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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549


FORM 10-K

(Mark One)

x

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]

 

 

 

For the fiscal year ended December 31, 2002

 

 

OR

 

 

o

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]

 

 

 

For the transition period from _______ to _______

 

 

Commission file number 1-12566

 


 

G & L REALTY CORP.

(Exact name of Registrant as specified in its charter)

 

Maryland

 

95-4449388

(State or other jurisdiction of incorporation or organization)

 

(I.R.S. Employer Identification No.)

 

 

 

439 N. Bedford Drive Beverly Hills, California

 

90210

(Address of Principal Executive Offices)

 

(Zip Code)

 

 

 

Registrant’s telephone number, including area code: (310) 273-9930

 


 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

 

Name of each exchange on which registered


 


Series A Preferred Stock, $.01 par value

 

New York Stock Exchange

Series B Preferred Stock, $.01 par value

 

New York Stock Exchange

Securities registered pursuant to Section 12(g) of the Act:
None

          Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  

Yes   x

No   o

          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. o

          Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2).

Yes   o

No   x

          State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, or the average bid and asked price of such common equity, as of the last business day of the registrant’s most recently completed second fiscal quarter.

          All voting and non-voting common equity is held by affiliates.



Table of Contents

ANNUAL REPORT ON FORM 10-K

FOR THE FISCAL YEAR ENDED DECEMBER 31, 2002

PART I

 

 

 

ITEM 1.

BUSINESS

1

ITEM 2.

PROPERTIES

5

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 EQUITY AND RELATED STOCKHOLDER MATTERS

17

ITEM 6.

CONSOLIDATED SELECTED FINANCIAL DATA

18

ITEM 7.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

20

ITEM 7A.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

32

ITEM 8.  

FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA

33

ITEM 9.

CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING  AND FINANCIAL DISCLOSURE

33

 

 

 

PART III

 

 

 

 

 

ITEM 10.

DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

33

ITEM 11.

EXECUTIVE COMPENSATION

35

ITEM 12.

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

37

ITEM 13.

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

38

ITEM 14.

CONTROLS AND PROCEDURES

38

 

 

 

PART IV

 

 

 

 

 

ITEM 15.

EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

39

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Table of Contents

PART I

ITEM 1. 

BUSINESS

General

          The Company is a self-managed real estate investment trust (“REIT”) that owns, acquires, develops, manages and leases health care properties. The Company’s business currently consists of investments, made either directly or through joint ventures, in medical office buildings (“MOB”), assisted living facilities (“ALF”) and skilled nursing facilities (“SNF”).  All of the Company’s assets are held by, and all of its operations are conducted through, G&L Realty Partnership, L.P. (the “Operating Partnership”) and G&L Senior Care Partnership, L.P. (the “Senior Care Partnership”) or their subsidiaries.  The Company was incorporated in Maryland on September 15, 1993.

          On October 29, 2001, the Company completed a merger with G & L Acquisition, LLC, a Maryland limited liability company, substantially on the terms provided for in the Agreement and Plan of Merger, dated as of May 10, 2001, as amended, by and between the Company and G & L Acquisition, LLC (the “Merger”).  The Company was the survivor of the Merger.  G & L Acquisition, LLC was owned by Daniel M. Gottlieb and Steven D. Lebowitz, Chief Executive Officer and President, respectively, of the Company.  Upon completion of the Merger, each outstanding share of the Company’s Common Stock, other than a portion of the shares held by Messrs. Gottlieb and Lebowitz, was converted into the right to receive $13.00 in cash, without interest. After completion of the Merger, the Company’s Common Stock was delisted from the New York Stock Exchange.

Description of Business

          The MOB business strategy is to acquire, develop, manage and lease a portfolio of medical office buildings. The Company currently seeks growth opportunities mainly in Southern California through acquisition and development of additional MOBs directly or through strategic joint ventures. The MOB portfolio currently consists of approximately 857,000 rentable square feet. The Company directly owns 19 high quality MOBs, an adjacent parking facility, a research and development building and two retail facilities and indirectly owns three additional MOBs (collectively, the “MOB Properties”).  All of the MOB Properties are located in California.  Several of the MOB Properties include retail space on the ground level.  As of January 31, 2003, the MOB Properties were 97.5% leased.  On February 23, 2003, a joint venture, in which the Company held a 50% interest, sold a 23,000 square foot MOB located in Aliso Viejo, California for $7.3 million.  The joint venture recognized a gain of approximately $3 million from the sale.  The Company received net proceeds of $1.2 million from the sale. 

          The ALF and SNF business strategy is to capitalize on consolidation opportunities in the assisted living and skilled nursing facility industry by making selected equity investments in ALFs and SNFs.  The Company directly and indirectly owns four ALFs, eight SNFs and two senior resident apartment complexes, including one under development (collectively, the “ALF and SNF Properties”).  All of the ALFs are located in Southern California.  Four of the SNFs are located in Massachusetts, one in California, one in Arizona, one in Maryland and one in Washington.  The two senior resident apartment complexes are located in Arizona and Southern California, respectively.  The ALF and SNF Properties have an aggregate of 1,364 beds or units.  On February 28, 2003, a joint venture, in which the Company held a 50% interest, sold an ALF located in Omaha, Nebraska for $11.1 million.  The joint venture recognized a gain of approximately $4 million from the sale.  The Company received net proceeds of $1.8 million from the sale.

          See Note 14 of the Notes to the Consolidated Financial Statements for financial information about the Company’s three main business segments: investments in (i) MOBs, (ii) ALFs and (iii) SNFs. 

          As part of its overall business strategy, the Company develops MOBs, ALFs and SNFs, either directly or through joint ventures.  The Company has a long history of successful developments and believes that it can maximize growth through a combination of development and acquisition.  In March 2002, the Company completed the development of a 50,000 square foot, 92-bed ALF located in Yorba Linda, California.  The ALF in Yorba Linda

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is a joint venture with D.D.& F., Inc., a wholly-owned subsidiary of Prestige Care, Inc., an Oregon-based operator of ALFs and SNFs.

          In addition to the Company’s investments in its existing MOB Properties, the Company also seeks to make selective acquisitions of MOBs. From time to time hospital owners sell their Mobs to raise capital. These sales create opportunities for the Company to acquire Mobs on attractive terms. Because hospitals will often seek a buyer with the operating skills necessary to meet the needs of the medical practitioners located in the building, the Company believes that its successful history of operating Mobs provides it with a competitive advantage in the acquisition, development, redevelopment and management of Mobs

          Through its ALF and SNF Properties, the Company seeks to selectively acquire ownership interests in ALFs and SNFs that have characteristics consistent with the Company’s growth strategy.  The Company believes that the aging population in the United States has increased the demand for efficiently operated ALFs and SNFs.  The Company believes that it is in a position to capitalize on this increased demand by selectively acquiring ownership interests in attractively situated ALFs and SNFs.  The Company also believes that there is potential for the Company to make additional acquisitions of ALFs and SNFs.

          Financing for new acquisitions of MOBs, ALFs and SNFs may be provided through existing or new joint ventures with third parties or third-party financing in the form of secured or unsecured debt.  The Company’s capacity to obtain debt financing facilitates its ability to acquire ownership interests in additional MOBs, ALFs and SNFs.  However, notwithstanding any business policies or objectives of the Company, no assurance can be given that the Company, or its investment affiliates, will be able to make acquisitions on favorable terms or that such properties will be profitably operated.  In addition, the Company and its investment affiliates will likely incur additional indebtedness in connection with future acquisitions.

Property Management

          The Company provides a full range of management services for the operation of MOBs.  The ability of the Company to manage MOBs to meet the unique needs of medical practitioners has been critical to its success to date.  The Company has experienced lease renewal rates of approximately 85.9%, 83.0%, and 85.2% for the years ended December 31, 2002, 2001 and 2000, respectively, with respect to medical office space in the MOB Properties based on the medical office space leases available for renewal in these periods.  Developing and managing MOBs differs from developing and managing general office properties due to the special requirements of the tenants and their patients.  MOBs generally have higher maintenance requirements in the public areas due to heavy foot traffic, many short appointments which increase demand on parking facilities, the use of sophisticated medical equipment requiring increased plumbing and electrical capacity and expanded environmental regulations that impose more stringent restrictions on the disposal of medical waste.  The management of MOBs also generally requires experience in specialized tenant improvements and higher levels of responsiveness required by medical practitioners.  Additional important management functions include the placement of tenants within MOBs to accommodate increased space needs and managing the tenant mix at properties so that referrals by practitioners with different specialties within the building are facilitated.  The Company stresses meeting these and other special demands of medical property tenants.

Tax Status

          The Company believes that it has operated in such a manner as to qualify for taxation as a REIT under Sections 856 through 860 of the Internal Revenue Code of 1986, as amended (the “Code”), commencing with its

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taxable year ended December 31, 1993, and the Company intends to continue to operate in such a manner.  As long as the Company qualifies for taxation as a REIT under the Code, the Company generally will not be taxed at the corporate level.  If the Company fails to qualify as a REIT in any taxable year, the Company will be subject to federal income tax (including any applicable alternative minimum tax) on its taxable income at regular corporate rates.  Even if the Company qualifies for taxation as a REIT, the Company may be subject to certain state and local taxes on its income and property and to federal income and excise taxes on its undistributed income.

Employees

          As of March 28, 2003, the Company (including the Operating Partnership) employed 30 persons, 12 of whom are on-site building employees who provide maintenance services for the MOB Properties and 8 of whom are professional employees engaged in leasing, asset management and administration.

Dependence on Key Tenants

          The Company’s MOBs typically consist of several smaller tenants rather than one or two large tenants.  As of December 31, 2002, no MOB tenant accounted for more than 10% of the Company’s total revenues.  Although no MOB tenant accounts for more than 10% of the Company’s total revenues, the risks associated with smaller tenants include (i) less creditworthiness, (ii) greater tenant turnover and (iii) greater property management needs.

          The ALFs and SNFs are either leased to senior care companies or managed by senior care companies that operate the facilities.  During 2000, the Company replaced lease agreements at four of its facilities with management contracts.  Because the Company replaced these leases with management contracts, all of the revenues and expenses relating to the operations of these facilities are reflected in the consolidated financial statements of the Company. Although all of the Company’s ALF and SNF properties are currently leased or under management contracts, finding experienced senior care managers is a time-consuming and difficult task.  During 2002, revenue from the Company’s three SNFs in Hampden, Massachusetts accounted for approximately 39% of the Company’s total revenues.   Should these three facilities or any of the Company’s other ALFs or SNFs require a change in lessee or manager, the Company’s financial results could be materially impacted despite the fact that no other ALF or SNF tenant or manager accounts for more than 10% of the Company’s total revenues.

Government Regulation

          Environmental Matters.   Under various federal, state and local laws, ordinances and regulations, an owner or operator of real estate is liable for the costs of removal or remediation of certain hazardous or toxic substances on or in its property.  These laws impose liability without regard to whether the owner knew of, or was responsible for, the presence of any hazardous or toxic substances.  The presence of such substances, or the failure to properly remediate these substances, may adversely affect the owner’s ability to borrow using the real estate as collateral and may subject the owner to material remediation costs.  All of the MOB Properties, ALFs and SNFs have been subject to Phase I environmental assessments (which involve inspection of the subject property, but no soil sampling or groundwater analysis) by independent environmental consultants.  Although restricted in scope, these independent assessments revealed no material evidence of existing environmental liability, and the Company has not been notified by any governmental authority of any noncompliance by, liability for, or other claim against the Company in connection with environmental matters related to the MOB Properties, ALFs or SNFs.  While the Company is not aware of any environmental liability that it believes would have a material adverse effect on its business, assets or results of operations, no assurance can be given that the environmental assessments revealed all potential environmental liabilities or that a prior owner did not create any material environmental condition not known to the Company or that future uses or conditions (including changes in applicable environmental laws and regulations) will not result in imposition of environmental liability.

          The independent environmental assessments include selective sampling for asbestos where the age of the buildings or the types of materials warranted such sampling.  Limited quantities of non-friable asbestos are present in some of the Company’s properties.

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Management believes that it has undertaken adequate measures to ensure that the asbestos will remain undisturbed and that it does not pose a current health risk.  Management plans to continue to monitor this situation.

          Physicians generate medical waste in the normal course of their practice.  The Company’s leases require the individual tenants to make arrangements for the disposal of medical waste and require all tenants to provide proof that they have contracted with a third party service to remove waste from the premises each night.  The handling and disposal of this waste is the responsibility of the tenants; however, the Company remains responsible as the owner of the property.  There can be no assurance that all such medical waste will be properly handled and disposed of or that the Company will not incur costs in connection with improper disposal of medical waste by its tenants.

          Healthcare Industry Regulation.    Physicians and senior care operators are subject to heavy government regulation including the determination of the level of reimbursements for medical costs incurred and services provided under government programs.  Changes in government regulations regarding medical reimbursements and other regulations affecting the healthcare industry can have a dramatic impact on the operations of medical practitioners or senior care operators under government programs.  Both the federal government and many state governments are exploring numerous reforms concerning the healthcare industry that could have a significant impact on many healthcare-related businesses.  If legislation were enacted that decreased the level of government medical reimbursements or increased the degree of regulatory oversight, thereby increasing the expenses of healthcare businesses, the Company’s tenant base could be adversely affected.  This, in turn, could negatively impact the ability of the Company to make distributions.

          Americans with Disabilities Act.   All of the MOB Properties and ALF and SNF Properties are required to comply with the Americans with Disabilities Act (“ADA”).  The ADA generally requires that buildings be made accessible to people with disabilities.  Compliance with the ADA requirements could require removal of access barriers and noncompliance could result in imposition of fines by the federal government or an award of damages to private litigants.  The Company believes it is in substantial compliance with the ADA and that it will not be required to make substantial capital expenditures to address the requirements of the ADA.  If required changes involve a greater expenditure than the Company currently anticipates, the Company’s ability to make distributions could be adversely affected.

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ITEM 2. 

PROPERTIES

          The MOB Properties consist of 19 high quality MOBs directly owned by the Company, three MOBs indirectly-owned by the Company, an adjacent parking facility, a research and development building and two retail facilities.  The ALF and SNF Properties consist of four ALFs, eight SNFs and two senior resident apartment complexes. As of January 31, 2003, the MOB Properties were 97.5% leased to 426 tenants and the ALF and SNF Properties were 100% leased to operators or under contracts with management companies.  The Company’s MOB tenants are primarily established medical practitioners representing a cross section of medical practices.

Description of the MOB Properties and ALF and SNF Properties

MOB Properties

          The Company, through its MOB operations, acquires, develops, manages and leases MOBs, a research and development building a parking facility and two retail facilities.  Developing and managing MOBs differs from developing and managing conventional office buildings due to the special requirements of physicians and their patients.  Because doctors now perform a variety of medical procedures in their offices, many MOBs have become sophisticated ambulatory centers that allow for outpatient surgery and procedures.  In addition, MOBs generally have higher maintenance requirements in the public areas due to heavy foot traffic, many short appointments that increase demand on parking facilities, the use of sophisticated medical equipment requiring increased plumbing and electrical capacity and expanded environmental regulations that impose more stringent restrictions on the disposal of medical waste.  The management of MOBs also generally requires experience in specialized tenant improvements and higher levels of responsiveness required by medical practitioners.  Additional important management functions include the placement of tenants to accommodate increased space needs and managing the tenant mix at properties to facilitate referrals by practitioners with different specialties within the building.  The Company stresses meeting these and other special demands of MOB tenants.

ALF and SNF Properties

          The Company, as part of its overall strategy, acquires, develops and leases ALFs and SNFs.  The Company typically leases its ALFs and SNFs to third party senior care operators.  The operation of ALFs and SNFs requires a high level of experience and expertise due to the specific needs of the residents and the complex administrative functions surrounding the admission and care of residents and the administering of government programs.  The operators of ALFs and SNFs must also maintain a positive relationship with local hospitals and other medical providers in order to attract new residents.  The Company considers all of the above factors when leasing its facilities to third party operators or hiring managers to operate its facilities.

          The health care industry is facing various challenges, including increased government and private payor pressure to reduce medical delivery costs.  Substantially all of the Company’s tenants are in the medical profession and could be or have been adversely affected by the new Medicare prospective payment system, cost containment and other health care reform proposals.  In the past two years, the Company has changed managers at two of its ALFs  and six of its SNFs in response to financial difficulties encountered by the managers or dissatisfaction with the operating results of the managers.  Any future proposals that limit access to medical care or reduce reimbursement for physicians’ services may also impact the ability of the Company’s tenants to pay rent.  However, the Company believes that the aging population in the United States, combined with other recent trends in the health care industry, such as the performance of non-acute procedures outside of hospitals, could spur increased demand for space in full service MOBs that contain surgery centers and out-patient facilities, such as those owned by the Company.

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          The following tables set forth certain information regarding each of the MOB Properties and ALF and SNF Properties as of January 31, 2003.  All of the MOB Properties and ALF and SNF Properties are held in fee by the Company or, in the case of jointly-owned properties, by the joint venture property partnership or limited liability company.  Except as noted below, the Company owns 100% of each property.

MOB Properties—Summary Data

Property

 

Number
of
Buildings

 

Year
Constructed or
Rehabilitated

 

Rentable
Square
Feet(1)

 

Rented
Square
Feet(2)

 

Occupancy(2)

 

Total
Annualized
Rent(3)

 

Average
Rent per
Sq. Ft.

 


 


 



 



 



 



 



 



 

 
405 N. Bedford, Beverly Hills,

 

 

1

 

 

1947/1987

 

 

42,396

 

 

42,396

 

 

100.0

%

$

1,889,000

 

$

44.56

 

 
415 N. Bedford, Beverly Hills

 

 

1

 

 

1955

 

 

5,720

 

 

5,720

 

 

100.0

 

 

276,000

 

 

48.25

 

 
416 N. Bedford, Beverly Hills

 

 

1

 

 

1946/1986

 

 

40,292

 

 

40,292

 

 

100.0

 

 

1,659,000

 

 

41.17

 

 
435 N. Bedford, Beverly Hills

 

 

1

 

 

1950/63/84

 

 

53,691

 

 

52,389

 

 

97.6

 

 

2,139,000

 

 

40.83

 

 
435 N. Roxbury, Beverly Hills (6)

 

 

1

 

 

1956/1983

 

 

40,865

 

 

40,865

 

 

100.0

 

 

1,666,000

 

 

40.77

 

 
436 N. Bedford, Beverly Hills

 

 

1

 

 

1987

 

 

74,113

 

 

73,630

 

 

99.3

 

 

3,449,000

 

 

46.84

 

 
Sherman Oaks Medical Plaza 4955 Van Nuys Blvd. Sherman Oaks

 

 

1

 

 

1969/1993

 

 

67,967

 

 

65,995

 

 

97.1

 

 

1,604,000

 

 

24.30

 

 
Irwindale Building 12701 Schabarum Ave. Irwindale

 

 

1

 

 

1992

 

 

47,604

 

 

47,604

 

 

100.0

 

 

628,000

 

 

13.19

 

 
Coronado Plaza 1330 Orange Ave, Coronado

 

 

1

 

 

1977/1985

 

 

39,688

 

 

37,796

 

 

95.2

 

 

1,196,000

 

 

31.64

 

 
Holy Cross Medical Plaza 11550 Indian Hills Road Mission Hills

 

 

1

 

 

1985

 

 

70,521

 

 

64,771

 

 

91.8

 

 

1,850,000

 

 

28.56

 

 
St. Joseph’s Medical Office Bldg. 2031 West Alameda Ave. Burbank

 

 

1

 

 

1987

 

 

25,769

 

 

25,769

 

 

100.0

 

 

708,000

 

 

27.47

 

 
Lyons Avenue Medical Building 24355 Lyons Avenue, Santa Clarita

 

 

1

 

 

1990

 

 

48,930

 

 

48,930

 

 

100.0

 

 

1,090,000

 

 

22.28

 

 
Tustin—Medical Office I 14591 Newport Avenue, Tustin

 

 

1

 

 

1969

 

 

18,092

 

 

16,211

 

 

89.6

 

 

310,000

 

 

19.12

 

 
Tustin—Medical Office II 14642 Newport Avenue, Tustin

 

 

1

 

 

1985

 

 

48,621

 

 

48,216

 

 

99.2

 

 

1,151,000

 

 

23.87

 

 
Pier One Retail Center (10) 26771 Aliso Creek Road, Aliso Viejo

 

 

1

 

 

1998

 

 

9,100

 

 

9,100

 

 

100.0

 

 

182,000

 

 

20.00

 

 
Regents Medical Center 4150 Regents Park Row, La Jolla

 

 

1

 

 

1989

 

 

66,557

 

 

66,557

 

 

100.0

 

 

1,907,000

 

 

28.65

 

 
San Pedro Medical Plaza (7) 1360 West 6th Street, San Pedro

 

 

3

 

 

1963/1979

 

 

61,241

 

 

53,724

 

 

87.7

 

 

1,228,000

 

 

22.86

 

 
1095 Irvine Boulevard, Tustin

 

 

1

 

 

1995

 

 

10,125

 

 

10,125

 

 

100.0

 

 

224,000

 

 

22.12

 

 
Santa Clarita Valley Medical Center 23861 McBean Pkwy, Santa Clarita

 

 

5

 

 

1981

 

 

41,943

 

 

41,432

 

 

98.8

 

 

868,000

 

 

20.95

 

 
Santa Clarita Valley Medical Center, F 23929 McBean Pkwy, Santa Clarita

 

 

1

 

 

1998/1999

 

 

43,912

 

 

43,912

 

 

100.0

 

 

1,161,000

 

 

26.44

 

 
 

 



 

 

 

 



 



 

 

 

 



 

 

 

 

Total/Weighted average of all MOB Properties

 

 

26

 

 

 

 

 

857,147

 

 

835,434

 

 

97.5

%

$

25,185,000

 

 

30.15

 

 
 


 

 

 

 



 



 

 

 

 



 

 

 

 



See footnotes on page 9

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Table of Contents

ALF and SNF Properties—Summary Data

Property

 

Number of
Buildings

 

Year
Constructed or
Rehabilitated

 

Number of
Beds/Units

 

Occupancy(4)

 


 


 


 


 


 

Southern California
 

 

 

 

 

 

 

 

 

 

 

 

 

 
Pacific Gardens Santa Monica (8) 851 Second Street, Santa Monica

 

 

1

 

 

1990

 

 

92

U

 

95.7

%

 
The Arbors (7) 12979 Rancho Penasquitos Boulevard, San Diego

 

 

1

 

 

1998/1999

 

 

92

U

 

100.0

 

 
Pacific Gardens Tarzana (9) 18700 Burbank Boulevard Tarzana

 

 

1

 

 

1989

 

 

80

U

 

84.4

 

 
North Valley Nursing and Rehabilitation Center1645 Esplanade, Chico (5)

 

 

1

 

 

1960

 

 

59

B

 

0

 

 
Prestige Assisted Living at Yorba Linda (7) 4792 Lakeview Ave, Yorba Linda

 

 

1

 

 

2000-2002

 

 

80

U

 

60.0

 

Arizona
 

 

 

 

 

 

 

 

 

 

 

 

 

 
Maryland Gardens

 

 

 

 

 

 

 

 

60

B

 

 

 

31 West Maryland Avenue, Phoenix
 

 

1

 

 

1951-1957

 

 

38

U

 

90.0

 

 
Maryland Gardens II 39 West Maryland Avenue, Phoenix

 

 

1

 

 

1968

 

 

20

U

 

100.0

 

Maryland
 

 

 

 

 

 

 

 

 

 

 

 

 

 
St. Thomas More Nursing & Rehabilitation Center, 4922 La Salle Road, Hyattsville

 

 

1

 

 

1955-56/1976

 

 

220

B

 

96.6

 

Massachusetts
 

 

 

 

 

 

 

 

 

 

 

 

 

 
Riverdale Gardens 42 Prospect Avenue, West Springfield

 

 

1

 

 

1957-1975

 

 

168

B

 

91.1

 

 
Chestnut Hill 32 Chestnut Street, East Longmeadow

 

 

1

 

 

1984

 

 

123

B

 

92.1

 

 
Mary Lyon 34 Main Street, Hampden

 

 

1

 

 

1986

 

 

100

B

 

93.4

 

 
Ring East Nursing Home (7) 215 Bicentennial Highway, Springfield

 

 

1

 

 

1987

 

 

120

B

 

93.8

 

Washington
 

 

 

 

 

 

 

 

 

 

 

 

 

 
Pacific Care Center 3035 Cherry Street, Hoquiam

 

 

1

 

 

1954

 

 

112

B

 

48.8

 

 
 

 



 

 

 

 



 

 

 

 

Total of all ALF and SNF Properties
 

 

13

 

 

 

 

 

1,364

 

 

 

 

 
 


 

 

 

 



 

 

 

 

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1)

Rentable square feet includes space used for management purposes but does not include storage space.

2)

Occupancy includes occupied space and space used for management purposes.  Rented square feet includes space that is leased but not yet occupied.  Occupancy figures have been rounded to the nearest tenth of one percent.

3)

Rent is based on third-party leased space billed in January 2002; no rent is assumed from management space.

4)

Occupancy is on a per-bed or unit basis.

5)

The Company acquired this property through foreclosure of its first deed of trust in March 2000.  The facility is currently closed.

6)

The Company owns 32.8% of this property.

7)

The Company owns 50% of this property.

8)

The Company owns 93% of this property.

9)

The Company owns 85% of this property.

10)

The Company is currently under contract to sell this property for $2.8 million.

MOB Properties 

          Six of the MOB Properties are located on North Bedford and North Roxbury Drives in the ‘‘Golden Triangle’’ area of Beverly Hills, California, near three major hospitals—Cedars Sinai Medical Center, Century City Hospital and UCLA Medical Center.  The buildings feature high quality interior improvements, including rich wood paneling and brass hardware appointments, both in the common areas and in most of the doctors’ offices.  These six MOB Properties include twenty-one operating rooms.  The 405, 416 and 436 North Bedford Drive buildings each have emergency back-up generators.  Parking for these six MOB Properties is provided in the 415 North Bedford garage and in subterranean parking at 436 North Bedford and 435 North Roxbury Drives.  Each of these MOBs has copper insulated pipe with sufficient capacity for medical use, electrical systems designed for extra load requirements and extensive security systems.

     405 North Bedford Drive, Beverly Hills

          The 405 North Bedford Drive MOB, built in 1947 and extensively remodeled in 1987, consists of approximately 42,000 rentable square feet in four stories plus a penthouse and a basement.  The reinforced brick building, with ground floor retail space, features cherry wood paneled walls and brass hardware in the common areas and decorative concrete trim on the exterior.

     415 North Bedford Drive, Beverly Hills

          The 415 North Bedford Drive building is a four-level parking structure with approximately 5,700 square feet of ground floor retail space for seven tenants.  The parking structure contains 316 spaces and is valet operated.

     416 North Bedford Drive, Beverly Hills

          The 416 North Bedford Drive property is a four-story, approximately 40,000 rentable square foot reinforced brick MOB with a basement and ground floor retail space.  Built in 1946 and extensively remodeled in 1986, the building features oak paneled walls and moldings, brass hardware, tinted concrete borders on the exterior, and fourth floor skylights that provide an open, airy atmosphere in the hallway and in some of the suites.

     435 North Bedford Drive, Beverly Hills

          The 435 North Bedford Drive property is a four-story, approximately 54,000 rentable square foot reinforced brick and masonry MOB with a penthouse, basement, and ground floor retail space.  Built in 1950 and extensively remodeled in 1984, the building features oak molding, wall sconces and paneling in the hallways plus stained runner boards and built-in stained hardwood cabinets in some of the medical office suites.

     435 North Roxbury Drive, Beverly Hills

          The 435 North Roxbury Drive property is a four-story, approximately 41,000 rentable square foot MOB with a penthouse, subterranean parking and retail space on the ground floor.  The building, which was built in 1956 and

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extensively remodeled in 1983, features a reinforced brick and masonry exterior and raised, oak-stained paneling and molding in the hallways.

     436 North Bedford Drive, Beverly Hills

          The 436 North Bedford Drive property is a three-story, approximately 74,000 rentable square foot MOB with three levels of subterranean parking.  Built in 1987, the building features ground floor retail and office space surrounding a central courtyard and balconies at selected locations on the second and third floors.  The exterior is clad in rose color sandstone with cast stone and granite trim.  The central courtyard features a cascading waterfall sculpture and stone pavers with intricate marble and stone patterns.  Cherry wood paneled walls also line the elevator lobbies on all floors and portions of the hallways.

     Sherman Oaks Medical Plaza, Sherman Oaks

          The Sherman Oaks Medical Plaza is a seven-story, approximately 68,000 rentable square foot MOB, constructed in 1969, that is adjacent to the Sherman Oaks Hospital and Health Center, a 156-bed hospital which includes the major burn center for the San Fernando Valley.  A $1 million capital improvement program renovating the building systems and common areas of the Sherman Oaks Medical Plaza was completed in 1993.  The Company also owns the adjacent air rights and three-level parking structure behind the property which provides a total of 426 parking spaces.  The land beneath the parking structure is owned by Sherman Oaks Hospital which also leases 150 parking spaces in the structure.

     Irwindale Building, Irwindale

          The Irwindale Building in Irwindale, California is a two-story, approximately 48,000 square foot research and development building, constructed in 1992, on a site that provides two parking areas with a total of 244 spaces.  The Company converted this building from an MOB to an R&D building in 2001.  Prior to 2001, this property was 100% leased to Cigna Healthcare of California (“Cigna”).  After Cigna bought out their lease, the Company converted the building to an R&D facility in order to re-lease the building to Autronics Corporation, a British-based electronics company.  The lease with Autronics Corporation commenced on July 1, 2001 and expires on June 30, 2008.  The lease is guaranteed by Curtiss-Wright Corporation, the parent company of Autronics Corporation.

     Coronado Plaza

          Coronado Plaza is a three-story, approximately 40,000 rentable square foot office and retail complex located in Coronado, California.  The building is located on the beach across the street from the Hotel Del Coronado and the majority of the second and third floor suites have unobstructed ocean views.  The building has subterranean parking for 96 vehicles plus street parking surrounding the entire property.

     Holy Cross Medical Plaza, Mission Hills

          The Holy Cross Medical Plaza is situated on approximately 2.6 acres of the 15-acre campus of Holy Cross Medical Plaza, a 316-bed hospital.  The campus also includes the Villa de la Santa Cruz SNF, another MOB, a magnetic resonance imaging center, and an outpatient diagnostic center.  Built in 1985, the Holy Cross Medical Plaza is a three-story, approximately 71,000 square foot MOB occupied primarily by medical and dental practitioners.  A two-story parking structure and an open asphalt-paved lot can accommodate a total of 333 vehicles.  The surrounding site is landscaped with grass, trees, shrubs and planter boxes.

     St. Joseph’s Professional Building, Burbank

          The St. Joseph’s Professional Building is a steel frame, brick-facade building, constructed in 1987, that features approximately 26,000 rentable square feet in two floors of office space over three levels of subterranean parking which can accommodate up to 100 vehicles.  The building is located one-quarter of a mile from St. Joseph’s Hospital and is directly across the street from the Walt Disney Company’s world headquarters campus.  Saint

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Joseph’s Hospital includes 658 beds and is owned by the Sisters of Providence, an organization which owns other hospitals throughout North America. 

     Lyons Avenue Medical Building

          The Lyons Avenue Medical Building is a two-story, approximately 49,000 rentable square foot MOB located in Valencia, California only ½ mile from the Henry Mayo Newhall Memorial Hospital.  The building has subterranean parking and a two-story atrium entry.   The building’s excellent market position provides first class medical space for those doctors that do not need an association with the hospital.

     Tustin—MOB I

          The 14591 Newport Avenue building in Tustin, California is a two-story, approximately 18,000 rentable square foot MOB that was constructed in 1969 on a 1.2-acre site.  The site is landscaped with grass lawns, shrubs, and trees and includes an asphalt-paved parking lot with approximately 105 parking spaces, representing a parking ratio of 5.8 parking spaces per 1,000 square feet of building area.

     Tustin—MOB II

          The 14642 Newport Avenue building in Tustin, California is a four-story, approximately 49,000 rentable square foot MOB, developed in 1985, that features a surgery center with three operating rooms, a pharmacy, and an industrial clinic on the first floor.  Medical offices are located on all of the other floors.

     Regents Medical Center, La Jolla

          The Regents Medical Center is a three-story, approximately 67,000 rentable square foot MOB situated on approximately 2.6 acres in the University Town Center area of San Diego, near the University of California, San Diego.  The building, which was constructed in 1989, has ground level retail spaces, two upper floors of medical offices, and subterranean and ground level parking that can accommodate a total of 285 vehicles.

     Pier One Retail Center

          The Pier One Retail Center is a one-story, 9,100 rentable square foot retail facility built by the Company in 1998 in Aliso Viejo, California.  The building is 100% leased to Pier One Imports, Inc. for ten years on a triple net basis.  The lease provides for monthly rent of $15,000.

     San Pedro Medical Plaza

          The San Pedro Medical Plaza in San Pedro, California is an approximately 61,000 rentable square foot complex consisting of three MOBs.  The buildings are located across the street from the San Pedro Peninsula Hospital and are situated on 7.85 acres incorporating a 383 space surface parking lot. 

     1095 Irvine Boulevard, Tustin

          The 1095 Irvine Boulevard building in Tustin, California consists of approximately 10,000 rentable square feet and was redeveloped in 1995 as a primary health care center for physicians who are part of the St. Joseph Hospital of Orange health care network.  The property is leased to St. Joseph Hospital, Inc. under a net lease with a 15-year term, which began in August 1995, and provides for annual cost of living rent escalations limited to 3%.  The lease provides for monthly rent of $18,000 and expires on July 31, 2010.

     Santa Clarita Valley Medical Center

          The Santa Clarita Valley Medical Center in Valencia, California is an approximately 42,000 square foot complex consisting of four one-story MOBs and one two-story MOB.  The buildings are located on the Henry Mayo Newhall Memorial Hospital Campus, the only regional hospital in the area.  The campus includes a 241-bed medical

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center and another MOB. An adjacent parking lot can accommodate up to 435 vehicles.  The buildings are subject to a 60-year ground lease which includes payments of $11,000 per month. 

     Santa Clarita Valley Medical Center, Bldg F

          Building F at the Santa Clarita Valley Medical Center is a two-story, approximately 44,000 square foot MOB built by the Company in 1999.  The building is located on the Henry Mayo Newhall Memorial Hospital Campus and is adjacent to the other five MOBs owned by the Company on the Hospital Campus.  Building F is the premier medical office building in the Santa Clarita Valley area.  The building is subject to a 60-year ground lease that includes payments of $11,000 per month.

ALF and SNF Properties

Southern California Properties

Pacific Gardens Santa Monica

          Pacific Gardens Santa Monica is a 92-unit, approximately 61,000 square foot, four-story ALF located in Santa Monica, California just two blocks from the beach.  The building contains a 3-story, subterranean parking garage for 112 vehicles.  The facility features a kitchen, 150-seat dining room, community room, TV lounges, library, beauty parlor and guest laundry areas on each floor.  The facility is in close proximity to nearby shopping, restaurants and entertainment.  Two major hospitals, Santa Monica Hospital Medical Center and St. John’s Hospital are located within two miles of the property.

     The Arbors at Rancho Penasquitos

          The Arbors at Rancho Penasquitos is a 92-unit, approximately 52,000 square foot, three-story ALF located in Rancho Penasquitos, California.  The building was originally built in 1988 as a Ramada Hotel.  In 1998, the Company, in joint venture with Parsons House, LLC, purchased the property and converted it into The Arbors at Rancho Penasquitos.  The facility opened in March 1999.

          Each unit contains approximately 360 square feet and includes a small kitchenette. The facility contains a kitchen, dining room, activity room and a lounge.  The 2.07-acre property also has a parking lot that can accommodate up to 114 cars.

     Pacific Gardens Tarzana

          Pacific Gardens Tarzana is a two-story, 80-unit, approximately 44,000 square foot ALF located in Tarzana, California.  The facility features a formal dining room, two living rooms, pharmaceutical services, daily maid service and personal laundry service.

     Prestige Assisted Living at Yorba Linda

          Prestige Assisted Living at Yorba Linda is a two story, 80-unit, approximately 50,000 square foot ALF located in Yorba Linda, California.  The project is a joint venture between the Company and Prestige Care Inc., an experienced ALF operator.  Construction began on the facility in October 1999 and was completed in the first quarter of 2002.  

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Arizona Properties

     Maryland Gardens

          Maryland Gardens is a 98-bed SNF located in Phoenix.  The facility is situated on approximately 1.84 acres and consists of a 60-bed SNF and a 38-unit Alzheimers unit.  The facility is leased to Senior Management Resources, LLC, a Phoenix, Arizona-based operator of SNFs.

     Maryland Gardens II

          Maryland Gardens II is a 20-unit, approximately 30,000 square foot apartment complex acquired by the Company in May 1998.  The building is located on a 1.0-acre lot adjacent to the Maryland Gardens SNF.  The building, named the Winter Gardens Apartments, currently consists of residential tenants.  The property also includes a 1.0-acre vacant parcel of land and a duplex building.

Maryland Properties

          St. Thomas More Nursing and Rehabilitation Center is a 220-bed SNF located in Hyattsville, Maryland.  The Company acquired the property in January 2002.  The Company previously held a first deed of trust on the property.  The property has been managed by FutureCare, Inc., a Maryland-based owner and operator of SNFs, since 1997. 

Massachusetts Properties

     Hampden Properties

          G&L Hampden, LLC, a wholly owned subsidiary of the Company, acquired three nursing home properties in Massachusetts on October 28, 1997 from Hampden Nursing Homes, Inc. (“HNH”), a nonprofit corporation.  Lenox Healthcare, Inc. (“Lenox”) managed the three facilities from October 1998 through December 1999.  In November 1999, Lenox filed for bankruptcy protection.  The Company immediately moved to replace Lenox as the manager of the nursing homes.  In January 2000, the Company received the bankruptcy court’s permission to replace Lenox as the manager and a new management firm, a subsidiary of Roush & Associates (“Roush”), was immediately retained. Since acquiring the properties from HNH, HNH has held the licenses necessary to operate the facilities.  In March 2000, the Company successfully transferred the licenses to G&L Massachusetts, LLC, a subsidiary of the Operating Partnership.  G&L Massachusetts, LLC subsequently leased the three facilities from the Company while Roush continued to manage them.  The lease requires monthly payments of $175,000 net of property taxes, insurance and costs to maintain the facilities.  

Riverdale Gardens

          Riverdale Gardens Nursing Home, located in West Springfield, Massachusetts, is a 168-bed nursing facility currently licensed for 84 skilled care and 84 intermediate care beds with 16 private and 76 double occupancy rooms.  Constructed in various stages between 1957 and 1975, the property consists of a single story 54,451 square foot building on approximately 3.85 acres as well as a 3,366 square foot single family residence on an adjacent 30,000 square foot lot.

Chestnut Hill

          Chestnut Hill Nursing Home, located in East Longmeadow, Massachusetts, is a 123 bed nursing home consisting of 82 skilled nursing and 41 intermediate care beds with 15 private and 54 double occupancy rooms.  The facility is a 49,198 square foot single story building constructed in 1984 on approximately 11.9 acres of land.

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Mary Lyon

          Mary Lyon Nursing Home, located in Hampden, Massachusetts, occupies a 28,940 square foot building situated on 3.7 acres and was originally constructed in 1959 and renovated in 1986.  The facility is licensed for 100 beds of which 40 are skilled nursing and 60 are intermediate care beds with ten private rooms, 39 double occupancy rooms and three quadruple occupancy rooms.

Ring East Nursing Home

          Ring East Nursing Home, located in Springfield, Massachusetts, occupies an approximately 58,000 square foot building, was constructed in 1987 and opened in 1988.  The facility is licensed for 120 beds and residents include both short-stay post-acute patients as well as long-term care residents. 

Washington Property

     Pacific Care Center

          Pacific Care Center is a 112-bed SNF located in Hoquiam.  Prestige Care, inc. a Vancouver, Washington-based owner and operator of ALFs, has managed this facility since April 1, 2000.  On December 1, 2000, after obtaining the license to operate the facility, Prestige Care, Inc. signed a five-year lease with the Company.

Leases

     MOB Properties

          As of January 31, 2003, the MOB Properties were approximately 97.5% leased.  New leases and extensions are normally granted for a minimum of three to five years and provide for annual rent increases.  Office tenants generally have gross leases whereby rents may be adjusted for a tenant’s proportionate share of any increases in the cost of operating the building.  However, the Company has recently been leasing office space with provisions for the tenants to pay all utility costs directly.  Most retail tenants have net leases and pay their share of all operating expenses including property taxes and insurance.  The following is a lease expiration table setting forth the number, square feet and associated annual rent for those leases expiring in future years.

MOB Properties—Lease Expirations

Year of Lease Expiration

 

Number of
Leases
Expiring (1)

 

Approximate
Total Rented
Square Feet (1)

 

Annual Rent

 

% of
Total Annual
Rent

 


 


 


 


 


 

2003
 

 

69

 

 

107,137

 

$

3,344,000

 

 

14.4

%

2004
 

 

56

 

 

101,204

 

 

3,040,000

 

 

13.1

%

2005
 

 

65

 

 

103,952

 

 

3,330,000

 

 

14.3

%

2006
 

 

66

 

 

128,162

 

 

4,437,000

 

 

19.0

%

2007
 

 

49

 

 

103,206

 

 

3,575,000

 

 

15.3

%

2008
 

 

19

 

 

104,275

 

 

2,314,000

 

 

9.9

%

2009
 

 

15

 

 

50,303

 

 

1,423,000

 

 

6.1

%

2010
 

 

9

 

 

32,713

 

 

890,000

 

 

3.8

%

2011
 

 

7

 

 

17,603

 

 

575,000

 

 

2.5

%

2012
 

 

7

 

 

16,588

 

 

371,000

 

 

1.6

%

2013 or later
 

 

0

 

 

—  

 

 

—  

 

 

—  

 

 
 


 



 



 



 

 
Total

 

 

362

 

 

765,143

 

$

23,299,000

 

 

100.0

%

 
 

 



 



 



 



 



1)

Does not include month-to-month leases or vacant space.  There are 64 month-to-month tenants who occupy approximately 70,000 square feet of space and pay approximately $157,000 per month in rent.

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          The Company was successful in obtaining lease renewals, achieving a weighted average renewal rate of approximately 85.9% on MOB leases that expired during 2002.  Although there can be no assurance that this renewal level will be maintained, the Company believes this high renewal rate is due in part to the tendency of medical practitioners to continue to practice in the same space over a number of years.  Also, the Company’s tenants frequently invest large sums of money in equipment and fixtures for their offices.  Furthermore, relocating a doctor’s office can be disruptive to the patients who are familiar with the doctor’s office location.

Senior Care Loans

     Lending Operations

          From 1995 through 1999, the Company was in the business of originating loans secured by healthcare properties. Since 1999, the Company has made no secured loans and has exited the business of originating loans. As of December 31, 2002, the Company had seven loans outstanding that total approximately $6.3 million before reserves of $4.5 million.   The seven loans are described in the following paragraphs.

          In October 1999, the Company provided $1.65 million of bridge financing for a $9.0 million apartment complex located in Tulsa, Oklahoma.  The borrower sold the apartment complex in December 1999 through a tax-exempt bond offering to NVHF Park Chase, LLC (“NVHF”), a not-for-profit company.  As part of its loan repayment, the Company received approximately $380,000 in cash.  For the remaining balance, the Company received $1.26 million in tax-exempt, subordinated B-bonds from the offering.  The tax-exempt bonds are due in December 2029 and bear interest at 8.75% per annum.  In addition, the Company received a 10-year, 10%, $560,000 unsecured note from NVHF Affiliates, LLC, the parent company of NVHF.  The Company is also the guarantor on a $300,000 letter of credit in favor of NVHF Affiliates, LLC.

          In December 1997, the Company funded $4.6 million into an escrow, to be loaned to Aspen Paso Robles, Inc. (“Aspen”) for the purchase of (i) a 59-bed nursing and rehabilitation center in Chico, California; (ii) a 38-bed SNF in Paso Robles, California; and (iii) a 57-bed intermediate care center in Beaumont, California.  The loan closed on February 25, 1998 although the funds for the Beaumont facility remained in escrow until October 1998 at which time the Company secured the return of those funds and applied them to pay down the loan balance to $3.6 million.  The borrower subsequently filed a Chapter 11 proceeding under the U.S. Bankruptcy Code. As of December 31, 1999, the remaining $3.6 million loan balance was in default and the two facilities securing the loan were closed.  In March 2000, the Company obtained title to the two SNFs from the bankruptcy court.  In May 2002, the Company sold the Paso Robles facility for $0.3 million.  As of December 31, 2002, the outstanding loan balance was fully reserved.  The Company is currently pursuing legal action against the borrower and other parties involved in the transaction in order to recover the remaining outstanding balance.

          In addition to the notes discussed above, the Company had six other loans outstanding at December 31, 2002, with an aggregate face value of $6.8 million, excluding approximately $0.4 million of additional accrued, unpaid interest.  The following is a summary of the four other loans as of December 31, 2002:

 

$150,000 note secured by second deed of trust, interest payable semiannually at a rate of 10.0% per annum.  This note is fully reserved and currently in default.

 

 

 

 

$104,000 unsecured promissory note due July 1, 2000, interest payable at 10.0% per annum.  This note is fully reserved and currently in default.

 

 

 

 

$1,000,000 unsecured promissory note due September 1, 2000, interest payable at 10.0% per annum.  This note is fully reserved and currently in default.

 

 

 

 

$290,000 unsecured promissory note due April 11, 2003, interest payable at 10.0% per annum.

 

 

 

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          As of December 31, 2002, the Company had reserves of $4.5 million for doubtful notes receivable. Management believes that $4.5 million is appropriate in relation to the status of the loans in the Company’s portfolio as of March 31, 2003.

Notes Receivable from Stockholders

          In addition to the seven loans discussed above, the Company also has two unsecured promissory notes totaling $5,240,000 due on October 31, 2011 with interest payable at 30-day LIBOR plus 7.5% per annum. The borrowers on these two notes are Daniel M. Gottlieb and Steven D. Lebowitz, the Company’s chief executive officer and president, respectively. These notes were issued in connection with the Company’s acquisition of its outstanding common stock on October 29, 2001. The Company used a portion of the proceeds from its $35 million loan from GMAC Commercial Mortgage Corp. to fund these notes. Messrs. Gottlieb & Lebowitz used these proceeds to fund a $3.5 million tender offer for the Company’s Series A and Series B Preferred Stock and repay $1.7 million of personal debt. See Management’s Discussion and Analysis of Financial Condition and Results of Operations and Note 11 of the Notes to the Consolidated Financial Statements for more information regarding these notes.

     GLN

          GLN was formed with Nomura Asset Capital Corp. (“Nomura”) for the purpose of making short-term loans to third parties to purchase senior care facilities.  As of December 31, 2002, GLN had no loans outstanding.  In May 1997, GLN funded a secured loan of approximately $1.5 million to a limited partnership created to acquire a recreational vehicle (“RV”) park in Florida for approximately $1.2 million.  This loan bore interest at a rate of approximately 9.0% per annum and matured on May 1, 1999.  The loan provided for monthly payments of interest only.  In January 2002, the borrower sold the property for approximately $1.8 million and repaid GLN in full.  GLN distributed the net proceeds to Nomura and the Company and is in the process of dissolving.

Insurance

          The Company carries comprehensive liability, fire, flood, extended coverage and rental loss insurance with respect to the MOB Properties and certain ALF and SNF Properties.  There are certain types of losses that may either be uninsurable or not economically insurable; moreover, there can be no assurance that policies maintained by the Company will be adequate in the event of a loss.  The Company carries earthquake and flood insurance for coverage of losses up to $35 million on the MOB Properties and certain ALF and SNF Properties located in California and Arizona, which amount represents approximately 25% of the net book value of these properties.  This coverage is subject to a 10% deductible up to the amount of insured loss. The ALF and SNF Properties located in Washington and Massachusetts do not carry earthquake or flood insurance.  Thirty-one of the 39 properties directly or indirectly owned by the Company are located in Southern California, which has a history of seismic activity, including the 1994 Northridge earthquake that damaged the Holy Cross Medical Plaza property.  Two ALF and SNF Properties owned by the Company are located in Phoenix, Arizona, in an area with a history of flood activity.  Where the Company does not directly insure against casualty or liability, the Company requires the lessees or operators of its ALF and SNF Properties to maintain such insurance and name the Company and its subsidiaries as additional insured with full rights of a direct beneficiary in the event of loss.  Should an uninsured loss occur, the Company could lose its investment in, and anticipated earnings and cash flow from, a property.

ITEM 3.

LEGAL PROCEEDINGS

          There is no material pending litigation to which the Company or its consolidated or unconsolidated subsidiaries is a defendant or to which any of their properties is subject other than routine litigation arising in the ordinary course of business, most, if not all, of which is expected to be covered by insurance, except as discussed below.

          In February 2000, the Operating Partnership filed a declaratory relief action in the New Jersey State Court seeking a determination that LaSalle National Bank (“LaSalle”) did not have any rights against certain assets held by the Operating Partnership.  In December 2001, the Operating Partnership entered a settlement agreement with LaSalle whereby it would pay LaSalle $1.1 million and assign certain claims in full satisfaction of any amounts owed by the Operating Partnership to LaSalle.  The Operating Partnership paid the $1.1 million to LaSalle in January 2002.

          In November 1999, Landmark Healthcare Facilities, LLC (“Landmark”) filed a lawsuit against Valencia, a subsidiary of the Company, entitled Landmark Healthcare Facilities, LLC v. G&L Valencia, LLC, case number 816391 in the Superior Court of the State of California, County of Orange, claiming that Landmark is entitled to

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approximately $600,000 plus interest under an agreement for the development of an MOB in Valencia, California.  In December 1999, the Company filed a counter suit to recover approximately $400,000 plus interest that was already paid under the development agreement and for a judgment and declaration that all of Landmark’s rights, title and interest in Valencia have been terminated or assigned to the Company.  On July 5, 2001, the court issued a ruling in favor of the Company in an amount in excess of $900,000.  In January 2002, the Company accepted a settlement offer for $310,000 to be paid off over 10 months.  The Company was repaid in full in May 2002.

          In January 2001, the Company settled a lawsuit with Cigna Healthcare, Inc and Cigna Healthcare of California (“Cigna”) and received a settlement of $4.1 million.  The settlement ended litigation against Cigna for delinquent rent under a lease for a MOB in Irwindale, California.  Due to this settlement, the Company recorded lease termination income of $2.6 million in the first quarter of 2001.

          There are a number of putative stockholder class actions pending against the Company and its directors that arose out of the proposal by Daniel M. Gottlieb, the Chief Executive Officer of the Company, and Steven D. Lebowitz, the President of the Company, to acquire all of the outstanding shares of the Company’s common stock not then owned by them.  The first suit, Lukoff v. G & L Realty Corp. et al., case number BC 241251, was filed in the Superior Court for the State of California, County of Los Angeles, on December 4, 2000.  A second suit, Abrons v. G & L Realty Corp. et al., case number 24-C-00-006109, was filed in the Circuit Court for Baltimore City, Maryland, on December 14, 2000.  This suit was voluntarily dismissed without prejudice on June 7, 2001, and re-filed in the Superior Court for the State of California, County of Los Angeles, case number BC 251479, on May 31, 2001.  Morse v. G & L Realty Corp. et al., case number 221719-V, was filed in the Circuit Court for Montgomery County, Maryland, on May 17, 2001.  Another suit, Harbor Finance Partners v. Daniel M. Gottlieb et al., case number BC 251593, was filed in the Superior Court for the State of California, County of Los Angeles, on June 1, 2001.  All these actions assert claims for breach of fiduciary duty and seek compensatory damages and other relief.  The Lukoff, Abrons and Harbor Finance actions have been consolidated for all purposes, with Lukoff designated as the lead action. No trial date has been set. The Morse action has been stayed pending the conclusion of the California class actions.

          In addition, a group of four former stockholders of the Company filed an individual suit against the Company and its directors arising from the same conduct alleged in the putative class actions and asserting claims for breach of fiduciary duty and usurpation of corporate opportunity. This suit, Lyle Weisman, et al. v. G & L Realty Corp., et al, case number BC 271401, was filed in the Superior Court of California, County of Los Angeles, on April 4, 2002. The Weisman plaintiffs also assert claims for intentional and negligent interference with prospective economic advantage against the individual defendants on the theory that they interfered with the Weisman plaintiffs’ purported proposals to acquire the Company. On January 17, 2003, the Company and Messrs. Gottlieb and Lebowitz jointly filed a cross-complaint against the Weisman plaintiffs alleging that their acquisition proposals were made with no real intent to acquire the Company, but simply to disrupt the Company’s existing merger agreement with Messrs. Gottlieb and Lebowitz. The cross-complaint asserts causes of action for intentional interference with contract and prospective economic advantage, fraud, negligent misrepresentation and unfair competition. The Weisman suit has been consolidated with the Lukoff class actions for purposes of discovery. No trial date has been set.

          All of these lawsuits are covered by $5 million of directors and officer’s liability insurance.

ITEM 4.

SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None.

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PART II

ITEM 5.

MARKET FOR REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

          Until October 29, 2001, the Company’s Common Stock was listed on the New York Stock Exchange under the symbol GLR. On October 29, 2001, the Company completed a merger with G & L Acquisition, LLC, a Maryland limited liability company, substantially on the terms provided for in the Agreement of Plan and Merger, dated as of May 10, 2001, as amended, by and between the Company and G & L Acquisition, LLC (the “Merger”).  G & L Acquisition, LLC is owned by Daniel M. Gottlieb and Steven D. Lebowitz, Chief Executive Officer and President, respectively, of the Company.  Upon completion of the Merger, each outstanding share of the Company’s Common Stock, other than a portion of the shares held by Messrs. Gottlieb and Lebowitz, was converted into the right to receive $13.00 in cash, without interest.  After completion of the Merger, the Company’s Common Stock was delisted from the New York Stock Exchange.  There is no established public trading market for the Company’s common stock.  As of March 28, 2003, the Company had two holders of its Common Stock.

          The table below sets forth the high and low sales prices of the Company’s stock for each full quarterly period from January 1, 2001 to October 29, 2001 as reported by the New York Stock Exchange.  The table also includes, on a per share basis, the quarterly cash distribution declared and paid to holders of the Company’s Common Stock and Units for each of the last two fiscal years.

 

 

High

 

Low

 

Distribution

 

 
 


 



 



 

2002 Fourth quarter
 

 

—  

 

 

—  

 

 

0.667

 

 
Third quarter

 

 

—  

 

 

—  

 

 

—  

 

 
Second quarter

 

 

—  

 

 

—  

 

 

—  

 

 
First quarter

 

 

—  

 

 

—  

 

 

—  

 

2001 Fourth quarter (Through October 29)
 

$

13.50

 

 

12.05

 

 

0.205

 

 
Third quarter

 

 

14.05

 

 

12.25

 

 

0.125

 

 
Second quarter

 

 

14.39

 

 

10.15

 

 

0.125

 

 
First quarter

 

 

10.75

 

 

8.88

 

 

0.125

 

 
 

 

 

 

 

 

 

 

 

 

 


          The Company also paid monthly dividends to holders of the Company’s Series A and Series B Preferred Stock on the fifteenth day of each month. Dividends are paid monthly at the rate of $2.56 and $2.45 per annum on shares of the Company’s Series A and Series B Preferred Stock, respectively.  Distributions on the Company’s Series A and Series B Preferred Stock are senior to all classes of the Company’s Common Stock.  Subsequent to the Merger, the Company’s Series A and Series B Preferred Stock is still outstanding and traded on the New York Stock Exchange. 

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Table of Contents

ITEM 6.

CONSOLIDATED SELECTED FINANCIAL DATA

          The following table sets forth consolidated selected financial and operating information for the Company for each of the years ended December 31, 2002, 2001, 2000, 1999 and 1998.  The following information should be read in conjunction with all of the financial statements and notes thereto included in this Form 10-K.  This data also should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included elsewhere in this Form 10-K.  The consolidated selected financial and operating data as of December 31, 2002, 2001, 2000, 1999 and 1998 and for each of the years ended December 31, 2002, 2001, 2000, 1999 and 1998 have been derived from audited financial statements.

 

 

Year ended December 31,

 

 

 


 

 

 

2002

 

2001

 

2000

 

1999

 

1998

 

 

 



 



 



 



 



 

 

 

(In thousands, except per share amounts)

 

Operating Data:
 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenues:
 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
Rental

 

$

29,041

 

$

26,428

 

$

25,525

 

$

27,564

 

$

24,272

 

 
Patient revenues

 

 

24,261

 

 

21,057

 

 

17,820

 

 

—  

 

 

—  

 

 
Tenant reimbursements

 

 

2,829

 

 

1,894

 

 

1,495

 

 

1,275

 

 

781

 

 
Parking

 

 

1,534

 

 

1,502

 

 

1,273

 

 

1,148

 

 

1,501

 

 
Interest and loan fees

 

 

2,459

 

 

2,801

 

 

2,528

 

 

2,792

 

 

4,514

 

 
Net gain on sale of assets

 

 

—  

 

 

—  

 

 

1,263

 

 

—  

 

 

—  

 

 
Other income

 

 

1,433

 

 

4,484

 

 

546

 

 

398

 

 

180

 

 
 

 



 



 



 



 



 

 
Total revenues

 

 

61,557

 

 

58,166

 

 

50,450

 

 

33,177

 

 

31,248

 

 
 

 



 



 



 



 



 

Expenses:
 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
Property operations

 

 

8,781

 

 

8,611

 

 

7,798

 

 

7,360

 

 

6,131

 

 
Skilled nursing operations

 

 

21,421

 

 

19,004

 

 

16,548

 

 

—  

 

 

—  

 

 
Depreciation and amortization

 

 

6,282

 

 

6,012

 

 

5,915

 

 

5,616

 

 

4,542

 

 
Interest

 

 

17,349

 

 

13,249

 

 

13,557

 

 

12,416

 

 

8,683

 

 
General and administrative

 

 

3,280

 

 

3,953

 

 

2,892

 

 

3,196

 

 

2,554

 

 
Provision for doubtful accounts, notes and bonds receivable

 

 

1,542

 

 

1,004

 

 

2,288

 

 

2,210

 

 

5,603

 

 
Impairment of long-lived assets

 

 

—  

 

 

—  

 

 

—  

 

 

6,400

 

 

—  

 

 
 

 



 



 



 



 



 

 
Total expenses

 

 

58,655

 

 

51,833

 

 

48,998

 

 

37,198

 

 

27,513

 

 
 

 



 



 



 



 



 

 
Income (loss) from operations before minority interests, equity in (loss) earnings of unconsolidated affiliates and discontinued operations

 

 

2,902

 

 

6,333

 

 

1,452

 

 

(4,021

)

 

3,735

 

 
Equity in (loss) earnings of unconsolidated affiliates

 

 

(140

)

 

205

 

 

(417

)

 

(269

)

 

80

 

 
Minority interest in consolidated affiliates

 

 

(285

)

 

(302

)

 

(182

)

 

(175

)

 

(225

)

 
Corporate income tax expense

 

 

(295

)

 

(85

)

 

—  

 

 

—  

 

 

—  

 

 
Minority interest in Operating Partnership

 

 

—  

 

 

—  

 

 

460

 

 

2,202

 

 

404

 

 
 

 



 



 



 



 



 

 
Income (loss) from operations before discontinued operations

 

 

2,182

 

 

6,151

 

 

1,313

 

 

(2,263

)

 

3,994

 

 
 

 



 



 



 



 



 

 
Net (loss) income from discontinued operations

 

 

(13

)

 

(21

)

 

(164

)

 

148

 

 

349

 

 
Gain from discontinued operations

 

 

2,320

 

 

—  

 

 

—  

 

 

—  

 

 

—  

 

 
 

 



 



 



 



 



 

 
Total income (loss) from discontinued operations

 

 

2,307

 

 

(21

)

 

(164

)

 

148

 

 

349

 

 
 

 



 



 



 



 



 

 
Net income (loss)

 

 

4,489

 

 

6,130

 

 

1,149

 

 

(2,115

)

 

4,343

 

 
Dividends on preferred stock

 

 

(7,162

)

 

(7,162

)

 

(7,164

)

 

(7,212

)

 

(7,212

)

 
 

 



 



 



 



 



 

 
Net loss to common stockholders

 

$

(2,673

)

$

(1,032

)

$

(6,015

)

$

(9,327

)

$

(2,869

)

 
 

 



 



 



 



 



 

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At or for the Year ended December 31,

 

 

 


 

 

 

2002

 

2001

 

2000

 

1999

 

1998

 

 

 


 


 


 


 


 

 

 

(In thousands, except per share amounts)

 

Cash Flow Data:
 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net cash provided by operating activities
 

$

3,871

 

$

15,482

 

$

7,332

 

$

8,708

 

$

12,666

 

Net cash provided by (used in) investing activities
 

 

11,612

 

 

(2,809

)

 

(373

)

 

(12,330

)

 

(51,094

)

Net cash (used in) provided by financing activities
 

 

(15,156

)

 

(13,425

)

 

(11,713

)

 

9,788

 

 

26,198

 

Balance Sheet Data:
 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Land, buildings and improvements, net
 

$

169,962

 

$

166,009

 

$

168,280

 

$

180,367

 

$

186,751

 

Mortgage loans and bonds receivable, net
 

 

1,829

 

 

11,976

 

 

11,244

 

 

16,026

 

 

12,101

 

Total investments
 

 

171,791

 

 

177,985

 

 

179,524

 

 

196,393

 

 

198,852

 

Total assets
 

 

198,008

 

 

205,024

 

 

205,466

 

 

232,396

 

 

219,499

 

Total debt
 

 

194,092

 

 

192,698

 

 

158,942

 

 

177,371

 

 

134,880

 

Total stockholders’ equity
 

 

(2,272

)

 

901

 

 

39,891

 

 

51,385

 

 

79,584

 

Other Data:
 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ratio of earnings to fixed charges and preferred dividends (1)
 

 

0.89

x

 

0.95x

 

 

0.71x

 

 

0.53x

 

 

0.82x

 

Ratio of funds from operations to fixed charges and preferred dividends (2)
 

 

1.04

x

 

1.10

x

 

0.91

x

 

0.70

x

 

1.05

x

Number of properties
 

 

39

 

 

42

 

 

40

 

 

45

 

 

36

 


1)

For purposes of these computations, earnings consist of net income plus fixed charges.  Fixed charges and preferred dividends consist of interest expense, capitalized interest, amortization of deferred financing costs and preferred dividends paid to preferred stockholders during the period.  The deficit of earnings to fixed charges and preferred dividends for the years ended December 31, 2002, 2001,  2000, 1999 and 1998 was $2,673,000, $1,032,000,  $6,015,000,$9,327,000 and $3,038,000, respectively.

2)

For purposes of these computations, ratio of funds from operations to fixed charges consists of FFO as defined in note (1) on page 31 plus fixed charges and preferred dividends paid to preferred stock holders during the period.  Fixed charges and preferred dividends consist of interest expense, capitalized interest, amortization of deferred financing costs and preferred dividends paid to preferred stockholders during the period.  The deficit of funds from operations to fixed charges for the years ended December 31, 2000 and 1999 was $1,786,000 and $5,966,000, respectively.

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ITEM 7.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

          The following discussion should be read in conjunction with the Consolidated Selected Financial Data and the Company’s Consolidated Financial Statements and Notes thereto included elsewhere in this Form 10-K.

          Information contained in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” contains forward-looking statements.  These statements can be identified by the use of forward-looking terminology such as “may,” “will,” “expect,” “anticipate,” “estimate” or “continue” or the negative thereof or other comparable terminology.  Any one factor or combination of factors could cause the Company’s actual operating performance or financial results to differ substantially from those anticipated by management.   Factors influencing the Company’s operating performance and financial results include, but are not limited to, changes in the general economy, the supply of, and demand for, healthcare related real estate in markets in which the Company has investments, the availability of financing, governmental regulations concerning, but not limited to, new construction and development, the creditworthiness of tenants and borrowers, environmental issues, healthcare services and government participation in the financing thereof, and other risks and unforeseen circumstances affecting the Company’s investments which may be discussed elsewhere in this Annual Report on Form 10-K. 

Critical Accounting Policies

          Revenue recognition.  The majority of the Company’s revenues results from rents from operating leases.  Base rental income is recognized on a straight-line basis over the term of the lease regardless of when payments are due.  Certain leases include rent concessions and escalation clauses creating an effective rent that is included in unbilled rent receivable.  The remaining source of the Company’s revenue is from patient revenue derived from its operation of three SNFs located in Massachusetts.  Patient revenue is reported at the estimated net realizable amount from patients, third party payors and others for services rendered, net of contractual adjustments.

          Allowances for doubtful accounts, notes and bonds receivable.  Tenant rents and reimbursements receivable, unbilled rent receivable and mortgage loans and bonds receivable are carried net of the allowances for doubtful accounts, notes and bonds receivable.  Management’s determination of the adequacy of these allowances requires significant judgments and estimates.  Tenant rents and reimbursements receivable consist of amounts due for contractual lease payments and reimbursements for common area maintenance, property taxes, insurance and other expenses due from tenants.  Management regularly reviews its tenant receivables and adjusts the allowance based on specific identification, in management’s opinion, of an individual tenant’s ability to pay its obligations under the terms of its lease.  Unbilled rent receivable consists of the cumulative straight-line rental income recorded to date that exceeds the actual amounts billed to date under the Company’s lease agreements.  Based on historical loss experience, management has typically maintained a reserve for unbilled rent receivable equal to 10% to 20% of the unbilled rent receivable balance.  Mortgage loans and bonds receivable consist of the Company’s investment in loans secured by real property along with certain unsecured notes.  Management regularly evaluates its loan portfolio and adjusts the allowance based on the specific identification, in management’s opinion, of a borrower’s ability to pay its obligations under the terms of the loan.

          Long-lived assets.  The Company’s assets consist mainly of investments in real property.  The Company reviews long-lived assets for impairment whenever events or changes in circumstances indicate that an asset’s book value exceeds the undiscounted expected future cash flows to be derived from that asset.  Whenever undiscounted expected future cash flows are less than the book value, the asset will be reduced to estimated fair value and an impairment loss will be recognized.  The Company recorded no impairment losses in 2002, 2001 and 2000.

Results of Operations

Comparison of the Year Ended December 31, 2002 Versus the Year Ended December 31, 2001

          Total revenues increased by $3.4 million, or 6%, from $58.2 million for the year ended December 31, 2001, to $61.6 million for the same period in 2002.  The increase was due to an increase in rental revenues and tenant

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reimbursements of $3.6 million and an increase in patient revenues of $3.2 million.  These increases were offset by a $0.3 million decrease in interest and loan fee income as well as a $3.1 million decrease in lease termination fees and other income. 

          Patient revenues relating to the skilled nursing facilities located in Hampden, Massachusetts, which are operated by the Company, increased by $3.2 million, or 15%, from $21.1 million for the year ended December 31, 2001, to $24.3 million for the same period in 2002.   This increase was due to increased occupancy and higher patient reimbursement rates.

          Rents, tenant reimbursements and parking revenues increased by $3.6 million, or 12%, from a combined total of $29.8 million for the year ended December 31, 2001, to $33.4 million in 2002.  The January 2002 acquisition of a SNF in Hyattsville, Maryland accounted for $1.5 million of this increase.  In addition, the Company re-leased its MOB located in Irwindale, California accounting for an increase of $0.3 million.  The MOB was vacant for the first six months of 2001.  Increased occupancy and rental rates per the terms of its lease agreements at the Company’s MOB properties accounted for an additional $1.8 million increase in rental revenue. 

          Interest and loan fee income decreased $0.3 million from $2.8 million for the year ended December 31, 2001 to $2.5 million in 2002.  This decrease was due to a $0.5 million decrease in the fair market value of the LIBOR interest rate cap associated with the $35 million loan with GMAC.  This decrease was offset by a $0.2 million increase in interest and loan fee income due to fees associated with the early repayment of the Company’s two notes receivable related to a SNF located in Hyattsville, Maryland.

          The Company recognized lease termination income in the amount of $2.6 million during 2001.  This was related to the settlement of a lawsuit for delinquent rent, future rent and other amounts owed under a lease at the Company’s MOB located in Irwindale, California.  The Company sued the tenant, which had been in default on their rent since December 1999, to recover the delinquent rent payments as well as all future rent through the end of the lease which expired on November 30, 2004.  In January 2001, the Company received a settlement in the amount of $4.1 million.  At the time of the settlement the total delinquent rent was approximately $1.5 million.

          Total expenses increased by $7.1 million, or 14%, from $51.9 million for the year ended December 31, 2001, to $59.0 million in 2002.  Increased skilled nursing operating costs at the three Hampden SNFs accounted for $2.4 million of this increase in total expenses.  Rising liability insurance and staffing costs at these SNFs were the primary reason for this increase. 

          Property operating expenses increased by $0.1 million, or 1%, from $8.6 million for the year ended December 31, 2001, to $8.7 million for the same period in 2002.  Increased electricity, insurance and repairs and maintenance costs at the Company’s MOB properties accounted for this increase. 

          Depreciation and amortization expense increased $0.3 million, or 5%, from $6.0 million for the year ended December 31, 2001, to $6.3 million for same period in 2002.  This increase was related to the January 2002 acquisition of the SNF in Hyattsville, Maryland as well as additions to building improvements and leasing commissions during 2002. 

          Interest expense increased $4.1 million, or 31%, from $13.3 million for the year ended December 31, 2001 to $17.4 million in 2002.  The majority of this increase, $3.0 million, was due to the interest expense associated with the Company’s $35 million loan with GMAC that was obtained in October 2001 in order to repurchase the Company’s outstanding common stock.  An additional $1.0 million of the increase was due to the decline in the fair market value of the LIBOR interest rate cap associated with the $35 million loan.  In addition, the Company paid $0.7 million of pre-payment fees relating to the early repayment of a $7.3 million loan secured by an ALF located in Tarzana, California.  These increases were offset by a $0.7 million decrease in interest expense on the Company’s variable rate mortgages due to lower interest rates.  While the Company recognized a $1.0 million loss related to the decline in the fair market value of its LIBOR interest rate cap, the value of the LIBOR interest rate cap fluctuates based upon current prevailing market interest rates.  For the year ended December 31, 2001, the Company recognized a $0.5 million gain on the fair market value of its LIBOR interest rate cap, thus, the net effect on earnings since the Company’s purchase of this financial instrument has been a $0.5 million loss.

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          General and administrative costs decreased $0.7 million, or 18%, from $4.0 million for the year ended December 31, 2001, to $3.3 million for the same period in 2002.  The main reason for the decrease was that the Company repurchased $0.7 million of outstanding stock options from its employees at the end of 2001 in connection with the repurchase of the Company’s outstanding common stock.   

          Provisions for doubtful accounts, notes and bonds receivable increased by $0.6 million, or 60%, from $1.0 million for the year ended December 31, 2001, to $1.6 million for the same period in 2002.  This increase is the result of the Company’s concern about the collectibility of its rents receivables related to its SNF located in Hoquiam, Washington as well as its ALF located in Tarzana, California. 

          Equity in earnings of unconsolidated affiliates decreased $0.3 million for the year ended December 31, 2002 compared to the same period in 2001.  This decrease was primarily the result of losses associated with the Company’s 50% investment in Lakeview Associates, LLC.  Lakeview was formed for the purpose of developing a two-story, 80-unit, 92 bed assisted living facility in Yorba Linda, California.  The facility has been in a lease-up phase since opening in March 2002 and therefore producing a net loss.

          Corporate income tax expense increased by $0.2 million from $0.1 million for the year ended December 31, 2001 to $0.3 million for the same period in 2002.  This estimated tax liability is related to federal taxes due on net income earned at the Company’s skilled nursing facilities located in Hampden, Massachusetts.  

          The Company recognized a net gain from discontinued operations in the amount of $2.3 million during the year ended December 31, 2002.  The sale, in January 2002, of a 183-bed hospital located in Tustin, California to Pacific Health Corporation, the operator of the hospital, accounted for a gain of $2.4 million.  This gain was offset by a loss of $0.1 million due to the sale, in May 2002, of a SNF located in Paso Robles, California.

          Net income decreased $1.6 million from $6.1 million for the twelve months ended December 31, 2001 to $4.5 million for the same period in 2002.  This decrease was primarily due to the $4.0 million increase in interest expense, the $3.1 million decrease in lease termination fees and other income, the $2.4 million increase in skilled nursing operations and the $0.6 million increase in provisions for doubtful accounts, notes and bonds receivable.   These were offset by the $2.3 million increase in the gains on sale of assets, the $3.2 million increase in patient revenues and the $3.6 million increase in rents, tenant reimbursements and parking revenues.

Comparison of the Year Ended December 31, 2001 Versus the Year Ended December 31, 2000

          Total revenues increased by $7.7 million, or 15%, from $50.5 million for the year ended December 31, 2000, to $58.2 million in 2001.  Patient revenues relating to the skilled nursing facilities in which the Company currently owns the license to operate accounted for $3.2 million of this increase.  On March 15, 2000, the Company obtained licenses from the Commonwealth of Massachusetts to operate the three SNFs comprising 383 beds owned by the Company and located in Hampden, Massachusetts.  As a result of the license transfer, all of the assets, liabilities, revenues and expenses of these SNFs beginning March 15, 2000 are reflected in the consolidated financial statements of the Company.    On April 1, 2000, the Company obtained the license to operate its SNF located in Phoenix, Arizona.  For the nine months ended December 31, 2000, the assets, liabilities, revenues and expenses of this SNF were also included in the condensed consolidated financial statements of the Company.   On January 1, 2001, the Company entered into a new lease with a new manager that entitles the Company to monthly lease payments.  As a result of this new lease, the assets, liabilities, revenues and expenses of this SNF are no longer included in the condensed consolidated financial statements of the Company.

          Rents, tenant reimbursements and parking revenues increased by $1.5 million, or 5%, from a combined total of $28.3 million for the year ended December 31, 2000, to $29.8 million in 2001.  During 2001, the Company increased the occupancy at its MOB properties by approximately 2% and increased its rental rates per the terms of its lease agreements resulting in an increase in rental revenues of approximately $1.8 million.  In addition, new lease agreements at two of the Company’s SNFs accounted for an increase of $0.8 million in rental revenue.  These increases were offset by the loss of $0.7 million in rental revenue as a result of the termination of the lease at the Company’s MOB located in Irwindale, California which the Company re-leased at a lower rental rate and an additional $0.4 million related to the loss of rental revenue from the SNFs discussed above in which the Company

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now owns the license to operate.  Previously, the Company collected monthly rent for these facilities in the form of lease payments from the prior operator.  

          Interest and loan fee income increased $0.3 million from $2.5 million for the year ended December 31, 2000 to $2.8 million in 2001.  This increase was due to a $0.5 million increase in the fair-market-value of the LIBOR interest rate cap associated with the $35 million loan with GMAC and a $0.3 million increase related to an outstanding loan on a apartment complex development in Tustin, California.  This increase was offset by a $0.2 million decrease in interest income related to the financing by the Company of an apartment complex located in Tulsa, Oklahoma.  The remaining $0.3 million decrease is the result of the November 2000 repayment of a $3.1 million mortgage held by the Company on a SNF in El Centro, California.

          The Company recognized a net gain on the sale of assets in the amount of $1.3 million during the year ended December 31, 2000.  The sale, in January 2000, of a 33,000 square foot MOB located in Aliso Viejo, California to Hoag Memorial Hospital accounted for $1.4 million of the gain.  This gain was offset by the loss of $0.1 million on the sale of the Company’s 50% interest in Valley Convalescent, LLC, an unconsolidated affiliate.

          The Company recognized lease termination income in the amount of $2.6 million during 2001.  This was related to the settlement of a lawsuit for delinquent rent, future rent and other amounts owed under a lease at the Company’s MOB located in Irwindale, California.  The Company sued the tenant, which had been in default on their rent since December 1999, to recover the delinquent rent payments as well as all future rent through the end of the lease which was to expire November 30, 2004.  In January 2001, the Company received a settlement in the amount of $4.1 million.  At the time of the settlement the total delinquent rent was approximately $1.5 million.

          Total expenses increased by $2.8 million, or 6%, from $49.0 million for the year ended December 31, 2000, to $51.8 million in 2001.  The consolidation of the operating revenues and expenses of the three Hampden SNFs as of March 15, 2000 as discussed above accounted for $2.5 million of this increase in total expenses.

          Property operating expenses increased by $0.8 million, or 10%, from $7.8 million for the year ended December 31, 2000, to $8.6 million for the same period in 2001.  This increase was due to additional utility, property tax and repairs and maintenance costs at the Company’s MOB properties.    

          There was no substantial change in depreciation and amortization expense for the year ended December 31, 2001 compared to the same period in 2000.

          Interest expense decreased $0.3 million, or 2%, from $13.6 million for the year ended December 31, 2000 to $13.3 million in 2001.  $0.9 million of this decrease is due to the August 2000 repayment of the Company’s outstanding line of credit balance of $1.6 million as well as decreased interest payments on the Company’s approximately $33 million of variable rate mortgage debt due to lower interest rates.  This decrease was offset by a $0.6 million increase in interest expense resulting from the $35.0 million note payable obtained in order to fund the October 2001 merger.

          General and administrative costs increased $1.1 million, or 38%, from $2.9 million for the year ended December 31, 2000, to $4.0 million for the same period in 2001.  $0.7 million of this increase was related payments made to option holders whose exercise price was less than that of the price paid for the Company’s common stock as a result of the merger.  The remaining increase was attributed to the write-off of acquisition and construction costs associated with a discontinued development project as well as legal fees related to the Company’s defense in its lawsuit with Landmark Health. 

          Equity in earnings of unconsolidated affiliates increased $0.6 million for the year ended December 31, 2001 compared to the same period in 2000.  This increase was primarily the result of increased occupancy rates at the facilities associated with the Company’s 50% investment in Penasquitos LLC and the Company’s 50% investment in Eagle Run Inc.  In March 1999, The Arbors at Rancho Penasquitos, an ALF owned by the Company through Penasquitos LLC, commenced operations.  The facility has been in a lease-up phase since opening in March 1999 and therefore had been producing a net loss.  Eagle Run commenced operations in November 1999 and also had been producing a net loss.  Occupancy rates at both facilities are increasing, thus decreasing the Company’s loss

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associated with these properties.  In addition, the Company’s three MOBs located in San Pedro, California, in which the Company owns 50%, increased its net income by approximately $0.1 million in 2001.  

          During 2000, the Company recorded an extraordinary loss on the early retirement of long-term debt in the amount of $0.2 million.  This loss was a result of pre-payment fees and the write-off of deferred loan fees relating to the repayment of a $5.5 million loan secured by a 33,000 square foot MOB in Aliso Viejo, California.  The building was sold to Hoag Memorial Hospital Presbyterian on January 25, 2000 for a price of $8.3 million.  The Company used a portion of the proceeds to repay the $5.5 million loan.  During 2001, the Company recorded an extraordinary loss on the early retirement of long-term debt in the amount of $0.1 million.  This loss was the result of the write-off of deferred loan fees relating to the repayment of a $5.1 million loan secured by two of its properties located in Tustin, California.

          Net income increased $5.0 million from $1.1 million for the twelve months ended December 31, 2000 to $6.1 million in 2001.  This increase was primarily due to the $3.2 million increase in patient revenues, the $3.9 million increase in other income, the $1.5 million increase in rents, tenant reimbursements and parking revenues, the $0.6 million increase in earnings from unconsolidated affiliates and the $1.1 million decrease in provisions for doubtful accounts and notes receivable.    These were offset by a $2.5 million increase in skilled nursing operation expenses, a $1.8 million increase in property operation expenses, and a $1.1 million increase in general and administrative costs.

Liquidity and Capital Resources 

          As of December 31, 2002, the Company’s direct investment in net real estate assets totaled approximately $170.0 million, $4.1 million in joint ventures and $1.8 million invested in notes receivable.  Total debt outstanding at year-end totaled $194.1 million.  

          The Company obtains its liquidity from multiple internal and external sources.  Internally, funds are derived from the operation of MOBs, SNFs, ALFs and senior care lending activities.   The MOB Properties produced approximately $7.6 million of net income before minority interests for the year ended December 31, 2002.  The MOB Properties contain approximately 857,000 rentable square feet and, as of January 31, 2003, were approximately 97.5% leased to over 425 tenants with lease terms typically ranging from three to ten years.   The ALF and SNF Properties produced approximately $0.8 million of net income for the year ended December 31, 2002.  All of the ALF and SNF Properties, except for the three SNFs located in Hampden, Massachusetts where the Company holds the operating licenses and has entered into a management agreement with a local operator and except for the North Valley Nursing and Rehabilitation Center which is closed, are leased to operators who are responsible for the management of the facilities.  All of the leases are for five years or less with non-credit tenants.  In the event that the operators of these facilities are unable to effectively operate the facilities, the ability of the operators to make rental payments to the Company may become impaired and the Company may need to commit additional capital to the facilities in order to keep them operating.  If any of these operators experience financial difficulty, the financial position of the Company and the ability of the Company to make expected distributions would likely be adversely affected.

          The Company’s principal external sources of capital consist of various secured loans.  As of December 31, 2002, the Company had secured loans outstanding of approximately $194.1 million.  While the Company will still consider selective property acquisitions that are accretive to earnings, the Company’s primary goal over the next few years is to reduce the balance on the $35 million loan obtained from GMAC in October 2001.  The Company’s ability to reduce the balance on the $35 million loan along with its ability to make selective acquisitions requires continued access to capital.  If the Company is unable to obtain access to new capital or to refinance its existing investments, the Company’s ability to reduce the balance on the $35 million loan and to expand and even its ability to maintain its current level of distributions to its stockholders may be impaired.  The Company is also considering selling some of its assets in the future in order to provide additional liquidity.  As of December 31, 2002, the outstanding balance on the $35 million loan with GMAC was $33.1 million.

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          During 2002, the Company received proceeds of $4.6 million related to the sale of a 183-bed hospital located in Tustin, California.   The Company used $2.3 million of these proceeds to repay an outstanding loan on the hospital.  In addition, the Company received proceeds of $10.8 million related to the repayment of two notes receivable from Heritage Care, Inc.  The Company used the proceeds to repay an outstanding loan balance of $8.3 million secured by the notes.   In January 2002, the Company received $0.7 million as repayment of a promissory note secured by a recreational vehicle park in Florida.   In May 2002, the Company received proceeds of $0.3 million related to the sale of a SNF located in Paso Robles, California.  Also in May, the Company used the proceeds from a new $8.3 million loan secured by its ALF located in Tarzana, California to repay three notes totaling $7.3 million secured by the same property.  The new loan bears interest at 6.95% and is due on May 17, 2037.  In December 2002, the Company received net proceeds of $4.1 million from a new $4.3 million loan secured by its SNF located in Phoenix, Arizona.  The new loan bears interest at LIBOR plus 4.25% per annum and is due on June 5, 2004.   The net proceeds from these refinancings and sales were used to provide working capital for the Company.

          In September 2002, the Company received an extension on a $13.2 million loan due on October 1, 2002.  The loan, which is secured by three SNFs located in Massachusetts, was extended until January 1, 2003.  Pursuant to the terms of the extension, the interest rate on the loan was increased from LIBOR plus 2.75% per annum to LIBOR plus 4.0% per annum.  In March 2003, the loan was extended until January 1, 2004 on substantially the same terms and conditions as the previous extension.  The Company expects to repay this loan in 2003 using the proceeds from a new long-term loan.

          In the fourth quarter of 2002, the Company declared a distribution payable to holders of the Company’s Common Stock in the amount of $0.5 million, or $0.67 per common share.  These distributions were paid on December 23, 2002 to stockholders of record on December 23, 2002.  The Company also paid monthly dividends of $0.6 million to holders of the Company’s Preferred Stock on the fifteenth day of each month during 2002 to holders of record on the first day of each month.   The Company distributed dividends of $0.5 million to holders of the Company’s Common Stock during 2002 while the Company’s FFO was $1.0 million.

          In February 2003, a joint venture, in which the Company held a 50% interest, sold a 23,000 square foot MOB located in Aliso Viejo, California for $7.3 million.  The Company received net proceeds of $1.2 million from the sale.  Also in February 2003, another joint venture, in which the Company held a 50% interest, sold an ALF located in Omaha, Nebraska for $11.1 million.  The Company received net proceeds of $1.8 million from the sale.  Finally, in February 2003, the Company refinanced an MOB located in Beverly Hills, California for $8.2 million.  The loan proceeds were used to repay the existing loan of $7.2 million along with other costs associated with the loan.  The new loan bears interest at 5.55% and is due on February 1, 2013.  The net proceeds from these transactions will be used by the Company to pay down the $35 million GMAC loan, for selective property acquisitions or for working capital.

          While the Company is highly leveraged, the Company expects to continue meeting its short-term liquidity requirements through its working capital and cash flow provided by operations.  The Company also expects to maintain stockholder distributions in accordance with REIT requirements, although no assurances can be given that the current level of distributions will be maintained.  Long-term liquidity requirements such as refinancing mortgages, financing acquisitions and financing capital improvements will be accomplished through long-term borrowings and the sale of assets.  

Historical Cash Flows

          The Company’s net cash from operating activities decreased $11.6 million, or 75%, from $15.5 million for the year ended December 31, 2001 to $3.9 million for the same period in 2002.  The decrease is due primarily to the change in accounts payable and other liabilities of $8.4 million, a $2.3 million increase in net gains on sale of assets, a $1.6 million decrease in net income and a $2.3 million change in tenant rent and reimbursements receivable over 2001.  These were offset by $1.5 million change in fair market value of the Company’s LIBOR interest rate cap, a $0.6 million increase in the allowance for doubtful accounts and notes receivable and a $1.0 million decrease in accrued interest receivable. 

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          Net cash from investing activities increased $14.4 million from a net use of $2.8 million for the year ended December 31, 2001 to net cash provided of $11.6 million for the same period in 2002.  The increase was primarily due to an $8.5 million increase in principal payments received from mortgage loans and notes receivable, a $1.0 million increase in distributions from unconsolidated affiliates, a $0.9 million decrease in additions to rental properties and a $5.1 million increase in the sale of real estate assets.  These were offset by a $1.5 million increase in contributions to unconsolidated affiliates.  

          Net cash flows used in financing activities increased $1.8 million from $13.4 million for the twelve months ended December 31, 2001, to $15.2 million for the same period in 2002.  The increase was due primarily to a $33.0 million decrease in notes payable proceeds as well as a $9.7 million increase in the repayment of notes payable.  These were offset by a $36.1 million decrease in repurchases of the Company’s common stock, a $2.8 million decrease in deferred loan costs, a $1.1 million decrease in restricted cash and a $1.0 million decrease in distributions.  

Debt Structure

          As of December 31, 2002, the Company had twenty-one loans totaling $194.1 million.  The terms of these loans are described below.

          In August 1995, the Company borrowed $30.0 million from Nomura for ten years at a fixed rate of 7.89%.  As of December 31, 2002, the outstanding balance under this loan was approximately $26.5 million, requiring monthly principal and interest payments of approximately $229,000 (25-year amortization), and will have a balance of $24.7 million on August 11, 2005, when the note is due.  Pursuant to the loan agreement, the Company has the option to prepay this loan at any time upon the payment of a premium which, when added to the remaining principal amount of the note, will be sufficient to purchase non-callable obligations of the U.S. government sufficient to provide for the scheduled payments remaining under the note.  No prepayment premium is required during the 90-day period prior to the note’s due date.  The properties located at 405 North Bedford, 415 North Bedford, 416 North Bedford and 435 North Bedford have been pledged as security for this note.  The Company is currently in the process of refinancing this loan and has signed an application with GMAC for $47 million at an annual interest rate equal to the greater of 5.25% or the 10-Year U.S. Treasury rate plus 1.68%.  Although the Company has signed an application with GMAC, no assurances can be given that this loan will fund or that the Company will be able to obtain another loan for similar terms and conditions.

          During 1996, the Company borrowed $35.0 million from Nomura for ten years at a fixed rate of 8.492%.  This note had an outstanding balance of approximately $32.0 million as of December 31, 2002, requires monthly principal and interest payments of approximately $282,000 (25-year amortization), and will have a balance of $29.4 million on August 11, 2006, when the note is due.  Pursuant to this loan agreement, the Company has the option to prepay this loan at any time after August 30, 1999 upon the payment of a premium which, when added to the remaining principal amount of the note, will be sufficient to purchase non-callable obligations of the U.S. government sufficient to provide for the scheduled payments remaining under this note.  The Sherman Oaks Medical Plaza, Regents Medical Center, Irwindale MOB and the 436 North Bedford Drive MOB have been pledged as security for this note.

          During the fourth quarter of 1999, the Company obtained a $13.92 million loan from GMAC Commercial Mortgage Corp. (“GMAC”) secured by the Hampden Properties and repaid the existing $6.0 million Nomura loan.  The loan bears interest at LIBOR plus 2.75% and requires monthly principal and interest payments of approximately $122,000.  In September 2002, the Company received an extension on this loan, which matured on October 1, 2002.  In March 2003, the loan, which is secured by three SNFs located in Massachusetts, was extended until January 1, 2004.  Pursuant to the terms of the extension, the interest rate was increased to LIBOR plus 4.0% per annum.  The Company expects to repay this loan in 2003 using the proceeds from a new long-term loan.  As of December 31, 2002 the outstanding balance on this loan was $13.2 million. 

          On April 22, 1998, 435 North Roxbury Drive, Ltd. (the “Roxbury Partnership”), of which the Operating Partnership is the sole general partner with an ownership interest of 32.81%, refinanced the 435 North Roxbury

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Drive property with a $7.83 million loan from Tokai Bank of California (“Tokai”).  The Roxbury Partnership repaid the remaining balance on the old loan of $7.5 million with the new loan, which bore interest at a fixed rate of 7.05% and was due on April 1, 2008.  This loan, which had an outstanding balance of $7.2 million as of December 31, 2002, required monthly principal and interest payments of approximately $56,000 (25-year amortization).  The 435 North Roxbury Drive property had been pledged as security for this loan.  On February 28, 2003, the Roxbury Partnership refinanced the property with a new $8.2 million loan from Morgan Stanley Dean Witter Mortgage Capital, Inc.  The Roxbury Partnership repaid the remaining balance on the old loan of $7.2 million along with a prepayment penalty of $144,000 with the proceeds from the new loan.  The new loan bears interest at a fixed rate of 5.55% and is due on February 1, 2013.  The new loan requires monthly principal and interest payments of $47,000 (30-year amortization).

          On April 22, 1998, the Company borrowed an additional $12.7 million from Tokai at a fixed rate of 7.05%.  On June 1, 1998, the Company began making monthly principal and interest payments on these loans of approximately $91,000 (25-year amortization).  These notes, which will have a balance at maturity of $10.0 million, are due on April 1, 2008.  As of December 31, 2002, the balance on these notes was $11.7 million.  These notes consist of three separate first deeds of trust and are not cross-collateralized.  The Holy Cross Medical Plaza, the St. Joseph’s Medical Office Building and the Tustin Medical Plaza have been pledged as security for these loans.

          On June 30, 1998, the Company, through GLH Pacific Gardens, LLC, acquired Pacific Gardens, a 92-unit senior care facility in Santa Monica, California for $11.2 million.  Of this amount, GLH Pacific Gardens, LLC borrowed $8.5 million from GMAC at an interest rate of 30-day LIBOR plus 2.35%.  The note required monthly interest-only payments.  In August 1999, the Company refinanced this mortgage with an $11.4 million 35-year HUD loan at an interest rate of 8%.  The loan requires monthly principal and interest payments of approximately $77,000.  As of December 31, 2002, the unpaid balance on this loan was $11.1 million.

          On August 6, 1998, the Company acquired a 110-bed skilled nursing facility in Hoquiam, Washington for $3.3 million.  Of this amount, the Company borrowed $2.5 million from GMAC at a fixed rate of 7.49%.  On October 1, 1998, the Company began making monthly principal and interest payments of approximately $18,000 (25-year amortization).  This note, which will have a balance at maturity of $2.0 million, is due on September 1, 2008.  The Pacific Care Center has been pledged as security for this note.  As of December 31, 2002, the unpaid balance on this note was $2.3 million.

          On December 22, 1998, the Company acquired a 49,000 square foot MOB in Valencia, California for $7.4 million.  Of this amount, the Company borrowed $5.2 million from The Life Insurance Co. of Virginia at a fixed rate of 6.75%.  On February 1, 1999, the Company began making monthly principal and interest payments of approximately $38,000 (25-year amortization).  This note, which will have a balance at maturity of $0.9 million, is due on January 1, 2019.  The Lyons Avenue Medical Building has been pledged as security for this note. As of December 31, 2002, the unpaid balance on this note was $4.7 million.  The Company is currently in the process of refinancing this loan.

          On December 31, 1998, the Company acquired a 40,000 square foot office and retail complex in Coronado, California for $9.5 million.  Of this amount, the Company borrowed $7.5 million from GMAC at a fixed rate of 6.90%.  On February 10, 1999, the Company began making monthly principal and interest payments of approximately $50,000 (25-year amortization).  This note, which will have a balance at maturity of $6.4 million, is due on December 11, 2008.  The Coronado Plaza has been pledged as security for this note.  The unpaid balance on this note was $7.2 million as of December 31, 2002. 

          On June 30, 1999, the Company obtained a $1.44 million loan from American United Life Insurance Company.   The loan, which is secured by the Pier One Retail Center in Aliso Viejo, California, bears interest at a rate of 7.375% and is due on July 1, 2009.  On July 1, 1999, the Company began making monthly principal and interest payments of approximately $11,000.  As of December 31, 2002, the unpaid balance on this note was $1.4 million.

          On July 2, 1999, the Company obtained a $10 million long-term loan secured by its six building portfolio of MOBs located at the Henry Mayo Newhall Hospital campus in Valencia, California.  The Company used $5.0

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million of the total proceeds to repay a short-term loan secured by these buildings.  The loan, which is due on July 1, 2009, bears an interest rate of 6.85% and had an unpaid balance of $9.3 million as of December 31, 2002.

          In July 2000, the Company obtained a $2.0 million line of credit secured by the accounts receivable at the Company’s three SNFs located in Massachusetts.   The line of credit is guaranteed by the Company.  In May 2002, the line of credit was increased to $3.5 million.  The line of credit bears interest at prime plus 2.0% and is due on July 13, 2003.  The unpaid balance on this line of credit was $2.4 million as of December 31, 2002.

          In August 2001, the Company obtained a loan in the amount of $7.2 million from Deutsche Bank secured by two of its properties located in Tustin, California.  The proceeds were used to repay an existing $5.1 million first deed of trust.  The loan bears interest at 7.51% and is due in August 2011.  As of December 31, 2002, the unpaid balance on this note was $7.1 million.

          On October 29, 2001, in connection with the Merger, the Operating Partnership borrowed $35 million from GMAC.  The Loan is for ten years and bears interest initially at the one month LIBOR rate plus 7.5%.  The spread over one month LIBOR can be reduced to as low as 5.5% based on the outstanding balance on the Loan and if the Operating Partnership meets certain debt service covenant ratios.  As interest rate protection, the Operating Partnership purchased a LIBOR cap on November 8, 2001 for $905,000 which caps the maximum LIBOR rate at 4.25% for five years in determining the interest due on the Loan.  Per the terms of the Loan, any net proceeds from the refinancing of any of the Company’s MOB properties must be used to repay the outstanding principal on the Loan.  As of December 31, 2002, the unpaid balance on this note was $33.1 million.

          On January 9, 2002, the Company purchased a SNF located in Hyattsville, Maryland for $14.9 million which included the assumption of a new $11.9 million loan bearing interest at 7.05% per annum.  The loan, which is secured by the SNF, requires monthly principal and interest payments of approximately $85,000 (25-year amortization) and is due on January 1, 2027.  The Company previously held a $7.8 million first mortgage that was secured by this SNF along with a $2.7 million unsecured note from the owner of the SNF.  Using the first mortgage and unsecured note as collateral, the Company borrowed $8.5 million in December 1999.  The net proceeds from the new $11.9 million loan were used to repay the outstanding balance on that loan.  As of December 31, 2002, the unpaid balance on the existing loan was $11.8 million. 

          On May 17, 2002, the Company refinanced its ALF located in Tarzana, California with a new $8.3 million HUD loan.  The net proceeds were used to repay the existing first mortgage of $5.5 million along with a second mortgage and unsecured note totaling $1.7 million.  The Company incurred a prepayment penalty of approximately $0.7 million in connection with the early repayment of the first mortgage.  The new loan, which requires monthly principal and interest payments of approximately $53,000 (35-year amortization), bears interest at 6.95% per annum and is due on May 17, 2037.  As of December 31, 2002, the unpaid balance on this loan was $8.3 million.   In connection with this loan, the Company also obtained a $0.5 million unsecured loan.  As of December 31, 2002, the unpaid balance on this loan was $0.5 million.

          On December 5, 2002, the Company obtained a loan in the amount of $4.3 million from GMAC secured by its 98-bed SNF located in Phoenix, Arizona.  The loan, which requires monthly principal and interest payments of approximately $27,000, bears interest at LIBOR plus 4.5%, with a minimum rate of 7.25%, and is due on July 1, 2005.  As of December 31, 2002, the unpaid balance on this note was $4.3 million.

Capital Commitments

          As of March 28, 2003, a joint venture in which the Company is a 50% owner was under contract to purchase a psychiatric facility located in Aliso Viejo, California for $5.5 million.  As part of the joint venture agreement, the Company is required to contribute 75% of the equity capital to the joint venture in order to purchase and substantially remodel the psychiatric facility.  The Company estimated its capital commitment related to this joint venture to be approximately $1 million over the next 18 months.

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Financing Policies

          To the extent that the Board of Directors of the Company decides to seek additional funding, the Company may raise such capital using various means, including retention of internally generated funds (subject to the distribution requirements in the Code with respect to REITs), existing working capital and possibly the issuance of additional debt (secured or unsecured) or any combination of the above.  It is anticipated that borrowings will continue to be made through the Operating Partnership and Senior Care Partnership or other entities, although the Company may also incur indebtedness that may be re-borrowed by the Operating Partnership or the Senior Care Partnership on the same terms and conditions as are applicable to the Company’s borrowing of such funds.  Except as required pursuant to existing financing agreements, the Company has not established any limit on the number or amount of mortgages or unsecured debt that may be placed on any single property or on its portfolio as a whole.

          The Board of Directors of the Company also has the authority to cause the Operating Partnership or the Senior Care Partnership to issue additional Units in any manner (and subject to certain limitations in the Partnership Agreement on such terms and for such consideration) as it deems appropriate and may also decide to seek financing for the purposes of managing the Company’s balance sheet by adjusting the Company’s existing capitalization.  The refinancing of the Company’s balance sheet may entail the issuance and/or retirement of debt, equity or hybrid securities.

Inflation

          The majority of the Company’s leases are long-term leases designed to mitigate the adverse effect of inflation.  Approximately 50% of the Company’s leases contain provisions that call for annual rent increases equal to the increase in the Consumer Price Index and the majority of the remaining leases allow for specific annual rent increases.  Furthermore, many of the Company’s leases require tenants to pay a pro rata share of building operating expenses, including real estate taxes, insurance and common area maintenance.  The effect of such provisions is to reduce the Company’s exposure to increases in costs and operating expenses resulting from inflation.

New Accounting Pronouncements

          In January 2002, the Company adopted the provisions of SFAS 142 “Goodwill and Other Intangible Assets” (“SFAS 142”).  This statement discontinues the practice of amortizing goodwill and other intangible assets and requires a periodic review process for impairment.  This statement also requires that a portion of the purchase price of real estate acquisitions be assigned to the fair value of an intangible asset for above market operating leases or to an intangible liability for below market operating leases.  Such intangible assets or liabilities are then required to be amortized into revenue over the remaining life of the respective leases.   The adoption of this statement did not have a material effect on the Company’s results of operations or financial condition for the year ended December 31, 2002.

          In January 2002, the Company adopted the provisions of SFAS 144 “Accounting for the Impairment or Disposal of Long-Lived Assets” (“SFAS 144”).  This statement addresses financial accounting and reporting for the disposal of long-lived assets and supercedes FAS 121 “Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of.”  In accordance with SFAS 144, the net income and net gain or loss on dispositions of operating properties sold subsequent to December 31, 2001 are reflected in the consolidated statement of operations as discontinued operations for all periods presented.  In accordance with EITF 87-24 “Allocation of Interest to Discontinued Operations”, the Company has allocated interest on debt that is required to be repaid as a result of the disposal transactions to discontinued operations, but has elected not to allocate consolidated interest that is not directly attributable to the disposition property.  The net income or loss and the net gain or loss on dispositions of operating properties sold prior to December 31, 2001 are included in continuing operations for all periods presented.  The adoption of this statement did not have a material effect on the Company’s results of operations or financial condition for the year ended December 31, 2002.

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          In April 2002, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 145,Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections (“SFAS 145”). The most significant provisions of this statement relate to the rescission of Statement No. 4 “Reporting Gains and Losses from Extinguishment of Debt” and it also amends other existing authoritative pronouncements to make various technical corrections, clarify meanings, or describe their applicability under changed conditions. Under SFAS 145, any gain or loss on extinguishment of debt that was classified as an extraordinary item in prior periods presented that does not meet certain defined criteria must be reclassified.   The provisions of SFAS 145 are effective for fiscal years beginning after May 15, 2002.  Management does not expect that the adoption of this statement will have a material effect on the Company’s results of operations or financial condition. 

          In June 2002, FASB issued SFAS 146, “Accounting for Costs Associated with Exit or Disposal Activities” (“SFAS 146”).  SFAS 146 addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies Emerging Issues Task Force Issue No. 94-3“Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity”.  SFAS 146 requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred.  The provisions of SFAS 146 are effective for exit or disposal activities that are initiated after December 31, 2002.  Management does not expect that the adoption of this statement will have a material effect on the Company’s results of operations or financial condition.

          In November 2002, the FASB issued FASB Interpretation No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others” (“FIN 45”).  FIN 45 significantly changes the current practice in the accounting for, and disclosure of, guarantees.  Guarantees and indemnification agreements meeting the characteristics described in FIN 45 are required to be initially recorded as a liability at fair value.  FIN 45 also requires a guarantor to make significant new disclosures for virtually all guarantees even if the likelihood of the guarantor having to make payment under the guarantee is remote.  The disclosure requirements within FIN 45 are effective for financial statements for annual or interim periods ending after December 15, 2002.  The initial recognition and initial measurement provisions are applicable on a prospective basis to guarantees issued or modified after December 31, 2002.  The Company adopted the disclosure provisions of FIN 45 as of December 31, 2002.  Management does not expect the adoption of the initial recognition and measurement provisions will have a material effect on the Company’s results of operations or financial condition.

          In January 2003, the FASB issued FASB Interpretation No. 46, “Consolidation of Variable Interest Entities” (“FIN 46”).  FIN 46 clarifies the application of Accounting Research Bulletin No. 51, “Consolidated Financial Statements” and provides guidance on the identification of entities for which control is achieved through means other than through voting rights (“variable interest entities” or “VIEs”) and how to determine when and which business enterprise should consolidate the VIE.  This new model for consolidation applies to and entity which either (1) the equity investors (if any) do not have a controlling financial interest or (2) the equity investment at risk is insufficient to finance that entity’s activities without receiving additional subordinated financial support from other parties.  The provisions of this interpretation are immediately effective for VIEs formed after January 31, 2003.  For VIEs formed prior to January 31, 2003, the provisions of this interpretation apply to the first fiscal year or interim period beginning after June 15, 2003.  The Company is in the process of evaluating all of its investments and other interests in entities that may be deemed VIEs under the provisions of FIN 46. These investments include real estate joint ventures with assets totaling $44 million as of December 31, 2002. The Company’s maximum exposure to loss represents its recorded investment in these real estate joint ventures totaling $4.1 million as of December 31, 2002. The Company believes that many of these entities will not be consolidated, and may not ultimately fall under the provisions of FIN 46. The Company cannot make any definitive conclusion until it completes its evaluation.

Non-GAAP Supplemental Financial Measure

          Industry analysts generally consider funds from operations (“FFO”) to be an appropriate measure of the performance of a REIT.  The Company calculates FFO as defined by the Board of Governors of the National Association of Real Estate Investment Trusts (“NAREIT”).  FFO is calculated to include the minority interests’ share of income from the Operating Partnership and Senior Care Partnership since the Operating Partnership and Senior Care Partnership’s   net income is allocated proportionately among all owners of Operating Partnership and Senior Care Partnership units.  The combined number of Operating Partnership and Senior Care Partnership units held by the Company is identical to the number of outstanding shares of the Company’s Common Stock, and owners of Operating Partnership and Senior Care Partnership units may, at their discretion, convert their units into shares of Common Stock on a one-for-one basis.

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          The Company believes that, in order to facilitate a clear understanding of the operating results of the Company, FFO should be examined in conjunction with the Company’s net income as presented in the Selected Financial Data and Consolidated Financial Statements and Notes thereto included elsewhere in this Form 10-K and the additional data presented below.  The table on the following page presents an analysis of FFO and additional data for each of the four quarters and the year ended December 31, 2002 for the Operating Partnership:

G&L REALTY CORP.
FUNDS FROM OPERATIONS
FOR THE FOUR QUARTERS AND YEAR ENDED DECEMBER 31, 2002

 

 

2002 Fiscal Quarter

 

Year

 

 

 


 


 

 

 

1st

 

2nd

 

3rd

 

4th

 

2002

 

 

 



 



 



 



 



 

 

 

(In thousands, except per share data)

 

Funds from Operations (1):
 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income
 

$

3,896

 

$

493

 

$

570

 

$

(470

)

$

4,489

 

Depreciation of real estate assets
 

 

1,353

 

 

1,338

 

 

1,332

 

 

1,338

 

 

5,361

 

Amortization of deferred lease costs
 

 

65

 

 

63

 

 

61

 

 

62

 

 

251

 

Gain on sale of assets
 

 

(2,458

)

 

138

 

 

—  

 

 

—  

 

 

(2,320

)

Depreciation of real estate assets from unconsolidated affiliates
 

 

99

 

 

117

 

 

166

 

 

143

 

 

525

 

Adjustment for minority interest in consolidated affiliates
 

 

(35

)

 

(37

)

 

(37

)

 

(39

)

 

(148

)

Dividends paid on preferred stock
 

 

(1,790

)

 

(1,791

)

 

(1,790

)

 

(1,791

)

 

(7,162

)

 
 


 



 



 



 



 

Operating Partnership funds from operations
 

 

1,130

 

 

321

 

 

302

 

 

(757

)

 

996

 

Minority interest in  Operating Partnership
 

 

(60

)

 

(17

)

 

(16

)

 

40

 

 

(53

)

 
 


 



 



 



 



 

 
Funds from operations

 

$

1,070

 

$

304

 

$

286

 

$

(717

)

$

943

 

 
 


 



 



 



 



 

Dividends declared
 

$

—  

 

$

—  

 

$

—  

 

$

0.67

 

$

0.67

 

Dividends paid on Common Stock
 

 

—  

 

 

—  

 

 

—  

 

 

500

 

 

500

 

Pay-out ratio
 

 

N/A

 

 

N/A

 

 

N/A

 

 

N/A

 

 

53.0

%

Additional Data
 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash Flows:
 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
Operating activities

 

 

(802

)

 

693

 

 

3,262

 

 

717

 

 

3,870

 

 
Investing activities

 

 

14,333

 

 

(946

)

 

(573

)

 

(1,202

)

 

11,612

 

 
Financing activities

 

 

(12,844

)

 

(944

)

 

(2,345

)

 

978

 

 

(15,155

)

Capital Expenditures:
 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
Building improvements

 

 

98

 

 

237

 

 

264

 

 

317

 

 

916

 

 
Tenant improvements

 

 

147

 

 

190

 

 

120

 

 

282

 

 

739

 

 
Furniture, fixtures & equipment

 

 

41

 

 

115

 

 

147

 

 

160

 

 

463

 

 
Leasing commissions

 

 

44

 

 

24

 

 

37

 

 

54

 

 

159

 

Depreciation and Amortization:
 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
Depreciation of real estate assets

 

 

1,353

 

 

1,338

 

 

1,332

 

 

1,338

 

 

5,361

 

 
Depreciation of non-real estate assets

 

 

143

 

 

144

 

 

146

 

 

178

 

 

611

 

 
Amortization of deferred lease costs

 

 

65

 

 

63

 

 

61

 

 

62

 

 

251

 

 
Amortization of deferred licensing costs

 

 

13

 

 

13

 

 

14

 

 

13

 

 

53

 

 
Amortization of capitalized financing costs

 

 

307

 

 

201

 

 

206

 

 

215

 

 

929

 

Rents:
 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
Straight-line rent

 

 

7,091

 

 

7,548

 

 

7,121

 

 

7,301

 

 

29,061

 

 
Billed rent

 

 

7,222

 

 

7,734

 

 

7,223

 

 

7,513

 

 

29,692

 


1)

FFO represents net income (computed in accordance with GAAP, consistently applied), excluding gains (or losses) from debt restructuring and sales of property, plus depreciation of real property, less preferred stock dividends paid to holders of preferred stock during the period and after adjustments for consolidated and unconsolidated entities in which the Company holds a partial interest.  FFO is computed in accordance with the definition adopted by NAREIT.  FFO should not be considered as an alternative to net income or any other indicator developed in compliance with GAAP, including measures of liquidity such as cash flows from operations, investing and financing activities.  FFO is helpful in evaluating the performance of a real estate portfolio considering the fact that historical cost accounting assumes that the value of real estate diminishes predictably over time.  FFO is only one of a range of indicators which should be considered in determining a company’s operating performance.  The methods of calculating FFO among different companies are subject to variation, and FFO therefore may be an invalid measure for purposes of comparing companies.  Also, the elimination of depreciation and gains and losses on sales of property may not be a true indication of an entity’s ability to recover its investment in properties.  The Company implemented the new methods of calculating FFO effective as of the NAREIT-suggested adoption dates of January 1, 1996 and January 1, 2000, respectively.

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Table of Contents

ITEM 7A.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

          The primary risk inherent in the Company’s market sensitive instruments is the risk of loss resulting from interest rate fluctuations.  As of December 31, 2002, approximately 27% of the Company’s notes payable bear interest at a rate indexed to the one-month LIBOR rate or Prime Rate.  The tables below provide information as of December 31, 2002 and 2001 about the Company’s long-term debt obligations that are sensitive to changes in interest rates, including principal cash flows by scheduled maturity, weighted average interest rate and estimated fair value.  The weighted average interest rates presented are the actual rates as of December 31, 2002 and 2001.

 

 

PRINCIPAL MATURING IN:

 

Total

 

Fair Market
Value
December 31,
2002

 

 

 


 

 

 

 

 

2003

 

2004

 

2005

 

2006

 

2007

 

Thereafter

 

 

 

 

 



 



 



 



 



 



 



 



 

 

 

(in thousands)

 

 

 

 

 

 

 

Liabilities:
 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Mortgage debt:
 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
Fixed rate

 

$

2,564

 

$

2,752

 

$

27,508

 

$

31,665

 

$

1,750

 

$

74,713

 

$

140,952

 

$

168,016

 

 
Average interest rate

 

 

7.57

%

 

7.57

%

 

7.56

%

 

7.49

%

 

7.14

%

 

7.14

%

 

7.52

%

 

 

 

 
Variable rate

 

 

2,174

 

 

15,367

 

 

6,890

 

 

3,006

 

 

3,489

 

 

19,857

 

 

50,783

 

 

50,783

 

 
Average interest rate

 

 

7.82

%

 

7.82

%

 

7.82

%

 

7.82

%

 

7.82

%

 

7.82

%

 

7.82

%

 

 

 

Line of credit:
 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
Variable rate

 

 

2,357

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2,357

 

 

2,357

 

 
Average interest rate

 

 

6.75

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

6.75

%

 

 

 

 
 


 



 



 



 



 



 



 



 

 
 

$

7,095

 

$

18,119

 

$

34,398

 

$

34,671

 

$

5,239

 

$

94,570

 

$

194,092

 

$

221,156

 

 
 


 



 



 



 



 



 



 



 

          The Company’s future earnings and cash flows relating to market sensitive instruments are primarily dependent upon prevailing LIBOR market interest rate.  Based upon interest rates as of December 31, 2002, a 1% increase in the LIBOR rate would decrease future earnings by $531,000 and future cash flow would decrease by $400,000.  A 1% decrease in the LIBOR rate would increase future earnings by $531,000 and future cash flow would increase by $400,000.  A 1% change in the LIBOR rate would not have a material impact on the fair value of the Company’s debt.

 

 

PRINCIPAL MATURING IN:

 

Total

 

Fair Market
Value
December 31,
2001

 

 

 


 

 

2002

 

2003

 

2004

 

2005

 

2006

 

Thereafter

 

 



 



 



 



 



 



 



 



 

 

 

(in thousands)

 

 

 

 

 

 

 

Liabilities:
 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Mortgage debt:
 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
Fixed rate

 

$

2,275

 

$

2,458

 

$

2,637

 

$

34,122

 

$

31,418

 

$

57,065

 

$

129,975

 

$

139,944

 

 
Average interest rate

 

 

7.78

%

 

7.78

%

 

7.78

%

 

7.78

%

 

7.75

%

 

7.34

%

 

7.78

%

 

 

 

 
Variable rate

 

 

23,905

 

 

5,589

 

 

1,542

 

 

1,542

 

 

1,542

 

 

27,163

 

 

61,283

 

 

72,503

 

 
Average interest rate

 

 

7.34

%

 

7.34

%

 

7.34

%

 

7.34

%

 

7.34

%

 

7.34

%

 

7.34

%

 

 

 

Line of credit:
 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
Variable rate

 

 

1,440

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1,440

 

 

1,440

 

 
Average interest rate

 

 

7.0

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

7.0

%

 

 

 

 
 


 



 



 



 



 



 



 



 

 
 

$

27,620

 

$

8,047

 

$

4,179

 

$

35,664

 

$

32,960

 

$

84,228

 

$

192,698

 

$

213,887

 

 
 


 



 



 



 



 



 



 



 

          The Company’s future earnings and cash flows relating to market sensitive instruments are primarily dependent upon prevailing LIBOR market interest rate.  Based upon interest rates as of December 31, 2001, a 1% increase in the LIBOR rate would decrease future earnings by $613,000, future cash flow would not be affected.  A 1% decrease in the LIBOR rate would increase future earnings by $613,000, future cash flow would not be affected.  A 1% change in the LIBOR rate would not have a material impact on the fair value of the Company’s debt.

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Table of Contents

          In November 2001, the Company purchased an interest rate cap for $0.9 million to protect against an increase in the one month LIBOR rate on a $35 million variable rate loan the Company obtained in October 2001.  The interest rate cap is for a term of five years and protects the Company on a specific portion of the loan, which decreases over the term of the cap, on any increase in the one month LIBOR rate above 4.25% per annum.  The one month LIBOR rate has not exceeded 4.25% since the Company purchased the interest rate cap.

ITEM 8.

FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA

          See Index to Consolidated Financial Statements and Schedules on Page 42.

ITEM 9.

CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

          Not applicable.

PART III

ITEM 10.

DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

The following table sets forth certain information with respect to the Company’s directors as of March 28, 2003, based on information furnished to us by each director.

Name

 

Age

 

Position

 

Director
Since


 

 


 


Daniel M. Gottlieb
 

62

 

Chief Executive Officer, Co-Chairman of the Board and Director

 

1993

Steven D. Lebowitz
 

62

 

President, Co-Chairman of the Board and Director

 

1993

Richard L. Lesher
 

69

 

Director

 

1993

Charles P. Reilly
 

60

 

Director

 

1993

S. Craig Tompkins
 

52

 

Director

 

1993

          The following is a biographical summary of the experience of our directors. 

          Mr. Gottlieb is our Chief Executive Officer and Co-Chairman of our board and has held these positions since we commenced operations in 1993. Mr. Gottlieb co-founded G & L Development in 1976 and has been a general partner of G & L Development and active in commercial real estate management and development since that time. Mr. Gottlieb received his B.A. with honors from the University of Southern California and earned a J.D. from Boalt Hall School of Law at the University of California at Berkeley. Prior to forming G & L Development, Mr. Gottlieb first served as a Los Angeles County Deputy District Attorney and later entered private practice specializing in real estate law and business management. Mr. Gottlieb has also served on the board of directors of the United States Chamber of Commerce, Washington, D.C. since February 1996.

          Mr. Lebowitz is our President and Co-Chairman of our board and has held these positions since we commenced operations in 1993. Mr. Lebowitz is the co-founder and a general partner of G & L Development and has been active in the development, management and ownership of a wide range of real estate properties since 1968. Mr. Lebowitz received a B.S. in Accounting from the University of Southern California, where he also received his MBA with highest honors in 1965. From 1962 to 1964, Mr. Lebowitz worked for Deloitte & Touche, LLP and was licensed as a Certified Public Accountant in 1964. From 1965 to 1968, Mr. Lebowitz worked with the U.S. Department of Commerce and the Brookings Institution in Washington D.C. Mr. Lebowitz served on the board of directors of the United States Chamber of Commerce, Washington, D.C. from 1989 to 1994.  Mr. Lebowitz is currently a member of the Board of Counselors of the USC Ethel Percy Andrus Gerontology Center.

33


Table of Contents

          Dr. Lesher has served as our director since we commenced operations in 1993.  Dr. Lesher is currently retired.  Dr. Lesher.  Dr. Lesher was President of the United States Chamber of Commerce, Washington D.C. from 1975 to 1997, and was a member of its board of directors.  He served on numerous committees of the board, including the executive and budget committees.  In addition, Dr. Lesher is a member of the board of directors of World Heart Corporation (Ottawa, Canada), an artificial heart research and development company and AIT Corporation, a high-tech company.  Dr. Lesher received a B.B.A. from the University of Pittsburgh in 1958, a M.S. from Pennsylvania State University in 1960 and a D.B.A. from Indiana University in 1963 and holds four Honorary Doctorates.

          Mr. Reilly has served as our director since we commenced operations in 1993. Mr. Reilly is the managing member of Shamrock Investments, LLC, 172 Chevy Chase Drive, Beverly Hills, CA 90210, an investment and merchant banking firm that specializes in the health care industry. Prior to forming Shamrock Investments in 1987, Mr. Reilly served as Senior Executive Vice President and Chief Development Officer for American Medical International, Inc. In this position, Mr. Reilly was responsible for growth through the acquisition and development of new health care facilities and related business in the United States and abroad. Mr. Reilly was a member of American Medical International’s board of directors and served on its finance, management, and executive committees. Mr. Reilly is the former Chairman of the board of directors of Dynamic Health, Inc., an owner/operator of acute care hospitals, the former Chairman of the board of directors of Paragon Ambulatory Surgery Centers, Inc., an owner/operator of freestanding ambulatory surgery centers, and the former Chairman of the board of directors of PHP Healthcare Corp., a managed care provider.  In November 1998, PHP Healthcare declared bankruptcy. Mr. Reilly holds a law degree from the University of Pennsylvania and a bachelor’s degree in accounting and finance from Pennsylvania State University. He has served as a director, trustee, and governing council member of the Federation of American Healthcare Systems, the National Committee for Quality Health Care and the American Hospital Association and is a past President of the Beverly Hills Chamber of Commerce.

          Mr. Tompkins has served as our director since we commenced operations in 1993. Mr. Tompkins also serves as the Chairman of our Company’s audit and strategic Planning Committees. Mr. Tompkins is the Vice Chairman of Reading International, Inc. (AMEX symbols RDI.A and RDI.B), a publicly traded company principally engaged in the development and operation of cinemas and live theaters in the United States, Australia, New Zealand and Puerto Rico, and in real estate development in Australia and New Zealand. Reading international is the product of the consolidation at the end of 2001 of three public companies: Craig Corporation, Reading Entertainment and Citadel Holding Corporation. Prior to the consolidation and for more than the past five years, Mr. Tompkins has been the President and a Director of Craig Corporation, the Vice Chairman and Corporate Secretary of Reading Entertainment, and the Vice Chairman and Corporate Secretary of Citadel Holding Corporation. Prior to the consolidation, Craig’s shares traded on the New York Stock Exchange, Reading’s share traded on the American Stock Exchange, and Citadel’s shares traded on the NASDAQ Stock Market. During the period April 2000 to December 31, 2001, Mr. Tompkins was also as a Director of Fidelity Federal Bank, FSB, where he served on the Bank’s audit and compensation committees. Mr. Tompkins also served on the special board committee which oversaw the sale of the Bank, which closed on December 31, 2001. Prior to joining Craig and Reading in 1993, Mr. Tompkins was a partner specializing in corporate and real estate law in the law firm of Gibson, Dunn & Crutcher. Mr. Tompkins holds a bachelor’s degree from Claremont McKenna College and a J.D. from Harvard Law School.

          The following table sets forth the names, ages and positions of each of our executive officers. 

Name

 

Age

 

Position

 

Officer
Since


 

 


 


Daniel M. Gottlieb
 

62

 

Chief Executive Officer, Co-Chairman of the Board

 

1993

Steven D. Lebowitz
 

62

 

President, Cochairman of the Board

 

1993

John H. Rauch
 

72

 

Senior Vice President, Operations

 

1996

David E. Hamer
 

29

 

Vice President, Chief Accounting Officer, and Secretary

 

1998

34


Table of Contents

          The following is a biographical summary of the experience of our executive officers.  For the biographical summary of the experience of Messrs. Gottlieb and Lebowitz, see the biographical summary of the experience of our directors.

          Mr. Rauch has been our Senior Vice President, Operations since 1996. Mr. Rauch is responsible for the asset management of all our medical office buildings. From 1975 to 1996 he was founder and President of Camden Consultants, Inc., an economic consulting firm providing clients with real estate and corporate planning information.  Mr. Rauch had been a consultant to our company from 1985 to 1996. Mr. Rauch received his law degree from the University of Southern California with honors in 1961 and his bachelor’s degree in economics from the University of California, Los Angeles in 1954.

          Mr. Hamer has been our Controller and Chief Accounting Officer since 1998.  The board of directors elected Mr. Hamer as a Vice President in March 2000 and as Secretary in May 2001.  Mr. Hamer worked for Deloitte & Touche, LLP, 350 South Grand Avenue, Suite 200, Los Angeles, California, 90071, from 1995 to 1998 specializing in real estate.  He graduated from the University of California, Los Angeles in 1995 with a Bachelor of Arts degree in political science and a specialization in business administration.  Mr. Hamer is a registered Certified Public Accountant.

          Section 16(a) Beneficial Ownership Reporting Compliance.  Based solely upon a review of Securities and Exchange Commission Forms 3, 4 and 5 furnished to the Company and certain written representations, the Company believes that all reports required by Section 16(a) of the Securities and Exchange Act of 1934 with respect to the Company’s fiscal year ended December 31, 2002 have been filed by its officers, directors and 10% beneficial owners.

ITEM 11.

EXECUTIVE COMPENSATION

          The following table sets forth certain information with respect to our chief executive officer and our three other most highly compensated executive officers whose cash compensation exceeded $100,000 during the year ended December 31, 2002 (collectively, the ‘‘Named Executive Officers’’). We did not grant any restricted stock awards or stock appreciation rights or make any long-term incentive plan payouts during the year ended December 31, 2002.

 

 

Fiscal Year
Ended
December 31

 

Annual Compensation

 

Long Term
Compensation
Awards
Securities
Underlying
Options/
SARS(#)

 

 


 

Name and Principal Position

Salary($)

 

Bonus($)

 

Other Annual Compensation($)

 


 



 



 



 



 



 

Daniel M. Gottlieb
 

2002

 

$

390,000

 

$

100,000

 

 

—  

 

 

—  

 

 
Chief Executive Officer

 

2001

 

 

267,750

 

 

100,000

 

 

—  

 

 

—  

 

 
Co-Chairman of the Board and Director

 

2000

 

 

255,000

 

 

35,000

 

 

—  

 

 

50,000

 

Steven D. Lebowitz
 

2002

 

$

390,000

 

$

100,000

 

 

—  

 

 

—  

 

 
President, Co-Chairman  of the Board and Director

 

2001

 

 

267,750

 

 

100,000

 

 

—  

 

 

—  

 

 
 

2000

 

 

255,000

 

 

35,000

 

 

—  

 

 

50,000

 

John H. Rauch
 

2002

 

$

120,750

 

$

35,000

 

 

—  

 

 

—  

 

 
Senior Vice President

 

2001

 

 

115,000

 

 

30,000

 

 

—  

 

 

—  

 

 
 

2000

 

 

100,000

 

 

25,000

 

 

—  

 

 

—  

 

David E. Hamer
 

2002

 

$

130,000

 

$

25,000

 

 

—  

 

 

—  

 

 
Vice President, Chief Accounting Officer and Secretary

 

2001

 

 

125,000

 

 

40,000

 

 

—  

 

 

—  

 

 
 

2000

 

 

100,000

 

 

15,000

 

 

—  

 

 

—  

 

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Table of Contents

Employment Agreements and Arrangements

          In December 1993, each of Daniel M. Gottlieb and Steven D. Lebowitz entered into separate but identical employment agreements with us and the operating partnership for a term of three years.  The agreements provide for automatic renewal for succeeding terms of one year unless we or Messrs. Gottlieb or Lebowitz give notice at least three months prior to expiration of any term.  The employment agreements provide for automatic annual increases in base compensation equal to 5% per annum; however, the compensation committee of the board of directors may review the annual base compensation every twelve months in light of various factors, and following each such review, the annual base compensation may be increased above the 5% automatic increase.  In 1999 and 2000, Messrs. Gottlieb and Lebowitz waived their right to receive the automatic 5% salary increase.  The compensation committee approved the salary increase for Messrs. Gottlieb and Lebowitz in 2002 and 2001.

          In addition, each of Messrs. Gottlieb and Lebowitz are entitled to receive an annual bonus as determined by the compensation committee in an amount not to exceed a maximum of 100% of annual base compensation.  Furthermore, each agreement provides that Messrs. Gottlieb and Lebowitz are entitled:  (1) to participate in all of our medical, dental, life insurance, retirement, profit sharing, stock incentive, disability and bonus plans which may be made available to our executives (only medical plans presently exist) and (2) to severance payments, under certain circumstances, equal to two times their then-current annual compensation.  The compensation committee approved a bonus of $100,000 in 2002 and 2001 and $35,000 in 2000 for each of Messrs. Gottlieb and Lebowitz.  The compensation committee has also approved an auto allowance for both Messrs. Gottlieb and Lebowitz in the amount of $18,000 per year.

          The agreements require Messrs. Gottlieb and Lebowitz to devote substantially all of their working time and best efforts to performance of their duties for us and, during the term of their employment, prohibits them, with certain exceptions, from directly or indirectly owning or operating or otherwise investing or participating in any other business that is in competition with our business without the prior approval of a majority of the independent members of our board of directors.

Option Grants for 2002

          The Company granted no options in 2002.

Aggregated Option Exercises in 2002 and Options Values at December 31, 2002

          There are currently no outstanding options.

Compensation of Directors

          We pay an annual fee of $12,000 plus a fee of $1,000 for attending regular meetings and $500 for attending committee meetings to our directors who are not our employees.  Our employees who are also directors are not paid any director fees.  Messrs. Gottlieb and Lebowitz are the only directors who are also our employees.  The reasonable expenses incurred by each director in connection with the performance of the director’s duties are also reimbursed by us.  The Company also approved payment to the directors for their work on the special committee of the board of directors during 2001.  The Company approved payment of $55,000 to Dr. Lesher and $70,000 to Mr. Reilly which were paid in 2002.  The Company also approved payment of $100,000 to Mr. Tompkins, of which $50,000 was paid in 2002 and $50,000 was paid in 2003. 

Compensation Committee Interlocks and Insider Participation in Compensation Decisions

          The Company currently has no compensation committee.  The Company’s board of directors determines the annual compensation for Messrs. Gottlieb and Lebowitz.  While Messrs. Gottlieb and Lebowitz are co-chairmen of the board of directors, they do not participate in discussions concerning their compensation and abstain from

36


Table of Contents

voting on any such proposals.  Annual compensation for the Company’s other executive officers is determined by Messrs. Gottlieb and Lebowitz.

ITEM 12.

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

          The following table sets forth information as of March 28, 2003 regarding the beneficial ownership of common stock and operating partnership units by (1) each person or company known by us to be the beneficial owner of more than 5% of our outstanding shares of common stock, (2) each of our directors, (3) each of the Named Executive Officers (as defined under “Executive Compensation”) and (4) our directors and executive officers as a group.  As of March 28, 2003 we had 710,199 shares of common stock outstanding.  In addition there were 39,932 operating partnership units outstanding which were not owned by us.  Each person named in the table has sole voting and investment power with respect to all shares shown as beneficially owned by such person except as provided under applicable state marital property laws or as set forth in the notes following the table.

Name and address Of Beneficial Owner

 

Number of Shares of Common Stock

 

Percentage of Shares of Common Stock Outstanding(1)

 

Number of Units(2)

 

Percentage Interest In Operating Partnership(3)

 

Percentage Ownership in Company(4)

 

Number of Shares of Preferred Stock

 


 



 



 



 



 



 



 

Daniel M. Gottlieb(5) (7)
 

 

383,582

 

 

54.0

%

 

14,400

 

 

1.9

%

 

53.1

%

 

104,267

 

 
439 N. Bedford Drive Beverly Hills, CA 90210

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Steven D. Lebowitz(6) (7)
 

 

326,617

 

 

46.0

 

 

12,404

 

 

1.7

 

 

45.2

 

 

88,820

 

 
439 N. Bedford Drive Beverly Hills, CA 90210

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Directors and Executive Officers
 

 

710,199

 

 

100.0

%

 

26,804

 

 

3.6

%

 

98.3

%

 

193,087

 

 
as a group (2 persons)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 


(1)

For the purposes of determining the percentage of outstanding common stock held by each person or group set forth in the table, the number of shares indicated as beneficially owned by such person or group is divided by the sum of the number of outstanding shares of common stock as of March 28, 2003.  Assumes that none of the outstanding operating partnership units are converted into shares of common stock.

 

 

(2)

Units in the operating partnership (other than those held by us) are convertible at the option of the holder for shares of common stock or cash, at our election, at the date one year from the date of issuance.  All operating partnership units are currently convertible.  The conversion ratio is one operating partnership unit for one share of common stock.

 

 

(3)

Based on a total of 750,131 operating partnership units outstanding (excluding preferred units all of which are held by us), including the 710,199 operating partnership units held by our company as of March 28, 2003.

 

 

(4)

Assumes that all operating partnership units held by the person or group and all options exercisable within 60 days of March 28, 2003 held by the person or group are converted for shares of common stock and that none of the operating partnership units held by other persons are converted into shares of common stock, notwithstanding the percentage limitations under our charter that limits the number of shares that may be acquired by such person.

 

 

(5)

Mr. Gottlieb has pledged 383,582 shares of Common Stock to GMAC Commercial Mortgage Corp. in connection with the $35 million loan obtained by the Company to facilitate the Merger.  Mr. Gottlieb has pledged 81,687 shares of preferred stock to secure personal loans.

37


Table of Contents

(6)

Mr. Lebowitz has pledged 326,617 shares of Common Stock to GMAC Commercial Mortgage Corp. in connection with the $35 million loan obtained by the Company to facilitate the Merger.  Mr. Lebowitz has pledged 69,585 shares of preferred stock to secure personal loans.

 

 

(7)

Because Messrs. Gottlieb and Lebowitz have pledged all of the Company’s Common Stock to GMAC Commercial Mortgage Corp. to secure the $35 million loan obtained by the Company to facilitate the Merger, a default on the $35 million loan could result in a foreclosure of the Company’s Common Stock and a change in control of the Company.

 

ITEM 13.

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

          We have adopted a policy pursuant to which material transactions between us and our executive officers, directors and principal stockholders (i.e., stockholders owning beneficially 5% or more of our outstanding voting securities) are submitted to the board of directors for approval by a disinterested majority of the directors voting with respect to the transaction. For this purpose, a transaction is deemed material if such transaction, alone or together with a series of similar transactions during the same fiscal year, involves an amount which exceeds $60,000.

          On October 29, 2001, the Company completed a merger with G & L Acquisition, LLC, a Maryland limited liability company, substantially on the terms provided for in the Agreement of Plan and Merger, dated as of May 10, 2001, as amended, by and between the Company and G & L Acquisition, LLC (the “Merger”).  The Company was the survivor in the Merger.  G & L Acquisition, LLC was owned by Daniel M. Gottlieb and Steven D. Lebowitz, Chief Executive Officer and President, respectively, of the Company.  Upon completion of the Merger, each outstanding share of the Company’s Common Stock, other than a portion of the shares held by Messrs. Gottlieb and Lebowitz, was converted into the right to receive $13.00 in cash, without interest.  After completion of the Merger, the Company’s Common Stock was delisted from the New York Stock Exchange.

          In order to fund the Merger and related transactions, Messrs. Gottlieb and Lebowitz obtained a loan from GMAC Commercial Mortgage Corporation (“GMAC”) in the amount of $35 million (the “Loan”).  Immediately following the completion of the Merger on October 29, 2001, the Operating Partnership became the borrower under the Loan.  The Loan is for ten years and bears interest initially at the one month London Interbank Offered Rate (“LIBOR”) plus 7.5%.  The spread over LIBOR can be reduced to as low as 5.5% based on the outstanding balance on the Loan and if the Operating Partnership meets certain debt service covenant ratios.  As interest rate protection, the Operating Partnership purchased a LIBOR cap on November 8, 2001 for $905,000 which caps the maximum LIBOR rate at 4.25% for five years in determining the interest due on the Loan.

          As part of the Merger, the Operating Partnership loaned $5.2 million of the Loan proceeds to Messrs. Gottlieb and Lebowitz to fund a $3.5 million tender offer for the Company’s Series A and Series B Preferred Stock and to repay $1.7 million of personal debt.  Each of the $2.6 million loans to Messrs. Gottlieb and Lebowitz are for a term of ten years, bear interest at the interest rate in effect on the Loan and require monthly interest only payments.  Messrs. Gottlieb and Lebowitz have the option to accrue any and all interest payments, which shall then be added to the principal balance of the notes.  As of March 28, 2003, $5.7 million, including accrued interest, was outstanding under these loans.  For purposes of presentation in the consolidated financial statements, the $5.2 million loaned to Messrs. Gottlieb and Lebowitz has been shown as a deduction to stockholders’ equity.

ITEM 14.

CONTROLS AND PROCEDURES

          Within 90 days prior to the date of this report, the Company evaluated the effectiveness of its disclosure controls and procedures.  This evaluation was performed by the Company’s Chief Accounting Officer, its President and its Chief Executive Officer.  These disclosure controls and procedures are designed to ensure that the information required to be disclosed by the Company in its periodic reports filed with the Securities and Exchange Commission (the “Commission”) is recorded, processed, summarized and reported, within the time periods specified by the Commission’s rules and forms, and that the information is communicated to the certifying officers on a timely basis.  Based on this evaluation, the certifying officers concluded that the Company’s disclosure controls and procedures were effective.  There have been no significant changes in the Company’s internal controls or in other factors that could significantly affect the internal controls subsequent to the date of their evaluation.

38


Table of Contents

PART IV

ITEM 15.

EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K

(a)   Index to Consolidated Financial Statements and Schedules:

 

 

 

Page
Reference
Form 10-K

 

 

 


1.
Consolidated Financial Statements:

 

 

 
Independent Auditors’ Report

 

F-1

 
Consolidated Balance Sheets as of December 31, 2002 and 2001

 

F-2

 
Consolidated Statements of Operations for the Years Ended December 31, 2002, 2001 and 2000

 

F-3

 
Consolidated Statement of Stockholders’ Equity For the Years Ended December 31, 2002, 2001 and 2000

 

F-4

 
Consolidated Statements of Cash Flows for the Years Ended December 31, 2002, 2001 and 2000

 

F-5 to 6

 
Notes to Consolidated Financial Statements

 

F-7 to 32

 
 

 

 

2.
Consolidated Financial Statement Schedules:

 

 

 
 

 

 

 
All schedules have been omitted because the required information is not present in amounts sufficient to require submission of the schedule or because the required information is included elsewhere in the Consolidated Financial Statements or the Notes thereto.

(b)   Reports on Form 8-K

       None.

39


Table of Contents

(c)   Exhibits

Exhibit No.

 

Note

 

Description


 


 


 
2.1

 

(10)

 

The Agreement and Plan of Merger between G&L Acquisition, LLC and G&L realty Corp.

 
 

 

 

 

 

 
2.2

 

(11)

 

Amendment No. 1 to the Agreement and Plan of Merger between G&L Acquisition, LLC and G&L Realty Corp. dated September 28, 2001.

 
 

 

 

 

 

 
2.3

 

(12)

 

Amendment No. 2 to the Agreement and Plan of Merger between G&L Acquisition, LLC and G&L Realty Corp. dated October 26, 2001.

 
 

 

 

 

 

 
2.4

 

(14)

 

Partnership Merger Agreement dated as of May 10, 2001 by and among G&L Acquisition, LLC, G&L Partnership, LLC, G&L Realty Corp. and G&L Realty Partnership, L.P.

 
 

 

 

 

 

 
3.1

 

(1)

 

Amended and Restated Articles of Incorporation of G&L Realty Corp.

 
 

 

 

 

 

 
3.2

 

(3)

 

Amended and Restated Bylaws of G&L Realty Corp.

 
 

 

 

 

 

 
10.3

 

(2)

 

Agreement of Limited Partnership of G&L Realty Partnership, L.P.

 
 

 

 

 

 

 
10.3.2

 

(13)

 

Amendment to Agreement of Limited Partnership of G&L Realty Partnership, L.P. dated as of July 31, 2001.

 
 

 

 

 

 

 
10.5

 

(1)

 

Form of Indemnity Agreement between G&L Realty Corp. and directors and certain officers.

 
 

 

 

 

 

 
10.9.2

 

(1)

 

Agreement for Purchase and Sale of Limited Partnership Interests (435 North Roxbury Drive, Ltd.) between the Selling Partner (as defined therein) and G&L Development, dated as of October 29, 1993.

 
 

 

 

 

 

 
10.11

 

(1)

 

Agreement for Transfer of Partnership Interests and Other Assets by and between G&L Realty Corp. and Reese Milner, Helen Milner and Milner Development Corp., dated as of October 29, 1993.

 
 

 

 

 

 

 
10.12.2

 

(3)

 

Amended and Restated Mortgage Loan Agreement dated as of January 11, 1995 among G&L Financing Partnership, L.P., Nomura Asset Capital Corporation and Bankers Trust Company of New York.

 
 

 

 

 

 

 
10.22

 

(4)

 

Amended and Restated Mortgage Loan Agreement by and between G&L Realty Financing Partnership II, L.P., as Borrower, and Nomura Asset Capital Corporation, as Lender, dated as of October 31, 1995.

 
 

 

 

 

 

 
10.25

 

(5)

 

Commitment Letter between G&L Realty Partnership, L. P. and Nomura Asset Capital Corporation, dated as of September 29, 1995.

 
 

 

 

 

 

 
10.30

 

(6)

 

Mortgage Loan Agreement dated as of May 24, 1996 by and between G&L Medical Partnership, L.P. as Borrower and Nomura Asset Capital Corporation as Lender.

 
 

 

 

 

 

 
10.58

 

(7)

 

Limited Liability Company Agreement of G&L Hampden, LLC.

 
 

 

 

 

 

 
10.77

 

(8)

 

Agreement for Transfer of Property by and among G&L Coronado, LLC as Transferor and G&L Realty Partnership, L.P. as Operating Partnership dated as of December 30, 1998.

 
 

 

 

 

 

 
10.78

 

(8)

 

Tenant Estoppel and Real Estate Lease between G&L Coronado, LLC as Landlord and Coronado Managers Corp. as Tenant dated December 1, 1998.

 
 

 

 

 

 

 
10.79

 

(8)

 

Guaranty of Lease between Steven D. Lebowitz and Daniel M. Gottlieb (collectively “Guarantor”) in favor of G&L Coronado, LLC (“Landlord”).

 
 

 

 

 

 

 
10.81

 

(9)

 

Loan Agreement in the amount of $13.92 million between G&L Hampden, LLC, as Borrower, and GMAC Commercial Mortgage Corporation, as Lender.

40


Table of Contents

(c)   Exhibits - (continued from previous page)

Exhibit No.

 

Note

 

Description


 

 


 
10.82

 

(13)

 

Credit Agreement among G&L Realty Partnership, L.P., G&L Partnership, LLC, the Several Lenders from Time to Time Parties Hereto and GMAC Commercial Mortgage Corporation, as Agent, dated as of October 29, 2001

 
 

 

 

 

 

 
10.83

 

(13)

 

Guarantee and Collateral Agreement made by Daniel M. Gottlieb, Steven D. Lebowitz, G&L Realty Corp. and G&L Realty Partnership, LP in favor of GMAC Commercial Mortgage Corporation, as Agent, dated as of October 29, 2001.

 
 

 

 

 

 

 
21

 

 

 

List of Subsidiaries

           
 
99.1

 

 

 

Certification Pursuant to 18 U.S.C. Section 1350

           
 
99.2

 

 

 

Certification Pursuant to 18 U.S.C. Section 1350

 

1)

Previously filed as an exhibit of like number to the Registrant’s Registration Statement on Form S-11 and amendments thereto (File No. 33-68984) and incorporated herein by reference.

 

 

2)

Previously filed as an exhibit of like number to the Company’s Annual Report on Form 10-K for the year ended December 31, 1993 and incorporated herein by reference.

 

 

3)

Previously filed as an exhibit of like number to the Company’s Annual Report on Form 10-K for the year ended December 31, 1994 and incorporated herein by reference.

 

 

4)

Previously filed as Exhibits 10.1 (with respect to Exhibit 10.22), 10.2 (with respect to Exhibit 10.23), and 10.3 (with respect to Exhibit 10.24) to the Registrant’s Quarterly Report on Form 10-Q for the Quarter ended September 30, 1995 and incorporated herein by reference.

 

 

5)

Previously filed as an exhibit of like number to the Company’s Annual Report on Form 10-K for the year ended December 31, 1995 and incorporated herein by reference.

 

 

6)

Previously filed as an exhibit of like number to the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 1996 and incorporated herein by reference.

 

 

7)

Filed as an exhibit to the Company’s Current Report on Form 8-K (filed as of October 28, 1997) and incorporated herein by reference.

 

 

8)

Filed as an exhibit to the Company’s Annual Report on Form 10-K (filed as of April 9, 1999) for the year ended December 31, 1998 and incorporated herein by reference.

 

 

9)

Filed as an exhibit to the Company’s Quarterly Report on Form 10-Q (filed as of November 12, 1999) for the quarter ended September 30, 1999 and incorporated herein by reference

 

 

10)

Filed as an exhibit to the Company’s Quarterly Report on Form 10-Q (filed as of May 15, 2001) for the quarter ended March 31, 2001 and incorporated herein by reference.

 

 

11)

Filed as an exhibit to the Company’s Current Report on Form 8-K (filed as of October 4, 2001) and incorporated herein by reference.

 

 

12)

Filed as an exhibit to the Company’s Current Report on Form 8-K (filed as of October 31, 2001) and incorporated herein by reference.

 

 

13)

Filed as an exhibit to the Company’s Current Report on Form 8-K (filed as of November 13, 2001) and incorporated herein by reference.

 

 

14)

Filed as an exhibit to the Company’s Quarterly Report on Form 10-Q (filed as of November 14, 2001) for the quarter ended September 30, 2001 and incorporated herein by reference.

 

 

c)

Management contract or compensatory plan or arrangement.

41


Table of Contents

INDEPENDENT AUDITORS’ REPORT

To the Board of Directors and Stockholders
G&L Realty Corp.:

          We have audited the accompanying consolidated balance sheets of G&L Realty Corp. and subsidiaries (the Company) as of December 31, 2002 and 2001 and the related consolidated statements of operations, stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2002.  These consolidated financial statements are the responsibility of the Company’s management.  Our responsibility is to express an opinion on these financial statements based on our audits.

          We conducted our audits in accordance with auditing standards generally accepted in the United States of America.  Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement.  An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements.  An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation.  We believe that our audits provide a reasonable basis for our opinion.

          In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of G&L Realty Corp. and subsidiaries as of December 31, 2002 and 2001, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2002 in conformity with accounting principles generally accepted in the United States of America.

          As discussed in Notes 2 and 16 to the financial statements, the Company changed the presentation of the results of operations and realized gains and losses from properties disposed of in accordance with the adoption of Statement of Financial Accountant Standards No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, during the year ended December 31, 2002.

/s/ DELOITTE & TOUCHE LLP

 


 

Los Angeles, California
March 31, 2003

 

F-1


Table of Contents

G&L REALTY CORP.

CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)

 

 

December 31,

 

 

 


 

 

 

2002

 

2001

 

 

 



 



 

ASSETS

 

 

 

 

 

 

 

Rental properties (Notes 3, 17 and 19):
 

 

 

 

 

 

 

 
Land

 

$

28,840

 

$

28,599

 

 
Building and improvements, net

 

 

140,876

 

 

137,410

 

 
Projects under development

 

 

246

 

 

—  

 

 
 


 



 

 
Total rental properties

 

 

169,962

 

 

166,009

 

Cash and cash equivalents
 

 

2,366

 

 

2,039

 

Restricted cash
 

 

3,267

 

 

4,252

 

Tenant rent and reimbursements receivable, net (Note 4)
 

 

7,314

 

 

6,197

 

Unbilled rent receivable, net (Note 5)
 

 

3,182

 

 

2,661

 

Mortgage loans and bonds receivable, net (Note 6)
 

 

1,829

 

 

11,976

 

Investments in unconsolidated affiliates (Note 7)
 

 

4,139

 

 

4,581

 

Deferred charges and other assets, net (Note 8)
 

 

5,949

 

 

7,309

 

 
 


 



 

 
TOTAL ASSETS

 

$

198,008

 

$

205,024

 

 
 

 



 



 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

LIABILITIES:
 

 

 

 

 

 

 

 
Notes payable (Note 9)

 

$

194,092

 

$

192,698

 

 
Accounts payable and other liabilities

 

 

5,905

 

 

10,583

 

 
Tenant security deposits

 

 

1,431

 

 

1,561

 

 
 

 



 



 

 
Total liabilities

 

 

201,428

 

 

204,842

 

Commitments and Contingencies (Note 10)
 

 

 

 

 

 

 

Minority interest in consolidated affiliates
 

 

(1,148

)

 

(719

)

Minority interest in Operating and Senior Care Partnerships
 

 

—  

 

 

—  

 

 
 

 

 

 

 

 

 

STOCKHOLDERS’ EQUITY (Notes 11 and 12):
 

 

 

 

 

 

 

 
Preferred shares - $.01 par value, 10,000,000 shares authorized, liquidation preference of $25.00 per share

 

 

 

 

 

 

 

 

Series A Preferred - 1,495,000 shares issued and outstanding as of December 31, 2002 and 2001, respectively

 

 

15

 

 

15

 

 

Series B Preferred - 1,380,000 shares issued and  outstanding as of December 31, 2002 and 2001, respectively

 

 

14

 

 

14

 

 
Common shares - $.01 par value, 50,000,000 shares authorized, 710,199 shares issued and outstanding as of December 31, 2002 and 2001, respectively

 

 

7

 

 

7

 

 
Additional paid-in capital

 

 

40,827

 

 

40,827

 

 
Distributions in excess of net income

 

 

(37,895

)

 

(34,722

)

 
Notes receivable from stockholders

 

 

(5,240

)

 

(5,240

)

 
 

 



 



 

 
Total stockholders’ (deficit) equity

 

 

(2,272

)

 

901

 

 
 

 



 



 

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
 

$

198,008

 

$

205,024

 

 
 


 



 

See accompanying notes to Consolidated Financial Statements

F-2


Table of Contents

G&L REALTY CORP.

CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)

 

 

Year Ended December 31,

 

 

 


 

 

 

2002

 

2001

 

2000

 

 

 



 



 



 

REVENUES:
 

 

 

 

 

 

 

 

 

 

 
Rent (Notes 5 and 13)

 

$

29,041

 

$

26,428

 

$

25,525

 

 
Patient revenues

 

 

24,261

 

 

21,057

 

 

17,820

 

 
Tenant reimbursements

 

 

2,829

 

 

1,894

 

 

1,495

 

 
Parking

 

 

1,534

 

 

1,502

 

 

1,273

 

 
Interest and loan fees

 

 

2,459

 

 

2,801

 

 

2,528

 

 
Net gain on sale of assets

 

 

—  

 

 

—  

 

 

1,263

 

 
Other income (Note 10)

 

 

1,433

 

 

4,484

 

 

546

 

 
 


 



 



 

 
Total revenues

 

 

61,557

 

 

58,166

 

 

50,450

 

 
 


 



 



 

EXPENSES:
 

 

 

 

 

 

 

 

 

 

 
Property operations

 

 

8,781

 

 

8,611

 

 

7,798

 

 
Skilled nursing operations

 

 

21,421

 

 

19,004

 

 

16,548

 

 
Depreciation and amortization

 

 

6,282

 

 

6,012

 

 

5,915

 

 
Interest (Note 15)

 

 

17,349

 

 

13,249

 

 

13,557

 

 
General and administrative

 

 

3,280

 

 

3,953

 

 

2,892

 

 
Provision for doubtful accounts, notes and bonds receivable (Notes 4 and 6)

 

 

1,542

 

 

1,004

 

 

2,288

 

 
 


 



 



 

 
Total expenses

 

 

58,655

 

 

51,833

 

 

48,998

 

 
 


 



 



 

Income from operations before minority interests and equity in (loss) earnings of unconsolidated affiliates and discontinued operations
 

 

2,902

 

 

6,333

 

 

1,452

 

Equity in (loss) earnings of unconsolidated affiliates
 

 

(140

)

 

205

 

 

(417

)

Minority interest in consolidated affiliates
 

 

(285

)

 

(302

)

 

(182

)

Corporate income tax expense
 

 

(295

)

 

(85

)

 

—  

 

Minority interest in Operating Partnership
 

 

—  

 

 

—  

 

 

460

 

 
 


 



 



 

Income from operations before discontinued operations
 

 

2,182

 

 

6,151

 

 

1,313

 

 
 


 



 



 

Discontinued operations (Note 16):
 

 

 

 

 

 

 

 

 

 

 
Net loss from operations of discontinued operations

 

 

(13

)

 

(21

)

 

(164

)

 
Gain from discontinued operations

 

 

2,320

 

 

—  

 

 

—  

 

 
 


 



 



 

Total income (loss) from discontinued operations
 

 

2,307

 

 

(21

)

 

(164

)

 
 


 



 



 

Net income
 

 

4,489

 

 

6,130

 

 

1,149

 

Dividends on preferred stock
 

 

(7,162

)

 

(7,162

)

 

(7,164

)

 
 


 



 



 

Net loss available to common stockholders
 

$

(2,673

)

$

(1,032

)

$

(6,015

)

 
 


 



 



 

See accompanying notes to Consolidated Financial Statements

F-3


Table of Contents

G&L REALTY CORP.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(In thousands)

 

 

Preferred Stock
Series A

 

Preferred Stock
Series B

 

Common Stock

 

Additional
Paid-in
capital

 

Distributions
in excess of
net income

 

Notes
receivable
from
stockholders

 

Total
stockholders’
equity

 

 

 


 


 


 

 

 

 

 

Shares

 

Amount

 

Shares

 

Amount

 

Shares

 

Amount

 

 

 

 
 


 



 



 



 



 



 



 



 



 



 

BALANCE JANUARY 1, 2000
 

 

1,495

 

$

15

 

 

1,380

 

$

14

 

 

2,636

 

$

26

 

$

75,412

 

$

(25,412

)

$

—  

 

$

50,055

 

Repurchase of common and preferred stock
 

 

 

 

 

 

 

 

 

 

 

 

 

 

(302

)

 

(3

)

 

(2,971

)

 

 

 

 

 

 

 

(2,974

)

Net Income
 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1,149

 

 

 

 

 

1,149

 

Distributions declared
 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(8,339

)

 

 

 

 

(8,339

)

 
 


 



 



 



 



 



 



 



 



 



 

BALANCE DECEMBER 31, 2000
 

 

1,495

 

 

15

 

 

1,380

 

 

14

 

 

2,334

 

 

23

 

 

72,441

 

 

(32,602)

 

 

—  

 

 

39,891

 

Repurchase of common stock Partnership units
 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1,624

)

 

(16

)

 

(31,439

)

 

 

 

 

 

 

 

(31,455

)

Issuance of notes receivable to stockholders
 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(5,240

)

 

(5,240

)

Net Income
 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

6,130

 

 

 

 

 

6,130

 

Distributions declared
 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(175

)

 

(8,250

)

 

 

 

 

(8,425

)

 
 


 



 



 



 



 



 



 



 



 



 

BALANCE DECEMBER 31, 2001
 

 

1,495

 

 

15

 

 

1,380

 

 

14

 

 

710

 

 

7

 

 

40,827

 

 

(34,722

)

 

(5,240

)

 

901

 

Net Income
 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

4,489

 

 

 

 

 

4,489

 

Distributions declared
 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(7,662

)

 

 

 

 

(7,662

)

 
 


 



 



 



 



 



 



 



 



 



 

BALANCE DECEMBER 31, 2002
 

 

1,495

 

$

15

 

 

1,380

 

$

14

 

 

710

 

$

7

 

$

40,827

 

$

(37,895

)

$

(5,240

)

$

(2,272

)

 
 


 



 



 



 



 



 



 



 



 



 

See accompanying notes to Consolidated Financial Statements

F-4


Table of Contents

G&L REALTY CORP.

CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)

 

 

Year Ended December 31,

 

 

 


 

 

 

2002

 

2001

 

2000

 

 

 



 



 



 

CASH FLOWS FROM OPERATING ACTIVITIES:
 

 

 

 

 

 

 

 

 

 

 
Net income

 

$

4,489

 

$

6,130

 

$

1,149

 

 
Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

 

 

 

 

 

 
Depreciation and amortization

 

 

6,275

 

 

6,063

 

 

6,015

 

 
Amortization of deferred financing costs

 

 

929

 

 

703

 

 

614

 

 
Net gain on sale of assets

 

 

—  

 

 

—  

 

 

(1,263

)

 
Net gain from discontinued operations

 

 

(2,320

)

 

—  

 

 

—  

 

 
Loss (gain) on change in value of interest rate hedge

 

 

957

 

 

(545

)

 

—  

 

 
Minority interests

 

 

285

 

 

302

 

 

(278

)

 
Unbilled rent receivable

 

 

(631

)

 

(249

)

 

(176

)

 
Equity in loss (earnings) of unconsolidated affiliates

 

 

140

 

 

(205

)

 

417

 

 
Provision for doubtful accounts, notes and bonds receivables

 

 

1,542

 

 

1,004

 

 

2,288

 

 
(Increase) decrease in:

 

 

 

 

 

 

 

 

 

 

 
Prepaid expense and other assets

 

 

(232

)

 

(74

)

 

(962

)

 
Tenant rent and reimbursements receivable

 

 

(2,570

)

 

(340

)

 

(4,665

)

 
Accrued interest and loan fees receivable

 

 

(234

)

 

(1,207

)

 

333

 

 
Increase (decrease) in:

 

 

 

 

 

 

 

 

 

 

 
Accounts payable and other liabilities

 

 

(4,655

)

 

3,706

 

 

3,822

 

 
Tenant security deposits

 

 

(104

)

 

194

 

 

38

 

 
 

 



 



 



 

 
Net cash provided by operating activities

 

 

3,871

 

 

15,482

 

 

7,332

 

 
 

 



 



 



 

CASH FLOWS FROM INVESTING ACTIVITIES:
 

 

 

 

 

 

 

 

 

 

 
Additions to rental properties

 

 

(2,234

)

 

(3,189

)

 

(3,259

)

 
Purchases of real estate assets

 

 

—  

 

 

—  

 

 

(10,385

)

 
Sale of real estate assets

 

 

5,141

 

 

—  

 

 

8,794

 

 
Construction in progress

 

 

(246

)

 

171

 

 

(13

)

 
Pre-acquisition costs, net

 

 

116

 

 

(107

)

 

471

 

 
Contributions to unconsolidated affiliates

 

 

(1,746

)

 

(256

)

 

(482

)

 
Distributions from unconsolidated affiliates

 

 

1,717

 

 

731

 

 

1,262

 

 
Leasing commissions

 

 

(159

)

 

(488

)

 

(158

)

 
Investments in notes and bonds receivable

 

 

(310

)

 

(478

)

 

(283

)

 
Principal payments received from notes and bonds receivable

 

 

9,333

 

 

807

 

 

3,680

 

 
 

 



 



 



 

 
Net cash provided by (used in) investing activities

 

 

11,612

 

 

(2,809

)

 

(373

)

 
 

 



 



 



 

CASH FLOWS FROM FINANCING ACTIVITIES:
 

 

 

 

 

 

 

 

 

 

 
Notes payable proceeds

 

 

14,526

 

 

47,550

 

 

9,310

 

 
Repayment of notes payable

 

 

(23,029

)

 

(13,286

)

 

(12,427

)

 
Payment of deferred loan costs

 

 

(171

)

 

(2,958

)

 

(270

)

 
Decrease in restricted cash

 

 

1,479

 

 

372

 

 

3,969

 

 
Minority interest equity contribution

 

 

25

 

 

—  

 

 

486

 

 
Purchase of common and preferred stock and partnership units

 

 

—  

 

 

(36,078

)

 

(2,974

)

 
Distributions

 

 

(7,986

)

 

(9,025

)

 

(9,807

)

 
 

 



 



 



 

 
Net cash used in financing activities

 

 

(15,156

)

 

(13,425

)

 

(11,713

)

 
 


 



 



 

Continued…

F-5


Table of Contents

G&L REALTY CORP.

CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
 

 

327

 

 

(752

)

 

(4,754

)

BEGINNING CASH AND CASH EQUIVALENTS
 

 

2,039

 

 

2,791

 

 

7,545

 

 
 


 



 



 

ENDING CASH AND CASH EQUIVALENTS
 

$

2,366

 

$

2,039

 

$

2,791

 

 
 


 



 



 

 
 

 

 

 

 

 

 

 

 

 

SUPPLEMENTAL CASH FLOW INFORMATION
 

 

 

 

 

 

 

 

 

 

Cash paid during the year for interest
 

$

16,019

 

$

12,479

 

$

12,178

 

 
 


 



 



 

NONCASH INVESTING AND FINANCING ACTIVITIES
 

 

 

 

 

 

 

 

 

 

 
Distributions declared not yet paid

 

$

—  

 

$

370

 

$

370

 

 
 

 



 



 



 

 
Transfers from projects under development to building

 

$

—  

 

$

376

 

$

—  

 

 
 

 



 



 



 

 
Preferred distributions due to minority partner

 

$

60

 

$

44

 

$

63

 

 
 

 



 



 



 

 
Exchange of equity interest in consolidated affiliate for partnership units held by non-affiliated limited partner

 

$

—  

 

$

617

 

$

—  

 

 
 

 



 



 



 

 
Transfer from investments in unconsolidated affiliates To notes receivable

 

$

—  

 

$

—  

 

$

3,070

 

 
 

 



 



 



 

Acquisition of property and other assets for assumption of note payable:
 

 

 

 

 

 

 

 

 

 

 
Restricted cash

 

$

597

 

 

 

 

 

 

 

 
Land

 

 

1,390

 

 

 

 

 

 

 

 
Buildings and improvements

 

 

10,760

 

 

 

 

 

 

 

 
Deferred charges and other assets

 

 

463

 

 

 

 

 

 

 

 
Note receivable

 

 

(1,269

)

 

 

 

 

 

 

 
 

 



 

 

 

 

 

 

 

 
Total

 

$

11,941

 

 

 

 

 

 

 

 
 


 

 

 

 

 

 

 

Assumption of note payable for property and other assets:
 

 

 

 

 

 

 

 

 

 

 
Note payable

 

$

11,941

 

 

 

 

 

 

 

 
 


 

 

 

 

 

 

 

 
Net cost of assets transferred from the Company:

 

 

 

 

 

 

 

 

 

 

 
Land

 

 

 

 

 

 

 

$

5,640

 

 
Building and improvements, net

 

 

 

 

 

 

 

 

9,172

 

 
Restricted cash

 

 

 

 

 

 

 

 

170

 

 
Mortgage loans and bonds receivable, net

 

 

 

 

 

 

 

 

1,136

 

 
Deferred charges and other assets, net

 

 

 

 

 

 

 

 

197

 

 
 

 

 

 

 

 

 

 



 

 
 

 

 

 

 

 

 

$

16,315

 

 
 

 

 

 

 

 

 



 

 
Transfer note receivable to land and building:

 

 

 

 

 

 

 

 

 

 

 
Land

 

 

 

 

 

 

 

$

252

 

 
Building

 

 

 

 

 

 

 

 

1,009

 

 
 

 

 

 

 

 

 

 



 

 
Total

 

 

 

 

 

 

 

$

1,261

 

 
 

 

 

 

 

 

 

 



 

 
Notes receivable

 

 

 

 

 

 

 

$

1,261

 

 
 

 

 

 

 

 

 

 



 

Concluded

F-6


Table of Contents

G&L REALTY CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE YEARS ENDED DECEMBER 31, 2002

1.     General

          G&L Realty Corp. (the “Company”) was formed as a Maryland corporation to continue the ownership, management, acquisition and development activities previously conducted by G&L Development, a California general partnership, the Company’s predecessor.  All of the Company’s assets are held by, and all of its operations are conducted through, the following entities:

 

G&L Realty Partnership, L.P., a Delaware limited partnership

 

 

(the “Operating Partnership”)

 

G&L Senior Care Partnership, L.P., a Delaware limited partnership

 

 

(the “Senior Care Partnership”)

 

G&L Realty Financing Partnership II, L.P., a Delaware limited partnership

 

 

(the “Realty Financing Partnership”)*

 

G&L Medical Partnership, L.P., a Delaware limited partnership

 

 

(the “Medical Partnership”)*

 

G&L Gardens, LLC, an Arizona limited liability company

 

 

(“Maryland Gardens”)*

`

435 North Roxbury Drive, Ltd., a California limited partnership

 

 

(the “Roxbury Partnership”)

 

GL/PHP, LLC, a Delaware limited liability company (“GL/PHP”)*

 

G&L Hampden, LLC, a Delaware limited liability company (“Hampden”)*

 

G&L Valencia, LLC, a California limited liability company (“Valencia”)

 

G&L Holy Cross, LLC, a California limited liability company (“Holy Cross”)*

 

G&L Burbank, LLC, a California limited liability company (“Burbank”)*

 

G&L Tustin, LLC, a California limited liability company (“Tustin”)*

 

GLH Pacific Gardens, LLC, a California limited liability company (“Pacific Gardens”)

 

G&L Hoquiam, LLC, a California limited liability company (“Hoquiam”)

 

G&L Lyons, LLC, a California limited liability company (“Lyons”)

 

G&L Coronado (1998), LLC, a California limited liability company (“Coronado”)

 

GLH Tarzana, LLC, a California limited liability company (“Tarzana”)

 

G&L Heritage Care, LLC, a Delaware limited liability company (“Heritage”)

 

G&L Massachusetts, LLC, a Delaware limited liability company (“Massachusetts”)

 

G&L Aspen, LLC, a California limited liability company (“Aspen”)

 

G&L Tustin II, LLC, a Delaware limited liability company (“Tustin II”)

 

G&L Tustin III, LLC, a Delaware limited liability company (“Tustin III”)

 

G&L St. Thomas More, Inc., a Maryland corporation (“St. Thomas More”)

 

 

*

The Realty Financing Partnership, the Medical Partnership, Maryland Gardens, GL/PHP, Hampden, Holy Cross, Burbank and Tustin are herein defined collectively as the “Financing Entities” and individually as the “Financing Entity”.

          The Company, as the sole general partner and as owner of an approximately 95% ownership interest, controls the Operating Partnership and the Senior Care Partnership.  The Company controls the Financing Entities through wholly owned subsidiaries incorporated in either the State of Delaware or the State of California (collectively, the “Subsidiaries” and individually, a “Subsidiary”).  Each Subsidiary either (i) owns, as sole general partner or sole managing member, a 1% ownership interest in its related Financing Entity or (ii) owns no interest and acts as the manager of the Financing Entity.

F-7


Table of Contents

The remaining 99% ownership interest in each Financing Entity, which is owned 1% by a Subsidiary, is owned by the Operating Partnership or the Senior Care Partnership, acting as sole limited partner or member.  Financing Entities in which a Subsidiary owns no interest are 100% owned by the Operating Partnership and the Senior Care Partnership.

          References in these consolidated financial statements to the Company include its operations, assets and liabilities including the operations, assets and liabilities of the Operating Partnership, the Senior Care Partnership, the Subsidiaries, the Financing Entities, the Roxbury Partnership (in which the Operating Partnership owns a 32.81% partnership interest and is the sole general partner), Pacific Gardens (in which the Operating Partnership owns a 93% membership interest and is a co-managing member), Tarzana (in which the Operating Partnership owns a 85% membership interest and is a co-managing member) and Hoquiam, Lyons, Coronado, Heritage, Massachusetts,  Aspen, Tustin II, Tustin III and St. Thomas More (in which the Operating Partnership or the Senior Care Partnership own a 100% interest).

          In addition to the Subsidiaries, the Company also owns interests in various unconsolidated affiliates.  Although the Company’s investment represents a significant portion of the capital of such unconsolidated affiliates and the Company exercises influence over the activities of these entities, the Company does not have the requisite level of voting control to include the assets, liabilities and operating activities of these entities in the consolidated financial statements of the Company.   The entities in which the Company has unconsolidated financial interests are as follows:

 

GLN Capital Co., LLC (“GLN”)

 

G&L Grabel, San Pedro, LLC (“San Pedro”)

 

G&L Penasquitos, LLC (“Penasquitos LLC”)

 

G&L Penasquitos, Inc. (“Penasquitos Inc.”)

 

G&L Parsons on Eagle Run, LLC (“Eagle Run”)

 

G&L Parsons on Eagle Run, Inc. (“Eagle Run Inc.”)

 

Lakeview Associates, LLC (“Lakeview”)

 

Tustin Heritage Place, LLC (“Heritage Place”)

 

Pac Par MOB, LLC (“Pacific Park”)

 

G&L Radius Realty, LLC (“Radius”)

 

G&L Aurora, LLC (“Aurora”)

GLN, San Pedro, Penasquitos Inc., Penasquitos LLC, Eagle Run, Eagle Run, Inc., Lakeview, Heritage Place, Pacific Park, Radius and Aurora are herein collectively referred to as the “Unconsolidated Affiliates” and individually as “Unconsolidated Affiliate”.

2.     Summary of Significant Accounting Policies

          Business-- The Company is a self-managed Real Estate Investment Trust (“REIT”) that acquires, develops, manages, finances and leases healthcare properties.  The Company’s business currently consists of investments in healthcare properties.  Investments in healthcare properties consist of acquisitions, made either directly or through joint ventures, in medical office buildings (“MOBs”), skilled nursing facilities (“SNFs”) and assisted living facilities (“ALFs”).  

          Basis of presentation-- The accompanying consolidated financial statements include the accounts of the Company and its subsidiaries.  The interests in the Roxbury Partnership, Pacific Gardens, Tarzana, the Operating Partnership and the Senior Care Partnership that are not owned by the Company, have been reflected as minority interests in the Operating and Senior Care Partnerships.  All significant intercompany accounts and transactions have been eliminated in consolidation. 

          Properties-- The Operating Partnership, the Senior Care Partnership, the Realty Financing Partnership, the Medical Partnership, Maryland Gardens, the Roxbury Partnership, GL/PHP, Hampden, Valencia, Holy Cross, Burbank, Tustin, Pacific Gardens, Hoquiam, Lyons, Heritage, Massachusetts, Aspen, Coronado, Tustin II,  Tustin III and St. Thomas More own a 100% fee simple interest in all of the properties.

F-8


Table of Contents

          Income taxes-- The Company expects to qualify as a REIT under Sections 856 through 860 of the Internal Revenue Code of 1986, as amended (the “Code”).  As a REIT, the Company is generally not subject to corporate Federal income taxes so long as it distributes at least 90% of its taxable income to stockholders and meets certain other requirements relating to its income and assets.  For the years ended December 31, 2002, 2001 and 2000, the Company met all of these requirements.  Though as a REIT the Company is generally not permitted to operate properties, in 2000, the Company foreclosed upon and took over the operations at its three SNFs located in Hampden, Massachusetts.  Under Section 856(e) of the Code, the Company has the ability to operate these properties as “foreclosure property” for a period of up to three years after the year in which the foreclosure took place.  However, the Company must pay Federal and State income taxes on the taxable income produced by these three facilities during this period.  As a result, the Company has included $220,000 and $85,000 of corporate income tax expense in its financial statements for the years ended December 31, 2002 and 2001, respectively, with respect to these properties.    The Company included an additional $75,000 of corporate income tax expense in its financial statements for the year ended December 31, 2002 related to its investment in a taxable REIT subsidiary under Section 856(l) of the Internal Revenue Code.  The taxable REIT subsidiary owns a SNF in Maryland and leases the SNF to an operator.  State income tax requirements are similar to Federal requirements.

          Real estate and depreciation-- Rental property is recorded at cost less accumulated depreciation.  Depreciation is computed on a straight-line basis over the estimated useful lives of the assets as follows:

Buildings and improvements

40 years

Tenant improvements

Life of lease

Furniture, fixtures and equipment

5 years

          Depreciation expense for the years ended December 31, 2002, 2001 and 2000 was $5,972,000, $5,730,000 and $5,697,000 respectively.  Expenditures for maintenance and repairs are charged to operations as incurred.  Significant renovations and all costs directly related to acquisitions are capitalized.

          Revenue recognition-- Base rental income is recognized on a straight-line basis over the term of the lease regardless of when payments are due.  Certain leases include rent concessions and escalation clauses creating an effective rent that is included in unbilled rent receivable (Note 5).  Patient revenue is reported at the estimated net realizable amount from patients, third party payors and others for services rendered, net of contractual adjustments.

          Cash and cash equivalents-- All demand and money market accounts and short-term investments in governmental funds with a maturity of three months or less are considered to be cash and cash equivalents.  Cash equivalents are carried at cost, which approximates fair value due to the short period of time to maturity.  Throughout the year, the Company also maintained cash balances at banks in excess of federally insured limits.

          Restricted Cash-- Pursuant to various loan agreements, the Company is required to fund segregated interest bearing accounts to be used for debt service payments, tenant security deposits, property taxes, insurance premiums and property improvements. 

          Allowance for uncollectible amounts—Tenant rent and reimbursements receivable and unbilled rent receivable are carried net of the allowances for uncollectible amounts.  Management determines the adequacy of the allowances based upon the specific individual receivables, management’s knowledge of the business and other relevant factors.

          Deferred charges and other assets-- Deferred charges and other assets consist of leasing commissions, deferred loan fees, financing costs, construction-in-progress, investments, deposits and prepaid expenses.   Leasing commissions are amortized on a straight-line basis over the lives of the leases which range typically from five to ten years.  Deferred loan fees are amortized using the effective interest method over the terms of the respective loan agreements.  Expenses incurred to obtain financing are capitalized and amortized over the term of the related loan as a yield adjustment.

          Minority interest in consolidated affiliates-- The Operating Partnership, as sole general partner, has a 32.81% ownership interest in the Roxbury Partnership which owns the property located at 435 North Roxbury Drive.  The minority interest is a debit balance that resulted from depreciation allocations and cash distributed to partners in excess of their original investment

F-9


Table of Contents

and subsequent accumulated earnings.  It is management’s opinion that the deficit is adequately secured by the unrecognized appreciated value of the Roxbury property and will be recovered through an accumulation of undistributed earnings or sale of the property.   The Senior Care Partnership owns a 93% interest in Pacific Gardens and an 85% interest in Tarzana.

          Long-lived assets-- The Company reviews long-lived assets for impairment whenever events or changes in circumstances indicate that an asset’s book value exceeds the undiscounted expected future cash flows to be derived from that asset.  Whenever undiscounted expected future cash flows are less than the book value, the asset will be reduced to estimated fair value and an impairment loss will be recognized.  The Company recorded no impairment losses in 2002, 2001 and 2000.

          Financial instruments--The estimated fair value of the Company’s financial instruments is determined using available market information and appropriate valuation methodologies.  However, considerable judgment is necessary to interpret market data and develop the related estimates of fair value.  The use of different market assumptions or estimation methodologies may have a material impact on the estimated fair value amounts.  The book value of cash, cash equivalents, tenant rent and other accounts receivable, accounts payable and other liabilities approximates fair value due to their short-term maturities.  The carrying amount of the Company’s variable rate notes payable as of December 31, 2002 and 2001 approximate fair value because the interest rates are comparable to rates currently being offered to the Company.  The fair value of the Company’s fixed rate notes payable as of December 31, 2002 and 2001 was $168.0 million and $139.9 million, respectively because the interest rates on the Company’s fixed rate notes payable were higher for both 2002 and  2001  than the rates being offered to the Company at that time.  The estimated fair values of the Company’s mortgage loans and bonds receivable, are based upon market values of loans and bonds receivable with similar characteristics adjusted for risk inherent in the underlying transactions.  Management estimates that the fair value of the Company’s mortgage loans and bonds receivable approximate their amortized cost basis, after adjustment for the allowance for amounts deemed to be uncollectible. 

          Use of estimates-- The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.  Actual results could differ from those estimates.

          Derivative financial instruments--The Company is exposed to the effect of interest rate changes in the normal course of business.  Under certain circumstances, the Company mitigates these risks by following established risk management policies and procedures which include the periodic use of derivatives.  The Company’s primary strategy in entering into derivative contracts is to minimize the volatility that changes in interest rates could have on its future cash flows.  The Company employs derivative instruments that are designated as cash flow hedges, including interest rate swaps and caps, to effectively convert a portion of its variable-rate debt to fixed-rate debt.  The Company does not enter into derivative instruments for speculative purposes.

          In November 2001, the Company purchased an interest rate cap for $905,000 to protect against an increase in the one month LIBOR rate on a $35 million variable rate loan the Company obtained in October 2001.  The interest rate cap is for a term of five years and protects the Company on a specific portion of the loan, which decreases over the term of the cap, on any increase in the one month LIBOR rate above 4.25% per annum.  SFAS 133 requires the Company to record the interest rate cap on the balance sheet at fair value and to record changes in the fair value of the interest rate cap in the statement of operations.  For the year ended December 31, 2001, the Company recognized a $0.5 million gain on the fair market value of its LIBOR interest rate cap while recognizing a $1.0 million loss for the year ended December 31, 2002.

          Recent accounting pronouncements--In January 2002, the Company adopted the provisions of SFAS 142 “Goodwill and Other Intangible Assets” (“SFAS 142”).  This statement discontinues the practice of amortizing goodwill and other intangible assets and requires a periodic review process for impairment.  This statement also requires that a portion of the purchase price of real estate acquisitions be assigned to the fair value of an intangible asset for above market operating leases or to an intangible liability for below market operating leases.  Such intangible assets or liabilities are then required to be amortized into revenue over the remaining life of the respective leases.   The adoption of this statement did not have a material effect on the Company’s results of operations or financial condition for the year ended December 31, 2002.

F-10


Table of Contents

          In January 2002, the Company adopted the provisions of SFAS 144 “Accounting for the Impairment or Disposal of Long-Lived Assets” (“SFAS 144”).  This statement addresses financial accounting and reporting for the disposal of long-lived assets and supercedes FAS 121 “Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of.”  In accordance with SFAS 144, the net income and net gain or loss on dispositions of operating properties sold subsequent to December 31, 2001 are reflected in the consolidated statement of operations as discontinued operations for all periods presented.  In accordance with EITF 87-24 “Allocation of Interest to Discontinued Operations”, the Company has allocated interest on debt that is required to be repaid as a result of the disposal transactions to discontinued operations, but has elected not to allocate consolidated interest that is not directly attributable to the disposition property.  The net income or loss and the net gain or loss on dispositions of operating properties sold prior to December 31, 2001 are included in continuing operations for all periods presented.  The adoption of this statement did not have a material effect on the Company’s results of operations or financial condition for the year ended December 31, 2002.

          In April 2002, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 145,Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections (“SFAS 145”). The most significant provisions of this statement relate to the rescission of Statement No. 4 “Reporting Gains and Losses from Extinguishment of Debt” and it also amends other existing authoritative pronouncements to make various technical corrections, clarify meanings, or describe their applicability under changed conditions. Under SFAS 145, any gain or loss on extinguishment of debt that was classified as an extraordinary item in prior periods presented that does not meet certain defined criteria must be reclassified.   The provisions of SFAS 145 are effective for fiscal years beginning after May 15, 2002.  Management does not expect that the adoption of this statement will have a material effect on the Company’s results of operations or financial condition. 

          In June 2002, FASB issued SFAS 146, “Accounting for Costs Associated with Exit or Disposal Activities” (“SFAS 146”).  SFAS 146 addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies Emerging Issues Task Force Issue No. 94-3“Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity”.  SFAS 146 requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred.  The provisions of SFAS 146 are effective for exit or disposal activities that are initiated after December 31, 2002.  Management does not expect that the adoption of this statement will have a material effect on the Company’s results of operations or financial condition.

          In November 2002, the FASB issued FASB Interpretation No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others” (“FIN 45”).  FIN 45 significantly changes the current practice in the accounting for, and disclosure of, guarantees.  Guarantees and indemnification agreements meeting the characteristics described in FIN 45 are required to be initially recorded as a liability at fair value.  FIN 45 also requires a guarantor to make significant new disclosures for virtually all guarantees even if the likelihood of the guarantor having to make payment under the guarantee is remote.  The disclosure requirements within FIN 45 are effective for financial statements for annual or interim periods ending after December 15, 2002.  The initial recognition and initial measurement provisions are applicable on a prospective basis to guarantees issued or modified after December 31, 2002.  The Company adopted the disclosure provisions of FIN 45 as of December 31, 2002.  Management does not expect the adoption of the initial recognition and measurement provisions will have a material effect on the Company’s results of operations or financial condition.

          In January 2003, the FASB issued FASB Interpretation No. 46, “Consolidation of Variable Interest Entities” (“FIN 46”).  FIN 46 clarifies the application of Accounting Research Bulletin No. 51, “Consolidated Financial Statements” and provides guidance on the identification of entities for which control is achieved through means other than through voting rights (“variable interest entities” or “VIEs”) and how to determine when and which business enterprise should consolidate the VIE.  This new model for consolidation applies to and entity which either (1) the equity investors (if any) do not have a controlling financial interest or (2) the equity investment at risk is insufficient to finance that entity’s activities without receiving additional subordinated financial support from other parties.  The provisions of this interpretation are immediately effective for VIEs formed after January 31, 2003.  For VIEs formed prior to January 31, 2003, the provisions of this interpretation apply to the first fiscal year or interim period beginning after June 15, 2003. The Company is in the process of evaluating all of its investments and other interests in entities that may be deemed VIEs under the provisions of FIN 46. These investments include real estate joint ventures with assets totaling $44 million as of December 31, 2002. The Company’s maximum exposure to loss represents its recorded investment in these real estate joint ventures totaling $4.1 million as of December 31, 2002. The Company believes that many of these entities will not be consolidated, and may not ultimately fall under the provisions of FIN 46. The Company cannot make any definitive conclusion until it completes its evaluation.

F-11


Table of Contents

3.     Buildings and Improvements

          Buildings and improvements consist of the following:

 

 

December 31,

 

 

 


 

 

 

2002

 

2001

 

 

 



 



 

 

 

(in thousands)

 

Buildings and improvements
 

$

162,831

 

$

155,774

 

Tenant improvements
 

 

12,379

 

 

11,983

 

Furniture, fixtures and equipment
 

 

5,105

 

 

3,526

 

 
 


 



 

 
 

 

180,315

 

 

171,283

 

Less accumulated depreciation and amortization
 

 

(39,439

)

 

(33,873

)

 
 


 



 

Total
 

$

140,876

 

$

137,410

 

 
 


 



 

4.     Tenant Rent and Reimbursements Receivable

          Tenant rent and reimbursements receivable are net of an allowance for uncollectible amounts of $1,142,000 and $1,261,000 as of December 31, 2002 and 2001, respectively.  The activity in the allowance for uncollectible tenant accounts for the three years ending December 31, 2002, was as follows:

 

 

Year ended December 31,

 

 

 


 

 

 

2002

 

2001

 

2000

 

 

 



 



 



 

 

 

(in thousands)

 

Balance, beginning of year
 

$

1,261

 

$

555

 

$

3,409

 

Additions
 

 

1,316

 

 

858

 

 

1,007

 

Charge-offs
 

 

(1,435

)

 

(152

)

 

(3,861

)

 
 


 



 



 

Balance, end of year
 

$

1,142

 

$

1,261

 

$

555

 

 
 


 



 



 

5.     Unbilled Rent Receivable

          The Company has operating leases with tenants that expire at various dates through 2012.  The minimum rents due under these leases are subject to either scheduled fixed increases or adjustments based on the Consumer Price Index.  Generally accepted accounting principles require that rents due under operating leases with fixed increases be averaged over the life of the lease.  This practice, known as “straight-line rents” creates an unbilled rent receivable in any period during which the amount of straight-line rent exceeds the actual rent billed (this occurs primarily at the inception of the lease period).  As the lease approaches its expiration date, billed rent will eventually exceed the amount of straight-line rent causing the unbilled rent receivable to decline.  The straight-line rent calculation assumes no new or re-negotiated rents or extension periods during the life of the lease and excludes operating cost reimbursements.  The following table summarizes future rents due under existing leases and the corresponding straight-line rent calculation as of December 31, 2002:

Year Ending December 31,

 

Future Minimum
Rent

 

Straight-line
Rent

 

Unbilled Rent
Receivable

 


 



 



 



 

 

 

(in thousands)

 

 
2003

 

$

17,466

 

$

17,441

 

$

25

 

 
2004

 

 

15,081

 

 

14,698

 

 

383

 

 
2005

 

 

12,829

 

 

12,166

 

 

663

 

 
2006

 

 

10,218

 

 

9,409

 

 

809

 

 
2007

 

 

5,793

 

 

5,329

 

 

464

 

 
Thereafter

 

 

8,862

 

 

7,652

 

 

1,210

 

 
 

 



 



 



 

Total
 

$

70,249

 

$

66,695

 

$

3,554

 

 
 


 



 



 

F-12


Table of Contents

          The activity in the allowance for unbilled rent, recorded as a reduction of rental revenue for the three years ending December 31, 2002, consisted of the following:

 

 

Year ended December 31,

 

 

 


 

 

 

2002

 

2001

 

2000

 

 

 



 



 



 

 

 

(in thousands)

 

Balance, beginning of year
 

$

475

 

$

394

 

$

706

 

Additions
 

 

25

 

 

81

 

 

76

 

Charge-offs
 

 

(128

)

 

—  

 

 

(388

)

 
 


 



 



 

Balance, end of year
 

$

372

 

$

475

 

$

394

 

 
 


 



 




6.     Mortgage Loans and Bonds Receivable

          Mortgage loans and bonds receivable consist of the following:

 

 

December 31,

 

 

 


 

 

 

2002

 

2001

 

 

 



 



 

 

 

(in thousands)

 

Secured bond receivable due December 15, 2029, interest payable semiannually at 8.75% per annum
 

$

1,218

 

$

1,218

 

Unsecured promissory note due January 31, 2010, principal and interest payable monthly at 10% per annum
 

 

567

 

 

567

 

Secured Note due April 1, 2008, interest payable semiannually at 10% per annum (This note is currently in default)
 

 

150

 

 

150

 

Unsecured promissory note due September 1, 2000, interest payable at 10% per annum (This note is currently in default)
 

 

1,000

 

 

1,000

 

Unsecured promissory note due July 1, 2000, interest payable at 10% per annum (This note is currently in default)
 

 

79

 

 

79

 

Secured promissory note due August 25, 1998, interest payable at 12% per annum (This note is currently in default).
 

 

2,377

 

 

2,377

 

Unsecured promissory note receivable due April 11, 2003, interest payable monthly at 10%
 

 

290

 

 

290

 

Secured Promissory Note due March 31, 2009, collateralized by deed of trust, principal and interest payable monthly at 12% per annum.  This note was repaid in January 2002
 

 

—  

 

 

7,617

 

Unsecured Promissory Note due March 31, 2009, principal and interest payable monthly at 12% per annum. This note was repaid in January 2002
 

 

—  

 

 

2,700

 

 
 


 



 

Face value of mortgage loans and bonds receivable
 

 

5,681

 

 

15,998

 

Accrued interest
 

 

623

 

 

462

 

Allowance for uncollectible amounts
 

 

(4,475

)

 

(4,484

)

 
 


 



 

Total mortgage loans and bonds interest receivable
 

$

1,829

 

$

11,976

 

 
 


 



 

          The activity in the allowance for uncollectible notes receivable for the three years ending December 31, 2002, is as follows:

 

 

Year ended December 31,

 

 

 


 

 

 

2002

 

2001

 

2000

 

 

 



 



 



 

 

 

(in thousands)

 

Balance, beginning of year
 

$

4,484

 

$

5,527

 

$

4,576

 

Additions
 

 

89

 

 

146

 

 

2,861

 

Charge-offs
 

 

(98

)

 

(1,189

)

 

(1,910

)

 
 


 



 



 

Balance, end of year
 

$

4,475

 

$

4,484

 

$

5,527

 

 
 


 



 



 

F-13


Table of Contents

7.     Investments In Unconsolidated Affiliates

          The Company has investments in various unconsolidated affiliates as described in Note 1.  The following tables provide a summary of the Company’s investment in each of these entities as of December 31, 2002 and 2001 (in thousands).

 

 

GLN Capital

 

San Pedro

 

Penasquitos
LLC

 

Heritage
Place

 

Aurora

 

Pacific Park

 

Radius

 

Eagle Run,
Inc.

 

EagleRun

 

Lakeview

 

Total

 

 

 



 



 



 



 



 



 



 



 



 



 



 

Opening balance at beginning of year
 

$

807

 

$

1,351

 

$

(358

)

$

—  

 

$

—  

 

$

—  

 

$

—  

 

$

(501

)

$

375

 

$

398

 

$

2,072

 

Equity in earnings (loss) of affiliates
 

 

5

 

 

169

 

 

(186

)

 

—  

 

 

—  

 

 

48

 

 

43

 

 

53

 

 

48

 

 

(320

)

 

(140

)

Cash contributions
 

 

1

 

 

—  

 

 

69

 

 

—  

 

 

17

 

 

—  

 

 

1,174

 

 

—  

 

 

—  

 

 

364

 

 

1,625

 

Cash distributions
 

 

(813

)

 

—  

 

 

—  

 

 

—  

 

 

—  

 

 

—  

 

 

—  

 

 

(468

)

 

—  

 

 

—  

 

 

(1,281

)

 
 


 



 



 



 



 



 



 



 



 



 



 

Equity, before inter-company adjustments
 

 

—  

 

 

1,520

 

 

(475

)

 

—  

 

 

17

 

 

48

 

 

1,217

 

 

(916

)

 

423

 

 

442

 

 

2,276

 

Intercompany receivable (payable), net
 

 

—  

 

 

37

 

 

292

 

 

14

 

 

—  

 

 

(672

)

 

—  

 

 

36

 

 

48

 

 

2,108

 

 

1,863

 

 
 


 



 



 



 



 



 



 



 



 



 



 

Investment in unconsolidated affiliates
 

$

—  

 

$

1,557

 

$

(183

)

$

14

 

$

17

 

$

(624

)

$

1,217

 

$

(880

)

$

471

 

$

2,550

 

$

4,139

 

 
 


 



 



 



 



 



 



 



 



 



 



 

 

 

 

GLN Capital

 

San Pedro

 

Penasquitos
LLC

 

Penasquitos
Inc.

 

Heritage
Park

 

Pacific Gardens
Corp.

 

Eagle Run,
Inc.

 

EagleRun

 

Lakeview

 

Total

 

 

 



 



 



 



 



 



 



 



 



 



 

Opening balance at beginning of year
 

$

765

 

$

1,144

 

$

161

 

$

20

 

$

—  

 

$

(312

)

$

(370

)

$

655

 

$

250

 

$

2,313

 

Equity in (loss) earnings of affiliates
 

 

(4

)

 

207

 

 

(147

)

 

—  

 

 

—  

 

 

312

 

 

(131

)

 

(32

)

 

—  

 

 

205

 

Cash contributions
 

 

46

 

 

—  

 

 

70

 

 

—  

 

 

—  

 

 

—  

 

 

—  

 

 

—  

 

 

188

 

 

304

 

Cash distributions
 

 

—  

 

 

—  

 

 

(442

)

 

—  

 

 

—  

 

 

—  

 

 

—  

 

 

(248

)

 

(40

)

 

(730

)

 
 


 



 



 



 



 



 



 



 



 



 

Equity, before inter-company adjustments
 

 

807

 

 

1,351

 

 

(358

)

 

20

 

 

—  

 

 

—  

 

 

(501

)

 

375

 

 

398

 

 

2,092

 

Intercompany receivable (payable), net
 

 

67

 

 

71

 

 

291

 

 

(20

)

 

14

 

 

—  

 

 

29

 

 

48

 

 

1,989

 

 

2,489

 

 
 


 



 



 



 



 



 



 



 



 



 

Investment in unconsolidated affiliates
 

$

874

 

$

1,422

 

$

(67

)

$

—  

 

$

14

 

$

—  

 

$

(472

)

$

423

 

$

2,387

 

$

4,581

 

 
 


 



 



 



 



 



 



 



 



 



 

F-14


Table of Contents

          Following is a summary of the condensed financial information of each of the unconsolidated affiliates as of and for the year ended December 31, 2002 (in thousands).

 

 

GLN

 

San
Pedro

 

Penasquitos
LLC

 

Penasquitos
Inc.

 

Aurora

 

Heritage
Place

 

Pacific
Park

 

Eagle Run Inc.

 

Eagle Run

 

Radius

 

Lakeview

 

Total

 

 
 


 



 



 



 



 



 



 



 



 



 



 



 

Financial Position:
 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
Land

 

$

—  

 

$

2,011

 

$

641

 

$

—  

 

$

—  

 

$

750

 

$

822

 

$

—  

 

$

1,191

 

$

200

 

$

947

 

$

6,562

 

 
Buildings

 

 

—  

 

 

4,205

 

 

6,056

 

 

—  

 

 

—  

 

 

—  

 

 

2,875

 

 

—  

 

 

4,524

 

 

5,753

 

 

7,830

 

 

31,243

 

 
Notes receivable, net

 

 

—  

 

 

—  

 

 

—  

 

 

—  

 

 

—  

 

 

—  

 

 

—  

 

 

—  

 

 

—  

 

 

—  

 

 

—  

 

 

—  

 

 
Other assets

 

 

7

 

 

446

 

 

954

 

 

—  

 

 

17

 

 

238

 

 

1,556

 

 

399

 

 

1,341

 

 

1,147

 

 

392

 

 

6,497

 

 
Notes payable

 

 

—  

 

 

(4,542

)

 

(8,377

)

 

—  

 

 

—  

 

 

(940

)

 

(4,582

)

 

—  

 

 

(7,025

)

 

(5,457

)

 

(7,825

)

 

(38,748

)

 
Other liabilities

 

 

(7

)

 

(947

)

 

(388

)

 

(10

)

 

—  

 

 

(48

)

 

(407

)

 

(1,404

)

 

(98

)

 

(67

)

 

(918

)

 

(4,294

)

 
 


 



 



 



 



 



 



 



 



 



 



 



 

Net assets
 

$

—  

 

$

1,173

 

$

(1,114

)

$

(10

)

$

17

 

$

—  

 

$

264

 

$

(1,005

)

$

(67

)

$

1,576

 

$

426

 

$

1,260

 

 
 


 



 



 



 



 



 



 



 



 



 



 



 

Partner’s equity:
 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
Company

 

$

—  

 

$

1,520

 

$

(475

)

$

20

 

$

17

 

$

—  

 

$

48

 

$

(916

)

$

423

 

$

1,217

 

$

442

 

$

2,296

 

 
Others

 

 

—  

 

 

(347

)

 

(639

)

 

(30

)

 

—  

 

 

—  

 

 

216

 

 

(89

)

 

(490

)

 

359

 

 

(16

)

 

(1,036

)

 
 

 



 



 



 



 



 



 



 



 



 



 



 



 

Total equity
 

$

—  

 

$

1,173

 

$

(1,114)

 

$

(10)

 

$

17

 

$

—  

 

$

264

 

$

(1,005)

 

$

(67)

 

$

1,576

 

$

426

 

$

1,260

 

 
 


 



 



 



 



 



 



 



 



 



 



 



 

Operations:
 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
Revenues

 

$

9

 

$

1,186

 

$

661

 

$

—  

 

$

—  

 

$

—  

 

$

783

 

$

3,504

 

$

924

 

$

467

 

$

599

 

$

8,133

 

 
Expenses

 

 

—  

 

 

(960

)

 

(1,033

)

 

—  

 

 

—  

 

 

—  

 

 

(687

)

 

(3,398

)

 

(828

)

 

(409

)

 

(1,239

)

 

(8,554

)

 
 

 



 



 



 



 



 



 



 



 



 



 



 



 

Net income (loss)
 

$

9

 

$

226

 

$

(372)

 

$

—  

 

$

—  

 

$

—  

 

$

96

 

$

106

 

$

96

 

$

58

 

$

(640)

 

$

(421)

 

 
 


 



 



 



 



 



 



 



 



 



 



 



 

Allocation of net income (loss):
 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
Company.

 

$

5

 

$

169

 

$

(186

)

$

—  

 

$

—  

 

$

—  

 

$

48

 

$

53

 

$

48

 

$

43

 

$

(320

)

$

(140

)

 
Others

 

 

4

 

 

57

 

 

(186

)

 

—  

 

 

—  

 

 

—  

 

 

48

 

 

53

 

 

48

 

 

15

 

 

(320

)

 

(281

)

 
 

 



 



 



 



 



 



 



 



 



 



 



 



 

Net income (loss)
 

$

9

 

$

226

 

$

(372

)

$

—  

 

$

—  

 

$

—  

 

$

96

 

$

106

 

$

96

 

$

58

 

$

(640

)

$

(421

)

 
 


 



 



 



 



 



 



 



 



 



 



 



 

F-15


Table of Contents

Following is a summary of the condensed financial information of each of the unconsolidated affiliates as of and for the year ended December 31, 2001 (in thousands).

 

 

GLN Capital

 

San Pedro

 

Penasquitos
LLC

 

Penasquitos
Inc.

 

Heritage
Park

 

Pacific
Gardens
Corp.

 

Eagle Run
Inc.

 

Eagle Run

 

Lakeview

 

Total

 

 
 


 



 



 



 



 



 



 



 



 



 

Financial Position:
 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
Land

 

$

—  

 

$

1,882

 

$

641

 

$

—  

 

$

750

 

$

—  

 

$

—  

 

$

1,191

 

$

947

 

$

5,411

 

 
Buildings

 

 

—  

 

 

4,239

 

 

6,248

 

 

—  

 

 

—  

 

 

—  

 

 

—  

 

 

4,713

 

 

—  

 

 

15,200

 

 
Notes receivable, net

 

 

1,586

 

 

—  

 

 

—  

 

 

—  

 

 

—  

 

 

—  

 

 

—  

 

 

—  

 

 

—  

 

 

1,586

 

 
Other Assets

 

 

—  

 

 

327

 

 

1,149

 

 

—  

 

 

238

 

 

—  

 

 

493

 

 

1,933

 

 

7,209

 

 

11,349

 

 
Notes payable

 

 

—  

 

 

(4,640

)

 

(8,426

)

 

—  

 

 

(940

)

 

—  

 

 

—  

 

 

(7,025

)

 

(6,602

)

 

(27,633

)

 
Other liabilities

 

 

(69

)

 

(614

)

 

(174

)

 

(10

)

 

(48

)

 

—  

 

 

(1,494

)

 

(40

)

 

(1,000

)

 

(3,449

)

 
 

 



 



 



 



 



 



 



 



 



 



 

Net assets
 

$

1,517

 

$

1,194

 

$

(562

)

$

(10

)

$

—  

 

$

—  

 

$

(1,001

)

$

772

 

$

554

 

$

2,464

 

 
 


 



 



 



 



 



 



 



 



 



 

Partner’s equity:
 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
Company

 

$

807

 

$

1,351

 

$

(358

)

$

20

 

$

—  

 

$

—  

 

$

(501

)

$

375

 

$

398

 

$

2,092

 

 
Others

 

 

710

 

 

(157

)

 

(204

)

 

(30

)

 

—  

 

 

—  

 

 

(500

)

 

397

 

 

156

 

 

372

 

 
 

 



 



 



 



 



 



 



 



 



 



 

Total Equity
 

$

1,517

 

$

1,194

 

$

(562

)

$

(10

)

$

—  

 

$

—  

 

$

(1,001

)

$

772

 

$

554

 

$

2,464

 

 
 


 



 



 



 



 



 



 



 



 



 

 

 

 

GLN Capital

 

San Pedro

 

Penasquitos
LLC

 

Penasquitos
Inc.

 

Heritage
Park

 

Pacific
Gardens
Corp.

 

Eagle Run
Inc.

 

Eagle Run

 

Lakeview

 

Total

 

 
 


 



 



 



 



 



 



 



 



 



 

Operations:
 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
Revenues

 

$

—  

 

$

1,169

 

$

657

 

$

—  

 

$

—  

 

$

312

 

$

3,048

 

$

688

 

$

—  

 

$

5,874

 

 
Expenses

 

 

(8

)

 

(962

)

 

(949

)

 

—  

 

 

—  

 

 

—  

 

 

(3,310

)

 

(752

)

 

—  

 

 

(5,981

)

 
 

 



 



 



 



 



 



 



 



 



 



 

Net (loss) income
 

$

(8

)

$

207

 

$

(292

)

$

—  

 

$

—  

 

$

312

 

$

(262

)

$

(64

)

$

—  

 

$

(107

)

 
 


 



 



 



 



 



 



 



 



 



 

Allocation of net (loss) income:
 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
Company

 

$

(4

)

$

207

 

$

(147

)

$

—  

 

$

—  

 

$

312

 

$

(131

)

$

(32

)

$

—  

 

$

205

 

 
Others

 

 

(4

)

 

—  

 

 

(145

)

 

—  

 

 

—  

 

 

—  

 

 

(131

)

 

(32

)

 

—  

 

 

(312

)

 
 

 



 



 



 



 



 



 



 



 



 



 

Net (loss) income
 

$

(8

)

$

207

 

$

(292

)

$

—  

 

$

—  

 

$

312

 

$

(262

)

$

(64

)

$

—  

 

$

(107

)

 
 


 



 



 



 



 



 



 



 



 



 

F-16


Table of Contents

8.     Deferred Charges and Other Assets

          Deferred charges and other assets consist of the following:

 

 

December 31,

 

 

 


 

 
 

2002

 

2001

 

 
 

 


 

 
 

(in thousands)

 

Deferred financing costs
 

$

6,779

 

$

7,467

 

Pre-acquisition costs
 

 

6

 

 

257

 

Leasing commissions
 

 

1,953

 

 

1,974

 

Prepaid expense and other assets
 

 

559

 

 

483

 

 
 


 



 

 
 

 

9,297

 

 

10,181

 

Less accumulated amortization
 

 

(3,348

)

 

(2,872

)

 
 


 



 

Total
 

$

5,949

 

$

7,309

 

 
 


 



 

9.     Notes Payable

 

 

December 31,

 

 

 


 

 
 

Notes payable consist of the following:

 

2002

 

2001

 

 
 

 


 


 

 
 

(in thousands)

 

$7,831,000 Note due April 1, 2008 collateralized by deed of trust, monthly principal and interest payments of $56,000, interest at 7.05% per annum.
 

$

7,207

 

$

7,359

 

$7,500,000 Note due December 11, 2008, collateralized by deed of trust, monthly principal and interest payments of $50,000, interest at 6.90% per annum.
 

 

7,161

 

 

7,255

 

$3,500,000 Secured line of credit due July 13, 2003, interest payable at Prime plus 2.0% per annum.
 

 

2,357

 

 

1,440

 

$8,100,000 Note due April 1, 2008, collateralized by deed of trust, monthly principal and interest payments of $58,000, interest at 7.05% per annum.
 

 

7,456

 

 

7,613

 

$2,475,000 Note due September 1, 2008 collateralized by deed of trust, monthly principal and interest payments of $18,000, interest at 7.49% per annum.
 

 

2,305

 

 

2,349

 

$3,267,000 Note due April 1, 2008 collateralized by deed of trust, monthly principal and interest payments of $23,000, interest at 7.05% per annum.
 

 

3,007

 

 

3,071

 

$5,225,000 Note due January 1, 2019 collateralized by deed of trust, monthly principal and interest payments of $38,209, interest at 6.75% per annum.
 

 

4,661

 

 

4,817

 

$1,333,125 Note due April 1, 2008 collateralized by deed of trust, monthly principal and interest payments of $9,554, interest at 7.05% per annum.
 

 

1,227

 

 

1,253

 

$35,000,000 Note due August 11, 2006, collateralized by deed of trust, monthly payments of $282,000 of principal and interest, interest at 8.492% per annum.
 

 

31,987

 

 

32,585

 

$30,000,000 Note due August 11, 2005, collateralized by deed of trust, monthly principal and interest payments of $229,000, interest at 7.89% per annum.
 

 

26,521

 

 

27,126

 

$11,400,000 Note due September 1, 2034, collateralized by deed of trust, monthly principal and interest payments of $77,000, interest at 8% per annum.
 

 

11,137

 

 

11,220

 

$10,000,000 Note due July 1, 2009 collateralized by deed of trust, monthly principal and interest payments of $58,000, interest at 6.85% per annum.
 

 

9,260

 

 

9,490

 

$1,440,000 Note due July 1, 2009 collateralized by deed of trust, monthly principal and interest payments of $11,000, interest at 7.375% per annum.
 

 

1,360

 

 

1,385

 

$13,920,000 Note due January 1, 2004 collateralized by deed of trust, monthly principal and interest payments at LIBOR plus 4.0% per annum.
 

 

13,168

 

 

13,499

 

$35,000,000 Note due October 29, 2011, monthly principal and interest payable at LIBOR plus 7.50% per annum
 

 

33,095

 

 

34,873

 

F-17


Table of Contents
$7,200,000 Note due on August 1, 2011, collateralized by deed of trust, monthly principal and interest of $50,000, interest at 7.51% per annum
 

 

7,121

 

 

7,182

 

$250,000 Unsecured note due October 1, 2002,  monthly principal and interest payments at  Prime plus 1.0%
 

 

220

 

 

250

 

$8,327,000 Note due May 17, 2037, collateralized by deed of trust, monthly principal and interest payments of $53,000, interest at 6.95% per annum.
 

 

8,296

 

 

—  

 

$11,941,000 Note due January 1, 2027, collateralized by deed of trust, monthly principal and interest payments of $85,000, interest at 7.05% per annum.
 

 

11,773

 

 

—  

 

$4,300,000 Note due July 1, 2005, collateralized by deed of trust, monthly principal and interest payments of $27,000, interest at LIBOR plus 4.5% per annum.
 

 

4,300

 

 

—  

 

$483,000 Unsecured promissory note due May 17, 2017, interest rate of 8.0% per annum, monthly principal and interest payments of $4,600.
 

 

473

 

 

—  

 

$7,500,000 Note due January 21, 2002 collateralized by deed of trust, monthly principal and interest payments at Prime plus 0.75% per annum.
 

 

—  

 

 

2,342

 

$8,500,000 Note due January 1, 2002, collateralized by deed of trust, monthly principal and interest payments at LIBOR plus 2.75% per annum.
 

 

—  

 

 

8,275

 

$2,100,000 Note due November 1, 2002, collateralized by deed of trust, monthly principal and interest payments at LIBOR plus 3.40% per annum.
 

 

—  

 

 

2,044

 

$800,000 Unsecured note due May 1, 2006, monthly principal and interest payments of $5,600, interest at 7.50% per annum.
 

 

—  

 

 

785

 

$950,000 Note due May 1, 2006, collateralized by a second deed of trust, monthly principal and interest payments of $7,300, interest at 8.50% per annum.
 

 

—  

 

 

936

 

 
 


 

 

 

 

$5,800,000 Note due in 2006, collateralized by deed of trust, monthly principal and interest payments of $48,000, interest at 8.30% per annum.
 

 

—  

 

 

5,549

 

 
 


 



 

Total
 

$

194,092

 

$

192,698

 

 
 


 



 

          As of December 31, 2002, 30-day LIBOR was 1.382% and the prime rate was 4.25%.

          Aggregate future principal payments as of December 31, 2002 are as follows:

Years Ending December 31

 

 

 

 


 

 

 

 

(in thousands)
 

 

 

 

2003
 

$

20,263

 

2004
 

 

9,251

 

2005
 

 

30,098

 

2006
 

 

34,671

 

2007
 

 

5,239

 

Thereafter
 

 

94,570

 

 
 


 

 
Total

 

$

194,092

 

 
 

 



 

10.     Commitments and Contingencies

          Neither the Company, the Operating Partnership, the Financing Entities, the Subsidiaries, Maryland Gardens, the Roxbury Partnership, Valencia, Pacific Gardens, Hoquiam, Lyons, Coronado, Tarzana, Heritage, Massachusetts, Aspen, Tustin II, Tustin III, St. Thomas More, the Unconsolidated Affiliates nor any of the assets within their portfolios of MOBs, parking facilities, and retail space (the “Properties”) is currently a party to any material litigation, except as discussed below.

          In February 2000, the Operating Partnership filed a declaratory relief action in the New Jersey State Court seeking a determination that LaSalle National Bank (“LaSalle”) did not have any rights against certain assets held by the Operating Partnership.  In December 2001, the Operating Partnership entered a settlement agreement with LaSalle whereby it would pay LaSalle $1.1 million and assign certain claims in full satisfaction of any amounts

F-18


Table of Contents

owed by the Operating Partnership to LaSalle.  The Operating Partnership paid the $1.1 million to LaSalle in January 2002.

          In November 1999, Landmark Healthcare Facilities, LLC (“Landmark”) filed a lawsuit against Valencia, a subsidiary of the Company, entitled Landmark Healthcare Facilities, LLC v. G&L Valencia, LLC, case number 816391 in the Superior Court of California, County of Orange, claiming that Landmark is entitled to approximately $600,000 plus interest under an agreement for the development of an MOB in Valencia, California.  In December 1999, the Company filed a counter suit to recover approximately $400,000 plus interest that was already paid under the development agreement and for a judgment and declaration that all of Landmark’s rights, title and interest in Valencia have been terminated or assigned to the Company.  On July 5, 2001, the court issued a ruling in favor of the Company in an amount in excess of $900,000.  In January 2002, the Company accepted a settlement offer for $310,000 to be paid off over 10 months.    The Company was repaid in full in May 2002.

           In January 2001, the Company settled a lawsuit with Cigna Healthcare, Inc and Cigna Healthcare of California (“Cigna”) and received a settlement of $4.1 million.  The settlement ended litigation against Cigna for delinquent rent, future rent and other amounts owed under a lease at the Company’s MOB located in Irwindale, California.   Due to this settlement, the Company recorded lease termination income of $2.6 million in the first quarter of 2001.

          There are a number of stockholder class actions pending against the Company and its directors that arose out of the proposal by Daniel M. Gottlieb, the Chief Executive Officer of the Company, and Steven D. Lebowitz, the President of the Company, to acquire all of the outstanding shares of the Company’s common stock not then owned by them.  The first suit, Lukoff v. G & L Realty Corp. et al., case number BC 241251, was filed in the Superior Court for the State of California, County of Los Angeles, on December 4, 2000.  A second suit, Abrons v. G & L Realty Corp. et al., case number 24-C-00-006109, was filed in the Circuit Court for Baltimore City, Maryland, on December 14, 2000.  This suit was voluntarily dismissed without prejudice on June 7, 2001, and re-filed in the Superior Court for the State of California, County of Los Angeles, case number BC 251479, on May 31, 2001.  Morse v. G & L Realty Corp. et al., case number 221719-V, was filed in the Circuit Court for Montgomery County, Maryland, on May 17, 2001.  Another suit, Harbor Finance Partners v. Daniel M. Gottlieb et al., case number BC 251593, was filed in the Superior Court for the State of California, County of Los Angeles, on June 1, 2001.  In addition, a group of four individual shareholders who sought to acquire the Company also filed suit against the Company and its directors arising out of the same conduct alleged in the class actions.  This suit, Lyle Weisman, et al. v. G & L Realty Corp., et al., case number BC 271401, was filed in the Superior Court of California, County of Los Angeles, on April 4, 2002.  On January 17, 2003, the Company filed a cross-complaint against the Weisman plaintiffs alleging causes of action for intentional interference with contract and prospective economic advantage, fraud, negligent misrepresentation and unfair competition.  All these actions assert claims for breach of fiduciary duty and seek compensatory damages and other relief.  The Lukoff, Abrons and Harbor Finance actions have been consolidated for all purposes and the Morse action has been stayed by stipulation of the parties subject to approval of the court.  These lawsuits are covered by $5 million of directors and officer’s liability insurance.

          The Company is the guarantor on a $300,000 letter of credit in favor of NVHF Affiliates, LLC (“NVHF”), a non-profit low-income apartment owner.  In December 1999, the Company purchased $1.3 million of subordinated bonds issued by NVHF for the acquisition of an apartment complex located in Tulsa, Oklahoma.  In order to facilitate the acquisition of the property, the Company agreed to guarantee a letter of credit issued by the Bank of Oklahoma.  The letter of credit was established to pay the interest payments on the secured debt of the property in the event the cash flow of the property was insufficient to meet such payments.  To date, the letter of credit has not been accessed and the property is current on its interest payments to all debt holders.  The Company’s maximum liability under the guarantee is $300,000, although the Company does not anticipate having to pay anything under this letter of credit.  As such, the Company has recorded no liability on its balance sheet related to this guarantee as of December 31, 2002.  In addition, the Company holds an unsecured promissory note from NVHF in the amount of $562,000.   The Company has held the note for almost three years and NVHF is current on all payments due under the terms of the note.

          As of March 29, 2003, a joint venture in which the Company is a 50% owner was under contract to purchase a psychiatric facility located in Aliso Viejo, California for $5.5 million.  As part of the joint venture agreement, the Company is required to contribute 75% of the equity capital to the joint venture in order to purchase and substantially remodel the psychiatric facility.  The Company estimated its capital commitment related to this joint venture to be approximately $1 million over the next 18 months.

F-19


Table of Contents

11.     Stockholders’ Equity

          In May 1997, the Company issued 1,495,000 shares of the 10.25% Series A Preferred Stock, from which it received net proceeds of $35.4 million.   In November 1997, the Company issued 1,380,000 shares of 9.8% Series B Preferred Stock and received net proceeds of $32.6 million.   The Company’s preferred stock has no stated maturity, is not subject to any sinking fund requirements and is not convertible into or exchangeable for any property or other securities of the Company.  The Company, at its sole discretion, may call the Series A and Series B Preferred Stock at any time after June 1, 2001 and January 1, 2002, respectively.  All classes of the Company’s preferred stock have a par value of $0.01 and rank senior to the Company’s common stock with respect to payment of dividends and upon liquidation.  All classes of Preferred Stock are on parity with all other classes of the Company’s Preferred Stock for payment of dividends and liquidation purposes.  In the event of liquidation, or if the Company elects to call the Preferred Stock, holders of the Company’s Preferred Stock are entitled to receive $25.00 per share plus any accrued and unpaid dividends, whether or not such dividends have been declared by the Company’s Board of Directors.  Holders of the Company’s Series A Preferred Stock are entitled to receive monthly dividends at an annual rate of $2.56 per share.  Series B Preferred Stockholders are entitled to receive monthly dividends at an annual rate of $2.45 per share.

          On October 29, 2001, the Company completed a merger with G & L Acquisition, LLC, a Maryland limited liability company, substantially on the terms provided for in the Agreement of Plan and Merger, dated as of May 10, 2001, as amended, by and between the Company and G & L Acquisition, LLC (the “Merger”).  The Company was the survivor in the Merger.  G & L Acquisition, LLC was owned by Daniel M. Gottlieb and Steven D. Lebowitz, Chief Executive Officer and President, respectively, of the Company.  Upon completion of the Merger, each outstanding share of the Company’s Common Stock, other than a portion of the shares held by Messrs. Gottlieb and Lebowitz, was converted into the right to receive $13.00 in cash, without interest.  After completion of the Merger, the Company’s Common Stock was delisted from the New York Stock Exchange.

          In order to fund the Merger and related transactions, Messrs. Gottlieb and Lebowitz obtained a loan from GMAC Commercial Mortgage Corporation (“GMAC”) in the amount of $35 million (the “Loan”).  Immediately following the completion of the Merger on October 29, 2001, the Operating Partnership became the borrower under the Loan.  The Loan is for ten years and bears interest initially at the 30 day London Interbank Offered Rate (“LIBOR”) plus 7.5%.  The interest rate spread over 30 day LIBOR can be reduced to as low as 5.5% based on the outstanding balance on the Loan and if the Operating Partnership meets certain debt service covenant ratios.  As interest rate protection, the Operating Partnership purchased a LIBOR cap on November 8, 2001 for $905,000 which caps the maximum 30 day LIBOR rate at 4.25% for five years in determining the interest due on the Loan.   For the year ended December 31, 2001, the Company recognized a $0.5 million gain on the fair market value of its LIBOR interest rate cap while recognizing a $1.0 million loss for the year ended December 31, 2002.

          In order to secure the Loan, the Company, the Operating Partnership and Messrs. Gottlieb and Lebowitz have granted GMAC a security interest in, among other things, all accounts, chattel paper, documents, general intangibles, investment property and security entitlements of the Company and the Operating Partnership and all hedging agreements entered into by Messrs. Gottlieb and Lebowitz, the Company or the Operating Partnership.  The Company, the Operating Partnership and Messrs. Gottlieb and Lebowitz have also granted GMAC a pledge of (a) all promissory notes made by any of the Company, the Operating Partnership, any MOB subsidiary, Messrs. Gottlieb and Lebowitz or an affiliate of Messrs. Gottlieb and Lebowitz in favor of the Company or the Operating Partnership, (b) all partnership units of the Operating Partnership owned by the Company or by Messrs. Gottlieb and Lebowitz or their affiliates, together with any other share certificates, options or rights of any nature in respect of the partnership units of the Operating Partnership that may be issued or granted to, or held by, the Company, the Operating Partnership or Messrs. Gottlieb and Lebowitz while the Loan is in effect and (c) all Common Stock of the Company owned by Messrs. Gottlieb and Lebowitz or their affiliates together with any other share certificates, options or rights of any nature in respect of the Common Stock of the Company that may be issued or granted to, or held by, the Company, the Operating Partnership, or Messrs. Gottlieb and Lebowitz while the Loan is in effect.

          The Operating Partnership used $28.1 million of the Loan proceeds to fund the Merger consideration of $13.00 per share for each outstanding share of the Company’s Common Stock, other than a portion of the shares held by Messrs.

F-20


Table of Contents

Gottlieb and Lebowitz.  The Operating Partnership loaned $5.2 million of the Loan proceeds to Messrs. Gottlieb and Lebowitz to fund a $3.5 million tender offer for the Company’s Series A and Series B Preferred Stock  and to repay $1.7 million of personal debt.  For purposes of presentation in these consolidated financial statements, the $5.2 million loaned to Messrs. Gottlieb and Lebowitz and been shown as a deduction to stockholders’ equity.  The remaining Loan proceeds were used to purchase the LIBOR cap described above and to pay fees and other costs associated with the Loan.

          Immediately prior to the Merger, the Company created a new partnership named G&L Senior Care Partnership, L.P. (the “Senior Care Partnership”) and the Operating Partnership transferred its interest in Maryland Gardens, GL/PHP, Hampden, Pacific Gardens, Hoquiam, Tarzana, Heritage, Massachusetts, Aspen, GLN, Penasquitos LLC, Penasquitos Inc., Eagle Run, Eagle Run Inc., Lakeview and Heritage to the Senior Care Partnership.  In addition, the Operating Partnership also transferred its direct ownership of a 183-bed hospital in Tustin, California along with the debt secured by this property, a 20-unit apartment complex in Phoenix, Arizona and all of its mortgage and notes receivable outstanding to the Senior Care Partnership.  The creation of the Senior Care Partnership and the transfer of the Company’s Non-MOB assets to this partnership were part of the terms and conditions of the Loan.

          Also immediately prior to the Merger, two of the limited partners of the Operating Partnership traded their limited partnership units back to the Operating Partnership in exchange for an increased limited partnership interest in the Roxbury Partnership.  This exchange decreased the Operating Partnership’s interest in the Roxbury Partnership from 61.75% to 32.81%.

          Distributions in excess of net income-- As described in Note 2, the Company has elected to be treated as a REIT for Federal income tax purposes.  As such, the Company is required to distribute at least 90% of its annual taxable income.

          For the years ended December 31, 2002, 2001 and 2000, cash distributed in the form of dividends to holders of the Company’s Common Stock exceeded the Company’s taxable income and is therefore considered to be a return of capital.  In 2002, 2001 and 2000, 100% of the Company’s dividend was considered a return of capital to common stockholders.  In 2002, dividends paid to holders of the Company’s preferred stock were considered a 40.8% return of capital to preferred stockholders, 32.9% taxable as long-term capital gain, 3.4% taxable as Section 1250 unrecaptured gain on sale and the remaining 22.9% taxable as ordinary income.  In 2001, dividends paid to holders of the Company’s preferred stock were considered a 26.1% return of capital to preferred stockholders.  In previous years, the dividends paid to holders of the Company’s preferred stock were fully taxable as ordinary income.

12.     Stock Incentive Plan

          Until October 29, 2001, the Company had a stock incentive plan under which an aggregate of 209,500 shares of the Company’s Common Stock were reserved for issuance.  Options were granted at per share amounts not less than fair market value at the date of grant and expire ten years thereafter.  Granted options vested in even increments over a two or three year period beginning one year from the grant date.  The Company does not charge the estimated compensation cost of options granted against income.  Compensation cost is estimated to be the fair value of all options granted based on the Binomial option-pricing model.  Based upon the stock price at the date of grant, the costs associated with options granted in the year ended December 31, 2000 is $88,000.  If the compensation costs had been charged against income at the time of vesting, adjusted for shares exercised and canceled during the period, the Company’s net income and earnings per share would have been reduced to the pro forma amounts indicated below:

 

 

Year Ended December 31,

 

 
 

2002

 

2001

 

2000

 

 
 

 


 


 

 
 

(in thousands, except per share amounts)

 

Net Income (Loss):
 

 

 

 

 

 

 

 

 

 

 
As reported

 

$

4,489

 

$

6,130

 

$

1,149

 

 
Pro forma

 

 

N/A

 

 

N/A

 

$

1,061

 

 
 

 

 

 

 

 

 

 

 

 

Loss per share:
 

 

 

 

 

 

 

 

 

 

F-21


Table of Contents
 
As reported:

 

 

 

 

 

 

 

 

 

 

 
Basic

 

 

N/A

 

 

N/A

 

$

(2.53

)

 
Fully diluted

 

 

N/A

 

 

N/A

 

$

(2.53

)

Pro forma:
 

 

 

 

 

 

 

 

 

 

 
Basic

 

 

N/A

 

 

N/A

 

$

(2.57

)

 
Fully diluted

 

 

N/A

 

 

N/A

 

$

(2.57

)

          Pursuant to the merger agreement dated October 29, 2001, each outstanding option has been cancelled.  The agreement provided that each option holder would be entitled to receive a cash amount equal to $13.00 less the exercise price for each share of common stock subject to the option, payable after the effective time of the merger for a vested or unvested option.  In addition, upon the execution of the merger agreement, all unvested options held by Daniel M. Gottlieb and Steven D. Lebowitz became fully vested and exercisable.  During 2001, the amount paid by the Company to cancelled option holders was approximately $683,000. 

          A summary of the status of the Company’s stock incentive plan as of December 31, 2001 and 2000, and changes during the years ending on those dates is presented in the following table.  The average price presented below represents the weighted average exercise price based upon the market value at the grant date.

 

 

2001

 

2000

 

 

 


 


 

 

 

Shares

 

Average
Price

 

Shares

 

Average
Price

 

 
 


 



 



 



 

Outstanding, Beginning of year
 

 

250,000

 

$

11.16

 

 

151,000

 

$

12.88

 

 
Granted

 

 

—  

 

 

—  

 

 

102,000

 

 

8.85

 

 
Exercised

 

 

—  

 

 

—  

 

 

—  

 

 

—  

 

 
Forfeited or canceled

 

 

(250,000

)

 

11.16

 

 

(3,000

)

 

18.92

 

 
 


 



 



 



 

Outstanding, End of year
 

 

—  

 

 

—  

 

 

250,000

 

$

11.16

 

 
 


 



 



 



 

Options exercisable At year-end
 

 

—  

 

 

—  

 

 

172,882

 

$

16.11

 

Weighted-average fair value of options granted during the year
 

 

—  

 

 

—  

 

$

2.60

 

 

 

 

Fair value of options- The Company estimated the fair value of the options granted in 2000 based on the following assumptions:

 

 

Year Ended December 31,
2000

 

 
 

 

Risk-free interest rate
 

 

4.98

%

Expected life of the option
 

 

3 years

 

Expected volatility of stock
 

 

50.00

%

Expected dividends
 

$

0.50

 

          The Company assumes that the equivalent risk-free interest rate is the closing market rate, on the last trading day of the year, for three-year treasury bills.

          The Company’s stock incentive plan was introduced in conjunction with its initial public offering on December 16, 1993.  Based upon the number of options exercised and cancelled since the inception of the plan, the Company assumed the estimated life of the outstanding option agreements to be three years.

F-22


Table of Contents

13.     Concentration of Credit Risk

          The Company is subject to the all risks associated with leasing property, including but not limited to, the risk that upon the expiration of leases for space located in the Company’s properties, the leases may not be renewed, the space may not be re-leased or the terms of renewal or re-leasing (including any cost of required renovations or concessions to tenants) may be less favorable than current lease terms.  If the Company is unable to promptly re-lease or renew leases for a significant portion of its space or if the rental rates upon renewal or re-leasing are significantly lower than expected, the Company’s earnings and the ability to make distributions to stockholders may be adversely affected.  Most of the tenants in the Company’s healthcare properties provide specialized health care services.  The ability of the tenants to honor the terms of their respective leases is dependent upon the economic, regulatory and social factors affecting the communities and industry in which the tenants operate.

          Many of the Company’s medical office properties are in close proximity to one or more local hospitals.  Relocation or closure of a local hospital could make the Company’s nearby properties (particularly those outside of the Beverly Hills area) less desirable to doctors and healthcare providers affiliated with the hospital and affect the Company’s ability to collect rent due under existing leases, renew leases and attract new business.  

          A portion of the Company’s assets are invested in debt instruments secured by long-term senior care or skilled nursing facilities.  The ability of the facility owners to pay their obligations as they come due, as well as their ability to obtain other permanent financing through the sale of bonds or other forms of long-term financing is dependent upon their ability to attract patients who are able to pay for the services they require.  These facilities have complex licensing requirements as do the professionals they employ.  The majority of the services rendered are paid by various federal, state and local agencies.  Each of these facilities function in a complex environment of changing government regulations which have a significant impact on economic viability.

          G&L Hampden, LLC, a wholly owned subsidiary of the Company, acquired three SNFs in Massachusetts on October 28, 1997 from Hampden Nursing Homes, Inc. (“HNH”), a nonprofit corporation. Lenox Healthcare, Inc. (“Lenox”) managed the three facilities from October 1998 through December 1999.  In November 1999, Lenox filed for bankruptcy protection.  The Company immediately moved to replace Lenox as the manager of the nursing homes.  In January 2000, the Company received the bankruptcy court’s permission to replace Lenox as the manager and a new management firm, a subsidiary of Roush & Associates (“Roush”), was immediately retained.  Although Lenox managed these Massachusetts nursing homes, HNH held the licenses necessary to operate the facilities.  In March 2000, the Company successfully transferred the licenses to G&L Massachusetts, LLC, a subsidiary of the Operating Partnership.  Revenue from the three Massachusetts nursing homes represented approximately 39.4% of the Company’s total revenues in 2002.  Roush is an experienced skilled nursing facility operator and the Company’s management believes that Roush will be able to profitably manage these facilities for the Company; however, the financial position of the Company, and its ability to make expected distributions to stockholders, may be adversely affected in the event that Roush experiences financial difficulties.

          In addition to the nursing homes in Massachusetts, the Company owns other ALF and SNF Properties that it leases to operators.  All of the leases are for five years or less with non-credit tenants.  In the event that the operators of these facilities are unable to effectively operate the facilities, the ability of the operators to make rental payments to the Company may become impaired and the Company may need to commit additional capital to the facility in order to keep it operating.  If any of these operators experience financial difficulty, the financial position of the Company and the ability of the Company to make expected distributions may be adversely affected.

14.     Segment Information

           The Company’s business currently consists of the following segments:

 

Medical office buildings – These investments consist of 23 high quality MOBs, two retail facilities and one parking facility totaling approximately 857,000 rentable square feet and all located in Southern California.  These properties are owned either directly by the Company or indirectly through joint ventures.

F-23


Table of Contents

 

Skilled nursing facilities – These investments consist of eight SNFs and one senior apartment complex which is located adjacent to the SNF in Phoenix, Arizona.  The SNFs are located in Hampden, Massachusetts; Phoenix, Arizona; Hoquiam, Washington; Hyattsville, Maryland and Chico, California.  Seven of the SNFs and the apartment complex are owned 100% by the Company.  On April 10, 2002, the Company acquired, through a joint venture, a 75% interest in a 120-bed SNF in Massachusetts.  In addition, the Company currently holds the operating license in three of the eight SNFs.  On March 15, 2000, the Company obtained licenses from the Commonwealth of Massachusetts to operate the three SNFs owned by the Company in Hampden, Massachusetts.  The Company then entered into a management agreement with a third-party company to manage the facility.  As a result, all of the assets, liabilities, revenues and expenses of these SNFs are reflected in the consolidated financial statements of the Company and the segment information provided below.  The Company will be required to pay the applicable corporate income tax on any net income produced by the SNFs located in Hampden, Massachusetts, although the Company’s REIT status will not be affected. While the Company does not intend to hold these operating licenses for the long term, the Company believes it is currently in the best interests to own the licenses to operate these facilities.

 

 

 

 

Assisted living facilities  – These investments consist of five ALFs, all owned through joint ventures.  The five ALFs contain over 350 units that are typically occupied by residents who require a less intense level of care in comparison to the SNFs.

 

 

 

 

Debt obligations – These investments consist of short-term secured and unsecured loans made to third parties to facilitate the acquisition of healthcare facilities.  As of December 31, 2002, the Company had seven loans outstanding with a net book value of $1.8 million.

                       The tables on the following pages reconcile the Company’s income and expense activity for the years ending December 31, 2002, 2001 and 2000 and balance sheet data as of December 31, 2002 and 2001. 

F-24


Table of Contents

2002 Reconciliation of Reportable Segment Information

 

 

Medical
Office

 

Skilled
Nursing

 

Assisted
Living

 

Debt
Obligations

 

Other

 

Total

 

 
 


 



 



 



 



 



 

 
 

(In thousands)

 

Revenue:
 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
Rents, tenant reimbursements and parking

 

$

27,941

 

$

2,556

 

$

2,907

 

$

—  

 

$

—  

 

$

33,404

 

 
Patient revenues

 

 

—  

 

 

24,261

 

 

—  

 

 

—  

 

 

—  

 

 

24,261

 

 
Interest and loan fees

 

 

41

 

 

33

 

 

1

 

 

2,345

 

 

39

 

 

2,459

 

 
Other income

 

 

605

 

 

762

 

 

—  

 

 

—  

 

 

66

 

 

1,433

 

 
 

 



 



 



 



 



 



 

 
Total revenues

 

 

28,587

 

 

27,612

 

 

2,908

 

 

2,345

 

 

105

 

 

61,557

 

 
 

 



 



 



 



 



 



 

Expenses:
 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
Property operations

 

 

7,921

 

 

508

 

 

209

 

 

143

 

 

—  

 

 

8,781

 

 
Skilled nursing operations

 

 

—  

 

 

21,421

 

 

—  

 

 

—  

 

 

—  

 

 

21,421

 

 
Depreciation and amortization

 

 

4,339

 

 

1,387

 

 

514

 

 

—  

 

 

42

 

 

6,282

 

 
Interest

 

 

8,682

 

 

1,959

 

 

2,264

 

 

150

 

 

4,294

 

 

17,349

 

 
Provision for doubtful accounts, notes and bonds receivable

 

 

10

 

 

993

 

 

450

 

 

89

 

 

—  

 

 

1,542

 

 
General and administrative

 

 

—  

 

 

—  

 

 

—  

 

 

—  

 

 

3,280

 

 

3,280

 

 
 

 



 



 



 



 



 



 

 
Total expenses

 

 

20,952

 

 

26,268

 

 

3,437

 

 

382

 

 

7,616

 

 

58,655

 

 
 

 



 



 



 



 



 



 

Income (loss) from operations
 

 

7,635

 

 

1,344

 

 

(529

)

 

1,963

 

 

(7,511

)

 

2,902

 

Equity in earnings (loss) of unconsolidated affiliates
 

 

218

 

 

43

 

 

(406

)

 

5

 

 

—  

 

 

(140

)

 
Corporate tax expense

 

 

—  

 

 

(295

)

 

—  

 

 

—  

 

 

—  

 

 

(295

)

 
 


 



 



 



 



 



 

Income (loss) from operations before minority interests
 

$

7,853

 

$

1,092

 

$

(935

)

$

1,968

 

$

(7,511

)

$

2,467

 

 
 


 



 



 



 



 



 

2002 Reconciliation of Reportable Segment Information

 

 

Medical
Office

 

Skilled
Nursing

 

Assisted
Living

 

Debt
Obligations

 

Other

 

Total

 

 
 


 



 



 



 



 



 

 
 

(In thousands)

 

Rental properties
 

$

109,715

 

$

39,148

 

$

20,927

 

$

—  

 

$

172

 

$

169,962

 

Mortgage loans and notes receivable, net
 

 

—  

 

 

268

 

 

—  

 

 

1,561

 

 

—  

 

 

1,829

 

Cash and cash equivalents
 

 

1,444

 

 

778

 

 

(108

)

 

—  

 

 

252

 

 

2,366

 

Restricted cash
 

 

2,077

 

 

917

 

 

213

 

 

—  

 

 

60

 

 

3,267

 

Tenant rent and reimbursement receivable, net
 

 

375

 

 

4,008

 

 

2,436

 

 

—  

 

 

495

 

 

7,314

 

Unbilled rent receivable, net
 

 

3,182

 

 

—  

 

 

—  

 

 

—  

 

 

—  

 

 

3,182

 

Investment in unconsolidated affiliates
 

 

932

 

 

1,218

 

 

1,989

 

 

—  

 

 

—  

 

 

4,139

 

Deferred financing costs, net
 

 

3,337

 

 

747

 

 

553

 

 

—  

 

 

—  

 

 

4,637

 

Pre-acquisition costs
 

 

6

 

 

—  

 

 

—  

 

 

—  

 

 

—  

 

 

6

 

Deferred lease costs, net
 

 

747

 

 

—  

 

 

—  

 

 

—  

 

 

—  

 

 

747

 

Prepaid expense and other
 

 

283

 

 

233

 

 

43

 

 

—  

 

 

—  

 

 

559

 

 
 


 



 



 



 



 



 

 
Total assets

 

$

122,098

 

$

47,317

 

$

26,053

 

$

1,561

 

$

979

 

$

198,008

 

 
 

 



 



 



 



 



 



 

F-25


Table of Contents

2001 Reconciliation of Reportable Segment Information

 

 

Medical
Office

 

Skilled
Nursing

 

Assisted
Living

 

Debt
Obligations

 

Other

 

Total

 

 
 


 



 



 



 



 



 

 
 

(In thousands)

 

Revenue:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
Rents, tenant reimbursements and parking

 

$

25,815

 

$

1,266

 

$

2,743

 

$

—  

 

$

—  

 

$

29,824

 

 
Patient revenues

 

 

—  

 

 

21,057

 

 

—  

 

 

—  

 

 

—  

 

 

21,057

 

 
Interest and loan fees

 

 

130

 

 

37

 

 

2

 

 

1,906

 

 

726

 

 

2,801

 

 
Lease termination income

 

 

2,613

 

 

—  

 

 

—  

 

 

—  

 

 

—  

 

 

2,613

 

 
Other income

 

 

265

 

 

753

 

 

—  

 

 

794

 

 

59

 

 

1,871

 

 
 

 



 



 



 



 



 



 

 
Total revenues

 

 

28,823

 

 

23,113

 

 

2,745

 

 

2,700

 

 

785

 

 

58,166

 

 
 

 



 



 



 



 



 



 

Expenses:
 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
Property operations

 

 

7,789

 

 

554

 

 

174

 

 

94

 

 

—  

 

 

8,611

 

 
Skilled nursing operations

 

 

—  

 

 

19,004

 

 

—  

 

 

—  

 

 

—  

 

 

19,004

 

 
Depreciation and amortization

 

 

4,466

 

 

987

 

 

511

 

 

—  

 

 

48

 

 

6,012

 

 
Interest

 

 

9,119

 

 

1,307

 

 

1,517

 

 

671

 

 

635

 

 

13,249

 

 
Provision for doubtful accounts, notes and bonds receivable

 

 

83

 

 

850

 

 

—  

 

 

71

 

 

—  

 

 

1,004

 

 
General and administrative

 

 

—  

 

 

—  

 

 

—  

 

 

—  

 

 

3,953

 

 

3,953

 

 
 

 



 



 



 



 



 



 

 
Total expenses

 

 

21,457

 

 

22,702

 

 

2,202

 

 

836

 

 

4,636

 

 

51,833

 

 
 

 



 



 



 



 



 



 

Income (loss) from operations
 

 

7,366

 

 

411

 

 

543

 

 

1,864

 

 

(3,851

)

 

6,333

 

Equity in earnings (loss) of unconsolidated affiliates
 

 

207

 

 

—  

 

 

2

 

 

(4

)

 

—  

 

 

205

 

Corporate tax expense
 

 

—  

 

 

(85

)

 

—  

 

 

—  

 

 

—  

 

 

(85

)

 
 


 



 



 



 



 



 

Income (loss) from operations before minority interests
 

$

7,573

 

$

326

 

$

545

 

$

1,860

 

$

(3,851

)

$

6,453

 

 
 


 



 



 



 



 



 

 

2001 Reconciliation of Reportable Segment Information

 

 

Medical
Office

 

Skilled
Nursing

 

Assisted
Living

 

Debt
Obligations

 

Other

 

Total

 

 

 
 


 



 



 



 



 



 

 

(In thousands)

 

 

Rental properties
 

$

114,067

 

$

30,419

 

$

21,322

 

$

—  

 

$

201

 

$

166,009

 

 

Mortgage loans and notes receivable, net
 

 

—  

 

 

297

 

 

—  

 

 

11,679

 

 

—  

 

 

11,976

 

 

Cash and cash equivalents
 

 

31

 

 

95

 

 

260

 

 

—  

 

 

1,653

 

 

2,039

 

 

Restricted cash
 

 

2,780

 

 

581

 

 

19

 

 

872

 

 

—  

 

 

4,252

 

 

Tenant rent and reimbursement receivable, net
 

 

349

 

 

4,017

 

 

1,263

 

 

125

 

 

424

 

 

6,178

 

 

Unbilled rent receivable, net
 

 

2,633

 

 

28

 

 

—  

 

 

—  

 

 

—  

 

 

2,661

 

 

Other receivables, net
 

 

(7

)

 

—  

 

 

—  

 

 

—  

 

 

26

 

 

19

 

 

Investment in unconsolidated affiliates
 

 

1,422

 

 

—  

 

 

2,285

 

 

874

 

 

—  

 

 

4,581

 

 

Deferred financing costs, net
 

 

4,584

 

 

392

 

 

412

 

 

293

 

 

—  

 

 

5,681

 

 

Pre-acquisition costs
 

 

—  

 

 

—  

 

 

—  

 

 

135

 

 

122

 

 

257

 

 

Deferred lease costs, net
 

 

885

 

 

4

 

 

—  

 

 

—  

 

 

—  

 

 

889

 

 

Prepaid expense and other
 

 

116

 

 

306

 

 

43

 

 

—  

 

 

17

 

 

482

 

 

 
 


 



 



 



 



 



 

 

 
Total assets

 

$

126,860

 

$

36,139

 

$

25,604

 

$

13,978

 

$

2,443

 

$

205,024

 

 

 
 

 



 



 



 



 



 



 

 

F-26


Table of Contents

2000 Reconciliation of Reportable Segment Information

 

 

Medical
Office

 

Skilled
Nursing

 

Assisted
Living

 

Debt
Obligations

 

Other

 

Total

 

 
 


 



 



 



 



 



 

 
 

(In thousands)

 

Revenue:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
Rents, tenant reimbursements and parking

 

$

24,741

 

$

964

 

$

2,588

 

$

—  

 

$

—  

 

$

28,293

 

 
Patient revenues

 

 

—  

 

 

17,820

 

 

—  

 

 

—  

 

 

—  

 

 

17,820

 

 
Interest and loan fees

 

 

246

 

 

10

 

 

—  

 

 

2,198

 

 

74

 

 

2,528

 

 
Net gain (loss) on sale of assets

 

 

1,405

 

 

(142

)

 

—  

 

 

—  

 

 

—  

 

 

1,263

 

 
Other income

 

 

147

 

 

339

 

 

—  

 

 

—  

 

 

60

 

 

546

 

 
 

 



 



 



 



 



 



 

 
Total revenues

 

 

26,539

 

 

18,991

 

 

2,588

 

 

2,198

 

 

134

 

 

50,450

 

 
 

 



 



 



 



 



 



 

Expenses:
 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
Property operations

 

 

6,999

 

 

475

 

 

150

 

 

174

 

 

—  

 

 

7,798

 

 
Skilled nursing operations

 

 

—  

 

 

16,548

 

 

—  

 

 

—  

 

 

—  

 

 

16,548

 

 
Depreciation and amortization

 

 

4,502

 

 

857

 

 

492

 

 

—  

 

 

64

 

 

5,915

 

 
Interest

 

 

9,165

 

 

1,855

 

 

1,530

 

 

877

 

 

130

 

 

13,557

 

 
General and administrative

 

 

—  

 

 

—  

 

 

—  

 

 

—  

 

 

2,892

 

 

2,892

 

 
 

 

 

 

 



 

 

 

 

 

 

 

 

 

 



 

 
Provision for doubtful accounts and notes receivable

 

 

—  

 

 

563

 

 

—  

 

 

1,725

 

 

—  

 

 

2,288

 

 
 


 



 



 



 



 



 

 

 
Total expenses

 

 

20,666

 

 

20,298

 

 

2,172

 

 

2,776

 

 

3,086

 

 

48,998

 

 
 

 



 



 



 



 



 



 

Income (loss) from operations
 

 

5,873

 

 

(1,307

)

 

416

 

 

(578

)

 

(2,952

)

 

1,452

 

 

 
 

 

 

 



 

 

 

 

 

 

 

 

 

 



 

 

Equity in earnings (loss) of unconsolidated affiliates
 

 

122

 

 

(8

)

 

(520

)

 

(11

)

 

—  

 

 

(417

)

 

 
 


 



 



 



 



 



 

 

Income (loss) from operations before minority interests
 

$

5,995

 

$

(1,315

)

$

(104

)

$

(589

)

$

(2,952

)

$

(1,035

)

 

 
 


 



 



 



 



 



 

 

15.     Related Party Transactions

          On February 7, 2000, the board of directors of the Company unanimously approved the guarantee of a $500,000 line of credit from Tokai Bank to each of Daniel M. Gottlieb and Steven D. Lebowitz, both directors and officers of the Company, for a total of $1 million.  The guarantee was canceled in October 2001.   In addition, on February 29, 2000, the board of directors granted 50,000 non-qualified Common Stock options to each of Messrs. Gottlieb and Lebowitz.  The exercise price of the options was $8.875, the closing price of the Company’s Common Stock on February 29, 2000.

          On October 29, 2001, the Company completed a merger with G & L Acquisition, LLC, a Maryland limited liability company, substantially on the terms provided for in the Agreement of Plan and Merger, dated as of May 10, 2001, as amended, by and between the Company and G & L Acquisition, LLC (the “Merger”).  The Company was the survivor in the Merger.  G & L Acquisition, LLC was owned by Daniel M. Gottlieb and Steven D. Lebowitz, Chief Executive Officer and President, respectively, of the Company.  Upon completion of the Merger, each outstanding share of the Company’s Common Stock, other than a portion of the shares held by Messrs. Gottlieb and Lebowitz, was converted into the right to receive $13.00 in cash, without interest.  After completion of the Merger, the Company’s Common Stock was delisted from the New York Stock Exchange.

          As part of the Merger, the Operating Partnership loaned $5.2 million of the Loan proceeds to Messrs. Gottlieb and Lebowitz to fund a $3.5 million tender offer for the Company’s Series A and Series B Preferred Stock and to repay $1.7 million of personal debt.  Each of the $2.6 million loans to Messrs. Gottlieb and Lebowitz are for a term of ten years, bear interest at the interest rate in effect on the Loan and require monthly interest only payments.  Messrs. Gottlieb and Lebowitz have the option to accrue any and all interest payments, which shall then be added to the principal balance of the notes.  For purposes of presentation in these consolidated financial statements, the $5.2 million loaned to Messrs. Gottlieb and Lebowitz has been shown as a deduction to stockholders’ equity. 

F-27


Table of Contents

16.     Discontinued Operations

          In accordance with SFAS 144, the net income or loss and the net gain or loss on dispositions of operating properties sold subsequent to December 31, 2001 are reflected in the consolidated statement of operations as discontinued operations for all periods presented (see Note 2).  For the years ended December 31, 2002, 2001 and 2000, discontinued operations relates to the hospital and the vacant SNF that the Company sold in 2002.   The related interest expense was also allocated to discontinued operations.  The following table summarizes the income and expense components that comprise discontinued operations:

 

 

Year Ended December 31,

 

 

 


 

 

 

2002

 

2001

 

2000

 

 

 


 


 


 

 
 

(In thousands)

 

REVENUES:
 

 

 

 

 

 

 

 

 

 

 
Rent

 

$

19

 

$

369

 

$

364

 

 
Interest and loan fees

 

 

—  

 

 

—  

 

 

27

 

 
Other income

 

 

—  

 

 

—  

 

 

4

 

 
 

 



 



 



 

 
Total revenues

 

$

19

 

$

369

 

$

395

 

 
 


 



 



 

EXPENSES:
 

 

 

 

 

 

 

 

 

 

 
Property operations

 

 

15

 

 

68

 

 

56

 

 
Depreciation and amortization

 

 

(4

)

 

110

 

 

100

 

 
Interest

 

 

21

 

 

212

 

 

403

 

 
 

 



 



 



 

 
Total expenses

 

 

32

 

 

390

 

 

559

 

 
 

 



 



 



 

Net loss income from discontinued operations
 

 

(13

)

 

(21

)

 

(164

)

Net gain from disposition of discontinued operations
 

 

2,320

 

 

—  

 

 

—  

 

 
 


 



 



 

 
Total income (loss) from discontinued operations

 

$

2,307

 

$

(21

)

$

(164

)

 
 


 



 



 

17.     Subsequent Events

          On February 23, 2003, a joint venture, in which the Company holds a 50% interest, sold a 23,000 square foot MOB located in Aliso Viejo, California for $7.3 million.  The joint venture recognized a gain of approximately $3 million from the sale.  The Company received net proceeds of $1.2 million from the sale.

          On February 28, 2003, the Company refinanced one of its MOBs located in Beverly Hills, California with a new $8.2 million loan from Morgan Stanley Dean Witter Mortgage Capital, Inc.  The Company repaid the remaining balance on the old loan of $7.2 million along with a prepayment penalty of $144,000 with the proceeds from the new loan.  The new loan bears interest at a fixed rate of 5.55% and is due on February 1, 2013.

          Also on February 28, 2003, another joint venture, in which the Company holds a 50% interest, sold an ALF located in Omaha, Nebraska for $11.1 million.  The joint venture recognized a gain of approximately $4 million from the sale.  The Company received net proceeds of $1.8 million from the sale. 

          In March 2003, the Company received an extension on a $13.9 million loan that was originally due on October 1, 2002, but which had been previously extended to January 1, 2003.  The loan, which is secured by three SNFs located in Massachusetts, was extended until January 1, 2004.  Per the terms of the extension, the interest rate was increased to LIBOR plus 4.0% per annum.  The Company expects to repay this loan in 2003 using the proceeds from a new long-term loan.  As of December 31, 2002 the outstanding balance on this loan was $13.2 million.

F-28


Table of Contents

18.     Unaudited Consolidated Quarterly Information

                Unaudited consolidated quarterly financial information for the periods as follows:

 

 

2002 Fiscal Quarter

 

 

 


 

 
 

1st

 

2nd

 

3rd

 

4th

 

 
 


 



 



 



 

 
 

(In thousands, except per share amounts)

 

Revenue:
 

 

 

 

 

 

 

 

 

 

 

 

 

 
Rental

 

$

7,072

 

$

7,548

 

$

7,121

 

$

7,301

 

 
Patient revenues

 

 

5,724

 

 

5,852

 

 

6,549

 

 

6,136

 

 
Tenant reimbursements

 

 

563

 

 

979

 

 

658

 

 

629

 

 
Parking

 

 

357

 

 

402

 

 

393

 

 

382

 

 
Interest and loan fees

 

 

1,800

 

 

232

 

 

214

 

 

213

 

 
Other income

 

 

379

 

 

434

 

 

573

 

 

47

 

 
 

 



 



 



 



 

 
Total revenues

 

 

15,895

 

 

15,447

 

 

15,508

 

 

14,708

 

 
 

 



 



 



 



 

Expenses:
 

 

 

 

 

 

 

 

 

 

 

 

 

 
Property operations

 

 

2,146

 

 

2,251

 

 

2,388

 

 

1,913

 

 
Skilled nursing operations

 

 

5,098

 

 

5,264

 

 

5,553

 

 

5,506

 

 
Depreciation and amortization

 

 

1,578

 

 

1,558

 

 

1,553

 

 

1,590

 

 
Interest

 

 

4,588

 

 

4,570

 

 

4,175

 

 

4,019

 

 
General and administrative

 

 

789

 

 

814

 

 

793

 

 

884

 

 
Provision for doubtful accounts

 

 

209

 

 

355

 

 

175

 

 

887

 

 
 

 



 



 



 



 

 
Total expenses

 

 

14,408

 

 

14,812

 

 

14,637

 

 

14,799

 

 
 

 



 



 



 



 

 
Income from operations before minority interests

 

 

1,487

 

 

635

 

 

871

 

 

(91

)

 
Equity in earnings (loss) of unconsolidated affiliates

 

 

89

 

 

9

 

 

(96

)

 

(142

)

 
Minority interest in consolidated affiliates

 

 

(125

)

 

(13

)

 

(85

)

 

(62

)

 
Corporate income tax expense

 

 

—  

 

 

—  

 

 

(120

)

 

(175

)

 
 

 



 



 



 



 

 
Income before discontinued operations

 

 

1,451

 

 

631

 

 

570

 

 

(470

)

 
Net loss from operations of discontinued operations

 

 

(13

)

 

—  

 

 

—  

 

 

—  

 

 
Gain (loss) from discontinued operations

 

 

2,458

 

 

(138

)

 

—  

 

 

—  

 

 
 

 



 



 



 



 

 
Net income (loss)

 

 

3,896

 

 

493

 

 

570

 

 

(470

)

 
Dividends on preferred stock

 

 

(1,790

)

 

(1,791

)

 

(1,790

)

 

(1,791

)

 
 

 



 



 



 



 

 
Net income (loss) to common stockholders

 

$

2,106

 

$

(1,298

)

$

(1,220

)

$

(2,261

)

 
 

 



 



 



 



 

F-29


Table of Contents

 

 

2001 Fiscal Quarter

 

 

 


 

 
 

1st

 

2nd

 

3rd

 

4th

 

 
 


 



 



 



 

 
 

(In thousands, except per share amounts)

 

Revenue:

 

 

 

 

 

 

 

 

 

 

 

 

 

 
Rental

 

$

6,490

 

$

6,418

 

$

6,771

 

$

6,749

 

 
Patient revenues

 

 

5,008

 

 

5,353

 

 

5,289

 

 

5,407

 

 
Tenant reimbursements

 

 

409

 

 

614

 

 

413

 

 

458

 

 
Parking

 

 

346

 

 

435

 

 

347

 

 

374

 

 
Lease termination income

 

 

2,613

 

 

—  

 

 

—  

 

 

—  

 

 
Interest and loan fees

 

 

510

 

 

489

 

 

445

 

 

1,357

 

 
Other income

 

 

437

 

 

149

 

 

398

 

 

887

 

 
 

 



 



 



 



 

 
Total revenues

 

 

15,813

 

 

13,458

 

 

13,663

 

 

15,232

 

 
 

 



 



 



 



 

Expenses:
 

 

 

 

 

 

 

 

 

 

 

 

 

 
Property operations

 

 

1,949

 

 

2,205

 

 

2,206

 

 

2,251

 

 
Skilled nursing operations

 

 

4,530

 

 

4,753

 

 

4,793

 

 

4,928

 

 
Depreciation and amortization

 

 

1,457

 

 

1,479

 

 

1,528

 

 

1,535

 

 
Interest

 

 

3,206

 

 

3,181

 

 

3,199

 

 

3,676

 

 
General and administrative

 

 

848

 

 

860

 

 

834

 

 

1,411

 

 
Provision for doubtful accounts

 

 

219

 

 

135

 

 

275

 

 

375

 

 
 

 



 



 



 



 

 
Total expenses

 

 

12,209

 

 

12,613

 

 

12,835

 

 

14,176

 

 
 

 



 



 



 



 

 
Income from operations before minority interests

 

 

3,604

 

 

845

 

 

828

 

 

1,056

 

 
Equity in (loss) earnings of unconsolidated affiliates

 

 

(83

)

 

(92

)

 

83

 

 

297

 

 
Minority interest in consolidated affiliates

 

 

(62

)

 

(71

)

 

(68

)

 

(101

)

 
Corporate income tax expense

 

 

—  

 

 

—  

 

 

(212

)

 

127

 

 
 

 



 



 



 



 

 
Income before discontinued operations

 

 

3,459

 

 

682

 

 

631

 

 

1,379

 

 
Net (loss) income from discontinued operations

 

 

(26

)

 

11

 

 

(25

)

 

19

 

 
 

 



 



 



 



 

 
Net income

 

 

3,433

 

 

693

 

 

606

 

 

1,398

 

 
Dividends on preferred stock

 

 

(1,790

)

 

(1,791

)

 

(1,790

)

 

(1,791

)

 
 

 



 



 



 



 

 
Net income (loss) to common stockholders

 

$

1,643

 

$

(1,098

)

$

(1,184

)

$

(393

)

 
 


 



 



 



 

F-30


Table of Contents

19.

SCHEDULE OF CONSOLIDATED REAL ESTATE AND ACCUMULATED DEPRECIATION AS OF DECEMBER 31, 2002.  (In Thousands).

 

 

 

 

 

 

Initial Cost to Company

 

Cost Capitalized Subsequent
to Acquisition

 

Gross amount at which carried at close of Period (See Note G)

 

 

 

 

 

 

 

 

 

 

 

 


 


 


 

 

 

 

 

 

 

Description

 

Encumbrances
(See Notes)

 

Land

 

Building and
Improvements

 

Land

 

Building and
Improvements

 

Land

 

Building and
Improvements

 

Total

 

Accumulated
Depreciation

 

Acquisition
Date

 

Date of
Construction or
Rehabilitation

 


 


 


 


 


 


 


 


 


 


 


 


 

Medical Office Buildings California Properties:
 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

405 North Bedford Drive
 

 

(See Note A

)

$

2,186

 

$

4,076

 

$

452

 

$

10,383

 

$

2,638

 

$

14,459

 

$

17,097

 

$

5,280

 

 

1993

 

 

1947/1987

 

415 North Bedford Drive
 

 

(See Note A

)

 

292

 

 

573

 

 

—  

 

 

621

 

 

292

 

 

1,194

 

 

1,486

 

 

646

 

 

1993

 

 

1955

 

416 North Bedford Drive
 

 

(See Note A

)

 

427

 

 

247

 

 

—  

 

 

2,763

 

 

427

 

 

3,010

 

 

3,437

 

 

1,338

 

 

1993

 

 

1946/1986

 

435 North Bedford Drive
 

 

(See Note A

)

 

1,144

 

 

2,853

 

 

—  

 

 

3,333

 

 

1,144

 

 

6,186

 

 

7,330

 

 

3,418

 

 

1993

 

 

1950/1963/1984

 

435 North Roxbury Drive
 

$

7,207

 

 

162

 

 

390

 

 

39

 

 

3,235

 

 

201

 

 

3,625

 

 

3,826

 

 

1,530

 

 

1993

 

 

1956/1983

 

436 North Bedford Drive
 

 

(See Note B

)

 

2,675

 

 

15,317

 

 

—  

 

 

635

 

 

2,675

 

 

15,952

 

 

18,627

 

 

2,736

 

 

1990

 

 

1980

 

439 North Bedford Drive
 

 

—  

 

 

—  

 

 

109

 

 

—  

 

 

510

 

 

---

 

 

619

 

 

619

 

 

446

 

 

1993

 

 

1956/1983

 

Holy Cross Medical Plaza
 

 

7,456

 

 

2,556

 

 

10,256

 

 

—  

 

 

1,429

 

 

2,556

 

 

11,685

 

 

14,241

 

 

3,234

 

 

1994

 

 

1985

 

St. Joseph’s Professional Building.
 

 

3,007

 

 

1,300

 

 

3,936

 

 

—  

 

 

408

 

 

1,300

 

 

4,344

 

 

5,644

 

 

1,049

 

 

1993

 

 

1987

 

Sherman Oaks Medical Plaza
 

 

(See Note B

)

 

1,454

 

 

8,278

 

 

—  

 

 

2,727

 

 

1,454

 

 

11,005

 

 

12,459

 

 

3,473

 

 

1994

 

 

1969/1993

 

Regents Medical Center
 

 

(See Note B

)

 

1,470

 

 

8,390

 

 

—  

 

 

1,401

 

 

1,470

 

 

9,791

 

 

11,261

 

 

2,854

 

 

1994

 

 

1989

 

Cigna HealthCare Bldg.
 

 

(See Note B

)

 

1,260

 

 

7,282

 

 

—  

 

 

1,023

 

 

1,260

 

 

8,305

 

 

9,565

 

 

1,736

 

 

1994

 

 

1992

 

1095 Irvine Boulevard
 

 

1,227

 

 

474

 

 

663

 

 

—  

 

 

454

 

 

474

 

 

1,117

 

 

1,591

 

 

449

 

 

1994

 

 

1994/1995

 

14591 Newport Avenue
 

 

(See Note D

)

 

160

 

 

36

 

 

—  

 

 

452

 

 

160

 

 

488

 

 

648

 

 

128

 

 

1996

 

 

1969

 

14642 Newport Avenue
 

 

(See Note D

)

 

400

 

 

1,033

 

 

—  

 

 

629

 

 

400

 

 

1,662

 

 

2,062

 

 

564

 

 

1996

 

 

1985

 

26771 Aliso Creek Road
 

 

1,360

 

 

585

 

 

—  

 

 

(25

)

 

1,328

 

 

560

 

 

1,328

 

 

1,888

 

 

138

 

 

1997

 

 

1998

 

23861 McBean Parkway
 

 

9,260

 

 

—  

 

 

4,164

 

 

—  

 

 

8,641

 

 

---

 

 

12,805

 

 

12,805

 

 

1,805

 

 

1998

 

 

1981/1999

 

24355 Lyons Avenue
 

 

4,660

 

 

623

 

 

6,752

 

 

—  

 

 

623

 

 

623

 

 

7,375

 

 

7,998

 

 

948

 

 

1998

 

 

1990

 

1330 Orange Avenue
 

 

7,161

 

 

809

 

 

8,753

 

 

—  

 

 

421

 

 

809

 

 

9,174

 

 

9,983

 

 

918

 

 

1998

 

 

1977/1985

 

Senior Care Facilities Arizona Properties:
 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

31 West Maryland Avenue
 

 

4,300

 

 

800

 

 

3,847

 

 

—  

 

 

736

 

 

800

 

 

4,583

 

 

5,383

 

 

810

 

 

1997

 

 

1951-1957

 

39 West Maryland Avenue
 

 

—  

 

 

172

 

 

835

 

 

—  

 

 

118

 

 

172

 

 

953

 

 

1,125

 

 

131

 

 

1998

 

 

1968

 

 
 

 

 

 

 

 

 

 

 

 

 

—  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

California Properties:
 

 

 

 

 

 

 

 

 

 

 

—  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1437 Seventh Street
 

 

11,137

 

 

2,357

 

 

8,427

 

 

—  

 

 

1,300

 

 

2,357

 

 

9,727

 

 

12,084

 

 

1,191

 

 

1998

 

 

1990

 

1645 Esplanade
 

 

—  

 

 

159

 

 

636

 

 

—  

 

 

2

 

 

159

 

 

638

 

 

797

 

 

44

 

 

2000

 

 

1960

 

18700 Burbank Blvd.
 

 

8,769

 

 

2,350

 

 

8,035

 

 

—  

 

 

336

 

 

2,350

 

 

8,371

 

 

10,721

 

 

713

 

 

2000

 

 

1989

 

 
 

 

 

 

 

 

 

 

 

 

 

—  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Massachusetts Properties:
 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

42 Prospect Avenue
 

 

(See Note C

)

 

1,048

 

 

4,609

 

 

—  

 

 

1

 

 

1,048

 

 

4,610

 

 

5,658

 

 

1,080

 

 

1997

 

 

1957/65/78/85

 

32 Chestnut Street
 

 

(See Note C

)

 

1,319

 

 

9,307

 

 

—  

 

 

799

 

 

1,319

 

 

10,106

 

 

11,425

 

 

1,193

 

 

1997

 

 

1985

 

34 Main Street
 

 

(See Note C

)

 

702

 

 

3,040

 

 

—  

 

 

—  

 

 

702

 

 

3,040

 

 

3,742

 

 

710

 

 

1997

 

 

1965/1985

 

Maryland Properties:
 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

4922 La Salle Road
 

 

11,773

 

 

1,390

 

 

10,759

 

 

—  

 

 

119

 

 

1,390

 

 

10,878

 

 

12,268

 

 

360

 

 

2002

 

 

1955-56/1976

 

Washington Properties:
 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

3035 Cherry Street
 

 

2,305

 

 

100

 

 

3,216

 

 

—  

 

 

69

 

 

100

 

 

3,285

 

 

3,385

 

 

517

 

 

1998

 

 

1954

 

 
 


 



 



 



 



 



 



 



 



 



 



 

 
Total

 

$

79,622

 

$

28,374

 

$

135,819

 

$

466

 

$

44,496

 

$

28,840

 

$

180,315

 

$

209,155

 

$

39,439

 

 

 

 

 

 

 

 
 

 



 



 



 



 



 



 



 



 



 

 

 

 

 

 

 

Realty Financing Partnership
 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(See Note A)
 

 

26,521

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Medical Partnership  (See Note B)
 

 

31,987

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

G&L Hampden, LLC
 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(See Note C)
 

 

13,168

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

G&l Realty Partnership
 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(See Note D)
 

 

7,121

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Per Above
 

 

79,622

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
 


 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total encumbrances
 

$

158,419

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
 


 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

F-31


Table of Contents

The changes in total real estate assets and accumulated depreciation for the years ended December 31 are as follows:

 

 

Total Real Estate Assets

 

 

Accumulated Depreciation

 

 

 


 

 

 

 


 

 

 

2002

 

2001

 

2000

 

 

 

 

2001

 

2001

 

2000

 

 

 


 


 


 

 

 

 


 


 


 

 
 

(in thousands)

 

 

 

 

(in thousands)

 

Balance at beginning of year
 

$

199,882

 

$

196,317

 

$

204,121

 

 

Balance at beg. of year

 

$

33,873

 

$

28,208

 

$

23,912

 

Improvements and acquisitions
 

 

12,361

 

 

3,565

 

 

14,887

 

 

Depreciation

 

 

5,855

 

 

5,665

 

 

5,697

 

Dispositions
 

 

(3,088

)

 

—  

 

 

(22,691

)

 

Dispositions

 

 

(289

)

 

—  

 

 

(1,401

)

 
 


 



 



 

 

 

 



 



 



 

Balance at end of year
 

$

209,155

 

$

199,882

 

$

196,317

 

 

Balance at end of year

 

$

39,439

 

$

33,873

 

$

28,208

 

 
 


 



 



 

 

 

 



 



 



 


Note A:

The Realty Financing Partnership owns the following properties which are security for a blanket first trust deed: 405 North Bedford, 415 North Bedford, 416 North Bedford and 435 North Bedford.

Note B:

The Medical Partnership owns the following properties, which are each security for a blanket first trust deed: Sherman Oaks Medical Plaza, Cigna HealthCare Building, Regents Medical Center and 436 North Bedford Drive.

Note C:

G&L Hampden, LLC owns the following properties, which are security for a first trust deed: 42 Prospect Avenue, 32 Chestnut Street, and 34 Main Street.

Note D:

G&L Realty Partnership, L.P. owns the following properties which are security for a first trust deed:  14591 Newport Avenue, 14642 Newport Avenue

F-32


Table of Contents

SIGNATURES

          Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

 

G&L REALTY CORP.

     

Date: March 31, 2003

By:

/s/ DAVID E. HAMER

 

 

 


 

 

 

David E. Hamer

 

 

 

Controller and Chief Accounting Officer

          Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.

Signature

 

Title

 

Date


 


 


/s/ DANIEL M. GOTTLIEB

 

 

 

March 31, 2003


 

 

 

 

Daniel M. Gottlieb

 

Chief Executive Officer, Co-Chairman of the Board and Director (Principal Executive Officer)

 

 

 
 

 

 

 

/s/ STEVEN D. LEBOWITZ

 

President, Co-Chairman of the Board and Director

 

March 31 2003


 

 

 

 

Steven D. Lebowitz

 

 

 

 

 
 

 

 

 

/s/ RICHARD L. LESHER

 

Director

 

March 31, 2003


 

 

 

 

Richard L. Lesher

 

 

 

 

 
 

 

 

 

/s/ CHARLES P. REILLY

 

Director

 

March 31, 2003


 

 

 

 

Charles P. Reilly

 

 

 

 


 

 

 

 

/s/ S. CRAIG TOMPKINS

 

Director

 

March 31, 2003


 

 

 

 

S. Craig Tompkins

 

 

 

 

 
 

 

 

 

F-33


Table of Contents

CERTIFICATIONS

 

I, Daniel M. Gottlieb, certify that:

 

 

            1.           I have reviewed this annual report on Form 10-K of G&L Realty Corp.;

 

 

 

            2.          Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;

 

 

 

            3.           Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;

 

 

 

            4.          The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:

 

 

 

 

            a)          designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;

 

 

 

 

 

            b)          evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the “Evaluation Date”); and

 

 

 

 

 

            c)          presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

 

 

 

 

 

            5.          The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):

 

 

 

 

            a)          all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and

 

 

 

 

 

            b)          any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and

 

 

 

 

 

            6.          The registrant’s other certifying officers and I have indicated in this annual report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

Date: March 31, 2003

/s/ DANIEL M. GOTTLIEB

 


 

Daniel M. Gottlieb

 

Chief Executive Officer

 


Table of Contents

 

I, David E. Hamer, certify that:

 

 

 

            1.          I have reviewed this annual report on Form 10-K of G&L Realty Corp.;

 

 

 

 

            2.          Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;

 

 

 

 

            3.          Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;

 

 

 

 

            4.          The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:

 

 

 

 

                  a)          designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;

 

 

 

 

 

                  b)          evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the “Evaluation Date”); and

 

 

 

 

 

                   c)          presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

 

 

 

 

 

            5.          The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):

 

 

 

 

                   a)          all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and

 

 

 

 

 

                   b)          any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and

 

 

 

 

 

            6.          The registrant’s other certifying officers and I have indicated in this annual report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

Date: March 31, 2003

/s/ DAVID E. HAMER

 


 

David E. Hamer

 

Chief Accounting Officer