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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-K
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 0-28354
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GREAT LAKES REIT
(Exact Name of Registrant as Specified in Its Charter)
MARYLAND 36-4238056
(State or Other Jurisdiction of (I.R.S. Employer Identification
Incorporation or Organization) Number)
823 Commerce Drive
Suite 300
Oak Brook, Illinois 60523
(630) 368-2900
(Address and telephone number of principal executive offices)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Common Shares of Beneficial Interest, $.01 par value per share
9 3/4% Series A Cumulative Redeemable Preferred Shares
of Beneficial Interest, $.01 par value per share
(Liquidation Preference $25.00 per share)
Name of each exchange on which registered
New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes /X/ No / /
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. / /
As of March 2, 1999, the aggregate market value of common shares of
beneficial interest held by non-affiliates of the registrant was $182,550,665.
The number of the registrant's common shares of beneficial interest, $.01
par value per share, outstanding as of March 2, 1999 was 16,491,794.
Documents Incorporated by Reference:
Part III incorporates by reference the Registrant's Proxy Statement related to
the Annual Meeting of Shareholders to be held May 19, 1999.
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GREAT LAKES REIT
FORM 10-K ANNUAL REPORT--1998
TABLE OF CONTENTS
PAGE
-----
PART I
Item 1. Business.......................................................................... 3
Item 2. Properties........................................................................ 5
Item 3. Legal Proceedings................................................................. 9
Item 4. Submission of Matters to a Vote of Security Holders............................... 9
Item 4A. Executive officers of the Registrant
PART II
Item 5. Market for Registrant's Common Equity and Related Shareholder
Matters......................................................................... 9
Item 6. Selected Financial Data........................................................... 11
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations........................................................... 13
Item 7A. Market Risks...................................................................... 18
Item 8. Financial Statements and Supplementary Data....................................... 19
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure...................................................................... 19
PART III (Incorporated by reference)
Item 10. Directors and Executive Officers of the Registrant................................ 19
Item 11. Executive Compensation............................................................ 19
Item 12. Security Ownership of Certain Beneficial Owners and Management.................... 20
Item 13. Certain Relationships and Related Transactions.................................... 20
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K................... 20
Signatures................................................................................................... 23
Index to Financial Statements................................................................................ F-1
2
PART I
ITEM 1. BUSINESS.
GENERAL
Great Lakes REIT, a Maryland real estate investment trust that is the
successor to a business that began operations in 1992 (the "Company"), is a
fully integrated, self-administered and self-managed real estate company. As of
December 31, 1998, the Company owned and operated 40 properties (the
"Properties") in the Chicago, Milwaukee, Minneapolis, Detroit, Columbus, Denver
and Cincinnati areas (the "Current Markets"). The Properties contain
approximately 5.2 million rentable square feet leased to approximately 550
tenants with a weighted average occupancy rate of approximately 94.8% as of
December 31, 1998. The Company has elected to be treated for federal income tax
purposes as a real estate investment trust ("REIT"). The Company conducts
substantially all of its operations through Great Lakes REIT, L.P. (the
"Operating Partnership"), in which the Company is the sole general partner. All
references to the "Company" in this Form 10-K include the Company and the
Operating Partnership unless the context otherwise requires.
BUSINESS STRATEGY
The Company's primary business strategy is to acquire well-located,
underperforming suburban office properties generally located within a 500 mile
radius of metropolitan Chicago (the "Midwest Region") at attractive yields and
to increase cash flow and property value by implementing a comprehensive
operating strategy. The Company's operating strategy includes: (i) investment in
value-enhancing renovation and refurbishment programs; (ii) aggressive leasing
efforts; (iii) reduction and containment of operating costs; and (iv) a strong
emphasis on tenant services and satisfaction. The Company seeks to establish
itself as one of the suburban office property owner/operators of choice in the
markets it serves and to maximize tenant retention.
The Company continues to evaluate certain markets outside the Midwest
Region. In the event an appropriate acquisition opportunity is identified that
is consistent with the other elements of the Company's primary business
strategy, the Company may acquire properties in markets outside the Midwest
Region. In addition, the Company may from time to time consider acquiring
properties located in select urban or central business district areas. In
conjunction with this strategy, the Company purchased assets in suburban Denver
and in the central business districts of Milwaukee and Columbus in 1998.
Although the Company will continue to focus on acquiring attractive
properties as it implements its primary business strategy, the Company intends
to pursue limited new property development opportunities that are otherwise
consistent with the Company's overall business strategy. In 1998, the Company
became involved in the development of a 96,000 square foot building in the
Milwaukee suburb of Pewaukee, agreeing to purchase the to-be-built property for
$11.4 million. The Company anticipates that the project will be completed in
June 1999. The Company also intends to enhance its leasing flexibility by
offering build-to-suit development options to current and prospective tenants
who require space that is otherwise unavailable in a particular market. In
addition, the Company will continue to pursue the redevelopment of older
properties in attractive locations, such as its 777 Eisenhower, Ann Arbor,
Michigan property.
As part of its goal of maximizing shareholder value, the Company will engage
in strategic dispositions of select Properties. The Company typically will seek
to dispose of Properties when one or more of the following conditions is
present: (i) the market price for a Property is at or near replacement cost;
(ii) a Property has high occupancy and there is limited potential to increase
cash flow and property value within a reasonable period; (iii) the Company
believes that its capital can be redeployed more productively; and (iv)
ownership of the Property is no longer consistent with the Company's business
strategy. In this regard, the Company has commenced marketing efforts with
respect to the possible disposition of six Properties comprising 430,395 square
feet, or 8.2% of the total square footage of the Company's portfolio.
3
FINANCING STRATEGY
The Company seeks to maintain a well-balanced, conservative and flexible
capital structure by: (i) currently targeting a maximum ratio of long-term debt
to total market capitalization in the range of 50%; (ii) extending and
sequencing the maturity dates of its debt; (iii) focusing on borrowing at fixed
rates; (iv) pursuing debt financings and refinancings on an unsecured basis; and
(v) maintaining relatively conservative debt service and fixed charge coverage
ratios. In addition, as discussed under Item 7, "Management's Discussion and
Analysis of Financial Condition and Results of Operations," the Company has a
$150 million unsecured credit facility that is generally used for short-term
funding of acquisition of additional properties and for working capital
requirements. The Company's debt to total market capitalization ratio (total
market capitalization is defined as the total market value of all outstanding
Common and Preferred Shares and units of limited partnership interest in the
Operating Partnership owned by non-affiliates plus outstanding indebtedness) at
March 1, 1999 was 39.9%.
COMPETITION
All of the Properties are located in competitive markets. The properties
with which the Company competes for tenants are owned by institutional
investors, other REITs or local real estate operators, however, no single
competitor or small group of competitors is dominant in any of the Current
Markets. Changes in the supply of and demand for rental properties with
characteristics similar to those of the Properties may adversely affect rental
rates or the Company's ability to lease space at the Properties or other newly
acquired properties. In addition, the Company may be competing with other owners
and operators that have greater financial resources and more experience than the
Company.
INSURANCE
The Company carries comprehensive liability, fire, extended coverage and
rental loss insurance covering all of the Properties, with policy specifications
and insured limits that the Company believes are adequate and appropriate under
the circumstances. There are, however, certain types of losses that are not
generally insured because they are either uninsurable or not economically
feasible to insure. Should an uninsured loss or a loss in excess of insured
limits occur, the Company could lose its capital invested in any of the
Properties, as well as the anticipated future revenues from such Property and,
in the case of recourse debt, the Company would remain obligated for any
mortgage debt or other financial obligations related to such Property. Any such
loss would adversely affect the Company. Moreover, as a general partner of the
Operating Partnership, the Company will generally be liable for any of the
Operating Partnership's unsatisfied obligations other than non-recourse
obligations. The Company believes that the Properties are adequately insured;
however, no assurance can be given that material losses in excess of insurance
proceeds will not occur in the future.
ENVIRONMENTAL REGULATIONS
Under various federal, state and local environmental laws, ordinances and
regulations, a current or previous owner or operator of real estate may be
required to investigate and clean up hazardous or toxic substances or petroleum
product releases at such property and may be held liable to a governmental
entity or to third parties for property damage and for investigation and
clean-up costs incurred by such parties in connection with the contamination.
Such laws typically impose clean-up responsibility and liability without regard
to whether the owner knew of or caused the presence of the contaminants, and the
liability under such laws has been interpreted to be joint and several unless
the harm is divisible and there is a reasonable basis for allocation of
responsibility. The costs of investigation, remediation or removal of such
substances may be substantial, and the presence of such substances, or the
failure to properly remediate the contamination on such property, may adversely
affect the owner's ability to sell or rent such property or to borrow using such
property as collateral. Persons who arrange for the disposal or treatment of
hazardous or toxic substances at a disposal or treatment facility also may be
liable for the costs of removal or remediation of a release of hazardous or
toxic substances at such disposal or treatment facility, whether or not such
facility is owned or operated by such person. In addition, some environmental
laws create a lien
4
on the contaminated site in favor of the government for damages and costs
incurred in connection with the contamination. Finally, the owner of a site may
be subject to common law claims by third parties based on damages and costs
resulting from environmental contamination emanating from such site.
During the last three years, independent environmental consultants have
conducted or updated Phase I Environmental Assessments ("Phase I Assessments")
at each of the Properties. In addition, a limited-scope Phase II Assessment
("Phase II Assessment") has been conducted at the University Office Plaza
property (the Phase I Assessments and the Phase II Assessment are collectively
referred to as the "Environmental Assessments"). The Phase I Assessments have
included, among other things, a visual inspection of the Properties and the
surrounding area and a review of relevant state, federal and historical
documents. Except for the Phase II Assessment and certain limited sampling in
connection with underground tank and/or piping removals at the Arlington Ridge
Service Center and One Park Plaza properties, no invasive techniques such as
soil or groundwater sampling were performed at any of the Properties. The
Company's Environmental Assessments of the Properties have not revealed any
condition giving rise to an environmental liability that the Company believes
would have a material adverse effect on the Company's business, assets or
results of operations, taken as a whole, nor is the Company otherwise aware of
any such condition. There can be no assurance, however, that the Company's
Environmental Assessments would reveal all conditions giving rise to
environmental liabilities. Moreover, there can be no assurance that (i) future
laws, ordinances or regulations will not impose any material environmental
liability or (ii) the current environmental condition of the Properties will not
be affected by tenants, by the condition of land or operations in the vicinity
of the Properties (such as the presence of underground storage tanks), or by
third parties unrelated to the Company.
OTHER MATTERS
The Company's operations are not dependent on a single or few customers; no
single customer accounts for more than 5% of the Company's total revenue. The
Company's operations are not subject to significant seasonal fluctuations. As of
December 31, 1998, the Company employed 77 persons, none of whom is represented
by a collective bargaining unit.
For additional information about the Company's investments and operations,
see Item 7, "Management's Discussion and Analysis of Financial Condition and
Results of Operations," and Item 8, "Financial Statements and Supplementary
Data." For additional information about the Company's business segments, see
Item 8, "Financial Statements and Supplementary Data."
ITEM 2--PROPERTIES
GENERAL
As of December 31, 1998, the Company owned 40 Properties containing
approximately 5.2 million square feet. The Properties consist primarily of Class
A and Class B suburban office properties, which range in size form approximately
15,000 to 375,000 rentable square feet. The Properties consist of 32 suburban
office properties, two central business district office buildings, 1 light
industrial distribution facility and 5 office/service centers (generally
single-story buildings with both finished office and unfinished storage area).
The 40 Properties are generally located in the suburban areas of Chicago (19),
Milwaukee (6), Minneapolis (3), Detroit (5), Columbus (4), Denver (2) and
Cincinnati (1). Many of the Properties offer amenities, including indoor and
outdoor parking, loading dock facilities, on-site property management, in-house
conference facilities and lounge areas with food and beverage service.
Management believes that the location and quality of construction of the
Properties, as well as the Company's reputation for providing superior tenant
service, enable the Company to attract and retain a diverse tenant base. As of
December 31, 1998, the Properties were leased to more than 550 tenants, no
single tenant accounted for more than 5% of the aggregate annualized base rent
of the Company's portfolio and only 20 tenants individually represented more
than 1% of such aggregate Annualized Base Rent.
5
The Company holds fee simple title to each of the Properties except for the
Columbus, Ohio office property. The following table sets forth certain of the
information as of December 31, 1998 regarding the Properties.
PROPERTY OWNERSHIP COMPANY YEAR DATE
PROPERTY LOCATION TYPE INTEREST OWNERSHIP % BUILT ACQUIRED
- ----------------------------------- -------------------- --------------- ----------------- ----- ---------
CHICAGO AREA
1900 East Golf Road
Schaumburg, IL..................... Multi-story Office Fee 100 % 1980 Dec-96
1750 East Golf Road
Schaumburg, IL..................... Multi-story Office Fee 100 % 1985 Sep-97
160-185 Hansen Court
Wood Dale, IL...................... Single story Fee 100 % 1986 Jan-94
Office/Office
service
3455, 3550, 3555 Salt Creek
Arlington Heights, IL.............. Single story Fee 100 % 1984 Oct-97
Office/Office
service
601 Campus Drive
Arlington Heights, IL.............. Single story Fee 100 % 1987 May-93
Office/Office
service
1251 Plum Grove Road
Schaumburg, IL..................... Single story Office Fee 100 % 1986 Jan-96
1011 Touhy Avenue
Des Plaines, IL.................... Multi-story Office Fee 100 % 1978 Dec-93
2800 River Road
Des Plaines, IL.................... Multi-story Office Fee 100 % 1983 Feb-95
1660 Feehanville Drive
Mount Prospect, IL................. Multi-story Office Fee 100 % 1989 Aug-95
565 Lakeview Parkway
Vernon Hills, IL................... Single story Office Fee 100 % 1991 Dec-95
175 Hawthorn Parkway
Vernon Hills, IL................... Multi-story Office Fee 100 % 1987 Sep-94
3400 Dundee Road
Northbrook, IL..................... Multi-story Office Fee 100 % 1986 Oct-93
3010 & 3020 Woodcreek Dr
Downers Grove, IL.................. Single story Fee 100 % 1986 Nov-96
Office/Office
service
823 Commerce Drive
Oak Brook, IL...................... Multi-story Office Fee 100 % 1969 Nov-95
1675 Holmes Road
Elgin, IL.......................... Industrial Fee 100 % 1990 Feb-97
16601 S. Kedzie Avenue
Markham, IL........................ Single story Office Fee 100 % 1984 Feb-97
3030 Warrenville Road
Lisle, IL.......................... Multi-story Office Fee 100 % 1988 Sep-98
191 Waukegan Road
Northfield, IL..................... Multi-story Office Fee 100 % 1983 Sep-98
MILWAUKEE AREA
11270 W. Park Place
Milwaukee, WI...................... Multi-story Office Fee 100 % 1984 Sep-95
11925 W. Lake Park Drive
Milwaukee, WI...................... Single story Office Fee 100 % 1989 Jun-93
2514 S. 102nd Street &
10150 W. National Av
West Allis, WI..................... Multi-story Office Fee 100 % 1987 Nov-96
150, 175, 250 Patrick Blvd.
Brookfield, WI..................... Single story Fee 100 % 1987 Jun-94
Office/Office
service
LAND AREA SQUARE OCCUPANCY ENCUMBRANCE
PROPERTY LOCATION IN ACRES FOOTAGE 12/31/98 (000'S OMITTED)
- ----------------------------------- --------------- --------- ------------- ---------------
CHICAGO AREA
1900 East Golf Road
Schaumburg, IL..................... 12.9 265,423 94.6% --
1750 East Golf Road
Schaumburg, IL..................... 7.7 213,369 97.6% --
160-185 Hansen Court
Wood Dale, IL...................... 10.6 113,911 100.0% --
3455, 3550, 3555 Salt Creek
Arlington Heights, IL.............. 8.7 97,910 83.8% --
601 Campus Drive
Arlington Heights, IL.............. 6.0 96,219 98.0% (1)
1251 Plum Grove Road
Schaumburg, IL..................... 3.2 43,338 100.0% --
1011 Touhy Avenue
Des Plaines, IL.................... 5.3 153,777 85.3% --
2800 River Road
Des Plaines, IL.................... 2.0 99,732 100.0% --
1660 Feehanville Drive
Mount Prospect, IL................. 7.3 85,487 100.0% --
565 Lakeview Parkway
Vernon Hills, IL................... 7.1 85,552 100.0% --
175 Hawthorn Parkway
Vernon Hills, IL................... 4.6 84,104 89.0% (1)
3400 Dundee Road
Northbrook, IL..................... 2.6 74,884 84.4% (1)
3010 & 3020 Woodcreek Dr
Downers Grove, IL.................. 8.8 126,911 96.2% (1)
823 Commerce Drive
Oak Brook, IL...................... 2.6 45,098 100.0% --
1675 Holmes Road
Elgin, IL.......................... 5.5 101,286 100.0% $ 2,101
16601 S. Kedzie Avenue
Markham, IL........................ 1.5 15,000 55.3% --
3030 Warrenville Road
Lisle, IL.......................... 15.8 149,791 99.7% --
191 Waukegan Road
Northfield, IL..................... 3.5 61,925 95.7% --
MILWAUKEE AREA
11270 W. Park Place
Milwaukee, WI...................... 7.9 197,474 100.0% (1)
11925 W. Lake Park Drive
Milwaukee, WI...................... 3.4 36,069 100.0% (1)
2514 S. 102nd Street &
10150 W. National Av
West Allis, WI..................... 6.8 121,620 85.2% (1)
150, 175, 250 Patrick Blvd.
Brookfield, WI..................... 12.0 117,210 82.4% $ 3,177
6
PROPERTY OWNERSHIP COMPANY YEAR DATE
PROPERTY LOCATION TYPE INTEREST OWNERSHIP % BUILT ACQUIRED
- ----------------------------------- -------------------- --------------- ----------------- ----- ---------
375 Bishop's Way
Brookfield, WI..................... Multi-story Office Fee 100 % 1987 Apr-97
111 East Kilbourn Avenue
Milwaukee, WI...................... Multi-story Office Fee 100 % 1988 Apr-98
SUBURBAN
MINNEAPOLIS/ST. PAUL AREA
2550 University Avenue W
St. Paul, MN....................... Multi-story Office Fee 100 % 1916 Dec-96
2221 University Avenue SE
Minneapolis, MN.................... Multi-story Office Fee 100 % 1979 May-95
2550 University Avenue W
St. Paul, MN....................... Multi-story Office Fee 100 % 1916 Jul-98
DETROIT AREA
777 East Eisenhower Pkwy.
Ann Arbor, MI...................... Multi-story Office Fee 100 % 1975 Dec-97
32255 Northwestern Highway
Farmington Hills, MI............... Multi-story Office Fee 100 % 1986 Dec-97
1301 W. Long Lake Road
Troy, MI........................... Multi-story Office Fee 100 % 1988 Nov-96
No. 40 OakHollow
Southfield, MI..................... Multi-story Office Fee 100 % 1989 Dec-96
24800 Denso Drive
Southfield, MI..................... Multi-story Office Fee 100 % 1987 Aug-95
COLUMBUS AREA
655 Metro Place South
Dublin, OH......................... Multi-story Office Fee 100 % 1986 Sep-97
4860-5000 Blazer Mem. Pky.
Dublin, OH......................... Single story Office Fee 100 % 1986 Sep-96
425 Metro Place North
Dublin, OH......................... Multi-story Office Fee 100 % 1982 Sep-97
175 South Third Street
Columbus, OH....................... Multi-story Office (2) 100 % 1981 Jan-98
CINCINNATI AREA
30 Merchant Street
Springdale, OH..................... Multi-story Office Fee 100 % 1988 Apr-96
DENVER AREA
116 Inverness Drive East
Englewood, CO...................... Multi-story Office Fee 100 % 1984 May-98
183 Inverness Drive West
Englewood, CO...................... Multi-story Office Fee 100 % 1982 May-98
Totals.............................
LAND AREA SQUARE OCCUPANCY ENCUMBRANCE
PROPERTY LOCATION IN ACRES FOOTAGE 12/31/98 (000'S OMITTED)
- ----------------------------------- --------------- --------- ------------- ---------------
375 Bishop's Way
Brookfield, WI..................... 4.1 53,829 96.4% --
111 East Kilbourn Avenue
Milwaukee, WI...................... 0.6 373,842 89.1% --
SUBURBAN
MINNEAPOLIS/ST. PAUL AREA
2550 University Avenue W
St. Paul, MN....................... 4.4 200,114 97.7% --
2221 University Avenue SE
Minneapolis, MN.................... 2.8 97,660 100.0% $ 4,800
2550 University Avenue W
St. Paul, MN....................... 2.2 120,734 92.5% --
DETROIT AREA
777 East Eisenhower Pkwy.
Ann Arbor, MI...................... 23.6 274,025 96.5% --
32255 Northwestern Highway
Farmington Hills, MI............... 12.9 230,318 99.3% $ 11,942
1301 W. Long Lake Road
Troy, MI........................... 11.5 170,591 100.0% (1)
No. 40 OakHollow
Southfield, MI..................... 5.7 81,088 98.3% (1)
24800 Denso Drive
Southfield, MI..................... 10.5 79,546 97.8% (1)
COLUMBUS AREA
655 Metro Place South
Dublin, OH......................... 15.0 215,599 88.8% --
4860-5000 Blazer Mem. Pky.
Dublin, OH......................... 13.7 124,929 87.9% --
425 Metro Place North
Dublin, OH......................... 6.3 101,679 96.3% --
175 South Third Street
Columbus, OH....................... (2) 196,088 87.5% --
CINCINNATI AREA
30 Merchant Street
Springdale, OH..................... 5.9 95,910 100.0% --
DENVER AREA
116 Inverness Drive East
Englewood, CO...................... 7.4 204,998 100.0% 12,312
183 Inverness Drive West
Englewood, CO...................... 11.8 183,895 100.0% --
Totals............................. 5,232,435 94.8% $ 34,332
--------- ----- -------
--------- ----- -------
- ----------------------------------
Footnotes: (dollars in thousands)
(1) These properties are pledged as security for a $75,000 mortgage loan.
(2) The land beneath this property is subject to a land lease expiring November
30, 2044 with one 15-year extension option. Annual rental payments are $50.
7
LEASES
The Company's leases are typically structured for terms in the range of
three to seven years. The Company's leases are a mixture of net leases (whereby
tenants pay their pro rata share of real estate tax and operating expenses) and
full service, gross leases under which tenants typically pay for all real estate
tax and operating expenses above those for an established base year or expense
stop. Leases on a significant portion of the rentable square feet in the
Company's portfolio are net leases that were in existence upon the Company's
acquisition of the Properties. However, whether structured as net leases or
gross leases with base year or expense stop expense reimbursement clauses,
virtually all leases entered into by the Company require tenants to reimburse
the Company for the tenant's pro-rata share of real estate tax and operating
expense increases.
Leases often contain provisions permitting tenants to renew at prevailing
market rates. Under the Company's leases, the Company is generally responsible
for structural repairs and other capitalized costs. Certain leases contain
provisions, which permit the tenant to terminate its lease upon written notice
to the Company, subject to the tenant's obligation to pay a termination penalty.
Such termination penalties are generally negotiated with a tenant when a lease
is executed and are usually calculated to compensate the Company for unamortized
tenant improvements and leasing commissions at the termination date, and, in
certain instances, for rent on the space for a period of months after the
termination date.
LEASE DISTRIBUTIONS. The following table sets forth information relating to
the distribution of the Company's leases based on rentable square feet under
lease, as of December 31, 1998.
PERCENTAGE PERCENTAGE
OF AGGREGATE ANNUALIZED OF AGGREGATE
PORTFOLIO BASE RENT PORTFOLIO
SQUARE FEET LEASED (000'S ANNUALIZED
UNDER LEASE SQUARE FEET OMITTED) BASE RENT
- ---------------------- --------------- -------------- -------------------
2,500 or Less......... 5.66% $ 4,870 7.21%
2,501 - 5,000......... 10.27% 7,968 11.80%
5,001 - 7,500......... 10.67% 7,063 10.46%
7,501 - 10,000........ 6.90% 4,706 6.97%
10,001 - 20,000....... 17.05% 11,082 16.41%
20,001 - 40,000....... 19.04% 12,466 18.46%
40,001 +.............. 30.42% 19,381 28.70%
100.00% $ 67,536 100.00%
LEASE EXPIRATIONS--PORTFOLIO TOTAL. The following table sets forth a
summary schedule of the lease expirations for the Properties for leases in place
as of December 31, 1998, assuming that none of the tenants exercise renewal
options or termination rights, if any, at or prior to the scheduled expirations.
PERCENTAGE
SQUARE OF ANNUALIZED BASE
FOOTAGE TOTAL RENT OF EXPIRING PERCENTAGE OF
YEAR OF OF LEASED LEASES (000'S TOTAL
LEASE EXPIRING SQUARE OMITTED) ANNUALIZED
EXPIRATION LEASES FOOTAGE AT 12/31/98 BASE RENT
- ----------- --------- ----------- ----------------- ---------------
1999..... 558,949 11.51% $ 8,095 11.99%
2000..... 857,775 17.66% 12,274 18.17%
2001..... 981,936 20.22% 11,648 17.25%
2002..... 839,905 17.30% 12,041 17.83%
2003..... 824,773 16.98% 13,703 20.29%
2004..... 292,244 6.02% 3,841 5.69%
2005..... 94,200 1.94% 988 1.46%
2006..... 109,927 2.26% 1,189 1.76%
2007..... 112,523 2.32% 1,554 2.30%
2008..... 146,759 3.02% 1,795 2.66%
2009..... 37,131 0.76% 408 0.60%
4,856,122 100.00% $ 67,536 100.00%
8
The following table combines certain historical information regarding tenants at
the Properties who renewed an existing lease at or prior to the expiration of
the existing lease:
TOTAL/
WEIGHTED
AVERAGE
1993 1994 1995 1996 1997 1998 1993-1998
--------- --------- --------- --------- --------- --------- ---------
Number of leases expired
during calendar year(1)............. 3 7 25 34 85 108 262
Number of leases renewed.............. 3 4 18 26 53 65 169
Percentage of leases renewed.......... 100% 57% 72% 76% 62% 60% 65%
Aggregate rentable square footage
of expiring leases(1)............... 54,157 26,716 92,205 139,615 347,150 703,759 1,363,602
Aggregate rentable square footage
of lease renewals................... 54,157 19,645 72,586 118,142 175,247 410,752 850,529
Percentage of expiring rentable
square footage renewed.............. 100% 74% 79% 85% 50% 58% 62%
- ------------------------
(1) The aggregate rentable square footage of expiring leases excludes those
leases for tenants moving out where the Company believes the decision to
vacate was made prior to the Company's acquisition of the property.
ITEM 3--LEGAL PROCEEDINGS
As of March 2, 1999, the Company was not a party to any material legal
proceedings.
ITEM 4--SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to shareholders during the fourth quarter of the
fiscal year ended December 31, 1998.
ITEM 4A--EXECUTIVE OFFICERS OF THE REGISTRANT
The Company's executive officers are elected annually and, subject to the
terms of any applicable employment agreements, serve at the pleasure of the
Company's Board of Trustees. The following table sets forth certain information
with respect to the executive officers of the Company:
NAME AGE PRESENT POSITION AND OFFICES WITH THE COMPANY
- -------------------------------------------------- --- --------------------------------------------------
Richard A. May 54 Chief Executive Officer and Chairman of the Board
of Trustees
Patrick R. Hunt 45 President, Chief Operating Officer and Trustee
Richard L. Rasley 42 Executive Vice President, Secretary, Co-General
Counsel
James Hicks 43 Chief Financial Officer and Treasurer
Raymond M. Braun 39 Chief Investment Officer
Kim S. Mills 50 Senior Vice President--Leasing
Edith M. Scurto 33 Senior Vice President--Property Management
Richard A. May. Mr. May co-founded the Company in 1992 and has served as
principal executive officer and as Chairman of the Board of Trustees of the
Company since its inception. Mr. May is currently
9
the Chairman of the Board, and Chief Executive Officer of the Company. In 1986,
Mr. May co-founded Equity Partners Ltd. ("the Advisor") and from 1987 until
April 1, 1996, Mr. May was an officer and shareholder of the Advisor. Mr. May is
a licensed real estate broker in the States of Illinois and Indiana and holds
several inactive National Association of Securities Dealers, Inc. ("NASD")
licenses. He is also a member of National Association of Real Estate Investment
Trusts ("NAREIT"). Mr. May received his Bachelor's Degree in mechanical
engineering from the University of Illinois and received his M.B.A. degree from
The University of Chicago.
Patrick R. Hunt. Mr. Hunt, President, Chief Operating Officer and Trustee,
joined the Company in August 1997 and has general supervisory responsibility for
Company operating activities. From 1983 until August 1997, Mr. Hunt was employed
by LaSalle Partners, Incorporated ("LaSalle Partners") a Chicago-based provider
of international real estate services. Mr. Hunt served as a managing director of
LaSalle Partners from 1996 until August 1997. Mr. Hunt is a member of the
Pension Real Estate Association and NAREIT. He received his Bachelor's Degree
from Northwestern University and his M.B.A. degree from The University of
Chicago.
Richard L. Rasley. Mr. Rasley co-founded the Company in 1992 and has served
as Secretary of the Company since its inception. Mr. Rasley is currently the
Executive Vice President, Co-General Counsel and Secretary of the Company and
has general supervisory responsibility for administrative and legal matters.
From 1987 until April l, 1996, Mr. Rasley was an officer and shareholder of the
Advisor. Mr. Rasley is a Certified Public Accountant, holds several inactive
NASD licenses, and is a member of the Illinois Bar and NAREIT. Mr. Rasley
received his Bachelor's Degree from the University of Iowa and received his
M.B.A. and J.D. degrees from the University of Illinois.
James Hicks. Mr. Hicks, Chief Financial Officer and Treasurer of the
Company, joined the Advisor in 1994 and currently has general supervisory
responsibility for the finance and accounting activities of the Company. From
1989 to 1993, Mr. Hicks was employed by JMB Institutional Realty Corporation,
which was a real estate adviser to pension funds and other institutional
investors, as a vice president of portfolio management with responsibility for
overall asset management of a portfolio of international and domestic commercial
real estate properties. He received his Bachelor's Degree in Accounting and
Mathematics from Augustana College and his M.B.A. degree from Northwestern
University. Mr. Hicks is a Certified Public Accountant and is a member of the
Illinois CPA Society and American Institute of Certified Public Accountants.
Raymond M. Braun. Mr. Braun, Chief Investment Officer, joined the Advisor in
May 1990 and currently has primary responsibility for all of the Company's real
estate acquisition activities. Prior to joining the Advisor, Mr. Braun was
employed from 1986 to 1990 by The Balcor Company, a major real estate investment
company involved in all aspects of real estate including development,
management, syndication and mortgage lending. Mr. Braun received his Bachelor's
Degree from the University of Illinois. Mr. Braun is a member of the National
Association of Industrial and Office Park Realtors.
Kim S. Mills. Mr. Mills, Senior Vice President-Leasing, joined the Advisor
in January 1996. Mr. Mills has primary responsibility for all of the Company's
leasing activities. Prior to joining the Advisor, Mr. Mills was employed by
Simon Property Group REIT, a commercial property REIT, from 1992 to 1995 as a
regional manager with responsibility for overall portfolio management of high
rise office buildings totaling over four million square feet. Mr. Mills received
his Bachelor's Degree from Ohio Northern University and has a Real Property
Administrator designation from the Building Owners and Managers Association.
Edith M. Scurto. Ms. Scurto, Senior Vice President-Property Management,
joined the Advisor in December 1984. In August 1987, she was given
responsibility for the firm's property management activities. Since that date
she has individually managed or overseen the management of all of the Advisor's
and the Company's properties, and has been involved with virtually every aspect
of property management, reporting, improvement and maintenance. In December
1997, Ms. Scurto became the Company's Senior Vice President- Property
Management. Ms. Scurto currently oversees the management of all of the
10
Company's properties. Ms. Scurto is a current member of the Institute of Real
Estate Management, maintains an Illinois Real Estate Sales Person License and is
a Certified Property Manager.
PART II
ITEM 5--MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
The Company's common shares of beneficial interest, $.01 par value per
share, (the "Common Shares") are listed on the New York Stock Exchange (the
"NYSE") under the symbol "GL."
As of March 2, 1999, there were approximately 370 holders of record of the
Common Shares, which excludes beneficial owners of shares registered in nominee
or street name.
The table below sets forth for the periods indicated, the reported high and
low sale prices of the Common Shares on the NYSE Composite Tape and the
quarterly dividends per share paid by the Company on such shares. May 8, 1997
was the first day the Common Shares were listed on the NYSE. Prior to May 8,
1997, there was no established trading market for the Common Shares.
1998 1Q 2Q 3Q 4Q 1997 1Q 2Q 3Q 4Q
- -------------------- ------- ------- ------- ------- -------------------- ------- ------- ------- -------
High................ 20 3/16 19 1/2 18 1/2 16 5/8 High................ n/a 16 7/16 19 7/16 19 5/16
Low................. 18 1/4 15 5/8 14 3/16 15 1/8 Low................. n/a 15 3/8 16 18 1/8
Dividend............ $.30 $.30 $.32 $.32 Dividend............ $.30 $.30 $.30 $.30
The Company, in order to qualify as a REIT under the Code, is required to
make distributions (other than capital gain distributions) to its shareholders
with respect to each taxable year in amounts at least equal to (i) the sum of
(A) 95% of its "REIT taxable income" (computed without regard to the dividends
paid deduction and its net capital gain) and (B) 95% of the net income (after
tax), if any, from foreclosure property, minus (ii) the sum of certain items of
non-cash income. The Company's distribution strategy is to distribute what it
believes is a conservative percentage of its cash flow, permitting the Company
to retain funds for capital improvements and other investments while funding its
distributions.
For federal income tax purposes, distributions may consist of ordinary
income dividends, nontaxable return of capital, capital gains or a combination
thereof. Distributions in excess of the Company's current and accumulated
earnings and profits (calculated for tax purposes) will constitute a nontaxable
return of capital rather than a dividend and will reduce the shareholder's basis
in his or her Common Shares for tax purposes. To the extent that a distribution
exceeds both the Company's current and accumulated earnings and profits and the
shareholder's basis in his or her shares, the amount of such excess will
generally be treated as gain from the sale or exchange of that shareholder's
shares. The Company annually notifies stockholders of the taxability of
distributions paid during the preceding year. The following table sets forth the
taxability of distributions paid in 1998, 1997 and 1996:
1998 1997 1996
--------- --------- ---------
Ordinary income........................................... 87.1% 88.4% 88.3%
Non-taxable return of capital............................. 12.9% 11.6% 11.7%
--- --- ---
Total..................................................... 100% 100% 100%
--- --- ---
--- --- ---
11
RECENT SALES OF UNREGISTERED SECURITIES
The following table is a summary of certain information relating to all
securities of the Company sold by the Company during the period covered by this
Report on Form 10-K that were not registered under the Securities Act:
TOTAL SHARES ISSUANCE
AND UNITS PROCEEDS
TYPE OF SECURITY SOLD OFFERING PERIOD SOLD (000'S OMITTED) COSTS
- ---------------------------------------- ----------------- ------------- --------------- -----
Operating Partnership Units(1).......... 48,447 $ 887 --
Common Shares(2)........................ December 31, 1998 6,044 $ 66 --
- ------------------------
(1) On May 22, 1998, the Company issued 48,447 units in the Operating
Partnership in connection with the acquisition by the Company of the Denver
properties. The Company sold such securities pursuant to the exemption from
the registration requirements of the Securities Act of 1933, as amended (the
"Securities Act"), provided by Section 4(2) thereof, including in reliance
upon the exemption provided by Regulation D thereunder to "accredited
investors" in those states in which it was authorized to do so. There was no
underwriter involved in such sale of securities.
(2) During the quarter ended December 31, 1998, the Company issued 6,044 Common
Shares pursuant to the exercise of outstanding share options. These shares
were issued to the optionholders pursuant to exemptions from the
registration requirements of the Securities Act provided by Section 4(2)
thereof or Rule 701 thereunder.
12
ITEM 6--SELECTED FINANCIAL DATA
The following sets forth selected financial and operating information for
the Company for each of the periods and dates indicated. The following
information should be read in conjunction with the financial statements and
notes thereto of the Company included elsewhere in this report. The selected
historical financial and operating information for the Company at December 31,
1998 and 1997, and for each of the three years in the period ended December 31,
1998 has been derived from the Company's financial statements audited by Ernst &
Young LLP, independent auditors, whose report with respect thereto is included
elsewhere in this report. The selected financial and operating information for
the Company at December 31, 1996, 1995, and 1994 and for the years ended
December 31, 1995, and 1994 has been derived from the Company's audited
financial statements.
YEAR ENDED DECEMBER 31,
(UNAUDITED)
HISTORICAL
1998 1997 1996 1995 1994
--------- --------- --------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Income Statement Data:
Revenue
Rental........................................ $ 62,527 $ 36,231 $ 20,249 $ 12,410 $ 6,647
Reimbursement................................. 17,141 10,688 4,814 2,355 884
Interest and other............................ 1,230 744 169 201 52
--------- --------- --------- --------- ---------
Total revenue............................... 80,898 47,663 25,232 14,966 7,583
--------- --------- --------- --------- ---------
Expenses:
Real estate taxes............................. 12,634 7,702 3,954 2,625 1,418
Other property operating...................... 21,018 11,958 6,548 3,967 1,944
General and administrative.................... 4,958 3,379 2,242 923 561
Interest...................................... 12,339 4,308 3,778 2,296 911
Depreciation and amortization................. 13,092 8,200 4,001 1,955 761
--------- --------- --------- --------- ---------
Total expenses.............................. 64,041 35,547 20,523 11,766 5,595
--------- --------- --------- --------- ---------
Income before gain on sale of properties........ 16,857 12,116 4,709 3,200 1,988
Gain on sale of properties...................... 3,140
--------- --------- --------- --------- ---------
Income before allocation to minority
interests..................................... 16,857 12,116 7,849 3,200 1,988
Minority interests.............................. 61 11
--------- --------- --------- --------- ---------
Net income...................................... 16,796 12,105 7,849 3,200 1,988
Income allocated to preferred shareholders...... 163
--------- --------- --------- --------- ---------
Net income applicable to common shares.......... $ 16,633 $ 12,105 $ 7,849 $ 3,200 $ 1,988
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Earnings per common share-basic................. $ 0.99 $ 0.92 $ 1.33 $ 0.89 $ 0.97
Weighted average common shares outstanding-
basic......................................... 16,793 13,140 5,885 3,605 2,043
Diluted earnings per common share............... $ 0.98 $ 0.91 $ 1.32 $ 0.88 $ 0.96
Weighted average common shares outstanding-
diluted....................................... 16,974 13,305 5,927 3,650 2,070
Balance Sheet Data (end of period):
Properties--net of accumulated depreciation..... $ 426,862 $ 285,941 $ 184,122 $ 91,858 $ 37,234
Total assets.................................... $ 443,689 $ 297,137 $ 194,149 $ 98,978 $ 42,522
Total long-term debt............................ $ 193,623 $ 95,098 $ 86,111 $ 48,307 $ 15,955
Total liabilities............................... $ 213,437 $ 109,732 $ 97,554 $ 54,013 $ 18,460
Shareholders' equity............................ $ 229,087 $ 187,092 $ 96,595 $ 44,965 $ 24,062
Operating Data:
EBITDA(1)....................................... $ 42,064 $ 24,613 $ 12,487 $ 7,451 $ 3,660
Funds from Operations(2):
Net income applicable to common shares........ $ 16,633 $ 12,105 $ 7,849 $ 3,200 $ 1,988
Gain on sale of properties.................... (3,140)
Depreciation and amortization................. 12,360 7,102 3,741 1,824 718
Loan prepayment costs......................... 644
--------- --------- --------- --------- ---------
Funds from Operations......................... $ 28,993 $ 19,851 $ 8,450 $ 5,024 $ 2,706
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
11
YEAR ENDED DECEMBER 31,
(UNAUDITED)
HISTORICAL
1998 1997 1996 1995 1994
--------- --------- --------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Cash dividends per common share................. $ 1.24 $ 1.20 $ 1.20 $ 1.13 $ 0.96
Cash flows from operating activities............ $ 30,332 $ 21,429 $ 12,828 $ 5,650 $ 1,977
Cash flows from investing activities............ $(139,052) $(104,057) $ (91,646) $ (51,650) $ (20,493)
Cash flows from financing activities............ $ 109,749 $ 82,377 $ 79,203 $ 44,626 $ 17,420
Number of properties owned at period end........ 40 34 25 16 9
Aggregate square feet of properties owned at
period end.................................... 5,232 3,988 2,684 1,529 758
Occupancy at period end of properties owned at
period end.................................... 95% 93% 92% 86% 84%
- --------------------------
(1) EBITDA is defined as net income before interest, gain on sale of properties,
taxes, depreciation and amortization expenses. Because of the Company's REIT
status, the Company does not pay income taxes. EBITDA should not be
considered as an alternative to net income (determined in accordance with
GAAP) as an indicator of the Company's financial performance or to cash flow
from operating activities (determined in accordance with GAAP) as a measure
of the Company's liquidity, nor is it indicative of funds available to fund
the Company's cash needs, including its ability to make distributions.
(2) The White Paper on Funds From Operations approved by the Board of Governors
of the National Association of Real Estate Investment Trusts ("NAREIT") in
March 1995 (the "White Paper") defines Funds from Operations as net income
(loss) (computed in accordance with GAAP), excluding gains (or losses) from
debt restructuring and sales of property, plus real estate related
depreciation and amortization and after adjustments for unconsolidated
partnerships and joint ventures. Management considers Funds from Operations
an appropriate measure of performance of an equity REIT because it is
predicated on cash flow analyses. The Company computes Funds from Operations
in accordance with standards established by the White Paper which may differ
from the methodology for calculating Funds from Operations utilized by other
equity REITs and, accordingly, may not be comparable to such other REITs.
Funds from Operations should not be considered as an alternative to net
income (determined in accordance with GAAP) as an indicator of the Company's
financial performance or to cash flow from operating activities (determined
in accordance with GAAP) as a measure of the Company's liquidity, nor is it
indicative of funds available to fund the Company's cash needs, including
its ability to make distributions.
12
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (DOLLARS IN THOUSANDS)
RESULTS OF OPERATIONS
1998 COMPARED TO 1997
The changes in the income statement in 1998 to 1997 are as follows:
INCREASE
(DECREASE)
------------------
Rental and reimbursements................................................. $ 32,749
Interest and other........................................................ 486
-------
Total revenues.......................................................... 33,235
-------
Real estate taxes......................................................... 4,932
Other property operating.................................................. 9,060
General and administrative................................................ 1,579
Interest.................................................................. 8,031
Depreciation and amortization............................................. 4,892
-------
Total expenses............................................................ 28,494
-------
Income before gain on sale of properties.................................. 4,741
Minority interests........................................................ (50)
-------
Net income................................................................ 4,691
Income allocated to preferred shares...................................... (163)
-------
Net income applicable to common shares.................................... $ 4,528
-------
-------
During 1998, the Company acquired six properties. The operating results of
these properties have been included in the Company's financial statements from
the dates of their respective acquisitions. In 1997, the Company acquired nine
properties, and in 1998 a full year of operations of these properties has been
included in the Company's financial statements. In analyzing the 1998 operating
results of the Company, the changes in rental and reimbursement income, real
estate taxes, and other property operating expenses from 1997 are due
principally to: (i) the addition of operating results from properties acquired
in 1998 from the dates of their respective acquisitions, (ii) the addition of a
full year's operating results in 1998 of properties acquired in 1997 compared to
the partial year's operating results from the dates of their respective
acquisitions in 1997 and (iii) improved operations of properties during 1998
compared to 1997. A summary of these changes as they impact rental and
reimbursement income, real estate taxes and other property operating expenses
for 1998 follows:
RENTAL AND OTHER PROPERTY
REIMBURSEMENT REAL ESTATE OPERATING
INCOME TAXES EXPENSES
-------------- ----------- ---------------
Increase due to 1998 acquisitions............... $ 14,991 $ 2,023 $ 4,673
Increase due to inclusion of full year of
properties acquired in 1997................... 15,383 2,525 4,256
Property dispositions in 1998................... (179) (15) (25)
Improved operations in 1998 compared to 1997.... 2,554 399 156
------- ----------- ------
$ 32,949 $ 4,932 $ 9,060
------- ----------- ------
------- ----------- ------
13
Interest expense increased by $8,031 in 1998 compared to 1997 as the Company
had increased amounts of outstanding indebtedness during 1998 compared with
1997. This indebtedness was incurred to finance the acquisition of properties
acquired during 1998.
General and administrative expenses increased by $1,579 due to one-time
costs associated with the conversion to a trust ($307), non-recurring costs
associated with acquisitions not completed ($56), legal fees associated with
acquisitions not completed ($51), increased compensation costs in 1998 ($820),
increases in costs associated with shareholder relations ($150) and increases in
other costs due to the increased size of the company ($195).
Depreciation and amortization increased in 1998 by $4,892 as the Company
incurred these expenses on 40 properties as of December 31, 1998 as compared to
34 properties as of December 31, 1997.
1997 COMPARED TO 1996
The changes in the income statement items in 1997 compared to 1996 are as
follows:
INCREASE
(DECREASE)
------------------
Rental and reimbursements................................................. $ 21,856
Interest and other........................................................ 575
-------
Total revenues.......................................................... 22,431
-------
Real estate taxes......................................................... 3,748
Other property operating.................................................. 5,410
General and administrative................................................ 1,137
Interest.................................................................. 530
Depreciation and amortization............................................. 4,199
-------
Total expenses............................................................ 15,024
-------
Income before gain on sale of properties and allocation to minority
interests............................................................... 7,407
Gain on sale of properties................................................ (3,140)
Minority interests........................................................ (11)
-------
Net income................................................................ $ 4,256
-------
-------
During 1997, the Company acquired nine properties. The operating results of
these properties have been included in the Company's financial statements from
the dates of their respective acquisitions. In 1996, the Company acquired ten
properties, and in 1997 a full year of operations of these properties has been
included in the Company's financial statements. In analyzing the 1997 operating
results of the Company, the changes in rental income, real estate taxes, and
other property operating expenses from 1996 are due principally to: (i) the
addition of operating results from properties acquired in 1997 from the dates of
their respective acquisitions, (ii) the addition of a full year's operating
results in 1997 of properties acquired in 1996 compared to the partial year's
operating results from the dates of their respective acquisitions in 1996 and
(iii) improved operations of properties during 1997 compared to 1996. A summary
14
of these changes as they impact rental and reimbursement income, real estate
taxes and other property operating expenses for 1997 follows:
RENTAL AND OTHER PROPERTY
REIMBURSEMENT REAL ESTATE OPERATING
INCOME TAXES EXPENSES
-------------- ----------- ---------------
Increase due to 1997 acquisitions............... $ 4,315 $ 743 $ 1,032
Increase due to inclusion of full year of
properties acquired in 1996................... 17,717 2,957 4,280
Property dispositions in 1996................... (1,695) (160) (446)
Improved operations in 1997 compared to 1996.... 1,519 208 544
------- ----------- ------
$ 21,856 $ 3,748 $ 5,410
------- ----------- ------
------- ----------- ------
Interest expense increased by $530 in 1997 compared to 1996 as the Company
increased amounts of outstanding short-term indebtedness during 1997 compared
with 1996. This indebtedness was incurred to finance the acquisition of
properties acquired in 1997.
General and administrative expenses increased by $1,137 due to an increase
in compensation costs as the Company hired additional employees in 1997 ($735),
one-time costs associated with the hiring of the Company's president ($191),
increased franchise taxes ($80), and increased administrative costs related to
the increase in employees ($131).
Depreciation and amortization increased in 1997 by $4,199 as the Company
incurred these expenses on 34 properties as of December 31, 1997 as compared to
25 properties as of December 31, 1996.
Gain on sale decreased by $3,140, as the Company did not sell any properties
in 1997 as compared to two dispositions in 1996.
FORWARD-LOOKING STATEMENTS
Certain statements in this document constitute "forward-looking statements"
within the meaning of Section 27A of the Securities Act of 1933 and Section 21E
of the Securities Exchange Act of 1934, and the Company intends that such
"forward-looking statements" be subject to the safe harbors created thereby. The
words "believe", "expect" and "anticipate" and similar expressions identify
forward-looking statements. These forward-looking statements reflect the
Company's current views with respect to future events and financial performance,
but are subject to many uncertainties and factors relating to the Company's
operations and business environment that may cause the actual results of the
Company to be materially different from any future results expressed or implied
by such forward-looking statements. Examples of such uncertainties include, but
are not limited to, changes in interest rates, increased competition for
acquisition of new properties, unanticipated expenses and delays in acquiring
properties or increasing occupancy rates and regional economic and business
conditions.
LIQUIDITY AND CAPITAL RESOURCES
The Company expects to meet its short-term liquidity requirements
principally through its working capital and net cash provided by operating
activities. The Company considers its cash provided by operating activities to
be adequate to meet operating requirements and to fund the payment of dividends
in order to comply with certain federal income tax requirements applicable to
real estate investment trusts ("REITs").
The Company expects to meet its liquidity requirements for property
acquisitions and significant capital improvements through additional borrowings
on its existing $150,000 unsecured line of credit, which matures in April 2001.
15
In 1998 the Company completed approximately $142,000 of property
acquisitions. The ability of the Company to continue to make acquisitions at
this pace is predicated upon the Company's ability to access the public and
private equity and debt markets at acceptable prices and rates. In light of the
recent market pricing of the Company's common shares, the Company expects its
acquisition activity will be reduced.
The Company expects to meet its long-term liquidity requirements (such as
scheduled mortgage debt maturities, property acquisitions, and significant
capital improvements) through long-term collateralized and uncollateralized
borrowings, the issuance of debt or additional equity securities in the Company,
and targeted property dispositions.
Pursuant to its previously announced share repurchase program, the Company
has purchased (as of December 31, 1998) 721,400 of its common shares at a cost
of $10,931. Funds for the purchases came from borrowings on its unsecured line
of credit and working capital.
On July 17, 1998, the Company's Board of Trustees approved a plan to sell
six properties. These properties include five office properties and one
industrial building. The specific properties, all in suburban Chicago, are:
PROPERTY LOCATION
- -------------------------------------------------------------------------- ------------------
565 Lakeview Parkway...................................................... Vernon Hills
2800 River Road........................................................... Des Plaines
1251 Plum Grove Road...................................................... Schaumburg
Kensington Corporate Center............................................... Mount Prospect
Court Office Center....................................................... Markham
1675 Holmes Road.......................................................... Elgin
The Company expects to generate proceeds from the sale of these assets in
the range of $30,000 to $35,000, and formally commenced marketing efforts in
September 1998. These proposed dispositions are consistent with the Company's
strategy to seek to enhance shareholder value in part through strategic
dispositions. The Company currently plans to use the proceeds from the sale to
reduce outstanding balance of its unsecured credit facility, to acquire
additional investment properties, and for working capital.
At December 31, 1998, the Company has committed to fund $4,200 for the
renovation of its Ann Arbor, Michigan property. The Company also has committed
to acquire, upon completion, an office building under construction in Pewaukee,
Wisconsin for a maximum contract price of $11,400. The Company expects to close
this acquisition in November 1999. At December 31, 1998, the Company had
approximately $65,700 available to borrow on its unsecured credit facility.
In June 1998, the Financial Accounting Standards Board issued Statement No.
133, Accounting for Derivative Instruments and Hedging Activities, which is
required to be adopted in years beginning after June 15, 1999. Because of the
Company's minimal use of derivatives, management does not anticipate that the
adoption of the new Statement will have a significant effect on earnings or the
financial position of the Company.
YEAR 2000 ISSUES AND STATUS
The Company recognizes the importance of the Year 2000 issues and has
initiated a program of evaluation, remediating and testing the systems and
equipment serving its businesses for Year 2000 readiness. The Company is also
assessing the readiness of external parties, including its suppliers, vendors,
bankers, insurers and other service providers as well as its tenants. The
evaluation phase is intended to determine the readiness of internal systems and
equipment as well as the readiness of third parties. The remediation phase
includes computer software, hardware and operating equipment as well as
identifying solutions to possible third party noncompliance. The testing phase
includes integrated testing of all systems which are modified.
16
Amounts incurred to date for remediation costs have not been material. The
current status of the Company's state of readiness and expected completion dates
for evaluation, remediation and testing related to Year 2000 issues are
summarized below:
FINANCIAL SOFTWARE: The evaluation of its financial software is 100%
complete and since the Company believes this software is Year 2000 compliant, no
remediation is required. The Company has not yet tested whether the financial
items are in fact Year 2000 compliant but expects to begin such testing in the
second quarter of 1999. Costs associated with the testing phase will not be
material.
NETWORKING SOFTWARE: The Company operates its internal computer network on
a product that is not Year 2000 compliant. The Company has ordered an upgrade to
this product as well as the necessary hardware to compliment the software
upgrade. The Company initiated training of its employees for this software
upgrade in the third quarter of 1998. The software and hardware upgrade is
expected to be installed and tested during the first quarter of 1999. Total
costs associated with this effort are anticipated to be $50 (including $15 for
the hardware).
BUILDING SYSTEMS: Building systems include heating and air-conditioning
control systems, elevator operating software, building security systems,
telephone systems, and alarm monitoring systems. The Company has contacted all
its vendors related to these systems in order to evaluate Year 2000 issues with
respect to embedded technology related to these building systems. The Company
has requested that its vendors for these systems indicate their compliance with
Year 2000 issues. Most vendors have been reluctant to disclose their readiness
to Year 2000 issues.
The Company has identified several building systems that need to be upgraded
in its properties for Year 2000 issues. Total costs for the upgrades, which are
expected to occur in 1999, are expected to be $250.
TENANTS: The Company is developing a plan to contact its tenants in inquire
as to whether the tenant's accounts payable systems will be able make required
payments for the Year 2000 on a timely basis. The Company expects to complete
its evaluation of this issue by June 1999 and to develop contingency plans, if
necessary, beginning in July of 1999.
The Company believes that in the most likely, worst case scenario, internal
remediation and testing of financial and networking technology systems and
building systems will be completed as indicated above and will have minimal
unfavorable impact on the results of operations and financial condition. If any
or all of these efforts are delayed, there could be disruption of the financial,
networking, and building systems. Critical third party vendors, suppliers and
service providers have been contacted to evaluate their Year 2000 readiness.
However, external parties providing materials and services to the Company have
been reluctant to fully disclose information about their readiness. Accordingly,
the Company cannot be assured there will be no disruption of operations because
of vendors and service providers who are not fully Year 2000 compliant.
Contingency plans will be developed, where necessary, as part of the remediation
phases indicated above, to provide a continued supply of building services. The
Company is developing a plan to contact significant tenants to determine their
compliance with Year 2000 issues. However, the Company has not completed these
evaluations and cannot determine whether there are vendors, suppliers and
tenants who will not be compliant on a timely basis or whether the failure of
any of these entities to become compliant could have a material adverse effect
on its business, consolidated results of operations and consolidated financial
position.
STATEMENTS OF CASH FLOWS
1998 COMPARED TO 1997
Cash provided by operating activities increased by $8,903, as the Company
owned 40 properties during 1998 as compared to 34 properties during 1997.
17
Cash used by investing activities increased by $34,995 primarily as
properties purchased increased by $31,165 and property additions increased by
$5,440.
Cash provided by financing activities increased by $27,372 million primarily
as net proceeds from share sales decreased by $36,275, distributions increased
by $4,235, purchase of treasury shares increased by $10,931, and the proceeds
from bank and mortgage loans (net of repayments) increased by $80,093.
1997 COMPARED TO 1996
Cash provided by operating activities increased by $8,601, as the Company
owned 34 properties during 1997 compared to 25 properties during 1996.
Cash used by investing activities increased by $12,411 primarily as the
Company had property sales proceeds of $11,707 in 1996 compared to none in 1997.
Cash provided by financing activities increased by $3,174 as net proceeds
from share sales increased by $44,039, proceeds from loans increased by $60,876,
repayments of loans increased by $92,683, distributions paid increased by
$9,897, and payment of deferred financing costs decreased by $724.
ITEM 7(A)--MARKET RISK (DOLLARS IN THOUSANDS)
The Company's interest income is sensitive to changes in the general levels
of U.S. short-term interest rates.
The Company's interest expense is sensitive to changes in the general level
of U.S. short-term and long-term interest rates as the Company has outstanding
indebtedness at fixed and variable rates.
The Company's variable rate debt bears interest at LIBOR plus 1% to 1.3% per
annum depending on overall Company leverage. Increases in LIBOR rates would
increase the Company's interest expense and reduce its cash flow. Conversely,
declines in LIBOR rates would decrease its interest expense and increase its
cash flow. At December 31, 1998, the Company has not hedged (i.e. fixed the
interest rate) on its variable rate debt. The Company may, in the future, enter
into interest rate swaps, interest rate caps, or other derivative financial
instruments to fix interest rates on its variable rate debt. The Company
generally operates with variable rate debt representing less than 50% of total
long-term debt.
At December 31, 1998, the Company had $104,532 of fixed rate debt
outstanding at an average rate of 6.92%. If the general level of interest rates
in the United States were to fall, the Company would not likely have the
opportunity to refinance this fixed rate debt at lower interest rates due to
prepayment restrictions and penalties on its fixed rate debt.
In general, the Company believes long-term fixed rate debt is preferable as
a financing vehicle for its operations due to the long-term fixed contractual
rental income the Company receives from its tenants. As a result, the Company
has 54% of its long-term debt outstanding at December 31, 1998 at fixed rates.
The Company may, as market conditions warrant, enter into additional fixed rate
long-term debt instruments on either a secured or unsecured basis.
18
A tabular presentation of interest rate sensitivity is as follows:
INTEREST RATE SENSITIVITY
PRINCIPAL AMOUNT BY EXPECTED MATURITY
AVERAGE INTEREST RATE
1999 2000 2001 2002 2003 THEREAFTER
--------- --------- --------- --------- --------- -----------
Liabilities:
Fixed Rate
Mortgage loans payable.......................... $ 2,390 $ 2,566 $ 2,749 $ 2,947 $ 13,964 $ 79,916
Average interest rate........................... 7.00% 7.00% 7.01% 7.01% 7.06% 6.97%
Variable Rate
Bank loan payable............................... $ 84,291
Average interest rate(1)
Bonds payable................................... $ 250 280 310 340 375 3,245
Average interest rate........................... (2) (2) (2) (2) (2) (2)
- ------------------------
(1) The current interest rate on this debt is LIBOR + 1.3%.
(2) The interest rate on the bonds payable is reset weekly. After factoring in
credit enhancement costs for the bonds, the average interest rate in 1998
was 5.3%.
ITEM 8--FINANCIAL STATEMENTS
The financial statements and supplementary data required by Regulation S-X
are included in this Report on Form 10-K commencing on Page F-1.
ITEM 9--CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
PART III
ITEM 10--TRUSTEES AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information regarding trustees of the Company will be set forth under the
caption "Election of Trustees" in the Company's proxy statement related to the
Company's 1999 annual meeting of shareholders (the "Proxy Statement") and is
incorporated herein by reference. Information regarding executive officers of
the Company is included as Item 4A of Part I as required by Instruction 3 of
Item 401(b) of Regulation S-K. Information required by Item 405 of Regulation
S-K will be set forth under the caption "Section 16(a) Beneficial Ownership
Reporting Compliance" in the Proxy Statement and is incorporated herein by
reference.
ITEM 11--EXECUTIVE COMPENSATION.
Information required by this item will be set forth under the caption
"Executive Compensation" in the Proxy Statement and, except for the information
under the captions "Executive Compensation--Compensation Committee Report on
Executive Compensation" and "Executive Compensation--Performance Graph," is
incorporated herein by reference.
19
ITEM 12--SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
Information required by this item will be set forth under the caption
"Security Ownership of Certain Beneficial Owners and Management" in the Proxy
Statement and is incorporated herein by reference.
ITEM 13--CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Information regarding any disclosable relationships and related transactions
of directors and executive officers will be set forth under the caption "Certain
Relationships and Related Transactions" in the Proxy Statement and is
incorporated herein by reference.
PART IV
ITEM 14--EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) 1. See Index to Financial Statements.
2. See Index to Financial Statements.
All other schedules are not submitted because the required criteria have
not been met, or because the required information is included in the
consolidated financial statements or notes thereto.
3. Exhibits:
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- --------- --------------------------------------------------------------------------------------------------------
3.1 Amended and Restated Declaration of Trust of the Company as filed with the Maryland State Department of
Assessments and Taxation on July 27, 1998 (incorporated by reference to Appendix B to the Proxy
Statement/Prospectus that is part of the Company's Registration Statement on Form S-4 (File No.
333-56167) (the "S-4")).
3.2 Articles Supplementary regarding the Company's 9 3/4% Cumulative Redeemable Preferred Shares of
Beneficial Interest, $.01 par value per share (the "Series A Preferred Shares"), as filed with the
Maryland State Department of Assessments and Taxation on December 17, 1998 (incorporated by reference to
Exhibit 1 to the Company's Form 8-A Registration Statement (File No. 1-14307) filed with the Securities
and Exchange Commission on December 16, 1998 (the "December 1998 8-A")).
3.3 Bylaws of the Company (incorporated by reference to Appendix C to the Proxy Statement/ Prospectus that
is part of the S-4).
4.1 Specimen of certificate representing the Company's Common Shares of Beneficial Interest, $.01 par value
per share (incorporated by reference to Exhibit 4.2 in the Company's Form 8-A Registration Statement
filed with the Securities and Exchange Commission on July 16, 1998).
4.2 Specimen of certificate representing the Series A Preferred Shares (incorporated by reference to Exhibit
4 to the December 1998 8-A).
4.3 Unsecured Revolving Credit Agreement dated April 6, 1998 with Bank of America National Trust and Savings
Association, as lender and administrative agent, The First National Bank of Chicago, as lender and
documentation agent, Dresdner Bank AG, New York and Grand Cayman branches, as lender and co-agent, U.S.
Bank National Association, as lender and co-agent, and LaSalle National Bank, as lender and co-agent
(the "Unsecured Revolving Credit Agreement") (incorporated by reference to Exhibit 10.1 to the Company's
Current Report on Form 8-K dated April 17, 1998 filed with the Securities and Exchange Commission on
April 20, 1998)).
20
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- --------- --------------------------------------------------------------------------------------------------------
4.4 First Amendment to the Unsecured Revolving Credit Agreement, dated June 19, 1998.
4.5 Second Amendment to the Unsecured Revolving Credit Agreement, dated December 16, 1998.
4.6 Loan Agreement, dated December 1, 1998, between the Company and AUSA Life Insurance Company, Inc.,
(incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K filed with the
Securities and Exchange Commission on December 9, 1998).
10.1 Amended and Restated Agreement of Limited Partnership of Great Lakes REIT, L.P., dated December 27, 1996
(the "Partnership Agreement") (incorporated by reference to Exhibit 5 to the Company's Current Report on
Form 8-K dated January 14, 1997).
10.2 First Amendment to the Partnership Agreement dated February 6, 1997 (incorporated by reference to
Exhibit 10.3 to the Company's Registration Statement on Form S-11 (File No. 333-22619) (the "S-11")).
10.3 Second Amendment to the Partnership Agreement, dated February 10, 1997.
10.4 Third Amendment to the Partnership Agreement, dated May 22, 1998.
10.5 Fourth Amendment to the Partnership Agreement, dated December 23, 1998 (incorporated by reference to
Exhibit 10.1 to the Company's Current Report on Form 8-K dated December 23, 1998).
*10.6 1997 Equity and Performance Incentive Plan (the "Employee Plan")(incorporated by reference to Exhibit
4.4 to the Company's Post-Effective Amendment No.1 to Form S-8 Registration Statement (File No.
333-56619)).
*10.7 Form of Option Agreement for use in connection with options granted under the Employee Plan; Richard A.
May, Patrick R. Hunt, Richard L. Rasley, James Hicks, and Raymond Braun entered into agreements in 1998
that evidenced an option to purchase 34,700, 31,950, 19,450, 19,450, and 19,450 Common Shares,
respectively.
*10.8 Amended and Restated Option Plan for Independent Trustees (the "Trustee Plan") dated July 2, 1992, as
amended.")(incorporated by reference to Exhibit 4.4 to the Company's Post-Effective Amendment No.1 to
Form S-8 Registration Statement (File No. 333-56617)).
*10.9 Form of Non-Qualified Stock Option Certificate for use in connection with options granted under the
Trustee Plan; James J. Brinkerhoff, Daniel E. Josephs, Daniel P. Kearney, Edward Lowenthal and Donald E.
Phillips were each issued certificates dated December 31, 1998 that evidenced an option to purchase
5,000 Common Shares.
*10.10 Form of Employment Agreement dated July 17, 1998 for Richard A. May and Patrick R. Hunt (incorporated by
reference to Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the quarter ended September
30, 1998).
*10.11 Form of Employment Agreement dated July 17, 1998 for Raymond M. Braun, James Hicks and Richard L. Rasley
(incorporated by reference to Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1998).
*10.12 Form of Change in Control Agreement dated July 17, 1998 for Kim S. Mills and Edith M. Scurto
(incorporated by reference to Exhibit 10.3 to the Company's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1998).
*10.13 Limited Purpose Employee Loan Program of the Company (incorporated by reference to Exhibit 10.61 to the
Company's Form 10/A Registration Statement filed with the Securities and Exchange Commission on January
9, 1997).
21
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- --------- --------------------------------------------------------------------------------------------------------
*10.14 Form of Limited Purpose Employee Loan Program Promissory Note for use in connection with limited purpose
employee loans. Richard A. May, Patrick R. Hunt, Richard L. Rasley and James Hicks borrowed $2,832,756,
$1,274,648, $1,264,000 and $52,000, respectively, during 1998.
10.15 Indemnification Escrow Agreement dated April 1, 1996 between the Company, Richard A. May, Richard L.
Rasley, Tim A. Grodrian and American National Bank and Trust Company of Chicago (incorporated by
reference to Exhibit 10.8 to the Company's Form 10 Registration Statement filed with the Commission on
April 26, 1996).
*10.16 Restricted Stock Agreement dated May 1, 1996 between the Company and Raymond Braun (incorporated by
reference to Exhibit 10.8.6 to the S-11).
21.1 Subsidiaries of the Company
23.1 Consent of Independent Auditors
24.1 Power of Attorney (set forth on the signature page hereof).
27.1 Financial Data Schedule
* Notes Management contract or compensation plan or arrangement.
- ------------------------
(b) Reports on Form 8-K:
During the fourth quarter ended December 31, 1998, the Company filed the
following reports on Form 8-K.
Report on Form 8-K dated December 9, 1998 reporting the following item:
Item 5. Other Events
Report on Form 8-K dated December 23, 1998 reporting the following item:
Item 5. Other Events
22
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of
Chicago, State of Illinois on the 18th day of March, 1999.
GREAT LAKES REIT, INC.
By: /s/ RICHARD A. MAY
-----------------------------------------
Richard A. May
CHAIRMAN OF THE BOARD OF DIRECTORS AND
CHIEF EXECUTIVE OFFICER
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities indicated and on the 18th day of March, 1999.
TITLE
--------------------------
Chairman of the Board of
/s/ RICHARD A. MAY Directors and Chief
- ------------------------------ Executive Officer
Richard A. May (Principal Executive
Officer)
/s/ RICHARD L. RASLEY Executive Vice President,
- ------------------------------ Secretary and Co-General
Richard L. Rasley Counsel
Senior Vice
President-Finance, Chief
/s/ JAMES HICKS Financial Officer and
- ------------------------------ Treasurer (Principal
James Hicks Financial Officer and
Principal Accounting
Officer)
/s/ JAMES J. BRINKERHOFF
- ------------------------------ Director
James J. Brinkerhoff
/s/ DANIEL E. JOSEPHS
- ------------------------------ Director
Daniel E. Josephs
/s/ DANIEL P. KEARNEY
- ------------------------------ Director
Daniel P. Kearney
/s/ EDWARD LOWENTHAL
- ------------------------------ Director
Edward Lowenthal
/s/ DONALD E. PHILLIPS
- ------------------------------ Director
Donald E. Phillips
23
GREAT LAKES REIT
INDEX TO FINANCIAL STATEMENTS
(ITEM 14(A))
Financial Statements
Report of Independent Auditors................................................ F-2
Consolidated Balance Sheets as of December 31, 1998 and 1997.................. F-3
Consolidated Statements of Income for the years ended December 31, 1998, 1997
and 1996...................................................................... F4
Consolidated Statements of Changes in Shareholders' Equity for the years ended
December 31, 1998, 1997 and 1996.............................................. F-5
Consolidated Statements of Cash Flows for the years ended December 31, 1998,
1997 and 1996................................................................. F-6
Notes to Consolidated Financial Statements.................................... F-7
Financial Statement Schedules
Schedule III--Real Estate and Accumulated Depreciation as of December 31,
1998.......................................................................... S-1
Schedules, other than as listed above, are omitted for the reason that they are
not applicable or equivalent information has been included elsewhere herein.
F-1
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Shareholders
Great Lakes REIT
We have audited the accompanying consolidated balance sheets of Great Lakes
REIT as of December 31, 1998 and 1997 and the related consolidated statements of
income, changes in shareholders' equity, and cash flows for each of the three
years in the period ended December 31, 1998. Our audit also included the
financial statement schedule listed in the index at Item 14(a). These financial
statements and schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Great Lakes
REIT at December 31, 1998 and 1997, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1998 in conformity with generally accepted accounting principles.
Also, in our opinion, the related financial statement schedule, when considered
in relation to the basic financial statements taken as a whole, presents fairly
in all material respects the information set forth therein.
Ernst & Young LLP
Chicago, Illinois
January 29, 1999
F-2
GREAT LAKES REIT
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
DECEMBER 31,
----------------------
1998 1997
---------- ----------
ASSETS
Properties:
Land...................................................................................... $ 60,960 $ 46,044
Buildings, improvements, and equipment.................................................... 388,068 251,353
---------- ----------
449,028 297,397
Less accumulated depreciation............................................................. 22,166 11,456
---------- ----------
426,862 285,941
Cash and cash equivalents................................................................. 2,466 1,437
Real estate tax escrows................................................................... 619 332
Rents receivable.......................................................................... 5,021 3,279
Deferred financing and leasing costs, net of accumulated amortization..................... 6,067 3,444
Goodwill, net of accumulated amortization................................................. 1,284 1,359
Other assets.............................................................................. 1,370 1,345
---------- ----------
Total assets.............................................................................. $ 443,689 $ 297,137
---------- ----------
---------- ----------
LIABILITIES AND SHAREHOLDERS' EQUITY
Bank loan payable......................................................................... $ 84,291 $ 72,500
Mortgage loans payable.................................................................... 104,532 17,568
Bonds payable............................................................................. 4,800 5,030
Accounts payable and accrued liabilities.................................................. 4,338 3,151
Accrued real estate taxes................................................................. 11,149 7,777
Prepaid rent.............................................................................. 3,220 2,781
Security deposits......................................................................... 1,107 925
---------- ----------
Total liabilities......................................................................... 213,437 109,732
---------- ----------
Minority interests........................................................................ 1,165 313
---------- ----------
Commitments and contingencies
Preferred shares of beneficial interest ($0.01 par value, 10,000,000 shares authorized;
1,500,000 9 3/4% Series A Cumulative Redeemable shares, with a $25.00 per share
Liquidation Preference, issued and outstanding in 1998)................................. 37,500
Common shares of beneficial interest ($0.01 par value, 60,000,000 shares authorized;
17,513,578 and 15,862,811 shares issued in 1998 and 1997, respectively)................. 175 159
Paid-in-capital........................................................................... 223,414 196,431
Retained earnings (deficit)............................................................... (8,790) (4,501)
Employee share loans...................................................................... (11,967) (4,654)
Deferred compensation..................................................................... (44) (73)
Treasury shares, at cost (743,184 and 21,784 shares in 1998 and 1997, respectively)....... (11,201) (270)
---------- ----------
Total shareholders' equity................................................................ 229,087 187,092
---------- ----------
Total liabilities and shareholders' equity................................................ $ 443,689 $ 297,137
---------- ----------
---------- ----------
The accompanying notes are an integral part of these financial statements.
F-3
GREAT LAKES REIT
CONSOLIDATED STATEMENTS OF INCOME
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
YEARS ENDED DECEMBER 31,
------------------------------------------
1998 1997 1996
------------- ------------- ------------
REVENUES:
Rental............................................................... $ 62,527 $ 36,231 $ 20,249
Reimbursements....................................................... 17,141 10,688 4,814
Interest and other................................................... 1,230 744 169
------------- ------------- ------------
Total revenues....................................................... 80,898 47,663 25,232
------------- ------------- ------------
EXPENSES:
Real estate taxes.................................................... 12,634 7,702 3,954
Other property operating............................................. 21,018 11,958 6,548
General and administrative........................................... 4,958 3,379 2,242
Interest............................................................. 12,339 4,308 3,778
Depreciation and amortization........................................ 13,092 8,200 4,001
------------- ------------- ------------
Total expenses....................................................... 64,041 35,547 20,523
------------- ------------- ------------
Income before gain on sale of properties............................. 16,857 12,116 4,709
Gain on sale of properties........................................... 3,140
------------- ------------- ------------
Income before allocation to minority interests....................... 16,857 12,116 7,849
Minority interests................................................... 61 11
------------- ------------- ------------
Net income........................................................... 16,796 12,105 7,849
Income allocated to preferred shares................................. 163
------------- ------------- ------------
Net income applicable to common shares............................... $ 16,633 $ 12,105 $ 7,849
------------- ------------- ------------
------------- ------------- ------------
Earnings per common share--basic..................................... $ 0.99 $ 0.92 $ 1.33
------------- ------------- ------------
------------- ------------- ------------
Weighted average common shares outstanding--basic.................... 16,793,410 13,140,124 5,884,708
------------- ------------- ------------
------------- ------------- ------------
Diluted earnings per common share.................................... $ 0.98 $ 0.91 $ 1.32
------------- ------------- ------------
------------- ------------- ------------
Weighted average common shares outstanding--diluted.................. 16,974,311 13,304,540 5,927,208
------------- ------------- ------------
------------- ------------- ------------
The accompanying notes are an integral part of these financial statements.
F-4
GREAT LAKES REIT
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997, AND 1996
(DOLLARS IN THOUSANDS)
1998 1997 1996
---------- ---------- ---------
PREFERRED SHARES
Balance at beginning of period............................................... $ $ 2 $
Cancellation of preferred shares............................................. (2) --
Proceeds from the sale of preferred shares................................... 37,500 2
---------- ---------- ---------
Balance at end of period..................................................... 37,500 2
---------- ---------- ---------
COMMON SHARES
Balance at beginning of period............................................... 159 88 45
Net proceeds from the sale of common shares.................................. 11 66 39
Exercise of share options.................................................... 5 4 3
Restricted share awards......................................................
Issuance of shares for acquisitions.......................................... 1 1
---------- ---------- ---------
Balance at end of period..................................................... 175 159 88
---------- ---------- ---------
PAID-IN CAPITAL
Balance at beginning of period............................................... 196,431 98,096 45,861
Net proceeds from the sale of common shares.................................. 21,009 92,940 47,378
Preferred share offering costs............................................... (1,349)
Exercise of common share options............................................. 7,323 3,860 3,247
Restricted common share awards............................................... 480
Issuance of common shares for acquisitions................................... 1,535 1,130
---------- ---------- ---------
Balance at end of period..................................................... 223,414 196,431 98,096
---------- ---------- ---------
RETAINED EARNINGS (DEFICIT)
Balance at beginning of period............................................... (4,501) 177 (786)
Net income................................................................... 16,796 12,105 7,849
Distributions/dividends...................................................... (21,085) (16,783) (6,886)