-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: keymaster@town.hall.org Originator-Key-Asymmetric: MFkwCgYEVQgBAQICAgADSwAwSAJBALeWW4xDV4i7+b6+UyPn5RtObb1cJ7VkACDq pKb9/DClgTKIm08lCfoilvi9Wl4SODbR1+1waHhiGmeZO8OdgLUCAwEAAQ== MIC-Info: RSA-MD5,RSA, PhZpeJ/UWdt13Ztpk6cVoHeOFmF0Y3UHVnzxZEFlwrc5uIan0ntsayey8Q+rPiUN lFFucsCBJub26G1BdKVukA== 0000912057-94-002366.txt : 19940801 0000912057-94-002366.hdr.sgml : 19940801 ACCESSION NUMBER: 0000912057-94-002366 CONFORMED SUBMISSION TYPE: 10-K/A PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19931231 FILED AS OF DATE: 19940722 FILER: COMPANY DATA: COMPANY CONFORMED NAME: GRUBB & ELLIS CO CENTRAL INDEX KEY: 0000216039 STANDARD INDUSTRIAL CLASSIFICATION: 6531 IRS NUMBER: 941424307 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K/A SEC ACT: 1934 Act SEC FILE NUMBER: 001-08122 FILM NUMBER: 94539818 BUSINESS ADDRESS: STREET 1: ONE MONTGOMERY ST-STE3100 STREET 2: TELESIS TWR 9TH FLR CITY: SAN FRANCISCO STATE: CA ZIP: 94104 BUSINESS PHONE: 4159561990 MAIL ADDRESS: STREET 1: ONE MONTGOMERY ST-STE 3100 STREET 2: TELESIS TWR 9TH FLR CITY: SAN FRANCISCO STATE: CA ZIP: 94104 10-K/A 1 FORM 10-K/A UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K/A (Amendment No. 2) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (FEE REQUIRED) For the fiscal year ended December 31, 1993 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED) For the transition period from to ---------- ---------- Commission file number 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.) One Montgomery Street, - Telesis Tower, San Francisco, CA 94104 ------------------------ (Address of principal, executive offices) (Zip Code) (415)956-1990 ---------------------------------------------------- (Registrant's telephone number, including area 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 Stock 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 ----- ----- The aggregate market value of voting common stock held by nonaffiliates of the registrant as of March 1, 1994 was approximately $12,270,000. The number of shares outstanding of the registrant's common stock as of March 1, 1994 was 4,060,628 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 (December 31, 1993) are incorporated by reference into part III. 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. [] Total Pages: Exhibit Index: GRUBB & ELLIS COMPANY FORM 10-K TABLE OF CONTENTS PAGE ---- COVER PAGE 1 TABLE OF CONTENTS 2 Part I. Item 1. Business 3 Item 2. Properties 7 Item 3. Legal Proceedings 8 Item 4. Submission of Matters to a Vote of Security Holders 8 Part II. Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters 8 Item 6. Selected Financial Data 9-10 Item 7. Management's Discussion and Analysis of Financial 11-21 Condition and Results of Operations Item 8. Financial Statements and Supplementary Data 22-54 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 55 Part III. Item 10. Directors and Executive Officers of the Registrant 56 Item 11. Executive Compensation 60 Item 12. Security Ownership of Certain Beneficial Owners and Management 73 Item 13. Certain Relationships and Related Transactions 76 Part IV. Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K 78-83 INDEX OF FINANCIAL STATEMENTS AND SCHEDULES 78 SIGNATURES 84-85 EXHIBIT INDEX 91 2 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 and majority owned subsidiaries (the "Company") provide real estate services. Such services include commercial brokerage, residential brokerage, property and facilities management (through its wholly owned operations and majority owned subsidiary, Axiom Real Estate Management, Inc. ("Axiom")) and other services which are offered to real estate owners, investors and tenants. Based on revenue, the Company is one of the largest commercial real estate services companies in the United States. Through Axiom, the Company is also one of the largest property management firms in the country with approximately 75 million square feet of property under management. Additionally, the Company has for a number of years provided mortgage brokerage, appraisal, consultation and asset management services. As of the year ended December 31, 1993, the Company had 105 offices in 61 cities in 17 states and the District of Columbia, with approximately 1,400 real estate agents, 900 non-agent employees and 1,400 Axiom property management staff (the cost of the property management staff is substantially reimbursed by clients). Additionally, the Company maintains informal business relationships with full-service real estate firms in England, France, Italy, Germany, the Netherlands, Asia and the Pacific Basin for purposes of client business referral. In 1992, the Company also formed an alliance for purposes of client business referral with Mexus Services Corporation ("Mexus"), a firm specializing in providing consulting services to U.S. firms seeking to do business in Mexico. In 1993, commercial brokerage was the major source of revenue for the Company, followed by property management, residential brokerage, and appraisal and consulting services. The balance of the Company's revenue was derived from real estate investment advisory and other services. The Company believes that commercial brokerage is likely to continue to be its major source of revenue for the foreseeable future. BUSINESS DEVELOPMENT AND STRATEGY Having established operations in California, Arizona, Colorado, Washington and Hawaii from 1958 through 1980, the Company proceeded to develop a national network of commercial brokerage offices, primarily by purchasing established real estate services firms in selected markets during the period from 1981 through 1986. The acquisitions have enabled the Company to provide diversified services to multi-regional and national clients. This strategy also resulted in a significant increase in the Company's level of fixed costs and overhead. Most of the acquired companies no longer use their original company names and are identified solely as Grubb & Ellis Company. In 1990, in response to adverse real estate market conditions, the Company closed 15 offices in locations judged to be non-strategic. In 1991, the 3 Company closed four additional offices and also sold its Texas residential operations. In January 1992, the Company sold its Georgia residential operations, leaving California as its sole focus for residential business at that time. In April 1992, the Company reached an agreement with Better Homes and Gardens to become a residential Area Development Alliance Partner in Southern California. Under the terms of this agreement, the Company continues to provide residential services, but national and regional marketing support is provided to both agents and customers by Better Homes and Gardens. Effective September 1, 1992, the Company formed Axiom, a property and facilities management joint venture with International Business Machines Corporation ("IBM"). The purpose of the joint venture is to provide commercial property management real estate services, third-party and corporate facilities management on a nationwide basis. The Company holds a 74% interest, and IBM owns 26% of Axiom. Additional shares of Axiom's common stock have been reserved for the issuance of equity incentives to management. In connection with the joint venture, IBM Credit Corporation and Axiom entered into a Master Financing Agreement under which Axiom borrowed approximately $700,000 and may borrow a maximum additional amount of approximately $2,050,000. The Company has also entered into a credit agreement with Axiom pursuant to which Axiom borrowed approximately $1,550,000. This amount was funded by property management receivable collections, and the Company has no further obligation to fund additional amounts to Axiom. As a consequence of the establishment of the joint venture, IBM added approximately 17 million square feet of management contracts to the Company's existing portfolio. Effective January 1994, Axiom closed certain offices pursuant to its strategic objectives, and the Company, independent of Axiom, resumed property management services in some of those locations. From 1990 to late 1992, the Company actively pursued equity financing to strengthen its liquidity and meet its short- and long-term working capital needs, as the severe economic recession had hindered its ability to meet debt principal and interest obligations to The Prudential Insurance Company of America ("Prudential"). On January 29, 1993, the stockholders of the Company approved a proposal for restructuring the debt and equity of the Company (the "Recapitalization"), which involved a cash investment of $12,850,000 by Warburg, Pincus Investors, L.P., a Delaware limited partnership ("Warburg"), and $900,000 by Joe F. Hanauer ("Hanauer"), a private investor who became Chairman of the Board of the Company. The investment was made in exchange for convertible preferred stock and warrants to purchase common stock and the renegotiation of the Company's indebtedness of approximately $40 million to Prudential, including the conversion of approximately $15 million of that indebtedness into convertible preferred stock and warrants to purchase common stock. As a result of the Recapitalization, and giving effect to the sale of a total of 1,193 shares of preferred stock and 9,570 warrants by Warburg and Hanauer to Wilbert F. Schwartz, President and Chief Executive Officer of the Company, Warburg and Hanauer together held approximately 38.9% and Prudential held approximately 25.6% of the Company's equity on a fully diluted basis but before exercise of outstanding warrants at December 31, 1993. Upon the possible future exercise of all outstanding warrants, Warburg and Hanauer together held approximately 43.3% and Prudential held approximately 24.6% of the Company's equity on a fully diluted basis at December 31, 1993. In February 1993, the Company completed the sale of the real estate advisory business of Grubb & Ellis Realty Advisers, Inc., a wholly owned subsidiary of the Company, to a privately held concern. In early March 1993, the Company sold its Northern California residential real estate brokerage operations. The sale included 13 residential real estate 4 offices located throughout Northern California as well as a relocation office. Under the terms of the sale, most of the approximately 400 employees and salespersons of the Company's Northern California residential operations became employees of the purchaser. Also, in October 1993, the Company's residential mortgage services operations in Northern California were closed. Southern California residential operations currently remain the Company's only residential brokerage and residential mortgage service operations. Effective February 1994, the Company closed unprofitable appraisal and consulting offices in Dallas, Phoenix and Atlanta. Having streamlined its operations in response to recessionary business conditions and restructured its capital base, management currently intends to expand its business by focusing its marketing efforts on coordinating institutional and governmental property dispositions, enhancing its investment brokerage capabilities, obtaining additional national accounts as a service provider to major corporations seeking to outsource real estate services, expanding its property management services, and providing enhanced support tools and training to its commercial offices nationwide (see Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations", and Note 1 of Notes to the Consolidated Financial Statements). During March 1994, the Company substantially completed negotiations to amend its debt agreements with Prudential to modify certain financial covenants and defer principal payments. The agreements also provide a financing commitment from Warburg for a $10 million interim loan which is expected to be retired in connection with a proposed sale of rights to acquire common stock of the Company (see Notes 1 and 5 of Notes to the Consolidated Financial Statements). LINES OF BUSINESS (See Item 7 "Management's Discussion and Analysis of Financial Condition and Results of Operations".) COMMERCIAL BROKERAGE The Company acts as a sales or leasing agent for commercial properties, which include office, industrial, retail and hotel properties, as well as undeveloped land. Properties range in size and type from single, free-standing locations to multi-level, mixed-use projects. Offices are typically located in or near major metropolitan areas. In 1993, the Company realigned its previous six-region structure to form four commercial brokerage regions: Pacific Southwest (Southern California and Arizona); Pacific Northwest (Washington, Oregon and Northern California); Midwest/Texas (Colorado, Illinois, Michigan, Ohio and Texas); and Eastern (Connecticut, Florida, Georgia, Massachusetts, New York, New Jersey, Pennsylvania, Virginia and Washington D.C.). Effective March 1994, to enhance operating efficiencies and reduce expenses, the Company reorganized its operations into three regions from four regions, combining its Midwest/Texas and Eastern regions under the direction of one regional president. Commercial brokerage comprised approximately 72% of the Company's total revenue for the year ended December 31, 1993. At December 31, 1993, the Company had approximately 1,030 commercial salespersons. The majority of commercial brokerage salespersons, who are primarily leasing agents, focus their activities on one type of commercial property (office, industrial or retail) in a specific market area. Most of the Company's other commercial salespersons broker the sale of commercial investment property or undeveloped land. Most salespersons are independent contractors with the Company, although in certain offices, salespeople are hired as employees. 5 RESIDENTIAL BROKERAGE The Company's residential brokerage operations are focused on sales of homes in higher-priced neighborhoods located in Southern California. The Company also provides relocation services through its network of offices and through membership in two national residential referral associations. Commissions from residential brokerage constituted approximately 10% of the Company's total revenue for the year ended December 31, 1993. The Company had 11 residential brokerage offices in Southern California with approximately 360 residential salespersons at December 31, 1993. Since 1989, the Company has emphasized its mortgage origination capability from its residential offices through Grubb & Ellis Mortgage Services, Inc. ("GEMS"), a wholly owned subsidiary of the Company engaged in residential mortgage brokerage activities. By year-end 1993, these activities continued solely in Southern California. MANAGEMENT AND CONSULTING SERVICES In 1993, management and consulting services included the Company's property management operations, appraisal, consulting, and asset services. PROPERTY MANAGEMENT Substantially all of the Company's facilities and property management services are conducted through Axiom, which managed approximately 75 million square feet of property, including approximately 24 million square feet of IBM facilities as of December 31, 1993. The Company provides property and facilities management services to owners of office, retail, industrial and multi-family residential real estate. These services include tenant relations, facilities and construction management, financial reporting and analysis, and engineering consultation. Property management clients include pension funds, developers, financial institutions, corporate and individual owners and syndicators. The principal markets for the Company's property management services are in Connecticut, Colorado, Georgia, Illinois, New Jersey, New York, Ohio, Pennsylvania, and Washington, D.C. Property and facilities management fees constituted approximately 11% of the Company's total revenue for the year ended December 31, 1993. APPRAISAL AND CONSULTING The Company offers appraisal and consulting services through offices in California, Colorado, Illinois, Ohio and New York. Most of these offices are located within commercial brokerage services offices. Appraisal and consulting services primarily include valuation of single properties and real estate portfolios, expert witness testimony, market and feasibility studies and investment analysis. ASSET SERVICES Grubb & Ellis Asset Services Company ("GEASC"), a wholly owned subsidiary of the Company, was formed to coordinate the delivery of the Company's services to federal agencies and financial institutions with troubled real estate assets. The subsidiary is also responsible for overseeing the Company's auction partnership with the Ross-Dove Company and overseeing and assuring compliance with rules and regulations that must be observed by firms offering services to federal agencies. Prior to September 1993, the Company and its subsidiary, Grubb & Ellis Asset Services Company ("GEASC"), provided services to the Resolution Trust company (the "RTC") and the Federal Deposit Insurance Corporation (the "FDIC"). As a result of Prudential's current stock ownership 6 and certain of its rights under the Stockholders' Agreement, Prudential may be deemed to be a related entity to the Company under RTC regulation. The Company, upon learning that Prudential was party to a lawsuit with the FDIC, voluntarily refrained from entering into new RTC contracts on the basis that if Prudential is deemed to be a related party with the Company, the existence of the lawsuit might impair the Company's and GEASC's ability to contract with the RTC and the FDIC. OTHER SERVICES Other revenue is derived from commercial mortgage brokerage operations and from the Company's partnership and joint venture activities. Partnership and joint venture activities are not a significant portion of the Company's business, and the Company does not anticipate expansion of activity in this area. COMPETITION Although the Company ranks among the largest national commercial real estate services organizations in the United States in terms of revenue, the real estate brokerage industry is fragmented and highly competitive. Thus, the Company's most significant competition in a particular market may be one or both of the other two national firms, and/or regional and local firms, in any combination. In addition, companies not previously engaged primarily in the real estate services business, but with substantial financial resources, now provide real estate or real estate-related services. For example, certain insurance companies, Wall Street investment firms and major real estate developers participate in more traditional commercial brokerage activities. As a result of the recessionary economy and depressed real estate markets in much of the country, a number of real estate services firms have decreased their size and/or left the business entirely during the last three years. Real estate companies may compete on the pricing of services, service delivery capability (for example, the ability to deliver multiple services to a client or the ability to deliver the same services in a number of different markets) and/or proven record of success. ENVIRONMENTAL REGULATIONS 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 and/or sale of real estate. Additionally, new or modified regulations could develop in a manner which have not, but could, adversely affect the Company's commercial brokerage and property management operations. The Company believes it is in compliance in all material respects with all environmental laws or regulations applicable to its operations. SEASONALITY The Company has typically experienced its lowest quarterly revenue in the first quarter of each year with higher and more consistent revenue in the second and third quarters. The fourth quarter has historically provided the highest quarterly level of revenue due to increased activity caused by the desire of clients to complete transactions by year-end. However, quarterly revenue variations have not been significant over the last three years. Revenue in any given quarter, as a percentage of total annual revenue, ranged from a high of 29.2% to a low of 19.8%, as adjusted to eliminate the effect of sold operations. ITEM 2. PROPERTIES 7 Inapplicable. ITEM 3. LEGAL PROCEEDINGS The information called for by Item 3 is included in Note 9 of Notes to the Consolidated Financial Statements under Item 8 of this Report, which Note is incorporated herein by reference. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The principal markets for the Company's common stock are the New York and Pacific Stock Exchanges. The following table sets forth the high and low sales prices of the Company's common stock on the New York Stock Exchange for each quarter of 1993 and 1992, as restated to reflect the one-for-five reverse stock split which occurred January 29, 1993 (see Notes 1 and 5 of Notes to the Consolidated Financial Statements).
1993 1992 ------------------------- -------------------------- High Low High Low ----------- ---------- ------------ ---------- First Quarter $ 8 $ 1 7/8 $ 12 1/2 $ 6 7/8 Second Quarter 5 7/8 3 3/8 10 5/8 6 1/4 Third Quarter 4 1/2 2 3/4 8 1/8 5 Fourth Quarter 3 5/8 2 5/8 6 1/4 4 3/8
As of March 1, 1994, there were 2,563 registered holders of the Company's common stock. No cash dividends were declared on the Company's common or preferred stock in 1993 or 1992. Any dividend payments with respect to the common stock will be subject to the restrictions in certain debt agreements with Prudential. The agreements restrict the payment of cash dividends on and repurchases of the Company's common stock, depending upon the amount of the consolidated net income of the Company during designated periods. 8 ITEM 6. SELECTED FINANCIAL DATA Five-year Comparison of Selected Financial and Other Data for the Company
For the Years Ended December 31 -------------------------------- (in thousands except per share amounts and shares) -------------------------------------------------- 1993 1992 1991 1990 1989 ---- ---- ---- ---- ---- Revenue $ 201,724 $ 224,163 $ 268,634 $ 321,360 $ 362,030 Net (loss) income $ (18,208) $ (59,676) $ (49,297) $ (29,751) $ 521 Undeclared dividends (accretion of liquid- ation preference) on preferred stock $ (2,196) -- -- -- -- Net (loss) earnings applicable to common stockholders $ (20,404) $ (59,676) $ (49,297) $ (29,751) $ 521 (Loss) earnings per common shares and equivalents $ (5.08) $ (3.40) $ (2.95) $ (1.82) $ 0.03 Weighted average common shares and equivalents 4,019,795 17,546,513 16,682,858 16,389,526 16,364,763 Cash dividends per common share -- -- -- -- -- Retroactive effect of one-for-five reverse stock split as a result the January 29, 1993 Recapitalization (see Notes 1 and 5 to the Consolidated Financial Statements): (Loss) earnings per common share and equivalents $ (5.08) $ (17.01) $ (14.77) $ (9.08) $ 0.16 Weighted average common shares and equivalents 4,019,795 3,509,303 3,336,572 3,277,905 3,272,953
Loss and per share data reported on the above table reflect expenses related to special charges and unusual items in the amounts of $13.5 million in 1993, $44.9 million in 1992, $37.0 million in 1991 and $18.0 million in 1990. See discussion in "Management's Discussion and Analysis of Financial Condition and Results of Operations". 9 Five Year Comparison of Selected Financial and Other Data for the Company
At December 31 -------------- 1993 1992 1991 1990 1989 ---- ---- ---- ---- ---- (in thousands except per share amounts, shares and staff data) Total assets $ 42,185 $ 44,672 $ 81,805 $ 126,982 $ 159,460 Working capital (deficit) $ (17,842) $ (33,273) $ 3,523 $ 12,591 $ 25,264 Long-term liabilities $ 30,648 $ 36,370 $ 44,015 $ 43,994 $ 44,361 Redeemable convertible preferred stock $ 29,900 -- -- -- -- Common stockholders' equity (deficit) $ (68,867) $ (51,458) $ 6,466 $ 55,531 $ 84,110 Book value per common share $ (16.96) $ (2.86) $ 0.39 $ 3.35 $ 5.19 Common shares outstanding 4,060,271 18,007,481 16,758,016 16,564,858 16,221,563 Total staff 3,720 4,602 5,089 6,737 7,058 Retroactive effect of one -for -five reverse stock split as a result of the January 29, 1993 recapita- lization (see Notes 1 and 5 to the Consolidated Financial Statements): Book value per common share $ (16.96) $ (14.29) $ 1.93 $ 16.76 $ 25.93 Common shares outstanding 4,060,271 3,601,496 3,351,603 3,312,972 3,244,313
10 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS OVERVIEW The Company's business and financial condition during the past four years has been substantially impaired due to the general economic recession and a severe decline in activity levels and prices within the commercial and residential real estate sector. During 1993, the Company's revenue was derived substantially from commercial brokerage activities. Property management, residential, appraisal, consulting and other real estate services fees provided the majority of the remaining revenue. The decrease in 1993 revenue from 1992 levels was due to the sale of the Company's real estate advisory business and Northern California residential brokerage operations in February and March of 1993, respectively. In 1993, the Company continued to downsize and restructure its operations to lower costs in response to the new management's strategic direction for the Company. Special charges and unusual items, relating primarily to downsizing and restructuring, amounted to $13.5 million in 1993. This amount is comprised of $10.1 million related to the write-off of goodwill, $2.9 million related to severance and costs, and $500,000 of other items. On January 29, 1993, the Company's stockholders approved and the Company closed a restructuring of its debt and equity with Warburg, Hanauer and Prudential (the "Recapitalization"). The Recapitalization included a one-for-five reverse stock split and reduction in the par value of the common stock from $1.00 to $.01 per share (see Notes 1 and 5 of Notes to the Consolidated Financial Statements). 11 LINES OF BUSINESS The following table shows revenue and operating loss by line of business for the years ended December 31, 1993, 1992 and 1991 and identifiable assets for the years ended December 31, 1993 and 1992 (in thousands):
(1) (2) (3) Brokerage Other Operations Operations Corporate Consolidated ---------- ---------- -------- ------------ 1993 Revenue $173,266 $ 27,858 $ 600 $201,724 Operating Loss (8,125) (2,328) (7,755) (18,208) Identifiable Assets 11,930 5,641 24,614 42,185 1992 Revenue 195,532 28,183 448 224,163 Operating Loss (18,896) (10,270) (30,510) (59,676) Identifiable Assets 24,935 4,135 15,602 44,672 1991 Revenue 235,791 30,953 1,890 268,634 Operating Loss (37,367) (523) (11,407) (49,297) (1) Includes commercial and residential real estate, and mortgage brokerage services. The operating loss amounts include special charges and unusual items in the amounts of $10.3 million in 1993, $14.5 million in 1992, and $33.3 million in 1991. (2) Includes property management, construction management, appraisal and consulting, and real estate asset management and advisory services. The operating loss amounts include special charges and unusual items in the amounts of $1.8 million in 1993, $7.9 million in 1992, and $703,000 in 1991. (3) Includes corporate administration, investments in property partnerships and joint ventures, and interest income and expenses. The operating loss amounts include special charges and unusual items in the amounts of $1.4 million in 1993, $22.5 million in 1992, and $3.0 million in 1991.
1993 COMPARED TO 1992 REVENUE Total 1993 revenue was $201.7 million, a decrease of 10.0% from $224.2 million in 1992. The decrease was the result of the sales of the Northern California residential brokerage operations and real estate advisory services during the first quarter of 1993. Excluding these operations, revenue was $198.3 million in 1993 compared to $188.9 million in 1992, representing an increase of 5.0% from 1992. Revenue from commercial brokerage offices increased in 1993 by $4.9 million or 3.5% from 1992. This is the first year-to-year increase in revenue from the commercial brokerage operations since 1988. Increases in revenue occurred in the Midwest/Texas, Eastern and Pacific Southwest regions, offset by a decline in revenue in the Pacific Northwest region. 12 The Company's residential brokerage business reported a decline in revenue of $28.7 million or 58.2% from 1992, due to the sale of the Company's Northern California residential brokerage business. The Northern California residential brokerage operations contributed $3.4 million to 1993 revenue compared to revenue of $33.1 million in 1992. Revenue from the remaining Southern California residential brokerage operations increased by 6.0% to $17.2 million from 1992. The increase in revenue was attributable to increased residential buyer activity resulting primarily from lower interest rates during 1993. Revenue from mortgage brokerage operations increased $1.6 million or 22.7% in 1993 as compared to 1992. Revenue from commercial mortgage brokerage operations increased by approximately $700,000 or 29.6% from 1992, and residential mortgage brokerage revenue increased approximately $900,000 or 19.2% from 1992. COSTS AND EXPENSES Real estate brokerage commissions and other commission expense (salespersons' participation) is the Company's major expense and is contingent upon gross brokerage commission revenue levels. Salespersons' participation expense as a percentage of revenue decreased from 52.3% in 1992 to 49.7% in 1993. The decrease in participation as a percentage of revenue is primarily the result of the sale of the Northern California residential brokerage operations. Total operating expenses, other than salespersons' participation expense, of $119.1 million for 1993 decreased by 28.3% from $166.1 million in 1992. The decrease in expenses primarily resulted from a decrease in special charges and unusual items (see discussion below) to $13.5 million in 1993 from $44.9 million incurred in 1992. Additionally, expenses decreased in 1993 as compared to 1992 as a result of the sales of the Northern California residential brokerage operations and real estate advisory operations. Total operating expenses, excluding expenses from the real estate advisory operations and Northern California residential brokerage operations, and the special charges and unusual items, decreased by 3.8% or $4.1 million from 1992. This reduction in operating expenses is attributable to management's continued effort to aggressively reduce fixed overhead expenses by closing unprofitable field offices and streamlining operations. Special charges and unusual items were first incurred in 1990 in an effort to reposition the Company to operate more efficiently in response to recessionary market conditions. The continued weakening in certain sectors of the real estate economy since 1989 had resulted in further decreased revenue. During late 1992 and early 1993, the Company completed the Recapitalization and retained a new executive management team. New management reevaluated the Company's business strategy and determined that a variety of restructuring and recapitalization efforts were necessary in order for the business to continue as a going concern. These restructuring efforts have included downsizing operations and focusing the Company's activities on its core business functions, as well as realigning the operational structure into a more centralized operation with less middle management. Recapitalization efforts have included the restructuring of the Company's debt and the infusion of cash by Warburg and Hanauer (see Notes 1 and 5 of Notes to the Consolidated Financial Statements). Other restructuring plans include additional investments in training, computer systems and other resources which are expected to improve future profits. 13 The Company's evaluation of the carrying value of goodwill for 1991, 1992 and 1993 was significantly impacted by a continuation of the recessionary cycle and the severe downturn in the real estate markets. Goodwill associated with certain acquisitions was written down in 1991 and 1992 because the Company's analysis of the future activity of those operations indicated permanent impairment; these entities were acquired during a period of rapid expansion during the 1980's when real estate activity was at increased levels and profit margins were substantially higher than those found in the market today. In 1990, in response to adverse real estate market conditions, the Company closed 15 offices in locations judged to be non-strategic. In 1991, the Company closed four additional offices and also sold its Texas residential operations. In January 1992, the Company sold its Georgia residential operations, leaving California as its sole focus for residential business at that time. As of December 31, 1992, all of the remaining unamortized goodwill was associated with the commercial brokerage operation. The Company's analysis of goodwill performed in the fourth quarter of 1993 indicated that the commercial brokerage business would operate at a loss without the planned restructuring and recapitalization efforts and would, therefore, be unable to recover goodwill. Accordingly, the remaining goodwill was written off as of December 31, 1993. As part of new management's comprehensive reevaluation of the Company's business strategy discussed above, as of December 31, 1993, the Company determined that it will close certain offices and terminate certain employees. Accordingly, as of December 31, 1993, the Company has accrued for the expected costs that result from this strategic decision. Based on historical operating results, the Company expects that future operating results will be positively impacted by approximately $1.7 million per annum as a result of restructuring. The Company began implementation of these restructuring efforts during the first quarter of 1994, and expects them to be substantially complete by December 31, 1994. The related lease termination and other miscellaneous office closing costs, net of expected sublease income, have been accrued. Approximately $3.5 million of these costs, comprised primarily of lease costs and severance, are expected to be paid in cash (net of amounts expected to be received in cash), while $443,000 represents non-cash write-downs and write-offs of equipment and leasehold improvements and other asset and liability balances. Severance costs are expected to be paid during 1994 and 1995, while office closure costs, net of expected sublease income, are expected to be incurred over the next eight years (see Note 9 of Notes to the Consolidated Financial Statements regarding expected future minimum lease obligations and sublease income). The funding of these cash requirements is expected to come from the new Warburg loan commitment and subsequent rights offering (see Note 1 of Notes to the Consolidated Financial Statements), and cash flow from operations. Consequently, in response to management's strategy discussed above, special charges and unusual items of $13.5 million and $44.9 million were recorded in the fourth quarters of 1993 and 1992, respectively. The 1993 charges include goodwill write-off of $10.1 million, office closure and severance costs of $2.9 million, and other charges of $500,000. The 1992 charges include $16.2 million in reserves for legal claims and settlements which did not recur in 1993 (see Note 10 of the Notes to Consolidated Financial Statements). Payments made in 1993 against this reserve did not have a material adverse effect on the Company's financial condition or results of operations. 14 INCOME TAXES The 1993 provision for income taxes is $575,000 compared with $605,000 in 1992. The provision relates to state and local taxes assessed on profitable subsidiaries of the Company. Effective January 1, 1993, the Company adopted Statement of Financial Accounting Standard (SFAS) No. 109, Accounting for Income Taxes, which was issued in February, 1992. SFAS No. 109 supersedes SFAS No. 96, Accounting for Income Taxes, which was adopted by the Company in January, 1987, and changes the criteria for recognition and measurement of deferred tax assets. As permitted under the Statement, the Company has elected not to restate the financial statements of prior quarters. The cumulative effect of the change and the effect of the change on pretax income for the year ended December 31, 1993 is not material. NET LOSS The net loss for 1993 was $18.2 million compared to a net loss of $59.7 million for the previous year. Net loss per common share was $5.08 in 1993 compared to a net loss per common share of $17.01 in 1992, giving effect to the one-for-five reverse stock split resulting from the Recapitalization. Losses in 1993 and 1992 were primarily the result of the special charges and unusual items of $13.5 million and $44.9 million, respectively. STOCKHOLDERS' DEFICIT During 1993, stockholders' deficit increased by $17.4 million from 1992 and book value decreased from $(14.29) per common share, giving effect to the one-for- five reverse stock split, to $(16.96) per common share, as a direct result of the loss from operations and special charges and unusual items. 1992 COMPARED TO 1991 REVENUE From 1989 through 1992, the Company experienced a continual decline in revenue, substantially as a result of the severely depressed real estate market. Revenue decreased in 1992 by 16.5% or $44.4 million from $268.6 million in 1991 to $224.2 million in 1992. Revenue from the brokerage line of business decreased from 1991 by 17.1% or $40.3 million due primarily to the sale of the Company's Texas and Georgia residential brokerage operations in mid-1991 and early 1992, respectively. Commercial brokerage revenue for 1992 decreased from 1991 by $2.5 million or 1.8%. Increases in commercial real estate brokerage revenue from 1991 occurred in the Midwest, Eastern and Texas regions, which were offset by declines in revenue in the Western region. The Company's residential brokerage business reported an overall decline in revenue of 41.1% or $37.7 million from 1991 due to the sale of the Company's Texas and Georgia residential brokerage operations. These operations contributed $38.2 million of revenue during 1991. California residential brokerage revenue of $54.0 million increased by $487,000 or 0.9% from 1991. This increase was attributable to residential mortgage brokerage operations which contributed $4.2 million of revenue during 1992, an increase of 33.2% or $1.1 million from 1991. The improved revenue from residential mortgage 15 brokerage operations was due to increased activity in the refinancing of residential mortgages resulting from record low interest rates. The Northern California residential real estate brokerage operations, which were sold during March 1993, contributed $33.1 million in revenue in 1992 and $31.3 million in revenue in 1991. Revenue in 1992 from other lines of business was $2.8 million or 8.9% less than in 1991. Declines in revenue were primarily a result of decreased property management and appraisal and consulting fees. Property management revenue declined due to a reduction in the number of properties under management. The decrease in appraisal and consulting revenue was primarily due to a reorganization and consolidation of operations in the New York appraisal office, which resulted in fewer appraisal staff and clients in that market. 1992 corporate revenue decreased from 1991 by $1.4 million due to declines in interest income, as less cash was available for investment at lower interest rates, as well as to decreases in income from partnerships and joint ventures. COSTS AND EXPENSES Salespersons' participation expense as a percentage of revenue increased from 51.5% in 1991 to 52.3% in 1992. The increase in participation as a percentage of revenue was primarily the result of a decision by management to freeze the 1991 year-end commission brackets for top producers in order to improve retention. Total operating expenses of $283.2 million for 1992 decreased by 10.8% from $317.5 million in 1991. Expenses related to the Texas and Georgia residential brokerage operations were $36.9 million in 1991. Total operating expenses, excluding expenses from the Texas and Georgia residential brokerage operations and the special charges and unusual items (discussed below), decreased by 2.2% or $5.3 million. This reduction in operating expenses was attributable to closing unprofitable field offices and streamlining operations in response to declines in revenue. Operating expenses from the brokerage line of business decreased in 1992 from 1991 by $58.7 million, primarily as a result of the sales of Texas and Georgia residential operations. Additionally, special charges and unusual items of $14.5 million and $33.3 million were included in brokerage operating expenses in 1992 and 1991, respectively (see discussion below). Operating expenses, excluding expenses from Texas and Georgia residential, and excluding special charges and unusual items, decreased in 1992 by $3.0 million or 1.5% from 1991. Operating expenses from other lines of business increased from 1991 by $7.0 million or 22.2% due to increases in special charges and unusual items of $7.2 million over 1991 (see discussion below). In 1992, corporate expenses increased from 1991 by $17.5 million. The increase consisted of $22.5 million in special charges and unusual items (discussed below), offset in part by decreases in other operating expenses during 1992 of $2.3 million or 22.4% from 1991. 16 Management's strategy resulted in special charges and unusual expense items of $44.9 million in the fourth quarter of 1992 and $37.0 million in 1991. In 1992, these charges included reserves of $2.8 million for the continued decline in net realizable value of properties held in joint ventures and partnerships, and office closure and severance costs of $6.1 million. These charges also included goodwill write-down of $18.9 million due to permanent value impairment of certain acquisitions made from 1982 to 1986. The $18.9 million goodwill write- down in 1992 relates to ten entities which were determined to have suffered permanent impairment of value due to significant changes in the operating environments of the entities and the current strategic plans and direction of management. In 1991, these charges included reserves of $2.8 million for the decline in value of properties held in joint ventures and partnerships, office closure and severance costs of $4.4 million, and $29.5 million of goodwill write-down. The $29.5 million goodwill write-down in 1991 includes $8.3 million in goodwill of three entities for which the conclusion was reached during the fourth quarter of 1991 that closure or spin-off was appropriate, and $21.2 million in goodwill for six entities for which impairment was indicated at December 31, 1991. The determination of impairment of goodwill was based upon an evaluation of deteriorating operating results, future business plans and budgets, economic projections for the real estate industry, and an evaluation of various non-financial data. Additionally, the 1992 special charges and unusual items include $16.2 million in reserves for claims and settlements in connection with several significant lawsuits as well as potential professional liability exposure arising from the Company's salesforce (see Notes 9 and 10 of the Notes to Consolidated Financial Statements). Other charges of $900,000 and $270,000 were recorded in 1992 and 1991, respectively. INCOME TAXES The 1992 provision for income taxes is $605,000 compared with $445,000 in 1991. The provision relates to state and local taxes assessed on profitable subsidiaries of the Company. NET LOSS The net loss for 1992 was $59.7 million compared to a net loss of $49.3 million for the previous year. Net loss per common share was $3.40 in 1992 compared to a net loss per common share of $2.95 in 1991. Giving effect to the one-for-five reverse stock split resulting from the Recapitalization, net loss per common share was $17.01 in 1992 compared to a net loss per common share of $14.77 in 1991. Losses in 1992 and 1991 were primarily the result of the special charges and unusual items of $44.9 million and $37.0 million, respectively. The 1992 operating loss from the brokerage operations was $18.9 million compared to a 1991 loss of $37.4 million. The 1992 operating loss was attributable to special charges and unusual items (discussed above) of $14.5 million, as well as to continued declines in revenue from commercial and residential real estate brokerage operations. The operating loss of $37.4 million in 1991 included $33.3 million in special charges and unusual items (discussed above). Operating losses from the Company's other lines of business were $10.3 million in 1992 compared to $523,000 in 1991. The 1992 loss was due to approximately 17 $7.9 million in special charges as well as declines in property management and appraisal and consulting fees (all discussed above). LIQUIDITY AND CAPITAL RESOURCES During 1993, the working capital deficit decreased to a deficit of $17.8 million from a deficit of $33.3 million at December 31, 1992, primarily attributable to the Recapitalization. Adjustments to reconcile net loss to net cash used by operating activities in 1993 include a write-down of goodwill of $10.1 million, $2.9 million of office closure and severance costs, $500,000 of other special charges and unusual items, $2.3 million of depreciation and amortization charges, a $3.9 million decrease in real estate brokerage commissions receivable, and a $2.4 million increase in other asset accounts. The Company realized cash proceeds of approximately $2.2 million from the sale of the Northern California residential operations, approximately $1.2 million from the sale of the real estate advisory operation, and approximately $400,000 from the sale of various properties owned by partnerships in Texas in which the Company has interests. Real estate brokerage commissions receivable, net of salespersons' participation and allowance for uncollectible accounts, decreased approximately $3.9 million as of December 31, 1993 compared to December 31, 1992, a result of increased collections of outstanding receivables, and the write-off of receivables the Company deems no longer collectible. In November 1986, the Company received $35 million from the sale of $10 million in Senior Notes and $25 million in Subordinated Notes to Prudential. Additionally, in February 1991, the Company fully utilized a $5 million, two- year revolving line-of-credit from Prudential (the "1991 Revolving Line of Credit") which was due February 1993. On January 29, 1993, in connection with the Recapitalization, Prudential canceled $15 million of the outstanding Subordinated Notes in exchange for 150,000 shares of 5% Junior Convertible Preferred Stock and warrants exercisable for 200,000 shares of common stock at an exercise price of $5.50 per share (giving effect to the reverse stock split). Prudential also canceled the remaining $10 million of Subordinated Notes in exchange for $10 million of 10.65% Payment-In-Kind notes, which were reduced to approximately $9,080,000 when Prudential exercised its warrants to purchase 397,549 shares of common stock at an exercise price of $7.30 (giving effect to the reverse stock split). Approximately $1,982,000 of accrued interest payable to Prudential was also canceled in conjunction with the exercise of this warrant. The 1992 $2 million principal payment on $10 million of Senior Notes was deferred until 1995 and 1996. During 1993, Prudential allowed a deferral of the $2 million payment due November 1, 1993, until May 1, 1994. Additionally, the $5 million 1991 Revolving Line of Credit was exchanged for a $5 million Revolving Credit Note due December 31, 1994, exchangeable for a two-year term loan due December 31, 1996. The debt agreements with Prudential limit the Company's ability to pay dividends and contain additional restrictions on the making of acquisitions, loans, investments, debt and sales of assets. The Company is also required to maintain a defined working capital ratio. As of December 31, 1993, the Company did not meet the ratio requirement, and was in violation of certain other covenants. However, Prudential provided a waiver of these covenants as of December 31, 1993. 18 Also in connection with the Recapitalization, the Company issued to Warburg and Hanauer 137,160 shares of 12% Senior Convertible Preferred Stock, five-year warrants to purchase 500,000 and 200,000 shares of common stock at exercise prices of $5.00 and $5.50 per share, respectively, and five-year warrants to purchase up to 400,000 shares of common stock, which become exercisable at a formula price only in the event the Company incurs a defined liability in excess of $1.5 million ("contingent warrants"), all in exchange for $13,750,000 in cash. On July 1, 1993, Warburg and Hanauer sold 1,193 shares of Senior Convertible Preferred Stock, five-year warrants to purchase 4,350 and 1,740 shares at $5.00 and $5.50 per share, respectively, and contingent warrants to purchase 3,480 shares of common stock to Wilbert F. Schwartz, President and Chief Executive Officer of the Company. See Notes 5 and 9 of Notes to the Consolidated Financial Statements regarding Company liabilities for other debt and lease obligations which mature at various dates. During March 1994, the Company substantially completed negotiations to amend its debt agreements with Prudential to modify certain financial covenants and defer principal payments. The agreements also provide a financing commitment from Warburg for a $10 million interim loan which is expected to be retired in connection with a proposed sale of rights to acquire common stock of the Company. The Company, Warburg and Prudential have entered into an agreement in principle (the "Agreement") pursuant to which the existing Prudential debt agreements were amended to provide that the Company will not be required to make principal payments on any of the Prudential debt prior to November 1, 1997. Thereafter, the revolving credit facility will mature on November 1, 1999, principal on the Senior Note will be payable in two equal installments on November 1, 1997 and 1998, and principal on the PIK Notes will be payable in two approximately equal installments on November 1, 2000 and 2001. The interest rate on the PIK Notes will increase from 10.65% to 11.65% per annum on January 1, 1996. In addition, certain covenants of the debt agreements remain in place, but will not be in effect until April 1, 1997. The debt agreements, as amended, provide for supplemental principal payments commencing July 1, 1998 if the Company meets certain financial tests. Warburg has agreed to loan the Company up to $10 million at an initial interest rate of 5% per annum with a maturity date of April 28, 1995. The interest rate will increase to 10% per annum in the event that stockholder approval of certain of the transactions contemplated by the Agreement is not obtained. Interest on the loan will be due upon maturity or upon refinancing, whichever occurs first. The loan will be secured by the Company's commercial brokerage revenues through a cash collateral account. Prudential also will have a lien on the cash collateral account which will be subordinated to Warburgs's loan. The Agreement also provides for the Company to seek additional equity capital through a rights offering, and contemplates that the Company would issue to holders of the Company's common stock, for each share of common stock, a non- transferable right to acquire one share of Company common stock at an exercise price tentatively set at $2.375 per share. Subject to certain conditions, stockholders also would have certain rights to oversubscribe to the extent that other stockholders do not subscribe. Warburg has agreed to acquire the rights not acquired by the holders of common stock in the rights offering 19 through the conversion of its loan up to an amount not exceeding $10 million plus accrued interest on the loan. Pursuant to the Agreement, the rights offering would occur after the Company obtains the approval of the transactions contemplated by the Agreement from the holders of a majority of the shares of the Company's voting stock, including a majority of the holders of the shares of the Company's voting stock other than Warburg and Prudential. Accordingly, there can be no assurance that such approval will be obtained. The Agreement also contemplates certain amendments to the existing Senior Convertible Preferred Stock held by Warburg and the Junior Convertible Preferred Stock held by Prudential. Both series of preferred stock would be amended to be nonredeemable. As of the date of the rights offering, the exercise prices on the outstanding warrants held by Prudential and Warburg would be reduced to $3.50 per share pursuant to the terms of such warrants, except that the exercise price on the contingent warrants to purchase 370,566 shares held by Warburg, which are exercisable only under specified circumstances, would be reduced to the same price per share as the rights offering. As it relates to the rights offering, Warburg will retain certain anti-dilution rights with respect to the preferred stock and warrants which it currently holds. Thereafter, the preferred stock and warrants held by Warburg would be amended to eliminate the anti-dilution provisions with respect to the issuance of common stock and common stock equivalents at less than the conversion price or exercise price. The preferred stock and the outstanding warrants held by Prudential would be amended to eliminate the anti-dilution provisions with respect to the issuance of common stock and common stock equivalents at less than the conversion price or exercise price. The Junior Convertible Preferred Stock also would be amended to increase the dividend rate to 10% per annum effective January 1, 2002, with further increases of 1% per year effective January 1, 2003 and January 1, 2004 and 2% per year effective January 1, 2005 and each January 1 thereafter. The Senior Convertible Preferred Stock would be amended to provide that at such time as the dividend rate on the Junior Convertible Preferred Stock would increase above 12%, the dividend rate on the Senior Convertible Preferred Stock would increase by the same amount as the dividend rate on the Junior Convertible Preferred Stock. The Junior Convertible Preferred Stock also would be amended to provide that under certain circumstances following the conversion of the Senior Convertible Preferred Stock holders of the Junior Convertible Preferred Stock will be obligated to convert such preferred stock. In consideration of their agreements, the Company would grant Warburg and Prudential warrants to purchase approximately 325,000 and 150,000 shares of common stock of the Company, respectively. The exercise price of these warrants would be equal to the rights offering price. At the conclusion of the transactions, depending on the level of stockholder participation in the rights offering, Prudential's equity interest in the Company could decline to under 19% and Warburg's equity interest in the Company could increase to over 52% on a fully diluted basis. The Company intends to meet its short- and long-term cash requirements from operating cash flow, use of the interim financing, seasonal use of the Prudential $5 million Revolving Credit Note and, assuming the Company obtains the required shareholder approval, the subsequent sale of rights to acquire common stock in the Company. While the Company's full-year operating plan for 20 1994 anticipates positive operating cash flow, the Company was unable to generate positive operating cash flow during 1993 or 1992 despite plans to the contrary. If the 1994 operating plan is not substantially achieved because of adverse economic conditions or other unfavorable events, the Company may find it necessary to further reduce expense levels, or undertake other actions as may be appropriate. In such event, the Company anticipates that its ability to raise financing on acceptable terms would be severely limited and there can be no assurance that the Company would be able to raise additional financing. DIVIDENDS Any dividend payments on the common stock will be subject to restrictions on the payment of dividends in the Prudential debt agreements and the payment of all accrued and unpaid dividends on the Preferred Stock. 21 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA REPORT OF INDEPENDENT ACCOUNTANTS The Board of Directors and Stockholders Grubb & Ellis Company We have audited the accompanying consolidated balance sheets of Grubb & Ellis Company and Subsidiaries as of December 31, 1993 and 1992, and the related consolidated statements of operations, stockholders' equity (deficit), and cash flows for the years then ended. Our audits also included the financial statement schedules for 1993 and 1992 listed in the Index at Item 14(a). These financial statements and schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedules based on our audits. We did not audit the financial statements of Axiom Real Estate Management, Inc., a 74% owned subsidiary, which statements reflect total assets of $5,837,845 and $3,856,419 as of December 31, 1993 and 1992, respectively, and total revenues of $21,422,586 and $7,054,979 for the year ended December 31, 1993 and the period September 1, 1992 through December 31, 1992. Those statements were audited by other auditors whose report has been furnished to us, and our opinion, insofar as it relates to data included for Axiom Real Estate Management, Inc., is based solely on the report of the other auditors. The financial statements and schedules of Grubb & Ellis Company and Subsidiaries for the year ended December 31, 1991 were audited by other auditors whose report dated March 27, 1992, except as to the information presented in Schedule VIII, for which the date is December 24, 1992, expressed an unqualified opinion on those statements. 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 and related schedules are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements and related schedules. 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 and the report of other auditors provide a reasonable basis for our opinion. In our opinion, based on our audits and the report of other auditors, the 1993 and 1992 consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Grubb & Ellis Company and Subsidiaries at December 31, 1993 and 1992, and the consolidated results of their operations and their cash flows for the years then ended, in conformity with generally accepted accounting principles. Also, in our opinion, the related financial statement schedules, when considered in relation to the basic financial statements taken as a whole, present fairly in all material respects the information as of December 31, 1993 and 1992 and for the years then ended set forth therein. San Francisco, California ERNST & YOUNG March 29, 1994 22 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Stockholders of Grubb & Ellis Company and Subsidiaries We have audited the accompanying consolidated statements of operations, stockholders' equity and cash flows of Grubb & Ellis Company and Subsidiaries for the year ended December 31, 1991. We have audited the financial statement schedules (Schedules II, VIII, and X) for the year ended December 31, 1991. These financial statements and financial statement schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and financial statement schedules 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 results of operations and cash flows of Grubb & Ellis Company and Subsidiaries for the year ended December 31, 1991, in conformity with generally accepted accounting principles. In addition, in our opinion, the financial statement schedules referred to above, when considered in relation to the basic financial statements taken as a whole, present fairly, in all material respects, the information required to be included therein. COOPERS & LYBRAND San Francisco, California March 27, 1992, except as to the information presented in Schedule VIII, for which the date is December 24, 1992 23 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors Axiom Real Estate Management, Inc.: We have audited the accompanying balance sheets of Axiom Real Estate Management, Inc. as of December 31, 1993 and 1992 and the related statements of operations, stockholders' equity and cash flows for the year ended December 31, 1993 and for the period September 1, 1992 (date of inception) through December 31, 1992. 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 financial statements referred to above present fairly, in all material respects, the financial position of Axiom Real Estate Management, Inc. as of December 31, 1993 and 1992, and the results of its operations and its cash flows for the year ended December 31, 1993 and for the period September 1, 1992 (date of inception) through December 31, 1992 in conformity with generally accepted accounting principles. COOPERS & LYBRAND Pittsburgh Pennsylvania January 28, 1994 24 GRUBB & ELLIS COMPANY AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS December 31, 1993 and 1992 (in thousands)
ASSETS 1993 1992 ---- ---- Current assets Cash and cash equivalents $22,364 $12,937 Receivables: Real estate brokerage commissions 493 4,406 Real estate services fees and other commissions receivable 2,312 3,047 Other receivables 4,865 3,420 Real estate investments and other assets held for sale -- 1,951 Prepaids and other current assets 2,628 726 ------- ------- Total current assets 32,662 26,487 Noncurrent assets Real estate brokerage commissions receivable 1,155 1,214 Real estate investments held for sale and real estate owned 1,305 1,608 Equipment and leasehold improvements, net 5,063 3,974 Excess of cost over net assets of acquired companies, net of accumulated amortization of $15,555 at December 31, 1992 -- 10,458 Other assets 2,000 931 ------- ------- Total assets $42,185 $44,672 ------- ------- ------- -------
The accompanying notes are an integral part of the consolidated financial statements. 25 GRUBB AND ELLIS COMPANY AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS December 31, 1993 and 1992 (in thousands except per share amounts and shares)
LIABILITIES 1993 1992 ---- ---- Current liabilities Notes payable and current portion of long-term debt $ 506 $ 2,277 Current portion of notes payable and long-term debt to related party 8,830 18,830 Accounts payable 1,873 3,028 Compensation and employee benefits 11,817 8,628 Deferred commissions payable 2,814 1,914 Accrued severance obligations 2,883 1,424 Accrued office closure costs 3,043 3,036 Accrued claims and settlements 10,375 14,432 Other accrued expenses 8,363 6,191 --------- --------- Total current liabilities 50,504 59,760 Long-term liabilities Long-term debt, net of current portion 900 737 Long-term debt to related party , net of current portion 15,237 20,507 Accrued claims and settlements 9,678 9,396 Accrued severance obligations 555 1,215 Accrued office closure costs 4,043 4,308 Other 235 207 --------- --------- Total liabilities 81,152 96,130 --------- --------- REDEEMABLE PREFERRED STOCK 12% Senior convertible preferred stock, $100.00 per share Redemption Value: 137,160 shares outstanding 14,365 -- 5% Junior convertible preferred stock, $100.00 per share Redemption Value: 150,000 shares outstanding 15,535 -- --------- --------- Total redeemable preferred stock 29,900 -- --------- --------- STOCKHOLDERS' EQUITY (DEFICIT) Preferred stock, $.01 par value: 1,000,000 shares authorized; 287,160 shares issued as redeemable preferred stock. Common stock, $.01 par value: 25,000,000 shares authorized; 4,060,271 and 3,601,496 shares issued and outstanding at December 31, 1993 and 1992, respectively, giving retroactive effect to the one-for-five reverse stock split and reduction in par value. 41 36 Additional paid-in-capital 48,070 47,276 Retained earnings (deficit) (116,978) (98,770) --------- --------- 26 Total stockholders' equity (deficit) (68,867) (51,458) --------- --------- Total liabilities and stockholders' deficit $ 42,185 $ 44,672 --------- --------- --------- ---------
The accompanying notes are an integral part of the consolidated financial statements. 27 GRUBB & ELLIS COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS for the years ended December 31, 1993, 1992 and 1991 (in thousands except per share amounts and shares)
1993 1992 1991 ---- ---- ---- Revenue Commercial real estate brokerage commissions $ 141,875 $ 136,082 $ 139,513 Residential real estate brokerage commissions 20,266 49,171 88,572 Real estate services fees, commissions and other 38,590 37,709 38,149 Interest income 442 529 1,656 Other 551 672 744 ---------- ---------- ---------- Total revenue 201,724 224,163 268,634 ---------- ---------- ---------- Cost and expenses Real estate brokerage and other commissions 100,250 117,154 138,459 Selling, general and administrative 55,958 64,607 72,022 Salaries and wages 44,780 48,412 58,477 Interest expense 333 155 553 Interest expense to related party 2,255 4,225 4,173 Depreciation and amortization 2,287 3,802 6,820 Special charges and unusual items 13,494 44,879 36,982 ---------- ---------- ---------- Total costs and expenses 219,357 283,234 317,486 ---------- ---------- ---------- Loss before income taxes (17,633) (59,071) (48,852) Provision for income taxes (575) (605) (445) ---------- ---------- ---------- Net loss (18,208) (59,676) (49,297) ---------- ---------- ---------- ---------- ---------- ---------- Undeclared dividends (accretion of liquidation preference) on preferred stock $ (2,196) -- -- Net loss applicable to common stockholders $ (20,404) $ (59,676) $ (49,297) Net loss per common share and equivalents, giving retroactive effect to the one-for-five reverse stock split on January 29, 1993 $ (5.08) $ (17.01) $ (14.77) Weighted average common shares giving retroactive effect to the one-for-five reverse split on January 29, 1993. 4,019,795 3,509,303 3,336,572
The accompanying notes are an integral part of the consolidated financial statements. 28 GRUBB & ELLIS COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) for the years ended December 31, 1993, 1992 and 1991 (in thousands except per share amounts and shares)
Total Common Stock Common ------------ Additional Retained Stockholders' Outstanding Paid-in- Earnings Equity Shares Amount Capital (Deficit) (Deficit) ----------- -------- ----------- ------------ ------------- December 31, 1990 16,564,858 $ 16,565 $ 28,763 $ 10,203 $ 55,531 Common stock issued for: Employee common stock purchase agreements and exercises of common stock options, net of common stock tendered 88,288 88 18 106 Acquisition earnouts 104,870 105 21 126 Net loss (49,297) (49,297) ----------- -------- -------- --------- ---------- December 31, 1991 16,758,016 16,758 28,802 (39,094) 6,466 Common stock issued for: Defined contribution plan 211,753 212 79 291 Compensation in lieu of cash 905,749 905 405 1,310 Employee common stock purchase agreements and exercises of common stock options, net of common stock tendered 94,165 94 6 100 Acquisition earnouts 37,798 38 13 51 Net loss (59,676) (59,676) ----------- -------- -------- --------- ---------- December 31, 1992 18,007,481 18,007 29,305 (98,770) (51,458) Effect of one-for-five reverse stock split and change in par value from $1.00 to $0.01 per share. (14,405,985) (17,971) 17,971 Undeclared dividends (accretion of liquidation preference) on preferred stock (2,196) (2,196) Common stock issued for: Exercise of Old Prudential warrant 397,549 4 2,898 2,902 Rights redemption 42,400 1 1 Employee common stock purchase agreements and exercises of common stock options, net of common stock tendered 14,161 70 70 Acquisition earnouts 4,665 22 22 Net loss (18,208) (18,208) ----------- -------- -------- --------- ---------- December 31, 1993 4,060,271 $ 41 $ 48,070 $(116,978) $ (68,867) ----------- -------- -------- --------- ---------- ----------- -------- -------- --------- ----------
The accompanying notes are an integral part of the consolidated financial statements. 29 GRUBB & ELLIS COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS for the years ended December 31, 1993, 1992, and 1991 (in thousands)
1993 1992 1991 ---- ---- ---- Cash Flows from Operating Activities: Net loss $(18,208) $(59,676) $(49,297) Adjustments to reconcile net loss to net cash used by operating activities: Gain (loss) on sale of real estate and other assets 20 (556) (1,497) Loss from equity investments -- 190 572 Depreciation and amortization 2,287 3,802 6,820 Change in asset valuation allowances 25 1,981 (1,121) Other non-cash charges related to special charges and unusual items 13,494 44,879 36,618 Change in Operating Assets and Liabilities: Decrease in real estate brokerage commissions receivable 3,937 2,748 2,904 Decrease (increase) in other asset accounts (2,446) 3,070 1,342 Increase (decrease) in accounts payable (1,153) 1,704 385 Increase (decrease) in deferred commissions payable 900 (857) 62 Decrease in other liability accounts (1,589) (62) (4,625) ------- -------- -------- Net cash used in operating activities (2,733) (2,777) (7,837) ------- -------- -------- Cash Flows from Investing Activities: Proceeds from sale of assets 3,350 3,747 4,659 Purchases of equipment and leasehold improvements (3,115) (1,577) (1,046) Proceeds from disposition of real estate joint ventures and real estate owned 389 526 1,319 Distribution from (advances to) real estate joint ventures 76 (152) (1,529) Cash payments for acquisition earnout agreements -- (51) (210) ------- -------- -------- Net cash provided by investing activities 700 2,493 3,193 ------- -------- -------- Cash Flows From Financing Activities: Proceeds from issuance of preferred stock 13,750 -- -- Offering costs related to issuance of preferred stock (1,281) -- -- Proceeds from borrowing 8,000 700 5,000 Repayment of notes payable (9,067) (1,690) (1,194) Proceeds from issuance of common stock 58 104 106 ------- -------- -------- Net cash provided by (used in) financing activities 11,460 (886) 3,912 Net increase (decrease) in cash and cash equivalents 9,427 (1,170) (732) Cash and equivalents at beginning of the year 12,937 14,107 14,839 ------- -------- -------- Cash and cash equivalents at end of the year $ 22,364 $ 12,937 $ 14,107 ------- -------- -------- ------- -------- --------
The accompanying notes are an integral part of the consolidated financial statements. 30 31 GRUBB & ELLIS COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS --------------- 1. COMPANY OPERATIONS AND LIQUIDITY BUSINESS: The Company's predominant business activity is providing real estate services, comprised of commercial brokerage, residential brokerage, property management (primarily through its majority owned subsidiary Axiom Real Estate Management, Inc. ("Axiom")) and other services offered primarily to real estate owners, investors and tenants. LIQUIDITY AND SUBSEQUENT EVENTS: Liquidity and stockholders' equity have been adversely affected during the last four years by significant losses from operations resulting from adverse economic conditions in the real estate industry. These accumulated losses have resulted in a deficit in stockholders' equity and a negative current ratio. The Company has taken the following significant steps toward meeting its 1994 operating plan with the objective of returning to profitability and improving liquidity: During March 1994, the Company obtained an interim financing commitment from Warburg, Pincus Investors, L.P., a Delaware limited partnership ("Warburg"). This commitment provides for a loan of up to $10 million at an initial interest rate of 5% per annum, and would mature 13 months from issuance. The loan will be secured by the Company's commercial brokerage revenues. Subject to stockholder approval and certain other conditions, the Company would obtain equity financing through a sale of rights (the "Rights Offering"). The Rights Offering would entitle each stockholder to acquire one right for each share of stock owned. Under certain conditions, stockholders would have certain rights to oversubscribe to the extent that other stockholders do not subscribe. Warburg would acquire any common stock not acquired by the public stockholders through the exercise of rights, up to an amount not exceeding $10 million plus accrued interest on the Warburg loan. The rights, which are planned to be non-transferable, would be offered to common stockholders of the Company at a price tentatively set at $2.375 per share. The interest rate on the Warburg interim financing will increase to 10% per annum in the event that stockholder approval of the Rights Offering is not obtained. 32 GRUBB & ELLIS COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued --------------- LIQUIDITY AND SUBSEQUENT EVENTS, CONTINUED: The Company's debt to The Prudential Insurance Company of America ("Prudential") was restructured. The debt payment schedule was amended such that the Company will not be required to make principal payments on any of the Prudential debt prior to November 1, 1997. Additionally, the New Revolving Credit Note, as amended, will be due November 1, 1999, with a waiver of the requirement that the Company pay this note in full during one consecutive sixty-day period in 1994 (see Note 5). In consideration for these agreements, Warburg and Prudential would receive approximately 325,000 warrants and 150,000 warrants, respectively, to purchase common stock of the Company. The exercise price of these warrants would be equal to the rights offering price. Certain covenants related to the Prudential debt will remain in place, but will not be in effect during a designated three-year period (see Note 5). The Company has established a restructuring plan that provides for closure of certain unprofitable operations and which is expected to centralize management and reduce overhead expense. As part of the implementation of this plan, during February 1994, the Company closed four of its unprofitable appraisal and consulting offices. Additionally, during March 1994, the Company reorganized its operations into three regions from four regions. As part of its strategic planning, the Company has developed an operating plan, which includes the above activities, and which projects cash flow for the year adequate to meet obligations as they become due. It is management's belief that the operating plan is achievable, although in the event that the 1994 operating plan is not substantially achieved because of deteriorating economic conditions or other unfavorable events, the Company may further reduce expense levels, or undertake other actions as may be appropriate. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES PRINCIPLES OF CONSOLIDATION: The consolidated financial statements include the accounts of Grubb & Ellis Company, its wholly and majority owned subsidiaries and controlled partnerships (the "Company"). All significant intercompany accounts and transactions and transactions with unconsolidated joint ventures and partnerships accounted for under the equity method of accounting are eliminated. BASIS OF REVENUE RECOGNITION: Real estate sales commissions are generally 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 33 GRUBB & ELLIS COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued --------------- BASIS OF REVENUE RECOGNITION, CONTINUED: to buyer, if applicable, and no contingencies exist with respect to entitlement to the payment. Real estate leasing commissions are generally recognized at the earlier of receipt of payment or occupancy, assuming the Company has possession of a signed lease agreement and all significant contingencies have been removed. All other commissions and fees are recognized at the time the related services have been performed by the Company, unless significant future contingencies exist. COSTS AND EXPENSES: Real estate brokerage commission and other commission expense (salespersons' participation) is recognized concurrently with the recording of the related revenue. All other costs and expenses are recognized when incurred. EQUIPMENT AND LEASEHOLD IMPROVEMENTS: Equipment and leasehold improvements are carried at cost. Depreciation of equipment is computed by the straight-line method over estimated useful lives ranging from three to seven years. Leasehold improvements are amortized by the straight-line method over their useful lives not to exceed the terms of the leases. Maintenance and repairs are charged to expense as incurred. EXCESS OF COST OVER NET ASSETS OF ACQUIRED COMPANIES: The excess of cost over net assets of acquired companies ("goodwill"), which includes additional consideration paid to the sellers in the form of contingent earnout agreements, has been amortized using the straight-line method over periods ranging from 10 to 40 years. The Company evaluates the carrying value of its goodwill and other assets on an ongoing basis by reviewing a number of factors, including operating results, business plans, budgets and economic projections. The Company's evaluation previously focused upon revenues, direct costs and operating results of the residential and commercial units before allocation of corporate overhead. These evaluations resulted in write-downs for permanent impairment in value of approximately $18.9 million in 1992 and $29.5 million in 1991. Of these amounts, in 1992 $10.6 million related to commercial brokerage operations, $1.3 million related to residential brokerage operations and $7.0 related to other operations, and in 1991, $24.8 million related to commercial brokerage operations, $3.8 million related to residential operations, and $900,000 related to other operations. As of January 1, 1993, all of the remaining unamortized goodwill ($10.5 million) was associated with the commercial brokerage operation. Due to downsizing of operations and changes in its business plan, the Company analyzed the recoverability of the remaining goodwill based upon projected operations of the remaining business after considering all corporate overhead. As more fully discussed in Note 10 regarding special charges and unusual items, 1993 events and the Company's business plan for 1994 indicated that the business unit as structured in 1993 was, and would continue to be, unprofitable and therefore unable to generate income sufficient to recover goodwill without a restructuring. As 34 GRUBB & ELLIS COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued --------------- EXCESS OF COST OVER NET ASSETS OF ACQUIRED COMPANIES, CONTINUED: a result, the Company wrote off its remaining goodwill balance related to this unit in the fourth quarter of 1993. TAXES ON INCOME: Effective January 1, 1993, the Company adopted Statement of Financial Accounting Standard (SFAS) No. 109, Accounting for Income Taxes. SFAS No. 109 supersedes SFAS No. 96, Accounting for Income Taxes, which was adopted by the Company in January, 1987, and changes the criteria for recognition and measurement of deferred tax assets. As permitted under the Statement, the Company has elected not to restate the financial statements of prior years. The cumulative effect of the change and the effect of the change on pre-tax income for the year ended December 31, 1993 is not material. Deferred income taxes, if any, are recorded to reflect the tax consequences in future years of the differences between the tax bases of assets and liabilities and their financial reporting amounts. Investment tax credits are accounted for under the flow-through method, whereby the provision for income taxes is reduced in the year the tax credits first become available. EARNINGS (LOSS) PER COMMON SHARE AND EQUIVALENTS: Earnings (loss) per common share and equivalents computations are based on the weighted average number of common shares outstanding after giving effect to potential dilution from common stock options and warrants. The calculation of loss per common share includes net loss adjusted for amounts applicable to the Senior and Junior Convertible Preferred Stock for the undeclared dividends (accretion of liquidation preference) in the amounts of approximately $1,509,000 and $687,000, respectively, for the year ended December 31, 1993. CASH AND CASH EQUIVALENTS: The Company had $1,275,260 of cash that is subject to withdrawal restrictions at December 31, 1993, and none was restricted at December 31, 1992. These balances are associated with the Company's error and omissions insurance captive and are restricted to use for errors and omissions insurance claims. For purposes of the Statement of Cash Flows, cash equivalents include investments in highly liquid debt instruments which are purchased with a maturity of ninety days or less. Cash payments for interest for the three years ended December 31, 1993, 1992 and 1991 were approximately $1.0 million, $2.7 million and $4.7 million, respectively. Cash payments for income taxes for the three years ended December 31, 1993, 1992 and 1991 were approximately $515,000, $949,000 and $1,146,000, respectively. REAL ESTATE INVESTMENTS: Real estate investments which are held for sale are recorded at the lower of cost or net realizable value. Carrying amounts reflect periodic depreciation. The Company has recorded a valuation allowance on real 35 GRUBB & ELLIS COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued --------------- REAL ESTATE INVESTMENTS, CONTINUED: estate investments and real estate owned of approximately $3,792,000 and $6,366,000 at December 31, 1993 and 1992, respectively. In connection with the disposition of real estate investments, the Company sold a property with a book value of approximately $413,000 in exchange for a note receivable. The Company received a note receivable of $1.2 million and recorded $778,000 of deferred revenue related to this transaction. The Company sold another property for approximately $1.1 million, the proceeds from which were used to extinguish the debt on the property. Additionally, a property with a basis of approximately $411,000 was acquired in connection with the sale of the Company's real estate advisory operations, in exchange for a note payable of approximately $381,000. Included in accrued claims and settlements is an estimated amount representing the Company's interest in operating losses of a prior joint venture investment in real estate for which the Company could be liable. RECLASSIFICATIONS: Certain reclassifications of the 1992 and 1991 consolidated financial statements have been made to conform to the 1993 presentation. 3. REAL ESTATE BROKERAGE COMMISSIONS RECEIVABLE Real estate brokerage commissions receivable were as follows at December 31, 1993 and 1992:
1993 1992 ---- ---- (in thousands) Commissions receivable $ 16,625 $ 22,082 Salespersons' participation (9,950) (11,460) Allowance for uncollectible accounts (5,027) (5,002) -------- -------- Total 1,648 5,620 Less portion classified as current 493 4,406 -------- -------- Noncurrent portion $ 1,155 $ 1,214 -------- -------- -------- --------
4. EQUIPMENT AND LEASEHOLD IMPROVEMENTS Equipment and leasehold improvements consisted of the following at December 31, 1993 and 1992:
1993 1992 ---- ---- (in thousands) Office furniture and equipment $12,701 $11,448 Leasehold improvements 5,055 6,672 ------- ------- Total 17,756 18,120 Less accumulated depreciation and amortization 12,693 14,146 ------- ------- Equipment and leasehold improvements, net $ 5,063 $ 3,974 ------- ------- ------- -------
36 GRUBB & ELLIS COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued --------------- 5. LONG-TERM DEBT AND RECAPITALIZATION Long-term debt consisted of the following at December 31, 1993 and 1992, before the restructuring of debt which occurred in March 1994:
1993 1992 ---- ---- (in thousands) New Senior Notes, 9.9%, due November 1, 1996 $ 10,000 - - Senior Notes, 9.9%, due November 1, 1996 - - $ 10,000 $10 million 10.65% PIK Notes, net of $920,000 cancellation pursuant to terms of debt restructuring and $493,000 of unamortized discount, due November 1, 1999 9,067 - - $25 million Subordinated Notes, 10.65%, net of unamortized discount of $664,000 at December 31, 1992 - - 24,336 New Revolving Credit Note at 2.5% above LIBOR, due December 31, 1994 (exchangeable for a 2-year term loan due December 31, 1996) 5,000 - - 1991 Revolving Line of Credit, at 3.5% above LIBOR, due February 15, 1993 - - 5,000 Notes payable at various rates of interest, due through 2005 1,406 3,015 -------- -------- 25,473 42,351 Less portion classified as current 9,336 21,107 -------- -------- Long-term portion $ 16,137 $ 21,244 -------- -------- -------- --------
Annual maturities of the outstanding principal of long-term debt were as follows at December 31, 1993: 1994, $9,336,000; 1995, $3,386,000; 1996, $2,870,000; 1997, $3,212,000; 1998, $3,214,000 and thereafter, $3,455,000. SENIOR AND SUBORDINATED NOTES: During 1986, the Senior and Subordinated Notes were issued to Prudential. In connection with the issuance of the Subordinated Notes, the Company also issued a detachable stock subscription warrant ("Old Prudential Warrant") to 37 GRUBB & ELLIS COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued --------------- SENIOR AND SUBORDINATED NOTES, CONTINUED: purchase shares of the Company's common stock, the number of shares and exercise price of which were subject to certain anti-dilution provisions. The Subordinated Notes were discounted to yield an effective annual rate of 12%. The resultant discount, net of issuance costs, was allocated to the warrant and included in additional paid-in-capital. At December 31, 1991, the Old Prudential Warrant provided for the purchase of 1,987,748 shares of the Company's common stock at an exercise price of $2.47 per share. In connection with a modification of the debt agreements, as of January 1, 1992, the price was adjusted to $1.46 per share and the term of the warrant was extended from November 1994 to November 1996. Giving effect to the one-for- five reverse stock split, the Old Prudential Warrant provided for the purchase of 397,549 shares at a price of $7.30 per share. The Old Prudential Warrant was exercised in connection with the debt restructuring in January 1993. REVOLVING LINE OF CREDIT: On February 8, 1991, the Company entered into an agreement under which Prudential provided a revolving line of credit of up to $5 million for two years (the "1991 Revolving Line of Credit"), which was fully utilized by the Company. OTHER NOTES PAYABLE: Other notes payable of the Company are secured by various assets with a carrying value of approximately $6.2 million and $5.9 million at December 31, 1993 and 1992, respectively. 1992 MODIFICATIONS OF DEBT AGREEMENTS: On March 25, 1992 the Senior and Subordinated Notes and the 1991 Revolving Line of Credit were amended effective January 1, 1992. The amendment modified the financial covenants and provided for a deferral of the $5 million principal payment on the Subordinated Notes due November 1, 1992 to February 1, 1993. In addition, interest payments totaling approximately $1.8 million due on May 1, 1992 on the Senior and Subordinated Notes were deferred until August 1, 1992. In November 1992, the Company and Prudential signed a Senior Note, Subordinated Note and Revolving Credit Note Agreement (the "New Note Agreement") to restructure the Senior and Subordinated Notes and Revolving Line of Credit discussed above. Additionally, on January 29, 1993, the Company issued 150,000 shares of 5% Junior Convertible Preferred Stock and five-year warrants to purchase 1 million shares of common stock at an exercise price of $1.10 per share (200,000 shares at $5.50 per share after the January 29, 1993 one-for-five reverse stock split) in exchange for $15 million of the original Prudential Subordinated Notes. Holders of Junior Convertible Preferred Stock will be entitled to receive, out of any funds legally 38 GRUBB & ELLIS COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued --------------- 1992 MODIFICATIONS OF DEBT AGREEMENTS, CONTINUED: available, cumulative dividends payable in cash at a rate of 5% per annum compounded annually. Pursuant to the New Note Agreement, all of the outstanding Senior Notes were converted into $10 million of the Company's 9.9% Senior Notes Due November 1, 1996 (the "New Senior Notes"). The New Senior Notes defer the 1993 principal payment until 1995 and 1996. Further, $10 million of the Subordinated Notes were converted into $10 million of 10.65% Payment-in-Kind Notes Due November 1, 1999 (the "10.65% PIK Notes"). Also pursuant to the New Note Agreement, Prudential exercised its warrants to purchase 1,987,748 shares at $1.46 (397,549 shares at an exercise price of $7.30 after the one-for-five reverse stock split), for which approximately $920,000 of the 10.65% PIK Notes and $1,982,000 of accrued interest on the original Subordinated Notes were canceled by Prudential in payment of the exercise price of the warrants. Semi-annual interest payments are required pursuant to both the New Senior Notes and the 10.65% PIK Notes, although until all of the New Senior Notes have been retired, the interest due under the 10.65% PIK Notes may be paid in kind by the issuance of additional 10.65% PIK Notes. Annual principal payments are required in the amount of (i) $2 million on November 1 of each of 1993 and 1994 with respect to the New Senior Notes, (ii) $3 million on November 1 of each of 1995 and 1996, also with respect to the New Senior Notes, (iii) one third of the principal amount of the 10.65% PIK Notes outstanding on November 1 of each of 1997 and 1998, and (iv) all remaining outstanding principal amounts of the 10.65% PIK Notes on November 1, 1999. The $2 million payment due November 1, 1993 on the New Senior Note has been deferred until May 1, 1994. Pursuant to the New Note Agreement, the Company issued to Prudential a $5 million Revolving Credit Note due December 31, 1994 (the "New Revolving Credit Note"), as a restructuring of the 1991 Revolving Line of Credit, which was to expire on February 15, 1993. The New Revolving Credit Note bears interest at 2.5% above LIBOR (2% below the rate of interest pursuant to the 1991 Revolving Line of Credit). During one sixty consecutive day period in 1994, the Company will be required to pay down in full this note. Upon maturity, the Company will have the option of converting the New Revolving Credit Note into a new term note, which would mature on December 31, 1996 (the "Converted Term Note"). The Converted Term Note would have an interest rate of LIBOR plus 3% and require semi-annual principal payments (payable on June 30 and December 31 of each of 1995 and 1996) of $1,250,000. The New Note Agreement contains significant restrictions on the payment of cash dividends and repurchases of stock of the Company. The New Note Agreement also contains significant restrictions on the Company's (and certain of its subsidiaries') ability to, among other things, (i) incur debt and liens upon their properties, (ii) enter into guarantees and make loans, investments and advances, (iii) merge or enter into similar business combinations, (iv) conduct any business other than their present businesses, (v) sell assets, including receivables, (vi) make capital expenditures and (vii) enter into certain other transactions. The New Note Agreement between the Company and Prudential contains various affirmative and negative covenants, which require, among other things, that the Company (combined with certain of its subsidiaries and taken as a whole) 39 GRUBB & ELLIS COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued --------------- 1992 MODIFICATIONS OF DEBT AGREEMENTS, CONTINUED: maintain a ratio of Consolidated Current Assets to Consolidated Current Liabilities (as such terms are defined in the New Note Agreement), excluding the current portion of long-term debt, of greater than 1:1 at the end of each of its fiscal quarters. As of December 31, 1993 the Company did not meet certain covenants and restrictions as established in the New Note Agreement, including the aforementioned ratio. However, Prudential has provided a waiver of these covenants as of December 31, 1993 (see Note 1). The Company issued to Warburg and Joe F. Hanauer ("Hanauer") 137,160 shares of 12% Senior Convertible Preferred Stock, five-year warrants to purchase 500,000 and 200,000 shares of common stock at exercise prices of $5.00 and $5.50 per share, respectively, and five-year warrants to purchase up to 400,000 shares of common stock which become exercisable at a formula price only in the event the Company incurs a defined liability in excess of $1.5 million, all in exchange for $13,750,000 in cash. These amounts reflect the one-for-five reverse stock split. Holders of Senior Convertible Preferred Stock will be entitled to receive, out of any funds legally available, cumulative dividends payable in cash, at a rate of 12% per annum. AXIOM NOTE PAYABLE: The Company's subsidiary, Axiom, has a credit facility with IBM. As of December 31, 1993, the available line of credit was $2,050,000. This credit facility is collateralized by substantially all of Axiom's assets and contains certain covenants, including the maintenance of minimum levels of net worth, financial ratios and restrictions on the payment of dividends. PREFERRED STOCK: The 12% Senior Convertible Preferred Stock and 5% Junior Convertible Preferred Stock are subject to mandatory conversion in the event that (i) at all times during a two-year period the consolidated debt to net income before taxes, excluding extraordinary items, and income or loss from discontinued operations plus total interest expense and depreciation and amortization has not exceeded 3.0:1.0, (ii) on each trading day during a six-month period the price of the Common Stock has exceeded $8.75 per share and (iii) the Company is in full compliance with the terms and conditions of all agreements pursuant to which the Company has incurred indebtedness for borrowed money. The Company must redeem the Senior and Junior Convertible Preferred Stock beginning November 1, 2000 and ending no later than November 1, 2003. Each share of Senior Convertible Preferred Stock and Junior Convertible Preferred Stock is convertible, at the option of the holder, into shares of common stock of the Company, which number of common shares is determined by dividing the Senior Convertible Preferred Stock Stated Value or the Junior Convertible Preferred Stock Stated Value, as the case may be, by the conversion prices of $3.01371 and $5.6085, respectively. The stated value of the Senior Convertible Preferred Stock and Junior Convertible Preferred Stock is an amount in cash equal to $100.00 per share. Such initial conversion 40 GRUBB & ELLIS COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued --------------- PREFERRED STOCK, CONTINUED: prices are subject to adjustment as provided in the Certificate of Amendment of Certificate of Incorporation. Except as otherwise required by law, the Senior Convertible Preferred Stock, the Junior Convertible Preferred Stock, the common stock and any other capital stock of the Company entitled to vote with the common stock is deemed to be one class for the purpose of voting on all matters submitted for the approval of the stockholders of the Company. The carrying value of the Senior Convertible Preferred Stock and the Junior Convertible Preferred Stock is adjusted by undeclared dividends (accretion of liquidation preference) due upon maturity in the amount of $1,509,000 and $687,000, respectively, for the year ended December 31,1993, direct costs associated with the Recapitalization in the amount of $1,095,000 and $187,000, respectively, for the year ended December 31,1993 and the accretion of direct costs in the amount of $201,000 and $34,000, respectively, for the year ended December 31, 1993. The Senior Convertible Preferred Stock, with respect to dividend rights and rights on redemptions and on liquidation, winding up and dissolution, ranks prior to any other equity securities of the Company, including all classes of common stock and any other series of Preferred Stock of the Company. The Junior Convertible Preferred Stock, with respect to dividend rights and rights on redemption and on liquidation, winding up and dissolution, ranks prior to any other equity securities of the Company, including all classes of common stock and any other series of Preferred Stock of the Company other than the Senior Convertible Preferred Stock, which ranks prior to the Junior Convertible Preferred Stock. STOCKHOLDER RIGHTS PLAN: In March 1989, the Company adopted a Stockholder Rights Plan (the "Rights Plan"), pursuant to which each outstanding share of common stock carried with it the right ("Right") to purchase from the Company certain junior participating preferred stock. Upon the closing of the transactions of the Recapitalization, all Rights existing under the Rights Plan were redeemed for $.01 per share, paid in shares of common stock. MARCH 1994 DEBT RESTRUCTURING: During March 1994, the Company, Warburg and Prudential entered into an agreement in principle (the "Agreement") pursuant to which the existing Prudential debt agreements were amended to provide that the Company will not be required to make principal payments on any of the Prudential debt prior to November 1, 1997. Thereafter, the revolving credit facility will mature on November 1, 1999, principal on the Senior Note will be payable in two equal installments on November 1, 1997 and 1998, and principal on the PIK Notes will be payable in two approximately equal installments on November 1, 2000 and 2001. The interest rate on the PIK Notes will increase from 10.65% to 11.65% per annum on January 1, 1996. In addition, certain covenants of the debt agreements remain in place, but will not be in effect until April 1, 1997. The debt agreements, as amended, provide for supplemental principal payments commencing July 1, 1998 if the Company meets certain financial tests. 41 42 GRUBB & ELLIS COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued --------------- MARCH 1994 RESTRUCTURING, CONTINUED: The Agreement also contemplates certain amendments to the existing Senior Convertible Preferred Stock held by Warburg and the Junior Convertible Preferred Stock held by Prudential. Both series of preferred stock would be amended to be nonredeemable. As of the date of the Rights Offering, the exercise prices on the outstanding warrants held by Prudential and Warburg would be reduced to $3.50 per share pursuant to the terms of such warrants, except that the exercise price on the contingent warrants to purchase 370,566 shares held by Warburg, which are exercisable only under specified circumstances, would be reduced to the same price per share as the Rights Offering. As it relates to the Rights Offering, Warburg will retain certain anti-dilution rights with respect to the preferred stock and warrants which it currently holds. Thereafter, the preferred stock and warrants held by Warburg would be amended to eliminate the anti-dilution provisions with respect to the issuance of common stock and common stock equivalents at less than the conversion price or exercise price. The preferred stock and the outstanding warrants held by Prudential would be amended to eliminate the anti-dilution provisions with respect to the issuance of common stock and common stock equivalents at less than the conversion price or exercise price. The Junior Convertible Preferred Stock also would be amended to increase the dividend rate to 10% per annum effective January 1, 2002, with further increases of 1% per year effective January 1, 2003 and January 1, 2004 and 2% per year effective January 1, 2005 and each January 1 thereafter. The Senior Convertible Preferred Stock would be amended to provide that at such time as the dividend rate on the Junior Convertible Preferred Stock would increase above 12%, the dividend rate on the Senior Convertible Preferred Stock would increase by the same amount as the dividend rate on the Junior Convertible Preferred Stock. The Junior Convertible Preferred Stock also would be amended to provide that under certain circumstances, following the conversion of the Senior Convertible Preferred Stockholders of the Junior Convertible Preferred Stock will be obligated to convert such preferred stock. 43 GRUBB & ELLIS COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued --------------- 6. INCOME TAXES The provision for income taxes for each of the three years ended December 31, 1993 consisted of state income taxes due currently. At December 31, 1993, the following income tax carryforwards were available to the Company:
Expiration Amount Dates -------------- ------------- (in thousands) Federal regular tax operating loss carryforwards $28,600 2001 to 2008 Federal investment tax credit carryforwards $ 278 1998 to 2000
As of December 31, 1993, the Company had a federal tax net operating loss carryforward of $28.6 million and a federal investment tax credit carryforward of $278,000, after taking into effect the reduction in tax attributes pursuant to Section 108(b)(2) of the Internal Revenue Code (the "Code"), resulting from the cancellation of indebtedness pursuant to Section 108(a) of the Code. The Recapitalization that occurred in January 1993 constituted an ownership change within the meaning of Section 382 of the Code thereby limiting the amount of taxable income after the ownership change which may be offset by the above net operating loss carryovers attributable to periods prior to the ownership change. The annual amount of net operating losses allowed under such Section 382 will be approximately $825,000. Net operating losses attributable to periods subsequent to the ownership change are approximately $10.5 million, and are not subject to the limitation under Code Section 382. The Company's effective tax rate on its loss before taxes differs from the statutory regular tax rate as follows:
1993 1992 1991 ---- ---- ---- Federal statutory rate (35.0)% (34.0)% (34.0)% State income taxes 3.3 1.0 0.9 Goodwill amortization 20.9 11.6 22.4 Losses for which no tax benefit was recorded in current period 14.1 22.4 11.6 ---- ---- ---- Effective income tax rate for the year 3.3% 1.0% 0.9% ---- ---- ---- ---- ---- ----
The differences between the tax bases of assets and liabilities and their financial reporting amounts that give rise to significant portions of deferred income tax liabilities or assets are: real estate investment valuation allowances, equity in partnership gains and losses, property and equipment depreciation and accrued expenses. 44 GRUBB & ELLIS COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued --------------- 6. INCOME TAXES, CONTINUED: At December 31, 1993, net deferred tax assets totaled approximately $24.8 million. The total valuation allowance recognized for the net deferred tax assets was also approximately $24.8 million. The valuation allowance decreased by approximately $2.8 million during the year. The components of the Company's deferred tax (liabilities) and assets are as follows as of December 31, 1993:
(in thousands) Gross deferred tax liabilities - current Commission and fee reserves $ (514) Gross deferred tax assets - current Commission and fee reserves 4,263 Litigation accrual 3,631 Compensation accrual 2,540 Gross deferred tax assets - current ------ 10,434 Deferred tax assets valuation allowance - current (9,920) Gross deferred tax liabilities - noncurrent Investment in partnerships $ (231) Gross deferred tax assets - noncurrent Depreciation 27 Commission and fee reserves 3,726 Litigation accrual 3,387 Net operating loss carryforwards 10,010 Estimated net operating loss carryforward limitation under Code Section 382 (2,010) Gross deferred tax assets - noncurrent ------ 15,140 Deferred tax assets valuation allowance - noncurrent (14,909) ------- Net deferred tax (liability) asset $ 0 ------- -------
45 GRUBB & ELLIS COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued --------------- 7. STOCK PLANS The information set forth below regarding stock option compensation plans gives effect to the one-for-five reverse stock split in 1993. Changes in stock options were as follows for the years ended December 31, 1993 and 1992:
1993 1992 1991 --------------------------- --------------------------- --------------------------- Shares Exercise Price Shares Exercise Price Shares Exercise Price ------ -------------- ------ -------------- ------ -------------- Stock options outstanding at the beginning of $5.00 to $5.00 to $11.25 to the year 199,762 51.88 209,159 51.88 193,248 51.88 Granted or 2.88 to $5.00 to $5.00 to regranted 662,000 4.38 52,399 10.00 67,800 10.00 Lapsed or 5.00 to 5.00 to 6.88 to canceled (129,395) 51.88 (61,796) 20.00 (51,889) 22.50 Exercised (4,666) 6.88 - - - - - - - - ------- -------------- ------- -------------- ------- -------------- Stock options outstanding at the end of $2.88 to $5.00 to $5.00 to the year 727,701 28.75 199,762 51.88 209,159 51.88 ------- -------------- ------- -------------- ------- -------------- ------- -------------- ------- -------------- ------- -------------- Exercisable at end of the $6.25 to $11.25 to $11.25 to year 51,680 28.75 107,879 51.88 130,012 51.88 ------- -------------- ------- -------------- ------- -------------- ------- -------------- ------- -------------- ------- --------------
STOCK OPTION PLANS: The Company's 1990 Amended and Restated Stock Option Plan provides for grants of options to purchase the Company's common stock. The plan was amended effective May 1993 to authorize a fixed number of 1,350,000 shares for the plan. At December 31, 1993 and 1992, 627,633 and 70,282 shares were available for the grant of options, respectively. Stock options under this plan are 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 are determined by the Compensation Committee of the Board of Directors. The Company's 1993 Stock Option Plan for Outside Directors provides for automatic grants to newly-elected non-management directors of options to purchase 10,000 shares of common stock, at exercise prices set at the market price at the date of grant. 50,000 shares are authorized for the plan. The options expire five years from the date of grant and vest over 46 GRUBB & ELLIS COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued --------------- STOCK OPTION PLANS, CONTINUED: three years from such date. At December 31, 1993, an option to purchase 10,000 shares were outstanding under the plan, which was not vested. During 1991, no options were exercised. EMPLOYEE COMMON STOCK PURCHASE PLAN: In 1987, the Company adopted an employee stock purchase plan which enables eligible employees to purchase common stock of the Company at discounted prices. In August 1993, the plan was amended to authorize up to 200,000 shares of stock for issuance under this plan. As of December 31, 1993, 100,000 shares were available for issue. During 1993, 1992 and 1991, 6,342, 19,240 and 19,326 shares, respectively, were purchased under this plan. 401(K) PLANS: The Company has a defined contribution plan covering eligible employees other than employees of Axiom. The Company discretionarily contributes to the plan based upon specified percentages of voluntary employee contributions, which contributions may be made in common stock or cash, or a combination of each. Axiom has a 401(k) plan that does not provide for employer contributions to be made in stock. Expenses for the plans amounted to approximately $418,000, $32,000, and $353,000 for 1993, 1992, and 1991, respectively. 8. RELATED PARTY TRANSACTIONS The Company participates in joint ventures, partnerships and trusts in which officers, directors and salespersons of the Company may also participate as investors. Such persons or their affiliates frequently provide property management and other real estate services to these entities, and such persons may manage or otherwise control such joint ventures or partnerships. Revenue earned by the Company for services rendered to affiliates, including joint ventures, officers and directors and their affiliates ("Related Parties"), was as follows for the years ended December 31, 1993, 1992, and 1991:
1993 1992 1991 ---- ---- ---- (in thousands) Real estate brokerage commissions $ 618 $ 404 $ 3,334 Real estate services fees and commissions 1,214 1,235 2,560
47 GRUBB & ELLIS COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued --------------- 8. RELATED PARTY TRANSACTIONS, CONTINUED: The Company rents office space from Related Parties. Such rent expense for the years ended December 31, 1993, 1992 and 1991 was $1,312,000, $1,502,000, and 2,628,000, respectively. At December 31, 1993 and 1992, the Company had $494,000 and $865,000, respectively, of notes and other receivables from Related Parties, which are fully reserved. At December 31, 1993 the Company had a liability of $530,000 due to a Related Party related to a reimbursement of out-of-pocket costs and expenses incurred in connection with the Recapitalization. A limited partnership which is affiliated with the Company is a partner in a joint venture formed to develop an office building in Southern California. As permanent financing for the project, the joint venture borrowed $5.8 million on a non-recourse basis from a Related Party in September 1990, secured by an unamortized first mortgage on the property at a rate of 10.02% per year and a term of five years. As of December 31, 1993, the outstanding principal amount on the note was $5.8 million. At December 31, 1993 and 1992, the Company paid approximately $50,000 and $190,000, respectively, to a Related Party for administration of the Company's employee health plan for four of its offices. In connection with the Recapitalization, certain Related Parties, including persons or entities which became Related Parties as a result of the transaction, received reimbursement of expenses totaling approximately $253,000, and one Related Party received a fee of $325,000. 9. COMMITMENTS AND CONTINGENCIES The Company was contingently liable for approximately $512,000 at December 31, 1993 as a guarantor of certain obligations of unrelated third parties. The guarantees arose in connection with the transfer of assets and liabilities to such parties. These notes payable mature at various dates through 1998. Of the Company's contingent liability at December 31, 1993, substantially all is collateralized by land and improved property of these entities. In the opinion of management, the current underlying value of the assets collateralizing the contingent liabilities is greater than the related obligations guaranteed by the Company. The Company has also indemnified two wholly owned partnerships for their contingent liabilities of up to $2 million each. The Company has noncancelable operating lease obligations for office space and certain equipment ranging from one to eight years, as well as sublease 48 GRUBB & ELLIS COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued --------------- 9. COMMITMENTS AND CONTINGENCIES, CONTINUED: agreements. The leases provide for increases that compound annually based on the Consumer Price Index or otherwise increase at specific rates and times. Substantially all leases require payment of property taxes, insurance and maintenance costs in addition to rental payments. The minimum lease payments are as follows at December 31, 1993:
Gross Sublease Lease Rental Net Lease Year Obligation Income Obligation ---- ---------- -------- ---------- (in thousands) 1994 $14,793 $1,199 $13,594 1995 11,558 978 10,580 1996 8,233 738 7,495 1997 4,090 127 3,963 1998 2,892 127 2,765 Thereafter 3,195 318 2,877
As a component of the Company's restructuring charges related to the downsizing and closing of certain offices, the Company has accrued for approximately $7.1 million of the above expected future minimum rental payments for offices which have been or are planned to be closed during 1994, net of expected sublease income of approximately $2.7 million, as of December 31, 1993. Lease and rental expense for the years ended December 31, 1993, 1992 and 1991 was $19,552,000, $27,510,000, and $30,841,000 , respectively, net of sublease income of $1,214,000, $1,138,000, and $814,000, respectively. The Company and certain of its affiliates are defendants in a series of lawsuits arising from the formation of a limited partnership to purchase an office/retail building in San Francisco in 1985 in which they acted as the syndicator, the general partner of the partnership and the property manager of the investment property. These lawsuits are described below. MICHAEL R. SPARER, ET AL. V. 222 SUTTER STREET PARTNERS, LTD., ET AL., San Francisco Superior Court, was filed on March 16, 1989 by nine limited partners who contended that the Company's affiliates made misrepresentations in certain partnership offering documents, were negligent in their investigation of an investment and mismanaged a property. Pursuant to an agreement among the parties, the plaintiffs' claims were submitted to arbitration, resulting in an award to the plaintiffs. The insurance company paid a substantial portion of this award in 1993. The portion paid by the Company did not have a material effect on the Company's results of operations. DONALD C. ANDERSON, ET AL. V. GRUBB & ELLIS COMPANY, ET AL., San Francisco Superior Court, filed on May 24, 1990, and GABRIEL L. AGUILAR, ET AL. V. GRUBB & ELLIS COMPANY, ET AL., San Francisco Superior Court, filed on May 31, 1990, are purported class actions on behalf of approximately 180 limited partners other than the SPARER plaintiffs and current Company employees or affiliates, who invested $14.5 million in the partnership. The two lawsuits have been consolidated into one action. The allegations 49 GRUBB & ELLIS COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued --------------- 9. COMMITMENTS AND CONTINGENCIES, CONTINUED: include claims similar to those in the SPARER case and additional allegations that the defendants improperly extended the termination date of the offering. The plaintiffs sought rescission of their interests at the time of purchase. In March 1994, the Company agreed to settle both lawsuits subject to court approval and certain other conditions. The court preliminarily approved the settlement and notices of the settlement have been sent to the limited partners. A hearing will be held for the court to consider final approval of the proposed settlement, which includes the issuance of 50,000 shares of common stock of the Company and the payment of cash. The Company's insurance carrier will pay a substantial portion of any cash settlement in these cases. In March 1994, the Company reached a tentative agreement in principle to settle a potential claim by a former joint venture partner, relating to a partnership involving the ownership and operation of commercial real estate. A number of issues remain outstanding to be negotiated between the parties. It is expected that these issues can be resolved but there can be no assurances in this regard. If a settlement is finalized, the Company expects to pay cash and issue shares of common stock of the Company in settlement of this claim (see Note 2 "Real Estate Investments"). The Company has accrued for the estimated settlement costs of this case, of which such amount is included in special charges and unusual items. The Company is involved in various other claims and lawsuits arising in the ordinary course of business, as well as in connection with its participation in various joint ventures, partnerships and a trust. In the opinion of management, upon the advice of counsel, the eventual outcome of the above claims and lawsuits will not have a material adverse effect on the Company's financial position. The Company's errors and omissions insurance carrier issued a notice of non-renewal of this coverage, effective June 1994. The Company is actively pursuing this coverage with other underwriters and does not anticipate difficulty in obtaining coverage with another carrier. 50 GRUBB & ELLIS COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued --------------- 10. SPECIAL CHARGES AND UNUSUAL ITEMS
1993 1992 1991 ---- ---- ---- (in millions) Goodwill write-down $10.1 $18.9 $29.5 Severance and office closure costs 2.9 6.1 4.4 Reduction in carrying value of equity in joint venture and other property investments - - 2.8 2.8 Legal expense and estimated settlement provisions - - 16.2 - - Other 0.5 0.9 0.3 ---- ---- ---- $13.5 $44.9 $37.0 ---- ---- ---- ---- ---- ----
As discussed in Note 2, the Company evaluates the carrying value of its goodwill and other assets by reviewing a number of factors, including operating results, business plans, budgets and economic projections, to determine whether such goodwill is recoverable from future operations. The Company's evaluation for 1991, 1992 and 1993 was significantly impacted by a continuation of the recessionary cycle and the severe downturn in the real estate markets. Goodwill associated with certain acquisitions was written off in 1991 and 1992 because the Company's analysis of the future activity of those operations indicated permanent impairment; these entities were acquired during a period of rapid expansion during the 1980's when real estate activity was at increased levels and profit margins were substantially higher than those found in the market today. As of December 31, 1992, all of the remaining unamortized goodwill was associated with the commercial brokerage operation. In early 1993, the Company completed a Recapitalization and retained a new executive management team. New management reevaluated the Company's business strategy and determined that a variety of restructuring and recapitalization efforts were necessary in order for the business to continue as a going concern. These restructuring efforts have included downsizing operations and refocusing the Company's activities on its core business functions as well as realigning the operational structure into a more centralized operation with less middle management. Recapitalization efforts have included the restructuring of the Company's debt and the infusion of cash by Warburg and Hanauer (see Note 5). The Company's analysis of goodwill performed in the fourth quarter of 1993 indicated that the commercial brokerage business would operate at a loss without the planned restructuring and recapitalization efforts and would, therefore, be unable to recover goodwill; accordingly, the remaining goodwill was written off as of December 31, 1993. 51 GRUBB & ELLIS COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued --------------- 10. SPECIAL CHARGES AND UNUSUAL ITEMS, CONTINUED: During each of the last three years, the Company determined that it would close certain offices and terminate certain employees. The net costs of such actions were accrued as severance and office closure costs when such plans were adopted and amounted to approximately $3.9 million, $1.3 million and $3.6 million for 1993, 1992 and 1991, respectively. Approximately $443,000, $55,000 and $518,000 of these costs represent non-cash write- downs and write-offs of equipment and leasehold improvements and other asset and liability balances for the years 1993, 1992 and 1991, respectively, with the remaining costs expected to be paid in cash. As a consequence of the recessionary cycle and depressed real estate markets, the Company made provisions to increase its valuation allowance of its partnership and joint venture investments during 1992 and 1991 to reflect reductions in estimated net realizable values. Estimated net realizable value is current market value less disposition costs. The substantial legal expense and estimated settlement provision for 1992 reflects several significant lawsuits including those discussed in Note 9. Additionally, the Company has evaluated potential professional liability exposure arising from the Company's salesforce, and this provision includes an estimate for incurred but not reported cases. The gains from the sales of the Company's real estate advisory business and Northern California residential real estate operations during the first quarter of 1993 which are included in "other" in special charges and unusual items. All of the $13.5 million of special charges and unusual items were provided for in the fourth quarter of 1993. Such amounts are generally attributable to events which occurred subsequent to the third quarter, such as the reevaluation of the carrying value of goodwill and other assets due to the revised business strategy and market emphasis, and events and the recognition of additional costs for restructuring that became evident in the fourth quarter when the related plans were developed and adopted. 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; 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 its interest-bearing investments with major financial institutions and limits the amount of credit exposure to any one financial institution in accordance with policy and pursuant to restrictions in the New Note Agreement with Prudential. 52 GRUBB & ELLIS COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued --------------- 12. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
1993 ---- First Second Third Fourth Quarter Quarter Quarter Quarter (A) ------- ------- ------- ----------- (in thousands except per share amounts and shares) Revenue $ 42,297 $ 50,732 $ 50,852 $ 57,843 --------- ------------ ----------- ----------- --------- ------------ ----------- ----------- Income(loss) before income taxes $ (4,562) $ 529 $ (538) $ (13,062) --------- ------------ ----------- ----------- --------- ------------ ----------- ----------- Net income (loss) $ (4,662) $ 454 $ (638) $ (13,362) --------- ------------ ----------- ----------- --------- ------------ ----------- ----------- Loss per common share and equivalents $ (1.30) $ (0.04) $ (0.30) $ (3.44) --------- ------------ ----------- ----------- --------- ------------ ----------- ----------- Weighted average common shares and equivalents 3,900,154 4,056,954 4,060,268 4,060,271 --------- ------------ ----------- ----------- --------- ------------ ----------- ----------- Common stock market price range (high:low) 8:1 7/8 5 7/8:3 3/8 4 1/2:2 3/4 3 5/8:2 5/8 --------- ------------ ----------- ----------- --------- ------------ ----------- ----------- (A) See Note 10 for discussion of special charges and unusual items recorded in the fourth quarter.
53 GRUBB & ELLIS COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued --------------- 12. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
1992 ---- First Second Third Fourth Quarter Quarter Quarter Quarter (A) ------- ------- ------- ----------- (in thousands except per share amounts and shares) Revenue $ 48,805 $ 60,111 $ 54,307 $ 60,940 ------------ ------------ ---------- ----------- ------------ ------------ ---------- ----------- Loss before income taxes $ (5,269) $ (149) $ (4,101) $ (49,552) ------------ ------------ ---------- ----------- ------------ ------------ ---------- ----------- Net loss $ (5,429) $ (269) $ (4,193) $ (49,785) ------------ ------------ ---------- ----------- ------------ ------------ ---------- ----------- Loss per common share and equivalents $ (0.32) $ (0.02) $ (0.23) $ (2.77) ------------ ------------ ---------- ----------- ------------ ------------ ---------- ----------- Weighted average common shares and equivalents 16,763,871 17,593,968 17,865,009 17,955,215 ------------ ------------ ---------- ----------- ------------ ------------ ---------- ----------- Common stock market price range (high:low) 2 1/2:1 3/8 2 1/8:1 1/4 1 5/8:1 1 1/4:7/8 ------------ ------------ ---------- ----------- ------------ ------------ ---------- ----------- Retroactive effect of one- for five reverse stock split in January 1993: Loss per common share and equivalents $ (1.62) $ (0.08) $ (1.17) $ (13.86) ------------ ------------ ---------- ----------- ------------ ------------ ---------- ----------- Weighted average common shares and equivalents 3,352,774 3,518,794 3,573,002 3,591,043 ------------ ------------ ---------- ----------- ------------ ------------ ---------- ----------- Common Stock market price range (high:low) 12 1/2:6 7/8 10 5/8:6 1/4 8 1/8:5 6 1/4:4 3/8 ------------ ------------ ---------- ----------- ------------ ------------ ---------- ----------- (A) See Note 10 for discussion of special charges and unusual items recorded in the fourth quarter.
54 GRUBB & ELLIS COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued --------------- ITEM 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None. 55 GRUBB & ELLIS COMPANY PART III -------------- ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT DIRECTORS OF THE REGISTRANT The Board currently consists of six directors, following the resignation of John Mullman, a representative of The Prudential Insurance Company of America ("Prudential"), in January 1994. Joe F. Hanauer, 56, Chairman of the Board of the Company, has, since December 1988, been a general partner of Combined Investments, L.P., an investment management business located in Laguna Beach, California, whose investments include real estate. Since February 1993, Mr. Hanauer has served as a director of certain subsidiaries of the Company and, through Combined Investments, L.P., has also provided operational and management services to the Company. From 1977 to December 1988, Mr. Hanauer was associated with Coldwell Banker Residential Group, Inc., serving as Chairman and Chief Executive Officer from 1984. Since March 1989, he has also been Chairman of the Greyhawk Corporation ("Greyhawk"), a corporation of which he is a majority shareholder and which has interests in real estate brokerage franchising. He is also a director of MAF Bancorp. Mr. Hanauer was first elected as a director of the Company in January 1993 pursuant to a stockholders' agreement among Warburg Pincus Investors, L.P. ("Warburg"), Prudential, the Company and Mr. Hanauer dated as of January 29, 1993 (the "Stockholders' Agreement"). Lawrence S. Bacow, 42, is a professor at the Massachusetts Institute of Technology ("M.I.T.") Center for Real Estate and the M.I.T. Department of Urban Studies and Planning. He joined the M.I.T. faculty in 1977 and the M.I.T. Center for Real Estate in 1983, serving as the director of the Center for Real Estate from 1990 until 1992. From December 1987 to June 1990, he was also a principal of Artel Associates, a company which provided investment banking services to real estate companies. Professor Bacow has served as a director of the Company since January 1993. 56 Kenneth E. Field, 50, has been President and Chief Executive Officer of INVESCORP, Limited, a private merchant banking and real estate development company located in Toronto, Ontario, Canada, since July 1989. Prior to that time, he was a director of Bramalea Limited, a real estate development firm located in Toronto, and served as its Chief Executive Officer from 1986 and President from 1977. He is also a director and a majority shareholder of Commercial Alcohols, Inc., an industrial fuel alcohol company. Mr. Field has served as a director of the Company since 1988. Reuben S. Leibowitz, 46, is a Managing Director of E.M. Warburg, Pincus & Co., Inc. ("Warburg Pincus"), a venture banking and investment counseling firm. He has been associated with Warburg Pincus since 1984. Warburg Pincus is an affiliate of Warburg, the Company's principal stockholder. Mr. Leibowitz is also a director of Chelsea GCA Realty, Inc. Mr. Leibowitz was first elected as a director of the Company in January 1993 as a representative of Warburg pursuant to the Stockholders' Agreement. John D. Santoleri, 30, has been a Vice President of Warburg, Pincus Ventures, Inc., the venture banking subsidiary of Warburg Pincus, since 1991, and has been associated with Warburg Pincus since June 1989. From June 1985 to June 1989, he was associated with The Harlan Company, a New York-based real estate consulting firm, and served there as Vice President from September 1988 to June 1989. Warburg, Pincus Ventures, Inc. is an affiliate of Warburg, the Company's principal stockholder. Mr. Santoleri also serves as a director of Chelsea GCA Realty, Inc. Mr. Santoleri was first elected as a director of the Company in January 1993 as a representative of Warburg pursuant to the Stockholders' Agreement. Wilbert F. Schwartz, 52, has been President and Chief Executive Officer of the Company since February 1993. He will resign from such positions, which resignation is expected to be effective July 1, 1994. He will remain a director of the Company. He had been an employee of Prudential since 1976, serving as Managing Director of its subsidiary, Prudential Investment Corp., from October 1991 until February 1993, and as President and Vice Chairman of Prudential's Real Estate Affiliates division from March 1990 to October 1991. Mr. Schwartz was first elected as a director of the Company in January 1993 as a representative of Prudential, a principal stockholder of the Company. 57 EXECUTIVE OFFICERS OF THE REGISTRANT In addition to Mr. Schwartz, the following are executive officers of the Company: John F. Carpenter, 47, has been President of the Company's Pacific Northwest Region, a Senior Vice President of the Company, and Regional Director of Investment Marketing in the commercial brokerage division since October 1992. From September 1990 to September 1992, he was President and Chief Executive Officer of Real Estate Investment Trust of California. He was previously associated with the Company as a district manager from January 1987 to August 1990. He joined the Company as a salesperson in 1979. Robert J. Hanlon, Jr., 47, has been Senior Vice President and Chief Financial Officer of the Company since December 1993. Prior to joining the Company, Mr. Hanlon, who is a Certified Public Accountant, was employed by Prudential for over 23 years, serving as Senior Vice President and Chief Financial Officer of its affiliate, Prudential Capital Corporation, from 1985 through 1989 and as Executive Vice President, Finance and Administration, of Prudential's affiliate, Prudential Relocation Management, from 1990 through 1993. Gordon M. Hess, 45, has been Chief Administrative Officer of the Company since June 1993, and a Senior Vice President of the Company since January 1991. He was National Marketing Director of the Company's commercial brokerage division from February 1992 to June 1993 and served as Vice President of the Company from February 1989 to January 1991. From January 1989 to February 1992, he was Vice President of National/International Accounts for the Company's Western Region. From February 1991 to February 1992, he was Vice President of Corporate Support Services and National Retail Marketing for the Company. He joined the Honolulu office of the Company in 1986 as Senior Vice President of the commercial brokerage division and District Manager. 58 Phillip D. Royster, 50, has been President of the Company's Pacific Southwest Region since January 1992 and a Senior Vice President of the Company since May 1990. He was President of the Company's California Region from January 1990 to January 1992, and a Senior Vice President of the Company's commercial brokerage division from February 1984 to May 1990. Robert J. Walner, 47, has been Senior Vice President, Secretary and General Counsel of the Company since January 1994. From August 1992 to January 1994, Mr. Walner was associated with Lawrence Walner & Associates, Ltd. in Chicago, Illinois, a law firm specializing in state and federal class action litigation on a national basis. From November 1979 to August 1992, he was Senior Vice President, General Counsel and Secretary to the Balcor Company, a subsidiary of American Express Company. Neil R. Young, 45, has been President of the Company's Eastern Region since March 1994, President of the Midwest/Texas Region since January 1993, and a Senior Vice President of the Company since January 1992. Mr. Young has been with the Company since 1983, serving prior to 1993 as an Executive Vice President, Regional Manager, District Manager and Sales Manager of the commercial brokerage division in the Midwest Region. 59 ITEM 11. EXECUTIVE COMPENSATION COMPENSATION OF DIRECTORS Only directors who are not employees of the Company and who are neither holders of five percent or more of the capital stock of the Company ("Five- Percent Holders") nor employees or affiliates of entities which are Five-Percent Holders ("Outside Directors"), receive compensation for serving on the Board and on its committees. Such compensation currently consists of an annual retainer fee of $15,000 and a fee of $1,000 for each Board or committee meeting attended. These fees are set by the Board. In addition, under the 1993 Stock Option Plan for Outside Directors, Outside Directors each receive an option to purchase 10,000 shares of Common Stock of the Company, $.01 par value ("Common Stock") upon the date of first election to the Board, with an exercise price equal to market value on such date. Pursuant to an agreement, effective as of February 1, 1993, between the Company and Combined Investments, L.P., a company of which Mr. Hanauer is the general partner, Mr. Hanauer devotes a substantial amount of his working time providing operational and management services to the Company for compensation of $15,000 per month plus expenses. During 1993, Combined Investments, L.P. earned $165,000 under such agreement. The agreement is terminable by either party on 30 days' notice. Mr. Hanauer receives no other fees or compensation from the Company for his service as Chairman of the Board. 60 COMPENSATION OF EXECUTIVE OFFICERS The following table sets forth, for all persons who served as Chief Executive Officer in 1993 and each of the four most highly compensated other executive officers of the Company (determined as of December 31, 1993), compensation earned, including deferred compensation, for services in all capacities with the Company and its subsidiaries for the fiscal years ended December 31, 1993, 1992, and 1991. Two additional tables provide information about these employees' stock options. SUMMARY COMPENSATION TABLE
Long Term Compensation Annual Compensation Awards ------------------------------------------------ --------------------------- Other Securities Name Annual Under- All Other and Compen- lying Compen- Principal sation Options sation Position Year Salary ($) Bonus ($) ($) SARS (#) ($) ($) - - ------------------------------------------------------------------------------------------------------------------------------- Wilbert F. Schwartz 1993 211,000 0 0 400,000 0 Chief Executive Officer (2) 1992 0 0 0 0 0 1991 0 0 0 0 0 Alvin L. Swanson, Jr. 1993 92,000 0 14,000 0 149,000 Former Chief Executive Officer (3) 1992 154,000 60,000 19,000 60,000 0 1991 0 0 12,000 0 0 Neil R. Young 1993 220,000 69,000 0 15,000 2,000(4) President of the 1992 103,000 80,000 0 5,000(5) 0 Midwest/Texas Region 1991 73,000 82,000 0 800(5) 1,000(4) J. David Dawson 1993 195,000 0 0 20,000 2,000(4) President of the 1992 81,000 0 0 20,000(5) 0 Eastern Region 1991 0 0 0 0 0 John F. Carpenter 1993 171,000 9,000 0 15,000 1,000(4) President of the 1992 39,000 0 0 0 0 Pacific Northwest Region 1991 0 0 0 0 0 Gordon M. Hess 1993 172,000 0 0 13,500 1,000(4) Chief Administrative Officer 1992 174,000 0 0 5,000(5) 0 1991 157,000 0 0 800(5) 0 (1) The amounts represent options to purchase the designated numbers of shares of Common Stock, except with respect to Mr. Swanson, in which case the amounts represent stock appreciation rights ("SARs"). (2) Mr. Schwartz was elected President and Chief Executive Officer in February 1993. 61 (3) Mr. Swanson served as President and Chief Executive Officer between May 1992 through February 1993. Other annual compensation in 1993 relates to legal expenses incurred in connection with his employment contract, and in 1991 and 1992 represents directors' fees. All other compensation relates to his severance agreement, which includes $5,200 for health coverage. (4) Represents Company contributions to the 401(k) plan accounts of the designated individuals. (5) These options were canceled in 1993 pursuant to a repricing program. The repriced options are included in the 1993 grants of options.
62 63 OPTION/SAR GRANTS IN LAST FISCAL YEAR
Potential Realizable Value at Assumed Annual Rates of Stock Price Appreciation Individual Grants For Option Term (1) - - ----------------------------------------------------------------------------------------------------------------------------- (a) (b) (c) (d) (e) (f) (g) % of Securities Total Under- Options/ lying SARs Options/ Granted to Exercise SARs Employees or Base Granted in Fiscal Price Expiration Name (#)(2)(3) Year ($/Sh) Date 5%($) 10%($) - - --------------------- ---------- ----------- --------- ----------- -------- ---------- Wilbert F. Schwartz 400,000 77.4% $3.50 June 8, 2001 $595,000 $1,494,000 Alvin L. Swanson, Jr. -- -- -- -- -- -- Neil R. Young 15,000 2.9% $4.125 August 9, 2001 $ 30,000 $ 71,000 J. David Dawson 20,000 3.9% $4.125 August 9, 2001 $ 39,000 $ 94,000 John F. Carpenter 15,000 2.9% $4.125 August 9, 2001 $ 30,000 $ 71,000 Gordon M. Hess 13,500 2.6% $4.125 August 9, 2001 $ 27,000 $ 64,000 (1) The potential realizable value is calculated from the market price per share, assuming the Common Stock appreciates in value at the stated percentage rate from the date of grant of an option or SAR to the expiration date. Actual gains, if any, are dependent on the future market price of the Common Stock. (2) The amounts represent options to purchase the designated numbers of shares of Common Stock 64 (3) The option of Mr. Schwartz was granted on June 8, 1993, and the options of Messrs. Young, Dawson, Carpenter and Hess were granted on August 9, 1993, under the 1990 Amended and Restated Stock Option Plan, as amended. The options were each granted at market value on the date of grant, and vest in five, equal annual installments commencing one year from the date of grant. Vesting accelerates upon certain conditions related to changes of control of the Company or at the discretion of the Compensation Committee. Upon termination of Mr. Dawson's employment on April 30, 1994, all of the options held by him will expire. In connection with the resignation of Mr. Schwartz, all of the options held by him will be canceled.
65 AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FY-END OPTION/SAR VALUES
(a) (b) (c) (d) (e) Number of Securities Value of Underlying Unexercised Unexercised In-the-Money Options/SARs at Options/SARs at FY-End (#) FY-End ($) Shares Acquired Exercisable/ Exercisable/ Name on Exercise (#) Value Realized ($) Unexercisable (1) Unexercisable (2) - - ---------------------------------------------------------------------------------------------------------------- Wilbert F. Schwartz -- -- 0/400,000 -- Alvin L. Swanson, Jr. -- -- 60,000/0 -- Neil R. Young -- -- 0/15,000 -- J. David Dawson -- -- 0/20,000 -- John F. Carpenter -- -- 0/15,000 -- Gordon M. Hess -- -- 0/13,500 -- (1) Mr. Swanson was granted 60,000 SARs. The other amounts represent options to purchase the designated numbers of shares of Common Stock. (2) The value of unexercised in-the-money options and SARs at fiscal year-end was calculated based on the closing price of the Common Stock as reported on the New York Stock Exchange on December 31, 1993 ($3.125 per share).
66 EMPLOYMENT CONTRACTS AND TERMINATION OF EMPLOYMENT AND CHANGE-IN-CONTROL ARRANGEMENTS The Company entered into an agreement with Mr. Swanson as of May 20, 1992 in connection with his services as President and Chief Executive Officer. Under the agreement, he received a base salary of $250,000, health benefits and $60,000 incentive compensation for services rendered during 1992. In addition, pursuant to the agreement, 60,000 SARs were granted which expire seven years from the date of grant and are exercisable for Common Stock or, in certain circumstances, for cash. The exercise price of the SARs is generally equal to the difference between the fair market value of a share of Common Stock at exercise and $3.52. As of February 24, 1993, Mr. Swanson resigned as President and Chief Executive Officer, and from that date until his resignation from all positions with the Company on May 20, 1993, Mr. Swanson provided transitional services and received a base salary of $200,000. Certain severance compensation provisions of his employment agreement became effective upon Mr. Swanson's termination of employment, including the extension of payments equal to his original base salary until May 20, 1994, continuing health benefits until age 65 and acceleration of the vesting of his SARs. In the event that such severance payments are deemed to constitute "excess parachute payments" as that term is defined in Section 280G of the Internal Revenue Code, the Company is obligated under such agreement to pay an additional amount equal to the federal excise tax obligations of Mr. Swanson. Mr. Swanson's term as a director expired August 9, 1993. Mr. Schwartz was elected President and Chief Executive Officer of the Company on February 24, 1993, receiving an annual salary of $250,000, and eligibility for incentive compensation in an amount of up to 60% of his salary in the discretion of the Compensation Committee. In connection with his resignation from such positions effective July 1, 1994, Mr. Schwartz will receive severance compensation equal to one year's base salary and continued health benefits for one year. In connection with his resignation effective April 30, 1994, Mr. Dawson, formerly President of the Eastern Region of the Company, will receive, pursuant to an agreement, severance compensation equal to three and one-half months' salary, a payment of $40,000 and a relocation allowance of up to $15,000. 67 COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION The members of the Compensation Committee of the Board ("Compensation Committee") from January 29, 1993 through December 31, 1993 were Reuben S. Leibowitz (Chairman), Lawrence S. Bacow and John Mullman, none of whom serve as officers of the Company. John Mullman resigned from the Board in January 1994. From January 1 through January 29, 1993, the members of the Compensation Committee were Marvin M. Grove, Robert C. Kyle and Henry S. Miller, Jr., none of whom served as officers of the Company. Until May 1992, Mr. Miller was Chairman of HSM Inc., a subsidiary acquired by the Company in August 1984. In connection with an exchange of obligations with respect to certain partnerships between HSM Inc. and David Donosky, the son-in-law of Mr. Miller and former President of the Texas Region of the Company, Mr. Donosky owed, as of March 1, 1994, outstanding principal and accrued interest of approximately $147,000 to HSM Inc. The debt is non-recourse and due in 1996, bearing interest at 11% per year. Mr. Donosky also borrowed $240,000 from the Company on a recourse basis at a prime rate of interest and due in November of 1993, secured by his rights to purchase 23,850 shares of Common Stock as a result of a stock option exercise, at a weighted average exercise price of $14.50 per share. As of March 1, 1994, the outstanding principal and accrued interest on this loan was approximately $208,000. As a result of his failure to purchase and sell the shares subject to the exercised stock option within one year of the exercise, Mr. Donosky defaulted in his obligation to the Company for payment of the purchase price of the shares in the aggregate amount of approximately $346,000, and the shares were not issued. The indebtedness related to the partnerships and the $240,000 loan had also been secured by a pledge of Mr. Donosky's non- qualified options to purchase 20,000 shares of Common Stock at a weighted average exercise price of $17.40 per share. These options expired upon termination of Mr. Donosky's employment in January 1993. In February 1993, Mr. Donosky filed for bankruptcy under Chapter 7 of the U.S. Bankruptcy Code. 68 Mr. Leibowitz is a Managing Director of Warburg, Pincus & Co., Inc. an affiliate of Warburg. Mr. Mullman is a Vice President, Corporate Finance of Prudential. Warburg and Prudential entered into certain agreements with the Company in connection with a recapitalization in 1993 and a restructuring of debt in 1994 as described below. 1993 RECAPITALIZATION. On January 29, 1993, the stockholders of the Company approved a financial recapitalization and debt restructuring (the "Recapitalization"), pursuant to which Warburg (for a purchase price of $12,850,000) and Mr. Hanauer (for a purchase price of $900,000) purchased (i) 128,266 and 8,894 shares, respectively, of newly issued Senior Preferred Stock, (ii) five-year warrants initially to purchase 340,000 and 160,000 shares of Common Stock, respectively, at an exercise price of $5.00 per share (the $5.00 Warrants"), (iii) five-year warrants initially to purchase 142,000 and 58,000 shares of Common Stock, respectively, at an exercise price of $5.50 per share (the "$5.50 Warrants, and, together with the $5.00 Warrants, the "Warburg/Hanauer Warrants"), and (iv) subscription warrants ("Subscription Warrants") to purchase 373,818 and 26,182 shares of Common Stock, respectively, at an exercise price of $5.00 per share. The funds used by Warburg to purchase the Senior Preferred Stock, the Warburg/Hanauer Warrants and the Subscription Warrants were provided from Warburg's investment capital. Mr. Hanauer purchased the Senior Preferred Stock, the Warburg/Hanauer Warrants and the Subscription Warrants with funds borrowed in the ordinary course of business under Mr. Hanauer's unsecured line of credit with First National Bank of Blue Island. The Company owed approximately $530,000 to Warburg at December 31, 1993 for reimbursement of its expenses related to the Recapitalization. As of April 1, 1994, such obligation had been paid. In connection with the Recapitalization, the Company paid certain fees and expenses to an affiliate of Mr. Hanauer. See "Item 13. Certain Relationships and Related Transactions." Pursuant to the Recapitalization, the Company and Prudential agreed to restructure an existing $5-million revolving line of credit (the "Old Revolving Credit Note"), $10 million of existing 9.90% Senior Notes due November 1996 (the "Senior Notes") and $25 million of existing 10.65% Subordinated Notes due November 1996 (the "Subordinated Notes") held by Prudential. Prudential and the Company entered into a Senior Note, Subordinated Note and Revolving Credit Note Agreement (the "New Note Agreement") pursuant to which the Company issued to Prudential (i) a new $5-million Revolving Credit Note due December 31, 1994 (the "New Revolving Credit Note") upon cancellation of the Old Revolving Credit Note, (ii) $10 million of the Company's 9.9% Senior Notes due November 1, 1996 (the "New Senior Notes") upon cancellation of all 69 of the outstanding Senior Notes and (iii) $10 million of the Company's 10.65% Subordinated Payment-in-Kind Notes due November 1, 1999 (the "PIK Notes") upon conversion of $10 million of the Subordinated Notes. In addition, prior to the Recapitalization, Prudential held warrants (the "Old Prudential Warrants") to purchase 397,549 shares of Common Stock at an exercise price of $7.30 per share, which Prudential agreed to exercise through the cancellation of approximately $1,982,000 of the accrued and unpaid interest on the Subordinated Notes and cancellation of approximately $920,000 of PIK Notes. In addition, Prudential, in exchange for the cancellation of $15 million of Subordinated Notes, purchased (x) 150,000 newly issued shares of Junior Preferred Stock and (y) five-year warrants initially to purchase 200,000 shares of Common Stock at an exercise price of $5.50 per share (the "Prudential $5.50 Warrants"). The Company reimbursed Prudential for approximately $206,000 of its out-of-pocket costs and expenses incurred in connection with the Recapitalization. As part of the Recapitalization, Warburg, Prudential, Mr. Hanauer and the Company entered into a stockholders' agreement (the "Stockholders' Agreement"), which provides for the nomination of up to three persons for election as director by Warburg and up to two persons for election as director by Prudential. Pursuant to the Stockholders' Agreement, Mr. Leibowitz was nominated for election as a director by Warburg, and Mr. Mullman was nominated for election as a director by Prudential. On July 1, 1993, Warburg and Mr. Hanauer sold an aggregate of 1,193 shares of Senior Preferred Stock, $5.00 Warrants to purchase 4,350 shares, $5.50 Warrants to purchase 1,740 shares, and Subscription Warrants to purchase 3,480 shares of Common Stock to Wilbert F. Schwartz, President and Chief Executive Officer of the Company, for a purchase price of approximately $120,000, which was approximately equal to the consideration paid by Warburg and Mr. Hanauer upon their acquisition of such securities. In connection with the resignation of Mr. Schwartz, he has agreed to resell such securities to Warburg and Mr. Hanauer for the same purchase price that he paid upon acquisition of such securities. 70 1994 DEBT RESTRUCTURING. During March 1994, the Company, Warburg and Prudential entered into an agreement in principle (the "Agreement") pursuant to which the New Note Agreement was amended to provide that the Company will not be required to make principal payments on any of the Prudential debt prior to November 1, 1997. Thereafter, the revolving credit facility will mature on November 1, 1999, principal on the New Senior Notes will be payable in two equal installments on November 1, 1997 and 1998, and principal on the PIK Notes will be payable in two approximately equal installments on November 1, 2000 and 2001. The interest rate on the PIK Notes will increase from 10.65 % to 11.65% per annum on January 1, 1996. In addition, certain covenants of the New Note Agreement will remain in place, but will not be in effect until April 1, 1997. The New Note Agreement, as amended, provides for supplemental principal payments commencing July 1, 1998 if the Company meets certain financial tests. The Agreement also provides a financing commitment from Warburg for a $10 million interim loan which is expected to be retired in connection with a proposed sale of rights to acquire Common Stock of the Company. Warburg has agreed to loan the Company up to $10 million at an initial interest rate of 5% per annum with a maturity date of April 28, 1995. The interest rate will increase to 10% per annum in the event that stockholder approval of certain of the transactions contemplated by the Agreement is not obtained. Interest on the loan will be due upon maturity or upon refinancing, whichever occurs first. The loan will be secured by the Company's commercial brokerage revenues through a cash collateral account. Prudential also will have a lien on the cash collateral account which will be subordinated to Warburg's loan. The Agreement also provides for the Company to seek additional equity capital through a rights offering, and contemplates that the Company would issue to holders of the Common Stock, for each share of Common Stock held, a non- transferable right to acquire one share of Common Stock, at an exercise price tentatively set at $2.375 per share. Subject to certain conditions, stockholders also would have certain rights to oversubscribe to the extent that other stockholders do not subscribe. Warburg has agreed to acquire the Common Stock not acquired by the holders of Common Stock in the rights offering through the conversion of its loan up to an amount not exceeding $10 million plus accrued interest on the loan. Pursuant to the Agreement, the rights offering would occur after the Company obtains the approval of the transactions contemplated by the Agreement from the holders of a majority of the shares of the Company's voting stock, including a majority of the holders of the shares of the Company's voting stock other than Warburg and Prudential. Accordingly, there can be no assurance that such approval will be obtained. 71 The Agreement also contemplates certain amendments to the existing Senior Preferred Stock held by Warburg and the Junior Preferred Stock held by Prudential (together, the "Preferred Stock"). Both series of Preferred Stock would be amended to be non-redeemable. As of the date of the rights offering, the exercise prices on the outstanding Warrants held by Prudential and Warburg would be reduced to $3.50 per share pursuant to the terms of such Warrants, except that the exercise price on the Subscription Warrants to purchase 370,566 shares held by Warburg, which are exercisable only under specified circumstances, would be reduced to the same price per share as the rights offering. As it relates to the rights offering, Warburg will retain certain anti-dilution rights with respect to the preferred stock and Warrants which it currently holds. Thereafter, the Preferred Stock and Warrants held by Warburg would be amended to eliminate the anti-dilution provisions with respect to the issuance of Common Stock and Common Stock equivalents at less than the conversion price or exercise price. The Preferred Stock and the outstanding Warrants held by Prudential would be amended to eliminate the anti-dilution provisions with respect to the issuance of Common Stock and Common Stock equivalents at less than the conversion price or exercise price. The Junior Preferred Stock also would be amended to increase the dividend rate to 10% per annum effective January 1, 2002, with further increases of 1% per year effective January 1, 2003 and January 1, 2004, and 2% per year effective January 1, 2005 and each January 1 thereafter. The Senior Preferred Stock would be amended to provide that at such time as the dividend rate on the Junior Preferred Stock would increase above 12%, the dividend rate on the Senior Preferred Stock would increase by the same amount as the dividend rate on the Junior Preferred Stock. The Junior Preferred Stock also would be amended to provide that under certain circumstances following the conversion of the Senior Preferred Stock, holders of the Junior Preferred Stock will be obligated to convert such preferred stock. In consideration of their agreements, the Company would grant Warburg and Prudential warrants to purchase approximately 325,000 and 150,000 shares of Common Stock of the Company, respectively. The exercise price of these warrants would be equal to the rights offering price. In the ordinary course of business, Prudential, its affiliates and franchisees paid the Company approximately $4.6 million during 1993 for management of several of its properties and for leasing commissions. The Company also rents office space in the ordinary course of business under a long-term lease from a partnership of which Prudential is a general partner, paying approximately $1,312,000 in rent during 1993. 72 A limited partnership which is affiliated with the Company is a partner in a joint venture formed to develop an office building in southern California. As a permanent financing for the project, the joint venture borrowed $5.8 million on a non-recourse basis from Prudential in September 1990, secured by an unamortized first mortgage on the property, at a rate of 10.02% per year and a term of five years. As of June 1, 1994, the outstanding principal amount on the note was $5.8 million. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The following table sets forth information as of March 1, 1994 concerning beneficial ownership of Common Stock by known beneficial holders of more than 5% of the outstanding Common Stock, directors, named executive officers, and all current directors and executive officers as a group. Unless otherwise noted, the listed persons have sole voting and dispositive powers with respect to the shares held in their names, subject to community property laws if applicable.
Amount and Nature of Beneficial Ownership Percent of Class (1) -------------------- -------------------- Warburg, Pincus Investors, L.P. 466 Lexington Avenue, New York, NY 10017 5,067,425 (2)(5) 55.5% The Prudential Insurance Company of America Four Gateway Center Newark, NJ 07102 3,272,060 (3)(5) 47.2% Joe F. Hanauer Combined Investments, L.P. 361 Forest Ave., Suite 200 Laguna Beach, CA 92651 555,773 (4)(5) 12.1% FMR Corp. 82 Devonshire Street Boston, MA 02109-3614 307,600 (6) 7.6% Lawrence S. Bacow 4,134 (7)(8) * John F. Carpenter 638 (6) * J. David Dawson 637 (8) * Kenneth E. Field 27,137 (9) * Gordon M. Hess 1,538 (8) * Reuben S. Leibowitz -0- (2) -- John D. Santoleri -0- (2) -- Wilbert F. Schwartz 45,676 (10) 1.1% Alvin L. Swanson, Jr. 81,804 (11) 2.0% Neil R. Young 3,082 * All current directors and executive officers as a group (13 persons) 639,487 (8) 13.8% * Does not exceed 1.0%. 73 (1) Percentages total more than 100% due to the requirement to count derivative securities for certain purposes. The percentages of shares of Common Stock beneficially owned by the designated persons assumes that no other person exercises currently outstanding warrants or options or convertible securities. (2) At March 1, 1994, Warburg beneficially owned 5,067,425 shares of Common Stock through its ownership of (i) 127,150 shares of Senior Preferred Stock which are convertible into an aggregate of 4,219,052 shares of Common Stock, (ii) currently exercisable warrants to purchase an aggregate of 477,807 shares of Common Stock, and (iii) Subscription Warrants which will be exercisable to purchase 370,566 shares of Common Stock only in the event the Company pays certain liabilities after January 29, 1993 which exceed an aggregate of $1,500,000. Such Subscription Warrants, with an aggregate exercise price equal to 92.64% of the amount by which such excess liabilities exceed $500,000, will be exercisable by Warburg for a period of 90 days. The sole general partner of Warburg is Warburg, Pincus & Co., a New York general partnership ("WP"). E.M. Warburg, Pincus & Company, a New York general partnership that has the same general partners as WP ("E.M. Warburg"), manages Warburg. Lionel I. Pincus is the managing partner of WP and E.M. Warburg and may be deemed to control them. WP has a 20% interest in the profits of Warburg and, through its wholly-owned subsidiary, E.M. Warburg, Pincus & Co., Inc. ("Warburg Pincus"), owns 1.13% of the limited partnership interests in Warburg. Mr. Leibowitz, a director of the Company, is a Managing Director of Warburg Pincus and a general partner of WP and E.M. Warburg. As such, he may be deemed to be a beneficial owner of an indeterminate portion of the shares of Common Stock beneficially owned by Warburg, Warburg Pincus and WP. He disclaims any such beneficial ownership. Mr. Santoleri, a director of the Company, is a Vice President of Warburg, Pincus Ventures, Inc., which is an affiliate of Warburg. Mr. Santoleri disclaims beneficial ownership of any shares of Common Stock beneficially owned by Warburg. 74 (3) At March 1,1994, Prudential beneficially owned 3,272,060 shares of Common Stock through its ownership of (i) 397,549 shares of Common Stock, (ii) 150,000 shares of Junior Preferred Stock which are convertible into an aggregate of 2,674,511 shares of Common Stock, and (iii) currently exercisable warrants to purchase an aggregate of 200,000 shares of Common Stock. (4) At March 1, 1994, Mr. Hanauer, a director and Chairman of the Company, beneficially owned 555,773 shares of Common Stock, through his ownership of the following securities held in a trust of which Mr. Hanauer is the trustee and he and his wife and children are beneficiaries: (i) 21,153 shares of Common Stock, (ii) 8,817 shares of Senior Preferred Stock convertible into an aggregate of 292,563 shares of Common Stock, (iii) currently exercisable warrants to purchase an aggregate of 216,103 shares of Common Stock, and (iv) Subscription Warrants to purchase 25,954 shares of Common Stock, which will be exercisable only in the event the Company pays certain liabilities after January 29, 1993 which exceed an aggregate of $1,500,000. Such Subscription Warrants, with an aggregate exercise price equal to 6.49% of the amount by which such excess liabilities exceed $500,000, will be exercisable by Mr. Hanauer for a period of 90 days. (5) Pursuant to the rules promulgated under the Securities Exchange Act of 1934, as amended, Prudential, Warburg and Mr. Hanauer may be deemed to be a "group," as defined in Section 13(d) of such Act. Prudential, Warburg and Mr. Hanauer do not affirm the existence of such a group and disclaim beneficial ownership of shares of Common Stock beneficially owned by any other party. (6) Includes 203,500 shares held by affiliates of FMR Corp., which is a holding company for certain investment advisors. Information with respect to FMR Corp. is based on the most recent Schedule 13D filed with the Securities and Exchange Commission reflecting beneficial ownership of Common Stock. (7) Includes an option under a Company stock option plan which, as of March 1, 1994, was exercisable for 3,334 shares. (8) Includes, in the aggregate, 838 shares held by immediate family members of, and 424 shares held jointly with immediate family members by, all current directors and executive officers as a group. (9) Includes 10,120 shares held by a corporation of which Mr. Field is President and sole shareholder. 75 (10) At March 1, 1994 Mr. Schwartz beneficially owned 45,676 shares of Common Stock, through his ownership of 1,193 shares of Senior Preferred Stock convertible into an aggregate of 39,586 shares of Common Stock and currently exercisable warrants to purchase an aggregate of 6,090 shares of Common Stock. Mr. Schwartz also holds Subscription Warrants to purchase 3,480 shares of Common Stock which will be exercisable only in the event that the Company pays certain liabilities after January 29, 1993 which exceed an aggregate of $1,500,000. Such Subscription Warrants, with an aggregate exercise price equal to .87% of the amount by which such excess liabilities exceed $500,000, will be exercisable by Mr. Schwartz for a period of 90 days. In connection with the resignation of Mr. Schwartz, he has agreed to resell such securities to Warburg and Mr. Hanauer for the same purchase price that he paid upon acquisition of such securities. Includes 60,000 currently exercisable stock appreciation rights ("SARs") held by Mr. Swanson which fully vested upon his resignation on May 20, 1993. The SARs are generally exercisable for shares of Common Stock with an aggregate fair market value equal to the excess of the fair market value of the Common Stock over $3.52.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Following are descriptions of certain transactions and business relationships between the Company and its directors, executive officers and principal stockholders. See also "Compensation Committee Interlocks and Insider Participation." In May 1992, the Company entered into an agreement with the Meredith Corporation's operating group known as "Better Homes and Garden Real Estate Service" ("BH&G") whereby certain residential brokerage offices of the Company in California and BH&G agreed to jointly offer marketing, training and other support services to independent brokerage firms. Under the agreement, the Company will be paid fees by Meredith Corporation based upon the performance of the independent firms involved, and will, after the first year of the agreement, be obligated to pay fees to Meredith Corporation based upon the Company's gross revenue for the offices participating in the program. To date, no fees have been paid to the Company by Meredith Corporation and the Company has not paid any fees to Meredith Corporation. The Company believes the program with Meredith Corporation will assist the participating offices to be more competitive and will permit the Company to profit as a result of offering mortgage services to 76 Meredith Corporation franchisees. Meredith Corporation and Greyhawk, a corporation of which Mr. Hanauer is a majority shareholder and chairman of the board, are parties to certain agreements pursuant to which Greyhawk has agreed to assist Meredith Corporation in developing its Better Homes and Gardens franchises in several U.S. markets. Greyhawk has not to date received any fees based on amounts received by Meredith Corporation from the Company, but will be entitled to receive such fees in the future. In connection with the Recapitalization, Greyhawk was paid a fee of $325,000 by the Company related to its efforts in introducing to the Company various potential investors, including Warburg. An additional $46,000 was paid by the Company to Greyhawk as reimbursement of travel and legal expenses related to these efforts. - - -------------------------------------------------------------------------------- 77 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 Reports of Independent Auditors and Consolidated Financial Statements are submitted herewith: - Reports of Independent Auditors. - Consolidated Balance Sheets at December 31, 1993 and December 31, 1992. - Consolidated Statements of Operations for the years ended December 31, 1993, 1992 and 1991. - Consolidated Statements of Stockholders' Equity (Deficit) for the years ended December 31, 1993, 1992 and 1991. - Consolidated Statements of Cash Flows for the years ended December 31, 1993, 1992 and 1991. - Notes to Consolidated Financial Statements. 2. The following Consolidated Financial Statement Schedules are submitted herewith: II. Amounts Receivable from Related Parties and Underwriters, Promoters and Employees Other Than Related Parties at December 31, 1993, 1992 and 1991. VII. Guarantees of Securities of Other Issuers at December 31, 1993. VIII. Valuation and Qualifying Accounts IX. Short Term Borrowings X. Supplementary Income Statement Information for the years ended December 31, 1993, 1992 and 1991. All other schedules for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission are not required under the related instructions or are inapplicable, and therefore have been omitted. 3. Exhibits required to be filed by Item 601 of Regulation S-K: (3) ARTICLES OF INCORPORATION AND BYLAWS 3.1 Certificate of Incorporation of the Registrant, as restated effective December 8, 1993, incorporated herein by reference to Exhibit 3.1 to the Registrant's Annual Report on Form 10-K filed on March 31, 1994 (Commission File No. 1-8122). 3.2 Grubb & Ellis Company Bylaws, as amended effective August 9, 1993, incorporated herein by reference to Exhibit 4.4 to the 78 Registrant's registration statement on Form S-8 filed on November 12, 1993 (Registration No. 33-71484). 3.3 Amendment to the Grubb & Ellis Company Bylaws, effective as of August 9, 1993, incorporated herein by reference to Exhibit 4.5 to the Registrant's registration statement on Form S-8 filed on November 12, 1993. (Registration No. 33-71484). (4) INSTRUMENTS DEFINING THE RIGHTS OF SECURITY HOLDERS, INCLUDING INDENTURES 4.1 Senior Note, Subordinated Note and Revolving Credit Note Agreement between The Prudential Insurance Company of America and the Registrant dated as of November 2, 1992, incorporated herein by reference to Exhibit 4.6 to the Registrant's Current Report on Form 8-K filed on February 8, 1993 (Commission File No. 1-8122). 4.2 Letter agreement between The Prudential Insurance Company of America and the Registrant dated March 26, 1993, incorporated herein by reference to Exhibit 4.10 to the Registrant's Quarterly Report on Form 10-Q filed on May 15, 1993 (Commission File No. 1-8122). 4.3 Letter agreement between The Prudential Insurance Company of America and the Registrant dated April 19, 1993, incorporated herein by reference to Exhibit 4.11 to the Registrant's Quarterly Report on Form 10-Q filed on May 15, 1993 (Commission File No. 1-8122). 4.4 Letter agreement between The Prudential Insurance Company of America and the Registrant dated October 26, 1993, incorporated herein by reference to Exhibit 4.21 to the Registrant's registration statement on Form S-8 filed on November 12, 1993 (Registration No. 33-71484). 4.5 Letter agreement between The Prudential Insurance Company of America and the Registrant dated March 28, 1994, incorporated herein by by reference to Exhibit 4.5 to the Registrant's Annual Report on Form 10-K filed on March 31, 1994 (Commission File No. 1-8122). 4.6 Securities Purchase Agreement between The Prudential Insurance Company of America and the Registrant, dated as of November 2, 1992, incorporated herein by reference to Exhibit 28.4 to the Registrant's Current Report on Form 8-K filed on November 12, 1992 (Commission File No. 1-8122). 4.7 Specimen of stock subscription warrant No. 5 issued to The Prudential Insurance Company of America, dated January 29, 1993, exercisable for 200,000 shares of the Registrant's Common Stock, incorporated by reference to Exhibit 28.10 to the Registrant's Current Report on Form 8-K filed on February 8, 1993 (Commission File No. 1-8122). 4.8 Securities Purchase Agreement among Warburg, Pincus Investors, L.P., Joe F. Hanauer and the Registrant, dated as of November 2, 1992, incorporated herein by reference to Exhibit 28.3 to the Registrant's Current Report on Form 8-K filed on November 12, 1992 (Commission File No. 1-8122). 4.9 Specimen of stock subscription warrant No. 6 issued to Warburg, Pincus Investors, L.P., dated as of January 29, 1993, exercisable 79 for 337,042 shares of the Registrant's Common Stock, incorporated herein by reference to Exhibit 4.11 to the Registrant's registration statement on Form S-8 filed on November 12, 1993 (Registration No. 33-71484). 4.10 Specimen of stock subscription warrant No. S-3 issued to Warburg, Pincus Investors, L.P., dated January 29, 1993, exercisable for 370,566 shares of the Registrant's Common Stock, incorporated herein by reference to Exhibit 4.17 to the Registrant's registration statement on Form S-8 filed on November 12, 1993 (Registration No. 33-71484). 4.11 Summary of terms of proposed bridge loan and rights offering executed by Warburg, Pincus Investors, L.P., The Prudential Insurance Company of America and the Registrant as of March 28, 1994, incorporated herein by reference to Exhibit 4.11 to the Registrant's Annual Report on Form 10-K filed on March 31, 1994 (Commission File No. 1-8122). 4.12 Cash Collateral Account Agreement between Bank of America N.T.&S.A. and the Registrant dated as of March 29, 1994, incorporated herein by reference to Exhibit 4.12 to the Registrant's Annual Report on Form 10-K filed on March 31, 1994 (Commission File No. 1-8122). 4.13 Intercreditor Agreement between Warburg, Pincus, Investor, L.P. and The Prudential Insurance Company of America dated as of March 28, 1994, incorporated herein by reference to Exhibit 4.13 to the registrant's Annual Report on Form 10-K filed on March 31, 1994 (Commission File No. 1-8122). 4.14 Promissory Note in the amount of $250,000 dated as of January 8, 1990 executed by the Registrant in favor of DW Limited Partnership, incorporated herein by reference to Exhibit 4.14 to the Registrant's Annual Report on Form 10-K filed on March 31, 1994 (Commission File No. 1-8122). 4.15 Promissory Note in the amount of up to $10 million dated as of March 29, 1994, executed by the Registrant in favor of Warburg, Pincus Investors, L.P., incorporated herein by reference to Exhibit 4.15 to the Registrant's Amendment to its Annual Report on Form 10-K/A filed on April 29, 1994 (Commission File No. 1-8122). 4.16 Loan and Security Agreement among the Registrant, Warburg Pincus Investors, L.P. and The Prudential Insurance Company of America dated as of March 29, 1994, incorporated herein by reference to Exhibit 4.16 to the Registrant's Amendment to its Annual Report on Form 10-K/A filed on April 29, 1994 (Commission File No. 1-8122). 4.17 Modification to Note and Security Agreement between the Registrant and The Prudential Insurance Company of America dated as of March 28, 1994, incorporated herein by reference to Exhibit 4.17 to the Registrant's Amendment to its Annual Report on Form 10-K/A filed on April 29, 1994 (Commission file No. 1-8122). On an individual basis, instruments other than Exhibits listed above defining the rights of holders of long-term debt of the Registrant and its consolidated subsidiaries and partnerships do not exceed ten percent of total consolidated assets and are, therefore, omitted; however, the Company will furnish supplementally to the Commission any such omitted instrument upon request. (10) MATERIAL CONTRACTS 10.1 Grubb & Ellis Company 1990 Amended and Restated Stock Option Plan, as amended as of August 9, 1993, 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. 33-71580). 10.2 Grubb & Ellis Company Executive Supplemental Deferred Compensation Plan, incorporated herein by reference to Exhibit 10.13 to the Registrant's Registration Statement on Form S-2 filed on January 12, 1990 (Registration No. 33-32979). 80 10.3 Grubb & Ellis Company 1985 Restricted Value Stock Plan, as amended effective December 3, 1987, incorporated herein by reference to Exhibit 10.13 to the Registrant's Annual Report on Form 10-K filed on March 31, 1989 (Commission File No. 1-8122). 10.4 Agreement between HSM Inc. and David Donosky dated January 15, 1988, regarding exchange of indebtedness, incorporated herein by reference to Exhibit 10.23 to the Registrant's Annual Report on Form 10-K filed on March 30, 1988 (Commission File No. 1-8122). 10.5 Loan Agreement between David Donosky and the Registrant dated October 20, 1989, incorporated herein by reference to Exhibit 10.21 to the Registrant's registration statement on Form S-2 filed on January 12, 1990 (Registration No. 33-32979). 10.6 Description of Grubb & Ellis Company Senior Management Compensation Plan, incorporated herein by reference to Exhibit 10.17 to the Registrant's Annual Report on Form 10-K filed on March 30, 1992 (Commission File No. 1-8122). 10.7 Stock Purchase and Stockholder Agreement dated May 6, 1992, among GE New Corp., the Registrant and International Business Machines Corporation, incorporated herein by reference to Exhibit 28.2 to the Registrant's Quarterly Report on Form 10-Q filed on May 15, 1992 (Commission File No. 1-8122). 10.8 Master Management Agreement dated May 6, 1992 between International Business Machines Corporation and GE New Corp., incorporated herein by reference to Exhibit 28.2 to the Registrant's Quarterly Report on Form 10-Q filed on May 15, 1992 (Commission File No. 1-8122). 10.9 Master Financing Agreement dated August 5, 1992 between IBM Credit Corporation and Axiom Real Estate Management, Inc., incorporated herein by reference to Exhibit 28.4 to the Registrant's Quarterly Report on Form 10-Q filed on August 13, 1992 (Commission File No. 1-8122). 10.10 Credit Agreement dated as of August 31, 1992, between Axiom Real Estate Management, Inc. and the Registrant, incorporated herein by reference to Exhibit 28.6 to the Registrant's Quarterly Report on Form 10-Q filed on November 16, 1992 (Commission File No. 1-8122). 10.11 Purchase Agreement dated February 16, 1993 between the Registrant and JMB Institutional Realty Advisers, L.P., incorporated herein by reference to Exhibit 10.20 to the Registrant's Quarterly Report on Form 10-Q filed on May 15, 1993 (Commission File No. 1-1822). 10.12 Purchase Agreement dated March 4, 1993 between the Registrant and Fox and Carskadon/Better Homes and Gardens, incorporated herein by reference to Exhibit 10.21 to the Registrant's Quarterly Report on Form 10-Q filed May 15, 1993 (Commission File No. 1-1822). 10.13 Stockholders' Agreement among Warburg, Pincus Investors, L.P., The Prudential Insurance Company of America, Joe F. Hanauer and the Registrant dated January 29, 1993, incorporated herein by reference to Exhibit 28.1 to the Registrant's Current Report on Form 8-K filed on February 8, 1993 (Commission File No. 1-8122). 81 10.14 Amendment to Stockholders' Agreement among Warburg, Pincus Investors, L.P., The Prudential Insurance Company of America, Joe F. Hanauer and the Registrant, dated as of July 1, 1993, incorporated herein by reference to Exhibit 10.15 to the Registrant's Quarterly Report on Form 10-Q filed on August 16, 1993 (Commission File No. 1-8122). 10.15 Severance Compensation Agreement, dated as of December 31, 1992, between the Registrant and Donald L. McGee, incorporated herein by reference to Exhibit 10.25 to the Registrant's Annual Report on Form 10-K filed on April 15, 1993 (Commission File No. 1-8122). 10.16 Severance Compensation Agreement, dated as of August 31, 1992, between the Registrant and Emmett R. DeMoss, Jr., incorporated herein by reference to Exhibit 10.26 to the Registrant's Annual Report on Form 10-K filed on April 15, 1993 (Commission File No. 1-8122). 10.17 Severance Compensation Agreement, dated as of December 31, 1992, between the Registrant and Donald V. Jones, incorporated herein by reference to Exhibit 10.27 to the Registrant's Annual Report on Form 10-K filed on April 15, 1993 (Commission File No. 1-8122). 10.18 Amendment No. 1 to Severance Compensation Agreement, dated as of December 31, 1992, between the Registrant and Donald V. Jones, incorporated herein by reference to Exhibit 10.28 to the Registrant's Annual Report on Form 10-K filed on April 15, 1993 (Commission File No. 1-8122). 10.19 Employment Agreement, effective May 20, 1992, between the Registrant and Alvin L. Swanson, Jr., incorporated herein by reference to Exhibit 10.29 to the Registrant's Annual Report on Form 10-K filed on April 15, 1993 (Commission File No. 1-8122). 10.20 First Amendment to Employment Agreement, effective as of May 20, 1992, between the Registrant and Alvin L. Swanson, Jr., incorporated herein by reference to Exhibit 10.30 to the Registrant's Annual Report on Form 10-K filed on April 15, 1993 (Commission File No. 1-8122). 10.21 Second Amendment to Employment Agreement, effective as of February 24, 1993, between the Registrant and Alvin L. Swanson, Jr., incorporated herein by reference to Exhibit 10.31 to the Registrant's Quarterly Report on Form 10-Q filed on May 15, 1993 (Commission File No. 1-8122). 10.22 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). 10.23 Separation Agreement between the Registrant and Wilbert F. Schwartz dated as of April 25, 1994, incorporated herein by reference to Exhibit 10.23 to the Registrant's Amendment to its Annual Report on Form 10-K/A filed on April 29, 1994 (Commission File No. 1-8122). (11) STATEMENT REGARDING COMPUTATION OF PER SHARE EARNINGS, incorporated herein by reference to Exhibit 11 to the Registrant's Annual Report on Form 10-K filed on March 31, 1994 (Commission File No. 1-8122). (21) SUBSIDIARIES OF THE REGISTRANT, incorporated herein by reference to Exhibit 21 to the Registrant's Annual Report on Form 10-K filed on March 31, 1994 (Commission File No. 1-8122). (23.1) CONSENTS OF INDEPENDENT AUDITORS - Ernst & Young (23.2) CONSENTS OF INDEPENDENT AUDITORS - Coopers & Lybrand 82 23.1 Consent of Ernst & Young 23.2 Consent of Coopers & Lybrand (24) POWERS OF ATTORNEY (b) Reports on Form 8-K: None. 83 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized on this 30th day of March, 1994. GRUBB & ELLIS COMPANY (Registrant) by * ------------------------------------ Wilbert F. Schwartz President, Chief Executive Officer and Director 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. March 30, 1994 - - -------------------------------------- Robert J. Hanlon, Jr. Chief Financial Officer and Senior Vice President March 30, 1994 - - -------------------------------------- Connie Hardisty Vice President and Corporate Controller * March 30, 1994 - - -------------------------------------- Joe F. Hanauer, Chairman of the Board and Director * March 30, 1994 - - -------------------------------------- Kenneth E. Field, Director * March 30, 1994 - - -------------------------------------- Reuben S. Leibowitz, Director 84 * March 30, 1994 - - -------------------------------------- John D. Santoleri, Director * March 30, 1994 - - -------------------------------------- Lawrence S. Bacow, Director *Pursuant to Powers of Attorney - - -------------------------------------- By: Robert J. Walner, Attorney-in-Fact 85 GRUBB & ELLIS COMPANY AND SUBSIDIARIES SCHEDULE II - AMOUNTS RECEIVABLE FROM RELATED PARTIES AND UNDERWRITERS PROMOTERS, AND EMPLOYEES OTHER THAN RELATED PARTIES DECEMBER 31, 1993, 1992 AND 1991 (IN THOUSANDS)
Column A Column B Column C Column D Column E ---------- ---------- ---------- ---------- ----------- Balance at Amounts Name of beginning Amounts Written- Non- Debtor of Period Additions Collected Off Current Current ---------- ---------- ---------- ---------- ---------- ------------------------- 1993 Donosky, David (A) $265 - - - - - - $265 - - Sineni, Tom 253 - - 15 238 - - - - Clark, Carl (A) 229 - - - - - - 229 - - 9800 Townpark 118 - - - - 118 - - - - 1992 Donosky, David (B) $313 $ 14 $ 18 $ 44 $265 - - Sineni Tom (B) 89 179 15 - - 253 - - Clark, Carl (B) 59 170 - - - - 229 - - 9800 Townpark (B) - - 118 - - - - 118 - - 1991 Donosky, David $384 $ 25 $ 96 - - $313 - - (A) The balances owed by these parties were fully reserved for at December 31, 1993. (B) The balances owed by these parties were fully reserved for at December 31, 1992.
86 GRUBB & ELLIS COMPANY AND SUBSIDIARIES SCHEDULE VII - GUARANTEES OF SECURITIES OF OTHER ISSUERS DECEMBER 31, 1993 (IN THOUSANDS)
Column A Column B Column C Column D Column E Column F Column G - - -------- -------- -------- -------- -------- -------- -------- Name of Issuer Title of Nature of any Default by of Securities Issue of Total Amount Owned by Amount in Issuer of Securities Guaranteed by Each Class Amount Person or persons Treasury of Guaranteed in Principal, Person for of Guaranteed for which Issuer of Interest, Sinking Fund or which Statement Securities and the Statement Securities Nature of Redemption Provisions, is Filed Guaranteed Outstanding is Filed Guaranteed Guarantee or Payment of Dividends - - ---------------- ---------- ----------- ----------------- ----------- --------- ------------------------- Economy Federal Savings and Loan Association of St. Louis (A) $ 499 (C) Jacksonville Hotel Associates (B) 13 (D) ----------- $ 512 ----------- ----------- Grubb & Ellis Company and Subsidiaries, Notes to Schedule VII: (A) Mortgage loans payable. (B) Telephone equipment lease. (C) Mortgage loan principal and interest. (D) Lease payments.
87 GRUBB & ELLIS COMPANY AND SUBSIDIARIES SCHEDULE VIII - VALUATION AND QUALIFYING ACCOUNTS (IN THOUSANDS)
Column A Column B Column C Column D Column E - - ---------------------------- ---------- ------------ -------------- ---------- Additions Deductions ------------ -------------- Amounts written off or Balance at Charged to recovered upon Balance at beginning costs and repayment of end of Description of period expenses (1) receivable (1) period - - ---------------------------- ---------- ------------ -------------- ---------- Allowance for uncollectible real estate brokerage commissions receivable (1) - - ---------------------------- Year ended December 31, 1993: 5,002 25 5,027 Year ended December 31, 1992: 3,182 1,820 5,002 Year ended December 31, 1991: 4,301 1,119 3,182 Reserves on real estate investments and real estate owned - - ---------------------------- Year ended December 31, 1993: 6,366 2,574 3,792 Year ended December 31, 1992: 4,255 2,987 876 6,366 Year ended December 31, 1991: 5,104 3,048 3,897 4,255 (1) The above additions and deletions have been presented as a net balance due to limitations in the Company's computer systems.
88 GRUBB & ELLIS COMPANY AND SUBSIDIARIES SCHEDULE IX -SHORT TERM BORROWINGS FOR THE YEAR ENDED DECEMBER 31, 1993 AND 1992 (IN THOUSANDS)
Column A Column B Column C Column D Column E Column F -------- -------- -------- -------- --------- -------- Maximum amount Average amount Weighted Balance at Weighted outstanding outstanding average interest Category of aggregate end of average during the during the rate during short-term borrowings period interest rate period period (1) the period (1) - - --------------------- ------ ------------- ------ ----------- -------------- Year-ended December 31, 1993: Revolving Line of Credit - Non-bank Financial Institution 5,000,000 5.89% 5,000,000 3,416,667 5.30% Year ended December 31, 1992: Revolving Line of Credit - Non-bank Financial Institution 5,000,000 7.10% 5,000,000 5,000,000 7.33% (1) The average amount outstanding and weighted average interest rate during the period were computed based on month-end amounts.
89 GRUBB & ELLIS COMPANY AND SUBSIDIARIES SCHEDULE X - SUPPLEMENTARY INCOME STATEMENT INFORMATION FOR THE YEARS ENDED DECEMBER 31, 1993, 1992, AND 1991
COLUMN A COLUMN B Description Charged to Costs and Expenses(A) - - ----------- ----------------------------- 1993 1992 1991 ---- ---- ---- Advertising Costs $4,998 $6,225 $7,774 Goodwill Amortization $ 402 $1,218 $2,850 (A) Amounts for maintenance and repairs, depreciation and amortization of intangible assets (other than goodwill), taxes other than payroll and income taxes and royalties are not presented as such amounts are less than 1% of total sales and revenue.
90 GRUBB & ELLIS COMPANY AND SUBSIDIARIES EXHIBIT INDEX(A) FOR THE YEAR ENDED DECEMBER 31, 1993 Exhibit Page: - - ------- (23) Consents of Independent Auditors 23.1 Consent of Ernst & Young 23.2 Consent of Coopers & Lybrand (24) Powers of Attorney (A) Exhibits incorporated by reference are listed in Item 14(a)3 of this report. 91 EX-23.1 2 CONSENT OF INDEPENDENT AUDITORS Exhibit 23.1 CONSENT OF INDEPENDENT AUDITORS ------------------------------- We consent to the incorporation by reference in the Registration Statement (Form S-8 Number 33-71578) pertaining to the Employee New Stock Purchase Plan, as amended, the Registration Statement (Form S-8 Number 33-71580 and 33-35640) pertaining to the 1990 Amended and Restated Stock Option Plan, as amended, the Registration Statement (Form S-8 Number 33-71484) pertaining to the 1993 Stock Option Plan for Outside Directors, the Registration Statement (Form S-8 Number 33-17194) pertaining to the 1985 Restricted Value Stock Plan, as amended and the Registration Statement (Form S-2 Number 33-32979) pertaining to the Executive Supplemental Deferred Compensation Plan of Grubb & Ellis Company and Subsidiaries of our report dated March 29, 1994, with respect to the financial statements and schedules of Grubb & Ellis Company and Subsidiaries included in the Annual Report (Form 10-K/A (Amendment No. 2)) for the year ended December 31, 1993, filed with the Securities Exchange Commission. /s/ Ernst & Young San Francisco, California July 21, 1994 EX-23.2 3 CONSENT OF INDEPENDENT ACCOUNTANTS CONSENT OF INDEPENDENT ACCOUNTANTS We consent to the incorporation by reference of our report dated March 27, 1992, except as to the information presented in Schedule VIII, for which the date is December 24, 1992, on our audits of the consolidated statements of operations, stockholders' equity and cash flows and financial statement schedules of Grubb & Ellis Company and Subsidiaries for the year ended December 31, 1991, which report is included in the Annual Report on Form 10-K and 10-K/A (Amendment No. 2), in the registration statements of Grubb & Ellis Company and Subsidiaries as follows: Form S-8: The 1985 Restricted Value Stock Plan and the 1987 Hamilton Purchase Stock Plan (File No. 33-17194). Form S-2: The Deferred Equity Program for Commissioned Salespersons (File No. 33-32979). Form S-8: The 1990 Amended and Restated Stock Option Plan, As Amended (File No. 33-71580 and 33- 35640). Form S-8: The 1993 Stock Option Plan for Outside Directors (File No. 33-71484). Form S-8: Employee New Stock Purchase Plan, As Amended (File No. 33-71578). COOPERS & LYBRAND San Francisco, California July 21, 1994 -----END PRIVACY-ENHANCED MESSAGE-----