<PAGE>
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1997
----------------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________________ to ___________________
Commission File Number: 1-8122
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GRUBB & ELLIS COMPANY
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(Exact name of registrant as specified in its charter)
Delaware 94-1424307
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2215 Sanders Road, Suite 400,
Northbrook, IL 60062
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(Address of principal executive offices)
(Zip Code)
(847) 753-7500
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(Registrant's telephone number, including area code)
No Change
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(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No ___
---
19,588,371
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(Number of shares outstanding of the registrant's
common stock at November 1, 1997)
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PART I
FINANCIAL INFORMATION
2
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ITEM 1. FINANCIAL STATEMENTS
GRUBB & ELLIS COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
For the Three Months
Ended September 30,
--------------------
1997 1996
---------- ---------
Revenue:
Transaction service commissions $ 52,205 $ 42,791
Management services fees 7,058 5,728
Other fees 2,836 3,308
---------- ---------
Total revenue 62,099 51,827
---------- ---------
Costs and expenses:
Transaction service commissions 31,202 25,936
Salaries and wages 15,859 12,677
Selling, general and administrative 11,995 10,694
Depreciation and amortization 736 767
Other non-recurring income -- (93)
---------- ---------
Total costs and expenses 59,792 49,981
---------- ---------
Total operating income 2,307 1,846
Other income and expenses:
Interest income 248 130
Other income, net 31 76
Interest expense to related parties -- (726)
---------- ---------
Income before income taxes 2,586 1,326
Net benefit (provision) for income taxes 449 (30)
---------- ---------
Net income $ 3,035 $ 1,296
---------- ---------
---------- ---------
Net income applicable to common stockholders,
net of undeclared dividends earned on
preferred stock in 1996 $ 3,035 $ 501
---------- ---------
---------- ---------
Net income per common share and equivalents:
Primary - $ .14 $ .06
---------- ---------
---------- ---------
Fully diluted - $ .14 $ .06
---------- ---------
---------- ---------
Weighted average common shares and
equivalents outstanding 22,036,137 8,916,567
---------- ---------
---------- ---------
See notes to condensed consolidated financial statements.
3
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GRUBB & ELLIS COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
ASSETS
September 30, June 30,
1997 1997
---------- ---------
Current assets:
Cash and cash equivalents $ 17,113 $ 16,790
Commissions, management services and other
fees receivable 7,165 4,694
Other receivables 1,983 2,097
Prepaids and other current assets 99 1,257
Deferred taxes 3,820 3,220
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Total current assets 30,180 28,058
Noncurrent assets:
Equipment and leasehold improvements, net 6,917 5,988
Commissions, management services and other
fees receivable 581 525
Other assets 2,280 2,125
---------- ---------
Total assets $ 39,958 $ 36,696
---------- ---------
---------- ---------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 2,034 $ 1,938
Compensation and employee benefits payable 4,963 4,568
Accrued office closure costs 605 788
Other accrued expenses 4,264 3,779
---------- ---------
Total current liabilities 11,866 11,073
Long-term liabilities:
Accrued claims and settlements 10,l12 10,512
Accrued office closure costs 272 308
Other liabilities 1,874 1,880
---------- ---------
Total liabilities 24,124 23,773
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Stockholders' equity:
Common stock, $.01 par value: 25,000,000
shares authorized; 19,583,571 and
19,509,952 shares issued and outstanding
at September 30, 1997 and June 30,
1997, respectively 197 196
Additional paid-in-capital 110,454 110,579
Retained earnings (deficit) (94,817) (97,852)
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Total stockholders' equity 15,834 12,923
---------- ---------
Total liabilities and stockholders' equity $ 39,958 $ 36,696
---------- ---------
---------- ---------
See notes to condensed consolidated financial statements.
4
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GRUBB & ELLIS COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
For the three Months
Ended September 30,
-------------------
1997 1996
---------- ---------
Cash Flows from Operating Activities
Net income $ 3,035 $ 1,296
Adjustments to reconcile net income to
net cash provided by operating activities (1,170) (118)
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Net cash provided by operating activities 1,865 1,178
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Cash Flows from Investing Activities:
Purchases of equipment and
leasehold improvements (1,418) (287)
Proceeds from disposition and distribution
from real estate joint ventures and
real estate owned -- 10
---------- ---------
Net cash used in investing activities (1,418) (277)
---------- ---------
Cash Flows from Financing Activities:
Exercise of common stock options (124) --
Repayment of notes payable -- (5)
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Net cash used in financing activities (124) (5)
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Net increase in cash and cash equivalents 323 896
Cash and cash equivalents at beginning of period 16,790 13,547
---------- ---------
Cash and cash equivalents at end of period $ 17,113 $ 14,443
---------- ---------
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_________________________________
Supplemental Disclosure of Cash Flow Information:
Cash payments during the period for:
Interest $ 605
Income taxes $ 195 33
See notes to condensed consolidated financial statements.
5
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GRUBB & ELLIS COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. INTERIM PERIOD REPORTING
The accompanying unaudited condensed consolidated financial statements
include the accounts of Grubb & Ellis Company and its wholly owned
subsidiaries and controlled partnerships (collectively, the "Company").
The accompanying unaudited condensed consolidated financial statements are
prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q and
Article 10 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting
principles for complete financial statements and, therefore, should be
read in conjunction with the Company's Annual Report on Form 10-K for the
year ended June 30, 1997.
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.
In the opinion of management, all adjustments necessary for a fair
statement of the financial position and results of operations for the
interim periods presented have been included in these financial statements
and are of a normal and recurring nature. Certain amounts in prior
periods have been reclassified to conform to the current presentation.
Operating results for the three months ended September 30, 1997 are not
necessarily indicative of the results that may be achieved in future
periods.
2. INCOME TAXES
The Company's tax provision consists of currently payable state and local
income taxes and federal alternative minimum taxes, totaling $151,000 and
$30,000 in the three months ended September 30, 1997 and 1996,
respectively. In addition, the Company recognized a deferred tax benefit
of $600,000 in the three months ended September 30, 1997, as a result of a
reduction in the valuation allowance against the net deferred tax asset,
based upon the expected utilization of net operating loss carryforwards.
Management believes that, due to favorable economic conditions, the
elimination of debt and the recent trend of earnings, it is more likely
than not that the Company will generate sufficient future taxable income
to realize the deferred tax asset.
6
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GRUBB & ELLIS COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
3. NET INCOME PER COMMON SHARE AND EQUIVALENTS
Net income per common share and equivalents computations are based on the
weighted average number of common shares and equivalents outstanding.
Common equivalent shares from stock options, stock warrants and
convertible preferred stock are excluded from the computations if their
effect is anti-dilutive.
The calculation of net income per common share and equivalents for the
three months ended September 30, 1996, includes adjustments for earned but
undeclared dividends related to the Company's previously outstanding
Senior and Junior Convertible Preferred Stock, totaling $578,000 and
$217,000, respectively. All of the preferred stock was either retired or
converted to common stock during December 1996.
PRO FORMA INFORMATION --
The information below presents (in thousands, except share data) the pro
forma impact to net income per common share and equivalents for the three
months ended September 30, 1996 assuming (a) equity investments of $10
million in December 1996 and $11.25 million in January 1997 were made at
the beginning of the period, then concurrently (b) all outstanding long-
term debt was immediately retired and (c) all outstanding Senior and
Junior Convertible Preferred Stock was also immediately retired or
converted into common stock.
1996
----
Net income applicable to common stockholders $ 501
Add pro forma adjustments:
Dividends applicable to preferred stock 795
Interest expense to related parties 726
Pro forma net income applicable to common
stockholders $ 2,022
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----------
Pro forma weighted average common shares and
equivalents outstanding 19,945,000
----------
----------
Pro forma net income per common share
and equivalents (A): $ .10
----------
----------
(A) The pro forma net income per common share and equivalents amounts are
the same for both primary and fully diluted bases of calculation.
The pro forma information is not necessarily indicative of the results of
the Company had such transactions occurred on the dates discussed above,
nor does such information purport to represent the expected result for
future periods.
4. IMPACT OF CHANGE IN ACCOUNTING STANDARDS
In February 1997, the Financial Accounting Standards Board issued
Statement No. 128, Earnings Per Share, which is required to be adopted for
periods ending after December 15, 1997. At that time, the Company will be
required to change the method currently used to compute earnings per share
and to restate all prior periods. Under the new requirements, earnings
per share will be computed under both basic and diluted methods, where
basic earnings
7
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GRUBB & ELLIS COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
4. IMPACT OF CHANGE IN ACCOUNTING STANDARDS (CONTINUED)
per share excludes the dilutive effect of stock options and other common
stock equivalents currently included in calculating primary earnings per
share. The impact of this change would result in basic earnings per share
of $.16 and diluted earnings per share of $.14 for the three months ended
September 30, 1997.
5. COMMITMENTS AND CONTINGENCIES
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.
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 an 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.
The Company previously disclosed in its Annual Report on Form 10-K for the
year ended June 30, 1997, information concerning a lawsuit entitled JOHSZ
ET AL. V. KOLL COMPANY, ET AL., and a related lawsuit entitled YOUNKIN,
MAIONA, ET AL. V. KOLL COMPANY, ET AL. and a class action lawsuit, JOHN W.
MATTHEWS, ET AL. V. KIDDER, PEABODY & CO., ET AL. AND HSM INC., ET AL.
Since such report, there has been no material change WITH RESPECT TO THESE
MATTERS.
8
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
NOTE REGARDING FORWARD-LOOKING STATEMENTS
This report contains forward-looking statements which may involve known
and unknown risks, uncertainties and other factors that may cause the
Company's actual results and performance in future periods to be
materially different from any future results or performance suggested by
these statements. Such factors, which could adversely affect the
Company's ability to obtain these results include, among other things, (i)
the volume of transactions and prices for real estate in the real estate
markets generally, (ii) a general or regional economic downturn which
could create a recession in the real estate markets, (iii) the Company's
debt level and its ability to make interest and principal payments, (iv)
an increase in expenses related to new initiatives, investments in
personnel and technology, and service improvements, (v) the success of new
initiatives and investments, and (vi) other factors described in the
Company's Form 10-K for the fiscal year ended June 30, 1997.
RESULTS OF OPERATIONS
REVENUE
The Company's revenue is derived principally from transaction service
commissions related to commercial real estate. Property and facilities
management services, along with asset management, mortgage brokerage,
appraisal and consulting fees, provide substantially all of the remaining
revenue.
Revenue in any given quarter during the three fiscal year period ended
June 30, 1997, as a percentage of total annual revenue, ranged from a high
of 31.1% to a low of 19.0%, with revenue earned in the first quarters of
each of the last three fiscal years ranging from 22.7% to 25.3%. The
Company has historically experienced its lowest quarterly revenue in the
quarter ending March 31 of each year with progressively higher revenue in
the quarters ending June 30, September 30, and December 31, due to
increased activity caused by the desire of clients to complete
transactions by calendar year-end.
Total revenue for the quarter ended September 30, 1997 was $62.1 million,
an increase of 19.8% over revenue of $51.8 million for the same period
last year, reflecting a continued strong national economy, robust
commercial real estate markets and increased business activity across the
Company's service lines. This improvement related primarily to a $9.4
million increase in transaction service commissions over the same period
in 1996. Management services fees of $7.1 million for the quarter ended
September 30, 1997 increased by $1.3 million, or 23.2%, as a result of
increased activity in business services and property and facilities
management. These improvements were slightly offset by reduced asset
management and other fees for the quarter ended September 30, 1997.
COSTS AND EXPENSES
Transaction service commission expense is the Company's major expense and
is a direct function of gross transaction service commission revenue
levels. As a percentage of transaction service commission revenue,
related commission
9
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expense remained relatively unchanged for the quarter ended September 30,
1997 as compared to the same period in 1996. Commission expense related to
other fee revenue is also included in transaction service commission
expense for the periods reported.
Total costs and expenses, other than transaction service commissions,
increased for the three months ended September 30, 1997, by $4.5 million
or 18.9% over the comparable period last year. The rise in costs is
attributable in part to expenses associated with increased business
activity in the Company's core businesses; higher general and
administrative expense resulting from increased expenses related to
marketing, research and technology; and the recruiting costs and salaries
for senior-level executives hired to direct the Company's Corporate
Services Group and Institutional Services Group.
Other non-recurring income of $93,000 was recognized for the quarter ended
September 30, 1996 primarily related to the recovery of previously
established reserves for office closure costs.
NET INCOME
Net income of $3.0 million or $.14 per common share for the quarter ended
September 30, 1997 compared favorably to net income of $1.3 million or
$.06 per common share for the same period in 1996. The increase over the
prior year's performance was related to higher net earnings from
transaction and management services activities, the elimination of
interest expense resulting from the extinguishment of the Company's long-
term debt, and the recognition of a deferred tax benefit of $600,000 in
the first quarter of fiscal 1998. This increase in income was partially
offset by the increase in costs and expenses other than transaction
service commissions, as described above.
In February 1997, the Financial Accounting Standards Board issued
Statement No. 128, Earnings Per Share, which is required to be adopted for
periods ending after December 15, 1997. At that time, the Company will be
required to change the method currently used to compute earnings per share
and to restate all prior periods. Under the new requirements, earnings
per share will be computed under both basic and diluted methods, where
basic earnings per share excludes the dilutive effect of stock options and
other common stock equivalents currently included in calculating primary
earnings per share. The impact of this change would result in basic
earnings per share of $.16 and diluted earnings per share of $.14 for the
three months ended September 30, 1997.
LIQUIDITY AND CAPITAL RESOURCES
Working capital increased by $1.3 million to $18.3 million during the
quarter ended September 30, 1997, while cash and cash equivalents
increased by $323,000 during the same period. The increase was primarily
attributable to cash provided by operations of $1.9 million, net of
purchases of equipment and leasehold improvements of $1.4 million.
The Company believes that its short-term and long-term cash requirements
will be met by operating cash flow. In addition, the Company has a $15
million credit facility available for additional capital needs.
Currently, the Company has no outstanding borrowings under the credit
facility.
To the extent that the Company's cash requirements are not met by
operating cash flow or borrowings under the credit facility, due to
10
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adverse economic conditions or other unfavorable events, the Company may
find it necessary to reduce expense levels or undertake other actions as
may be appropriate under the circumstances.
The Company has increased its investment in various business and
technology initiatives, entering into preliminary contracts for intranet,
human resources, and transaction services information systems. The
Company's current contracted commitments for these systems, including
required computer hardware additions and upgrades, total approximately
$528,000, with additional commitments being likely.
The Company is exploring strategic acquisition opportunities that have the
potential to broaden its geographic reach and expand the depth and breadth
of its current lines of business. The sources of consideration for such
acquisitions could be cash, the Company's line of credit, new debt, and/or
the issuance of stock. Although it is the Company's intent to actively
pursue this strategy, no assurances can be made that these acquisitions
will occur.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
11
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PART II
OTHER INFORMATION
(ITEMS 1, 2, 3, 4 AND 5 ARE NOT APPLICABLE
FOR THE QUARTER ENDED SEPTEMBER 30, 1997)
12
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ITEM 6(a). EXHIBITS
(3) ARTICLES OF INCORPORATION AND BYLAWS
3.1 Certificate of Incorporation of the Registrant, as restated effective
November 1, 1994, incorporated herein by reference to Exhibit 3.2 to
the Registrant's Annual Report on Form 10-K filed on March 31, 1995
(Commission File No. 1-8122).
3.2 Certificate of Retirement with Respect to 130,233 Shares of Junior
Convertible Preferred Stock of Grubb & Ellis Company, filed with the
Delaware Secretary of State on January 22, 1997, incorporated herein
by reference to Exhibit 3.3 to the Registrant's Quarterly Report on
Form 10-Q filed on February 13, 1997 (Commission File No. 1-8122).
3.3 Certificate of Retirement with Respect to 8,894 Shares of Series A
Senior Convertible Preferred Stock, 128,266 Shares of Series B Senior
Convertible Preferred Stock, and 19,767 Shares of Junior Convertible
Preferred Stock of Grubb & Ellis Company, filed with the Delaware
Secretary of State on January 22, 1997, incorporated herein by
reference to Exhibit 3.4 to the Registrant's Quarterly Report on Form
10-Q filed on February 13, 1997 (Commission File No. 1-8122).
3.4 Grubb & Ellis Company Bylaws, as amended and restated effective June
1, 1994, incorporated herein by reference to Exhibit 3.2 to the
Registrant's Quarterly Report on Form 10-Q filed on November 13, 1996
(Commission File No. 1-8122).
(11) STATEMENT REGARDING COMPUTATION OF PER SHARE EARNINGS
(27) FINANCIAL DATA SCHEDULE
ITEM 6(b) REPORTS ON FORM 8-K
None.
13
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
GRUBB & ELLIS COMPANY
(Registrant)
Date: November 13, 1997 /s/ Brian D. Parker
-------------------------
Brian D. Parker
Senior Vice President and
Chief Financial Officer
14
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GRUBB & ELLIS COMPANY AND SUBSIDIARIES
EXHIBIT INDEX
FOR THE QUARTER ENDED SEPTEMBER 30, 1997
EXHIBIT
(11) STATEMENT REGARDING COMPUTATION OF PER SHARE EARNINGS
(27) FINANCIAL DATA SCHEDULE
15
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GRUBB & ELLIS COMPANY AND SUBSIDIARIES
EXHIBIT (11) STATEMENT RE COMPUTATION OF
PER SHARE EARNINGS - FORM 10-Q
FOR THE THREE MONTHS ENDED
SEPTEMBER 30, 1997 AND 1996
(UNAUDITED)
(IN THOUSANDS, EXCEPT FOR SHARE DATA)
Three Months
Ended September 30,
-------------------
1997 1996
-------- --------
Primary income per share applicable to
Common Stock:
Weighted average common shares and
equivalents outstanding 22,036,137 8,916,567
---------- ---------
---------- ---------
Net income $ 3,035 $ 1,296
Dividends in arrears on Preferred Stock -- (795)
---------- ---------
Net income applicable to Common Stockholders $ 3,035 $ 501
---------- ---------
---------- ---------
Net income per common share and equivalents $ .14 $ .06
---------- ---------
---------- ---------
Fully diluted income per share applicable
to Common Stock:
Weighted average common shares and
equivalents outstanding 22,036,137 8,916,567
---------- ---------
---------- ---------
Net income $ 3,035 $ 501
---------- ---------
---------- ---------
Net income per common share and equivalents $ .14 $ .06
---------- ---------
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<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONDENSED CONSOLIDATED BALANCE SHEETS AND THE CONSOLIDATED STATEMENTS OF
INCOME AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-START> JUL-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 17,113
<SECURITIES> 0
<RECEIVABLES> 11,390
<ALLOWANCES> 1,661
<INVENTORY> 0
<CURRENT-ASSETS> 30,180
<PP&E> 21,360
<DEPRECIATION> 14,443
<TOTAL-ASSETS> 39,958
<CURRENT-LIABILITIES> 11,866
<BONDS> 0
0
0
<COMMON> 197
<OTHER-SE> 15,637
<TOTAL-LIABILITY-AND-EQUITY> 39,958
<SALES> 0
<TOTAL-REVENUES> 62,378
<CGS> 0
<TOTAL-COSTS> 31,202
<OTHER-EXPENSES> 28,590
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 2,586
<INCOME-TAX> (449)
<INCOME-CONTINUING> 3,035
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,035
<EPS-PRIMARY> .14
<EPS-DILUTED> .14
</TABLE>
