FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2001
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
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 94-1424307
- ------------------------------ -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2215 Sanders Road, Suite 400,
Northbrook, IL 60062
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(Address of principal executive offices)
(Zip Code)
(847) 753-7500
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(Registrant's telephone number, including area code)
No Change
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(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes _X_ No ___
13,558,428
-------------------------------------------------
(Number of shares outstanding of the registrant's
common stock at November 1, 2001)
PART I
FINANCIAL INFORMATION
2
ITEM 1. FINANCIAL STATEMENTS
GRUBB & ELLIS COMPANY
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
ASSETS
September 30, June 30,
2001 2001
-------- --------
Current assets:
Cash and cash equivalents $ 4,924 $ 7,248
Service fees receivable, net 16,457 17,897
Other receivables 3,418 3,610
Professional service contracts, net 4,025 3,263
Prepaids and other current assets 9,121 5,278
Deferred tax assets, net 1,421 1,296
-------- --------
Total current assets 39,366 38,592
Noncurrent assets:
Equipment, software and leasehold
improvements, net 19,402 19,669
Goodwill, net 25,937 26,328
Deferred tax assets, net 3,753 3,535
Other assets 3,835 4,302
-------- --------
Total assets $ 92,293 $ 92,426
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 2,248 $ 3,330
Commissions payable 5,312 7,952
Credit facility debt 8,000 8,000
Accrued compensation and employee benefits 16,569 13,416
Deferred commissions payable 3,433 293
Other accrued expenses 4,969 4,385
-------- --------
Total current liabilities 40,531 37,376
Long-term liabilities:
Credit facility debt 27,000 29,000
Accrued claims and settlements 8,987 8,695
Other liabilities 1,338 1,039
-------- --------
Total liabilities 77,856 76,110
-------- --------
Stockholders' equity:
Common stock, $.01 par value:
50,000,000 shares authorized; issued and
outstanding 13,517,380 shares at
September 30, 2001 and 13,358,615 shares
at June 30, 2001 135 134
Additional paid-in-capital 67,513 66,858
Accumulated other comprehensive loss (337) (68)
Retained deficit (52,874) (50,608)
-------- --------
Total stockholders' equity 14,437 16,316
-------- --------
Total liabilities and stockholders' equity $ 92,293 $ 92,426
======== ========
See notes to condensed consolidated financial statements.
3
GRUBB & ELLIS COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
For the three months ended
September 30,
-------------------------
2001 2000
----------- -----------
Revenue:
Transaction services fees $ 62,942 $ 92,730
Management services fees 13,846 15,370
----------- -----------
Total revenue 76,788 108,100
----------- -----------
Costs and expenses:
Services commissions 36,793 58,481
Salaries, wages and benefits 25,153 24,795
Selling, general and administrative 15,415 17,107
Depreciation and amortization 2,800 2,876
----------- -----------
Total costs and expenses 80,161 103,259
----------- -----------
Total operating income (loss) (3,373) 4,841
Other income and expenses:
Interest income 98 355
Interest expense (632) (30)
----------- -----------
Income (loss) before income taxes
and cumulative effect (3,907) 5,166
Benefit (provision) for income taxes 1,641 (2,134)
----------- -----------
Income (loss) before cumulative effect
of accounting change (2,266) 3,032
Cumulative effect of accounting change, net of tax -- (3,133)
----------- -----------
Net loss $ (2,266) $ (101)
=========== ===========
Net income (loss) per common share:
Basic -
-before cumulative effect $ (0.17) $ 0.15
-from cumulative effect of accounting change -- (0.16)
----------- -----------
$ (0.17) $ (0.01)
=========== ===========
Diluted -
-before cumulative effect $ (0.17) $ 0.14
-from cumulative effect of accounting change -- (0.15)
----------- -----------
$ (0.17) $ (0.01)
=========== ===========
Weighted average common shares outstanding:
Basic - 13,447,107 19,855,920
=========== ===========
Diluted - 13,447,107 21,019,631
=========== ===========
See notes to condensed consolidated financial statements.
4
GRUBB & ELLIS COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
For the
three months ended
September 30,
-------------------
2001 2000
------- --------
Cash Flows from Operating Activities
Net loss $(2,266) $ (101)
Cumulative effect of accounting change, net of tax -- 3,133
Depreciation and amortization expense 2,800 2,876
Adjustments to reconcile net loss to net cash
provided by operating activities (55) 1,130
------- --------
Net cash provided by operating activities 479 7,038
------- --------
Cash Flows from Investing Activities:
Purchases of equipment, software and
leasehold improvements (1,364) (2,338)
------- --------
Net cash used in investing activities (1,364) (2,338)
------- --------
Cash Flows from Financing Activities:
Repayment of credit facility debt (2,000) --
Repayment of acquisition debt -- (519)
Other financing sources 561 95
------- --------
Net cash used in financing activities (1,439) (424)
------- --------
Net increase (decrease) in cash and cash equivalents (2,324) 4,276
Cash and cash equivalents at beginning of period 7,248 17,862
------- --------
Cash and cash equivalents at end of period $ 4,924 $ 22,138
======= ========
See notes to condensed consolidated financial statements.
5
GRUBB & ELLIS COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. INTERIM PERIOD REPORTING
The accompanying unaudited condensed consolidated financial statements include
the accounts of Grubb & Ellis Company and its wholly owned subsidiaries
(collectively, the "Company") and are prepared in accordance with accounting
principles generally accepted in the United States for interim financial
information and with the instructions to Form 10-Q and Article 10 of Regulation
S-X. Accordingly, they do not include all of the information and footnotes
required by accounting principles generally accepted in the United States for
complete financial statements and, therefore, should be read in conjunction with
the Company's Annual Report on Form 10-K for the year ended June 30, 2001.
The financial statements have been prepared in conformity with accounting
principles generally accepted in the United States 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.
In the opinion of management, all adjustments necessary for a fair statement of
the financial position and results of operations for the interim periods
presented have been included in these financial statements and are of a normal
and recurring nature.
Operating results for the three months ended September 30, 2001 are not
necessarily indicative of the results that may be achieved in future periods.
In June 2001, the Financial Accounting Standards Board issued Statements of
Financial Accounting Standards No. 141, "Business Combinations," and No. 142,
"Goodwill and Other Intangible Assets," effective for fiscal years beginning
after December 15, 2001. Under the new rules, goodwill will no longer be
amortized but will be subject to annual impairment tests in accordance with the
Statements. Other intangible assets will continue to be amortized over their
useful lives. The Company will apply the new rules on accounting for goodwill
and other intangible assets beginning in the first fiscal quarter of fiscal
2003, which for the Company would be the quarter ending September 30, 2002.
Application of the nonamortization provisions of the Statement is expected to
result in an increase in net operating income of approximately $1.6 million per
year. During fiscal 2003, the Company will perform the first of the required
impairment tests of goodwill as of July 1, 2002 and has not yet determined what
the effect of these tests will be on the earnings and financial position of the
Company.
2. TOTAL COMPREHENSIVE INCOME
The Company is a party to two interest rate swap agreements which effectively
fix the interest rate on fifty percent of the Company's outstanding term loan
obligations. The Company has determined that these agreements are to be
characterized as effective under the definitions included within Statement of
Financial Accounting Standards No. 133 "Accounting for Derivative Instruments
and Hedging Activities."
6
The change in value of these instruments during a reporting period is
characterized as Other Comprehensive Income or Loss, and totaled approximately
$269,000 of loss during the three months ended September 30, 2001. This loss,
along with the Company's net loss of $2,266,000 for the three months ended
September 30, 2001, results in a Total Comprehensive Loss of $2,535,000, or
$0.18 per share, for the period.
GRUBB & ELLIS COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
3. INCOME TAXES
The benefit (provision) for income taxes for the three months ended September
30, 2001 and 2000 is as follows (in thousands):
For the
three months ended
September 30,
-----------------------
2001 2000
------ -------
Current $1,298 $(1,921)
Deferred 343 (213)
------ -------
$1,641 $(2,134)
====== =======
4. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings per
common share from continuing operations (in thousands, except per share data):
For the
three months ended
September 30,
---------------------
2001 2000
--------- -------
INCOME (LOSS) BEFORE CUMULATIVE EFFECT $ (2,266) $ 3,032
========= =======
BASIC EARNINGS PER SHARE:
Weighted average common shares outstanding 13,447 19,856
========= =======
Earnings (loss) per share - basic $ (0.17) $ 0.15
========= =======
DILUTED EARNINGS PER SHARE:
Weighted average common shares outstanding 13,447 19,856
Effect of dilutive securities:
Stock options and warrants (A) -- 1,164
--------- -------
Weighted average dilutive common shares
outstanding 13,447 21,020
========= =======
Earnings (loss) per share - diluted $ (0.17) $ 0.14
========= =======
7
(A) Since the Company recognized a loss before cumulative effect for the three
months ended September 30, 2001, the effect of stock options and warrants
would be anti-dilutive. These securities, which otherwise would have had a
dilutive effect of approximately 588,000 shares, have been excluded from
the earnings per share calculation for the three months ended September 30,
2001.
8
GRUBB & ELLIS COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
5. CHANGE IN ACCOUNTING PRINCIPLE
In the fourth quarter of the fiscal year ended June 30, 2001, the Company
changed its method of accounting for revenue recognition for leasing commissions
and consulting fees in compliance with Staff Accounting Bulletin No. 101 ("SAB
101"), "Revenue Recognition in Financial Statements," effective July 1, 2000.
The cumulative effect of the accounting change on prior years resulted in a
reduction to income of $3.1 million, net of applicable taxes of $2.1 million,
which is included in net income for the quarter ended September 30, 2000.
Operating results for the first quarters of fiscal years 2002 and 2001 are
presented herein in compliance with the requirements of this change in
accounting principle. The effect of the accounting change on the quarter ended
September 30, 2000, which has been restated from prior reported results, was to
increase revenue by $1.7 million, related commission expense by $806,000 and
after-tax income by $514,000 from the amounts previously reported.
For the three month periods ended September 30, 2001 and 2000, the Company
recognized revenue, net of related services commission expense, totaling
$166,000 and $2.4 million, respectively, that was included in the $5.2 million
pre-tax cumulative effect adjustment at July 1, 2000. While this accounting
change affects the timing of recognition of leasing and consulting revenues (and
corresponding services commission expense), it does not impact the Company's
cash flow from operations.
6. SEGMENT INFORMATION
The Company has two reportable segments - Transaction Services (formerly
described as "Advisory Services" in prior reports) and Management Services, and
evaluates segment performance and allocates resources based on earnings before
interest, taxes, depreciation and amortization, and other non-recurring expenses
("EBITDA") (amounts in thousands).
Transaction Management Company
Services Services Totals
-------- -------- ---------
Three months ended September 30, 2001
Total revenue $ 62,942 $ 13,846 $ 76,788
EBITDA (555) (18) (573)
Total assets as of September 30, 2001 70,757 21,536 92,293
Three months ended September 30, 2000
Total revenue $ 92,730 $ 15,370 $ 108,100
EBITDA 7,038 679 7,717
Total assets as of September 30, 2000 84,350 23,030 107,380
9
GRUBB & ELLIS COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
6. SEGMENT INFORMATION (CONTINUED)
RECONCILIATION OF SEGMENT EBITDA TO INCOME BEFORE INCOME TAXES
Three months ended
September 30,
-------------------
2001 2000
------- -------
Total segment EBITDA $ (573) $ 7,717
Less:
Depreciation & amortization (2,800) (2,876)
Net interest income (expense) (534) 325
------- -------
Income (loss) before income taxes $(3,907) $ 5,166
======= =======
In evaluating segment performance, the Company's management utilizes EBITDA as a
measure of the segment's ability to generate cash flow from its operations.
Other items contained within the measurement of net income, such as interest
expense and taxes, and non-recurring items, are generated and managed at the
corporate administration level rather than the segment level. In addition, net
income measures also include non-cash amounts such as depreciation and
amortization expense.
Management believes that EBITDA as presented with respect to the Company's
reportable segments is an important measure of cash generated by the Company's
operating activities. EBITDA is similar to net cash flow from operations because
it excludes certain non-cash items, however, it also excludes interest and
income taxes. Management believes that EBITDA is relevant because it assists
investors in evaluating the Company's ability to service its debt by providing a
commonly used measure of cash available to pay interest. EBITDA should not be
considered as an alternative to net income or cash flows from operating
activities (which are determined in accordance with GAAP), as an indicator of
operating performance or a measure of liquidity. EBITDA also facilitates
comparison of the Company's results of operations with those companies having
different capital structures. Other companies may define EBITDA differently,
and, as a result, such measures may not be comparable to the Company's EBITDA.
7. CREDIT FACILITY DEBT
In August 2001, the Company entered into an amendment to the previously amended
and restated credit agreement arranged by Bank of America, N.A., which amended
financial covenants related to minimum cash flow levels and fixed cost ratios.
The amendment also increased the interest margin by 0.25% over the rate
effective in fiscal 2001.
The Company's financial results were further impacted by the terrorist attacks
on September 11th and, as a result, certain covenants provided for in the
amendment were not achieved for the September 30, 2001 reporting period. The
Company received a waiver from the banks relative to these covenant shortfalls,
and is currently negotiating a further amendment to the credit agreement to
provide sufficient covenant relief in future reporting periods.
10
GRUBB & ELLIS COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
8. COMMITMENTS AND CONTINGENCIES
LITIGATION:
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. The defendants include HSM Inc., a
wholly-owned subsidiary of the Company, and several subsidiaries of HSM Inc.,
along with other parties unrelated to HSM Inc. The complaint alleges violation
under the Racketeer Influenced 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 were sought.
On August 18, 2000, the district court issued an opinion granting defendants'
motions for summary judgment dismissing the federal RICO claims as time-barred
under the statute of limitations. As to the state law claims for breach of
fiduciary duty and negligent misrepresentation, the court declined to exercise
supplemental jurisdiction and dismissed them without prejudice. The court
declined to rule on defendants' motion to decertify the class because it was
moot. Plaintiffs appealed the summary judgment to the Third Circuit Court of
Appeals. On July 31, 2001, the appeals court affirmed and upheld the dismissal
of the Plaintiffs' claims. The Plaintiffs' petition for rehearing was denied on
August 28, 2001.
The Company has, and intends to continue 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.
ENVIRONMENTAL:
A corporate subsidiary of the Company owns a 33% interest in a general
partnership, which in turn owns property in the State of Texas which is the
subject of an environmental assessment and remediation effort, due to the
discovery of certain chemicals related to a release of dry cleaning solvent in
the soil and groundwater of the partnership's property and adjacent properties.
Prior assessments had determined that minimal costs would be incurred to
remediate the release. However, subsequent findings at and around the
partnership's property have increased the probability that additional
remediation costs will be necessary. The partnership is working with the Texas
Natural Resource Conservation Commission and the local municipality to implement
a multi-faceted plan, which includes both remediation and ongoing monitoring of
the affected properties. Each of the partnership's partners has recently
contributed new capital to finance the continuing assessment and remediation
efforts. The Company's share of anticipated costs to remediate and monitor this
situation is estimated at approximately $600,000. As of September 30, 2001,
approximately $210,000 of
11
this amount has been paid and the remaining $390,000 has been reflected as a
loss reserve for such matters in the consolidated balance sheet. The Company's
management believes that the outcome of these events will not have a material
adverse effect on the consolidated financial position of the Company.
12
GRUBB & ELLIS COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
8. COMMITMENTS AND CONTINGENCIES (CONTINUED)
GENERAL:
The Company is involved in various claims and lawsuits arising out of the
conduct of its business, as well as in connection with its participation in
various joint ventures, 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.
13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
NOTE REGARDING FORWARD-LOOKING STATEMENTS
This report contains forward-looking statements which may involve known and
unknown risks, uncertainties and other factors that may cause the actual
results, performance or achievements of the Company in future periods to be
materially different from any future results, performance or achievements
expressed or suggested by these statements. Such statements relate to, among
other things, capital expenditures, acquisitions, operating improvements and
costs, and are indicated by words or phrases such as "continuing," "believes,"
"expects," and similar words or phrases. 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 that
could create a recession in the real estate markets, (iii) the Company's debt
level and its ability to make interest and principal payments, (iv) an increase
in expenses related to new initiatives, investments in people, technology, and
service improvements, (v) the Company's ability to implement, and the success
of, new initiatives and investments, including the Company's new consulting
business practice and the integration of that practice with the Company's
existing expertise, (vi) the ability of the Company to consummate acquisitions
and integrate acquired companies and assets, and (vii) other factors described
in the Company's Annual Report on Form 10-K for the fiscal year ended June 30,
2001.
RESULTS OF OPERATIONS
REVENUE
The Company's revenue is derived principally from transaction services fees
related to commercial real estate, which include commissions from leasing,
acquisition and disposition assignments as well as fees from valuation,
consulting and asset management assignments. Management services fees comprise
the remainder of the Company's revenues, and include fees related to both
property and facilities management outsourcing, business services and agency
leasing.
Revenue in any given quarter during the three fiscal year period ended June 30,
2001, as a percentage of total annual revenue, ranged from a high of 34.4% to a
low of 19.1%, with revenue earned in the first quarters of each of the last
three fiscal years ranging from 23.0% to 26.2%. The Company has typically
experienced its lowest quarterly revenue in the quarter ending March 31 of each
year with higher and more consistent revenue in the quarters ended June 30 and
September 30, and its highest quarterly revenue in the quarter ending December
31, due to increased activity caused by the desire of clients to complete
transactions by calendar year-end.
Total revenue for the three months ended September 30, 2001 was $76.8 million, a
decrease of 29.0% from revenue of $108.1 million for the same period last year.
Significantly affecting this decline was a $29.8 million decrease in transaction
services fees in the current fiscal quarter over the same period in 2000. This
resulted from decreased activity in the technology markets as well as the
current softening in the general economy and its impact on the real estate
industry through negative absorption and higher vacancy rates, particularly in
the office sector. The terrorist attacks of September 11th created additional
marketplace instability and further deterioration of overall economic
conditions. Management service fees decreased to $13.8 million during the
quarter ended September 30, 2001 as compared to $15.4
14
million in the prior year, due primarily to decreased agency leasing and
business services fees.
15
COSTS AND EXPENSES
Services commission expense is the Company's largest expense and is a direct
function of gross transaction services revenue levels, which include transaction
services commissions and other fees. Professionals receive services commissions
at rates which increase upon achievement of certain levels of production. As a
percentage of gross transaction revenue, related commission expense decreased to
58.5% for the quarter ended September 30, 2001 as compared to 63.1% for the same
period in 2000. This decrease was due to unusually high average commission
expense incurred during the prior year in technology markets such as Silicon
Valley, San Francisco, Denver, Washington D.C. and New York, resulting from
higher production per professional.
Salaries, wages and benefits were relatively flat, increasing by only $358,000
or 1.4% during the quarter ended September 30, 2001 as compared to September 30,
2000. Selling, general and administrative expenses decreased by $1.7 million, or
9.9%, for the same period. The net decrease in these operating costs of $1.3
million resulted from the company tightening its discretionary expenditures in
response to the slowing general economy.
Depreciation and amortization expense for the quarter ended September 30, 2001
decreased slightly to $2.8 million from $2.9 million in the comparable period
last year. The Company also holds multi-year service contracts with certain key
professionals, the costs of which are being amortized over the lives of the
respective contracts, which are generally two to three years. Amortization
expense relating to these contracts of $662,000 was recognized in the quarter
ended September 30, 2001 compared to $679,000 for the same period in the prior
year.
In June 2001, the Financial Accounting Standards Board issued Statements of
Financial Accounting Standards No. 141, "Business Combinations," and No. 142,
"Goodwill and Other Intangible Assets," effective for fiscal years beginning
after December 15, 2001. Under the new rules, goodwill will no longer be
amortized but will be subject to annual impairment tests in accordance with the
Statements. Other intangible assets will continue to be amortized over their
useful lives. The Company will apply the new rules on accounting for goodwill
and other intangible assets beginning in the first fiscal quarter of fiscal
2003, which for the Company would be the quarter ending September 30, 2002.
Application of the nonamortization provisions of the Statement is expected to
result in an increase in net operating income of approximately $1.6 million per
year. During fiscal 2003, the Company will perform the first of the required
impairment tests of goodwill as of July 1, 2002 and has not yet determined what
the effect of these tests will be on the earnings and financial position of the
Company.
Interest income decreased during the quarter ended September 30, 2001 as
compared to September 30, 2000 as a result of lower available invested cash.
Interest expense was incurred during the quarter ended September 30, 2001 due to
the Company's term loan borrowings in January 2001 under the credit facility,
while interest expense incurred during the quarter ended September 30, 2000 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.
In December 1999, the Securities and Exchange Commission issued Staff Accounting
Bulletin No. 101, Revenue Recognition in Financial Statements ("SAB 101")
relating to the recognition of revenue for publicly owned companies. The
adoption of SAB 101 resulted in the recognition
16
of a cumulative effect charge of $3.1 million (net of applicable taxes of $2.1
million) on July 1, 2000.
17
NET LOSS
The net loss for the three months ended September 30, 2001 was $2.3 million, or
$0.17 per common share on a diluted basis, as compared to a net loss of
$101,000, or $0.01 per common share for the same period in the prior fiscal
year. The increase in the net loss was primarily due to the decline in net
transaction services revenues recognized in the quarter ended September 30, 2001
partially offset by the cumulative effect from the change in accounting
principle recognized during the quarter ended September 30, 2000.
LIQUIDITY AND CAPITAL RESOURCES
The Company generated cash flow from operations of $479,000, while $1.4 million
was used in investing activities for purchases of equipment, software and
leasehold improvements, and $1.4 million was used in financing activities,
primarily related to the repayment of credit facility borrowings totaling $2.0
million.
See Note 6 of Notes to Condensed Consolidated Financial Statements in Item 1 of
this Report for information concerning earnings before interest, taxes,
depreciation and amortization.
In August 2001, the Company entered into an amendment to the previously amended
and restated credit agreement arranged by Bank of America, N.A., which amended
financial covenants related to minimum cash flow levels and fixed cost ratios.
The amendment also increased the interest margin by 0.25% over the rate
effective in fiscal 2001. The Company's financial results were further impacted
by the terrorist attacks on September 11th and, as a result, certain covenants
provided for in the amendment were not achieved for the September 30, 2001
reporting period. The tragic events exacerbated the deterioration in economic
conditions that were being felt prior to the attacks. The Company received a
waiver from the banks relative to these covenant shortfalls, and is currently
negotiating a further amendment to the credit agreement to provide sufficient
covenant relief in future reporting periods.
The Company entered into certain contractual employment and compensation
agreements with its new chief executive, chief financial and chief operating
officers both during and prior to the three months ended September 30, 2001.
Terms of these agreements included, among other things, in the aggregate i)
signing bonuses totaling $550,000, ii) guaranteed initial year bonuses totaling
$925,000, iii) loans totaling $1.8 million with repayment terms tied to
retention bonuses and continued employment, iv) retention bonuses, net of taxes,
sufficient to repay the executive loan obligations in (iii) above, and v)
options to purchase 850,000 shares of the Company's common stock, exercisable at
current market prices on the dates of grant. The Company had funded all signing
bonuses and loans as of September 30, 2001, while the guaranteed initial year
bonuses are expected to be funded on the anniversary dates of the respective
officers.
The Company believes that its short-term and long-term operating cash
requirements will be met by operating cash flow. In addition, the Company's
credit facility is available for additional capital needs. In the event of
adverse economic conditions or other unfavorable events, and to the extent that
the Company's cash requirements are not met by operating cash flow or borrowings
under its credit facility, the Company may find it necessary to reduce
expenditure levels or undertake other actions as may be appropriate under the
circumstances.
18
The Company continues to explore additional strategic acquisition opportunities
that have the potential to expand the depth and breadth of its current lines of
business and increase its market share. The sources of consideration for such
acquisitions could be cash, the Company's current credit facility, new debt,
and/or the issuance of stock, or a combination of the above. No assurances can
be made that any additional acquisitions will be made. Warburg, Pincus
Investors, L.P., a principal stockholder, may provide the Company with financing
in connection with potential acquisitions.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's bank debt obligations are floating rate obligations whose interest
rate and related monthly interest payments vary with the movement in LIBOR. In
order to mitigate this risk, terms of the credit agreement required the Company
to enter into interest rate swap agreements to effectively convert fifty percent
of its floating rate term debt obligations to fixed rate debt obligations
through March, 2004. Interest rate swaps generally involve the exchange of fixed
and floating rate interest payments on an underlying notional amount. As of
September 30, 2001 the Company had $17.5 million in notional amount interest
rate swaps outstanding in which the Company pays a fixed rate of 5.18% and
receives a three month LIBOR based rate from the counterparties. The notional
amount of the interest rate swap agreements is scheduled to decline as follows:
Notional Amount Date
--------------- --------------
$14,500,000 June 30, 2002
10,500,000 June 30, 2003
8,000,000 March 31, 2004
When interest rates rise the interest rate swap agreements increase in fair
value to the Company and when interest rates fall the interest rate swap
agreements decline in value to the Company. As of September 30, 2001, interest
rates had fallen and the interest rate swap agreements were in an unrealized
loss position to the Company of approximately $337,000, net of taxes.
To highlight the sensitivity of the interest rate swap agreements to changes in
interest rates, the following summary shows the effects of a hypothetical
instantaneous change of 100 basis points (BPS) in interest rates as of September
30, 2001 (in thousands):
Notional Amount $17,500
Fair Value to the Company (337)
Change in Fair Value to the Company
Reflecting Change in Interest Rates
- 100 BPS (167)
+ 100 BPS 162
The company does not utilize financial instruments for trading or other
speculative purposes, nor does it utilize leveraged financial instruments.
20
PART II
OTHER INFORMATION
(ITEMS 2 THROUGH 5 ARE NOT APPLICABLE
FOR THE QUARTER ENDED SEPTEMBER 30, 2001)
21
ITEM 1. LEGAL PROCEEDINGS
The disclosure called for by Item 1 is incorporated by reference to Note 8 of
Notes to Condensed Consolidated Financial Statements.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBITS
(3) Articles of Incorporation and Bylaws
3.1 Certificate of Incorporation of the Registrant, as restated November
1, 1994, incorporated herein by reference to Exhibit 3.2 to the
Registrant's Annual Report on Form 10-K filed on March 31, 1995
(Commission File No. 1-8122).
3.2 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).
3.3 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).
3.4 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).
(10) Material Contracts
10.1* First Amendment to the Employment Agreement between Ian Y. Bress and
the Registrant, . dated as of October 3, 2001.
* Management contract or compensatory plan or arrangement.
(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: November 14, 2001 /s/ Ian Y. Bress
----------------------------
Ian Y. Bress
Chief Financial Officer
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GRUBB & ELLIS COMPANY
EXHIBIT INDEX
FOR THE QUARTER ENDED SEPTEMBER 30, 2001
EXHIBIT
(10) Material Contracts
10.1 First Amendment to Employment Agreement between Ian Y. Bress and the
Registrant, dated as of October 3, 2001.
24