------
Income (loss) before extraordinary loss $ 0.70 $ (0.75)
Extraordinary loss --- (0.06)
------- -------
Net income (loss) $ 0.70 $ (0.81)
======= =======
Fully diluted:
--------------
Income (loss) before extraordinary loss $ 0.70 $ (0.75)
Extraordinary loss --- (0.06)
------- -------
Net income (loss) $ 0.70 $ (0.81)
======= =======
Weighted average shares outstanding:
Basic 2,334 2,512
======= =======
Fully diluted 2,348 2,514
======= =======
See accompanying notes to Condensed Consolidated Financial Statements.
Page 4
G&L REALTY CORP.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Three Months Ended March 31,
2001 2000
-------------------------------
(Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 3,433 $ (250)
Adjustments to reconcile net income to net cash provided by
Operating activities:
Depreciation and amortization 1,473 1,533
Amortization of deferred loan costs 170 136
Extraordinary loss on early retirement of long-term debt --- 158
Net gain on sale of assets --- (1,263)
Minority interests 62 (466)
Equity in loss of unconsolidated affiliates 83 143
Provision for doubtful accounts and notes receivables --- 2,288
Unbilled rent receivable, net (76) (67)
(Increase) decrease in:
Other receivables (2) 82
Tenant rent and reimbursements receivable 1,869 (1,567)
Prepaid expense and other assets (258) (803)
Accrued interest and loan fees receivable 18 285
Increase (decrease) in:
Accounts payable and other liabilities (1,047) 1,871
Tenant security deposits 173 6
------- -------
Net cash provided by operating activities 5,898 2,086
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of real estate assets --- (10,385)
Sale of real estate assets --- 8,794
Additions to rental properties (487) (1,041)
Pre-acquisition costs, net (10) 348
Construction in progress 171 (11)
Leasing commissions (178) (39)
Investment in mortgage loans and notes receivable (300) ---
Contributions to unconsolidated affiliates (155) (42)
Distributions from unconsolidated affiliates --- 1,213
Principal payments received from mortgage loans and notes receivable 128 100
------- -------
Net cash used in investing activities (831) (1,063)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Notes payable proceeds 5,100 7,513
Repayment of notes payable (5,813) (9,086)
Payment of deferred loan costs (208) (215)
Decrease (increase) in restricted cash (656) 380
Minority interest equity contribution --- 486
Purchase of common and preferred stock and partnership units --- (2,374)
Distributions (2,263) (2,584)
------- -------
Net cash used in financing activities (3,840) (5,880)
------- -------
See accompanying notes to Condensed Consolidated Financial Statements.
Continued...
Page 5
G&L REALTY CORP.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Three Months Ended March 31,
2001 2000
-----------------------------
(Unaudited)
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 1,227 (4,857)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 2,791 7,545
------ -------
CASH AND CASH EQUIVALENTS, END OF PERIOD $4,018 $ 2,688
====== =======
SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid during the period for interest $3,126 $ 3,457
====== =======
NONCASH INVESTING AND FINANCING ACTIVITIES
Distributions declared not yet paid $ 370 $ 378
====== =======
Preferred distributions due to minority partner $ 15 $ 14
====== =======
Transfers from projects under development to building $ 374 ---
====== =======
Transfer from investments in unconsolidated affiliates to notes receivable --- $ 3,070
====== =======
Transfer note receivable to land and building:
Land $ 252
Building 1,009
-------
Total $ 1,261
=======
Notes receivable $ 1,261
=======
Concluded.
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 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
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 6th 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 House, LLC, a California limited liability
company . 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 period ended
March 31, 2001 and 2000 has not been audited by independent accountants, but
includes all adjustments (consisting of normal recurring adjustments) which are,
in the opinion of management, necessary for a fair presentation of the results
for such periods. The results of operations for the three months ended March 31,
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.
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:
March 31, December 31,
2001 2000
----------------------------------
(in thousands)
Buildings and improvements.................................................... $155,439 $155,224
Tenant improvements........................................................... 9,792 9,214
Furniture, fixtures and equipment............................................. 3,347 3,280
-------- --------
168,578 167,718
Less accumulated depreciation and amortization................................ (29,585) (28,208)
-------- --------
Total...................................................................... $138,993 $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:
March 31, December 31,
2001 2000
--------------------------
(in thousands)
Deferred loan costs........................................................... $ 4,219 $ 4,011
Pre-acquisition costs......................................................... 160 150
Leasing commissions........................................................... 1,664 1,486
Prepaid expense and other assets.............................................. 766 914
------- -------
6,809 6,561
Less accumulated amortization................................................. (2,230) (2,012)
------- -------
Total....................................................................... $ 4,579 $ 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 three
months ended March 31, 2001 and for the year ended December 31, 2000:
March 31, December 31,
2001 2000
-----------------------------------
(in thousands)
Distributions in excess of net income at beginning of period................. $(32,602) $(25,412)
Net income during period..................................................... 3,433 1,149
Less: Distributions declared................................................. (2,081) (8,339)
Distributions in excess of net income........................................ $(31,250) $(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 year 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 March 31, 2001 and 2000 there were approximately
247,500 and 250,500 stock options outstanding with weighted average exercise
prices of $11.11 and $11.31, respectively. For the three months ended March 31,
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. The
following table reconciles the numerator and denominator of the basic and fully
diluted per share computations for net income for the three months ended March
31, 2001 and 2000:
Page 11
G&L REALTY CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
For the Three Month Periods
ended March 31,
2001 2000
---------------------------
(in thousands)
Numerator:
----------
Net income (loss) $ 3,433 $ (250)
Preferred stock dividends (1,790) (1,793)
------- -------
Net income (loss) available to common
stockholders $ 1,643 $(2,043)
======= =======
Denominator:
------------
Weighted average shares - basic 2,334 2,512
Dilutive effect of stock options 14 2
------- -------
Weighted average shares - fully diluted 2,348 2,514
======= =======
Per share:
---------
Basic $ 0.70 $ (0.81)
Dilutive effect of stock options --- ---
------- -------
Fully diluted $ 0.70 $ (0.81)
======= =======
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, respectively, 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.
See also the Company's Current Reports on Form 8-K filed on December 1,
2000, February 22, 2001, April 16, 2001 and May 11, 2001 for more information
regarding the proposal from Messrs. Gottlieb and Lebowitz and the agreement with
them.
Page 12
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 March 31, 2001. (In thousands).
Penasquitos Penasquitos Heritage Pacific
GLN San Pedro LLC Inc. Park Gardens Corp.
------------------------------------------------------------------------------------
Opening balance at beginning of
period.......................... $765 $1,144 $161 $ 20 $ --- $(312)
Equity in (loss) earnings of
affiliates...................... --- 52 (1) --- --- ---
Cash contributions............... --- --- 70 --- --- ---
Cash distributions............... --- --- --- --- --- ---
---- ------ ---- ----- ----- -----
Equity, before inter-company
adjustments..................... 765 1,196 230 20 --- (312)
---- ------ ---- ----- ----- -----
Intercompany transactions:
Receivable (payable), net........ 66 88 248 (20) 13 110
---- ------ ---- ----- ----- -----
Investment in unconsolidated
affiliates...................... $831 $1,284 $478 $ --- $ 13 $(202)
==== ====== ==== ===== ===== =====
Eagle Run, Inc. Eagle Run Lakeview Total
------------------------------------------------------
Opening balance at beginning of
period.......................... $(370) $655 $ 250
Equity in (loss) earnings of
affiliates...................... (153) 19 --- (83)
Cash contributions............... --- --- 54 124
Cash distributions............... --- --- --- ---
----- ---- ------ ------
Equity, before inter-company
adjustments..................... (523) 674 304 2,354
----- ---- ------ ------
Intercompany transactions:
Receivable (payable), net........ 9 48 2,007 2,569
----- ---- ------ ------
Investment in unconsolidated
affiliates...................... $(514) $722 $2,311 $4,923
===== ==== ====== ======
Page 13
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 three months ended March 31, 2001.
(In thousands).
Pacific
San Penasquitos Penasquitos Heritage Gardens
GLN Pedro LLC Inc. Park Corp.
-------------------------------------------------------------------------------
Financial Position:
-------------------
Land................................. $ $ 1,882 $ 641 $ --- $ 750 $ ---
Buildings............................ --- 4,195 6,356 --- --- ---
Notes receivable, net................ 1,585 --- --- --- --- ---
Other assets......................... --- 320 1,371 --- 238 ---
Notes payable........................ --- (4,707) (7,949) --- (940) ---
Other liabilities.................... (60) (465) (390) (10) (48) (349)
------ ------- ------- ---- ----- -----
Net assets............................. $1,525 $ 1,225 $ 29 $(10) $ --- $(349)
====== ======= ======= ==== ===== =====
Partner's equity:
-----------------
G&L Realty Partnership, L.P.......... $ 765 $ 1,196 $ 230 $ 20 $ --- $(312)
Others............................... 760 29 (201) (30) --- (37)
------ ------- ------- ---- ----- -----
Total equity........................... $1,525 $ 1,225 $ 29 $(10) $ --- $(349)
====== ======= ======= ==== ===== =====
Operations:
-----------
Revenues............................. $ $ 276 $ 244 $--- $ --- $ ---
Expenses............................. --- (224) (246) --- --- ---
------ ------- ------- ---- ----- -----
Net (loss) income...................... $ --- $ 52 $ (2) $--- $ --- $ ---
====== ======= ======= ==== ===== =====
Allocation of net (loss) income:
--------------------------------
G&L Realty Partnership, L.P.......... $ --- $ 52 $ (1) $--- $ --- $ ---
Others............................... --- --- (1) --- --- ---
------ ------- ------- ---- ----- -----
Net (loss) income...................... $ --- $ 52 $ (2) $--- $ --- $ ---
====== ======= ======= ==== ===== =====
Eagle Run
Inc. Eagle Run Lakeview Total
----------------------------------------------
Financial Position:
-------------------
Land................................. $ --- $ 1,191 $ 947 $ 5,411
Buildings............................ --- 4,876 --- 15,427
Notes receivable, net................ --- --- --- 1,585
Other assets......................... 475 1,147 2,716 6,267
Notes payable........................ --- (5,808) (2,361) (21,765)
Other liabilities.................... (1,522) (69) (748) (3,661)
------- ------- ------- --------
Net assets............................. $(1,047) $ 1,337 $ 554 $ 3,264
======= ======= ======= ========
Partner's equity:
-----------------
G&L Realty Partnership, L.P.......... $ (523) $ 674 $ 304 $ 2,354
Others............................... (524) 663 250 910
------- ------- ------- --------
Total equity........................... $(1,047) $ 1,337 $ 554 $ 3,264
======= ======= ======= ========
Operations:
-----------
Revenues............................. $ 646 $ 256 $ --- $ 1,422
Expenses............................. (952) (218) --- (1,640)
------- ------- ------- --------
Net (loss) income...................... $ (306) $ 38 $ --- $ (218)
======= ======= ======= ========
Allocation of net (loss) income:
--------------------------------
G&L Realty Partnership, L.P.......... $ (153) $ 19 $ --- $ (83)
Others............................... (153) 19 --- (135)
------- ------- ------- --------
Net (loss) income...................... $ (306) $ 38 $ --- $ (218)
======= ======= ======= ========
Page 14
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 the 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 March 31, 2001, the Company had eleven loans
outstanding with a net book value of $11.4 million.
The tables on the following pages reconcile the Company's income and expense
activity for the three months ended March 31, 2001 and 2000 and balance sheet
data as of March 31, 2001.
Page 15
G&L REALTY CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
2001 Reconciliation of Reportable Segment Information
For the three months ended March 31, 2001
Medical Skilled Assisted Debt
Office Nursing Living Obligations Other Total
------- ------- --------- ----------- ------- --------
(In thousands)
Revenue:
Rents, tenant reimb. and parking............. $6,229 $ 419 $ 688 $ --- $ --- $ 7,336
Patient revenues............................. --- 5,008 --- --- --- 5,008
Interest and loan fees....................... 44 3 --- 408 55 510
Lease termination income..................... 2,613 --- --- --- --- 2,613
Other income................................. 105 318 --- --- 14 437
------ ------ ----- ----- ------ -------
Total revenues............................. 8,991 5,748 688 408 69 15,904
------ ------ ----- ----- ------ -------
Expenses:
Property operations.......................... 1,845 253 43 36 --- 2,177
Skilled nursing operations................... --- 4,530 --- --- --- 4,530
Depreciation and amortization................ 1,079 253 128 --- 13 1,473
Interest..................................... 2,242 478 373 202 3 3,298
Provision for doubtful accounts and notes
receivable.................................. --- --- --- --- --- ---
General and administrative................... --- --- --- --- 848 848
------ ------ ----- ----- ------ -------
Total expenses............................. 5,166 5,514 544 238 864 12,326
------ ------ ----- ----- ------ -------
Income (loss) from operations................. 3,825 234 144 170 (795) 3,578
Equity in earnings (loss) of unconsolidated
affiliates................................... 52 --- (135) --- --- (83)
------ ------ ----- ----- ------ -------
Income (loss) from operations before minority
interests.................................... $3,877 $ 234 $ 9 $ 170 $ (795) $ 3,495
====== ====== ===== ===== ====== =======
2000 Reconciliation of Reportable Segment Information
For the three months ended March 31, 2000
Medical Skilled Assisted Debt
Office Nursing Living Obligations Other Total
------- -------- --------- ------------ ------- --------
(In thousands)
Revenue:
Rents, tenant reimb. and parking............. $6,294 $ 828 $ 325 $ --- $ --- $ 7,447
Patient revenues............................. --- 899 --- --- --- 899
Interest and loan fees....................... 60 2 1 364 57 484
Net gain on sale of assets................... 1,405 (142) --- --- --- 1,263
Other income................................. 94 1 --- --- 14 109
------ ------ ----- ------- ----- -------
Total revenues............................. 7,853 1,588 326 364 71 10,202
------ ------ ----- ------- ----- -------
Expenses:
Property operations.......................... 1,582 228 30 15 --- 1,855
Skilled nursing operations................... --- 818 --- --- --- 818
Depreciation and amortization................ 1,233 206 75 --- 19 1,533
Provision for doubtful accounts and notes
receivable.................................. --- 563 --- 1,725 --- 2,288
Interest..................................... 2,286 393 466 208 70 3,423
General and administrative................... --- --- --- --- 700 700
------ ------ ----- ------- ----- -------
Total expenses............................. 5,101 2,208 571 1,948 789 10,617
------ ------ ----- ------- ----- -------
Income (loss) from operations................. 2,752 (620) (245) (1,584) (718) (415)
Equity in earnings (loss) of unconsolidated
affiliates................................... 31 (8) (164) (2) --- (143)
------ ------ ----- ------- ----- -------
Income (loss) from operations before minority
interests.................................... $2,783 $ (628) $(409) $(1,586) $(718) $ (558)
====== ====== ===== ======= ===== =======
Page 16
G&L REALTY CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
2001 Reconciliation of Reportable Segment Information
As of March 31, 2001
Medical Skilled Assisted Debt
Office Nursing Living Obligations Other Total
--------- -------- -------- ----------- ------- --------
(In thousands)
Rental properties............................ $114,631 $31,028 $21,705 $ --- $ 228 $167,592
Mortgage loans and notes receivable, net..... --- 290 --- 11,108 --- 11,398
Other assets................................. 10,875 5,265 4,287 2,095 3,614 26,136
-------- ------- ------- ------- ------ --------
Total assets.............................. $125,506 $36,583 $25,992 $13,203 $3,842 $205,126
======== ======= ======= ======= ====== ========
Other assets:
Cash and cash equivalents................... $ 456 $ 9 $ 181 $ --- $3,372 $ 4,018
Restricted cash............................. 3,670 702 34 874 --- 5,280
Tenant rent and reimbursement receivable,
net........................................ 382 3,508 833 21 56 4,800
Unbilled rent receivable, net............... 2,417 71 --- --- --- 2,488
Other receivables, net...................... 13 --- --- 35 --- 48
Investment in unconsolidated affiliates..... 1,284 --- 2,808 831 --- 4,923
Deferred loan costs, net.................... 1,686 574 388 223 --- 2,871
Pre-acquisition costs....................... --- 49 --- 111 --- 160
Deferred lease costs, net................... 773 9 --- --- --- 782
Prepaid expense and other................... 194 343 43 --- 186 766
-------- ------- ------- ------- ------ --------
Total other assets........................ $ 10,875 $ 5,265 $ 4,287 $ 2,095 $3,614 $ 26,136
======== ======= ======= ======= ====== ========
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 17
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.
Two putative shareholder class actions have been filed against the Company
and its directors arising out of the proposal by Daniel M. Gottlieb and Steven
D. Lebowitz, the Chief Executive Officer and President, respectively, 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 of the State of
California, County of Los Angeles, on December 4, 2000. The 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. Both actions assert
claims for breach of fiduciary duty and seek, among other things, compensatory
damages and to enjoin the transaction. Defendants have filed a motion to dismiss
the Abrons action on the ground that the complaint fails to state a claim. All
of the Defendants, except the Company, have filed an additional motion to
dismiss the Abrons action for lack of personal jurisdiction. Defendants also
have filed a motion to dismiss or stay the Abrons action on grounds of forum non
conveniens and comity. In the Lukoff action, Defendants have filed a demurrer to
the complaint on the ground that it fails to state facts sufficient to
constitute a cause of action. 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.
Page 18
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 Three Month Period Ended March 31, 2001 versus the Three
Month Period Ended March 31, 2000.
Total revenues increased by $5.7 million, or 56%, from $10.2 million in the
first quarter of 2000, to $15.9 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 $4.1 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 decreased by $0.1 million,
or 1%, from $7.4 million in the first quarter of 2000, to $7.3 million for the
same period in 2001. The loss of rental revenue related to the termination of
the lease at the Company's MOB located in Irwindale, California accounted for
$0.3 million of this decrease. In addition, $0.5 million of this decrease was
related to the loss of rental revenue from the SNFs discussed above in which the
Company now owns the licenses to operate. Previously, the Company collected
monthly rent for these facilities in the form of lease payments from the prior
operator. These decreases were offset by a $0.2 million increase in rental
revenues at two of the Company's SNFs resulting from new lease agreements.
Also, during the year 2000 and the first quarter of 2001, the Company increased
occupancy at its MOB properties by 3.4% and increased its rental rates per the
terms of its lease agreements resulting in an increase in rental revenues of
approximately $0.5 million.
Interest and loan fee income increased approximately $0.1 million, or 25%,
from $0.4 million in the first quarter of 2000, to $0.5 million for the same
period in 2000. This increase was due to additional interest income related to
the financing by the Company in 1999 of an apartment complex located in Tulsa,
Oklahoma.
The Company recognized a net gain on the sale of assets in the amount of $1.3
million in the first quarter of 2000. The sale, in January 2000, of a 33,000
square foot MOB located in Aliso Viejo, California
Page 19
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 quarter 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.
Other income increased $0.3 million in the first quarter of 2001 compared to
the same period in 2000. This increase is due to the amortization of negative
goodwill related to the Company's acquisition of the operating licenses at its
three SNFs located in Hampden, Massachusetts and the recognition of income
relating to cash received on accounts receivable that arose prior to March 15,
2000.
Total expenses increased by $1.7 million, or 16%, from $10.6 million for the
three months ended March 31, 2000, to $12.3 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 $3.7 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 $0.3, or 16%, from $1.9 million in
the first quarter of 2000 to $2.2 million in the same period in 2001. This
increase is mainly due to additional utility and repairs and maintenance costs
at the Company's MOBs.
Depreciation and amortization expense decreased $0.1 million, or 7%, from
$1.5 million for the three months ended March 31, 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 $0.1 million, or 3%, from $3.4 million for the
three months ended March 31, 2000, to $3.3 million for the same period in 2001.
This decrease was due to the August 2000 repayment of the Company's line of
credit as well as decreased interest payments on the Company's variable rate
mortgages due to lower interest rates.
General & administrative costs increased $0.2 million, or 29%, from $0.7
million for the three months ended March 31, 2000, to $0.9 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.
Equity in loss of unconsolidated affiliates increased $0.1 million for the
three months ended March 31, 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 produced a net loss for the first quarter 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 $3.6 million, from a net loss of $0.2 million for the
three months ended March 31, 2000 to a gain of $3.4 million for the same period
in 2001. This increase was primarily due to the $4.1
Page 20
million increase in patient revenues, the $2.9 million increase in other income
and the $2.3 million decrease in provisions for doubtful accounts and notes
receivable. These were offset by the $3.7 million increase in skilled nursing
operation expenses, the $1.3 million decrease in net gains on sale of assets and
the $0.3 million increase in property operations.
Liquidity and Capital Resources
-------------------------------
As of March 31, 2001, the Company's direct investment in net real estate
assets totaled approximately $167.6 million, $4.9 million in joint ventures and
$11.4 million invested in notes receivable. Total debt outstanding as of March
31, 2001 totaled $158.2 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 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 three months of 2001, the Company
received proceeds of $4.1 million 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. 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.
The Company declared a quarterly distribution payable to holders of the
Company's Common Stock for the first quarter of 2001 in the amount of $0.125 per
common share. These distributions were paid on April 15, 2001 to stockholders
of record on March 31, 2001. 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 quarter to holders of record on the first day of each
month. The Company distributed dividends of $0.4 million to holders of the
Company's Common Stock during the first three months of 2001 while the Company's
FFO was $0.4 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.
Historical Cash Flows
---------------------
The Company's net cash provided by operating activities increased $3.8
million, or 181%, from $2.1 million for the three months ended March 31, 2000 to
$5.9 million for the same period in 2001. The increase is due primarily to a
$3.6 million increase in net income, a $3.4 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 $2.9
million decrease in accounts payable and other liabilities, and a $2.3 million
decrease in provisions for doubtful accounts and notes receivables.
Net cash used in investing activities decreased $0.2 million, or 20%, from
$1.0 million for the three months ended March 31, 2000 to $0.8 million for the
same period in 2001. The decrease was primarily due to an $8.8 million decrease
in the sale of real estate and a $1.2 million decrease in distributions from
unconsolidated affiliates. These were offset by a $10.4 million decrease in
purchases of real estate assets and a $0.6 million decrease in additions to
rental properties.
Cash flows used in financing activities decreased by approximately $2.0
million from $5.9 million for the three months ended March 31, 2000, to $3.9
million for the same period in 2001. The decrease is mainly
Page 21
due to a $3.3 million decrease in the repayment of notes payable as well as a
$2.4 million decrease in purchases of the Company's common stock. These were
offset by a $2.4 million decrease in notes payable proceeds, a $1.0 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.
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.
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 month periods ended March 31, 2001 and 2000.
Page 22
G&L REALTY CORP.
FUNDS FROM OPERATIONS AND ADDITIONAL DATA
(Unaudited)
For the Three Month
Periods Ended March 31,
2001 2000
-----------------------
(in thousands)
Funds from Operations(1)
------------------------
Net income (loss)............................................. $ 3,433 $ (250)
Minority interest in Operating Partnership.................... --- (533)
---------------------
Income (loss) for Operating Partnership....................... 3,433 (783)
Depreciation of real estate assets............................ 1,272 1,342
Amortization of deferred lease costs.......................... 67 79
Net gain on sale of assets.................................... --- (1,263)
Lease termination income...................................... (2,613) ---
Depreciation from unconsolidated affiliates................... 70 149
Extraordinary loss on early retirement of debt................ --- 158
Adjustment for minority interest in consolidated affiliates... (40) (53)
Dividends on preferred stock.................................. (1,790) (1,793)
---------------------
Funds from Operations(1)...................................... $ 399 $(2,164)
=====================
Weighted average shares outstanding(2)
--------------------------------------
Basic 2,959 3,137
=====================
Fully diluted 2,973 3,139
=====================
Additional Data
---------------
Cash flows:
-----------
Operating activities....................................... $ 5,898 $ 2,086
Investing activities....................................... (831) (1,063)
Financing activities....................................... (3,840) (5,880)
Capital expenditures
--------------------
Building improvements...................................... $ 215 $ 262
Tenant improvements........................................ 578 613
Furniture, fixtures & equipment............................ 67 166
Leasing commissions........................................ 178 39
Depreciation and amortization
-----------------------------
Depreciation of real estate assets......................... $ 1,272 $ 1,342
Depreciation of non-real estate assets..................... 121 112
Amortization of deferred lease costs....................... 67 79
Amortization of deferred licensing costs................... 13 ---
Amortization of capitalized financing costs................ 170 136
Accrued rent in excess of billed rent $ 76 $ 71
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 23
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 March 31, 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 March 31, 2001.
Fair Market
PRINCIPAL MATURING IN: Value
-------------------------------------------------------------------------- March 31,
2001 2002 2003 2004 2005 Thereafter Total 2001
---- ---- ---- ---- ---- ---------- ----- ----
(in thousands)
Liabilities:
Mortgage debt:
Fixed rate $ 890 $ 2,145 $2,307 $2,475 $9,253 $ 96,086 $113,156 $110,208
Average interest rate 7.73% 7.73% 7.73% 7.73% 7.73% 7.73% 7.73%
Variable rate 9,310 22,947 88 95 103 10,852 43,395 43,395
Average interest rate 7.83% 7.83% 7.83% 7.83% 7.83% 7.83% 7.83%
Line of credit:
Variable rate 1,678 1,678 1,678
Average interest rate 11.50% 11.50%
------- ------- ------ ------ ------ -------- -------- --------
$11,878 $25,092 $2,395 $2,570 $9,356 $106,938 $158,229 $158,281
======= ======= ====== ====== ====== ======== ======== ========
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 March 31, 2001, a 1% increase in the LIBOR rate
would decrease future earnings by $429,000, future cash flow would not be
affected. A 1% decrease in the LIBOR rate would increase future earnings by
$429,000, 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.
24
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
Condensed 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.
25
Item 6 Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit No. Note Description
----------- ---- -------------------------------------------------------------------------------------------------
2.1 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.
26
(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.
27
(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.
28
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.
c) Management contract or compensatory plan or arrangement.
(b) Reports on Form 8-K
A report on Form 8-K dated February 22, 2001 was filed with the Securities
and Exchange Commission for the purpose of announcing the receipt of a
revised proposal from Daniel M. Gottlieb and Steven D. Lebowitz, the Chief
Executive Officer and the President, respectively, of the Company, to
acquire its publicly-held Common Stock.
A report on Form 8-K dated April 16, 2001 was filed with the Securities and
Exchange Commission 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 11, 2001 was filed with the Securities and
Exchange Commission 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.
29
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: May 15, 2001 By: /s/ David E. Hamer
---------------------------------
David E. Hamer
Chief Accounting Officer
30
APPENDIX E
================================================================================
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.
================================================================================
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
G & L REALTY CORP.
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
FOR THE ANNUAL MEETING OF STOCKHOLDERS ON ______, 2001
The undersigned stockholder of G & L Realty Corp., a Maryland corporation (the
"Company"), hereby acknowledges receipt of the Notice of Annual Meeting of
Stockholders of the Company and the accompanying Proxy Statement. This proxy
revokes all prior proxies and appoints each of Daniel M. Gottlieb, Steven D.
Lebowitz and David E. Hamer proxies of the undersigned, each with full power of
substitution, to attend the Annual Meeting of Stockholders of the Company to be
held at the Beverly Hilton Hotel, 9876 Wilshire Boulevard, Beverly Hills,
California, on _________, 2001 at ____a.m., local time, and any adjournment(s)
or postponement(s) of the meeting, to cast on behalf of the undersigned all
votes that the undersigned is entitled to cast at such meeting and otherwise to
represent the undersigned at the meeting with all powers possessed by the
undersigned if personally present at the meeting.
1. APPROVAL OF THE MERGER OF G & L ACQUISITION, LLC AND THE COMPANY
substantially on the terms provided for IN THE AGREEMENT AND PLAN OF
MERGER, DATED MAY 10, 2001, BY AND BETWEEN G & L ACQUISITION, LLC AND THE
COMPANY.
[_] FOR
[_] AGAINST
[_] ABSTAIN
2. ELECTION OF DIRECTORS [_] FOR all nominees listed below
(except as marked to the contrary
below)
[_] WITHHOLD AUTHORITY to vote for
all nominees listed below
(Instruction: To withhold authority to vote for any individual nominee,
strike a line through the nominee's name on the list below.)
Daniel M. Gottlieb Steven D. Lebowitz Richard L. Lesher
Leslie D. Michelson Charles P. Reilly S. Craig Tompkins
3. RATIFICATION OF THE APPOINTMENT OF DELOITTE & TOUCHE, LLP AS INDEPENDENT
ACCOUNTANTS OF THE COMPANY FOR 2001.
[_] FOR
[_] AGAINST
[_] ABSTAIN
4. IF A MOTION TO ADJOURN THE ANNUAL MEETING IS PROPERLY BROUGHT, TO VOTE UPON
THE ADJOURNMENT OF THE ANNUAL MEETING.
[_] FOR
[_] AGAINST
[_] ABSTAIN
5. TO TRANSACT SUCH OTHER BUSINESS AS MAY PROPERLY COME BEFORE THE ANNUAL
MEETING OR ANY ADJOURNMENTS OR POSTPONEMENTS OF THE MEETING AS TO WHICH THE
UNDERSIGNED HEREBY CONFERS DISCRETIONARY AUTHORITY.
This proxy when properly executed will be voted in the manner directed above by
the undersigned Stockholder. If this proxy is executed but no direction is made,
this proxy will be voted FOR Proposal 1, FOR each of the nominees for director
in Proposal 2, FOR Proposal 3, FOR Proposal 4 and in the discretion of the
proxies on any matters arising under Proposal 5.
[_] CHECK HERE ONLY IF YOU PLAN TO ATTEND THE MEETING IN PERSON.
Dated: _____________________________2001
______________________________
PLEASE MARK/SIGN, DATE AND RETURN THIS PROXY Signature
CARD PROMPTLY USING THE ENCLOSED ENVELOPE.
______________________________
Signature if held jointly
Please sign exactly as your name is printed. When shares are held by joint
tenants, both should sign. When signing as an attorney, executor, administrator,
trustee or guardian, please give your full title as such. If a corporation,
please sign the full corporate name by the President or other authorized
officer. If a partnership, please sign in partnership name by an authorized
person.