<PAGE>
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2000
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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Commission File Number: 1-8122
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GRUBB & ELLIS COMPANY
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(Exact name of registrant as specified in its charter)
Delaware 94-1424307
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2215 Sanders Road, Suite 400,
Northbrook, IL 60062
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(Address of principal executive offices)
(Zip Code)
(847) 753-7500
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(Registrant's telephone number, including area code)
No Change
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(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
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19,929,822
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(Number of shares outstanding of the registrant's
common stock at November 1, 2000)
<PAGE>
PART I
FINANCIAL INFORMATION
2
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Item 1. Financial Statements
GRUBB & ELLIS COMPANY
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
(unaudited)
Assets
<TABLE>
<CAPTION>
September 30, June 30,
2000 2000
------------ ---------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 22,138 $ 17,862
Services fees receivable, net 18,016 17,060
Other receivables 4,402 3,416
Prepaids and other current assets 5,313 4,477
Deferred tax assets, net 1,075 1,132
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Total current assets 50,944 43,947
Noncurrent assets:
Equipment, software and leasehold
improvements, net 21,174 20,501
Goodwill, net 29,123 29,559
Deferred tax assets, net 2,976 3,133
Other assets 6,131 6,095
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Total assets $110,348 $103,235
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 8,938 $ 9,554
Acquisition indebtedness - 519
Accrued compensation and employee benefits 17,098 14,316
Deferred commissions payable 5,585 1,097
Other accrued expenses 4,881 6,578
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Total current liabilities 36,502 32,064
Long-term liabilities:
Accrued claims and settlements 8,778 8,741
Other liabilities 835 810
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Total liabilities 46,115 41,615
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Stockholders' equity:
Common stock, $.01 par value: 50,000,000
shares authorized; issued and outstanding
19,881,727 shares at September 30, 2000
and 19,810,894 shares at June 30, 2000 198 198
Additional paid-in-capital 113,494 113,399
Retained earnings (deficit) (49,459) (51,977)
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Total stockholders' equity 64,233 61,620
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Total liabilities and stockholders' equity $110,348 $103,235
======== ========
</TABLE>
See notes to condensed consolidated financial statements.
3
<PAGE>
GRUBB & ELLIS COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except share data)
(unaudited)
<TABLE>
<CAPTION>
For the Three Months
Ended September 30,
-----------------------------
<S> <C> <C>
2000 1999
----------- -----------
Revenue:
Advisory services fees $ 90,997 $ 80,332
Management services fees 15,370 14,869
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Total revenue 106,367 95,201
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Costs and expenses:
Services commissions 57,675 47,697
Salaries, wages and benefits 24,795 23,789
Selling, general and administrative 17,107 15,907
Depreciation and amortization 2,876 2,298
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Total costs and expenses 102,453 89,691
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Total operating income 3,914 5,510
Other income and expenses:
Interest and other income 426 251
Interest expense (30) (192)
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Income before income taxe 4,310 5,569
Provision for income taxes 1,792 2,228
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Net income $ 2,518 $ 3,341
=========== ===========
Net income per common share:
Basic - $ 0.13 $ 0.17
=========== ===========
Diluted - $ 0.12 $ 0.16
=========== ===========
Weighted average common shares outstanding:
Basic - 19,855,920 19,851,208
=========== ===========
Diluted - 21,019,631 21,071,963
=========== ===========
</TABLE>
See notes to condensed consolidated financial statements.
4
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GRUBB & ELLIS COMPANY
Condensed Consolidated Statements of Cash Flows
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
For the three months ended
September 30,
--------------------------
2000 1999
-------- ---------
<S> <C> <C>
Cash Flows from Operating Activities
Net income $ 2,518 $ 3,341
Net adjustments to reconcile net income to net cash
provided by operating activities 4,520 10,980
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Net cash provided by operating activities 7,038 14,321
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Cash Flows from Investing Activities:
Purchases of equipment, software and leasehold improvements (2,338) (3,044)
Cash paid for business acquisitions, net of cash acquired - (829)
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Net cash used in investing activities (2,338) (3,873)
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Cash Flows from Financing Activities:
Repayment of acquisition indebtedness (519) (1,633)
Repayment of credit facility indebtedness - (4,500)
Other financing sources (uses) 95 (946)
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Net cash used in financing activities (424) (7,079)
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Net increase in cash and cash equivalents 4,276 3,369
Cash and cash equivalents at beginning of period 17,862 5,500
-------- --------
Cash and cash equivalents at end of period $ 22,138 $ 8,869
======== ========
</TABLE>
See notes to condensed consolidated financial statements.
5
<PAGE>
GRUBB & ELLIS COMPANY AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
1. Interim Period Reporting
The accompanying unaudited condensed consolidated financial statements include
the accounts of Grubb & Ellis Company and its wholly owned subsidiaries and
controlled partnerships (collectively, the "Company") and are prepared in
accordance with accounting principles generally accepted in the United States
for interim financial information and with the instructions to Form 10-Q and
Article 10 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by accounting principles generally accepted
in the United States for complete financial statements and, therefore, should be
read in conjunction with the Company's Annual Report on Form 10-K for the year
ended June 30, 2000.
The financial statements have been prepared in conformity with accounting
principles generally accepted in the United States which require management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities (including disclosure of contingent assets and liabilities) at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
In the opinion of management, all adjustments necessary for a fair statement of
the financial position and results of operations for the interim periods
presented have been included in these financial statements and are of a normal
and recurring nature. Certain amounts in prior periods have been reclassified to
conform to the current presentation.
Operating results for the three months ended September 30, 2000 are not
necessarily indicative of the results that may be achieved in future periods.
In December 1999, the Securities and Exchange Commission ("SEC") staff issued
Staff Accounting Bulletin ("SAB") No. 101, "Revenue Recognition," which
summarized the SEC staff's views regarding the recognition and reporting of
revenues in financial statements and requires companies to comply with the SAB
not later than the fourth fiscal quarter of the fiscal year beginning after
December 15, 1999, which for the Company would be the quarter ending June 30,
2001. Based upon current estimates, the Company would record a charge to income
of approximately $5.3 million, before applicable taxes, representing the
cumulative change as of July 1, 2000. SAB 101 will impact the timing of leasing
revenue recognition as the Company will be precluded from recognizing revenue
when contingencies exist relating to the performance of third parties to the fee
arrangement. Such contingencies generally include a tenant's future occupancy or
the commencement of rental payments by the tenant. Although the adoption of SAB
101 may impact the period in which leasing transaction revenues are recognized,
it is not expected to impact the timing of the Company's cash flow from
operations. The Company has not completed its analysis of the impact of SAB 101
for periods subsequent to June 30, 2000.
2. Income Taxes
The provision for income taxes for the three months ended September 30, 2000 and
1999 is as follows (in thousands):
<TABLE>
<CAPTION>
For the three months ended
September 30,
--------------------------
2000 1999
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<S> <C> <C>
Current $1,579 $ 390
Deferred 213 1,838
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$1,792 $2,228
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</TABLE>
6
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GRUBB & ELLIS COMPANY AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
3. Earnings Per Share
The following table sets forth the computation of basic and diluted earnings per
share (in thousands, except per share data):
<TABLE>
<CAPTION>
For the three months ended
September 30,
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2000 1999
------------------------------
<S> <C> <C>
Net income $ 2,518 $ 3,341
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Basic earnings per share:
Weighted average common shares outstanding 19,856 19,851
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Earnings per share - basic $ 0.13 $ 0.17
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Diluted earnings per share:
Weighted average common shares outstanding 19,856 19,851
Effect of dilutive securities:
Stock options and warrants 1,164 1,221
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Weighted average dilutive common shares
outstanding 21,020 21,072
============= =============
Earnings per share - diluted $ 0.12 $ 0.16
============= =============
</TABLE>
7
<PAGE>
GRUBB & ELLIS COMPANY AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
4. Segment Information
The Company has two reportable segments - Advisory Services and Management
Services, and evaluates segment performance and allocates resources based on
earnings before interest expense, taxes, depreciation and amortization
("EBITDA") (Amounts in thousands).
<TABLE>
<CAPTION>
Advisory Management Company
Services Services Totals
------------------- ------------------- -------------------
<S> <C> <C> <C>
Three months ended September 30, 2000
Total revenue $90,997 $15,370 $106,367
EBITDA 6,130 1,086 7,216
Total assets as of September 30, 2000 87,323 23,025 110,348
Three months ended September 30, 1999
Total revenue $80,332 $14,869 $ 95,201
EBITDA 7,380 679 8,059
Total assets as of September 30, 1999 61,609 22,129 83,738
</TABLE>
Reconciliation of Segment EBITDA to Income
<TABLE>
<CAPTION>
Three months ended September 30,
-----------------------------------------------
2000 1999
--------------------- ---------------------
<S> <C> <C>
Total segment EBITDA $7,216 $8,059
Less:
Depreciation & amortization 2,876 2,298
Interest expense 30 192
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Income before income taxes $4,310 $5,569
===================== =====================
</TABLE>
8
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GRUBB & ELLIS COMPANY AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
5. Commitments and Contingencies
Litigation:
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. The
defendants include HSM Inc., a wholly-owned subsidiary of the Company, and
several subsidiaries of HSM Inc., along with other parties unrelated to HSM
Inc. The complaint alleges violation under the Racketeer Influenced 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 were sought. Following the court's
dismissal of the complaint by Partnerships I and III due to the plaintiff's
lack of standing, in September 1996, the district court granted plaintiff's
motion to file an amended complaint to add additional plaintiffs, and
granted plaintiffs' motion for class certification with respect to
Partnerships I, II and III. Plaintiffs then filed an amended complaint
adding new party plaintiffs in order to preserve claims relating to
Partnerships I and III. The case was stayed in September 1996, pending the
outcome of defendants' subsequent appeal to the United States Court of
Appeals for the Third Circuit on the question of the applicability of the
Private Securities Litigation Reform Act of 1995 (the "Securities
Litigation Reform Act") to the case. The Third Circuit Court of Appeals
entered an order in November 1998 holding that the Securities Litigation
Reform Act was not applicable to this case and that plaintiffs may proceed
with their RICO claims against the defendants. Defendants filed a petition
for writ of certiorari with the United States Supreme Court appealing the
Third Circuit's decision, which was denied on April 19, 1999. Discovery has
been completed.
On August 18, 2000, the district court issued an opinion granting
defendants' motions for summary judgment dismissing the federal RICO claims
as time-barred under the statute of limitations. As to the state law
claims for breach of fiduciary duty and negligent misrepresentation, the
court declined to exercise supplemental jurisdiction and dismissed them
without prejudice. The court declined to rule on defendants' motion to
decertify the class because it was moot. Plaintiffs have filed a notice of
appeal to the Third Circuit Court of Appeals.
The Company has, and intends to continue 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.
Environmental:
A corporate subsidiary of the Company owns a 33% interest in a general
partnership, which in turn owns property in the State of Texas which is the
subject of an environmental assessment and remediation effort, due to the
discovery of certain chemicals related to dry cleaning solvents in the soil and
groundwater of the property. Prior assessments had determined that minimal costs
would be incurred to correct the situation. However, new findings at and around
the site have increased the probability that additional remediation costs will
be necessary. The partnership is working with the Texas Natural Resource
Conservation Commission to agree upon an appropriate remediation plan. The
9
<PAGE>
partnership and the Company subsidiary are not able, at the time of this report,
to estimate a range of costs related to the cleanup effort. The Company's
management believes that the outcome of these events will not have a material
adverse effect on the consolidated financial position of the Company.
General:
The Company is involved in various claims and lawsuits arising out of the
conduct of its business, as well as in connection with its participation in
various joint ventures and partnerships, many of which may not be covered
by the Company's insurance policies. In the opinion of management, the
eventual outcome of such claims and lawsuits is not expected to have a
material adverse effect on the Company's financial position or results of
operations.
10
<PAGE>
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
NOTE REGARDING FORWARD-LOOKING STATEMENTS
This report contains forward-looking statements which may involve known and
unknown risks, uncertainties and other factors that may cause the actual
results, performance or achievements of the Company in future periods to be
materially different from any future results, performance or achievements
expressed or implied by these statements. Such factors which could
adversely affect the Company's ability to obtain these results include,
among other things, (i) the volume of transactions and prices for real
estate in the real estate markets generally, (ii) a general or regional
economic downturn which could create a recession in the real estate
markets, (iii) the Company's debt level and its ability to make interest
and principal payments, (iv) an increase in expenses related to new
initiatives, investments in personnel and technology, and service
improvements, (v) the success of new initiatives and investments, (vi) the
ability of the Company to integrate acquired companies and assets, and
(vii) other factors described in the Company's Annual Report on Form 10-K
for the fiscal year ended June 30, 2000.
RESULTS OF OPERATIONS
Revenue
The Company's revenue is derived principally from advisory services fees
related to commercial real estate, which include commissions from leasing,
acquisition and disposition transactions as well as fees from valuation,
consulting and asset management assignments. Management services fees
comprise the remainder of the Company's revenues, and include fees related
to both property and facilities management outsourcing, engineering and
construction management services, business services and agency leasing.
Revenue in any given quarter during the three fiscal year period ended June
30, 2000, as a percentage of total annual revenue, ranged from a high of
31.4% to a low of 19.1%, with revenue earned in the first quarters of each
of the last three fiscal years ranging from 22.0% to 24.2%. 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 ended June 30 and September 30, and its highest quarterly revenue
in the quarter ending December 31, due to increased activity caused by the
desire of clients to complete transactions by calendar year-end.
Total revenue for the three months ended September 30, 2000 was $106.4
million, an increase of 11.7% over revenue of $95.2 million for the same
period last year. This improvement related to a $10.7 million increase in
advisory services fees in the current fiscal quarter over the same period
in 1999 as a result of increased activity in the technology markets, the
Company's multi-market relationships, larger assignments and the continuing
increase in average production per professional. Management service fees
increased to $15.4 million during the quarter ended September 30, 2000 as
compared to $14.9 million in the prior year. New business revenue gained
during the quarter was mostly offset due to the Company resigning a
marginally profitable account, which had generated approximately $3.0
million in revenue annually.
Costs and Expenses
Advisory services commission expense is the Company's major expense and is
a direct function of gross transaction revenue levels, which include
advisory service commissions and other fees. Professionals participate in
advisory services fees at rates which increase upon achievement of certain
levels of production. As a percentage of gross transaction revenue,
related commission expense increased to 63.4% for the quarter ended
September 30, 2000 as compared to 59.4% for the same period in 1999.
Unusually high average commission expense has been incurred in flourishing
technology markets such as Silicon Valley, San Francisco, Denver,
Washington D.C. and New York, and has resulted from strong incremental
revenue growth in these markets, rather than changes to the existing
compensation structure of the Company's advisory professionals.
11
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Salaries, wages and benefits increased by $1.0 million or 4.2% in the
quarter ended September 30, 2000 as compared to September 30, 1999, while
selling, general and administrative expenses increased by $1.2 million, or
7.5%, for the same period. The rise in these operating costs is
attributable partially to the operating and integration costs associated
with Landauer Associates, Inc., acquired in the first quarter of fiscal
year 2000, along with additional costs and expenses required to support the
overall revenue growth of the Company.
Depreciation and amortization expense for the quarter ended September 30,
2000 increased to $2.9 million from $2.3 million in the comparable period
last year, as the Company placed in service numerous technology
infrastructure improvements during the first half of fiscal year 2000. The
Company also holds multi-year service contracts with certain key advisory
professionals, the costs of which are being amortized over the lives of the
respective contracts, which are generally two to three years. Amortization
expense relating to these contracts of $679,000 was recognized in the
quarter ended September 30, 2000 compared to $479,000 for the same period
in the prior year. In previously filed financial statements, these costs
were included in advisory services commissions expense, and have been
reclassified for comparative purposes for the prior period presented.
Net Income
Net income for the three months ended September 30, 2000 was $2.5 million,
or $0.12 per common share on a diluted basis, as compared to net income of
$3.3 million, or $0.16 per common share for the same period in fiscal year
2000. The decrease was due primarily to higher average commission expense
related to the technology markets, along with the continued integration
costs resulting from the acquisition of Landauer Associates, Inc.
LIQUIDITY AND CAPITAL RESOURCES
The Company generated cash flow from operations of $7.0 million, of which
$2.3 million was used in investing activities, primarily for purchases of
equipment, software and leasehold improvements, and $0.4 million was used
in financing activities, primarily to repay acquisition debt. Working
capital also increased by $2.6 million during the quarter ended September
30, 2000.
In August 1999 the Company announced a program through which it may
purchase up to $3 million of its common stock on the open market from time
to time as market conditions warrant. As of September 30, 2000 the Company
had repurchased 359,900 shares at a total cost of approximately $1,983,000.
No shares were repurchased during the quarter ended September 30, 2000.
The Company believes that its short-term and long-term operating cash
requirements will be met by operating cash flow. In addition, the
Company's credit facility is available for additional capital needs. In
the event of adverse economic conditions or other unfavorable events, and
to the extent that the Company's cash requirements are not met by operating
cash flow or borrowings under its credit facility, the Company may find it
necessary to reduce expenditure levels or undertake other actions as may be
appropriate under the circumstances.
Although the current market conditions have limited opportunities for
short-term accretive acquisitions, the Company continues to explore
additional strategic acquisition opportunities that have the potential to
broaden its geographic reach, increase its market share and/or expand the
depth and breadth of its current line 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, or a combination of the
above. No assurances can be made that any additional acquisitions will be made.
12
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PART II
OTHER INFORMATION
(Items 2 through 5 are not applicable
for the quarter ended September 30, 2000)
13
<PAGE>
Item 1. Legal Proceedings
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The disclosure called for by Item 1 is incorporated by reference to Note 5 of
Notes to Condensed Consolidated Financial Statements.
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibits
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(3) Articles of Incorporation and Bylaws
3.1 Certificate of Incorporation of the Registrant, as restated November 1,
1994, incorporated herein by reference to Exhibit 3.2 to the
Registrant's Annual Report on Form 10-K filed on March 31, 1995
(Commission File No. 1-8122).
3.2 Certificate of Retirement with Respect to 130,233 Shares of Junior
Convertible Preferred Stock of Grubb & Ellis Company, filed with the
Delaware Secretary of State on January 22, 1997, incorporated herein by
reference to Exhibit 3.3 to the Registrant's Quarterly Report on
Form 10-Q filed on February 13, 1997 (Commission File No. 1-8122).
3.3 Certificate of Retirement with Respect to 8,894 Shares of Series A
Senior Convertible Preferred Stock, 128,266 Shares of Series B Senior
Convertible Preferred Stock, and 19,767 Shares of Junior Convertible
Preferred Stock of Grubb & Ellis Company, filed with the Delaware
Secretary of State on January 22, 1997, incorporated herein by reference
to Exhibit 3.4 to the Registrant's Quarterly Report on Form 10-Q filed
on February 13, 1997 (Commission File No. 1-8122).
3.4 Grubb & Ellis Company Bylaws, as amended and restated effective June 1,
1994, incorporated herein by reference to Exhibit 3.2 to the
Registrant's Quarterly Report on Form 10-Q filed on November 13, 1996
(Commission File No. 1-8122).
(27) Financial Data Schedule.
(b) Reports on Form 8-K
-------------------
None.
14
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
GRUBB & ELLIS COMPANY
---------------------
(Registrant)
Date: November 14, 2000 /s/ Blake W. Harbaugh
-------------------------------------
Blake W. Harbaugh
Senior Vice President and
Chief Financial Officer
15
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Grubb & Ellis Company and Subsidiaries
EXHIBIT INDEX
for the quarter ended September 30, 2000
----------------------------------------
Exhibit
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(27) Financial Data Schedule
16
