FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1996
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________________ to ___________________
Commission File Number: 1-8122
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GRUBB & ELLIS COMPANY
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(Exact Name of Registrant as Specified in Its Charter)
Delaware 94-1424307
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(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
One Montgomery Street, Telesis Tower,
San Francisco, CA 94104
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(Address of Principal Executive Offices)
(Zip Code)
(415) 956-1990
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(Registrant's Telephone Number, Including Area Code)
No Change
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(Former Name, Former Address and Former Fiscal Year,
if Changed Since Last Report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No ___
8,894,688
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(Number of Shares Outstanding of the Registrant's
Common Stock at May 1, 1996)
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PART I
FINANCIAL INFORMATION
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ITEM 1. FINANCIAL STATEMENTS
GRUBB & ELLIS COMPANY AND SUBSIDIARIES
Condensed Consolidated Statements of Operations
(in thousands, except per share amounts and shares)
(unaudited)
For the Three Months
Ended March 31,
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1996 1995
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Revenue:
Commercial real estate brokerage commissions $ 28,615 $ 29,880
Real estate services fees, commissions and other 8,318 8,193
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Total Revenue 36,933 38,073
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Costs and Expenses:
Real estate brokerage and other commissions 17,467 17,555
Selling, general and administrative 11,761 12,181
Salaries and wages 11,715 11,385
Depreciation and amortization 674 437
Special charges and unusual items (110) (119)
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Total costs and expenses 41,507 41,439
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Total operating loss (4,574) (3,366)
Other income and expenses:
Interest income 226 288
Other income, net 15 (28)
Interest expense to related parties (777) (739)
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Loss before income taxes (5,110) (3,845)
Provision for income taxes 6 66
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Net loss $ (5,116) $ (3,911)
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Net loss applicable to common stockholders,
net of undeclared dividends earned on
preferred stock $ (5,887) $ (4,612)
Net loss per common share and equivalents $ (.66) $ (.52)
Weighted average common shares outstanding 8,883,970 8,797,377
See notes to condensed consolidated financial statements.
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GRUBB & ELLIS COMPANY AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(unaudited - in thousands)
ASSETS
March 31, December 31, March 31,
1996 1995 1995
----------- ----------- -----------
(unaudited) (unaudited)
Current Assets:
Cash and cash equivalents $ 9,189 $26,611 $12,462
Real estate brokerage commissions receivable 3,229 3,313 2,715
Real estate services fees and
other commissions receivable 3,265 3,669 3,030
Other receivables 3,640 3,923 2,768
Prepaids and other current assets 667 1,295 1,184
----------- ----------- -----------
Total current assets 19,990 38,811 22,159
Noncurrent Assets:
Real estate brokerage commissions receivable 224 272 352
Real estate investments held for sale
and real estate owned 534 579 1,037
Equipment and leasehold improvements, net 5,374 5,563 5,251
Other assets 1,652 951 1,945
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Total assets $27,774 $46,176 $30,744
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See notes to condensed consolidated financial statements.
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GRUBB & ELLIS COMPANY AND SUBSIDIARIES
Condensed Consolidated Balance Sheets, continued
(in thousands, except per share amounts and shares)
March 31, December 31, March 31,
1996 1995 1995
----------- ----------- -----------
(unaudited) (unaudited)
LIABILITIES
Current Liabilities:
Notes payable and current portion of long-term debt $ 676 $ 276 $ 446
Accounts payable 1,075 1,498 2,102
Compensation and employee benefits payable 4,986 9,552 5,330
Deferred commissions payable 48 7,451 125
Accrued severance obligations 713 776 709
Accrued office closure costs 767 867 1,236
Accrued claims and settlements 1,824 2,132 2,264
Other accrued expenses 5,074 6,377 6,346
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Total current liabilities 15,163 28,929 18,558
Long-Term Liabilities:
Long-term debt, net of current portion 346 351 387
Long-term debt to related party,
net of current portion 27,450 26,698 25,674
Accrued claims and settlements 12,683 12,802 13,274
Accrued severance obligations -- 16 202
Accrued office closure costs 982 1,099 1,910
Other -- -- 130
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Total liabilities 56,624 69,895 60,135
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Commitments and contingencies (Note 4) -- -- --
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STOCKHOLDERS' EQUITY (DEFICIT)
Preferred stock, $.01 par value:
1,000,000 shares authorized; 137,160
shares of 12% Senior Convertible
Preferred Stock and 150,000 shares
of 5% Junior Convertible Preferred Stock outstanding 32,143 32,143 32,143
Common stock, $.01 par value:
25,000,000 shares authorized;
8,894,688, 8,883,970 and 8,800,633
shares issued and outstanding at
March 31, 1996, December 31, 1995
and March 31, 1995, respectively 90 90 89
Additional paid-in capital 57,068 57,084 56,923
Retained earnings (deficit) (118,151) (113,036) (118,546)
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Total stockholders' equity (deficit) (28,850) (23,719) (29,391)
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Total liabilities and stockholders' equity (deficit) $27,774 $ 46,176 $ 30,744
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See notes to condensed consolidated financial statements.
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GRUBB & ELLIS COMPANY AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(unaudited - in thousands)
For the Three Months
Ended March 31,
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1996 1995
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Cash Flows from Operating Activities:
Net loss $ (5,116) $ (3,911)
Adjustments to reconcile net loss to net
cash used in operating activities (12,440) (6,431)
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Net cash used in operating activities (17,556) (10,342)
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Cash Flows from Investing Activities:
Proceeds from disposition and distribution from
real estate joint ventures and real estate owned 39 --
Purchases of equipment and leasehold improvements (301) (501)
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Net cash used in investing activities (262) (501)
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Cash Flows from Financing Activities:
Proceeds from borrowing 400 --
Repayment of notes payable (4) (66)
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Net cash used in financing activities 396 (66)
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Net decrease in cash and cash equivalents (17,422) (10,909)
Cash and cash equivalents at beginning of period 26,611 23,371
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Cash and cash equivalents at end of period $ 9,189 $ 12,462
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Supplemental Disclosure of Cash Flow Information:
Cash paid during the period for:
Interest $ 603 $ 603
Income taxes 398 487
See notes to condensed consolidated financial statements.
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GRUBB & ELLIS COMPANY AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
1. INTERIM PERIOD REPORTING
The accompanying unaudited condensed consolidated financial statements
include the accounts of Grubb & Ellis Company, its wholly and majority
owned and controlled subsidiaries and controlled partnerships (the
"Company"), and are prepared in accordance with generally accepted
accounting principles for interim financial information and with the
instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly,
they do not include all of the information and footnotes required by
generally accepted accounting principles for complete financial statements
and therefore, should be read in conjunction with the Company's Annual
Report on Form 10-K for the year ended December 31, 1995 and footnotes
thereto.
In the opinion of management, all adjustments (consisting of normal
recurring accruals) considered necessary for a fair presentation have been
included. Certain amounts in prior periods have been reclassified to
conform to the current presentation.
Operating results for the quarter ended March 31, 1996 are not necessarily
indicative of the results that may be expected for future periods. Any
adjustments to reserves provided in prior periods in connection with
offices which management determined in 1993 to close in 1994 are reflected
as "Special charges and unusual items".
On January 24, 1996, the Board of Directors of the Company determined to
change the Company's fiscal year from a calendar year to a fiscal year
ending June 30 commencing in 1996. This change is intended to enable
management to improve the Company's planning capability related to its
natural business cycle, as well as enable it to adjust operations earlier
in the fiscal year based on the cash flows generated during its typically
strongest revenue quarter which ends December 31.
2. INCOME TAXES
The Company's tax provision is attributable to federal, state and local
income taxes assessed on profitable subsidiaries of the Company.
3. EARNINGS (LOSS) PER COMMON SHARE AND EQUIVALENTS
Earnings (loss) per common share and equivalents computations are based on
the weighted average number of common shares outstanding. Common equivalent
shares from stock options and
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GRUBB & ELLIS COMPANY AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
warrants are excluded from the computation if their effect is anti-
dilutive.
The calculation of earnings (loss) per common share includes net income
(loss), adjusted for amounts applicable to the Senior and Junior
Convertible Preferred Stock related to undeclared dividends earned as
follows (in thousands):
1996 1995
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Senior Convertible Preferred Stock $ 557 $ 498
Junior Convertible Preferred Stock 214 203
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$ 771 $ 701
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4. COMMITMENTS AND CONTINGENCIES
The Company has guaranteed, in the aggregate amount of $4 million, the
contingent liabilities of one of its wholly-owned subsidiaries with respect
to two limited partnerships in which the subsidiary formerly acted as
general partner.
The Company is involved in various claims and lawsuits arising out of the
conduct of its business, as well as in connection with its participation in
various joint ventures, partnerships, and a trust, 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.
The Company previously disclosed in its Annual Report on Form 10-K for the
year ended December 31, 1995 the information concerning a lawsuit entitled
JOHSZ ET AL. V. KOLL COMPANY, ET AL., and a related lawsuit entitled
YOUNKIN, MAIONA, ET AL. V. KOLL COMPANY, ET AL. and a purported class
action lawsuit, JOHN W. MATTHEWS, ET AL. V. KIDDER, PEABODY & CO., ET AL.
AND HSM INC., ET AL. There has been no material change with respect to
these matters.
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GRUBB & ELLIS COMPANY AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
5. PURCHASE OF AXIOM REAL ESTATE MANAGEMENT, INC. MINORITY INTEREST
On January 24, 1996, the Company completed the purchase of the common stock
held by International Business Machines Corporation ("IBM") in Axiom Real
Estate Management, Inc. ("Axiom") for a purchase price of $600,000. The
Company paid $150,000 cash upon closing and will pay three additional
$150,000 annual installments beginning January 1997. As a result of this
transaction, the Company owns 100% of the outstanding common stock of
Axiom. The excess of the purchase price over the underlying proportionate
value of the net assets acquired of approximately $450,000 has been
recorded related to the purchase and will be amortized over five years.
Since its inception in 1992, Axiom has provided facilities management to
IBM pursuant to a facilities management agreement (the "Managed Service
Agreement"). In connection with the purchase transaction, the Managed
Service Agreement was modified effective January 1, 1996 providing for the
extension of its term until December 31, 2000, with the option for IBM to
extend it for two additional one year periods, the reduction of fees
charged, and the ability for IBM to change the facilities portfolio under
management by Axiom under certain circumstances. The modified Managed
Service Agreement is expected to result in the reduction of annual fees
paid by IBM to Axiom of approximately $1.8 million for each of the years
1996 and 1997. This reduction in revenue is expected to be offset in part
by the extension of the contract, the opportunity to obtain additional
business from IBM and a reduction in costs by reducing certain duplicative
administrative, marketing and other costs.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
REVENUE
The Company's revenue is derived principally from commercial brokerage
activities. Property and asset management, mortgage brokerage and appraisal
and consulting fees provide substantially all of the remaining revenue.
The Company has historically experienced its lowest quarterly revenue in the
first calendar quarter of each year with historically higher and more
consistent revenue in the second and third calendar quarters. The fourth
calendar quarter 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 1995,
1994 and 1993, as a percentage of total annual revenue, ranged from a high of
31.7% to a low of 19.8%, as adjusted to eliminate the effect of operations
sold or closed. Additionally, the Company operates in an industry that may
be affected by various economic conditions, such as interest rates, and tax
and environmental laws.
Total revenue for the quarter ended March 31, 1996 was approximately $36.9
million, a decrease of 3.0% from revenue of $38.1 million for the same period
last year. Commercial brokerage revenue decreased $1.3 million or 4.2% from
the comparable 1995 period. The commercial brokerage revenue for the quarter
ended March 31, 1995 was particularly strong and at a level which had not
been surpassed since the comparable 1990 period. Commercial brokerage
revenues for the quarter ended March 31, 1996 reflected slower paced
commercial brokerage market activities which has been historically
characteristic of the quarter ending March 31. Other real estate service
fees of $8.3 million increased slightly over the prior year period.
COSTS AND EXPENSES
Real estate brokerage and other commission expense (salespersons'
participation) is the Company's major expense and is a direct function of
gross brokerage commission revenue levels. As a percentage of total
commercial real estate brokerage commission revenue, commercial brokerage
salespersons' participation expense for the first three months of 1996
increased by 200 basis points over the comparable period in 1995. The
increased participation expense percentage was primarily related to
performance of top producers who earned commissions at higher levels.
Total costs and expenses, other than real estate brokerage commission expense
and special charges and unusual items, for the quarter ended March 31, 1996
were $24.2 million, level with the comparable prior year quarter.
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Special charges and unusual items reflect net favorable adjustments of
$110,000 and $119,000 for the quarters ended March 31, 1996 and 1995,
respectively, primarily related to the non-cash reversal of the remaining net
office lease liability of the Southern California residential brokerage
operations sold in November 1994.
As of March 31, 1996, the Company had current accrued severance and office
closure costs of approximately $1.5 million of which $713,000 of accrued
severance costs and $403,000 of accrued office closure costs, net of expected
sublease income, are expected to be paid in cash. Approximately $900,000 of
the $1.0 million of long-term accrued office closure costs, net of expected
sublease income, are expected to be paid in cash over the next six years.
NET LOSS
The net loss of $5.1 million or $.66 per common share for the quarter ended
March 31, 1996 compared unfavorably to the net loss of $3.9 million or $.52
per common share for the same period in 1995. The decrease from prior year's
performance was primarily related to lower earnings from commercial brokerage
activities and higher national marketing costs reflecting the continued
implementation of the strategy to integrate the Company's resources to better
serve its clients.
LIQUIDITY AND CAPITAL RESOURCES
Working capital decreased by $5.1 million to $4.8 million during the first
three months of 1996. Cash and cash equivalents decreased by $17.4 million
from December 31, 1995 to March 31, 1996. The decrease was mainly
attributable to cash used by operations of $17.6 million, which included cash
outflows of $4.0 million for 1995 salespersons' and managers' incentive
compensation, $7.4 million for deferred salespersons' commission payments,
and aggregate interest payments of $600,000 on the 9.9% Senior Notes and the
Revolving Credit Note.
The Company has historically experienced the highest use of operating cash in
the quarter ended March 31, primarily related to the payment of incentive and
deferred commission payable balances which attain peak levels as a result of
business activity levels during the quarter ending December 31.
Additionally, quarterly revenues are typically at their lowest level of the
year during the quarter ending March 31. Historically, operating cash
requirements reduce significantly with higher and more consistent revenue in
the subsequent quarters.
Operating cash flow is expected to be sufficient to meet the Company's
anticipated normal operating expenses. The Company's long-term cash
requirements include principal payments on its long-term debt as described in
the Company's Annual Report on Form 10-K for the year ended December 31, 1995
and footnotes thereto. To the extent that the Company's cash requirements are
not met by operating cash flow, due to adverse economic
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conditions or other unfavorable events, the Company may find it necessary to
further reduce expense levels, seek refinancing, or undertake other actions
as may be appropriate. In such event, the Company anticipates that its
ability to raise financing on acceptable terms would be severely limited and
there can be no assurance that the Company would be able to raise additional
financing.
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PART II
OTHER INFORMATION
(Items 2, 3, 4 and 5 are not applicable
for the quarter ended March 31, 1996)
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ITEM 1. LEGAL PROCEEDINGS
The Company previously disclosed in its Annual Report on Form 10-K for the
year ended December 31, 1995 the information concerning a lawsuit entitled JOHSZ
ET AL. V. KOLL COMPANY, ET AL., and a related lawsuit entitled YOUNKIN, MAIONA,
ET AL. V. KOLL COMPANY, ET AL. and a purported class action lawsuit, JOHN W.
MATTHEWS, ET AL. V. KIDDER, PEABODY & CO., ET AL. AND HSM INC., ET AL. There
has been no material change with respect to these matters.
ITEM 6(A). EXHIBITS
(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 on March 31, 1995
(Commission File No. 1-8122).
3.2 Grubb & Ellis Company Bylaws, as amended effective June 1, 1994,
incorporated herein by reference to Exhibit 4.21 to the Registrant's
Quarterly Report on Form 10-Q filed on November 14, 1994 (Commission
File No. 1-8122).
(10) MATERIAL CONTRACTS
10.1 Employment agreement between Neil R. Young and the Registrant
dated as of February 22, 1996.
(11) STATEMENT REGARDING COMPUTATION OF PER SHARE EARNINGS
(27) FINANCIAL DATA SCHEDULE
ITEM 6(b) REPORTS ON FORM 8-K
NONE
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
GRUBB & ELLIS COMPANY
(Registrant)
Date: May 15, 1996 /s/ James E. Klescewski
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James E. Klescewski
Vice President and Corporate
Controller
(Chief Accounting Officer)
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Grubb & Ellis Company and Subsidiaries
EXHIBIT INDEX (A)
FOR THE QUARTER ENDED MARCH 31, 1996
EXHIBIT
(10) MATERIAL CONTRACTS
10.1 Employment Agreement between Neil R. Young and the Registrant
dated as of February 22, 1996.
(11) STATEMENT REGARDING COMPUTATION OF PER SHARE EARNINGS
(27) FINANCIAL DATA SCHEDULE
(A) Exhibits incorporated by reference are listed in Item 6(a) ofthis report.
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