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 December 31, 1996
---------------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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Commission File Number: 1-8122
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GRUBB & ELLIS COMPANY
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(Exact Name of Registrant as Specified in Its Charter)
Delaware 94-1424307
- -------------------------------- -------------------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
2215 Sanders Road, 4th Floor,
Northbrook, IL 60062
--------------------------------------
(Address of Principal Executive Offices)
(Zip Code)
(847) 753-9010
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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
--- ---
19,457,643
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(Number of Shares Outstanding of the Registrant's
Common Stock at February 2, 1997)
1
PART I
FINANCIAL INFORMATION
2
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 For the Six Months
Ended December 31, Ended December 31,
------------------------ ------------------------
1996 1995 1996 1995
--------- --------- --------- ---------
Revenue:
Commercial real estate
brokerage commissions $ 56,510 $ 50,329 $ 99,301 $ 89,015
Real estate services fees,
commissions and other 11,524 10,052 20,660 18,728
--------- --------- --------- ---------
Total revenue 68,034 60,381 119,961 107,743
--------- --------- --------- ---------
Costs and Expenses:
Real estate brokerage
and other commissions 35,214 30,652 61,153 53,614
Selling, general and administrative 11,598 11,904 22,288 23,088
Salaries and wages 13,933 10,978 26,610 23,380
Depreciation and amortization 885 608 1,652 1,173
Special charges and unusual items 993 234 900 76
--------- --------- --------- ---------
Total costs and expenses 62,623 54,376 112,603 101,331
--------- --------- --------- ---------
Total operating income 5,411 6,005 7,358 6,412
Other income and expenses:
Interest income 221 217 351 356
Other income, net 151 (203) 126 789
Interest expense to
related parties (599) (741) (1,325) (1,471)
--------- --------- --------- ---------
Income before income taxes 5,184 5,278 6,510 6,086
and extraordinary item
Provision for income taxes (37) 54 (67) (158)
--------- --------- --------- ---------
Income before extraordinary item 5,147 5,332 6,443 5,928
Extraordinary item - gain
on extinguishment of debt, net
of income taxes 3,576 - 3,576 -
--------- --------- --------- ---------
Net income $ 8,723 $ 5,332 $ 10,019 $ 5,928
--------- --------- --------- ---------
--------- --------- --------- ---------
See notes to condensed consolidated financial statements.
3
GRUBB & ELLIS COMPANY AND SUBSIDIARIES
Condensed Consolidated Statements of Operations, Continued
(in thousands, except per share amounts and shares)
(unaudited)
For the Three Months For the Six Months
Ended December 31, Ended December 31,
------------------------ ------------------------
1996 1995 1996 1995
--------- --------- --------- ---------
Net income applicable to common
stockholders net of undeclared
dividends earned on preferred stock $ 8,087 $ 4,609 $ 8,588 $ 4,482
--------- --------- --------- ---------
--------- --------- --------- ---------
Net income per common share
and equivalents:
Primary -
- from operations $ .35 $ .42 $ .43 $ .42
- from extra-
ordinary gain .27 - .28 -
--------- --------- --------- ---------
$ .62 $ .42 $ .71 $ .42
--------- --------- --------- ---------
--------- --------- --------- ---------
Weighted average common
shares and equivalents
outstanding 13,334,656 8,827,675 12,669,232 8,850,416
---------- --------- ---------- ---------
---------- --------- ---------- ---------
Fully diluted -
- from operations $ .30 $ .32 $ .37 $ .36
- from extra-
ordinary gain .20 - .21 -
--------- --------- --------- ---------
$ .50 $ .32 $ .58 $ .36
--------- --------- --------- ---------
--------- --------- --------- ---------
Weighted average common
shares and equivalents
outstanding 17,343,642 8,827,675 17,366,724 8,850,416
---------- --------- ---------- ---------
---------- --------- ---------- ---------
See notes to condensed consolidated financial statements.
4
GRUBB & ELLIS COMPANY AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(in thousands)
ASSETS
(unaudited)
December 31, June 30, December 31,
1996 1996 1995
------------ --------- ------------
Current Assets:
Cash and cash equivalents $ 28,530 $ 13,547 $ 26,611
Real estate brokerage
commissions receivable 2,533 206 3,313
Real estate services fees and
other commissions receivable 2,713 3,172 3,669
Other receivables 3,209 4,326 3,923
Prepaids and other current
assets 1,508 1,484 1,295
------------ --------- ------------
Total current assets 38,493 22,735 38,811
Noncurrent Assets:
Real estate brokerage
commissions receivable 61 100 272
Real estate investments held
for sale and real estate owned 666 537 579
Equipment and leasehold
improvements, net 4,828 5,194 5,563
Other assets 1,611 1,092 951
------------ --------- ------------
Total assets $ 45,659 $ 29,658 $ 46,176
------------ --------- ------------
------------ --------- ------------
See notes to condensed consolidated financial statements.
5
GRUBB & ELLIS COMPANY AND SUBSIDIARIES
Condensed Consolidated Balance Sheets, continued
(in thousands, except per share amounts and shares)
(unaudited)
December 31, June 30, December 31,
1996 1996 1995
------------ --------- ------------
LIABILITIES
Current Liabilities:
Notes payable and current portion
of long-term debt $ 22 $ 28 $ 276
Accounts payable 1,508 1,624 1,498
Compensation and employee benefits
payable 7,104 5,380 9,552
Deferred commissions payable 8,411 201 7,451
Accrued severance obligations 890 98 776
Accrued office closure costs 1,137 623 867
Accrued claims and settlements 1,449 1,779 2,132
Other accrued expenses 5,147 6,717 6,377
------------ --------- ------------
Total current liabilities 25,668 16,450 28,929
Long-Term Liabilities:
Long-term debt, net of current
portion 291 336 351
Long-term debt to related party 15,000 27,514 26,698
Accrued claims and settlements 11,190 11,804 12,802
Accrued office closure costs 497 960 1,099
Other 406 69 16
------------ --------- ------------
Total liabilities 53,052 57,133 69,895
------------ --------- ------------
Commitments and contingencies (Note 4) -- -- --
------------ --------- ------------
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
Common stock, $.01 par value:
25,000,000 shares authorized;
16,948,619, 8,916,415 and 8,883,970
shares issued and outstanding at
December 31, 1996, June 30, 1996
and December 31, 1995, respectively 170 90 90
Additional paid-in capital 99,280 57,154 57,084
Retained earnings (deficit) (106,843) (116,862) (113,036)
------------ --------- ------------
Total stockholders' equity (deficit) (7,393) (27,475) (23,719)
------------ --------- ------------
Total liabilities and
stockholders' equity (deficit) $ 45,659 $ 29,658 $ 46,176
------------ --------- ------------
------------ --------- ------------
See notes to condensed consolidated financial statements.
6
GRUBB & ELLIS COMPANY AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(unaudited - in thousands)
For the Six Months
Ended December 31,
----------------------
1996 1995
--------- ----------
Cash Flows from Operating Activities:
Net income $ 10,019 $ 5,928
Extraordinary item - gain on
extinguishment of debt (3,576) -
Other adjustments to reconcile net income to net
cash used in operating activities 9,251 9,404
--------- ----------
Net cash provided by operating activities 15,694 15,332
--------- ----------
--------- ----------
Cash Flows from Investing Activities:
Proceeds from disposition and distributions from
real estate joint ventures and real estate owned 95 1,188
Purchases of equipment and leasehold improvements (792) (1,207)
--------- ----------
Net cash used in investing activities (697) (19)
--------- ----------
Cash Flows from Financing Activities:
Repayment of notes payable (14) (108)
Repayment of long-term debt to related party (10,000) -
Issuance of common stock 10,000 -
--------- ----------
Net cash used in financing activities (14) (108)
--------- ----------
Net increase in cash and cash equivalents 14,983 15,205
Cash and cash equivalents at beginning of period 13,547 11,406
--------- ----------
Cash and cash equivalents at end of period $ 28,530 $ 26,611
--------- ----------
--------- ----------
--------------------------------
Supplemental Disclosure of Cash Flow Information:
Cash paid during the period for:
Interest $ 1,357 $ 716
Income taxes 16 561
See notes to condensed consolidated financial statements.
7
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"). The Company consolidates Axiom Real Estate Management, Inc.
("Axiom"), which provides real estate property and facilities management
services. The Company acquired the minority interest in Axiom in January
1996, increasing its ownership to 100%. Prior to the acquisition, the
minority interest was immaterial and was included in other long-term
liabilities on the Condensed Consolidated Balance Sheets and the related
minority interest in operating results has been included in "Other income,
net" on the Condensed Consolidated Statements of Operations through the
date it was acquired.
The accompanying unaudited condensed consolidated financial statements 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, as amended by
Amendment No. 1 thereto on Form 10-K/A for the year ended June 30, 1996,
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 three months or six months ended December 31,
1996 are not necessarily indicative of the results that may be expected for
future periods.
On February 5, 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.
8
GRUBB & ELLIS COMPANY AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
2. INCOME TAXES
The Company's tax provision is attributable to state and local income taxes
assessed on profitable subsidiaries of the Company. Additionally the
provision for income taxes for the three months and six months ended
December 31, 1995 included federal income taxes related solely to Axiom
which filed on a separate company basis for tax purposes.
3. FINANCING TRANSACTIONS
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; (b) $10 million 9.9% Senior Notes due in equal
installments on November 1, 1997 and 1998; (c) $10.9 million 10.65%
Subordinated Payment-In-Kind Note due November 1, 2001; (d) $2.2 million
11.65% Subordinated Payment-In-Kind Notes, due November 1, 2001 (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.
The Sale Agreement provided that in the event that Warburg converts its
Senior Convertible Preferred Stock to common stock, Prudential will convert
its remaining Junior Convertible Preferred Stock to common stock as well.
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.
9
GRUBB & ELLIS COMPANY AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
3. FINANCING TRANSACTIONS (CONTINUED)
While the Option remained unexercised during the Option period, no interest
or dividends were to accrue or be 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, currently 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 $13.5
million principal amount) and 130,233 shares of Junior Convertible
Preferred Stock (convertible into approximately 2.3 million shares of
common stock). The repurchase of the PIK Notes resulted in a $3.6 million
extraordinary gain on the extinguishment of debt. There were no income
taxes recorded with respect to the extraordinary gain due to the Company's
available net operating loss carryforward. In connection with these
transactions, Warburg retained warrants to purchase an aggregate of 325,000
shares of common stock and Joe F. Hanauer received warrants to purchase an
aggregate of 25,000 shares of common stock, which Warburg acquired from
Prudential. At the same time, Warburg granted the Company a second option
(the "Second Option") to purchase the 9.9% Senior Notes and Revolving
Credit Note held by Warburg until April 16, 1997 (which may be extended to
July 15, 1997 under certain circumstances) for $13 million, plus interest,
and the Option was canceled. In addition, Warburg and Joe F. Hanauer
converted all of their shares of Senior Convertible Preferred Stock and
Prudential converted all of its remaining shares of Junior Convertible
Preferred Stock to purchase an aggregate of 5,520,624 shares of common
stock.
SUBSEQUENT EVENT -
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 purchase from Warburg,
and then retire, the $10 million of outstanding 9.9% Senior Notes and $5
million Revolving Credit Note, at a price equal
10
GRUBB & ELLIS COMPANY AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
3. FINANCING TRANSACTIONS (CONTINUED)
to $13 million plus accrued interest of approximately $96,000. This
transaction will result in an extraordinary gain on the extinguishment of
debt in an amount equal to approximately $2 million for the quarter ending
March 31, 1997.
As a result of the above mentioned transactions, all shares of Senior and
Junior Convertible Preferred Stock of the Company have been either
converted to common stock or retired as of December 31, 1996, extinguishing
accrued and unpaid dividends on such stock. Additionally, all long-term
debt has been eliminated as of January 27, 1997.
4. NET INCOME PER COMMON SHARE AND EQUIVALENTS
Net income per common share and equivalents computations are based on the
weighted average number of common shares outstanding. Common equivalent
shares from stock options and warrants are excluded from the computation if
their effect is anti-dilutive.
The calculation of net income per common share includes net income,
adjusted for amounts applicable to the Senior and Junior Convertible
Preferred Stock related to undeclared dividends earned as shown below (in
thousands). Since all of the preferred stock was either retired or
converted to common stock on December 11, 1996 (see Note 3), undeclared
dividends were only calculated through that date.
For the For the
Three Months Ended Six Months Ended
December 31, December 31,
------------------- --------------------
1996 1995 1996 1995
------ ------ -------- --------
Senior Convertible
Preferred Stock $ 454 $ 516 $ 1,032 $ 1,032
Junior Convertible
Preferred Stock 182 207 399 414
------ ------ -------- --------
$ 636 $ 723 $ 1,431 $ 1,446
------ ------ -------- --------
------ ------ -------- --------
11
GRUBB & ELLIS COMPANY AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
4. NET INCOME PER COMMON SHARE AND EQUIVALENTS (CONTINUED)
PRO FORMA INFORMATION -
The information presented below presents the pro forma impact to net income
per common share and equivalents assuming (a) the equity investments of $10
million in December 1996 and
$11.25 million in January 1997 described in Note 3 above were made at the
beginning of the respective periods, then concurrently (b) all outstanding
long-term debt to Prudential was immediately retired and (c) all
outstanding Senior and Junior Convertible Preferred Stock was also
immediately retired or converted into common stock. The primary and fully
diluted pro forma net income per common share calculations are the same
within each period presented.
For the Three Months For the Six Months
Ended December 31, Ended December 31,
------------------------- -------------------------
1996 1995 1996 1995
---------- ---------- ---------- ----------
Net income applicable to
common stockholders $ 8,087 $ 4,609 $ 8,588 $ 4,482
Add pro forma adjustments -
Dividends applicable to
preferred stock 636 723 1,431 1,446
Interest expense to
related parties 599 741 1,325 1,471
---------- ---------- ---------- ----------
Pro forma net income applicable
to common stockholders $ 9,322 $ 6,073 $ 11,344 $ 7,399
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Pro forma weighted average common
shares and equivalents
outstanding 19,926,207 19,226,215 19,884,170 19,306,090
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Pro forma net income per
common share:
From operations $ 0.29 $ 0.32 $ 0.39 $ 0.38
From extraordinary
gain 0.18 - 0.18 -
---------- ---------- ---------- ----------
$ 0.47 0.32 $ 0.57 $ 0.38
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
The pro forma information is not necessarily indicative of the results of
the Company had such transactions occurred on the days discussed above, nor
does such information purport to represent the expected results for future
periods.
12
GRUBB & ELLIS COMPANY AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
5. 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, as
amended by Amendment No. 1 thereto on Form 10-K/A for the year ended June
30, 1996, 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
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.
13
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, appraisal and
consulting fees provide substantially all of the remaining revenue.
The quarter ending December 31 has historically provided the highest quarterly
revenue due to increased activity caused by the desire of clients to complete
transactions by calendar year-end. The Company has historically experienced its
lowest quarterly revenue in the quarter ending March 31 of each year with
historically higher and more consistent revenue in the quarters ending June 30
and September 30. Revenue in any given quarter during the three fiscal year
period ended June 30, 1996, as a percentage of total annual revenue, ranged from
a high of 31.2% to a low of 19.0%, 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.
For the six months ended December 31, 1996, total revenue of $120.0 million
increased by $12.2 million, or 11.3%, compared to the same period last year.
Commercial brokerage revenue increased $10.3 million, or 11.6%, over the
comparable 1995 period, reflecting improving conditions for commercial real
estate and the Company's increasing market share in specific locations. Other
real estate services fees of $20.7 million for the six months ended December 31,
1996 increased by $1.9 million, or 10.3%, as a result of higher fees for
appraisal and consulting services and property management.
Total revenue for the quarter ended December 31, 1996 was $68.0 million, an
increase of 12.7% over revenue of $60.4 million for the same period last year.
Commercial brokerage revenue increased $6.2 million or 12.3% over the comparable
1995 period. Other real estate service fees of $11.5 million increased $1.5
million, or 14.6%, over the prior year period as described above.
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 six months and the second quarter of fiscal year 1997
increased by 65 and 70 basis points, respectively, over the comparable periods
in fiscal year 1996. The increased participation expense percentages were
primarily related to
14
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, increased by $2.9 million or 6.1%, for
the first six months of fiscal year 1997 compared to the same period in fiscal
year 1996. The increase in costs and expenses was primarily attributable to the
$3.2 million increase in salary and wages. Approximately one-half of this
increase was due to changes in reserves related to partially self-insured
employee benefit programs. The balance of the increase was due to (a) higher
salary costs for Axiom related to increased property management activities, (b)
the hiring costs and salaries related to additional senior level executives for
the Institutional Services and Corporate Services Groups of the commercial
brokerage operations, (c) increased salary cost, as opposed to participation
expense, due to guarantees provided to commercial brokerage office District and
Sales Managers in their initial year of service and (d) the impact of normal
annual salary increases.
Total costs and expenses, other than real estate brokerage commission expense
and special charges and unusual items, for the quarter ended December 31, 1996
increased by $2.9 million, or 12.5%, compared to the same quarter in 1995 for
the same reasons identified above.
Special charges and unusual items reflect a net charge of $900,000 and $993,000,
respectively, for the six and three month periods ended December 31, 1996.
These amounts included a $1.2 million charge for incremental non-recurring costs
related to the relocation of the Company's corporate headquarters from San
Francisco, California to Northbrook, Illinois. The Company estimates that an
additional $1.3 million charge will be incurred over the six month period ending
June 30, 1997, for similar costs related to the relocation.
As of December 31, 1996, the Company had current accrued severance and office
closure costs of approximately $2.0 million, of which $890,000 of accrued
severance costs and $903,000 of accrued office closure costs, net of expected
sublease income, are expected to be paid in cash. All of the $497,000 of
long-term accrued office closure costs, net of expected sublease income, are
expected to be paid in cash over the next five years.
NET INCOME
The net income of $10.0 million or $.71 per common share for the six months
ended December 31, 1996 compared favorably to the net income of $5.9 million or
$.42 per common share for the same period in 1995. The increase over the prior
year's performance was related to the $3.6 million extraordinary gain on the
extinguishment of debt in connection with the financing transactions described
above in Note 3 to the Condensed Consolidated Financial Statements and higher
earnings from commercial brokerage activities, offset by $824,000 more in
special
15
charges and unusual items, primarily related to the relocation of the Company's
corporate headquarters, and $663,000 less in other income.
The net income of $8.7 million or $.62 per common share for the quarter ended
December 31, 1996 compared favorably to the net income of $5.3 million or a $.42
per common share for the same period in 1995. The increase over the prior
year's performance was related to the $3.6 million extraordinary gain on the
extinguishment of debt and higher earnings from commercial brokerage activities,
offset by higher special charges and unusual items, primarily related to the
relocation of the Company's corporate headquarters.
LIQUIDITY AND CAPITAL RESOURCES
Working capital increased by $6.5 million to $12.8 million during the six months
ended December 31, 1996. Cash and cash equivalents increased by $15.0 from June
30, 1996 to December 31, 1996. The increase was primarily attributable to cash
provided by operations of $15.7 million net of purchases of equipment and
leasehold improvements of $792,000.
The Company has historically experienced the highest use of operating cash in
the quarter ending 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. Historically,
operating cash requirements reduce significantly with higher and more consistent
revenue in the subsequent quarters.
For discussion regarding certain financing transactions, see Note 3 to Condensed
Consolidated Financial Statements, which is hereby incorporated herein by
reference.
The Company believes that its short-term and long-term cash requirements will be
met by operating cash flow. Significant progress has been made over the seven
month period ended January 31, 1997 towards improving the Company's financial
condition. During the six months ended December 31, 1996, the Company sold 2.5
million shares of its common stock for aggregate proceeds of $10 million,
retired all of the outstanding PIK Notes (approximately $13.5 million principal
amount), retired 130,233 shares of Junior Convertible Preferred Stock
(convertible into approximately 2.3 million shares of common stock) and retired
all outstanding shares of Senior Convertible Preferred Stock and all remaining
shares of Junior Convertible Preferred Stock which were converted into an
aggregate 5,520,624 shares of common stock. In January 1997, the Company raised
an additional $11.25 million of equity through the sale of 2.5 million shares of
its common stock and retired the $10 million of outstanding 9.9% Senior Notes
and $5 million Revolving Credit Note. As of January 27, 1997, the Company had
no outstanding long-term debt. The Company is
16
currently in negotiations to secure a bank line of credit for general corporate
purposes and acquisitions.
To the extent that the Company's cash requirements are not met by operating cash
flow, due to adverse economic conditions or other unfavorable events, the
Company may find it necessary to reduce expense levels or undertake other
actions as may be appropriate.
17
PART II
OTHER INFORMATION
(Items 1, 3, 4 and 5 are not applicable
for the quarter ended December 31, 1996)
18
ITEM 2. CHANGES IN SECURITIES
(c) Sales of Unregistered Securities during the three month period ended
December 31, 1996:
All of the following transactions were consummated in reliance on Section
4(2) of the Securities Act of 1933, as amended, in that they did not involve a
public offering or sale of the Company's securities. None of the sales was
underwritten.
On December 11, 1996, the Company sold 833,334 shares of Common Stock to
Mike Kojaian, and 833,333 shares of Common Stock to each of Kenneth J. Kojaian
and C. Michael Kojaian, for a purchase price of $4.00 per share, or $10,000,000
in the aggregate. The purchase price was paid in cash.
Also on December 11, 1996, the Company issued to Warburg 4,828,548 shares
of Common Stock upon Warburg's conversion of 128,266 shares of Series B Senior
Convertible Preferred Stock. On the same date, the Company issued to the Joe F.
Hanauer Trust, 339,629 shares of Common Stock upon the conversion of 8,894
shares of Series A Senior Convertible Preferred Stock held by the trust.
On December 16, 1996, the Company issued to Prudential 352,447 shares of
Common Stock upon the conversion of 19,767 shares of Junior Convertible
Preferred Stock.
SUBSEQUENT EVENT. On January 24, 1997, the Company sold 2,500,000 shares
of Common Stock to Archon Group, L.P. for a purchase price of $4.50 per share,
or $11,250,000 in the aggregate. The purchase price was paid in cash.
ITEM 6(a). EXHIBITS
(2) PLAN OF ACQUISITION, REORGANIZATION, ARRANGEMENT
LIQUIDATION OR SUCCESSION
2.1 Sale and Assignment Agreement between Warburg, Pincus Investors, L.P.
and The Prudential Insurance Company of America dated October 21,
1996, incorporated herein by reference to Exhibit 99.1 to the Current
Report on Form 8-K filed by the Registrant on November 5, 1996
(Commission File No. 1-8122).
2.2 Option Agreement between Warburg, Pincus Investors, L.P. and the
Registrant dated October 21, 1996, incorporated herein by reference to
Exhibit 99.2 to the Current Report on Form 8-K filed by the Registrant
on November 5, 1996 (Commission File No. 1-8122).
(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).
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3.2 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).
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.
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.
(4) INSTRUMENTS DEFINING THE RIGHTS OF SECURITY HOLDERS,
INCLUDING INDENTURES
4.1 Third Amendment to Stockholders' Agreement by and among the
Registrant, Warburg, Pincus Investors, L.P., Joe F. Hanauer and The
Prudential Insurance Company of America, dated October 22, 1996,
incorporated herein by reference to Exhibit 99.3 to the Current Report
on Form 8-K filed by the Registrant on November 5, 1996 (Commission
File No. 1-8122).
4.2 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).
4.3 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).
4.4 Tri-Party Agreement dated as of December 11, 1996 by and 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 Option Agreement dated as of December 11, 1996 by and between the
Registrant and Warburg, Pincus Investors, L.P., incorporated herein by
reference to Exhibit 4.2 to the Registrant's Current Report on Form
8-K filed on December 20, 1996 (Commission file No. 1-8122).
4.6 Stock Purchase Agreement dated as of December 11, 1996 by and among
the registrant, Mike Kojaian, Kenneth J. Kojaian and C. Michael
Kojaian, incorporated herein by reference to Exhibit
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4.3 to the Registrant's Current Report on Form 8-K filed on December
20, 1996 (Commission File No. 1-8122).
4.7 Registration Rights agreement dated as of December 11, 1996 by and
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).
4.8 Purchase Agreement dated as of January 24, 1997 by and among 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).
4.9 Stock Purchase Agreement dated as of January 24, 1997 by and 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).
4.10 Registration Rights agreement dated as of January 24, 1997 by and
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).
4.11 Stock Subscription Warrant No. 20 dated December 11, 1996 issued to
Joe F. Hanauer Trust.
4.12 Stock Subscription Warrant No. 21 dated December 11, 1996 issued to
Warburg, Pincus Investors, L.P.
4.13 Stock Subscription Warrant No. 22 dated December 11, 1996 issued to
Joe F. Hanauer Trust.
4.14 Stock Subscription Warrant No. 23 dated December 11, 1996 issued to
Warburg, Pincus Investors, L.P.
4.15 Form of Amendment No. 1 to Stock Subscription Warrants No. 8, 9, 13
and 15 issued to Joe F. Hanauer Trust.
4.16 Termination of Stockholders Agreement dated as of December 11, 1996 by
and among the Registrant, Warburg, Pincus Investors, L.P. and Joe F.
Hanauer.
(10) MATERIAL CONTRACTS
10.1 Property Management Services Agreement between Axiom Real Estate
Management, Inc., a wholly-owned subsidiary of the Registrant, and The
Chase Manhattan Bank dated as of January 1, 1997.
(11) STATEMENT REGARDING COMPUTATION OF PER SHARE EARNINGS
(27) FINANCIAL DATA SCHEDULE
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ITEM 6(b) REPORTS ON FORM 8-K
A Current Report on Form 8-K dated October 21, 1996 was filed, reporting
under Item 5 the sale of certain notes, common stock warrants and preferred
stock (the "Prudential Securities") held in the Company by The Prudential
Insurance Company of America to Warburg, Pincus Investors, L.P. ("Warburg"), and
the issuance of an option by Warburg to the Company for the sale by Warburg to
the Company of the Prudential Securities.
A Current Report on Form 8-K dated December 4, 1996 was filed, reporting
under Item 5 the relocation of the Company's principal offices from San
Francisco, California to Northbrook, Illinois.
A Current Report on Form 8-K dated December 11, 1996 was filed, reporting
under Item 5 a series of transactions whereby a portion of the Prudential
Securities was purchased by the Company, a new option was issued by Warburg to
the Company relating to the purchase of the remainder of the Prudential
Securities, and the sale of 2,500,000 shares of Common Stock to the principals
of the Kojaian Companies, Southfield, Michigan was consummated.
SUBSEQUENT EVENT. A Current Report on Form 8-K dated January 24, 1997 was
filed, reporting under Item 5 a series of transactions whereby the second option
to purchase the remainder of the Prudential Securities was exercised by the
Company and the sale of 2,500,000 shares of Common Stock to Archon Group, L.P.
was consummated.
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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: February 13, 1997 /s/ Brian D. Parker
-------------------------------
Brian D. Parker
Senior Vice President and
Chief Financial Officer
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Grubb & Ellis Company and Subsidiaries
EXHIBIT INDEX (A)
FOR THE QUARTER ENDED DECEMBER 31, 1996
EXHIBIT
(3) ARTICLES OF INCORPORATION AND BYLAWS
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.
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.
(4) INSTRUMENTS DEFINING THE RIGHTS OF SECURITY HOLDERS, INCLUDING INDENTURES
4.11 Stock Subscription Warrant No. 20 dated December 11, 1996 issued to
Joe F. Hanauer Trust.
4.12 Stock Subscription Warrant No. 21 dated December 11, 1996 issued to
Warburg, Pincus Investors, L.P.
4.13 Stock Subscription Warrant No. 22 dated December 11, 1996 issued to
Joe F. Hanauer Trust.
4.14 Stock Subscription Warrant No. 23 dated December 11, 1996 issued to
Warburg, Pincus Investors, L.P.
4.15 Form of Amendment No. 1 to Stock Subscription Warrants No. 8, 9, 13
and 15 issued to Joe F. Hanauer Trust.
4.16 Termination of Stockholders' Agreement dated as of December 11, 1996
by and among the Registrant, Warburg, Pincus Investors, L.P. and Joe
F. Hanauer.
(10) MATERIAL CONTRACTS
10.1 Property Management Services Agreement between Axiom Real Estate
Management, Inc., a wholly-owned subsidiary of the Registrant, and The
Chase Manhattan Bank dated as of January 1, 1997.
(11) STATEMENT REGARDING COMPUTATION OF PER SHARE EARNINGS
(27) FINANCIAL DATA SCHEDULE
(A) Exhibits incorporated by reference are listed in Item 6(a) of this report.
24