-----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, P6QPbHFIRaFytmUzDTnOzmbG974op5CaaYZybrvryxx5o8t8lZd7gPa1oDwi2cYx K3VXI/S5CPm0Ayjyp4fsUA== 0000930413-02-003236.txt : 20021118 0000930413-02-003236.hdr.sgml : 20021118 20021115103116 ACCESSION NUMBER: 0000930413-02-003236 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20020930 FILED AS OF DATE: 20021114 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-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-08122 FILM NUMBER: 02828665 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-Q 1 c26144_10q.txt FORM 10-Q SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 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 94-1424307 ------------------------------- ------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 2215 Sanders Road, Suite 400, Northbrook, IL 60062 ------------------------------------------------------ (Address of principal executive offices) (Zip Code) (847) 753-7500 ------------------------------------------------------ (Registrant's telephone number, including area code) No Change ------------------------------------------------------ (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes _X_ No ___ Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes ___ No _X_ 15,116,825 ------------------------------------------------------ (Number of shares outstanding of the registrant's common stock at November 1, 2002) PART I FINANCIAL INFORMATION 2 ITEM 1. FINANCIAL STATEMENTS GRUBB & ELLIS COMPANY CONDENSED CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE DATA) (UNAUDITED) ASSETS
September 30, June 30, 2002 2002 ------------- --------- Current assets: Cash and cash equivalents $ 11,202 $ 14,085 Services fees receivable, net 13,918 13,212 Other receivables 3,036 3,396 Professional service contracts, net 1,589 1,974 Prepaid income taxes 6,950 6,890 Prepaid and other current assets 1,638 586 Deferred tax assets, net 1,657 1,563 -------- -------- Total current assets 39,990 41,706 Noncurrent assets: Equipment, software and leasehold improvements, net 17,186 17,843 Goodwill, net 26,958 26,958 Deferred tax assets, net 1,004 947 Other assets 3,143 2,923 -------- -------- Total assets $ 88,281 $ 90,377 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 4,524 $ 5,569 Commissions payable 5,011 5,347 Credit facility debt 7,300 5,750 Accrued compensation and employee benefits 17,080 16,243 Deferred commissions payable 1,276 403 Other accrued expenses 4,702 4,143 -------- -------- Total current liabilities 39,893 37,455 Long-term liabilities: Credit facility debt 24,000 26,000 Note payable - affiliate, net -- 10,660 Accrued claims and settlements 7,354 7,823 Other liabilities 2,406 2,573 -------- -------- Total liabilities 73,653 84,511 -------- -------- Stockholders' equity: Preferred stock: 1,000,000 shares authorized; 11,725 Series A shares issued and outstanding at $1,000 stated value at September 30, 2002 11,725 -- Common stock, $.01 par value: 50,000,000 shares authorized; 15,078,299 shares issued and outstanding at September 30, 2002 and 15,028,839 shares at June 30, 2002 151 150 Additional paid-in-capital 71,403 72,084 Accumulated other comprehensive loss (332) (283) Retained deficit (68,319) (66,085) -------- -------- Total stockholders' equity 14,628 5,866 -------- -------- Total liabilities and stockholders' equity $ 88,281 $ 90,377 ======== ========
See notes to condensed consolidated financial statements. 3 GRUBB & ELLIS COMPANY CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT SHARE DATA) (UNAUDITED)
For the three months ended September 30, ----------------------------- 2002 2001 ------------ ------------ Revenue: Transaction services fees $ 64,651 $ 63,610 Management services fees 12,199 13,178 ------------ ------------ Total revenue 76,850 76,788 ------------ ------------ Costs and expenses: Services commissions 38,112 36,793 Salaries, wages and benefits 22,873 25,153 Selling, general and administrative 15,680 15,415 Depreciation and amortization 2,047 2,800 Other non-recurring expense 900 -- ------------ ------------ Total costs and expenses 79,612 80,161 ------------ ------------ Total operating loss (2,762) (3,373) Other income and expenses: Interest income 93 116 Interest expense (934) (650) ------------ ------------ Loss before income taxes (3,603) (3,907) Benefit for income taxes 1,369 1,641 ------------ ------------ Net loss (2,234) (2,266) Preferred stock dividends accrued (42) -- ------------ ------------ Net loss to common stockholders $ (2,276) $ (2,266) ============ ============ Net loss per weighted average common share outstanding: Basic - $ (0.15) $ (0.17) ============ ============ Diluted - $ (0.15) $ (0.17) ============ ============ Weighted average common shares outstanding: Basic - 15,071,848 13,447,107 ============ ============ Diluted - 15,071,848 13,447,107 ============ ============
See notes to condensed consolidated financial statements. 4 GRUBB & ELLIS COMPANY CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS) (UNAUDITED)
For the three months ended September 30, -------------------------- 2002 2001 -------- -------- Cash Flows from Operating Activities Net loss $ (2,234) $ (2,266) Depreciation and amortization expense 2,047 2,800 Other adjustments to reconcile net loss to net cash provided by (used in) operating activities (1,358) (55) -------- -------- Net cash provided by (used in) operating activities (1,545) 479 -------- -------- Cash Flows from Investing Activities: Purchases of equipment, software and leasehold improvements (915) (1,364) -------- -------- Net cash used in investing activities (915) (1,364) -------- -------- Cash Flows from Financing Activities: Repayment of credit facility debt (450) (2,000) Other financing sources 27 561 -------- -------- Net cash used in financing activities (423) (1,439) -------- -------- Net decrease in cash and cash equivalents (2,883) (2,324) Cash and cash equivalents at beginning of period 14,085 7,248 -------- -------- Cash and cash equivalents at end of period $ 11,202 $ 4,924 ======== ========
See notes to condensed consolidated financial statements. 5 GRUBB & ELLIS COMPANY NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 1. INTERIM PERIOD REPORTING The accompanying unaudited condensed consolidated financial statements include the accounts of Grubb & Ellis Company and its wholly owned subsidiaries (collectively, the "Company") and are prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements and, therefore, should be read in conjunction with the Company's Annual Report on Form 10-K for the year ended June 30, 2002. The financial statements have been prepared in conformity with accounting principles generally accepted in the United States that require management to make estimates and assumptions that affect the reported amounts of assets and liabilities (including disclosure of contingent assets and liabilities) at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. In the opinion of management, all adjustments necessary for a fair statement of the financial position and results of operations for the interim periods presented have been included in these financial statements and are of a normal and recurring nature. Certain amounts in prior periods have been reclassified to conform to the current presentation. Such reclassifications have not changed previously reported results of operations or cash flows. Operating results for the three months ended September 30, 2002 are not necessarily indicative of the results that may be achieved in future periods. 2. TOTAL COMPREHENSIVE LOSS The Company is a party to two interest rate swap agreements that effectively fix the interest rate on a portion of the Company's outstanding term loan obligations. 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." The change in value of these instruments during a reporting period is characterized as Other Comprehensive Income or Loss, and totaled approximately $49,000 and $269,000 of unrealized losses during the three months ended September 30, 2002 and 2001, respectively. These losses, along with the Company's net losses of $2,234,000 and $2,266,000 for the three months ended September 30, 2002 and 2001, results in a Total Comprehensive Loss of $2,283,000 and $2,535,000 for the periods, respectively. 3. INCOME TAXES The benefit for income taxes for the three months ended September 30, 2002 and 2001 is as follows (in thousands): For the three months ended September 30, -------------------------- 2002 2001 ------ ------ Current $1,218 $1,298 Deferred 151 343 ------ ------ $1,369 $1,641 ====== ====== 6 GRUBB & ELLIS COMPANY NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 3. INCOME TAXES (CONTINUED) The Company recorded prepaid taxes totaling approximately $6,950,000 and $6,890,000 as of September 30, 2002 and June 30, 2002, respectively. Included in these assets are tax refund receivables resulting from filed federal and state returns for the tax year ended December 31, 2001 totaling approximately $1,420,000 and $2,584,000 at September 30, 2002 and June 30, 2002, respectively. Also included are tax effected operating loss carrybacks totaling approximately $5,530,000 and $4,306,000 at September 30, 2002 and June 30, 2002, respectively, which the Company will realize or has realized primarily against the federal tax liability payments made in prior tax years. 4. LOSS PER COMMON SHARE 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 three months ended September 30, -------------------------- 2002 2001 ------- -------- Net loss to common stockholders $(2,276) $ (2,266) ======= ======== BASIC EARNINGS PER COMMON SHARE: Weighted average common shares outstanding 15,072 13,447 ======= ======== Net loss per common share - basic $ (0.15) $ (0.17) ======= ======== DILUTED EARNINGS PER COMMON SHARE: Weighted average common shares outstanding 15,072 13,447 Effect of dilutive securities: Stock options and warrants -- -- ------- -------- Weighted average dilutive common shares outstanding 15,072 13,447 ======= ======== Net loss per common share - diluted $ (0.15) $ (0.17) ======= ======== Additionally, options outstanding to purchase shares of common stock, the effect of which would be anti-dilutive, were approximately 2,532,000 and 2,315,000 at September 30, 2002 and 2001, respectively, and were not included in the computation of diluted earnings per share because an operating loss was reported for the quarters ending September 30, 2002 and 2001. 5. ISSUANCE OF PREFERRED STOCK On September 19, 2002, Kojaian Ventures, L.L.C. ("KV"), a related party, exercised its right to convert a subordinated promissory note it held into preferred stock of the Company. 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 $11,725,000 were reclassified to stockholders' equity on the date of conversion. Issuance costs of $783,000, previously offset against the note obligations, were also reclassified as a reduction of additional paid in capital. The preferred stock carries a dividend coupon of 12%, compounded quarterly on a cumulative basis. Accrued dividends at September 30, 2002 totaled approximately $42,000. 7 GRUBB & ELLIS COMPANY NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 5. ISSUANCE OF PREFERRED STOCK (CONTINUED) 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, subject to adjustment. As a consequence of the conversion, there has been a change in the voting control of the Company, as these equivalents, along with 3,762,884 shares of outstanding common stock owned by KV and its affiliates (approximately 25% of the outstanding common stock of the Company), 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 Investors, L.P., which currently owns approximately 39% of the outstanding common stock of the Company, has approximately 22% of the total voting power. 6. SECURITIES EXCHANGE LISTING The Company's common stock was 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 standards 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 was being 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's common stock commenced trading on the over-the-counter market ("OTC") effective October 17, 2002, under the symbol GBEL.OB, and ceased trading on the NYSE prior to the opening that day. 7. CHANGE IN ACCOUNTING PRINCIPLE 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 is no longer amortized but is subject to annual impairment tests in accordance with the Statement. Other intangible assets will continue to be amortized over their useful lives. The Company applied the new rules on accounting for goodwill and other intangible assets beginning in the quarter ended September 30, 2002 and completed the transitional impairment tests of goodwill as of July 1, 2002. The Company has determined that no goodwill impairment will impact the earnings and financial position of the Company as of that date. Application of the non-amortization provisions of the Statement resulted in an increase in net operating income of approximately $391,000 for the quarter ended September 30, 2002 and is expected to result in an increase in net operating income of approximately $1.6 million for the fiscal year. 8. SEGMENT INFORMATION The Company has two reportable segments - Transaction Services and Management Services, and evaluates segment performance and allocates resources based on earnings before interest, taxes, depreciation and amortization, and other non-recurring expenses ("EBITDA") that include an allocation of certain corporate level administrative expenses (amounts in thousands). 8 GRUBB & ELLIS COMPANY NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 8. SEGMENT INFORMATION (CONTINUED) Transaction Management Segment Services Services Totals ----------- ---------- -------- Three months ended September 30, 2002 Total revenue $ 64,651 $ 12,199 $ 76,850 EBITDA 663 (478) 185 Total assets as of September 30, 2002 56,108 22,562 78,670 Three months ended September 30, 2001 Total revenue $ 63,610 $ 13,178 $ 76,788 EBITDA 113 (686) (573) Total assets as of September 30, 2001 59,336 21,536 80,872 RECONCILIATION OF SEGMENT EBITDA TO INCOME (LOSS) BEFORE INCOME TAXES Three Months Ended September 30, -------------------------------- 2002 2001 ------- ------- Total segment EBITDA $ 185 $ (573) Less: Depreciation & amortization (2,047) (2,800) Non-recurring expense (900) -- Net interest expense (841) (534) ------- ------- Loss before income taxes $(3,603) $(3,907) ======= ======= RECONCILIATION OF SEGMENT ASSETS TO BALANCE SHEET (IN THOUSANDS): As of September 30, -------------------- 2002 2001 ------- ------- Total segment assets $78,670 $80,872 Current tax assets 6,950 6,247 Deferred tax assets 2,661 5,174 ------- ------- Total assets $88,281 $92,293 ======= ======= 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 9 GRUBB & ELLIS COMPANY NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 8. SEGMENT INFORMATION (CONTINUED) 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. 9. COMMITMENTS AND CONTINGENCIES CREDIT AGREEMENT COVENANTS: The Company is subject to certain financial covenants pursuant to the terms of its credit agreement, including minimum EBITDA (as defined in the credit agreement) levels it must achieve. As of September 30, 2002 the Company had achieved these levels and is in compliance with this covenant. However, the Company's transaction services revenue is subject to seasonal fluctuations, with the calendar quarter ending December 31 historically providing from 28% to 34% of its annual transaction revenue. Based on the continuing economic downturn and the impact it is expected to have on the Company's projected operating performance, along with the uncertainty surrounding the seasonality of its primary revenue stream, it is possible the Company may not achieve the EBITDA performance needed to remain in compliance with its credit facility covenants for the upcoming quarter ending December 31, 2002. Failure to achieve EBITDA thresholds established in the Company's credit facility agreement would result in a technical default of the agreement, and the banks would have the right under the agreement to pursue various courses of action, including converting the debt into a demand obligation, or, in the alternative, granting waivers, amendments, or modifications of terms. In the event of such a default, there can be no assurances that such a waiver, amendment or modification to the credit agreement could be obtained. 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 September 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. 10 GRUBB & ELLIS COMPANY NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 9. COMMITMENTS AND CONTINGENCIES (CONTINUED) 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. 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 claims and lawsuits arising out of the conduct of its business, as well as in connection with its participation in various joint ventures and partnerships, many of which may not be covered by the Company's insurance policies. In the opinion of management, the eventual outcome of such claims and lawsuits is not expected to have a material adverse effect on the Company's financial position or results of operations. 10. NON-RECURRING EXPENSE A non-recurring expense consisting of severance and other costs totaling $900,000 was incurred during the quarter ended September 30, 2002 in connection with the termination of employment of the Company's former chief operating officer. 11 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS NOTE REGARDING FORWARD-LOOKING STATEMENTS This 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 and other factors that may cause the actual results, performance or achievements of the Company in future periods to be materially different from any future results, performance or achievements expressed or suggested 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 strategy or plans, we are making projections, forecasts or forward-looking statements. Actual results and stockholder's 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 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: (i) the volume of transactions and prices for real estate in the real estate markets generally, (ii) a general or regional economic downturn that could create a recession in the real estate markets, (iii) the Company's debt level and its ability to make interest and principal payments, (iv) an increase in expenses related to new initiatives, investments in people, technology, and service improvements, (v) the Company's ability to implement, and the success of, new initiatives and investments, including expansion into new specialty areas and integration of the Company's business units, (vi) the ability of the Company to consummate acquisitions and integrate acquired companies and assets, and (vii) other factors described in the Company's Annual Report on Form 10-K for the fiscal year ended June 30, 2002, filed on October 15, 2002. RESULTS OF OPERATIONS REVENUE The Company's revenue is derived principally from transaction services fees related to commercial real estate, which include commissions from leasing, acquisition and disposition, 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. Revenue in any given quarter during the three fiscal year period ended June 30, 2002, as a percentage of total annual revenue, ranged from a high of 34.4% to a low of 18.6%, with revenue earned in the first quarters of each of the last three fiscal years ranging from 23.0% to 26.2%. The Company has typically experienced its lowest quarterly revenue in the quarter ending March 31 of each year with higher and more consistent revenue in the quarters ending June 30 and September 30, and its highest quarterly revenue in the quarter ending December 31, due to increased activity caused by the desire of clients to complete transactions by calendar year-end. Total revenue of $76.9 million was recognized for the three months ended September 30, 2002 as compared to revenue of $76.8 million for the same period last year. Transaction services fees increased by $1.0 million in the current fiscal quarter over the same quarter in 2001 while management services fees decreased by $980,000 during that same period. 12 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 commission expense increased slightly to 59.0% for the quarter ended September 30, 2002 as compared to 57.8% for the same period in 2001. Salaries, wages and benefits decreased by $2.3 million or 9.1% during the quarter ended September 30, 2002 as compared to September 30, 2001. Selling, general and administrative expenses were relatively flat, increasing by $265,000, or 1.7%, for the same period. The overall decrease in these operating costs of $2.0 million resulted from the company tightening its discretionary expenditures in response to the slowing general economy. Depreciation and amortization expense for the quarter ended September 30, 2002 decreased to $2.0 million from $2.8 million in the comparable period last year. 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 $366,000 was recognized in the quarter ended September 30, 2002 compared to $662,000 for the same period in the prior year. 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 is no longer amortized but is subject to annual impairment tests in accordance with the Statement. Other intangible assets will continue to be amortized over their useful lives. The Company applied the new rules on accounting for goodwill and other intangible assets beginning in the quarter ended September 30, 2002 and completed the transitional impairment tests of goodwill as of July 1, 2002. The Company has determined that no goodwill impairment will impact the earnings and financial position of the Company as of that date. Application of the non-amortization provisions of the Statement resulted in a decrease in depreciation and amortization expense and a corresponding increase in net operating income of approximately $391,000 for the quarter ended September 30, 2002 as compared to September 30, 2001. It is expected to result in an increase in net operating income of approximately $1.6 million for the fiscal year. A non-recurring expense consisting of severance and other costs totaling $900,000 was incurred during the quarter ended September 30, 2002 in connection with the termination of employment of the Company's former chief operating officer. Interest income decreased during the quarter ended September 30, 2002 as compared to the same periods in the prior year as a result of lower available invested cash. Interest expense incurred during the quarters ended September 30, 2002 and 2001 was due primarily to the Company's term loan borrowings under the credit facility. Interest expense was also incurred during the quarter ended September 30, 2002 due to the note payable-affiliate funded in March 2002. NET LOSS The net loss for the three months ended September 30, 2002 was $2,234,000, or $0.15 per common share on a diluted basis, as compared to $2,266,000, or $0.17 per common share, for the same period in the prior fiscal year. The number of common shares outstanding at September 30, 2002 represented an increase over the previous year's number of outstanding common shares primarily due to the exercise of warrants in January 2002 to purchase 1,337,358 shares. 13 LIQUIDITY AND CAPITAL RESOURCES For the three months ended September 30, 2002, the Company used cash flow of $1.5 million for operating activities, used $915,000 in investing activities for purchases of equipment, software and leasehold improvements, and used $423,000 in financing activities primarily for the repayment of credit facility borrowings. 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. See Note 6 of Notes to Condensed Consolidated Financial Statements in Item 1 of this Report for information concerning earnings before interest, taxes, depreciation and amortization. On September 19, 2002, Kojaian Ventures, L.L.C. ("KV"), a related party, exercised its right to convert a subordinated promissory note it held into preferred stock of the Company. 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 $11,725,000 were reclassified to stockholders' equity on the date of conversion. Issuance costs of $783,000, previously offset against the note obligations, were also reclassified as a reduction of additional paid in capital. The preferred stock carries a dividend coupon of 12%, compounded quarterly on a cumulative basis. Accrued dividends at September 30, 2002 totaled approximately $42,000. 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, subject to adjustment. As a consequence of the conversion, there has been a change in the voting control of the Company, as these equivalents, along with 3,762,884 shares of outstanding common stock owned by KV and its affiliates (approximately 25% of the outstanding common stock of the Company), 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 Investors, L.P., which currently owns approximately 39% of the outstanding common stock of the Company, has approximately 22% of the total voting power. The Company's common stock was 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 standards 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 was being 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's common stock commenced trading on the over-the-counter market ("OTC") effective October 17, 2002, under the symbol GBEL.OB, and ceased trading on the NYSE prior to the opening that day. The Company has principal payment obligations under the term portion of its Credit Facility of $31.3 million as of September 30, 2002, of which $7.3 million becomes due over the twelve months ending September 30, 2003. 14 The Company is subject to certain financial covenants pursuant to the terms of its credit agreement, including minimum EBITDA (as defined in the credit agreement) levels it must achieve. As of September 30, 2002 the Company had achieved these levels and is in compliance with this covenant. However, the Company's transaction services revenue is subject to seasonal fluctuations, with the calendar quarter ending December 31 historically providing from 28% to 34% of its annual transaction revenue. Based on the continuing economic downturn and the impact it is expected to have on the Company's projected operating performance, along with the uncertainty surrounding the seasonality of its primary revenue stream, it is possible the Company may not achieve the EBITDA performance needed to remain in compliance with its credit facility covenants for the upcoming quarter ending December 31, 2002. Failure to achieve EBITDA thresholds established in the Company's credit facility agreement would result in a technical default of the agreement, and the banks would have the right under the agreement to pursue various courses of action, including converting the debt into a demand obligation, or, in the alternative, granting waivers, amendments, or modifications of terms. In the event of such a default, there can be no assurances that such a waiver, amendment or modification to the credit agreement could be obtained. 15 ITEM 3. 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. 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 September 30, 2002 the Company had $13.5 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 September 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 $332,000, net of taxes. 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 September 30, 2002 (in thousands): Notional Amount $13,500 Fair Value to the Company (332) Change in Fair Value to the Company Reflecting Change in Interest Rates - 100 BPS (80) + 100 BPS 79 The Company does not utilize financial instruments for trading or other speculative purposes, nor does it utilize leveraged financial instruments. ITEM 4. CONTROLS AND PROCEDURES Within the 90-day period prior to the filing of this Quarterly Report on Form 10-Q, the Company carried out an evaluation, under the supervision and with the participation of management, including the Chief Executive Officer and the Chief Financial Officer, of the effectiveness of the Company's disclosure controls and procedures. Based upon the evaluation, the Company's Chief Executive Officer and Chief Financial Officer have concluded that the Company's disclosure controls and procedures are effective to timely alert them to material information required to be included in Company's Exchange Act filings. In addition, there have been no significant changes in the internal controls, or in other factors that could significantly affect internal controls, subsequent to the date that the Chief Executive Officer and Chief Financial Officer completed their evaluation. 16 PART II OTHER INFORMATION (ITEMS 3 AND 5 ARE NOT APPLICABLE FOR THE QUARTER ENDED SEPTEMBER 30, 2002) 17 ITEM 1. LEGAL PROCEEDINGS The disclosure called for by Item 1 is incorporated by reference to Note 9 of Notes to Condensed Consolidated Financial Statements. ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS (a) On September 13, 2002, the Company filed an Amended and Restated Certificate of Designations, Number, Voting Powers, Preferences and Rights of Series A Preferred Stock ("Certificate of Designations") with the Delaware Secretary of State, which had been approved by the Board of Directors of the Company. Pursuant to the Certificate of Designations, the Company authorized 60,000 shares of preferred stock as Series A Preferred Stock, with a liquidation preference generally equal to 40% of the consideration available to all common equity holders upon liquidation. (b) and (c) On September 19, 2002, Kojaian Ventures, L.L.C. ("KV") exercised its right to convert the outstanding principal, accrued interest and certain costs of a promissory note in the face amount of $11,237,500, which had been issued by the Company in May 2002, into 11,725 shares of Series A Preferred Stock. At the conversion date, each share of Series A Preferred Stock had voting power equivalent to 1,007 shares of common stock of the Company, subject to adjustment. The shares were exempt from the registration requirements under Section 4(2) of the Act. The issuance and sale of the convertible note and the issuance of the Series A Preferred Stock were not underwritten. See Notes 5 of Notes to Condensed, Consolidated Financial Statements, and such disclosure is incorporated herein by reference. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (A) EXHIBITS (3) ARTICLES OF INCORPORATION AND BYLAWS 3.1 Certificate of Incorporation of the Registrant, as restated November 1, 1994, incorporated herein by reference to Exhibit 3.2 to the Registrant's Annual Report on Form 10-K filed on March 31, 1995. 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 of State on January 22, 1997, incorporated herein by reference to Exhibit 3.4 to the Registrant's Quarterly Report on Form 10-Q filed on February 13, 1997. 3.5 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. (4) INSTRUMENTS DEFINING THE RIGHTS OF SECURITY HOLDERS, INCLUDING INDENTURES. 4.1 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. 18 4.2 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. 4.3 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, incorporated herein by reference to Exhibit 3.8 to the Registrant's Annual Report on Form 10-K filed on October 15, 2002. 4.4 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. 4.5 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. 4.6 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. (10) MATERIAL CONTRACTS 10.1* Separation Agreement entered into between Mark R. Costello and the Registrant, and General Release executed by Mr. Costello, dated as of July 12, 2002, incorporated herein by reference to Exhibit 10.6 to the Registrant's Annual Report on Form 10-K filed on October 15, 2002. *Management contract or compensatory plan or arrangement. (99) OTHER INFORMATION 99.1 SARBANES-OXLEY ACT, SECTION 906 CERTIFICATION (B) REPORTS ON FORM 8-K None. 19 SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. GRUBB & ELLIS COMPANY (Registrant) Date: November 14, 2002 /s/ Ian Y. Bress ------------------------ Ian Y. Bress Chief Financial Officer 20 CERTIFICATIONS I, Barry M. Barovick, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Grubb & Ellis Company; 2. Based on my knowledge, this quarterly 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 quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly 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 quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a. designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b. evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c. presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent function): a. all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b. any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: November 14, 2002 /s/ Barry M. Barovick ----------------------- Barry M. Barovick President, Chief Executive Officer and a director 21 CERTIFICATIONS I, Ian Y. Bress, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Grubb & Ellis Company; 2. Based on my knowledge, this quarterly 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 quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly 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 quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a. designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b. evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c. presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent function): a. all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b. any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: November 14, 2002 /s/ Ian Y. Bress ----------------------- Ian Y. Bress Chief Financial Officer 22 GRUBB & ELLIS COMPANY EXHIBIT INDEX FOR THE QUARTER ENDED SEPTEMBER 30, 2002 EXHIBIT (99) OTHER INFORMATION 99.1 Sarbanes-Oxley Act, Section 906 Certification 23 EX-99.1 3 c26144_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-Q of the Company for the period ended September 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 November 14, 2002 /s/ Ian Y. Bress --------------------- Ian Y. Bress Chief Financial Officer November 14, 2002 -----END PRIVACY-ENHANCED MESSAGE-----