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, 2000
---------------------
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
-----------------------------------------
(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
--- ---
19,969,824
--------------------------------------------------
(Number of shares outstanding of the registrant's
common stock at January 19, 2001.)
1
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,
2000 2000
------------ --------
Current assets:
Cash and cash equivalents $ 65,034 $ 17,862
Services fees receivable, net 16,777 17,060
Other receivables 3,593 3,416
Prepaids and other current assets 4,553 4,477
Deferred tax assets, net 932 1,132
-------- --------
Total current assets 90,889 43,947
Noncurrent assets:
Equipment, software and leasehold improvements, net 21,514 20,501
Goodwill, net 26,896 29,559
Deferred tax assets, net 2,581 3,133
Other assets 5,544 6,095
-------- --------
Total assets $147,424 $103,235
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 12,384 $ 9,554
Acquisition indebtedness - 519
Accrued compensation and employee benefits 22,746 14,316
Deferred commissions payable 25,666 1,097
Other accrued expenses 7,916 6,578
-------- --------
Total current liabilities 68,712 32,064
Long-term liabilities:
Accrued claims and settlements 9,049 8,741
Other liabilities 989 810
-------- --------
Total liabilities 78,750 41,615
-------- --------
Stockholders' equity:
Common stock, $.01 par value: 50,000,000 shares
authorized; issued and outstanding 19,934,622 at
December 31, 2000 and 19,810,894 shares at
June 30, 2000 199 198
Additional paid-in-capital 113,986 113,399
Retained earnings (deficit) (45,511) (51,977)
-------- --------
68,674
Total stockholders' equity 61,620
-------- --------
Total liabilities and stockholders' equity $147,424 $103,235
======== ========
See notes to condensed consolidated financial statements.
3
GRUBB & ELLIS COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except share data)
(unaudited)
For the three months For the six months
ended December 31, ended December 31,
-------------------------- ----------------------
2000 1999 2000 1999
----------- ----------- ---------- ---------
Revenue:
Advisory services fees $ 124,688 $ 100,321 $ 215,685 $ 180,653
Management services fees 15,776 16,966 31,146 31,835
----------- ----------- ---------- ----------
Total revenue 140,464 117,287 246,831 212,488
----------- ----------- ---------- ----------
Costs and expenses:
Services commissions 82,129 62,279 139,804 109,976
Salaries, wages and benefits 25,840 24,443 50,635 48,232
Selling, general and administrative 18,145 17,949 35,252 33,856
Depreciation and amortization 2,870 2,799 5,746 5,097
Impairment and other non-recurring expenses 2,886 - 2,886 -
----------- ------------ ---------- ----------
Total costs and expenses 131,870 107,470 234,323 197,161
----------- ------------ ---------- ----------
Total operating income 8,594 9,817 12,508 15,327
Other income and expenses:
Interest and other income 674 287 1,100 538
Interest expense (49) (101) (79) (293)
----------- ------------ ---------- ----------
Income before income taxes 9,219 10,003 13,529 15,572
Provision for income taxes (4,865) (4,312) (6,657) (6,540)
----------- ------------ ---------- ----------
Income before extraordinary item 4,354 5,691 6,872 9,032
Extraordinary loss on extinguishment of
debt, net of tax (406) - (406) -
----------- ------------ ---------- ----------
Net income $ 3,948 $ 5,691 $ 6,466 $ 9,032
=========== ============ ========== ==========
Net income per common share:
Basic -
- from operations $ .22 $ .29 $ .35 $ .46
- from extraordinary loss (.02) - (.02) -
----------- ------------ ---------- ----------
$ .20 $ .29 $ .33 $ .46
=========== ============ ========== ==========
Diluted -
- from operations $ .21 $ .27 $ .33 $ .43
- from extraordinary loss (.02) - (.02) -
----------- ------------ ---------- ----------
$ .19 $ .27 $ .31 $ .43
=========== ============ ========== ==========
Weighted average common shares outstanding:
Basic - 19,922,320 19,764,149 19,889,120 19,822,359
=========== ============ ========== ==========
Diluted - 20,878,998 21,063,369 20,949,314 21,082,347
=========== ============ ========== ==========
See notes to condensed consolidated financial statements.
4
GRUBB & ELLIS COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited - in thousands)
For the six months
ended December 31,
-------------------
2000 1999
------- ------
Cash Flows from Operating Activities:
Net income $ 6,466 $ 9,032
Deferral of payment of commission expense 24,569 17,156
Depreciation and amortization expense 5,746 5,097
Impairment of goodwill 2,150 -
Extraordinary loss, net of tax 406 -
Accrued compensation and other benefits 8,430 4,616
Other adjustments to reconcile net income to net cash
provided by operating activities 3,498 1,657
-------- --------
Net cash provided by operating activities 51,265 37,558
-------- --------
Cash Flows from Investing Activities:
Purchase of equipment, software and leasehold
improvements (4,161) (4,767)
Cash paid for business acquisitions, net of
cash acquired - (861)
Other investing activities - (1,500)
-------- --------
Net cash used in investing activities (4,161) (7,128)
-------- --------
Cash Flows from Financing Activities:
Repayment of acquisition indebtedness (519) (1,743)
Repayment of credit facility indebtedness - (10,000)
Borrowings on credit facility - 3,500
Repurchase of common stock - (1,608)
Other financing sources (uses) 587 (349)
-------- --------
Net cash provided by (used in) investing activities 68 (10,200)
-------- --------
Net increase in cash and cash equivalents 47,172 20,230
Cash and cash equivalents at beginning of period 17,862 5,500
-------- --------
Cash and cash equivalents at end of period $65,034 $ 25,730
======== ========
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 and
controlled partnerships (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, 2000.
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.
Operating results for the six months ended December 31, 2000 are not necessarily
indicative of the results that may be achieved in future periods.
In December 1999, the Securities and Exchange Commission ("SEC") staff issued
Staff Accounting Bulletin ("SAB") No. 101, "Revenue Recognition," which
summarized the SEC staff's views regarding the recognition and reporting of
revenues in financial statements and requires companies to comply with the SAB
not later than the fourth fiscal quarter of the fiscal year beginning after
December 15, 1999, which for the Company would be the quarter ending June 30,
2001. Based upon current estimates, the Company would record a charge to income
of approximately $5.3 million, before applicable taxes, representing the
cumulative change as of July 1, 2000. The adoption and implementation of SAB
101 will impact the timing of leasing revenue recognition as the Company will be
precluded from recognizing revenue when contingencies exist that could affect
the Company's contractual right to collect commissions pursuant to the
respective commission or lease agreements. The contingencies generally relate
to the performance of third parties to the fee arrangement, such as a tenant's
future occupancy or the commencement of rental payments by the tenant. Although
the adoption of SAB 101 may impact the period in which leasing transaction
revenues are recognized, it is not expected to impact the timing of the
Company's cash flow from operations. The Company has not completed its analysis
of the impact of SAB 101 for periods subsequent to June 30, 2000.
6
GRUBB & ELLIS COMPANY
Notes to Condensed Consolidated Financial Statements
2. Income Taxes
The provision for income taxes for the six months ended December 31, 2000 and
1999 is as follows (in thousands):
For the six months ended
December 30,
------------------------
2000 1999
----------- ----------
Current $ 5,905 $ 2,802
Deferred 752 3,738
----------- ----------
$ 6,657 $ 6,540
=========== ==========
The Company's effective tax rate for financial statement purposes increased for
the six months ended December 31, 2000 due to the non-deductible nature of the
write-off of goodwill related to the acquisition of White Commercial Real
Estate.
3. Earnings Per Share
The following table sets forth the computation of basic and diluted earnings per
share (in thousands, except per share data):
Three months ended Six months ended
December 31, December 31,
----------------------------- ----------------------------
2000 1999 2000 1999
------------- ------------- ------------- -------------
Net income $ 3,948 $ 5,691 $ 6,466 $ 9,032
============= ============= ============= =============
Basic earnings per share:
Weighted average common shares outstanding 19,922 19,764 19,889 19,822
============= ============= ============= =============
Earnings per share - basic $ .20 $ .29 $ .33 $ .46
============= ============= ============= =============
Diluted earnings per share:
Weighted average common shares outstanding 19,922 19,764 19,889 19,822
Effect of dilutive securities:
Stock options and warrants 957 1,299 1,060 1,260
------------- ------------- ------------- -------------
Weighted average dilutive common shares outstanding 20,879 21,063 20,949 21,082
============= ============= ============= =============
Earnings per share - diluted $ .19 $ .27 $ .31 $ .43
============= ============= ============= =============
7
GRUBB & ELLIS COMPANY
Notes to Condensed Consolidated Financial Statements
4. Segment Information
The Company has two reportable segments - Advisory Services and Management
Services, and evaluates segment performance and allocates resources based on
earnings before interest expense, taxes, depreciation and amortization, and
other non-recurring expenses ("EBITDA") (amounts in thousands).
Advisory Management Company
Services Services Total
------------------- ------------------ ------------------
Six months ended December 31, 2000
Total revenue $ 215,685 $ 31,146 $ 246,831
EBITDA 20,037 2,203 22,240
Total assets as of December 31, 2000 121,678 25,746 147,424
Six months ended December 31, 1999
Total revenue $ 180,653 $ 31,835 $ 212,488
EBITDA 19,102 1,860 20,962
Total assets as of December 31, 1999 78,766 25,016 103,782
Reconciliation of Segment EBITDA to Income Before Income Taxes
Six months ended
December 31,
---------------------------------------
2000 1999
---------------- ----------------
Total segment EBITDA $ 22,240 $ 20,962
Less:
Depreciation and amortization 5,746 5,097
Non-recurring expenses 2,886 -
Interest expense 79 293
---------------- ----------------
Income before income taxes
$ 13,529 $ 15,572
================ ================
8
GRUBB & ELLIS COMPANY
Notes to Condensed Consolidated Financial Statements
5. Credit Facility Debt
Effective December 31, 2000, the Company entered into an amended and restated
credit agreement ("Credit Agreement") arranged by Bank of America, N.A.
("BofA"), which revised certain terms and provisions of its prior credit
facility. The Credit Agreement provides for a $40 million term loan to be used
to fund a portion of the self tender offer completed by the Company effective
January 24, 2001, along with a $15 million revolving credit facility for working
capital purposes. The term loan facility was funded on January 24, 2001, with
the revolving credit facility remaining fully available as of February 14, 2001.
Interest on outstanding borrowings is due quarterly in arrears and is based upon
BofA's prime rate and/or the LIBOR rate plus, in either case, an additional
margin based upon a particular financial leverage ratio of the Company, and will
vary depending upon which interest rate options the Company chooses to be
applied to specific borrowings. The term loan facility amortizes on a quarterly
basis, totaling $8 million each year, until December 31, 2005 when both
facilities mature. Certain other mandatory prepayment provisions related to the
operating cash flows of the Company and receipts of certain debt, equity and/or
sales proceeds also exist within the agreement.
Direct expenses related to the Credit Agreement amendment totaling approximately
$560,000 have been recorded as deferred financing fees and will be amortized on
a straight-line basis over the term of the agreement. Unamortized fees related
to the prior agreement, totaling approximately $406,000, net of applicable taxes
of approximately $207,000, were written off concurrently with the effective date
of the amendment and have been recorded as an extraordinary loss in accordance
with accounting principles generally accepted in the United States.
The Credit Agreement also requires the Company to enter into interest rate
protection agreements, in forms and amounts acceptable to BofA as administrative
agent, within 90 days of the date of the agreement, effectively fixing the
interest rates on not less than 50% of the aggregate principal amount of the
term loan scheduled to be outstanding for a period of not less than three years.
The initial fair value of these instruments will be determined once the Company
enters into the agreements. As of the date of this report, no such agreements
have been executed.
The Credit Agreement is collateralized by substantially all of the Company's
assets and contains certain restrictive covenants, including, among other
things: restrictions on the payment of dividends, the redemption or repurchase
of capital stock, acquisitions, investments and loans; and the maintenance of
certain financial ratios.
9
GRUBB & ELLIS COMPANY
Notes to Condensed Consolidated Financial Statements
6. Impairment and Other Non-recurring Expenses
In accordance with Financial Accounting Standards No. 121 "Accounting for the
Impairment of Long Lived Assets and for Long Lived Assets to be Disposed of",
the net carrying value of goodwill is reviewed by management if facts and
circumstances suggest that an impairment may exist. Such an impairment was
identified related to the remaining goodwill associated with the April 1998
acquisition of White Commercial Real Estate. The Company believes that the
future estimated undiscounted cash flows of this operation are not sufficient to
support the carrying value of such goodwill, and have written off the remaining
asset totaling $2,150,000, and recorded such charge to other non-recurring
expenses within the accompanying Condensed Consolidated Statements of Income.
The Company also incurred other non-recurring expenses totaling $736,000,
primarily professional services fees, related to its recent review of strategic
initiatives, including potential acquisitions, sales and mergers.
7. Commitments and Contingencies
Litigation:
John W. Matthews, et al. v Kidder, Peabody & Co., et al. and HSM Inc., et al.,
filed on January 23, 1995 in the United States District Court for the Western
District of Pennsylvania, is a class action on behalf of approximately 6,000
limited partners who invested approximately $85 million in three public real
estate limited partnerships (the "Partnerships") during the period beginning in
1982 and continuing through 1986. The defendants include HSM Inc., a wholly-
owned subsidiary of the Company, and several subsidiaries of HSM Inc., along
with other parties unrelated to HSM Inc. The complaint alleges violation under
the Racketeer Influenced and Corrupt Organizations Act ("RICO"), securities
fraud, breach of fiduciary duty and negligent misrepresentation surrounding the
defendants' organization, promotion, sponsorship and management of the
Partnerships. Specific damages were not pled, but treble, punitive as well as
compensatory damages and restitution were sought. Following the court's
dismissal of the complaint by Partnerships I and III due to the plaintiff's lack
of standing, in September 1996, the district court granted plaintiff's motion to
file an amended complaint to add additional plaintiffs, and granted plaintiffs'
motion for class certification with respect to Partnerships I, II and III.
Plaintiffs then filed an amended complaint adding new party plaintiffs in order
to preserve claims relating to Partnerships I and III. The case was stayed in
September 1996, pending the outcome of defendants' subsequent appeal to the
United States Court of Appeals for the Third Circuit on the question of the
applicability of the Private Securities Litigation Reform Act of 1995 (the
"Securities Litigation Reform Act") to the case. The Third Circuit Court of
Appeals entered an order in November 1998 holding that the Securities Litigation
Reform Act was not applicable to this case and that plaintiffs may proceed with
their RICO claims against the defendants. Defendants filed a petition for writ
of certiorari with the United States Supreme Court appealing the Third Circuit's
decision, which was denied on April 19, 1999.
10
GRUBB & ELLIS COMPANY
Notes to Condensed Consolidated Financial Statements
7. Commitments and Contingencies (continued)
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 have appealed to the Third Circuit Court of Appeals and briefs
have been filed.
The Company has, and intends to continue to, vigorously defend the Matthews
action, and believes it has meritorious defenses to contest the claims asserted
by the plaintiffs. Based upon available information, the Company is not able to
determine the financial impact, if any, of such action, but believes that the
outcome will not have a material adverse effect on the Company's financial
position or results of operations.
Environmental:
A corporate subsidiary of the Company owns a 33% interest in a general
partnership, which in turn owns property in the State of Texas which is the
subject of an environmental assessment and remediation effort, due to the
discovery of certain chemicals related to a release of dry cleaning solvents in
the soil and groundwater of the partnership's property and adjacent properties.
Prior assessments had determined that minimal costs would be incurred to correct
the situation. However, 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 to agree upon an appropriate remediation plan and implementation
schedule. 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.
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.
8. Subsequent Event - Self Tender Offer
On December 15, 2000, the Company commenced a cash self tender offer to purchase
up to 7.0 million shares of its outstanding common stock at a price of $7 per
share. Shares issuable upon the exercise of outstanding stock options and
warrants were also eligible for the buyback. On January 25, 2001 the Company
announced the expiration of the offer period, pursuant to which approximately
19.6 million shares were tendered.
11
GRUBB & ELLIS COMPANY
Notes to Condensed Consolidated Financial Statements
8. Subsequent Event - Self Tender Offer (continued)
The Company subsequently transferred $49 million in funds to the depositary
agent for disbursement to the shareholders of record, to buy back and
concurrently retire 7.0 million shares of common stock at $7 per share,
including 281,901 shares from options exercised by option holders.
Holders of the Company's outstanding stock warrants chose not to exercise such
warrants or tender any underlying shares. The tender offer was financed through
a $40 million term loan (see Note 5 of Notes to Condensed Consolidated Financial
Statements) and $9 million of the Company's cash reserves. Direct expenses
related to the tender offer will be charged to stockholders' equity during the
quarter ending March 31, 2001.
The option exercises, and the subsequent repurchase of the resulting shares by
the Company through the completion of the tender offer, will result in non-
recurring compensation expense of approximately $1.0 million to the Company
during the quarter ending March 31, 2001. APB Opinion No. 25, Accounting for
Stock Issued to Employees, and related interpretations require that compensation
expense be recognized to the extent that the fair value of stock repurchased by
a company exceeds the exercise price of the underlying option, whenever such
purchases are made within six months of the option exercise date.
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 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
increased debt level and its ability to make principal and interest payments,
(iv) expenses or capital requirements related to initiatives, investments in
personnel and technology, and service improvements, (v) the success of new
initiatives and investments, (vi) the ability of the Company to 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, 2000.
RESULTS OF OPERATIONS
Revenue
The Company's revenue is derived principally from advisory services fees related
to commercial real estate, which include commissions from leasing, acquisition
and disposition transactions as well as fees from valuation, consulting and
asset management assignments. Management services fees comprise the remainder of
the Company's revenues, and include fees related to both property and facilities
management outsourcing, engineering and construction management services,
business services and agency leasing.
Revenue in any given quarter during the three fiscal year period ended June 30,
2000, as a percentage of total annual revenue, ranged from a high of 31.4% to a
low of 19.1%, with revenue earned in the second quarters of each of the last
three fiscal years ranging from 28.3% to 31.4%. 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, 2000 was $246.8 million, an
increase of 16.2% over revenue of $212.5 million for the same period last year.
This improvement related to a $35.0 million increase in advisory services fees
in the current six months over the same period in 1999 as a result of increased
real estate transaction activity in certain technology markets, the Company's
multi-market relationships, larger assignments and the continuing increase in
average production per professional. Management service fees decreased to $31.1
million during the six months ended December 31, 2000 as compared to $31.8
million in the prior year. New business revenue gained during the six months was
offset due to the Company resigning a marginally profitable account, which had
generated approximately $3.0 million in revenue annually, as well as
13
reduced business services fees resulting from lower demand for outsourced
reprographics from large corporate clients.
Total revenue for the quarter ended December 31, 2000 was $140.5 million, an
increase of 19.8% over revenue of $117.3 million for the same period last year.
Advisory services fees increased $24.4 million 13 or 24.3% over the prior year
period, while management services fees decreased by $1.2 million, or 7.0%.
Costs and Expenses
Advisory services commission expense is the Company's largest expense and is a
direct function of gross transaction revenue levels, which include advisory
service commissions and other fees. Professionals participate in advisory
services fees at rates which increase upon achievement of certain levels of
production. As a percentage of gross transaction revenue, related commission
expense increased to 64.8% from 60.9% for the six months ended December 31, 2000
as compared to the same period in 1999, and increased to 65.9% from 62.1% for
the respective quarters ended December 31 in the same periods. Unusually high
average commission expense has been incurred in flourishing technology markets
such as Silicon Valley, San Francisco, Denver, Washington D.C. and New York, and
has resulted from strong incremental revenue growth in these markets and the
commensurately high production per professional, rather than changes to the
existing compensation structure of the Company's advisory professionals.
Salaries, wages and benefits increased by $2.4 million or 5.0% in the six months
ended December 31, 2000 as compared to December 31, 1999, while selling, general
and administrative expenses increased by $1.4 million, or 4.1%, for the same
period. For the quarter ended December 31, 2000, salaries, wages and benefits
increased by $1.4 million or 5.7% as compared to the same period in the prior
year, while selling, general and administrative expense were relatively flat for
the same periods. The rise in these operating costs is attributable partially
to the operating and integration costs associated with Landauer Associates,
Inc., acquired in the first quarter of fiscal year 2000, along with additional
costs and expenses required to support the overall revenue growth of the
Company.
Depreciation and amortization expense for the six months ended December 31, 2000
increased to $5.7 million from $5.1 million in the comparable period last year,
as the Company placed in service numerous technology infrastructure improvements
during the first half of fiscal year 2000. The Company also holds multi-year
service contracts with certain key advisory professionals for which cash
payments were made to the professional upon signing. These costs are being
amortized over the lives of the respective contracts, which are generally two to
three years. Amortization expense relating to these contracts of $1.4 million
was recognized in the six months ended December 31, 2000, respectively, compared
to $1.0 million for the same period in the prior year.
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. See Note 6 of Notes to Condensed Consolidated Financial Statements for
additional information.
Interest and other income increased during the three and six month periods
ending December 31, 2000 as compared to the same periods in the prior year as a
result of higher cash investments resulting from improved operations along with
a reduction in the Company's outstanding debt.
14
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.
Net Income
Net income for the six months ended December 31, 2000 was $6.5 million, or $0.31
per common share on a diluted basis, as compared to net income of $9.0 million,
or $.43 per common share for the same period in 14 fiscal year 2000. For the
quarter ended December 31, 2000, net income was $3.9 million, or $0.19 per
common share on a diluted basis, as compared to net income of $5.7 million or
$0.27 per common share for the same period in fiscal year 2000. The decrease in
net income for the quarter and six month period was primarily due to non-
recurring and extraordinary items totaling $3.0 million on a tax effected basis,
or $0.14 per diluted common share, and was partially offset by improved net
operating income and net interest income earned for the periods.
LIQUIDITY AND CAPITAL RESOURCES
The Company generated cash flow from operations of $51.3 million, of which $4.2
million was used in investing activities, primarily for purchases of equipment,
software and leasehold improvements. Financing activities for the period were
minimal, as the Company repaid its remaining acquisition debt and received net
proceeds from stock option and employee stock purchase plan activities. Working
capital also increased by $10.3 million during the six months ended December 31,
2000.
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 commissions balances of approximately $25.7
million, related to revenues earned in calendar year 2000, were paid in the
quarter ending March 31, 2001.
On December 15, 2000, the Company commenced a cash self tender offer ("Offer")
to purchase up to 7.0 million shares of its outstanding common stock at a price
of $7 per share. On January 25, 2001 the Company announced the completion of
the Offer period, and subsequently transferred $49 million in funds to the
depositary agent for disbursement to the shareholders of record. The Offer was
funded with $9 million of the Company's cash reserves and a $40 million term
loan borrowed under an amended and restated credit agreement ("Credit
Agreement") arranged by Bank of America, N.A. ("BofA"), which revised certain
terms and provisions of its prior credit facility. The Credit Agreement also
provides a $15 million revolving credit facility for working capital purposes.
The term loan facility was funded on January 24, 2001, and amortizes on a
quarterly basis, totaling $8 million each year, until December 31, 2005 when
both facilities mature. The revolving credit facility remains fully available
as of the date of this report. Certain other mandatory prepayment provisions
related to the receipt by the Company of certain debt, equity and/or sales
proceeds also exist within the Credit Agreement.
Additional direct expenses related to the Offer will be charged to stockholders'
equity during the quarter ending March 31, 2001, as incurred. Direct expenses
related to the Credit Agreement totaling approximately $560,000 have been
recorded as deferred financing fees and will be amortized over the term of the
agreement.
15
The Credit Agreement also requires the Company to enter interest rate protection
agreements, within 90 days of the date of the agreement, effectively fixing the
interest rates on not less than 50% of the aggregate principal amount of the
term loan scheduled to be outstanding for a period of not less than three years.
Certain provision variances between these requirements and the underlying term
loan will likely result in the agreements being characterized as ineffective
under the definitions included within Statement of Financial Accounting
Standards No. 133, "Accounting for Derivative Instruments and Hedging
Activities". This characterization will likely result in a more volatile
earnings impact in future periods, as the Company will be required to recognize
changes in the fair value of the instruments within its earnings statements for
the period being presented. The initial fair value of these instruments will be
determined once the Company enters into the agreements. As of the date of this
report, no such agreements have been executed.
See Notes 5 and 8 of Notes to Condensed Consolidated Financial Statements for
additional information pertaining to the Offer and Credit Agreement.
In August 1999 the Company announced a program through which it may purchase up
to $3 million of its common stock on the open market from time to time as market
conditions warrant. As of December 31, 2000 the Company had repurchased 359,900
shares at a total cost of approximately $2.0 million. No shares were
repurchased under this program during the six months ended December 31, 2000.
The Company believes that its short-term and long-term operating cash
requirements will be met by operating cash flow. In addition, the Company's
credit facility is available for additional capital needs. In the event of
adverse economic conditions or other unfavorable events, and to the extent that
the Company's cash requirements are not met by operating cash flow or borrowings
under its credit facility, the Company may find it necessary to reduce
expenditure levels or undertake other actions as may be appropriate under the
circumstances.
Although the current market conditions have limited opportunities for short-term
accretive acquisitions, the Company continues to explore additional strategic
acquisition opportunities that have the potential to broaden its geographic
reach, increase its market share and/or expand the depth and breadth of its
current line of business. 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.
16
PART II
OTHER INFORMATION
(Items 3 and 5 are not applicable
for the quarter ended December 31, 2000)
17
Item 1. Legal Proceedings
-----------------
The disclosure called for by Item 1 is incorporated by reference to Note 7 of
Notes to Condensed Consolidated Financial Statements.
Item 2. Changes in Securities
---------------------
(b) Effective December 31, 2000, the Company amended and restated its secured
credit agreement with Bank of America, N.A. as Administrative Agent and a
lender, and certain other lenders (the "Credit Agreement"), providing for a
credit facility of up to $55 million. The term of the Credit Agreement extends
until December 2005. As security for the facility, the lenders have a security
interest in the majority of the assets of the Company and its primary
subsidiaries. In addition, the material subsidiaries of the Company have
guaranteed repayment of any amounts borrowed under the facility. Pursuant to the
provisions of the Credit Agreement, the Company is prohibited from the payment
of dividends or other repurchases, redemption or distributions with respect to
its capital stock, other than dividends, redemption or other distributions
payable in common stock with the same economic and voting rights as the
currently outstanding common stock; and the Company may repurchase shares for
cash in the amount of $2 million during the term of the agreement. There are
also restrictions on indebtedness, liens, guarantees, loans, investments,
acquisitions, and dispositions of assets. The financial covenants applicable
during the term of the Credit Agreement include maintaining a) a ratio of debt
to EBITDA of no more than i) 2.00 to 1.00 during calendar year 2001, ii) 1.75 to
1.00 during calendar year 2002, and iii) 1.50 to 1.00 at any time thereafter; b)
a ratio of EBITDA to the sum of interest expense, income taxes, debt service,
capital expenditures and earnout payments of at least 1.10 to 1.00 at all times,
and c) minimum EBITDA of $31,000,000 for the period of four consecutive fiscal
quarters ending on the last day of any fiscal quarter.
Item 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
The 2000 annual meeting of stockholders of the Company was held on November 16,
2000. 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:
Shares Withholding
Nominee Shares For Authority
- ------- ---------- ---------
R. David Anacker 18,064,307 660,350
Joe F. Hanauer 18,064,403 660,254
C. Michael Kojaian 18,064,509 660,148
Reuben S. Leibowitz 18,063,593 661,064
Ian C. Morgan 18,061,196 663,461
Robert J. McLaughlin 18,064,191 660,466
Todd A. Williams 18,063,137 661,520
There were no broker non-votes with respect to any of the nominees for director.
The votes cast for, against, abstained and broker non-votes with respect to the
Grubb & Ellis 2000 Stock Option Plan were as follows: 15,143,126 shares for,
2,178,040 shares against, 16,945 shares abstained, and 1,386,546 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
18
Shares of Junior Convertible Preferred Stock of Grubb & Ellis Company,
filed with the Delaware Secretary of State on January 22, 1997,
incorporated herein by reference to Exhibit 3.4 to the Registrant's
Quarterly Report on Form 10-Q filed on February 13, 1997 (Commission File
No. 1-8122).
3.4 Grubb & Ellis Company Bylaws, as amended and restated effective 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 (Commission File
No. 1-8122).
(4) Instruments Defining the Rights of Security Holders, including Indentures
4.1 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, incorporated herein
by reference to Exhibit (b)(1) to the Registrant's Amendment No. 2 to
Tender Offer Statement on Schedule TO/A filed on January 10, 2001
(Commission File No. 1-8122).
4.2 Note executed by the Registrant in favor of Bank of America, N.A. dated as
of December 31, 2000, incorporated herein by reference to Exhibit (b)(2)
to the Registrant's Amendment No. 2 to Tender Offer Statement on Schedule
TO/A filed on January 10, 2001 (Commission File No. 1-8122).
4.3 Note executed by the Registrant in favor of LaSalle Bank National
Association dated as of December 31, 2000, incorporated herein by
reference to Exhibit (b)(3) to the Registrant's Amendment No. 2 to
Tender Offer Statement on Schedule TO/A filed on January 10, 2001
(Commission File No. 1-8122).
4.4 Note executed by the Registrant in favor of American National Bank and
Trust Company of Chicago dated as of December 31, 2000, incorporated
herein by reference to Exhibit (b)(4) to the Registrant's Amendment No. 2
to Tender Offer Statement on Schedule TO/A filed on January 10, 2001
(Commission File No. 1-8122).
4.5 Swingline Loan Note executed by the Registrant in favor of Bank of
America, N.A. in the amount of $2,000,000 dated as of December 31, 2000,
incorporated herein by reference to Exhibit (b)(5) to the Registrant's
Amendment No. 2 to Tender Offer Statement on Schedule TO/A filed on
January 10, 2001 (Commission File No. 1-8122).
(10) Material Contracts
10.1 Separation Agreement entered into between Steven D. Scruggs and Grubb &
Ellis Company dated as of September 12, 2000.
10.2 Grubb & Ellis Company 2000 Stock Option Plan, effective as of November
16, 2000.
10.3 Pledge Agreement between Landauer Realty Group, Inc. and Bank of America,
N.A., as Administrative Agent, dated as of December 31, 2000.
10.4 Pledge Agreement between the Registrant and Bank of America, N.A., as
Administrative Agent, dated as of October 15, 1999, incorporated herein by
reference to Exhibit 10.1 to the Registrant's Quarterly Report on Form
10-Q filed on November 12, 1999 (Commission File No. 1-8122).
10.5 Pledge Agreement between Grubb & Ellis Management Services, Inc. and Bank
of America, N.A., as Administrative Agent, dated as of October 15, 1999
incorporated herein by reference to Exhibit 10.2 to the Registrant's
Quarterly Report on Form 10-Q filed on November 12, 1999 (Commission File
No. 1-8122).
10.6 Pledge Agreement between HSM Inc. and Bank of America, N.A., as
Administrative Agent, dated as of October 15, 1999 incorporated herein by
reference to Exhibit 10.3 to the Registrant's Quarterly Report on Form
10-Q filed on November 12, 1999 (Commission File No. 1-8122).
10.7 Guarantee and Collateral Agreement by the Registrant and certain of its
Subsidiaries in favor of Bank of America, N.A., as Administrative Agent,
dated as of October 15, 1999 incorporated herein by reference to Exhibit
10.4 to the Registrant's Quarterly Report on Form 10-Q filed on November
12, 1999 (Commission File No. 1-8122).
10.8 Collateral Trademark Security Agreement by the Registrant in favor of Bank
of America, N.A., as Administrative Agent, dated as of October 15, 1999
incorporated herein by reference to Exhibit 10.5 to the Registrant's
Quarterly Report on Form 10-Q filed on November 12, 1999 (Commission File
No. 1-8122).
(b) Reports on Form 8-K
-------------------
None.
19
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, 2001
/s/ Blake W. Harbaugh
----------------------
Blake W. Harbaugh
Senior Vice President and
Chief Financial Officer
20
Grubb & Ellis Company
EXHIBIT INDEX
for the quarter ended December 31, 2000
---------------------------------------
Exhibits
- --------
(10) Material Contracts
10.1 Separation Agreement entered into between Steven D. Scruggs and Grubb &
Ellis Company dated as of September 12, 2000.
10.2 Grubb & Ellis Company 2000 Stock Option Plan, effective as of
November 16, 2000.
10.3 Pledge Agreement between Landauer Realty Group, Inc. and Bank of America,
N.A., as Administrative Agent, dated as of December 31, 2000.
21