<PAGE>
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A
Amendment No. 1
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 (FEE REQUIRED)
For the Fiscal year ended June 30, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For the transition period from _____________ to_______________
Commission file number 1-8122 .
-------------------
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 August 15, 1996 was approximately $14,337,298.
The number of shares outstanding of the registrant's common stock as of
August 15, 1996 was 8,916,415 shares.
DOCUMENTS INCORPORATED BY REFERENCE
None.
<PAGE>
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A
Amendment No. 1
Grubb & Ellis Company
---------------------
Footnote 9 of the Notes to Consolidated Financial Statements in Item 8
of Form 10-K, filed September 27, 1996, has been changed to provide more
current information with respect to recent decisions by the court in the JOHN
W. MATTHEWS, ET AL. V. KIDDER PEABODY & CO., ET AL. AND HSM INC., ET AL.
legal matter.
2
<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 June 30, 1996 and 1995, and the related
consolidated statements of operations, stockholders' equity (deficit), and cash
flows for each of the three years in the period ended June 30, 1996. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Grubb &
Ellis Company and Subsidiaries at June 30, 1996 and 1995, and the consolidated
results of their operations and their cash flows for each of the three years in
the period ended June 30, 1996, in conformity with generally accepted accounting
principles.
ERNST & YOUNG LLP
San Francisco, California
August 15, 1996
3
<PAGE>
GRUBB & ELLIS COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JUNE 30, 1996 AND 1995
(IN THOUSANDS)
ASSETS
1996 1995
------- -------
Current assets
Cash and cash equivalents $13,547 $11,406
Receivables:
Real estate brokerage commissions 206 2,390
Real estate services fees and other
commissions 3,172 2,952
Other receivables 4,326 3,051
Prepaids and other current assets 1,484 1,354
------- -------
Total current assets 22,735 21,153
Noncurrent assets
Real estate brokerage commissions receivable 100 412
Real estate investments held for sale and
real estate owned 537 828
Equipment and leasehold improvements, net 5,194 5,309
Other assets 1,092 2,039
------- -------
Total assets $29,658 $29,741
------- -------
------- -------
The accompanying notes are an integral part
of the consolidated financial statements.
4
<PAGE>
GRUBB & ELLIS COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JUNE 30, 1996 AND 1995
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS AND SHARES)
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
1996 1995
-------- -------
Current liabilities
Notes payable and current portion of long-term debt $ 28 $ 383
Accounts payable 1,624 2,162
Compensation and employee benefits payable 5,380 4,820
Deferred commissions payable 201 239
Accrued severance obligations 98 465
Accrued office closure costs 623 1,086
Accrued claims and settlements 1,779 2,436
Other accrued expenses 6,717 6,947
-------- -------
Total current liabilities 16,450 18,538
Long-term liabilities
Long-term debt, net of current portion 336 361
Long-term debt to related party, net of current portion 27,514 25,967
Accrued claims and settlements 11,804 12,824
Accrued severance obligations - 202
Accrued office closure costs 960 1,348
Other 69 294
-------- -------
Total liabilities 57,133 59,534
-------- -------
STOCKHOLDERS' EQUITY (DEFICIT)
Preferred stock, $.01 par value: 1,000,000 shares
authorized; 137,160 shares of 12% Senior Convertible
Preferred Stock and 150,000 shares of 5% Junior
Convertible Preferred Stock outstanding 32,143 32,143
Common stock, $.01 par value: 25,000,000 shares
authorized; 8,916,415 and 8,810,220 shares issued and
outstanding at June 30, 1996 and 1995, respectively 90 89
Additional paid-in-capital 57,154 56,939
Retained earnings (deficit) (116,862) (118,964)
-------- -------
Total stockholders' equity (deficit) (27,475) (29,793)
-------- -------
Total liabilities and stockholders' equity (deficit) $ 29,658 $ 29,741
-------- -------
-------- -------
The accompanying notes are an integral part
of the consolidated financial statements.
5
<PAGE>
GRUBB & ELLIS COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED JUNE 30, 1996, 1995 AND 1994
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS AND SHARES)
<TABLE>
<CAPTION>
1996 1995 1994
---------- ---------- ----------
<S> <C> <C> <C>
Revenue
Commercial real estate brokerage commissions $ 157,562 $ 152,160 $ 144,078
Residential real estate brokerage commissions - - 9,013
Real estate services fees, commissions and other 36,166 33,624 32,091
---------- ---------- ----------
Total revenue 193,728 185,784 185,182
---------- ---------- ----------
Cost and expenses
Real estate brokerage and other commissions 95,037 89,596 91,071
Selling, general and administrative 45,706 46,602 51,353
Salaries and wages 47,562 46,565 42,982
Depreciation and amortization 2,546 2,012 2,064
Special charges and unusual items (462) (2,606) 13,182
---------- ---------- ----------
Total costs and expenses 190,389 182,169 200,652
---------- ---------- ----------
Total operating income (loss) 3,339 3,615 (15,470)
Other income and expenses
Interest income 689 773 451
Other income, net 1,306 633 614
Interest expense (28) (131) (69)
Interest expense to related parties (3,006) (2,886) (2,469)
---------- ---------- ----------
Income (loss) before income taxes 2,300 2,004 (16,943)
Provision for income taxes (198) (448) (597)
---------- ---------- ----------
Net income (loss) $ 2,102 $ 1,556 $ (17,540)
---------- ---------- ----------
---------- ---------- ----------
Net loss applicable to common stockholders, net of
dividends in arrears and accretion of
liquidation preference on preferred stock in the
amounts of $3,012, $2,739 and $2,494 for the years
ended June 30, 1996, 1995 and 1994, respectively $ (910) $ (1,183) $ (20,034)
Net loss per common share and equivalents $ (.10) $ (.16) $ (4.92)
Weighted average common shares outstanding 8,870,720 7,271,257 4,073,715
</TABLE>
The accompanying notes are an integral part
of the consolidated financial statements.
6
<PAGE>
GRUBB & ELLIS COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE YEARS ENDED JUNE 30, 1996, 1995 AND 1994
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS AND SHARES)
<TABLE>
<CAPTION>
Common Stock Total
------------------------- Additional Retained Stockholders'
Outstanding Preferred Paid-in- Earnings Equity
Shares Amount Stock Capital (Deficit) (Deficit)
---------- -------- -------- -------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Balance as of June 30, 1993 4,060,268 $ 41 $ - $ 49,268 $(102,980) $ (53,671)
Accretion of liquidation
preference on preferred stock - - - (2,494) - (2,494)
Employee common stock purchase
agreements 3,573 - - 8 - 8
Employee 401 (k) plan
matching contribution 50,708 1 - 158 - 159
Net loss - - - - (17,540) (17,540)
---------- -------- -------- -------- --------- ---------
Balance as of June 30, 1994 4,114,549 42 - 46,940 (120,520) (73,538)
Accretion of liquidation
preference on preferred stock - - - (877) - (877)
Elimination of mandatory
redemption provision on
preferred stock:
12% Senior Convertible
Preferred Stock - - 15,945 - - 15,945
5% Junior Convertible
Preferred Stock - - 16,198 - - 16,198
Warrants issued in connection
with 1994 Recapitalization - - - 259 - 259
Common stock issued for:
Stockholder rights offering and
standby commitment 4,361,975 44 - 9,847 - 9,891
Litigation settlements 299,898 3 - 678 - 681
Employee common stock purchase
agreements 23,798 - - 61 - 61
Employee 401(k) plan
matching contribution 10,000 - - 31 - 31
Net income - - - - 1,556 1,556
---------- -------- -------- -------- --------- ---------
Balance as of June 30, 1995 8,810,220 89 32,143 56,939 (118,964) (29,793)
Employee common stock purchase
agreements and exercise of
common stock options 52,665 - - 108 - 108
Employee 401(k) plan
matching contribution 53,530 1 - 107 - 108
Net income - - - - 2,102 2,102
---------- -------- -------- -------- --------- ---------
Balance as of June 30, 1996 8,916,415 $ 90 $ 32,143 $ 57,154 $(116,862) $ (27,475)
---------- -------- -------- -------- --------- ---------
---------- -------- -------- -------- --------- ---------
</TABLE>
The accompanying notes are an integral part
of the consolidated financial statements.
7
<PAGE>
GRUBB & ELLIS COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED JUNE 30, 1996, 1995 AND 1994
(IN THOUSANDS)
<TABLE>
<CAPTION>
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
Cash Flows from Operating Activities:
Net income (loss) $ 2,102 $ 1,556 $ (17,540)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization 2,546 2,012 2,064
Interest expense on Payment-in-Kind Notes 1,606 1,407 1,137
Increase (decrease) in real estate brokerage commissions
receivable valuation allowances 199 (1,302) (47)
Other non-cash charges related to special charges
and unusual items (462) (2,606) 13,182
Gain on sale of real estate and other assets - - 18
Decrease in real estate brokerage commissions receivable 2,306 2,288 881
Decrease (increase) in other asset accounts (212) 3,064 (192)
Increase (decrease) in accounts payable (1,595) 608 484
Increase (decrease)in deferred commissions payable (38) 50 (10)
Decrease in other liability accounts (3,458) (6,358) (6,169)
--------- --------- ---------
Net cash provided by (used in) operating activities 2,994 719 (6,192)
--------- --------- ---------
Cash Flows from Investing Activities:
Purchases of equipment and leasehold improvements (1,724) (2,944) (2,554)
Proceeds from disposition of real estate joint venture
interests and real estate owned 1,036 31 393
Distributions from real estate joint ventures 54 52 96
--------- --------- ---------
Net cash used in investing activities (634) (2,861) (2,065)
--------- --------- ---------
Cash Flows From Financing Activities:
Offering costs related to issuance of preferred stock - - (132)
Proceeds from borrowing 400 - 14,250
Repayment of notes payable and credit facility borrowings (654) (282) (6,833)
Proceeds from issuance of common stock 35 4,201 32
Costs related to Rights Offering and issuance of common stock - (586) -
Costs related to debt refinancing - (55) -
--------- --------- ---------
Net cash provided by (used in) financing activities (219) 3,278 7,317
--------- --------- ---------
Net increase (decrease) in cash and cash equivalents 2,141 1,136 (940)
Cash and equivalents at beginning of the year 11,406 10,270 11,210
--------- --------- ---------
Cash and cash equivalents at end of the year $ 13,547 $ 11,406 $ 10,270
--------- --------- ---------
--------- --------- ---------
</TABLE>
The accompanying notes are an integral part
of the consolidated financial statements.
8
<PAGE>
GRUBB & ELLIS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
THE COMPANY:
Grubb & Ellis Company (the "Company") is a commercial real estate
information and services company that provides services to real estate
owners/investors and tenants including commercial brokerage and property and
facilities management. Additionally, the Company provides mortgage brokerage,
appraisal, consultation and asset management services. The Company also
provided residential brokerage services until November 1994 when it sold its
remaining residential real estate business in Southern California.
PRINCIPLES OF CONSOLIDATION:
The consolidated financial statements include the accounts of Grubb & Ellis
Company, its wholly and majority owned and controlled subsidiaries and
controlled partnerships. The Company consolidates Axiom Real Estate Management,
Inc. ("Axiom"), which provides real estate property and facilities management
services. As described in Note 2 to the Notes to Consolidated Financial
Statements, the Company acquired the minority interest in Axiom in January 1996.
Prior to the acquisition the minority interest was immaterial and has been
included in other long-term liabilities on the Consolidated Balance Sheet and
the related minority interest in operating results has been included in "Other
income, net" on the Consolidated Statements of Operations through the date it
was acquired. All significant intercompany accounts and transactions with
consolidated entities and transactions with unconsolidated joint ventures and
partnerships accounted for under the equity method of accounting have been
eliminated.
BASIS OF PRESENTATION:
The financial statements have been prepared in conformity with generally
accepted accounting principles which require management to make estimates and
assumptions that affect the reported amounts of assets and liabilities
(including disclosure of contingent assets and liabilities) at the date of the
financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
CHANGE IN REPORTING PERIOD:
On February 5, 1996, the Board of Directors of the Company changed the
Company's reporting year ending December 31 to a fiscal year ending June 30
commencing in 1996. This change is intended to enable management to improve the
Company's planning capability related to its natural business cycle, as well as
enable it to modify business decisions earlier in the fiscal year in response to
cash flows generated during its typically strongest revenue quarter which ends
December 31. Reporting periods presented herein have been recast to conform to
the June 30 fiscal year end.
FAIR VALUE OF FINANCIAL INSTRUMENTS:
In 1995, the Company adopted Statement of Financial Accounting Standards
("SFAS") No. 107, "Disclosures about Fair Value of Financial Instruments," which
requires disclosure of fair value information about financial instruments,
whether or not recognized in the Consolidated Balance Sheets. Considerable
judgment is necessarily required in interpreting market data to develop
estimates of fair value. Accordingly, the estimates presented herein
9
<PAGE>
GRUBB & ELLIS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
are not necessarily indicative of the amounts that the Company could realize in
a current market exchange. The use of different market assumptions and/or
estimation methodologies may have a material effect on the estimated fair value
amounts.
SHORT-TERM FINANCIAL INSTRUMENTS - the carrying amounts of cash and cash
equivalents, receivables, and obligations under accounts payable and debt
instruments approximate their fair values.
LONG-TERM DEBT - an estimate of the fair value of the Company's long-term
debt would require the use of a discounted cash flow analysis based on the
Company's current incremental borrowing rates for similar types of borrowing
arrangements. Management believes that the Company's current financial position
is significantly different from its financial position during the period in
which it originally acquired its long-term debt and believes that the Company
would be unable to obtain similar financing given these facts and the current
state of its financial matters. Accordingly, management is unable, without
incurring excessive costs, to estimate its incremental borrowing rate, and
considers estimation of fair value of these instruments to be impracticable.
ACCOUNTING FOR STOCK-BASED COMPENSATION:
In October 1995, the Financial Accounting Standards Board issued Statement
No. 123, "Accounting for Stock-Based Compensation ("Statement 123")," which is
effective for the Company's next annual reporting period. Statement 123 allows
companies to either account for stock-based compensation under the new
provisions of Statement 123 or under the provisions of Accounting Principles
Bulletin Opinion No. 25, but requires pro forma disclosure in the footnotes to
the financial statements as if the measurement provisions of Statement 123 had
been adopted. The Company has not yet determined whether or not to adopt
Statement 123 beginning in the fiscal year ending June 30, 1997, but does not
believe that the adoption will have a material impact on the financial position
or the results of operations of the Company.
REVENUE RECOGNITION:
Real estate sales commissions are generally recognized at the earlier of
receipt of payment, close of escrow or transfer of title between buyer and
seller. Receipt of payment occurs at the point at which all Company services
have been performed, title to real property has passed from seller to buyer, if
applicable, and no contingencies exist with respect to entitlement to the
payment. Real estate leasing commissions are generally recognized at the
earlier of receipt of payment or tenant occupancy, assuming the Company has
possession of a signed lease agreement and no significant contingencies exist.
All other commissions and fees are recognized at the time the related services
have been performed by the Company, unless significant future contingencies
exist.
"Other income, net" includes revenues and expenses recognized subsequent to
December 31, 1993 related to offices which the Company determined to close
10
<PAGE>
GRUBB & ELLIS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
after that date. Such revenues and expenses were $3,389,000 and $3,389,000
respectively, for the fiscal year ended June 30, 1994 and $13,000 and $13,000,
respectively, for the fiscal year ended June 30, 1995. Also included are the
revenues and expenses of miscellaneous transactions and the disposition of real
estate investments.
COSTS AND EXPENSES:
Real estate brokerage and other commission expense (salespersons'
participation) is recognized concurrently with the recording of the related
revenue. All other costs and expenses are recognized when incurred.
Axiom incurs salaries, wages and benefits in connection with the property and
corporate facilities management services it provides which are in part
reimbursed by the owners of such properties. The following is a summary of the
Axiom total gross and reimbursable salaries, wages and benefits (in thousands)
for the years ended June 30, 1996, 1995 and 1994. The net expense is included
in salaries and wages on the Consolidated Statement of Operations.
1996 1995 1994
-------- -------- ---------
Gross salaries, wages and benefits $80,757 $65,465 $71,036
Less: reimbursements from
property owners (66,310) (51,959) (57,874)
-------- -------- ---------
Net salaries, wages and benefits $14,447 $13,506 $13,162
-------- -------- ---------
-------- -------- ---------
EQUIPMENT AND LEASEHOLD IMPROVEMENTS:
Equipment and leasehold improvements are recorded at cost. Depreciation of
equipment is computed using the straight-line method over their estimated useful
lives ranging from three to seven years. Leasehold improvements are amortized
using the straight-line method over their useful lives not to exceed
the terms of the respective leases. Maintenance and repairs are charged to
expense as incurred.
ACCRUED CLAIMS AND SETTLEMENTS:
The Company has maintained or currently maintains partially self-insured
programs for errors and omissions, general liability, workers' compensation and
certain employee health care costs. Reserves for such partially self-insured
programs are included in accrued claims and settlements and are based on the
aggregate of the liability for reported claims and an actuarially-based estimate
of incurred but not reported claims, net of expected insurance reimbursements.
INCOME TAXES:
The provision for income taxes is based on income or loss recognized for
financial statement purposes and includes the effects of temporary differences
between such income or loss and that recognized for tax return purposes.
Deferred income taxes, if any, are recorded to reflect the tax consequences
in
11
<PAGE>
GRUBB & ELLIS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
future years of the differences between the tax bases of assets and liabilities
and their financial reporting amounts.
EARNINGS (LOSS) PER COMMON SHARE AND EQUIVALENTS:
Earnings (loss) per common share and equivalents computations are based on
the weighted average number of common shares outstanding after giving effect to
potential dilution from common stock options and warrants. For specifics
regarding the potential dilution from common stock options and warrants, see
Note 5 to the Notes to Consolidated Financial Statements. As calculated in
accordance with generally accepted accounting principles, primary earnings
(loss) per common share is the same as fully diluted earnings (loss) per common
share for each year presented. Common share and per share amounts have been
adjusted to give retroactive effect to the one-for-five reverse stock split on
January 29, 1993.
The calculation of earnings (loss) per common share includes net income
(loss) adjusted for amounts applicable to the Senior and Junior Convertible
Preferred Stock related to undeclared dividends and accretion of liquidation
preference (for the periods during which the preferred stock was subject to
mandatory redemption) as follows (in thousands):
<TABLE>
<CAPTION>
Years Ended June 30,
--------------------------------------------------------
Cumulative
1996 1995 1994 1993 Total
------- ------- ------ ---- ----------
<S> <C> <C> <C> <C> <C>
Junior Convertible Preferred Stock -
Undeclared dividends $ 844 $ 541 $ - $ - $1,385
Accretion of liquidation preference - 262 766 312 1,340
Senior Convertible Preferred Stock -
Undeclared dividends 2,168 1,321 - - 3,489
Accretion of liquidation preference - 615 1,728 686 3,029
------ ------ ------ ------ -------
$3,012 $2,739 $2,494 $ 998 $ 9,243
------ ------ ------ ------ -------
------ ------ ------ ------ -------
</TABLE>
CASH AND CASH EQUIVALENTS:
Cash and cash equivalents consist of demand deposits and highly liquid
short-term debt instruments with original maturities of three months or less
from the date of purchase and are stated at cost.
The Company had cash balances of $1,683,000 and $2,377,000 at June 30, 1996
and 1995, respectively, restricted to use for errors and omissions insurance
claims associated with the Company's errors and omissions insurance captive.
Additionally, Axiom had cash balances of $1,357,000 at June 30, 1995, which
prior to the purchase of the minority ownership interest in Axiom in January
1996, were not available for use by the Company.
For purposes of disclosure for the Consolidated Statements of Cash Flows,
cash payments for interest for the fiscal years ended June 30, 1996, 1995 and
1994 were approximately $1,425,000, $1,400,000 and $1,260,000, respectively.
Cash payments for income taxes for the fiscal years ended June 30, 1996, 1995
and 1994 were approximately $975,000, $720,000 and $533,000, respectively.
12
<PAGE>
GRUBB & ELLIS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
REAL ESTATE INVESTMENTS:
Real estate investments held for sale are recorded at the lower of cost or
net realizable value. The Company had a valuation allowance on real estate
investments and real estate owned of approximately $2,393,000 and $3,501,000 at
June 30, 1996 and 1995, respectively. In connection with the disposition of
real estate investments, the Company sold a property in December 1993 with a
book value of approximately $413,000 in exchange for a note receivable of
$1,190,000, resulting in the deferral of $884,000 of revenue under the cost
recovery method. The note receivable was sold at a discount in August 1995
resulting in a gain of $818,000, net of the recognition of revenue previously
deferred and is included in "Other income, net" for the fiscal year ended June
30, 1996.
The following is a summary of the changes in the valuation allowance on
real estate investments and real estate owned for the fiscal years ended June
30, 1996, 1995 and 1994 (in thousands):
1996 1995 1994
------- ------- -------
Balance at beginning of period $3,501 $3,763 $6,093
Charged to costs and expenses 31 - -
Amounts written off (1,139) (262) (2,330)
--------- ------- -------
Balance at end of period $2,393 $3,501 $3,763
--------- ------- -------
--------- ------- -------
RECLASSIFICATIONS:
Certain prior year amounts have been reclassified to conform to the current
year presentation.
2. PURCHASE OF AXIOM MINORITY INTEREST
On January 24, 1996, the Company completed the purchase of the common stock
held by International Business Machines Corporation ("IBM") in Axiom for a
purchase price of $600,000. The Company paid $150,000 cash upon closing and
will pay three additional $150,000 annual installments beginning January 1997.
As a result of this transaction, the Company owns 100% of the outstanding common
stock of Axiom. The acquisition of the minority interest was accounted for as a
purchase.
Since its inception in 1992, Axiom has provided facilities management to
IBM pursuant to a facilities management agreement (the "Managed Service
Agreement"). In connection with the purchase transaction, the Managed Service
Agreement was modified effective January 1, 1996 providing for the extension of
its term until December 31, 2000, with the option for IBM to extend it for two
additional one year periods, the reduction of fees charged, and the ability for
IBM to change the facilities portfolio under management by Axiom under certain
circumstances. The modified Managed Service Agreement resulted in the reduction
of annual fees paid by IBM to Axiom of $750,000 for the fiscal year ended June
30, 1996 and is expected to result in the reduction of annual fees
13
<PAGE>
GRUBB & ELLIS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. PURCHASE OF AXIOM MINORITY INTEREST (CONTINUED)
of approximately $1.8 million and $900,000, respectively for the fiscal years
ending June 30, 1997 and 1998.
This reduction is expected to be offset in part by the extension of the
contract, the opportunity to obtain additional business from IBM and a reduction
in costs by reducing certain duplicative administrative, marketing and other
costs.
3. REAL ESTATE BROKERAGE COMMISSIONS RECEIVABLE
Real estate brokerage commissions receivable consisted of the following at
June 30, 1996 and 1995 (in thousands):
1996 1995
-------- --------
Commissions receivable $12,389 $14,375
Salespersons' participation (8,903) (8,593)
Allowance for uncollectible accounts (3,180) (2,980)
-------- --------
Total 306 2,802
Less portion classified as current 206 2,390
-------- --------
Noncurrent portion $ 100 $ 412
-------- --------
-------- --------
The following is a summary of the changes in the allowance for
uncollectible real estate brokerage commissions receivable for the fiscal years
ended June 30, 1996, 1995 and 1994 (in thousands):
1996 1995 1994
-------- --------- ---------
Balance at beginning of period $ 2,980 $ 4,283 $ 4,331
Charged to costs and expenses 200 - -
Amounts written off or
recovered upon payment
of receivable, net - (1,303) (48)
-------- --------- ---------
Balance at end of period $ 3,180 $ 2,980 $ 4,283
-------- --------- ---------
-------- --------- ---------
14
<PAGE>
GRUBB & ELLIS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Equipment and leasehold improvements consisted of the following at June 30,
1996 and 1995 (in thousands):
1996 1995
------- -------
Office furniture and equipment $15,639 $14,684
Leasehold improvements 4,858 4,871
------- -------
Total 20,497 19,555
Less accumulated depreciation and amortization 15,303 14,246
------- -------
Equipment and leasehold improvements, net $ 5,194 $ 5,309
------- -------
------- -------
5. LONG-TERM DEBT AND RECAPITALIZATION
Long-term debt consisted of the following at June 30, 1996 and 1995 (in
thousands):
1996 1995
------- -------
LONG-TERM DEBT TO RELATED PARTY:
Senior Notes, 9.9%, due
November 1, 1997 and 1998 $10,000 $10,000
$10 million 11.65% PIK Notes, net,
due November 1, 2000 and 2001 12,514 10,967
Revolving Credit Note at 2.5% above
LIBOR, due November 1, 1999 5,000 5,000
LONG-TERM DEBT TO NON-RELATED PARTIES:
Other notes payable at various rates of
interest, due through 2005 364 744
------- -------
27,878 26,711
Less portion classified as current 28 383
------- -------
Long-term portion $27,850 $26,328
------- -------
------- -------
15
<PAGE>
GRUBB & ELLIS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. LONG-TERM DEBT AND RECAPITALIZATION (CONTINUED)
Aggregate maturities of long-term debt, excluding discount amortization,
for the next five fiscal years ending June 30, are as follows: 1997 - $28,000;
1998 - $5,031,000; 1999 - $5,034,000; 2000 - $5,037,000; 2001 - $6,298,000 and
thereafter, $6,450,000.
1994 RECAPITALIZATION:
On November 1, 1994, the Company, Warburg, Pincus Investors, L.P.
("Warburg") and The Prudential Insurance Company of America ("Prudential")
completed certain related party financing transactions (the "1994
Recapitalization") pursuant to agreements (the "Agreements") providing for,
among other things, (1) additional equity capital through a rights offering and
Standby Agreement by Warburg, (2) amendments to a debt agreement with
Prudential, (3) issuance of additional warrants to purchase common stock of the
Company and (4) amendments to the existing Junior and Senior Convertible
Preferred Stock and warrants held by Warburg and Prudential. The debt agreement
amendments with Prudential include a provision for supplemental principal
payments commencing July 1, 1998 if the Company meets certain financial tests.
In addition, certain covenants of the debt agreement remain in place, but will
not be in effect until April 1, 1997.
STOCKHOLDER RIGHTS OFFERING:
Through a Stockholder Rights Offering which expired October 31, 1994,
common stockholders, other than Warburg and Prudential, purchased 84,542 shares
of common stock at the subscription price of $2.375 per share for total proceeds
of $201,000. Pursuant to a Standby Agreement, Warburg purchased 4,277,433
shares of common stock, not purchased by common stockholders in the Rights
Offering, at the subscription price of $2.375 per share for total proceeds of
approximately $10,159,000. As provided for in the Standby Agreement, Warburg
paid for its shares with $4,000,000 in cash and through cancellation of
$6,159,000 of indebtedness outstanding under an interim financing loan,
including accrued interest of approximately $159,000. Warburg had made the
interim financing loan pursuant to an agreement entered into in March 1994,
which was terminated in connection with the consummation of the 1994
Recapitalization. Direct costs of $469,000 were capitalized in connection with
the Stockholder Rights Offering.
9.9% SENIOR NOTES:
The 9.9% Senior Notes were issued to Prudential in 1986 and were
subsequently modified in 1992 and also in connection with the 1994
Recapitalization. The principal payment terms were modified requiring two
approximately equal installments on November 1, 1997 and 1998. The 9.9% Senior
Notes require semi-annual interest payments.
11.65% PAYMENT-IN-KIND NOTES:
In January 1993, Prudential agreed, among other things, to convert $10
million of the then outstanding 11% Subordinated Notes into $10 million of
10.65% Payment-in-Kind Notes (the "PIK Notes") due November 1, 1999 (the "1993
Recapitalization"). The PIK Notes require semi-annual interest payments
16
<PAGE>
GRUBB & ELLIS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. LONG-TERM DEBT AND RECAPITALIZATION (CONTINUED)
until all of the 9.9% Senior Notes have been retired, the interest may be paid
in kind by the issuance of additional PIK Notes. In connection with the 1994
Recapitalization, the terms of the principal payments were modified requiring
two approximately equal installments on November 1, 2000 and 2001.
Additionally, the interest rate per annum increased from 10.65% to 11.65% (the
"11.65% PIK Notes") per annum on January 1, 1996. Interest expense is being
recorded on the level yield method at an effective yield rate of 11.5% per
annum. The outstanding amount of the 11.65% PIK Notes is net of $920,000
canceled by Prudential in payment of the exercise price of a warrant pursuant to
the terms of the 1993 Recapitalization and unamortized discount of $213,000 at
June 30, 1995. Interest expense paid in kind was $1,606,000, $1,407,000 and
$1,137,000 for fiscal years ending June 30, 1996, 1995 and 1994, respectively.
REVOLVING CREDIT NOTE:
The Revolving Credit Note bears interest at 2.5% above LIBOR and has
certain repayment requirements and other financial covenants. Prior to the 1994
Recapitalization, upon maturity, the Company had the option of converting the
note into a term note which would mature on December 31, 1996, have an interest
rate of LIBOR plus 5% and require equal semi-annual principal payments beginning
June 30, 1995. In connection with the 1994 Recapitalization, Prudential
canceled the conversion option, extended the maturity date to November 1, 1999
and waived the Company's obligation to repay all of the outstanding principal
for a 60-day period in 1994 and in subsequent years until the fiscal year
beginning July 1, 1997.
OTHER NOTES PAYABLE:
Other notes payable of the Company are secured by various assets with
carrying values of approximately $411,000 and $411,000 at June 30, 1996 and
1995, respectively.
AXIOM CREDIT FACILITY:
Axiom has a credit facility with a subsidiary of IBM which provides for
maximum outstanding borrowings not to exceed the lesser of $2,050,000 or Axiom's
borrowing base which is comprised of eligible accounts receivable as defined.
The credit facility expires October 19, 1998 and is subject to automatic
successive three year extensions unless IBM provides ninety (90) days written
notice of its intent to terminate at the end of the initial three year term or
at the end of any successive three year terms. There were no borrowings
outstanding under this credit facility as of June 30, 1996. Any borrowings
under this credit facility would be collateralized by substantially all of
Axiom's assets and subject to certain financial ratio covenants, including the
maintenance of minimum levels of net worth.
JUNIOR CONVERTIBLE PREFERRED STOCK:
In January 1993, the Company issued 150,000 shares of 5% Junior Convertible
Preferred Stock ("Junior Preferred") and five-year warrants to purchase 200,000
shares of common stock at an exercise price of $5.50 per share to Prudential in
exchange for $15 million of the then outstanding 10.65% Subordinated Notes.
Each share of Junior Preferred is convertible, at the
17
<PAGE>
GRUBB & ELLIS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. LONG-TERM DEBT AND RECAPITALIZATION (CONTINUED)
option of the holder, into shares of common stock of the Company determined by
dividing the $100 stated value per share by the conversion price of $5.6085.
Each share of Junior Preferred is also subject to mandatory conversion based on
specific financial ratios and/or conditions. Holders of Junior Preferred are
entitled to receive, out of any funds legally available, cumulative dividends
payable in cash at a rate of 5% per annum compounded annually. The Junior
Preferred Stock also was subject to mandatory redemption by the Company.
The 1994 Recapitalization provided for the elimination of the mandatory
redemption provisions and an increase in the dividend rate effective January 1,
2002 to 10% per annum with further increases of 1% per annum effective January
1, 2003 and January 1, 2004 and 2% per annum effective January 1, 2005 and each
January 1 thereafter.
With respect to dividend rights and rights on redemption and liquidation,
winding up and dissolution, the Junior Preferred ranks prior to any other equity
securities of the Company, including all classes of common stock and any series
of preferred stock of the Company other than the Senior Convertible Preferred
Stock, which ranks prior to Junior Preferred.
Prior to the 1994 Recapitalization, the carrying value of the Junior
Preferred was adjusted by accretion of liquidation preference due upon
liquidation in the amount of $653,000, and accretion of direct costs of $27,000.
On a cumulative basis, undeclared dividends and accretion of direct costs
amounted to $1,385,000 and $58,000, respectively. In connection with the 1994
and 1993 Recapitalizations, the carrying value of the Junior Preferred was
adjusted by direct costs of $17,000 and $183,000, respectively.
SENIOR CONVERTIBLE PREFERRED STOCK:
In January 1993, the Company issued to Warburg and Joe F. Hanauer
("Hanauer") for $13,750,000 in cash, an aggregate of 137,160 shares of 12%
Senior Convertible Preferred Stock ("Senior Preferred"), five-year warrants to
purchase 500,000 and 200,000 shares of common stock at exercise prices of $5.00
and $5.50 per share, respectively, and five-year warrants to purchase up to
400,000 shares of common stock (the "Contingent Warrants") which become
exercisable at a formula price only in the event the Company incurs a defined
liability in excess of $1.5 million.
Each share of Senior Preferred is convertible, at the option of the holder,
into shares of common stock of the Company determined by dividing the $100
stated value per share by the conversion price of $2.6564 for Warburg and
$2.6354 for Hanauer. Each share of Senior Preferred is also subject to
mandatory conversion based on specific financial ratios and/or conditions. The
Senior Preferred was also subject to mandatory redemption by the Company.
Hanauer's shares of Senior Preferred are subject to anti-dilution provisions
with respect to the issuance of common stock and common stock equivalents at
less than the conversion price. Holders of Senior Preferred are entitled to
receive, out of any funds legally available, cumulative dividends payable in
cash at a rate of 12% per annum compounded annually.
18
<PAGE>
GRUBB & ELLIS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. LONG-TERM DEBT AND RECAPITALIZATION (CONTINUED)
SENIOR CONVERTIBLE PREFERRED STOCK (CONTINUED):
The 1994 Recapitalization provided for the elimination of the mandatory
redemption provision and an increase in the dividend rate so that at such time
the dividend rate on the Junior Preferred increases above the dividend rate of
the Senior Preferred, the dividend rate on the Senior Preferred will increase by
the same amount. As a result of the application of the anti-dilution provisions
previously existing in Warburg's Senior Preferred and currently existing in
Hanauer's, the number of shares issuable upon conversion of the Senior Preferred
increased from 4,551,201 shares to 5,166,028 shares. With respect to dividend
rights and rights on redemption and on liquidation, winding up and dissolution,
the Senior Preferred ranks prior to any other equity securities of the Company,
including all classes of common stock and any other series of preferred stock of
the Company.
Prior to the 1994 Recapitalization, the carrying value of the Senior
Preferred was adjusted by accretion of liquidation preference due upon
liquidation in the amount of $1,520,000 and the accretion of direct costs of
$160,000. On a cumulative basis, undeclared dividends and accretion of direct
costs amounted to $3,489,000 and $336,000, respectively. In connection with the
1994 and 1993 Recapitalizations, the carrying value of the Senior Preferred was
adjusted by direct costs of $100,000 and $1,070,000, respectively.
NEW WARRANTS AND AMENDMENTS TO EXISTING WARRANTS:
As consideration for acquiring shares of stock not purchased in the
Stockholder Rights Offering in connection with the Standby Agreement, and
agreeing to other financing transactions, the Company issued to Warburg a
warrant to purchase 325,000 shares at an exercise price of $2.375 per share,
exercisable within 5 years. As consideration for modifying the terms of the
9.9% Senior Notes, 11.65% PIK Notes and Revolving Credit Note, waiving
noncompliance with and deferring application of certain covenants of the
Prudential debt agreement, and agreeing to other financing transactions, the
Company issued to Prudential a warrant to purchase 150,000 shares at an exercise
price of $2.375 per share, exercisable within 5 years. Loan costs of $225,000
were capitalized in connection with the Prudential warrant and are being
amortized over the weighted average remaining terms of the debt agreements with
Prudential.
In connection with the 1994 Recapitalization, the Company's warrants to
purchase common stock issued to Warburg and Prudential in connection with the
1993 Recapitalization were amended to reduce the exercise price to $3.50 per
share, eliminate certain anti-dilution provisions, and in the case of the
warrants held by Prudential, extend the expiration date from January 1998 until
December 1998. Prudential waived the anti-dilution provisions of its existing
warrants in connection with the 1994 Recapitalization.
19
<PAGE>
GRUBB & ELLIS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. LONG-TERM DEBT AND RECAPITALIZATION (CONTINUED)
As a result of the 1994 Recapitalization and application of the anti-
dilution provisions previously existing in the warrants held by Warburg and
currently existing in the warrants held by Hanauer, the aggregate number of
shares issuable upon conversion of such warrants have increased from 726,182 to
1,048,893 shares. Loan costs of $34,000 were capitalized in connection with the
Prudential warrant amendments and are being amortized over the weighted average
remaining terms of the debt agreements with Prudential. Contingent warrants
held by Warburg, originally issued with the Senior Preferred, to acquire up to
373,818 shares under certain circumstances, were canceled.
PRUDENTIAL LONG-TERM DEBT RESTRICTIONS:
In connection with the 1993 Recapitalization, Prudential and the Company
signed an agreement (the "New Note Agreement") which contains significant
restrictions on the payment of cash dividends and purchases of stock of the
Company. The New Note Agreement also contains significant restrictions on the
Company's (and certain of its subsidiaries') ability to, among other things, (i)
incur debt and liens upon their properties, (ii) enter into guarantees and make
loans, investments and advances, (iii) merge or enter into similar business
combinations, (iv) conduct any business other than their present businesses, (v)
sell assets, including receivables, (vi) make capital expenditures and (vii)
enter into certain other transactions.
The New Note Agreement between the Company and Prudential contains various
affirmative and negative covenants, which require, among other things, that the
Company (combined with certain of its subsidiaries and taken as a whole)
maintain a ratio of consolidated current assets to consolidated current
liabilities (the "Working Capital Ratio") as defined in the New Note Agreement,
excluding the current portion of long-term debt, of not less than 1:1 at the end
of each of its fiscal quarters. In connection with the 1994 Recapitalization,
Prudential agreed to waive the requirements of the Working Capital Ratio, and
covenants restricting the Company's capital expenditures until April 1, 1997 and
eliminated the cumulative loss provision.
6. INCOME TAXES
While the Company has changed its financial reporting year to a fiscal year
ending June 30, it will continue to maintain the calendar year for tax reporting
purposes. The provision for income taxes for each of the three fiscal years
ended June 30, 1996, 1995 and 1994, consisted of state and local income taxes
due currently. Additionally, the provision for income taxes for fiscal years
ended June 30, 1995 and 1994 includes federal income taxes related solely to
Axiom which filed on a separate company basis for tax purposes.
At June 30, 1996, the following income tax carryforwards were available to
the Company, after taking into effect the reduction in tax attributes
resulting from the cancellation of indebtedness pursuant to Section 108(b)(2)
of the Internal Revenue Code (the "Code") (in thousands):
Expiration
Amount Dates
------- --------
Federal regular tax operating loss carryforwards $41,532 2005 to 2010
Federal investment tax credit carryforwards $ 278 1998 to 2000
20
<PAGE>
GRUBB & ELLIS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. INCOME TAXES (CONTINUED)
The 1993 Recapitalization constituted an ownership change within the
meaning of Section 382 of the Code thereby limiting the amount of
post-ownership change taxable income which may be offset by the above net
operating loss carryovers attributable to periods prior to the ownership
change. The annual amount of net operating losses allowed under Section 382
will be approximately $825,000. Net operating losses not subject to the
limitation under Section 382 are approximately $21.3 million.
The Company's effective tax rate on its income (loss) before taxes differs
from the statutory federal regular tax rate as follows:
Years Ended June 30,
-------------------------------
1996 1995 1994
------ ------ ------
Federal statutory rate 35.0% 35.0% (35.0)%
State and local income taxes
(net of federal benefit) 1.9 5.1 2.2
Goodwill amortization - - 21.3
Meals and entertainment 6.3 6.6 0.8
Recognition of a deferred tax asset
in the current period - (24.2) -
Losses for which a tax detriment
(benefit) was recorded in current
period (33.8) - 14.2
-------- --------- --------
Effective income tax rate for the year 9.4% 22.5% 3.5%
-------- --------- --------
-------- --------- --------
At June 30, 1996, net deferred tax assets totaled approximately $21.6
million. The total valuation allowance recognized for net deferred tax assets
was also approximately $21.6 million. The valuation allowance decreased by
approximately $3.2 million during the fiscal year ended June 30, 1996.
The differences between the tax bases of assets and liabilities and their
financial reporting amounts that give rise to significant portions of deferred
income tax liabilities or assets are: reserves for severance, office closures
and claims and settlements, real estate investment valuation allowances, equity
in partnership gains and losses, property and equipment depreciation and accrued
expenses.
21
<PAGE>
GRUBB & ELLIS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. INCOME TAXES (CONTINUED)
The components of the Company's deferred tax (liabilities) and assets are
as follows as of June 30, 1996 (in thousands):
Gross deferred tax liabilities - current
Commission and fee reserves $ (489)
Gross deferred tax assets - current
Commission and fee reserves $1,549
Claims and settlements 356
Compensation accrual 936
Workers' compensation accrual 652
--------
Gross deferred tax assets - current 3,493
Deferred tax assets valuation
allowance - current (3,004)
Gross deferred tax assets - noncurrent
Investment in partnerships 19
Depreciation 19
Investment tax credit 278
Commission and fee reserves 1,553
Claims and settlements 2,599
Net operating loss carryforwards 15,886
Estimated net operating loss
carryforward limitation under
Code Section 382 (1,770)
--------
Gross deferred tax assets - noncurrent 18,584
Deferred tax assets valuation
allowance - noncurrent (18,584)
--------
Net deferred tax (liability) asset $ -
--------
--------
7. STOCK OPTIONS, STOCK PURCHASE AND EMPLOYEE 401(k) PLANS
STOCK OPTION PLANS:
Changes in stock options were as follows for the fiscal years ended June
30, 1996, 1995 and 1994:
22
<PAGE>
GRUBB & ELLIS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. STOCK OPTIONS, STOCK PURCHASE AND EMPLOYEE 401(k) PLANS (CONTINUED)
STOCK OPTION PLANS (CONTINUED):
<TABLE>
<CAPTION>
1996 1995 1994
------------------------- -------------------------- ------------------------
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
---------- ------------ ----------- ----------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Stock Options
outstanding at the
beginning of the $1.88 to $2.88 to $3.50 to
year 651,900 $28.75 321,118 $28.75 662,900 $28.75
Granted or $2.13 to $1.88 to $2.88 to
regranted 1,000,000 $2.38 352,850 $2.38 162,000 $4.13
Lapsed or
canceled $1.88 to $4.13 to $3.50 to
(552,100) $23.15 (22,068) $18.75 (503,782) $18.75
$1.88 to
Exercised (14,400) $3.13 - - - -
---------- ------------ ----------- ----------- --------- ---------
Stock options
outstanding at the $1.88 to $1.88 to $2.88 to
end of the year 1,085,400 $28.75 651,900 $28.75 321,118 $28.75
---------- ------------ ----------- ----------- --------- ---------
---------- ------------ ----------- ----------- --------- ---------
Exercisable at end $1.88 to $2.88 to $3.50 to
of the year 300,235 $28.75 165,251 $28.75 96,461 $28.75
---------- ------------ ----------- ----------- --------- ---------
---------- ------------ ----------- ----------- --------- ---------
</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 November 1995 to authorize a total of 1,500,000 shares for
issuance under the plan and to provide for flexibility in setting terms of
exercise. At June 30, 1996, 1995 and 1994, the number of shares available for
the grant of options were 425,534, 723,434 and 1,030,029, respectively. Stock
options under this plan are 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
have been determined by the Compensation Committee of the Board of Directors
until August 1996, and thereafter, by 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 for each such Director 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 June 30,
1996, 1995 and 1994, the number of shares available for the grant of options
were 20,000, 20,000 and 30,000, respectively. As of June 30, 1996, options to
purchase 20,001 shares have vested under this plan.
EMPLOYEE COMMON STOCK PURCHASE PLAN:
In 1987, the Company adopted the Employee New 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 June 30, 1996, 43,546 shares were
available for issue. During the fiscal years ended June 30, 1996, 1995 and
1994, the number of shares purchased under this plan were 38,265, 15,804 and
3,213, respectively.
23
<PAGE>
GRUBB & ELLIS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. STOCK OPTIONS, STOCK PURCHASE AND EMPLOYEE 401(k) PLANS (CONTINUED)
EMPLOYEE 401(k) PLANS:
The Company has an employee 401(k) 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 employer contributions may be made in common stock or cash, or a
combination of both. Axiom has an employee 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 $418,000,
$484,000 and $574,000 for the fiscal years ended June 30, 1996, 1995 and 1994,
respectively.
8. 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 fiscal years ended June 30, 1996, 1995 and
1994 (in thousands):
1996 1995 1994
------- ------- ------
Real estate brokerage $ 710 $ 977 $3,215
commissions
Real estate services
fees and commissions $1,102 $ 458 $ 408
The Company rents office space from Related Parties. Such rent expense was
$1,122,000 for each of the fiscal years ended June 30, 1996, 1995 and 1994. See
Note 5 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. In April 1995, in response to the joint venture's inability
to make the required interest payments, the joint venture entered into a
forbearance agreement with the Related Party providing for reduced interest
payments, and in November 1995, the Related Party sold the loan to a third
party.
24
<PAGE>
GRUBB & ELLIS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. RELATED PARTY TRANSACTIONS (CONTINUED)
In connection with the 1994 Recapitalization, the Company entered into
agreements with certain Related Parties (see Note 5 to Notes to Consolidated
Financial Statements) and paid approximately $70,000 in legal fees on behalf of
Prudential.
9. 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 June 30, 1996 (in
thousands):
Year Gross Sublease
Ending Lease Rental Net Lease
June 30, Obligation Income Obligation
--------- ---------- -------- ----------
1997 $10,710 $ 997 $ 9,713
1998 7,546 176 7,370
1999 5,570 127 5,443
2000 3,978 127 3,851
2001 2,329 127 2,202
Thereafter 843 - 843
--------- --------- -----------
$30,976 $1,554 $29,422
--------- --------- -----------
--------- --------- -----------
As a component of the Company's restructuring charges related to the
downsizing and closing of certain offices, the Company has accrued for
approximately $1,583,000 of the above expected future minimum rental payments,
net of expected sublease income of approximately $669,000 as of June 30, 1996.
25
<PAGE>
GRUBB & ELLIS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. COMMITMENTS AND CONTINGENCIES (CONTINUED)
Lease and rental expense for the fiscal years ended June 30, 1996, 1995 and
1994 amounted to $15,104,000, $15,788,000 and $17,101,000, respectively, net of
sublease income of $833,000, $947,000 and $1,161,000, 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.
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, two former Company
employees, 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 were sought. In the JOHSZ case,
plaintiffs dismissed with prejudice all causes of action allowing punitive
damages. The remaining causes of action were dismissed by summary judgment of
the Superior Court, entered on December 18, 1995. Plaintiffs have appealed this
summary judgment to the California Court of Appeals. In the YOUNKIN case,
plaintiffs dismissed without prejudice all causes of action allowing punitive
damages. The case is presently stayed pending resolution of a petition for a
writ of mandamus/appeal on a sanction award entered by the court against the
plaintiffs.
JOHN W. MATTHEWS, ET AL. V. KIDDER, PEABODY & CO., ET AL. AND HSM INC.,
ET AL., filed on January 23, 1995 in the United States District Court for the
Western District of Pennsylvania, is a class action on behalf of
approximately 6,000 limited partners who invested approximately $85 million
in three public real estate limited partnerships (the "Partnerships") during
the period beginning in 1982 and continuing through 1986. 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. Specific damages were not pled, but treble, punitive as well
as compensatory damages and restitution are sought. On December 19, 1995 the
court granted the defendants' motion to dismiss the entire complaint with
regard to Partnerships I and III, based upon the plaintiff's lack of standing
in those Partnerships
26
<PAGE>
GRUBB & ELLIS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. COMMITMENTS AND CONTINGENCIES (CONTINUED)
but denied the motion with respect to the plaintiff's standing in Partnership
II, in which the plaintiff was a unitholder. The court declined to rule on
the other bases for dismissal, stating that they could be raised by summary
judgment motion after discovery. Plaintiff filed a motion for leave to file
an amended complaint adding new party plaintiffs in order to preserve claims
relating to Partnerships I and III. On September 27, 1996, the court granted
plaintiff's motion to file an amended complaint to add additional plaintiffs
with respect to Partnerships I and II. Also on that date, the court granted
plaintiff's motion for class certification with respect to Partnerships I, II
and III. Defendants intend to appeal the court's ruling permitting plaintiff
to file an amended complaint. Discovery has commenced.
The Company intends to vigorously defend the JOHSZ and YOUNKIN appeals, and
the 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 believes that the outcome will not have a material
adverse effect on the Company's financial position or results of operations.
10. 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 certain of these measures, as well as other
special charges, have been recorded in "Special Charges and Unusual Items".
During the fiscal year ended June 30, 1994, the Company recorded Special
Charges and Unusual Items totaling $13.2 million, including the write-off of the
remaining $10.1 million of goodwill related to its commercial brokerage
business, $2.9 million for severance and office closure costs and $200,000 of
other net costs inclusive of the net gain from the sale of the Company's real
estate advisory business and Northern California residential real estate
operations.
During the fiscal year ended June 30, 1995, the Company made non-cash
reversals of approximately $2.6 million of previously established reserves for
severance and office closure costs. Approximately $1.4 million of the reversals
related to closing certain offices more efficiently than initially estimated and
$930,000 related to the reversal of the remaining net office lease liability of
the Company's Southern California residential brokerage operations which were
sold in November 1994.
During the fiscal year ended June 30, 1996, the Company recorded a $462,000
net credit to Special Charges and Unusual Items. Special charges included
$525,000 of severance costs for a senior executive related to restructuring the
operations of Axiom and credits to Special Charges and Unusual Items included
approximately $627,000 of non-cash reversals primarily related to previously
established reserves for severance and office closure costs and the reversal of
an additional $360,000 of remaining net office lease liability related to the
sale of the Southern California residential brokerage operations 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
$203,000 will be reduced in future periods.
27
<PAGE>
GRUBB & ELLIS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. SPECIAL CHARGES AND UNUSUAL ITEMS (CONTINUED)
As of June 30, 1996, the Company had current accrued severance and office
closure costs of approximately $721,000 of which $82,000 of accrued severance
costs and $276,000 of accrued office closure costs, net of anticipated sublease
income, are expected to be paid in cash during the fiscal year ending June 30,
1997. As of June 30, 1996, approximately $603,000 of the $960,000 of long-term
accrued office closure costs, net of anticipated sublease income, are expected
to be paid in cash over the next six years. During the fiscal year ended June
30, 1996, the Company paid $1.4 million in cash for the accrued severance and
office closure costs.
11. 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 Company policy and pursuant to
restrictions in the New Note Agreement with Prudential.
28
<PAGE>
GRUBB & ELLIS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
Fiscal Year Ended June 30, 1996
-------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- -------- -------- --------
(in thousands, except per share amounts and shares)
<S> <C> <C> <C> <C>
Operating Revenue $ 47,362 $ 60,381 $ 36,933 $ 49,052
----------- ------------ ----------- -----------
----------- ------------ ----------- -----------
Operating income (loss) $ 407 $ 6,005 $ (4,574) $ 1,501
----------- ------------ ----------- -----------
----------- ------------ ----------- -----------
Income(loss) before income
taxes $ 808 $ 5,278 $ (5,110) $ 1,324
----------- ------------ ----------- -----------
----------- ------------ ----------- -----------
Net income (loss) $ 596 $ 5,332 $ (5,116) $ 1,290
----------- ------------ ----------- -----------
----------- ------------ ----------- -----------
Net income (loss)
per common share:
Primary $ (.01) $ .42 $ (.67) $ .06
----------- ------------ ----------- -----------
----------- ------------ ----------- -----------
Fully diluted $ (.01) $ .32 $ (.67) $ .08
----------- ------------ ----------- -----------
----------- ------------ ----------- -----------
Weighted average common
shares and equivalents 8,827,675 8,827,675 8,827,675 8,831,513
----------- ------------ ----------- -----------
----------- ------------ ----------- -----------
Common stock market price
range (high:low) 2 3/4 : 1 7/8 2 5/8 : 1 7/8 3 : 1 7/8 5 1/4 : 2 1/4
----------- ------------ ----------- -----------
----------- ------------ ----------- -----------
Fiscal Year Ended June 30, 1995
-------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- -------- -------- --------
(in thousands, except per share amounts and shares)
Operating Revenue $ 47,003 $ 56,779 $ 38,064 $ 43,938
----------- ------------ ----------- -----------
----------- ------------ ----------- -----------
Operating income (loss) $ 1,221 $ 5,982 $ (3,370) $ (218)
----------- ------------ ----------- -----------
----------- ------------ ----------- -----------
Income(loss) before income
taxes $ 681 $ 5,309 $ (3,866) $ (120)
----------- ------------ ----------- -----------
----------- ------------ ----------- -----------
Net income (loss) $ 581 $ 5,299 $ (3,933) $ (391)
----------- ------------ ----------- -----------
----------- ------------ ----------- -----------
Net income (loss) per
common share:
Primary $ (0.02) $ 0.49 $ (0.65) $ (0.16)
----------- ------------ ----------- -----------
----------- ------------ ----------- -----------
Fully diluted $ (0.02) $ 0.35 $ (0.65) $ (0.16)
----------- ------------ ----------- -----------
----------- ------------ ----------- -----------
Weighted average common
shares 4,261,351 7,102,586 7,102,586 7,102,586
----------- ------------ ----------- -----------
----------- ------------ ----------- -----------
Common stock market price
range (high:low) 2 7/8 : 1 5/8 2 3/8 : 1 7/8 2 1/2 : 1 7/8 2 5/8 : 2
------------ ------------- ------------ ------------
------------ ------------- ------------ ------------
</TABLE>
29
<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 8th day of
October, 1996.
GRUBB & ELLIS COMPANY
(REGISTRANT)
by * October 8, 1996
----------------------------------------
Neil R. Young
President,
Chief Executive Officer and Director
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.
/s/ James E. Klescewski October 8, 1996
- ------------------------------------------
James E. Klescewski
Vice President and Corporate Controller
Principal Financial
and Accounting Officer
* October 8, 1996
- ------------------------------------------
Joe F. Hanauer, Chairman of the Board
and Director
* October 8, 1996
- ------------------------------------------
R. David Anacker, Director
* October 8, 1996
- ------------------------------------------
Reuben S. Leibowitz, Director
30
<PAGE>
* October 8, 1996
- ------------------------------------------
John D. Santoleri, Director
* October 8, 1996
- ------------------------------------------
Lawrence S. Bacow, Director
* October 8, 1996
- ------------------------------------------
Robert J. McLaughlin, Director
/s/ Robert J. Walner
- ------------------------------------------
*By: Robert J. Walner, Attorney-in-Fact, pursuant to Powers of Attorney
31
