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, 2001
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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
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GRUBB & ELLIS COMPANY
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(Exact name of registrant as specified in its charter)
Delaware 94-1424307
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(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 ___
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13,318,115
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(Number of shares outstanding of the registrant's
common stock at April 23, 2001.)
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,
2001 2000
----------- ----------
Current assets:
Cash and cash equivalents $ 11,193 $ 17,862
Services fees receivable, net 27,844 28,896
Other receivables 3,458 3,416
Prepaids and other current assets 6,636 4,477
Deferred tax assets, net 1,037 1,132
-------- --------
Total current assets 50,168 55,783
Noncurrent assets:
Equipment, software and leasehold improvements, net 20,774 20,501
Goodwill, net 26,720 29,559
Deferred tax assets, net 2,871 3,133
Other assets 6,873 6,966
-------- --------
Total assets $107,406 $115,942
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 2,667 $ 2,708
Commissions payable 16,664 18,682
Acquisition indebtedness - 519
Accrued compensation and employee benefits 12,081 14,316
Credit facility debt 8,000 -
Other liabilities 5,568 7,675
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Total current liabilities 44,980 43,900
Long-term liabilities:
Credit facility debt 31,000 -
Accrued claims and settlements 8,966 8,741
Other liabilities 2,296 1,681
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Total liabilities 87,242 54,322
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Stockholders' equity:
Common stock, $.01 par value: 50,000,000 shares
authorized; issued and outstanding 13,265,941 at
March 31, 2001 and 19,810,894 shares at
June 30, 2000 133 198
Additional paid-in-capital 66,619 113,399
Accumulated other comprehensive income (123) -
Retained earnings (deficit) (46,465) (51,977)
-------- --------
Total stockholders' equity 20,164 61,620
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Total liabilities and stockholders' equity $107,406 $115,942
======== ========
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,
------------------------------- ------------------------------
2001 2000 2001 2000
------------- ------------- ------------ ------------
Revenue:
Advisory services fees $ 66,187 $ 76,869 $ 281,872 $ 257,522
Management services fees 14,537 16,698 45,683 48,533
----------- ----------- ----------- -----------
Total revenue 80,724 93,567 327,555 306,055
----------- ----------- ----------- -----------
Costs and expenses:
Services commissions 36,923 43,892 176,727 153,868
Salaries, wages and benefits 24,753 25,761 75,388 73,993
Selling, general and administrative 16,655 16,873 51,907 50,729
Depreciation and amortization 2,949 2,629 8,695 7,726
Impairment and other non-recurring expenses 970 - 3,856 -
----------- ----------- ----------- -----------
Total costs and expenses 82,250 89,155 316,573 286,316
----------- ----------- ----------- -----------
Total operating income (loss) (1,526) 4,412 10,982 19,739
Other income and expenses:
Interest and other income 494 262 1,594 800
Interest expense (613) (88) (692) (381)
----------- ----------- ----------- -----------
Income (loss) before income taxes and
extraordinary item (1,645) 4,586 11,884 20,158
(Provision) benefit for income taxes 691 (1,926) (5,966) (8,466)
----------- ----------- ----------- -----------
Income (loss) before extraordinary item (954) 2,660 5,918 11,692
Extraordinary loss on extinguishment of
debt, net of tax - - (406) -
----------- ----------- ----------- -----------
Net income (loss) $ (954) $ 2,660 $ 5,512 $ 11,692
=========== =========== =========== ===========
Net income (loss) per common share:
Basic -
- from operations $ (.06) $ .14 $ .32 $ .59
- from extraordinary loss - - (.02) -
----------- ----------- ----------- -----------
$ (.06) $ .14 $ .30 $ .59
=========== =========== =========== ===========
Diluted -
- from operations $ (.06) $ .13 $ .31 $ .56
- from extraordinary loss - - (.02) -
----------- ----------- ----------- -----------
$ (.06) $ .13 $ .29 $ .56
=========== =========== =========== ===========
Weighted average common shares outstanding:
Basic - 15,028,181 19,676,369 18,292,462 19,774,590
=========== =========== =========== ===========
Diluted - 15,911,503 20,894,089 19,293,699 21,020,492
=========== =========== =========== ===========
See notes to condensed consolidated financial statements
4
GRUBB & ELLIS COMPANY
CONDENSED CONSOLDATED STATEMENTS OF CASH FLOWS
(unaudited - in thousands)
For the nine months
ended March 31,
---------------------------------
2001 2000
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Cash Flows from Operating Activities: $ 5,512 $ 11,692
Net income 8,695 7,726
Depreciation and amortization expense 2,150 -
Impairment of goodwill 406 -
Extraordinary loss, net of tax
Accrued compensation and other benefits (2,235) 341
Funding of multi-year service contracts (2,298) (1,948)
Other adjustments to reconcile net income to net cash
provided by operating activities (3,377) 186
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Net cash provided by operating activities 8,853 17,997
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Cash Flows from Investing Activities:
Purchase of equipment, software and leasehold (5,457) (6,294)
improvements
Cash paid for business acquisitions, net of cash acquired - (1,112)
Other investing activities - (1,900)
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Net cash used in investing activities (5,457) (9,306)
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Cash Flows from Financing Activities:
Repayment of acquisition debt (519) (2,103)
Repayment of credit facility debt (1,000) (11,000)
Borrowings on credit facility 40,000 3,500
Cash paid to fund self-tender offer (48,752) -
Repurchase of common stock - (1,983)
Other financing sources (uses) 206 (103)
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Net cash used in financing activities (10,065) (11,689)
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Net decrease in cash and cash equivalents (6,669) (2,998)
Cash and cash equivalents at beginning of period 17,862 5,500
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Cash and cash equivalents at end of period $ 11,193 $ 2,502
======== ========
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, including commissions payable of
approximately $18.7 million which had previously been netted against related
commissions receivable. Such reclassifications have not changed previously
reported results of operations or cash flows.
Operating results for the nine months ended March 31, 2001 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 future commission payments 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.
The Financial Accounting Standards Board issued Statement of Financial
Accounting ("SFAS") No. 138 "Accounting for Derivative Instruments and Hedging
Activities" which amends SFAS No. 133, "Accounting for Derivative Instruments
and Hedging Activities." SFAS No. 133, as amended, requires companies to record
derivatives on the balance sheet as assets or liabilities, measured at fair
value. The Company became subject to the requirements of SFAS No. 133 during the
three months ended March 31, 2001, as a result of entering into two interest
rate swaps in conjunction with a new credit agreement. See Note 5 of Notes to
Condensed Consolidated Financial Statements for additional information. SFAS No.
133 may increase or decrease reported net income and stockholders' equity
prospectively, depending on future levels of interest rates, the computed
"effectiveness" of the derivatives, as that term is defined by
6
GRUBB & ELLIS COMPANY
Notes to Condensed Consolidated Financial Statements
1. Interim Period Reporting (continued)
SFAS No. 133, and other variables affecting the fair values of derivative
instruments and hedged items, but will have no effect on cash flows.
2. Income Taxes
The provision for income taxes for the nine months ended March 31, 2001 and 2000
is as follows (in thousands):
For the nine months ended
March 31,
-----------------------
2001 2000
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Current $5,609 $4,266
Deferred 357 4,200
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$5,966 $8,466
======= ======
The Company's effective tax rate for financial statement purposes increased for
the nine months ended March 31, 2001 due to the non-deductible nature of the
write-off of goodwill related to the acquisition of White Commercial Real
Estate.
3. Earnings (Loss) Per Share
The following table sets forth the computation of basic and diluted earnings
(loss) per share (in thousands, except per share data):
Three months ended Nine months ended
March 31, March 31,
----------------------- ---------------------
2001 2000 2001 2000
-------- ------ ------- -------
Net income (loss) $ (954) $ 2,660 $ 5,512 $11,692
======= ======= ======= =======
Basic earnings (loss) per share:
Weighted average common shares outstanding 15,028 19,676 18,292 19,774
======= ======= ======= =======
Earnings (loss) per share - basic $ (.06) $ .14 $ .30 $ .59
======= ======= ======= =======
Diluted earnings (loss) per share:
Weighted average common shares outstanding 15,028 19,676 18,292 19,774
Effect of dilutive securities:
Stock options and warrants 884 1,218 1,002 1,246
------- ------- ------- -------
Weighted average dilutive common shares outstanding 15,912 20,894 19,294 21,020
------- ------- ------- -------
Earnings (loss) per share - diluted $ (.06) $ .13 $ .29 $ .56
======= ======= ======= =======
The dilutive effect of stock options and warrants for the three months ended
March 31, 2001 has been excluded, as their inclusion is anti-dilutive.
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 Totals
--------- ---------- ---------
Nine months ended March 31, 2001
Total revenue $281,872 $45,683 $327,555
EBITDA 22,454 2,673 25,127
Total assets as of March 31, 2001 83,611 23,795 107,406
Nine months ended March 31, 2000
Total revenue $257,522 $48,533 $306,055
EBITDA 24,757 3,508 28,265
Total assets as of March 31, 2000 77,626 23,516 101,142
Reconciliation of Segment EBITDA to Income Before Income Taxes
Nine months ended
March 31,
------------------------
2001 2000
--------- --------
Total segment EBITDA $25,127 $28,265
Less:
Depreciation and amortization 8,695 7,726
Non-recurring expenses 3,856 -
Interest expense 692 381
------- -------
Income before income taxes and
extraordinary item $11,884 $20,158
======= =======
In evaluating segment performance, the Company's management utilizes EBITDA as a
measure of the segment's ability to generate cash flow from its operations.
Other items contained within the measurement of net income, such as interest
expense and taxes, and non-recurring items, are generated and managed at the
corporate administration level rather than the segment level. In addition, net
income measures also include non-cash amounts such as depreciation and
amortization expense.
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 expense and income taxes.
Management believes that EBITDA is relevant because it assists investors in
evaluating the Company's ability to service its debt by providing a commonly
used measure of cash available to pay interest. EBITDA 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.
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 which was
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 May 15,
2001.
Interest on outstanding borrowings 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 average interest rate paid by the Company for the three months ended March
31, 2001 was 7.87%. 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
$545,000 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 $270,000, 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.
Repayment of the Credit Agreement is collateralized by substantially all of the
Company's assets and the Credit Agreement 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 and
minimum EBITDA levels.
The variable interest rate structure of the Credit Agreement exposes the Company
to risks associated with changes in the interest rate markets. Consequently, the
Credit Agreement required 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.
The Company subsequently established risk management policies and procedures to
manage the cost of borrowing obligations, which include the use of interest rate
swap derivatives to fix the interest rate on debt with floating rate indices.
Further, the Company prohibits the use of derivative instruments for trading or
speculative purposes. In March 2001, the Company entered into two interest rate
swap agreements for a three year term, with banks that are parties to the Credit
Agreement. As of March 31, 2001, the swap agreements had a total notional amount
of $19.5 million, with a fixed annual interest rate to be paid by the Company of
5.18%, and a variable rate to be received by the Company equal to three month
LIBOR borrowing rates. 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".
9
GRUBB & ELLIS COMPANY
Notes to Condensed Consolidated Financial Statements
5. Credit Facility Debt (continued)
On March 31, 2001, the derivative instruments were reported at their fair value
of approximately $123,000 in other liabilities in the condensed Consolidated
Balance Sheet. The offsetting amount is reported as a deferred loss in
Accumulated Other Comprehensive Income. The Company's interest rate swaps are
treated as cash flow hedges, which address the risk associated with future cash
flows of debt transactions. Over time, the unrealized gains and losses held in
Accumulated Other Comprehensive Income will be reclassified into earnings in the
same periods in which the hedged interest payments affect earnings.
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 impairment was
identified related to the remaining goodwill associated with the April 1998
acquisition of White Commercial Real Estate. A significant majority of the sales
force terminated their relationship with the Company, and the office was
subsequently closed with the remaining staff relocated to the Oakland,
California office. The Company believed that the future estimated undiscounted
cash flows of this operation were not sufficient to support the carrying value
of such goodwill, and wrote off the remaining asset totaling $2,150,000, and
recorded such charge to other non-recurring expenses in the nine months ended
March 31, 2001 within the accompanying Condensed Consolidated Statements of
Operations.
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, and $970,000
of stock option compensation expense related to the in the money portion of the
options exercised in connection with the Company's self-tender offer.
7. Self-Tender Offer
On December 15, 2000, the Company commenced a self-tender offer to purchase up
to 7.0 million shares of its outstanding common stock at a price of $7 per share
in cash. 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.
The Company subsequently disbursed net proceeds of approximately $48.8 million
to buy back and concurrently retire 7.0 million shares of common stock,
including 281,901 shares from options exercised by optionholders, and fund
direct costs of the self-tender offer.
Holders of the Company's outstanding stock warrants chose not to exercise such
warrants or tender any underlying shares in respect of the warrants. The tender
offer was financed through a $40 million term loan (see Note 5 of Notes to
Condensed Consolidated Financial Statements) and $8.8 million of the Company's
cash reserves. Direct expenses totaling approximately $737,000 related to the
tender offer were charged to stockholders' equity during the quarter ending
March 31, 2001.
10
GRUBB & ELLIS COMPANY
Notes to Condensed Consolidated Financial Statements
7. Self-tender Offer (continued)
The option exercises, and the subsequent repurchase of the resulting shares by
the Company through the completion of the tender offer, resulted in non-
recurring compensation expense of approximately $970,000 to the Company during
the quarter ended 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.
8. Commitments and Contingencies
Litigation:
John W. Matthews, et al. v Kidder, Peabody & Co., et al. and HSM Inc., et al.,
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filed on January 23, 1995 in the United States District Court for the Western
District of Pennsylvania, is a class action on behalf of approximately 6,000
limited partners who invested approximately $85 million in three public real
estate limited partnerships (the "Partnerships") during the period beginning in
1982 and continuing through 1986. The defendants include HSM Inc., a wholly-
owned subsidiary of the Company, and several subsidiaries of HSM Inc., along
with other parties unrelated to HSM Inc. The complaint alleges violation under
the Racketeer Influenced and Corrupt Organizations Act ("RICO"), securities
fraud, breach of fiduciary duty and negligent misrepresentation surrounding the
defendants' organization, promotion, sponsorship and management of the
Partnerships. Specific damages were not pled, but treble, punitive as well as
compensatory damages and restitution were sought.
On August 18, 2000, the district court issued an opinion granting defendants'
motions for summary judgment dismissing the federal RICO claims as time-barred
under the statute of limitations. As to the state law claims for breach of
fiduciary duty and negligent misrepresentation, the court declined to exercise
supplemental jurisdiction and dismissed them without prejudice. The court
declined to rule on defendants' motion to decertify the class because it was
moot. Plaintiffs have appealed the summary judgment to the Third Circuit Court
of Appeals and briefs have been filed. There were no material developments in
this lawsuit during the period covered by this report.
Additional information concerning this lawsuit is contained in the Company's
Annual Report on Form 10-K for the 2000 fiscal year, and the Quarterly Reports
on Form 10-Q for the first and second fiscal quarters of 2001.
The Company has, and intends to continue to, vigorously defend the Matthews
--------
action, and believes it has meritorious defenses to contest the claims asserted
by the plaintiffs. Based upon available information, the Company is not able to
determine the financial impact, if any, of such action, but believes that the
outcome will not have a material adverse effect on the Company's financial
position or results of operations.
11
GRUBB & ELLIS COMPANY
Notes to Condensed Consolidated Financial Statements
8. Commitments and Contingencies (continued)
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 and the local municipality to implement a multi-faceted plan, which
includes both remediation and ongoing monitoring of the affected properties.
Each of the partnership's partners has recently contributed new capital to
finance the continuing assessment and remediation efforts. The Company's
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.
9. Subsequent Event
The Company entered into an employment agreement with Barry M. Barovick as Chief
Executive Officer and President effective May 15, 2001. Terms of the agreement
call for, among other things, signing bonus and loan payments of up to $1.75
million to be paid within the first ninety days of the agreement.
12
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
NOTE REGARDING FORWARD-LOOKING STATEMENTS
This report contains forward-looking statements which may involve known and
unknown risks, uncertainties and other factors that may cause the actual
results, performance or achievements of the Company in future periods to be
materially different from any future results, performance or achievements
expressed or suggested by these statements. Such statements relate to, among
other things, capital expenditures, acquisitions, operating improvements and
costs, and are indicated by words or phrases such as "continuing," "believes,"
"expects," and similar words or phrases. Such factors which could adversely
affect the Company's ability to obtain these results include, among other
things, (i) the volume of transactions and prices for real estate in the real
estate markets generally, (ii) a general or regional economic downturn that
could create a recession in the real estate markets, (iii) the Company's
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 third quarters of each of the last
three fiscal years ranging from 19.1% to 22.6%. 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 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 nine months ended March 31, 2001 was $327.6 million, an
increase of 7.0% over revenue of $306.1 million for the same period last year.
This improvement related to a $24.4 million increase in advisory services fees
in the current nine months over the same period in 2000 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 annual production per professional. Management services fees decreased
to $45.7 million during the nine months ended March 31, 2001 as compared to
$48.5 million in the prior year. New business revenue gained during the nine
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
reduced
13
business services fees resulting from an unusually large one-time business
services printing assignment completed during the quarter ended March 31, 2000.
Total revenue for the quarter ended March 31, 2001 was $80.7 million, a decrease
of 12.8% over revenue of $93.6 million for the same period last year. Advisory
services fees decreased $10.7 million or 13.9% over the prior year period, while
management services fees decreased by $2.2 million, or 12.9%. The current
softening in the general economy has resulted in a higher than normal slowing in
real estate transaction velocity due to negative absorption and higher vacancy
rates in certain markets.
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 62.7% from 59.8% for the nine months ended March 31, 2001
as compared to the same period in 2000, and decreased to 55.8% from 57.1% for
the respective quarters ended March 31 in the same periods. Unusually high
average commission expense had been incurred during the first six months of
fiscal year 2001 in flourishing technology markets such as Silicon Valley, San
Francisco, Denver, Washington D.C. and New York, and 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. Commensurate with the
downturn in advisory services commission revenues described above, the
commission expenses incurred during the three months ended March 31, 2001, also
declined.
Salaries, wages and benefits increased by $1.4 million or 1.9% in the nine
months ended March 31, 2001 as compared to March 31, 2000, while selling,
general and administrative expenses increased by $1.2 million, or 2.3%, for the
same period. For the quarter ended March 31, 2001, salaries, wages and benefits
decreased by $1.0 million or 3.9% as compared to the same period in the prior
year, while selling, general and administrative expenses were relatively flat
for the same periods.
Depreciation and amortization expense for the nine months ended March 31, 2001
increased 12.5% to $8.7 million from $7.7 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 $2.1 million
was recognized in the nine months ended March 31, 2001 compared to $1.5 million
for the same period in the prior year.
During the quarter ended March 31, 2001 the Company recognized other non-
recurring expenses totaling $3.9 million, relating primarily to the impairment
of goodwill related to the April 1998 acquisition of White Commercial Real
Estate, as well as compensation expense related to stock options exercised in
connection with the Company's recently completed self-tender offer. See Notes 6
and 7 of Notes to Condensed Consolidated Financial Statements for additional
information.
Interest and other income increased during the three and nine month periods
ending March 31, 2001 as compared to the same periods in the prior year as a
result of higher cash investments resulting
14
from improved operations being invested prior to funding the self-tender offer
and related costs during the three months ended March 31, 2001.
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 of approximately $270,000, 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 nine months ended March 31, 2001 was $5.5 million, or $.29
per common share on a diluted basis, as compared to net income of $11.7 million,
or $.56 per common share for the same period in fiscal year 2000. For the
quarter ended March 31, 2001, a net loss was recognized totaling $954,000, or
$(.06) per common share on a diluted basis, as compared to net income of $2.7
million or $.13 per common share for the same period in fiscal year 2000. The
decrease in net income was primarily due to the non-recurring and extraordinary
items occurring during the periods, along with the decline in net commission
revenues recognized in the quarter ended March 31, 2001.
LIQUIDITY AND CAPITAL RESOURCES
The Company generated cash flow from operations of $8.9 million for the nine
months ended March 31, 2001 of which $5.5 million was used in investing
activities, primarily for purchases of equipment, software and leasehold
improvements. Financing activities for the period used cash reserves of $10.1
million. The Company used $40 million of term loan proceeds from its credit
facility and $8.8 million of cash reserves to repurchase 7.0 million shares of
stock in connection with a self-tender offer completed during the quarter ended
March 31, 2001. Additional financing activities included scheduled principal
repayments and proceeds generated from issuance of stock to option holders and
the employee stock purchase plan. Working capital also decreased by $6.7 million
during the nine months ended March 31, 2001, due primarily to the addition of
$8.0 million of current debt obligations under the new credit facility.
The Company has historically experienced the highest use of operating cash in
the quarter ended March 31, primarily related to the payment of certain employee
benefits and incentives 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 ended March 31, 2001.
On December 15, 2000, the Company commenced a self-tender offer ("Offer") to
purchase up to 7.0 million shares of its outstanding common stock at a price of
$7 per share in cash. On January 25, 2001 the Company announced the completion
of the Offer period, and subsequently disbursed net proceeds of approximately
$48.8 million to the shareholders and optionholders and to fund direct expenses
of the offer. The Offer and payment of related expenses was funded with $8.8
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.
15
Direct expenses related to the Offer totaling approximately $737,000 were
charged to stockholders' equity during the quarter ended March 31, 2001, as
incurred. Direct expenses related to the Credit Agreement totaling approximately
$545,000 have been recorded as deferred financing fees and will be amortized
over the term of the agreement.
The Credit Agreement also required 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.
The Company entered into two such agreements, each of which contains nearly
identical terms. These interest rate swap agreements require the Company to pay
a fixed annual interest rate of 5.18% on a notional amount representing one-half
of the outstanding term loan principal, or $19.5 million as of March 31, 2001.
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". This characterization requires the Company to recognize changes in
the fair value of the instruments within its stockholders' equity for the period
being presented. The initial fair value of the instruments at March 31, 2001
reflects an obligation, and a corresponding charge has been recorded in Other
Comprehensive Income in the Company's stockholders' equity.
See Notes 5 and 7 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 March 31, 2001 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 nine months ended March 31, 2001.
The Company entered into an employment agreement with Barry M. Barovick as Chief
Executive Officer and President effective May 15, 2001. Terms of the agreement
call for, among other things, signing bonus and loan payments of up to $1.75
million to be paid within the first ninety days of the agreement. The agreement
is filed as an exhibit to this report and is incorporated herein by reference.
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
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The Company's debt obligations are floating rate obligations whose interest rate
and related monthly interested payments vary with the movement in LIBOR. See
Note 5 to the Condensed Consolidated Financial Statements. In order to mitigate
this risk, terms of the credit agreement required the Company to enter into
interest rate swap agreements to effectively convert fifty percent of its
floating rate term debt obligations to fixed rate debt obligations. Interest
rate swaps generally involve the exchange of fixed and floating rate interest
payments on an underlying notional amount. As of March 31, 2001 the Company had
a $19.5 million notional amount interest rate swap outstanding in which the
Company pays a fixed rate of 5.18% and receives a three month LIBOR rate from
the counterparties. The notional amount of the interest rate swap agreement is
scheduled to decline as follows:
Notional Amount Date
------------------- -------------
$9,750,000 June 30, 2001
7,750,000 June 30, 2002
5,750,000 June 30, 2003
4,000,000 March 31, 2004
When interest rates rise the interest rate swap agreements increase in fair
value to the Company and when interest rate fall the interest rate swap
agreements decline in value to the Company. As of March 31, 2001, interest rates
had fallen and the interest rate swap agreement was in an unrealized loss
position to the Company of approximately $123,000.
17
PART II
OTHER INFORMATION
(Items 2, 3, 4 and 5 are not applicable
for the quarter ended march 31, 2001)
18
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 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 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.
3.3 Certificate of Retirement with Respect to 8,894 Shares of Series A Senior
Convertible Preferred Stock, 128,266 Shares of Series B Senior Convertible
Preferred Stock, and 19,767 Shares of Junior Convertible Preferred Stock of
Grubb & Ellis Company, filed with the Delaware Secretary of State on
January 22, 1997, incorporated herein by reference to Exhibit 3.4 to the
Registrant's Quarterly Report on Form 10-Q filed on February 13, 1997.
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.
(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.
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.
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.
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)
19
to the Registrant's Amendment No. 2 to Tender Offer Statement on Schedule
TO/A filed on January 10, 2001.
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.
(10) Material Contracts
10.1 Employment Agreement entered into between Barry M. Barovick and Grubb &
Ellis Company dated as of May 15, 2001.
(B) Reports On Form 8-K
-------------------
None.
20
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
GRUBB & ELLIS COMPANY
---------------------
(Registrant)
Date: May 15, 2001 /s/ Blake W. Harbaugh
---------------------
Blake W. Harbaugh
Senior Vice President and
Chief Financial Officer
21
Grubb & Ellis Company
EXHIBIT INDEX
for the quarter ended March 31, 2001
------------------------------------
Exhibits
- --------
(10) Material Contracts
10.1 Employment Agreement entered into between Barry M. Barovick and Grubb &
Ellis Company dated as of May 15, 2001.
22