FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2003
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________________ to ___________________
Commission File Number: 1-8122
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, 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 ___
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes ___ No _X_
15,097,371
-------------------------------------------------------
(Number of shares outstanding of the registrant's
common stock at May 1, 2003)
PART I
FINANCIAL INFORMATION
2
ITEM 1. FINANCIAL STATEMENTS
GRUBB & ELLIS COMPANY
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
ASSETS
March 31, June 30,
2003 2002
-------- --------
Current assets:
Cash and cash equivalents $ 7,544 $ 14,085
Services fees receivable, net 13,020 13,212
Other receivables 2,728 3,396
Professional service contracts, net 1,262 1,974
Prepaid income taxes 872 6,890
Prepaid and other current assets 1,556 586
Deferred tax assets, net -- 1,563
-------- --------
Total current assets 26,982 41,706
Noncurrent assets:
Equipment, software and leasehold improvements, net 14,895 17,843
Goodwill, net 26,958 26,958
Deferred tax assets, net -- 947
Other assets 3,519 2,923
-------- --------
Total assets $ 72,354 $ 90,377
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 3,947 $ 5,569
Commissions payable 4,022 5,347
Credit facility debt 10,875 5,750
Accrued compensation and employee benefits 17,315 16,243
Deferred commissions payable -- 403
Other accrued expenses 5,770 4,143
-------- --------
Total current liabilities 41,929 37,455
Long-term liabilities:
Credit facility debt 18,675 26,000
Note payable - affiliate, net -- 10,660
Accrued claims and settlements 7,772 7,823
Other liabilities 3,330 2,573
-------- --------
Total liabilities 71,706 84,511
-------- --------
Stockholders' equity:
Preferred stock: 1,000,000 shares authorized;
11,725 Series A shares issued and outstanding
at $1,000 stated value at March 31, 2003 11,725 --
Common stock, $.01 par value: 50,000,000 shares
authorized; 15,049,226 shares issued and
outstanding at March 31, 2003 and 15,028,839
shares at June 30, 2002 150 150
Additional paid-in-capital 71,367 72,084
Accumulated other comprehensive loss (234) (283)
Retained deficit (82,360) (66,085)
-------- --------
Total stockholders' equity 648 5,866
-------- --------
Total liabilities and stockholders' equity $ 72,354 $ 90,377
======== ========
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 nine months
ended March 31, ended March 31,
----------------------------- -----------------------------
2003 2002 2003 2002
------------ ------------ ------------ ------------
Revenue:
Transaction services fees $ 49,715 $ 45,574 $ 189,514 $ 197,550
Management services fees 12,407 12,611 37,561 38,781
------------ ------------ ------------ ------------
Total revenue 62,122 58,185 227,075 236,331
------------ ------------ ------------ ------------
Costs and expenses:
Services commissions 28,470 25,082 111,817 115,260
Salaries, wages and benefits 21,621 23,110 62,694 74,312
Selling, general and administrative 14,847 15,708 48,947 48,727
Depreciation and amortization 2,011 2,688 6,118 8,278
Severance, office closure and other special charges 7,663 2,377 9,447 677
------------ ------------ ------------ ------------
Total costs and expenses 74,612 68,965 239,023 247,254
------------ ------------ ------------ ------------
Total operating loss (12,490) (10,780) (11,948) (10,923)
Other income and expenses:
Interest income 55 121 226 320
Interest expense (577) (696) (2,135)
(1,943)
------------ ------------ ------------ ------------
Loss before income taxes (13,012) (11,355) (13,857) (12,546)
Benefit (provision) for income taxes (2,739) 4,769 (2,418) 4,988
------------ ------------ ------------ ------------
Net loss (15,751) (6,586) (16,275) (7,558)
Preferred stock dividends accrued (359) -- (757) --
------------ ------------ ------------ ------------
Net loss to common stockholders $ (16,110) $ (6,586) $ (17,032) $ (7,558)
============ ============ ============ ============
Net loss per weighted average common share outstanding:
Basic - $ (1.06) $ (0.45) $ (1.13) $ (0.55)
============ ============ ============ ============
Diluted - $ (1.06) $ (0.45) $ (1.13) $ (0.55)
============ ============ ============ ============
Weighted average common shares outstanding:
Basic - 15,140,410 14,585,189 15,107,081 13,853,964
============ ============ ============ ============
Diluted - 15,140,410 14,585,189 15,107,081 13,853,964
============ ============ ============ ============
See notes to condensed consolidated financial statements.
4
GRUBB & ELLIS COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
For the
nine months ended
March 31,
--------------------
2003 2002
-------- --------
Cash Flows from Operating Activities:
Net loss $(16,275) $ (7,558)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization expense 6,118 8,278
Accrued severance, office closure and other
special charges 9,447 677
Net receipt of tax refunds 4,962 1,402
Deferred tax benefit (4,990) (4,446)
Increase in deferred tax asset valuation allowance 7,500 --
Funding of multi-year service contracts (2,255) (1,268)
Other adjustments (6,349) (670)
-------- --------
Net cash used in operating activities (1,842) (3,585)
-------- --------
Cash Flows from Investing Activities:
Purchases of equipment, software and
leasehold improvements (2,463) (3,961)
Cash paid for business acquisition -- (2,295)
-------- --------
Cash used in investing activities (2,463) (6,256)
-------- --------
Cash Flows from Financing Activities:
Repayment of credit facility debt (4,450) (5,000)
Borrowings on credit facility debt 2,250 6,000
Borrowings from affiliate -- 5,000
Proceeds from issuance of common stock, net 228 5,081
Other financing uses (264) (443)
-------- --------
Net cash provided by (used in) financing activities (2,236) 10,638
-------- --------
Net increase (decrease) in cash and cash equivalents (6,541) 797
Cash and cash equivalents at beginning of period 14,085 7,248
-------- --------
Cash and cash equivalents at end of period $ 7,544 $ 8,045
======== ========
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, 2002.
The financial statements have been prepared in conformity with accounting
principles generally accepted in the United States that 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 nine months ended March 31, 2003 are not necessarily
indicative of the results that may be achieved in future periods.
2. TOTAL COMPREHENSIVE LOSS
The Company is a party to two interest rate swap agreements that effectively fix
the interest rate on a portion 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
$48,000 of unrealized income and $127,000 of unrealized loss during the nine
months ended March 31, 2003 and 2002, respectively. This gain and loss, along
with the Company's net losses of $16,275,000 and $7,558,000 for the nine months
ended March 31, 2003 and 2002, results in a Total Comprehensive Loss of
$16,227,000 and $7,685,000 for the periods, respectively.
3. INCOME TAXES
The benefit (provision) for income taxes for the nine months ended March 31,
2003 and 2002 is as follows (in thousands):
For the nine months ended
March 31,
-------------------------
2003 2002
---------- ----------
Current benefit $ 92 $ 542
Deferred benefit 4,990 4,446
Increase in valuation allowance (7,500) --
---------- ----------
$ (2,418) $ 4,988
========== ==========
The Company recorded prepaid taxes totaling approximately $872,000 and
$6,890,000 as of March 31, 2003
6
GRUBB & ELLIS COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
3. INCOME TAXES (CONTINUED)
and June 30, 2002, respectively. Included in these assets are tax refund
receivables resulting from filed federal and state returns totaling
approximately $745,000 and $2,584,000 at March 31, 2003 and June 30, 2002,
respectively. Also included are tax effected operating loss carrybacks totaling
approximately $127,000 and $4,306,000 at March 31, 2003 and June 30, 2002,
respectively, which the Company will realize or has realized primarily against
the federal or state tax liability payments made in prior tax years. The Company
also received net tax refunds of approximately $4,962,000 and $1,402,000, during
the nine months ended March 31, 2003 and 2002, respectively, primarily related
to its federal tax carrybacks.
During the nine months ended March 31, 2003 the Company increased the valuation
allowance it carries against its deferred tax assets by approximately $7.5
million to reflect uncertainty in regards to the realization of the assets in
future periods.
4. EARNINGS PER COMMON 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 nine months ended
March 31, March 31,
----------------------------- -----------------------------
2003 2002 2003 2002
------------ ------------ ------------ ------------
NET LOSS TO COMMON STOCKHOLDERS $ (16,110) $ (6,586) $ (17,032) $ (7,558)
============ ============ ============ ============
BASIC EARNINGS PER COMMON SHARE:
Weighted average common shares outstanding 15,140 14,585 15,107 13,854
============ ============ ============ ============
Net loss per common share - basic $ (1.06) $ (0.45) $ (1.13) $ (0.55)
============ ============ ============ ============
DILUTED EARNINGS PER COMMON SHARE: 15,140 14,585 15,107 13,854
Weighted average common shares outstanding
Effect of dilutive securities:
Stock options and warrants -- -- -- --
------------ ------------ ------------ ------------
Weighted average dilutive common shares outstanding 15,140 14,585 15,107 13,854
============ ============ ============ ============
Net loss per common share - diluted $ (1.06) $ (0.45) $ (1.13) $ (0.55)
============ ============ ============ ============
Additionally, options outstanding to purchase shares of common stock, the effect
of which would be anti-dilutive, were approximately 1,777,000 and 2,895,000 at
March 31, 2003 and 2002, respectively, and were not included in the computation
of diluted earnings per share because an operating loss was reported for the
nine months ending March 31, 2003 and 2002.
5. ISSUANCE OF PREFERRED STOCK
On September 19, 2002, Kojaian Ventures, L.L.C. ("KV"), a related party,
exercised its right to convert a subordinated promissory note it held into
preferred stock of the Company. As a result of this conversion, 11,725 shares of
the Company's Series A Preferred Stock were issued, with a stated value of
$1,000 per share. The outstanding related party principal and interest
obligations totaling $11,725,000 were reclassified to stockholders' equity on
the date of conversion. Issuance costs of $783,000, previously offset against
the note obligations, were also reclassified as a reduction of additional paid
in capital. The preferred stock
7
GRUBB & ELLIS COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
5. ISSUANCE OF PREFERRED STOCK (CONTINUED)
carries a dividend coupon of 12%, compounded quarterly on a cumulative basis.
Accrued dividends at March 31, 2003 totaled approximately $757,000.
The preferred stock contains liquidation preference and voting rights equal to
990 common shares for each share of preferred stock, or a total of 11,607,750
common share equivalents, subject to adjustment. As a consequence of the
conversion, there has been a change in the voting control of the Company, as
these equivalents, along with 3,762,884 shares of outstanding common stock owned
by KV and its affiliates (approximately 25% of the outstanding common stock of
the Company), represent approximately 57% of the total voting power of the
Company. The preferred stock is not convertible into any other securities of the
Company or subject to redemption. Warburg Pincus Investors, L.P., which
currently owns approximately 39% of the outstanding common stock of the Company,
has approximately 22% of the total voting power.
6. SECURITIES EXCHANGE LISTING
On October 8, 2002, the Company's common stock was de-listed from the New York
Stock Exchange ("NYSE") due primarily to the Company's book value and market
capitalization value being below the minimum levels required by the NYSE's
listing standards. The Company's common stock commenced trading on the
over-the-counter market ("OTC") effective October 17, 2002, under the symbol
GBEL.OB, and ceased trading on the NYSE prior to the opening that day.
7. CHANGE IN ACCOUNTING PRINCIPLE
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 is no longer amortized but is subject to annual impairment tests
in accordance with the Statement. Other intangible assets will continue to be
amortized over their useful lives. The Company applied the new rules on
accounting for goodwill and other intangible assets beginning in the quarter
ended September 30, 2002 and completed the transitional impairment tests of
goodwill as of July 1, 2002. The Company has determined that no goodwill
impairment will impact the earnings and financial position of the Company as of
that date. Application of the non-amortization provisions of the Statement
resulted in an increase in net operating income of approximately $391,000 and
$1.2 million for the three and nine month periods ended March 31, 2003 as
compared to the same periods in 2002, or $0.03 and $0.08 per share,
respectively, and is expected to result in an increase in net operating income
of approximately $1.6 million for the fiscal year.
8. SEGMENT INFORMATION
The Company has two reportable segments - Transaction Services and Management
Services, and evaluates segment performance and allocates resources based on
earnings before interest, taxes, depreciation and amortization, and other
special charges ("EBITDA") that include an allocation (primarily based on
segment revenue) of certain corporate level administrative expenses (amounts in
thousands).
8
GRUBB & ELLIS COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
8. SEGMENT INFORMATION (CONTINUED)
Transaction Management Segment
Services Services Totals
----------- ----------- -----------
Nine months ended March 31, 2003
Total revenue $ 189,514 $ 37,561 $ 227,075
EBITDA 4,323 (706) 3,617
Total assets as of March 31, 2003 52,797 18,685 71,482
Nine months ended March 31, 2002
Total revenue $ 197,550 $ 38,781 $ 236,331
EBITDA (1,058) (910) (1,968)
Total assets as of March 31, 2002 58,022 20,334 78,356
RECONCILIATION OF SEGMENT EBITDA TO INCOME (LOSS) BEFORE INCOME TAXES
NINE MONTHS ENDED
MARCH 31,
2003 2002
--------- ---------
Total segment EBITDA $ 3,617 $ (1,968)
Less:
Depreciation & amortization (6,118) (8,278)
Special charges (9,447) (677)
Net interest expense (1,909) (1,623)
--------- ---------
Loss before income taxes $ (13,857) $ (12,546)
========= =========
RECONCILIATION OF SEGMENT ASSETS TO BALANCE SHEET (IN THOUSANDS):
AS OF MARCH 31,
2003 2002
--------- ---------
Total segment assets $ 71,482 $ 78,356
Current tax assets 872 3,863
Deferred tax assets -- 9,277
--------- ---------
Total assets $ 72,354 $ 91,496
========= =========
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 special charges, 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
9
GRUBB & ELLIS COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
8. SEGMENT INFORMATION (CONTINUED)
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 (loss) 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.
9. CREDIT AGREEMENT
The Company is subject to certain financial covenants pursuant to the terms of
its amended and restated term loan and credit facility (the "Credit Facility")
by and among the Company, various financial institutions and Bank of America,
N.A. as agent and lender (collectively, the "Banks"), including minimum EBITDA
(as defined in the credit agreement) levels it must achieve. On December 20,
2002, the Company received a waiver through March 31, 2003 from the Banks with
respect to any default regarding the minimum EBITDA levels for the quarter ended
December 31, 2002 which levels were not achieved. The waiver also provided for
an increase in interest rates of 50 basis points on borrowings until such time
as the outstanding principal due falls below $24.0 million, and accelerated
certain principal repayments of $1.7 million, which were made in the quarter
ended March 31, 2003. The Company also did not achieve minimum EBITDA levels
through the quarter ended March 31, 2003, and the waiver was extended until May
1, 2003, and then extended again until May 30, 2003. See Note 13 for additional
information.
10. COMMITMENTS AND CONTINGENCIES
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. Although the partnership's other partners have made all
past contributions and are expected to make all future required contributions,
there can be no assurances to this effect. The Company's share of anticipated
costs to remediate and monitor this situation is estimated at approximately
$1,012,000, based upon a comprehensive project plan prepared by an independent
third party environmental remediation firm. As of March 31, 2003, approximately
$554,000 of this amount has been paid and the remaining $458,000 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 Company's consolidated financial position or
results of operations.
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,
10
GRUBB & ELLIS COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
10. COMMITMENTS AND CONTINGENCIES (CONTINUED)
Reliance was placed in liquidation by order of the Commonwealth of Pennsylvania,
which casts doubt on the recovery from Reliance of the Company's open claims.
The Company has established loss reserves for the estimated settlement costs of
the claims. 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.
EXECUTIVE CHANGE OF CONTROL PLAN:
In December 2002, the Company was named as a defendant in a complaint filed by
an executive officer of the Company in the Eastern Division of the U.S. District
Court for the Northern District of Illinois, pursuant to which such executive
officer sought a determination whether a "change of control" had occurred at the
Company, as that term is defined in the Company's Executive Change of Control
Plan. On March 6, 2003, the Company settled the lawsuit for the amount of the
plaintiff's legal fees and the case was dismissed without prejudice.
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 and partnerships, 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.
11. SEVERANCE, OFFICE CLOSURE AND OTHER SPECIAL CHARGES
A special charge consisting of severance and other costs totaling $900,000 was
incurred during the quarter ended September 30, 2002 in connection with the
termination of employment of the Company's former Chief Operating Officer.
During the quarter ended December 31, 2002, additional expenses totaling
$884,000 were incurred, consisting of severance of $150,000 and other costs
totaling $734,000 related to office closure costs. Office closure costs consist
primarily of future lease obligations of office space by the Company, net of
estimated sublease income, along with related unamortized leasehold
improvements. In the quarter ended March 31, 2003, the Company recorded
additional special charges of $7.7 million, consisting of $2.5 million related
to additional office closure costs and $5.2 million of additional severance
costs related to the resignations of the Company's former Chief Executive
Officer, former Chief Financial Officer and its General Counsel, and to a
reduction of other salaried personnel. The cumulative amount of special charges
incurred by the Company during the nine months ended March 31, 2003 totaled $9.4
million.
During the quarter ended December 31, 2001, the Company concluded long standing
litigation proceedings on the John W. Matthews, et al. v Kidder, Peabody & Co.,
et al. and HSM Inc., et al. ("Matthews") case for which it had previously
recorded loss reserves. In addition, during this period, loss reserves were
recorded as a result of the liquidation proceedings surrounding one of the
Company's insurance carriers ("Reliance" liquidation). (See Note 10 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 special charges in the quarter ended December 31, 2001 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
11
GRUBB & ELLIS COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
11. SEVERANCE, OFFICE CLOSURE AND OTHER SPECIAL CHARGES (CONTINUED)
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. In the
quarter ended March 31, 2002, the Company recorded additional special charges of
$2.4 million, consisting of $1.0 million of severance costs related to a
reduction of salaried personnel and $1.4 million related to office closure
costs. As a result of these events, the Company recognized a net special charge
of $677,000 for the nine months ended March 31, 2002.
12. CHANGE IN ACCOUNTING ESTIMATE
During the quarter ended December 31, 2002, the Company reduced its estimate of
incentive bonus payments expected to be made to eligible employees based upon
lower than expected calendar year 2002 operating results. This change in
estimate was a result of both the continuing economic downturn being encountered
in the real estate services industry and an increased turnover in the Company's
transaction professional workforce, which directly impacted the Company's
revenues for the year. The Company recorded this revision as a reduction to
salaries, wages and benefits expense totaling approximately $3.9 million in its
statement of operations for the quarter ended December 31, 2002.
13. SUBSEQUENT EVENT
In May 2003, an affiliated entity of C. Michael Kojaian, the Company's
controlling stockholder and Chairman of the Board, agreed to acquire the
Company's Credit Facility from the Banks by May 30, 2003. The terms of the
proposed acquisition by the Kojaian-affiliated entity of the Credit Facility
from the Banks were not disclosed, and the Company is not a party to the
transaction.
In connection with the anticipated acquisition of the Credit Facility, Kojaian
Funding, L.L.C., another affiliated entity of Mr. Kojaian, made a $4 million
subordinated loan to the Company on May 9, 2003 (the "Subordinated Loan") for
working capital purposes. The Company is obligated to pay interest only on the
Subordinated Loan during its term at the rate of 10% per annum, payable monthly
in arrears. The entire principal amount of the Subordinated Loan is due on July
15, 2004, although it may be prepaid in whole or in part at any time by the
Company without premium or penalty upon fifteen (15) days' prior notice. The
Subordinated Loan, which was consented to by the Banks, is secured by all the
assets of the Company and is guaranteed by all the Company's subsidiaries,
although such security interest is subordinate to the interests of the lender
under the Credit Facility. The Company paid a 1% financing fee in connection
with the closing of the Subordinated Loan.
Mr. Kojaian has also advised the Company that in connection with his affiliate's
acquisition of the Credit Facility, he intends that the Credit Facility will
also be amended to provide the Company greater flexibility with respect to the
Credit Facility's existing financial covenants and provisions. The Company has
received a waiver from the Banks from certain of these covenants, as described
more fully in Note 9 of these Notes to Condensed Consolidated Financial
Statements.
The material terms and conditions of the Subordinated Loan were negotiated by a
special committee comprised of the disinterested member of the Company's board
of directors, which committee was established for such purpose. The special
committee recommended the entering into of the Subordinated Loan to the full
board, which was unanimously approved by all of the directors. It is anticipated
that the special committee will also negotiate the terms of any amendment to the
Credit Facility with the affiliated entity of Mr. Kojaian that acquires the
Credit Facility.
12
GRUBB & ELLIS COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
13. SUBSEQUENT EVENT (CONTINUED)
Although the Company expects that the Kojaian related entity will enter into
definitive documentation to acquire the Credit Facility from the Banks on or
before May 30, 2003, there can be no assurances in this regard. In the event the
Kojaian related entity does not acquire the Credit Facility from the Banks for
any reason whatsoever, and the Company is unable to secure a further waiver from
the Banks, or otherwise amend the Credit Facility with the Banks, of which there
can be no assurances, the Company will be in default of its Credit Facility on
May 31, 2003. Similarly, in the event that the Credit Facility is acquired from
the Banks by the Kojaian related entity, the Company expects to satisfactorily
amend certain of the financial covenants of the Credit Facility, however there
can be no assurances that this will occur. If this does not occur, the Company
will be in default of the Credit Facility. In addition, there can be no
assurances that the Company will be able to repay the Subordinated Loan from
operating cash flow when it is due, or that the amount of the Subordinated Loan
is sufficient and that the Company will not require additional working capital
infusions at a future date.
13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Report contains statements that are not historical facts and constitute
projections, forecasts or forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995. The statements are not
guarantees of performance. They 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.
You can identify such statements by the fact that they do not relate strictly to
historical or current facts. These statements use words such as "believe,"
"expect," "should," "strive," "plan," "intend," "estimate" and "anticipate" or
similar expressions. When we discuss strategy or plans, we are making
projections, forecasts or forward-looking statements. Actual results and
stockholder's value will be affected by a variety of risks and factors,
including, without limitation, international, national and local economic
conditions and real estate risks and financing risks and acts of terror or war.
Many of the risks and factors that will determine these results and values are
beyond the Company's ability to control or predict. These statements are
necessarily based upon various assumptions involving judgment with respect to
the future. All such forward-looking statements speak only as of the date of
this Report. The Company expressly disclaims any obligation or undertaking to
release publicly any updates of revisions to any forward-looking statements
contained herein to reflect any change in the Company's expectations with regard
thereto or any change in events, conditions or circumstances on which any such
statement is based. Factors that could adversely affect the Company's ability to
obtain these results and value 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 expansion into new specialty areas and integration of the
Company's business units, (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, 2002, filed on October 15, 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, and agency leasing assignments as well as fees from
appraisal and consulting services. Management services fees comprise the
remainder of the Company's revenues, and include fees related to both property
and facilities management outsourcing and business services.
Revenue in any given quarter during the three fiscal year period ended June 30,
2002, as a percentage of total annual revenue, ranged from a high of 34.4% to a
low of 18.6%, with revenue earned in the third quarters of each of the last
three fiscal years ranging from 22.6% to 18.6%. The Company has typically
experienced its lowest quarterly revenue in the quarter ending March 31 of each
year with higher and more consistent revenue in the quarters ending June 30 and
September 30, 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 of $227.1 million was recognized for the nine months ended March
31, 2003 as compared to revenue of $236.3 million for the same period last year.
Transaction services fees decreased by $8.0 million in the current fiscal period
over the same period in 2002 due to the weak general economy and its impact on
14
the real estate industry, along with an increased turnover in the Company's
transaction professional workforce. Management services fees decreased by $1.2
million or 3.2% during that same period.
Total revenue for the quarter ended March 31, 2003 was $62.1 million, an
increase of 6.8% over revenue of $58.2 for the same period last year, primarily
due to an increase in transaction services fees of $4.1 million or 9.1% over the
prior year period. Although this reflects an improvement in revenue, the fees in
the prior year's comparable quarter were at significantly depressed levels due
to the lingering impact felt by the real estate industry from the terrorist
attacks on the World Trade Center in September 2001.
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 increased
slightly to 59.0% for the nine months ended March 31, 2003 as compared to 58.3%
for the same period in 2002 and increased to 57.3% from 55.0% for the respective
quarters ended March 31 in the same periods.
Salaries, wages and benefits decreased by $11.6 million or 15.6% during the nine
months ended March 31, 2003 as compared to March 31, 2002. The decrease resulted
primarily from a reduction in workforce in March 2002, along with the reduction
of bonus payments and the elimination of the company match to the 401(k) Plan
for qualified employees for calendar year 2002. Selling, general and
administrative expenses were relatively flat, increasing by $220,000, or 0.5%,
for the same period.
Depreciation and amortization expense for the nine months ended March 31, 2003
decreased by 26.1% to $6.1 million from $8.3 million in the comparable period
last year. The Company 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 $1.2 million was recognized in the nine months ended March
31, 2003 compared to $1.7 million for the same period in the prior year. A
similar related decrease resulted in the quarter ended March 31, 2003, as
depreciation and amortization expense decreased $677,000, or 25.2%, from the
comparable prior year period.
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 is no longer amortized but is subject to annual impairment tests
in accordance with the Statement. Other intangible assets will continue to be
amortized over their useful lives. The Company applied the new rules on
accounting for goodwill and other intangible assets beginning in the quarter
ended September 30, 2002 and completed the transitional impairment tests of
goodwill as of July 1, 2002. The Company determined that no goodwill impairment
would impact the earnings and financial position of the Company as of that date.
Application of the non-amortization provisions of the Statement resulted in a
decrease in depreciation and amortization expense and a corresponding increase
in net operating income of approximately $391,000 and $1.2 million for the three
and nine month periods ended March 31, 2003 as compared to the same periods in
2002, or $0.03 and $0.08 per share, respectively. It is expected to result in an
increase in net operating income of approximately $1.6 million for the fiscal
year.
During the nine months ended March 31, 2003, the Company recorded special
charges totaling $9.4 million, consisting primarily of severance costs of $6.2
million related to the resignations of the Company's former Chief Executive
Officer, Chief Financial Officer, Chief Operating Officer, the Company's General
Counsel and other salaried personnel, and office closure costs of $3.2 million.
Of these severance and office closure costs, $5.2 million and $2.5 million,
respectively, were recorded in the quarter ended March 31, 2003.
15
During the quarter ended December 31, 2001, the Company concluded long standing
litigation proceedings on the John W. Matthews, et al. v Kidder, Peabody & Co.,
et al. and HSM Inc., et al. ("Matthews") case for which it had previously
recorded loss reserves. In addition, during this period, loss reserves were
recorded as a result of the liquidation proceedings surrounding one of the
Company's insurance carriers ("Reliance" liquidation). (See Note 10 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 special charges in the quarter ended December 31 2001 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. In the quarter ended March 31, 2002, the Company recorded
additional special charges of $2.4 million, consisting of $1.0 million of
severance costs related to a reduction of salaried personnel and $1.4 million
related to office closure costs. As a result of these events, the Company
recognized net special charges of $677,000 for the nine months ended March 31,
2002.
Interest income decreased during the three and nine month periods ended March
31, 2003 as compared to the same periods in the prior year as a result of lower
available invested cash and declining interest rates.
Interest expense incurred during the nine months ended March 31, 2003 and 2002
was due primarily to the Company's term loan borrowings under the credit
facility. Interest expense was also incurred during the quarter ended September
30, 2003 due to the note payable-affiliate funded in March 2002 and subsequently
converted to preferred stock in September 2002. See Note 5 of Notes to Condensed
Consolidated Financial Statements in Item 1 of this Report for additional
information.
During the nine months ended March 31, 2003, the Company recorded a tax
provision of approximately $2.4 million as compared to a benefit of
approximately $5.0 million in the comparable prior year period. This resulted
primarily from an increase of approximately $7.5 million in the valuation
allowance the Company carries against its deferred tax assets to reflect
uncertainty in regards to the realization of the assets in future periods. See
Note 3 of Notes to Condensed Consolidated Financial Statements for additional
information.
NET INCOME (LOSS)
The net loss to common stockholders for the nine months ended March 31, 2003 was
$17.0 million, or $1.13 per common share on a diluted basis, as compared to $7.6
million, or $0.55 per common share, for the same period in the prior fiscal
year. For the quarter ended March 31, 2003, the net loss was $16.1 million, or
$1.06 per common share on a diluted basis, as compared to $6.6 million, or $0.45
per common share for the same period in fiscal year 2002.
LIQUIDITY AND CAPITAL RESOURCES
For the nine months ended March 31, 2003, the Company used cash flow from
operations of $1.8 million as losses from the Company's operations were
partially offset by the receipt of federal tax refunds. The Company also used
$2.5 million in investing activities for purchases of equipment, software and
leasehold improvements, and used $2.2 million in financing activities primarily
for the repayment of term loan borrowings of $4.5 million, offset by additional
credit revolver borrowings of $2.3 million.
The cash flow activities described in the preceding paragraph, along with the
classification of $10.9 million of the amounts outstanding under the Company's
credit facility as current debt obligations, have resulted in a negative working
capital position of approximately $14.9 million as of March 31, 2003. The
Company's working capital position was improved with the receipt of $4.0 million
of proceeds related to the subordinated note issued in May 2003 and may further
improve if the Company is successful in
16
renegotiating the terms of its credit facility, as described more fully below.
However, further strengthening of the Company's working capital position will
require improvement in its cash flow from operations, or additional working
capital infusions, as to both of which there can be no assurances.
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 $7.6 million,
related to revenues earned in calendar year 2002, were paid in January 2003, and
incentive bonuses of approximately $2.0 million were paid in March 2003.
See Note 8 of Notes to Condensed Consolidated Financial Statements in Item 1 of
this Report for information concerning earnings before interest, taxes,
depreciation and amortization.
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 debt or equity proceeds, the Company may find it necessary to
reduce expenditure levels or undertake other actions as may be appropriate under
the circumstances. The Company has principal payment obligations under the term
portion of its credit facility of $27.3 million as of March 31, 2003, of which
$8.6 million becomes due over the twelve months ending March 31, 2004. The
Company has also fully utilized its revolving credit facility through borrowings
of $2.3 million and letters of credit issued for $2.7 million, and entered into
a $4.0 million subordinated loan with a related party in May 2003 as described
more fully below.
The Company is subject to certain financial covenants pursuant to the terms of
its amended and restated term loan and credit facility (the "Credit Facility")
by and among the Company, various financial institutions and Bank of America,
N.A. as agent and lender (collectively, the "Banks"), including minimum EBITDA
(as defined in the credit agreement) levels it must achieve. On December 20,
2002, the Company received a waiver through March 31, 2003 from the Banks with
respect to any default regarding the minimum EBITDA levels for the quarter ended
December 31, 2002 which levels were not achieved. The waiver also provided for
an increase in interest rates of 50 basis points on borrowings until such time
as the outstanding principal falls below $24.0 million, and accelerated
principal repayments of $1.7 million, which were made in the quarter ended March
31, 2003. The Company also did not achieve minimum EBITDA levels through the
quarter ended March 31, 2003, and the waiver was extended until May 1, 2003, and
then extended again to May 30, 2003.
In May 2003, an affiliated entity of C. Michael Kojaian, the Company's
controlling stockholder and Chairman of the Board, agreed to acquire the
Company's Credit Facility from the Banks by May 30, 2003. The terms of the
proposed acquisition by the Kojaian-affiliated entity of the Credit Facility
from the Banks were not disclosed, and the Company is not a party to the
transaction.
In connection with the anticipated acquisition of the Credit Facility, Kojaian
Funding, L.L.C., another affiliated entity of Mr. Kojaian, made a $4 million
subordinated loan to the Company on May 9, 2003 (the "Subordinated Loan") for
working capital purposes. The Company is obligated to pay interest only on the
Subordinated Loan during its term at the rate of 10% per annum, payable monthly
in arrears. The entire principal amount of the Subordinated Loan is due on July
15, 2004, although it may be prepaid in whole or in part at any time by the
Company without premium or penalty upon fifteen (15) days' prior notice. The
Subordinated Loan, which was consented to by the Banks, is secured by all the
assets of the Company and is guaranteed by all the Company's subsidiaries,
although such security interest is subordinate to the interests of the lender
under the Credit Facility. The Company paid a 1% financing fee in connection
with the closing of the Subordinated Loan.
Mr. Kojaian has also advised the Company that in connection with his affiliate's
acquisition of the Credit Facility, he intends that the Credit Facility will
also be amended to provide the Company greater flexibility
17
with respect to the Credit Facility's existing financial covenants and
provisions. The Company has received a waiver from the Banks from certain of
these covenants, as described more fully above.
The material terms and conditions of the Subordinated Loan were negotiated by a
special committee comprised of the disinterested member of the Company's board
of directors, which committee was established for such purpose. The special
committee recommended the entering into of the Subordinated Loan to the full
board, which was unanimously approved by all of the directors. It is anticipated
that the special committee will also negotiate the terms of any amendment to the
Credit Facility with the affiliated entity of Mr. Kojaian that acquires the
Credit Facility.
Although the Company expects that the Kojaian related entity will enter into
definitive documentation to acquire the Credit Facility from the Banks on or
before May 30, 2003, there can be no assurances in this regard. In the event the
Kojaian related entity does not acquire the Credit Facility from the Banks for
any reason whatsoever, and the Company is unable to secure a further waiver from
the Banks, or otherwise amend the Credit Facility with the Banks, of which there
can be no assurances, the Company will be in default of its Credit Facility on
May 31, 2003. Similarly, in the event that the Credit Facility is acquired from
the Banks by the Kojaian related entity, the Company expects to satisfactorily
amend certain of the financial covenants of the Credit Facility, however there
can be no assurances that this will occur. If this does not occur, the Company
will be in default of the Credit Facility. In addition, there can be no
assurances that the Company will be able to repay the Subordinated Loan from
operating cash flow when it is due, or that the amount of the Subordinated Loan
is sufficient and that the Company will not require additional working capital
infusions at a future date.
Each of (i) the $4 million Promissory Note dated May 9, 2003, (ii) the Guarantee
and Collateral Agreement made by Grubb & Ellis Company and certain of its
subsidiaries in favor of Kojaian Funding, L.L.C. dated as of May 9, 2003, (iii)
the Security Agreement by and between Grubb & Ellis Company and Kojaian Funding,
L.L.C., dated as of May 9, 2003, (iv) the Subordination Agreement dated as of
May 9, 2003 in favor of Bank of America, N.A., as agent, and the Banks,
delivered by Kojaian Funding, L.L.C. and Grubb & Ellis Company, (v) the Use of
Proceeds Letter dated May 9, 2003 from Grubb & Ellis Company to Kojaian Funding,
L.L.C., (vi) the Fee Letter from Grubb & Ellis Company to Kojaian Funding,
L.L.C. dated May 9, 2003, and (vii) the press release dated May 12, 2003, are
annexed as exhibits to this Quarterly Report on Form 10-Q.
On March 17, 2003, the Company disclosed several executive management changes as
part of a corporate realignment designed to enable the Company to better serve
its clients by focusing on its transaction, management and strategic services
business and global client capabilities. Specifically, the Company disclosed
that the Company's Chief Executive Officer and Chief Financial Officer had
resigned to pursue other opportunities. In addition, the Company has entered
into a separation agreement with its General Counsel who is resigning effective
July 2, 2003.
In conjunction with its corporate realignment, the Company is also instituting
various cost control initiatives that it believes will serve to strengthen the
Company's financial position, while at the same time permit the Company to
continue to provide the same level of services that it has in the past.
Specifically, in addition to a work force reduction of approximately 40
individuals, the Company is further reducing compensation expenses, which is the
Company's single largest expense, as a result of the agreement of certain of its
executive officers to reduce their salaries by as much as fifteen percent. The
Company believes the foregoing measures, and others, including, but not limited
to the streamlining of its national marketing activities, will result in
aggregate savings to the Company of up to $15 million on an annualized basis.
Effective as of April 1, 2003, the Company entered into a series of agreements
that altered the structure of the Company's transaction services operations in
Phoenix, Arizona, effectively transferring its existing Phoenix commercial
transaction services business to a newly-formed entity whose majority owners are
the
18
real estate salespersons previously employed by the Company in its Phoenix
office. As part of the overall transaction, this new entity has signed an
agreement pursuant to which it shall participate in the Company's affiliate
program. The fees received by the Company from this affiliate agreement will
comprise the revenues earned from the new Phoenix structure, as the gross
operations of the office will no longer be reflected in the Company's future
financial statements (other than revenue earned from trailing contracts the
Company retained). The Company also obtained the right to acquire a minority
interest in this entity, which right it exercised in May 2003, and will record
its pro rata share of the future operations of the new entity in its financial
statements.
On September 19, 2002, Kojaian Ventures, L.L.C. ("KV"), a related party,
exercised its right to convert a subordinated promissory note it held into
preferred stock of the Company. As a result of this conversion, 11,725 shares of
the Company's Series A Preferred Stock were issued, with a stated value of
$1,000 per share. The outstanding related party principal and interest
obligations totaling $11,725,000 were reclassified to stockholders' equity on
the date of conversion. Issuance costs of $783,000, previously offset against
the note obligations, were also reclassified as a reduction of additional paid
in capital. The preferred stock carries a dividend coupon of 12%, compounded
quarterly on a cumulative basis. Accrued dividends at March 31, 2003 totaled
approximately $757,000.
The preferred stock contains liquidation preference and voting rights equal to
990 common shares for each share of preferred stock, or a total of 11,607,750
common share equivalents, subject to adjustment. As a consequence of the
conversion, there has been a change in the voting control of the Company, as
these equivalents, along with 3,762,884 shares of outstanding common stock owned
by KV and its affiliates (approximately 25% of the outstanding common stock of
the Company), represent approximately 57% of the total voting power of the
Company. The preferred stock is not convertible into any other securities of the
Company or subject to redemption. Warburg Pincus Investors, L.P., which
currently owns approximately 39% of the outstanding common stock of the Company,
has approximately 22% of the total voting power.
On October 8, 2002, the Company's common stock was de-listed from the New York
Stock Exchange ("NYSE"), due primarily to the Company's book value and market
capitalization value being below the minimum levels required by the NYSE's
listing standards. The Company's common stock commenced trading on the
over-the-counter market ("OTC") effective October 17, 2002, under the symbol
GBEL.OB, and ceased trading on the NYSE prior to the opening that day.
19
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. As
of March 31, 2003, the outstanding principal balances on these debt obligations
totaled $27.3 million, of which $8.6 million is due over the next twelve months.
Since interest payments on these obligations will increase if interest rate
markets rise, or decrease if interest rate markets decline, the Company is
subject to cash flow risk related to these debt instruments. In order to
mitigate this risk, terms of the credit agreement required the Company to enter
into interest rate swap agreements to effectively convert a portion 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 March
31, 2003, the Company had $11.5 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 counter-parties. The notional amount of
the interest rate swap agreements is scheduled to decline as follows:
Notional Amount Date
--------------- --------------
$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 March 31, 2003, there was a
net decline in interest rates 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 $235,000, 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 March 31,
2003 (in thousands):
Notional Amount $ 11,500
Fair Value to the Company (235)
Change in Fair Value to the Company
Reflecting Change in Interest Rates
- 100 BPS (44)
+ 100 BPS 43
The Company does not utilize financial instruments for trading or other
speculative purposes, nor does it utilize leveraged financial instruments.
ITEM 4. CONTROLS AND PROCEDURES
Within the 90-day period prior to the filing of this Quarterly Report on Form
10-Q, the Company carried out an evaluation, under the supervision and with the
participation of management, including the Chief Financial Officer and other
executive officers acting collectively as the Company's Chief Executive Officer,
of the effectiveness of the Company's disclosure controls and procedures. Based
upon the evaluation, the Company's executive officers and Chief Financial
Officer have concluded that the Company's disclosure controls and procedures are
effective to timely alert them to material information required to be included
in Company's Exchange Act filings. In addition, there have been no significant
changes in the internal controls, or in other factors that could significantly
affect internal controls, subsequent to the date that the executive officers and
Chief Financial Officer completed their evaluation.
20
PART II
OTHER INFORMATION
(ITEMS 2 AND 3 ARE NOT APPLICABLE
FOR THE QUARTER ENDED MARCH 31, 2003)
21
ITEM 1. LEGAL PROCEEDINGS
The disclosure called for by Item 1 is incorporated by reference to Note 10 of
Notes to Condensed Consolidated Financial Statements.
ITEM 5. OTHER INFORMATION
During March of 2003 each of Barry M. Barovick, Reuben S. Leibowitz, and Steven
H. Shepsman resigned from the Company's Board of Directors. Mr. Barovick's
resignation was automatic in connection with his resignation as the Company's
CEO in early March. Thereafter, Mr. Leibowitz, a nominee of Warburg Pincus, a
substantial institutional stockholder of the Company, and Mr. Shepsman, an
independent director, also resigned. Warburg Pincus' other nominee, Mr. Ian
Morgan, resigned in December of 2002 and the nominee of the other substantial,
institutional stockholder of the Company, Mr. Todd Williams, the nominee of
Goldman Sachs, resigned in November 2002, shortly after the Company's annual
meeting. None of the resignations submitted by any of these former directors
stated any disagreement with the registrant on any matter relating to the
registrant's operations, policies or practices. On April 1, 2003 the remaining
members of the Company's board elected Rodger D. Young to the Board of Directors
until the next annual meeting of stockholders.
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.
3.2 Amendment to the Restated Certificate of Incorporation of the
Registrant as filed with the Delaware Secretary of State on December 9,
1997, incorporated herein by reference to Exhibit 4.4 to the
Registrant's Statement on Form S-8 filed on December 19, 1997 (File No.
333-42741).
3.3 Certificate of Retirement with Respect to 130,233 Shares of Junior
Convertible Preferred Stock of Grubb & Ellis Company, filed with the
Delaware Secretary of State on January 22, 1997, incorporated herein by
reference to Exhibit 3.3 to the Registrant's Quarterly Report on Form
10-Q filed on February 13, 1997.
3.4 Certificate of Retirement with Respect to 8,894 Shares of Series A
Senior Convertible Preferred Stock, 128,266 shares of Series B Senior
Convertible Preferred Stock, and 19,767 Shares of Junior Convertible
Preferred Stock of Grubb & Ellis Company, filed with the Delaware
Secretary of State on January 22, 1997, incorporated herein by
reference to Exhibit 3.4 to the Registrant's Quarterly Report on Form
10-Q filed on February 13, 1997.
3.5 Bylaws of the Registrant, as amended and restated effective May 31,
2000, incorporated herein by reference to Exhibit 3.5 to the
Registrant's Annual Report on Form 10-K filed on September 28, 2000.
(4) INSTRUMENTS DEFINING THE RIGHTS OF SECURITY HOLDERS,
INCLUDING INDENTURES.
4.1 Amended and Restated Certificate of Designations, Number, Voting
Powers, Preferences and Rights of Series A Preferred Stock of Grubb &
Ellis Company, as filed with the Secretary of State of Delaware on
September 13, 2002, incorporated herein by reference to Exhibit 3.8 to
the Registrant's Annual Report on Form 10-K filed on October 15, 2002.
22
4.2 Securities Purchase Agreement dated May 13, 2002 by and between Grubb &
Ellis Company and Kojaian Ventures, L.L.C., incorporated herein by
reference to Exhibit 2 to the Registrant's Current Report on Form 8-K
filed on May 14, 2002.
4.3 Copy of Convertible Subordinated Promissory Note and Security Agreement
in the principal amount of $11,237,500 dated May 13, 2002 issued by the
Registrant to Kojaian Ventures, L.L.C., incorporated herein by
reference to Exhibit 3 to the Registrant's Current Report on Form 8-K
filed on May 14, 2002.
4.4 Form of Waiver executed by Bank of America, N.A., LaSalle Bank National
Association and Bank One, N.A., and the Company, dated December 20,
2002, incorporated herein by reference to Exhibit 1 to the Registrant's
Current Report on Form 8-K filed on January 10, 2003.
4.5 Form of Waiver executed by Bank of America, N.A., LaSalle Bank National
Association and Bank One, N.A., and the Company, dated March 26, 2003,
incorporated herein by reference to Exhibit 6 to the Registrant's
Current Report on Form 8-K filed on March 27, 2003.
4.6 Form of Waiver executed by Bank of America, N.A., LaSalle Bank National
Association and Bank One, N.A., and the Company, dated May 1, 2003,
incorporated herein by reference to Exhibit 1 to the Registrant's
Current Report on Form 8-K filed on May 2, 2003.
4.7 Copy of Promissory Note in the principal amount of $4,000,000 dated May
9, 2003 issued by the Registrant to Kojaian Funding, L.L.C.
4.8 Copy of Guarantee and Collateral Agreement by the Registrant and
certain of its Subsidiaries in favor of Kojaian Funding, L.L. C., as
Lender, dated as of May 9, 2003.
4.9 Copy of Security Agreement by the Registrant in favor of Kojaian
Funding, L.L. C., as Lender, dated as of May 9, 2003.
4.10 Copy of Subordination Agreement executed by Kojaian Funding, L.L.C. in
favor of Bank of America, as Agent, and the Lenders, dated as of May 9,
2003.
4.11 Copy of Side Letter Agreement executed by the Registrant, dated as of
May 9, 2003.
4.12 Copy of Side Letter Agreement executed by the Registrant, dated as of
May 9, 2003.
(10) MATERIAL CONTRACTS
10.1* Separation Agreement entered into between Barry M. Barovick and the
Registrant dated March 14, 2003, incorporated herein by reference to
Exhibit 3 to the Registrant's Current Report on Form 8-K filed on March
27, 2003.
10.2* Separation Agreement entered into between Ian Y. Bress and the
Registrant dated February 28, 2003, incorporated herein by reference to
Exhibit 4 to the Registrant's Current Report on Form 8-K filed on March
27, 2003.
10.3* Separation Agreement entered into between Robert J. Walner and the
Registrant dated March 10, 2003.
10.4* Employment Agreement entered into between Brian D. Parker and the
Registrant dated March 1, 2003, incorporated herein by reference to
Exhibit 5 to the Registrant's Current Report on Form 8-K filed on March
27, 2003.
23
10.5 Transition Agreement entered into as of April 1, 2003, portions of
which were omitted pursuant to a request for Confidential Treatment
under Rule 24(b) of the Securities Act of 1934, as amended,
incorporated herein by reference to Exhibit 2 to the Registrant's
Current Report on Form 8-K filed on April 16, 2003.
*Management contract or compensatory plan or arrangement.
(99) OTHER INFORMATION
99.1 SARBANES-OXLEY ACT, SECTION 906 CERTIFICATION
99.2 PRESS RELEASE DATED MAY 12, 2003 ISSUED BY THE COMPANY.
(B) REPORTS ON FORM 8-K
A Current Report on Form 8-K dated March 1, 2003, was filed with the
Securities and Exchange Commission on March 27, 2003, reporting under
Item 5 (a) a summary of several executive management changes and
institution of various cost control initiatives, (b) an extension of
the waiver to the Company's amended and restated term loan and
revolving credit facility dated as of December 5, 2000 and (c) the
settlement of a lawsuit filed by an executive officer of the Company in
December 2002 where the Company was named as a defendant and the
lawsuit's dismissal without prejudice.
A Current Report on Form 8-K dated April 1, 2003, was filed with the
Securities and Exchange Commission on April 16, 2003, reporting under
Item 5 the restructuring of the Company's existing Phoenix, Arizona
commercial transaction services business to a newly formed affiliated
entity.
A Current Report on Form 8-K dated May 1, 2003, was filed with the
Securities and Exchange Commission on May 2, 2003, reporting under Item
5 the further extension of the waiver to the Company's amended and
restated term loan and revolving credit facility dated as of December
5, 2000.
24
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
GRUBB & ELLIS COMPANY
(Registrant)
Date: May 20, 2003 /s/ Brian D. Parker
-------------------
Brian D. Parker
Chief Financial Officer and
acting in capacity of co-Chief Executive Officer
25
CERTIFICATIONS
I, Maureen Ehrenberg, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Grubb & Ellis
Company;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a. designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b. evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
c. presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of the registrant's board of directors (or persons performing the
equivalent function):
a. all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b. any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: May 20, 2003
/s/ Maureen Ehrenberg
---------------------
Maureen Ehrenberg
Executive Vice President
acting in capacity of co-Chief Executive Officer
26
CERTIFICATIONS
I, Richard L. Fulton, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Grubb & Ellis
Company;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a. designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b. evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
c. presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of the registrant's board of directors (or persons performing the
equivalent function):
a. all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b. any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: May 20, 2003
/s/ Richard L. Fulton
---------------------
Richard L. Fulton
Executive Vice President
acting in capacity of co-Chief Executive Officer
27
CERTIFICATIONS
I, Robert Osbrink, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Grubb & Ellis
Company;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a. designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b. evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
c. presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of the registrant's board of directors (or persons performing the
equivalent function):
a. all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b. any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: May 20, 2003
/s/ Robert Osbrink
------------------
Robert Osbrink
Executive Vice President
acting in capacity of co-Chief Executive Officer
28
CERTIFICATIONS
I, Brian D. Parker, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Grubb & Ellis
Company;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a. designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b. evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
c. presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of the registrant's board of directors (or persons performing the
equivalent function):
a. all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b. any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: May 20, 2003
/s/ Brian D. Parker
-------------------
Brian D. Parker
Chief Financial Officer and
acting in capacity of co-Chief Executive Officer
29
GRUBB & ELLIS COMPANY
EXHIBIT INDEX
FOR THE QUARTER ENDED MARCH 31, 2003
EXHIBITS
(4) INSTRUMENTS DEFINING THE RIGHTS OF SECURITY HOLDERS,
INCLUDING INDENTURES
4.7 Promissory Note in the principal amount of $4,000,000 dated May 9, 2003
issued by the Registrant to Kojaian Funding, L.L.C.
4.8 Guarantee and Collateral Agreement by the Registrant and certain of its
Subsidiaries in favor of Kojaian Funding, L.L.C., as Lender, dated as
of May 9, 2003
4.9 Security Agreement by the Registrant in favor of Kojaian Funding,
L.L.C., as Lender, dated as of May 9, 2003
4.10 Subordination Agreement executed by Kojaian Funding, L.L.C. in favor of
Bank of America, as Agent, and the Lenders, dated as of May 9, 2003
4.11 Side Letter Agreement executed by the Registrant, dated as of May 9,
2003
4.12 Side Letter Agreement executed by the Registrant, dated as of May 9,
2003
(10) MATERIAL CONTRACTS
10.3 Separation Agreement entered into between Robert J. Walner and the
Registrant, dated March 10, 2003.
(99) OTHER INFORMATION
99.1 Sarbanes-Oxley Act, Section 906 Certification
99.2 Press Release dated May 12, 2003 issued by the Company.
30