-----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, P0xAQe1kmmOIcfUbJ+Kk6P6WrvNqzpyfMIKKJX8oL4AxMdGnidcVF5WyfbtR+Dka dWtGnUp0lkrqQeS35ClfyQ== 0000950131-99-005502.txt : 19991227 0000950131-99-005502.hdr.sgml : 19991227 ACCESSION NUMBER: 0000950131-99-005502 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 10 CONFORMED PERIOD OF REPORT: 19990630 FILED AS OF DATE: 19990928 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: SEC FILE NUMBER: 001-08122 FILM NUMBER: 99718773 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 FORM 10-K - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended June 30, 1999 OR [_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission file no. 1-8122 GRUBB & ELLIS COMPANY (Exact name of registrant as specified in its charter) Delaware 94-1424307 (State or other jurisdiction of (IRS Employer incorporation or organization) Identification No.) (847) 753-7500 2215 Sanders Road, Suite 400, (Registrant's telephone number, Northbrook, IL 60062 including area code) (Address of principal executive offices) (Zip Code) Securities registered pursuant to Section 12(b) of the Act: Title of each class Name of each exchange on which --------- registered Common Stock -------------- New York Stock Exchange Pacific Exchange Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein and will not be contained, to the best of registrant's knowledge, in its definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [_] The aggregate market value of voting common stock held by non-affiliates of the registrant as of August 19, 1999 was approximately $16,376,000. The number of shares outstanding of the registrant's common stock as of August 19, 1999 was 19,931,192 shares. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Registrant's definitive proxy statement to be filed pursuant to Regulation 14A no later than 120 days after the end of the fiscal year (June 30, 1999) are incorporated by reference into Part III of this Report. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 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....................................................... 5 Item 3. Legal Proceedings................................................ 5 Item 4. Submission of Matters to a Vote of Security Holders.............. 5 Part II. Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters................................................................. 6 Item 6. Selected Financial Data.......................................... 6 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations................................................... 7 Item 7A.Quantitative and Qualitative Disclosures About Market Risk....... 12 Item 8. Financial Statements and Supplementary Data...................... 12 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.................................................... 35 Part III. Item 10. Directors and Executive Officers of the Registrant.............. 35 Item 11. Executive Compensation.......................................... 35 Item 12. Security Ownership of Certain Beneficial Owners and Management.. 35 Item 13. Certain Relationships and Related Transactions.................. 35 Part IV. Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8- K....................................................................... 36 SIGNATURES................................................................ 40 EXHIBIT INDEX.............................................................
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 a full service commercial real estate company that provides a full range of services, including transaction services and property and facilities management, to users and investors worldwide. The Company's professionals arrange the sale or lease of such business properties as industrial, retail and office buildings, as well as multi-family, hospitality and commercial land. Major multiple-market clients have a single point of contact through the firm's corporate and financial units for advisory services, including site selection, feasibility studies, market forecasts and research. The Company is one of the nation's largest publicly traded commercial real estate firms, based on total revenue. Property and facilities management services are provided by Grubb & Ellis Management Services, Inc. ("GEMS"), a wholly owned subsidiary of the Company since January 24, 1996 (prior to which time GEMS was a majority owned subsidiary). GEMS had approximately 131 million square feet of property under management as of June 30, 1999. Currently, the Company has approximately 4,400 professionals and staff, with offices and affiliates in 90 markets throughout the United States. Internationally, the Company serves the needs of its multinational clients through its European headquarters in London. Strategic Initiatives In fiscal 1999, the Company pursued several initiatives designed to help meet its goal of enhancing the quality of its service lines and expanding and diversifying sources of revenue beyond traditional commercial brokerage. The Company continued to build its Corporate Services Group and Institutional Services Group, which utilize a relationship management system to allow the Company to respond to the increasing demand from major corporate and institutional clients for expanded services through a single point of contact. The Company also expanded its national affiliate program, through alliances with 26 real estate services firms, which has enabled it to enter markets where it previously did not have a formal presence and to better meet the multi- market needs of national clients. The Company has also invested in technology systems designed to provide a stable platform for growth and to efficiently deliver and share data with clients. Among them is what the Company believes to be a state-of-the-art, company-wide information sharing and research network which enables its professional staff across all offices to work more efficiently, access the latest market intelligence, and more fully address clients' needs. Since July 1998, the Company also completed four acquisitions that reinforce its strategy of increasing its presence in key markets. Those acquisitions included: Bishop Hawk, Inc., a Northern California real estate services firm; Smithy Braedon Oncor International, serving the greater Washington D.C. metropolitan area; Commercial Florida Realty Partners, Inc., a southern Florida firm; and Island Realty Service Group, Inc., a real estate services firm based in Long Island, New York. In addition, in July 1999, the Company acquired substantially all of the assets of Landauer Associates, Inc., a national real estate valuation and consulting firm with offices in several major cities across the United States. In August 1999, the Company announced a program through which it may repurchase up to $3.0 million of its common stock on the open market. See Item 7 of this Report for additional information. 3 Organization The Company is organized to provide the real estate related services described below. Additional information on these business segments can be found in Note 13 of Notes to Consolidated Financial Statements under Item 8 of this report. Transaction Services The Company represents the interests of tenants, owners, buyers or sellers in leasing, acquisition and disposition transactions. These transactions involve various types of commercial real estate, including office, industrial, retail and land. Historically, these services have represented a significant portion of the Company's revenue, and in fiscal year 1999 represented 83% of the Company's total revenue. In addition, the Company delivers consulting and strategic planning services to its clients, including site selection, feasibility studies, exit strategies, market forecasts, appraisals and demographics and research services. Management Services GEMS provides comprehensive property management, leasing and related services for properties owned primarily by institutional investors, along with facilities management services for corporate users. Related services include construction management, agency leasing, lease administration, business services and engineering services. In fiscal year 1999, these services represented the remaining 17% of the Company's total revenue. Competition The Company competes in a variety of service disciplines within the commercial real estate industry. Each of these business areas is highly competitive on a national as well as local level. The Company faces competition not only from other real estate service providers, but also from accounting and appraisal firms and self managed real estate investment trusts. Due to the relative strength and longevity of the Company's position in the markets in which it presently operates, its ability to offer clients a range of real estate services on a local, regional and national basis, decreased competition in certain markets and the Company's improved capital base, the Company believes that it can operate successfully in the future in this highly competitive industry, although there can be no assurances in this regard. Environmental Regulation A number of states and localities have adopted laws and regulations imposing environmental controls, disclosure rules and zoning restrictions which have impacted the management, development, use, and/or sale of real estate. Such laws and regulations tend to discourage sales and leasing activities and mortgage lending with respect to some properties, and may therefore adversely affect the Company. Failure of the Company to disclose environmental issues in connection with a real estate transaction may subject the Company to liability to a buyer or lessee of property. Property management services also could subject the Company to environmental liabilities pursuant to applicable laws and contractual obligations to property owners. Insurance for such matters may not be available. Additionally, new or modified environmental regulations could develop in a manner which could adversely affect the Company's transaction and management services. The Company's financial results and competitive position for the fiscal year 1999 have not been materially impacted by its compliance with environmental laws or regulations, and no material capital expenditures relating to such compliance are planned. Seasonality The Company has typically experienced its lowest quarterly revenue in the quarter ending March 31 of each year with higher and more consistent revenue in the quarters ending June 30 and September 30. The 4 quarter ending December 31 has historically provided the highest quarterly level of revenue due to increased activity caused by the desire of clients to complete transactions by calendar year-end. Revenue in any given quarter during the years ended June 30, 1999, 1998 and 1997, as a percentage of total annual revenue, ranged from a high of 31.4% to a low of 19.1%. Service Marks The Company has registered tradenames and service marks for the "Grubb & Ellis" name and logo. The right to use the "Grubb & Ellis" name is considered an important asset of the Company, and the Company actively defends and enforces such service marks. Real Estate Markets The Company's business is highly dependent on the commercial real estate markets, which in turn are impacted by such factors as the general economy, interest rates and demand for real estate in local markets. Changes in one or more of these factors could either favorably or unfavorably impact the volume of transactions and prices or lease terms for real estate. Consequently, the Company's revenue from brokerage commissions and property management fees, operating results, cash flow and financial condition would also be impacted by changes in these factors. ITEM 2. Properties The Company leases all of its office space. The terms of the leases vary depending on the size and location of the office. As of June 30, 1999, the Company leased approximately 687,000 square feet of office space in 72 locations under leases which expire at various dates through June 30, 2008. For those leases which are not renewable, the Company believes there is adequate alternative office space available at acceptable rental rates to meet its needs, although there can be no assurances in this regard. For further information, see Note 9 of the Notes to Consolidated Financial Statements under Item 8 of this Report. ITEM 3. Legal Proceedings The information called for by Item 3 is included in Note 9 of the Notes to Consolidated Financial Statements under Item 8 of this Report. ITEM 4. Submission of Matters to a Vote of Security Holders No matters were submitted to a vote of security holders during the fourth quarter of fiscal year 1999. 5 GRUBB & ELLIS COMPANY PART II ITEM 5. Market for the Registrant's Common Equity and Related Stockholder Matters The principal market for the Company's common stock is the New York Stock Exchange ("NYSE"). The following table sets forth the high and low sales prices of the Company's common stock on the NYSE for each quarter of the years ended June 30, 1999 and 1998.
1999 1998 ---------------- ----------------- High Low High Low ---- --- ---- ---- First Quarter......... $14/1///16/ $8 3/8 $17 $12/13///16/ Second Quarter........ $10/5///16/ $7/7///16/ $17/3///16/ $12/13///16/ Third Quarter......... $7 7/8 $6 1/4 $16 3/8 $10 1/8 Fourth Quarter........ $6 7/8 $ 5/1///16/ $15 3/8 $10 1/8
As of August 19, 1999, there were 2,450 registered holders of the Company's common stock and 19,931,192 shares of common stock outstanding, of which 16,390,350 were held by persons who may be considered "affiliates" of the Company, as defined in Federal securities regulations. Sales of substantial amounts of common stock, including shares issued upon the exercise of warrants or options held by affiliates (see Note 7 of the Notes to Consolidated Financial Statements in Item 8 of this Report), or the perception that such sales might occur, could adversely affect prevailing market prices for the common stock. No cash dividends were declared on the Company's common stock during the fiscal years ended June 30, 1999 or 1998, and the Company does not anticipate paying cash dividends in the foreseeable future. The Company is prohibited from paying dividends on its common stock by the terms of its revolving credit facility. See "Liquidity and Capital Resources" under Item 7 of this Report and Note 5 of the Notes to Consolidated Financial Statements under Item 8 of this Report. The Company's preferred stock was either retired or converted to common stock by February 1997. ITEM 6. Selected Financial Data Five Year Comparison of Selected Financial and Other Data for the Company:
1999 1998 1997 1996 1995 ---------- ---------- ---------- --------- --------- (in thousands, except per share amounts and shares data) Total revenue........... $ 314,101 $ 282,834 $ 228,630 $ 193,728 $ 185,784 Net income ............. 8,079 21,506 19,010 2,102 1,556 Dividends applicable to preferred stockholders: Accretion of liquidation preference........... -- -- -- -- (877) Dividends in arrears.. -- -- (1,431) (3,012) (1,862) Provision for income taxes.................. (5,301) (447) (372) (198) (448) Reduction in deferred tax asset valuation allowance.............. 1,325 6,504 3,220 -- -- Net income (loss) applicable to common stockholders (1)....... 8,079 21,506 17,579 (910) (1,183) Net income (loss) per common share (1) --Basic............... 0.41 1.10 1.22 (.10) (.16) --Diluted............. 0.37 .98 .97 (.10) (.16) Weighted average common shares --Basic............... 19,785,715 19,607,352 14,429,971 8,870,720 7,271,257 --Diluted............. 21,587,898 22,043,920 19,567,635 8,870,720 7,271,257 Other Data: EBITDA (2).............. $ 18,836 $ 19,118 $ 17,629 $ 7,418 $ 4,427
6 - -------- (1) Net income (loss) and per share data reported on the above table reflect other non-recurring expenses in the amount of $2.4 million for the fiscal year ended June 30, 1997. Other non-recurring income of $462,000 and $2.6 million is included in the results for the fiscal years ended June 30, 1996 and 1995, respectively. Net income for the year ended June 30, 1997 includes $5.4 million in extraordinary gain, net of taxes, on the extinguishment of debt. For information regarding comparability of this data as it may relate to future periods, see discussion in Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations and Note 10 of the Notes to Consolidated Financial Statements under Item 8 of this Report. (2) The Company defines EBITDA as earnings before interest expense, income taxes, depreciation and amortization, adjusted to exclude other non- recurring income and expense and extraordinary items, which may not be comparable to measures of the same title reported by other companies.
as of June 30, ------------------------------------------------------ 1999 1998 1997 1996 1995 ---------- ---------- ---------- --------- --------- (in thousands, except per share amounts and shares data) Consolidated Balance Sheet Data: Total assets............ $ 79,793 $ 63,518 $ 36,696 $ 29,658 $ 29,741 Working capital......... (300) 15,822 16,985 8,064 5,051 Long-term debt.......... 553 459 -- 27,514 26,328 Other long-term liabilities............ 9,688 10,118 12,700 14,948 14,668 Stockholders' equity (deficit).............. 44,482 35,414 12,923 (27,475) (29,793) Book value per common share.................. 2.24 1.80 .66 (3.08) (3.38) Common shares outstanding............ 19,885,084 19,721,056 19,509,952 8,916,415 8,810,220
ITEM 7. Management's Discussion and Analysis of Financial Condition and Results of Operations NOTE REGARDING FORWARD-LOOKING STATEMENTS This Annual Report on Form 10-K contains forward-looking statements regarding, among other things, future revenue growth, income and changes in expense levels. These statements are subject to known and unknown risks, uncertainties and other factors that may cause the Company's actual results and performance in future periods to be materially different from any future results or performance suggested by these statements. Such factors, which could adversely affect the Company's ability to obtain these results include, among other things, (i) the volume of transactions and prices for real estate in the real estate markets generally, (ii) a general or regional economic downturn which could create a recession in the real estate markets, (iii) the Company's debt level and its ability to make interest and principal payments, (iv) an increase in expenses related to new initiatives, investments in people and technology, and service improvements, (v) the success of new initiatives and investments, (vi) the impact of year 2000 technology issues, and (vii) other factors described elsewhere in this Annual Report. RESULTS OF OPERATIONS Overview The Company reported net income of $8.1 million for the year ended June 30, 1999, and made continued progress toward implementing the strategic initiatives announced in fiscal 1997 and 1998, including significant acquisitions of Bishop Hawk, Inc. and Smithy Braedon Oncor International in fiscal 1999. The Company's transaction services fees, fueled by a continued strong economy and commercial real estate markets, increased to $260.1 million in fiscal year 1999, while management services fee revenue increased by 50.9% or $18.2 million for the same period. 7 Fiscal Year 1999 Compared to Fiscal Year 1998 Revenue The Company's revenue is derived principally from transaction services fees related to commercial real estate, including transaction commissions and asset management, appraisal and consulting fees. Management services fees are generated from property and facilities management services, along with agency leasing commissions and construction management fees. Total revenue for fiscal year 1999 was $314.1 million, an increase of 11.1% over revenue of $282.8 million for fiscal year 1998. This improvement related primarily to a $18.2 million, or 50.9%, increase in management services fees as a result of increased activity in property and facilities management and business service and continued gains in outsourcing contracts. Transaction services fees increased by $13.0 million, or 5.3%, in fiscal 1999 compared to the prior year, although such fees related to investment sales for the same periods decreased 26.6% due to fallout from the tightened credit market experienced by the real estate industry in the latter half of calendar 1999. Transaction services fees revenues, excluding fees related to investment sales, increased by 12.9% in fiscal 1999 as compared to fiscal 1998. Cost and Expenses Transaction services commission expense is the Company's major expense and bears a direct relationship to transaction services fees, which include transaction services commission revenue and other related fees. As a percentage of these revenues, related commission expense increased slightly, due to higher participation percentages attributable to higher production levels, and higher costs related to guaranteed participation amounts for newly hired professionals. Total costs and expenses, other than transaction services commissions, increased by $22.6 million, or 17.7%, for fiscal year 1999 compared to fiscal year 1998. These increases were due to increased operating, depreciation and amortization expenses attributable to the nine acquisitions made by the Company over the last fifteen months, as well as higher variable operating costs associated with increases in its management services business. Interest expense incurred in fiscal year 1999 was due primarily to seller financing related to business acquisitions made in calendar year 1998, as well as credit facility borrowings in the last half of fiscal year 1999. Income Taxes As of June 30, 1999, the Company had gross deferred tax assets of $11.4 million, with $5.4 million of the deferred tax assets relating to net operating loss and tax credit carryforwards which will be available to offset future taxable income through 2010. The Company has recorded a valuation allowance for $4.3 million against the deferred tax assets as of June 30, 1999 and will continue to do so until such time as management believes that it is more likely than not that the Company will generate taxable income sufficient to realize such tax benefits. The Company recognized a $1.3 million deferred tax benefit during fiscal 1999 which represented a partial reduction of the valuation allowance for the net deferred tax assets. Management believes that, due to favorable economic conditions, the elimination of long-term debt and the recent trend of earnings, it is more likely than not that the Company will generate sufficient future taxable income to realize the net deferred tax assets. Although uncertainties exist as to these events, the Company will continue to review its operations periodically to assess whether its deferred tax assets may be realized. See Note 6 of Notes to Consolidated Financial Statements in Item 8 of this Report for additional information. Net Income Net income for fiscal year 1999 was $8.1 million, or $.37 per common share on a diluted basis, as compared to net income of $21.5 million, or $.98 per common share for fiscal year 1998. The Company 8 generated basic earnings per share of $.41 and $1.10 in fiscal years 1999 and 1998, respectively. Included in net income were deferred tax benefits of $1.3 million and $6.5 million for fiscal years 1999 and 1998, respectively. Stockholders' Equity During fiscal year 1999, stockholders' equity increased $9.1 million to $44.5 million from $35.4 million at June 30, 1998. In addition to net income of $8.1 million for fiscal year 1999, the Company received $1.0 million from the sale of common stock under its stock option plans and employee stock purchase plan. See Note 7 of Notes to Consolidated Financial Statements in Item 8 of this Report for additional information. The book value per common share issued and outstanding increased to $2.24 at June 30, 1999 from $1.80 at June 30, 1998. Fiscal Year 1998 Compared to Fiscal Year 1997 Revenue Total revenue for fiscal year 1998 was $282.8 million, an increase of 23.7% over revenue of $228.6 million for fiscal year 1997, reflecting continued strong real estate markets and increased business activity across the Company's service lines. This improvement related primarily to a $45.7 million, or 22.7%, increase in transaction services fees. Management services fees of $35.8 million for fiscal year 1998 increased by $8.6 million, or 31.4%, as a result of increased activity in property and facilities management and business services. Cost and Expenses Transaction services commission expense is the Company's major expense and bears a direct relationship to transaction services fees, which include transaction services commission revenue and other related fees. As a percentage of these revenues, related commission expense increased slightly, due to higher participation percentages attributable to higher production levels, and higher costs related to guaranteed participation amounts for newly hired professionals. Total costs and expenses, other than transaction services commissions and other non-recurring expenses, increased by $26.4 million, or 26.0%, for fiscal year 1998 compared to fiscal year 1997. These increases were due in part to additional expenditures related to staffing and implementing the Company's Corporate Services Group and Institutional Services Group initiatives. In addition, the Company has incurred additional variable operating costs associated with increases in its transaction and management services businesses. Other non-recurring expenses for fiscal year 1997 resulted primarily from incremental non-recurring costs related to the relocation of the Company's corporate headquarters from San Francisco, California to Northbrook, Illinois. The repayment of the Company's long-term debt during fiscal year 1997, resulted in a decrease in interest expense of $1.3 million. Interest expense incurred in fiscal year 1998 was the result of seller financing related to business acquisitions in that year. Income Taxes As of June 30, 1998, the Company had gross deferred tax assets of $15.9 million, with $9.7 million of the deferred tax assets relating to net operating loss and tax credit carryforwards which will be available to offset future taxable income through 2010. The Company has recorded a valuation allowance for $5.6 million against the deferred tax assets as of June 30, 1998 and will continue to do so until such time as management believes that it is more likely than not that the Company will generate taxable income sufficient to realize such tax benefits. The Company recognized a $6.5 million deferred tax benefit during fiscal 1998 which represented a partial reduction of the valuation allowance for the net deferred tax assets. 9 Net Income Net income for fiscal year 1998 was $21.5 million, or $.98 per common share on a diluted basis, as compared to net income of $19.0 million, or $.97 per common share for fiscal year 1997. The Company generated basic earnings per share of $1.10 and $1.22 in fiscal years 1998 and 1997, respectively. Included in net income were deferred tax benefits of $6.5 million and $3.2 million for fiscal years 1998 and 1997, respectively. Net income for the prior year also included non-recurring charges of $2.4 million related primarily to the corporate headquarters relocation and a $5.4 million extraordinary gain on the extinguishment of debt in connection with the financing transactions which occurred in fiscal 1997. Stockholders' Equity During fiscal year 1998, stockholders' equity increased $22.5 million to $35.4 million from $12.9 million at June 30, 1997. In addition to net income of $21.5 million for fiscal year 1998, the Company received $1.0 million from the sale of common stock under its stock option plans and employee stock purchase plan. See Note 7 of Notes to Consolidated Financial Statements in Item 8 of this Report for additional information. The book value per common share issued and outstanding increased to $1.80 at June 30, 1998 from $.66 at June 30, 1997. LIQUIDITY AND CAPITAL RESOURCES During fiscal year 1999, cash and cash equivalents decreased by $8.8 million primarily as a result of cash used in investing activities of $26.8 million, offset by cash provided by operating activities of $12.8 million and financing activities of $5.2 million. Net cash provided by operating activities was negatively impacted by an increase in prepaid expenses related to employment and service contracts with transaction services professionals along with prepaid calendar year 1999 income taxes. Net cash used in investing activities related to cash paid in connection with business acquisitions of $17.1 million, and $9.7 million of technology infrastructure investments and purchases of other equipment and leasehold improvements. Net cash provided by financing activities related to $7.5 million of borrowings on the Company's credit facility for working capital purposes, along with $1.0 million generated from stock option exercises and employee stock purchases. Financing activities also included the payment of $3.3 million of seller indebtedness, related to the Company's recent acquisitions. During fiscal year 1999, working capital decreased by $16.1 million as the Company used its working capital funds to acquire new businesses and invest in technology infrastructure and other fixed assets. The Company believes that its long-term operating cash requirements, including its technology initiative commitments, will be met by operating cash flow. In addition, the Company has a $35 million credit facility available for additional capital needs. As of June 30, 1999, the Company had outstanding borrowings totaling $7.5 million for short-term operating cash requirements under the credit facility, of which $4.5 million was repaid in September 1999. The Company is currently in negotiations to replace its existing credit facility, which expires in March 2001, with a facility having an increased total commitment available to the Company, and extending the expiration date to September 2004. Although it is the Company's intent to close this loan transaction, there can be no assurances that this event will occur. To the extent that the Company's cash requirements are not met by operating cash flow or borrowings under its credit facility, in the event of adverse economic conditions or other unfavorable events, the Company may find it necessary to reduce expenditure levels or undertake other actions as may be appropriate under the circumstances. The Company completed the acquisition of Bishop Hawk, Inc. in July 1998, Smithy Braedon Oncor International in December 1998, Commercial Florida Realty Partners, Inc. in February 1999 and Landauer Associates, Inc. in July 1999 (See Note 12 of Notes to Consolidated Financial Statements in Item 8 of this 10 Report for additional information). The Company will continue to explore strategic acquisition opportunities that have the potential to broaden its geographic reach, increase its market share to a significant portion and/or expand the depth and breadth of its current lines of business. The sources of consideration for such acquisitions could be cash, the Company's current credit facility, new debt, and/or the issuance of stock. Although it is the Company's intent to actively pursue this strategy, no assurances can be made that any new acquisitions will occur. In August 1999, the Company announced a program through which it may repurchase up to $3.0 million of its common stock on the open market from time to time as market conditions warrant. The repurchase program, which is expected to take place over the next twelve months, will be financed through operating cash flow or the Company's revolving credit facility. As of September 20, 1999, the Company had repurchased approximately 162,000 of its shares under this program at a total cost of approximately $900,000. Year 2000 Issues During fiscal years 1997 through 1999, the Company significantly increased its investment in various technology initiatives. The Company embarked upon these initiatives to enhance the productivity of its staff and business processes, and to provide a stable platform to support the Company's recent and future growth. Through its three year technology plan, the Company has sought to mitigate material risks associated with the year 2000. This technology improvement plan has replaced most of the Company's information systems and equipment platforms, including intranet, human resources, general ledger, accounts payable and transaction services management and research, and consequently has brought these systems into compliance with year 2000 requirements. The Company has also completed upgrades to various servers and desktop computers. As a part of this three year plan, the Company is currently testing and implementing a new transaction services revenue system, which it expects to complete before December 1999. The Company has a contingency plan which addresses the risk associated with the current revenue system database, which is not year 2000 compliant. The Company has made capital expenditures totaling $9.1 million through August 30, 1999 related to these systems, and currently expects to invest an additional $1.6 million over the next four months to complete its technology plan, the majority of which relates to implementation for the revenue system. The Company has been testing its systems (including tests of the financial systems and service interruption tests) and has found no unknown problems. Management of the Company believes it has an effective program in place relating to its internal information systems to resolve the year 2000 issue in a timely manner, although no assurances can be given in this regard. The Company has assessed its exposure to year 2000 issues other than those related to internal information systems, including issues related to third party vendors, and developed a plan (including contingencies to address these risks). The Company evaluated its telecommunication systems and, based on this investigation, spent $2.0 million (and expects to spend another $0.3 million) to upgrade or replace non-compliant telephone, voice mail, facsimile and other telecommunications equipment. As of August 20, 1999, these replacements and upgrades were approximately 80% complete, with the remaining systems scheduled to be completed by October 31, 1999. The Company will face business interruption risk if telecommunications are suspended as a result of a year 2000 issue. In addition to its own systems, the Company's year 2000 plan has included evaluation of building systems in properties managed by Grubb & Ellis Management Services, Inc. ("GEMS") (as well as the Company's facilities), and various property accounting systems for GEMS clients. GEMS is working with its clients (property owners) to gather information on the year 2000 readiness of building systems such as security, elevator and HVAC. Over 90% of these building systems have been tested, and most of the remedial work is scheduled for completion by September 30, 1999. GEMS is also assisting its clients in preparing contingency 11 plans, which will be put in place during October 1999. For client accounting, GEMS has received and installed accounting software upgrades from all software vendors, and these systems appear to be year 2000 compliant. Since the Company cannot anticipate all possible outcomes of the year 2000 problem, nor predict the readiness of entities with which it transacts business, there can be no assurance these events will not have a material adverse effect on the Company's business, financial condition, results of operations or cash flows. Dividends The Company's revolving credit facility contains certain restrictive covenants including the prohibition of the payment of dividends and restrictions on acquisitions, dispositions of assets, indebtedness, liens, investments, the extension of credit and the issuance of certain types of preferred stock, and the maintenance of a certain ratio of debt to cash flow. As of June 30, 1999, the Company was in compliance with, or had received waivers with respect to, all covenants of the credit facility. ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk The Company considered the provision of Financial Reporting Release No. 48 "Disclosure of Accounting Policies for Derivative Financial Instruments and Derivative Commodity Instruments, and Disclosure of Quantitative and Qualitative Information about Market Risk Inherent in Derivative Financial Instruments, Other Financial Instruments and Derivative Commodity Instruments". The Company had no holdings of derivative financial or commodity instruments at June 30, 1999. A review of the Company's other financial instruments and risk exposures at that date revealed that the Company had exposure to interest rate risk. The Company utilized sensitivity analyses to assess the potential effect of this risk and concluded that near-term changes in interest rates should not materially adversely affect the Company's financial position, results of operations or cash flows. ITEM 8. Financial Statements and Supplementary Data 12 REPORT OF INDEPENDENT AUDITORS The Board of Directors and Stockholders Grubb & Ellis Company We have audited the accompanying consolidated balance sheets of Grubb & Ellis Company as of June 30, 1999 and 1998, and the related consolidated statements of operations, stockholders' equity, and cash flows for each of the three years in the period ended June 30, 1999. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Grubb & Ellis Company at June 30, 1999 and 1998, and the consolidated results of its operations and its cash flows for each of the three years in the period ended June 30, 1999, in conformity with generally accepted accounting principles. /s/ Ernst & Young LLP Chicago, Illinois August 23, 1999 13 GRUBB & ELLIS COMPANY CONSOLIDATED BALANCE SHEETS June 30, 1999 and 1998 (in thousands, except share data)
1999 1998 -------- -------- ASSETS Current assets: Cash and cash equivalents................................ $ 5,500 $ 14,251 Service fees receivable, net............................. 9,019 9,025 Other receivables........................................ 2,291 1,310 Prepaid commissions...................................... 1,618 -- Prepaids and other assets................................ 3,402 3,179 Deferred tax assets, net................................. 2,940 5,584 -------- -------- Total current assets................................... 24,770 33,349 Noncurrent assets: Equipment, software and leasehold improvements, net...... 18,554 13,152 Goodwill, net............................................ 28,564 10,578 Deferred tax assets, net................................. 3,450 4,140 Other assets............................................. 4,455 2,299 -------- -------- Total assets........................................... $ 79,793 $ 63,518 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable......................................... $ 3,122 $ 3,845 Credit facility indebtedness............................. 7,500 -- Acquisition indebtedness................................. 2,332 2,807 Compensation and employee benefits payable............... 9,511 6,948 Other accrued expenses................................... 2,605 3,927 -------- -------- Total current liabilities.............................. 25,070 17,527 Long-term liabilities: Acquisition indebtedness................................. 553 459 Accrued claims and settlements........................... 8,837 9,041 Other liabilities........................................ 851 1,077 -------- -------- Total liabilities...................................... 35,311 28,104 -------- -------- Stockholders' equity: Common stock, $.01 par value: 50,000,000 shares authorized; 19,885,084 and 19,721,056 shares issued and outstanding at June 30, 1999 and 1998, respectively..... 199 198 Additional paid-in-capital............................... 112,550 111,562 Retained earnings (deficit).............................. (68,267) (76,346) -------- -------- Total stockholders' equity............................. 44,482 35,414 -------- -------- Total liabilities and stockholders' equity............. $ 79,793 $ 63,518 ======== ========
The accompanying notes are an integral part of the consolidated financial statements. 14 GRUBB & ELLIS COMPANY CONSOLIDATED STATEMENTS OF OPERATIONS for the years ended June 30, 1999, 1998 and 1997 (in thousands, except share data)
1999 1998 1997 ---------- ---------- ---------- Revenue: Transaction services fees................ $ 260,071 $ 247,040 $ 201,389 Management services fees................. 54,030 35,794 27,241 ---------- ---------- ---------- Total revenue.......................... 314,101 282,834 228,630 ---------- ---------- ---------- Costs and expenses: Transaction services commissions......... 151,592 140,457 113,460 Salaries and wages....................... 83,531 70,680 55,095 Selling, general and administrative...... 61,064 53,816 43,567 Depreciation and amortization............ 6,079 3,563 2,964 Other non-recurring expenses............. -- -- 2,431 ---------- ---------- ---------- Total costs and expenses............... 302,266 268,516 217,517 ---------- ---------- ---------- Total operating income................. 11,835 14,318 11,113 Other income and expenses: Interest and other income................ 922 1,237 1,121 Interest expense......................... (702) (106) (1,453) ---------- ---------- ---------- Income before income taxes and extraordinary item.................... 12,055 15,449 10,781 Net benefit (provision) for income taxes... (3,976) 6,057 2,848 ---------- ---------- ---------- Income before extraordinary item........... 8,079 21,506 13,629 Extraordinary item--gain on extinguishment of debt, net of taxes of $195............. -- -- 5,381 ---------- ---------- ---------- Net income............................. $ 8,079 $ 21,506 $ 19,010 ========== ========== ========== Net income applicable to common stockholders, net of undeclared dividends earned on preferred stock in the amounts of $1,431 for the year ended June 30, 1997...................................... $ 8,079 $ 21,506 $ 17,579 ========== ========== ========== Net income per common share: Basic-- --from operations........................ $ 0.41 $ 1.10 $ 0.85 --from extraordinary gain................ -- -- 0.37 ---------- ---------- ---------- $ 0.41 $ 1.10 $ 1.22 ========== ========== ========== Weighted average common shares outstanding. 19,785,715 19,607,352 14,429,971 ========== ========== ========== Diluted-- --from operations........................ $ 0.37 $ 0.98 $ 0.70 --from extraordinary gain................ -- -- 0.27 ---------- ---------- ---------- $ 0.37 $ 0.98 $ 0.97 ========== ========== ========== Weighted average common shares outstanding. 21,587,898 22,043,920 19,567,635 ========== ========== ==========
The accompanying notes are an integral part of the consolidated financial statements. 15 GRUBB & ELLIS COMPANY CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) for the years ended June 30, 1999, 1998 and 1997 (in thousands, except share data)
Common Stock Total ------------------ Additional Retained Stockholders' Outstanding Preferred Paid-in- Earnings Equity Shares Amount Stock Capital (Deficit) (Deficit) ----------- ------ --------- ---------- --------- ------------- Balance as of June 30, 1996................... 8,916,415 $ 90 $ 32,143 $ 57,154 $(116,862) $(27,475) Employee common stock purchases and net exercise of common stock options.......... 72,913 1 -- 430 -- 431 Issuance of common stock, net of related costs.................. 5,000,000 50 -- 20,907 -- 20,957 Retirement of preferred stock: 5% Junior Convertible Preferred Stock....... -- -- (14,064) 14,064 -- -- Conversion of preferred stock to common stock: 12% Senior Convertible Preferred Stock....... 5,168,177 52 (15,945) 15,893 -- -- 5% Junior Convertible Preferred Stock....... 352,447 3 (2,134) 2,131 -- -- Net income.............. -- -- -- -- 19,010 19,010 ---------- ---- -------- -------- --------- -------- Balance as of June 30, 1997................... 19,509,952 196 -- 110,579 (97,852) 12,923 Employee common stock purchases and net exercise of common stock options.......... 211,104 2 -- 983 -- 985 Net income.............. -- -- -- -- 21,506 21,506 ---------- ---- -------- -------- --------- -------- Balance as of June 30, 1998................... 19,721,056 198 -- 111,562 (76,346) 35,414 Employee common stock purchases and net exercise of stock options................ 164,028 1 -- 988 -- 989 Net income.............. -- -- -- -- 8,079 8,079 ---------- ---- -------- -------- --------- -------- Balance as of June 30, 1999................... 19,885,084 $199 $ -- $112,550 $ (68,267) $ 44,482 ========== ==== ======== ======== ========= ========
The accompanying notes are an integral part of the consolidated financial statements. 16 GRUBB & ELLIS COMPANY CONSOLIDATED STATEMENTS OF CASH FLOWS for the years ended June 30, 1999, 1998 and 1997 (in thousands)
1999 1998 1997 -------- -------- -------- Cash Flows from Operating Activities: Net income...................................... $ 8,079 $ 21,506 $ 19,010 Adjustments to reconcile net income to net cash provided by operating activities: Extraordinary item--gain on extinguishment of debt, net of tax............................. -- -- (5,381) Deferred tax provision (benefit).............. 3,334 (6,504) (3,220) Depreciation and amortization................. 6,079 3,563 2,964 Interest expense on Payment-in-Kind Notes..... -- -- 465 Recovery of real estate valuation allowance... -- -- (425) Provision (recovery) for services fees receivable valuation allowances.............. 547 96 (1,161) (Increase) decrease in services fees receivable................................... (541) (4,488) (580) (Increase) decrease in prepaids and other assets....................................... (4,791) (1,321) 2,288 Increase (decrease) in accounts payable....... (723) 699 286 Increase (decrease) in compensation and employee benefits payable.................... 2,563 2,380 (812) Decrease in accrued claims and settlements.... (204) (1,471) (3,071) Decrease in other liabilities................. (1,548) (19) (1,847) -------- -------- -------- Net cash provided by operating activities... 12,795 14,441 8,516 -------- -------- -------- Cash Flows from Investing Activities: Purchases of equipment, software and leasehold improvements................................... (9,669) (10,200) (3,216) Cash paid for business acquisitions, net of cash acquired....................................... (17,102) (7,580) -- -------- -------- -------- Cash used in investing activities........... (26,771) (17,780) (3,216) -------- -------- -------- Cash Flows From Financing Activities: Proceeds from borrowing......................... 7,500 -- -- Repayment of acquisition indebtedness........... (3,264) -- -- Proceeds from issuance of common stock, net..... 989 985 21,388 Repayment of long-term debt to related party.... -- -- (23,000) Deferred financing fees......................... -- (185) (445) -------- -------- -------- Net cash provided by (used in) financing activities................................. 5,225 800 (2,057) -------- -------- -------- Net (decrease) increase in cash and cash equivalents (8,751) (2,539) 3,243 Cash and equivalents at beginning of the year... 14,251 16,790 13,547 -------- -------- -------- Cash and cash equivalents at end of the year.... $ 5,500 $ 14,251 $ 16,790 ======== ======== ========
The accompanying notes are an integral part of the consolidated financial statements. 17 GRUBB & ELLIS COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. Summary of Significant Accounting Policies (a) The Company: Grubb & Ellis Company (the "Company") is a full service commercial real estate company that provides services to real estate owners/investors and tenants including transaction services involving leasing, acquisitions and dispositions, and property and facilities management services. Additionally, the Company provides consulting and strategic services with respect to commercial real estate. (b) Principles of Consolidation: The consolidated financial statements include the accounts of Grubb & Ellis Company, and its wholly and majority owned and controlled subsidiaries and controlled partnerships, including Grubb & Ellis Management Services, Inc. ("GEMS"), which provides property and facilities management services. All significant intercompany accounts have been eliminated. (c) Basis of Presentation: The financial statements have been prepared in conformity with generally accepted accounting principles which require management to make estimates and assumptions that affect the reported amounts of assets and liabilities (including disclosure of contingent assets and liabilities) at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. (d) Revenue Recognition: Real estate sales commissions are recognized at the earlier of receipt of payment, close of escrow or transfer of title between buyer and seller. Receipt of payment occurs at the point at which all Company services have been performed, title to real property has passed from seller to buyer, if applicable, and no contingencies exist with respect to entitlement to the payment. Real estate leasing commissions are recognized at the earlier of receipt of full payment or partial payment and tenant occupancy, assuming a lease agreement has been executed and no contingencies exist. All other commissions and fees are recognized at the time the related services have been performed by the Company, unless future contingencies exist. (e) Costs and Expenses: Real estate transaction and other commission expense is recognized concurrently with the related revenue. All other costs and expenses are recognized when incurred. GEMS incurs certain salaries, wages and benefits in connection with the property and corporate facilities management services it provides which are in part reimbursed by the owners of such properties. The following is a summary of the GEMS total gross and reimbursable salaries, wages and benefits (in thousands) for the years ended June 30, 1999, 1998 and 1997. The net expense is included in salaries and wages on the Consolidated Statements of Operations.
1999 1998 1997 -------- -------- -------- Gross salaries, wages and benefits.......... $125,126 $101,610 $ 82,681 Less: reimbursements from property owners... (94,753) (79,333) (67,051) -------- -------- -------- Net salaries, wages and benefits............ $ 30,373 $ 22,277 $ 15,630 ======== ======== ========
18 GRUBB & ELLIS COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (f) Accounting for Stock-Based Compensation: Statement of Financial Accounting Standards No. 123, "Accounting for Stock- Based Compensation" ("Statement 123") allows companies to either account for stock-based compensation under the provisions of Statement 123 or under the provisions of Accounting Principles Bulletin Opinion No. 25 ("APB 25"). The Company elected to continue accounting for stock based compensation to its employees under the provisions of APB 25. Accordingly, if the exercise price of the Company's employee stock options equals or exceeds the fair market value of the underlying stock on the date of grant, no compensation expense is recognized by the Company. If the exercise price of an award is less than the fair market value of the underlying stock at the date of grant, the Company recognizes the difference as compensation expense over the vesting period of the award. The Company, however, is required to provide pro forma disclosure as if the fair value measurement provisions of Statement 123 had been adopted. See Note 7 of Notes to Consolidated Financial Statements for additional information. (g) Income Taxes: Deferred income taxes are recorded based on enacted statutory rates to reflect the tax consequences in future years of the differences between the tax bases of assets and liabilities and their financial reporting amounts. Deferred tax assets, such as net operating loss carryforwards, which will generate future tax benefits are recognized to the extent that realization of such benefits through future taxable earnings or alternative tax strategies is more likely than not. (h) Cash and Cash Equivalents: Cash and cash equivalents consist of demand deposits and highly liquid short-term debt instruments with maturities of three months or less from the date of purchase and are stated at cost. Cash payments for interest were approximately $511,000, $127,000 and $1.5 million for each of the fiscal years ended June 30, 1999, 1998 and 1997, respectively. Cash payments for income taxes for the fiscal years ended June 30, 1999, 1998 and 1997 were approximately $474,000, $297,000 and $168,000, respectively. (i) Equipment, Software and Leasehold Improvements: Equipment, software and leasehold improvements are recorded at cost. Depreciation of equipment is computed using the straight-line method over their estimated useful lives ranging from three to seven years. Software costs consist of costs to purchase and develop software. All software costs are amortized using a straight line method over their estimated useful lives, ranging from three to seven years. Development costs are amortized once the related software is placed in service. Leasehold improvements are amortized using the straight-line method over their useful lives not to exceed the terms of the respective leases. Maintenance and repairs are charged to expense as incurred. (j) Goodwill Goodwill, representing the excess of the cost over the net tangible assets of acquired businesses, is stated at cost and is amortized on a straight line basis over estimated future periods to be benefited, which range from 15 to 25 years. Accumulated amortization amounted to approximately $1,651,000 and $338,000 at June 30, 1999 and 1998, respectively. In accordance with Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of", the net carrying value of goodwill is reviewed by 19 GRUBB & ELLIS COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) management if facts and circumstances, such as significant declines in revenues or number of brokers, suggest that it may be impaired. If any impairment is indicated as a result of such reviews, the Company would measure it by comparing undiscounted cash flows of a specific acquired business with the carrying value of goodwill associated therewith. If the future estimated undiscounted cash flows are not sufficient to recover the carrying value of such goodwill, such asset would be adjusted to its fair value through a charge to operations. No impairment losses have been identified in fiscal 1999, 1998 or 1997. (k) Accrued Claims and Settlements: The Company has maintained partially self-insured and deductible programs for errors and omissions, general liability, workers' compensation and certain employee health care costs. Reserves for such programs are included in accrued claims and settlements and compensation and employee benefits payable, as appropriate. Reserves are based on the aggregate of the liability for reported claims and an actuarially-based estimate of incurred but not reported claims. (l) Fair Value of Financial Instruments: Statement of Financial Accounting Standards No. 107, "Disclosures about Fair Value of Financial Instruments", requires disclosure of fair value information about financial instruments, whether or not recognized in the Consolidated Balance Sheets. Considerable judgment is required in interpreting market data to develop estimates of fair value. Accordingly, the estimates presented herein are not necessarily indicative of the amounts that the Company could realize in a current market exchange. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts. The carrying amounts of the Company's financial instruments, which include cash and cash equivalents, receivables and obligations under accounts payable and debt instruments, approximate their fair values, based on similar instruments with similar risks. (m) Segment reporting: Effective April 1, 1999, the Company adopted the Financial Accounting Standards Board's Statement of Financial Accounting Standards No. 131, Disclosures about Segments of an Enterprise and Related Information (Statement 131) which establishes standards for the way that public business enterprises report information about operating segments in their financial statements. The adoption of Statement 131 did not affect the Company's results of operations or financial position, but did affect the disclosure of segment information. See note 13 of Notes to Consolidated Financial Statements. (n) Reclassifications: Certain prior year amounts have been reclassified to conform to the current year presentation. 2. Services Fees Receivable, net Service fees receivable at June 30, 1999 and 1998 consisted of the following (in thousands):
1999 1998 -------- -------- Commissions and fees receivable....................... $ 27,017 $ 22,172 Commissions payable................................... (14,874) (10,591) Allowance for uncollectible accounts.................. (2,662) (2,115) -------- -------- Total............................................... 9,481 9,466 Less portion classified as current.................... 9,019 9,025 -------- -------- Noncurrent portion (included in other assets)....... $ 462 $ 441 ======== ========
20 GRUBB & ELLIS COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) The following is a summary of the changes in the allowance for uncollectible service fees receivable for the fiscal years ended June 30, 1999, 1998 and 1997 (in thousands):
1999 1998 1997 ------ ------ ------- Balance at beginning of year....................... $2,115 $2,019 $ 3,180 Provision for bad debt............................. 547 96 -- Recovery of allowance.............................. -- -- (1,161) ------ ------ ------- Balance at end of year............................. $2,662 $2,115 $ 2,019 ====== ====== =======
3. Equipment, Software and Leasehold Improvements, net Equipment, software and leasehold improvements at June 30, 1999 and 1998 consisted of the following (in thousands):
1999 1998 ------- ------- Furniture, equipment and software systems................. $33,545 $26,569 Leasehold improvements.................................... 4,097 3,275 ------- ------- Total................................................... 37,642 29,844 Less accumulated depreciation and amortization............ 19,088 16,692 ------- ------- Equipment, software and leasehold improvements, net....... $18,554 $13,152 ======= =======
The Company wrote off approximately $2.2 million and $297,000 of fully depreciated furniture and equipment during the fiscal years ended June 30, 1999 and 1998, respectively. 4. Earnings Per Common Share Statement of Financial Accounting Standards No. 128, "Earnings per Share" ("Statement 128") requires disclosure of basic earnings per share which excludes any dilutive effects of options, warrants, and convertible securities and diluted earnings per share. All earnings per share amounts for all periods have been presented and, where necessary, restated to conform to the Statement No. 128 requirements. The calculation of earnings per common share for fiscal 1997 includes net income adjusted for amounts applicable to the Senior and Junior Convertible Preferred Stock related to undeclared dividends. All of the preferred stock was either retired or converted to common stock in December, 1996 (see Note 5), and all accrued and undeclared dividends through that date were forgiven. 21 GRUBB & ELLIS COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) The following table sets forth the computation of basic and diluted earnings per common share from continuing operations (in thousands, except per share data):
For the fiscal year ended June 30, ------------------------- 1999 1998 1997 ------- -------- -------- Basic earnings per common share: Income before extraordinary gain............... $ 8,079 $ 21,506 $ 13,629 Adjustments Dividends--senior convertible preferred stock....................................... -- -- (1,032) Dividends--junior convertible preferred stock....................................... -- -- (399) ------- -------- -------- Net income before extraordinary gain applicable to common stockholders........... $ 8,079 $ 21,506 $ 12,198 ======= ======== ======== Weighted average common shares outstanding-- basic......................................... 19,786 19,607 14,430 ======= ======== ======== Earnings per common share--basic............... $ 0.41 $ 1.10 $ 0.85 ======= ======== ======== Diluted earnings per common share: Net income before extraordinary gain applicable to common stockholders........................ $ 8,079 $21,506 $13,629 ======= ======== ======== Weighted average common shares outstanding..... 19,786 19,607 14,430 Effect of dilutive securities: Stock options and warrants................... 1,802 2,437 1,631 Senior convertible preferred stock........... -- -- 2,308 Junior convertible preferred stock........... -- -- 1,199 ------- -------- -------- Weighted average common shares outstanding..... 21,588 22,044 19,568 ======= ======== ======== Earnings per common share--diluted............. $ 0.37 $ .98 $ 0.70 ======= ======== ========
Options outstanding to purchase shares of common stock, the effect of which would be antidilutive, were 1,124,850 and 48,550 at June 30, 1999 and June 30, 1998, respectively, and were not included in the computation of diluted earnings per share because the option exercise price was greater than the average market price of the common shares for the year. 5. Financing and Capital Related Transactions Revolving Credit Facility: On March 13, 1997 the Company entered into a $15 million revolving credit facility (the "Credit Agreement") with PNC Bank, National Association ("PNC") for general corporate purposes and acquisitions. The Credit Agreement expires on March 13, 2001. On January 26, 1998, PNC and the Company amended the Credit Agreement by adding an additional bank and expanding the credit facility to $35 million. Payment and maturity terms remained relatively unchanged, with interest on outstanding borrowings due quarterly in arrears. Interest is based upon PNC's prime rate and/or the LIBOR rate plus, in either case, an additional margin based upon a particular financial ratio of the Company, and will vary depending upon which interest rate options the Company chooses to be applied to specific borrowings. At June 30, 1999, the Company had outstanding borrowings of $7.5 million under the Credit Agreement, with a weighted average interest rate of 7.0 percent. In connection with the Credit Agreement and the subsequent amendment, the Company incurred commitment and other financing fees totaling approximately $576,000, which are being amortized over the 22 GRUBB & ELLIS COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) term of the Credit Agreement. Performance of the Company's obligations under the Credit Agreement is collateralized by substantially all of the Company's assets. The Credit Agreement contains certain restrictive covenants, including, among other things, the prohibition of the payment of dividends, restrictions on the issuance of certain types of preferred stock, and the maintenance of certain financial ratios. Fiscal 1997 Financing Transactions: During the year ended June 30, 1997, the Company retired all of its outstanding long-term debt, as further described below. Sale Agreement--Long-term Debt--On October 21, 1996, Warburg, Pincus Investors, L.P. ("Warburg") and The Prudential Insurance Company of America ("Prudential") entered into an agreement (the "Sale Agreement") pursuant to which Warburg acquired from Prudential all of the outstanding debt, common stock warrants, and substantially all of the Junior Convertible Preferred Stock held by Prudential in the Company (together, the "Prudential Securities"), for $23 million plus accrued but unpaid interest on the debt. The closing occurred on October 22, 1996. Concurrently, Warburg granted the Company an option, (the "Option") until April 16, 1997, to acquire all of the Prudential Securities which Warburg acquired from Prudential, at Warburg's cost, plus interest. The Prudential Securities included: (a) $5 million Revolving Credit Note due November 1, 1999 (the "Revolving Credit Note"); (b) $10 million 9.9% Senior Notes due in equal installments on November 1, 1997 and 1998 (the "Senior Notes"); (c) $10.9 million 11.65% Subordinated Payment-In-Kind Note due November 1, 2000 and 2001; (d) $2.2 million 11.65% Subordinated Payment-In-Kind Notes, due November 1, 2000 and 2001 ((c) and (d) collectively the "PIK Notes"); (e) 130,233 shares of Junior Convertible Preferred Stock; and (f) stock subscription warrants to subscribe for 350,000 shares of common stock. Pursuant to the Sale Agreement, Prudential agreed that in the event that Warburg converted its Senior Convertible Preferred Stock to common stock, Prudential would convert its remaining Junior Convertible Preferred Stock to common stock. As of the date of the Sale Agreement, Prudential continued to hold 397,549 shares of common stock and 19,767 shares of Junior Convertible Preferred Stock convertible into 352,447 shares of common stock. While the Option remained unexercised during the Option period, no interest or dividends accrued or were due or payable on the Prudential Securities; however, the Company was obligated to pay Warburg interest at an initial rate of 10% per annum, increasing to 12% per annum as of February 1, 1997, on Warburg's $23 million investment in the Prudential Securities. In consideration of receipt of the Option, the Company agreed to extend the expiration date of warrants to purchase an aggregate of 1,012,358 shares of common stock of the Company, then held by Warburg, to January 29, 2002. Equity Investments--On December 11, 1996, the Company sold 2.5 million shares of its common stock for $10 million to the principals of the Kojaian Companies, Southfield, Michigan. The $10 million was used to purchase from Warburg, and then retire, all of the outstanding PIK Notes (approximately $13.6 million of principal and accrued interest) and 130,233 shares of Junior Convertible Preferred Stock. The repurchase of the PIK Notes resulted in a $3.6 million extraordinary gain on the extinguishment of debt. Concurrently, Warburg and Joe F. Hanauer, a director of the Company, converted all of the Senior Convertible Preferred Stock held by them into an aggregate of 5,168,177 shares of common stock, and Mr. Hanauer agreed to cancel certain warrants held by him. In connection with these transactions, Warburg retained warrants to purchase an aggregate of 325,000 shares of common stock and Mr. Hanauer received, from Warburg, warrants to purchase an aggregate of 25,000 shares of common stock. At the same time, Warburg granted the Company a second option (the "Second Option") to purchase the Senior Notes and Revolving Credit Note held by Warburg until 23 GRUBB & ELLIS COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) April 16, 1997 for $13 million, plus interest, and the Option was canceled. Pursuant to the Sale Agreement, Prudential converted all of its remaining shares of Junior Convertible Preferred Stock into an aggregate of 352,447 shares of common stock. On January 24, 1997, the Company sold 2.5 million shares of its common stock for $11.25 million to Archon Group, L.P., a majority owned subsidiary of the international investment bank, Goldman, Sachs & Co. The $11.25 million, together with existing cash, was used to exercise the Second Option and purchase from Warburg, and then retire, the $10 million Senior Notes and $5 million Revolving Credit Note, at a price equal to $13 million plus accrued interest of approximately $96,000. The purchase of these notes resulted in a $2 million extraordinary gain on the extinguishment of debt. As a result of the above mentioned transactions, all shares of Senior and Junior Convertible Preferred Stock of the Company were either converted to common stock or retired, and all accrued and undeclared dividends were forgiven. 6. Income Taxes The Company maintains a fiscal year ending June 30 for financial reporting purposes and a calendar year for income tax reporting purposes. The provision (benefit) for income taxes for the fiscal years ended June 30, 1999, 1998 and 1997 consisted of the following:
1999 1998 1997 ------ ------- ------- Current Federal.......................................... $ 227 $ 169 $ 217 State and local.................................. 415 278 155 ------ ------- ------- 642 447 372 Deferred......................................... 3,334 (6,504) (3,220) ------ ------- ------- Net provision (benefit).......................... $3,976 $(6,057) $(2,848) ====== ======= =======
At June 30, 1999, the following income tax carryforwards were available to the Company (in thousands):
Expiration Amount Dates ------- ------------ Federal income tax operating loss carryforwards......... $11,506 2007 to 2010 Federal investment tax credit carryforwards............. 278 1999 to 2000 Federal alternative minimum tax credit carryforward..... 624 Indefinite
24 GRUBB & ELLIS COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) In addition, certain of the Company's net operating loss carryforwards ("NOL's") are limited pursuant to Section 382 of the Internal Revenue Code ("Code") relating to a prior ownership change. The NOL's of $11.7 million allowable under Section 382 are limited to approximately $825,000 per year, subject to carryforward term limitations specified by the Code. At June 30, 1999, the amount of NOL's not subject to limitation amounted to approximately $4.4 million and are included as a deferred tax asset in the table below. The Company's effective tax rate on its income before taxes differs from the statutory federal income tax rate as follows:
Years Ended June 30, -------------------- 1999 1998 1997 ----- ----- ----- Federal statutory rate............................... 35.0% 35.0% 35.0% State and local income taxes (net of federal tax benefits)........................................... 1.9 1.2 1.4 Alternative minimum tax.............................. 1.9 1.1 1.3 Meals and entertainment.............................. 3.4 2.4 .8 Reduction in valuation allowance..................... (11.0) (53.0) (32.0) Goodwill amortization................................ .9 -- -- Other................................................ .9 -- -- Stock option compensation............................ -- (3.9) -- Real estate partnership losses....................... -- (6.9) -- NOL carryforwards.................................... -- (15.1) (22.7) ----- ----- ----- Effective income tax rate.......................... 33.0% (39.2)% (16.2)% ===== ===== =====
During fiscal years 1999, 1998 and 1997, the Company reduced the valuation allowance by $1.3 million, $6.5 million and $3.2 million, respectively, to recognize deferred tax assets expected to be realized in future years. The recognition of deferred tax assets is based primarily upon the expected utilization of NOL and credit carryforwards. Management believes that, due to favorable economic conditions, the elimination of long-term debt and the Company's recent history of earnings, it is more likely than not that the Company will generate sufficient future taxable income to realize the net deferred tax assets. Deferred income tax liabilities or assets are determined based on the differences between the financial statement and tax bases of assets and liabilities. The components of the Company's deferred tax assets and liabilities are as follows as of June 30, 1999 and 1998 (in thousands):
1999 1998 ------- ------- Deferred tax assets: NOL and credit carryforwards............................. $ 5,389 $ 9,739 Insurance reserves....................................... 2,784 3,442 Commission and fee reserves.............................. 1,028 1,236 Claims and settlements................................... 1,423 991 Other.................................................... 766 486 ------- ------- Deferred tax assets.................................... 11,390 15,894 Less valuation allowance................................... 4,260 5,585 ------- ------- 7,130 10,309 Deferred tax liabilities: Accumulated depreciation................................. (740) (585) ------- ------- Net deferred tax asset................................. $ 6,390 $ 9,724 ======= ======= Current.............................................. $ 2,940 $ 5,584 ======= ======= Long-term............................................ $ 3,450 $ 4,140 ======= =======
25 GRUBB & ELLIS COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 7. Stock Options, Warrants and Stock Purchase and Employee 401(k) Plans Stock Option Plans: Changes in stock options were as follows for the fiscal years ended June 30, 1999, 1998 and 1997:
1999 1998 1997 -------------------------- --------------------------- -------------------------- Shares Exercise Price Shares Exercise Price Shares Exercise Price --------- --------------- --------- ---------------- --------- --------------- Stock Options Outstanding at the beginning of the year.. 2,383,280 $1.88 to $27.50 1,802,320 $ 1.88 to $27.50 1,085,400 $1.88 to $28.75 Granted................. 357,500 $6.25 to $ 8.94 815,000 $11.13 to $16.44 800,000 $3.38 to $15.25 Lapsed or canceled...... (182,100) $2.38 to $27.50 (87,600) $ 2.38 to $18.75 (61,340) $1.88 to $28.75 Exercised............... (28,400) $1.88 to $ 6.50 (146,440) $ 1.88 to $13.50 (21,740) $1.88 to $10.00 --------- --------- --------- Stock options outstanding at the end of the year............ 2,530,280 $1.88 to $18.75 2,383,280 $ 1.88 to $27.50 1,802,320 $1.88 to $27.50 ========= ========= ========= Exercisable at end of the year............... 1,045,102 635,520 446,864 $1.88 to $27.50 ========= ========= =========
The Company had 1,132,630 stock options with exercise prices ranging from $1.88 to $4.40, 429,800 stock options with exercise prices ranging from $6.25 to $8.94 and 967,850 stock options with exercise prices ranging from $11.31 to $18.75, outstanding at June 30, 1999. Weighted average information per share with respect to stock options for fiscal years ended June 30, 1999 and 1998 is as follows:
1999 1998 ---------- ---------- Exercise price: Granted........................................... $ 8.49 $11.49 Lapsed or canceled................................ 10.67 11.03 Exercised......................................... 3.71 3.26 Outstanding at June 30............................ 6.96 6.98 Remaining life...................................... 4.78 years 4.75 years
The Company's 1990 Amended and Restated Stock Option Plan, as amended, provides for grants of options to purchase the Company's common stock. The plan was amended effective February 1, 1997 and June 20, 1997 to increase the authorized number of shares issuable under the plan by 300,000 and 200,000 shares, respectively, to a total of 2,000,000 shares. At June 30, 1999, 1998 and 1997, the number of shares available for the grant of options under the plan were 226,124, 164,474 and 186,874, respectively. Stock options under this plan may be granted at prices from 50% up to 100% of the market price per share at the dates of grant, the terms and vesting schedules of which had been determined by the Compensation Committee of the Board of Directors until September 1996, and thereafter, by the Board of Directors. The Company's 1993 Stock Option Plan for Outside Directors provides for an automatic grant to each newly-elected non-management member of the Board of Directors of an option to purchase 10,000 shares of common stock, at exercise prices set at the market price at the date of grant. The options expire five years from the date of grant and vest over three years from such date. The plan originally authorized 50,000 shares for issuance, but was amended in November 1998 to increase the number of issuable shares to 300,000. In addition, the amendment provides for additional automatic grants of 8,000 shares to each outside director upon each of such director's successive fourth year anniversaries of service. These new grants expire ten years after the date of grant and vest over four years from such date. At each of June 30, 1999, 1998 and 1997, the number of shares available for the grant of options was 246,000, 10,000 and 20,000, respectively. 26 GRUBB & ELLIS COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) The Company's 1998 Stock Option Plan provides for grants of options to purchase the Company's common stock. The plan authorizes the issuance of up to 2,000,000 shares, and had 1,081,950 and 1,305,000 shares available for grant as of June 30, 1999 and 1998, respectively. Stock options under this plan may be granted at prices and with such other terms and vesting schedules as determined by the Compensation Committee of the Board of Directors, or, with respect to options granted to corporate officers, the full Board of Directors. Stock Warrants: As of June 30, 1999, the Company had the following stock warrants outstanding, all of which expire on January 29, 2002:
Number of Exercise Warrants Price --------- -------- 475,000......................... $2.37500 235,045......................... 3.40355 887,358......................... 3.50000 88,496......................... 3.60449
In July 1999, the Company issued a warrant to purchase 600,000 shares of the Company's common stock to the parent company of Landauer Associates, Inc. ("LAI"), as part of the consideration granted in the acquisition of LAI. The warrants have an exercise price of $6.25 and a five year life, expiring in July 2004. Employee Common Stock Purchase Plans: The Company's former plan (the Employee New Stock Purchase Plan) was effective from May 1987 through June 30, 1997, when it expired. It enabled eligible employees to purchase common stock of the Company at discounted prices. As amended, up to 200,000 shares of stock were authorized for issuance under this plan. When it expired, all but 20,576 shares had been issued under the plan. During the fiscal year ended June 30, 1997, the number of shares purchased under this plan were 22,970. The Grubb & Ellis Company Employee Stock Purchase Plan was adopted effective August 1, 1997, and provides for the purchase of up to 750,000 shares of common stock by employees of the Company at a 15% discount from market price, as defined, through payroll deductions. The number of shares purchased under this plan were 135,963 and 79,272 during the fiscal years ended June 30, 1999 and 1998, respectively. Employee 401(k) Plans: Prior to January 1, 1997, the Company had an employee 401(k) plan covering eligible employees other than employees of GEMS. The Company contributed on a discretionary basis to the plan based upon specified percentages of voluntary employee contributions, which employer contributions may be made in common stock or cash, or a combination of both. Prior to January 1, 1997, GEMS also had an employee 401(k) plan, under which it made similar discretionary contributions; however such plan did not provide for employer contributions to be made in stock. The two plans were merged on January 1, 1997 and provide that employer contributions may be made in common stock of the Company or cash. Discretionary contributions by the Company and other expenses for the plans amounted to approximately $891,000, $637,000 and $585,000 for the fiscal years ended June 30, 1999, 1998 and 1997, respectively. Pro Forma Information: Pro forma information regarding net income and earnings per share is required by Statement 123, and has been determined as if the Company had accounted for options granted subsequent to July 1, 1996, and therefore 27 GRUBB & ELLIS COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) includes grants under the 1990 Amended and Restated Stock Option Plan, 1993 Stock Option Plan for Outside Directors and 1998 Stock Option Plan, and purchases made under the Grubb & Ellis Employee Stock Purchase Plan, under the fair value method of that Statement. The fair value for the options was estimated at the date of grant using a Black-Scholes option pricing model. Weighted-average assumptions for fiscal years 1999, 1998 and 1997, respectively, are as follows:
1999 1998 1997 ---------- ---------- ---------- Risk free interest rates............. 4.74% 6.13% 6.27% Dividend yields...................... 0% 0% 0% Volatility factors of the expected market price of the common stock.... .627 .625 .586 Weighted-average expected lives...... 6.00 years 4.10 years 4.96 years
The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because changes in these assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of options granted. The weighted average fair values of options granted by the Company in fiscal years 1999, 1998 and 1997 using this model were $4.40, $6.17 and $4.40, respectively. The effects on fiscal year 1999, 1998 and 1997 pro forma net income and pro forma earnings per common share of amortizing to expense the estimated fair value of stock options are not necessarily representative of the effects on net income to be reported in future years due to such things as the vesting period of the stock options, and the potential for issuance of additional stock options in future years. For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the options' vesting period. The pro forma effect of applying Statement 123's fair value method to the Company's stock-based awards results in net income of approximately $6,645,000 and $20,609,000, basic earnings per share of $.34 and $1.05, and diluted earnings per share of $.31 and $.93 for the fiscal years ended June 30, 1999 and 1998, respectively. Pro forma results for fiscal year 1997 are not materially different from amounts reported. Stock Repurchase Plan: In August 1999, the Company announced a program through which it may repurchase up to $3.0 million of its common stock on the open market from time to time as market conditions warrant. 8. Related Party Transactions Revenue earned by the Company for services rendered to affiliates, including joint ventures, officers and directors and their affiliates, was as follows for the fiscal years ended June 30, 1999, 1998 and 1997 (in thousands):
1999 1998 1997 ------ ------ ------ Transaction service commissions..................... $2,152 $3,282 $ 836 Management services and other fees.................. $3,918 $2,341 $1,028
28 GRUBB & ELLIS COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 9. Commitments and Contingencies Noncancelable Operating Leases: The Company has noncancelable operating lease obligations for office space and certain equipment ranging from one to eight years, and sublease agreements under which the Company acts as sublessor. The office space leases provide for annual rent increases based on the Consumer Price Index, or other specified terms, and typically require payment of property taxes, insurance and maintenance costs. Future minimum payments under noncancelable operating leases with an initial term of one year or more were as follows at June 30, 1999 (in thousands):
Year Ending Lease June 30, Obligations ----------- ----------- 2000........................ $13,266 2001........................ 11,103 2002........................ 8,748 2003........................ 5,934 2004........................ 3,517 Thereafter................... 3,307
Lease and rental expense for the fiscal years ended June 30, 1999, 1998 and 1997 amounted to $18,708,000, $15,590,000 and $14,542,000, respectively. Legal Matters: On March 14, 1994, Johsz, et al. v. Koll Company, et al., was filed in the Orange County (California) Superior Court against the Koll Company, Grubb & Ellis Company, Koll Center Newport Number 10, a California general partnership ("Koll"), and Southern California Edison Company ("Edison"). The complaint was served on the Company in June 1994. A second complaint, Younkin, Maiona, et al. v. Koll Company, et al., based on similar causes of action, was filed in the same court on December 13, 1994 and served on the Company in February 1995. The plaintiffs in these two cases, three former Company brokers, two former Company employees, and their spouses, alleged that the brokers and employees acquired cancer from electromagnetic waves produced by the electric transformer owned by Edison and situated in a vault below office space leased by the Company in a building owned by Koll. The complaints alleged negligence, battery, and negligent infliction of emotional distress, fraudulent concealment, loss of consortium and, against Edison only, strict liability. Specific damages were not pled. In the Johsz case, plaintiffs dismissed with prejudice all causes of action allowing punitive damages. The remaining causes of action were dismissed by summary judgment of the Superior Court, entered on December 18, 1995, and the plaintiffs appealed this summary judgment to the California Court of Appeals. In the Younkin case, plaintiff Maiona died while the suit was pending. In 1998, all of the Younkin plaintiffs dismissed their claims. Maiona's heirs filed a wrongful death action (Maiona v. Southern California Edison, et. al.) alleging essentially the same theory as the dismissed Younkin case. The Company moved to dismiss the Maiona case which motion was granted in September 1998. In January 1999, both the Johsz and Maiona matters were settled without any payment to the plaintiff by the Company. John W. Matthews, et al. v. Kidder, Peabody & Co., et al. and HSM Inc., et al., filed on January 23, 1995 in the United States District Court for the Western District of Pennsylvania, is a class action on behalf of approximately 6,000 limited partners who invested approximately $85 million in three public real estate limited partnerships (the "Partnerships") during the period beginning in 1982 and continuing through 1986. HSM Inc. is a wholly-owned subsidiary of the Company. The complaint alleges violations under the Racketeer Influenced 29 GRUBB & ELLIS COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) and Corrupt Organizations Act ("RICO"), securities fraud, breach of fiduciary duty and negligent misrepresentation surrounding the defendants' organization, promotion, sponsorship and management of the Partnerships. Specific damages were not pled, but treble, punitive as well as compensatory damages and restitution are sought. On December 19, 1995 the court granted the defendants' motion to dismiss the entire complaint with regard to Partnerships I and III, based upon the plaintiff's lack of standing in those Partnerships but denied the motion with respect to the plaintiff's standing in Partnership II, in which the plaintiff was a unitholder. The court declined to rule on the other bases for dismissal, stating that they could be raised by summary judgment motion after discovery. Plaintiff filed a motion for leave to file an amended complaint adding new party plaintiffs in order to preserve claims relating to Partnerships I and III. On September 27, 1996, the court granted plaintiff's motion to file an amended complaint to add additional plaintiffs with respect to Partnerships I and III. Also on that date, the court granted plaintiffs' motion for class certification with respect to Partnerships I, II and III. Subsequently, the court entered an order granting an interlocutory appeal by defendants to the September 26, 1996 order on the question of the applicability of the Private Securities Litigation Reform Act of 1995 (the "Securities Litigation Reform Act") to this case. The case was stayed, including discovery, pending the outcome of the appeal. In November 1998 the United States Court of Appeals for the Third Circuit entered an order holding that the Securities Litigation Reform Act is not applicable to this case and that plaintiffs may proceed with their RICO claims against the defendants. Discovery is now proceeding. Defendants filed a petition for writ of certiorari with the United States Supreme Court appealing the Third Circuit's decision. On April 19, 1999, the United States Supreme Court denied defendants' petition. The Company intends to vigorously defend the Matthews action, and believes it has meritorious defenses to contest the claims asserted by the plaintiffs. Based upon available information, the Company is not able to determine the financial impact, if any, of such action, but believes that the outcome will not have a material adverse effect on the Company's financial position or results of operations. The Company is involved in various other claims and lawsuits arising out of the conduct of its business, as well as in connection with its participation in various joint ventures, partnerships, a trust and appraisal business, many of which may not be covered by the Company's insurance policies. In the opinion of management, the eventual outcome of such claims and lawsuits is not expected to have a material adverse effect on the Company's financial position or results of operations. 10. Other Non-recurring Expense During the fiscal year ended June 30, 1997, the Company recorded a $2.4 million charge for incremental non-recurring costs related to the relocation of the Company's corporate headquarters from San Francisco, California to Northbrook, Illinois. 11. Concentration of Credit Risk Financial instruments that potentially subject the Company to credit risk consist principally of trade receivables and interest-bearing investments. Users of real estate services account for a substantial portion of trade receivables and collateral is generally not required. The risk associated with this concentration is limited due to the large number of users and their geographic dispersion. The Company places substantially all of its interest-bearing investments with major financial institutions and limits the amount of credit exposure with any one financial institution. 30 GRUBB & ELLIS COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 12. Business Acquisitions and Related Indebtedness Fiscal 1998 Acquisitions The Company completed the acquisition of White Commercial Real Estate in March 1998, Crane Realty & Management Co. and certain assets of LaCagnina & Associates in April 1998, Aequus Property Management Company in May 1998 and certain assets of Eagle Western Management Company in June 1998. Each of these acquisitions has been accounted for under the purchase method of accounting, with all operations subsequent to the respective acquisition dates reflected in the Company's financial statements. Substantially all of the purchase prices in these acquisitions were allocated to goodwill. The purchase prices of these acquisitions, net of cash acquired, totaled approximately $10.6 million, including related acquisition costs of approximately $567,000 and seller provided financing of approximately $3.0 million. The amounts due the sellers bear interest at rates ranging from 5.0% to 9.25% (with a weighted average rate of 7.86% at June 30, 1998) and have maturities totaling approximately $2,807,000 in fiscal year 1999 and approximately $170,000 in fiscal year 2000. In addition, terms of certain of the acquisitions provide for additional consideration up to a maximum of $700,000 which is dependent upon the achievement of certain levels of revenues earned subsequent to the date of acquisition. Due to the contingent nature of these amounts, the Company will record them as additional purchase price upon payment to the sellers. Fiscal 1999 Acquisitions On July 22, 1998, the Company acquired substantially all of the assets of Bishop Hawk, Inc. for total consideration of approximately $11.1 million, which included seller financing of approximately $2.5 million. The Company has recorded the acquisition under the purchase method of accounting, with all operations subsequent to the acquisition date reflected in the Company's financial statements. The notes to the seller are payable in installments through July 22, 2000, and bear interest at a weighted average rate of 9.14% per annum. The Company was obligated to make certain incentive based payments to the seller, contingent upon the achievement of defined revenue levels for the twelve months following the acquisition date. Such revenue levels were not achieved, and therefore no further contingent obligation remain related to this acquisition. In connection with this acquisition, the Company incurred $3.5 million of borrowings under its credit facility, all of which were repaid by August 21, 1998. In December 1998, the Company acquired substantially all of the assets of Williams Property Venture d/b/a Smithy Braedon Oncor International and Smithy Braedon Oncor International Management Inc. (collectively "Smithy Braedon"). The Company also acquired substantially all of the assets of Commercial Florida Realty Partners, Inc. ("Commercial Florida") and Island Realty Service Group, Inc. ("Island Realty") in February 1999. The Company has recorded these acquisitions under the purchase method of accounting, and all operations subsequent to the respective acquisition dates are reflected in the Company's financial statements. The purchase prices of these three acquisitions totaled approximately $8.3 million, including seller provided financing of approximately $347,000 which bears interest at an annual rate of 7.5% and becomes due in January 2000. The Company is also obligated to pay additional purchase price amounts which are contingent on revenue levels achieved during the twelve months following the acquisitions. Due to the contingent nature of these payments, the Company will record this portion of the purchase prices only to the extent they are paid to the sellers. Substantially all of the purchase prices in these acquisitions were allocated to goodwill. 31 GRUBB & ELLIS COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Subsequent Period Acquisition: On July 30, 1999, the Company acquired substantially all of the assets of Landauer Associates, Inc. a real estate valuation and consulting firm. Consideration given the seller at closing included cash, common stock warrants (see Note 7 of Notes to Consolidated Financial Statements), and the assumption of certain liabilities. The Company will record the acquisition under the purchase method of accounting, and all operations subsequent to the acquisition date will be reflected in the Company's financial statements for the fiscal year ending June 30, 2000. Pro Forma Information (Unaudited): The following unaudited pro forma financial information reflects the operations of the Company, assuming the above ten acquisitions had occurred on July 1 of each year (in thousands, except share data):
Fiscal year ended ----------------- June 30, June 30, 1999 1998 -------- -------- Total revenue........................................... $341,827 $343,118 Income before taxes..................................... 13,158 18,007 Net income.............................................. 8,752 23,066 Earnings per share: Basic................................................. 0.44 1.18 Diluted............................................... 0.40 1.03
Pro forma information does not purport to be indicative of the results that would have been obtained had these events occurred at the beginning of the periods presented, and is not intended to be a projection of future results. 13. Segment Information The Company has two reportable segments--Transaction Services and Management Services. The Transaction Services segment advises buyers, sellers, landlords and tenants on the sale and leasing of commercial property and includes the Company's Corporate Services, Institutional Services and national affiliate program operations. The Management Services segment provides property management, leasing and related services for owners of investment properties and facilities management services for corporate users. The fundamental distinction between the Transaction and Management Services segments lies in the nature of the revenue streams and related cost structures. Transaction Services generates revenues primarily on a commission or project fee basis. Therefore, the personnel responsible for providing these services are compensated primarily on a commission basis. The Management Services revenues are generated primarily by long term (one year or more) contractual fee arrangements. Therefore, the personnel responsible for delivering these services are compensated primarily on a salaried basis. 32 GRUBB & ELLIS COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) The Company evaluates segment performance and allocates resources based on earnings before interest expense, taxes, depreciation and amortization ("EBITDA"). The segment information below has been prepared using the same accounting policies as those described in the summary of significant accounting policies. Corporate overhead expenses, along with interest and other income, have been allocated on a relative revenue basis to each segment.
Transaction Management Company Services Services Totals ----------- ---------- -------- (Amounts in $000's) Fiscal year ended June 30, 1999 Total Revenues............................ $260,071 $54,030 $314,101 EBITDA.................................... 15,650 3,186 18,836 Total Assets.............................. 51,821 21,582 73,403 Fiscal year ended June 30, 1998 Total Revenues............................ $247,040 $35,794 $282,834 EBITDA.................................... 19,963 (845) 19,118 Total Assets.............................. 34,052 19,742 53,794 Fiscal year ended June 30, 1997 Total Revenues............................ $201,389 $27,241 $228,630 EBITDA.................................... 16,369 1,260 17,629 Total Assets.............................. 25,683 7,793 33,476
Reconciliation of Segment EBITDA to Income Statement:
Fiscal Year Ended June 30, ----------------------- 1999 1998 1997 ------- ------- ------- Total Segment EBITDA................................ $18,836 $19,118 $17,629 Less: Depreciation & Amortization......................... 6,079 3,563 2,964 Non-recurring expenses.............................. -- -- 2,431 Interest expense.................................... 702 106 1,453 ------- ------- ------- Income before income taxes and extraordinary items............................................ $12,055 $15,449 $10,781 ======= ======= =======
Reconciliation of Segment Assets to Balance Sheet:
Fiscal Year Ended June 30, ------------------- 1999 1998 ------- ------- Total segment assets..................................... $73,403 $53,794 Deferred taxes........................................... 6,390 9,724 ------- ------- Total assets........................................... $79,793 $63,518 ======= =======
33 GRUBB & ELLIS COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 14. Selected Quarterly Financial Data (Unaudited)
Fiscal Year Ended June 30, 1999 ------------------------------------------------ First Second Third Fourth Quarter Quarter Quarter Quarter ----------- ----------- ----------- ----------- (in thousands, except per share amounts and shares) Operating revenue.......... $ 76,169 $ 98,641 $ 59,962 $ 79,329 =========== =========== =========== =========== Operating income (loss).... $ 3,661 $ 9,424 $ (4,078) $ 2,828 =========== =========== =========== =========== Income (loss) before income taxes..................... $ 3,716 $ 9,580 $ (4,010) $ 2,769 =========== =========== =========== =========== Net income (loss).......... $ 2,310 $ 5,800 $ (2,406) $ 2,375 =========== =========== =========== =========== Net income (loss ) per common share: Basic-- $ 0.12 $ 0.29 $ (0.12) $ 0.12 =========== =========== =========== =========== Weighted average common shares outstanding...... 19,722 19,756 19,805 19,860 =========== =========== =========== =========== Diluted-- $ 0.11 $ 0.27 $ (0.12) $ 0.11 =========== =========== =========== =========== Weighted average common shares outstanding...... 21,880 21,657 21,480 21,337 =========== =========== =========== =========== Common stock market price range (high:low).......... 14.06:8.38 10.31:7.44 7.88:6.25 6.88:5.06 =========== =========== =========== =========== Fiscal Year Ended June 30, 1998 ------------------------------------------------ First Second Third Fourth Quarter Quarter Quarter Quarter ----------- ----------- ----------- ----------- (in thousands, except per share amounts and shares) Operating revenue.......... $ 62,099 $ 81,525 $ 58,977 $ 80,233 =========== =========== =========== =========== Operating income (loss).... $ 2,307 $ 7,281 $ (1,127) $ 5,857 =========== =========== =========== =========== Income (loss) before income taxes $ 2,586 $ 7,591 $ (791) $ 6,063 =========== =========== =========== =========== Net income................. $ 3,035 $ 8,540 $ 2,655 $ 7,276 =========== =========== =========== =========== Net income per common share: Basic-- $ 0.16 $ 0.44 $ 0.14 $ 0.37 =========== =========== =========== =========== Weighted average common shares outstanding...... 19,542 19,592 19,626 19,671 =========== =========== =========== =========== Diluted-- $ 0.14 $ 0.39 $ 0.12 $ 0.33 =========== =========== =========== =========== Weighted average common shares outstanding...... 22,036 21,988 21,915 22,087 =========== =========== =========== =========== Common stock market price range (high:low).......... 17.00:12.81 17.19:12.19 16.38:10.13 15.38:10.13 =========== =========== =========== ===========
34 ITEM 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None. GRUBB & ELLIS COMPANY PART III ITEM 10. Directors and Executive Officers of the Registrant The information called for by Item 10 is incorporated by reference from the registrant's definitive proxy statement to be filed pursuant to Regulation 14A under the Securities Exchange Act of 1934 (the "Exchange Act") no later than 120 days after the end of the 1999 fiscal year. ITEM 11. Executive Compensation The information called for by Item 11 is incorporated by reference from the registrant's definitive proxy statement to be filed pursuant to Regulation 14A under the Exchange Act no later than 120 days after the end of the 1999 fiscal year. ITEM 12. Security Ownership of Certain Beneficial Owners and Management The information called for by Item 12 is incorporated by reference from the registrant's definitive proxy statement to be filed pursuant to Regulation 14A under the Exchange Act no later than 120 days after the end of the 1999 fiscal year. ITEM 13. Certain Relationships and Related Transactions The information called for by Item 13 is incorporated by reference from the registrant's definitive proxy statement to be filed pursuant to Regulation 14A under the Exchange Act no later than 120 days after the end of the 1999 fiscal year. 35 GRUBB & ELLIS COMPANY PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K (a) The following documents are filed as a part of this report: 1. The following Report of Independent Auditors and Consolidated Financial Statements are submitted herewith: Report of Independent Auditors Consolidated Balance Sheets at June 30, 1999 and June 30, 1998. Consolidated Statements of Operations for the years ended June 30, 1999, 1998 and 1997. Consolidated Statements of Stockholders' Equity (Deficit) for the years ended June 30, 1999, 1998 and 1997. Consolidated Statements of Cash Flows for the years ended June 30, 1999, 1998 and 1997. Notes to Consolidated Financial Statements. 2. All schedules for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission are not required under the related instructions, are inapplicable, or the information is contained in the Notes to Consolidated Financial Statements and therefore have been omitted. 3. Exhibits required to be filed by Item 601 of Regulation S-K: (3) Articles of Incorporation and Bylaws 3.1 Certificate of Incorporation of the Registrant, as restated effective November 1, 1994, incorporated herein by reference to Exhibit 3.2 to the Registrant's Annual Report on Form 10-K filed March 31, 1995 (Commission File No. 1-8122). 3.2 Amendment to the Restated Certificate of Incorporation of Grubb & Ellis Company, filed with the Delaware Secretary of State on December 9, 1997, incorporated herein by reference to Exhibit 4.4 to the Registrant's Registration Statement on Form S-8 filed on December 9, 1997 (Commission File No. 333-42741). 3.3 Certificate of Retirement with respect to 130,233 Shares of Junior Convertible Preferred Stock of Grubb & Ellis Company, filed with the Delaware Secretary of State on January 22, 1997, incorporated herein by reference to Exhibit 3.3 to the Registrant's Quarterly Report on Form 10-Q filed on February 13, 1997 (Commission File No. 1-8122). 3.4 Certificate of Retirement with respect to 8,894 Shares of Series A Senior Convertible Preferred Stock, 128,266 Shares of Series B Senior Convertible Preferred Stock, and 19,767 Shares of Junior Convertible Preferred Stock of Grubb & Ellis Company, filed with the Delaware Secretary of State on January 22, 1997, incorporated herein by reference to Exhibit 3.4 to the Registrant's Quarterly Report on Form 10-Q filed on February 13, 1997 (Commission File No. 1-8122). 3.5 Grubb & Ellis Company Bylaws, as amended and restated effective June 1, 1994, incorporated herein by reference to Exhibit 3.2 to the Registrant's Quarterly Report on Form 10-Q filed on November 13, 1996 (Commission File No. 1-8122).
(4) Instruments Defining the Rights of Security Holders, including Indentures 4.1 First Amendment to Warrant No. 18, held by Warburg, Pincus Investors, L.P., exercisable for 687,358 shares of common stock of the Registrant extending the expiration date to January 29, 2002, incorporated herein by reference to Exhibit 4.2 to the Registrant's Quarterly Report on Form 10-Q filed on November 13, 1996 (Commission File No. 1-8122).
36 4.2 First Amendment to Warrant No. 19, held by Warburg, Pincus Investors, L.P., exercisable for 325,000 shares of common stock of the Registrant extending the expiration date to January 29, 2002, incorporated herein by reference to Exhibit 4.3 to the Registrant's Quarterly Report on Form 10-Q filed on November 13, 1996 (Commission File No. 1-8122). 4.3 Stock Purchase Agreement dated as of December 11, 1996 among the Registrant, Mike Kojaian, Kenneth J. Kojaian and C. Michael Kojaian, incorporated herein by reference to Exhibit 4.3 to the Registrant's Current Report on Form 8-K filed on December 20, 1996 (Commission File No. 1-8122). 4.4 Registration Rights Agreement dated as of December 11, 1996 among the Registrant, Warburg, Pincus Investors, L.P., Joe F. Hanauer, Mike Kojaian, Kenneth J. Kojaian and C. Michael Kojaian, incorporated herein by reference to Exhibit 4.1 to the Registrant's Current Report on Form 8-K filed on December 20, 1996 (Commission File No. 1-8122). 4.5 Purchase Agreement dated as of January 24, 1997 between the Registrant and Warburg, Pincus Investors, L.P., incorporated herein by reference to Exhibit 4.1 to the Registrant's Current Report on Form 8-K filed on February 4, 1997 (Commission File No. 1-8122). 4.6 Stock Purchase Agreement dated as of January 24, 1997 between the Registrant and Archon Group, L.P., incorporated herein by reference to Exhibit 4.2 to the Registrant's Current Report on Form 8-K filed on February 4, 1997 (Commission File No. 1-8122). 4.7 Registration Rights Agreement dated as of January 24, 1997 between the Registrant and Archon Group, L.P., incorporated herein by reference to Exhibit 4.3 to the Registrant's Current Report on Form 8-K filed on February 4, 1997 (Commission File No. 1-8122). 4.8 Stock Subscription Warrant No. 20 dated December 11, 1996 issued to Joe F. Hanauer Trust, incorporated herein by reference to Exhibit 4.11 to the Registrant's Quarterly Report on Form 10-Q filed on February 13, 1997 (Commission File No. 1-8122). 4.9 Stock Subscription Warrant No. 21 dated December 11, 1996 issued to Warburg, Pincus Investors, L.P., incorporated herein by reference to Exhibit 4.12 to the Registrant's Quarterly Report on Form 10-Q filed on February 13, 1997 (Commission File No. 1-8122). 4.10 Stock Subscription Warrant No. 22 dated December 11, 1996 issued to Joe F. Hanauer Trust, incorporated herein by reference to Exhibit 4.13 to the Registrant's Quarterly Report on Form 10-Q filed on February 13, 1997 (Commission File No. 1-8122). 4.11 Stock Subscription Warrant No. 23 dated December 11, 1996 issued to Warburg, Pincus Investors, L.P., incorporated herein by reference to Exhibit 4.14 to the Registrant's Quarterly Report on Form 10-Q filed on February 13, 1997 (Commission File No. 1-8122). 4.12 Form of Amendment No. 1 to Stock Subscription Warrants No. 8, 9, 13 and 15 issued to Joe F. Hanauer Trust, incorporated herein by reference to Exhibit 4.15 to the Registrant's Quarterly Report on Form 10-Q filed on February 13, 1997 (Commission File No. 1-8122). 4.13 Amended and Restated Credit Agreement among the Registrant, certain subsidiaries of the Registrant, PNC Bank, National Association, and American National Bank and Trust Company of Chicago dated as of January 26, 1998, incorporated herein by reference to Exhibit 4.1 to the Registrant's Quarterly Report on Form 10-Q filed on February 13, 1998 (Commission File No. 1-8122). 4.14 Amended and Restated Subordination Agreement among the Registrant and certain subsidiaries of the Registrant in favor of PNC Bank, National Association, and American National Bank and Trust Company of Chicago dated as of January 26, 1998, incorporated herein by reference to Exhibit 4.2 to the Registrant's Quarterly Report on Form 10-Q filed on February 13, 1998 (Commission File No. 1-8122).
37 4.15 Revolving Credit Note executed by the Registrant in favor of PNC Bank, National Association in the amount of $20 million dated as of January 26, 1998, incorporated herein by reference to Exhibit 4.3 to the Registrant's Quarterly Report on Form 10-Q filed on February 13, 1998 (Commission File No. 1-8122). 4.16 Revolving Credit Note executed by the Registrant in favor of American National Bank and Trust Company of Chicago in the amount of $15 million dated as of January 26, 1998, incorporated herein by reference to Exhibit 4.4 to the Registrant's Quarterly Report on Form 10-Q filed on February 13, 1998 (Commission File No. 1-8122). 4.17 First Amendment to Amended and Restated Credit Agreement among the Registrant, certain subsidiaries of the Registrant, PNC Bank, National Association, and American National Bank and Trust Company of Chicago dated as of March 16, 1998, incorporated herein by reference to Exhibit 4.5 to the Registrant's Quarterly Report on Form 10-Q filed on May 14, 1998 (Commission File No. 1-8122). 4.18 Amendment to Amended and Restated Credit Agreement among the Registrant, certain subsidiaries of the Registrant, PNC Bank, National Association, and American National Bank and Trust Company of Chicago dated as of August 23, 1999. 4.19 Promissory Note Issued July 22, 1998 by Grubb & Ellis Company in favor of Bishop Hawk, Inc. (in the amount of $1,084,020), incorporated herein by reference to Exhibit 2.3 to the Registrant's Current Report on Form 8-K filed on August 5, 1998 (Commission File No. 1-8122). 4.20 Stock Subscription Warrant No. A-1 dated July 30, 1999 issued to Aegon USA Realty Advisors, Inc.
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 between Neil R. Young and the Registrant dated as of February 22, 1996, incorporated herein by reference to Exhibit 10.1 to the Registrant's Quarterly Report on Form 10-Q filed on May 15, 1996 (Commission File No. 1-8122). 10.2* First Amendment to the Employment Agreement between Neil R. Young and the Registrant dated as of May 19, 1999. 10.3* Grubb & Ellis 1990 Amended and Restated Stock Option Plan, as amended effective as of June 20, 1997, incorporated herein by reference to Exhibit 4.6 to the Registrant's Registration Statement on Form S-8 filed on December 19, 1997 (Registration No. 333-42741). 10.4* Description of Grubb & Ellis Company Executive Officer Incentive Compensation Plan. 10.5* 1993 Stock Option Plan for Outside Directors, incorporated herein by reference to Exhibit 4.1 to the Registrant's registration statement on Form S-8 filed on November 12, 1993 (Registration No. 33-71484). 10.6 First Amendment to the 1993 Stock Option Plan for Outside Directors, effective November 19, 1998, incorporated herein by reference to Exhibit 10.1 to the Registrant's Quarterly Report on Form 10-Q filed on February 12, 1999 (Commission File No. 1-8122). 10.6* Grubb & Ellis 1998 Stock Option Plan, effective as of January 13, 1998. 10.7* Executive Change of Control Plan, effective as of May 10, 1999 and attached form of Acknowledgement Agreement.
38 10.8 Amended and Restated Master Collateral Assignment of Contracts Rights to PNC Bank, National Association, as Agent by the Registrant and Subsidiaries of the Registrant as of January 26, 1998, incorporated herein by reference to Exhibit 10.1 to the Registrant's Quarterly Report on Form 10-Q filed on February 13, 1998 (Commission File No. 1-8122). 10.9 Amended and Restated Master Agreement of Guaranty and Suretyship by the Registrant and Subsidiaries of the Registrant in favor of PNC Bank, National Association, as Agent by the Registrant and Subsidiaries of the Registrant as of January 26, 1998, incorporated herein by reference to Exhibit 10.2 to the Registrant's Quarterly Report on Form 10-Q filed on February 13, 1998 (Commission File No. 1-8122). 10.10 Amended and Restated Pledge Agreement among the Registrant, certain Subsidiaries of the Registrant, PNC Bank, National Association, and American National Bank and Trust Company of Chicago dated as of January 26, 1998, incorporated herein by reference to Exhibit 10.3 to the Registrant's Quarterly Report on Form 10-Q filed on February 13, 1998 (Commission File No. 1-8122). 10.11 Amended and Restated Security Agreement among the Registrant, certain Subsidiaries of the Registrant, PNC Bank, National Association, and American National Bank and Trust Company of Chicago dated as of January 26, 1998, incorporated herein by reference to Exhibit 10.4 to the Registrant's Quarterly Report on Form 10-Q filed on February 13, 1998 (Commission File No. 1-8122). 10.12 Amended and Restated Trademark Security Agreement by the Registrant in favor of PNC Bank, National Association, and American National Bank and Trust Company of Chicago dated as of January 26, 1998, incorporated herein by reference to Exhibit 10.5 to the Registrant's Quarterly Report on Form 10-Q filed on February 13, 1998 (Commission File No. 1-8122). 10.13 Managed Service Agreement between International Business Machines Corporation and Axiom Real Estate Management, Inc. dated as of January 1, 1996, and Side Letter Agreement between the parties dated January 19, 1996, incorporated herein by reference to Exhibit 99.2 to the Registrant's Current Report on Form 8-K filed on February 8, 1996 (Commission File No. 1-8122). 10.14 Asset Purchase Agreement by and among Bishop Hawk, Inc., Sopilote Inc., N. Bruce Ashwill and Grubb & Ellis Company dated July 22, 1998 (without exhibits), incorporated herein by reference to Exhibit 2.1 to the Registrant's Current Report on Form 8-K filed on August 5, 1998 (Commission File No. 1-8122).
- -------- *Management contract or compensatory plan or arrangement. (21) Subsidiaries of the Registrant (23) Consent of Independent Auditors 23.1 Consent of Ernst & Young LLP (24) Powers of Attorney (27) Financial Data Schedule (b) None 39 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Grubb & Ellis Company (Registrant) * By___________________________________ Neil Young Chairman of the Board and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. * By_____________________________ September 28, 1999 Neil Young Chairman of the Board and Chief Executive Officer Principal Executive Officer /s/ Brian D. Parker September 28, 1999 - ------------------------------- Brian D. Parker Executive Vice President and Chief Financial Officer Principal Financial and Accounting Officer
* September 28, 1999 ____________________________________ R. David Anacker, Director * September 28, 1999 ____________________________________ Lawrence S. Bacow, Director * September 28, 1999 ____________________________________ Joe F. Hanauer, Director * September 28, 1999 ____________________________________ C. Michael Kojaian, Director * September 28, 1999 ____________________________________ Sidney Lapidus, Director * September 28, 1999 ____________________________________ Reuben S. Leibowitz, Director * September 28, 1999 ____________________________________ Robert J. McLaughlin, Director
40 * September 28, 1999 ____________________________________ Thomas A. Meador, Director * September 28, 1999 ____________________________________ John D. Santoleri, Director * September 28, 1999 ____________________________________ Todd A. Williams, Director
/s/ Robert J. Walner By: ___________________________ Robert J. Walner Attorney-in-Fact, *pursuant to Powers of Attorney 41 Grubb & Ellis Company and Subsidiaries EXHIBIT INDEX (A) for the fiscal year ended June 30, 1999 Exhibit (4) Instruments Defining the Rights of Security Holders, Including Indentures 4.18 Amendment to Amended and Restated Credit Agreement among the Registrant, certain subsidiaries of the Registrant, PNC Bank, National Association, and American National Bank and Trust Company of Chicago dated as of August 23, 1999. 4.20 Stock Subscription Warrant No. A-1 dated July 30, 1999 issued to Aegon USA Realty Advisors, Inc. (10) Material Contracts 10.2 First Amendment to the Employment Agreement between Neil R. Young and the Registrant dated as of May 19, 1999, 10.4 Description of Grubb & Ellis Company Executive Officer Incentive Compensation Plan. 10.7 Executive Change of Control Plan, effective as of May 10, 1999 and attached form of Acknowledgement Agreement. (21) Subsidiaries of the Registrant (23) Consent of Independent Auditors 23.1 Consent of Ernst & Young LLP (24) Powers of Attorney (27) Financial Data Schedule - -------- (A) Exhibits incorporated by reference are listed in Item 14(a)3 of this Report. 42 EX-4.18 2 AMD TO AMENDED & RESTATED CREDIT AGREEMENT EXHIBIT 4.18 AMENDMENT TO AMENDED AND RESTATED CREDIT AGREEMENT THIS AMENDMENT to Amended and Restated Credit Agreement is dated as of August 23, 1999, and is made by and among GRUBB & ELLIS COMPANY, a Delaware corporation (the "Borrower"), each of the GUARANTORS, the BANKS and PNC BANK, NATIONAL ASSOCIATION, in its capacity as agent for the Banks (hereinafter referred to in such capacity as the "Agent"). BACKGROUND WHEREAS, the parties hereto are parties to that certain Amended and Restated Credit Agreement dated as of January 26, 1998, as amended from time to time (collectively, the "Agreement"), pursuant to which the Banks provided to the Borrower a revolving credit facility in an aggregate principal amount not to exceed $35,000,000 at any one time outstanding; and WHEREAS, the Borrower has requested the Lender to amend certain terms in the Agreement in order to permit the Borrower to repurchase and redeem up to $3,000,000 of the shares of outstanding capital stock of the Borrower owned by the public, and the Agent and the Banks have agreed to such amendments, subject to the terms and conditions of this Amendment. AGREEMENT NOW THEREFORE, the parties hereto, in consideration of their mutual covenants and agreements hereinafter set forth and intending to be legally bound hereby, covenant and agree as follows: 1. Capitalized terms used herein unless otherwise defined herein shall have the meanings ascribed to them in the Agreement. 2. Section 8.1.10.1 of the Agreement is hereby amended and restated as follows: "8.1.10.1 General. ------- The Loan Parties will use the Letters of Credit and the proceeds of the Loans only (i) to finance Permitted Acquisitions, (ii) for the repurchase and redemption in the market of outstanding capital stock of the Borrower; provided however, that not more than $3,000,000 aggregate outstanding principal balance of the Loans will be used to finance the repurchase and redemption of the outstanding capital stock of the Borrower, and (iii) for general corporate purposes and for working capital, provided however, that not more than $15,000,000 aggregate outstanding principal balance of Loans will be used to finance general corporate purposes and for working capital. The Loan Parties shall not use the Letters of Credit and the proceeds of the Loans for any purpose which contravenes any applicable Law or any provision hereof." 3. Section 8.2.5 is hereby amended and restated as follows: "8.2.5 Dividends and Related Distributions. ----------------------------------- Each of the Loan Parties shall not make or pay any dividend or other distribution of any nature (whether in cash, property, securities or otherwise) on account of or in respect of its shares of capital stock, partnership interests or limited liability company interests on account of the purchase, redemption, retirement or acquisition of its shares of capital stock (or warrants, options or rights therefor), partnership interests or limited liability company interests, except (i) the Loan Parties may make dividends or other distributions payable to another Loan Party, and (ii) so long as no Event of Default or Potential Default shall exist prior to or after giving effect to a repurchase of the Borrower's outstanding capital stock, the Borrower may redeem or repurchase in the market shares of its outstanding capital stock in an amount such that the consideration paid by the Borrower does not exceed $3,000,000 in the aggregate for all such redemptions and repurchases." 4. The Borrower shall pay an amendment fee in the amount of $17,500, to be allocated to the Banks based upon each Bank's Ratable Share, upon execution and delivery of this Amendment to the Agent, which fee shall be deemed to be earned as of the date of this Amendment upon execution of this Amendment by all the parties hereto. 5. The Loan Parties reconfirm and ratify the Agreement and the Loan Documents all in accordance with their respective terms, except to the extent that any of those terms are expressly modified by the provisions of this Amendment, and the Loan Parties confirm that the Agreement and the Loan Documents have at all times since the date of their respective execution and delivery continued in full force and effect. 6. The provisions of this Agreement shall bind the Loan Parties and their respective successors and assigns and are for the benefit of the Agent and the Banks and their respective successors and assigns. 7. The Loan Parties each represent that it has the corporate power and has been duly authorized by all requisite corporate action to execute and deliver this Amendment and to perform its obligations hereunder. 8. The Loan Parties each represent that this Amendment has been duly executed and delivered by such Loan Party and constitutes the legal, valid and binding obligations of such Loan Party, enforceable against such Loan Party in accordance with its terms, except to the extent that the enforceability thereof may be limited by bankruptcy, insolvency, reorganization, moratorium, fraudulent conveyance or other similar laws affecting the enforceability of creditors rights generally or by general equitable principles. -2- 9. Neither this Amendment nor the consummation of the transactions contemplated herein nor the performance by the Loan Parties of their respective obligations hereunder or under the Agreement or the Loan Documents will (i) violate any law, rule or regulation or court order to which any Loan Party is subject; (ii) conflict with or result in a breach of any Loan Party's certificate of incorporation or bylaws or any material agreement or instrument to which any Loan Party is subject or by which its properties are bound or (iii) result in the creation or imposition of any lien, security interest or encumbrance on the property of any Loan Party, whether now owned or hereafter acquired, other than liens in favor of the Agent for the benefit of the Banks. 10. This Amendment may be executed by different parties hereto on any number of separate counterparts, each of which, when so executed and delivered, shall be an original, and all such counterparts shall together constitute one and the same instrument. [SIGNATURES APPEAR ON THE NEXT PAGE.] -3- IN WITNESS WHEREOF, and intending to be legally bound hereby, this Second Amendment to Amended and Restated Credit Agreement has been duly signed, sealed and delivered by the undersigned parties as of the day and year specified at the beginning hereof. GRUBB & ELLIS COMPANY By: /s/ Brian Parker (Seal) -------------------------------- Name: Brian Parker ---------------------------- Title: Executive Vice President and Chief ---------------------------------- Financial Officer ----------------- EACH OF THE SUBSIDIARIES OF GRUBB & ELLIS COMPANY SET FORTH ON THE ATTACHED SCHEDULE I By: /s/ Brian Parker (Seal) -------------------------------- Name: Brian Parker ----------------------------- Title: Executive Vice President and Chief ---------------------------------- Financial Officer of each of the ----------------- Loan Parties set forth on Schedule I attached hereto PNC BANK, NATIONAL ASSOCIATION, individually and as Agent By: /s/ Jay C. Baker -------------------------------- Title: Senior Vice President AMERICAN NATIONAL BANK AND TRUST COMPANY OF CHICAGO By: Ross C. Weigand ------------------------------- Title: First Vice President -4- EX-4.20 3 STOCK SUBSCRIPTION WARRANT Exhibit 4.20 Stock Subscription Warrant to Subscribe for 600,000 Shares of Common Stock Stock Subscription Warrant No. A-1 THIS STOCK SUBSCRIPTION WARRANT AND ANY SHARES ACQUIRED UPON THE EXERCISE OF THIS STOCK SUBSCRIPTION WARRANT HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED. NEITHER THIS STOCK SUBSCRIPTION WARRANT NOR ANY OF SUCH SHARES MAY BE SOLD OR TRANSFERRED IN THE ABSENCE OF SUCH REGISTRATION OR AN EXEMPTION THEREFROM UNDER SAID ACT. STOCK SUBSCRIPTION WARRANT To Subscribe for and Purchase Shares of Common Stock of GRUBB & ELLIS COMPANY THIS CERTIFIES THAT, for value received, AEGON USA REALTY ADVISORS, INC. or registered assigns, is entitled to subscribe for and purchase from GRUBB & ELLIS COMPANY (herein called the "Company"), a corporation organized and existing under the laws of the State of Delaware, at any time or from time to time during the period specified in paragraph 2 hereof, up to SIX HUNDRED THOUSAND fully paid and nonassessable shares of the Company's common stock, par value $0.01 per share (the "Common Stock"), at an exercise price per share of $6.25 (the "Exercise Price"). The number of shares purchasable hereunder and the Exercise Price are subject to adjustment as provided in paragraph 4 hereof. The term "Warrant," as used herein, shall mean this Stock Subscription Warrant, including all amendments hereto. The term "Warrant Shares," as used herein, refers to the shares purchasable upon the exercise of the Warrants. Certain terms used herein and not elsewhere defined are defined in paragraph 15 hereof. This Warrant is subject to the following provisions, terms and conditions: 1. Manner of Exercise; Issuance of Certificates; Payment for Shares. ---------------------------------------------------------------- The rights represented by this Warrant may be exercised by the holder hereof in whole or in part (but not as to a fractional Warrant Share), by the surrender of this Warrant, together with a completed Exercise Agreement in the form attached hereto, during normal business hours on any business day at the principal office of the Company (or such other office or agency of the Company in New York, New York or Chicago, Illinois as it may designate by notice in writing to the holder hereof at the address of such holder appearing on the books of the Company) at any time during the period set forth in paragraph 2 hereof and upon payment to the Company by certified check or bank draft of the Exercise Price for such shares, or, at the election of the holder hereof, by delivery of other Warrants equal in value to the aggregate Exercise Price with respect to such Warrants being exercised, the value of which other Warrants shall be deemed to equal the difference between the Market Price of a share of Common Stock on the date immediately preceding the date of exercise and the then current Exercise Price. The Company agrees that the shares so purchased shall be and are deemed to be issued to the holder hereof or its designee as the record owner of such shares as of the close of business on the date on which this Warrant shall have been surrendered and payment made for such shares as aforesaid. Certificates for the Warrant Shares so purchased, representing the aggregate number of shares specified in said Exercise Agreement, shall be delivered to the holder hereof within a reasonable time, not exceeding five business days, after the rights represented by this Warrant shall have been so exercised. Each stock certificate so delivered shall be in such denominations as may be requested by the holder hereof and shall be registered in the name of said holder or such other name (upon compliance with the transfer requirements hereinafter set forth) as shall be designated by said holder. If this Warrant shall have been exercised only in part, then, unless this Warrant has expired, the Company shall, at its expense, at the time of delivery of said stock certificates, deliver to said holder a new Warrant representing the number of shares with respect to which this Warrant shall not then have been exercised. The Company shall pay all taxes and other expenses and charges payable in connection with the preparation, execution and delivery of stock certificates (and any new Warrants) pursuant to this paragraph except that, in case such stock certificates shall be registered in a name or names other than the holder of this Warrant or its nominee, funds sufficient to pay all stock transfer taxes which shall be payable in connection with the execution and delivery of such stock certificates shall be paid by the holder hereof to the Company at the time of the delivery of such stock certificates by the Company as mentioned above. 2. Period of Exercise. This Warrant is exercisable at any time or ------------------ from time to time prior to July 31, 2004. 3. Shares to be Fully Paid; Reservation of Shares. The Company ---------------------------------------------- covenants and agrees that all Warrant Shares will, upon issuance, be fully paid and nonassessable and free from preemptive rights and all taxes, liens and charges with respect to the issue thereof; and without limiting the generality of the foregoing, the Company covenants and agrees that it will from time to time take all such action as may be required to assure that the par value per Warrant Share is at all times equal to or less than the effective Exercise Price. The Company further covenants and agrees that during the period within which the rights represented by this Warrant may be exercised, the Company will at all times have authorized, and reserved for the purpose of issue upon exercise of the subscription rights evidenced by this Warrant, a sufficient number of shares of Common Stock to provide for the exercise of the rights represented by this Warrant. The Company shall take all such action as may be necessary to assure that such shares of Common Stock may be so issued without violation of any applicable law or regulation and will be approved for listing on any domestic securities exchange upon which the Common Stock may be listed. The Company further 2 covenants and agrees that it will, at any time, at its expense, promptly list on each national securities exchange on which any Capital Stock is at the time listed, upon official notice of issuance, Common Stock issuable upon the exercise of any Warrant as provided in paragraph 1 hereof, and maintain such listing of all shares of Common Stock from time to time issuable upon such exercise, and will, at any time, register under the Securities Exchange Act of 1934, as amended, all shares of Common Stock from time to time issuable upon such exercise if and at the time that any existing shares of Capital Stock are so registered. 4. Anti-dilution Provisions. The Exercise Price set forth above ------------------------ shall be subject to adjustment from time to time as hereinafter provided. For purposes of this paragraph 4, the term "Capital Stock" as used herein includes the Company's Common Stock and shall also include any capital stock of any class of the Company hereafter authorized which shall not be limited to a fixed sum or percentage in respect of the rights of the holders thereof to participate in dividends and in the distribution of assets upon the voluntary or involuntary liquidation, dissolution or winding up of the Company; provided that the shares purchasable pursuant to this Warrant shall include only Common Stock. Upon each adjustment of the Exercise Price, this Warrant shall thereafter represent the right to purchase, at the Exercise Price resulting from such adjustment, the largest number of shares of Common Stock obtained by multiplying the Exercise Price in effect immediately prior to such adjustment by the number of shares of Common Stock purchasable thereunder immediately prior to such adjustment and dividing the product thereof by the Exercise Price resulting from such adjustment. In case the Company, at any time, shall be a party to any Transaction, each holder hereof, upon the exercise hereof at any time on or after the Consummation Date shall be entitled to receive, and this Warrant shall thereafter represent the right to receive, in lieu of the Common Stock issuable upon exercise prior to the Consummation Date, the kind and amount of securities or property (including cash) which it would have owned or have been entitled to receive after the happening of such Transaction had this Warrant been exercised immediately prior to such Transaction. Notwithstanding anything contained herein to the contrary, the Company shall not effect any Transaction unless prior to the consummation thereof each corporation or entity (other than the Company) which may be required to deliver any securities or other property upon the exercise of Warrants, the surrender of Warrants or the satisfaction of exercise rights as provided herein, shall assume, by written instrument delivered to each holder of Warrants, the obligation to deliver to such holder such securities or other property to which, in accordance with the foregoing provisions, such holder may be entitled, and such corporation or entity shall have similarly delivered to each holder of Warrants an opinion of counsel for such corporation or entity, satisfactory to each holder of Warrants, which opinion shall state that all the outstanding Warrants, including, without limitation, the exercise provisions applicable thereto, if any, shall thereafter continue in full force and effect and shall be enforceable against such corporation or entity in accordance with the terms hereof and thereof and, together with such other matters as such holders may reasonably request. 3 In case the Company shall (i) pay a dividend in shares of Capital Stock or securities convertible into Capital Stock or make a distribution to all holders of shares of Capital Stock in shares of Capital Stock or securities convertible into Capital Stock, (ii) subdivide its outstanding shares of Capital Stock, (iii) combine its outstanding shares of Capital Stock into a smaller number of shares of Capital Stock or (iv) issue by reclassification of its shares of Capital Stock other securities of the Corporation, the Exercise Price shall be adjusted (to the nearest cent) by multiplying the Exercise Price immediately prior to such adjustment by a fraction, of which the numerator shall be the number of shares of Capital Stock outstanding immediately prior to the occurrence of such event, and of which the denominator shall be the number of shares of Capital Stock outstanding (including any convertible securities issued pursuant to clause (i) or (iv) above on an as converted basis) immediately thereafter. An adjustment made pursuant to the foregoing sentence shall become effective immediately after the effective date of such event retroactive to the record date, if any, for such event. (b) Notice of Adjustment. Upon the occurrence of any event -------------------- requiring an adjustment of the Exercise Price, then and in each such case the Company shall promptly deliver to each holder of Warrants a certificate signed by the President or any Vice President and the Secretary or any Assistant Secretary of the Company (an "Officers' Certificate") stating the Exercise Price resulting from such adjustment and the increase or decrease, if any, in the number of shares of Common Stock issuable upon exercise of the Warrants, setting forth in reasonable detail the method of calculation and the facts upon which such calculation is based. Within 90 days after each fiscal year in which any such adjustment shall have occurred, or within 30 days after any request therefor by any holder of Warrants stating that such holder contemplates exercise of such Warrants, the Company will obtain and deliver to each holder of Warrants the opinion of its regular independent auditors or another firm of independent public accountants of recognized national standing selected by the Company's Board of Directors who are satisfactory to the registered holder of this Warrant, which opinion shall confirm the statements in the most recent Officers' Certificate delivered under this paragraph 4(d). (c) Other Notices. In case at any time: ------------- (i) the Company shall declare or pay to the holders of Capital Stock any dividend other than a regular periodic cash dividend or any periodic cash dividend in excess of 115% of the cash dividend for the comparable fiscal period in the immediately preceding fiscal year; (ii) the Company shall declare or pay any dividend upon Capital Stock payable in stock or make any special dividend or other distribution (other than regular cash dividends) to the holders of Capital Stock; (iii) the Company shall offer for subscription pro rata to the holders of Capital Stock any additional shares of stock of any class or other rights; 4 (iv) there shall be any capital reorganization, or reclassification of the Capital Stock of the Company, or consolidation or merger of the Company with, or sale of all or substantially all of its assets to, another corporation or other entity; (v) there shall be a voluntary or involuntary dissolution, liquidation or winding-up of the Company; or (vi) there shall be any other Transaction; then, in any one or more of such cases, the Company shall give to the holder of each Warrant (a) at least 15 days prior to any event referred to in clause (i) or (ii) above, at least 30 days prior to any event referred to in clause (iii), (iv) or (v) above, and within five business days after it has knowledge of any pending Transaction, written notice of the date on which the books of the Company shall close or a record shall be taken for such dividend, distribution or subscription rights or for determining rights to vote in respect of any such reorganization, reclassification, consolidation, merger, sale, dissolution, liquidation, winding-up or Transaction and (b) in the case of any such reorganization, reclassification, consolidation, merger, sale, dissolution, liquidation, winding-up or Transaction known to the Company, at least 30 days prior written notice of the date (or, if not then known, a reasonable approximation thereof by the Company) when the same shall take place. Such notice in accordance with the foregoing clause (a) shall also specify, in the case of any such dividend, distribution or subscription rights, the date on which the holders of Capital Stock shall be entitled thereto, and such notice in accordance with the foregoing clause (b) shall also specify the date on which the holders of Capital Stock shall be entitled to exchange their Capital Stock for securities or other property deliverable upon such reorganization, reclassification, consolidation, merger, sale, dissolution, liquidation, winding-up or Transaction, as the case may be. Such notice shall also state that the action in question or the record date is subject to the effectiveness of a registration statement under the Securities Act (a "Registration Statement") or to a favorable vote of security holders, if either is required. Any exercise of the Warrant may be made conditioned by the holder thereof upon the consummation of any of the events described in clauses (i) through (iv) above. 5. Certain Agreements of the Company. The Company covenants and --------------------------------- agrees that: (a) Certain Actions Prohibited. The Company will not by amendment of -------------------------- its certificate of incorporation or through any reorganization, transfer of assets, consolidation, merger, dissolution, issue or sale of securities or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms to be observed or performed hereunder by the Company, but will at all times in good faith assist in the carrying out of all the provisions of this Warrant and in the taking of all such action as may reasonably be requested by the holder of any Warrant in order to protect the exercise rights of the holders of the Warrants. Without limiting the generality of the foregoing, the Company (i) will not increase the par value of any shares of Common Stock receivable upon the exercise of the Warrants above the Exercise Price then in effect, (ii) will take all such actions as may be necessary or appropriate in order that the Company may validly and legally issue fully paid and nonassessable shares of Common Stock upon the exercise of all Warrants from time to time outstanding, (iii) will not take any action which results in 5 any adjustment of the number of shares of Common Stock issuable after the action upon the exercise of all of the Warrants if, as a result of such adjustment, the number of shares of Common Stock issuable upon exercise of all the Warrants would exceed the total number of shares of Common Stock then authorized by the Company's certificate of incorporation and available for the purpose of issue upon such exercise, and (iv) will not issue any capital stock of any class which has the right to more than one vote per share or any capital stock of any class which is preferred as to dividends or as to the distribution of assets upon voluntary or involuntary dissolution, liquidation or winding-up, unless the rights of the holders thereof shall be limited to a fixed sum or percentage (or floating rate related to market yields) of par value or stated value in respect of participation in dividends and a fixed sum or percentage of par value or stated value in any such distribution of assets. (b) Successors and Assigns. This Warrant will be binding upon any ---------------------- entity succeeding to the Company by merger, consolidation or acquisition of all or substantially all of the Company's assets. (c) Issuance of Warrant Securities. If the issuance of any Warrant ------------------------------ Shares required to be reserved for purposes of exercise of this Warrant or for the conversion of such Warrant Shares requires registration with or approval of any Federal governmental authority under any Federal or state law (other than any registration under the Securities Act) or listing on any national securities exchange, before such shares may be issued upon exercise of this Warrant, the Company will, at its expense, use its best efforts to cause such shares to be duly registered or approved, or listed on the relevant national securities exchange, as the case may be, at such time, so that such shares may be issued in accordance with the terms hereof and so converted. 6. Issue Tax. The issuance of certificates for Warrant Shares upon --------- the exercise of Warrants shall be made without charge to the holders of such Warrants or such shares for any issuance tax in respect thereof, provided that the Company shall not be required to pay any tax which may be payable in respect of any transfer involved in the issuance and delivery of any certificate in a name other than the holder of the Warrant exercised. 7. Closing of Books. The Company will at no time close its ---------------- transfer books against the transfer of any Warrant, of any Warrant Shares issued or issuable upon the exercise of any Warrant or in any manner which interferes with the timely exercise of this Warrant. 8. Amendments to Terms of Warrant Shares. The Company will not ------------------------------------- amend the terms of the Warrant Shares in any manner that would treat the Warrant Shares differently from other shares of the Company's Common Stock. 9. Availability of Information. The Company will cooperate with --------------------------- each holder of any Warrants or Warrant Shares in supplying such information as may be necessary for such holder to complete and file any information reporting forms presently or hereafter required by the Securities and Exchange Commission as a condition to the availability of an exemption from the Securities Act for the sale of any Warrants or Warrant Shares. The Company will deliver to any person at the time holding any Warrants, promptly upon their becoming available, copies of all 6 financial statements, reports, notices and proxy statements sent or made available generally by the Company to its stockholders, and copies of all regular and periodic reports and all registration statements and prospectuses filed by the Company with any securities exchange or with the Securities and Exchange Commission. 10. No Rights or Liabilities as a Stockholder. This Warrant shall ----------------------------------------- not entitle the holder hereof to any voting rights or other rights as a stockholder of the Company. No provision of this Warrant, in the absence of affirmative action by the holder hereof to purchase Warrant Shares, and no mere enumeration herein of the rights or privileges of the holder hereof, shall give rise to any liability of such holder for the Exercise Price or as a stockholder of the Company, whether such liability is asserted by the Company or by creditors of the Company. 11. Transfer and Exchange. --------------------- (a) (1) The transfer of this Warrant and all rights hereunder, in whole or in part, is registrable at the office or agency of the Company referred to below by the holder hereof in person or by his duly authorized attorney, upon surrender of this Warrant properly endorsed. Each taker and holder of this Warrant, by taking or holding the same, consents and agrees that this Warrant, when endorsed in blank, shall be deemed negotiable, and that the holder hereof, when this Warrant shall have been so endorsed, may be treated by the Company and all other persons dealing with this Warrant as the absolute owner and holder hereof for any purpose and as the person entitled to exercise the rights represented by this Warrant, or to the registration of transfer hereof on the books of the Company; and until due presentment for registration of transfer on such books the Company may treat the registered holder hereof as the owner and holder for all purposes, and the Company shall not be affected by notice to the contrary. (2) The holder of this Warrant, by acceptance hereof, understands that the Warrant Securities are characterized as "restricted securities" under the federal securities laws inasmuch as they are being or will be acquired from the Company in a transaction not involving a public offering and that under such laws and applicable regulations such Warrant Securities may be resold without registration under the Securities Act only in certain limited circumstances. The holder of this Warrant, by acceptance hereof, agrees to comply with all applicable laws (including, without limitation, any filing required by the Hart- Scott-Rodino Antitrust Improvements Act of 1976) upon exercise hereof. The holder of this Warrant, by acceptance hereof, represents that such holder is acquiring this Warrant and any Warrant Shares to be issued upon exercise hereof for its own account (including any separate account) for the purpose of investment and not with a view to or for sale in connection with any distribution thereof. The holder hereof further represents that such holder has had an opportunity to ask questions and receive answers from the Company regarding the terms and conditions of the offering of the Warrant Securities as required by Section (b)(2)(v) of Rule 502 of Regulation D under the Securities Act. Without in any way limiting the foregoing, the holder hereof further agrees not to make any disposition of all or any portion of the Warrant Securities unless and until: 7 (x) There is then in effect a Registration Statement under the Securities Act covering such proposed disposition and such disposition is made in accordance with such Registration Statement; or (y) Such disposition is made in conformity with the limitations of Rule 144 under the Securities Act or similar rule as then in effect under the Securities Act; or (z) (i) The holder hereof shall have notified the Company of the proposed disposition and shall have furnished the Company with a detailed statement of the circumstances surrounding the proposed disposition, and (ii) shall have furnished the Company with an opinion of counsel, reasonably satisfactory to the Company (it being understood that if the holder of this Warrant is a party to the Agreement, counsel who is such party's employee shall be deemed reasonably satisfactory to the Company), that such disposition will not require registration of such Warrant Securities under the Securities Act. (b) Register. The Company shall maintain, at the principal office -------- of the Company (or such other office or agency of the Company in New York, New York or Chicago, Illinois as it may designate by notice to the holder hereof), a register for the Warrants, in which the Company shall record the name and address of the person in whose name a Warrant has been issued, as well as the name and address of each transferee and each prior owner of such Warrant. Within 10 days after any holder of Warrants shall by notice request the same, the Company will deliver to such holder a certificate, signed by one of its officers, listing the name and address of every other holder of Warrants and/or Warrant Shares, as such information appears in said register and in the stock transfer books of the Company at the close of business on the day before such certificate is signed. (c) Warrants Exchangeable for Different Denominations. This ------------------------------------------------- Warrant is exchangeable, upon the surrender hereof by the holder hereof at the office or agency of the Company referred to in paragraph 10(b), for new Warrants of like tenor representing in the aggregate the right to subscribe for and purchase the number of shares which may be subscribed for and purchased hereunder of Common Stock, each of such new Warrants to represent the right to subscribe for and purchase such number of shares as shall be designated by said holder hereof at the time of such surrender. (d) Replacement of Warrants. Upon receipt of evidence reasonably ----------------------- satisfactory to the Company of the loss, theft, destruction or mutilation of this Warrant and, in the case of any such loss, theft or destruction, upon delivery of an indemnity bond (or, in the case of any institutional holder, an indemnity agreement) reasonably satisfactory in form and amount to the Company or, in the case of any such mutilation, upon surrender and cancellation of such Warrant, the Company at its expense will execute and deliver, in lieu thereof, a new Warrant of like tenor. (e) Cancellation; Payment of Expenses. Upon the surrender of this --------------------------------- Warrant in connection with any exchange, transfer or replacement as provided in this paragraph 10, this Warrant shall be promptly canceled by the Company. The Company shall pay all taxes (other than 8 securities transfer taxes) and all other expenses and charges payable in connection with the preparation, execution and delivery of Warrants pursuant to this paragraph 10. 12. Registration Rights. The Company covenants and agrees as ------------------- follows: (a) Definitions. For purposes of this paragraph 11: ----------- The term "Registrable Securities" means (i) the Common Stock issued pursuant to this Warrant and (ii) any Common Stock of the Company issued pursuant to a stock dividend, stock split or other distribution, merger, consolidation, recapitalization or reclassification or otherwise, and any securities of the Company which may be issued or distributed with respect to, or in exchange for, any such Common Stock or such other securities pursuant to a stock dividend, stock split or other distribution, merger, consolidation, recapitalization or reclassification or otherwise; provided, however, that any such Registrable Securities shall cease to be Registrable Securities when (i) a Registration Statement with respect to the sale of such Registrable Securities has been declared effective under the Securities Act and such Registrable Securities have been disposed of in accordance with the plan of distribution set forth in such Registration Statement, (ii) such Registrable Securities are distributed pursuant to Rule 144 (or any similar provision then in force) under the Securities Act or (iii) such Registrable Securities shall have been otherwise transferred, new certificates for them not bearing a legend restricting further transfer under the Securities Act shall have been delivered by the Company and they may be resold without subsequent registration under the Securities Act; provided, further, however, that any securities that have ceased to be Registrable Securities cannot thereafter become Registrable Securities, and any security that is issued or distributed in respect to securities that have ceased to be Registrable Securities are not Registrable Securities. (b) Grant of Rights. The Company hereby grants to the holder --------------- registration rights as follows (the "Registration Rights"): (1) Piggyback Registrations. Subject to paragraph 11(b)(2) hereof, if at any time and from time to time after the date hereof, the Company files a Registration Statement under the Securities Act with respect to any offering of any equity securities by the Company for its own account or for the account of any of its equity holders (other than (i) a registration on Form S-4 or Form S-8 or a shelf registration on Form S-3 for the sale of securities by the Company or any successor form to such Forms or (ii) any registration of securities as it relates to an offering and sale to management of the Company pursuant to any employee stock plan or other employee benefit plan arrangement) then, as soon as practicable (but in no event less than ten (10) days prior to the proposed date of filing such Registration Statement), the Company shall give written notice of such proposed filing to the holder of the Registrable Securities, and such notice shall offer the holder of the Registrable Securities the opportunity to register such number of Registrable Securities as such holder may request (a "Piggyback Registration") and shall specify whether the offering is to be underwritten or is to be offered on another basis. Subject to paragraph 11(b)(2), the Company shall include in such Registration Statement all Registrable Securities requested within thirty (30) days after the receipt of any such notice (which request shall specify the Registrable Securities intended to be disposed of by such holder) 9 to be included in the Registration for such offering pursuant to a Piggyback Registration; provided, however, that if, at any time after giving written notice of its intention to register any securities and prior to the effective date of the Registration Statement filed in connection with such Registration, the Company shall determine for any reason not to register or to delay registration of such securities, the Company may, at its election, give written notice of such determination to such holder of Registrable Securities and, thereupon, (i) in the case of a determination not to register, shall be relieved of its obligation to register any Registrable Securities in connection with such Registration (but not from its obligation to pay the Registration Expenses in connection therewith), and (ii) in the case of a determination to delay registering, shall be permitted to delay registering any Registrable Securities, for the same period as the delay in registering such other securities. If the offering pursuant to such Registration Statement is to be underwritten, then the holder making a request for a Piggyback Registration pursuant to this paragraph 11(b)(1) must participate in such underwritten offering and shall not be permitted to make any other offering in connection with such Registration. If the offering pursuant to such Registration Statement is to be on any other basis, then the holder making a request for a Piggyback Registration pursuant to this paragraph 11(b)(1) must participate in such offering on such basis and shall not be permitted to make an underwritten offering in connection with such Registration. The holder of Registrable Securities shall be permitted to withdraw all or part of such holder's Registrable Securities from a Piggyback Registration at any time prior to the effective date thereof. (2) Underwriter's Cutback. The Company shall use its best efforts to cause the managing underwriter or underwriters of a proposed underwritten offering to permit the Registrable Securities requested to be included in the Registration for such offering under paragraph 11(b)(1) or pursuant to other piggyback registration rights granted by the Company, if any ("Piggyback Securities"), to be included on the same terms and conditions as any similar securities included therein. Notwithstanding the foregoing, if the managing underwriter or underwriters of any such proposed underwritten offerings informs the Company and the holders of such Registrable Securities in writing that the total amount or kind of securities, including Piggyback Securities, which such holders and any other persons or entities intend to include in such offering would be reasonably likely to adversely affect the price or distribution of the securities offered in such offering or the timing thereof, then the securities to be included in such Registration shall be (i) first, 100% of the securities that the Company or the holder or holders making a request for a demand registration pursuant to demand registration rights, as the case may be, proposes to sell, and (ii) second, the number of securities that, in the opinion of such underwriter or underwriters, can be sold without an adverse effect on the price, timing or distribution of the securities to be included, selected pro rata among holders of Registrable Securities and holders of other securities subject to other piggyback registration rights granted by the Company, if any ("Piggyback Securities") to the extent any of such holders has requested pursuant to paragraph 11(b)(1) or pursuant to other incidental registration rights to be included in such Piggyback Registration, based on the number of shares of Registrable Securities or Piggyback Securities requested to be registered by each such holder. (c) Hold-Back Agreements; Other Registration Rights Agreements. Each ---------------------------------------------------------- holder of Registrable Securities agrees, if requested by (i) the Company or (ii) the managing 10 underwriters in an underwritten offering, not to effect any public sale or distribution of securities of the Company the same as or similar to those being registered, or any securities convertible into or exchangeable or exercisable for such securities, in any Registration Statement, including a sale pursuant to Rule 144 under the Securities Act (except as part of such underwritten registration), during the 14-day period prior to, and during the 90-day period (or such longer period of up to 180 days as may be required by such underwriter) beginning on, the effective date of any Registration Statement (except as part of such registration) or the commencement of the public distribution of securities, to the extent timely notified in writing by the Company or the managing underwriters (or the holders, as the case may be). The Company may enter into any other registration rights agreement. (d) Holder Representations for Registration. Each holder of --------------------------------------- Registrable Securities agrees by acquisition of such Registrable Securities that, upon receipt of any notice from the Company of the happening of any event as a result of which a Registration Statement filed pursuant to this Agreement or the Prospectus included in such Registration Statement (as then in effect) contains any untrue statement of a material fact or omits to state a material fact necessary to make the statements therein (in the case of the Prospectus and any preliminary prospectus, in the light of the circumstances under which they were made) not misleading or, if for any other reason it shall be necessary to amend or supplement the Registration Statement or the Prospectus in order to comply with the Securities Act, such holder will forthwith discontinue disposition of Registrable Securities pursuant to such Registration Statement until such holder's receipt of the copies of the supplemented or amended Prospectus, or until it is advised in writing by the Company that the use of the Prospectus may be resumed, and has received copies of any additional or supplemental filings which are incorporated by reference in the Prospectus, and, if so directed by the Company, such holder will deliver to the Company (at the Company's expense) all copies, other than permanent file copies then in such holder's possession, of the Prospectus covering such Registrable Securities current at the time of receipt of such notice, and the Company shall, as promptly as practicable thereafter, prepare and file with the Commission, and furnish without charge to the selling holders and the managing underwriters, if any, a supplement or amendment to such Registration Statement or Prospectus which will correct such statement or omission or effect such compliance. (e) Underwritten Offerings. If the Company proposes to register any ---------------------- of its securities under the Securities Act as contemplated by paragraph 11(b) and such securities are to be distributed by or through one or more underwriters, the holders of Registrable Securities to be distributed by such underwriters shall be parties to the underwriting agreement between the Company and such underwriters and may, at their option, require that any or all of the representations and warranties by, and the other agreements on the part of, the Company to and for the benefit of such underwriters shall also be made to and for the benefit of such holders of Registrable Securities and that any or all of the conditions precedent to the obligations of such underwriters under such underwriting agreement be conditions precedent to the obligations of such holders of Registrable Securities. Any such holder of Registrable Securities shall not be required to make any representations or warranties to or agreements with the Company or the underwriters other than representations, warranties or agreements regarding such holder, such holders' Registrable Securities and such holder's intended method of distribution or any other 11 representations required by law. No Person may participate in any underwritten registration hereunder unless such Person (i) agrees to sell such Person's securities on the basis provided in any underwriting arrangements approved by the Persons entitled to approve such arrangements and (ii) completes and executes all customary questionnaires, powers of attorney, indemnities, underwriting agreements and other documents required under the terms of such underwriting arrangements. (f) Registration Expenses. All expenses incident to the Company's --------------------- performance of or compliance with the Company's registration obligations under paragraph 11(b) will be borne by the Company, regardless of whether the Registration Statement becomes effective; provided that the Company shall not be responsible for fees and disbursements of counsel selected by the holders of the Piggyback Securities being registered and underwriting discounts and commissions and transfer taxes, if any, and fees and disbursements of counsel to such underwriters (other than such fees and disbursements incurred in connection with any registration or qualification of Registrable Securities under the securities or blue sky laws of any state). The Company will pay its internal expenses (including, without limitation, all salaries and expenses of its officers and employees performing legal or accounting duties), the expense of any audit and the fees and expenses of any Person, including special experts, retained by the Company. (g) Indemnification. ---------------- (1) Indemnification by the Company. The Company agrees to indemnify and hold harmless, to the full extent permitted by law, each holder of Registrable Securities, its officers, directors, employees, partners, shareholders and agents and each Person who controls such holder (within the meaning of the Securities Act or the Securities Exchange Act of 1934 (the "Exchange Act")) from and against all losses, claims, damages, liabilities and expenses (including reasonable costs of investigation and legal expenses) arising out of or based upon any untrue or alleged untrue statement of a material fact contained in any Registration Statement, Prospectus or preliminary Prospectus or any omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, except insofar as the same are caused by or contained in any information furnished in writing to the Company by such holder expressly for use therein; provided, however, that the Company shall not be liable in any such case to the extent that any such loss, claim, damage, liability or expense arises out of or is based upon an untrue statement or alleged untrue statement or omission or alleged omission made in any such preliminary Prospectus if (i) it is determined that it was the responsibility of such holder to provide the Person asserting such loss, claim, damage, liability or expense with a current copy of the Prospectus and such holder failed to deliver or cause to be delivered a copy of the Prospectus to such Person after the Company had furnished such holder with a sufficient number of copies of the same and (ii) the Prospectus completely corrected in a timely manner such untrue statement or omission. This indemnity shall be in addition to any liability the Company may otherwise have, shall remain in full force and effect regardless of any investigation made by or on behalf of such holder or any such officer, director, employee, agent, partner, shareholder or controlling Person and shall survive termination of this Agreement and the transfer of Registrable Securities by such holder. The Company will also indemnify underwriters, selling brokers, dealer managers and similar 12 securities industry professionals participating in the distribution, their officers, directors, partners, shareholders and each Person who controls such Persons (within the meaning of the Securities Act and the Exchange Act) to the same extent as provided above (with appropriate modification) with respect to the indemnification of the holders of Registrable Securities, if requested. (2) Indemnification by the Selling Holder of Registrable Securities. Each selling holder of Registrable Securities, severally and not jointly, agrees to indemnify and hold harmless, to the full extent permitted by law, the Company, its directors and officers and each Person who controls the Company (within the meaning of the Securities Act or the Exchange Act) from and against any losses, claims, damages, liabilities and expenses resulting from any untrue statement of a material fact or any omission of a material fact required to be stated in the Registration Statement, Prospectus or preliminary Prospectus or necessary to make the statements therein not misleading, to the extent, but only to the extent, that such untrue statement or omission is caused by or contained in any information furnished in writing by such selling holder to the Company specifically for inclusion in such Registration Statement or Prospectus and has not been corrected in a subsequent writing prior to or concurrently with the sale of the Registrable Securities to the Person asserting such loss, claim, damage, liability or expense. This indemnity shall be in addition to any liability such selling holder may otherwise have, shall remain in full force and effect regardless of any investigation made by or on behalf of the Company or any such officer, director or controlling Person and shall survive termination of this Agreement and the transfer of Registrable Securities by such selling holder. The Company shall be entitled to receive indemnities from underwriters, selling brokers, dealer managers and similar securities industry professionals participating in the distribution, to the same extent as provided above (with appropriate modification) with respect to information so furnished in writing by such Persons specifically for inclusion in any Prospectus or Registration Statement. (3) Conduct of Indemnification Proceedings. Any Person entitled to indemnification hereunder will (i) give prompt written notice to the indemnifying party of any claim with respect to which it seeks indemnification and (ii) permit such indemnifying party to assume the defense of such claim with counsel reasonably satisfactory to the indemnified party; provided, however, that any delay or failure to so notify the indemnifying party shall relieve the indemnifying party of its obligations hereunder only to the extent, if at all, that it is prejudiced by reason of such delay or failure; provided further, however, that any Person entitled to indemnification hereunder shall have the right to select and employ separate counsel and to participate in the defense of such claim, but the fees and expenses of such counsel shall be at the expense of such Person unless (i) the indemnifying party has agreed in writing to pay such fees or expenses, or (ii) the indemnifying party shall have failed to assume the defense of such claim within a reasonable time after receipt of notice of such claim from the Person entitled to indemnification hereunder and employ counsel reasonably satisfactory to such Person, or (iii) in the reasonable judgment of any such Person, based upon advice of its counsel, a conflict of interest may exist between such Person and the indemnifying party with respect to such claims (in which case, if the Person notifies the indemnifying party in writing that such Person elects to employ separate counsel at the expense of the indemnifying party, the indemnifying party shall not have the right to assume the defense of such claim on behalf of such Person). If such defense 13 is not assumed by the indemnifying party, the indemnifying party will not be subject to any liability for any settlement made without its consent (but such consent will not be unreasonably withheld), provided that an indemnifying party shall not be required to consent to any settlement involving the imposition of equitable remedies or involving the imposition of any material obligations on such indemnifying party other than financial obligations for which such indemnified party is entitled to be indemnified hereunder. No indemnifying party shall consent to entry of any judgment or enter into any settlement which does not include as an unconditional term thereof the giving by the claimant or plaintiff to such indemnified party of a release from all liability in respect to such claim or litigation. Whenever the indemnified party or the indemnifying party receives a firm offer to settle a claim for which indemnification is sought hereunder, it shall promptly notify the other of such offer. If the indemnifying party refuses to accept such offer within 20 business days after receipt of such offer (or of notice thereof), such claim shall continue to be contested and, if such claim is within the scope of the indemnifying party's indemnity contained herein, the indemnified party shall be indemnified pursuant to the terms hereof. If the indemnifying party notifies the indemnified party in writing that the indemnifying party desires to accept such offer, but the indemnified party refuses to accept such offer within 20 business days after receipt of such notice, the indemnified party may continue to contest such claim and, in such event, the total maximum liability of the indemnifying party to indemnify or otherwise reimburse the indemnified party hereunder with respect to such claim shall be limited to and shall not exceed the amount of such offer, plus reasonable out-of-pocket costs and expenses (including reasonable attorneys' fees and disbursements) to the date of notice that the indemnifying party desires to accept such offer, provided that this sentence shall not apply to any settlement of any claim involving the imposition of equitable remedies or to any settlement imposing any material obligations on such indemnified party other than financial obligations for which such indemnified party is entitled to be indemnified hereunder. An indemnifying party who is not entitled to, or elects not to, assume the defense of a claim will not be obligated to pay the fees and expenses of more than one counsel for all parties indemnified by such indemnifying party with respect to such claim, unless in the written opinion of counsel to the indemnified party reasonably satisfactory to the indemnifying party, use of one counsel by all indemnified parties would be expected to give rise to a conflict of interest between such indemnified parties with respect to such claim, in which event the indemnifying party shall be obligated to pay the fees and expenses of one such additional counsel. (4) Contribution. If for any reason the indemnification provided for in the preceding paragraphs (a) and (b) is unavailable to an indemnified party or insufficient to hold it harmless as contemplated by the preceding paragraphs (a) and (b), then the indemnifying party shall contribute to the amount paid or payable by the indemnified party as a result of such loss, claim, damage or liability in such proportion as is appropriate to reflect not only the relative benefits received by the indemnified party and the indemnifying party, but also the relative fault of the indemnified party and the indemnifying party, as well as any other relevant equitable considerations, provided that no selling holder of Registrable Securities shall be required to contribute in an amount greater than the dollar amount of the proceeds received by such selling holder with respect to the sale of any such Registrable Securities. No person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. 14 (h) Assignment of Registration Rights. The rights to cause the --------------------------------- Company to register Registrable Securities pursuant to this Agreement may be assigned by a holder to a transferee or assignee of such securities. (i) No Conflicting Agreements. The Company represents and warrants ------------------------- to the holder that the Company is not a party to any agreement that conflicts in any manner with the holder's rights to cause the Company to register Registrable Securities pursuant to any provision of this Agreement. (j) Rights and Obligations Survive Exercise and Expiration of --------------------------------------------------------- Warrant. The rights and obligations of the Company and the holder set forth in this paragraph 11 shall survive the exercise and expiration of this Warrant. 13. Notices. All notices referred to in this Warrant shall be in ------- writing and shall be delivered personally or by certified or registered mail, return receipt requested, postage prepaid and will be deemed to have been given when so delivered or mailed (i) to the Company, at its principal executive offices and (ii) to the holder of this Warrant, at such holder's address as it appears in the records of the Company (unless otherwise indicated by such holder). 14. Remedies. The Company stipulates that the remedies at law of the -------- holder of this Warrant in the event of any default or threatened default by the Company in the performance of or compliance with any of the terms of this Warrant are not and will not be adequate, and that such terms may be specifically enforced by a decree for the specific performance of any agreement contained herein or by an injunction against a violation of any of the terms hereof or otherwise. 15. Severability. In the event that any one or more of the ------------ provisions contained herein, or the application thereof in any circumstance, is held invalid, illegal or unenforceable, the validity, legality and enforceability of any such provision in every other respect and of the remaining provisions contained herein shall not be affected or impaired thereby. 16. Definitions. For the purpose of this Warrant, the following ----------- terms shall have the following meanings: "Agreement" shall mean this Stock Subscription Warrant. --------- "Capital Stock" shall have the meaning assigned to such term in ------------- paragraph 4. "Consummation Date" shall mean the date of the consummation of a ----------------- Transaction. "Market Price" shall mean, on any date specified herein, (A) if any ------------ class of Capital Stock is listed or admitted to trading on any national securities exchange, the highest price obtained by taking the arithmetic mean over a period of twenty consecutive Trading Days ending the second Trading Day prior to such date of the average, on each such Trading Day, of the high and low sale price of shares of each such class of Capital Stock or if no such sale takes place on such date, the 15 average of the highest closing bid and lowest closing asked prices thereof on such date, in each case as officially reported on all national securities exchanges on which each such class of Capital Stock is then listed or admitted to trading, or (B) if no shares of any class of Capital Stock are then listed or admitted to trading on any national securities exchange, the highest closing price of any class of Capital Stock on such date in the over-the-counter market as shown by Nasdaq Stock Market or, if no such shares of any class of Capital Stock are then quoted in such system, as published by the National Quotation Bureau, Incorporated or any similar successor organization, and in either case as reported by any member firm of the New York Stock Exchange selected by the Company. If no shares of any class of Capital Stock are then listed or admitted to trading on any national securities exchange and if no closing bid and asked prices thereof are then so quoted or published in the over-the-counter market, "Market Price" shall mean the higher of (x) the book value per share of Capital Stock (assuming for the purposes of this calculation the economic equivalence of all shares of all classes of Capital Stock) as determined on a fully diluted basis in accordance with generally accepted accounting principles by a firm of independent public accountants of recognized standing (which may be its regular auditors) selected by the Board of Directors of the Company as of the last day of any month ending within 60 days preceding the date as of which the determination is to be made or (y) the fair value per share of Capital Stock (assuming for the purposes of this calculation the economic equivalence of all shares of all classes of Capital Stock), as determined on a fully diluted basis in good faith by an independent brokerage firm or Standard & Poor's Corporation (as selected by the Board of Directors of the Company), as of a date which is 15 days preceding the date as of which the determination is to be made. "Person" shall mean any individual, corporation, partnership, ------ association, trust or other entity or organization, including a government or political subdivision or instrumentality thereof. "Securities Act" shall mean the Securities Act of 1933, as amended. -------------- "Trading Day" shall mean any day on which the New York Stock Exchange ----------- is open for trading on a regular basis. "Transaction" shall mean any transaction to which the Company is a ----------- party at any time (including, without limitation, a merger, consolidation, sale of all or substantially all of the Company's assets, liquidation or recapitalization of the Capital Stock) in which the previously outstanding Capital Stock shall be changed into or exchanged for different securities of the Company or common stock or other securities of another corporation or interests in a noncorporate entity or other property (including cash) or any combination of any of the foregoing or in which the Capital Stock ceases to be a publicly traded security either listed on the New York Stock Exchange or the American Stock Exchange or quoted by Nasdaq Stock Market or any successor thereto or comparable system. "Warrant Securities" shall mean the Warrants and the Warrant Shares. ------------------ 17. Miscellaneous. This Warrant contains the entire agreement among ------------- the parties hereto with respect to the subject matter contained herein, supersedes all prior agreements, 16 negotiations and understandings, whether written or oral, with respect to the subject matter hereof, and any term hereof may be changed, waived, discharged or terminated only by an instrument in writing signed by the party against which enforcement of such change, waiver, discharge or termination is sought. This Warrant is being delivered in the State of Illinois and shall be governed by and construed and enforced in accordance with the internal laws of the State of Illinois (without reference to any principles of the conflicts of laws). The headings in this Warrant are for purposes of reference only, and shall not limit or otherwise affect any of the terms hereof. Dated: July 30, 1999 GRUBB & ELLIS COMPANY /s/ Brian Parker ------------------- Name: Brian Parker Title: EVP & CFO Attest: /s/ Robert J. Walner - -------------------------- Name: Robert J. Walner Title: Secretary 17 Exhibit 4.20 FORM OF SUBSCRIPTION (To be signed only on exercise of Warrant) TO ______________________________ The undersigned, the holder of the within Warrant, hereby irrevocably elects to exercise the purchase right represented by such Warrant for, and to purchase thereunder, ______________* shares of Common Stock of________________ _________________, and herewith makes payment of $_____________therefor [in cash] [by cancellation of the right to buy ___ shares of Common Stock represented by this Warrant], and requests that the certificates for such shares be issued in the name of, and delivered to __________________________, whose address is __________________________________________. ____________________________________ (Signature must conform in all respects to name of holder as specified on the face of the Warrant) ____________________________________ ____________________________________ (Address) Dated: _____________________ _____________________________ * Insert here the number of shares as to which the Warrant is being exercised. Exhibit 4.20 FORM OF ASSIGNMENT (To be signed only on transfer of Warrant) For value received, the undersigned hereby sells, assigns, and transfers unto ________________________________ the right represented by the within Warrant to purchase shares of Common Stock of________________________ _______ to which the within Warrant relates, and appoints _____________Attorney to transfer such right on the books of ___________________________ full power of substitution in the premises. ___________________________________ (Signature must conform in all respects to name of holder as specified on the face of the Warrant) ___________________________________ ___________________________________ (Address) Dated: ______________________ EX-10.2 4 1ST AMD. TO THE EMPLOYMENT AGREEMENT EXHIBIT 10.2 FIRST AMENDMENT TO EMPLOYMENT AGREEMENT This FIRST AMENDMENT TO EMPLOYMENT AGREEMENT (the "Amendment") amends and extends, as of May 19, 1999, the employment agreement ("Employment Agreement") entered into between Neil R. Young (the "Executive") and Grubb & Ellis Company, a Delaware corporation (the "Company") as of February 22, 1996. 1. All capitalized terms in this Amendment which have not been defined herein shall have the meanings set forth in the Employment Agreement. 2. Pursuant to Paragraph 2 of the Employment Agreement, the Executive has elected and the Company has accepted the election of the Executive to extend the Period of Contract Employment from June 30, 1999 to June 30, 2000 (the "Contract Extension Period"). 3. The Executive's Base Salary during the Contract Extension Period shall be $450,000. 4. For the Contract Extension Period, the Executive shall be eligible for Bonus Compensation of up to 100% of his Base Salary, and shall be paid minimum Bonus Compensation of $200,000. The Executive's Bonus Compensation for the Contract Extension Period ("Year 2000 Bonus") shall be based entirely on the financial performance of the Company for the Contract Extension Period against the Board-approved budget and financial goals of the Company, comprised one- third of EBITDA Margin goal achievement, one-third of net income goal achievement, and one-third of revenue goal achievement. The following additional terms apply to earning the Year 2000 Bonus: a) financial results are determined after bonus payments for all Company officers and managers are taken into account; b) no bonus component is paid for less than 70% of goal achievement related to each component; c) at 70% of goal achievement for a component, 40% of the bonus component is paid; d) after 70% of goal achievement of a component, an additional 2% of eligible bonus amount is paid for each 1% incremental achievement of the component goals until achievement of 100% of the goal is reached and therefore 100% of the bonus component is earned; and e) after 100% of the goals have been achieved, each incremental percent achieved over the goals set will be matched by an incremental percent of bonus payment, to a maximum of 125% of the target percentage of salary. 5. Paragraph 8 of the Employment Agreement shall be amended to add a sentence at the end of the Paragraph which shall read as follows: "In the event that the Executive delivers a Termination Notice to the Company after May 19, 1999, or in the event that the Company does not renew the Employment Agreement beyond its expiration on June 30, 2000, the Executive shall be entitled to (i) payment of all earned but unpaid Base Salary, Bonus Compensation, and vacation pay through the Effective Date, payable in a lump Page 1 of 2 sum within five (5) days after the Effective Date; (ii) payment of an amount equal to the Base Salary the Executive would have earned during the twelve (12) months following the Effective Date, payable in equal installments over such twelve-month period in accordance with the Company's customary payroll practices; (iii) continuation during such twelve-month period of all benefit plans or other arrangements, or their equivalent, referred to in Section 6 of this Agreement." 6. Notwithstanding anything to the contrary in the Employment Agreement, upon a "Change of Control" as defined in the Grubb & Ellis Company Executive Change of Control Plan (the "Plan") dated as of May 10, 1999, the provisions of the Plan shall supersede the provisions of Paragraphs 7 and 8 of the Employment Agreement with respect to the consequences of termination of employment of the Executive, and related obligations of the Company. 7. Except as modified by this Amendment, all other terms of the Employment Agreement shall remain in full force and effect. IN WITNESS WHEREOF, the parties hereto have executed this Amendment to the Employment Agreement as of the day and year first written above. This Amendment may be executed in counterpart, each of which shall constitute an original and both of which together shall be deemed one instrument. /s/ Neil Young -------------------------------- Neil Young GRUBB & ELLIS COMPANY By /s/ Reuben S. Leibowitz ----------------------------- Reuben S. Leibowitz Chairman, Compensation Committee of the Board Page 2 of 2 EX-10.4 5 EXECUTIVE OFFICER COMPENSATION PLAN Exhibit 10.4 DESCRIPTION OF GRUBB & ELLIS COMPANY EXECUTIVE OFFICER INCENTIVE COMPENSATION PLAN Grubb & Ellis Company has an incentive compensation program for the executive officers which is reviewed for modification annually, under which each executive officer may receive, in addition to any individually determined base compensation, cash incentive compensation. This program, beginning in the 1999 calendar year, provides for incentive compensation based upon achievement of goals related to the Company, and as applicable, business divisions, with respect to revenue and certain measures of profitability, as well as goals related to other business plan objectives for each individual. W:\cv\3480 EX-10.7 6 EXECUTIVE CHANGE OF CONTROL PLAN EXHIBIT 10.7 EXECUTIVE CHANGE OF CONTROL PLAN May 10, 1999 The Board of Directors (the "Board") of Grubb & Ellis Company, a Delaware corporation (the "Company") has determined that it is in the best interests of the Company and its stockholders to assure that the Company will have the continued dedication of certain Executives, notwithstanding the possibility, threat or occurrence of a Change of Control (as defined below) of the Company. The Board believes it is imperative (i) to diminish the inevitable distraction of the Executives by virtue of the personal uncertainties and risks created by a pending or threatened Change of Control, (ii) to encourage the Executives' full attention and dedication to the Company currently and in the event of any threatened or pending Change of Control, and (iii) to provide the Executives with compensation and benefits arrangements upon a Change of Control which ensure that the compensation and benefits expectations of the Executives will be satisfied and which are competitive with those of other corporations. Therefore, in order to accomplish these objectives the Board has caused the Company to enter into this Grubb & Ellis Company Executive Change of Control Plan (the "Plan"). 1. Certain Definitions. (a) The "Effective Date" shall mean the first ------------------- date during the Change of Control Period (as defined in Section 1 (b)) on which a Change of Control (as defined in Section 2) occurs. Anything in this Plan to the contrary notwithstanding, if a Change of Control occurs, and if a former Executive has been removed as an Executive by the Board, or if an Executive's employment with the Company is terminated prior to the date on which the Change of Control occurs, and if it is reasonably demonstrated by an Executive or former Executive that such termination of employment or removal as an Executive (i) was at the request of a third party who has taken steps reasonably calculated to effect a Change of Control or (ii) otherwise arose in connection with or anticipation of a Change of Control, then for all purposes of this Plan the "Effective Date" shall mean the date immediately prior to the date of such termination of employment or removal as an Executive. (b) The "Change of Control Period" shall mean the period commencing on the date hereof and ending thirty-six calendar months after the date hereof; provided, however, that commencing on the date one year after the date hereof, and on each annual anniversary of such date (such date and each annual anniversary thereof shall be hereinafter referred to as the "Renewal Date"), unless previously terminated, the Change of Control Period shall be automatically extended so as to terminate thirty-six calendar months from such Renewal Date, unless at least 60 days prior to the Renewal Date the Company shall give notice to each Executive that the Change of Control Period shall not be so extended. (c) "Executive" shall be each executive officer of the Company as designated by the Board. 2. Change of Control. For the purpose of this Plan, a "Change of Control" ----------------- shall mean: (a) The acquisition by any individual, entity or group (within the meaning of Section 13 (d)(3) or 14(d)(2) of the Securities Exchange Act of 1934, as amended (the "Exchange Act")) (a "Person") of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of 25% or more of either (i) the then outstanding shares of common stock of the Company (the "Outstanding Company Common Stock") or (ii) the combined voting power of the then outstanding voting securities of the Company entitled to vote generally in the election of directors (the "Outstanding Company Voting Securities"); provided, however, that for purposes of this subsection (a), the following acquisitions shall not constitute a Change of Control: (i) any acquisition by the Company, provided however, that after such acquisition, the Company is not eligible for deregistration under Section 12 of the Exchange Act; (ii) any acquisition by any employee benefit plan (or related trust) sponsored or maintained by the Company or any corporation controlled by the Company, provided however, that after such acquisition, the Company is not eligible for deregistration under Section 12 of the Exchange Act; (iii) any acquisition by any corporation pursuant to a transaction which complies with clauses (i), (ii) and (iii) of subsection (c) of this Section 2; or (iv) any acquisition by Warburg, Pincus Investors, L.P. ("Warburg"), The Goldman Sachs Group, L.P. ("GS Group") or C. Michael Kojaian, Mike Kojaian and Kenneth J. Kojaian (the "Kojaian Investors") or any affiliate thereof (collectively the "Current Investors") of additional securities beyond their present holdings unless such acquisition results in either (x) the termination of the Voting Agreement dated January 24, 1997 by and among the Current Investors as in effect on the date hereof, resulting in any one of the Current Investors obtaining the power to elect all or a majority of the directors of the Company or (y) the Company being eligible for deregistration under Section 12 of the Exchange Act. For purposes hereof, "affiliate" shall include all Persons controlled by or under common control with a Current Investor, or any trusts, partnerships or other entity for the benefit of a Current Investor which is an individual or for the benefit of such individual's family members; or (b) Individuals who, as of the date hereof, constitute the Board (the "Incumbent Board") cease for any reason to constitute at least a majority of the Board; provided, however, that any individual becoming a director subsequent to the date hereof whose election, or nomination for election by the Company's shareholders, was approved by a vote of at least a majority of the directors then comprising the Incumbent Board shall be considered as though such individual were a member of the Incumbent Board, but excluding, for this purpose, any such individual whose initial assumption of office occurs as a result of an actual or threatened election contest with respect to the election or removal of directors or other actual or threatened solicitation of proxies or consents by or on behalf of a Person other than the Board; or (c) Consummation of a reorganization, merger or consolidation or the acquisition of assets of another entity (a "Business Combination"), in each case, unless, following such Business Combination, (i) all or substantially all of the Persons who were the beneficial owners, respectively, of the Outstanding Company Common Stock and Outstanding Company Voting Securities immediately prior to such Business Combination beneficially own, directly or indirectly, more than 50% of, respectively, the then outstanding shares of common stock and the combined voting power of the then outstanding voting securities entitled to vote generally in the election of directors, or more than 50% of the ownership interests, as the case may be, of the corporation or other entity resulting from such Business Combination (including, without limitation, a corporation or other entity which as a result of such transaction owns the Company or all or substantially all of the Company's assets either directly or through one or more subsidiaries) in substantially the same proportions as their ownership, immediately prior to such Business Combination, of the Outstanding Company Common Stock and Outstanding Company Voting Securities, as the case may be, (ii) no Person (excluding any entity resulting from such Business Combination or any employee benefit plan (or related trust) of the Company or any entity resulting from such Business Combination) beneficially owns, directly or indirectly, 25% or more of, respectively, the then outstanding shares of common stock of the corporation 2 (or ownership interests of the entity) resulting from such Business Combination or the combined voting power of the then outstanding voting securities of such corporation (or such entity) except to the extent that such ownership existed prior to the Business Combination and (iii) at least a majority of the members of the board of directors of the corporation (or other such entity) resulting from such Business Combination were members of the Incumbent Board at the time of the execution of the initial agreement, or of the action of the Board, providing for such Business Combination; or (d) A substantial partial or complete liquidation or dissolution of the Company or approval of same by the shareholders of the Company; or (e) A sale or other disposition of all or substantially all of the assets of the Company; or (f) The Current Investors in the aggregate cease to own beneficially at least 45% of the Outstanding Company Common Stock or the Outstanding Company Voting Securities, other than by reason of an underwritten offering of shares to the public pursuant to a registration statement under the Securities Act of 1933, as amended, provided that immediately following such sale, no Person owns 25% or more of the Outstanding Company Common Stock or the Outstanding Company Voting Securities. (g) Notwithstanding the foregoing, any "Rule 13e-3 transaction," as defined in Rule 13e-3 promulgated under the Exchange Act as of the date of adoption of this Plan which is approved in advance by a vote of at least a majority of the directors then comprising the Incumbent Board, shall not be deemed a Change of Control under this Plan; provided that one or more of the Current Investors after such transaction beneficially owns, and continues to beneficially own, at least 45% of the Outstanding Company Common Stock or the Outstanding Company Voting Securities, or at least 45% of the voting equity interests of any successor to the Company, and any successor to the Company in such a transaction assumes the Company's obligations under the Plan such that a subsequent change in control of the successor of the type contemplated in clauses (a) through (f) of this Section 2 has the effect of a Change of Control hereunder. 3. Employment Period. The Company shall continue the Executive in its ----------------- employ, in accordance with the terms and conditions of this Plan, for the period commencing on the Effective Date and ending at the end of twenty-four calendar months after the Effective Date (the "Employment Period"). 4. Terms of Employment. (a) Position and Duties. ------------------- (i) During the Employment Period, (A) the Executive's position (including status, offices, titles and reporting requirements), authority, duties and responsibilities ("Duties") shall be at least commensurate in all material respects with the most significant of those held, exercised and assigned to the Executive at any time during the 120-day period immediately preceding the Effective Date and (B) the Executive's services shall be performed at the location where the Executive was employed immediately preceding the Effective Date or any office or location less than 35 miles from the Executive's primary residence, immediately prior to such relocation. Anything in this Plan to the contrary notwithstanding, if a Change of Control occurs and Executive's Duties are reduced or in any manner adversely affected prior to the date on which the Change of Control occurs, and if it is reasonably demonstrated by the Executive that such modification was at the request of a third party who has taken steps 3 reasonably calculated to effect a Change of Control, or (ii) otherwise arose in connection with or anticipation of a Change of Control, then for all purposes of this Section the Executive's Duties shall be those in effect on the date immediately prior to such modification. (ii) During the Employment Period, and excluding any periods of vacation and sick leave to which the Executive is entitled, the Executive shall devote his or her full attention and time to the business and affairs of the Company and, to the extent necessary to discharge the responsibilities assigned to the Executive hereunder, to use the Executive's reasonable best efforts to perform faithfully and efficiently such responsibilities. During the Employment Period, subject to the Company's conflicts policy, it shall not be a violation of this Plan for the Executive to (A) serve on corporate, civic or charitable boards or committees, (B) deliver lectures, fulfill speaking engagements or teach at educational institutions and (C) manage personal investments, so long as such activities do not significantly interfere with the performance of the Executive's responsibilities as an employee of the Company in accordance with this Plan. It is expressly understood and agreed that to the extent that any such activities have been conducted by the Executive prior to the Effective Date, the continued conduct of such activities (or the conduct of activities similar in nature and scope thereto) subsequent to the Effective Date shall not thereafter be deemed to interfere with the performance of the Executive's responsibilities to the Company. (b) Compensation. (i) Base Salary. During the Employment Period, the Executive shall receive an annual base salary ("Annual Base Salary"), which shall be paid at a monthly rate, at least equal to twelve times the highest monthly base salary paid or payable, including any base salary which has been earned but deferred, to the Executive by the Company and its affiliated companies in respect of the twelve-month period immediately preceding the month in which the Effective Date occurs. During the Employment Period, the Annual Base Salary shall be reviewed no more than 12 months after the last salary increase awarded to the Executive prior to the Effective Date and thereafter at least annually. Any increase in Annual Base Salary shall not serve to limit or reduce any other obligation to the Executive under this Plan. Annual Base Salary shall not be reduced after any such increase and the term Annual Base Salary as utilized in this Plan shall refer to Annual Base Salary as so increased. As used in this Plan, the term "affiliated companies" shall include any company controlled by, controlling or under common control with the Company. (ii) Annual Bonus. In addition to Annual Base Salary, the Executive shall be awarded, for each calendar year ending during the Employment Period, an annual bonus (the "Annual Bonus") in cash at least equal to the Executive's highest bonus under the Company's bonus plan or any comparable bonus under any predecessor or successor plan of the Company, for the last three full calendar years prior to the Effective Date (annualized in the event that the Executive was not employed by the Company for the whole of such calendar year) (the "Recent Annual Bonus"). Each such Annual Bonus shall be paid no later than the end of the third month of the calendar year next following the calendar year for which the Annual Bonus is awarded, unless the Executive shall elect to defer the receipt of such Annual Bonus. (iii) Incentive, Savings and Retirement Plans. During the Employment Period, the Executive shall be entitled to participate in all incentive, stock option, savings and retirement plans, practices, policies and programs applicable generally to other peer executives of the Company and its affiliated companies, but in no event shall such plans, practices, policies and programs provide the Executive with incentive opportunities (measured with respect to both regular and special incentive opportunities, to the extent, if any, that such distinction is applicable), savings opportunities and retirement benefit opportunities, in each case, less 4 favorable in value, in the aggregate, than the most favorable of those provided by the Company and its affiliated companies for the Executive under such plans, practices, policies and programs as in effect at any time during the 120-day period immediately preceding the Effective Date or if more favorable to the Executive, those provided generally at any time after the Effective Date to other peer executives of the Company and its affiliated companies. (iv) Welfare Benefit Plans. During the Employment Period, the Executive and/or the Executive's family, as the case may be, shall be eligible for participation in and shall receive all benefits under welfare benefit plans, practices, policies and programs provided by the Company and its affiliated companies (including, without limitation, medical, prescription, dental, disability, salary continuance, employee life, group life, accidental death and travel accident insurance plans and programs) to the extent applicable generally to other peer executives of the Company and its affiliated companies, but in no event shall such plans, practices, policies and programs provide the Executive with benefits which are less favorable in value, in the aggregate, than the most favorable of such plans, practices, policies and programs in effect for the Executive at any time during the 120-day period immediately preceding the Effective Date or, if more favorable to the Executive, those provided generally at any time after the Effective Date to other peer executives of the Company and its affiliated companies. (v) Expenses. During the Employment Period, the Executive shall be entitled to receive prompt reimbursement for all reasonable expenses incurred by the Executive in accordance with the most favorable policies, practices and procedures of the Company and its affiliated companies in effect for the Executive at any time during the 120-day period immediately preceding the Effective Date or, if more favorable to the Executive, as in effect generally at any time thereafter with respect to other peer executives of the Company and its affiliated companies. (vi) Perquisites. During the Employment Period, the Executive shall be entitled to fringe benefits, including, without limitation, tax and financial planning services and, if applicable, use of an automobile and payment of related expenses, in accordance with the most favorable plans, practices, programs and policies of the Company and its affiliated companies in effect for the Executive at any time during the 120-day period immediately preceding the Effective Date or, if more favorable to the Executive, as in effect generally at any time thereafter with respect to other peer executives of the Company and its affiliated companies. (vii) Office and Support Staff. During the Employment Period, the Executive shall be entitled to a similar office or offices, and to personal secretarial and other assistance, at least equal to the most favorable of the foregoing provided to the Executive by the Company and its affiliated companies at any time during the 120-day period immediately preceding the Effective Date or, if more favorable to the Executive, as provided generally at any time thereafter with respect to other peer executives of the Company and its affiliated companies. (viii) Vacation. During the Employment Period, the Executive shall be entitled to paid vacations in accordance with the most favorable plans, policies, programs and practices of the Company and its affiliated companies as in effect for the Executive at any time during the 120-day period immediately preceding the Effective Date or, if more favorable to the Executive, as in effect generally at any time thereafter with respect to other peer executives of the Company and its affiliated companies. 5 (ix) Substitution of Nonqualified Benefits. If the continued provision of benefits to the Executive under any employee benefit plan of the Company at the level required by this Section 4(b) would cause such employee benefit plan to violate any minimum coverage, nondiscrimination requirement or other requirement of any applicable provision of the Internal Revenue Code of 1986, as amended (the "Code") or the Employee Retirement Income Security Act of 1974, as amended ("ERISA"), the Company may provide the closest possible economic equivalent of such benefit in the form of a nonqualified plan or additional compensation. 5. Termination of Employment. (a) Death or Disability. The Executive's ------------------------- employment shall terminate automatically upon the Executive's death during the Employment Period. If the Company determines in good faith that Disability of the Executive has occurred during the Employment Period (pursuant to the definition of Disability set forth below), it may give to the Executive written notice of its intention to terminate the Executive's employment. In such event, the Executive's employment with the Company shall terminate effective on the 30th day after receipt of such notice by the Executive (the "Disability Effective Date"), provided that, within the 30 days after such receipt, the Executive shall not have returned to full-time performance of the Executive's duties. For purposes of this Plan, "Disability" shall mean the absence of the Executive from the Executive's duties with the Company on a full-time basis for 180 consecutive business days as a result of incapacity due to mental or physical illness which is determined to be total and permanent by a physician selected by the Company or its insurers and reasonably acceptable to the Executive or the Executive's legal representative. (b) Cause. The Company may terminate the Executive's employment during the Employment Period for Cause. For purposes of this Plan, "Cause" shall mean: (i) the willful and continued failure of the Executive to perform substantially the Executive's duties with the Company or one of its affiliates (other than any such failure resulting from incapacity due to physical or mental illness), after a written demand for substantial performance is delivered to the Executive by the Board or the Chief Executive Officer of the Company which specifically identifies the manner in which the Board or Chief Executive Officer believes that the Executive has not substantially performed the Executive's duties, or (ii) the conviction of the Executive of a felony involving moral turpitude. For purposes of this provision, no act or failure to act, on the part of the Executive, shall be considered "willful" unless it is done, or omitted to be done, by the Executive in bad faith or without reasonable belief that the Executive's action or omission was in the best interests of the Company. Any act, or failure to act, based upon authority given pursuant to a resolution duly adopted by the Board or upon the instructions of the Chief Executive Officer or a senior officer of the Company or based upon the advice of counsel for the Company shall be conclusively presumed to be done, or omitted to be done, by the Executive in good faith and in the best interests of the Company. The cessation of employment of the Executive shall not be deemed to be for Cause unless and until there shall have been delivered to the Executive a copy of a resolution duly adopted by the affirmative vote of not less than three-quarters of the entire membership of the Board at a meeting of the Board called and held for such purpose (after reasonable notice is provided to the Executive and the Executive is given an opportunity, together with counsel, to be heard before the Board), finding that, in the good faith opinion of the Board, the Executive is guilty of the conduct described in subparagraph (i) or (ii) above, and specifying the particulars thereof in detail. 6 (c) Good Reason; Window Period. The Executive's employment may be terminated by the Executive (i) for Good Reason or (ii) during the Window Period for any or no reason. For purposes of this Plan, the "Window Period" shall mean the 30-day period immediately following the first six month period after the Effective Date. For purposes of this Plan, "Good Reason" shall mean: (i) the assignment to the Executive of any Duties inconsistent in any respect with the Executive's position (including status, offices, titles and reporting requirements), authority, duties or responsibilities as contemplated by Section 4(a) of this Plan, or any other action by the Company which results in a diminution in such position, authority, duties or responsibilities, excluding for this purpose an isolated, insubstantial and inadvertent action not taken in bad faith and which is remedied by the Company promptly after receipt of notice thereof given by the Executive; (ii) any failure by the Company to comply with any of the provisions of Section 4(b) of this Plan, other than an isolated, insubstantial and inadvertent failure not occurring in bad faith and which is remedied by the Company promptly after receipt of notice thereof given by the Executive; (iii) the Company's requiring the Executive to be based at any office or location other than as provided in Section 4(a)(i)(B) hereof or the Company's requiring the Executive to travel on Company business to a substantially greater extent than required immediately prior to the Effective Date; (iv) any purported termination by the Company of the Executive's employment otherwise than as expressly permitted by this Plan; or (v) any failure by the Company to comply with and satisfy Section 11(c) of this Plan. For purposes of this Section 5(c), any good faith determination of "Good Reason" made by the Executive shall be conclusive. (d) Notice of Termination. Any termination by the Company for Cause or on account of Disability, or by the Executive for any or no reason during the Window Period, or for Good Reason, shall be communicated by Notice of Termination to the other party. For purposes of this Plan, a "Notice of Termination" means a written notice which (i) indicates the specific termination provision in this Plan relied upon, (ii) to the extent applicable, sets forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of the Executive's employment under the provision so indicated and (iii) if the Date of Termination (as defined below) is other than the date of receipt of such notice, specifies the termination date (which date shall be not more than thirty days after the giving of such notice). The failure by the Executive or the Company to set forth in the Notice of Termination any fact or circumstance which contributes to a showing of Good Reason or Cause shall not waive any right of the Executive or the Company, respectively, hereunder or preclude the Executive or the Company, respectively, from asserting such fact or circumstance in enforcing the Executive's or the Company's rights hereunder. (e) Date of Termination. "Date of Termination" means (i) if the Executive's employment is terminated by the Company for Cause, or by the Executive during the Window Period or for Good Reason, the date of receipt of the Notice of Termination or any later date 7 specified therein, as the case may be, (ii) if the Executive's employment is terminated by the Company other than for Cause or Disability, the date on which the Company notifies the Executive of such termination and (iii) if the Executive's employment is terminated by reason of death or Disability, the date of death of the Executive or the Disability Effective Date, as the case may be. 6. Obligations of the Company upon Termination. (a) Good Reason or ------------------------------------------- during the Window Period; Other Than for Cause, Death or Disability. If, during the Employment Period, the Company shall terminate the Executive's employment other than for Cause, Death or Disability or the Executive shall terminate employment for Good Reason or for any or no reason during the Window Period: (i) the Company shall pay to the Executive in a lump sum in cash within 30 days after the Date of Termination (unless the Executive elects in writing to be paid over a period not to exceed two years after the Date of Termination), the aggregate of the following amounts: A. the sum of (1) the Executive's Annual Base Salary through the Date of Termination to the extent not theretofore paid, (2) the product of (x) the higher of (I) the Recent Annual Bonus and (II) the Annual Bonus paid or payable, including any bonus or portion thereof which has been earned but deferred (and annualized for any calendar year consisting of less than twelve full months or during which the Executive was employed for less than twelve full months), for the most recently completed calendar year during the Employment Period, if any (such higher amount being referred to as the "Highest Annual Bonus") and (y) a fraction, the numerator of which is the number of days in the current calendar year through the Date of Termination, and the denominator of which is 365 and (3) any compensation previously deferred by the Executive other than compensation deferred under the Company's 401(k) Plan or equivalent plan (together with any accrued interest or earnings thereon) and any accrued vacation pay, in each case to the extent not theretofore paid (the sum of the amounts described in clauses (1), (2), and (3) shall be hereinafter referred to as the "Accrued Obligations"); and B. the amount equal to the product of (1) two and (2) the sum of (x) the Executive's Annual Base Salary and (y) the Highest Annual Bonus; provided however, that if the Executive shall terminate employment during the Window Period, and not for Good Reason, then pursuant to this Section 6(a)(i)B, Executive shall receive the amount equal to the product of (1) two and (2) the sum of (x) the Executive's Annual Base Salary and (y) fifty percent (50%) of the Highest Annual Bonus; Provided however, that twenty-five percent (25%) of the amount set forth in Section 6(a)(i)B herein shall be withheld from such lump sum payment and shall be paid to the Executive in a lump sum in cash, together with interest on the unpaid balance at the Fed Funds Rate (as defined in Section 8), six months after the Date of Termination, if Executive does not breach Section 10 herein, "Confidential Information and Non-Competition", during such six month period. 8 For purposes of this Plan, the aggregate of the amounts described in clauses A and B of this Section 6(a)(i) shall hereafter be referred to as the "Special Termination Amount". (ii) for two years after the Executive's Date of Termination, or such longer period as may be provided by the terms of the appropriate plan, program, practice or policy, the Company shall continue benefits to the Executive and/or the Executive's family at least equal to those which would have been provided to them in accordance with the plans, programs, practices and policies described in Section 4(b) (iii) and (iv) of this Plan if the Executive's employment had not been terminated or, if more favorable to the Executive, as in effect generally at any time thereafter with respect to other peer executives of the Company and its affiliated companies and their families, provided, however, that if the Executive becomes reemployed with another employer and is eligible to receive medical or other welfare benefits under another employer-provided plan, the medical and other welfare benefits described herein shall be secondary to those provided under such other plan during such applicable period of eligibility, and for purposes of determining eligibility (but not the time of commencement of benefits) of the Executive for retiree benefits pursuant to such plans, practices, programs and policies, the Executive shall be considered to have remained employed until two years after the Date of Termination and to have retired on the last day of such period; provided, however, that if the provision of benefits under any employee benefit plan pursuant to this Section 6(a)(ii) of this Plan would cause such plan to violate any requirement of the Code, the provisions of Section 4(b)(ix) of this Plan shall apply. For purposes hereof, any matching employer contribution for any period that ends during such 24 months shall be determined as if the Executive had made the same employee contribution during such period as he made during the last period ending prior to or with the date of termination (or, if greater, the actual amount of the Executive's contribution for such period). It is understood that the provision of benefits by the Company pursuant to this Section 6(a)(ii) shall be in addition to and not concurrent with any rights the Executive may have to continue any such benefits as required by law, including but not limited to COBRA. In the event that the Company does not maintain or provide any such benefits to its employees, or in the event of a Change of Control under Section 2(d), then in lieu of providing the benefits required by this Section 6(a)(ii) the Company shall pay the Executive the value of such benefits in a cash lump sum. The benefits required to be provided under this Section 6(a)(ii) and Section 6(a)(iii) shall hereafter be referred to as the "Special Benefits". (iii) to the extent not theretofore paid or provided, the Company shall timely pay or provide to the Executive any other amounts or benefits required to be paid or provided or which the Executive is entitled to receive under any plan, program, policy or practice or contract or agreement of the Company and its affiliated companies (such other amounts and benefits shall be hereinafter referred to as the "Other Benefits"). (b) Death. If the Executive's employment is terminated by reason of the Executive's death during the Employment Period, this Plan shall terminate with respect to such Executive without further obligation to the Executive's legal representatives under this Plan, other than for payment of the Accrued Obligations and the timely payment or provision of Other Benefits. The Accrued Obligations shall be paid to the Executive's estate or beneficiary, as applicable, in a lump sum in cash within 30 days of the Date of Termination. With respect to the provision of Other Benefits, the term Other Benefits as utilized in this Section 6(b) shall include, without limitation, and the Executive's estate and/or beneficiaries shall be entitled to receive, benefits at least equal to the most favorable benefits provided by the Company and affiliated companies to the estates and beneficiaries of peer executives of the Company and such affiliated companies under such plans, programs, practices and policies relating to death 9 benefits, if any, as in effect with respect to other peer executives and their beneficiaries at any time during the 120-day period immediately preceding the Effective Date or, if more favorable to the Executive's estate and/or the Executive's beneficiaries, as in effect on the date of the Executive's death with respect to other peer executives of the Company and its affiliated companies and their beneficiaries. (c) Disability. If the Executive's employment is terminated by reason of the Executive's Disability during the Employment Period, this Plan shall terminate with respect to such Executive without further obligation to the Executive, other than for payment of the Accrued Obligations and the timely payment or provision of Other Benefits. The Accrued Obligations shall be paid to the Executive in a lump sum in cash within 30 days of the Date of Termination. With respect to the provision of the Other Benefits, these terms as utilized in this Section 6(c) shall include, and the Executive shall be entitled after the Disability Effective Date to receive, disability and other benefits at least equal to the most favorable of those generally provided by the Company and its affiliated companies to disabled executives and/or their families in accordance with such plans, programs, practices and policies relating to disability, if any, as in effect generally with respect to other peer executives and their families at any time during the 120-day period immediately preceding the Effective Date or, if more favorable to the Executive and/or the Executive's family, as in effect at any time thereafter generally with respect to other peer executives of the Company and its affiliated companies and their families. (d) Cause; Other than for Good Reason or during the Window Period. If the Executive's employment shall be terminated for Cause during the Employment Period, this Plan shall terminate with respect to such Executive without further obligation to the Executive other than the obligation to pay to the Executive (x) the Annual Base Salary through the Date of Termination, (y) the amount of any compensation previously deferred by the Executive, and (z) Other Benefits, in each case to the extent theretofore unpaid. If the Executive voluntarily terminates employment during the Employment Period, excluding a termination either for Good Reason or for any or no reason during the Window Period, this Plan shall terminate with respect to such Executive without further obligation to the Executive, other than for Accrued Obligations and the timely payment or provision of Other Benefits. In such case, all Accrued Obligations shall be paid to the Executive in a lump sum in cash within 30 days of the Date of Termination. 7. Non-exclusivity of Rights. Nothing in this Plan shall prevent or limit ------------------------- the Executive's continuing or future participation in any plan, program, policy or practice (other than any severance pay plan related to a change of control of the Company) provided by the Company or any of its affiliated companies and for which the Executive may qualify, nor, subject to Section 12(e), shall anything herein limit or otherwise affect such rights as the Executive may have under any contract or agreement with the Company or any of its affiliated companies. Amounts which are vested benefits or which the Executive is otherwise entitled to receive under any plan, policy, practice or program of or any contract or agreement with the Company or any of its affiliated companies at or subsequent to the Date of Termination shall be payable in accordance with such plan, policy, practice or program or contract or agreement except as explicitly modified by this Plan (with the Executive's consent if the modification would be adverse to the Executive as solely determined by the Executive). 8. Full Settlement; Legal Fees. The Company's obligation to make the --------------------------- payments provided for in this Plan and otherwise to perform its obligations hereunder shall not be affected by any set-off, counterclaim, recoupment, defense or other claim, right or action which the Company may have against the Executive or others. Neither shall the Company's rights with respect to any claim, right or action it may have against the Executive be affected by, reduced 10 or eliminated on account of its obligations under this Plan. In no event shall the Executive be obligated to seek other employment or take any other action by way of mitigation of the amounts payable to the Executive under any of the provisions of this Plan and except as specifically provided in Section 6(a) (ii), such amounts shall not be reduced whether or not the Executive obtains other employment. The Company agrees to pay as incurred, to the full extent permitted by law, all legal fees and expense which the Executive may reasonably incur as a result of any contest (regardless of the outcome thereof) by the Company, the Executive or others of the validity or enforceability of, or liability under, any provision of this Plan or any guarantee of performance thereof (whether such contest is between the Company and the Executive or between either of them and any third party, and including as a result of any contest by the Executive about the amount of any payment pursuant to this Plan), plus in each case interest on any delayed payment at the applicable Federal rate provided for in Section 7872(f) (2) (A) of the Code (the "Fed Funds Rate"). 9. Certain Additional Payments by the Company. ------------------------------------------ (a) Anything in this Plan to the contrary notwithstanding, in the event it shall be determined that any payment or distribution by the Company to or for the benefit of the Executive (whether paid or payable or distributed or distributable pursuant to the terms of this Plan or otherwise, but determined without regard to any additional payments required under this Section 9) (a "Payment") would be subject to the excise tax imposed by Section 4999 of the Code because the Payment is considered a "parachute payment" under Section 280G of the Code, or any interest or penalties are incurred by the Executive with respect to such excise tax (such excise tax, together with any such interest and penalties, are hereinafter collectively referred to as the "Excise Tax"), then the Executive shall be entitled to receive an additional payment (a "Gross-Up Payment") in an amount such that after payment by the Executive of all taxes (including any interest or penalties imposed with respect to such taxes), including, without limitation, any income taxes (and any interest and penalties imposed with respect thereto) and Excise Tax imposed upon the Gross-Up Payment, the Executive retains an amount of the Gross-Up Payment equal to the Excise Tax imposed upon the Payments. For purposes of determining the amount of the Gross- Up Payment, Executive shall be deemed to pay Federal income taxes at the highest applicable marginal rate of Federal income taxation for the calendar year in which the Gross-Up Payment is to be made and to pay any applicable state and local income taxes at the highest applicable marginal rate of taxation for the calendar year in which the Gross-Up Payment is to be made, net of the maximum reduction in Federal income taxes which could be obtained from the deduction of such state or local taxes if paid in such year (determined without regard to limitations on deductions based upon the amount of adjusted gross income), and to have otherwise allowable deductions for Federal, state and local income tax purposes at least equal to those disallowed because of the inclusion of the Gross-Up Payment in adjusted gross income. Notwithstanding the foregoing provisions of this Section 9(a), if it shall be determined that the Executive is entitled to a Gross-Up Payment, but that the present value as of the date of the Change of Control, determined in accordance with Sections 280G(b)(2)(ii) and 280G(d)(4) of the Code (the "Present Value"), of the Payments does not exceed 110% of the greatest Present Value of Payments (the "Safe Harbor Cap") that could be paid to the Executive such that the receipt thereof would not give rise to any Excise Tax, then no Gross-Up Payment shall be made to the Executive and the amounts payable to the Executive hereunder shall be reduced or deferred until the Present Value of the Payments equals the Safe Harbor Cap. The reduction or deferral of the amounts payable hereunder, if applicable, shall be made in the manner elected by the Executive. For purposes of reducing the Present Value of Payments to the Safe Harbor Cap, only amounts payable hereunder (and no other Payments) shall be reduced or deferred, unless the Executive otherwise agrees to a 11 reduction or deferral of other Payments in accordance with the agreement governing such other Payments. If the reduction of the amounts payable hereunder would not result in a reduction of the Present Value of the Payments to the Safe Harbor Cap, no amounts payable under this Plan shall be reduced pursuant to this provision. (b) Subject to the provisions of Section 9(c), all determinations required to be made under this Section 9, including whether and when a Gross-Up Payment is required and the amount of such Gross-Up Payment and the assumptions to be utilized in arriving at such determination, shall be made by a nationally recognized certified public accounting firm designated by the Executive (the "Accounting Firm"), which shall provide detailed supporting calculations both to the Company and the Executive within 15 business days of the receipt of notice from the Executive that there has been a Payment, or such earlier time as is requested by the Company. In the event that the Accounting Firm is serving as accountant or auditor for the individual, entity or group effecting the Change of Control, the Executive shall appoint another nationally recognized accounting firm to make the determinations required hereunder (which accounting firm shall then be referred to as the Accounting Firm hereunder). All fees and expenses of the Accounting Firm shall be borne solely by the Company. Any Gross-Up Payment, as determined pursuant to this Section 9, shall be paid by the Company to the Executive within five days of the receipt of the Accounting Firm's determination. Any determination by the Accounting Firm shall be binding upon the Company and the Executive. As a result of the uncertainty in the application of Section 4999 of the Code at the time of the initial determination by the Accounting Firm hereunder, it is possible that Gross-Up Payments which will not have been made by the Company should have been made ("Underpayment"), consistent with the calculations required to be made hereunder. In the event that the Company exhausts its remedies pursuant to Section 9(c) and the Executive thereafter is required to make a payment of any Excise Tax, the Accounting Firm shall determine the amount of the Underpayment that has occurred and any such Underpayment shall be promptly paid by the Company to or for the benefit of the Executive. (c) The Executive shall notify the Company in writing of any claim by the Internal Revenue Service that, if successful, would require the payment by the Company of the Gross-Up Payment. Such notification shall be given as soon as practicable but no later than ten business days after the Executive is informed in writing of such claim and shall apprise the Company of the nature of such claim and the date on which such claim is requested to be paid. The Executive shall not pay such claim prior to the expiration of the 30-day period following the date on which it gives such notice to the Company (or such shorter period ending on the date that any payment of taxes with respect to such claim is due). If the Company notifies the Executive in writing prior to the expiration of such period that it desires to contest such claim, the Executive shall: (i) give the Company any information reasonably requested by the Company relating to such claim, (ii) take such action in connection with contesting such claim as the Company shall reasonably request in writing from time to time, including, without limitation, accepting legal representation with respect to such claim by an attorney reasonably selected by the Company, (iii) cooperate with the Company in good faith in order effectively to contest such claim, and 12 (iv) permit the Company to participate in any proceedings relating to such claim; provided, however, that the Company shall bear and pay directly all costs and expenses (including additional interest and penalties) incurred in connection with such contest and shall indemnify and hold the Executive harmless, on an after-tax basis, for any Excise Tax or income tax (including interest and penalties with respect thereto) imposed as a result of such representation and payment of costs and expenses. Without limitation on the foregoing provisions of this Section 9(c), the Company shall control all proceedings taken in connection with such contest and, at its sole option, may pursue or forgo any and all administrative appeals, proceedings, hearings and conferences with the taxing authority in respect of such claim and may, at its sole option, either direct the Executive to pay the tax claimed and sue for a refund or contest the claim in any permissible manner, and the Executive agrees to prosecute such contest to a determination before any administrative tribunal, in a court of initial jurisdiction and in one or more appellate courts, as the Company shall determine; provided, however, that if the Company directs the Executive to pay such claim and sue for a refund, the Company shall advance the amount of such payment to the Executive, on an interest-free basis and shall indemnify and hold the Executive harmless, on an after-tax basis, from any Excise Tax or income tax (including interest or penalties with respect thereto) imposed with respect to such advance or with respect to any imputed income with respect to such advance, and further provided that any extension of the statute of limitations relating to payment of taxes for the taxable year of the Executive with respect to which such contested amount is claimed to be due is limited solely to such contested amount. Furthermore, the Company's control of the contest shall be limited to issues with respect to which a Gross-Up Payment would be payable hereunder and the Executive shall be entitled to settle or contest, as the case may be, any other issue raised by the Internal Revenue Service or any other taxing authority. (d) If, after the receipt by the Executive of an amount advanced by the Company pursuant to Section 9(c), the Executive becomes entitled to receive any refund with respect to such claim, the Executive shall (subject to the Company's complying with the requirements of Section 9(c)) promptly pay to the Company the amount of such refund (together with any interest paid or credited thereon after taxes applicable thereto). If, after the receipt by the Executive of an amount advanced by the Company pursuant to Section 9(c), a determination is made that the Executive shall not be entitled to any refund with respect to such claim and the Company does not notify the Executive in writing of its intent to contest such denial of refund prior to the expiration of 30 days after such determination, then such advance shall be forgiven and shall not be required to be repaid and the amount of such advance shall offset, to the extent thereof, the amount of Gross-Up Payment required to be paid. 10. Confidential Information and Non-Competition. (a) The Executive shall -------------------------------------------- hold in a fiduciary capacity for the benefit of the Company all secret or confidential information, knowledge or data relating to the Company or any of its affiliated companies, and their respective businesses, which shall have been obtained by the Executive during the Executive's employment by the Company or any of its affiliated companies and which shall not be or become public knowledge (other than by acts by the Executive or representatives of the Executive in violation of this Plan). After termination of the Executive's employment with the Company, the Executive shall not, without the prior written consent of the Company or as may otherwise be required by law or legal process, communicate or divulge any such information, knowledge or data to anyone other than the Company and those designated by it. In no event shall an asserted violation of the provisions of this Section 10 constitute a basis for deferring or withholding any amounts otherwise payable to the Executive under this Plan. 13 (b) If upon termination the Executive receives the Special Termination Amount, the Special Benefits and the Other Benefits, then for six months after the Date of Termination, Executive shall not: (i) solicit, directly or indirectly, or attempt to influence the Company's clients with the purpose or effect of diverting their business away from the Company; and (ii) solicit, directly or indirectly, any of the Company's employees or sales professionals to leave the Company and associate with a competitor of the Company. Twenty-five percent (25%) of the Special Termination Amount, the Special Benefits and the Other Benefits received by Executive shall be allocated to this non-competition section (the "Allocation"). If Executive breaches this Section 10(b), Executive shall forfeit any amounts appropriately withheld pursuant to the proviso set forth in Section 6(a)(i)B and shall repay any balance of the Allocation to the Company, and the Company may pursue any other remedies available to it at law or in equity for such breach. 11. Successors. (a) The benefits under the Plan are personal to the ---------- Executive and without the prior written consent of the Company shall not be assignable by the Executive otherwise than by will or the laws of descent and distribution. This Plan shall inure to the benefit of and be enforceable by and binding upon the Executive's heirs and legal representatives. (b) The obligations of the Company under the Plan shall be binding on the Company and its successors and assigns. (c) The Company will require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Company to assume expressly and agree to perform this Plan in the same manner and to the same extent that the Company would be required to perform it if no such succession had taken place. As used in this Plan, "Company" shall mean the Company as hereinbefore defined and any successor to its business and/or assets as aforesaid which assumes and agrees to perform this Plan by operation of law, or otherwise. 12. Miscellaneous. (a) This Plan shall be governed by and construed in ------------- accordance with the laws of the State of Illinois without reference to principles of conflict of laws, except to the extent pre-empted by federal law. The captions of this Plan are not part of the provisions hereof and shall have no force or effect. This Plan may not be amended, modified or terminated otherwise than by a written agreement approved by the Board of Directors and executed by an authorized officer or director of the Company and each affected Executive or their respective successors and legal representatives. (b) The invalidity or unenforceability of any provision of this Plan shall not affect the validity or enforceability of any other provision of this Plan. (c) The Company may withhold from any amounts payable under this Plan such Federal, state, local or foreign taxes as shall be required to be withheld pursuant to any applicable law or regulation. (d) The Executive's or the Company's failure to insist upon strict compliance with any provision hereof or any other provision of this Plan or the failure to assert any right the Executive or the Company may have hereunder, including, without limitation, the right of the Executive to terminate employment for Good Reason or for any or no reason during the Window Period, shall not be deemed to be a waiver of such provision or right or any other provision or right of this Plan. 14 (e) Except as may otherwise be provided under any other written agreement between the Executive and the Company, the employment relationship between the Executive and the Company is "at will" and, prior to the Effective Date, except as otherwise provided in this Plan, the Executive's employment may be terminated by either the Executive or the Company at any time prior to the Effective Date, in which case the Executive shall have no further rights under this Plan. From and after the Effective Date this Plan shall supersede any other agreement currently in place between the Company and any Executive with respect to treatment of an Executive in the event of a Change of Control. Except as modified by this Plan, Executive's employment with the Company is subject to all Company policies governing employees of the Company as in effect from time to time, including but not limited to, the Employee Handbook and the expense policy. (f) All rights under this Plan shall at all times be entirely unfunded, and no provision shall at any time be made with respect to segregating any assets of the Company for payment of any amounts due hereunder. The Executive, his or her spouse and beneficiaries shall only have the rights of general unsecured creditors of the Company. (g) As and when each Executive signs an acknowledgment agreement to participate in this Plan, then this Plan shall constitute a valid and binding Employment Agreement between each such Executive and the Company. By its Board of Directors, the Company has caused the Plan to be adopted as of the day and year first above written. By: /s/ Reuben S. Leibowitz -------------------------------------------------- On behalf of the Board Authorized Officer or Director 15 EX-21 7 SUBSIDIARIES OF THE COMPANY Exhibit 21 SUBSIDIARIES OF THE REGISTRANT ------------------------------ SUBSIDIARIES OF GRUBB & ELLIS COMPANY NAME AND STATE OF - -------- -------- TRADE NAMES (if any) INCORPORATION - -------------------- ------------- Adams-Cates Company Georgia Aequus Property Management Company Texas Collective Services, Inc. Pennsylvania Grubb & Ellis Affiliates, Inc. Delaware Grubb & Ellis Asset Services Company Delaware Grubb & Ellis Colorado, Inc. California Trade name: Grubb & Ellis Company Grubb & Ellis Europe, Inc. California Grubb & Ellis Management Services, Inc. Delaware Grubb & Ellis Mortgage Group, Inc. California Grubb & Ellis Mortgage Services, Inc. California Grubb & Ellis New York, Inc. New York Trade name: James Felt Realty Services Grubb & Ellis Institutional Properties, Inc. California Grubb & Ellis of Nevada, Inc. Nevada Grubb & Ellis of Michigan, Inc. Delaware Trade name: Grubb & Ellis Company Grubb & Ellis of Oregon, Inc. Washington Grubb & Ellis Realty Advisers, Inc. California Landauer Realty Group, Inc. Florida Grubb & Ellis Southeast Partners, Inc. California G&E Investor Properties I, Inc. California G&E Investor Properties III, Inc. California G&E Investor Properties IV, Inc. California HSM Inc. Texas Leggat McCall/Grubb & Ellis, Inc. Massachusetts Montclair Insurance Company Ltd. Bermuda Oliver Realty, Inc. Delaware The Schuck Commercial Brokerage Company Colorado Wm. A. White/Grubb & Ellis Inc. New York Wm. A. White/Tishman East Inc. New York White Commercial Real Estate California Trade Name: White Commercial Real Estate, a Company of Grubb & Ellis Property Solutions Worldwide SUBSIDIARIES OF GRUBB & ELLIS MANAGEMENT SERVICES, INC. NAME AND STATE OF - -------- -------- TRADE NAMES (if any) INCORPORATION - -------------------- ------------- Crane Realty & Management Co. California Grubb & Ellis Management Services of Canada, Inc. Ontario, Canada Grubb & Ellis Management Services of Colorado, Inc Colorado Trade Name: Grubb & Ellis Management Services, Inc. Grubb & Ellis Management Services of Michigan, Inc. Michigan Trade Name: Grubb & Ellis Management Services, Inc. SUBSIDIARIES OF CRANE REALTY & MANAGEMENT CO. NAME AND STATE OF - -------- -------- TRADE NAMES (if any) INCORPORATION - -------------------- ------------- Crane Realty Services, Inc. California SUBSIDIARIES OF GRUBB & ELLIS MANAGEMENT SERVICES OF CANADA, INC. NAME AND STATE OF - -------- -------- TRADE NAMES (if any) INCORPORATION - -------------------- ------------- Grubb & Ellis Facilities Services of Canada, Inc. Ontario, Canada SUBSIDIARIES OF HSM INC. NAME AND STATE OF - -------- -------- TRADE NAMES (if any) INCORPORATION - -------------------- ------------- Henry S. Miller Financial Corporation Texas HSM Condominium Corporation Texas HSM Real Estate Securities Corporation Texas Miller Capital Corporation Texas Miller Real Estate Services Corporation Texas EX-23.1 8 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. 333-67729) pertaining to the Grubb & Ellis Company Deferred Compensation Plan, the Registration Statement (Form S-8 No. 333-73331) pertaining to the Grubb & Ellis 1998 Stock Option Plan and the 1993 Stock Option Plan for Outside Directors of Grubb & Ellis Company, the Registration Statement (Form S-3 No. 333-48515) pertaining to the registration of $150,000,000 of debt securities, preferred stock, common stock, equity warrants and debt warrants, the Registration Statement (Form S-8 No. 333-42741) pertaining to the Grubb & Ellis Company 1990 Amended and Restated Stock Option Plan and Grubb & Ellis Employee Stock Purchase Plan, the Registration Statements (Form S-8 Nos. 33-71580, 33- 35640 and 2-98541) pertaining to the 1990 Amended and Restated Stock Option Plan, as amended, and the Registration Statement (Form S-8 No. 33-71484) pertaining to the 1993 Stock Option Plan for Outside Directors of Grubb & Ellis Company of our report dated August 23, 1999, with respect to the financial statements of Grubb & Ellis Company included in the Annual Report (Form 10-K) for the year ended June 30, 1999. /s/ Ernst & Young LLP Chicago, Illinois September 23, 1999 EX-24 9 POWERS OF ATTORNEY Exhibit 24 GRUBB & ELLIS COMPANY POWER OF ATTORNEY ANNUAL REPORT ON FORM 10-K The undersigned President and Chief Executive Officer of Grubb & Ellis Company, a Delaware corporation (the "Company"), hereby constitutes and appoints Robert J. Walner, Blake Harbaugh, and Carol Vanairsdale, jointly and severally, his attorneys with full power of substitution, to sign and file with the Securities and Exchange Commission, in his capacity as President and Chief Executive Officer of the Company, the Company's Annual Report on Form 10-K for the 1999 fiscal year and any and all amendments or supplements thereto, and any and all instruments or documents filed as part of or in conjunction with such Annual Report or amendments or supplements thereto, and hereby ratifies all that said attorneys or any of them may do or cause to be done by virtue hereof. IN WITNESS WHEREOF, I have signed these presents this 16th day of September, 1999. /s/ Neil Young --------------------- Neil Young President and Chief Executive Officer GRUBB & ELLIS COMPANY POWER OF ATTORNEY ANNUAL REPORT ON FORM 10-K Each of the undersigned directors of Grubb & Ellis Company, a Delaware corporation (the "Company"), hereby constitutes and appoints Robert J. Walner, Blake Harbaugh, and Carol Vanairsdale, jointly and severally, his attorneys with full power of substitution, to sign and file with the Securities and Exchange Commission, in his capacity as director of the Company, the Company's Annual Report on Form 10-K for the fiscal year ending June 30, 1999 and any and all amendments or supplements thereto, and any and all instruments or documents filed as part of or in conjunction with such Annual Report or amendments or supplements thereto, and hereby ratifies all that said attorneys or any of them may do or cause to be done by virtue hereof. This instruments may be executed in a number of identical counter parts, each of which shall be deemed an original for all purposes and all of which shall constitute, collectively, one instrument. IN WITNESS WHEREOF, we have signed these presents this 16th day of September, 1999. /s/ R. David Anacker /s/ Reuben S. Leibowitz - ------------------------- ------------------------ R. David Anacker Reuben S. Leibowitz /s/ Lawrence S. Bacow /s/ Robert J. McLaughlin - ------------------------- ------------------------- Lawrence S. Bacow Robert J. McLaughlin /s/ Joe F. Hanauer /s/ Thomas E. Meador - ------------------------- ------------------------- Joe F. Hanauer Thomas E. Meador /s/ C. Michael Kojaian /s/ John D. Santoleri - ------------------------- ------------------------- C. Michael Kojaian John D. Santoleri /s/ Sidney Lapidus /s/ Neil R. Young - ------------------------- ------------------------- Sidney Lapidus Neil R. Young /s/ Todd A. Williams - ------------------------- Todd A. Williams EX-27 10 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE COINSOLIDATED STATEMENTS OF OPERATIONS AND CONSOLIDATED BALANCE SHEETS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 YEAR JUN-30-1999 JUL-01-1998 JUN-30-1999 5,500 0 12,143 2,662 0 24,770 37,642 19,088 79,793 25,070 0 0 0 199 44,283 79,793 0 315,023 0 151,592 150,674 0 702 12,055 3,976 8,079 0 0 0 8,079 .41 .37
-----END PRIVACY-ENHANCED MESSAGE-----