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FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2002
------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________________ to ___________________
Commission File Number: 1-8122
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GRUBB & ELLIS COMPANY
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(Exact name of registrant as specified in its charter)
Delaware 94-1424307
------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2215 Sanders Road, Suite 400,
Northbrook, IL 60062
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(Address of principal executive offices)
(Zip Code)
(847) 753-7500
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(Registrant's telephone number, including area code)
No Change
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(Former name, former address and former fiscal year,
if changed since last report)
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 whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes ___ No _X_
15,116,825
------------------------------------------------------
(Number of shares outstanding of the registrant's
common stock at November 1, 2002)
PART I
FINANCIAL INFORMATION
2
ITEM 1. FINANCIAL STATEMENTS
GRUBB & ELLIS COMPANY
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
ASSETS
September 30, June 30,
2002 2002
------------- ---------
Current assets:
Cash and cash equivalents $ 11,202 $ 14,085
Services fees receivable, net 13,918 13,212
Other receivables 3,036 3,396
Professional service contracts, net 1,589 1,974
Prepaid income taxes 6,950 6,890
Prepaid and other current assets 1,638 586
Deferred tax assets, net 1,657 1,563
-------- --------
Total current assets 39,990 41,706
Noncurrent assets:
Equipment, software and leasehold improvements, net 17,186 17,843
Goodwill, net 26,958 26,958
Deferred tax assets, net 1,004 947
Other assets 3,143 2,923
-------- --------
Total assets $ 88,281 $ 90,377
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 4,524 $ 5,569
Commissions payable 5,011 5,347
Credit facility debt 7,300 5,750
Accrued compensation and employee benefits 17,080 16,243
Deferred commissions payable 1,276 403
Other accrued expenses 4,702 4,143
-------- --------
Total current liabilities 39,893 37,455
Long-term liabilities:
Credit facility debt 24,000 26,000
Note payable - affiliate, net -- 10,660
Accrued claims and settlements 7,354 7,823
Other liabilities 2,406 2,573
-------- --------
Total liabilities 73,653 84,511
-------- --------
Stockholders' equity:
Preferred stock: 1,000,000 shares authorized; 11,725 Series A shares
issued and outstanding at $1,000 stated value at September 30, 2002 11,725 --
Common stock, $.01 par value: 50,000,000 shares authorized;
15,078,299 shares issued and outstanding at September 30, 2002
and 15,028,839 shares at June 30, 2002 151 150
Additional paid-in-capital 71,403 72,084
Accumulated other comprehensive loss (332) (283)
Retained deficit (68,319) (66,085)
-------- --------
Total stockholders' equity 14,628 5,866
-------- --------
Total liabilities and stockholders' equity $ 88,281 $ 90,377
======== ========
See notes to condensed consolidated financial statements.
3
GRUBB & ELLIS COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
For the three months ended
September 30,
-----------------------------
2002 2001
------------ ------------
Revenue:
Transaction services fees $ 64,651 $ 63,610
Management services fees 12,199 13,178
------------ ------------
Total revenue 76,850 76,788
------------ ------------
Costs and expenses:
Services commissions 38,112 36,793
Salaries, wages and benefits 22,873 25,153
Selling, general and administrative 15,680 15,415
Depreciation and amortization 2,047 2,800
Other non-recurring expense 900 --
------------ ------------
Total costs and expenses 79,612 80,161
------------ ------------
Total operating loss (2,762) (3,373)
Other income and expenses:
Interest income 93 116
Interest expense (934) (650)
------------ ------------
Loss before income taxes (3,603) (3,907)
Benefit for income taxes 1,369 1,641
------------ ------------
Net loss (2,234) (2,266)
Preferred stock dividends accrued (42) --
------------ ------------
Net loss to common stockholders $ (2,276) $ (2,266)
============ ============
Net loss per weighted average common share outstanding:
Basic - $ (0.15) $ (0.17)
============ ============
Diluted - $ (0.15) $ (0.17)
============ ============
Weighted average common shares outstanding:
Basic - 15,071,848 13,447,107
============ ============
Diluted - 15,071,848 13,447,107
============ ============
See notes to condensed consolidated financial statements.
4
GRUBB & ELLIS COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
For the three months ended
September 30,
--------------------------
2002 2001
-------- --------
Cash Flows from Operating Activities
Net loss $ (2,234) $ (2,266)
Depreciation and amortization expense 2,047 2,800
Other adjustments to reconcile net loss to net cash
provided by (used in) operating activities (1,358) (55)
-------- --------
Net cash provided by (used in) operating activities (1,545) 479
-------- --------
Cash Flows from Investing Activities:
Purchases of equipment, software and leasehold improvements (915) (1,364)
-------- --------
Net cash used in investing activities (915) (1,364)
-------- --------
Cash Flows from Financing Activities:
Repayment of credit facility debt (450) (2,000)
Other financing sources 27 561
-------- --------
Net cash used in financing activities (423) (1,439)
-------- --------
Net decrease in cash and cash equivalents (2,883) (2,324)
Cash and cash equivalents at beginning of period 14,085 7,248
-------- --------
Cash and cash equivalents at end of period $ 11,202 $ 4,924
======== ========
See notes to condensed consolidated financial statements.
5
GRUBB & ELLIS COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. INTERIM PERIOD REPORTING
The accompanying unaudited condensed consolidated financial statements include
the accounts of Grubb & Ellis Company and its wholly owned subsidiaries
(collectively, the "Company") and are prepared in accordance with accounting
principles generally accepted in the United States for interim financial
information and with the instructions to Form 10-Q and Article 10 of Regulation
S-X. Accordingly, they do not include all of the information and footnotes
required by accounting principles generally accepted in the United States for
complete financial statements and, therefore, should be read in conjunction with
the Company's Annual Report on Form 10-K for the year ended June 30, 2002.
The financial statements have been prepared in conformity with accounting
principles generally accepted in the United States that require management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities (including disclosure of contingent assets and liabilities) at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
In the opinion of management, all adjustments necessary for a fair statement of
the financial position and results of operations for the interim periods
presented have been included in these financial statements and are of a normal
and recurring nature. Certain amounts in prior periods have been reclassified to
conform to the current presentation. Such reclassifications have not changed
previously reported results of operations or cash flows.
Operating results for the three months ended September 30, 2002 are not
necessarily indicative of the results that may be achieved in future periods.
2. TOTAL COMPREHENSIVE LOSS
The Company is a party to two interest rate swap agreements that effectively fix
the interest rate on a portion of the Company's outstanding term loan
obligations. The Company has determined that these agreements are to be
characterized as effective under the definitions included within Statement of
Financial Accounting Standards No. 133 "Accounting for Derivative Instruments
and Hedging Activities."
The change in value of these instruments during a reporting period is
characterized as Other Comprehensive Income or Loss, and totaled approximately
$49,000 and $269,000 of unrealized losses during the three months ended
September 30, 2002 and 2001, respectively. These losses, along with the
Company's net losses of $2,234,000 and $2,266,000 for the three months ended
September 30, 2002 and 2001, results in a Total Comprehensive Loss of $2,283,000
and $2,535,000 for the periods, respectively.
3. INCOME TAXES
The benefit for income taxes for the three months ended September 30, 2002 and
2001 is as follows (in thousands):
For the three months ended
September 30,
--------------------------
2002 2001
------ ------
Current $1,218 $1,298
Deferred 151 343
------ ------
$1,369 $1,641
====== ======
6
GRUBB & ELLIS COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
3. INCOME TAXES (CONTINUED)
The Company recorded prepaid taxes totaling approximately $6,950,000 and
$6,890,000 as of September 30, 2002 and June 30, 2002, respectively. Included in
these assets are tax refund receivables resulting from filed federal and state
returns for the tax year ended December 31, 2001 totaling approximately
$1,420,000 and $2,584,000 at September 30, 2002 and June 30, 2002, respectively.
Also included are tax effected operating loss carrybacks totaling approximately
$5,530,000 and $4,306,000 at September 30, 2002 and June 30, 2002, respectively,
which the Company will realize or has realized primarily against the federal tax
liability payments made in prior tax years.
4. LOSS PER COMMON SHARE
The following table sets forth the computation of basic and diluted earnings per
common share from continuing operations (in thousands, except per share data):
For the three months ended
September 30,
--------------------------
2002 2001
------- --------
Net loss to common stockholders $(2,276) $ (2,266)
======= ========
BASIC EARNINGS PER COMMON SHARE:
Weighted average common shares outstanding 15,072 13,447
======= ========
Net loss per common share - basic $ (0.15) $ (0.17)
======= ========
DILUTED EARNINGS PER COMMON SHARE:
Weighted average common shares outstanding 15,072 13,447
Effect of dilutive securities:
Stock options and warrants -- --
------- --------
Weighted average dilutive common shares outstanding 15,072 13,447
======= ========
Net loss per common share - diluted $ (0.15) $ (0.17)
======= ========
Additionally, options outstanding to purchase shares of common stock, the effect
of which would be anti-dilutive, were approximately 2,532,000 and 2,315,000 at
September 30, 2002 and 2001, respectively, and were not included in the
computation of diluted earnings per share because an operating loss was reported
for the quarters ending September 30, 2002 and 2001.
5. ISSUANCE OF PREFERRED STOCK
On September 19, 2002, Kojaian Ventures, L.L.C. ("KV"), a related party,
exercised its right to convert a subordinated promissory note it held into
preferred stock of the Company. As a result of this conversion, 11,725 shares of
the Company's Series A Preferred Stock were issued, with a stated value of
$1,000 per share. The outstanding related party principal and interest
obligations totaling $11,725,000 were reclassified to stockholders' equity on
the date of conversion. Issuance costs of $783,000, previously offset against
the note obligations, were also reclassified as a reduction of additional paid
in capital. The preferred stock carries a dividend coupon of 12%, compounded
quarterly on a cumulative basis. Accrued dividends at September 30, 2002 totaled
approximately $42,000.
7
GRUBB & ELLIS COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
5. ISSUANCE OF PREFERRED STOCK (CONTINUED)
The preferred stock contains liquidation preference and voting rights equal to
1,007 common shares for each share of preferred stock, or a total of 11,807,075
common share equivalents, subject to adjustment. As a consequence of the
conversion, there has been a change in the voting control of the Company, as
these equivalents, along with 3,762,884 shares of outstanding common stock owned
by KV and its affiliates (approximately 25% of the outstanding common stock of
the Company), represent approximately 58% of the total voting power of the
Company. The preferred stock is not convertible into any other securities of the
Company or subject to redemption. Warburg Pincus Investors, L.P., which
currently owns approximately 39% of the outstanding common stock of the Company,
has approximately 22% of the total voting power.
6. SECURITIES EXCHANGE LISTING
The Company's common stock was listed on the New York Stock Exchange ("NYSE")
pursuant to a listing agreement. As previously disclosed by the Company, the
NYSE had accepted the Company's proposed business plan to attain compliance with
the NYSE's listing standards on or before July 4, 2003. This plan had been
submitted in response to a notification received by the Company on January 4,
2002 regarding non-compliance with such listing standards. As a result of the
business plan's acceptance, the Company's common stock continued to be traded on
the exchange, subject to the Company maintaining compliance with the plan and
periodic review by the NYSE. Upon completion of a recent review, the NYSE
announced on October 8, 2002 that the Company's common stock was being de-listed
from the NYSE, due primarily to the Company's book value and market
capitalization value being below minimum levels required by their listing
standards. The Company's common stock commenced trading on the over-the-counter
market ("OTC") effective October 17, 2002, under the symbol GBEL.OB, and ceased
trading on the NYSE prior to the opening that day.
7. CHANGE IN ACCOUNTING PRINCIPLE
In June 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets,"
effective for fiscal years beginning after December 15, 2001. Under the new
rules, goodwill is no longer amortized but is subject to annual impairment tests
in accordance with the Statement. Other intangible assets will continue to be
amortized over their useful lives. The Company applied the new rules on
accounting for goodwill and other intangible assets beginning in the quarter
ended September 30, 2002 and completed the transitional impairment tests of
goodwill as of July 1, 2002. The Company has determined that no goodwill
impairment will impact the earnings and financial position of the Company as of
that date. Application of the non-amortization provisions of the Statement
resulted in an increase in net operating income of approximately $391,000 for
the quarter ended September 30, 2002 and is expected to result in an increase in
net operating income of approximately $1.6 million for the fiscal year.
8. SEGMENT INFORMATION
The Company has two reportable segments - Transaction Services and Management
Services, and evaluates segment performance and allocates resources based on
earnings before interest, taxes, depreciation and amortization, and other
non-recurring expenses ("EBITDA") that include an allocation of certain
corporate level administrative expenses (amounts in thousands).
8
GRUBB & ELLIS COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
8. SEGMENT INFORMATION (CONTINUED)
Transaction Management Segment
Services Services Totals
----------- ---------- --------
Three months ended September 30, 2002
Total revenue $ 64,651 $ 12,199 $ 76,850
EBITDA 663 (478) 185
Total assets as of September 30, 2002 56,108 22,562 78,670
Three months ended September 30, 2001
Total revenue $ 63,610 $ 13,178 $ 76,788
EBITDA 113 (686) (573)
Total assets as of September 30, 2001 59,336 21,536 80,872
RECONCILIATION OF SEGMENT EBITDA TO INCOME (LOSS) BEFORE INCOME TAXES
Three Months Ended September 30,
--------------------------------
2002 2001
------- -------
Total segment EBITDA $ 185 $ (573)
Less:
Depreciation & amortization (2,047) (2,800)
Non-recurring expense (900) --
Net interest expense (841) (534)
------- -------
Loss before income taxes $(3,603) $(3,907)
======= =======
RECONCILIATION OF SEGMENT ASSETS TO BALANCE SHEET (IN THOUSANDS):
As of September 30,
--------------------
2002 2001
------- -------
Total segment assets $78,670 $80,872
Current tax assets 6,950 6,247
Deferred tax assets 2,661 5,174
------- -------
Total assets $88,281 $92,293
======= =======
In evaluating segment performance, the Company's management utilizes EBITDA as a
measure of the segment's ability to generate cash flow from its operations.
Other items contained within the measurement of net income, such as interest and
taxes, and non-recurring items, are generated and managed at the corporate
administration level rather than the segment level. In addition, net income
measures also include non-cash amounts such as depreciation and amortization
expense.
Management believes that EBITDA as presented with respect to the Company's
reportable segments is an important measure of cash generated by the Company's
operating activities. EBITDA is similar to net cash flow from operations because
it excludes certain non-cash items, however, it also excludes interest and
9
GRUBB & ELLIS COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
8. SEGMENT INFORMATION (CONTINUED)
income taxes. Management believes that EBITDA is relevant because it assists
investors in evaluating the Company's ability to service its debt by providing a
commonly used measure of cash available to pay interest. EBITDA should not be
considered as an alternative to net income (loss) or cash flows from operating
activities (which are determined in accordance with GAAP), as an indicator of
operating performance or a measure of liquidity. EBITDA also facilitates
comparison of the Company's results of operations with those companies having
different capital structures. Other companies may define EBITDA differently,
and, as a result, such measures may not be comparable to the Company's EBITDA.
9. COMMITMENTS AND CONTINGENCIES
CREDIT AGREEMENT COVENANTS:
The Company is subject to certain financial covenants pursuant to the terms of
its credit agreement, including minimum EBITDA (as defined in the credit
agreement) levels it must achieve. As of September 30, 2002 the Company had
achieved these levels and is in compliance with this covenant. However, the
Company's transaction services revenue is subject to seasonal fluctuations, with
the calendar quarter ending December 31 historically providing from 28% to 34%
of its annual transaction revenue. Based on the continuing economic downturn and
the impact it is expected to have on the Company's projected operating
performance, along with the uncertainty surrounding the seasonality of its
primary revenue stream, it is possible the Company may not achieve the EBITDA
performance needed to remain in compliance with its credit facility covenants
for the upcoming quarter ending December 31, 2002. Failure to achieve EBITDA
thresholds established in the Company's credit facility agreement would result
in a technical default of the agreement, and the banks would have the right
under the agreement to pursue various courses of action, including converting
the debt into a demand obligation, or, in the alternative, granting waivers,
amendments, or modifications of terms. In the event of such a default, there can
be no assurances that such a waiver, amendment or modification to the credit
agreement could be obtained.
ENVIRONMENTAL:
A corporate subsidiary of the Company owns a 33% interest in a general
partnership, which in turn owns property in the State of Texas which is the
subject of an environmental assessment and remediation effort, due to the
discovery of certain chemicals related to a release of dry cleaning solvent in
the soil and groundwater of the partnership's property and adjacent properties.
Prior assessments had determined that minimal costs would be incurred to
remediate the release. However, subsequent findings at and around the
partnership's property have increased the probability that additional
remediation costs will be necessary. The partnership is working with the Texas
Natural Resource Conservation Commission and the local municipality to implement
a multi-faceted plan, which includes both remediation and ongoing monitoring of
the affected properties. Both the Company and each of the partnership's other
partners have contributed new capital to finance the continuing assessment and
remediation efforts, although there can be no assurance that such future
contributions will be made by the other partners. The Company's share of
anticipated costs to remediate and monitor this situation is estimated at
approximately $818,000. As of September 30, 2002, approximately $351,000 of this
amount has been paid and the remaining $467,000 has been reflected as a loss
reserve for such matters in the consolidated balance sheet. The Company's
management believes that the outcome of these events will not have a material
adverse effect on the consolidated financial position of the Company.
10
GRUBB & ELLIS COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
9. COMMITMENTS AND CONTINGENCIES (CONTINUED)
INSOLVENT INSURANCE PROVIDER:
In fiscal years 1999 and 2000, the Company's primary errors and omissions
insurance carrier was Reliance Insurance Company (of Illinois and California,
collectively "Reliance"). The Company has six open claims that were covered by
Reliance policies upon the exhaustion of a self-insured retention. In October
2001, Reliance was placed in liquidation by order of the Commonwealth of
Pennsylvania, and as a result casts doubt on the recovery of the Company's open
claims. The Company has established loss reserves for the estimated settlement
costs of the claims. The Company is seeking reimbursement for the costs of
defense, settlement and/or judgment on these claims both from appropriate state
insurance guaranty associations and from the liquidator. The Company is unable
to estimate the probability and timing of any potential reimbursement at this
time, and therefore, has not assumed any potential recoveries in establishing
its reserves.
GENERAL:
The Company is involved in various claims and lawsuits arising out of the
conduct of its business, as well as in connection with its participation in
various joint ventures and partnerships, many of which may not be covered by the
Company's insurance policies. In the opinion of management, the eventual outcome
of such claims and lawsuits is not expected to have a material adverse effect on
the Company's financial position or results of operations.
10. NON-RECURRING EXPENSE
A non-recurring expense consisting of severance and other costs totaling
$900,000 was incurred during the quarter ended September 30, 2002 in connection
with the termination of employment of the Company's former chief operating
officer.
11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Report contains statements that are not historical facts and constitute
projections, forecasts or forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995. The statements are not
guarantees of performance. They involve known and unknown risks, uncertainties
and other factors that may cause the actual results, performance or achievements
of the Company in future periods to be materially different from any future
results, performance or achievements expressed or suggested by these statements.
You can identify such statements by the fact that they do not relate strictly to
historical or current facts. These statements use words such as "believe,"
"expect," "should," "strive," "plan," "intend," "estimate" and "anticipate" or
similar expressions. When we discuss strategy or plans, we are making
projections, forecasts or forward-looking statements. Actual results and
stockholder's value will be affected by a variety of risks and factors,
including, without limitation, international, national and local economic
conditions and real estate risks and financing risks and acts of terror or war.
Many of the risks and factors that will determine these results and values are
beyond the Company's ability to control or predict. These statements are
necessarily based upon various assumptions involving judgment with respect to
the future. All such forward-looking statements speak only as of the date of
this Report. The Company expressly disclaims any obligation or undertaking to
release publicly any updates of revisions to any forward-looking statements
contained herein to reflect any change in the Company's expectations with regard
thereto or any change in events, conditions or circumstances on which any such
statement is based. Factors that could adversely affect the Company's ability to
obtain these results and value include, among other things: (i) the volume of
transactions and prices for real estate in the real estate markets generally,
(ii) a general or regional economic downturn that could create a recession in
the real estate markets, (iii) the Company's debt level and its ability to make
interest and principal payments, (iv) an increase in expenses related to new
initiatives, investments in people, technology, and service improvements, (v)
the Company's ability to implement, and the success of, new initiatives and
investments, including expansion into new specialty areas and integration of the
Company's business units, (vi) the ability of the Company to consummate
acquisitions and integrate acquired companies and assets, and (vii) other
factors described in the Company's Annual Report on Form 10-K for the fiscal
year ended June 30, 2002, filed on October 15, 2002.
RESULTS OF OPERATIONS
REVENUE
The Company's revenue is derived principally from transaction services fees
related to commercial real estate, which include commissions from leasing,
acquisition and disposition, and agency leasing assignments as well as fees from
appraisal and consulting services. Management services fees comprise the
remainder of the Company's revenues, and include fees related to both property
and facilities management outsourcing and business services.
Revenue in any given quarter during the three fiscal year period ended June 30,
2002, as a percentage of total annual revenue, ranged from a high of 34.4% to a
low of 18.6%, with revenue earned in the first quarters of each of the last
three fiscal years ranging from 23.0% to 26.2%. The Company has typically
experienced its lowest quarterly revenue in the quarter ending March 31 of each
year with higher and more consistent revenue in the quarters ending June 30 and
September 30, and its highest quarterly revenue in the quarter ending December
31, due to increased activity caused by the desire of clients to complete
transactions by calendar year-end.
Total revenue of $76.9 million was recognized for the three months ended
September 30, 2002 as compared to revenue of $76.8 million for the same period
last year. Transaction services fees increased by $1.0 million in the current
fiscal quarter over the same quarter in 2001 while management services fees
decreased by $980,000 during that same period.
12
COSTS AND EXPENSES
Services commissions expense is the Company's largest expense and is a direct
function of gross transaction services revenue levels, which include transaction
services commissions and other fees. Professionals receive services commissions
at rates that increase upon achievement of certain levels of production. As a
percentage of gross transaction revenue, related commission expense increased
slightly to 59.0% for the quarter ended September 30, 2002 as compared to 57.8%
for the same period in 2001.
Salaries, wages and benefits decreased by $2.3 million or 9.1% during the
quarter ended September 30, 2002 as compared to September 30, 2001. Selling,
general and administrative expenses were relatively flat, increasing by
$265,000, or 1.7%, for the same period. The overall decrease in these operating
costs of $2.0 million resulted from the company tightening its discretionary
expenditures in response to the slowing general economy.
Depreciation and amortization expense for the quarter ended September 30, 2002
decreased to $2.0 million from $2.8 million in the comparable period last year.
The Company holds multi-year service contracts with certain key professionals,
the costs of which are amortized over the lives of the respective contracts,
which are generally two to three years. Amortization expense relating to these
contracts of $366,000 was recognized in the quarter ended September 30, 2002
compared to $662,000 for the same period in the prior year.
In June 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets,"
effective for fiscal years beginning after December 15, 2001. Under the new
rules, goodwill is no longer amortized but is subject to annual impairment tests
in accordance with the Statement. Other intangible assets will continue to be
amortized over their useful lives. The Company applied the new rules on
accounting for goodwill and other intangible assets beginning in the quarter
ended September 30, 2002 and completed the transitional impairment tests of
goodwill as of July 1, 2002. The Company has determined that no goodwill
impairment will impact the earnings and financial position of the Company as of
that date. Application of the non-amortization provisions of the Statement
resulted in a decrease in depreciation and amortization expense and a
corresponding increase in net operating income of approximately $391,000 for the
quarter ended September 30, 2002 as compared to September 30, 2001. It is
expected to result in an increase in net operating income of approximately $1.6
million for the fiscal year.
A non-recurring expense consisting of severance and other costs totaling
$900,000 was incurred during the quarter ended September 30, 2002 in connection
with the termination of employment of the Company's former chief operating
officer.
Interest income decreased during the quarter ended September 30, 2002 as
compared to the same periods in the prior year as a result of lower available
invested cash.
Interest expense incurred during the quarters ended September 30, 2002 and 2001
was due primarily to the Company's term loan borrowings under the credit
facility. Interest expense was also incurred during the quarter ended September
30, 2002 due to the note payable-affiliate funded in March 2002.
NET LOSS
The net loss for the three months ended September 30, 2002 was $2,234,000, or
$0.15 per common share on a diluted basis, as compared to $2,266,000, or $0.17
per common share, for the same period in the prior fiscal year. The number of
common shares outstanding at September 30, 2002 represented an increase over the
previous year's number of outstanding common shares primarily due to the
exercise of warrants in January 2002 to purchase 1,337,358 shares.
13
LIQUIDITY AND CAPITAL RESOURCES
For the three months ended September 30, 2002, the Company used cash flow of
$1.5 million for operating activities, used $915,000 in investing activities for
purchases of equipment, software and leasehold improvements, and used $423,000
in financing activities primarily for the repayment of credit facility
borrowings.
In the event of adverse economic conditions or other unfavorable events, and to
the extent that the Company's cash requirements are not met by operating cash
flow or available debt or equity proceeds, the Company may find it necessary to
reduce expenditure levels or undertake other actions as may be appropriate under
the circumstances.
See Note 6 of Notes to Condensed Consolidated Financial Statements in Item 1 of
this Report for information concerning earnings before interest, taxes,
depreciation and amortization.
On September 19, 2002, Kojaian Ventures, L.L.C. ("KV"), a related party,
exercised its right to convert a subordinated promissory note it held into
preferred stock of the Company. As a result of this conversion, 11,725 shares of
the Company's Series A Preferred Stock were issued, with a stated value of
$1,000 per share. The outstanding related party principal and interest
obligations totaling $11,725,000 were reclassified to stockholders' equity on
the date of conversion. Issuance costs of $783,000, previously offset against
the note obligations, were also reclassified as a reduction of additional paid
in capital. The preferred stock carries a dividend coupon of 12%, compounded
quarterly on a cumulative basis. Accrued dividends at September 30, 2002 totaled
approximately $42,000.
The preferred stock contains liquidation preference and voting rights equal to
1,007 common shares for each share of preferred stock, or a total of 11,807,075
common share equivalents, subject to adjustment. As a consequence of the
conversion, there has been a change in the voting control of the Company, as
these equivalents, along with 3,762,884 shares of outstanding common stock owned
by KV and its affiliates (approximately 25% of the outstanding common stock of
the Company), represent approximately 58% of the total voting power of the
Company. The preferred stock is not convertible into any other securities of the
Company or subject to redemption. Warburg Pincus Investors, L.P., which
currently owns approximately 39% of the outstanding common stock of the Company,
has approximately 22% of the total voting power.
The Company's common stock was listed on the New York Stock Exchange ("NYSE")
pursuant to a listing agreement. As previously disclosed by the Company, the
NYSE had accepted the Company's proposed business plan to attain compliance with
the NYSE's listing standards on or before July 4, 2003. This plan had been
submitted in response to a notification received by the Company on January 4,
2002 regarding non-compliance with such listing standards. As a result of the
business plan's acceptance, the Company's common stock continued to be traded on
the exchange, subject to the Company maintaining compliance with the plan and
periodic review by the NYSE. Upon completion of a recent review, the NYSE
announced on October 8, 2002 that the Company's common stock was being de-listed
from the NYSE, due primarily to the Company's book value and market
capitalization value being below minimum levels required by their listing
standards. The Company's common stock commenced trading on the over-the-counter
market ("OTC") effective October 17, 2002, under the symbol GBEL.OB, and ceased
trading on the NYSE prior to the opening that day.
The Company has principal payment obligations under the term portion of its
Credit Facility of $31.3 million as of September 30, 2002, of which $7.3 million
becomes due over the twelve months ending September 30, 2003.
14
The Company is subject to certain financial covenants pursuant to the terms of
its credit agreement, including minimum EBITDA (as defined in the credit
agreement) levels it must achieve. As of September 30, 2002 the Company had
achieved these levels and is in compliance with this covenant. However, the
Company's transaction services revenue is subject to seasonal fluctuations, with
the calendar quarter ending December 31 historically providing from 28% to 34%
of its annual transaction revenue. Based on the continuing economic downturn and
the impact it is expected to have on the Company's projected operating
performance, along with the uncertainty surrounding the seasonality of its
primary revenue stream, it is possible the Company may not achieve the EBITDA
performance needed to remain in compliance with its credit facility covenants
for the upcoming quarter ending December 31, 2002. Failure to achieve EBITDA
thresholds established in the Company's credit facility agreement would result
in a technical default of the agreement, and the banks would have the right
under the agreement to pursue various courses of action, including converting
the debt into a demand obligation, or, in the alternative, granting waivers,
amendments, or modifications of terms. In the event of such a default, there can
be no assurances that such a waiver, amendment or modification to the credit
agreement could be obtained.
15
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's bank debt obligations are floating rate obligations whose interest
rate and related monthly interest payments vary with the movement in LIBOR. In
order to mitigate this risk, terms of the credit agreement required the Company
to enter into interest rate swap agreements to effectively convert a portion of
its floating rate term debt obligations to fixed rate debt obligations through
March, 2004. Interest rate swaps generally involve the exchange of fixed and
floating rate interest payments on an underlying notional amount. As of
September 30, 2002 the Company had $13.5 million in notional amount interest
rate swaps outstanding in which the Company pays a fixed rate of 5.18% and
receives a three-month LIBOR based rate from the counter-parties. The notional
amount of the interest rate swap agreements is scheduled to decline as follows:
Notional Amount Date
--------------- --------------
$10,500,000 June 30, 2003
8,000,000 March 31, 2004
When interest rates rise the interest rate swap agreements increase in fair
value to the Company and when interest rates fall the interest rate swap
agreements decline in value to the Company. As of September 30, 2002, there was
a net decline in interest rates since the Company had entered into the
agreements, and the interest rate swap agreements were in an unrealized loss
position to the Company of approximately $332,000, net of taxes.
To highlight the sensitivity of the interest rate swap agreements to changes in
interest rates, the following summary shows the effects of a hypothetical
instantaneous change of 100 basis points (BPS) in interest rates as of September
30, 2002 (in thousands):
Notional Amount $13,500
Fair Value to the Company (332)
Change in Fair Value to the Company
Reflecting Change in Interest Rates
- 100 BPS (80)
+ 100 BPS 79
The Company does not utilize financial instruments for trading or other
speculative purposes, nor does it utilize leveraged financial instruments.
ITEM 4. CONTROLS AND PROCEDURES
Within the 90-day period prior to the filing of this Quarterly Report on Form
10-Q, the Company carried out an evaluation, under the supervision and with the
participation of management, including the Chief Executive Officer and the Chief
Financial Officer, of the effectiveness of the Company's disclosure controls and
procedures. Based upon the evaluation, the Company's Chief Executive Officer and
Chief Financial Officer have concluded that the Company's disclosure controls
and procedures are effective to timely alert them to material information
required to be included in Company's Exchange Act filings. In addition, there
have been no significant changes in the internal controls, or in other factors
that could significantly affect internal controls, subsequent to the date that
the Chief Executive Officer and Chief Financial Officer completed their
evaluation.
16
PART II
OTHER INFORMATION
(ITEMS 3 AND 5 ARE NOT APPLICABLE
FOR THE QUARTER ENDED SEPTEMBER 30, 2002)
17
ITEM 1. LEGAL PROCEEDINGS
The disclosure called for by Item 1 is incorporated by reference to Note 9 of
Notes to Condensed Consolidated Financial Statements.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
(a) On September 13, 2002, the Company filed an Amended and Restated Certificate
of Designations, Number, Voting Powers, Preferences and Rights of Series A
Preferred Stock ("Certificate of Designations") with the Delaware Secretary of
State, which had been approved by the Board of Directors of the Company.
Pursuant to the Certificate of Designations, the Company authorized 60,000
shares of preferred stock as Series A Preferred Stock, with a liquidation
preference generally equal to 40% of the consideration available to all common
equity holders upon liquidation.
(b) and (c) On September 19, 2002, Kojaian Ventures, L.L.C. ("KV") exercised its
right to convert the outstanding principal, accrued interest and certain costs
of a promissory note in the face amount of $11,237,500, which had been issued by
the Company in May 2002, into 11,725 shares of Series A Preferred Stock. At the
conversion date, each share of Series A Preferred Stock had voting power
equivalent to 1,007 shares of common stock of the Company, subject to
adjustment. The shares were exempt from the registration requirements under
Section 4(2) of the Act. The issuance and sale of the convertible note and the
issuance of the Series A Preferred Stock were not underwritten. See Notes 5 of
Notes to Condensed, Consolidated Financial Statements, and such disclosure is
incorporated herein by reference.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBITS
(3) ARTICLES OF INCORPORATION AND BYLAWS
3.1 Certificate of Incorporation of the Registrant, as restated November 1,
1994, incorporated herein by reference to Exhibit 3.2 to the
Registrant's Annual Report on Form 10-K filed on March 31, 1995.
3.2 Amendment to the Restated Certificate of Incorporation of the Registrant
as filed with the Delaware Secretary of State on December 9, 1997,
incorporated herein by reference to Exhibit 4.4 to the Registrant's
Statement on Form S-8 filed on December 19, 1997 (File No. 333-42741).
3.3 Certificate of Retirement with Respect to 130,233 Shares of Junior
Convertible Preferred Stock of Grubb & Ellis Company, filed with the
Delaware Secretary of State on January 22, 1997, incorporated herein by
reference to Exhibit 3.3 to the Registrant's Quarterly Report on Form
10-Q filed on February 13, 1997.
3.4 Certificate of Retirement with Respect to 8,894 Shares of Series A
Senior Convertible Preferred Stock, 128,266 shares of Series B Senior
Convertible Preferred Stock, and 19,767 Shares of Junior Convertible
Preferred Stock of Grubb & Ellis Company, filed with the Delaware
Secretary of State on January 22, 1997, incorporated herein by reference
to Exhibit 3.4 to the Registrant's Quarterly Report on Form 10-Q filed
on February 13, 1997.
3.5 Bylaws of the Registrant, as amended and restated effective May 31,
2000, incorporated herein by reference to Exhibit 3.5 to the
Registrant's Annual Report on Form 10-K filed on September 28, 2000.
(4) INSTRUMENTS DEFINING THE RIGHTS OF SECURITY HOLDERS, INCLUDING
INDENTURES.
4.1 Certificate of Designations, Number, Voting Powers, Preferences and
Rights of Series A Preferred Stock of the Registrant as filed with the
Secretary of State of the State of Delaware on March 8, 2002
incorporated herein by reference to Exhibit 4 to the Registrant's
Current Report on Form 8-K filed on March 12, 2002.
18
4.2 Certificate of Amendment of Certificate of Designations, Number, Voting
Powers, Preferences and Rights of Series A Preferred Stock of Grubb &
Ellis Company, incorporated herein by reference to Exhibit 4 to the
Registrant's Current Report on Form 8-K filed on May 14, 2002.
4.3 Amended and Restated Certificate of Designations, Number, Voting Powers,
Preferences and Rights of Series A Preferred Stock of Grubb & Ellis
Company, as filed with the Secretary of State of Delaware on September
13, 2002, incorporated herein by reference to Exhibit 3.8 to the
Registrant's Annual Report on Form 10-K filed on October 15, 2002.
4.4 Securities Purchase Agreement dated May 13, 2002 by and between Grubb &
Ellis Company and Kojaian Ventures, L.L.C., incorporated herein by
reference to Exhibit 2 to the Registrant's Current Report on Form 8-K
filed on May 14, 2002.
4.5 Convertible Subordinated Promissory Note and Security Agreement in the
principal amount of $11,237,500 dated May 13, 2002 and executed by Grubb
& Ellis Company, incorporated herein by reference to Exhibit 3 to the
Registrant's Current Report on Form 8-K filed on May 14, 2002.
4.6 Copy of Convertible Subordinated Promissory Note and Security Agreement
in the principal amount of $11,237,500 dated May 13, 2002 issued by the
Registrant to Kojaian Ventures, L.L.C., incorporated herein by reference
to Exhibit 3 to the Registrant's Current Report on Form 8-K filed on May
14, 2002.
(10) MATERIAL CONTRACTS
10.1* Separation Agreement entered into between Mark R. Costello and the
Registrant, and General Release executed by Mr. Costello, dated as of
July 12, 2002, incorporated herein by reference to Exhibit 10.6 to the
Registrant's Annual Report on Form 10-K filed on October 15, 2002.
*Management contract or compensatory plan or arrangement.
(99) OTHER INFORMATION
99.1 SARBANES-OXLEY ACT, SECTION 906 CERTIFICATION
(B) REPORTS ON FORM 8-K
None.
19
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
GRUBB & ELLIS COMPANY
(Registrant)
Date: November 14, 2002 /s/ Ian Y. Bress
------------------------
Ian Y. Bress
Chief Financial Officer
20
CERTIFICATIONS
I, Barry M. Barovick, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Grubb & Ellis
Company;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and we have:
a. designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b. evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
c. presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of the registrant's board of directors (or persons
performing the equivalent function):
a. all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b. any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date: November 14, 2002
/s/ Barry M. Barovick
-----------------------
Barry M. Barovick
President, Chief Executive Officer and a director
21
CERTIFICATIONS
I, Ian Y. Bress, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Grubb & Ellis
Company;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and we have:
a. designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b. evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
c. presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of the registrant's board of directors (or persons
performing the equivalent function):
a. all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b. any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date: November 14, 2002
/s/ Ian Y. Bress
-----------------------
Ian Y. Bress
Chief Financial Officer
22
GRUBB & ELLIS COMPANY
EXHIBIT INDEX
FOR THE QUARTER ENDED SEPTEMBER 30, 2002
EXHIBIT
(99) OTHER INFORMATION
99.1 Sarbanes-Oxley Act, Section 906 Certification
23