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, 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
-----------------------------
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
- --------------------------------------------------------------------------------
(Address of principal executive offices)
(Zip Code)
(847) 753-7500
- --------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
No Change
- --------------------------------------------------------------------------------
(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
---- ----
14,897,763
------------------------------------
(Number of shares outstanding of the registrant's
common stock at January 31, 2002)
PART I
FINANCIAL INFORMATION
2
ITEM 1. FINANCIAL STATEMENTS
GRUBB & ELLIS COMPANY
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
ASSETS
December 31, June 30,
2001 2001
----------- -----------
Current assets:
Cash and cash equivalents $ 25,621 $ 7,248
Services fees receivable, net 19,050 17,897
Other receivables 3,603 3,610
Professional service contracts, net 3,095 3,263
Prepaids and other current assets 8,366 5,278
Deferred tax assets, net 1,261 1,296
----------- -----------
Total current assets 60,996 38,592
Noncurrent assets:
Equipment, software and leasehold improvements, net 18,891 19,669
Goodwill, net 25,546 26,328
Deferred tax assets, net 3,439 3,535
Other assets 2,938 4,302
----------- -----------
Total assets $ 111,810 $ 92,426
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 3,494 $ 3,330
Commissions payable 12,894 7,952
Credit facility debt 8,000 8,000
Accrued compensation and employee benefits 19,787 13,416
Deferred commissions payable 14,467 293
Other accrued expenses 4,562 4,385
----------- -----------
Total current liabilities 63,204 37,376
Long-term liabilities:
Credit facility debt 24,000 29,000
Accrued claims and settlements 7,340 8,695
Other liabilities 1,343 1,039
----------- -----------
Total liabilities 95,887 76,110
----------- -----------
Stockholders' equity:
Common stock, $.01 par value: 50,000,000 shares authorized;
13,558,428 shares issued and outstanding at
December 31, 2001 and 13,358,615 shares at June 30, 2001 136 134
Additional paid-in-capital 67,656 66,858
Accumulated other comprehensive loss (288) (68)
Retained deficit (51,581) (50,608)
----------- -----------
Total stockholders' equity 15,923 16,316
----------- -----------
Total liabilities and stockholders' equity $ 111,810 $ 92,426
=========== ===========
See notes to condensed consolidated financial statements.
3
GRUBB & ELLIS COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
For the three months For the six months
ended December 31, ended December 31,
------------------------------- --------------------------------
2001 2000 2001 2000
------------ ------------- ------------- -------------
Revenue:
Transaction services fees $ 87,658 $ 125,961 $ 150,600 $ 218,691
Management services fees 13,700 15,776 27,546 31,146
------------ ------------- ------------- -------------
Total revenue 101,358 141,737 178,146 249,837
------------ ------------- ------------- -------------
Costs and expenses:
Services commissions 53,385 82,341 90,178 140,822
Salaries, wages and benefits 26,049 25,840 51,202 50,635
Selling, general and administrative 17,604 18,145 33,019 35,252
Depreciation and amortization 2,790 2,870 5,590 5,746
Impairment and other non-recurring items (1,700) 2,886 (1,700) 2,886
------------ ------------- ------------- -------------
Total costs and expenses 98,128 132,082 178,289 235,341
------------ - ------------ ------------- -------------
Total operating income (loss) 3,230 9,655 (143) 14,496
Other income and expenses:
Interest income 101 595 199 950
Interest expense (615) (49) (1,247) (79)
------------ ------------- ------------- -------------
Income (loss) before income taxes, extraordinary
item and cumulative effect 2,716 10,201 (1,191) 15,367
Benefit (provision) for income taxes (1,422) (5,258) 219 (7,392)
------------ ------------- ------------- -------------
Income (loss) before extraordinary item and cumulative
effect 1,294 4,943 (972) 7,975
Extraordinary loss on extinguishment of debt, net of tax -- (406) -- (406)
------------ ------------- ------------- -------------
Income (loss) before cumulative effect of accounting
change 1,294 4,537 (972) 7,569
Cumulative effect of accounting change, net of tax -- -- -- (3,133)
------------ ------------- ------------- -------------
Net income (loss) $ 1,294 $ 4,537 $ (972) $ 4,436
============ ============= ============= =============
Net income (loss) per common share:
Basic -
- before extraordinary item and cumulative effect $ .10 $ .25 $ (.07) $ .40
- from extraordinary loss -- (.02) -- (.02)
- from cumulative effect of accounting change -- -- -- (.16)
------------ ------------- ------------- -------------
$ .10 $ .23 $ (.07) $ .22
============ ============= ============= =============
Diluted -
- before extraordinary item and cumulative effect $ .09 $ .24 $ (.07) $ .38
- from extraordinary loss -- (.02) -- (.02)
- from cumulative effect of accounting
change -- -- -- (.15)
------------ ------------- ------------- -------------
$ .09 $ .22 $ (.07) $ .21
============ ============= ============= =============
Weighted average common shares outstanding:
Basic - 13,545,489 19,922,320 13,496,298 19,889,120
============ ============= ============= =============
Diluted - 13,679,015 20,878,998 13,496,298 20,949,314
============ ============= ============= =============
See notes to condensed consolidated financial statements.
4
GRUBB & ELLIS COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
For the six months ended
December 31,
------------------------
2001 2000
---------- ----------
Cash Flows from Operating Activities
Net income (loss) $ (972) $ 4,436
Cumulative effect of accounting change, net of tax -- 3,133
Deferral of payment of commission expense 14,174 24,569
Depreciation and amortization expense 5,590 5,746
Impairment of goodwill -- 2,150
Extraordinary loss, net of tax -- 406
Accrued compensation and other benefits 6,371 8,430
Other adjustments to reconcile net income (loss) to net cash
provided by operating activities 178 2,395
---------- ----------
Net cash provided by operating activities 25,341 51,265
---------- ----------
Cash Flows from Investing Activities:
Purchases of equipment, software and leasehold improvements (2,551) (4,161)
---------- ----------
Net cash used in investing activities (2,551) (4,161)
---------- ----------
Cash Flows from Financing Activities:
Repayment of credit facility debt (5,000) --
Repayment of acquisition debt -- (519)
Other financing sources 583 587
---------- ----------
Net cash provided by (used in) financing activities (4,417) 68
---------- ----------
Net increase in cash and cash equivalents 18,373 47,172
Cash and cash equivalents at beginning of period 7,248 17,862
---------- ----------
Cash and cash equivalents at end of period $ 25,621 $ 65,034
========== ==========
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. Certain amounts in
prior periods have been reclassified to conform to the current
presentation. Such reclassifications have not changed previously
reported results of operations or cash flows.
Operating results for the six months ended December 31, 2001 are not
necessarily indicative of the results that may be achieved in future
periods.
In June 2001, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 142, "Goodwill and Other
Intangible Assets," effective for fiscal years beginning after December
15, 2001. Under the new rules, goodwill will no longer be amortized but
will be subject to annual impairment tests in accordance with the
Statement. 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 non-amortization
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 that
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."
The change in value of these instruments during a reporting period is
characterized as Other Comprehensive Income or Loss, and totaled
approximately $220,000 of an unrealized loss during the six months
ended December 31, 2001. This loss, along with the Company's net loss
of $972,000 for the six months
6
GRUBB & ELLIS COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
2. TOTAL COMPREHENSIVE INCOME (CONTINUED)
ended December 31, 2001, results in a Total Comprehensive Loss of
$1,192,000, or $0.09 per diluted share, for the period.
3. INCOME TAXES
The benefit (provision) for income taxes for the six months ended
December 31, 2001 and 2000 is as follows (in thousands):
For the six months ended
December 31,
----------------------------
2001 2000
------------ ------------
Current $ 350 $ (6,640)
Deferred (131) (752)
------------ ------------
$ 219 $ (7,392)
============ ============
The Company's effective tax rate for financial statement purposes was
impacted by the high ratio of permanent differences to its taxable loss
for the six months ended December 31, 2001.
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 For the six months ended
December 31, December 31,
--------------------------------- --------------------------------
2001 2000 2001 2000
INCOME (LOSS) BEFORE EXTRAORDINARY ITEMS $ 1,294 $ 4,943 $ (972) $ 7,975
========== ========== ========== ==========
BASIC EARNINGS PER SHARE:
Weighted average common shares outstanding 13,545 19,922 13,496 19,889
========== ========== ========== ==========
Earnings (loss) per share - basic $ 0.10 $ 0.25 $ (0.07) $ .40
========== ========== ========== ==========
DILUTED EARNINGS PER SHARE: 13,545 19,922 13,496 19,889
Weighted average common shares outstanding
Effect of dilutive securities:
Stock options and warrants (A) 134 957 -- 1,060
---------- ---------- ---------- ----------
Weighted average dilutive common shares outstanding 13,679 20,879 13,496 20,949
========== ========== ========== ==========
Earnings (loss) per share - diluted $ 0.09 $ 0.24 $ (0.07) $ .38
========== ========== ========== ==========
(A) Since the Company recognized a loss before extraordinary items for the
six months ended December 31, 2001, the effect of stock options and
warrants would be anti-dilutive. These securities, which otherwise
would have had a dilutive effect of approximately 361,000 shares, have
been excluded from the earnings per share calculation for the six
months ended December 31, 2001.
7
GRUBB & ELLIS COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
4. EARNINGS PER SHARE (CONTINUED)
In January 2002, the Company issued an additional 1,337,358 shares of
its common stock upon the exercise of certain warrants held by its
largest stockholder, Warburg, Pincus Investors, L.P., which were
scheduled to expire on January 29, 2002. The aggregate purchase price
of the common stock was approximately $4.2 million, reflecting an
average weighted price of $3.11 per share. Additional warrants held by
a director of the Company exercisable for a total of 337,827 shares of
common stock at a weighted average price of $3.46 expired on January
29, 2002.
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 six months ended December 31, 2000.
Operating results for the first six months 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 six months ended December 31, 2000, which has been restated from
prior reported results, was to increase revenue by $2.9 million,
related commission expense by $1.0 million and after-tax income by $1.1
million from the amounts previously reported.
For the six month periods ended December 31, 2001 and 2000, the Company
recognized revenue, net of related services commission expense,
totaling $203,000 and $3.7 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
-------- -------- --------
Six months ended December 31, 2001
Total revenue $150,600 $ 27,546 $178,146
EBITDA 3,944 (197) 3,747
Total assets as of December 31, 2001 91,343 20,467 111,810
Six months ended December 31, 2000
Total revenue $218,691 $ 31,146 $249,837
EBITDA 20,925 2,203 23,128
Total assets as of December 31, 2000 132,278 25,746 158,024
8
GRUBB & ELLIS COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
6. SEGMENT INFORMATION (CONTINUED)
RECONCILIATION OF SEGMENT EBITDA TO INCOME (LOSS) BEFORE INCOME TAXES
SIX MONTHS ENDED DECEMBER 31,
-----------------------------
2001 2000
---------- ----------
Total segment EBITDA $ 3,747 $ 23,128
Less:
Depreciation & amortization (5,590) (5,746)
Non-recurring items 1,700 (2,886)
Net interest income (expense) (1,048) 871
---------- ----------
Income (loss) before income taxes $ (1,191) $ 15,367
========== ==========
In evaluating segment performance, the Company' s management utilizes
EBITDA as a measure of the segment's ability to generate cash flow from
its operations. Other items contained within the measurement of net
income, such as interest and taxes, and non-recurring items, are
generated and managed at the corporate administration level rather than
the segment level. In addition, net income measures also include
non-cash amounts such as depreciation and amortization expense.
Management believes that EBITDA as presented with respect to the
Company's reportable segments is an important measure of cash generated
by the Company's operating activities. EBITDA is similar to net cash
flow from operations because it excludes certain non-cash items,
however, it also excludes interest and 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 each of August 2001 and November 2001, the Company entered into
separate amendment agreements on its term loan and line of credit
facility arranged by Bank of America, N.A., which amended financial
covenants related to minimum cash flow levels and fixed cost ratios.
The amendments also increased the interest margin by 0.50% over the
original terms. As a result of continuing deterioration in both the
general economy as well as the real estate services industry, the
Company failed to achieve certain financial covenants contained in the
amended agreement. The Company has received a waiver from the banks for
covenant violations existing for the quarter ended December 31, 2001.
The waiver expires on February 28, 2002, and the Company is currently
negotiating a restructuring of its credit agreement to align the
financial covenant requirements with the current economic environment.
While management is actively pursuing the restructuring of the credit
agreement, there can be no assurances that the Company will be
successful.
9
GRUBB & ELLIS COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
8. COMMITMENTS AND CONTINGENCIES
LITIGATION/RECOVERY OF LOSS RESERVES:
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, and the
Plaintiffs' time for filing any further appeals or related claims
expired in both federal and state courts in the quarter ended December
31, 2001. Accordingly, the Company has recognized a non-recurring item
in relation to the recovery of loss reserves previously recorded in
connection with this case (see Note 9 for additional information).
ENVIRONMENTAL:
A corporate subsidiary of the Company owns a 33% interest in a general
partnership, which in turn owns property in the State of Texas which is
the subject of an environmental assessment and remediation effort, due
to the discovery of certain chemicals related to a release of dry
cleaning solvent in the soil and groundwater of the partnership's
property and adjacent properties. Prior assessments had determined that
minimal costs would be incurred to remediate the release. However,
subsequent findings at and around the partnership's property have
increased the probability that additional remediation costs will be
necessary. The partnership is working with the Texas Natural Resource
Conservation Commission and the local municipality to implement a
multi-faceted plan, which includes both remediation and ongoing
monitoring of the affected properties. Both the Company and each of the
partnership's other partners have contributed new capital to finance
the continuing assessment and remediation efforts, although there can
be no assurance that such future contributions will be made by the
other partners. The Company's share of anticipated costs to remediate
and monitor this situation is estimated at approximately $600,000. As
of December 31, 2001, approximately $210,000 of 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.
10
GRUBB & ELLIS COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
8. COMMITMENTS AND CONTINGENCIES (CONTINUED)
INSOLVENT INSURANCE PROVIDER:
In fiscal years 1999 and 2000, the Company's primary errors and
omissions insurance carrier was Reliance Insurance Company (of Illinois
and California, collectively "Reliance"). The Company has six open
claims that were covered by Reliance policies upon the exhaustion of a
self-insured retention. In October 2001, Reliance was placed in
liquidation by order of the Commonwealth of Pennsylvania, and as a
result casts doubt on the recovery of the Company's open claims. The
Company has established loss reserves for the estimated settlement
costs of the claims and recognized a non-recurring charge in its
financial statements for the quarter ended December 31, 2001 (see Note
9 for further information). The Company is seeking reimbursement for
the costs of defense, settlement and/or judgment on these claims both
from appropriate state insurance guaranty associations and from the
liquidator. The Company is unable to estimate the probability and
timing of any potential reimbursement at this time, and therefore has
not assumed any potential recoveries in establishing its reserves.
GENERAL:
The Company is involved in various claims and lawsuits arising out of
the conduct of its business, as well as in connection with its
participation in various joint ventures, 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.
9. NON-RECURRING ITEMS
In the three months ended December 31, 2001, the Company concluded long
standing litigation proceedings for which it had previously recorded
loss reserves equal to its estimated financial exposure. In addition,
the Company recorded loss reserves during this period as a result of
the liquidation proceedings surrounding one of its insurance carriers.
(See Note 8 for additional information.) The positive outcome of the
Matthews case, partially offset by the additional exposure on the
Reliance liquidation, resulted in $2.2 million of net income from claim
related reserves. The Company also incurred other non-recurring expense
totaling $500,000 related to a write-down of the carrying basis of an
investment in a commercial real estate services internet venture. The
Company's decision to write-down its interest in the venture was due to
a dilution in the Company's ownership position, as well as uncertainty
in the venture's ability to achieve its business plan. As a result of
these events, the Company has recognized net non-recurring income of
$1.7 million for the six months ended December 31, 2001.
10. SUBSEQUENT EVENTS
PENDING ACQUISITION:
In January 2002, the Company entered into an agreement to acquire
substantially all of the assets of the Wadley-Donovan Group, Inc. a
professional real estate services firm located in northern New Jersey.
Wadley-Donovan Group, Inc. specializes in site selection and providing
economic development strategies primarily for Fortune 100 companies and
state, local and regional government agencies and municipalities. The
transaction is structured as all cash with a purchase price of $2.3
million, and is scheduled to close by
11
GRUBB & ELLIS COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
10. SUBSEQUENT EVENTS (CONTINUED)
the end of February 2002. Closing of the acquisition is subject only to
typical closing conditions of transactions of this type, and is not
subject to financing.
PUBLIC RIGHTS OFFERING:
In January 2002, the Company filed a Registration Statement on Form S-3
with the Securities and Exchange Commission, pursuant to which it
presently intends to distribute rights to purchase shares of its common
stock to stockholders of record as of the close of business on February
25, 2002. A standby group consisting of our largest stockholder and
certain members of executive management have agreed to enter into an
agreement with the Company to purchase all of the shares offered under
the rights offering that are not purchased by the other stockholders of
the Company. Each full right will entitle the holder to subscribe for
one share of common stock at a subscription price equal to the market
price of the stock as of the effective date of the offering. Each
stockholder (except for those in the standby group) who exercises all
of their rights to subscribe to the stock being offered is being
granted an over-subscription privilege to purchase additional shares
(if any) that are available. While it is the Company's intent to
proceed with the rights offering, there can be no assurance that the
offering will be completed.
The aggregate net proceeds to Grubb & Ellis from this offering are
currently expected to be approximately $10.8 million, after deducting
fees and estimated expenses of approximately $200,000. Expected uses of
the proceeds include implementing the Company's various strategic
initiatives, financing strategic acquisitions and general working
capital purposes.
12
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 each of the Company's Annual Report on Form 10-K for the
fiscal year ended June 30, 2001, filed on September 28, 2001, and the
Company's registration statement on Form S-3 filed on January 29, 2002.
RESULTS OF OPERATIONS
REVENUE
The Company's revenue is derived principally from transaction services
fees related to commercial real estate, which include commissions from
leasing, acquisition and disposition assignments as well as fees from
appraisal and advisory services. 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 six months ended December 31, 2001 was $178.1
million, a decrease of 28.7% from revenue of $250.0 million for the
same period last year. Significantly affecting this decline was a $68.0
million decrease in transaction services fees in the current fiscal
period 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 $27.5 million
during the six months ended December 31, 2001 as compared to $31.1
million in the prior year, due primarily to decreased agency leasing
and business services fees.
Total revenue for the quarter ended December 31, 2001 was $101.4
million, a decrease of 28.5% over revenue of $141.7 million for the
same period last year. Transaction services fees decreased $38.3
million or 30.4% over the prior year period, while management services
decreased by $2.1 million or 13.2%.
13
COSTS AND EXPENSES
Services commissions expense is the Company's largest expense and is a
direct function of gross transaction services revenue levels, which
include transaction services commissions and other fees. Professionals
receive services commissions at rates that increase upon achievement of
certain levels of production. As a percentage of gross transaction
revenue, related commission expense decreased to 59.9% for the six
months ended December 31, 2001 as compared to 64.4% for the same period
in 2000 and decreased to 60.9% from 65.4% for the respective quarters
ended December 31 in the same periods. These decreases were 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
$567,000 or 1.1% during the six months ended December 31, 2001 as
compared to December 31, 2000, primarily due to higher health care
insurance costs. Selling, general and administrative expenses decreased
by $2.2 million, or 6.3%, for the same period. The net decrease in
these operating costs of $1.6 million resulted from the company
tightening its discretionary expenditures in response to the slowing
general economy.
Depreciation and amortization expense for the six months ended December
31, 2001 decreased slightly to $5.6 million from $5.7 million in the
comparable period last year. The Company also holds multi-year service
contracts with certain key professionals, the costs of which are
amortized over the lives of the respective contracts, which are
generally two to three years. Amortization expense relating to these
contracts of $1.3 million was recognized in the six months ended
December 31, 2001 compared to $1.4 million for the same period in the
prior year.
In the three months ended December 31, 2001, the Company concluded long
standing litigation proceedings for which it had previously recorded
loss reserves equal to its estimated financial exposure. In addition,
the Company recorded loss reserves during this period as a result of
the liquidation proceedings surrounding one of its insurance carriers.
(See Note 8 of Notes to Condensed Consolidated Financial Statements in
Item 1 of this Report for additional information.) The positive outcome
of the Matthews case, partially offset by the additional exposure on
the Reliance liquidation, resulted in $2.2 million of net income from
claim related reserves. The Company also incurred other non-recurring
expense totaling $500,000 related to a write-down of the carrying basis
of an investment in a commercial real estate services internet venture.
The Company's decision to write-down its interest in the venture was
due to a dilution in the Company's ownership position, as well as
uncertainty in the venture's ability to achieve its business plan. As a
result of these events, the Company has recognized net non-recurring
income of $1.7 million for the six months ended December 31, 2001.
During the quarter ended December 31, 2000 the Company recognized other
non-recurring expenses totaling $2.9 million relating primarily to the
impairment of goodwill related to the April 1998 acquisition of White
Commercial Real Estate.
In June 2001, the Financial Accounting Standards Board issued
Statements of Financial Accounting Standard 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 Statement. 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 non-amortization
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,
14
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 three and six month periods ended
December 31, 2001 as compared to the same periods in the prior year as
a result of lower available invested cash.
Interest expense incurred during the six months ended December 31, 2001
was due to the Company's term loan borrowings in January 2001 under the
credit facility, while interest expense incurred during the six months
ended December 31, 2000 was due primarily to seller financing related
to business acquisitions made in calendar year 1998.
Effective December 31, 2000, the Company amended and restated its
existing credit agreement. Unamortized costs related to the prior
agreement totaling $406,000, net of applicable taxes, were written off
and have been recorded as an extraordinary loss from extinguishment of
debt during the quarter ended December 31, 2000.
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 of a cumulative effect charge of $3.1 million (net of
applicable taxes of $2.1 million) on July 1, 2000.
NET INCOME (LOSS)
The net loss for the six months ended December 31, 2001 was $1.0
million, or $0.07 per common share on a diluted basis, as compared to
net income of $4.4 million, or $0.21 per common share for the same
period in the prior fiscal year. For the quarter ended December 31,
2001, net income was $1.3 million, or $0.09 per common share on a
diluted basis, as compared to net income of $4.5 million or $0.22 per
common share for the same period in fiscal year 2000. The decrease in
net income was primarily due to the decline in net transaction services
revenues recognized in the six months ended December 30, 2001 partially
offset by the non-recurring items and the cumulative effect from the
change in accounting principle recognized during the prior fiscal
year's comparable period.
LIQUIDITY AND CAPITAL RESOURCES
The Company generated cash flow from operations of $25.3 million, used
$2.6 million in investing activities for purchases of equipment,
software and leasehold improvements, and used $4.4 million for net
financing activities, primarily related to the repayment of credit
facility borrowings totaling $5.0 million.
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 during the quarter ended December 31. Deferred commission
balances of approximately $14.5 million, related to revenues earned in
calendar year 2001, were paid in January 2002, and incentive bonuses of
approximately $9.2 million are expected to be paid in late February
2002.
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 each of August 2001 and November 2001, the Company entered into
separate amendment agreements on its term loan and line of credit
facility arranged by Bank of America, N.A., which amended financial
covenants related to minimum cash flow levels and fixed cost ratios.
The amendments also increased the interest margin by 0.50% over the
original terms. As a result of continuing deterioration in both the
general economy as well as the real estate services industry, the
Company failed to achieve certain financial
15
covenants contained in the amended agreement. The Company has received
a waiver from the banks for covenant violations existing for the
quarter ended December 31, 2001. The waiver expires on February 28,
2002, and the Company is currently negotiating a restructuring of its
credit agreement to align the financial covenant requirements with the
current economic environment. While management is actively pursuing the
restructuring of the credit agreement, there can be no assurances that
the Company will be successful.
In January 2002, the Company issued an additional 1,337,358 shares of
its common stock upon the exercise of certain warrants held by its
largest stockholder, Warburg, Pincus Investors, L.P., which were
scheduled to expire on January 29, 2002. The aggregate purchase price
of the common stock was approximately $4.2 million, reflecting an
average weighted price of $3.11 per share.
In January 2002, the Company filed a Registration Statement on Form S-3
with the Securities and Exchange Commission, pursuant to which it
presently intends to distribute rights to purchase shares of its common
stock to stockholders of record as of the close of business on February
25, 2002. A standby group consisting of our largest stockholder and
certain members of executive management have agreed to enter into an
agreement with the Company to purchase all of the shares offered under
the rights offering that are not purchased by the other stockholders of
the Company. Each full right will entitle the holder to subscribe for
one share of common stock at a subscription price equal to the market
price of the stock as of the effective date of the offering. Each
stockholder (except for those in the standby group) who exercises all
of their rights to subscribe to the stock being offered is being
granted an over-subscription privilege to purchase additional shares
(if any) that are available. While it is the Company's intent to
proceed with the rights offering, there can be no assurance that the
offering will be completed.
The aggregate net proceeds to Grubb & Ellis from this offering are
currently expected to be approximately $10.8 million, after deducting
fees and estimated expenses of approximately $200,000. Expected uses of
the proceeds include implementing the Company's various strategic
initiatives, financing strategic acquisitions and general working
capital purposes.
The Company believes that its short-term and long-term operating cash
requirements will be met by operating cash flow, the expected proceeds
from the public rights offering and/or debt financing. In the event of
adverse economic conditions or other unfavorable events, and to the
extent that the Company's cash requirements are not met by operating
cash flow or available borrowings, the Company may find it necessary to
reduce expenditure levels or undertake other actions as may be
appropriate under the circumstances.
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 or that financing will be
available under terms and conditions acceptable to the Company.
16
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
December 31, 2001 the Company had $16.0 million in notional amount
interest rate swaps outstanding in which the Company pays a fixed rate
of 5.18% and receives a three month LIBOR based rate from the
counter-parties. The notional amount of the interest rate swap
agreements is scheduled to decline as follows:
Notional Amount Date
--------------- --------------
$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 December
31, 2001, interest rates had fallen since the Company had entered into
the agreements, and the interest rate swap agreements were in an
unrealized loss position to the Company of approximately $288,000, 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 December 31, 2001 (in thousands):
Notional Amount $ 16,000
Fair Value to the Company (288)
Change in Fair Value to the Company
Reflecting Change in Interest Rates
- 100 BPS (143)
+ 100 BPS 140
The Company does not utilize financial instruments for trading or other
speculative purposes, nor does it utilize leveraged financial
instruments.
17
PART II
OTHER INFORMATION
(ITEMS 2, 3 AND 5 ARE NOT APPLICABLE
FOR THE QUARTER ENDED DECEMBER 31, 2001)
18
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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The 2001 annual meeting of stockholders of the Company was held on November 16,
2001. The Company submitted to a vote of stockholders, through the solicitation
of proxies, the election of seven directors, representing the entire Board of
Directors, and approval of a stock option plan. The votes cast for and withheld
with respect to each nominee for election as director were as follows:
NOMINEE SHARES FOR SHARES WITHOLDING
------- ---------- AUTHORITY
-----------------
R. David Anacker 12,643,247 54,186
Barry M. Barovick 12,232,872 464,561
Joe F. Hanauer 12,633,809 63,624
C. Michael Kojaian 12,633,342 64,091
Reuben S. Leibowitz 12,632,863 64,570
Ian C. Morgan 12,632,499 64,934
Todd A. Williams 12,633,052 64,381
There were no broker non-votes with respect to any of the nominees for director.
The votes cast for, against, and abstained and broker non-votes with respect to
the amendment to the Grubb & Ellis Employee Stock Purchase Plan were as follows:
11,387,211 shares for, 169,472 shares against, 22,853 shares abstained, and
1,117,897 shares representing broker non-votes.
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).
19
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).
(4) INSTRUMENTS DEFINING THE RIGHTS OF SECURITY HOLDERS, INCLUDING
INDENTURES
4.1 Second Amendment dated November 29, 2001 to Amended and Restated Credit
Agreement among the Registrant, the other financial institutions from
time to time parties thereto, Bank of America, N.A., American National
Bank and Trust Company of Chicago and LaSalle Bank National
Association, dated as of December 31, 2000.
(10) MATERIAL CONTRACTS
10.1* Employment Agreement entered into between Robert J. Walner and the
Registrant, dated as of December 14, 2001.
* Management contract of compensatory plan or arrangement.
(B) REPORTS ON FORM 8-K
None.
20
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 14, 2002 /s/ IAN Y. BRESS
-----------------------
Ian Y. Bress
Chief Financial Officer
21
GRUBB & ELLIS COMPANY
EXHIBIT INDEX
FOR THE QUARTER ENDED DECEMBER 31, 2001
EXHIBIT
(4) INSTRUMENTS DEFINING THE RIGHTS OF SECURITY HOLDERS, INCLUDING
INDENTURES
4.1 Second Amendment dated November 29, 2001 to Amended and Restated Credit
Agreement among the Registrant, the other financial institutions from
time to time parties thereto, Bank of America, N.A., American National
Bank and Trust Company of Chicago and LaSalle Bank National
Association, dated as of December 31, 2000.
(10) MATERIAL CONTRACTS
10.1* Employment Agreement entered into between Robert J. Walner and the
Registrant, dated as of December 14, 2001.
* Management contract of compensatory plan or arrangement.
22