<PAGE>
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 (FEE REQUIRED)
For the fiscal year ended December 31, 1994
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For the transition period from __________ to __________
Commission file number 1-8122 .
--------------
GRUBB & ELLIS COMPANY
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 94-1424307 .
------------------------- -------------------------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
One Montgomery Street, - Telesis Tower,
San Francisco, CA 94104
------------------------
(Address of principal executive offices) (Zip Code)
(415)956-1990
--------------------------------------------------
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
------------------- -----------------------------------------
Common Stock New York Stock Exchange
Pacific Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No _____
-----
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein and will not be contained, to the best
of registrant's knowledge, in its definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. []
The aggregate market value of voting common stock held by nonaffiliates of the
registrant as of February 15, 1995 was approximately $8,618,643.
The number of shares outstanding of the registrant's common stock as of February
15, 1995 was 8,797,377 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 (December
31, 1994) are incorporated by reference into part III.
1
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GRUBB & ELLIS COMPANY
FORM 10-K
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
COVER PAGE 1
TABLE OF CONTENTS 2
Part I.
Item 1. Business 3
Item 2. Properties 8
Item 3. Legal Proceedings 8
Item 4. Submission of Matters to a Vote of Security Holders 8
Part II.
Item 5. Market for the Registrant's Common Equity
and Related Stockholder Matters 9
Item 6. Selected Financial Data 10-11
Item 7. Management's Discussion and Analysis of Financial 12-18
Condition and Results of Operations
Item 8. Financial Statements and Supplementary Data 19-44
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure 44
Part III.
Item 10. Directors and Executive Officers of the Registrant 45
Item 11. Executive Compensation 45
Item 12. Security Ownership of Certain Beneficial
Owners and Management 45
Item 13. Certain Relationships and Related Transactions 45
Part IV.
Item 14. Exhibits, Financial Statement Schedules,
and Reports on Form 8-K 46-51
INDEX OF FINANCIAL STATEMENTS AND SCHEDULES 51
SIGNATURES 52-53
FINANCIAL STATEMENT SCHEDULE 54
EXHIBIT INDEX SCHEDULE 55
</TABLE>
2
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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 and majority owned
subsidiaries (the "Company") provide real estate services to real estate
owners/investors and tenants. Such services include commercial brokerage and
property and facilities management through its wholly owned operations and
majority owned subsidiary, Axiom Real Estate Management, Inc. ("Axiom").
Additionally, the Company has for a number of years provided mortgage brokerage,
appraisal, consultation and asset management services. The Company also provided
residential brokerage services until November 1994 when it sold its remaining
residential real estate business in Southern California.
Based on revenue, the Company is one of the largest commercial real estate
services companies in the United States. Through Axiom, the Company is also one
of the largest property management firms in the country with approximately 70
million square feet of property under management. As of the year ended December
31, 1994, the Company had 87 offices in 58 cities in 16 states and the District
of Columbia, with approximately 1,050 real estate agents, 670 non-agent
employees and 1,200 Axiom property management staff (the cost of the property
management staff is substantially reimbursed by clients).
The Company maintains informal business relationships with full-service real
estate firms in England, France, Italy, Germany, the Netherlands, Asia and the
Pacific Basin and has established its own representative offices in Sweden and
London. The Company has a nonexclusive alliance with Mexus Services Corporation
("Mexus"), for purposes of client business referral. Mexus specializes in
providing consulting services to U.S. firms seeking to do business in Mexico.
In 1994, commercial brokerage was the major source of revenue for the Company,
followed by property management, and appraisal and consulting services. The
balance of the Company's revenue was derived from real estate investment
advisory and other services. The Company believes that commercial brokerage is
likely to continue to be its major source of revenue for the foreseeable future.
BUSINESS DEVELOPMENT AND STRATEGY
Having established operations in California, Arizona, Colorado, Washington and
Hawaii from 1958 through 1980, the Company merged with a real estate investment
trust in 1981 and became a publicly traded Company. The Company then proceeded
to develop a national network of commercial brokerage offices, primarily by
purchasing established real estate services firms in selected markets during the
period from 1981 through 1986. The Company refinanced the resulting acquisition
indebtedness in 1986 with the proceeds from the sale of $10 million in senior
notes, $25 million in subordinated notes and a warrant to purchase common stock
pursuant to an agreement with The Prudential
3
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Insurance Company of America ("Prudential"). The acquisitions have enabled the
Company to provide diversified services to multi-regional and national clients.
Most of the acquired companies no longer use their original company names and
are identified solely as Grubb & Ellis Company. During this acquisition period,
the Company also acquired residential brokerage offices in Georgia and Texas and
expanded its operations in California through acquisitions in Southern
California.
In September 1992, the Company formed Axiom, a property and facilities
management joint venture with International Business Machines Corporation
("IBM"). The purpose of the joint venture is to provide commercial property
management real estate services, and third-party and corporate facilities
management on a nationwide basis. The Company holds a 74% interest, and IBM
owns 26% of Axiom. Additional shares of Axiom's common stock have been reserved
for the issuance of equity incentives to management. As of December 31, 1994,
Axiom managed approximately 19 million square feet of office space for IBM.
The Company's rapid acquisition strategy implemented from 1981 through 1986
resulted in a significant increase in fixed costs and overhead. In response to
this increased cost structure, and a declining and adverse real estate market in
the late 1980's, the Company began to close unprofitable and non-strategic
offices beginning in 1990. In 1990, the Company closed 15 property management
and commercial and residential brokerage offices in locations judged to be non-
strategic. In 1991, the Company closed four additional offices and also sold
its Texas residential operations. In January 1992, the Company sold its Georgia
residential operations. In February 1993, the Company completed the sale of the
real estate advisory business of Grubb & Ellis Realty Advisers, Inc., a wholly
owned subsidiary of the Company, to a privately held concern.
In early March 1993, the Company sold its Northern California residential real
estate brokerage operations. The sale included 13 residential real estate
offices as well as a relocation office. In October 1993, the Company closed its
residential mortgage services operations in Northern California, and in February
1994, closed its unprofitable appraisal and consulting offices in Atlanta,
Chicago, Dallas, Denver and Phoenix.
In January 1994, Axiom closed certain offices pursuant to its strategic
objectives, and the Company, independent of Axiom, resumed property management
services in some of those locations. In November 1994, the Company sold its
remaining residential real estate operations in Southern California, consisting
of nine residential offices and one relocation office.
From 1990 to late 1992, the Company actively pursued equity financing to
strengthen its liquidity and meet its short- and long-term working capital
needs, as the severe economic recession had hindered its ability to meet debt
principal and interest obligations to Prudential. On January 29, 1993, the
stockholders of the Company approved a proposal for restructuring the debt and
equity of the Company (the "1993 Recapitalization"), which involved a cash
investment of $12.9 million by Warburg, Pincus Investors, L.P., a Delaware
limited partnership ("Warburg"), and $900,000 by Joe F. Hanauer ("Hanauer"), a
private investor who became Chairman of the Board of the Company. The
investment was made in exchange for convertible preferred stock and warrants to
purchase common stock and the renegotiation of the Company's indebtedness of
approximately $40 million to Prudential, including the conversion of
approximately $15 million of that indebtedness into convertible preferred stock
and warrants to purchase common stock. As a result of the 1993 Recapitalization
and certain other transactions, Warburg and Hanauer together held approximately
39.2% and Prudential held approximately 26.3% of the Company's equity at the end
of 1993 on a fully diluted basis but before exercise of outstanding warrants.
4
<PAGE>
At the end of 1993, the Company projected that without additional capital, the
Company would be unable beyond the near term to meet its working capital needs
and service its principal obligations to Prudential. Negotiations to modify debt
agreements and financial covenants with Prudential and to obtain a $10 million
interim financing loan from Warburg were substantially completed in March 1994.
Hanauer assumed the additional responsibilities of Chief Executive Officer in
July 1994. On September 12, 1994, stockholders of the Company approved a
proposal for restructuring the debt and equity of the Company (the "1994
Recapitalization") and in November 1994, such transactions were completed with
Warburg and Prudential as more fully described below (see Item 7, "Management's
Discussion and Analysis of Financial Condition and Results of Operations", and
Note 4 of Notes to Consolidated Financial Statements).
Through a stockholders' rights offering which was completed in November 1994,
common stockholders, other than Warburg and Prudential, purchased 84,542 shares
of common stock for total proceeds of $201,000 and, pursuant to a Standby
Agreement, Warburg purchased 4,277,433 shares of common stock for total
consideration of $10.2 million. Warburg paid for its shares with $4.0 million
in cash and through cancellation of $6.2 million of indebtedness outstanding
under its interim financing loan.
Debt agreements with Prudential were modified to provide, among other things,
deferral of principal payments until November 1, 1997 and thereafter on the $15
million principal amount of the 9.9% senior notes, 10.65% payment-in-kind notes
and the revolving credit facility all of which would have been due during the
period from 1994 through 1996 (see Note 4 of Notes to Consolidated Financial
Statements).
Certain provisions of the Company's outstanding convertible preferred stock were
amended to provide, among other things, elimination of the mandatory redemption
and certain anti-dilution provisions and an increase in the dividend rate
commencing in 2002. Additionally, Warburg and Prudential were issued additional
warrants to purchase common stock and certain terms of existing warrants were
modified.
As a result of the 1994 Recapitalization, Warburg and Hanauer together hold
approximately 57.0% and Prudential holds approximately 18.5% of the Company's
equity on a fully diluted basis but before exercise of outstanding warrants and
options.
During 1994, the Company settled two significant lawsuits related to closed
operations. As of December 31, 1994, the Company had either sold or closed
nearly all of its targeted unprofitable offices and non-strategic businesses in
response to recessionary business conditions. With the completion of the 1994
Recapitalization and development of its 1995 business plan, management believes
it is well positioned to devote its resources to expanding its core commercial
real estate business and to take advantage of the improving markets for
commercial real estate.
COMMERCIAL BROKERAGE
The Company acts as a sales or leasing agent for commercial properties, which
include office, industrial, retail and hotel properties, as well as undeveloped
land. Properties range in size and type from single, free-standing locations to
multi-level, mixed-use projects. Offices are typically
5
<PAGE>
located in or near major metropolitan areas. In 1994, to enhance operating
efficiencies and reduce expenses, the Company realigned its previous four-region
structure to form three commercial brokerage regions: Pacific Southwest
(Southern California and Arizona); Pacific Northwest (Washington, Oregon and
Northern California); and Eastern (Colorado, Connecticut, Florida, Georgia,
Illinois, Massachusetts, Michigan, New Jersey, New York, Ohio, Pennsylvania,
Texas, Virginia and Washington, D.C.). Commercial brokerage comprised
approximately 83% of the Company's operating revenue for the year ended December
31, 1994. At December 31, 1994, the Company had approximately 1,050 commercial
salespersons.
The majority of commercial brokerage salespersons, who are primarily leasing
agents, focus their activities on one type of commercial property (office,
industrial or retail) in a specific market area. Most of the Company's other
commercial salespersons broker the sale of commercial investment property or
undeveloped land. The majority of salespersons are independent contractors with
the Company, although in certain offices, salespeople are hired as employees.
RESIDENTIAL BROKERAGE
Through the date of sale in November 1994, the Company's remaining residential
brokerage operations were focused on sales of homes in higher-priced
neighborhoods located in Southern California. The Company also provided
relocation services through its network of offices and through membership in two
national residential referral associations. Commissions from residential
brokerage constituted approximately 10% of the Company's operating revenue for
the year ended December 31, 1993. The Company fully reserved for the
closure/sale of its remaining residential brokerage operations in Southern
California during the fourth quarter of 1993, therefore, operating revenues and
expenses from residential brokerage operations in 1994 are included in "Other
income, net", but have no impact on net income.
From 1989 through 1994, the Company provided residential mortgage brokerage
services through Grubb & Ellis Mortgage Services, Inc. ("GEMS"), a wholly owned
subsidiary of the Company. The Company closed the remaining office in Southern
California during 1994.
MANAGEMENT AND CONSULTING SERVICES
In 1994, management and consulting services included the Company's property
management operations, appraisal, consulting, and asset services.
Property Management
Substantially all of the Company's facilities and property management services
are conducted through Axiom, which managed approximately 70 million square feet
of property, including approximately 19 million square feet of IBM facilities as
of December 31, 1994.
The Company provides property and facilities management services to owners of
office, retail, industrial and multi-family residential real estate. These
services include tenant relations, facilities and construction management,
financial reporting and analysis, and engineering consultation. Property
management clients include pension funds, developers, financial institutions,
corporate and individual owners and syndicators. The principal markets for the
Company's property management services are in Connecticut, Georgia, Illinois,
New Jersey, New York, Ohio, Pennsylvania, Texas and Washington, D.C.
6
<PAGE>
Property and facilities management fees constituted approximately 12% of the
Company's operating revenue for the year ended December 31, 1994.
Appraisal and Consulting
The Company offers appraisal and consulting services through offices in
California, Ohio and New York. Most of these offices are located within
commercial brokerage services offices. Appraisal and consulting services
primarily include valuation of single properties and real estate portfolios,
expert witness testimony, market and feasibility studies and investment
analysis.
Asset Services
Grubb & Ellis Asset Services Company ("GEASC"), a wholly owned subsidiary of the
Company, was formed to coordinate the delivery of the Company's services to
federal agencies and financial institutions with troubled real estate assets and
to oversee the Company's auction business. In April 1994, the Company was
notified by the Resolution Trust Company (the "RTC") that it had proposed to
exclude the Company and GEASC from RTC contracting as the Company had not filed
certain reports with the RTC. The Company filed a response to the RTC's
proposed exclusion and was notified in February 1995 that the Company and GEASC
were excluded from such business for an indefinite period of time. The Company
is currently evaluating its options.
Other Services
Other revenue is derived from commercial mortgage brokerage operations and from
the Company's partnership and joint venture activities. Partnership and joint
venture activities are not a significant portion of the Company's business, and
the Company does not anticipate expansion of activity in this area.
COMPETITION
Although the Company ranks among the largest national commercial real estate
services organizations in the United States in terms of revenue, the real estate
brokerage industry is fragmented and highly competitive. Thus, the Company's
most significant competition in a particular market may be one or both of the
other two national firms, and/or regional and local firms, in any combination.
In addition, companies not previously engaged primarily in the real estate
services business, but with substantial financial resources, now provide real
estate or real estate-related services. For example, certain insurance
companies, Wall Street investment firms and major real estate developers
participate in more traditional commercial brokerage activities.
As a result of the recent recessionary economy and depressed real estate markets
in much of the country, a number of real estate services firms have decreased
their size and/or left the business entirely during the last four years. Real
estate companies may compete on the pricing of services, service delivery
capability (for example, the ability to deliver multiple services to a client or
the ability to deliver the same services in a number of different markets)
and/or proven record of success. Due to the relative strength and longevity of
the Company's position in the markets in which it presently operates its ability
to offer clients a range of ancillary real estate services on a local, regional
and national basis, decreased competition in certain markets and its improved
capital base, the Company believes that it can operate successfully in the
future in this highly competitive industry.
7
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ENVIRONMENTAL REGULATIONS
A number of states and localities have adopted laws and regulations imposing
environmental controls, disclosure rules and zoning restrictions which have
impacted the management, development, use, and/or sale of real estate.
Additionally, new or modified regulations could develop in a manner which have
not, but could, adversely affect the Company's commercial brokerage and property
management operations (see Note 8 of Notes to Consolidated Financial
Statements). The Company believes it is in compliance in all material respects
with all environmental laws or regulations applicable to its operations.
SEASONALITY
The Company has typically experienced its lowest quarterly revenue in the first
quarter of each year with higher and more consistent revenue in the second and
third quarters. The fourth quarter has historically provided the highest
quarterly level of revenue due to increased activity caused by the desire of
clients to complete transactions by year-end. Revenue in any given quarter
during 1994, 1993 and 1992, as a percentage of total annual revenue, ranged from
a high of 30.8% to a low of 19.8%, as adjusted to eliminate the effect of
operations sold or closed.
ITEM 2. PROPERTIES
Inapplicable.
ITEM 3. LEGAL PROCEEDINGS
The information called for by Item 3 is included in Note 8 of Notes to the
Consolidated Financial Statements under Item 8 of this Report, which Note is
incorporated herein by reference.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
8
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GRUBB & ELLIS COMPANY
PART II
_____________________
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The principal markets for the Company's common stock are the New York and
Pacific Stock Exchanges. The following table sets forth the high and low sales
prices of the Company's common stock on the New York Stock Exchange for each
quarter of 1994 and 1993.
<TABLE>
<CAPTION>
1994 1993
--------------------- ----------------------
High Low High Low
--------- -------- --------- --------
<S> <C> <C> <C> <C>
First Quarter $ 4 1/4 $ 2 7/8 $ 8 $ 1 7/8
Second Quarter 3 1/4 2 1/4 5 7/8 3 3/8
Third Quarter 2 7/8 1 5/8 4 1/2 2 3/4
Fourth Quarter 2 3/8 1 7/8 3 5/8 2 5/8
</TABLE>
As of February 15, 1995, there were 2,593 registered holders of the Company's
common stock.
No cash dividends were declared on the Company's common or preferred stock in
1994 or 1993.
Any dividend payments with respect to the common stock will be subject to the
restrictions in a certain debt agreement with Prudential. The agreement
prohibits the payment of cash dividends on and repurchases of the Company's
common stock.
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ITEM 6. SELECTED FINANCIAL DATA
Five-year Comparison of Selected Financial and Other Data for the Company:
<TABLE>
<CAPTION>
For the Years Ended December 31,/(1)/
-----------------------------------------------------------------------
1994 1993 1992 1991 1990
---------- ---------- --------- --------- ---------
(in thousands, except per share amounts and shares)
<S> <C> <C> <C> <C> <C>
Operating Revenue $ 183,602 $ 200,731 $ 222,962 $ 266,234 $ 319,022
Net income (loss) $ 2,343 $ (18,208) $ (59,676) $ (49,297) $ (29,751)
Dividends applicable to preferred
stockholders:
Accretion of liquidation preference $ (2,173) $ (2,196) - - -
Dividends in arrears $ (438) - - - -
Net loss applicable
to common stockholders $ (268) $ (20,404) $ (59,676) $ (49,297) $ (29,751)
Loss per common share and
equivalents /(2)/ $ (0.05) $ (5.08) $ (17.01) $ (14.77) $ (9.08)
Weighted average common shares and
equivalents /(3)/ 4,934,806 4,019,795 3,509,303 3,336,572 3,277,905
</TABLE>
__________________________________________
/(1)/ Net income (loss) and per share data reported on the above table
reflect expenses related to special charges and unusual items in the
amounts of $13.5 million in 1993, $44.9 million in 1992, $37.0 million in
1991 and $18.0 million in 1990. A favorable adjustment of $2.2 million to
special charges and unusual items is included in the 1994 results. For
information regarding comparability of this data as it may relate to future
periods, see discussion in Item 7, "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and Note 9 of the Notes to
Consolidated Financial Statements.
/(2)/ Loss per common share and equivalents were $3.40, $2.95 and $1.82
for the years ended December 31, 1992, 1991 and 1990, respectively, prior
to the one-for-five reverse stock split on January 29, 1993.
/(3)/ Weighted average common shares and equivalents were 17,546,513,
16,682,858 and 16,389,526 for the years ended December 31, 1992, 1991 and
1990, respectively, prior to the one-for-five reverse stock split on
January 29, 1993.
10
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Five Year Comparison of Selected Financial and Other Data for the Company:
<TABLE>
<CAPTION>
As of December 31,
----------------------------------------------------------------------------
1994 1993 1992 1991 1990
-------- -------- -------- -------- --------
(in thousands, except per share amounts, shares and staff data)
<S> <C> <C> <C> <C> <C>
Total assets $ 45,429 $ 42,185 $ 44,672 $ 81,805 $ 126,982
Working capital
(deficit) $ 7,349 $ (17,842) $ (33,273) $ 3,523 $ 12,591
Long-term liabilities $ 41,738 $ 30,648 $ 36,370 $ 44,015 $ 43,994
Redeemable convertible
preferred stock - $ 29,900 - - -
Common stockholders'
equity (deficit) $ (25,486) $ (68,867) $ (51,458) $ 6,466 $ 55,531
Total staff 2,920 3,720 4,602 5,089 6,737
Book value per
common share (1) $ (2.90) $ (16.96) $ (14.29) $ 1.93 $ 16.76
Common shares
outstanding (2) 8,797,377 4,060,271 3,601,496 3,351,603 3,312,972
</TABLE>
(1) Book value per common share was $(2.86), $.39 and $3.35 as of December 31,
1992, 1991 and 1990, respectively, prior to the one-for-five reverse stock split
on January 29, 1993.
(2) Common shares outstanding were 18,007,481, 16,758,016 and 16,564,858 as of
December 31, 1992, 1991 and 1990, respectively, prior to the one-for-five
reverse stock split on January 29, 1993.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
OVERVIEW
Over the four-year period ending in 1993, the Company's business and financial
condition were substantially impaired due to the general economic recession and
a severe decline in activity levels and prices within the commercial and
residential real estate sectors. During 1994, the Company substantially
completed the process begun in 1990 of selling or closing unprofitable offices
and non-strategic businesses and new management continued to downsize operations
and lower operating costs. In November 1994, the Company completed a financial
restructuring (the "1994 Recapitalization"), including a rights offering to
stockholders, amendments to existing debt agreements with The Prudential
Insurance Company of America ("Prudential") and amendments to existing preferred
stock. The 1994 Recapitalization resulted in a total reduction of liabilities
of approximately $6.2 million and an increase in equity of approximately $42.2
million and provided a way for the Company to deal positively with several
converging aspects of its business, including an improving market for commercial
real estate and the ability to settle protracted litigation stemming from
discontinued operations.
During 1994, the Company's revenue was derived substantially from commercial
brokerage activities. Property management, appraisal and consulting fees
provided the majority of the remaining revenue. The decrease in 1994 operating
revenues from 1993 levels was due to the sale of the Company's real estate
advisory business and Northern California residential brokerage operations in
February and March of 1993, respectively, and the inclusion of revenues for the
Company's Southern California residential brokerage operations (which were sold
in November 1994) in "Other income, net" in 1994.
1994 COMPARED TO 1993
OPERATING REVENUE
Total operating revenue for 1994 was $183.6 million, a decrease of 8.5% from
$200.7 million in 1993. Excluding revenue from the Northern California
residential brokerage operations and real estate advisory services which were
sold during the first quarter of 1993, and certain other offices which at the
end of 1993 were sold, closed, or expected to be closed, as well as government
contracting business conducted through April 1994, operating revenue of $183.1
million increased by $17.0 million or 10.2% over 1993.
Operating revenue from commercial brokerage offices increased in 1994 by $10.2
million or 7.2% over 1993. Increases in operating revenue occurred primarily in
the Pacific Northwest region and the Midwest/Texas area of the Eastern region as
a result of improving markets for commercial real estate and the Company's
increasing market share in specific markets.
Operating revenue from the Company's residential brokerage operations of $20.3
million in 1993 consisted of $3.1 million from the Northern California
operations which were sold in March 1993 and $17.2 million from the Southern
California operations. The Company fully reserved for the closure/sale of its
remaining residential brokerage operations in Southern California during the
12
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fourth quarter of 1993, therefore, operating revenues and expenses from the
Southern California operations were included in "Other income, net" in 1994, but
have no impact on net income.
Real estate services fees, commissions and other fees of $31.6 million in 1994
decreased by $7.0 million or 18.2% from $38.6 million in 1993. The decrease in
revenues relates primarily to the closure, or provision to close, certain
mortgage brokerage, appraisal and consulting offices at the end of 1993.
COSTS AND EXPENSES
Real estate brokerage and other commission expense (salespersons' participation)
is the Company's major expense and is a direct function of gross brokerage
commission levels. Salespersons' participation expense as a percentage of total
operating revenue decreased from 49.9% in 1993 to 47.7% in 1994. The decrease
in participation expense as a percentage of revenue was primarily related to the
fact that the Company did not reflect the revenues or expenses of the Southern
California residential brokerage operations in operating income for 1994, as the
provision for the closure of such operations was recorded at the end of 1993.
Excluding the impact of residential brokerage operations from 1993,
participation expense as a percentage of revenue was virtually the same as 1994
at 47.8%.
Total costs and expenses, other than salespersons' participation expense, of
$91.9 million for 1994 decreased by 21.1% from $116.5 million in 1993. The
decrease primarily resulted from a decrease in special charges and unusual items
and, as explained below, because the expenses of the residential brokerage
operations are included in "Other income, net" in 1994. Further excluding the
cost and expenses of businesses closed or sold in 1993 and 1994, and the special
charges and unusual items, 1994 costs and expenses increased by $4.2 million or
4.7% over 1993. Such expense increases were primarily a result of several key
management positions being filled in the latter part of 1993 and additional
investments in technology anticipated to improve profits in future years.
The Company recorded favorable adjustments of $2.2 million to special charges
and unusual items in 1994 as a result of reversals of previously established
reserves associated with the closure of certain offices which were accomplished
more efficiently than initially estimated at the end of 1993, and the sale of
the Company's remaining residential brokerage operations in November 1994. In
1993, special charges and unusual items of $13.5 million were recorded including
the write-down of the remaining unamortized goodwill of $10.1 million, office
closure and severance costs of $2.9 million and other charges of $500,000 as
described further below.
During the years 1990 through 1993, the Company incurred special charges and
unusual items as a result of efforts to reposition the Company to operate more
efficiently in response to recessionary market conditions. During late 1992 and
through 1994, the Company retained a new executive management team and completed
certain recapitalization transactions necessary for the business to continue as
a going concern (see Item 1, "Business" and Note 4 of Notes to Consolidated
Financial Statements). Such efforts included downsizing operations and focusing
the Company's activities on its core businesses, as well as realigning into a
more centralized operation with less middle management.
13
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The Company's evaluation of the carrying value of goodwill for 1991, 1992 and
1993 was significantly impacted by a continuation of the recessionary cycle and
the severe downturn in the real estate markets. In 1991 and 1992, the Company
wrote-off goodwill of $18.9 million and $29.5 million, respectively, associated
with business entities acquired in a period of rapid expansion during the 1980's
when real estate activity was at increased levels and profit margins were
substantially higher than those found in the market today. The Company's
analysis of goodwill performed in the fourth quarter of 1993 indicated that the
commercial brokerage business would operate at a loss without the planned
restructuring and recapitalization efforts and would, therefore, be unable to
recover goodwill. Accordingly, the remaining goodwill of $10.1 million was
written off as of December 31, 1993.
As part of new management's comprehensive reevaluation of the Company's business
strategy at the end of 1993, the Company determined that it would close certain
offices and terminate certain employees. Accordingly, as of December 31, 1993,
the Company accrued $3.4 million related to office lease termination and other
miscellaneous office closing costs, net of expected sublease income. Based on
historical operating results, the Company expected that future operating results
would be positively impacted by approximately $1.7 million per annum as a result
of the closing of offices, termination of employees and other restructuring
efforts. The Company began implementation of these restructuring efforts during
the first quarter of 1994 and substantially completed them by December 31, 1994.
During 1994, the Company paid $3.5 million in cash and made non-cash reductions
of $2.2 million to the severance obligation and office closure reserves.
Interest expense to related parties of $2.8 million in 1994 increased by
$349,000 over the 1993 amount of $2.5 million primarily as a result of interest
on the interim financing loan provided by Warburg, Pincus Investors, L.P.
("Warburg") in connection with the 1994 Recapitalization ($175,000) and higher
interest on the revolving credit facility related to greater use in 1994
compared to 1993 ($142,000).
INCOME TAXES
The 1994 provision for income taxes was $307,000 compared to $575,000 in 1993.
The 1994 tax provision consists of federal, state and local income taxes
assessed on profitable subsidiaries of the Company, whereas the 1993 tax
provision has no federal income tax component. The 1994 federal income tax
component relates solely to the Company's subsidiary Axiom, which reports on a
separate basis for tax purposes.
The Company reported a taxable loss of $8.7 million on its 1993 consolidated
federal income tax return and estimates that it will report a taxable loss of
approximately $13 million for 1994. As of December 31, 1994, the Company had
net current and noncurrent deferred tax assets of $4.5 million and $21.2
million, respectively. Approximately $12.8 million of the net noncurrent
deferred tax assets relate to tax net operating loss carryforwards which will be
available to offset future taxable income through 2009. The Company has
recorded a valuation allowance for the entire amount of the net current and
noncurrent deferred tax assets as of December 31, 1994 and will continue to do
so until such time that management believes that it is more likely than not that
the Company will generate taxable income sufficient to realize such tax
benefits. See Note 5 of Notes to Consolidated Financial Statements for
additional information.
14
<PAGE>
NET INCOME
Net income of $2.3 million for 1994 compared favorably to a net loss of $18.2
million for the previous year. Net income for 1994 included $2.2 million of
favorable adjustments to special charges and unusual items, whereas the net loss
for 1993 included charges of $13.5 million. Net loss per common share was $.05
in 1994 compared to a net loss per common share of $5.08 in 1993. Net loss
applicable to common stockholders is calculated by reducing net income (loss) by
undeclared dividends and accretion of liquidation preference on preferred stock
of $2.6 million and $2.2 million in 1994 and 1993, respectively.
STOCKHOLDERS' DEFICIT
During 1994, stockholders' deficit decreased by $43.4 million from 1993 year-end
primarily as a result of 1994 net income of $2.3 million; common stock issued in
connection with the 1994 Recapitalization of $9.9 million and $681,000 issued in
connection with litigation settlements; and reclassification of preferred stock
of $32.1 million as a result of the elimination of the mandatory redemption
provision in connection with the 1994 Recapitalization, net of $2.2 million of
undeclared dividends (accretion of liquidation preference) on preferred stock.
The book value per common share increased from $(16.96) at December 31, 1993 to
$(2.90) per common share at December 31, 1994 as a result of the above mentioned
changes and the increase in the number of shares of common stock outstanding
from approximately 4.1 million at December 31, 1993, to 8.8 million at December
31, 1994, primarily related to the 1994 Recapitalization.
1993 COMPARED TO 1992
OPERATING REVENUE
Total operating revenue for 1993 was $200.7 million, a decrease of 10.0% from
$223.0 million in 1992. The decrease was the result of the sales of the
Northern California residential brokerage operations and real estate advisory
services during the first quarter of 1993. Excluding these operations,
operating revenue increased 5.0% to $197.3 million in 1993 compared to $188.0
million in 1992.
Operating revenue from commercial brokerage offices increased in 1993 by $4.9
million or 3.5% over 1992. This was the first year-to-year increase in
operating revenue from the commercial brokerage operations since 1988.
Increases in operating revenue occurred in the Eastern and Pacific Southwest
regions, partially offset by a decline in the Pacific Northwest region.
Operating revenue from the Company's residential brokerage operations of $20.3
million in 1993 decreased by $28.9 million or 58.8% from 1992, primarily due to
the sale of the Company's Northern California residential brokerage operations.
The Northern California residential brokerage operations contributed $3.1
million to 1993 operating revenue compared to $33.1 million in 1992. Operating
revenue from the remaining Southern California residential brokerage operations
increased in 1993 by $1.0 million to $17.2 million or 5.9% over 1992. The
increase in operating revenue was attributable to increased residential buyer
activity resulting primarily from lower interest rates during 1993.
15
<PAGE>
Real estate services fees, commissions and other fees of $38.6 million in 1993
increased by $881,000 or 2.3% over 1992. The increase relates primarily to
higher revenue from the property management and mortgage brokerage operations of
$5.1 million net of a decrease in appraisal and consulting and other revenues of
approximately $4.2 million.
COSTS AND EXPENSES
Salespersons' participation expense as a percentage of total operating revenue
decreased from 52.5% in 1992 to 50.0% in 1993. The decrease in participation as
a percentage of revenue was primarily the result of the sale of the Northern
California residential brokerage operations.
Total costs and expenses, other than salespersons' participation expense, of
$116.5 million for 1993 decreased by 27.9% from $161.7 million in 1992. The
decrease primarily resulted from a decrease in special charges and unusual items
(see discussion below) to $13.5 million in 1993 from $44.9 million incurred in
1992. Additionally, cost and expenses decreased in 1993 as compared to 1992 as
a result of the sales of the Northern California residential brokerage
operations and real estate advisory operations. Further excluding the cost and
expenses of the real estate advisory and Northern California residential
brokerage operations, and the special charges and unusual items, 1993 cost and
expenses decreased by 3.8% or $4.1 million from 1992. This reduction in
operating expenses was primarily attributable to management's efforts to
aggressively reduce fixed overhead expenses by closing unprofitable field
offices and streamlining operations.
The Company recorded special charges and unusual items of $13.5 million in 1993
and $44.9 million in 1992. As described above, goodwill write-downs of $10.1
million and $18.9 million were recorded in 1993 and 1992, respectively, as a
result of management's determination that goodwill would not be recoverable from
future operations. In connection with the related management decisions to
downsize and realign operations, severance, office closure and other costs were
accrued in the amounts of $3.4 million and $7.0 million in 1993 and 1992,
respectively. Additionally, the 1992 special charges and unusual items include
$16.2 million in reserves for claims and settlements in connection with several
significant lawsuits and potential liability exposure arising from the Company's
brokerage business, as well as reserves of $2.8 million for the decline in the
value of properties held in joint ventures and partnerships.
Interest expense to related parties of $2.5 million in 1993 decreased by $1.7
million from $4.2 million in 1992 primarily related to the January 1993 exchange
of $15 million of the then outstanding 10.65% Subordinated Notes for 150,000
shares of 5% Junior Convertible Preferred Stock and five-year warrants to
purchase 200,000 shares of common stock at $5.50 per share. This transaction
resulted in a $1.6 million reduction to interest expense in 1993 when compared
to 1992.
INCOME TAXES
The 1993 provision for income taxes was $575,000 compared to $605,000 in 1992.
The tax provisions consist of state and local income taxes assessed on
profitable subsidiaries of the Company.
16
<PAGE>
Effective January 1, 1993, the Company adopted Statement of Financial Accounting
Standard (SFAS) No. 109, Accounting for Income Taxes, which was issued in
February, 1992. SFAS No. 109 supersedes SFAS No. 96, Accounting for Income
Taxes, which was adopted by the Company in 1987, and changes the criteria for
recognition and measurement of deferred tax assets. As permitted under SFAS No.
109, the Company elected not to restate the financial statements of prior years.
The cumulative effect of the change and the effect of the change on pretax
income for the year ended December 31, 1993 was not material.
NET LOSS
The net loss for 1993 was $18.2 million compared to a net loss of $59.7 million
for the previous year. Net loss per common share was $5.08 in 1993 compared to
a net loss per common share of $17.01 in 1992, giving effect to the one-for-five
reverse stock split on January 29, 1993. Losses in 1993 and 1992 were primarily
the result of the special charges and unusual items of $13.5 million and $44.9
million, respectively.
LIQUIDITY AND CAPITAL RESOURCES
During 1994, cash and cash equivalents increased by $7.0 million over the 1993
year-end level. The increase was attributable to cash provided by financing
activities of $9.3 million, net of cash used in investing and operating
activities of $1.9 million and $466,000, respectively. Net cash provided by
financing activities of $9.3 million consisted primarily of the gross
consideration of $10.4 million from the 1994 Recapitalization in November 1994,
net of $641,000 of debt refinancing and offering costs. Outstanding borrowings
of $6.2 million under the Warburg interim financing loan were repaid from
Warburg's purchase of common stock under its Standby Agreement. Net cash used
in investing activities of $1.9 million in 1994 primarily relates to $2.2
million of purchases of equipment and leasehold improvements. Net cash used in
operating activities was significantly impacted by claims and settlements,
office closure and severance costs for which reserves were provided at the end
of 1993 and 1992 (see Consolidated Statements of Cash Flows, decrease in other
liability accounts). Excluding such items from the net cash used in operating
activities in 1994 would have resulted in $9.5 million of positive cash flow
from operations.
The Company has historically experienced the highest use of operating cash in
the first quarter of the year, primarily related to the payment of year-end
compensation and deferred commissions payable balances which attain peak levels
as a result of fourth quarter business activity. Additionally, quarterly
revenues are typically at their lowest level in the first quarter.
As of December 31, 1994, the Company had current accrued severance and office
closure costs of approximately $2.2 million of which $876,000 of accrued
severance costs and $893,000 of accrued office closure costs, net of expected
sublease income, are expected to be paid in cash. As of December 31, 1994, the
Company had long-term accrued severance costs of $277,000 which are expected to
be paid in cash in 1996. Approximately $1.5 million of the $2.2 million of
long-term accrued office closure costs, net of expected sublease income, is
expected to be paid in cash over the next seven years (see Note 8
17
<PAGE>
of the Notes to Consolidated Financial Statements). The funding of these cash
requirements is expected to come from cash flow from operations.
During 1994, working capital improved by $25.1 million from a deficit of $17.8
million at December 31, 1993, to $7.3 million at December 31, 1994. The
improvement was primarily related to the $8.6 million reclassification of debt
(Revolving Credit Note and Senior Notes) from current to noncurrent as a result
of the 1994 Recapitalization described below, a $6.2 million reclassification of
accrued claims and settlements from current to noncurrent and an increase in
cash and cash equivalents of $7.0 million. The reclassification of accrued
claims and settlements from current to noncurrent was the result of management's
change in the estimate, upon consultation with counsel, of the expected timing
of the resolution of current litigation.
During 1994, the Company made significant progress towards restructuring its
long-term debt and equity. Through a Stockholders Rights Offering which was
completed in November 1994, common stockholders, other than Warburg and
Prudential, purchased 84,542 shares of common stock for total proceeds of
$201,000 and pursuant to a Standby Agreement, Warburg purchased 4,277,433 shares
of common stock for total proceeds of $10.2 million. Warburg paid for its shares
with $4.0 million in cash and through cancellation of $6.2 million of
indebtedness outstanding under its interim financing loan.
Debt agreements with Prudential were modified to provide, among other things,
deferral of principal payments until November 1, 1997 and thereafter on the $15
million of principal amount of the 9.9% Senior Notes, 10.65% Payment-in-Kind
Notes and the Revolving Credit Note which would have been due from 1994 through
1996 (see Note 4 of Notes to Consolidated Financial Statements).
Certain provisions of the Company's outstanding convertible preferred stock were
amended to provide for, among other things, elimination of the mandatory
redemption and certain anti-dilution provisions and an increase in the dividend
rate commencing in 2002. Additionally, Warburg and Prudential were issued
additional warrants to purchase common stock and certain terms of existing
warrants were modified.
The Company believes that its short-term and long-term cash requirements will be
met by operating cash flow. With the completion of the 1994 Recapitalization
and development of its 1995 business plan, management believes it will be able
to clearly focus on expanding its core commercial real estate business and
should be well prepared to take advantage of the improving markets for
commercial real estate. However, if the Company's goals are not substantially
achieved because of adverse economic conditions or other unfavorable events, the
Company may find it necessary to further reduce expense levels, or undertake
other actions as may be appropriate. In such event, the Company anticipates that
its ability to raise financing on acceptable terms would be severely limited and
there can be no assurance that the Company would be able to raise additional
financing.
DIVIDENDS
Any dividend payments by the Company on the common stock will be subject to
restrictions on the payment of dividends in the Prudential debt agreements and
the payment of all accrued and unpaid dividends on the Preferred Stock. Any
dividend payments by Axiom will be subject to restrictions in its credit
facility agreement with IBM.
18
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Grubb & Ellis Company
We have audited the accompanying consolidated balance sheets of Grubb & Ellis
Company and Subsidiaries as of December 31, 1994 and 1993, and the related
consolidated statements of operations, stockholders' equity (deficit), and cash
flows for each of the three years in the period ended December 31, 1994. Our
audits also included the financial statement schedules listed in the Index at
Item 14(a). These financial statements and schedules are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements and schedules based on our audits. We did not audit the
financial statements of Axiom Real Estate Management, Inc., a 74% owned
subsidiary, which statements reflect total assets of $6,445,166 and $5,837,845
as of December 31, 1994 and 1993, respectively, and total revenues of
$22,533,316, $21,422,586 and $7,054,979 for the years ended December 31, 1994
and 1993 and the period September 1, 1992 through December 31, 1992. Those
statements were audited by other auditors whose report has been furnished to us,
and our opinion, insofar as it relates to data included for Axiom Real Estate
Management, Inc., is based solely on the report of the other auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and related
schedules are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements and related schedules. 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 and the report of other auditors provide a reasonable basis for our
opinion.
In our opinion, based on our audits and the report of other auditors, the
consolidated financial statements referred to above present fairly, in all
material respects, the consolidated financial position of Grubb & Ellis Company
and Subsidiaries at December 31, 1994 and 1993, and the consolidated results of
their operations and their cash flows for each of the three years in the period
ended December 31, 1994, in conformity with generally accepted accounting
principles. Also, in our opinion, the related financial statement schedules,
when considered in relation to the basic financial statements taken as a whole,
present fairly in all material respects the information set forth therein.
San Francisco, California Ernst & Young LLP
February 8, 1995
19
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
---------------------------------
To the Board of Directors
Axiom Real Estate Management, Inc.:
We have audited the accompanying balance sheets of Axiom Real Estate Management,
Inc. as of December 31, 1994 and 1993 and the related statements of income,
stockholders' equity and cash flows for the years then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Axiom Real Estate Management,
Inc. as of December 31, 1994 and 1993, and the results of its operations and its
cash flows for the years then ended in conformity with generally accepted
accounting principles.
Pittsburgh, Pennsylvania Coopers & Lybrand L.L.P.
January 27, 1995
20
<PAGE>
GRUBB & ELLIS COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1994 AND 1993
(IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
1994 1993
------ ------
<S> <C> <C>
Current assets
Cash and cash equivalents $ 23,371 $ 16,406
Receivables:
Real estate brokerage commissions 4,500 6,451
Real estate services fees and other
commissions 3,317 2,312
Other receivables 3,116 4,865
Prepaids and other current assets 2,222 2,628
------- ------
Total current assets 36,526 32,662
</TABLE>
<TABLE>
<S> <C> <C>
Noncurrent assets
Real estate brokerage commissions receivable 454 1,155
Real estate investments held for sale and
real estate owned 1,016 1,305
Equipment and leasehold improvements, net 5,203 5,063
Other assets 2,230 2,000
------ ------
Total assets $ 45,429 $ 42,185
====== ======
</TABLE>
The accompanying notes are an integral part
of the consolidated financial statements.
21
<PAGE>
GRUBB AND ELLIS COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1994 AND 1993
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS AND SHARES)
LIABILITIES
<TABLE>
<CAPTION>
1994 1993
--------- ---------
<S> <C> <C>
Current liabilities
Notes payable and current portion of long-term debt $ 508 $ 506
Current portion of notes payable and long-term debt to
related party - 8,830
Accounts payable 1,764 1,873
Compensation and employee benefits payable 8,556 11,817
Deferred commissions payable 5,195 2,814
Accrued severance obligations 876 2,883
Accrued office closure costs 1,346 3,043
Accrued claims and settlements 2,502 10,375
Other accrued expenses 8,430 8,363
---------- ----------
Total current liabilities 29,177 50,504
Long-term liabilities
Long-term debt, net of current portion 391 900
Long-term debt to related party, net of current portion 25,292 15,237
Accrued claims and settlements 13,404 9,678
Accrued severance obligations 277 555
Accrued office closure costs 2,220 4,043
Other 154 235
---------- -----------
Total liabilities 70,915 81,152
REDEEMABLE PREFERRED STOCK
12% Senior Convertible Preferred Stock, $100.00 per share
redemption value; 137,160 shares outstanding - 14,365
5% Junior Convertible Preferred Stock, $100.00 per share
redemption value; 150,000 shares outstanding - 15,535
---------- -----------
Total redeemable preferred stock - 29,900
---------- -----------
STOCKHOLDERS' EQUITY (DEFICIT)
Preferred stock, $.01 par value: 1,000,000 shares
authorized; 137,160 shares of 12% Senior Convertible
Preferred Stock and 150,000 shares of 5% Junior 32,143 -
Convertible Preferred Stock outstanding
Common stock, $.01 par value: 25,000,000 shares
authorized; 8,797,377 and 4,060,271 shares issued and
outstanding at December 31, 1994 and 1993, respectively 89 41
Additional paid-in-capital 56,917 48,070
Retained earnings (deficit) (114,635) (116,978)
---------- -----------
Total stockholders' equity (deficit) (25,486) (68,867)
---------- -----------
Total liabilities and stockholders' equity (deficit) $ 45,429 $ 42,185
========== ===========
</TABLE>
The accompanying notes are an integral part
of the consolidated financial statements.
22
<PAGE>
GRUBB & ELLIS COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS AND SHARES)
<TABLE>
<CAPTION>
1994 1993 1992
--------- --------- ---------
<S> <C> <C> <C>
Revenue
Commercial real estate brokerage commissions $ 152,031 $ 141,875 $ 136,082
Residential real estate brokerage commissions - 20,266 49,171
Real estate services fees, commissions and other 31,571 38,590 37,709
--------- --------- ---------
Total revenue 183,602 200,731 222,962
--------- --------- ---------
Cost and expenses
Real estate brokerage and other commissions 87,578 100,250 117,154
Selling, general and administrative 48,456 55,958 64,607
Salaries and wages 43,706 44,780 48,412
Depreciation and amortization 1,981 2,287 3,802
Special charges and unusual items (2,241) 13,494 44,879
--------- --------- ---------
Total costs and expenses 179,480 216,769 278,854
--------- --------- ---------
Total operating income (loss) 4,122 (16,038) (55,892)
Other income and expenses
Interest income 574 442 529
Other income, net 806 551 672
Interest expense (51) (136) (155)
Interest expense to related parties (2,801) (2,452) (4,225)
--------- --------- ---------
Income (loss) before income taxes 2,650 (17,633) (59,071)
Provision for income taxes (307) (575) (605)
--------- --------- ---------
Net income (loss) $ 2,343 $ (18,208) $ (59,676)
========= ========= =========
Net loss applicable to common stockholders, net of
dividends in arrears and accretion of
liquidation preference on preferred stock in the
amount of $2,611, $2,196 and $0 in 1994, 1993
and 1992, respectively $ (268) $ (20,404) $ (59,676)
Net loss per common share and equivalents, giving
retroactive effect to the one-for-five reverse
stock split on January 29, 1993 $ (.05) $ (5.08) $ (17.01)
Weighted average common shares outstanding giving
retroactive effect to the one-for-five reverse
split on January 29, 1993 4,934,806 4,019,795 3,509,303
</TABLE>
The accompanying notes are an integral part
of the consolidated financial statements.
23
<PAGE>
GRUBB & ELLIS COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS AND SHARES)
<TABLE>
<CAPTION>
Common Stock
---------------------------
Outstanding Preferred
Shares Amount Stock
--------- -------- ---------
<S> <C> <C> <C>
Balance as of December 31, 1991 16,758,016 $ 16,758 $ -
Common stock issued for:
Defined contribution plan 211,753 212 -
Compensation in lieu of cash 905,749 905 -
Employee common stock purchase
agreements and exercises of
common stock options, net of
common stock tendered 94,165 94 -
Acquisition earnouts 37,798 38 -
Net loss - - -
---------- -------- ---------
Balance as of December 31, 1992 18,007,481 18,007 -
Effect of one-for-five reverse
stock split and change in par
value from $1.00 to $0.01 per
share (14,405,985) (17,971) -
Accretion of liquidation
preference on preferred stock - - -
Common stock issued for:
Exercise of Prudential warrant 397,549 4 -
Rights redemption 42,400 1 -
Employee common stock purchase
agreements and exercise of
common stock options, net of
common stock tendered 14,161 - -
Acquisition earnouts 4,665 - -
Net loss - - -
---------- -------- ---------
Balance as of December 31, 1993 4,060,271 41 -
Accretion of liquidation
preference on preferred stock - - -
Elimination of mandatory
redemption provision on
preferred stock:
12% Senior Convertible
Preferred Stock - - 15,945
5% Junior Convertible
Preferred Stock - - 16,198
Warrants issued in connection
with 1994 Recapitalization - - -
Common stock issued for:
Stockholder rights offering and
standby commitment 4,361,975 44 -
Litigation settlements 299,898 3 -
Employee common stock purchase
agreements 14,525 - -
Employee 401(k) plan
matching contribution 60,708 1 -
Net income - - -
---------- -------- ---------
Balance as of December 31, 1994 8,797,377 $ 89 $ 32,143
========== ======== =========
</TABLE>
<TABLE>
<CAPTION>
Total
Additional Retained Stockholders'
Paid-in- Earnings Equity
Capital (Deficit) (Deficit)
------- --------- ---------
<S> <C> <C> <C>
Balance as of December 31, 1991 $28,802 $ (39,094) $ 6,466
Common stock issued for:
Defined contribution plan 79 - 291
Compensation in lieu of cash 405 - 1,310
Employee common stock purchase
agreements and exercises of
common stock options, net of
common stock tendered 6 - 100
Acquisition earnouts 13 - 51
Net loss - (59,676) (59,676)
Balance as of December 31, 1992 29,305 (98,770) (51,458)
Effect of one-for-five reverse
stock split and change in par
value from $1.00 to $0.01 per
share 17,971 - -
Accretion of liquidation
preference on preferred stock (2,196) - (2,196)
Common stock issued for:
Exercise of Prudential warrant 2,898 - 2,902
Rights redemption - - 1
Employee common stock purchase
agreements and exercise of
common stock options, net of
common stock tendered 70 - 70
Acquisition earnouts 22 - 22
Net loss - (18,208) (18,208)
------- --------- --------
Balance as of December 31, 1993 48,070 (116,978) (68,867)
Accretion of liquidation
Preference on preferred stock (2,173) - (2,173)
Elimination of mandatory
redemption provision on
preferred stock:
12% Senior Convertible
Preferred Stock - - 15,945
5% Junior Convertible
Preferred Stock - - 16,198
Warrants issued in connection
with 1994 Recapitalization 259 - 259
Common stock issued for:
Stockholder rights offering and
standby commitment 9,847 - 9,891
Litigation settlements 678 - 681
Employee common stock purchase
agreements 47 - 47
Employee 401(k) plan
matching contribution 189 - 190
Net income - 2,343 2,343
------- --------- --------
Balance as of December 31, 1994 $56,917 $(114,635) $(25,486)
======= ========= ========
</TABLE>
The accompanying notes are an integral part
of the consolidated financial statements.
24
<PAGE>
GRUBB & ELLIS COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1994, 1993, AND 1992
(IN THOUSANDS)
<TABLE>
<CAPTION>
1994 1993 1992
---- ---- ----
<S> <C> <C> <C>
Cash Flows From Operating Activities:
Net income (loss) $ 2,343 $ (18,208) $(59,676)
Adjustments to reconcile net income (loss) to net cash used
by operating activities:
Gain (loss) on sale of real estate and other assets - 20 (556)
Loss from equity investments - - 190
Depreciation and amortization 1,981 2,287 3,802
Increase (decrease) in real estate brokerage commissions
receivable valuation allowances (1,909) 25 1,981
Other non-cash charges related to special charges
and unusual items (2,241) 13,494 44,879
Decrease in real estate brokerage commissions receivable 4,561 3,270 2,697
Decrease (increase) in other asset accounts 1,047 (2,446) 3,070
Increase (decrease) in accounts payable (109) (1,153) 1,704
Increase (decrease) in deferred commissions payable 2,381 900 (857)
Decrease in other liability accounts (8,520) (1,589) (62)
-------- ---------- ----------
Net cash used in operating activities (466) (3,400) (2,828)
-------- ---------- ----------
Cash Flows From Investing Activities:
Proceeds from sale of assets - 3,350 3,747
Purchases of equipment and leasehold improvements (2,230) (3,115) (1,577)
Proceeds from disposition of real estate joint ventures
and real estate owned 344 389 526
Distribution from (advances to) real estate joint ventures 20 76 (152)
Cash payments for acquisition earnout agreements - - (51)
-------- ---------- --------
Net cash provided by (used in) investing activities (1,866) 700 2,493
-------- ---------- --------
Cash Flows From Financing Activities:
Proceeds from issuance of preferred stock - 13,750 -
Offering costs related to issuance of preferred stock - (1,281) -
Proceeds from borrowing 6,000 8,000 700
Repayment of notes payable (263) (9,067) (1,690)
Proceeds from issuance of common stock 4,201 58 104
Costs related to Rights Offering and issuance of common stock (586) - -
Costs related to debt refinancing (55) - -
-------- ---------- --------
Net cash provided by (used in) financing activities 9,297 11,460 (886)
-------- ---------- --------
Net increase (decrease) in cash and cash equivalents 6,965 8,760 (1,221)
Cash and equivalents at beginning of the year 16,406 7,646 8,867
-------- ---------- --------
Cash and cash equivalents at end of the year $ 23,371 $ 16,406 $ 7,646
======== ========== ========
</TABLE>
The accompanying notes are an integral part
of the consolidated financial statements.
25
<PAGE>
GRUBB & ELLIS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation:
The consolidated financial statements include the accounts of Grubb & Ellis
Company, its wholly and majority owned and controlled subsidiaries and
controlled partnerships (the "Company"). The Company consolidates its majority
owned subsidiary, Axiom Real Estate Management, Inc. ("Axiom"), which provides
real estate property and facilities management services. However, of the seven
members of Axiom's Board of Directors, the Company may elect only two and the
minority shareholder may elect one. The Company and the minority shareholder
voting together as a class may elect four additional directors, including the
Chief Executive Officer, Chief Operating Officer and two unaffiliated directors,
one of whom is nominated by the Company and one of whom is nominated by the
minority shareholder. All significant intercompany accounts and transactions
with unconsolidated joint ventures and partnerships accounted for under the
equity method of accounting have been eliminated.
Revenue Recognition:
Real estate sales commissions are generally recognized at the earlier of
receipt of payment, close of escrow or transfer of title between buyer and
seller. Receipt of payment occurs at the point at which all Company services
have been performed, title to real property has passed from seller to buyer, if
applicable, and no contingencies exist with respect to entitlement to the
payment. Real estate leasing commissions are generally recognized at the earlier
of receipt of payment or tenant occupancy, assuming the Company has possession
of a signed lease agreement and no significant contingencies exist. All other
commissions and fees are recognized at the time the related services have been
performed by the Company, unless significant future contingencies exist.
"Other income, net" includes revenues and expenses recognized subsequent to
1993 related to offices which the Company determined in 1993 to close in 1994.
Such revenues and expenses were $17,939,000 and $17,939,000, respectively, in
1994. Also included are the revenues and expenses of miscellaneous transactions
and the disposition of real estate investments.
Costs and Expenses:
Real estate brokerage and other commission expense (salespersons'
participation) is recognized concurrently with the recording of the related
revenue. All other costs and expenses are recognized when incurred.
Equipment and Leasehold Improvements:
Equipment and leasehold improvements are recorded at cost. Depreciation of
equipment is computed using the straight-line method over their estimated
useful lives ranging from three to seven years. Leasehold improvements are
amortized using the straight-line method over their useful lives not to exceed
the terms of the respective leases. Maintenance and repairs are charged to
expense as incurred.
26
<PAGE>
GRUBB & ELLIS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Accrued Claims and Settlements:
The Company maintains partially self-insured programs for errors and
omissions, general liability, workers' compensation and certain employee health
care costs. Reserves for such partially self-insured programs are included in
accrued claims and settlements and are based on the aggregate of the liability
for reported claims and an actuarially-based estimate of incurred but not
reported claims, net of expected insurance reimbursements.
Income Taxes:
Deferred income taxes, if any, are recorded to reflect the tax consequences
in future years of the differences between the tax bases of assets and
liabilities and their financial reporting amounts. Investment tax credits are
accounted for under the flow-through method, whereby the provision for income
taxes is reduced in the year the tax credits first become available.
Earnings (Loss) Per Common Share and Equivalents:
Earnings (loss) per common share and equivalents computations are based on
the weighted average number of common shares outstanding after giving effect to
potential dilution from common stock options and warrants. Primary earnings
(loss) per common share is the same as fully diluted earnings (loss) per common
share for each year presented. Common share and per share amounts have been
adjusted to give retroactive effect to the one-for-five reverse stock split on
January 29, 1993. The calculation of earnings (loss) per common share includes
net income (loss) adjusted for amounts applicable to the Senior and Junior
Convertible Preferred Stock related to accretion of liquidation preference (for
the periods during which the preferred stock was subject to mandatory
redemption) and undeclared dividends as follows (in thousands):
<TABLE>
<CAPTION>
Cumulative
1994 1993 Total
------ ------ -------
<S> <C> <C> <C>
Junior Convertible Preferred Stock:
Accretion of liquidation preference $ 653 $ 687 $ 1,340
Undeclared dividends 131 - 131
Senior Convertible Preferred Stock:
Accretion of liquidation preference 1,520 1,509 3,029
Undeclared dividends 307 - 307
------ ------ -------
$2,611 $2,196 $ 4,807
====== ====== =======
</TABLE>
Cash and Cash Equivalents:
The Company had cash balances of $2,096,000 and $1,275,000 at December 31,
1994 and 1993, respectively, restricted to use for errors and omissions
insurance claims associated with the Company's errors and omissions insurance
captive. Additionally, Axiom had cash balances of $2,490,000 and $1,103,000 at
December 31, 1994 and 1993, respectively, which as a result of the structuring
of the Company's majority ownership interest in Axiom, were not available for
use by the Company.
27
<PAGE>
GRUBB & ELLIS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Cash and Cash Equivalents (Continued):
For purposes of the Statement of Cash Flows, cash equivalents include
investments in highly liquid debt instruments which are purchased with a
maturity of ninety days or less. Cash payments for interest for the three years
ended December 31, 1994, 1993 and 1992 were approximately $1,418,000, $1,005,000
and $2,717,000, respectively. Cash payments for income taxes for the three
years ended December 31, 1994, 1993 and 1992 were approximately $363,000,
$515,000 and $949,000, respectively.
Real Estate Investments:
Real estate investments held for sale are recorded at the lower of cost or
net realizable value. The Company had a valuation allowance on real estate
investments and real estate owned of approximately $3,778,000 and $3,792,000 at
December 31, 1994 and 1993, respectively. In connection with the disposition of
real estate investments, the Company sold a property in 1993 with a book value
of approximately $413,000 in exchange for a note receivable of $1,190,000. As of
December 31, 1994, the note receivable balance was $1,085,000 and revenue of
$884,000 has been deferred and will be recognized under the cost recovery
method.
Reclassifications:
Certain prior year amounts have been reclassified to conform to the current
year's presentation.
2. REAL ESTATE BROKERAGE COMMISSIONS RECEIVABLE
Real estate brokerage commissions receivable consisted of the following at
December 31, 1994 and 1993 (in thousands):
<TABLE>
<CAPTION>
1994 1993
------- -------
<S> <C> <C>
Commissions receivable $17,484 $22,584
Salespersons' participation (9,412) (9,951)
Allowance for uncollectible accounts (3,118) (5,027)
------- -------
Total 4,954 7,606
Less portion classified as current 4,500 6,451
------- -------
Noncurrent portion $ 454 $ 1,155
======= =======
</TABLE>
28
<PAGE>
GRUBB & ELLIS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Equipment and leasehold improvements consisted of the following at
December 31, 1994 and 1993 (in thousands):
<TABLE>
<CAPTION>
1994 1993
------- -------
<S> <C> <C>
Office furniture and equipment $13,685 $12,701
Leasehold improvements 4,846 5,055
------- -------
Total 18,531 17,756
Less accumulated depreciation and amortization 13,328 12,693
------- -------
Equipment and leasehold improvements, net $ 5,203 $ 5,063
======= =======
</TABLE>
4. LONG-TERM DEBT AND RECAPITALIZATION
Long-term debt consisted of the following at December 31, 1994 and 1993
(in thousands):
<TABLE>
<CAPTION>
1994 1993
--------- --------
<S> <C> <C>
Senior Notes, 9.9%, due
November 1, 1997 and 1998 $ 10,000 $ -
Senior Notes, 9.9%, due November 1,
1996 and thereafter as described below - 10,000
$10 million 10.65% PIK Notes, net,
increasing to 11.65% effective
January 1, 1996, due November 1,
2000 and 2001 10,292 -
$10 million 10.65% PIK Notes, net, due
November 1, 1997 and thereafter as
described below - 9,067
Revolving Credit Note at 3.5% above
LIBOR, due November 1, 1999 5,000 -
Revolving Credit Note at 3.5% above
LIBOR, due December 31, 1994 - 5,000
Other notes payable at various rates of
interest, due through 2005 899 1,406
--------- --------
26,191 25,473
Less portion classified as current 508 9,336
--------- --------
Long-term portion $ 25,683 $ 16,137
========= ========
</TABLE>
29
<PAGE>
GRUBB & ELLIS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. LONG-TERM DEBT AND RECAPITALIZATION (CONTINUED)
Aggregate maturities of long-term debt, excluding discount amortization,
for the next five years are as follows: 1995 - $508,000; 1996 - $78,000; 1997 -
$5,023,000; 1998 - $5,026,000; 1999 - $5,029,000; and thereafter, $10,850,000.
1994 Recapitalization:
On November 1, 1994, the Company, Warburg, Pincus Investors, L.P.
("Warburg") and The Prudential Insurance Company of America ("Prudential")
completed certain related party financing transactions (the "1994
Recapitalization") pursuant to agreements (the "Agreements") providing for,
among other things, (1) additional equity capital through a rights offering and
Standby Agreement by Warburg, (2) amendments to a debt agreement with
Prudential, (3) issuance of additional warrants to purchase common stock of the
Company and (4) amendments to the existing Junior and Senior Convertible
Preferred Stock and warrants held by Warburg and Prudential. The debt amendments
with Prudential include a provision for supplemental principal payments
commencing July 1, 1998 if the Company meets certain financial tests. In
addition, certain covenants of the debt agreement remain in place, but will not
be in effect until April 1, 1997.
Stockholder Rights Offering:
Through a Stockholder Rights Offering which expired October 31, 1994,
common stockholders, other than Warburg and Prudential, purchased 84,542 shares
of common stock at the subscription price of $2.375 per share for total proceeds
of $201,000. Pursuant to a Standby Agreement, Warburg purchased 4,277,433 shares
of common stock, not purchased by common stockholders in the Rights Offering, at
the subscription price of $2.375 per share for total proceeds of approximately
$10,159,000. As provided for in the Standby Agreement, Warburg paid for its
shares with $4,000,000 in cash and through cancellation of $6,159,000 of
indebtedness outstanding under an interim financing loan, including accrued
interest of approximately $159,000. Warburg had made the interim financing loan
pursuant to an agreement entered into in March 1994, which was terminated in
connection with the consummation of the 1994 Recapitalization. Direct costs of
$469,000 were capitalized in connection with the Stockholder Rights Offering.
9.9% Senior Notes:
The 9.9% Senior Notes were issued to Prudential in 1986 and were
subsequently modified in 1992 to require annual principal payments of $2 million
on November 1, 1993 and 1994 and $3 million on November 1, 1995 and 1996. The
9.9% Senior Notes require semi-annual interest payments. No principal payments
have been made on the 9.9% Senior Notes since the issue date. In connection with
the 1994 Recapitalization, the principal payment terms were modified requiring
two approximately equal installments on November 1, 1997 and 1998.
30
<PAGE>
GRUBB & ELLIS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. LONG-TERM DEBT AND RECAPITALIZATION (CONTINUED)
10.65% Payment-in-Kind Notes:
In January 1993, Prudential agreed, among other things, to convert $10
million of the then outstanding 10.65% Subordinated Notes into $10 million of
10.65% Payment-in-Kind Notes (the "10.65% PIK Notes") due November 1, 1999 (the
"1993 Recapitalization"). The 10.65% PIK Notes require semi-annual interest
payments, although until all of the 9.9% Senior Notes have been retired, the
interest may be paid in kind by the issuance of additional 10.65% PIK Notes.
Prior to the 1994 Recapitalization, principal payments were required in the
amount of one third of the principal amount of the 10.65% PIK Notes outstanding
on November 1 of each of 1997 and 1998 and all remaining outstanding principal
amounts on November 1, 1999. In connection with the 1994 Recapitalization, the
terms of the principal payments were modified requiring two approximately equal
installments on November 1, 2000 and 2001. Additionally, the interest rate will
increase from 10.65% to 11.65% per annum on January 1, 1996. Interest expense is
being recorded on the level yield method at an effective yield rate of 11.5%.
The outstanding amount of the 10.65% PIK Notes is net of $920,000 canceled by
Prudential in payment of the exercise price of a warrant pursuant to the terms
of the 1993 Recapitalization and unamortized discount of $323,000 and $493,000
at December 31, 1994 and 1993, respectively.
Revolving Credit Note:
In January 1993, the Company issued to Prudential a $5 million Revolving
Credit Note due December 31, 1994 as a modification of the 1991 revolving Line
of credit which was to expire on February 15, 1993. The Revolving Credit Note
bears interest at 3.5% above LIBOR and has certain repayment requirements and
other financial covenants. Prior to the 1994 Recapitalization, upon maturity,
the Company had the option of converting the note into a term note which would
mature on December 31, 1996, have an interest rate of LIBOR plus 5% and require
equal semi-annual principal payments beginning June 30, 1995. In connection with
the 1994 Recapitalization, Prudential canceled the conversion option, extended
the maturity date to November 1, 1999 and waived the Company's obligation to
repay all of the outstanding principal for a 60-day period in 1994 and in
subsequent years until after April 1, 1997.
Other Notes Payable:
Other notes payable of the Company are secured by various assets with
carrying values of approximately $6,856,000 and $6,249,000 at December 31, 1994
and 1993, respectively.
Axiom Credit Facility:
The Company's subsidiary, Axiom, has a $2,050,000 credit facility with IBM
which expires August 31, 1995. There were no borrowings outstanding under this
credit facility as of December 31, 1994. This credit facility is collateralized
by substantially all of Axiom's assets and contains certain covenants, including
the maintenance of minimum levels of net worth, financial ratios and
restrictions on the payments of dividends.
31
<PAGE>
GRUBB & ELLIS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. LONG-TERM DEBT AND RECAPITALIZATION (CONTINUED)
Junior Convertible Preferred Stock:
In January 1993, the Company issued 150,000 shares of 5% Junior Convertible
Preferred Stock ("Junior Preferred") and five-year warrants to purchase 200,000
shares of common stock at an exercise price of $5.50 per share in exchange for
$15 million of the then outstanding 10.65% Subordinated Notes. Each share of
Junior Preferred is convertible, at the option of the holder, into shares of
common stock of the Company determined by dividing the $100 stated value per
share by the conversion price of $5.6085. Prior to the 1994 Recapitalization,
each share of Junior Preferred was subject to mandatory conversion based on
specific financial ratios and/or conditions. Holders of Junior Preferred are
entitled to receive, out of any funds legally available, cumulative dividends
payable in cash at a rate of 5% per annum compounded annually.
The 1994 Recapitalization provided for the elimination of the mandatory
redemption provision and an increase in the dividend rate effective January 1,
2002 to 10% per annum with further increases of 1% per annum effective January
1, 2003 and January 1, 2004 and 2% per annum effective January 1, 2005 and each
January 1 thereafter.
With respect to dividend rights and rights on redemption and liquidation,
winding up and dissolution, the Junior Preferred ranks prior to any other equity
securities of the Company, including all classes of common stock and any series
of preferred stock of the Company other than the Senior Convertible Preferred
Stock, which ranks prior to Junior Preferred.
During 1994 and prior to the 1994 Recapitalization, the carrying value of
the Junior Preferred was adjusted by accretion of liquidation preference due
upon liquidation in the amount of $653,000, and accretion of direct costs of
$27,000. On a cumulative basis, undeclared dividends and accretion of direct
costs amounted to $1,340,000 and $58,000, respectively. In connection with the
1994 and 1993 Recapitalizations, the carrying value of the Junior Preferred was
adjusted by direct costs of $17,000 and $183,000, respectively.
Senior Convertible Preferred Stock:
In January 1993, the Company issued to Warburg and Joe F. Hanauer
("Hanauer") for $13,750,000 in cash, an aggregate of 137,160 shares of 12%
Senior Convertible Preferred Stock ("Senior Preferred"), five-year warrants to
purchase 500,000 and 200,000 shares of common stock at exercise prices of $5.00
and $5.50 per share, respectively, and five-year warrants to purchase up to
400,000 shares of common stock (the "Contingent Warrants") which become
exercisable at a formula price only in the event the Company incurs a defined
liability in excess of $1.5 million.
Each share of Senior Preferred is convertible, at the option of the holder,
into shares of common stock of the Company determined by dividing the $100
stated value per share by the conversion price of $2.6564 for Warburg and
$2.6716 for Hanauer. Prior to the 1994 Recapitalization, each share of Senior
Preferred was subject to mandatory conversion based on specific financial
32
<PAGE>
GRUBB & ELLIS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. LONG-TERM DEBT AND RECAPITALIZATION (CONTINUED)
Senior Convertible Preferred Stock (Continued):
ratios and/or conditions and anti-dilution provisions with respect to the
issuance of common stock and common stock equivalents at less than the
conversion price or exercise price. Holders of Senior Preferred are entitled to
receive, out of any funds legally available, cumulative dividends payable in
cash at a rate of 12% per annum compounded annually.
The 1994 Recapitalization provided for the elimination of the mandatory
redemption provision and an increase in the dividend rate so that at such time
the dividend rate on the Junior Preferred increases above the dividend rate of
the Senior Preferred, the dividend rate on the Senior Preferred will increase by
the same amount. As a result of the application of the anti-dilution provisions
previously existing in the Senior Preferred, the number of shares issuable upon
conversion of the Senior Preferred increased from 4,551,201 shares to 5,161,456
shares. With respect to dividend rights and rights on redemption and on
liquidation, winding up and dissolution, the Senior Preferred ranks prior to any
other equity securities of the Company, including all classes of common stock
and any other series of preferred stock of the Company.
During 1994 and prior to the 1994 Recapitalization, the carrying value of
the Senior Preferred was adjusted by accretion of liquidation preference due
upon liquidation in the amount of $1,520,000 and the accretion of direct costs
of $160,000. On a cumulative basis, undeclared dividends and accretion of direct
costs amounted to $3,029,000 and $336,000, respectively. In connection with the
1994 and 1993 Recapitalizations, the carrying value of the Senior Preferred was
adjusted by direct costs of $100,000 and $1,070,000, respectively.
New Warrants and Amendments to Existing Warrants:
As consideration for acquiring shares of stock not purchased in the
Stockholder Rights Offering in connection with the Standby Agreement, and
agreeing to other financing transactions, the Company issued to Warburg a
warrant to purchase 325,000 shares at an exercise price of $2.375 per share,
exercisable within 5 years. As consideration for modifying the terms of the 9.9%
Senior Notes, 10.65% PIK Notes and Revolving Credit Note, waiving noncompliance
with and deferring application of certain covenants of the Prudential debt
agreement, and agreeing to other financing transactions, the Company issued to
Prudential a warrant to purchase 150,000 shares at an exercise price of $2.375
per share, exercisable within 5 years. Loan costs of $225,000 were capitalized
in connection with the Prudential warrant and are being amortized over the
weighted average remaining terms of the debt agreements with Prudential.
In connection with the 1994 Recapitalization, the Company's warrants to
purchase common stock issued to Warburg and Prudential in connection with the
1993 Recapitalization were amended to reduce the exercise price to $3.50 per
share, eliminate certain anti-dilution provisions, and in the case of the
warrants held by Prudential, extend the expiration date from January 1998 until
December 1998. Prudential waived the anti-dilution provisions of its existing
warrants in connection with the 1994 Recapitalization.
33
<PAGE>
GRUBB & ELLIS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. LONG-TERM DEBT AND RECAPITALIZATION (CONTINUED)
As a result of the 1994 Recapitalization and application of the anti-dilution
provisions previously existing in the warrants held by Warburg and Hanauer, the
aggregate number of shares issuable upon conversion of such warrants increased
from 726,182 to 1,034,885 shares. Loan costs of $34,000 were capitalized in
connection with the Prudential warrant amendments and are being amortized over
the weighted average remaining terms of the debt agreements with Prudential.
The contingent warrants held by Warburg, originally issued with the Senior
Preferred, to acquire up to 373,818 shares under certain circumstances, were
canceled.
Prudential Long-term Debt Restrictions:
In connection with the 1993 Recapitalization, Prudential and the Company
signed an agreement (the "New Note Agreement") which contains significant
restrictions on the payment of cash dividends and purchases of stock of the
Company. The New Note Agreement also contains significant restrictions on the
Company's (and certain of its subsidiaries') ability to, among other things, (i)
incur debt and liens upon their properties, (ii) enter into guarantees and make
loans, investments and advances, (iii) merge or enter into similar business
combinations, (iv) conduct any business other than their present businesses, (v)
sell assets, including receivables, (vi) make capital expenditures and (vii)
enter into certain other transactions.
The New Note Agreement between the Company and Prudential contains various
affirmative and negative covenants, which require, among other things, that the
Company (combined with certain of its subsidiaries and taken as a whole)
maintain a ratio of consolidated current assets to consolidated current
liabilities (the "Working Capital Ratio") as defined in the New Note Agreement,
excluding the current portion of long-term debt, of greater than 1:1 at the end
of each of its fiscal quarters.
At December 31, 1993 the Company did not meet certain covenants and
restrictions as established in the New Note Agreement, including the Working
Capital Ratio. However, in connection with the 1994 Recapitalization, Prudential
agreed to waive the requirements of the Working Capital Ratio, cumulative loss
provisions and covenants restricting the Company's capital expenditures until
April 1, 1997.
5. INCOME TAXES
The provision for income taxes for the year ended December 31, 1994
consisted of federal, state and local income taxes. The provision for income
taxes for the years ended December 31, 1993 and 1992 consisted entirely of state
and local taxes due currently.
At December 31, 1994, the following income tax carryforwards were available
to the Company (in thousands):
<TABLE>
<CAPTION>
Expiration
Amount Dates
------- ------------
<S> <C> <C>
Federal regular tax operating
loss carryforwards $38,200 2001 to 2009
Federal investment tax credit
carryforwards $ 278 1998 to 2000
</TABLE>
34
<PAGE>
GRUBB & ELLIS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. INCOME TAXES (CONTINUED)
As of December 31, 1994, the Company had a federal tax net operating loss
carryforward of $38.2 million and a federal investment tax credit carryforward
of $278,000, after taking into effect the reduction in tax attributes resulting
from the cancellation of indebtedness pursuant to Section 108(b)(2) of the
Internal Revenue Code (the "Code"). The 1993 Recapitalization constituted an
ownership change within the meaning of Section 382 of the Code thereby limiting
the amount of post-ownership change taxable income which may be offset by the
above net operating loss carryovers attributable to periods prior to the
ownership change. The annual amount of net operating losses allowed under
Section 382 will be approximately $825,000. Net operating losses attributable
to periods subsequent to the ownership change are approximately $21.7 million
and are not subject to the limitation under Section 382.
The Company's effective tax rate on its income (loss) before taxes differs
from the statutory regular tax rate as follows:
<TABLE>
<CAPTION>
1994 1993 1992
----- ----- -----
<S> <C> <C> <C>
Federal statutory rate 35.0% (35.0)% (34.0)%
State income taxes (net of federal benefit) 3.7 3.3 1.0
Goodwill amortization - 20.9 11.6
Meals and entertainment 5.2 - -
Recognition of a deferred tax asset in the
current period (32.3) - -
Losses for which no tax benefit was
recorded in current period - 14.1 22.4
------ ------ ------
Effective income tax rate for the year 11.6% 3.3% 1.0%
====== ====== ======
</TABLE>
At December 31, 1994, net deferred tax assets totaled approximately $25.7
million. The total valuation allowance recognized for net deferred tax assets
was also approximately $25.7 million. The valuation allowance decreased by
approximately $900,000 during 1994.
The differences between the tax bases of assets and liabilities and their
financial reporting amounts that give rise to significant portions of deferred
income tax liabilities or assets are: real estate investment valuation
allowances, equity in partnership gains and losses, property and equipment
depreciation and accrued expenses.
35
<PAGE>
GRUBB & ELLIS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. INCOME TAXES (CONTINUED)
The components of the Company's deferred tax (liabilities) and assets are
as follows as of December 31, 1994 (in thousands):
<TABLE>
<S> <C> <C>
Gross deferred tax liabilities - current
Commission and fee reserves $ (477)
Gross deferred tax assets - current
Commission and fee reserves $ 2,400
Litigation accrual 957
Compensation accrual 1,647
-----
Gross deferred tax assets - current 5,004
Deferred tax assets valuation
allowance - current (4,527)
Gross deferred tax assets - noncurrent
Investment in partnerships 19
Depreciation 33
Investment tax credit 278
Commission and fee reserves 2,917
Litigation accrual 5,127
Net operating loss carryforwards 14,598
Estimated net operating loss
carryforward limitation under
Code Section 382 (1,765)
-------
Gross deferred tax assets - noncurrent 21,207
Deferred tax assets valuation
allowance - noncurrent (21,207)
-------
Net deferred tax (liability) asset $ -
======
</TABLE>
6. STOCK OPTIONS, STOCK PURCHASE AND EMPLOYEE 401(K) PLANS
Stock Option Plans:
The information set forth below regarding stock option plans gives effect
to the one-for-five reverse stock split in 1993. Changes in stock options were
as follows for the years ended December 31, 1994, 1993 and 1992:
36
<PAGE>
GRUBB & ELLIS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. STOCK OPTIONS, STOCK PURCHASE AND EMPLOYEE 401(K) PLANS (CONTINUED)
Stock Option Plans (Continued):
<TABLE>
<CAPTION>
1994 1993 1992
----------------------- ----------------------- -----------------------
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
-------- -------- -------- -------- ------- ---------
<S> <C> <C> <C> <C> <C> <C>
Stock options
outstanding at the
beginning of the $2.88 to $5.00 to $5.00 to
year 727,701 $28.75 199,762 $51.88 209,159 $51.88
Granted or $2.00 to $2.88 to $5.00 to
regranted 55,000 $3.13 662,000 $4.38 52,399 $10.00
Lapsed or $3.50 to $5.00 to $5.00 to
canceled (468,450) $18.75 (129,395) $51.88 (61,796) $20.00
Exercised - - (4,666) $6.88 - -
------- -------- ------- -------- ------- --------
Stock options
outstanding at the $2.00 to $2.88 to $5.00 to
end of the year 314,251 $28.75 727,701 $28.75 199,762 $51.88
------- -------- ------- -------- ------- --------
Exercisable at end $2.88 to $6.25 to $11.25 to
of the year 114,653 $28.75 51,680 $28.75 107,879 $51.88
======= ======== ======= ======== ======= =========
</TABLE>
The Company's 1990 Amended and Restated Stock Option Plan as amended,
provides for grants of options to purchase the Company's common stock. The plan
was amended effective May 1993 to authorize a fixed number of 1,350,000 shares
for the plan. At December 31, 1994, 1993 and 1992, 1,065,749, 627,633 and 70,282
shares were available for the grant of options, respectively. Stock options
under this plan are granted at prices from 50% up to 100% of the market price
per share at the dates of grant, the terms and vesting schedules of which are
determined by the Compensation Committee of the Board of Directors.
The Company's 1993 Stock Option Plan for Outside Directors provides for
automatic grants to newly-elected non-management members of the Board of
Directors of options to purchase 10,000 shares of common stock, at exercise
prices set at the market price at the date of grant. The plan has authorized
50,000 shares for issuance. The options expire five years from the date of grant
and vest over three years from such date. At December 31, 1994 and 1993, options
to purchase 30,000 and 10,000 shares, respectively, were outstanding under the
plan. As of December 31, 1994, 3,334 shares have vested.
Employee Common Stock Purchase Plan:
In 1987, the Company adopted an employee stock purchase plan which enables
eligible employees to purchase common stock of the Company at discounted prices.
In August 1993, the plan was amended to authorize up to 200,000 shares of stock
for issuance under this plan. As of December 31, 1994, 93,826 shares were
available for issue. During 1994, 1993 and 1992, 6,174, 6,342 and 19,240 shares,
respectively, were purchased under this plan.
37
<PAGE>
GRUBB & ELLIS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. STOCK OPTIONS, STOCK PURCHASE AND EMPLOYEE 401(K) PLANS (CONTINUED)
Employee 401(k) Plans:
The Company has a defined contribution plan covering eligible employees
other than employees of Axiom. The Company contributes on a discretionary basis
to the plan based upon specified percentages of voluntary employee
contributions, which contributions may be made in common stock or cash, or a
combination of both. Axiom has a 401(k) plan that does not provide for employer
contributions to be made in stock. Discretionary contributions by the Company
and other expenses for the plans amounted to approximately $548,390, $418,000,
and $32,000 for 1994, 1993, and 1992, respectively.
7. RELATED PARTY TRANSACTIONS
The Company participates in joint ventures, partnerships and trusts in
which officers, directors and salespersons of the Company may also participate
as investors. Such persons or their affiliates frequently provide property
management and other real estate services to these entities, and such persons
may manage or otherwise control such joint ventures or partnerships.
Revenue earned by the Company for services rendered to affiliates,
including joint ventures, officers and directors and their affiliates ("Related
Parties"), was as follows for the years ended December 31, 1994, 1993, and 1992
(in thousands):
<TABLE>
<CAPTION>
1994 1993 1992
------ ------ -------
<S> <C> <C> <C>
Real estate brokerage $ 633 $ 618 $ 404
commissions
Real estate services
fees and commissions $1,489 $1,214 $ 1,235
</TABLE>
The Company rents office space from Related Parties. Such rent expense for
the years ended December 31, 1994, 1993 and 1992 was $1,122,000, $1,312,000 and
$1,502,000, respectively.
At December 31, 1993, the Company had $494,000 of notes and other
receivables from Related Parties, which were fully reserved. See Note 4 to the
Notes to Consolidated Financial Statements for information regarding long-term
debt with Prudential, a Related Party.
A limited partnership which is affiliated with the Company is a partner in
a joint venture formed to develop an office building in Southern California. As
permanent financing for the project, the joint venture borrowed $5.8 million on
a non-recourse basis from a Related Party in September 1990, secured by an
unamortized first mortgage on the property at a rate of 10.02% per year and a
term of five years.
38
<PAGE>
GRUBB & ELLIS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. RELATED PARTY TRANSACTIONS (CONTINUED)
During 1993, the Company paid approximately $50,000, to a Related Party for
administration of the Company's employee health plan for four of its offices.
In connection with the 1993 Recapitalization, certain Related Parties
received reimbursement of expenses totaling approximately $783,000, and one
Related Party received fees of $325,000. In connection with the 1994
Recapitalization, the Company entered into agreements with certain Related
Parties (see Note 4 to Notes to Consolidated Financial Statements) and paid
approximately $70,000 in legal fees on behalf of Prudential.
8. COMMITMENTS AND CONTINGENCIES
Real Estate Joint Ventures and Partnerships:
The Company has guaranteed, in the aggregate amount of $4 million, the
contingent liabilities of one of its wholly-owned subsidiaries with respect to
two limited partnerships in which the subsidiary formerly acted as general
partner.
Noncancelable Operating Leases:
The Company has noncancelable operating lease obligations for office space
and certain equipment ranging from one to eight years, and sublease agreements
under which the Company acts as sublessor. The office space leases provide for
annual rent increases based on the Consumer Price Index, or other specified
terms, and typically require payment of property taxes, insurance and
maintenance costs.
Future minimum payments under noncancelable operating leases with an
initial term of one year or more were as follows at December 31, 1994 (in
thousands):
<TABLE>
<CAPTION>
Gross Sublease
Lease Rental Net Lease
Year Obligation Income Obligation
---- ---------- ------ ----------
<S> <C> <C> <C>
1995 $13,246 $1,977 $11,269
1996 9,823 1,662 8,161
1997 5,604 460 5,144
1998 4,122 127 3,995
1999 2,163 127 2,036
Thereafter 2,538 191 2,347
------- ------ -------
Total $37,496 $4,544 $32,952
======= ====== =======
</TABLE>
As a component of the Company's restructuring charges related to the
downsizing and closing of certain offices, the Company has accrued for
approximately $3,561,000 of the above expected future minimum rental payments
net of expected sublease income of approximately $1,209,000, as of December 31,
1994.
<PAGE>
GRUBB & ELLIS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. COMMITMENTS AND CONTINGENCIES (CONTINUED)
Noncancelable Operating Leases (Continued):
Lease and rental expense for the years ended December 31, 1994, 1993 and
1992 amounted to $15,339,000, $19,552,000 and $27,510,000, respectively, net of
sublease income of $1,087,000, $1,214,000 and $1,138,000, respectively.
Legal Matters:
The Company is involved in various claims and lawsuits arising out of the
conduct of its business, as well as in connection with its participation in
various joint ventures, partnerships, a trust and appraisal business, many of
which may not be covered by the Company's insurance policies. In the opinion of
management, the eventual outcome of such claims and lawsuits is not expected to
have a material adverse effect on the Company's financial position or results of
operations. See Note 9 to the Notes to Consolidated Financial Statements for a
discussion of legal settlements during 1994.
On March 14, 1994, Johsz, et al. v. Koll Company, et al., was filed in the
--------------------------------------
Orange County (California) Superior Court against the Koll Company, Grubb &
Ellis Company, Koll Center Newport Number 10, a California general partnership
("Koll"), and Southern California Edison Company ("Edison"). The complaint was
served on the Company in June 1994. A second complaint, Younkin, Maiona, et al.
-----------------------
v. Koll Company, et al., based on similar causes of action was filed in the same
------------------------
court on December 13, 1994 and served on the Company in February 1995. The
plaintiffs in these two cases, three former Company brokers, a former Company
employee, a current Company employee, and their spouses, allege that the brokers
and employees acquired cancer from electromagnetic waves produced by the
electric transformer owned by Edison and situated in a vault below office space
leased by the Company in a building owned by Koll. The complaints allege
negligence, battery, negligent infliction of emotional distress, fraudulent
concealment, loss of consortium and, against Edison only, strict liability.
Specific damages were not pled, but punitive as well as compensatory damages are
sought. Discovery is ongoing. A trial date of August 7, 1995 has been set for
the Johsz case.
-----
John W. Matthews, et al. v. Kidder, Peabody & Co., et al. and HSM Inc., et
--------------------------------------------------------------------------
al., filed on January 23, 1995 in the United States District Court for the
----
Western District of Pennsylvania, is a purported class action on behalf of
approximately 6,000 limited partners who invested approximately $85 million in
three public real estate limited partnerships (the "Partnerships") during the
period beginning in 1982 and continuing through 1986. HSM Inc. is a wholly-owned
subsidiary of the Company. The complaint alleges violations under the Racketeer
Influenced and Corrupt Organizations Act, securities fraud, breach of fiduciary
duty and negligent misrepresentation surrounding the defendants' organization,
promotion, sponsorship and management of the Partnerships. No discovery has been
conducted. No plaintiff class has been certified. Specific damages were not
pled, but treble, punitive as well as compensatory damages and restitution are
sought.
The Company intends to vigorously defend the Johsz, Younkin and Matthews
---------------------------
actions. Management believes it has meritorious defenses to contest the claims
asserted in those actions. Based upon available information, the Company is not
able to determine the financial impact, if any, of such actions, but based upon
available information, believes that the outcome will not have a material
adverse effect on the Company's financial position or results of operations.
40
<PAGE>
GRUBB & ELLIS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. SPECIAL CHARGES AND UNUSUAL ITEMS
The Company's management periodically evaluates its business strategy and
direction and the carrying value of certain assets. Over the four-year period
ended December 31, 1994, management implemented a variety of restructuring and
recapitalization measures necessary for the Company to continue as a going
concern. The financial impact of these measures, as well as other special
charges, have been recorded in "Special Charges and Unusual Items" as follows
(in millions):
<TABLE>
<CAPTION>
1994 1993 1992
------ ----- -----
<S> <C> <C> <C>
Goodwill write-down $ - $10.1 $18.9
Severance and office
closure costs (1.9) 2.9 6.1
Reduction in carrying value
of equity in joint venture
and other property
investments
- - 2.8
Legal expense and estimated
settlement provisions - - 16.2
Other, net (.3) 0.5 0.9
------ ----- -----
$(2.2) $13.5 $44.9
====== ===== =====
</TABLE>
Excess of Cost Over Net Assets of Acquired Companies ("Goodwill"):
During 1991, 1992 and 1993, the Company evaluated the carrying value of its
goodwill to determine whether it would be recoverable from future operations. A
number of factors were reviewed including operating results, business plans,
budgets and economic projections. The evaluation was significantly impacted by
the continuation of the recessionary cycle and the severe downturn in the real
estate markets. In 1991 and 1992, the Company wrote-off goodwill associated with
certain business entities acquired in a period of rapid expansion during the
1980's when real estate activity was at increased levels and profit margins were
substantially higher than those found in the market today. As of December 31,
1992, all of the remaining unamortized goodwill was associated with commercial
brokerage operations. In 1993, the Company completed a recapitalization and
acquired a new executive management team which determined that additional market
capitalization and a variety of restructuring efforts were needed in order for
the business to
41
<PAGE>
GRUBB & ELLIS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. SPECIAL CHARGES AND UNUSUAL ITEMS (CONTINUED)
Excess of Cost Over Net Assets of Acquired Companies ("Goodwill") (Continued):
continue as a going concern. The restructuring efforts in 1994 included
downsizing operations and refocusing the Company's activities on its core
business (commercial brokerage) functions as well as realigning the operational
structure into a more centralized operation with less middle management.
Recapitalization efforts in 1994 included the restructuring of the Company's
debt and the infusion of cash by Warburg (See Note 4). The Company's analysis
of goodwill performed in the fourth quarter of 1993 indicated that the
commercial brokerage business would operate at a loss without the planned
restructuring and recapitalization efforts and therefore be unable to recover
goodwill. Accordingly, the remaining goodwill was written off as of December
31, 1993.
Severance and Office Closure Costs:
During 1991, 1992 and 1993, the Company accrued estimated employee
severance and office closure costs when plans were adopted to close certain
unprofitable offices. During 1994, the Company paid $3.5 million in cash
(relating to the termination of 37 employees and the closure of 28 offices) and
made non-cash reductions of $2.2 million to these reserves. Approximately $1.2
million of the non-cash reductions in the employee severance and office closure
cost reserves were a result of closing certain offices more efficiently than
initially estimated and are reflected as a credit to "Special Charges and
Unusual Items" in 1994. Also reflected as a credit to "Special Charges and
Unusual Items" in 1994 is the non-cash adjustment of $750,000 related to the
reversal of a portion of the remaining net office lease liability of the
Company's residential brokerage operations which were sold in November 1994.
Should the buyer of the Southern California residential brokerage operations
perform under the remaining lease liability that it assumed (which extends to
November 1997), remaining office closure reserves of approximately $750,000 will
be reduced in future periods. Of the $4.7 million of remaining accrued severance
and office closure costs at December 31, 1994, the Company estimates
approximately $3.6 million will be paid in cash.
Equity Joint Venture and Other Property Investments:
As a consequence of the recessionary cycle and depressed real estate
markets, the Company made provisions to increase its valuation allowance of its
partnership and joint venture investments during 1992 and 1991 to reflect
reductions in estimated net realizable values. Estimated net realizable value
was based on the then current market value less disposition costs.
Legal Expense and Estimated Settlement Provisions:
The legal expense and estimated settlement provision for 1992 included an
estimate for potential professional liability exposure arising from the
activities of the Company's salesforce for incurred but not reported cases and
the estimated costs of several significant lawsuits, two of which were settled
in 1994.
42
<PAGE>
GRUBB & ELLIS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. SPECIAL CHARGES AND UNUSUAL ITEMS (CONTINUED)
Legal Expense and Estimated Settlement Provisions (Continued):
In June 1994, the Company settled two consolidated actions, Donald C.
---------
Anderson, et al. v. Grubb & Ellis Company, et al., and Gabriel L. Aguilar, et
-----------------------------------------------------------------------------
al. v. Grubb & Ellis Company, et al., filed on behalf of the limited partners
--------------------------------------
of a limited partnership formed to purchase an office/retail building in
California in 1985 in which the Company and certain of its affiliates acted as
the syndicator, the general partner of the partnership and the property manager
of the investment property. The Company's portion of the settlement involved a
cash payment and approximately 50,000 shares of common stock of the Company. In
July 1994, the Company settled a potential claim of a former joint venture
partner relating to a partnership involving the ownership and operation of
commercial real estate for cash and 250,000 shares of common stock of the
Company.
Other, Net:
In 1993, "Other, net" includes $1,543,000 of gains from the sales of the
Company's real estate advisory business and Northern California residential real
estate operations which were transacted in the first quarter of 1993. In 1994,
"Other, net" includes a $250,000 gain from the sale of the remaining residential
real estate operations in Southern California.
10. CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject the Company to credit risk
consist principally of trade receivables and interest-bearing investments. Users
of real estate services account for a substantial portion of trade receivables
and collateral is generally not required. The risk associated with this
concentration is limited due to the large number of users and their geographic
dispersion.
The Company places substantially all its interest-bearing investments with
major financial institutions and limits the amount of credit exposure to any one
financial institution in accordance with policy and pursuant to restrictions in
the New Note Agreement with Prudential.
43
<PAGE>
GRUBB & ELLIS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
1994/(a)/
--------
First Second Third Fourth
Quarter Quarter Quarter Quarter
--------------- ------------ ------------- -------------
(in thousands, except per share amounts and shares)
<S> <C> <C> <C> <C>
Operating Revenue $ 34,345 $ 45,479 $ 47,004 $ 56,774
============= ============ ============= =============
Operating income (loss) $ (3,884) $ 804 $ 1,224 $ 5,978
============= ============ ============= =============
Income(loss) before income
taxes $ (4,630) $ 1,283 $ 685 $ 5,312
============= ============ ============= =============
Net income (loss) $ (4,747) $ 1,203 $ 584 $ 5,303
============= ============ ============= =============
Net income (loss) per common
share:
Primary $ (1.33) $ 0.11 $ (0.02) $ 0.49
============= ============ ============= =============
Fully diluted $ (1.33) $ 0.11 $ (0.02) $ 0.35
============= ============= ============= =============
Weighted average common
shares 4,062,136 4,114,549 4,261,351 7,275,468
============= ============= ============= =============
Common stock market price
range (high: low) 4 1/4 : 2 7/8 3 1/4 : 2 1/4 2 7/8 : 1 5/8 2 3/8 : 1 7/8
============= ============= ============= =============
1993/(a)/
---------
First Second Third Fourth
Quarter Quarter Quarter Quarter
------------ ------------- ------------- -------------
(in thousands, except per share amounts and shares)
Operating Revenue $ 42,104 $ 50,629 $ 50,062 $ 57,936
============ ============= ============= =============
Operating income (loss) $ (3,990) $ 1,014 $ (711) $ (12,351)
============ ============= ============= =============
Income(loss) before income
taxes $ (4,562) $ 529 $ (538) $ (13,062)
============ ============= ============= =============
Net income (loss) $ (4,662) $ 454 $ (638) $ (13,362)
============ ============= ============= =============
Net loss per common share:
Primary $ (1.30) $ (0.04) $ (0.30) $ (3.44)
============ ============= ============= =============
Fully diluted $ (1.30) $ (0.04) $ (0.30) $ (3.44)
============ ============= ============= =============
Weighted average common
shares and equivalents 3,900,154 4,056,954 4,060,268 4,060,271
============ ============= ============= =============
Common stock market price
range (high: low) 8 : 1 7/8 5 7/8 : 3 3/8 4 1/2 : 2 3/4 3 5/8 : 2 5/8
============ ============= ============= =============
----------------------------------
</TABLE>
/(a)/ See Note 9 for a discussion of special charges and unusual items recorded
in the fourth quarter of 1993 and credits to special charges and unusual items
recorded during 1994. Certain operating revenue and operating income (loss)
amounts have been reclassified from those reported on the Form 10-Q to conform
to the presentation in the December 31, 1994 Statement of Operations.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None.
44
<PAGE>
GRUBB & ELLIS COMPANY
PART III
______________
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information called for by Item 10 is incorporated by reference from the
registrant's definitive proxy statement to be filed pursuant to Regulation 14A
no later than 120 days after the end of the 1994 fiscal year.
ITEM 11. EXECUTIVE COMPENSATION
The information called for by Item 11 is incorporated by reference from the
registrant's definitive proxy statement to be filed pursuant to Regulation 14A
no later than 120 days after the end of the 1994 fiscal year.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information called for by Item 12 is incorporated by reference from the
registrant's definitive proxy statement to be filed pursuant to Regulation 14A
no later than 120 days after the end of the 1994 fiscal year.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information called for by Item 13 is incorporated by reference from the
registrant's definitive proxy statement to be filed pursuant to Regulation 14A
no later than 120 days after the end of the 1994 fiscal year.
45
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
--------------------------------------------------------
FORM 8-K
--------
(a) The following documents are filed as a part of this report:
1. The following Reports of Independent Auditors and Consolidated
Financial Statements are submitted herewith:
. Reports of Independent Auditors.
. Consolidated Balance Sheets at December 31, 1994 and
December 31, 1993.
. Consolidated Statements of Operations for the years ended
December 31, 1994, 1993 and 1992.
. Consolidated Statements of Stockholders' Equity (Deficit)
for the years ended December 31, 1994, 1993 and 1992.
. Consolidated Statements of Cash Flows for the years ended
December 31, 1994, 1993 and 1992.
. Notes to Consolidated Financial Statements.
2. The following Consolidated Financial Statement Schedules are submitted
herewith:
II. Valuation and Qualifying Accounts
All other schedules for which provision is made in the applicable
accounting regulations of the Securities and Exchange Commission are
not required under the related instructions or are inapplicable, and
therefore have been omitted.
3. Exhibits required to be filed by Item 601 of Regulation S-K:
(3) ARTICLES OF INCORPORATION AND BYLAWS
3.1 Certificate of Amendment to the Restated Certificate of Incorporation
of the Registrant, effective November 1, 1994.
3.2 Certificate of Incorporation of the Registrant, as restated effective
November 1, 1994 (not yet filed with the Secretary of State of the
State of Delaware).
3.3 Grubb & Ellis Company Bylaws, as amended effective June 1, 1994,
incorporated herein by reference to Exhibit 4.21 to the Registrant's
Quarterly Report on Form 10-Q filed on November 14, 1994 (Commission
File No. 1-8122).
3.4 Amendment to the Grubb & Ellis Company Bylaws, effective as of June
1, 1994, incorporated herein by reference to Exhibit 4.20 to the
Registrant's Quarterly Report on Form 10-Q filed on November 14, 1994
(Commission File No. 1-8122).
(4) INSTRUMENTS DEFINING THE RIGHTS OF SECURITY HOLDERS, INCLUDING
INDENTURES
46
<PAGE>
4.1 Senior Note, Subordinated Note and Revolving Credit Note Agreement
between The Prudential Insurance Company of America and the
Registrant dated as of November 2, 1992, incorporated herein by
reference to Exhibit 4.6 to the Registrant's Current Report on
Form 8-K filed on February 8, 1993 (Commission File No. 1-8122).
4.2 Letter agreement between The Prudential Insurance Company of America
and the Registrant dated March 26, 1993, incorporated herein by
reference to Exhibit 4.10 to the Registrant's Quarterly Report on
Form 10-Q filed on May 15, 1993 (Commission File No. 1-8122).
4.3 Letter agreement between The Prudential Insurance Company of America
and the Registrant dated April 19, 1993, incorporated herein by
reference to Exhibit 4.11 to the Registrant's Quarterly Report on
Form 10-Q filed on May 15, 1993 (Commission File No. 1-8122).
4.4 Letter agreement between The Prudential Insurance Company of America
and the Registrant dated October 26, 1993, incorporated herein by
reference to Exhibit 4.21 to the Registrant's registration statement
on Form S-8 filed on November 12, 1993 (Registration No. 33-71484).
4.5 Letter agreement between The Prudential Insurance Company of America
and the Registrant dated March 28, 1994, incorporated herein by
reference to Exhibit 4.5 to the Registrant's Annual Report on
Form 10-K filed on March 31, 1994 (Commission File No. 1-8122).
4.6 Modification to Note and Security Agreement between the Registrant
and The Prudential Insurance Company of America dated as of March 28,
1994, incorporated by reference to Exhibit 4.17 to the Registrant's
Amendment to its Annual Report on Form 10-K/A filed on April 29, 1994
(Commission File No. 1-8122).
4.7 Amendment dated July 20, 1994 to the Senior Note, Subordinated Note
and Revolving Credit Note Agreement between the Registrant and The
Prudential Insurance Company of America, incorporated herein by
reference to Exhibit 10.2 to the Registrant's registration statement
on Form S-3 filed on July 22, 1994 (Registration No. 33-54707).
4.8 Securities Purchase Agreement between The Prudential Insurance
Company of America and the Registrant, dated as of November 2, 1992,
incorporated herein by reference to Exhibit 28.4 to the Registrant's
Current Report on Form 8-K filed on November 12, 1992 (Commission
File No. 1-8122).
4.9 Securities Purchase Agreement among Warburg, Pincus Investors, L.P.,
Joe F. Hanauer and the Registrant, dated as of November 2, 1992,
incorporated herein by reference to Exhibit 28.3 to the Registrant's
Current Report on Form 8-K filed on November 12, 1992 (Commission
File No. 1-8122).
4.10 Summary of terms of proposed bridge loan and rights offering executed
by Warburg, Pincus Investors, L.P., The Prudential Insurance Company
of America and the Registrant as of March 28, 1994, incorporated
herein by reference to Exhibit 4.11 to the
47
<PAGE>
Registrant's Annual Report on Form 10-K filed on March 31, 1994
(Commission File No. 1-8122).
4.11 Cash Collateral Account Agreement between Bank of America N.T.& S.A.
and the Registrant dated as of March 29, 1994, incorporated herein by
reference to Exhibit 4.12 to the Registrant's Annual Report on Form
10-K filed on March 31, 1994 (Commission File No. 1-8122).
4.12 Intercreditor Agreement between Warburg, Pincus Investors, L.P. and
The Prudential Insurance Company of America dated as of March 28,
1994, incorporated herein by reference to Exhibit 4.13 to the
Registrant's Annual Report on Form 10-K filed on March 31, 1994
(Commission File No. 1-8122).
4.13 Promissory Note in the amount of $250,000 dated as of January 8, 1990
executed by the Registrant in favor of DW Limited Partnership,
incorporated herein by reference to Exhibit 4.14 to the Registrant's
Annual Report on Form 10-K filed on March 31, 1994 (Commission File
No. 1-8122).
4.14 Specimen of Stock Subscription Warrant No. S-4 issued to the Joe F.
Hanauer Trust, dated January 29, 1993, exercisable for 25,954 shares
of the Registrant's Common Stock, incorporated herein by reference to
Exhibit 4.18 to the Registrant's registration statement on Form S-8
filed on November 12, 1993 (Registration No. 33-71484).
4.15 Promissory Note in the amount of up to $10 million dated as of March
29, 1994, executed by the Registrant in favor of Warburg, Pincus
Investors, L.P., incorporated herein by reference to Exhibit 4.15 to
the Registrant's Amendment to its Annual Report on Form 10-K/A filed
on April 29, 1994 (Commission File No. 1-8122).
4.16 Loan and Security Agreement between the Registrant and Warburg,
Pincus Investors, L.P. dated as of March 29, 1994, incorporated
herein by reference to Exhibit 4.16 to the Registrant's Amendment to
its Annual Report on Form 10-K/A filed on April 29, 1994 (Commission
File No. 1-8122).
4.17 Form of Rights Certificate in connection with 1994 Rights Offering of
the Registrant, incorporated herein by reference to Exhibit 4.3 to
the Registrant's registration statement on Form S-3 filed on July 22,
1994 (Registration No. 33-54707).
4.18 Specimen of Stock Subscription Warrant No. 16 issued to The
Prudential Insurance Company of America, restated as of November 1,
1994, exercisable for 200,000 shares of the Registrant's Common
Stock, incorporated herein by reference to Exhibit 4.23 to the
Registrant's Quarterly Report on Form 10-Q filed on November 14, 1994
(Commission File No. 1-8122).
4.19 Specimen of Stock Subscription Warrant No. 17 issued to The
Prudential Insurance Company of America, as of November 1, 1994,
exercisable for 150,000 shares of the Registrant's Common Stock,
incorporated herein by reference to Exhibit 4.24 to the Registrant's
Quarterly Report on Form 10-Q filed on November 14, 1994 (Commission
File No. 1-8122).
4.20 Specimen of Stock Subscription Warrant No. 18 issued to Warburg,
Pincus Investors, L.P., restated as of November 1, 1994,
48
<PAGE>
exercisable for 687,358 shares of the Registrant's Common Stock,
incorporated herein by reference to Exhibit 4.25 to the Registrant's
Quarterly Report on Form 10-Q filed on November 14, 1994 (Commission
File No. 1-8122).
4.21 Specimen of Stock Subscription Warrant No. 19 issued to Warburg,
Pincus Investors, L.P., as of November 1, 1994, exercisable for
325,000 shares of the Registrant's Common Stock, incorporated herein
by reference to Exhibit 4.26 to the Registrant's Quarterly Report on
Form 10-Q filed on November 14, 1994 (Commission File No. 1-8122).
4.22 Amended Senior Note executed by the Registrant in favor of The
Prudential Insurance Company of America in the amount of $6,500,000,
dated as of November 1, 1994, incorporated herein by reference to
Exhibit 4.27 to the Registrant's Quarterly Report on Form 10-Q filed
on November 14, 1994 (Commission File No. 1-8122).
4.23 Amended Senior Note executed by the Registrant in favor of The
Prudential Insurance Company of America in the amount of $3,500,000,
dated as of November 1, 1994, incorporated herein by reference to
Exhibit 4.28 to the Registrant's Quarterly Report on Form 10-Q filed
on November 14, 1994 (Commission File No. 1-8122).
4.24 Amended Payment-In-Kind Note executed by the Registrant in favor of
The Prudential Insurance Company of America in the amount of
$10,900,834.333, dated as of November 1, 1994, incorporated herein by
reference to Exhibit 4.29 to the Registrant's Quarterly Report on
Form 10-Q filed on November 14, 1994 (Commission File No. 1-8122).
4.25 Amended Revolving Credit Note executed by the Registrant in favor of
The Prudential Insurance Company of America in the amount of
$5,000,000, dated as of November 1, 1994, incorporated herein by
reference to Exhibit 4.30 to the Registrant's Quarterly Report on
Form 10-Q filed on November 14, 1994 (Commission File No. 1-8122).
On an individual basis, instruments other than Exhibits listed above
under Exhibit 4 defining the rights of holders of long-term debt of
the Registrant and its consolidated subsidiaries and partnerships do
not exceed ten percent of total consolidated assets and are,
therefore, omitted; however, the Company will furnish supplementally
to the Commission any such omitted instrument upon request.
(10) MATERIAL CONTRACTS
10.1* Grubb & Ellis Company 1990 Amended and Restated Stock Option Plan, as
amended as of May 28, 1993, incorporated herein by reference to
Exhibit 4.1 to the Registrant's registration statement on Form S-8
filed on November 12, 1993 (Registration No. 33-71580).
10.2* Description of Grubb & Ellis Company Senior Management Compensation
Plan, incorporated herein by reference to Exhibit 10.17 to the
Registrant's Annual Report on Form 10-K filed on March 30, 1992
(Commission File No. 1-8122).
10.3 Stock Purchase and Stockholder Agreement dated May 6, 1992, among GE
New Corp., the Registrant and International Business Machines
* Management contract or compensatory plan or arrangement.
49
<PAGE>
Corporation, incorporated herein by reference to Exhibit 28.2 to the
Registrant's Quarterly Report on Form 10-Q filed on May 15, 1992
(Commission File No. 1-8122).
10.4 Master Management Agreement dated May 6, 1992 between International
Business Machines Corporation and GE New Corp., incorporated herein
by reference to Exhibit 28.2 to the Registrant's Quarterly Report on
Form 10-Q filed on May 15, 1992 (Commission File No. 1-8122).
10.5 Master Financing Agreement dated August 5, 1992 between IBM Credit
Corporation and Axiom Real Estate Management, Inc., incorporated
herein by reference to Exhibit 28.4 to the Registrant's Quarterly
Report on Form 10-Q filed on August 13, 1992 (Commission File No. 1-
8122).
10.6 Credit Agreement dated as of August 31, 1992, between Axiom Real
Estate Management, Inc. and the Registrant, incorporated herein by
reference to Exhibit 28.6 to the Registrant's Quarterly Report on
Form 10-Q filed on November 16, 1992 (Commission File No. 1-8122).
10.7 Purchase Agreement dated February 16, 1993 between the Registrant and
JMB Institutional Realty Advisers, L.P., incorporated herein by
reference to Exhibit 10.20 to the Registrant's Quarterly Report on
Form 10-Q filed on May 15, 1993 (Commission File No. 1-8122).
10.8 Purchase Agreement dated March 4, 1993 between the Registrant and Fox
and Carskadon/Better Homes and Gardens, incorporated herein by
reference to Exhibit 10.21 to the Registrant's Quarterly Report on
Form 10-Q filed May 15, 1993 (Commission File No. 1-8122).
10.9 Stockholders' Agreement among Warburg, Pincus Investors, L.P., The
Prudential Insurance Company of America, Joe F. Hanauer and the
Registrant dated January 29, 1993, incorporated herein by reference
to Exhibit 28.1 to the Registrant's Current Report on Form 8-K filed
on February 8, 1993 (Commission File No. 1-8122).
10.10 Amendment to Stockholders' Agreement among Warburg, Pincus Investors,
L.P., The Prudential Insurance Company of America, Joe F. Hanauer and
the Registrant, dated as of July 1, 1993, incorporated herein by
reference to Exhibit 10.15 to the Registrant's Quarterly Report on
Form 10-Q filed on August 16, 1993 (Commission File No. 1-8122).
10.11*1993 Stock Option Plan for Outside Directors, incorporated herein by
reference to Exhibit 4.1 to the Registrant's registration statement
on Form S-8 filed on November 12, 1993 (Registration No. 33-71484).
10.12*Separation Agreement between the Registrant and Wilbert F. Schwartz
dated as of April 25, 1994, incorporated herein by reference to
Exhibit 10.23 to the Registrant's Amendment to its Annual Report on
Form 10-K/A filed on April 29, 1994 (Commission File No. 1-8122).
10.13 Standby Agreement dated July 21, 1994 between the Registrant and
Warburg, Pincus Investors, L.P., incorporated herein by reference to
Exhibit 10.1 to the Registrant's registration statement on Form S-3
filed on July 22, 1994 (Registration No. 33-54707).
10.14 Second Amendment to the Stockholders' Agreement dated November 1,
1994, among the Registrant, Warburg, Pincus Investors, L.P., The
* Management contract or compensatory plan or arrangement.
50
<PAGE>
Prudential Insurance Company of America, and Joe F. Hanauer,
incorporated herein by reference to Exhibit 10.19 to the Registrant's
Quarterly Report on Form 10-Q filed on November 14, 1994 (Commission
File No. 1-8122).
10.15 Agreement dated November 8, 1994 among the Registrant, Newco Realty
Corp., Dennis Gordon, John Tillotson, Javier Uribe, and Charles
Neubauer, incorporated herein by reference to Exhibit 10.1 to the
Registrant's Current Report on Form 8-K filed on December 1, 1994
(Commission File No. 1-8122)
10.16 Servicemark License Agreement dated November 17, 1994 between the
Registrant and Newco Realty Corp., incorporated herein by reference
to Exhibit 10.2 to the Registrant's Current Report on Form 8-K filed
on December 1, 1994 (Commission File No. 1-8122)
10.17 Guaranty dated November 8, 1994 executed by Dennis Gordon, Javier
Uribe, John Tillotson and Charles Neubauer, incorporated herein by
reference to Exhibit 10.3 to the Registrant's Current Report on Form
8-K filed on December 1, 1994 (Commission File No. 1-8122)
10.18*Description of Grubb & Ellis Company Management Separation
Arrangements.
(11) Statement regarding Computation of Per Share Earnings
(21) Subsidiaries of the Registrant
(23) Consents of Independent Auditors
23.1 Consent of Ernst & Young LLP
23.2 Consent of Coopers & Lybrand L.L.P.
(24) Powers of Attorney
(27) Financial Data Schedule
(b) Reports on Form 8-K:
During the fourth quarter of 1994, a Current Report on Form 8-K dated
October 24, 1994 was filed, reporting under Item 5 the registrant's
earnings for third quarter 1994. In addition, a Current Report on Form 8-K
dated November 17, 1994 was filed, reporting under Item 2 the sale of
certain assets related to the registrant's Southern California residential
brokerage operations, and a Current Report on Form 8-K dated November 17,
1994 was filed, reporting under Item 7 financial information related to
such sale.
*Management contract or compensatory plan or arrangement.
51
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized on this 30th day of March,
1995.
GRUBB & ELLIS COMPANY
(REGISTRANT)
*
by ________________________________
Joe F. Hanauer
Chairman of the Board and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
March 30, 1995
_______________________________________
Robert J. Hanlon, Jr.
Chief Financial Officer and
Senior Vice President
March 30, 1995
_______________________________________
James E. Klescewski
Vice President and
Corporate Controller
March 30, 1995
*
______________________________________
Joe F. Hanauer, Chairman of the Board
and Director
* March 30, 1995
______________________________________
R. David Anacker, Director
* March 30, 1995
______________________________________
Reuben S. Leibowitz, Director
* March 30, 1995
______________________________________
John D. Santoleri, Director
52
<PAGE>
* March 30, 1995
______________________________________
Lawrence S. Bacow, Director
* March 30, 1995
______________________________________
Robert J. McLaughlin, Director
*Pursuant to Powers of Attorney
__________________________________
By: Robert J. Walner, Attorney-in-Fact
53
<PAGE>
<TABLE>
<CAPTION>
GRUBB & ELLIS COMPANY AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING
ACCOUNTS
(in thousands)
Column A Column B Column C Column D Column E
------------------------ -------------------- --------------------- ---------------------- ----------------------
Additions Deductions
--------------------- ----------------------
Amounts
written off or
Balance at Charged to recovered upon Balance at
beginning costs and repayment of end of
Description of period expenses (1) receivable (1) period
------------------------ ---------------------- -------------------- ------------------------ ----------------------
<S> <C> <C> <C> <C>
Allowance for uncollectible
real estate brokerage
commissions receivable (1)
--------------------------------
Year ended December 31, 1994: 5,027 1,909 3,118
Year ended December 31, 1993: 5,002 25 5,027
Year ended December 31, 1992: 3,182 1,820 5,002
Reserves on real estate
investments and real
estate owned
--------------------------------
Year ended December 31, 1994 3,792 264 278 3,778
Year ended December 31, 1993: 6,366 2,574 3,792
Year ended December 31, 1992: 4,255 2,987 876 6,366
(1) The above additions and deletions have been presented as a net balance
due to limitations in the Company's computer systems.
</TABLE>
54
<PAGE>
GRUBB & ELLIS COMPANY AND SUBSIDIARIES
EXHIBIT INDEX/(A)/
FOR THE YEAR ENDED DECEMBER 31, 1994
<TABLE>
<CAPTION>
Exhibit Page:
-------
<S> <C> <C>
(3) Articles of Incorporation and Bylaws
3.1 Certificate of Amendment of Restated Certificate of
Incorporation of the Registrant, effective November 1, 1994. 56
3.2 Certificate of Incorporation of the Registrant, as
restated effective November 1, 1994 (not yet filed
with the Secretary of State of the State of Delaware). 86
(10) Material Contracts
10.18 Description of Grubb & Ellis Company Management
Separation Arrangements. 126
(11) Statement regarding Computation of Per Share Earnings 127
(21) Subsidiaries of the Registrant 128
(23) Consents of Independent Auditors
23.1 Consent of Ernst & Young LLP 130
23.2 Consent of Coopers & Lybrand L.L.P. 131
(24) Powers of Attorney 132
(27) Financial Data Schedule
</TABLE>
(A) Exhibits incorporated by reference are listed in Item 14(a)3 of this
report.
55
<PAGE>
EXHIBIT 3.1
CERTIFICATE OF AMENDMENT
OF
RESTATED CERTIFICATE OF INCORPORATION
GRUBB & ELLIS COMPANY, a corporation organized and existing under
and by virtue of the General Corporation Law of the State of Delaware, DOES
HEREBY CERTIFY:
FIRST: That on June 1, 1994, the Board of Directors of said
Corporation duly adopted the following resolution setting forth proposed
amendments to the Restated Certificate of Incorporation of said Corporation,
declaring said amendments to be advisable. The resolution setting forth the
proposed amendments is as follows:
RESOLVED, that Article IV of the Certificate of Incorporation of
this Corporation is hereby amended to read in its entirety as follows:
"The total number of shares of capital stock which the
Corporation shall have authority to issue is twenty-six million (26,000,000)
shares, of which twenty-five million (25,000,000) shares with a par value of
$.01 each shall be designated Common Stock, and of which one million (1,000,000)
shares with a par value of $.01 each shall be designated Preferred Stock, of
which Preferred Stock fifty thousand (50,000) shares with a par value of $.01
each shall be designated Series A Senior Convertible Preferred Stock ("Series A
Senior Preferred Stock"), two hundred thousand (200,000) shares with a par value
of $.01 each shall be designated Series B Senior Convertible Preferred Stock
("Series B Senior Preferred Stock") and two hundred thousand (200,000) shares
with a par value of $.01 each shall be designated Junior Convertible Preferred
Stock. Except as noted in the second following paragraph, as used herein,
"Senior Convertible Preferred Stock," shall mean collectively, the Series A
Senior Preferred Stock and the Series B Senior Preferred Stock, or either of
them. As used herein, "Convertible Preferred Stock" shall mean collectively, the
Senior Convertible Preferred Stock and the Junior Convertible Preferred Stock,
or either of them.
Upon the filing on January 29, 1993 of the Certificate of
Amendment of Certificate of Incorporation (the "Amendment"), every five shares
of outstanding Common Stock were automatically reclassified, changed and
converted into one share of Common Stock. No fractional shares of Common Stock
were issued upon such conversion, but in lieu thereof, the Corporation paid a
cash adjustment in respect of such fractional interest in an amount equal to
such fractional interest multiplied by the Market Price of a share of Common
Stock on the date on which the Amendment was filed. Unless otherwise requested
by the holders thereof, the share certificates representing the shares of Common
Stock outstanding prior to the filing of the Amendment represent such shares as
reclassified,
56
<PAGE>
changed and converted following the filing of the Amendment. In addition, on
December 8, 1993, the Company filed a Restated Certificate of Incorporation
restating, integrating, and not further amending the provisions of the Company's
certificate of incorporation as amended and supplemented before that date.
Upon the filing of this Certificate of Amendment of Restated
Certificate of Incorporation (the "Certificate of Amendment"), Warburg, Pincus
Investors, L.P. ("Warburg") will exchange all of its shares of Senior
Convertible Preferred Stock held prior to such filing ("Existing Senior
Convertible Preferred Stock") for an equal number of shares of Series B Senior
Preferred Stock. Effective immediately after the issuance of such shares of
Series B Senior Preferred Stock, each remaining share of Existing Senior
Convertible Preferred Stock shall be automatically reclassified, changed and
converted into one share of Series A Senior Preferred Stock. Unless otherwise
requested by the holders thereof, the share certificates representing the shares
of Existing Senior Convertible Preferred Stock outstanding prior to the filing
of the Certificate of Amendment which have not been exchanged for Series B
Senior Convertible Stock shall represent shares of Series A Senior Convertible
Preferred Stock as reclassified, changed and converted following the issuance of
the Series B Senior Convertible Stock.
The class of capital stock of the Corporation designated Common
Stock shall have (i) subject to the proviso at the end of this sentence, full
voting rights, with one vote represented by each share of stock; (ii) rights to
payment of dividends without preference if, as, and when declared by the Board
of Directors of the Corporation; and (iii) rights to liquidation distributions
of the Corporations's assets without preference after payment of preferential
liquidation distributions, if any, payable on any issued and outstanding series
of Preferred Stock; provided, however, that, notwithstanding the provisions of
clause (i) of this sentence, the holders of Common Stock shall not have the
right to vote on any of the matters described in Section 4(b)(i) or 4(b)(ii)
below in this Article IV except in clauses (A) and (D) thereof, except as
otherwise required by the laws of the State of Delaware.
The Preferred Stock may be issued from time to time in one or
more series. The Board of Directors is hereby expressly vested with authority to
fix by resolution or resolutions the designations and the powers, preferences
and relative, participating, optional or other special rights, and the
qualifications, limitations or restrictions thereof (including, without
limitation, the voting powers, if any, the dividend rate, conversion rights,
redemption price, or liquidation preference), of any wholly unissued series of
Preferred Stock, to fix the number of shares constituting any such series, and
to increase or decrease the number of shares of any such series (but not below
the number of shares thereof then outstanding). In case the number of shares of
any such series shall be so decreased, the shares constituting such decrease
shall resume the status which they had prior to the adoption of the resolution
or resolutions originally fixing the number of shares of such series.
A statement of the designations and the voting powers,
preferences and relative, participating, optional and other special rights of
the shares of the Senior Convertible Preferred
57
<PAGE>
Stock and the Junior Convertible Preferred Stock, and the qualifications,
limitations or restrictions thereof are as follows:
1. Rank. The Senior Convertible Preferred Stock shall, with respect
----
to dividend rights and rights on liquidation, winding up and dissolution, rank
prior to any other equity securities of the Corporation, including all classes
of Common Stock and any other series of Preferred Stock of the Corporation, with
the Series A Senior Preferred Stock and the Series B Senior Preferred Stock
ranking on an equal priority in all such foregoing respects. The Junior
Convertible Preferred Stock shall, with respect to dividend rights and rights on
liquidation, winding up and dissolution, rank prior to any other equity
securities of the Corporation, including all classes of Common Stock and any
other series of Preferred Stock of the Corporation other than the Senior
Convertible Preferred Stock which shall rank prior to the Junior Convertible
Preferred Stock (all of such equity securities of the Corporation to which the
Junior Convertible Preferred Stock ranks prior are collectively referred to
herein as the "Junior Stock").
2. Dividends
---------
(a) Senior Convertible Preferred Stock. The holders of Senior
----------------------------------
Convertible Preferred Stock shall be entitled to receive, when and as declared
by the Board of Directors out of funds legally available therefor, cumulative
dividends at a rate (the "Senior Dividend Rate") equal to the greater of 12% or
the Junior Preferred Dividend Rate (as defined below). Such dividends shall be
computed on the basis of the Series A Senior Preferred Stock Stated Value and
the Series B Senior Preferred Stock Stated Value, respectively, and shall be
payable annually on the first day of each October commencing on the first of
such dates to occur after the Issue Date. Dividends shall accrue on each share
of Senior Convertible Preferred Stock from the Issue Date and shall accrue from
day to day, whether or not earned or declared. Accrued but unpaid dividends on
the Senior Convertible Preferred Stock shall increase at a compounding rate
equal to the Senior Dividend Rate compounded annually. Dividends paid on the
shares of Senior Convertible Preferred Stock in an amount less than the total
amount of such dividends at the time accrued and payable on such shares shall be
allocated pro rata on a share-by-share basis among all such shares at the time
outstanding. The Board of Directors may fix a record date for the determination
of holders of all, but not less than all shares of Senior Convertible Preferred
Stock entitled to receive payment of a dividend or distribution declared
thereon, which record date shall be not more than 30 days prior to the date
fixed for the payment thereof. During such time as any shares of the Senior
Convertible Preferred Stock are outstanding, the Corporation shall not declare,
pay or set apart for payment any dividend on any of the Junior Convertible
Preferred Stock or Junior Stock, other than a redemption pursuant to Section
5(h), or make any payment on account of, or set apart money for a sinking or
other similar fund or make any payment for, the purchase, redemption or other
retirement of, any of the Junior Convertible Preferred Stock or Junior Stock or
any warrants, rights, calls or options exercisable for or convertible into any
of the Junior Convertible Preferred Stock or Junior Stock, or make any
distribution in respect thereof, either directly or indirectly, and whether in
cash, obligations or shares of the Corporation or other property (other than
distributions or dividends in Junior Convertible Preferred Stock or Junior Stock
to the holders of Junior Convertible Preferred Stock or Junior
58
<PAGE>
Stock), and shall not permit any corporation or other entity directly or
indirectly controlled by the Corporation to purchase or redeem any of the Junior
Convertible Preferred Stock or Junior Stock or any warrants, rights, calls or
options exercisable for or convertible into any of the Junior Convertible
Preferred Stock or Junior Stock, other than a redemption pursuant to Section
5(h), unless prior to or concurrently with such declaration, payment, setting
apart for payment, purchase, redemption or distribution, as the case may be, the
full cumulative dividends on all outstanding shares of Senior Convertible
Preferred Stock shall have been paid in full or contemporaneously are declared
and paid through the most recent dividend payment date. Notwithstanding the
foregoing, a redemption pursuant to Section 5(h) may be effected prior to the
payment in full of cumulative dividends on all outstanding shares of Senior
Convertible Preferred Stock. The dividend rights of the Series A Senior
Preferred Stock and Series B Senior Preferred Stock shall be on an equal
priority.
(b) Junior Convertible Preferred Stock. The holders of Junior
----------------------------------
Convertible Preferred Stock shall be entitled to receive, when and as declared
by the Board of Directors out of funds legally available therefor, cumulative
dividends payable in cash at a rate (the "Junior Preferred Dividend Rate") of 5%
per annum through December 31, 2001, 10% per annum from January 1, 2002 through
December 31, 2002, 11% per annum from January 1, 2003 through December 31, 2003,
12% per annum from January 1, 2004 through December 31, 2004, and commencing on
January 1, 1995 and on each January 1 thereafter, such rate shall increase by
2%. Such dividends shall be computed on the basis of the Junior Convertible
Preferred Stock Stated Value and shall be payable annually on the first day of
each October commencing on the first of such dates to occur after the shares of
Junior Convertible Preferred Stock are initially issued. Dividends shall accrue
on each share of Junior Convertible Preferred Stock from the date of issuance
thereof and shall accrue from day to day, whether or not earned or declared.
Accrued but unpaid dividends shall increase at a compounding rate equal to the
Junior Preferred Dividend Rate compounded annually. Dividends paid on the shares
of Junior Convertible Preferred Stock in an amount less than the total amount of
such dividends at the time accrued and payable on such shares shall be allocated
pro rata on a share-by-share basis among all such shares at the time
outstanding. The Board of Directors may fix a record date for the determination
of holders of shares of Junior Convertible Preferred Stock entitled to receive
payment of a dividend or distribution declared thereon, which record date shall
be not more than 30 days prior to the date fixed for the payment thereof. During
such time as any shares of the Junior Convertible Preferred Stock are
outstanding, the Corporation shall not declare, pay or set apart for payment any
dividend on any of the Junior Stock or make any payment on account of, or set
apart money for a sinking or other similar fund or make any payment for, the
purchase, redemption or other retirement of, any of the Junior Stock or any
warrants, rights, calls or options exercisable for or convertible into any of
the Junior Stock, or make any distribution in respect thereof, either directly
or indirectly, and whether in cash, obligations or shares of the Corporation or
other property (other than distributions or dividends in Junior Stock to the
holders of Junior Stock), and shall not permit any corporation or other entity
directly or indirectly controlled by the Corporation to purchase or redeem any
of the Junior Stock or any warrants, rights, calls or options exercisable for or
convertible into any of the Junior Stock, unless prior to or concurrently with
such declaration,
59
<PAGE>
payment, setting apart for payment, purchase, redemption or distribution, as the
case may be, the full cumulative dividends on all outstanding shares of Junior
Convertible Preferred Stock shall have been paid in full or contemporaneously
are declared and paid through the most recent dividend payment date.
3. Liquidation Preference
----------------------
(a) Senior Convertible Preferred Stock. In the event of any voluntary
----------------------------------
or involuntary liquidation, dissolution or winding up of the affairs of the
Corporation, the holders of the shares of Series A Senior Preferred Stock and
Series B Senior Preferred Stock then outstanding shall be entitled to be first
paid out of the assets of the Corporation available for distribution to its
stockholders an amount in cash equal to $100.00 per share of Series A Senior
Preferred Stock (the "Series A Senior Preferred Stock Stated Value") and $100.00
per share of Series B Senior Preferred Stock (the "Series B Senior Preferred
Stock Stated Value"), respectively, plus an amount equal to all dividends
(whether or not earned or declared) on such shares accrued and unpaid thereon to
the date of final distribution, before any payment shall be made or any assets
distributed to the holders of the Junior Convertible Preferred Stock or Junior
Stock. Except as provided in the preceding sentence, holders of the Senior
Convertible Preferred Stock shall not be entitled to any distribution in the
event of liquidation, dissolution or winding up of the affairs of the
Corporation. If, upon any such liquidation, dissolution or winding up of the
Corporation, the remaining assets of the Corporation available for distribution
to its stockholders shall be insufficient to pay the holders of the Senior
Convertible Preferred Stock the full amount to which they shall be entitled, the
holders of any of the Senior Convertible Preferred Stock shall share ratably in
any distribution of the remaining assets and funds of the Corporation in
proportion to the respective amounts which would otherwise be payable in respect
of the shares held by them upon such distribution if all amounts payable on or
with respect to such shares were paid in full. The distribution rights of the
Series A Senior Preferred Stock and Series B Senior Preferred Stock shall be on
an equal priority.
(b) Junior Convertible Preferred Stock. In the event of any voluntary
----------------------------------
or involuntary liquidation, dissolution or winding up of the affairs of the
Corporation, if assets are remaining after the payment in full of the
preferential amount of the Series A Senior Preferred Stock Stated Value and the
Series B Senior Preferred Stock Stated Value set forth in Section 3(a) plus an
amount equal to all dividends (whether or not earned or declared) on such shares
accrued and unpaid thereon, the holders of the shares of Junior Convertible
Preferred Stock then outstanding shall be next entitled to be first paid out of
the assets of the Corporation available for distribution to its stockholders an
amount in cash equal to $100.00 per share (the "Junior Convertible Preferred
Stock Stated Value") plus an amount equal to all dividends (whether or not
earned or declared) on such shares accrued and unpaid thereon to the date of
final distribution, before any payment shall be made or any assets distributed
to the holders of any of the Junior Stock. Except as provided in the preceding
sentence, holders of the Junior Convertible Preferred Stock shall not be
entitled to any distribution in the event of liquidation, dissolution or winding
up of the affairs of the Corporation. If, upon any such liquidation, dissolution
or winding up of the Corporation, the remaining assets of the Corporation
available
60
<PAGE>
for distribution to its stockholders shall be insufficient to pay the holders of
the Junior Convertible Preferred Stock the full amount to which they shall be
entitled, the holders of the Junior Convertible Preferred Stock shall share
ratably in any distribution of the remaining assets and funds of the Corporation
in proportion to the respective amounts which would otherwise be payable in
respect of the shares held by them upon such distribution if all amounts payable
on or with respect to such shares were paid in full.
(c) For the purposes of this Section 3, neither the voluntary sale,
conveyance, exchange or transfer (for cash, shares of stock, securities or other
consideration) of all or substantially all the property or assets of the
Corporation nor the consolidation or merger of the Corporation with one or more
other corporations shall be deemed a liquidation, dissolution or winding up,
voluntary or involuntary.
(d) The liquidation payment with respect to each outstanding
fractional share of Convertible Preferred Stock shall be equal to a ratably
proportionate amount of the liquidation payment with respect to each outstanding
share of Convertible Preferred Stock.
4. Voting Rights
-------------
(a) Right to Vote. Except as otherwise required by law, the Senior
-------------
Convertible Preferred Stock, the Junior Convertible Preferred Stock, the Common
Stock and any other capital stock of the Corporation entitled to vote with the
Common Stock shall be deemed to be one class for the purpose of voting, or
giving written consent in lieu of voting, on all matters submitted for the
approval of the stockholders of the Corporation. Each person in whose name
shares of Convertible Preferred Stock shall be registered on the record date for
determining the holders of the Convertible Preferred Stock entitled to vote at
any meeting of stockholders (or adjournment thereof) or to consent to corporate
action in writing without a meeting shall be entitled to, at such meeting or
with respect to such action, one vote for each share of Common Stock of the
Corporation into which each share of Convertible Preferred Stock registered in
the name of such person on such record date could be converted (with any
fractional share determined on an aggregate conversion basis being rounded to
the nearest whole share).
(b) Significant Events
------------------
(i) During such time as any shares of Senior Convertible
Preferred Stock are outstanding, the Corporation will not, without the
affirmative vote or consent of the holders of at least two-thirds of the
issued and outstanding shares of Senior Convertible Preferred Stock voting
together as one single and separate class, (A) create, authorize or issue
(including on conversion or exchange of any convertible or exchangeable
securities or by reclassification) any class or series of shares ranking on
a parity with or prior to the Senior Convertible Preferred Stock, either as
to dividends upon voluntary or involuntary liquidation, dissolution or
winding up, (B) increase the authorized shares of, or issue (including on
conversion or exchange of any convertible or exchangeable securities or by
reclassification) any shares of Senior Convertible
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Preferred Stock, (C) amend, alter, waive the application of, or repeal
(whether by merger, consolidation or otherwise) any provision of the
Certificate of Incorporation of the Corporation, enter into any agreement
or take any other corporate action which in any manner would alter, change
or otherwise adversely affect the powers, rights or preferences of the
Senior Convertible Preferred Stock, (D) effect the reorganization,
recapitalization, liquidation, dissolution or winding up of the
Corporation, or the sale, lease, conveyance or exchange of all or
substantially all of the assets, property or business of the Corporation,
or the merger or consolidation of the Corporation with or into any other
corporation, if such transaction in any manner would alter, change or
otherwise adversely affect the powers, rights or preferences of the Senior
Convertible Preferred Stock or (E) take any action which would cause a
dividend or other distribution to be deemed to be received by the holders
of the Senior Convertible Preferred Stock for federal income tax purposes
unless such dividend or other distribution is actually received by such
holders.
(ii) During such time as any shares of Junior Convertible
Preferred Stock are outstanding, the Corporation will not, without the
affirmative vote or consent of the holders of at least two-thirds of the
issued and outstanding shares of Junior Convertible Preferred Stock voting
together as a separate class, (A) create, authorize or issue (including on
conversion or exchange of any convertible or exchangeable securities or by
reclassification) any class or series of shares ranking on a parity with or
prior to the Junior Convertible Preferred Stock, either as to dividends or
redemption or upon voluntary or involuntary liquidation, dissolution or
winding up, (B) increase the authorized shares of, or issue (including on
conversion or exchange of any convertible or exchangeable securities or by
reclassification) any shares of Junior Convertible Preferred Stock, (C)
amend, alter, waive the application of, or repeal (whether by merger,
consolidation or otherwise) any provision of the Certificate of
Incorporation of the Corporation, enter into any agreement or take any
other corporate action which in any manner would alter, change or otherwise
adversely affect the powers, rights or preferences of the Junior
Convertible Preferred Stock, (D) effect the reorganization,
recapitalization, liquidation, dissolution or winding up of the
Corporation, or the sale, lease, conveyance or exchange of all or
substantially all of the assets, property or business of the Corporation,
or the merger or consolidation of the Corporation with or into any other
corporation, if such transaction in any manner would alter, change or
otherwise adversely affect the powers, rights or preferences of the Junior
Convertible Preferred Stock or (E) take any action which would cause a
dividend or other distribution to be deemed to be received by the holders
of the Junior Convertible Preferred Stock for federal income tax purposes
unless such dividend or other distribution is actually received by such
holders.
(c) Written Consent. Whenever holders of the Convertible Preferred
---------------
Stock are required or permitted to take any action by vote, such action may be
taken without a meeting by written consent, setting forth the action so taken
and signed by the holders of the outstanding Senior Convertible Preferred Stock
or Junior Convertible Preferred Stock, as the case may be, having not less than
the minimum number of votes that would be necessary to
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authorize or take such action at a meeting at which all such shares entitled to
vote thereon were present and voted.
5. Conversion. Holders of the Convertible Preferred Stock shall
----------
have the following conversion rights (collectively, the "Conversion Rights"):
(a) Right to Convert. Each share of Series A Senior Preferred Stock,
----------------
Series B Senior Preferred Stock and Junior Convertible Preferred Stock shall be
convertible, at the option of the holder thereof, at any time and from time to
time, into such number of validly issued, fully paid and nonassessable shares of
Common Stock of the Corporation, as is determined by dividing the Series A
Senior Preferred Stock Stated Value, the Series B Senior Preferred Stock Stated
Value or the Junior Convertible Preferred Stock Stated Value, as the case may
be, by the respective "Conversion Prices" (as defined below) in effect at the
time of the conversion; provided, however, that if such share shall be called
for redemption pursuant to Section 5(h), it may not be converted after the
redemption date unless the Corporation shall have failed to pay or provide for
the payment of the redemption price therefor (in accordance with Section 5(h)).
The Conversion Prices initially in effect shall be $ 2.6716 for the Series A
Senior Preferred Stock (the "Series A Senior Preferred Stock Conversion Price"),
$ 2.6564 for the Series B Senior Preferred Stock (the "Series B Senior Preferred
Stock Conversion Price"), and $5.6085 for the Junior Convertible Preferred Stock
(the "Junior Preferred Stock Conversion Price") (the Series A Senior Preferred
Stock Conversion Price, the Series B Senior Preferred Stock Conversion Price,
and the Junior Preferred Stock Conversion Price, collectively the "Conversion
Prices" and each individually, a "Conversion Price"). Such initial Conversion
Prices, and the rate at which shares of Convertible Preferred Stock may be
converted into shares of Common Stock, shall be subject to adjustment as
provided in Section 5(d) below.
(b) Fractional Shares. No fractional shares of Common Stock shall be
-----------------
issued upon conversion of the Convertible Preferred Stock, but in lieu thereof,
the Corporation shall pay a cash adjustment in respect of such fractional
interest in an amount equal to such fractional interest multiplied by the Market
Price of a share of Common Stock on the date on which such shares of Convertible
Preferred Stock are deemed to have been converted.
(c) Mechanics of Conversion
-----------------------
(i) In order for a holder of the Convertible Preferred Stock
to convert shares of Convertible Preferred Stock into shares of Common
Stock, such holder shall surrender the certificate or certificates for such
shares of Convertible Preferred Stock, at the office of the transfer agent
for the Convertible Preferred Stock (or at the principal office of the
Corporation if the Corporation serves as its own transfer agent), together
with written notice that such holder elects to convert all or any number of
the shares of the Convertible Preferred Stock represented by such
certificate or certificates. Such notice shall state such holder's name or
the names of the nominees in which such holder wishes the certificate or
certificates for shares of Common Stock to be issued. If required by the
Corporation, certificates surrendered for conversion
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shall be endorsed or accompanied by a written instrument or instruments of
transfer, in form satisfactory to the Corporation, duly executed by the
registered holder or his or its attorney duly authorized in writing. The
date on which the transfer agent (or the Corporation, if the Corporation
serves as its own transfer agent) receives such certificate or certificates
and notice shall be the conversion date ("Conversion Date"). As soon as
practicable, and in any event within five business days, after the
Conversion Date, the Corporation shall issue and deliver, or cause to be
issued and delivered, to such holder of Convertible Preferred Stock, or to
his or its nominees, (i) a certificate or certificates for the number of
validly issued, fully paid and nonassessable shares of Common Stock to
which such holder shall be entitled upon conversion and (ii) if fewer than
the full number of shares of Convertible Preferred Stock evidenced by the
surrendered certificate or certificates are being converted, a new
certificate or certificates of like tenor for the number of shares
evidenced by such surrendered certificate or certificates less the number
of shares converted.
(ii) During such times as any shares of Convertible Preferred
Stock are outstanding, the Corporation shall reserve and keep available out
of its authorized but unissued stock, for the purpose of effecting the
conversion of Convertible Preferred Stock, such number of its duly
authorized shares of Common Stock as shall from time to time be sufficient
to effect the conversion of all outstanding shares of Convertible Preferred
Stock.
(iii) All shares of Convertible Preferred Stock which shall have
been surrendered for conversion as herein provided shall no longer be
deemed to be outstanding and all rights with respect to such shares
(including the rights, if any, to receive notices and to vote) shall
immediately cease and terminate on the Conversion Date, except only the
right of the holders thereof to receive shares of Common Stock in exchange
therefor. Such conversions shall be deemed to have been made at the close
of business on the Conversion Date and the converting holder shall be
treated for all purposes as having become the record holder of such Common
Stock at such time. Any shares of Convertible Preferred Stock so converted
shall be retired and canceled and shall not be reissued, and the
Corporation may from time to time take such appropriate action as may be
necessary to reduce the authorized Convertible Preferred Stock accordingly.
(d) Anti-dilution Provisions
------------------------
(i) Adjustments; Capital Stock. The Series A Senior Preferred
--------------------------
Stock Conversion Price set forth above shall be subject to adjustment from
time to time as hereinafter provided. For purposes of this Section 5, the
term "Capital Stock" as used herein includes the Corporation's Common Stock
and shall also include any capital stock of any class of the Corporation
thereafter authorized which shall not be limited to a fixed sum or
percentage in respect of the rights of the holders thereof to participate
in dividends and in the distribution of assets upon the voluntary or
involuntary liquidation, dissolution or winding up of the Corporation.
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(ii) Adjustment of Series A Senior Preferred Stock Conversion
--------------------------------------------------------
Price Upon Issuance of Additional Shares of Capital Stock
---------------------------------------------------------
(A) In case the Corporation, at any time or from time to
time after the Issue Date shall issue or sell Additional Shares of
Capital Stock without considera-tion or for a consideration per share
less than the greater of the Series A Senior Preferred Stock
Conversion Price or the Market Price in effect, in each case, on the
date of such issue or sale, then, and in each such case, subject to
Section 5(d)(viii), the Series A Senior Preferred Stock Conversion
Price shall be reduced, concurrently with such issue or sale, to a
price (calculated to the nearest .001 of a cent) determined by
multiplying such Series A Senior Preferred Stock Conversion Price by a
fraction:
(1) the numerator of which shall be (a) the number of shares
of Capital Stock outstanding immediately prior to such issue or
sale plus (b) the number of shares of Capital Stock which the
aggregate consideration received by the Corporation for the total
number of such Additional Shares of Capital Stock so issued or
sold would purchase at the greater of such Market Price or such
Series A Senior Preferred Stock Conversion Price, and
(2) the denominator of which shall be the number of shares
of Capital Stock outstanding immediately after such issue or sale,
provided that, for the purposes of this Section 5(d)(ii)(A), (w)
immediately after any Additional Shares of Capital Stock are deemed to have
been issued pursuant to Section 5(d)(iii) or 5(d)(iv), such Additional
Shares shall be deemed to be outstanding, and (x) treasury shares shall not
be deemed to be outstanding; and provided further that, for the purposes of
this Section 5(d)(ii)(A), (y) the crediting of shares of the Corporation's
Common Stock to participating real estate salespersons under the
Corporation's Deferred Equity Program which was adopted by the Corporation
on October 18, 1989 shall cause an adjustment in the Series A Senior
Preferred Stock Conversion Price concurrently with such crediting of the
shares of the Corporation's Common Stock and (z) the issuance of such
shares previously credited to participating real estate salespersons under
the Corporation's Deferred Equity Program shall not cause an adjustment in
the Series A Senior Preferred Stock Conversion Price.
(B) In case the Corporation, at any time or from time to
time after the Issue Date, shall declare, order, pay or make a
dividend or other distribution (including, without limitation, any
distribution of other or additional stock or other securities or
property or Options by way of dividend or spinoff, reclassification,
recapitalization or similar corporate rearrangement) on the Capital
Stock, other than (1) a dividend payable in Additional Shares of
Capital Stock or in Options for Capital Stock or Convertible
Securities or (2) a dividend
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<PAGE>
payable in cash or other property and declared out of retained
earnings of the Corporation, then, and in each such case, subject to
Section 5(d)(viii), the Series A Senior Preferred Stock Conversion
Price in effect immediately prior to the close of business on the
record date fixed for the determination of holders of any class of
securities entitled to receive such dividend or distribution shall be
reduced, effective as of the close of business on such record date, to
a price (calculated to the nearest .001 of a cent) determined by
multiplying the Series A Senior Preferred Stock Conversion Price by a
fraction:
(1) the numerator of which shall be the Market Price in
effect on such record date or, if any class of Capital Stock
trades on an ex-dividend basis, on the date prior to the
commencement of ex-dividend trading, less the value of such
dividend or distribution which has not been declared out of
retained earnings (as determined in good faith by the Board of
Directors of the Corporation) applicable to one share of Capital
Stock, and
(2) the denominator of which shall be such Market Price.
(iii) Treatment of Options and Convertible Securities. In case
the Corporation, at any time or from time to time after the Issue Date,
shall issue, sell, grant or assume, or shall fix a record date for the
determination of holders of any class of securities entitled to receive,
any Options or Convertible Securities, then, and in each such case, the
maximum number of Additional Shares of Capital Stock (as set forth in the
instrument relating thereto, without regard to any provisions contained
therein for a subsequent adjustment of such number) issuable upon the
exercise of such Options or, in the case of Convertible Securities and
Options therefor, the conversion or exchange of such Convertible
Securities, shall be deemed to be Additional Shares of Capital Stock issued
as of the time of such issue, sale, grant or assumption or, in case such a
record date shall have been fixed, as of the close of business on such
record date, provided that such Additional Shares of Capital Stock shall
not be deemed to have been issued unless the consideration per share
(determined pursuant to Section 5(d)(v)) of such shares would be less than
the greater of the applicable Conversion Price or the Market Price in
effect, in each case, on the date of and immediately prior to such issue,
sale, grant or assumption or immediately prior to the close of business on
such record date or, if the Capital Stock trades on an ex-dividend basis,
on the date prior to the commencement of ex-dividend trading, as the case
may be, and provided, further, that in any such case in which Additional
Shares of Capital Stock are deemed to be issued,
(A) no further adjustment of the Series A Senior Preferred
Conversion Price shall be made upon the subsequent issue or sale of
Additional Shares of Capital Stock or Convertible Securities upon the
exercise of such Options or the conversion or exchange of such
Convertible Securities;
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<PAGE>
(B) if such Options or Convertible Securities by their terms
provide, with the passage of time or otherwise, for any change in the
consideration payable to the Corporation, or change in the number of
Additional Shares of Capital Stock issuable, upon the exercise,
conversion or exchange thereof (by change of rate or otherwise), the
Conversion Price computed upon the original issue, sale, grant or
assumption thereof (or upon the occurrence of the record date with
respect thereto), and any subsequent adjustments based thereon, shall,
upon any such change becoming effective, be recomputed to reflect such
change insofar as it affects such Options, or the rights of conversion
or exchange under such Convertible Securities, which are outstanding
at such time;
(C) upon the expiration of any such Options or of the rights
of conversion or exchange under any such Convertible Securities which
shall not have been exercised (or upon purchase by the Corporation and
cancellation or retirement of any such Options which shall not have
been exercised or of any such Convertible Securities the rights of
conversion or exchange under which shall not have been exercised), the
Conversion Price computed upon the original issue, sale, grant or
assumption thereon (or upon the occurrence of the record date with
respect thereto), and any subsequent adjustments based thereon, shall,
upon such expiration (or such cancellation or retirement, as the case
may be), be recomputed as if:
(1) in the case of Options for Capital Stock or of
Convertible Securities, the only Additional Shares of Capital
Stock issued or sold (or deemed issued or sold) were the
Additional Shares of Capital Stock, if any, actually issued or
sold upon the exercise of such Options or the conversion or
exchange of such Convertible Securities and the consideration
received therefor were (a) an amount equal to (i) the
consideration actually received by the Corporation for the issue,
sale, grant or assumption of all such Options, whether or not
exercised, plus (ii) the consideration actually received by the
Corporation upon such exercise, minus (iii) the consideration
paid by the Corporation for any purchase of such Options which
were not exercised, or (b) an amount equal to (i) the
consideration actually received by the Corporation for the issue,
sale, grant or assumption of all such Convertible Securities
which were actually converted or exchanged, plus (ii) the
additional consideration, if any, actually received by the
Corporation upon such conversion or exchange, minus (iii) the
excess, if any, of the consideration paid by the Corporation for
any purchase of such Convertible Securities, the rights of
conversion or exchange under which were not exercised, over an
amount that would be equal to the fair value (as determined in
good faith by the Board of Directors of the Corporation) of the
Convertible Securities so purchased if such
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<PAGE>
Convertible Securities were not convertible into or exchangeable
for Additional Shares of Capital Stock, and
(2) in the case of Options for Convertible Securities, only
the Convertible Securities, if any, actually issued or sold upon
the exercise of such Options were issued at the time of the
issue, sale, grant or assumption of such Options, and the
consideration received by the Corporation for the Additional
Shares of Capital Stock deemed to have then been issued were an
amount equal to (a) the consideration actually received by the
Corporation for the issue, sale, grant or assumption of all such
Options, whether or not exercised, plus (b) the consideration
deemed to have been received by the Corporation (pursuant to
Section 5(d)(v)) upon the issue or sale of the Convertible
Securities with respect to which such Options were actually exer-
cised, minus (c) the consideration paid by the Corporation for
any purchase of such Options which were not exercised.
(iv) Treatment of Stock Dividends, Stock Splits, Etc.; Certain
---------------------------------------------------------
Stock Repurchases
-----------------
(A) In case the Corporation, at any time or from time to
time after the Issue Date, shall declare or pay any dividend or other
distribution on the Capital Stock payable in Capital Stock, or shall
effect a subdivision of the outstanding shares of Capital Stock into a
greater number of shares of Capital Stock (by reclassification or
otherwise than by payment of a dividend in Capital Stock), then, and
in each such case, Additional Shares of Capital Stock shall be deemed
to have been issued (1) in the case of any such dividend, immediately
after the close of business on the record date for the determination
of holders of any class of securities entitled to receive such
dividend, or (2) in the case of any such subdivision, at the close of
business on the day immediately prior to the day upon which such
corporate action becomes effective.
(B) If the Corporation at any time or from time to time
after the Issue Date shall, directly or indirectly, including through
a Subsidiary (as defined below) or otherwise, purchase, redeem or
otherwise acquire (a "Repurchase") any of its Capital Stock at a price
per share greater than the Market Price, then the Series A Senior
Preferred Stock Conversion Price upon each such Repurchase shall be
adjusted to the price determined by multiplying the Series A Senior
Preferred Stock Conversion Price by a fraction (1) the numerator of
which shall be the number of shares of Capital Stock outstanding
immediately prior to the such Repurchase minus the number of shares of
Capital Stock which the aggregate consideration for total repurchased
Capital Stock would purchase at the Market Price; and (2) the
denominator of which shall be the number of shares of Capital Stock
outstanding immediately after such Repurchase. For the purposes of
this Subsection 5(d)(iv)(B), the date as of
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<PAGE>
which the Series A Senior Preferred Stock Conversion Price shall be
computed shall be the earlier of (x) the date on which the Corporation
shall enter into contract for the Repurchase of such Capital Stock, or
(y) the date of the actual Repurchase of such Capital Stock. For
purposes of this Section 5(d)(iv)(B), a Repurchase of Convertible
Securities shall be deemed to be a Repurchase of the underlying
Capital Stock, and the computation herein required shall be made on
the basis of the full exercise, conversion or exchange for such
Convertible Securities on the date as of which such computation is
required hereby to be made even if such Convertible Securities are not
exercisable, convertible or exchangeable on such date.
(v) Computation of Consideration. For the purposes of this
----------------------------
Section 5:
(A) The consideration for the issue or sale of any
Additional Shares of Capital Stock or for the issue, sale, grant or
assumption of any Options or Convertible Securities, irrespective of
the accounting treatment of such consideration,
(1) insofar as it consists of cash, shall be computed as the
amount of cash received by the Corporation, and insofar as it
consists of securities or other non-cash consideration, shall be
computed as of the date immediately preceding such issue, sale,
grant or assumption as the fair value (as determined in good
faith by the Board of Directors of the Corporation) of such
consideration (or, if such consideration is received for the
issue or sale of Additional Shares of Capital Stock and the
Market Price thereof is less than the fair value, as so
determined, of such consideration, then such con-sideration shall
be computed as the Market Price of such Additional Shares of
Capital Stock), in each case without deducting any expenses paid
or incurred by the Corporation, any commissions or compensation
paid or concessions or discounts allowed to underwriters, dealers
or others performing similar services and any accrued interest or
dividends in connection with such issue or sale, and
(2) in case Additional Shares of Capital Stock are issued or
sold or Options or Convertible Securities are issued, sold,
granted or assumed together with other stock or securities or
other assets of the Corporation for a consideration which covers
both, shall be the proportion of such consideration so received,
computed as provided in subsection (1) above, allocable to such
Additional Shares of Capital Stock or Options or Convertible
Securities, as the case may be, all as determined in good faith
by the Board of Directors of the Corporation.
(B) All Additional Shares of Capital Stock, Options or
Convertible Securities issued in payment of any dividend or other
distribution
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on any class of stock of the Corporation and all Additional Shares of
Capital Stock issued to effect a subdivision of the outstanding shares
of Capital Stock into a greater number of shares of Capital Stock (by
reclassification or otherwise than by payment of a dividend in Capital
Stock) shall be deemed to have been issued without consideration.
(C) Additional Shares of Capital Stock deemed to have been
issued for consideration pursuant to Section 5(d)(iii), relating to
Options and Convertible Securities, shall be deemed to have been
issued for a consideration per share determined by dividing
(1) the total amount, if any, received and receivable by the
Corporation as consideration for the issue, sale, grant or
assumption of the Options or Convertible Securities in question,
plus the minimum aggregate amount of additional consideration (as
set forth in the instruments relating thereto, without regard to
any provision contained therein for a subsequent adjustment of
such consideration) payable to the Corporation upon the exercise
in full of such Options or the conversion or exchange of such
Convertible Securities or, in the case of Options for Convertible
Securities, the exercise of such Options for Convertible
Securities and the conversion or exchange of such Convertible
Securities, in each case comprising such consideration as
provided in the foregoing subsection (A), by
(2) the maximum number of shares of Capital Stock (as set
forth in the instruments relating thereto, without regard to any
provision contained therein for a subsequent adjustment of such
number) issuable upon the exercise of such Options or the
conversion or exchange of such Convertible Securities.
(D) In case the Corporation shall issue any Additional
Shares of Capital Stock, Options or Convertible Securities in
connection with the acquisition by the Corporation of the stock or
assets of any other corporation or the merger of any other corporation
into the Corporation under circumstances where on the date of issue of
such Additional Shares of Capital Stock, Options or Convertible
Securities the consideration received for such Additional Shares of
Capital Stock or deemed to have been received for the Additional
Shares of Capital Stock deemed to be issued pursuant to Section
5(d)(iii) is less than the Market Price of the Capital Stock in effect
immediately prior to such issue but on the date the number of
Additional Shares of Capital Stock or the amount and the exercise
price or conversion price of such Options or Convertible Securities to
be so issued were set forth in a binding agreement between the
Corporation and the other party or parties to such transaction the
consideration received for such Additional Shares of Capital Stock or
deemed to have been received for the Additional Shares of Capital
Stock deemed to be issued pursuant to Section
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5(d)(iii) would not have been less than the Market Price of the
Capital Stock then in effect, such Additional Shares of Capital Stock
shall not be deemed to have been issued for less than the Market Price
of the Capital Stock if such terms so set forth in such binding
agreement are not changed prior to the date of issue.
(vi) Adjustments for Combinations, Etc. In case the outstanding
---------------------------------
shares of Capital Stock shall be combined or consolidated, by
reclassification or otherwise, into a lesser number of shares of Capital
Stock, the Conversion Prices in effect immediately prior to such
combination or consolidation shall, concurrently with the effectiveness of
such combination or consolidation, be proportionately increased.
(vii) Dilution in Case of Other Securities. In case any Other
------------------------------------
Securities shall be issued or sold or shall become subject to issue or sale
upon the conversion or ex-change of any securities of the Corporation or to
subscription, purchase or other acquisition pursuant to any options issued
or granted by the Corporation for a consideration such as to dilute, on a
basis to which the standards established in the other provisions of this
Section 5 are applicable, the conversion rights of the holders of the
Series A Senior Preferred Stock, then, and in each such case, the
computations, adjustments and readjustments provided for in this Section 5
with respect to the applicable Conversion Price shall be made as nearly as
possible in the manner so provided and applied to determine the amount of
Other Securities from time to time receivable upon the conversion of the
Series A Senior Preferred Stock, so as to protect the holders of the Series
A Senior Preferred Stock against the effect of such dilution.
(viii) Minimum Adjustment and Timing of Adjustment of Conversion
---------------------------------------------------------
Price
-----
(A) If the amount of any adjustment of the Series A Senior
Preferred Stock Conversion Price required pursuant to this Section 5
would be less than one percent (1%) of such Conversion Price in effect
at the time such adjustment is otherwise so required to be made, such
amount shall be carried forward and adjustment with respect thereto
made at the time of and together with any subsequent adjustment which,
together with such amount and any other amount or amounts so carried
forward, shall aggregate at least one percent (1%) of such Conversion
Price; provided that, upon the conversion of any shares of Series A
Senior Preferred Stock, all adjustments carried forward and not
theretofore made up to and including the date of such conversion
shall, with respect to the Series A Senior Preferred Stock then
converted, be made to the nearest .001 of a cent.
(B) Each Series A Senior Preferred Conversion Price shall be
adjusted within 90 days of the end of each fiscal year of the
Corporation with respect to events subject to the anti-dilution
provisions of the Series A Senior Preferred Stock which have occurred
during such fiscal year; provided that,
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upon the conversion of any shares of Series A Senior Preferred Stock,
all adjustments carried forward and not theretofore made up to and
including the date of such conversion shall, with respect to the
shares of Series A Senior Preferred Stock then converted, be made to
the nearest .001 of a cent and provided further that the applicable
Series A Senior Preferred Conversion Price shall also be adjusted
prior to any transfer or other disposition of any Series A Senior
Preferred Stock and promptly at any time upon the request of the
holder of any Series A Senior Preferred Stock, subject to the
provisions of clause 5(d)(viii)(A) above.
(ix) Changes in Capital Stock; Series A Senior Preferred Stock.
---------------------------------------------------------
In case at any time the Corporation shall be a party to any transaction
(including, without limitation, a merger, consolidation, sale of all or
substantially all of the Corporation's assets, liquidation or
recapitalization of the Capital Stock) in which the previously outstanding
Capital Stock shall be changed into or exchanged for different securities
of the Corporation or common stock or other securities of another
corporation or interests in a noncorporate entity or other property
(including cash) or any combination of any of the foregoing or in which the
Capital Stock ceases to be a publicly traded security either listed on the
New York Stock Exchange or the American Stock Exchange or quoted by NASDAQ
or any successor thereto or comparable system (each such transaction being
herein called the "Transaction," the date of consummation of the
Transaction being herein called the "Consummation Date," the Corporation
(in the case of a recapitalization of the Capital Stock or any other such
transaction in which the Corporation retains substantially all of its
assets and survives as a corporation) or such other corporation or entity
(in each other case) being herein called the "Acquiring Company," and the
common stock (or equivalent equity interests) of the Acquiring Company
being herein called the "Acquirer's Common Stock"), then, as a condition of
the consummation of the Transaction, lawful and adequate provisions shall
be made so that each holder of Series A Senior Preferred Stock, upon the
conversion thereof at any time on or after the Consummation Date (but
subject, in the case of an election pursuant to clause (B) or (C) below, to
the time limitation hereinafter provided for such election),
(A) shall be entitled to receive, and any Series A Senior
Preferred Stock shall thereafter represent the right to receive, in
lieu of the Common Stock issuable upon such conversion prior to the
Consummation Date, such number of shares of the Acquirer's Common
Stock as are issuable in exchange for each share of Common Stock,
unless the Acquiring Company fails to meet the requirements set forth
in clauses (D), (E) and (F) below, in which case shares of the common
stock of the corporation (herein called a "Parent") which directly or
indirectly controls the Acquiring Company if it meets the requirements
set forth in clauses (D), (E) and (F) below, at an aggregate
conversion price for such number of shares equal to the lesser of (1)
the Conversion Price in effect immediately prior to the Consummation
Date multiplied by a fraction the numerator of which is the aggregate
market price
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for such number of shares (determined in the same manner as provided
in the definition of Market Price) of the Acquirer's Common Stock or
the Parent's common stock, as the case may be, immediately prior to
the Consummation Date and the denominator of which is the Market Price
per share of Common Stock immediately prior to the Consummation Date,
or (2) the aggregate market price for such number of shares (as so
determined) of the Acquirer's Common Stock or the Parent's common
stock, as the case may be, immediately prior to the Consummation Date
(subject in each case to adjustments from and after the Consummation
Date as nearly equivalent as possible to the adjustments provided for
in this Section 5),
or at the election of the holder of such Series A Senior Preferred Stock
pursuant to notice given to the Corporation on or before the later of (1)
the thirtieth day following the Consummation Date, and (2) the sixtieth day
following the date of delivery or mailing to such holder of the last proxy
statement relating to the vote on the Transaction by the holders of the
Capital Stock,
(B) shall be entitled to receive, and any Series A Senior
Preferred Stock shall thereafter represent the right to receive, in
lieu of the Capital Stock issuable upon such conversion prior to the
Consummation Date, the highest amount of securities or other property
to which such holder would actually have been entitled as a
stockholder upon the consummation of the Transaction if such holder
had converted such Series A Senior Preferred Stock immediately prior
thereto (subject to adjustments from and after the Consummation Date
as nearly equivalent as possible to the adjustments provided for in
this Section 5), provided that if a purchase, tender or exchange offer
shall have been made to and accepted by the holders of more than 50%
of the outstanding shares of Capital Stock, and if the holder of such
Series A Senior Preferred Stock so designates in such notice given to
the Corporation, the holder of such Series A Senior Preferred Stock
shall be entitled to receive in lieu thereof, the highest amount of
securities or other property to which such holder would actually have
been entitled as a stockholder if such holder had converted such
Series A Senior Preferred Stock prior to the expiration of such
purchase, tender or exchange offer and accepted such offer (subject to
adjustments from and after the consummation of such purchase, tender
or exchange offer as nearly equivalent as possible to the adjustments
provided for in this Section 5),
or, if neither the Acquiring Company nor the Parent meets the requirements
set forth in clauses (D), (E) and (F) below, at the election of the holder
of Series A Senior Preferred Stock pursuant to notice given to the
Corporation on or before the later of (1) the thirtieth day following the
Consummation Date, and (2) the sixtieth day following the date of delivery
or mailing to such holder of the last proxy statement relating to the vote
on the Transaction by the holders of the Common Stock,
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<PAGE>
(C) shall be entitled to receive, within 15 days after such
election, in full satisfaction of the Conversion Rights afforded to
the Series A Senior Preferred Stock held by such holder under this
Section 5, an amount equal to the fair market value of such conversion
rights as determined by an independent investment banker (with an
established national reputation as a valuer of equity securities)
selected by the Corporation, such fair market value to be determined
with regard to all material relevant factors but without regard to the
effects on such value of the Transaction.
The Corporation agrees to obtain, and deliver to each holder of Series A
Senior Preferred Stock a copy of, the determination of an independent
investment banker (selected by the Corporation and reasonably satisfactory
to the holders of Series A Senior Preferred Stock) necessary for the
valuation under clause (C) above within 15 days after the Consummation Date
of any Transaction to which clause (C) is applicable.
The requirements referred to above in the case of the Acquiring
Company or its Parent are that immediately after the Consummation Date:
(D) it is a solvent corporation organized under the laws of
any State of the United States of America having its common stock
listed on the New York Stock Exchange or the American Stock Exchange
or quoted by NASDAQ or any successor thereto or comparable system, and
such common stock continues to meet such requirements for such listing
or quotation,
(E) it is required to file, and in each of its three fiscal
years immediately preceding the Consummation Date has filed, reports
with the Securities and Exchange Commission pursuant to Section 13 or
15(d) of the Securities Exchange Act of 1934, as amended, and
(F) in the case of the Parent, such Parent is required to
include the Acquiring Company in the consolidated financial statements
contained in the Parent's Annual Report on Form 10-K as filed with the
Securities and Exchange Commission and is not itself included in the
consolidated financial statements of any other Person (other than its
consolidated subsidiaries).
Notwithstanding anything contained herein to the contrary, the Corporation
shall not effect any Transaction unless prior to the consummation thereof
each corporation or entity (other than the Corporation) which may be
required to deliver any securities or other property upon the conversion of
Series A Senior Preferred Stock, the surrender of Series A Senior Preferred
Stock or the satisfaction of conversion rights as provided herein shall
assume, by written instrument delivered to each holder of Series A Senior
Preferred Stock, the obligation to deliver to such holder such securities
or other property to which, in accordance with the foregoing provisions,
such holder may be entitled, and such corporation or entity shall have
similarly delivered to each holder of
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Series A Senior Preferred Stock an opinion of counsel for such corporation
or entity, satisfactory to each holder of Series A Senior Preferred Stock,
which opinion shall state that all the outstanding Series A Senior
Preferred Stock, including, without limitation, the conversion provisions
applicable thereto, if any, shall thereafter continue in full force and
effect and shall be enforceable against such corporation or entity in
accordance with the terms hereof and thereof, together with such other
matters as such holders may reasonably request.
(x) Treatment of Stock Dividends, Stock Splits, Etc.; Certain
---------------------------------------------------------
Transactions. In case the Corporation, at any time or from time to time
after the Issue Date, shall be a party to any Transaction, each holder of
Series B Senior Preferred Stock and each holder of Junior Convertible
Preferred Stock, upon the exercise thereof at any time on or after the
Consummation Date shall be entitled to receive, and such Series B Senior
Preferred Stock and Junior Convertible Preferred Stock shall thereafter
represent the right to receive, in lieu of the Common Stock issuable upon
conversion prior to the Consummation Date the kind and amount of securities
or property (including cash) which it would have owned or have been
entitled to receive after the happening of such Transaction had such Series
B Senior Preferred Stock or Junior Convertible Preferred Stock been
converted immediately prior to such Transaction.
Notwithstanding anything contained herein to the contrary, the
Corporation shall not effect any Transaction unless prior to the
consummation thereof each corporation or entity (including, without
limitation, the Corporation) which may be required to deliver any
securities or property (including cash) upon the conversion of Series B
Senior Preferred Stock or Junior Convertible Preferred Stock, the surrender
of Series B Senior Preferred Stock or Junior Convertible Preferred Stock or
the satisfaction of conversion rights as provided herein shall assume, by
written instrument delivered to each holder of Series B Senior Preferred
Stock or Junior Convertible Preferred Stock, the obligation to deliver to
such holder such securities or other property to which, in accordance with
the foregoing provisions, such holder may be entitled, and such corporation
or entity shall have similarly delivered to each holder of Series B Senior
Preferred Stock or Junior Convertible Preferred Stock an opinion of counsel
for such corporation or entity, satisfactory to each such holder, which
opinion shall state that all the rights and privileges, including without
limitation, conversion privileges of the Series B Senior Preferred Stock
and the Junior Convertible Preferred Stock shall thereafter continue in
full force and effect and shall be enforceable against such corporation or
entity in accordance with the terms hereof and thereof, together with such
other matters as such holders may reasonably request.
In case the Corporation shall (i) pay a dividend in shares of
Capital Stock or securities convertible into Capital Stock or make a
distribution to all holders of shares of Capital Stock in shares of Capital
Stock or securities convertible into Capital Stock, (ii) subdivide its
outstanding shares of Capital Stock, (iii) combine its outstanding shares
of Capital Stock into a smaller number of shares of Capital Stock or (iv)
issue by reclassification of its shares of Capital Stock other securities
of the
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Corporation, the Series B Preferred Stock Conversion Price and the Junior
Preferred Stock Conversion Price shall be adjusted (to the nearest cent) by
multiplying, (x) in the case of the Series B Senior Preferred Stock, the
Series B Preferred Stock Conversion Price immediately prior to such
adjustment by a fraction, of which the numerator shall be the number of
shares of Capital Stock outstanding immediately prior to the occurrence of
such event, and of which the denominator shall be the number of shares of
Capital Stock outstanding (including any convertible securities issued
pursuant to clause (i) or (iv) above on an as converted basis) immediately
thereafter, or (y) in the case of the Junior Preferred Stock Conversion
Price, the Junior Preferred Stock Conversion Price immediately prior to
such adjustment by a fraction, of which the numerator shall be the number
of shares of Capital Stock outstanding immediately prior to the occurrence
of such event, and of which the denominator shall be the number of shares
of Capital Stock outstanding (including any convertible securities issued
pursuant to clause (i) or (iv) above on an as converted basis) immediately
thereafter. An adjustment made pursuant to the foregoing sentence shall
become effective immediately after the effective date of such event
retroactive to the record date, if any, for such event.
(xi) Certain Issues and Repurchases Excepted. Anything herein to
---------------------------------------
the contrary notwithstanding, the Corporation shall not be required to make
any adjustment of contrary notwithstanding, the Corporation shall not be
required to make any adjustment of the Series A Senior Preferred Conversion
Prices in the case of (A) the issuance of shares of the Senior Convertible
Preferred Stock on the Issue Date and the issuance of shares of Series A
Senior Preferred Stock and Series B Senior Preferred Stock pursuant to this
Article IV upon the filing of the Certificate of Amendment as described
herein, (B) the issuance of shares of the Junior Convertible Preferred
Stock on the Issue Date, (C) the issuance of warrants to purchase shares of
Common Stock (the "Warburg Warrants") concurrently with the issuance of the
Senior Convertible Preferred Stock on January 29, 1993 (the "Restructuring
Date"), and any amendments to such Warburg Warrants through the date of
filing of the Certificate of Amendment, (D) the issuance to The Prudential
Insurance Company of America ("Prudential") of warrants to purchase shares
of Common Stock (the "New Prudential Warrants") concurrently with the
issuance of the Junior Convertible Preferred Stock, and any amendments to
such New Prudential Warrants through the date of filing of the Certificate
of Amendment, (E) the issuance of warrants to purchase shares of Common
Stock (the "1994 Warrants") concurrently with the filing of this
Certificate of Amendment, and any amendments to such 1994 Warrants, (F) the
issuance of shares of Capital Stock issuable upon conversion of the
Convertible Preferred Stock or upon exercise of the Warburg Warrants, the
New Prudential Warrants, the 1994 Warrants, the Stock Subscription Warrant,
dated as of November 25, 1986, by the Corporation to Prudential or any
other Option or right outstanding on the Issue Date to purchase or
otherwise acquire Capital Stock, (G) the granting by the Corporation, after
the Issue Date, of Options to purchase Capital Stock or the sale or grant,
after the Issue Date, of Capital Stock, pursuant to option or stock
purchase plans or agreements, or other incentive compensation plans or
agreements, heretofore or hereafter adopted in respect of, or entered into
with, directors, officers, employees or salespersons (other than pursuant
to
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<PAGE>
the Corporation's Preferred Equity Program) of the Corporation or any of its
Subsidiaries in connection with their employment, being directors or acting as
salesperson, provided that the consideration for the sale or grant of any such
Options or Capital Stock (including the exercise price of any Option) is at
least equal to the Market Price of such shares of Capital Stock on the date such
Options are granted or the date established by any such plan for a purchase
thereunder, as the case may be, (H) the Repurchase from any director, officer,
employee or salesperson of the Corporation or any Subsidiary of any Option or
share of Capital Stock upon his resignation or other termination from being a
director, officer, employee or salesperson of the Corporation or any Subsidiary
or (I) the issuance of shares of Common Stock in payment of the redemption price
of the Rights issued pursuant to the Rights Agreement, dated as of March 13,
1989, as amended, between the Corporation and Bank of America N.T. & S.A., as
Rights Agent.
(xii) Notice of Adjustment. Upon the occurrence of any event
--------------------
requiring an adjustment of any Conversion Price, then and in each such case the
Corporation shall promptly deliver to each holder of Convertible Preferred Stock
a certificate signed by the President or any Vice President and the Secretary or
any Assistant Secretary of the Corporation (an "Officers' Certificate") stating
the applicable Conversion Price resulting from such adjustment and the increase
or decrease, if any, in the number of shares of Common Stock issuable upon
conversion of such Convertible Preferred Stock, setting forth in reasonable
detail the method of calculation and the facts upon which such calculation is
based. Within 90 days after each fiscal year in which any such adjustment shall
have occurred, or within 30 days after any request therefor by any holder of
Convertible Preferred Stock stating that such holder contemplates conversion of
such Convertible Preferred Stock, the Corporation will obtain and deliver to
each holder of Convertible Preferred Stock the opinion of its regular
independent auditors or another firm of independent public accountants of
recognized national standing selected by the Corporation's Board of Directors
who are satisfactory to the registered holders of a majority of the Convertible
Preferred Stock, which opinion shall confirm the statements in the most recent
Officers' Certificate delivered under this Section 5(d)(xi). It is understood
and agreed that the independent public accountant rendering any such opinion
shall be entitled expressly to assume in such opinion the accuracy of any
determination of fair value made by the Board of Directors of the Corporation
pursuant to Section 5(d)(v).
(xiii) Other Notices. In case at any time:
-------------
(A) the Corporation shall declare or pay to the holders
of Capital Stock any dividend other than a regular periodic cash
dividend or any periodic cash dividend in excess of 115% of the cash
dividend for the comparable fiscal period in the immediately preceding
fiscal year;
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<PAGE>
(B) the Corporation shall declare or pay any dividend
upon Capital Stock payable in stock or make any special dividend or
other distribution (other than regular cash dividends) to the holders
of Capital Stock;
(C) the Corporation shall offer for subscription pro rata
to the holders of Capital Stock any additional shares of stock of any
class or other rights;
(D) there shall be any capital reorganization, or
reclassification of the Capital Stock of the Corporation, or
consolidation or merger of the Corporation with, or sale of all or
substantially all of its assets to, another corporation or other
entity;
(E) there shall be a voluntary or involuntary
dissolution, liquidation or winding-up of the Corporation; or
(F) there shall be any other Transaction;
then, in any one or more of such cases, the Corporation shall give to each
holder of Convertible Preferred Stock (1) at least 15 days prior to any event
referred to in clause (A) or (B) above, at least 30 days prior to any event
referred to in clause (C), (D) or (E) above, and within five business days after
it has knowledge of any pending Transaction, written notice of the date on which
the books of the Corporation shall close or a record shall be taken for such
dividend, distribution or subscription rights or for determining rights to vote
in respect of any such reorganization, reclassification, consolidation, merger,
sale, dissolution, liquidation, winding-up or Transaction and (2) in the case of
any such reorganization, reclassification, consolidation, merger, sale,
dissolution, liquidation, winding-up or Transaction known to the Corporation, at
least 30 days prior written notice of the date (or, if not then known, a
reasonable approximation thereof by the Corporation) when the same shall take
place. Such notice in accordance with the foregoing clause (1) shall also
specify, in the case of any such dividend, distribution or subscription rights,
the date on which the holders of Capital Stock shall be entitled thereto, and
such notice in accordance with the foregoing clause (2) shall also specify the
date on which the holders of Capital Stock shall be entitled to exchange their
Capital Stock for securities or other property deliverable upon such
reorganization, reclassification, consolidation, merger, sale, dissolution,
liquidation, winding-up or Transaction, as the case may be. Such notice shall
also state that the action in question or the record date is subject to the
effectiveness of a registration statement under the Securities Act of 1933, as
amended, or to a favorable vote of security holders, if either is required.
(xiv) Certain Events. If any event occurs as to which, in the
--------------
good faith judgment of the Board of Directors of the Corporation, the other
provisions of this Section 5 are not strictly applicable or if strictly
applicable would not fairly protect the conversion rights of the holders of the
Series A Senior Preferred Stock in accordance
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<PAGE>
with the essential intent and principles of such provisions, then the
Board of Directors of the Corporation shall appoint its regular
independent auditors or another firm of independent public accountants of
recognized national standing who are satisfactory to the holders of a
majority of the Series A Senior Preferred Stock which shall give their
opinion upon the adjustment, if any, on a basis consistent with such
essential intent and principles, necessary to preserve, without dilution,
the rights of the holders of the Series A Senior Preferred Stock. Upon
receipt of such opinion, the Board of Directors of the Corporation shall
forthwith make the adjustments described therein; provided, that no such
adjustment shall have the effect of increasing any Series A Senior
Preferred Stock Conversion Price as otherwise determined pursuant to this
Section 5. The Corporation may make such reductions in the Series A Senior
Preferred Conversion Price or increase in the number of shares of Common
Stock purchasable here-under as it deems advisable, including any
reductions or increases, as the case may be, necessary to ensure that any
event treated for Federal income tax purposes as a distribution of stock
or stock rights not be taxable to recipients.
(e) No Impairment. The Corporation shall not, by amendment of its
--------------
Certificate of Incorporation or through any reorganization, transfer of assets,
consolidation, merger, dissolution, issue or sale of securities or any other
voluntary action, avoid or seek to avoid the observance or performance of any of
the terms to be observed or performed hereunder by the Corporation, but shall at
all times in good faith assist in the carrying out of all the provisions of this
Section 5 and in the taking of all such action as may be necessary or
appropriate in order to protect the Conversion Rights of the holders of the
Series A Senior Preferred Stock against impairment.
(f) Mandatory Conversion. If (i) at all times during a two-year
--------------------
period prior to the date of conversion the ratio of Consolidated Debt to EBITDA
(each as defined below) of the Corporation has not exceeded 3.0:1.0, (ii) on
each Trading Day during a six-month period prior to the date of conversion the
Daily Market Price of the Common Stock has exceeded $8.75 per share, subject to
proportionate adjustment whenever there shall occur a stock split, combination,
reclassification or other similar event involving the Common Stock, and (iii)
the Corporation is in full compliance with all of the terms and conditions of
all agreements pursuant to which the Corporation or any Subsidiary shall have
incurred Indebtedness for borrowed money all, but not less than all, of the then
outstanding shares of Convertible Preferred Stock shall be converted into shares
of Common Stock as provided below. The Corporation shall provide written notice
of the occurrence of the foregoing events giving rise to such mandatory
conversion by United States certified or registered mail, postage prepaid,
mailed not more than 30 days thereafter to all holders of record of the shares
to be converted at such holders' addresses as the same appear on the stock
register of the Corporation. Each such notice shall state the proposed date on
which such mandatory conversion will occur (which date shall not be fewer than
30 days after the date notice thereof is received), the applicable Conversion
Price and the place or places where certificates for shares of the Convertible
Preferred Stock are to be surrendered for conversion. From and after the date
of mandatory conversion, the certificates for the Convertible Preferred
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<PAGE>
Stock shall be deemed to represent only the shares of Common Stock into which
such shares of Convertible Preferred Stock shall have been converted. The Holder
of such certificates shall surrender such certificates for conversion upon and
pursuant to the request of the Corporation.
(g) Certain Definitions. For purposes of this Article IV, the
-------------------
following terms shall have the following meanings:
(i) "Additional Shares of Capital Stock" shall mean all shares
------------------------------------
(including treasury shares) of Capital Stock issued or sold (or,
pursuant to Sections 5(d)(iii) or 5(d)(iv) deemed to be issued) by the
Corporation after the Issue Date, whether or not subsequently
reacquired or retired by the Corporation, other than shares of Common
Stock issued upon the conversion of the Convertible Preferred Stock.
(ii) "Consolidated Debt" shall mean with respect to any
-------------------
Person, the total Indebtedness of such Person and its Subsidiaries on
a consolidated basis determined in accordance with GAAP.
(iii) "Convertible Securities" shall mean any evidences
------------------------
of indebtedness, shares of stock (other than Common Stock) or
securities directly or indirectly convertible into or exchangeable for
Additional Shares of Capital Stock.
(iv) "Daily Market Price" shall mean, on any date specified
--------------------
herein, (A) if any class of Capital Stock is listed or admitted to
trading on any national securities exchange, the average of the high
and low sale price of shares of each such class of Capital Stock or if
no such sale takes place on such date, the average of the highest
closing bid and lowest closing asked prices thereof on such date, in
each case as officially reported on all national securities exchanges
on which each such class of Capital Stock is then listed or admitted
to trading, or (B) if no shares of any class of Capital Stock are then
listed or admitted to trading on any national securities exchange, the
highest closing price of any class of Capital Stock on such date in
the over-the-counter market as shown by NASDAQ or, if no such shares
of any class of Capital Stock are then quoted in such system, as
published by the National Quotation Bureau, Incorporated or any
similar successor organization, and in either case as reported by any
member firm of the New York Stock Exchange selected by the
Corporation. If no shares of any class of Capital Stock are then
listed or admitted to trading on any national securities exchange and
if no closing bid and asked prices thereof are then so quoted or
published in the over-the-counter market, "Daily Market Price" shall
mean the higher of (x) the book value per share of Capital Stock
(assuming for the purposes of this calculation the economic
equivalence of all shares of all classes of Capital Stock) as
determined on a fully diluted basis in accordance with generally
accepted accounting principles by a firm of independent public
accountants of recognized standing (which may be its regular auditors)
selected by the Board of Directors of the
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Corporation as of the last day of any month ending within 60 days
preceding the date as of which the determination is to be made or (y)
the fair value per share of Capital Stock (assuming for the purposes
of this calculation the economic equivalence of all shares of all
classes of Capital Stock), as determined on a fully diluted basis in
good faith by an independent brokerage firm or Standard & Poor's
Corporation (as selected by the Board of Directors of the
Corporation), as of a date which is 15 days preceding the date as of
which the determination is to be made.
(v) "EBITDA" shall mean, with respect to any Person, for any
--------
period, the sum of (A) the net income of such Person and its
Subsidiaries on a consolidated basis before taxes, excluding
extraordinary items and income or loss from discontinued operations,
(B) total interest expense of such Person and its Subsidiaries on a
consolidated basis and (C) depreciation and amortization for such
Person and its Subsidiaries on a consolidated basis.
(vi) "GAAP" shall mean generally accepted accounting
------
principles set forth in the opinions and pronouncements of the
Accounting Principles Board of the American Institute of Certified
Public Accountants and statements and pronouncements of the Financial
Accounting Standards Board or in such other statements by such other
entity as may be approved by a significant segment of the accounting
profession.
(vii) "Indebtedness" shall mean, with respect to any
--------------
Person, all items (excluding items of contingency reserves or of
reserves for deferred income taxes) which in accordance with GAAP
would be included in determining total liabilities as shown on the
liability side of a balance sheet of such Person as of the date on
which Indebtedness is to be determined.
(viii) "Issue Date" shall mean the date on which shares of
------------
Convertible Preferred Stock are first issued by the Corporation.
"Issue Date" with respect to the shares of Series A Senior Preferred
Stock and Series B Senior Preferred Stock outstanding on the date of
filing of the Certificate of Amendment shall be deemed to be the date
of issuance of the respective shares of Existing Senior Convertible
Preferred Stock which were exchanged for or converted into such shares
of Series A Senior Preferred Stock and Series B Senior Preferred
Stock.
(ix) "Market Price" shall mean, on any date specified herein,
--------------
(A) if any class of Capital Stock is listed or admitted to trading on
any national securities exchange, the highest price obtained by taking
the arithmetic mean over a period of 20 consecutive Trading Days
ending the second Trading Day prior to such date of the average, on
each such Trading Day, of the high and low sale price of shares of
each such class of Capital Stock or if no such sale takes place on
such date, the average of the highest closing bid and lowest
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closing asked prices thereof on such date, in each case as officially
reported on all national securities exchanges on which each such class
of Capital Stock is then listed or admitted to trading, or (B) if no
shares of any class of Capital Stock are then listed or admitted to
trading on any national securities exchange, the highest closing price
of any class of Capital Stock on such date in the over-the-counter
market as shown by NASDAQ or, if no such shares of any class of
Capital Stock are then quoted in such system, as published by the
National Quotation Bureau, Incorporated or any similar successor
organization, and in either case as reported by any member firm of the
New York Stock Exchange selected by the Corporation. If no shares of
any class of Capital Stock are then listed or admitted to trading on
any national securities exchange and if no closing bid and asked
prices thereof are then so quoted or published in the over-the-counter
market, "Market Price" shall mean the higher of (x) the book value per
share of Capital Stock (assuming for the purposes of this calculation
the economic equivalence of all shares of all classes of Capital
Stock) as determined on a fully diluted basis in accordance with
generally accepted accounting principles by a firm of independent
public accountants of recognized standing (which may be its regular
auditors) selected by the Board of Directors of the Corporation as of
the last day of any month ending within 60 days preceding the date as
of which the determination is to be made or (y) the fair value per
share of Capital Stock (assuming for the purposes of this calculation
the economic equivalence of all shares of all classes of Capital
Stock), as determined on a fully diluted basis in good faith by an
independent brokerage firm or Standard & Poor's Corporation (as
selected by the Board of Directors of the Corporation), as of a date
which is 15 days preceding the date as of which the determination is
to be made.
(x) "Options" shall mean rights, options or warrants to
---------
subscribe for, purchase or otherwise acquire either Additional Shares
of Capital Stock or Convertible Securities.
(xi) "Other Securities" shall mean any stock (other than
------------------
Capital Stock) and any other securities of the Corporation or any
other Person (corporate or otherwise) which the holders of the
Convertible Preferred Stock at any time shall be entitled to receive,
or shall have received, upon the conversion or partial conversion of
the Convertible Preferred Stock, in lieu of or in addition to Common
Stock, or which at any time shall be issuable or shall have been
issued in exchange for or in replacement of Common Stock or Other
Securities pursuant to Section 5(d)(ix) or otherwise.
(xii) "Person" shall mean any individual, firm, corporation
--------
or other entity, and shall include any successor (by merger or
otherwise) of such entity.
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(xiii) "Subsidiary" shall mean any corporation or other entity
------------
the majority of the outstanding voting shares of which is at the time
owned (either alone or through Subsidiaries or together with
Subsidiaries) by the Corporation or another Subsidiary.
(xiv) "Trading Day" shall mean any day on which the New York
-------------
Stock Exchange is open for trading on a regular basis.
(xv) "Transaction" shall have the meaning set forth in Section
-------------
5(d)(ix).
(h) Junior Convertible Preferred Stock
----------------------------------
(i) In the event that the Corporation undertakes to sell its
Common Stock through an underwritten public offering (an "Offering"), and
if the underwriter advises the Corporation that in order to complete such
Offering on the most favorable terms to the Corporation it is necessary for
the Junior Convertible Preferred Stock to be retired, then the Corporation
may so notify the holders of the Junior Convertible Preferred Stock (the
"Conversion Notice"), and such holders shall, on or prior to the Conversion
Date (as defined below) convert their Junior Convertible Preferred Stock
into Common Stock pursuant to the terms of this Article IV. The holders of
the Junior Convertible Preferred Stock shall be obligated to convert their
Junior Convertible Preferred Stock only if (A) on or prior to the
Conversion Date, all the holders of the Series B Senior Preferred Stock
shall have converted their Series B Senior Preferred Stock into Common
Stock, or all Series B Senior Preferred Stock shall otherwise have been
retired, and (B) the Market Price of the Common Stock at the Conversion
Date is greater than the sum of the Junior Preferred Stock Stated Value
plus accrued dividends per share of Junior Convertible Preferred Stock
(such sum being referred to herein as the "Accreted Value"); provided that
--------
if at the Conversion Date, the Market Price of the Common Stock is less
than the Accreted Value, then each holder of the Junior Convertible
Preferred Stock must either, at its option (A) convert the Junior
Convertible Preferred Stock into Common Stock on or prior to the Conversion
Date or (B) require the Corporation to redeem the Junior Convertible
Preferred Stock at the Accreted Value, in which case such holder shall
notify the Corporation of its election on or prior to the Conversion Date.
If a holder elects to require the Corporation to redeem the Junior
Convertible Preferred Stock, then the Corporation shall make such
redemption within 60 days after the Conversion Date; provided that the
--------
Corporation shall be obligated to redeem the Junior Convertible Preferred
Stock only if it has sufficient funds legally available on the redemption
date in order to redeem shares of Junior Convertible Preferred Stock
pursuant to this Section 5(h); provided further that if the Board
-------- -------
determines not to proceed with the Offering any notice of redemption shall
be withdrawn and the Corporation's obligation to redeem such shares shall
terminate. "Conversion Date" shall mean the date stated in the Conversion
Notice on or prior to which the holders of the Junior Convertible Preferred
Stock shall be required to convert their Junior Convertible Preferred Stock
in accordance with this Section 5(h). Without
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the consent of each holder of Junior Convertible Preferred Stock, the
Conversion Date may not be a date earlier than the closing date of the
Offering; provided that the Conversion Notice may identify the Offering's
--------
closing date as "the closing date," in lieu of using a calendar date.
(ii) If the Corporation shall be required to redeem shares Junior
Convertible Preferred Stock pursuant to Section 5(h)(i), then notice of
such redemption shall be given by United States certified or registered
mail, postage prepaid, mailed not less than thirty (30) days nor more than
sixty (60) days prior to the redemption date, to all holders of record of
the shares to be redeemed at such holders' addresses as the same appear on
the stock register of the Corporation. Each such notice shall state: (A)
the redemption date; (B) the number of shares of Junior Convertible
Preferred Stock to be redeemed and, if less than all the shares held by
such holder are to be redeemed from such holder, the number of shares to be
redeemed from such holder; (C) the redemption price; and (D) the place or
places where certificates for shares of the Junior Convertible Preferred
Stock are to be surrendered for payment of the redemption price.
(iii) Notice having been mailed as aforesaid, from and after the
redemption date (unless default shall be made by the Corporation in
providing payment of the redemption price by deposit with a bank or trust
company having capital and surplus of at least $50,000,000 of the shares
called for redemption) said shares shall no longer be deemed to be
outstanding, and all rights of the holders thereof as stockholders of the
Corporation (except the right to receive from the Corporation the
redemption price) shall cease. Upon surrender, in accordance with the
above-mentioned notice, of the certificates for any shares so redeemed
(properly endorsed or signed for transfer, if the Board of Directors of the
Corporation shall so require and the notice shall so state), such shares
shall be redeemed by the Corporation at the redemption price provided for
in this Section 5(h). In the event fewer than all of the shares
represented by any such certificate are redeemed, a new certificate shall
be issued, without cost to the holder thereof, representing the unredeemed
shares. The provisions of this Section 5(h)(iii) shall be subject to
Section 5(h)(i).
(i) Reacquired Shares. Shares of Convertible Preferred Stock which
------------------
have been issued and reacquired in any manner, including shares purchased or
redeemed or exchanged, shall (upon compliance with any applicable provisions of
the laws of the State of Delaware) have the status of authorized and unissued
shares of Preferred Stock undesignated as to series and may be redesignated and
reissued as part of any series of the Preferred Stock; provided, however, that
no such issued and reacquired shares of Senior Convertible Preferred Stock shall
be reissued or sold as Series A Senior Preferred Stock and no such issued and
reacquired shares of Junior Convertible Preferred Stock shall be reissued or
sold as Junior Convertible Preferred Stock.
SECOND: That thereafter, pursuant to a resolution of the Board of
Directors duly adopted on May 10, 1994, a meeting of the stockholders of said
Corporation was duly called and held, upon notice in accordance with Section 222
of the General Corporation Law
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of the State of Delaware at which meeting the necessary number of shares as
required by statute were voted in favor of the amendments.
THIRD: That said amendments were duly adopted in accordance with the
provisions of Section 242 of the General Corporation Law of the State of
Delaware.
IN WITNESS WHEREOF, GRUBB & ELLIS COMPANY has caused this certificate
to be signed by Robert J. Walner, its Senior Vice President, and Carol M.
Vanairsdale, its Assistant Secretary, this 1st day of November, 1994.
GRUBB & ELLIS COMPANY
/s/ Robert J. Walner
--------------------
Robert J. Walner
Senior Vice President
Attest:
/s/ Carol M. Vanairsdale
------------------------
Carol M. Vanairsdale
Assistant Secretary
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EXHIBIT 3.2
RESTATED CERTIFICATE OF INCORPORATION
OF
GRUBB & ELLIS COMPANY
---------------------
Grubb & Ellis Company, a corporation organized and existing under the laws of
the State of Delaware, hereby certifies as follows:
1. The name of the Corporation is Grubb & Ellis Company, and the original
Certificate of Incorporation of the Corporation was filed with the Secretary of
State of Delaware on December 5, 1980.
2. This Restated Certificate of Incorporation was duly adopted pursuant to
Section 245 of the General Corporation Law of the State of Delaware. This
Restated Certificate of Incorporation restates and integrates and does not
further amend the provisions of the Certificate of Incorporation of this
Corporation as heretofore amended and supplemented. There is no discrepancy
between such provisions and the provisions of this Restated Certificate of
Incorporation.
3. The text of the Restated Certificate of Incorporation as heretofore
amended and supplemented is hereby restated and further amended to read in its
entirety as follows:
ARTICLE I
---------
The name of the Corporation is Grubb & Ellis Company.
ARTICLE II
----------
The registered office of the Corporation in the State of Delaware is located
at 32 Loockerman Square, Suite L-100 in the City of Dover, County of Kent. The
name of the Corporation's registered agent at such address is The Prentice Hall
Corporation System, Inc.
ARTICLE III
-----------
The purposes of the Corporation are to engage in any lawful act or activity
for which corporations may be organized under the General Corporation Law of the
State of Delaware.
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ARTICLE IV
----------
The total number of shares of capital stock which the Corporation
shall have authority to issue is twenty-six million (26,000,000) shares, of
which twenty-five million (25,000,000) shares with a par value of $.01 each
shall be designated Common Stock, and of which one million (1,000,000) shares
with a par value of $.01 each shall be designated Preferred Stock, of which
Preferred Stock fifty thousand (50,000) shares with a par value of $.01 each
shall be designated Series A Senior Convertible Preferred Stock ("Series A
Senior Preferred Stock"), two hundred thousand (200,000) shares with a par value
of $.01 each shall be designated Series B Senior Convertible Preferred Stock
("Series B Senior Preferred Stock") and two hundred thousand (200,000) shares
with a par value of $.01 each shall be designated Junior Convertible Preferred
Stock. Except as noted in the second following paragraph, as used herein,
"Senior Convertible Preferred Stock," shall mean collectively, the Series A
Senior Preferred Stock and the Series B Senior Preferred Stock, or either of
them. As used herein, "Convertible Preferred Stock" shall mean collectively, the
Senior Convertible Preferred Stock and the Junior Convertible Preferred Stock,
or either of them.
Upon the filing on January 29, 1993 of the Certificate of Amendment of
Certificate of Incorporation (the "Amendment"), every five shares of outstanding
Common Stock were automatically reclassified, changed and converted into one
share of Common Stock. No fractional shares of Common Stock were issued upon
such conversion, but in lieu thereof, the Corporation paid a cash adjustment in
respect of such fractional interest in an amount equal to such fractional
interest multiplied by the Market Price of a share of Common Stock on the date
on which the Amendment was filed. Unless otherwise requested by the holders
thereof, the share certificates representing the shares of Common Stock
outstanding prior to the filing of the Amendment represent such shares as
reclassified, changed and converted following the filing of the Amendment. In
addition, on December 8, 1993, the Company filed a Restated Certificate of
Incorporation restating, integrating, and not further amending the provisions of
the Company's certificate of incorporation as amended and supplemented before
that date.
Upon the filing on November 1, 1994 of the Certificate of Amendment of
Restated Certificate of Incorporation (the "Certificate of Amendment"), Warburg,
Pincus Investors, L.P. ("Warburg") exchanged all of its shares of Senior
Convertible Preferred Stock held prior to such filing ("Existing Senior
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Convertible Preferred Stock") for an equal number of shares of Series B Senior
Preferred Stock. Effective immediately after the issuance of such shares of
Series B Senior Preferred Stock, each remaining share of Existing Senior
Convertible Preferred Stock shall be automatically reclassified, changed and
converted into one share of Series A Senior Preferred Stock. Unless otherwise
requested by the holders thereof, the share certificates representing the shares
of Existing Senior Convertible Preferred Stock outstanding prior to the filing
of the Certificate of Amendment which have not been exchanged for Series B
Senior Convertible Stock shall represent shares of Series A Senior Convertible
Preferred Stock as reclassified, changed and converted following the issuance of
the Series B Senior Convertible Stock.
The class of capital stock of the Corporation designated Common Stock
shall have (i) subject to the proviso at the end of this sentence, full voting
rights, with one vote represented by each share of stock; (ii) rights to payment
of dividends without preference if, as, and when declared by the Board of
Directors of the Corporation; and (iii) rights to liquidation distributions of
the Corporations's assets without preference after payment of preferential
liquidation distributions, if any, payable on any issued and outstanding series
of Preferred Stock; provided, however, that, notwithstanding the provisions of
clause (i) of this sentence, the holders of Common Stock shall not have the
right to vote on any of the matters described in Section 4(b)(i) or 4(b)(ii)
below in this Article IV except in clauses (A) and (D) thereof, except as
otherwise required by the laws of the State of Delaware.
The Preferred Stock may be issued from time to time in one or more
series. The Board of Directors is hereby expressly vested with authority to fix
by resolution or resolutions the designations and the powers, preferences and
relative, participating, optional or other special rights, and the
qualifications, limitations or restrictions thereof (including, without
limitation, the voting powers, if any, the dividend rate, conversion rights,
redemption price, or liquidation preference), of any wholly unissued series of
Preferred Stock, to fix the number of shares constituting any such series, and
to increase or decrease the number of shares of any such series (but not below
the number of shares thereof then outstanding). In case the number of shares of
any such series shall be so decreased, the shares constituting such decrease
shall resume the status which they had prior to the adoption of the resolution
or resolutions originally fixing the number of shares of such series.
A statement of the designations and the voting powers, preferences and
relative, participating, optional and other
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special rights of the shares of the Senior Convertible Preferred Stock and the
Junior Convertible Preferred Stock, and the qualifications, limitations or
restrictions thereof are as follows:
1. Rank. The Senior Convertible Preferred Stock shall, with respect
----
to dividend rights and rights on liquidation, winding up and dissolution, rank
prior to any other equity securities of the Corporation, including all classes
of Common Stock and any other series of Preferred Stock of the Corporation, with
the Series A Senior Preferred Stock and the Series B Senior Preferred Stock
ranking on an equal priority in all such foregoing respects. The Junior
Convertible Preferred Stock shall, with respect to dividend rights and rights on
liquidation, winding up and dissolution, rank prior to any other equity
securities of the Corporation, including all classes of Common Stock and any
other series of Preferred Stock of the Corporation other than the Senior
Convertible Preferred Stock which shall rank prior to the Junior Convertible
Preferred Stock (all of such equity securities of the Corporation to which the
Junior Convertible Preferred Stock ranks prior are collectively referred to
herein as the "Junior Stock").
2. Dividends
---------
(a) Senior Convertible Preferred Stock. The holders of Senior
----------------------------------
Convertible Preferred Stock shall be entitled to receive, when and as declared
by the Board of Directors out of funds legally available therefor, cumulative
dividends at a rate (the "Senior Dividend Rate") equal to the greater of 12% or
the Junior Preferred Dividend Rate (as defined below). Such dividends shall be
computed on the basis of the Series A Senior Preferred Stock Stated Value and
the Series B Senior Preferred Stock Stated Value, respectively, and shall be
payable annually on the first day of each October commencing on the first of
such dates to occur after the Issue Date. Dividends shall accrue on each share
of Senior Convertible Preferred Stock from the Issue Date and shall accrue from
day to day, whether or not earned or declared. Accrued but unpaid dividends on
the Senior Convertible Preferred Stock shall increase at a compounding rate
equal to the Senior Dividend Rate compounded annually. Dividends paid on the
shares of Senior Convertible Preferred Stock in an amount less than the total
amount of such dividends at the time accrued and payable on such shares shall be
allocated pro rata on a share-by-share basis among all such shares at the time
outstanding. The Board of Directors may fix a record date for the determination
of holders of all, but not less than all shares of Senior Convertible Preferred
Stock entitled to receive payment of a dividend or distribution declared
thereon, which record date shall be not more than 30 days prior to the date
fixed for the
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payment thereof. During such time as any shares of the Senior Convertible
Preferred Stock are outstanding, the Corporation shall not declare, pay or set
apart for payment any dividend on any of the Junior Convertible Preferred Stock
or Junior Stock, other than a redemption pursuant to Section 5(h), or make any
payment on account of, or set apart money for a sinking or other similar fund or
make any payment for, the purchase, redemption or other retirement of, any of
the Junior Convertible Preferred Stock or Junior Stock or any warrants, rights,
calls or options exercisable for or convertible into any of the Junior
Convertible Preferred Stock or Junior Stock, or make any distribution in respect
thereof, either directly or indirectly, and whether in cash, obligations or
shares of the Corporation or other property (other than distributions or
dividends in Junior Convertible Preferred Stock or Junior Stock to the holders
of Junior Convertible Preferred Stock or Junior Stock), and shall not permit any
corporation or other entity directly or indirectly controlled by the Corporation
to purchase or redeem any of the Junior Convertible Preferred Stock or Junior
Stock or any warrants, rights, calls or options exercisable for or convertible
into any of the Junior Convertible Preferred Stock or Junior Stock, other than a
redemption pursuant to Section 5(h), unless prior to or concurrently with such
declaration, payment, setting apart for payment, purchase, redemption or
distribution, as the case may be, the full cumulative dividends on all
outstanding shares of Senior Convertible Preferred Stock shall have been paid in
full or contemporaneously are declared and paid through the most recent dividend
payment date. Notwithstanding the foregoing, a redemption pursuant to Section
5(h) may be effected prior to the payment in full of cumulative dividends on all
outstanding shares of Senior Convertible Preferred Stock. The dividend rights of
the Series A Senior Preferred Stock and Series B Senior Preferred Stock shall be
on an equal priority.
(b) Junior Convertible Preferred Stock. The holders of Junior
----------------------------------
Convertible Preferred Stock shall be entitled to receive, when and as declared
by the Board of Directors out of funds legally available therefor, cumulative
dividends payable in cash at a rate (the "Junior Preferred Dividend Rate") of 5%
per annum through December 31, 2001, 10% per annum from January 1, 2002 through
December 31, 2002, 11% per annum from January 1, 2003 through December 31, 2003,
12% per annum from January 1, 2004 through December 31, 2004, and commencing on
January 1, 1995 and on each January 1 thereafter, such rate shall increase by
2%. Such dividends shall be computed on the basis of the Junior Convertible
Preferred Stock Stated Value and shall be payable annually on the first day of
each October commencing on the first of such dates to occur after the shares of
Junior Convertible Preferred Stock are initially issued. Dividends shall accrue
on each share of Junior Convertible Preferred Stock from the date of
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issuance thereof and shall accrue from day to day, whether or not earned or
declared. Accrued but unpaid dividends shall increase at a compounding rate
equal to the Junior Preferred Dividend Rate compounded annually. Dividends paid
on the shares of Junior Convertible Preferred Stock in an amount less than the
total amount of such dividends at the time accrued and payable on such shares
shall be allocated pro rata on a share-by-share basis among all such shares at
the time outstanding. The Board of Directors may fix a record date for the
determination of holders of shares of Junior Convertible Preferred Stock
entitled to receive payment of a dividend or distribution declared thereon,
which record date shall be not more than 30 days prior to the date fixed for the
payment thereof. During such time as any shares of the Junior Convertible
Preferred Stock are outstanding, the Corporation shall not declare, pay or set
apart for payment any dividend on any of the Junior Stock or make any payment on
account of, or set apart money for a sinking or other similar fund or make any
payment for, the purchase, redemption or other retirement of, any of the Junior
Stock or any warrants, rights, calls or options exercisable for or convertible
into any of the Junior Stock, or make any distribution in respect thereof,
either directly or indirectly, and whether in cash, obligations or shares of the
Corporation or other property (other than distributions or dividends in Junior
Stock to the holders of Junior Stock), and shall not permit any corporation or
other entity directly or indirectly controlled by the Corporation to purchase or
redeem any of the Junior Stock or any warrants, rights, calls or options
exercisable for or convertible into any of the Junior Stock, unless prior to or
concurrently with such declaration, payment, setting apart for payment,
purchase, redemption or distribution, as the case may be, the full cumulative
dividends on all outstanding shares of Junior Convertible Preferred Stock shall
have been paid in full or contemporaneously are declared and paid through the
most recent dividend payment date.
3. Liquidation Preference
----------------------
(a) Senior Convertible Preferred Stock. In the event of any voluntary
----------------------------------
or involuntary liquidation, dissolution or winding up of the affairs of the
Corporation, the holders of the shares of Series A Senior Preferred Stock and
Series B Senior Preferred Stock then outstanding shall be entitled to be first
paid out of the assets of the Corporation available for distribution to its
stockholders an amount in cash equal to $100.00 per share of Series A Senior
Preferred Stock (the "Series A Senior Preferred Stock Stated Value") and $100.00
per share of Series B Senior Preferred Stock (the "Series B Senior Preferred
Stock Stated Value"), respectively, plus an amount equal to all dividends
(whether or not earned or declared) on such shares
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accrued and unpaid thereon to the date of final distribution, before any payment
shall be made or any assets distributed to the holders of the Junior Convertible
Preferred Stock or Junior Stock. Except as provided in the preceding sentence,
holders of the Senior Convertible Preferred Stock shall not be entitled to any
distribution in the event of liquidation, dissolution or winding up of the
affairs of the Corporation. If, upon any such liquidation, dissolution or
winding up of the Corporation, the remaining assets of the Corporation available
for distribution to its stockholders shall be insufficient to pay the holders of
the Senior Convertible Preferred Stock the full amount to which they shall be
entitled, the holders of any of the Senior Convertible Preferred Stock shall
share ratably in any distribution of the remaining assets and funds of the
Corporation in proportion to the respective amounts which would otherwise be
payable in respect of the shares held by them upon such distribution if all
amounts payable on or with respect to such shares were paid in full. The
distribution rights of the Series A Senior Preferred Stock and Series B Senior
Preferred Stock shall be on an equal priority.
(b) Junior Convertible Preferred Stock. In the event of any voluntary
----------------------------------
or involuntary liquidation, dissolution or winding up of the affairs of the
Corporation, if assets are remaining after the payment in full of the
preferential amount of the Series A Senior Preferred Stock Stated Value and the
Series B Senior Preferred Stock Stated Value set forth in Section 3(a) plus an
amount equal to all dividends (whether or not earned or declared) on such shares
accrued and unpaid thereon, the holders of the shares of Junior Convertible
Preferred Stock then outstanding shall be next entitled to be first paid out of
the assets of the Corporation available for distribution to its stockholders an
amount in cash equal to $100.00 per share (the "Junior Convertible Preferred
Stock Stated Value") plus an amount equal to all dividends (whether or not
earned or declared) on such shares accrued and unpaid thereon to the date of
final distribution, before any payment shall be made or any assets distributed
to the holders of any of the Junior Stock. Except as provided in the preceding
sentence, holders of the Junior Convertible Preferred Stock shall not be
entitled to any distribution in the event of liquidation, dissolution or winding
up of the affairs of the Corporation. If, upon any such liquidation, dissolution
or winding up of the Corporation, the remaining assets of the Corporation
available for distribution to its stockholders shall be insufficient to pay the
holders of the Junior Convertible Preferred Stock the full amount to which they
shall be entitled, the holders of the Junior Convertible Preferred Stock shall
share ratably in any distribution of the remaining assets and funds of the
Corporation in proportion to the respective amounts which would otherwise be
payable in
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respect of the shares held by them upon such distribution if all amounts payable
on or with respect to such shares were paid in full.
(c) For the purposes of this Section 3, neither the voluntary sale,
conveyance, exchange or transfer (for cash, shares of stock, securities or other
consideration) of all or substantially all the property or assets of the
Corporation nor the consolidation or merger of the Corporation with one or more
other corporations shall be deemed a liquidation, dissolution or winding up,
voluntary or involuntary.
(d) The liquidation payment with respect to each outstanding
fractional share of Convertible Preferred Stock shall be equal to a ratably
proportionate amount of the liquidation payment with respect to each outstanding
share of Convertible Preferred Stock.
4. Voting Rights
-------------
(a) Right to Vote. Except as otherwise required by law, the Senior
-------------
Convertible Preferred Stock, the Junior Convertible Preferred Stock, the Common
Stock and any other capital stock of the Corporation entitled to vote with the
Common Stock shall be deemed to be one class for the purpose of voting, or
giving written consent in lieu of voting, on all matters submitted for the
approval of the stockholders of the Corporation. Each person in whose name
shares of Convertible Preferred Stock shall be registered on the record date for
determining the holders of the Convertible Preferred Stock entitled to vote at
any meeting of stockholders (or adjournment thereof) or to consent to corporate
action in writing without a meeting shall be entitled to, at such meeting or
with respect to such action, one vote for each share of Common Stock of the
Corporation into which each share of Convertible Preferred Stock registered in
the name of such person on such record date could be converted (with any
fractional share determined on an aggregate conversion basis being rounded to
the nearest whole share).
(b) Significant Events
------------------
(i) During such time as any shares of Senior Convertible
Preferred Stock are outstanding, the Corporation will not, without the
affirmative vote or consent of the holders of at least two-thirds of the
issued and outstanding shares of Senior Convertible Preferred Stock voting
together as one single and separate class, (A) create, authorize or issue
(including on conversion or exchange of any convertible or exchangeable
securities or by
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reclassification) any class or series of shares ranking on a parity with or
prior to the Senior Convertible Preferred Stock, either as to dividends
upon voluntary or involuntary liquidation, dissolution or winding up, (B)
increase the authorized shares of, or issue (including on conversion or
exchange of any convertible or exchangeable securities or by
reclassification) any shares of Senior Convertible Preferred Stock, (C)
amend, alter, waive the application of, or repeal (whether by merger,
consolidation or otherwise) any provision of the Certificate of
Incorporation of the Corporation, enter into any agreement or take any
other corporate action which in any manner would alter, change or otherwise
adversely affect the powers, rights or preferences of the Senior
Convertible Preferred Stock, (D) effect the reorganization,
recapitalization, liquidation, dissolution or winding up of the
Corporation, or the sale, lease, conveyance or exchange of all or
substantially all of the assets, property or business of the Corporation,
or the merger or consolidation of the Corporation with or into any other
corporation, if such transaction in any manner would alter, change or
otherwise adversely affect the powers, rights or preferences of the Senior
Convertible Preferred Stock or (E) take any action which would cause a
dividend or other distribution to be deemed to be received by the holders
of the Senior Convertible Preferred Stock for federal income tax purposes
unless such dividend or other distribution is actually received by such
holders.
(ii) During such time as any shares of Junior Convertible
Preferred Stock are outstanding, the Corporation will not, without the
affirmative vote or consent of the holders of at least two-thirds of the
issued and outstanding shares of Junior Convertible Preferred Stock voting
together as a separate class, (A) create, authorize or issue (including on
conversion or exchange of any convertible or exchangeable securities or by
reclassification) any class or series of shares ranking on a parity with or
prior to the Junior Convertible Preferred Stock, either as to dividends or
redemption or upon voluntary or involuntary liquidation, dissolution or
winding up, (B) increase the authorized shares of, or issue (including on
conversion or exchange of any convertible or exchangeable securities or by
reclassification) any shares of Junior Convertible Preferred Stock, (C)
amend, alter, waive the application of, or repeal (whether by merger,
consolidation or otherwise) any provision of the Certificate of
Incorporation of the Corporation, enter into any agreement or take any
other corporate action which in any manner would alter, change or otherwise
adversely affect the powers, rights or preferences of the Junior
Convertible Preferred Stock, (D) effect the
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reorganization, recapitalization, liquidation, dissolution or winding up of
the Corporation, or the sale, lease, conveyance or exchange of all or
substantially all of the assets, property or business of the Corporation,
or the merger or consolidation of the Corporation with or into any other
corporation, if such transaction in any manner would alter, change or
otherwise adversely affect the powers, rights or preferences of the Junior
Convertible Preferred Stock or (E) take any action which would cause a
dividend or other distribution to be deemed to be received by the holders
of the Junior Convertible Preferred Stock for federal income tax purposes
unless such dividend or other distribution is actually received by such
holders.
(c) Written Consent. Whenever holders of the Convertible Preferred
---------------
Stock are required or permitted to take any action by vote, such action may be
taken without a meeting by written consent, setting forth the action so taken
and signed by the holders of the outstanding Senior Convertible Preferred Stock
or Junior Convertible Preferred Stock, as the case may be, having not less than
the minimum number of votes that would be necessary to authorize or take such
action at a meeting at which all such shares entitled to vote thereon were
present and voted.
5. Conversion. Holders of the Convertible Preferred Stock shall
----------
have the following conversion rights (collectively, the "Conversion Rights"):
(a) Right to Convert. Each share of Series A Senior Preferred Stock,
----------------
Series B Senior Preferred Stock and Junior Convertible Preferred Stock shall be
convertible, at the option of the holder thereof, at any time and from time to
time, into such number of validly issued, fully paid and nonassessable shares of
Common Stock of the Corporation, as is determined by dividing the Series A
Senior Preferred Stock Stated Value, the Series B Senior Preferred Stock Stated
Value or the Junior Convertible Preferred Stock Stated Value, as the case may
be, by the respective "Conversion Prices" (as defined below) in effect at the
time of the conversion; provided, however, that if such share shall be called
for redemption pursuant to Section 5(h), it may not be converted after the
redemption date unless the Corporation shall have failed to pay or provide for
the payment of the redemption price therefor (in accordance with Section 5(h)).
The Conversion Prices initially in effect shall be $ 2.6716 for the Series A
Senior Preferred Stock (the "Series A Senior Preferred Stock Conversion Price"),
$ 2.6564 for the Series B Senior Preferred Stock (the "Series B Senior Preferred
Stock Conversion Price"), and $5.6085 for the Junior Convertible Preferred Stock
(the "Junior Preferred Stock Conversion Price") (the Series A Senior Preferred
Stock Conversion Price, the Series
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B Senior Preferred Stock Conversion Price, and the Junior Preferred Stock
Conversion Price, collectively the "Conversion Prices" and each individually, a
"Conversion Price"). Such initial Conversion Prices, and the rate at which
shares of Convertible Preferred Stock may be converted into shares of Common
Stock, shall be subject to adjustment as provided in Section 5(d) below.
(b) Fractional Shares. No fractional shares of Common Stock shall be
-----------------
issued upon conversion of the Convertible Preferred Stock, but in lieu thereof,
the Corporation shall pay a cash adjustment in respect of such fractional
interest in an amount equal to such fractional interest multiplied by the Market
Price of a share of Common Stock on the date on which such shares of Convertible
Preferred Stock are deemed to have been converted.
(c) Mechanics of Conversion
-----------------------
(i) In order for a holder of the Convertible Preferred Stock to
convert shares of Convertible Preferred Stock into shares of Common Stock,
such holder shall surrender the certificate or certificates for such shares
of Convertible Preferred Stock, at the office of the transfer agent for the
Convertible Preferred Stock (or at the principal office of the Corporation
if the Corporation serves as its own transfer agent), together with written
notice that such holder elects to convert all or any number of the shares
of the Convertible Preferred Stock represented by such certificate or
certificates. Such notice shall state such holder's name or the names of
the nominees in which such holder wishes the certificate or certificates
for shares of Common Stock to be issued. If required by the Corporation,
certificates surrendered for conversion shall be endorsed or accompanied by
a written instrument or instruments of transfer, in form satisfactory to
the Corporation, duly executed by the registered holder or his or its
attorney duly authorized in writing. The date on which the transfer agent
(or the Corporation, if the Corporation serves as its own transfer agent)
receives such certificate or certificates and notice shall be the
conversion date ("Conversion Date"). As soon as practicable, and in any
event within five business days, after the Conversion Date, the Corporation
shall issue and deliver, or cause to be issued and delivered, to such
holder of Convertible Preferred Stock, or to his or its nominees, (i) a
certificate or certificates for the number of validly issued, fully paid
and nonassessable shares of Common Stock to which such holder shall be
entitled upon conversion and (ii) if fewer than the full number of shares
of Convertible Preferred Stock evidenced by the surrendered certificate or
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certificates are being converted, a new certificate or certificates of like
tenor for the number of shares evidenced by such surrendered certificate or
certificates less the number of shares converted.
(ii) During such times as any shares of Convertible Preferred
Stock are outstanding, the Corporation shall reserve and keep available out
of its authorized but unissued stock, for the purpose of effecting the
conversion of Convertible Preferred Stock, such number of its duly
authorized shares of Common Stock as shall from time to time be sufficient
to effect the conversion of all outstanding shares of Convertible Preferred
Stock.
(iii) All shares of Convertible Preferred Stock which shall
have been surrendered for conversion as herein provided shall no longer be
deemed to be outstanding and all rights with respect to such shares
(including the rights, if any, to receive notices and to vote) shall
immediately cease and terminate on the Conversion Date, except only the
right of the holders thereof to receive shares of Common Stock in exchange
therefor. Such conversions shall be deemed to have been made at the close
of business on the Conversion Date and the converting holder shall be
treated for all purposes as having become the record holder of such Common
Stock at such time. Any shares of Convertible Preferred Stock so converted
shall be retired and canceled and shall not be reissued, and the
Corporation may from time to time take such appropriate action as may be
necessary to reduce the authorized Convertible Preferred Stock accordingly.
(d) Anti-dilution Provisions
------------------------
(i) Adjustments; Capital Stock. The Series A Senior Preferred
--------------------------
Stock Conversion Price set forth above shall be subject to adjustment from
time to time as hereinafter provided. For purposes of this Section 5, the
term "Capital Stock" as used herein includes the Corporation's Common Stock
and shall also include any capital stock of any class of the Corporation
thereafter authorized which shall not be limited to a fixed sum or
percentage in respect of the rights of the holders thereof to participate
in dividends and in the distribution of assets upon the voluntary or
involuntary liquidation, dissolution or winding up of the Corporation.
(ii) Adjustment of Series A Senior Preferred Stock Conversion
--------------------------------------------------------
Price Upon Issuance of Additional Shares of Capital Stock
---------------------------------------------------------
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(A) In case the Corporation, at any time or from time to
time after the Issue Date shall issue or sell Additional Shares of
Capital Stock without considera-tion or for a consideration per share
less than the greater of the Series A Senior Preferred Stock
Conversion Price or the Market Price in effect, in each case, on the
date of such issue or sale, then, and in each such case, subject to
Section 5(d)(viii), the Series A Senior Preferred Stock Conversion
Price shall be reduced, concurrently with such issue or sale, to a
price (calculated to the nearest .001 of a cent) determined by
multiplying such Series A Senior Preferred Stock Conversion Price by a
fraction:
(1) the numerator of which shall be (a) the number of shares
of Capital Stock outstanding immediately prior to such issue or
sale plus (b) the number of shares of Capital Stock which the
aggregate consideration received by the Corporation for the total
number of such Additional Shares of Capital Stock so issued or
sold would purchase at the greater of such Market Price or such
Series A Senior Preferred Stock Conversion Price, and
(2) the denominator of which shall be the number of shares
of Capital Stock outstanding immediately after such issue or
sale,
provided that, for the purposes of this Section 5(d)(ii)(A), (w)
immediately after any Additional Shares of Capital Stock are deemed to have
been issued pursuant to Section 5(d)(iii) or 5(d)(iv), such Additional
Shares shall be deemed to be outstanding, and (x) treasury shares shall not
be deemed to be outstanding; and provided further that, for the purposes of
this Section 5(d)(ii)(A), (y) the crediting of shares of the Corporation's
Common Stock to participating real estate salespersons under the
Corporation's Deferred Equity Program which was adopted by the Corporation
on October 18, 1989 shall cause an adjustment in the Series A Senior
Preferred Stock Conversion Price concurrently with such crediting of the
shares of the Corporation's Common Stock and (z) the issuance of such
shares previously credited to participating real estate salespersons under
the Corporation's Deferred Equity Program shall not cause an adjustment in
the Series A Senior Preferred Stock Conversion Price.
(B) In case the Corporation, at any time or from time to
time after the Issue Date, shall declare,
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order, pay or make a dividend or other distribution (including,
without limitation, any distribution of other or additional stock or
other securities or property or Options by way of dividend or spinoff,
reclassification, recapitalization or similar corporate rearrangement)
on the Capital Stock, other than (1) a dividend payable in Additional
Shares of Capital Stock or in Options for Capital Stock or Convertible
Securities or (2) a dividend payable in cash or other property and
declared out of retained earnings of the Corporation, then, and in
each such case, subject to Section 5(d)(viii), the Series A Senior
Preferred Stock Conversion Price in effect immediately prior to the
close of business on the record date fixed for the determination of
holders of any class of securities entitled to receive such dividend
or distribution shall be reduced, effective as of the close of
business on such record date, to a price (calculated to the nearest
.001 of a cent) determined by multiplying the Series A Senior
Preferred Stock Conversion Price by a fraction:
(1) the numerator of which shall be the Market Price in
effect on such record date or, if any class of Capital Stock
trades on an ex-dividend basis, on the date prior to the
commencement of ex-dividend trading, less the value of such
dividend or distribution which has not been declared out of
retained earnings (as determined in good faith by the Board of
Directors of the Corporation) applicable to one share of Capital
Stock, and
(2) the denominator of which shall be such Market Price.
(iii) Treatment of Options and Convertible Securities. In case
-----------------------------------------------
the Corporation, at any time or from time to time after the Issue Date,
shall issue, sell, grant or assume, or shall fix a record date for the
determination of holders of any class of securities entitled to receive,
any Options or Convertible Securities, then, and in each such case, the
maximum number of Additional Shares of Capital Stock (as set forth in the
instrument relating thereto, without regard to any provisions contained
therein for a subsequent adjustment of such number) issuable upon the
exercise of such Options or, in the case of Convertible Securities and
Options therefor, the conversion or exchange of such Convertible
Securities, shall be deemed to be Additional Shares of Capital Stock issued
as of the time of such issue, sale, grant or assumption or, in case such a
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record date shall have been fixed, as of the close of business on such
record date, provided that such Additional Shares of Capital Stock shall
not be deemed to have been issued unless the consideration per share
(determined pursuant to Section 5(d)(v)) of such shares would be less than
the greater of the applicable Conversion Price or the Market Price in
effect, in each case, on the date of and immediately prior to such issue,
sale, grant or assumption or immediately prior to the close of business on
such record date or, if the Capital Stock trades on an ex-dividend basis,
on the date prior to the commencement of ex-dividend trading, as the case
may be, and provided, further, that in any such case in which Additional
Shares of Capital Stock are deemed to be issued,
(A) no further adjustment of the Series A Senior Preferred
Conversion Price shall be made upon the subsequent issue or sale of
Additional Shares of Capital Stock or Convertible Securities upon the
exercise of such Options or the conversion or exchange of such
Convertible Securities;
(B) if such Options or Convertible Securities by their terms
provide, with the passage of time or otherwise, for any change in the
consideration payable to the Corporation, or change in the number of
Additional Shares of Capital Stock issuable, upon the exercise,
conversion or exchange thereof (by change of rate or otherwise), the
Conversion Price computed upon the original issue, sale, grant or
assumption thereof (or upon the occurrence of the record date with
respect thereto), and any subsequent adjustments based thereon, shall,
upon any such change becoming effective, be recomputed to reflect such
change insofar as it affects such Options, or the rights of conversion
or exchange under such Convertible Securities, which are outstanding
at such time;
(C) upon the expiration of any such Options or of the rights
of conversion or exchange under any such Convertible Securities which
shall not have been exercised (or upon purchase by the Corporation and
cancellation or retirement of any such Options which shall not have
been exercised or of any such Convertible Securities the rights of
conversion or exchange under which shall not have been exercised), the
Conversion Price computed upon the original issue, sale, grant or
assumption thereon (or upon the occurrence of the record date with
respect thereto), and any subsequent adjustments based thereon, shall,
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upon such expiration (or such cancellation or retirement, as the case
may be), be recomputed as if:
(1) in the case of Options for Capital Stock or of
Convertible Securities, the only Additional Shares of Capital
Stock issued or sold (or deemed issued or sold) were the
Additional Shares of Capital Stock, if any, actually issued or
sold upon the exercise of such Options or the conversion or
exchange of such Convertible Securities and the consideration
received therefor were (a) an amount equal to (i) the
consideration actually received by the Corporation for the issue,
sale, grant or assumption of all such Options, whether or not
exercised, plus (ii) the consideration actually received by the
Corporation upon such exercise, minus (iii) the consideration
paid by the Corporation for any purchase of such Options which
were not exercised, or (b) an amount equal to (i) the
consideration actually received by the Corporation for the issue,
sale, grant or assumption of all such Convertible Securities
which were actually converted or exchanged, plus (ii) the
additional consideration, if any, actually received by the
Corporation upon such conversion or exchange, minus (iii) the
excess, if any, of the consideration paid by the Corporation for
any purchase of such Convertible Securities, the rights of
conversion or exchange under which were not exercised, over an
amount that would be equal to the fair value (as determined in
good faith by the Board of Directors of the Corporation) of the
Convertible Securities so purchased if such Convertible
Securities were not convertible into or exchangeable for
Additional Shares of Capital Stock, and
(2) in the case of Options for Convertible Securities, only
the Convertible Securities, if any, actually issued or sold upon
the exercise of such Options were issued at the time of the
issue, sale, grant or assumption of such Options, and the
consideration received by the Corporation for the Additional
Shares of Capital Stock deemed to have then been issued were an
amount equal to (a) the consideration actually received by the
Corporation for the issue, sale, grant or assumption of all such
Options, whether or not exercised, plus (b) the consideration
deemed to have been received by the Corporation (pursuant to
Section 5(d)(v)) upon
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the issue or sale of the Convertible Securities with respect to
which such Options were actually exer-cised, minus (c) the
consideration paid by the Corporation for any purchase of such
Options which were not exercised.
(iv) Treatment of Stock Dividends, Stock Splits, Etc.; Certain
---------------------------------------------------------
Stock Repurchases
-----------------
(A) In case the Corporation, at any time or from time to
time after the Issue Date, shall declare or pay any dividend or other
distribution on the Capital Stock payable in Capital Stock, or shall
effect a subdivision of the outstanding shares of Capital Stock into a
greater number of shares of Capital Stock (by reclassification or
otherwise than by payment of a dividend in Capital Stock), then, and
in each such case, Additional Shares of Capital Stock shall be deemed
to have been issued (1) in the case of any such dividend, immediately
after the close of business on the record date for the determination
of holders of any class of securities entitled to receive such
dividend, or (2) in the case of any such subdivision, at the close of
business on the day immediately prior to the day upon which such
corporate action becomes effective.
(B) If the Corporation at any time or from time to time
after the Issue Date shall, directly or indirectly, including through
a Subsidiary (as defined below) or otherwise, purchase, redeem or
otherwise acquire (a "Repurchase") any of its Capital Stock at a price
per share greater than the Market Price, then the Series A Senior
Preferred Stock Conversion Price upon each such Repurchase shall be
adjusted to the price determined by multiplying the Series A Senior
Preferred Stock Conversion Price by a fraction (1) the numerator of
which shall be the number of shares of Capital Stock outstanding
immediately prior to the such Repurchase minus the number of shares of
Capital Stock which the aggregate consideration for total repurchased
Capital Stock would purchase at the Market Price; and (2) the
denominator of which shall be the number of shares of Capital Stock
outstanding immediately after such Repurchase. For the purposes of
this Subsection 5(d)(iv)(B), the date as of which the Series A Senior
Preferred Stock Conversion Price shall be computed shall be the
earlier of (x) the date on which the Corporation shall enter into
contract for the Repurchase of such Capital Stock, or (y) the date of
the actual Repurchase of such Capital Stock. For
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purposes of this Section 5(d)(iv)(B), a Repurchase of Convertible
Securities shall be deemed to be a Repurchase of the underlying
Capital Stock, and the computation herein required shall be made on
the basis of the full exercise, conversion or exchange for such
Convertible Securities on the date as of which such computation is
required hereby to be made even if such Convertible Securities are not
exercisable, convertible or exchangeable on such date.
(v) Computation of Consideration. For the purposes of this
----------------------------
Section 5:
(A) The consideration for the issue or sale of any
Additional Shares of Capital Stock or for the issue, sale, grant or
assumption of any Options or Convertible Securities, irrespective of
the accounting treatment of such consideration,
(1) insofar as it consists of cash, shall be computed as the
amount of cash received by the Corporation, and insofar as it
consists of securities or other non-cash consideration, shall be
computed as of the date immediately preceding such issue, sale,
grant or assumption as the fair value (as determined in good
faith by the Board of Directors of the Corporation) of such
consideration (or, if such consideration is received for the
issue or sale of Additional Shares of Capital Stock and the
Market Price thereof is less than the fair value, as so
determined, of such consideration, then such con-sideration shall
be computed as the Market Price of such Additional Shares of
Capital Stock), in each case without deducting any expenses paid
or incurred by the Corporation, any commissions or compensation
paid or concessions or discounts allowed to underwriters, dealers
or others performing similar services and any accrued interest or
dividends in connection with such issue or sale, and
(2) in case Additional Shares of Capital Stock are issued or
sold or Options or Convertible Securities are issued, sold,
granted or assumed together with other stock or securities or
other assets of the Corporation for a consideration which covers
both, shall be the proportion of such consideration so received,
computed as provided in
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subsection (1) above, allocable to such Additional Shares of
Capital Stock or Options or Convertible Securities, as the case
may be, all as determined in good faith by the Board of Directors
of the Corporation.
(B) All Additional Shares of Capital Stock, Options or
Convertible Securities issued in payment of any dividend or other
distribution on any class of stock of the Corporation and all
Additional Shares of Capital Stock issued to effect a subdivision of
the outstanding shares of Capital Stock into a greater number of
shares of Capital Stock (by reclassification or otherwise than by
payment of a dividend in Capital Stock) shall be deemed to have been
issued without consideration.
(C) Additional Shares of Capital Stock deemed to have been
issued for consideration pursuant to Section 5(d)(iii), relating to
Options and Convertible Securities, shall be deemed to have been
issued for a consideration per share determined by dividing
(1) the total amount, if any, received and receivable by the
Corporation as consideration for the issue, sale, grant or
assumption of the Options or Convertible Securities in question,
plus the minimum aggregate amount of additional consideration (as
set forth in the instruments relating thereto, without regard to
any provision contained therein for a subsequent adjustment of
such consideration) payable to the Corporation upon the exercise
in full of such Options or the conversion or exchange of such
Convertible Securities or, in the case of Options for Convertible
Securities, the exercise of such Options for Convertible
Securities and the conversion or exchange of such Convertible
Securities, in each case comprising such consideration as
provided in the foregoing subsection (A), by
(2) the maximum number of shares of Capital Stock (as set
forth in the instruments relating thereto, without regard to any
provision contained therein for a subsequent adjustment of such
number) issuable upon the exercise of such Options or the
conversion or exchange of such Convertible Securities.
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(D) In case the Corporation shall issue any Additional
Shares of Capital Stock, Options or Convertible Securities in
connection with the acquisition by the Corporation of the stock or
assets of any other corporation or the merger of any other corporation
into the Corporation under circumstances where on the date of issue of
such Additional Shares of Capital Stock, Options or Convertible
Securities the consideration received for such Additional Shares of
Capital Stock or deemed to have been received for the Additional
Shares of Capital Stock deemed to be issued pursuant to Section
5(d)(iii) is less than the Market Price of the Capital Stock in effect
immediately prior to such issue but on the date the number of
Additional Shares of Capital Stock or the amount and the exercise
price or conversion price of such Options or Convertible Securities to
be so issued were set forth in a binding agreement between the
Corporation and the other party or parties to such transaction the
consideration received for such Additional Shares of Capital Stock or
deemed to have been received for the Additional Shares of Capital
Stock deemed to be issued pursuant to Section 5(d)(iii) would not have
been less than the Market Price of the Capital Stock then in effect,
such Additional Shares of Capital Stock shall not be deemed to have
been issued for less than the Market Price of the Capital Stock if
such terms so set forth in such binding agreement are not changed
prior to the date of issue.
(vi) Adjustments for Combinations, Etc. In case the
---------------------------------
outstanding shares of Capital Stock shall be combined or consolidated, by
reclassification or otherwise, into a lesser number of shares of Capital
Stock, the Conversion Prices in effect immediately prior to such
combination or consolidation shall, concurrently with the effectiveness of
such combination or consolidation, be proportionately increased.
(vii) Dilution in Case of Other Securities. In case any
------------------------------------
Other Securities shall be issued or sold or shall become subject to issue
or sale upon the conversion or ex-change of any securities of the
Corporation or to subscription, purchase or other acquisition pursuant to
any options issued or granted by the Corporation for a consideration such
as to dilute, on a basis to which the standards established in the other
provisions of this Section 5 are applicable, the conversion rights of the
holders of the Series A Senior Preferred Stock, then, and in
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each such case, the computations, adjustments and readjustments provided
for in this Section 5 with respect to the applicable Conversion Price shall
be made as nearly as possible in the manner so provided and applied to
determine the amount of Other Securities from time to time receivable upon
the conversion of the Series A Senior Preferred Stock, so as to protect the
holders of the Series A Senior Preferred Stock against the effect of such
dilution.
(viii) Minimum Adjustment and Timing of Adjustment of
----------------------------------------------
Conversion Price
----------------
(A) If the amount of any adjustment of the Series A Senior
Preferred Stock Conversion Price required pursuant to this Section 5
would be less than one percent (1%) of such Conversion Price in effect
at the time such adjustment is otherwise so required to be made, such
amount shall be carried forward and adjustment with respect thereto
made at the time of and together with any subsequent adjustment which,
together with such amount and any other amount or amounts so carried
forward, shall aggregate at least one percent (1%) of such Conversion
Price; provided that, upon the conversion of any shares of Series A
Senior Preferred Stock, all adjustments carried forward and not
theretofore made up to and including the date of such conversion
shall, with respect to the Series A Senior Preferred Stock then
converted, be made to the nearest .001 of a cent.
(B) Each Series A Senior Preferred Conversion Price shall be
adjusted within 90 days of the end of each fiscal year of the
Corporation with respect to events subject to the anti-dilution
provisions of the Series A Senior Preferred Stock which have occurred
during such fiscal year; provided that, upon the conversion of any
shares of Series A Senior Preferred Stock, all adjustments carried
forward and not theretofore made up to and including the date of such
conversion shall, with respect to the shares of Series A Senior
Preferred Stock then converted, be made to the nearest .001 of a cent
and provided further that the applicable Series A Senior Preferred
Conversion Price shall also be adjusted prior to any transfer or other
disposition of any Series A Senior Preferred Stock and promptly at any
time upon the request of the holder of any Series A Senior Preferred
Stock, subject to the provisions of clause 5(d)(viii)(A) above.
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(ix) Changes in Capital Stock; Series A Senior Preferred Stock.
---------------------------------------------------------
In case at any time the Corporation shall be a party to any transaction
(including, without limitation, a merger, consolidation, sale of all or
substantially all of the Corporation's assets, liquidation or
recapitalization of the Capital Stock) in which the previously outstanding
Capital Stock shall be changed into or exchanged for different securities
of the Corporation or common stock or other securities of another
corporation or interests in a noncorporate entity or other property
(including cash) or any combination of any of the foregoing or in which the
Capital Stock ceases to be a publicly traded security either listed on the
New York Stock Exchange or the American Stock Exchange or quoted by NASDAQ
or any successor thereto or comparable system (each such transaction being
herein called the "Transaction," the date of consummation of the
Transaction being herein called the "Consummation Date," the Corporation
(in the case of a recapitalization of the Capital Stock or any other such
transaction in which the Corporation retains substantially all of its
assets and survives as a corporation) or such other corporation or entity
(in each other case) being herein called the "Acquiring Company," and the
common stock (or equivalent equity interests) of the Acquiring Company
being herein called the "Acquirer's Common Stock"), then, as a condition of
the consummation of the Transaction, lawful and adequate provisions shall
be made so that each holder of Series A Senior Preferred Stock, upon the
conversion thereof at any time on or after the Consummation Date (but
subject, in the case of an election pursuant to clause (B) or (C) below, to
the time limitation hereinafter provided for such election),
(A) shall be entitled to receive, and any Series A Senior
Preferred Stock shall thereafter represent the right to receive, in
lieu of the Common Stock issuable upon such conversion prior to the
Consummation Date, such number of shares of the Acquirer's Common
Stock as are issuable in exchange for each share of Common Stock,
unless the Acquiring Company fails to meet the requirements set forth
in clauses (D), (E) and (F) below, in which case shares of the common
stock of the corporation (herein called a "Parent") which directly or
indirectly controls the Acquiring Company if it meets the requirements
set forth in clauses (D), (E) and (F) below, at an aggregate
conversion price for such number of shares equal to the lesser of (1)
the Conversion Price in effect immediately prior to the Consummation
Date multiplied by a fraction the numerator of which is the aggregate
market price for such number of shares
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<PAGE>
(determined in the same manner as provided in the definition of Market
Price) of the Acquirer's Common Stock or the Parent's common stock, as
the case may be, immediately prior to the Consummation Date and the
denominator of which is the Market Price per share of Common Stock
immediately prior to the Consummation Date, or (2) the aggregate
market price for such number of shares (as so determined) of the
Acquirer's Common Stock or the Parent's common stock, as the case may
be, immediately prior to the Consummation Date (subject in each case
to adjustments from and after the Consummation Date as nearly
equivalent as possible to the adjustments provided for in this Section
5),
or at the election of the holder of such Series A Senior Preferred Stock
pursuant to notice given to the Corporation on or before the later of (1)
the thirtieth day following the Consummation Date, and (2) the sixtieth day
following the date of delivery or mailing to such holder of the last proxy
statement relating to the vote on the Transaction by the holders of the
Capital Stock,
(B) shall be entitled to receive, and any Series A Senior
Preferred Stock shall thereafter represent the right to receive, in
lieu of the Capital Stock issuable upon such conversion prior to the
Consummation Date, the highest amount of securities or other property
to which such holder would actually have been entitled as a
stockholder upon the consummation of the Transaction if such holder
had converted such Series A Senior Preferred Stock immediately prior
thereto (subject to adjustments from and after the Consummation Date
as nearly equivalent as possible to the adjustments provided for in
this Section 5), provided that if a purchase, tender or exchange offer
shall have been made to and accepted by the holders of more than 50%
of the outstanding shares of Capital Stock, and if the holder of such
Series A Senior Preferred Stock so designates in such notice given to
the Corporation, the holder of such Series A Senior Preferred Stock
shall be entitled to receive in lieu thereof, the highest amount of
securities or other property to which such holder would actually have
been entitled as a stockholder if such holder had converted such
Series A Senior Preferred Stock prior to the expiration of such
purchase, tender or exchange offer and accepted such offer (subject to
adjustments from and after the consummation of such purchase, tender
or exchange offer as nearly equivalent as possible to the adjustments
provided for in this Section 5),
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or, if neither the Acquiring Company nor the Parent meets the requirements
set forth in clauses (D), (E) and (F) below, at the election of the holder
of Series A Senior Preferred Stock pursuant to notice given to the
Corporation on or before the later of (1) the thirtieth day following the
Consummation Date, and (2) the sixtieth day following the date of delivery
or mailing to such holder of the last proxy statement relating to the vote
on the Transaction by the holders of the Common Stock,
(C) shall be entitled to receive, within 15 days after such
election, in full satisfaction of the Conversion Rights afforded to
the Series A Senior Preferred Stock held by such holder under this
Section 5, an amount equal to the fair market value of such conversion
rights as determined by an independent investment banker (with an
established national reputation as a valuer of equity securities)
selected by the Corporation, such fair market value to be determined
with regard to all material relevant factors but without regard to the
effects on such value of the Transaction.
The Corporation agrees to obtain, and deliver to each holder of Series A
Senior Preferred Stock a copy of, the determination of an independent
investment banker (selected by the Corporation and reasonably satisfactory
to the holders of Series A Senior Preferred Stock) necessary for the
valuation under clause (C) above within 15 days after the Consummation Date
of any Transaction to which clause (C) is applicable.
The requirements referred to above in the case of the
Acquiring Company or its Parent are that immediately after the Consummation
Date:
(D) it is a solvent corporation organized under the laws of
any State of the United States of America having its common stock
listed on the New York Stock Exchange or the American Stock Exchange
or quoted by NASDAQ or any successor thereto or comparable system, and
such common stock continues to meet such requirements for such listing
or quotation,
(E) it is required to file, and in each of its three fiscal
years immediately preceding the Consummation Date has filed, reports
with the Securities and Exchange Commission pursuant to Section
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13 or 15(d) of the Securities Exchange Act of 1934, as amended, and
(F) in the case of the Parent, such Parent is required to
include the Acquiring Company in the consolidated financial statements
contained in the Parent's Annual Report on Form 10-K as filed with the
Securities and Exchange Commission and is not itself included in the
consolidated financial statements of any other Person (other than its
consolidated subsidiaries).
Notwithstanding anything contained herein to the contrary, the Corporation
shall not effect any Transaction unless prior to the consummation thereof
each corporation or entity (other than the Corporation) which may be
required to deliver any securities or other property upon the conversion of
Series A Senior Preferred Stock, the surrender of Series A Senior Preferred
Stock or the satisfaction of conversion rights as provided herein shall
assume, by written instrument delivered to each holder of Series A Senior
Preferred Stock, the obligation to deliver to such holder such securities
or other property to which, in accordance with the foregoing provisions,
such holder may be entitled, and such corporation or entity shall have
similarly delivered to each holder of Series A Senior Preferred Stock an
opinion of counsel for such corporation or entity, satisfactory to each
holder of Series A Senior Preferred Stock, which opinion shall state that
all the outstanding Series A Senior Preferred Stock, including, without
limitation, the conversion provisions applicable thereto, if any, shall
thereafter continue in full force and effect and shall be enforceable
against such corporation or entity in accordance with the terms hereof and
thereof, together with such other matters as such holders may reasonably
request.
(x) Treatment of Stock Dividends, Stock Splits, Etc.; Certain
---------------------------------------------------------
Transactions. In case the Corporation, at any time or from time to time
------------
after the Issue Date, shall be a party to any Transaction, each holder of
Series B Senior Preferred Stock and each holder of Junior Convertible
Preferred Stock, upon the exercise thereof at any time on or after the
Consummation Date shall be entitled to receive, and such Series B Senior
Preferred Stock and Junior Convertible Preferred Stock shall thereafter
represent the right to receive, in lieu of the Common Stock issuable upon
conversion prior to the Consummation Date the kind and amount of securities
or property (including cash) which it would have owned or have been
entitled to receive after the happening of such Transaction had such Series
B Senior
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Preferred Stock or Junior Convertible Preferred Stock been converted
immediately prior to such Transaction.
Notwithstanding anything contained herein to the contrary, the
Corporation shall not effect any Transaction unless prior to the
consummation thereof each corporation or entity (including, without
limitation, the Corporation) which may be required to deliver any
securities or property (including cash) upon the conversion of Series B
Senior Preferred Stock or Junior Convertible Preferred Stock, the surrender
of Series B Senior Preferred Stock or Junior Convertible Preferred Stock or
the satisfaction of conversion rights as provided herein shall assume, by
written instrument delivered to each holder of Series B Senior Preferred
Stock or Junior Convertible Preferred Stock, the obligation to deliver to
such holder such securities or other property to which, in accordance with
the foregoing provisions, such holder may be entitled, and such corporation
or entity shall have similarly delivered to each holder of Series B Senior
Preferred Stock or Junior Convertible Preferred Stock an opinion of counsel
for such corporation or entity, satisfactory to each such holder, which
opinion shall state that all the rights and privileges, including without
limitation, conversion privileges of the Series B Senior Preferred Stock
and the Junior Convertible Preferred Stock shall thereafter continue in
full force and effect and shall be enforceable against such corporation or
entity in accordance with the terms hereof and thereof, together with such
other matters as such holders may reasonably request.
In case the Corporation shall (i) pay a dividend in shares of
Capital Stock or securities convertible into Capital Stock or make a
distribution to all holders of shares of Capital Stock in shares of Capital
Stock or securities convertible into Capital Stock, (ii) subdivide its
outstanding shares of Capital Stock, (iii) combine its outstanding shares
of Capital Stock into a smaller number of shares of Capital Stock or (iv)
issue by reclassification of its shares of Capital Stock other securities
of the Corporation, the Series B Preferred Stock Conversion Price and the
Junior Preferred Stock Conversion Price shall be adjusted (to the nearest
cent) by multiplying, (x) in the case of the Series B Senior Preferred
Stock, the Series B Preferred Stock Conversion Price immediately prior to
such adjustment by a fraction, of which the numerator shall be the number
of shares of Capital Stock outstanding immediately prior to the occurrence
of such event, and of which the denominator shall be the number of shares
of Capital Stock outstanding (including any convertible
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securities issued pursuant to clause (i) or (iv) above on an as converted
basis) immediately thereafter, or (y) in the case of the Junior Preferred
Stock Conversion Price, the Junior Preferred Stock Conversion Price
immediately prior to such adjustment by a fraction, of which the numerator
shall be the number of shares of Capital Stock outstanding immediately
prior to the occurrence of such event, and of which the denominator shall
be the number of shares of Capital Stock outstanding (including any
convertible securities issued pursuant to clause (i) or (iv) above on an as
converted basis) immediately thereafter. An adjustment made pursuant to the
foregoing sentence shall become effective immediately after the effective
date of such event retroactive to the record date, if any, for such event.
(xi) Certain Issues and Repurchases Excepted. Anything herein
---------------------------------------
to the contrary notwithstanding, the Corporation shall not be required to
make any adjustment of the Series A Senior Preferred Conversion Prices in
the case of (A) the issuance of shares of the Senior Convertible Preferred
Stock on the Issue Date and the issuance of shares of Series A Senior
Preferred Stock and Series B Senior Preferred Stock pursuant to this
Article IV upon the filing of the Certificate of Amendment as described
herein, (B) the issuance of shares of the Junior Convertible Preferred
Stock on the Issue Date, (C) the issuance of warrants to purchase shares of
Common Stock (the "Warburg Warrants") concurrently with the issuance of the
Senior Convertible Preferred Stock on January 29, 1993 (the "Restructuring
Date"), and any amendments to such Warburg Warrants through the date of
filing of the Certificate of Amendment, (D) the issuance to The Prudential
Insurance Company of America ("Prudential") of warrants to purchase shares
of Common Stock (the "New Prudential Warrants") concurrently with the
issuance of the Junior Convertible Preferred Stock, and any amendments to
such New Prudential Warrants through the date of filing of the Certificate
of Amendment, (E) the issuance of warrants to purchase shares of Common
Stock (the "1994 Warrants") concurrently with the filing of this
Certificate of Amendment, and any amendments to such 1994 Warrants, (F) the
issuance of shares of Capital Stock issuable upon conversion of the
Convertible Preferred Stock or upon exercise of the Warburg Warrants, the
New Prudential Warrants, the 1994 Warrants, the Stock Subscription Warrant,
dated as of November 25, 1986, by the Corporation to Prudential or any
other Option or right outstanding on the Issue Date to purchase or
otherwise acquire Capital Stock, (G) the granting by the Corporation, after
the Issue Date, of Options to purchase Capital Stock or the sale or grant,
after the Issue Date, of Capital Stock, pursuant to option
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or stock purchase plans or agreements, or other incentive compensation
plans or agreements, heretofore or hereafter adopted in respect of, or
entered into with, directors, officers, employees or salespersons (other
than pursuant to the Corporation's Preferred Equity Program) of the
Corporation or any of its Subsidiaries in connection with their employment,
being directors or acting as salesperson, provided that the consideration
for the sale or grant of any such Options or Capital Stock (including the
exercise price of any Option) is at least equal to the Market Price of such
shares of Capital Stock on the date such Options are granted or the date
established by any such plan for a purchase thereunder, as the case may be,
(H) the Repurchase from any director, officer, employee or salesperson of
the Corporation or any Subsidiary of any Option or share of Capital Stock
upon his resignation or other termination from being a director, officer,
employee or salesperson of the Corporation or any Subsidiary or (I) the
issuance of shares of Common Stock in payment of the redemption price of
the Rights issued pursuant to the Rights Agreement, dated as of March 13,
1989, as amended, between the Corporation and Bank of America N.T. & S.A.,
as Rights Agent.
(xii) Notice of Adjustment. Upon the occurrence of any event
--------------------
requiring an adjustment of any Conversion Price, then and in each such case
the Corporation shall promptly deliver to each holder of Convertible
Preferred Stock a certificate signed by the President or any Vice President
and the Secretary or any Assistant Secretary of the Corporation (an
"Officers' Certificate") stating the applicable Conversion Price resulting
from such adjustment and the increase or decrease, if any, in the number of
shares of Common Stock issuable upon conversion of such Convertible
Preferred Stock, setting forth in reasonable detail the method of
calculation and the facts upon which such calculation is based. Within 90
days after each fiscal year in which any such adjustment shall have
occurred, or within 30 days after any request therefor by any holder of
Convertible Preferred Stock stating that such holder contemplates
conversion of such Convertible Preferred Stock, the Corporation will obtain
and deliver to each holder of Convertible Preferred Stock the opinion of
its regular independent auditors or another firm of independent public
accountants of recognized national standing selected by the Corporation's
Board of Directors who are satisfactory to the registered holders of a
majority of the Convertible Preferred Stock, which opinion shall confirm
the statements in the most recent Officers' Certificate delivered under
this Section 5(d)(xi). It is understood and agreed that the independent
public accountant rendering any such opinion
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<PAGE>
shall be entitled expressly to assume in such opinion the accuracy of any
determination of fair value made by the Board of Directors of the
Corporation pursuant to Section 5(d)(v).
(xiii) Other Notices. In case at any time:
-------------
(A) the Corporation shall declare or pay to the holders of
Capital Stock any dividend other than a regular periodic cash dividend
or any periodic cash dividend in excess of 115% of the cash dividend
for the comparable fiscal period in the immediately preceding fiscal
year;
(B) the Corporation shall declare or pay any dividend upon
Capital Stock payable in stock or make any special dividend or other
distribution (other than regular cash dividends) to the holders of
Capital Stock;
(C) the Corporation shall offer for subscription pro rata to
the holders of Capital Stock any additional shares of stock of any
class or other rights;
(D) there shall be any capital reorganization, or
reclassification of the Capital Stock of the Corporation, or
consolidation or merger of the Corporation with, or sale of all or
substantially all of its assets to, another corporation or other
entity;
(E) there shall be a voluntary or involuntary dissolution,
liquidation or winding-up of the Corporation; or
(F) there shall be any other Transaction;
then, in any one or more of such cases, the Corporation shall give to each
holder of Convertible Preferred Stock (1) at least 15 days prior to any
event referred to in clause (A) or (B) above, at least 30 days prior to any
event referred to in clause (C), (D) or (E) above, and within five business
days after it has knowledge of any pending Transaction, written notice of
the date on which the books of the Corporation shall close or a record
shall be taken for such dividend, distribution or subscription rights or
for determining rights to vote in respect of any such reorganization,
reclassification, consolidation, merger, sale, dissolution, liquidation,
winding-up or Transaction
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<PAGE>
and (2) in the case of any such reorganization, reclassification,
consolidation, merger, sale, dissolution, liquidation, winding-up or
Transaction known to the Corporation, at least 30 days prior written notice
of the date (or, if not then known, a reasonable approximation thereof by
the Corporation) when the same shall take place. Such notice in accordance
with the foregoing clause (1) shall also specify, in the case of any such
dividend, distribution or subscription rights, the date on which the
holders of Capital Stock shall be entitled thereto, and such notice in
accordance with the foregoing clause (2) shall also specify the date on
which the holders of Capital Stock shall be entitled to exchange their
Capital Stock for securities or other property deliverable upon such
reorganization, reclassification, consolidation, merger, sale, dissolution,
liquidation, winding-up or Transaction, as the case may be. Such notice
shall also state that the action in question or the record date is subject
to the effectiveness of a registration statement under the Securities Act
of 1933, as amended, or to a favorable vote of security holders, if either
is required.
(xiv) Certain Events. If any event occurs as to which, in
--------------
the good faith judgment of the Board of Directors of the Corporation, the
other provisions of this Section 5 are not strictly applicable or if
strictly applicable would not fairly protect the conversion rights of the
holders of the Series A Senior Preferred Stock in accordance with the
essential intent and principles of such provisions, then the Board of
Directors of the Corporation shall appoint its regular independent auditors
or another firm of independent public accountants of recognized national
standing who are satisfactory to the holders of a majority of the Series A
Senior Preferred Stock which shall give their opinion upon the adjustment,
if any, on a basis consistent with such essential intent and principles,
necessary to preserve, without dilution, the rights of the holders of the
Series A Senior Preferred Stock. Upon receipt of such opinion, the Board of
Directors of the Corporation shall forthwith make the adjustments described
therein; provided, that no such adjustment shall have the effect of
increasing any Series A Senior Preferred Stock Conversion Price as
otherwise determined pursuant to this Section 5. The Corporation may make
such reductions in the Series A Senior Preferred Conversion Price or
increase in the number of shares of Common Stock purchasable here-under as
it deems advisable, including any reductions or increases, as the case may
be, necessary to ensure that any event treated for Federal income tax
purposes as a
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distribution of stock or stock rights not be taxable to recipients.
(e) No Impairment. The Corporation shall not, by amendment of its
--------------
Certificate of Incorporation or through any reorganization, transfer of assets,
consolidation, merger, dissolution, issue or sale of securities or any other
voluntary action, avoid or seek to avoid the observance or performance of any of
the terms to be observed or performed hereunder by the Corporation, but shall at
all times in good faith assist in the carrying out of all the provisions of this
Section 5 and in the taking of all such action as may be necessary or
appropriate in order to protect the Conversion Rights of the holders of the
Series A Senior Preferred Stock against impairment.
(f) Mandatory Conversion. If (i) at all times during a two-year
--------------------
period prior to the date of conversion the ratio of Consolidated Debt to EBITDA
(each as defined below) of the Corporation has not exceeded 3.0:1.0, (ii) on
each Trading Day during a six-month period prior to the date of conversion the
Daily Market Price of the Common Stock has exceeded $8.75 per share, subject to
proportionate adjustment whenever there shall occur a stock split, combination,
reclassification or other similar event involving the Common Stock, and (iii)
the Corporation is in full compliance with all of the terms and conditions of
all agreements pursuant to which the Corporation or any Subsidiary shall have
incurred Indebtedness for borrowed money all, but not less than all, of the then
outstanding shares of Convertible Preferred Stock shall be converted into shares
of Common Stock as provided below. The Corporation shall provide written notice
of the occurrence of the foregoing events giving rise to such mandatory
conversion by United States certified or registered mail, postage prepaid,
mailed not more than 30 days thereafter to all holders of record of the shares
to be converted at such holders' addresses as the same appear on the stock
register of the Corporation. Each such notice shall state the proposed date on
which such mandatory conversion will occur (which date shall not be fewer than
30 days after the date notice thereof is received), the applicable Conversion
Price and the place or places where certificates for shares of the Convertible
Preferred Stock are to be surrendered for conversion. From and after the date of
mandatory conversion, the certificates for the Convertible Preferred Stock shall
be deemed to represent only the shares of Common Stock into which such shares of
Convertible Preferred Stock shall have been converted. The Holder of such
certificates shall surrender such certificates for conversion upon and pursuant
to the request of the Corporation.
(g) Certain Definitions. For purposes of this Article IV, the
-------------------
following terms shall have the following meanings:
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(i) "Additional Shares of Capital Stock" shall mean all shares
------------------------------------
(including treasury shares) of Capital Stock issued or sold (or,
pursuant to Sections 5(d)(iii) or 5(d)(iv) deemed to be issued) by the
Corporation after the Issue Date, whether or not subsequently
reacquired or retired by the Corporation, other than shares of Common
Stock issued upon the conversion of the Convertible Preferred Stock.
(ii) "Consolidated Debt" shall mean with respect to any
-------------------
Person, the total Indebtedness of such Person and its Subsidiaries on
a consolidated basis determined in accordance with GAAP.
(iii) "Convertible Securities" shall mean any evidences of
------------------------
indebtedness, shares of stock (other than Common Stock) or securities
directly or indirectly convertible into or exchangeable for Additional
Shares of Capital Stock.
(iv) "Daily Market Price" shall mean, on any date specified
--------------------
herein, (A) if any class of Capital Stock is listed or admitted to
trading on any national securities exchange, the average of the high
and low sale price of shares of each such class of Capital Stock or if
no such sale takes place on such date, the average of the highest
closing bid and lowest closing asked prices thereof on such date, in
each case as officially reported on all national securities exchanges
on which each such class of Capital Stock is then listed or admitted
to trading, or (B) if no shares of any class of Capital Stock are then
listed or admitted to trading on any national securities exchange, the
highest closing price of any class of Capital Stock on such date in
the over-the-counter market as shown by NASDAQ or, if no such shares
of any class of Capital Stock are then quoted in such system, as
published by the National Quotation Bureau, Incorporated or any
similar successor organization, and in either case as reported by any
member firm of the New York Stock Exchange selected by the
Corporation. If no shares of any class of Capital Stock are then
listed or admitted to trading on any national securities exchange and
if no closing bid and asked prices thereof are then so quoted or
published in the over-the-counter market, "Daily Market Price" shall
mean the higher of (x) the book value per share of Capital Stock
(assuming for the purposes of this
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calculation the economic equivalence of all shares of all classes of
Capital Stock) as determined on a fully diluted basis in accordance
with generally accepted accounting principles by a firm of independent
public accountants of recognized standing (which may be its regular
auditors) selected by the Board of Directors of the Corporation as of
the last day of any month ending within 60 days preceding the date as
of which the determination is to be made or (y) the fair value per
share of Capital Stock (assuming for the purposes of this calculation
the economic equivalence of all shares of all classes of Capital
Stock), as determined on a fully diluted basis in good faith by an
independent brokerage firm or Standard & Poor's Corporation (as
selected by the Board of Directors of the Corporation), as of a date
which is 15 days preceding the date as of which the determination is
to be made.
(v) "EBITDA" shall mean, with respect to any Person, for any
--------
period, the sum of (A) the net income of such Person and its
Subsidiaries on a consolidated basis before taxes, excluding
extraordinary items and income or loss from discontinued operations,
(B) total interest expense of such Person and its Subsidiaries on a
consolidated basis and (C) depreciation and amortization for such
Person and its Subsidiaries on a consolidated basis.
(vi) "GAAP" shall mean generally accepted accounting principles
------
set forth in the opinions and pronouncements of the Accounting
Principles Board of the American Institute of Certified Public
Accountants and statements and pronouncements of the Financial
Accounting Standards Board or in such other statements by such other
entity as may be approved by a significant segment of the accounting
profession.
(vii) "Indebtedness" shall mean, with respect to any Person, all
--------------
items (excluding items of contingency reserves or of reserves for
deferred income taxes) which in accordance with GAAP would be included
in determining total liabilities as shown on the liability side of a
balance sheet of such Person as of the date on which Indebtedness is
to be determined.
(viii) "Issue Date" shall mean the date on which shares of
------------
Convertible Preferred Stock are first issued by the Corporation.
"Issue Date" with respect to the shares of Series A Senior Preferred
Stock and Series B Senior Preferred Stock outstanding on the date of
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filing of the Certificate of Amendment shall be deemed to be the date
of issuance of the respective shares of Existing Senior Convertible
Preferred Stock which were exchanged for or converted into such shares
of Series A Senior Preferred Stock and Series B Senior Preferred
Stock.
(ix) "Market Price" shall mean, on any date specified herein,
--------------
(A) if any class of Capital Stock is listed or admitted to trading on
any national securities exchange, the highest price obtained by taking
the arithmetic mean over a period of 20 consecutive Trading Days
ending the second Trading Day prior to such date of the average, on
each such Trading Day, of the high and low sale price of shares of
each such class of Capital Stock or if no such sale takes place on
such date, the average of the highest closing bid and lowest closing
asked prices thereof on such date, in each case as officially reported
on all national securities exchanges on which each such class of
Capital Stock is then listed or admitted to trading, or (B) if no
shares of any class of Capital Stock are then listed or admitted to
trading on any national securities exchange, the highest closing price
of any class of Capital Stock on such date in the over-the-counter
market as shown by NASDAQ or, if no such shares of any class of
Capital Stock are then quoted in such system, as published by the
National Quotation Bureau, Incorporated or any similar successor
organization, and in either case as reported by any member firm of the
New York Stock Exchange selected by the Corporation. If no shares of
any class of Capital Stock are then listed or admitted to trading on
any national securities exchange and if no closing bid and asked
prices thereof are then so quoted or published in the over-the-counter
market, "Market Price" shall mean the higher of (x) the book value per
share of Capital Stock (assuming for the purposes of this calculation
the economic equivalence of all shares of all classes of Capital
Stock) as determined on a fully diluted basis in accordance with
generally accepted accounting principles by a firm of independent
public accountants of recognized standing (which may be its regular
auditors) selected by the Board of Directors of the Corporation as of
the last day of any month ending within 60 days preceding the date as
of which the determination is to be made or (y) the fair value per
share of Capital Stock (assuming for the purposes of this calculation
the economic equivalence of all shares of all classes of Capital
Stock), as determined on a
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fully diluted basis in good faith by an independent brokerage firm or
Standard & Poor's Corporation (as selected by the Board of Directors
of the Corporation), as of a date which is 15 days preceding the date
as of which the determination is to be made.
(x) "Options" shall mean rights, options or warrants to
---------
subscribe for, purchase or otherwise acquire either Additional Shares
of Capital Stock or Convertible Securities.
(xi) "Other Securities" shall mean any stock (other than
------------------
Capital Stock) and any other securities of the Corporation or any
other Person (corporate or otherwise) which the holders of the
Convertible Preferred Stock at any time shall be entitled to receive,
or shall have received, upon the conversion or partial conversion of
the Convertible Preferred Stock, in lieu of or in addition to Common
Stock, or which at any time shall be issuable or shall have been
issued in exchange for or in replacement of Common Stock or Other
Securities pursuant to Section 5(d)(ix) or otherwise.
(xii) "Person" shall mean any individual, firm,
--------
corporation or other entity, and shall include any successor (by
merger or otherwise) of such entity.
(xiii) "Subsidiary" shall mean any corporation or other entity
------------
the majority of the outstanding voting shares of which is at the time
owned (either alone or through Subsidiaries or together with
Subsidiaries) by the Corporation or another Subsidiary.
(xiv) "Trading Day" shall mean any day on which the New York
-------------
Stock Exchange is open for trading on a regular basis.
(xv) "Transaction" shall have the meaning set forth in Section
-------------
5(d)(ix).
(h) Junior Convertible Preferred Stock
----------------------------------
(i) In the event that the Corporation undertakes to sell its
Common Stock through an underwritten public offering (an "Offering"), and
if the underwriter advises the Corporation that in order to complete such
Offering on the most favorable terms to the Corporation it is necessary for
the Junior Convertible Preferred Stock to be retired, then the Corporation
may so notify the holders of the Junior Convertible Preferred Stock (the
"Conversion Notice"), and
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such holders shall, on or prior to the Conversion Date (as defined below)
convert their Junior Convertible Preferred Stock into Common Stock pursuant
to the terms of this Article IV. The holders of the Junior Convertible
Preferred Stock shall be obligated to convert their Junior Convertible
Preferred Stock only if (A) on or prior to the Conversion Date, all the
holders of the Series B Senior Preferred Stock shall have converted their
Series B Senior Preferred Stock into Common Stock, or all Series B Senior
Preferred Stock shall otherwise have been retired, and (B) the Market Price
of the Common Stock at the Conversion Date is greater than the sum of the
Junior Preferred Stock Stated Value plus accrued dividends per share of
Junior Convertible Preferred Stock (such sum being referred to herein as
the "Accreted Value"); provided that if at the Conversion Date, the Market
--------
Price of the Common Stock is less than the Accreted Value, then each holder
of the Junior Convertible Preferred Stock must either, at its option (A)
convert the Junior Convertible Preferred Stock into Common Stock on or
prior to the Conversion Date or (B) require the Corporation to redeem the
Junior Convertible Preferred Stock at the Accreted Value, in which case
such holder shall notify the Corporation of its election on or prior to the
Conversion Date. If a holder elects to require the Corporation to redeem
the Junior Convertible Preferred Stock, then the Corporation shall make
such redemption within 60 days after the Conversion Date; provided that the
--------
Corporation shall be obligated to redeem the Junior Convertible Preferred
Stock only if it has sufficient funds legally available on the redemption
date in order to redeem shares of Junior Convertible Preferred Stock
pursuant to this Section 5(h); provided further that if the Board
-------- -------
determines not to proceed with the Offering any notice of redemption shall
be withdrawn and the Corporation's obligation to redeem such shares shall
terminate. "Conversion Date" shall mean the date stated in the Conversion
Notice on or prior to which the holders of the Junior Convertible Preferred
Stock shall be required to convert their Junior Convertible Preferred Stock
in accordance with this Section 5(h). Without the consent of each holder of
Junior Convertible Preferred Stock, the Conversion Date may not be a date
earlier than the closing date of the Offering; provided that the
--------
Conversion Notice may identify the Offering's closing date as "the closing
date," in lieu of using a calendar date.
(ii) If the Corporation shall be required to redeem shares Junior
Convertible Preferred Stock pursuant to Section 5(h)(i), then notice of
such redemption shall be given by United States certified or registered
mail, postage prepaid, mailed not less than thirty (30) days nor more
than
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sixty (60) days prior to the redemption date, to all holders of record of
the shares to be redeemed at such holders' addresses as the same appear on
the stock register of the Corporation. Each such notice shall state: (A)
the redemption date; (B) the number of shares of Junior Convertible
Preferred Stock to be redeemed and, if less than all the shares held by
such holder are to be redeemed from such holder, the number of shares to be
redeemed from such holder; (C) the redemption price; and (D) the place or
places where certificates for shares of the Junior Convertible Preferred
Stock are to be surrendered for payment of the redemption price.
(iii) Notice having been mailed as aforesaid, from and after the
redemption date (unless default shall be made by the Corporation in
providing payment of the redemption price by deposit with a bank or trust
company having capital and surplus of at least $50,000,000 of the shares
called for redemption) said shares shall no longer be deemed to be
outstanding, and all rights of the holders thereof as stockholders of the
Corporation (except the right to receive from the Corporation the
redemption price) shall cease. Upon surrender, in accordance with the
above-mentioned notice, of the certificates for any shares so redeemed
(properly endorsed or signed for transfer, if the Board of Directors of the
Corporation shall so require and the notice shall so state), such shares
shall be redeemed by the Corporation at the redemption price provided for
in this Section 5(h). In the event fewer than all of the shares represented
by any such certificate are redeemed, a new certificate shall be issued,
without cost to the holder thereof, representing the unredeemed shares. The
provisions of this Section 5(h)(iii) shall be subject to Section 5(h)(i).
(i) Reacquired Shares. Shares of Convertible Preferred Stock which
------------------
have been issued and reacquired in any manner, including shares purchased or
redeemed or exchanged, shall (upon compliance with any applicable provisions of
the laws of the State of Delaware) have the status of authorized and unissued
shares of Preferred Stock undesignated as to series and may be redesignated and
reissued as part of any series of the Preferred Stock; provided, however, that
no such issued and reacquired shares of Senior Convertible Preferred Stock shall
be reissued or sold as Series A Senior Preferred Stock and no such issued and
reacquired shares of Junior Convertible Preferred Stock shall be reissued or
sold as Junior Convertible Preferred Stock.
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ARTICLE V
---------
Bylaws of the Corporation may be amended, altered or repealed, and new Bylaws
may be adopted, (i) by the affirmative vote of the holders of at least a
majority of the outstanding shares of capital stock of the Corporation entitled
to vote generally in the election of directors (considered for this purpose as
one class) or (ii) by an affirmative vote of a majority of the Board of
Directors but such right of the directors shall not divest or limit the right of
the stockholders to adopt, alter or repeal Bylaws.
ARTICLE VI
----------
The property, business and affairs of the Corporation shall be managed by or
under the direction of the Board of Directors. The number of directors of the
Corporation (exclusive of directors to be elected, if any, by the holders of any
one or more series of Preferred Stock voting separately as a class or classes)
shall not be less than six nor more than eighteen, the exact number of directors
to be determined from time to time by a resolution adopted by the Board of
Directors.
Unless the Bylaws of the Corporation are amended by the stockholders of the
Corporation after the effectiveness of this provision to provide for the
division of the directors into classes, at each annual meeting all directors
shall be elected to hold office until their respective successors are elected
and qualified or until their earlier resignation or removal. Any vacancies in
the Board of Directors for any reason, and any newly created directorships
resulting from any increase in the number of directors, may be filled by the
Board of Directors, acting by a majority of the directors then in office,
although less than a quorum, and any directors so chosen shall hold office until
the next election of directors and until their successors shall have been duly
elected and qualified. No decrease in the number of directors shall shorten the
term of any incumbent director. Notwithstanding the foregoing, and except as
otherwise required by law, whenever the holders of any one or more series of
Preferred Stock shall have the right, voting separately as a class, to elect one
or more directors of the Corporation, the terms of the director or directors
elected by such holders shall expire at the next succeeding annual meeting of
stockholders. The stockholders of the Corporation shall not have cumulative
voting rights.
ARTICLE VII
-----------
The Corporation reserves the right to repeal, alter, amend, or rescind any
provision contained in this Certificate of Incorporation, in the manner now or
hereafter prescribed by statute or this Certificate of Incorporation, and all
rights conferred on stockholders herein are granted subject to this reservation.
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ARTICLE VIII
------------
The Corporation is to have perpetual existence.
ARTICLE IX
----------
Special meetings of the stockholders of the Corporation for any purpose or
purposes may be called at any time by the Board of Directors, or by a majority
of the members of the Board of Directors or by a committee of the Board of
Directors which has been duly designated by the Board of Directors, whose powers
and authority, as provided in a resolution of the Board of Directors or in the
Bylaws of the Corporation, include the power to call such meetings, or by the
affirmative vote of the holders of at least a majority of the outstanding shares
of capital stock of the Corporation entitled to vote generally in the election
of directors (considered for this purpose as one class), but such special
meetings may not be called by any other person or persons.
ARTICLE X
---------
The Corporation shall, to the full extent permitted by any applicable law,
including without limitation the General Corporation Law of the State of
Delaware as amended from time to time, indemnify each director and officer,
present or former, of the Corporation (as defined in the General Corporation Law
of the State of Delaware) whom it may indemnify pursuant to such applicable law.
The foregoing shall not be construed to limit the powers of the Board of
directors to provide any other rights of indemnity which it may deem
appropriate.
A director of the Corporation shall not be personally liable to the
Corporation or its stockholders for monetary damages for breach of fiduciary
duty as a director, except for liability (i) for any breach of the director's
duty of loyalty to the Corporation or its stockholders, (ii) for acts or
omissions not in good faith or which involve intentional misconduct or a knowing
violation of law, (iii) under Section 174 of the Delaware General Corporation
Law; or (iv) for any transaction from which the director derived an improper
personal benefit.
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IN WITNESS WHEREOF, GRUBB & ELLIS COMPANY has caused this certificate to
be signed by Robert J. Walner, its Senior Vice President, and Carol M.
Vanairsdale, its Assistant Secretary, this ___ day of ________________, 1995.
GRUBB & ELLIS COMPANY
--------------------------------------
Robert J. Walner, Senior Vice President
President
Attest:
-----------------------------------------
Carol M. Vanairsdale, Assistant Secretary
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Exhibit 10.18
GRUBB & ELLIS COMPANY
DESCRIPTION OF
MANAGEMENT SEPARATION ARRANGEMENTS
Robert J. Hanlon, Jr., Senior Vice President and Chief Financial Officer,
has an arrangement with Grubb & Ellis Company (the "Company"), pursuant to
which he is entitled to receive severance compensation in an amount equal to six
months' salary in the event that the Company experiences a change of control and
Mr. Hanlon's employment with the Company is terminated for any reason other than
cause.
Robert J. Walner, Senior Vice President, General Counsel and Corporate
Secretary, has an arrangement with the Company, pursuant to which he is entitled
to receive severance compensation in an amount equal to up to nine months'
salary and reimbursement of certain out-of-pocket expenses under certain
circumstances relating to the location required for performance of his services,
in the event that he resigns from employment with the Company.
March 8, 1995
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<PAGE>
GRUBB & ELLIS COMPANY AND SUBSIDIARIES
EXHIBIT (11)
COMPUTATION OF PER SHARE EARNINGS
FOR THE YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS AND SHARES)
<TABLE>
<CAPTION>
1994 1993 1992/(B)/
========== ---------- ------------
<S> <C> <C> <C>
Net income (loss) $ 2,343 $ (18,208) $ (59,676)
Dividends in arrears on preferred
stock (438) - -
Accretion of liquidation preference
on preferred stock (2,173) (2,196) -
---------- ---------- ----------
Net loss applicable to common
stockholders $ (268) $ (20,404) $ (59,676)
========== ========== ==========
Primary loss per share applicable
to common stock:
Weighted average common
shares outstanding 4,934,806 4,019,795 3,509,303
Dilutive stock options-based
on the treasury stock method - - -
---------- ---------- ----------
Total 4,934,806 4,019,795 3,509,303
---------- ========== ==========
Loss per common share and
equivalents $ (.05) $ (5.08) $ (17.01)
========== ---------- ==========
Fully-diluted loss per share
applicable to Common Stock /(A)/:
Weighted average common
shares outstanding 4,934,806 4,019,795 3,509,303
Dilutive stock options-
based on the treasury
stock method - - -
---------- ---------- ----------
Total 4,934,806 4,019,795 3,509,303
---------- ========== ==========
Loss per common share and
equivalents $ (.05) $ (5.08) $ (17.01)
========== ---------- ==========
</TABLE>
/(A)/ This calculation is submitted in accordance with the Securities Exchange
Act of 1934, Release No. 9083, although not required by footnote 2 to
paragraph 14 of APB Opinion No. 15 because it results in dilutions of
less than 3%.
/(B)/ Number of shares gives retroactive effect to the one-for-five reverse
stock
split on January 29, 1993.
127
<PAGE>
EXHIBIT 21
----------
SUBSIDIARIES AS OF JANUARY 1, 1995
SUBSIDIARIES OF GRUBB & ELLIS COMPANY
<TABLE>
<CAPTION>
NAME AND STATE OF
-------- --------
TRADE NAMES (IF ANY) INCORPORATION
-------------------- -------------
<S> <C>
Adams-Cates Company Georgia
Axiom Real Estate Management, Inc....... Delaware
Collective Services, Inc. Pennsylvania
Grubb & Ellis Asset Services Company Delaware
Grubb & Ellis City Center, Inc. California
Grubb & Ellis Colorado, Inc. California
TRADE NAME: Grubb & Ellis Company
Grubb & Ellis Equity Management, Inc. Texas
Grubb & Ellis Institutional Properties, California
Inc.
Grubb & Ellis Mortgage Services, Inc. California
TRADENAME: GEMS
Grubb & Ellis New York, Inc. New York
TRADE NAMES: James Felt Realty
Services
Wm. A.
White/Grubb & Ellis
Grubb & Ellis of Nevada, Inc. Nevada
Grubb & Ellis of Oregon, Inc. Washington
Grubb & Ellis Realty Advisers, Inc. California
Grubb & Ellis Southeast Partners, Inc. California
G&E Investor Properties I, Inc. California
G&E Investor Properties II, Inc. California
G&E Investor Properties III, Inc. California
G&E Investor Properties IV, Inc. California
HSM Inc. Texas
Leggat McCall/Grubb & Ellis, Inc. Massachusetts
Montclair Insurance Company Ltd. Bermuda
The Schuck Commercial Brokerage Company Colorado
Wm. A. White/Grubb & Ellis Inc. New York
Wm. A. White/Tishman East Inc. New York
</TABLE>
128
<PAGE>
SUBSIDIARIES OF AXIOM REAL ESTATE MANAGEMENT, INC.
<TABLE>
<CAPTION>
NAME AND STATE OF
-------- --------
TRADE NAMES (IF ANY) INCORPORATION
-------------------- -------------
<S> <C>
Axiom Real Estate Management of Colorado, Colorado
Inc.
TRADE NAME: Axiom Real Estate
Management, Inc
</TABLE>
SUBSIDIARIES OF HSM INC.
<TABLE>
<CAPTION>
NAME AND STATE OF
-------- --------
TRADE NAMES (IF ANY) INCORPORATION
-------------------- -------------
<S> <C>
Henry S. Miller Financial Corporation Texas
HSM Condominium Corporation Texas
HSM Properties, Inc. Texas
HSM Real Estate Securities Corporation Texas
Miller Capital Corporation. Texas
Miller Real Estate Services Corporation Texas
</TABLE>
129
<PAGE>
Exhibit 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statement (Form
S-8 Number 33-71578) pertaining to the Employee New Stock Purchase Plan, as
amended, the Registration Statement (Form S-8 Number 33-71580, 33-35640 and 2-
98541) pertaining to the 1990 Amended and Restated Stock Option Plan, as
amended, the Registration Statement (Form S-8 Number 33-71484) pertaining to the
1993 Stock Option Plan for Outside Directors, the Registration Statement (Form
S-8 Number 33-17194) pertaining to the 1985 Restricted Value Stock Plan, as
amended and the Registration Statement (Form S-2 Number 33-32979) pertaining to
the Deferred Equity Program of Grubb & Ellis Company and Subsidiaries of our
report dated February 8, 1995, with respect to the financial statements and
schedules of Grubb & Ellis Company and Subsidiaries included in the Annual
Report (Form 10-K) for the year ended December 31, 1994, filed with the
Securities Exchange Commission.
San Francisco, California
March 27, 1995 Ernst & Young LLP
130
<PAGE>
Exhibit 23.2
CONSENT OF INDEPENDENT AUDITORS
-------------------------------
We consent to the incorporation by reference in the Registration Statement (Form
S-8 Number 33-71578) pertaining to the Employee New Stock Purchase Plan, as
amended, the Registration Statement (Form S-8 Number 33-71580,33-35640 and 2-
98541) pertaining to the 1990 Amended and Restated Stock Option Plan, as
amended, the Registration Statement (Form S-8 Number 33-71484) pertaining to the
1993 Stock Option Plan for Outside Directors, the Registration Statement (Form
S-8 Number 33-17194) pertaining to the 1985 Restricted Value Stock Plan, as
amended, and the Registration Statement (Form S-2 Number 33-32979) pertaining to
the Deferred Equity Program of Grubb & Ellis Company and Subsidiaries of our
report dated January 27, 1995, the financial statements of Axiom Real Estate
Management, Inc. (Axiom) as of and for the year ended December 31, 1994. Ernst &
Young LLP has placed reliance on our work performed on the financial statements
of Axiom as of and for the year ended December 31, 1994, and has elected to make
reference to that effect in its report on the consolidated financial statements
of Grubb & Ellis Company and Subsidiaries dated February 8, 1995, which is
included in the Annual Report (Form 10-K) for the year ended December 31, 1994,
filed with the Securities Exchange Commission.
Pittsburgh, Pennsylvania Coopers & Lybrand L.L.P.
March 27, 1995
131
<PAGE>
EXHIBIT 24
GRUBB & ELLIS COMPANY
POWER OF ATTORNEY
ANNUAL REPORT ON FORM 10-K
The undersigned Chairman of the Board and Chief Executive Officer of Grubb
& Ellis Company, a Delaware corporation (the "Company"), hereby constitutes and
appoints Robert J. Walner, James E. Klescewski, and Carol M. Vanairsdale,
jointly and severally, his attorneys with full power of substitution, to sign
and file with the Securities and Exchange Commission, in his capacity as
Chairman of the Board and Chief Executive Officer of the Company, the Company's
Annual Report on Form 10-K for the fiscal year 1994 and any and all amendments
thereto, and any and all instruments or documents filed as part of or in
conjunction with such Annual Report or amendments thereto, and hereby ratifies
all that said attorneys or any of them may do or cause to be done by virtue
hereof.
IN WITNESS WHEREOF, I have signed these presents this 7th day of February,
1995.
/S/ JOE F. HANAUER
------------------------
Joe F. Hanauer
Chairman of the Board
Chief Executive Officer
132
<PAGE>
GRUBB & ELLIS COMPANY
POWER OF ATTORNEY
ANNUAL REPORT ON FORM 10-K
Each of the undersigned directors of Grubb & Ellis Company, a Delaware
corporation (the "Company"), hereby constitutes and appoints Robert J. Walner,
James E. Klescewski, and Carol M. Vanairsdale, jointly and severally, his
attorneys with full power of substitution, to sign and file with the Securities
and Exchange Commission, in his capacity as director of the Company, the
Company's Annual Report on Form 10-K for the fiscal year 1994 and any and all
amendments thereto, and any and all instruments or documents filed as part of or
in conjunction with such Annual Report or amendments thereto, and hereby
ratifies all that said attorneys or any of them may do or cause to be done by
virtue hereof.
This instrument may be executed in a number of identical counterparts, each
of which shall be deemed an original for all purposes and all of which shall
constitute, collectively, one instrument.
IN WITNESS WHEREOF, we have signed these presents this 7th day of February,
1995.
/c/ R. David Anacker /c/ Joe F. Hanauer
--------------------------- ---------------------------
R. David Anacker Joe F. Hanauer
/c/ Lawrence S. Bacow /c/ Reuben S. Leibowitz
--------------------------- ---------------------------
Lawrence S. Bacow Reuben S. Leibowitz
/c/ Robert J. McLaughlin /c/ John D. Santoleri
--------------------------- ---------------------------
Robert J. McLaughlin John D. Santoleri
133
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
The schedule contains summary financial information extracted from the
consolidated balance sheets and the consolidated statements of operations and is
qualified in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1994
<PERIOD-START> JAN-01-1994
<PERIOD-END> DEC-31-1994
<CASH> 23,371
<SECURITIES> 0
<RECEIVABLES> 13,357
<ALLOWANCES> 5,087
<INVENTORY> 0
<CURRENT-ASSETS> 36,526
<PP&E> 18,531
<DEPRECIATION> 13,328
<TOTAL-ASSETS> 45,429
<CURRENT-LIABILITIES> 29,177
<BONDS> 0
<COMMON> 89
0
32,143
<OTHER-SE> 56,917
<TOTAL-LIABILITY-AND-EQUITY> 45,429
<SALES> 0
<TOTAL-REVENUES> 184,982<F1>
<CGS> 0
<TOTAL-COSTS> 87,578
<OTHER-EXPENSES> 91,902
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,852
<INCOME-PRETAX> 2,650
<INCOME-TAX> 307
<INCOME-CONTINUING> 2,343
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,343
<EPS-PRIMARY> (.05)
<EPS-DILUTED> (.05)
<FN>
<F1>Interest income and Other income, net are included under Total Revenues.
</FN>
</TABLE>
