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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
FOR THE FISCAL YEAR ENDED JUNE 30, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _________________ TO _________________
COMMISSION FILE NUMBER 1-8122
GRUBB & ELLIS COMPANY
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE
(STATE OR OTHER JURISDICTION OF
INCORPORATION OR ORGANIZATION)
2215 SANDERS ROAD, SUITE 400, NORTHBROOK, IL
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
94-1424307
(I.R.S. EMPLOYER IDENTIFICATION NO.)
60062
(ZIP CODE)
(847) 753-7500
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
--------------------------
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
TITLE OF EACH CLASS
COMMON STOCK
NAME OF EACH EXCHANGE ON WHICH REGISTERED
NEW YORK 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 non-affiliates
of the registrant as of September 20, 2002 was approximately $8,071,474.
The number of shares outstanding of the registrant's common stock as of
September 20, 2002 was 15,078,299 shares.
--------------------------
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the Registrant's definitive proxy statement to be filed
pursuant to Regulation 14A no later than 120 days after the end of the fiscal
year (June 30, 2002) are incorporated by reference into Part III of this Report.
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GRUBB & ELLIS COMPANY
FORM 10-K
TABLE OF CONTENTS
Page
COVER PAGE ............................................................................................. 1
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
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations ... 9
Item 7A. Quantitative and Qualitative Disclosures About Market Risk .............................. 18
Item 8. Financial Statements and Supplementary Data ............................................. 19
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 ...................................... 43
Item 11. Executive Compensation .................................................................. 43
Item 12. Security Ownership of Certain Beneficial Owners and Management .......................... 43
Item 13. Certain Relationships and Related Transactions .......................................... 43
PART IV.
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K ........................ 44
SIGNATURES ............................................................................................. 49
CERTIFICATIONS ......................................................................................... 50
EXHIBIT INDEX .......................................................................................... 52
2
GRUBB & ELLIS COMPANY
PART I
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 an integrated real estate services firm. The Company utilizes more
than 1,000 transaction professionals in 42 owned offices, and over 400
transactions professionals in 47 affiliate offices. Including its alliance with
Knight Frank, one of Europe's leading real estate consulting firms, it has the
collective resources of over 8,000 individuals in 200 offices in 29 countries
around the world. The Company is one of the nation's largest publicly traded
commercial real estate firms, based on total revenue.
The Company, through its offices, affiliates and alliance with Knight
Frank provides a full range of real estate services, including transaction,
management and consulting services, to users and investors worldwide.
Professionals throughout Grubb & Ellis strategize, arrange and advise on the
sale, acquisition or lease of such business properties as industrial, retail and
office buildings, as well as the acquisition and disposition of multi-family
properties and commercial land.
Major multiple-market clients have a single point of contact through the
Company's global accounts program for coordination of all services. Delivered in
a seamless manner across a global platform, comprehensive services inclusive of
feasibility studies, site selection, market forecasts and research are made
available to large companies and investors.
Property and facilities management services are provided by Grubb & Ellis
Management Services, Inc. ("GEMS"), a wholly owned subsidiary of the Company.
Leveraging the management portfolio and the trend for outsourcing, additional
revenues are earned in the provision of business services and construction
management. Operating on a national scale, GEMS had approximately 152 million
square feet of property under management as of June 30, 2002.
Our global executive office is located at 55 E. 59th Street, New York, New
York 10022-1122 (telephone 212-759-9700). Our principal operations center is
located at 2215 Sanders Road, Suite 400, Northbrook, Illinois 60062 (telephone
847-753-7500).
CURRENT BUSINESS PLATFORM AND ORGANIZATION
Historically, Grubb & Ellis' transaction services operations have
generated approximately 85% of the Company's revenue, with leasing transactions
providing approximately 75% of the transaction revenue and dispositions and
acquisitions accounting for the remaining 25%. The leasing activity represents a
balanced blend of tenant representation, landlord representation and
dual-representation. Grubb & Ellis' transaction professionals are supported by
the Company's in-depth market research which is regarded by real estate
professionals and other industry constituents as one of the leading sources for
market data in the real estate industry.
The management services group has traditionally represented approximately
15% of the Company's revenue. Management service fees are generated from
third-party property management, facilities management, business services, and
other related activities. The Grubb & Ellis Management Services business unit
provides its customers with client accounting, engineering services, independent
property management, and corporate facilities management.
The Company is currently organized in the following business segments, in
order to provide the real estate related services described below. Additional
information on these business segments can be found in Note 16 of Notes to
Consolidated Financial Statements in Item 8 of this Report.
TRANSACTION SERVICES
Historically, transaction services have represented a large portion of the
Company's operations, and in fiscal year 2002 represented 84% of the Company's
total revenue. A significant portion of the transaction services provided by the
Company are transaction related services, in which the Company represents the
interests of tenants, owners, buyers or sellers in leasing, acquisition and
disposition transactions. These transactions involve various types of commercial
real estate, including office, industrial, retail, hospitality, multi-family and
land.
3
The Company also delivers, to a lesser extent, certain consulting related
services primarily to its transaction services clients, including site
selection, feasibility studies, exit strategies, market forecasts, appraisals,
strategic planning and research services.
MANAGEMENT SERVICES
GEMS provides comprehensive property management and related services for
properties owned primarily by institutional investors, along with facilities
management services for corporate users. Related services include construction
management, business services and engineering services. In fiscal year 2002,
these services represented the remaining 16% of the Company's total revenue.
STRATEGIC INITIATIVES
In fiscal 2002, the Company continued to build a global platform and
develop the expertise to provide a comprehensive range of integrated real estate
transaction and advisory services. The Company plans to leverage its expertise
and market presence in transaction and management services to become a
full-service business advisory firm that corporations entrust to advise them on
strategic real estate issues. The Company continued its efforts this past fiscal
year in positioning itself as a leading provider of comprehensive real estate
services. In order to maximize the potential of the integrated services
platform, the Company will focus on building value-added services such as global
consulting, project management and capital markets capabilities. The Company's
platform will continue to strive for differentiation and competitive advantage
in the pursuit of transaction services business.
Grubb & Ellis will strive to build real estate advisory capabilities that
provide the depth and specialty expertise that will enhance its delivery of
transaction services and position the Company as a strategic advisor to
corporate America. The Company will continue to build comprehensive value-added
services that address the strategic complexities of real estate decisions faced
by business entities and other constituents in the real estate industry. As a
prelude to executing a transaction, the Company will seek to advise a client on
how real estate fits into its overall strategic plan. By positioning Grubb &
Ellis as a business advisor to corporate executive management, the Company plans
to create the platform to deliver the strategic planning and advisory real
estate services that the Company believes will be the catalyst for increased
success in the delivery of transactions. The Company will focus on an
account-centric model of building client relationships and recurring revenue
streams from the integrated business platform in furtherance of its goal to
provide real estate services to an identifiable and sustainable customer base.
In addition, if successfully implemented, Grubb & Ellis believes, among other
things, that the Company would then be more resilient to the economic swings
that have traditionally impacted the Company's earnings.
The Knight Frank strategic alliance is the centerpiece for the advancement
of the Company's global business strategy. With market presence in Europe, India
and the Pacific Rim, the Company believes that Knight Frank is positioned to be
an effective alliance partner that complements Grubb & Ellis' strengths and
provides the mechanism to deliver real estate services to global enterprises. As
the trend towards globalization among large entities continues to gain momentum,
the Company intends to focus on global business development and capabilities.
Grubb & Ellis has focused its efforts in penetrating the lucrative "middle
market" of real estate operating companies, REITs, and real estate
investors/owners in the delivery of transaction services on complex dispositions
and investment sale transactions. The Company's senior investment transaction
professionals have developed strategic relationships in the institutional
investment marketplace that provide recurring revenues from investment sales
activities involving pension advisors, opportunity funds, and other constituents
that invest in commercial properties.
In February 2002, the Company acquired substantially all of the assets of
the Wadley-Donovan Group, Inc., a professional real estate services firm located
in northern New Jersey. This group specializes in site selection, consulting and
providing economic development strategies primarily for Fortune 100 companies
and state, local and regional government agencies and municipalities. The
Company continues to explore additional strategic acquisition opportunities that
have the potential to expand the depth and breadth of its current lines of
business and increase its market share. The Company's ability to assimilate
acquired advisory practices and new strategic initiatives, and its effectiveness
in transitioning the overall related infrastructure, are critical to its success
in realizing its goals of a fully integrated business model. There can be no
assurance that the Company will be able to complete any further acquisitions or
introductions of new strategic initiatives.
Grubb & Ellis plans to continue to leverage the talent within the Company
and the collective local market knowledge to differentiate themselves in the
marketplace. In building the integrated business services platform, the Company
4
plans to leverage each of its specialty operating areas, stressing synergy and
integration in growing account-centric relationships among prominent owners and
users of real estate.
The Company has broadened its national affiliate program, through
alliances with 39 real estate services firms, which has enabled it to enter
markets where it previously did not have a formal presence and to better meet
the multi-market needs of global clients. The Company has also invested in
technology systems designed to provide a scalable platform for growth and to
efficiently deliver and share data with clients. Among them is what the Company
believes to be a state-of-the-art, company-wide information sharing and research
network which enables its professional staff across all offices to work more
efficiently, access the latest market intelligence, and more fully address
clients' needs.
INDUSTRY AND COMPETITION
The commercial real estate industry is large and fragmented. The estimated
$4 trillion of commercial real estate in the United States produces annual sales
transactions valued at $500 billion and annual lease transactions valued at $200
billion. The gross market for annual brokerage commissions is estimated at
approximately $19 billion. On a national basis, the commercial brokerage
industry is highly fragmented with the half-dozen leading firms generating
approximately 10% of the revenue.
As a result of the current economic downturn, at present, lease rates have
declined or stabilized in many markets. Absorption rates have dropped
significantly and vacancy rates have increased in many markets. Leasing
commission rates have held firm, although sales commission rates have come under
pressure, especially for larger institutional-grade properties. These factors
have contributed to an industry-wide decline in commission revenue.
The Company competes in a variety of service disciplines within the
commercial real estate industry. Each of these business areas is highly
competitive on a national as well as local level. The Company faces competition
not only from other real estate service providers, but also from boutique real
estate advisory firms, appraisal firms and self-managed real estate investment
trusts. Although many of the Company's competitors are local or regional firms
that are substantially smaller than the Company, some of the Company's
competitors are substantially larger than the Company on a local or regional
basis. In general, there can be no assurance that the Company will be able to
continue to compete effectively, to maintain current fee levels or margins, or
maintain or increase its market share. Due to the Company's relative strength
and longevity in the markets in which it presently operates, and its ability to
offer clients a range of real estate services on a local, regional, national and
international basis, 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
Federal, state and local laws and regulations impose environmental
controls, disclosure rules and zoning restrictions that have impacted the
management, development, use, and/or sale of real estate. The Company's
financial results and competitive position for the fiscal year 2002 have not
been materially impacted by its compliance with environmental laws or
regulations. Such laws and regulations tend to discourage sales and leasing
activities and mortgage lending with respect to some properties, and may
therefore adversely affect the Company and the industry in general. Failure of
the Company to disclose environmental issues in connection with a real estate
transaction may subject the Company to liability to a buyer or lessee of
property. Applicable laws and contractual obligations to property owners could
also subject the Company to environmental liabilities through the provision of
management services. Environmental laws and regulations impose liability on
current or previous real property owners or operators for the cost of
investigating, cleaning up or removing contamination caused by hazardous or
toxic substances at the property. The Company may be held liable as an operator
for such costs in its role as an on-site property manager. Liability can be
imposed even if the original actions were legal and the Company had no knowledge
of, or was not responsible for, the presence of the hazardous or toxic
substances. Further, the Company may also be held responsible for the entire
payment of the liability if it is subject to joint and several liability and the
other responsible parties are unable to pay. The Company may also be liable
under common law to third parties for damages and injuries resulting from
environmental contamination emanating from the site, including the presence of
asbestos containing materials. Insurance for such matters may not be available.
Additionally, new or modified environmental regulations could develop in a
manner that could adversely affect the Company's transaction and management
services. See Note 10 of Notes to Consolidated Financial Statements in Item 8 of
this Report.
SEASONALITY
Since the majority of the Company's revenues are derived from transaction
services which are seasonal in nature, the Company's revenue stream and the
related commission expense are also subject to seasonal fluctuations. However,
5
the Company's non-variable operating expenses, which are treated as expenses
when incurred during the year, are relatively constant in total dollars on a
quarterly basis. 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, 2002, 2001 and 2000, as a percentage of total annual revenue,
ranged from a high of 34.4% to a low of 18.6%.
SERVICE MARKS
The Company has registered trade names and service marks for the "Grubb &
Ellis" name and logo and certain other trade names. The right to use the "Grubb
& Ellis" name is considered an important asset of the Company, and the Company
actively defends and enforces such trade names and service marks.
REAL ESTATE MARKETS
The Company's business is highly dependent on the commercial real estate
markets, which in turn are impacted by numerous factors, including but not
limited to the general economy, interest rates and demand for real estate in
local markets. Changes in one or more of these factors could either favorably or
unfavorably impact the volume of transactions and prices or lease terms for real
estate. Consequently, the Company's revenue from transaction services and
property management fees, operating results, cash flow and financial condition
are impacted by these factors, among others.
SECURITIES EXCHANGE LISTING
The Company's common stock is currently listed on the New York Stock
Exchange ("NYSE") pursuant to a listing agreement. As previously disclosed by
the Company, the NYSE had accepted the Company's proposed business plan to
attain compliance with the NYSE's listing standard on or before July 4, 2003.
This plan had been submitted in response to a notification received by the
Company on January 4, 2002 regarding non-compliance with such listing standards.
As a result of the business plan's acceptance, the Company's common stock
continued to be traded on the exchange, subject to the Company maintaining
compliance with the plan and periodic review by the NYSE. Upon completion of a
recent review, the NYSE announced on October 8, 2002 that the Company's common
stock will be de-listed from the NYSE, due primarily to the Company's book value
and market capitalization value being below minimum levels required by their
listing standards. The Company is making arrangements to have its common stock
traded on the over-the-counter market ("OTC") and is scheduled to cease trading
on the NYSE prior to the opening on Thursday October 17, 2002. Although the
Company is seeking an orderly transition and has reason to believe the NYSE will
effectuate the same, there can be no assurance that the OTC will accept the
Company's shares for listing prior to their de-listing from the NYSE, or at all,
and that there will be no interruption of the public listing of the Company's
common stock.
ITEM 2. PROPERTIES
The Company leases all of its office space through non-cancelable
operating leases. The terms of the leases vary depending on the size and
location of the office. As of June 30, 2002, the Company leased approximately
801,000 square feet of office space in 88 locations under leases, which expire
at various dates through December 31, 2011. For those leases that are not
renewable, the Company believes there is adequate alternative office space
available at acceptable rental rates to meet its needs, although there can be no
assurances in this regard. For further information, see Note 10 of Notes to
Consolidated Financial Statements in Item 8 of this Report.
ITEM 3. LEGAL PROCEEDINGS
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of fiscal year 2002.
6
GRUBB & ELLIS COMPANY
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
MARKET AND PRICE INFORMATION
The principal market for the Company's common stock is the New York Stock
Exchange ("NYSE"). The following table sets forth the high and low sales prices
of the Company's common stock on the NYSE for each quarter of the fiscal years
ended June 30, 2002 and 2001.
2002 2001
------------------------ ------------------------
High Low High Low
------ ------ ------ ------
First Quarter $5.40 $3.35 $6.50 $5.50
Second Quarter $4.10 $2.31 $6.38 $4.13
Third Quarter $3.10 $2.35 $6.30 $4.80
Fourth Quarter $4.25 $2.30 $6.07 $4.50
As of September 20, 2002, there were 1,225 registered holders of the
Company's common stock and 15,078,299 shares of common stock outstanding, of
which 11,409,447 were held by persons who may be considered "affiliates" of the
Company, as defined in Federal securities regulations. Sales of substantial
amounts of common stock, including shares issued upon the exercise of warrants
or options, or the perception that such sales might occur, could adversely
affect prevailing market prices for the common stock.
No cash dividends were declared on the Company's common stock during the
fiscal years ended June 30, 2002 or 2001. The Company has agreed, under the
terms of its revolving credit facility, not to pay cash dividends on its common
stock for the duration of the facility, without obtaining an appropriate waiver
from the lenders.
SALES OF UNREGISTERED SECURITIES
On January 23, 2002, Warburg, Pincus Investors, L.P. exercised warrants to
purchase an aggregate of 1,337,358 shares of Common Stock of the Company at a
weighted average price of approximately $3.11 per share, in cash. The shares
were exempt from the registration requirements under Section 4(2) of the
Securities Act of 1933, as amended (the "Act"), in that the transaction did not
involve a public offering or sale of the Company's securities ("Section 4(2)
Exemption.").
On January 28, 2002, the Company issued to Joe F. Hanauer, a director of
the Company, 1,977 shares of Common Stock of the Company, upon the surrender and
cashless exercise of a warrant to purchase 10,714 shares of Common Stock of the
Company at an exercise price of $2.375 per share. The issuance of the 1,977
shares was exempt as a Section 4(2) Exemption.
Effective May 14, 2002, the Company repurchased the shares issued to
Warburg, Pincus Investors, L.P. at the same aggregate purchase price paid for
them. At the same date, the Company issued and sold to Kojaian Ventures, L.L.C.
("KV") the same number of shares of common stock, at the same purchase price.
The shares were exempt from the registration requirements under Section 4(2) of
the Act, as a Section 4(2) Exemption.
Also effective May 14, 2002, the Company issued to KV a promissory note in
the face amount of $11,237,500, the outstanding principal, accrued interest and
certain costs of which were convertible, generally at the option of the holder,
to shares of a new Series A Preferred Stock. On September 19, 2002, KV converted
the promissory note to 11,725 shares of Series A Preferred Stock. The shares
were exempt from the registration requirements under Section 4(2) of the Act as
a Section 4(2) Exemption. The net proceeds of the note were used in part to pay
down revolving debt of the Company under its credit agreement and in part for
working capital purposes.
See Notes 6 and 17 of Notes to Consolidated Financial Statements, and such
disclosure is incorporated herein by reference.
None of the sales described above was underwritten.
7
EQUITY COMPENSATION PLAN INFORMATION
The following table provides information on equity compensation plans of
the Company as of June 30, 2002.
Number of securities
remaining available for
future issuance under
Number of securities to be Weighted average equity compensation
issued upon exercise of exercise price of plans (excluding
outstanding options, outstanding options, securities reflected in
warrants and rights warrants and rights column (a))
Plan Category (a) (b) (c)
- -------------- --------------------- ------------------- ---------------------
Equity Compensation
plans approved by
security holders 1,625,603 $5.36 2,417,153(1)
Equity compensation
plans not approved by
security holders 1,191,258 $7.59 755,355
Total 2,816,861 $6.30 3,172,508(1)
(1)Includes 915,782 shares authorized for issuance under the Company's Employee
Stock Purchase Plan, a plan intending to qualify under Section 423 of the
Internal Revenue Code of 1986, as amended.
EQUITY COMPENSATION PLANS NOT APPROVED BY STOCKHOLDERS
Grubb & Ellis 1998 Stock Option Plan--this information can be found in
Note 8 of Notes to Consolidated Financial Statements in Item 8 of this Report.
ITEM 6. SELECTED FINANCIAL DATA
Five-Year Comparison of Selected Financial and Other Data for the Company:
FOR THE YEARS ENDED JUNE 30,
-----------------------------------------------------------------------
2002 2001 2000 1999 1998
------ ------ ------ ------ ------
(IN THOUSANDS, EXCEPT SHARE DATA)
Total revenue .............................. $ 313,476 $ 411,962 $ 413,919 $ 314,101 $ 282,834
Net income (loss) .......................... (15,477) 1,369 16,290 8,079 21,506
Benefit (provision) for income taxes ....... 1,187 (5,372) (9,598) (5,301) (447)
(Increase) reduction in deferred tax asset
valuation allowance ...................... (5,214) -- -- 1,325 6,504
Income (loss) before extraordinary item and
cumulative effect (1) .................... (15,477) 4,908 16,290 8,079 21,506
Income (loss) before extraordinary item and
cumulative effect per common share (1)
- Basic .................................. (1.09) 0.28 0.82 0.41 1.10
- Diluted ................................ (1.09) 0.27 0.77 0.37 0.98
Weighted average common shares
- Basic .................................. 14,147,618 17,051,546 19,779,220 19,785,715 19,607,352
- Diluted ................................ 14,147,618 17,975,351 21,037,311 21,587,898 22,043,920
(1)Income and per share data reported on the above table reflect other
non-recurring expenses in the amount of $1.75 million, $6.2 million and $2.65
million for the fiscal years ended June 30, 2002, 2001 and 2000,
respectively. Net income for the fiscal year ended June 30, 2001 includes an
extraordinary loss of $406,000, net of taxes, on the extinguishment of debt
and a charge of $3.1 million reflecting the cumulative effect of a change in
an accounting principle. 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
Notes 5, 13 and 14 of the Notes to Consolidated Financial Statements in Item
8 of this Report.
8
AS OF JUNE 30,
-----------------------------------------------------------------------
2002 2001 2000 1999 1998
----- ----- ----- ----- -----
(IN THOUSANDS, EXCEPT SHARE DATA)
CONSOLIDATED BALANCE SHEET DATA:
Total assets ............................ $ 90,377 $ 92,426 $ 115,942 $ 98,451 $ 76,847
Working capital ......................... 4,251 1,216 11,883 (300) 15,822
Long-term debt .......................... 36,660 29,000 -- 553 459
Other long-term liabilities ............. 10,396 9,734 10,422 11,189 11,122
Stockholders' equity .................... 5,866 16,316 61,620 44,482 35,414
Book value per common share ............. 0.39 1.22 3.11 2.24 1.80
Common shares outstanding ............... 15,028,839 13,358,615 19,810,894 19,885,084 19,721,056
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Annual Report contains statements that are not historical facts and
constitute projections, forecasts or forward-looking statements within the
meaning of the Private Securities Litigation Reform Act of 1995. The statements
are not guarantees of performance. They involve known and unknown risks,
uncertainties, assumptions and other factors which may cause the actual results,
performance or achievements of the Company to be materially different from any
future results, performance or achievements expressed or implied by these
statements. You can identify such statements by the fact that they do not relate
strictly to historical or current facts. These statements use words such as
"believe," "expect," "should," "strive", "plan," "intend", "estimate" and
"anticipate" or similar expressions. When we discuss our strategy or plans, we
are making projections, forecasts or forward-looking statements. Actual results
and stockholders' value will be affected by a variety of risks and factors,
including, without limitation, international, national and local economic
conditions and real estate risks and financing risks and acts of terror or war.
Many of the risks and factors that will determine these results and values are
beyond the Company's ability to control or predict. These statements are
necessarily based upon various assumptions involving judgment with respect to
the future.
All such forward-looking statements speak only as of the date of this
Annual Report. The Company expressly disclaims any obligation or undertaking to
release publicly any updates of revisions to any forward-looking statements
contained herein to reflect any change in the Company's expectations with regard
thereto or any change in events, conditions or circumstances on which any such
statement is based.
Factors that could adversely affect the Company's ability to obtain these
results and value include, among other things:
o DECLINE IN THE VOLUME OF REAL ESTATE TRANSACTIONS AND PRICES OF REAL
ESTATE. The Company's revenue is largely based on commissions from real estate
transactions. As a result, a decline in the volume of real estate available for
lease or sale, or in real estate prices, could have a material adverse effect on
the Company's revenues.
o GENERAL ECONOMIC SLOWDOWN OR RECESSION IN THE REAL ESTATE MARKETS.
Periods of economic slowdown or recession, rising interest rates or declining
demand for real estate, both on a general or regional basis, will adversely
affect certain segments of the Company's business. Such economic conditions
could result in a general decline in rents and sales prices, a decline in the
level of investment in real estate, a decline in the value of real estate
investments and an increase in defaults by tenants under their respective
leases, all of which in turn would adversely affect revenues from transaction
services fees and brokerage commissions which are derived from property sales
and aggregate rental payments, property management fees and consulting and other
service fees.
o THE COMPANY'S DEBT LEVEL AND ABILITY TO MAKE PRINCIPAL AND INTEREST
PAYMENTS. The Company currently has $31.75 million of outstanding debt incurred
in connection with the self-tender offer. Any material downturn in the Company's
revenue or increase in its costs and expenses could render the Company unable to
meet its debt obligations. The Company is subject to credit facility covenants
which are based on the achievement of certain cash flow levels. Should these
cash flow levels not be achieved, it is possible that the Company would be found
to be in default of its credit facility.
o IMPLEMENTATION OF STRATEGIC INITIATIVES, EXPENSES OR CAPITAL EXPEND-
ITURES RELATED TO INITIATIVES. As discussed in Part I, Item 1 of this Annual
Report under "Strategic Initiatives," the Company has undertaken, and plans to
continue to undertake, a number of strategic initiatives, some of which involve
expansion into a new specialty areas, integration of the Company's business
units, investments in technology systems, service improvements, people and
acquisitions. There can be no assurance
9
that the Company will be able to successfully develop and expand its expertise
in specialty areas, whether by acquisition or organic growth, or that the
Company will be able to effectively integrate its core business units. Even if
the Company successfully develops and deploys its integrated services platform,
there can be no assurance that it will result in the Company's revenues and
value being less cyclical or in the Company's profit margins being more
consistent and higher. The investments related to some or all of these new
initiatives may result in significant expenditures by the Company. The Company's
results of operations could be adversely affected if these strategic initiatives
are unsuccessful.
o RISKS ASSOCIATED WITH ACQUISITIONS. As discussed in Part I, Item I of
this Annual Report under "Strategic Initiatives," the Company has completed an
acquisition and established a strategic alliance. Also, in connection with the
Company's strategic initiatives, it may undertake one or more additional
strategic acquisitions. There can be no assurance that significant difficulties
in integrating operations acquired from other companies and in coordinating and
integrating systems in a strategic alliance will not be encountered, including
difficulties arising from the diversion of management's attention from other
business concerns, the difficulty associated with assimilating groups of broad
and geographically dispersed personnel and operations and the difficulty in
maintaining uniform standards and policies. There can be no assurance that the
integration will ultimately be successful, that the Company's management will be
able to effectively manage any acquired business or that any acquisition or
strategic alliance will benefit the Company overall.
o LIABILITIES ARISING FROM ENVIRONMENTAL LAWS AND REGULATIONS. Part I,
Item I of this Annual Report under "Environmental Regulation" discusses
potential risks related to environmental laws and regulations.
o THE COMPANY FACES INTENSE COMPETITION. Part I, Item I of this Annual
Report under "Competition" discusses potential risks related to competition.
o THE COMPANY'S REVENUES ARE SEASONAL. Part I, Item I of this Annual
Report under "Seasonality" discusses potential risks related to the seasonal
nature of the Company's business.
o THE COMPANY'S ABILITY TO ATTRACT AND RETAIN QUALIFIED PERSONNEL. The
growth of the Company's business is largely dependent upon its ability to
attract and retain qualified personnel in all areas of its business. If the
Company is unable to attract and retain such qualified personnel, it may be
forced to limit its growth, and its business and operating results could suffer.
o CONTROL BY EXISTING STOCKHOLDERS. A single investor has in excess of 50%
of the voting power of the Company. As a result, this investor can influence the
Company's affairs and policies and the approval or disapproval of most matters
submitted to a vote of the Company's stockholders, including the election of
directors.
o OTHER FACTORS. Other factors are described elsewhere in this Annual
Report.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The Company's consolidated financial statements have been prepared in
accordance with accounting principles generally accepted in the United States,
which require the Company to make estimates and judgments that affect the
reported amount of assets, liabilities, revenues and expenses, and the related
disclosure. The Company believes that the following critical accounting
policies, among others, affect its more significant judgments and estimates used
in the preparation of its consolidated financial statements.
REVENUE RECOGNITION
Real estate sales commissions are 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, and title to real property has passed from seller to buyer, if
applicable. Real estate leasing commissions are recognized upon execution of
appropriate lease and commission agreements and receipt of full or partial
payment, and, when payable upon certain events such as tenant occupancy or rent
commencement, upon occurrence of such events. All other commissions and fees are
recognized at the time the related services have been performed by the Company,
unless future contingencies exist. Consulting revenue is recognized generally
upon the delivery of agreed upon services to the client.
IMPAIRMENT OF GOODWILL
In assessing the recoverability of the Company's goodwill, the Company
must make assumptions regarding estimated future cash flows and other factors to
determine the fair value of the respective assets. On July 1, 2002, the
10
Company adopted Statements of Financial Accounting Standards No. 142, "Goodwill
and Other Intangible Assets." The Company has completed the transitional
impairment tests of goodwill as of July 1, 2002 and has determined that no
goodwill impairment will impact the earnings and financial position of the
Company as of that date. Future events could occur which would cause the Company
to conclude that impairment indicators exist and an impairment loss is
warranted.
DEFERRED TAXES
The Company records a valuation allowance to reduce the carrying value of
its deferred tax assets to an amount that the Company considers is more likely
than not to be realized in future tax filings. In assessing this allowance, the
Company considers future taxable earnings along with ongoing and potential tax
planning strategies. Additional timing differences, future earnings trends
and/or tax strategies may occur which could warrant a corresponding adjustment
to the valuation allowance.
INSURANCE AND CLAIM RESERVES
The Company has maintained partially self-insured and deductible programs
for errors and omissions, general liability, workers' compensation and certain
employee health care costs. Reserves are based upon an estimate provided by an
independent actuarial firm of the aggregate of the liability for reported claims
and an estimate of incurred but not reported claims.
The Company is also subject to various proceedings, lawsuits and other
claims related to environmental, labor and other matters, and is required to
assess the likelihood of any adverse judgments or outcomes to these matters. A
determination of the amount of reserves, if any, for these contingencies is made
after careful analysis of each individual issue. New developments in each
matter, or changes in approach such as a change in settlement strategy in
dealing with these matters, may warrant an increase or decrease in the amount of
these reserves.
RESULTS OF OPERATIONS
OVERVIEW
The Company reported a net loss of $15.5 million for the year ended June
30, 2002, primarily due to the decline in net transaction services revenues,
partially offset by the decreases in operating expenses and non-recurring items
and the cumulative effect from the change in accounting principle recognized
during the prior fiscal year.
FISCAL YEAR 2002 COMPARED TO FISCAL YEAR 2001
REVENUE
The Company's revenue is derived principally from transaction services
fees related to commercial real estate, which include commissions from leasing,
acquisition and disposition, and agency leasing assignments as well as fees from
appraisal and consulting services. Management services fees comprise the
remainder of the Company's revenues, and include fees related to both property
and facilities management outsourcing and business services.
Total revenue for fiscal year 2002 was $313.5 million, a decrease of 23.9%
from revenue of $412.0 million for fiscal year 2001. Significantly affecting
this decline was a $96.4 million decrease in transaction services fees in the
current fiscal year from the prior fiscal year. This resulted from decreased
activity in the technology markets as well as the current softening in the
general economy and its impact on the real estate industry through negative
absorption and higher vacancy rates, particularly in the office sector. The
terrorist attacks of September 11, 2001 created additional marketplace
instability and further deterioration of overall economic conditions across the
United States. Management services fees remained relatively flat decreasing to
$51.4 million during the 2002 fiscal year as compared to $53.5 million in the
prior fiscal year.
COSTS AND EXPENSES
Services commissions expense is the Company's largest expense and is a
direct function of gross transaction services revenue levels, which include
transaction services commissions and other fees. Professionals receive services
commissions at rates that increase upon achievement of certain levels of
production. As a percentage of gross transaction revenue, related
11
commission expense decreased to 58.0% for fiscal year 2002 as compared to 60.4%
for fiscal year 2001. This decrease was due to unusually high average commission
expense incurred during the prior year in technology markets such as Silicon
Valley, San Francisco, Denver, Washington D.C. and New York, resulting from
higher production per professional.
Salaries, wages and benefits were relatively flat, decreasing by $1.4
million or 1.4% during fiscal year 2002 as compared to 2001. Selling, general
and administrative expenses decreased by $2.7 million, or 4.0%, for the same
period. The decrease in these operating costs of $4.1 million resulted from the
Company tightening its discretionary expenditures in response to the slowing
general economy.
Depreciation and amortization expense for fiscal year 2002 decreased to
$10.7 million from $11.6 million in fiscal year 2001. The Company holds
multi-year service contracts with certain key professionals, the costs of which
are amortized over the lives of the respective contracts, which are generally
two to three years. Amortization expense relating to these contracts of $2.1
million was recognized in fiscal year 2002, compared to $2.9 million in the
prior year due to a reduction in the number of new service contracts executed in
the current year.
During fiscal year 2002, the Company concluded long standing litigation
proceedings on the JOHN W. MATTHEWS, ET AL. V KIDDER, PEABODY & CO., ET AL. AND
HSM INC., ET AL. ("Matthews") case for which it had previously recorded loss
reserves. In addition, during this period, loss reserves were recorded as a
result of the liquidation proceedings surrounding one of the Company's insurance
carriers ("Reliance" liquidation). (See Note 10 of Notes to Consolidated
Statements in Item 8 of this Report for additional information.) The positive
outcome of the Matthews case, partially offset by the additional exposure on the
Reliance liquidation, resulted in $2.2 million of income from claim related
reserves. The Company also incurred other non-recurring expenses in fiscal year
2002 totaling $3.9 million, consisting of $1.0 million of severance costs
related to a reduction of salaried overhead, $2.1 million related to office
closure costs, $300,000 related to costs incurred for the retirement of the
Warburg Pincus $5,000,000 Subordinated Note and for the evaluation of an
unsolicited purchase offer from a third party, and $500,000 related to a
write-down of the carrying basis of an investment in a commercial real estate
services internet venture. The Company's decision to write-down its interest in
the venture was due to a dilution in the Company's ownership position, as well
as uncertainty in the venture's ability to achieve its business plan. As a
result of these events, the Company has recognized a net non-recurring expense
of $1,749,000 for fiscal year 2002.
During fiscal year 2001, the Company recognized other non-recurring
expenses totaling $6.2 million, relating primarily to the impairment of goodwill
related to the April 1998 acquisition of White Commercial Real Estate, as well
as compensation expense related to stock options exercised in connection with
the Company's self-tender offer, an initial write down in the carrying basis of
an investment in an internet venture, and executive severance costs related to
prior senior management changes. (See Notes 12 and 13 of Notes to Consolidated
Statements in Item 8 of this Report for additional information.)
In June 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets,"
effective for fiscal years beginning after December 15, 2001. Under the new
rules, goodwill will no longer be amortized but will be subject to annual
impairment tests in accordance with the Statement. Other intangible assets will
continue to be amortized over their useful lives. The Company will apply the new
rules on accounting for goodwill and other intangible assets beginning in the
first fiscal quarter of fiscal 2003, which for the Company would be the quarter
ending September 30, 2002. Application of the non-amortization provisions of the
Statement is expected to result in an increase in net operating income of
approximately $1.6 million per year. The Company has completed the transitional
impairment tests of goodwill as of July 1, 2002 and has determined that no
goodwill impairment will impact the earnings and financial position of the
Company as of that date.
Interest income decreased during fiscal year 2002 as compared to fiscal
year 2001 as a result of lower available invested cash and lower interest rates.
Interest expense incurred during fiscal year 2002 was due to the Company's
term loan borrowings under the credit facility related to the Company's
self-tender offer, and the note payable-affiliate funded in March 2002. Interest
expense incurred during the first half of fiscal year 2001 was due primarily to
seller financing related to business acquisitions made in calendar year 1998.
Interest expense incurred in the second half of fiscal year 2001 was due to the
term loan borrowings under the credit facility.
Effective December 31, 2000, the Company restructured its credit agreement
with Bank of America, N.A. as agent and lender and certain other lenders
("Credit Agreement"). Unamortized costs related to the prior agreement totaling
$406,000, net of applicable taxes, were written off and have been recorded as an
extraordinary loss from extinguishment of debt during fiscal year 2001.
12
As disclosed in "Accounting Change" below, the SEC issued SAB 101 relating
to the recognition of revenue for publicly owned companies. The application of
SAB 101 resulted in the recognition of a cumulative effect charge of $3.1
million (net of applicable taxes of $2.1 million) on July 1, 2000.
INCOME TAXES
As of June 30, 2002, the Company had gross deferred tax assets of $14.6
million, with $5.4 million of the deferred tax assets relating to net operating
loss carry forwards which will be available to offset future taxable income
through 2012. Management believes that the Company will generate sufficient
future taxable income to realize a portion of these net deferred tax assets. The
Company has recorded a valuation allowance for $9.7 million against the deferred
tax assets as of June 30, 2002 and will continue to do so until such time as
management believes that the Company will realize such tax benefits. Although
uncertainties exist as to these events, the Company will continue to review its
operations periodically to assess whether and when all deferred tax assets may
be realized. The net income tax benefit recorded in 2002 reflects a charge for
an increase in the valuation allowance of $5.2 million compared to a charge of
$200,000 in 2001. See Note 7 of Notes to Consolidated Financial Statements in
Item 8 of this Report for additional information.
NET INCOME
The net loss for fiscal year 2002 was $15.5 million, or $(1.09) per common
share on a diluted basis, as compared to net income of $1.4 million, or $.08 per
common share for fiscal year 2001.
STOCKHOLDERS' EQUITY
During fiscal year 2002, stockholders' equity decreased $10.4 million to
$5.9 million from $16.3 million at June 30, 2001. The net loss of $15.5 million
for fiscal year 2002 was partially offset by the receipt of $5.2 million of
proceeds from the exercise of warrants along with the sale of common stock under
the Company's stock option plans and employee stock purchase plan. See Liquidity
and Capital Resources below and Note 8 of Notes to Consolidated Financial
Statements in Item 8 of this Report for additional information. The book value
per common share issued and outstanding decreased to $0.39 at June 30, 2002 from
$1.22 at June 30, 2001.
FISCAL YEAR 2001 COMPARED TO FISCAL YEAR 2000
ACCOUNTING CHANGE
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101 ("SAB 101"), Revenue Recognition in Financial
Statements. SAB 101 summarizes the SEC staff's views regarding the recognition
and reporting of revenues in financial statements. The adoption of SAB 101 is
reflected as a cumulative effect of a change in accounting principle as of July
1, 2000. Under SAB 101, the Company's leasing commissions that are payable upon
certain events such as tenant occupancy or commencement of rent will now be
recognized upon the occurrence of such events. In addition, consulting fees will
be recognized under SAB 101 generally upon the delivery of agreed upon services
to the client. Historically, the Company had recognized leasing commissions at
the earlier of receipt of full payment or receipt of partial payment when lease
and commissions agreements had been executed and no significant contingencies
existed. The Company had recognized consulting fees as employee time was
incurred on a project. While this accounting change affects the timing of
recognition of leasing revenues (and corresponding services commission expense)
and consulting revenues, it does not impact the Company's cash flow from
operations.
The cumulative effect of the accounting change on prior years resulted in
a reduction to income for fiscal year 2001 of $3.1 million (net of applicable
taxes of $2.1 million), or $.17 per diluted share. The effect of retroactive
application of the accounting change to July 1, 2000 increased transaction
services fees by $2.6 million, EBITDA by $1.1 million and income before the
cumulative effect of the accounting change by $632,000, or $.04 per diluted
share, for fiscal year 2001.
On a pro forma basis, giving effect to the change retroactive to July 1,
1999, the Company would have reported transaction services fees of $354.0
million, EBITDA of $37.7 million, and net income of $15.5 million for fiscal
year 2000. Actual results reported for fiscal year 2000 included transaction
services fees of $355.7 million, EBITDA of $38.9 million and net income of $16.3
million.
13
REVENUE
Total revenue for fiscal year 2001 was $412.0 million, a decrease of 0.5%
from $413.9 million for fiscal year 2000. Transaction services fees remained
relatively flat, as increased activity in the first half of the fiscal year from
certain technology markets, multi-market relationships and larger assignments
was offset in the second half of the fiscal year by the weakening general
economy and its impact on the real estate industry through negative absorption
and higher vacancy rates. The impact of SAB 101 on these revenues for fiscal
2001 as compared to fiscal 2000 was insignificant. Management services fees of
$53.5 million in fiscal 2001 decreased by approximately $4.7 million, or 8.1%
compared to the prior year. New business revenue gains were offset by the
Company resigning a marginally profitable account which had generated
approximately $3.0 million in annual revenue, as well as fees recognized in
fiscal year 2000 resulting from an unusually large one-time business services
printing assignment.
COSTS AND EXPENSES
As a percentage of transaction services gross transaction revenue, related
commission expense increased to 60.4% from 58.5% for fiscal year 2001 as
compared to fiscal year 2000. Unusually high average commission expense had been
incurred during the first six months of fiscal year 2001 in once flourishing
technology markets such as Silicon Valley, San Francisco, Denver, Washington
D.C. and New York. This resulted from strong incremental revenue growth in these
markets and the commensurately high production per professional, rather than
changes to the existing compensation structure of the Company's transaction
professionals. Commensurate with the subsequent downturn in transaction services
commission revenues described above, the commission expenses incurred during the
last six months of fiscal year 2001 also declined.
Salaries, wages and benefits expenses, along with selling, general and
administrative expenses, were relatively flat in fiscal year 2001 as compared to
fiscal year 2000, increasing by approximately $710,000, or 0.4%.
Depreciation and amortization expense for fiscal year 2001 increased to
$11.6 million from $10.5 million in fiscal year 2000 as the Company placed in
service numerous technology infrastructure improvements during the first half of
fiscal year 2000. The Company also holds multi-year service contracts with
certain key professionals, the costs of which are being amortized over the lives
of the respective contracts, which are generally two to three years.
Amortization expense relating to these contracts of $2.9 million was recognized
in fiscal year 2001, compared to $2.2 million in the prior year.
During fiscal year 2001, the Company recognized other non-recurring
expenses totaling $6.2 million, relating primarily to the impairment of goodwill
related to the April 1998 acquisition of White Commercial Real Estate, as well
as compensation expense related to stock options exercised in connection with
the Company's self-tender offer, a writedown in the carrying basis of an
investment in an internet venture, and executive severance costs related to
senior management changes. Other non-recurring expenses totaling $2.7 million
for fiscal year 2000 were recognized in connection with the resignation of the
Company's former chairman and chief executive officer.
Interest income increased during fiscal year 2001 as compared to fiscal
year 2000 as a result of higher available invested cash from improved operations
in the first half of the fiscal year being invested prior to funding the
Company's self-tender offer and related costs during the latter half of the
fiscal year.
Interest expense incurred in fiscal year 2000 and through the first six
months of fiscal year 2001 was due primarily to seller financing related to
business acquisitions made in calendar year 1998, as well as credit facility
borrowings in the last half of fiscal year 1999. Interest expense incurred in
the second half of fiscal year 2001 was due to the term loan borrowings related
to the Company's self-tender offer.
INCOME TAXES
As of June 30, 2001, the Company had gross deferred tax assets of $11.4
million, with $2.5 million of the deferred tax assets relating to net operating
loss carry forwards. The Company recorded a valuation allowance for $4.5 million
against the deferred tax assets as of June 30, 2001.
NET INCOME
Net income for fiscal year 2001 was $1.4 million, or $.08 per common share
on a diluted basis, as compared to net income of $16.3 million, or $.77 per
common share for fiscal year 2000. The Company generated basic earnings per
share of $.08 and $.82 in fiscal years 2001 and 2000, respectively. Included in
net income were deferred tax benefits of $1.4 million for fiscal year 2000.
14
STOCKHOLDERS' EQUITY
During fiscal year 2001, stockholders' equity decreased $45.3 million to
$16.3 million from $61.6 million at June 30, 2000. In addition to net income of
$1.4 million for fiscal year 2001, the Company received $2.2 million from the
sale of common stock under its stock option plans and employee stock purchase
plan and paid $48.8 million to shareholders in connection with a self-tender
offer completed in January 2001. The book value per common share issued and
outstanding decreased to $1.22 at June 30, 2001 from $3.11 at June 30, 2000.
LIQUIDITY AND CAPITAL RESOURCES
During fiscal year 2002, cash and cash equivalents increased by $6.8
million primarily as a result of cash generated by operating activities of $4.3
million and financing activities of $10.0 million offset by cash used in
investing activities of $7.4 million. Cash used in investing activities related
to $5.1 million of purchases of equipment, software and leasehold improvements
and $2.3 million related to a business acquisition. Net financing activities
primarily related to the funding of an $11.2 million loan by Kojaian Ventures,
L.L.C. ("KV"), and related issuance of a promissory note to KV ("KV Subordinated
Note") and proceeds of $5.2 million from the issuance of common stock offset by
the net repayment of the credit facility term loan debt totaling $5.3 million.
The Company has historically experienced the highest use of operating cash
in the quarter ending March 31, primarily related to the payment of certain
employee benefits and incentives and deferred commission payable balances that
attain peak levels during the quarter ending December 31. Deferred commissions
balances of approximately $14.5 million, related to revenues earned in calendar
year 2001, were paid in the quarter ended March 31, 2002.
See Note 16 of Notes to Consolidated Financial Statements in Item 8 of
this Report for information concerning earnings before interest, taxes,
depreciation and amortization.
In January 2002, the Company issued an additional 1,337,358 shares of its
common stock upon the exercise of certain warrants held by its largest
stockholder, Warburg, Pincus Investors, L.P., which were scheduled to expire on
January 29, 2002. The aggregate purchase price of the common stock was
approximately $4.2 million, reflecting an average weighted price of $3.11 per
share.
In each of August 2001 and November 2001, the Company entered into
amendments to its credit agreement that amended financial covenants related to
minimum cash flow levels and fixed cost ratios. The amendments also increased
the interest margin by 0.50% over the original terms. As a result of continuing
deterioration in both the general economy as well as the real estate services
industry, the Company's operations for the quarter ended December 31, 2001
resulted in non-compliance with certain financial covenants contained in the
amended agreement. The Company received a waiver with respect to these covenant
defaults that expired on February 28, 2002.
Effective March 8, 2002, the Company completed the restructuring of its
credit facility that was effected in accordance with the terms and conditions of
a third amendment to the credit agreement ("Third Amendment"). Upon giving
effect to the Third Amendment, the Company was and is in compliance with its
covenants under the credit facility. Under the terms of the Third Amendment,
$5,000,000 of principal amortization of the term loan that was previously due in
calendar year 2002 was deferred, certain financial covenants relating to the
Company's cash flows and operations were revised, and the commitment under the
revolving loan portion was reduced from $15,000,000 to $6,000,000 (and was
further reduced to $5,000,000 in June 2002).
Simultaneously with the Third Amendment, the Company, Bank of America (as
administrative agent), and Warburg, Pincus Investors, L.P. ("Warburg Pincus")
also entered into an option purchase agreement (the "Option Agreement") whereby
Warburg Pincus funded a $5,000,000 promissory note (the "$5,000,000 Subordinated
Note") and granted the Company the right (which right was assignable to the
banks) to cause Warburg Pincus to deliver to the Company an additional
$6,000,000 in June 2002 upon substantially the same terms and conditions as the
$5,000,000 Subordinated Note (the "$6,000,000 Subordinated Note"). All sums
evidenced by the $5,000,000 Subordinated Note and the $6,000,000 Subordinated
Note (collectively, the "Subordinated Notes") were subordinate to all other
indebtedness under the credit facility. The Subordinated Notes were demand
obligations bearing interest at the rate of 15% per annum, compounded quarterly,
although no payments of interest or principal were permitted until the credit
facility was terminated. In addition, all principal and interest and reasonable
costs evidenced by the Subordinated Notes were subject to conversion generally
at the option of the holder, into 11,000 shares of the Company's newly created
Series A Preferred Stock having a stated value of $1,000 per share.
15
Pursuant to the Option Agreement, the Company also received the right to
replace the Warburg Pincus financing arrangements ("Refinancing Right") by a
certain date, contemplated by the Option Agreement. Specifically, upon the
receipt of at least approximately $15,000,000 from the sale of equity or
subordinated debt securities, and the tendering to Warburg Pincus, or its
assigns, on or before the extended date of May 14, 2002, of (i) the entire
principal amount of the $11,000,000 Subordinated Notes, plus accrued interest
thereon and reasonable costs with respect thereto, and (ii) the sum of
$4,158,431, to re-purchase 1,337,358 shares of common stock acquired by Warburg
Pincus in January 2002, all of the debt and equity securities issued and
issuable thereunder, will automatically be terminated.
On May 13, 2002, the Company effected a closing of a financing with
Kojaian Ventures, L.L.C. ("KV") which is wholly-owned by C. Michael Kojaian, who
is a member of the Board of Directors of the Company and, along with his father,
owned, subsequent to the closing of the KV financing, approximately 20% of the
Company's issued and outstanding Common Stock. In addition, certain affiliated
real estate entities of KV, in the aggregate, are substantial clients of the
Company. The Company accepted the financing offered by KV based, in part, upon
the fact that the KV financing, which replaced the financing provided by Warburg
Pincus in March 2002, was on more favorable terms and conditions to the Company
than the Warburg Pincus financing.
Accordingly, on the closing of the KV Transaction on May 13, 2002, KV paid
to the Company an aggregate of $15,386,580 which provided the Company with the
necessary funds, which the Company used, to (i) repay the $5,000,000
Subordinated Note and accrued interest thereon of $137,500, (ii) pay $100,000 of
Warburg Pincus' reasonable, documented out-of-pocket expenses associated with
the $5,000,000 Subordinated Note, (iii) repurchase, at cost, 1,337,358 shares of
Common Stock held by Warburg Pincus for a price per share of $3.11, or an
aggregate purchase price of $4,158,431, and (iv) pay down $6,000,000 of
revolving debt under the Company's Credit Facility. In exchange therefore, KV
received (i) a convertible subordinated note in the principal amount of
$11,237,500 (the "KV Debt"), and (ii) 1,337,358 shares of Common Stock at a
price of $3.11 per share. As a consequence, upon the closing of the KV
Transaction, the Option Agreement was terminated, and KV replaced Warburg Pincus
as a junior lender under the Credit Facility. The form of KV's financing is
substantially identical to the form of the $11,000,000 Subordinated Debt that
Warburg Pincus was to provide pursuant to the Option Agreement, provided,
however, that the KV Debt is more favorable to the Company in two (2) material
respects.
First, the interest rate on the KV Debt is 12% per annum as opposed to 15%
per annum. Similarly, the Series A Preferred Stock into which the KV Debt is
convertible has a coupon of 12% per annum, compounded quarterly, rather than 15%
per annum, compounded quarterly. Second, the Series A Preferred Stock that KV is
entitled to receive, like the Series A Preferred Stock that was issuable to
Warburg Pincus, has approximately a 40% preference on liquidation, dissolution
and certain change in control transactions rather than the 50% preference on the
Warburg Pincus financing. KV's liquidation preference is the greater of (i) 1.5
times the Conversion Amount, plus the accrued dividend thereon at the rate of
12% per annum (provided such liquidation, dissolution, or change of control
transaction takes place within twelve (12) months after May 13, 2002, and
thereafter it will increase to 2 times the Conversion Amount plus the accrued
dividend thereon at the rate of 12% per annum), or (ii) the equivalent of 40%
percent of the consideration to be paid to all the equity holders of the
Company, not on a fully diluted basis as was the case in the Warburg Pincus
financing, but rather, on an "Adjusted Outstanding Basis" (as defined in the
underlying documents).
On September 19, 2002, Kojaian Ventures, L.L.C. ("KV"), a related party,
exercised its right to convert the subordinated debt instruments it held into
preferred stock of the Company. (See Notes 6 and 19 for additional information.)
As a result of this conversion, 11,725 shares of the Company's Series A
Preferred Stock were issued, with a face value of $1,000 per share. The
outstanding related party principal and interest obligations totaling
$10,967,000 (net of issuance costs of $758,000), will be reclassified to
stockholders' equity.
The preferred stock contains liquidation preference and voting rights
equal to 1,007 common shares for each share of preferred stock, or a total of
11,807,075 common share equivalents. As a consequence of the conversion, there
has been a change in the control of the Company, as these equivalents, along
with 3,762,884 shares of outstanding common stock owned by KV or its affiliates,
represent approximately 60% of the total voting power of the Company. The
preferred stock is not convertible into any other securities of the Company or
subject to redemption. Warburg Pincus, which currently owns approximately 39% of
the issued and outstanding common stock of the Company, has approximately 22% of
the voting power.
Interest on outstanding borrowings under the credit facility is based upon
BofA's prime rate and/or a LIBOR based rate plus, in either case, an additional
margin based upon a particular financial leverage ratio of the Company, and will
vary depending upon which interest rate options the Company chooses to be
applied to specific borrowings. The
16
average interest rate incurred by the Company on the Credit Agreement
obligations during fiscal year 2002 was 5.68%. The term loan facility amortizes
on a monthly basis through December 2002, and then on a quarterly basis, until
December 31, 2005 when both facilities mature.
Certain other mandatory prepayment provisions related to the operating
cash flows of the Company and receipts of certain debt, equity and/or sales
proceeds also exist within the agreement. Scheduled principal payments are as
follows (in thousands):
YEAR ENDING
JUNE 30 AMOUNT
--------------- ----------------
2003 $ 5,750
2004 9,875
2005 11,125
2006 5,000
--------
$ 31,750
========
Direct expenses related to the Credit Agreement and amendments totaling
approximately $1,070,000 have been recorded as deferred financing fees and are
amortized over the term of the agreement. Unamortized fees related to the prior
credit facility agreement, totaling approximately $406,000 (net of applicable
taxes of approximately $270,000) were written off concurrently with the
effective date of the Credit Agreement and have been recorded as an
extraordinary loss in accordance with accounting principles generally accepted
in the United States during the fiscal year ended June 30, 2001.
The variable interest rate structure of the Credit Agreement exposes the
Company to risks associated with changes in the interest rate markets.
Consequently, the Credit Agreement required the Company to enter interest rate
protection agreements, within 90 days of the date of the agreement, initially
fixing the interest rates on not less than 50% of the aggregate principal amount
of the term loan scheduled to be outstanding for a period of not less than three
years. The Company subsequently established risk management policies and
procedures to manage the cost of borrowing obligations, which include the use of
interest rate swap derivatives to fix the interest rate on debt with floating
rate indices. Further, the Company prohibits the use of derivative instruments
for trading or speculative purposes. In March 2001, the Company entered into two
interest rate swap agreements for a three year term, with banks that are parties
to the Credit Agreement. As of June 30, 2002, the swap agreements had a total
notional amount of $14.5 million, with a fixed annual interest rate to be paid
by the Company of 5.18%, and a variable rate to be received by the Company equal
to three month LIBOR based borrowing rates. The Company has determined that
these agreements are to be characterized as effective under the definitions
included within Statement of Financial Accounting Standards No. 133, "Accounting
for Derivative Instruments and Hedging Activities".
On June 30, 2002, the derivative instruments were reported at their fair
value of approximately $283,000, net of applicable taxes, in other liabilities
in the condensed Consolidated Balance Sheet. The offsetting amount is reported
as a deferred loss in Accumulated Other Comprehensive Loss. The Company's
interest rate swaps are treated as cash flow hedges, which address the risk
associated with future variable cash flows of debt transactions. Over time, the
unrealized gains and losses held in Accumulated Other Comprehensive Loss will be
reclassified into earnings in the same periods in which the hedged interest
payments affect earnings.
Repayment of the Credit Agreement is collateralized by substantially all
of the Company's assets and the Credit Agreement contains certain restrictive
covenants, including, among other things: achievement of minimum EBITDA levels
as defined in the agreement, restrictions on indebtedness, the payment of
dividends, the redemption or repurchase of capital stock, acquisitions,
investments and loans; and the maintenance of certain financial ratios.
In January 2002, the Company filed a Registration Statement on Form S-3
with the Securities and Exchange Commission, pursuant to which it intended to
distribute rights to purchase shares of its common stock to stockholders of
record as of the close of business on February 25, 2002. On March 8, 2002, the
Company withdrew this Registration Statement due to commencement of other
financing arrangements for the Company.
In August 1999, the Company announced a program through which it may
purchase up to $3 million of its common stock on the open market from time to
time as market conditions warrant. As of June 30, 2002, the Company had
repurchased 359,900 shares at a total cost of approximately $2.0 million. No
shares were repurchased under this program during fiscal years 2002 and 2001.
17
The Company has a $5.0 million revolver facility under its Credit
Agreement for intended short term borrowing needs. Letters of credit totaling
$1.35 million have been issued by the Company, thus reducing the available
borrowings under the revolver facility.
Pursuant to the terms of its Credit Agreement, as amended, the Company is
required to achieve minimum EBITDA levels from operations totaling $12.1 million
for the next fiscal year ended June 30, 2003. In addition, principal repayments
totaling $5.8 million are scheduled to become due during the 2003 fiscal year.
The Company's common stock is currently listed on the New York Stock
Exchange ("NYSE") pursuant to a listing agreement. As previously disclosed by
the Company, the NYSE had accepted the Company's proposed business plan to
attain compliance with the NYSE's listing standard on or before July 4, 2003.
This plan had been submitted in response to a notification received by the
Company on January 4, 2002 regarding non-compliance with such listing standards.
As a result of the business plan's acceptance, the Company's common stock
continued to be traded on the exchange, subject to the Company maintaining
compliance with the plan and periodic review by the NYSE. Upon completion of a
recent review, the NYSE announced on October 8, 2002 that the Company's common
stock will be de-listed from the NYSE, due primarily to the Company's book value
and market capitalization value being below minimum levels required by their
listing standards. The Company is making arrangements to have its common stock
traded on the over-the-counter market ("OTC") and is scheduled to cease trading
on the NYSE prior to the opening on Thursday October 17, 2002. Although the
Company is seeking an orderly transition and has reason to believe the NYSE will
effectuate the same, there can be no assurance that the OTC will accept the
Company's shares for listing prior to their de-listing from the NYSE, or at all,
and that there will be no interruption of the public listing of the Company's
common stock.
The Company believes that its short-term and long-term operating cash
requirements will be met by operating cash flow, and/or debt and equity
financing. In the event of adverse economic conditions or other unfavorable
events, and to the extent that the Company's cash requirements are not met by
operating cash flow or available debt or equity proceeds, the Company may find
it necessary to reduce expenditure levels or undertake other actions as may be
appropriate under the circumstances.
The Company continues to explore additional strategic acquisition
opportunities that have the potential to expand the depth and breadth of its
current lines of business and increase its market share. The sources of
consideration for such acquisitions could be cash, the Company's current credit
facility, new debt, and/or the issuance of stock, or a combination of the above.
No assurances can be made that any additional acquisitions will be made or that
financing will be available under terms and conditions acceptable to the
Company.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's bank debt obligations are floating rate obligations whose
interest rate and related monthly interest payments vary with the movement in
LIBOR. See Note 5 of Notes to the Consolidated Financial Statements in Item 8 of
this Report. In order to mitigate this risk, terms of the credit agreement
required the Company to enter into interest rate swap agreements to effectively
convert a portion of its floating rate term debt obligations to fixed rate debt
obligations through March 2004. Interest rate swaps generally involve the
exchange of fixed and floating rate interest payments on an underlying notional
amount. As of June 30, 2002, the Company had $14.5 million in notional amount
interest rate swaps outstanding in which the Company pays a fixed rate of 5.18%
and receives a three-month LIBOR based rate from the counter-parties. The
notional amount of the interest rate swap agreements is scheduled to decline as
follows:
NOTIONAL AMOUNT DATE
--------------- ----------------
$10,500,000 June 30, 2003
8,000,000 March 31, 2004
When interest rates rise the interest rate swap agreements increase in
fair value to the Company and when interest rates fall the interest rate swap
agreements decline in value to the Company. As of June 30, 2002, there was a net
decline in interest rates since the Company had entered into the agreements, and
the interest rate swap agreements were in an unrealized loss position to the
Company of approximately $283,000, net of taxes.
18
To highlight the sensitivity of the interest rate swap agreements to
changes in interest rates, the following summary shows the effects of a
hypothetical instantaneous change of 100 basis points (BPS) in interest rates as
of June 30, 2002 (in thousands):
Notional Amount ...................................... $ 14,500
Fair Value to the Company ............................ (283)
Change in Fair Value to the Company Reflecting
Change in Interest Rates
-100 BPS ......................................... (99)
+100 BPS ......................................... 97
The Company does not utilize financial instruments for trading or other
speculative purposes, nor does it utilize leveraged financial instruments.
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 as of June 30, 2002 and 2001, and the related consolidated
statements of operations, stockholders' equity, and cash flows for each of the
three years in the period ended June 30, 2002. 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 auditing standards generally
accepted in the United States. 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 at June 30, 2002 and 2001, and the consolidated results of
its operations and its cash flows for each of the three years in the period
ended June 30, 2002, in conformity with accounting principles generally accepted
in the United States.
As discussed in Note 14 to the consolidated financial statements, in
fiscal 2001 the Company changed its method of accounting for revenue recognition
for leasing commissions and consulting fees.
ERNST & YOUNG LLP
Chicago, Illinois
September 19, 2002, except
for the third paragraph of Note 17,
as to which the date is October 8, 2002
19
GRUBB & ELLIS COMPANY
CONSOLIDATED BALANCE SHEETS
JUNE 30, 2002 AND 2001
(IN THOUSANDS, EXCEPT SHARE DATA)
ASSETS
2002 2001
------ ------
Current assets:
Cash and cash equivalents ......................................................... $ 14,085 $ 7,248
Services fees receivable, net ..................................................... 13,212 17,897
Other receivables ................................................................. 3,396 3,610
Professional service contracts, net ............................................... 1,974 3,263
Prepaid income taxes .............................................................. 6,890 4,598
Prepaid and other current assets .................................................. 586 680
Deferred tax assets, net .......................................................... 1,563 1,296
-------- --------
Total current assets ............................................................ 41,706 38,592
Noncurrent assets:
Equipment, software and leasehold improvements, net ............................... 17,843 19,669
Goodwill, net ..................................................................... 26,958 26,328
Deferred tax assets, net .......................................................... 947 3,535
Other assets ...................................................................... 2,923 4,302
-------- --------
Total assets .................................................................... $ 90,377 $ 92,426
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable .................................................................. $ 5,569 $ 3,330
Commissions payable ............................................................... 5,347 7,952
Credit facility debt .............................................................. 5,750 8,000
Accrued compensation and employee benefits ........................................ 16,243 13,416
Other accrued expenses ............................................................ 4,546 4,678
-------- --------
Total current liabilities ....................................................... 37,455 37,376
Long-term liabilities:
Credit facility debt .............................................................. 26,000 29,000
Note payable--affiliate, net ...................................................... 10,660 --
Accrued claims and settlements .................................................... 7,823 8,695
Other liabilities ................................................................. 2,573 1,039
-------- --------
Total liabilities ............................................................... 84,511 76,110
-------- --------
Stockholders' equity:
Common stock, $.01 par value: 50,000,000 shares authorized; 15,028,839 and
13,358,615 shares issued and outstanding at June 30, 2002 and 2001, respectively 150 134
Additional paid-in-capital ........................................................ 72,084 66,858
Accumulated other comprehensive loss .............................................. (283) (68)
Retained deficit .................................................................. (66,085) (50,608)
-------- --------
Total stockholders' equity ...................................................... 5,866 16,316
-------- --------
Total liabilities and stockholders' equity ...................................... $ 90,377 $ 92,426
======== ========
The accompanying notes are an integral part of these
consolidated financial statements.
20
GRUBB & ELLIS COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED JUNE 30, 2002, 2001 AND 2000
(IN THOUSANDS, EXCEPT SHARE DATA)
2002 2001 2000
-------- -------- --------
Revenue:
Transaction services fees ............................................. $262,077 $358,462 $355,704
Management services fees ............................................... 51,399 53,500 58,215
---------- ---------- ----------
Total revenue ........................................................ 313,476 411,962 413,919
---------- ---------- ----------
Costs and expenses:
Services commissions ................................................... 151,900 216,646 208,260
Salaries, wages and benefits ........................................... 97,497 98,847 98,383
Selling, general and administrative .................................... 65,828 68,550 68,304
Depreciation and amortization .......................................... 10,706 11,635 10,521
Impairment and other non-recurring expenses ............................ 1,749 6,222 2,650
---------- ---------- ----------
Total costs and expenses ............................................. 327,680 401,900 388,118
---------- ---------- ----------
Total operating income (loss) ........................................ (14,204) 10,062 25,801
Other income and expenses:
Interest income ........................................................ 401 1,640 500
Interest expense ....................................................... (2,861) (1,422) (413)
---------- ---------- ----------
Income (loss) before income taxes,
extraordinary item and cumulative effect ............................ (16,664) 10,280 25,888
Benefit (provision) for income taxes ...................................... 1,187 (5,372) (9,598)
---------- ---------- ----------
Income (loss) before extraordinary item and cumulative effect ............. (15,477) 4,908 16,290
Extraordinary loss on extinguishment of debt, net of tax .................. -- (406) --
---------- ---------- ----------
Income (loss) before cumulative effect of accounting change ............... (15,477) 4,502 16,290
Cumulative effect of accounting change, net of tax ........................ -- (3,133) --
---------- ---------- ----------
Net income (loss) ...................................................... $(15,477) $ 1,369 $ 16,290
========== ========== ==========
Net income (loss) per common share:
Basic-
- before extraordinary item and cumulative effect ...................... $ (1.09) $ 0.28 $ 0.82
- from extraordinary loss .............................................. -- (0.02) --
- from cumulative effect of accounting change .......................... -- (0.18) --
---------- ---------- ----------
.......................................................................... $ (1.09) $ 0.08 $ 0.82
========== ========== ==========
Diluted-
- before extraordinary item and cumulative effect ...................... $ (1.09) $ 0.27 $ 0.77
- from extraordinary loss .............................................. -- (0.02) --
- from cumulative effect of accounting change .......................... -- (0.17) --
---------- ---------- ----------
.......................................................................... $ (1.09) $ 0.08 $ 0.77
========== ========== ==========
Weighted average common shares outstanding:
Basic- ................................................................. 14,147,618 17,051,546 19,779,220
========== ========== ==========
Diluted- ............................................................... 14,147,618 17,975,351 21,037,311
========== ========== ==========
The accompanying notes are an integral part of these
consolidated financial statements.
21
GRUBB & ELLIS COMPANY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED JUNE 30, 2002, 2001 AND 2000
(IN THOUSANDS, EXCEPT SHARE DATA)
Common Stock
------------------ Accumulated
Additional Other Retained Total Total
Outstanding Paid-In- Comprehensive Earnings Comprehensive Stockholders'
Shares Amount Capital Loss (Deficit) Income (Loss) Equity
----------- ------ ---------- ------------- --------- ------------- ------------
Balance as of July 1, 1999 ........ 19,885,084 $199 $112,550 $ -- $(68,267) $ 44,482
Stock warrants issued ............. -- -- 1,620 -- 1,620
Stock repurchases ................. (359,900) (4) (1,979) -- (1,983)
Employee common stock
purchases and net exercise of
stock options .................. 285,710 3 1,208 -- 1,211
Net income ........................ -- -- -- 16,290 16,290
---------- ---- -------- ------ -------- --------
Balance as of June 30, 2000 ....... 19,810,894 198 113,399 -- (51,977) 61,620
Self-tender offer repurchases ..... (7,000,073) (70) (48,740) -- -- (48,810)
Employee common stock
purchases and net exercise of
stock options .................. 547,794 6 2,199 -- -- 2,205
Net income ........................ -- -- -- -- 1,369 $ 1,369 1,369
Change in value of cash
flow hedge, net of tax .......... -- -- -- (68) -- (68) (68)
---------
Total comprehensive income ........ $ 1,301
---------- ---- -------- ------ -------- ========= --------
Balance as of June 30, 2001 ....... 13,358,615 134 66,858 (68) (50,608) 16,316
Employee common stock
purchases and net exercise of
stock options .................. 330,889 3 1,076 1,079
Proceeds from stock warrant
exercises, net ................. 1,339,335 13 4,150 4,163
Net loss .......................... -- -- -- (15,477) $ (15,477) (15,477)
Change in value of cash
flow hedge, net of tax ......... -- -- -- (215) -- (215) (215)
---------
Total comprehensive loss .......... $ (15,692)
---------- ---- -------- ------ -------- ========= --------
Balance as of June 30, 2002 ....... 15,028,839 $150 $ 72,084 $(283) $(66,085) $ 5,866
========== ==== ======== ====== ======== ========
The accompanying notes are an integral part of these
consolidated financial statements.
22
GRUBB & ELLIS COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED JUNE 30, 2002, 2001 AND 2000
(IN THOUSANDS, EXCEPT SHARE DATA)
2002 2001 2000
-------- -------- --------
Cash Flows from Operating Activities:
Net income (loss) .......................................................... $(15,477) $ 1,369 $ 16,290
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Deferred tax provision (benefit) ........................................ 2,321 (566) 2,125
Depreciation and amortization ........................................... 10,706 11,635 10,521
Extraordinary loss, net of tax .......................................... -- 406 --
Cumulative effect of accounting change, net of tax ...................... -- 3,133 --
Impairment and other non-cash non-recurring expenses ................... 374 3,000 --
Recovery for services fees receivable valuation allowances .............. (229) (195) (336)
Stock option compensation expense ....................................... -- 1,219 --
Funding of multi-year service contracts .................................... (793) (3,637) (2,773)
(Increase) decrease in services fees receivable ............................ 4,724 (3,962) (2,384)
(Increase) decrease in prepaid income taxes ................................ (2,292) (4,598) 1,084
(Increase) decrease in prepaid and other assets ............................ 1,662 3,975 184
Increase (decrease) in accounts and commissions payable .................... (255) 92 1,111
Increase (decrease) in accrued compensation and employee benefits .......... 2,828 (900) 4,805
Increase (decrease) in accrued claims and settlements ...................... 1,328 (46) (95)
Increase (decrease) in other liabilities .................................. (578) (2,916) 4,402
-------- --------- --------
Net cash provided by operating activities ............................. 4,319 8,009 34,934
-------- --------- --------
Cash Flows from Investing Activities:
Purchases of equipment, software and leasehold improvements ................ (5,147) (6,153) (8,008)
Cash paid for business acquisitions, net of cash acquired .................. (2,295) (568) (1,112)
Other investing activities ................................................. -- -- (1,900)
-------- --------- --------
Cash used in investing activities ..................................... (7,442) (6,721) (11,020)
-------- --------- --------
Cash Flows from Financing Activities:
Repayment of credit facility debt .......................................... (11,250) (3,000) (7,500)
Borrowings on credit facility debt ......................................... 6,000 40,000 --
Repayment of acquisition indebtedness ...................................... -- (519) (2,366)
Repayment of borrowings from affiliate ..................................... (5,000) -- --
Borrowings from affiliate .................................................. 16,237 -- --
Proceeds from issuance of common stock, net ................................ 1,079 986 1,211
Proceeds from stock warrant exercises, net ................................. 4,163 -- --
Cash paid to fund self-tender offer ........................................ -- (48,810) --
Repurchase of common stock ................................................. -- -- (1,983)
Issuance and deferred financing fees ....................................... (1,269) (559) (914)
-------- --------- --------
Net cash provided by (used in) financing activities ................... 9,960 (11,902) (11,552)
-------- --------- --------
Net increase (decrease) in cash and cash equivalents ...................... 6,837 (10,614) 12,362
Cash and cash equivalents at beginning of the year ......................... 7,248 17,862 5,500
-------- --------- --------
Cash and cash equivalents at end of the year ............................... $ 14,085 $ 7,248 $ 17,862
======== ========= ========
The accompanying notes are an integral part of these
consolidated financial statements.
23
GRUBB & ELLIS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) THE COMPANY
Grubb & Ellis Company (the "Company") is a full service commercial real
estate company that provides services to real estate owners/investors and
tenants including transaction services involving leasing, acquisitions and
dispositions, and property and facilities management services. Additionally, the
Company provides consulting and strategic services with respect to commercial
real estate.
(b) PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Grubb &
Ellis Company, and its wholly owned subsidiaries, including Grubb & Ellis
Management Services, Inc. ("GEMS"), which provides property and facilities
management services. All significant intercompany accounts have been eliminated.
(c) BASIS OF PRESENTATION
The financial statements have been prepared in conformity with accounting
principles generally accepted in the United States which require management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities (including disclosure of contingent assets and liabilities) at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
(d) REVENUE RECOGNITION
Real estate sales commissions are 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, and title to real property has passed from seller to buyer, if
applicable. Real estate leasing commissions are recognized upon execution of
appropriate lease and commission agreements and receipt of full or partial
payment, and, when payable upon certain events such as tenant occupancy or rent
commencement, upon occurrence of such events. All other commissions and fees are
recognized at the time the related services have been performed by the Company,
unless future contingencies exist. Consulting revenue is recognized generally
upon the delivery of agreed upon services to the client.
Effective July 1, 2000, the Company changed its method of accounting to
comply with the Securities and Exchange Commission's ("SEC") Staff Accounting
Bulletin No. 101, "Revenue Recognition in Financial Statements," which
summarized the SEC staff's views regarding the recognition and reporting of
revenues in financial statements. See Note 14 for additional information.
(e) COSTS AND EXPENSES
Real estate transaction services and other commission expenses are
recognized concurrently with the related revenue. All other costs and expenses
are recognized when incurred.
GEMS incurs certain salaries, wages and benefits in connection with the
property and corporate facilities management services it provides which are in
part reimbursed at cost by the owners of such properties. The following is a
summary of the GEMS total gross and reimbursable salaries, wages and benefits
(in thousands) for the years ended June 30, 2002, 2001 and 2000. The net expense
is included in salaries, wages and benefits on the Consolidated Statements of
Operations.
2002 2001 2000
--------- --------- ---------
Gross salaries, wages and benefits ...................................... $ 151,078 $ 140,667 $ 132,556
Less: reimbursements from property owners ............................... (117,970) (104,648) (94,621)
--------- --------- ---------
Net salaries, wages and benefits ........................................ $ 33,108 $ 36,019 $ 37,935
========= ========= =========
24
GRUBB & ELLIS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
(f) ACCOUNTING FOR STOCK-BASED COMPENSATION
Statements of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation ("Statement 123") allows companies to either account
for stock-based compensation under the provisions of Statement 123 or under the
provisions of Accounting Principles Board Opinion No. 25 ("APB 25"). The Company
elected to continue accounting for stock-based compensation to its employees
under the provisions of APB 25. Accordingly, because the exercise price of the
Company's employee stock options equals or exceeds the fair market value of the
underlying stock on the date of grant, no compensation expense is recognized by
the Company. If the exercise price of an award is less than the fair market
value of the underlying stock at the date of grant, the Company recognizes the
difference as compensation expense over the vesting period of the award. The
Company, however, is required to provide pro forma disclosure as if the fair
value measurement provisions of Statement 123 had been adopted. See Note 8 of
Notes to Consolidated Financial Statements for additional information.
(g) INCOME TAXES
Deferred income taxes are recorded based on enacted statutory rates to
reflect the tax consequences in future years of the differences between the tax
bases of assets and liabilities and their financial reporting amounts. Deferred
tax assets, such as net operating loss carry forwards, which will generate
future tax benefits are recognized to the extent that realization of such
benefits through fu