<PAGE>
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 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
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(Exact name of registrant as specified in its charter)
Delaware 94-1424307
- -------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2215 Sanders Road, Suite 400,
Northbrook, IL 60062
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(Address of principal executive offices)
(Zip Code)
(847) 753-7500
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(Registrant's telephone number, including area code)
No Change
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(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes X No ___
---
19,802,636
------------------------------------------------------
(Number of shares outstanding of the registrant's
common stock at February 8, 1999)
<PAGE>
PART I
FINANCIAL INFORMATION
2
<PAGE>
ITEM 1. FINANCIAL STATEMENTS
GRUBB & ELLIS COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
For the Three Months Ended For the Six Months
December 31, Ended December 31,
--------------------------------------------------------------------------------
1998 1997 1998 1997
------------ ------------- ------------- -------------
<S> <C> <C> <C> <C>
Revenue:
Transaction services fees $ 84,261 $ 73,205 $ 148,474 $ 128,026
Management services fees 14,380 8,320 26,336 15,598
------------ ------------- ------------- -------------
Total revenue 98,641 81,525 174,810 143,624
------------ ------------- ------------- -------------
Costs and expenses:
Transaction services commissions 50,522 42,143 87,794 73,345
Salaries and wages 20,275 18,102 40,582 33,961
Selling, general and administrative 17,060 13,203 30,716 25,198
Depreciation and amortization 1,360 796 2,633 1,532
------------ ------------- ------------- -------------
Total costs and expenses 89,217 74,244 161,725 134,036
------------ ------------- ------------- -------------
Total operating income 9,424 7,281 13,085 9,588
Other income and expenses:
Interest and other income 292 310 504 589
Interest expense (136) - (293) -
------------ ------------- ------------- -------------
Income before income taxes 9,580 7,591 13,296 10,177
Net (provision) benefit for income taxes (3,780) 949 (5,186) 1,398
------------ ------------- ------------- -------------
Net income $ 5,800 $ 8,540 $ 8,110 $ 11,575
------------ ------------- ------------- -------------
------------ ------------- ------------- -------------
Net income per common share:
Basic - $ .29 $ .44 $ .41 $ .59
------------ ------------- ------------- -------------
------------ ------------- ------------- -------------
Diluted - $ .27 $ .39 $ .37 $ .53
------------ ------------- ------------- -------------
------------ ------------- ------------- -------------
Weighted average common shares outstanding
Basic - 19,756,374 19,592,001 19,739,249 19,566,773
------------ ------------- ------------- -------------
------------ ------------- ------------- -------------
Diluted - 21,656,858 21,988,328 21,796,497 22,028,923
------------ ------------- ------------- -------------
------------ ------------- ------------- -------------
</TABLE>
See notes to condensed consolidated financial statements.
3
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GRUBB & ELLIS COMPANY
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
ASSETS
December 31, June 30,
1998 1998
----------- ---------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 31,772 $ 14,251
Services fees receivable 10,158 8,006
Other receivables 1,530 2,329
Prepaids and other current assets 3,313 3,179
Deferred tax assets 1,512 5,584
----------- ---------
Total current assets 48,285 33,349
Noncurrent assets:
Equipment and leasehold improvements, net 14,461 13,152
Goodwill, net 26,966 10,578
Deferred tax assets 3,769 4,140
Other assets 2,558 2,299
----------- ---------
Total assets $ 96,039 $ 63,518
----------- ---------
----------- ---------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 3,433 $ 3,845
Acquisition indebtedness 4,916 2,807
Accrued compensation and employee benefits 11,575 6,948
Deferred commissions payable 16,006 818
Other accrued expenses 4,799 3,109
----------- ---------
Total current liabilities 40,729 17,527
Long-term liabilities:
Acquisition indebtedness 1,019 -
Accrued claims and settlements 9,274 9,041
Other liabilities 954 1,536
----------- ---------
Total liabilities 51,976 28,104
----------- ---------
Stockholders' equity:
Common stock, $.01 par value: 50,000,000
shares authorized; 19,799,236 and
19,721,056 shares issued and outstanding
at December 31, 1998 and June 30, 1998,
respectively
198 198
Additional paid-in-capital 112,100 111,562
Retained earnings (deficit) (68,235) (76,346)
----------- ---------
Total stockholders' equity 44,063 35,414
----------- ---------
Total liabilities and stockholders' equity $ 96,039 $ 63,518
----------- ---------
----------- ---------
</TABLE>
See notes to condensed consolidated financial statements.
4
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GRUBB & ELLIS COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
For the Six Months Ended
December 31,
----------------------------
1998 1997
-------- ---------
<S> <C> <C>
Cash Flows from Operating Activities:
Net income $ 8,110 $ 11,575
Adjustments to reconcile net income to net cash provided by
operating activities 27,123 8,148
-------- --------
Net cash provided by operating activities 35,233 19,723
-------- --------
Cash Flows from Investing Activities:
Purchases of equipment, software and leasehold improvements (3,499) (2,953)
Cash paid for business acquisitions, net of cash acquired (14,603) -
-------- --------
Net cash used in investing activities (18,102) (2,953)
-------- --------
Cash Flows from Financing Activities:
Net cash used in financing activities 390 (20)
-------- --------
Net increase in cash and cash equivalents 17,521 16,750
Cash and cash equivalents at beginning of period 14,251 16,790
-------- --------
Cash and cash equivalents at end of period $ 31,772 $ 33,540
-------- --------
-------- --------
Supplemental Disclosure of Cash Flow Information:
Cash payments during the period for:
Interest $ 153 $ -
Income taxes 408 528
</TABLE>
See notes to condensed consolidated financial statements.
5
<PAGE>
GRUBB & ELLIS COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. INTERIM PERIOD REPORTING
The accompanying unaudited condensed consolidated financial statements
include the accounts of Grubb & Ellis Company and its wholly owned
subsidiaries and controlled partnerships (collectively, the "Company").
The accompanying unaudited condensed consolidated financial statements were
prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q and
Article 10 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting
principles for complete financial statements and, therefore, should be read
in conjunction with the Company's Annual Report on Form 10-K for the year
ended June 30, 1998.
The financial statements have been prepared in conformity with generally
accepted accounting principles which require management to make estimates and
assumptions that affect the reported amounts of assets and liabilities
(including disclosure of contingent assets and liabilities) at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
In the opinion of management, all adjustments necessary for a fair statement
of the financial position and results of operations for the interim periods
presented have been included in these financial statements and are of a
normal and recurring nature. Certain amounts in prior periods have been
reclassified to conform to the current presentation.
Operating results for the six months ended December 31, 1998 are not
necessarily indicative of the results that may be achieved in future periods.
2. INCOME TAXES
The net provision (benefit) for income taxes for the six months ended
December 31, 1998 and 1997 is as follows (in thousands):
<TABLE>
<CAPTION>
For the six months ended
December 31,
-----------------------------
1998 1997
------- -------
<S> <C> <C>
Current $ 743 $ 302
Deferred 4,443 (1,700)
------- -------
$ 5,186 $(1,398)
------- -------
------- -------
</TABLE>
The Company recognized a tax benefit for the six months ended December 31,
1997, as a result of a reduction in the valuation allowance against its net
deferred tax assets.
6
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GRUBB & ELLIS COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
3. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings
per share from continuing operations (in thousands, except per share data)
<TABLE>
<CAPTION>
Three months ended Six months ended
December 31, December 31,
----------- ------------
1998 1997 1998 1997
------- -------- -------- -------
<S> <C> <C> <C> <C>
BASIC EARNINGS PER SHARE:
Net income $ 5,800 $ 8,540 $ 8,110 $11,575
------- -------- -------- -------
------- -------- -------- -------
Weighted average common shares outstanding
19,756 19,592 19,739 19,567
------- -------- -------- -------
------- -------- -------- -------
Earning per share - basic $ .29 $ .44 $ .41 $ .59
------- -------- -------- -------
------- -------- -------- -------
DILUTED EARNINGS PER SHARE:
Net income $ 5,800 $ 8,540 $ 8,110 $11,575
------- -------- -------- -------
------- -------- -------- -------
Weighted average common shares outstanding 19,756 19,592 19,739 19,567
Effect of dilutive securities:
Stock options and warrants 1,901 2,396 2,057 2,462
------- -------- -------- -------
Weighted average diluted common shares outstanding 21,657 21,988 21,796 22,029
------- -------- -------- -------
------- -------- -------- -------
Earning per share - diluted $ .27 $ .39 $ .37 $ .53
------- -------- -------- -------
------- -------- -------- -------
</TABLE>
4. BUSINESS ACQUISITIONS AND RELATED INDEBTEDNESS
On July 22, 1998, the Company acquired substantially all of the assets of
Bishop Hawk, Inc. for total consideration of approximately $11.1 million,
inclusive of seller financing totaling approximately $2.5 million. The
Company has recorded the acquisition under the purchase method of accounting,
and all operations of Bishop Hawk, Inc. subsequent to the acquisition date
are reflected in the Company's financial statements for the six months ended
December 31, 1998.
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
7
<PAGE>
GRUBB & ELLIS COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
4. BUSINESS ACQUISITIONS AND RELATED INDEBTEDNESS (CONTINUED)
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.
In December 1998, the Company acquired substantially all of the assets of
Williams Property Venture d/b/a Smithy Braedon Oncor International and Smithy
Braedon Oncor International Management Inc. (collectively "Smithy Braedon").
The Company also acquired substantially all of the assets of Commercial
Florida Realty Partners, Inc. ("Commercial Florida") and Island Realty
Services Group, Inc. ("Island Realty") in February 1999. The Company has
recorded these acquisitions under the purchase method of accounting, and all
operations of Smithy Braedon subsequent to the acquisition date are reflected
in the Company's financial statements for the six months ended December 31,
1998. All operations of Commercial Florida and Island Realty subsequent to
their acquisition dates will be reflected in the Company's financial
statements beginning with the following fiscal quarter.
The purchase prices of these three acquisitions totaled approximately $8.3
million, including seller provided financing of approximately $347,000 which
bears interest at an annual rate of 7.5% and becomes due in January 2000. The
Company is also obligated to pay additional purchase price amounts which are
contingent on revenue levels achieved during the twelve months following the
acquisitions. Due to the contingent nature of these payments, the Company
will record this portion of the purchase prices only to the extent they are
paid to the sellers.
PRO FORMA INFORMATION:
The following unaudited pro forma financial information reflects the
operations of the Company for the six months ended December 31, 1998 and
1997, assuming the above acquisitions of Bishop Hawk, Inc. and Smithy Braedon
had occurred on July 1 of each period (in thousands, except share data):
<TABLE>
<CAPTION>
Six months ended
December 31,
1998 1997
-------- --------
<S> <C> <C>
Total revenue $179,196 $156,285
Income before taxes 13,497 11,037
Net income 8,233 12,099
Earnings per share:
Basic .42 .62
Diluted .38 .55
</TABLE>
8
<PAGE>
GRUBB & ELLIS COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
4. BUSINESS ACQUISITIONS AND RELATED INDEBTEDNESS (CONTINUED)
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.
5. COMMITMENTS AND CONTINGENCIES
The Company previously disclosed in its Annual Report on Form 10-K for the
year ended June 30, 1998, information concerning a lawsuit entitled JOHSZ ET
AL. V. KOLL COMPANY, ET AL., and a related lawsuit entitled MAIONA V.
SOUTHERN CALIFORNIA EDISON, ET AL. The lawsuits alleged that the plaintiffs,
employees and brokers associated with the Company, had contracted cancer from
electromagnetic waves produced by an electric transformer located in a vault
below office space leased by the Company. In the Company's Quarterly Report
on Form 10-Q for the fiscal quarter ended September 30, 1998, the Company
disclosed that its motion to dismiss the MAIONA case was granted and that the
Company anticipated that the plaintiffs would appeal. In January 1999, the
MAIONA and JOHSZ matters were settled for a waiver of costs.
The Company also previously disclosed in its Annual Report on Form 10-K for
the year ended June 30, 1998, information concerning a lawsuit filed on
January 23, 1995 in the United States District Court for the Western District
of Pennsylvania, entitled JOHN W. MATTHEWS, ET AL. V. KIDDER, PEABODY & CO.,
ET AL. AND HSM INC., ET AL. On September 26, 1996, the court granted
plaintiffs' motion to file an amended complaint to add additional plaintiffs
with respect to Partnerships I and III and granted plaintiffs' motion for
class certification with respect to Partnerships I, II and III. Subsequently,
the court entered an order granting an interlocutory appeal by defendants to
the September 26, 1996 order on the question of the applicability of the
Private Securities Litigation Reform Act of 1995 (the "Securities Litigation
Reform Act") to this case. The case was stayed, including discovery, pending
the outcome of the appeal. In November 1998 the United States Court of
Appeals for the Third Circuit entered an order holding that the Securities
Litigation Reform Act is not applicable to this case and that plaintiffs may
proceed with their RICO claims against the defendants. Discovery is now
proceeding.
The Company intends to vigorously defend the MATTHEWS action and believes it
has meritorious defenses to contest the claims asserted by plaintiffs. Based
upon available information, the Company is not able to determine the
financial impact, if any, of such action, 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 claims and lawsuits arising out of the
conduct of its business, as well as in connection with its participation
9
<PAGE>
GRUBB & ELLIS COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
5. COMMITMENTS AND CONTINGENCIES (CONTINUED)
in various joint ventures, partnerships, a trust, and an appraisal business,
many of which may not be covered by the Company's insurance policies. In the
opinion of management, the eventual outcome of such claims and lawsuits is
not expected to have a material adverse effect on the Company's financial
position or results of operations.
10
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
NOTE REGARDING FORWARD-LOOKING STATEMENTS
This report contains forward-looking statements which may involve known and
unknown risks, uncertainties and other factors that may cause the Company's
actual results and performance in future periods to be materially different
from any future results or performance suggested by these statements. Such
factors, which could adversely affect the Company's ability to obtain these
results include, among other things, (i) the volume of transactions and
prices for real estate in the real estate markets generally, (ii) a general
or regional economic downturn which could create a recession in the real
estate markets, (iii) the Company's debt level and its ability to make
interest and principal payments, (iv) an increase in expenses related to new
initiatives, investments in personnel and technology, and service
improvements, (v) the success of new initiatives and investments, (vi) the
impact of Year 2000 technology issues, (vii) the ability of the Company to
integrate acquired companies and assets, and (viii) other factors described
in the Company's Form 10-K for the fiscal year ended June 30, 1998.
RESULTS OF OPERATIONS
REVENUE
The Company's revenue is derived principally from transaction services fees
related to commercial real estate, which include commissions from leasing,
acquisition and disposition transactions as well as fees from appraisal,
consulting and asset management assignments. Management services fees
comprise the remainder of the Company's revenues, and include fees related to
both property and facilities management, business services, construction
management and agency leasing.
Revenue in any given quarter during the three fiscal year period ended
June 30, 1998, as a percentage of total annual revenue, ranged from a high of
31.2% to a low of 19.1%, with revenue earned in the second quarters of each
of the last three fiscal years ranging from 28.8% to 31.1%. The Company has
historically experienced its lowest quarterly revenue in the quarter ending
March 31 of each year with progressively higher revenue in the quarters
ending June 30, September 30, and December 31, due to increased activity
caused by the desire of clients to complete transactions by calendar year-end.
Total revenue for the six months ended December 31, 1998 was $174.8 million,
an increase of 21.7% over revenue of $143.6 million for the same period last
year, reflecting strong real estate markets overall, increased business
activity across the Company's service lines and increased revenues related to
the business acquisitions made in calendar 1998. This improvement related
primarily to a $20.4 million increase in transaction services fees over the
same period in 1997. Management services fees of $26.3 million for the six
months ended December 31, 1998 increased by $10.7 million, or 68.8%, as a
result of increased activity in business services and property and facilities
management.
Total revenue for the quarter ended December 31, 1998 was $98.6 million, an
increase of 21.0% over revenue of $81.5 million for the same period
11
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last year. Transaction services fees increased $11.1 million or 15.1% over
the prior year period, while management services fees increased by $6.1
million, or 72.8%.
COSTS AND EXPENSES
Transaction services commission expense is the Company's major expense and is
a direct function of gross transaction revenue levels, which include
transaction services commissions and other fees. Professionals participate in
transactions services fees at rates which increase upon achievement of
certain levels of production. As a percentage of gross transaction revenue,
related commission expense increased for the six months and quarter ended
December 31, 1998 as compared to the same periods in 1997 due to higher
participation percentages related to increased production levels.
Total costs and expenses, other than transaction services commissions,
increased by $13.2 million, or 21.8%, for the first six months of fiscal year
1999 compared to the same period in fiscal year 1998. The rise in costs is
attributable primarily to additional variable operating costs associated with
increases in its transaction and management services businesses.
Total costs and expenses, other than transaction services commissions, for
the quarter ended December 31, 1998 increased by $6.6 million, or 20.5%,
compared to the same quarter in fiscal year 1997 due primarily to the costs
described above.
Depreciation and amortization expense for the three months and six months
ended December 31, 1998 increased to $1.3 million from $796,000 and to $2.6
million from $1.5 million, respectively, in the comparable periods last year,
as the Company placed in service numerous technology infrastructure
improvements during the latter part of fiscal year 1998. Amortization of the
goodwill related to the Company's various business acquisitions during 1998
also contributed to this increase.
NET INCOME
Net income for the six months ended December 31, 1998 was $8.1 million, or
$.37 per common share on a diluted basis, as compared to net income of $11.6
million, or $.53 per common share for the same period in fiscal year 1998.
The decrease was due primarily to a provision for income taxes of $5.2
million in the six months ended December 31, 1998 as compared to a net tax
benefit of $1.4 million related to a reduction in the valuation allowance
against certain deferred tax assets in the same period last year. Net income
for the six months ended December 31, 1998 reflects an effective tax rate of
39 percent, compared with a rate of 3 percent in the same period last year
(exclusive of the non-recurring deferred tax benefit) due to the utilization
of net operating loss carryforwards from prior years. Income before taxes
increased to $13.3 million for the six months ended December 31, 1998 from
$10.2 million in the prior year, due primarily from increased income related
to the Company's transaction services business.
Net income for the quarter ended December 31, 1998 was $5.8 million or $.27
per common share on a diluted basis, as compared to $8.5 million or $.39 per
common share for the same period in fiscal year 1998. The decrease was due to
the tax rates and deferred tax benefits described above, of which $1.1
million was recognized in the quarter ended December 31, 1997.
12
<PAGE>
Income before taxes increased to $9.6 million for the quarter ended
December 31, 1998 from $7.6 million for the same period in the prior year.
LIQUIDITY AND CAPITAL RESOURCES
Working capital decreased by $8.3 million to $7.6 million during the six
months ended December 31, 1998. Although the Company's cash and cash
equivalents increased by $17.5 million from June 30, 1998 to December 31,
1998, current liabilities increased by $23.2 million, primarily from
increases in management incentive bonuses and deferred commissions owed to
transaction services professionals totaling approximately $18.7 million. In
addition, current deferred tax assets decreased by $4.1 million during the
period, related primarily to the utilization of net operating loss carry
forwards. Cash provided by operations of $35.2 million was offset by net cash
of $18.1 million used in investing activities, primarily for business
acquisitions (see Note 4 of Notes to Condensed Consolidated Financial
Statements for additional information) and purchases of equipment and
leasehold improvements.
The Company has historically experienced the highest use of operating cash in
the quarter ended March 31, primarily related to the payment of incentive
bonuses and deferred commission payable balances which attain peak levels as
a result of the high volume of transaction services activity during the
quarter ended December 31. Deferred commissions payable balances of
approximately $16.0 million, related to revenues earned in the six months
ended December 31, 1998, have been paid subsequent to the end of that period.
The Company believes that its short-term and long-term operating cash
requirements, including its technology initiative commitments, will be met by
operating cash flow and potential borrowings under its $35 million credit
facility, which is available for additional capital needs. Currently, the
Company has $3.0 million of 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 continues to explore additional strategic acquisition
opportunities that have the potential to broaden its geographic reach,
significantly increase its market share and/or expand the depth and breadth
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, and continuing in 1999, 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
13
<PAGE>
stable platform to support the Company's recent and future growth. Pursuant
to this technology improvement plan, the Company has replaced most of its
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 has completed the design and is currently
in the process of developing and implementing a new transaction services
revenue system, and is completing upgrades to various remaining servers and
desktop computers. The Company expects to complete these remaining
initiatives by September 1999, and consequently to mitigate any material risk
associated with the year 2000. The Company has made capital expenditures
totaling approximately $7.5 million through December 1998 related to all of
its information technology systems, and currently expects to invest an
additional $1.2 to $1.5 million to complete its technology plan, the majority
of which relates to software development. Management of the Company believes
it has an effective program in place relating to its internal information
systems to resolve the related year 2000 issue in a timely manner, although
no assurances can be given in this regard.
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 Grubb & Ellis Management Services ("GEMS")
as well as the Company's facilities, various property accounting systems for
GEMS' clients, and telecommunications systems. The Company evaluated its
telecommunication systems and currently expects to invest $1.9 million over
the next few months to 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 (property owners) to
gather information on the year 2000 readiness of building systems such as
security, elevator and HVAC. For client accounting, GEMS is currently
upgrading non-compliant software as new versions become available from the
vendors. GEMS anticipates that all of the client accounting software will be
upgraded or replaced by March 1999, with one exception which is scheduled to
be completed by August 1999. GEMS is working with its clients as well as
these vendors to address these systems in a timely fashion, although no
assurances can be given in this regard.
The Company is currently developing a contingency plan to address risks
associated with the Company not completing its plan before the year 2000.
Since the Company cannot anticipate all possible 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.
14
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ITEM 3. 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 December 31, 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.
15
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PART II
OTHER INFORMATION
(ITEMS 2, 3 AND 5 ARE NOT APPLICABLE
FOR THE QUARTER ENDED DECEMBER 31, 1998)
16
<PAGE>
ITEM 1. LEGAL PROCEEDINGS
The information called for by Item 1 is incorporated by reference from Note 5
to Notes to Condensed Consolidated Financial Statements.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The 1998 annual meeting of stockholders of the Company was held on November 19,
1998. The Company submitted to a vote of stockholders, through the
solicitation of proxies, the following proposals: the election of eleven
directors, representing the entire Board of Directors; and an amendment to
the 1993 Stock Option Plan for Outside Directors, increasing the authorized
shares of Common Stock for the grant of options thereunder from 50,000 shares
to 300,000 shares and providing for additional automatic grants of stock
options to each outside director on his or her successive four-year
anniversary of service as director (the "Amendment"). The votes cast for,
against and withheld with respect to each nominee for election as director
were as follows:
<TABLE>
<CAPTION>
Withheld
Nominee For Authority
------- --- ---------
<S> <C> <C>
Neil Young 18,563,004 59,812
R. David Anacker 18,562,984 59,832
Lawrence S. Bacow 18,563,004 59,812
Joe F. Hanauer 18,563,004 59,812
C. Michael Kojaian 18,562,994 59,822
Sidney Lapidus 18,561,811 61,005
Reuben S. Leibowitz 18,561,952 60,864
Robert J. McLaughlin 18,563,004 58,812
Thomas E. Meador 18,561,952 60,684
John D. Santoleri 18,561,952 60,684
Todd A. Williams 18,561,811 61,005
</TABLE>
The votes cast for the Amendment were as follows: 18,000,119 in favor,
606,956 against and 15,740 abstained. There were no broker non-votes with
respect to any of the nominees for director or the Amendment.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
(3) ARTICLES OF INCORPORATION AND BYLAWS
3.1 Certificate of Incorporation of the Registrant, as restated effective
November 1, 1994, incorporated herein by reference to Exhibit 3.2 to the
Registrant's Annual Report on Form 10-K filed on March 31, 1995 (Commission
File No. 1-8122).
3.2 Certificate of Retirement with Respect to 130,233 Shares of Junior
Convertible Preferred Stock of Grubb & Ellis Company, filed with the Delaware
Secretary of State on January 22, 1997, incorporated herein by reference to
Exhibit 3.3 to the Registrant's Quarterly Report on Form 10-Q filed on
February 13, 1997 (Commission File No. 1-8122).
17
<PAGE>
3.3 Certificate of Retirement with Respect to 8,894 Shares of Series A
Senior Convertible Preferred Stock, 128,266 Shares of Series B Senior
Convertible Preferred Stock, and 19,767 Shares of Junior Convertible
Preferred Stock of Grubb & Ellis Company, filed with the Delaware
Secretary of State on January 22, 1997, incorporated herein by
reference to Exhibit 3.4 to the Registrant's Quarterly Report on Form
10-Q filed on February 13, 1997 (Commission File No. 1-8122).
3.4 Grubb & Ellis Company Bylaws, as amended and restated effective
June 1, 1994, incorporated herein by reference to Exhibit 3.2 to the
Registrant's Quarterly Report on Form 10-Q filed on November 13, 1996
(Commission File No. 1-8122).
(10) MATERIAL CONTRACTS
10.1 First Amendment to the 1993 Stock Option Plan for Outside Directors,
effective November 19, 1998.
(27) FINANCIAL DATA SCHEDULE.
(b) REPORTS ON FORM 8-K
A Current Report on Form 8-K dated November 16, 1998, was filed with the
Securities and Exchange Commission during the second quarter of the 1999
fiscal year, reporting under Item 5 (a) the acquisition, as of December 1,
1998, of certain assets of Williams Property Venture and Smithy Braedon Oncor
International Management, Inc., a real estate services firm located in
Washington, D.C.; and (b) certain developments during November 1998 in a
lawsuit entitled JOHN W. MATTHEWS, ET AL V. KIDDER, PEABODY & CO., ET AL AND
HSM INC., ET AL, which had previously been reported in the Company's Annual
Report on Form 10-K for the 1998 fiscal year. See Note 5 to Notes to
Condensed Consolidated Financial Statements in this Quarterly Report.
18
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
GRUBB & ELLIS COMPANY
---------------------
(Registrant)
Date: February 12, 1999 /s/ Brian D. Parker
--------------------
Brian D. Parker
Senior Vice President and
Chief Financial Officer
19
<PAGE>
GRUBB & ELLIS COMPANY
EXHIBIT INDEX (A)
FOR THE QUARTER ENDED DECEMBER 31, 1998
EXHIBIT
(10) MATERIAL CONTRACTS
(10.1) First Amendment to the 1993 Stock Options Plan for Outside Directors
effective November 19, 1998.
(27) FINANCIAL DATA SCHEDULE
- -----------------------------
(A) Exhibits incorporated by reference are listed in Item 6 of this Report.
20
<PAGE>
EXHIBIT 10.1
FIRST AMENDMENT TO THE
1993 STOCK OPTION PLAN FOR OUTSIDE DIRECTORS
Grubb & Ellis Company (the "Company"), a corporation organized under the
laws of the State of Delaware, by resolution of its Board of Directors and its
stockholders has adopted this First Amendment to the 1993 Stock Option Plan for
Outside Directors (the "Plan") pursuant to Section 11 of the Plan, effective as
of November 19, 1998.
1. Section 2 of the Plan is hereby amended to read in its entirety as
follows:
"2. EFFECTIVE DATE OF THE PLAN; TERM. The Plan was originally
effective as of January 1, 1993. Subject to approval by the holders of a
majority of the outstanding shares of Common Stock of the Company voting on
or before November 19, 1998, this First Amendment to the Plan shall be
effective as of November 19, 1998 ("Effective Date"). The Plan shall
continue in effect until such date as the Board of Directors of the Company
discontinues the Plan, or earlier upon the issuance of all of the Shares
reserved for the Plan. Any such termination of the Plan shall not affect
Options previously granted and such Options shall remain in full force and
effect as if this Plan had not been terminated."
2. Section 3 of the Plan is hereby amended to read in its entirety as
follows:
"3. ADMINISTRATION. This Plan shall be administered by the Board of
Directors of the Company (the "Board"). Subject to the provisions of this
Plan, the Board shall have sole authority, in its absolute discretion, to
do everything necessary or appropriate to administer this Plan, including,
without limitation, interpreting this Plan. All decisions, determinations
and interpretations of the Board shall be final and binding on all persons,
including the Company and its subsidiaries, and all persons who have been
granted Options under the Plan ("Optionees")."
3. Section 5 of the Plan is hereby amended to read in its entirety as
follows:
"5. STOCK TO BE OPTIONED. The maximum number of Shares of
authorized, but unissued, or reacquired Common Stock of the Company, which
may be optioned and sold under this Plan is, as of the Effective Date,
300,000 Shares, 50,000 of which were authorized under the Plan prior to the
adoption of this First Amendment. Shares subject to expired or canceled
Options will be available for regrant of Options."
1
<PAGE>
4. Section 6 of the Plan is hereby amended to read in its entirety as
follows:
"6. GRANTING OF OPTIONS. Upon the election of an Outside Director
to the Board of Directors of the Company, such Outside Director shall
automatically be granted an option to purchase 10,000 Shares as of the date
of such election ("Initial Options"). On and after the Effective Date, an
option to purchase 8,000 Shares shall automatically be granted to each
Outside Director on each successive fourth-year anniversary of such Outside
Director's initial election as director ("Anniversary Options"). Outside
Directors who had served as directors of the Company for at least four
years prior to the Effective Date shall be granted an option to purchase
8,000 Shares on the Effective Date and shall thereafter be granted an
option to purchase 8,000 Shares on each successive fourth-year anniversary
of the dates that their original service as directors of the Company began.
Options granted are "non-qualified options" only, which do not meet the
requirements of Section 422 of the Internal Revenue Code of 1986, as
amended (the "Code"). Initial Options shall expire on the earlier of five
years after the date of grant or 30 days after the termination of the
service of the Optionee as an Outside Director for any reason other than
death. Anniversary Options shall expire on the earlier of ten years after
the date of grant or three months after termination of the service of the
Optionee as an Outside Director for any reason other than death.
In the event of the death of the Optionee, both Initial Options and
Anniversary Options, to the extent vested on the date of death of the
Optionee, remain exercisable for a period of one year following the date of
death of the Optionee."
5. Section 8 of the Plan is hereby amended to read in its entirety as
follows:
"8. VESTING OF OPTIONS.
(a) Subject to subsection (d), Section 6 and Section 9(d), each
Initial Option shall become exercisable in three (3) cumulative, annual
installments from the date of grant, each installment consisting of
one-third of the Shares covered by the Option.
(b) Subject to subsection (d), Section 6 and Section 9(d), each
Anniversary Option shall become exercisable in four (4) cumulative, annual
installments from the date of grant, each installment consisting of
one-fourth of the Shares covered by the Option. Notwithstanding the
foregoing, each Anniversary Option shall become fully vested and
exercisable as to all Shares covered by the Anniversary Option in the event
of the termination of the Outside Director's service as a director of the
Company on account of death or disability. The Board has the discretion to
accelerate the vesting of any Anniversary Option at any time.
2
<PAGE>
(c) No portion of any Option which is unexercisable on the date
an Outside Director's service as a director of the Company ceases shall
thereafter become exercisable.
(d) Notwithstanding the foregoing, all Options granted pursuant
to this Plan shall vest immediately upon the occurrence of any of the
following events (hereafter referred to as "Acceleration"): (i) the
merger or combination of the Company with another corporation, when as a
result thereof the shareholders 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; (ii) 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;
(iii) a sale to an unrelated party of substantially all of the assets of
the Company; or (iv) a substantial partial or complete liquidation of the
Company."
6. Section 14 of the Plan is hereby amended to read in its entirety as
follows:
"14. CONDITIONS TO ISSUANCE OF STOCK CERTIFICATES. 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;
(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 Board shall, in its absolute
discretion, deem necessary or advisable;
(c) The obtaining of any approval or other clearance from any
state or federal governmental agency which the Board shall, in its absolute
discretion, determine to be necessary or advisable;
(d) The lapse of such reasonable period of time following the
exercise of the Option as the Board may establish from time to time for
reasons of administrative convenience; and
(e) The receipt by the Company of full payment for such shares,
including payment of any applicable withholding tax."
3
<PAGE>
* * * * *
I hereby certify that the foregoing First Amendment to the Plan was duly
adopted by the Board of Directors of Grubb & Ellis Company as of May 28, 1998.
Executed on this 10th day of February, 1999.
/s/ Carol Vanairsdale
----------------------------------
Assistant Secretary
* * * * *
I hereby certify that the foregoing First Amendment to the Plan was duly
approved by the stockholders of Grubb & Ellis Company on November 19, 1998.
Executed on this 10th day of February, 1999.
/s/ Carol Vanairsdale
----------------------------------
Assistant Secretary
4
<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> 6-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-START> JUL-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 31,772
<SECURITIES> 0
<RECEIVABLES> 13,473
<ALLOWANCES> 1,785
<INVENTORY> 0
<CURRENT-ASSETS> 48,285
<PP&E> 32,670
<DEPRECIATION> 18,209
<TOTAL-ASSETS> 96,039
<CURRENT-LIABILITIES> 40,729
<BONDS> 0
0
0
<COMMON> 198
<OTHER-SE> 43,865
<TOTAL-LIABILITY-AND-EQUITY> 96,039
<SALES> 0
<TOTAL-REVENUES> 175,314
<CGS> 0
<TOTAL-COSTS> 87,794
<OTHER-EXPENSES> 73,931
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 293
<INCOME-PRETAX> 13,296
<INCOME-TAX> 5,186
<INCOME-CONTINUING> 8,110
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 8,110
<EPS-PRIMARY> .41
<EPS-DILUTED> .37
</TABLE>
