<PAGE>
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------------
FORM 10-K/A
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED JUNE 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.
--------------------------
GRUBB & ELLIS COMPANY
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
DELAWARE 94-1424307
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
</TABLE>
2215 SANDERS ROAD, SUITE 400,
NORTHBROOK IL, 60062
-----------------------------------------------------
(Address of principal executive offices) (Zip Code)
(847) 753-7500
-----------------------------------------------------
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
<TABLE>
<CAPTION>
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
- -------------------- ----------------------------------------------
<S> <C>
Common Stock New York Stock Exchange
Pacific Exchange
</TABLE>
--------------------------
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes _X_ No ____
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein and will not be contained, to the
best of registrant's knowledge, in its definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. / /
The aggregate market value of voting common stock held by non-affiliates of
the registrant as of August 12, 1997 was approximately $74,385,000.
The number of shares outstanding of the registrant's common stock as of
August 12, 1997 was 19,511,243 shares.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's definitive proxy statement to be filed pursuant
to Regulation 14A no later than 120 days after the end of the fiscal year (June
30, 1997) are incorporated by reference into Part III of this Report.
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<PAGE>
GRUBB & ELLIS COMPANY
FORM 10-K/A
TABLE OF CONTENTS
<TABLE>
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PAGE
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<S> <C> <C>
COVER PAGE 1
TABLE OF CONTENTS 2
Part II.
Item 6. Selected Financial Data 7
Item 7. Management's Discussion and Analysis of Financial Condition and Results of 8
Operations
Item 8. Financial Statements and Supplementary Data 13
Part IV.
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K 36
SIGNATURES 40
EXHIBIT INDEX
</TABLE>
2
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
Five Year Comparison of Selected Financial and Other Data for the Company:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED JUNE 30,(1)
---------------------------------------------------------------------
1997 1996 1995 1994 1993
------------- ------------ ------------ ------------ ------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS AND SHARES)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENTS OF OPERATIONS
DATA:
Total revenue............................. $ 228,630 $ 193,728 $ 185,784 $ 185,182 $ 207,410
Net income (loss)......................... 19,010 2,102 1,556 (17,540) (58,186)
Dividends applicable to preferred
stockholders:
Accretion of liquidation preference..... -- -- (877) (2,494) (998)
Dividends in arrears.................... (1,431) (3,012) (1,862) -- --
Provision for income taxes................ (372) (198) (448) (597) (500)
Reduction in deferred tax asset valuation
allowance............................... 3,220 -- -- -- --
Net income (loss) applicable to common
stockholders............................ 17,579 (910) (1,183) (20,034) (59,184)
Net income (loss) per common share
-- Basic................................ 1.22 (.10) (.16) (4.92) (15.66)
-- Diluted.............................. .97 (.10) (.16) (4.92) (15.66)
Weighted average common shares
-- Basic................................ 14,429,971 8,870,720 7,271,257 4,073,715 3,778,645
-- Diluted.............................. 19,567,635 8,870,720 7,271,257 4,073,715 3,778,645
OTHER DATA:
EBITDA (2)................................ $ 17,629 $ 7,418 $ 4,427 $ 841 $ (6,214)
</TABLE>
- ------------------------
(1) Net income (loss) and per share data reported on the above table reflect
other non-recurring expenses in the amounts of $2.4 million, $13.2 million
and $44.9 million for the fiscal years ended June 30, 1997, 1994 and 1993,
respectively. Other non-recurring income of $462,000 and $2.6 million is
included in the results for the fiscal years ended June 30, 1996 and 1995,
respectively. Net income for the year ended June 30, 1997 includes $5.4
million in extraordinary gain, net of taxes, on the extinguishment of debt.
For information regarding comparability of this data as it may relate to
future periods, see discussion in Item 7, Management's Discussion and
Analysis of Financial Condition and Results of Operations" and Note 10 of
the Notes to Consolidated Financial Statements.
(2) The Company defines EBITDA as earnings before interest expense, income
taxes, depreciation and amortization, adjusted to exclude other
non-recurring income and expense and extraordinary items, which may not be
comparable to measures of the same title reported by other companies.
3
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<TABLE>
<CAPTION>
AS OF JUNE 30, (UNAUDITED)
-------------------------------------------------------------------------
-------------
1997 1996 1995 1994 1993
------------- ------------- ------------- ------------- -------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS, SHARES AND STAFF DATA)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Total assets......................... $ 36,696 $ 29,658 $ 29,741 $ 32,142 $ 43,628
Working capital (deficit)............ 16,985 8,064 5,051 (14,308) 3,750
Long-term debt....................... -- 27,514 26,328 16,402 19,731
Other long-term liabilities.......... 12,700 14,948 14,668 15,990 24,194
Redeemable convertible preferred
stock.............................. -- -- -- 31,308 26,681
Stockholders' equity (deficit)....... 12,923 (27,475) (29,793) (73,538) (53,638)
Book value per common share.......... .66 (3.08) (3.38) (17.87) (13.21)
Common shares outstanding............ 19,509,952 8,916,415 8,810,220 4,114,549 4,060,268
Total staff.......................... 3,800 2,900 3,100 3,000 4,300
</TABLE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
NOTE REGARDING FORWARD-LOOKING STATEMENTS
Information contained in this Annual Report on Form 10-K contains
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995, which can be identified by the use of
forward-looking terminology such as "may," "will," "expect," "anticipate,"
"estimate" or "continue" or the negative thereof or other variations thereon or
comparable terminology. There are a number of important factors with respect to
such forward-looking statements, including certain risks and uncertainties, that
could cause actual results to differ materially from those contemplated in such
forward-looking 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 people and technology, and service
improvements, (v) the success of the new initiatives and investments and (vi)
other factors described elsewhere in this Annual Report.
RESULTS OF OPERATIONS
OVERVIEW
The Company reported net income of $19.0 million for the year ended June 30,
1997, and made significant progress toward improving its financial condition
during the year. Aggregate gross proceeds of $21.25 million of equity capital
was raised from two strategic investors, enabling the Company to retire all of
its long-term debt. All outstanding Senior and Junior Convertible Preferred
Stock was either retired or converted into common stock, extinguishing $10.7
million of accrued and undeclared dividends on such stock. Additionally, the
Company secured a $15 million revolving credit facility for general working
capital purposes. Finally, the corporate headquarters operations were moved from
San Francisco, California to Northbrook, Illinois. The move is intended to serve
the long-term interests of the Company by providing better access to its
corporate and institutional clients.
The Company's transaction service commissions revenue, fueled by a continued
strong economy and commercial real estate markets, increased to $188.7 million
in fiscal year 1997, approximately 19.6% higher than fiscal year 1996. The
Company established its Institutional Services Group and Corporate Services
Group which provide value-added services for multi-market real estate owners and
investors, delivered
4
<PAGE>
through a single point of contact. The Company also established a national
affiliates program to enter markets in which the Company did not have a formal
presence and to better meet the multi-market needs of national clients.
Currently, the Company has formed alliances with 13 independent brokerage firms
with a presence in 16 geographic or metropolitan markets in the United States.
FISCAL YEAR 1997 COMPARED TO FISCAL YEAR 1996
REVENUE
Total revenue for fiscal year 1997 was $228.6 million, an increase of $34.9
million or 18.0% over fiscal year 1996, 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
$31.1 million increase in transaction service commissions over fiscal year 1996.
Management services and other fees of $39.9 million for fiscal year 1997
increased by $3.8 million, or 10.4%, as a result of increased activity in
business services, property and facilities management, and other services fees.
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 expense
remained relatively unchanged for fiscal year 1997 as compared to fiscal year
1996.
Total costs and expenses, other than transaction service commission expense
and other non-recurring expenses, increased by $5.8 million, or 6.1%, for fiscal
year 1997 compared to fiscal year 1996. The increase in costs and expenses was
primarily attributable to the $7.5 million increase in salary and wages.
Approximately $2.2 million of this increase was due to a reduction in reserves
in fiscal year 1996 related to partially self-insured employee benefit programs.
The balance of the increase was due to (a) the hiring costs and salaries related
to additional senior level executives for the Institutional Services Group and
Corporate Services Group, (b) increased salary cost (as opposed to participation
expense) related to salary guarantees provided to District and Sales Managers in
their initial year of service and (c) the impact of normal annual salary
increases and incentive bonuses.
Other non-recurring expenses of $2.4 million consist primarily of costs
related to the relocation of the Company's corporate headquarters from San
Francisco, California to Northbrook, Illinois.
Interest expense to related parties decreased by $1.6 million, or 52%,
resulting from the repayment of the Company's long-term debt in two installments
during December 1996 and January 1997. The terms of the repayment also provided
for a portion of the debt to be forgiven. As a result, the Company recognized an
extraordinary gain of $5.4 million, net of taxes, in fiscal year 1997 related to
this extinguishment of debt.
INCOME TAXES
GEMS has been included in the Company's consolidated tax return beginning
with calendar year 1996, due to the Company's purchase of the minority interest
in GEMS in January 1996, as described in Note 1 of the Notes to Consolidated
Financial Statements.
The Company maintains a fiscal year ending June 30 for financial reporting
purposes and reports on the calendar year on a consolidated basis for income tax
purposes. As of June 30, 1997, the Company had net deferred tax assets of $19.5
million, with approximately $12.0 million of the net deferred tax assets
relating to tax net operating loss and credit carryforwards which will be
available to offset future taxable income through 2010. The Company has recorded
a valuation allowance for $16.3 million against the deferred tax assets as of
June 30, 1997 and will continue to do so until such time as management believes
that it is more likely than not that the Company will generate taxable income
sufficient to realize such tax benefits. The Company recognized a $3.2 million
deferred tax benefit during fiscal 1997 which represented
5
<PAGE>
a partial reduction of the valuation allowance for the net deferred tax assets.
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. Although uncertainties exist as to these fiscal year 1998 events, the
Company will continue to review its operations periodically to assess the
realizability of its deferred tax assets. See Note 6 of Notes to Consolidated
Financial Statements in Item 8 of this report for additional information.
NET INCOME
The Company reported net income of $19.0 million and $2.1 million for fiscal
years 1997 and 1996, respectively. Net income for fiscal year 1997 included
non-recurring expenses, a deferred tax benefit and an extraordinary gain, all of
which, when netted, totaled $6.2 million, while net income for fiscal year 1996
included non-recurring income of $462,000. Excluding the effect of these items,
net income in fiscal year 1997 was $12.8 million as compared to $1.6 million for
fiscal year 1996.
The accrued and undeclared dividends on the Company's convertible senior
and junior preferred stock totaled $1.4 million in fiscal year 1997, prior to
the conversion or retirement of all such stock in December 1996, and $3.0
million in fiscal year 1996. Earnings per common share, including such
accrued dividends, of $1.22 and $.97 on a basic and diluted basis,
respectively, were earned in fiscal year 1997, as compared to a loss of $.10
per share on both a basic and diluted basis in fiscal year 1996.
In 1997, the Financial Accounting Standard Board issued Statement of
Financial Accounting Standards No. 128, "Earnings per Share", which replaced
the previously reported primary and fully diluted earnings per share
calculations with basic and diluted earnings per share. Unlike primary
earnings per share, basic earnings per share excludes any dilutive effects of
options, warrants, and convertible securities. Diluted earnings per share is
very similar to the previously reported fully diluted earnings per share. All
earnings per share amounts for all periods have been presented and, where
necessary, restated to conform to the Statement No. 128 requirements.
STOCKHOLDERS' EQUITY (DEFICIT)
During fiscal year 1997, stockholders' equity increased $40.4 million to
$12.9 million from a deficit of $27.5 million at June 30, 1996. In addition to
net income of $19.0 million for fiscal year 1997, the Company received $21.0
million, net of related costs, in connection with two common stock transactions
that raised new capital from two strategic investors. See Note 5 of Notes to
Consolidated Financial Statements for additional information. The book value per
common share issued and outstanding increased to $.66 at June 30, 1997 from
$(3.08) at June 30, 1996.
FISCAL YEAR 1996 COMPARED TO FISCAL YEAR 1995
REVENUE
Total revenue for fiscal year 1996 was $193.7 million, an increase of $7.9
million or 4.3% over fiscal year 1995. Revenue from transaction service
commissions increased in fiscal year 1996 by $5.4 million or 3.6% over fiscal
year 1995, reflecting a slower than anticipated growth in the market for
commercial real estate. Management services and other fees of $36.2 million in
fiscal year 1996 increased $2.5 million or 7.6% over fiscal year 1995. The
increase in these revenues related primarily to a $1.9 million increase in
property and facilities management fees over fiscal year 1995.
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 in fiscal year 1996,
transaction service commission expense increased by approximately 1.4% over
fiscal year 1995 primarily due to the performance of top service professionals
and the Company's commitment to strengthen its work force by adding seasoned
professionals.
Total costs and expenses, other than transaction service commission expense
and other non-recurring income, were $95.8 million in fiscal year 1996, only .7%
higher than fiscal year 1995.
Other non-recurring income of $462,000 and $2.6 million was recognized in
fiscal year 1996 and fiscal year 1995, respectively. The fiscal year 1996 income
included recoveries of $987,000 primarily related to previously established
reserves for severance and office closure costs, which were partially offset by
a
6
<PAGE>
$525,000 charge for severance costs for a senior executive related to
restructuring the operations of GEMS. The fiscal year 1995 income of $2.6
million also represented recoveries of previously established reserves for
severance and office closure costs, of which approximately $1.4 million 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 residential brokerage operations.
INCOME TAXES
The fiscal year 1996 and fiscal year 1995 provision for income taxes
consists of state and local income taxes assessed on profitable subsidiaries of
the Company and federal income taxes related solely to GEMS, the Company's
subsidiary which filed on a separate basis for tax purposes through calendar
1995.
NET INCOME
The Company reported net income of $2.1 million and $1.6 million for fiscal
years 1996 and 1995, respectively. Net income included $462,000 and $2.6 million
of other non-recurring income in fiscal years 1996 and 1995, respectively. Other
income in fiscal year 1996 included $818,000, representing the net gain in the
sale of a note secured by certain real estate.
The accrued and unpaid dividends on the Company's convertible senior and
junior preferred stock amounted to $3.0 million and $2.7 million for fiscal
years 1996 and 1995, respectively. Taking into effect such dividends, the net
loss per common share of $0.10 for fiscal year 1996 compared favorably to a net
loss of $0.16 per common share for fiscal year 1995.
STOCKHOLDERS' DEFICIT
During fiscal year 1996, stockholders' deficit decreased by $2.3 million
from fiscal 1995 as a result of fiscal year 1996 net income of $2.1 million, and
$216,000 related to common stock issued in connection with the employee stock
purchase plan and the matching contribution by the Company to the employee
401(k) plan. The book value per common share increased from $(3.38) at June 30,
1995 to $(3.08) per common share at June 30, 1996 as a result of the above
mentioned changes.
LIQUIDITY AND CAPITAL RESOURCES
During fiscal year 1997, cash and cash equivalents increased by $3.2
million, primarily as a result of $8.0 million of net cash provided by operating
activities offset by $2.7 million of net cash used in investing activities and
$2.1 million of net cash used in financing activities. Net cash provided by
operating activities was significantly impacted by a decrease in the Company's
accrued claims and settlements as well as other accrued expenses. The net cash
used in investing activities related primarily to $3.2 million of purchases of
equipment and leasehold improvements, offset by $513,000 of proceeds from the
disposition of real estate and distributions from real estate joint ventures.
The net cash used in financing activities related to the Company's use of $21.25
million from the issuance of common stock to two strategic investors, along with
$1.75 million of existing cash reserves, to retire all of its outstanding
long-term debt and 130,233 shares of Junior Convertible Preferred Stock.
Working capital increased by $8.9 million to $17.0 million at June 30, 1997
primarily as a result of the increase in cash and cash equivalents of $3.2
million, the recognition of a deferred tax benefit of $3.2 million and a
reduction of current liabilities of $3.6 million.
The Company believes that its short-term and long-term cash requirements
will be met by operating cash flow. Significant progress has been made during
fiscal year 1997 towards improving the Company's financial condition. During
this period the Company sold 5.0 million shares of its common stock for
aggregate gross proceeds of $21.25 million, retired all of the outstanding
Payment-in-Kind Notes (approximately $13.6 million of principal and accrued
interest), Senior Notes ($10 million principal amount) and
7
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the $5 million Revolving Credit Note. As of January 27, 1997, the Company had no
outstanding long-term debt. Additionally, the Company retired 130,233 shares of
Junior Convertible Preferred Stock. All outstanding shares of Senior Convertible
Preferred Stock and all remaining shares of Junior Convertible Preferred Stock
were converted into an aggregate 5,520,624 shares of common stock.
On March 13, 1997 the Company entered into a $15 million revolving credit
facility (the "Credit Agreement") with PNC Bank, National Association ("PNC")
for general corporate purposes. The Credit Agreement expires on March 13, 2001.
Currently, the Company has no outstanding borrowings under the Credit Agreement.
Interest on outstanding borrowings will be due quarterly in arrears and is based
upon PNC's prime rate and/or the LIBOR rate plus, in either case, an additional
margin based upon a particular financial ratio of the Company, and will vary
depending upon which interest rate options the Company chooses to be applied to
specific borrowings. In connection with the Credit Agreement, the Company
incurred commitment and other financing fees totaling $445,000, which will be
amortized over the term of the Credit Agreement. Performance of the Company's
obligations under the Credit Agreement is secured by substantially all of the
Company's assets.
For discussion regarding financing and capital related transactions, see
Note 5 of Notes to Consolidated Financial Statements in Item 8 of this report.
To the extent that the Company's cash requirements are not met by operating
cash flow or borrowings under the Credit Agreement, due to 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 financial
system technology initiatives, entering into preliminary contracts for intranet,
human resources, and transaction services information systems. The Company's
contracted commitments for these systems, including required computer hardware
additions and upgrades, total approximately $1,400,000, with additional
commitments being contemplated.
DIVIDENDS
The Company's $15 million revolving credit facility contains certain
restrictive covenants including the prohibition of the payment of dividends,
restrictions on acquisitions, dispositions of assets, indebtedness, liens,
investments, the extension of credit and the issuance of certain types of
preferred stock, and the maintenance of a certain ratio of debt to cash flow. As
of June 30, 1997, the Company was in compliance with all covenants of the Credit
Agreement.
8
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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, 1997 and 1996, 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, 1997. 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, 1997 and 1996, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended June 30, 1997, in conformity with generally
accepted accounting principles.
ERNST & YOUNG LLP
Chicago, Illinois
August 18, 1997, except for Note 1(k)
as to which the date
is March 21, 1998
9
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GRUBB & ELLIS COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JUNE 30, 1997 AND 1996
(IN THOUSANDS, EXCEPT SHARE DATA)
ASSETS
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<CAPTION>
1997 1996
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Current assets:
Cash and cash equivalents........................................................ $ 16,790 $ 13,547
Commissions, management and other service fees receivable........................ 4,694 3,378
Other receivables................................................................ 2,097 4,326
Prepaids and other current assets................................................ 1,257 1,484
Deferred taxes................................................................... 3,220 --
------------- -------------
Total current assets....................................................... 28,058 22,735
Noncurrent assets:
Equipment and leasehold improvements, net........................................ 5,988 5,194
Transaction service commissions and management service and other fees
receivable..................................................................... 525 100
Other assets..................................................................... 2,125 1,629
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Total assets............................................................... $ 36,696 $ 29,658
------------- -------------
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LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable................................................................. $ 1,938 $ 1,652
Compensation and employee benefits payable....................................... 4,568 5,380
Accrued office closure costs..................................................... 788 623
Other accrued expenses........................................................... 3,779 7,016
------------- -------------
Total current liabilities.................................................. 11,073 14,671
Long-term liabilities:
Long-term debt to related party.................................................. -- 27,514
Accrued claims and settlements................................................... 10,512 13,583
Accrued office closure costs..................................................... 308 960
Other liabilities................................................................ 1,880 405
------------- -------------
Total liabilities.......................................................... 23,773 57,133
------------- -------------
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 at June 30, 1996....................... -- 32,143
Common stock, $.01 par value: 25,000,000 shares authorized; 19,509,952 and
8,916,415 shares issued and outstanding at June 30, 1997 and 1996,
respectively................................................................... 196 90
Additional paid-in-capital....................................................... 110,579 57,154
Retained earnings (deficit)...................................................... (97,852) (116,862)
------------- -------------
Total stockholders' equity (deficit)....................................... 12,923 (27,475)
------------- -------------
Total liabilities and stockholders' equity (deficit)....................... $ 36,696 $ 29,658
------------- -------------
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</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
10
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GRUBB & ELLIS COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED JUNE 30, 1997, 1996 AND 1995
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Revenue
Transaction service commissions.................................... $ 188,686 $ 157,562 $ 152,160
Management services and other fees................................. 39,944 36,166 33,624
------------ ------------ ------------
Total revenue................................................ 228,630 193,728 185,784
------------ ------------ ------------
Costs and expenses
Transaction service commissions.................................... 113,460 95,037 89,596
Salaries and wages................................................. 55,095 47,562 46,565
Selling, general and administrative................................ 43,567 45,706 46,602
Depreciation and amortization...................................... 2,964 2,546 2,012
Other non-recurring expenses (income).............................. 2,431 (462) (2,606)
------------ ------------ ------------
Total costs and expenses..................................... 217,517 190,389 182,169
------------ ------------ ------------
Total operating income....................................... 11,113 3,339 3,615
Other income and expenses
Interest income.................................................... 840 689 773
Other income, net.................................................. 281 1,306 633
Interest expense to related parties................................ (1,453) (3,034) (3,017)
------------ ------------ ------------
Income before income taxes and extraordinary item............ 10,781 2,300 2,004
Net benefit (provision) for income taxes............................. 2,848 (198) (448)
------------ ------------ ------------
Income before extraordinary item..................................... 13,629 2,102 1,556
Extraordinary item -- gain on extinguishment of debt, net of taxes of
$195............................................................... 5,381 -- --
------------ ------------ ------------
Net income................................................... $ 19,010 $ 2,102 $ 1,556
------------ ------------ ------------
------------ ------------ ------------
Net income (loss) applicable to common stockholders, net of
undeclared dividends earned on preferred stock in the amounts of
$1,431, $3,012, and $2,739 for the years ended June 30, 1997, 1996,
and 1995, respectively............................................. $ 17,579 $ (910) $ (1,183)
------------ ------------ ------------
------------ ------------ ------------
Net income (loss) per common share:
Basic --
-- from operations................................................. $ .85 $ (.10) $ (.16)
-- from extraordinary gain......................................... .37 -- --
------------ ------------ ------------
$ 1.22 $ (.10) (.16)
------------ ------------ ------------
------------ ------------ ------------
Weighted average common shares outstanding......... 14,429,971 8,870,720 7,271,257
------------ ------------ ------------
------------ ------------ ------------
Diluted --
-- from operations................................................. $ .70 $ (.10) $ (.16)
-- from extraordinary gain......................................... .27 -- --
------------ ------------ ------------
$ .97 $ (.10) $ (.16)
------------ ------------ ------------
------------ ------------ ------------
Weighted average common shares outstanding......... 19,567,635 8,870,720 7,271,257
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
11
<PAGE>
GRUBB & ELLIS COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE YEARS ENDED JUNE 30, 1997, 1996 AND 1995
(IN THOUSANDS, EXCEPT SHARE DATA)
<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, 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 purchases.......... 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 purchases 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)
Employee common stock purchases and
exercise of common stock options....... 72,913 1 -- 430 -- 431
Issuance of common stock, net of related
costs.................................. 5,000,000 50 -- 20,907 -- 20,957
Retirement of preferred stock:
5% Junior Convertible Preferred Stock.. -- -- (14,064) 14,064 -- --
Conversion of preferred stock to common
stock:
12% Senior Convertible Preferred
Stock................................ 5,168,177 52 (15,945) 15,893 -- --
5% Junior Convertible Preferred Stock.. 352,447 3 (2,134) 2,131 -- --
Net income............................... -- -- -- -- 19,010 19,010
----------- ----------- ----------- ----------- ----------- ------------
Balance as of June 30, 1997.............. 19,509,952 $ 196 $ -- $ 110,579 $ (97,852) $ 12,923
----------- ----------- ----------- ----------- ----------- ------------
----------- ----------- ----------- ----------- ----------- ------------
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements
12
<PAGE>
GRUBB & ELLIS COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED JUNE 30, 1997, 1996 AND 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
1997 1996 1995
------------- ------------- -------------
<S> <C> <C> <C>
Cash Flows from Operating Activities:
Net income.......................................................... $ 19,010 $ 2,102 $ 1,556
Adjustments to reconcile net income to net cash provided by
operating activities:
Extraordinary item -- gain on extinguishment of debt, net of
tax............................................................. (5,381) -- --
Deferred tax benefit.............................................. (3,220) -- --
Depreciation and amortization..................................... 2,964 2,546 2,012
Interest expense on Payment-in-Kind Notes......................... 465 1,606 1,407
Recovery of real estate valuation allowance....................... (425) -- --
Other non-cash charges related to non-recurring income............ -- (462) (2,606)
(Recovery of) provision for commissions, management and other
service fees receivable valuation allowances.................... (1,306) 200 (1,303)
Increase (decrease) in commissions, management and other service
fees receivable................................................. (435) 2,306 2,288
Decrease (increase) in other assets............................... 1,775 (213) 3,065
Increase (decrease) in accounts payable........................... 286 (1,595) 608
(Decrease) increase in compensation and employee benefits
payable......................................................... (812) (38) 50
Decrease in other liabilities..................................... (4,918) (3,458) (6,358)
------------- ------------- -------------
Net cash provided by operating activities................... 8,003 2,994 719
------------- ------------- -------------
Cash Flows from Investing Activities:
Purchases of equipment and leasehold improvements................... (3,216) (1,724) (2,944)
Proceeds from disposition of real estate and distributions from real
estate joint ventures............................................. 513 1,090 83
------------- ------------- -------------
Net cash used in investing activities....................... (2,703) (634) (2,861)
------------- ------------- -------------
Cash Flows From Financing Activities:
Proceeds from borrowing............................................. -- 400 --
Repayment of notes payable and credit facility borrowings........... -- (654) (282)
Repayment of long-term debt to related party........................ (23,000) -- --
Proceeds from issuance of common stock, net......................... 21,388 35 3,615
Deferred financing fees............................................. (445) -- (55)
------------- ------------- -------------
Net cash (used in) provided by financing activities......... (2,057) (219) 3,278
------------- ------------- -------------
Net increase in cash and cash equivalents........................... 3,243 2,141 1,136
Cash and equivalents at beginning of the year....................... 13,547 11,406 10,270
------------- ------------- -------------
Cash and cash equivalents at end of the year........................ $ 16,790 $ 13,547 $ 11,406
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
13
<PAGE>
GRUBB & ELLIS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) THE COMPANY:
Grubb & Ellis Company and Subsidiaries (the "Company") is a full service
commercial real estate company that provides services to real estate
owners/investors and tenants including transaction services involving leasing,
acquisitions and dispositions, and property and facilities management services.
Additionally, the Company provides financial advisory services as well as
consulting and strategic services with respect to commercial real estate.
(b) PRINCIPLES OF CONSOLIDATION:
The consolidated financial statements include the accounts of Grubb & Ellis
Company, its wholly and majority owned and controlled subsidiaries and
controlled partnerships. The Company consolidates Grubb & Ellis Management
Services, Inc. ("GEMS"), formerly named Axiom Real Estate Management, Inc.,
which provides property and facilities management services. As described below,
the Company acquired the minority interest in GEMS in January 1996. Prior to the
acquisition, the minority interest was included in other long-term liabilities
on the Consolidated Balance Sheet with the related minority interest in
operating results included in "Other income, net" in the Consolidated Statements
of Operations. All significant intercompany accounts have been eliminated.
On January 24, 1996, the Company completed the purchase of the common stock
held by International Business Machines Corporation ("IBM") in GEMS for a
purchase price of $600,000. The terms of the transaction required $150,000 cash
upon closing and three additional $150,000 annual installments beginning January
1997. At June 30, 1997 and 1996, the outstanding liability to IBM totaled
$300,000 and $450,000, respectively. As a result of this transaction, the
Company owns 100% of the outstanding common stock of GEMS. The acquisition of
the minority interest was accounted for as a purchase.
(c) 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.
(d) FAIR VALUE OF FINANCIAL INSTRUMENTS:
Statement of Financial Accounting Standards ("SFAS") No. 107, "Disclosures
about Fair Value of Financial Instruments," requires disclosure of fair value
information about financial instruments, whether or not recognized in the
Consolidated Balance Sheets. Considerable judgment is required in interpreting
market data to develop estimates of fair value. Accordingly, the estimates
presented herein 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.
The carrying amounts of the Company's financial instruments, which include
cash and cash equivalents, receivables and obligations under accounts payable
and debt instruments, approximate their fair values.
14
<PAGE>
GRUBB & ELLIS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(e) 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
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 ("APB 25"). The Company elected to continue accounting
for stock based compensation to its employees under the provisions of APB 25.
Accordingly, if the exercise price of the Company's employee stock options
equals or exceeds the fair market value of the underlying stock on the date of
grant, no compensation expense is recognized by the Company. If the exercise
price of an award is less than the fair market value of the underlying stock at
the date of grant, the Company recognizes the difference as compensation expense
over the vesting period of the award. The Company, however, is required to
provide pro forma disclosure as if the fair value measurement provisions of
Statement 123 had been adopted. See Note 7 of Notes to Consolidated Financial
Statements for additional information.
(f) REVENUE RECOGNITION:
Real estate sales commissions are recognized at the earlier of receipt of
payment, close of escrow or transfer of title between buyer and seller. Receipt
of payment occurs at the point at which all Company services have been
performed, 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 recognized at the earlier of
receipt of payment or tenant occupancy, assuming a lease agreement has been
executed 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.
(g) COSTS AND EXPENSES:
Real estate transaction and other commission expense is recognized
concurrently with the related revenue. All other costs and expenses are
recognized when incurred.
GEMS 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
GEMS total gross and reimbursable salaries, wages and benefits (in thousands)
for the years ended June 30, 1997, 1996 and 1995. The net expense is included in
salaries and wages on the Consolidated Statements of Operations.
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Gross salaries, wages and benefits........................... $ 82,681 $ 80,757 $ 65,465
Less: reimbursements from property owners.................... (67,051) (66,310) (51,959)
--------- --------- ---------
Net salaries, wages and benefits............................. $ 15,630 $ 14,447 $ 13,506
--------- --------- ---------
--------- --------- ---------
</TABLE>
(h) 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.
15
<PAGE>
GRUBB & ELLIS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.
(i) ACCRUED CLAIMS AND SETTLEMENTS:
The Company has maintained 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.
(j) 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 are recorded based on enacted statutory rates to reflect
the tax consequences in future years of the differences between the tax bases of
assets and liabilities and their financial reporting amounts. Future tax
benefits, such as net operating loss carryforwards, are recognized to the extent
that realization of such benefits through future taxable earnings or alternative
tax strategies are more likely than not.
(k) EARNINGS (LOSS) PER COMMON SHARE:
In 1997, the Financial Accounting Standard Board issued Statement of
Financial Accounting Standards No. 128, "Earnings per Share", which replaced
the previously reported primary and fully diluted earnings per share
calculations with basic and diluted earnings per share. Unlike primary
earnings per share, basic earnings per share excludes any dilutive effects of
options, warrants, and convertible securities. Diluted earnings per share is
very similar to the previously reported fully diluted earnings per share. All
earnings per share amounts for all periods have been presented and, where
necessary, restated to conform to the Statement No. 128 requirements.
The calculation of earnings (loss) per common share includes net income
adjusted for amounts applicable to the Senior and Junior Convertible
Preferred Stock related to undeclared dividends for the periods during which
the preferred stock was subject to mandatory redemption. All of the preferred
stock was either retired or converted to common stock in December, 1996 (see
Note 5), and all accrued and undeclared dividends through that date were
forgiven.
The following table sets forth the computation of basic and diluted earnings
per common share from continuing operations (in thousands, except per share
data):
<TABLE>
<CAPTION>
For the fiscal year ended June 30,
---------------------------------------------
1997 1996 1995
-------- -------- -------
<S> <C> <C> <C>
Basic earnings per common share:
Income before extraordinary gain $13,629 $ 2,102 $ 1,556
Adjustments:
Dividends-senior preferred stock (1,032) (2,168) (1,936)
Dividends-junior preferred stock (399) (844) (803)
-------- -------- -------
Net income (loss) before extraordinary
gain applicable to common
stockholders $12,198 $ (910) $(1,183)
-------- -------- -------
-------- -------- -------
Weighted average common shares
outstanding - basic 14,430 8,871 7,271
-------- -------- -------
-------- -------- -------
Earnings (loss) per common share - basic $ 0.85 $ (0.10) $ (0.16)
-------- -------- -------
-------- -------- -------
Diluted earnings per common share:
Income before extraordinary gain $13,629 $ 2,102 $ 1,556
Adjustments:
Dividends-senior preferred stock -- (2,168) (1,936)
Dividends-junior preferred stock -- (844) (803)
-------- -------- -------
Net income (loss) before extraordinary
gain applicable to common
stockholders $13,629 $ (910) $(1,183)
-------- -------- -------
-------- -------- -------
Weighted average common shares
outstanding 14,430 8,871 7,271
Effect of dilutive securities:
Stock options and warrants 1,631 -- --
Senior convertible preferred stock 2,308 -- --
Junior convertible preferred stock 1,199 -- --
-------- -------- -------
Weighted average common shares
outstanding - diluted 19,568 8,871 7,271
-------- -------- -------
-------- -------- -------
Earnings (loss) per common share - diluted $ 0.70 $ (0.10) $ (0.16)
-------- -------- -------
-------- -------- -------
</TABLE>
16
<PAGE>
GRUBB & ELLIS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(l) CASH AND CASH EQUIVALENTS:
Cash and cash equivalents consist of demand deposits and highly liquid
short-term debt instruments with maturities of three months or less from the
date of purchase and are stated at cost.
Cash payments for interest were approximately $1.5 million for the fiscal
year ended June 30, 1997 and $1.4 million for each of the fiscal years ended
June 30, 1996 and 1995. Cash payments for income taxes for the fiscal years
ended June 30, 1997, 1996 and 1995 were approximately $168,000, $975,000, and
$720,000 respectively.
(m) RECLASSIFICATIONS:
Certain prior year amounts have been reclassified to conform to the current
year presentation.
2. COMMISSIONS, MANAGEMENT AND OTHER SERVICE FEES RECEIVABLE
Commissions, management and other service fees receivable consisted of the
following at June 30, 1997 and 1996 (in thousands):
<TABLE>
<CAPTION>
1997 1996
--------- ---------
<S> <C> <C>
Commissions and fees receivable......................................... $ 15,145 $ 15,561
Commissions payable..................................................... (8,052) (8,903)
Allowance for uncollectible accounts.................................... (1,874) (3,180)
--------- ---------
Total........................................................... 5,219 3,478
Less portion classified as current...................................... 4,694 3,378
--------- ---------
Noncurrent portion.............................................. $ 525 $ 100
--------- ---------
--------- ---------
</TABLE>
17
<PAGE>
GRUBB & ELLIS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. COMMISSIONS, MANAGEMENT AND OTHER SERVICE FEES RECEIVABLE (CONTINUED)
The following is a summary of the changes in the allowance for uncollectible
commissions, management and other service fees receivable for the fiscal years
ended June 30, 1997, 1996 and 1995 (in thousands):
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Balance at beginning of year..................................... $ 3,180 $ 2,980 $ 4,283
Provision for bad debt........................................... -- 200 --
Recovery of allowance............................................ (1,306) -- (1,303)
--------- --------- ---------
Balance at end of year........................................... $ 1,874 $ 3,180 $ 2,980
--------- --------- ---------
--------- --------- ---------
</TABLE>
3. EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Equipment and leasehold improvements consisted of the following at June 30,
1997 and 1996 (in thousands):
<TABLE>
<CAPTION>
1997 1996
--------- ---------
<S> <C> <C>
Office furniture and equipment.......................................... $ 17,490 $ 15,639
Leasehold improvements.................................................. 2,451 4,858
--------- ---------
Total................................................................. 19,941 20,497
Less accumulated depreciation and amortization.......................... 13,953 15,303
--------- ---------
Equipment and leasehold improvements, net............................... $ 5,988 $ 5,194
--------- ---------
--------- ---------
</TABLE>
During the year ended June 30, 1997, the Company wrote-off approximately
$400,000 of fully depreciated office furniture and equipment and $3.4 million of
fully amortized leasehold improvements.
4. REAL ESTATE
At June 30, 1997 and 1996, the Company held investments in real estate or
real estate related investments equaling $299,000 and $537,000, respectively,
net of applicable valuation allowances. These amounts are included in other
assets in the Consolidated Balance Sheets.
The following is a summary of the changes in the valuation allowance for
real estate investments and real estate owned for the fiscal years ended June
30, 1997, 1996 and 1995 (in thousands):
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Balance at beginning of year................................... $ 2,393 $ 3,501 $ 3,763
Charged to costs and expenses.................................. -- 31 --
Amounts written off............................................ (1,504) (1,139) (262)
Recoveries..................................................... (425) -- --
--------- --------- ---------
Balance at end of year......................................... $ 464 $ 2,393 $ 3,501
--------- --------- ---------
--------- --------- ---------
</TABLE>
18
<PAGE>
GRUBB & ELLIS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. FINANCING AND CAPITAL RELATED TRANSACTIONS
During the year ended June 30, 1997, the Company retired all of its
outstanding long-term debt, as further described below. At June 30, 1996,
long-term debt to related party consisted of the following (in thousands):
<TABLE>
<S> <C>
Senior Notes, 9.9% semi-annual interest payments, principal due in
two approximately equal installments on November 1, 1997 and
1998............................................................. $ 10,000
Payment-in-Kind Notes, 11.65% semi-annual interest payments,
principal due in two equal installments on November 1, 2000 and
2001............................................................. 12,514
Revolving Credit Note, monthly interest payments of 2.5% above
LIBOR, principal due November 1, 1999............................ 5,000
---------
$ 27,514
---------
---------
</TABLE>
FISCAL 1997 FINANCING TRANSACTIONS:
SALE AGREEMENT -- LONG-TERM DEBT -- On October 21, 1996, Warburg, Pincus
Investors, L.P. ("Warburg") and The Prudential Insurance Company of America
("Prudential") entered into an agreement (the "Sale Agreement") pursuant to
which Warburg acquired from Prudential all of the outstanding debt, common stock
warrants, and substantially all of the Junior Convertible Preferred Stock held
by Prudential in the Company (together, the "Prudential Securities"), for $23
million plus accrued but unpaid interest on the debt. The closing occurred on
October 22, 1996. Concurrently, Warburg granted the Company an option, (the
"Option") until April 16, 1997, to acquire all of the Prudential Securities
which Warburg acquired from Prudential, at Warburg's cost, plus interest.
The Prudential Securities included: (a) $5 million Revolving Credit Note due
November 1, 1999 (the "Revolving Credit Note"); (b) $10 million 9.9% Senior
Notes due in equal installments on November 1, 1997 and 1998 (the "Senior
Notes"); (c) $10.9 million 11.65% Subordinated Payment-In-Kind Note due November
1, 2000 and 2001; (d) $2.2 million 11.65% Subordinated Payment-In-Kind Notes,
due November 1, 2000 and 2001 ((c) and (d) collectively the "PIK Notes"); (e)
130,233 shares of Junior Convertible Preferred Stock; and (f) stock subscription
warrants to subscribe for 350,000 shares of common stock.
Pursuant to the Sale Agreement, Prudential agreed that in the event that
Warburg converted its Senior Convertible Preferred Stock to common stock,
Prudential would convert its remaining Junior Convertible Preferred Stock to
common stock. As of the date of the Sale Agreement, Prudential continued to hold
397,549 shares of common stock and 19,767 shares of Junior Convertible Preferred
Stock convertible into 352,447 shares of common stock.
While the Option remained unexercised during the Option period, no interest
or dividends accrued or were due or payable on the Prudential Securities;
however, the Company was obligated to pay Warburg interest at an initial rate of
10% per annum, increasing to 12% per annum as of February 1, 1997, on Warburg's
$23 million investment in the Prudential Securities. In consideration of receipt
of the Option, the Company agreed to extend the expiration date of warrants to
purchase an aggregate of 1,012,358 shares of common stock of the Company, then
held by Warburg, to January 29, 2002.
EQUITY INVESTMENTS -- On December 11, 1996, the Company sold 2.5 million
shares of its common stock for $10 million to the principals of the Kojaian
Companies, Southfield, Michigan. The $10 million
19
<PAGE>
GRUBB & ELLIS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. FINANCING AND CAPITAL RELATED TRANSACTIONS (CONTINUED)
was used to purchase from Warburg, and then retire, all of the outstanding PIK
Notes (approximately $13.6 million of principal and accrued interest) and
130,233 shares of Junior Convertible Preferred Stock. The repurchase of the PIK
Notes resulted in a $3.6 million extraordinary gain on the extinguishment of
debt. Concurrently, Warburg and Joe F. Hanauer, a director of the Company,
converted all of the Senior Convertible Preferred Stock held by them into an
aggregate of 5,168,177 shares of common stock, and Mr. Hanauer agreed to cancel
certain warrants held by him. In connection with these transactions, Warburg
retained warrants to purchase an aggregate of 325,000 shares of common stock and
Mr. Hanauer received, from Warburg, warrants to purchase an aggregate of 25,000
shares of common stock. At the same time, Warburg granted the Company a second
option (the "Second Option") to purchase the Senior Notes and Revolving Credit
Note held by Warburg until April 16, 1997 for $13 million, plus interest, and
the Option was canceled. Pursuant to the Sale Agreement, Prudential converted
all of its remaining shares of Junior Convertible Preferred Stock into an
aggregate of 352,447 shares of common stock.
On January 24, 1997, the Company sold 2.5 million shares of its common stock
for $11.25 million to Archon Group, L.P., a majority owned subsidiary of the
international investment bank, Goldman, Sachs & Co. The $11.25 million, together
with existing cash, was used to exercise the Second Option and purchase from
Warburg, and then retire, the $10 million Senior Notes and $5 million Revolving
Credit Note, at a price equal to $13 million plus accrued interest of
approximately $96,000. The purchase of these notes resulted in a $2 million
extraordinary gain on the extinguishment of debt.
As a result of the above mentioned transactions, all shares of Senior and
Junior Convertible Preferred Stock of the Company were either converted to
common stock or retired, and all accrued and undeclared dividends were forgiven.
REVOLVING CREDIT FACILITY:
On March 13, 1997 the Company entered into a $15 million revolving credit
facility (the "Credit Agreement") with PNC Bank, National Association ("PNC")
for general corporate purposes and acquisitions. The Credit Agreement expires on
March 13, 2001. At June 30, 1997, the Company had no outstanding borrowings
under the Credit Agreement.
Interest on outstanding borrowings will be due quarterly in arrears and is
based upon PNC's prime rate and/or the LIBOR rate plus, in either case, an
additional margin based upon a particular financial ratio of the Company, and
will vary depending upon which interest rate options the Company chooses to be
applied to specific borrowings. In connection with the Credit Agreement, the
Company incurred commitment and other financing fees totaling $445,000, which
are being amortized over the term of the Credit Agreement. Performance of the
Company's obligations under the Credit Agreement is collateralized by
substantially all of the Company's assets. The Credit Agreement contains certain
restrictive covenants, including the prohibition of the payment of dividends,
restrictions on the issuance of certain types of preferred stock, and the
maintenance of certain financial ratios.
6. INCOME TAXES
The Company maintains a fiscal year ending June 30 for financial reporting
purposes and reports on the calendar year on a consolidated basis for income tax
purposes. The provision for income taxes for the fiscal years ended June 30,
1997, 1996 and 1995 consisted of currently payable state and local income taxes
and in 1997 also included a federal alternative minimum tax provision of
$217,000 and a deferred tax
20
<PAGE>
GRUBB & ELLIS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. INCOME TAXES (CONTINUED)
benefit of $3.2 million. Additionally, the provision for income taxes for the
year ended June 30, 1995 included federal income taxes related solely to Axiom,
which filed on a separate basis for income tax purposes.
At June 30, 1997, the following income tax carryforwards were available to
the Company (in thousands):
<TABLE>
<CAPTION>
EXPIRATION
AMOUNT DATES
--------- --------------
<S> <C> <C>
Federal income tax operating loss carryforwards................... $ 30,027 2007 to 2010
Federal investment tax credit carryforwards....................... 278 1998 to 2000
Federal alternative minimum tax credit carryforward............... 217 Indefinite
</TABLE>
In addition, certain of the Company's net operating loss carryforwards
(NOL's) are limited pursuant to Section 382 of the Internal Revenue Code
relating to a prior ownership change. The NOL's allowable under Section 382 are
limited to approximately $825,000 per year. At June 30, 1997, the amount of
NOL's not subject to limitation amounted to approximately $18.1 million.
The Company's effective tax rate on its income before taxes differs from the
statutory federal income tax rate as follows:
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
-------------------------------
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Federal statutory rate......................................... 35.0% 35.0% 35.0%
State and local income taxes (net of federal tax benefits)..... 1.4 1.9 5.1
Alternative minimum tax........................................ 1.3 -- --
Meals and entertainment........................................ .8 5.5 6.6
Reduction in valuation allowance............................... (32.0) (33.8) (24.2)
Utilization of NOL carryforwards............................... (22.7) -- --
--------- --------- ---------
Effective income tax rate.................................... (16.2)% 8.6% 22.5%
--------- --------- ---------
--------- --------- ---------
</TABLE>
During 1997, the Company reduced the valuation allowance against the net
deferred tax assets. The reduction reflects the utilization of deferred tax
assets, which lowered 1997 taxable income, and the recognition of a deferred tax
asset of $3.2 million. The recognition of the deferred tax asset is based upon
the expected utilization of NOL's and is classified as a current asset in the
consolidated balance sheet as of June 30, 1997. 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. In 1996 and 1995, a
valuation allowance equal to 100% of the net deferred tax asset was recorded by
the Company due to the uncertainty of realization.
21
<PAGE>
GRUBB & ELLIS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. INCOME TAXES (CONTINUED)
Deferred income tax liabilities or assets are determined based on the
differences between the financial statement and tax bases of assets and
liabilities. The components of the Company's deferred tax assets and
(liabilities) are as follows as of June 30, 1997 and 1996 (in thousands):
<TABLE>
<CAPTION>
1997 1996
--------- ---------
<S> <C> <C>
Deferred tax assets:
Commission and fee reserves........................................... $ 2,531 $ 3,102
Insurance reserves.................................................... 2,404 --
Claims and settlements................................................ 1,679 2,955
Compensation accrual.................................................. 1,090 936
NOL and credit carryovers............................................. 11,980 14,394
Other................................................................. 368 690
--------- ---------
20,052 22,077
Deferred tax liabilities:
Commission and fee reserves........................................... 586 489
--------- ---------
Net deferred tax assets............................................. 19,466 21,588
Less valuation allowance................................................ (16,246) (21,588)
--------- ---------
Net deferred tax asset.............................................. $ 3,220 $ --
--------- ---------
--------- ---------
</TABLE>
7. STOCK OPTIONS, WARRANTS AND STOCK PURCHASE AND EMPLOYEE 401(K) PLANS
STOCK OPTION PLANS:
Changes in stock options were as follows for the fiscal years ended June 30,
1997, 1996 and 1995:
<TABLE>
<CAPTION>
1997 1996 1995
--------------------- --------------------- --------------------
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
---------- --------- ---------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Stock Options outstanding at the beginning $ 1.88 to $ 1.88 to $ 2.88 to
of the year............................. 1,085,400 $28.75 651,900 $28.75 321,118 $28.75
$ 3.38 to $ 2.13 to $ 1.88 to
Granted or regranted...................... 800,000 $15.25 1,000,000 $2.38 352,850 $2.38
$ 1.88 to $ 1.88 to $ 4.13 to
Lapsed or canceled........................ (61,340) $28.75 (552,100) $23.15 (22,068) $18.75
$ 1.88 to $ 1.88 to --
Exercised................................. (21,740) $10.00 (14,400) $3.13 --
---------- ---------- ---------
Stock options outstanding at the end of $ 1.88 to $ 1.88 to $ 1.88 to
the year................................ 1,802,320 $27.50 1,085,400 $28.75 651,900 $28.75
---------- ---------- ---------
---------- ---------- ---------
$ 1.88 to $ 1.88 to $ 2.88 to
Exercisable at end of the year............ 446,864 $27.50 300,235 $28.75 165,251 $28.75
---------- ---------- ---------
---------- ---------- ---------
</TABLE>
22
<PAGE>
GRUBB & ELLIS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. STOCK OPTIONS, WARRANTS AND STOCK PURCHASE AND EMPLOYEE 401(K) PLANS
(CONTINUED)
During fiscal year 1997, the weighted average exercise price of options
granted or regranted was $7.539 (with a weighted average fair market value of
$4.395), lapsed or canceled was $4.624, exercised was $3.079 and options
outstanding at June 30 was $4.810.
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, subject to shareholder approval, effective February 1, 1997 and
June 20, 1997 to increase the authorized number of shares issuable under the
plan by 300,000 and 200,000 shares, respectively, to a total of 2,000,000
shares. At June 30, 1997, 1996 and 1995, the number of shares available for the
grant of options were 186,874, 425,534 and 723,434, respectively. Stock options
under this plan may be 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
September 1996, and thereafter, by the Board of Directors.
The Company's 1993 Stock Option Plan for Outside Directors provides for an
automatic grant to each newly-elected non-management member of the Board of
Directors of an option to purchase 10,000 shares of common stock, at exercise
prices set at the market price at the date of grant. The plan has authorized
50,000 shares for issuance. The options expire five years from the date of grant
and vest over three years from such date. At each of June 30, 1997, 1996 and
1995, the number of shares available for the grant of options was 20,000. As of
June 30, 1997, options to purchase 26,667 shares have vested under this plan.
Pro forma information regarding net income and earnings per share is
required by Statement 123, and has been determined as if the Company had
accounted for its options under the fair value method of that Statement. The
fair value for the options as of July 1, 1995 was estimated at the date of grant
using a Black-Scholes option pricing model. Weighted-average assumptions for
1997 and 1996, respectively, are as follows:
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Risk free interest rates........................................... 6.27% 5.60%
Dividend yields.................................................... 0% 0%
Volatility factors of the expected market price of the common
stock............................................................ .586 .515
Weighted-average expected lives.................................... 4.96 years 5.15 years
</TABLE>
The Black-Scholes option valuation model was developed for use in estimating
the fair value of traded options which have no vesting restrictions and are
fully transferable. In addition, option valuation models require the input of
highly subjective assumptions including the expected stock price volatility.
Because changes in the subjective input assumptions can materially affect the
fair value estimate, in management's opinion, the existing models do not
necessarily provide a reliable single measure of the fair value of options
granted.
The effect on 1997 and 1996 pro forma net income and pro forma earnings
per common share of amortizing to expense the estimated fair value of stock
options are not necessarily representative of the effects on net income to be
reported in future years due to such things as the vesting period of the
stock options, and the potential for issuance of additional stock options in
future years. For purposes of pro forma disclosures, the estimated fair value
of the options is amortized to expense over the options' vesting period. The
pro forma effect of applying Statement 123's fair value
23
<PAGE>
GRUBB & ELLIS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. STOCK OPTIONS, WARRANTS AND STOCK PURCHASE AND EMPLOYEE 401(K) PLANS
(CONTINUED)
method to the Company's stock-based awards results in net income and earnings
per share that are not materially different from amounts reported.
STOCK WARRANTS
As of June 30, 1997, the Company had the following stock warrants
outstanding, all of which expire on January 29, 2002:
<TABLE>
<CAPTION>
NUMBER OF EXERCISE
WARRANTS PRICE
- ----------- ----------
<S> <C>
475,000 $ 2.37500
235,045 3.40355
887,358 3.50000
88,496 3.60449
</TABLE>
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. As amended, up to 200,000 shares of stock were authorized for issuance
under this plan. On June 30, 1997, the plan terminated pursuant to its terms. At
that time, all but 20,576 shares had been issued under the plan. During the
fiscal years ended June 30, 1997, 1996 and 1995, the number of shares purchased
under this plan were 22,970, 38,265 and 15,804, respectively.
On June 20, 1997, the Board of Directors adopted, subject to shareholder
approval, a new employee stock purchase plan effective August 1, 1997. The new
plan provides for the purchase of up to 750,000 shares of common stock by
employees of the Company at a discount from market price through payroll
deductions.
EMPLOYEE 401(K) PLANS:
Prior to January 1, 1997, the Company had an employee 401(k) plan covering
eligible employees other than employees of GEMS. The Company contributed 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. Prior to January 1, 1997, GEMS also had an
employee 401(k) plan, but such plan did not provide for employer contributions
to be made in stock. The two plans were merged together on January 1, 1997 and
provide that employer contributions may be made in common stock of the Company
or cash. Discretionary contributions by the Company and other expenses for the
plans amounted to approximately $585,000, $418,000 and $484,000 for the fiscal
years ended June 30, 1997, 1996 and 1995, respectively.
24
<PAGE>
GRUBB & ELLIS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. RELATED PARTY TRANSACTIONS
Revenue earned by the Company for services rendered to affiliates, including
joint ventures, officers and directors and their affiliates, was as follows for
the fiscal years ended June 30, 1997, 1996 and 1995 (in thousands):
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Transaction service commissions.................................... $ 836 $ 710 $ 977
Management services and other fees................................. $ 1,028 $ 1,102 $ 458
</TABLE>
The Company rented office space from a company which was a related party
until October 1996. Such rent expense was $374,000, $1,122,000 and $1,122,000
for the fiscal years ended June 30, 1997, 1996 and 1995, respectively.
See Note 5 to the Notes to Consolidated Financial Statements for information
regarding long-term debt with related parties.
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, 1997 (in thousands):
<TABLE>
<CAPTION>
YEAR ENDING LEASE
JUNE 30, OBLIGATIONS
- ------------ -----------
<S> <C>
1998 $ 11,370
1999 9,161
2000 7,755
2001 5,895
2002 4,065
Thereafter 4,231
-----------
$ 42,477
-----------
-----------
</TABLE>
As a component of the Company's restructuring charges related to the closing
of certain offices, the Company has accrued for approximately $1,096,000 of the
above expected future minimum rental payments, net of expected sublease income
of approximately $539,000 as of June 30, 1997.
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, 1997, 1996 and
1995 amounted to $14,542,000, $15,104,000, and $15,788,000 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. One of the plaintiffs in the YOUNKIN case has recently
died of her illnesses. 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. No trial date on the remaining causes of action has been set in
YOUNKIN.
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. Discovery has commenced. 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 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 III. Also on that date, the court granted plaintiff's motion
for class certification with respect to Partnerships I, II and III.
26
<PAGE>
GRUBB & ELLIS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. COMMITMENTS AND CONTINGENCIES (CONTINUED)
Defendants have appealed the court's ruling permitting plaintiff to file an
amended complaint. The case has been stayed, including discovery, pending the
outcome of the appeal.
The Company intends to vigorously defend the JOHSZ appeal, 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. OTHER NON-RECURRING EXPENSE (INCOME)
During the fiscal year ended June 30, 1995, the Company recognized
recoveries of approximately $2.6 million of previously established reserves for
severance and office closure costs. Approximately $1.4 million of the recoveries
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 other non-recurring expenses. Charges included $525,000 of
severance costs for a senior executive related to restructuring the operations
of GEMS, while income credits included recoveries of $987,000 primarily related
to previously established reserves for severance and office closure costs.
During the fiscal year ended June 30, 1997, the Company recorded a $2.4
million charge for incremental non-recurring costs related to the relocation of
the Company's corporate headquarters from San Francisco, California to
Northbrook, Illinois.
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 of its interest-bearing investments
with major financial institutions and limits the amount of credit exposure to
any one financial institution.
27
<PAGE>
GRUBB & ELLIS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. PRO FORMA INFORMATION (UNAUDITED)
The information presented below presents the unaudited pro forma impact
to net income per common share assuming (a) the equity investments of $10
million in December 1996 and $11.25 million in January 1997 described in Note
5 to the Notes to Consolidated Financial Statements were made at the
beginning of the respective years, then concurrently (b) all outstanding
long-term debt to The Prudential Insurance Company of America was immediately
retired and (c) all outstanding Senior and Junior Convertible Preferred Stock
was also immediately retired or converted into common stock.
<TABLE>
<CAPTION>
(UNAUDITED) (UNAUDITED)
1997 1996
------------- -------------
<S> <C> <C>
Net income (loss) applicable to common stockholders...................... $ 17,579 $ (910)
Add pro forma adjustments --
Dividends applicable to preferred stock................................ 1,431 3,012
Interest expense to related parties.................................... 1,453 3,034
------------- -------------
Pro forma net income applicable to common stockholders................... $ 20,463 $ 5,136
------------- -------------
------------- -------------
Pro forma weighted average common shares outstanding
-- Basic............................................................... 19,434,392 19,362,599
------------- -------------
------------- -------------
-- Diluted............................................................. 21,064,891 19,362,599
------------- -------------
------------- -------------
Pro forma net income per common share:
Basic:
From operations...................................................... $ .77 $ .27
From extraordinary gain.............................................. .28 --
------------- -------------
$ 1.05 $ .27
------------- -------------
------------- -------------
Diluted:
From operations...................................................... $ .71 $ .27
From extraordinary gain.............................................. .26 --
------------- -------------
$ .97 $ .27
------------- -------------
------------- -------------
</TABLE>
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 results for future
periods.
28
<PAGE>
GRUBB & ELLIS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
13. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
FISCAL YEAR ENDED JUNE 30, 1997
---------------------------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
------------ ------------- ------------- -------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS AND SHARES)
<S> <C> <C> <C> <C>
Operating revenue............................................ $ 51,927 $ 68,034 $ 48,593 $ 60,076
------------ ------------- ------------- -------------
------------ ------------- ------------- -------------
Operating income (loss)...................................... $ 1,947 $ 5,411 $ (1,651) $ 5,406
------------ ------------- ------------- -------------
------------ ------------- ------------- -------------
Income (loss) before income taxes and extraordinary item..... $ 1,326 $ 5,184 $ (1,438) $ 5,709
------------ ------------- ------------- -------------
------------ ------------- ------------- -------------
Extraordinary item -- gain on extinguishment of debt......... -- $ 3,576 $ 2,000 $ (195)
------------ ------------- ------------- -------------
------------ ------------- ------------- -------------
Net income (loss)............................................ $ 1,296 $ 8,723 $ 534 $ 8,457
------------ ------------- ------------- -------------
------------ ------------- ------------- -------------
Net income (loss) per common share:
Basic --
-- from operations......................................... $ .06 $ .42 $ (.08) $ .44
------------ ------------- ------------- -------------
------------ ------------- ------------- -------------
-- from extraordinary gain................................. -- $ .34 $ .11 $ (.01)
------------ ------------- ------------- -------------
------------ ------------- ------------- -------------
Weighted average common shares outstanding................. 8,916,567 10,657,026 18,791,426 19,515,296
------------ ------------- ------------- -------------
------------ ------------- ------------- -------------
Diluted --
-- from operations......................................... $ .06 $ .30 $ (.08) $ .40
------------ ------------- ------------- -------------
------------ ------------- ------------- -------------
-- from extraordinary gain................................. -- $ .20 $ .11 $ (.01)
------------ ------------- ------------- -------------
------------ ------------- ------------- -------------
Weighted average common shares outstanding................. 8,916,567 17,330,945 18,791,426 21,819,489
------------ ------------- ------------- -------------
------------ ------------- ------------- -------------
4 3/4 : 10 1/8 :
Common stock market price range (high:low)................... 3 1/4 4 3/4 : 4 4 1/4 17 1/8 : 9
------------ ------------- ------------- -------------
------------ ------------- ------------- -------------
</TABLE>
<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:
Basic.................................................. $ (.01) $ .42 $ (.67) $ .06
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Diluted................................................ $ (.01) $ .32 $ (.67) $ .06
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Weighted average common shares outstanding............... 8,827,675 8,827,675 8,827,675 8,831,513
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
2 3/4 : 2 5/8 : 5 1/4 :
Common stock market price range (high:low)............... 1 7/8 1 7/8 3 : 1 7/8 2 1/4
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
</TABLE>
29
<PAGE>
GRUBB & ELLIS COMPANY
PART IV
------------------------
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) The following documents are filed as a part of this report:
1. The following Report of Independent Auditors and Consolidated Financial
Statements are submitted herewith:
Report of Independent Auditors
Consolidated Balance Sheets at June 30, 1997 and June 30,
1996.
Consolidated Statements of Operations for the years ended
June 30, 1997, 1996 and 1995.
Consolidated Statements of Stockholders' Equity (Deficit)
for the years ended June 30, 1997, 1996 and 1995.
Consolidated Statements of Cash Flows for the years ended
June 30, 1997, 1996 and 1995.
Notes to Consolidated Financial Statements.
2. All schedules for which provision is made in the applicable accounting
regulations of the Securities and Exchange Commission are not required
under the related instructions, are inapplicable, or the information is
contained in the Notes to Consolidated Financial Statements and therefore
have been omitted.
3. Exhibits required to be filed by Item 601 of Regulation S-K:
(3) Articles of Incorporation and Bylaws
<TABLE>
<S> <C>
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 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).
(4) Instruments Defining the Rights of Security Holders, including Indentures
4.1 First Amendment to Warrant No. 18, held by Warburg, Pincus Investors, L.P.,
exercisable for 687,358 shares of common stock of the Registrant extending the
expiration date to January 29, 2002, incorporated herein by reference to Exhibit 4.2
to the Registrant's Quarterly Report on Form 10-Q filed on November 13, 1996
(Commission File No. 1-8122).
</TABLE>
30
<PAGE>
<TABLE>
<S> <C>
4.2 First Amendment to Warrant No. 19, held by Warburg, Pincus Investors, L.P.,
exercisable for 325,000 shares of common stock of the Registrant extending the
expiration date to January 29, 2002, incorporated herein by reference to Exhibit 4.3
to the Registrant's Quarterly Report on Form 10-Q filed on November 13, 1996
(Commission File No. 1-8122).
4.3 Option Agreement dated as of December 11, 1996 between the Registrant and Warburg,
Pincus Investors, L.P., incorporated herein by reference to Exhibit 4.2 to the
Registrant's Current Report on Form 8-K filed on December 20, 1996 (Commission file
No. 1-8122).
4.4 Stock Purchase Agreement dated as of December 11, 1996 among the Registrant, Mike
Kojaian, Kenneth J. Kojaian and C. Michael Kojaian, incorporated herein by reference
to Exhibit 4.3 to the Registrant's Current Report on Form 8-K filed on December 20,
1996 (Commission File No. 1-8122).
4.5 Registration Rights Agreement dated as of December 11, 1996 among the Registrant,
Warburg, Pincus Investors, L.P., Joe F. Hanauer, Mike Kojaian, Kenneth J. Kojaian
and C. Michael Kojaian, incorporated herein by reference to Exhibit 4.1 to the
Registrant's Current Report on Form 8-K filed on December 20, 1996 (Commission File
No. 1-8122).
4.6 Purchase Agreement dated as of January 24, 1997 between the Registrant and Warburg,
Pincus Investors, L.P., incorporated herein by reference to Exhibit 4.1 to the
Registrant's Current Report on Form 8-K filed on February 4, 1997 (Commission File
No. 1-8122).
4.7 Stock Purchase Agreement dated as of January 24, 1997 between the Registrant and
Archon Group, L.P., incorporated herein by reference to Exhibit 4.2 to the
Registrant's Current Report on Form 8-K filed on February 4, 1997 (Commission File
No. 1-8122).
4.8 Registration Rights Agreement dated as of January 24, 1997 between the Registrant
and Archon Group, L.P., incorporated herein by reference to Exhibit 4.3 to the
Registrant's Current Report on Form 8-K filed on February 4, 1997 (Commission File
No. 1-8122).
4.9 Stock Subscription Warrant No. 20 dated December 11, 1996 issued to Joe F. Hanauer
Trust, incorporated herein by reference to Exhibit 4.11 to the Registrant's
Quarterly Report on Form 10-Q filed on February 13, 1997 (Commission File No.
1-8122).
4.10 Stock Subscription Warrant No. 21 dated December 11, 1996 issued to Warburg, Pincus
Investors, L.P., incorporated herein by reference to Exhibit 4.12 to the
Registrant's Quarterly Report on Form 10-Q filed on February 13, 1997 (Commission
File No. 1-8122).
4.11 Stock Subscription Warrant No. 22 dated December 11, 1996 issued to Joe F. Hanauer
Trust, incorporated herein by reference to Exhibit 4.13 to the Registrant's
Quarterly Report on Form 10-Q filed on February 13, 1997 (Commission File No.
1-8122).
4.12 Stock Subscription Warrant No. 23 dated December 11, 1996 issued to Warburg, Pincus
Investors, L.P., incorporated herein by reference to Exhibit 4.14 to the
Registrant's Quarterly Report on Form 10-Q filed on February 13, 1997 (Commission
File No. 1-8122).
4.13 Form of Amendment No. 1 to Stock Subscription Warrants No. 8, 9, 13 and 15 issued to
Joe F. Hanauer Trust, incorporated herein by reference to Exhibit 4.15 to the
Registrant's Quarterly Report on Form 10-Q filed on February 13, 1997 (Commission
File No. 1-8122).
4.14 Credit Agreement among the Registrant, certain Subsidiaries of the Registrant, and
PNC Bank, National Association dated as of March 13, 1997, incorporated herein by
reference to Exhibit 4.14 to the Registrant's Quarterly Report on Form 10-Q filed on
May 15, 1997 (Commission File No. 1-8122).
4.15 Subordination Agreement by and among the Registrant and certain Subsidiaries of the
Registrant in favor of PNC Bank, National Association dated as of March 13, 1997,
incorporated herein by reference to Exhibit 4.15 to the Registrant's Quarterly
Report on Form 10-Q filed on May 15, 1997 (Commission File No. 1-8122).
</TABLE>
31
<PAGE>
<TABLE>
<S> <C>
4.16 Revolving Credit Note executed by the Registrant in favor of PNC Bank, National
Association in the amount of up to $15 million dated as of March 13, 1997,
incorporated herein by reference to Exhibit 4.16 to the Registrant's Quarterly
Report on Form 10-Q filed on May 15, 1997 (Commission File No. 1-8122).
4.17 Letter dated March 12, 1997 from IBM Credit Corporation to Axiom Real Estate
Management, Inc., acknowledging release of collateral and discharge of all
obligations under Revolving Loan and Security Agreement dated October 19, 1995,
incorporated herein by reference to Exhibit 4.17 to the Registrant's Quarterly
Report on Form 10-Q filed on May 15, 1997 (Commission File No. 1-8122).
On an individual basis, instruments other than Exhibits listed above under Exhibit 4 defining
the rights of holders of long-term debt of the Registrant and its consolidated subsidiaries and
partnerships do not exceed ten percent of total consolidated assets and are, therefore,
omitted; however, the Company will furnish supplementally to the Commission any such omitted
instrument upon request.
</TABLE>
<TABLE>
<S> <C>
(10) Material Contracts
10.1* Employment agreement between Neil R. Young and the Registrant dated as of February
22, 1996, incorporated herein by reference to Exhibit 10.1 to the Registrant's
Quarterly Report on Form 10-Q filed on May 15, 1996 (Commission File No. 1-8122).
10.2* Grubb & Ellis Company 1990 Amended and Restated Stock Option Plan, as amended and
restated as of September 25, 1996.
10.3* Description of Grubb & Ellis Company Senior Management Compensation Plan,
incorporated herein by reference to Exhibit 10.17 to the Registrant's Annual Report
on Form 10-K filed on March 30, 1992 (Commission File No. 1-8122).
10.4* 1993 Stock Option Plan for Outside Directors, incorporated herein by reference to
Exhibit 4.1 to the Registrant's registration statement on Form S-8 filed on November
12, 1993 (Registration No. 33-71484).
10.5* Description of Grubb & Ellis Company Management Separation Arrangements,
incorporated herein by reference to Exhibit 10.18 to the Registrant's Annual Report
on Form 10-K filed on March 31, 1995 (Commission File No. 1-8122).
10.6 Master Collateral Assignment of Contract Rights to PNC Bank, National Association by
the Registrant and Subsidiaries of the Registrant dated as of March 13, 1997,
incorporated herein by reference to Exhibit 10.1 to the Registrant's Quarterly
Report on Form 10-Q filed on May 15, 1997 (Commission File No. 1-8122).
10.7 Master Agreement of Guaranty and Suretyship by and between the Registrant and
Subsidiaries of the Registrant in favor of PNC Bank National Association dated as of
March 13, 1997, incorporated herein by reference to Exhibit 10.2 to the Registrant's
Quarterly Report on Form 10-Q filed on May 15, 1997 (Commission File No. 1-8122).
10.8 Pledge Agreement among the Registrant, certain Subsidiaries of the Registrant and
PNC Bank, National Association dated as of March 13, 1997, incorporated herein by
reference to Exhibit 10.3 to the Registrant's Quarterly Report on Form 10-Q filed on
May 15, 1997 (Commission File No. 1-8122).
10.9 Security Agreement by and among the Registrant, certain Subsidiaries of the
Registrant and PNC Bank, National Association dated as of March 13, 1997,
incorporated herein by reference to Exhibit 10.4 to the Registrant's Quarterly
Report on Form 10-Q filed on May 15, 1997 (Commission File No. 1-8122).
10.10 Trademark Security Agreement by the Registrant in favor of PNC Bank, National
Association dated as of March 13, 1997, incorporated herein by reference to Exhibit
10.5 to the Registrant's Quarterly Report on Form 10-Q filed on May 15, 1997
(Commission File No. 1-8122).
</TABLE>
32
<PAGE>
<TABLE>
<S> <C>
10.11 Stock Sale Agreement between the Registrant and International Business Machines
Corporation dated January 19, 1996, incorporated herein by reference to Exhibit 99.1
to the Registrant's Current Report on Form 8-K filed on February 8, 1996 (Commission
File No. 1-8122).
10.12 Managed Service Agreement between International Business Machines Corporation and
Axiom Real Estate Management, Inc. dated as of January 1, 1996, and Side Letter
Agreement between the parties dated January 19, 1996, incorporated herein by
reference to Exhibit 99.2 to the Registrant's Current Report on Form 8-K filed on
February 8, 1996 (Commission File No. 1-8122).
</TABLE>
- ------------------------
<TABLE>
<S> <C>
* Management contract or compensatory plan or arrangement.
(21) Subsidiaries of the Registrant
(23) Consent of Independent Auditors
23.1 Consent of Ernst & Young LLP
(24) Powers of Attorney
(27) Financial Data Schedule
(b) Reports on Form 8-K: none
</TABLE>
33
<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 day of
September, 1997.
GRUBB & ELLIS COMPANY
(REGISTRANT)
<TABLE>
<S> <C> <C>
By *
----------------------------------------------------
Neil Young September 26, 1997
CHAIRMAN OF THE BOARD AND CHIEF EXECUTIVE OFFICER
</TABLE>
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.
<TABLE>
<C> <S>
/s/ BRIAN D. PARKER September 26, 1997
- ---------------------------------------------------------
Brian D. Parker
SENIOR VICE PRESIDENT AND CHIEF FINANCIAL OFFICER,
PRINCIPAL FINANCIAL AND ACCOUNTING OFFICER
* September 26, 1997
- ---------------------------------------------------------
R. David Anacker
DIRECTOR
* September 26, 1997
- ---------------------------------------------------------
Lawrence S. Bacow
DIRECTOR
* September 26, 1997
- ---------------------------------------------------------
Joe F. Hanauer
DIRECTOR
* September 26, 1997
- ---------------------------------------------------------
C. Michael Kojaian
DIRECTOR
* September 26, 1997
- ---------------------------------------------------------
Sidney Lapidus
DIRECTOR
</TABLE>
34
<PAGE>
<TABLE>
<C> <S>
* September 26, 1997
- ---------------------------------------------------------
Reuben S. Leibowitz
DIRECTOR
* September 26, 1997
- ---------------------------------------------------------
Robert J. McLaughlin
DIRECTOR
* September 26, 1997
- ---------------------------------------------------------
John D. Santoleri
DIRECTOR
* September 26, 1997
- ---------------------------------------------------------
Todd A. Williams
DIRECTOR
</TABLE>
<TABLE>
<S> <C> <C> <C>
*By: /s/ ROBERT J. WALNER
--------------------------------------
Robert J. Walner
ATTORNEY-IN-FACT,
PURSUANT TO POWERS OF ATTORNEY
</TABLE>
35
<PAGE>
GRUBB & ELLIS COMPANY AND SUBSIDIARIES
EXHIBIT INDEX (A)
FOR THE FISCAL YEAR ENDED JUNE 30, 1997
<TABLE>
<CAPTION>
EXHIBIT
- -----------
<C> <S>
(10) Material Contracts
10.2 1990 Amended and Restated Stock Option Plan, as amended and restated as of September 25, 1996.
(21) Subsidiaries of the Registrant
(23) Consent of Independent Auditors
23.1 Consent of Ernst & Young LLP
(24) Powers of Attorney
(27) Financial Data Schedule
(A) Exhibits incorporated by reference are listed in Item 14(a)3 of this Report.
</TABLE>
36
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration
Statement (Form S-8 Number 33-71578) pertaining to the Employee New Stock
Purchase Plan, as amended, the Registration Statement (Form S-8 Number
33-71580, 33-35640 and 2-98541) pertaining to the 1990 Amended and Restated
Stock Option Plan, as amended, the Registration Statement (Form S-8 Number
33-71484) pertaining to the 1993 Stock Option Plan for Outside Directors, and
the Registration Statement (Form S-8 Number 33-17194) pertaining to the 1985
Restricted Value Stock Plan, as amended of Grubb & Ellis Company and
Subsidiaries of our report dated August 18, 1997 (except for Note 1(k) as to
which the date is March 21, 1998), with respect to the
financial statements of Grubb & Ellis Company and Subsidiaries included in
the Annual Report (Form 10-K/A) for the year ended June 30, 1997, filed with
the Securities and Exchange Commission.
ERNST & YOUNG LLP
Chicago, Illinois
March 21, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEETS AND THE CONSOLIDATED STATEMENTS OF OPERATIONS AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-START> JUL-01-1996
<PERIOD-END> JUN-30-1997
<CASH> 16,790
<SECURITIES> 0
<RECEIVABLES> 9,190
<ALLOWANCES> 1,874
<INVENTORY> 0
<CURRENT-ASSETS> 28,058
<PP&E> 19,941
<DEPRECIATION> 19,953
<TOTAL-ASSETS> 36,696
<CURRENT-LIABILITIES> 11,073
<BONDS> 0
0
0
<COMMON> 196
<OTHER-SE> 12,727
<TOTAL-LIABILITY-AND-EQUITY> 36,696
<SALES> 0
<TOTAL-REVENUES> 229,751
<CGS> 0
<TOTAL-COSTS> 113,460
<OTHER-EXPENSES> 104,057
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,453
<INCOME-PRETAX> 10,781
<INCOME-TAX> (2,848)
<INCOME-CONTINUING> 13,629
<DISCONTINUED> 0
<EXTRAORDINARY> 5,381
<CHANGES> 0
<NET-INCOME> 19,010
<EPS-PRIMARY> 1.22
<EPS-DILUTED> .97
</TABLE>
