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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 (FEE REQUIRED)
For the Fiscal year ended June 30, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
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 (IRS Employer
incorporation or organization) Identification No.)
One Montgomery Street, - Telesis Tower,
San Francisco, CA 94104
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(Address of principal executive offices) (Zip Code)
(415)956-1990
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(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
------------------- -----------------------------------------
Common Stock New York Stock Exchange
Pacific Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein and will not be contained, to the best
of registrant's knowledge, in its definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of voting common stock held by nonaffiliates of the
registrant as of August 15, 1996 was approximately $14,337,298.
The number of shares outstanding of the registrant's common stock as of
August 15, 1996 was 8,916,415 shares.
DOCUMENTS INCORPORATED BY REFERENCE
None.
GRUBB & ELLIS COMPANY
FORM 10-K
TABLE OF CONTENTS
COVER PAGE Page
----
TABLE OF CONTENTS 2
Part I.
Item 1. Business 3
Item 2. Properties 6
Item 3. Legal Proceedings 6
Item 4. Submission of Matters to a Vote of Security Holders 6
Part II.
Item 5. Market for the Registrant's Common Equity
and Related Stockholder Matters 7
Item 6. Selected Financial Data 8-9
Item 7. Management's Discussion and Analysis of Financial 10-16
Condition and Results of Operations
Item 8. Financial Statements and Supplementary Data 17-43
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure 43
Part III.
Item 10. Directors and Executive Officers of the Registrant 44-45
Item 11. Executive Compensation 46-51
Item 12. Security Ownership of Certain Beneficial
Owners and Management 52-54
Item 13. Certain Relationships and Related Transactions 54
Part IV.
Item 14. Exhibits, Financial Statement Schedules,
and Reports on Form 8-K 55-60
SIGNATURES 61-62
EXHIBIT INDEX 63
2
GRUBB & ELLIS COMPANY
PART I
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ITEM 1. BUSINESS
GENERAL
Grubb & Ellis Company, a Delaware corporation organized in 1980, is the
successor by merger to a real estate brokerage company first established in
California in 1958. Grubb & Ellis Company and its wholly owned subsidiaries
(the "Company") is a commercial real estate information and services company
that provides services to real estate owners/investors and tenants including
commercial brokerage and property and facilities management. Additionally, the
Company provides mortgage brokerage, appraisal, consultation and asset
management services. The Company also provided residential brokerage services
until November 1994 when it sold its remaining residential real estate business
in Southern California.
Based on revenue, the Company is one of the largest commercial real estate
services companies in the United States and is the largest such publicly-traded
company (NYSE). Axiom Real Estate Management, Inc. ("Axiom"), presently a
wholly owned subsidiary of the Company (until January 24, 1996 Axiom was a
majority owned subsidiary), provides property and facilities management services
and is one of the largest property management firms in the country with
approximately 65 million square feet of property under management. At June 30,
1996, the Company had 87 offices in 60 cities in 18 states and the District of
Columbia, with approximately 1,095 commercial brokerage salespersons, 694 non-
agent employees and 1,158 Axiom property management staff. The cost of the
property management staff is substantially reimbursed by clients.
The Company maintains informal business relationships with full-service real
estate firms in England, France, Italy, Germany, Mexico, the Netherlands, Asia
and the Pacific Basin and has established its own representative office in
Europe.
The Company changed its reporting period from a calendar year to a fiscal year
ending June 30 commencing in 1996 as further described in Note 1 of the Notes to
the Consolidated Financial Statements under Item 8 of this Report.
COMMERCIAL BROKERAGE
The Company acts as a sales or leasing agent for commercial properties, which
include office, industrial, retail, apartment and hotel properties, as well as
undeveloped land. Properties range in size and type from single, free-standing
locations to multi-level, mixed-use projects. The Company's offices are
typically located in or near major metropolitan areas. Commercial brokerage
comprised approximately 81% of the Company's operating revenue for the year
ended June 30, 1996.
The majority of commercial brokerage salespersons, who are primarily leasing
agents, focus their activities on one type of commercial property (office,
industrial or retail) in a specific market area. Most of the Company's other
salespersons broker the sale of commercial investment property or undeveloped
land. The majority of salespersons are independent contractors of the Company,
although in certain offices, salespersons are hired as employees.
Over the past eighteen months, the Company increased its Institutional Services
Group ("ISG") and Corporate Services Group ("CSG") capabilities. The objective
of these groups is to provide a single source of value-added services for multi-
market real estate owners and investors, all delivered through a single point of
contact.
3
ISG services insurance companies, pension fund advisors, real estate investment
trusts, syndicators and other portfolio buyers by assisting with the
acquisition, sale, financing or recapitalization of real estate assets. CSG
services Fortune 500 firms that outsource all or a portion of their real estate
planning and implementation activities.
OTHER REAL ESTATE SERVICES
PROPERTY MANAGEMENT
Substantially all of the Company's facilities and property management services
are conducted through Axiom, which managed approximately 65 million square feet
of property, including approximately 18 million square feet of facilities of
International Business Machines Corporation ("IBM"), as of June 30, 1996.
The Company provides property and facilities management services to owners of
office, retail, industrial and multi-family residential real estate. These
services include tenant relations, facilities and construction management,
financial reporting and analysis, and engineering consultation. Property
management clients include pension funds, developers, financial institutions,
corporate and individual owners and syndicators. The principal markets for the
Company's property management services are in Georgia, Illinois, Michigan, New
Jersey, New York, Ohio, Pennsylvania, Texas and Washington, D.C. Property and
facilities management fees constituted approximately 11% of the Company's
operating revenue for the year ended June 30, 1996.
On January 24, 1996, the Company completed the purchase of the minority interest
held by IBM in Axiom as further described in Note 2 of the Notes to the
Consolidated Financial Statements under Item 8 of this report.
APPRAISAL AND CONSULTING
The Company offers appraisal and consulting services through offices in
California, Ohio and New York. Most of these resources are located within
commercial brokerage services offices. Appraisal and consulting services
primarily include valuation of single properties and real estate portfolios,
expert witness testimony, market and feasibility studies and investment
analysis.
OTHER SERVICES
Other revenue is derived from commercial mortgage brokerage operations and from
the Company's partnership and joint venture activities. Partnership and joint
venture activities are not a significant portion of the Company's business, and
the Company does not anticipate expansion of activity in this area.
RESIDENTIAL BROKERAGE
In November 1994, the Company sold its remaining residential brokerage
operations in Southern California. Commissions from residential brokerage
constituted approximately 5% of the Company's operating revenue for the year
ended June 30, 1994. The Company fully reserved for the closure/sale of its
residential brokerage operations in Southern California in December 1993,
therefore, operating revenues and expenses from residential brokerage operations
subsequent to that date are included in "Other income, net", but have no impact
on net income.
Beginning in 1989, the Company provided residential mortgage brokerage services
through Grubb & Ellis Mortgage Services, Inc. ("GEMS"), a wholly owned
subsidiary of the Company. The Company completed the closure of its GEMS
offices in November 1994.
4
COMPETITION
Although the Company ranks among the largest national commercial real estate
information and services organizations in the United States in terms of revenue,
the real estate brokerage industry is fragmented and highly competitive. Thus,
the Company's most significant competition in a particular market may be one or
both of the other two national firms, and/or regional and local firms, in any
combination. In addition, companies not previously engaged primarily in the
real estate services business, but with substantial financial resources, now
provide real estate or real estate related services. For example, certain
insurance companies, Wall Street investment firms, national property management
firms and major real estate developers participate in more traditional
commercial brokerage activities.
As a result of the recent recessionary economy and depressed real estate markets
in much of the country, a number of real estate services firms have decreased
their size and/or left the business entirely during the last five years. Real
estate companies may compete on the pricing of services, service delivery
capability (for example, the ability to deliver multiple services to a client or
the ability to deliver the same services in a number of different markets)
and/or proven record of success. Due to the relative strength and longevity of
the Company's position in the markets in which it presently operates, its
ability to offer clients a range of ancillary real estate services on a local,
regional and national basis, decreased competition in certain markets and the
Company's improved capital base, the Company believes that it can operate
successfully in the future in this highly competitive industry although there
can be no assurances in this regard.
ENVIRONMENTAL REGULATION
A number of states and localities have adopted laws and regulations imposing
environmental controls, disclosure rules and zoning restrictions which have
impacted the management, development, use, and/or sale of real estate.
Additionally, new or modified environmental regulations could develop in a
manner which have not, but could, adversely affect the Company's commercial
brokerage and property management operations. The Company's financial results
and competitive position for the fiscal year 1996 have not been materially
impacted by its compliance with environmental laws or regulations, and no
material capital expenditures relating to such compliance are planned.
SEASONALITY
The Company has typically experienced its lowest quarterly revenue in the
quarter ending March 31 of each year with higher and more consistent revenue in
the quarters ending June 30 and September 30. The quarter ending December 31
has historically provided the highest quarterly level of revenue due to
increased activity caused by the desire of clients to complete transactions by
calendar year-end. Revenue in any given quarter during the years ended June 30,
1996, 1995 and 1994, as a percentage of total annual revenue, ranged from a high
of 31.2% to a low of 19.0%, as adjusted to eliminate the effect of operations
sold or closed.
The Company changed its reporting period from a calendar year to a fiscal year
ending June 30 commencing in 1996 as further described in Note 1 of the Notes to
the Consolidated Financial Statements under Item 8 of this Report.
5
ITEM 2. PROPERTIES
The Company leases all of its office space. The terms of the leases vary
depending on the size and location of the office. As of June 30, 1996, the
Company leased approximately 586,000 square feet of office space in 67 locations
under leases which expire at various dates through June 30, 2004. For those
leases which are not renewable, the Company believes there is adequate
alternative office space available at acceptable rental rates to meet its needs.
As of June 30, 1996, approximately 61,000 square feet of the above mentioned
office space was subleased under agreements in which the Company acts as a
sublessor. For further information, see Note 9 of the Notes to the Consolidated
Financial Statements under Item 8 of this Report, which Note is incorporated
herein by reference.
ITEM 3. LEGAL PROCEEDINGS
The information called for by Item 3 is included in Note 9 of the Notes to the
Consolidated Financial Statements under Item 8 of this Report, which Note is
incorporated herein by reference.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The 1996 annual meeting of stockholders of the Company was held on May 14, 1996.
At the meeting all seven directors were re-elected with the following vote:
For Withheld
---------- --------
Joe F. Hanauer 15,828,037 181,065
Neil R. Young 15,829,035 180,067
R. David Anacker 15,827,623 181,479
Lawrence S. Bacow 15,829,123 179,979
Reuben S. Leibowitz 15,827,980 181,122
Robert J. McLaughlin 15,829,123 179,979
John D. Santoleri 15,827,920 181,182
Also at the meeting an amendment to the 1990 Amended and Restated Stock Option
Plan was approved, which increased the number of shares authorized for the plan
to 1,500,000 shares and provided greater flexibility in setting exercise terms,
by the following vote: 15,671,542 in favor; 312,800 against; and 24,760
abstained.
6
GRUBB & ELLIS COMPANY
PART II
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ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The principal markets for the Company's common stock are the New York and
Pacific Stock Exchanges. The following table sets forth the high and low sales
prices of the Company's common stock on the New York Stock Exchange ("NYSE") for
each quarter of the years ended June 30, 1996 and 1995.
1996 1995
---------------- ----------------
High Low High Low
---- --- ---- ---
First Quarter $2 3/4 $1 7/8 $2 7/8 $1 5/8
Second Quarter 2 5/8 1 7/8 2 3/8 1 7/8
Third Quarter 3 1 7/8 2 1/2 1 7/8
Fourth Quarter 5 1/4 2 1/4 2 5/8 2
As of September 1, 1996, there were 2,367 registered holders of the Company's
common stock.
No cash dividends were declared on the Company's common or preferred stock
during the years ended June 30, 1996 or 1995.
Any dividend payments with respect to the common stock will be subject to the
restrictions in a certain debt agreement with The Prudential Insurance Company
of America ("Prudential"). The agreement prohibits the payment of cash
dividends on and repurchases of the Company's common stock.
The Company currently and for some time has not met certain criteria for the
continued listing of its common stock on the NYSE. Although the NYSE has
informed the Company that it is closely monitoring the Company's continued
listing status, it has not notified the Company of any plans to delist the
common stock. The common stock is also listed on the Pacific Stock Exchange.
In the event of delisting by the NYSE, the Company will use its best efforts to
have its common stock continue to be listed on the Pacific Stock Exchange and/or
traded in another exchange or market, such as the over-the-counter market.
However, the delisting of the common stock by the NYSE could have an adverse
impact on the market price and liquidity of the common stock.
As of September 1, 1996, the Company had 8,916,415 shares of common stock
outstanding. In addition, the Company has outstanding certain Senior
Convertible Preferred Stock and Junior Convertible Preferred Stock, which are
convertible into approximately 7.8 million shares of common stock, as well as
warrants to purchase approximately 1.7 million shares of common stock. See Note
5 to the Notes to Consolidated Financial Statements. The Company also has
outstanding options to purchase approximately 1.1 million shares of common stock
under certain Company plans. Combined with the currently outstanding shares of
common stock, the conversion of such shares of Senior and Junior Convertible
Preferred Stock and the exercise of such warrants and options, which would
result in a total of
7
approximately 19.5 million shares of common stock, would dilute the
proportionate equity interests of the holders of the common stock. Sales of
substantial amounts of common stock (including shares issued upon the exercise
of warrants or options), or the perception that such sales could occur, could
adversely affect prevailing market prices for the common stock.
ITEM 6. SELECTED FINANCIAL DATA
For the Years Ended June 30, (1)
----------------------------------------------------------------------
(Unaudited)
-------------------------
1996 1995 1994 1993 1992
---------- ---------- ---------- ---------- ----------
(in thousands, except per share amounts and shares)
Total revenue $ 193,728 $ 185,784 $ 185,182 $ 207,410 $ 240,323
Net income (loss) $ 2,102 $ 1,556 $ (17,540) $ (58,186) $ (49,317)
Dividends applicable to preferred
stockholders:
Accretion of liquidation preference $ - $ (877) $ (2,494) $ (998) $ -
Dividends in arrears $ (3,012) $ (1,862) $ - $ - $ -
Net loss applicable
to common stockholders $ (910) $ (1,183) $ (20,034) $ (59,184) $ (49,317)
Loss per common share and
equivalents (2) $ (.10) $ (.16) $ (4.92) $ (15.66) $ (14.54)
Weighted average common shares and
equivalents (3) 8,870,720 7,271,257 4,073,715 3,778,645 3,390,763
- ---------------
(1) The Company reduced its residential real estate operations by selling
certain operations or closing certain offices in the calendar years from
1991 through 1994. The remaining residential real estate operations were
fully reserved for in December 1993. Operating revenue included
residential real estate brokerage commissions of $9.0 million, $34.7
million and $61.6 million for the fiscal years ended June 30, 1994, 1993
and 1992, respectively. Net income (loss) and per share data reported on
the above table reflect expenses related to special charges and unusual
items in the amounts of $13.2 million, $44.9 million and $37.0 million for
the fiscal years ended June 30, 1994, 1993 and 1992, respectively.
Favorable adjustments of $462,000 and $2.6 million to special charges and
unusual items are included in the results for the fiscal years ended June
30, 1996 and 1995, respectively. For information regarding comparability
of this data as it may relate to future periods, see discussion in Item 7,
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and Note 10 of the Notes to Consolidated Financial Statements.
(2) Loss per common share and equivalents was $2.91 for the year ended June 30,
1992 prior to the one-for-five reverse stock split on January 29, 1993.
(3) Weighted average common shares and equivalents were 16,953,818 for the year
ended June 30, 1992, prior to the one-for-five reverse stock split on
January 29, 1993.
8
Five Year Comparison of Selected Financial and Other Data for the Company:
As of June 30,
----------------------------------------------------------------------
Unaudited
-------------------------
1996 1995 1994 1993 1992
---------- ---------- ---------- ---------- ----------
(in thousands, except per share amounts, shares and staff data)
Total assets $ 29,658 $ 29,741 $ 32,142 $ 43,628 $ 71,789
Working capital
(deficit) $ 6,285 $ 2,615 $ (19,437) $ 527 $ (7,771)
Long-term liabilities $ 40,683 $ 40,996 $ 32,392 $ 43,925 $ 34,489
Redeemable convertible
preferred stock $ - $ - $ 31,308 $ 26,681 $ -
Common stockholders'
equity (deficit) $ (27,475) $ (29,793) $ (73,538) $ (53,638) $ 2,037
Total staff 2,947 3,070 2,983 4,291 4,322
Book value per
common share (1) $ (3.08) $ (3.38) $ (17.87) $ (13.21) $ 0.58
Common shares
outstanding (2) 8,916,415 8,810,220 4,114,549 4,060,268 3,526,452
(1) Book value per common share was $0.12 as of June 30, 1992 prior to the one-
for-five reverse stock split on January 29, 1993.
(2) Common shares outstanding were 17,632,261 as of June 30, 1992 prior to the
one-for-five reverse stock split on January 29, 1993.
9
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
OVERVIEW
On February 5, 1996, the Board of Directors of the Company changed the Company's
reporting year ending December 31 to a fiscal year ending June 30 commencing in
1996. This change is intended to enable management to improve the Company's
planning capability related to its natural business cycle, as well as enable it
to modify business decisions earlier in the fiscal year in response to cash
flows generated during its typically strongest revenue quarter which ends
December 31. The consolidated financial statements for the current and prior
years presented in Item 8 have been recast based on the fiscal years ending
June 30.
During 1990 to 1993, the Company recorded $113.4 million of special charges and
unusual items related to the write-off of goodwill recorded in connection with
business acquisitions in the middle to late 1980's, severance and office closure
costs, legal expense and estimated settlement provisions and the write-off of
equity investments in joint ventures and other real estate owned. Remaining
unamortized goodwill was written-off in December 1993 and represented the
majority of the $13.2 million of special charges and unusual items recorded in
the year ended June 30, 1994 ("Fiscal 1994"). By December 1994, the Company had
substantially completed the process begun in 1990 of selling and closing
unprofitable offices and non-strategic businesses.
In November 1994, the Company completed a financial restructuring (the "1994
Recapitalization"), including a rights offering to stockholders, amendments to
existing debt agreements with The Prudential Insurance Company of America
("Prudential") and amendments to existing preferred stock. The 1994
Recapitalization resulted in a total reduction of liabilities of approximately
$6.2 million and an increase in equity of approximately $42.2 million.
In January 1996, the Company completed the acquisition of the minority interest
in Axiom Real Estate Management, Inc. ("Axiom"), its property and facilities
management subsidiary. Now that the Company owns 100% of Axiom, it intends to
create synergies that can be valuable to Axiom, the Company and their clients.
The Company reported net income of $2.1 million and $1.6 million for the years
ended June 30, 1996 ("Fiscal 1996") and June 30, 1995 ("Fiscal 1995"),
respectively. The reporting of two consecutive profitable years was last
accomplished a decade ago. Operating income excluding special charges and
unusual items increased from a loss of $2.3 million in Fiscal 1994 to income of
$1.0 million and $2.9 million in Fiscal 1995 and Fiscal 1996, respectively.
Additionally, the Company continues to monitor and control its operating costs
and expenses and, since the end of Fiscal 1996, has achieved or has identified
and expects to achieve, cost reductions from office relocations and
consolidations, renegotiation of office leases and national vendor contracts and
certain management changes.
Over the past three fiscal years, the Company increased its commercial brokerage
sales force by approximately 6.3%. The increase in the sales force, combined
with improving markets for commercial real estate, resulted in commercial real
estate brokerage commissions of $157.6 million in Fiscal 1996, approximately
9.4% higher than Fiscal 1994. Over the past eighteen months, the Company
increased its Institutional Services Group ("ISG") and Corporate Services Group
("CSG")
10
capabilities providing a single source of value-added services for multi-market
real estate owners and investors, all seamlessly delivered through a single
point of contact. The Company plans to continue to expand its ISG and CSG
capabilities over the near term.
The Company anticipates that its revenues for Fiscal 1997 will generally outpace
those of Fiscal 1996 as a result of the new initiatives described above.
However, no assurance can be made that revenues will increase because the
Company's revenues are impacted by numerous factors including the stability of
its sales force, the perception of trends in the general economy, interest rate
levels and anticipated and actual changes in the federal tax law. Most of these
factors, plus the possibility the Company may execute favorable modifications to
contracts with certain vendors or landlords, will have an impact on whether the
Company will achieve anticipated operating cost reductions previously described.
There are no assurances in that regard.
FISCAL 1996 COMPARED TO FISCAL 1995
REVENUE
Total revenue for Fiscal 1996 was $193.7 million, an increase of $7.9 million or
4.3% over Fiscal 1995. Revenue from commercial brokerage offices increased in
Fiscal 1996 by $5.4 million or 3.6% over Fiscal 1995, reflecting a slower than
anticipated velocity in the market for commercial real estate. Real estate
services fees, commissions and other fees of $36.2 million in Fiscal 1996
increased $2.5 million or 7.6% over Fiscal 1995. The increase in these revenues
related primarily to a $1.9 million increase in property and facilities
management fees over Fiscal 1995.
COSTS AND EXPENSES
Real estate brokerage and other commission expense (salespersons' participation)
is the Company's major expense and is a direct function of gross brokerage
commission levels. Commercial brokerage salespersons' participation expense is
comprised of nearly all of real estate brokerage and other commissions expense
in Fiscal 1996 and Fiscal 1995. As a percentage of commercial real estate
brokerage revenue in Fiscal 1996, commercial brokerage salespersons'
participation expense increased by approximately 1.4% over Fiscal 1995 primarily
due to the performance of top producers and the Company's commitment to
strengthen the salesforce by adding seasoned salespersons.
Total costs and expenses, other than salespersons' participation expense and the
favorable adjustments to special charges and unusual items, were $95.8 million
in Fiscal 1996, only .7% higher than Fiscal 1995.
Special charges and unusual items reflect net favorable adjustments of $462,000
and $2.6 million for Fiscal 1996 and Fiscal 1995, respectively. The 1996
adjustment included a $525,000 charge for severance costs for a senior executive
related to restructuring the operations of Axiom, offset by certain other
credits including $627,000 of non-cash reversals primarily related to previously
established reserves for severance and office closure costs and the reversal of
$360,000 of remaining net office lease liability related to the sale of the
Southern California residential brokerage operations in November 1994. The
Fiscal 1995 net favorable adjustment of $2.6 million to special charges and
unusual items represented non-cash reversals of approximately $1.4 million
related to closing certain offices more efficiently than initially estimated and
$930,000 related to the reversal of
11
the remaining net office lease liability of the residential brokerage operations
mentioned above.
Interest expense to related parties of $3.0 million in Fiscal 1996 increased by
$120,000 over Fiscal 1995. An increase in interest expense of $180,000 in
Fiscal 1996 over Fiscal 1995 on the 11.65% Payment-in-Kind Notes (the "11.65%
PIK Notes") was the result of the increased principal balance due to interest
being paid in kind by the issuance of additional 11.65% PIK Notes. Offsetting
this increase was elimination of interest expense on the interim financing loan
provided in March 1994 by Warburg, Pincus Investors, L.P. ("Warburg") which was
repaid by the Company in November 1994. There was additional interest expense
of $22,000 in Fiscal 1996 on the revolving credit facility due to an increase in
the interest rate which is calculated at 2.5% above LIBOR. Principal
outstanding on the revolving credit facility was the same in Fiscal 1996 and
Fiscal 1995.
INCOME TAXES
The Fiscal 1996 and Fiscal 1995 provision for income taxes consists of state and
local income taxes assessed on profitable subsidiaries of the Company and
federal income taxes related solely to Axiom, the Company's subsidiary which
filed on a separate basis for tax purposes. Axiom will be included in the
Company's consolidated tax return beginning in calendar year 1996 due to the
Company's purchase of the minority interest in Axiom as described in Note 2 of
the Notes to Consolidated Financial Statements.
While the Company has changed its financial reporting year to a fiscal year
ending June 30, it will continue to maintain the calendar year for tax reporting
purposes. The Company reported taxable losses of $6.8 million and $11.5 million
on its 1995 and 1994 consolidated federal income tax returns.
As of June 30, 1996, the Company had net current and noncurrent deferred tax
assets of $3.0 million and $18.6 million, respectively. Approximately $14.1
million of the net noncurrent deferred tax assets relate to tax net operating
loss carryforwards which will be available to offset future taxable income
through 2010. The Company has recorded a valuation allowance for the entire
amount of the net current and noncurrent deferred tax assets as of June 30, 1996
and will continue to do so until such time that management believes that it is
more likely than not that the Company will generate taxable income sufficient to
realize such tax benefits. See Note 6 of Notes to Consolidated Financial
Statements for additional information.
NET INCOME
The Company reported net income of $2.1 million and $1.6 million for Fiscal 1996
and Fiscal 1995, respectively. Net income included favorable adjustments from
special charges and unusual items of $462,000 and $2.6 million in Fiscal 1996
and Fiscal 1995, respectively. "Other income, net" in Fiscal 1996 included
$818,000, representing the net gain in the sale of a note secured by certain
real estate.
The accrued and unpaid dividends on the Company's convertible senior and junior
preferred stock amounted to $3.0 million and $2.7 million for Fiscal 1996 and
1995, respectively. Taking into effect such dividends, the net loss per common
share of $0.10 for Fiscal 1996 compared favorably to a net loss of $0.16 per
common share for Fiscal 1995. However, the accrued dividends would no longer be
payable if the preferred stock is exchanged for common stock, as allowed by the
conversion provisions in the preferred stock.
12
STOCKHOLDERS' DEFICIT
During Fiscal 1996, stockholders' deficit decreased by $2.3 million from Fiscal
1995 as a result of Fiscal 1996 net income of $2.1 million and $216,000 in
respect of common stock issued in connection with the employee common stock
purchase plan and the matching contribution by the Company to the employee
401(k) plan. The book value per common share increased from $(3.38) at June 30,
1995 to $(3.08) per common share at June 30, 1996 as a result of the above
mentioned changes.
FISCAL 1995 COMPARED TO FISCAL 1994
REVENUE
Total revenue for Fiscal 1995 was $185.8 million, an increase of .3% from $185.2
million for Fiscal 1994. Excluding revenue from the Southern California
residential brokerage operations which were sold during November 1994, and
certain other offices which at the end of 1993 were sold, closed, or expected to
be closed, as well as government contracting business conducted through March
1994, Fiscal 1995 revenue of $185.8 million increased by $15.2 million or 8.9%
over Fiscal 1994.
Revenue from commercial brokerage offices increased in Fiscal 1995 by $8.1
million or 5.6% over Fiscal 1994 as a result of improving markets for commercial
real estate and the Company's increasing market share in specific markets.
Revenue from the Company's residential brokerage operations of $9.0 million in
Fiscal 1994 was derived primarily from the Southern California operations for
the period July, 1993 through December, 1993. The Company fully reserved for
the closure/sale of its remaining residential brokerage operations in Southern
California during the second quarter of Fiscal 1994. Consequently, revenues and
expenses from the Southern California operations were included in "Other income,
net" in Fiscal 1995, but have no impact on net income.
Real estate services fees, commissions and other fees of $33.6 million in Fiscal
1995 increased by $1.5 million or 4.8% over the $32.1 million in Fiscal 1994.
The increase in revenues related primarily to $2.8 million increase in property
and facilities management fees over Fiscal 1994, offset by lower appraisal and
consulting fees and mortgage brokerage fees due to offices being closed during
Fiscal 1994.
COSTS AND EXPENSES
Salespersons' participation expense as a percentage of total operating revenue
decreased from 49.2% in Fiscal 1994 to 48.2% in Fiscal 1995. The decrease in
participation expense as a percentage of revenue was primarily related to the
fact that the Company did not reflect the revenues or expenses of the Southern
California residential brokerage operations in operating income for Fiscal 1995,
as the provision for the closure of such operations was recorded at the end of
calendar 1993. Excluding the impact of residential brokerage operations from
July through December 1993, participation expense as a percentage of revenue for
Fiscal 1995 of 48.2% was slightly higher than Fiscal 1994 at 48.0%.
Total costs and expenses, other than salespersons' participation expense, of
$92.6 million for Fiscal 1995 decreased by 15.5% from $109.6 million in Fiscal
1994. The decrease primarily resulted from a decrease in special charges and
unusual items and, as explained above, because the expenses of the residential
brokerage operations are included in "Other income, net" after December 1993.
Further
13
excluding the cost and expenses of businesses closed or sold in Fiscal 1994 and
1995, Fiscal 1995 costs and expenses increased by $4.3 million or 4.7% over
Fiscal 1994. Such expense increases were primarily a result of additional
investments in technology anticipated to improve profits in future years, and
the filling of several key management positions.
The Company recorded favorable adjustments of $2.6 million to special charges
and unusual items in Fiscal 1995. This resulted from reversals of previously
established reserves associated with the closure of certain offices which were
accomplished more efficiently than initially estimated at the end of calendar
1993, and the sale of the Company's remaining residential brokerage operations
in November 1994. In Fiscal 1994, special charges and unusual items of $13.2
million were recorded including the write-down of the remaining unamortized
goodwill of $10.1 million, office closure and severance costs of $2.9 million
and other charges of $200,000.
Interest expense to related parties of $2.9 million in Fiscal 1995 increased by
$417,000 over the Fiscal 1994 amount of $2.5 million primarily as a result of
increased interest on the 11.65% PIK Note due to greater principal balances
($246,000) and higher interest on the revolving credit facility related to
greater use in Fiscal 1995 compared to Fiscal 1994 ($104,000).
INCOME TAXES
The Fiscal 1995 provision for income taxes was $448,000 compared to $597,000 in
Fiscal 1994. Both years' tax provisions consist of federal, state and local
income taxes assessed on profitable subsidiaries of the Company. The federal
income tax component related solely to Axiom, the Company's subsidiary which
reported on a separate basis for tax purposes through calendar year 1995.
NET INCOME
Net income of $1.6 million for fiscal 1995 compared favorably to a net loss of
$17.5 million for Fiscal 1994. Net income for Fiscal 1995 included $2.6 million
of favorable adjustments to special charges and unusual items, whereas the net
loss for Fiscal 1994 included charges of $13.2 million. Net loss per common
share was $.16 in Fiscal 1995 compared to a net loss per common share of $4.92
in Fiscal 1994. Net loss applicable to common stockholders is calculated by
reducing net income (loss) by undeclared dividends and accretion of liquidation
preference on preferred stock of $2.7 million and $2.5 million in Fiscal 1995
and Fiscal 1994, respectively.
LIQUIDITY AND CAPITAL RESOURCES
During Fiscal 1996, cash and cash equivalents increased by $2.1 million
primarily as a result of $3.0 million of net cash provided by operating
activities offset by $634,000 of net cash used in investing activities and
$219,000 of net cash used in financing activities. Net cash provided by
operating activities was significantly impacted by a $3.5 million decrease in
other liability accounts including claims and settlements, office closure and
severance costs for which reserves were provided at the end of the 1993 and 1992
calendar years, as well as a decrease in accounts payable of $1.6 million offset
by a decrease in real estate brokerage commissions receivable of $2.3 million.
The net cash used in investing activities primarily related to $1.7 million of
purchases of equipment and leasehold improvements offset by $1.0 million of
proceeds from disposition of real estate joint ventures and real estate owned
including the sale of a note receivable as further described in Note 1 of the
Notes to Consolidated Financial Statements.
14
The Company has historically experienced the highest use of operating cash
during the quarter ending March 31, primarily related to the payment of calendar
year-end compensation and deferred commissions payable balances which attain
peak levels as a result of calendar year end business activity. Additionally,
quarterly revenues are typically at their lowest level in the quarter ending
March 31.
As of June 30, 1996, the Company had current accrued severance and office
closure costs of approximately $721,000 of which $82,000 of accrued severance
costs and $276,000 of accrued office closure costs, net of expected sublease
income, are expected to be paid in cash in fiscal 1997. Approximately $600,000
of the $1.0 million of long-term accrued office closure costs, net of expected
sublease income, is expected to be paid in cash over the next six years (see
Note 10 of the Notes to Consolidated Financial Statements). The funding of
these cash requirements is expected to be provided by cash flows from
operations.
Working capital improved by $3.7 million to $6.3 million at June 30, 1996
primarily as a result of the $2.1 million increase in cash and cash equivalents
and reductions in accrued severance and office closure costs of $830,000.
Operating cash flow is expected to be sufficient to meet the Company's
anticipated normal operating expenses. The Company's long-term cash
requirements include annual principal payments on its long-term debt of
approximately $5.0 million in Fiscal 1998 through Fiscal 2000, $6.3 million in
Fiscal 2001 and $6.4 million in Fiscal 2002. The actual principal payments in
Fiscal 2001 and Fiscal 2002 may be greater if future interest due on the 11.65%
Payment-in-Kind Notes is paid in kind by the issuance of additional notes.
Also, the Revolving Credit Note which matures on November 1, 1999, requires the
repayment of all outstanding principal for a sixty day period during each fiscal
year beginning July 1, 1997. Pursuant to its debt agreement with Prudential,
beginning on April 1, 1997, the Company will be required to meet certain
financial covenants and comply with certain covenants restricting capital
expenditures. The Company's long-term debt is described in greater detail in
Note 5 of the Notes to Consolidated Financial Statements.
To the extent that the Company's cash requirements are not met by operating cash
flow, due to adverse economic conditions or other unfavorable events, the
Company may find it necessary to curtail its expansion activities, to further
reduce expense levels, seek refinancing, or undertake other actions as may be
appropriate. In such event, the Company anticipates that its ability to raise
financing on acceptable terms would be severely limited and there can be no
assurance that the Company would be able to raise additional financing.
DIVIDENDS
Any dividend payments by the Company on the common stock will be subject to
restrictions on the payment of dividends in the Prudential debt agreements and
the payment of all accrued and unpaid dividends on the Senior and Junior
Convertible Preferred Stock.
NOTE REGARDING FORWARD-LOOKING STATEMENTS
Information contained in this Annual Report on Form 10-K contains "forward-
looking statements: within the meaning of the Private Securities Litigation
Reform Act of 1995, which can be identified by the use of forward-looking
terminology such as "may," "will," "expect," "anticipate," "estimate" or
"continue" or the negative thereof or other variations thereon or comparable
terminology. There are a number of important factors with respect to such
forward-looking statements, including certain risks and uncertainties, that
could cause actual results to differ
15
materially from those contemplated in such forward-looking statements. Such
factors, which could adversely affect the Company's ability to obtain these
results, include (i) the volume of transactions and prices for real estate in
the real estate markets generally, (ii) a general economic downturn which could
create a recession in the real estate markets, (iii) the Company's debt level
and its ability to make interest and principal payments, (iv) the success of the
Company's cost reduction and expansion programs, (v) an increase in expenses
related to new initiatives and service improvements and (vi) other factors
described elsewhere in this Annual Report.
16
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Grubb & Ellis Company
We have audited the accompanying consolidated balance sheets of Grubb & Ellis
Company and Subsidiaries as of June 30, 1996 and 1995, and the related
consolidated statements of operations, stockholders' equity (deficit), and cash
flows for each of the three years in the period ended June 30, 1996. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Grubb &
Ellis Company and Subsidiaries at June 30, 1996 and 1995, and the consolidated
results of their operations and their cash flows for each of the three years in
the period ended June 30, 1996, in conformity with generally accepted accounting
principles.
ERNST & YOUNG LLP
San Francisco, California
August 15, 1996
17
GRUBB & ELLIS COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JUNE 30, 1996 AND 1995
(IN THOUSANDS)
ASSETS
1996 1995
------- -------
Current assets
Cash and cash equivalents $13,547 $11,406
Receivables:
Real estate brokerage commissions 206 2,390
Real estate services fees and other
commissions 3,172 2,952
Other receivables 4,326 3,051
Prepaids and other current assets 1,484 1,354
------- -------
Total current assets 22,735 21,153
Noncurrent assets
Real estate brokerage commissions receivable 100 412
Real estate investments held for sale and
real estate owned 537 828
Equipment and leasehold improvements, net 5,194 5,309
Other assets 1,092 2,039
------- -------
Total assets $29,658 $29,741
------- -------
------- -------
The accompanying notes are an integral part
of the consolidated financial statements.
18
GRUBB & ELLIS COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JUNE 30, 1996 AND 1995
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS AND SHARES)
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
1996 1995
-------- -------
Current liabilities
Notes payable and current portion of long-term debt $ 28 $ 383
Accounts payable 1,624 2,162
Compensation and employee benefits payable 5,380 4,820
Deferred commissions payable 201 239
Accrued severance obligations 98 465
Accrued office closure costs 623 1,086
Accrued claims and settlements 1,779 2,436
Other accrued expenses 6,717 6,947
-------- -------
Total current liabilities 16,450 18,538
Long-term liabilities
Long-term debt, net of current portion 336 361
Long-term debt to related party, net of current portion 27,514 25,967
Accrued claims and settlements 11,804 12,824
Accrued severance obligations - 202
Accrued office closure costs 960 1,348
Other 69 294
-------- -------
Total liabilities 57,133 59,534
-------- -------
STOCKHOLDERS' EQUITY (DEFICIT)
Preferred stock, $.01 par value: 1,000,000 shares
authorized; 137,160 shares of 12% Senior Convertible
Preferred Stock and 150,000 shares of 5% Junior
Convertible Preferred Stock outstanding 32,143 32,143
Common stock, $.01 par value: 25,000,000 shares
authorized; 8,916,415 and 8,810,220 shares issued and
outstanding at June 30, 1996 and 1995, respectively 90 89
Additional paid-in-capital 57,154 56,939
Retained earnings (deficit) (116,862) (118,964)
-------- -------
Total stockholders' equity (deficit) (27,475) (29,793)
-------- -------
Total liabilities and stockholders' equity (deficit) $ 29,658 $ 29,741
-------- -------
-------- -------
The accompanying notes are an integral part
of the consolidated financial statements.
19
GRUBB & ELLIS COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED JUNE 30, 1996, 1995 AND 1994
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS AND SHARES)
1996 1995 1994
---------- ---------- ----------
Revenue
Commercial real estate brokerage commissions $ 157,562 $ 152,160 $ 144,078
Residential real estate brokerage commissions - - 9,013
Real estate services fees, commissions and other 36,166 33,624 32,091
---------- ---------- ----------
Total revenue 193,728 185,784 185,182
---------- ---------- ----------
Cost and expenses
Real estate brokerage and other commissions 95,037 89,596 91,071
Selling, general and administrative 45,706 46,602 51,353
Salaries and wages 47,562 46,565 42,982
Depreciation and amortization 2,546 2,012 2,064
Special charges and unusual items (462) (2,606) 13,182
---------- ---------- ----------
Total costs and expenses 190,389 182,169 200,652
---------- ---------- ----------
Total operating income (loss) 3,339 3,615 (15,470)
Other income and expenses
Interest income 689 773 451
Other income, net 1,306 633 614
Interest expense (28) (131) (69)
Interest expense to related parties (3,006) (2,886) (2,469)
---------- ---------- ----------
Income (loss) before income taxes 2,300 2,004 (16,943)
Provision for income taxes (198) (448) (597)
---------- ---------- ----------
Net income (loss) $ 2,102 $ 1,556 $ (17,540)
---------- ---------- ----------
---------- ---------- ----------
Net loss applicable to common stockholders, net of
dividends in arrears and accretion of
liquidation preference on preferred stock in the
amounts of $3,012, $2,739 and $2,494 for the years
ended June 30, 1996, 1995 and 1994, respectively $ (910) $ (1,183) $ (20,034)
Net loss per common share and equivalents $ (.10) $ (.16) $ (4.92)
Weighted average common shares outstanding 8,870,720 7,271,257 4,073,715
The accompanying notes are an integral part
of the consolidated financial statements.
20
GRUBB & ELLIS COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE YEARS ENDED JUNE 30, 1996, 1995 AND 1994
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS AND SHARES)
Common Stock Total
------------------------- Additional Retained Stockholders'
Outstanding Preferred Paid-in- Earnings Equity
Shares Amount Stock Capital (Deficit) (Deficit)
---------- -------- -------- -------- --------- ---------
Balance as of June 30, 1993 4,060,268 $ 41 $ - $ 49,268 $(102,980) $ (53,671)
Accretion of liquidation
preference on preferred stock - - - (2,494) - (2,494)
Employee common stock purchase
agreements 3,573 - - 8 - 8
Employee 401 (k) plan
matching contribution 50,708 1 - 158 - 159
Net loss - - - - (17,540) (17,540)
---------- -------- -------- -------- --------- ---------
Balance as of June 30, 1994 4,114,549 42 - 46,940 (120,520) (73,538)
Accretion of liquidation
preference on preferred stock - - - (877) - (877)
Elimination of mandatory
redemption provision on
preferred stock:
12% Senior Convertible
Preferred Stock - - 15,945 - - 15,945
5% Junior Convertible
Preferred Stock - - 16,198 - - 16,198
Warrants issued in connection
with 1994 Recapitalization - - - 259 - 259
Common stock issued for:
Stockholder rights offering and
standby commitment 4,361,975 44 - 9,847 - 9,891
Litigation settlements 299,898 3 - 678 - 681
Employee common stock purchase
agreements 23,798 - - 61 - 61
Employee 401(k) plan
matching contribution 10,000 - - 31 - 31
Net income - - - - 1,556 1,556
---------- -------- -------- -------- --------- ---------
Balance as of June 30, 1995 8,810,220 89 32,143 56,939 (118,964) (29,793)
Employee common stock purchase
agreements and exercise of
common stock options 52,665 - - 108 - 108
Employee 401(k) plan
matching contribution 53,530 1 - 107 - 108
Net income - - - - 2,102 2,102
---------- -------- -------- -------- --------- ---------
Balance as of June 30, 1996 8,916,415 $ 90 $ 32,143 $ 57,154 $(116,862) $ (27,475)
---------- -------- -------- -------- --------- ---------
---------- -------- -------- -------- --------- ---------
The accompanying notes are an integral part
of the consolidated financial statements.
21
GRUBB & ELLIS COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED JUNE 30, 1996, 1995 AND 1994
(IN THOUSANDS)
1996 1995 1994
--------- --------- ---------
Cash Flows from Operating Activities:
Net income (loss) $ 2,102 $ 1,556 $ (17,540)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization 2,546 2,012 2,064
Interest expense on Payment-in-Kind Notes 1,606 1,407 1,137
Increase (decrease) in real estate brokerage commissions
receivable valuation allowances 199 (1,302) (47)
Other non-cash charges related to special charges
and unusual items (462) (2,606) 13,182
Gain on sale of real estate and other assets - - 18
Decrease in real estate brokerage commissions receivable 2,306 2,288 881
Decrease (increase) in other asset accounts (212) 3,064 (192)
Increase (decrease) in accounts payable (1,595) 608 484
Increase (decrease)in deferred commissions payable (38) 50 (10)
Decrease in other liability accounts (3,458) (6,358) (6,169)
--------- --------- ---------
Net cash provided by (used in) operating activities 2,994 719 (6,192)
--------- --------- ---------
Cash Flows from Investing Activities:
Purchases of equipment and leasehold improvements (1,724) (2,944) (2,554)
Proceeds from disposition of real estate joint venture
interests and real estate owned 1,036 31 393
Distributions from real estate joint ventures 54 52 96
--------- --------- ---------
Net cash used in investing activities (634) (2,861) (2,065)
--------- --------- ---------
Cash Flows From Financing Activities:
Offering costs related to issuance of preferred stock - - (132)
Proceeds from borrowing 400 - 14,250
Repayment of notes payable and credit facility borrowings (654) (282) (6,833)
Proceeds from issuance of common stock 35 4,201 32
Costs related to Rights Offering and issuance of common stock - (586) -
Costs related to debt refinancing - (55) -
--------- --------- ---------
Net cash provided by (used in) financing activities (219) 3,278 7,317
--------- --------- ---------
Net increase (decrease) in cash and cash equivalents 2,141 1,136 (940)
Cash and equivalents at beginning of the year 11,406 10,270 11,210
--------- --------- ---------
Cash and cash equivalents at end of the year $ 13,547 $ 11,406 $ 10,270
--------- --------- ---------
--------- --------- ---------
The accompanying notes are an integral part
of the consolidated financial statements.
22
GRUBB & ELLIS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
THE COMPANY:
Grubb & Ellis Company (the "Company") is a commercial real estate
information and services company that provides services to real estate
owners/investors and tenants including commercial brokerage and property and
facilities management. Additionally, the Company provides mortgage brokerage,
appraisal, consultation and asset management services. The Company also
provided residential brokerage services until November 1994 when it sold its
remaining residential real estate business in Southern California.
PRINCIPLES OF CONSOLIDATION:
The consolidated financial statements include the accounts of Grubb & Ellis
Company, its wholly and majority owned and controlled subsidiaries and
controlled partnerships. The Company consolidates Axiom Real Estate Management,
Inc. ("Axiom"), which provides real estate property and facilities management
services. As described in Note 2 to the Notes to Consolidated Financial
Statements, the Company acquired the minority interest in Axiom in January 1996.
Prior to the acquisition the minority interest was immaterial and has been
included in other long-term liabilities on the Consolidated Balance Sheet and
the related minority interest in operating results has been included in "Other
income, net" on the Consolidated Statements of Operations through the date it
was acquired. All significant intercompany accounts and transactions with
consolidated entities and transactions with unconsolidated joint ventures and
partnerships accounted for under the equity method of accounting have been
eliminated.
BASIS OF PRESENTATION:
The financial statements have been prepared in conformity with generally
accepted accounting principles 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.
CHANGE IN REPORTING PERIOD:
On February 5, 1996, the Board of Directors of the Company changed the
Company's reporting year ending December 31 to a fiscal year ending June 30
commencing in 1996. This change is intended to enable management to improve the
Company's planning capability related to its natural business cycle, as well as
enable it to modify business decisions earlier in the fiscal year in response to
cash flows generated during its typically strongest revenue quarter which ends
December 31. Reporting periods presented herein have been recast to conform to
the June 30 fiscal year end.
FAIR VALUE OF FINANCIAL INSTRUMENTS:
In 1995, the Company adopted Statement of Financial Accounting Standards
("SFAS") No. 107, "Disclosures about Fair Value of Financial Instruments," which
requires disclosure of fair value information about financial instruments,
whether or not recognized in the Consolidated Balance Sheets. Considerable
judgment is necessarily required in interpreting market data to develop
estimates of fair value. Accordingly, the estimates presented herein
23
GRUBB & ELLIS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
are not necessarily indicative of the amounts that the Company could realize in
a current market exchange. The use of different market assumptions and/or
estimation methodologies may have a material effect on the estimated fair value
amounts.
SHORT-TERM FINANCIAL INSTRUMENTS - the carrying amounts of cash and cash
equivalents, receivables, and obligations under accounts payable and debt
instruments approximate their fair values.
LONG-TERM DEBT - an estimate of the fair value of the Company's long-term
debt would require the use of a discounted cash flow analysis based on the
Company's current incremental borrowing rates for similar types of borrowing
arrangements. Management believes that the Company's current financial position
is significantly different from its financial position during the period in
which it originally acquired its long-term debt and believes that the Company
would be unable to obtain similar financing given these facts and the current
state of its financial matters. Accordingly, management is unable, without
incurring excessive costs, to estimate its incremental borrowing rate, and
considers estimation of fair value of these instruments to be impracticable.
ACCOUNTING FOR STOCK-BASED COMPENSATION:
In October 1995, the Financial Accounting Standards Board issued Statement
No. 123, "Accounting for Stock-Based Compensation ("Statement 123")," which is
effective for the Company's next annual reporting period. Statement 123 allows
companies to either account for stock-based compensation under the new
provisions of Statement 123 or under the provisions of Accounting Principles
Bulletin Opinion No. 25, but requires pro forma disclosure in the footnotes to
the financial statements as if the measurement provisions of Statement 123 had
been adopted. The Company has not yet determined whether or not to adopt
Statement 123 beginning in the fiscal year ending June 30, 1997, but does not
believe that the adoption will have a material impact on the financial position
or the results of operations of the Company.
REVENUE RECOGNITION:
Real estate sales commissions are generally recognized at the earlier of
receipt of payment, close of escrow or transfer of title between buyer and
seller. Receipt of payment occurs at the point at which all Company services
have been performed, title to real property has passed from seller to buyer, if
applicable, and no contingencies exist with respect to entitlement to the
payment. Real estate leasing commissions are generally recognized at the
earlier of receipt of payment or tenant occupancy, assuming the Company has
possession of a signed lease agreement and no significant contingencies exist.
All other commissions and fees are recognized at the time the related services
have been performed by the Company, unless significant future contingencies
exist.
"Other income, net" includes revenues and expenses recognized subsequent to
December 31, 1993 related to offices which the Company determined to close
24
GRUBB & ELLIS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
after that date. Such revenues and expenses were $3,389,000 and $3,389,000
respectively, for the fiscal year ended June 30, 1994 and $13,000 and $13,000,
respectively, for the fiscal year ended June 30, 1995. Also included are the
revenues and expenses of miscellaneous transactions and the disposition of real
estate investments.
COSTS AND EXPENSES:
Real estate brokerage and other commission expense (salespersons'
participation) is recognized concurrently with the recording of the related
revenue. All other costs and expenses are recognized when incurred.
Axiom incurs salaries, wages and benefits in connection with the property and
corporate facilities management services it provides which are in part
reimbursed by the owners of such properties. The following is a summary of the
Axiom total gross and reimbursable salaries, wages and benefits (in thousands)
for the years ended June 30, 1996, 1995 and 1994. The net expense is included
in salaries and wages on the Consolidated Statement of Operations.
1996 1995 1994
-------- -------- ---------
Gross salaries, wages and benefits $80,757 $65,465 $71,036
Less: reimbursements from
property owners (66,310) (51,959) (57,874)
-------- -------- ---------
Net salaries, wages and benefits $14,447 $13,506 $13,162
-------- -------- ---------
-------- -------- ---------
EQUIPMENT AND LEASEHOLD IMPROVEMENTS:
Equipment and leasehold improvements are recorded at cost. Depreciation of
equipment is computed using the straight-line method over their estimated useful
lives ranging from three to seven years. Leasehold improvements are amortized
using the straight-line method over their useful lives not to exceed
the terms of the respective leases. Maintenance and repairs are charged to
expense as incurred.
ACCRUED CLAIMS AND SETTLEMENTS:
The Company has maintained or currently maintains partially self-insured
programs for errors and omissions, general liability, workers' compensation and
certain employee health care costs. Reserves for such partially self-insured
programs are included in accrued claims and settlements and are based on the
aggregate of the liability for reported claims and an actuarially-based estimate
of incurred but not reported claims, net of expected insurance reimbursements.
INCOME TAXES:
The provision for income taxes is based on income or loss recognized for
financial statement purposes and includes the effects of temporary differences
between such income or loss and that recognized for tax return purposes.
Deferred income taxes, if any, are recorded to reflect the tax consequences
in
25
GRUBB & ELLIS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
future years of the differences between the tax bases of assets and liabilities
and their financial reporting amounts.
EARNINGS (LOSS) PER COMMON SHARE AND EQUIVALENTS:
Earnings (loss) per common share and equivalents computations are based on
the weighted average number of common shares outstanding after giving effect to
potential dilution from common stock options and warrants. For specifics
regarding the potential dilution from common stock options and warrants, see
Note 5 to the Notes to Consolidated Financial Statements. As calculated in
accordance with generally accepted accounting principles, primary earnings
(loss) per common share is the same as fully diluted earnings (loss) per common
share for each year presented. Common share and per share amounts have been
adjusted to give retroactive effect to the one-for-five reverse stock split on
January 29, 1993.
The calculation of earnings (loss) per common share includes net income
(loss) adjusted for amounts applicable to the Senior and Junior Convertible
Preferred Stock related to undeclared dividends and accretion of liquidation
preference (for the periods during which the preferred stock was subject to
mandatory redemption) as follows (in thousands):
Years Ended June 30,
--------------------------------------------------------
Cumulative
1996 1995 1994 1993 Total
------- ------- ------ ---- ----------
Junior Convertible Preferred Stock -
Undeclared dividends $ 844 $ 541 $ - $ - $1,385
Accretion of liquidation preference - 262 766 312 1,340
Senior Convertible Preferred Stock -
Undeclared dividends 2,168 1,321 - - 3,489
Accretion of liquidation preference - 615 1,728 686 3,029
------ ------ ------ ------ -------
$3,012 $2,739 $2,494 $ 998 $ 9,243
------ ------ ------ ------ -------
------ ------ ------ ------ -------
CASH AND CASH EQUIVALENTS:
Cash and cash equivalents consist of demand deposits and highly liquid
short-term debt instruments with original maturities of three months or less
from the date of purchase and are stated at cost.
The Company had cash balances of $1,683,000 and $2,377,000 at June 30, 1996
and 1995, respectively, restricted to use for errors and omissions insurance
claims associated with the Company's errors and omissions insurance captive.
Additionally, Axiom had cash balances of $1,357,000 at June 30, 1995, which
prior to the purchase of the minority ownership interest in Axiom in January
1996, were not available for use by the Company.
For purposes of disclosure for the Consolidated Statements of Cash Flows,
cash payments for interest for the fiscal years ended June 30, 1996, 1995 and
1994 were approximately $1,425,000, $1,400,000 and $1,260,000, respectively.
Cash payments for income taxes for the fiscal years ended June 30, 1996, 1995
and 1994 were approximately $975,000, $720,000 and $533,000, respectively.
26
GRUBB & ELLIS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
REAL ESTATE INVESTMENTS:
Real estate investments held for sale are recorded at the lower of cost or
net realizable value. The Company had a valuation allowance on real estate
investments and real estate owned of approximately $2,393,000 and $3,501,000 at
June 30, 1996 and 1995, respectively. In connection with the disposition of
real estate investments, the Company sold a property in December 1993 with a
book value of approximately $413,000 in exchange for a note receivable of
$1,190,000, resulting in the deferral of $884,000 of revenue under the cost
recovery method. The note receivable was sold at a discount in August 1995
resulting in a gain of $818,000, net of the recognition of revenue previously
deferred and is included in "Other income, net" for the fiscal year ended June
30, 1996.
The following is a summary of the changes in the valuation allowance on
real estate investments and real estate owned for the fiscal years ended June
30, 1996, 1995 and 1994 (in thousands):
1996 1995 1994
------- ------- -------
Balance at beginning of period $3,501 $3,763 $6,093
Charged to costs and expenses 31 - -
Amounts written off (1,139) (262) (2,330)
--------- ------- -------
Balance at end of period $2,393 $3,501 $3,763
--------- ------- -------
--------- ------- -------
RECLASSIFICATIONS:
Certain prior year amounts have been reclassified to conform to the current
year presentation.
2. PURCHASE OF AXIOM MINORITY INTEREST
On January 24, 1996, the Company completed the purchase of the common stock
held by International Business Machines Corporation ("IBM") in Axiom for a
purchase price of $600,000. The Company paid $150,000 cash upon closing and
will pay three additional $150,000 annual installments beginning January 1997.
As a result of this transaction, the Company owns 100% of the outstanding common
stock of Axiom. The acquisition of the minority interest was accounted for as a
purchase.
Since its inception in 1992, Axiom has provided facilities management to
IBM pursuant to a facilities management agreement (the "Managed Service
Agreement"). In connection with the purchase transaction, the Managed Service
Agreement was modified effective January 1, 1996 providing for the extension of
its term until December 31, 2000, with the option for IBM to extend it for two
additional one year periods, the reduction of fees charged, and the ability for
IBM to change the facilities portfolio under management by Axiom under certain
circumstances. The modified Managed Service Agreement resulted in the reduction
of annual fees paid by IBM to Axiom of $750,000 for the fiscal year ended June
30, 1996 and is expected to result in the reduction of annual fees
27
GRUBB & ELLIS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. PURCHASE OF AXIOM MINORITY INTEREST (CONTINUED)
of approximately $1.8 million and $900,000, respectively for the fiscal years
ending June 30, 1997 and 1998.
This reduction is expected to be offset in part by the extension of the
contract, the opportunity to obtain additional business from IBM and a reduction
in costs by reducing certain duplicative administrative, marketing and other
costs.
3. REAL ESTATE BROKERAGE COMMISSIONS RECEIVABLE
Real estate brokerage commissions receivable consisted of the following at
June 30, 1996 and 1995 (in thousands):
1996 1995
-------- --------
Commissions receivable $12,389 $14,375
Salespersons' participation (8,903) (8,593)
Allowance for uncollectible accounts (3,180) (2,980)
-------- --------
Total 306 2,802
Less portion classified as current 206 2,390
-------- --------
Noncurrent portion $ 100 $ 412
-------- --------
-------- --------
The following is a summary of the changes in the allowance for
uncollectible real estate brokerage commissions receivable for the fiscal years
ended June 30, 1996, 1995 and 1994 (in thousands):
1996 1995 1994
-------- --------- ---------
Balance at beginning of period $ 2,980 $ 4,283 $ 4,331
Charged to costs and expenses 200 - -
Amounts written off or
recovered upon payment
of receivable, net - (1,303) (48)
-------- --------- ---------
Balance at end of period $ 3,180 $ 2,980 $ 4,283
-------- --------- ---------
-------- --------- ---------
28
GRUBB & ELLIS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Equipment and leasehold improvements consisted of the following at June 30,
1996 and 1995 (in thousands):
1996 1995
------- -------
Office furniture and equipment $15,639 $14,684
Leasehold improvements 4,858 4,871
------- -------
Total 20,497 19,555
Less accumulated depreciation and amortization 15,303 14,246
------- -------
Equipment and leasehold improvements, net $ 5,194 $ 5,309
------- -------
------- -------
5. LONG-TERM DEBT AND RECAPITALIZATION
Long-term debt consisted of the following at June 30, 1996 and 1995 (in
thousands):
1996 1995
------- -------
LONG-TERM DEBT TO RELATED PARTY:
Senior Notes, 9.9%, due
November 1, 1997 and 1998 $10,000 $10,000
$10 million 11.65% PIK Notes, net,
due November 1, 2000 and 2001 12,514 10,967
Revolving Credit Note at 2.5% above
LIBOR, due November 1, 1999 5,000 5,000
LONG-TERM DEBT TO NON-RELATED PARTIES:
Other notes payable at various rates of
interest, due through 2005 364 744
------- -------
27,878 26,711
Less portion classified as current 28 383
------- -------
Long-term portion $27,850 $26,328
------- -------
------- -------
29
GRUBB & ELLIS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. LONG-TERM DEBT AND RECAPITALIZATION (CONTINUED)
Aggregate maturities of long-term debt, excluding discount amortization,
for the next five fiscal years ending June 30, are as follows: 1997 - $28,000;
1998 - $5,031,000; 1999 - $5,034,000; 2000 - $5,037,000; 2001 - $6,298,000 and
thereafter, $6,450,000.
1994 RECAPITALIZATION:
On November 1, 1994, the Company, Warburg, Pincus Investors, L.P.
("Warburg") and The Prudential Insurance Company of America ("Prudential")
completed certain related party financing transactions (the "1994
Recapitalization") pursuant to agreements (the "Agreements") providing for,
among other things, (1) additional equity capital through a rights offering and
Standby Agreement by Warburg, (2) amendments to a debt agreement with
Prudential, (3) issuance of additional warrants to purchase common stock of the
Company and (4) amendments to the existing Junior and Senior Convertible
Preferred Stock and warrants held by Warburg and Prudential. The debt agreement
amendments with Prudential include a provision for supplemental principal
payments commencing July 1, 1998 if the Company meets certain financial tests.
In addition, certain covenants of the debt agreement remain in place, but will
not be in effect until April 1, 1997.
STOCKHOLDER RIGHTS OFFERING:
Through a Stockholder Rights Offering which expired October 31, 1994,
common stockholders, other than Warburg and Prudential, purchased 84,542 shares
of common stock at the subscription price of $2.375 per share for total proceeds
of $201,000. Pursuant to a Standby Agreement, Warburg purchased 4,277,433
shares of common stock, not purchased by common stockholders in the Rights
Offering, at the subscription price of $2.375 per share for total proceeds of
approximately $10,159,000. As provided for in the Standby Agreement, Warburg
paid for its shares with $4,000,000 in cash and through cancellation of
$6,159,000 of indebtedness outstanding under an interim financing loan,
including accrued interest of approximately $159,000. Warburg had made the
interim financing loan pursuant to an agreement entered into in March 1994,
which was terminated in connection with the consummation of the 1994
Recapitalization. Direct costs of $469,000 were capitalized in connection with
the Stockholder Rights Offering.
9.9% SENIOR NOTES:
The 9.9% Senior Notes were issued to Prudential in 1986 and were
subsequently modified in 1992 and also in connection with the 1994
Recapitalization. The principal payment terms were modified requiring two
approximately equal installments on November 1, 1997 and 1998. The 9.9% Senior
Notes require semi-annual interest payments.
11.65% PAYMENT-IN-KIND NOTES:
In January 1993, Prudential agreed, among other things, to convert $10
million of the then outstanding 11% Subordinated Notes into $10 million of
10.65% Payment-in-Kind Notes (the "PIK Notes") due November 1, 1999 (the "1993
Recapitalization"). The PIK Notes require semi-annual interest payments
30
GRUBB & ELLIS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. LONG-TERM DEBT AND RECAPITALIZATION (CONTINUED)
until all of the 9.9% Senior Notes have been retired, the interest may be paid
in kind by the issuance of additional PIK Notes. In connection with the 1994
Recapitalization, the terms of the principal payments were modified requiring
two approximately equal installments on November 1, 2000 and 2001.
Additionally, the interest rate per annum increased from 10.65% to 11.65% (the
"11.65% PIK Notes") per annum on January 1, 1996. Interest expense is being
recorded on the level yield method at an effective yield rate of 11.5% per
annum. The outstanding amount of the 11.65% PIK Notes is net of $920,000
canceled by Prudential in payment of the exercise price of a warrant pursuant to
the terms of the 1993 Recapitalization and unamortized discount of $213,000 at
June 30, 1995. Interest expense paid in kind was $1,606,000, $1,407,000 and
$1,137,000 for fiscal years ending June 30, 1996, 1995 and 1994, respectively.
REVOLVING CREDIT NOTE:
The Revolving Credit Note bears interest at 2.5% above LIBOR and has
certain repayment requirements and other financial covenants. Prior to the 1994
Recapitalization, upon maturity, the Company had the option of converting the
note into a term note which would mature on December 31, 1996, have an interest
rate of LIBOR plus 5% and require equal semi-annual principal payments beginning
June 30, 1995. In connection with the 1994 Recapitalization, Prudential
canceled the conversion option, extended the maturity date to November 1, 1999
and waived the Company's obligation to repay all of the outstanding principal
for a 60-day period in 1994 and in subsequent years until the fiscal year
beginning July 1, 1997.
OTHER NOTES PAYABLE:
Other notes payable of the Company are secured by various assets with
carrying values of approximately $411,000 and $411,000 at June 30, 1996 and
1995, respectively.
AXIOM CREDIT FACILITY:
Axiom has a credit facility with a subsidiary of IBM which provides for
maximum outstanding borrowings not to exceed the lesser of $2,050,000 or Axiom's
borrowing base which is comprised of eligible accounts receivable as defined.
The credit facility expires October 19, 1998 and is subject to automatic
successive three year extensions unless IBM provides ninety (90) days written
notice of its intent to terminate at the end of the initial three year term or
at the end of any successive three year terms. There were no borrowings
outstanding under this credit facility as of June 30, 1996. Any borrowings
under this credit facility would be collateralized by substantially all of
Axiom's assets and subject to certain financial ratio covenants, including the
maintenance of minimum levels of net worth.
JUNIOR CONVERTIBLE PREFERRED STOCK:
In January 1993, the Company issued 150,000 shares of 5% Junior Convertible
Preferred Stock ("Junior Preferred") and five-year warrants to purchase 200,000
shares of common stock at an exercise price of $5.50 per share to Prudential in
exchange for $15 million of the then outstanding 10.65% Subordinated Notes.
Each share of Junior Preferred is convertible, at the
31
GRUBB & ELLIS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. LONG-TERM DEBT AND RECAPITALIZATION (CONTINUED)
option of the holder, into shares of common stock of the Company determined by
dividing the $100 stated value per share by the conversion price of $5.6085.
Each share of Junior Preferred is also subject to mandatory conversion based on
specific financial ratios and/or conditions. Holders of Junior Preferred are
entitled to receive, out of any funds legally available, cumulative dividends
payable in cash at a rate of 5% per annum compounded annually. The Junior
Preferred Stock also was subject to mandatory redemption by the Company.
The 1994 Recapitalization provided for the elimination of the mandatory
redemption provisions and an increase in the dividend rate effective January 1,
2002 to 10% per annum with further increases of 1% per annum effective January
1, 2003 and January 1, 2004 and 2% per annum effective January 1, 2005 and each
January 1 thereafter.
With respect to dividend rights and rights on redemption and liquidation,
winding up and dissolution, the Junior Preferred ranks prior to any other equity
securities of the Company, including all classes of common stock and any series
of preferred stock of the Company other than the Senior Convertible Preferred
Stock, which ranks prior to Junior Preferred.
Prior to the 1994 Recapitalization, the carrying value of the Junior
Preferred was adjusted by accretion of liquidation preference due upon
liquidation in the amount of $653,000, and accretion of direct costs of $27,000.
On a cumulative basis, undeclared dividends and accretion of direct costs
amounted to $1,385,000 and $58,000, respectively. In connection with the 1994
and 1993 Recapitalizations, the carrying value of the Junior Preferred was
adjusted by direct costs of $17,000 and $183,000, respectively.
SENIOR CONVERTIBLE PREFERRED STOCK:
In January 1993, the Company issued to Warburg and Joe F. Hanauer
("Hanauer") for $13,750,000 in cash, an aggregate of 137,160 shares of 12%
Senior Convertible Preferred Stock ("Senior Preferred"), five-year warrants to
purchase 500,000 and 200,000 shares of common stock at exercise prices of $5.00
and $5.50 per share, respectively, and five-year warrants to purchase up to
400,000 shares of common stock (the "Contingent Warrants") which become
exercisable at a formula price only in the event the Company incurs a defined
liability in excess of $1.5 million.
Each share of Senior Preferred is convertible, at the option of the holder,
into shares of common stock of the Company determined by dividing the $100
stated value per share by the conversion price of $2.6564 for Warburg and
$2.6354 for Hanauer. Each share of Senior Preferred is also subject to
mandatory conversion based on specific financial ratios and/or conditions. The
Senior Preferred was also subject to mandatory redemption by the Company.
Hanauer's shares of Senior Preferred are subject to anti-dilution provisions
with respect to the issuance of common stock and common stock equivalents at
less than the conversion price. Holders of Senior Preferred are entitled to
receive, out of any funds legally available, cumulative dividends payable in
cash at a rate of 12% per annum compounded annually.
32
GRUBB & ELLIS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. LONG-TERM DEBT AND RECAPITALIZATION (CONTINUED)
SENIOR CONVERTIBLE PREFERRED STOCK (CONTINUED):
The 1994 Recapitalization provided for the elimination of the mandatory
redemption provision and an increase in the dividend rate so that at such time
the dividend rate on the Junior Preferred increases above the dividend rate of
the Senior Preferred, the dividend rate on the Senior Preferred will increase by
the same amount. As a result of the application of the anti-dilution provisions
previously existing in Warburg's Senior Preferred and currently existing in
Hanauer's, the number of shares issuable upon conversion of the Senior Preferred
increased from 4,551,201 shares to 5,166,028 shares. With respect to dividend
rights and rights on redemption and on liquidation, winding up and dissolution,
the Senior Preferred ranks prior to any other equity securities of the Company,
including all classes of common stock and any other series of preferred stock of
the Company.
Prior to the 1994 Recapitalization, the carrying value of the Senior
Preferred was adjusted by accretion of liquidation preference due upon
liquidation in the amount of $1,520,000 and the accretion of direct costs of
$160,000. On a cumulative basis, undeclared dividends and accretion of direct
costs amounted to $3,489,000 and $336,000, respectively. In connection with the
1994 and 1993 Recapitalizations, the carrying value of the Senior Preferred was
adjusted by direct costs of $100,000 and $1,070,000, respectively.
NEW WARRANTS AND AMENDMENTS TO EXISTING WARRANTS:
As consideration for acquiring shares of stock not purchased in the
Stockholder Rights Offering in connection with the Standby Agreement, and
agreeing to other financing transactions, the Company issued to Warburg a
warrant to purchase 325,000 shares at an exercise price of $2.375 per share,
exercisable within 5 years. As consideration for modifying the terms of the
9.9% Senior Notes, 11.65% PIK Notes and Revolving Credit Note, waiving
noncompliance with and deferring application of certain covenants of the
Prudential debt agreement, and agreeing to other financing transactions, the
Company issued to Prudential a warrant to purchase 150,000 shares at an exercise
price of $2.375 per share, exercisable within 5 years. Loan costs of $225,000
were capitalized in connection with the Prudential warrant and are being
amortized over the weighted average remaining terms of the debt agreements with
Prudential.
In connection with the 1994 Recapitalization, the Company's warrants to
purchase common stock issued to Warburg and Prudential in connection with the
1993 Recapitalization were amended to reduce the exercise price to $3.50 per
share, eliminate certain anti-dilution provisions, and in the case of the
warrants held by Prudential, extend the expiration date from January 1998 until
December 1998. Prudential waived the anti-dilution provisions of its existing
warrants in connection with the 1994 Recapitalization.
33
GRUBB & ELLIS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. LONG-TERM DEBT AND RECAPITALIZATION (CONTINUED)
As a result of the 1994 Recapitalization and application of the anti-
dilution provisions previously existing in the warrants held by Warburg and
currently existing in the warrants held by Hanauer, the aggregate number of
shares issuable upon conversion of such warrants have increased from 726,182 to
1,048,893 shares. Loan costs of $34,000 were capitalized in connection with the
Prudential warrant amendments and are being amortized over the weighted average
remaining terms of the debt agreements with Prudential. Contingent warrants
held by Warburg, originally issued with the Senior Preferred, to acquire up to
373,818 shares under certain circumstances, were canceled.
PRUDENTIAL LONG-TERM DEBT RESTRICTIONS:
In connection with the 1993 Recapitalization, Prudential and the Company
signed an agreement (the "New Note Agreement") which contains significant
restrictions on the payment of cash dividends and purchases of stock of the
Company. The New Note Agreement also contains significant restrictions on the
Company's (and certain of its subsidiaries') ability to, among other things, (i)
incur debt and liens upon their properties, (ii) enter into guarantees and make
loans, investments and advances, (iii) merge or enter into similar business
combinations, (iv) conduct any business other than their present businesses, (v)
sell assets, including receivables, (vi) make capital expenditures and (vii)
enter into certain other transactions.
The New Note Agreement between the Company and Prudential contains various
affirmative and negative covenants, which require, among other things, that the
Company (combined with certain of its subsidiaries and taken as a whole)
maintain a ratio of consolidated current assets to consolidated current
liabilities (the "Working Capital Ratio") as defined in the New Note Agreement,
excluding the current portion of long-term debt, of not less than 1:1 at the end
of each of its fiscal quarters. In connection with the 1994 Recapitalization,
Prudential agreed to waive the requirements of the Working Capital Ratio, and
covenants restricting the Company's capital expenditures until April 1, 1997 and
eliminated the cumulative loss provision.
6. INCOME TAXES
While the Company has changed its financial reporting year to a fiscal year
ending June 30, it will continue to maintain the calendar year for tax reporting
purposes. The provision for income taxes for each of the three fiscal years
ended June 30, 1996, 1995 and 1994, consisted of state and local income taxes
due currently. Additionally, the provision for income taxes for fiscal years
ended June 30, 1995 and 1994 includes federal income taxes related solely to
Axiom which filed on a separate company basis for tax purposes.
At June 30, 1996, the following income tax carryforwards were available to
the Company, after taking into effect the reduction in tax attributes
resulting from the cancellation of indebtedness pursuant to Section 108(b)(2)
of the Internal Revenue Code (the "Code") (in thousands):
Expiration
Amount Dates
------- --------
Federal regular tax operating loss carryforwards $41,532 2005 to 2010
Federal investment tax credit carryforwards $ 278 1998 to 2000
34
GRUBB & ELLIS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. INCOME TAXES (CONTINUED)
The 1993 Recapitalization constituted an ownership change within the
meaning of Section 382 of the Code thereby limiting the amount of
post-ownership change taxable income which may be offset by the above net
operating loss carryovers attributable to periods prior to the ownership
change. The annual amount of net operating losses allowed under Section 382
will be approximately $825,000. Net operating losses not subject to the
limitation under Section 382 are approximately $21.3 million.
The Company's effective tax rate on its income (loss) before taxes differs
from the statutory federal regular tax rate as follows:
Years Ended June 30,
-------------------------------
1996 1995 1994
------ ------ ------
Federal statutory rate 35.0% 35.0% (35.0)%
State and local income taxes
(net of federal benefit) 1.9 5.1 2.2
Goodwill amortization - - 21.3
Meals and entertainment 6.3 6.6 0.8
Recognition of a deferred tax asset
in the current period - (24.2) -
Losses for which a tax detriment
(benefit) was recorded in current
period (33.8) - 14.2
-------- --------- --------
Effective income tax rate for the year 9.4% 22.5% 3.5%
-------- --------- --------
-------- --------- --------
At June 30, 1996, net deferred tax assets totaled approximately $21.6
million. The total valuation allowance recognized for net deferred tax assets
was also approximately $21.6 million. The valuation allowance decreased by
approximately $3.2 million during the fiscal year ended June 30, 1996.
The differences between the tax bases of assets and liabilities and their
financial reporting amounts that give rise to significant portions of deferred
income tax liabilities or assets are: reserves for severance, office closures
and claims and settlements, real estate investment valuation allowances, equity
in partnership gains and losses, property and equipment depreciation and accrued
expenses.
35
GRUBB & ELLIS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. INCOME TAXES (CONTINUED)
The components of the Company's deferred tax (liabilities) and assets are
as follows as of June 30, 1996 (in thousands):
Gross deferred tax liabilities - current
Commission and fee reserves $ (489)
Gross deferred tax assets - current
Commission and fee reserves $1,549
Claims and settlements 356
Compensation accrual 936
Workers' compensation accrual 652
--------
Gross deferred tax assets - current 3,493
Deferred tax assets valuation
allowance - current (3,004)
Gross deferred tax assets - noncurrent
Investment in partnerships 19
Depreciation 19
Investment tax credit 278
Commission and fee reserves 1,553
Claims and settlements 2,599
Net operating loss carryforwards 15,886
Estimated net operating loss
carryforward limitation under
Code Section 382 (1,770)
--------
Gross deferred tax assets - noncurrent 18,584
Deferred tax assets valuation
allowance - noncurrent (18,584)
--------
Net deferred tax (liability) asset $ -
--------
--------
7. STOCK OPTIONS, STOCK PURCHASE AND EMPLOYEE 401(k) PLANS
STOCK OPTION PLANS:
Changes in stock options were as follows for the fiscal years ended June
30, 1996, 1995 and 1994:
36
GRUBB & ELLIS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. STOCK OPTIONS, STOCK PURCHASE AND EMPLOYEE 401(k) PLANS (CONTINUED)
STOCK OPTION PLANS (CONTINUED):
1996 1995 1994
------------------------- -------------------------- ------------------------
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
---------- ------------ ----------- ----------- --------- ---------
Stock Options
outstanding at the
beginning of the $1.88 to $2.88 to $3.50 to
year 651,900 $28.75 321,118 $28.75 662,900 $28.75
Granted or $2.13 to $1.88 to $2.88 to
regranted 1,000,000 $2.38 352,850 $2.38 162,000 $4.13
Lapsed or
canceled $1.88 to $4.13 to $3.50 to
(552,100) $23.15 (22,068) $18.75 (503,782) $18.75
$1.88 to
Exercised (14,400) $3.13 - - - -
---------- ------------ ----------- ----------- --------- ---------
Stock options
outstanding at the $1.88 to $1.88 to $2.88 to
end of the year 1,085,400 $28.75 651,900 $28.75 321,118 $28.75
---------- ------------ ----------- ----------- --------- ---------
---------- ------------ ----------- ----------- --------- ---------
Exercisable at end $1.88 to $2.88 to $3.50 to
of the year 300,235 $28.75 165,251 $28.75 96,461 $28.75
---------- ------------ ----------- ----------- --------- ---------
---------- ------------ ----------- ----------- --------- ---------
The Company's 1990 Amended and Restated Stock Option Plan, as amended,
provides for grants of options to purchase the Company's common stock. The plan
was amended effective November 1995 to authorize a total of 1,500,000 shares for
issuance under the plan and to provide for flexibility in setting terms of
exercise. At June 30, 1996, 1995 and 1994, the number of shares available for
the grant of options were 425,534, 723,434 and 1,030,029, respectively. Stock
options under this plan are gra