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UNITED STATES 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 June 30, 1999
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 no. 1-8122
GRUBB & ELLIS COMPANY
(Exact name of registrant as specified in its charter)
Delaware 94-1424307
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
(847) 753-7500
2215 Sanders Road, Suite 400, (Registrant's telephone number,
Northbrook, IL 60062 including area code)
(Address of principal executive
offices) (Zip Code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which
--------- registered
Common Stock --------------
New York Stock Exchange
Pacific 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 its definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [_]
The aggregate market value of voting common stock held by non-affiliates of
the registrant as of August 19, 1999 was approximately $16,376,000.
The number of shares outstanding of the registrant's common stock as of
August 19, 1999 was 19,931,192 shares.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's definitive proxy statement to be filed pursuant
to Regulation 14A no later than 120 days after the end of the fiscal year (June
30, 1999) are incorporated by reference into Part III of this Report.
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GRUBB & ELLIS COMPANY
FORM 10-K
TABLE OF CONTENTS
Page
----
COVER PAGE................................................................ 1
TABLE OF CONTENTS......................................................... 2
Part I.
Item 1. Business......................................................... 3
Item 2. Properties....................................................... 5
Item 3. Legal Proceedings................................................ 5
Item 4. Submission of Matters to a Vote of Security Holders.............. 5
Part II.
Item 5. Market for the Registrant's Common Equity and Related Stockholder
Matters................................................................. 6
Item 6. Selected Financial Data.......................................... 6
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations................................................... 7
Item 7A.Quantitative and Qualitative Disclosures About Market Risk....... 12
Item 8. Financial Statements and Supplementary Data...................... 12
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.................................................... 35
Part III.
Item 10. Directors and Executive Officers of the Registrant.............. 35
Item 11. Executive Compensation.......................................... 35
Item 12. Security Ownership of Certain Beneficial Owners and Management.. 35
Item 13. Certain Relationships and Related Transactions.................. 35
Part IV.
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-
K....................................................................... 36
SIGNATURES................................................................ 40
EXHIBIT INDEX.............................................................
2
GRUBB & ELLIS COMPANY
PART I
ITEM 1. Business
General
Grubb & Ellis Company, a Delaware corporation organized in 1980, is the
successor by merger to a real estate brokerage company first established in
California in 1958. Grubb & Ellis Company and its wholly owned subsidiaries
(the "Company") is a full service commercial real estate company that provides
a full range of services, including transaction services and property and
facilities management, to users and investors worldwide. The Company's
professionals arrange the sale or lease of such business properties as
industrial, retail and office buildings, as well as multi-family, hospitality
and commercial land. Major multiple-market clients have a single point of
contact through the firm's corporate and financial units for advisory services,
including site selection, feasibility studies, market forecasts and research.
The Company is one of the nation's largest publicly traded commercial real
estate firms, based on total revenue.
Property and facilities management services are provided by Grubb & Ellis
Management Services, Inc. ("GEMS"), a wholly owned subsidiary of the Company
since January 24, 1996 (prior to which time GEMS was a majority owned
subsidiary). GEMS had approximately 131 million square feet of property under
management as of June 30, 1999.
Currently, the Company has approximately 4,400 professionals and staff, with
offices and affiliates in 90 markets throughout the United States.
Internationally, the Company serves the needs of its multinational clients
through its European headquarters in London.
Strategic Initiatives
In fiscal 1999, the Company pursued several initiatives designed to help
meet its goal of enhancing the quality of its service lines and expanding and
diversifying sources of revenue beyond traditional commercial brokerage. The
Company continued to build its Corporate Services Group and Institutional
Services Group, which utilize a relationship management system to allow the
Company to respond to the increasing demand from major corporate and
institutional clients for expanded services through a single point of contact.
The Company also expanded its national affiliate program, through alliances
with 26 real estate services firms, which has enabled it to enter markets where
it previously did not have a formal presence and to better meet the multi-
market needs of national clients. The Company has also invested in technology
systems designed to provide a stable platform for growth and to efficiently
deliver and share data with clients. Among them is what the Company believes to
be a state-of-the-art, company-wide information sharing and research network
which enables its professional staff across all offices to work more
efficiently, access the latest market intelligence, and more fully address
clients' needs.
Since July 1998, the Company also completed four acquisitions that reinforce
its strategy of increasing its presence in key markets. Those acquisitions
included: Bishop Hawk, Inc., a Northern California real estate services firm;
Smithy Braedon Oncor International, serving the greater Washington D.C.
metropolitan area; Commercial Florida Realty Partners, Inc., a southern Florida
firm; and Island Realty Service Group, Inc., a real estate services firm based
in Long Island, New York. In addition, in July 1999, the Company acquired
substantially all of the assets of Landauer Associates, Inc., a national real
estate valuation and consulting firm with offices in several major cities
across the United States.
In August 1999, the Company announced a program through which it may
repurchase up to $3.0 million of its common stock on the open market. See Item
7 of this Report for additional information.
3
Organization
The Company is organized to provide the real estate related services
described below. Additional information on these business segments can be found
in Note 13 of Notes to Consolidated Financial Statements under Item 8 of this
report.
Transaction Services
The Company represents the interests of tenants, owners, buyers or sellers
in leasing, acquisition and disposition transactions. These transactions
involve various types of commercial real estate, including office, industrial,
retail and land. Historically, these services have represented a significant
portion of the Company's revenue, and in fiscal year 1999 represented 83% of
the Company's total revenue. In addition, the Company delivers consulting and
strategic planning services to its clients, including site selection,
feasibility studies, exit strategies, market forecasts, appraisals and
demographics and research services.
Management Services
GEMS provides comprehensive property management, leasing and related
services for properties owned primarily by institutional investors, along with
facilities management services for corporate users. Related services include
construction management, agency leasing, lease administration, business
services and engineering services. In fiscal year 1999, these services
represented the remaining 17% of the Company's total revenue.
Competition
The Company competes in a variety of service disciplines within the
commercial real estate industry. Each of these business areas is highly
competitive on a national as well as local level. The Company faces competition
not only from other real estate service providers, but also from accounting and
appraisal firms and self managed real estate investment trusts. Due to the
relative strength and longevity of the Company's position in the markets in
which it presently operates, its ability to offer clients a range of real
estate services on a local, regional and national basis, decreased competition
in certain markets and the Company's improved capital base, the Company
believes that it can operate successfully in the future in this highly
competitive industry, although there can be no assurances in this regard.
Environmental Regulation
A number of states and localities have adopted laws and regulations imposing
environmental controls, disclosure rules and zoning restrictions which have
impacted the management, development, use, and/or sale of real estate. Such
laws and regulations tend to discourage sales and leasing activities and
mortgage lending with respect to some properties, and may therefore adversely
affect the Company. Failure of the Company to disclose environmental issues in
connection with a real estate transaction may subject the Company to liability
to a buyer or lessee of property. Property management services also could
subject the Company to environmental liabilities pursuant to applicable laws
and contractual obligations to property owners. Insurance for such matters may
not be available. Additionally, new or modified environmental regulations could
develop in a manner which could adversely affect the Company's transaction and
management services. The Company's financial results and competitive position
for the fiscal year 1999 have not been materially impacted by its compliance
with environmental laws or regulations, and no material capital expenditures
relating to such compliance are planned.
Seasonality
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. The
4
quarter ending December 31 has historically provided the highest quarterly
level of revenue due to increased activity caused by the desire of clients to
complete transactions by calendar year-end. Revenue in any given quarter during
the years ended June 30, 1999, 1998 and 1997, as a percentage of total annual
revenue, ranged from a high of 31.4% to a low of 19.1%.
Service Marks
The Company has registered tradenames and service marks for the "Grubb &
Ellis" name and logo. The right to use the "Grubb & Ellis" name is considered
an important asset of the Company, and the Company actively defends and
enforces such service marks.
Real Estate Markets
The Company's business is highly dependent on the commercial real estate
markets, which in turn are impacted by such factors as the general economy,
interest rates and demand for real estate in local markets. Changes in one or
more of these factors could either favorably or unfavorably impact the volume
of transactions and prices or lease terms for real estate. Consequently, the
Company's revenue from brokerage commissions and property management fees,
operating results, cash flow and financial condition would also be impacted by
changes in these factors.
ITEM 2. Properties
The Company leases all of its office space. The terms of the leases vary
depending on the size and location of the office. As of June 30, 1999, the
Company leased approximately 687,000 square feet of office space in 72
locations under leases which expire at various dates through June 30, 2008. For
those leases which are not renewable, the Company believes there is adequate
alternative office space available at acceptable rental rates to meet its
needs, although there can be no assurances in this regard. For further
information, see Note 9 of the Notes to Consolidated Financial Statements under
Item 8 of this Report.
ITEM 3. Legal Proceedings
The information called for by Item 3 is included in Note 9 of the Notes to
Consolidated Financial Statements under Item 8 of this Report.
ITEM 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of security holders during the fourth
quarter of fiscal year 1999.
5
GRUBB & ELLIS COMPANY
PART II
ITEM 5. Market for the Registrant's Common Equity and Related Stockholder
Matters
The principal market for the Company's common stock is the New York Stock
Exchange ("NYSE"). The following table sets forth the high and low sales prices
of the Company's common stock on the NYSE for each quarter of the years ended
June 30, 1999 and 1998.
1999 1998
---------------- -----------------
High Low High Low
---- --- ---- ----
First Quarter......... $14/1///16/ $8 3/8 $17 $12/13///16/
Second Quarter........ $10/5///16/ $7/7///16/ $17/3///16/ $12/13///16/
Third Quarter......... $7 7/8 $6 1/4 $16 3/8 $10 1/8
Fourth Quarter........ $6 7/8 $ 5/1///16/ $15 3/8 $10 1/8
As of August 19, 1999, there were 2,450 registered holders of the Company's
common stock and 19,931,192 shares of common stock outstanding, of which
16,390,350 were held by persons who may be considered "affiliates" of the
Company, as defined in Federal securities regulations. Sales of substantial
amounts of common stock, including shares issued upon the exercise of warrants
or options held by affiliates (see Note 7 of the Notes to Consolidated
Financial Statements in Item 8 of this Report), or the perception that such
sales might occur, could adversely affect prevailing market prices for the
common stock.
No cash dividends were declared on the Company's common stock during the
fiscal years ended June 30, 1999 or 1998, and the Company does not anticipate
paying cash dividends in the foreseeable future. The Company is prohibited from
paying dividends on its common stock by the terms of its revolving credit
facility. See "Liquidity and Capital Resources" under Item 7 of this Report and
Note 5 of the Notes to Consolidated Financial Statements under Item 8 of this
Report. The Company's preferred stock was either retired or converted to common
stock by February 1997.
ITEM 6. Selected Financial Data
Five Year Comparison of Selected Financial and Other Data for the Company:
1999 1998 1997 1996 1995
---------- ---------- ---------- --------- ---------
(in thousands, except per share amounts and shares
data)
Total revenue........... $ 314,101 $ 282,834 $ 228,630 $ 193,728 $ 185,784
Net income ............. 8,079 21,506 19,010 2,102 1,556
Dividends applicable to
preferred stockholders:
Accretion of
liquidation
preference........... -- -- -- -- (877)
Dividends in arrears.. -- -- (1,431) (3,012) (1,862)
Provision for income
taxes.................. (5,301) (447) (372) (198) (448)
Reduction in deferred
tax asset valuation
allowance.............. 1,325 6,504 3,220 -- --
Net income (loss)
applicable to common
stockholders (1)....... 8,079 21,506 17,579 (910) (1,183)
Net income (loss) per
common share (1)
--Basic............... 0.41 1.10 1.22 (.10) (.16)
--Diluted............. 0.37 .98 .97 (.10) (.16)
Weighted average common
shares
--Basic............... 19,785,715 19,607,352 14,429,971 8,870,720 7,271,257
--Diluted............. 21,587,898 22,043,920 19,567,635 8,870,720 7,271,257
Other Data:
EBITDA (2).............. $ 18,836 $ 19,118 $ 17,629 $ 7,418 $ 4,427
6
- --------
(1) Net income (loss) and per share data reported on the above table reflect
other non-recurring expenses in the amount of $2.4 million for the fiscal
year ended June 30, 1997. Other non-recurring income of $462,000 and $2.6
million is included in the results for the fiscal years ended June 30, 1996
and 1995, respectively. Net income for the year ended June 30, 1997
includes $5.4 million in extraordinary gain, net of taxes, on the
extinguishment of debt. For information regarding comparability of this
data as it may relate to future periods, see discussion in Item 7,
Management's Discussion and Analysis of Financial Condition and Results of
Operations and Note 10 of the Notes to Consolidated Financial Statements
under Item 8 of this Report.
(2) The Company defines EBITDA as earnings before interest expense, income
taxes, depreciation and amortization, adjusted to exclude other non-
recurring income and expense and extraordinary items, which may not be
comparable to measures of the same title reported by other companies.
as of June 30,
------------------------------------------------------
1999 1998 1997 1996 1995
---------- ---------- ---------- --------- ---------
(in thousands, except per share amounts and shares
data)
Consolidated Balance
Sheet Data:
Total assets............ $ 79,793 $ 63,518 $ 36,696 $ 29,658 $ 29,741
Working capital......... (300) 15,822 16,985 8,064 5,051
Long-term debt.......... 553 459 -- 27,514 26,328
Other long-term
liabilities............ 9,688 10,118 12,700 14,948 14,668
Stockholders' equity
(deficit).............. 44,482 35,414 12,923 (27,475) (29,793)
Book value per common
share.................. 2.24 1.80 .66 (3.08) (3.38)
Common shares
outstanding............ 19,885,084 19,721,056 19,509,952 8,916,415 8,810,220
ITEM 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K contains forward-looking statements
regarding, among other things, future revenue growth, income and changes in
expense levels. These statements are subject to known and unknown risks,
uncertainties and other factors that may cause the Company's actual results and
performance in future periods to be materially different from any future
results or performance suggested by these statements. Such factors, which could
adversely affect the Company's ability to obtain these results 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
which 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 and
technology, and service improvements, (v) the success of new initiatives and
investments, (vi) the impact of year 2000 technology issues, and (vii) other
factors described elsewhere in this Annual Report.
RESULTS OF OPERATIONS
Overview
The Company reported net income of $8.1 million for the year ended June 30,
1999, and made continued progress toward implementing the strategic initiatives
announced in fiscal 1997 and 1998, including significant acquisitions of Bishop
Hawk, Inc. and Smithy Braedon Oncor International in fiscal 1999.
The Company's transaction services fees, fueled by a continued strong
economy and commercial real estate markets, increased to $260.1 million in
fiscal year 1999, while management services fee revenue increased by 50.9% or
$18.2 million for the same period.
7
Fiscal Year 1999 Compared to Fiscal Year 1998
Revenue
The Company's revenue is derived principally from transaction services fees
related to commercial real estate, including transaction commissions and asset
management, appraisal and consulting fees. Management services fees are
generated from property and facilities management services, along with agency
leasing commissions and construction management fees.
Total revenue for fiscal year 1999 was $314.1 million, an increase of 11.1%
over revenue of $282.8 million for fiscal year 1998. This improvement related
primarily to a $18.2 million, or 50.9%, increase in management services fees as
a result of increased activity in property and facilities management and
business service and continued gains in outsourcing contracts. Transaction
services fees increased by $13.0 million, or 5.3%, in fiscal 1999 compared to
the prior year, although such fees related to investment sales for the same
periods decreased 26.6% due to fallout from the tightened credit market
experienced by the real estate industry in the latter half of calendar 1999.
Transaction services fees revenues, excluding fees related to investment sales,
increased by 12.9% in fiscal 1999 as compared to fiscal 1998.
Cost and Expenses
Transaction services commission expense is the Company's major expense and
bears a direct relationship to transaction services fees, which include
transaction services commission revenue and other related fees. As a percentage
of these revenues, related commission expense increased slightly, due to higher
participation percentages attributable to higher production levels, and higher
costs related to guaranteed participation amounts for newly hired
professionals.
Total costs and expenses, other than transaction services commissions,
increased by $22.6 million, or 17.7%, for fiscal year 1999 compared to fiscal
year 1998. These increases were due to increased operating, depreciation and
amortization expenses attributable to the nine acquisitions made by the Company
over the last fifteen months, as well as higher variable operating costs
associated with increases in its management services business.
Interest expense incurred in fiscal year 1999 was due primarily to seller
financing related to business acquisitions made in calendar year 1998, as well
as credit facility borrowings in the last half of fiscal year 1999.
Income Taxes
As of June 30, 1999, the Company had gross deferred tax assets of $11.4
million, with $5.4 million of the deferred tax assets relating to net operating
loss and tax credit carryforwards which will be available to offset future
taxable income through 2010. The Company has recorded a valuation allowance for
$4.3 million against the deferred tax assets as of June 30, 1999 and will
continue to do so until such time as management believes that it is more likely
than not that the Company will generate taxable income sufficient to realize
such tax benefits. The Company recognized a $1.3 million deferred tax benefit
during fiscal 1999 which represented a partial reduction of the valuation
allowance for the net deferred tax assets. Management believes that, due to
favorable economic conditions, the elimination of long-term debt and the recent
trend of earnings, it is more likely than not that the Company will generate
sufficient future taxable income to realize the net deferred tax assets.
Although uncertainties exist as to these events, the Company will continue to
review its operations periodically to assess whether its deferred tax assets
may be realized. See Note 6 of Notes to Consolidated Financial Statements in
Item 8 of this Report for additional information.
Net Income
Net income for fiscal year 1999 was $8.1 million, or $.37 per common share
on a diluted basis, as compared to net income of $21.5 million, or $.98 per
common share for fiscal year 1998. The Company
8
generated basic earnings per share of $.41 and $1.10 in fiscal years 1999 and
1998, respectively. Included in net income were deferred tax benefits of $1.3
million and $6.5 million for fiscal years 1999 and 1998, respectively.
Stockholders' Equity
During fiscal year 1999, stockholders' equity increased $9.1 million to
$44.5 million from $35.4 million at June 30, 1998. In addition to net income of
$8.1 million for fiscal year 1999, the Company received $1.0 million from the
sale of common stock under its stock option plans and employee stock purchase
plan. See Note 7 of Notes to Consolidated Financial Statements in Item 8 of
this Report for additional information. The book value per common share issued
and outstanding increased to $2.24 at June 30, 1999 from $1.80 at June 30,
1998.
Fiscal Year 1998 Compared to Fiscal Year 1997
Revenue
Total revenue for fiscal year 1998 was $282.8 million, an increase of 23.7%
over revenue of $228.6 million for fiscal year 1997, reflecting continued
strong real estate markets and increased business activity across the Company's
service lines. This improvement related primarily to a $45.7 million, or 22.7%,
increase in transaction services fees. Management services fees of $35.8
million for fiscal year 1998 increased by $8.6 million, or 31.4%, as a result
of increased activity in property and facilities management and business
services.
Cost and Expenses
Transaction services commission expense is the Company's major expense and
bears a direct relationship to transaction services fees, which include
transaction services commission revenue and other related fees. As a percentage
of these revenues, related commission expense increased slightly, due to higher
participation percentages attributable to higher production levels, and higher
costs related to guaranteed participation amounts for newly hired
professionals.
Total costs and expenses, other than transaction services commissions and
other non-recurring expenses, increased by $26.4 million, or 26.0%, for fiscal
year 1998 compared to fiscal year 1997. These increases were due in part to
additional expenditures related to staffing and implementing the Company's
Corporate Services Group and Institutional Services Group initiatives. In
addition, the Company has incurred additional variable operating costs
associated with increases in its transaction and management services
businesses.
Other non-recurring expenses for fiscal year 1997 resulted primarily from
incremental non-recurring costs related to the relocation of the Company's
corporate headquarters from San Francisco, California to Northbrook, Illinois.
The repayment of the Company's long-term debt during fiscal year 1997,
resulted in a decrease in interest expense of $1.3 million. Interest expense
incurred in fiscal year 1998 was the result of seller financing related to
business acquisitions in that year.
Income Taxes
As of June 30, 1998, the Company had gross deferred tax assets of $15.9
million, with $9.7 million of the deferred tax assets relating to net operating
loss and tax credit carryforwards which will be available to offset future
taxable income through 2010. The Company has recorded a valuation allowance for
$5.6 million against the deferred tax assets as of June 30, 1998 and will
continue to do so until such time as management believes that it is more likely
than not that the Company will generate taxable income sufficient to realize
such tax benefits. The Company recognized a $6.5 million deferred tax benefit
during fiscal 1998 which represented a partial reduction of the valuation
allowance for the net deferred tax assets.
9
Net Income
Net income for fiscal year 1998 was $21.5 million, or $.98 per common share
on a diluted basis, as compared to net income of $19.0 million, or $.97 per
common share for fiscal year 1997. The Company generated basic earnings per
share of $1.10 and $1.22 in fiscal years 1998 and 1997, respectively. Included
in net income were deferred tax benefits of $6.5 million and $3.2 million for
fiscal years 1998 and 1997, respectively. Net income for the prior year also
included non-recurring charges of $2.4 million related primarily to the
corporate headquarters relocation and a $5.4 million extraordinary gain on the
extinguishment of debt in connection with the financing transactions which
occurred in fiscal 1997.
Stockholders' Equity
During fiscal year 1998, stockholders' equity increased $22.5 million to
$35.4 million from $12.9 million at June 30, 1997. In addition to net income of
$21.5 million for fiscal year 1998, the Company received $1.0 million from the
sale of common stock under its stock option plans and employee stock purchase
plan. See Note 7 of Notes to Consolidated Financial Statements in Item 8 of
this Report for additional information. The book value per common share issued
and outstanding increased to $1.80 at June 30, 1998 from $.66 at June 30, 1997.
LIQUIDITY AND CAPITAL RESOURCES
During fiscal year 1999, cash and cash equivalents decreased by $8.8 million
primarily as a result of cash used in investing activities of $26.8 million,
offset by cash provided by operating activities of $12.8 million and financing
activities of $5.2 million. Net cash provided by operating activities was
negatively impacted by an increase in prepaid expenses related to employment
and service contracts with transaction services professionals along with
prepaid calendar year 1999 income taxes. Net cash used in investing activities
related to cash paid in connection with business acquisitions of $17.1 million,
and $9.7 million of technology infrastructure investments and purchases of
other equipment and leasehold improvements. Net cash provided by financing
activities related to $7.5 million of borrowings on the Company's credit
facility for working capital purposes, along with $1.0 million generated from
stock option exercises and employee stock purchases. Financing activities also
included the payment of $3.3 million of seller indebtedness, related to the
Company's recent acquisitions.
During fiscal year 1999, working capital decreased by $16.1 million as the
Company used its working capital funds to acquire new businesses and invest in
technology infrastructure and other fixed assets.
The Company believes that its long-term operating cash requirements,
including its technology initiative commitments, will be met by operating cash
flow. In addition, the Company has a $35 million credit facility available for
additional capital needs. As of June 30, 1999, the Company had outstanding
borrowings totaling $7.5 million for short-term operating cash requirements
under the credit facility, of which $4.5 million was repaid in September 1999.
The Company is currently in negotiations to replace its existing credit
facility, which expires in March 2001, with a facility having an increased
total commitment available to the Company, and extending the expiration date to
September 2004. Although it is the Company's intent to close this loan
transaction, there can be no assurances that this event will occur.
To the extent that the Company's cash requirements are not met by operating
cash flow or borrowings under its credit facility, in the event of adverse
economic conditions or other unfavorable events, the Company may find it
necessary to reduce expenditure levels or undertake other actions as may be
appropriate under the circumstances.
The Company completed the acquisition of Bishop Hawk, Inc. in July 1998,
Smithy Braedon Oncor International in December 1998, Commercial Florida Realty
Partners, Inc. in February 1999 and Landauer Associates, Inc. in July 1999 (See
Note 12 of Notes to Consolidated Financial Statements in Item 8 of this
10
Report for additional information). The Company will continue to explore
strategic acquisition opportunities that have the potential to broaden its
geographic reach, increase its market share to a significant portion and/or
expand the depth and breadth of its current lines of business. The sources of
consideration for such acquisitions could be cash, the Company's current credit
facility, new debt, and/or the issuance of stock. Although it is the Company's
intent to actively pursue this strategy, no assurances can be made that any new
acquisitions will occur.
In August 1999, the Company announced a program through which it may
repurchase up to $3.0 million of its common stock on the open market from time
to time as market conditions warrant. The repurchase program, which is expected
to take place over the next twelve months, will be financed through operating
cash flow or the Company's revolving credit facility. As of September 20, 1999,
the Company had repurchased approximately 162,000 of its shares under this
program at a total cost of approximately $900,000.
Year 2000 Issues
During fiscal years 1997 through 1999, the Company significantly increased
its investment in various technology initiatives. The Company embarked upon
these initiatives to enhance the productivity of its staff and business
processes, and to provide a stable platform to support the Company's recent and
future growth. Through its three year technology plan, the Company has sought
to mitigate material risks associated with the year 2000. This technology
improvement plan has replaced most of the Company's information systems and
equipment platforms, including intranet, human resources, general ledger,
accounts payable and transaction services management and research, and
consequently has brought these systems into compliance with year 2000
requirements. The Company has also completed upgrades to various servers and
desktop computers. As a part of this three year plan, the Company is currently
testing and implementing a new transaction services revenue system, which it
expects to complete before December 1999. The Company has a contingency plan
which addresses the risk associated with the current revenue system database,
which is not year 2000 compliant.
The Company has made capital expenditures totaling $9.1 million through
August 30, 1999 related to these systems, and currently expects to invest an
additional $1.6 million over the next four months to complete its technology
plan, the majority of which relates to implementation for the revenue system.
The Company has been testing its systems (including tests of the financial
systems and service interruption tests) and has found no unknown problems.
Management of the Company believes it has an effective program in place
relating to its internal information systems to resolve the year 2000 issue in
a timely manner, although no assurances can be given in this regard.
The Company has assessed its exposure to year 2000 issues other than those
related to internal information systems, including issues related to third
party vendors, and developed a plan (including contingencies to address these
risks). The Company evaluated its telecommunication systems and, based on this
investigation, spent $2.0 million (and expects to spend another $0.3 million)
to upgrade or replace non-compliant telephone, voice mail, facsimile and other
telecommunications equipment. As of August 20, 1999, these replacements and
upgrades were approximately 80% complete, with the remaining systems scheduled
to be completed by October 31, 1999. The Company will face business
interruption risk if telecommunications are suspended as a result of a year
2000 issue.
In addition to its own systems, the Company's year 2000 plan has included
evaluation of building systems in properties managed by Grubb & Ellis
Management Services, Inc. ("GEMS") (as well as the Company's facilities), and
various property accounting systems for GEMS clients. GEMS is working with its
clients (property owners) to gather information on the year 2000 readiness of
building systems such as security, elevator and HVAC. Over 90% of these
building systems have been tested, and most of the remedial work is scheduled
for completion by September 30, 1999. GEMS is also assisting its clients in
preparing contingency
11
plans, which will be put in place during October 1999. For client accounting,
GEMS has received and installed accounting software upgrades from all software
vendors, and these systems appear to be year 2000 compliant.
Since the Company cannot anticipate all possible outcomes of the year 2000
problem, nor predict the readiness of entities with which it transacts
business, there can be no assurance these events will not have a material
adverse effect on the Company's business, financial condition, results of
operations or cash flows.
Dividends
The Company's revolving credit facility contains certain restrictive
covenants including the prohibition of the payment of dividends and
restrictions on acquisitions, dispositions of assets, indebtedness, liens,
investments, the extension of credit and the issuance of certain types of
preferred stock, and the maintenance of a certain ratio of debt to cash flow.
As of June 30, 1999, the Company was in compliance with, or had received
waivers with respect to, all covenants of the credit facility.
ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk
The Company considered the provision of Financial Reporting Release No. 48
"Disclosure of Accounting Policies for Derivative Financial Instruments and
Derivative Commodity Instruments, and Disclosure of Quantitative and
Qualitative Information about Market Risk Inherent in Derivative Financial
Instruments, Other Financial Instruments and Derivative Commodity Instruments".
The Company had no holdings of derivative financial or commodity instruments at
June 30, 1999. A review of the Company's other financial instruments and risk
exposures at that date revealed that the Company had exposure to interest rate
risk. The Company utilized sensitivity analyses to assess the potential effect
of this risk and concluded that near-term changes in interest rates should not
materially adversely affect the Company's financial position, results of
operations or cash flows.
ITEM 8. Financial Statements and Supplementary Data
12
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Grubb & Ellis Company
We have audited the accompanying consolidated balance sheets of Grubb &
Ellis Company as of June 30, 1999 and 1998, and the related consolidated
statements of operations, stockholders' equity, and cash flows for each of the
three years in the period ended June 30, 1999. These financial statements are
the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with 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 consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of Grubb & Ellis Company at June 30, 1999 and 1998, and the consolidated
results of its operations and its cash flows for each of the three years in the
period ended June 30, 1999, in conformity with generally accepted accounting
principles.
/s/ Ernst & Young LLP
Chicago, Illinois
August 23, 1999
13
GRUBB & ELLIS COMPANY
CONSOLIDATED BALANCE SHEETS
June 30, 1999 and 1998
(in thousands, except share data)
1999 1998
-------- --------
ASSETS
Current assets:
Cash and cash equivalents................................ $ 5,500 $ 14,251
Service fees receivable, net............................. 9,019 9,025
Other receivables........................................ 2,291 1,310
Prepaid commissions...................................... 1,618 --
Prepaids and other assets................................ 3,402 3,179
Deferred tax assets, net................................. 2,940 5,584
-------- --------
Total current assets................................... 24,770 33,349
Noncurrent assets:
Equipment, software and leasehold improvements, net...... 18,554 13,152
Goodwill, net............................................ 28,564 10,578
Deferred tax assets, net................................. 3,450 4,140
Other assets............................................. 4,455 2,299
-------- --------
Total assets........................................... $ 79,793 $ 63,518
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable......................................... $ 3,122 $ 3,845
Credit facility indebtedness............................. 7,500 --
Acquisition indebtedness................................. 2,332 2,807
Compensation and employee benefits payable............... 9,511 6,948
Other accrued expenses................................... 2,605 3,927
-------- --------
Total current liabilities.............................. 25,070 17,527
Long-term liabilities:
Acquisition indebtedness................................. 553 459
Accrued claims and settlements........................... 8,837 9,041
Other liabilities........................................ 851 1,077
-------- --------
Total liabilities...................................... 35,311 28,104
-------- --------
Stockholders' equity:
Common stock, $.01 par value: 50,000,000 shares
authorized; 19,885,084 and 19,721,056 shares issued and
outstanding at June 30, 1999 and 1998, respectively..... 199 198
Additional paid-in-capital............................... 112,550 111,562
Retained earnings (deficit).............................. (68,267) (76,346)
-------- --------
Total stockholders' equity............................. 44,482 35,414
-------- --------
Total liabilities and stockholders' equity............. $ 79,793 $ 63,518
======== ========
The accompanying notes are an integral part of the consolidated financial
statements.
14
GRUBB & ELLIS COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS
for the years ended June 30, 1999, 1998 and 1997
(in thousands, except share data)
1999 1998 1997
---------- ---------- ----------
Revenue:
Transaction services fees................ $ 260,071 $ 247,040 $ 201,389
Management services fees................. 54,030 35,794 27,241
---------- ---------- ----------
Total revenue.......................... 314,101 282,834 228,630
---------- ---------- ----------
Costs and expenses:
Transaction services commissions......... 151,592 140,457 113,460
Salaries and wages....................... 83,531 70,680 55,095
Selling, general and administrative...... 61,064 53,816 43,567
Depreciation and amortization............ 6,079 3,563 2,964
Other non-recurring expenses............. -- -- 2,431
---------- ---------- ----------
Total costs and expenses............... 302,266 268,516 217,517
---------- ---------- ----------
Total operating income................. 11,835 14,318 11,113
Other income and expenses:
Interest and other income................ 922 1,237 1,121
Interest expense......................... (702) (106) (1,453)
---------- ---------- ----------
Income before income taxes and
extraordinary item.................... 12,055 15,449 10,781
Net benefit (provision) for income taxes... (3,976) 6,057 2,848
---------- ---------- ----------
Income before extraordinary item........... 8,079 21,506 13,629
Extraordinary item--gain on extinguishment
of debt, net of taxes of $195............. -- -- 5,381
---------- ---------- ----------
Net income............................. $ 8,079 $ 21,506 $ 19,010
========== ========== ==========
Net income applicable to common
stockholders, net of undeclared dividends
earned on preferred stock in the amounts
of $1,431 for the year ended June 30,
1997...................................... $ 8,079 $ 21,506 $ 17,579
========== ========== ==========
Net income per common share:
Basic--
--from operations........................ $ 0.41 $ 1.10 $ 0.85
--from extraordinary gain................ -- -- 0.37
---------- ---------- ----------
$ 0.41 $ 1.10 $ 1.22
========== ========== ==========
Weighted average common shares outstanding. 19,785,715 19,607,352 14,429,971
========== ========== ==========
Diluted--
--from operations........................ $ 0.37 $ 0.98 $ 0.70
--from extraordinary gain................ -- -- 0.27
---------- ---------- ----------
$ 0.37 $ 0.98 $ 0.97
========== ========== ==========
Weighted average common shares outstanding. 21,587,898 22,043,920 19,567,635
========== ========== ==========
The accompanying notes are an integral part of the consolidated financial
statements.
15
GRUBB & ELLIS COMPANY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
for the years ended June 30, 1999, 1998 and 1997
(in thousands, except share data)
Common Stock Total
------------------ Additional Retained Stockholders'
Outstanding Preferred Paid-in- Earnings Equity
Shares Amount Stock Capital (Deficit) (Deficit)
----------- ------ --------- ---------- --------- -------------
Balance as of June 30,
1996................... 8,916,415 $ 90 $ 32,143 $ 57,154 $(116,862) $(27,475)
Employee common stock
purchases and net
exercise of common
stock options.......... 72,913 1 -- 430 -- 431
Issuance of common
stock, net of related
costs.................. 5,000,000 50 -- 20,907 -- 20,957
Retirement of preferred
stock:
5% Junior Convertible
Preferred Stock....... -- -- (14,064) 14,064 -- --
Conversion of preferred
stock to common stock:
12% Senior Convertible
Preferred Stock....... 5,168,177 52 (15,945) 15,893 -- --
5% Junior Convertible
Preferred Stock....... 352,447 3 (2,134) 2,131 -- --
Net income.............. -- -- -- -- 19,010 19,010
---------- ---- -------- -------- --------- --------
Balance as of June 30,
1997................... 19,509,952 196 -- 110,579 (97,852) 12,923
Employee common stock
purchases and net
exercise of common
stock options.......... 211,104 2 -- 983 -- 985
Net income.............. -- -- -- -- 21,506 21,506
---------- ---- -------- -------- --------- --------
Balance as of June 30,
1998................... 19,721,056 198 -- 111,562 (76,346) 35,414
Employee common stock
purchases and net
exercise of stock
options................ 164,028 1 -- 988 -- 989
Net income.............. -- -- -- -- 8,079 8,079
---------- ---- -------- -------- --------- --------
Balance as of June 30,
1999................... 19,885,084 $199 $ -- $112,550 $ (68,267) $ 44,482
========== ==== ======== ======== ========= ========
The accompanying notes are an integral part of the consolidated financial
statements.
16
GRUBB & ELLIS COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
for the years ended June 30, 1999, 1998 and 1997
(in thousands)
1999 1998 1997
-------- -------- --------
Cash Flows from Operating Activities:
Net income...................................... $ 8,079 $ 21,506 $ 19,010
Adjustments to reconcile net income to net cash
provided by operating activities:
Extraordinary item--gain on extinguishment of
debt, net of tax............................. -- -- (5,381)
Deferred tax provision (benefit).............. 3,334 (6,504) (3,220)
Depreciation and amortization................. 6,079 3,563 2,964
Interest expense on Payment-in-Kind Notes..... -- -- 465
Recovery of real estate valuation allowance... -- -- (425)
Provision (recovery) for services fees
receivable valuation allowances.............. 547 96 (1,161)
(Increase) decrease in services fees
receivable................................... (541) (4,488) (580)
(Increase) decrease in prepaids and other
assets....................................... (4,791) (1,321) 2,288
Increase (decrease) in accounts payable....... (723) 699 286
Increase (decrease) in compensation and
employee benefits payable.................... 2,563 2,380 (812)
Decrease in accrued claims and settlements.... (204) (1,471) (3,071)
Decrease in other liabilities................. (1,548) (19) (1,847)
-------- -------- --------
Net cash provided by operating activities... 12,795 14,441 8,516
-------- -------- --------
Cash Flows from Investing Activities:
Purchases of equipment, software and leasehold
improvements................................... (9,669) (10,200) (3,216)
Cash paid for business acquisitions, net of cash
acquired....................................... (17,102) (7,580) --
-------- -------- --------
Cash used in investing activities........... (26,771) (17,780) (3,216)
-------- -------- --------
Cash Flows From Financing Activities:
Proceeds from borrowing......................... 7,500 -- --
Repayment of acquisition indebtedness........... (3,264) -- --
Proceeds from issuance of common stock, net..... 989 985 21,388
Repayment of long-term debt to related party.... -- -- (23,000)
Deferred financing fees......................... -- (185) (445)
-------- -------- --------
Net cash provided by (used in) financing
activities................................. 5,225 800 (2,057)
-------- -------- --------
Net (decrease) increase in cash and cash
equivalents (8,751) (2,539) 3,243
Cash and equivalents at beginning of the year... 14,251 16,790 13,547
-------- -------- --------
Cash and cash equivalents at end of the year.... $ 5,500 $ 14,251 $ 16,790
======== ======== ========
The accompanying notes are an integral part of the consolidated financial
statements.
17
GRUBB & ELLIS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies
(a) The Company:
Grubb & Ellis Company (the "Company") is a full service commercial real
estate company that provides services to real estate owners/investors and
tenants including transaction services involving leasing, acquisitions and
dispositions, and property and facilities management services. Additionally,
the Company provides consulting and strategic services with respect to
commercial real estate.
(b) Principles of Consolidation:
The consolidated financial statements include the accounts of Grubb & Ellis
Company, and its wholly and majority owned and controlled subsidiaries and
controlled partnerships, including Grubb & Ellis Management Services, Inc.
("GEMS"), which provides property and facilities management services. All
significant intercompany accounts have been eliminated.
(c) Basis of Presentation:
The financial statements have been prepared in conformity with generally
accepted accounting principles which 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.
(d) Revenue Recognition:
Real estate sales commissions are recognized at the earlier of receipt of
payment, close of escrow or transfer of title between buyer and seller. Receipt
of payment occurs at the point at which all Company services have been
performed, title to real property has passed from seller to buyer, if
applicable, and no contingencies exist with respect to entitlement to the
payment. Real estate leasing commissions are recognized at the earlier of
receipt of full payment or partial payment and tenant occupancy, assuming a
lease agreement has been executed and no contingencies exist. All other
commissions and fees are recognized at the time the related services have been
performed by the Company, unless future contingencies exist.
(e) Costs and Expenses:
Real estate transaction and other commission expense is recognized
concurrently with the related revenue. All other costs and expenses are
recognized when incurred. GEMS incurs certain salaries, wages and benefits in
connection with the property and corporate facilities management services it
provides which are in part reimbursed by the owners of such properties. The
following is a summary of the GEMS total gross and reimbursable salaries, wages
and benefits (in thousands) for the years ended June 30, 1999, 1998 and 1997.
The net expense is included in salaries and wages on the Consolidated
Statements of Operations.
1999 1998 1997
-------- -------- --------
Gross salaries, wages and benefits.......... $125,126 $101,610 $ 82,681
Less: reimbursements from property owners... (94,753) (79,333) (67,051)
-------- -------- --------
Net salaries, wages and benefits............ $ 30,373 $ 22,277 $ 15,630
======== ======== ========
18
GRUBB & ELLIS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(f) Accounting for Stock-Based Compensation:
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-
Based Compensation" ("Statement 123") allows companies to either account for
stock-based compensation under the provisions of Statement 123 or under the
provisions of Accounting Principles Bulletin Opinion No. 25 ("APB 25"). The
Company elected to continue accounting for stock based compensation to its
employees under the provisions of APB 25. Accordingly, if the exercise price of
the Company's employee stock options equals or exceeds the fair market value of
the underlying stock on the date of grant, no compensation expense is
recognized by the Company. If the exercise price of an award is less than the
fair market value of the underlying stock at the date of grant, the Company
recognizes the difference as compensation expense over the vesting period of
the award. The Company, however, is required to provide pro forma disclosure as
if the fair value measurement provisions of Statement 123 had been adopted. See
Note 7 of Notes to Consolidated Financial Statements for additional
information.
(g) Income Taxes:
Deferred income taxes are recorded based on enacted statutory rates to
reflect the tax consequences in future years of the differences between the tax
bases of assets and liabilities and their financial reporting amounts. Deferred
tax assets, such as net operating loss carryforwards, which will generate
future tax benefits are recognized to the extent that realization of such
benefits through future taxable earnings or alternative tax strategies is more
likely than not.
(h) Cash and Cash Equivalents:
Cash and cash equivalents consist of demand deposits and highly liquid
short-term debt instruments with maturities of three months or less from the
date of purchase and are stated at cost.
Cash payments for interest were approximately $511,000, $127,000 and $1.5
million for each of the fiscal years ended June 30, 1999, 1998 and 1997,
respectively. Cash payments for income taxes for the fiscal years ended June
30, 1999, 1998 and 1997 were approximately $474,000, $297,000 and $168,000,
respectively.
(i) Equipment, Software and Leasehold Improvements:
Equipment, software and leasehold improvements are recorded at cost.
Depreciation of equipment is computed using the straight-line method over their
estimated useful lives ranging from three to seven years. Software costs
consist of costs to purchase and develop software. All software costs are
amortized using a straight line method over their estimated useful lives,
ranging from three to seven years. Development costs are amortized once the
related software is placed in service. Leasehold improvements are amortized
using the straight-line method over their useful lives not to exceed the terms
of the respective leases. Maintenance and repairs are charged to expense as
incurred.
(j) Goodwill
Goodwill, representing the excess of the cost over the net tangible assets
of acquired businesses, is stated at cost and is amortized on a straight line
basis over estimated future periods to be benefited, which range from 15 to 25
years. Accumulated amortization amounted to approximately $1,651,000 and
$338,000 at June 30, 1999 and 1998, respectively.
In accordance with Financial Accounting Standards No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
of", the net carrying value of goodwill is reviewed by
19
GRUBB & ELLIS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
management if facts and circumstances, such as significant declines in revenues
or number of brokers, suggest that it may be impaired. If any impairment is
indicated as a result of such reviews, the Company would measure it by
comparing undiscounted cash flows of a specific acquired business with the
carrying value of goodwill associated therewith. If the future estimated
undiscounted cash flows are not sufficient to recover the carrying value of
such goodwill, such asset would be adjusted to its fair value through a charge
to operations. No impairment losses have been identified in fiscal 1999, 1998
or 1997.
(k) Accrued Claims and Settlements:
The Company has maintained partially self-insured and deductible programs
for errors and omissions, general liability, workers' compensation and certain
employee health care costs. Reserves for such programs are included in accrued
claims and settlements and compensation and employee benefits payable, as
appropriate. Reserves are based on the aggregate of the liability for reported
claims and an actuarially-based estimate of incurred but not reported claims.
(l) Fair Value of Financial Instruments:
Statement of Financial Accounting Standards No. 107, "Disclosures about Fair
Value of Financial Instruments", requires disclosure of fair value information
about financial instruments, whether or not recognized in the Consolidated
Balance Sheets. Considerable judgment is required in interpreting market data
to develop estimates of fair value. Accordingly, the estimates presented herein
are not necessarily indicative of the amounts that the Company could realize in
a current market exchange. The use of different market assumptions and/or
estimation methodologies may have a material effect on the estimated fair value
amounts.
The carrying amounts of the Company's financial instruments, which include
cash and cash equivalents, receivables and obligations under accounts payable
and debt instruments, approximate their fair values, based on similar
instruments with similar risks.
(m) Segment reporting:
Effective April 1, 1999, the Company adopted the Financial Accounting
Standards Board's Statement of Financial Accounting Standards No. 131,
Disclosures about Segments of an Enterprise and Related Information (Statement
131) which establishes standards for the way that public business enterprises
report information about operating segments in their financial statements. The
adoption of Statement 131 did not affect the Company's results of operations or
financial position, but did affect the disclosure of segment information. See
note 13 of Notes to Consolidated Financial Statements.
(n) Reclassifications:
Certain prior year amounts have been reclassified to conform to the current
year presentation.
2. Services Fees Receivable, net
Service fees receivable at June 30, 1999 and 1998 consisted of the following
(in thousands):
1999 1998
-------- --------
Commissions and fees receivable....................... $ 27,017 $ 22,172
Commissions payable................................... (14,874) (10,591)
Allowance for uncollectible accounts.................. (2,662) (2,115)
-------- --------
Total............................................... 9,481 9,466
Less portion classified as current.................... 9,019 9,025
-------- --------
Noncurrent portion (included in other assets)....... $ 462 $ 441
======== ========
20
GRUBB & ELLIS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following is a summary of the changes in the allowance for uncollectible
service fees receivable for the fiscal years ended June 30, 1999, 1998 and 1997
(in thousands):
1999 1998 1997
------ ------ -------
Balance at beginning of year....................... $2,115 $2,019 $ 3,180
Provision for bad debt............................. 547 96 --
Recovery of allowance.............................. -- -- (1,161)
------ ------ -------
Balance at end of year............................. $2,662 $2,115 $ 2,019
====== ====== =======
3. Equipment, Software and Leasehold Improvements, net
Equipment, software and leasehold improvements at June 30, 1999 and 1998
consisted of the following (in thousands):
1999 1998
------- -------
Furniture, equipment and software systems................. $33,545 $26,569
Leasehold improvements.................................... 4,097 3,275
------- -------
Total................................................... 37,642 29,844
Less accumulated depreciation and amortization............ 19,088 16,692
------- -------
Equipment, software and leasehold improvements, net....... $18,554 $13,152
======= =======
The Company wrote off approximately $2.2 million and $297,000 of fully
depreciated furniture and equipment during the fiscal years ended June 30, 1999
and 1998, respectively.
4. Earnings Per Common Share
Statement of Financial Accounting Standards No. 128, "Earnings per Share"
("Statement 128") requires disclosure of basic earnings per share which
excludes any dilutive effects of options, warrants, and convertible securities
and diluted earnings per share. All earnings per share amounts for all periods
have been presented and, where necessary, restated to conform to the Statement
No. 128 requirements.
The calculation of earnings per common share for fiscal 1997 includes net
income adjusted for amounts applicable to the Senior and Junior Convertible
Preferred Stock related to undeclared dividends. All of the preferred stock was
either retired or converted to common stock in December, 1996 (see Note 5), and
all accrued and undeclared dividends through that date were forgiven.
21
GRUBB & ELLIS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 fiscal year ended
June 30,
-------------------------
1999 1998 1997
------- -------- --------
Basic earnings per common share:
Income before extraordinary gain............... $ 8,079 $ 21,506 $ 13,629
Adjustments
Dividends--senior convertible preferred
stock....................................... -- -- (1,032)
Dividends--junior convertible preferred
stock....................................... -- -- (399)
------- -------- --------
Net income before extraordinary gain
applicable to common stockholders........... $ 8,079 $ 21,506 $ 12,198
======= ======== ========
Weighted average common shares outstanding--
basic......................................... 19,786 19,607 14,430
======= ======== ========
Earnings per common share--basic............... $ 0.41 $ 1.10 $ 0.85
======= ======== ========
Diluted earnings per common share:
Net income before extraordinary gain applicable
to common stockholders........................ $ 8,079 $21,506 $13,629
======= ======== ========
Weighted average common shares outstanding..... 19,786 19,607 14,430
Effect of dilutive securities:
Stock options and warrants................... 1,802 2,437 1,631
Senior convertible preferred stock........... -- -- 2,308
Junior convertible preferred stock........... -- -- 1,199
------- -------- --------
Weighted average common shares outstanding..... 21,588 22,044 19,568
======= ======== ========
Earnings per common share--diluted............. $ 0.37 $ .98 $ 0.70
======= ======== ========
Options outstanding to purchase shares of common stock, the effect of which
would be antidilutive, were 1,124,850 and 48,550 at June 30, 1999 and June 30,
1998, respectively, and were not included in the computation of diluted
earnings per share because the option exercise price was greater than the
average market price of the common shares for the year.
5. Financing and Capital Related Transactions
Revolving Credit Facility:
On March 13, 1997 the Company entered into a $15 million revolving credit
facility (the "Credit Agreement") with PNC Bank, National Association ("PNC")
for general corporate purposes and acquisitions. The Credit Agreement expires
on March 13, 2001. On January 26, 1998, PNC and the Company amended the Credit
Agreement by adding an additional bank and expanding the credit facility to $35
million. Payment and maturity terms remained relatively unchanged, with
interest on outstanding borrowings due quarterly in arrears. Interest is based
upon PNC's prime rate and/or the LIBOR rate plus, in either case, an additional
margin based upon a particular financial ratio of the Company, and will vary
depending upon which interest rate options the Company chooses to be applied to
specific borrowings. At June 30, 1999, the Company had outstanding borrowings
of $7.5 million under the Credit Agreement, with a weighted average interest
rate of 7.0 percent.
In connection with the Credit Agreement and the subsequent amendment, the
Company incurred commitment and other financing fees totaling approximately
$576,000, which are being amortized over the
22
GRUBB & ELLIS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
term of the Credit Agreement. Performance of the Company's obligations under
the Credit Agreement is collateralized by substantially all of the Company's
assets. The Credit Agreement contains certain restrictive covenants, including,
among other things, the prohibition of the payment of dividends, restrictions
on the issuance of certain types of preferred stock, and the maintenance of
certain financial ratios.
Fiscal 1997 Financing Transactions:
During the year ended June 30, 1997, the Company retired all of its
outstanding long-term debt, as further described below.
Sale Agreement--Long-term Debt--On October 21, 1996, Warburg, Pincus
Investors, L.P. ("Warburg") and The Prudential Insurance Company of America
("Prudential") entered into an agreement (the "Sale Agreement") pursuant to
which Warburg acquired from Prudential all of the outstanding debt, common
stock warrants, and substantially all of the Junior Convertible Preferred Stock
held by Prudential in the Company (together, the "Prudential Securities"), for
$23 million plus accrued but unpaid interest on the debt. The closing occurred
on October 22, 1996. Concurrently, Warburg granted the Company an option, (the
"Option") until April 16, 1997, to acquire all of the Prudential Securities
which Warburg acquired from Prudential, at Warburg's cost, plus interest.
The Prudential Securities included: (a) $5 million Revolving Credit Note due
November 1, 1999 (the "Revolving Credit Note"); (b) $10 million 9.9% Senior
Notes due in equal installments on November 1, 1997 and 1998 (the "Senior
Notes"); (c) $10.9 million 11.65% Subordinated Payment-In-Kind Note due
November 1, 2000 and 2001; (d) $2.2 million 11.65% Subordinated Payment-In-Kind
Notes, due November 1, 2000 and 2001 ((c) and (d) collectively the "PIK
Notes"); (e) 130,233 shares of Junior Convertible Preferred Stock; and (f)
stock subscription warrants to subscribe for 350,000 shares of common stock.
Pursuant to the Sale Agreement, Prudential agreed that in the event that
Warburg converted its Senior Convertible Preferred Stock to common stock,
Prudential would convert its remaining Junior Convertible Preferred Stock to
common stock. As of the date of the Sale Agreement, Prudential continued to
hold 397,549 shares of common stock and 19,767 shares of Junior Convertible
Preferred Stock convertible into 352,447 shares of common stock.
While the Option remained unexercised during the Option period, no interest
or dividends accrued or were due or payable on the Prudential Securities;
however, the Company was obligated to pay Warburg interest at an initial rate
of 10% per annum, increasing to 12% per annum as of February 1, 1997, on
Warburg's $23 million investment in the Prudential Securities. In consideration
of receipt of the Option, the Company agreed to extend the expiration date of
warrants to purchase an aggregate of 1,012,358 shares of common stock of the
Company, then held by Warburg, to January 29, 2002.
Equity Investments--On December 11, 1996, the Company sold 2.5 million
shares of its common stock for $10 million to the principals of the Kojaian
Companies, Southfield, Michigan. The $10 million was used to purchase from
Warburg, and then retire, all of the outstanding PIK Notes (approximately $13.6
million of principal and accrued interest) and 130,233 shares of Junior
Convertible Preferred Stock. The repurchase of the PIK Notes resulted in a $3.6
million extraordinary gain on the extinguishment of debt. Concurrently, Warburg
and Joe F. Hanauer, a director of the Company, converted all of the Senior
Convertible Preferred Stock held by them into an aggregate of 5,168,177 shares
of common stock, and Mr. Hanauer agreed to cancel certain warrants held by him.
In connection with these transactions, Warburg retained warrants to purchase an
aggregate of 325,000 shares of common stock and Mr. Hanauer received, from
Warburg, warrants to purchase an aggregate of 25,000 shares of common stock. At
the same time, Warburg granted the Company a second option (the "Second
Option") to purchase the Senior Notes and Revolving Credit Note held by Warburg
until
23
GRUBB & ELLIS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
April 16, 1997 for $13 million, plus interest, and the Option was canceled.
Pursuant to the Sale Agreement, Prudential converted all of its remaining
shares of Junior Convertible Preferred Stock into an aggregate of 352,447
shares of common stock.
On January 24, 1997, the Company sold 2.5 million shares of its common
stock for $11.25 million to Archon Group, L.P., a majority owned subsidiary of
the international investment bank, Goldman, Sachs & Co. The $11.25 million,
together with existing cash, was used to exercise the Second Option and
purchase from Warburg, and then retire, the $10 million Senior Notes and $5
million Revolving Credit Note, at a price equal to $13 million plus accrued
interest of approximately $96,000. The purchase of these notes resulted in a
$2 million extraordinary gain on the extinguishment of debt.
As a result of the above mentioned transactions, all shares of Senior and
Junior Convertible Preferred Stock of the Company were either converted to
common stock or retired, and all accrued and undeclared dividends were
forgiven.
6. Income Taxes
The Company maintains a fiscal year ending June 30 for financial reporting
purposes and a calendar year for income tax reporting purposes. The provision
(benefit) for income taxes for the fiscal years ended June 30, 1999, 1998 and
1997 consisted of the following:
1999 1998 1997
------ ------- -------
Current
Federal.......................................... $ 227 $ 169 $ 217
State and local.................................. 415 278 155
------ ------- -------
642 447 372
Deferred......................................... 3,334 (6,504) (3,220)
------ ------- -------
Net provision (benefit).......................... $3,976 $(6,057) $(2,848)
====== ======= =======
At June 30, 1999, the following income tax carryforwards were available to
the Company (in thousands):
Expiration
Amount Dates
------- ------------
Federal income tax operating loss carryforwards......... $11,506 2007 to 2010
Federal investment tax credit carryforwards............. 278 1999 to 2000
Federal alternative minimum tax credit carryforward..... 624 Indefinite
24
GRUBB & ELLIS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
In addition, certain of the Company's net operating loss carryforwards
("NOL's") are limited pursuant to Section 382 of the Internal Revenue Code
("Code") relating to a prior ownership change. The NOL's of $11.7 million
allowable under Section 382 are limited to approximately $825,000 per year,
subject to carryforward term limitations specified by the Code. At June 30,
1999, the amount of NOL's not subject to limitation amounted to approximately
$4.4 million and are included as a deferred tax asset in the table below.
The Company's effective tax rate on its income before taxes differs from the
statutory federal income tax rate as follows:
Years Ended June
30,
--------------------
1999 1998 1997
----- ----- -----
Federal statutory rate............................... 35.0% 35.0% 35.0%
State and local income taxes (net of federal tax
benefits)........................................... 1.9 1.2 1.4
Alternative minimum tax.............................. 1.9 1.1 1.3
Meals and entertainment.............................. 3.4 2.4 .8
Reduction in valuation allowance..................... (11.0) (53.0) (32.0)
Goodwill amortization................................ .9 -- --
Other................................................ .9 -- --
Stock option compensation............................ -- (3.9) --
Real estate partnership losses....................... -- (6.9) --
NOL carryforwards.................................... -- (15.1) (22.7)
----- ----- -----
Effective income tax rate.......................... 33.0% (39.2)% (16.2)%
===== ===== =====
During fiscal years 1999, 1998 and 1997, the Company reduced the valuation
allowance by $1.3 million, $6.5 million and $3.2 million, respectively, to
recognize deferred tax assets expected to be realized in future years. The
recognition of deferred tax assets is based primarily upon the expected
utilization of NOL and credit carryforwards. Management believes that, due to
favorable economic conditions, the elimination of long-term debt and the
Company's recent history of earnings, it is more likely than not that the
Company will generate sufficient future taxable income to realize the net
deferred tax assets.
Deferred income tax liabilities or assets are determined based on the
differences between the financial statement and tax bases of assets and
liabilities. The components of the Company's deferred tax assets and
liabilities are as follows as of June 30, 1999 and 1998 (in thousands):
1999 1998
------- -------
Deferred tax assets:
NOL and credit carryforwards............................. $ 5,389 $ 9,739
Insurance reserves....................................... 2,784 3,442
Commission and fee reserves.............................. 1,028 1,236
Claims and settlements................................... 1,423 991
Other.................................................... 766 486
------- -------
Deferred tax assets.................................... 11,390 15,894
Less valuation allowance................................... 4,260 5,585
------- -------
7,130 10,309
Deferred tax liabilities:
Accumulated depreciation................................. (740) (585)
------- -------
Net deferred tax asset................................. $ 6,390 $ 9,724
======= =======
Current.............................................. $ 2,940 $ 5,584
======= =======
Long-term............................................ $ 3,450 $ 4,140
======= =======
25
GRUBB & ELLIS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
7. Stock Options, Warrants and Stock Purchase and Employee 401(k) Plans
Stock Option Plans:
Changes in stock options were as follows for the fiscal years ended June 30,
1999, 1998 and 1997:
1999 1998 1997
-------------------------- --------------------------- --------------------------
Shares Exercise Price Shares Exercise Price Shares Exercise Price
--------- --------------- --------- ---------------- --------- ---------------
Stock Options
Outstanding at the
beginning of the year.. 2,383,280 $1.88 to $27.50 1,802,320 $ 1.88 to $27.50 1,085,400 $1.88 to $28.75
Granted................. 357,500 $6.25 to $ 8.94 815,000 $11.13 to $16.44 800,000 $3.38 to $15.25
Lapsed or canceled...... (182,100) $2.38 to $27.50 (87,600) $ 2.38 to $18.75 (61,340) $1.88 to $28.75
Exercised............... (28,400) $1.88 to $ 6.50 (146,440) $ 1.88 to $13.50 (21,740) $1.88 to $10.00
--------- --------- ---------
Stock options
outstanding at the end
of the year............ 2,530,280 $1.88 to $18.75 2,383,280 $ 1.88 to $27.50 1,802,320 $1.88 to $27.50
========= ========= =========
Exercisable at end of
the year............... 1,045,102 635,520 446,864 $1.88 to $27.50
========= ========= =========
The Company had 1,132,630 stock options with exercise prices ranging from
$1.88 to $4.40, 429,800 stock options with exercise prices ranging from $6.25
to $8.94 and 967,850 stock options with exercise prices ranging from $11.31 to
$18.75, outstanding at June 30, 1999.
Weighted average information per share with respect to stock options for
fiscal years ended June 30, 1999 and 1998 is as follows:
1999 1998
---------- ----------
Exercise price:
Granted........................................... $ 8.49 $11.49
Lapsed or canceled................................ 10.67 11.03
Exercised......................................... 3.71 3.26
Outstanding at June 30............................ 6.96 6.98
Remaining life...................................... 4.78 years 4.75 years
The Company's 1990 Amended and Restated Stock Option Plan, as amended,
provides for grants of options to purchase the Company's common stock. The plan
was amended effective February 1, 1997 and June 20, 1997 to increase the
authorized number of shares issuable under the plan by 300,000 and 200,000
shares, respectively, to a total of 2,000,000 shares. At June 30, 1999, 1998
and 1997, the number of shares available for the grant of options under the
plan were 226,124, 164,474 and 186,874, respectively. Stock options under this
plan may be granted at prices from 50% up to 100% of the market price per share
at the dates of grant, the terms and vesting schedules of which had been
determined by the Compensation Committee of the Board of Directors until
September 1996, and thereafter, by the Board of Directors.
The Company's 1993 Stock Option Plan for Outside Directors provides for an
automatic grant to each newly-elected non-management member of the Board of
Directors of an option to purchase 10,000 shares of common stock, at exercise
prices set at the market price at the date of grant. The options expire five
years from the date of grant and vest over three years from such date. The plan
originally authorized 50,000 shares for issuance, but was amended in November
1998 to increase the number of issuable shares to 300,000. In addition, the
amendment provides for additional automatic grants of 8,000 shares to each
outside director upon each of such director's successive fourth year
anniversaries of service. These new grants expire ten years after the date of
grant and vest over four years from such date. At each of June 30, 1999, 1998
and 1997, the number of shares available for the grant of options was 246,000,
10,000 and 20,000, respectively.
26
GRUBB & ELLIS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The Company's 1998 Stock Option Plan provides for grants of options to
purchase the Company's common stock. The plan authorizes the issuance of up to
2,000,000 shares, and had 1,081,950 and 1,305,000 shares available for grant as
of June 30, 1999 and 1998, respectively. Stock options under this plan may be
granted at prices and with such other terms and vesting schedules as determined
by the Compensation Committee of the Board of Directors, or, with respect to
options granted to corporate officers, the full Board of Directors.
Stock Warrants:
As of June 30, 1999, the Company had the following stock warrants
outstanding, all of which expire on January 29, 2002:
Number of Exercise
Warrants Price
--------- --------
475,000......................... $2.37500
235,045......................... 3.40355
887,358......................... 3.50000
88,496......................... 3.60449
In July 1999, the Company issued a warrant to purchase 600,000 shares of the
Company's common stock to the parent company of Landauer Associates, Inc.
("LAI"), as part of the consideration granted in the acquisition of LAI. The
warrants have an exercise price of $6.25 and a five year life, expiring in July
2004.
Employee Common Stock Purchase Plans:
The Company's former plan (the Employee New Stock Purchase Plan) was
effective from May 1987 through June 30, 1997, when it expired. It enabled
eligible employees to purchase common stock of the Company at discounted
prices. As amended, up to 200,000 shares of stock were authorized for issuance
under this plan. When it expired, all but 20,576 shares had been issued under
the plan. During the fiscal year ended June 30, 1997, the number of shares
purchased under this plan were 22,970.
The Grubb & Ellis Company Employee Stock Purchase Plan was adopted effective
August 1, 1997, and provides for the purchase of up to 750,000 shares of common
stock by employees of the Company at a 15% discount from market price, as
defined, through payroll deductions. The number of shares purchased under this
plan were 135,963 and 79,272 during the fiscal years ended June 30, 1999 and
1998, respectively.
Employee 401(k) Plans:
Prior to January 1, 1997, the Company had an employee 401(k) plan covering
eligible employees other than employees of GEMS. The Company contributed on a
discretionary basis to the plan based upon specified percentages of voluntary
employee contributions, which employer contributions may be made in common
stock or cash, or a combination of both. Prior to January 1, 1997, GEMS also
had an employee 401(k) plan, under which it made similar discretionary
contributions; however such plan did not provide for employer contributions to
be made in stock. The two plans were merged on January 1, 1997 and provide that
employer contributions may be made in common stock of the Company or cash.
Discretionary contributions by the Company and other expenses for the plans
amounted to approximately $891,000, $637,000 and $585,000 for the fiscal years
ended June 30, 1999, 1998 and 1997, respectively.
Pro Forma Information:
Pro forma information regarding net income and earnings per share is
required by Statement 123, and has been determined as if the Company had
accounted for options granted subsequent to July 1, 1996, and therefore
27
GRUBB & ELLIS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
includes grants under the 1990 Amended and Restated Stock Option Plan, 1993
Stock Option Plan for Outside Directors and 1998 Stock Option Plan, and
purchases made under the Grubb & Ellis Employee Stock Purchase Plan, under the
fair value method of that Statement. The fair value for the options was
estimated at the date of grant using a Black-Scholes option pricing model.
Weighted-average assumptions for fiscal years 1999, 1998 and 1997,
respectively, are as follows:
1999 1998 1997
---------- ---------- ----------
Risk free interest rates............. 4.74% 6.13% 6.27%
Dividend yields...................... 0% 0% 0%
Volatility factors of the expected
market price of the common stock.... .627 .625 .586
Weighted-average expected lives...... 6.00 years 4.10 years 4.96 years
The Black-Scholes option valuation model was developed for use in estimating
the fair value of traded options which have no vesting restrictions and are
fully transferable. In addition, option valuation models require the input of
highly subjective assumptions including the expected stock price volatility.
Because changes in these assumptions can materially affect the fair value
estimate, in management's opinion, the existing models do not necessarily
provide a reliable single measure of the fair value of options granted. The
weighted average fair values of options granted by the Company in fiscal years
1999, 1998 and 1997 using this model were $4.40, $6.17 and $4.40, respectively.
The effects on fiscal year 1999, 1998 and 1997 pro forma net income and pro
forma earnings per common share of amortizing to expense the estimated fair
value of stock options are not necessarily representative of the effects on net
income to be reported in future years due to such things as the vesting period
of the stock options, and the potential for issuance of additional stock
options in future years. For purposes of pro forma disclosures, the estimated
fair value of the options is amortized to expense over the options' vesting
period. The pro forma effect of applying Statement 123's fair value method to
the Company's stock-based awards results in net income of approximately
$6,645,000 and $20,609,000, basic earnings per share of $.34 and $1.05, and
diluted earnings per share of $.31 and $.93 for the fiscal years ended June 30,
1999 and 1998, respectively. Pro forma results for fiscal year 1997 are not
materially different from amounts reported.
Stock Repurchase Plan:
In August 1999, the Company announced a program through which it may
repurchase up to $3.0 million of its common stock on the open market from time
to time as market conditions warrant.
8. Related Party Transactions
Revenue earned by the Company for services rendered to affiliates, including
joint ventures, officers and directors and their affiliates, was as follows for
the fiscal years ended June 30, 1999, 1998 and 1997 (in thousands):
1999 1998 1997
------ ------ ------
Transaction service commissions..................... $2,152 $3,282 $ 836
Management services and other fees.................. $3,918 $2,341 $1,028
28
GRUBB & ELLIS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
9. Commitments and Contingencies
Noncancelable Operating Leases:
The Company has noncancelable operating lease obligations for office space
and certain equipment ranging from one to eight years, and sublease agreements
under which the Company acts as sublessor. The office space leases provide for
annual rent increases based on the Consumer Price Index, or other specified
terms, and typically require payment of property taxes, insurance and
maintenance costs.
Future minimum payments under noncancelable operating leases with an initial
term of one year or more were as follows at June 30, 1999 (in thousands):
Year Ending Lease
June 30, Obligations
----------- -----------
2000........................ $13,266
2001........................ 11,103
2002........................ 8,748
2003........................ 5,934
2004........................ 3,517
Thereafter................... 3,307
Lease and rental expense for the fiscal years ended June 30, 1999, 1998 and
1997 amounted to $18,708,000, $15,590,000 and $14,542,000, respectively.
Legal Matters:
On March 14, 1994, Johsz, et al. v. Koll Company, et al., was filed in the
Orange County (California) Superior Court against the Koll Company, Grubb &
Ellis Company, Koll Center Newport Number 10, a California general partnership
("Koll"), and Southern California Edison Company ("Edison"). The complaint was
served on the Company in June 1994. A second complaint, Younkin, Maiona, et al.
v. Koll Company, et al., based on similar causes of action, was filed in the
same court on December 13, 1994 and served on the Company in February 1995. The
plaintiffs in these two cases, three former Company brokers, two former Company
employees, and their spouses, alleged that the brokers and employees acquired
cancer from electromagnetic waves produced by the electric transformer owned by
Edison and situated in a vault below office space leased by the Company in a
building owned by Koll. The complaints alleged negligence, battery, and
negligent infliction of emotional distress, fraudulent concealment, loss of
consortium and, against Edison only, strict liability. Specific damages were
not pled. In the Johsz case, plaintiffs dismissed with prejudice all causes of
action allowing punitive damages. The remaining causes of action were dismissed
by summary judgment of the Superior Court, entered on December 18, 1995, and
the plaintiffs appealed this summary judgment to the California Court of
Appeals. In the Younkin case, plaintiff Maiona died while the suit was pending.
In 1998, all of the Younkin plaintiffs dismissed their claims. Maiona's heirs
filed a wrongful death action (Maiona v. Southern California Edison, et. al.)
alleging essentially the same theory as the dismissed Younkin case. The Company
moved to dismiss the Maiona case which motion was granted in September 1998. In
January 1999, both the Johsz and Maiona matters were settled without any
payment to the plaintiff by the Company.
John W. Matthews, et al. v. Kidder, Peabody & Co., et al. and HSM Inc., et
al., filed on January 23, 1995 in the United States District Court for the
Western District of Pennsylvania, is a class action on behalf of approximately
6,000 limited partners who invested approximately $85 million in three public
real estate limited partnerships (the "Partnerships") during the period
beginning in 1982 and continuing through 1986. HSM Inc. is a wholly-owned
subsidiary of the Company. The complaint alleges violations under the Racketeer
Influenced
29
GRUBB & ELLIS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
and Corrupt Organizations Act ("RICO"), securities fraud, breach of fiduciary
duty and negligent misrepresentation surrounding the defendants' organization,
promotion, sponsorship and management of the Partnerships. Specific damages
were not pled, but treble, punitive as well as compensatory damages and
restitution are sought. On December 19, 1995 the court granted the defendants'
motion to dismiss the entire complaint with regard to Partnerships I and III,
based upon the plaintiff's lack of standing in those Partnerships but denied
the motion with respect to the plaintiff's standing in Partnership II, in which
the plaintiff was a unitholder. The court declined to rule on the other bases
for dismissal, stating that they could be raised by summary judgment motion
after discovery. Plaintiff filed a motion for leave to file an amended
complaint adding new party plaintiffs in order to preserve claims relating to
Partnerships I and III. On September 27, 1996, the court granted plaintiff's
motion to file an amended complaint to add additional plaintiffs with respect
to Partnerships I and III. Also on that date, the court granted plaintiffs'
motion for class certification with respect to Partnerships I, II and III.
Subsequently, the court entered an order granting an interlocutory appeal by
defendants to the September 26, 1996 order on the question of the applicability
of the Private Securities Litigation Reform Act of 1995 (the "Securities
Litigation Reform Act") to this case. The case was stayed, including discovery,
pending the outcome of the appeal. In November 1998 the United States Court of
Appeals for the Third Circuit entered an order holding that the Securities
Litigation Reform Act is not applicable to this case and that plaintiffs may
proceed with their RICO claims against the defendants. Discovery is now
proceeding. Defendants filed a petition for writ of certiorari with the United
States Supreme Court appealing the Third Circuit's decision. On April 19, 1999,
the United States Supreme Court denied defendants' petition.
The Company intends to vigorously defend the Matthews action, and believes
it has meritorious defenses to contest the claims asserted by the plaintiffs.
Based upon available information, the Company is not able to determine the
financial impact, if any, of such action, but believes that the outcome will
not have a material adverse effect on the Company's financial position or
results of operations.
The Company is involved in various other claims and lawsuits arising out of
the conduct of its business, as well as in connection with its participation in
various joint ventures, partnerships, a trust and appraisal business, 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. Other Non-recurring Expense
During the fiscal year ended June 30, 1997, the Company recorded a $2.4
million charge for incremental non-recurring costs related to the relocation of
the Company's corporate headquarters from San Francisco, California to
Northbrook, Illinois.
11. Concentration of Credit Risk
Financial instruments that potentially subject the Company to credit risk
consist principally of trade receivables and interest-bearing investments.
Users of real estate services account for a substantial portion of trade
receivables and collateral is generally not required. The risk associated with
this concentration is limited due to the large number of users and their
geographic dispersion.
The Company places substantially all of its interest-bearing investments
with major financial institutions and limits the amount of credit exposure with
any one financial institution.
30
GRUBB & ELLIS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
12. Business Acquisitions and Related Indebtedness
Fiscal 1998 Acquisitions
The Company completed the acquisition of White Commercial Real Estate in
March 1998, Crane Realty & Management Co. and certain assets of LaCagnina &
Associates in April 1998, Aequus Property Management Company in May 1998 and
certain assets of Eagle Western Management Company in June 1998. Each of these
acquisitions has been accounted for under the purchase method of accounting,
with all operations subsequent to the respective acquisition dates reflected in
the Company's financial statements. Substantially all of the purchase prices in
these acquisitions were allocated to goodwill.
The purchase prices of these acquisitions, net of cash acquired, totaled
approximately $10.6 million, including related acquisition costs of
approximately $567,000 and seller provided financing of approximately $3.0
million. The amounts due the sellers bear interest at rates ranging from 5.0%
to 9.25% (with a weighted average rate of 7.86% at June 30, 1998) and have
maturities totaling approximately $2,807,000 in fiscal year 1999 and
approximately $170,000 in fiscal year 2000.
In addition, terms of certain of the acquisitions provide for additional
consideration up to a maximum of $700,000 which is dependent upon the
achievement of certain levels of revenues earned subsequent to the date of
acquisition. Due to the contingent nature of these amounts, the Company will
record them as additional purchase price upon payment to the sellers.
Fiscal 1999 Acquisitions
On July 22, 1998, the Company acquired substantially all of the assets of
Bishop Hawk, Inc. for total consideration of approximately $11.1 million, which
included seller financing of approximately $2.5 million. The Company has
recorded the acquisition under the purchase method of accounting, with all
operations subsequent to the acquisition date reflected in the Company's
financial statements. The notes to the seller are payable in installments
through July 22, 2000, and bear interest at a weighted average rate of 9.14%
per annum. The Company was obligated to make certain incentive based payments
to the seller, contingent upon the achievement of defined revenue levels for
the twelve months following the acquisition date. Such revenue levels were not
achieved, and therefore no further contingent obligation remain related to this
acquisition. In connection with this acquisition, the Company incurred $3.5
million of borrowings under its credit facility, all of which were repaid by
August 21, 1998.
In December 1998, the Company acquired substantially all of the assets of
Williams Property Venture d/b/a Smithy Braedon Oncor International and Smithy
Braedon Oncor International Management Inc. (collectively "Smithy Braedon").
The Company also acquired substantially all of the assets of Commercial Florida
Realty Partners, Inc. ("Commercial Florida") and Island Realty Service Group,
Inc. ("Island Realty") in February 1999. The Company has recorded these
acquisitions under the purchase method of accounting, and all operations
subsequent to the respective acquisition dates are reflected in the Company's
financial statements.
The purchase prices of these three acquisitions totaled approximately $8.3
million, including seller provided financing of approximately $347,000 which
bears interest at an annual rate of 7.5% and becomes due in January 2000. The
Company is also obligated to pay additional purchase price amounts which are
contingent on revenue levels achieved during the twelve months following the
acquisitions. Due to the contingent nature of these payments, the Company will
record this portion of the purchase prices only to the extent they are paid to
the sellers.
Substantially all of the purchase prices in these acquisitions were
allocated to goodwill.
31
GRUBB & ELLIS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Subsequent Period Acquisition:
On July 30, 1999, the Company acquired substantially all of the assets of
Landauer Associates, Inc. a real estate valuation and consulting firm.
Consideration given the seller at closing included cash, common stock warrants
(see Note 7 of Notes to Consolidated Financial Statements), and the assumption
of certain liabilities. The Company will record the acquisition under the
purchase method of accounting, and all operations subsequent to the acquisition
date will be reflected in the Company's financial statements for the fiscal
year ending June 30, 2000.
Pro Forma Information (Unaudited):
The following unaudited pro forma financial information reflects the
operations of the Company, assuming the above ten acquisitions had occurred on
July 1 of each year (in thousands, except share data):
Fiscal year ended
-----------------
June 30, June 30,
1999 1998
-------- --------
Total revenue........................................... $341,827 $343,118
Income before taxes..................................... 13,158 18,007
Net income.............................................. 8,752 23,066
Earnings per share:
Basic................................................. 0.44 1.18
Diluted............................................... 0.40 1.03
Pro forma information does not purport to be indicative of the results that
would have been obtained had these events occurred at the beginning of the
periods presented, and is not intended to be a projection of future results.
13. Segment Information
The Company has two reportable segments--Transaction Services and Management
Services.
The Transaction Services segment advises buyers, sellers, landlords and
tenants on the sale and leasing of commercial property and includes the
Company's Corporate Services, Institutional Services and national affiliate
program operations.
The Management Services segment provides property management, leasing and
related services for owners of investment properties and facilities management
services for corporate users.
The fundamental distinction between the Transaction and Management Services
segments lies in the nature of the revenue streams and related cost structures.
Transaction Services generates revenues primarily on a commission or project
fee basis. Therefore, the personnel responsible for providing these services
are compensated primarily on a commission basis. The Management Services
revenues are generated primarily by long term (one year or more) contractual
fee arrangements. Therefore, the personnel responsible for delivering these
services are compensated primarily on a salaried basis.
32
GRUBB & ELLIS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The Company evaluates segment performance and allocates resources based on
earnings before interest expense, taxes, depreciation and amortization
("EBITDA"). The segment information below has been prepared using the same
accounting policies as those described in the summary of significant accounting
policies. Corporate overhead expenses, along with interest and other income,
have been allocated on a relative revenue basis to each segment.
Transaction Management Company
Services Services Totals
----------- ---------- --------
(Amounts in $000's)
Fiscal year ended June 30, 1999
Total Revenues............................ $260,071 $54,030 $314,101
EBITDA.................................... 15,650 3,186 18,836
Total Assets.............................. 51,821 21,582 73,403
Fiscal year ended June 30, 1998
Total Revenues............................ $247,040 $35,794 $282,834
EBITDA.................................... 19,963 (845) 19,118
Total Assets.............................. 34,052 19,742 53,794
Fiscal year ended June 30, 1997
Total Revenues............................ $201,389 $27,241 $228,630
EBITDA.................................... 16,369 1,260 17,629
Total Assets.............................. 25,683 7,793 33,476
Reconciliation of Segment EBITDA to Income Statement:
Fiscal Year Ended June
30,
-----------------------
1999 1998 1997
------- ------- -------
Total Segment EBITDA................................ $18,836 $19,118 $17,629
Less:
Depreciation & Amortization......................... 6,079 3,563 2,964
Non-recurring expenses.............................. -- -- 2,431
Interest expense.................................... 702 106 1,453
------- ------- -------
Income before income taxes and extraordinary
items............................................ $12,055 $15,449 $10,781
======= ======= =======
Reconciliation of Segment Assets to Balance Sheet:
Fiscal Year Ended
June 30,
-------------------
1999 1998
------- -------
Total segment assets..................................... $73,403 $53,794
Deferred taxes........................................... 6,390 9,724
------- -------
Total assets........................................... $79,793 $63,518
======= =======
33
GRUBB & ELLIS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
14. Selected Quarterly Financial Data (Unaudited)
Fiscal Year Ended June 30, 1999
------------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
----------- ----------- ----------- -----------
(in thousands, except per share amounts and
shares)
Operating revenue.......... $ 76,169 $ 98,641 $ 59,962 $ 79,329
=========== =========== =========== ===========
Operating income (loss).... $ 3,661 $ 9,424 $ (4,078) $ 2,828
=========== =========== =========== ===========
Income (loss) before income
taxes..................... $ 3,716 $ 9,580 $ (4,010) $ 2,769
=========== =========== =========== ===========
Net income (loss).......... $ 2,310 $ 5,800 $ (2,406) $ 2,375
=========== =========== =========== ===========
Net income (loss ) per
common share:
Basic-- $ 0.12 $ 0.29 $ (0.12) $ 0.12
=========== =========== =========== ===========
Weighted average common
shares outstanding...... 19,722 19,756 19,805 19,860
=========== =========== =========== ===========
Diluted-- $ 0.11 $ 0.27 $ (0.12) $ 0.11
=========== =========== =========== ===========
Weighted average common
shares outstanding...... 21,880 21,657 21,480 21,337
=========== =========== =========== ===========
Common stock market price
range (high:low).......... 14.06:8.38 10.31:7.44 7.88:6.25 6.88:5.06
=========== =========== =========== ===========
Fiscal Year Ended June 30, 1998
------------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
----------- ----------- ----------- -----------
(in thousands, except per share amounts and
shares)
Operating revenue.......... $ 62,099 $ 81,525 $ 58,977 $ 80,233
=========== =========== =========== ===========
Operating income (loss).... $ 2,307 $ 7,281 $ (1,127) $ 5,857
=========== =========== =========== ===========
Income (loss) before income
taxes $ 2,586 $ 7,591 $ (791) $ 6,063
=========== =========== =========== ===========
Net income................. $ 3,035 $ 8,540 $ 2,655 $ 7,276
=========== =========== =========== ===========
Net income per common
share:
Basic-- $ 0.16 $ 0.44 $ 0.14 $ 0.37
=========== =========== =========== ===========
Weighted average common
shares outstanding...... 19,542 19,592 19,626 19,671
=========== =========== =========== ===========
Diluted-- $ 0.14 $ 0.39 $ 0.12 $ 0.33
=========== =========== =========== ===========
Weighted average common
shares outstanding...... 22,036 21,988 21,915 22,087
=========== =========== =========== ===========
Common stock market price
range (high:low).......... 17.00:12.81 17.19:12.19 16.38:10.13 15.38:10.13
=========== =========== =========== ===========
34
ITEM 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
GRUBB & ELLIS COMPANY
PART III
ITEM 10. Directors and Executive Officers of the Registrant
The information called for by Item 10 is incorporated by reference from the
registrant's definitive proxy statement to be filed pursuant to Regulation 14A
under the Securities Exchange Act of 1934 (the "Exchange Act") no later than
120 days after the end of the 1999 fiscal year.
ITEM 11. Executive Compensation
The information called for by Item 11 is incorporated by reference from the
registrant's definitive proxy statement to be filed pursuant to Regulation 14A
under the Exchange Act no later than 120 days after the end of the 1999 fiscal
year.
ITEM 12. Security Ownership of Certain Beneficial Owners and Management
The information called for by Item 12 is incorporated by reference from the
registrant's definitive proxy statement to be filed pursuant to Regulation 14A
under the Exchange Act no later than 120 days after the end of the 1999 fiscal
year.
ITEM 13. Certain Relationships and Related Transactions
The information called for by Item 13 is incorporated by reference from the
registrant's definitive proxy statement to be filed pursuant to Regulation 14A
under the Exchange Act no later than 120 days after the end of the 1999 fiscal
year.
35
GRUBB & ELLIS COMPANY
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) The following documents are filed as a part of this report:
1. The following Report of Independent Auditors and Consolidated
Financial Statements are submitted herewith:
Report of Independent Auditors
Consolidated Balance Sheets at June 30, 1999 and June 30, 1998.
Consolidated Statements of Operations for the years ended June 30,
1999, 1998 and 1997.
Consolidated Statements of Stockholders' Equity (Deficit) for the years
ended June 30, 1999, 1998 and 1997.
Consolidated Statements of Cash Flows for the years ended June 30,
1999, 1998 and 1997.
Notes to Consolidated Financial Statements.
2. All schedules for which provision is made in the applicable
accounting regulations of the Securities and Exchange Commission are not
required under the related instructions, are inapplicable, or the
information is contained in the Notes to Consolidated Financial Statements
and therefore have been omitted.
3. Exhibits required to be filed by Item 601 of Regulation S-K:
(3) Articles of Incorporation and Bylaws
3.1 Certificate of Incorporation of the Registrant, as restated effective
November 1, 1994, incorporated herein by reference to Exhibit 3.2 to
the Registrant's Annual Report on Form 10-K filed March 31, 1995
(Commission File No. 1-8122).
3.2 Amendment to the Restated Certificate of Incorporation of Grubb &
Ellis Company, filed with the Delaware Secretary of State on December
9, 1997, incorporated herein by reference to Exhibit 4.4 to the
Registrant's Registration Statement on Form S-8 filed on December 9,
1997 (Commission 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 (Commission File No. 1-8122).
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 (Commission File No. 1-8122).
3.5 Grubb & Ellis Company Bylaws, as amended and restated effective June
1, 1994, incorporated herein by reference to Exhibit 3.2 to the
Registrant's Quarterly Report on Form 10-Q filed on November 13, 1996
(Commission File No. 1-8122).
(4) Instruments Defining the Rights of Security Holders, including
Indentures
4.1 First Amendment to Warrant No. 18, held by Warburg, Pincus Investors,
L.P., exercisable for 687,358 shares of common stock of the Registrant
extending the expiration date to January 29, 2002, incorporated herein
by reference to Exhibit 4.2 to the Registrant's Quarterly Report on
Form 10-Q filed on November 13, 1996 (Commission File No. 1-8122).
36
4.2 First Amendment to Warrant No. 19, held by Warburg, Pincus Investors,
L.P., exercisable for 325,000 shares of common stock of the
Registrant extending the expiration date to January 29, 2002,
incorporated herein by reference to Exhibit 4.3 to the Registrant's
Quarterly Report on Form 10-Q filed on November 13, 1996 (Commission
File No. 1-8122).
4.3 Stock Purchase Agreement dated as of December 11, 1996 among the
Registrant, Mike Kojaian, Kenneth J. Kojaian and C. Michael Kojaian,
incorporated herein by reference to Exhibit 4.3 to the Registrant's
Current Report on Form 8-K filed on December 20, 1996 (Commission
File No. 1-8122).
4.4 Registration Rights Agreement dated as of December 11, 1996 among the
Registrant, Warburg, Pincus Investors, L.P., Joe F. Hanauer, Mike
Kojaian, Kenneth J. Kojaian and C. Michael Kojaian, incorporated
herein by reference to Exhibit 4.1 to the Registrant's Current Report
on Form 8-K filed on December 20, 1996 (Commission File No. 1-8122).
4.5 Purchase Agreement dated as of January 24, 1997 between the
Registrant and Warburg, Pincus Investors, L.P., incorporated herein
by reference to Exhibit 4.1 to the Registrant's Current Report on
Form 8-K filed on February 4, 1997 (Commission File No. 1-8122).
4.6 Stock Purchase Agreement dated as of January 24, 1997 between the
Registrant and Archon Group, L.P., incorporated herein by reference
to Exhibit 4.2 to the Registrant's Current Report on Form 8-K filed
on February 4, 1997 (Commission File No. 1-8122).
4.7 Registration Rights Agreement dated as of January 24, 1997 between
the Registrant and Archon Group, L.P., incorporated herein by
reference to Exhibit 4.3 to the Registrant's Current Report on Form
8-K filed on February 4, 1997 (Commission File No. 1-8122).
4.8 Stock Subscription Warrant No. 20 dated December 11, 1996 issued to
Joe F. Hanauer Trust, incorporated herein by reference to Exhibit
4.11 to the Registrant's Quarterly Report on Form 10-Q filed on
February 13, 1997 (Commission File No. 1-8122).
4.9 Stock Subscription Warrant No. 21 dated December 11, 1996 issued to
Warburg, Pincus Investors, L.P., incorporated herein by reference to
Exhibit 4.12 to the Registrant's Quarterly Report on Form 10-Q filed
on February 13, 1997 (Commission File No. 1-8122).
4.10 Stock Subscription Warrant No. 22 dated December 11, 1996 issued to
Joe F. Hanauer Trust, incorporated herein by reference to Exhibit
4.13 to the Registrant's Quarterly Report on Form 10-Q filed on
February 13, 1997 (Commission File No. 1-8122).
4.11 Stock Subscription Warrant No. 23 dated December 11, 1996 issued to
Warburg, Pincus Investors, L.P., incorporated herein by reference to
Exhibit 4.14 to the Registrant's Quarterly Report on Form 10-Q filed
on February 13, 1997 (Commission File No. 1-8122).
4.12 Form of Amendment No. 1 to Stock Subscription Warrants No. 8, 9, 13
and 15 issued to Joe F. Hanauer Trust, incorporated herein by
reference to Exhibit 4.15 to the Registrant's Quarterly Report on
Form 10-Q filed on February 13, 1997 (Commission File No. 1-8122).
4.13 Amended and Restated Credit Agreement among the Registrant, certain
subsidiaries of the Registrant, PNC Bank, National Association, and
American National Bank and Trust Company of Chicago dated as of
January 26, 1998, incorporated herein by reference to Exhibit 4.1 to
the Registrant's Quarterly Report on Form 10-Q filed on February 13,
1998 (Commission File No. 1-8122).
4.14 Amended and Restated Subordination Agreement among the Registrant and
certain subsidiaries of the Registrant in favor of PNC Bank, National
Association, and American National Bank and Trust Company of Chicago
dated as of January 26, 1998, incorporated herein by reference to
Exhibit 4.2 to the Registrant's Quarterly Report on Form 10-Q filed
on February 13, 1998 (Commission File No. 1-8122).
37
4.15 Revolving Credit Note executed by the Registrant in favor of PNC
Bank, National Association in the amount of $20 million dated as of
January 26, 1998, incorporated herein by reference to Exhibit 4.3 to
the Registrant's Quarterly Report on Form 10-Q filed on February 13,
1998 (Commission File No. 1-8122).
4.16 Revolving Credit Note executed by the Registrant in favor of American
National Bank and Trust Company of Chicago in the amount of $15
million dated as of January 26, 1998, incorporated herein by
reference to Exhibit 4.4 to the Registrant's Quarterly Report on Form
10-Q filed on February 13, 1998 (Commission File No. 1-8122).
4.17 First Amendment to Amended and Restated Credit Agreement among the
Registrant, certain subsidiaries of the Registrant, PNC Bank,
National Association, and American National Bank and Trust Company of
Chicago dated as of March 16, 1998, incorporated herein by reference
to Exhibit 4.5 to the Registrant's Quarterly Report on Form 10-Q
filed on May 14, 1998 (Commission File No. 1-8122).
4.18 Amendment to Amended and Restated Credit Agreement among the
Registrant, certain subsidiaries of the Registrant, PNC Bank,
National Association, and American National Bank and Trust Company of
Chicago dated as of August 23, 1999.
4.19 Promissory Note Issued July 22, 1998 by Grubb & Ellis Company in
favor of Bishop Hawk, Inc. (in the amount of $1,084,020),
incorporated herein by reference to Exhibit 2.3 to the Registrant's
Current Report on Form 8-K filed on August 5, 1998 (Commission File
No. 1-8122).
4.20 Stock Subscription Warrant No. A-1 dated July 30, 1999 issued to
Aegon USA Realty Advisors, Inc.
On an individual basis, instruments other than Exhibits listed above under
Exhibit 4 defining the rights of holders of long-term debt of the Registrant
and its consolidated subsidiaries and partnerships do not exceed ten percent of
total consolidated assets and are, therefore, omitted; however, the Company
will furnish supplementally to the Commission any such omitted instrument upon
request.
(10) Material Contracts
10.1* Employment agreement between Neil R. Young and the Registrant dated
as of February 22, 1996, incorporated herein by reference to Exhibit
10.1 to the Registrant's Quarterly Report on Form 10-Q filed on May
15, 1996 (Commission File No. 1-8122).
10.2* First Amendment to the Employment Agreement between Neil R. Young
and the Registrant dated as of May 19, 1999.
10.3* Grubb & Ellis 1990 Amended and Restated Stock Option Plan, as
amended effective as of June 20, 1997, incorporated herein by
reference to Exhibit 4.6 to the Registrant's Registration Statement
on Form S-8 filed on December 19, 1997 (Registration No. 333-42741).
10.4* Description of Grubb & Ellis Company Executive Officer Incentive
Compensation Plan.
10.5* 1993 Stock Option Plan for Outside Directors, incorporated herein by
reference to Exhibit 4.1 to the Registrant's registration statement
on Form S-8 filed on November 12, 1993 (Registration No. 33-71484).
10.6 First Amendment to the 1993 Stock Option Plan for Outside Directors,
effective November 19, 1998, incorporated herein by reference to
Exhibit 10.1 to the Registrant's Quarterly Report on Form 10-Q filed
on February 12, 1999 (Commission File No. 1-8122).
10.6* Grubb & Ellis 1998 Stock Option Plan, effective as of January 13,
1998.
10.7* Executive Change of Control Plan, effective as of May 10, 1999 and
attached form of Acknowledgement Agreement.
38
10.8 Amended and Restated Master Collateral Assignment of Contracts
Rights to PNC Bank, National Association, as Agent by the Registrant
and Subsidiaries of the Registrant as of January 26, 1998,
incorporated herein by reference to Exhibit 10.1 to the Registrant's
Quarterly Report on Form 10-Q filed on February 13, 1998 (Commission
File No. 1-8122).
10.9 Amended and Restated Master Agreement of Guaranty and Suretyship by
the Registrant and Subsidiaries of the Registrant in favor of PNC
Bank, National Association, as Agent by the Registrant and
Subsidiaries of the Registrant as of January 26, 1998, incorporated
herein by reference to Exhibit 10.2 to the Registrant's Quarterly
Report on Form 10-Q filed on February 13, 1998 (Commission File No.
1-8122).
10.10 Amended and Restated Pledge Agreement among the Registrant, certain
Subsidiaries of the Registrant, PNC Bank, National Association, and
American National Bank and Trust Company of Chicago dated as of
January 26, 1998, incorporated herein by reference to Exhibit 10.3
to the Registrant's Quarterly Report on Form 10-Q filed on February
13, 1998 (Commission File No. 1-8122).
10.11 Amended and Restated Security Agreement among the Registrant,
certain Subsidiaries of the Registrant, PNC Bank, National
Association, and American National Bank and Trust Company of Chicago
dated as of January 26, 1998, incorporated herein by reference to
Exhibit 10.4 to the Registrant's Quarterly Report on Form 10-Q filed
on February 13, 1998 (Commission File No. 1-8122).
10.12 Amended and Restated Trademark Security Agreement by the Registrant
in favor of PNC Bank, National Association, and American National
Bank and Trust Company of Chicago dated as of January 26, 1998,
incorporated herein by reference to Exhibit 10.5 to the Registrant's
Quarterly Report on Form 10-Q filed on February 13, 1998 (Commission
File No. 1-8122).
10.13 Managed Service Agreement between International Business Machines
Corporation and Axiom Real Estate Management, Inc. dated as of
January 1, 1996, and Side Letter Agreement between the parties dated
January 19, 1996, incorporated herein by reference to Exhibit 99.2
to the Registrant's Current Report on Form 8-K filed on February 8,
1996 (Commission File No. 1-8122).
10.14 Asset Purchase Agreement by and among Bishop Hawk, Inc., Sopilote
Inc., N. Bruce Ashwill and Grubb & Ellis Company dated July 22, 1998
(without exhibits), incorporated herein by reference to Exhibit 2.1
to the Registrant's Current Report on Form 8-K filed on August 5,
1998 (Commission File No. 1-8122).
- --------
*Management contract or compensatory plan or arrangement.
(21) Subsidiaries of the Registrant
(23) Consent of Independent Auditors
23.1 Consent of Ernst & Young LLP
(24) Powers of Attorney
(27) Financial Data Schedule
(b) None
39
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.
Grubb & Ellis Company
(Registrant)
*
By___________________________________
Neil Young
Chairman of the Board 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 and on the dates indicated.
*
By_____________________________ September 28, 1999
Neil Young
Chairman of the Board and
Chief Executive Officer
Principal Executive Officer
/s/ Brian D. Parker September 28, 1999
- -------------------------------
Brian D. Parker
Executive Vice President and
Chief Financial Officer
Principal Financial and
Accounting Officer
* September 28, 1999
____________________________________
R. David Anacker, Director
* September 28, 1999
____________________________________
Lawrence S. Bacow, Director
* September 28, 1999
____________________________________
Joe F. Hanauer, Director
* September 28, 1999
____________________________________
C. Michael Kojaian, Director
* September 28, 1999
____________________________________
Sidney Lapidus, Director
* September 28, 1999
____________________________________
Reuben S. Leibowitz, Director
* September 28, 1999
____________________________________
Robert J. McLaughlin, Director
40
* September 28, 1999
____________________________________
Thomas A. Meador, Director
* September 28, 1999
____________________________________
John D. Santoleri, Director
* September 28, 1999
____________________________________
Todd A. Williams, Director
/s/ Robert J. Walner
By: ___________________________
Robert J. Walner
Attorney-in-Fact,
*pursuant to Powers of
Attorney
41
Grubb & Ellis Company and Subsidiaries
EXHIBIT INDEX (A)
for the fiscal year ended June 30, 1999
Exhibit
(4) Instruments Defining the Rights of Security Holders, Including
Indentures
4.18 Amendment to Amended and Restated Credit Agreement among the
Registrant, certain subsidiaries of the Registrant, PNC Bank,
National Association, and American National Bank and Trust
Company of Chicago dated as of August 23, 1999.
4.20 Stock Subscription Warrant No. A-1 dated July 30, 1999 issued to
Aegon USA Realty Advisors, Inc.
(10) Material Contracts
10.2 First Amendment to the Employment Agreement between Neil R.
Young and the Registrant dated as of May 19, 1999,
10.4 Description of Grubb & Ellis Company Executive Officer Incentive
Compensation Plan.
10.7 Executive Change of Control Plan, effective as of May 10, 1999
and attached form of Acknowledgement Agreement.
(21) Subsidiaries of the Registrant
(23) Consent of Independent Auditors
23.1 Consent of Ernst & Young LLP
(24) Powers of Attorney
(27) Financial Data Schedule
- --------
(A) Exhibits incorporated by reference are listed in Item 14(a)3 of this
Report.
42