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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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, 1999
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 no. 1-8122
GRUBB & ELLIS COMPANY
(Exact name of registrant as specified in its charter)
Delaware 94-1424307
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
(847) 753-7500
2215 Sanders Road, Suite 400, (Registrant's telephone number,
Northbrook, IL 60062 including area code)
(Address of principal executive
offices) (Zip Code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which
--------- registered
Common Stock --------------
New York Stock Exchange
Pacific Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein and will not be contained, to the
best of registrant's knowledge, in its definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [_]
The aggregate market value of voting common stock held by non-affiliates of
the registrant as of August 19, 1999 was approximately $16,376,000.
The number of shares outstanding of the registrant's common stock as of
August 19, 1999 was 19,931,192 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, 1999) are incorporated by reference into Part III of this Report.
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GRUBB & ELLIS COMPANY
FORM 10-K
TABLE OF CONTENTS
<TABLE>
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Page
----
<S> <C>
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.......................................... 6
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations................................................... 7
Item 7A.Quantitative and Qualitative Disclosures About Market Risk....... 12
Item 8. Financial Statements and Supplementary Data...................... 12
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.............. 35
Item 11. Executive Compensation.......................................... 35
Item 12. Security Ownership of Certain Beneficial Owners and Management.. 35
Item 13. Certain Relationships and Related Transactions.................. 35
Part IV.
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-
K....................................................................... 36
SIGNATURES................................................................ 40
EXHIBIT INDEX.............................................................
</TABLE>
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GRUBB & ELLIS COMPANY
PART I
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
a full range of services, including transaction services and property and
facilities management, to users and investors worldwide. The Company's
professionals arrange the sale or lease of such business properties as
industrial, retail and office buildings, as well as multi-family, hospitality
and commercial land. Major multiple-market clients have a single point of
contact through the firm's corporate and financial units for advisory services,
including site selection, feasibility studies, market forecasts and research.
The Company is one of the nation's largest publicly traded commercial real
estate firms, based on total revenue.
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 131 million square feet of property under
management as of June 30, 1999.
Currently, the Company has approximately 4,400 professionals and staff, with
offices and affiliates in 90 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 1999, the Company pursued several initiatives 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, through alliances
with 26 real estate services firms, 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. 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 July 1998, the Company also completed four acquisitions that reinforce
its strategy of increasing its presence in key markets. Those acquisitions
included: Bishop Hawk, Inc., a Northern California real estate services firm;
Smithy Braedon Oncor International, serving the greater Washington D.C.
metropolitan area; Commercial Florida Realty Partners, Inc., a southern Florida
firm; and Island Realty Service Group, Inc., a real estate services firm based
in Long Island, New York. In addition, in July 1999, the Company acquired
substantially all of the assets of Landauer Associates, Inc., a national real
estate valuation and consulting firm with offices in several major cities
across the United States.
In August 1999, the Company announced a program through which it may
repurchase up to $3.0 million of its common stock on the open market. See Item
7 of this Report for additional information.
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Organization
The Company is organized to provide the real estate related services
described below. Additional information on these business segments can be found
in Note 13 of Notes to Consolidated Financial Statements under Item 8 of this
report.
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 1999 represented 83% 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 1999, these services
represented the remaining 17% of the Company's total revenue.
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 could adversely affect the Company's transaction and
management services. The Company's financial results and competitive position
for the fiscal year 1999 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
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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 any given quarter during
the years ended June 30, 1999, 1998 and 1997, as a percentage of total annual
revenue, ranged from a high of 31.4% 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 revenue 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, 1999, the
Company leased approximately 687,000 square feet of office space in 72
locations under leases which expire at various dates through June 30, 2008. 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 1999.
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GRUBB & ELLIS COMPANY
PART II
ITEM 5. Market for the Registrant's Common Equity and Related Stockholder
Matters
The principal market for the Company's common stock is the New York Stock
Exchange ("NYSE"). 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, 1999 and 1998.
<TABLE>
<CAPTION>
1999 1998
---------------- -----------------
High Low High Low
---- --- ---- ----
<S> <C> <C> <C> <C>
First Quarter......... $14/1///16/ $8 3/8 $17 $12/13///16/
Second Quarter........ $10/5///16/ $7/7///16/ $17/3///16/ $12/13///16/
Third Quarter......... $7 7/8 $6 1/4 $16 3/8 $10 1/8
Fourth Quarter........ $6 7/8 $ 5/1///16/ $15 3/8 $10 1/8
</TABLE>
As of August 19, 1999, there were 2,450 registered holders of the Company's
common stock and 19,931,192 shares of common stock outstanding, of which
16,390,350 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 stock during the
fiscal years ended June 30, 1999 or 1998, 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.
ITEM 6. Selected Financial Data
Five Year Comparison of Selected Financial and Other Data for the Company:
<TABLE>
<CAPTION>
1999 1998 1997 1996 1995
---------- ---------- ---------- --------- ---------
(in thousands, except per share amounts and shares
data)
<S> <C> <C> <C> <C> <C>
Total revenue........... $ 314,101 $ 282,834 $ 228,630 $ 193,728 $ 185,784
Net income ............. 8,079 21,506 19,010 2,102 1,556
Dividends applicable to
preferred stockholders:
Accretion of
liquidation
preference........... -- -- -- -- (877)
Dividends in arrears.. -- -- (1,431) (3,012) (1,862)
Provision for income
taxes.................. (5,301) (447) (372) (198) (448)
Reduction in deferred
tax asset valuation
allowance.............. 1,325 6,504 3,220 -- --
Net income (loss)
applicable to common
stockholders (1)....... 8,079 21,506 17,579 (910) (1,183)
Net income (loss) per
common share (1)
--Basic............... 0.41 1.10 1.22 (.10) (.16)
--Diluted............. 0.37 .98 .97 (.10) (.16)
Weighted average common
shares
--Basic............... 19,785,715 19,607,352 14,429,971 8,870,720 7,271,257
--Diluted............. 21,587,898 22,043,920 19,567,635 8,870,720 7,271,257
Other Data:
EBITDA (2).............. $ 18,836 $ 19,118 $ 17,629 $ 7,418 $ 4,427
</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 amount of $2.4 million for the fiscal
year ended June 30, 1997. 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
under Item 8 of this Report.
(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.
<TABLE>
<CAPTION>
as of June 30,
------------------------------------------------------
1999 1998 1997 1996 1995
---------- ---------- ---------- --------- ---------
(in thousands, except per share amounts and shares
data)
<S> <C> <C> <C> <C> <C>
Consolidated Balance
Sheet Data:
Total assets............ $ 79,793 $ 63,518 $ 36,696 $ 29,658 $ 29,741
Working capital......... (300) 15,822 16,985 8,064 5,051
Long-term debt.......... 553 459 -- 27,514 26,328
Other long-term
liabilities............ 9,688 10,118 12,700 14,948 14,668
Stockholders' equity
(deficit).............. 44,482 35,414 12,923 (27,475) (29,793)
Book value per common
share.................. 2.24 1.80 .66 (3.08) (3.38)
Common shares
outstanding............ 19,885,084 19,721,056 19,509,952 8,916,415 8,810,220
</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 $8.1 million for the year ended June 30,
1999, and made continued progress toward implementing the strategic initiatives
announced in fiscal 1997 and 1998, including significant acquisitions of Bishop
Hawk, Inc. and Smithy Braedon Oncor International in fiscal 1999.
The Company's transaction services fees, fueled by a continued strong
economy and commercial real estate markets, increased to $260.1 million in
fiscal year 1999, while management services fee revenue increased by 50.9% or
$18.2 million for the same period.
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Fiscal Year 1999 Compared to Fiscal Year 1998
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. 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 1999 was $314.1 million, an increase of 11.1%
over revenue of $282.8 million for fiscal year 1998. This improvement related
primarily to a $18.2 million, or 50.9%, increase in management services fees as
a result of increased activity in property and facilities management and
business service and continued gains in outsourcing contracts. Transaction
services fees increased by $13.0 million, or 5.3%, in fiscal 1999 compared to
the prior year, although such fees related to investment sales for the same
periods decreased 26.6% due to fallout from the tightened credit market
experienced by the real estate industry in the latter half of calendar 1999.
Transaction services fees revenues, excluding fees related to investment sales,
increased by 12.9% in fiscal 1999 as compared to fiscal 1998.
Cost and Expenses
Transaction services commission expense is the Company's major expense and
bears a direct relationship to transaction services fees, 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,
increased by $22.6 million, or 17.7%, for fiscal year 1999 compared to fiscal
year 1998. These increases were due to increased operating, depreciation and
amortization expenses attributable to the nine acquisitions made by the Company
over the last fifteen months, as well as higher variable operating costs
associated with increases in its management services business.
Interest expense incurred in fiscal year 1999 was due primarily to seller
financing related to business acquisitions made in calendar year 1998, as well
as credit facility borrowings in the last half of fiscal year 1999.
Income Taxes
As of June 30, 1999, the Company had gross deferred tax assets of $11.4
million, with $5.4 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
$4.3 million against the deferred tax assets as of June 30, 1999 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 $1.3 million deferred tax benefit
during fiscal 1999 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.
Net Income
Net income for fiscal year 1999 was $8.1 million, or $.37 per common share
on a diluted basis, as compared to net income of $21.5 million, or $.98 per
common share for fiscal year 1998. The Company
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generated basic earnings per share of $.41 and $1.10 in fiscal years 1999 and
1998, respectively. Included in net income were deferred tax benefits of $1.3
million and $6.5 million for fiscal years 1999 and 1998, respectively.
Stockholders' Equity
During fiscal year 1999, stockholders' equity increased $9.1 million to
$44.5 million from $35.4 million at June 30, 1998. In addition to net income of
$8.1 million for fiscal year 1999, the Company received $1.0 million 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 $2.24 at June 30, 1999 from $1.80 at June 30,
1998.
Fiscal Year 1998 Compared to Fiscal Year 1997
Revenue
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 fees, 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.
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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 $1.0 million 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.
LIQUIDITY AND CAPITAL RESOURCES
During fiscal year 1999, cash and cash equivalents decreased by $8.8 million
primarily as a result of cash used in investing activities of $26.8 million,
offset by cash provided by operating activities of $12.8 million and financing
activities of $5.2 million. Net cash provided by operating activities was
negatively impacted by an increase in prepaid expenses related to employment
and service contracts with transaction services professionals along with
prepaid calendar year 1999 income taxes. Net cash used in investing activities
related to cash paid in connection with business acquisitions of $17.1 million,
and $9.7 million of technology infrastructure investments and purchases of
other equipment and leasehold improvements. Net cash provided by financing
activities related to $7.5 million of borrowings on the Company's credit
facility for working capital purposes, along with $1.0 million generated from
stock option exercises and employee stock purchases. Financing activities also
included the payment of $3.3 million of seller indebtedness, related to the
Company's recent acquisitions.
During fiscal year 1999, working capital decreased by $16.1 million as the
Company used its working capital funds to acquire new businesses and invest in
technology infrastructure and other fixed assets.
The Company believes that its long-term operating cash requirements,
including its technology initiative commitments, will be met by operating cash
flow. In addition, the Company has a $35 million credit facility available for
additional capital needs. As of June 30, 1999, the Company had outstanding
borrowings totaling $7.5 million for short-term operating cash requirements
under the credit facility, of which $4.5 million was repaid in September 1999.
The Company is currently in negotiations to replace its existing credit
facility, which expires in March 2001, with a facility having an increased
total commitment available to the Company, and extending the expiration date to
September 2004. Although it is the Company's intent to close this loan
transaction, there can be no assurances that this event will occur.
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 Bishop Hawk, Inc. in July 1998,
Smithy Braedon Oncor International in December 1998, Commercial Florida Realty
Partners, Inc. in February 1999 and Landauer Associates, Inc. in July 1999 (See
Note 12 of Notes to Consolidated Financial Statements in Item 8 of this
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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 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.
In August 1999, the Company announced a program through which it may
repurchase up to $3.0 million of its common stock on the open market from time
to time as market conditions warrant. The repurchase program, which is expected
to take place over the next twelve months, will be financed through operating
cash flow or the Company's revolving credit facility. As of September 20, 1999,
the Company had repurchased approximately 162,000 of its shares under this
program at a total cost of approximately $900,000.
Year 2000 Issues
During fiscal years 1997 through 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 stable platform to support the Company's recent and
future growth. Through its three year technology plan, the Company has sought
to mitigate material risks associated with the year 2000. 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 research, and
consequently has brought these systems into compliance with year 2000
requirements. The Company has also completed upgrades to various servers and
desktop computers. As a part of this three year plan, the Company is currently
testing and implementing a new transaction services revenue system, which it
expects to complete before December 1999. The Company has a contingency plan
which addresses the risk associated with the current revenue system database,
which is not year 2000 compliant.
The Company has made capital expenditures totaling $9.1 million through
August 30, 1999 related to these systems, and currently expects to invest an
additional $1.6 million over the next four months to complete its technology
plan, the majority of which relates to implementation for the revenue system.
The Company has been testing its systems (including tests of the financial
systems and service interruption tests) and has found no unknown problems.
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, although no assurances can be given in this regard.
The Company has assessed its exposure to year 2000 issues other than those
related to internal information systems, including issues related to third
party vendors, and developed a plan (including contingencies to address these
risks). The Company evaluated its telecommunication systems and, based on this
investigation, spent $2.0 million (and expects to spend another $0.3 million)
to upgrade or replace non-compliant telephone, voice mail, facsimile and other
telecommunications equipment. As of August 20, 1999, these replacements and
upgrades were approximately 80% complete, with the remaining systems scheduled
to be completed by October 31, 1999. The Company will face business
interruption risk if telecommunications are suspended as a result of a year
2000 issue.
In addition to its own systems, the Company's year 2000 plan has included
evaluation of building systems in properties managed by Grubb & Ellis
Management Services, Inc. ("GEMS") (as well as the Company's facilities), and
various property accounting systems for GEMS clients. 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. Over 90% of these
building systems have been tested, and most of the remedial work is scheduled
for completion by September 30, 1999. GEMS is also assisting its clients in
preparing contingency
11
<PAGE>
plans, which will be put in place during October 1999. For client accounting,
GEMS has received and installed accounting software upgrades from all software
vendors, and these systems appear to be year 2000 compliant.
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.
Dividends
The Company's revolving credit facility contains certain restrictive
covenants including the prohibition of the payment of dividends and
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, 1999, the Company was in compliance with, or had received
waivers with respect to, all covenants of the credit facility.
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, 1999. 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.
ITEM 8. Financial Statements and Supplementary Data
12
<PAGE>
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, 1999 and 1998, and the related consolidated
statements of operations, stockholders' equity, and cash flows for each of the
three years in the period ended June 30, 1999. 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, 1999 and 1998, and the consolidated
results of its operations and its cash flows for each of the three years in the
period ended June 30, 1999, in conformity with generally accepted accounting
principles.
/s/ Ernst & Young LLP
Chicago, Illinois
August 23, 1999
13
<PAGE>
GRUBB & ELLIS COMPANY
CONSOLIDATED BALANCE SHEETS
June 30, 1999 and 1998
(in thousands, except share data)
<TABLE>
<CAPTION>
1999 1998
-------- --------
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents................................ $ 5,500 $ 14,251
Service fees receivable, net............................. 9,019 9,025
Other receivables........................................ 2,291 1,310
Prepaid commissions...................................... 1,618 --
Prepaids and other assets................................ 3,402 3,179
Deferred tax assets, net................................. 2,940 5,584
-------- --------
Total current assets................................... 24,770 33,349
Noncurrent assets:
Equipment, software and leasehold improvements, net...... 18,554 13,152
Goodwill, net............................................ 28,564 10,578
Deferred tax assets, net................................. 3,450 4,140
Other assets............................................. 4,455 2,299
-------- --------
Total assets........................................... $ 79,793 $ 63,518
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable......................................... $ 3,122 $ 3,845
Credit facility indebtedness............................. 7,500 --
Acquisition indebtedness................................. 2,332 2,807
Compensation and employee benefits payable............... 9,511 6,948
Other accrued expenses................................... 2,605 3,927
-------- --------
Total current liabilities.............................. 25,070 17,527
Long-term liabilities:
Acquisition indebtedness................................. 553 459
Accrued claims and settlements........................... 8,837 9,041
Other liabilities........................................ 851 1,077
-------- --------
Total liabilities...................................... 35,311 28,104
-------- --------
Stockholders' equity:
Common stock, $.01 par value: 50,000,000 shares
authorized; 19,885,084 and 19,721,056 shares issued and
outstanding at June 30, 1999 and 1998, respectively..... 199 198
Additional paid-in-capital............................... 112,550 111,562
Retained earnings (deficit).............................. (68,267) (76,346)
-------- --------
Total stockholders' equity............................. 44,482 35,414
-------- --------
Total liabilities and stockholders' equity............. $ 79,793 $ 63,518
======== ========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
14
<PAGE>
GRUBB & ELLIS COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS
for the years ended June 30, 1999, 1998 and 1997
(in thousands, except share data)
<TABLE>
<CAPTION>
1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
Revenue:
Transaction services fees................ $ 260,071 $ 247,040 $ 201,389
Management services fees................. 54,030 35,794 27,241
---------- ---------- ----------
Total revenue.......................... 314,101 282,834 228,630
---------- ---------- ----------
Costs and expenses:
Transaction services commissions......... 151,592 140,457 113,460
Salaries and wages....................... 83,531 70,680 55,095
Selling, general and administrative...... 61,064 53,816 43,567
Depreciation and amortization............ 6,079 3,563 2,964
Other non-recurring expenses............. -- -- 2,431
---------- ---------- ----------
Total costs and expenses............... 302,266 268,516 217,517
---------- ---------- ----------
Total operating income................. 11,835 14,318 11,113
Other income and expenses:
Interest and other income................ 922 1,237 1,121
Interest expense......................... (702) (106) (1,453)
---------- ---------- ----------
Income before income taxes and
extraordinary item.................... 12,055 15,449 10,781
Net benefit (provision) for income taxes... (3,976) 6,057 2,848
---------- ---------- ----------
Income before extraordinary item........... 8,079 21,506 13,629
Extraordinary item--gain on extinguishment
of debt, net of taxes of $195............. -- -- 5,381
---------- ---------- ----------
Net income............................. $ 8,079 $ 21,506 $ 19,010
========== ========== ==========
Net income applicable to common
stockholders, net of undeclared dividends
earned on preferred stock in the amounts
of $1,431 for the year ended June 30,
1997...................................... $ 8,079 $ 21,506 $ 17,579
========== ========== ==========
Net income per common share:
Basic--
--from operations........................ $ 0.41 $ 1.10 $ 0.85
--from extraordinary gain................ -- -- 0.37
---------- ---------- ----------
$ 0.41 $ 1.10 $ 1.22
========== ========== ==========
Weighted average common shares outstanding. 19,785,715 19,607,352 14,429,971
========== ========== ==========
Diluted--
--from operations........................ $ 0.37 $ 0.98 $ 0.70
--from extraordinary gain................ -- -- 0.27
---------- ---------- ----------
$ 0.37 $ 0.98 $ 0.97
========== ========== ==========
Weighted average common shares outstanding. 21,587,898 22,043,920 19,567,635
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
15
<PAGE>
GRUBB & ELLIS COMPANY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
for the years ended June 30, 1999, 1998 and 1997
(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,
1996................... 8,916,415 $ 90 $ 32,143 $ 57,154 $(116,862) $(27,475)
Employee common stock
purchases and net
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 net
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
Employee common stock
purchases and net
exercise of stock
options................ 164,028 1 -- 988 -- 989
Net income.............. -- -- -- -- 8,079 8,079
---------- ---- -------- -------- --------- --------
Balance as of June 30,
1999................... 19,885,084 $199 $ -- $112,550 $ (68,267) $ 44,482
========== ==== ======== ======== ========= ========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
16
<PAGE>
GRUBB & ELLIS COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
for the years ended June 30, 1999, 1998 and 1997
(in thousands)
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Cash Flows from Operating Activities:
Net income...................................... $ 8,079 $ 21,506 $ 19,010
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 provision (benefit).............. 3,334 (6,504) (3,220)
Depreciation and amortization................. 6,079 3,563 2,964
Interest expense on Payment-in-Kind Notes..... -- -- 465
Recovery of real estate valuation allowance... -- -- (425)
Provision (recovery) for services fees
receivable valuation allowances.............. 547 96 (1,161)
(Increase) decrease in services fees
receivable................................... (541) (4,488) (580)
(Increase) decrease in prepaids and other
assets....................................... (4,791) (1,321) 2,288
Increase (decrease) in accounts payable....... (723) 699 286
Increase (decrease) in compensation and
employee benefits payable.................... 2,563 2,380 (812)
Decrease in accrued claims and settlements.... (204) (1,471) (3,071)
Decrease in other liabilities................. (1,548) (19) (1,847)
-------- -------- --------
Net cash provided by operating activities... 12,795 14,441 8,516
-------- -------- --------
Cash Flows from Investing Activities:
Purchases of equipment, software and leasehold
improvements................................... (9,669) (10,200) (3,216)
Cash paid for business acquisitions, net of cash
acquired....................................... (17,102) (7,580) --
-------- -------- --------
Cash used in investing activities........... (26,771) (17,780) (3,216)
-------- -------- --------
Cash Flows From Financing Activities:
Proceeds from borrowing......................... 7,500 -- --
Repayment of acquisition indebtedness........... (3,264) -- --
Proceeds from issuance of common stock, net..... 989 985 21,388
Repayment of long-term debt to related party.... -- -- (23,000)
Deferred financing fees......................... -- (185) (445)
-------- -------- --------
Net cash provided by (used in) financing
activities................................. 5,225 800 (2,057)
-------- -------- --------
Net (decrease) increase in cash and cash
equivalents (8,751) (2,539) 3,243
Cash and equivalents at beginning of the year... 14,251 16,790 13,547
-------- -------- --------
Cash and cash equivalents at end of the year.... $ 5,500 $ 14,251 $ 16,790
======== ======== ========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
17
<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, and its wholly and majority owned and controlled subsidiaries and
controlled partnerships, including 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 thousands) for the years ended June 30, 1999, 1998 and 1997.
The net expense is included in salaries and wages on the Consolidated
Statements of Operations.
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Gross salaries, wages and benefits.......... $125,126 $101,610 $ 82,681
Less: reimbursements from property owners... (94,753) (79,333) (67,051)
-------- -------- --------
Net salaries, wages and benefits............ $ 30,373 $ 22,277 $ 15,630
======== ======== ========
</TABLE>
18
<PAGE>
GRUBB & ELLIS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(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 $511,000, $127,000 and $1.5
million for each of the fiscal years ended June 30, 1999, 1998 and 1997,
respectively. Cash payments for income taxes for the fiscal years ended June
30, 1999, 1998 and 1997 were approximately $474,000, $297,000 and $168,000,
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
consist of costs to purchase and develop software. All software costs are
amortized using a straight line method over their estimated useful lives,
ranging from three to seven years. Development costs are amortized once the
related software is placed in service. Leasehold improvements are amortized
using the straight-line method over their useful lives not to exceed the terms
of the respective leases. Maintenance and repairs are charged to expense as
incurred.
(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 $1,651,000 and
$338,000 at June 30, 1999 and 1998, respectively.
In accordance with Financial Accounting Standards No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
of", the net carrying value of goodwill is reviewed by
19
<PAGE>
GRUBB & ELLIS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
management if facts and circumstances, such as significant declines in revenues
or number of brokers, suggest that it may be impaired. If any impairment is
indicated as a result of such reviews, the Company would measure it by
comparing undiscounted cash flows of a specific acquired business with the
carrying value of goodwill associated therewith. If the future estimated
undiscounted cash flows are not sufficient to recover the carrying value of
such goodwill, such asset would be adjusted to its fair value through a charge
to operations. No impairment losses have been identified in fiscal 1999, 1998
or 1997.
(k) Accrued Claims and Settlements:
The Company has maintained partially self-insured and deductible programs
for errors and omissions, general liability, workers' compensation and certain
employee health care costs. Reserves for such 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) Segment reporting:
Effective April 1, 1999, the Company adopted the Financial Accounting
Standards Board's Statement of Financial Accounting Standards No. 131,
Disclosures about Segments of an Enterprise and Related Information (Statement
131) which establishes standards for the way that public business enterprises
report information about operating segments in their financial statements. The
adoption of Statement 131 did not affect the Company's results of operations or
financial position, but did affect the disclosure of segment information. See
note 13 of Notes to Consolidated Financial Statements.
(n) Reclassifications:
Certain prior year amounts have been reclassified to conform to the current
year presentation.
2. Services Fees Receivable, net
Service fees receivable at June 30, 1999 and 1998 consisted of the following
(in thousands):
<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
Commissions and fees receivable....................... $ 27,017 $ 22,172
Commissions payable................................... (14,874) (10,591)
Allowance for uncollectible accounts.................. (2,662) (2,115)
-------- --------
Total............................................... 9,481 9,466
Less portion classified as current.................... 9,019 9,025
-------- --------
Noncurrent portion (included in other assets)....... $ 462 $ 441
======== ========
</TABLE>
20
<PAGE>
GRUBB & ELLIS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following is a summary of the changes in the allowance for uncollectible
service fees receivable for the fiscal years ended June 30, 1999, 1998 and 1997
(in thousands):
<TABLE>
<CAPTION>
1999 1998 1997
------ ------ -------
<S> <C> <C> <C>
Balance at beginning of year....................... $2,115 $2,019 $ 3,180
Provision for bad debt............................. 547 96 --
Recovery of allowance.............................. -- -- (1,161)
------ ------ -------
Balance at end of year............................. $2,662 $2,115 $ 2,019
====== ====== =======
</TABLE>
3. Equipment, Software and Leasehold Improvements, net
Equipment, software and leasehold improvements at June 30, 1999 and 1998
consisted of the following (in thousands):
<TABLE>
<CAPTION>
1999 1998
------- -------
<S> <C> <C>
Furniture, equipment and software systems................. $33,545 $26,569
Leasehold improvements.................................... 4,097 3,275
------- -------
Total................................................... 37,642 29,844
Less accumulated depreciation and amortization............ 19,088 16,692
------- -------
Equipment, software and leasehold improvements, net....... $18,554 $13,152
======= =======
</TABLE>
The Company wrote off approximately $2.2 million and $297,000 of fully
depreciated furniture and equipment during the fiscal years ended June 30, 1999
and 1998, respectively.
4. Earnings 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 per common share for fiscal 1997 includes net
income adjusted for amounts applicable to the Senior and Junior Convertible
Preferred Stock related to undeclared dividends. 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.
21
<PAGE>
GRUBB & ELLIS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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,
-------------------------
1999 1998 1997
------- -------- --------
<S> <C> <C> <C>
Basic earnings per common share:
Income before extraordinary gain............... $ 8,079 $ 21,506 $ 13,629
Adjustments
Dividends--senior convertible preferred
stock....................................... -- -- (1,032)
Dividends--junior convertible preferred
stock....................................... -- -- (399)
------- -------- --------
Net income before extraordinary gain
applicable to common stockholders........... $ 8,079 $ 21,506 $ 12,198
======= ======== ========
Weighted average common shares outstanding--
basic......................................... 19,786 19,607 14,430
======= ======== ========
Earnings per common share--basic............... $ 0.41 $ 1.10 $ 0.85
======= ======== ========
Diluted earnings per common share:
Net income before extraordinary gain applicable
to common stockholders........................ $ 8,079 $21,506 $13,629
======= ======== ========
Weighted average common shares outstanding..... 19,786 19,607 14,430
Effect of dilutive securities:
Stock options and warrants................... 1,802 2,437 1,631
Senior convertible preferred stock........... -- -- 2,308
Junior convertible preferred stock........... -- -- 1,199
------- -------- --------
Weighted average common shares outstanding..... 21,588 22,044 19,568
======= ======== ========
Earnings per common share--diluted............. $ 0.37 $ .98 $ 0.70
======= ======== ========
</TABLE>
Options outstanding to purchase shares of common stock, the effect of which
would be antidilutive, were 1,124,850 and 48,550 at June 30, 1999 and June 30,
1998, respectively, and were not included in the computation of diluted
earnings per share because the option exercise price was greater than the
average market price of the common shares for the year.
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, 1999, the Company had outstanding borrowings
of $7.5 million under the Credit Agreement, with a weighted average interest
rate of 7.0 percent.
In connection with the Credit Agreement and the subsequent amendment, the
Company incurred commitment and other financing fees totaling approximately
$576,000, which are being amortized over the
22
<PAGE>
GRUBB & ELLIS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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.
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
23
<PAGE>
GRUBB & ELLIS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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
(benefit) for income taxes for the fiscal years ended June 30, 1999, 1998 and
1997 consisted of the following:
<TABLE>
<CAPTION>
1999 1998 1997
------ ------- -------
<S> <C> <C> <C>
Current
Federal.......................................... $ 227 $ 169 $ 217
State and local.................................. 415 278 155
------ ------- -------
642 447 372
Deferred......................................... 3,334 (6,504) (3,220)
------ ------- -------
Net provision (benefit).......................... $3,976 $(6,057) $(2,848)
====== ======= =======
</TABLE>
At June 30, 1999, 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......... $11,506 2007 to 2010
Federal investment tax credit carryforwards............. 278 1999 to 2000
Federal alternative minimum tax credit carryforward..... 624 Indefinite
</TABLE>
24
<PAGE>
GRUBB & ELLIS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
In addition, certain of the Company's net operating loss carryforwards
("NOL's") are limited pursuant to Section 382 of the Internal Revenue Code
("Code") relating to a prior ownership change. The NOL's of $11.7 million
allowable under Section 382 are limited to approximately $825,000 per year,
subject to carryforward term limitations specified by the Code. At June 30,
1999, the amount of NOL's not subject to limitation amounted to approximately
$4.4 million and are included as a deferred tax asset in the table below.
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,
--------------------
1999 1998 1997
----- ----- -----
<S> <C> <C> <C>
Federal statutory rate............................... 35.0% 35.0% 35.0%
State and local income taxes (net of federal tax
benefits)........................................... 1.9 1.2 1.4
Alternative minimum tax.............................. 1.9 1.1 1.3
Meals and entertainment.............................. 3.4 2.4 .8
Reduction in valuation allowance..................... (11.0) (53.0) (32.0)
Goodwill amortization................................ .9 -- --
Other................................................ .9 -- --
Stock option compensation............................ -- (3.9) --
Real estate partnership losses....................... -- (6.9) --
NOL carryforwards.................................... -- (15.1) (22.7)
----- ----- -----
Effective income tax rate.......................... 33.0% (39.2)% (16.2)%
===== ===== =====
</TABLE>
During fiscal years 1999, 1998 and 1997, the Company reduced the valuation
allowance by $1.3 million, $6.5 million and $3.2 million, respectively, 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 long-term debt and the
Company's recent history of earnings, it is more likely than not that the
Company will generate sufficient future taxable income to realize the net
deferred tax assets.
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, 1999 and 1998 (in thousands):
<TABLE>
<CAPTION>
1999 1998
------- -------
<S> <C> <C>
Deferred tax assets:
NOL and credit carryforwards............................. $ 5,389 $ 9,739
Insurance reserves....................................... 2,784 3,442
Commission and fee reserves.............................. 1,028 1,236
Claims and settlements................................... 1,423 991
Other.................................................... 766 486
------- -------
Deferred tax assets.................................... 11,390 15,894
Less valuation allowance................................... 4,260 5,585
------- -------
7,130 10,309
Deferred tax liabilities:
Accumulated depreciation................................. (740) (585)
------- -------
Net deferred tax asset................................. $ 6,390 $ 9,724
======= =======
Current.............................................. $ 2,940 $ 5,584
======= =======
Long-term............................................ $ 3,450 $ 4,140
======= =======
</TABLE>
25
<PAGE>
GRUBB & ELLIS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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,
1999, 1998 and 1997:
<TABLE>
<CAPTION>
1999 1998 1997
-------------------------- --------------------------- --------------------------
Shares Exercise Price Shares Exercise Price Shares Exercise Price
--------- --------------- --------- ---------------- --------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Stock Options
Outstanding at the
beginning of the year.. 2,383,280 $1.88 to $27.50 1,802,320 $ 1.88 to $27.50 1,085,400 $1.88 to $28.75
Granted................. 357,500 $6.25 to $ 8.94 815,000 $11.13 to $16.44 800,000 $3.38 to $15.25
Lapsed or canceled...... (182,100) $2.38 to $27.50 (87,600) $ 2.38 to $18.75 (61,340) $1.88 to $28.75
Exercised............... (28,400) $1.88 to $ 6.50 (146,440) $ 1.88 to $13.50 (21,740) $1.88 to $10.00
--------- --------- ---------
Stock options
outstanding at the end
of the year............ 2,530,280 $1.88 to $18.75 2,383,280 $ 1.88 to $27.50 1,802,320 $1.88 to $27.50
========= ========= =========
Exercisable at end of
the year............... 1,045,102 635,520 446,864 $1.88 to $27.50
========= ========= =========
</TABLE>
The Company had 1,132,630 stock options with exercise prices ranging from
$1.88 to $4.40, 429,800 stock options with exercise prices ranging from $6.25
to $8.94 and 967,850 stock options with exercise prices ranging from $11.31 to
$18.75, outstanding at June 30, 1999.
Weighted average information per share with respect to stock options for
fiscal years ended June 30, 1999 and 1998 is as follows:
<TABLE>
<CAPTION>
1999 1998
---------- ----------
<S> <C> <C>
Exercise price:
Granted........................................... $ 8.49 $11.49
Lapsed or canceled................................ 10.67 11.03
Exercised......................................... 3.71 3.26
Outstanding at June 30............................ 6.96 6.98
Remaining life...................................... 4.78 years 4.75 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, 1999, 1998
and 1997, the number of shares available for the grant of options under the
plan were 226,124, 164,474 and 186,874, 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 options expire five
years from the date of grant and vest over three years from such date. The plan
originally authorized 50,000 shares for issuance, but was amended in November
1998 to increase the number of issuable shares to 300,000. In addition, the
amendment provides for additional automatic grants of 8,000 shares to each
outside director upon each of such director's successive fourth year
anniversaries of service. These new grants expire ten years after the date of
grant and vest over four years from such date. At each of June 30, 1999, 1998
and 1997, the number of shares available for the grant of options was 246,000,
10,000 and 20,000, respectively.
26
<PAGE>
GRUBB & ELLIS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The Company's 1998 Stock Option Plan provides for grants of options to
purchase the Company's common stock. The plan authorizes the issuance of up to
2,000,000 shares, and had 1,081,950 and 1,305,000 shares available for grant as
of June 30, 1999 and 1998, respectively. 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, 1999, 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>
In July 1999, the Company issued a warrant to purchase 600,000 shares of the
Company's common stock to the parent company of Landauer Associates, Inc.
("LAI"), as part of the consideration granted in the acquisition of LAI. The
warrants have an exercise price of $6.25 and a five year life, expiring in July
2004.
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 year ended June 30, 1997, the number of shares
purchased under this plan were 22,970.
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 were 135,963 and 79,272 during the fiscal years ended June 30, 1999 and
1998, respectively.
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 $891,000, $637,000 and $585,000 for the fiscal years
ended June 30, 1999, 1998 and 1997, 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
27
<PAGE>
GRUBB & ELLIS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 1999, 1998 and 1997,
respectively, are as follows:
<TABLE>
<CAPTION>
1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
Risk free interest rates............. 4.74% 6.13% 6.27%
Dividend yields...................... 0% 0% 0%
Volatility factors of the expected
market price of the common stock.... .627 .625 .586
Weighted-average expected lives...... 6.00 years 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. The
weighted average fair values of options granted by the Company in fiscal years
1999, 1998 and 1997 using this model were $4.40, $6.17 and $4.40, respectively.
The effects on fiscal year 1999, 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
$6,645,000 and $20,609,000, basic earnings per share of $.34 and $1.05, and
diluted earnings per share of $.31 and $.93 for the fiscal years ended June 30,
1999 and 1998, respectively. Pro forma results for fiscal year 1997 are not
materially different from amounts reported.
Stock Repurchase Plan:
In August 1999, the Company announced a program through which it may
repurchase up to $3.0 million of its common stock on the open market from time
to time as market conditions warrant.
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, 1999, 1998 and 1997 (in thousands):
<TABLE>
<CAPTION>
1999 1998 1997
------ ------ ------
<S> <C> <C> <C>
Transaction service commissions..................... $2,152 $3,282 $ 836
Management services and other fees.................. $3,918 $2,341 $1,028
</TABLE>
28
<PAGE>
GRUBB & ELLIS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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, 1999 (in thousands):
<TABLE>
<CAPTION>
Year Ending Lease
June 30, Obligations
----------- -----------
<S> <C>
2000........................ $13,266
2001........................ 11,103
2002........................ 8,748
2003........................ 5,934
2004........................ 3,517
Thereafter................... 3,307
</TABLE>
Lease and rental expense for the fiscal years ended June 30, 1999, 1998 and
1997 amounted to $18,708,000, $15,590,000 and $14,542,000, 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, alleged 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 alleged 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, and
the plaintiffs appealed this summary judgment to the California Court of
Appeals. 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
moved to dismiss the Maiona case which motion was granted in September 1998. In
January 1999, both the Johsz and Maiona matters were settled without any
payment to the plaintiff by the Company.
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
29
<PAGE>
GRUBB & ELLIS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
and Corrupt Organizations Act ("RICO"), securities fraud, breach of fiduciary
duty and negligent misrepresentation surrounding the defendants' organization,
promotion, sponsorship and management of the Partnerships. Specific damages
were not pled, but treble, punitive as well as compensatory damages and
restitution are sought. On December 19, 1995 the court granted the defendants'
motion to dismiss the entire complaint with regard to Partnerships I and III,
based upon the plaintiff's lack of standing in those Partnerships 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.
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. Defendants filed a petition for writ of certiorari with the United
States Supreme Court appealing the Third Circuit's decision. On April 19, 1999,
the United States Supreme Court denied defendants' petition.
The Company intends to vigorously defend the Matthews action, and believes
it has meritorious defenses to contest the claims asserted by the 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 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
During the fiscal year ended June 30, 1997, the Company recorded a $2.4
million charge for incremental non-recurring costs related to the relocation of
the Company's corporate headquarters from San Francisco, California to
Northbrook, Illinois.
11. Concentration of Credit Risk
Financial instruments that potentially subject the Company to credit risk
consist principally of trade receivables and interest-bearing investments.
Users of real estate services account for a substantial portion of trade
receivables and collateral is generally not required. The risk associated with
this concentration is limited due to the large number of users and their
geographic dispersion.
The Company places substantially all of its interest-bearing investments
with major financial institutions and limits the amount of credit exposure with
any one financial institution.
30
<PAGE>
GRUBB & ELLIS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
12. Business Acquisitions and Related Indebtedness
Fiscal 1998 Acquisitions
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. Substantially all of the purchase prices in
these acquisitions were allocated to goodwill.
The purchase prices of these acquisitions, net of cash acquired, totaled
approximately $10.6 million, including related acquisition 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.
In addition, terms of certain of the acquisitions provide for additional
consideration up to a maximum of $700,000 which is 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.
Fiscal 1999 Acquisitions
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 has
recorded the acquisition under the purchase method of accounting, with all
operations subsequent to the acquisition date reflected in the Company's
financial statements. 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. The Company was obligated to make certain incentive based payments
to the seller, contingent upon the achievement of defined revenue levels for
the twelve months following the acquisition date. Such revenue levels were not
achieved, and therefore no further contingent obligation remain related to this
acquisition. 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 Service Group,
Inc. ("Island Realty") in February 1999. The Company has recorded these
acquisitions under the purchase method of accounting, and all operations
subsequent to the respective acquisition dates are reflected in the Company's
financial statements.
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.
Substantially all of the purchase prices in these acquisitions were
allocated to goodwill.
31
<PAGE>
GRUBB & ELLIS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Subsequent Period Acquisition:
On July 30, 1999, the Company acquired substantially all of the assets of
Landauer Associates, Inc. a real estate valuation and consulting firm.
Consideration given the seller at closing included cash, common stock warrants
(see Note 7 of Notes to Consolidated Financial Statements), and the assumption
of certain liabilities. 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 June 30, 2000.
Pro Forma Information (Unaudited):
The following unaudited pro forma financial information reflects the
operations of the Company, assuming the above ten acquisitions had occurred on
July 1 of each year (in thousands, except share data):
<TABLE>
<CAPTION>
Fiscal year ended
-----------------
June 30, June 30,
1999 1998
-------- --------
<S> <C> <C>
Total revenue........................................... $341,827 $343,118
Income before taxes..................................... 13,158 18,007
Net income.............................................. 8,752 23,066
Earnings per share:
Basic................................................. 0.44 1.18
Diluted............................................... 0.40 1.03
</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.
13. Segment Information
The Company has two reportable segments--Transaction Services and Management
Services.
The Transaction Services segment advises buyers, sellers, landlords and
tenants on the sale and leasing of commercial property and includes the
Company's Corporate Services, Institutional Services and national affiliate
program operations.
The Management Services segment provides property management, leasing and
related services for owners of investment properties and facilities management
services for corporate users.
The fundamental distinction between the Transaction and Management Services
segments lies in the nature of the revenue streams and related cost structures.
Transaction Services generates revenues primarily on a commission or project
fee basis. Therefore, the personnel responsible for providing these services
are compensated primarily on a commission basis. The Management Services
revenues are generated primarily by long term (one year or more) contractual
fee arrangements. Therefore, the personnel responsible for delivering these
services are compensated primarily on a salaried basis.
32
<PAGE>
GRUBB & ELLIS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The Company evaluates segment performance and allocates resources based on
earnings before interest expense, taxes, depreciation and amortization
("EBITDA"). The segment information below has been prepared using the same
accounting policies as those described in the summary of significant accounting
policies. Corporate overhead expenses, along with interest and other income,
have been allocated on a relative revenue basis to each segment.
<TABLE>
<CAPTION>
Transaction Management Company
Services Services Totals
----------- ---------- --------
(Amounts in $000's)
<S> <C> <C> <C>
Fiscal year ended June 30, 1999
Total Revenues............................ $260,071 $54,030 $314,101
EBITDA.................................... 15,650 3,186 18,836
Total Assets.............................. 51,821 21,582 73,403
Fiscal year ended June 30, 1998
Total Revenues............................ $247,040 $35,794 $282,834
EBITDA.................................... 19,963 (845) 19,118
Total Assets.............................. 34,052 19,742 53,794
Fiscal year ended June 30, 1997
Total Revenues............................ $201,389 $27,241 $228,630
EBITDA.................................... 16,369 1,260 17,629
Total Assets.............................. 25,683 7,793 33,476
</TABLE>
Reconciliation of Segment EBITDA to Income Statement:
<TABLE>
<CAPTION>
Fiscal Year Ended June
30,
-----------------------
1999 1998 1997
------- ------- -------
<S> <C> <C> <C>
Total Segment EBITDA................................ $18,836 $19,118 $17,629
Less:
Depreciation & Amortization......................... 6,079 3,563 2,964
Non-recurring expenses.............................. -- -- 2,431
Interest expense.................................... 702 106 1,453
------- ------- -------
Income before income taxes and extraordinary
items............................................ $12,055 $15,449 $10,781
======= ======= =======
</TABLE>
Reconciliation of Segment Assets to Balance Sheet:
<TABLE>
<CAPTION>
Fiscal Year Ended
June 30,
-------------------
1999 1998
------- -------
<S> <C> <C> <C>
Total segment assets..................................... $73,403 $53,794
Deferred taxes........................................... 6,390 9,724
------- -------
Total assets........................................... $79,793 $63,518
======= =======
</TABLE>
33
<PAGE>
GRUBB & ELLIS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
14. Selected Quarterly Financial Data (Unaudited)
<TABLE>
<CAPTION>
Fiscal Year Ended June 30, 1999
------------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
----------- ----------- ----------- -----------
(in thousands, except per share amounts and
shares)
<S> <C> <C> <C> <C>
Operating revenue.......... $ 76,169 $ 98,641 $ 59,962 $ 79,329
=========== =========== =========== ===========
Operating income (loss).... $ 3,661 $ 9,424 $ (4,078) $ 2,828
=========== =========== =========== ===========
Income (loss) before income
taxes..................... $ 3,716 $ 9,580 $ (4,010) $ 2,769
=========== =========== =========== ===========
Net income (loss).......... $ 2,310 $ 5,800 $ (2,406) $ 2,375
=========== =========== =========== ===========
Net income (loss ) per
common share:
Basic-- $ 0.12 $ 0.29 $ (0.12) $ 0.12
=========== =========== =========== ===========
Weighted average common
shares outstanding...... 19,722 19,756 19,805 19,860
=========== =========== =========== ===========
Diluted-- $ 0.11 $ 0.27 $ (0.12) $ 0.11
=========== =========== =========== ===========
Weighted average common
shares outstanding...... 21,880 21,657 21,480 21,337
=========== =========== =========== ===========
Common stock market price
range (high:low).......... 14.06:8.38 10.31:7.44 7.88:6.25 6.88:5.06
=========== =========== =========== ===========
<CAPTION>
Fiscal Year Ended June 30, 1998
------------------------------------------------
First Second Third Fourth
Quarter Quarter 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................. $ 3,035 $ 8,540 $ 2,655 $ 7,276
=========== =========== =========== ===========
Net income per common
share:
Basic-- $ 0.16 $ 0.44 $ 0.14 $ 0.37
=========== =========== =========== ===========
Weighted average common
shares outstanding...... 19,542 19,592 19,626 19,671
=========== =========== =========== ===========
Diluted-- $ 0.14 $ 0.39 $ 0.12 $ 0.33
=========== =========== =========== ===========
Weighted average common
shares outstanding...... 22,036 21,988 21,915 22,087
=========== =========== =========== ===========
Common stock market price
range (high:low).......... 17.00:12.81 17.19:12.19 16.38:10.13 15.38:10.13
=========== =========== =========== ===========
</TABLE>
34
<PAGE>
ITEM 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
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
under the Securities Exchange Act of 1934 (the "Exchange Act") no later than
120 days after the end of the 1999 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
under the Exchange Act no later than 120 days after the end of the 1999 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
under the Exchange Act no later than 120 days after the end of the 1999 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
under the Exchange Act no later than 120 days after the end of the 1999 fiscal
year.
35
<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, 1999 and June 30, 1998.
Consolidated Statements of Operations for the years ended June 30,
1999, 1998 and 1997.
Consolidated Statements of Stockholders' Equity (Deficit) for the years
ended June 30, 1999, 1998 and 1997.
Consolidated Statements of Cash Flows for the years ended June 30,
1999, 1998 and 1997.
Notes to Consolidated Financial Statements.
2. All schedules for which provision is made in the applicable
accounting regulations of the Securities and Exchange Commission are not
required under the related instructions, are inapplicable, or the
information is contained in the Notes to Consolidated Financial Statements
and therefore have been omitted.
3. Exhibits required to be filed by Item 601 of Regulation S-K:
(3) Articles of Incorporation and Bylaws
<TABLE>
<C> <S>
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).
</TABLE>
(4) Instruments Defining the Rights of Security Holders, including
Indentures
<TABLE>
<C> <S>
4.1 First Amendment to Warrant No. 18, held by Warburg, Pincus Investors,
L.P., exercisable for 687,358 shares of common stock of the Registrant
extending the expiration date to January 29, 2002, incorporated herein
by reference to Exhibit 4.2 to the Registrant's Quarterly Report on
Form 10-Q filed on November 13, 1996 (Commission File No. 1-8122).
</TABLE>
36
<PAGE>
<TABLE>
<C> <S>
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).
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).
</TABLE>
37
<PAGE>
<TABLE>
<C> <S>
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 (Commission File No. 1-8122).
4.18 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 August 23, 1999.
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).
4.20 Stock Subscription Warrant No. A-1 dated July 30, 1999 issued to
Aegon USA Realty Advisors, Inc.
</TABLE>
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
<TABLE>
<C> <S>
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* First Amendment to the Employment Agreement between Neil R. Young
and the Registrant dated as of May 19, 1999.
10.3* 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).
10.4* Description of Grubb & Ellis Company Executive Officer Incentive
Compensation Plan.
10.5* 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).
10.6 First Amendment to the 1993 Stock Option Plan for Outside Directors,
effective November 19, 1998, incorporated herein by reference to
Exhibit 10.1 to the Registrant's Quarterly Report on Form 10-Q filed
on February 12, 1999 (Commission File No. 1-8122).
10.6* Grubb & Ellis 1998 Stock Option Plan, effective as of January 13,
1998.
10.7* Executive Change of Control Plan, effective as of May 10, 1999 and
attached form of Acknowledgement Agreement.
</TABLE>
38
<PAGE>
<TABLE>
<C> <S>
10.8 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).
10.9 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).
10.10 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).
10.11 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).
10.12 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).
10.13 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).
10.14 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>
- --------
*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) None
39
<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.
Grubb & Ellis Company
(Registrant)
*
By___________________________________
Neil Young
Chairman of the Board and Chief
Executive Officer
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.
*
By_____________________________ September 28, 1999
Neil Young
Chairman of the Board and
Chief Executive Officer
Principal Executive Officer
/s/ Brian D. Parker September 28, 1999
- -------------------------------
Brian D. Parker
Executive Vice President and
Chief Financial Officer
Principal Financial and
Accounting Officer
<TABLE>
<CAPTION>
<S> <C> <C>
* September 28, 1999
____________________________________
R. David Anacker, Director
* September 28, 1999
____________________________________
Lawrence S. Bacow, Director
* September 28, 1999
____________________________________
Joe F. Hanauer, Director
* September 28, 1999
____________________________________
C. Michael Kojaian, Director
* September 28, 1999
____________________________________
Sidney Lapidus, Director
* September 28, 1999
____________________________________
Reuben S. Leibowitz, Director
* September 28, 1999
____________________________________
Robert J. McLaughlin, Director
</TABLE>
40
<PAGE>
<TABLE>
<S> <C> <C>
* September 28, 1999
____________________________________
Thomas A. Meador, Director
* September 28, 1999
____________________________________
John D. Santoleri, Director
* September 28, 1999
____________________________________
Todd A. Williams, Director
</TABLE>
/s/ Robert J. Walner
By: ___________________________
Robert J. Walner
Attorney-in-Fact,
*pursuant to Powers of
Attorney
41
<PAGE>
Grubb & Ellis Company and Subsidiaries
EXHIBIT INDEX (A)
for the fiscal year ended June 30, 1999
Exhibit
(4) Instruments Defining the Rights of Security Holders, Including
Indentures
4.18 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 August 23, 1999.
4.20 Stock Subscription Warrant No. A-1 dated July 30, 1999 issued to
Aegon USA Realty Advisors, Inc.
(10) Material Contracts
10.2 First Amendment to the Employment Agreement between Neil R.
Young and the Registrant dated as of May 19, 1999,
10.4 Description of Grubb & Ellis Company Executive Officer Incentive
Compensation Plan.
10.7 Executive Change of Control Plan, effective as of May 10, 1999
and attached form of Acknowledgement Agreement.
(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.
42
<PAGE>
EXHIBIT 4.18
AMENDMENT TO AMENDED AND
RESTATED CREDIT AGREEMENT
THIS AMENDMENT to Amended and Restated Credit Agreement is dated as of
August 23, 1999, and is made by and among GRUBB & ELLIS COMPANY, a Delaware
corporation (the "Borrower"), each of the GUARANTORS, the BANKS and PNC BANK,
NATIONAL ASSOCIATION, in its capacity as agent for the Banks (hereinafter
referred to in such capacity as the "Agent").
BACKGROUND
WHEREAS, the parties hereto are parties to that certain Amended and
Restated Credit Agreement dated as of January 26, 1998, as amended from time to
time (collectively, the "Agreement"), pursuant to which the Banks provided to
the Borrower a revolving credit facility in an aggregate principal amount not to
exceed $35,000,000 at any one time outstanding; and
WHEREAS, the Borrower has requested the Lender to amend certain terms
in the Agreement in order to permit the Borrower to repurchase and redeem up to
$3,000,000 of the shares of outstanding capital stock of the Borrower owned by
the public, and the Agent and the Banks have agreed to such amendments, subject
to the terms and conditions of this Amendment.
AGREEMENT
NOW THEREFORE, the parties hereto, in consideration of their mutual
covenants and agreements hereinafter set forth and intending to be legally bound
hereby, covenant and agree as follows:
1. Capitalized terms used herein unless otherwise defined herein shall have
the meanings ascribed to them in the Agreement.
2. Section 8.1.10.1 of the Agreement is hereby amended and restated as
follows:
"8.1.10.1 General.
-------
The Loan Parties will use the Letters of Credit and the
proceeds of the Loans only (i) to finance Permitted Acquisitions, (ii) for the
repurchase and redemption in the market of outstanding capital stock of the
Borrower; provided however, that not more than $3,000,000 aggregate outstanding
principal balance of the Loans will be used to finance the repurchase and
redemption of the outstanding capital stock of the Borrower, and (iii) for
general corporate purposes and for working capital, provided however, that not
more than $15,000,000 aggregate outstanding principal balance of Loans will be
used to finance general corporate purposes and for working capital. The Loan
Parties shall not use the Letters of Credit and the
<PAGE>
proceeds of the Loans for any purpose which contravenes any applicable Law or
any provision hereof."
3. Section 8.2.5 is hereby amended and restated as follows:
"8.2.5 Dividends and Related Distributions.
-----------------------------------
Each of the Loan Parties shall not make or pay any dividend or
other distribution of any nature (whether in cash, property, securities or
otherwise) on account of or in respect of its shares of capital stock,
partnership interests or limited liability company interests on account of the
purchase, redemption, retirement or acquisition of its shares of capital stock
(or warrants, options or rights therefor), partnership interests or limited
liability company interests, except (i) the Loan Parties may make dividends or
other distributions payable to another Loan Party, and (ii) so long as no Event
of Default or Potential Default shall exist prior to or after giving effect to a
repurchase of the Borrower's outstanding capital stock, the Borrower may redeem
or repurchase in the market shares of its outstanding capital stock in an amount
such that the consideration paid by the Borrower does not exceed $3,000,000 in
the aggregate for all such redemptions and repurchases."
4. The Borrower shall pay an amendment fee in the amount of $17,500, to be
allocated to the Banks based upon each Bank's Ratable Share, upon execution
and delivery of this Amendment to the Agent, which fee shall be deemed to
be earned as of the date of this Amendment upon execution of this Amendment
by all the parties hereto.
5. The Loan Parties reconfirm and ratify the Agreement and the Loan Documents
all in accordance with their respective terms, except to the extent that
any of those terms are expressly modified by the provisions of this
Amendment, and the Loan Parties confirm that the Agreement and the Loan
Documents have at all times since the date of their respective execution
and delivery continued in full force and effect.
6. The provisions of this Agreement shall bind the Loan Parties and their
respective successors and assigns and are for the benefit of the Agent and
the Banks and their respective successors and assigns.
7. The Loan Parties each represent that it has the corporate power and has
been duly authorized by all requisite corporate action to execute and
deliver this Amendment and to perform its obligations hereunder.
8. The Loan Parties each represent that this Amendment has been duly executed
and delivered by such Loan Party and constitutes the legal, valid and
binding obligations of such Loan Party, enforceable against such Loan Party
in accordance with its terms, except to the extent that the enforceability
thereof may be limited by bankruptcy, insolvency, reorganization,
moratorium, fraudulent conveyance or other similar laws affecting the
enforceability of creditors rights generally or by general equitable
principles.
-2-
<PAGE>
9. Neither this Amendment nor the consummation of the transactions
contemplated herein nor the performance by the Loan Parties of their
respective obligations hereunder or under the Agreement or the Loan
Documents will (i) violate any law, rule or regulation or court order to
which any Loan Party is subject; (ii) conflict with or result in a breach
of any Loan Party's certificate of incorporation or bylaws or any material
agreement or instrument to which any Loan Party is subject or by which its
properties are bound or (iii) result in the creation or imposition of any
lien, security interest or encumbrance on the property of any Loan Party,
whether now owned or hereafter acquired, other than liens in favor of the
Agent for the benefit of the Banks.
10. This Amendment may be executed by different parties hereto on any number of
separate counterparts, each of which, when so executed and delivered, shall
be an original, and all such counterparts shall together constitute one and
the same instrument.
[SIGNATURES APPEAR ON THE NEXT PAGE.]
-3-
<PAGE>
IN WITNESS WHEREOF, and intending to be legally bound hereby, this
Second Amendment to Amended and Restated Credit Agreement has been duly signed,
sealed and delivered by the undersigned parties as of the day and year specified
at the beginning hereof.
GRUBB & ELLIS COMPANY
By: /s/ Brian Parker (Seal)
--------------------------------
Name: Brian Parker
----------------------------
Title: Executive Vice President and Chief
----------------------------------
Financial Officer
-----------------
EACH OF THE SUBSIDIARIES OF
GRUBB & ELLIS COMPANY SET
FORTH ON THE ATTACHED
SCHEDULE I
By: /s/ Brian Parker (Seal)
--------------------------------
Name: Brian Parker
-----------------------------
Title: Executive Vice President and Chief
----------------------------------
Financial Officer of each of the
-----------------
Loan Parties set forth on Schedule
I attached hereto
PNC BANK, NATIONAL ASSOCIATION,
individually and as Agent
By: /s/ Jay C. Baker
--------------------------------
Title: Senior Vice President
AMERICAN NATIONAL BANK AND
TRUST COMPANY OF CHICAGO
By: Ross C. Weigand
-------------------------------
Title: First Vice President
-4-
<PAGE>
Exhibit 4.20
Stock Subscription Warrant to Subscribe for
600,000 Shares of Common Stock
Stock Subscription Warrant No. A-1
THIS STOCK SUBSCRIPTION WARRANT AND ANY SHARES ACQUIRED UPON THE
EXERCISE OF THIS STOCK SUBSCRIPTION WARRANT HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED. NEITHER THIS STOCK SUBSCRIPTION WARRANT NOR
ANY OF SUCH SHARES MAY BE SOLD OR TRANSFERRED IN THE ABSENCE OF SUCH
REGISTRATION OR AN EXEMPTION THEREFROM UNDER SAID ACT.
STOCK SUBSCRIPTION WARRANT
To Subscribe for and Purchase Shares
of Common Stock of
GRUBB & ELLIS COMPANY
THIS CERTIFIES THAT, for value received,
AEGON USA REALTY ADVISORS, INC. or registered assigns, is entitled to
subscribe for and purchase from GRUBB & ELLIS COMPANY (herein called the
"Company"), a corporation organized and existing under the laws of the State of
Delaware, at any time or from time to time during the period specified in
paragraph 2 hereof, up to
SIX HUNDRED THOUSAND
fully paid and nonassessable shares of the Company's common stock, par value
$0.01 per share (the "Common Stock"), at an exercise price per share of $6.25
(the "Exercise Price"). The number of shares purchasable hereunder and the
Exercise Price are subject to adjustment as provided in paragraph 4 hereof. The
term "Warrant," as used herein, shall mean this Stock Subscription Warrant,
including all amendments hereto. The term "Warrant Shares," as used herein,
refers to the shares purchasable upon the exercise of the Warrants.
Certain terms used herein and not elsewhere defined are defined in
paragraph 15 hereof.
This Warrant is subject to the following provisions, terms and
conditions:
1. Manner of Exercise; Issuance of Certificates; Payment for Shares.
----------------------------------------------------------------
The rights represented by this Warrant may be exercised by the holder hereof in
whole or in part (but not as to a fractional Warrant Share), by the surrender of
this Warrant, together with a completed Exercise
<PAGE>
Agreement in the form attached hereto, during normal business hours on any
business day at the principal office of the Company (or such other office or
agency of the Company in New York, New York or Chicago, Illinois as it may
designate by notice in writing to the holder hereof at the address of such
holder appearing on the books of the Company) at any time during the period set
forth in paragraph 2 hereof and upon payment to the Company by certified check
or bank draft of the Exercise Price for such shares, or, at the election of the
holder hereof, by delivery of other Warrants equal in value to the aggregate
Exercise Price with respect to such Warrants being exercised, the value of which
other Warrants shall be deemed to equal the difference between the Market Price
of a share of Common Stock on the date immediately preceding the date of
exercise and the then current Exercise Price. The Company agrees that the shares
so purchased shall be and are deemed to be issued to the holder hereof or its
designee as the record owner of such shares as of the close of business on the
date on which this Warrant shall have been surrendered and payment made for such
shares as aforesaid. Certificates for the Warrant Shares so purchased,
representing the aggregate number of shares specified in said Exercise
Agreement, shall be delivered to the holder hereof within a reasonable time, not
exceeding five business days, after the rights represented by this Warrant shall
have been so exercised. Each stock certificate so delivered shall be in such
denominations as may be requested by the holder hereof and shall be registered
in the name of said holder or such other name (upon compliance with the transfer
requirements hereinafter set forth) as shall be designated by said holder. If
this Warrant shall have been exercised only in part, then, unless this Warrant
has expired, the Company shall, at its expense, at the time of delivery of said
stock certificates, deliver to said holder a new Warrant representing the number
of shares with respect to which this Warrant shall not then have been exercised.
The Company shall pay all taxes and other expenses and charges payable in
connection with the preparation, execution and delivery of stock certificates
(and any new Warrants) pursuant to this paragraph except that, in case such
stock certificates shall be registered in a name or names other than the holder
of this Warrant or its nominee, funds sufficient to pay all stock transfer taxes
which shall be payable in connection with the execution and delivery of such
stock certificates shall be paid by the holder hereof to the Company at the time
of the delivery of such stock certificates by the Company as mentioned above.
2. Period of Exercise. This Warrant is exercisable at any time or
------------------
from time to time prior to July 31, 2004.
3. Shares to be Fully Paid; Reservation of Shares. The Company
----------------------------------------------
covenants and agrees that all Warrant Shares will, upon issuance, be fully paid
and nonassessable and free from preemptive rights and all taxes, liens and
charges with respect to the issue thereof; and without limiting the generality
of the foregoing, the Company covenants and agrees that it will from time to
time take all such action as may be required to assure that the par value per
Warrant Share is at all times equal to or less than the effective Exercise
Price. The Company further covenants and agrees that during the period within
which the rights represented by this Warrant may be exercised, the Company will
at all times have authorized, and reserved for the purpose of issue upon
exercise of the subscription rights evidenced by this Warrant, a sufficient
number of shares of Common Stock to provide for the exercise of the rights
represented by this Warrant. The Company shall take all such action as may be
necessary to assure that such shares of Common Stock may be so issued without
violation of any applicable law or regulation and will be approved for listing
on any domestic securities exchange upon which the Common Stock may be listed.
The Company further
2
<PAGE>
covenants and agrees that it will, at any time, at its expense, promptly list on
each national securities exchange on which any Capital Stock is at the time
listed, upon official notice of issuance, Common Stock issuable upon the
exercise of any Warrant as provided in paragraph 1 hereof, and maintain such
listing of all shares of Common Stock from time to time issuable upon such
exercise, and will, at any time, register under the Securities Exchange Act of
1934, as amended, all shares of Common Stock from time to time issuable upon
such exercise if and at the time that any existing shares of Capital Stock are
so registered.
4. Anti-dilution Provisions. The Exercise Price set forth above
------------------------
shall be subject to adjustment from time to time as hereinafter provided. For
purposes of this paragraph 4, the term "Capital Stock" as used herein includes
the Company's Common Stock and shall also include any capital stock of any class
of the Company hereafter authorized which shall not be limited to a fixed sum or
percentage in respect of the rights of the holders thereof to participate in
dividends and in the distribution of assets upon the voluntary or involuntary
liquidation, dissolution or winding up of the Company; provided that the shares
purchasable pursuant to this Warrant shall include only Common Stock. Upon each
adjustment of the Exercise Price, this Warrant shall thereafter represent the
right to purchase, at the Exercise Price resulting from such adjustment, the
largest number of shares of Common Stock obtained by multiplying the Exercise
Price in effect immediately prior to such adjustment by the number of shares of
Common Stock purchasable thereunder immediately prior to such adjustment and
dividing the product thereof by the Exercise Price resulting from such
adjustment.
In case the Company, at any time, shall be a party to any Transaction,
each holder hereof, upon the exercise hereof at any time on or after the
Consummation Date shall be entitled to receive, and this Warrant shall
thereafter represent the right to receive, in lieu of the Common Stock issuable
upon exercise prior to the Consummation Date, the kind and amount of securities
or property (including cash) which it would have owned or have been entitled to
receive after the happening of such Transaction had this Warrant been exercised
immediately prior to such Transaction.
Notwithstanding anything contained herein to the contrary, the Company
shall not effect any Transaction unless prior to the consummation thereof each
corporation or entity (other than the Company) which may be required to deliver
any securities or other property upon the exercise of Warrants, the surrender of
Warrants or the satisfaction of exercise rights as provided herein, shall
assume, by written instrument delivered to each holder of Warrants, the
obligation to deliver to such holder such securities or other property to which,
in accordance with the foregoing provisions, such holder may be entitled, and
such corporation or entity shall have similarly delivered to each holder of
Warrants an opinion of counsel for such corporation or entity, satisfactory to
each holder of Warrants, which opinion shall state that all the outstanding
Warrants, including, without limitation, the exercise provisions applicable
thereto, if any, shall thereafter continue in full force and effect and shall be
enforceable against such corporation or entity in accordance with the terms
hereof and thereof and, together with such other matters as such holders may
reasonably request.
3
<PAGE>
In case the Company shall (i) pay a dividend in shares of Capital
Stock or securities convertible into Capital Stock or make a distribution to all
holders of shares of Capital Stock in shares of Capital Stock or securities
convertible into Capital Stock, (ii) subdivide its outstanding shares of Capital
Stock, (iii) combine its outstanding shares of Capital Stock into a smaller
number of shares of Capital Stock or (iv) issue by reclassification of its
shares of Capital Stock other securities of the Corporation, the Exercise Price
shall be adjusted (to the nearest cent) by multiplying the Exercise Price
immediately prior to such adjustment by a fraction, of which the numerator shall
be the number of shares of Capital Stock outstanding immediately prior to the
occurrence of such event, and of which the denominator shall be the number of
shares of Capital Stock outstanding (including any convertible securities issued
pursuant to clause (i) or (iv) above on an as converted basis) immediately
thereafter. An adjustment made pursuant to the foregoing sentence shall become
effective immediately after the effective date of such event retroactive to the
record date, if any, for such event.
(b) Notice of Adjustment. Upon the occurrence of any event
--------------------
requiring an adjustment of the Exercise Price, then and in each such case the
Company shall promptly deliver to each holder of Warrants a certificate signed
by the President or any Vice President and the Secretary or any Assistant
Secretary of the Company (an "Officers' Certificate") stating the Exercise Price
resulting from such adjustment and the increase or decrease, if any, in the
number of shares of Common Stock issuable upon exercise of the Warrants, setting
forth in reasonable detail the method of calculation and the facts upon which
such calculation is based. Within 90 days after each fiscal year in which any
such adjustment shall have occurred, or within 30 days after any request
therefor by any holder of Warrants stating that such holder contemplates
exercise of such Warrants, the Company will obtain and deliver to each holder of
Warrants the opinion of its regular independent auditors or another firm of
independent public accountants of recognized national standing selected by the
Company's Board of Directors who are satisfactory to the registered holder of
this Warrant, which opinion shall confirm the statements in the most recent
Officers' Certificate delivered under this paragraph 4(d).
(c) Other Notices. In case at any time:
-------------
(i) the Company shall declare or pay to the holders of Capital Stock
any dividend other than a regular periodic cash dividend or any periodic
cash dividend in excess of 115% of the cash dividend for the comparable
fiscal period in the immediately preceding fiscal year;
(ii) the Company shall declare or pay any dividend upon Capital Stock
payable in stock or make any special dividend or other distribution (other
than regular cash dividends) to the holders of Capital Stock;
(iii) the Company shall offer for subscription pro rata to the holders
of Capital Stock any additional shares of stock of any class or other
rights;
4
<PAGE>
(iv) there shall be any capital reorganization, or reclassification
of the Capital Stock of the Company, or consolidation or merger of the
Company with, or sale of all or substantially all of its assets to, another
corporation or other entity;
(v) there shall be a voluntary or involuntary dissolution,
liquidation or winding-up of the Company; or
(vi) there shall be any other Transaction;
then, in any one or more of such cases, the Company shall give to the holder of
each Warrant (a) at least 15 days prior to any event referred to in clause (i)
or (ii) above, at least 30 days prior to any event referred to in clause (iii),
(iv) or (v) above, and within five business days after it has knowledge of any
pending Transaction, written notice of the date on which the books of the
Company shall close or a record shall be taken for such dividend, distribution
or subscription rights or for determining rights to vote in respect of any such
reorganization, reclassification, consolidation, merger, sale, dissolution,
liquidation, winding-up or Transaction and (b) in the case of any such
reorganization, reclassification, consolidation, merger, sale, dissolution,
liquidation, winding-up or Transaction known to the Company, at least 30 days
prior written notice of the date (or, if not then known, a reasonable
approximation thereof by the Company) when the same shall take place. Such
notice in accordance with the foregoing clause (a) shall also specify, in the
case of any such dividend, distribution or subscription rights, the date on
which the holders of Capital Stock shall be entitled thereto, and such notice in
accordance with the foregoing clause (b) shall also specify the date on which
the holders of Capital Stock shall be entitled to exchange their Capital Stock
for securities or other property deliverable upon such reorganization,
reclassification, consolidation, merger, sale, dissolution, liquidation,
winding-up or Transaction, as the case may be. Such notice shall also state
that the action in question or the record date is subject to the effectiveness
of a registration statement under the Securities Act (a "Registration
Statement") or to a favorable vote of security holders, if either is required.
Any exercise of the Warrant may be made conditioned by the holder thereof upon
the consummation of any of the events described in clauses (i) through (iv)
above.
5. Certain Agreements of the Company. The Company covenants and
---------------------------------
agrees that:
(a) Certain Actions Prohibited. The Company will not by amendment of
--------------------------
its certificate of incorporation or through any reorganization, transfer of
assets, consolidation, merger, dissolution, issue or sale of securities or any
other voluntary action, avoid or seek to avoid the observance or performance of
any of the terms to be observed or performed hereunder by the Company, but will
at all times in good faith assist in the carrying out of all the provisions of
this Warrant and in the taking of all such action as may reasonably be requested
by the holder of any Warrant in order to protect the exercise rights of the
holders of the Warrants. Without limiting the generality of the foregoing, the
Company (i) will not increase the par value of any shares of Common Stock
receivable upon the exercise of the Warrants above the Exercise Price then in
effect, (ii) will take all such actions as may be necessary or appropriate in
order that the Company may validly and legally issue fully paid and
nonassessable shares of Common Stock upon the exercise of all Warrants from time
to time outstanding, (iii) will not take any action which results in
5
<PAGE>
any adjustment of the number of shares of Common Stock issuable after the action
upon the exercise of all of the Warrants if, as a result of such adjustment, the
number of shares of Common Stock issuable upon exercise of all the Warrants
would exceed the total number of shares of Common Stock then authorized by the
Company's certificate of incorporation and available for the purpose of issue
upon such exercise, and (iv) will not issue any capital stock of any class which
has the right to more than one vote per share or any capital stock of any class
which is preferred as to dividends or as to the distribution of assets upon
voluntary or involuntary dissolution, liquidation or winding-up, unless the
rights of the holders thereof shall be limited to a fixed sum or percentage (or
floating rate related to market yields) of par value or stated value in respect
of participation in dividends and a fixed sum or percentage of par value or
stated value in any such distribution of assets.
(b) Successors and Assigns. This Warrant will be binding upon any
----------------------
entity succeeding to the Company by merger, consolidation or acquisition of
all or substantially all of the Company's assets.
(c) Issuance of Warrant Securities. If the issuance of any Warrant
------------------------------
Shares required to be reserved for purposes of exercise of this Warrant or for
the conversion of such Warrant Shares requires registration with or approval of
any Federal governmental authority under any Federal or state law (other than
any registration under the Securities Act) or listing on any national securities
exchange, before such shares may be issued upon exercise of this Warrant, the
Company will, at its expense, use its best efforts to cause such shares to be
duly registered or approved, or listed on the relevant national securities
exchange, as the case may be, at such time, so that such shares may be issued in
accordance with the terms hereof and so converted.
6. Issue Tax. The issuance of certificates for Warrant Shares upon
---------
the exercise of Warrants shall be made without charge to the holders of such
Warrants or such shares for any issuance tax in respect thereof, provided that
the Company shall not be required to pay any tax which may be payable in respect
of any transfer involved in the issuance and delivery of any certificate in a
name other than the holder of the Warrant exercised.
7. Closing of Books. The Company will at no time close its
----------------
transfer books against the transfer of any Warrant, of any Warrant Shares issued
or issuable upon the exercise of any Warrant or in any manner which interferes
with the timely exercise of this Warrant.
8. Amendments to Terms of Warrant Shares. The Company will not
-------------------------------------
amend the terms of the Warrant Shares in any manner that would treat the Warrant
Shares differently from other shares of the Company's Common Stock.
9. Availability of Information. The Company will cooperate with
---------------------------
each holder of any Warrants or Warrant Shares in supplying such information as
may be necessary for such holder to complete and file any information reporting
forms presently or hereafter required by the Securities and Exchange Commission
as a condition to the availability of an exemption from the Securities Act for
the sale of any Warrants or Warrant Shares. The Company will deliver to any
person at the time holding any Warrants, promptly upon their becoming available,
copies of all
6
<PAGE>
financial statements, reports, notices and proxy statements sent or made
available generally by the Company to its stockholders, and copies of all
regular and periodic reports and all registration statements and prospectuses
filed by the Company with any securities exchange or with the Securities and
Exchange Commission.
10. No Rights or Liabilities as a Stockholder. This Warrant shall
-----------------------------------------
not entitle the holder hereof to any voting rights or other rights as a
stockholder of the Company. No provision of this Warrant, in the absence of
affirmative action by the holder hereof to purchase Warrant Shares, and no mere
enumeration herein of the rights or privileges of the holder hereof, shall give
rise to any liability of such holder for the Exercise Price or as a stockholder
of the Company, whether such liability is asserted by the Company or by
creditors of the Company.
11. Transfer and Exchange.
---------------------
(a) (1) The transfer of this Warrant and all rights hereunder, in
whole or in part, is registrable at the office or agency of the Company referred
to below by the holder hereof in person or by his duly authorized attorney, upon
surrender of this Warrant properly endorsed. Each taker and holder of this
Warrant, by taking or holding the same, consents and agrees that this Warrant,
when endorsed in blank, shall be deemed negotiable, and that the holder hereof,
when this Warrant shall have been so endorsed, may be treated by the Company and
all other persons dealing with this Warrant as the absolute owner and holder
hereof for any purpose and as the person entitled to exercise the rights
represented by this Warrant, or to the registration of transfer hereof on the
books of the Company; and until due presentment for registration of transfer on
such books the Company may treat the registered holder hereof as the owner and
holder for all purposes, and the Company shall not be affected by notice to the
contrary.
(2) The holder of this Warrant, by acceptance hereof, understands
that the Warrant Securities are characterized as "restricted securities" under
the federal securities laws inasmuch as they are being or will be acquired from
the Company in a transaction not involving a public offering and that under such
laws and applicable regulations such Warrant Securities may be resold without
registration under the Securities Act only in certain limited circumstances. The
holder of this Warrant, by acceptance hereof, agrees to comply with all
applicable laws (including, without limitation, any filing required by the Hart-
Scott-Rodino Antitrust Improvements Act of 1976) upon exercise hereof.
The holder of this Warrant, by acceptance hereof, represents that such
holder is acquiring this Warrant and any Warrant Shares to be issued upon
exercise hereof for its own account (including any separate account) for the
purpose of investment and not with a view to or for sale in connection with any
distribution thereof. The holder hereof further represents that such holder has
had an opportunity to ask questions and receive answers from the Company
regarding the terms and conditions of the offering of the Warrant Securities as
required by Section (b)(2)(v) of Rule 502 of Regulation D under the Securities
Act.
Without in any way limiting the foregoing, the holder hereof further
agrees not to make any disposition of all or any portion of the Warrant
Securities unless and until:
7
<PAGE>
(x) There is then in effect a Registration Statement under the
Securities Act covering such proposed disposition and such disposition is
made in accordance with such Registration Statement; or
(y) Such disposition is made in conformity with the limitations of
Rule 144 under the Securities Act or similar rule as then in effect under the
Securities Act; or
(z) (i) The holder hereof shall have notified the Company of the
proposed disposition and shall have furnished the Company with a detailed
statement of the circumstances surrounding the proposed disposition, and (ii)
shall have furnished the Company with an opinion of counsel, reasonably
satisfactory to the Company (it being understood that if the holder of this
Warrant is a party to the Agreement, counsel who is such party's employee shall
be deemed reasonably satisfactory to the Company), that such disposition will
not require registration of such Warrant Securities under the Securities Act.
(b) Register. The Company shall maintain, at the principal office
--------
of the Company (or such other office or agency of the Company in New York, New
York or Chicago, Illinois as it may designate by notice to the holder hereof), a
register for the Warrants, in which the Company shall record the name and
address of the person in whose name a Warrant has been issued, as well as the
name and address of each transferee and each prior owner of such Warrant. Within
10 days after any holder of Warrants shall by notice request the same, the
Company will deliver to such holder a certificate, signed by one of its
officers, listing the name and address of every other holder of Warrants and/or
Warrant Shares, as such information appears in said register and in the stock
transfer books of the Company at the close of business on the day before such
certificate is signed.
(c) Warrants Exchangeable for Different Denominations. This
-------------------------------------------------
Warrant is exchangeable, upon the surrender hereof by the holder hereof at the
office or agency of the Company referred to in paragraph 10(b), for new Warrants
of like tenor representing in the aggregate the right to subscribe for and
purchase the number of shares which may be subscribed for and purchased
hereunder of Common Stock, each of such new Warrants to represent the right to
subscribe for and purchase such number of shares as shall be designated by said
holder hereof at the time of such surrender.
(d) Replacement of Warrants. Upon receipt of evidence reasonably
-----------------------
satisfactory to the Company of the loss, theft, destruction or mutilation of
this Warrant and, in the case of any such loss, theft or destruction, upon
delivery of an indemnity bond (or, in the case of any institutional holder, an
indemnity agreement) reasonably satisfactory in form and amount to the Company
or, in the case of any such mutilation, upon surrender and cancellation of such
Warrant, the Company at its expense will execute and deliver, in lieu thereof, a
new Warrant of like tenor.
(e) Cancellation; Payment of Expenses. Upon the surrender of this
---------------------------------
Warrant in connection with any exchange, transfer or replacement as provided in
this paragraph 10, this Warrant shall be promptly canceled by the Company. The
Company shall pay all taxes (other than
8
<PAGE>
securities transfer taxes) and all other expenses and charges payable in
connection with the preparation, execution and delivery of Warrants pursuant to
this paragraph 10.
12. Registration Rights. The Company covenants and agrees as
-------------------
follows:
(a) Definitions. For purposes of this paragraph 11:
-----------
The term "Registrable Securities" means (i) the Common Stock issued
pursuant to this Warrant and (ii) any Common Stock of the Company issued
pursuant to a stock dividend, stock split or other distribution, merger,
consolidation, recapitalization or reclassification or otherwise, and any
securities of the Company which may be issued or distributed with respect to, or
in exchange for, any such Common Stock or such other securities pursuant to a
stock dividend, stock split or other distribution, merger, consolidation,
recapitalization or reclassification or otherwise; provided, however, that any
such Registrable Securities shall cease to be Registrable Securities when (i) a
Registration Statement with respect to the sale of such Registrable Securities
has been declared effective under the Securities Act and such Registrable
Securities have been disposed of in accordance with the plan of distribution set
forth in such Registration Statement, (ii) such Registrable Securities are
distributed pursuant to Rule 144 (or any similar provision then in force) under
the Securities Act or (iii) such Registrable Securities shall have been
otherwise transferred, new certificates for them not bearing a legend
restricting further transfer under the Securities Act shall have been delivered
by the Company and they may be resold without subsequent registration under the
Securities Act; provided, further, however, that any securities that have ceased
to be Registrable Securities cannot thereafter become Registrable Securities,
and any security that is issued or distributed in respect to securities that
have ceased to be Registrable Securities are not Registrable Securities.
(b) Grant of Rights. The Company hereby grants to the holder
---------------
registration rights as follows (the "Registration Rights"):
(1) Piggyback Registrations. Subject to paragraph 11(b)(2) hereof, if
at any time and from time to time after the date hereof, the Company files a
Registration Statement under the Securities Act with respect to any offering of
any equity securities by the Company for its own account or for the account of
any of its equity holders (other than (i) a registration on Form S-4 or Form S-8
or a shelf registration on Form S-3 for the sale of securities by the Company or
any successor form to such Forms or (ii) any registration of securities as it
relates to an offering and sale to management of the Company pursuant to any
employee stock plan or other employee benefit plan arrangement) then, as soon as
practicable (but in no event less than ten (10) days prior to the proposed date
of filing such Registration Statement), the Company shall give written notice of
such proposed filing to the holder of the Registrable Securities, and such
notice shall offer the holder of the Registrable Securities the opportunity to
register such number of Registrable Securities as such holder may request (a
"Piggyback Registration") and shall specify whether the offering is to be
underwritten or is to be offered on another basis. Subject to paragraph
11(b)(2), the Company shall include in such Registration Statement all
Registrable Securities requested within thirty (30) days after the receipt of
any such notice (which request shall specify the Registrable Securities intended
to be disposed of by such holder)
9
<PAGE>
to be included in the Registration for such offering pursuant to a Piggyback
Registration; provided, however, that if, at any time after giving written
notice of its intention to register any securities and prior to the effective
date of the Registration Statement filed in connection with such Registration,
the Company shall determine for any reason not to register or to delay
registration of such securities, the Company may, at its election, give written
notice of such determination to such holder of Registrable Securities and,
thereupon, (i) in the case of a determination not to register, shall be relieved
of its obligation to register any Registrable Securities in connection with such
Registration (but not from its obligation to pay the Registration Expenses in
connection therewith), and (ii) in the case of a determination to delay
registering, shall be permitted to delay registering any Registrable Securities,
for the same period as the delay in registering such other securities. If the
offering pursuant to such Registration Statement is to be underwritten, then the
holder making a request for a Piggyback Registration pursuant to this paragraph
11(b)(1) must participate in such underwritten offering and shall not be
permitted to make any other offering in connection with such Registration. If
the offering pursuant to such Registration Statement is to be on any other
basis, then the holder making a request for a Piggyback Registration pursuant to
this paragraph 11(b)(1) must participate in such offering on such basis and
shall not be permitted to make an underwritten offering in connection with such
Registration. The holder of Registrable Securities shall be permitted to
withdraw all or part of such holder's Registrable Securities from a Piggyback
Registration at any time prior to the effective date thereof.
(2) Underwriter's Cutback. The Company shall use its best efforts to
cause the managing underwriter or underwriters of a proposed underwritten
offering to permit the Registrable Securities requested to be included in the
Registration for such offering under paragraph 11(b)(1) or pursuant to other
piggyback registration rights granted by the Company, if any ("Piggyback
Securities"), to be included on the same terms and conditions as any similar
securities included therein. Notwithstanding the foregoing, if the managing
underwriter or underwriters of any such proposed underwritten offerings informs
the Company and the holders of such Registrable Securities in writing that the
total amount or kind of securities, including Piggyback Securities, which such
holders and any other persons or entities intend to include in such offering
would be reasonably likely to adversely affect the price or distribution of the
securities offered in such offering or the timing thereof, then the securities
to be included in such Registration shall be (i) first, 100% of the securities
that the Company or the holder or holders making a request for a demand
registration pursuant to demand registration rights, as the case may be,
proposes to sell, and (ii) second, the number of securities that, in the opinion
of such underwriter or underwriters, can be sold without an adverse effect on
the price, timing or distribution of the securities to be included, selected pro
rata among holders of Registrable Securities and holders of other securities
subject to other piggyback registration rights granted by the Company, if any
("Piggyback Securities") to the extent any of such holders has requested
pursuant to paragraph 11(b)(1) or pursuant to other incidental registration
rights to be included in such Piggyback Registration, based on the number of
shares of Registrable Securities or Piggyback Securities requested to be
registered by each such holder.
(c) Hold-Back Agreements; Other Registration Rights Agreements. Each
----------------------------------------------------------
holder of Registrable Securities agrees, if requested by (i) the Company or (ii)
the managing
10
<PAGE>
underwriters in an underwritten offering, not to effect any public sale or
distribution of securities of the Company the same as or similar to those being
registered, or any securities convertible into or exchangeable or exercisable
for such securities, in any Registration Statement, including a sale pursuant to
Rule 144 under the Securities Act (except as part of such underwritten
registration), during the 14-day period prior to, and during the 90-day period
(or such longer period of up to 180 days as may be required by such underwriter)
beginning on, the effective date of any Registration Statement (except as part
of such registration) or the commencement of the public distribution of
securities, to the extent timely notified in writing by the Company or the
managing underwriters (or the holders, as the case may be). The Company may
enter into any other registration rights agreement.
(d) Holder Representations for Registration. Each holder of
---------------------------------------
Registrable Securities agrees by acquisition of such Registrable Securities
that, upon receipt of any notice from the Company of the happening of any event
as a result of which a Registration Statement filed pursuant to this Agreement
or the Prospectus included in such Registration Statement (as then in effect)
contains any untrue statement of a material fact or omits to state a material
fact necessary to make the statements therein (in the case of the Prospectus and
any preliminary prospectus, in the light of the circumstances under which they
were made) not misleading or, if for any other reason it shall be necessary to
amend or supplement the Registration Statement or the Prospectus in order to
comply with the Securities Act, such holder will forthwith discontinue
disposition of Registrable Securities pursuant to such Registration Statement
until such holder's receipt of the copies of the supplemented or amended
Prospectus, or until it is advised in writing by the Company that the use of the
Prospectus may be resumed, and has received copies of any additional or
supplemental filings which are incorporated by reference in the Prospectus, and,
if so directed by the Company, such holder will deliver to the Company (at the
Company's expense) all copies, other than permanent file copies then in such
holder's possession, of the Prospectus covering such Registrable Securities
current at the time of receipt of such notice, and the Company shall, as
promptly as practicable thereafter, prepare and file with the Commission, and
furnish without charge to the selling holders and the managing underwriters, if
any, a supplement or amendment to such Registration Statement or Prospectus
which will correct such statement or omission or effect such compliance.
(e) Underwritten Offerings. If the Company proposes to register any
----------------------
of its securities under the Securities Act as contemplated by paragraph 11(b)
and such securities are to be distributed by or through one or more
underwriters, the holders of Registrable Securities to be distributed by such
underwriters shall be parties to the underwriting agreement between the Company
and such underwriters and may, at their option, require that any or all of the
representations and warranties by, and the other agreements on the part of, the
Company to and for the benefit of such underwriters shall also be made to and
for the benefit of such holders of Registrable Securities and that any or all of
the conditions precedent to the obligations of such underwriters under such
underwriting agreement be conditions precedent to the obligations of such
holders of Registrable Securities. Any such holder of Registrable Securities
shall not be required to make any representations or warranties to or agreements
with the Company or the underwriters other than representations, warranties or
agreements regarding such holder, such holders' Registrable Securities and such
holder's intended method of distribution or any other
11
<PAGE>
representations required by law. No Person may participate in any underwritten
registration hereunder unless such Person (i) agrees to sell such Person's
securities on the basis provided in any underwriting arrangements approved by
the Persons entitled to approve such arrangements and (ii) completes and
executes all customary questionnaires, powers of attorney, indemnities,
underwriting agreements and other documents required under the terms of such
underwriting arrangements.
(f) Registration Expenses. All expenses incident to the Company's
---------------------
performance of or compliance with the Company's registration obligations under
paragraph 11(b) will be borne by the Company, regardless of whether the
Registration Statement becomes effective; provided that the Company shall not be
responsible for fees and disbursements of counsel selected by the holders of the
Piggyback Securities being registered and underwriting discounts and commissions
and transfer taxes, if any, and fees and disbursements of counsel to such
underwriters (other than such fees and disbursements incurred in connection with
any registration or qualification of Registrable Securities under the securities
or blue sky laws of any state). The Company will pay its internal expenses
(including, without limitation, all salaries and expenses of its officers and
employees performing legal or accounting duties), the expense of any audit and
the fees and expenses of any Person, including special experts, retained by the
Company.
(g) Indemnification.
----------------
(1) Indemnification by the Company. The Company agrees to indemnify
and hold harmless, to the full extent permitted by law, each holder of
Registrable Securities, its officers, directors, employees, partners,
shareholders and agents and each Person who controls such holder (within the
meaning of the Securities Act or the Securities Exchange Act of 1934 (the
"Exchange Act")) from and against all losses, claims, damages, liabilities and
expenses (including reasonable costs of investigation and legal expenses)
arising out of or based upon any untrue or alleged untrue statement of a
material fact contained in any Registration Statement, Prospectus or preliminary
Prospectus or any omission or alleged omission to state therein a material fact
required to be stated therein or necessary to make the statements therein not
misleading, except insofar as the same are caused by or contained in any
information furnished in writing to the Company by such holder expressly for use
therein; provided, however, that the Company shall not be liable in any such
case to the extent that any such loss, claim, damage, liability or expense
arises out of or is based upon an untrue statement or alleged untrue statement
or omission or alleged omission made in any such preliminary Prospectus if (i)
it is determined that it was the responsibility of such holder to provide the
Person asserting such loss, claim, damage, liability or expense with a current
copy of the Prospectus and such holder failed to deliver or cause to be
delivered a copy of the Prospectus to such Person after the Company had
furnished such holder with a sufficient number of copies of the same and (ii)
the Prospectus completely corrected in a timely manner such untrue statement or
omission. This indemnity shall be in addition to any liability the Company may
otherwise have, shall remain in full force and effect regardless of any
investigation made by or on behalf of such holder or any such officer, director,
employee, agent, partner, shareholder or controlling Person and shall survive
termination of this Agreement and the transfer of Registrable Securities by such
holder. The Company will also indemnify underwriters, selling brokers, dealer
managers and similar
12
<PAGE>
securities industry professionals participating in the distribution, their
officers, directors, partners, shareholders and each Person who controls such
Persons (within the meaning of the Securities Act and the Exchange Act) to the
same extent as provided above (with appropriate modification) with respect to
the indemnification of the holders of Registrable Securities, if requested.
(2) Indemnification by the Selling Holder of Registrable Securities.
Each selling holder of Registrable Securities, severally and not jointly, agrees
to indemnify and hold harmless, to the full extent permitted by law, the
Company, its directors and officers and each Person who controls the Company
(within the meaning of the Securities Act or the Exchange Act) from and against
any losses, claims, damages, liabilities and expenses resulting from any untrue
statement of a material fact or any omission of a material fact required to be
stated in the Registration Statement, Prospectus or preliminary Prospectus or
necessary to make the statements therein not misleading, to the extent, but only
to the extent, that such untrue statement or omission is caused by or contained
in any information furnished in writing by such selling holder to the Company
specifically for inclusion in such Registration Statement or Prospectus and has
not been corrected in a subsequent writing prior to or concurrently with the
sale of the Registrable Securities to the Person asserting such loss, claim,
damage, liability or expense. This indemnity shall be in addition to any
liability such selling holder may otherwise have, shall remain in full force and
effect regardless of any investigation made by or on behalf of the Company or
any such officer, director or controlling Person and shall survive termination
of this Agreement and the transfer of Registrable Securities by such selling
holder. The Company shall be entitled to receive indemnities from underwriters,
selling brokers, dealer managers and similar securities industry professionals
participating in the distribution, to the same extent as provided above (with
appropriate modification) with respect to information so furnished in writing by
such Persons specifically for inclusion in any Prospectus or Registration
Statement.
(3) Conduct of Indemnification Proceedings. Any Person entitled to
indemnification hereunder will (i) give prompt written notice to the
indemnifying party of any claim with respect to which it seeks indemnification
and (ii) permit such indemnifying party to assume the defense of such claim with
counsel reasonably satisfactory to the indemnified party; provided, however,
that any delay or failure to so notify the indemnifying party shall relieve the
indemnifying party of its obligations hereunder only to the extent, if at all,
that it is prejudiced by reason of such delay or failure; provided further,
however, that any Person entitled to indemnification hereunder shall have the
right to select and employ separate counsel and to participate in the defense of
such claim, but the fees and expenses of such counsel shall be at the expense of
such Person unless (i) the indemnifying party has agreed in writing to pay such
fees or expenses, or (ii) the indemnifying party shall have failed to assume the
defense of such claim within a reasonable time after receipt of notice of such
claim from the Person entitled to indemnification hereunder and employ counsel
reasonably satisfactory to such Person, or (iii) in the reasonable judgment of
any such Person, based upon advice of its counsel, a conflict of interest may
exist between such Person and the indemnifying party with respect to such claims
(in which case, if the Person notifies the indemnifying party in writing that
such Person elects to employ separate counsel at the expense of the indemnifying
party, the indemnifying party shall not have the right to assume the defense of
such claim on behalf of such Person). If such defense
13
<PAGE>
is not assumed by the indemnifying party, the indemnifying party will not be
subject to any liability for any settlement made without its consent (but such
consent will not be unreasonably withheld), provided that an indemnifying party
shall not be required to consent to any settlement involving the imposition of
equitable remedies or involving the imposition of any material obligations on
such indemnifying party other than financial obligations for which such
indemnified party is entitled to be indemnified hereunder. No indemnifying party
shall consent to entry of any judgment or enter into any settlement which does
not include as an unconditional term thereof the giving by the claimant or
plaintiff to such indemnified party of a release from all liability in respect
to such claim or litigation. Whenever the indemnified party or the indemnifying
party receives a firm offer to settle a claim for which indemnification is
sought hereunder, it shall promptly notify the other of such offer. If the
indemnifying party refuses to accept such offer within 20 business days after
receipt of such offer (or of notice thereof), such claim shall continue to be
contested and, if such claim is within the scope of the indemnifying party's
indemnity contained herein, the indemnified party shall be indemnified pursuant
to the terms hereof. If the indemnifying party notifies the indemnified party in
writing that the indemnifying party desires to accept such offer, but the
indemnified party refuses to accept such offer within 20 business days after
receipt of such notice, the indemnified party may continue to contest such claim
and, in such event, the total maximum liability of the indemnifying party to
indemnify or otherwise reimburse the indemnified party hereunder with respect to
such claim shall be limited to and shall not exceed the amount of such offer,
plus reasonable out-of-pocket costs and expenses (including reasonable
attorneys' fees and disbursements) to the date of notice that the indemnifying
party desires to accept such offer, provided that this sentence shall not apply
to any settlement of any claim involving the imposition of equitable remedies or
to any settlement imposing any material obligations on such indemnified party
other than financial obligations for which such indemnified party is entitled to
be indemnified hereunder. An indemnifying party who is not entitled to, or
elects not to, assume the defense of a claim will not be obligated to pay the
fees and expenses of more than one counsel for all parties indemnified by such
indemnifying party with respect to such claim, unless in the written opinion of
counsel to the indemnified party reasonably satisfactory to the indemnifying
party, use of one counsel by all indemnified parties would be expected to give
rise to a conflict of interest between such indemnified parties with respect to
such claim, in which event the indemnifying party shall be obligated to pay the
fees and expenses of one such additional counsel.
(4) Contribution. If for any reason the indemnification provided for
in the preceding paragraphs (a) and (b) is unavailable to an indemnified party
or insufficient to hold it harmless as contemplated by the preceding paragraphs
(a) and (b), then the indemnifying party shall contribute to the amount paid or
payable by the indemnified party as a result of such loss, claim, damage or
liability in such proportion as is appropriate to reflect not only the relative
benefits received by the indemnified party and the indemnifying party, but also
the relative fault of the indemnified party and the indemnifying party, as well
as any other relevant equitable considerations, provided that no selling holder
of Registrable Securities shall be required to contribute in an amount greater
than the dollar amount of the proceeds received by such selling holder with
respect to the sale of any such Registrable Securities. No person guilty of
fraudulent misrepresentation (within the meaning of Section 11(f) of the
Securities Act) shall be entitled to contribution from any person who was not
guilty of such fraudulent misrepresentation.
14
<PAGE>
(h) Assignment of Registration Rights. The rights to cause the
---------------------------------
Company to register Registrable Securities pursuant to this Agreement may be
assigned by a holder to a transferee or assignee of such securities.
(i) No Conflicting Agreements. The Company represents and warrants
-------------------------
to the holder that the Company is not a party to any agreement that conflicts in
any manner with the holder's rights to cause the Company to register Registrable
Securities pursuant to any provision of this Agreement.
(j) Rights and Obligations Survive Exercise and Expiration of
---------------------------------------------------------
Warrant. The rights and obligations of the Company and the holder set forth in
this paragraph 11 shall survive the exercise and expiration of this Warrant.
13. Notices. All notices referred to in this Warrant shall be in
-------
writing and shall be delivered personally or by certified or registered mail,
return receipt requested, postage prepaid and will be deemed to have been given
when so delivered or mailed (i) to the Company, at its principal executive
offices and (ii) to the holder of this Warrant, at such holder's address as it
appears in the records of the Company (unless otherwise indicated by such
holder).
14. Remedies. The Company stipulates that the remedies at law of the
--------
holder of this Warrant in the event of any default or threatened default by the
Company in the performance of or compliance with any of the terms of this
Warrant are not and will not be adequate, and that such terms may be
specifically enforced by a decree for the specific performance of any agreement
contained herein or by an injunction against a violation of any of the terms
hereof or otherwise.
15. Severability. In the event that any one or more of the
------------
provisions contained herein, or the application thereof in any circumstance, is
held invalid, illegal or unenforceable, the validity, legality and
enforceability of any such provision in every other respect and of the remaining
provisions contained herein shall not be affected or impaired thereby.
16. Definitions. For the purpose of this Warrant, the following
-----------
terms shall have the following meanings:
"Agreement" shall mean this Stock Subscription Warrant.
---------
"Capital Stock" shall have the meaning assigned to such term in
-------------
paragraph 4.
"Consummation Date" shall mean the date of the consummation of a
-----------------
Transaction.
"Market Price" shall mean, on any date specified herein, (A) if any
------------
class of Capital Stock is listed or admitted to trading on any national
securities exchange, the highest price obtained by taking the arithmetic mean
over a period of twenty consecutive Trading Days ending the second Trading Day
prior to such date of the average, on each such Trading Day, of the high and low
sale price of shares of each such class of Capital Stock or if no such sale
takes place on such date, the
15
<PAGE>
average of the highest closing bid and lowest closing asked prices thereof on
such date, in each case as officially reported on all national securities
exchanges on which each such class of Capital Stock is then listed or admitted
to trading, or (B) if no shares of any class of Capital Stock are then listed or
admitted to trading on any national securities exchange, the highest closing
price of any class of Capital Stock on such date in the over-the-counter market
as shown by Nasdaq Stock Market or, if no such shares of any class of Capital
Stock are then quoted in such system, as published by the National Quotation
Bureau, Incorporated or any similar successor organization, and in either case
as reported by any member firm of the New York Stock Exchange selected by the
Company. If no shares of any class of Capital Stock are then listed or admitted
to trading on any national securities exchange and if no closing bid and asked
prices thereof are then so quoted or published in the over-the-counter market,
"Market Price" shall mean the higher of (x) the book value per share of Capital
Stock (assuming for the purposes of this calculation the economic equivalence of
all shares of all classes of Capital Stock) as determined on a fully diluted
basis in accordance with generally accepted accounting principles by a firm of
independent public accountants of recognized standing (which may be its regular
auditors) selected by the Board of Directors of the Company as of the last day
of any month ending within 60 days preceding the date as of which the
determination is to be made or (y) the fair value per share of Capital Stock
(assuming for the purposes of this calculation the economic equivalence of all
shares of all classes of Capital Stock), as determined on a fully diluted basis
in good faith by an independent brokerage firm or Standard & Poor's Corporation
(as selected by the Board of Directors of the Company), as of a date which is 15
days preceding the date as of which the determination is to be made.
"Person" shall mean any individual, corporation, partnership,
------
association, trust or other entity or organization, including a government or
political subdivision or instrumentality thereof.
"Securities Act" shall mean the Securities Act of 1933, as amended.
--------------
"Trading Day" shall mean any day on which the New York Stock Exchange
-----------
is open for trading on a regular basis.
"Transaction" shall mean any transaction to which the Company is a
-----------
party at any time (including, without limitation, a merger, consolidation, sale
of all or substantially all of the Company's assets, liquidation or
recapitalization of the Capital Stock) in which the previously outstanding
Capital Stock shall be changed into or exchanged for different securities of the
Company or common stock or other securities of another corporation or interests
in a noncorporate entity or other property (including cash) or any combination
of any of the foregoing or in which the Capital Stock ceases to be a publicly
traded security either listed on the New York Stock Exchange or the American
Stock Exchange or quoted by Nasdaq Stock Market or any successor thereto or
comparable system.
"Warrant Securities" shall mean the Warrants and the Warrant Shares.
------------------
17. Miscellaneous. This Warrant contains the entire agreement among
-------------
the parties hereto with respect to the subject matter contained herein,
supersedes all prior agreements,
16
<PAGE>
negotiations and understandings, whether written or oral, with respect to the
subject matter hereof, and any term hereof may be changed, waived, discharged or
terminated only by an instrument in writing signed by the party against which
enforcement of such change, waiver, discharge or termination is sought. This
Warrant is being delivered in the State of Illinois and shall be governed by and
construed and enforced in accordance with the internal laws of the State of
Illinois (without reference to any principles of the conflicts of laws). The
headings in this Warrant are for purposes of reference only, and shall not limit
or otherwise affect any of the terms hereof.
Dated: July 30, 1999 GRUBB & ELLIS COMPANY
/s/ Brian Parker
-------------------
Name: Brian Parker
Title: EVP & CFO
Attest:
/s/ Robert J. Walner
- --------------------------
Name: Robert J. Walner
Title: Secretary
17
<PAGE>
Exhibit 4.20
FORM OF SUBSCRIPTION
(To be signed only on exercise of Warrant)
TO ______________________________
The undersigned, the holder of the within Warrant, hereby irrevocably
elects to exercise the purchase right represented by such Warrant for, and to
purchase thereunder, ______________* shares of Common Stock of________________
_________________, and herewith makes payment of $_____________therefor [in
cash] [by cancellation of the right to buy ___ shares of Common Stock
represented by this Warrant], and requests that the certificates for such
shares be issued in the name of, and delivered to __________________________,
whose address is __________________________________________.
____________________________________
(Signature must conform in all respects to
name of holder as specified on the face of
the Warrant)
____________________________________
____________________________________
(Address)
Dated: _____________________
_____________________________
* Insert here the number of shares as to which the Warrant is being exercised.
<PAGE>
Exhibit 4.20
FORM OF ASSIGNMENT
(To be signed only on transfer of Warrant)
For value received, the undersigned hereby sells, assigns, and
transfers unto ________________________________ the right represented by the
within Warrant to purchase shares of Common Stock of________________________
_______ to which the within Warrant relates, and appoints _____________Attorney
to transfer such right on the books of ___________________________ full power of
substitution in the premises.
___________________________________
(Signature must conform in all respects to
name of holder as specified on the face of
the Warrant)
___________________________________
___________________________________
(Address)
Dated: ______________________
<PAGE>
EXHIBIT 10.2
FIRST AMENDMENT TO
EMPLOYMENT AGREEMENT
This FIRST AMENDMENT TO EMPLOYMENT AGREEMENT (the "Amendment") amends and
extends, as of May 19, 1999, the employment agreement ("Employment Agreement")
entered into between Neil R. Young (the "Executive") and Grubb & Ellis Company,
a Delaware corporation (the "Company") as of February 22, 1996.
1. All capitalized terms in this Amendment which have not been defined
herein shall have the meanings set forth in the Employment Agreement.
2. Pursuant to Paragraph 2 of the Employment Agreement, the Executive has
elected and the Company has accepted the election of the Executive to extend the
Period of Contract Employment from June 30, 1999 to June 30, 2000 (the "Contract
Extension Period").
3. The Executive's Base Salary during the Contract Extension Period shall
be $450,000.
4. For the Contract Extension Period, the Executive shall be eligible for
Bonus Compensation of up to 100% of his Base Salary, and shall be paid minimum
Bonus Compensation of $200,000. The Executive's Bonus Compensation for the
Contract Extension Period ("Year 2000 Bonus") shall be based entirely on the
financial performance of the Company for the Contract Extension Period against
the Board-approved budget and financial goals of the Company, comprised one-
third of EBITDA Margin goal achievement, one-third of net income goal
achievement, and one-third of revenue goal achievement. The following additional
terms apply to earning the Year 2000 Bonus: a) financial results are determined
after bonus payments for all Company officers and managers are taken into
account; b) no bonus component is paid for less than 70% of goal achievement
related to each component; c) at 70% of goal achievement for a component, 40% of
the bonus component is paid; d) after 70% of goal achievement of a component, an
additional 2% of eligible bonus amount is paid for each 1% incremental
achievement of the component goals until achievement of 100% of the goal is
reached and therefore 100% of the bonus component is earned; and e) after 100%
of the goals have been achieved, each incremental percent achieved over the
goals set will be matched by an incremental percent of bonus payment, to a
maximum of 125% of the target percentage of salary.
5. Paragraph 8 of the Employment Agreement shall be amended to add a
sentence at the end of the Paragraph which shall read as follows:
"In the event that the Executive delivers a Termination Notice to the
Company after May 19, 1999, or in the event that the Company does not renew
the Employment Agreement beyond its expiration on June 30, 2000, the
Executive shall be entitled to (i) payment of all earned but unpaid Base
Salary, Bonus Compensation, and vacation pay through the Effective Date,
payable in a lump
Page 1 of 2
<PAGE>
sum within five (5) days after the Effective Date; (ii)
payment of an amount equal to the Base Salary the Executive would have
earned during the twelve (12) months following the Effective Date, payable
in equal installments over such twelve-month period in accordance with the
Company's customary payroll practices; (iii) continuation during such
twelve-month period of all benefit plans or other arrangements, or their
equivalent, referred to in Section 6 of this Agreement."
6. Notwithstanding anything to the contrary in the Employment
Agreement, upon a "Change of Control" as defined in the Grubb & Ellis Company
Executive Change of Control Plan (the "Plan") dated as of May 10, 1999, the
provisions of the Plan shall supersede the provisions of Paragraphs 7 and 8 of
the Employment Agreement with respect to the consequences of termination of
employment of the Executive, and related obligations of the Company.
7. Except as modified by this Amendment, all other terms of the
Employment Agreement shall remain in full force and effect.
IN WITNESS WHEREOF, the parties hereto have executed this Amendment to the
Employment Agreement as of the day and year first written above. This Amendment
may be executed in counterpart, each of which shall constitute an original and
both of which together shall be deemed one instrument.
/s/ Neil Young
--------------------------------
Neil Young
GRUBB & ELLIS COMPANY
By /s/ Reuben S. Leibowitz
-----------------------------
Reuben S. Leibowitz
Chairman, Compensation
Committee of the Board
Page 2 of 2
<PAGE>
Exhibit 10.4
DESCRIPTION OF GRUBB & ELLIS COMPANY
EXECUTIVE OFFICER INCENTIVE COMPENSATION PLAN
Grubb & Ellis Company has an incentive compensation program for the executive
officers which is reviewed for modification annually, under which each executive
officer may receive, in addition to any individually determined base
compensation, cash incentive compensation. This program, beginning in the 1999
calendar year, provides for incentive compensation based upon achievement of
goals related to the Company, and as applicable, business divisions, with
respect to revenue and certain measures of profitability, as well as goals
related to other business plan objectives for each individual.
W:\cv\3480
<PAGE>
EXHIBIT 10.7
EXECUTIVE CHANGE OF CONTROL
PLAN
May 10, 1999
The Board of Directors (the "Board") of Grubb & Ellis Company, a Delaware
corporation (the "Company") has determined that it is in the best interests of
the Company and its stockholders to assure that the Company will have the
continued dedication of certain Executives, notwithstanding the possibility,
threat or occurrence of a Change of Control (as defined below) of the Company.
The Board believes it is imperative (i) to diminish the inevitable distraction
of the Executives by virtue of the personal uncertainties and risks created by a
pending or threatened Change of Control, (ii) to encourage the Executives' full
attention and dedication to the Company currently and in the event of any
threatened or pending Change of Control, and (iii) to provide the Executives
with compensation and benefits arrangements upon a Change of Control which
ensure that the compensation and benefits expectations of the Executives will be
satisfied and which are competitive with those of other corporations. Therefore,
in order to accomplish these objectives the Board has caused the Company to
enter into this Grubb & Ellis Company Executive Change of Control Plan (the
"Plan").
1. Certain Definitions. (a) The "Effective Date" shall mean the first
-------------------
date during the Change of Control Period (as defined in Section 1 (b)) on which
a Change of Control (as defined in Section 2) occurs. Anything in this Plan to
the contrary notwithstanding, if a Change of Control occurs, and if a former
Executive has been removed as an Executive by the Board, or if an Executive's
employment with the Company is terminated prior to the date on which the Change
of Control occurs, and if it is reasonably demonstrated by an Executive or
former Executive that such termination of employment or removal as an Executive
(i) was at the request of a third party who has taken steps reasonably
calculated to effect a Change of Control or (ii) otherwise arose in connection
with or anticipation of a Change of Control, then for all purposes of this Plan
the "Effective Date" shall mean the date immediately prior to the date of such
termination of employment or removal as an Executive.
(b) The "Change of Control Period" shall mean the period commencing
on the date hereof and ending thirty-six calendar months after the date hereof;
provided, however, that commencing on the date one year after the date hereof,
and on each annual anniversary of such date (such date and each annual
anniversary thereof shall be hereinafter referred to as the "Renewal Date"),
unless previously terminated, the Change of Control Period shall be
automatically extended so as to terminate thirty-six calendar months from such
Renewal Date, unless at least 60 days prior to the Renewal Date the Company
shall give notice to each Executive that the Change of Control Period shall not
be so extended.
(c) "Executive" shall be each executive officer of the Company as
designated by the Board.
2. Change of Control. For the purpose of this Plan, a "Change of Control"
-----------------
shall mean:
(a) The acquisition by any individual, entity or group (within the
meaning of Section 13 (d)(3) or 14(d)(2) of the Securities Exchange Act of 1934,
as amended (the
<PAGE>
"Exchange Act")) (a "Person") of beneficial ownership (within the meaning of
Rule 13d-3 promulgated under the Exchange Act) of 25% or more of either (i) the
then outstanding shares of common stock of the Company (the "Outstanding Company
Common Stock") or (ii) the combined voting power of the then outstanding voting
securities of the Company entitled to vote generally in the election of
directors (the "Outstanding Company Voting Securities"); provided, however, that
for purposes of this subsection (a), the following acquisitions shall not
constitute a Change of Control: (i) any acquisition by the Company, provided
however, that after such acquisition, the Company is not eligible for
deregistration under Section 12 of the Exchange Act; (ii) any acquisition by any
employee benefit plan (or related trust) sponsored or maintained by the Company
or any corporation controlled by the Company, provided however, that after such
acquisition, the Company is not eligible for deregistration under Section 12 of
the Exchange Act; (iii) any acquisition by any corporation pursuant to a
transaction which complies with clauses (i), (ii) and (iii) of subsection (c) of
this Section 2; or (iv) any acquisition by Warburg, Pincus Investors, L.P.
("Warburg"), The Goldman Sachs Group, L.P. ("GS Group") or C. Michael Kojaian,
Mike Kojaian and Kenneth J. Kojaian (the "Kojaian Investors") or any affiliate
thereof (collectively the "Current Investors") of additional securities beyond
their present holdings unless such acquisition results in either (x) the
termination of the Voting Agreement dated January 24, 1997 by and among the
Current Investors as in effect on the date hereof, resulting in any one of the
Current Investors obtaining the power to elect all or a majority of the
directors of the Company or (y) the Company being eligible for deregistration
under Section 12 of the Exchange Act. For purposes hereof, "affiliate" shall
include all Persons controlled by or under common control with a Current
Investor, or any trusts, partnerships or other entity for the benefit of a
Current Investor which is an individual or for the benefit of such individual's
family members; or
(b) Individuals who, as of the date hereof, constitute the Board (the
"Incumbent Board") cease for any reason to constitute at least a majority of the
Board; provided, however, that any individual becoming a director subsequent to
the date hereof whose election, or nomination for election by the Company's
shareholders, was approved by a vote of at least a majority of the directors
then comprising the Incumbent Board shall be considered as though such
individual were a member of the Incumbent Board, but excluding, for this
purpose, any such individual whose initial assumption of office occurs as a
result of an actual or threatened election contest with respect to the election
or removal of directors or other actual or threatened solicitation of proxies or
consents by or on behalf of a Person other than the Board; or
(c) Consummation of a reorganization, merger or consolidation or the
acquisition of assets of another entity (a "Business Combination"), in each
case, unless, following such Business Combination, (i) all or substantially all
of the Persons who were the beneficial owners, respectively, of the Outstanding
Company Common Stock and Outstanding Company Voting Securities immediately prior
to such Business Combination beneficially own, directly or indirectly, more than
50% of, respectively, the then outstanding shares of common stock and the
combined voting power of the then outstanding voting securities entitled to vote
generally in the election of directors, or more than 50% of the ownership
interests, as the case may be, of the corporation or other entity resulting from
such Business Combination (including, without limitation, a corporation or other
entity which as a result of such transaction owns the Company or all or
substantially all of the Company's assets either directly or through one or more
subsidiaries) in substantially the same proportions as their ownership,
immediately prior to such Business Combination, of the Outstanding Company
Common Stock and Outstanding Company Voting Securities, as the case may be, (ii)
no Person (excluding any entity resulting from such Business Combination or any
employee benefit plan (or related trust) of the Company or any entity resulting
from such Business Combination) beneficially owns, directly or indirectly, 25%
or more of, respectively, the then outstanding shares of common stock of the
corporation
2
<PAGE>
(or ownership interests of the entity) resulting from such Business Combination
or the combined voting power of the then outstanding voting securities of such
corporation (or such entity) except to the extent that such ownership existed
prior to the Business Combination and (iii) at least a majority of the members
of the board of directors of the corporation (or other such entity) resulting
from such Business Combination were members of the Incumbent Board at the time
of the execution of the initial agreement, or of the action of the Board,
providing for such Business Combination; or
(d) A substantial partial or complete liquidation or dissolution of
the Company or approval of same by the shareholders of the Company; or
(e) A sale or other disposition of all or substantially all of the
assets of the Company; or
(f) The Current Investors in the aggregate cease to own beneficially
at least 45% of the Outstanding Company Common Stock or the Outstanding Company
Voting Securities, other than by reason of an underwritten offering of shares to
the public pursuant to a registration statement under the Securities Act of
1933, as amended, provided that immediately following such sale, no Person owns
25% or more of the Outstanding Company Common Stock or the Outstanding Company
Voting Securities.
(g) Notwithstanding the foregoing, any "Rule 13e-3 transaction," as
defined in Rule 13e-3 promulgated under the Exchange Act as of the date of
adoption of this Plan which is approved in advance by a vote of at least a
majority of the directors then comprising the Incumbent Board, shall not be
deemed a Change of Control under this Plan; provided that one or more of the
Current Investors after such transaction beneficially owns, and continues to
beneficially own, at least 45% of the Outstanding Company Common Stock or the
Outstanding Company Voting Securities, or at least 45% of the voting equity
interests of any successor to the Company, and any successor to the Company in
such a transaction assumes the Company's obligations under the Plan such that a
subsequent change in control of the successor of the type contemplated in
clauses (a) through (f) of this Section 2 has the effect of a Change of Control
hereunder.
3. Employment Period. The Company shall continue the Executive in its
-----------------
employ, in accordance with the terms and conditions of this Plan, for the period
commencing on the Effective Date and ending at the end of twenty-four calendar
months after the Effective Date (the "Employment Period").
4. Terms of Employment. (a) Position and Duties.
-------------------
(i) During the Employment Period, (A) the Executive's position
(including status, offices, titles and reporting requirements), authority,
duties and responsibilities ("Duties") shall be at least commensurate in all
material respects with the most significant of those held, exercised and
assigned to the Executive at any time during the 120-day period immediately
preceding the Effective Date and (B) the Executive's services shall be performed
at the location where the Executive was employed immediately preceding the
Effective Date or any office or location less than 35 miles from the Executive's
primary residence, immediately prior to such relocation. Anything in this Plan
to the contrary notwithstanding, if a Change of Control occurs and Executive's
Duties are reduced or in any manner adversely affected prior to the date on
which the Change of Control occurs, and if it is reasonably demonstrated by the
Executive that such modification was at the request of a third party who has
taken steps
3
<PAGE>
reasonably calculated to effect a Change of Control, or (ii) otherwise arose in
connection with or anticipation of a Change of Control, then for all purposes of
this Section the Executive's Duties shall be those in effect on the date
immediately prior to such modification.
(ii) During the Employment Period, and excluding any periods of
vacation and sick leave to which the Executive is entitled, the Executive shall
devote his or her full attention and time to the business and affairs of the
Company and, to the extent necessary to discharge the responsibilities assigned
to the Executive hereunder, to use the Executive's reasonable best efforts to
perform faithfully and efficiently such responsibilities. During the Employment
Period, subject to the Company's conflicts policy, it shall not be a violation
of this Plan for the Executive to (A) serve on corporate, civic or charitable
boards or committees, (B) deliver lectures, fulfill speaking engagements or
teach at educational institutions and (C) manage personal investments, so long
as such activities do not significantly interfere with the performance of the
Executive's responsibilities as an employee of the Company in accordance with
this Plan. It is expressly understood and agreed that to the extent that any
such activities have been conducted by the Executive prior to the Effective
Date, the continued conduct of such activities (or the conduct of activities
similar in nature and scope thereto) subsequent to the Effective Date shall not
thereafter be deemed to interfere with the performance of the Executive's
responsibilities to the Company.
(b) Compensation. (i) Base Salary. During the Employment Period,
the Executive shall receive an annual base salary ("Annual Base Salary"), which
shall be paid at a monthly rate, at least equal to twelve times the highest
monthly base salary paid or payable, including any base salary which has been
earned but deferred, to the Executive by the Company and its affiliated
companies in respect of the twelve-month period immediately preceding the month
in which the Effective Date occurs. During the Employment Period, the Annual
Base Salary shall be reviewed no more than 12 months after the last salary
increase awarded to the Executive prior to the Effective Date and thereafter at
least annually. Any increase in Annual Base Salary shall not serve to limit or
reduce any other obligation to the Executive under this Plan. Annual Base Salary
shall not be reduced after any such increase and the term Annual Base Salary as
utilized in this Plan shall refer to Annual Base Salary as so increased. As used
in this Plan, the term "affiliated companies" shall include any company
controlled by, controlling or under common control with the Company.
(ii) Annual Bonus. In addition to Annual Base Salary, the
Executive shall be awarded, for each calendar year ending during the Employment
Period, an annual bonus (the "Annual Bonus") in cash at least equal to the
Executive's highest bonus under the Company's bonus plan or any comparable bonus
under any predecessor or successor plan of the Company, for the last three full
calendar years prior to the Effective Date (annualized in the event that the
Executive was not employed by the Company for the whole of such calendar year)
(the "Recent Annual Bonus"). Each such Annual Bonus shall be paid no later than
the end of the third month of the calendar year next following the calendar year
for which the Annual Bonus is awarded, unless the Executive shall elect to defer
the receipt of such Annual Bonus.
(iii) Incentive, Savings and Retirement Plans. During the
Employment Period, the Executive shall be entitled to participate in all
incentive, stock option, savings and retirement plans, practices, policies and
programs applicable generally to other peer executives of the Company and its
affiliated companies, but in no event shall such plans, practices, policies and
programs provide the Executive with incentive opportunities (measured with
respect to both regular and special incentive opportunities, to the extent, if
any, that such distinction is applicable), savings opportunities and retirement
benefit opportunities, in each case, less
4
<PAGE>
favorable in value, in the aggregate, than the most favorable of those provided
by the Company and its affiliated companies for the Executive under such plans,
practices, policies and programs as in effect at any time during the 120-day
period immediately preceding the Effective Date or if more favorable to the
Executive, those provided generally at any time after the Effective Date to
other peer executives of the Company and its affiliated companies.
(iv) Welfare Benefit Plans. During the Employment Period, the
Executive and/or the Executive's family, as the case may be, shall be eligible
for participation in and shall receive all benefits under welfare benefit plans,
practices, policies and programs provided by the Company and its affiliated
companies (including, without limitation, medical, prescription, dental,
disability, salary continuance, employee life, group life, accidental death and
travel accident insurance plans and programs) to the extent applicable generally
to other peer executives of the Company and its affiliated companies, but in no
event shall such plans, practices, policies and programs provide the Executive
with benefits which are less favorable in value, in the aggregate, than the most
favorable of such plans, practices, policies and programs in effect for the
Executive at any time during the 120-day period immediately preceding the
Effective Date or, if more favorable to the Executive, those provided generally
at any time after the Effective Date to other peer executives of the Company and
its affiliated companies.
(v) Expenses. During the Employment Period, the Executive
shall be entitled to receive prompt reimbursement for all reasonable expenses
incurred by the Executive in accordance with the most favorable policies,
practices and procedures of the Company and its affiliated companies in effect
for the Executive at any time during the 120-day period immediately preceding
the Effective Date or, if more favorable to the Executive, as in effect
generally at any time thereafter with respect to other peer executives of the
Company and its affiliated companies.
(vi) Perquisites. During the Employment Period, the Executive
shall be entitled to fringe benefits, including, without limitation, tax and
financial planning services and, if applicable, use of an automobile and payment
of related expenses, in accordance with the most favorable plans, practices,
programs and policies of the Company and its affiliated companies in effect for
the Executive at any time during the 120-day period immediately preceding the
Effective Date or, if more favorable to the Executive, as in effect generally at
any time thereafter with respect to other peer executives of the Company and its
affiliated companies.
(vii) Office and Support Staff. During the Employment Period,
the Executive shall be entitled to a similar office or offices, and to personal
secretarial and other assistance, at least equal to the most favorable of the
foregoing provided to the Executive by the Company and its affiliated companies
at any time during the 120-day period immediately preceding the Effective Date
or, if more favorable to the Executive, as provided generally at any time
thereafter with respect to other peer executives of the Company and its
affiliated companies.
(viii) Vacation. During the Employment Period, the Executive
shall be entitled to paid vacations in accordance with the most favorable plans,
policies, programs and practices of the Company and its affiliated companies as
in effect for the Executive at any time during the 120-day period immediately
preceding the Effective Date or, if more favorable to the Executive, as in
effect generally at any time thereafter with respect to other peer executives of
the Company and its affiliated companies.
5
<PAGE>
(ix) Substitution of Nonqualified Benefits. If the continued
provision of benefits to the Executive under any employee benefit plan of the
Company at the level required by this Section 4(b) would cause such employee
benefit plan to violate any minimum coverage, nondiscrimination requirement or
other requirement of any applicable provision of the Internal Revenue Code of
1986, as amended (the "Code") or the Employee Retirement Income Security Act of
1974, as amended ("ERISA"), the Company may provide the closest possible
economic equivalent of such benefit in the form of a nonqualified plan or
additional compensation.
5. Termination of Employment. (a) Death or Disability. The Executive's
-------------------------
employment shall terminate automatically upon the Executive's death during the
Employment Period. If the Company determines in good faith that Disability of
the Executive has occurred during the Employment Period (pursuant to the
definition of Disability set forth below), it may give to the Executive written
notice of its intention to terminate the Executive's employment. In such event,
the Executive's employment with the Company shall terminate effective on the
30th day after receipt of such notice by the Executive (the "Disability
Effective Date"), provided that, within the 30 days after such receipt, the
Executive shall not have returned to full-time performance of the Executive's
duties. For purposes of this Plan, "Disability" shall mean the absence of the
Executive from the Executive's duties with the Company on a full-time basis for
180 consecutive business days as a result of incapacity due to mental or
physical illness which is determined to be total and permanent by a physician
selected by the Company or its insurers and reasonably acceptable to the
Executive or the Executive's legal representative.
(b) Cause. The Company may terminate the Executive's employment
during the Employment Period for Cause. For purposes of this Plan, "Cause" shall
mean:
(i) the willful and continued failure of the Executive to
perform substantially the Executive's duties with the Company or one of its
affiliates (other than any such failure resulting from incapacity due to
physical or mental illness), after a written demand for substantial performance
is delivered to the Executive by the Board or the Chief Executive Officer of the
Company which specifically identifies the manner in which the Board or Chief
Executive Officer believes that the Executive has not substantially performed
the Executive's duties, or
(ii) the conviction of the Executive of a felony involving
moral turpitude.
For purposes of this provision, no act or failure to act, on the part of the
Executive, shall be considered "willful" unless it is done, or omitted to be
done, by the Executive in bad faith or without reasonable belief that the
Executive's action or omission was in the best interests of the Company. Any
act, or failure to act, based upon authority given pursuant to a resolution duly
adopted by the Board or upon the instructions of the Chief Executive Officer or
a senior officer of the Company or based upon the advice of counsel for the
Company shall be conclusively presumed to be done, or omitted to be done, by the
Executive in good faith and in the best interests of the Company. The cessation
of employment of the Executive shall not be deemed to be for Cause unless and
until there shall have been delivered to the Executive a copy of a resolution
duly adopted by the affirmative vote of not less than three-quarters of the
entire membership of the Board at a meeting of the Board called and held for
such purpose (after reasonable notice is provided to the Executive and the
Executive is given an opportunity, together with counsel, to be heard before the
Board), finding that, in the good faith opinion of the Board, the Executive is
guilty of the conduct described in subparagraph (i) or (ii) above, and
specifying the particulars thereof in detail.
6
<PAGE>
(c) Good Reason; Window Period. The Executive's employment may be
terminated by the Executive (i) for Good Reason or (ii) during the Window Period
for any or no reason. For purposes of this Plan, the "Window Period" shall mean
the 30-day period immediately following the first six month period after the
Effective Date. For purposes of this Plan, "Good Reason" shall mean:
(i) the assignment to the Executive of any Duties inconsistent
in any respect with the Executive's position (including status, offices, titles
and reporting requirements), authority, duties or responsibilities as
contemplated by Section 4(a) of this Plan, or any other action by the Company
which results in a diminution in such position, authority, duties or
responsibilities, excluding for this purpose an isolated, insubstantial and
inadvertent action not taken in bad faith and which is remedied by the Company
promptly after receipt of notice thereof given by the Executive;
(ii) any failure by the Company to comply with any of the
provisions of Section 4(b) of this Plan, other than an isolated, insubstantial
and inadvertent failure not occurring in bad faith and which is remedied by the
Company promptly after receipt of notice thereof given by the Executive;
(iii) the Company's requiring the Executive to be based at any
office or location other than as provided in Section 4(a)(i)(B) hereof or the
Company's requiring the Executive to travel on Company business to a
substantially greater extent than required immediately prior to the Effective
Date;
(iv) any purported termination by the Company of the Executive's
employment otherwise than as expressly permitted by this Plan; or
(v) any failure by the Company to comply with and satisfy
Section 11(c) of this Plan.
For purposes of this Section 5(c), any good faith determination of "Good Reason"
made by the Executive shall be conclusive.
(d) Notice of Termination. Any termination by the Company for Cause
or on account of Disability, or by the Executive for any or no reason during the
Window Period, or for Good Reason, shall be communicated by Notice of
Termination to the other party. For purposes of this Plan, a "Notice of
Termination" means a written notice which (i) indicates the specific termination
provision in this Plan relied upon, (ii) to the extent applicable, sets forth in
reasonable detail the facts and circumstances claimed to provide a basis for
termination of the Executive's employment under the provision so indicated and
(iii) if the Date of Termination (as defined below) is other than the date of
receipt of such notice, specifies the termination date (which date shall be not
more than thirty days after the giving of such notice). The failure by the
Executive or the Company to set forth in the Notice of Termination any fact or
circumstance which contributes to a showing of Good Reason or Cause shall not
waive any right of the Executive or the Company, respectively, hereunder or
preclude the Executive or the Company, respectively, from asserting such fact or
circumstance in enforcing the Executive's or the Company's rights hereunder.
(e) Date of Termination. "Date of Termination" means (i) if the
Executive's employment is terminated by the Company for Cause, or by the
Executive during the Window Period or for Good Reason, the date of receipt of
the Notice of Termination or any later date
7
<PAGE>
specified therein, as the case may be, (ii) if the Executive's employment is
terminated by the Company other than for Cause or Disability, the date on which
the Company notifies the Executive of such termination and (iii) if the
Executive's employment is terminated by reason of death or Disability, the date
of death of the Executive or the Disability Effective Date, as the case may be.
6. Obligations of the Company upon Termination. (a) Good Reason or
-------------------------------------------
during the Window Period; Other Than for Cause, Death or Disability. If, during
the Employment Period, the Company shall terminate the Executive's employment
other than for Cause, Death or Disability or the Executive shall terminate
employment for Good Reason or for any or no reason during the Window Period:
(i) the Company shall pay to the Executive in a lump sum in cash
within 30 days after the Date of Termination (unless the Executive elects in
writing to be paid over a period not to exceed two years after the Date of
Termination), the aggregate of the following amounts:
A. the sum of (1) the Executive's Annual Base Salary
through the Date of Termination to the extent not theretofore paid, (2) the
product of (x) the higher of (I) the Recent Annual Bonus and (II) the
Annual Bonus paid or payable, including any bonus or portion thereof which
has been earned but deferred (and annualized for any calendar year
consisting of less than twelve full months or during which the Executive
was employed for less than twelve full months), for the most recently
completed calendar year during the Employment Period, if any (such higher
amount being referred to as the "Highest Annual Bonus") and (y) a fraction,
the numerator of which is the number of days in the current calendar year
through the Date of Termination, and the denominator of which is 365 and
(3) any compensation previously deferred by the Executive other than
compensation deferred under the Company's 401(k) Plan or equivalent plan
(together with any accrued interest or earnings thereon) and any accrued
vacation pay, in each case to the extent not theretofore paid (the sum of
the amounts described in clauses (1), (2), and (3) shall be hereinafter
referred to as the "Accrued Obligations"); and
B. the amount equal to the product of (1) two and (2) the
sum of (x) the Executive's Annual Base Salary and (y) the Highest Annual
Bonus; provided however, that if the Executive shall terminate employment
during the Window Period, and not for Good Reason, then pursuant to this
Section 6(a)(i)B, Executive shall receive the amount equal to the product
of (1) two and (2) the sum of (x) the Executive's Annual Base Salary and
(y) fifty percent (50%) of the Highest Annual Bonus;
Provided however, that twenty-five percent (25%) of the
amount set forth in Section 6(a)(i)B herein shall be withheld from such
lump sum payment and shall be paid to the Executive in a lump sum in cash,
together with interest on the unpaid balance at the Fed Funds Rate (as
defined in Section 8), six months after the Date of Termination, if
Executive does not breach Section 10 herein, "Confidential Information and
Non-Competition", during such six month period.
8
<PAGE>
For purposes of this Plan, the aggregate of the amounts
described in clauses A and B of this Section 6(a)(i) shall hereafter be
referred to as the "Special Termination Amount".
(ii) for two years after the Executive's Date of Termination, or
such longer period as may be provided by the terms of the appropriate plan,
program, practice or policy, the Company shall continue benefits to the
Executive and/or the Executive's family at least equal to those which would have
been provided to them in accordance with the plans, programs, practices and
policies described in Section 4(b) (iii) and (iv) of this Plan if the
Executive's employment had not been terminated or, if more favorable to the
Executive, as in effect generally at any time thereafter with respect to other
peer executives of the Company and its affiliated companies and their families,
provided, however, that if the Executive becomes reemployed with another
employer and is eligible to receive medical or other welfare benefits under
another employer-provided plan, the medical and other welfare benefits described
herein shall be secondary to those provided under such other plan during such
applicable period of eligibility, and for purposes of determining eligibility
(but not the time of commencement of benefits) of the Executive for retiree
benefits pursuant to such plans, practices, programs and policies, the Executive
shall be considered to have remained employed until two years after the Date of
Termination and to have retired on the last day of such period; provided,
however, that if the provision of benefits under any employee benefit plan
pursuant to this Section 6(a)(ii) of this Plan would cause such plan to violate
any requirement of the Code, the provisions of Section 4(b)(ix) of this Plan
shall apply. For purposes hereof, any matching employer contribution for any
period that ends during such 24 months shall be determined as if the Executive
had made the same employee contribution during such period as he made during the
last period ending prior to or with the date of termination (or, if greater, the
actual amount of the Executive's contribution for such period). It is understood
that the provision of benefits by the Company pursuant to this Section 6(a)(ii)
shall be in addition to and not concurrent with any rights the Executive may
have to continue any such benefits as required by law, including but not limited
to COBRA. In the event that the Company does not maintain or provide any such
benefits to its employees, or in the event of a Change of Control under Section
2(d), then in lieu of providing the benefits required by this Section 6(a)(ii)
the Company shall pay the Executive the value of such benefits in a cash lump
sum. The benefits required to be provided under this Section 6(a)(ii) and
Section 6(a)(iii) shall hereafter be referred to as the "Special Benefits".
(iii) to the extent not theretofore paid or provided, the Company
shall timely pay or provide to the Executive any other amounts or benefits
required to be paid or provided or which the Executive is entitled to receive
under any plan, program, policy or practice or contract or agreement of the
Company and its affiliated companies (such other amounts and benefits shall be
hereinafter referred to as the "Other Benefits").
(b) Death. If the Executive's employment is terminated by reason of
the Executive's death during the Employment Period, this Plan shall terminate
with respect to such Executive without further obligation to the Executive's
legal representatives under this Plan, other than for payment of the Accrued
Obligations and the timely payment or provision of Other Benefits. The Accrued
Obligations shall be paid to the Executive's estate or beneficiary, as
applicable, in a lump sum in cash within 30 days of the Date of Termination.
With respect to the provision of Other Benefits, the term Other Benefits as
utilized in this Section 6(b) shall include, without limitation, and the
Executive's estate and/or beneficiaries shall be entitled to receive, benefits
at least equal to the most favorable benefits provided by the Company and
affiliated companies to the estates and beneficiaries of peer executives of the
Company and such affiliated companies under such plans, programs, practices and
policies relating to death
9
<PAGE>
benefits, if any, as in effect with respect to other peer executives and their
beneficiaries at any time during the 120-day period immediately preceding the
Effective Date or, if more favorable to the Executive's estate and/or the
Executive's beneficiaries, as in effect on the date of the Executive's death
with respect to other peer executives of the Company and its affiliated
companies and their beneficiaries.
(c) Disability. If the Executive's employment is terminated by reason
of the Executive's Disability during the Employment Period, this Plan shall
terminate with respect to such Executive without further obligation to the
Executive, other than for payment of the Accrued Obligations and the timely
payment or provision of Other Benefits. The Accrued Obligations shall be paid to
the Executive in a lump sum in cash within 30 days of the Date of Termination.
With respect to the provision of the Other Benefits, these terms as utilized in
this Section 6(c) shall include, and the Executive shall be entitled after the
Disability Effective Date to receive, disability and other benefits at least
equal to the most favorable of those generally provided by the Company and its
affiliated companies to disabled executives and/or their families in accordance
with such plans, programs, practices and policies relating to disability, if
any, as in effect generally with respect to other peer executives and their
families at any time during the 120-day period immediately preceding the
Effective Date or, if more favorable to the Executive and/or the Executive's
family, as in effect at any time thereafter generally with respect to other peer
executives of the Company and its affiliated companies and their families.
(d) Cause; Other than for Good Reason or during the Window Period. If
the Executive's employment shall be terminated for Cause during the Employment
Period, this Plan shall terminate with respect to such Executive without further
obligation to the Executive other than the obligation to pay to the Executive
(x) the Annual Base Salary through the Date of Termination, (y) the amount of
any compensation previously deferred by the Executive, and (z) Other Benefits,
in each case to the extent theretofore unpaid. If the Executive voluntarily
terminates employment during the Employment Period, excluding a termination
either for Good Reason or for any or no reason during the Window Period, this
Plan shall terminate with respect to such Executive without further obligation
to the Executive, other than for Accrued Obligations and the timely payment or
provision of Other Benefits. In such case, all Accrued Obligations shall be paid
to the Executive in a lump sum in cash within 30 days of the Date of
Termination.
7. Non-exclusivity of Rights. Nothing in this Plan shall prevent or limit
-------------------------
the Executive's continuing or future participation in any plan, program, policy
or practice (other than any severance pay plan related to a change of control of
the Company) provided by the Company or any of its affiliated companies and for
which the Executive may qualify, nor, subject to Section 12(e), shall anything
herein limit or otherwise affect such rights as the Executive may have under any
contract or agreement with the Company or any of its affiliated companies.
Amounts which are vested benefits or which the Executive is otherwise entitled
to receive under any plan, policy, practice or program of or any contract or
agreement with the Company or any of its affiliated companies at or subsequent
to the Date of Termination shall be payable in accordance with such plan,
policy, practice or program or contract or agreement except as explicitly
modified by this Plan (with the Executive's consent if the modification would be
adverse to the Executive as solely determined by the Executive).
8. Full Settlement; Legal Fees. The Company's obligation to make the
---------------------------
payments provided for in this Plan and otherwise to perform its obligations
hereunder shall not be affected by any set-off, counterclaim, recoupment,
defense or other claim, right or action which the Company may have against the
Executive or others. Neither shall the Company's rights with respect to any
claim, right or action it may have against the Executive be affected by, reduced
10
<PAGE>
or eliminated on account of its obligations under this Plan. In no event shall
the Executive be obligated to seek other employment or take any other action by
way of mitigation of the amounts payable to the Executive under any of the
provisions of this Plan and except as specifically provided in Section 6(a)
(ii), such amounts shall not be reduced whether or not the Executive obtains
other employment. The Company agrees to pay as incurred, to the full extent
permitted by law, all legal fees and expense which the Executive may reasonably
incur as a result of any contest (regardless of the outcome thereof) by the
Company, the Executive or others of the validity or enforceability of, or
liability under, any provision of this Plan or any guarantee of performance
thereof (whether such contest is between the Company and the Executive or
between either of them and any third party, and including as a result of any
contest by the Executive about the amount of any payment pursuant to this Plan),
plus in each case interest on any delayed payment at the applicable Federal rate
provided for in Section 7872(f) (2) (A) of the Code (the "Fed Funds Rate").
9. Certain Additional Payments by the Company.
------------------------------------------
(a) Anything in this Plan to the contrary notwithstanding, in the
event it shall be determined that any payment or distribution by the Company to
or for the benefit of the Executive (whether paid or payable or distributed or
distributable pursuant to the terms of this Plan or otherwise, but determined
without regard to any additional payments required under this Section 9) (a
"Payment") would be subject to the excise tax imposed by Section 4999 of the
Code because the Payment is considered a "parachute payment" under Section 280G
of the Code, or any interest or penalties are incurred by the Executive with
respect to such excise tax (such excise tax, together with any such interest and
penalties, are hereinafter collectively referred to as the "Excise Tax"), then
the Executive shall be entitled to receive an additional payment (a "Gross-Up
Payment") in an amount such that after payment by the Executive of all taxes
(including any interest or penalties imposed with respect to such taxes),
including, without limitation, any income taxes (and any interest and penalties
imposed with respect thereto) and Excise Tax imposed upon the Gross-Up Payment,
the Executive retains an amount of the Gross-Up Payment equal to the Excise Tax
imposed upon the Payments. For purposes of determining the amount of the Gross-
Up Payment, Executive shall be deemed to pay Federal income taxes at the highest
applicable marginal rate of Federal income taxation for the calendar year in
which the Gross-Up Payment is to be made and to pay any applicable state and
local income taxes at the highest applicable marginal rate of taxation for the
calendar year in which the Gross-Up Payment is to be made, net of the maximum
reduction in Federal income taxes which could be obtained from the deduction of
such state or local taxes if paid in such year (determined without regard to
limitations on deductions based upon the amount of adjusted gross income), and
to have otherwise allowable deductions for Federal, state and local income tax
purposes at least equal to those disallowed because of the inclusion of the
Gross-Up Payment in adjusted gross income. Notwithstanding the foregoing
provisions of this Section 9(a), if it shall be determined that the Executive is
entitled to a Gross-Up Payment, but that the present value as of the date of the
Change of Control, determined in accordance with Sections 280G(b)(2)(ii) and
280G(d)(4) of the Code (the "Present Value"), of the Payments does not exceed
110% of the greatest Present Value of Payments (the "Safe Harbor Cap") that
could be paid to the Executive such that the receipt thereof would not give rise
to any Excise Tax, then no Gross-Up Payment shall be made to the Executive and
the amounts payable to the Executive hereunder shall be reduced or deferred
until the Present Value of the Payments equals the Safe Harbor Cap. The
reduction or deferral of the amounts payable hereunder, if applicable, shall be
made in the manner elected by the Executive. For purposes of reducing the
Present Value of Payments to the Safe Harbor Cap, only amounts payable hereunder
(and no other Payments) shall be reduced or deferred, unless the Executive
otherwise agrees to a
11
<PAGE>
reduction or deferral of other Payments in accordance with the agreement
governing such other Payments. If the reduction of the amounts payable hereunder
would not result in a reduction of the Present Value of the Payments to the Safe
Harbor Cap, no amounts payable under this Plan shall be reduced pursuant to this
provision.
(b) Subject to the provisions of Section 9(c), all determinations
required to be made under this Section 9, including whether and when a Gross-Up
Payment is required and the amount of such Gross-Up Payment and the assumptions
to be utilized in arriving at such determination, shall be made by a nationally
recognized certified public accounting firm designated by the Executive (the
"Accounting Firm"), which shall provide detailed supporting calculations both to
the Company and the Executive within 15 business days of the receipt of notice
from the Executive that there has been a Payment, or such earlier time as is
requested by the Company. In the event that the Accounting Firm is serving as
accountant or auditor for the individual, entity or group effecting the Change
of Control, the Executive shall appoint another nationally recognized accounting
firm to make the determinations required hereunder (which accounting firm shall
then be referred to as the Accounting Firm hereunder). All fees and expenses of
the Accounting Firm shall be borne solely by the Company. Any Gross-Up Payment,
as determined pursuant to this Section 9, shall be paid by the Company to the
Executive within five days of the receipt of the Accounting Firm's
determination. Any determination by the Accounting Firm shall be binding upon
the Company and the Executive. As a result of the uncertainty in the application
of Section 4999 of the Code at the time of the initial determination by the
Accounting Firm hereunder, it is possible that Gross-Up Payments which will not
have been made by the Company should have been made ("Underpayment"), consistent
with the calculations required to be made hereunder. In the event that the
Company exhausts its remedies pursuant to Section 9(c) and the Executive
thereafter is required to make a payment of any Excise Tax, the Accounting Firm
shall determine the amount of the Underpayment that has occurred and any such
Underpayment shall be promptly paid by the Company to or for the benefit of the
Executive.
(c) The Executive shall notify the Company in writing of any claim by
the Internal Revenue Service that, if successful, would require the payment by
the Company of the Gross-Up Payment. Such notification shall be given as soon as
practicable but no later than ten business days after the Executive is informed
in writing of such claim and shall apprise the Company of the nature of such
claim and the date on which such claim is requested to be paid. The Executive
shall not pay such claim prior to the expiration of the 30-day period following
the date on which it gives such notice to the Company (or such shorter period
ending on the date that any payment of taxes with respect to such claim is due).
If the Company notifies the Executive in writing prior to the expiration of such
period that it desires to contest such claim, the Executive shall:
(i) give the Company any information reasonably requested by
the Company relating to such claim,
(ii) take such action in connection with contesting such claim
as the Company shall reasonably request in writing from time to time, including,
without limitation, accepting legal representation with respect to such claim by
an attorney reasonably selected by the Company,
(iii) cooperate with the Company in good faith in order
effectively to contest such claim, and
12
<PAGE>
(iv) permit the Company to participate in any proceedings
relating to such claim;
provided, however, that the Company shall bear and pay directly all costs and
expenses (including additional interest and penalties) incurred in connection
with such contest and shall indemnify and hold the Executive harmless, on an
after-tax basis, for any Excise Tax or income tax (including interest and
penalties with respect thereto) imposed as a result of such representation and
payment of costs and expenses. Without limitation on the foregoing provisions of
this Section 9(c), the Company shall control all proceedings taken in connection
with such contest and, at its sole option, may pursue or forgo any and all
administrative appeals, proceedings, hearings and conferences with the taxing
authority in respect of such claim and may, at its sole option, either direct
the Executive to pay the tax claimed and sue for a refund or contest the claim
in any permissible manner, and the Executive agrees to prosecute such contest to
a determination before any administrative tribunal, in a court of initial
jurisdiction and in one or more appellate courts, as the Company shall
determine; provided, however, that if the Company directs the Executive to pay
such claim and sue for a refund, the Company shall advance the amount of such
payment to the Executive, on an interest-free basis and shall indemnify and hold
the Executive harmless, on an after-tax basis, from any Excise Tax or income tax
(including interest or penalties with respect thereto) imposed with respect to
such advance or with respect to any imputed income with respect to such advance,
and further provided that any extension of the statute of limitations relating
to payment of taxes for the taxable year of the Executive with respect to which
such contested amount is claimed to be due is limited solely to such contested
amount. Furthermore, the Company's control of the contest shall be limited to
issues with respect to which a Gross-Up Payment would be payable hereunder and
the Executive shall be entitled to settle or contest, as the case may be, any
other issue raised by the Internal Revenue Service or any other taxing
authority.
(d) If, after the receipt by the Executive of an amount advanced by
the Company pursuant to Section 9(c), the Executive becomes entitled to receive
any refund with respect to such claim, the Executive shall (subject to the
Company's complying with the requirements of Section 9(c)) promptly pay to the
Company the amount of such refund (together with any interest paid or credited
thereon after taxes applicable thereto). If, after the receipt by the Executive
of an amount advanced by the Company pursuant to Section 9(c), a determination
is made that the Executive shall not be entitled to any refund with respect to
such claim and the Company does not notify the Executive in writing of its
intent to contest such denial of refund prior to the expiration of 30 days after
such determination, then such advance shall be forgiven and shall not be
required to be repaid and the amount of such advance shall offset, to the extent
thereof, the amount of Gross-Up Payment required to be paid.
10. Confidential Information and Non-Competition. (a) The Executive shall
--------------------------------------------
hold in a fiduciary capacity for the benefit of the Company all secret or
confidential information, knowledge or data relating to the Company or any of
its affiliated companies, and their respective businesses, which shall have been
obtained by the Executive during the Executive's employment by the Company or
any of its affiliated companies and which shall not be or become public
knowledge (other than by acts by the Executive or representatives of the
Executive in violation of this Plan). After termination of the Executive's
employment with the Company, the Executive shall not, without the prior written
consent of the Company or as may otherwise be required by law or legal process,
communicate or divulge any such information, knowledge or data to anyone other
than the Company and those designated by it. In no event shall an asserted
violation of the provisions of this Section 10 constitute a basis for deferring
or withholding any amounts otherwise payable to the Executive under this Plan.
13
<PAGE>
(b) If upon termination the Executive receives the Special
Termination Amount, the Special Benefits and the Other Benefits, then for six
months after the Date of Termination, Executive shall not: (i) solicit, directly
or indirectly, or attempt to influence the Company's clients with the purpose or
effect of diverting their business away from the Company; and (ii) solicit,
directly or indirectly, any of the Company's employees or sales professionals to
leave the Company and associate with a competitor of the Company. Twenty-five
percent (25%) of the Special Termination Amount, the Special Benefits and the
Other Benefits received by Executive shall be allocated to this non-competition
section (the "Allocation"). If Executive breaches this Section 10(b), Executive
shall forfeit any amounts appropriately withheld pursuant to the proviso set
forth in Section 6(a)(i)B and shall repay any balance of the Allocation to the
Company, and the Company may pursue any other remedies available to it at law or
in equity for such breach.
11. Successors. (a) The benefits under the Plan are personal to the
----------
Executive and without the prior written consent of the Company shall not be
assignable by the Executive otherwise than by will or the laws of descent and
distribution. This Plan shall inure to the benefit of and be enforceable by and
binding upon the Executive's heirs and legal representatives.
(b) The obligations of the Company under the Plan shall be binding on
the Company and its successors and assigns.
(c) The Company will require any successor (whether direct or
indirect, by purchase, merger, consolidation or otherwise) to all or
substantially all of the business and/or assets of the Company to assume
expressly and agree to perform this Plan in the same manner and to the same
extent that the Company would be required to perform it if no such succession
had taken place. As used in this Plan, "Company" shall mean the Company as
hereinbefore defined and any successor to its business and/or assets as
aforesaid which assumes and agrees to perform this Plan by operation of law, or
otherwise.
12. Miscellaneous. (a) This Plan shall be governed by and construed in
-------------
accordance with the laws of the State of Illinois without reference to
principles of conflict of laws, except to the extent pre-empted by federal law.
The captions of this Plan are not part of the provisions hereof and shall have
no force or effect. This Plan may not be amended, modified or terminated
otherwise than by a written agreement approved by the Board of Directors and
executed by an authorized officer or director of the Company and each affected
Executive or their respective successors and legal representatives.
(b) The invalidity or unenforceability of any provision of this Plan
shall not affect the validity or enforceability of any other provision of this
Plan.
(c) The Company may withhold from any amounts payable under this Plan
such Federal, state, local or foreign taxes as shall be required to be withheld
pursuant to any applicable law or regulation.
(d) The Executive's or the Company's failure to insist upon strict
compliance with any provision hereof or any other provision of this Plan or the
failure to assert any right the Executive or the Company may have hereunder,
including, without limitation, the right of the Executive to terminate
employment for Good Reason or for any or no reason during the Window Period,
shall not be deemed to be a waiver of such provision or right or any other
provision or right of this Plan.
14
<PAGE>
(e) Except as may otherwise be provided under any other written
agreement between the Executive and the Company, the employment relationship
between the Executive and the Company is "at will" and, prior to the Effective
Date, except as otherwise provided in this Plan, the Executive's employment may
be terminated by either the Executive or the Company at any time prior to the
Effective Date, in which case the Executive shall have no further rights under
this Plan. From and after the Effective Date this Plan shall supersede any other
agreement currently in place between the Company and any Executive with respect
to treatment of an Executive in the event of a Change of Control. Except as
modified by this Plan, Executive's employment with the Company is subject to all
Company policies governing employees of the Company as in effect from time to
time, including but not limited to, the Employee Handbook and the expense
policy.
(f) All rights under this Plan shall at all times be entirely
unfunded, and no provision shall at any time be made with respect to segregating
any assets of the Company for payment of any amounts due hereunder. The
Executive, his or her spouse and beneficiaries shall only have the rights of
general unsecured creditors of the Company.
(g) As and when each Executive signs an acknowledgment agreement to
participate in this Plan, then this Plan shall constitute a valid and binding
Employment Agreement between each such Executive and the Company.
By its Board of Directors, the Company has caused the Plan to be adopted as
of the day and year first above written.
By: /s/ Reuben S. Leibowitz
--------------------------------------------------
On behalf of the Board
Authorized Officer or Director
15
<PAGE>
Exhibit 21
SUBSIDIARIES OF THE REGISTRANT
------------------------------
SUBSIDIARIES OF GRUBB & ELLIS COMPANY
NAME AND STATE OF
- -------- --------
TRADE NAMES (if any) INCORPORATION
- -------------------- -------------
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. California
Grubb & Ellis New York, Inc. New York
Trade name: James Felt Realty Services
Grubb & Ellis Institutional Properties, Inc. California
Grubb & Ellis of Nevada, Inc. Nevada
Grubb & Ellis of Michigan, Inc. Delaware
Trade name: Grubb & Ellis Company
Grubb & Ellis of Oregon, Inc. Washington
Grubb & Ellis Realty Advisers, Inc. California
Landauer Realty Group, Inc. 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 Name: White Commercial Real Estate, a
Company of Grubb & Ellis Property Solutions Worldwide
<PAGE>
SUBSIDIARIES OF GRUBB & ELLIS MANAGEMENT SERVICES, INC.
NAME AND STATE OF
- -------- --------
TRADE NAMES (if any) INCORPORATION
- -------------------- -------------
Crane Realty & Management Co. California
Grubb & Ellis Management Services of Canada, Inc. Ontario, Canada
Grubb & Ellis Management Services of Colorado, Inc Colorado
Trade Name: Grubb & Ellis Management Services, Inc.
Grubb & Ellis Management Services of Michigan, Inc. Michigan
Trade Name: Grubb & Ellis Management Services, Inc.
SUBSIDIARIES OF CRANE REALTY & MANAGEMENT CO.
NAME AND STATE OF
- -------- --------
TRADE NAMES (if any) INCORPORATION
- -------------------- -------------
Crane Realty Services, Inc. California
SUBSIDIARIES OF GRUBB & ELLIS MANAGEMENT SERVICES OF CANADA, INC.
NAME AND STATE OF
- -------- --------
TRADE NAMES (if any) INCORPORATION
- -------------------- -------------
Grubb & Ellis Facilities Services of Canada, Inc. Ontario, Canada
SUBSIDIARIES OF HSM INC.
NAME AND STATE OF
- -------- --------
TRADE NAMES (if any) INCORPORATION
- -------------------- -------------
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
<PAGE>
Exhibit 23.1
Consent of Independent Auditors
We consent to the incorporation by reference in the Registration Statement (Form
S-8 No. 333-67729) pertaining to the Grubb & Ellis Company Deferred Compensation
Plan, the Registration Statement (Form S-8 No. 333-73331) pertaining to the
Grubb & Ellis 1998 Stock Option Plan and the 1993 Stock Option Plan for Outside
Directors of Grubb & Ellis Company, 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 23, 1999, with respect to the financial
statements of Grubb & Ellis Company included in the Annual Report (Form 10-K)
for the year ended June 30, 1999.
/s/ Ernst & Young LLP
Chicago, Illinois
September 23, 1999
<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 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 1999 fiscal year and any and all amendments or supplements thereto, and any
and all instruments or documents filed as part of or in conjunction with such
Annual Report or amendments or supplements 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 16th day of
September, 1999.
/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 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, 1999 and any and all
amendments or supplements thereto, and any and all instruments or documents
filed as part of or in conjunction with such Annual Report or amendments or
supplements thereto, and hereby ratifies all that said attorneys or any of them
may do or cause to be done by virtue hereof.
This instruments may be executed in a number of identical counter parts,
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 16th day of
September, 1999.
/s/ R. David Anacker /s/ Reuben S. Leibowitz
- ------------------------- ------------------------
R. David Anacker Reuben S. Leibowitz
/s/ Lawrence S. Bacow /s/ Robert J. McLaughlin
- ------------------------- -------------------------
Lawrence S. Bacow Robert J. McLaughlin
/s/ Joe F. Hanauer /s/ Thomas E. Meador
- ------------------------- -------------------------
Joe F. Hanauer Thomas E. Meador
/s/ C. Michael Kojaian /s/ John D. Santoleri
- ------------------------- -------------------------
C. Michael Kojaian John D. Santoleri
/s/ Sidney Lapidus /s/ Neil R. Young
- ------------------------- -------------------------
Sidney Lapidus Neil R. Young
/s/ Todd A. Williams
- -------------------------
Todd A. Williams
<TABLE> <S> <C>
<PAGE>
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THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COINSOLIDATED 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-30-1999
<PERIOD-START> JUL-01-1998
<PERIOD-END> JUN-30-1999
<CASH> 5,500
<SECURITIES> 0
<RECEIVABLES> 12,143
<ALLOWANCES> 2,662
<INVENTORY> 0
<CURRENT-ASSETS> 24,770
<PP&E> 37,642
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<TOTAL-ASSETS> 79,793
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<COMMON> 199
<OTHER-SE> 44,283
<TOTAL-LIABILITY-AND-EQUITY> 79,793
<SALES> 0
<TOTAL-REVENUES> 315,023
<CGS> 0
<TOTAL-COSTS> 151,592
<OTHER-EXPENSES> 150,674
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 702
<INCOME-PRETAX> 12,055
<INCOME-TAX> 3,976
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