-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, PNXVHw48nSo4yMyPk4sbWa2gevwOpcSle3XowGFOzIoD95o38JF06NnrWgZu4NBV cvLvdcE2r+JIxepMMWzikw== 0000930413-02-002965.txt : 20021015 0000930413-02-002965.hdr.sgml : 20021014 20021015103614 ACCESSION NUMBER: 0000930413-02-002965 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 20020630 FILED AS OF DATE: 20021015 FILER: COMPANY DATA: COMPANY CONFORMED NAME: GRUBB & ELLIS CO CENTRAL INDEX KEY: 0000216039 STANDARD INDUSTRIAL CLASSIFICATION: REAL ESTATE AGENTS & MANAGERS (FOR OTHERS) [6531] IRS NUMBER: 941424307 STATE OF INCORPORATION: DE FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-08122 FILM NUMBER: 02788453 BUSINESS ADDRESS: STREET 1: 2215 SANDERS RD STREET 2: STE 400 CITY: NORTHBROOK STATE: IL ZIP: 60062 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 1 c25690_10k.txt ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 -------------------------- FORM 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED JUNE 30, 2002 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM _________________ TO _________________ COMMISSION FILE NUMBER 1-8122 GRUBB & ELLIS COMPANY (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE (STATE OR OTHER JURISDICTION OF INCORPORATION OR ORGANIZATION) 2215 SANDERS ROAD, SUITE 400, NORTHBROOK, IL (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) 94-1424307 (I.R.S. EMPLOYER IDENTIFICATION NO.) 60062 (ZIP CODE) (847) 753-7500 (REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE) -------------------------- SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: TITLE OF EACH CLASS COMMON STOCK NAME OF EACH EXCHANGE ON WHICH REGISTERED NEW YORK 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 [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein and will not be contained, to the best of registrant's knowledge, in its definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] The aggregate market value of voting common stock held by non-affiliates of the registrant as of September 20, 2002 was approximately $8,071,474. The number of shares outstanding of the registrant's common stock as of September 20, 2002 was 15,078,299 shares. -------------------------- DOCUMENTS INCORPORATED BY REFERENCE: Portions of the Registrant's definitive proxy statement to be filed pursuant to Regulation 14A no later than 120 days after the end of the fiscal year (June 30, 2002) are incorporated by reference into Part III of this Report. ================================================================================ 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 .............................................................................. 6 Item 3. Legal Proceedings ....................................................................... 6 Item 4. Submission of Matters to a Vote of Security Holders ..................................... 6 PART II. Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters ............... 7 Item 6. Selected Financial Data ................................................................. 8 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations ... 9 Item 7A. Quantitative and Qualitative Disclosures About Market Risk .............................. 18 Item 8. Financial Statements and Supplementary Data ............................................. 19 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure .... 43 PART III. Item 10. Directors and Executive Officers of the Registrant ...................................... 43 Item 11. Executive Compensation .................................................................. 43 Item 12. Security Ownership of Certain Beneficial Owners and Management .......................... 43 Item 13. Certain Relationships and Related Transactions .......................................... 43 PART IV. Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K ........................ 44 SIGNATURES ............................................................................................. 49 CERTIFICATIONS ......................................................................................... 50 EXHIBIT INDEX .......................................................................................... 52
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 owned subsidiaries (the "Company") is an integrated real estate services firm. The Company utilizes more than 1,000 transaction professionals in 42 owned offices, and over 400 transactions professionals in 47 affiliate offices. Including its alliance with Knight Frank, one of Europe's leading real estate consulting firms, it has the collective resources of over 8,000 individuals in 200 offices in 29 countries around the world. The Company is one of the nation's largest publicly traded commercial real estate firms, based on total revenue. The Company, through its offices, affiliates and alliance with Knight Frank provides a full range of real estate services, including transaction, management and consulting services, to users and investors worldwide. Professionals throughout Grubb & Ellis strategize, arrange and advise on the sale, acquisition or lease of such business properties as industrial, retail and office buildings, as well as the acquisition and disposition of multi-family properties and commercial land. Major multiple-market clients have a single point of contact through the Company's global accounts program for coordination of all services. Delivered in a seamless manner across a global platform, comprehensive services inclusive of feasibility studies, site selection, market forecasts and research are made available to large companies and investors. Property and facilities management services are provided by Grubb & Ellis Management Services, Inc. ("GEMS"), a wholly owned subsidiary of the Company. Leveraging the management portfolio and the trend for outsourcing, additional revenues are earned in the provision of business services and construction management. Operating on a national scale, GEMS had approximately 152 million square feet of property under management as of June 30, 2002. Our global executive office is located at 55 E. 59th Street, New York, New York 10022-1122 (telephone 212-759-9700). Our principal operations center is located at 2215 Sanders Road, Suite 400, Northbrook, Illinois 60062 (telephone 847-753-7500). CURRENT BUSINESS PLATFORM AND ORGANIZATION Historically, Grubb & Ellis' transaction services operations have generated approximately 85% of the Company's revenue, with leasing transactions providing approximately 75% of the transaction revenue and dispositions and acquisitions accounting for the remaining 25%. The leasing activity represents a balanced blend of tenant representation, landlord representation and dual-representation. Grubb & Ellis' transaction professionals are supported by the Company's in-depth market research which is regarded by real estate professionals and other industry constituents as one of the leading sources for market data in the real estate industry. The management services group has traditionally represented approximately 15% of the Company's revenue. Management service fees are generated from third-party property management, facilities management, business services, and other related activities. The Grubb & Ellis Management Services business unit provides its customers with client accounting, engineering services, independent property management, and corporate facilities management. The Company is currently organized in the following business segments, in order to provide the real estate related services described below. Additional information on these business segments can be found in Note 16 of Notes to Consolidated Financial Statements in Item 8 of this Report. TRANSACTION SERVICES Historically, transaction services have represented a large portion of the Company's operations, and in fiscal year 2002 represented 84% of the Company's total revenue. A significant portion of the transaction services provided by the Company are transaction related services, in which the Company represents the interests of tenants, owners, buyers or sellers in leasing, acquisition and disposition transactions. These transactions involve various types of commercial real estate, including office, industrial, retail, hospitality, multi-family and land. 3 The Company also delivers, to a lesser extent, certain consulting related services primarily to its transaction services clients, including site selection, feasibility studies, exit strategies, market forecasts, appraisals, strategic planning and research services. MANAGEMENT SERVICES GEMS provides comprehensive property management and related services for properties owned primarily by institutional investors, along with facilities management services for corporate users. Related services include construction management, business services and engineering services. In fiscal year 2002, these services represented the remaining 16% of the Company's total revenue. STRATEGIC INITIATIVES In fiscal 2002, the Company continued to build a global platform and develop the expertise to provide a comprehensive range of integrated real estate transaction and advisory services. The Company plans to leverage its expertise and market presence in transaction and management services to become a full-service business advisory firm that corporations entrust to advise them on strategic real estate issues. The Company continued its efforts this past fiscal year in positioning itself as a leading provider of comprehensive real estate services. In order to maximize the potential of the integrated services platform, the Company will focus on building value-added services such as global consulting, project management and capital markets capabilities. The Company's platform will continue to strive for differentiation and competitive advantage in the pursuit of transaction services business. Grubb & Ellis will strive to build real estate advisory capabilities that provide the depth and specialty expertise that will enhance its delivery of transaction services and position the Company as a strategic advisor to corporate America. The Company will continue to build comprehensive value-added services that address the strategic complexities of real estate decisions faced by business entities and other constituents in the real estate industry. As a prelude to executing a transaction, the Company will seek to advise a client on how real estate fits into its overall strategic plan. By positioning Grubb & Ellis as a business advisor to corporate executive management, the Company plans to create the platform to deliver the strategic planning and advisory real estate services that the Company believes will be the catalyst for increased success in the delivery of transactions. The Company will focus on an account-centric model of building client relationships and recurring revenue streams from the integrated business platform in furtherance of its goal to provide real estate services to an identifiable and sustainable customer base. In addition, if successfully implemented, Grubb & Ellis believes, among other things, that the Company would then be more resilient to the economic swings that have traditionally impacted the Company's earnings. The Knight Frank strategic alliance is the centerpiece for the advancement of the Company's global business strategy. With market presence in Europe, India and the Pacific Rim, the Company believes that Knight Frank is positioned to be an effective alliance partner that complements Grubb & Ellis' strengths and provides the mechanism to deliver real estate services to global enterprises. As the trend towards globalization among large entities continues to gain momentum, the Company intends to focus on global business development and capabilities. Grubb & Ellis has focused its efforts in penetrating the lucrative "middle market" of real estate operating companies, REITs, and real estate investors/owners in the delivery of transaction services on complex dispositions and investment sale transactions. The Company's senior investment transaction professionals have developed strategic relationships in the institutional investment marketplace that provide recurring revenues from investment sales activities involving pension advisors, opportunity funds, and other constituents that invest in commercial properties. In February 2002, the Company acquired substantially all of the assets of the Wadley-Donovan Group, Inc., a professional real estate services firm located in northern New Jersey. This group specializes in site selection, consulting and providing economic development strategies primarily for Fortune 100 companies and state, local and regional government agencies and municipalities. The Company continues to explore additional strategic acquisition opportunities that have the potential to expand the depth and breadth of its current lines of business and increase its market share. The Company's ability to assimilate acquired advisory practices and new strategic initiatives, and its effectiveness in transitioning the overall related infrastructure, are critical to its success in realizing its goals of a fully integrated business model. There can be no assurance that the Company will be able to complete any further acquisitions or introductions of new strategic initiatives. Grubb & Ellis plans to continue to leverage the talent within the Company and the collective local market knowledge to differentiate themselves in the marketplace. In building the integrated business services platform, the Company 4 plans to leverage each of its specialty operating areas, stressing synergy and integration in growing account-centric relationships among prominent owners and users of real estate. The Company has broadened its national affiliate program, through alliances with 39 real estate services firms, which has enabled it to enter markets where it previously did not have a formal presence and to better meet the multi-market needs of global clients. The Company has also invested in technology systems designed to provide a scalable platform for growth and to efficiently deliver and share data with clients. Among them is what the Company believes to be a state-of-the-art, company-wide information sharing and research network which enables its professional staff across all offices to work more efficiently, access the latest market intelligence, and more fully address clients' needs. INDUSTRY AND COMPETITION The commercial real estate industry is large and fragmented. The estimated $4 trillion of commercial real estate in the United States produces annual sales transactions valued at $500 billion and annual lease transactions valued at $200 billion. The gross market for annual brokerage commissions is estimated at approximately $19 billion. On a national basis, the commercial brokerage industry is highly fragmented with the half-dozen leading firms generating approximately 10% of the revenue. As a result of the current economic downturn, at present, lease rates have declined or stabilized in many markets. Absorption rates have dropped significantly and vacancy rates have increased in many markets. Leasing commission rates have held firm, although sales commission rates have come under pressure, especially for larger institutional-grade properties. These factors have contributed to an industry-wide decline in commission revenue. The Company competes in a variety of service disciplines within the commercial real estate industry. Each of these business areas is highly competitive on a national as well as local level. The Company faces competition not only from other real estate service providers, but also from boutique real estate advisory firms, appraisal firms and self-managed real estate investment trusts. Although many of the Company's competitors are local or regional firms that are substantially smaller than the Company, some of the Company's competitors are substantially larger than the Company on a local or regional basis. In general, there can be no assurance that the Company will be able to continue to compete effectively, to maintain current fee levels or margins, or maintain or increase its market share. Due to the Company's relative strength and longevity in the markets in which it presently operates, and its ability to offer clients a range of real estate services on a local, regional, national and international basis, the Company believes that it can operate successfully in the future in this highly competitive industry, although there can be no assurances in this regard. ENVIRONMENTAL REGULATION Federal, state and local laws and regulations impose environmental controls, disclosure rules and zoning restrictions that have impacted the management, development, use, and/or sale of real estate. The Company's financial results and competitive position for the fiscal year 2002 have not been materially impacted by its compliance with environmental laws or regulations. Such laws and regulations tend to discourage sales and leasing activities and mortgage lending with respect to some properties, and may therefore adversely affect the Company and the industry in general. Failure of the Company to disclose environmental issues in connection with a real estate transaction may subject the Company to liability to a buyer or lessee of property. Applicable laws and contractual obligations to property owners could also subject the Company to environmental liabilities through the provision of management services. Environmental laws and regulations impose liability on current or previous real property owners or operators for the cost of investigating, cleaning up or removing contamination caused by hazardous or toxic substances at the property. The Company may be held liable as an operator for such costs in its role as an on-site property manager. Liability can be imposed even if the original actions were legal and the Company had no knowledge of, or was not responsible for, the presence of the hazardous or toxic substances. Further, the Company may also be held responsible for the entire payment of the liability if it is subject to joint and several liability and the other responsible parties are unable to pay. The Company may also be liable under common law to third parties for damages and injuries resulting from environmental contamination emanating from the site, including the presence of asbestos containing materials. Insurance for such matters may not be available. Additionally, new or modified environmental regulations could develop in a manner that could adversely affect the Company's transaction and management services. See Note 10 of Notes to Consolidated Financial Statements in Item 8 of this Report. SEASONALITY Since the majority of the Company's revenues are derived from transaction services which are seasonal in nature, the Company's revenue stream and the related commission expense are also subject to seasonal fluctuations. However, 5 the Company's non-variable operating expenses, which are treated as expenses when incurred during the year, are relatively constant in total dollars on a quarterly basis. The Company has typically experienced its lowest quarterly revenue in the quarter ending March 31 of each year with higher and more consistent revenue in the quarters ending June 30 and September 30. The quarter ending December 31 has historically provided the highest quarterly level of revenue due to increased activity caused by the desire of clients to complete transactions by calendar year-end. Revenue in any given quarter during the years ended June 30, 2002, 2001 and 2000, as a percentage of total annual revenue, ranged from a high of 34.4% to a low of 18.6%. SERVICE MARKS The Company has registered trade names and service marks for the "Grubb & Ellis" name and logo and certain other trade names. The right to use the "Grubb & Ellis" name is considered an important asset of the Company, and the Company actively defends and enforces such trade names and service marks. REAL ESTATE MARKETS The Company's business is highly dependent on the commercial real estate markets, which in turn are impacted by numerous factors, including but not limited to the general economy, interest rates and demand for real estate in local markets. Changes in one or more of these factors could either favorably or unfavorably impact the volume of transactions and prices or lease terms for real estate. Consequently, the Company's revenue from transaction services and property management fees, operating results, cash flow and financial condition are impacted by these factors, among others. SECURITIES EXCHANGE LISTING The Company's common stock is currently listed on the New York Stock Exchange ("NYSE") pursuant to a listing agreement. As previously disclosed by the Company, the NYSE had accepted the Company's proposed business plan to attain compliance with the NYSE's listing standard on or before July 4, 2003. This plan had been submitted in response to a notification received by the Company on January 4, 2002 regarding non-compliance with such listing standards. As a result of the business plan's acceptance, the Company's common stock continued to be traded on the exchange, subject to the Company maintaining compliance with the plan and periodic review by the NYSE. Upon completion of a recent review, the NYSE announced on October 8, 2002 that the Company's common stock will be de-listed from the NYSE, due primarily to the Company's book value and market capitalization value being below minimum levels required by their listing standards. The Company is making arrangements to have its common stock traded on the over-the-counter market ("OTC") and is scheduled to cease trading on the NYSE prior to the opening on Thursday October 17, 2002. Although the Company is seeking an orderly transition and has reason to believe the NYSE will effectuate the same, there can be no assurance that the OTC will accept the Company's shares for listing prior to their de-listing from the NYSE, or at all, and that there will be no interruption of the public listing of the Company's common stock. ITEM 2. PROPERTIES The Company leases all of its office space through non-cancelable operating leases. The terms of the leases vary depending on the size and location of the office. As of June 30, 2002, the Company leased approximately 801,000 square feet of office space in 88 locations under leases, which expire at various dates through December 31, 2011. For those leases that are not renewable, the Company believes there is adequate alternative office space available at acceptable rental rates to meet its needs, although there can be no assurances in this regard. For further information, see Note 10 of Notes to Consolidated Financial Statements in Item 8 of this Report. ITEM 3. LEGAL PROCEEDINGS None. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of security holders during the fourth quarter of fiscal year 2002. 6 GRUBB & ELLIS COMPANY PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS MARKET AND PRICE INFORMATION The principal market for the Company's common stock is the New York Stock Exchange ("NYSE"). The following table sets forth the high and low sales prices of the Company's common stock on the NYSE for each quarter of the fiscal years ended June 30, 2002 and 2001.
2002 2001 ------------------------ ------------------------ High Low High Low ------ ------ ------ ------ First Quarter $5.40 $3.35 $6.50 $5.50 Second Quarter $4.10 $2.31 $6.38 $4.13 Third Quarter $3.10 $2.35 $6.30 $4.80 Fourth Quarter $4.25 $2.30 $6.07 $4.50
As of September 20, 2002, there were 1,225 registered holders of the Company's common stock and 15,078,299 shares of common stock outstanding, of which 11,409,447 were held by persons who may be considered "affiliates" of the Company, as defined in Federal securities regulations. Sales of substantial amounts of common stock, including shares issued upon the exercise of warrants or options, or the perception that such sales might occur, could adversely affect prevailing market prices for the common stock. No cash dividends were declared on the Company's common stock during the fiscal years ended June 30, 2002 or 2001. The Company has agreed, under the terms of its revolving credit facility, not to pay cash dividends on its common stock for the duration of the facility, without obtaining an appropriate waiver from the lenders. SALES OF UNREGISTERED SECURITIES On January 23, 2002, Warburg, Pincus Investors, L.P. exercised warrants to purchase an aggregate of 1,337,358 shares of Common Stock of the Company at a weighted average price of approximately $3.11 per share, in cash. The shares were exempt from the registration requirements under Section 4(2) of the Securities Act of 1933, as amended (the "Act"), in that the transaction did not involve a public offering or sale of the Company's securities ("Section 4(2) Exemption."). On January 28, 2002, the Company issued to Joe F. Hanauer, a director of the Company, 1,977 shares of Common Stock of the Company, upon the surrender and cashless exercise of a warrant to purchase 10,714 shares of Common Stock of the Company at an exercise price of $2.375 per share. The issuance of the 1,977 shares was exempt as a Section 4(2) Exemption. Effective May 14, 2002, the Company repurchased the shares issued to Warburg, Pincus Investors, L.P. at the same aggregate purchase price paid for them. At the same date, the Company issued and sold to Kojaian Ventures, L.L.C. ("KV") the same number of shares of common stock, at the same purchase price. The shares were exempt from the registration requirements under Section 4(2) of the Act, as a Section 4(2) Exemption. Also effective May 14, 2002, the Company issued to KV a promissory note in the face amount of $11,237,500, the outstanding principal, accrued interest and certain costs of which were convertible, generally at the option of the holder, to shares of a new Series A Preferred Stock. On September 19, 2002, KV converted the promissory note to 11,725 shares of Series A Preferred Stock. The shares were exempt from the registration requirements under Section 4(2) of the Act as a Section 4(2) Exemption. The net proceeds of the note were used in part to pay down revolving debt of the Company under its credit agreement and in part for working capital purposes. See Notes 6 and 17 of Notes to Consolidated Financial Statements, and such disclosure is incorporated herein by reference. None of the sales described above was underwritten. 7 EQUITY COMPENSATION PLAN INFORMATION The following table provides information on equity compensation plans of the Company as of June 30, 2002.
Number of securities remaining available for future issuance under Number of securities to be Weighted average equity compensation issued upon exercise of exercise price of plans (excluding outstanding options, outstanding options, securities reflected in warrants and rights warrants and rights column (a)) Plan Category (a) (b) (c) - -------------- --------------------- ------------------- --------------------- Equity Compensation plans approved by security holders 1,625,603 $5.36 2,417,153(1) Equity compensation plans not approved by security holders 1,191,258 $7.59 755,355 Total 2,816,861 $6.30 3,172,508(1)
(1)Includes 915,782 shares authorized for issuance under the Company's Employee Stock Purchase Plan, a plan intending to qualify under Section 423 of the Internal Revenue Code of 1986, as amended. EQUITY COMPENSATION PLANS NOT APPROVED BY STOCKHOLDERS Grubb & Ellis 1998 Stock Option Plan--this information can be found in Note 8 of Notes to Consolidated Financial Statements in Item 8 of this Report. ITEM 6. SELECTED FINANCIAL DATA Five-Year Comparison of Selected Financial and Other Data for the Company:
FOR THE YEARS ENDED JUNE 30, ----------------------------------------------------------------------- 2002 2001 2000 1999 1998 ------ ------ ------ ------ ------ (IN THOUSANDS, EXCEPT SHARE DATA) Total revenue .............................. $ 313,476 $ 411,962 $ 413,919 $ 314,101 $ 282,834 Net income (loss) .......................... (15,477) 1,369 16,290 8,079 21,506 Benefit (provision) for income taxes ....... 1,187 (5,372) (9,598) (5,301) (447) (Increase) reduction in deferred tax asset valuation allowance ...................... (5,214) -- -- 1,325 6,504 Income (loss) before extraordinary item and cumulative effect (1) .................... (15,477) 4,908 16,290 8,079 21,506 Income (loss) before extraordinary item and cumulative effect per common share (1) - Basic .................................. (1.09) 0.28 0.82 0.41 1.10 - Diluted ................................ (1.09) 0.27 0.77 0.37 0.98 Weighted average common shares - Basic .................................. 14,147,618 17,051,546 19,779,220 19,785,715 19,607,352 - Diluted ................................ 14,147,618 17,975,351 21,037,311 21,587,898 22,043,920
(1)Income and per share data reported on the above table reflect other non-recurring expenses in the amount of $1.75 million, $6.2 million and $2.65 million for the fiscal years ended June 30, 2002, 2001 and 2000, respectively. Net income for the fiscal year ended June 30, 2001 includes an extraordinary loss of $406,000, net of taxes, on the extinguishment of debt and a charge of $3.1 million reflecting the cumulative effect of a change in an accounting principle. For information regarding comparability of this data as it may relate to future periods, see discussion in Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations and Notes 5, 13 and 14 of the Notes to Consolidated Financial Statements in Item 8 of this Report. 8
AS OF JUNE 30, ----------------------------------------------------------------------- 2002 2001 2000 1999 1998 ----- ----- ----- ----- ----- (IN THOUSANDS, EXCEPT SHARE DATA) CONSOLIDATED BALANCE SHEET DATA: Total assets ............................ $ 90,377 $ 92,426 $ 115,942 $ 98,451 $ 76,847 Working capital ......................... 4,251 1,216 11,883 (300) 15,822 Long-term debt .......................... 36,660 29,000 -- 553 459 Other long-term liabilities ............. 10,396 9,734 10,422 11,189 11,122 Stockholders' equity .................... 5,866 16,316 61,620 44,482 35,414 Book value per common share ............. 0.39 1.22 3.11 2.24 1.80 Common shares outstanding ............... 15,028,839 13,358,615 19,810,894 19,885,084 19,721,056
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS NOTE REGARDING FORWARD-LOOKING STATEMENTS This Annual Report contains statements that are not historical facts and constitute projections, forecasts or forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. The statements are not guarantees of performance. They involve known and unknown risks, uncertainties, assumptions and other factors which may cause the actual results, performance or achievements of the Company to be materially different from any future results, performance or achievements expressed or implied by these statements. You can identify such statements by the fact that they do not relate strictly to historical or current facts. These statements use words such as "believe," "expect," "should," "strive", "plan," "intend", "estimate" and "anticipate" or similar expressions. When we discuss our strategy or plans, we are making projections, forecasts or forward-looking statements. Actual results and stockholders' value will be affected by a variety of risks and factors, including, without limitation, international, national and local economic conditions and real estate risks and financing risks and acts of terror or war. Many of the risks and factors that will determine these results and values are beyond the Company's ability to control or predict. These statements are necessarily based upon various assumptions involving judgment with respect to the future. All such forward-looking statements speak only as of the date of this Annual Report. The Company expressly disclaims any obligation or undertaking to release publicly any updates of revisions to any forward-looking statements contained herein to reflect any change in the Company's expectations with regard thereto or any change in events, conditions or circumstances on which any such statement is based. Factors that could adversely affect the Company's ability to obtain these results and value include, among other things: o DECLINE IN THE VOLUME OF REAL ESTATE TRANSACTIONS AND PRICES OF REAL ESTATE. The Company's revenue is largely based on commissions from real estate transactions. As a result, a decline in the volume of real estate available for lease or sale, or in real estate prices, could have a material adverse effect on the Company's revenues. o GENERAL ECONOMIC SLOWDOWN OR RECESSION IN THE REAL ESTATE MARKETS. Periods of economic slowdown or recession, rising interest rates or declining demand for real estate, both on a general or regional basis, will adversely affect certain segments of the Company's business. Such economic conditions could result in a general decline in rents and sales prices, a decline in the level of investment in real estate, a decline in the value of real estate investments and an increase in defaults by tenants under their respective leases, all of which in turn would adversely affect revenues from transaction services fees and brokerage commissions which are derived from property sales and aggregate rental payments, property management fees and consulting and other service fees. o THE COMPANY'S DEBT LEVEL AND ABILITY TO MAKE PRINCIPAL AND INTEREST PAYMENTS. The Company currently has $31.75 million of outstanding debt incurred in connection with the self-tender offer. Any material downturn in the Company's revenue or increase in its costs and expenses could render the Company unable to meet its debt obligations. The Company is subject to credit facility covenants which are based on the achievement of certain cash flow levels. Should these cash flow levels not be achieved, it is possible that the Company would be found to be in default of its credit facility. o IMPLEMENTATION OF STRATEGIC INITIATIVES, EXPENSES OR CAPITAL EXPEND- ITURES RELATED TO INITIATIVES. As discussed in Part I, Item 1 of this Annual Report under "Strategic Initiatives," the Company has undertaken, and plans to continue to undertake, a number of strategic initiatives, some of which involve expansion into a new specialty areas, integration of the Company's business units, investments in technology systems, service improvements, people and acquisitions. There can be no assurance 9 that the Company will be able to successfully develop and expand its expertise in specialty areas, whether by acquisition or organic growth, or that the Company will be able to effectively integrate its core business units. Even if the Company successfully develops and deploys its integrated services platform, there can be no assurance that it will result in the Company's revenues and value being less cyclical or in the Company's profit margins being more consistent and higher. The investments related to some or all of these new initiatives may result in significant expenditures by the Company. The Company's results of operations could be adversely affected if these strategic initiatives are unsuccessful. o RISKS ASSOCIATED WITH ACQUISITIONS. As discussed in Part I, Item I of this Annual Report under "Strategic Initiatives," the Company has completed an acquisition and established a strategic alliance. Also, in connection with the Company's strategic initiatives, it may undertake one or more additional strategic acquisitions. There can be no assurance that significant difficulties in integrating operations acquired from other companies and in coordinating and integrating systems in a strategic alliance will not be encountered, including difficulties arising from the diversion of management's attention from other business concerns, the difficulty associated with assimilating groups of broad and geographically dispersed personnel and operations and the difficulty in maintaining uniform standards and policies. There can be no assurance that the integration will ultimately be successful, that the Company's management will be able to effectively manage any acquired business or that any acquisition or strategic alliance will benefit the Company overall. o LIABILITIES ARISING FROM ENVIRONMENTAL LAWS AND REGULATIONS. Part I, Item I of this Annual Report under "Environmental Regulation" discusses potential risks related to environmental laws and regulations. o THE COMPANY FACES INTENSE COMPETITION. Part I, Item I of this Annual Report under "Competition" discusses potential risks related to competition. o THE COMPANY'S REVENUES ARE SEASONAL. Part I, Item I of this Annual Report under "Seasonality" discusses potential risks related to the seasonal nature of the Company's business. o THE COMPANY'S ABILITY TO ATTRACT AND RETAIN QUALIFIED PERSONNEL. The growth of the Company's business is largely dependent upon its ability to attract and retain qualified personnel in all areas of its business. If the Company is unable to attract and retain such qualified personnel, it may be forced to limit its growth, and its business and operating results could suffer. o CONTROL BY EXISTING STOCKHOLDERS. A single investor has in excess of 50% of the voting power of the Company. As a result, this investor can influence the Company's affairs and policies and the approval or disapproval of most matters submitted to a vote of the Company's stockholders, including the election of directors. o OTHER FACTORS. Other factors are described elsewhere in this Annual Report. CRITICAL ACCOUNTING POLICIES AND ESTIMATES The Company's consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States, which require the Company to make estimates and judgments that affect the reported amount of assets, liabilities, revenues and expenses, and the related disclosure. The Company believes that the following critical accounting policies, among others, affect its more significant judgments and estimates used in the preparation of its consolidated financial statements. REVENUE RECOGNITION Real estate sales commissions are recognized at the earlier of receipt of payment, close of escrow or transfer of title between buyer and seller. Receipt of payment occurs at the point at which all Company services have been performed, and title to real property has passed from seller to buyer, if applicable. Real estate leasing commissions are recognized upon execution of appropriate lease and commission agreements and receipt of full or partial payment, and, when payable upon certain events such as tenant occupancy or rent commencement, upon occurrence of such events. All other commissions and fees are recognized at the time the related services have been performed by the Company, unless future contingencies exist. Consulting revenue is recognized generally upon the delivery of agreed upon services to the client. IMPAIRMENT OF GOODWILL In assessing the recoverability of the Company's goodwill, the Company must make assumptions regarding estimated future cash flows and other factors to determine the fair value of the respective assets. On July 1, 2002, the 10 Company adopted Statements of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets." The Company has completed the transitional impairment tests of goodwill as of July 1, 2002 and has determined that no goodwill impairment will impact the earnings and financial position of the Company as of that date. Future events could occur which would cause the Company to conclude that impairment indicators exist and an impairment loss is warranted. DEFERRED TAXES The Company records a valuation allowance to reduce the carrying value of its deferred tax assets to an amount that the Company considers is more likely than not to be realized in future tax filings. In assessing this allowance, the Company considers future taxable earnings along with ongoing and potential tax planning strategies. Additional timing differences, future earnings trends and/or tax strategies may occur which could warrant a corresponding adjustment to the valuation allowance. INSURANCE AND CLAIM RESERVES The Company has maintained partially self-insured and deductible programs for errors and omissions, general liability, workers' compensation and certain employee health care costs. Reserves are based upon an estimate provided by an independent actuarial firm of the aggregate of the liability for reported claims and an estimate of incurred but not reported claims. The Company is also subject to various proceedings, lawsuits and other claims related to environmental, labor and other matters, and is required to assess the likelihood of any adverse judgments or outcomes to these matters. A determination of the amount of reserves, if any, for these contingencies is made after careful analysis of each individual issue. New developments in each matter, or changes in approach such as a change in settlement strategy in dealing with these matters, may warrant an increase or decrease in the amount of these reserves. RESULTS OF OPERATIONS OVERVIEW The Company reported a net loss of $15.5 million for the year ended June 30, 2002, primarily due to the decline in net transaction services revenues, partially offset by the decreases in operating expenses and non-recurring items and the cumulative effect from the change in accounting principle recognized during the prior fiscal year. FISCAL YEAR 2002 COMPARED TO FISCAL YEAR 2001 REVENUE The Company's revenue is derived principally from transaction services fees related to commercial real estate, which include commissions from leasing, acquisition and disposition, and agency leasing assignments as well as fees from appraisal and consulting services. Management services fees comprise the remainder of the Company's revenues, and include fees related to both property and facilities management outsourcing and business services. Total revenue for fiscal year 2002 was $313.5 million, a decrease of 23.9% from revenue of $412.0 million for fiscal year 2001. Significantly affecting this decline was a $96.4 million decrease in transaction services fees in the current fiscal year from the prior fiscal year. This resulted from decreased activity in the technology markets as well as the current softening in the general economy and its impact on the real estate industry through negative absorption and higher vacancy rates, particularly in the office sector. The terrorist attacks of September 11, 2001 created additional marketplace instability and further deterioration of overall economic conditions across the United States. Management services fees remained relatively flat decreasing to $51.4 million during the 2002 fiscal year as compared to $53.5 million in the prior fiscal year. COSTS AND EXPENSES Services commissions expense is the Company's largest expense and is a direct function of gross transaction services revenue levels, which include transaction services commissions and other fees. Professionals receive services commissions at rates that increase upon achievement of certain levels of production. As a percentage of gross transaction revenue, related 11 commission expense decreased to 58.0% for fiscal year 2002 as compared to 60.4% for fiscal year 2001. This decrease was due to unusually high average commission expense incurred during the prior year in technology markets such as Silicon Valley, San Francisco, Denver, Washington D.C. and New York, resulting from higher production per professional. Salaries, wages and benefits were relatively flat, decreasing by $1.4 million or 1.4% during fiscal year 2002 as compared to 2001. Selling, general and administrative expenses decreased by $2.7 million, or 4.0%, for the same period. The decrease in these operating costs of $4.1 million resulted from the Company tightening its discretionary expenditures in response to the slowing general economy. Depreciation and amortization expense for fiscal year 2002 decreased to $10.7 million from $11.6 million in fiscal year 2001. The Company holds multi-year service contracts with certain key professionals, the costs of which are amortized over the lives of the respective contracts, which are generally two to three years. Amortization expense relating to these contracts of $2.1 million was recognized in fiscal year 2002, compared to $2.9 million in the prior year due to a reduction in the number of new service contracts executed in the current year. During fiscal year 2002, the Company concluded long standing litigation proceedings on the JOHN W. MATTHEWS, ET AL. V KIDDER, PEABODY & CO., ET AL. AND HSM INC., ET AL. ("Matthews") case for which it had previously recorded loss reserves. In addition, during this period, loss reserves were recorded as a result of the liquidation proceedings surrounding one of the Company's insurance carriers ("Reliance" liquidation). (See Note 10 of Notes to Consolidated Statements in Item 8 of this Report for additional information.) The positive outcome of the Matthews case, partially offset by the additional exposure on the Reliance liquidation, resulted in $2.2 million of income from claim related reserves. The Company also incurred other non-recurring expenses in fiscal year 2002 totaling $3.9 million, consisting of $1.0 million of severance costs related to a reduction of salaried overhead, $2.1 million related to office closure costs, $300,000 related to costs incurred for the retirement of the Warburg Pincus $5,000,000 Subordinated Note and for the evaluation of an unsolicited purchase offer from a third party, and $500,000 related to a write-down of the carrying basis of an investment in a commercial real estate services internet venture. The Company's decision to write-down its interest in the venture was due to a dilution in the Company's ownership position, as well as uncertainty in the venture's ability to achieve its business plan. As a result of these events, the Company has recognized a net non-recurring expense of $1,749,000 for fiscal year 2002. During fiscal year 2001, the Company recognized other non-recurring expenses totaling $6.2 million, relating primarily to the impairment of goodwill related to the April 1998 acquisition of White Commercial Real Estate, as well as compensation expense related to stock options exercised in connection with the Company's self-tender offer, an initial write down in the carrying basis of an investment in an internet venture, and executive severance costs related to prior senior management changes. (See Notes 12 and 13 of Notes to Consolidated Statements in Item 8 of this Report for additional information.) In June 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets," effective for fiscal years beginning after December 15, 2001. Under the new rules, goodwill will no longer be amortized but will be subject to annual impairment tests in accordance with the Statement. Other intangible assets will continue to be amortized over their useful lives. The Company will apply the new rules on accounting for goodwill and other intangible assets beginning in the first fiscal quarter of fiscal 2003, which for the Company would be the quarter ending September 30, 2002. Application of the non-amortization provisions of the Statement is expected to result in an increase in net operating income of approximately $1.6 million per year. The Company has completed the transitional impairment tests of goodwill as of July 1, 2002 and has determined that no goodwill impairment will impact the earnings and financial position of the Company as of that date. Interest income decreased during fiscal year 2002 as compared to fiscal year 2001 as a result of lower available invested cash and lower interest rates. Interest expense incurred during fiscal year 2002 was due to the Company's term loan borrowings under the credit facility related to the Company's self-tender offer, and the note payable-affiliate funded in March 2002. Interest expense incurred during the first half of fiscal year 2001 was due primarily to seller financing related to business acquisitions made in calendar year 1998. Interest expense incurred in the second half of fiscal year 2001 was due to the term loan borrowings under the credit facility. Effective December 31, 2000, the Company restructured its credit agreement with Bank of America, N.A. as agent and lender and certain other lenders ("Credit Agreement"). Unamortized costs related to the prior agreement totaling $406,000, net of applicable taxes, were written off and have been recorded as an extraordinary loss from extinguishment of debt during fiscal year 2001. 12 As disclosed in "Accounting Change" below, the SEC issued SAB 101 relating to the recognition of revenue for publicly owned companies. The application of SAB 101 resulted in the recognition of a cumulative effect charge of $3.1 million (net of applicable taxes of $2.1 million) on July 1, 2000. INCOME TAXES As of June 30, 2002, the Company had gross deferred tax assets of $14.6 million, with $5.4 million of the deferred tax assets relating to net operating loss carry forwards which will be available to offset future taxable income through 2012. Management believes that the Company will generate sufficient future taxable income to realize a portion of these net deferred tax assets. The Company has recorded a valuation allowance for $9.7 million against the deferred tax assets as of June 30, 2002 and will continue to do so until such time as management believes that the Company will realize such tax benefits. Although uncertainties exist as to these events, the Company will continue to review its operations periodically to assess whether and when all deferred tax assets may be realized. The net income tax benefit recorded in 2002 reflects a charge for an increase in the valuation allowance of $5.2 million compared to a charge of $200,000 in 2001. See Note 7 of Notes to Consolidated Financial Statements in Item 8 of this Report for additional information. NET INCOME The net loss for fiscal year 2002 was $15.5 million, or $(1.09) per common share on a diluted basis, as compared to net income of $1.4 million, or $.08 per common share for fiscal year 2001. STOCKHOLDERS' EQUITY During fiscal year 2002, stockholders' equity decreased $10.4 million to $5.9 million from $16.3 million at June 30, 2001. The net loss of $15.5 million for fiscal year 2002 was partially offset by the receipt of $5.2 million of proceeds from the exercise of warrants along with the sale of common stock under the Company's stock option plans and employee stock purchase plan. See Liquidity and Capital Resources below and Note 8 of Notes to Consolidated Financial Statements in Item 8 of this Report for additional information. The book value per common share issued and outstanding decreased to $0.39 at June 30, 2002 from $1.22 at June 30, 2001. FISCAL YEAR 2001 COMPARED TO FISCAL YEAR 2000 ACCOUNTING CHANGE In December 1999, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 101 ("SAB 101"), Revenue Recognition in Financial Statements. SAB 101 summarizes the SEC staff's views regarding the recognition and reporting of revenues in financial statements. The adoption of SAB 101 is reflected as a cumulative effect of a change in accounting principle as of July 1, 2000. Under SAB 101, the Company's leasing commissions that are payable upon certain events such as tenant occupancy or commencement of rent will now be recognized upon the occurrence of such events. In addition, consulting fees will be recognized under SAB 101 generally upon the delivery of agreed upon services to the client. Historically, the Company had recognized leasing commissions at the earlier of receipt of full payment or receipt of partial payment when lease and commissions agreements had been executed and no significant contingencies existed. The Company had recognized consulting fees as employee time was incurred on a project. While this accounting change affects the timing of recognition of leasing revenues (and corresponding services commission expense) and consulting revenues, it does not impact the Company's cash flow from operations. The cumulative effect of the accounting change on prior years resulted in a reduction to income for fiscal year 2001 of $3.1 million (net of applicable taxes of $2.1 million), or $.17 per diluted share. The effect of retroactive application of the accounting change to July 1, 2000 increased transaction services fees by $2.6 million, EBITDA by $1.1 million and income before the cumulative effect of the accounting change by $632,000, or $.04 per diluted share, for fiscal year 2001. On a pro forma basis, giving effect to the change retroactive to July 1, 1999, the Company would have reported transaction services fees of $354.0 million, EBITDA of $37.7 million, and net income of $15.5 million for fiscal year 2000. Actual results reported for fiscal year 2000 included transaction services fees of $355.7 million, EBITDA of $38.9 million and net income of $16.3 million. 13 REVENUE Total revenue for fiscal year 2001 was $412.0 million, a decrease of 0.5% from $413.9 million for fiscal year 2000. Transaction services fees remained relatively flat, as increased activity in the first half of the fiscal year from certain technology markets, multi-market relationships and larger assignments was offset in the second half of the fiscal year by the weakening general economy and its impact on the real estate industry through negative absorption and higher vacancy rates. The impact of SAB 101 on these revenues for fiscal 2001 as compared to fiscal 2000 was insignificant. Management services fees of $53.5 million in fiscal 2001 decreased by approximately $4.7 million, or 8.1% compared to the prior year. New business revenue gains were offset by the Company resigning a marginally profitable account which had generated approximately $3.0 million in annual revenue, as well as fees recognized in fiscal year 2000 resulting from an unusually large one-time business services printing assignment. COSTS AND EXPENSES As a percentage of transaction services gross transaction revenue, related commission expense increased to 60.4% from 58.5% for fiscal year 2001 as compared to fiscal year 2000. Unusually high average commission expense had been incurred during the first six months of fiscal year 2001 in once flourishing technology markets such as Silicon Valley, San Francisco, Denver, Washington D.C. and New York. This resulted from strong incremental revenue growth in these markets and the commensurately high production per professional, rather than changes to the existing compensation structure of the Company's transaction professionals. Commensurate with the subsequent downturn in transaction services commission revenues described above, the commission expenses incurred during the last six months of fiscal year 2001 also declined. Salaries, wages and benefits expenses, along with selling, general and administrative expenses, were relatively flat in fiscal year 2001 as compared to fiscal year 2000, increasing by approximately $710,000, or 0.4%. Depreciation and amortization expense for fiscal year 2001 increased to $11.6 million from $10.5 million in fiscal year 2000 as the Company placed in service numerous technology infrastructure improvements during the first half of fiscal year 2000. The Company also holds multi-year service contracts with certain key professionals, the costs of which are being amortized over the lives of the respective contracts, which are generally two to three years. Amortization expense relating to these contracts of $2.9 million was recognized in fiscal year 2001, compared to $2.2 million in the prior year. During fiscal year 2001, the Company recognized other non-recurring expenses totaling $6.2 million, relating primarily to the impairment of goodwill related to the April 1998 acquisition of White Commercial Real Estate, as well as compensation expense related to stock options exercised in connection with the Company's self-tender offer, a writedown in the carrying basis of an investment in an internet venture, and executive severance costs related to senior management changes. Other non-recurring expenses totaling $2.7 million for fiscal year 2000 were recognized in connection with the resignation of the Company's former chairman and chief executive officer. Interest income increased during fiscal year 2001 as compared to fiscal year 2000 as a result of higher available invested cash from improved operations in the first half of the fiscal year being invested prior to funding the Company's self-tender offer and related costs during the latter half of the fiscal year. Interest expense incurred in fiscal year 2000 and through the first six months of fiscal year 2001 was due primarily to seller financing related to business acquisitions made in calendar year 1998, as well as credit facility borrowings in the last half of fiscal year 1999. Interest expense incurred in the second half of fiscal year 2001 was due to the term loan borrowings related to the Company's self-tender offer. INCOME TAXES As of June 30, 2001, the Company had gross deferred tax assets of $11.4 million, with $2.5 million of the deferred tax assets relating to net operating loss carry forwards. The Company recorded a valuation allowance for $4.5 million against the deferred tax assets as of June 30, 2001. NET INCOME Net income for fiscal year 2001 was $1.4 million, or $.08 per common share on a diluted basis, as compared to net income of $16.3 million, or $.77 per common share for fiscal year 2000. The Company generated basic earnings per share of $.08 and $.82 in fiscal years 2001 and 2000, respectively. Included in net income were deferred tax benefits of $1.4 million for fiscal year 2000. 14 STOCKHOLDERS' EQUITY During fiscal year 2001, stockholders' equity decreased $45.3 million to $16.3 million from $61.6 million at June 30, 2000. In addition to net income of $1.4 million for fiscal year 2001, the Company received $2.2 million from the sale of common stock under its stock option plans and employee stock purchase plan and paid $48.8 million to shareholders in connection with a self-tender offer completed in January 2001. The book value per common share issued and outstanding decreased to $1.22 at June 30, 2001 from $3.11 at June 30, 2000. LIQUIDITY AND CAPITAL RESOURCES During fiscal year 2002, cash and cash equivalents increased by $6.8 million primarily as a result of cash generated by operating activities of $4.3 million and financing activities of $10.0 million offset by cash used in investing activities of $7.4 million. Cash used in investing activities related to $5.1 million of purchases of equipment, software and leasehold improvements and $2.3 million related to a business acquisition. Net financing activities primarily related to the funding of an $11.2 million loan by Kojaian Ventures, L.L.C. ("KV"), and related issuance of a promissory note to KV ("KV Subordinated Note") and proceeds of $5.2 million from the issuance of common stock offset by the net repayment of the credit facility term loan debt totaling $5.3 million. The Company has historically experienced the highest use of operating cash in the quarter ending March 31, primarily related to the payment of certain employee benefits and incentives and deferred commission payable balances that attain peak levels during the quarter ending December 31. Deferred commissions balances of approximately $14.5 million, related to revenues earned in calendar year 2001, were paid in the quarter ended March 31, 2002. See Note 16 of Notes to Consolidated Financial Statements in Item 8 of this Report for information concerning earnings before interest, taxes, depreciation and amortization. In January 2002, the Company issued an additional 1,337,358 shares of its common stock upon the exercise of certain warrants held by its largest stockholder, Warburg, Pincus Investors, L.P., which were scheduled to expire on January 29, 2002. The aggregate purchase price of the common stock was approximately $4.2 million, reflecting an average weighted price of $3.11 per share. In each of August 2001 and November 2001, the Company entered into amendments to its credit agreement that amended financial covenants related to minimum cash flow levels and fixed cost ratios. The amendments also increased the interest margin by 0.50% over the original terms. As a result of continuing deterioration in both the general economy as well as the real estate services industry, the Company's operations for the quarter ended December 31, 2001 resulted in non-compliance with certain financial covenants contained in the amended agreement. The Company received a waiver with respect to these covenant defaults that expired on February 28, 2002. Effective March 8, 2002, the Company completed the restructuring of its credit facility that was effected in accordance with the terms and conditions of a third amendment to the credit agreement ("Third Amendment"). Upon giving effect to the Third Amendment, the Company was and is in compliance with its covenants under the credit facility. Under the terms of the Third Amendment, $5,000,000 of principal amortization of the term loan that was previously due in calendar year 2002 was deferred, certain financial covenants relating to the Company's cash flows and operations were revised, and the commitment under the revolving loan portion was reduced from $15,000,000 to $6,000,000 (and was further reduced to $5,000,000 in June 2002). Simultaneously with the Third Amendment, the Company, Bank of America (as administrative agent), and Warburg, Pincus Investors, L.P. ("Warburg Pincus") also entered into an option purchase agreement (the "Option Agreement") whereby Warburg Pincus funded a $5,000,000 promissory note (the "$5,000,000 Subordinated Note") and granted the Company the right (which right was assignable to the banks) to cause Warburg Pincus to deliver to the Company an additional $6,000,000 in June 2002 upon substantially the same terms and conditions as the $5,000,000 Subordinated Note (the "$6,000,000 Subordinated Note"). All sums evidenced by the $5,000,000 Subordinated Note and the $6,000,000 Subordinated Note (collectively, the "Subordinated Notes") were subordinate to all other indebtedness under the credit facility. The Subordinated Notes were demand obligations bearing interest at the rate of 15% per annum, compounded quarterly, although no payments of interest or principal were permitted until the credit facility was terminated. In addition, all principal and interest and reasonable costs evidenced by the Subordinated Notes were subject to conversion generally at the option of the holder, into 11,000 shares of the Company's newly created Series A Preferred Stock having a stated value of $1,000 per share. 15 Pursuant to the Option Agreement, the Company also received the right to replace the Warburg Pincus financing arrangements ("Refinancing Right") by a certain date, contemplated by the Option Agreement. Specifically, upon the receipt of at least approximately $15,000,000 from the sale of equity or subordinated debt securities, and the tendering to Warburg Pincus, or its assigns, on or before the extended date of May 14, 2002, of (i) the entire principal amount of the $11,000,000 Subordinated Notes, plus accrued interest thereon and reasonable costs with respect thereto, and (ii) the sum of $4,158,431, to re-purchase 1,337,358 shares of common stock acquired by Warburg Pincus in January 2002, all of the debt and equity securities issued and issuable thereunder, will automatically be terminated. On May 13, 2002, the Company effected a closing of a financing with Kojaian Ventures, L.L.C. ("KV") which is wholly-owned by C. Michael Kojaian, who is a member of the Board of Directors of the Company and, along with his father, owned, subsequent to the closing of the KV financing, approximately 20% of the Company's issued and outstanding Common Stock. In addition, certain affiliated real estate entities of KV, in the aggregate, are substantial clients of the Company. The Company accepted the financing offered by KV based, in part, upon the fact that the KV financing, which replaced the financing provided by Warburg Pincus in March 2002, was on more favorable terms and conditions to the Company than the Warburg Pincus financing. Accordingly, on the closing of the KV Transaction on May 13, 2002, KV paid to the Company an aggregate of $15,386,580 which provided the Company with the necessary funds, which the Company used, to (i) repay the $5,000,000 Subordinated Note and accrued interest thereon of $137,500, (ii) pay $100,000 of Warburg Pincus' reasonable, documented out-of-pocket expenses associated with the $5,000,000 Subordinated Note, (iii) repurchase, at cost, 1,337,358 shares of Common Stock held by Warburg Pincus for a price per share of $3.11, or an aggregate purchase price of $4,158,431, and (iv) pay down $6,000,000 of revolving debt under the Company's Credit Facility. In exchange therefore, KV received (i) a convertible subordinated note in the principal amount of $11,237,500 (the "KV Debt"), and (ii) 1,337,358 shares of Common Stock at a price of $3.11 per share. As a consequence, upon the closing of the KV Transaction, the Option Agreement was terminated, and KV replaced Warburg Pincus as a junior lender under the Credit Facility. The form of KV's financing is substantially identical to the form of the $11,000,000 Subordinated Debt that Warburg Pincus was to provide pursuant to the Option Agreement, provided, however, that the KV Debt is more favorable to the Company in two (2) material respects. First, the interest rate on the KV Debt is 12% per annum as opposed to 15% per annum. Similarly, the Series A Preferred Stock into which the KV Debt is convertible has a coupon of 12% per annum, compounded quarterly, rather than 15% per annum, compounded quarterly. Second, the Series A Preferred Stock that KV is entitled to receive, like the Series A Preferred Stock that was issuable to Warburg Pincus, has approximately a 40% preference on liquidation, dissolution and certain change in control transactions rather than the 50% preference on the Warburg Pincus financing. KV's liquidation preference is the greater of (i) 1.5 times the Conversion Amount, plus the accrued dividend thereon at the rate of 12% per annum (provided such liquidation, dissolution, or change of control transaction takes place within twelve (12) months after May 13, 2002, and thereafter it will increase to 2 times the Conversion Amount plus the accrued dividend thereon at the rate of 12% per annum), or (ii) the equivalent of 40% percent of the consideration to be paid to all the equity holders of the Company, not on a fully diluted basis as was the case in the Warburg Pincus financing, but rather, on an "Adjusted Outstanding Basis" (as defined in the underlying documents). On September 19, 2002, Kojaian Ventures, L.L.C. ("KV"), a related party, exercised its right to convert the subordinated debt instruments it held into preferred stock of the Company. (See Notes 6 and 19 for additional information.) As a result of this conversion, 11,725 shares of the Company's Series A Preferred Stock were issued, with a face value of $1,000 per share. The outstanding related party principal and interest obligations totaling $10,967,000 (net of issuance costs of $758,000), will be reclassified to stockholders' equity. The preferred stock contains liquidation preference and voting rights equal to 1,007 common shares for each share of preferred stock, or a total of 11,807,075 common share equivalents. As a consequence of the conversion, there has been a change in the control of the Company, as these equivalents, along with 3,762,884 shares of outstanding common stock owned by KV or its affiliates, represent approximately 60% of the total voting power of the Company. The preferred stock is not convertible into any other securities of the Company or subject to redemption. Warburg Pincus, which currently owns approximately 39% of the issued and outstanding common stock of the Company, has approximately 22% of the voting power. Interest on outstanding borrowings under the credit facility is based upon BofA's prime rate and/or a LIBOR based rate plus, in either case, an additional margin based upon a particular financial leverage ratio of the Company, and will vary depending upon which interest rate options the Company chooses to be applied to specific borrowings. The 16 average interest rate incurred by the Company on the Credit Agreement obligations during fiscal year 2002 was 5.68%. The term loan facility amortizes on a monthly basis through December 2002, and then on a quarterly basis, until December 31, 2005 when both facilities mature. Certain other mandatory prepayment provisions related to the operating cash flows of the Company and receipts of certain debt, equity and/or sales proceeds also exist within the agreement. Scheduled principal payments are as follows (in thousands): YEAR ENDING JUNE 30 AMOUNT --------------- ---------------- 2003 $ 5,750 2004 9,875 2005 11,125 2006 5,000 -------- $ 31,750 ======== Direct expenses related to the Credit Agreement and amendments totaling approximately $1,070,000 have been recorded as deferred financing fees and are amortized over the term of the agreement. Unamortized fees related to the prior credit facility agreement, totaling approximately $406,000 (net of applicable taxes of approximately $270,000) were written off concurrently with the effective date of the Credit Agreement and have been recorded as an extraordinary loss in accordance with accounting principles generally accepted in the United States during the fiscal year ended June 30, 2001. The variable interest rate structure of the Credit Agreement exposes the Company to risks associated with changes in the interest rate markets. Consequently, the Credit Agreement required the Company to enter interest rate protection agreements, within 90 days of the date of the agreement, initially fixing the interest rates on not less than 50% of the aggregate principal amount of the term loan scheduled to be outstanding for a period of not less than three years. The Company subsequently established risk management policies and procedures to manage the cost of borrowing obligations, which include the use of interest rate swap derivatives to fix the interest rate on debt with floating rate indices. Further, the Company prohibits the use of derivative instruments for trading or speculative purposes. In March 2001, the Company entered into two interest rate swap agreements for a three year term, with banks that are parties to the Credit Agreement. As of June 30, 2002, the swap agreements had a total notional amount of $14.5 million, with a fixed annual interest rate to be paid by the Company of 5.18%, and a variable rate to be received by the Company equal to three month LIBOR based borrowing rates. The Company has determined that these agreements are to be characterized as effective under the definitions included within Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities". On June 30, 2002, the derivative instruments were reported at their fair value of approximately $283,000, net of applicable taxes, in other liabilities in the condensed Consolidated Balance Sheet. The offsetting amount is reported as a deferred loss in Accumulated Other Comprehensive Loss. The Company's interest rate swaps are treated as cash flow hedges, which address the risk associated with future variable cash flows of debt transactions. Over time, the unrealized gains and losses held in Accumulated Other Comprehensive Loss will be reclassified into earnings in the same periods in which the hedged interest payments affect earnings. Repayment of the Credit Agreement is collateralized by substantially all of the Company's assets and the Credit Agreement contains certain restrictive covenants, including, among other things: achievement of minimum EBITDA levels as defined in the agreement, restrictions on indebtedness, the payment of dividends, the redemption or repurchase of capital stock, acquisitions, investments and loans; and the maintenance of certain financial ratios. In January 2002, the Company filed a Registration Statement on Form S-3 with the Securities and Exchange Commission, pursuant to which it intended to distribute rights to purchase shares of its common stock to stockholders of record as of the close of business on February 25, 2002. On March 8, 2002, the Company withdrew this Registration Statement due to commencement of other financing arrangements for the Company. In August 1999, the Company announced a program through which it may purchase up to $3 million of its common stock on the open market from time to time as market conditions warrant. As of June 30, 2002, the Company had repurchased 359,900 shares at a total cost of approximately $2.0 million. No shares were repurchased under this program during fiscal years 2002 and 2001. 17 The Company has a $5.0 million revolver facility under its Credit Agreement for intended short term borrowing needs. Letters of credit totaling $1.35 million have been issued by the Company, thus reducing the available borrowings under the revolver facility. Pursuant to the terms of its Credit Agreement, as amended, the Company is required to achieve minimum EBITDA levels from operations totaling $12.1 million for the next fiscal year ended June 30, 2003. In addition, principal repayments totaling $5.8 million are scheduled to become due during the 2003 fiscal year. The Company's common stock is currently listed on the New York Stock Exchange ("NYSE") pursuant to a listing agreement. As previously disclosed by the Company, the NYSE had accepted the Company's proposed business plan to attain compliance with the NYSE's listing standard on or before July 4, 2003. This plan had been submitted in response to a notification received by the Company on January 4, 2002 regarding non-compliance with such listing standards. As a result of the business plan's acceptance, the Company's common stock continued to be traded on the exchange, subject to the Company maintaining compliance with the plan and periodic review by the NYSE. Upon completion of a recent review, the NYSE announced on October 8, 2002 that the Company's common stock will be de-listed from the NYSE, due primarily to the Company's book value and market capitalization value being below minimum levels required by their listing standards. The Company is making arrangements to have its common stock traded on the over-the-counter market ("OTC") and is scheduled to cease trading on the NYSE prior to the opening on Thursday October 17, 2002. Although the Company is seeking an orderly transition and has reason to believe the NYSE will effectuate the same, there can be no assurance that the OTC will accept the Company's shares for listing prior to their de-listing from the NYSE, or at all, and that there will be no interruption of the public listing of the Company's common stock. The Company believes that its short-term and long-term operating cash requirements will be met by operating cash flow, and/or debt and equity financing. In the event of adverse economic conditions or other unfavorable events, and to the extent that the Company's cash requirements are not met by operating cash flow or available debt or equity proceeds, the Company may find it necessary to reduce expenditure levels or undertake other actions as may be appropriate under the circumstances. The Company continues to explore additional strategic acquisition opportunities that have the potential to expand the depth and breadth of its current lines of business and increase its market share. The sources of consideration for such acquisitions could be cash, the Company's current credit facility, new debt, and/or the issuance of stock, or a combination of the above. No assurances can be made that any additional acquisitions will be made or that financing will be available under terms and conditions acceptable to the Company. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company's bank debt obligations are floating rate obligations whose interest rate and related monthly interest payments vary with the movement in LIBOR. See Note 5 of Notes to the Consolidated Financial Statements in Item 8 of this Report. In order to mitigate this risk, terms of the credit agreement required the Company to enter into interest rate swap agreements to effectively convert a portion of its floating rate term debt obligations to fixed rate debt obligations through March 2004. Interest rate swaps generally involve the exchange of fixed and floating rate interest payments on an underlying notional amount. As of June 30, 2002, the Company had $14.5 million in notional amount interest rate swaps outstanding in which the Company pays a fixed rate of 5.18% and receives a three-month LIBOR based rate from the counter-parties. The notional amount of the interest rate swap agreements is scheduled to decline as follows: NOTIONAL AMOUNT DATE --------------- ---------------- $10,500,000 June 30, 2003 8,000,000 March 31, 2004 When interest rates rise the interest rate swap agreements increase in fair value to the Company and when interest rates fall the interest rate swap agreements decline in value to the Company. As of June 30, 2002, there was a net decline in interest rates since the Company had entered into the agreements, and the interest rate swap agreements were in an unrealized loss position to the Company of approximately $283,000, net of taxes. 18 To highlight the sensitivity of the interest rate swap agreements to changes in interest rates, the following summary shows the effects of a hypothetical instantaneous change of 100 basis points (BPS) in interest rates as of June 30, 2002 (in thousands): Notional Amount ...................................... $ 14,500 Fair Value to the Company ............................ (283) Change in Fair Value to the Company Reflecting Change in Interest Rates -100 BPS ......................................... (99) +100 BPS ......................................... 97 The Company does not utilize financial instruments for trading or other speculative purposes, nor does it utilize leveraged financial instruments. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA REPORT OF INDEPENDENT AUDITORS The Board of Directors and Stockholders Grubb & Ellis Company We have audited the accompanying consolidated balance sheets of Grubb & Ellis Company as of June 30, 2002 and 2001, and the related consolidated statements of operations, stockholders' equity, and cash flows for each of the three years in the period ended June 30, 2002. 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 auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Grubb & Ellis Company at June 30, 2002 and 2001, and the consolidated results of its operations and its cash flows for each of the three years in the period ended June 30, 2002, in conformity with accounting principles generally accepted in the United States. As discussed in Note 14 to the consolidated financial statements, in fiscal 2001 the Company changed its method of accounting for revenue recognition for leasing commissions and consulting fees. ERNST & YOUNG LLP Chicago, Illinois September 19, 2002, except for the third paragraph of Note 17, as to which the date is October 8, 2002 19 GRUBB & ELLIS COMPANY CONSOLIDATED BALANCE SHEETS JUNE 30, 2002 AND 2001 (IN THOUSANDS, EXCEPT SHARE DATA) ASSETS
2002 2001 ------ ------ Current assets: Cash and cash equivalents ......................................................... $ 14,085 $ 7,248 Services fees receivable, net ..................................................... 13,212 17,897 Other receivables ................................................................. 3,396 3,610 Professional service contracts, net ............................................... 1,974 3,263 Prepaid income taxes .............................................................. 6,890 4,598 Prepaid and other current assets .................................................. 586 680 Deferred tax assets, net .......................................................... 1,563 1,296 -------- -------- Total current assets ............................................................ 41,706 38,592 Noncurrent assets: Equipment, software and leasehold improvements, net ............................... 17,843 19,669 Goodwill, net ..................................................................... 26,958 26,328 Deferred tax assets, net .......................................................... 947 3,535 Other assets ...................................................................... 2,923 4,302 -------- -------- Total assets .................................................................... $ 90,377 $ 92,426 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable .................................................................. $ 5,569 $ 3,330 Commissions payable ............................................................... 5,347 7,952 Credit facility debt .............................................................. 5,750 8,000 Accrued compensation and employee benefits ........................................ 16,243 13,416 Other accrued expenses ............................................................ 4,546 4,678 -------- -------- Total current liabilities ....................................................... 37,455 37,376 Long-term liabilities: Credit facility debt .............................................................. 26,000 29,000 Note payable--affiliate, net ...................................................... 10,660 -- Accrued claims and settlements .................................................... 7,823 8,695 Other liabilities ................................................................. 2,573 1,039 -------- -------- Total liabilities ............................................................... 84,511 76,110 -------- -------- Stockholders' equity: Common stock, $.01 par value: 50,000,000 shares authorized; 15,028,839 and 13,358,615 shares issued and outstanding at June 30, 2002 and 2001, respectively 150 134 Additional paid-in-capital ........................................................ 72,084 66,858 Accumulated other comprehensive loss .............................................. (283) (68) Retained deficit .................................................................. (66,085) (50,608) -------- -------- Total stockholders' equity ...................................................... 5,866 16,316 -------- -------- Total liabilities and stockholders' equity ...................................... $ 90,377 $ 92,426 ======== ========
The accompanying notes are an integral part of these consolidated financial statements. 20 GRUBB & ELLIS COMPANY CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEARS ENDED JUNE 30, 2002, 2001 AND 2000 (IN THOUSANDS, EXCEPT SHARE DATA)
2002 2001 2000 -------- -------- -------- Revenue: Transaction services fees ............................................. $262,077 $358,462 $355,704 Management services fees ............................................... 51,399 53,500 58,215 ---------- ---------- ---------- Total revenue ........................................................ 313,476 411,962 413,919 ---------- ---------- ---------- Costs and expenses: Services commissions ................................................... 151,900 216,646 208,260 Salaries, wages and benefits ........................................... 97,497 98,847 98,383 Selling, general and administrative .................................... 65,828 68,550 68,304 Depreciation and amortization .......................................... 10,706 11,635 10,521 Impairment and other non-recurring expenses ............................ 1,749 6,222 2,650 ---------- ---------- ---------- Total costs and expenses ............................................. 327,680 401,900 388,118 ---------- ---------- ---------- Total operating income (loss) ........................................ (14,204) 10,062 25,801 Other income and expenses: Interest income ........................................................ 401 1,640 500 Interest expense ....................................................... (2,861) (1,422) (413) ---------- ---------- ---------- Income (loss) before income taxes, extraordinary item and cumulative effect ............................ (16,664) 10,280 25,888 Benefit (provision) for income taxes ...................................... 1,187 (5,372) (9,598) ---------- ---------- ---------- Income (loss) before extraordinary item and cumulative effect ............. (15,477) 4,908 16,290 Extraordinary loss on extinguishment of debt, net of tax .................. -- (406) -- ---------- ---------- ---------- Income (loss) before cumulative effect of accounting change ............... (15,477) 4,502 16,290 Cumulative effect of accounting change, net of tax ........................ -- (3,133) -- ---------- ---------- ---------- Net income (loss) ...................................................... $(15,477) $ 1,369 $ 16,290 ========== ========== ========== Net income (loss) per common share: Basic- - before extraordinary item and cumulative effect ...................... $ (1.09) $ 0.28 $ 0.82 - from extraordinary loss .............................................. -- (0.02) -- - from cumulative effect of accounting change .......................... -- (0.18) -- ---------- ---------- ---------- .......................................................................... $ (1.09) $ 0.08 $ 0.82 ========== ========== ========== Diluted- - before extraordinary item and cumulative effect ...................... $ (1.09) $ 0.27 $ 0.77 - from extraordinary loss .............................................. -- (0.02) -- - from cumulative effect of accounting change .......................... -- (0.17) -- ---------- ---------- ---------- .......................................................................... $ (1.09) $ 0.08 $ 0.77 ========== ========== ========== Weighted average common shares outstanding: Basic- ................................................................. 14,147,618 17,051,546 19,779,220 ========== ========== ========== Diluted- ............................................................... 14,147,618 17,975,351 21,037,311 ========== ========== ==========
The accompanying notes are an integral part of these consolidated financial statements. 21 GRUBB & ELLIS COMPANY CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY FOR THE YEARS ENDED JUNE 30, 2002, 2001 AND 2000 (IN THOUSANDS, EXCEPT SHARE DATA)
Common Stock ------------------ Accumulated Additional Other Retained Total Total Outstanding Paid-In- Comprehensive Earnings Comprehensive Stockholders' Shares Amount Capital Loss (Deficit) Income (Loss) Equity ----------- ------ ---------- ------------- --------- ------------- ------------ Balance as of July 1, 1999 ........ 19,885,084 $199 $112,550 $ -- $(68,267) $ 44,482 Stock warrants issued ............. -- -- 1,620 -- 1,620 Stock repurchases ................. (359,900) (4) (1,979) -- (1,983) Employee common stock purchases and net exercise of stock options .................. 285,710 3 1,208 -- 1,211 Net income ........................ -- -- -- 16,290 16,290 ---------- ---- -------- ------ -------- -------- Balance as of June 30, 2000 ....... 19,810,894 198 113,399 -- (51,977) 61,620 Self-tender offer repurchases ..... (7,000,073) (70) (48,740) -- -- (48,810) Employee common stock purchases and net exercise of stock options .................. 547,794 6 2,199 -- -- 2,205 Net income ........................ -- -- -- -- 1,369 $ 1,369 1,369 Change in value of cash flow hedge, net of tax .......... -- -- -- (68) -- (68) (68) --------- Total comprehensive income ........ $ 1,301 ---------- ---- -------- ------ -------- ========= -------- Balance as of June 30, 2001 ....... 13,358,615 134 66,858 (68) (50,608) 16,316 Employee common stock purchases and net exercise of stock options .................. 330,889 3 1,076 1,079 Proceeds from stock warrant exercises, net ................. 1,339,335 13 4,150 4,163 Net loss .......................... -- -- -- (15,477) $ (15,477) (15,477) Change in value of cash flow hedge, net of tax ......... -- -- -- (215) -- (215) (215) --------- Total comprehensive loss .......... $ (15,692) ---------- ---- -------- ------ -------- ========= -------- Balance as of June 30, 2002 ....... 15,028,839 $150 $ 72,084 $(283) $(66,085) $ 5,866 ========== ==== ======== ====== ======== ========
The accompanying notes are an integral part of these consolidated financial statements. 22 GRUBB & ELLIS COMPANY CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED JUNE 30, 2002, 2001 AND 2000 (IN THOUSANDS, EXCEPT SHARE DATA)
2002 2001 2000 -------- -------- -------- Cash Flows from Operating Activities: Net income (loss) .......................................................... $(15,477) $ 1,369 $ 16,290 Adjustments to reconcile net income (loss) to net cash provided by operating activities: Deferred tax provision (benefit) ........................................ 2,321 (566) 2,125 Depreciation and amortization ........................................... 10,706 11,635 10,521 Extraordinary loss, net of tax .......................................... -- 406 -- Cumulative effect of accounting change, net of tax ...................... -- 3,133 -- Impairment and other non-cash non-recurring expenses ................... 374 3,000 -- Recovery for services fees receivable valuation allowances .............. (229) (195) (336) Stock option compensation expense ....................................... -- 1,219 -- Funding of multi-year service contracts .................................... (793) (3,637) (2,773) (Increase) decrease in services fees receivable ............................ 4,724 (3,962) (2,384) (Increase) decrease in prepaid income taxes ................................ (2,292) (4,598) 1,084 (Increase) decrease in prepaid and other assets ............................ 1,662 3,975 184 Increase (decrease) in accounts and commissions payable .................... (255) 92 1,111 Increase (decrease) in accrued compensation and employee benefits .......... 2,828 (900) 4,805 Increase (decrease) in accrued claims and settlements ...................... 1,328 (46) (95) Increase (decrease) in other liabilities .................................. (578) (2,916) 4,402 -------- --------- -------- Net cash provided by operating activities ............................. 4,319 8,009 34,934 -------- --------- -------- Cash Flows from Investing Activities: Purchases of equipment, software and leasehold improvements ................ (5,147) (6,153) (8,008) Cash paid for business acquisitions, net of cash acquired .................. (2,295) (568) (1,112) Other investing activities ................................................. -- -- (1,900) -------- --------- -------- Cash used in investing activities ..................................... (7,442) (6,721) (11,020) -------- --------- -------- Cash Flows from Financing Activities: Repayment of credit facility debt .......................................... (11,250) (3,000) (7,500) Borrowings on credit facility debt ......................................... 6,000 40,000 -- Repayment of acquisition indebtedness ...................................... -- (519) (2,366) Repayment of borrowings from affiliate ..................................... (5,000) -- -- Borrowings from affiliate .................................................. 16,237 -- -- Proceeds from issuance of common stock, net ................................ 1,079 986 1,211 Proceeds from stock warrant exercises, net ................................. 4,163 -- -- Cash paid to fund self-tender offer ........................................ -- (48,810) -- Repurchase of common stock ................................................. -- -- (1,983) Issuance and deferred financing fees ....................................... (1,269) (559) (914) -------- --------- -------- Net cash provided by (used in) financing activities ................... 9,960 (11,902) (11,552) -------- --------- -------- Net increase (decrease) in cash and cash equivalents ...................... 6,837 (10,614) 12,362 Cash and cash equivalents at beginning of the year ......................... 7,248 17,862 5,500 -------- --------- -------- Cash and cash equivalents at end of the year ............................... $ 14,085 $ 7,248 $ 17,862 ======== ========= ========
The accompanying notes are an integral part of these consolidated financial statements. 23 GRUBB & ELLIS COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (a) THE COMPANY Grubb & Ellis Company (the "Company") is a full service commercial real estate company that provides services to real estate owners/investors and tenants including transaction services involving leasing, acquisitions and dispositions, and property and facilities management services. Additionally, the Company provides consulting and strategic services with respect to commercial real estate. (b) PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the accounts of Grubb & Ellis Company, and its wholly owned subsidiaries, including Grubb & Ellis Management Services, Inc. ("GEMS"), which provides property and facilities management services. All significant intercompany accounts have been eliminated. (c) BASIS OF PRESENTATION The financial statements have been prepared in conformity with accounting principles generally accepted in the United States which require management to make estimates and assumptions that affect the reported amounts of assets and liabilities (including disclosure of contingent assets and liabilities) at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. (d) REVENUE RECOGNITION Real estate sales commissions are recognized at the earlier of receipt of payment, close of escrow or transfer of title between buyer and seller. Receipt of payment occurs at the point at which all Company services have been performed, and title to real property has passed from seller to buyer, if applicable. Real estate leasing commissions are recognized upon execution of appropriate lease and commission agreements and receipt of full or partial payment, and, when payable upon certain events such as tenant occupancy or rent commencement, upon occurrence of such events. All other commissions and fees are recognized at the time the related services have been performed by the Company, unless future contingencies exist. Consulting revenue is recognized generally upon the delivery of agreed upon services to the client. Effective July 1, 2000, the Company changed its method of accounting to comply with the Securities and Exchange Commission's ("SEC") Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements," which summarized the SEC staff's views regarding the recognition and reporting of revenues in financial statements. See Note 14 for additional information. (e) COSTS AND EXPENSES Real estate transaction services and other commission expenses are recognized concurrently with the related revenue. All other costs and expenses are recognized when incurred. GEMS incurs certain salaries, wages and benefits in connection with the property and corporate facilities management services it provides which are in part reimbursed at cost by the owners of such properties. The following is a summary of the GEMS total gross and reimbursable salaries, wages and benefits (in thousands) for the years ended June 30, 2002, 2001 and 2000. The net expense is included in salaries, wages and benefits on the Consolidated Statements of Operations.
2002 2001 2000 --------- --------- --------- Gross salaries, wages and benefits ...................................... $ 151,078 $ 140,667 $ 132,556 Less: reimbursements from property owners ............................... (117,970) (104,648) (94,621) --------- --------- --------- Net salaries, wages and benefits ........................................ $ 33,108 $ 36,019 $ 37,935 ========= ========= =========
24 GRUBB & ELLIS COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(continued) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED) (f) ACCOUNTING FOR STOCK-BASED COMPENSATION Statements of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation ("Statement 123") allows companies to either account for stock-based compensation under the provisions of Statement 123 or under the provisions of Accounting Principles Board Opinion No. 25 ("APB 25"). The Company elected to continue accounting for stock-based compensation to its employees under the provisions of APB 25. Accordingly, because the exercise price of the Company's employee stock options equals or exceeds the fair market value of the underlying stock on the date of grant, no compensation expense is recognized by the Company. If the exercise price of an award is less than the fair market value of the underlying stock at the date of grant, the Company recognizes the difference as compensation expense over the vesting period of the award. The Company, however, is required to provide pro forma disclosure as if the fair value measurement provisions of Statement 123 had been adopted. See Note 8 of Notes to Consolidated Financial Statements for additional information. (g) INCOME TAXES Deferred income taxes are recorded based on enacted statutory rates to reflect the tax consequences in future years of the differences between the tax bases of assets and liabilities and their financial reporting amounts. Deferred tax assets, such as net operating loss carry forwards, which will generate future tax benefits are recognized to the extent that realization of such benefits through future taxable earnings or alternative tax strategies is more likely than not. (h) CASH AND CASH EQUIVALENTS Cash and cash equivalents consist of demand deposits and highly liquid short-term debt instruments with maturities of three months or less from the date of purchase and are stated at cost. Cash payments for interest were approximately $2,892,000, $1,383,000 and $537,000 for each of the fiscal years ended June 30, 2002, 2001 and 2000, respectively. Cash payments for income taxes for the fiscal years ended June 30, 2002, 2001 and 2000 were approximately $360,000, $10,303,000 and $4,372,000, respectively. Cash refunds for income taxes totaling approximately $1,576,000 were received in the fiscal year ended June 30, 2002. (i) TRANSACTION SERVICE CONTRACTS The Company holds multi-year service contracts with certain key transaction professionals for which cash payments were made to the professionals upon signing, the costs of which are being amortized over the lives of the respective contracts, which are generally two to three years. Amortization expense relating to these contracts of $2.1 million, $2.9 million and $2.2 million was recognized in fiscal years 2002, 2001 and 2000, respectively. (j) EQUIPMENT, SOFTWARE AND LEASEHOLD IMPROVEMENTS Equipment, software and leasehold improvements are recorded at cost. Depreciation of equipment is computed using the straight-line method over their estimated useful lives ranging from three to seven years. Software costs consist of costs to purchase and develop software. All software costs are amortized using a straight-line method over their estimated useful lives, ranging from three to seven years. Development costs are amortized once the related software is placed in service. Leasehold improvements are amortized using the straight-line method over their useful lives not to exceed the terms of the respective leases. Maintenance and repairs are charged to expense as incurred. (k) GOODWILL Goodwill, representing the excess of the cost over the fair value of the net tangible assets of acquired businesses, is stated at cost and is amortized on a straight-line basis over estimated future periods to be benefited, which range from 15 to 25 years. Accumulated amortization amounted to approximately $5,815,000 and $4,704,000 at June 30, 2002 and 2001, respectively. The Company wrote-off approximately $454,000 of fully amortized goodwill in 2002. 25 GRUBB & ELLIS COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED) The net carrying value of goodwill is reviewed by management if facts and circumstances, such as significant declines in revenues or number of professionals, suggest that an impairment may exist. If an impairment is identified as a result of such reviews, the Company would measure it by comparing undiscounted cash flows of a specific acquired business with the carrying value of goodwill associated therewith. If the future estimated undiscounted cash flows are not sufficient to recover the carrying value of such goodwill, such asset would be adjusted to its fair value through a charge to operations. An impairment loss of $2,150,000 was recognized in fiscal 2001. (See Note 13 of Notes to Consolidated Financial Statements for additional information.) No goodwill impairment losses were identified in fiscal 2002 or 2000. In June 2001, the Financial Accounting Standards Board issued Statements of Financial Accounting Standards No. 141, BUSINESS COMBINATIONS, and No. 142, GOODWILL AND OTHER INTANGIBLE ASSETS, effective for fiscal years beginning after December 15, 2001. Under the new rules, goodwill will no longer be amortized but will be subject to annual impairment tests in accordance with the Statements. Other intangible assets will continue to be amortized over their useful lives. The Company will apply the new rules on accounting for goodwill and other intangible assets beginning in the first fiscal quarter of fiscal 2003, which for the Company would be the quarter ending September 30, 2002. Application of the non-amortization provisions of the Statement is expected to result in an increase in net income of approximately $1.6 million per year. The Company has completed the transitional impairment tests of goodwill as of July 1, 2002 and has determined that no goodwill impairment will impact the earnings and financial position of the Company as of that date. (l) ACCRUED CLAIMS AND SETTLEMENTS The Company has maintained partially self-insured and deductible programs for errors and omissions, general liability, workers' compensation and certain employee health care costs. Reserves for such programs are included in accrued claims and settlements and compensation and employee benefits payable, as appropriate. Reserves are based on the aggregate of the liability for reported claims and an actuarially-based estimate of incurred but not reported claims. (m) FAIR VALUE OF FINANCIAL INSTRUMENTS Statements of Financial Accounting Standards No. 107, "Disclosures about Fair Value of Financial Instruments", requires disclosure of fair value information about financial instruments, whether or not recognized in the Consolidated Balance Sheets. Considerable judgment is required in interpreting market data to develop estimates of fair value. Accordingly, the estimates presented herein are not necessarily indicative of the amounts that the Company could realize in a current market exchange. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts. The carrying amounts of the Company's financial instruments, which include cash and cash equivalents, receivables and obligations under accounts payable and debt instruments, approximate their fair values, based on similar instruments with similar risks. (n) FAIR VALUE OF DERIVATIVE INSTRUMENTS AND HEDGED ITEMS The Financial Accounting Standards Board issued Statement of Financial Accounting ("SFAS") No. 138 "Accounting for Derivative Instruments and Hedging Activities" which amends SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133, as amended, requires companies to record derivatives on the balance sheet as assets or liabilities, measured at fair value. The Company became subject to the requirements of SFAS No. 133 during March 2001, as a result of entering into two interest rate swap agreements in conjunction with a new credit agreement. See Note 5 of Notes to Consolidated Financial Statements for additional information. SFAS No. 133 may increase or decrease reported net income and stockholders' equity prospectively, depending on future levels of interest rates, the computed "effectiveness" of the derivatives, as that term is defined by SFAS No. 133, and other variables affecting the fair values of derivative instruments and hedged items, but will have no effect on cash flows. 26 GRUBB & ELLIS COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED) (o) RECLASSIFICATIONS Certain amounts in prior periods have been reclassified to conform to the current year presentation. Agency leasing fees of approximately $6.7 million and $7.2 million were reclassified from management services fees to transaction service fees for fiscal years 2001 and 2000, respectively. Such reclassifications have not changed previously reported results of operations or cash flows. 2. SERVICES FEES RECEIVABLE, NET Services fees receivable at June 30, 2002 and 2001 consisted of the following (in thousands):
2002 2001 -------- -------- Transaction services fees receivable ................................................... $ 6,005 $ 9,969 Management services fees receivable .................................................... 8,126 8,886 Allowance for uncollectible accounts ................................................ (605) (834) --------- -------- Total ............................................................................. 13,526 18,021 Less portion classified as current .................................................. 13,212 17,897 --------- -------- Non-current portion (included in other assets) ...................................... $ 314 $ 124 ========= ========
The following is a summary of the changes in the allowance for uncollectible services fees receivable for the fiscal years ended June 30, 2002, 2001 and 2000 (in thousands):
2002 2001 2000 -------- -------- -------- Balance at beginning of year .............................................. $ 834 $ 2,326 $ 2,662 Reduction from change in accounting principle ............................. -- (1,297) -- Recovery of allowance ..................................................... (229) (195) (336) ------- -------- -------- Balance at end of year .................................................... $ 605 $ 834 $ 2,326 ======= ======== ========
3. EQUIPMENT, SOFTWARE AND LEASEHOLD IMPROVEMENTS, NET Equipment, software and leasehold improvements at June 30, 2002 and 2001 consisted of the following (in thousands):
2002 2001 -------- -------- Furniture, equipment and software systems .............................................. $43,436 $40,954 Leasehold improvements ................................................................. 6,636 5,060 ------- ------- Total ............................................................................. 50,072 46,014 Less accumulated depreciation and amortization ......................................... 32,229 26,345 ------- ------- Equipment, software and leasehold improvements, net .................................... $17,843 $19,669 ======= =======
The Company wrote off approximately $1.1 million and $1.7 million of furniture and equipment during the fiscal years ended June 30, 2002 and 2001, respectively. Approximately $0.9 million and $1.3 million of accumulated depreciation and amortization expense had been recorded on these assets prior to their disposition in the fiscal years ended June 30, 2002 and 2001, respectively. 4. EARNINGS (LOSS) PER COMMON SHARE Statement of Financial Accounting Standards No. 128, "Earnings per Share" ("Statement 128")requires disclosure of basic earnings per share that excludes any dilutive effects of options, warrants, and convertible securities and diluted earnings per share. 27 GRUBB & ELLIS COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 4. EARNINGS (LOSS) PER COMMON SHARE--(CONTINUED) The following table sets forth the computation of basic and diluted earnings per common share from continuing operations (in thousands, except per share data):
FOR THE FISCAL YEAR ENDED JUNE 30, ------------------------------- 2002 2001 2000 ---- ---- ---- Basic earnings per common share: Income (loss) before extraordinary item and cumulative effect ........ $(15,477) $ 4,908 $ 16,290 ======== ======== ======== Weighted average common shares outstanding ........................... 14,148 17,052 19,779 ======== ======== ======== Earnings (loss) per common share--basic .............................. $ (1.09) $ 0.28 $ 0.82 ======== ======== ======== FOR THE FISCAL YEAR ENDED JUNE 30, ------------------------------- 2002 2001 2000 ---- ---- ---- Diluted earnings per common share: Income (loss) before extraordinary item and cumulative effect ........ $(15,477) $ 4,908 $ 16,290 ======== ======== ======== Weighted average common shares outstanding ........................... 14,148 17,052 19,779 Effect of dilutive securities: Stock options and warrants (A) ..................................... -- 923 1,258 -------- -------- -------- Weighted average common shares outstanding ........................... 14,148 17,975 21,037 ======== ======== ======== Earnings (loss) per common share--diluted ............................ $ (1.09) $ 0.27 $ 0.77 ======== ======== ========
Additionally, options outstanding to purchase shares of common stock, the effect of which would be anti-dilutive, were 2,816,861, 1,661,697, and 1,177,800 at June 30, 2002, 2001 and 2000, respectively, and were not included in the computation of diluted earnings per share either because the option exercise price was greater than the average market price of the common shares for the year or in 2002, an operating loss was reported. 5. CREDIT FACILITY DEBT Effective December 31, 2000, the Company entered into an amended and restated credit agreement ("Credit Agreement") arranged by Bank of America, N.A. ("BofA"), which revised certain terms and provisions of its prior credit facility. The Credit Agreement provided for a $40 million term loan that was used to fund a portion of the self-tender offer completed by the Company effective January 24, 2001, along with a $15 million revolving credit facility for working capital purposes. In each of August 2001 and November 2001, the Company entered into amendments to its Credit Agreement that amended financial covenants related to minimum cash flow levels and fixed cost ratios. The amendments also increased the interest margin by 0.50% over the original terms. As a result of continuing deterioration in both the general economy as well as the real estate services industry, the Company's operations for the quarter ended December 31, 2001 resulted in non-compliance with certain financial covenants contained in the amended agreement. The Company received a waiver with respect to these covenant defaults that expired on February 28, 2002. Effective March 8, 2002, the Company completed the restructuring of its credit facility that was effected in accordance with the terms and conditions of a third amendment to the Credit Agreement ("Third Amendment"). Upon giving effect to the Third Amendment, the Company was and is in compliance with its covenants under the credit facility. Under the terms of the Third Amendment, $5,000,000 of principal amortization of the term loan that was previously due in calendar year 2002 was deferred, certain financial covenants relating to the Company's cash flows and operations were revised, and the commitment under the revolving loan portion was reduced from $15,000,000 to $6,000,000 (and was further reduced to $5,000,000 in June 2002). 28 GRUBB & ELLIS COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 5. CREDIT FACILITY DEBT--(CONTINUED) Simultaneously with the Third Amendment, the Company, Bank of America (as administrative agent), and Warburg, Pincus Investors, L.P. ("Warburg Pincus") also entered into an option purchase agreement (the "Option Agreement") whereby Warburg Pincus funded a $5,000,000 promissory note (the "$5,000,000 Subordinated Note") and granted the Company the right (which right was assignable to the banks) to cause Warburg Pincus to deliver to the Company an additional $6,000,000 in June 2002 upon substantially the same terms and conditions as the $5,000,000 Subordinated Note (the "$6,000,000 Subordinated Note"). All sums evidenced by the $5,000,000 Subordinated Note and the $6,000,000 Subordinated Note (collectively, the "Subordinated Notes") were subordinate to all other indebtedness under the credit facility. The Subordinated Notes were demand obligations bearing interest at the rate of 15% per annum, compounded quarterly, although no payments of interest or principal were permitted until the credit facility was terminated. In addition, all principal and interest and reasonable costs evidenced by the Subordinated Notes were subject to conversion generally at the option of the holder, into 11,000 shares of the Company's newly created Series A Preferred Stock, subject to adjustment for accrued interest thereon, having a stated value of $1,000 per share. Pursuant to the Option Agreement, the Company also received the right to replace the Warburg Pincus financing arrangements ("Refinancing Right") by a certain date, contemplated by the Option Agreement. Specifically, upon the receipt of at least approximately $15,000,000 from the sale of equity or subordinated debt securities, and the tendering to Warburg Pincus, or its assigns, on or before the extended date of May 14, 2002, of (i) the entire principal amount of the $11,000,000 Subordinated Notes, plus accrued interest thereon and reasonable costs with respect thereto, and (ii) the sum of $4,158,431, to re-purchase 1,337,358 shares of common stock acquired by Warburg Pincus in January 2002, all of the debt and equity securities issued and issuable thereunder, will automatically be terminated. On May 13, 2002, the Company exercised the Refinancing Right and entered into a replacement financing arrangement with Kojaian Ventures, L.L.C. See Note 6, Note Payable-Affiliate, for additional information. The Company currently has a $5.0 million revolver facility under its Credit Agreement for intended short term borrowing needs. Letters of credit totaling $1.35 million have been issued by the Company, thus reducing the available borrowings under the revolver facility. Interest on outstanding borrowings under the credit facility is based upon BofA's prime rate and/or a LIBOR based rate plus, in either case, an additional margin based upon a particular financial leverage ratio of the Company, and will vary depending upon which interest rate options the Company chooses to be applied to specific borrowings. The average interest rate incurred by the Company on the Credit Agreement obligations during fiscal year 2002 was 5.68%. The term loan facility amortizes on a monthly basis through December 2002, and then on a quarterly basis, until December 31, 2005 when both facilities mature. Certain other mandatory prepayment provisions related to the operating cash flows of the Company and receipts of certain debt, equity and/or sales proceeds also exist within the Credit Agreement. Scheduled principal payments are as follows (in thousands): YEAR ENDING JUNE 30 AMOUNT ----------------- -------- 2003 $ 5,750 2004 9,875 2005 11,125 2006 5,000 ------- $31,750 ======= Direct expenses related to the Credit Agreement and amendments totaling approximately $1,070,000 have been recorded as deferred financing fees and are amortized over the term of the agreement. Unamortized fees related to the prior credit facility agreement, totaling approximately $406,000 (net of applicable taxes of approximately $270,000) were written off concurrently with the effective date of the Credit Agreement and have been recorded as 29 GRUBB & ELLIS COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 5. CREDIT FACILITY DEBT--(CONTINUED) an extraordinary loss in accordance with accounting principles generally accepted in the United States during the fiscal year ended June 30, 2001. The variable interest rate structure of the Credit Agreement exposes the Company to risks associated with changes in the interest rate markets. Consequently, the Credit Agreement required the Company to enter interest rate protection agreements, within 90 days of the date of the agreement, initially fixing the interest rates on not less than 50% of the aggregate principal amount of the term loan scheduled to be outstanding for a period of not less than three years. The Company subsequently established risk management policies and procedures to manage the cost of borrowing obligations, which include the use of interest rate swap derivatives to fix the interest rate on debt with floating rate indices. Further, the Company prohibits the use of derivative instruments for trading or speculative purposes. In March 2001, the Company entered into two interest rate swap agreements for a three year term, with banks that are parties to the Credit Agreement. As of June 30, 2002, the swap agreements had a total notional amount of $14.5 million, with a fixed annual interest rate to be paid by the Company of 5.18%, and a variable rate to be received by the Company equal to three month LIBOR based borrowing rates. The Company has determined that these agreements are to be characterized as effective under the definitions included within Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities". On June 30, 2002, the derivative instruments were reported at their fair value of approximately $283,000, net of applicable taxes, in other liabilities in the condensed Consolidated Balance Sheet. The offsetting amount is reported as a deferred loss in Accumulated Other Comprehensive Loss. The Company's interest rate swaps are treated as cash flow hedges, which address the risk associated with future variable cash flows of debt transactions. Over time, the unrealized gains and losses held in Accumulated Other Comprehensive Loss will be reclassified into earnings in the same periods in which the hedged interest payments affect earnings. Repayment of the Credit Agreement is collateralized by substantially all of the Company's assets and the Credit Agreement contains certain restrictive covenants, including, among other things: achievement of minimum EBITDA levels as defined in the agreement, restrictions on indebtedness, the payment of dividends, the redemption or repurchase of capital stock, acquisitions, investments and loans; and the maintenance of certain financial ratios. 6. NOTE PAYABLE--AFFILIATE On May 13, 2002, the Company effected a closing of a financing with Kojaian Ventures, L.L.C. ("KV") which is wholly-owned by C. Michael Kojaian, who is a member of the Board of Directors of the Company and, along with his father, owned, subsequent to the closing of the KV financing, approximately 20% of the Company's issued and outstanding Common Stock. In addition, certain affiliated real estate entities of KV, in the aggregate, are substantial clients of the Company. The Company accepted the financing offered by KV based, in part, upon the fact that the KV financing, which replaced the financing provided by Warburg Pincus in March 2002 (see Note 5 for additional information), was on more favorable terms and conditions to the Company than the Warburg Pincus financing. Accordingly, on the closing of the KV financing on May 13, 2002, KV paid to the Company an aggregate of $15,386,580 which provided the Company with the necessary funds, which the Company used, to (i) repay the $5,000,000 Subordinated Note and accrued interest thereon of $137,500, (ii) pay $100,000 of Warburg Pincus' reasonable, documented out-of-pocket expenses associated with the $5,000,000 Subordinated Note, (iii) repurchase, at cost, 1,337,358 shares of Common Stock held by Warburg Pincus for a price per share of $3.11, or an aggregate purchase price of $4,158,431, and (iv) pay down $6,000,000 of revolving debt under the Company's Credit Agreement. In exchange therefore, KV received (i) a convertible subordinated note in the principal amount of $11,237,500 (the "KV Debt"), and (ii) 1,337,358 shares of Common Stock at a price of $3.11 per share. As a consequence, upon the closing of the KV Transaction, the Option Agreement was terminated, and KV replaced Warburg Pincus as a junior lender under the Credit Facility. The form of KV's financing is substantially identical to the form of the $11,000,000 Subordinated Notes that Warburg Pincus was to provide pursuant to the Option Agreement, provided, however, that the KV Debt is more favorable to the Company in two (2) material respects. 30 GRUBB & ELLIS COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 6. NOTE PAYABLE--AFFILIATE--(CONTINUED) First, the interest rate on the KV Debt is 12% per annum as opposed to 15% per annum. Similarly, the Series A Preferred Stock into which the KV Debt is convertible has a coupon of 12% per annum, compounded quarterly, rather than 15% per annum, compounded quarterly. Second, the Series A Preferred Stock that KV is entitled to receive, like the Series A Preferred Stock that was issuable to Warburg Pincus, has approximately a 40% preference on liquidation, dissolution and certain change in control transactions rather than the 50% preference on the Warburg Pincus financing. KV's liquidation preference is the greater of (i) 1.5 times the Conversion Amount, plus the accrued dividend thereon at the rate of 12% per annum (provided such liquidation, dissolution, or change of control transaction takes place within twelve (12) months after May 13, 2002, and thereafter it will increase to 2 times the Conversion Amount plus the accrued dividend thereon at the rate of 12% per annum), or (ii) the equivalent of 40% percent of the consideration to be paid to all the equity holders of the Company, not on a fully diluted basis as was the case in the Warburg Pincus financing, but rather, on an "Adjusted Outstanding Basis" (as defined in the underlying documents). On September 19, 2002, the conversion rights existing under the KV Debt were exercised. See Note 17, Subsequent Event, for additional information. 7. INCOME TAXES The Company maintains a fiscal year ending June 30 for financial reporting purposes and a calendar year for income tax reporting purposes. The provision for income taxes for the fiscal years ended June 30, 2002, 2001 and 2000, which includes the income tax impact attributed to the extraordinary item ($270,000) and the cumulative effect adjustment ($2,089,000) in 2001, consisted of the following (in thousands):
2002 2001 2000 ---- ---- ---- Current Federal .............................................................. $(4,051) $3,095 $6,230 State and local ...................................................... 381 484 1,243 ------- ------ ------ (3,670) 3,579 7,473 Deferred .............................................................. 2,483 (566) 2,125 ------- ------ ------ Net provision (benefit) .............................................. $(1,187) $3,013 $9,598 ======= ====== ======
The Company recorded prepaid taxes totaling approximately $6,890,000 and $4,598,000 as of June 30, 2002 and 2001, respectively. Included in these assets are tax refund receivables resulting from filed federal and state returns totaling approximately $2,584,000 and $2,920,000 for the tax years ended December 31, 2001 and 2000, respectively. Also included are tax effected operating loss carrybacks totaling approximately $4,306,000 and $1,678,000 at June 30, 2002 and 2001, respectively, which the Company will or has realized primarily against federal tax liability payments made in prior tax years. After giving effect to its income tax returns filed for calendar year 2001, the Company has approximately $8,300,000 of remaining prior year tax liability payments against which it can apply its current carrybacks as of June 30, 2002. At June 30, 2002, federal income tax operating loss carryforwards ("NOL's") were available to the Company in the amount of approximately $11.7 million, which expire from 2008 to 2012. Utilization of certain of these net operating loss carryforwards totaling $5.4 million is limited to approximately $960,000 per year, pursuant to Section 382 of the Internal Revenue Code ("Code") relating to a prior ownership change. At June 30, 2002, the Company also had a book capital loss carryforward of $1,350,000 that can be used to offset future book capital gains. As a result of a change in estimate in the fiscal year ended June 30, 2000 additional NOL's of approximately $2.0 million, previously considered unavailable to the Company under Code Section 382 (and not given accounting recognition) were identified. Approximately $1.0 million of these NOL's were utilized in fiscal year 2000, with the remaining carryforwards reflected as a component of the NOL's at June 30, 2002, discussed above. 31 GRUBB & ELLIS COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 7. Income Taxes--(Continued) The Company's effective tax rate on its income before taxes differs from the statutory federal income tax rate as follows for the fiscal years ended June 30:
2002 2001 2000 -------- -------- -------- Federal statutory rate ..................................................... 34.0% 35.0% 35.0% State and local income taxes (net of federal tax benefits) ................. 5.2 3.9 5.2 Meals and entertainment .................................................... (2.2) 3.2 1.3 Increase in valuation allowance ............................................ (31.3) -- -- Goodwill impairment ........................................................ -- 8.1 -- Goodwill amortization and other ............................................ 1.4 2.1 (2.1) NOL carryforwards .......................................................... -- -- (2.3) ------ ------ ------ Effective income tax rate ............................................... 7.1% 52.3% 37.1% ====== ====== ======
During fiscal year 2002, the Company increased the valuation allowance it carries against its deferred tax assets by approximately $5.2 million to reflect uncertainty in regards to the realization of the assets in future periods. Deferred income tax liabilities or assets are determined based on the differences between the financial statement and tax basis of assets and liabilities. The components of the Company's deferred tax assets and liabilities are as follows as of June 30, 2002 and 2001 (in thousands):
2002 2001 ---- ---- Deferred tax assets: NOL and credit carry forwards ....................................................... $ 5,435 $ 2,464 Insurance reserves .................................................................. 3,887 2,677 Commission and fee reserves ......................................................... 725 641 Claims and settlements .............................................................. 679 1,534 Accounting change, deferred for tax basis ........................................... 609 1,014 Deferred compensation plan .......................................................... 1,409 1,298 Other ............................................................................... 1,870 1,746 -------- -------- Deferred tax assets ............................................................... 14,614 11,374 Less valuation allowance ............................................................... (9,745) (4,530) -------- -------- ....................................................................................... 4,869 6,844 Deferred tax liabilities ............................................................... (2,359) (2,013) -------- -------- Net deferred tax asset .............................................................. $ 2,510 $ 4,831 ======== ======== Current ........................................................................... $ 1,563 $ 1,296 ======== ======== Long Term ......................................................................... $ 947 $ 3,535 ======== ========
32 GRUBB & ELLIS COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 8. STOCK OPTIONS, WARRANTS, STOCK PURCHASE AND 401(K) PLANS STOCK OPTION PLANS Changes in stock options were as follows for the fiscal years ended June 30, 2002, 2001, and 2000:
2002 2001 2000 --------------------------- --------------------------- ---------------------------- SHARES EXERCISE PRICE SHARES EXERCISE PRICE SHARES EXERCISE PRICE -------- ---------------- -------- ---------------- -------- ---------------- Stock options outstanding at the beginning of the year .... 2,554,515 $1.88 to $16.44 2,714,330 $1.88 to $16.44 2,530,280 $1.88 to $20.00 Granted ..................... 868,000 $2.60 to $4.95 620,000 $4.80 to $6.44 845,500 $4.75 to $5.81 Lapsed or canceled .......... (577,777) $4.25 to $13.50 (310,895) $1.88 to $13.50 (648,050) $1.88 to $20.00 Exercised ................... (27,877) $1.88 to $4.25 (468,920) $1.88 to $6.50 (13,400) $1.88 to $2.38 --------- --------- --------- Stock options outstanding at the end of the year ... 2,816,861 $1.88 to $16.44 2,554,515 $1.88 to $16.44 2,714,330 $1.88 to $16.44 ========= ========= ========= Exercisable at end of the Year ............... 1,267,861 1,095,007 1,127,182 ========= ========= =========
Additional information segregated by relative ranges of exercise prices for stock options outstanding as of June 30, 2002 is as follows:
WEIGHTED WEIGHTED WEIGHTED AVERAGE AVERAGE AVERAGE YEARS EXERCISE EXERCISE EXERCISE REMAINING PRICE-OUTSTANDING PRICE-EXERCISABLE PRICE SHARES LIFE SHARES SHARES ----------------- ---------- ----------- ----------------- ----------------- $1.88 to $3.05 403,937 9.05 2.89 2.70 $3.13 to $4.80 1,076,633 8.09 4.43 4.18 $4.95 to $11.13 822,241 7.18 6.84 5.75 $11.31 to $16.44 514,050 5.02 12.03 8.81 --------- 2,816,861 =========
Weighted average information per share with respect to stock options for fiscal years ended June 30, 2002 and 2001 is as follows:
2002 2001 ---- ---- Exercise price: Granted ............................................................................ $ 3.73 $ 4.88 Lapsed or cancelled .............................................................. 8.00 6.21 Exercised ........................................................................ 2.05 3.56 Outstanding at June 30 ........................................................... 6.30 7.45 Remaining life ..................................................................... 7.40 years 6.88 years
The Company's 1990 Amended and Restated Stock Option Plan, as amended, provides for grants of options to purchase the Company's common stock for a total of 2,000,000 shares. At June 30, 2002, 2001 and 2000, the number of shares available for the grant of options under the plan were 795,371, 595,014 and 543,524, respectively. Stock options under this plan may be granted at prices from 50% up to 100% of the market price per share at the dates of grant, their terms and vesting schedules of which are determined by the Board of Directors. The Company's 1993 Stock Option Plan for Outside Directors provides for an automatic grant of an option to purchase 10,000 shares of common stock to each newly elected independent member of the Board of Directors and an automatic grant of an option to purchase 8,000 shares at the successive four year service anniversaries of each such director. The exercise prices are set at the market price at the date of grant. The initial options expire five years from the date of grant 33 GRUBB & ELLIS COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 8. STOCK OPTIONS, WARRANTS, STOCK PURCHASE AND 401(K) PLANS--(CONTINUED) and vest over three years from such date. The anniversary options vest over four years from the date of grant and expire ten years from such date. The plan was amended in November 1998 to increase the number of issuable shares authorized for the plan from 50,000 to 300,000 and to provide for the anniversary options. The number of shares available for grant was 236,000, 254,000 and 246,000 at June 30, 2002, 2001 and 2000, respectively. The Company's 1998 Stock Option Plan provides for grants of options to purchase the Company's common stock. The plan authorizes the issuance of up to 2,000,000 shares, and had 755,355, 786,105, and 567,100 shares available for grant as of June 30, 2002, 2001 and 2000, respectively. Stock options under this plan may be granted at prices and with such other terms and vesting schedules as determined by the Compensation Committee of the Board of Directors, or, with respect to options granted to corporate officers, the full Board of Directors. The Company's 2000 Stock Option Plan, provides for grants of options to purchase the Company's common stock. The plan authorizes the issuance of up to 1,500,000 shares, and had 470,000 and 900,000 shares available for grant as of June 30, 2002 and 2001, respectively. Stock options under this plan may be granted at prices and with such other terms and vesting schedules as determined by the Compensation Committee of the Board of Directors, or, with respect to options granted to corporate officers who are subject to Section 16 of the Securities Exchange Act of 1934, as amended, the full Board of Directors. STOCK WARRANTS In July 1999, the Company issued a warrant to purchase 600,000 shares of the Company's common stock at $6.25 per share to Aegon USA Realty Advisors, Inc., the parent company of Landauer Associates, Inc. ("LAI"), as part of the consideration granted in the acquisition of LAI. The warrant has a five-year life, expiring in July 2004, and remains outstanding as of June 30, 2002. During January 2002, warrants were exercised resulting in the issuance of 1,339,335 common shares and proceeds of approximately $4.2 million. Other warrants, representing 337,827 common shares, expired on January 29, 2002. EMPLOYEE STOCK PURCHASE PLAN The Grubb & Ellis Company Employee Stock Purchase Plan provides for the purchase of up to 1,750,000 shares of common stock by employees of the Company at a 15% discount from market price, as defined, through payroll deductions. The numbers of shares purchased under this plan were 178,012, 182,683 and 272,310 during the fiscal years ended June 30, 2002, 2001 and 2000, respectively. The Company has a 401(k) plan covering eligible employees and provides that employer contributions may be made in common stock of the Company or cash. Discretionary contributions by the Company for the plans (net of forfeitures and reimbursements received pursuant to property and corporate facilities management services agreements) amounted to approximately $1,209,000, $1,083,000, and $514,000 for the plan years ended December 31, 2001, 2000 and 1999, respectively. PRO FORMA INFORMATION Pro forma information regarding net income and earnings per share is required by Statement 123, and has been determined as if the Company had accounted for options granted subsequent to July 1, 1996, and therefore includes grants under the 1990 Amended and Restated Stock Option Plan, 1993 Stock Option Plan for Outside Directors, 1998 Stock Option Plan and 2000 Stock Option Plan and purchases made under the Grubb & Ellis Employee Stock Purchase Plan, under the fair value method of that Statement. The fair value for the options was estimated at the date of grant using a Black-Scholes option pricing model. Weighted-average assumptions for options granted for fiscal years 2002, 2001 and 2000, respectively, are as follows:
2002 2001 2000 -------- -------- -------- Risk free interest rates .................................................. 4.43% 5.23% 5.99% Dividend yields ........................................................... 0% 0% 0% Volatility factors of the expected market price Of the common stock ..................................................... 607 .587 .598 Weighted-average expected lives ........................................... 6.00 years 6.00 years 6.00 years
34 GRUBB & ELLIS COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 8. STOCK OPTIONS, WARRANTS, STOCK PURCHASE AND 401(K) PLANS--(CONTINUED) The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options that have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because changes in these assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of options granted. The weighted average fair values of options granted by the Company in fiscal years 2002, 2001 and 2000 using this model were $2.24, $4.86 and $2.90, respectively. The effects on fiscal year 2002, 2001 and 2000 pro forma net income (loss) and pro forma earnings (loss) per common share of amortizing to expense the estimated fair value of stock options are not necessarily representative of the effects on net income (loss) to be reported in future years due to such things as the vesting period of the stock options, and the potential for issuance of additional stock options in future years. For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the options' vesting period. The pro forma effect of applying Statement 123's fair value method to the Company's stock-based awards results in net income (loss) of approximately ($17,258,000), ($246,000) and $14,614,000, basic earnings (loss) per share of ($1.22), ($.01) and $.74, and diluted earnings (loss) per share of ($1.22), ($.01) and $.69 for the fiscal years ended June 30, 2002, 2001 and 2000, respectively. STOCK REPURCHASE PLAN In August 1999, the Company announced a program through which it may repurchase up to $3.0 million of its common stock on the open market from time to time as market conditions warrant. As of June 30, 2002, the Company had repurchased 359,900 shares of stock at an aggregate price of approximately $2.0 million. No shares were repurchased under this program during fiscal years 2002 or 2001. 9. RELATED PARTY TRANSACTIONS The Company provides both transaction and management services to parties which are related to principal stockholders and/or directors of the Company, primarily Kojaian affiliated entities (collectively, "Kojaian Companies") and Archon Group, L.P. ("Archon"). In addition, the Company also paid asset management fees to the Kojaian Companies and Archon related to properties the Company manages on their behalf. Revenue earned by the Company for services rendered to these and other affiliates, including joint ventures, officers and directors and their affiliates, was as follows for the fiscal years ended June 30, 2002, 2001 and 2000 (in thousands):
2002 2001 2000 ---- ---- ---- Transaction Services Kojaian Companies .................................................... $ 700 $ 1,686 $ 1,742 Archon ............................................................... 4,176 10,999 8,947 Others ............................................................... 481 654 1,208 -------- -------- -------- 5,357 13,339 11,897 -------- -------- -------- Management Services Kojaian Companies .................................................... 6,064 5,446 3,348 Archon ............................................................... 3,476 3,604 3,221 -------- -------- -------- 9,540 9,050 6,569 Less: asset management fees Kojaian Companies .................................................... 2,750 2,061 1,277 Archon ............................................................... 242 175 28 -------- -------- -------- 6,548 6,814 5,264 -------- -------- -------- Total ................................................................ $ 11,905 $ 20,153 $ 17,161 ======== ======== ========
35 GRUBB & ELLIS COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 9. RELATED PARTY TRANSACTIONS--(CONTINUED) In August 2002, the Company entered into a lease for 16,800 square feet of office space in Southfield, Michigan within a building owned by an entity related to the Kojaian Companies. The lease provides for an annual average base rent of $365,400 over the ten year life of the lease. The Company entered into certain contractual employment and compensation agreements with its new chief executive, financial and operating officers during fiscal years 2002 and 2001. Terms of these agreements included, among other things, i) signing bonuses totaling $528,500, ii) guaranteed initial year bonuses totaling $810,000, iii) loans totaling $1.8 million with repayment terms tied to retention bonuses and continued employment, iv) retention bonuses, net of taxes, sufficient to repay the executive loan obligations in (iii) above, and v) options to purchase 850,000 shares of the Company's common stock, exercisable at current market prices, none of which have been exercised as of June 30, 2002. All payments related to the signing bonuses and loans were made to the officers by August 15, 2001, and the guaranteed initial year bonuses, along with a retention bonus sufficient to repay $500,000 of the loans, were paid in June and July 2002. In July 2002, the chief operating officer's employment agreement with the Company was terminated. Non-recurring expenses totaling approximately $900,000 will be recognized during the first quarter of fiscal year 2003. 10. COMMITMENTS AND CONTINGENCIES NON-CANCELABLE OPERATING LEASES The Company has non-cancelable operating lease obligations for office space and certain equipment ranging from one to nine years, and sublease agreements under which the Company acts as sublessor. The office space leases provide for annual rent increases based on the Consumer Price Index, or other specific terms, and typically require payment of property taxes, insurance and maintenance costs. Future minimum payments under non-cancelable operating leases with an initial term of one year or more were as follows at June 30, 2002 (in thousands): Year Ending June 30, Lease Obligations ------------------------ ----------------------- 2003 $ 18,029 2004 13,588 2005 11,463 2006 8,666 2007 5,999 Thereafter 15,090 Lease and rental expense for the fiscal years ended June 30, 2002, 2001 and 2000 amounted to $22,695,000, $22,288,000, and $21,268,000, respectively. LITIGATION/RECOVERY OF LOSS RESERVES JOHN W. MATTHEWS, ET AL. V KIDDER, PEABODY & Co., ET AL. AND HSM INC., ET AL. filed on January 23, 1995 in the United States District Court for the Western District of Pennsylvania, was a class action on behalf of approximately 6,000 limited partners who invested approximately $85 million in three public real estate limited partnerships (the "Partnerships") during the period beginning in 1982 and continuing through 1986. The defendants include HSM Inc., a wholly owned subsidiary of the Company, and several subsidiaries of HSM Inc., along with other parties unrelated to HSM Inc. The complaint alleged violation under the Racketeer Influenced and Corrupt Organizations Act ("RICO"), securities fraud, breach of fiduciary duty and negligent misrepresentation surrounding the defendants' organization, promotion, sponsorship and management of the Partnerships. Specific damages were not pled, but treble, punitive as well as compensatory damages and restitution were sought. 36 GRUBB & ELLIS COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 10. COMMITMENTS AND CONTINGENCIES--(CONTINUED) On August 18, 2000, the district court issued an opinion granting defendants' motions for summary judgment dismissing the federal RICO claims as time-barred under the statute of limitations. As to the state law claims for breach of fiduciary duty and negligent misrepresentation, the court declined to exercise supplemental jurisdiction and dismissed them without prejudice. The court declined to rule on defendants' motion to decertify the class because it was moot. Plaintiffs appealed the summary judgment to the Third Circuit Court of Appeals. On July 31, 2001, the appeals court affirmed and upheld the dismissal of the Plaintiffs' claims. The Plaintiffs' petition for rehearing was denied on August 28, 2001, and the Plaintiffs' time for filing any further appeals or related claims expired in both federal and state courts in the quarter ended December 31, 2001. Accordingly, the Company has recognized a non-recurring item in relation to the recovery of loss reserves previously recorded in connection with this case. (See Note 13 of Notes to Consolidated Financial Statements.) ENVIRONMENTAL A corporate subsidiary of the Company owns a 33% interest in a general partnership, which in turn owns property in the State of Texas which is the subject of an environmental assessment and remediation effort, due to the discovery of certain chemicals related to a release of dry cleaning solvent in the soil and groundwater of the partnership's property and adjacent properties. Prior assessments had determined that minimal costs would be incurred to remediate the release. However, subsequent findings at and around the partnership's property have increased the probability that additional remediation costs will be necessary. The partnership is working with the Texas Natural Resource Conservation Commission and the local municipality to implement a multi-faceted plan, which includes both remediation and ongoing monitoring of the affected properties. Both the Company and each of the partnership's other partners have contributed new capital to finance the continuing assessment and remediation efforts, although there can be no assurance that such future contributions will be made by the other partners. The Company's share of anticipated costs to remediate and monitor this situation is estimated at approximately $818,000. As of June 30, 2002, approximately $351,000 of this amount has been paid and the remaining $467,000 has been reflected as a loss reserve for such matters in the consolidated balance sheet. The Company's management believes that the outcome of these events will not have a material adverse effect on the consolidated financial position of the Company. INSOLVENT INSURANCE PROVIDER In fiscal years 1999 and 2000, the Company's primary errors and omissions insurance carrier was Reliance Insurance Company (of Illinois and California, collectively "Reliance"). The Company has six open claims that were covered by Reliance policies upon the exhaustion of a self-insured retention. In October 2001, Reliance was placed in liquidation by order of the Commonwealth of Pennsylvania, and as a result casts doubt on the recovery of the Company's open claims. The Company has established loss reserves for the estimated settlement costs of the claims and recognized a non-recurring charge in its financial statements for the quarter ended December 31, 2001. (See Note 13 of Notes to Consolidated Financial Statements.) The Company is seeking reimbursement for the costs of defense, settlement and/or judgment on these claims both from appropriate state insurance guaranty associations and from the liquidator. The Company is unable to estimate the probability and timing of any potential reimbursement at this time, and therefore has not assumed any potential recoveries in establishing its reserves. GENERAL The Company is involved in various other claims and lawsuits arising out of the conduct of its business, as well as in connection with its participation in various joint ventures, partnerships, a trust and appraisal business, many of which may not be covered by the Company's insurance policies. In the opinion of management, the eventual outcome of such claims and lawsuits is not expected to have a material adverse effect on the Company's financial position or results of operations. 11. CONCENTRATION OF CREDIT RISK Financial instruments that potentially subject the Company to credit risk consist principally of trade receivables and interest-bearing investments. Users of real estate services account for a substantial portion of trade receivables and 37 GRUBB & ELLIS COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 11. CONCENTRATION OF CREDIT RISK--(CONTINUED) collateral is generally not required. The risk associated with this concentration is limited due to the large number of users and their geographic dispersion. The Company places substantially all of its interest-bearing investments with major financial institutions and limits the amount of credit exposure with any one financial institution. The Company believes it has limited exposure to the extent of non-performance by the counterparties of each interest rate swap agreement as each counterparty is a major financial institution and, accordingly, the Company does not anticipate their non-performance. 12. SELF-TENDER OFFER On December 15, 2000, the Company commenced a self-tender offer to purchase up to 7.0 million shares of its outstanding common stock at a price of $7 per share in cash. Shares issuable upon the exercise of outstanding stock options and warrants were also eligible for the buyback. On January 25, 2001 the Company announced the expiration of the offer period. The Company subsequently disbursed net proceeds of approximately $48.8 million to buy back and concurrently retire approximately 7.0 million shares of common stock, including 281,901 shares from options exercised by option holders, and fund direct costs of the self-tender offer. Holders of the Company's outstanding stock warrants chose not to exercise such warrants and tender any underlying shares in respect of the warrants. The tender offer was financed through a $40 million term loan (See Note 5 of Notes to Consolidated Financial Statements.) and $8.8 million of the Company's cash reserves. Direct expenses totaling approximately $795,000 related to the tender offer were charged to stockholders' equity during the fiscal year ended June 30, 2001. The option exercises, and the subsequent repurchase of the resulting shares by the Company through the completion of the tender offer, resulted in non-recurring compensation expense of approximately $970,000 to the Company during the quarter ended March 31, 2001. APB Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations require that compensation expense be recognized to the extent that the fair value of stock repurchased by a company exceeds the exercise price of the underlying option, whenever such purchases are made within six months of the option exercise date. 13. IMPAIRMENT AND OTHER NON-RECURRING EXPENSES During the fiscal year ended June 30, 2002, the Company concluded long standing litigation proceedings on the JOHN W. MATTHEWS, ET AL. V KIDDER, PEABODY & CO., ET AL. AND HSM INC., ET AL. ("Matthews") case for which it had previously recorded loss reserves. (See Note 10 of Notes to Consolidated Financial Statements.) In addition, during this period, loss reserves were recorded as a result of the liquidation proceedings surrounding one of the Company's insurance carriers ("Reliance" liquidation). (See Note 10 of Notes to Consolidated Financial Statements.) The positive outcome of the Matthews case, partially offset by the additional exposure on the Reliance liquidation, resulted in $2.2 million of net income from claim related reserves. The Company also incurred a $500,000 non-recurring expense related to a write-down of the carrying basis of an investment in a commercial real estate services internet venture. The Company's decision to write-down its interest in the venture was due to a dilution in the Company's ownership position, as well as uncertainty in the venture's ability to achieve its business plan. The Company recorded additional charges of $3.4 million to other non-recurring expenses, consisting of $1.0 million of severance costs related to a reduction of salaried overhead, $2.1 million related to office closure costs and $300,000 related to costs incurred for the retirement of the Warburg Pincus $5,000,000 Subordinated Note and for the evaluation of an unsolicited purchase offer from a third party. As a result of these events, the Company has recognized a net non-recurring expense of $1,749,000 in the fiscal year ended June 30, 2002. In accordance with Financial Accounting Standards No. 121 "Accounting for the Impairment of Long Lived Assets and for Long Lived Assets to be Disposed of", the net carrying value of goodwill is reviewed by management if facts and circumstances suggest that an impairment may exist. Such impairment was identified related to the remaining goodwill associated with the April 1998 acquisition of White Commercial Real Estate. A significant majority of the sales 38 GRUBB & ELLIS COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 13. IMPAIRMENT AND OTHER NON-RECURRING EXPENSES--(CONTINUED) force terminated their relationship with the Company, and the office was subsequently closed with the remaining staff relocated to the Oakland, California office. The Company believed that the future estimated undiscounted cash flows of this operation were not sufficient to support the carrying value of such goodwill, and wrote off the remaining asset totaling $2,150,000, and recorded such charge to other non-recurring expenses in the fiscal year ended June 30, 2001. The Company also incurred other non-recurring expense in the fiscal year ended June 30, 2001 totaling $736,000, primarily professional services fees, related to its recent review of strategic initiatives, including potential acquisitions, sales and mergers, $970,000 of stock option compensation expense related to the in the money portion of the options exercised in connection with the Company's self-tender offer, $1,516,000 of executive severance costs related to senior management changes, and $850,000 related to a write-down of the carrying basis of an investment in commercial real estate services internet venture. During the fiscal year ended June 30, 2000, the Company recorded a $2.7 million charge for incremental non-recurring costs related to the resignation of Neil Young, the Company's former chairman and chief executive officer, on May 25, 2000. The Company and Mr. Young entered into a separation agreement that provided for payments totaling $2.7 million, prior to certain contingent amounts. The payments included $1.6 million in return for cancellation of options to purchase 465,000 shares of common stock of the Company. 14. CHANGE IN ACCOUNTING PRINCIPLE In December 1999, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 101, Revenue Recognition in Financial Statements ("SAB 101"). SAB 101 summarizes the SEC staff's views regarding the recognition and reporting of revenues in financial statements. At June 30, 2001, the Company changed its method of accounting for revenue recognition for leasing commissions and consulting fees, in compliance with SAB 101, and reported such change as a cumulative effect of a change in accounting principle, effective July 1, 2000. As such, operating results for the years ended June 30, 2002 and 2001 are presented in compliance with the requirements of this accounting change. Historically, the Company had recognized leasing commissions at the earlier of receipt of full payment or receipt of partial payment when lease and commissions agreements had been executed and no significant contingencies existed. The Company had recognized consulting fees as employee time was incurred on a project. Under the new accounting method, adopted retroactive to July 1, 2000, the Company's leasing commissions that are payable upon certain events such as tenant occupancy or commencement of rent will now be recognized upon the occurrence of such events. In addition, consulting fees will be recognized under SAB 101 generally upon the delivery of agreed upon services to the client. While this accounting change affects the timing of recognition of leasing and consulting revenues (and corresponding services commission expense), it does not impact the Company's cash flow from operations. The cumulative effect of the accounting change for prior years resulted in a reduction to income for fiscal year 2001 of $3.1 million, net of applicable taxes of $2.1 million. The effect of the change in fiscal year 2001 was to increase revenues by $2.6 million and income before the cumulative effect of the accounting change by $632,000, or $.04 per diluted common share. For the fiscal years ended June 30, 2002 and 2001, the Company recognized revenue, net of related services commission expense, totaling $319,000 and $4.1 million, respectively, that was included in the $5.2 million pre-tax cumulative effect adjustment at July 1, 2000. 15. BUSINESS ACQUISITIONS AND RELATED INDEBTEDNESS FISCAL 2002 ACQUISITION In February 2002, the Company acquired substantially all of the assets of the Wadley-Donovan Group, Inc., a professional real estate services firm located in northern New Jersey. Wadley-Donovan Group, Inc. specializes in site 39 GRUBB & ELLIS COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 15. BUSINESS ACQUISITIONS AND RELATED INDEBTEDNESS--(CONTINUED) selection, consulting and providing economic development strategies primarily for Fortune 100 companies and state, local and regional government agencies and municipalities. Consideration given to the seller at closing equaled $2.3 million. The Company has recorded the acquisition under the purchase method of accounting. All operations subsequent to the acquisition date are reflected in the Company's financial statements. FISCAL 2000 ACQUISITION In July 1999, the Company acquired substantially all of the assets of Landauer Associates, Inc. a real estate valuation and consulting firm. Consideration to the seller at closing included cash, a common stock warrant (See Note 8 of Notes to Consolidated Financial Statements.), and the assumption of certain liabilities. The Company has recorded the acquisition under the purchase method of accounting, and all operations subsequent to the acquisition date are reflected in the Company's financial statements. Substantially all of the purchase prices in the fiscal years 2002 and 2000 acquisitions were allocated to goodwill. 16. SEGMENT INFORMATION The Company has two reportable segments - Transaction Services (formerly described as "Advisory Services" in prior reports) and Management Services. The Transaction Services segment advises buyers, sellers, landlords and tenants on the sale, leasing and valuation of commercial property and includes the Company's national accounts groups and national affiliate program operations. The Management Services segment provides property management and related services for owners of investment properties and facilities management services for corporate users. The fundamental distinction between the Transaction Services and Management Services segments lies in the nature of the revenue streams and related cost structures. Transaction Services generates revenues primarily on a commission or project fee basis. Therefore, the personnel responsible for providing these services are compensated primarily on a commission basis. The Management Services revenues are generated primarily by long term (one year or more) contractual fee arrangements. Therefore, the personnel responsible for delivering these services are compensated primarily on a salaried basis. The Company evaluates segment performance and allocates resources based on earnings before interest, taxes, depreciation and amortization ("EBITDA"), excluding other non-recurring or extraordinary items. In evaluating segment performance, the Company's management utilizes EBITDA as a measure of the segment's ability to generate cash flow from its operations. Other items contained within the measurement of net income, such as interest and taxes, and non-recurring items, are generated and managed at the corporate administration level rather than the segment level. In addition, net income measures also include non-cash amounts such as depreciation and amortization expense. Management believes that EBITDA as presented with respect to the Company's reportable segments is an important measure of cash generated by the Company's operating activities. EBITDA is similar to net cash flow from operations because it excludes certain non-cash items, however, it also excludes interest and income taxes. Management believes that EBITDA is relevant because it assists investors in evaluating the Company's ability to service its debt by providing a commonly used measure of cash available to pay interest. EBITDA should not be considered as an alternative to net income (loss) or cash flows from operating activities (which are determined in accordance with GAAP), as an indicator of operating performance or a measure of liquidity. EBITDA also facilitates comparison of the Company's results of operations with those companies having different capital structures. Other companies may define EBITDA differently, and, as a result, such measures may not be comparable to the Company's EBITDA. 40 GRUBB & ELLIS COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 16. SEGMENT INFORMATION--(CONTINUED)
TRANSACTION MANAGEMENT COMPANY SERVICES SERVICES TOTALS ----------- ---------- ------- (AMOUNTS IN THOUSANDS) Fiscal year ended June 30, 2002 Total Revenues ........................................................ $262,077 $51,399 $313,476 EBITDA ................................................................ 598 (2,347) (1,749) Total Assets .......................................................... 60,866 20,111 80,977 Fiscal year ended June 30, 2001 Total Revenues ........................................................ $358,462 $53,500 $411,962 EBITDA ................................................................ 32,433 (4,514) 27,919 Total Assets .......................................................... 61,863 21,134 82,997 Fiscal year ended June 30, 2000 Total Revenues ........................................................ $355,704 $58,215 $413,919 EBITDA ................................................................ 40,871 (1,899) 38,972 RECONCILIATION OF SEGMENT EBITDA TO STATEMENTS OF OPERATIONS (IN THOUSANDS): FISCAL YEAR ENDED JUNE 30, ------------------------------------- 2002 2001 2000 --------- -------- -------- Total Segment EBITDA .................................................... $ (1,749) $ 27,919 $ 38,972 Less: Depreciation & amortization ............................................ (10,706) (11,635) (10,521) Non-recurring expenses ................................................. (1,749) (6,222) (2,650) Net interest income (expense) .......................................... (2,460) 218 87 -------- -------- -------- Income before income taxes ........................................... $(16,664) $ 10,280 $ 25,888 ======== ======== ======== RECONCILIATION OF SEGMENT ASSETS TO BALANCE SHEET (IN THOUSANDS): AS OF JUNE 30, --------------------- 2002 2001 -------- ------- Total segment assets ................................................................. $ 80,977 $ 82,997 Current tax assets ................................................................... 6,890 4,598 Deferred taxes assets ................................................................ 2,510 4,831 -------- -------- Total Assets ....................................................................... $ 90,377 $ 92,426 ======== ========
17. SUBSEQUENT EVENTS ISSUANCE OF PREFERRED STOCK On September 19, 2002, Kojaian Ventures, L.L.C. ("KV"), a related party, exercised its right to convert a subordinated debt instrument it held into preferred stock of the Company. (See Note 6 for additional information.) As a result of this conversion, 11,725 shares of the Company's Series A Preferred Stock were issued, with a stated value of $1,000 per share. The outstanding related party principal and interest obligations totaling $10,967,000 (net of issuance costs of $758,000), will be reclassified to stockholders' equity. The preferred stock contains liquidation preference and voting rights equal to 1,007 common shares for each share of preferred stock, or a total of 11,807,075 common share equivalents. As a consequence of the conversion, there has been a change in the control of the Company, as these equivalents, along with 3,762,884 shares of outstanding common stock owned by KV or its affiliates, represent approximately 58% of the total voting power of the Company. The preferred stock is not convertible into any other securities of the Company or subject to redemption. Warburg Pincus, which currently 41 GRUBB & ELLIS COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 17. SUBSEQUENT EVENTS--(CONTINUED) owns approximately 39% of the issued and outstanding common stock of the Company, has approximately 22% of the voting power. SECURITIES EXCHANGE LISTING The Company's common stock is currently listed on the New York Stock Exchange ("NYSE") pursuant to a listing agreement. As previously disclosed by the Company, the NYSE had accepted the Company's proposed business plan to attain compliance with the NYSE's listing standard on or before July 4, 2003. This plan had been submitted in response to a notification received by the Company on January 4, 2002 regarding non-compliance with such listing standards. As a result of the business plan's acceptance, the Company's common stock continued to be traded on the exchange, subject to the Company maintaining compliance with the plan and periodic review by the NYSE. Upon completion of a recent review, the NYSE announced on October 8, 2002 that the Company's common stock will be de-listed from the NYSE, due primarily to the Company's book value and market capitalization value being below minimum levels required by their listing standards. The Company is making arrangements to have its common stock traded on the over-the-counter market ("OTC") and is scheduled to cease trading on the NYSE prior to the opening on Thursday October 17, 2002. Although the Company is seeking an orderly transition and has reason to believe the NYSE will effectuate the same, there can be no assurance that the OTC will accept the Company's shares for listing prior to their de-listing from the NYSE, or at all, and that there will be no interruption of the public listing of the Company's common stock. 18. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
Fiscal Year Ended June 30, 2002 (in thousands, except per share amounts) -------------------------------------------------------------------------- First Quarter Second Quarter Third Quarter Fourth Quarter ------------- -------------- -------------- ------------- Operating revenue ....................... $ 76,788 $ 101,358 $ 58,185 $ 77,145 ============= ============= ============= ============= Operating income (loss) ................. $ (3,373) $ 3,230 $ (10,780) $ (3,281) ============= ============= ============= ============= Income (loss) before extraordinary item . $ (2,266) $ 1,294 $ (6,586) $ (7,919) ============= ============= ============= ============= Net (loss) income ....................... $ (2,266) $ 1,294 $ (6,586) $ (7,919) ============= ============= ============= ============= Income (loss) before extraordinary item and cumulative effect per common share: Basic-- ................................. $ (.17) $ .10 $ (.45 $ (.53) ============= ============= ============= ============= Weighted average common shares outstanding ................. 13,447 13,545 14,585 15,032 ============= ============= ============= ============= Diluted-- ............................... $ (.17) $ .09 $ (.45) $ (.53) ============= ============= ============= ============= Weighted average common shares outstanding ................. 13,447 13,679 14,585 15,032 ============= ============= ============= ============= EBITDA .................................. $ (573) $ 4,320 $ (5,715) $ 219 ============= ============= ============= ============= Common stock market price range (high: low) ............... $5.40 : $3.35 $4.10 : $2.31 $3.10 : $2.35 $4.25 : $2.30 ============= ============= ============= =============
42 GRUBB & ELLIS COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 18. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)--(CONTINUED)
Fiscal Year Ended June 30, 2002 (in thousands, except per share amounts) -------------------------------------------------------------------------- First Quarter Second Quarter Third Quarter Fourth Quarter ------------- -------------- -------------- ------------- Operating revenue ....................... $ 108,100 $ 141,737 $ 80,160 $ 81,965 ============= ============= ============= ============= Operating income (loss) ................. $ 4,841 $ 9,655 $ (2,460) $ (1,974) ============= ============= ============= ============= Income (loss) before extraordinary item and cumulative effect ................... $ 3,032 $ 4,943 $ (1,485) $ (1,582) ============= ============= ============= ============= Net (loss) income ....................... $ (101) $ 4,537 $ (1,485) $ (1,582) ============= ============= ============= ============= Income (loss) before extraordinary item and cumulative effect per common share: Basic-- ................................. $ .15 $ .25 $ (.10) $ (.12) ============= ============= ============= ============= Weighted average common shares outstanding ................. 19,856 19,922 15,028 13,315 ============= ============= ============= ============= Diluted-- ............................... $ .14 $ .24 $ (.10) $ (.12) ============= ============= ============= ============= Weighted average common shares outstanding ................. 21,020 20,879 15,028 13,315 ============= ============= ============= ============= EBITDA .................................. $ 7,717 $ 15,411 $ 1,459 $ 3,332 ============= ============= ============= ============= Common stock market price range (high: low) ............... $6.50 : $5.50 $6.38 : $4.13 $6.30 : $4.80 $6.07 : $4.50 ============= ============= ============= =============
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information called for by Item 10 is incorporated by reference from the registrant's definitive proxy statement to be filed pursuant to Regulation 14A under the Securities Exchange Act of 1934 (the "Exchange Act") no later than 120 days after the end of the 2002 fiscal year. ITEM 11. EXECUTIVE COMPENSATION The information called for by Item 11 is incorporated by reference from the registrant's definitive proxy statement to be filed pursuant to Regulation 14A under the Exchange Act no later than 120 days after the end of the 2002 fiscal year. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information called for by Item 12 is incorporated by reference from the registrant's definitive proxy statement to be filed pursuant to Regulation 14A under the Exchange Act no later than 120 days after the end of the 2002 fiscal year. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information called for by Item 13 is incorporated by reference from the registrant's definitive proxy statement to be filed pursuant to Regulation 14A under the Exchange Act no later than 120 days after the end of the 2002 fiscal year. 43 GRUBB & ELLIS COMPANY PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) The following documents are filed as part of this report: 1. The following Report of Independent Auditors and Consolidated Financial Statements are submitted herewith: Report of Independent Auditors Consolidated Balance Sheets at June 30, 2002 and June 30, 2001. Consolidated Statements of Operations for the years ended June 30, 2002, 2001 and 2000. Consolidated Statements of Stockholders' Equity for the years ended June 30, 2002, 2001 and 2000 Consolidated Statements of Cash Flows for the years ended June 30, 2002, 2001 and 2000. Notes to Consolidated Financial Statements. 2. All schedules for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission are not required under the related instructions, are inapplicable, or the information is contained in the Notes to Consolidated Financial Statements and therefore have been omitted. 3. Exhibits required to be filed by Item 601 of Regulation S-K: (3) Articles of Incorporation and Bylaws 3.1 Certificate of Incorporation of the Registrant as restated to include all amendments through November 1, 1994, which was filed with the Delaware Secretary of State on May 19, 1995, incorporated herein by reference to Exhibit 3.2 to the Registrant's Annual Report on Form 10-K filed on March 31, 1995. 3.2 Amendment to the Restated Certificate of Incorporation of the Registrant as filed with the Delaware Secretary of State on December 9, 1997, incorporated herein by reference to Exhibit 4.4 to the Registrant's Statement on Form S-8 filed on December 19, 1997 (File No. 333-42741). 3.3 Certificate of Retirement with Respect to 130,233 Shares of Junior Convertible Preferred Stock of Grubb & Ellis Company, filed with the Delaware Secretary of State on January 22, 1997, incorporated herein by reference to Exhibit 3.3 to the Registrant's Quarterly Report on Form 10-Q filed on February 13, 1997. 3.4 Certificate of Retirement with Respect to 8,894 Shares of Series A Senior Convertible Preferred Stock, 128,266 Shares of Series B Senior Convertible Preferred Stock, and 19,767 Shares of Junior Convertible Preferred Stock of Grubb & Ellis Company, filed with the Delaware Secretary State on January 22, 1997, incorporated herein by reference to Exhibit 3.4 to the Registrant's Quarterly Report on Form 10-Q filed on February 13, 1997. 3.5 Certificate of Designations, Number, Voting Powers, Preferences and Rights of Series A Preferred Stock of the Registrant as filed with the Secretary of State of the State of Delaware on March 8, 2002 incorporated herein by reference to Exhibit 4 to the Registrant's Current Report on Form 8-K filed on March 12, 2002. 3.6 Certificate of Amendment of Certificate of Designations, Number, Voting Powers, Preferences and Rights of Series A Preferred Stock of Grubb & Ellis Company, incorporated herein by reference to Exhibit 4 to the Registrant's Current Report on Form 8-K filed on May 14, 2002. 3.7 Bylaws of the Registrant, as amended and restated effective May 31, 2000, incorporated herein by reference to Exhibit 3.5 to the Registrant's Annual Report on Form 10-K filed on September 28, 2000. 3.8 Amended and Restated Certificate of Designations, Number, Voting Powers, Preferences and Rights of Series A Preferred Stock of Grubb & Ellis Company, as filed with the Secretary of State of Delaware on September 13, 2002. 44 (4) INSTRUMENTS DEFINING THE RIGHTS OF SECURITY HOLDERS, INCLUDING INDENTURES. 4.1 Stock Purchase Agreement dated as of December 11, 1996 among the Registrant, Mike Kojaian, Kenneth J. Kojaian and C. Michael Kojaian, incorporated herein by reference to Exhibit 4.3 to the Registrant's Current Report on Form 8-K filed on December 20, 1996. 4.2 Registration Rights Agreement dated as of December 11, 1996 among the Registrant, Warburg, Pincus Investors, L.P., Joe F. Hanauer, Mike Kojaian, Kenneth J. Kojaian and C. Michael Kojaian, incorporated herein by reference to Exhibit 4.1 to the Registrant's Current Report on Form 8-K filed on December 20, 1996. 4.3 Purchase Agreement dated as of January 24, 1997 between the Registrant and Warburg, Pincus Investors, L.P., incorporated herein by reference to Exhibit 4.1 to the Registrant's Current Report on Form 8-K filed on February 4, 1997. 4.4 Stock Purchase Agreement dated as of January 24, 1997 between the Registrant and Archon Group, L.P., incorporated herein by reference to Exhibit 4.2 to the Registrant's Current Report on Form 8-K filed on February 4, 1997. 4.5 Registration Rights Agreement dated as of January 24, 1997 between the Registrant and Archon Group, L.P., incorporated herein by reference to Exhibit 4.3 to the Registrant's Current Report on Form 8-K filed on February 4, 1997. 4.6 Securities Purchase Agreement dated May 13, 2002 by and between Grubb & Ellis Company and Kojaian Ventures, L.L.C., incorporated herein by reference to Exhibit 2 to the Registrant's Current Report on Form 8-K filed on May 14, 2002. 4.7 Convertible Subordinated Promissory Note and Security Agreement in the principal amount of $11,237,500 dated May 13, 2002 and executed by Grubb & Ellis Company, incorporated herein by reference to Exhibit 3 to the Registrant's Current Report on Form 8-K filed on May 14, 2002. 4.8 Stock Subscription Warrant No. A-1 dated July 30, 1999 issued to Aegon USA Realty Advisors, Inc., incorporated herein by reference to Exhibit 4.20 to the Registrant's Annual Report on Form 10-K filed on September 28, 1999. 4.9 Amended and Restated Credit Agreement among the Registrant, the other financial institutions from time to time parties thereto, Bank of America, N.A., American National Bank and Trust Company of Chicago and LaSalle Bank National Association, dated as of December 31, 2000, incorporated herein by reference to Exhibit (b)(1) to the Registrant's Amendment No. 2 to Tender Offer Statement on Schedule TO/A filed on January 10, 2001. 4.10 Note executed by the Registrant in favor of Bank of America, N.A. dated as of December 31, 2000, incorporated herein by reference to Exhibit (b)(2) to the Registrant's Amendment No. 2 to Tender Offer Statement on Schedule TO/A filed on January 10, 2001. 4.11 Note executed by the Registrant in favor of LaSalle Bank National Association dated as of December 31, 2000, incorporated herein by reference to Exhibit (b)(3) to the Registrant's Amendment No. 2 to Tender Offer Statement on Schedule TO/A filed on January 10, 2001. 4.12 Note executed by the Registrant in favor of American National Bank and Trust Company of Chicago dated as of December 31, 2000, incorporated herein by reference to Exhibit (b)(4) to the Registrant's Amendment No. 2 to Tender Offer Statement on Schedule TO/A filed on January 10, 2001. 4.13 Swingline Loan Note executed by the Registrant in favor of Bank of America, N.A. in the amount of $2,000,000 dated as of December 31, 2000, incorporated herein by reference to Exhibit (b)(5) to the Registrant's Amendment No. 2 to Tender Offer Statement on Schedule TO/A filed on January 10, 2001. 4.14 First Amendment dated August 22, 2001 to Amended and Restated Credit Agreement among the Registrant, the other financial institutions from time to time parties thereto, Bank of America, N.A., American National Bank and Trust Company of Chicago and LaSalle Bank National Association, dated as of December 31, 2000, incorporated herein by reference to Exhibit 4.19 to the Registrant's Annual Report on Form 10-K filed on September 28, 2001. 45 4.15 Second Amendment dated November 29, 2001 to Amended and Restated Credit Agreement among the Registrant, the other financial institutions from time to time parties thereto, Bank of America, N.A., American National Bank and Trust Company of Chicago and LaSalle Bank National Association, dated as of December 31, 2000 incorporated herein by reference to Exhibit 4.1 to the Registrant's Quarterly Report on Form 10-Q filed on February 14, 2002. 4.16 Third Amendment dated March 7, 2002 to Amended and Restated Credit Agreement dated as of December 31, 2000 by and among the Registrant, various financial institutions, and Bank of America, N.A., as Administrative Agent incorporated herein by reference to Exhibit 1 to the Registrant's Current Report on Form 8-K filed on March 12, 2002. 4.17 Form of Subordination Agreement, executed by Warburg, Pincus Investors, L.P. in favor of Bank of America, N.A., as Agent, and the Lenders, which is an Exhibit to the Option Purchase Agreement incorporated herein by reference to Exhibit 2 to the Registrant's Current Report on Form 8-K filed on March 12, 2002. 4.18 Option Purchase Agreement dated March 7, 2002 by and among the Registrant, Warburg, Pincus Investors, L.P. and Bank of America, N.A., as Administrative Agent incorporated herein by reference to Exhibit 3 to the Registrant's Current Report on Form 8-K filed on March 12, 2002. 4.19 Fourth Amendment dated as of May 13, 2002 to the Amended and Restated Credit Agreement among the Registrant, the other financial institutions from time to time parties thereto, Bank of America, N.A., American National Bank and Trust Company of Chicago and LaSalle Bank National Association, dated as of December 31, 2000, incorporated herein by reference to Exhibit 5 to the Registrant's Current Report on Form 8-K filed on May 14, 2002. 4.20 Copy of $5,000,000 Convertible Promissory Note and Security Agreement dated March 7, 2002 issued by the Registrant to Warburg, Pincus Investors, L.P. incorporated herein by reference to Exhibit 5 to the Registrant's Current Report on Form 8-K filed on March 12, 2002. 4.21 Form of $6,000,000 Convertible Promissory Note and Security Agreement of the Registrant which is an Exhibit to the Option Purchase Agreement to be payable to the order of Warburg, Pincus Investors, L.P. incorporated herein by reference to Exhibit 6 to the Registrant's Current Report on Form 8-K filed on March 12, 2002 (Commission File No. 1-8122). 4.22 Securities Purchase Agreement dated May 13, 2002 by and between Grubb & Ellis Company and Kojaian Ventures, L.L.C., incorporated herein by reference to Exhibit 2 to the Registrant's Current Report on Form 8-K filed on May 14, 2002. 4.23 Copy of Convertible Subordinated Promissory Note and Security Agreement in the principal amount of $11,237,500 dated May 13, 2002 issued by the Registrant to Kojaian Ventures, L.L.C., incorporated herein by reference to Exhibit 3 to the Registrant's Current Report on Form 8-K filed on May 14, 2002. On an individual basis, instruments other than Exhibits listed above under Exhibit 4 defining the rights of holders of long-term debt of the Registrant and its consolidated subsidiaries and partnerships do not exceed ten percent of total consolidated assets and are, therefore, omitted; however, the Company will furnish supplementally to the Commission any such omitted instrument upon request. (10) MATERIAL CONTRACTS 10.1* Employment Agreement entered into between Barry M. Barovick and the Registrant dated as of May 15, 2001, incorporated herein by reference to Exhibit 10.1 to the Registrant's Quarterly Report on Form 10-Q filed on May 12, 2001. 10.2* Stock Purchase Agreement entered into between Barry M. Barovick and the Registrant dated as of May 15, 2001, incorporated herein by reference to Exhibit 4.8 to the Registrant's registration statement on Form S-8 filed on June 15, 2001 (File No. 333-63136). 10.3* Loan Agreement and Retention Bonus Program entered into between Barry M. Barovick and the Registrant, and Promissory Note executed by Mr. Barovick, dated as of May 15, 2001, incorporated herein by reference to Exhibit 10.3 to the Registrant's Annual Report on Form 10-K filed on September 28, 2001. 46 10.4* Employment Agreement entered into between Mark R. Costello and the Registrant dated as of July 5, 2001, incorporated herein by reference to Exhibit 10.4 to the Registrant's Annual Report on Form 10-K filed on September 28, 2001. 10.5* Loan Agreement and Retention Bonus Program entered into between Mark R. Costello and the Registrant, and Promissory Note executed by Mr. Costello, dated as of July 23, 2001, incorporated herein by reference to Exhibit 10.5 to the Registrant's Annual Report on Form 10-K filed on September 28, 2001. 10.6* Separation Agreement entered into between Mark R. Costello and the Registrant, and General Release executed by Mr. Costello, dated as of July 12, 2002. 10.7* Employment Agreement entered into between Ian Y. Bress and the Registrant dated as of June 18, 2001, incorporated herein by reference to Exhibit 10.6 to the Registrant's Annual Report on Form 10-K, filed on September 28, 2001. 10.8* First Amendment to Employment Agreement entered into between Ian Y. Bress and the Registrant dated as of October 3, 2001, incorporated herein by reference to Exhibit 10.1 to the Registrant's Quarterly Report on Form 10-Q, filed on November 14, 2001. 10.9* Employment Agreement entered into between Robert J. Walner and the Registrant dated as of December 14, 2001, incorporated herein by reference to Exhibit 10.1 to the Registrant's Quarterly Report on Form 10-Q, filed on February 14, 2002. 10.10* Change of Status and Separation Agreement entered into between Blake Harbaugh and the Registrant dated as of July 26, 2001. 10.11* Grubb & Ellis 1990 Amended and Restated Stock Option Plan, as amended effective as of June 20, 1997, incorporated herein by reference to Exhibit 4.6 to the Registrant's Registration Statement on Form S-8 filed on December 19, 1997 (Registration No. 333-42741). 10.12* 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). 10.13* First Amendment to the 1993 Stock Option Plan for Outside Directors, effective November 19, 1998, incorporated herein by reference to Exhibit 10.1 to the Registrant's Quarterly Report on Form 10-Q filed on February 12, 1999. 10.14* Grubb & Ellis 1998 Stock Option Plan, effective as of January 13, 1998, incorporated herein by reference to Exhibit 10.6 to the Registrant's Annual Report on Form 10-K filed on September 28, 1999. 10.15* First Amendment to the Grubb & Ellis 1998 Stock Option Plan, effective as of February 10, 2000, incorporated herein by reference to Exhibit 10.7 to the Registrant's Quarterly Report on Form 10-Q filed on May 12, 2000. 10.16* Grubb & Ellis Company 2000 Stock Option Plan, effective November 16, 2000, incorporated by herein by reference to Exhibit 10.2 to the Registrant's Quarterly Report on Form 10-Q filed on February 14, 2001. 10.17* Description of Grubb & Ellis Company Executive Officer Incentive Compensation Plan, incorporated herein by reference to Exhibit 10.4 to the Registrant's Annual Report on Form 10-K filed on September 28, 1999. 10.18* Executive Change of Control Plan, effective as of May 10, 1999 and attached form of Acknowledgement Agreement, incorporated herein by reference to Exhibit 10.7 to the Registrant's Annual Report on Form 10-K filed on September 28, 1999. 10.19* First Amendment to the Executive Change of Control Plan, effective as of February 10, 2000, incorporated herein by reference to Exhibit 10.6 to the Registrant's Quarterly Report on Form 10-Q filed on May 12, 2000. 10.20* Second Amendment to the Executive Change of Control Plan, effective as of June 1, 2000, and attached form of Acknowledgement Agreement, incorporated herein by reference to Exhibit 10.12 to the Registrant's Annual Report on Form 10-K filed on September 28, 2000. 47 10.21* Executive Incentive Bonus and Severance Plan, effective as of June 1, 2000, incorporated herein by reference to Exhibit 10.13 to the Registrant's Annual Report on Form 10-K filed on September 28, 2000. 10.22 Pledge Agreement between Landauer Realty Group, Inc. and Bank of America, N.A., as Administrative Agent, dated as of December 31, 2000, incorporated herein by reference to Exhibit 10.3 to the Registrant's Quarterly Report on Form 10-Q filed on February 14, 2001. 10.23 Pledge Agreement between the Registrant and Bank of America, N.A., as Administrative Agent, dated as of October 15, 1999, incorporated herein by reference to Exhibit 10.1 to the Registrant's Quarterly Report on Form 10-Q filed on November 12, 1999. 10.24 Pledge Agreement between Grubb & Ellis Management Services, Inc. and Bank of America, N.A., as Administrative Agent, dated as of October 15, 1999 incorporated herein by reference to Exhibit 10.2 to the Registrant's Quarterly Report on Form 10-Q filed on November 12, 1999. 10.25 Pledge Agreement between HSM Inc. and Bank of America, N.A., as Administrative Agent, dated as of October 15, 1999 incorporated herein by reference to Exhibit 10.3 to the Registrant's Quarterly Report on Form 10-Q filed on November 12, 1999. 10.26 Guarantee and Collateral Agreement by the Registrant and certain of its Subsidiaries in favor of Bank of America, N.A., as Administrative Agent, dated as of October 15, 1999 incorporated herein by reference to Exhibit 10.4 to the Registrant's Quarterly Report on Form 10-Q filed on November 12, 1999. 10.27 Collateral Trademark Security Agreement by the Registrant in favor of Bank of America, N.A., as Administrative Agent, dated as of October 15, 1999 incorporated herein by reference to Exhibit 10.5 to the Registrant's Quarterly Report on Form 10-Q filed on November 12, 1999. 10.28 Letter Agreement dated April 14, 2002 by and between the Registrant and Kojaian Ventures, L.L.C., incorporated herein by reference to Exhibit 1 to the Registrant's Current Report on Form 8-K filed April 19, 2002. 10.29 Letter Amendment dated May 13, 2002 by and between Grubb & Ellis Company and Kojaian Ventures, L.L.C., incorporated herein by reference to Exhibit 1 to the Registrant's Current Report on Form 8-K filed May 14, 2002. *Management contract or compensatory plan or arrangement. (21) SUBSIDIARIES OF THE REGISTRANT (23) CONSENT OF INDEPENDENT AUDITORS 23.1 Consent of Ernst & Young LLP (24) POWERS OF ATTORNEY (99) 99.1 SARBANES-OXLEY ACT, SECTION 906 CERTIFICATION 99.2 ANNUAL EARNINGS RELEASE FOR THE FISCAL YEAR ENDED JUNE 30, 2002 (B) REPORTS FILED ON FORM 8-K A Current Report on Form 8-K dated April 15, 2002 was filed with the Securities and Exchange Commission on April 19, 2002, disclosing under Item 1 a change in control of the Registrant due to certain financing transactions. A Current Report on Form 8-K dated May 13, 2002, was filed with the Securities and Exchange Commission on May 14, 2002, disclosing under Item 1 a change in control of the Registrant due to certain financing transactions. 48 SIGNATURES Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. GRUBB & ELLIS COMPANY (REGISTRANT) /s/ Barry M. Barovick October 11, 2002 ----------------------------- Barry M. Barovick President, Chief Executive Officer and a 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. PRINCIPAL EXECUTIVE OFFICER /s/ Barry M. Barovick October 11, 2002 ----------------------------- Barry M. Barovick President, Chief Executive Officer and a director PRINCIPAL FINANCIAL AND ACCOUNTING OFFICER /s/ Ian Y. Bress October 11, 2002 ----------------------------- Ian Y. Bress Chief Financial Officer DIRECTORS October 11, 2002 ----------------------------- R. David Anacker, Director ** October 11, 2002 ----------------------------- Anthony G. Antone, Director ** October 11, 2002 ----------------------------- C. Michael Kojaian, Director ** October 11, 2002 ----------------------------- Reuben S. Leibowitz, Director ** October 11, 2002 ----------------------------- Ian C. Morgan, Director ** October 11, 2002 ----------------------------- Steven H. Shepsman, Director October 11, 2002 ----------------------------- Todd A. Williams, Director /s/ Ian Y. Bress ----------------------------- **By: Ian Y. Bress, Attorney-in-Fact, pursuant to Powers Of Attorney 49 CERTIFICATIONS I, Barry M. Barovick, certify that: 1. I have reviewed this annual report on Form 10-K of Grubb & Ellis Company; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; Date: October 11, 2002 /s/ Barry M. Barovick ------------------------------------ Barry M. Barovick President, Chief Executive Officer and a director 50 CERTIFICATIONS I, Ian Y. Bress, certify that: 1. I have reviewed this annual report on Form 10-K of Grubb & Ellis Company; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; Date: October 11, 2002 /s/ Ian Y. Bress ------------------------------------ Ian Y. Bress Chief Financial Officer 51 GRUBB & ELLIS COMPANY AND SUBSIDIARIES EXHIBIT INDEX FOR THE FISCAL YEAR ENDED JUNE 30, 2002 EXHIBIT (3) ARTICLES OF INCORPORATION AND BYLAWS 3.8 Amended and Restated Certificate of Designations, Number, Voting Powers, Preferences, and Rights of Series A Preferred Stock of Grubb & Ellis Company, as filed with the Secretary of State of the State of Delaware on September 13, 2002. (10) MATERIAL CONTRACTS 10.6 Separation Agreement entered into between Mark R. Costello and the Registrant, and General Release executed by Mr. Costello, dated as of July 12, 2002. (21) SUBSIDIARIES OF THE REGISTRANT (23) CONSENT OF INDEPENDENT AUDITORS 23.1 Consent of Ernst & Young LLP (24) POWERS OF ATTORNEY (99) 99.1 Sarbanes-Oxley Act, Section 906 Certification 99.2 Annual Earnings Release for the fiscal year ended June 30, 2002 (A) Exhibits incorporated by reference are listed in Item 14 (a) 3 of this Report 52 EX-3.8 3 c25690_ex38.txt CERTIFICATE OF DESIGNATIONS Exhibit 3.8 AMENDED AND RESTATED CERTIFICATE OF DESIGNATIONS, NUMBER, VOTING POWERS, PREFERENCES AND RIGHTS OF SERIES A PREFERRED STOCK OF GRUBB & ELLIS COMPANY (A DELAWARE CORPORATION) Pursuant to Section 151 of the General Corporation Law of the State of Delaware The undersigned DOES HEREBY CERTIFY that the following resolution was duly adopted by the Board of Directors of Grubb & Ellis Company, a Delaware corporation (hereinafter called the "Corporation"), with the preferences and rights set forth therein relating to dividends, redemption, dissolution and distribution of assets of the Corporation having been fixed by the Board of Directors pursuant to authority granted to it under the Corporation's CERTIFICATE OF INCORPORATION and in accordance with the provisions of Section 151 of the General Corporation Law of the State of Delaware ("GCL"): RESOLVED: That the Corporation's Certificate of Designations, Number, Voting Powers, Preferences and Rights of Series A Preferred Stock dated March 7, 2002, and filed with the Secretary of State of the State of Delaware on March 8, 2002, and as thereafter amended on May 14, 2002 and corrected on May 15, 2002, is hereby amended in its entirety; and it is further RESOLVED: That, pursuant to authority conferred upon the Board of Directors by the Certificate of Incorporation of the Corporation, the Board of Directors of this Corporation hereby amends the designations, powers, preferences and relative, participating, optional or other special rights, and the qualifications, limitations or restrictions thereof, of such shares (the "CERTIFICATE OF AMENDMENT"), in addition to those set forth in the Certificate of Incorporation of the Corporation, as follows: 1. DESIGNATION AND AMOUNT. The shares of such series shall be designated "Series A Preferred Stock," par value $.01 per share, (the "Series A Preferred Stock"), and the number of shares constituting such series shall be up to 60,000 shares. 2. DIVIDENDS. (a) The holders of Series A Preferred Stock shall be entitled to receive, when and as declared by the Board of Directors of the Corporation (the "Board of Directors"), out of the net profits of the Corporation, dividends per share equal to 12% per annum of the Stated Value (as herein defined) of such Series A Preferred Stock, before any dividends shall be declared, set apart for or paid upon the common stock, par value $.01 per share (the "Common Stock") of the Corporation, or any other stock ranking with respect to dividends or on liquidation junior to the Series A Preferred Stock (such stock being referred to hereinafter collectively as "Junior Stock") in any year. All dividends declared upon the Series A Preferred Stock shall be declared pro rata per share and compounded quarterly. For purposes hereof, the term "Stated Value" shall mean $1000.00 per share subject to appropriate adjustment in the event of any stock dividend, stock split, stock distribution or combination with respect to the Series A Preferred Stock. (b) Dividends on the Series A Preferred Stock shall be cumulative and shall continue to accrue whether or not declared and whether or not in any fiscal year there shall be net profits or surplus available for the payment of dividends in such fiscal year, so that if in any fiscal year or years, dividends in whole or in part are not paid upon the Series A Preferred Stock, unpaid dividends shall accumulate as against the holders of the Junior Stock. (c) In the event dividends on the Series A Preferred Stock are paid in additional shares of Series A Preferred Stock, the number of shares of Series A Preferred Stock to be issued in payment of the dividend with respect to each outstanding share of Series A Preferred Stock shall be determined by dividing the amount of the dividend per share that would have been payable had such dividend been paid in cash by the Stated Value. To the extent that any such dividend would result in the issuance of a fractional share of Series A Preferred Stock (which shall be determined with respect to the aggregate number of shares of Series A Preferred Stock held of record by each holder) then the amount of such fraction multiplied by the Stated Value shall be paid in cash (unless there are no legally available funds with which to make such cash payment, in which event such cash payment shall be made as soon as possible). (d) For so long as the Series A Preferred Stock remains outstanding, the Corporation shall not, without the prior consent of the holders of a majority of the outstanding shares of Series A Preferred Stock, pay any dividend upon the Junior Stock, whether in cash or other property (other than shares of Junior Stock), or purchase, redeem or otherwise acquire any such Junior Stock unless it has paid the dividend to the holders of the Series A Preferred Stock as described above. Notwithstanding the provisions of this Section 2(d), without declaring or paying dividends on the Series A Preferred Stock, the Corporation may, subject to applicable law, repurchase or redeem shares of capital stock of the Corporation from current or former officers or employees of the Corporation pursuant to the terms of repurchase or similar agreements in effect from time to time, provided that such agreements have been approved by the Board of Directors and the terms of such agreements provide for a repurchase or redemption price not in excess of the price per share paid by such employee for such share. 3. LIQUIDATION, DISSOLUTION OR WINDING UP. (a) In the event of any voluntary or involuntary liquidation, dissolution or winding up of the Corporation (a "Liquidation"), the holders of shares of Series A Preferred Stock then outstanding shall, subject to the provisions of Section 3(d) below, be entitled to be paid out of the assets of the Corporation available for distribution to its stockholders, after and subject to the payment in full of all amounts required to be distributed to the holders of any other series of preferred stock of the Corporation ranking on liquidation prior and in preference to the Series A Preferred Stock (any such preferred stock being referred to hereinafter as "Senior Preferred Stock") upon such Liquidation, but before payment of any consideration shall be made to the holders of Junior Stock, consideration equal to the greater of (i) 150% of the Stated Value per share, plus any dividends thereon that are accrued but unpaid, or (ii) the amount such holder 2 would have received assuming that each share of Series A Preferred Stock equaled 998 shares (the "Assumed Share Number") of Common Stock, which Assumed Share Number is based upon the number of "Adjusted Outstanding Shares" (as that term is defined in paragraph 5(b) below) on April 14, 2002, subject to further adjustment as provided in Section 5 and Section 6 hereof; PROVIDED, HOWEVER, that notwithstanding anything set forth herein to the contrary, in the event that a Liquidation does not occur, or a binding agreement to effect any such Liquidation has not been executed and delivered by the Company on or before May 13, 2003 (the "Adjustment Date"), then subclause (i) of this sentence shall automatically be deemed to be amended to be 200% of the Stated Value per share, plus any dividends thereon that are accrued but unpaid. If upon any Liquidation, at any time, the remaining assets of the Corporation available for the distribution to its stockholders after payment in full of amounts required to be paid or distributed to holders of Senior Preferred Stock shall be insufficient to pay the holders of shares of Series A Preferred Stock the full amount to which they shall be entitled, the holders of shares of Series A Preferred Stock, and any class of stock ranking on liquidation on a parity with the Series A Preferred Stock, shall share ratably in any distribution of the remaining assets and funds of the Corporation in proportion to the respective amounts which would otherwise be payable in respect to the shares held by them upon such distribution if all amounts payable on or with respect to said shares were paid in full. (b) After the payment of all preferential amounts required to be paid to the holders of Senior Preferred Stock and Series A Preferred Stock and any other series of preferred stock ("Preferred Stock") upon Liquidation, the holders of shares of Common Stock then outstanding shall be entitled to receive the remaining assets and funds of the Corporation available for distribution to its stockholders. (c) Liquidation as used in this Section 3 shall be deemed to include any transaction which is referred to in any one or more of the following clauses (i) through (iii): (i) any merger or consolidation involving the Corporation which meets the criteria set forth in clause (iii) below; (ii) the acquisition of the Corporation either (x) through the sale, conveyance, mortgage, pledge or lease of all or substantially all the assets of the Corporation, or (y) through the acquisition of an interest in the Company's common stock of the Company by way of purchase (whether by public tender offer or otherwise), merger or consolidation, or (z) otherwise; or (iii) Any transaction or series of transactions, where, other than any person or group who is or are current stockholders of the Corporation as of April 14, 2002 and/or any of their respective affiliates, a "person" or "group" (as such terms are used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act")) is or becomes the "beneficial owner" (as defined by Rules 13d-3 and 13d-5 of the Exchange Act), directly or indirectly, of 50% or more of the outstanding capital stock of the Corporation. (d) (i) Notwithstanding anything set forth herein to the contrary, in the event that the Corporation enters into a definitive binding agreement with respect to a 3 transaction which is deemed to be a Liquidation as defined in Section 3(c)(ii) herein above (a "Section 3(c)(ii) Liquidation") on or before the "Non-Voting Date," as such term is defined in, and as such date may be extended pursuant to, Section 4(d) below, and the Section 3(c)(ii) Liquidation, or any transaction contemplated or permitted by the definitive binding agreement relating to the Section 3(c)(ii) Liquidation, closes on or before the Non-Voting Date, then the holder shall not be entitled to receive the consideration set forth in Section 3(a) above, but rather, shall be entitled to receive, before payment of any consideration shall be made to the holders of Junior Stock, 100% of the Stated Value per share plus any dividends thereon that are accrued but unpaid (the "Series A Investment") plus Two Million Dollars ($2,000,000) (the "Alternate Liquidation Amount"), PROVIDED, HOWEVER, that in the event that holder accepts the Alternate Liquidation Amount, then the holder expressly agrees that holder shall not, shall cause the Holder's "affiliates" (as defined in Section 4(c) below) not to, and shall not assist or encourage any stockholder of the Corporation to, under any circumstances whatsoever, seek, or be permitted to seek, to exercise any appraisal rights under Section 262 of the GCL, or otherwise seek, or be permitted to seek, to challenge the Section 3(c)(ii) Liquidation. Unless the holder expressly notifies the Corporation in writing within seven (7) days after holder has received the Alternate Liquidation Amount, which notice, to be effective, must be in accordance with the notice provisions set forth in Section (d)(ii) below and must also include the return of the entire Alternate Liquidation Amount, time being of the essence, that it does not accept the Alternate Liquidation Amount, then the holder shall automatically and irrevocably be deemed to have accepted the Alternate Liquidation Amount. In the event that, in accordance with the provisions of the immediately preceding sentence, the holder duly notifies the Corporation that it does not accept the Alternate Liquidation Amount, the holder shall be deemed to have irrevocably waived its right to receive such Alternate Liquidation Amount. As used in this Certificate of Amendment, the term Section 3(c)(ii) Liquidation shall mean not only the transaction that is deemed to be a Liquidation as defined in Section 3(c)(ii) above, but shall also include any transaction contemplated or permitted by the definitive binding agreement relating to the Section 3(c)(ii) Liquidation transaction. (ii) All notices, requests, demands, other communications and deliveries required or desired to be given hereunder shall only be effective if given in writing by hand, by certified or registered mail, return receipt requested, postage prepaid, or by U.S. express mail service, or by private overnight mail service (e.g. Federal Express), or by facsimile transmission. Any such notice, request, demand, other communication or delivery shall be deemed to have been received (a) on the business day actually received if given by hand or facsimile transmission, (b) on the business day immediately subsequent to mailing, if sent by U.S. express mail service or private overnight mail service, or (c) three (3) business days following the mailing thereof, if mailed by certified or registered mail, postage prepaid, return receipt requested, and all such notices shall be sent to the following addresses (or to such other address or addresses as a party may have advised the other in the manner provided herein): 4 If to the Corporation to: Grubb & Ellis Company 55 East 59th Street New York, New York 10022 Telephone No. (212) 326-4744 Facsimile No. (212) 326-4903 Attn: Chief Executive Officer -and- 2215 Sanders Road Suite 400 Northbrook, Illinois 60062 Telephone No. (847) 753-7500 Facsimile No. (847) 753-9060 Attn: Chief Administrator Officer with a copy simultaneously by like means: Zukerman Gore & Brandeis, LLP 900 Third Avenue New York, New York 10022 Telephone No. (212) 223-6700 Facsimile No. (212) 223-6433 Attention: Jeffrey D. Zukerman, Esq. If to the holder of the Series A Preferred Stock: Kojaian Ventures, L.L.C. 39400 Woodward Avenue Suite 250 Bloomfield Hills, Michigan 48304 Telephone No. (248) 644-7600 Facsimile No. (248) 644-7620 with a copy simultaneously by like means to: Carson Fischer, P.L.C. Third Floor 300 East Maple Road Birmingham, Michigan 48009 Telephone No. (248) 644-4840 Facsimile No. (248) 644-1832 Attn: Robert M. Carson, Esq. 5 (e) In the event of any Liquidation, each holder of Series A Preferred Stock shall have the right to elect to receive the benefits of Section 6(e) in lieu of receiving payment in Liquidation, pursuant to this Section 3. Upon payment of all amounts due under this Section 3, the holder of any shares of Series A Preferred Stock shall have no further rights in respect of such shares. 4. VOTING. (a) Each issued and outstanding share of Series A Preferred Stock shall be entitled to the number of votes equal to the Assumed Share Number (as adjusted from time to time pursuant to Section 5 and Section 6), at each meeting of stockholders of the Corporation (or pursuant to any action by written consent) with respect to any and all matters presented to the stockholders of the Corporation (including increasing or decreasing the number of authorized shares of capital stock of the Corporation) for their action or consideration. (b) In addition to any other rights provided by law, the Corporation shall not, without first obtaining the affirmative vote or written consent of the holders of a majority of the outstanding shares of Series A Preferred Stock: (i) amend or repeal any provision of the Corporation's Certificate of Incorporation or By-Laws; (ii) authorize or effect the payment of dividends or the redemption or repurchase of any capital stock of the Corporation or rights to acquire capital stock of the Corporation; or (iii) authorize or effect the issuance by the Corporation of any shares of capital stock or rights to acquire capital stock other than (x) pursuant to options, warrants, conversion or subscription rights in existence on March 7, 2002 (the "Initial Issuance Date") or thereafter approved with the consent of the holders of a majority of the then outstanding shares of Series A Preferred Stock or (y) pursuant to stock option, stock bonus or other employee stock plans for the benefit of the employees and consultants and outside directors of the Corporation or its subsidiaries in existence as of such date or thereafter approved with the consent of the holders of a majority of the then outstanding shares of Series A Preferred Stock. (c) The Corporation shall not amend, alter or repeal the preferences, special rights or other powers of the Series A Preferred Stock so as to affect adversely the Series A Preferred Stock, without the written consent or affirmative vote of the holders of at least a majority of the then outstanding shares of Series A Preferred Stock, given in writing or by vote at a meeting, consenting or voting (as the case may be) separately as a class. For this purpose, the authorization or issuance of any series of Preferred Stock with preference or priority over, or being on a parity with the Series A Preferred Stock as to the right to receive either dividends or amounts distributable upon liquidation, dissolution or winding up of the Corporation shall be deemed so to affect adversely the Series A Preferred Stock. (d) Notwithstanding anything set forth herein to the contrary, prior to May 31, 2002 (as same may be extended as provided below, the "Non-Voting Date"), the holder shall not exercise any voting rights, of any equity securities of the Corporation beneficially owned by the 6 holder, in any manner whatsoever, that could directly or indirectly hinder, prohibit, delay or prevent the consummation of, or materially alter the terms of, a proposed Section 3(c)(ii) Liquidation, PROVIDED, THAT in the event the Corporation enters into a definitive binding agreement with respect to a Section 3(c)(ii) Liquidation on or before the Non-Voting Date, then the Non-Voting Date shall automatically be extended to September 30, 2002. In addition, prior to the expiration of the Non-Voting Date, the holder shall not have the right, and shall cause its controlling member not to, and not to agree, to voluntarily transfer, donate, sell, assign or otherwise dispose of any preferred, common or other equity securities of the Corporation or any other interest therein. As used herein, the term "affiliate" or any correlative term shall mean, with respect to any party, any other party directly or indirectly controlling, controlled by, or under direct or indirect common control with, such party, or other than the father of the controlling member of Kojaian Ventures, L.L.C. 5. CALCULATION OF ASSUMED SHARE NUMBER. The Assumed Share Number shall be determined by dividing the Stated Value by the Strike Price then in effect. (a) The initial strike price, subject to adjustment as provided herein, is equal to $1.00 (the "Strike Price") based upon the Adjusted Outstanding Shares as of April 14, 2002 as adjusted pursuant to Sections 5 and 6 hereof. The applicable Assumed Share Number and Strike Price from time to time in effect is subject to adjustment as hereinafter provided. The Assumed Share Number shall be calculated to the nearest share of Common Stock. (b) As used herein, the term "Adjusted Outstanding Shares" shall mean the shares of Common Stock outstanding as of April 14, 2002, plus the shares of Common Stock underlying and either issuable or issued upon (i) those Common Stock options that have been granted prior to and were outstanding on April 14, 2002, and that have an exercise price equal to or less than $5.00 per share (other than such Common Stock options, if any, that are cancelled on or before the Adjustment Date), plus (ii) all Common Stock options that are authorized as of April 14, 2002, and thereafter granted on or before the Adjustment Date, plus (iii) 50% of all Common Stock options, if any, authorized after April 14, 2002, and thereafter granted on or before the Adjustment Date ("Newly Authorized Options"), provided that the number of Newly Authorized Options to be taken into account for the purposes of this subclause (iii) shall not exceed the number of any Common Stock options cancelled on or before the Adjustment Date. Notwithstanding anything set forth herein to the contrary, in the event that a Liquidation shall be consummated before the Adjustment Date, then for purposes of calculating the Adjusted Outstanding Shares, the Adjustment Date shall be deemed to be the date of consummation of such liquidation. (c) Whenever the Assumed Share Number and Strike Price shall be adjusted as provided in Section 6 hereof, the Corporation shall forthwith file at each office designated for the conversion of Series A Preferred Stock, a statement, signed by the Chairman of the Board, the President, any Vice President or Treasurer of the Corporation, showing in reasonable detail the facts requiring such adjustment and the Assumed Share Number that will be effective after such adjustment. The Corporation shall also cause a notice setting forth any such adjustments to be sent by mail, first class, postage prepaid, to each record holder of Series A Preferred Stock at his or its address appearing on the stock register. 7 6. ANTI-DILUTION PROVISIONS. (a) The Strike Price shall be subject to adjustment from time to time in accordance with this Section 6 commencing on April 14, 2002 (whether shares of the Series A Preferred Stock are outstanding or not). For purposes of this Section 6, the term "Number of Common Shares Deemed Outstanding" at any given time shall mean the number of Adjusted Outstanding Shares at such time (including (x) certain options, warrants and securities convertible into or exchangeable for shares of Common Stock and (y) without duplication, the number of shares of the Common Stock deemed to be outstanding under paragraphs 6(b)(1) to (9), inclusive, at such time, all in accordance with the provisions of this Section 6). (b) Except as provided in Section 6(c), 6(d) or 6(f) hereof, if and whenever on or after the Initial Issuance Date, the Corporation shall issue or sell, or shall in accordance with paragraphs 6(b)(1) to (9), inclusive, be deemed to have issued or sold any shares of its Common Stock for a consideration per share less than the Strike Price in effect immediately prior to the time of such issue or sale, then forthwith upon such issue or sale (the "Triggering Transaction"), the Strike Price shall, subject to paragraphs (1) to (9) of this Section 6(b), be reduced to the Strike Price (calculated to the nearest tenth of a cent) determined by dividing: (i) an amount equal to the sum of (x) the product derived by multiplying the Number of Common Shares Deemed Outstanding immediately prior to such Triggering Transaction by the Strike Price then in effect, plus (y) the consideration, if any, received by the Corporation upon consummation of such Triggering Transaction, by (ii) an amount equal to the sum of (x) the Number of Common Shares Deemed Outstanding immediately prior to such Triggering Transaction plus (y) the number of shares of Common Stock issued (or deemed to be issued in accordance with paragraphs 6(b)(1) to (9)) in connection with the Triggering Transaction. For purposes of determining the adjusted Strike Price under this Section 6(b), the following paragraphs (1) to (9), inclusive, shall be applicable: (1) In case the Corporation at any time shall in any manner grant (whether directly or by assumption in a merger or otherwise) any rights to subscribe for or to purchase, or any options for the purchase of, Common Stock or any stock or other securities convertible into or exchangeable for Common Stock (such rights or options being herein called "Options" and such convertible or exchangeable stock or securities being herein called "Convertible Securities"), whether or not such Options or the right to convert or exchange any such Convertible Securities are immediately exercisable and the price per share for which the Common Stock is issuable upon exercise, conversion or exchange (determined by dividing (x) the total amount, if any, received or receivable by the Corporation as consideration for the granting of such Options, plus the minimum aggregate amount of additional consideration payable to the Corporation upon the exercise of all such Options, plus, in the case of such Options which relate to Convertible Securities, the minimum aggregate amount of additional consideration, if any, payable upon the issue or sale of such Convertible Securities 8 and upon the conversion or exchange thereof, by (y) the total maximum number of shares of Common Stock issuable upon the exercise of such Options or the conversion or exchange of such Convertible Securities) shall be less than the Strike Price in effect immediately prior to the time of the granting of such Option, then the total maximum amount of Common Stock issuable upon the exercise of such Options or in the case of Options for Convertible Securities, upon the conversion or exchange of such Convertible Securities shall (as of the date of granting of such Options) be deemed to be outstanding and to have been issued and sold by the Corporation for such price per share. No adjustment of the Strike Price shall be made upon the actual issue of such shares of Common Stock or such Convertible Securities upon the exercise of such Options, except as otherwise provided in paragraph (3) below. (2) In case the Corporation at any time shall in any manner issue (whether directly or by assumption in a merger or otherwise) or sell any Convertible Securities, whether or not the rights to exchange or convert thereunder are immediately exercisable, and the price per share for which Common Stock is issuable upon such conversion or exchange (determined by dividing (x) the total amount received or receivable by the Corporation as consideration for the issue or sale of such Convertible Securities, plus the minimum aggregate amount of additional consideration, if any, payable to the Corporation upon the conversion or exchange thereof, by (y) the total maximum number of shares of Common Stock issuable upon the conversion or exchange of all such Convertible Securities) shall be less than the Strike Price in effect immediately prior to the time of such issue or sale, then the total maximum number of shares of Common Stock issuable upon conversion or exchange of all such Convertible Securities shall (as of the date of the issue or sale of such Convertible Securities) be deemed to be outstanding and to have been issued and sold by the Corporation for such price per share. No adjustment of the Strike Price shall be made upon the actual issue of such Common Stock upon exercise of the rights to exchange or convert under such Convertible Securities, except as otherwise provided in paragraph (3) below. (3) If the purchase price provided for in any Options referred to in paragraph (1), the additional consideration, if any, payable upon the conversion or exchange of any Convertible Securities referred to in paragraphs (1) or (2), or the rate at which any Convertible Securities referred to in paragraphs (1) or (2) are convertible into or exchangeable for Common Stock shall change at any time, the Strike Price in effect at the time of such change shall forthwith be readjusted to the Strike Price which would have been in effect at such time had such Options or Convertible Securities still outstanding provided for such changed purchase price, additional consideration or conversion rate, as the case may be, at the time initially granted, issued or sold. (4) On the expiration of any Option, the issuance of which initially caused a reduction in the Conversion Price in accordance with the provisions of 9 this Section 6(b), or the termination of any right to convert or exchange any Convertible Securities, the issuance of which initially caused a reduction in the Conversion Price in accordance with the provisions of this Section 6(b), the Strike Price then in effect hereunder shall forthwith be increased to the Strike Price which would have been in effect at the time of such expiration or termination had such Option or Convertible Securities, to the extent outstanding immediately prior to such expiration or termination, never been issued. (5) In case any Options shall be issued in connection with the issue or sale of other securities of the Corporation, together comprising one integral transaction in which no specific consideration is allocated to such Options by the parties thereto, such Options shall be deemed to have been issued without consideration. (6) In case any shares of Common Stock, Options or Convertible Securities shall be issued or sold or deemed to have been issued or sold for cash, the consideration received therefor shall be deemed to be the amount received by the Corporation therefor. In case any shares of Common Stock, Options or Convertible Securities shall be issued or sold for a consideration other than cash, the amount of the consideration other than cash received by the Corporation shall be the fair value of such consideration as determined in good faith by the Board of Directors. In case any shares of Common Stock, Options or Convertible Securities shall be issued in connection with any merger or acquisition in which the Corporation is the surviving corporation, the amount of consideration therefor shall be deemed to be the fair value of such portion of the net assets and business of the non-surviving corporation as shall be attributable to such Common Stock, Options or Convertible Securities, as the case may be. (7) The number of shares of Common Stock outstanding at any given time shall not include shares owned or held by or for the account of the Corporation, and the disposition of any shares so owned or held shall be considered an issue or sale of Common Stock for the purpose of this Section 6(b). (8) In case the Corporation shall declare a dividend or make any other distribution upon the stock of the Corporation payable in Options or Convertible Securities, then in such case any Options or Convertible Securities, as the case may be, issuable in payment of such dividend or distribution shall be deemed to have been issued or sold without consideration. (9) For purposes of this Section 6(b), in case the Corporation shall take a record of the holders of its Common Stock for the purpose of entitling them (x) to receive a dividend or other distribution payable in Common Stock, Options or in Convertible Securities, or (y) to subscribe for or purchase Common Stock, Options or Convertible Securities, then such record date shall be deemed to be the date of the issue or sale of the shares of Common Stock deemed to have been issued or sold upon the declaration of such dividend or the making of such other 10 distribution or the date of the granting of such right or subscription or purchase, as the case may be. (c) In the event the Corporation shall declare a dividend upon the Common Stock (other than a dividend payable in Common Stock) payable otherwise than out of earnings or earned surplus, determined in accordance with generally accepted accounting principles, including the making of appropriate deductions for minority interests, if any, in subsidiaries (herein referred to as "Liquidating Dividends"), then, Corporation shall pay the holders of the Series A Preferred Stock an amount equal to the aggregate value at the time of such exercise of all Liquidating Dividends based upon the Assumed Share Number, at the then applicable Strike Price prior to any payment to holders of Common Stock. For the purposes of this Section 6(c), a dividend other than in cash shall be considered payable out of earnings or earned surplus only to the extent that such earnings or earned surplus are charged an amount equal to the fair value of such dividend as determined in good faith by the Board of Directors. (d) In case the Corporation shall at any time (i) subdivide the outstanding Common Stock or (ii) issue a dividend on its outstanding Common Stock payable in shares of Common Stock, the Assumed Share Number in effect immediately prior to such dividend or combination shall be proportionately increased by the same ratio as the subdivision or dividend (with appropriate adjustments to the Strike Price in effect immediately prior to such subdivision or dividend). In case the Corporation shall at any time combine its outstanding Common Stock, the Assumed Share Number in effect immediately prior to such combination shall be proportionately decreased by the same ratio as the combination (with appropriate adjustments to the Strike Price in effect immediately prior to such combination). (e) If any capital reorganization or reclassification of the capital stock of the Corporation, or consolidation or merger of the Corporation with another corporation, or the sale of all or substantially all of its assets to another corporation shall be effected in such a way that holders of Common Stock shall be entitled to receive stock, securities, cash or other property with respect to or in exchange for Common Stock, then, as a condition of such reorganization, reclassification, consolidation, merger or sale, lawful and adequate provision shall be made whereby the holders of the Series A Preferred Stock shall have the right to acquire and receive, which right shall be prior to the rights of the holders of Junior Stock (but after and subject to the rights of holders of Senior Preferred Stock, if any), such shares of stock, securities, cash or other property issuable or payable (as part of the reorganization, reclassification, consolidation, merger or sale) with respect to or in exchange for such number of outstanding shares of Common Stock as would have been received based upon the Assumed Share Number at the Strike Price then in effect. The Corporation will not effect any such consolidation, merger or sale, unless prior to the consummation thereof the successor corporation (if other than the Corporation) resulting from such consolidation or merger or the corporation purchasing such assets shall assume by written instrument mailed or delivered to the holders of the Series A Preferred Stock at the last address of each such holder appearing on the books of the Corporation, the obligation to deliver to each such holder such shares of stock, securities or assets as, in accordance with the foregoing provisions, such holder may be entitled to purchase. (f) The provisions of this Section 6 shall not apply to any Common Stock issued, issuable or deemed outstanding under paragraphs 6(b)(1) to (9) inclusive: (i) pursuant to 11 options, warrants and conversion rights that are not deemed to be Adjusted Outstanding Shares, (ii) on conversion of the Series A Preferred Stock or the sale of any additional shares of Series A Preferred Stock, or (iii) any issuance of stock for which the holders of a majority of the outstanding shares of Series A Preferred Stock have waived in writing the rights contained in this Section 6. (g) If at any time or from time to time on or after the Initial Issuance Date, the Corporation shall grant, issue or sell any Options, Convertible Securities or rights to purchase property (the "Purchase Rights") pro rata to the record holders of any class of Common Stock and such grants, issuances or sales do not result in an adjustment of the Strike Price under Section 6(b) hereof, then each holder of Series A Preferred Stock shall be entitled to acquire (within thirty (30) days after the later to occur of the initial exercise date of such Purchase Rights or receipt by such holder of the notice concerning Purchase Rights to which such holder shall be entitled under Section 6(g)) and upon the terms applicable to such Purchase Rights either: (i) the aggregate Purchase Rights which such holder could have acquired if it had held the Assumed Share Number of shares of Common Stock immediately before the grant, issuance or sale of such Purchase Rights; provided that if any Purchase Rights were distributed to holders of Common Stock without the payment of additional consideration by such holders, corresponding Purchase Rights shall be distributed to the exercising holders of the Series A Preferred Stock as soon as possible after such exercise and it shall not be necessary for the exercising holder of the Series A Preferred Stock specifically to request delivery of such rights; or (ii) in the event that any such Purchase Rights shall have expired or shall expire prior to the end of said thirty (30) day period, the number of shares of Common Stock or the amount of property which such holder could have acquired upon such exercise at the time or times at which the Corporation granted, issued or sold such expired Purchase Rights. If any event occurs as to which, in the opinion of the Board of Directors, the provisions of this Section 6 are not strictly applicable or if strictly applicable would not fairly protect the rights of the holders of the Series A Preferred Stock in accordance with the essential intent and principles of such provisions, then the Board of Directors shall make an adjustment in the application of such provisions, in accordance with such essential intent and principles, so as to protect such rights as aforesaid, but in no event shall any adjustment have the effect of increasing the Strike Price as otherwise determined pursuant to any of the provisions of this Section 6 except in the case of a combination of shares of a type contemplated in Section 6(d) hereof and then in no event to an amount larger than the Strike Price as adjusted pursuant to Section 6(d) hereof. 7. SERIES A DIRECTORS. (a) During the period commencing upon the initial issuance of any Series A Preferred Stock by the Company and concluding thirty-six (36) months thereafter (the "36 Month Period"), the holders of a majority in interest of the Series A Preferred Stock shall have the right, at any time and from time to time during such 36 Month Period, to designate three directors the "Series A Directors". The Series A Directors, acting as a committee, shall have the 12 right, during the 36 Month Period, to approve (by the affirmative vote of the majority the Series A Directors) any of the transactions set forth in Section 7(b) below. Any meeting of the Series A Directors may be called by its Chairman, in the event that the Series A Directors elect to designate one of its members as its Chairman, or by a majority of the members of the Series A Directors. It is expressly understood and agreed that the designation of Series A Directors shall not in any fashion prohibit or limit the Board of Directors of the Company with respect to its duties, abilities or responsibilities under the GCL to consider, examine, review, analyze, discuss and/or vote on any matter that may legally come before the Board of Directors, including but not limited to those matters set forth in Section 7(b) below; PROVIDED THAT it is further expressly understood and agreed that in the event that the Series A Directors seek to exercise their right with respect to approving any transaction set forth in Section 7(b) below, then in order for the Company to approve, effect or implement any action set forth in Section 7(b) below, in addition to any approval of the Board of Directors or stockholders of the Company that may be required by the Certificate of Incorporation, Bylaws or applicable law, the affirmative approval of the Series A Directors shall be required as provided in this Section 7. The Series A Directors shall be full voting members of the Board of Directors. (b) During the 36 Month Period, the Series A Directors shall have a right of approval with respect to any of the following transactions: (i) the authorization or effecting of (a) any sale, lease, transfer or other disposition of all or substantially all the assets of the Corporation; (b) any merger or consolidation or other reorganization of the Corporation with or into another corporation, (c) the acquisition by the Corporation of another entity by means of a purchase of all or substantially all of the capital stock or assets of such entity, or (d) a liquidation, winding up, dissolution or adoption of any plan for the same. It is expressly understood and agreed that upon the expiration of the 36 Month Period, all of the terms and provisions of this Section 7 shall automatically terminate and shall be of no further force and effect. 8. LEGENDS. All shares of Series A Preferred Stock and Common Stock issuance upon conversion of the Series A Preferred Stock shall bear one or all of the following legends: (a) The Securities represented hereby have not been registered under the Securities Act of 1933, as amended (the "Act"), or under the Securities Laws of certain states. These securities are subject to restrictions on transferability and resale and may not be transferred or resold except as permitted under the Act and applicable state securities laws, pursuant to registration or exemption therefrom. Investors should be aware that they may be required to bear the financial risks of this investment for an indefinite period of time. The issuer of these securities may require an opinion of counsel in form and substance reasonably satisfactory to the issuer to the effect that any proposed transfer or resale is in compliance with the act and any applicable state securities laws." 13 (b) Any legend required by the Blue Sky laws of any state to the extent such laws are applicable to the securities represented by the certificate so legended. 14 IN WITNESS WHEREOF, Grubb & Ellis Company has caused this Certificate of Designations, Number, Voting Powers, Preferences and Rights of Series A Convertible Preferred Stock to be duly executed by its CEO this 19th day of September, 2002. GRUBB & ELLIS COMPANY By /s/ Barry M. Barovick --------------------------------------------- Name: Barry M. Barovick Title: CEO 15 EX-10.6 4 c25690_106.txt SEPARATION AGREEMENT Exhibit 10.6 SEPARATION AGREEMENT This Separation Agreement, dated as of July 12, 2002 (this "Separation Agreement"), is made by and between GRUBB & ELLIS COMPANY, a Delaware corporation having its executive offices in New York, New York (the "Company"), and MARK R. COSTELLO (the "Executive"). In consideration of the mutual covenants and agreements hereinafter set forth, the Company and the Executive agree as follows: 1. EFFECTIVE DATE. This Separation Agreement will become effective upon the latest of the following dates (the "Effective Date"): (1) the date on which the Separation Agreement has been executed by both the Company and the Executive; or (2) the date on which the Executive's general release attached hereto as Exhibit A becomes effective. 2. TERMINATION OF EMPLOYMENT AGREEMENT. Except and to the extent provided in Paragraph 9 of this Separation Agreement, the Employment Agreement dated as of July 5, 2001 between the Company and the Executive, and any exhibits and attachments thereto (the "Employment Agreement") is hereby terminated as of the Effective Date. 3. RESIGNATION OF EXECUTIVE. The Executive agrees that as of the date hereof, he hereby resigns from his position as Chief Operating Officer of the Company. 4. SEPARATION PAYMENTS. The Company agrees to pay the Executive the following sums, net of applicable withholdings for taxes and customary payroll deductions (collectively, the "Separation Payments"): (i) Five (5) days after the Effective Date, a lump sum in cash equal to Two Hundred Fifty Thousand Dollars ($250,000) representing Executive's 2002 guaranteed bonus; (ii) Cash payments of Fifty-Four Thousand One Hundred Sixty Six and 67/00 Dollars ($54,166.67) per month, for the period commencing as of the Effective Date and ending on August 10, 2003, payable semi-monthly, or Six Hundred Fifty Thousand Dollars ($650,000) per annum, representing base salary due the Executive pursuant to Section 9(a) of the Employment Agreement, which shall be prorated as necessary; (iii) Five (5) days after the Effective Date, Forty Three Thousand Nine Hundred Twenty Nine and 08/100 Dollars ($43,929.08) representing the equivalent of the benefits that the Executive is entitled to receive from the Company for healthcare, dental, vision, life insurance, disability coverages, and perquisites for the period commencing as of the Effective Date and ending August 10, 2003, which has in part been grossed up to cover the Executive's income taxes; and (iv) Five (5) days after the Effective Date, $25,850.00 representing 82.72 hours of accrued and unused vacation pay. Subject to the provisions of Paragraph 6 below, the Executive agrees that the Separation Payments described in this Separation Agreement are in exchange for any and all rights or claims of the Executive of any nature whatsoever, whether at law or in equity, under any and all prior oral and written arrangements, understandings or agreements, including without limitation, the Employment Agreement, to severance payments, bonus payments, or any other consideration or benefits. 6. BENEFIT PLANS. After the Effective Date, except for rights under various employee stock option, deferred compensation and 401(k) plans in which the Executive is a participant, the Executive will no longer be covered by or eligible for any benefits under any Company employee benefit plans in which the Executive currently participates. After the Effective Date, Executive will receive by separate cover information regarding the Executive's rights to health insurance continuation (COBRA) and any 401(k), stock option and deferred compensation plan benefits. To the extent that the Executive has such rights, nothing in this Agreement will impair those rights. 7. NON-DISPARAGEMENT; NON-ASSISTANCE. (a) The Executive agrees that, without the prior written consent of the Company, neither he, nor anyone acting on his behalf, will: (a) make derogatory, disparaging, or critical statements to any person or entity about the "Released Parties" (as that term is defined in EXHIBIT A annexed hereto); or (b) for a three (3) year period commencing with the Effective Date, make any public disclosures or communicate, directly or indirectly, with the press or other media, including but not limited to through the issuance of a press release, concerning the past or present employees or businesses of the Company or any of its related affiliates or Executive's employment with the Company or the termination thereof. The Company agrees that, without the prior written consent of the Executive, it will not, for a three (3) year period commencing on the Effective Date, make derogatory, disparaging, or critical statements about the Executive, including but not limited to through the issuance of a press release, press interview or in Company meetings, or concerning the Executive's employment with the Company or the termination thereof. Except as required by law, the Company shall not issue any press release after the Effective Date regarding the termination of the Executive's employment without the Executive's prior written consent, which shall not be unreasonably withheld or delayed, PROVIDED, HOWEVER, that nothing contained herein shall prohibit the Company from making any public disclosures with respect to the Executive in its public filings required to be made under federal or state securities laws or pursuant to the rules or regulations of any regulatory or administrative bodies or stock exchanges. (b) The Executive agrees that neither he, nor anyone acting on his behalf will, unless compelled by legal process, assist or encourage others to assert claims or to commence or maintain litigation against the Released Parties. 2 8. CONFIDENTIALITY. The Executive agrees that he will not, unless required by law or otherwise permitted by express written permission from or request by the Company, disclose to anyone any information regarding the following: (a) any non-public information regarding the Company, including its practices, procedures, trade secrets, finances, client lists, or marketing of the Company's services. (b) the terms of this Agreement, except that the Executive may disclose this information to members of his immediate family and to his attorney, accountant or other professional advisor(s) to whom he must make the disclosure in order for them to render professional services to him. The Executive shall instruct them, however, to maintain the confidentiality of this information just as the Executive must, and any breach of this obligation of confidentiality by such family member or professional advisor(s) shall be deemed to be a breach by the Executive. If required to disclose the terms of this Agreement by law, the Executive shall provide the Company with sufficient notice prior to any such disclosure, including the basis for the legal requirement to disclose, to allow the Company to seek a protective order preventing the disclosure. 9. NON-SOLICITATION. The executive agrees that for the period ending one (1) year after the Effective Date, the Executive shall not, without the prior permission of the Chief Executive Officer of the Company, directly or indirectly, on behalf of himself or any other person or entity solicit for employment any then current executive, employee or independent contractor of the Company, or directly or indirectly request or induce any then current executive, employee or independent contractor of the Company to leave the employ of, or association with, the Company, or directly or indirectly hire any individual who was an executive, employee or independent contractor of the Company at any time during the six (6) month period prior to the date of hiring. The Executive further reaffirms his "no solicitation" obligations pursuant to Section 10 of the Employment Agreement, which are hereby incorporated by reference herein as though set forth herein in full. Notwithstanding the foregoing to the contrary, nothing contained herein (whether by incorporation by reference or otherwise) shall operate to (i) prohibit the Executive from hiring Mary Hummel, his administrative assistant, at any time (ii) cause the Executive to be in breach of the non-solicitation provisions hereof if any future employer shall hire an employee or independent contractor of the Company so long as the Executive was not, directly or indirectly, involved in the solicitation or hiring of such person. For purposes hereof, the term "independent contractor" shall mean any broker or consultant to the Company. 10. FORFEITURE. If the Board of Directors of the Company reasonably determines that the Executive has engaged in a "Prohibited Action" (as defined in the next paragraph), then: (a) the Company and the Executive agree that any issue as to whether the Executive has engaged in a Prohibited Action and the amount of damages, if any, resulting to the Company from such Prohibited Action shall be determined in accordance with the provisions of Paragraph 13 hereof; and (b) no further Separation Payments will be payable to the Executive but shall be escrowed with the Company's outside counsel, and the Executive's right to exercise any stock options will be suspended while these issues are in arbitration. If the arbitrator determines (or if the Company and the Executive otherwise agree) that the Executive has engaged in a Prohibited Action and that the Company should be awarded a specified amount to compensate it for damages resulting from such 3 Prohibited Action (the "Damage Amount"), then the Company shall offset any unpaid amounts otherwise payable under this Separation Agreement ("Unpaid Severance Amount") by the Damage Amount. If the Damage Amount exceeds the Unpaid Severance Amount, then the Executive shall pay to the Company in a lump sum the amount by which the Damage Amount exceeds the Unpaid Severance Amount within 15 days after the date on which the arbitrator renders its decision (or the date on which the Company and the Executive otherwise agree). For purposes of this Separation Agreement, a "Prohibited Action" means the Executive's breach of the provisions of this Separation Agreement, including without limitation the Non-Disparagement and Non-Assistance provisions of Paragraph 7, the Confidentiality provisions of Paragraph 8, and the Non-Solicitation provisions of Paragraph 9 hereof. 11. GENERAL RELEASE. As a condition to the receipt of any Separation Payments under Paragraph 4, the Executive agrees to execute a general release, in the form attached hereto as Exhibit A. 12. WITHHOLDING. Any payments made under this Separation Agreement shall be subject to any applicable federal, state, and local tax withholdings. 13. ARBITRATION. Any dispute or controversy between the Company and the Executive, including, without limitation, any and all matters relating to this Separation Agreement, the Executive's employment with the Company and the cessation thereof, and all matters arising under any federal, state or local statute, rule or regulation or principle of contract law or common law, including but not limited to Title VII of the Civil Rights Act of 1964, AS AMENDED, 42 U.S.C.ss.ss.2000e ET SEQ., the Age Discrimination in Employment Act of 1967, AS AMENDED, 29 U.S.C.ss.ss.621 ET SEQ., the Americans with Disabilities Act of 1990, 42 U.S.C.ss.ss.12101 ET SEQ., the Employee Retirement Income Security Act of 1974, AS AMENDED, 29 U.S.C.ss.ss.1001 ET SEQ., the New York State Human Rights Law, AS AMENDED, N.Y. Exec. Law ss.ss.290 ET SEQ., the New York City Human Rights Law, AS AMENDED, N.Y.C. Admin. Code ss.ss.8-101 ET SEQ., and any other equivalent state or local statutes, will be settled by arbitration administered by the American Arbitration Association ("AAA") in New York, New York pursuant to the AAA's National Rules for the Resolution of Employment Disputes (or their equivalent). Notwithstanding the foregoing, at the Company's option, in addition to and not in lieu of any other rights under this Separation Agreement or at law, the Company shall have the right to injunctive relief in any federal or state court to enjoin the breach of any provision of this Separation Agreement. In the event of the Company's breach of this Separation Agreement, the Executive shall be permitted to seek damages against the Company, as well as the acceleration of all payments payable hereunder. Each party will be responsible to pay its own fees and costs incurred under this Paragraph 13. 14. LOAN FORGIVENESS; LOAN AGREEMENT PAYMENT. (a) Reference is hereby made to that certain Loan Agreement dated July 23, 2001 between the Company and the Executive and the Retention Bonus Program and Promissory Note also dated July 23, 2001 (collectively, the "Loan Agreement"). The Company hereby confirms that, in accordance with and pursuant to the Retention Bonus Program and in addition to the Separation 4 Payments provided herein, the Executive shall be given a bonus as of the Effective Date equal to the outstanding and unpaid accrued interest and principal under the loan outstanding under the Loan Agreement. Such bonus payment shall be applied to retire and cancel the Loan Agreement. (b) No sooner than ten (10) days prior to the date upon which the executive shall file his 2002 U.S. federal income tax return (the "Payment Date"), the Company shall pay to the Executive an amount necessary to pay the applicable income taxes on the interest on the loan made to the Executive (pursuant to the Loan Agreement) that have not been previously paid to him; PROVIDED, HOWEVER, that at least sixty (60) days prior to the Payment Date, the Executive shall have furnished the Company with his accountant's written certification of the amount of such taxes thereon, which shall be reasonably approved by the Company's accountants. 15. RETURN OF PROPERTY. The Executive agrees to return to the Company, by the Effective Date, any and all information and materials, whether in paper, magnetic, electronic or other form, that Executive may possess relating to the Company's practices, procedures, trade secrets, finances, client lists, or marketing of the Company's services. In addition, the Executive shall also, by the Effective Date, return to the Company all laptops, cellphones, pda's, Blackberrys, credit cards, keys, building passes and all other property of the Company. 16. OFFICES SERVICES. The Company shall reimburse the Executive for the cost to lease an office in an executive office suite location for a period of sixty (60) days at any time between the Effective Date and December 31, 2002, at a cost to the Company not to exceed $5,000 in the aggregate. Subject to the Executive's compliance with the other terms hereof, the Company will permit the Executive to maintain remote access to his voicemail through December 31, 2002 and, during such period, the Company will not reassign the Executive's current office telephone number to any other employee or other person. 17. COOPERATION. Subsequent to the Effective Date and through August 11, 2003, the Executive shall cooperate with the Company and provide such assistance to the Company as the Company may reasonably request, from time to time, concerning matters with which the Executive was engaged on the Company's behalf provided that such assistance does not conflict with the Executive's then responsibilities to another employer. 18. SEVERABILITY. In the event that any of the provisions of this Separation Agreement or the application of any such provisions to the Company or the Executive with respect to obligations hereunder will be held to be unlawful or unenforceable by any court or arbitrator, the remaining portions of this Separation Agreement will remain in full force and effect and will not be invalidated or impaired in any manner. 19. GOVERNING LAW. This Separation Agreement will be governed by and construed in accordance with the laws of the State of New York, without giving effect to the principles of conflicts of laws. 20. ENTIRE AGREEMENT. This Separation Agreement and EXHIBIT A annexed hereto contains the entire agreement between the Company and the Executive with respect to the subject 5 matter hereof and supersedes all prior agreements and understandings, whether oral or written, between the Company and the Executive with respect to the subject matter of this Separation Agreement. This Separation Agreement may be amended only by an agreement in writing signed by both the Company and the Executive. 21. COUNTERPARTS. This Separation Agreement may be executed in any number of originals or facsimile counterparts, each of which so executed will be deemed to be an original, and such counterparts will together constitute but one agreement. IN WITNESS WHEREOF, the Company has caused this Separation Agreement to be duly executed on its behalf by an officer duly authorized, and the Executive has duly executed this Separation Agreement, all as of the date and year first written above. GRUBB & ELLIS COMPANY By: /s/ Barry Barovick ------------------ Name: Barry Barovick Title: Chief Executive Officer /s/ Mark R. Costello -------------------- Mark Costello 6 GENERAL RELEASE BY MARK COSTELLO FOR AND IN CONSIDERATION OF the terms and conditions of the Separation Agreement dated as of July 11, 2002 by and between MARK R. COSTELLO (the "Executive") and GRUBB & ELLIS COMPANY (the "Company") (the "Separation Agreement"), the Executive agrees, on behalf of himself, his heirs, executors, administrators and assigns, to release and discharge the Company, and all of its current and former officers, directors, employees, agents, stockholders, subsidiaries, divisions, affiliates, parents, successors and assigns ("Released Parties") from any and all manner of actions and causes of action, suits, debts, dues, accounts, bonds, covenants, contracts, agreements, judgments, charges, claims, and demands whatsoever ("Losses") which the Executive, his heirs, executors, administrators and assigns have, or may hereafter have against the Released Parties or any of them arising out of or by reason of any cause, matter or thing whatsoever from the beginning of the world to the date hereof, including without limitation any and all matters relating to his Employment Agreement with the Company, his employment by the Company and the cessation thereof, and all matters arising under any federal, state or local statute, rule or regulation or principle of contract law or common law, including but not limited to Title VII of the Civil Rights Act of 1964, AS AMENDED, 42 U.S.C.ss.ss.2000e ET SEQ., the Age Discrimination in Employment Act of 1967, as amended, 29 U.S.C.ss.ss.621 ET SEQ., the Americans with Disabilities Act of 1990, AS AMENDED, 42 U.S.C.ss.ss.12101 ET SEQ., the Employee Retirement Income Security Act of 1974, AS AMENDED, 29 U.S.C.ss.ss.1001 et seq., the New York State Human Rights Law, AS AMENDED, N.Y. Exec. Law ss.ss.290 ET SEQ., the New York City Human Rights Law, AS AMENDED, N.Y.C. Admin. Code ss.ss.8-101 ET SEQ., and any other equivalent state or local statute; PROVIDED, HOWEVER, that the Executive does not release and discharge the Released Parties from any Losses arising out of or in connection with his Separation Agreement. It is understood that nothing in this General Release is to be construed as an admission on behalf of the Released Parties of any wrongdoing with respect to the Executive, any such wrongdoing being expressly denied. The Executive represents and warrants that he fully understands the terms of this General Release, that he has had the benefit of advice of counsel, and that he knowingly and voluntarily, of his own free will without any duress, being fully informed and after due deliberation, accepts its terms and signs the same as his own free act. The Executive understands that as a result of executing this General Release, he will not have the right to assert that the Company unlawfully terminated his employment or violated any of his rights in connection with his employment. The Executive affirms that he has not filed, and agrees not to initiate or cause to be initiated on his behalf, any complaint, charge, claim, or proceeding against the Released Parties before any federal, state, or local agency, court or other body relating to his employment and the cessation thereof, and agrees not to voluntarily participate in such a proceeding. The Executive waives any right he may have to benefit in any manner from any relief (whether monetary or otherwise) arising out of any such proceeding. The Executive, having had the advice of counsel, knowingly waives the remainder of the 21-day period he had from July 11, 2002, to consider whether to execute this General Release. Upon the Executive's execution of this General Release, he will have seven (7) days after execution to revoke it. In the event of revocation, the Executive must present written notice of revocation to Mr. Barry Barovick of the Company. If seven (7) days pass without such notice of revocation, this General Release shall become binding and effective on the eighth (8th) day (the "Release Effective Date"). This General Release shall be governed by the laws of the State of New York without giving effect to the principles of conflicts of law. /s/ Mark R. Costello 7/31/02 - --------------------- ------- Mark R. Costello Date 7 EX-21 5 c25690_ex21.txt SUBSIDIARIES OF GRUBB & ELLIS COMPANY Exhibit 21 SUBSIDIARIES OF GRUBB & ELLIS COMPANY
Subsidiaries State of Incorporation ------------ ---------------------- 1. Aequus Property Management Company Texas 2. Collective Services, Inc. Pennsylvania 3. Grubb & Ellis Affiliates, Inc. Delaware 4. Grubb & Ellis Asset Services Company Delaware 5. Grubb & Ellis Europe, Inc. California 6. Grubb & Ellis Institutional Properties, Inc. California 7. Grubb & Ellis Management Services, Inc. Delaware SUBSIDIARIES OF GRUBB & ELLIS MANAGEMENT SERVICES, INC.: a. Grubb & Ellis Management Services of Michigan, Michigan Inc. ("GEMS of Michigan") b. Grubb & Ellis Management Services of Canada, Inc. Canada c. GEMS Mexicana, S. DE R.L. DE C.V. (98% owned Mexico by GEMS, 2% owned by GEMS of Michigan, Inc.) d. Crane Realty & Management Co. California SUBSIDIARIES OF CRANE REALTY & MANAGEMENT CO.: 1. Crane Realty Services, Inc. California 8. Grubb & Ellis Mortgage Group, Inc. California 9. Grubb & Ellis Mortgage Services, Inc. California 10. Grubb & Ellis New York, Inc. New York 11. Grubb & Ellis of Michigan, Inc. Michigan 12. Grubb & Ellis of Nevada, Inc. Nevada 13. Grubb & Ellis of Oregon, Inc. Washington 14. Grubb & Ellis Realty Advisers, Inc. California 15. Grubb & Ellis Consulting Services Company Florida SUBSIDIARIES OF GRUBB & ELLIS CONSULTING SERVICES COMPANY: a. Landauer Hospitality International, Inc. Delaware b. Landauer Securities, Inc. Massachusetts 16. Grubb & Ellis Southeast Partners, Inc. California 17. HSM Inc.: Texas SUBSIDIARIES OF HSM INC.: a. Henry S. Miller Financial Corporation Texas b. HSM Condominium Corporation Texas c. HSM Real Estate Services Corporation Texas d. Miller Capital Corporation Texas e. Miller Real Estate Services Corporation Texas 18. Leggat McCall/Grubb & Ellis, Inc. Massachusetts 19. Montclair Insurance Company, Ltd. Bermuda 20. The Schuck Commercial Brokerage Company Colorado 21. White Commercial Real Estate California 22. Wm. A. White/Grubb & Ellis, Inc. New York 23. Wm. A White/Tishman East Inc. New York
EX-23.1 6 c25690_ex23-1.txt 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 No. 333-81938) pertaining to the registration of additional shares for the Grubb & Ellis Employee Stock Purchase Plan, the Registration Statement (Form S-8 No. 333-63136) pertaining to the Grubb & Ellis Company 2000 Stock Option Plan, the Stock Purchase Agreement between the Company and Barry M. Barovick, dated as of May 15, 2001 and the Employment Agreement between the Company and Barry M. Barovick dated as of May 15, 2001, the Registration Statement (Form S-8 No. 333-67729) pertaining to the Grubb & Ellis Company Deferred Compensation Plan, the Registration Statement (Form S-8 No. 333-73331) pertaining to the Grubb & Ellis 1998 Stock Option Plan and the 1993 Stock Option Plan for Outside Directors of Grubb & Ellis Company, the Registration Statement (Form S-3 No. 333-48515) pertaining to the registration of $150,000,000 of debt securities, preferred stock, common stock, equity warrants and debt warrants, the Registration Statement (Form S-8 No. 333-42741) pertaining to the Grubb & Ellis Company 1990 Amended and Restated Stock Option Plan and Grubb & Ellis Employee Stock Purchase Plan, the Registration Statements (Form S-8 Nos. 33-71580, 33-35640 and 2-98541) pertaining to the 1990 Amended and Restated Stock Option Plan, as amended, and the Registration Statement (Form S-8 No. 33-71484) pertaining to the 1993 Stock Option Plan for Outside Directors of Grubb & Ellis Company, of our report dated September 19, 2002, except for the third paragraph of Note 17, as to which the date is October 8, 2002, with respect to the consolidated financial statements of Grubb & Ellis Company included in the Annual Report (Form 10-K) for the year ended June 30, 2002. Chicago, Illinois October 14, 2002 EX-99.1 7 c25690_ex99-1.txt Exhibit 99.1 Written Statement of Chief Executive Officer and Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 The undersigned, the Chief Executive Officer and the Chief Financial Officer of Grubb & Ellis Company (the "Company"), each hereby certifies that to his knowledge, on the date hereof: (a) the Form 10-K of the Company for the period ended June 30, 2002 filed on the date hereof with the Securities and Exchange Commission (the "Report") fully complies with the requirements of Section 13 (a) or 15 (d) of the Securities Exchange Act of 1934; and (b) information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/ Barry M. Barovick --------------------- Barry M. Barovick President, Chief Executive Officer and a director October 11, 2002 /s/ Ian Y. Bress ---------------- Ian Y. Bress Chief Financial Officer October 11, 2002 EX-99.2 8 c25690_ex99-2.txt ANNUAL EARNINGS RELEASE EXHIBIT 99.2 [GRAPHIC OMITTED] GRUBB & ELLIS(R) MEDIA RELEASE Property Solutions Worldwide FOR IMMEDIATE RELEASE CONTACT: Ian Bress, Chief Financial Officer ian.bress@grubb-ellis.com 212.326.4784 ------------------------- GRUBB & ELLIS REPORTS FISCAL YEAR 2002 RESULTS NEW YORK, NY (Sept. XX, 2002) - Grubb & Ellis Company (NYSE: GBE), one of the largest commercial real estate firms in the U.S., today reported a net loss for the fiscal year ended June 30, 2002 of $15.5 million, or $1.09 per diluted share, compared with net income of $1.4 million, or $.08 per diluted common share, for the same period a year ago. For the fourth quarter of fiscal 2002, the company reported a net loss of $7.9 million, or $.53 per diluted common share, compared with a net loss of $1.6 million, or $.12 per diluted common share, a year earlier. Total revenue for fiscal 2002 was $313.5 million, a decrease of 24 percent from $412.0 million generated a year earlier. For the fiscal 2002 fourth quarter, total revenue was $77.1 million, 6 percent lower than $82.0 million in the fiscal 2001 fourth quarter. Earnings before interest, income taxes, depreciation and amortization (EBITDA), before non-recurring items, was a loss of $1.7 million for fiscal 2002, compared with income of $27.9 million for fiscal 2001. For the 2002 fourth quarter, the company's EBITDA was $219,000, compared with $3.3 million in the fourth quarter of 2001. "There's no question that fiscal 2002 was a difficult year for our company and the commercial real estate services industry as a whole. We're pleased that fourth quarter revenue, while still below last year's levels, reflects an improving trend indicating that transaction velocity is beginning to grow. Expense control remains a priority as we position Grubb & Ellis for the long-term, " said Barry M. Barovick, President and Chief Executive Officer. "The Company continues to maintain stability and sufficient capitalization to weather a continuing downturn while remaining focused on positioning itself for long-term success and leadership in the industry when the economic conditions improve." - more - [GRAPHIC OMITTED] Grubb & Ellis Knight Frank Global Alliance GRUBB & ELLIS COMPANY is one of the world's leading providers of integrated real estate services. Through its comprehensive global array of consulting, transaction and management solutions, Grubb & Ellis has established an innovative "continuum" of multi-level services for businesses and corporations worldwide, including strategic planning, property and asset management services, and transaction expertise in both corporate and investment real estate. With the collective resources of more than 8,000 people in over 200 offices in 30 countries, including its domestic affiliates and a strategic initiative with Knight Frank, one of the leading property consulting firms in Europe, Africa and Asia Pacific, Grubb & Ellis provides a unique "single point of contact" approach for clients that empowers its professionals to approach commercial real estate issues seamlessly. For more information, visit the company's website at www.grubb-ellis.com. EDITOR'S NOTE: CERTAIN STATEMENTS CONTAINED IN THIS PRESS RELEASE, WHICH ARE NOT HISTORICAL FACTS, ARE FORWARD-LOOKING STATEMENTS, AS THE TERM IS DEFINED IN THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995. SUCH FORWARD-LOOKING STATEMENTS ARE SUBJECT TO RISKS AND UNCERTAINTIES THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE CURRENTLY ANTICIPATED DUE TO A NUMBER OF FACTORS, WHICH INCLUDE, BUT ARE NOT LIMITED TO: ISSUES AFFECTING REAL ESTATE ON BOTH A NATIONAL AND LOCAL BASIS, GENERAL ECONOMIC CONDITIONS, THE ABILITY OF THE COMPANY TO EFFECTIVELY RESPOND TO CHANGING MARKET CONDITIONS, AND OTHER FACTORS THAT ARE DISCUSSED IN THE COMPANY'S ANNUAL REPORT ON 10-K FOR THE FISCAL YEAR ENDED JUNE 30, 2001 AND THE COMPANY'S QUARTERLY REPORTS ON FORM 10-Q FOR THE THREE (3) MONTH PERIODS ENDED SEPTEMBER 30, 2001, DECEMBER 31, 2001 AND MARCH 31, 2002, ALL OF WHICH HAVE BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION. ### --TABLES FOLLOW -- GRUBB & ELLIS COMPANY CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT SHARE DATA) (UNAUDITED)
Three Months Ended Years Ended June 30, June 30, 2002 2001 2002 2001 ---- ---- ---- ---- Revenue Transaction services fees $ 64,527 $ 68,924 $ 262,077 $ 358,462 Management services fees 12,618 13,041 51,399 53,500 --------- --------- --------- --------- Total revenue 77,145 81,965 313,476 411,962 --------- --------- --------- --------- Costs and expenses Services commissions 36,640 38,531 151,900 216,646 Salaries, wages and benefits 23,185 23,459 97,497 98,847 Selling, general and administrative 17,101 16,643 65,828 68,550 Depreciation and amortization 2,428 2,940 10,706 11,635 Impairment and other non-recurring expenses 1,072 2,366 1,749 6,222 --------- --------- --------- --------- Total costs and expenses 80,426 83,939 327,680 401,900 --------- --------- --------- --------- Operating income (loss) (3,281) (1,974) (14,204) 10,062 Other income and expenses Interest income 81 147 401 1,640 Interest expense (918) (730) (2,861) (1,422) --------- --------- --------- --------- Income (loss) before income taxes (4,118) (2,557) (16,664) 10,280 Income tax benefit (provision) 1,413 975 6,401 (5,372) Deferred tax asset valuation charge (5,214) - (5,214) - --------- --------- --------- --------- Income (loss) before extraordinary item and cumulative effect (7,919) (1,582) (15,477) 4,908 Extraordinary loss on extinguishment of debt, net of tax - - - (406) Cumulative effect of accounting change - - - (3,133) ========= ========= ========= ========= Net income (loss) $ (7,919) $ (1,582) $ (15,477) $ 1,369 ========= ========= ========= ========= Earnings per share - diluted $ (0.53) $ (0.12) $ (1.09) $ 0.08 ========= ========= ========= ========= EBITDA(1) $ 219 $ 3,332 $ (1,749) $ 27,919 ========= ========= ========= ========= Weighted average shares outstanding (diluted) 15,032 13,315 14,148 17,975 ========= ========= ========= =========
1. Earnings before interest, income taxes, depreciation and amortization, adjusted to exclude non-recurring items. GRUBB & ELLIS COMPANY FINANCIAL STATEMENTS ARE REPORTED FOR FISCAL YEARS ENDED JUNE 30, 2002 AND JUNE 30, 2001. [GRAPHIC OMITTED] Grubb & Ellis Knight Frank Global Alliance GRUBB & ELLIS COMPANY SELECTED CONDENSED CONSOLIDATED BALANCE SHEET DATA (IN THOUSANDS) (UNAUDITED) June 30, June 30, 2002 2001 --------- --------- ASSETS Cash and cash equivalents $ 14,085 $ 7,248 Total current assets $ 41,706 $ 38,592 Total assets $ 90,377 $ 92,426 LIABILITIES Total debt $ 42,410 $ 37,000 Total current liabilities $ 37,455 $ 37,376 Total liabilities $ 84,511 $ 76,110 Total stockholders' equity $ 5,866 $ 16,316 Total liabilities and stockholders' equity $ 90,377 $ 92,426 -----END PRIVACY-ENHANCED MESSAGE-----