-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, FNKk2gjizFAYD0m2uKN7ZF8spmxJX+iegMiTQR+ws5um50qVyVhS4hgem+xk/BQF Fc4Mi4P6iRPf9wxFrTUd6w== 0000891618-97-000885.txt : 19970225 0000891618-97-000885.hdr.sgml : 19970225 ACCESSION NUMBER: 0000891618-97-000885 CONFORMED SUBMISSION TYPE: 10-K405/A PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19951231 FILED AS OF DATE: 19970224 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: GLENBOROUGH REALTY TRUST INC CENTRAL INDEX KEY: 0000929454 STANDARD INDUSTRIAL CLASSIFICATION: REAL ESTATE [6500] IRS NUMBER: 943211970 STATE OF INCORPORATION: MD FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405/A SEC ACT: SEC FILE NUMBER: 001-14162 FILM NUMBER: 97541522 BUSINESS ADDRESS: STREET 1: 400 SOUTH EL CAMINO REAL STREET 2: 11TH FL CITY: SAN MATEO STATE: CA ZIP: 94402 BUSINESS PHONE: 4153439300 MAIL ADDRESS: STREET 1: 400 SOUT EL CAMINO REAL STREET 2: 11TH FL CITY: SAN MATEO STATE: CA ZIP: 94402 10-K405/A 1 AMENDED FORM 10-K405 FISCAL YEAR ENDED 12/31/95 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K/A (Mark One) [ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1995 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 COMMISSION FILE NUMBER 1-14162 GLENBOROUGH REALTY TRUST INCORPORATED (Exact name of Registrant as specified in its charter) Maryland 94-3211970 (State or other jurisdiction (I.R.S. Employer of incorporation or organization) Identification No.) 400 South El Camino Real, 94402-1708 Suite 1100 San Mateo, California - (415) 343-9300 (Zip Code) (Address of principal executive offices and telephone number) Securities registered under Section 12(b)of the Act: Name of Exchange Title of each class: on which registered: Common Stock, $.001 par value New York Stock Exchange Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K [ X ] As of March 28, 1996, the aggregate market value of the voting stock held by nonaffiliates of the registrant was $62,741,426. The aggregate market value was computed with reference to the closing price on the New York Stock Exchange on such date. This calculation does not reflect a determination that persons are affiliates for any other purpose. As of March 28, 1996, 5,754,021 shares of Common Stock ($.001 par value) were outstanding. DOCUMENTS INCORPORATED: Part III: Portions of the Registrant's definitive proxy statement to be issued in conjunction with the Registrant's annual stockholder's meeting to be held on May 30, 1996. 2 Explanatory Note All items of the Registrant's Annual Report on Form 10-K for the year ended December 31, 1996 are included herein; however, only the items set forth below are hereby amended, to the extent set forth herein, by this Form 10-K/A: Part I ------ Item 1 Part II ------- Item 6 Item 7 Item 9 Part III -------- Item 11 Item 14 TABLE OF CONTENTS Page No. PART I Item 1 Business 3 Item 2 Properties 6 Item 3 Legal Proceedings 15 Item 4 Submission of Matters to a Vote of Security Holders 16 PART II Item 5 Market for Registrant's Common Stock and Related Stockholder Matters 17 Item 6 Selected Financial Data 17 Item 7 Management's Discussion and Analysis of Financial Condition and Results of Operations 21 Item 8 Financial Statements and Supplementary Data 24 Item 9 Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 24 PART III Item 10 Directors and Executive Officers of the Registrant 25 Item 11 Executive Compensation 25 Item 12 Security Ownership of Certain Beneficial Owners and Management 25 Item 13 Certain Relationships and Related Transactions 25 PART IV Item 14 Exhibits, Financial Statement Schedules and Reports on Form 8-K 26 3 PART I ITEM 1. BUSINESS General Development and Description of Business Glenborough Realty Trust Incorporated (the "Company") is a self-administered and self-managed equity real estate investment trust ("REIT") engaged primarily in the ownership, operation, management, leasing and acquisition of various types of income-producing properties. As of December 31, 1995 the Company owned and operated 36 income-producing properties (the "Properties," and each a "Property") and held two mortgage receivables. The Properties are comprised of 10 industrial Properties, 19 retail Properties, one residential Property, four hotel Properties and two office Properties, located in 19 states. The Company was incorporated in the state of Maryland on August 26, 1994. On December 31, 1995, the Company completed a consolidation (the "Consolidation") in which Glenborough Corporation, a California corporation ("GC") and eight public limited partnerships (the "Partnerships") collectively, the "GRT Predecessor Entities", merged with and into the Company. The Company (i) issued shares (the "Shares") of the $.001 par value Common Stock of the Company to the Partnerships in exchange for the net assets of the Partnerships; (ii) merged with GC, with the Company being the surviving entity; (iii) acquired an interest in three companies (the "Associated Companies") that provide asset and property management services, as well as other services; and (iv) through a subsidiary operating partnership, Glenborough Properties, L.P. (the "Operating Partnership"), acquired interests in certain warehouse distribution facilities from GPA, Ltd., a California limited partnership ("GPA"). A portion of the Company's operations are conducted through the Operating Partnership, of which the Company is the sole general partner, and in which the limited partner interests not held by the Company are held by GPA. The Company operates the assets acquired in the Consolidation and intends to invest in income property directly and through joint ventures. In addition, the Associated Companies may acquire general partner interests in other real estate limited partnerships. The Company intends to qualify as a REIT under the Internal Revenue Code of 1986, as amended. The common stock of the Company (the "Common Stock") is listed on the New York Stock Exchange ("NYSE") under the trading symbol "GLB." The Company's principal business objectives are to achieve a stable and increasing source of cash flow available for distribution to stockholders. By achieving these objectives, the Company will seek to raise stockholder value over time. The Associated Companies Glenborough Corporation ("GC", formerly known as Glenborough Realty Corporation). GC provides management services, including asset management, property management, and general partner services, to partnerships of which it is the general partner which were not included in the Consolidation. The Company owns 100% of the 19,000 shares (representing 95% of total outstanding shares) of non-voting preferred stock of GC. Three individuals, including Sandra Boyle, an executive officer of the Company, own 33 1/3% each of the 1,000 shares, (representing 5% of total outstanding shares) of voting common stock of GRC. It is intended that the Company's interest in GC will comply with REIT qualification standards. The Company, through its ownership of preferred stock of GC, is entitled to receive cumulative, preferred dividends of $0.80 per share, which must be paid before any dividends can be paid with respect to the common stock of GC. Once the cumulative preferred dividend requirement has been satisfied, any additional dividends are paid in equal amounts per share on both the preferred stock and the common stock, i.e., in aggregate, 95% to the preferred stock and 5% to the common stock. Through the preferred stock, the Company is also be entitled to receive a preferred liquidation value of $95.00 per share plus all cumulative 4 and unpaid dividends. The preferred stock is subject to redemption at the option of GC after a "lock-out" period of ten years, for a redemption price of $95.00 per share. This structure is intended to provide the Company with a significant portion of the economic benefits of the operations of GC. The financial results of GC are accounted for by utilizing the equity method. Glenborough Inland Realty Corporation ("GIRC"). GIRC provides management services for certain partnerships sponsored by Rancon Financial Corporation, an unaffiliated corporation (the "Rancon Partnerships"). These services include asset management, development, Securities and Exchange Commission reporting, accounting, investor relations and property management services, and may in the future also include general partner services. The Company owns 100% of the 19,000 shares (representing 95% of total outstanding shares) of non-voting preferred stock of GIRC. Three individuals, including Frank Austin, an executive officer of the Company, own 33 1/3% each of the 1,000 shares, (representing 5% of total outstanding shares) of voting common stock of GIRC. It is intended that the Company's interest in GIRC will comply with REIT qualification standards. The Company, through its ownership of preferred stock, is entitled to receive cumulative, preferred dividends of $0.80 per share, which must be paid before any dividends can be paid with respect to the common stock. Once the cumulative preferred dividend requirement has been satisfied, any additional dividends are paid in equal amounts per share on both the preferred stock and the common stock, i.e., in aggregate, 95% to the preferred stock and 5% to the common stock. Through the preferred stock, the Company is also entitled to receive a preferred liquidation value of $55.00 per share plus all cumulative and unpaid dividends. The preferred stock is subject to redemption at the option of GIRC after a "lock-out" period of ten years, for a redemption price of $55.00 per share. This structure is intended to provide the Company with a significant portion of the economic benefits of the operations of GIRC. The financial results of GIRC are accounted for by utilizing the equity method. Glenborough Hotel Group ("GHG"). The Operating Partnership leases its hotel properties to GHG. The Operating Partnership holds a first mortgage on another hotel which is managed by GHG under a contract with its owner. Two other hotels, owned by a partnership whose general partner is GC, are also managed by GHG under a contract with the partnership. The Company owns 100% of the 50 shares of non-voting preferred stock of GHG. Three individuals, including Terri Garnick, an executive officer of the Company, own 33 1/3% each of the 1,000 shares, of voting common stock of GHG. It is intended that the Company's interest in GHG will comply with REIT qualification standards. The Company, through its ownership of preferred stock, is entitled to receive cumulative, preferred dividends of $600 per share, which must be paid before any dividends can be paid with respect to the common stock. Once the cumulative preferred dividend requirement has been satisfied, any additional dividends are paid in equal amounts per share on both the preferred stock and the common stock, i.e., in aggregate, 75% to the preferred stock and 25% to the common stock. Through the preferred stock, the Company is also entitled to receive a preferred liquidation value of $40,000 per share plus all cumulative and unpaid dividends. The preferred stock is subject to redemption at the option of GHG after a "lock-out" period of four years, for a redemption price of $40,000 per share. This structure is intended to provide the Company with a significant portion of the economic benefits of the operations of GHG. The financial results of GHG will be accounted for by utilizing the equity method. 5 GHG owns approximately 80% of the common stock of Resort Group, Inc. ("RGI"). RGI manages homeowners associations and rental pools for two beachfront resort condominium hotel properties and owns six units at one of the Properties. GHG also owns 94% of the outstanding common stock of Atlantic Pacific Holdings, Ltd., the sole owner of 100% of the common stock of Atlantic Pacific Assurance Company, Limited (APAC), a Bermuda corporation formed to underwrite certain insurable risks of certain of the Company's predecessor partnerships and related entities. APAC no longer underwrites any business and is expected to be liquidated in 1997. GHG accounts for its investment in APAC using the cost method due to its anticipated liquidation. Employees As of December 31, 1995, the Company and the Associated Companies had approximately 410 full-time employees. Competition The Company's Properties compete for tenants (or guests, in the case of hotels) with similar properties located in their markets. Management believes that characteristics influencing the competitiveness of a real estate project include the geographic location of the property, the professionalism of the property manager and the maintenance and appearance of the property, in addition to external factors such as general economic circumstances, trends, and the existence of new competing properties in the general area in which the Company competes for tenants (or guests, in the case of hotels). Additional competitive factors with respect to commercial properties include the ease of access to the property, the adequacy of related facilities, such as parking, and the ability to provide rent concessions and additional tenant improvements commensurate with local market conditions. Such competition may lead to rent concessions that could adversely affect the Company's cash flow. Although the Company believes its Properties are competitive with comparable properties as to those factors within the Company's control, continued over-building and other external factors could adversely affect the ability of the Company to attract and retain tenants. The marketability of the Properties may also be affected (either positively or negatively) by these factors as well as by changes in general or local economic conditions, including prevailing interest rates. The Company also experiences competition when attempting to acquire equity interests in desirable real estate, including competition from domestic and foreign financial institutions, other REIT's, life insurance companies, pension funds, trust funds, partnerships and individual investors. Working Capital The Company's practice is to maintain cash reserves for normal repairs, replacements, improvements, working capital and other contingencies. Other Factors Compliance with laws and regulations regarding the discharge of materials into the environment, or otherwise relating to the protection of the environment, is not expected to have any material effects upon the capital expenditures, earnings and competitive position of the Company. The Properties have each been subject to Phase I Environmental Assessments ("Phase I Reports") and, where such an assessment was indicated by findings in a Phase I Report, Phase II Environmental Assessments ("Phase II Reports" and, collectively, the "Environmental Reports") have been conducted on certain Properties. These reports did not indicate any significant environmental issues. 6 In the event pre-existing environmental conditions not disclosed in the Environmental Reports and requiring remediation are discovered subsequently, the cost of remediation will be borne by the Company. Additionally, no assurances can be given that (i) future laws, ordinances, or regulations will not impose any material environmental liability, (ii) the current environmental condition of the Properties has not been or will not be affected by tenants and occupants of the Properties, by the condition of properties in the vicinity of the Properties or by third parties unrelated to the Company or (iii) that the Company will not otherwise incur significant liabilities associated with costs of remediation relating to the Properties. ITEM 2. PROPERTIES The Location and Type of the Company's Properties The Company's Properties consist of 36 properties which are diversified by type (retail, industrial, office, apartment and hotel) and are located in four geographic regions and 19 states within the United States comprising numerous local markets. The following table sets forth, as of December 31, 1995, the location and type of Properties by rentable square feet and/or units along with average occupancy.
Sq. Ft. Sq. Ft. Sq. Ft. Units Units # of Region Retail Industrial Office Apt. Hotel Props. - ------ ------ ---------- ------ ---- ----- ------ West 73,500 198,457 -- 104 277 6 Central 16,000 1,116,570 106,076 -- 222 16 Northeast -- 274,000 -- -- -- 1 South 196,158 -- -- -- -- 13 ------- --------- ------- --- --- -- Total 285,658 1,589,027 106,076 104 499 36 ======= ========= ======= === === == No. of Properties 19 10 2 1 4 Average Occupancy 95% 99% 97% 93% 73%
For the years ended December 31, 1995, 1994 and 1993, rental revenue from the two Properties leased to Navistar International represented approximately 10% of the historical combined total rental revenue of the GRT Predecessor Entities. A complete listing of Properties owned by the Company at December 31, 1995 is included as part of Schedule III in Item 14 below. Upon Consolidation of the Company, the Company assumed a note payable on one property and pledged a significant portion of the remaining properties as security for its new notes payable, summarized as follows: Loan secured by nine properties with a fixed interest rate of 7.57% requiring monthly payments of principal and interest of $149,000, based on a 25 year amortization with a maturity date of January 1, 2006 $20,000,000 Lines of credit secured by nine properties with a variable interest rate of LIBOR plus 2.365%, requiring monthly interest only payments and having maturity dates of November 29, 1998 and December 29, 1998 10,000,000 Loan secured by one property with a fixed interest rate of 7.75%, requiring monthly payments of principal and interest of $20,000 based on a 25 year amortization, with a maturity date of January 1, 2006 2,650,000
7 Loan secured by one property with a fixed interest rate of 8%, requiring monthly payments of principal and interest of $13,000 based on a 25 year amortization, with a maturity date of September 1, 2005 1,035,000 ----------- $33,685,000
The Company's annual property tax expense is anticipated to be approximately $980,000, which is approximately 1.17% of the appraised value of its Properties. Retail Properties The retail portfolio consists of 19 Properties with a total of 285,658 square feet. As of December 31, 1995, the occupancy of the retail Properties was 95%. Three of the retail Properties, representing 198,908 square feet or 70% of the total retail space, are anchored community shopping centers. The anchor tenants are national or regional supermarkets and drug stores. Ten of the retail Properties are leased to QuikTrip Corporation on long-term leases expiring in 2008, 2010 or 2014. QuikTrip is a regional convenience store operator with over 300 stores in six states. The leases require the tenant to pay for all Property costs and provide for periodic fixed increases of base rent. Under such leases, the tenant has one five-year option to renew at specified rental rates. Six of the retail Properties are located in the Atlanta metropolitan area and are leased to tenants in the automotive care industry. The leases for the retail Properties (excluding the above described QuikTrip leases) generally include fixed or Consumer Price Index ("CPI")-based rent increases and some include provisions for the payment of additional rent based on a percentage of the tenants' gross sales that exceed specified amounts. Retail tenants also typically pay as additional rent their pro rata share of the Property operating costs including common area maintenance, property taxes, insurance and non-structural repairs. Some leases contain options to renew at market rates or specified rates. The Company holds fee title to all of the retail Properties except one of the community centers ("Park Center"), which is owned by AFP Partners, one of the partnerships managed by GC. The Company holds a participating first mortgage interest in Park Center. In accordance with generally accepted accounting principles ("GAAP"), the Company is accounting for Park Center as though it holds fee title, as substantially all risks and rewards of ownership have been transferred to the Company as a result of the terms of the mortgage note. The following table sets forth, for the periods specified, the aggregate average occupancy and average annual base rent per leased square foot for the retail properties. RETAIL PROPERTIES HISTORICAL RENT AND OCCUPANCY
Average Average Effective Total Total Occupancy Base Rent Effective Rentable for the per Leased Annual Base Year Area (Sq Ft) Period Sq Ft (1) Rent ($000s)(2) - ---- ------------ ------ --------- --------------- 1995 285,658 95% $10.80 $2,927 1994 285,722 94 10.76 2,890 1993 285,722 90 11.11 2,858 1992 285,722 88 11.12 2,823 1991 285,722 91 11.18 2,906
(1) Total effective annual base rent divided by average occupancy in square feet. (2) Total effective annual base rent including any free rent given for the period. 8 The following table sets forth the contractual lease expirations for leases for the retail Properties as of December 31, 1995. RETAIL PROPERTIES LEASE EXPIRATIONS
Annual Base Rentable Square Rent Under Percentage of Total Number of Footage Expiring Annual Base Rent Leases Subject to Leases Represented by Year Expiring Expiring Leases ($000s)(1) Expiring Leases (2) - ---- -------- --------------- ---------- ------------------- 1996 15 23,723 $ 280 9.16% 1997 13 26,112 275 9.00 1998 14 26,153 280 9.16 1999 13 22,902 275 9.00 2000 13 31,777 367 12.00 2001 3 44,380 264 8.63 Thereafter 12 94,856 1,316 43.05 -- ------- ------ ------ Total 83 269,903(2) $3,057(3) 100.00% == ======= ====== =======
(1) Annual base rent expiring during each period, divided by total annual base rent (both adjusted for contractual increases). (2) This figure is based on square footage actually leased (which excludes vacant space), which accounts for the difference between this figure and "Total Rentable Area" in the preceding table (which includes vacant space). (3) This figure incorporates contractual rent increases arising after 1995, and thus differs from "Total Annual Base Rent" in the preceding table which is based on 1995 rental amounts. Industrial Properties The Company owns ten industrial Properties aggregating 1,589,027 rentable square feet. Eight of the industrial Properties are designed for warehouse and distribution, ranging in size from 37,200 square feet to 474,426 square feet. Two of the industrial Properties are self-storage facilities with 311 units and 499 units. Four of the warehouse Properties are currently leased to multiple tenants and four are leased to single tenants. Three of the four single-tenant warehouse Properties, including the two largest facilities, are adaptable in design for multi-tenant use. As of December 31, 1995 the warehouse Properties were approximately 99% leased to 24 tenants and the self-storage facilities were approximately 92% leased. The four single-tenant Properties all have nine years remaining on leases whose original terms were 20 years and include rent increases every three years based on all or a percentage of the change in the CPI. Under these leases, the tenants are required to pay for all of the Properties' operating costs, such as common area maintenance, property taxes, insurance and all repairs including structural repairs. All four of the single-tenant Properties are leased to Navistar International Transportation Corporation ("Navistar"), but two of the leases have been assumed by Case Equipment Corporation ("Case"). Navistar has options under its leases to purchase either or both of the Properties on March 1 of 1999 and 2002. The option price is equal to the lesser of: (i) the greater of the appraised value or a specified option floor price; or (ii) a price derived by applying a specified capitalization rate to a specified rental amount. The Case leases provide a purchase option exercisable by the tenant on March 1, 1999 and 2002 for an amount equal to the greater of the appraised value or a specified minimum price. Management does not believe, based on discussions with both tenants, that either tenant currently intends to exercise any purchase options at this time. The remaining warehouse Properties have leases whose terms range from one to six years. Most of the leases are "triple net" leases, whereby the tenants are required to pay as additional rent their pro rata share of the Property's operating costs, common area maintenance, property taxes, insurance and non-structural 9 repairs. Some of the leases are "industrial gross" leases, whereby the tenant pays as additional rent their pro rata share of common area maintenance and repair costs and their share of the increase in taxes and insurance over a specified base year cost. Many of these leases call for fixed or CPI-based rent increases. The Company holds fee title to all of the industrial Properties except a 40,482 square foot warehouse facility in Seattle ("Sea Tac II"), which is owned by AFP Partners, one of the partnerships managed by GC. The Company holds a participating first mortgage interest in Sea Tac II. In accordance with GAAP, the Company is accounting for Sea Tac II as though it holds fee title as substantially all risks and rewards of ownership have been transferred to the Company as a result of the terms of the mortgage note. The following table sets forth, for the periods specified, the aggregate average occupancy and average Annual Base Rent per leased square foot for the Industrial Properties.
INDUSTRIAL PROPERTIES HISTORICAL RENT AND OCCUPANCY Total Average Average Effective Total Effective Rentable Occupancy Base Rent per Annual Base Year Area (Sq Ft) for the Period Leased Sq Ft (1) Rent ($000s)(2) - ---- ------------ -------------- --------------- --------------- 1995 1,589,027 99% $2.52 $3,985 1994 1,589,092 99 2.48 3,887 1993 1,589,092 97 2.37 3,648 1992 1,589,092 96 2.31 3,518 1991 1,589,092 97 2.35 3,617
(1) Total effective annual base rent divided by average occupancy in square feet. (2) Total effective annual base rent including any free rent given for the period. The following table sets forth the contractual lease expirations for leases for the industrial Properties as of December 31, 1995. INDUSTRIAL PROPERTIES LEASE EXPIRATIONS (1)
Percentage of Total Rentable Annual Annual Base Year Number of Square Footage Base Rent Rent Represented of lease Leases Subject to Under Expiring by Expiring Expiration Expiring Expiring Leases Leases ($000s) (2) Leases (3) - ---------- -------- --------------- ------------------ ---------- 1996 3 15,600 $ 67 1.94% 1997 9 63,000 229 6.62 1998 5 99,800 340 9.83 1999 6 14,400 87 2.52 2000 1 1,200 7 .20 Thereafter 6 1,297,827 2,729 78.89 -- --------- ------ ------ Total 30 1,491,827(3) $3,459(4) 100.00% == ========= ====== ======
(1) Excludes self-storage facilities. (2) Annual base rent expiring during each period, divided by total annual base rent (both adjusted for contractual increases). (3) This figure is based on square footage actually leased (which excludes vacant space), which accounts for the difference between this figure and "Total Rentable Area" in the preceding table (which includes vacant space). (4) This figure incorporates contractual rent increases arising after 1995, and thus differs from "Total Annual Base Rent" in the preceding table which is based on 1995 rents. 10 Office Properties The Company owns two office Properties with total rentable square footage of 106,076. Both are suburban mid-rise buildings. The leases for the office Properties have terms ranging from one to six years. The office leases generally require the tenant to reimburse the Company for increases in building operating costs over a base amount. Many of the leases contain fixed or CPI-based rent increases. As of December 31, 1995, the office Properties were approximately 97% leased. The following table sets forth, for the periods specified, the aggregate average occupancy and average Annual Base Rent per leased square foot. OFFICE PROPERTIES HISTORICAL RENT AND OCCUPANCY
Total Average Average Effective Total Effective Rentable Occupancy Base Rent per Annual Base Year Area (Sq Ft) for the Period Leased Sq Ft (1) Rent ($000s) (2) - ---- ------------ -------------- ------------- ------------- 1995 106,076 97% $11.91 $ 1,228 1994 105,770 88 11.44 1,065 1993 104,666 80 12.04 1,008 1992 104,754 80 11.10 930 1991 104,754 53 9.60 533
(1) Total effective annual base rent divided by average occupancy in square feet. (2) Total effective annual base rent including any free rent given for the period. The following table sets forth the contractual lease expirations for leases for the office Properties as of December 31, 1995. OFFICE PROPERTIES LEASE EXPIRATIONS
Percentage of Rentable Annual Total Annual Base Year Number of Square Footage Base Rent Rent Represented of lease Leases Subject to Under Expiring by Expiring Expiration Expiring Expiring Leases Leases ($000s) (1) Leases (2) - ---------- -------- --------------- --------------- ------- 1996 5 12,346 $ 140 8.81% 1997 8 14,678 201 12.65 1998 4 45,922 774 48.71 1999 3 12,988 150 9.44 2000 -- -- -- -- Thereafter 2 17,275 324 20.39 -- ------- ------ ------ Total 22 103,209 (2) $1,589 (3) 100.00% == ======= ====== ======
(1) Annual base rent expiring during each period, divided by total annual base rent (both adjusted for contractual increases). (2) This figure is based on square footage actually leased (which excludes vacant space), which accounts for the difference between this figure and "Total Rentable Area" in the preceding table (which includes vacant space). (3) This figure incorporates contractual rent increases arising after 1995, and thus differs from "Total Annual Base Rent" in the preceding table which is based on 1995 rents. 11 Tenant Improvements and Leasing Commissions The following table summarizes by year the capitalized tenant improvement and leasing commission expenditures incurred in the renewal or re-leasing of previously occupied space since January 1, 1991. CAPITALIZED TENANT IMPROVEMENTS AND LEASING COMMISSIONS
1991 1992 1993 1994 1995 ---- ---- ---- ---- ---- INDUSTRIAL PROPERTIES Square footage renewed or re-leased 108,200 52,491 66,500 89,000 141,523 Capitalized tenant improvements and commissions($000s) $ 41 $ 21 $ 64 $ 60 $ 19 Average per square foot of renewed or re-leased space $ 0.38 $ 0.40 $ 0.96 $ 0.67 $ 0.13 OFFICE PROPERTIES Square footage renewed or re-leased 45,586 26,989 23,909 18,384 79,745 Capitalized tenant improvements and commissions ($000s) $ 515 $ 192 $ 59 $ 58 $ 323 Average per square foot of renewed or re-leased space $ 11.29 $ 7.12 $ 2.47 $ 3.18 $ 4.05 RETAIL PROPERTIES Square footage renewed or re-leased 14,136 26,403 31,443 46,833 33,294 Capitalized tenant improvements and commissions ($000s) $ 16 $ 63 $ 59 $ 59 $ 98 Average per square foot of renewed or re-leased space $ l.13 $ 2.38 $ 1.87 $ l.25 $ 2.94 ALL PROPERTIES Square footage renewed or re-leased 167,922 105,883 121,852 154,217 254,562 Capitalized tenant improvement and leasing commission expenditures ($000s) $ 572 $ 276 $ 182 $ 176 $ 440 Average per square foot of renewed or re-leased space $ 3.40 $ 2.61 $ 1.49 $ 1.14 $ 1.73
Apartment Properties The Company owns one apartment complex known as Summerbreeze, with 104 units totaling 73,284 square feet of space, located in North Hollywood, California. As of December 31, 1995, Summerbreeze was approximately 93% occupied. 12 The following table sets forth, for the periods specified, the average occupancy, average base rent per unit and annual base rent for the Summerbreeze Apartments. APARTMENT PROPERTIES HISTORICAL RENT AND OCCUPANCY
Average Total Average Effective Total Effective Rentable Occupancy Base Rent per Annual Base Year Area(Units) for the Period Leased Unit (1) Rent ($000s) (2) - ---- ----------- -------------- ----------- ------------- 1995 104 94% $ 601 $ 697 1994 104 98 632 774 1993 104 93 632 734 1992 104 98 633 758 1991 104 95 634 752
(1) Total effective annual base rent divided by average occupied unit. (2) Total effective annual base rent including any free rent given for the period. Hotels Overview. The Hotel portfolio consists of four all-suite hotels (the "Hotels," and each a "Hotel") ranging from 90 to 157 rooms each. All of the hotels are currently operating under license agreements with Country Lodging by Carlson, Inc. and are marketed as Country Suites By Carlson ("Country Suites"). The Hotels consist primarily of one-bedroom suites, but each Property also includes some studio suites and two-bedroom suites. Country Lodging is part of the Carlson Companies, based in Minneapolis, Minnesota. The Carlson Companies own, operate and franchise Radisson Hotels, TGI Friday's Restaurants, Country Kitchen Restaurants and the Carlson Travel Agency Network. Currently there are a total of more than 70 Country Inns and Suites. The Company holds fee title to three of the four Hotels. The fourth Hotel, the Country Suites in Irving, Texas ("Country Suites"), is actually owned by AFP Partners, one of the Partnerships managed by GC. The Company holds a participating first mortgage interest in Country Suites. In accordance with GAAP, the Company is accounting for Country Suites as though it holds fee title, as substantially all risks and rewards of ownership have been transferred to the Company as a result of the terms of the mortgage note. The hotels owned in fee title are currently leased to GHG (see "The Percentage Leases," discussed below). The Irving, TX hotel is managed by GHG under terms of a pre-existing contract. 13 The following table contains occupancy, average daily rate ("ADR") and revenue per available room ("REVPAR") information for the Company's Hotels as well as comparative information for all U.S. Hotels and all Country Lodging hotels.
Year Ended December 31: 1991 1992 1993 1994 1995 ---- ---- ---- ---- ---- IRVING, TX Occupancy 57.4% 66.1% 76.3% 77.5% 76.0% ADR $ 61.77 $ 53.53 $ 50.22 $ 58.52 $ 66.55 REVPAR $ 35.46 $ 35.37 $ 38.33 $ 45.36 $ 50.57 ONTARIO, CA Occupancy 54.7% 59.3% 59.6% 56.4% 65.5% ADR $ 56.46 $ 52.93 $ 51.61 $ 52.02 $ 48.38 REVPAR $ 30.89 $ 31.42 $ 30.74 $ 29.35 $ 31.67 ARLINGTON, TX Occupancy 73.3% 67.6% 61.0% 63.4% 70.2% ADR $ 58.44 $ 57.85 $ 51.58 $ 62.73 $ 64.96 REVPAR $ 42.84 $ 39.14 $ 31.46 $ 39.79 $ 45.63 TUCSON, AZ Occupancy 73.4% 71.8% 77.4% 77.4% 79.0% ADR $ 51.28 $ 54.38 $ 54.46 $ 57.21 $ 58.93 REVPAR $ 37.66 $ 39.05 $ 42.16 $ 44.29 $ 46.53 ALL U.S. HOTELS(1) Occupancy 60.3% 61.8% 63.7% 65.2% 66.0% ADR $ 59.03 $ 59.84 $ 60.99 $ 63.63 $ 66.88 REVPAR $ 35.60 $ 36.98 $ 38.85 $ 41.48 $ 44.14 COUNTRY LODGING SYSTEM(2) Occupancy 68.1% 67.1% 71.4% 75.0% 75.4% ADR $ 48.30 $ 50.62 $ 50.00 $ 53.00 $ 56.00 REVPAR $ 32.90 $ 33.94 $ 35.72 $ 39.75 $ 41.00
(1) Source: Smith Travel Research, Arthur Andersen LLP, Country Hospitality. (2) Source: Country Hospitality. Data for the years 1989, 1990 and 1991 include Canadian properties. Data for all other years are limited to U.S. properties. THE PERCENTAGE LEASES In order for the Company to qualify as a REIT, neither the Company nor the Operating Partnership can operate the Hotels. Therefore, the three owned Hotels are leased to GHG for a term of five years pursuant to percentage leases ("Percentage Leases") which provide for rent equal to the greater of the Base Rent (as defined in the lease) or a specified percentage of rent (the "Percentage Rent"). Each Hotel is separately leased to the lessee. The lessee's ability to make rent payments will to a large degree depend on its ability to generate cash flow from the operations of the Hotels. Each Percentage Lease contains the provisions described below. Each Percentage Lease has a non-cancelable term of five years, subject to earlier termination upon the occurrence of certain contingencies described in the Percentage Lease. The lessee under the Percentage Lease has one five-year renewal option at the then current fair market rent. During the term of each Percentage Lease, the lessee is obligated to pay the greater of Base Rent or Percentage Rent. Base Rent accrues and is required to be paid monthly in advance. Percentage Rent is calculated by multiplying fixed percentages by room revenues for each of the three Hotels; the applicable percentage changes when revenue exceeds a specified threshold, and the threshold may be adjusted annually in accordance with changes in the applicable CPI. Percentage Rent is due quarterly. 14 The table below sets forth the annual Base Rent and the Percentage Rent formulas for each of the three hotels. HOTEL LEASE RENT PROVISIONS
Initial Annual Hotel Base Rent Annual Percentage Rent Formulas ----- --------- ------------------------------- Ontario, CA $ 240,000 24% of the first $1,575,000 of room revenue plus 40% of room revenue above $1,575,000 and 5% of other revenue Arlington, TX 360,000 27% of the first $1,600,000 of room revenue plus 42% of room revenue above $1,600,000 and 5% of other revenue Tucson, AZ 600,000 40% of the first $1,350,000 of room revenue plus 46% of room revenue above $1,350,000 and 5% of other revenue
Other than real estate and personal property taxes, casualty insurance, a fixed capital improvement allowance and maintenance of underground utilities and structural elements, which are the responsibility of the Company, the Percentage Leases require the Lessee to pay rent, insurance, all costs, salaries, and expenses and all utility and other charges incurred in the operation of the Hotels. Under the Percentage Leases, the Company is required to maintain the underground utilities and the structural elements of the improvements, including exterior walls (excluding plate glass) and roof. In addition, the Company is required to fund periodic capital improvements to the buildings and grounds, and the periodic repair, replacement and refurbishment of furniture, fixtures and equipment, up to the following amounts per quarter for the first year of the Percentage Lease: Arlington-$25,000; Ontario-$22,750 and Tucson-$28,500. These amounts will be increased annually in accordance with the CPI. These obligations will be carried forward to the extent not expended, and any unexpended amounts will remain the property of the Company upon termination of the Percentage Leases except for capital improvements and maintenance of structural elements and underground utilities, the lessee will be required, at its expense, to maintain the Hotels in good order and repair, except for ordinary wear and tear, and to make non-structural, foreseen and unforeseen, and ordinary and extraordinary, repairs which may be necessary and appropriate to keep the Hotels in good order and repair. The lessee will not be permitted to sublet all or any part of the Hotels or to assign its interest under any of the Percentage Leases, other than to an affiliate of the lessee, without the prior written consent of the Company. No assignment or subletting will release the lessee from any of its obligations under the Percentage Leases. In the event the Company enters into an agreement to sell or otherwise transfer a Hotel, the Company will have the right to terminate the Percentage Lease with respect to such Hotel upon paying the lessee the fair market value of the lessee's leasehold interest in the remaining term of the Percentage Lease to be terminated. The lessee is the licensee under the franchise licenses on the Hotels. The franchise agreements are assignable to the Company, another lessee or a new owner, with a payment of $2,500 per hotel. 15 Mortgage Receivables The Company holds two notes receivable which have a total outstanding principal balance at December 31, 1995 of $8,079,000, and are summarized in the table below. As of March 29, 1996, all payments were current. SUMMARY OF MORTGAGE RECEIVABLES
Principal Collateral Property Balance at Interest Name Type 12/31/95 Rate Maturity - ---- ---- -------- ---- -------- Hovpark Industrial/Office $7,563,000 8.00% 11/1/96 Laurel Cranford Industrial $ 516,000 8.00% 6/1/01
The financial statement carrying value of the Hovpark loan is $6,700,000, the estimated fair value of the underlying collateral. The Company does not intend to engage in the business of making real estate loans. ITEM 3. LEGAL PROCEEDINGS BLUMBERG. On February 21, 1995, a class action complaint was filed in the Superior Court of the State of California in and for San Mateo County in connection with the Consolidation. The plaintiff is Anthony E. Blumberg, an Investor in Equitec B, on behalf of himself and all others similarly situated. The defendants are GRC, GC and Robert Batinovich. The Partnerships and the Company are nominal defendants. The complaint alleged breaches by the defendants of their fiduciary duty and duty of good faith and fair dealing to investors in the Partnerships. The complaint sought injunctive relief and compensatory damages. The complaint alleged that the valuation of GC was excessive and was done without appraisal of GC's business or assets. The complaint further alleged that the interest rate for the notes to be issued to investors in lieu of shares of Common Stock, if they so elected (the "Notes") was too low for the risk involved and that the Notes would likely sell, if at all, at a substantial discount from their face value (All of the Notes were paid off at face value plus interest subsequent to year end). On October 9, 1995 the parties entered into an agreement to settle the action. The defendants, in entering into the settlement agreement, did not acknowledge any fault, liability or wrongdoing of any kind and continue to deny all material allegations asserted in the litigation. Pursuant to the settlement agreement, the defendants will be released from all claims, known or unknown, that have been, could have been, or in the future might be asserted, relating to, among other things, the Consolidation, the acquisition of the Company's shares pursuant to the Consolidation, any misrepresentation or omission in the Registration Statement or Prospectus, or the subject matter of the lawsuit. In return, the defendants agreed to the following: (a) the inclusion of additional or expanded disclosure in the Prospectus/Consent Solicitation Statement, and (b) the placement of certain restrictions on the sale of the stock by certain insiders and the granting of stock options to certain insiders following consummation of the Consolidation. Plaintiff's counsel indicated that it would request that the court award it $850,000 in attorneys' fees, costs and expenses. In addition, plaintiffs counsel indicated it would request the court for an award of $5,000 payable to Anthony E. Blumberg as the class representative. The defendants agreed not to oppose such requests. On October 11, 1995, the court certified the class for purposes of settlement, and set a hearing on December 21, 1995, to determine whether it should approve the settlement and class counsel's application for fees. A notice of the proposed settlement was distributed to the members of the class on November 15, 1995. The notice specified that, in order to be heard at the hearing, any class member objecting to the proposed settlement must, by December 15, 1995, file a notice of intent to appear, and a detailed statement of the grounds for their objection. 16 A number of objections were received from class members. The objections reiterated the claims in the original Blumberg complaint, and asserted that the settlement agreement did not adequately compensate the class for releasing those claims. One of the objections was filed by the same law firm that had brought a class action against the former general partners of one of the merging partnerships (described as the "GPI Litigation" in the issuer's Registration Statement on Form S-4). The other was filed by the same law firm that brought the "BEJ" action described below. The hearing originally scheduled for December 21, 1995 was continued to January 17, 1996. At the hearing on January 17, the court heard the arguments of the objectors seeking to overturn the settlement, as well as the arguments of the plaintiffs and the defendants in defense of the settlement. The court granted all parties a period of time in which to file additional pleadings, and announced that it would render a final decision after receiving those additional pleadings. As of March 29, 1995, no decision has been issued. BEJ EQUITY PARTNERS. On December 1, 1995, a second class action complaint relating to the Consolidation was filed in Federal District Court for the Northern District of California. The plaintiffs are BEJ Equity Partners, J/B Investment Partners, Jesse B. Small and Sean O'Reilly as custodian f/b/o Jordan K. O'Reilly, who as a group held limited partner interests in the Partnerships known as Outlook IV, All Suites, GPI, Equitec 4, Equitec C and Equitec Mortgage IV, on behalf of themselves and all others similarly situated. The defendants are GRC, GC, the Company, GPA, Ltd., Robert Batinovich and Andrew Batinovich. The Partnerships are named as nominal defendants. This action alleges the same disclosure violations and breaches of fiduciary duty as were alleged in the Blumberg action. The complaint sought injunctive relief, which was denied at a hearing on December 22, 1995. At that hearing, the court also deferred all further proceedings in this case until after the scheduled January 17 hearing in the Blumberg case. Given the delays in the resolution of the Blumberg case, the court and the parties in BEJ have postponed all proceedings in BEJ, and the defendants' responsive pleading in BEJ is now due on April 1, 1996. It is management's position that the BEJ action, and the objections to the settlement of the Blumberg action, are without merit, and management intends to pursue a vigorous defense in both matters. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS The Company did not submit any matters to a vote of security holders in the fourth quarter of the fiscal year ended December 31, 1995. 17 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The shares of the Company's common stock are traded on the New York Stock Exchange under the symbol "GLB." Market Information The Company's Common Stock has been traded on the New York Stock Exchange since January 31, 1996. Consequently, price information is not applicable for the period ended December 31, 1995. On March 28, 1996, the closing stock sales price on the NYSE was $13.875 per share. Holders The approximate number of holders of record of the shares of the Company's common stock was 11,006 as of March 26, 1996. Dividends and Distributions No dividends have been declared or paid to date. The Company intends to declare regular quarterly dividends to its stockholders. Federal income tax law requires that a REIT distribute annually at least 95% of its REIT taxable income. Future dividends by the Company will be at the discretion of the Board of Directors and will depend upon the actual Funds from Operations of the Company, its financial condition, capital requirements, the annual distribution requirements under the REIT provisions of the Internal Revenue Code, applicable legal restrictions and such other factors as the Board of Directors deems relevant. Although the Company intends to make quarterly distributions to its stockholders, no assurances can be given as to the amounts of dividends that will be distributed. ITEM 6. SELECTED FINANCIAL DATA Set forth below are selected financial data for: Glenborough Realty Trust Incorporated: Consolidated balance sheet data is presented as of December 31, 1995. The GRT Predecessor Entities: Combined operating data is presented for the years ended December 31, 1995, 1994, 1993, 1992 and 1991. The combined balance sheet data is presented as of December 31, 1995, 1994, 1993, 1992 and 1991. Glenborough Realty Trust Incorporated: Pro forma consolidated operating data is presented for the year ended December 31, 1995 and assumes the consolidation and related transactions occurred on January 1, 1994. 18 This selected financial data should be read in conjunction with financial statements of Glenborough Realty Trust Incorporated, including the notes thereto, included in Item 14. As of and for the years ended December 31, (in thousands)
1995 1994 1993 1992 1991 ---- ---- ---- ---- ---- Pro Historical Pro Historical Historical Historical Historical Forma Combined Forma Combined Combined Combined Combined ----- -------- ----- -------- -------- -------- -------- OPERATING DATA: Revenue (1) $ 16,428 $ 34,171 $ 15,885 $ 30,681 $ 32,224 $ 31,128 $ 28,726 Net income (loss) (2) $ 3,796 $ 524 $ 4,144 $ 1,580 $ 4,418 $ (2,681) $ 1,301 Per share: Net income (3) $ 0.66 $ -- $ 0.72 $ -- $ -- $ -- $ -- Distributions $ 1.20 $ -- $ 1.20 $ -- $ -- $ -- $ -- BALANCE SHEET DATA: Net rental property $ -- $ 77,574 $ -- $ 63,994 $ 70,245 $ 75,022 $ 77,717 Mortgage loans receivable, net $ -- $ 7,216 $ -- $ 19,953 $ 18,825 $ 18,967 $ 24,018 Total debt $ -- $ 36,168 $ -- $ 17,906 $ 12,172 $ 15,350 $ 12,269 Shareholders' equity $ -- $ 55,628 $ -- $ 80,558 $ 85,841 $ 87,172 $ 96,958 OTHER DATA: EBIDA (4) $ 11,361 $ 9,291 $ 11,258 $ 10,269 $ 10,326 $ 8,815 $ 9,256 Cash flow provided by (used for): Operating activities 9,998 (10,608) 5,742 22,426 12,505 6,891 7,103 Investing activities (48,034) 8,656 1,710 (1,947) (2,002) (1,437) (44) Financing activities 36,246 (17,390) (6,408) (2,745) (8,927) (9,476) (2,868) FFO (5) $ 9,811 $ 7,162 $ 9,709 $ 9,129 $ 9,025 $ 7,349 $ 7,692 7,692 FFO per share(6) $ 1.56 $ -- $ 1.54 $ -- $ -- $ -- $ -- FAD (7) $ 8,579 $ 4,215 $ 8,477 $ 6,888 $ 6,114 $ 4,731 $ 4,595 FAD per share(6) $ 1.36 $ -- $ 1.35 $ -- $ -- $ -- $ -- Distributions $ 7,556 $ -- $ 7,556 $ -- $ -- $ -- $ -- Distributions per share $ 1.20 $ -- $ 1.20 $ -- $ -- $ -- $ --
(1) Certain revenues which are included in the historical combined amounts are not included on a pro forma basis. These revenues are included in three unconsolidated Associated Companies (GHG, GRC and GIRC), on a pro forma basis, from which the Company receives lease payments and/or equity in earnings. (2) Pro forma net income excludes Consolidation costs. During the year ended December 31, 1995, Equitec Mortgage Fund IV had recorded a loss provision of $863 to reduce the carrying value of its 19 mortgage loan receivable secured by the Eatontown, New Jersey property to its estimated realizable value, which is equal to the value used for Consolidation purposes. In addition, GC had recorded loss provisions of $955 on investments in and advances to certain affiliated real estate partnerships not deemed to be realizable at December 31, 1995. For the year ended December 31, 1994, Glenborough Corporation had recorded a loss provision of $533 to reduce its investment in Glenborough Partners to its estimated market value. Historical combined net loss in 1992 includes a non-recurring write-down of $4,282 on Glenborough Pension Investor's ("GPI") investment in master agreement that resulted from GPI's in-substance foreclosure on certain of its notes receivable. (3) Pro forma net income per share equals pro forma net income excluding Consolidation costs divided by weighted average shares outstanding (assuming GPA Ltd.'s interest in the Operating Partnership is not converted into shares of common stock of the Company). (4) EBIDA means earnings before interest expense, depreciation, amortization and minority interests. EBIDA is computed as income from operations before minority interests and extraordinary items plus interest expense, depreciation, amortization and unrealized loss provisions. The Company believes that in addition to cash flows and net income, EBIDA is a useful financial performance measurement for assessing the operating performance of an equity REIT because, together with net income and cash flows, EBIDA provides investors with an additional basis to evaluate the ability of a REIT to incur and service debt and to fund acquisitions and other capital expenditures. EBIDA does not represent net income or cash flows from operation, financing and investing activities as defined by generally accepted accounting principles and does not necessarily indicate that cash flows will be sufficient to fund cash needs. It should not be considered as an alternative to net income as an indicator of the Company's operating performance or to cash flows as a measure of liquidity. (5) See the discussion which follows regarding Funds from Operations ("FFO"). (6) Pro forma distributions, FFO and FAD per share equals distributions, FFO and FAD divided by the weighted average shares outstanding, assuming conversion of GPA, Ltd.'s interest in the Operating Partnership into shares of common stock of the Company. GPA Ltd.'s interest in the Operating Partnership entitles it to a cash distribution equal to that which it would receive if a conversion had taken place. (7) FAD means funds available for distribution. FAD represents Funds from Operations plus recurring principal receipts from mortgage loans less reserves for lease commissions, capital expenditures (excluding property acquisitions) and debt principal amortization. FAD should not be considered an alternative to net income as a measure of the Company's financial performance or to cash flow from operating activities (computed in accordance with GAAP) as a measure of the Company's liquidity, nor is it necessarily indicative of sufficient cash flow to fund all of the Company's needs. FUNDS FROM OPERATIONS The Company believes that FFO is a measure of cash flow which, when considered in conjunction with other measures of operating performance, affects the value of equity REITs such as the Company. FFO means income (loss) from operations before minority interests and extraordinary items plus depreciation and amortization except amortization of deferred financing costs and loss provisions. The Company believes that to facilitate a clear understanding of the combined historical operating results of the Properties, FFO and FAD should be considered in conjunction with net income as presented in the pro forma consolidating statements of operations. Management generally considers FFO to be a useful financial performance measure of the operating performance of an equity REIT because, together with net income and cash flows, FFO provides investors with an additional basis to evaluate the ability of a REIT to incur and service debt and to fund acquisitions and other capital expenditures. FFO does not represent net income or cash flows from operations as defined by GAAP and does not necessarily indicate that cash flows will be sufficient to fund cash needs. It should not be considered as an alternative to net income as an indicator of the Company's operating performance or to cash flows as a measure of liquidity. FFO does not measure whether cash flow is sufficient to fund all of the Company's cash needs including principal amortization, capital improvements and distributions to stockholders. FFO also does not represent cash flows generated from operating, investing or financing activities as defined by GAAP. Further, FFO as disclosed by other REITs may not be comparable to the Company's calculation of FFO. 20 In February 1995, NAREIT established new guidelines for calculating FFO that clarify the previous guidelines established by NAREIT. The primary change from the old definition to the new definition is the treatment of amortization of deferred financing fees. Under the new definition, the amortization of deferred financing fees are no longer added back to net income in calculating FFO. The new guidelines are effective beginning in 1996. Beginning with the first quarter of 1996, the Company will calculate its FFO based upon the new NAREIT definition and, accordingly, will no longer add back amortization of deferred financing fees and costs. The change does not affect the Company's FAD. The following table sets forth the Company's calculation of pro forma FFO, based upon the new NAREIT definition and pro forma FAD for the year ended December 31, 1995 (dollars in thousands). Net income before minority interest and extraordinary items $ 4,077 Depreciation and amortization 3,654 Loss provisions 863 Adjustment to reflect FFO of Associated Companies (1) 1,044 FFO 9,638 Amortization of deferred financing fees 173 Principal receipts on mortgage loans 100 Capital reserve (955) Principal amortization reserve (377) FAD $ 8,579 FFO per share $ 1.53 FAD per share $ 1.36 Distributions per share $ 1.20 Fully converted weighted average shares outstanding (2) 6,296,354
(1) On a pro forma basis, reflects the adjustments to FFO required to reflect the pro forma FFO of the Associated Companies attributable to the Company. The Company's investments in the Associated Companies are accounted for using the equity method of accounting. The following table sets forth the calculation of the necessary adjustments.
1995 ---- Pro forma FFO: Glenborough Realty Corporation $ 756 Glenborough Inland Realty Corporation 2,019 Glenborough Hotel Group 120 ------ Total FFO of Associated Companies 2,895 ------ FFO attributable to other owners (160) Company's equity in earnings (1,691) ------ Adjustment $ 1,044 =======
21 (2) On a pro forma basis, assumes conversion of GPA's units in the Operating Partnership into shares of common stock of the Company. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion should be read in conjunction with the selected data in Item 6 and the Consolidated Financial Statements of Glenborough Realty Trust Incorporated and the GRT Predecessor Entities, including the notes thereto, included in Item 14. BACKGROUND The balance sheet as of December 31, 1994, and the statements of operations, equity and cash flows for the years ended December 31, 1995, 1994 and 1993 of the GRT Predecessor Entities include the historical operations of GC and the Partnerships. These statements have been adjusted to reflect the consolidation of two joint ventures which were, in aggregate, wholly owned by the Partnerships. LIQUIDITY AND CAPITAL RESOURCES GENERAL Historically for the Partnerships, the principal sources of funding for the acquisition of Properties was the sale of limited partnership interests in the Partnerships and permanent financing. In the future, the Company intends to rely upon permanent debt financing, public debt and equity as its funding sources for acquisition, expansion and renovation of properties. The Company expects to meet its short-term liquidity requirements generally through its initial working capital and cash generated by operations. As of December 31, 1995, the Company had no material commitments for capital improvements. Planned capital improvements consist only of tenant improvements and other expenditures necessary to lease and maintain the Properties and furniture and fixtures and building improvements at the Hotel Properties. The Company believes that its cash generated by operations will be adequate to meet both operating requirements and declare dividends in accordance with REIT requirements in both the short and the long-term. However, there can be no assurance that the Company's results of operations will not fluctuate in the future and at times negatively affect its ability to meet its operating requirements and to declare dividends on a regular basis. The Company expects to meet certain of its long-term liquidity requirements, such as scheduled debt maturities and possible acquisitions, through a combination of long-term secured and unsecured borrowings and the issuance of debt and equity securities of the Company. Mortgage loans receivable decreased from $19,953,000 at December 31, 1994 to $7,216,000 at December 31, 1995. The decrease was primarily due to the early payoff of the $10,275,000 Finley Square note receivable on April 28, 1995. $545,000 in interest and prepayment fees and penalties was also received by the Company in connection with the early payoff of the Finley Square note receivable. Additionally in 1995, due to the uncertainty of the borrower's ability to payoff the note receivable upon its November 1996 maturity, the Company recorded a $863,000 loss provision on the mortgage loan receivable secured by the office and research complex in Eatontown, New Jersey. The carrying value of the note was written down to the estimated fair value of the property, resulting in the $863,000 loss. Mortgage loans receivable further decreased by $1,513,000 due to the early repayment in January and June of 1995 of three of the four notes secured by the Laurel Cranford buildings. 22 Cash and cash equivalents decreased from $23,929,000 at December 31, 1994 to $4,587,000 at December 31, 1995. This decrease was primarily due to the payment of consolidation and litigation costs, partner distributions, redemption of investor units and repayment of debt. Mortgage loans and secured bank lines payable increased from $17,906,000 at December 31, 1994 to $33,685,000 at December 31, 1995 due to new borrowings obtained in 1995. Approximately $4,000,000 of the new debt was incurred to finance the acquisition of the Summerbreeze apartment complex (see following paragraph) and approximately $7,500,000 was incurred to finance the acquisition of the Rancon management contracts. Of the remaining $4,200,000 of new debt, $3,000,000 was fully secured by a $3,000,000 certificate of deposit held by Robert Batinovich ("Batinovich"), approximately $1,100,000 was Batinovich's debt assumed in a stock redemption and the remaining $100,000 was incurred to purchase an investment in real estate related to the acquisition of RGI and is secured by the related real estate. On January 12, 1995, Glenborough Pension Investors ("GPI"), one of the GRT Predecessor entities, acquired the Summerbreeze apartment complex (the "Property") by a deed-in-lieu of foreclosure. GPI had formerly held a note secured by a second deed of trust on the Property. The former owners of the Property agreed to grant a deed-in-lieu of foreclosure to GPI in exchange for $150,000 and GPI's assumption of the first trust deed note which was in default. On May 18, 1995, the debt was refinanced with a $4,000,000 first mortgage loan. The net operating income of the property continues to be sufficient to cover the related debt service. The Company adopted Statement of Financial Accounting Standards (SFAS) No. 121, "Accounting for Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed Of" in the fourth quarter of 1995. The adoption of SFAS No. 121 did not have a material effect on the recorded amounts of the Company's long-lived assets. See Note 2 to the Financial Statements for a further discussion of this adoption. RESULTS OF OPERATIONS ANALYSIS OF TRENDS The composition of the assets of the GRT Predecessor Entities changed substantially from 1993 to 1995. In 1994, Glenborough Partners disposed of a substantial portion of its real estate investments. As a result of the disposition of these assets and a loss of related revenues, GC downsized its property management business resulting in lower general and administrative expenses in 1994. However, in 1995, GC increased its management business through the acquisition of the management contracts for nine Rancon Financial Corporation affiliated partnerships (the "Rancon Contracts"). The Rancon Contracts contributed to a substantial increase in asset and property management fee revenue as well as an increase in operating and general and administrative expenses. Additionally, in connection with the 1995 Consolidation with the Company, certain of GC's 1995 operations reflect expense items related to the Consolidation that will not be recurring in the Company or its Associated Companies. Such expenses that are included in the accompanying Combined Statement of Income for the year ended December 31, 1995, before provision for income taxes, totaled $4,261,000 and include salaries, general and administrative expenses, professional fees, a shareholder guarantee fee and a loss on disposition of certain assets. COMPARISON OF YEAR ENDED DECEMBER 31, 1995 TO YEAR ENDED DECEMBER 31, 1994 Rental revenues increased $1,657,000 or 12%, in 1995 to $15,454,000 from $13,797,000 in 1994. The increase was primarily due to a net increase in occupancy at certain commercial properties, the acquisition of the Summerbreeze apartment complex and a significant increase in hotel revenues due to overall increases in occupancy and average daily room rates. Fees and reimbursements increased by $2,692,000 or 20%, in 1995 to $16,019,000 from $13,327,000 in 1994. The increase was primarily due to an increase in property and asset management fees and related expense reimbursements due to the acquisition of the Rancon and RGI management contracts. This increase 23 was offset by decreased transaction fees because of one-time fees earned by GC attributable to the sales of properties during 1994, including a substantial portion of Glenborough Partners' portfolio, and decreased property and asset management fees and expense reimbursements derived from those properties. Interest and other income decreased $859,000, or 24%, to $2,698,000 in 1995 from $3,557,000 in 1994. This decrease primarily resulted from the early repayment of the Finley Square note receivable in April of 1995 and the early repayment in January and June of 1995 of three of the four notes from the sale of the Laurel Cranford buildings. Operating expenses increased by $1,794,000 or 26% to $8,576,000 in 1995 from $6,782,000 in 1994. The increase is due to both higher variable expenses related to increased occupancy rates and to the acquisition of the Summerbreeze apartment complex in January 1995. General and administrative expenses, including salaries, increased $2,493,000, or 19%, in 1995 to $15,947,000 from $13,454,000 in 1994. The increase is primarily due to the additional expenses related to the Rancon and RGI management contracts offset by lower field and corporate office payroll expenses after the reduction of the Company's management portfolio due to property sales occurring during 1994. Depreciation and amortization expense increased $721,000, or 18%, in 1995 to $4,762,000 from $4,041,000 in 1994. The increase was primarily due to the acquisition of Summerbreeze and to the additional amortization of contracts related to the acquisition of the Rancon and RGI management contracts. These factors were slightly offset by a decrease due to the sale of the Laurel Cranford buildings in 1994. Interest expense increased $989,000 or 87% in 1995 to $2,129,000 from $1,140,000 in 1994. The increase was the result of increased debt levels primarily related to the financing of the Rancon management contracts acquisition and from a first deed of trust on the Summerbreeze apartment complex acquired in 1995. During 1995, loss provisions in the amount of $863,000 and $955,000 were recorded to provide for an anticipated renegotiation of terms on one of the Company's mortgage loans receivable (as previously discussed) and for unrealizable investments in and advances to certain affiliated real estate partnerships of GC. In addition, $58,000 related to a portion of the $116,000 loss on the hedge transaction recorded by GC during fiscal 1995, as further discussed in Note 11. Additionally, GC's investment in Carroll Vista Associates, Glenco Squaw Associates and GRC Airport Associates were written down by $400,000, $374,000 and $181,000, respectively, to reflect the net realizable value of the underlying assets of the respective partnerships. COMPARISON OF YEAR ENDED DECEMBER 31, 1994 TO YEAR ENDED DECEMBER 31, 1993 Rental revenues increased $251,000 or 2%, in 1994 to $13,797,000 from $13,546,000 in 1993. The increase was the result of a net increase in occupancy at certain commercial properties as well as an increase in hotel revenues due to increases in the average daily room rates ranging between 1% and 22% of the 1994 average daily room rates. These increases were partially offset by the sale of a hotel in 1993 and a light industrial property in 1994. Fees and reimbursements decreased by $2,112,000 or 14% in 1994 to $13,327,000 from $15,439,000 in 1993. This decrease primarily related to lower property and asset management fees due to the termination of certain contracts, along with a reduction in the related expense reimbursements. Property related expense reimbursements decreased during 1994 due to the loss of a third party management contract. These factors were offset by an increase in transaction fees earned on property dispositions and sales. Interest and other income increased $318,000 or 10%, to $3,557,000 in 1994 from $3,239,000 in 1993. This increase was primarily attributable to the interest income received on the notes that were obtained from the sale of certain properties in early 1994. 24 Operating expenses decreased by $771,000 or 10% to $6,782,000 in 1994 from $7,553,000 in 1993. The decrease is related to the sale of a hotel in 1993 and a light industrial building in 1994. General and administrative expenses, including salaries, decreased $867,000, or 6%, in 1994 to $13,454,000 from $14,321,000 in 1993. The majority of this decrease was the result of a general staff and overhead reduction which resulted from the sale of a light industrial property in 1994 and a hotel in 1993, and the termination of certain management contracts. Depreciation and amortization expense decreased $531,000 or 12%, in 1994 to $4,041,000 from $4,572,000 in 1993. This decrease was primarily the result of the sale of certain properties in late 1993 and in 1994, offset by an increase in depreciation, largely due to late 1993 capital additions and tenant improvements that had not been subjected to a full year of depreciation. Interest expense decreased $161,000, or 12%, in 1994 to $1,140,000 from $1,301,000 in 1993. This decrease primarily resulted from the modification of principal amortization of a loan payable and was offset by an interest expense increase, attributable to overall debt level increases. During 1994 the Company recorded a loss provision of $3,508,000. Of this provision, $2,360,000 was for the loss on the sale of a light industrial property known as Laurel Cranford, $533,000 was due to a loss on the sale of units of Glenborough Partners, $557,000 was for the write-down of an investment in Glenborough Partners, a real estate partnership and $58,000 related to a loss on the hedge transaction recorded by GC, as further discussed in Note 11. The Laurel Cranford Property had been for sale or lease since early 1993. In March 1994, Outlook IV received an offer to sell the property at an amount approximating its ultimate sale price. Subsequent to receipt of the offer, Outlook IV reconsidered its strategy of preferring a lease of this property given the then current status of the market in the surrounding area. The earthquake, which occurred in the immediate area in January 1994, had made an already competitive market more difficult and it was decided at that time that pursuit of the sale opportunity then available represented the best course of action for Outlook IV. The write-down of the investment in Glenborough Partners was recorded to reflect the net realizable value of the underlying assets of the partnership. In 1993, loss provisions in the amount of $828,000 and $425,000 were recorded to provide for the write-down of an investment in Glenborough Partners and for performance on a guarantee of an affiliate's development debt. In addition, a loss on the sale of the Fort Worth hotel in the amount of $1,056,000 was recognized. In 1993, $2,274,000 in debt forgiveness was recorded as an extraordinary item. $920,000 of this amount was attributable to notes payable by GC for the purchase of the management contracts for the Outlook Partnerships which was in excess of the then net book value of those contracts. The seller forgave all $1,600,000 remaining on these notes payable, which were to be due in full in 1996, in exchange for a $300,000 advance cash payment. An additional $1,354,000 in debt was forgiven in connection with the sale of the Country Suites By Carlson-Fort Worth hotel. All amounts forgiven under both transactions were payable to affiliates of the former general partner of the Outlook Partnerships. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The response to this item is submitted as a separate section of this Form 10-K. See Item 14. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. 25 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information required by Item 10 is incorporated by reference from the Company's definitive proxy statement for its annual stockholders' meeting to be held on May 30, 1996. ITEM 11. EXECUTIVE COMPENSATION The Company began its operations on December 31, 1995. Therefore, no compensation was paid to any executive officers for services rendered to the Company during 1995. The following table sets forth compensation received from GC by the named executive officers for services rendered to GC during 1995.
OFFICER NAME POSITION BASE COMPENSATION BONUS (1) ------------ -------- ----------------- --------- Robert Batinovich Chairman, President and $900,000 -- Chief Executive Officer Andrew Batinovich Director, Executive Vice 265,000 -- President, Chief Operating Officer and Chief Financial Officer Frank Austin Senior Vice President, 176,800 $400,000 General Counsel and Secretary Sandra Boyle Senior Vice President 180,000 400,000 Terri Garnick Senior Vice President and 90,000 100,000 Chief Accounting Officer
(1) Represents bonuses paid in 1995 from GC for services rendered to GC during the full term of employment of the named executive officers, which varied from approximately seven to twelve years. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required by Item 12 is incorporated by reference from the Company's definitive proxy statement for its annual stockholders' meeting to be held on May 30, 1996. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required by Item 13 is incorporated by reference from the Company's definitive proxy statement for its annual stockholders meeting to be held on May 30, 1996. 26 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K
Page No. (a) (1) Financial Statements Report of Independent Public Accountants F-1 Glenborough Realty Trust Incorporated and GRT Predecessor Entities Balance Sheets F-2 GRT Predecessor Entities Combined Statements of Income F-3 Glenborough Realty Trust Incorporated and GRT Predecessor Entities Statements of Equity F-4 Glenborough Realty Trust Incorporated and GRT Predecessor Entities Statements of Cash Flows F-5, F-6 Notes to Financial Statements F-7 (2) Financial Statement Schedules Schedule III - Real Estate and Accumulated Depreciation F-17 Schedule IV - Mortgage Loans on Real Estate F-20 (3) Exhibits The Exhibit Index attached hereto is hereby incorporated by reference to this Item 47 (b) Reports on Form 8-K No reports on Form 8-K were filed by the registrant during the last quarter of the period covered by this report.
27 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Shareholders of GLENBOROUGH REALTY TRUST INCORPORATED: We have audited the accompanying consolidated balance sheet of GLENBOROUGH REALTY TRUST INCORPORATED, as of December 31, 1995, the combined balance sheet of the GRT Predecessor Entities as of December 31, 1994 and the related combined statements of income, equity and cash flows of the GRT Predecessor Entities for each of the three years in the period ended December 31, 1995. These financial statements and the schedule referred to below are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of GLENBOROUGH REALTY TRUST INCORPORATED, as of December 31, 1995, the combined financial position of the GRT Predecessor Entities as of December 31, 1994 and the results of operations and cash flows for each of the three years in the period ended December 31, 1995, of the GRT Predecessor Entities in conformity with generally accepted accounting principles. Our audits were made for the purpose of forming an opinion on the basic financial statements taken as a whole. The schedule listed in the index to financial statements and schedule is presented for the purpose of complying with the Securities and Exchange Commission's rules and is not a required part of the basic financial statements. This schedule has been subjected to the auditing procedures applied in our audits of the basic financial statements and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole. San Francisco, California March 13, 1996 F-1 28 GLENBOROUGH REALTY TRUST INCORPORATED AND GRT PREDECESSOR ENTITIES BALANCE SHEETS December 31, 1995 and 1994 (in thousands, except share amounts)
Glenborough GRT Realty Trust Predecessor Incorporated Entities Consolidated Combined 1995 1994 -------- ------ ASSETS Rental property, net of accumulated depreciation of $24,877 and $19,455 in 1995 and 1994, respectively $ 77,574 $ 63,994 Investments in Associated Companies and Glenborough Partners 5,763 527 Investments in management contracts and other, net 484 3,440 Mortgage loans receivable, net of provision for loss of $863 in 1995 7,216 19,953 Cash and cash equivalents 4,587 23,929 Prepaid consolidation costs 6,082 -- Prepaid litigation expenses 1,155 -- Other assets 2,879 5,478 -------- --------- TOTAL ASSETS $105,740 $ 117,321 ======== ========= LIABILITIES Mortgage loans $ 23,685 $ 6,500 Secured bank line 10,000 -- Notes payable -- 11406 Investor notes payable 2,483 -- Other liabilities 5,982 18,857 -------- --------- Total liabilities 42,150 36,763 -------- --------- MINORITY INTEREST 7,962 -- SHAREHOLDERS' EQUITY Common stock (5,754,021 shares issued and outstanding at December 31, 1995) 6 5 Additional paid-in capital 55,622 6,613 Receivable from shareholder -- (8,763) Retained earnings -- (904) General partner -- (1,730) Limited partners -- 85,337 -------- --------- Total shareholders' equity 55,628 80,558 -------- --------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $105,740 $ 117,321 ======== =========
The accompanying notes are an integral part of these financial statements. F-2 29 GRT PREDECESSOR ENTITIES COMBINED STATEMENTS OF INCOME For the Years Ended December 31, 1995, 1994 and 1993 (in thousands, except per unit amounts)
1995 1994 1993 ---- ---- ---- REVENUE Rental revenue $ 15,454 $ 13,797 $ 13,546 Fees and reimbursements 16,019 13,327 15,439 Interest and other income 2,698 3,557 3,239 ----------- ----------- ----------- Total revenue 34,171 30,681 32,224 ----------- ----------- ----------- OPERATING EXPENSES Operating expenses 8,576 6,782 7,553 General and administrative 15,947 13,454 14,321 Depreciation and amortization 4,762 4,041 4,572 Interest expense 2,129 1,140 1,301 Provision for loss on investments in real estate, real estate partnerships and mortgage loans receivable 1,876 3,508 2,309 ----------- ----------- ----------- Total operating expense 33,290 28,925 30,056 ----------- ----------- ----------- Income before provision for income taxes and extraordinary items 881 1,756 2,168 Provision for income taxes (357) (176) (24) ------------ ------------ ------------ Income before extraordinary items 524 1,580 2,144 Extraordinary item - gain on early extinguishment of debt -- -- 2,274 ----------- ----------- ----------- Net income $ 524 $ 1,580 $ 4,418 =========== =========== ===========
The accompanying notes are an integral part of these financial statements. F-3 30 GLENBOROUGH REALTY TRUST INCORPORATED AND GRT PREDECESSOR ENTITIES STATEMENTS OF EQUITY For the Years Ended December 31, 1995, 1994 and 1993 (in thousands)
GRT Predecessor Entities Combined ----------------------------------------------------------------------------------------- Additional Receivable Retained General Limited Common Paid-in from Retained Partner Partners Stock Capital Stockholder (Deficit) Total ------- -------- ----- ------- ----------- --------- ----- BALANCE AT DECEMBER 31, 1992 $(1,733) $ 89,884 $ 2 $ 5,962 $(5,042) $ (1,901) $87,172 Distributions (46) (3,732) -- -- -- -- (3,778) Sale of Stock -- -- -- 314 -- -- 314 Redemption of Units -- (15) -- -- -- -- (15) Advances to Shareholder, net -- -- -- -- (2,270) -- (2,270) Net income (loss) 18 1,760 -- -- -- 2,640 4,418 ------- --------- ---- ------- ------- -------- -------- BALANCE AT DECEMBER 31, 1993 (1,761) 87,897 2 6,276 (7,312) 739 85,841 ------- --------- ---- ------- ------- -------- -------- Contributions 55 -- 3 337 -- -- 395 Distributions (37) (3,770) -- -- -- (2,000) (5,807) Advances to Shareholder, net -- -- -- -- (1,451) -- (1,451) Net income (loss) 13 1,210 -- -- -- 357 1,580 ------- --------- ---- ------- ------- -------- -------- BALANCE AT DECEMBER 31, 1994 (1,730) 85,337 5 6,613 (8,763) (904) 80,558 ------- --------- ---- ------- ------- -------- -------- Distributions (117) (10,507) -- -- -- -- (10,624) Redemption of shares -- -- (2) (6,613) -- (6,533) (13,148) Repayment of Shareholder advances, net -- -- -- -- 8,763 -- 8,763 Net income (loss) 17 1,751 -- -- -- (1,244) 524 Issuance of investor notes in exchange for units of limited partnership interest -- (2,483) -- -- -- -- (2,483) Equity in consolidation attributable to minority interest -- (7,962) -- -- -- -- (7,962) Consolidation and issuance of shares 1,830 (66,136) (3) -- -- 8,681 (55,628) ------- --------- ---- ------- ------- -------- -------- BALANCE AT DECEMBER 31, 1995 $ -- $ -- $ -- $ -- $ -- $ -- $ -- ------- --------- ---- ------- ------- -------- -------- Glenborough Realty Trust Incorporated -------------------------------------------------- Common Stock Additional -------------------- Paid-in Shares Par Value Capital Total ------ --------- ------- ----- BALANCE AT DECEMBER 31, 1992 -- $ -- $ -- $ -- Distributions -- -- -- Sale of Stock -- -- -- -- Redemption of Units -- -- -- -- Advances to Shareholder, net -- -- -- -- Net income (loss) -- -- -- ----- ---- ------- ------- BALANCE AT DECEMBER 31, 1993 -- -- -- -- ----- ---- ------- ------- Contributions -- -- -- -- Distributions -- -- -- -- Advances to Shareholder, net -- -- -- -- Net income (loss) -- -- -- -- ----- ---- ------- ------- BALANCE AT DECEMBER 31, 1994 -- -- -- -- ----- ---- ------- ------- Distributions -- -- -- -- Redemption of shares -- -- -- -- Repayment of Shareholder advances, net -- -- -- -- Net income (loss) -- -- -- -- Issuance of investor notes in exchange for units of limited partnership interest -- -- -- -- Equity in consolidation attributable to minority interest -- -- -- -- Consolidation and issuance of shares 5,754 6 55,622 55,628 ----- ---- ------- ------- BALANCE AT DECEMBER 31, 1995 5,754 $ 6 $55,622 $55,628 ----- ---- ------- -------
The accompanying notes are an integral part of these financial statements. F-4 31 GLENBOROUGH REALTY TRUST INCORPORATED AND GRT PREDECESSOR ENTITIES STATEMENTS OF CASH FLOWS For the years ended December 31, 1995, 1994 and 1993 (in thousands)
1995 1994 1993 ---- ---- ---- Cash flows from operating activities: Net income (loss) $ 524 $ 1,580 $ 4,418 Adjustments to reconcile net income to net cash provided by (used for) operating activities: Depreciation and amortization 4,762 4,041 4,572 Provision for loss on investments in real estate, real estate partnerships and mortgage loans receivable 1,876 3,508 2,309 Changes in certain assets and liabilities, net (17,770) 13,297 1,206 -------- ------- ------ Net cash provided by (used for) operating activities (10,608) 22,426 12,505 -------- ------- ------ Cash flows from investing activities: Additions to rental property (3,925) (2,210) (2,104) Principal receipts on mortgage loans receivable 12,581 1,328 142 Purchase of minority interest -- (1,342) -- Net proceeds from sale of property -- 277 -- Distribution to minority partner -- -- (40) -------- ------- ------ Net cash provided by (used for) investing activities 8,656 (1,947) (2,002) -------- ------- ------ Cash flows from financing activities: Capital contributions -- 395 314 Distributions (10,624) (5,807) (3,778) Redemption of units and shares (10,389) -- (15) Proceeds from borrowings 8,910 6,165 -- Repayment of borrowings (14,050) (2,047) (3,178) Advances to/payments from Shareholder, net 8,763 (1,451) (2,270) -------- ------- ------ Net cash provided by (used for) financing activities (17,390) (2,745) (8,927) -------- ------- ------ Net increase (decrease) in cash and cash equivalents (19,342) 17,734 1,576 Cash and cash equivalents at beginning of period 23,929 6,195 4,619 -------- ------- ------ Cash and cash equivalents at end of period $ 4,587 $23,929 $6,195 ======== ======= ======
(continued) The accompanying notes are an integral part of these financial statements. F-5 32 GLENBOROUGH REALTY TRUST INCORPORATED AND GRT PREDECESSOR ENTITIES STATEMENTS OF CASH FLOWS - CONTINUED For the years ended December 31, 1995, 1994 and 1993 (in thousands, except per share amounts)
1995 1994 1993 ---- ---- ---- Supplemental cash flow information: Cash paid for interest $ 1,951 $ 1,119 $1,017 ======= ============ ====== Supplemental Disclosure of Non-Cash Investing and Financing Activities: Conversion of shares of common stock into investor notes payable $ 2,483 $ -- $ -- ======= ============ ====== Conversion of equity to minority interest $ 7,962 $ -- $ -- ======= ============ ====== Consolidation and issuance of shares of common stock in exchange for limited partnership units and common stock in GRT Predecessor entities $55,628 $ -- $ -- ======= ============ ====== Refinancing of debt of GRT Predecessor entities by Glenborough Realty Trust Incorporated $28,200 $ -- $ -- ======= ============ ====== Acquisition of real estate through foreclosure and assumption of first trust deed note payable $ 3,908 $ -- $ -- ======= ============ ======
The accompanying notes are an integral part of these financial statements. F-6 33 GLENBOROUGH REALTY TRUST INCORPORATED AND GRT PREDECESSOR ENTITIES Notes to Financial Statements December 31, 1995 and 1994 Note 1. ORGANIZATION Glenborough Realty Trust Incorporated (the "Company") was organized in the State of Maryland on August 26, 1994. It is the intent of the Company to qualify as a real estate investment trust ("REIT") under the Internal Revenue Code of 1986, as amended (the "Code"). The Company has completed a Consolidation with certain associated public California limited partnerships and other entities engaged in real estate activities (the "GRT Predecessor Entities"). The Consolidation was accomplished through an exchange of assets of the GRT Predecessor Entities for 5,754,021 shares of Common Stock of the Company. Proxy materials were mailed to the limited partners of the Predecessor Entities on October 29, 1995. The Solicitation period expired on December 28, 1995, and the Consolidation occurred on December 31, 1995. The Company will commence operations on January 1, 1996. To maintain its qualification as a REIT, no more than 50% in value of the outstanding shares of the Company may be owned, directly or indirectly, by five or fewer individuals (defined to include certain entities), applying certain constructive ownership rules. To help ensure that the Company will not fail this test, the Company's Charter provides for certain restrictions on the transfer of the Common Stock to prevent further concentration of stock ownership. The Company, through several subsidiaries, is engaged primarily in the ownership, operation, management, leasing, acquisition, expansion and development of various income-producing properties. The Company's major consolidated subsidiary, in which it holds a 1% general partner and a 85.37% limited partner interest, is Glenborough Properties, L.P. (the "Operating Partnership"). The Operating Partnership, directly and through various subsidiaries in which it and the Company own 100% of the ownership interests, controls a total of 36 real estate projects and 2 notes receivable. The remaining 13.63% limited partnership interest in the Operating Partnership is owned by GPA, Ltd., an affiliated partnership which exchanged certain of its assets for an interest in the Operating Partnership. The Company also holds 100% of the non-voting preferred stock of three Associated Companies: - - Glenborough Corporation (formerly Glenborough Realty Corporation) is the general partner of nine partnerships and provides asset and property management services for these nine partnerships and two partnerships for which an affiliate serves as general partner (the Controlled Partnerships). It also provides property management services for a limited portfolio of property owned by unaffiliated third parties. - - Glenborough Inland Realty Corporation provides partnership administration, asset management, property management and development services under a long term contract to an additional group of partnerships which include six public and one private partnerships. - - Glenborough Hotel Group leases the three Country Suites By Carlson hotels owned by the Company and operates them for its own account. It also operates three Country Suites By Carlson hotels owned by the Controlled Partnerships, and operates two resort condominium hotels. The Associated Companies are accounted for using the equity method, as discussed further in Note 4. Note 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES BASIS OF PRESENTATION The accompanying financial statements present the consolidated financial position of the Company as of December 31, 1995, the combined financial position of the GRT Predecessor Entities as of December 31, 1994, and the combined results of operations and cash flows of the GRT Predecessor Entities for the three F-7 34 GLENBOROUGH REALTY TRUST INCORPORATED AND GRT PREDECESSOR ENTITIES Notes to Financial Statements December 31, 1995 and 1994 years then ended, as the Consolidation transaction discussed in Note 1 above was not effective until December 31, 1995. All intercompany transactions, receivables and payables have been eliminated in consolidation and combination. PERVASIVENESS OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the results of operations during the reporting period. Actual results could differ from those estimates. NEW ACCOUNTING PRONOUNCEMENT In March 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 121 (SFAS 121), "Accounting for Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed Of." The Company adopted SFAS 121 in the fourth quarter of fiscal 1995. SFAS 121 requires that an evaluation of an individual property for possible impairment must be performed whenever events or changes in circumstances indicate that an impairment may have occurred. There was no impact from the initial adoption of SFAS 121. RENTAL PROPERTY TO BE HELD AND USED Rental properties are stated at cost unless circumstances indicate that cost cannot be recovered, in which case, the carrying value of the property is reduced to estimated fair value. Estimated fair value: (i) is based upon the Company's plans for the continued operation of each property; (ii) is computed using estimated sales price, as determined by prevailing market values for comparable properties and/or the use of capitalization rates multiplied by annualized rental income based upon the age, construction and use of the building, and (iii) does not purport, for a specific property, to represent the current sales price that the Company could obtain from third parties for such property. The fulfillment of the Company's plans related to each of its properties is dependent upon, among other things, the presence of economic conditions which will enable the Company to continue to hold and operate the properties prior to their eventual sale. Due to uncertainties inherent in the valuation process and in the economy, it is reasonably possible that the actual results of operating and disposing of the Company's properties could be materially different than current expectations. Depreciation is provided using the straight line method over the useful lives of the respective assets. The useful lives are as follow: Buildings and improvements 10 to 40 years Tenant Improvements Term of the related lease Furniture and Equipment 5 to 7 years INVESTMENTS IN MANAGEMENT CONTRACTS Investments in management contracts are recorded at cost and are amortized on a straight-line basis over seven years. MORTGAGE LOANS RECEIVABLE The Company monitors the recoverability of its loans and notes receivable through ongoing contact with the borrowers to ensure timely receipt of interest and principal payments, and where appropriate, obtains financial information concerning the operation of the properties. Interest on mortgage loans is recognized as revenue as it accrues during the period the loan is outstanding. Mortgage loans receivable will be evaluated for F-8 35 GLENBOROUGH REALTY TRUST INCORPORATED AND GRT PREDECESSOR ENTITIES Notes to Financial Statements December 31, 1995 and 1994 impairment if it becomes evident that the borrower is unable to meet its debt service obligations in a timely manner and cannot satisfy its payments using sources other than the operations of the property securing the loan. If it is concluded that such circumstances exist, then the loan will be considered to be impaired and its recorded amount will be reduced to the fair value of the collateral securing it. Interest income will also cease to accrue under such circumstances. Due to uncertainties inherent in the valuation process, it is reasonably possible that the amount ultimately realized from the Company's collection on these receivables will be different than the recorded amounts. CASH EQUIVALENTS The Company considers short-term investments (including certificates of deposit) with a maturity of three months or less at the time of investment to be cash equivalents. FAIR VALUE OF FINANCIAL INSTRUMENTS Statement of Financial Accounting Standards No. 107 requires disclosure about fair value for all financial instruments. Based on the borrowing rates currently available to the Company, the carrying amount of debt approximates fair value. Cash and cash equivalents consist of demand deposits, certificates of deposit and overnight repurchase agreements with financial institutions. The carrying amount of cash and cash equivalents as well as the mortgage notes receivable described above, approximates fair value. DEFERRED FINANCING AND OTHER FEES Fees paid in connection with the financing and leasing of the Company's properties are amortized over the term of the related notes payable or leases and are included in other assets. MINORITY INTEREST Minority interest represents the 13.63% limited partner interest in the Operating Partnership held by GPA, Ltd. REVENUES All leases are classified as operating leases. Rental revenue is recognized on a straight-line basis over the terms of the leases. For the years ended December 31, 1995, 1994 and 1993, rental revenue from the two properties leased to Navistar International represented approximately 10% of the Company's total rental revenue. Fees and reimbursement revenues consist of property management fees, overhead administration fees, and transaction fees from the acquisition, disposition, refinance, leasing and construction supervision of real estate. Substantially all of these revenues will be earned by the Association Companies. Revenues are recognized only after the Company is contractually entitled to receive payment, after the services for which the fee is received have been provided, and after the ability and timing of payments are reasonably assured and predictable. INCOME TAXES The Company intends to make an election to be taxed as a REIT under Sections 856 through 860 of the Code. As a REIT, the Company generally will not be subject to Federal income tax to the extent that it distributes at least 95% of its REIT taxable income to its shareholders. REITs are subject to a number of organizational and operational requirements. If the Company fails to qualify as a REIT in any taxable year, the Company will be subject to Federal income tax (including any applicable alternative minimum tax) on its taxable income at F-9 36 GLENBOROUGH REALTY TRUST INCORPORATED AND GRT PREDECESSOR ENTITIES Notes to Financial Statements December 31, 1995 and 1994 regular corporate tax rates. Even if the Company qualifies for taxation as a REIT, the Company may be subject to certain state and local taxes on its income and property and to Federal income and excise taxes on its undistributed income. Certain of the Company's predecessors were subject to income taxes, the provisions for which have been included in the accompanying combined results of operations of the GRT Predecessor Entities. Note 3. RENTAL PROPERTY, NET The cost and accumulated depreciation and amortization of real estate investments as of December 31, 1995 and 1994 are as follows (in thousands):
Building and Accumulated 1995: Land Improvements Total Depreciation ----- ---- ------------ ----- ------------ Retail properties $ 13,036 $ 17,149 $ 30,185 $ (5,042) Industrial properties 4,481 24,507 28,988 (5,665) Office properties 1,653 9,097 10,750 (3,427) Hotel properties 4,803 23,685 28,488 (10,619) Apartment property 1,857 2,183 4,040 (124) ---------- ----------- ---------- ----------- Total $ 25,830 $ 76,621 $ 102,451 $ (24,877) ========= ========== ========= ========== 1994: ----- Retail properties $ 13,036 $ 17,000 $ 30,036 $ (4,166) Industrial properties 2,910 10,854 13,764 (2,016) Office properties 1,653 10,163 11,816 (3,737) Hotel properties 4,803 23,030 27,833 (9,536) Apartment property -- -- -- -- ---------- ----------- ---------- --------- Total $ 22,402 $ 61,047 $ 83,449 $ (19,455) ========== =========== ========== ==========
The Company leases its commercial and industrial property under non-cancelable operating lease agreements. Future minimum rents to be received as of December 31, 1995 are as follows (in thousands):
Year Ending December 31, 1996 $ 7,215 1997 6,801 1998 6,098 1999 5,151 2000 4,685 Thereafter 23,408 ------ $53,358
F-10 37 GLENBOROUGH REALTY TRUST INCORPORATED AND GRT PREDECESSOR ENTITIES Notes to Financial Statements December 31, 1995 and 1994 Note 4. INVESTMENTS IN ASSOCIATED COMPANIES AND GLENBOROUGH PARTNERS As of December 31, 1995 the Company had the following investments in associated companies and Glenborough Partners (in thousands): ASSOCIATED COMPANIES
Glenborough Glenborough Inland Realty Glenborough Glenborough Corporation Corporation Hotel Group Partners ----------- ----------- ----------- -------- 100% 100% 100% 3.9% Nature of investment Preferred Preferred Preferred Limited partner stock stock stock interest Basis of accounting Equity Equity Equity Cost Investment $ (109) $ 3,919 $ 1,368 $ 585
The Company's investments in the Associated Companies are accounted for on the equity method as the Company has significant ownership interests but does not own any voting interests. The Company records earnings on its investments in the Associated Companies equal to its cash flow preference, to the extent of earnings, plus its pro rata share of remaining earnings, based upon cash flow allocation percentages. Dividends received from the Associated Companies are recorded as a reduction of the Company's investments. Note 5. INVESTMENTS IN MANAGEMENT CONTRACTS AND OTHER, NET Investments in management contracts in the accompanying GRT Predecessor Entities Combined balance sheet reflect the unamortized portion of the management contracts the GC consolidated entities held with both related and unrelated entities and that involve asset management as well as property management responsibilities. The respective balance included in the Company's balance sheet as of December 31, 1995, represents the unamortized portion of the contract associated with asset management for the Glenborough Institutional Fund I partnership. Certain assets included in investments in management contracts and other as of December 31, 1994 were transferred to the Associated Companies in the Consolidation. Note 6. MORTGAGE LOANS RECEIVABLE The Company holds a first mortgage loan in the amount of $6,700,000 at December 31, 1995, secured by an office and research complex in Eatontown, New Jersey. The loan matures on November 1, 1996 with interest only payable monthly at the fixed rate of eight percent (8%) per annum. The borrower is additionally obligated to pay contingent cash flow equal to 75% of all annual net cash flow of the property until the Company receives the equivalent of ten percent (10%) interest for the year in issue, and thereafter fifty percent (50%) of all additional net cash flow of the property (if any) for the year in issue. During the year ended December 31, 1995, the GRT Predecessor Entities recorded a loss provision of $863,000 against the then current balance of $7,563,000 in anticipation of a renegotiation of the terms of the note upon its maturity on November 1, 1996. Interest will continue to accrue at 8% of the face value of the $7,563,000 note. As of December 31, 1995, the borrower was current on all interest payments. F-11 38 GLENBOROUGH REALTY TRUST INCORPORATED AND GRT PREDECESSOR ENTITIES Notes to Financial Statements December 31, 1995 and 1994 The Company holds a first mortgage loan in the amount of $516,000 at December 31, 1995 secured by an industrial property in Los Angeles, California. The terms of the note include interest accruing at eight percent (8%) per annum for the first twenty-four months and at nine percent (9%) per annum for the next sixty months until the note matures in June 2001. Monthly principal and interest installment payments, computed based on a thirty year amortization schedule, commenced January 1995 and continue until maturity. Contractually due principal payments of the mortgage loans receivable are scheduled as follows (in thousands):
Year Ending December 31, 1996 $ 7,567 1997 4 1998 5 1999 5 2000 6 Thereafter 492 -------- Total 8,079 Loss Provision (863) -------- Net $ 7,216 ========
Note 7. DEBT The Company had the following mortgage loans, bank lines, and notes payable outstanding as of December 31, 1995 and 1994 (in thousands):
1995 1994 ------ ----- Secured loan with an investment bank with a fixed interest rate of 7.57%, principal (based upon a 25 year amortization) and interest payments of $149 and maturity date of January 1, 2006. The loan is secured by nine properties with an aggregate net carrying value of $39,082 at December 31, 1995 $20,000 $ -- Secured line of credit with a bank with a variable interest rate of LIBOR plus 2.365% (7.88% at December 31, 1995), monthly interest only payments and maturity dates of November 29, 1998 and December 29, 1998. The line is secured by nine properties and a mortgage note receivable with an aggregate net carrying value of $25,783 at December 31, 1995 10,000 -- Secured loan with a bank with a fixed interest rate of 7.75%, monthly principal (based upon a 25 year amortization) and interest payments of $20 and maturity date of January 1, 2006. The loan is secured by one property with a net carrying value of $3,916 at December 31, 1995 2,650 -- Secured loan with a bank with a fixed interest rate of 8.00% , monthly principal (based upon a 25 year amortization) and interest payments of $13 and maturity date of September 1, 2005. The loan is secured by one property with a net carrying value of $4,056 at December 31, 1995 1,035 1,103
F-12 39 GLENBOROUGH REALTY TRUST INCORPORATED AND GRT PREDECESSOR ENTITIES Notes to Financial Statements December 31, 1995 and 1994 Secured loan with a variable interest rate of 1.5% over lenders prime per annum with monthly interest only payments until maturity on January 5, 1995 (see below) -- 1,300 Secured loan with a bank with a fixed interest rate of 8.25% per annum with monthly payments of principal and interest of $53 and matures on May 1, 2002 (see below) -- 4,097 Various borrowings of GC with fixed interest rates from 5.37% to 8.5% and variable rates of lenders prime plus 1% to 2%. Maturity dates on GC's borrowings ranged from November 18, 1995 to July 1, 1999 (see below) -- 11,406 -------- -------- Total $ 33,685 $ 17,906 ======== ========
Of the loans outstanding at December 31, 1994, the $4,097,000 was paid off with proceeds received for the payoff of a wrap around mortgage note receivable held in favor of one of the GRT Predecessor Entities. In addition, the $1,300,000 and $11,406,000 notes were paid off as part of the refinancing in 1995. The required principal payments on the mortgage loans for the next five years and thereafter are as follows (in thousands):
Year Ending December 31, ------------ 1996 $ 390 1997 421 1998 10,454 1999 489 2000 529 Thereafter 21,402 ------ Total $ 33,685 ===========
Note 8. INVESTOR NOTES PAYABLE Included in the proxy to approve or disapprove the Consolidation, was the option to choose notes in lieu of shares of Common Stock. Upon successful completion of the Consolidation, notes in the amount of $2,483,000 were issued to the limited partners whose votes indicated such election. The notes are unsecured obligations of the Company, bearing a variable rate of interest payable quarterly until their maturity date, November 1, 2002. Subsequent to December 31, 1995, the Company paid the notes in full, along with accrued interest, thereon. Note 9. PREPAID CONSOLIDATION COSTS Prepaid consolidation costs include the costs of mailing and printing the Prospectus/Consent Solicitation Statement, any supplements thereto or other documents related to the Consolidation, the costs of the Information Agent, Investor brochure, telephone calls, broker-dealer fact sheets, printing, postage, travel, meetings, legal and other fees related to the solicitation of consents, as well as reimbursement of costs incurred by brokers and banks in forwarding the Prospectus/Consent Solicitation Statement to Investors. F-13 40 GLENBOROUGH REALTY TRUST INCORPORATED AND GRT PREDECESSOR ENTITIES Notes to Financial Statements December 31, 1995 and 1994 Included in prepaid consolidation costs and other liabilities are amounts accrued but not yet paid as of December 31, 1995. The entire balance of prepaid consolidation costs will be expensed January 1, 1996. F-14 41 GLENBOROUGH REALTY TRUST INCORPORATED AND GRT PREDECESSOR ENTITIES Notes to Financial Statements December 31, 1995 and 1994 Note 10. RELATED PARTY TRANSACTIONS Fee and reimbursement income earned by the GRT Predecessor Entities from related partnerships totaled $2,995,000, $2,858,000 and $3,712,000 for the years ended December 31, 1995, 1994 and 1993, respectively. Note 11. CAPITAL CONTRIBUTION FROM SHAREHOLDERS During the year ended December 31, 1994, the two major shareholders of GC contributed to GC cash of approximately $16 million, along with an obligation to return $17 million of November 1995 one year Treasury Bills that had an approximate market value of $16 million (included in other liabilities at December 31, 1994) at the time of the contribution. This investment was viewed as a hedge against the Company's exposure to rising interest rates because of its floating rate debt. This position was closed in February 1995 at a total loss of approximately $116,000. Note 12. PROVISION FOR LOSS ON INVESTMENTS IN REAL ESTATE, REAL ESTATE PARTNERSHIPS AND MORTGAGE LOANS RECEIVABLE The loss provisions recorded during the years ended are as follows:
1995 1994 1993 ---- ---- ---- Reduce carrying value of New Jersey note receivable to value of collateral $ 863 $ -- $ -- Loss on sale of real estate -- 2,360 1,056 Reduce value of GC investments in real estate partnerships to estimated net realizable value 955 557 828 Loss on sale of investments -- 591 -- Other 58 -- 425 ------ ------ ------ $1,876 $3,508 $2,309 ====== ====== ======
Note 13. STOCK COMPENSATION PLAN Subject to stockholder approval, the Board of Directors of the Company has adopted an incentive stock compensation plan (the "Incentive Plan") to enable certain executive officers and key employees of the company to participate in the ownership of the Company. There will be no option awards under the Incentive Plan until at least 90 days following completion of the Consolidation. Shares of Common Stock will be reserved for issuance under the Incentive Plan and any other stock incentive plans adopted by the Company, which will equal ten percent (10%) of the total number of Shares outstanding, as of the effective date of the Consolidation. The Incentive Plan will be subject to approval by the Stockholders and is scheduled to remain in effect for 10 years unless terminated prior to such time by the Board of Directors. F-15 42 GLENBOROUGH REALTY TRUST INCORPORATED AND GRT PREDECESSOR ENTITIES Notes to Financial Statements December 31, 1995 and 1994 In addition to the Incentive Plan, the Company intends to adopt other types of compensation plans for its directors, executive officers and employees. Note 14. COMMITMENTS AND CONTINGENCIES Environmental Matters. The Company follows the policy of monitoring its properties for the presence of hazardous or toxic substances. The Company is not aware of any environmental liability with respect to the properties that would have a material adverse effect on the Company's business, assets or results of operations. There can be no assurance that such a material environmental liability does not exist. The existence of any such material environmental liability could have an adverse effect on the Company's results of operations and cash flow. General Uninsured Losses. The Company carries comprehensive liability, fire, flood, extended coverage and rental loss insurance with policy specifications, limits and deductibles customarily carried for similar properties. There are, however, certain types of extraordinary losses which may be either uninsurable, or not economically insurable. Further, certain of the properties are located in areas that are subject to earthquake activity. Should a property sustain damage as a result of an earthquake, the Company may incur losses due to insurance deductibles, co- payments on insured losses or uninsured losses. Should an uninsured loss occur, the Company could lose its investment in, and anticipated profits and cash flows from, a property. Litigation. The Company and the Associated Companies are defendants in certain legal proceedings stemming from the Consolidation and prior restructuring transactions. The complaints allege, among other things, that the valuation of the Associated Companies was excessive and that the interest rate assigned to the Investor Notes was too low for the risk involved. These proceedings are in various stages of completion. It is management's position that all claims associated with these matters are without merit. The Company intends to pursue a vigorous defense of all these matters. Note 15. EXTRAORDINARY ITEMS In 1993, $2,274,000 in debt forgiveness was recorded as extraordinary items. $920,000 of this amount was attributable to notes payable by GC for the purchase of the management contracts which was in excess of the then net book value of those contracts. The seller forgave all $1,600,000 remaining on these notes payable, which were to be due in full in 1996, in exchange for a $300,000 advance cash payment. An additional $1,354,000 in debt was forgiven in connection with the sale of the Country Suites By Carlson-Fort Worth hotel. All amounts forgiven under both transactions were payable to affiliates of the former general partner of the GRT Predecessor Entities. F-16 43 GLENBOROUGH REALTY TRUST INCORPORATED SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION DECEMBER 31, 1995 (In Thousands)
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E Cost Capitalized (Reduced) Initial Cost to Subsequent to Gross Amount Carried Company(1) Acquisition(6) at December 31, 1995 --------------- ---------------- --------------------- Buildings Building and and (3) Description Encumbrances Land Improvements Improvements Land Improvements Total -------- ------- -------- ------- ------- ------- Retail Properties: Atlanta Auto Centers: College Park, GA $ (4) $ 266 $ 489 $ (55) $ 266 $ 434 $ 700 Marietta, GA (4) 404 701 (129) 404 572 976 Norcross, GA (4) 287 641 (71) 287 570 857 Roswell, GA (4) 206 332 (53) 206 279 485 Smyrna, GA (4) 240 479 (75) 240 404 644 Snellville, GA (4) 433 551 (60) 418 506 924 Park Center(2) (4) 1,748 3,296 (557) 1,748 2,739 4,487 QuickTrips: #668 - Granite City, IL 599 475 -- 599 475 1,074 #722 - Lithonia, GA 581 450 -- 581 450 1,031 #718 - Norcross, GA 416 445 146 562 445 1,007 #711 - Fulton, GA 618 616 6 618 622 1,240 #75R - Tulsa, OK 181 442 8 181 450 631 #738 - Mableton, GA 293 470 60 353 470 823 #712 - Atlanta, GA 549 495 12 549 507 1,056 #698 - Godfrey, IL 523 568 -- 523 568 1,091 #691 - Madison, IL 356 430 -- 356 430 786 #609 - St. Louis, MO 451 617 7 451 624 1,075 Shannon Crossing (5) 2,488 2,075 335 2,488 2,410 4,898 Westwood Plaza (5) 2,206 3,892 302 2,206 4,194 6,400 -------- ------- -------- ------- ------- ------- 12,845 17,464 (124) 13,036 17,149 30,185 -------- ------- -------- ------- ------- ------- Industrial Properties: All American Self Storage: Eagan, MN (4) 301 960 (196) 301 764 1,065 New Hope, MN (4) 207 1,940 (265) 207 1,675 1,882 Benicia Industrial Park (5) 1,037 4,787 (280) 978 4,566 5,544 COLUMN F COLUMN G COLUMN H (1) Life Accumulated Date Depreciated Depreciation Acquired Over ------------ -------- ------------ Retail Properties: Atlanta Auto Centers: College Park, GA $ 59 12/86 5-25 yrs. Marietta, GA 78 12/86 5-25 yrs. Norcross, GA 77 12/86 5-25 yrs. Roswell, GA 39 12/86 5-25 yrs. Smyrna, GA 55 12/86 5-25 yrs. Snellville, GA 71 12/86 5-25 yrs. Park Center(2) 37 99/86 5-25 yrs. QuickTrips: #668 - Granite City, IL 12 59/90 5-20 yrs. #722 - Lithonia, GA 11 89/90 20 yrs. #718 - Norcross, GA 11 79/90 20 yrs. #711 - Fulton, GA 227 10/88 5-20 yrs. #75R - Tulsa, OK 167 10/88 20 yrs. #738 - Mableton, GA 123 9/90 5-20 yrs. #712 - Atlanta, GA 189 10/88 20 yrs. #698 - Godfrey, IL 149 9/90 20 yrs. #691 - Madison, IL 113 9/90 20 yrs. #609 - St. Louis, MO 227 10/88 5-20 yrs. Shannon Crossing 1,211 10/88 3-14 yrs. Westwood Plaza 1,518 1/88 3-23 yrs. ----- 5,042 ----- Industrial Properties: All American Self Storage: Eagan, MN 104 7/86 5-25 yrs. New Hope, MN 244 7/86 5-25 yrs. Benicia Industrial Park 1,569 7/86 5-30 yrs.
(continued) F-17 44 GLENBOROUGH REALTY TRUST INCORPORATED SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION DECEMBER 31, 1995 - CONTINUED - (In Thousands)
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E Cost Capitalized (Reduced) Initial Cost to Subsequent to Gross Amount Carried Company(1) Acquisition(6) at December 31, 1995 ---------------- ---------------- -------------------- Buildings Building and and (3) Description Encumbrances Land Improvements Improvements Land Improvements Total - ----------------------------------------------------------------------------------------------------------------------------------- Industrial Properties (continued) Case Equipment Corp.: Kansas City, KS 383 3,264 (1,396) 236 2,015 2,251 Memphis, TN 305 2,583 (1,106) 187 1,595 1,782 Navistar Intntl Trans.: W. Chicago, IL (5) 1,289 10,941 (4,682) 793 6,755 7,548 Baltimore, MD (5) 577 4,911 (2,101) 355 3,032 3,387 Park 100 - Building 42 & 46 (4) 712 3,286 (417) 712 2,869 3,581 Sea Tac II(2) (4) 712 1,474 (238) 712 1,236 1,948 ------- -------- -------- ------- -------- -------- 5,523 34,146 (10,681) 4,481 24,507 28,988 ------- -------- -------- ------- -------- -------- Office Properties: 4500 Plaza 1,035 1,192 4,606 543 1,123 5,218 6,341 Regency Westpointe (5) 530 3,147 732 530 3,879 4,409 ------- -------- -------- ------- -------- -------- 1,722 7,753 1,275 1,653 9,097 10,750 ------- -------- -------- ------- -------- -------- Hotel Properties: Country Suites by Carlson: Arlington, TX (5) 1,527 5,346 1,157 1,611 6,419 8,030 Irving, TX(2) (4) 972 3,850 (1,199) 954 2,669 3,623 Ontario, CA (5) 1,224 5,576 272 1,145 5,927 7,072 Tucson, AZ (5) 1,048 7,600 1,115 1,093 8,670 9,763 ------- -------- -------- ------- -------- -------- 4,771 22,372 1,345 4,803 23,685 28,488 ------- -------- -------- ------- -------- -------- Residential Property: Summer Breeze 2,650 1,857 2,138 45 1,857 2,183 4,040 ------- -------- -------- ------- -------- -------- 1,857 2,138 45 1,857 2,183 4,040 ------- -------- -------- ------- -------- -------- $ 33,685 $26,718 $ 83,873 $ (8,140) $25,830 $ 76,621 $102,451 ======== ======= ======== ======== ======= ======== ======== COLUMN A COLUMN F COLUMN G COLUMN H (1) Life Accumulated Date Depreciated Description Depreciation Acquired Over - ---------------------------------------------------------------------------------------- Industrial Properties (continued) Case Equipment Corp.: Kansas City, KS 477 3/84 50 yrs. Memphis, TN 378 3/84 50 yrs. Navistar Intntl Trans.: W. Chicago, IL 1,596 3/84 50 yrs. Baltimore, MD 717 3/84 50 yrs. Park 100 - Building 42 & 46 403 10/86 5-25 yrs. Sea Tac II(2) 177 2/86 5-25 yrs. ------- 5,665 ------- Office Properties: 4500 Plaza 2,285 3/86 5-30 yrs. Regency Westpointe 1,142 6/87 5-30 yrs. ------- 3,427 ------- Hotel Properties: Country Suites by Carlson: Arlington, TX 3,161 12/86 7-25 yrs. Irving, TX(2) 403 10/86 5-25 yrs. Ontario, CA 2,842 11/86 5-30 yrs. Tucson, AZ 4,213 12/86 7-25 yrs. ------- 10,619 ------- Residential Property: Summer Breeze 124 1/95 3-18 yrs. ------- 124 ------- $24,877 ========
(1) Initial Cost and Date Acquired by Participating Partnership (2) The Company holds a participating first mortgage interest in the property. In accordance with GAAP, the Company is accounting for the property as though it holds fee title. (3) The aggregate cost for Federal income tax purposes is $84,400. (4) Pledged as security for Imperial Bank Loan -- $10,000. (5) Pledged as security for Bear Stearns Loan -- $20,000. (6) Bracketed amounts represent reductions to carrying value in prior years. F-18 45 GLENBOROUGH REALTY TRUST INCORPORATED SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION (In Thousands) Reconciliation of gross amount at which real estate was carried:
For the years ended December 31, 1995 1994 1993 ---- ---- ---- Investments in real estate: Balance at beginning of period $ 83,449 $ 86,400 $ 89,293 Additions during period: Property acquisition 17,151 206 -- Improvements, etc 1,851 2,464 1,201 Retirements -- (5,621) (4,094) -------- -------- -------- Balance at end of period $102,451 $ 83,449 $ 86,400 ======== ======== ======== Accumulated Depreciation: Balance at beginning of period $ 19,455 $ 16,945 $ 15,308 Additions charged to costs and expenses 2,254 3,489 3,165 Acquisitions 3,168 -- -- Retirements -- (979) (1,528) -------- -------- -------- Balance at end of period $ 24,877 $ 19,455 $ 16,945 ======== ======== ========
F-19 46 GLENBOROUGH REALTY TRUST INCORPORATED SCHEDULE IV - MORTGAGE LOANS ON REAL ESTATE DECEMBER 31, 1995 (In Thousands)
COLUMN A COLUMN B COLUMN C Description of Loan Final Maturity and Securing Property Interest Rate Date - --------------------- ------------- -------------- First Mortgage Loan 8% 11/1/96 Office and research complex, Eatontown, NY First Mortgage Loan 8%-9% 6/1/01 Industrial property, Los Angeles, CA COLUMN A COLUMN D COLUMN E COLUMN F COLUMN G COLUMN H Principal Amount of Loans Subject Description of Loan Periodic Face Carrying to Delinquent and Securing Property Payment Terms Prior Liens Amount Amount (1) Principal or Interest - --------------------- -------------------------- ----------- ------ ---------- --------------------- First Mortgage Loan Monthly interest payments, Office and research principal due upon maturity complex, Decreasing prepayment penalty None $7,600 $6,700 None Eatontown, NY of between $76 and $380 commencing February 1, 1991 First Mortgage Loan Monthly interest and principal None 553 516 None ----- ----- Industrial property, payments, commencing Los Angeles, CA January 1, 1996 based on a thirty year amortization 8,153 $7,216 ===== ======
F-20 47 GLENBOROUGH REALTY TRUST INCORPORATED SCHEDULE IV - MORTGAGE LOANS ON REAL ESTATE December 31, 1995 The following is a summary of changes in the carrying amount of mortgage loans for the years ended December 31, 1995, 1994 and 1993 (in thousands):
1995 1994 1993 -------- -------- -------- Balance at beginning of year $ 19,953 $ 18,825 $ 18,967 Additions during year: New mortgage loans 7 2,122 108 Deductions during year: Loss provision (863) -- -- Collections of principal (11,881) (994) (250) -------- -------- -------- Balance at end of year $ 7,216 $ 19,953 $ 18,825 ======== ======== ========
F-21 48 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, hereunto duly authorized. GLENBOROUGH REALTY TRUST INCORPORATED Date: February 21, 1997 By: /s/ Terri Garnick --------------------------------- Terri Garnick Senior Vice President, Chief Accounting Officer, Treasurer (Principal Accounting Officer) 49 EXHIBIT INDEX EXHIBIT NUMBER EXHIBIT TITLE --------- -------------------------------------------------------------- 3.01 Articles of Amendment and Restatement of Articles of Incorporation of Glenborough Realty Trust Incorporated. (1) 3.02 Bylaws of Glenborough Realty Trust Incorporated. (1) 4.02 Form of Common Stock Certificate. (1) 10.01 First Amended and Restated Agreement of Limited Partnership of Glenborough Properties, L.P. (1) 10.02 Form of Indemnification Agreement for existing Officers and Directors of Glenborough Realty Trust Incorporated. (1) 10.04* 1996 Employee Stock Incentive Plan. (1) 10.05* 1996 Non-Employee and Director Stock Incentive Plan. (1) 10.06 Lease Agreements between Glenborough Properties, L.P. and Glenborough Hotel Group for Country Suites-Ontario and Country Suites-Arlington (2) 10.07* Employment Agreement between Glenborough Realty Trust Incorporated and Robert Batinovich (2) 10.08* Employment Agreement between Glenborough Realty Trust Incorporated and Andrew Batinovich (2) 10.14 Management, Administration and Consulting Agreement dated as of December 20, 1994 between Glenborough Inland Realty Corporation and the General Partners of nine Rancon Partnerships. (1) 10.15 Amendment to Management, Administration and Consulting Agreement dated March 30, 1995 between Glenborough Inland Realty Corporation and the General Partners of nine Rancon Partnership. (1) 10.18 Agreement between Glenborough Corporation and Bear, Stearns & Co., Inc., dated October 7, 1994. (1) 10.19* Employment Agreement between Glenborough Realty Corporation Robert Batinovich (2) 10.20* Employment Agreement between Glenborough Realty Corporation Andrew Batinovich (2) 10.21* Employment Agreement between Glenborough Inland Realty Corporation and Andrew Batinovich (2) 50 EXHIBIT NUMBER EXHIBIT TITLE --------- -------------------------------------------------------------- 10.22* Employment Agreement between Glenborough Inland Realty Corporation and Andrew Batinovich (2) 10.23* Employment Agreement between Glenborough Hotel Group and Andrew Batinovich (2) 10.24 Form of Indemnification Agreement for Existing Officers and Directors of Glenborough Hotel Group. (1) 10.25 Form of Indemnification Agreement for Existing Officers and Directors of Glenborough Realty Corporation. (1) 10.26 Form of Indemnification Agreement for Existing Officers and Directors of Glenborough Inland Realty Corporation. (1) 10.27 Registration Agreement between Glenborough Realty Trust Incorporated and GPA, Ltd. (2) 10.28 Lock Up Agreements. (2) 10.29 Subscription Agreement between Glenborough Properties, L.P. and GPA, Ltd. (2) 10.30 Form of Agreement for Purchase and Sale of Real Estate to be entered into by and between Glenborough Realty Trust Incorporated and Outlook Income Fund 9. (1) 10.31 Indemnification Agreement for Glenborough Realty Corporation and Glenborough Realty Trust Incorporated, with Robert Batinovich as indemnitor. (2) * Indicates management contract or compensatory plan or arrangement. (1) Incorporated by reference to the identically numbered exhibit to the Company's Registration Statement on Form S-4 (Registration No. 33-83506), which became effective October 26, 1995. (2) Incorporated by references to the identically numbered exhibit to the Company's Annual Report on Form 10-K for the year ended December 31, 1995. -----END PRIVACY-ENHANCED MESSAGE-----