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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED JUNE 30, 1998
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to .
Commission file number 1-8122.
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GRUBB & ELLIS COMPANY
(Exact name of registrant as specified in its charter)
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<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
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(Address of principal executive offices) (Zip Code)
(847) 753-7500
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(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
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TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
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<S> <C>
Common Stock New York Stock Exchange
Pacific Exchange
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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 20, 1998 was approximately $57,532,000.
The number of shares outstanding of the registrant's common stock as of
August 20, 1998 was 19,722,721 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, 1998) are incorporated by reference into Part III of this Report.
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GRUBB & ELLIS COMPANY
FORM 10-K
TABLE OF CONTENTS
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PAGE
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COVER PAGE 1
TABLE OF CONTENTS 2
Part I.
Item 1. Business 3
Item 2. Properties 5
Item 3. Legal Proceedings 5
Item 4. Submission of Matters to a Vote of Security Holders 5
Part II.
Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters 6
Item 6. Selected Financial Data 7
Item 7. Management's Discussion and Analysis of Financial Condition and Results of 8
Operations
Item 7A. Quantitative and Qualitative Disclosures About Market Risk 13
Item 8. Financial Statements and Supplementary Data 14
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 35
Part III.
Item 10. Directors and Executive Officers of the Registrant 36
Item 11. Executive Compensation 36
Item 12. Security Ownership of Certain Beneficial Owners and Management 36
Item 13. Certain Relationships and Related Transactions 36
Part IV.
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K 37
SIGNATURES 41
EXHIBIT INDEX
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2
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GRUBB & ELLIS COMPANY
PART I
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ITEM 1. BUSINESS
GENERAL
Grubb & Ellis Company, a Delaware corporation organized in 1980, is the
successor by merger to a real estate brokerage company first established in
California in 1958. Grubb & Ellis Company and its wholly owned subsidiaries (the
"Company") is a full service commercial real estate company that provides
services to real estate owners/investors and tenants including transaction
services and property and facilities management. Additionally, the Company
provides consulting and strategic services with respect to commercial real
estate. The Company is one of the nation's largest publicly traded commercial
real estate firms, based on total revenues.
Property and facilities management services are provided by Grubb & Ellis
Management Services, Inc. ("GEMS"), a wholly owned subsidiary of the Company
since January 24, 1996 (prior to which time GEMS was a majority owned
subsidiary). GEMS had approximately 125 million square feet of property under
management as of June 30, 1998.
Currently, the Company has approximately 4,400 professionals and staff, with
offices and affiliates in 87 markets throughout the United States.
Internationally, the Company serves the needs of its multinational clients
through its European headquarters in London.
STRATEGIC INITIATIVES
In fiscal 1998, the Company continued several initiatives it launched in
fiscal 1997 which were designed to help meet its goal of enhancing the quality
of its service lines and expanding and diversifying sources of revenue beyond
traditional commercial brokerage. The Company continued to build its Corporate
Services Group and Institutional Services Group, which utilize a relationship
management system to allow the Company to respond to the increasing demand from
major corporate and institutional clients for expanded services through a single
point of contact. The Company also expanded its national affiliate program,
which has enabled it to enter markets where it previously did not have a formal
presence and to better meet the multi-market needs of national clients.
Currently, the Company has formed alliances with 22 real estate services firms
with a presence in 25 geographic or metropolitan markets in the United States.
The Company has also invested in technology systems designed to provide a stable
platform for growth and to efficiently deliver and share data with clients.
Among them is what the Company believes to be a state-of-the-art, company-wide
information sharing and research network which enables its professional staff
across all offices to work more efficiently, access the latest market
intelligence, and more fully address clients' needs.
Since April 1998, the Company also completed six acquisitions that reinforce
its strategy of increasing its transaction and management presence in key
markets. Those acquisitions included: White Commercial Real Estate, a Northern
California industrial real estate firm with 11 transaction professionals; Crane
Realty & Management Co. and LaCagnina & Associates, two property management
firms in Southern California with a total of 8.5 million square feet under
management; Aequus Property Management Company, a San Antonio commercial real
estate services firm with nine transaction professionals and 2.5 million square
feet under management; Eagle Western Management Company, a Phoenix property
management firm with 8 million square feet of property under management; and
Bishop Hawk, Inc., a Northern California real estate services firm with more
than 70 transaction professionals.
3
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ORGANIZATION
The Company is organized to provide the following real estate related
services:
TRANSACTION SERVICES
The Company represents the interests of tenants, owners, buyers or sellers
in leasing, acquisition and disposition transactions. These transactions involve
various types of commercial real estate, including office, industrial, retail
and land. Historically, these services have represented a significant portion of
the Company's revenue, and in fiscal year 1998 represented 87% of the Company's
total revenue. In addition, the Company delivers consulting and strategic
planning services to its clients, including site selection, feasibility studies,
exit strategies, market forecasts, appraisals and demographics and research
services.
MANAGEMENT SERVICES
GEMS provides comprehensive property management, leasing and related
services for properties owned primarily by institutional investors, along with
facilities management services for corporate users. Related services include
construction management, agency leasing, lease administration, business services
and engineering services. In fiscal year 1998, these services represented the
remaining 13% of the Company's total revenues.
COMPETITION
The Company competes in a variety of service disciplines within the
commercial real estate industry. Each of these business areas is highly
competitive on a national as well as local level. The Company faces competition
not only from other real estate service providers, but also from accounting and
appraisal firms and self managed real estate investment trusts. Due to the
relative strength and longevity of the Company's position in the markets in
which it presently operates, its ability to offer clients a range of real estate
services on a local, regional and national basis, decreased competition in
certain markets and the Company's improved capital base, the Company believes
that it can operate successfully in the future in this highly competitive
industry, although there can be no assurances in this regard.
ENVIRONMENTAL REGULATION
A number of states and localities have adopted laws and regulations imposing
environmental controls, disclosure rules and zoning restrictions which have
impacted the management, development, use, and/or sale of real estate. Such laws
and regulations tend to discourage sales and leasing activities and mortgage
lending with respect to some properties, and may therefore adversely affect the
Company. Failure of the Company to disclose environmental issues in connection
with a real estate transaction may subject the Company to liability to a buyer
or lessee of property. Property management services also could subject the
Company to environmental liabilities pursuant to applicable laws and contractual
obligations to property owners. Insurance for such matters may not be available.
Additionally, new or modified environmental regulations could develop in a
manner which have not, but could adversely affect the Company's transaction and
management services. The Company's financial results and competitive position
for the fiscal year 1998 have not been materially impacted by its compliance
with environmental laws or regulations, and no material capital expenditures
relating to such compliance are planned.
SEASONALITY
The Company has typically experienced its lowest quarterly revenue in the
quarter ending March 31 of each year with higher and more consistent revenue in
the quarters ending June 30 and September 30. The quarter ending December 31 has
historically provided the highest quarterly level of revenue due to increased
activity caused by the desire of clients to complete transactions by calendar
year-end. Revenue in
4
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any given quarter during the years ended June 30, 1998, 1997 and 1996, as a
percentage of total annual revenue, ranged from a high of 31.2% to a low of
19.1%.
SERVICE MARKS
The Company has registered tradenames and service marks for the "Grubb &
Ellis" name and logo. The right to use the "Grubb & Ellis" name is considered an
important asset of the Company, and the Company actively defends and enforces
such service marks.
REAL ESTATE MARKETS
The Company's business is highly dependent on the commercial real estate
markets, which in turn are impacted by such factors as the general economy,
interest rates and demand for real estate in local markets. Changes in one or
more of these factors could either favorably or unfavorably impact the volume of
transactions and prices or lease terms for real estate. Consequently, the
Company's revenues from brokerage commissions and property management fees,
operating results, cash flow and financial condition would also be impacted by
changes in these factors.
ITEM 2. PROPERTIES
The Company leases all of its office space. The terms of the leases vary
depending on the size and location of the office. As of June 30, 1998, the
Company leased approximately 600,000 square feet of office space in 70 locations
under leases which expire at various dates through November 30, 2005. For those
leases which are not renewable, the Company believes there is adequate
alternative office space available at acceptable rental rates to meet its needs,
although there can be no assurances in this regard. For further information, see
Note 9 of the Notes to Consolidated Financial Statements under Item 8 of this
Report.
ITEM 3. LEGAL PROCEEDINGS
The information called for by Item 3 is included in Note 9 of the Notes to
Consolidated Financial Statements under Item 8 of this Report.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of fiscal year 1998.
5
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GRUBB & ELLIS COMPANY
PART II
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ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The principal markets for the Company's common stock are the New York Stock
Exchange ("NYSE") and the Pacific Exchange. The following table sets forth the
high and low sales prices of the Company's common stock on the NYSE for each
quarter of the years ended June 30, 1998 and 1997.
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1998 1997
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HIGH LOW HIGH LOW
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First Quarter........... $17 $12 13/16 $ 4 3/4 $ 3 1/4
Second Quarter.......... 17 3/16 12 3/16 4 3/4 4
Third Quarter........... 16 3/8 10 1/8 10 1/8 4 1/4
Fourth Quarter.......... 15 3/8 10 1/8 17 1/8 9
</TABLE>
As of August 20, 1998, there were 2,220 registered holders of the Company's
common stock and 19,722,721 shares of common stock outstanding, of which
14,580,426 were held by persons who may be considered "affiliates" of the
Company, as defined in Federal securities regulations. Sales of substantial
amounts of common stock, including shares issued upon the exercise of warrants
or options held by affiliates (see Note 7 of the Notes to Consolidated Financial
Statements in Item 8 of this Report), or the perception that such sales might
occur, could adversely affect prevailing market prices for the common stock.
No cash dividends were declared on the Company's common or preferred stock
during the fiscal years ended June 30, 1998 or 1997, and the Company does not
anticipate paying cash dividends in the foreseeable future. The Company is
prohibited from paying dividends on its common stock by the terms of its
revolving credit facility. See "Liquidity and Capital Resources" under Item 7 of
this Report and Note 5 of the Notes to Consolidated Financial Statements under
Item 8 of this Report. The Company's preferred stock was either retired or
converted to common stock by February 1997.
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ITEM 6. SELECTED FINANCIAL DATA
Five Year Comparison of Selected Financial and Other Data for the Company:
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1998 1997 1996 1995 1994
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(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS AND SHARES)
<S> <C> <C> <C> <C> <C>
Total revenue............................ $ 282,834 $ 228,630 $ 193,728 $ 185,784 $ 185,182
Net income (loss)........................ 21,506 19,010 2,102 1,556 (17,540)
Dividends applicable to preferred
stockholders:
Accretion of liquidation preference.... -- -- -- (877) (2,494)
Dividends in arrears................... -- (1,431) (3,012) (1,862) --
Provision for income taxes............... (447) (372) (198) (448) (597)
Reduction in deferred tax asset valuation
allowance.............................. 6,504 3,220 -- -- --
Net income (loss) applicable to common
stockholders........................... 21,506 17,579 (910) (1,183) (20,034)
Net income (loss) per
common share
-- Basic............................... 1.10 1.22 (.10) (.16) (4.92)
-- Diluted............................. .98 .97 (.10) (.16) (4.92)
Weighted average common shares
-- Basic............................... 19,607,352 14,429,971 8,870,720 7,271,257 4,073,715
-- Diluted............................. 22,043,920 19,567,635 8,870,720 7,271,257 4,073,715
OTHER DATA:
EBITDA (2)............................... $ 19,118 $ 17,629 $ 7,418 $ 4,427 $ 841
</TABLE>
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(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 and $13.2
million for the fiscal years ended June 30, 1997 and 1994, 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.
7
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AS OF JUNE 30, (UNAUDITED)
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1998 1997 1996 1995 1994
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(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS, SHARES AND STAFF DATA)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Total assets......................... $ 63,518 $ 36,696 $ 29,658 $ 29,741 $ 32,142
Working capital (deficit)............ 15,822 16,985 8,064 5,051 (14,308)
Long-term debt....................... -- -- 27,514 26,328 16,402
Other long-term liabilities.......... 10,577 12,700 14,948 14,668 15,990
Redeemable convertible preferred
stock.............................. -- -- -- -- 31,308
Stockholders' equity (deficit)....... 35,414 12,923 (27,475) (29,793) (73,538)
Book value per common share.......... 1.80 .66 (3.08) (3.38) (17.87)
Common shares outstanding............ 19,721,056 19,509,952 8,916,415 8,810,220 4,114,549
</TABLE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K contains forward-looking statements
regarding, among other things, future revenue growth, income and changes in
expense levels. These statements are subject to known and unknown risks,
uncertainties and other factors that may cause the Company's actual results and
performance in future periods to be materially different from any future results
or performance suggested by these statements. Such factors, which could
adversely affect the Company's ability to obtain these results include, among
other things, (i) the volume of transactions and prices for real estate in the
real estate markets generally, (ii) a general or regional economic downturn
which could create a recession in the real estate markets, (iii) the Company's
debt level and its ability to make interest and principal payments, (iv) an
increase in expenses related to new initiatives, investments in people and
technology, and service improvements, (v) the success of new initiatives and
investments, (vi) the impact of year 2000 technology issues, and (vii) other
factors described elsewhere in this Annual Report.
RESULTS OF OPERATIONS
OVERVIEW
The Company reported net income of $21.5 million for the year ended June 30,
1998, and made continued progress toward implementing the strategic initiatives
announced in fiscal 1997.
The Company's transaction services fees, fueled by a continued strong
economy and commercial real estate markets, increased to $247.0 million in
fiscal year 1998, 22.7% higher than fiscal year 1997. This growth was also
impacted by the Company's continued development of its Institutional Services
Group and Corporate Services Group which provide value-added services for
multi-market real estate investors and owners, delivered through a single point
of contact. The Company also increased the number of firms participating in the
national affiliates program, currently having relationships with 22 independent
real estate services firms with a presence in 25 geographic or metropolitan
markets in the United States.
FISCAL YEAR 1998 COMPARED TO FISCAL YEAR 1997
REVENUE
The Company's revenue is derived principally from transaction services fees
related to commercial real estate, including transaction commissions and asset
management, appraisal and consulting fees.
8
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Management services fees are generated from property and facilities management
services, along with agency leasing commissions and construction management
fees.
Total revenue for fiscal year 1998 was $282.8 million, an increase of 23.7%
over revenue of $228.6 million for fiscal year 1997, reflecting continued strong
real estate markets and increased business activity across the Company's service
lines. This improvement related primarily to a $45.7 million, or 22.7%, increase
in transaction services fees. Management services fees of $35.8 million for
fiscal year 1998 increased by $8.6 million, or 31.4%, as a result of increased
activity in property and facilities management and business services.
COST AND EXPENSES
Transaction services commission expense is the Company's major expense and
bears a direct relationship to transaction services revenues, which include
transaction services commission revenue and other related fees. As a percentage
of these revenues, related commission expense increased slightly, due to higher
participation percentages attributable to higher production levels, and higher
costs related to guaranteed participation amounts for newly hired professionals.
Total costs and expenses, other than transaction services commissions and
other non-recurring expenses, increased by $26.4 million, or 26.0%, for fiscal
year 1998 compared to fiscal year 1997. These increases were due in part to
additional expenditures related to staffing and implementing the Company's
Corporate Services Group and Institutional Services Group initiatives. In
addition, the Company has incurred additional variable operating costs
associated with increases in its transaction and management services businesses.
Other non-recurring expenses for fiscal year 1997 resulted primarily from
incremental non-recurring costs related to the relocation of the Company's
corporate headquarters from San Francisco, California to Northbrook, Illinois.
The repayment of the Company's long-term debt during fiscal year 1997,
resulted in a decrease in interest expense of $1.3 million. Interest expense
incurred in fiscal year 1998 was the result of seller financing related to
business acquisitions in that year.
INCOME TAXES
As of June 30, 1998, the Company had gross deferred tax assets of $15.9
million, with $9.7 million of the deferred tax assets relating to net operating
loss and tax credit carryforwards which will be available to offset future
taxable income through 2010. The Company has recorded a valuation allowance for
$5.6 million against the deferred tax assets as of June 30, 1998 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 $6.5 million deferred tax benefit
during fiscal 1998 which represented a partial reduction of the valuation
allowance for the net deferred tax assets. Management believes that, due to
favorable economic conditions, the elimination of long-term 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 net deferred tax assets.
Although uncertainties exist as to these events, the Company will continue to
review its operations periodically to assess whether its deferred tax assets may
be realized. See Note 6 of Notes to Consolidated Financial Statements in Item 8
of this Report for additional information.
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 in Item 8 of this Report.
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NET INCOME
Net income for fiscal year 1998 was $21.5 million, or $.98 per common share
on a diluted basis, as compared to net income of $19.0 million, or $.97 per
common share for fiscal year 1997. The Company generated basic earnings per
share of $1.10 and $1.22 in fiscal years 1998 and 1997, respectively. Included
in net income were deferred tax benefits of $6.5 million and $3.2 million for
fiscal years 1998 and 1997, respectively. Net income for the prior year also
included non-recurring charges of $2.4 million related primarily to the
corporate headquarters relocation and a $5.4 million extraordinary gain on the
extinguishment of debt in connection with the financing transactions which
occurred in fiscal 1997.
STOCKHOLDERS' EQUITY
During fiscal year 1998, stockholders' equity increased $22.5 million to
$35.4 million from $12.9 million at June 30, 1997. In addition to net income of
$21.5 million for fiscal year 1998, the Company received $985,000 from the sale
of common stock under its stock option plans and employee stock purchase plan.
See Note 7 of Notes to Consolidated Financial Statements in Item 8 of this
Report for additional information. The book value per common share issued and
outstanding increased to $1.80 at June 30, 1998 from $.66 at June 30, 1997.
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
$34.1 million increase in transaction services fees over fiscal year 1996.
Management services fees of $27.2 million for fiscal year 1997 increased by
$802,000, or 3.0%, as a result of increased activity in business services and
property and facilities management fees.
COSTS AND EXPENSES
As a percentage of transaction services fees, related transaction services
commission expense remained relatively unchanged for fiscal year 1997 as
compared to fiscal year 1996.
Total costs and expenses, other than transaction services 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 in fiscal year 1997 consist
primarily of costs related to the relocation of the Company's corporate
headquarters from San Francisco, California to Northbrook, Illinois.
Interest expense 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.
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INCOME TAXES
As of June 30, 1997, the Company had deferred tax assets of $19.5 million,
with $12.0 million of the 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 recorded a valuation allowance for $16.3 million
against the deferred tax assets as of June 30, 1997. The Company recognized a
$3.2 million deferred tax benefit during fiscal 1997 which represented a partial
reduction of the valuation allowance.
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.
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 in Item 8 of this Report 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.
LIQUIDITY AND CAPITAL RESOURCES
During fiscal year 1998, cash and cash equivalents decreased by $2.5 million
primarily as a result of cash used in investing activities of $17.8 million,
offset by cash provided by operating activities of $14.5 million and financing
activities of $.8 million. Net cash provided by operating activities was
negatively impacted by an increase in accounts receivable, resulting from the
Company's higher revenue levels in fiscal 1998. Net cash used in investing
activities related to cash paid in connection with business acquisitions of $7.6
million, primarily in the fourth quarter of fiscal year 1998, and $10.2 million
of technology infrastructure investments and purchases of other equipment and
leasehold improvements. Net cash provided by financing activities related to
cash generated from stock option exercises and employee stock purchases, offset
by minor financing fees on the Company's credit facility.
During fiscal year 1998, working capital decreased by $1.2 million to $15.8
million primarily as a result of the decrease in cash of $2.5 million along with
seller financing of $2.8 million the Company incurred related to business
acquisitions in fiscal year 1998. These decreases in working capital were
partially offset by increases in deferred tax assets of $2.4 million and net
remaining current assets and liabilities of $1.7 million.
The Company believes that its short-term and long-term operating cash
requirements will be met by operating cash flow. In addition, on January 26,
1998, the Company amended its credit agreement, by adding an additional bank and
expanding the credit facility available for general corporate purposes and
acquisitions to $35 million from $15 million. Payment terms and maturities
remained relatively unchanged,
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although certain restrictive covenants were eliminated or modified. Currently,
the Company has no outstanding borrowings under the credit facility.
To the extent that the Company's cash requirements are not met by operating
cash flow or borrowings under its credit facility, in the event of adverse
economic conditions or other unfavorable events, the Company may find it
necessary to reduce expenditure levels or undertake other actions as may be
appropriate under the circumstances.
The Company completed the acquisition of White Commercial Real Estate in
March 1998, La Cagnina & Associates, Inc. and Crane Realty & Management Co. in
April 1998, Aequus Property Management Company in May 1998, Eagle Western
Management Company in June 1998 and Bishop Hawk, Inc. in July 1998 (See Note 12
of Notes to Consolidated Financial Statements in Item 8 of this Report for
additional information). The Company will continue to explore strategic
acquisition opportunities that have the potential to broaden its geographic
reach, increase its market share to a significant portion and/or expand the
depth of its current lines of business. The sources of consideration for such
acquisitions could be cash, the Company's current credit facility, new debt,
and/or the issuance of stock. Although it is the Company's intent to actively
pursue this strategy, no assurances can be made that any new acquisitions will
occur.
YEAR 2000 ISSUES
During fiscal years 1997 and 1998, the Company significantly increased its
investment in various technology initiatives. The Company embarked upon these
initiatives to enhance the productivity of its staff and business processes, and
to provide a stable platform to support the Company's future growth. In
addition, this technology improvement plan has replaced most of the Company's
information systems and equipment platforms, including intranet, human
resources, general ledger, accounts payable and transaction services management,
and consequently has brought these systems into compliance with year 2000
requirements. The Company is currently in the process of developing a new
transaction services revenue system, and is completing upgrades to various
remaining servers and desktop computers. The Company expects all of these
initiatives to be completed, and consequently to achieve related year 2000
requirements, by the end of fiscal year 1999. The Company has made capital
expenditures totaling $6.6 million through August 1998 related to these systems,
and currently expects to invest an additional $1.4 million over the next sixteen
months to complete its technology plan, of which $900,000 relates to software
development and $500,000 to equipment upgrades. Management of the Company
believes it has an effective program in place relating to its internal
information systems to resolve the year 2000 issue in a timely manner.
The Company is also assessing its exposure to year 2000 issues other than
those related to internal information systems, including issues related to third
party vendors, in order to develop an appropriate plan (including contingencies
to address these risks). In addition to its own information systems, the
Company's year 2000 plan includes consideration of building systems in
properties managed by GEMS (as well as the Company's facilities), client
accounting systems for GEMS clients, and telecommunications systems. The Company
completed an initial evaluation of its telecommunication systems and is engaging
a consultant to assist in determining how to cost-effectively upgrade or replace
non-compliant telephone, voice mail, facsimile and other telecommunications
equipment. The Company will face business interruption risk if
telecommunications are suspended as a result of a year 2000 issue. GEMS is
working with its clients (building owners) to gather information on the year
2000 readiness of building systems such as security, elevator and HVAC. For
client accounting, GEMS is evaluating all its hardware, software and operating
systems, and non-compliant equipment will be upgraded or replaced. GEMS has
surveyed the vendors of its client accounting software and is working with its
clients as well as these vendors to address these systems in a timely fashion.
12
<PAGE>
The Company is currently developing a contingency plan to address any risks
associated with the Company not completing its plan before the year 2000. Since
the Company cannot anticipate all possible future outcomes of the year 2000
problem, nor predict the readiness of entities with which it transacts business,
there can be no assurance these events will not have a material adverse effect
on the Company's business, financial condition, results of operations or cash
flows.
DIVIDENDS
The Company's 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, 1998,
the Company was in compliance with, or had received waivers with respect to, all
covenants of the credit facility. The Company is currently seeking modifications
to the credit facility to enhance its flexibility in conducting business
operations in relation to the credit facility. See Note 5 of Notes to
Consolidated Financial Statements in Item 8 of this Report for additional
information.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company considered the provision of Financial Reporting Release No. 48
"Disclosure of Accounting Policies for Derivative Financial Instruments and
Derivative Commodity Instruments, and Disclosure of Quantitative and Qualitative
Information about Market Risk Inherent in Derivative Financial Instruments,
Other Financial Instruments and Derivative Commodity Instruments". The Company
had no holdings of derivative financial or commodity instruments at June 30,
1998. A review of the Company's other financial instruments and risk exposures
at that date revealed that the Company had exposure to interest rate risk. The
Company utilized sensitivity analyses to assess the potential effect of this
risk and concluded that near-term changes in interest rates should not
materially adversely affect the Company's financial position, results of
operations or cash flows.
13
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Grubb & Ellis Company
We have audited the accompanying consolidated balance sheets of Grubb &
Ellis Company as of June 30, 1998 and 1997, and the related consolidated
statements of operations, stockholders' equity, and cash flows for each of the
three years in the period ended June 30, 1998. 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 at June 30, 1998 and 1997, and the consolidated results of
its operations and its cash flows for each of the three years in the period
ended June 30, 1998, in conformity with generally accepted accounting
principles.
ERNST & YOUNG LLP
Chicago, Illinois
August 21, 1998
14
<PAGE>
GRUBB & ELLIS COMPANY
CONSOLIDATED BALANCE SHEETS
JUNE 30, 1998 AND 1997
(IN THOUSANDS, EXCEPT SHARE DATA)
ASSETS
<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
Current assets:
Cash and cash equivalents............................................................... $ 14,251 $ 16,790
Service fees receivable, net............................................................ 8,006 4,549
Other receivables....................................................................... 2,329 2,242
Prepaids and other assets............................................................... 3,179 1,257
Deferred tax assets..................................................................... 5,584 3,220
---------- ----------
Total current assets.............................................................. 33,349 28,058
Noncurrent assets:
Equipment, software and leasehold improvements, net..................................... 13,152 5,988
Goodwill, net........................................................................... 10,578 320
Deferred tax assets, net................................................................ 4,140 --
Other assets............................................................................ 2,299 2,330
---------- ----------
Total assets...................................................................... $ 63,518 $ 36,696
---------- ----------
---------- ----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable........................................................................ $ 3,845 $ 3,021
Acquisition indebtedness................................................................ 2,807 --
Compensation and employee benefits payable.............................................. 6,948 4,568
Other accrued expenses.................................................................. 3,927 3,484
---------- ----------
Total current liabilities......................................................... 17,527 11,073
Long-term liabilities:
Accrued claims and settlements.......................................................... 9,041 10,512
Other liabilities....................................................................... 1,536 2,188
---------- ----------
Total liabilities................................................................. 28,104 23,773
---------- ----------
Stockholders' equity:
Common stock, $.01 par value: 50,000,000 and 25,000,000 shares authorized and 19,721,056
and 19,509,952 shares issued and outstanding at June 30, 1998 and 1997,
respectively.......................................................................... 198 196
Additional paid-in-capital.............................................................. 111,562 110,579
Retained earnings (deficit)............................................................. (76,346) (97,852)
---------- ----------
Total stockholders' equity........................................................ 35,414 12,923
---------- ----------
Total liabilities and stockholders' equity........................................ $ 63,518 $ 36,696
---------- ----------
---------- ----------
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
15
<PAGE>
GRUBB & ELLIS COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED JUNE 30, 1998, 1997 AND 1996
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Revenue:
Transaction services fees.......................................... $ 247,040 $ 201,389 $ 167,289
Management services fees........................................... 35,794 27,241 26,439
------------ ------------ ------------
Total revenue................................................ 282,834 228,630 193,728
------------ ------------ ------------
Costs and expenses:
Transaction services commissions................................... 140,457 113,460 95,037
Salaries and wages................................................. 70,680 55,095 47,562
Selling, general and administrative................................ 53,816 43,567 45,706
Depreciation and amortization...................................... 3,563 2,964 2,546
Other non-recurring expenses (income).............................. -- 2,431 (462)
------------ ------------ ------------
Total costs and expenses......................................... 268,516 217,517 190,389
------------ ------------ ------------
Total operating income....................................... 14,318 11,113 3,339
Other income and expenses:
Interest income.................................................... 1,092 840 689
Other income, net.................................................. 145 281 1,306
Interest expense................................................... (106) (1,453) (3,034)
------------ ------------ ------------
Income before income taxes and extraordinary item............ 15,449 10,781 2,300
Net benefit (provision) for income taxes............................. 6,057 2,848 (198)
------------ ------------ ------------
Income before extraordinary item..................................... 21,506 13,629 2,102
Extraordinary item -- gain on extinguishment of debt, net of taxes of
$195............................................................... -- 5,381 --
------------ ------------ ------------
Net income................................................... $ 21,506 $ 19,010 $ 2,102
------------ ------------ ------------
------------ ------------ ------------
Net income (loss) applicable to common stockholders, net of
undeclared dividends earned on preferred stock in the amounts of
$1,431 and $3,012 for the years ended June 30, 1997 and 1996,
respectively....................................................... $ 21,506 $ 17,579 $ (910)
------------ ------------ ------------
------------ ------------ ------------
Net income (loss) per common share:
Basic --
-- from operations................................................. $ 1.10 $ .85 $ (.10)
-- from extraordinary gain......................................... -- .37 --
------------ ------------ ------------
$ 1.10 $ 1.22 $ (.10)
------------ ------------ ------------
------------ ------------ ------------
Weighted average common shares outstanding......................... 19,607,352 14,429,971 8,870,720
------------ ------------ ------------
------------ ------------ ------------
Diluted --
-- from operations................................................. $ .98 $ .70 $ (.10)
-- from extraordinary gain......................................... -- .27 --
------------ ------------ ------------
$ .98 $ .97 $ (.10)
------------ ------------ ------------
------------ ------------ ------------
Weighted average common shares outstanding......................... 22,043,920 19,567,635 8,870,720
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
16
<PAGE>
GRUBB & ELLIS COMPANY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE YEARS ENDED JUNE 30, 1998, 1997 AND 1996
(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, 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
Employee common stock purchases and exercise of
common stock options............................. 211,104 2 -- 983 -- 985
Net income......................................... -- -- -- -- 21,506 21,506
----------- ----- ----------- ----------- --------- ------------
Balance as of June 30, 1998........................ 19,721,056 $ 198 $ -- $ 111,562 $ (76,346) $ 35,414
----------- ----- ----------- ----------- --------- ------------
----------- ----- ----------- ----------- --------- ------------
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
17
<PAGE>
GRUBB & ELLIS COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED JUNE 30, 1998, 1997 AND 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
1998 1997 1996
---------- --------- ---------
<S> <C> <C> <C>
Cash Flows from Operating Activities:
Net income...................................................................... $ 21,506 $ 19,010 $ 2,102
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.......................................................... (6,504) (3,220) --
Depreciation and amortization................................................. 3,563 2,964 2,546
Interest expense on Payment-in-Kind Notes..................................... -- 465 1,606
Recovery of real estate valuation allowance................................... -- (425) --
Other non-cash charges related to non-recurring income........................ -- -- (462)
Provision (recovery) for services fees receivable valuation allowances........ 96 (1,161) 200
(Increase) decrease in services fees receivable............................... (3,469) (580) 2,306
(Increase) decrease in prepaids and other assets.............................. (2,340) 2,288 877
Increase (decrease) in accounts payable....................................... 699 286 (1,595)
Increase (decrease) in compensation and employee benefits payable............. 2,380 (812) (38)
Decrease in accrued claims and settlements.................................... (1,471) (3,071) (1,677)
Decrease in other liabilities................................................. (19) (1,847) (2,435)
---------- --------- ---------
Net cash provided by operating activities............................... 14,441 8,516 3,430
---------- --------- ---------
Cash Flows from Investing Activities:
Purchases of equipment, software and leasehold improvements..................... (10,200) (3,216) (1,724)
Cash paid for business acquisitions, net of cash acquired....................... (7,580) -- --
---------- --------- ---------
Cash used in investing activities....................................... (17,780) (3,216) (1,724)
---------- --------- ---------
Cash Flows From Financing Activities:
Repayment of long-term debt to related party.................................... -- (23,000) --
Proceeds from borrowing......................................................... -- -- 400
Proceeds from issuance of common stock, net..................................... 985 21,388 35
Deferred financing fees......................................................... (185) (445) --
---------- --------- ---------
Net cash provided by (used in) financing activities..................... 800 (2,057) 435
---------- --------- ---------
Net (decrease) increase in cash and cash equivalents............................ (2,539) 3,243 2,141
Cash and equivalents at beginning of the year................................... 16,790 13,547 11,406
---------- --------- ---------
Cash and cash equivalents at end of the year.................................... $ 14,251 $ 16,790 $ 13,547
---------- --------- ---------
---------- --------- ---------
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
18
<PAGE>
GRUBB & ELLIS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(A) THE COMPANY:
Grubb & Ellis Company (the "Company") is a full service commercial real
estate company that provides services to real estate owners/investors and
tenants including transaction services involving leasing, acquisitions and
dispositions, and property and facilities management services. Additionally, the
Company provides consulting and strategic services with respect to commercial
real estate.
(B) PRINCIPLES OF CONSOLIDATION:
The consolidated financial statements include the accounts of Grubb & Ellis
Company, its wholly and majority owned and controlled subsidiaries and
controlled partnerships. The Company consolidates Grubb & Ellis Management
Services, Inc. ("GEMS"), which provides property and facilities management
services. All significant intercompany accounts have been eliminated.
(C) BASIS OF PRESENTATION:
The financial statements have been prepared in conformity with 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) 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 full payment or partial payment and tenant occupancy, assuming a
lease agreement has been executed and no contingencies exist. All other
commissions and fees are recognized at the time the related services have been
performed by the Company, unless future contingencies exist.
(E) 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 certain 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
19
<PAGE>
GRUBB & ELLIS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
thousands) for the years ended June 30, 1998, 1997 and 1996. The net expense is
included in salaries and wages on the Consolidated Statements of Operations.
<TABLE>
<CAPTION>
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Gross salaries, wages and benefits........................ $ 101,610 $ 82,681 $ 80,757
Less: reimbursements from property owners................. (79,333) (67,051) (66,310)
---------- ---------- ----------
Net salaries, wages and benefits.......................... $ 22,277 $ 15,630 $ 14,447
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
(F) ACCOUNTING FOR STOCK-BASED COMPENSATION:
Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation ("Statement 123") allows companies to either account
for stock-based compensation under the provisions of Statement 123 or under the
provisions of Accounting Principles 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.
(G) INCOME TAXES:
Deferred income taxes are recorded based on enacted statutory rates to
reflect the tax consequences in future years of the differences between the tax
bases of assets and liabilities and their financial reporting amounts. Deferred
tax assets, such as net operating loss carryforwards, which will generate future
tax benefits are recognized to the extent that realization of such benefits
through future taxable earnings or alternative tax strategies is more likely
than not.
(H) 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 $127,000, $1.5 million and
$1.4 million for each of the fiscal years ended June 30, 1998, 1997 and 1996,
respectively. Cash payments for income taxes for the fiscal years ended June 30,
1998, 1997 and 1996 were approximately $297,000, $168,000 and $975,000
respectively.
(I) EQUIPMENT, SOFTWARE AND LEASEHOLD IMPROVEMENTS:
Equipment, software 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. Software costs are
amortized using a straight line method over their estimated useful lives ranging
from three to seven years, while leasehold improvements are amortized using the
straight-line method over
20
<PAGE>
GRUBB & ELLIS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
their useful lives not to exceed the terms of the respective leases. Maintenance
and repairs are charged to expense as incurred.
(J) GOODWILL
Goodwill, representing the excess of the cost over the net tangible assets
of acquired businesses, is stated at cost and is amortized on a straight line
basis over estimated future periods to be benefited, which range from 15 to 25
years. Accumulated amortization amounted to approximately $338,000 and $134,000
at June 30, 1998 and 1997, respectively.
(K) 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 compensation and employee benefits payable,
as appropriate. Reserves are based on the aggregate of the liability for
reported claims and an actuarially-based estimate of incurred but not reported
claims.
(L) FAIR VALUE OF FINANCIAL INSTRUMENTS:
Statement of Financial Accounting Standards 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, based on similar
instruments with similar risks.
(M) RECLASSIFICATIONS:
Certain prior year amounts have been reclassified to conform to the current
year presentation.
21
<PAGE>
GRUBB & ELLIS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SERVICES FEE RECEIVABLE, NET
Service fees receivable at June 30, 1998 and 1997 consisted of the following
(in thousands):
<TABLE>
<CAPTION>
1998 1997
---------- ---------
<S> <C> <C>
Commissions and fees receivable........................................ $ 21,153 $ 15,145
Commissions payable.................................................... (10,591) (8,052)
Allowance for uncollectible accounts................................... (2,115) (2,019)
---------- ---------
Total.......................................................... 8,447 5,074
Less portion classified as current..................................... 8,006 4,549
---------- ---------
Noncurrent portion (included in other assets).................. $ 441 $ 525
---------- ---------
---------- ---------
</TABLE>
The following is a summary of the changes in the allowance for uncollectible
service fees receivable for the fiscal years ended June 30, 1998, 1997 and 1996
(in thousands):
<TABLE>
<CAPTION>
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Balance at beginning of year.................................... $ 2,019 $ 3,180 $ 2,980
Provision for bad debt.......................................... 96 -- 200
Recovery of allowance........................................... -- (1,161) --
--------- --------- ---------
Balance at end of year.......................................... $ 2,115 $ 2,019 $ 3,180
--------- --------- ---------
--------- --------- ---------
</TABLE>
3. EQUIPMENT, SOFTWARE AND LEASEHOLD IMPROVEMENTS, NET
Equipment, software and leasehold improvements at June 30, 1998 and 1997
consisted of the following (in thousands):
<TABLE>
<CAPTION>
1998 1997
--------- ---------
<S> <C> <C>
Furniture, equipment and software systems............................... $ 26,569 $ 17,490
Leasehold improvements.................................................. 3,275 2,451
--------- ---------
Total................................................................. 29,844 19,941
Less accumulated depreciation and amortization.......................... 16,692 13,953
--------- ---------
Equipment, software and leasehold improvements, net..................... $ 13,152 $ 5,988
--------- ---------
--------- ---------
</TABLE>
The Company wrote off approximately $297,000 and $400,000 of fully
depreciated furniture and equipment during the fiscal years ended June 30, 1998
and 1997, respectively, as well as $3.4 million of fully amortized leasehold
improvements during fiscal year 1997.
22
<PAGE>
GRUBB & ELLIS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. EARNINGS (LOSS) PER COMMON SHARE:
Statement of Financial Accounting Standards No. 128, "Earnings per Share"
("Statement 128") requires disclosure of basic earnings per share which excludes
any dilutive effects of options, warrants, and convertible securities and
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,
-------------------------------
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Basic earnings per common share:
Income before extraordinary gain........................... $ 21,506 $ 13,629 $ 2,102
Adjustments
Dividends-senior convertible preferred stock............. -- (1,032) (2,168)
Dividends-junior convertible preferred stock............. -- (399) (844)
--------- --------- ---------
Net income (loss) before extraordinary gain applicable to
common stockholders.................................... $ 21,506 $ 12,198 $ (910)
--------- --------- ---------
--------- --------- ---------
Weighted average common shares outstanding -- basic...... 19,607 14,430 8,871
--------- --------- ---------
--------- --------- ---------
Earnings (loss) per common share -- basic.................. $ 1.10 $ 0.85 $ (0.10)
--------- --------- ---------
--------- --------- ---------
Diluted earnings per common share:
Income before extraordinary gain........................... $ 21,506 $ 13,629 $ 2,102
Adjustments
Dividends--senior convertible preferred stock............ -- -- (2,168)
Dividends--junior convertible preferred stock............ -- -- (844)
--------- --------- ---------
Net income (loss) before extraordinary gain applicable to
common stockholders...................................... $ 21,506 $ 13,629 $ (910)
--------- --------- ---------
--------- --------- ---------
Weighted average common shares outstanding................. 19,607 14,430 8,871
Effect of dilutive securities:
Stock options and warrants............................... 2,437 1,631 --
Senior convertible preferred stock....................... -- 2,308 --
Junior convertible preferred stock....................... -- 1,199 --
--------- --------- ---------
Weighted average common shares outstanding................. 22,044 19,568 8,871
--------- --------- ---------
--------- --------- ---------
Earnings (loss) per common share -- diluted................ $ .98 $ 0.70 $ (0.10)
--------- --------- ---------
--------- --------- ---------
</TABLE>
23
<PAGE>
GRUBB & ELLIS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. FINANCING AND CAPITAL RELATED TRANSACTIONS
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. On January 26, 1998, PNC and the Company amended the Credit
Agreement by adding an additional bank and expanding the credit facility to $35
million. Payment and maturity terms remained relatively unchanged, with interest
on outstanding borrowings due quarterly in arrears. Interest 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. At June 30, 1998, the Company had no outstanding borrowings under
the Credit Agreement.
In connection with the Credit Agreement and the subsequent amendment, the
Company incurred commitment and other financing fees totaling approximately
$558,000, 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, among other things,
the prohibition of the payment of dividends, restrictions on the issuance of
certain types of preferred stock, and the maintenance of certain financial
ratios.
FISCAL 1997 FINANCING TRANSACTIONS:
During the year ended June 30, 1997, the Company retired all of its
outstanding long-term debt, as further described below.
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.
24
<PAGE>
GRUBB & ELLIS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. FINANCING AND CAPITAL RELATED TRANSACTIONS (CONTINUED)
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 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.
6. INCOME TAXES
The Company maintains a fiscal year ending June 30 for financial reporting
purposes and a calendar year for income tax reporting purposes. The provision
for income taxes for the fiscal years ended June 30, 1998, 1997 and 1996
consisted of currently payable state and local income taxes of $278,000,
$155,000 and $198,000, respectively, and also included federal alternative
minimum tax provisions of $169,000 and $217,000 in 1998 and 1997, respectively.
In addition, deferred tax benefits of $6.5 million and $3.2 million were
recorded in fiscal 1998 and 1997, respectively.
25
<PAGE>
GRUBB & ELLIS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. INCOME TAXES (CONTINUED)
At June 30, 1998, 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...................................... $ 23,367 2007 to 2010
Federal investment tax credit carryforwards.......................................... 278 1998 to 2000
Federal alternative minimum tax credit carryforward.................................. 347 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, 1998, the amount of
NOL's not subject to limitation amounted to approximately $15.5 million.
The Company's effective tax rate on its income before taxes differs from the
statutory federal income tax rate as follows:
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
-------------------------------
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C> <C>
Federal statutory rate.................................................. 35.0% 35.0% 35.0%
State and local income taxes (net of federal tax benefits).............. 1.2 1.4 1.9
Alternative minimum tax................................................. 1.1 1.3 --
Meals and entertainment................................................. 2.4 .8 5.5
Stock option compensation............................................... (3.9) -- --
Real estate partnership losses.......................................... (6.9) -- --
Reduction in valuation allowance........................................ (53.0) (32.0) (33.8)
Utilization of NOL carryforwards........................................ (15.1) (22.7) --
-
--------- --------- ---------
Effective income tax rate............................................. (39.2)% (16.2)% 8.6%
-
-
--------- --------- ---------
--------- --------- ---------
</TABLE>
During fiscal years 1998 and 1997, previously reserved deferred tax assets
were realized which lowered the Company's taxable income for the related year.
Accordingly, the Company reduced its valuation allowance to the extent of these
realized assets. In addition, the Company further reduced the valuation
allowance in each of fiscal years 1998 and 1997 to recognize deferred tax assets
expected to be realized in future years. The recognition of deferred tax assets
is based primarily upon the expected utilization of NOL and credit
carryforwards. Management believes that, due to favorable economic conditions,
the elimination of debt and the recent trend of earnings, it is more likely than
not that the Company will generate sufficient future taxable income to realize
the net deferred tax assets.
26
<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, 1998 and 1997 (in thousands):
<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
Deferred tax assets:
NOL and credit carryforwards............................................................ $ 9,739 $ 11,980
Insurance reserves...................................................................... 3,442 2,404
Commission and fee reserves............................................................. 1,236 1,945
Claims and settlements.................................................................. 991 1,679
Compensation accrual.................................................................... -- 1,090
Other................................................................................... 486 368
---------- ----------
Deferred tax assets................................................................... 15,894 19,466
Less valuation allowance.................................................................. (5,585) (16,246)
---------- ----------
10,309 3,220
Deferred tax liabilities:
Accumulated depreciation................................................................ (585) --
---------- ----------
Net deferred tax asset................................................................ $ 9,724 $ 3,220
---------- ----------
---------- ----------
Current............................................................................. $ 5,584 $ 3,220
---------- ----------
---------- ----------
Long-term........................................................................... $ 4,140 $ --
---------- ----------
---------- ----------
</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,
1998, 1997 and 1996:
<TABLE>
<CAPTION>
1998 1997 1996
---------------------- --------------------- ---------------------
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
---------- ---------- ---------- --------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
Stock Options outstanding at the $ 1.88 to $ 1.88 to $ 1.88 to
beginning of the year................. 1,802,320 $27.50 1,085,400 $28.75 651,900 $28.75
$ 11.13 to $ 3.38 to $ 2.13 to
Granted................................ 815,000 $16.44 800,000 $15.25 1,000,000 $2.38
$ 2.38 to $ 1.88 to $ 1.88 to
Lapsed or canceled..................... (87,600) $18.75 (61,340) $28.75 (552,100) $23.15
$ 1.88 to $ 1.88 to $ 1.88 to
Exercised.............................. (146,440) $13.50 (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.............................. 2,383,280 $27.50 1,802,320 $27.50 1,085,400 $28.75
---------- ---------- ----------
---------- ---------- ----------
$ 1.88 to $ 1.88 to
Exercisable at end of the year......... 635,520 446,864 $27.50 300,235 $28.75
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
27
<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)
Weighted average information per share with respect to stock options for
fiscal years ended June 30, 1998 and 1997 is as follows:
<TABLE>
<CAPTION>
1998 1997
----------- ----------
<S> <C> <C>
Exercise price:
Granted......................................................... $ 11.49 $ 7.54
Lapsed or canceled.............................................. 11.03 4.62
Exercised....................................................... 3.26 3.08
Outstanding..................................................... 6.98 4.88
Remaining life.................................................... 4.75 years 4.5 years
</TABLE>
The Company's 1990 Amended and Restated Stock Option Plan, as amended,
provides for grants of options to purchase the Company's common stock. The plan
was amended effective 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, 1998, 1997 and
1996, the number of shares available for the grant of options under the plan
were 164,474, 186,874 and 425,534, 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 had 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, 1998, 1997 and
1996, the number of shares available for the grant of options was 10,000,
20,000, and 20,000 respectively.
The Company's 1998 Stock Option Plan provides for grants to purchase the
Company's common stock. The plan authorizes the issuance of up to 2,000,000
shares, and had 1,305,000 shares available for grant as of June 30, 1998. Stock
options under this plan may be granted at prices and with such other terms and
vesting schedules as determined by the Compensation Committee of the Board of
Directors, or, with respect to options granted to corporate officers, the full
Board of Directors.
STOCK WARRANTS
As of June 30, 1998, 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>
28
<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)
EMPLOYEE COMMON STOCK PURCHASE PLANS:
The Company's former plan (the Employee New Stock Purchase Plan) was
effective from May 1987 through June 30, 1997, when it expired. It enabled
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. When it expired, all but 20,576 shares had been issued under the
plan. During the fiscal years ended June 30, 1997 and 1996, the number of shares
purchased under this plan were 22,970 and 38,265, respectively.
The Grubb & Ellis Company Employee Stock Purchase Plan was adopted effective
August 1, 1997, and provides for the purchase of up to 750,000 shares of common
stock by employees of the Company at a 15% discount from market price, as
defined, through payroll deductions. The number of shares purchased under this
plan was 79,272 during the fiscal year ended June 30, 1998.
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, under which it made similar discretionary contributions;
however such plan did not provide for employer contributions to be made in
stock. The two plans were merged 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 $637,000, $585,000 and $418,000 for the fiscal years ended June
30, 1998, 1997 and 1996, respectively.
PRO FORMA INFORMATION
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 options granted subsequent to July 1, 1996, and therefore includes
grants under the 1990 Amended and Restated Stock Option Plan, 1993 Stock Option
Plan for Outside Directors and 1998 Stock Option Plan, and purchases made under
the Grubb & Ellis Employee Stock Purchase Plan, under the fair value method of
that Statement. The fair value for the options was estimated at the date of
grant using a Black-Scholes option pricing model. Weighted-average assumptions
for fiscal years 1998 and 1997, respectively, are as follows:
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
Risk free interest rates............................................................... 6.13% 6.27%
Dividend yields........................................................................ 0% 0%
Volatility factors of the expected market price of the common stock.................... .625 .586
Weighted-average expected lives........................................................ 4.10 years 4.96 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 these 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.
29
<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)
The weighted average fair value of options granted by the Company in fiscal
years 1998 and 1997 using this model was $6.17 and $4.40, respectively.
The effects on fiscal year 1998 and 1997 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 method to the Company's
stock-based awards results in net income of approximately $20,609,000, basic
earnings per share of $1.05 and diluted earnings per share of $.93 for the
fiscal year ended June 30, 1998. Pro forma results for fiscal year 1997 are not
materially different from amounts reported.
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, 1998, 1997 and 1996 (in thousands):
<TABLE>
<CAPTION>
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Transaction service commissions.................................. $ 3,282 $ 836 $ 710
Management services and other fees............................... $ 2,341 $ 1,028 $ 1,102
</TABLE>
See Note 5 to the Notes to Consolidated Financial Statements for information
regarding long-term debt with related parties.
9. COMMITMENTS AND CONTINGENCIES
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, 1998 (in thousands):
<TABLE>
<CAPTION>
YEAR ENDING LEASE
JUNE 30, OBLIGATIONS
- -------------- -----------
<S> <C>
1999 $ 9,408
2000 7,829
2001 6,014
2002 3,821
2003 1,718
Thereafter 1,351
-----------
$ 30,141
-----------
-----------
</TABLE>
30
<PAGE>
GRUBB & ELLIS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. COMMITMENTS AND CONTINGENCIES (CONTINUED)
As a component of the Company's restructuring charges related to the closing
of certain offices, the Company has accrued for approximately $332,000 of the
above expected future minimum rental payments (net of expected sublease income
of approximately $408,000) as of June 30, 1998.
Lease and rental expense for the fiscal years ended June 30, 1998, 1997 and
1996 amounted to $15,590,000, $14,542,000 and $15,104,000, respectively.
LEGAL MATTERS:
On March 14, 1994, JOHSZ, ET AL. V. KOLL COMPANY, ET AL., was filed in the
Orange County (California) Superior Court against the Koll Company, Grubb &
Ellis Company, Koll Center Newport Number 10, a California general partnership
("Koll"), and Southern California Edison Company ("Edison"). The complaint was
served on the Company in June 1994. A second complaint, YOUNKIN, MAIONA, ET AL.
V. KOLL COMPANY, ET AL., based on similar causes of action, was filed in the
same court on December 13, 1994 and served on the Company in February 1995. The
plaintiffs in these two cases, three former Company brokers, two former Company
employees, and their spouses, allege that the brokers and employees acquired
cancer from electromagnetic waves produced by the electric transformer owned by
Edison and situated in a vault below office space leased by the Company in a
building owned by Koll. The complaints allege negligence, battery, and negligent
infliction of emotional distress, fraudulent concealment, loss of consortium
and, against Edison only, strict liability. Specific damages were not pled. 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. This
appeal remains pending. In the YOUNKIN case, plaintiff Maiona died while the
suit was pending. In 1998, all of the YOUNKIN plaintiffs dismissed their claims.
Maiona's heirs filed a wrongful death action (MAIONA V. SOUTHERN CALIFORNIA
EDISON, ET. AL.) alleging essentially the same theory as the dismissed YOUNKIN
case. The Company has moved to dismiss the MAIONA case and that motion is
pending.
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 plaintiffs motion
for class certification with respect to Partnerships I, II and III.
31
<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 MAIONA
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.
The Company is involved in various other 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.
10. OTHER NON-RECURRING EXPENSE (INCOME)
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.
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.
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 with
any one financial institution.
12. BUSINESS ACQUISITIONS AND RELATED INDEBTEDNESS
The Company completed the acquisition of White Commercial Real Estate in
March 1998, Crane Realty & Management Co. and certain assets of LaCagnina &
Associates in April 1998, Aequus Property Management Company in May 1998 and
certain assets of Eagle Western Management Company in June 1998. Each of these
acquisitions has been accounted for under the purchase method of accounting,
with all operations subsequent to the respective acquisition dates reflected in
the Company's financial statements.
The purchase price of these acquisitions, net of cash acquired, totaled
approximately $10.6 million, including related acquisitions costs of
approximately $567,000 and seller provided financing of approximately $3.0
million. The amounts due the sellers bear interest at rates ranging from 5.0% to
9.25% (with a weighted average rate of 7.86% at June 30, 1998) and have
maturities totaling approximately $2,807,000 in fiscal year 1999 and
approximately $170,000 in fiscal year 2000.
32
<PAGE>
GRUBB & ELLIS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. BUSINESS ACQUISITIONS AND RELATED INDEBTEDNESS (CONTINUED)
In addition, terms of certain of the acquisitions provide for additional
consideration up to a maximum of $700,000 which are dependent upon the
achievement of certain levels of revenues earned subsequent to the date of
acquisition. Due to the contingent nature of these amounts, the Company will
record them as additional purchase price upon payment to the sellers.
On July 22, 1998, the Company acquired substantially all of the assets of
Bishop Hawk, Inc. for total consideration of approximately $11.1 million, which
included seller financing of approximately $2.5 million. The Company will record
the acquisition under the purchase method of accounting, and all operations
subsequent to the acquisition date will be reflected in the Company's financial
statements for the fiscal year ending 1999.
The notes to the seller are payable in installments through July 22, 2000,
and bear interest at a weighted average rate of 9.14% per annum. Up to $500,000
will be deducted from the amounts due under the notes, therefore reducing the
recorded purchase price, in the event that certain revenue levels are not
attained in the first year following the acquisition. The Company also will pay
an additional amount ("Earnout Payment" ), which, if earned, will be payable by
September 22, 1999. The Earnout Payment is payable to the extent that the gross
revenue earned by the Company during the twelve months following the date of the
acquisition through the efforts of the former Bishop Hawk, Inc. professionals
who join the Company exceeds agreed upon levels. Due to the contingent nature of
this payment, the Company will record this portion of the purchase price only to
the extent it is paid to the seller.
In connection with this acquisition, the Company incurred $3.5 million of
borrowings under its credit facility, all of which were repaid by August 21,
1998.
PRO FORMA INFORMATION (UNAUDITED):
The following unaudited pro forma financial information reflects the
operations of the Company, assuming the above six acquisitions had occurred on
July 1 of each year (in thousands, except share data):
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
----------------------
JUNE 30, JUNE 30,
1998 1997
---------- ----------
<S> <C> <C>
Total revenue........................................................ $ 306,834 $ 251,210
Income before taxes and extraordinary item........................... $ 17,076 $ 11,810
Income before extraordinary item..................................... $ 22,498 $ 14,658
Net income........................................................... $ 22,498 $ 20,039
Earnings per share:
Basic.............................................................. $ 1.15 $ 1.29
Diluted............................................................ $ 1.02 $ 1.02
</TABLE>
Pro forma information does not purport to be indicative of the results that
would have been obtained had these events occurred at the beginning of the
periods presented, and is not intended to be a projection of future results.
33
<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, 1998
---------------------------------------------------------
FIRST SECOND FOURTH
QUARTER QUARTER THIRD QUARTER QUARTER
------------ ------------- ------------- -------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS AND SHARES)
<S> <C> <C> <C> <C>
Operating revenue.................................... $ 62,099 $ 81,525 $ 58,977 $ 80,233
------------ ------------- ------------- -------------
------------ ------------- ------------- -------------
Operating income (loss).............................. $ 2,307 $ 7,281 $ (1,127) $ 5,857
------------ ------------- ------------- -------------
------------ ------------- ------------- -------------
Income (loss) before income taxes.................... $ 2,586 $ 7,591 $ (791) $ 6,063
------------ ------------- ------------- -------------
------------ ------------- ------------- -------------
Net income (loss).................................... $ 3,035 $ 8,540 $ 2,655 $ 7,276
------------ ------------- ------------- -------------
------------ ------------- ------------- -------------
Net income (loss) per common share:
Basic --............................................. $ .16 $ .44 $ .14 $ .37
------------ ------------- ------------- -------------
------------ ------------- ------------- -------------
Weighted average common shares outstanding......... 19,541,544 19,592,001 19,626,177 19,670,785
------------ ------------- ------------- -------------
------------ ------------- ------------- -------------
Diluted --........................................... $ .14 $ .39 $ .12 $ .33
------------ ------------- ------------- -------------
------------ ------------- ------------- -------------
Weighted average common shares outstanding......... 22,036,137 21,988,328 21,914,686 22,086,870
------------ ------------- ------------- -------------
------------ ------------- ------------- -------------
Common stock market price range (high:low)........... 17.00:12.81 17.19:12.19 16.38:10.13 15.38:10.13
------------ ------------- ------------- -------------
------------ ------------- ------------- -------------
</TABLE>
<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
----------- ------------ ------------ ------------
----------- ------------ ------------ ------------
Common stock market price range (high:low) 4.75 : 3.25 4.75 : 4.00 10.13 : 4.25 17.13 : 9.00
----------- ------------ ------------ ------------
----------- ------------ ------------ ------------
</TABLE>
34
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
35
<PAGE>
GRUBB & ELLIS COMPANY
PART III
------------------------
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information called for by Item 10 is incorporated by reference from the
registrant's definitive proxy statement to be filed pursuant to Regulation 14A
no later than 120 days after the end of the 1998 fiscal year.
ITEM 11. EXECUTIVE COMPENSATION
The information called for by Item 11 is incorporated by reference from the
registrant's definitive proxy statement to be filed pursuant to Regulation 14A
no later than 120 days after the end of the 1998 fiscal year.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information called for by Item 12 is incorporated by reference from the
registrant's definitive proxy statement to be filed pursuant to Regulation 14A
no later than 120 days after the end of the 1998 fiscal year.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information called for by Item 13 is incorporated by reference from the
registrant's definitive proxy statement to be filed pursuant to Regulation 14A
no later than 120 days after the end of the 1998 fiscal year.
36
<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, 1998 and June 30,
1997.
Consolidated Statements of Operations for the years ended
June 30, 1998, 1997 and 1996.
Consolidated Statements of Stockholders' Equity (Deficit)
for the years ended June 30, 1998, 1997 and 1996.
Consolidated Statements of Cash Flows for the years ended
June 30, 1998, 1997 and 1996.
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:
<TABLE>
<S> <C>
(3) Articles of Incorporation and Bylaws
3.1 Certificate of Incorporation of the Registrant, as restated effective November 1,
1994, incorporated herein by reference to Exhibit 3.2 to the Registrant's Annual
Report on Form 10-K filed March 31, 1995 (Commission File No. 1-8122).
3.2 Amendment to the Restated Certificate of Incorporation of Grubb & Ellis Company,
filed with the Delaware Secretary of State on December 9, 1997, incorporated herein
by reference to Exhibit 4.4 to the Registrant's Registration Statement on Form S-8
filed on December 9, 1997 (Commission File No. 333-42741).
3.3 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).
3.4 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).
3.5 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
</TABLE>
37
<PAGE>
<TABLE>
<S> <C>
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).
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 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).
4.4 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).
4.5 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).
4.6 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).
4.7 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).
4.8 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).
4.9 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).
4.10 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).
4.11 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).
4.12 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).
4.13 Amended and Restated Credit Agreement among the Registrant, certain subsidiaries of
the Registrant, PNC Bank, National Association, and American National Bank and Trust
Company of Chicago dated as of January 26, 1998, incorporated herein by reference to
Exhibit 4.1 to the Registrant's Quarterly Report on Form 10-Q filed on February 13,
1998 (Commission File No. 1-8122).
</TABLE>
38
<PAGE>
<TABLE>
<S> <C>
4.14 Amended and Restated Subordination Agreement among the Registrant and certain
subsidiaries of the Registrant in favor of PNC Bank, National Association, and
American National Bank and Trust Company of Chicago dated as of January 26, 1998,
incorporated herein by reference to Exhibit 4.2 to the Registrant's Quarterly Report
on Form 10-Q filed on February 13, 1998 (Commission File No. 1-8122).
4.15 Revolving Credit Note executed by the Registrant in favor of PNC Bank, National
Association in the amount of $20 million dated as of January 26, 1998, incorporated
herein by reference to Exhibit 4.3 to the Registrant's Quarterly Report on Form 10-Q
filed on February 13, 1998 (Commission File No. 1-8122).
4.16 Revolving Credit Note executed by the Registrant in favor of American National Bank
and Trust Company of Chicago in the amount of $15 million dated as of January 26,
1998, incorporated herein by reference to Exhibit 4.4 to the Registrant's Quarterly
Report on Form 10-Q filed on February 13, 1998 (Commission File No. 1-8122).
4.17 First Amendment to Amended and Restated Credit Agreement among the Registrant,
certain subsidiaries of the Registrant, PNC Bank, National Association, and American
National Bank and Trust Company of Chicago dated as of March 16, 1998, incorporated
herein by reference to Exhibit 4.5 to the Registrant's Quarterly Report on Form 10-Q
filed on May 14, 1998 (Commissions File No. 1-8122).
4.18 Promissory Note Issued July 22, 1998 by Grubb & Ellis Company in favor of Bishop
Hawk, Inc. (in the amount of $1,449,800), incorporated herein by reference to
Exhibit 2.2 to the Registrant's Current Report on Form 8-K filed on August 5, 1998
(Commission File No. 1-8122).
4.19 Promissory Note Issued July 22, 1998 by Grubb & Ellis Company in favor of Bishop
Hawk, Inc. (in the amount of $1,084,020), incorporated herein by reference to
Exhibit 2.3 to the Registrant's Current Report on Form 8-K filed on August 5, 1998
(Commission File No. 1-8122).
On an individual basis, instruments other than Exhibits listed above under Exhibit 4 defining
the rights of holders of long-term debt of the Registrant and its consolidated subsidiaries and
partnerships do not exceed ten percent of total consolidated assets and are, therefore,
omitted; however, the Company will furnish supplementally to the Commission any such omitted
instrument upon request.
(10) Material Contracts
10.1* 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 1990 Amended and Restated Stock Option Plan, as amended effective as
of June 20, 1997, incorporated herein by reference to Exhibit 4.6 to the
Registrant's Registration Statement on Form S-8 filed on December 19, 1997
(Registration No. 333-42741).
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* Grubb & Ellis 1998 Stock Option Plan, effective as of January 13, 1998.
10.6 Amended and Restated Master Collateral Assignment of Contracts Rights to PNC Bank,
National Association, as Agent by the Registrant and Subsidiaries of the Registrant
as of January 26, 1998, incorporated herein by reference to Exhibit 10.1 to the
Registrant's Quarterly Report on Form 10-Q filed on February 13, 1998 (Commission
File No. 1-8122).
</TABLE>
39
<PAGE>
<TABLE>
<S> <C>
10.7 Amended and Restated Master Agreement of Guaranty and Suretyship by the Registrant
and Subsidiaries of the Registrant in favor of PNC Bank, National Association, as
Agent by the Registrant and Subsidiaries of the Registrant as of January 26, 1998,
incorporated herein by reference to Exhibit 10.2 to the Registrant's Quarterly
Report on Form 10-Q filed on February 13, 1998 (Commission File No. 1-8122).
10.8 Amended and Restated Pledge Agreement among the Registrant, certain Subsidiaries of
the Registrant, PNC Bank, National Association, and American National Bank and Trust
Company of Chicago dated as of January 26, 1998, incorporated herein by reference to
Exhibit 10.3 to the Registrant's Quarterly Report on Form 10-Q filed on February 13,
1998 (Commission File No. 1-8122).
10.9 Amended and Restated Security Agreement among the Registrant, certain Subsidiaries
of the Registrant, PNC Bank, National Association, and American National Bank and
Trust Company of Chicago dated as of January 26, 1998, incorporated herein by
reference to Exhibit 10.4 to the Registrant's Quarterly Report on Form 10-Q filed on
February 13, 1998 (Commission File No. 1-8122).
10.10 Amended and Restated Trademark Security Agreement by the Registrant in favor of PNC
Bank, National Association, and American National Bank and Trust Company of Chicago
dated as of January 26, 1998, incorporated herein by reference to Exhibit 10.5 to
the Registrant's Quarterly Report on Form 10-Q filed on February 13, 1998
(Commission File No. 1-8122).
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).
10.13 Asset Purchase Agreement by and among Bishop Hawk, Inc., Sopilote Inc., N. Bruce
Ashwill and Grubb & Ellis Company dated July 22, 1998 (without exhibits),
incorporated herein by reference to Exhibit 2.1 to the Registrant's Current Report
on Form 8-K filed on August 5, 1998 (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. A Current Report on Form 8-K was filed with the S.E.C. on
August 5, 1998, disclosing under Item 2 the acquisition of certain assets of Bishop
Hawk, Inc. The financial statements related to such acquisition will be filed as an
amendment to the Form 8-K.
</TABLE>
40
<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 28th day of
September, 1998.
GRUBB & ELLIS COMPANY
(REGISTRANT)
<TABLE>
<S> <C> <C>
By *
----------------------------------------------------
Neil Young September 28, 1998
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>
<S> <C> <C>
By *
----------------------------------------------------
Neil Young September 28, 1998
CHAIRMAN OF THE BOARD AND CHIEF EXECUTIVE OFFICER,
PRINCIPAL EXECUTIVE OFFICER
By /s/ BRIAN D. PARKER
----------------------------------------------------
Brian D. Parker September 28, 1998
SENIOR VICE PRESIDENT AND CHIEF FINANCIAL OFFICER,
PRINCIPAL FINANCIAL AND ACCOUNTING OFFICER
</TABLE>
<TABLE>
<C> <S>
* September 28, 1998
- ---------------------------------------------------------
R. David Anacker
DIRECTOR
* September 28, 1998
- ---------------------------------------------------------
Lawrence S. Bacow
DIRECTOR
* September 28, 1998
- ---------------------------------------------------------
Joe F. Hanauer
DIRECTOR
* September 28, 1998
- ---------------------------------------------------------
C. Michael Kojaian
DIRECTOR
* September 28, 1998
- ---------------------------------------------------------
Sidney Lapidus
DIRECTOR
</TABLE>
41
<PAGE>
<TABLE>
<C> <S>
* September 28, 1998
- ---------------------------------------------------------
Reuben S. Leibowitz
DIRECTOR
* September 28, 1998
- ---------------------------------------------------------
Robert J. McLaughlin
DIRECTOR
September 28, 1998
- ---------------------------------------------------------
Thomas A. Meador
DIRECTOR
* September 28, 1998
- ---------------------------------------------------------
John D. Santoleri
DIRECTOR
* September 28, 1998
- ---------------------------------------------------------
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>
42
<PAGE>
GRUBB & ELLIS COMPANY AND SUBSIDIARIES
EXHIBIT INDEX (A)
FOR THE FISCAL YEAR ENDED JUNE 30, 1998
<TABLE>
<CAPTION>
EXHIBIT
- ----------
<S> <C>
(10) Material Contracts
10.5 Grubb & Ellis 1998 Stock Option Plan, effective as of January 13, 1998.
(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>
<PAGE>
EXHIBIT 10.5
GRUBB & ELLIS COMPANY
1998 STOCK OPTION PLAN
EFFECTIVE JANUARY 13, 1998
Grubb & Ellis Company, a corporation organized under the laws of the State
of Delaware (the "Company") hereby adopts this 1998 Stock Option Plan.
The purposes of this Plan are as follows:
(1) To promote the interests of the Company, its subsidiaries and its
stockholders, in retaining and attracting key persons associated with the
Company and its subsidiaries, by granting options ("Options") to such persons to
purchase shares of its Common Stock, $.01 par value ("Shares").
(2) To enable the Company to obtain and retain the services of the type of
professional, technical and managerial employees considered essential to the
long-range success of the Company by providing and offering them an opportunity
to become owners of capital stock of the Company under options.
ARTICLE I.
DEFINITIONS
Whenever the following terms are used in this Plan, they shall have the
meaning specified below unless the context clearly indicates to the contrary.
The masculine pronoun shall include the feminine and neuter and the singular
shall include the plural, where the context so indicates.
SECTION 1.1. - ADMINISTRATOR
"Administrator" shall mean the entity that conducts the general
administration of the Plan as provided in Article VI.
SECTION 1.2. - AWARD LIMIT
"Award Limit" shall mean Options to acquire 500,000 shares of Common Stock.
SECTION 1.3. - BOARD
"Board" shall mean the Board of Directors of the Company.
SECTION 1.4. - CODE
"Code" shall mean the Internal Revenue Code of 1986, as amended.
<PAGE>
SECTION 1.5. - COMMON STOCK
"Common Stock shall mean the Common Stock, par value $.01 per share, of the
Company and any equity security of the Company issued or authorized to be issued
in the future, but excluding any preferred stock and any warrants, options or
other rights to purchase Common Stock. Debt securities of the Company
convertible into Common Stock shall be deemed equity securities of the Company.
SECTION 1.6. - COMPANY
"Company" shall mean Grubb & Ellis Company.
SECTION 1.7. - COMPENSATION COMMITTEE
"Compensation Committee" shall mean the Compensation Committee of the
Board.
SECTION 1.8. - CONSULTANT
"Consultant" shall mean any Person who is not an Employee and who renders
services to the Company, or any entity which is then a Parent Corporation or a
Subsidiary, as a consultant or adviser, whether such Person renders such
services at the time this Plan is adopted or renders such services subsequent to
the adoption of this Plan. "Consultant" shall not include any consultant or
adviser who is engaged in capital raising activities on behalf of the Company
nor shall it include any non-employee Director of the Company.
SECTION 1.9. - DIRECTOR
"Director" shall mean a member of the Board.
SECTION 1.10. - DISABILITY
"Disability" shall have the meaning set forth in Section 22(e)(3) of the
Code.
SECTION 1.11. - EMPLOYEE
"Employee" shall mean any Employee (as defined in accordance with the
regulations and revenue rulings then applicable under Section 3401(c) of the
Code) of the Company, or of any entity which is then a Parent Corporation or a
Subsidiary, whether such Employee is so employed at the time this Plan is
adopted or becomes so employed subsequent to the adoption of this Plan.
SECTION 1.12. - EXCHANGE ACT
"Exchange Act" shall mean the Securities Exchange Act of 1934, as amended.
2
<PAGE>
SECTION 1.13. - FAIR MARKET VALUE
"Fair Market Value" of a share of Common Stock as of any given date shall
mean: (i) the closing price of the Common Stock on the New York Stock Exchange
on the trading day preceding such date or, if shares of Common Stock were not
traded on such date, then on the next preceding trading day during which a sale
occurred; or (ii) if such stock is not traded on an exchange but is quoted on
NASDAQ or a successor quotation system, (1) the last sales price (if the stock
is then listed as a National Market Issue under the NASD National Market System)
or (2) the mean between the closing representative bid and asked prices (in all
other cases) for the stock on such date as reported by NASDAQ or such successor
quotation system; or (iii) if such stock is not publicly traded on an exchange
and not quoted on NASDAQ or a successor quotation system, the mean between the
closing bid and asked prices for the stock, on such date, as determined in good
faith by the Administrator; or (iv) if the Company's stock is not publicly
traded, the fair market value established by the Administrator acting in good
faith. In determining the Fair Market Value of the Company's Common Stock under
subsection (i) of this Section 1.13, the Administrator may rely on the closing
price as reported in the New York Stock Exchange composite transactions
published in the Western Edition of the Wall Street Journal.
SECTION 1.14. - OFFICER
"Officer" shall mean an Executive Officer designated as such by the Board
and other corporate officers who are elected by the Board.
SECTION 1.15. - OPTION
"Option" shall mean an option to purchase Common Stock of the Company,
granted under this Plan.
SECTION 1.16. - OPTIONEE
"Optionee" shall mean an Employee or Consultant to whom an Option is
granted under this Plan.
SECTION 1.17.- PARENT CORPORATION
"Parent Corporation" shall mean any corporation in an unbroken chain of
corporations ending with the Company if each of the corporations other than the
Company then owns stock possessing 50% or more of the total combined voting
power of all classes of stock in one of the other corporations in such chain.
SECTION 1.18. - PERSON
"Person" shall mean any of the following: an individual, a partnership, a
corporation, an association, a joint stock company, a trust, a joint venture, an
unincorporated organization or a
3
<PAGE>
governmental entity or any department, agency or political subdivision
thereof.
SECTION 1.19. - PLAN
"Plan" shall mean this 1998 Stock Option Plan.
SECTION 1.20. - RULE 16b-3
"Rule 16b-3" shall mean that certain Rule 16b-3 under the Exchange Act, or
any successor rule to such rule, and as such rule may be amended from time to
time.
SECTION 1.21. - SECRETARY
"Secretary" shall mean the Secretary of the Company.
SECTION 1.22. - SECTION 162(m) PARTICIPANT.
"Section 162(m) Participant" shall mean any key Employee designated by the
Administrator as a key Employee whose compensation for the fiscal year in which
the key Employee is so designated or a future fiscal year may be subject to the
limit on deductible compensation imposed by Section 162(m) of the Code.
SECTION 1.23. - SECURITIES ACT
"Securities Act" shall mean the Securities Act of 1933, as amended.
SECTION 1.24. - SUBSIDIARY
(a) "Subsidiary" shall mean any corporation in an unbroken chain of
corporations beginning with the Company if each of the corporations other than
the last corporation in the unbroken chain then owns stock possessing 50% or
more of the total combined voting power of all classes of stock in one of the
other corporations in such chain.
SECTION 1.25. - TERM OF PLAN
The "Term of Plan" shall be ten years, expiring on January 12, 2009.
SECTION 1.26. - TERMINATION OF EMPLOYMENT
"Termination of Employment," for purposes of the Plan, shall mean the time
when the Employee-employer relationship between the Optionee and the Company, a
Parent Corporation or a Subsidiary is terminated for any reason, with or without
cause, including, but not by way of limitation, a termination by resignation,
discharge, death or retirement, but excluding (i) terminations where there is a
simultaneous reemployment or continuing employment of an Optionee by the
Company; (ii) at the discretion of the Administrator, terminations which result
in
4
<PAGE>
a temporary severance of the Employee-employer relationship not exceeding 180
calendar days; and (iii) at the discretion of the Administrator, terminations
which are followed by the simultaneous establishment of a consulting
relationship by the Company with the former Employee. The Administrator, in its
absolute discretion, shall determine the effect of all matters and questions
relating to Termination of Employment with respect to the Plan and the Options
granted thereunder, including, but not by way of limitation all questions of
whether particular leaves of absence constitute Terminations of Employment.
However, nothing in this Plan shall be construed to modify the employment
relationship between the Company and the Employee, which is an at-will
employment relationship, except to the extent expressly provided otherwise in
writing.
SECTION 1.27. - TERMINATION OF SERVICE
"Termination of Service" shall mean the time when the engagement of
Optionee or the consulting agreement between Optionee and the Company relating
to Optionee's services as a Consultant to the Company, a Parent Corporation or a
Subsidiary is terminated for any reason, including without limitation,
termination of the engagement or consulting agreement due to breach, expiration
by its terms, completion of the services, or death; provided that when such
termination is simultaneously accompanied by commencement of employment with the
Company, a Parent Corporation or a Subsidiary, no Termination of Service shall
then occur and Termination of Service with respect to such Optionee shall
thereafter mean Termination of Employment with respect to such employment. The
Administrator, in its absolute discretion, shall determine all questions
relating to Termination of Service.
ARTICLE II.
SHARES SUBJECT TO PLAN
SECTION 2.1. - SHARES SUBJECT TO PLAN
(a) The shares of stock subject to Options shall be shares of the
Company's Common Stock. The aggregate number of such shares which may be issued
upon exercise of Options shall not exceed two million (2,000,000).
(b) No individual shall receive Options for more than the Award Limit
during the Term of Plan. To the extent required by Section 162(m) of the Code,
shares subject to Options which are canceled continue to be counted against the
Award Limit and if, after grant of an Option, the price of shares subject to
such Option is reduced, the transaction is treated as a cancellation of the
Option and a grant of a new Option and both the Option deemed to be canceled and
the Option deemed to be granted are counted against the Award Limit.
5
<PAGE>
SECTION 2.2. - UNEXERCISED OPTIONS
If any Option expires or is canceled without having been fully exercised,
the number of shares subject to such Option but as to which such Option was not
exercised prior to its expiration or cancellation may again be available for the
grant of Options hereunder, subject to the limitations of Section 2.1.
SECTION 2.3. - CHANGES IN COMMON STOCK
In the event that the outstanding shares of Common Stock of the Company are
hereafter changed into or exchanged for a different number or kind of shares or
other securities of the Company, or of another corporation, by reason of
reorganization, merger, consolidation, recapitalization, reclassification, stock
split-up, stock dividend, combination of shares or otherwise, appropriate
adjustments shall be made by the Administrator in the number and kind of shares
for the purchase of which Options may be granted including adjustments of the
limitations in Section 2.1 on the maximum number and kind of shares which may be
issued on exercise of Options.
ARTICLE III.
GRANTING OF OPTIONS
SECTION 3.1. - ELIGIBILITY
Any Employee or Consultant of the Company or of any of its Subsidiaries,
whether presently in existence or hereinafter organized or acquired, shall be
eligible to be granted Options.
SECTION 3.2. - NON-QUALIFIED OPTIONS
All Options granted under this Plan shall be non-qualified Options that are
not intended to constitute incentive stock options under Section 422 of the
Code.
SECTION 3.3. - PERFORMANCE-BASED COMPENSATION
The Board may determine, in its discretion, by resolution duly adopted, to
permit Options intended to qualify as performance-based compensation under Code
section 162(m)(4)(C) to be granted under the Plan and shall thereupon submit the
Plan for approval by the stockholders of the Company. In such event, the
committee described in Section 6.1(b), in its discretion, may grant Options
intended to qualify as performance-based compensation under Code Section
162(m)(4)(C), provided, that no such Option shall be exercisable until the Plan
is approved by the stockholders. If such approval is not obtained within twelve
months of the date the Board resolution is adopted, all such Options previously
granted shall thereupon be canceled and become null and void. Prior to the
adoption of the resolution by the Board to permit the grant of
6
<PAGE>
Options intended to qualify as performance-based compensation under the Plan,
all references in the Plan to Section 162(m) of the Code and Section 162(m)
Participants shall be disregarded.
SECTION 3.4. - GRANTING OF OPTIONS
(a) The Administrator shall from time to time, in its absolute discretion,
and subject to applicable limitations of this Plan:
(i) Determine which Employees and Consultants (including those to
whom Options have been previously granted under the Plan) in its opinion should
be granted Options; and
(ii) Subject to the Award Limit, determine the number of shares to be
subject to such Options granted to such selected Employees and Consultants; and
(iii) Determine the terms and conditions of such Options, consistent
with the Plan.
(iv) Subject to Section 3.3, determine whether such Options are to
qualify as performance-based compensation as described in Section 162(m)(4)(C)
of the Code and, if so, to determine the terms and conditions of the Options,
including such terms and conditions as may be required in order for such Options
to qualify as performance-based compensation as described in Section
162(m)(4)(C) of the Code.
(b) Upon the selection of an Employee or Consultant to be granted an
Option, the Administrator shall instruct the Secretary to issue such Option and
may impose such conditions on the grant of such Option as it deems appropriate.
Without limiting the generality of the preceding sentence, the Administrator
may, in its absolute discretion and on such terms as it deems appropriate,
require as a condition on the grant of an Option to an Employee or Consultant
that such individual surrender for cancellation some or all of the unexercised
Options which have been previously granted to him under this Plan or otherwise.
An Option the grant of which is conditioned upon such surrender may have an
option price lower (or higher) than the option price of the surrendered Option,
may cover the same (or a lesser or greater) number of shares as the surrendered
Option, may contain such other terms as the Administrator deems appropriate and
shall be exercisable in accordance with its terms, without regard to the number
of shares, price, option period or any other term or condition of the
surrendered Option.
7
<PAGE>
ARTICLE IV.
TERMS OF OPTIONS
SECTION 4.1. - OPTION AGREEMENT
Each Option shall be evidenced by a written Stock Option Grant, which shall
be executed by an authorized Officer of the Company and which shall contain such
terms and conditions as the Administrator shall determine, consistent with the
Plan, including, but not limited to, such terms and conditions as may be
required in order for such Options to qualify as performance-based compensation
as described in Section 162(m)(4)(C) of the Code, subject to Section 3.3 hereof.
SECTION 4.2. - OPTION PRICE
The price per share of the shares subject to each Option granted to
Employees and Consultants shall be set by the Administrator; PROVIDED, HOWEVER,
that such price shall be no less than the par value of a share of Common Stock,
unless otherwise permitted by applicable state law, and in the case of Options
intended to qualify as performance-based compensation as described in Section
162(m)(4)(C) of the Code, such price shall not be less than 100% of the Fair
Market Value of a share of Common Stock on the date such Option is granted.
SECTION 4.3. - OPTION VESTING
(a) Options shall become exercisable at such times and in such
installments (which may be cumulative) as the Administrator shall provide in the
terms of each individual Stock Option Grant; PROVIDED, HOWEVER, that unless the
Administrator otherwise provides, in the Stock Option Grant or otherwise, no
Option shall be exercisable by any Optionee until the Optionee has remained in
employment for one year after the date the Option is granted. At any time after
the grant of an Option, the Administrator may, on such terms and conditions as
it may determine to be appropriate, accelerate the time at which such Option or
any portion thereof may be exercised.
(b) No portion of an Option which is unexercisable at Termination of
Employment or Termination of Service shall thereafter become exercisable.
(c) Notwithstanding the foregoing, Options granted pursuant to this Plan
shall vest immediately upon the occurrence of any of the following events: (i)
with respect to any specifically designated Options, at the election of, and to
the extent determined by the Administrator with respect to Options specifically
designated; (ii) with respect to Options which have been at least 50% vested
prior to any of the following events: (x) upon the merger or combination of the
Company with another corporation, when as a result thereof the stockholders of
the Company immediately preceding such merger or combination shall immediately
thereafter own less than 50% of the outstanding shares of the surviving
corporation which at the time shall have, by the terms thereof, the ordinary
voting power to elect the directors of such corporation;
8
<PAGE>
(y) upon a tender offer or single transaction (other than a merger or
combination of the Company with another corporation) which in either case
results in a change in ownership of 33-1/3% or more of the outstanding shares
of Common Stock of the Company; (z) upon a sale to an unrelated party of
substantially all of the assets of the Company; or (iii) with respect to all
outstanding Options, upon a substantial partial or complete liquidation of
the Company.
SECTION 4.4. - OPTION TERM
The term of an Option shall be set by the Administrator in its discretion;
provided, however, that the term shall not be more than ten (10) years from the
date of the Option is granted. The Administrator may extend the term of any
outstanding Option in connection with any Termination of Employment or
Termination of Service of the Optionee, or amend any other term or condition of
such Option relating to such a termination.
SECTION 4.5. - CONSIDERATION
The Administrator shall determine and set forth the consideration necessary
for the granting of an Option in the written Stock Option Grant.
SECTION 4.6. - ADJUSTMENTS IN OUTSTANDING OPTIONS
In the event that the outstanding shares of the stock subject to Options
are changed into or exchanged for a different number or kind of shares of the
Company or other securities of the Company by reason of merger, consolidation,
recapitalization, reclassification, stock split-up, stock dividend, combination
of shares or otherwise, the Administrator shall make an appropriate and
equitable adjustment in the number and kind of shares as to which all
outstanding Options, or portions thereof then unexercised, shall be exercisable,
to the end that after such event the Optionee's proportionate interest shall be
maintained as before the occurrence of such event. Such adjustment in an
outstanding Option shall be made without change in the total price applicable to
the Option or the unexercised portion of the Option (except for any change in
the aggregate price resulting from rounding-off of share quantities or prices)
and with any necessary corresponding adjustment in Option price per share. Any
such adjustment made by the Administrator shall be final and binding upon all
Optionees, the Company and all other interested persons.
9
<PAGE>
ARTICLE V.
EXERCISE OF OPTIONS
SECTION 5.1. - PERSON ELIGIBLE TO EXERCISE
During the lifetime of the Optionee, only he may exercise an Option granted
to him, or any portion thereof. After the death of the Optionee, any
exercisable portion of an Option may, prior to the time when such portion
becomes unexercisable, be exercised by his personal representative or by any
person empowered to do so under the deceased Optionee's will or under the then
applicable laws of descent and distribution.
SECTION 5.2. - PARTIAL EXERCISE
At any time and from time to time prior to the time when any exercisable
Option or exercisable portion thereof becomes unexercisable, such Option or
portion thereof may be exercised in whole or in part; PROVIDED, HOWEVER, that
the Company shall not be required to issue fractional shares and the
Administrator may, by the terms of the Option, require any partial exercise to
be with respect to a specified minimum number of shares.
SECTION 5.3. - MANNER OF EXERCISE
An exercisable Option, or any exercisable portion thereof, may be exercised
solely by delivery to the Secretary or his office of all of the following prior
to the time when such Option or such portion becomes unexercisable:
(a) Notice in writing signed by the Optionee or other person then entitled
to exercise such Option or portion, stating that such Option or portion is
exercised, such notice complying with all applicable rules established by the
Administrator or its delegee; and
(b) (i) Full payment (in cash or by check) for the shares with respect to
which such Option or portion is thereby exercised; or
(ii) Subject to the Administrator's consent, shares of Common Stock
owned by the Optionee duly endorsed for transfer to the Company with a Fair
Market Value on the date of delivery equal to the aggregate Option price of the
shares with respect to which such Option or portion is thereby exercised;
(iii) Subject to the Administrator's consent, payment, in whole or
in part, through the surrender of shares of Common Stock then issuable upon
exercise of the Option having a Fair Market Value on the date of Option exercise
equal to the aggregate exercise price of the Option or exercised portion
thereof;
10
<PAGE>
(iv) Subject to the Administrator's consent, full payment in any other
form approved by the Administrator, consistent with applicable law and the Plan;
or
(v) Any combination of the consideration provided in the foregoing
subsections (i), (ii), (iii) and (iv); and
(c) On or prior to the date the same is required to be withheld:
(i) Full payment (in cash or by check) of any amount that must be
withheld by the Company for federal, state and/or local tax purposes; or
(ii) Subject to the Administrator's consent, full payment by delivery
to the Company of shares of the Common Stock owned by the Optionee duly endorsed
for transfer to the Company by the Optionee or other person then entitled to
exercise such Option or portion with an aggregate Fair Market Value equal to the
amount that must be withheld by the Company for federal, state and/or local tax
purposes; or
(iii) Subject to the Administrator's consent, full payment by
retention by the Company of shares of Common Stock to be issued pursuant to such
Option exercise with an aggregate Fair Market Value equal to the amount that
must be withheld by the Company for federal, state and/or local tax purposes; or
(iv) Any combination of payments provided for in the foregoing
subsections (i), (ii) or (iii).
(d) Such representations and documents as the Administrator, in its
absolute discretion, deems necessary or advisable to effect compliance with all
applicable provisions of the Securities Act and any other federal or state
securities laws or regulations. The Administrator may, in its absolute
discretion, also take whatever additional actions it deems appropriate to effect
such compliance including, without limitation, placing legends on share
certificates and issuing stop-transfer orders to transfer agents and registrars;
and
(e) In the event that the Option or portion thereof shall be exercised by
any person or persons other than the Optionee, appropriate proof of the right of
such person or persons to exercise the Option or portion thereof.
11
<PAGE>
SECTION 5.4. - CONDITIONS TO ISSUANCE OF STOCK CERTIFICATES
The shares of stock issuable and deliverable upon the exercise of an
Option, or any portion thereof, may be either previously authorized but unissued
shares or issued shares which have then been reacquired by the Company. The
Company shall not be required to issue or deliver any certificate or
certificates for shares of stock purchased upon the exercise of any Option or
portion thereof prior to fulfillment of all of the following conditions:
(a) The admission of such shares to listing on all stock exchanges on
which such class of stock is then listed; and
(b) The completion of any registration or other qualification of such
shares under any state or federal law or under the rulings or regulations of the
Securities and Exchange Commission or any other governmental regulatory body,
which the Administrator shall, in its absolute discretion, deem necessary or
advisable; and
(c) The obtaining of any approval or other clearance from any state or
federal governmental agency which the Administrator shall, in its absolute
discretion, determine to be necessary or advisable; and
(d) The payment to the Company (or other employer corporation) of all
amounts which it is required to withhold under federal, state or local law in
connection with the exercise of the Option; and
(e) The lapse of such reasonable period of time following the exercise of
the Option as the Administrator may establish from time to time for reasons of
administrative convenience.
SECTION 5.5 - EXPIRATION OF OPTIONS
(a) No Option may be exercised to any extent by anyone after the first to
occur of the following events:
(i) The expiration of ten years from the date the Option was
granted; or
(ii) The expiration of twelve (12) months from the date of the
Optionee's death;
(iii) The expiration of twelve (12) months from the date of the
Optionee's Termination of Employment or termination of Service by reason of his
Disability;
(iv) The expiration of three (3) months from the date of the
Optionee's Termination of Employment or Termination of Service for any reason
other than such Optionee's death or Disability, unless the Optionee dies within
said three-month period.
12
<PAGE>
(b) Subject to the provisions of Section 5.5(a), the Administrator shall
provide, in the terms of each individual Option, when such Option expires and
becomes unexercisable; and (without limiting the generality of the foregoing)
the Administrator may provide in the terms of individual Options that said
Options expire immediately upon a Termination of Employment or Termination of
Service for any reason.
SECTION 5.6 - RIGHTS AS STOCKHOLDERS
The holders of Options shall not be, nor have any of the rights or
privileges of, stockholders of the Company in respect of any shares purchasable
upon the exercise of any part of an Option unless and until certificates
representing such shares have been issued by the Company to such holders.
SECTION 5.7 - TRANSFER RESTRICTIONS
The Administrator, in its absolute discretion, may impose such restrictions
on the transferability of the shares purchasable upon the exercise of an Option
as it deems appropriate. Any such restriction shall be set forth in the
respective Stock Option Grant and may be referred to on the certificates
evidencing such shares. The Administrator may require the Optionee to give the
Company prompt notice of any disposition of shares of stock, acquired by
exercise of any stock options, within two years from the date of granting such
option or one year after the transfer of such shares to such Optionee. The
Administrator may direct that the certificates evidencing shares acquired by
exercise of any stock options refer to such requirement to give prompt notice of
disposition.
ARTICLE VI.
ADMINISTRATION
SECTION 6.1 - COMMITTEE
(a) The Administrator of the Plan with respect to Options granted to
Employees and Consultants shall be the Compensation Committee. The
Administrator of the Plan with respect to Options granted to Officers shall be
the Board. In either case, the Board has the authority to designate another
committee or a subcommittee of the Board to administer the Plan, consisting
solely of two or more Directors appointed by, and serving on such committee at
the pleasure of, the Board.
(b) Notwithstanding the foregoing, in the event the Board determines, in
its discretion and pursuant to Section 3.3, that Options intended to qualify as
performance-based compensation as described in Section 162(m)(4)(C) of the Code
may be granted under the Plan, the committee entitled to grant Options to
Section 162(m) Participants and Officers shall consist solely of two or more
Directors appointed by, and serving on such committee at the pleasure of, the
Board, each of whom is both a "non-employee director" as defined by Rule 16b-3
and an "outside
13
<PAGE>
director" for purposes of Section 162(m) of the Code. Appointment of members
of such committee shall be effective upon acceptance of appointment. Such
members may resign at any time by delivering written notice to the Board.
Vacancies in such committee shall be filled by the Board.
SECTION 6.2 - DUTIES AND POWERS OF THE ADMINISTRATOR
(a) Except as provided in section 6.2(b), the Administrator is authorized
to grant Options, including determining the terms of the Options, granted under
the Plan. It shall be the duty of the Administrator to conduct the general
administration of the Plan in accordance with its provisions. The Administrator
shall have the power to interpret the Plan and the Stock Option Grants, and to
adopt such rules for the administration, interpretation and application of the
Plan and the Stock Option Grants as are consistent therewith and to interpret,
amend or revoke any such rules.
(b) In the event the Board determines, in its discretion and pursuant to
Section 3.3, that Options intended to qualify as performance-based compensation
as described in Section 162(m)(4)(C) of the Code may be granted under the Plan,
the committee appointed under section 6.1(b) shall have the power to interpret
the Plan and the Stock Option Grants, to grant Options under the Plan to Section
162(m) Participants and Officers and to adopt such rules for the administration,
interpretation and application of the Plan and the Stock Option Grants as are
consistent therewith and to interpret, amend or revoke any such rules with
regard to Section 162(m) Participants and Officers.
SECTION 6.3 - MAJORITY RULE; UNANIMOUS WRITTEN CONSENT
The Administrator shall act by a majority of its members in office. The
Administrator may act either by vote at a meeting at which a quorum is present
or by a memorandum or other written instrument signed by a majority of the
Administrator.
SECTION 6.4 - COMPENSATION; PROFESSIONAL ASSISTANCE; GOOD FAITH ACTIONS
Members of the Administrator shall receive such compensation, if any, for
their services as members as may be determined by the Board. All expenses and
liabilities incurred by members of the Administrator in connection with the
administration of the Plan shall be borne by the Company. The Administrator
may, with the approval of the Board, employ attorneys, consultants, accountants,
appraisers, brokers or other persons. The Administrator, the Company and its
Officers and Directors shall be entitled to rely upon the advice, opinions or
valuations of any such persons. All actions taken and all interpretations and
determinations made by the Administrator in good faith shall be final and
binding upon all Optionees, the Company and all other interested persons. No
member of the Administrator shall be personally liable for any
14
<PAGE>
action, determination or interpretation made in good faith with respect to the
Plan or the Options, and all members of the Administrator shall be fully
protected by the Company in respect to any such action, determination or
interpretation.
ARTICLE VII.
OTHER PROVISIONS
SECTION 7.1 - OPTIONS NOT TRANSFERABLE
Options granted under this Plan may not be sold, pledged, assigned, or
transferred in any manner otherwise than by will or the laws of descent or
distribution.
SECTION 7.2 - AMENDMENT, SUSPENSION OR TERMINATION OF THE PLAN
The Plan may be wholly or partially amended or otherwise modified,
suspended or terminated at any time or from time to time by the Board, except
with respect to matters which under Section 162(m) of the Code are required to
be determined in the absolute discretion of the Administrator. However, neither
the amendment, suspension nor termination of the Plan shall, without the consent
of the holder of the Option, impair any rights or obligations under any Option
theretofore granted. No Option may be granted during any period of suspension
nor after termination of the Plan, and in no event may any Option be granted
under this Plan after the expiration of the Term of Plan.
SECTION 7.3 - EFFECT OF PLAN UPON OTHER OPTION AND COMPENSATION PLANS
The adoption of this Plan shall not affect any other compensation or
incentive plans in effect for the Company, any Parent Corporation or any
Subsidiary. Nothing in this Plan shall be construed to limit the right of the
Company, any Parent Corporation or any Subsidiary (a) to establish any other
forms of incentives or compensation for Employees of the Company, any Parent
Corporation or any Subsidiary or (b) to grant or assume options or other rights
otherwise than under this Plan in connection with any proper corporate purpose,
including, but not by way of limitation, the grant or assumption of options in
connection with the acquisition by purchase, lease, merger, consolidation or
otherwise, of the business, stock or assets of any corporation, firm or
association.
SECTION 7.4 - MISCELLANEOUS
(a) No person shall have any claim or right to be granted an Option under
this Plan. The grant of an Option under this Plan shall not confer any right on
the Optionee to continue in the employ of or association with the Company or
limit in any way the right of the Company to terminate such employment or
association.
15
<PAGE>
(b) The Company shall have the right to condition exercise of Options
granted pursuant to this Plan upon satisfactory arrangements to assure that, to
the extent the exercise of such Options shall result in realization by the
person exercising such Options of income subject to a requirement that taxes be
withheld with respect to such income, the amount of such taxes shall be provided
by the Optionee at the time of exercise of the Options or the number of Shares
issuable upon such exercise shall be reduced and withheld to satisfy such tax
obligations.
SECTION 7.5 - COMPLIANCE WITH LAWS
The Plan, the granting and vesting of Options under the Plan and the
issuance and delivery of shares of Common Stock and the payment of money under
the Plan or in connection with options granted or awarded hereunder are subject
to compliance with all applicable federal and state laws, rules and regulations
(including but not limited to state and federal securities law and federal
margin requirements) and to such approvals by any listing, regulatory or
governmental authority as may, in the opinion of counsel for the Company, be
necessary or advisable in connection therewith. Any securities delivered under
the Plan shall be subject to such restrictions, and the person acquiring such
securities shall, if requested by the Company, provide such assurances and
representations to the Company as the Company may deem necessary or desirable to
assure compliance with all applicable legal requirements. To the extent
permitted by applicable law, the Plan and Options granted or awarded hereunder
shall be deemed amended to the extent necessary to conform to such laws, rules
and regulations. Notwithstanding any other provision of the Plan, any Option
which is granted to a Section 162(m) Participant and is intended to qualify as
performance-based compensation as described in Section 162(m)(4)(C) of the Code
shall be subject to any additional limitations set forth in Section 162(m) of
the Code (including any amendment to Section 162(m) of the Code) or any
regulations or rulings issued thereunder that are requirements for qualification
as performance-based compensation as described in Section 162(m)(4)(C) of the
Code, and the Plan shall be deemed amended to the extent necessary to conform to
such requirements.
SECTION 7.6 - TITLES
Titles are provided herein for convenience only and are not to serve as a
basis for interpretation or construction of the Plan.
16
<PAGE>
SECTION 7.7 - GOVERNING LAW
This Plan and any agreements hereunder shall be administered, interpreted
and enforced under the internal laws of the State of Delaware, without regard to
conflicts of laws thereof.
I hereby certify that the foregoing was duly adopted by the Board of Directors
of Grubb & Ellis Company as of January 13, 1998.
Executed on this 26th day of March, 1998.
/s/ Carol Vanairsdale
------------------------------
Assistant Secretary
17
<PAGE>
EXHIBIT 21
SUBSIDIARIES OF THE REGISTRANT
SUBSIDIARIES OF GRUBB & ELLIS COMPANY
<TABLE>
<CAPTION>
NAME AND STATE OF
TRADE NAMES (if any) INCORPORATION
- -------------------- -------------
<S> <C>
Adams-Cates Company Georgia
Aequus Property Management Company Texas
Collective Services, Inc. Pennsylvania
Grubb & Ellis Affiliates, Inc. Delaware
Grubb & Ellis Asset Services Company Delaware
Grubb & Ellis Colorado, Inc. California
TRADE NAME: Grubb & Ellis Company
Grubb & Ellis Europe, Inc. California
Grubb & Ellis Management Services, Inc. Delaware
Grubb & Ellis Mortgage Group, Inc. California
Grubb & Ellis Mortgage Services, Inc.S California
Grubb & Ellis New York, Inc. New York
TRADE NAMES: James Felt Realty Services
Grubb & Ellis Institutional Properties, Inc. California
Grubb & Ellis of Nevada, Inc. Nevada
Grubb & Ellis of Oregon, Inc. Washington
Grubb & Ellis Realty Advisers, Inc. California
Grubb & Ellis Services Corporation Florida
Grubb & Ellis Southeast Partners, Inc. California
G&E Investor Properties I, Inc. California
G&E Investor Properties III, Inc. California
G&E Investor Properties IV, Inc. California
HSM Inc. Texas
Leggat McCall/Grubb & Ellis, Inc. Massachusetts
Montclair Insurance Company Ltd. Bermuda
Oliver Realty, Inc. Delaware
The Schuck Commercial Brokerage Company Colorado
Wm. A. White/Grubb & Ellis Inc. New York
Wm. A. White/Tishman East Inc. New York
White Commercial Real Estate California
TRADE NAMES: White Commercial Real Estate, a
Company of Grubb & Ellis Property Solutions
Worldwide
</TABLE>
<PAGE>
SUBSIDIARIES OF GRUBB & ELLIS MANAGEMENT SERVICES, INC.
<TABLE>
<CAPTION>
NAME AND STATE OF
TRADE NAMES (if any) INCORPORATION
- -------------------- -------------
<S> <C>
Crane Realty & Management Co. California
Grubb & Ellis Management Services of Canada, Inc. Canada
Grubb & Ellis Management Services of Colorado, Colorado
Inc.
TRADE NAME: Grubb & Ellis Management
Services, Inc.
</TABLE>
SUBSIDIARIES OF CRANE REALTY & MANAGEMENT CO.
<TABLE>
<CAPTION>
NAME AND STATE OF
TRADE NAMES (if any) INCORPORATION
- -------------------- -------------
<S> <C>
Crane Realty Services, Inc. California
</TABLE>
SUBSIDIARIES OF GRUBB & ELLIS MANAGEMENT SERVICES OF CANADA, INC.
<TABLE>
<CAPTION>
NAME AND STATE OF
TRADE NAMES (if any) INCORPORATION
- -------------------- -------------
<S> <C>
Grubb & Ellis Facilities Services of Canada, Inc. Canada
</TABLE>
SUBSIDIARIES OF HSM INC.
<TABLE>
<CAPTION>
NAME AND STATE OF
TRADE NAMES (if any) INCORPORATION
- -------------------- -------------
<S> <C>
Henry S. Miller Financial Corporation Texas
HSM Condominium Corporation Texas
HSM Real Estate Securities Corporation Texas
Miller Capital Corporation Texas
Miller Real Estate Services Corporation Texas
</TABLE>
2
<PAGE>
Exhibit 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statement
(Form S-3 No. 333-48515) pertaining to the registration of $150,000,000 of
debt securities, preferred stock, common stock, equity warrants and debt
warrants, the Registration Statement (Form S-8 No. 333-42741) pertaining to
the Grubb & Ellis Company 1990 Amended and Restated Stock Option Plan and
Grubb & Ellis Employee Stock Purchase Plan, the Registration Statements (Form
S-8 Nos. 33-71580, 33-35640 and 2-98541) pertaining to the 1990 Amended and
Restated Stock Option Plan, as amended, and the Registration Statement (Form
S-8 No. 33-71484) pertaining to the 1993 Stock Option Plan for Outside
Directors of Grubb & Ellis Company of our report dated August 21, 1998, with
respect to the financial statements of Grubb & Ellis Company included in the
Annual Report (Form 10-K) for the year ended June 30, 1998, filed with the
Securities and Exchange Commission.
Chicago, Illinois
September 25, 1998
<PAGE>
EXHIBIT 24
GRUBB & ELLIS COMPANY
POWER OF ATTORNEY
ANNUAL REPORT ON FORM 10-K
The undersigned President and Chief Executive Officer of Grubb & Ellis
Company, a Delaware corporation (the "Company"), hereby constitutes and appoints
Robert J. Walner, Blake Harbaugh, and Carol M. Vanairsdale, jointly and
severally, his attorneys with full power of substitution, to sign and file with
the Securities and Exchange Commission, in his capacity as President and Chief
Executive Officer of the Company, the Company's Annual Report on Form 10-K for
the 1998 fiscal year and any and all amendments thereto, and any and all
instruments or documents filed as part of or in conjunction with such Annual
Report or amendments thereto, and hereby ratifies all that said attorneys or any
of them may do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, I have signed these presents this 28th day of May,
1998.
/s/ Neil Young
-------------------------------------
Neil Young
President and Chief Executive Officer
<PAGE>
GRUBB & ELLIS COMPANY
POWER OF ATTORNEY
ANNUAL REPORT ON FORM 10-K
Each of the undersigned directors of Grubb & Ellis Company, a Delaware
corporation (the "Company"), hereby constitutes and appoints Robert J. Walner,
Blake Harbaugh, and Carol M. Vanairsdale, jointly and severally, his attorneys
with full power of substitution, to sign and file with the Securities and
Exchange Commission, in his capacity as director of the Company, the Company's
Annual Report on Form 10-K for the fiscal year ending June 30, 1998 and any and
all amendments thereto, and any and all instruments or documents filed as part
of or in conjunction with such Annual Report or amendments thereto, and hereby
ratifies all that said attorneys or any of them may do or cause to be done by
virtue hereof.
This instrument may be executed in a number of identical counterparts, each
of which shall be deemed an original for all purposes and all of which shall
constitute, collectively, one instrument.
IN WITNESS WHEREOF, we have signed these presents this 28th day of May,
1998.
/s/ Lawrence S. Bacow /s/ Reuben S. Leibowitz
- ------------------------------ ------------------------------
Lawrence S. Bacow Reuben S. Leibowitz
/s/ Robert J. McLaughlin /s/ John D. Santoleri
- ------------------------------ ------------------------------
Robert J. McLaughlin John D. Santoleri
/s/ R. David Anacker /s/ Joe F. Hanauer
- ------------------------------ ------------------------------
R. David Anacker Joe F. Hanauer
/s/ Neil Young /s/ Sidney Lapidus
- ------------------------------ ------------------------------
Neil Young Sidney Lapidus
/s/ Todd Williams /s/ C. Michael Kojaian
- ------------------------------ ------------------------------
Todd Williams C. Michael Kojaian
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED STATEMENTS OF OPERATIONS AND CONSOLIDATED BALANCE SHEETS AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-START> JUL-01-1997
<PERIOD-END> JUN-30-1998
<CASH> 14,251
<SECURITIES> 0
<RECEIVABLES> 12,891
<ALLOWANCES> 2,115
<INVENTORY> 0
<CURRENT-ASSETS> 33,349
<PP&E> 29,394
<DEPRECIATION> 16,692
<TOTAL-ASSETS> 63,518
<CURRENT-LIABILITIES> 17,527
<BONDS> 0
0
0
<COMMON> 198
<OTHER-SE> 35,216
<TOTAL-LIABILITY-AND-EQUITY> 63,518
<SALES> 0
<TOTAL-REVENUES> 284,071
<CGS> 0
<TOTAL-COSTS> 140,457
<OTHER-EXPENSES> 128,059
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 106
<INCOME-PRETAX> 15,449
<INCOME-TAX> (6,057)
<INCOME-CONTINUING> 21,506
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 21,506
<EPS-PRIMARY> 1.10
<EPS-DILUTED> .98
</TABLE>
