As
filed with the Securities and Exchange Commission on December 28, 2009
Registration No. 333-163550
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Amendment No. 1 to Form S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
GRUBB & ELLIS COMPANY
(Exact name of registrant as specified in its charter)
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Delaware
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6531
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94-1424307
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(State or other jurisdiction of
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(Primary Standard Industrial
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(I.R.S. Employer
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incorporation or organization)
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Classification Code Number)
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Identification Number)
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1551 North Tustin Avenue, Suite 300
Santa Ana, California 92705
(714) 667-8252
(Address, including zip code, and telephone number, including area code, of the registrants principal executive offices)
Thomas DArcy
Chief Executive Officer and President
Grubb & Ellis Company
1551 North Tustin Avenue, Suite 300
Santa Ana, California 92705
(714) 667-8252
(Name, address, including zip code, and telephone number, including area code, of agent for service)
Copies to:
Clifford A. Brandeis, Esq.
Zukerman Gore Brandeis & Crossman, LLP
875 Third Avenue
New York, New York 10022
(212) 223-6700
Approximate date of commencement of proposed sale to the public:
As soon as practicable after
the effective date of this Registration Statement.
If any of the securities being registered on this Form are to be offered on a delayed or
continuous basis pursuant to Rule 415 under the Securities Act of 1933, as amended, check the
following box.
þ
If this Form is filed to register additional securities for an offering pursuant to Rule
462(b) under the Securities Act, please check the following box and list the Securities Act
registration statement number of the earlier effective registration statement for the same
offering.
o
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities
Act, check the following box and list the Securities Act registration statement number of the
earlier effective registration statement for the same offering.
o
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities
Act, check the following box and list the Securities Act registration statement number of the
earlier effective registration statement for the same offering.
o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, a non-accelerated filer, or a smaller reporting company. See the definitions of large
accelerated filer, accelerated filer and smaller reporting company in Rule 12b2 of the
Exchange Act.
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Large accelerated filer
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Accelerated filer
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Non-accelerated filer
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(Do not check if a smaller reporting company)
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Smaller reporting company
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CALCULATION OF REGISTRATION FEE
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Proposed Maximum
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Proposed Maximum
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Title of Each Class of
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Amount to be
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Aggregate Offering
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Aggregate Offering
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Amount of
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Securities to be Registered
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Registered
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Price Per Unit
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Price(1)
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Registration Fee
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12% Cumulative
Participating Perpetual
Convertible Preferred
Stock, $0.01 par value per
share
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125,000
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$100
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$
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12,500,000
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$
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697.50
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(2)
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Common Stock, $0.01 par
value per share
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7,575,750
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(3)
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(4)
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(1)
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Estimated pursuant to Rule 457(o) under the Securities
Act of 1933, as amended (the
Securities Act
), solely
for the purpose of computing the amount of the
registration fee.
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(2)
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Calculated pursuant to Rule 457(o) promulgated under
the Securities Act and based on the filing fee of
$55.80 per $1,000,000 of securities registered.
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(3)
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Estimated based on the total number of shares of common
stock currently issuable upon conversion of the
preferred stock. Pursuant to Rule 416 under the
Securities Act, the common stock offered hereby shall
be deemed to cover additional securities to be offered
to prevent dilution resulting from stock splits, stock
dividends or similar transactions (pursuant to the
first conversion formula on page 101 of the Form
S-1). Adjustments to the conversion rate resulting in
the issuance of additional shares that are not
addressed by Rule 416 will be covered by a separate
registration statement.
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(4)
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No separate consideration will be received for the
shares of common stock issuable upon conversion of the
preferred stock, and, therefore, no registration fee
for those shares is required pursuant to Rule 457(i)
under the Securities Act.
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The Registrant hereby amends this Registration Statement on such date or dates as may be
necessary to delay its effective date until the Registrant shall file a further amendment which
specifically states that this Registration Statement shall thereafter become effective in
accordance with
Section 8(a)
of the Securities Act of 1933 or until the Registration Statement
shall become effective on such date as the Commission, acting pursuant to said Section
8(a)
, may
determine.
The information in this prospectus is not complete and may be
changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is
effective. This prospectus is not an offer to sell these securities
and is not soliciting an offer to buy these securities in any state
or jurisdiction where the offer or sale is not permitted.
SUBJECT
TO COMPLETION, DATED DECEMBER 28, 2009
PROSPECTUS
Grubb & Ellis Company
7,575,750 Shares of Common Stock
125,000 Shares of 12% Cumulative Participating Perpetual Convertible Preferred Stock
This prospectus relates to up to 125,000 shares of our outstanding 12% Cumulative
Participating Perpetual Convertible Preferred Stock, which we refer to herein as our
12%
Preferred Stock
or
Preferred Stock
, and up to 7,575,750 shares of our common stock issuable
upon conversion of our 12% Preferred Stock that may be sold by the selling stockholders identified
in this prospectus. The selling stockholders acquired the shares of 12% Preferred Stock offered by
this prospectus in a private placement of our securities. We are registering the offer and sale of
such shares of 12% Preferred Stock and such shares of common stock to satisfy registration rights
we have granted. We will not receive any of the proceeds from the sale of the shares of 12%
Preferred Stock or shares of common stock by the selling stockholders. We have agreed to bear all
expenses of registration of our common stock offered by this prospectus. The selling stockholders,
or their transferees, pledgees, donees or other successors in interest, may sell their 12%
Preferred Stock and shares of common stock issuable upon conversion of our 12% Preferred Stock by
the methods described under Plan of Distribution.
We will pay cumulative dividends on the 12% Preferred Stock from and including the date of
original issuance in the amount of $12.00 per share each year, which is equivalent to 12% of the
initial liquidation preference per share. Dividends on the Preferred Stock will be payable when,
as and if declared, quarterly in arrears, on March 31, June 30, September 30 and December 31,
beginning on December 31, 2009. In addition, in the event of any cash distribution to holders of
the common stock, par value $0.01 per share, of our company, referred to as our common stock,
holders of our 12% Preferred Stock will be entitled to participate in such distribution as if such
holders had converted their shares of Preferred Stock into common stock. Generally, we may not
redeem the 12% Preferred Stock before November 15, 2014. On or after November 15, 2014, we may, at
our option, redeem the 12% Preferred Stock, in whole or in part, by paying an amount equal to 110%
of the sum of the initial liquidation preference per share plus any accrued and unpaid dividends
to and including the date of redemption. Holders of our 12% Preferred Stock may require us to
repurchase all, or a specified whole number, of their Preferred Stock upon the occurrence of a
fundamental change (i) prior to November 15, 2014, at a repurchase price equal to 110% of the sum
of the initial liquidation preference
plus
accumulated but unpaid dividends to but excluding the
fundamental change repurchase date and (ii) from November 15, 2014 until prior to November 15,
2019 at a repurchase price equal to 100% of the sum of the initial liquidation preference plus
accumulated but unpaid dividends to but excluding the fundamental change repurchase date. In
addition, if a holder elects to convert their Preferred Stock in connection with certain change in
control events prior to November 15, 2014, we may increase the conversion rate by a number of
additional shares of common stock deliverable upon conversion of such Preferred Stock. The 12%
Preferred Stock has no stated maturity, and will not be subject to any sinking fund or mandatory
redemption.
The 12% Preferred Stock is convertible, at the holders option, into our common stock at a
conversion rate of 60.606 shares of our common stock per share of Preferred Stock, which
represents a conversion price of approximately $1.65 per share of common stock. Except as required
by law, the holders of the Preferred Stock vote together with the holders of the common stock as
one class on all matters on which holders of common stock vote. The Preferred Stock votes as a
separate class with respect to certain matters. Holders of the Preferred Stock when voting with
the common stock are entitled to voting rights equal to the number of shares of common stock into
which the Preferred Stock is convertible, on an as if converted basis.
Our common stock is listed on the New York Stock Exchange under the symbol GBE. On December
23, 2009, the last reported sales price for our common stock was $1.35.
There is currently no established market for the 12% Preferred Stock. We do not intend to
apply for listing of the 12% Preferred Stock on any securities exchange or for inclusion of the
12% Preferred Stock in any automated quotation system.
There are significant risks associated with an investment in our securities. See Risk
Factors beginning on page 5.
Neither the Securities and Exchange Commission nor any state securities commission has
approved or disapproved of these securities or determined if this prospectus is truthful or
complete. Any representation to the contrary is a criminal offense.
The
date of this prospectus is December , 2009.
SUMMARY
This summary highlights selected information contained elsewhere in this prospectus. This
summary may not contain all of the information that you should consider before deciding whether to
invest in the preferred stock or the common stock. For a more complete understanding of our company
and this offering, we encourage you to read this entire document, including the Risk Factors
section, the financial information included in this prospectus, and the other documents
incorporated by reference herein before deciding to invest in the preferred stock or the common
stock. In this prospectus, references to Grubb & Ellis, we, us and our refer to Grubb &
Ellis Company, a Delaware corporation, and its subsidiaries unless otherwise stated or the context
indicates otherwise.
Company Overview
Grubb & Ellis Company, a Delaware corporation founded 50 years ago in Northern California, is
one of the countrys largest and most respected commercial real estate services and investment
management firms. On December 7, 2007, the Company effected a stock merger (the
Merger
) with NNN
Realty Advisors, Inc. (
NNN
), a real estate asset management company and nationally recognized
sponsor of public non-traded real estate investment trusts (
REITs
), as well as a sponsor of tax
deferred tenant-in-common (
TIC
) 1031 property exchanges and other investment programs. Upon the
closing of the Merger, a change of control occurred. The former stockholders of NNN acquired
approximately 60% of the Companys issued and outstanding common stock.
With 127 owned and affiliate offices worldwide (54 owned and approximately 73 affiliates) and
more than 6,000 professionals, including a brokerage sales force of more than 1,800 brokers, the
Company offers property owners, corporate occupants and program investors comprehensive integrated
real estate solutions, including transactions, management, consulting and investment advisory
services supported by proprietary market research and extensive local market expertise.
In certain instances throughout this prospectus phrases such as legacy Grubb & Ellis or
similar descriptions are used to reference, when appropriate, Grubb & Ellis prior to the Merger.
Similarly, in certain instances throughout this prospectus the term NNN, legacy NNN or similar
phrases are used to reference, when appropriate, NNN Realty Advisors, Inc. prior to the Merger.
On March 16, 2009, management and the Audit Committee of the board of directors of the Company
(the
Board of Directors
or
Board
) concluded that the Companys previously issued audited
financial statements for each of the fiscal years ended December 31, 2006 and 2007, the unaudited
interim financial statements for each of the quarters ended March 31, June 30 and September 30,
2008 and selected financial data derived from the Companys previously issued audited financial
statements for the fiscal years ended December 31, 2005 and 2004 included in the Companys
securities filings thereafter should be restated. See The CompanyRestatement of Certain
Financial Information and Special Investigation below.
Our principal executive offices are located at 1551 North Tustin Avenue, Suite 300, Santa Ana,
California 92705. Our telephone number is (714) 667-8252. Our web address is
www.grubb-ellis.com
. Information contained in our web site is not incorporated by reference
into this prospectus, and you should not consider information in our web site as part of this
prospectus.
Transaction Services
Grubb & Ellis has a track record of over 50 years of proven performance in the commercial real
estate industry and is one of the largest real estate brokerage firms in the country, offering
clients the experience of thousands of successful transactions and the expertise that comes from a
nationwide platform. By focusing on the overall business objectives of its clients, Grubb & Ellis
utilizes its research capabilities, extensive properties database and expert negotiation skills to
create, buy, sell and lease opportunities for both users and owners of
commercial real estate. With a comprehensive approach to transactions, Grubb & Ellis offers a
full suite of services to clients, from site selection and sale negotiations to needs analysis,
occupancy projections, prospect qualification, pricing recommendations, long-term value
consultation, tenant representation and consulting services. As one of the most active and largest
commercial real estate brokerages in the United States, Grubb & Ellis traditional real estate
services provide added value to the Companys real estate investment programs by offering a
comprehensive market view and local area expertise. This powerful business combination allows the
Company to identify attractive investment properties and quickly acquire them for the benefit of
its program investors. In addition, select brokers have the opportunity to cross-sell product
through the Companys Investment Management platform.
Management Services
Grubb & Ellis delivers integrated property, facility, asset, construction, business and
engineering management services to a host of corporate and institutional clients. The Company
offers customized programs that focus on cost-efficient operations and tenant retention.
The Company manages a comprehensive range of properties including headquarters, facilities and
class A office space for major corporations, including many Fortune 500 companies. Grubb & Ellis
skills extend to management of industrial, manufacturing and warehousing facilities as well as data
centers, retail outlets and multi-family properties for real estate users and investors.
1
Additionally, Grubb & Ellis provides consulting services, including site selection,
feasibility studies, exit strategies, market forecasts, appraisals, strategic planning and research
services.
Investment Management
The Company and its subsidiaries are leading sponsors of real estate investment programs that
provide individuals and institutions the opportunity to invest in a broad range of real estate
investment vehicles, including tax-deferred 1031 TIC exchanges, public non-traded REITs and real
estate investment funds. During the year ended December 31, 2008, more than $984.3 million in
investor equity was raised for these investment programs. As of December 31, 2008, the Company has
more than $6.8 billion of assets under management related to the various programs that it sponsors.
The Company has completed transaction acquisition and disposition volume totaling approximately
$11.9 billion on behalf of more than 55,000 program investors since 1998.
Recent Events
Private Placement of 12% Preferred Stock
On November 6, 2009, we consummated the issuance and sale of 900,000 shares of our 12%
Preferred Stock in a private placement exempt from registration under Section 4(2) of the
Securities Act of 1933, as amended, and Rule 506 of Regulation D promulgated thereunder. The
Company received net proceeds from the offering of approximately $85 million after deducting
expenses and after giving effect to the conversion of $5 million of subordinated debt previously
provided in October, 2009 by an affiliate of the Companys largest stockholder. The Company used
the net proceeds to repay in full its indebtedness pursuant to the $75.0 million credit agreement
entered into on December 7, 2007, by and among the Company, the guarantors named therein, and the
financial institutions defined therein as lender parties, with Deutsche Bank Trust Company
Americas, as lender and administrative agent (the
Credit Facility
). The Credit Facility was
repaid at the agreed reduced principal amount equal to approximately 65% of the principal amount
outstanding under such facility. The balance of the net proceeds from the offering will be used for
general working capital purposes. The Company also granted a 45-day over-allotment option to the
initial purchaser and placement agent for the offering, and pursuant to such over-allotment option,
the Company sold an additional 65,700 shares of Preferred Stock for gross proceeds of $6.6 million,
all of which will be used for working capital purposes. See Managements
Discussion and Analysis of Financial Condition and Results of OperationsLiquidity and
Capital Resources and Description of Capital StockPreferred Stock.
Hiring of Chief Executive Officer
Effective November 16, 2009, Thomas P. DArcy joined the Company as its President, Chief
Executive Officer and as a member of its Board of Directors. Mr. DArcy entered into a three year
employment agreement with the Company subject to successive one-year extensions unless either party
advises the other to the contrary at least 90 days prior to the expiration of the then current
term. See Executive CompensationEmployment Contracts and Compensation ArrangementsThomas
DArcy.
Annual Meeting of Stockholders
At the Companys annual meeting of stockholders held on December 17, 2009 the Companys
common and preferred stockholders voted, among other things, to amend the Companys amended and
restated certificate of incorporation (the
certificate of incorporation
) to (i) increase the
Companys authorized number of shares of capital stock from 110,000,000 shares to 220,000,000
shares, of which 200,000,000 shares with a par value of $0.01 per share are designated common stock
and of which 20,000,000 shares with a par value of $0.01 per share are designated preferred stock,
and (ii) declassify the Board of Directors of the Company and fix the number of Directors to no
less than three and no more than eight as determined by the Board of Directors from time to time.
On December 17, 2009, subsequent to the conclusion of its annual meeting of stockholders, the
Company amended its certificate of incorporation to effect the amendments approved by its
stockholders at the annual meeting. At the Companys 2009 annual stockholders meeting, the
Companys common and preferred stockholders also elected each of Thomas DArcy, C. Michael Kojaian,
Robert J. McLaughlin, Devin I. Murphy, D. Fleet Wallace and Rodger D. Young as the six directors of
the declassified Board of Directors, each to serve a term of one year, and ratified the appointment
of Ernst & Young LLP as the Companys independent auditing firm.
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Selected Consolidated Financial Data
Grubb & Ellis Realty Investors, LLC (
GERI
) (formerly Triple Net Properties, LLC), was the
accounting acquirer of Triple Net Properties Realty, Inc. (
Realty
) and NNN Capital Corp.,
subsidiaries of our company acquired in the Merger. On December 7, 2007, GERI through NNN Realty
Advisors, Inc. merged with Grubb & Ellis Company. NNN Realty Advisors, Inc. was the accounting
acquiror. The selected historical consolidated financial data set forth below as of and for the
years ended December 31, 2008 and 2007 (restated), and the selected consolidated operating and cash
flow data for the year ended December 31, 2006 (restated), has been derived from the audited
financial statements beginning on page F-2 of this prospectus. The selected historical financial
data set forth below as of and for the years ended December 31, 2005 (restated) and 2004
(restated), and the selected consolidated balance sheet data as of December 31, 2006 (restated),
has been derived from unaudited consolidated financial statements not included in this prospectus.
The selected consolidated financial information set forth below as of September 30, 2009 and for
each of the nine-month periods ended September 30, 2009 and 2008 is derived from our unaudited
consolidated financial statements included in our quarterly report on Form 10-Q/A for the period
ended September 30, 2009 beginning on page F-62 of this prospectus. The unaudited consolidated
financial statements include all adjustments which we consider necessary for a fair statement of
our financial position and results of operations for those periods. The results for the nine month
periods ended September 30, 2009 and 2008 are not necessarily indicative of the results that might
be expected for the entire year ending December 31, 2009 or any other period. Historical results
are not necessarily indicative of the results that may be expected for any future period.
The selected historical consolidated financial data for the years ended December 31, 2007
(restated), 2006 (restated), 2005 (restated) and 2004 (restated) has been restated to correct
accounting errors related to the timing of revenue recognition relating to certain tenant-in-common
investment programs sponsored by GERI and the consolidation of certain entities that should have
been consolidated into our financial statements as described in Note 3 to the consolidated
financial statements beginning on page F-2 of this prospectus. As discussed in Note 2 to the
consolidated financial statements, the Company adopted Statement of Financial Accounting Standards
Board No. 160, later codified in ASC 810-10, Noncontrolling Interests in Consolidated Financial
Statements, an amendment of ARB 51, and also adopted FASB Position No. EITF 03-6-1, later codified
in ASC 260-10, Determining whether Instruments Granted in Share-Based Payment Transactions are
Participating Securities. The selected historical consolidated financial data set forth below
should be read in conjunction with the consolidated financial statements beginning on page F-2 of
this prospectus and Managements Discussion and Analysis of Financial Condition and Results of
Operation.
The impact of the restatement on our financial statements for the year ended December 31, 2007
resulted in an increase in net income of $230,000, or less than $0.01 per basic and diluted share,
an increase in total assets of $12.1 million, an increase in total liabilities of $5.5 million and
an increase in minority interest liability of $11.2 million. The impact of the restatement on our
financial statements for the year ended December 31, 2006 resulted in an increase in net income of
$3.9 million, or $0.19 per basic and diluted share, an increase in total assets of $19.7 million,
an increase in total liabilities of $18.1 million and an increase in minority interest liability of
$6.3 million. The impact of the restatement on fiscal year 2005 resulted in a decrease in net
income of $8.1 million, or $0.47 per basic and diluted share, an increase in total assets of $39.7
million, an increase in total liabilities of $47.4 million, and an increase in minority interest
liability of $993,000. The impact of the restatement on our financial statements for the year ended
December 31, 2004 resulted in a decrease in net income of $619,000, or $0.04 per basic and diluted
share, and an increase in total liabilities of $619,000.
3
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Nine Months Ended
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September 30,
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Year Ended December 31,
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2009
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2008
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2008
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2007
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2006
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2005
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2004
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Restated
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Restated (1)
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Restated (2)
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Restated (3)
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Restated (3)
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(In thousands, except per share data)
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(Unaudited)
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(Unaudited)
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(Unaudited)
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(Unaudited)
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Consolidated Statement
of Operations Data:
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Total services revenue
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$
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362,341
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$
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443,526
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$
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595,495
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$
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201,538
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$
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99,599
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$
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80,817
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$
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64,281
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Total revenue
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385,095
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468,828
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628,779
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229,657
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108,543
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84,423
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66,592
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Total compensation costs
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342,072
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365,488
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503,004
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104,109
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49,449
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29,873
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19,717
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Total operating expense
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480,088
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533,874
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929,407
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195,723
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97,633
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71,035
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51,082
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Operating (loss) income
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(94,933
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)
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(65,046
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)
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(300,628
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)
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33,934
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10,910
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13,388
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15,510
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(Loss) income from continuing
operations
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(96,349
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)
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(55,568
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)
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(318,668
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)
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23,741
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21,012
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13,679
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15,628
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Net (loss) income
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(97,354
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)
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(74,258
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)
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(342,589
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)
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23,033
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20,049
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10,288
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15,628
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Net (loss) income attributable
to Grubb & Ellis Company
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(95,668
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)
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(67,960
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(330,870
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)
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21,072
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19,971
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10,047
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15,628
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Basic (loss) earnings per share
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$
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(1.51
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)
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$
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(1.07
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$
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(5.21
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$
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0.53
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$
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1.01
|
|
|
$
|
0.58
|
|
|
$
|
0.90
|
|
(Loss) income from continuing
operations per share
|
|
$
|
(1.49
|
)
|
|
$
|
(0.79
|
)
|
|
$
|
(4.83
|
)
|
|
$
|
0.55
|
|
|
$
|
1.06
|
|
|
$
|
0.80
|
|
|
$
|
0.90
|
|
Diluted (loss) earnings per
share
|
|
$
|
(1.51
|
)
|
|
$
|
(1.07
|
)
|
|
$
|
(5.21
|
)
|
|
$
|
0.53
|
|
|
$
|
1.01
|
|
|
$
|
0.58
|
|
|
$
|
0.90
|
|
Basic weighted average shares
outstanding
|
|
|
63,618
|
|
|
|
63,574
|
|
|
|
63,515
|
|
|
|
38,652
|
|
|
|
19,681
|
|
|
|
17,200
|
|
|
|
17,407
|
|
Diluted weighted average
shares outstanding
|
|
|
63,618
|
|
|
|
63,574
|
|
|
|
63,515
|
|
|
|
38,652
|
|
|
|
19,694
|
|
|
|
17,200
|
|
|
|
17,407
|
|
Dividends declared per common
share
|
|
|
|
|
|
$
|
0.205
|
|
|
$
|
0.205
|
|
|
$
|
0.36
|
|
|
$
|
0.10
|
|
|
|
|
|
|
|
|
|
Consolidated Statement of Cash
Flow Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by
operating activities
|
|
$
|
(29,053
|
)
|
|
$
|
(34,120
|
)
|
|
$
|
(33,629
|
)
|
|
$
|
33,543
|
|
|
$
|
17,356
|
|
|
$
|
23,536
|
|
|
$
|
17,214
|
|
Net cash provided by (used in)
investing activities
|
|
|
81,185
|
|
|
|
(66,719
|
)
|
|
|
(76,330
|
)
|
|
|
(486,909
|
)
|
|
|
(56,203
|
)
|
|
|
(35,183
|
)
|
|
|
(13,046
|
)
|
Net cash (used in) provided by
financing activities
|
|
|
(75,673
|
)
|
|
|
85,937
|
|
|
|
93,616
|
|
|
|
400,468
|
|
|
|
140,525
|
|
|
|
10,251
|
|
|
|
(7,647
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
December 31,
|
|
|
2009
|
|
2008
|
|
2007
|
|
2006
|
|
2005
|
|
2004
|
|
|
|
|
|
|
|
|
|
|
Restated
|
|
Restated
|
|
Restated
|
|
Restated
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
(Unaudited)
|
|
(Unaudited)
|
Consolidated Balance
Sheet Data (at end of period):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
342,178
|
|
|
$
|
520,277
|
|
|
$
|
988,542
|
|
|
$
|
347,709
|
|
|
$
|
126,057
|
|
|
$
|
42,911
|
|
Long Term Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Line of credit
|
|
|
62,709
|
|
|
|
63,000
|
|
|
|
8,000
|
|
|
|
|
|
|
|
8,500
|
|
|
|
3,545
|
|
Notes payable and capital
lease obligations
|
|
|
107,953
|
|
|
|
107,203
|
|
|
|
107,343
|
|
|
|
843
|
|
|
|
887
|
|
|
|
|
|
Senior and participating
notes
|
|
|
16,277
|
|
|
|
16,277
|
|
|
|
16,277
|
|
|
|
10,263
|
|
|
|
2,300
|
|
|
|
4,845
|
|
Redeemable preferred
liability
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,077
|
|
|
|
5,717
|
|
Total Grubb & Ellis
stockholders (deficit) equity
|
|
|
(16,410
|
)
|
|
|
70,171
|
|
|
|
404,056
|
|
|
|
217,125
|
|
|
|
20,081
|
|
|
|
16,164
|
|
|
|
|
(1)
|
|
Based on GAAP, the operating results for the year ended
December 31, 2007 (restated) include the results of NNN
Realty Advisors, Inc. prior to the Merger for the full
periods presented and the results of Grubb & Ellis
Company for the period from December 8, 2007 through
December 31, 2007.
|
|
(2)
|
|
Includes a full year of operating results of GERI, one
and one-half months of Realty (acquired on November 16,
2006) and one-half month of GBE Securities (formerly
NNN Capital Corp.) (acquired on December 14, 2006).
GERI was treated as the acquirer in connection with
these transactions.
|
|
(3)
|
|
Based on GAAP, reflects operating results of GERI.
|
4
RISK FACTORS
Investing in our common stock and 12% Preferred Stock will be subject to risks, including
risks inherent in our business. The value of your investment may decline and could result in a
loss. You should carefully consider the following factors as well as other information contained in
this prospectus before deciding to invest in our common stock or 12% Preferred Stock. Additional
risks and uncertainties not presently known to us, or not identified below, may also materially
adversely affect our business, liquidity, financial condition and results of operations.
Risks Related to our Equity Securities
The 12% Preferred Stock will rank senior to our common stock but junior to all of our liabilities
and our subsidiaries liabilities, in the event of a bankruptcy, liquidation or winding-up.
In the event of bankruptcy, liquidation or winding-up, our assets will be available to pay
obligations on the 12% Preferred Stock only after all of our liabilities have been paid, but prior
to any payments are made with respect to our common stock. In addition, the 12% Preferred Stock
effectively ranks junior to all existing and future liabilities of our subsidiaries. The rights of
holders of the 12% Preferred Stock to participate in the assets of our subsidiaries upon any
liquidation or reorganization of any subsidiary will rank junior to the prior claims of that
subsidiarys creditors. In the event of bankruptcy, liquidation or winding-up, there may not be
sufficient assets remaining, after paying our liabilities, and our subsidiaries liabilities, to
pay amounts due on any or all of the 12% Preferred Stock then outstanding.
Additionally, unlike indebtedness, where principal and interest customarily are payable on
specified due dates, in the case of the 12% Preferred Stock, (1) dividends are payable only if and
when declared by our Board of Directors or a duly authorized committee of the Board, and (2) as a
Delaware corporation, we are restricted to making dividend payments and redemption payments only
out of legally available assets. Further, the 12% Preferred Stock places no restrictions on our
business or operations or on our ability to incur indebtedness or engage in any transactions except
that a consent of holders representing at least a majority of the 12% Preferred Stock is required
to amend our certificate of incorporation as to the terms of the 12% Preferred Stock or to issue
additional 12% Preferred Stock that ranks senior to or, to the extent that 225,000 shares of the
12% Preferred Stock remain outstanding, on a parity with, the 12% Preferred Stock.
The market price of the 12% Preferred Stock will be directly affected by the market price of our
common stock, which may be volatile.
To the extent that a secondary market for the 12% Preferred Stock develops, we believe that
the market price of the 12% Preferred Stock will be significantly affected by the market price of
our common stock. We cannot predict how the shares of our common stock will trade in the future.
This may result in greater volatility in the market price of the 12% Preferred Stock than would be
expected for non-convertible stock. From the beginning of the year ended December 31, 2006 to
December 23, 2009, the reported high and low sales prices for our common stock ranged from a low of
$0.25 to a high of $14.50 per share.
The market price of our common stock will likely fluctuate in response to a number of factors,
including, without limitation, the following:
|
|
|
our liquidity risk management, including our ratings, if any, our liquidity plan and potential transactions
designed to enhance liquidity;
|
|
|
|
|
actual or anticipated quarterly fluctuations in our operating and financial results;
|
|
|
|
|
developments related to investigations, proceedings, or litigation that involves us;
|
|
|
|
|
changes in financial estimates and recommendations by financial analysts;
|
|
|
|
|
dispositions, acquisitions, and financings;
|
|
|
|
|
additional issuances by us of common stock;
|
|
|
|
|
additional issuances by us of other series or classes of preferred stock;
|
|
|
|
|
actions of our common stockholders, including sales of common stock by stockholders and our directors and
executive officers;
|
|
|
|
|
changes in funding markets, including commercial paper, term debt, bank deposits and the asset-backed
securitization markets;
|
5
|
|
|
changes in confidence in real estate markets and real estate investments;
|
|
|
|
|
fluctuations in the stock price and operating results of our competitors and real estate-related stocks in general;
|
|
|
|
|
government reactions to current economic and market conditions; and
|
|
|
|
|
regional, national and global political and economic conditions and other factors.
|
The market price of our common stock may also be affected by market conditions affecting the
stock markets in general and/or real estate stocks in particular, including price and trading
fluctuations on the New York Stock Exchange. These conditions may result in (i) volatility in the
level of, and fluctuations in, the market prices of stocks generally and, in turn, our common
stock, and (ii) sales of substantial amounts of our common stock in the market, in each case that
could be unrelated or disproportionate to changes in our operating performance.
These broad market fluctuations may adversely affect the market prices of our common stock
and, in turn, the 12% Preferred Stock.
In addition, we expect that the market price of the 12% Preferred Stock will be influenced by
yield and interest rates in the capital markets, our creditworthiness, and the occurrence of events
affecting us that do not require an adjustment to the conversion rate.
There may be future sales or other dilution of our equity, which may adversely affect the market
price of our common stock or the 12% Preferred Stock and may negatively impact the holders
investment.
We are not restricted from issuing additional common stock, including any securities that are
convertible into or exchangeable for, or that represent the right to receive, common stock or any
substantially similar securities. In addition, with the applicable consent of holders of the 12%
Preferred Stock, we may issue additional preferred stock that ranks senior to, or on a parity with,
the 12% Preferred Stock. The market price of our common stock or 12% Preferred Stock could decline
as a result of sales of a large number of shares of common stock or 12% Preferred Stock or similar
securities in the market after this offering or the perception that such sales could occur. For
example, if we issue preferred stock in the future that has a preference over our common stock with
respect to the payment of dividends or upon our liquidation, dissolution, or winding-up, or if we
issue preferred stock with voting rights that dilute the voting power of our common stock, the
rights of holders of our common stock or the market price of our common stock could be adversely
affected.
In addition, each share of 12% Preferred Stock is convertible at the option of the holder
thereof into shares of our common stock. The conversion of some or all of the 12% Preferred Stock
will dilute the ownership interest of our existing common stockholders. Any sales in the public
market of our common stock issuable upon such conversion could adversely affect prevailing market
prices of the outstanding shares of our common stock and the 12% Preferred Stock. In addition, the
existence of our 12% Preferred Stock may encourage short selling or arbitrage trading activity by
market participants because the conversion of our 12% Preferred Stock could depress the price of
our equity securities. As noted above, a decline in the market price of the common stock may
negatively impact the market price for the 12% Preferred Stock.
An active trading market for the 12% Preferred Stock does not exist and may not develop.
The 12% Preferred Stock has no established trading market and is not listed on any securities
exchange. Since the securities have no stated maturity date, investors seeking liquidity will be
limited to selling their shares of 12% Preferred Stock in the secondary market or converting their
shares of 12% Preferred Stock into shares of common stock and subsequently seeking to sell those
shares of common stock. See Risk FactorsIf our common stock is delisted, your ability to
transfer or sell your shares of the 12% Preferred Stock, or common stock upon conversion, may be
limited and the market value of the 12% Preferred Stock will be adversely affected. We cannot
assure you that an active trading market in the 12% Preferred Stock will develop or, even if it
develops, we cannot assure you that it will last. In either case the trading price of the 12%
Preferred Stock could be adversely affected and the holders ability to transfer shares of 12%
Preferred Stock will be limited. We were advised by the initial purchaser in the offering of the
12% Preferred Stock that it intends to make a market in the shares of our 12% Preferred Stock;
however, it is not obligated to do so and may discontinue market-making at any time without notice.
We cannot assure you that another firm or person will make a market in the 12% Preferred Stock.
The 12% Preferred Stock has not been rated.
The 12% Preferred Stock has not been rated by any nationally recognized statistical rating
organization. This factor may affect the trading price of the 12% Preferred Stock.
6
Holders of the 12% Preferred Stock do not have identical rights as holders of common stock until
they acquire the common stock, but will be subject to all changes made with respect to our common
stock.
Except for voting and dividend rights, holders of the 12% Preferred Stock have no rights with
respect to the common stock until conversion of their 12% Preferred Stock, including rights to
respond to tender offers, but your investment in the 12% Preferred Stock may be negatively affected
by such events. See Description of 12% Preferred StockVoting Rights. Even though the holders of
the 12% Preferred Stock vote on an as-converted basis with holders of the common stock, upon
conversion of the 12% Preferred Stock, holders will be entitled to exercise the rights of a holder
of common stock only as to matters for which the record date occurs on or after the applicable
conversion date and only to the extent permitted by law, although holders will be subject to any
changes in the powers, preferences, or special rights of common stock that may occur as a result of
any stockholder action taken before the applicable conversion date. Certain actions, including
amendment of our certificate of incorporation, require the additional approval of a majority of
holders of the common stock voting as a separate class (excluding shares of common stock issuable
upon conversion of the 12% Preferred Stock).
The 12% Preferred Stock is perpetual in nature.
The shares of 12% Preferred Stock represent a perpetual interest in us and, unlike
indebtedness, will not give rise to a claim for payment of a principal amount at a particular date.
As a result, holders of the 12% Preferred Stock may be required to bear the financial risks of an
investment in the 12% Preferred Stock for an indefinite period of time. Holders have no right to
call for the redemption of the 12% Preferred Stock. Therefore, holders should be aware that they
may be required to bear the financial risks of an investment in the 12% Preferred Stock for an
indefinite period of time.
We are obligated to pay quarterly dividends with respect to our Preferred Stock.
We are obligated to pay quarterly dividends with respect to the 12% Preferred Stock and in the
event such dividends are in arrears for six or more quarters, whether or not consecutive, subject
to certain limitations, holders representing a majority of shares of Preferred Stock (voting
together as a class with the holders of all other classes or series of preferred stock upon which
like voting rights have been conferred and are exercisable) will be entitled to nominate and vote
for the election of two additional directors to serve on our Board of Directors (the
Preferred
Stock Directors
), until all unpaid dividends with respect to the Preferred Stock and any other
class or series of preferred stock upon which like voting rights have been conferred and are
exercisable have been paid or declared and a sum sufficient for payment is set aside for such
payment; provided that the election of any such Preferred Stock Directors will not cause us to
violate the corporate governance requirements of the New York Stock Exchange (
NYSE
) (or any other
exchange or automated quotation system on which our securities may be listed or quoted) that
requires listed or quoted companies to have a majority of independent directors; and provided
further that the Board of Directors will, at no time, include more than two Preferred Stock
Directors.
The conversion rate of the 12% Preferred Stock may not be adjusted for all dilutive events that may
adversely affect the market price of the 12% Preferred Stock or the common stock issuable upon
conversion of the 12% Preferred Stock.
The number of shares of our common stock that holders are entitled to receive upon conversion
of a share of 12% Preferred Stock is subject to adjustment for certain events arising from
increases in dividends or distributions in common stock, subdivisions, splits, and combinations of
the common stock, certain issuances of stock and stock purchase rights, debt, or asset
distributions, cash distributions, self-tender offers and exchange offers, and certain other
actions by us that modify our capital structure. See Description of 12% Preferred
StockConversion RightsConversion Rate AdjustmentGeneral. We will not adjust the conversion
rate for other events, including our issuances of common stock in connection with acquisitions or
the exercise of options or restricted stock awards granted pursuant to equity plans approved by the
Board, or, after the six-month anniversary of November 6, 2009, for cash. There can be no assurance
that an event that adversely affects the value of the 12% Preferred Stock, but does not result in
an adjustment to the conversion rate, will not occur. Further, if any of these other events
adversely affects the market price of our common stock, it may also adversely affect the market
price of the 12% Preferred Stock. In addition, we are not restricted from offering common stock in
the future or engaging in other transactions that may dilute our common stock and we may issue
additional shares of 12% Preferred Stock, which may dilute our common stock.
A change in control with respect to us may not constitute a merger, consolidation or sale of assets
or a fundamental change for the purpose of the 12% Preferred Stock.
The 12% Preferred Stock contains no covenants or other provisions to afford protection to
holders in the event of certain mergers, consolidations or sales of assets with respect to us
constituting a change in control on or after November 15, 2019 except upon the occurrence of
certain mergers, consolidations or sales of assets. See Description of 12% Preferred
StockConversion RightsConversion Rate AdjustmentMerger, Consolidation or Sale of Assets,
Description of 12% Preferred StockRepurchase of Option of Holders Upon a Fundamental Change and
Description of 12% Preferred StockAdjustment to Conversion Rate Upon Certain Change of Control
Events. Furthermore, the limited covenants with respect to a fundamental change or change in
control may not include every change in control event that could cause the market price of the 12%
Preferred Stock to decline. The adjustment to conversion rate described under Description of 12%
Preferred StockAdjustment to Conversion Rate upon Certain Change in Control Events will not be
applicable on or after November 15, 2014 and the repurchase right of preferred holders described
under Repurchase at Option of Holders Upon a Fundamental Change will not be applicable on or
after November 15, 2019, and these
7
limitations may have the effect of discouraging third parties from pursuing a change in
control of our company, which may otherwise be in the best interest of our stockholders. Any change
in control with respect to us either before or after November 15, 2019 may negatively affect the
liquidity, value or volatility of our common stock, and thus, negatively impact the value of the
12% Preferred Stock.
We may not have the funds necessary to repurchase the 12% Preferred Stock following a fundamental
change.
Holders of the notes have the right to require us to repurchase the 12% Preferred Stock in
cash upon the occurrence of a fundamental change prior to November 15, 2019. We may not have
sufficient funds to repurchase the 12% Preferred Stock at such time, and may not have the ability
to arrange necessary financing on acceptable terms. In addition, our ability to purchase the 12%
Preferred Stock may be limited by law or the terms of other agreements outstanding at such time.
Moreover, a failure to repurchase the 12% Preferred Stock may also constitute an event of default,
and result in the acceleration of the maturity of, any then existing indebtedness, under any
indenture, credit agreement or other agreement outstanding at that time, which could further
restrict our ability to make such payments.
The adjustment to conversion rate in respect of conversions following certain change in control
events may not adequately compensate you.
If certain change in control events occur prior to November 15, 2014, and a holder converts in
connection with such change in control, we will, under certain circumstances, pay a adjustment to
conversion rate in respect of any conversions of the 12% Preferred Stock that occur during the
period beginning on the date notice of such fundamental change is delivered and ending on the
change in control conversion date. See Description of 12% Preferred StockAdjustment to
Conversion Rate upon Certain Change in Control Events. Although the adjustment to the conversion
rate is designed to compensate holders for the lost option value of the holders 12% Preferred
Stock, it is only an approximation of such lost value and may not adequately compensate the holders
for their actual loss.
Our obligation to adjust the conversion rate in respect of conversions following certain
changes in control may be considered a penalty, in which case the enforceability thereof would be
subject to general principles of reasonableness, as applied to such payments.
If our common stock is delisted, your ability to transfer or sell the 12% Preferred Stock, or
common stock upon conversion, may be limited and the market value of the 12% Preferred Stock will
be adversely affected.
The 12% Preferred Stock does not contain protective provisions in the event that our common
stock is delisted. Since the 12% Preferred Stock has no stated maturity date, holders may be forced
to elect between converting their shares of the 12% Preferred Stock into illiquid shares of our
common stock or holding their shares of the 12% Preferred Stock and receiving stated dividends on
the stock when, as and if authorized by our Board of Directors and declared by us with no assurance
as to ever receiving the liquidation preference of the 12% Preferred Stock. Accordingly, if our
common stock is delisted, the holders ability to transfer or sell their shares of the 12%
Preferred Stock, or common stock upon conversion, may be limited, and the market value of the 12%
Preferred Stock will be adversely affected.
Holders of the 12% Preferred Stock may be unable to use the dividends-received deduction.
Distributions paid to corporate U.S. holders (as defined herein) of the 12% Preferred Stock
(or our common stock) may be eligible for the dividends-received deduction to the extent we have
current or accumulated earnings and profits, as determined for U.S. federal income tax purposes. As
of December 31, 2008, we had an accumulated deficit of $333.3 million and we had a net loss of
$330.9 million in the year ended December 31, 2008. As of September 30, 2009, we had an accumulated
deficit of $428.9 million and a net loss of $95.7 million for the nine (9) month period ended
September 30, 2009. There can be no assurance that we will have sufficient current or accumulated
earnings and profits during future fiscal years for the distributions on the 12% Preferred Stock
(or our common stock) to qualify as dividends for U.S. federal income tax purposes. If the
distributions fail to qualify as dividends, U.S. holders would be unable to use the
dividends-received deduction. Instead, distributions would be treated first as a tax-free return of
capital to the extent of a U.S. holders adjusted tax basis in the 12% Preferred Stock and
thereafter as capital gain. If a corporate U.S. holders tax basis in the 12% Preferred Stock (or
our common stock) were reduced in this manner, then the amount of gain, if any, recognized by such
holder on a subsequent disposition of such stock would be increased and such holder would not be
eligible for a dividends-received deduction to offset such gain.
Holders may have to pay U.S. federal income tax if we adjust, or fail to adjust, the conversion
rate of the 12% Preferred Stock in certain circumstances, even if holders do not receive a
corresponding distribution of cash.
Holders may be treated as having received a constructive distribution from us as a result of
certain adjustments to (or certain failures to make adjustments to) the conversion rate or other
terms of the 12% Preferred Stock. The tax treatment of any constructive distributions is not
entirely clear. It is possible that such distribution could be treated as a taxable dividend for
U.S. federal income tax purposes to the extent of our current and accumulated earnings and profits,
even though holders do not receive any cash with respect to such constructive distribution. In
addition, non-U.S. holders (as defined in Certain U.S. Federal Income Tax Considerations) of the
12% Preferred Stock may, in certain circumstances, be subject to U.S. federal withholding tax on
any constructive distributions on the 12% Preferred Stock that are treated as taxable dividends,
and we intend to withhold U.S. federal income tax with respect to any
8
such constructive taxable dividends from any payments made by us to such non-U.S. holders. You
are advised to consult your independent tax advisor and read Certain U.S. Federal Income Tax
Considerations regarding the U.S. federal income tax consequences of an adjustment to the
conversion rate of the 12% Preferred Stock and the issuance of the 12% Preferred Stock at less than
the liquidation preference amount.
Risks Related to the Companys Business in General
The ongoing downturn in the general economy and the real estate market has negatively impacted and
could continue to negatively impact the Companys business and financial results.
Periods of economic slowdown or recession, significantly reduced access to credit, declining
employment levels, decreasing demand for real estate, declining real estate values or the
perception that any of these events may occur, can reduce transaction volumes or demand for
services for each of our business lines. The current recession and the downturn in the real estate
market have resulted in and may continue to result in:
|
|
|
a decline in acquisition, disposition and leasing activity;
|
|
|
|
|
a decline in the supply of capital invested in commercial real estate;
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a decline in fees collected from investment management programs,
which are dependent upon demand for investment in commercial real
estate; and
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a decline in the value of real estate and in rental rates, which
would cause the Company to realize lower revenue from:
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property management fees, which in certain cases are
calculated as a percentage of the revenue of the property under
management; and
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commissions or fees derived from property valuation, sales
and leasing, which are typically based on the value, sale price or
lease revenue commitment, respectively.
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The declining real estate market in the United States, the availability and cost of credit,
increased unemployment, volatile oil prices, declining consumer confidence and the instability of
United States banking and financial institutions, have contributed to increased volatility, an
overall economic slowdown and diminished expectations for the economy and markets going forward.
The fragile state of the credit markets, the fear of a global recession for an extended period and
the current economic environment have impacted real estate services and investment management firms
like ours through reduced transaction volumes, falling transaction values, lower real estate
valuations, liquidity restrictions, market volatility, and the loss of confidence. As a
consequence, similar to other real estate services and investment management firms, our stock price
has declined significantly.
Due the economic downturn, it may take us longer to dispose of real estate assets and
investments and the selling prices may be lower than originally anticipated. If this occurs, fees
from transaction services will be reduced. In addition, the performance of certain properties in
the investment management portfolio may be negatively impacted, which would likewise affect our
fees. As a result, the carrying value of certain of our real estate investments may become impaired
and we could record losses as a result of such impairment or we could experience reduced
profitability related to declines in real estate values. As of September 30, 2008, the Company
initiated a plan to sell the properties it classified as real estate held for investment in its
financial statements as of September 30, 2008. As of December 31, 2008, the Companys Credit
Facility included a covenant which required the sale of certain of these assets before March 31,
2009. The downturn in the global credit markets significantly lessened the probability that the
Company would be able to achieve relief from this covenant through amendment or other financial
resolutions as of March 31, 2009. Pursuant to the requirements of the Property, Plant, and
Equipment Topic, the Company assessed the value of the assets. In addition, the Company reviewed
the valuation of its other owned properties and real estate investments. This valuation review
resulted in the Company recognizing an impairment charge of approximately $90.4 million against the
carrying value of the properties and real estate investments during the year ended December 31,
2008.
We are not able to predict the severity or duration of the current adverse economic
environment or the disruption in the financial markets. The real estate market tends to be cyclical
and related to the condition of the overall economy and to the perceptions of investors, developers
and other market participants as to the economic outlook. The ongoing downturn in the general
economy and the real estate market has negatively impacted and could continue to negatively impact
the Companys business and results of operations.
9
The ongoing adverse developments in the credit markets and the risk of continued market
deterioration have adversely affected the Companys revenues, expenses and operating results and
may continue to do so.
Our business lines are sensitive to credit cost and availability as well as market place
liquidity. In addition, the revenues in all our businesses are dependent to some extent on overall
volume of activity and pricing in the commercial real estate market. In 2008, the credit markets
experienced an unprecedented level of disruption and uncertainty. This disruption and uncertainty
has reduced the availability and significantly increased the cost of most sources of funding. In
certain cases, sources of funding have been eliminated.
Disruptions in the credit markets have adversely affected, and may continue to adversely
affect, our business of providing services to owners, purchasers, sellers, investors and occupants
of real estate in connection with acquisitions, dispositions and leasing of real property. If our
clients are unable to obtain credit on favorable terms, there will be fewer completed acquisitions,
dispositions and leases of property. In addition, if purchasers of real estate are not able to
obtain favorable financing resulting in a lack of disposition opportunities for funds for whom we
act as advisor, our fee revenues will decline and we may also experience losses on real estate held
for investment.
The recent decline in real estate values and the inability to obtain financing has either
eliminated or severely reduced the availability of the Companys historical funding sources for its
investment management programs, and to the extent credit remains available for these programs, it
is currently more expensive. The Company may not be able to continue to access sources of funding
for its investment management programs or, if available to the Company, the Company may not be able
to do so on favorable terms. Any decision by lenders to make additional funds available to the
Company in the future for its investment management programs will depend upon a number of factors,
such as industry and market trends in our business, the lenders own resources and policies
concerning loans and investments, and the relative attractiveness of alternative investment or
lending opportunities.
The depth and duration of the current credit market and liquidity disruptions are impossible
to predict. In fact, the magnitude of the recent credit market disruption has exceeded the
expectations of most if not all market participants. This uncertainty limits the Companys ability
to develop future business plans and the Company believes that it limits the ability of other
participants in the credit markets and the real estate markets to do so as well. This uncertainty
may lead market participants to act more conservatively than in recent history, which may continue
to depress demand and pricing in our markets.
We experienced additional, unanticipated costs and may have additional risk and further costs as a
result of the restatement of our financial statements.
As a result of the restatement of certain audited and unaudited financial data, and the
special investigation in connection therewith, we incurred substantial, additional unanticipated
costs for accounting and legal fees. The restatement and special investigation was also
time-consuming and affected managements attention and resources. Further, there are no assurances
that we will not become involved in legal proceedings in the future in relation to these
restatements. In connection with any such potential proceedings, any incurred expenses not covered
by available insurance or any adverse resolution could have a material adverse effect on the
Company. Any such future legal proceedings could also be time-consuming and distract our management
from the conduct of our business.
We have received a notice from the NYSE that we did not meet its continued listing requirements. If
we are unable to rectify this non-compliance in accordance with NYSE rules, our common stock will
be delisted from trading on the NYSE, which could have a material adverse effect on the liquidity
and value of our common stock.
On August 11, 2009, we received notification from NYSE Regulation, Inc. that we were not in
compliance with the NYSEs continued listing standard requiring that we maintain an average market
capitalization and stockholders equity of not less than $50 million. In connection with the NYSEs
rules, we submitted a business plan to the NYSE on November 3, 2009 evidencing how the Company
intends to come into compliance with the continued listing standards and on November 9, 2009, we
were advised that the NYSEs Listing and Compliance Committee has accepted the Companys business
plan. Accordingly, we need to have an average market capitalization over a consecutive 30 trading
day period of $50 million or total stockholders equity of $50 million by April 11, 2011 although
we may come into compliance sooner, or based on two consecutive quarterly monitoring periods, which
is an ongoing process. The NYSE conducts quarterly reviews during the 20-month period from August
11, 2009 through April 11, 2011.
If we are unable to regain compliance with the NYSEs continued listing standard within the
required time frame, our common stock will be delisted from the NYSE. As a result, we likely would
have our common stock quoted on the Over-the-Counter Bulletin Board (
OTC BB
) in order to have our
common stock continue to be traded on a public market. Securities that trade on the OTC BB
generally have less liquidity and greater volatility than securities that trade on the NYSE.
Delisting from the NYSE also may preclude us from using certain state securities law exemptions,
which could make it more difficult and expensive for us to raise capital in the future and more
difficult for us to provide compensation packages sufficient to attract and retain top talent. In
addition, because issuers whose securities trade on the OTC BB are not subject to the corporate
governance and other standards imposed by the NYSE, and such issuers receive less news and analyst
coverage, our reputation may suffer, which could result in a decrease in the trading price of our
shares. The delisting of our common stock from the NYSE, therefore, could significantly disrupt the
ability of investors to trade our common stock and could have a material adverse effect on the
value and liquidity of our common stock.
10
The Company is in a highly competitive business with numerous competitors, some of which may have
greater financial and operational resources than it does.
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 on a regional
and local level. The Company faces competition not only from other national real estate service
providers, but also from global real estate service providers, boutique real estate advisory firms,
consulting and appraisal firms. Depending on the product or service, the Company also faces
competition from other real estate service providers, institutional lenders, insurance companies,
investment banking firms, investment managers and accounting firms, some of which may have greater
financial resources than the Company does. The Company is also subject to competition from other
large national firms and from multi-national firms that have similar service competencies to it.
Although many of the Companys competitors are local or regional firms that are substantially
smaller than it, some of its competitors are substantially larger than it on a local, regional,
national or international basis. In general, there can be no assurance that the Company will be
able to continue to compete effectively with respect to any of its business lines or on an overall
basis, or to maintain current fee levels or margins, or maintain or increase its market share.
The TIC business in general, from which the Company has historically generated significant
revenues, materially contracted in 2008.
The Company has historically generated significant revenues from fees earned through the
transaction structuring and property management of its TIC Programs. In 2008, however, with the
nationwide decline in real estate values and the global credit crises, the TIC industry contracted
significantly. According to the research of OMNI, approximately $3.7 billion of TIC equity was
raised in 2006. In 2008, the amount of TIC equity raised declined by approximately 66% to $1.24
billion. Moreover, OMNI has indicated that based on the current year-to-date activity through the
first part of 2009, should the current trends remain constant throughout the entire calendar year,
the TIC industry would raise approximately $300.0 million in 2009, an approximately 90% decline
from 2006. As the Company has historically generated a significant amount of revenue from its TIC
operations, the rapid and steep decline in this industry may have a material, adverse effect on the
Companys business and results of operations if it is unable to generate revenues in its other
business segments, of which there can be no assurances, to make up for the loss of TIC-related
revenues.
As a service-oriented company, the Company depends on key personnel, and the loss of its current
personnel or its failure to hire and retain additional personnel could harm its business.
The Company depends on its ability to attract and retain highly skilled personnel. The Company
believes that its future success in developing its business and maintaining a competitive position
will depend in large part on its ability to identify, recruit, hire, train, retain and motivate
highly skilled executive, managerial, sales, marketing and customer service personnel. Competition
for these personnel is intense, and the Company may not be able to successfully recruit, assimilate
or retain sufficiently qualified personnel. We use equity incentives to attract and retain our key
personnel. In 2008, and the first quarter of 2009, our stock price declined significantly,
resulting in the decline in value of previously provided equity awards, which may result in an
increase risk of loss of key personnel. The performance of our stock may also diminish our ability
to offer attractive incentive awards to new hires. The Companys failure to recruit and retain
necessary executive, managerial, sales, marketing and customer service personnel could harm its
business and its ability to obtain new customers.
The Company plans to expand its business to include international operations that could subject it
to social, political and economic risks of doing business in foreign countries.
Although the Company does not currently conduct significant business outside the United
States, the Company intends to expand its business to include international operations. There can
be no assurance that the Company will be able to successfully expand its business in international
markets. Current global economic conditions may restrict, limit or delay the Companys ability to
expand its business into international markets or make such expansion less economically feasible.
If the Company expands into international markets, circumstances and developments related to
international operations that could negatively affect the Companys business or results of
operations include, but are not limited to, the following factors:
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lack of substantial experience operating in international markets;
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lack of recognition of the Grubb & Ellis brand name in international markets;
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difficulties and costs of staffing and managing international operations;
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currency restrictions, which may prevent the transfer of capital and profits to the United States;
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diverse foreign currency fluctuations;
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changes in regulatory requirements;
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potentially adverse tax consequences;
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11
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the responsibility of complying with multiple and potentially conflicting laws;
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the impact of regional or country-specific business cycles and economic instability;
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the geographic, time zone, language and cultural differences among personnel in different areas of the world;
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political instability; and
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foreign ownership restrictions with respect to operations in certain countries.
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Additionally, the Company may establish joint ventures with foreign entities for the provision of
brokerage services abroad, which may involve the purchase or sale of the Companys equity
securities or the equity securities of the joint venture participant(s). In these joint ventures,
the Company may not have the right or power to direct the management and policies of the joint
venture and other participants may take action contrary to the Companys instructions or requests
and against the Companys policies and objectives. In addition, the other participants may become
bankrupt or have economic or other business interests or goals that are inconsistent with the
Company. If a joint venture participant acts contrary to the Companys interest, then it could have
a material adverse effect on the Companys business and results of operations.
Failure to manage any future growth effectively may have a material adverse effect on the Companys
financial condition and results of operations.
Management will need to successfully manage any future growth effectively. The Company has
pursued an aggressive expansion strategy in the transaction services business. The integration and
additional growth may place a significant strain upon management, administrative, operational and
financial infrastructure. The Companys ability to grow also depends upon its ability to
successfully hire, train, supervise and manage additional executive officers and new employees,
obtain financing for its capital needs, expand its systems effectively, allocate its human
resources optimally, maintain clear lines of communication between its transactional and management
functions and its finance and accounting functions, and manage the pressures on its management and
administrative, operational and financial infrastructure. Additionally, managing future growth may
be difficult due to the new geographic locations and business lines of the Company. There can be no
assurance that the Company will be able to accurately anticipate and respond to the changing
demands it will face as it integrates and continues to expand its operations, and it may not be
able to manage growth effectively or to achieve growth at all. Any failure to manage the future
growth effectively could have a material adverse effect on the Companys business, financial
condition and results of operations.
Our ability to access credit and capital markets may be adversely affected by factors beyond our
control, including turmoil in the financial services industry, volatility in financial markets and
general economic downturns.
We used a significant portion of the net proceeds from the sale of the preferred stock to pay
off and terminate the Credit Facility. As of the date of prospectus, we do not have any revolving
credit or other credit facility in place and we do not have the ability to borrow funds under any
revolving credit or other credit arrangements. We have relied upon access to the credit markets as
a source of liquidity for the portion of our working capital requirements not provided by cash from
operations. Market disruptions such as those currently being experienced in the United States and
other countries may increase our cost of borrowing or adversely affect our ability to access
sources of liquidity upon which we have relied to finance our operations and satisfy our
obligations as they become due. These disruptions include turmoil in the financial services and
real estate industries, including substantial uncertainty surrounding particular lending
institutions, and general economic downturns. If we are unable to access credit at competitive
rates or at all, or if our short-term or long-term borrowing costs dramatically increase, our
ability to finance our operations, meet our short-term obligations and implement our operating
strategy could be adversely affected.
Risks Related to the Companys Transaction Services and Management Services Business
The Companys quarterly operating results are likely to fluctuate due to the seasonal nature of its
business and may fail to meet expectations, which may cause the price of its securities to decline.
Historically, the majority of legacy Grubb & Ellis revenue has been derived from the
transaction services that it provides. Such services are typically subject to seasonal
fluctuations. Legacy Grubb & Ellis typically experienced its lowest quarterly revenue in the
quarter ending March 31 of each year with higher and more consistent revenue in the quarters ending
June 30 and September 30. The quarter ending December 31 has historically provided the highest
quarterly level of revenue due to increased activity caused by the desire of clients to complete
transactions by calendar year-end. However, the Companys non-variable operating expenses, which
are treated as expenses when incurred during the year, are relatively constant in total dollars on
a quarterly basis. As a result, since a high proportion of these operating expenses are fixed,
declines in revenue could disproportionately affect the Companys operating results in a quarter.
In addition, the Companys quarterly operating results have fluctuated in the past and will likely
continue to fluctuate in the future. If the Companys quarterly operating results fail to meet
expectations, the price of the Companys securities could fluctuate or decline significantly.
12
If the properties that the Company manages fail to perform, then its business and results of
operations could be harmed.
The Companys success partially depends upon the performance of the properties it manages. The
Company could be adversely affected by the nonperformance of, or the deteriorating financial
condition of, certain of its clients. The revenue the Company generates from its property
management business is generally a percentage of aggregate rent collections from the properties.
The performance of these properties will depend upon the following factors, among others, many of
which are partially or completely outside of the Companys control:
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the Companys ability to attract and retain creditworthy tenants;
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the magnitude of defaults by tenants under their respective leases;
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the Companys ability to control operating expenses;
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governmental regulations, local rent control or stabilization ordinances which are in, or may be put into, effect;
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various uninsurable risks;
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financial condition of certain clients;
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financial conditions prevailing generally and in the areas in which these properties are located;
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the nature and extent of competitive properties; and
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the general real estate market.
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These or other factors may negatively impact the properties that the Company manages, which could
have a material adverse effect on its business and results of operations.
If the Company fails to comply with laws and regulations applicable to real estate brokerage and
mortgage transactions and other business lines, then it may incur significant financial penalties.
Due to the broad geographic scope of the Companys operations and the real estate services
performed, the Company is subject to numerous federal, state and local laws and regulations
specific to the services performed. For example, the brokerage of real estate sales and leasing
transactions requires the Company to maintain brokerage licenses in each state in which it
operates. If the Company fails to maintain its licenses or conducts brokerage activities without a
license or violates any of the regulations applicable to our licenses, then it may be required to
pay fines (including treble damages in certain states) or return commissions received or have our
licenses suspended or revoked. In addition, because the size and scope of real estate sales
transactions have increased significantly during the past several years, both the difficulty of
ensuring compliance with the numerous state licensing regimes and the possible loss resulting from
non-compliance have increased. Furthermore, the laws and regulations applicable to the Companys
business, both in the United States and in foreign countries, also may change in ways that increase
the costs of compliance. The failure to comply with both foreign and domestic regulations could
result in significant financial penalties which could have a material adverse effect on the
Companys business and results of operations.
The Company may have liabilities in connection with real estate brokerage and property and
facilities management activities.
As a licensed real estate broker, the Company and its licensed employees and independent
contractors that work for it are subject to statutory due diligence, disclosure and
standard-of-care obligations. Failure to fulfill these obligations could subject the Company or its
employees to litigation from parties who purchased, sold or leased properties that the Company or
they brokered or managed. The Company could become subject to claims by participants in real estate
sales, as well as building owners and companies for whom we provide management services, claiming
that the Company did not fulfill its statutory obligations as a broker.
In addition, in the Companys property and facilities management businesses, it hires and
supervises third-party contractors to provide construction and engineering services for its managed
properties. While the Companys role is limited to that of a supervisor, the Company may be subject
to claims for construction defects or other similar actions. Adverse outcomes of property and
facilities management litigation could have a material adverse effect on the Companys business,
financial condition and results of operations.
Environmental regulations may adversely impact the Companys business and/or cause the Company to
incur costs for cleanup of hazardous substances or wastes or other environmental liabilities.
Federal, state and local laws and regulations impose various environmental zoning
restrictions, use controls, and disclosure obligations which impact the management, development,
use, and/or sale of real estate. Such laws and regulations tend to discourage sales and leasing
activities, as well as mortgage lending availability, with respect to some properties. A decrease
or delay in such transactions may adversely affect the results of operations and financial
condition of the Companys real estate brokerage business. In addition, a failure by the Company to
disclose environmental concerns in connection with a real estate transaction may subject it to
liability to a buyer or lessee of property.
13
In addition, in its role as a property manager, the Company could incur liability under
environmental laws for the investigation or remediation of hazardous or toxic substances or wastes
at properties it currently or formerly managed, or at off-site locations where wastes from such
properties were disposed. Such liability can be imposed without regard for the lawfulness of the
original disposal activity, or the Companys knowledge of, or fault for, the release or
contamination. Further, liability under some of these laws may be joint and several, meaning that
one liable party could be held responsible for all costs related to a contaminated site. The
Company could also be held liable for property damage or personal injury claims alleged to result
from environmental contamination, or from asbestos-containing materials or lead-based paint present
at the properties it manages. Insurance for such matters may not be available or sufficient.
Certain requirements governing the removal or encapsulation of asbestos-containing materials,
as well as recently enacted local ordinances obligating property managers to inspect for and remove
lead-based paint in certain buildings, could increase the Companys costs of legal compliance and
potentially subject it to violations or claims. Although such costs have not had a material impact
on its financial results or competitive position during fiscal year 2006, 2007 or 2008, or the
nine-month period ending September 30, 2009, the enactment of additional regulations, or more
stringent enforcement of existing regulations, could cause it to incur significant costs in the
future, and/or adversely impact its brokerage and management services businesses.
Risks Related to the Companys Investment Management and Broker-Dealer Business
Declines in asset value and reductions in distributions in investment programs could adversely
affect the Company business, as it could cause harm to the Companys reputation, cause the loss of
management contracts and third-party broker-dealer selling agreements, limit the Companys ability
to sign future third-party broker-dealer selling agreements and potentially expose the Company to
legal liability.
The current market value of many of the properties owned through the Companys investment
programs have recently decreased as a result of the overall decline in the economy and commercial
real estate generally. In addition, there have been reductions in distributions in numerous
investment programs in 2008 and 2009, in certain instances to a zero percent distribution rate.
Significant declines in value and reductions in distributions in the investment programs sponsored
by the Company could adversely affect the Companys reputation and the Companys ability to attract
investors for future investment programs. In addition, significant declines in value and reductions
in distributions could cause the Company to lose asset and property management contracts for its
investment management programs, cause the Company to lose third-party broker-dealer selling
agreements for existing investment programs, including its REITs, and limit the Companys ability
to sign future third-party broker-dealer agreements. The loss of value may be significant enough to
cause certain investment programs to go into foreclosure or result in a complete loss of equity for
program investors. Significant losses in asset value and investor equity and reductions in
distributions increase the risk of claims or legal actions by program investors. Any such legal
liability could result in further damage to the Companys reputation, loss of third-party
broker-dealer selling agreements and incurrence of legal expenses.
The Company currently provides its Investment Management services primarily to its programs. Its
revenue depends on the number of its programs, on the price of the properties acquired or disposed
of by these programs, and on the revenue generated by the properties under its management.
The Company derives fees for Investment Management services based on a percentage of the price
of the properties acquired or disposed of by its programs and for management services based on a
percentage of the rental amounts of the properties in its programs. The Company is responsible for
the management of all of the properties owned by its programs, but as of December 31, 2008 it had
subcontracted the property management of approximately 18.0% of its programs office, medical
office and healthcare related facilities and retail properties (based on square footage) and 30.3%
of its programs multi-family apartment units to third parties. For REITs, investment decisions are
controlled by the Board of Directors of REITs that are independent of the Company. Investment
decisions of these Boards affect the fees earned by the Company. As a result, if any of the
Companys programs are unsuccessful, both its Transaction Services and Investment Management
services fees will be reduced, if any are paid at all. In addition, failures of the Companys
programs to provide competitive investment returns could significantly impair its ability to market
future programs. The Companys inability to spread risk among a large number of programs could
cause it to be over-reliant on a limited number of programs for its revenues. There can be no
assurance that the Company will maintain current levels of transaction and management services for
its programs properties.
The Company may be unable to grow its programs, which would cause it to fail to satisfy its
business strategy.
A significant element of the Company business strategy is the growth in the number of its
programs. The consummation of any future program will be subject to raising adequate capital for
the investment, identifying appropriate assets for acquisition and effectively and efficiently
closing the transactions. There can be no assurance that the Company will be able to identify and
invest in additional properties or will be able to raise adequate capital for new programs in the
future. If the Company is unable to consummate new programs in the future, it will not be able to
continue to grow the revenue it receives from either transaction or management services.
14
The inability to access investors for the Companys programs through broker-dealers or other
intermediaries could have a material adverse effect on its business.
The Companys ability to source capital for its programs depends significantly on access to
the client base of securities broker-dealers and other financial investment intermediaries that may
offer competing investment products. The Company believes that its future success in developing its
business and maintaining a competitive position will depend in large part on its ability to
continue to maintain these relationships as well as finding additional securities broker-dealers to
facilitate offerings by its programs or to find investors for the Companys REITs, TIC Programs and
other investment programs. The Company cannot be sure that it will continue to gain access to these
channels. In addition, competition for capital is intense and the Company may not be able to obtain
the capital required to complete a program. The inability to have this access could have a material
adverse effect on its business and results of operations.
The termination of any of the Companys broker-dealer relationships, especially given the limited
number of key broker-dealers, could have a material adverse effect on its business.
The Companys securities programs are sold through third-party broker-dealers who are members
of its selling group. While the Company has established relationships with its selling group, it is
required to enter into a new agreement with each member of the selling group for each new program
it offers. In addition, the Companys programs may be removed from a selling broker-dealers
approved program list at any time for any reason. The Company cannot assure you of the continued
participation of existing members of its selling group nor can the Company make an assurance that
its selling group will expand. While the Company continues to diversify and add new investment
channels for its programs, a significant portion of the growth in recent years in the number of TIC
Programs it sponsors and in its REITs has been as a result of capital raised by a relatively
limited number of broker-dealers. Loss of any of these key broker-dealer relationships, or the
failure to develop new relationships to cover the Companys expanding business through new
investment channels, could have a material adverse effect on its business and results of
operations.
Misconduct by third-party selling broker-dealers or the Companys sales force, could have a
material adverse effect on its business.
The Company relies on selling broker-dealers and the Companys sales force to properly offer
its securities programs to customers in compliance with its selling agreements and with applicable
regulatory requirements. While these persons are responsible for their activities as registered
broker-dealers, their actions may nonetheless result in complaints or legal or regulatory action
against the Company.
A significant amount of the Companys revenue has historically been derived from fees earned
through the transaction structuring and property management of its TIC Programs, which programs
rely primarily on Section 1031 of the Internal Revenue Code to provide for deferral of capital
gains taxes to make these programs attractive. A change in this tax code section or a complete
revocation of this section as it relates specifically to TICs could materially impact these
programs.
Section 1031 of the Internal Revenue Code provides for the deferral of capital gains taxes
which would ordinarily arise from the sale of real estate through a tax-deferred exchange of
property, which defers the recognition of capital gains tax until such time as the replacement
property is sold in a taxable transaction. These transactions are referred to as 1031 exchanges. In
2002, the Internal Revenue Service, or IRS, issued advance ruling guidelines outlining the
requirements for properly structured TIC arrangements, which the Company believes validate the TIC
structure generally and as it employs it. However, as recently as May 2006, the Senate Finance
Committee proposed a bill in the negotiations over the budget reconciliation tax-cutting package to
modify Section 1031 treatment for TICs as a way to raise additional tax revenue. The proposal was
unsuccessful, but the Company cannot assure you that in the future there will not be attempts to
limit or disallow the tax deferral benefits for TIC transactions. For the year ended December 31,
2008, approximately 1.4% of the Companys total revenue was derived from TIC acquisition fees,
although this amount is declining due to a significant contraction in the industry in 2008 (see
Risk Factor above, The TIC business in general, from which the Company has historically generated
significant revenues, materially contracted in 2008) If the Company were no longer able to
structure TIC Programs as 1031 exchanges for its investors, it could lose a significant amount of
revenue in the future, which might materially affect its results of operations. Moreover, any
attempt to limit or disallow the tax deferral benefits of the 1031 exchange generally would have a
material adverse effect on the real estate industry generally and on the Companys business and
results of operations.
A significant amount of the Companys programs are structured to provide favorable tax treatment to
investors or REITs. If a program fails to satisfy the requirements necessary to permit this
favorable tax treatment, the Company could be subject to claims by investors and its reputation for
structuring these transactions would be negatively affected, which would have an adverse effect on
its financial condition and results of operations.
The Company structures TIC Programs and public non-traded REITs to provide favorable tax
treatment to investors. For example, its TIC investors are able to defer the recognition of gain on
sale of investment or business property if they enter into a 1031 exchange. Similarly, qualified
REITs generally are not subject to federal income tax at corporate rates, which permits REITs to
make larger distributions to investors (i.e. without reduction for federal income tax imposed at
the corporate level). If the Company fails to properly structure a TIC transaction or if a REIT
fails to satisfy the complex requirements for qualification and taxation as a REIT under the
Internal Revenue Code, the Company could be subject to claims by investors as a result of
additional tax they may be required to pay or because they are unable to receive the distributions
they expected at the time they made their investment. In addition, any failure to satisfy
applicable tax regulations in structuring its programs would negatively affect the Companys
reputation,
15
which would in turn affect its ability to earn additional fees from new programs. Claims by
investors could lead to losses and any reduction in the Companys fees would have a material
adverse effect on its revenues.
Any future co-investment activities the Company undertakes could subject it to real estate
investment risks which could lead to the need for substantial capital contributions, which may
impact its cash flows and financial condition and, if it is unable to make them, could damage its
reputation and result in adverse consequences to its holdings.
The Company may from time to time invest its capital in certain real estate investments with
other real estate firms or with institutional investors such as pension plans. Any co-investment
will generally require the Company to make initial capital contributions, and some co-investment
entities may request additional capital from the Company and its subsidiaries holding investments
in those assets. These contributions could adversely impact the Companys cash flows and financial
condition. Moreover, the failure to provide these contributions could have adverse consequences to
the Companys interests in these investments. These adverse consequences could include damage to
the Companys reputation with its co-investment partners as well as dilution of ownership and the
necessity of obtaining alternative funding from other sources that may be on disadvantageous terms,
if available at all.
Geographic concentration of program properties may expose the Companys programs to regional
economic downturns that could adversely impact their operations and, as a result, the fees the
Company is able to generate from them, including fees on disposition of the properties as the
Company may be limited in its ability to dispose of properties in a challenging real estate market.
The Companys programs generally focus on acquiring assets satisfying particular investment
criteria, such as type or quality of tenants. There is generally no or little focus on the
geographic location of a particular property. The Company cannot guarantee, however, that its
programs will have, or will be able to maintain, a significant amount of geographic diversity.
Although the Companys property programs are located in 31 states, a majority of these properties
(by square footage) are located in Texas, California, Florida and North Carolina. Geographic
concentration of properties exposes the Companys programs to economic downturns in the areas where
the properties are located. A regional recession or other major, localized economic disruption in a
region, such as earthquakes and hurricanes, in any of these areas could adversely affect the
Companys programs ability to generate or increase their operating revenues, attract new tenants
or dispose of unproductive properties. Any reduction in program revenues would effectively reduce
the fees the Company generates from them, which would adversely affect the Companys results of
operations and financial condition.
The failure of Triple Net Properties, LLC, recently renamed Grubb & Ellis Realty Investors, LLC
(GERI) and Triple Net Properties Realty, Inc. (Realty), subsidiaries of the Company acquired in
the Merger, to hold certain required real estate licenses may subject Realty and the Company to
penalties, such as fines, restitution payments and termination of management agreements, and to the
suspension or revocation of certain broker licenses.
Although Realty was required to have real estate licenses in states in which it acted as a
broker for NNNs investment programs and received real estate commissions prior to 2007, Realty did
not hold a license in certain of those states when it earned fees for those services. In addition,
almost all of GERIs revenue was based on an arrangement with Realty to share fees from NNNs
programs. GERI did not hold a real estate license in any state, although most states in which
properties of NNNs programs were located may have required GERI to hold a license in order to
share fees. As a result, Realty and the Company may be subject to penalties, such as fines (which
could be a multiple of the amount received), restitution payments and termination of management
agreements, and to the suspension or revocation of certain of Realtys real estate broker licenses.
If third-party managers providing property management services for the Companys programs office,
medical office and healthcare related facilities, retail and multi-family properties are negligent
in their performance of, or default on, their management obligations, the tenants may not renew
their leases or the Company may become subject to unforeseen liabilities. If this occurs, it could
have an adverse effect on the Companys financial condition and operating results.
The Company has entered into agreements with third-party management companies to provide
property management services for a significant number of the Companys programs properties, and
the Company expects to enter into similar third-party management agreements with respect to
properties the Companys programs acquire in the future. The Company does not supervise these
third-party managers and their personnel on a day-to-day basis and the Company cannot assure you
that they will manage the Companys programs properties in a manner that is consistent with their
obligations under the Companys agreements, that they will not be negligent in their performance or
engage in other criminal or fraudulent activity, or that these managers will not otherwise default
on their management obligations to the Company. If any of the foregoing occurs, the relationships
with the Companys programs tenants could be damaged, which may cause the tenants not to renew
their leases, and the Company could incur liabilities resulting from loss or injury to the
properties or to persons at the properties. If the Company is unable to lease the properties or the
Company becomes subject to significant liabilities as a result of third-party management
performance issues, the Companys operating results and financial condition could be substantially
harmed.
16
The Company or its new programs may be required to incur future indebtedness to raise sufficient
funds to purchase properties.
One of the Companys business strategies is to develop new programs. The development of a new
program requires the identification and subsequent acquisition of properties when the opportunity
arises. In some instances, in order to effectively and efficiently complete a program, the Company
may provide deposits for the acquisition of property or actually purchase the property and
warehouse it temporarily for the program. If the Company does not have cash on hand available to
pay these deposits or fund an acquisition, the Company or the Companys programs may be required to
incur additional indebtedness, which indebtedness may not be available on acceptable terms. If the
Company incurs substantial debt, the Company could lose its interests in any properties that have
been provided as collateral for any secured borrowing, or the Company could lose its assets if the
debt is recourse to it. In addition, the Companys cash flow from operations may not be sufficient
to repay these obligations upon their maturity, making it necessary for the Company to raise
additional capital or dispose of some of its assets. The Company cannot assure you that it will be
able to borrow additional debt on satisfactory terms, or at all.
The Company may be required to repay loans the Company guaranteed that were used to finance
properties acquired by the Companys programs.
From time to time the Company has provided guarantees of loans for properties under
management. As of December 31, 2008, there were 151 properties under management with loan
guarantees of approximately $3.5 billion in total principal outstanding with terms ranging from 1
to 10 years, secured by properties with a total aggregate purchase price of approximately $4.8
billion as of December 31, 2008. The Companys guarantees consisted of the following as of December
31, 2008.
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(In thousands)
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December 31, 2008
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Non-recourse/carve-out guarantees of debt of properties under management(1)
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$
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3,414,433
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Non-recourse/carve-out guarantees of the Companys debt(1)
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$
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107,000
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Recourse guarantees of debt of properties under management
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$
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42,426
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Recourse guarantees of the Companys debt
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$
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10,000
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(1)
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A non-recourse/carve-out guaranty imposes personal liability
on the guarantor in the event the borrower engages in certain
acts prohibited by the loan documents.
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In addition, the consolidated variable interest entities (
VIEs
) and unconsolidated VIEs are
jointly and severally liable on the non-recourse mortgage debt related to the interests in the
Companys TIC investments totaling $277.8 million and $385.3 million as of December 31, 2008,
respectively.
As property values and performance decline, the risk of exposure under these guarantees
increases. Management evaluates these guarantees to determine if the guarantee meets the criteria
required to record a liability in accordance with the requirements of the Guarantees Topic. As of
December 31, 2008, the Company recorded a liability of $9.1 million related to recourse guarantees
of debt of properties under management which matured in January and April 2009. Any other such
liabilities were insignificant as of December 31, 2008 and 2007.
The revenue streams from the Companys management services may be subject to limitation or
cancellation.
The agreements under which the Company provides advisory and management services to public
non-traded REITs may generally be terminated by each REITs independent Board of Directors
following a notice period, with or without cause. The Company cannot assure you that these
agreements will not be terminated. Grubb & Ellis Healthcare REIT, Inc. (now Healthcare Trust of
America, Inc.) did not renew its Advisory Agreement with the Grubb & Ellis Healthcare REIT Advisor,
LLC, a subsidiary of the Company, upon the termination of the Advisory Agreement on September 20,
2009 and, as a result, the Companys asset and property management fees have been reduced. In
addition, if the Company has a significant amount of TIC Programs selling their properties or
public non-traded REITs liquidating in the same period, the Companys revenues would decrease
unless it is able to find replacement programs to generate new fees. The Company is currently in
the process of liquidating two of its public non-traded REITs and, as a result, the Companys
management fees from these REITs have been reduced due to the number of properties that have been
sold. Any decrease in the Companys fees, as a result of termination of a contract or customary
close out or liquidation of a program, could have a material adverse effect on the Companys
business, results of operations and financial condition.
Future pressures to lower, waive or credit back the Companys fees could reduce the Companys
revenue and profitability.
The Company has on occasion waived or credited its fees for real estate acquisitions and
financings for the Companys TIC Programs to improve projected investment returns and attract TIC
investors. There has also been a trend toward lower fees in some segments of the third-party asset
management business, and fees paid for the management of properties in the Companys TIC Programs
or public non-traded REITs could follow these trends. In order for the Company to maintain its fee
structure in a competitive environment, the Company must be able to provide clients with investment
returns and service that will encourage them to be willing to pay such fees. The Company cannot
assure you that it will be able to maintain its current fee structures. Fee reductions on existing
or future new business could have a material adverse impact on the Companys revenue and
profitability.
17
Regulatory uncertainties related to the Companys broker-dealer services could harm the Companys
business.
The securities industry in the United States is subject to extensive regulation under both
federal and state laws. Broker-dealers are subject to regulations covering all aspects of the
securities business. The Securities and Exchange Commission (the
SEC
), the Financial Industry
Regulatory Authority (
FINRA
), and other self-regulatory organizations and state securities
commissions can censure, fine, issue cease-and-desist orders to, suspend or expel a broker-dealer
or any of its officers or employees. The ability to comply with applicable laws and rules is
largely dependent on an internal system to ensure compliance, as well as the ability to attract and
retain qualified compliance personnel. The Company could be subject to disciplinary or other
actions in the future due to claimed noncompliance with these securities regulations, which could
have a material adverse effect on the Companys operations and profitability.
The Company depends upon its programs tenants to pay rent, and their inability to pay rent may
substantially reduce certain fees the Company receives which are based on gross rental amounts.
The Companys programs are subject to varying degrees of risk that generally arise from the
ownership of real estate. For example, the income the Company is able to generate from management
fees is derived from the gross rental income on the properties in its programs. The rental income
depends upon the ability of the tenants of the Companys programs properties to generate enough
income to make their lease payments to the Company. Changes beyond the Companys control may
adversely affect the tenants ability to make lease payments or could require them to terminate
their leases. Either an inability to make lease payments or a termination of one or more leases
could reduce the management fees the Company receives. These changes include, among others, the
following:
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downturns in national or regional economic conditions
where the Companys programs properties are located,
which generally will negatively impact the demand and
rental rates;
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changes in local market conditions such as an oversupply
of properties, including space available by sublease or
new construction, or a reduction in demand for properties
in the Companys programs, making it more difficult for
the Companys programs to lease space at attractive rental
rates or at all;
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competition from other available properties, which could
cause the Companys programs to lose current or
prospective tenants or cause them to reduce rental rates;
and
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changes in federal, state or local regulations and
controls affecting rents, prices of goods, interest rates,
fuel and energy consumption.
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Due to these changes, among others, tenants and lease guarantors, if any, may be unable to make
their lease payments.
Defaults by tenants or the failure of any lease guarantors to fulfill their obligations, or
other early termination of a lease could, depending upon the size of the leased premises and the
Companys ability as property manager to successfully find a substitute tenant, have a material
adverse effect on the Companys revenue.
Conflicts of interest inherent in transactions between the Companys programs and the Company, and
among its programs, could create liability for the Company that could have a material adverse
effect on its results of operations and financial condition.
These conflicts include but are not limited to the following:
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the Company experiences conflicts of interests with certain of its directors, officers and affiliates from time
to time with regard to any of its investments, transactions and agreements in which it holds a direct or indirect
pecuniary interest;
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since the Company receives both management fees and acquisition and disposition fees for its programs
properties, the Company could be in conflict with its programs over whether their properties should be sold or
held by the program and the Company may make decisions or take actions based on factors other than in the best
interest of investors of a particular sponsored investor program;
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a component of the compensation of certain of the Companys executives is based on the performance of the
Company, its stock and particular programs, which could cause the executives to favor those programs over others;
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the Company may face conflicts of interests as to how it allocates property acquisition opportunities or
prospective tenants among competing programs;
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the Company may face conflicts of interests if programs sell properties to each other or invest in each other; and
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18
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the Companys executive officers will devote only as much of their time to a program as they determine is
reasonably required, which may be substantially less than full time; during times of intense activity in other
programs, these officers may devote less time and fewer resources to a program than are necessary or appropriate
to manage the programs business.
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The Company cannot assure you that one or more of these conflicts will not result in claims by
investors in its programs, which could have a material adverse effect on its results of operations
and financial condition.
The offerings conducted to raise capital for the Companys TIC Programs are done in reliance on
exemptions from the registration requirements of the Securities Act. A failure to satisfy the
requirements for the appropriate exemption could void the offering or, if it is already completed,
provide the investors with rescission rights, either of which would have a material adverse effect
on the Companys reputation and as a result its business and results of operations.
The securities of the Companys TIC Programs are offered and sold in reliance upon a private
placement offering exemption from registration under the Securities Act and applicable state
securities laws. If the Company or its dealer-manager failed to comply with the requirements of the
relevant exemption and an offering were in process, the Company may have to terminate the offering.
If an offering was completed, the investors may have the right, if they so desired, to rescind
their purchase of the securities. A rescission offer could also be required under applicable state
securities laws and regulations in states where any securities were offered without registration or
qualification pursuant to a private offering or other exemption. If a number of holders sought
rescission at one time, the applicable program would be required to make significant payments which
could adversely affect its business and as a result, the fees generated by the Company from such
program. If one of the Companys programs was forced to terminate an offering before it was
completed or to make a rescission offer, the Companys reputation would also likely be
significantly harmed. Any reduction in fees as a result of a rescission offer or a loss of
reputation would have a material adverse effect on the Companys business and results of
operations.
The inability to identify suitable refinance options may negatively impact investment program
performance and cause harm to the Companys reputation, cause the loss of management contracts and
third-party broker-dealer selling agreements, limit the Companys ability to sign future
third-party broker-dealer selling agreements and potentially expose the Company to legal liability.
The availability of real estate financing has greatly diminished over the past year as a
result of the global credit crisis and overall decline in the real estate market. As a result, the
Company may not be able to refinance some or all of the loans maturing in its investment management
portfolio. Failure to obtain suitable refinance options may have a negative impact on investment
returns and may potentially cause investments to go into foreclosure or result in a complete loss
of equity for program investors. Any such negative impact on distributions, foreclosure or loss of
equity in an investment program could adversely affect the Companys reputation and the Companys
ability to attract investors for future investment programs. In addition, it could cause the
Company to lose asset and property management contracts, cause the Company to lose third-party
broker-dealer selling agreements for existing investment programs, including its REITs, and limit
the Companys ability to sign future third-party broker-dealer agreements. Significant losses in
investor equity and reductions in distributions increase the risk of claims or legal actions by
program investors. Any such legal liability could result in damage to the Companys reputation,
loss of third-party broker-dealer selling agreements and incurrence of legal expenses.
An increase in interest rates may negatively affect the equity value of the Companys programs or
cause the Company to lose potential investors to alternative investments, causing the fees the
Company receives for transaction and management services to be reduced.
Although in the last two years, interest rates in the United States have generally decreased,
if interest rates were to rise, the Companys financing costs would likely rise and the Companys
net yield to investors may decline. This downward pressure on net yields to investors in the
Companys programs could compare poorly to rising yields on alternative investments. Additionally,
as interest rates rise, valuations of commercial real estate properties typically decline. A
decrease in both the attractiveness of the Companys programs and the value of assets held by these
programs could cause a decrease in both transaction and management services revenues, which would
have an adverse effect on the Companys results of operations.
Increasing competition for the acquisition of real estate may impede the Companys ability to make
future acquisitions which would reduce the fees the Company generates from these programs and could
adversely affect the Companys operating results and financial condition.
The commercial real estate industry is highly competitive on an international, national and
regional level. The Companys programs face competition from REITs, institutional pension plans,
and other public and private real estate companies and private real estate investors for the
acquisition of properties and for raising capital to create programs to make these acquisitions.
Competition may prevent the Companys programs from acquiring desirable properties or increase the
price they must pay for real estate. In addition, the number of entities and the amount of funds
competing for suitable investment properties may increase, resulting in increased demand and
increased prices paid for these properties. If the Companys programs pay higher prices for
properties, investors may experience a lower return on investment and be less inclined to invest in
the Companys next program which may decrease the Companys profitability. Increased competition
for properties may also preclude the Companys programs from acquiring properties
19
that would generate the most attractive returns to investors or may reduce the number of
properties the Companys programs could acquire, which could have an adverse effect on the
Companys business.
Illiquidity of real estate investments could significantly impede the Companys ability to respond
to adverse changes in the performance of the Companys programs properties and harm the Companys
financial condition.
Because real estate investments are relatively illiquid, the Companys ability to promptly
facilitate a sale of one or more properties or investments in the Companys programs in response to
changing economic, financial and investment conditions may be limited. In particular, these risks
could arise from weakness in the market for a property, changes in the financial condition or
prospects of prospective purchasers, changes in regional, national or international economic
conditions, and changes in laws, regulations or fiscal policies of jurisdictions in which the
property is located. Fees from the disposition of properties would be materially affected if the
Company were unable to facilitate a significant number of property dispositions for the Companys
programs.
Uninsured and underinsured losses may adversely affect operations.
Should a property sustain damage or an occupant sustain an injury, the Company may incur
losses due to insurance deductibles, co-payments on insured losses or uninsured losses. In the
event of a substantial property loss or personal injury, the insurance coverage may not be
sufficient to pay the full damages. In the event of an uninsured loss, the Company could lose some
or all of its capital investment, cash flow and anticipated profits related to one or more
properties. Inflation, changes in building codes and ordinances, environmental considerations, and
other factors also might make it not feasible to use insurance proceeds to replace a property after
it has been damaged or destroyed. Under these circumstances, the insurance proceeds the Company
receives, if any, might not be adequate to restore the Companys economic position with respect to
the property. In the event of a significant loss at one or more of the properties in the Companys
programs, the remaining insurance under the applicable policy, if any, could be insufficient to
adequately insure the remaining properties. In this event, securing additional insurance, if
possible, could be significantly more expensive than the current policy. A loss at any of these
properties or an increase in premium as a result of a loss could decrease the income from or value
of properties under management in the Companys programs, which in turn would reduce the fees the
Company receives from these programs. Any decrease or loss in fees could have a material adverse
effect on the Companys financial condition or results of operations.
The Company carries commercial general liability, fire and extended coverage insurance with
respect to the Companys programs properties. The Company obtains coverage that has policy
specifications and insured limits that the Company believes are customarily carried for similar
properties. The Company cannot assure you, however, that particular risks that are currently
insurable will continue to be insurable on an economic basis or that current levels of coverage
will continue to be available. In addition, the Company generally does not obtain insurance against
certain risks, such as floods.
Risks Related to the Company in General
Delaware law and provisions of the Companys amended and restated certificate of incorporation and
restated bylaws contain provisions that could delay, deter or prevent a change of control.
The anti-takeover provisions of Delaware law impose various impediments on the ability or
desire of a third party to acquire control of the Company, even if a change of control would be
beneficial to its existing stockholders, and the Company will be subject to these Delaware
anti-takeover provisions. Additionally, the Companys amended and restated certificate of
incorporation and its restated bylaws contain provisions that might enable its management to resist
a proposed takeover of the Company. The provisions include:
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the authority of the Companys Board of Directors to issue, without stockholder approval, preferred
stock with such terms as the Companys Board of Directors may determine;
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the authority of the Companys Board of Directors to adopt, amend or repeal the Companys bylaws; and
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a prohibition on holders of less than a majority of the Companys outstanding shares of capital
stock calling a special meeting of the Companys stockholders.
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These provisions could discourage, delay or prevent a change of control of the Company or an
acquisition of the Company at a price that its stockholders may find attractive. These provisions
also may discourage proxy contests and make it more difficult for the Companys stockholders to
elect directors and take other corporate actions. The existence of these provisions could limit the
price that investors might be willing to pay in the future for shares of the Companys common
stock.
20
The Company has the ability to issue blank check preferred stock, which could adversely affect the
voting power and other rights of the holders of its common stock.
The Board of Directors has the right to issue blank check preferred stock, which may affect
the voting rights of holders of common stock and could deter or delay an attempt to obtain control
of the Company. There are currently nineteen million authorized and undesignated shares of
preferred stock that could be so issued. The Companys Board of Directors is authorized, without
any further stockholder approval, to issue one or more additional series of preferred stock in
addition to the currently outstanding 12% Preferred Stock. The Company is authorized to fix and
state the voting rights, powers, designations, preferences and relative participation or other
special rights of each such series of preferred stock and any qualifications, limitations and
restrictions thereon. Preferred stock typically ranks prior to the common stock with respect to
dividend rights, liquidation preferences, or both, and may have full, limited, or expanded voting
rights. Accordingly, issuances of preferred stock could adversely affect the voting power and other
rights of the holders of common stock and could negatively affect the market price of the Companys
common stock.
The Company has registration rights outstanding, which could have a negative impact on its share
price if exercised.
In addition to the shares of common stock and the 12% Preferred Stock that are being
registered pursuant to the registration statement of which this prospectus is included within,
pursuant to the Companys registration rights agreement with Kojaian Ventures, L.L.C. and Kojaian
Holdings, LLC, the holders of such rights could, in the future, cause the Company to file
additional registration statements with respect to certain of its shares of common stock, which
could have a negative impact on the market price of the Companys common stock.
In addition to the shares of common stock and the 12% Preferred Stock that are being
registered pursuant to the registration statement of which this prospectus is included within,
pursuant to the Companys registration rights agreement with certain holders of 12% Preferred
Stock, the holders of such rights could, in the future, cause the Company to file additional
registration statements with respect to its shares of 12% Preferred Stock and common stock, which
could have a negative impact on the market price of the Companys common stock.
Future sales of the Companys common stock could adversely affect its stock price
There are an aggregate of 996,849 Company shares at September 30, 2009 subject to issuance
upon the exercise of outstanding options. Accordingly, these shares will be available for sale in
the open market, subject to vesting restrictions, and, in the case of affiliates, certain volume
limitations. The sale of shares either pursuant to the exercise of outstanding options or as after
the satisfaction of vesting restriction of certain restricted stock could also cause the price of
the Companys common stock to decline.
21
CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS
We are including the following discussion to inform you of some of the risks and uncertainties
that can affect our company. Various statements contained in this prospectus, including those that
express a belief, expectation, or intention, as well as those that are not statements of historical
fact, are forward-looking statements. We use words such as
believe, intend, expect,
anticipate, plan, may, will, should
and similar expressions to identify forward-looking
statements. The forward-looking statements in this prospectus speak only as of the date of this
prospectus; we disclaim any obligation to update these statements unless required by applicable
securities laws, and we caution you not to rely on them unduly. You are further cautioned that any
forward-looking statements are not guarantees of future performance. Our beliefs, expectations and
intentions can change as a result of many possible events or factors, not all of which are known to
us or are within our control, and a number of risks and uncertainties could cause actual results to
differ materially from those anticipated in the forward-looking statements. Such factors, risks and
uncertainties include, but are not limited to:
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liquidity and availability of additional or continued sources of financing;
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the continued weakening national economy in general and the commercial real estate markets in particular;
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the continued global credit crises and capital markets disruption;
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changes in general economic and business conditions, including interest rates, the cost and availability of
financing of capital for investment in real estate, clients willingness to make real estate commitments and other
factors impacting the value of real estate assets;
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our ability to retain major clients and renew related contracts;
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the failure of properties sponsored or managed by us to perform as anticipated;
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the effects of the restatement of certain of our financial statements;
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our ability to compete in specific geographic markets or business segments that are material to us;
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the contraction of the TIC market; declining values of real assets and distributions on our programs;
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significant variability in our results of operations among quarters;
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our ability to retain our senior management and attract and retain qualified and experienced employees;
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our ability to comply with the laws and regulations applicable to real estate brokerage investment syndication and
mortgage transactions;
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our exposure to liabilities in connection with real estate brokerage, real estate and property management activities;
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changes in the key components of revenue growth for large commercial real estate services companies;
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reliance of companies on outsourcing for their commercial real estate needs;
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trends in use of large, full-service real estate providers;
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diversification of our client base;
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improvements in operating efficiency;
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protection of our brand;
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trends in pricing for commercial real estate services;
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the effect of implementation of new tax and accounting rules and standards; and
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the other risks identified in this prospectus including, without limitation, those under the headings Risk
Factors, Managements Discussion and Analysis of Financial Condition and Results of Operations and Business.
|
You should carefully consider these and other factors, risks and uncertainties before you make
an investment decision with respect to the 12% Preferred Stock or our common stock.
22
THE COMPANY
General
Grubb & Ellis Company, a Delaware corporation founded 50 years ago in Northern California, is
one of the countrys largest and most respected commercial real estate services and investment
management firms. On December 7, 2007, the Company effected a stock merger (the
Merger
) with NNN
Realty Advisors, Inc. (
NNN
), a real estate asset management company and nationally recognized
sponsor of public non-traded real estate investment trusts (
REITs
), as well as a sponsor of tax
deferred tenant-in-common (
TIC
) 1031 property exchanges and other investment programs. Upon the
closing of the Merger, a change of control occurred. The former stockholders of NNN acquired
approximately 60% of the Companys issued and outstanding common stock.
With 127 owned and affiliate offices worldwide (54 owned and approximately 73 affiliates) and
more than 6,000 professionals, including a brokerage sales force of more than 1,800 brokers, the
Company offers property owners, corporate occupants and program investors comprehensive integrated
real estate solutions, including transactions, management, consulting and investment advisory
services supported by proprietary market research and extensive local market expertise.
In certain instances throughout this prospectus, phrases such as legacy Grubb & Ellis or
similar descriptions are used to reference, when appropriate, Grubb & Ellis prior to the Merger.
Similarly, in certain instances throughout this prospectus the term NNN, legacy NNN or similar
phrases are used to reference, when appropriate, NNN Realty Advisors, Inc. prior to the Merger.
Business Segment Reporting
The Company currently reports its revenue by three operating business segments in accordance
with the requirements of the Segment Reporting Topic, which includes providing acquisition,
financing and disposition services with respect to its programs, asset management services related
to its programs, and dealer-manager services by its securities broker-dealer, which facilitates
capital raising transactions for its TIC, REIT and other investment programs; Transaction Services,
which comprises its real estate brokerage operations; and Management Services, which includes
property management, corporate facilities management, project management, client accounting,
business services and engineering services for unrelated third parties and properties owned by the
programs it sponsors. Additional information on these business segments can be found in Note 19 to
the consolidated financial statements included in this prospectus. Subsequent to the Merger, the
legacy NNN reportable segments were realigned into a single operating and reportable segment called
Investment Management. This realignment had no impact on the Companys consolidated balance sheet,
results of operations or cash flows.
For the year ended December 31, 2008, the Company had revenues of approximately $628.8 million
and loss from continuing operations of approximately $318.7 million.
Transaction Services
Grubb & Ellis has a track record of over 50 years of proven performance in the commercial real
estate industry and is one of the largest real estate brokerage firms in the country, offering
clients the experience of thousands of successful transactions and the expertise that comes from a
nationwide platform. By focusing on the overall business objectives of its clients, Grubb & Ellis
utilizes its research capabilities, extensive properties database and expert negotiation skills to
create, buy, sell and lease opportunities for both users and owners of commercial real estate. With
a comprehensive approach to transactions, Grubb & Ellis offers a full suite of services to clients,
from site selection and sale negotiations to needs analysis, occupancy projections, prospect
qualification, pricing recommendations, long-term value consultation, tenant representation and
consulting services. As one of the most active and largest commercial real estate brokerages in the
United States, Grubb & Ellis traditional real estate services provide added value to the Companys
real estate investment programs by offering a comprehensive market view and local area expertise.
This powerful business combination allows the Company to identify attractive investment properties
and quickly acquire them for the benefit of its program investors. In addition, select brokers have
the opportunity to cross-sell product through the Companys Investment Management platform.
The Company actively engages its brokerage force in the execution of its marketing strategy.
Regional and metro-area managing directors, who are responsible for operations in each major
market, facilitate the development of brokers. Through the Companys specialty practice groups,
known as Specialty Councils, key personnel share information regarding local, regional and
national industry trends and participate in national marketing activities, including trade shows
and seminars. This ongoing dialogue among brokers serves to increase their level of expertise as
well as their network of relationships, and is supplemented by other more formal education,
including recently expanded training programs offering sales and motivational training and
cross-functional networking and business development opportunities.
23
In some local markets where the Company does not have owned offices, it has affiliation
agreements with independent real estate service providers that conduct business under the Grubb &
Ellis brand. The Companys affiliation agreements provide for exclusive mutual referrals in their
respective markets, generating referral fees. The Companys affiliation agreements are generally
multi-year contracts. Through its affiliate offices, the Company has access to more than 1,000
brokers with local market research capabilities.
The Companys Corporate Services Group provides comprehensive coordination of all required
real estate related services to help realize the needs of clients real estate portfolios and to
maximize their business objectives. These services include consulting services, lease
administration, strategic planning, project management, account management and international
services. As of December 31, 2008, Grubb & Ellis had in excess of 1,800 brokers at its owned and
affiliate offices, of which 814 brokers were at its owned offices, down from 927 at December 31,
2007. Approximately 67% and 33% of the Companys Transaction Services revenue were from leasing and
sale transactions, respectively, during 2008.
Management Services
Grubb & Ellis delivers integrated property, facility, asset, construction, business and
engineering management services to a host of corporate and institutional clients. The Company
offers customized programs that focus on cost-efficient operations and tenant retention.
The Company manages a comprehensive range of properties including headquarters, facilities and
class A office space for major corporations, including many Fortune 500 companies. Grubb & Ellis
skills extend to management of industrial, manufacturing and warehousing facilities as well as data
centers, retail outlets and multi-family properties for real estate users and investors.
Additionally, Grubb & Ellis provides consulting services, including site selection,
feasibility studies, exit strategies, market forecasts, appraisals, strategic planning and research
services.
The Company is committed to providing unparalleled client service. In addition to expanding
the scope of products and services offered, it is also focused on ensuring that it can support
client relationships with best-in-class service. During 2008, the Company continued to expand the
number of client service relationship managers, which provide a single point of contact to
corporate clients with multi-service needs.
Grubb & Ellis Management Services, the Companys Management Services subsidiary, was
recognized as Microsoft Corporations top vendor of 2007 from among more than 15,000 vendors. In
addition, in 2008 Grubb & Ellis secured significant new management services contracts from Kraft
Foods, Sharp Healthcare and Red Mountain West. The Company also secured significant contract
renewals with Ingersoll Rand and Qwest Communications. At December 31, 2008, Grubb & Ellis managed
approximately 231.0 million square feet, of which 184.1 million were from third parties and 46.9
million related to its investment management programs.
Investment Management
The Company and its subsidiaries are leading sponsors of real estate investment programs that
provide individuals and institutions the opportunity to invest in a broad range of real estate
investment vehicles, including tax-deferred 1031 TIC exchanges, public non-traded REITs and real
estate investment funds. During the year ended 2008 and the nine months ended September 30, 2009,
respectively, the Company raised more than $984.3 million and $533.0 million in investor equity for
its sponsored investment programs; as of September 30, 2009, the Company has more than $5.8 billion
of assets under management related to the various programs that it sponsors. The Company has
completed transaction acquisition and disposition volume totaling approximately $11.9 billion on
behalf of more than 55,000 program investors since 1998.
Investment management products are distributed through the Companys broker-dealer subsidiary,
Grubb & Ellis Securities Inc. (
GBE Securities
) (formerly NNN Capital Corp.). GBE Securities is
registered with the SEC, FINRA and all 50 states. GBE Securities has agreements with an extensive
network of broker dealers. These selling relationships provide access to thousands of licensed
registered representatives. Part of the Companys strategy is to expand its network of
broker-dealers to increase the amount of equity that it raises in its various investment programs.
Grubb & Ellis Realty Investors, LLC (
GERI
) (formerly Triple Net Properties, LLC), a
subsidiary of the Company, is a recognized market leader in the securitized TIC industry as
measured by total equity raised according to published reports of OMNI Research and Consulting LLC
(
OMNI
). This product strategy allows investors to fractionally own large, institutional-quality
real estate assets with the added advantage of qualifying for deferred tax benefits on real estate
capital gains. The Company currently sponsors more than 150 TIC Programs and has taken more than 50
programs full cycle (from acquisition through disposition). The Company raised $176.9 million and
$13.0 million, respectively, of TIC equity during the year ended December 31, 2008 and the nine
months ended September 30, 2009.
24
Public non-traded REITs are registered with the SEC but are not listed on any of the
securities exchanges like a traded REIT. According to the published Stanger Report, Winter 2009, by
Robert A. Stanger and Co., an independent financial advisor, approximately $10.3 billion was raised
in this sector in 2008 and $6.2 billion is estimated to be raised in 2009. The Company currently
sponsors two demographically focused programs that are actively raising capital, Grubb & Ellis
Healthcare REIT II, Inc. and Grubb & Ellis Apartment REIT, Inc. The Companys sponsored REIT
programs raised $592.7 million and $518.0 million, respectively, during the year ended December 31,
2008 and the nine months ended September 30, 2009.
In February 2008, the Company launched its Private Client Management program for high net
worth investors. This platform provides comprehensive real estate investment and advisory services
to high net worth investors, offering qualified individuals, entities and corporations, the
opportunity to benefit from the potential advantages of real estate investment through a passive,
sole-ownership vehicle that delivers discretion to the investor. Private Client Management is open
to all qualified investors seeking to build or expand their commercial real estate portfolio,
whether their investment objectives are tax-deferred 1031 exchange driven or not. The Company
raised more than $193 million and $0, respectively, of equity through Private Client Management
during the year ended December 31, 2008 and the nine months ended September 30, 2009.
In 2008, the Company started a family of U.S. and global open end mutual funds that focus on
real estate securities and manage private investment funds exclusively for qualified investors
through its 51% ownership in Grubb & Ellis Alesco Global Advisors, LLC (
Alesco
). The Company,
through its subsidiary, Alesco, serves as the general partner and investment advisor to six hedge
fund limited partnerships, five of which are required to be consolidated: Grubb & Ellis AGA Realty
Income Fund, LP, AGA Strategic Realty Fund, L.P., AGA Global Realty Fund LP and AGA Realty Income
Partners LP, and one mutual fund which is required to be consolidated, Grubb & Ellis Realty Income
Fund. Alesco had approximately $8 million of investment funds under management as of September 30,
2009.
Through its multi-family platform, the Company provides investment management services for TIC
and REIT apartment products and currently manages in excess of 13,000 apartment units through Grubb
& Ellis Residential Management, Inc., the Companys multi-family management services subsidiary.
Our Opportunity
The Company seamlessly integrates its traditional transaction and management services with the
innovative investment programs of GERI. All functions of the new Company work together to provide
comprehensive service to clients and program investors. Teamed with a forward-looking investment
strategy that seeks to capitalize on the nations changing demographics, the Companys various
service offerings support its investment programs to provide clients and program investors with a
full array of solutions for multiple needs. The proprietary research and demographic investing
strategy of the Company establishes a foundation upon which its investment programs are based. The
real estate brokerage network of the Company offers keen insight into the available pool of assets
nationwide, in order to maximize acquisition opportunities for program investors. The professional
property and asset management services of the Company drive value to each of the investment
programs from acquisition through ultimate disposition. The Companys management believes that it
has the vision, discipline and strategy to deliver innovative solutions across the full spectrum of
commercial real estate, whether it is a need for space, strategic planning or a real estate
investment product that meets specific return criteria.
The Company re-branded its investment programs as Grubb & Ellis subsequent to the Merger to
capitalize on the strength of the brand name. Its TIC Programs are sponsored by GERI, its REIT
investment programs are now Grubb & Ellis Healthcare REIT II, Inc. and Grubb & Ellis Apartment
REIT, Inc. and its FINRA registered broker-dealer is now Grubb & Ellis Securities, Inc. As part of
the Companys strategic plan, management has identified more than $20.0 million of expense
synergies, on an annualized basis, a portion of which has been invested in enhancing the management
team with the addition of several executives in key operational and management roles.
Property Acquisitions and Dispositions
During the first half of 2007, the Company acquired three commercial propertiesthe Danbury
Property in Danbury, Connecticut, Abrams Center in Dallas, Texas and 6400 Shafer Court in Rosemont,
Illinoisfor an aggregate contract price of $122.2 million, along with acquisition costs of
approximately $1.3 million, and assumed obligations of approximately $542,000. The Company acquired
the three properties pursuant to its warehousing strategy to accumulate these assets with the
intention to hold them for future sale to Grubb & Ellis Realty Advisors, Inc. (
GERA
), the
Companys affiliated publicly traded special purpose acquisition company formed by the Company in
September 2005. The Company funded its equity position in these acquisitions primarily with
borrowings from its Credit Facility.
Simultaneously with the acquisition of the third property in June 2007, the Company closed two
non-recourse mortgage loan financings with Wachovia Bank, National Association in an aggregate
amount of $120.5 million. The proceeds of the mortgage loans were used to finance the purchase of
this third property, to fund certain required reserves for all three properties, to pay the
lenders fees and costs and to repay certain amounts borrowed by the Company through its Credit
Facility with respect to the first two properties purchased.
25
As a result of GERA failing to obtain the requisite consents of its stockholders in February
2008 to approve the acquisition of the three commercial office properties from the Company, GERA
was unable to effect a business combination within the proscribed deadline of March 3, 2008 in
accordance with its charter and was required to liquidate. Consequently, pursuant to a proxy
statement filed by GERA with the SEC on March 24, 2008, at a special meeting of GERAs stockholders
held on April 14, 2008, the stockholders approved the dissolution and plan of liquidation of GERA.
In the first quarter of 2008 the Company wrote-off its investment in GERA of approximately $5.8
million, including its stock and warrant purchases, operating advances and third party costs. The
Company also paid third-party legal, accounting, printing and other costs (other than monies paid
to stockholders of GERA on liquidation) associated with the dissolution and liquidation of GERA. In
addition, the various exclusive service agreements that the Company had previously entered into
with GERA for transaction services, property and facilities management, and project management,
were no longer of any force or effect.
As of September 30, 2008, the Company initiated a plan to sell five properties it classified
as real estate held for investment in its financial statements as of September 30, 2008. These five
properties are comprised of the three commercial properties that were initially intended to be
transferred to GERA as discussed above (the
GERA Properties
) and two other properties that the
Company previously acquired with the intention of transferring to a strategic office fund that
ultimately was never launched. As of December 31, 2008, the Company had a covenant within its
Credit Facility that required the sale of the GERA Properties before March 31, 2009. The downturn
in the global capital markets significantly lessened the probability that the Company would be able
to achieve relief from this covenant through amendment or other financial resolutions by March 31,
2009. Pursuant to the requirements of the Property, Plant and Equipment Topic, the Company assessed
the value of the assets. In addition, the Company reviewed the valuation of its other owned
properties and real estate investments. This valuation review resulted in the Company recognizing
an impairment charge of approximately $90.4 million against the carrying value of the properties
and real estate investments during the year ended December 31, 2008.
On October 31, 2008, the Company entered into that certain Agreement for the Purchase and Sale
of Real Property and Escrow Instructions to effect the sale of the Danbury Property located at 39
Old Ridgebury Road, Danbury, Connecticut, to an unaffiliated entity for a purchase price of $76
million. This agreement was amended and restated in its entirety by that certain Danbury Merger
Agreement dated as of January 23, 2009, as amended by the First Amendment to Danbury Merger
Agreement dated as of January 23, 2009 (the
First Danbury Amendment
), which reduced the purchase
price to $73.5 million. In accordance with the terms of the Danbury Merger Agreement, as amended by
the First Danbury Amendment, the Company received one half of the buyers deposits in an amount of
$3.125 million from the buyer upon the execution of the Danbury Merger Agreement, which released
deposit remained subject to the terms of the Danbury Merger Agreement and the remaining $3.125
million of deposits continued to be held in escrow pending the closing. On May 19, 2009, the
Company and the buyer entered into the Second Amendment to the Danbury Merger Agreement (the
Second Danbury Amendment
) pursuant to which the remaining $3.125 million of deposits held in
escrow were released to the Company (and remain subject to the terms of the Danbury Merger
Agreement, as amended) and the purchase price was reduced to $72.4 million. The closing of the sale
of the property pursuant to the Second Danbury Amendment closed on June 4, 2009.
Restatement of Certain Financial Information and Special Investigation
On March 16, 2009, management and the Audit Committee of the Board of Directors of the Company
concluded that the Companys previously issued audited financial statements for each of the fiscal
years ended December 31, 2006 and 2007, the unaudited interim financial statements for each of the
quarters ended March 31, June 30 and September 30, 2008 and selected financial data derived from
the Companys previously issued audited financial statements for the fiscal years ended December
31, 2005 and 2004 included in the Companys securities filings thereafter should be restated.
The Audit Committee reached this conclusion after consulting with and upon the recommendation
of management. The Audit Committee and management have discussed this conclusion with Ernst & Young
LLP (
EY
), the Companys independent registered public accounting firm, and management has
discussed this conclusion with Deloitte & Touche LLP (
D&T
), the independent registered public
accounting firm for NNN prior to the Merger.
As a consequence, (i) the Companys consolidated balance sheets as of December 31, 2006 and
December 31, 2007, and for each of the quarters ended March 31, June 30, and September 30, 2008;
(ii) the Companys related consolidated statements of operations, stockholders equity and cash
flows for each of the fiscal years ended December 31, 2004, December 31, 2005, December 31, 2006
and December 31, 2007 and for each of the quarters ended March 31, June 30 and September 30, 2008
and 2007, and the footnotes thereto; (iii) the related report of EY, with respect to the fiscal
year ended December 31, 2007; and (iv) the related reports of D&T, with respect to the fiscal years
ended December 31, 2004, December 31, 2005 and December 31, 2006, should no longer be relied upon.
The restatement of the Companys financial statements is based upon a review of the accounting
treatment of certain transactions entered into by NNN with respect to certain tenant-in-common
investment programs (
TIC Programs
) sponsored by NNN prior to the Merger. During this review, the
Company discovered that NNN had recognized fee revenue in 2004, 2005, 2006 and 2007 and the Company
had recognized fee revenue in the three interim periods in 2008 in advance of the period in which
such fee revenue should have been recognized.
26
After considering managements recommendation and consulting with EY, the Audit Committee has
determined that NNN incorrectly recognized fee revenue under the requirements of the Real
EstateRetail Land Topic and Real EstateGeneral Topic, in 2005, 2006 and 2007 and the three
interim periods in 2008 in connection with certain TIC Programs in which NNN had various forms of
continuing involvement after the close of the sale of the investments in the TIC Programs to
third-parties. As a result of the recognition by NNN of the applicable fee revenue in the wrong
accounting period, the Company reduced retained earnings as of January 1, 2006 by approximately
$8.7 million; increased revenues in 2006 by approximately $518,000; and increased revenues in 2007
by approximately $251,000.
The Audit Committee also has determined, after considering managements recommendation and
consulting with EY, that because NNN had various forms of continuing involvement after the close of
the sale of the investments in the TIC Programs to third-parties, certain entities involved in the
TIC Programs were variable interest entities in which the Company was the primary beneficiary and
therefore are required to be consolidated in accordance with the requirements of the Consolidation
Topic. The restatement also reflects the consolidation of these entities.
The determination to restate the Companys financial statements was prompted by the Audit
Committee being made aware in mid-December 2008 of the existence of a letter agreement, wherein a
former executive of NNN caused NNN to agree to provide certain investors with a right to exchange
their investment in certain TIC Programs for an investment in a different TIC Program (the
Exchange Letter
). As a consequence, the Board of Directors formed a special committee (the
Special Committee
) to investigate the facts and circumstances surrounding the Exchange Letter and
to determine whether there were any other similar agreements that might impact the Companys
previously issued financial statements. The Special Committee retained independent outside counsel,
Manatt Phelps & Phillips, LLP (
Manatt
), to assist it with this investigation. In connection
therewith, the Special Committee asked management to review the accounting treatment regarding the
Exchange Letter and any other letter agreements that might be identified in the course of the
special investigation. In the course of the special investigation, the Audit Committee and
management became aware of additional letter agreements authorized by former executives of NNN
(collectively, the
Additional Letters
), some providing for a right of exchange similar to that
contained in the Exchange Letter and others in which NNN committed to provide certain investors in
certain TIC Programs a specified rate of return. Manatt has concluded its investigation and advised
the Board of Directors that it did not uncover in the course of its investigation any other letter
agreements similar to the Exchange Letter and the Additional Letters. In connection with the
restatement of certain of the Companys financial statements as described herein and in Note 3 to
the consolidated financial statements included in this prospectus, management of the Company
re-evaluated the effectiveness of its disclosure controls and procedures both prior and subsequent
to the Merger. As a result of this re-evaluation, management determined that there was a control
deficiency that constituted a material weakness in the Companys internal controls prior to the
Merger that was not adequately remediated as of December 31, 2008. Accordingly, additional
enhancements to the control environment have been implemented in 2009 to ensure that controls
related to these material weaknesses are strengthened and will operate effectively.
Industry and Competition
The U.S. commercial real estate services industry is large and highly fragmented, with
thousands of companies providing asset management, investment management and brokerage services. In
recent years the industry has experienced substantial consolidation, a trend that is expected to
continue.
The top 25 brokerage companies collectively completed nearly $1.2 trillion in investment sales
and leasing transactions globally in 2007, according to the latest available survey published by
National Real Estate Investor, which is the most recent available survey. The Company ranked 13th
in this survey, including transactions in its affiliate offices.
Within the management services business, according to a recent survey published in 2008 by
National Real Estate Investor, the top 25 companies in the industry manage over 8.3 billion square
feet of commercial property. The Company ranks as the seventh largest property management company
in this survey with 265.6 million square feet under management at year end 2007, including property
under management in its affiliate offices. The largest company in the survey had 1.9 billion square
feet under management.
The Company competes in a variety of service businesses 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 regional and national service providers, but also
from global real estate providers, boutique real estate advisory firms and appraisal firms.
Although many of the Companys competitors are local or regional firms that are substantially
smaller than the Company, some competitors are substantially larger than the Company on a local,
regional, national and/or international basis. The Companys significant competitors include CB
Richard Ellis, Jones Lang LaSalle and Cushman & Wakefield, all of which have global platforms. The
Company believes that it needs such a platform in order to effectively compete for the business of
large multi-national corporations that are increasingly seeking a single real estate services
provider.
27
The Company believes there are only limited barriers to entry in its investment management
business. Its programs face competition generally from REITs, institutional pension plans and other
public and private real estate companies and private real estate investors for the acquisition of
properties and for raising capital to create programs to make these acquisitions. It also competes
against other real estate companies who may be chosen by a broker-dealer as an investment platform
instead of the Company and with other broker-dealers and other properties for viable tenants for
its programs properties. Finally, GBE Securities faces competition from institutions that provide
or arrange for other types of financing through private or public offerings of equity or debt and
from traditional bank financings. While there can be no assurances that the Company will be able to
continue to compete effectively, maintain current fee levels or margins, or maintain or increase
its market share, based on its competitive strengths, the Company believes that it can operate
successfully in the future in this highly competitive industry. The ability to do so, however,
depends upon the Companys ability to, among other things, successfully manage through the current,
unprecedented disruption and dislocation of the credit markets and the weakening national and
global economics. Specifically, as our business involves the acquisition, disposition, and
financing of commercial properties, many of such activities are dependent, either directly or
indirectly, and in whole or in part, with the availability and cost of credit. The disruption in
the global capital market which began in 2008 has adversely affected our businesses and will
continue to do so until such time as credit is once again available at reasonable costs. In
addition, the health of real estate investment and leasing markets is dependent on the level of
economic activity on a regional and local basis. The significant slowdown in overall economic
activity in 2008 has adversely affected many sectors of our business and will continue to do so
until economic conditions change.
Environmental Regulation
Federal, state and local laws and regulations impose environmental zoning restrictions, use
controls, disclosure obligations and other restrictions that impact the management, development,
use, and/or sale of real estate. Such laws and regulations tend to discourage sales and leasing
activities, as well as the willingness of mortgage lenders to provide financing, with respect to
some properties. If transactions in which the Company is involved are delayed or abandoned as a
result of these restrictions, the brokerage business could be adversely affected. In addition, a
failure by the Company to disclose known environmental concerns in connection with a real estate
transaction may subject the Company to liability to a buyer or lessee of property.
The Company generally undertakes a third-party Phase I investigation of potential
environmental risks when evaluating an acquisition for a sponsored program. A Phase I investigation
is an investigation for the presence or likely presence of hazardous substances or petroleum
products under conditions that indicate an existing release, a post release or a material threat of
a release. A Phase I investigation does not typically include any sampling. The Companys programs
may acquire a property with environmental contamination, subject to a determination of the level of
risk and potential cost of remediation.
Various environmental laws and regulations also can impose liability for the costs of
investigating or remediation of hazardous or toxic substances at sites currently or formerly owned
or operated by a party, or at off-site locations to which such party sent wastes for disposal. As a
property manager, the Company could be held liable as an operator for any such contamination, even
if the original activity was legal and the Company had no knowledge of, or did not cause, the
release or contamination. Further, because liability under some of these laws is joint and several,
the Company could be held responsible for more than its share, or even all, of the costs for such
contaminated site if the other responsible parties are unable to pay. The Company could also incur
liability for property damage or personal injury claims alleged to result from environmental
contamination, or from asbestos-containing materials or lead-based paint present at the properties
that it manages. Insurance for such matters may not always be available, or sufficient to cover the
Companys losses. Certain requirements governing the removal or encapsulation of
asbestos-containing materials, as well as recently enacted local ordinances obligating property
managers to inspect for and remove lead-based paint in certain buildings, could increase the
Companys costs of legal compliance and potentially subject the Company to violations or claims.
Although such costs have not had a material impact on the Companys financial results or
competitive position in 2008, the enactment of additional regulations, or more stringent
enforcement of existing regulations, could cause the Company to incur significant costs in the
future, and/or adversely impact the brokerage and management services businesses. See Note 21 to
the consolidated financial statements included in this prospectus.
Seasonality
Notwithstanding the Companys expanded business platform as a consequence of the Merger, a
substantial portion of the Companys revenues are derived from brokerage transaction services,
which are seasonal in nature. As a consequence, the Companys revenue stream and the related
commission expense are also subject to seasonal fluctuations. However, the Companys non-variable
operating expenses, which are treated as expenses when incurred during the year, are relatively
constant in total dollars on a quarterly basis. The Company has typically experienced its lowest
quarterly revenue from transaction services in the quarter ending March 31 of each year with higher
and more consistent revenue in the quarters ending June 30 and September 30. The quarter ending
December 31 has historically provided the highest quarterly level of revenue due to increased
activity caused by the desire of clients to complete transactions by calendar year-end. Transaction
services revenue represented 38.2% of the $628.8 million in total revenue for 2008.
28
Regulation
Transaction and Property Management Services
The Company and its brokers, salespersons and, in some instances, property managers are
regulated by the states in which it does business. These regulations may include licensing
procedures, prescribed professional responsibilities and anti-fraud provisions. The Companys
activities are also subject to various local, state, national and international jurisdictions fair
advertising, trade, housing and real estate settlement laws and regulations and are affected bylaws
and regulations relating to real estate and real estate finance and development. Because the size
and scope of real estate sales transactions have increased significantly during the past several
years, both the difficulty of ensuring compliance with the numerous state statutory requirements
and licensing regimes and the possible liability resulting from non-compliance have increased.
Dealer-Manager Services
The securities industry is subject to extensive regulation under federal and state law.
Broker-dealers are subject to regulations covering all aspects of the securities business. In
general, broker-dealers are required to register with the SEC and to be members of FINRA or the
NYSE. As a member of FINRA, GBE Securities broker-dealer business is subject to the requirements
of the Securities Exchange Act of 1934 as amended (the
Exchange Act
) and the rules promulgated
thereunder relating to broker-dealers and to the Rules of Fair Practice of FINRA. These regulations
establish, among other things, the minimum net capital requirements for GBE Securities
broker-dealer business. Such business is also subject to regulation under various state laws in all
50 states and the District of Columbia, including registration requirements.
Service Marks
The Company has registered trade names and service marks for the Grubb & Ellis name and logo
and certain other trade names. The Grubb & Ellis brand name is considered an important asset of
the Company, and the Company actively defends and enforces such trade names and service marks.
Real Estate Markets
The Companys business is highly dependent on the commercial real estate markets, which in
turn are impacted by numerous factors, including but not limited to the general economy,
availability and terms of credit 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,
demand for real estate investments and prices or lease terms for real estate. Consequently, the
Companys revenue from transaction services, investment management operations and property
management fees, operating results, cash flow and financial condition are impacted by these
factors, among others.
Private Placement of 12% Preferred Stock
On November 6, 2009, we consummated the issuance and sale of 900,000 shares of our 12%
Preferred Stock in a private placement exempt from registration under Section 4(2) of the
Securities Act of 1933, as amended, and Rule 506 of Regulation D promulgated thereunder. Each share
of 12% Preferred Stock is convertible into shares of our common stock. JMP Securities, Inc. acted
as initial purchaser and placement agent with this private placement. We received net proceeds from
the private placement of approximately $85 million after deducting expenses and after giving effect
to the conversion of $5 million of subordinated debt previously provided by an affiliate of the
Companys largest stockholder. We used the net proceeds to repay in full the Companys Credit
Facility at the agreed reduced principal amount equal to approximately 65% of the principal amount
outstanding under such facility. The balance of the net proceeds from the offering will be used for
general working capital purposes. We also granted a 45-day over-allotment option to the initial
purchaser and placement agent for the offering, and pursuant to such over-allotment option, we sold
an additional 65,700 shares of Preferred Stock for gross proceeds of $6.6 million, all of which
will be used for working capital purposes. This prospectus covers the resale by the selling
stockholders of certain of the shares of 12% Preferred Stock and common stock issuable upon
conversion of such 12% Preferred Stock previously issued.
Amendment and Repayment of Senior Secured Credit Facility
We entered into an amendment and limited waiver to our Credit Facility, effective as of
September 30, 2009 (the
Credit Facility Amendment
), that extended the time to effect a
recapitalization under our Credit Facility from September 30, 2009 to November 30, 2009. Pursuant
to the Credit Facility Amendment, we also received the right to prepay our Credit Facility in full
at any time on or prior to November 30, 2009 at a discounted amount equal to 65% of the aggregate
principal amount outstanding, which we refer to as the discount payment option. On November 6,
2009, concurrently with the closing of the private placement of 12% Preferred Stock, we repaid our
Credit Facility in full at the discounted amount and the Credit Facility was terminated in
accordance with its terms.
29
As a condition to entering into the Credit Facility Amendment, the lenders to our Credit
Facility required that Kojaian Management Corporation, an affiliate of our largest stockholder,
effect a $5 million subordinated financing of the Company, which we refer to as the stockholder
subordinated financing. On October 2, 2009, we completed the stockholder subordinated financing in
the form of a senior subordinated convertible note bearing an interest rate of 12% per annum.
Concurrently with the consummation of the private placement of 12% Preferred Stock, the principal
amount of the senior subordinated convertible note was converted into 50,000 shares of 12%
Preferred Stock.
Employees
As of December 31, 2008, the Company had approximately 5,000 employees including more than 800
transaction professionals working in 54 owned offices. Nearly 2,600 employees serve as property and
facilities management staff at the Companys client-owned properties and the Companys clients
reimburse the Company fully for their salaries and benefits. The Company considers its relationship
with its employees to be good and has not experienced any interruptions of its operations as a
result of labor disagreements.
Properties
The Company leases all of its office space through non-cancelable operating leases. The terms
of the leases vary depending on the size and location of the office. As of December 31, 2008, the
Company leased over 747,000 square feet of office space in 73 locations under leases which expire
at various dates through June 30, 2020. For those leases that are not renewable, the Company
believes that there are adequate alternatives available at acceptable rental rates to meet its
needs, although there can be no assurances in this regard. Many of our offices that contain
employees of the Transaction Services, Investment Management or Management Services segments also
contain employees of other segments. The Companys Corporate Headquarters are in Santa Ana,
California. See Note 21 to the consolidated financial statements included in this prospectus for
additional information.
Legal Proceedings
On September 16, 2004, Triple Net Properties, LLC (which was re-named Grubb & Ellis Realty
Investors, LLC (
GERI
) after the Merger), learned that the SEC Staff was conducting an
investigation referred to as In the matter of Triple Net Properties, LLC. The SEC Staff requested
information from Triple Net Properties, LLC relating to disclosure in the Triple Net Securities
Offerings. The SEC Staff also requested information from NNN Capital Corp. (which was re-named GBE
Securities after the Merger), the dealer-manager for the Triple Net securities offerings. The SEC
Staff requested financial and other information regarding the Triple Net securities offerings and
the disclosures included in the related offering documents from each of Triple Net Properties, LLC
and NNN Capital Corp.
On June 2, 2008, the Company was notified by the SEC Staff that the SEC closed the
investigation without any enforcement action against the Company or its subsidiaries. As a result,
the shares of common stock owned by Mr. Thompson, the founder of Triple Net Properties, LLC and the
former Chairman of the Company that were being held in the escrow account pending the outcome of
the SEC investigation were returned to Mr. Thompson and the escrow agreement was terminated.
General
Grubb & Ellis and its subsidiaries are involved in various claims and lawsuits arising out of
the ordinary conduct of its business, as well as in connection with its participation in various
joint ventures and partnerships, many of which may not be covered by the Companys 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 Companys financial position or results of
operations.
Corporate Information
Our principal executive offices are located at 1551 N. Tustin Avenue, Suite 300, Santa Ana,
California 92705 and our telephone number is (714) 667-8252.
30
RATIO OF EARNINGS TO FIXED CHARGES
The following table presents our historical ratios of earnings to fixed charges for the
periods indicated.
The ratios are based solely on historical financial information and no pro forma adjustments
have been made.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months
|
|
|
|
|
|
|
ended
|
|
|
|
|
|
|
September 30,
|
|
|
Year ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
Fixed Charges
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest and related amortization of borrowing costs
|
|
|
12,490
|
|
|
|
9,928
|
|
|
|
14,207
|
|
|
|
10,818
|
|
|
|
6,765
|
|
|
|
1,969
|
|
|
|
1,828
|
|
Estimate of the interest portion of rental expense
|
|
|
5,536
|
|
|
|
5,241
|
|
|
|
6,965
|
|
|
|
1,374
|
|
|
|
970
|
|
|
|
510
|
|
|
|
195
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed Charges
|
|
|
18,026
|
|
|
|
15,169
|
|
|
|
21,172
|
|
|
|
12,192
|
|
|
|
7,735
|
|
|
|
2,479
|
|
|
|
2,023
|
|
Earnings
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations before taxes
|
|
|
(95,762
|
)
|
|
|
(78,692
|
)
|
|
|
(319,495
|
)
|
|
|
38,494
|
|
|
|
13,571
|
|
|
|
13,679
|
|
|
|
16,247
|
|
Less: Equity in (losses) earnings of unconsolidated entities
|
|
|
(1,635
|
)
|
|
|
(10,602
|
)
|
|
|
(13,311
|
)
|
|
|
2,029
|
|
|
|
1,948
|
|
|
|
292
|
|
|
|
|
|
Plus: Distributions from unconsolidated entities
|
|
|
185
|
|
|
|
|
|
|
|
50
|
|
|
|
75
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-controlling interest in subsidiaries with earnings and no
fixed charges
|
|
|
|
|
|
|
|
|
|
|
(629
|
)
|
|
|
(839
|
)
|
|
|
(308
|
)
|
|
|
|
|
|
|
|
|
Plus: Fixed charges
|
|
|
18,026
|
|
|
|
15,169
|
|
|
|
21,172
|
|
|
|
12,192
|
|
|
|
7,735
|
|
|
|
2,479
|
|
|
|
2,023
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (1)
|
|
|
(75,916
|
)
|
|
|
(52,921
|
)
|
|
|
(285,591
|
)
|
|
|
47,893
|
|
|
|
19,050
|
|
|
|
15,866
|
|
|
|
18,270
|
|
Ratio of earnings to fixed charges
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3.9
|
|
|
|
2.5
|
|
|
|
6.4
|
|
|
|
9.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The amount of coverage deficiency
|
|
|
93,942
|
|
|
|
68,090
|
|
|
|
306,763
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
For purposes of calculating the ratio of earnings to fixed charges, earnings include net income before taxes, less minority interest in subsidiaries with earnings
and no fixed charges, less equity in earnings of 50% or less owned subsidiaries, plus distributions from 50% or less owned subsidiaries, plus total fixed charges.
Fixed charges represent interest, borrowing costs and estimates of interest within rental expenses.
|
31
USE OF PROCEEDS
The proceeds from the sale of each of the selling stockholders common stock and 12% Preferred
Stock will belong to that selling stockholder. We will not receive any proceeds from such sales.
32
PRICE AND RELATED INFORMATION CONCERNING REGISTERED SHARES
Market and Price Information
The principal market for the Companys common stock is the NYSE. The following table sets
forth the high and low sales prices of the Companys common stock on the NYSE for each of the first
three quarters of the year ended December 31, 2009 and for each quarter of the years ended December
31, 2008 and 2007.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
2008
|
|
2007
|
|
|
High
|
|
Low
|
|
High
|
|
Low
|
|
High
|
|
Low
|
First Quarter
|
|
$
|
1.29
|
|
|
$
|
0.25
|
|
|
$
|
7.50
|
|
|
$
|
3.80
|
|
|
$
|
11.90
|
|
|
$
|
10.23
|
|
Second Quarter
|
|
$
|
1.31
|
|
|
$
|
0.50
|
|
|
$
|
7.50
|
|
|
$
|
3.61
|
|
|
$
|
13.25
|
|
|
$
|
10.69
|
|
Third Quarter
|
|
$
|
1.96
|
|
|
$
|
0.55
|
|
|
$
|
5.00
|
|
|
$
|
2.70
|
|
|
$
|
12.15
|
|
|
$
|
7.00
|
|
Fourth Quarter
|
|
|
|
|
|
|
|
|
|
$
|
2.88
|
|
|
$
|
0.81
|
|
|
$
|
9.57
|
|
|
$
|
4.95
|
|
On December 23, 2009, the closing sale price of our common stock was $1.35.
As of December 23, 2009, there were 1,051 registered holders of the Companys common stock and
67,376,796 shares of common stock outstanding. Sales of substantial amounts of common stock,
including shares issued upon the exercise of warrants or options or upon the conversion of
preferred stock, or the perception that such sales might occur, could adversely affect prevailing
market prices for the common stock.
33
DIVIDEND POLICY
The Company declared first and second quarter cash dividends in 2008 for an aggregate of
$0.2050 per share for the year. On July 11, 2008, the Companys Board of Directors approved the
suspension of future dividend payments. Legacy NNN declared aggregate quarterly cash dividends in
2007 of $0.33 per share and the Company declared a fourth quarter cash dividend in 2007 of $0.03
for an aggregate of $0.36 per share in cash dividends for the year.
The 12% Preferred Stock are entitled to cumulative annual dividends of $12.00 per share
payable quarterly on each of March 31, June 30, September 30 and December 31, commencing on
December 31, 2009, when, as and if declared by the Board of Directors. Such dividends will
accumulate and be paid in arrears on the basis of a 360-day year consisting of twelve 30-day
months. Dividends on the 12% Preferred Stock will be paid in cash and accumulate and be cumulative
from the most recent date to which dividends have been paid, or if no dividends have been paid,
from and including November 6, 2009. Accumulated dividends on the 12% Preferred Stock will not bear
interest. In addition, in the event of any cash distribution to holders of common stock, holders of
12% Preferred Stock will be entitled to participate in such distribution as if such holders of 12%
Preferred Stock had converted their shares of 12% Preferred Stock into common stock. See
Description of Preferred StockDividends.
The Company declared a cash dividend of $1.8333 per share of Preferred Stock payable on
December 31, 2009 to holders of record as of the close of business on December 21, 2009.
34
Selected Consolidated Financial Data
Grubb & Ellis Realty Investors, LLC (
GERI
) (formerly Triple Net Properties, LLC), a
subsidiary of our company, was the accounting acquirer of Triple Net Properties Realty, Inc.
(
Realty
) and NNN Capital Corp., subsidiaries of our company acquired in the Merger. On December
7, 2007, GERI through NNN Realty Advisors, Inc. merged with Grubb & Ellis Company. NNN Realty
Advisors, Inc. was the accounting acquiror. The selected historical consolidated financial data set
forth below as of and for the years ended December 31, 2008 and 2007 (restated), and the selected
consolidated operating and cash flow data for the year ended December 31, 2006 (restated), has been
derived from the audited financial statements beginning on page F-2 of this prospectus. The
selected historical financial data set forth below as of and for the years ended December 31, 2005
(restated) and 2004 (restated), and the selected consolidated balance sheet data as of December 31,
2006 (restated), has been derived from unaudited consolidated financial statements not included in
this prospectus. The selected consolidated financial information set forth below as of September
30, 2009 and for each of the nine-month periods ended September 30, 2009 and 2008 is derived from
our unaudited consolidated financial statements included in our quarterly report on Form 10-Q/A for
the period ended September 30, 2009 beginning on page
F-62 of this prospectus. The unaudited
consolidated financial statements include all adjustments which we consider necessary for a fair
statement of our financial position and results of operations for those periods. The results for
the nine months ended September 30, 2009 and 2008 are not necessarily indicative of the results
that might be expected for the entire year ending December 31, 2009 or any other period. Historical
results are not necessarily indicative of the results that may be expected for any future period.
The selected historical consolidated financial data for the years ended December 31, 2007
(restated), 2006 (restated), 2005 (restated) and 2004 (restated) has been restated to correct
accounting errors related to the timing of revenue recognition relating to certain tenant-in-common
investment programs sponsored by GERI and the consolidation of certain entities that should have
been consolidated into our financial statements as described in Note 3 to the consolidated
financial statements beginning on page F-2 of this prospectus. As discussed in Note 2 to the
consolidated financial statements, the Company adopted Statement of Financial Accounting Standards
Board No. 160, later codified in ASC 810-10, Noncontrolling Interests in Consolidated Financial
Statements, an amendment of ARB 51, and also adopted FASB Position No. EITF 03-6-1, later codified
in ASC 260-10, Determining whether Instruments Granted in Share-Based Payment Transactions are
Participating Securities. The selected historical consolidated financial data set forth below
should be read in conjunction with the consolidated financial statements beginning on page F-2 of
this prospectus and Managements Discussion and Analysis of Financial Condition and Results of
Operation.
The impact of the restatement on our financial statements for the year ended December 31, 2007
resulted in an increase in net income of $230,000, or less than $0.01 per basic and diluted share,
an increase in total assets of $12.1 million, an increase in total liabilities of $5.5 million and
an increase in minority interest liability of $11.2 million. The impact of the restatement on our
financial statements for the year ended December 31, 2006 resulted in an increase in net income of
$3.9 million, or $0.19 per basic and diluted share, an increase in total assets of $19.7 million,
an increase in total liabilities of $18.1 million and an increase in minority interest liability of
$6.3 million. The impact of the restatement on fiscal year 2005 resulted in a decrease in net
income of $8.1 million, or $0.47 per basic and diluted share, an increase in total assets of $39.7
million, an increase in total liabilities of $47.4 million, and an increase in minority interest
liability of $993,000. The impact of the restatement on our financial statements for the year ended
December 31, 2004 resulted in a decrease in net income of $619,000, or $0.04 per basic and diluted
share, and an increase in total liabilities of $619,000.
35
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
Year Ended December 31,
|
|
|
2009
|
|
2008
|
|
2008
|
|
2007
|
|
2006
|
|
2005
|
|
2004
|
|
|
|
|
|
|
Restated
|
|
|
|
|
|
Restated (1)
|
|
Restated (2)
|
|
Restated (3)
|
|
Restated (3)
|
(In thousands, except per share data)
|
|
(Unaudited)
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
(Unaudited)
|
Consolidated
Statement of
Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total services revenue
|
|
$
|
362,341
|
|
|
$
|
443,526
|
|
|
$
|
595,495
|
|
|
$
|
201,538
|
|
|
$
|
99,599
|
|
|
$
|
80,817
|
|
|
$
|
64,281
|
|
Total revenue
|
|
|
385,095
|
|
|
|
468,828
|
|
|
|
628,779
|
|
|
|
229,657
|
|
|
|
108,543
|
|
|
|
84,423
|
|
|
|
66,592
|
|
Total compensation
costs
|
|
|
342,072
|
|
|
|
365,488
|
|
|
|
503,004
|
|
|
|
104,109
|
|
|
|
49,449
|
|
|
|
29,873
|
|
|
|
19,717
|
|
Total operating expense
|
|
|
480,088
|
|
|
|
533,874
|
|
|
|
929,407
|
|
|
|
195,723
|
|
|
|
97,633
|
|
|
|
71,035
|
|
|
|
51,082
|
|
Operating (loss) income
|
|
|
(94,933
|
)
|
|
|
(65,046
|
)
|
|
|
(300,628
|
)
|
|
|
33,934
|
|
|
|
10,910
|
|
|
|
13,388
|
|
|
|
15,510
|
|
(Loss) income from
continuing operations
|
|
|
(96,349
|
)
|
|
|
(55,568
|
)
|
|
|
(318,688
|
)
|
|
|
23,741
|
|
|
|
21,012
|
|
|
|
13,679
|
|
|
|
15,628
|
|
Net (loss) income
|
|
|
(97,354
|
)
|
|
|
(74,258
|
)
|
|
|
(342,589
|
)
|
|
|
23,032
|
|
|
|
20,049
|
|
|
|
10,288
|
|
|
|
15,628
|
|
Net (loss) income
attributable to Grubb
& Ellis Company
|
|
|
(95,668
|
)
|
|
|
(67,960
|
)
|
|
|
(330,870
|
)
|
|
|
21,072
|
|
|
|
19,971
|
|
|
|
10,047
|
|
|
|
15,628
|
|
Basic (loss) earnings
per share
|
|
$
|
(1.51
|
)
|
|
$
|
(1.07
|
)
|
|
$
|
(5.21
|
)
|
|
$
|
0.53
|
|
|
$
|
1.01
|
|
|
$
|
0.58
|
|
|
$
|
0.90
|
|
(Loss) income from
continuing operations
per share
|
|
$
|
(1.49
|
)
|
|
$
|
(0.79
|
)
|
|
$
|
(4.83
|
)
|
|
$
|
0.55
|
|
|
$
|
1.06
|
|
|
$
|
0.80
|
|
|
$
|
0.90
|
|
Diluted (loss)
earnings per share
|
|
$
|
(1.51
|
)
|
|
$
|
(1.07
|
)
|
|
$
|
(5.21
|
)
|
|
$
|
0.53
|
|
|
$
|
1.01
|
|
|
$
|
0.58
|
|
|
$
|
0.90
|
|
Basic weighted average
shares outstanding
|
|
|
63,618
|
|
|
|
63,574
|
|
|
|
63,515
|
|
|
|
38,652
|
|
|
|
19,681
|
|
|
|
17,200
|
|
|
|
17,407
|
|
Diluted weighted
average shares
outstanding
|
|
|
63,618
|
|
|
|
63,574
|
|
|
|
63,515
|
|
|
|
38,652
|
|
|
|
19,694
|
|
|
|
17,200
|
|
|
|
17,407
|
|
Dividends declared per
common share
|
|
|
|
|
|
$
|
0.205
|
|
|
$
|
0.205
|
|
|
$
|
0.36
|
|
|
$
|
0.10
|
|
|
|
|
|
|
|
|
|
Consolidated Statement
of Cash Flow Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in)
provided by operating
activities
|
|
$
|
(29,053
|
)
|
|
$
|
(34,120
|
)
|
|
$
|
(33,629
|
)
|
|
$
|
33,543
|
|
|
$
|
17,356
|
|
|
$
|
23,536
|
|
|
$
|
17,214
|
|
Net cash provided by
(used in) investing
activities
|
|
|
81,185
|
|
|
|
(66,719
|
)
|
|
|
(76,330
|
)
|
|
|
(486,909
|
)
|
|
|
(56,203
|
)
|
|
|
(35,183
|
)
|
|
|
(13,046
|
)
|
Net cash (used in)
provided by financing
activities
|
|
|
(75,673
|
)
|
|
|
85,937
|
|
|
|
93,616
|
|
|
|
400,468
|
|
|
|
140,525
|
|
|
|
10,251
|
|
|
|
(7,647
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
December 31,
|
|
|
2009
|
|
2008
|
|
2007
|
|
2006
|
|
2005
|
|
2004
|
|
|
|
|
|
|
|
|
|
|
Restated
|
|
Restated
|
|
Restated
|
|
Restated
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
(Unaudited)
|
|
(Unaudited)
|
Consolidated
Balance Sheet Data (at
end of period):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
342,178
|
|
|
$
|
520,277
|
|
|
$
|
988,542
|
|
|
$
|
347,709
|
|
|
$
|
126,057
|
|
|
$
|
42,911
|
|
Long Term Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Line of credit
|
|
|
62,709
|
|
|
|
63,000
|
|
|
|
8,000
|
|
|
|
|
|
|
|
8,500
|
|
|
|
3,545
|
|
Notes payable and
capital lease
obligations
|
|
|
107,953
|
|
|
|
107,203
|
|
|
|
107,343
|
|
|
|
843
|
|
|
|
887
|
|
|
|
|
|
Senior and
participating
notes
|
|
|
16,277
|
|
|
|
16,277
|
|
|
|
16,277
|
|
|
|
10,263
|
|
|
|
2,300
|
|
|
|
4,845
|
|
Redeemable
preferred
liability
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,077
|
|
|
|
5,717
|
|
Total Grubb & Ellis
Company stockholders
(deficit) equity
|
|
|
(16,410
|
)
|
|
|
70,171
|
|
|
|
404,056
|
|
|
|
217,125
|
|
|
|
20,081
|
|
|
|
16,164
|
|
|
|
|
(1)
|
|
Based on GAAP, the operating results for the year ended December 31, 2007 (restated) include the results of NNN
Realty Advisors, Inc. prior to the Merger for the full periods presented and the results of Grubb & Ellis
Company for the period from December 8, 2007 through December 31, 2007.
|
|
(2)
|
|
Includes a full year of operating results of GERI, one and one-half months of Realty (acquired on November 16,
2006) and one-half month of GBE Securities (formerly NNN Capital Corp.) (acquired on December 14, 2006).
GERI was treated as the acquirer in connection with these transactions.
|
|
(3)
|
|
Based on GAAP, reflects operating results of GERI.
|
36
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion and analysis of the financial condition and results of operations
should be read together with its financial statements and the related notes included elsewhere in
this prospectus. The following discussion reflects Grubb & Ellis performance for the periods listed
and may not be indicative of our future financial performance. In addition, some of the information
contained in this discussion and analysis or set forth elsewhere in this prospectus, including
information with respect to Grubb & Ellis plans and strategy for its business, includes
forward-looking statements that involve risks, uncertainties and assumptions. Actual results could
differ materially from the results described in or implied by the forward-looking statements
contained in the following discussion and analysis as a result of many factors, including those
discussed in the Risk Factors section of this prospectus.
Note Regarding Forward-Looking Statements
The accompanying Managements Discussion and Analysis of Financial Condition and Results of
Operations reflects the restatement of previously issued financial statements, as discussed in Note
3 to the consolidated financial statements included in this prospectus.
This registration statement and prospectus contains statements that are forward-looking and as
such are not historical facts. Rather, these statements constitute projections, forecasts or
forward-looking statements within the meaning of the Private Securities Litigation Reform Act of
1995. You should not place undue reliance on these statements. Forward-looking statements include
information concerning the Companys liquidity and possible or assumed future results of
operations, including descriptions of the Companys business strategies. These statements often
include words such as believe, expect, anticipate, intend, plan, estimate seek,
will, may or similar expressions. These statements are based on certain assumptions that the
Company has made in light of its experience in the industry as well as its perceptions of the
historical trends, current conditions, expected future developments and other factors the Company
believes are appropriate under these circumstances.
All such forward-looking statements speak only as of the date of this prospectus. The Company
expressly disclaims any obligation or undertaking to release publicly any updates or revisions to
any forward-looking statements contained herein to reflect any change in the Companys expectations
with regard thereto or any change in events, conditions or circumstances on which any such
statement is based.
Overview and Background
The Company is a commercial real estate services and investment management firm. The Merger
was accounted for using the purchase method of accounting based on accounting principles generally
accepted in the United States (
GAAP
) and as such, although structured as a reverse merger, NNN is
considered the acquirer of legacy Grubb & Ellis. As a consequence, the operating results for the
twelve months ended December 31, 2008 reflect the consolidated results of the Company as a result
of the Merger, while the twelve months ended December 31, 2007 includes the full year operating
results of legacy NNN and the operating results of legacy Grubb & Ellis for the period from
December 8, 2007 through December 31, 2007. The year ended December 31, 2006 includes solely the
operating results of legacy NNN.
Unless otherwise indicated, all pre-Merger legacy NNN share data have been adjusted to reflect
the conversion as a result of the Merger (see Note 22 to the consolidated financial statements
included in this prospectus for additional information).
Critical Accounting Policies
The Companys consolidated financial statements have been prepared in accordance with GAAP.
Certain accounting policies are considered to be critical accounting policies, as they require
management to make assumptions about matters that are highly uncertain at the time the estimate is
made and changes in the accounting estimate are reasonably likely to occur from period to period.
The Company believes that the following critical accounting policies reflect the more significant
judgments and estimates used in the preparation of its consolidated financial statements.
Revenue Recognition
Transaction Services
Real estate sales commissions are recognized when earned which is typically the close of
escrow. Receipt of payment occurs at the point at which all Company services have been performed,
and title to real property has passed from seller to buyer, if applicable. Real estate leasing
commissions are recognized upon execution of appropriate lease and commission agreements and
receipt of full or partial payment, and, when payable upon certain events such as tenant occupancy
or rent commencement, upon occurrence of such events. All other commissions and fees are recognized
at the time the related services have been performed and delivered by the Company to the client,
unless future contingencies exist.
37
Investment Management
The Company earns fees associated with its transactions by structuring, negotiating and
closing acquisitions of real estate properties to third-party investors. Such fees include
acquisition fees for locating and acquiring the property and selling it to various TIC investors,
REITs and its various real estate funds. The Company accounts for acquisition and loan fees in
accordance with the requirements of Real EstateGeneral Topic. In general, the Company records the
acquisition and loan fees upon the close of sale to the buyer if the buyer is independent of the
seller, collection of the sales price, including the acquisition fees and loan fees, is reasonably
assured, and the Company is not responsible for supporting operations of the property.
Organizational marketing expense allowance (
OMEA
) fees are earned and recognized from gross
proceeds of equity raised in connection with offerings and are used to pay formation costs, as well
as organizational and marketing costs. When the Company does not meet the criteria for revenue
recognition under Real EstateGeneral Topic, revenue is deferred until revenue can be reasonably
estimated or until the Company defers revenue up to its maximum exposure to loss. The Company earns
disposition fees for disposing of the property on behalf of the REIT, investment fund or TIC. The
Company recognizes the disposition fee when the sale of the property closes. The Company is
entitled to loan advisory fees for arranging financing related to properties under management.
The Company earns captive asset and property management fees primarily for managing the
operations of real estate properties owned by the real estate programs, REITs and limited liability
companies that invest in real estate or value funds it sponsors. Such fees are based on
pre-established formulas and contractual arrangements and are earned as such services are
performed. The Company is entitled to receive reimbursement for expenses associated with managing
the properties; these expenses include salaries for property managers and other personnel providing
services to the property. Each property in the Companys TIC Programs may also be charged an
accounting fee for costs associated with preparing financial reports. The Company is also entitled
to leasing commissions when a new tenant is secured and upon tenant renewals. Leasing commissions
are recognized upon execution of leases.
Through its dealer-manager, the Company facilitates capital raising transactions for its
programs its dealer-manager acts as a dealer-manager exclusively for the Companys programs and
does not provide securities services to any third party. The Companys wholesale dealer-manager
services are comprised of raising capital for its programs through its selling broker-dealer
relationships. Most of the commissions, fees and allowances earned for its dealer-manager services
are passed on to the selling broker-dealers as commissions and to cover offering expenses, and the
Company retains the balance. Accordingly, the Company records these fees net of the amounts paid to
its selling broker-dealer relationships.
Management Services
Management fees are recognized at the time the related services have been performed by the
Company, unless future contingencies exist. In addition, in regard to management and facility
service contracts, the owner of the property will typically reimburse the Company for certain
expenses that are incurred on behalf of the owner, which are comprised primarily of on-site
employee salaries and related benefit costs. The amounts which are to be reimbursed per the terms
of the services contract, are recognized as revenue by the Company in the same period as the
related expenses are incurred. In certain instances, the Company sub contracts its property
management services to independent property managers, in which case the Company passes a portion of
their property management fee on to the sub contractor, and the Company retains the balance.
Accordingly, the Company records these fees net of the amounts paid to its sub contractors.
Basis of Presentation and Principles of Consolidation
The consolidated financial statements include the accounts of the Company and its wholly-owned
and majority-owned controlled subsidiaries variable interest entities (
VIEs
) in which the
Company is the primary beneficiary and partnerships/LLCs in which the Company is the managing
member or general partner and the other partners/members lack substantive rights (hereinafter
collectively referred to as the
Company
). All significant intercompany accounts and transactions
have been eliminated in consolidation. For acquisitions of an interest in an entity or newly formed
joint venture or limited liability company, the Company evaluates the entity to determine if the
entity is deemed a VIE, and if the Company is deemed to be the primary beneficiary, in accordance
with the requirements of the Consolidation Topic.
The Company consolidates entities that are VIEs when the Company is deemed to be the primary
beneficiary of the VIE. For entities in which (i) the Company is not deemed to be the primary
beneficiary, (ii) the Companys ownership is 50.0% or less and (iii) the Company has the ability to
exercise significant influence, the Company uses the equity accounting method (i.e. at cost,
increased or decreased by the Companys share of earnings or losses, plus contributions less
distributions). The Company also uses the equity method of accounting for jointly-controlled
tenant-in-common interests. As events occur, the Company will reconsider its determination of
whether an entity is a VIE and who the primary beneficiary is to determine if there is a change in
the original determinations and will report such changes on a quarterly basis.
38
Purchase Price Allocation
In accordance with the requirements of the Business Combinations Topic, the purchase price of
acquired properties is allocated to tangible and identified intangible assets and liabilities based
on their respective fair values. The allocation to tangible assets (building and land) is based
upon determination of the value of the property as if it were vacant using discounted cash flow
models similar to those used by independent appraisers. Factors considered include an estimate of
carrying costs during the expected lease-up periods considering current market conditions and costs
to execute similar leases. Additionally, the purchase price of the applicable property is allocated
to the above or below market value of in-place leases and the value of in-place leases and related
tenant relationships.
The value allocable to the above or below market component of the acquired in-place leases is
determined based upon the present value (using a discount rate which reflects the risks associated
with the acquired leases) of the difference between (i) the contractual amounts to be paid pursuant
to the lease over its remaining term, and (ii) the Companys estimate of the amounts that would be
paid using fair market rates over the remaining term of the lease. The amounts allocated to above
market leases are included in identified intangible assets and below market lease values are
included in liabilities in the accompanying consolidated financial statements and are amortized to
rental revenue over the weighted-average remaining term of the acquired leases with each property.
The total amount of identified intangible assets acquired is further allocated to in-place
lease costs and the value of tenant relationships based on managements evaluation of the specific
characteristics of each tenants lease and the Companys overall relationship with that respective
tenant. Characteristics considered in allocating these values include the nature and extent of the
credit quality and expectations of lease renewals, among other factors. These allocations are
subject to change within one year of the date of purchase based on information related to one or
more events identified at the date of purchase that confirm the value of an asset or liability of
an acquired property.
Impairment of Long-Lived Assets
In accordance with the requirements of the Property, Plant, and Equipment Topic, long-lived
assets are periodically evaluated for potential impairment whenever events or changes in
circumstances indicate that their carrying amount may not be recoverable. In the event that
periodic assessments reflect that the carrying amount of the asset exceeds the sum of the
undiscounted cash flows (excluding interest) that are expected to result from the use and eventual
disposition of the asset, the Company would recognize an impairment loss to the extent the carrying
amount exceeded the fair value of the property. The Company estimates the fair value using
available market information or other industry valuation techniques such as present value
calculations. This valuation review resulted in the recognition of an impairment charge of
approximately $90.4 million against the carrying value of the properties and real estate
investments during the year ended December 31, 2008. No impairment losses were recognized for the
years ended December 31, 2007 and 2006.
The Company recognizes goodwill and other non-amortizing intangible assets in accordance with
the requirements of the IntangiblesGoodwill and Other Topic. Under this Topic, goodwill is
recorded at its carrying value and is tested for impairment at least annually or more frequently if
impairment indicators exist at a level of reporting referred to as a reporting unit. The Company
recognizes goodwill in accordance with the IntangiblesGoodwill and Other Topic and tests the
carrying value for impairment during the fourth quarter of each year. The goodwill impairment
analysis is a two-step process. The first step used to identify potential impairment involves
comparing each reporting units estimated fair value to its carrying value, including goodwill. To
estimate the fair value of its reporting units, the Company used a discounted cash flow model and
market comparable data. Significant judgment is required by management in developing the
assumptions for the discounted cash flow model. These assumptions include cash flow projections
utilizing revenue growth rates, profit margin percentages, discount rates, market/economic
conditions, etc. If the estimated fair value of a reporting unit exceeds its carrying value,
goodwill is considered to not be impaired. If the carrying value exceeds estimated fair value,
there is an indication of potential impairment and the second step is performed to measure the
amount of impairment. The second step of the process involves the calculation of an implied fair
value of goodwill for each reporting unit for which step one indicated a potential impairment. The
implied fair value of goodwill is determined by measuring the excess of the estimated fair value of
the reporting unit as calculated in step one, over the estimated fair values of the individual
assets, liabilities and identified intangibles. During the fourth quarter of 2008, the Company
identified the uncertainty surrounding the global economy and the volatility of the Companys
market capitalization as goodwill impairment indicators. The Companys goodwill impairment analysis
resulted in the recognition of an impairment charge of approximately $172.7 million during the year
ended December 31, 2008 and $0 million during the nine months ended September 30, 2009. The Company
also analyzed its trade name for impairment pursuant to the IntangiblesGoodwill and Other Topic
and determined that the trade name was not impaired as of December 31, 2008. Accordingly, no
impairment charge was recorded related to the trade name during the year ended December 31, 2008.
In addition to testing goodwill and its trade name for impairment, the Company tested the
intangible contract rights for impairment during the fourth quarter of 2008. The intangible
contract rights represent the legal right to future disposition fees of a portfolio of real estate
properties under contract. As a result of the current economic environment, a portion of these
disposition fees may not be recoverable. Based on the Companys analysis for the current and
projected property values, condition of the properties and status of mortgage loans payable, the
Company determined that there are certain properties for which receipt of disposition fees was
improbable. As a result, the Company recorded an impairment charge of approximately $8.6 million
related to the impaired intangible contract rights as of December 31, 2008 and $0.6 million during
the nine months ended September 30, 2009.
39
Insurance and Claim Reserves
The Company has maintained partially self-insured and deductible programs for, general
liability, workers compensation and certain employee health care costs. In addition, the Company
assumed liabilities at the date of the Merger representing reserves related to a self insured
errors and omissions program of the acquired company. Reserves for all 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. As of the date of the Merger, the Company entered
into a premium based insurance policy for all error and omission coverage on claims arising after
the date of the Merger. Claims arising prior to the date of the Merger continue to be applied
against the previously mentioned liability reserves assumed relative to the acquired company.
The Company is also subject to various proceedings, lawsuits and other claims related to
commission disputes and environmental, labor and other matters, and is required to assess the
likelihood of any adverse judgments or outcomes to these matters. A determination of the amount of
reserves, if any, for these contingencies is made after careful analysis of each individual issue.
New developments in each matter, or changes in approach such as a change in settlement strategy in
dealing with these matters, may warrant an increase or decrease in the amount of these reserves.
Recently Issued Accounting Pronouncements
The Company follows the requirements of the Fair Value Measurements and Disclosures Topic of
the FASB Accounting Standards Codification. The Topic defines fair value, establishes a framework
for measuring fair value in generally accepted accounting principles, and expands disclosures about
fair value instruments. In February 2008, the FASB amended the Topic to delay the effective date of
the Fair Value Measurements and Disclosures for non-financial assets and non-financial liabilities,
except for items that are recognized or disclosed at fair value in the financial statements on a
recurring basis (that is, at least annually). There was no effect on the Companys consolidated
financial statements as a result of the adoption of the Topic as of January 1, 2008 as it relates
to financial assets and financial liabilities. For items within its scope, the amended Fair Value
Measurements and Disclosures Topic deferred the effective date of the Fair Value Measurements and
Disclosures to fiscal years beginning after November 15, 2008, and interim periods within those
fiscal years. The Company adopted this Topic as it relates to non-financial assets and
non-financial liabilities in the first quarter of 2009 and the adoption did not have a material
effect on consolidated net income.
In February 2007, the FASB issued the requirements of the Financial Instruments Topic. The
Topic permits entities to choose to measure many financial instruments and certain other items at
fair value. The objective of the guidance is to improve financial reporting by providing entities
with the opportunity to mitigate volatility in reported earnings caused by measuring related assets
and liabilities differently without having to apply complex hedge accounting provisions. The
Company adopted the Topic on a prospective basis on January 1, 2008. The adoption of the Topic did
not have a material impact on the consolidated financial statements since the Company did not elect
to apply the fair value option for any of its eligible financial instruments or other items on the
January 1, 2008 effective date.
In December 2007, the FASB issued an amendment to the requirements of the Business
Combinations Topic. The amendment requires an acquiring entity to recognize all the assets acquired
and liabilities assumed in a transaction at the acquisition-date fair value with limited
exceptions. The Topic changed the accounting treatment and disclosure for certain specific items in
a business combination. The Topic applies prospectively to business combinations for which the
acquisition date is on or after the beginning of the first annual reporting period beginning on or
after December 15, 2008. The adoption of the requirements of the Topic will materially affect the
accounting for any future business combinations.
In December 2007, the FASB issued an amendment to the requirements of the Consolidation Topic.
The Consolidation Topic established new accounting and reporting standards for the non-controlling
interest in a subsidiary and for the deconsolidation of a subsidiary. The Topic requires that
noncontrolling interests be presented as a component of consolidated stockholders equity,
eliminates minority interest accounting such that the amount of net income attributable to the
noncontrolling interests will be presented as part of consolidated net income in the accompanying
consolidated statements of operations and not as a separate component of income and expense, and
requires that upon any changes in ownership that result in the loss of control of the subsidiary,
the noncontrolling interest be re-measured at fair value with the resultant gain or loss recorded
in net income. The Topic became effective for fiscal years beginning on or after December 15, 2008.
The Company adopted the requirements of the Topic on a retrospective basis on January 1, 2009. The
adoption of the requirements of the Topic had an impact on the presentation and disclosure of
noncontrolling (minority) interests in the consolidated financial statements. As a result of the
retrospective presentation and disclosure requirements of the Topic, the Company is required to
reflect the change in presentation and disclosure for all periods presented. Principal effect on
the consolidated balance sheet as of December 31, 2008 related to the adoption of the requirements
of the Topic was the change in presentation of minority interest from mezzanine to redeemable
noncontrolling interest, as reported herein. Additionally, the adoption of the requirements of the
Topic had the effect of reclassifying (income) loss attributable to noncontrolling interest in the
consolidated statements of operations from minority interest to separate line items. The Topic also
requires that net income (loss) be adjusted to include the net (income) loss attributable to the
noncontrolling interest, and a new line item for net income (loss) attributable to controlling
interest be presented in the consolidated statements of operations.
40
In March 2008, the FASB issued the requirements of the Derivatives and Hedging Topic. The
Topic is intended to improve financial reporting of derivative instruments and hedging activities
by requiring enhanced disclosures to enable investors to better understand their effects on an
entitys financial position, financial performance, and cash flows. The Topic achieves these
improvements by requiring disclosure of the fair values of derivative instruments and their gains
and losses in a tabular format. It also provides more information about an entitys liquidity by
requiring disclosure of derivative features that are credit risk-related. Finally, it requires
cross-referencing within footnotes to enable financial statement users to locate important
information about derivative instruments. The Topic is effective for financial statements issued
for fiscal years and interim periods beginning after November 15, 2008, with early application
encouraged. The Company has adopted the requirements of the Derivatives and Hedging Topic in the
first quarter of 2009 and the adoption did not have a material effect on its consolidated financial
statements.
In April 2008, the FASB issued an amendment to the requirements of the Intangibles Goodwill
and Other Topic. The requirements of the amended Topic is intended to improve the consistency
between the useful life of recognized intangible assets, and the period of expected cash flows used
to measure the fair value of the assets. The amendment changes the factors an entity should
consider in developing renewal or extension assumptions in determining the useful life of
recognized intangible assets. In addition the amended Topic requires disclosure of the entitys
accounting policy regarding costs incurred to renew or extend the term of recognized intangible
assets, the weighted average period to the next renewal or extension, and the total amount of
capitalized costs incurred to renew or extend the term of recognized intangible assets. The
requirements of the amended Topic are effective for financial statements issued for fiscal years
and interim periods beginning after December 15, 2008. The Company adopted the requirements of the
amended Topic on January 1, 2009. The adoption of the amended Topic did not have a material impact
on consolidated net income.
In June 2008, the FASB issued an amendment to the requirements of the Earnings Per Share
Topic
,
which addresses whether instruments granted in share-based payment transactions are
participating securities prior to vesting and, therefore, need to be included in the computation of
earnings per share under the two-class method, which apply to the Company because it grants
instruments to employees in share-based payment transactions that meet the definition of
participating securities, is effective retrospectively for financial statements issued for fiscal
years and interim periods beginning after December 15, 2008. The Company has adopted the
requirements of the amended Topic in the first quarter of 2009 and the adoption did not have a
material effect on its consolidated financial statements.
In December 2008, the FASB issued an amendment to the requirements of the Transfers and
Servicing Topic and an amendment to the requirements of the Consolidation Topic. The purpose of the
amendment is to improve disclosures by public entities and enterprises. The amended Topic requires
public entities to provide additional disclosures about transferors continuing involvements with
transferred financial assets. The amended Topic requires public enterprises to provide additional
disclosures about their involvement with variable interest entities. The requirements of the
amended Topic are effective for financial statements issued for fiscal years and interim periods
ending after December 15, 2008. For periods after the initial adoption date, comparative
disclosures are required. The Company adopted the requirements of the amended Topic on December 31,
2008 and the adoption did not have a material effect on net income.
RESULTS OF OPERATIONS
Results of Operations for the year ended December 31, 2008
Overview
The Company reported revenue of $628.8 million for the year ended December 31, 2008, compared
with revenue of $229.7 million for the same period of 2007. Approximately $442.0 million of the
increase was attributed to a full year of results from the Transaction Services and Management
Services businesses. The remaining decrease of $42.9 million was attributed to a net decrease of
$42.9 million in Investment Management revenue. The decrease in revenue as compared to the prior
year period can be attributed to lower acquisition fees as a result of less tenant-in-common equity
raised and lower disposition fees, only partially offset by an increase in acquisition fees related
to our public non-traded REITs as a result of a significant increase in equity raised.
Additionally, $6.8 million of property management fees related to captive management programs were
recorded in management services revenue as the property management related to those programs was
transferred subsequent to the Merger. The Company completed a total of 50 acquisitions and 9
dispositions on behalf of the investment programs it sponsors at values of approximately $1.2
billion and $225.8 million, respectively, during the year ended December 31, 2008. The net
acquisitions from the Investment Management business allowed the Company to grow its captive assets
under management by approximately 17.5% from $5.8 billion as of December 31, 2007 to $6.8 billion
as of December 31, 2008.
The net loss attributable to the Company for the year ended December 31, 2008 was $330.9
million, or $5.21 per diluted share, and included a non-cash charge of $181.3 million for goodwill
and intangible assets impairment, a non-cash charge of $90.4 million for real estate related
impairments (of which $32.9 million was recorded in the fourth quarter), a $28.0 million charge,
$18.9 million of which is non-cash, which includes an allowance for bad debt on related party
receivables and advances and an expected loss on the sale of two properties under management for
which the Company has a recourse obligation, a second quarter non-cash charge of $8.9 million for
depreciation and amortization related to the reclassification of five assets held for sale to
assets held for investment, a first quarter net write-off of its investment in GERA of $5.8 million
and $14.7 million of merger and integration related
41
costs. In addition, the year-to-date results included approximately $11.7 million of stock-based
compensation, $1.2 million for amortization of contract rights and other identified intangible
assets and $1.8 million of recognized loss on marketable equity securities.
As of September 30, 2008, the Company initiated a plan to sell the properties it classified as
real estate held for investment in its financial statements as of September 30, 2008. As of
December 31, 2008, the Company had a covenant within its Credit Facility which required the sale of
certain of these assets before March 31, 2009. The downturn in the global capital markets
significantly lessened the probability that the Company would be able to achieve relief from this
covenant through amendment or other financial resolutions by March 31 2009. Pursuant to the
requirements of the Property, Plant, and Equipment Topic
,
the Company assessed the value of the
assets. In addition, the Company reviewed the valuation of its other owned properties and real
estate investments. This valuation review resulted in the Company recognizing an impairment charge
of approximately $90.4 million against the carrying value of the properties and real estate
investments as of December 31, 2008.
As a result of the Merger in December 2007, the newly combined Companys operating segments
were evaluated for reportable segments. The legacy NNN reportable segments were realigned into a
single operating and reportable segment called Investment Management. This realignment had no
impact on the Companys consolidated balance sheet, results of operations or cash flows.
The Company reports its revenue by three operating business segments in accordance with the
provisions of Segment Reporting of the FASB Codification. Transaction Services, which comprises its
real estate brokerage operations; Investment Management which includes providing acquisition,
financing and disposition services with respect to its programs, asset management services related
to its programs, and dealer-manager services by its securities broker-dealer, which facilitates
capital raising transactions for its TIC, REIT and other investment programs; and Management
Services, which includes property management, corporate facilities management, project management,
client accounting, business services and engineering services for unrelated third parties and the
properties owned by the programs it sponsors. Additional information on these business segments can
be found in Note 19 to the consolidated financial statements included in this prospectus.
Year Ended December 31, 2008 Compared to Year Ended December 31, 2007
The following summarizes comparative results of operations for the periods indicated.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
|
|
|
December 31,
|
|
|
Change
|
|
|
|
2008
|
|
|
2007(1)
|
|
|
$
|
|
|
%
|
|
(In thousands)
|
|
|
|
|
|
Restated
|
|
|
|
|
|
|
|
|
Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transaction services
|
|
$
|
240,250
|
|
|
$
|
35,522
|
|
|
$
|
204,728
|
|
|
|
576.3
|
%
|
Investment management
|
|
|
101,581
|
|
|
|
149,651
|
|
|
|
(48,070
|
)
|
|
|
(32.1
|
)
|
Management services
|
|
|
253,664
|
|
|
|
16,365
|
|
|
|
237,299
|
|
|
|
1,450.0
|
|
Rental related
|
|
|
33,284
|
|
|
|
28,119
|
|
|
|
5,165
|
|
|
|
18.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
|
628,779
|
|
|
|
229,657
|
|
|
|
399,122
|
|
|
|
173.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation costs
|
|
|
503,004
|
|
|
|
104,109
|
|
|
|
398,895
|
|
|
|
383.2
|
|
General and administrative
|
|
|
119,660
|
|
|
|
44,251
|
|
|
|
75,409
|
|
|
|
170.4
|
|
Depreciation and amortization
|
|
|
16,028
|
|
|
|
9,321
|
|
|
|
6,707
|
|
|
|
72.0
|
|
Rental related
|
|
|
21,377
|
|
|
|
20,839
|
|
|
|
538
|
|
|
|
2.6
|
|
Interest
|
|
|
14,207
|
|
|
|
10,818
|
|
|
|
3,389
|
|
|
|
31.3
|
|
Merger related costs
|
|
|
14,732
|
|
|
|
6,385
|
|
|
|
8,347
|
|
|
|
130.7
|
|
Real estate related impairments
|
|
|
59,114
|
|
|
|
|
|
|
|
59,114
|
|
|
|
|
|
Goodwill and intangible asset impairment
|
|
|
181,285
|
|
|
|
|
|
|
|
181,285
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expense
|
|
|
929,407
|
|
|
|
195,723
|
|
|
|
733,684
|
|
|
|
374.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating (Loss) Income
|
|
|
(300,628
|
)
|
|
|
33,934
|
|
|
|
(334,562
|
)
|
|
|
(985.9
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other (Expense) Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity in (losses) earnings of unconsolidated entities
|
|
|
(13,311
|
)
|
|
|
2,029
|
|
|
|
(15,340
|
)
|
|
|
(756.0
|
)
|
Interest & dividend income
|
|
|
902
|
|
|
|
2,996
|
|
|
|
(2,094
|
)
|
|
|
(69.9
|
)
|
Other
|
|
|
(6,458
|
)
|
|
|
(465
|
)
|
|
|
(5,993
|
)
|
|
|
(1,288.8
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other (expense) income
|
|
|
(18,867
|
)
|
|
|
4,560
|
|
|
|
(23,427
|
)
|
|
|
(514.1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations before income tax
(provision) benefit
|
|
|
(319,495
|
)
|
|
|
38,494
|
|
|
|
(357,989
|
)
|
|
|
(930.0
|
)
|
Income tax (provision) benefit
|
|
|
827
|
|
|
|
(14,753
|
)
|
|
|
15,580
|
|
|
|
105.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
42
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
|
|
|
December 31,
|
|
|
Change
|
|
|
|
2008
|
|
|
2007(1)
|
|
|
$
|
|
|
%
|
|
(In thousands)
|
|
|
|
|
|
Restated
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
|
(318,668
|
)
|
|
|
23,741
|
|
|
|
(342,409
|
)
|
|
|
(1,442.3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discontinued Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) from discontinued operations net of taxes
|
|
|
(24,278
|
)
|
|
|
(960
|
)
|
|
|
(23,318
|
)
|
|
|
2,429.0
|
|
Gain on disposal of discontinued operations net of taxes
|
|
|
357
|
|
|
|
252
|
|
|
|
105
|
|
|
|
41.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loss from discontinued operations
|
|
|
(23,921
|
)
|
|
|
(708
|
)
|
|
|
(23,213
|
)
|
|
|
3,278.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
$
|
(342,589
|
)
|
|
$
|
23,033
|
|
|
$
|
(365,622
|
)
|
|
|
(1,587.4
|
)
|
Net (loss) income attributable to noncontrolling interest
|
|
|
(11,719
|
)
|
|
|
1,961
|
|
|
|
(13,680
|
)
|
|
|
(697.6
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income attributable to Grubb & Ellis Company
|
|
$
|
(330,870
|
)
|
|
$
|
21,072
|
|
|
$
|
(351,942
|
)
|
|
|
(1,670.2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Based on GAAP, the operating results for twelve months ended
December 31, 2007 includes the results of NNN for the full
periods presented and the results of the legacy Grubb & Ellis
business for the period from December 8, 2007 through December
31, 2007.
|
Revenue
Transaction Services Revenue
The Company earns revenue from the delivery of transaction and management services to the
commercial real estate industry. Transaction fees include commissions from leasing, acquisition and
disposition, and agency leasing assignments as well as fees from appraisal and consulting services.
Management fees, which include reimbursed salaries, wages and benefits, comprise the remainder of
the Companys Transaction Services revenue, and include fees related to both property and
facilities management outsourcing as well as project management and business services.
The Transaction Services segment was acquired from the legacy Grubb & Ellis on December 7,
2007 which includes brokerage commission, valuation and consulting revenue. As of December 31,
2008, legacy Grubb & Ellis had 814 brokers, down from 927 as of December 31, 2007.
Investment Management Revenue
Investment Management revenue of $101.6 million for the year ended December 31, 2008, which
includes transaction, captive management and dealer-manager businesses, was comprised primarily of
transaction fees of $43.4 million, asset and property management fees of $38.0 million and
dealer-manager fees of $15.1 million.
Transaction related fees decreased $39.8 million, or 47.8%, to $43.4 million for the year
ended December 31, 2008, compared to approximately $83.2 million for the same period in 2007. The
year-over-year decrease in transaction fees was primarily due to decreases of $14.6 million in real
estate acquisition fees, $13.5 million in real estate disposition fees, $5.0 million in OMEA fees,
and $6.6 million in other transaction related fees.
Acquisition fees decreased approximately $14.6 million, or 31.3%, to $32.1 million for the
year ended December 31, 2008, compared to approximately $46.7 million for the same period in 2007.
The year-over-year decrease in acquisition fees was primarily attributed to a decrease of
approximately $19.1 million in fees earned from the Companys TIC Programs and a decrease of
approximately $2.8 million in fees earned from the Companys other real estate funds and joint
ventures, partially offset by an increase of $3.1 million from the non-traded REIT programs and
$4.2 million from Private Client Management. During the year ended December 31, 2008, the Company
acquired 50 properties on behalf of its sponsored programs for an approximate aggregate total of
$1.2 billion, compared to 77 properties for an approximate aggregate total of $2.0 billion during
the same period in 2007.
Disposition fees decreased approximately $13.5 million, or 74.5%, to approximately $4.6
million for the year ended December 31, 2008, compared to approximately $18.2 million for the same
period in 2007. The decrease reflects lower sales volume and lower sales values due to current
market conditions. Fees on dispositions as a percentage of aggregate sales price was 2.6% for the
year ended December 31, 2008, compared to 2.4% for the same period in 2007, primarily due to a
change in the mix of properties sold. Offsetting the disposition fees during the year ended
December 31, 2008 and 2007 was $1.2 million and $3.2 million, respectively, of amortization of
identified intangible contract rights associated with the acquisition of Realty as they represent
the right to future disposition fees of a portfolio of real properties under contract.
OMEA fees decreased approximately $5.0 million, or 54.3%, to $4.2 million for the year ended
December 31, 2008, compared to approximately $9.1 million for the same period in 2007. OMEA fees as
a percentage of equity raised for the year ended December 31, 2008 was 2.4%, compared to 2.0% for
the same period in 2007. The decrease in OMEA fees earned was primarily due to a decline in TIC
equity raised, declining to $176.9 million in TIC equity raised in 2008, compared to $452.2 million
in TIC equity raised in 2007.
43
The Company completed a total of 50 acquisitions and 9 dispositions on behalf of the
investment programs it sponsors at values in excess of $1.2 billion and $225.8 million,
respectively, during 2008. The net acquisitions from the Investment Management business allowed the
Company to grow its captive assets under management by more than 17.0% during 2008. As of December
31, 2008, the value of the Companys assets under management was in excess of $6.8 billion.
Captive management fees were down approximately 7.5% year-over-year and include the movement
of approximately $6.8 million of revenue to the Companys Management Services segment. Exclusive of
this transfer of revenue, captive management fees increased approximately 9.1% year-over-year.
Management Services Revenue
Management Services revenue includes asset and property management fees as well as reimbursed
salaries, wages and benefits from the Companys third party property management and facilities
outsourcing services, along with business services fees. Management Services revenue was $253.7
million for the year ended December 31, 2008 and $16.4 million from December 8, 2007 through
December 31, 2007. Following the closing of the merger, Grubb & Ellis Management Services assumed
management of nearly 27.1 million square feet of NNNs 46.9 million-square-foot captive investment
management portfolio. As of December 31, 2008, the Company managed 231.0 million square feet of
property.
Rental Revenue
Rental revenue includes pass-through revenue for the master lease accommodations related to
the Companys TIC Programs.
Operating Expense Overview
Operating expenses increased $733.7 million, or 374.9%, to $929.4 million for the year ended
December 31, 2008, compared to $195.7 million for the same period in 2007. The increase includes
approximately $455.6 million due to the legacy Grubb & Ellis business, $59.1 million in real estate
related impairments, $181.3 million in goodwill and intangible asset impairments, a $28.0 million
charge which includes an allowance for bad debt on related party receivables and advances and an
expected loss on the sale of two properties under management for which the Company has a recourse
obligation, $8.3 million due to additional merger related costs and $4.2 million in additional
non-cash stock based compensation.
Compensation costs
Compensation costs increased $398.9 million, or 383.2%, to $503.0 million for the year ended
December 31, 2008, compared to $104.1 million for the same period in 2007 due to approximately
$406.3 million of compensation costs attributed to legacy Grubb & Ellis operations. Compensation
costs related to the investment management business decreased approximately 9.4% to $56.6 million,
for the year ended December 31, 2008, compared to $62.5 million for the same period in 2007.
Included in the compensation cost was non-cash stock compensation expense which increased by $4.2
million to $11.7 million for the year ended December 31, 2008 compared to $7.5 million for the same
period in 2007.
General and Administrative
General and administrative expense increased approximately $75.4 million, or 170.4%, to $119.7
million for the year ended December 31, 2008, compared to $44.3 million for the same period in 2007
due to approximately $48.4 million of general and administration expenses attributed to legacy
Grubb & Ellis operations and an increase of $27.0 million related to the investment management
business, primarily due to an increase in allowances for bad debt on related party receivables and
advances.
General and administrative expense was 19.0% of total revenue for the year ended December 31,
2008, compared with 19.3% for the same period in 2007.
Depreciation and Amortization
Depreciation and amortization increased approximately $6.7 million, or 72.0%, to $16.0 million
for the year ended December 31, 2008, compared to $9.3 million for the same period in 2007. The
increase includes approximately $6.3 million due to the legacy Grubb & Ellis business. Included in
depreciation and amortization expense was approximately $3.5 million for amortization of other
identified intangible assets.
Rental Expense
Rental expense includes pass-through expenses for master lease accommodations related to the
Companys TIC Programs.
44
Interest Expense
Interest expense increased approximately $3.4 million, or 31.3%, to $14.2 million for the year
ended December 31, 2008, compared to $10.8 million for the same period in 2007. Interest expense is
primarily comprised of interest expense related to the Companys Credit Facility.
Real Estate Related Impairments
The Company recognized an impairment charge of approximately $59.1 million during the year
ended December 31, 2008 related to two of its properties held for investment and certain
unconsolidated real estate investments. The impairment charges were recognized against the carrying
value of the investments during the year ended December 31, 2008. In addition, the Company
recognized approximately $31.2 million in real estate related impairments related to four
properties held for sale as of December 31, 2008, for which the net income (loss) of the properties
are classified as discontinued operations. See
Discontinued Operations
discussion below.
Goodwill and Intangible Assets Impairment
The Company recognized a goodwill and intangible assets impairment charge of approximately
$181.3 million during the year ended December 31, 2008. The total impairment charge of $181.3
million is comprised of $172.7 million related to goodwill impairment and $8.6 million related to
the impairment of intangible contract rights. The Company recognizes goodwill in accordance with
the requirements of the IntangiblesGoodwill and Other Topic and tests the carrying value for
impairment during the fourth quarter of each year. The goodwill impairment analysis is a two-step
process. The first step used to identify potential impairment involves comparing each reporting
units estimated fair value to its carrying value, including goodwill. To estimate the fair value
of its reporting units, the Company used a discounted cash flow model and market comparable data.
Significant judgment is required by management in developing the assumptions for the discounted
cash flow model. These assumptions include cash flow projections utilizing revenue growth rates,
profit margin percentages, discount rates, market/economic conditions, etc. If the estimated fair
value of a reporting unit exceeds its carrying value, goodwill is considered to not be impaired. If
the carrying value exceeds estimated fair value, there is an indication of potential impairment and
the second step is performed to measure the amount of impairment. The second step of the process
involves the calculation of an implied fair value of goodwill for each reporting unit for which
step one indicated a potential impairment. The implied fair value of goodwill is determined by
measuring the excess of the estimated fair value of the reporting unit as calculated in step one,
over the estimated fair values of the individual assets, liabilities and identified intangibles.
During the fourth quarter of 2008, the Company identified the uncertainty surrounding the global
economy and the volatility of the Companys market capitalization as goodwill impairment
indicators. The Companys goodwill impairment analysis resulted in the recognition of an impairment
charge of approximately $172.7 million during the year ended December 31, 2008. The Company also
analyzed its trade name for impairment pursuant to the IntangiblesGoodwill and Other Topic and
determined that the trade name was not impaired as of December 31, 2008. Accordingly, no impairment
charge was recorded related to the trade name during the year ended December 31, 2008. In addition
to testing goodwill and its trade name for impairment, the Company tested the intangible contract
rights for impairment during the fourth quarter of 2008. The intangible contract rights represent
the legal right to future disposition fees of a portfolio of real estate properties under contract.
As a result of the current economic environment, a portion of these disposition fees may not be
recoverable. Based on our analysis for the current and projected property values, condition of the
properties and status of mortgage loans payable associated with these contract rights, the Company
determined that there are certain properties for which receipt of disposition fees was improbable.
As a result, the Company recorded an impairment charge of approximately $8.6 million related to the
impaired intangible contract rights as of December 31, 2008.
Equity in Earnings (Losses) of Unconsolidated Real Estate
In the first quarter of 2008, the Company wrote off its investment in GERA, which resulted in
a net impact of approximately $5.8 million, including $4.5 million related to stock and warrant
purchases and $1.3 million related to operating advances and third party costs. Equity in losses
also includes $10.3 million in equity in earnings related to seven LLCs that are consolidated
pursuant to the requirements of the Consolidation Topic. The consolidated LLCs record equity in
earnings based on the LLCs pro rata ownership interest in the underlying unconsolidated properties.
Discontinued Operations
In accordance with the requirements of the Property, Plant and Equipment Topic for the year
ended December 31, 2008, discontinued operations included the net income (loss) of four properties
and two limited liability company (
LLC
) entities classified as held for sale as of December 31,
2008. The net loss of $23.9 million during the year ended December 31, 2008 includes approximately
$31.2 million of real estate related impairments. During October 2008, the Company initiated a plan
to sell the properties it classified as held for investment in its financial statements as of
September 30, 2008. As of December 31, 2008, the Company had a covenant within its Credit Facility
which required the sale of certain of these assets before March 31, 2009. The downturn in the
global capital markets significantly lessened the probability that the Company would be able to
achieve relief from this covenant through amendment or other financial resolutions by March 31,
2009. Pursuant to this topic, the Company assessed the
value of the assets. The impairment charges were recognized against the carrying value of the
properties during the year ended December 31, 2008. (See Note 20 to the consolidated financial
statements included in this prospectus for additional information.)
45
Income Tax
The Company recognized a tax provision from continuing operations of approximately $0.8
million for the year ended December 31, 2008, compared to a tax benefit of $14.8 million for the
same period in 2007. In 2008 and 2007, the reported effective income tax rates were (.26%) and
38.33%, respectively. The 2008 effective tax rate was negatively impacted by impairments of
Goodwill and the recording of a valuation allowance against deferred tax assets to the extent the
realization of the associated tax benefit is not more-likely-than-not. Based on managements
evaluation of the Companys tax position, it is believed the amounts related to the valuation
allowances are appropriately accrued. The Companys deferred tax assets are primarily attributable
to impairments of various real estate holdings. (See Note 25 to the consolidated financial
statements included in this prospectus for additional information.)
Net (Loss) Income
As a result of the above items, the Company recognized a net loss attributable to Grubb &
Ellis of approximately $330.9 million, or $5.21 per diluted share for the year ended December 31,
2008, compared to net income attributable to Grubb & Ellis Company of $21.1 million, or $0.53 per
diluted share, for the same period in 2007.
Year Ended December 31, 2007 Compared to Year Ended December 31, 2006
The following summarizes comparative results of operations for the periods indicated.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
|
|
|
December 31,
|
|
|
Change
|
|
|
|
2007(1)
|
|
|
2006(2)
|
|
|
$
|
|
|
%
|
|
(In thousands)
|
|
Restated
|
|
|
Restated
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transaction services
|
|
$
|
35,522
|
|
|
$
|
|
|
|
$
|
35,522
|
|
|
|
|
%
|
Investment management
|
|
|
149,651
|
|
|
|
99,599
|
|
|
|
50,052
|
|
|
|
50.3
|
|
Management services
|
|
|
16,365
|
|
|
|
|
|
|
|
16,365
|
|
|
|
|
|
Rental related
|
|
|
28,119
|
|
|
|
8,944
|
|
|
|
19,175
|
|
|
|
214.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
|
229,657
|
|
|
|
108,543
|
|
|
|
121,114
|
|
|
|
111.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation costs
|
|
|
104,109
|
|
|
|
49,449
|
|
|
|
54,660
|
|
|
|
110.5
|
|
General and administrative
|
|
|
44,251
|
|
|
|
30,188
|
|
|
|
14,063
|
|
|
|
46.6
|
|
Depreciation and amortization
|
|
|
9,321
|
|
|
|
1,808
|
|
|
|
7,513
|
|
|
|
415.5
|
|
Rental related
|
|
|
20,839
|
|
|
|
9,423
|
|
|
|
11,416
|
|
|
|
121.2
|
|
Interest
|
|
|
10,818
|
|
|
|
6,765
|
|
|
|
4,053
|
|
|
|
59.9
|
|
Merger related costs
|
|
|
6,385
|
|
|
|
|
|
|
|
6,385
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expense
|
|
|
195,723
|
|
|
|
97,633
|
|
|
|
98,090
|
|
|
|
100.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating (Loss) Income
|
|
|
33,934
|
|
|
|
10,910
|
|
|
|
23,024
|
|
|
|
211.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Income (Expense)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity in (losses) earnings of unconsolidated entities
|
|
|
2,029
|
|
|
|
1,948
|
|
|
|
81
|
|
|
|
4.2
|
|
Interest & dividend income
|
|
|
2,996
|
|
|
|
713
|
|
|
|
2,283
|
|
|
|
320.2
|
|
Other
|
|
|
(465
|
)
|
|
|
|
|
|
|
(465
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other (expense) income
|
|
|
4,560
|
|
|
|
2,661
|
|
|
|
1,899
|
|
|
|
71.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations before income tax
provision (benefit)
|
|
|
38,494
|
|
|
|
13,571
|
|
|
|
24,923
|
|
|
|
183.6
|
|
Income tax benefit (provision)
|
|
|
(14,753
|
)
|
|
|
7,441
|
|
|
|
(22,194
|
)
|
|
|
(298.3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
|
23,741
|
|
|
|
21,012
|
|
|
|
2,729
|
|
|
|
13.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discontinued Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) from discontinued operations net of taxes
|
|
|
(960
|
)
|
|
|
(1,031
|
)
|
|
|
71
|
|
|
|
6.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain on disposal of discontinued operations net of taxes
|
|
|
252
|
|
|
|
68
|
|
|
|
184
|
|
|
|
270.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loss from discontinued operations
|
|
|
(708
|
)
|
|
|
(963
|
)
|
|
|
255
|
|
|
|
26.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
|
23,033
|
|
|
|
20,049
|
|
|
|
2,984
|
|
|
|
14.9
|
|
Net (loss) income attributable to noncontrolling interest
|
|
|
1,961
|
|
|
|
78
|
|
|
|
1,883
|
|
|
|
2,414.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income attributable to Grubb & Ellis Company
|
|
$
|
21,072
|
|
|
$
|
19,971
|
|
|
$
|
1,101
|
|
|
|
5.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Based on GAAP, the operating results for twelve months ended December 31, 2007 includes the results of NNN for
the full periods presented and the results of the legacy Grubb & Ellis business for the period from December 8,
2007 through December 31, 2007.
|
|
(2)
|
|
Based on GAAP, the operating results for the twelve months ended December 31, 2006 represents legacy NNN business.
|
46
Revenue
Transaction Services Revenue
The Company earns revenue from the delivery of transaction and management services to the
commercial real estate industry. Transaction fees include commissions from leasing, acquisition and
disposition, and agency leasing assignments as well as fees from appraisal and consulting services.
Management fees, which include reimbursed salaries, wages and benefits, comprise the remainder of
the Companys Transaction Services revenue, and include fees related to both property and
facilities management outsourcing as well as project management and business services.
Transaction Services segment was acquired from the legacy Grubb & Ellis on December 7, 2007
which includes brokerage commission, valuation and consulting revenue. As of December 31, 2007, the
Company had 927 brokers, up from 917 at December 31, 2006.
Investment Management Revenue
Investment management revenue of $149.7 million for the year ended December 31, 2007, which
includes transaction, captive management and dealer-manager businesses, was comprised primarily of
transaction fees of $83.2 million, asset and property management fees of $41.0 million and
dealer-manager fees of $18.0 million.
Transaction related fees increased $27.0 million, or 48.0%, for the year ended December 31,
2007, primarily due to increases of $20.7 million in real estate acquisition fees, $2.5 million in
real estate disposition fees, $1.4 million in OMEA fees and $2.4 million in other transaction
related fees.
Acquisition fees increased $20.7 million, or 79.4%, to $46.7 million for the year ended
December 31, 2007, compared to $26.0 million for the same period in 2006. Net fees as a percentage
of aggregate acquisition price increased to 2.3% for the twelve months ended December 31, 2007,
compared to 1.9% for the same period in 2006, which resulted in $8.5 million in additional fees
earned during 2007. During the year ended December 31, 2007, the Company acquired 77 properties
(including six which were still owned as of December 31, 2007) on behalf of its sponsored programs
for an approximate aggregate total of $2.0 billion, compared to 45 properties for an approximate
aggregate total of $1.4 billion during the same period in 2006. This increase in acquisition volume
in 2007 resulted in an additional $11.9 million in net fees.
The $2.5 million increase in real estate disposition fees for the year ended December 31, 2007
was primarily due to an increase in fees realized from the sales of properties, with $18.2 million
in net fees realized from the disposition of 28 properties, with an average sales price of $31.3
million per property for the year ended December 31, 2007, compared to $15.7 million in fees
realized from the disposition of 22 properties for the same period in 2006 with an average sales
price of $37.9 million per property. Included in the fees realized from the sales of properties
were $5.7 million in fees earned as a result of the continuing liquidation of G REIT, Inc. (
G
REIT
) for the year ended December 31, 2007, compared to $5.3 million for the same period in 2006.
The disposition fees were reduced during the years ended December 31, 2007 and 2006 in the amount
of $3.2 million and $0.4 million, respectively, as a result of amortizing the identified intangible
contract rights associated with the acquisition of Realty as they represent the right to future
disposition fees of a portfolio of real properties under contract. Fees on dispositions as a
percentage of aggregate sales price was 2.4% for the year ended December 31, 2007, compared to 1.9%
for the same period in 2006 (excluding one property sold in 2006 for which the Company waived the
entire amount of the disposition fee), primarily due to a change in the mix of properties sold.
OMEA fees increased $1.4 million, or 18.2%, to $9.1 million for the twelve months ended
December 31, 2007, compared to $7.7 million for the same period in 2006. OMEA fees as a percentage
of equity raised for the year ended December 31, 2007 was 2.0%, compared to 1.5% for the same
period in 2006. The increase in OMEA fees earned was primarily due to $2.5 million in non-recurring
credits issued in 2006 partially offset by $0.9 million due to lower TIC equity raised in 2007 of
$451.0 million, compared to $510.0 million in TIC equity raised in 2006.
The diversified platform created as a result of the merger has already generated new revenue
opportunities. The Companys largest TIC investment during the fourth quarter of 2007 was generated
from the net proceeds of a Transaction Services client that was re-invested on a tax deferred basis
through GERIs TIC platform.
47
The Company completed a total of 77 acquisitions and 30 dispositions on behalf of the
investment programs it sponsors at values in excess of $2.0 billion and $880.0 million,
respectively, during 2007. The net acquisitions from the Investment Management business allowed the
Company to grow its captive assets under management by more than 27.0% during 2007. At December 31,
2007, the value of the Companys assets under management was in excess of $5.7 billion.
The $6.4 million, or 18.6%, increase in captive management revenue was primarily due to an
increase in property and asset management fees of $6.2 million, or 18.6%, to $41.0 million for the
year ended December 31, 2007, compared to $34.6 million for 2006. This increase was primarily the
result of the growth in recurring revenue, as total square footage of assets under management
increased to an average of approximately 29.4 million for the year ended December 31, 2007,
compared to approximately 26.2 million for the same period in 2006. Property and asset management
fees per average square foot were $1.39 for the year ended December 31, 2007, compared to $1.32 for
the same period in 2006. The increase in property and asset management fees per average square foot
was primarily due to a change in product mix. During 2007, assets managed under TIC Programs and
within Grubb & Ellis Healthcare REIT, Inc. (
Healthcare REIT
) and Grubb & Ellis Apartment REIT,
Inc. (
Apartment REIT
) increased to approximately 83.7% of average assets under management
compared to 75.7% in 2006, while assets managed under G REIT and T REIT, Inc. (
T REIT
) decreased
to approximately 5.7%, compared to 17.6% in 2006 as a result of the liquidation of those entities.
Property and asset management fees in TIC Programs earn up to 6% and in Healthcare REIT and
Apartment REIT earn up to approximately 4% plus 1% of each REITs average invested assets, while G
REIT and T REIT programs earn approximately 4%.
Management Services Revenue
Management Services revenue includes asset and property management fees as well as reimbursed
salaries, wages and benefits from the Companys third party property management and facilities
outsourcing services, along with business services fees. Revenue was $16.4 million from December 8,
2007 through December 31, 2007. Following the closing of the merger, Grubb & Ellis Management
Services assumed management of nearly 23 million square feet of NNNs 41.7 million-square-foot
captive investment management portfolio. At December 31, 2007, the Company managed 216 million
square feet of property.
Rental Revenue
Rental revenue includes pass-through revenue for the master lease accommodations related to
the Companys TIC Programs.
Operating Expense Overview
Operating expenses increased $98.1 million, or 100.5%, for the year ended December 31, 2007,
compared to the same period in 2006. Of the $98.1 million, $47.0 million was due to the Grubb &
Ellis legacy business from December 8, 2007 to December 31, 2007. The remaining $51.1 million of
the increase was attributed to legacy NNNs Investment Management business, including $20.8 million
in rental related expense, $10.2 million resulting from operations of the Companys broker-dealer
acquired in December 2006, $5.5 million in compensation related costs, $7.5 million in non-cash
stock based compensation, $6.4 million in merger related costs, offset by a decrease of $4.7
million in interest expense and a net decrease of approximately $0.5 million in other operating
costs.
Compensation costs
Compensation costs increased $54.7 million, or 110.5%, to $104.1 million for the year ended
December 31, 2007, compared to $49.4 million for the same period in 2006. Approximately $41.7
million of the increase was attributed to compensation costs from legacy Grubb & Ellis operations
from December 8 through December 31, 2007. The remaining $13.0 million of the increase was related
to the investment management business which increased to $62.5 million, or 26.3%, for the year
ended December 31, 2007, compared to $49.5 million for the same period in 2006. The increase of
$5.5 million, or 11.1%, in compensation related costs, which included $2.1 million in reimbursable
salaries, wages and benefits, was primarily due to an increase in full-time equivalent employees of
approximately 89%. Contributing to the increase in compensation costs was $7.5 million in non-cash
stock based compensation.
General and Administrative
General and administrative expense increased $14.1 million, or 46.6%, to $44.3 million for the
year ended December 31, 2007, compared to $30.2 million for the same period in 2006. Approximately
$4.7 million of the increase was attributed to general and administration expenses from the legacy
Grubb & Ellis operations from December 8, 2007 through December 31, 2007. The remaining $9.4
million of the increase was related to the investment management business which increased to $39.6
million for the year ended December 31, 2007, compared to $30.2 million for the same period in
2006. The increase was primarily due to a $10.2 million increase resulting from operations of the
Companys broker-dealer acquired in December 2006, partially offset by decrease of $1.2 million
related to non-recurring credits granted to certain investors in 2006.
48
Depreciation and Amortization
Depreciation and amortization increased $7.5 million, or 415.5%, to $9.3 million for the year
ended December 31, 2007, compared to $1.8 million for the same period in 2006. Approximately
$885,000 of the increase was attributed to depreciation and amortization expense from the legacy
Grubb & Ellis operations from December 8 through December 31, 2007, and an additional $6.7 million
related to properties held for investment.
Rental Expense
Rental expense includes pass-through expenses for master lease accommodations related to the
Companys TIC Programs.
Interest Expense
Interest expense increased $4.1 million, or 59.9%, to $10.8 million for the year ended
December 31, 2007, compared to $6.8 million for the same period in 2006. The increase was related
to approximately $0.6 million in interest expense from legacy Grubb & Ellis operations from
December 8 through December 31, 2007, $4.7 million related to investment management business and
two properties held for investment.
Discontinued Operations
In 2007, GERI acquired 13 properties to resell to its sponsored programs. In accordance with
the requirements of the Property, Plant and Equipment Topic, for the year ended December 31, 2007,
discontinued operations included the net income (loss) of one property and its associated limited
liability company (
LLC
) entity sold to a joint venture, two properties and the associated LLCs
resold to Healthcare REIT and ten properties and their associated LLCs classified as held for sale
as of December 31, 2007. In addition, for the year ended December 31, 2007, discontinued operations
included the net income (loss) of four properties and two LLCs owned by the Company and classified
as held for sale. (See Note 20 to the consolidated financial statements included in this prospectus
for additional information).
Income Tax
The Company incurred a tax provision of $14.8 million for the year ended December 31, 2007,
compared to a tax benefit of $7.4 million for the same period in 2006. Effective with the close of
NNNs 144A private equity offering on November 16, 2006, GERI became a wholly-owned subsidiary,
which caused a change in GERIs tax status from a non-taxable partnership to a taxable C
corporation. The change in tax status required NNN to recognize a one time income tax benefit of
$6.0 million for the future tax effects attributable to temporary differences between GAAP basis
and tax accounting principles as of the effective date of November 15, 2006. The $25.6 million
decrease in tax expense was primarily a result of the nonrecurring tax benefit noted above coupled
with the inclusion of 12 months of book income in 2007 versus six weeks of book income in 2006 due
to the change in tax status. In addition, the Company is subject to the highest federal income tax
rate of 35% in 2007, compared to a 34% statutory tax rate in 2006. (See Note 25 to the consolidated
financial statements included in this prospectus for additional information).
Net (loss) Income Attributable to Grubb & Ellis Company
As a result of the above items, net income attributable to Grubb & Ellis Company increased
$1.1 million to $21.1 million, or $0.53 per fully diluted share, for the year ended December 31,
2007, compared to net income attributable to Grubb & Ellis Company of $20.0 million, or $1.01 per
fully diluted share, for the same period in 2006.
Results of Operations for the nine months ended September 30, 2009
Overview
The Company reported revenue of approximately $385.1 million for the nine months ended
September 30, 2009, compared with revenue of $468.8 million for the same period in 2008. The
decrease was primarily the result of decreases in Transaction Services and Investment Management
revenue of $54.4 million and $40.6 million, respectively, partially offset by increases in
Management Services revenue of $13.8 million.
The net loss attributable to Grubb & Ellis Company for the first nine months of 2009 was $95.7
million, or $1.51 per diluted share, and includes a non-cash charge of $16.6 million for real
estate related impairments and a $21.6 million charge, which includes an allowance for bad debt and
write-offs of related party receivables and advances. In addition, the nine month results included
approximately $8.7 million of stock-based compensation and $5.7 million for amortization of other
identified intangible assets.
49
Nine Months Ended September 30, 2009 Compared to Nine Months Ended September 30, 2008
The following summarizes comparative results of operations for the periods indicated.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
|
|
|
|
September 30,
|
|
|
Change
|
|
(In thousands)
|
|
2009
|
|
|
2008
|
|
|
$
|
|
|
%
|
|
Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Management services
|
|
$
|
199,636
|
|
|
$
|
185,855
|
|
|
$
|
13,781
|
|
|
|
7.4
|
%
|
Transaction services
|
|
|
118,793
|
|
|
|
173,191
|
|
|
|
(54,398
|
)
|
|
|
(31.4
|
)
|
Investment management
|
|
|
43,912
|
|
|
|
84,480
|
|
|
|
(40,568
|
)
|
|
|
(48.0
|
)
|
Rental related
|
|
|
22,754
|
|
|
|
25,302
|
|
|
|
(2,548
|
)
|
|
|
(10.1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
|
385,095
|
|
|
|
468,828
|
|
|
|
(83,733
|
)
|
|
|
(17.9
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation costs
|
|
|
342,072
|
|
|
|
365,488
|
|
|
|
(23,416
|
)
|
|
|
(6.4
|
)
|
General and administrative
|
|
|
83,801
|
|
|
|
84,387
|
|
|
|
(586
|
)
|
|
|
(0.7
|
)
|
Depreciation and amortization
|
|
|
8,368
|
|
|
|
13,692
|
|
|
|
(5,324
|
)
|
|
|
(38.9
|
)
|
Rental related
|
|
|
16,159
|
|
|
|
15,384
|
|
|
|
775
|
|
|
|
5.0
|
|
Interest
|
|
|
12,490
|
|
|
|
9,928
|
|
|
|
2,562
|
|
|
|
25.8
|
|
Merger related costs
|
|
|
|
|
|
|
10,217
|
|
|
|
(10,217
|
)
|
|
|
(100.0
|
)
|
Real estate related impairments
|
|
|
16,615
|
|
|
|
34,778
|
|
|
|
(18,163
|
)
|
|
|
(52.2
|
)
|
Goodwill and intangible assets impairment
|
|
|
583
|
|
|
|
|
|
|
|
583
|
|
|
|
100.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expense
|
|
|
480,088
|
|
|
|
533,874
|
|
|
|
(53,786
|
)
|
|
|
(10.1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Loss
|
|
|
(94,993
|
)
|
|
|
(65,046
|
)
|
|
|
(29,947
|
)
|
|
|
(46.0
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other (Expense) Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity in losses of unconsolidated entities
|
|
|
(1,635
|
)
|
|
|
(10,602
|
)
|
|
|
8,967
|
|
|
|
84.6
|
|
Interest income
|
|
|
472
|
|
|
|
757
|
|
|
|
(285
|
)
|
|
|
(37.6
|
)
|
Other income (loss)
|
|
|
394
|
|
|
|
(3,801
|
)
|
|
|
4,195
|
|
|
|
110.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income (expense)
|
|
|
(769
|
)
|
|
|
(13,646
|
)
|
|
|
12,877
|
|
|
|
94.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations before income tax
(provision) benefit
|
|
|
(95,762
|
)
|
|
|
(78,692
|
)
|
|
|
(17,070
|
)
|
|
|
(21.7
|
)
|
Income tax (provision) benefit
|
|
|
(587
|
)
|
|
|
23,124
|
|
|
|
(23,711
|
)
|
|
|
(102.5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations
|
|
|
(96,349
|
)
|
|
|
(55,568
|
)
|
|
|
(40,781
|
)
|
|
|
(73.4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discontinued Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain (loss) from discontinued operations, net of taxes
|
|
|
(379
|
)
|
|
|
(18,871
|
)
|
|
|
18,492
|
|
|
|
98.0
|
|
(Loss) gain on disposal of discontinued operations, net of taxes
|
|
|
(626
|
)
|
|
|
181
|
|
|
|
(807
|
)
|
|
|
(445.9
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loss from discontinued operations
|
|
|
(1,005
|
)
|
|
|
(18,690
|
)
|
|
|
17,685
|
|
|
|
94.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
(97,354
|
)
|
|
|
(74,258
|
)
|
|
|
(23,096
|
)
|
|
|
(31.1
|
)
|
Net (loss) income from noncontrolling interests
|
|
|
(1,686
|
)
|
|
|
(6,298
|
)
|
|
|
4,612
|
|
|
|
73.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to Grubb & Ellis Company
|
|
$
|
(95,668
|
)
|
|
$
|
(67,960
|
)
|
|
$
|
(27,708
|
)
|
|
|
(40.8
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
Transaction and Management Services Revenue
Management Services revenue increased $13.8 million or 7.4% to $199.6 million for the nine
months ended September 30, 2009 which reflects an increase in square feet under management of 15.3
million or 7.4% to 221.2 million total square feet under management as of September 30, 2009.
Management Services revenue, which is primarily property management fees and reimbursable salaries,
also includes property management fee revenue of approximately $5.2 million and $5.6 million for
the nine months ended September 30, 2009 and 2008, respectively, from the management of a
significant portion of GERIs captive property portfolio by Grubb & Ellis Managements Services.
Transaction Services revenue decreased $54.4 million or 31.4% to $118.8 million for the nine
months ended September 30, 2009. Transaction Services revenue primarily includes brokerage
commission, valuation and consulting revenue. The Companys Transaction Services business was
negatively impacted by the current economic environment, which has reduced commercial real estate
transaction velocity, particularly investment sales.
50
Investment Management Revenue
Investment Management revenue decreased $40.6 million or 48.0% to $43.9 million for the nine
months ended September 30, 2009. Investment Management revenue reflects revenue generated through
the fee structure of the various investment products which included acquisition, loan and
disposition fees of approximately $7.5 million and captive management fees of $24.9 million. These
fees include acquisition, disposition, financing, and property and asset management. Key drivers of
this business are the dollar value of equity raised, the amount of transactions that are generated
in the investment product platforms and the amount of assets under management.
In total, $533.0 million in equity was raised for the Companys investment programs for the
nine months ended September 30, 2009, compared with $760.5 million in the same period in 2008. The
decrease was driven by a decrease in TIC equity raised and private client wealth management,
partially offset by an increase in equity raised by the Companys public non-traded REITs. During
the nine months ended September 30, 2009, the Companys public non-traded REIT programs raised
$518.0 million, an increase of 30.8% from the $396.1 million equity raised in the same period in
2008. The Companys TIC 1031 exchange programs raised $13.0 million in equity during the nine
months ended September 30, 2009, compared with $152.9 million in the same period in 2008. The
decrease in TIC equity raised for the nine months ended September 30, 2009 reflects the continued
decline in current market conditions.
Acquisition and loan fees decreased approximately $23.1 million, or 75.5%, to approximately
$7.5 million for the nine months ended September 30, 2009, compared to approximately $30.5 million
for the same period in 2008. The decrease in acquisition fees was primarily attributed to a
decrease of $12.2 million in fees earned from the Companys non-traded REIT programs, a decrease in
fees from the Private Client Management platform, formerly known as Wealth Management, of $4.4
million, and a decrease of $6.5 million in fees from the TIC programs. During the nine months ended
September 30, 2009, the Company acquired 6 properties on behalf of its sponsored programs for an
approximate aggregate total of $240.3 million, compared to 46 properties for an approximate
aggregate total of $1.0 billion during the same period in 2008.
Disposition fees decreased approximately $4.6 million, or 100%, to zero for the nine months
ended September 30, 2009, compared to approximately $4.6 million for the same period in 2008.
Offsetting the disposition fees during the nine months ended September 30, 2008 was approximately
$1.2 million of amortization of identified intangible contract rights associated with the
acquisition of Realty as they represent the right to future disposition fees of a portfolio of real
properties under contract. No amortization of identified intangible contract rights was recorded
for the nine months ended September 30, 2009 because no disposition fees were recorded.
Captive management decreased approximately $3.5 million or 12.4% to $24.9 million for the nine
months ended September 30, 2009 which primarily reflects an increase in the deferral of fees.
Rental Revenue
Rental revenue includes pass-through revenue for the master lease accommodations related to
the Companys TIC programs. Rental revenue also includes revenue from two properties held for
investment.
Operating Expense Overview
The Companys operating expense of $480.1 million for the nine months ended September 30,
2009, representing a decrease of $53.8 million compared to the same period in 2008. The Company
recognized real estate impairments of $16.6 million during the nine months ended September 30,
2009, a decrease of $18.2 million compared to real estate impairments of $34.8 million in the same
period of 2008. In addition, compensation costs decreased $23.4 million due to lower commissions
paid and synergies created as a result of the Merger and merger related costs decreased $10.2
million. Depreciation and amortization expense decreased $5.3 million when compared to the prior
period primarily due to depreciation charges related to two properties held for investment in 2008
and 2009. Partially offsetting the overall decrease was an increase in interest expense of $2.6
million for the nine months ended September 30, 2009.
Compensation Costs
Compensation costs decreased approximately $23.4 million, or 6.4%, to $342.1 million for the
nine months ended September 30, 2009, compared to approximately $365.5 million for the same period
in 2008 due to a decrease in commissions paid of approximately $32.6 million related to the
Transactions Services portfolio as a result of decrease in activity and a decrease of approximately
$5.1 million primarily related to the Investment Management business as a result of a reduction in
headcount and decreases in salaries partially offset by an increase of $14.3 million as a result of
an increase in reimbursable salaries, wages and benefits due to the growth in the Management
Services portfolio.
51
General and Administrative
General and administrative expense decreased approximately $0.6 million, or 0.7%, to $83.8
million for the nine months ended September 30, 2009, compared to approximately $84.4 million for
the same period in 2008. The decrease reflects an increase of approximately $5.1 million in bad
debt expense which is offset by decreases in items related to managements cost saving efforts.
General and administrative expense was 21.8% of total revenue for the nine months ended
September 30, 2009, compared with 18.0% for the same period in 2008.
Depreciation and Amortization
Depreciation and amortization expense decreased approximately $5.3 million, or 38.9%, to $8.4
million for the nine months ended September 30, 2009, compared to approximately $13.7 million for
the same period in 2008. The decrease is primarily due to two properties the Company held for
investment as of September 30, 2009. One of these properties was held for sale through June 30,
2009 and the other was held for sale through September 30, 2009. In accordance with the provisions
of Property, Plant, and Equipment Topic
,
management determined that the carrying value of each
property, before each property was classified as held for investment (adjusted for any depreciation
and amortization expense and impairment losses that would have been recognized had the asset been
continuously classified as held for investment) was greater than the carrying value net of selling
costs, of the property at the date of the subsequent decision not to sell. Therefore, the Company
made no additional adjustments to the carrying value of the asset as of September 30, 2009 and no
depreciation expense was recorded during the period each property was held for sale. Included in
depreciation and amortization expense was $2.4 million for amortization of other identified
intangible assets.
Rental Expense
Rental expense includes pass-through expenses for master lease accommodations related to the
Companys TIC programs. Rental expense also includes expense from two properties held for
investment.
Interest Expense
Interest expense increased approximately $2.6 million, or 25.8%, to $12.5 million for the nine
months ended September 30, 2009, compared to $9.9 million for the same period in 2008. The increase
in interest expense includes $1.5 million related to the reimbursement of mezzanine interest costs
on certain TIC programs. In addition, interest costs related to the Credit Facility reflect an
increase of $0.5 million due to additional borrowings, an increase in the interest rate to LIBOR
plus 800 basis points from LIBOR plus 300 basis points as a result of the third amendment to the
Credit Facility and an increase of $0.4 million related to the write off of loan fees related to
the Credit Facility.
Real Estate Related Impairments
The Company recognized impairment charges of approximately $16.6 million during the nine
months ended September 30, 2009, which includes $9.8 million related to certain unconsolidated real
estate investments and $6.8 million related to property held for investment as of September 30,
2009. Impairment charges of $10.2 million were recognized against the carrying value of the
investments and charges of $6.4 million were recorded as an other contingent liability related to
commitments associated with certain of the Companys TIC programs during the nine months ended
September 30, 2009. In addition, the Company recognized approximately $1.8 million related to two
properties sold during the nine months ended September 30, 2009, for which the net income (loss) of
the properties are classified as discontinued operations. See
Discontinued Operations
discussion
below. The Company recognized an impairment charge of approximately $34.8 million during the nine
months ended September 30, 2008. The impairment charge was recognized against the carrying value of
the investments as of September 30, 2008.
Discontinued Operations
In accordance with the requirements of the Property, Plant, and Equipment Topic, for the nine
months ended September 30, 2009 and 2008, discontinued operations included the results of
operations of four properties and one limited liability company (
LLC
) entity classified as held
for sale during the period. The net loss of $1.0 million during the nine months ended September 30,
2009 includes approximately $0.6 million in loss on sale, net of taxes, related to the sale of the
Danbury Property on June 3, 2009 and $1.8 million of real estate related impairments.
Income Tax
The Company recognized a tax expense of approximately $0.6 million for the nine months ended
September 30, 2009, compared to a tax benefit of $23.1 million for the same period in 2008. The net
$23.7 million increase in tax expense was primarily a result of the $36.4 million valuation
allowance recorded against continuing operations to offset tax benefits from the impairment of real
estate held for sale recorded in discontinued operations during the nine months ended September 30,
2009 as compared to the same period in 2008. For the nine months ended September 30, 2009 and
September 30, 2008, the reported effective income tax rates
were (0.613%) and 29.39%, respectively. The change in the effective tax rate is primarily due
to the impact of the $36.4 million valuation allowance. (See Note 19 to the consolidated financial
statements included in this prospectus for additional information.)
52
Net Loss Attributable to Grubb & Ellis Company
As a result of the above items, the Company recognized a net loss of $95.7 million, or $1.51
per diluted share, for the nine months ended September 30, 2009, compared to a net loss of $68.0
million, or $1.07 per diluted share, for the same period in 2008.
Commitments, Contingencies and Other Contractual Obligations
Contractual Obligations
The Company leases office space throughout the United States
through non-cancelable operating leases, which expire at various dates through 2016.
There have been no significant changes in the Companys contractual obligations since December
31, 2008.
TIC Program Exchange Provision
Prior to the Merger, NNN entered into agreements in which
NNN agreed to provide certain investors with a right to exchange their investment in certain TIC
Programs for an investment in a different TIC program. NNN also entered into an agreement with
another investor that provided the investor with certain repurchase rights under certain
circumstances with respect to their investment. The agreements containing such rights of exchange
and repurchase rights pertain to initial investments in TIC programs totaling $31.6 million. In
July 2009 the Company received notice from an investor of their intent to exercise such rights of
exchange and repurchase with respect to an initial investment totaling $4.5 million. The Company is
currently evaluating such notice to determine the nature and extent of the right of such exchange
and repurchase, if any.
The Company deferred revenues relating to these agreements of $0.3 million and $0.5 million
for the nine months ended September 30, 2009 and 2008, respectively. Additional losses of $14.3
million and $4.5 million related to these agreements were recorded during the quarter ended
December 31, 2008 and during the nine months ended September 30, 2009, respectively, to reflect the
impairment in value of properties underlying the agreements with investors. As of September 30,
2009, the Company had recorded liabilities totaling $22.6 million related to such agreements,
consisting of $3.8 million of cumulative deferred revenues and $18.8 million of additional losses
related to these agreements.
Guarantees
From time to time the Company provides guarantees of loans for properties under
management. As of September 30, 2009, there were 147 properties under management with loan
guarantees of approximately $3.5 billion in total principal outstanding with terms ranging from one
to 10 years, secured by properties with a total aggregate purchase price of approximately $4.8
billion. As of December 31, 2008, there were 151 properties under management with loan guarantees
of approximately $3.5 billion in total principal outstanding with terms ranging from one to 10
years, secured by properties with a total aggregate purchase price of approximately $4.8 billion.
In addition, each consolidated VIE is joint and severally liable, along with the other investors in
each relative TIC, on the non-recourse mortgage debt related to the VIEs interests in the relative
TIC investment. This non-recourse mortgage debt totaled $277.2 million and $277.8 million as of
September 30, 2009 and December 31, 2008, respectively.
The Companys guarantees consisted of the following as of September 30, 2009 and December 31,
2008:
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
December 31,
|
(In thousands)
|
|
2009
|
|
2008
|
Non-recourse/carve-out guarantees of debt of properties under management(1)
|
|
$
|
3,438,375
|
|
|
$
|
3,414,433
|
|
Non-recourse/carve-out guarantees of the Companys debt(1)
|
|
$
|
107,000
|
|
|
$
|
107,000
|
|
Recourse guarantees of debt of properties under management
|
|
$
|
39,717
|
|
|
$
|
42,426
|
|
Recourse guarantees of the Companys debt
|
|
$
|
10,000
|
|
|
$
|
10,000
|
|
|
|
|
(1)
|
|
A non-recourse/carve-out guarantee imposes liability on the
guarantor in the event the borrower engages in certain acts
prohibited by the loan documents. Each non-recourse carve-out
guarantee is an individual document entered into with the
mortgage lender in connection with the purchase or refinance of
an individual property. While there is not a standard document
evidencing these guarantees, liability under the non-recourse
carve-out guarantees generally may be triggered by, among other
things, any or all of the following:
|
|
|
|
a voluntary bankruptcy or similar insolvency proceeding of any borrower;
|
|
|
|
|
a transfer of the property or any interest therein in violation of the loan documents;
|
|
|
|
|
a violation by any borrower of the special purpose entity requirements set forth in the loan documents;
|
|
|
|
|
any fraud or material misrepresentation by any borrower or any guarantor in connection with the loan;
|
53
|
|
|
the gross negligence or willful misconduct by any borrower in connection with the property, the loan
or any obligation under the loan documents;
|
|
|
|
|
the misapplication, misappropriation or conversion of (i) any rents, security deposits, proceeds or
other funds, (ii) any insurance proceeds paid by reason of any loss, damage or destruction to the
property, and (iii) any awards or other amounts received in connection with the condemnation of all or
a portion of the property;
|
|
|
|
|
any waste of the property caused by acts or omissions of borrower of the removal or disposal of any
portion of the property after an event of default under the loan documents; and
|
|
|
|
|
the breach of any obligations set forth in an environmental or hazardous substances indemnification
agreement from borrower.
|
Certain violations (typically the first three listed above) render the entire debt balance recourse
to the guarantor regardless of the actual damage incurred by lender, while the liability for other
violations is limited to the damages incurred by the lender. Notice and cure provisions vary
between guarantees. Generally the guarantor irrevocably and unconditionally guarantees to the
lender the payment and performance of the guaranteed obligations as and when the same shall be due
and payable, whether by lapse of time, by acceleration or maturity or otherwise, and the guarantor
covenants and agrees that it is liable for the guaranteed obligations as a primary obligor. As of
September 30, 2009, to the best of the Companys knowledge, there is no amount of debt owed by the
Company as a result of the borrowers engaging in prohibited acts.
Management initially evaluates these guarantees to determine if the guarantee meets the
criteria required to record a liability in accordance with the requirements of the Guarantees
Topic. Any such liabilities were insignificant as of September 30, 2009 and December 31, 2008. In
addition, on an ongoing basis, the Company evaluates the need to record additional liability in
accordance with the requirements of the Contingencies Topic. As of September 30, 2009 and December
31, 2008, the Company had recourse guarantees of $39.7 million and $42.4 million, respectively,
relating to debt of properties under management. As of September 30, 2009, approximately $21.3
million of these recourse guarantees relate to debt that has matured or is not currently in
compliance with certain loan covenants. In evaluating the potential liability relating to such
guarantees, the Company considers factors such as the value of the properties secured by the debt,
the likelihood that the lender will call the guarantee in light of the current debt service and
other factors. As of September 30, 2009 and December 31, 2008, the Company recorded a liability of
$5.2 million and $9.1 million, respectively, related to its estimate of probable loss related to
recourse guarantees of debt of properties under management which matured in January and April 2009.
Investment Program Commitments
During June and July 2009, the Company revised the offering
terms related to certain investment programs which it sponsors, including the commitment to fund
additional property reserves and the waiver or reduction of future management fees and disposition
fees. The company recorded a liability for future funding commitments as of September 30, 2009 for
these unconsolidated VIEs totaling $1.5 million to fund TIC Program reserves.
Deferred Compensation Plan
During 2008, the Company implemented a deferred compensation
plan that permits employees and independent contractors to defer portions of their compensation,
subject to annual deferral limits, and have it credited to one or more investment options in the
plan. As of September 30, 2009 and December 31, 2008, $2.6 million and $1.7 million, respectively,
reflecting the non-stock liability under this plan were included in accounts payable and accrued
expenses. The Company has purchased whole-life insurance contracts on certain employee participants
to recover distributions made or to be made under this plan and as of September 30, 2009 and
December 31, 2008 have recorded the cash surrender value of the policies of $1.0 million and $1.1
million, respectively, in Prepaid expenses and other assets.
In addition, the Company awards phantom shares of Company stock to participants under the
deferred compensation plan. As of September 30, 2009 and December 31, 2008, the Company awarded an
aggregate of 6.0 million and 5.4 million phantom shares, respectively, to certain employees with an
aggregate value on the various grant dates of $23.3 million and $22.5 million, respectively. As of
September 30, 2009, an aggregate of 5.7 million phantom share grants were outstanding. Generally,
upon vesting, recipients of the grants are entitled to receive the number of phantom shares
granted, regardless of the value of the shares upon the date of vesting; provided, however, grants
with respect to 900,000 phantom shares had a guaranteed minimum share price ($3.1 million in the
aggregate) that will result in the Company paying additional compensation to the participants
should the value of the shares upon vesting be less than the grant date value of the shares. The
Company accounts for additional compensation relating to the guarantee portion of the awards by
measuring at each reporting date the additional payment that would be due to the participant based
on the difference between the then current value of the shares awarded and the guaranteed value.
This award is then amortized on a straight-line basis as compensation expense over the requisite
service (vesting) period, with an offset to deferred compensation liability.
54
Liquidity and Capital Resources
As of September 30, 2009, cash and cash equivalents decreased by approximately $23.5 million,
from a cash balance of $33.0 million as of December 31, 2008. The Companys operating activities
used net cash of $29.1 million, reflecting decreases in accounts receivable and prepaid assets of
$17.2 million and payments of net operating liabilities totaling $6.5 million. Other operating
activities used net cash totaling $39.8 million. Investing activities provided net cash of $81.2
million primarily as a result of the sale of two properties during the nine months ended September
30, 2009. Financing activities used net cash of $75.7 million primarily from principal repayments
on notes payable of $79.2 million primarily related to two properties sold during the nine months
ended September 30, 2009 offset by net contributions from noncontrolling interests of $4.1 million.
The Company believes that it will have sufficient capital resources to satisfy its liquidity needs
over the next twelve-month period. The Company expects to meet its long-term liquidity needs, which
may include principal repayments of debt obligations, investments in various real estate investor
programs and institutional funds and capital expenditures, through current and retained cash flow
earnings, the sale of real estate properties, additional long-term secured and unsecured borrowings
and proceeds from the potential issuance of debt or equity securities and the potential sale of
other assets. As of September 30, 2009, the Company had $63.0 million outstanding under the Credit
Facility.
Pursuant to the terms of the Credit Facility, the Company was restricted to solely use the
line of credit for investments, acquisitions, working capital, equity interest repurchase or
exchange, and other general corporate purposes. The line bore interest at either the prime rate or
LIBOR based rates, as the Company may choose on each of its borrowings, plus an applicable margin
ranging from 1.50% to 2.50% based on the Companys Debt/Earnings Before Interest, Taxes,
Depreciation and Amortization (
EBITDA
) ratio as defined in the Credit Facility.
On August 5, 2008, the Company entered into the First Letter Amendment to its Credit Facility.
The First Letter Amendment, among other things, provided the Company with an extension from
September 30, 2008 to March 31, 2009 to dispose of the three real estate assets that the Company
had previously acquired on behalf of GERA. Additionally, the First Letter Amendment also, among
other things, modified select debt and financial covenants in order to provide greater flexibility
to facilitate the Companys TIC Programs.
On November 4, 2008, the Company amended its Credit Facility (the
Second Letter Amendment
).
The effective date of the Second Letter Amendment was September 30, 2008. (Certain capitalized
terms set forth below that are not otherwise defined herein have the meaning ascribed to them in
the Credit Facility, as amended.)
The Second Letter Amendment, among other things, a) reduced the amount available under the
Credit Facility from $75.0 million to $50.0 million by providing that no advances or letters of
credit shall be made available to the Company after September 30, 2008 until such time as
borrowings have been reduced to less than $50.0 million; b) provided that 100% of any net cash
proceeds from the sale of certain real estate assets required to be sold by the Company shall
permanently reduce the Revolving Credit Commitments, provided that the Revolving Credit Commitments
shall not be reduced to less than $50.0 million by reason of the operation of such asset sales; and
c) modified the interest rate incurred on borrowings by increasing the applicable margins by 100
basis points and by providing for an interest rate floor for any prime rate related borrowings.
Additionally, the Second Letter Amendment, among other things, modified restrictions on
guarantees of primary obligations from $125.0 million to $50.0 million, modified select financial
covenants to reflect the impact of the economic environment on the Companys financial performance,
amended certain restrictions on payments by deleting any dividend/share repurchase limitations and
modified the reporting requirements of the Company with respect to real property owned or held.
As of September 30, 2008, the Company was not in compliance with certain of its financial
covenants related to EBITDA. As a result, part of the Second Letter Amendment included a provision
to modify selected covenants. The Company was not in compliance with certain debt covenants as of
March 31, 2009, all of which were effectively cured as of such date by the Third Amendment to the
Credit Facility described below. As a consequence of the foregoing, and certain provisions of the
Third Amendment, the $63.0 million outstanding under the Credit Facility has been classified as a
current liability as of September 30, 2009.
On May 20, 2009, the Company further amended its Credit Facility by entering into the Third
Amendment (the
Third Amendment
). The Third Amendment, among other things, bifurcated the existing
credit facility into two revolving credit facilities, (i) a $38,000,000 Revolving Credit A Facility
which was deemed fully funded as of the date of the Third Amendment, and (ii) a $29,289,245
Revolving Credit B Facility, comprised of revolving credit advances in the aggregate of $25,000,000
which were deemed fully funded as of the date of the Third Amendment and letters of credit advances
in the aggregate amount of $4,289,245 which are issued and outstanding as of the date of the Third
Amendment. The Third Amendment required the Company to draw down $4,289,245 under the Revolving
Credit B Facility on the date of the Third Amendment and deposit such funds in a cash collateral
account to cash collateralize outstanding letters of credit under the Credit Facility and
eliminated the swingline features of the Credit Facility and the Companys ability to cause the
lenders to issue any additional letters of credit. In addition, the Third Amendment also changed
the termination date of the Credit Facility from December 7, 2010 to March 31, 2010 and modified
the interest rate incurred on borrowings by initially increasing the applicable margin by 450 basis
points (or to 7.00% on prime rate loans and 8.00% on LIBOR based loans).
55
The Third Amendment also eliminated specific financial covenants, and in its place, the
Company was required to comply with the approved budget, that had been agreed to by the Company and
the lenders, subject to agreed upon variances. The approved budget related solely to the 2009
fiscal year (the
Budget
). The Budget was the Companys operating cash flow budget, and
encompassed all aspects of typical operating cash flows including revenues, fees and expenses, and
such working capital components as receivables and accounts payables, taxes, debt service and any
other identifiable cash flow items. Pursuant to the Budget, the Company was required to stay within
certain variance parameters with respect to cumulative cash flow for the remainder of the 2009 year
to remain in compliance with the Credit Facility. The Company was also required under the Third
Amendment to effect the Recapitalization Plan, on or before September 30, 2009 and in connection
therewith to effect the Partial Prepayment of the Revolving A Credit Facility. In the event the
Company failed to effect the Recapitalization Plan and in connection therewith to reduce the
Revolving Credit A Credit Facility by the Partial Prepayment amount, the (i) lenders would have had
the right commencing on October 1, 2009, to exercise the Warrants, for nominal consideration, to
purchase common stock of the Company equal to 15% of the common stock of the Company on a fully
diluted basis as of such date, subject to adjustment, (ii) the applicable margin automatically
increased to 11% on prime rate loans and increased to 12% on LIBOR based loans, (iii) the Company
was required to amortize an aggregate of $10 million of the Revolving Credit A Facility in three
equal installments on the first business day of each of the last three months of 2009, (iv) the
Company was obligated to submit a revised budget by October 1, 2009, (v) the Credit Facility would
have terminated on January 15, 2010, and (vi) no further advances were available to be drawn under
the Credit Facility.
In the event the Company effected the Recapitalization Plan and the Partial Prepayment amount
on or prior to September 30, 2009, the Warrants would have automatically expired and not become
exercisable, the applicable margin would have automatically been reduced to 3% on prime rate loans
and 4% on LIBOR based loans and the Company had the right, subject to the requisite approval of the
lenders, to seek an extension to extend the term of the Credit Facility to January 5, 2011,
provided the Company also paid a fee of .25% of the then outstanding commitments under the Credit
Facility. The Company calculated the initial fair value of the Warrants to be $534,000 and has
recorded such amount in stockholders equity with a corresponding debt discount to the line of
credit balance. Such debt discount amount will be amortized into interest expense over the
remaining term of the Credit Facility. As of September 30, 2009, the net debt discount balance was
$291,000 and is included in the current portion of line of credit in the accompanying consolidated
balance sheet.
As a result of the Third Amendment the Company was required to prepay Revolving Credit A
Advances (and to the extent the Revolving Credit A Facility shall be reduced to zero, prepay
outstanding Revolving Credit B Advances) in an amount equal to 100% (or, after the Revolving Credit
A Advances are reduced by at least the Partial Prepayment amount, in an amount equal to 50%) of Net
Cash Proceeds (as defined in the Credit Facility) from:
|
|
|
assets sales,
|
|
|
|
|
conversions of Investments (as defined in the Credit Facility),
|
|
|
|
|
the refund of any taxes or the sale of equity interests by the Company or its subsidiaries,
|
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|
|
|
the issuance of debt securities, or
|
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|
|
|
any other transaction or event occurring outside the ordinary course of business of the
Company or its subsidiaries;
|
provided, however, that (a) the Net Cash Proceeds received from the sale of the certain real
property assets shall be used to prepay outstanding Revolving Credit B Advances and to the extent
Revolving Credit B Advances shall be reduced to zero, to prepay outstanding Revolving Credit A
Advances, (b) the Company shall prepay outstanding Revolving Credit B Advances in an amount equal
to 100% of the Net Cash Proceeds from the sale of the Danbury Property unless the Company is then
not in compliance with the Recapitalization Plan in which event Revolving Credit A Advances shall
be prepaid first and (c) the Companys 2008 tax refund was used to prepay outstanding Revolving
Credit B Advances upon the closing of the Third Amendment.
The Third Amendment required the Company to use its commercially reasonable best efforts to
sell four other commercial properties, including the two remaining GERA Properties, by September
30, 2009. The Credit Facility is secured by substantially all of the assets of the Company.
On September 30, 2009, the Company further amended its Credit Facility by entering into the
First Credit Facility Letter Amendment. The First Credit Facility Letter Amendment, among other
things, modified and provided the Company an extension from September 30, 2009 to November 30, 2009
(the
Extension
) to (i) effect its Recapitalization Plan and in connection therewith to effect a
prepayment of at least seventy two (72%) percent of the Revolving Credit A Advances (as defined in
the Credit Facility), and (ii) sell four commercial properties, including the two real estate
assets the Company had previously acquired on behalf of GERA.
The First Credit Facility Letter Amendment also granted the Company a one-time right,
exercisable by November 30, 2009, to prepay the Credit Facility in full for a reduced principal
amount equal to approximately 65% of the aggregate principal amount of the Credit Facility then
outstanding (the
Discount Prepayment Option
).
In connection with the Extension, the warrant agreement was also amended to extend from
October 1, 2009 to December 1, 2009, the time when the Warrants are first exercisable by its
holders.
56
The First Credit Facility Letter Amendment also granted a one-time waiver from the covenant
requiring all proceeds of sales of equity or debt securities to be applied to pay down the Credit
Facility to facilitate the sale by the Company to an affiliate of the Companys largest stockholder
and Chairman of the Board of Directors of the Company, $5.0 million of subordinated debt or equity
securities of the Company (the
Permitted Placement
) so long as (i) the Permitted Placement is
junior, subject and subordinate to the Credit Facility, (ii) the net proceeds of the Permitted
Placement are placed into an account with the lender, (iii) the disbursement of the funds in such
account is in accordance with the approved budget that has been agreed to by the Company and the
lenders, (iv) that the lenders be granted a security interest in the net proceeds of the Permitted
Placement, and (v) the Permitted Placement is otherwise satisfactory to the Lenders. In addition,
if the Permitted Placement is in the form of subordinated debt, the Company and the entity making
the $5.0 million loan are required to enter into a subordination agreement with the lenders.
Finally, the First Credit Facility Letter Amendment also provided that $4.3 million that was
deposited in a cash collateral account to cash collateralize outstanding letters of credit under
the Credit Facility would instead be used to pay down the Credit Facility.
The Credit Facility was secured by substantially all of the Companys assets. The outstanding
balance on the Credit Facility was $63.0 million as of September 30, 2009 and December 31, 2008 and
carried a weighted average interest rate of 8.37% and 4.51%, respectively.
In connection with the Merger, the Company announced its intention to pay a $0.41 per share
dividend per annum, which equates to approximately $26.5 million on an annual basis. The Company
declared and paid such dividends for holders of records at the end of each of the first and second
calendar quarters of 2008. On July 11, 2008, the Companys Board of Directors approved the
suspension of future dividend payments. In addition, the Board of Directors approved a share
repurchase program under which the Company may repurchase up to $25 million of its common stock
through the end of 2009. The Company did not repurchase any shares of its common stock during the
nine months ended September 30, 2009.
The Credit Facility restricted our ability to operate outside of the approved budget without
the permission of the requisite majority of lenders, and the failure to operate within the approved
budget by more than the greater of $1,500,000 or 15% on a cumulative basis for more than three
consecutive weeks would, absent the requisite approval, result in an event of default of the Credit
Facility and make the entire balance due and payable. In addition, we were required to remit Net
Cash Proceeds from the sale of assets including real estate assets to repay advances under the
Credit Facility and pursue additional sources of capital in accordance with the Recapitalization
Plan. The Companys Credit Facility required the Company to implement the Recapitalization Plan and
complete each step provided in the Recapitalization Plan by the dates set for such completion. In
the event the Company was unable to effect the Partial Prepayment in connection with the
Recapitalization Plan by September 30, 2009, the Company was required to amortize $10 million of
the Revolving Credit A Facility in three equal installments on the first business day of each of
the last three months of 2009 and the entire Credit Facility would become due and payable on
January 15, 2010. In addition, the Company would not have access to any further advances under the
Revolving Credit B Facility which would greatly reduce the Companys liquidity. All of these
demands put the Companys liquidity and financial resources at risk.
On October 2, 2009, the Company effected the Permitted Placement (see Note 11 to the
consolidated financial statements included in this prospectus) and issued a $5.0 million senior
subordinated convertible note (the
Note
) to Kojaian Management Corporation. The Note (i) bears
interest at twelve percent (12%) per annum, (ii) is co-terminous with the term of the Credit
Facility (including if the Credit Facility is terminated pursuant to the Discount Prepayment
Option), (iii) is unsecured and fully subordinate to the Credit Facility, and (iv) in the event the
Company issues or sells equity securities in connection with or pursuant to a transaction with a
non-affiliate of the Company while the Note is outstanding, at the option of the holder of the
Note, the principal amount of the Note then outstanding is convertible into those equity securities
of the Company issued or sold in such non-affiliate transaction. In connection with the issuance of
the Note, Kojaian Management Corporation, the lenders to the Credit Facility and the Company
entered into a subordination agreement (the
Subordination Agreement
). The Permitted Placement was
a transaction by the Company not involving a public offering in accordance with Section 4(2) of the
Securities Act of 1933, as amended (the
Securities Act
).
On November 6, 2009, the Company completed the private placement of 900,000 shares of its 12%
Preferred Stock, to qualified institutional buyers and other accredited investors. In conjunction
with the offering, the entire $5.0 million principal balance of the Note was converted into the
Preferred Stock at the offering price and the holder of the Note received accrued interest of
approximately $57,000. In addition, the holder of the Note also purchased an additional $5 million
of preferred stock at the offering price. The Company also granted the initial purchaser a 45-day
option to purchase up to an additional 100,000 shares of Preferred Stock.
The Preferred Stock was offered in reliance on exemptions from the registration requirements
of the Securities Act that apply to offers and sales of securities that do not involve a public
offering. As such, the Preferred Stock was offered and will be sold only to (i) qualified
institutional buyers (as defined in Rule 144A under the Securities Act), (ii) to a limited number
of institutional accredited investors (as defined in Rule 501(a)(1), (2), (3) or (7) of the
Securities Act), and (iii) to a limited number of individual accredited investors (as defined in
Rule 501(a)(4), (5) or (6) of the Securities Act).
57
Upon the closing of the sale of the $90 million of Preferred Stock, the Company received cash
proceeds of approximately $85.0 million after giving effect to the conversion of the Note and after
deducting the initial purchasers discounts and certain offering expenses. A portion of proceeds
were used to pay in full borrowings under the Credit Facility then outstanding of $66.8 million for
a reduced amount equal to $43.4 million and the Credit Facility was terminated. The balance of the
proceeds to be used for working capital purposes.
The Certificate of Designations with respect to the Preferred Stock provides, among other
things, that each share of Preferred Stock is convertible, at the holders option, into the
Companys common stock, par value $.01 per share at a conversion rate of 60.606 shares of common
stock for each share of Preferred Stock, subject to adjustment, which represents a conversion price
of approximately $1.65 per share of common stock.
The terms of the Preferred Stock provide for cumulative dividends from and including the date
of original issuance in the amount of $12.00 per share each year. Dividends on the Preferred Stock
will be payable when, as and if declared, quarterly in arrears, on March 31, June 30, September 30
and December 31, beginning on December 31, 2009. In addition, in the event of any cash distribution
to holders of the common stock, holders of Preferred Stock will be entitled to participate in such
distribution as if such holders had converted their shares of Preferred Stock into common stock.
If the Company fails to pay the quarterly Preferred Stock dividend in full for two consecutive
quarters, the dividend rate will automatically be increased by .50% of the initial liquidation
preference per share per quarter (up to a maximum amount of increase of 2% of the initial
liquidation preference per share) until cumulative dividends have been paid in full. In addition,
subject to certain limitations, in the event the dividends on the Preferred Stock are in arrears
for six or more quarters, whether or not consecutive, holders representing a majority of the shares
of Preferred Stock voting together as a class with holders of any other class or series of
preferred stock upon which like voting rights have been conferred and are exercisable will be
entitled to nominate and vote for the election of two additional directors to serve on the Board of
Directors until all unpaid dividends with respect to the Preferred Stock and any other class or
series of preferred stock upon which like voting rights have been conferred or are exercisable have
been paid or declared and a sum sufficient for payment has been set aside therefore.
During the six month period following November 6, 2009, if the Company issues any securities,
other than certain permitted issuances, and the price per share of the common stock (or the
equivalent for securities convertible into or exchangeable for common stock) is less than the then
current conversion price of the Preferred Stock, the conversion price will be reduced pursuant to a
weighted average anti-dilution formula.
Holders of Preferred Stock may require the Company to repurchase all, or a specified whole
number, of their Preferred Stock upon the occurrence of a Fundamental Change (as defined in the
Certificate of Designations) with respect to any Fundamental Change that occurs (i) prior to
November 15, 2014, at a repurchase price equal to 110% of the sum of the initial liquidation
preference plus accumulated but unpaid dividends, and (ii) from November 15, 2014 until prior to
November 15, 2019, at a repurchase price equal to 100% of the sum of the initial liquidation
preference plus accumulated but unpaid dividends. On or after November 15, 2014, the Company may,
at its option, redeem the Preferred Stock, in whole or in part, by paying an amount equal to 110%
of the sum of the initial liquidation preference per share plus any accrued and unpaid dividends to
and including the date of redemption.
In the event of certain events that constitute a Change in Control (as defined in the
Certificate of Designations) prior to November 15, 2014, the conversion rate of the Preferred Stock
will be subject to increase. The amount of the increase in the applicable conversion rate, if any,
will be based on the date in which the Change in Control becomes effective, the price to be paid
per share with respect to the common stock and the transaction constituting the Change in Control.
The Company has entered into a registration rights agreement (the
Registration Rights
Agreement
) with one of the lead investors (and its affiliates) with respect to the shares of
Preferred Stock, and common stock issuable upon the conversion of such Preferred Stock, that was
acquired by such lead investor (and affiliates) in the offering and the registration statement in
which this prospectus is a part, is being filed pursuant to such Registration Rights Agreement. No
other purchasers of the Preferred Stock in the offering will have the right to have their shares of
Preferred Stock, or shares of common stock issuable upon conversion of such Preferred Stock,
registered. In addition, subject to certain limitations, the lead investor who acquired the
registration rights also has certain preemptive rights in the event the Company issues for cash
consideration any common stock or any securities convertible into or exchangeable for common stock
(or any rights, warrants or options to purchase any such common stock) during the six-month period
subsequent to November 6, 2009. Such preemptive right is intended to permit such lead investor to
maintain its pro rata ownership of the Preferred Stock acquired in the offering.
Except as otherwise provided by law, the holders of the Preferred Stock vote together with the
holders of common stock as one class on all matters on which holders of common stock vote. Holders
of the Preferred Stock when voting as a single class with holders of common stock are entitled to
voting rights equal to the number of shares of Common Stock into which the Preferred Stock is
convertible, on an as if converted basis. Holders of Preferred Stock vote as a separate class
with respect to certain matters.
58
Upon any liquidation, dissolution or winding up of the Company, holders of the Preferred Stock
will be entitled, prior to any distribution to holders of any securities ranking junior to the
Preferred Stock, including but not limited to the common stock, and on a pro rata basis with other
preferred stock of equal ranking, a cash liquidation preference equal to the greater of (i) 110% of
the sum of the initial liquidation preference per share plus accrued and unpaid dividends thereon,
if any, from November 6, 2009, the date of the closing of the offering, and (ii) an amount equal to
the distribution amount each holder of Preferred Stock would have received had all shares of
Preferred Stock been converted to common stock.
Pursuant to the overallotment option of up to 100,000 shares of Preferred Stock granted to the
initial purchaser in connection with the offering, the Company has effected the sale of an
aggregate of 65,700 shares of Preferred Stock for gross proceeds of approximately $6.6 million.
This prospectus shall not constitute an offer to sell or the solicitation of an offer to buy,
nor shall there be any sale of the Preferred Stock or common stock issuable upon conversion of the
Preferred Stock in any state in which the offer, solicitation or sale would be unlawful prior to
the registration or qualification under the securities laws of any such state.
Cash Flow
Year Ended December 31, 2008 Compared to Year Ended December 31, 2007
Net cash used in operating activities increased $67.1 million to $33.6 million for the year
ended December 31, 2008, compared to net cash provided by operating activities of $33.5 million for
the same period in 2007. Net cash used in operating activities included a decrease in net income of
$351.9 million adjusted for an increase in non-cash reconciling items, the most significant of
which was $181.3 million in goodwill impairment, $90.4 million in real estate related impairments,
$11.7 million in stock-based compensation, $29.0 million in depreciation and amortization primarily
related to five properties held for sale, $1.2 million as a result of amortizing the identified
intangible contract rights associated with the acquisition of Realty, partially offset by a $3.8
million increase in deferred taxes. Also contributing to this increase was cash used in net changes
in other operating assets and liabilities of $36.3 million.
Net cash used in investing activities decreased $410.6 million to $76.3 million for the year
ended December 31, 2008, compared to $486.9 million for the same period in 2007. This decrease in
cash used in investing activities was primarily related to a decrease of $483.0 million of cash
used in the acquisition and related improvements of office properties and asset purchases for
GERIs sponsored TIC Programs, partially offset by $92.9 million in proceeds from the sales of
certain real estate assets in 2007.
Net cash provided by financing activities decreased $306.9 million to $93.6 million for the
year ended December 31, 2008, compared to $400.5 million for the same period in 2007. The decrease
was primarily due to a decrease of $443.7 million in borrowings on notes payable related to
properties purchased for GERIs sponsored TIC Programs in 2008, a decrease of $27.0 million in
contributions from minority interests in 2008 offset by a decrease of $87.5 million in repayments
of notes payable and capital lease obligations and an increase in advances on the line of credit of
$55.0 million in 2008.
Year Ended December 31, 2007 Compared to Year Ended December 31, 2006
Net cash provided by operating activities increased $16.2 million to $33.5 million for the
year ended December 31, 2007, compared to $17.4 million for the same period in 2006. Net cash
provided by operating activities included an increase in net income of $1.1 million adjusted for an
increase in non-cash reconciling items, the most significant of which was $5.2 million in
stock-based compensation, $6.6 million in depreciation and amortization primarily related to two
properties purchased in 2007, $2.7 million as a result of amortizing the identified intangible
contract rights associated with the acquisition of Realty, partially offset by a $1.0 million
increase in deferred taxes. Also contributing to this increase was cash provided by net changes in
other operating assets and liabilities of $6.1 million. This increase in cash from operating
activities was partially offset by a $7.3 million increase in accounts receivable from related
parties which consisted primarily of accrued management, leasing and transaction fees from the
Companys various sponsored programs.
Net cash used in investing activities increased $430.7 million to $486.9 million for the year
ended December 31, 2007, compared to $56.2 million for the same period in 2006. This increase in
cash used in investing activities was primarily related to $142.3 million of cash used in the
acquisition and related improvements to two office properties held for investment and $462.8
million for asset purchases of GERIs sponsored programs, to facilitate the reselling of such
assets to its TIC Programs and REITs, partially offset by $92.9 million in proceeds from the sales
of these assets and $117.5 million in proceeds from repayment of advances to related parties.
Net cash provided by financing activities increased $259.9 million to $400.5 million for the
year ended December 31, 2007, compared to $140.5 million for the same period in 2006. The increase
was primarily due to an increase of $426.3 million in borrowings on notes payable related to
properties acquired in 2007 and an increase of $34.5 million in contributions from minority
interests in 2007 and a decrease of $11.6 million in dividends paid in 2007. Partially offsetting
the year-over-year increase in cash provided by financing activities was $146.0 million in net
proceeds in November 2006 as a result of the issuance of NNNs common stock through the 144A
private equity offering, an increase of $47.9 million in principal repayments on notes payable in
2007 and $7.5 million in additional repayments under the Companys line of credit in 2007.
59
Commitments, Contingencies and Other Contractual Obligations
Contractual Obligations
The Company leases office space throughout the country through non-cancelable operating
leases, which expire at various dates through June 30, 2020.
The following table summarizes contractual obligations as of December 31, 2008 and the effect
that such obligations are expected to have on the Companys liquidity and cash flow in future
periods. This table does not reflect any available extension options.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due by Period
|
|
|
|
Less Than
|
|
|
|
|
|
|
|
|
|
|
More Than
|
|
|
|
|
|
|
1 Year
|
|
|
1-3 Years
|
|
|
3-5 Years
|
|
|
5 Years
|
|
|
|
|
(In thousands)
|
|
2009
|
|
|
(2010-2011)
|
|
|
(2012-2013)
|
|
|
(After 2013)
|
|
|
Total
|
|
Principal secured debt
|
|
$
|
63,000
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
63,000
|
|
Interest secured debt
|
|
|
3,570
|
|
|
|
6,951
|
|
|
|
|
|
|
|
|
|
|
|
10,521
|
|
Principal properties held
for sale and investment
|
|
|
108,779
|
|
|
|
180
|
|
|
|
|
|
|
|
107,000
|
|
|
|
215,959
|
|
Interest properties held
for sale and investment
|
|
|
8,656
|
|
|
|
13,021
|
|
|
|
13,012
|
|
|
|
14,187
|
|
|
|
48,876
|
|
Principal senior notes
|
|
|
|
|
|
|
16,277
|
|
|
|
|
|
|
|
|
|
|
|
16,277
|
|
Interest senior notes
|
|
|
1,424
|
|
|
|
2,849
|
|
|
|
843
|
|
|
|
|
|
|
|
5,116
|
|
Operating lease obligations
others
|
|
|
9,793
|
|
|
|
21,754
|
|
|
|
21,884
|
|
|
|
19,880
|
|
|
|
73,311
|
|
Operating lease obligations
general
|
|
|
22,085
|
|
|
|
30,829
|
|
|
|
22,082
|
|
|
|
16,903
|
|
|
|
91,899
|
|
Capital lease obligations
|
|
|
333
|
|
|
|
203
|
|
|
|
|
|
|
|
|
|
|
|
536
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
217,640
|
|
|
$
|
92,064
|
|
|
$
|
57,821
|
|
|
$
|
157,970
|
|
|
$
|
525,495
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TIC Program Exchange Provisions.
Prior to the Merger, NNN entered into agreements in
which NNN agreed to provide certain investors with a right to exchange their investment in certain
TIC Programs for an investment in a different TIC program. NNN also entered into an agreement with
another investor that provided the investor with certain repurchase rights under certain
circumstances with respect to their investment. The agreements containing such rights of exchange
and repurchase rights pertain to initial investments in TIC programs totaling $31.6 million. The
Company deferred revenues relating to these agreements of $584,000, $393,000 and $986,000 for the
years ended December 31, 2006, 2007 and 2008, respectively. Additional losses of $14.3 million
related to these agreements were recorded in 2008 to reflect the impairment in value of properties
underlying the agreements with investors. As of December 31, 2008 the Company had recorded
liabilities totaling $18.6 million related to such agreements, consisting of $4.3 million of
cumulative deferred revenues and $14.3 million of additional losses related to these agreements.
Off-Balance Sheet Arrangements.
From time to time the Company provides guarantees of loans for
properties under management. As of December 31, 2008, there were 151 properties under management
with loan guarantees of approximately $3.5 billion in total principal outstanding with terms
ranging from one to 10 years, secured by properties with a total aggregate purchase price of
approximately $4.8 billion. As of December 31, 2007, there were 143 properties under management
with loan guarantees of approximately $3.4 billion in total principal outstanding with terms
ranging from one to 10 years, secured by properties with a total aggregate purchase price of
approximately $4.6 billion. In addition, the consolidated VIEs and unconsolidated VIEs are jointly
and severally liable on the non-recourse mortgage debt related to the interests in the Companys
TIC investments totaling $277.8 million and $385.3 million as of December 31, 2008, respectively.
The Companys guarantees consisted of the following as of December 31, 2008 and 2007:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
(In thousands)
|
|
2008
|
|
|
2007
|
|
Non-recourse/carve-out guarantees of debt of properties under management(1)
|
|
$
|
3,414,433
|
|
|
$
|
3,167,447
|
|
Non-recourse/carve-out guarantees of the Companys debt(1)
|
|
$
|
107,000
|
|
|
$
|
221,430
|
|
Guarantees of the Companys mezzanine debt
|
|
$
|
|
|
|
$
|
48,790
|
|
Recourse guarantees of debt of properties under management
|
|
$
|
42,426
|
|
|
$
|
47,399
|
|
Recourse guarantees of the Companys debt
|
|
$
|
10,000
|
|
|
$
|
10,000
|
|
|
|
|
(1)
|
|
A non-recourse/carve-out guaranty imposes personal liability on the guarantor in the event
the borrower engages in certain acts prohibited by the loan documents.
|
60
Management evaluates these guarantees to determine if the guarantee meets the criteria
required to record a liability in accordance with the requirements of the Guarantees Topic.
Subsequent to the initial measurement under the requirements of the Guarantees Topic, the Company
evaluates the ongoing liability relating to these guarantees in accordance with the requirements of
the Contingencies Topic. As of December 31, 2008, the Company recorded a liability of $9.1 million
related to recourse guarantees of debt of properties under management which matured in January and
April 2009. Any other such liabilities were insignificant as of December 31, 2008 and 2007.
Quantitative and Qualitative Disclosures About Market Risk.
Interest Rate Risk
Derivatives
The Companys Credit Facility debt obligations and mortgage loan obligations are
floating rate obligations whose interest rate and related monthly interest payments vary with the
movement in LIBOR and/or prime lending rates. As of December 31, 2008 and 2007, the outstanding
principal balances on the Credit Facility debt obligations totaled $63.0 million and $8.0 million,
respectively, and on the mortgage loan debt obligations totaled $216.0 million and $348.9 million,
respectively. As of September 30, 2009, the outstanding principal balance on the Credit Facility
totaled $63.0 million and on the mortgage loan debt obligations totaled $138.6 million. Since
interest payments on any future obligation will increase if interest rate markets rise, or decrease
if interest rate markets decline, the Company will be subject to cash flow risk related to these
debt instruments. In order to mitigate this risk, the terms of the Companys Credit Facility
required the Company to maintain interest rate hedge agreements that were in effect as of the date
of the Third Amendment against variable interest debt obligations. To fulfill this requirement, the
Company held two interest rate cap agreements with Deutsche Bank Trust Company Americas, which
provide for quarterly payments to the Company equal to the variable interest amount paid by the
Company in excess of 6.00% of the underlying notional amounts. In addition, the terms of certain
mortgage loan agreements required the Company to purchase two-year interest rate caps on 30-day
LIBOR with a LIBOR strike price of 6.00%, thereby locking the maximum interest rate on borrowings
under the mortgage loans at 7.70% for the initial two year term of the mortgage loans.
The Companys earnings are affected by changes in short-term interest rates as a result of the
variable interest rates incurred on its Credit Facility. The Companys Credit Facility is secured
by its assets, bears interest at the banks prime rate or LIBOR plus applicable margins based on
compliance with covenants with respect to consummation of a recapitalization transaction in
accordance with the Recapitalization Plan and currently matures on March 31, 2010, subject to
extension or early termination under certain circumstances. Since interest payments on this
obligation will increase if interest rate markets rise, or decrease if interest rate markets
decline, the Company is subject to cash flow risk related to this debt instrument as amounts are
drawn under the Credit Facility.
Additionally, the Companys earnings are affected by changes in short-term interest rates as a
result of the variable interest rate incurred on the portion of the outstanding mortgages on its
real estate held for sale. As of December 31, 2008 and 2007, the outstanding principal balance on
these variable rate debt obligations was $108.7 million and $169.3 million, respectively, with a
weighted average interest rate of 3.78% and 8.23% per annum, respectively. As of September 30,
2009, the outstanding principal balance on these variable rate debt obligations was $31.6 million,
with a weighted average interest rate of 6.00% per annum. Since interest payments on these
obligations will increase if interest rates rise, or decrease if interest rates decline, the
Company is subject to cash flow risk related to these debt instruments. As of December 31, 2008,
for example, a 0.5% increase in interest rates would have increased the Companys overall annual
interest expense by approximately $0.4 million, or 3.67%. As of December 31, 2007, for example, a
0.8% increase in interest rates would have increased the Companys overall annual interest expense
by approximately $1.4 million, or 9.72%. As of September 30, 2009, a 0.50% increase in interest
rates would not have increased the Companys overall annual interest expense since the Companys
variable rate mortgage debt has a minimum interest rate of 6.00% and is based on LIBOR plus an
applicable margin and a 0.50% increase in LIBOR plus the applicable margin would not have exceeded
the minimum interest rate of 6.00% in effect as of September 30, 2009. This sensitivity analysis
contains certain simplifying assumptions, for example, it does not consider the impact of changes
in prepayment risk.
During the fourth quarter of 2006, GERI entered into several interest rate lock agreements
with commercial banks aggregating to approximately $400.0 million, with interest rates ranging from
6.15% to 6.19% per annum. All rate locks were cancelled and all deposits in connection with these
agreements were refunded to the Company in April 2008.
Except for the acquisition of Grubb & Ellis Alesco Global Advisors, LLC, as previously
described, the Company does not utilize financial instruments for trading or other speculative
purposes, nor does it utilize leveraged financial instruments.
61
MANAGEMENT
Executive Officers and Directors
The following table and discussion sets forth, as of the date of this prospectus, the names
and ages of our current directors and our executive officers. Executive officers are appointed by
our Board of Directors and shall serve until the expiration of their contracts, their death,
resignation or removal by our Board of Directors. Our directors serve one year terms or until their
successors are elected and qualified or until their death, resignation or removal in the manner
provided in our certificate of incorporation, bylaws or other relevant operating documents. The
present term of each of our directors will expire at the next annual meeting of our stockholders.
|
|
|
|
|
|
|
Name
|
|
Age
|
|
Position with Company
|
Thomas DArcy
|
|
|
50
|
|
|
Chief Executive Officer, President and Director
|
Richard W. Pehlke
|
|
|
56
|
|
|
Executive Vice President and Chief Financial Officer
|
Andrea R. Biller
|
|
|
60
|
|
|
General Counsel, Executive Vice President and Corporate Secretary
|
Jeffrey T. Hanson
|
|
|
39
|
|
|
Chief Investment Officer
|
Jacob Van Berkel
|
|
|
49
|
|
|
Executive Vice President and Chief Operating Officer
|
Stanley J. Olander, Jr.
|
|
|
55
|
|
|
Executive Vice PresidentMultifamily of the Company
|
C. Michael Kojaian
|
|
|
48
|
|
|
Director
|
Robert J. McLaughlin
|
|
|
76
|
|
|
Director
|
Devin I. Murphy
|
|
|
49
|
|
|
Director
|
D. Fleet Wallace
|
|
|
42
|
|
|
Director
|
Rodger D. Young
|
|
|
63
|
|
|
Director
|
Thomas DArcy
has served as the President and Chief Executive Officer and as a director of the
Company since November 16, 2009. Mr. DArcy has been since April 2008 and is currently the
non-executive chairman of the board of directors of Inland Real Estate Corporation (NYSE: IRC),
where he has also been an independent director since 2005. Mr. DArcy has over 20 years of
experience acquiring, developing and financing all forms of commercial and residential real estate.
He is currently a principal in Bayside Realty Partners, a private real estate company focused on
acquiring, renovating and developing land and income producing real estate primarily in the New
England area. From 2001 to 2003, Mr. DArcy was president and chief executive officer of Equity
Investment Group, a private real estate company owned by an investor group which included The
Government of Singapore, The Carlyle Group and Northwestern Mutual Life Insurance Company. Prior to
his tenure with Equity Investment Group, Mr. DArcy was the chairman of the board, president and
chief executive officer of Bradley Real Estate, Inc., a Boston-based real estate investment trust
traded on the NYSE, from 1989 to 2000. Mr. DArcy is a graduate of Bates College.
Richard W. Pehlke
has served as the Executive Vice President and Chief Financial Officer of
the Company since February 2007. Prior to joining the Company, Mr. Pehlke served as Executive Vice
President and Chief Financial Officer and a member of the board of directors of Hudson Highland
Group, a publicly held global professional staffing and recruiting business, from 2003 to December
2005 and served as a consultant during 2006. From 2001 to 2003, Mr. Pehlke operated his own
consulting business specializing in financial strategy and leadership development. In 2000, he was
the Executive Vice President and Chief Financial Officer of ONE, Inc. a privately held software
implementation business. Prior to 2000, Mr. Pehlke held senior financial positions in the
telecommunications, financial services and food and consumer products industries.
Andrea R. Biller
has served as Executive Vice President, General Counsel and Corporate
Secretary of the Company since December 2007. She joined Grubb & Ellis Realty Investors, LLC in
March 2003 as General Counsel and served as NNNs General Counsel, Executive Vice President and
Corporate Secretary since November 2006 and director since December 2007. Ms. Biller also has
served as Executive Vice President and Corporate Secretary of Grubb & Ellis Healthcare REIT II,
Inc. since January 2009 and Corporate Secretary of Grubb & Ellis Apartment REIT, Inc. since April
2009 and from December 2005 to February 2009. Ms. Biller also has served as a director of Grubb &
Ellis Apartment REIT, Inc. since June 2008. Ms. Biller served as an Attorney at the Securities and
Exchange Commission, Division of Corporate Finance, in Washington D.C. from 1995-2000, including
two years as Special Counsel, and as a private attorney specializing in corporate and securities
law from 1990-1995 and 2000-2002. Ms. Biller is licensed to practice law in California, Virginia,
and Washington, D.C.
Jeffrey T. Hanson
has served as Chief Investment Officer of the Company since December 2007.
He has served as Chief Investment Officer of NNN since November 2006 and as a director since
November 2008 and joined Grub & Ellis Realty Investors in July 2006 and has served as its President
and Chief Investment Officer since November 2007. Mr. Hanson has also served as the President and
Chief Executive Officer of Triple Net Properties Realty, Inc. (
Realty
) since July 2006 and as
Chairman since April 2007. Mr. Hanson also has served as Chief Executive Officer and Chairman of
the Board of Grubb & Ellis Healthcare REIT II, Inc. since January 2009. From December 1997 to July
2006, Mr. Hanson was a Senior Vice President with the Grubb and Ellis Institutional Investment
Group in Grubb & Ellis Newport Beach office. Mr. Hanson served as a real estate broker with CB
Richard Ellis from 1996 to December 1997. Mr. Hanson formerly served as a member of the Grubb &
Ellis Presidents Counsel and Institutional Investment Group Board of Advisors.
62
Jacob Van Berkel
has served as Executive Vice President and Chief Operating Officer of the
Company since February 2008 and President, Real Estate Services since May 2008. Mr. Van Berkel
oversees operations and business integration for Grubb & Ellis, having joined NNN in August 2007 to
assist with the merger of the two companies. He is responsible for the strategic direction of all
Grubb & Ellis human resources, marketing and communications, research and other day-to-day
operational activities. He has 25 years of experience, including more than four years at CB Richard
Ellis as senior vice president, human resources as well as in senior global human resources,
operations and sales positions with First Data Corporation, Gateway Inc. and Western Digital.
Stanley J. Olander, Jr.
has served as an Executive Vice President Multifamily of the Company
since December 2007. He has also served as Chief Executive Officer and a director of Grubb & Ellis
Apartment REIT, Inc. and Chief Executive Officer of Grubb & Ellis Apartment REIT Advisors, LLC
since December 2005. Mr. Olander has also served as Grubb & Ellis Apartment REIT, Inc.s Chairman
of the Board since December 2006 and has also served as President of Grubb & Ellis Apartment REIT,
Inc. and President of Grubb & Ellis Apartment REIT Advisors, LLC since April 2007. Mr. Olander has
also been a Managing Member of ROC REIT Advisors, LLC since 2006 and a Managing Member of ROC
Realty Advisors since 2005. Additionally, since July 2007, Mr. Olander has also served as Chief
Executive Officer, President and Chairman of the Board of Grubb & Ellis Residential Management,
Inc. He served as President and Chief Financial Officer and a member of the board of directors of
Cornerstone Realty Income Trust, Inc. from 1996 until April 2005
C. Michael Kojaian
has served as a director of the Company since December 1996. He served as
the Chairman of the Board of Directors of the Company from June 2002 until December 7, 2007 and has
served as the Chairman of the Board of Directors of the Company since January 6, 2009. He has been
the President of Kojaian Ventures, L.L.C. and also Executive Vice President, a director and a
shareholder of Kojaian Management Corporation, both of which are investment firms headquartered in
Bloomfield Hills, Michigan, since 2000 and 1985, respectively. He is also a director of Arbor
Realty Trust, Inc. Mr. Kojaian has also served as the Chairman of the Board of Directors of Grubb &
Ellis Realty Advisors, Inc., an affiliate of the Company, from its inception in September 2005
until April 2008, and as its Chief Executive Officer from December 13, 2007 until April 2008.
Robert J. McLaughlin
has served as a director of the Company since July 2004. Mr. McLaughlin
previously served as a director of the Company from September 1994 to March 2001. He founded The
Sutter Group in 1982, a management consulting company that focuses on enhancing stockholder value,
and currently serves as its President. Previously, Mr. McLaughlin served as President and Chief
Executive Officer of Tru-Circle Corporation, an aerospace subcontractor, from November 2003 to
April 2004, and as Chairman of the Board of Directors from August 2001 to February 2003, and as
Chairman and Chief Executive Officer from October 2001 to April 2002 of Imperial Sugar Company.
Devin I. Murphy
has served as a director of the Company since July 2008. Mr. Murphy is a
managing director and vice chairman in the real estate investment banking division of Morgan
Stanley. Previously, he was a Managing Partner of Coventry Real Estate Advisors, a real estate
private equity firm founded in 1998 which sponsors institutional investment funds. Prior to joining
Coventry Real Estate Advisors, LLC in 2008, Mr. Murphy was the Global Head of Real Estate
Investment Banking at Deutsche Bank Securities, Inc. from 2004 to 2007. Prior to joining Deutsche
Bank, he was at Morgan Stanley & Company for 14 years in a variety of roles, including as Co-Head
North American Real Estate Investment Banking and Global Head of the firms Real Estate Private
Capital Markets Group.
D. Fleet Wallace
has served as a director of the Company since December 2007. Mr. Wallace also
had served as a director of NNN Realty Advisors, Inc. (
NNN
) from November 2006 to December 2007.
Mr. Wallace is a principal and co-founder of McCann Realty Partners, LLC, an apartment investment
company focusing on garden apartment properties in the Southeast formed in 2004. From April 1998 to
August 2001, Mr. Wallace served as corporate counsel and assistant secretary of United Dominion
Realty Trust, Inc., a publicly-traded real estate investment trust. From September 1994 to April
1998, Mr. Wallace was in the private practice of law with McGuire Woods in Richmond, Virginia.
Mr. Wallace has also served as a Trustee of G REIT Liquidating Trust since January 2008.
Rodger D. Young
has served as a director of the Company since April 2003. Mr. Young has been a
name partner of the law firm of Young & Susser, P.C. since its founding in 1991, a boutique firm
specializing in commercial litigation with offices in Southfield, Michigan and New York City. In
2001, Mr. Young was named Chairman of the Bush Administrations Federal Judge and U.S. Attorney
Qualification Committee by Governor John Engler and Michigans Republican Congressional Delegation.
Mr. Young is a member of the American College of Trial Lawyers and was listed in the 2007 edition
of
Best Lawyers of America
. Mr. Young was named by Chambers International and by Best Lawyers in
America as one of the top commercial litigators in the United States.
63
CORPORATE GOVERNANCE
Meetings
For the year ended December 31, 2008, our Board of Directors held 27 meetings. Each incumbent
director attended at least 75% of the aggregate of (i) the total number of meetings of the Board of
Directors held during the period that the individual served and (ii) the total number of meetings
held by all committees of the Board on which the director served during the period that the
individual served.
Independent Directors
The Board determined that seven of the eight directors serving in 2008, Messrs. Carpenter,
Greene, Kojaian, McLaughlin, Murphy, Wallace and Young were independent. For the year ended
December 31, 2008, Mr. Hunt was not considered independent under NYSE listing requirements because
he had been serving as the Companys interim Chief Executive Officer commencing in July 2008.
For purposes of determining the independence of its directors, the Board applies the following
criteria:
No Material Relationship
The director must not have any material relationship with the Company. In making this
determination, the Board considers all relevant facts and circumstances, including commercial,
charitable and familial relationships that exist, either directly or indirectly, between the
director and the Company.
Employment
The director must not have been an employee of the Company at any time during the past three
years. In addition, a member of the directors immediate family (including the directors spouse;
parents; children; siblings; mothers-, fathers-, brothers-, sisters-, sons- and daughters-in-law;
and anyone who shares the directors home, other than household employees) must not have been an
executive officer of the Company in the prior three years.
Other Compensation
The director or an immediate family member must not have received more than $100,000 per year
in direct compensation from the Company, other than in the form of director fees, pension or other
forms of deferred compensation during the past three years.
Auditor Affiliation
The director must not be a current partner or employee of the Companys internal or external
auditor. An immediate family member of the director must not be a current partner of the Companys
internal or external auditor, or an employee of such auditor who participates in the auditors
audit, assurance or tax compliance (but not tax planning) practice. In addition, the director or an
immediate family member must not have been within the last three years a partner or employee of the
Companys internal or external auditor who personally worked on the Companys audit.
Interlocking Directorships
During the past three years, the director or an immediate family member must not have been
employed as an executive officer by another entity where one of the Companys current executive
officers served at the same time on the compensation committee.
Business Transactions
The director must not be an employee of another entity that, during any one of the past three
years, received payments from the Company, or made payments to the Company, for property or
services that exceed the greater of $1 million or 2% of the other entitys annual consolidated
gross revenues. In addition, a member of the directors immediate family must not have been an
executive officer of another entity that, during any one of the past three years, received payments
from the Company, or made payments to the Company, for property or services that exceed the greater
of $1.0 million or 2% of the other entitys annual consolidated gross revenues.
64
Audit Committee
The Audit Committee of the Board is a separately designated standing audit committee
established in accordance with Section 3(a)(58)(A) of the Securities Exchange Act of 1934 as
amended (the
Exchange Act
) and the rules thereunder. The Audit Committee operates under a written
charter adopted by the Board of Directors. The charter of the Audit Committee was last revised
effective January 28, 2008 and is available on the Companys website at
www.grubb-ellis.com
. Printed copies of the charter of the Audit Committee may be obtained upon
request by contacting Investor Relations, Grubb & Ellis Company, 1551 North Tustin Avenue,
Suite 300, Santa Ana, California 92705. The current members of the Audit Committee are Robert
McLaughlin, Chair, D. Fleet Wallace and Rodger D. Young. The Board has determined that the members
of the Audit Committee are independent under the NYSE listing requirements and the Exchange Act and
the rules thereunder, and that Mr. McLaughlin is an audit committee financial expert in accordance
with rules established by the SEC. The members of the Audit Committee for the year ended December
31, 2008 were Robert McLaughlin, Chair, Harold H. Greene and D. Fleet Wallace. For the year ended
December 31, 2008, the Audit Committee held 10 meetings.
Compensation Committee
The Board of Directors has delegated to the Compensation Committee, a separately designated
standing committee, oversight responsibilities for the Companys executive compensation programs.
The Compensation Committee determines the policy and strategies of the Company with respect to
executive compensation taking into account certain factors that the Compensation Committee deems
appropriate such as (a) compensation elements that will enable the Company to attract and retain
executive officers who are in a position to achieve the strategic goals of the Company which are in
turn designed to enhance stockholder value, and (b) the Companys ability to compensate its
executives in relation to its profitability and liquidity.
The Compensation Committee approves, subject to further, final approval by the full Board of
Directors, (a) all compensation, arrangements and terms of employment, and any material changes to
the compensation arrangements or terms of employment, for the NEOs (as defined below) and certain
other key employees (including employment agreements and severance arrangements), and (b) the
establishment of, and changes to, equity-based awards programs. In addition, each calendar year,
the Compensation Committee approves the annual incentive goals and objectives of each named NEO and
certain other key employees, evaluates the performance of each NEO and certain other key employees
against the approved performance goals and objectives applicable to him or her, determines whether
and to what extent any incentive awards have been earned by each NEO, and makes recommendations to
the Companys Board of Directors regarding the approval of incentive awards.
Consistent with the Compensation Committees objectives, the Companys overall compensation
program is structured to attract, motivate and retain highly qualified executives by paying them
competitively and tying their compensation to the Companys success as a whole and their
contribution to the Companys success.
The Compensation Committee also provides general oversight of the Companys employee benefit
and retirement plans.
The current members of the Compensation Committee are D. Fleet Wallace, Chair, Robert J.
McLaughlin and Rodger D. Young. The members of the Compensation Committee for the year ended
December 31, 2008 were D. Fleet Wallace, Chair, Glenn C. Carpenter, Gary H. Hunt, C. Michael
Kojaian, Robert J. McLaughlin and Rodger D. Young. The Board has determined that the members of
the Compensation Committee are independent under the NYSE listing requirements and the Exchange Act
and the rules thereunder. For the year ended December 31, 2008, the Compensation Committee held ten
meetings.
The Compensation Committee operates under a written charter adopted by the full Board and
revised effective December 10, 2007, which is available on the Companys website at
www.grubb-ellis.com
. Printed copies may be obtained upon request by contacting Investor
Relations, Grubb & Ellis Company, 1551 North Tustin Avenue, Suite 300, Santa Ana, California 92705.
Corporate Governance and Nominating Committee
The functions of the Companys Corporate Governance and Nominating Committee, a separately
designated standing committee, are to assist the Board with respect to: (i) director qualification,
identification, nomination, independence and evaluation; (ii) committee structure, composition,
leadership and evaluation; (iii) succession planning for the CEO and other senior executives; and
(iv) corporate governance matters.
The current members of the Corporate Governance and Nominating Committee are Rodger D. Young,
Chair, and Devin I. Murphy. The members of the Corporate Governance and Nominating Committee for
the year ended December 31, 2008, were Rodger D. Young, Chair, Harold H. Greene and C. Michael
Kojaian. On February 9, 2009, Devin I. Murphy was appointed to serve as a member of the Corporate
Governance and Nominating Committee and Mr. Kojaian resigned as a member of the Corporate
Governance and Nominating Committee. The Board determined that
Messrs. Young, Greene, Kojaian and Murphy
were independent under the NYSE listing requirements and the Exchange Act and the rules thereunder.
For the year ended December 31, 2008, the Corporate Governance and Nominating Committee held 9
meetings. The Corporate Governance and Nominating Committee operates under a written charter
adopted by the Board, which is available on the Companys website at
www.grubb-ellis.com
access and printed copies of which may be obtained upon request by contacting Investor Relations,
Grubb & Ellis Company, 1551 North Tustin Avenue, Suite 300, Santa Ana, California 92705.
65
Director Nominations
Nominations by stockholders of persons for election to the Board of Directors must be made
pursuant to timely notice in writing to our Secretary. To be timely, a stockholders notice shall
be delivered or mailed to and received at our principal executive offices not later than the close
of business on the 90th day, nor earlier than the close of business on the 120th day prior to the
first anniversary of last years annual meeting; provided, however, that if the date of the annual
meeting is more than 30 days before or more than 70 days after such anniversary date, notice must
be delivered not earlier than the close of business on the 120th day prior to the annual meeting
and not later than the close of business on the later of the 90th day prior to the annual meeting
or the tenth day following the day on which public announcement of the date of the meeting is first
made. Such stockholders notice shall set forth: (1) the name, age, business address or, if known,
residence address of each proposed nominee; (2) the principal occupation or employment of each
proposed nominee; (3) the name and residence of the Chairman of the Board for notice by the Board
of Directors, or the name and residence address of the notifying stockholder for notice by said
stockholder; and (4) the total number of shares that to the best of the knowledge and belief of the
person giving the notice will be voted for each of the proposed nominees.
The Corporate Governance and Nominating Committee considers candidates for director who are
recommended by its members, by other Board members, by stockholders and by management. The
Corporate Governance and Nominating Committee evaluates director candidates recommended by
stockholders in the same way that it evaluates candidates recommended by its members, other members
of the Board, or other persons. The Corporate Governance and Nominating Committee considers all
aspects of a candidates qualifications in the context of our needs at that point in time with a
view to creating a Board with a diversity of experience and perspectives. Among the qualifications,
qualities and skills of a candidate considered important by the Corporate Governance and Nominating
Committee are a commitment to representing the long-term interests of the stockholders; an
inquisitive and objective perspective; the willingness to take appropriate risks; leadership
ability; personal and professional ethics, integrity and values; practical wisdom and sound
judgment; and business and professional experience in fields such as finance and accounting.
Communications to the Board
Stockholders, employees and others interested in communicating with any of the directors of
the Company may do so by writing to such director, c/o Andrea R. Biller, Corporate Secretary, Grubb
& Ellis Company, 1551 North Tustin Avenue, Suite 300, Santa Ana, California 92705.
Corporate Governance Guidelines
Effective July 6, 2006, the Board adopted corporate governance guidelines to assist the Board
in the performance of its duties and the exercise of its responsibilities. The Companys Corporate
Governance Guidelines are available on the Companys website at
www.grubb-ellis.com
and
printed copies may be obtained upon request by contacting Investor Relations, Grubb & Ellis
Company, 1551 North Tustin Avenue, Suite 300, Santa Ana, California 92705.
Director Attendance at Annual Meetings
Our Board has adopted a policy under which each member of the Board is strongly encouraged to
attend each Annual Meeting of our stockholders. All directors then in
office who were elected at the Companys
2009 Annual Meeting attended the Companys 2009 Annual Meeting.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Exchange Act requires Grubb & Ellis directors, certain officers and
persons who own more than 10% of its Common Stock, to file with the SEC initial reports of
ownership of Grubb & Ellis equity securities and to file subsequent reports when there are changes
in such ownership. Based on a review of reports submitted to Grubb & Ellis, we believe that during
the fiscal year ended December 31, 2008 all Section 16(a) filing requirements applicable to our
officers, directors, and more than 10% owners were complied with on a timely basis, except as noted
below.
On November 17, 2008, Rodger D. Young, a director of the Company, purchased 14,000 shares of
the Companys common stock on the open market. As a result of this transaction, a Form 4 was due to
be filed on November 19, 2008 for Mr. Young, but was not filed until November 21, 2008. In
addition, on December 10, 2008, the Company awarded each of its outside directors 20,000 restricted
shares of the Companys common stock, pursuant to the Companys 2006 Omnibus Equity Plan which vest
in equal 33 1 / 3 portions on each of the first, second, and third anniversaries of the grant date
(December 10, 2008). As a result of this award, a Form 4 was due to be filed on December 12, 2008
for each of the following directors then in office: Glenn C. Carpenter, Harold H. Greene, C.
Michael Kojaian, Robert J. McLaughlin, Devin I. Murphy, D. Fleet Wallace and Rodger D. Young.
However, the required Form 4s for each of the aforementioned outside directors of the Company were
not filed until December 16, 2008.
66
EXECUTIVE COMPENSATION
This compensation discussion and analysis describes the governance and oversight of the
Companys executive compensation programs and the material elements of compensation paid or awarded
to those who served as the Companys principal executive officer, the Companys principal financial
officer, and the three other most highly compensated executive officers of the Company during the
period from January 1, 2008 through December 31, 2008 (collectively, the
named executive officers
or
NEOs
and individually, a
named executive officer
or
NEO
). The specific amounts and
material terms of such compensation paid, payable or awarded are disclosed in the tables and
narrative included in this prospectus.
The compensation disclosure provided with respect to the Companys NEOs and directors with
respect to calendar year 2008 represent their full years compensation for such year, incurred by
the Company with respect to calendar year 2008. The compensation disclosure provided with respect
to the Companys NEOs and directors with respect to calendar years 2007 and 2006 represent their
full years compensation for each of those years, incurred by either NNN or the Company, as
applicable, with respect to calendar year 2006, and incurred by either NNN or the Company, as
applicable with respect to the entire 2007 calendar year, except for the period December 8, 2007
through December 31, 2007, during this three week stub period the Company incurred the entire
compensation to all NEOs and directors.
Compensation Committee Overview
The Board of Directors has delegated to the Compensation Committee oversight responsibilities
for the Companys executive compensation programs.
The Compensation Committee determines the policy and strategies of the Company with respect to
executive compensation taking into account certain factors that the Compensation Committee deems
appropriate such as (a) compensation elements that will enable the Company to attract and retain
executive officers who are in a position to achieve the strategic goals of the Company which are in
turn designed to enhance stockholder value, and (b) the Companys ability to compensate its
executives in relation to its profitability and liquidity.
The Compensation Committee approves, subject to further, final approval by the full Board of
Directors, (a) all compensation arrangements and terms of employment, and any material changes to
the compensation arrangements or terms of employment, for the NEOs and certain other key employees
(including employment agreements and severance arrangements), and (b) the establishment of, and
changes to, equity-based awards programs. In addition, each calendar year, the Compensation
Committee approves the annual incentive goals and objectives of each NEO and certain other key
employees, evaluates the performance of each NEO and certain other key employees against the
approved performance goals and objectives applicable to him or her, determines whether and to what
extent any incentive awards have been earned by each NEO, and makes recommendations to the
Companys Board of Directors regarding the approval of incentive awards.
Consistent with the Compensation Committees objectives, the Companys overall compensation
program is structured to attract, motivate and retain highly qualified executives by paying them
competitively and tying their compensation to the Companys success as a whole and their
contribution to the Companys success.
The Compensation Committee also provides general oversight of the Companys employee benefit
and retirement plans.
The Compensation Committee operates under a written charter adopted by the full Board and
revised effective December 10, 2007, which is available on the Companys website at
www.grubb-ellis.com
. Printed copies may be obtained upon request by contacting Investor
Relations, Grubb & Ellis Company, 1551 North Tustin Avenue, Suite 300, Santa Ana, California 92705.
Use of Consultants
Under its charter, the Compensation Committee has the power to select, retain, compensate and
terminate any compensation consultant it determines is useful in the fulfillment of the Committees
responsibilities. The Committee also has the authority to seek advice from internal or external
legal, accounting or other advisors.
In the fourth quarter of 2007, and in anticipation of the closing of the Companys stock
merger (the
Merger
) with NNN, the Company engaged the services of FPL Associations Compensation,
an outside consulting firm, to provide a comprehensive compensation study of the merged companies
for the Compensation Committee and the Board of Directors with respect to an analysis of, and
proposed designs and recommendations for, compensation arrangements primarily for the NEOs, other
lay service executives, directors, brokers and the Board.
The Company has previously engaged the services of Ferguson Partners, an affiliate of FPL
Associates Compensation. In February 2007, Ferguson Partners managed the search for the Companys
Chief Financial Officer which resulted in the hiring of the Companys Chief Financial Officer,
Richard W. Pehlke in February 2007. In conjunction with the search, Ferguson Partners advised the
Committee with respect to Mr. Pehlkes compensation arrangements and terms of employment.
Similarly, the Compensation Committee has used the services of Ferguson Partners in the past in
connection with the search and establishment of the compensation
67
arrangements and terms of employment for the other executive officers. In each instance, and
in connection with the study conducted by its affiliate, FPL Associates Compensation in the fourth
quarter of 2007, Ferguson Partners and FPL Associates Compensation provided to the Compensation
Committee and the Board with information regarding comparative market compensation arrangements.
In March 2008, the Company engaged Christenson Advisors, LLC to provide an array of
compensation and human resource related services across the Company.
The Company engaged the services of Equinox Partners in July 2008 to manage the search for the
Companys Chief Executive Officer following Scott D. Peters resignation in July 2008. Mr. DArcy
became the Companys President and Chief Executive Officer on November 16, 2009.
Role of Executives in Establishing Compensation
In advance of each Compensation Committee meeting, the Chief Executive Officer and the Chief
Operating Officer work with the Compensation Committee Chairman to set the meeting agenda. The
Compensation Committee periodically consults with the Chief Executive Officer of the Company with
respect to the hiring and the compensation of the other NEOs and certain other key employees.
Members of management, typically the Chief Executive Officer, the Chief Financial Officer and
General Counsel, regularly participate in non-executive portions of Compensation Committee
meetings.
Certain Compensation Committee Activity
The Compensation Committee met ten times during the year ended December 31, 2008 and in
fulfillment of its obligations, among other things, determined on December 3, 2008, based upon a
recommendation of Christenson Advisors, LLC, that the cash retainer for independent, outside
directors of $50,000 per annum would remain the same as would the Board Meeting and Committee
Meeting fees of $1,500 per meeting. Similarly, the Compensation Committee determined that the Audit
Chair retainer, the Compensation Chair retainer and the Governance Chair retainer would remain
constant at $15,000, $10,000 and $7,500 per annum, respectively. The Compensation Committee also
decided, based upon a recommendation of Christenson Advisors, LLC, that the $60,000 annual equity
award for independent, outside directors, with respect to 2008 only, be capped at 20,000 shares due
to decline in the stock market in 2008, which adversely affected the price of the Companys shares.
Compensation Philosophy, Goals and Objectives
As a commercial real estate services company, the Company is a people oriented business which
strives to create an environment that supports its employees in order to achieve its growth
strategy and other goals established by the Board so as to increase stockholder value over the long
term.
The primary goals and objectives of the Companys compensation programs are to:
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|
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Compensate management, key employees, independent
contractors and consultants on a competitive basis to
attract, motivate and retain high quality, high
performance individuals who will achieve the Companys
short-term and long term goals;
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Motivate and reward executive officers whose knowledge,
skill and performance are critical to the Companys
success;
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Align the interests of the Companys executive officers
and stockholders through equity-based long-term incentive
awards that motivate executive officers to increase
stockholder value and reward executive officers when
stockholder value increases; and
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Ensure fairness among the executive management team by
recognizing contributions each executive officer makes to
the Companys success.
|
The Compensation Committee established these goals in order to enhance stockholder value.
The Company believes that it is important for variable compensation, i.e., where an NEO has a
significant portion of his or her total cash compensation at risk, to constitute a significant
portion of total compensation and that such variable compensation be designed so as to reward
effective team work (through the achievement of Company-wide financial goals) as well as the
achievement of individual goals (through the achievement of business unit/functional goals and
individual performance goals and objectives). The Company believes that this dual approach best
aligns the individual NEOs interest with the interests of the stockholders.
68
Compensation During Term of Employment
The Companys compensation program for NEOs is comprised of four key elementsbase salary,
annual bonus incentive compensation, stock-based compensation and incentives and a retirement
planthat are intended to balance the goals of achieving both short-term and long-term results
which the Company believes will effectively align management with stockholders.
Base Salary
Amounts paid to NEOs as base salaries are included in the column captioned Salary in the
Summary Compensation Table below. The base salary of each NEO is determined based upon their
position, responsibility, qualifications and experience, and reflects consideration of both
external comparison to available market data and internal comparison to other executive officers.
The base salary for an NEO is typically established at the time of the negotiation of his or
her respective employment agreement. In the case of the Companys General Counsel Executive Vice
President and Corporate Secretary, Andrea R. Biller, her compensation has not been adjusted since
the inception of her current employment agreement. In the case of the Companys Chief Financial
Officer and Executive Vice President, Richard W. Pehlke, his base salary was increased on January
1, 2008 from $350,000 to $375,000. Chief Investment Officer, Jeffrey T. Hansons base salary was
increased on August 1, 2008 from $350,000 to $450,000. As a result of Jacob Van Berkel being
promoted to Chief Operating Officer and Executive Vice President on March 1, 2008, Mr. Van Berkels
base salary was increased from $280,000 to $400,000.
The base salary component is designed to constitute between 20% and 50% of total annual
compensation target for the NEOs based upon each individuals position in the organization and the
Committees determination of each positions ability to directly impact the Companys financial
results.
Annual Bonus Incentive Compensation
Amounts paid to NEOs under the annual bonus plan are included in the column captioned Bonus
in the Summary Compensation Table below. In addition to earning base salaries, each of the
Companys NEOs is eligible to receive an annual cash bonus, the target amount of which is set by
the individual employment agreement with each NEO. The annual bonus incentive of each NEO is
determined based upon his or her position, responsibility, qualifications and experience, and
reflects consideration of both external comparison to available market data and internal comparison
to other executive officers.
Jeffrey T. Hanson, Chief Investment Officer, had his annual bonus incentive target increase
from 100% to 150% effective August 1, 2008. Richard W. Pehlke, Chief Financial Officer and
Executive Vice President, had his annual bonus incentive target increase from 50% to 150% effective
January 1, 2008.
In 2007, the bonus plan with respect to those NEOs who were executive officers of the Company
had a formulaic component based on achievement of specified Company earnings before interest and
taxes (
EBIT
) and business unit/function EBIT goals and also a component based on the achievement
of personal goals and objectives designed to enhance the overall performance of the Company. The
bonus plan of those NEOs, who were executive officers of the NNN, while taking into account NNNs
earnings before interest, taxes, depreciation and amortization (
EBITDA
), as well as personal
goals and objectives, was not formulaic, but rather, more discretionary in nature. Beginning in
2008, the bonus plan for all NEOs has been standardized and will be tied to the specified targets
based on the Companys EBITDA as discussed below.
The annual cash bonus plan target for NEOs is between 50% and 200% of base salary and is
designed to constitute from 20% to 50% of an NEOs total annual target compensation. The bonus plan
component is based on each individuals role and responsibilities in the Company and the
Compensation Committees determination of each NEOs ability to directly impact the Companys
financial results.
The Compensation Committee reviews each NEOs bonus plan annually. Annual Company EBITDA
targets are determined in connection with the annual calendar-year based budget process. A minimum
threshold of 80% of Company EBITDA must be achieved before any payment is awarded with respect to
this component of bonus compensation. At the end of each calendar year, the Chief Executive
Officer reviews the performance of each of the other NEOs and certain other key employees against
the financial objectives and against their personal goals and objectives and makes recommendations
to the Compensation Committee for payments on the annual cash bonus plan. The Compensation
Committee reviews the recommendations and forwards these to the Board for final approval of
payments under the plan.
For fiscal year 2008, no annual incentive bonus plan payments were made to the NEOs.
During 2007, the Compensation Committee revised the calendar 2007 bonus plans for the
Companys NEOs to increase the percentage of bonus tied to the Companys EBIT performance in order
to more closely link the annual bonus to the Companys overall financial performance. The chart
directly below captioned Annual Bonus Incentive Compensation provides the details of the calendar
2006, calendar 2007 plans and calendar 2008 plans.
In addition to the annual bonus program, from time to time the Board may establish one-time
cash bonuses related to the satisfactory performance of identified special projects. Upon the
closing of the Merger, Scott D. Peters, the Companys former Chief
69
Executive Officer and President received (i) a special one-time transaction success fee of
$1,000,000, (ii) 528,000 shares of common stock of the Company from Anthony W. Thompson, the former
Chairman of the Board of the Company, and (iii) the right to receive up to $1,000,000 for a second
residence in California, which right Mr. Peters irrevocably waived in January 2008. The 528,000
shares of common stock received from Anthony W. Thompson were forfeited by Mr. Peters upon his
departure from the Company in July 2008 and returned to Mr. Thompson.
Annual Bonus Incentive Compensation
|
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|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bonus Target
|
|
|
|
|
|
|
|
|
|
|
|
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|
as a
|
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|
Business
|
|
|
|
|
Calendar
|
|
% of Base
|
|
Company
|
|
Unit/Function
|
|
Personal Goals
|
|
|
Year
|
|
Salary
|
|
Performance(5)
|
|
Performance(5)
|
|
and Objectives
|
Gary H. Hunt (1)
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current Interim Chief
Executive Officer
|
|
|
|
|
|
|
|
|
|
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|
|
|
|
|
|
|
|
|
|
|
Scott D. Peters (2)
|
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|
2008
|
|
|
|
200
|
%
|
|
|
70
|
%
|
|
|
|
|
|
|
30
|
%
|
Former Chief Executive Officer
|
|
|
2007
|
|
|
|
200
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
|
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|
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|
|
|
|
|
|
|
|
|
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|
Richard W. Pehlke
|
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|
2008
|
|
|
|
150
|
%
|
|
|
70
|
%
|
|
|
|
|
|
|
30
|
%
|
Chief Financial Officer
|
|
|
2007
|
|
|
|
50
|
%(3)
|
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|
90
|
%
|
|
|
|
|
|
|
10
|
%
|
|
Andrea R. Biller
|
|
|
2008
|
|
|
|
150
|
%
|
|
|
70
|
%
|
|
|
|
|
|
|
30
|
%
|
Executive Vice President,
|
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|
2007
|
|
|
|
150
|
%
|
|
|
|
|
|
|
|
|
|
|
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|
General Counsel and Corporate
Secretary
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
Jeffrey T. Hanson
|
|
|
2008
|
|
|
|
150
|
%
|
|
|
40
|
%
|
|
|
40
|
%
|
|
|
20
|
%
|
Chief Investment Officer
|
|
|
2007
|
|
|
|
100
|
%
|
|
|
|
|
|
|
|
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|
|
|
|
|
|
2006
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|
Jacob Van Berkel(4)
|
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2008
|
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|
100
|
%
|
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|
70
|
%
|
|
|
|
|
|
|
30
|
%
|
Chief Operating Officer and
Executive Vice President
|
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|
2007
|
|
|
|
100
|
%
|
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|
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|
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(1)
|
|
Mr. Hunt served as the Interim Chief Executive Officer from July 2008 until November 16, 2009,
when Mr. DArcy became the President and Chief Executive Officer.
|
|
(2)
|
|
Mr. Peters served as the Chief Executive Officer until July 2008.
|
|
(3)
|
|
Mr. Pehlke had a minimum guaranteed bonus of $125,000 for calendar 2007, prorated based on his
hire date in February 2007 (equal to $110,577).
|
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(4)
|
|
Mr. Van Berkel joined the Company in August 2007.
|
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(5)
|
|
2008 bonuses calculated based on Company EBITDA and 2007 bonuses calculated based on Company EBIT.
|
Stock-Based Compensation and Incentives
The compensation associated with stock awards granted to NEOs is included in the Summary
Compensation Table and other tables below (including the charts that show outstanding equity
awards). Except for the January 24, 2008 grant of 75,000 and 80,000 restricted shares of common
stock to Richard W. Pehlke and Jacob Van Berkel respectively, and the December 3, 2008 grant of
250,000 restricted shares of common stock to each of Richard W. Pehlke and Jacob Van Berkel, no
other grants were made to NEOs during the year ended December 31, 2008.
In February of 2009, each of Messrs. Pehlke and Van Berkel, on their own initiative,
voluntarily returned an aggregate of 131,000 and 130,000 restricted shares, respectively, to the
Company for re-allocation of such restricted shares, on the same terms and conditions, to various
employees in their respective business units.
The equity grants are intended to align management with the long-term interests of the
Companys stockholders and to have a retentive effect upon the Companys NEOs. The Compensation
Committee and the Board of Directors approve all equity grants to NEOs.
70
Profit Sharing Plan
NNN has established a profit sharing plan for its employees, pursuant to which NNN provides
matching contributions. Generally, all employees are eligible to participate following one year of
service with NNN. Matching contributions are made in NNNs sole discretion. Participants interests
in their respective contribution account vests over 4 years, with 0.0% vested in the first year of
service, 25.0% in the second year, 50.0% in the third year and 100.0% in the fourth year.
Retirement Plans
The amounts paid to the Companys NEOs under the retirement plan are included in the column
captioned All Other Compensation in the Summary Compensation Table below. The Company has
established and maintains a retirement savings plan under Section 401(k) of the Internal Revenue
Code of 1986 (the
Code
) to cover the Companys eligible employees including the Companys NEOs.
The Code allows eligible employees to defer a portion of their compensation, within prescribed
limits, on a tax deferred basis through contributions to the 401(k) Plan. The Companys 401(k) Plan
is intended to constitute a qualified plan under Section 401(k) of the Code and its associated
trust is intended to be exempt from federal income taxation under Section 501(a) of the Code. The
Company makes Company matching contributions to the 401(k) Plan for the benefit of the Companys
employees including the Companys NEOs. In April 2009, the Companys matching contributions to the
401(k) plan were suspended.
Personal Benefits and Perquisites
The amounts paid to the Companys NEOs for personal benefits and perquisites are included in
the column captioned All Other Compensation in the Summary Compensation Table below. Perquisites
to which all of the Companys NEOs are entitled include health, dental, life insurance, long-term
disability, profit-sharing and a 401(k) savings plan, and 100% of the premium cost of health
insurance for certain NEOs is paid for by the Company. Upon the closing of the Merger, Scott D.
Peters, the Companys then Chief Executive Officer and President had the right to receive up to
$1,000,000 for a second residence in California, which right Mr. Peters irrevocably waived in
January, 2008.
Long Term Incentive Plan
On May 1, 2008, the Compensation Committee adopted the Long Term Incentive Plan (
LTIP
) of
Grubb & Ellis Company, effective January 1, 2008, designed to reward the efforts of the executive
officers of the Company to successfully attain the Companys long-term goals by directly tying the
executive officers compensation to the Company and individual results. During fiscal year 2008, no
NEO received an award under the LTIP.
The LTIP is divided into two components: (i) annual long-term incentive target which comprises
50% of the overall target, and (ii) multi-year annual incentive target which comprises the other
50%.
Awards under the LTIP are earned by performance during a fiscal year and by remaining employed
by the Company through the date awards are granted, usually in March for annual long-term incentive
awards or though the conclusion of the three-year performance period for multi-year long term
incentive awards (
Grant Date
).
All awards are paid in shares of the Companys common stock, subject to the rights of the
Company to distribute cash or other non-equity forms of compensation in lieu of the Companys
common stock.
The annual long-term incentive target is broken down into three components: (i) absolute
stockholder return (30%); corporate EBITDA (35%); and individual performance priorities (35%).
Vesting of awards upon achievement of the annual long-term incentive targets is as follows: (i)
33.33% of the restricted shares of the Companys common stock will vest on the Grant Date; (ii)
33.33% will vest in the first anniversary of the Grant Date; and (iii) the remaining 33.33% will
vest on the second anniversary of the Grant Date.
The multi-year long-term incentive target is broken down into two components: (i) absolute
stockholder return (50%); and relative total stockholder return (50%). Vesting of awards upon
achievement of the multi-year long-term incentive awards is as follows: (i) 50% of the restricted
shares of the Companys common stock will be paid on the Grant Date; and (ii) 50% on the first year
anniversary of the Grant Date.
Summary Compensation Table
The following table sets forth certain information with respect to compensation for the
calendar years ended December 31, 2008, 2007 and 2006 earned by or paid to the Companys named
executive officers for such full calendar years (by either NNN or legacy Grubb & Ellis, as
applicable, prior to the Merger, and by the Company subsequent to the Merger). In certain instances
throughout this prospectus, phrases such as legacy Grubb & Ellis or similar descriptions are used
to reference, when appropriate, Grubb & Ellis prior to the Merger; similarly, the term NNN, legacy
NNN or similar phrases are used to reference, when appropriate, NNN Realty Advisors, Inc. prior to
the Merger.
71
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|
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|
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|
|
Change in
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Value
|
|
|
|
|
|
|
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|
|
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|
|
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|
|
Non-Equity
|
|
And
|
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|
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|
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|
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|
|
|
|
|
|
|
|
|
|
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|
|
Incentive
|
|
Nonqualified
|
|
|
|
|
Name and
|
|
Year
|
|
|
|
|
|
|
|
|
|
Stock
|
|
Option
|
|
Plan
|
|
Deferred
|
|
All Other
|
|
|
Principal
|
|
Ended
|
|
Salary
|
|
Bonus
|
|
Awards
|
|
Awards
|
|
Compensation
|
|
Compensation
|
|
Compensation
|
|
|
Position
|
|
December
|
|
($)
|
|
($)
|
|
($)(11)
|
|
($)(12)
|
|
($)
|
|
Earnings
|
|
($)(8)(13)(14)
|
|
Total
|
|
Gary H. Hunt(1)
|
|
|
2008
|
|
|
$
|
300,000
|
(5)
|
|
$
|
|
|
|
$
|
59,088
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
359,088
|
|
Interim
Chief
Executive Officer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Scott D. Peters(2)
|
|
|
2008
|
|
|
|
401,889
|
|
|
|
|
|
|
|
704,841
|
|
|
|
68,500
|
|
|
|
|
|
|
|
|
|
|
|
528,310
|
|
|
|
1,703,540
|
|
Former Chief
|
|
|
2007
|
|
|
|
587,808
|
|
|
|
1,825,800
|
|
|
|
2,610,555
|
|
|
|
91,250
|
|
|
|
|
|
|
|
|
|
|
|
655,621
|
|
|
|
5,771,034
|
|
Executive
Officer
|
|
|
2006
|
|
|
|
611,250
|
|
|
|
1,125,900
|
(7)
|
|
|
1,834,669
|
|
|
|
81,345
|
|
|
|
|
|
|
|
|
|
|
|
977,260
|
|
|
|
4,630,424
|
|
|
Richard W. Pehlke(3)
|
|
|
2008
|
|
|
|
375,000
|
|
|
|
|
|
|
|
112,951
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
487,951
|
|
Executive Vice
President, and Chief
Financial Officer
|
|
|
2007
|
|
|
|
299,500
|
|
|
|
200,000
|
|
|
|
49,770
|
|
|
|
198,808
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
748,078
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Andrea R. Biller
|
|
|
2008
|
|
|
|
400,000
|
|
|
|
|
|
|
|
100,106
|
|
|
|
42,803
|
|
|
|
|
|
|
|
|
|
|
|
688,565
|
|
|
|
1,231,474
|
|
Executive Vice
|
|
|
2007
|
|
|
|
400,000
|
|
|
|
451,000
|
|
|
|
1,286,413
|
|
|
|
73,000
|
|
|
|
|
|
|
|
|
|
|
|
592,134
|
|
|
|
2,802,547
|
|
President,
General
Counsel and
Corporate Secretary
|
|
|
2006
|
|
|
|
391,674
|
|
|
|
501,200
|
(7)
|
|
|
411,667
|
|
|
|
65,076
|
|
|
|
|
|
|
|
|
|
|
|
72,834
|
|
|
|
1,442,451
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Jeffrey T. Hanson
|
|
|
2008
|
|
|
|
391,667
|
|
|
|
250,000
|
(10)
|
|
|
2,900,777
|
|
|
|
38,168
|
|
|
|
|
|
|
|
|
|
|
|
556,727
|
|
|
|
4,137,339
|
|
Chief
|
|
|
2007
|
|
|
|
350,000
|
|
|
|
500,350
|
(10)
|
|
|
3,410,352
|
|
|
|
45,625
|
|
|
|
|
|
|
|
|
|
|
|
425,106
|
|
|
|
4,731,433
|
|
Investment
Officer
|
|
|
2006
|
|
|
|
117,628
|
(6)
|
|
|
1,212,180
|
(9)
|
|
|
726,079
|
|
|
|
40,673
|
|
|
|
|
|
|
|
|
|
|
|
1,083
|
|
|
|
2,097,643
|
|
|
Jacob Van Berkel(4)
|
|
|
2008
|
|
|
|
380,000
|
|
|
|
|
|
|
|
149,203
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,816
|
|
|
|
534,019
|
|
Chief Operating
Officer and
Executive Vice
President
|
|
|
2007
|
|
|
|
115,096
|
|
|
|
225,000
|
|
|
|
2,238
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
30
|
|
|
|
342,364
|
|
|
|
|
(1)
|
|
Mr. Hunt served as the Interim Chief Executive Officer from July 2008 until November 16, 2009, when Mr. DArcy became the President and Chief Executive Officer.
|
|
(2)
|
|
Mr. Peters served as the Chief Executive Officer from December 2007 until July 2008.
|
|
(3)
|
|
Mr. Pehlke has served as the Chief Financial Officer since February 2007.
|
|
(4)
|
|
Mr. Van Berkel joined the Company in August 2007.
|
|
(5)
|
|
Amounts paid to Mr. Hunt represent a consulting fee as Mr. Hunt was a consultant as the Interim Chief Executive Officer and was not an employee of the Company.
|
|
(6)
|
|
Mr. Hansons annual salary for fiscal 2006 was $250,000. The $117,628 represents amounts paid or to be paid to Mr. Hanson from July 29, 2006 (the date Mr. Hanson joined
Grubb & Ellis Realty Investors, LLC (
GERI
)) through December 31, 2006.
|
|
(7)
|
|
Bonus amounts include bonuses of $100,000 earned in fiscal 2006 to each of Mr. Peters and Ms. Biller upon the receipt by NNN from G REIT, a public non-traded REIT that NNN
sponsored, of net commissions aggregating $5 million or more from the sale of G REIT properties pursuant to a plan of liquidation approved by G REIT stockholders.
|
|
(8)
|
|
All other compensation also includes: (i) cash distributions based on membership interests of $85,303, $159,418 and $50,000 earned by Mr. Peters and $121,804, $159,418 and
$50,000 earned by Ms. Biller from Grubb & Ellis Apartment Management, LLC for each of the calendar years ended December 31, 2008, 2007 and 2006, respectively; and (ii)
cash distributions based on membership interests of $386,700, $413,546 and $0 earned by Mr. Peters and $547,519, $413,546 and $0 earned by each of Mr. Hanson and Ms.
Biller from Grubb & Ellis Healthcare Management, LLC for each of the calendar years ended December 31, 2008, 2007 and 2006, respectively.
|
72
|
|
|
(9)
|
|
Mr. Hanson was appointed GERIs Managing Director, Real Estate on July 29, 2006. His bonus amount included a $750,000 sign-on bonus that was paid in September 2006. Amount
also includes a special bonus paid to Mr. Hanson pursuant to his employment agreement for being the procuring cause of at least $25 million in equity from new sources,
which equity was received by GERI during the fiscal year, for real estate investments sourced by GERI.
|
|
(10)
|
|
Amount includes a special bonus of $250,000. The 2008 special bonus has not yet been paid as of the date of this prospectus.
|
|
(11)
|
|
The amounts shown are the amounts of compensation cost related to the grants of restricted stock, as well as the
compensation expense associated with the accelerated vesting of the restricted stock at the Merger date, as required by the
Equity Topic, utilizing the assumptions discussed in Note 24 to the consolidated financial statements included in this
prospectus.
|
|
(12)
|
|
The amounts shown are the amounts of compensation cost related to the grants of stock options, as well as compensation
expense associated with the accelerated vesting of the stock options at the Merger date, as required by the Equity Topic,
utilizing the assumptions discussed in Note 24 to the consolidated financial statements included in this prospectus.
|
|
(13)
|
|
The amounts shown include the Companys incremental cost for the provision to the named executive officers of certain
specified perquisites in fiscal 2008, 2007 and 2006, as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Living
|
|
Travel
|
|
Tax Gross Up
|
|
Metal & Dental
|
|
|
|
|
|
|
|
|
Expenses
|
|
Expenses
|
|
Payment
|
|
Premiums
|
|
Total
|
Named Executive Officer
|
|
Year
|
|
($)
|
|
($)
|
|
($)
|
|
($)
|
|
($)
|
Gary H. Hunt
|
|
|
2008
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
Scott D. Peters
|
|
|
2008
|
|
|
|
15,871
|
|
|
|
15,209
|
|
|
|
|
|
|
|
7,161
|
|
|
|
38,241
|
|
|
|
|
2007
|
|
|
|
27,314
|
|
|
|
29,573
|
|
|
|
|
|
|
|
8,340
|
|
|
|
65,227
|
|
|
|
|
2006
|
|
|
|
24,557
|
|
|
|
31,376
|
|
|
|
853,668
|
|
|
|
1,043
|
|
|
|
910,644
|
|
|
Richard W. Pehlke
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,287
|
|
|
|
7,287
|
|
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Andrea R. Biller
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,621
|
|
|
|
4,621
|
|
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,740
|
|
|
|
1,740
|
|
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
218
|
|
|
|
218
|
|
|
Jeffrey T. Hanson
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13,179
|
|
|
|
13,179
|
|
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,340
|
|
|
|
8,340
|
|
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,043
|
|
|
|
1,043
|
|
|
Jacob Van Berkel
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
The amounts shown also include the following 401(k) matching
contributions made by the Company, income attributable to life
insurance coverage and contributions to the profit-sharing plan
in fiscal 2008, 2007 and 2006, as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
401(k) Plan
|
|
|
|
|
|
Profit-Sharing Plan
|
|
|
|
|
|
|
|
|
Company
|
|
Life Insurance
|
|
Company
|
|
|
|
|
|
|
|
|
Contributions
|
|
Coverage
|
|
Contributions
|
|
Total
|
Named Executive Officer
|
|
Year
|
|
($)
|
|
($)
|
|
($)
|
|
($)
|
Gary H. Hunt
|
|
|
2008
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
Scott D. Peters
|
|
|
2008
|
|
|
|
4,600
|
|
|
|
374
|
|
|
|
|
|
|
|
4,974
|
|
|
|
|
2007
|
|
|
|
3,100
|
|
|
|
120
|
|
|
|
14,210
|
|
|
|
17,430
|
|
|
|
|
2006
|
|
|
|
|
|
|
|
116
|
|
|
|
16,500
|
|
|
|
16,616
|
|
|
Richard W. Pehlke
|
|
|
2008
|
|
|
|
|
|
|
|
1,290
|
|
|
|
|
|
|
|
1,290
|
|
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Andrea R. Biller
|
|
|
2008
|
|
|
|
|
|
|
|
1,290
|
|
|
|
|
|
|
|
1,290
|
|
|
|
|
2007
|
|
|
|
3,100
|
|
|
|
120
|
|
|
|
14,210
|
|
|
|
17,430
|
|
|
|
|
2006
|
|
|
|
6,000
|
|
|
|
116
|
|
|
|
16,500
|
|
|
|
22,616
|
|
|
Jeffrey T. Hanson
|
|
|
2008
|
|
|
|
|
|
|
|
270
|
|
|
|
|
|
|
|
270
|
|
|
|
|
2007
|
|
|
|
3,100
|
|
|
|
120
|
|
|
|
|
|
|
|
3,220
|
|
|
|
|
2006
|
|
|
|
|
|
|
|
40
|
|
|
|
|
|
|
|
40
|
|
|
Jacob Van Berkel
|
|
|
2008
|
|
|
|
4,600
|
|
|
|
450
|
|
|
|
|
|
|
|
5,050
|
|
|
|
|
2007
|
|
|
|
|
|
|
|
30
|
|
|
|
|
|
|
|
30
|
|
73
Grants of Plan-Based Awards
The following table sets forth information regarding the grants of plan-based awards made to
its NEOs for the fiscal year ended December 31, 2008.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
All Other
|
|
|
|
|
|
|
|
|
|
|
All Other
|
|
Option Awards:
|
|
Exercise or
|
|
|
|
|
|
|
|
|
Stock Awards:
|
|
Number of
|
|
Base Price
|
|
Grant Date
|
|
|
|
|
|
|
Number of
|
|
Securities
|
|
of Option
|
|
Fair Value of Stock
|
|
|
|
|
|
|
Shares of
|
|
Underlying
|
|
Awards
|
|
and Option
|
Name
|
|
Grant Date
|
|
Stock of Units
|
|
Options(1)
|
|
($/Share)
|
|
Awards($)(1)
|
Gary H. Hunt
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
|
|
|
$
|
|
|
|
Scott D. Peters
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Richard W. Pehlke
|
|
|
01/24/08
|
|
|
|
75,000
|
(2)
|
|
|
|
|
|
|
4.41
|
|
|
|
330,750
|
|
|
|
|
12/03/08
|
|
|
|
250,000
|
(2)
|
|
|
|
|
|
|
1.26
|
|
|
|
315,000
|
|
|
Andrea R. Biller
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Jeffrey T. Hanson
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Jacob Van Berkel
|
|
|
01/24/08
|
|
|
|
80,000
|
(2)
|
|
|
|
|
|
|
4.41
|
|
|
|
352,800
|
|
|
|
|
12/03/08
|
|
|
|
250,000
|
(2)
|
|
|
|
|
|
|
1.26
|
|
|
|
315,000
|
|
|
|
|
(1)
|
|
The grant date fair value of the shares of restricted
stock and stock options granted were computed in
accordance with the requirements of the Equity Topic.
|
|
(2)
|
|
Amounts shown with respect to Messrs. Pehlke and Van
Berkel represent restricted stock awarded pursuant to
the Companys 2006 Omnibus Equity Plan which will vest
in equal thirty-three and one third (33 1/3%)
installments on each of the first, second and third
anniversaries of their respective grant dates. In
February 2009, each of Messrs. Pehlke and Van Berkel,
on their own initiative, voluntarily returned an
aggregate of 131,000 and 130,000 restricted shares,
respectively, to the Company for re-allocation of such
restricted shares, on the same terms and conditions, to
various employees in their respective business units.
|
Outstanding Equity Awards at Fiscal Year-End
The following table sets forth summary information regarding the outstanding equity awards
held by the Companys named executive officers at December 31, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Option Awards
|
|
Stock Awards
|
|
|
Number of
|
|
Number of
|
|
|
|
|
|
|
|
|
|
Number of
|
|
Market Value
|
|
|
Securities
|
|
Securities
|
|
|
|
|
|
|
|
|
|
Shares or
|
|
of Shares
|
|
|
Underlying
|
|
Underlying
|
|
|
|
|
|
|
|
|
|
Units of
|
|
or Units
|
|
|
Unexercised
|
|
Unexercised
|
|
Option
|
|
Option
|
|
Stock that
|
|
of Stock That
|
|
|
Options
|
|
Options
|
|
Exercise
|
|
Expiration
|
|
Have Not
|
|
Have Not
|
Name
|
|
Exercisable
|
|
Unexercisable
|
|
Price
|
|
Date
|
|
Vested
|
|
Vested(1)
|
Gary H. Hunt
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,333
|
(2)
|
|
$
|
83,303
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,997
|
(3)
|
|
$
|
40,000
|
|
|
Scott D. Peters
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Richard W. Pehlke
|
|
|
25,000
|
(4)
|
|
|
|
|
|
$
|
11.75
|
|
|
|
02/14/2017
|
|
|
|
75,000
|
(5)
|
|
$
|
330,750
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
250,000
|
(6)
|
|
$
|
315,000
|
|
|
Andrea R. Biller
|
|
|
35,200
|
(7)
|
|
|
|
|
|
$
|
11.36
|
|
|
|
11/16/2016
|
|
|
|
17,600
|
(8)
|
|
$
|
199,936
|
|
|
Jeffrey T. Hanson
|
|
|
22,000
|
(9)
|
|
|
|
|
|
$
|
11.36
|
|
|
|
11/16/2016
|
|
|
|
247,720
|
(10)
|
|
$
|
2,814,099
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11,733
|
(11)
|
|
$
|
133,287
|
|
|
Jacob Van Berkel
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11,733
|
(12)
|
|
$
|
59,252
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
80,000
|
(5)
|
|
$
|
352,800
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
250,000
|
(6)
|
|
$
|
315,000
|
|
|
|
|
(1)
|
|
The grant date fair value of the shares of
restricted stock granted on January 24, 2008
or December 3, 2008, as applicable, as
computed in accordance with the requirements
of the Equity Topic, is reflected in the
Grants of Plan-Based Awards table.
|
|
(2)
|
|
Amounts shown represent 11,000 restricted
shares of the Companys common stock that
were received in connection with the Merger
in exchange for 12,500 shares of NNN
restricted stock. The 12,500 shares were
awarded to Mr. Hunt as a Director pursuant to
the NNNs 2006 Long Term Incentive Plan and
vest in equal 1/3 installments in each of the
first, second and third
|
74
|
|
|
|
|
anniversaries of the grant date (June 27, 2007), subject to continued service with the Company.
|
|
(3)
|
|
Amounts shown represent 8,996
shares of the Companys
common stock that were
awarded to Mr. Hunt as a
Director under the 2006
Omnibus Equity Plan and vest
in equal 1/3 installments in
each of the first, second and
third anniversaries of the
grant date (December 10,
2007), subject to continued
service with the Company.
|
|
(4)
|
|
Amounts shown represent
options granted on February
15, 2007. These options vest
in equal installments of
thirty-three and one-third
percent (33 1/3%) on the last
business day before each of
the first, second and third
anniversaries of February 14,
2007, subject to the terms of
the Stock Option Agreement by
and between Mr. Pehlke and
the Company, dated as of
February 15, 2007, and the
Companys 2006 Omnibus Equity
Plan.
|
|
(5)
|
|
Amounts shown represent
shares of the Companys
common stock that were
awarded on January 23, 2008
under the 2006 Omnibus Equity
Plan which will vest in equal
1/3 installments in each of
the first, second and third
anniversaries of the grant
date, subject to continued
service with the Company.
|
|
(6)
|
|
Amounts shown represent
shares of the Companys
common stock that were
awarded on December 3, 2008
under the 2006 Omnibus Equity
Plan which will vest in equal
1/3 installments in each of
the first, second and third
anniversaries of the grant
date, subject to continued
service with the Company.
|
|
(7)
|
|
Amounts shown represent
options received in the
Merger in exchange for stock
options to acquire 40,000
shares of the common stock of
NNN Realty Advisors, Inc. for
$10.00 per share. These
options vested and became
exercisable with respect to
1/3 of the underlying shares
of the Companys common stock
on each of November 16, 2006,
November 16, 2007 and
November 16, 2008 and have a
maximum term of ten-years.
|
|
(8)
|
|
Amounts shown represent
26,400 restricted shares of
the Companys common stock
that were received in
connection with the Merger in
exchange for 30,000 shares of
NNN restricted stock. The
30,000 shares were awarded to
Ms. Biller pursuant to the
NNNs 2006 Long Term
Incentive Plan and vest in
equal 1/3 installments in
each of the first, second and
third anniversaries of the
grant date (June 27, 2007),
subject to continued service
with the Company.
|
|
(9)
|
|
Amounts shown represent
options received in the
Merger in exchange for stock
options to acquire 25,000
shares of the common stock
NNN Realty Advisors, Inc. for
$10.00 per share. These
options vested and became
exercisable with respect to
1/3 of the underlying shares
of the Companys common stock
on each of November 16, 2006,
November 16, 2007 and
November 16, 2008 and have a
maximum term of ten-years.
|
|
(10)
|
|
Amounts shown represent
743,160 restricted shares of
the Companys common stock
that were received in
connection with the Merger in
exchange for 844,500 of NNN
restricted stock and which
are transferable from Mr.
Thompson and Mr. Rogers,
assuming Mr. Hanson remains
employed by the Company, in
equal 1/3 installments on
each of the first, second and
third anniversaries of the
grant date (July 29, 2006).
|
|
(11)
|
|
Amounts shown represent
17,600 restricted shares of
the Companys common stock
that were received in
connection with the Merger in
exchange for 20,000 shares of
NNN restricted stock. The
20,000 shares were awarded to
Mr. Hanson pursuant to the
NNNs 2006 Long Term
Incentive Plan and vest in
equal 1/3 installments in
each of the first, second and
third anniversaries of the
grant date (June 27, 2007),
subject to continued service
with the Company.
|
|
(12)
|
|
Amounts shown represent
17,600 restricted shares of
the Companys common stock
that were received in
connection with the Merger in
exchange for 20,000 shares of
NNN restricted stock. The
20,000 shares were awarded to
Mr. Van Berkel pursuant to
the NNNs 2006 Long Term
Incentive Plan and vest in
equal 1/3 installments in
each of the first, second and
third anniversaries of the
grant date (December 4,
2007), subject to continued
service with the Company.
|
75
Options Exercises and Stock Vested
The following table sets forth summary information regarding exercise of stock options and
vesting of restricted stock held by the Companys named executive officers at December 31, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Option Awards
|
|
Stock Awards
|
|
|
Number of Shares
|
|
|
|
|
|
Number of Shares
|
|
|
|
|
Acquired on
|
|
Value Realized on
|
|
Acquired on
|
|
Value realized on
|
Name
|
|
Exercise
|
|
Exercise ($)
|
|
Vesting
|
|
Vesting ($)
|
Gary H. Hunt
|
|
|
|
|
|
|
|
|
|
|
3,667
|
(1)
|
|
$
|
14,118
|
(2)
|
|
|
|
|
|
|
|
|
|
|
|
2,999
|
(3)
|
|
|
3,749
|
(4)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Scott D. Peters
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Richard W. Pehlke
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Andrea R. Biller
|
|
|
|
|
|
|
|
|
|
|
8,800
|
(5)
|
|
|
33,880
|
(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Jeffrey T. Hanson
|
|
|
|
|
|
|
|
|
|
|
247,720
|
(6)
|
|
|
857,111
|
(7)
|
|
|
|
|
|
|
|
|
|
|
|
5,867
|
(8)
|
|
|
22,588
|
(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Jacob Van Berkel
|
|
|
|
|
|
|
|
|
|
|
5,867
|
(9)
|
|
|
7,392
|
(10)
|
|
|
|
(1)
|
|
Amounts shown represent 11,000 restricted shares of the Companys common stock that
were received in connection with the Merger in exchange for 12,500 shares of NNN
restricted stock. The 12,500 shares were awarded to Mr. Hunt pursuant to the NNNs 2006
Long Term Incentive Plan and vest in equal 1/3 installments in each of the first,
second and third anniversaries of the grant date (June 27, 2007), subject to continued
service with the Company.
|
|
(2)
|
|
On June 26, 2008, the closing price of a share of common stock on the NYSE was $3.85.
|
|
(3)
|
|
Amounts shown represent 8,996 shares of the Companys common stock that were awarded to
Mr. Hunt on December 10, 2007 under the 2006 Omnibus Equity Plan and vest in equal 1/3
installments in each of the first, second and third anniversaries of the grant date,
subject to continued service with the Company.
|
|
(4)
|
|
On December 9, 2008, the closing price of a share of common stock on the NYSE was $1.25.
|
|
(5)
|
|
Amounts shown represent 26,400 restricted shares of the Companys common stock that
were received in connection with the Merger in exchange for 30,000 shares of NNN
restricted stock. The 30,000 shares were awarded to Ms. Biller pursuant to the NNNs
2006 Long Term Incentive Plan and vest in equal 1/3 installments in each of the first,
second and third anniversaries of the grant date (June 27, 2007), subject to continued
service with the Company.
|
|
(6)
|
|
Amounts shown represent 743,160 restricted shares of the Companys common stock that
were received in connection with the Merger in exchange for 844,500 of NNN restricted
stock and which are transferable from Mr. Thompson and Mr. Rogers, assuming Mr. Hanson
remains employed by the Company, in equal 1/3 installments on each of the first, second
and third anniversaries of the grant date (July 29, 2006).
|
|
(7)
|
|
On July 28, 2008, the closing price of a share of common stock on the NYSE was $3.46.
|
|
(8)
|
|
Amounts shown represent 17,600 restricted shares of the Companys common stock that
were received in connection with the Merger in exchange for 20,000 shares of NNN
restricted stock. The 20,000 shares were awarded to Mr. Hanson pursuant to the NNNs
2006 Long Term Incentive Plan and vest in equal 1/3 installments in each of the first,
second and third anniversaries of the grant date (June 27, 2007), subject to continued
service with the Company.
|
|
(9)
|
|
Amounts shown represent 17,600 restricted shares of the Companys common stock that
were received in connection with the Merger in exchange for 20,000 shares of NNN
restricted stock. The 20,000 shares were awarded to Mr. Van Berkel pursuant to the
NNNs 2006 Long Term Incentive Plan and vest in equal 1/3 installments in each of the
first, second and third anniversaries of the grant date (December 4, 2007), subject to
continued service with the Company.
|
|
(10)
|
|
On December 3, 2008, the closing price of a share of common stock on the NYSE was $1.26.
|
76
Non-Qualified Deferred Compensation
During fiscal year 2008, no named executive officer was a participant in the Deferred
Compensation Plan (
DCP
) in 2008.
Contributions
Under the DCP, the participants designated by the committee administering the DCP (the
Committee
) may elect to defer up to 80% of their base salary and commissions, and up to 100% of
their bonus compensation. In addition, the Company may make discretionary Company contributions to
the DCP at any time on behalf of the participants. Unless otherwise specified by the Company,
Company contributions shall be deemed to be invested in the Companys common stock.
Investment Elections
Participants designate the investment funds selected by the Committee in which the
participants deferral accounts shall be deemed to be invested for purposes of determining the
amount of earnings and losses to be credited to such accounts.
Vesting
The participants are fully vested at all times in amounts credited to the participants
deferral accounts. A participant shall vest in his or her Company contribution account as provided
by the Committee, but not earlier than twelve (12) months from the date the Company contribution is
credited to a participants Company contribution account. Except as otherwise provided by the
Company in writing, all vesting of Company contributions shall cease upon a participant
termination of service with the Company and any portion of a participants Company contribution
account which is unvested as of such date shall be forfeited; provided, however, that if a
participants termination of service is the result of his or her death, the participant shall be
100% vested in his or her Company contribution account(s).
Distributions
Scheduled distributions elected by the participants shall be no earlier than two years from
the last day of the fiscal year in which the deferrals are credited to the participants account,
or, if later, the last day of the fiscal year in which the Company contributions vest. The
participant may elect to receive the scheduled distribution in a lump sum or in equal installments
over a period of up to five years. Company contributions are only distributable in a lump sum.
In the event of a participants retirement (termination of service after attaining age 60, or
age 55 with at least 10 years of service) or disability (as defined in the DCP), the participants
vested deferral accounts shall be paid to the participant in a single lump sum on a date that is
not prior to the end of the six month period following the participants retirement or disability,
unless the participant has made an alternative election to receive the retirement or disability
benefits in equal installments over a period of up to 15 years, in which event payments shall be
made as elected.
In the event of a participants death, the Company shall pay to the participants beneficiary
a death benefit equal to the participants vested accounts in a single lump sum within 30 days
after the end of the month during which the participants death occurred.
The Company may accelerate payment in the event of a participants financial hardship.
Employment Contracts and Compensation Arrangements
Thomas DArcy
Effective November 16, 2009, Thomas P. DArcy entered into a three-year employment agreement
with the Company, pursuant to which Mr. DArcy serves as president, chief executive officer and a
member of the Board. The term of the employment agreement is subject to successive one (1) year
extensions unless either party advises the other to the contrary at least ninety (90) days prior to
the then expiration of the then current term. Pursuant to the employment agreement, Mr. DArcy was
appointed to serve on the Companys Board of Directors as a Class C Director until the 2010 annual
meeting of stockholders, unless prior to such meeting, the Company eliminates its staggered Board,
in which event Mr. DArcys appointment to the Board shall be voted on at the next annual meeting
of stockholders. Mr. DArcy will be a nominee for election to the Companys Board of Directors at
each subsequent annual meeting of the stockholders for so long as the employment agreement remains
in effect.
Mr. DArcy will receive a base salary of $650,000 per annum. Mr. DArcy is entitled to receive
target bonus cash compensation of up to 200% of his base salary based upon annual performance goals
to be established by the Compensation Committee of the Company. Mr. DArcy is guaranteed a cash
bonus with respect to the 2010 calendar year of 200% of base salary, but there is no guaranteed
bonus with respect to any subsequent year. In addition, there is no cash bonus compensation with
respect to the period commencing on November 16, 2009 and continuing up to and through December 31,
2009.
77
Commencing with calendar year 2010, at the discretion of the Board, Mr. DArcy is also
eligible to participate in a performance-based long term incentive plan, consisting of an annual
award payable either in cash, restricted shares of common stock, or stock options exercisable for
shares of common stock, as determined by the Compensation Committee. The target for any such
long-term incentive award will be $1.2 million per year, subject to ratable, annual vesting over
three years. Subject to the provisions of Mr. DArcys employment agreement, an initial long-term
incentive award with respect to calendar year 2010 will be granted in the first quarter of 2011 and
will vest in equal tranches of 1/3 each commencing on December 31, 2011. In addition, in connection
with the entering into of the employment agreement, Mr. DArcy purchased $500,000 of Preferred
Stock.
Mr. DArcy received a restricted stock award of 2,000,000 restricted shares of common stock,
of which 1,000,000 of such restricted shares are subject to vesting over three years in equal
annual increments of one-third each, commencing on the day immediately preceding the one-year
anniversary of November 16, 2009. The remaining 1,000,000 such restricted shares are subject to the
vesting based upon the market price of the Companys common stock during the initial three-year
term of the employment agreement. Specifically, (i) in the event that for any 30 consecutive
trading days the volume weighted average closing price per share of the Companys common stock on
the exchange or market on which the Companys shares are publically listed or quoted for trading is
at least $3.50, then 50% of such restricted shares shall vest, and (ii) in the event that for any
thirty (30) consecutive trading days the volume weighted average closing price per share of the
Companys common stock on the exchange or market on which the Companys shares of common stock are
publically listed or quoted for trading is at least $6.00, then the remaining 50% percent of such
restricted shares shall vest. Vesting with respect to all Mr. DArcys restricted shares is subject
to Mr. DArcys continued employment by the Company, subject to the terms of a Restricted Share
Agreement entered into by Mr. DArcy and the Company on November 16, 2009, and other terms and
conditions set forth in the employment agreement.
Mr. DArcy will receive from the Company a one-time cash payment of $35,000 as reimbursement
for all of his out-of-pocket transitory relocation expenses. Mr. DArcy is also entitled to
reimbursement expenses of $100,000 incurred in relocating to the Companys principal executive
offices.
Mr. DArcy is also entitled to a professional fee reimbursement of up to $15,000 incurred by
Mr. DArcy for legal and tax advice in connection with the negotiation and entering into the
employment agreement.
Mr. DArcy is entitled to participate in the Companys health and other benefit plans
generally afforded to executive employees and is reimbursed for reasonable travel, entertainment
and other reasonable expenses incurred in connection with his duties. The employment agreement
contains confidentiality, non-competition, no raid, non-solicitation, non-disparagement and
indemnification provisions.
The employment agreement is terminable by the Company upon Mr. DArcys death or incapacity or
for Cause (as defined in the employment agreement), without any additional compensation other than
what has accrued to Mr. DArcy as of the date of any such termination, except that in the case of
death or incapacity.
In the event that Mr. DArcy is terminated without Cause, or if Mr. DArcy terminates the
agreement for Good Reason (as defined in the employment agreement), Mr. DArcy is entitled to
receive: (i) all monies due to him which right to payment or reimbursement accrued prior to such
discharge; (ii) his annual base salary, payable in accordance with the Companys customary payroll
practices for 24 months; (iii) in lieu of any bonus cash compensation for the calendar year of
termination, an amount equal to two times Mr. DArcys bonus cash compensation earned in the
calendar year prior to termination, subject to Mr. DArcys right to receive the guaranteed bonus
with respect to the 2010 calendar year regardless when the termination without Cause occurs; (iv)
an amount payable monthly, equal to the amount Mr. DArcy paid for continuation of health insurance
coverage for such month under the Consolidated Omnibus Budget Reconciliation Act of 1986 (
COBRA
)
until the earlier of 18 months from the termination date or when Mr. DArcy obtains replacement
health coverage from another source; (v) the number of shares of common stock or unvested options
with respect to any long-term incentive awards granted prior to termination shall immediately vest;
and (vi) all Mr. DArcys restricted shares shall automatically vest.
In the event that Mr. DArcy is terminated without Cause or resigns for Good Reason (i) within
one year after a Change of Control (as defined in the employment agreement) or (ii) within three
months prior to a Change of Control, in contemplation thereof, Mr. DArcy is entitled to receive
(a) all monies due to him which right to payment or reimbursement accrued prior to such discharge,
(b) two times his base salary payable in accordance with the Companys customary payroll practices,
over a 24-month period, (c) in lieu of any bonus cash compensation for the calendar year of
termination, an amount equal to two times his target annual cash bonus earned in the calendar year
prior to termination, subject to Mr. DArcys right to receive the guaranteed bonus with respect to
the 2010 calendar year regardless when the termination in connection with a Change of Control
occurs, (d) an amount payable monthly, equal to the amount Mr. DArcy paid for continuation of
health insurance coverage for such month under the COBRA until the earlier of 18 months from the
termination date or when Mr. DArcy obtains replacement health coverage from another source; (e)
the number of shares of common stock or unvested options with respect to any long-term incentive
awards granted prior to termination shall immediately vest; and (f) Mr. DArcys restricted shares
will automatically vest.
The Companys payment of any amounts to Mr. DArcy upon his termination without Cause, for
Good Reason or upon a Change of Control is contingent upon Mr. DArcy executing the Companys then
standard form of release.
78
Potential Payments upon Termination or Change in Control
Thomas DArcy
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Involuntary
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Not for
|
|
|
Involuntary
|
|
|
Resignation
|
|
|
|
|
|
|
|
|
|
|
Executive Payments
|
|
Voluntary
|
|
|
Early
|
|
|
Normal
|
|
|
Cause
|
|
|
for Cause
|
|
|
for Good
|
|
|
Change in
|
|
|
|
|
|
|
|
Upon Termination
|
|
Termination
|
|
|
Retirement
|
|
|
Retirement
|
|
|
Termination
|
|
|
Termination
|
|
|
Reason
|
|
|
Control
|
|
|
Death
|
|
|
Disability
|
|
Severance Payments
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
1,300,000
|
|
|
$
|
|
|
|
$
|
1,300,000
|
|
|
$
|
1,300,000
|
|
|
$
|
|
|
|
$
|
|
|
Bonus Incentive
Compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2,600,000
|
|
|
|
|
|
|
$
|
2,600,000
|
|
|
$
|
2,600,000
|
|
|
|
|
|
|
|
|
|
Long Term Incentive
Plan
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock Options
(unvested and
accelerated)(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted Stock
(unvested and
accelerated)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,520,000
|
|
|
|
|
|
|
$
|
1,520,000
|
|
|
$
|
1,520,000
|
|
|
|
|
|
|
|
|
|
Performance Shares
(unvested and
accelerated)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,200,000
|
|
|
|
|
|
|
$
|
1,200,000
|
|
|
$
|
1,200,000
|
|
|
|
|
|
|
|
|
|
Benefit Continuation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
23,944
|
|
|
|
|
|
|
$
|
23,944
|
|
|
$
|
23,944
|
|
|
|
|
|
|
|
|
|
Tax Gross-Up
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Value
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
6,643,944
|
|
|
$
|
|
|
|
$
|
6,643,944
|
|
|
$
|
6,643,944
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gary H. Hunt
* Mr. Hunt served as Interim Chief Executive Officer of the Company from July 2008 until
November 16, 2009, when Thomas DArcy became the Companys President and Chief Executive Officer.
The following is a description of Mr. Hunts arrangement with the Company while he served as
Interim Chief Executive Officer of the Company.
In July 2008, Mr. Hunt became Interim Chief Executive Officer of the Company. Mr. Hunt did not
have an employment agreement with the Company. On August 28, 2008, the Compensation Committee of
the Board of Directors determined that until the appointment of a permanent Chief Executive Officer
and President, Mr. Hunt will be paid a monthly fee of $50,000. Mr. Hunt did not receive a bonus nor
did he receive any additional compensation for his service as a member of the Companys Board of
Directors.
Scott D. Peters
*In July 2008, Mr. Peters resigned from the Company. The following is a description of the
employment agreement under which Mr. Peters was employed during calendar year 2008.
In November, 2006, Mr. Peters entered into an executive employment agreement with the Company
pursuant to which Mr. Peters served as the Chief Executive Officer and President of the Company.
The agreement provided for an annual base salary of $550,000 per annum. His base salary was
increased to $600,000 per annum upon the closing of the Merger. Mr. Peters was eligible to receive
an annual discretionary bonus of up to 200% of his base salary. The executive employment agreement
had an initial term of three years, and on the final day of the original term, and on each
anniversary thereafter, the term of the agreement could have been extended automatically for an
additional year unless the Company or Mr. Peters provided at least one years written notice that
the term would not be extended. In connection with the entering into of his Employment Agreement in
November, 2006, Mr. Peters received 154,000 shares of restricted stock and 44,000 stock options at
an exercise price of $11.36 per share, one-third of which options vest on the grant date, and the
remaining options vest in equal installments on the first and second anniversary date of the option
grant.
Mr. Peters was also entitled to participate in the Companys health and other benefit plans
generally afforded to executive employees and was reimbursed for reasonable travel, entertainment
and other reasonable expenses incurred in connection with his duties. The employment agreement
contained confidentiality, non-competition, no raid, non-solicitation, non-disparagement and
indemnification provisions.
In the event the Company had terminated Mr. Peters employment for Cause (as defined in the
executive employment agreement) or if he had voluntarily resigned without Good Reason (as defined
in the executive employment agreement), Mr. Peters would have been entitled to accrued salary and
any unreimbursed business expenses. In the event that Mr. Peters employment terminated because of
the expiration of his term, death or disability, the Company would have paid any accrued salary,
any unreimbursed business expenses, and a prorated performance bonus equal to the performance bonus
(and in the case of termination for reason of death or disability, equal to the maximum target)
that otherwise would have been payable to Mr. Peters in the fiscal year in which the termination
occurred had he continued employment through the last day of such fiscal year, prorated for the
number of calendar months he was employed by the Company in such fiscal year. The prorated
performance bonus would have been paid within 60 days after Mr. Peters date of termination,
provided that he executed and delivered to the Company a general release and was not in material
breach of any of the provisions of the executive employment agreement.
79
In the event of termination of employment without Cause, or voluntary resignation with
Good Reason, the Company would have paid any accrued salary, any unreimbursed business expenses and
a severance benefit, in a lump sum cash payment, equal to Mr. Peters annual salary plus the target
bonus in the year of the termination, the sum of which will be multiplied by a severance benefit
factor. The severance benefit factor would have been determined as follows: (a) if the date of
termination occurred during the original three-year employment term, the severance benefit factor
will be the greater of one, and the number of months from the date of termination to the last day
of the original three-year employment term, divided by 12, or (b) if the date of termination was
after the original three-year employment term, the severance benefit factor will equal one. Also,
all options become fully vested.
In the event of a termination by the Company without Cause at any time within 90 days before,
or 12 months after, a Change in Control (as defined in the executive employment agreement), or in
the event of resignation for Good Reason within 12 months after a Change in Control, or if without
Good Reason during the period commencing six months after a Change in Control and ending 12 months
after a Change in Control, then the Company would have paid any accrued salary, any unreimbursed
business expenses, and a severance benefit. The severance benefit would have been in a lump sum
cash payment, equal to the annual salary plus the target bonus in the year of the termination, the
sum of which will be multiplied by three. Mr. Peters would have also received 100% of the Companys
paid health insurance coverage as provided immediately prior to the termination. The health
insurance coverage would have continued for two years following termination of employment, or until
Mr. Peters became covered under another employers group health insurance plan, whichever came
first. Also, Mr. Peters would have become fully vested in his options. These severance benefits
upon a Change in Control would have been paid 60 days after the date of termination, provided he
executed and delivered to the Company a general release and Mr. Peters was not in material breach
of any of the provisions of his employment agreement. Any payment and benefits discussed in this
paragraph regarding a termination associated with a Change in Control would have been in lieu of
any payments and benefits that would otherwise be awarded in an executives termination.
If payments or other amounts had become due to Mr. Peters under his executive employment
agreement or otherwise, and the excise tax imposed by Section 4999 of the Code had been applicable
to such payments, the Company would have been required to pay a gross up payment in the amount of
such excise tax plus the amount of income, excise and other taxes due as a result of the gross up
payment. All determinations required to be made and the assumptions to be utilized in arriving at
such determinations, with certain exceptions, would have been made by the Companys independent
certified public accountants serving immediately prior to the Change in Control.
In July 2008, Mr. Peters resigned from the Company and no payments are due to him under his
executive employment agreement.
Richard W. Pehlke
Effective February 15, 2007, Mr. Pehlke and the Company entered into a three-year employment
agreement pursuant to which Mr. Pehlke serves as the Companys Executive Vice President and Chief
Financial Officer at an annual base salary of $350,000. In addition, Mr. Pehlke is entitled to
receive target bonus cash compensation of up to 50% of his base salary based upon annual
performance goals to be established by the Compensation Committee of the Company. Mr. Pehlke is
also eligible to receive a target annual performance based equity bonus of 65% of his base salary
based upon annual performance goals to be established by the Compensation Committee. The equity
bonus is payable in restricted shares that vest on the third anniversary of the date of the grant.
Mr. Pehlke was also granted stock options to purchase 25,000 shares of the Companys common stock
which have a term of 10 years, are exercisable at $11.75 per share (equal to the market price of
the Companys common stock on the date immediately preceding the grant date) and vest ratably over
three years.
Mr. Pehlkes annual base salary was increased from $350,000 to $375,000 on January 1, 2008.
Similarly, Mr. Pehlkes target bonus compensation was increased from 50% to 150% of his base salary
on January 1, 2008.
Mr. Pehlke is also entitled to participate in the Companys health and other benefit plans
generally afforded to executive employees and is reimbursed for reasonable travel, entertainment
and other reasonable expenses incurred in connection with his duties. The employment agreement
contains confidentiality, non-competition, no raid, non-solicitation, non-disparagement and
indemnification provisions.
The employment agreement is terminable by the Company upon Mr. Pehlkes death or incapacity or
for Cause (as defined in the employment agreement), without any additional compensation other than
what has accrued to Mr. Pehlke as of the date of any such termination, except that in the case of
death or incapacity, any unvested restricted shares automatically vest.
In the event that Mr. Pehlke is terminated without Cause, or if Mr. Pehlke terminates the
agreement for Good Reason (as defined in the employment agreement), Mr. Pehlke is entitled to
receive his annual base salary, payable in accordance with the Companys customary payroll
practices, for the balance of the term of the agreement or 24 months, whichever is less (subject to
the provisions of Section 409A of the Internal Revenue Code of 1986, as amended) and all then
unvested options shall automatically vest. The Companys payment of any amounts to Mr. Pehlke upon
his termination without Cause or for Good Reason is contingent upon him executing the Companys
then standard form of release.
80
Effective December 23, 2008, Mr. Pehlke and the Company entered into a change of control
agreement pursuant to which in the event that Mr. Pehlke is terminated without Cause or resigns for
Good Reason upon a Change of Control (as defined in the employment agreement) or within six months
thereafter or is terminated without Cause or resigns for Good Reason within three months prior to a
Change of Control, in contemplation thereof, Mr. Pehlke is entitled to receive two times his base
salary payable in accordance with the Companys customary payroll practices, over a twelve month
period (subject to the provisions of Section 409A of the Code) plus an amount equal to one time his
target annual cash bonus payable in cash on the next immediately following date when similar annual
cash bonus compensation is paid to other executive officers of the Company (but in no event later
than March 15th of the calendar year following the calendar year to which such bonus payment
relates). In addition, upon a Change of Control, all then unvested options and restricted shares
automatically vest. The Companys payment of any amounts to Mr. Pehlke upon his termination upon a
Change of Control is contingent upon his executing the Companys then standard form of release.
Potential Payments upon Termination or Change in Control
Richard W. Pehlke
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Involuntary
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Not for
|
|
|
Involuntary
|
|
|
Resignation
|
|
|
|
|
|
|
|
|
|
|
Executive Payments
|
|
Voluntary
|
|
|
Early
|
|
|
Normal
|
|
|
Cause
|
|
|
for Cause
|
|
|
for Good
|
|
|
Change in
|
|
|
|
|
|
|
|
Upon Termination
|
|
Termination
|
|
|
Retirement
|
|
|
Retirement
|
|
|
Termination
|
|
|
Termination
|
|
|
Reason
|
|
|
Control
|
|
|
Death
|
|
|
Disability
|
|
Severance
Payments
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
421,875
|
|
|
$
|
|
|
|
$
|
421,875
|
|
|
$
|
1,312,500
|
|
|
$
|
|
|
|
$
|
|
|
Bonus Incentive
Compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long Term Incentive
Plan
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock Options
(unvested and
accelerated)(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted Stock
(unvested and
accelerated)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
403,000
|
|
|
|
|
|
|
$
|
403,000
|
|
|
$
|
403,000
|
|
|
|
|
|
|
|
|
|
Performance Shares
(unvested and
accelerated)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefit Continuation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax Gross-Up
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Value
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
824,875
|
|
|
$
|
|
|
|
$
|
824,875
|
|
|
$
|
1,715,500
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Mr. Pehlkes agreement provides for immediate vesting of all
stock options in the event of involuntary termination not for
Cause, resignation for Good Reason, or in the event of Change of
Control; the option exercise price is $11.75 and the closing
price on the NYSE on December 31, 2008 was $1.24, therefore, as
of December 31, 2008, Mr. Pehlkes options were out of the money.
|
Andrea R. Biller
In November 2006, Ms. Biller entered into an executive employment agreement with the Company
pursuant to which Ms. Biller served as the Companys General Counsel, Executive Vice President and
Secretary. The agreement provided for an annual base salary of $400,000 per annum. Under the
employment agreement, Ms. Biller was eligible to receive an annual discretionary bonus of up to
150% of her base salary. The executive employment agreement has an initial term of three years, and
on the final day of the original term, and on each anniversary thereafter, the term of the
agreement was extended automatically for an additional year unless the Company or Ms. Biller
provided at least one years written notice that the term will not be extended. On October 23,
2008, the Company provided written notice to Ms. Biller that it would not extend the terms and
conditions of Ms. Billers employment agreement beyond its initial term and the agreement expired
on November 15, 2009. In connection with the entering into of her employment agreement in November
2006, Ms. Biller received 114,400 shares of restricted stock and 35,200 stock options at an
exercise price of $11.36 per share, one-third of which options vest on the grant date, and the
remaining options vest in equal installments on the first and second anniversary date of the option
grant.
Ms. Biller is also entitled to participate in the Companys health and other benefit plans
generally afforded to executive employees and is reimbursed for reasonable travel, entertainment
and other reasonable expenses incurred in connection with her duties. The employment agreement
contained confidentiality, non-competition, no raid, non-solicitation, non-disparagement and
indemnification provisions.
81
Jeffrey T. Hanson
In November, 2006, Mr. Hanson entered into an executive employment agreement with the Company
pursuant to which Mr. Hanson served as the Companys Chief Investment Officer. The agreement
provided for an annual base salary of $350,000 per annum. Under the executive employment agreement,
Mr. Hanson was eligible to receive an annual discretionary bonus of up to 100% of his base salary.
The executive employment agreement had an initial term of three years, and on the final day of the
original term, and on each anniversary thereafter, the term of the Agreement was extended
automatically for an additional year unless the Company or Mr. Hanson provided at least one years
written notice that the term will not be extended. On October 23, 2008, the Company provided
written notice to Mr. Hanson that the Company would not extend the terms and conditions of Mr.
Hansons executive employment agreement beyond its initial term and the agreement expired on
November 15, 2009. In connection with the entering into of his executive employment agreement in
November, 2006, Mr. Hanson received 44,000 shares of restricted stock and 22,000 stock options at
an exercise price of $11.36 per share, one-third of which options vest on the grant date, and the
remaining options vest in equal installments on the first and second anniversary date of the option
grant. Mr. Hanson was entitled to receive a special bonus of $250,000 if, during the applicable
fiscal year, (x) Mr. Hanson was the procuring cause of at least $25 million of equity from new
sources, which equity was actually received by the Company during such fiscal year, for real estate
investments sourced by the Company, and (y) Mr. Hanson was employed by the Company on the last day
of such fiscal year.
Mr. Hansons annual base salary was increased from $350,000 to $450,000 on August 1, 2008.
Similarly, Mr. Hansons target bonus compensation was increased from 100% to 150% of his base
salary on August 1, 2008.
Mr. Hanson is also entitled to participate in the Companys health and other benefit plans
generally afforded to executive employees and is reimbursed for reasonable travel, entertainment
and other reasonable expenses incurred in connection with his duties. The executive employment
agreement contained confidentiality, non-competition, no raid, non-solicitation, non-disparagement
and indemnification provisions.
Jacob Van Berkel
Mr. Van Berkel was promoted to Chief Operating Officer and Executive Vice President on March
1, 2008 which provides for an annual base salary of $400,000 per annum. Mr. Van Berkel is eligible
to receive an annual discretionary bonus of up to 100% of his base salary. Effective December 23,
2008, Mr. Van Berkel and the Company entered into a change of control agreement pursuant to which
in the event that Mr. Van Berkel is terminated without Cause or resigns for Good Reason upon a
Change of Control (as defined in the change of control agreement) or within six months thereafter
or is terminated without Cause or resigns for Good Reason within three months prior to a Change of
Control, in contemplation thereof, Mr. Van Berkel is entitled to receive two times his base salary
payable in accordance with the Companys customary payroll practices, over a twelve month period
(subject to the provisions of Section 409A of the Code) plus an amount equal to one time his target
annual cash bonus payable in cash on the next immediately following date when similar annual cash
bonus compensation is paid to other executive officers of the Company (but in no event later than
March 15th of the calendar year following the calendar year to which such bonus payment relates).
In addition, upon a Change of Control, all then unvested restricted shares automatically vest. The
Companys payment of any amounts to Mr. Van Berkel upon his termination upon a Change of Control is
contingent upon his executing the Companys then standard form of release.
Potential Payments upon Termination or Change of Control
Jacob Van Berkel
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Executive
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Involuntary
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Not for
|
|
|
Involuntary
|
|
|
Resignation
|
|
|
|
|
|
|
|
|
|
|
Upon
|
|
Voluntary
|
|
|
Early
|
|
|
Normal
|
|
|
Cause
|
|
|
for Cause
|
|
|
for Good
|
|
|
Change in
|
|
|
|
|
|
|
|
Termination
|
|
Termination
|
|
|
Retirement
|
|
|
Retirement
|
|
|
Termination
|
|
|
Termination
|
|
|
Reason
|
|
|
Control
|
|
|
Death
|
|
|
Disability
|
|
Severance Payments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,200,000
|
|
|
|
|
|
|
|
|
|
Bonus Incentive
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long Term
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Incentive Plan
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock Options
(unvested and
accelerated)(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted Stock
(unvested and
accelerated)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
423,749
|
|
|
|
|
|
|
|
|
|
Performance Shares
(unvested and
accelerated)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefit Continuation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax Gross-Up
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Value
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
1,623,749
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
82
Compensation of Directors
Pursuant to the FPL Associates Compensation report obtained by the Board of Directors in
contemplation of the Merger, directors compensation was further reviewed and revised in December
2007.
Only individuals who serve as directors and are otherwise unaffiliated with the Company
(
Outside Directors
) receive compensation for serving on the Board and on its committees. Outside
Directors are compensated for serving on the Board with a combination of cash and equity based
compensation which includes annual grants of restricted stock, an annual retainer fee, meeting fees
and chairperson fees. Directors are also reimbursed for out-of-pocket travel expenses incurred in
attending Board and committee meetings.
Pursuant to the FPL Associates Compensation report, Board compensation was adjusted in
December 2007 as follows: (i) an annual retainer fee of $50,000 per annum; (ii) a fee of $1,500 for
each regular meeting of the Board of Directors attended in person or telephonically; (iii) a fee of
$1,500 for each meeting of a standing committee of the Board of Directors attended in person or
telephonically; and (iv) $60,000 worth of restricted shares of common stock issued at the then
current market price of the common stock, to vest ratably in equal annual installments over three
years, except in the event of a change in control, in which event vesting is accelerated. On March
12, 2008, the Compensation Committee, in consultation with Christenson Advisors, LLC, revised the
compensation arrangements for the non-executive Chairman of the Board to provide for an annual
retainer fee of $80,000 in cash, $140,000 worth of restricted shares of the Companys common stock
per annum to vest pro-rata over three years, and an annual allowance of $25,000. Outside Directors
are also required to commit to an equity position in the Company over five years in the amount
equal to $250,000 worth of common stock which may include annual restricted stock grants to the
directors.
Effective March 12, 2008, Mr. Glenn C. Carpenter, a former director, received an initial grant
of 11,958 shares of restricted stock which was based upon the closing price of the Companys common
stock on March 12, 2008, which was $6.69.
Effective July 10, 2008, Mr. Murphy received an initial grant of 19,480 shares of restricted
stock which was based upon the closing price of the Companys common stock on July 10, 2008, which
was $3.08.
Effective December 10, 2008, each of the Companys Outside Directors as of such date, Glenn C.
Carpenter, Harold H Greene, C. Michael Kojaian, Robert J. McLaughlin, Devin I. Murphy, D. Fleet
Wallace, and Rodger D. Young received 20,000 shares of common stock which is based upon the closing
price of the Companys common stock on December 10, 2008, which was $1.30. Those shares represent
the Companys annual grant to its Outside Directors which, pursuant to the Companys 2006 Omnibus
Equity Plan, is set at $60,000 worth of restricted shares of the Companys common stock based upon
the closing price of such common stock on the date of the grant. However, in light of market
conditions, the Company decided to limit such amount of grant in 2008 to 20,000 restricted shares
of the Companys common stock. Gary H. Hunt did not receive an annual restricted stock grant in
December 2008 as he was then serving as the Companys Interim Chief Executive Officer and was not
considered an Outside Director.
Director Compensation Table
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fees Earned
|
|
|
|
|
|
|
or Paid in
|
|
Stock
|
|
|
Director
|
|
Cash (1)
|
|
Awards (2)(3)
|
|
Total
|
Glenn C. Carpenter
|
|
$
|
117,000
|
|
|
$
|
82,915
|
|
|
$
|
199,915
|
|
Harold H. Greene
|
|
$
|
117,500
|
|
|
$
|
61,751
|
|
|
$
|
179,251
|
|
Gary H. Hunt
|
|
$
|
73,250
|
|
|
$
|
61,751
|
|
|
$
|
135,001
|
|
C. Michael Kojaian
|
|
$
|
108,500
|
|
|
$
|
20,040
|
|
|
$
|
128,540
|
|
Robert J. McLaughlin
|
|
$
|
134,000
|
|
|
$
|
20,040
|
|
|
$
|
154,040
|
|
Devin I. Murphy
|
|
$
|
60,110
|
|
|
$
|
9,666
|
|
|
$
|
69,776
|
|
Scott D. Peters(4)
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
Anthony W. Thompson(5)
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
D. Fleet Wallace
|
|
$
|
128,500
|
|
|
$
|
61,751
|
|
|
$
|
190,251
|
|
Rodger D. Young
|
|
$
|
132,000
|
|
|
$
|
20,040
|
|
|
$
|
152,040
|
|
|
|
|
(1)
|
|
Represents annual retainers plus all meeting and committee attendance fees earned by non-employee directors in 2008.
|
|
(2)
|
|
The amounts shown are the compensation costs recognized by the Company in 2008 in accordance with the requirements of the Equity Topic. Mr. Carpenter
received a grant of 11,958 shares of restricted stock on March 12, 2008, which also vests in three equal installments on each of the next three
annual anniversary dates of the grant. The grant date fair value of the 11,958 shares of restricted stock was $80,000 based on a value of $6.69 per
share on the date of the grant. Mr. Murphy received a grant of 19,480 shares of restricted stock on July 10, 2008, which also vests in three equal
installments on each of the next three annual anniversary dates of the grant. The grant date fair value of the 19,480 shares of restricted stock was
$60,000 based on a value of $3.08 per share on the date of the grant. Each of the Outside Directors received a grant of 20,000 shares on December 10,
2008 which vests in three equal increments on each of the next three annual anniversary dates of the grant. The grant date fair value of
|
83
|
|
|
|
|
the 20,000
shares of restricted stock was $26,000 based on a value of $1.30 per share on the date of grant. Those shares represent the Companys annual grant to
its Outside Directors which, pursuant to the Companys 2006 Omnibus Equity Plan, is set at $60,000 worth of restricted shares of the Companys common
stock based upon the closing price of such common stock on the date of the grant. However, in light of market conditions, the Company decided to
limit such amount of grant in 2008 to 20,000 restricted shares of the Companys common stock.
|
|
(3)
|
|
The following table shows the aggregate number of unvested stock awards and option awards granted to non-employee directors and outstanding as of
December 31, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock Awards
|
|
|
Options Outstanding
|
|
Outstanding at
|
Director
|
|
at December 31, 2008
|
|
December 31, 2008
|
Glenn C. Carpenter
|
|
|
0
|
|
|
|
45,288
|
|
Harold H. Greene
|
|
|
0
|
|
|
|
33,330
|
|
Gary H. Hunt
|
|
|
0
|
|
|
|
13,330
|
|
C. Michael Kojaian
|
|
|
0
|
|
|
|
25,997
|
|
Robert J. McLaughlin
|
|
|
0
|
(i)
|
|
|
25,997
|
|
Devin I. Murphy
|
|
|
0
|
|
|
|
39,480
|
|
Scott D. Peters(4)
|
|
|
0
|
|
|
|
0
|
|
Anthony W. Thompson(5)
|
|
|
0
|
|
|
|
0
|
|
D. Fleet Wallace
|
|
|
0
|
|
|
|
33,330
|
|
Rodger D. Young
|
|
|
10,000
|
|
|
|
25,997
|
|
|
|
|
(i)
|
|
Mr. McLaughlin exercised his option to purchase 10,000 shares of
common stock of the Company on March 18, 2008, at $2.99 per
share.
|
|
(4)
|
|
Mr. Peters resigned as Chief Executive Officer and President of the Company effective July 10, 2008.
|
|
(5)
|
|
Mr. Thompson resigned from the Board of Directors effective February 8, 2008
|
Stock Ownership Policy for Outside Directors
Under the current stock ownership policy, Outside Directors are required to accumulate an
equity position in the Company over five years in an amount equal to $250,000 worth of common stock
(the previous policy required an accumulation of $200,000 worth of common stock over a five year
period). Shares of common stock acquired by Outside Directors pursuant to the restricted stock
grants can be applied toward this equity accumulation requirement.
Compensation Committee Interlocks and Insider Participation
The members of the Compensation Committee during the year ended December 31, 2008 were D.
Fleet Wallace, Chair, Glenn C. Carpenter, Gary H. Hunt, C. Michael Kojaian, Robert J. McLaughlin,
and Rodger D. Young. In February, 2008 when Mr. Carpenter became Chairman of the Board, replacing
Anthony W. Thompson, he resigned from the Compensation Committee. In July 2008, when Scott Peters
resigned as Chief Executive Officer and President of the Company, Mr. Hunt assumed the position as
Interim Chief Executive Officer, subsequently resigned from the Compensation Committee as Chairman
and was replaced by D. Fleet Wallace as the new Chairman. In addition, Mr. Kojaian also became a
member of the Companys Compensation Committee. On February 9, 2009, Glenn C. Carpenter was
appointed to serve as a member of the Companys Compensation Committee and Mr. C. Michael Kojaian
resigned as a member of the Compensation Committee.
Except for Gary H. Hunt, who served as Interim Chief Executive Officer from July 2008 through
November 16, 2009 and as a former member of the Compensation Committee, none of the current or
former members of the Compensation Committee is or was a current or former officer or employee of
the Company or any of its subsidiaries or had any relationship requiring disclosure by the Company
under any paragraph of Item 404 of Regulation S-K of the SECs Rules and Regulations. During the
year ended December 31, 2008, none of the executive officers of the Company served as a member of
the board of directors or compensation committee of any other company that had one or more of its
executive officers serving as a member of the Companys Board of Directors or Compensation
Committee.
84
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Related Party Transaction Review Policy
The Company recognizes that transactions between the Company and any of its directors,
officers or principal stockholders or an immediate family member of any director, executive officer
or principal stockholder can present potential or actual conflicts of interest and create the
appearance that Company decisions are based on considerations other than the best interests of the
Company and its stockholders. The Company also recognizes, however, that there may be situations in
which such transactions may be in, or may not be inconsistent with, the best interests of the
Company.
The review and approval of related party transactions are governed by the Code of Business
Conduct and Ethics. The Code of Business Conduct and Ethics is a part of the Companys Employee
Handbook, a copy of which is distributed to each of the Companys employees at the time that they
begin working for the Company, and the Companys Salespersons Manual, a copy of which is
distributed to each of the Companys brokerage professionals at the time that they begin working
for the Company. The Code of Business Conduct and Ethics is also available on the Companys website
at
www.grubb-ellis.com
. In addition, within 60 days after he or she begins working for the
Company and once per year thereafter, the Company requires that each employee and brokerage
professional to complete an on-line Business Ethics training class and certify to the Company
that he or she has read and understands the Code of Business Conduct and Ethics and is not aware of
any violation of the Code of Business Conduct and Ethics that he or she has not reported to
management.
In order to ensure that related party transactions are fair to the Company and no worse than
could have been obtained through arms-length negotiations with unrelated parties, such
transactions are monitored by the Companys management and regularly reviewed by the Audit
Committee, which independently evaluates the benefit of such transactions to the Companys
stockholders. Pursuant to the Audit Committees charter, on a quarterly basis, management provides
the Audit Committee with information regarding related party transactions for review and discussion
by the Audit Committee and, if appropriate, the Board of Directors. The Audit Committee, in its
discretion, may approve, ratify, rescind or take other action with respect to a related party
transaction or, if necessary or appropriate, recommend that the Board of Directors approve, ratify,
rescind or take other action with respect to a related party transaction.
In addition, each director and executive officer annually delivers to the Company a
questionnaire that includes, among other things, a request for information relating to any
transactions in which both the director, executive officer, or their respective family members, and
the Company participates, and in which the director, executive officer, or such family member, has
a material interest.
Related Party Transactions
The following are descriptions of certain transactions commencing in fiscal year 2006 through
the date of this prospectus, in which the Company was a participant and in which any of the
Companys directors, executive officers, principal stockholders or any immediate family member of
any director, executive officer or principal stockholder had or may have had direct or indirect
material interest.
Certain Pre-Merger Transactions
NNN was organized in September 2006 to acquire each of Triple Net Properties Realty, Inc.
(
Realty
), Triple Net Properties, LLC (currently GERI) and NNN Capital Corp. (currently GBE
Securities), to bring the businesses conducted by those companies under one corporate umbrella. On
November 30, 2006, NNN completed a $160.0 million private placement of common stock to
institutional investors and certain accredited investors with 16 million shares of its common stock
sold in the offering at $10.00 per share. Net proceeds from the offering were $146.0 million. NNN
was the accounting acquirer of Triple Net Properties Realty and NNN Capital Corp.
Anthony W. Thompson, Chairman of the Board of NNN and Chairman of the Board of the Company
from December 7, 2007 through February 8, 2008, transferred certain of his common stock in Capital
Corp., an affiliated entity that eventually became a wholly-owned subsidiary of NNN, to each of
Louis J. Rogers, an NNN director (25.0%), and to Kevin K. Hull, the Chief Executive Officer and
President of Capital Corp. (25.0%). Because Mr. Thompson was an affiliate of Capital Corp. at the
time of these transfers, these transfers resulted in compensation charges to Capital Corp. In
addition, NNN agreed to pay the income taxes (including an associated gross-up payment to cover
the tax on the tax payment) incurred by Mr. Rogers ($467,000) and Mr. Hull (as to only
approximately one-half of such liability, or $191,000) in such transactions.
The
following formation transactions (the
Formation
Transactions
) were entered into in connection with NNNs Rule 144A
private equity offering in November 2006 and were not negotiated at arms length:
85
|
|
|
TNP Merger Sub, LLC, a Delaware limited liability company and wholly-owned subsidiary of
NNN, entered into an agreement and plan of merger with Triple Net Properties, which was
owned by Mr. Thompson and a number of other employees and third-party investors. In
connection with the merger agreement, NNN entered into contribution agreements with the
holders of a majority of the common membership interests of Triple Net Properties. Under
the merger agreement and the contribution agreements NNN issued
17,372,438 shares of its
common stock (to the accredited investor members) and $986,000 in cash (to the unaccredited
investor members in lieu of 0.5% of the shares of NNN common stock they would otherwise be
entitled to receive, which was valued at the $11.36 offering price to investors in the 144A
offering) in exchange for all the common member interests. Concurrently with the closing of
the 144A offering on November 16, 2006, Triple Net Properties became a wholly-owned
subsidiary of NNN.
|
|
|
|
|
NNN entered into a contribution agreement with Mr. Thompson and Mr. Rogers pursuant to
which they contributed all of the outstanding shares of Triple Net Properties Realty to NNN
in exchange for 4,124,120 shares of NNN common stock and, with respect to Mr. Thompson,
$9.4 million in cash in lieu of 22.3% of shares of NNN common stock he would otherwise be
entitled to receive, which was valued at the $11.36 offering price to investors in the 144A
offering. Concurrently with the closing of the 144A offering on November 16, 2006, Triple
Net Properties Realty became a wholly-owned subsidiary of NNN.
|
|
|
|
|
NNN entered into a contribution agreement with Mr. Thompson, Mr. Rogers and Mr. Kevin
Hull pursuant to which they contributed all of the outstanding shares of Capital Corp. to
NNN in exchange for 1,164,680 shares of NNN common stock and, with respect to Mr. Thompson,
$2.7 million in cash in lieu of 33.5% of shares of NNN common stock he would otherwise be
entitled to receive, which was valued at the $11.36 offering price to investors in the 144A
offering. Capital Corp. became a wholly-owned subsidiary of NNN on December 14, 2006,
following receipt of NASD approval.
|
In November, 2006, to the extent that NNN incurred any liability over the subsequent three (3)
year period arising from the failure to comply with real estate broker licensing requirements in
certain states, Messrs. Thompson, Rogers and Hanson agreed to forfeit up to an aggregate of
4,686,500 shares of NNN common stock (which became 4,124,120 shares of the Companys common stock
upon the Merger). To insure such indemnification obligations, all of these shares were placed into
escrow. In addition, Mr. Thompson agreed to indemnify NNN, to the extent the liability incurred by
NNN for such matters exceeds the deemed $46,865,000 value of the
escrowed shares, up to an additional
$9,435,000 in cash. The above indemnifications expired on November 16, 2009, and the Company did
not incur any liability with respect to any real estate licensure issues. Accordingly, and all of
the shares were released from escrow to Messrs. Thompson, Rogers and Hanson in November, 2009.
In 2006, Mr. Thompson and Mr. Rogers agreed to transfer common stock of NNN they owned to
Mr. Hanson, assuming he remained employed by the Company in equal increments on July 29, 2007, 2008
and 2009. Mr. Hanson remained employed by the Company during this three (3) year period and
accordingly, these stock transfers were effected by the release from
escrow of 743,160 shares of the Companys common stock
(557,370 from Mr. Thompson and 185,790 from Mr. Rogers). Because Mr. Thompson and Mr. Rogers were
affiliates of NNN at the time of such transfers, NNN and the Company recognized a compensation
charge.
On September 20, 2006, NNN awarded Mr. Peters a bonus of $2.1 million, which was payable in
178,957 shares of the Companys common stock, representing a value of $1.3 million and a cash tax
gross-up payment of $854,000.
Grubb & Ellis Realty Advisors, Inc.
On March 3, 2006, the registration statement with respect to an initial public offering for
Grubb & Ellis Realty Advisors, Inc. (
GERA
), an affiliate of the Company, was declared effective.
GERA was a special purpose acquisition company organized by the Company to acquire one or more
United States commercial real estate properties and/or assets, principally industrial and office
properties. GERA sold 23,958,334 units in its initial public offering at a price of $6.00 per unit,
each unit consisting of one share of common stock and two warrants. The public offering was
underwritten on a firm commitment basis by Deutsche Bank Securities Inc. and GERA raised gross
proceeds of approximately $143.75 million before offering expenses. Of the units sold, 1,666,667
units, for an aggregate price of $10.0 million, were sold to Kojaian Holdings, L.L.C., an entity
affiliated with C. Michael Kojaian, the Companys Chairman of the Board and also the Chairman of
the Board of GERA. Mark Rose, the then Chief Executive Officer of the Company, was also a director
of GERA.
The Company provided GERA with initial equity capital of $2.5 million for 5,876,069 shares of
common stock and, upon the completion of GERAs initial public offering, the Company owned approximately 19% of the
outstanding common stock of GERA. Pursuant to an agreement with Deutsche Bank Securities Inc., the
Company also agreed to purchase in the public marketplace, during the period commencing May 3, 2006 and continuing through
June 28, 2006 and to the extent available, up to $3.5 million of GERAs
warrants if the public price per warrant was $0.70 or less. The Company agreed
to purchase such warrants pursuant to an agreement in accordance with the guidelines specified by
Rule 10b5-1 under the Exchange Act, through an independent broker-dealer registered under Section
15 of the Exchange Act that did not participate in GERAs public offering. In addition, the Company
further agreed that any such warrants purchased by it would not be sold or transferred until the
completion of a business combination. On
86
June 28, 2006, the Company agreed to a sixty-day extension of this agreement, through August
27, 2006. As of June 30, 2006, the Company had increased its investment in GERA through the
purchase of approximately 395,000 warrants for an aggregate purchase price of approximately
$236,000, or approximately $0.60 per warrant, excluding commissions of approximately $16,000.
Pursuant to the extension of this agreement, the Company purchased approximately 4.2 million
additional warrants of GERA through August 27, 2006, for an aggregate purchase price of
approximately $1.9 million, or approximately $0.46 per warrant, excluding commissions of
approximately $170,000.
As consideration for serving as initial directors to GERA, the Company transferred 41,670
shares of GERAs common stock from the Companys initial investment to each of the initial
directors of GERA, including Messrs. Kojaian and Rose.
All of the officers of GERA were also officers of the Company. The officers and directors of
GERA did not receive compensation from GERA (other than the GERA shares transferred to the initial
directors by the Company).
On June 18, 2007, the Company entered into, along with its wholly owned subsidiary, GERA
Property Acquisition, LLC, a Membership Interest Purchase Agreement (the Purchase Agreement) with
GERA which contemplated the transfer of the three (3) commercial office properties from the Company
to GERA and, if consummated, would have constituted GERAs business combination. Pursuant to the
Purchase Agreement, the Company was to sell the properties to GERA, on a cost neutral basis,
and reimbursement for the actual costs and expenses paid by the Company with respect to the purchase of
the properties and imputed interest on cash advanced by the Company with respect to the properties.
Under the terms of the Purchase Agreement, the Purchase Agreement was subject to termination
under certain circumstances, including but not limited to if GERA failed to obtain the requisite
stockholder consents required under the laws of the State of Delaware and Realty Advisors charter
to approve the transactions contemplated by the Purchase Agreement.
Effective January 25, 2008, the Company entered into a letter agreement (the
Letter
Agreement
) with GERA pursuant to which the Company agreed, subject to and simultaneously upon the
closing of the Purchase Agreement, that GERA would have had the right to redeem an aggregate of
4,395,788 shares of common stock, par value $.0001 per share, of GERA stock currently owned by the
Company (the
Redemption
). The per share purchase price of each share that would have been
redeemed is the par value thereof, which would have resulted in an aggregate purchase price with
respect to the Redemption of $439.58. As noted above, the Company
owned approximately 19% of the issued and outstanding shares of GERA upon the completion of
GERAs initial public offering. Subsequent to the Redemption, the Company would have still
owned 1,271,931 shares of common stock of GERA, which would have represented approximately 5% of
the then issued and outstanding shares of GERA.
On February 28, 2008, a special meeting of the stockholders of GERA was held to vote on, among
other things, the proposed transaction with the Company, GERA failed to obtain the requisite
consents of its stockholders to approve its proposed business combination (i.e. the transactions
contemplated by the Purchase Agreement).
As a result thereof, GERA, in accordance with Section 8.1(f) of the Purchase Agreement,
advised the Company in a letter effective February 28, 2008, that it was terminating the Purchase
Agreement in accordance with its terms.
As a result of its failure to obtain the requisite stockholder approvals, GERA was unable to
effect a business combination within the proscribed deadline of March 3, 2008 in accordance with
its charter. Consequently, GERA filed a proxy statement with the SEC on March 11, 2008 with respect
to a special meeting of its stockholders to vote on the dissolution and liquidation of GERA. The
Company wrote-off in the first quarter of 2008 its investment in GERA of approximately $5.6
million, including its stock and warrant purchases, operating advances and third party costs. The
Company also paid any third-party legal, accounting, printing and other costs (other than monies to
be paid to stockholders of GERA on liquidation) associated with the dissolution and liquidation of
GERA. In addition, the various exclusive service agreements that the Company had previously entered
into with GERA for transaction services, property and facilities management, and project
management, never took effect due to GERAs failure to effect its business combination.
Commencing on February 27, 2006 and continuing through the eventual liquidation by GERA, the
Company made available to GERA office space, utilities and secretarial support for general and
administrative purposes as GERA required from time to time. GERA agreed to pay the Company $7,500
per month for these services. During the 2006 fiscal year, GERA paid the Company $30,000 for such
services.
Exchange of Preferred Stock
In July 2006, Kojaian Ventures, L.L.C. (
KV
), an affiliate of C. Michael Kojaian, exchanged
all 11,725 issued and outstanding shares of the Companys Series A-1 Preferred Stock for (i)
11,173,925 shares of the Companys common stock, which was the common stock equivalent that the
holder of the Series A-1 Preferred Stock was entitled to receive upon liquidation, merger,
consolidation, sale or change of control of the Company, and (ii) a payment by the Company of
$10,056,532.50 (or $0.90 per newly
87
issued share of common stock). Simultaneously with the exchange of Series A-1 Preferred Stock
for newly issued common stock, KV was the selling stockholder of 5 million shares of common stock
pursuant to the Companys Registration Statement on Form S-1, filed on June 29, 2006.
Archon
Archon, formally a principal stockholder of the Company that was engaged in the asset
management business, performed asset management services for various parties. During the period in
the 2006 fiscal year in which it was an affiliate of the Company, Archon and its affiliates and
portfolio property owners paid the Company and its subsidiaries the following approximate amounts
in connection with real estate services rendered to Archon and its portfolio properties: $854,000
in management fees, which include reimbursed salaries, wages and benefits of $626,000; $871,000 in
real estate sale and leasing commissions; and $52,000 in fees for other real estate and business
services. The Company also paid asset management fees to Archons affiliates of approximately
$9,000 related to properties the Company managed on their behalf. In addition, Archon, its
affiliates and portfolio property owners were involved in six transactions as a lessee/buyer during
the 2006 fiscal year, for which the Company received real estate commissions of approximately
$579,000 from the landlord/seller.
Osbrink Transaction
As of August 28, 2006, the Company entered into a written agreement with 1up Design Studios,
Inc. (
1up
), of which Ryan Osbrink, the son of Robert H. Osbrink, Former Executive Vice President
and President, Transaction Services of the Company, was a principal shareholder, to procure graphic
design and consulting services on assignments provided by brokerage professionals and/or employees
of the Company. The term of the agreement was for a period beginning September 1, 2006 ending on
August 31, 2007 and was terminable by either party upon 60 days prior notice. The agreement
provided that the Company would pay 1up a monthly retainer of $25,000, from which 1up would deduct
the cost of its design services. The pricing for 1ups design services was fixed pursuant to a
price schedule attached as an exhibit to the agreement. In addition, at the inception of the
agreement, the Company sold certain computer hardware and software to 1up for a price of $6,500
which was the approximate net book value of such items. The written agreement with 1up was
terminated effective as of March 1, 2007 at the request of the Audit Committee which believed that,
although the agreement did not violate the Companys related party transaction policy, termination
of the agreement was appropriate in order to avoid any appearance of impropriety that might result
from the agreement to pay 1up a fixed monthly retainer. While the Company was no longer obligated
to pay the monthly retainer to 1up, the Company continued to use 1up to provide design and
consulting services on an ad hoc basis. During the 2007 fiscal year, 1up was paid approximately
$239,000 in fees for its services. The Company believes that amounts paid to 1up for services are
comparable to the amounts that the Company would have paid to unaffiliated third parties.
Certain Thompson Transactions
The Company has made advances totaling $1.0 million and $3.3 million as of December 31, 2007
and December 31, 2006, respectively to Colony Canyon, a property 30.0% owned and solely managed by
Mr. Thompson. The advances bore interest at 10.0% per annum and
were required to be repaid within
one year (although the repayments were extended from time to time). These amounts were
repaid in full during the nine months ended September 30, 2008, and as of September 30, 2008 there
were no outstanding advances with respect to Colony Canyon. However, as of September 30, 2008, an
accounts receivable totaling $321,000 was due with respect to Colony Canyon. On November 4, 2008,
the Company made a formal written demand to Mr. Thompson for these monies.
As of December 31, 2008, advances to a program 40.0% owned and, as of April 1, 2008, managed
by Mr. Thompson totaled $983,000, which included $61,000 in accrued interest. As of December 31,
2008, the total outstanding balance of $983,000 was past due. The total past due amount of $983,000
has been reserved for and is included in the allowance for uncollectible advances. On November 4,
2008 and April 3, 2009, the Company made a formal written demand to Mr. Thompson for these monies.
In connection with the SEC investigation, referred to as In the Matter of Triple Net
Properties, LLC, to the extent that the Company was obligated to pay the SEC an amount in excess
of $1.0 million in connection with any settlement or other resolution of this matter, Mr. Thompson
agreed to forfeit to the Company up to 1,064,800 shares of its common stock. In connection with
this arrangement, NNN entered into an escrow agreement with Mr. Thompson and an independent escrow
agent, pursuant to which the escrow agent held 1,064,800 shares of the Companys common stock. On
June 2, 2008, the SEC informed the Company that the SEC was closing the investigation without any
enforcement action against Triple Net Properties, LLC (currently GERI) or NNN Capital Corp.
(currently GBE Securities). Since no fine was assessed by the SEC, the 1,064,800 shares were
released to Mr. Thompson during the second quarter of 2008.
Mr. Thompson has routinely provided personal guarantees to various lending institutions that
provided financing for the acquisition of many properties by the Companys programs. These
guarantees covered certain covenant payments, environmental and hazardous substance indemnification
and indemnification for any liability arising from the SEC investigation of Triple Net Properties,
88
LLC
(currently GERI). In connection with the Formation Transactions, the Company indemnified
Mr. Thompson for amounts he may have been required to pay under all of the guarantees to which Triple
Net Properties, LLC (currently GERI), Realty or NNN Capital Corp. (currently GBE Securities) was
an obligor to the extent such indemnification would not require the Company to book additional
liabilities on the Companys balance sheet. In September 2007, NNN acquired Cunningham Lending
Group LLC (
Cunningham
), a company that was wholly-owned by Mr. Thompson, for $255,000 in cash.
Prior to the acquisition, Cunningham made unsecured loans to some of the properties under
management by Triple Net Properties, LLC (currently GERI). The loans,
which bore interest at rates
ranging from 8.0% to 12.0% per annum were reflected in advances to related parties on the Companys
balance sheet and were serviced by the cash flows from the
programs. The Company consolidated Cunningham in its financial
statements beginning in 2005.
Offering Costs and Other Expenses Related to Public Non-Traded REITs
The Company, through its consolidated subsidiaries Grubb & Ellis Apartment REIT Advisor, LLC
and Grubb & Ellis Healthcare REIT II Advisor, LLC, bears certain general and administrative
expenses in its capacity as advisor of Apartment REIT and Healthcare REIT II, respectively, and is
reimbursed for these expenses. However, Apartment REIT and Healthcare REIT II will not reimburse
the Company for any operating expenses that, in any four consecutive fiscal quarters, exceed the
greater of 2.0% of average invested assets (as defined in their respective advisory agreements) or
25.0% of the respective REITs net income for such year, unless the board of directors of the
respective REITs approve such excess as justified based on unusual or nonrecurring factors. All
unreimbursable amounts are expensed by the Company. The Company,
through its consolidated subsidiaries Grubb &
Ellis Healthcare REIT Advisor, LLC, until August 28, 2009, bore certain general and
administrative expenses in its capacity as advisor of Healthcare REIT and was reimbursed for those expenses.
In addition, the Company, through a former subsidiary, Grubb & Ellis Healthcare REIT Advisor,
LLC, bore certain general and administrative expenses in its capacity as advisor of Healthcare
REIT, and was reimbursed for these expenses. However, Healthcare REIT did not reimburse the Company
for any operating expenses that, in any four consecutive fiscal quarters, exceeded the greater of
2.0% of average invested assets (as defined in their respective advisory agreements) or 25.0% of
Healthcare REITs net income for such year, unless the board of directors of the Healthcare REIT
approved such excess as justified based on unusual or nonrecurring factors. All unreimbursable
amounts were expensed by the Company.
The Company also paid for the organizational, offering and related expenses on behalf of
Apartment REIT for its initial offering that ended July 17, 2009 and Healthcare REIT for its
initial offering through August 28, 2009. These organizational, offering and related expenses
include all expenses (other than selling commissions and the marketing support fee which generally
represent 7.0% and 2.5% of the gross offering proceeds, respectively) to be paid by Apartment REIT
and Healthcare REIT in connection with their initial offerings. These expenses only become the
liability of Apartment REIT and Healthcare REIT to the extent other organizational and offering
expenses do not exceed 1.5% of the gross proceeds of the initial offerings. As of September 30,
2009 and December 31, 2008, the Company has incurred expenses of $4.3 million and $3.8 million,
respectively, in excess of 1.5% of the gross proceeds of the Apartment REIT offering. As of
September 30, 2009 and December 31, 2008, the Company has recorded an allowance for bad debt of
approximately $4.3 million and $3.8 million, respectively, related to the Apartment REIT offering
costs incurred as the Company believes that such amounts will not be reimbursed.
The Company also pays for the organizational, offering and related expenses on behalf of
Apartment REITs follow-on offering and Healthcare REIT IIs initial offering. These organizational
and offering expenses include all expenses (other than selling commissions and a dealer manager fee
which represent 7.0% and 3.0% of the gross offering proceeds, respectively) to be paid by Apartment
REIT and Healthcare REIT II in connection with these offerings. These expenses only become a
liability of Apartment REIT and Healthcare REIT II to the extent other organizational and offering
expenses do not exceed 1.0% of the gross proceeds of the offerings. As of September 30, 2009 and
December 31, 2008, the Company has incurred expenses of $1.3 million and $0, respectively, in
excess of 1.0% of the gross proceeds of the Apartment REIT follow-on offering. As of September 30,
2009 and December 31, 2008, the Company has incurred expenses of $1.8 million and $97,000,
respectively, in excess of 1.0% of the gross proceeds of the Healthcare REIT II initial offering.
The Company anticipates that such amount will be reimbursed in the future from the offering
proceeds of Apartment REIT and Healthcare REIT II.
89
Management
Fees
The Company provides both transaction and management services to parties which are related to
an affiliate of a principal stockholder and the Chairman of the Board of the Company (collectively,
Kojaian
Companies
). In addition, the Company also pays asset management fees to the Kojaian Companies
related to properties the Company manages on their behalf. Revenue, including reimbursable expenses
related to salaries, wages and benefits, earned by the Company for services rendered to Kojaian
Companies, including joint ventures, officers and directors and their affiliates, was $5.4 million
for the nine months ended September 30, 2009 and for the period beginning October 1, 2009 through
December 22, 2009, these revenues were approximately
$1.1 million. In August 2009, the Kojaian
Management Corporation prepaid $600,000 of property management fees to the company which was repaid
in September 2009 upon collection of management fees from parties related to the Kojaian Companies
to which the Company provides management services.
During the 2008 calendar year, the Kojaian Companies paid the Company and its subsidiaries the
following approximate amounts in connection with real estate services rendered: $9,345,000 for
management services, which include reimbursed salaries, wages and benefits of $4,028,000; $832,000
in real estate sale and leasing commissions; and $90,000 for other real estate and business
services. The Company also paid the Kojaian Companies approximately $2,970,000, which reflected
fees paid by the Kojaian Companies asset management clients for asset management services
performed by the Kojaian Companies, but for which the Company billed the clients.
During the 2007 calendar year, the Kojaian Companies paid the Company and its subsidiaries the
following approximate amounts in connection with real estate services rendered: $9,447,000 for
management services, which include reimbursed salaries, wages and benefits of $3,971,000; $797,000
in real estate sale and leasing commissions; and $68,000 for other real estate and business
services. The Company also paid the Kojaian Companies approximately $3,088,000, which reflected
fees paid by the Kojaian Companies asset management clients for asset management services
performed by the Kojaian Companies, but for which the Company billed the clients.
The Company believes that the fees and commissions paid to and by the Company as described
above were comparable to those that would have been paid to or received from unaffiliated third
parties in connection with similar transactions.
During the 2006 fiscal year, the Kojaian Companies paid the legacy Company and its
subsidiaries the following approximate amounts in connection with real estate services rendered:
$8,587,000 for management services, which include reimbursed salaries, wages and benefits of
$3,532,000; $724,000 in real estate sale and leasing commissions; and $41,000 for other real estate
and business services. The Company also paid the Kojaian Companies approximately $2,874,000, which
reflected fees paid by the Kojaian Companies asset management clients for asset management
services performed by the Kojaian Companies, but for which the Company billed the clients. In
addition, the Kojaian Companies were involved in two transactions as a lessee during the 2006
fiscal year, for which the legacy Company received real estate commissions of approximately $15,000
from the landlord.
In fiscal year 2006, the legacy Company incurred $27,000 in legal fees on behalf of Mr.
Kojaian and Kojaian Ventures, LLC in connection with a lawsuit in which the company indemnified
them pursuant to contractual indemnification obligations.
In August 2002, the Company entered into an office lease with a landlord related to the
Kojaian Companies, providing for an annual average base rent of $365,400 over the ten-year term of
the lease.
Other
Related Party Transactions
GERI, which is wholly owned by the Company, owns a 50.0% managing member interest in Grubb &
Ellis Apartment REIT Advisor, LLC and each of Grubb & Ellis Apartment Management, LLC and ROC REIT
Advisors, LLC own a 25.0% equity interest in Grubb & Ellis Apartment REIT Advisor, LLC. As of
September 30, 2009 and December 31, 2008, Andrea R. Biller, the Companys General Counsel,
Executive Vice President and Secretary, owned an equity interest of 18.0% of Grubb & Ellis
Apartment Management, LLC. On August 8, 2008, in accordance with the terms of the operating
agreement of Grubb & Ellis Apartment Management, LLC, Grubb & Ellis Apartment Management LLC
tendered settlement for the purchase of the 18.0% equity interest in Grubb & Ellis Apartment
Management LLC that was previously owned by Mr. Scott D. Peters, former chief executive officer of
the Company. As a consequence, through a wholly owned subsidiary, the Companys equity interest in
Grubb & Ellis Apartment Management, LLC increased from 64.0% to 82.0% after giving effect to this
purchase from Mr. Peters. As of September 30, 2009 and December 31, 2008, Stanley J. Olander, the
Companys Executive Vice PresidentMultifamily, owned an equity interest of 33.3% of ROC REIT
Advisors, LLC.
GERI owns a 75.0% managing member interest in Grubb & Ellis Healthcare REIT Advisor, LLC and,
therefore, consolidates Grubb & Ellis Healthcare REIT Advisor, LLC. Grubb & Ellis Healthcare
Management, LLC owns a 25.0% equity interest in Grubb & Ellis Healthcare REIT Advisor, LLC. As of
September 30, 2009 and December 31, 2008, each of Ms. Biller and Mr. Hanson, the Companys Chief
Investment Officer and GERIs President, owned an equity interest of 18.0% of Grubb & Ellis
Healthcare
90
Management, LLC. On August 8, 2008, in accordance with the terms of the operating agreement of
Grubb & Ellis Healthcare Management, LLC, Grubb & Ellis Healthcare Management, LLC tendered
settlement for the purchase of 18.0% equity interest in Grubb & Ellis Healthcare Management, LLC
that was previously owned by Mr. Peters. As a consequence, through a wholly owned subsidiary, the
Companys equity interest in Grubb & Ellis Healthcare Management, LLC increased from 46.0% to 64.0%
after giving effect to this purchase from Mr. Peters.
The grants of membership interests in Grubb & Ellis Apartment Management, LLC and Grubb &
Ellis Healthcare Management, LLC to certain executives are being accounted for by the Company as a
profit sharing arrangement. Compensation expense is recorded by the Company when the likelihood of
payment is probable and the amount of such payment is estimable, which generally coincides with
Grubb & Ellis Apartment REIT Advisor, LLC and Grubb & Ellis Healthcare REIT Advisor, LLC recording
its revenue. Compensation expense related to this profit sharing arrangement associated with Grubb
& Ellis Apartment Management, LLC includes distributions of $88,000, $175,000 and $22,000,
respectively, earned by Mr. Thompson, $85,000, $159,000 and $50,000, respectively, earned by Mr.
Peters and $122,000, $159,000 and $50,000, respectively, earned by Ms. Biller for the years ended
December 31, 2008, 2007 and 2006, respectively. Compensation expense related to this profit sharing
arrangement associated with Grubb & Ellis Healthcare Management, LLC includes distributions of
$175,000 and $175,000, respectively, earned by Mr. Thompson, $387,000 and $414,000, respectively,
earned by Mr. Peters and $548,000 and $414,000, respectively, earned by each of Ms. Biller and Mr.
Hanson for the years ended December 31, 2008 and 2007, respectively. No distributions were paid in
2006. There was no compensation expense related to the profit sharing arrangement with Grubb &
Ellis Apartment Management, LLC, and therefore no distributions to any members, for the nine months
ended September 30, 2009. Compensation expense related to this profit sharing arrangement
associated with Grubb & Ellis Healthcare Management, LLC includes distributions of $44,000 to Mr.
Thompson, $0 to Mr. Peters, $203,000 to Ms. Biller, and $203,000 to Mr. Hanson for the nine months
ended September 30, 2009.
As of September 30, 2009, December 31, 2008 and December 31, 2007, each of the remaining 82.0%
equity interest in Grubb & Ellis Apartment Management, LLC and the remaining 64.0% equity interest
in Grubb & Ellis Healthcare Management, LLC were owned by GERI. Any allocable earnings attributable
to GERIs ownership interests are paid to GERI on a quarterly basis.
The Companys directors and officers, as well as officers, managers and employees have
purchased, and may continue to purchase, interests in offerings made by the Companys programs at a
discount. The purchase price for these interests reflects the fact that selling commissions and
marketing allowances will not be paid in connection with these sales. The net proceeds to the
Company from these sales made net of commissions will be substantially the same as the net proceeds
received from other sales.
G REIT, Inc., a public non-traded REIT sponsored by NNN, agreed to pay Mr. Peters and Ms.
Biller, retention bonuses in connection with its stockholder approved liquidation, upon the filing
of each of G REITs annual and quarterly reports with the SEC during the period of the liquidation
process. These retention bonuses were agreed to by the independent directors of G REIT and approved
by the stockholders of G REIT in connection with G REITs stockholder approved liquidation. As of
each of December 31, 2007 and December 31, 2006, Mr. Peters and Ms. Biller received retention
bonuses of $200,000 and $100,000 from G REIT, respectively. On January 28, 2008, G REITs remaining
assets and liabilities were transferred to G REIT Liquidating Trust. Effective January 30, 2008,
and March 4, 2008, respectively, Mr. Peters and Ms. Biller irrevocably waived their rights to
receive all future retention bonuses from G REIT Liquidating Trust. Additionally, Mr. Peters and
Ms. Biller, each were entitled to a performance-based bonus of $100,000 upon the receipt by GERI of
net commissions aggregating $5,000,000 or more from the sale of G REIT properties. As of December
31, 2007, Mr. Peters and Ms. Biller have received their performance-based bonuses of $100,000 each
from GERI.
T REIT, Inc., a public non-traded REIT sponsored by NNN, paid performance bonuses in
connection with its shareholder approved liquidation to Ms. Biller of $35,000 in March 2006. On
July 20, 2007, T REIT, Inc.s remaining assets and liabilities were transferred to T REIT
Liquidating Trust.
On October 2, 2009, the Company effected the Permitted Placement (see Note 11 to the
consolidated financial statements included in this prospectus) and issued a $5.0 million senior
subordinated convertible note (the
Note
) to
Kojaian Management Corporation. The Note (i) bore
interest at twelve percent (12%) per annum, (ii) was co-terminous with the term of the Credit
Facility (including if the Credit Facility was terminated pursuant to the Discount Prepayment
Option), (iii) was unsecured and fully subordinate to the Credit Facility, and (iv) in the event the
Company issued or sold equity securities in connection with or pursuant to a transaction with a
non-affiliate of the Company while the Note was outstanding, at the option of the holder of the
Note, the principal amount of the Note then outstanding was convertible into those equity securities
of the Company issued or sold in such non-affiliate transaction. In connection with the issuance of
the Note, Kojaian Management Corporation, the lenders to the Credit Facility and the Company
entered into a subordination agreement (the
Subordination Agreement
). The Permitted Placement was
a transaction by the Company not involving a public offering in accordance with Section 4(2) of the
Securities Act.
91
On November 6, 2009, the Company completed the private placement of 900,000 shares of its 12%
Preferred Stock, to qualified institutional buyers and other accredited investors. In conjunction
with the offering, the entire $5.0 million principal balance of
the Note was converted into the 12%
Preferred Stock at the offering price and the holder of the Note received accrued interest of
approximately $57,000. In addition, the holder of the Note also purchased an additional $5.0
million of 12% Preferred Stock at the offering price. The Company also granted the initial purchaser a
45-day option to purchase up to an additional 100,000 shares of 12% Preferred Stock.
See issuance of a $5.0 million senior secured convertible note to, and purchase of $5.0
million of 12% Preferred Stock by a related party in Subsequent Events (Note 20 to consolidated
financial Statements included in this prospectus). See also Managements Discussion and Analysis
of Financial Condition and Results of OperationsLiquidity and Capital Resources.
92
PRINCIPAL STOCKHOLDERS
The following table shows the share ownership as of December 23, 2009 by persons known by the
Company to be beneficial holders of more than 5% of any class of the Companys outstanding capital
stock, directors, named executive officers, and all current directors and executive officers as a
group. Unless otherwise noted, the persons listed have sole voting and disposition powers over the
shares held in their names, subject to community property laws if applicable.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred Stock
|
|
|
Common Stock
|
|
Name and Address
|
|
Number of
|
|
|
Percentage
|
|
|
Number of
|
|
|
Percentage
|
|
of Beneficial Owner (1)
|
|
Shares
|
|
|
of Class
|
|
|
Shares (2)
|
|
|
of Class (3)
|
|
FMR LLC (4)
|
|
|
160,000
|
|
|
|
16.6
|
%
|
|
|
9,696,960
|
|
|
|
12.6
|
%
|
Persons affiliated with Kojaian Holdings LLC (5)
|
|
|
|
|
|
|
|
|
|
|
4,316,326
|
|
|
|
6.4
|
%
|
Persons affiliated with Kojaian Ventures, L.L.C. (6)
|
|
|
|
|
|
|
|
|
|
|
11,700,000
|
|
|
|
17.4
|
%
|
Persons affiliated with Kojaian Management
Corporation (7)
|
|
|
100,000
|
|
|
|
10.4
|
%
|
|
|
6,060,600
|
|
|
|
8.3
|
%
|
Lions Gate Capital
|
|
|
55,500
|
|
|
|
5.7
|
%
|
|
|
3,363,633
|
|
|
|
4.8
|
%
|
Wellington Management Company, LLP (8)
|
|
|
125,000
|
|
|
|
12.9
|
%
|
|
|
14,927,401
|
|
|
|
19.9
|
%
|
Named Executive Officers and Directors
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thomas DArcy
|
|
|
5,000
|
|
|
|
*
|
|
|
|
2,303,030
|
(12)
|
|
|
3.4
|
%
|
C. Michael Kojaian
|
|
|
100,000
|
(13)
|
|
|
10.4
|
%
|
|
|
22,151,035
|
(10)(11)(13)
|
|
|
30.1
|
%
|
Robert J. McLaughlin
|
|
|
|
|
|
|
|
|
|
|
202,914
|
(10)(11)(14)
|
|
|
*
|
|
Devin I. Murphy
|
|
|
1,000
|
|
|
|
*
|
|
|
|
165,200
|
(11)(15)
|
|
|
*
|
|
D. Fleet Wallace
|
|
|
|
|
|
|
|
|
|
|
93,909
|
(9)(10)(11)
|
|
|
*
|
|
Rodger D. Young
|
|
|
500
|
|
|
|
*
|
|
|
|
146,657
|
(10)(11)(16)
|
|
|
*
|
|
Andrea R. Biller
|
|
|
1,000
|
|
|
|
*
|
|
|
|
398,416
|
(17)
|
|
|
*
|
|
Jeffrey T. Hanson
|
|
|
250
|
(18)
|
|
|
*
|
|
|
|
731,335
|
(19)
|
|
|
1.1
|
%
|
Richard W. Pehlke
|
|
|
500
|
|
|
|
*
|
|
|
|
256,803
|
(20)
|
|
|
*
|
|
Scott D. Peters
|
|
|
|
|
|
|
|
|
|
|
506,750
|
(21)
|
|
|
*
|
|
Jacob Van Berkel
|
|
|
250
|
|
|
|
*
|
|
|
|
232,752
|
(22)
|
|
|
*
|
|
All Current Directors and Executive Officers as a
Group (11 persons)
|
|
|
108,500
|
|
|
|
11.2
|
%
|
|
|
26,881,007
|
(23)
|
|
|
36.3
|
%
|
|
|
|
*
|
|
Less than one percent.
|
|
(1)
|
|
Unless otherwise indicated, the address for each of the individuals listed below is c/o Grubb & Ellis Company, 1551
Tustin Avenue, Suite 300, Santa Ana, California 92705.
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|
(2)
|
|
Each share of Preferred Stock currently converts into 60.606 shares of common stock, and all common stock share
numbers include, where applicable, the number of shares of common stock into which any Preferred Stock held by the
beneficial owner is convertible at such rate of conversion.
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(3)
|
|
The percentage of shares of capital stock shown for each person in this column and in this footnote assumes that such
person, and no one else, has exercised or converted any outstanding warrants, options or convertible securities held
by him or her exercisable or convertible on December 23, 2009 or within 60 days thereafter.
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(4)
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|
Pursuant to a Schedule 13G filed with the SEC by FMR LLC on November 10, 2009, FMR is deemed to be the beneficial
owner of 160,000 shares of Preferred Stock, or 9,696,960 shares of common stock.
|
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(5)
|
|
Kojaian Holdings LLC is affiliated with each of C. Michael Kojaian, a director of the Company,
Kojaian Ventures, L.L.C. and Kojaian Management Corporation (See footnote 13 below). The address for
Kojaian Holdings LLC is 39400 Woodward Avenue, Suite 250, Bloomfield Hills, Michigan 48304.
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(6)
|
|
Kojaian Ventures, L.L.C. is affiliated with each of C. Michael Kojaian, a director of the Company,
Kojaian Holdings LLC and Kojaian Management Corporation (see footnote 13 below). The address of
Kojaian Ventures, L.L.C. is 39400 Woodward Ave., Suite 250, Bloomfield Hills, Michigan 48304.
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93
|
|
|
(7)
|
|
Kojaian Management Corporation is affiliated with each of C. Michael Kojaian, a director of the
Company, Kojaian Holdings LLC and Kojaian Ventures, L.L.C. (see footnote 13 below). The address of
Kojaian Management Corporation is 39400 Woodward Ave., Suite 250, Bloomfield Hills, Michigan 48304.
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(8)
|
|
Wellington Management Company, LLP (
Wellington Management
) is an investment adviser registered
under the Investment Advisers Act of 1940, as amended. Wellington Management, in such capacity, may
be deemed to share beneficial ownership over the shares held by its client accounts. Wellingtons
address is 75 State Street, Boston, Massachusetts 02109
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(9)
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|
Beneficially owned shares include 3,666 restricted shares of common stock which vest on June 27, 2010.
|
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(10)
|
|
Beneficially owned shares include 2,999 restricted shares of common stock that vest on the first
business day following December 10, 2010, such 2,999 shares granted pursuant to the Companys 2006
Omnibus Equity Plan.
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|
(11)
|
|
Beneficially owned shares include (i) 13,333 restricted shares of common stock which vest in 1/2
portions on each of the second and third anniversaries of December 10, 2008 and (ii) 45,113
restricted shares of common stock which vest in 33 1/3 portions on each of the first, second and
third anniversaries of December 17, 2009; in each case, such shares granted pursuant to the Companys
2006 Omnibus Equity Plan.
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|
(12)
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|
Beneficially owned shares include (i) 1,000,000 restricted shares of common stock which vest in equal
33 1/3 portions on each of the first, second, and third anniversaries of November 16, 2009, and (ii)
1,000,000 restricted shares of common stock which vest based upon the market price of the Companys
common stock during the initial three-year term of Mr. DArcys employment agreement. Specifically,
(i) in the event that for any 30 consecutive trading days the volume weighted average closing price
per share of the common stock on the exchange or market on which the Companys shares are publically
listed or quoted for trading is at least $3.50, then 50% of such restricted shares shall vest, and
(ii) in the event that for any 30 consecutive trading days the volume weighted average closing price
per share of the Companys common stock on the exchange or market on which the Companys shares of
common stock are publically listed or quoted for trading is at least $6.00, then the remaining 50%
percent of such restricted shares shall vest. Vesting with respect to all restricted shares is
subject to Mr. DArcys continued employment by the Company, subject to the terms of a Restricted
Share Agreement entered into by Mr. DArcy and the Company on November 16, 2009, and other terms and
conditions set forth in Mr. DArcys employment agreement.
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(13)
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|
Beneficially owned shares include shares directly held by Kojaian Holdings LLC, Kojaian Ventures,
L.L.C. and Kojaian Management Corporation. C. Michael Kojaian, a director of the Company, is
affiliated with Kojaian Ventures, L.L.C., Kojaian Holdings LLC and Kojaian Management Corporation.
Pursuant to rules established by the SEC, the foregoing parties may be deemed to be a group, as
defined in Section 13(d) of the Exchange Act, and C. Michael Kojaian is deemed to have beneficial
ownership of the shares directly held by each of Kojaian Ventures, L.L.C., Kojaian Holdings LLC and
Kojaian Management Corporation.
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(14)
|
|
Beneficially owned shares include 65,560 shares of common stock held directly by: (i) Katherine McLaughlins IRA (Mr. McLaughlin
wifes IRA of which Mr. McLaughlin disclaims beneficial ownership); (ii) Robert J. and Katherine
McLaughlin Trust; and (iii) Louise H. McLaughlin Trust.
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|
(15)
|
|
Beneficially owned shares include 12,986 restricted shares of common stock which vest in equal
portions on each first business day following July 10, 2010 and 2011 granted pursuant to the
Companys 2006 Omnibus Equity Plan.
|
|
(16)
|
|
Beneficially owned shares include 10,000 shares of common stock issuable upon exercise of fully
vested outstanding options.
|
|
(17)
|
|
Beneficially owned shares include 35,200 shares of common stock issuable upon exercise of fully
vested outstanding options. Beneficially owned shares include 8,800 shares of restricted stock that
vest on June 27, 2010.
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|
(18)
|
|
Mr. Hansons beneficially owned shares include 250 shares of Preferred Stock which are indirectly
held through Jeffrey T. Hanson and April L. Hanson, as Trustees of the Hanson Family Trust.
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|
(19)
|
|
Beneficially owned shares include 22,000 shares of common stock issuable upon exercise of fully
vested options. Beneficially owned shares include 5,867 restricted shares of common stock that vest
on June 27, 2010.
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94
|
|
|
20)
|
|
Beneficially owned shares include 25,000 shares of common stock issuable upon exercise of fully
vested outstanding options and options which will vest within 60 days of December 23, 2009. Beneficially owned shares include 25,000 restricted shares of common
stock that vest on the first business day after January 24, 2010 and 25,000 restricted shares of
common stock that vest on the first business day after January 24, 2011, all of these 50,000 shares
are subject to certain terms and conditions contained in that certain Restricted Stock Agreement
between the Company and Mr. Pehlke dated January 24, 2008. In addition, beneficially owned shares
include 79,333 restricted shares of common stock awarded to Mr. Pehlke pursuant to the Companys 2006
Omnibus Equity Plan which will vest in
1
/
2
installments on each first business day after the second and
third anniversaries of the grant date (December 3, 2008) and are subject to acceleration under
certain conditions.
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(21)
|
|
Based upon a Form 4 filed by Scott D. Peters, Mr. Peters may be deemed the beneficial owner of
506,750 shares of common stock. Scott D. Peters resigned his position with the Company in July 2008.
Mr. Peters, upon resignation, forfeited 836,000 shares of unvested restricted stock.
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(22)
|
|
Beneficially owned shares include 120,000 restricted shares of common stock awarded to Mr. Van Berkel
pursuant to the Companys 2006 Omnibus Equity Plan which will vest in equal 33 1/3% installments on
each first business day after the first, second and third anniversaries of the grant date (December
3, 2008) and are subject to acceleration under certain conditions. Beneficially owned shares also
include 26,667 restricted shares of common stock which vest on the first business day following
January 24, 2010 and 26,666 restricted shares of common stock which vest on the first business day
following January 24, 2011. Furthermore, beneficially owned shares include 5,867 shares of restricted
common stock which vest on the first business day after December 4, 2009 and 5,866 shares of
restricted common stock which vest on the first business day after December 4, 2010.
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(23)
|
|
Beneficially owned shares include the following shares of common stock issuable upon exercise of
outstanding options which are exercisable on December 23, 2009 or within 60 days thereafter under the
Companys various stock option plans: Mr. Young10,000 shares, Ms. Biller35,200 shares, Mr.
Hanson22,000 shares, Mr. Pehlke25,000 shares, and all current directors and executive officers as
a group 92,200 shares.
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95
DESCRIPTION OF CAPITAL STOCK
As of the date of this prospectus, the authorized capital stock of our company consists of
220,000,000 shares of capital stock, 200,000,000 of such shares being common stock, par value $0.01
per share, and 20,000,000 of such shares being preferred stock, par value $0.01 per share, issuable
in one or more series or classes.
Selected provisions of our organizational documents are summarized below. In addition, you
should be aware that the summary below does not describe or give full effect to the provisions of
statutory or common law which may affect your rights as a stockholder.
Common Stock
We have one existing class of common stock. As of December 23, 2009, there were 67,376,796
shares of our common stock outstanding. Holders of shares of our existing common stock are entitled
to one vote per share on all matters to be voted upon by our stockholders and are not entitled to
cumulative voting for the election of directors.
The holders of shares of our existing common stock are entitled to receive ratably dividends
as may be declared from time to time by our Board of Directors out of funds legally available for
dividend payments, subject to any dividend preferences of any holders of any other series of common
stock and preferred stock. In the event of our liquidation, dissolution or winding-up, after full
payment of all debts and other liabilities and liquidation preferences of any other series of
common stock and any preferred stock, the holders of shares of our existing common stock are
entitled to share ratably in all remaining assets. Our existing common stock has no preemptive or
conversion rights or other subscription rights. There are no redemption or sinking fund provisions
applicable to the shares of our existing common stock.
All issued and outstanding shares of common stock are fully paid and nonassessable.
Our common stock is listed under the symbol GBE on the New York Stock Exchange.
Computershare Investor Services, L.L.C. is the transfer agent and registrar for our common stock.
Preferred Stock
The Board of Directors has the authority to issue up to 20,000,000 shares of our preferred
stock in one or more series and to fix the rights, preferences, privileges and restrictions
thereof, including dividend rights, dividend rates, conversion rates, voting rights, terms of
redemption, redemption prices, liquidation preferences and the number of shares constituting any
series or the designation of that series, which may be superior to those of our common stock,
without further vote or action by the stockholders. The Board of Directors has designated up to
1,000,000 shares of our preferred stock as 12% Preferred Stock. As of the date of this prospectus,
the Company has issued an aggregate of 965,700 shares of 12% Preferred Stock.
One of the effects of undesignated preferred stock may be to enable our Board of Directors to
render it more difficult to or to discourage an attempt to obtain control of us by means of a
tender offer, proxy contest, merger or otherwise, and as a result to protect the continuity of our
management. The issuance of shares of the preferred stock by our Board of Directors as described
above may adversely affect the rights of the holders of common stock. For example, preferred stock
issued by us may rank prior to our common stock as to dividend rights, liquidation preference or
both, may have full or limited voting rights, and may be convertible into shares of common stock.
Accordingly, the issuance of shares of preferred stock may discourage bids for our common stock or
may otherwise adversely affect the market price of our common stock.
On November 6, 2009, we issued and sold of 900,000 shares of our 12% Preferred Stock in a
private placement exempt from registration under Section 4(2) of the Securities Act of 1933, as
amended, and Rule 506 of Regulation D promulgated thereunder. Each share of 12% Preferred Stock is
convertible into shares of our common stock. JMP Securities, Inc. acted as initial purchaser and
placement agent with this private placement. We also granted a 45-day over-allotment option to the
initial purchaser and placement agent for the offering, and pursuant to such over-allotment option,
we sold an additional 65,700 shares of Preferred Stock for gross proceeds of $6.6 million, all of
which will be used for working capital purposes. The rights, preferences, privileges and
restrictions thereof, including dividend rights, dividend rates, conversion rates, voting rights,
terms of redemption, redemption prices, liquidation preferences are described more fully in
Description of 12% Preferred Stock below.
Possible Anti-Takeover Effects of Delaware Law and Relevant Provisions of our Certificate of
Incorporation and Bylaws
Provisions of Delaware law and our certificate of incorporation and bylaws may make it more
difficult to acquire control of our company by tender offer, a proxy contest or otherwise or the
removal of our officers and directors. For example:
96
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As discussed above, our certificate of incorporation permits our Board of Directors to issue a
new series of preferred stock with terms that may make an acquisition by a third party more
difficult or less attractive (subject to the consent of holders representing at least a majority
of the outstanding shares of the 12% Preferred Stock, in the case of preferred stock that ranks
senior to or, to the extent that 225,000 shares of 12% Preferred Stock remains outstanding, on a
parity with, the 12% Preferred Stock).
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Our bylaws provide time limitations on stockholders that desire to present nominations for
election to our Board of Directors or propose matters that can be acted upon at stockholders
meetings.
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|
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|
|
Our certificate of incorporation and bylaws permit our Board to adopt, amend or repeal our bylaws.
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|
|
|
|
Our bylaws provide that special meetings of stockholders can be called only by our Board of
Directors or by holders of at least a majority of our outstanding capital stock.
|
Copies of our certificate of incorporation and bylaws, as amended through the date of this
prospectus, have been filed with and are publicly available at or from the SEC as described under
the heading Where You Can Find More Information.
97
DESCRIPTION OF 12% PREFERRED STOCK
The following is a summary of the material terms of the 12% Preferred Stock. You should refer
to the actual terms of the 12% Preferred Stock contained in the Certificate of Designation filed
with the Secretary of State of the State of Delaware and incorporated by reference as an exhibit to
the Registration Statement in which this prospectus is a part. You may obtain a copy of the
Certificate of Designation governing the 12% Preferred Stock from us at our website address set
forth under Where You Can Find More Information. As used in this description, unless otherwise
indicated or the context otherwise requires, the words we, us, our and our company do not
include any current or future subsidiary of Grubb & Ellis Company. We also describe below the
registration rights agreement that we entered into only with one of the lead investors.
General
As of December 23, 2009, there were 965,700 shares of our 12% Preferred Stock outstanding. The
rights, preferences, privileges, and restrictions on different series of preferred stock may differ
with respect to dividend rates, amounts payable on liquidation, voting rights, conversion rights,
redemption provisions, sinking fund provisions, and purchase funds and other matters.
Other than a lead investors right to purchase securities in a subsequent offering for the
six-month period after November 6, 2009, investors will not have any preemptive rights if we issue
other series of preferred stock. The 12% Preferred Stock is not subject to any sinking fund. We
have no obligation to retire the 12% Preferred Stock. The 12% Preferred Stock has a perpetual
maturity, subject to the holders right to convert the 12% Preferred Stock and our right to redeem
the 12% Preferred Stock at our option on or after November 15, 2014. Any 12% Preferred Stock
converted or redeemed or acquired by us will, upon cancellation, have the status of authorized but
unissued shares of 12% Preferred Stock. We will be able to reissue these canceled shares of 12%
Preferred Stock in any series of preferred stock.
The 12% Preferred Stock is not listed on any securities exchange.
Dividends
When and if declared by our Board of Directors out of legally available funds, holders of the
12% Preferred Stock are entitled to receive cash dividends at an annual rate of $12.00 per share of
the 12% Preferred Stock, subject to adjustment as described below. Dividends are payable quarterly
on each March 31, June 30, September 30 and December 31, beginning December 31, 2009, or, if such
date is not a business day, the next succeeding business day. In the case of any accrued but unpaid
dividends, we may pay dividends at additional times and for interim periods, if any, as determined
by our Board of Directors. Dividends on the 12% Preferred Stock are payable in cash and will
accumulate and be cumulative from the most recent date to which dividends have been paid, or if no
dividends have been paid, from November 6, 2009. Upon conversion of the 12% Preferred Stock,
accrued and unpaid dividends on those shares will be paid in cash or, at our election, exchanged
for a number of shares of our common stock equal to the dollar value of such accrued and unpaid
dividends divided by the conversion price then in effect at the time of conversion. Dividends will
be payable to holders of record as they appear on our stock books at the close of business on the
applicable record date not more than 30 days nor less than 10 days preceding the payment dates, as
fixed by our Board of Directors. If the 12% Preferred Stock is called for redemption on a
redemption date between the dividend record date and the dividend payment date and holders do not
convert the 12% Preferred Stock (as described below), holders will receive the dividend payment
together with all other accrued and unpaid dividends (at 110% of such dividends) on the redemption
date instead of receiving the dividend on the dividend date. Dividends payable on the 12% Preferred
Stock for any period greater or less than a full dividend period will be computed on the basis of a
360-day year consisting of twelve 30-day months. Accrued but unpaid dividends will not bear
interest.
In addition, in the event of any cash distribution to all holders of common stock, holders of
12% Preferred Stock will be entitled to participate in such distribution as if such holders of 12%
Preferred Stock had converted their shares of 12% Preferred Stock into common stock calculated on
the record date for determination of holders entitled to receive such distribution.
If we do not pay or set aside dividends in full on the 12% Preferred Stock and any other
preferred stock ranking on the same basis as to dividends, all dividends declared upon shares of
the 12% Preferred Stock and any other such preferred stock will be declared on a pro rata basis.
For these purposes, pro rata means that the amount of dividends declared per share on the 12%
Preferred Stock and any other preferred stock will bear the same ratio to each other that the
accrued and unpaid dividends per share on the shares of the 12% Preferred Stock and such other
preferred stock bear to each other.
Unless we have paid or set aside full cumulative dividends, if any, accrued on all outstanding
shares of 12% Preferred Stock and any other of our preferred stock ranking on the same basis as to
dividends:
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we may not declare or pay or set aside dividends on common
stock or any other stock ranking junior to the 12%
Preferred Stock as to dividends or liquidation
preferences, excluding dividends or distributions of
shares, options, warrants or rights to purchase common
stock or other stock ranking junior to the 12% Preferred
Stock as to dividends; and
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98
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we will not be able to redeem, purchase or otherwise
acquire for consideration (or pay or make available any
monies for a sinking fund for the redemption of any such
stock) any of our other stock ranking junior to the 12%
Preferred Stock as to dividends or liquidation
preferences, except (A) by conversion of such junior stock
into or exchange for our stock ranking junior to the 12%
Preferred Stock as to dividends and upon liquidation,
dissolution or winding up, (B) repurchases of unvested shares of our capital stock at cost upon termination of
employment or consultancy of the holder thereof, provided
such repurchases are approved by our Board of Directors in
good faith, or (C) with respect to any withholding in
connection with the payment of exercise prices or
withholding taxes relating to employee equity awards.
|
Under Delaware law, we may only make dividends or distributions to our stockholders from:
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our surplus; or
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the net profits for the fiscal year in which the dividend or distribution is declared and/or the preceding fiscal year.
|
Dividends on the 12% Preferred Stock will accrue whether or not:
|
|
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we have earnings;
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|
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there are funds legally available for the payment of those dividends; or
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those dividends are authorized or declared.
|
If our Board of Directors or an authorized committee of our Board does not declare a dividend
in respect of any dividend payment date, the Board of Directors or an authorized committee of our
Board may declare and pay the dividend on any other date, whether or not a dividend payment date.
The persons entitled to receive the dividend will be the holders of our 12% Preferred Stock as they
appear on our stock register on a record date selected by the Board of Directors or an authorized
committee of our Board. That date must not (1) precede the date our Board of Directors or an
authorized committee of our Board declares the dividend payable, and (2) be more than 30 days prior
to the date the dividend is paid.
So long as any shares of the 12% Preferred Stock are outstanding, no other stock of the
Company ranking on a parity with the 12% Preferred Stock as to dividends or upon liquidation,
dissolution or winding up shall be redeemed, purchased or otherwise acquired for any consideration
(or any monies be paid to or made available for a sinking fund or otherwise for the purchase or
redemption of any shares of any such stock) by the Company or any Subsidiary unless (i) the full
cumulative dividends, if any, accrued on all outstanding shares of 12% Preferred Stock shall have
been paid or set apart for payment for all past dividend periods and (ii) sufficient funds shall
have been set apart for the payment of the dividend for the current dividend period with respect to
the 12% Preferred Stock.
We will not authorize or pay any distributions on the 12% Preferred Stock or set aside funds
for the payment of distributions if restricted or prohibited by law, or if the terms of any of our
agreements, including agreements relating to indebtedness or any future series of preferred stock,
prohibit that authorization, payment or setting aside of funds or provide that the authorization,
payment or setting aside of funds is a breach of or a default under that agreement. We may in the
future become a party to agreements that restrict or prevent the payment of distributions on, or
the purchase of, the 12% Preferred Stock. These restrictions may include indirect covenants which
require us to maintain specified levels of net worth or assets.
Our ability to pay dividends and make any other distributions in the future will depend upon
our financial results, liquidity, and financial condition.
Dividend Rate AdjustmentFailure to Pay Dividends
If we fail to pay the quarterly 12% Preferred Stock dividend in full for two (2) consecutive
quarters, the dividend rate will automatically increase by 0.50% of the initial liquidation
preference per share of the 12% Preferred Stock per quarter (up to a maximum aggregate increase of
two percent (2%) of the initial liquidation preference per annum per share of the 12% Preferred
Stock) until cumulative dividends have been paid in full.
Ranking
The 12% Preferred Stock ranks, with respect to distribution rights and rights upon our
liquidation, winding-up or dissolution:
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junior to all of our existing and future debt obligations, including convertible or exchangeable debt securities;
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senior to our common stock and to any other capital stock issued in the future that by its terms ranks junior to
the 12% Preferred Stock with respect to dividend rights or payments upon our liquidation, winding-up or
dissolution;
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99
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on a parity with any of our capital stock issued in the future that by its terms ranks on a parity with 12%
Preferred Stock; and
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junior to any equity securities issued in the future and that by their terms rank senior to the 12% Preferred Stock.
|
While any shares of 12% Preferred Stock are outstanding, we may not authorize or issue any
equity securities that rank senior to the 12% Preferred Stock without the affirmative vote of
holders representing at least a majority of the outstanding 12% Preferred Stock. In addition, so
long as 225,000 shares of 12% Preferred Stock are outstanding, we may not authorize or issue any
equity securities that rank on a parity with the 12% Preferred Stock without the affirmative vote
of holders representing at least a majority of the outstanding 12% Preferred Stock. See Voting
Rights below.
Maturity
Our 12% Preferred Stock has no maturity date, and we are not required to redeem or repurchase
our 12% Preferred Stock at any time, except if a holder of shares of our 12% Preferred Stock causes
us to repurchase such shares in connection with certain change in control events. Accordingly, our
12% Preferred Stock will remain outstanding indefinitely unless a holder of shares of our 12%
Preferred Stock decides to convert it or to cause us to repurchase it in connection with certain
change of control events, or we decide to offer to repurchase it. See Conversion Rights,
Repurchase at Option of Holders upon a Fundamental Change and Optional Redemption.
Conversion Rights
General
Holders may convert their shares of 12% Preferred Stock at any time at the conversion rate of
60.606 shares of common stock per share of 12% Preferred Stock. This conversion rate is equivalent
to a conversion price of approximately $1.65 per share of common stock. We will not issue
fractional shares of common stock upon conversion. However, we will instead pay cash for each
fractional share based upon the market price of the common stock on the last business day prior to
the conversion date.
A holder of any shares of 12% Preferred Stock shall have the right, at such holders option
(except that, with respect to any shares of 12% Preferred Stock which shall be called for
redemption, such right shall terminate at the close of business on the trading day immediately
preceding the date fixed for redemption of such shares of 12% Preferred Stock unless we default in
payment due upon redemption thereof), to convert such shares at any time at the conversion rate of
60.606 fully paid and non-assessable shares of common stock (as such shares shall then be
constituted) per share of 12% Preferred Stock, as adjusted in accordance with the terms hereof, by
surrender of the certificate or certificates representing such share of 12% Preferred Stock so to
be converted in accordance with the terms of the Certificate of Designations.
In no event may we issue shares of common stock upon conversion of the 12% Preferred Stock if
such issuance would cause the aggregate outstanding shares of our common stock to exceed the total
authorized number of shares of our common stock.
In order to convert shares of 12% Preferred Stock, the holder must either:
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deliver the 12% Preferred Stock certificate at the
transfer agent office together with a duly signed and
completed notice of conversion, or
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if the 12% Preferred Stock is held in global form, follow
the procedures of The Depository Trust Company, or DTC.
|
The conversion date will be the date the holder delivers the 12% Preferred Stock certificate
and the duly signed and completed notice of conversion to the transfer agent or complies with the
procedures of DTC.
The holders of 12% Preferred Stock at the close of business on a record date will be entitled
to receive the dividend payment, if declared and paid, on those shares on the corresponding
dividend payment date notwithstanding the conversion of such shares following that record date.
Upon conversion of shares of 12% Preferred Stock, accrued and unpaid dividends on those shares will
be paid in cash or, at our election, exchanged for a number of shares of our common stock equal to
the dollar value of such accrued and unpaid dividends divided by the conversion price in effect at
the time of conversion.
Conversion Procedures
If the shares of 12% Preferred Stock are held in global certificate form, holders must comply
with the procedures of DTC to convert their beneficial interest in respect of the preferred stock
evidenced by a global stock certificate of the 12% Preferred Stock.
Holders may convert some or all of their shares of 12% Preferred Stock by surrendering to us
at our principal office or at the office of the transfer agent, the certificate or certificates for
the 12% Preferred Stock to be converted accompanied by a written notice stating that they elect to
convert all or a specified whole number of those shares in accordance with the provisions described
in this the
100
Certificate of Designations and specifying the name or names in which they wish the
certificate or certificates for the shares of common stock to be issued. In case the notice
specifies a name or names other than the holders name, the notice must be accompanied by payment
of all transfer taxes payable upon the issuance of shares of common stock in that name or names.
Other than those taxes, we will pay any documentary, stamp or similar issue or transfer taxes that
may be payable in respect of any issuance or delivery of shares of common stock upon conversion of
the 12% Preferred Stock. As promptly as practicable after the surrender of that certificate or
certificates and the receipt of the notice relating to the conversion and payment of all required
transfer taxes, if any, or the demonstration to our satisfaction that those taxes have been paid,
we will deliver or cause to be delivered (a) certificates representing the number of validly
issued, fully paid and non-assessable full shares of common stock to which the holder, or the
holders transferee, will be entitled, and (b) if less than the full number of shares of 12%
Preferred Stock evidenced by the surrendered certificate or certificates is being converted, a new
certificate or certificates, of like tenor, for the number of shares evidenced by the surrendered
certificate or certificates, less the number of shares being converted. This conversion will be
deemed to have been made at the close of business on the date of giving the notice and of
surrendering the certificate or certificates representing the shares of the 12% Preferred Stock to
be converted, or the conversion date, so that the holders rights as to the shares being
converted will cease except for the right to receive the conversion value, and, if applicable, the
person entitled to receive common shares will be treated for all purposes as having become the
record holder of those shares of common stock at that time.
If more than one share of 12% Preferred Stock is surrendered for conversion at the same time,
the number of shares of full common stock issuable on conversion of those shares of 12% Preferred
Stock will be computed on the basis of the total number of shares of 12% Preferred Stock so
surrendered.
Before the delivery of any securities upon conversion of the 12% Preferred Stock, we will
comply with all applicable federal and state laws and regulations. All common stock delivered upon
conversion of the 12% Preferred Stock will upon delivery be duly authorized, validly issued, fully
paid and non-assessable, free of all liens and charges and not subject to any preemptive rights.
Conversion Rate AdjustmentGeneral
We will adjust the conversion rate from time to time as follows:
(1) If we issue shares of our common stock as a dividend or distribution on shares of our
common stock to all holders of our common stock, or if we effect a share split or share
combination, the conversion rate shall be adjusted based on the following formula:
CR
1
= CR
0
x OS
1
/0S
0
where
CR
0
= the conversion rate in effect immediately prior to the
ex-dividend date for such dividend or distribution, or the effective date of such
share split or share combination;
CR
1
= the new conversion rate in effect immediately on and after
the ex-dividend date for such dividend or distribution, or the effective date of such
share split or share combination;
OS
1
= the number of shares of our common stock outstanding
immediately after such dividend or distribution, or the effective date of such share
split or share combination; and
OS
0
= the number of shares of our common stock outstanding
immediately prior to such dividend or distribution, or the effective date of such
share split or share combination.
Any adjustment made pursuant to this paragraph (1) will become effective at the open of
business on (x) the ex-dividend date for such dividend or other distribution or (y) the date on
which such split or combination becomes effective, as applicable. If any dividend or distribution
described in this paragraph (1) is declared but not so paid or made, the new conversion rate will
be readjusted to the conversion rate that would then be in effect if such dividend or distribution
had not been declared.
(2) If we distribute to all holders of our common stock any rights, warrants or options
entitling them, for a period expiring not more than 60 days after the date of issuance of such
rights, warrants or options, to subscribe for or purchase shares of our common stock at a price per
share that is less than the closing sale price per share of our common stock on the business day
immediately preceding the time of announcement of such distribution, we will adjust the conversion
rate based on the following formula:
CR
1
= CR
0
x (OS
0
+X)/(0S
0
+Y)
where
CR
0
= the conversion rate in effect immediately prior to the
ex-dividend date for such distribution;
CR
1
= the new conversion rate in effect immediately on and after
the ex-dividend date for such distribution;
OS
0
= the number of shares of our common stock outstanding
immediately prior to the ex-dividend date for such distribution;
X = the aggregate number of shares of our common stock issuable pursuant to such
rights, warrants or options; and
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Y = the number of shares of our common stock equal to the quotient of (A) the
aggregate price payable to exercise such rights, warrants or options and (B) the
closing sale price per share of our common stock on the business day immediately
preceding the time of announcement for the issuance of such rights, warrants or
options.
For purposes of this paragraph (2), in determining whether any rights, warrants or options
entitle the holders of shares of our common stock to subscribe for or purchase shares of our common
stock at less than the applicable closing sale price per share of our common stock, and in
determining the aggregate exercise or conversion price payable for such shares of common stock,
there shall be taken into account any consideration we receive for such rights, warrants or options
and any amount payable on exercise or conversion thereof, with the value of such consideration, if
other than cash, to be determined by our Board of Directors. If any right, warrant or option
described in this paragraph (2) is not exercised or converted prior to the expiration of the
exercisability or convertibility thereof, we will adjust the new conversion rate to the conversion
rate that would then be in effect if such right, warrant or option had not been so issued.
(3) If we distribute shares of our capital stock, evidence of indebtedness or assets or
property to all holders of our common stock, excluding:
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dividends, distributions, rights, warrants or options referred to in paragraph (1) or (2) above;
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dividends or distributions paid exclusively in cash; and
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spin-offs, as described below in this paragraph (3);
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then we will adjust the conversion rate based on the following formula:
CR
1
= CR
0
x SP
0
/(SP
0
FMV)
where
CR
0
= the conversion rate in effect immediately prior to the
ex-dividend date for such distribution;
CR
1
= the new conversion rate in effect immediately on and after
the ex-dividend date for such distribution;
SP
0
= the average of the closing sale price per share of our
common stock for the 10 consecutive trading days ending on the business day
immediately preceding the ex-dividend date for such distribution; and
FMV = the fair market value (as determined in good faith by our Board of Directors) of
the shares of capital stock, evidences of indebtedness, assets or property distributed
with respect to each outstanding share of our common stock on the earlier of the
record date or the ex-dividend date for such distribution.
An adjustment to the conversion rate made pursuant to the immediately preceding paragraph will
become effective on the ex-dividend date for such distribution; provided, however, that if FMV
with respect to any distribution of shares of capital stock, evidences of indebtedness or other
assets or property of ours is equal to or greater than SP
0
with respect to
such distribution, then in lieu of the foregoing adjustment, adequate provision shall be made so
that each holder of 12% Preferred Stock shall have the right to receive on the date such shares of
capital stock, evidences of indebtedness or other assets or property of ours are distributed to
holders of our common stock, for each share of 12% Preferred Stock, the amount of shares of capital
stock, evidences of indebtedness or other assets or property of ours such holder of 12% Preferred
Stock would have received had such holder of 12% Preferred Stock owned a number of shares of common
stock into which such 12% Preferred Stock is then convertible at the conversion rate in effect on
the ex-dividend date for such distribution.
If we distribute to all of our common stockholders capital stock of any class or series, or
similar equity interest, of or relating to one of our subsidiaries or other business unit, which we
refer to as a spin-off, the conversion rate in effect immediately before the 10th trading day from
and including the effective date of the spin-off will be adjusted based on the following formula:
CR
1
= CR
0
x (FMV
0
+MP
0
)/MP
0
where
CR
0
= the conversion rate in effect immediately prior to the 10th
trading day immediately following, and including, the effective date of the spin-off;
CR
1
= the new conversion rate in effect immediately on and after
the 10th trading day immediately following, and including, the effective date of the
spin-off;
FMV
0
= the average of the closing sale prices per share of the
capital stock or similar equity interest distributed to our common stockholders
applicable to one share of our common stock over the first 10 consecutive trading days
after the effective date of the spin-off; and
MP
0
= the average of the closing sale prices per share of our
common stock over the first 10 consecutive trading days after the effective date of
the spin-off.
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An adjustment to the conversion rate made pursuant to the immediately preceding paragraph will
occur on the 10th trading day from and including the effective date of the spin-off; provided that
in respect of any conversion within the 10 trading days following the effective date of any
spin-off, references within this paragraph (3) to 10 trading days will be deemed replaced with such
lesser number of trading days as have elapsed between the effective date of such spin-off and the
conversion date in determining the applicable conversion rate.
If any such dividend or distribution described in this paragraph (3) is declared but not paid
or made, the new conversion rate will be re-adjusted to be the conversion rate that would then be
in effect if such dividend or distribution had not been declared.
(4) If we or any of our subsidiaries make a payment in respect of a tender offer or exchange
offer for shares of our common stock to the extent that the cash and value of any other
consideration included in the payment per share of our common stock exceeds the closing sale price
per share of our common stock on the trading day next succeeding the last date on which tenders or
exchanges may be made pursuant to such tender offer or exchange offer, the conversion rate will be
adjusted based on the following formula:
CR
1
= CR
0
x (AC + (SP
1
x OS
1
))/(SP x OS°)
where
CR
0
= the conversion rate in effect on the day immediately
following the date such tender or exchange offer expires;
CR
1
= the conversion rate in effect on the second day immediately
following the date such tender or exchange offer expires;
AC = the aggregate value of all cash and any other consideration (as determined by our
Board of Directors) paid or payable for shares of our common stock purchased in such
tender or exchange offer;
OS
0
= the number of shares of our common stock outstanding
immediately prior to the date such tender or exchange offer expires;
OS
1
= the number of shares of our common stock outstanding
immediately after the date such tender or exchange offer expires (after giving effect
to the purchase or exchange of shares pursuant to such tender or exchange offer); and
SP
1
= the closing sale price per share of our common stock for the
trading day immediately following the date such tender or exchange offer expires.
If the application of the foregoing formula would result in a decrease in the conversion rate,
no adjustment to the conversion rate will be made.
Any adjustment to the conversion rate made pursuant to this paragraph (4) will become
effective on the second day immediately following the date such tender offer or exchange offer
expires. If we or one of our subsidiaries is obligated to purchase shares of our common stock
pursuant to any such tender or exchange offer but is permanently prevented by applicable law from
effecting any such purchase or all such purchases are rescinded, we will re-adjust the new
conversion rate to be the conversion rate that would be in effect if such tender or exchange offer
had not been made.
If we have in effect a rights plan while any shares of our 12% Preferred Stock remain
outstanding, holders of shares of our 12% Preferred Stock will receive, upon a conversion of such
shares, in addition to the shares of our common stock, rights under our stockholder rights
agreement unless, prior to conversion, the rights have expired, terminated or been redeemed or
unless the rights have separated from our common stock. If the rights provided for in any rights
plan that our Board of Directors may adopt have separated from the common stock in accordance with
the provisions of the rights plan so that holders of shares of our 12% Preferred Stock would not be
entitled to receive any rights in respect of our common stock that we elect to deliver upon
conversion of shares of our 12% Preferred Stock, we will adjust the conversion rate at the time of
separation as if we had distributed to all holders of our capital stock, evidences of indebtedness
or other assets or property pursuant to paragraph (3) above, subject to readjustment upon the
subsequent expiration, termination or redemption of the rights.
In no event will the conversion price be reduced below $0.01, subject to adjustment for share
splits and combinations and similar events.
We will not make any adjustment to the conversion rate if holders of shares of our 12%
Preferred Stock are permitted to participate, on an as-converted basis, in the transactions
described above.
Without limiting the foregoing or subsequent sections of this prospectus, the conversion rate
will not be adjusted for:
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the issuance of any shares of our common stock pursuant to
any present or future plan providing for the reinvestment
of dividends or interest payable on our securities and the
investment of additional optional amounts in shares of our
common stock under any plan;
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the issuance of any shares of our common stock or options
or rights to purchase such shares pursuant to any of our
present or future employee, director, trustee or
consultant benefit plans, employee agreements or
arrangements or programs;
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the issuance of any shares of our common stock pursuant to
any option, warrant, right, or exercisable, exchangeable
or convertible security outstanding as of the date shares
of our 12% Preferred Stock were first issued;
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a change in the par value of our common stock;
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accumulated and unpaid dividends or distributions on our
12% Preferred Stock, except as otherwise provided in the
Certificate of Designations; or
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the issuance of shares of our common stock or any
securities convertible into or exchangeable or exercisable
for shares of our common stock or the payment of cash upon
the repurchase or redemption thereof, except as otherwise
provided in the Certificate of Designations.
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No adjustment in the conversion rate will be required unless the adjustment would require an
increase or decrease of at least 1% of the conversion rate. If the adjustment is not made because
the adjustment does not change the conversion rate by at least 1%, then the adjustment that is not
made will be carried forward and taken into account in any future adjustment. In addition, we will
make any carryforward adjustments not otherwise effected on each anniversary of the original
issuance date of the 12% Preferred Stock, upon conversion of any shares of 12% Preferred Stock (but
only with respect to such converted 12% Preferred Stock) and if the shares of our 12% Preferred
Stock are called for redemption. All required calculations will be made to the nearest cent or
1/10,000th of a share, as the case may be.
We may make a temporary reduction in the conversion price of the 12% Preferred Stock if our
Board of Directors determines that this decrease would be in the best interests of our company. We
may, at our option, reduce the conversion price if our Board of Directors deems it advisable to
avoid or diminish any income tax to holders of common stock resulting from any dividend or
distribution of stock or rights to acquire stock or from any event treated as such for income tax
purposes. See the section entitled Certain U.S. Federal Income Tax Considerations below for more
information.
To the extent permitted by law, we may, from time to time, increase the conversion rate for a
period of at least 20 days if our Board of Directors determines that such an increase would be in
our best interests. Any such determination by our Board of Directors will be conclusive. In
addition, we may increase the conversion rate if our Board of Directors deems it advisable to avoid
or diminish any income tax to common stockholders resulting from any distribution of common stock
or similar event. We will give holders of shares of our 12% Preferred Stock at least 15 business
days notice of any increase in the conversion rate.
The closing sale price of our common stock on any date means the closing sale price per
share (or if no closing sale price is reported, the average of the closing bid and ask prices or,
if more than one in either case, the average of the average closing bid and the average closing ask
prices) on such date as reported on the New York Stock Exchange (or such other principal national
securities exchange on which the common stock is then listed or authorized for quotation or, if not
so listed or authorized for quotation, the average of the mid-point of the last bid and ask prices
for our common stock on the relevant date from each of at least three nationally recognized
independent investment banking firms selected by us for this purpose).
Conversion Price AdjustmentDilutive Issuances
For six (6) months following November 6, 2009, if we issue any common stock at a price that is
less than the then current conversion price of the 12% Preferred Stock, or any securities
convertible into or exchangeable for, directly or indirectly, our common stock (we refer to such
securities as convertible securities) or any rights, warrants or options to purchase any such
common stock or convertible securities with a conversion price or exercise price that is less than
the then current conversion price of the 12% Preferred Stock (we refer to all such issuances of
securities as dilutive issuances), then the conversion price will be reduced concurrently with
such issue or sale, according to the following formula:
CP
1
= CP
0
× (A + B) ÷ (A + C)
where
CP
1
= the conversion price in effect immediately after such
dilutive issuances;
CP
0
= the conversion price in effect immediately prior to such
dilutive issuances;
A = the number of shares of common stock outstanding immediately prior to such
dilutive issuances, treating for this purpose as outstanding all shares of common
stock issuable upon exercise of options outstanding immediately prior to such issue or
upon conversion or exchange of convertible securities outstanding immediately prior to
such issue;
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B = the number of shares of common stock that would have been issued if such dilutive
issuances had been at a price per share of common stock (or equivalent) equal to
CP
0
; and
C = the number of shares of common stock issued (or the number of shares of common
stock issuable upon the exercise of rights, warrants or options to purchase common
stock or convertible securities and/or upon the conversion or exchange of convertible
securities, as the case may be) in such dilutive issuances.
Notwithstanding anything to the contrary set forth above with respect to conversion price
adjustments for dilutive issuances, no adjustment will be made to the conversion price of the 12%
Preferred Stock with regard to:
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securities issued (other than for cash) in connection with a strategic
merger, alliance, joint venture, acquisition, consolidation, licensing or
partnering agreement;
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common stock issued in connection with any credit facility obtained by us; or
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common stock issued and grants of options to purchase common stock pursuant
to an employment agreement or arrangement or an equity compensation plan
approved by our Board of Directors.
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If the conversion price is adjusted as described above, then the conversion rate shall be
adjusted based on the following formula:
CR
1
= CR
0
× CP
0
/CP
1
where
CR
0
= the conversion rate in effect immediately prior to conversion
price adjustment;
CR
1
= the conversion rate in effect immediately following the
conversion price adjustment;
CP
0
= the conversion price in effect immediately prior to such
adjustment; and
CP
1
= the conversion price in effect immediately after such
adjustment.
Conversion Rate AdjustmentMerger, Consolidation or Sale of Assets
In the case of the following events, each of which we refer to as a business combination:
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any recapitalization, reclassification or change of our
common stock (other than changes resulting from a
subdivision or combination);
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a consolidation, merger or combination involving us into
any other person, or any merger of another person into us,
except for a merger that does not result in a
reclassification, conversion, exchange or cancellation of
common stock;
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a sale, transfer, conveyance or lease to another person of
all or substantially all of our property and assets (other
than to one or more of our subsidiaries); or
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a statutory share exchange;
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in each case, as a result of which our common stockholders are entitled to receive stock, other
securities, other property or assets (including cash or any combination thereof) with respect to or
in exchange for our common stock, a holder of shares of our 12% Preferred Stock will be entitled
thereafter to convert such shares of our 12% Preferred Stock into the kind and amount of stock,
other securities or other property or assets (including cash or any combination thereof) that the
holder of shares of our 12% Preferred Stock would have owned or been entitled to receive upon such
business combination as if such holder of shares of our 12% Preferred Stock held a number of shares
of our common stock equal to the conversion rate in effect on the effective date for such business
combination, multiplied by the number of shares of our 12% Preferred Stock held by such holder of
shares of our 12% Preferred Stock. If such business combination also constitutes a specified change
in control, a holder of shares of our 12% Preferred Stock converting such shares will not receive
additional shares if such holder does not convert its shares of our 12% Preferred Stock in
connection with (as described in Adjustment to Conversion Rate upon Certain Change in Control
Events) the relevant change in control. In the event that our common stockholders have the
opportunity to elect the form of consideration to be received in such business combination, we will
make adequate provision whereby the holders of shares of our 12% Preferred Stock will have a
reasonable opportunity to determine the form of consideration into which all of the shares of our
12% Preferred Stock, treated as a single class, will be convertible from and after the effective
date of such business combination. Such determination will be based on the weighted average of
elections made by the holders of shares of our 12% Preferred Stock that participate in such
determination, will be subject to any limitations to which all of our common stockholders are
subject, such as pro rata reductions applicable to any portion of the consideration payable in such
business combination, and will be conducted in such a manner as to be completed by the date that
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is the earliest of (1) the deadline for elections to be made by our common stockholders and (2) two
business days prior to the anticipated effective date of the business combination.
We will provide notice of the opportunity to determine the form of such consideration, as well
as notice of the determination made by the holders of shares of our 12% Preferred Stock (and the
weighted average of elections), by posting such notice with DTC and providing a copy of such notice
to the transfer agent. If the effective date of a business combination is delayed beyond the
initially anticipated effective date, the holders of shares of our 12% Preferred Stock will be
given the opportunity to make subsequent similar determinations in regard to such delayed effective
date. We may not become a party to any such transaction unless its terms are consistent with the
preceding. None of the foregoing provisions will affect the right of a holder of shares of our 12%
Preferred Stock to convert such holders shares of our 12% Preferred Stock into shares of our
common stock prior to the effective date.
Repurchase at Option of Holders upon a Fundamental Change
Each holder of our 12% Preferred Stock will have the right to require us to repurchase for
cash all, or a specified whole number, of such holders 12% Preferred Stock upon the occurrence of
a fundamental change (i) prior to November 15, 2014, at a repurchase price equal to 110% of the sum
of the initial liquidation preference
plus
accumulated but unpaid dividends to but excluding the
fundamental change repurchase date and (ii) from November 15, 2014 until prior to November 15, 2019
at a repurchase price equal to 100% of the sum of the initial liquidation preference plus
accumulated but unpaid dividends to but excluding the fundamental change repurchase date.
We will give notice by mail or by publication (with subsequent prompt notice by mail) to
holders of our 12% Preferred Stock and will post such notice with DTC and provide a copy of such
notice to the transfer agent of the anticipated effective date of any proposed fundamental change
that will occur prior to November 15, 2019. We must make this mailing or publication at least 15
days before the anticipated effective date of the fundamental change. In addition, no later than
the third business day after the completion of such fundamental change, we must make an additional
notice announcing such completion.
A holder of 12% Preferred Stock that has elected to convert its shares of 12% Preferred Stock
rather than require us to repurchase its shares of 12% Preferred Stock pursuant to the fundamental
change repurchase right will not be able to exercise the fundamental change repurchase right.
Within 15 days after the occurrence of a fundamental change, we will provide to the holders of
our 12% Preferred Stock and the transfer agent a notice of the occurrence of the fundamental change
and of the resulting conversion right. Such notice will state:
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the events constituting the fundamental change;
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the date of the fundamental change;
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the last date on which the holders of our 12% Preferred Stock may
exercise the fundamental change repurchase right;
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the fundamental change repurchase date;
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the name and address of the paying agent and the repurchase agent;
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that 12% Preferred Stock as to which the fundamental change
repurchase right has been exercised will be repurchased only if
the notice of exercise of the fundamental change repurchase right
has not been properly withdrawn; and
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the procedures that the holders of 12% Preferred Stock must
follow to exercise the fundamental change repurchase right.
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We will also issue a press release for publication on the Dow Jones & Company, Inc., Business
Wire or Bloomberg Business News (or, if such organizations are not in existence at the time of
issuance of such press release, such other news or press organization as is reasonably calculated
to broadly disseminate the relevant information to the public), or post notice on our website, in
any event prior to the opening of business on the first trading day following any date on which we
provide such notice to the holders of our 12% Preferred Stock.
The fundamental change repurchase date will be a date not less than 20 days nor more than 35
days after the date on which we give the above notice. To exercise the fundamental change
repurchase right, each holder of 12% Preferred Stock must deliver, on or before the close of
business on the fundamental change repurchase date, the 12% Preferred Stock to be converted, duly
endorsed for transfer, together with a completed written repurchase notice, to our transfer agent.
The repurchase notice will state:
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the relevant fundamental change repurchase date;
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the number of shares of 12% Preferred Stock to be repurchased; and
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that the 12% Preferred Stock is to be repurchased pursuant to the applicable provisions of the 12% Preferred Stock.
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If the 12% Preferred Stock is held in global form, the repurchase notice must comply with
applicable DTC procedures.
Holders of 12% Preferred Stock may withdraw any notice of exercise of their fundamental change
repurchase right (in whole or in part) by a written notice of withdrawal delivered to our transfer
agent prior to the close of business on the business day prior to the fundamental change repurchase
date. The notice of withdrawal must state:
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the number of withdrawn shares of our 12% Preferred Stock;
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if certificated shares of our 12% Preferred Stock have been issued, the certificate numbers of the
withdrawn shares of our 12% Preferred Stock; and
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the number of shares of our 12% Preferred Stock, if any, which remain subject to the repurchase notice.
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If the 12% Preferred Stock is held in global form, the notice of withdrawal must comply with
applicable DTC procedures.
Preferred stock as to which the fundamental change repurchase right has been properly
exercised and for which the repurchase notice has not been properly withdrawn will be repurchased
in accordance with the fundamental change repurchase right on the fundamental change repurchase
date. Payment of the fundamental change repurchase price is conditioned upon delivery of the
certificate or certificates for the 12% Preferred Stock to be repurchased. If less than the full
number of shares of 12% Preferred Stock evidenced by the surrendered certificate or certificates is
being repurchased, a new certificate or certificates, of like tenor, for the number of shares
evidenced by the surrendered certificate or certificates, less the number of shares being
repurchased, will be issued promptly to the holder.
In connection with any repurchase offer in the event of a fundamental change, we will comply
with all applicable federal and state laws and regulations.
A fundamental change will be deemed to occur upon a change in control or a termination of
trading prior to November 15, 2019. A change in control will be deemed to have occurred when:
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(1)
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any person or group (as such terms are used in Sections 13(d) and 14(d) of
the Exchange Act or any successor provisions to either of the foregoing),
including any group acting for the purpose of acquiring, holding, voting or
disposing of securities within the meaning of Rule 13d-5(b)(1) under the Exchange
Act, becomes the beneficial owner (as defined in Rule 13d-3 under the Exchange
Act, except that a person will be deemed to have beneficial ownership of all shares that any such person has the right to acquire, whether such right is
exercisable immediately or only after the passage of time), directly or
indirectly, of 50% or more of the total voting power of our Voting Stock (other
than as a result of any merger, share exchange, transfer of assets or similar
transaction solely for the purpose of changing our jurisdiction of incorporation
and resulting in a reclassification, conversion or exchange of outstanding shares
of common stock solely into shares of common stock of the surviving entity); or
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(2)
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(A) any person or group (as such terms are used in Sections 13(d) and 14(d)
of the Exchange Act or any successor provisions to either of the foregoing),
including any group acting for the purpose of acquiring, holding, voting or
disposing of securities within the meaning of Rule 13d-5(b)(1) under the Exchange
Act becomes the beneficial owner (as defined in Rule 13d-3 under the Exchange
Act, except that a person will be deemed to have beneficial ownership of all shares that any such person has the right to acquire, whether such right is
exercisable immediately or only after the passage of time), directly or
indirectly, of a majority of the total voting power of our Voting Stock (other
than as a result of any merger, share exchange, transfer of assets or similar
transaction solely for the purpose of changing our jurisdiction of incorporation
and resulting in a reclassification, conversion or exchange of outstanding shares
of common stock solely into shares of common stock of the surviving entity), and
(B) a termination of trading shall have occurred; or
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(3)
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our consolidation or merger with or into any other person, any merger of another
person into us, or any sale, transfer, assignment, lease, conveyance or other
disposition, directly or indirectly, of all or substantially all our assets and
the assets of our subsidiaries, considered as a whole (other than a disposition
of such assets as an entirety or virtually as an entirety to a wholly-owned
subsidiary) shall have occurred, other than:
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A.
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any transaction (a) that does not
result in any reclassification,
conversion, exchange or cancellation
of outstanding shares of our capital
stock, and (b) pursuant to which
holders of our capital stock
immediately prior to the transaction
are entitled to exercise, directly or
indirectly, 50% or more of the total
voting power of all shares of capital
stock entitled to vote generally in
the election of directors of the
continuing or surviving person
immediately after the transaction; or
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107
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B.
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any merger, share exchange, transfer
of assets or similar transaction
solely for the purpose of changing
our jurisdiction of incorporation and
resulting in a reclassification,
conversion or exchange of outstanding shares of common stock solely
into shares of common stock of the
surviving entity; or
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(4)
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during any period of two consecutive years, individuals who at the beginning of
such period constituted our Board of Directors (together with any new directors
whose nomination, election or appointment by such Board or whose nomination for
election by our stockholders was approved by a vote of a majority of the
directors then still in office who were either directors at the beginning of such
period or whose election, nomination or appointment was previously so approved)
cease for any reason to constitute 50% or more of our Board of Directors then in
office; or
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(5)
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our stockholders shall have approved any plan of liquidation or dissolution.
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Capital Stock
of any person means any and all shares, interests, participations or other
equivalents (however designated) of corporate stock or other equity participations, including
partnership interests, whether general or limited, of such person and any rights (other than debt
securities convertible and exchangeable into an equity interest), warrants or options to acquire an
equity interest in such person.
A
termination of trading
will be deemed to have occurred if our common stock is not listed
for trading on a U.S. national securities exchange or market, including, but not limited to, the
over-the-counter market or bulletin board.
Voting Stock
of any person means Capital Stock of such person which ordinarily has voting
power for the election of directors (or persons performing similar functions) of such person,
whether at all times or only for so long as no senior class of securities has such voting power by
reason of any contingency.
The definition of change in control includes a phrase relating to the sale, assignment, lease,
transfer or conveyance of all or substantially all of our assets or our assets and those of our
subsidiaries taken as a whole. Although there is a developing body of case law interpreting the
phrase substantially all, there is no precise established definition of the phrase under
applicable law. Accordingly, the ability of a holder of shares of our 12% Preferred Stock to
require us to repurchase their shares of 12% Preferred Stock as a result of a sale, assignment,
transfer, lease, or conveyance of less than all of our assets and those of our subsidiaries may be
uncertain.
This fundamental change repurchase feature may make more difficult or discourage a party from
taking over our company and removing incumbent management. We are not aware, however, of any
specific effort to accumulate our capital stock with the intent to obtain control of our company by
means of a merger, tender offer, solicitation or otherwise. Instead, the fundamental change
repurchase feature was a result of negotiations between us and the initial purchasers in the
offering of the 12% Preferred Stock.
We could, in the future, enter into certain transactions, including recapitalizations, which
would not constitute a fundamental change but would increase the amount of debt outstanding or
otherwise adversely affect the holders of 12% Preferred Stock. The incurrence of significant
amounts of additional debt could adversely affect our ability to service our debt.
Adjustment to Conversion Rate upon Certain Change in Control Events
If a change in control described in the clauses (2) or (3) of the definition of change in
control set forth above under Repurchase at Option of Holders upon a Fundamental Change occurs
prior to November 15, 2014, we will increase the conversion rate, to the extent described below, by
a number of additional shares if a holder elects to convert shares of our 12% Preferred Stock in
connection with any such transaction by increasing the conversion rate applicable to such shares if
and as required below; provided, however, that we will not adjust the conversion rate if a change
in control described in clause (3) of the definition of change in control occurs and 90% of the
consideration (excluding cash payments for fractional shares) in the transaction or transactions
constituting the change in control consists of shares of common stock that are, or upon issuance
will be, traded on the New York Stock Exchange or approved for trading on a Nasdaq market and, as a
result of such transaction or transactions, the 12% Preferred Stock becomes convertible solely into
such common stock and other consideration payable in such transaction or transactions.
A conversion of shares of our 12% Preferred Stock by a holder will be deemed for these
purposes to be in connection with a change in control if the holders written notice is received
by us at our principal office or by the transfer agent on or subsequent to the date 10 trading days
prior to the date announced by us as the anticipated effective date of the change in control but
before the close of business on the business day immediately preceding the related change in
control effective date. Any adjustment to the conversion rate will have the effect of increasing
the amount of any cash, securities or other assets otherwise due to holders of shares of our 12%
Preferred Stock upon conversion.
Any increase in the applicable conversion rate will be determined by reference to the table
below and is based on the date on which the change in control becomes effective (the
effective
date
) and the price (the
stock price
) paid per share of our common stock in the transaction
constituting the change in control. If holders of our common stock receive only cash in the
transaction, the stock price shall be the cash amount paid per share of our common stock.
Otherwise, the stock price shall be equal to the average closing sale price per share of our common
stock over the five trading-day period ending on the trading day immediately preceding the
effective date.
108
The following table sets forth the additional number of shares, if any, of our common stock
issuable upon conversion of each share of our 12% Preferred Stock in connection with such a change
in control, as specified above.
Additional Shares Upon a Change in Control
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Effective Date
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Stock Price on
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November 1,
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November 1,
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November 1,
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November 1,
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November 1,
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November 1,
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Effective Date
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2009
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2010
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2011
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2012
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2013
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2014
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$1.50
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11.112
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10.365
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9.477
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8.589
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7.701
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6.813
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$2.00
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7.284
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6.768
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5.686
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4.604
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3.522
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2.440
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$2.50
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5.093
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4.722
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3.571
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2.420
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1.268
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0.117
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$3.00
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3.700
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3.426
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2.570
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1.713
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0.857
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0.000
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$3.50
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2.755
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2.547
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1.910
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1.274
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0.637
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0.000
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$4.00
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2.083
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1.923
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1.442
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0.962
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0.481
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0.000
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$4.50
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1.586
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1.462
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1.097
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0.731
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0.366
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0.000
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$5.00
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1.213
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1.118
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0.839
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0.559
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0.280
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0.000
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The actual stock price and effective date may not be set forth in the foregoing table, in
which case:
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if the actual stock price on the effective date is between
two stock prices in the table or the actual effective date
is between two effective dates in the table, the amount of
the conversion rate adjustment will be determined by a
straight-line interpolation between the adjustment amounts
set forth for such two stock prices or such two effective
dates on the table based on a 360-day year, as applicable.
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if the stock price on the effective date equals or exceeds
$5.00 per share (subject to adjustment as described
below), no adjustment in the applicable conversion rate
will be made.
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if the stock price on the effective date is less than
$1.50 per share (subject to adjustment as described
below), no adjustment in the applicable conversion rate
will be made.
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The stock prices set forth in the first column of the table above will be adjusted as of any
date on which the conversion rate of our shares of 12% Preferred Stock is adjusted. The adjusted
stock prices will equal the stock prices applicable immediately prior to such adjustment multiplied
by a fraction, the numerator of which is the conversion rate immediately prior to the adjustment
giving rise to the stock price adjustment and the denominator of which is the conversion rate as so
adjusted. The conversion rate adjustment amounts set forth in the table above will be adjusted in
the same manner as the conversion rate other than by operation of an adjustment to the conversion
rate by virtue of the adjustment to the conversion rate as described above.
The additional shares, if any, or any cash delivered to satisfy our obligations to holders
that convert their shares of our 12% Preferred Stock in connection with a change in control will be
delivered upon the later of the settlement date for the conversion and promptly following the
effective date of the change in control transaction.
Our obligation to deliver the additional shares, or cash to satisfy our obligations, to
holders that convert their shares of 12% Preferred Stock in connection with a change in control
could be considered a penalty, in which case the enforceability thereof would be subject to general
principles of reasonableness of economic remedies.
Notwithstanding the foregoing, in no event will the conversion rate exceed 71.718 shares of
common stock per share of our 12% Preferred Stock, which maximum amount is subject to adjustments
in the same manner as the conversion rate as set forth under Conversion Rights.
Liquidation Rights
In the event of our voluntary or involuntary liquidation, winding-up or dissolution, each
holder of 12% Preferred Stock will be entitled to receive and to be paid out of our assets legally
available for distribution to our stockholders, prior to any payment or distribution is made to
holders of any securities ranking junior to the 12% Preferred Stock (including common stock), but
after payment of or provision for our debts and other liabilities or securities ranking senior to
the 12% Preferred Stock, and on a pro-rata basis with other preferred stock of equal ranking, a
cash liquidation preference equal to the greater of (i) 110% of the sum of the initial liquidation
preference per share
plus
accrued and unpaid dividends thereon, if any, from November 6, 2009
through the date of distribution of the assets, and (ii) an amount equal to the distribution amount
such holder of 12% Preferred Stock would have received had all shares of 12% Preferred Stock been
converted into common stock. Holders of any class or series of preferred stock ranking on parity
with the 12% Preferred Stock as to liquidation, winding-up or dissolution must also be entitled to
receive the full respective liquidation preferences and any accrued and unpaid dividends through
the date of distribution of the assets. If upon liquidation we do not have enough assets to pay in
full the amounts due on the 12% Preferred Stock and any other preferred stock ranking on parity
with the holders 12% Preferred Stock as to liquidation, winding-up or dissolution, holders of the
12% Preferred Stock and the holders of
109
such other preferred stock will share ratably in any such distributions of our assets in
proportion to the full respective liquidating distributions to which they would otherwise be
respectively entitled.
Only after the holders of 12% Preferred Stock have received their liquidation preference and
any accrued and unpaid dividends will we distribute assets to holders of common stock or any of our
other securities ranking junior to the shares of 12% Preferred Stock upon liquidation.
Holders of shares of our 12% Preferred Stock will be entitled to written notice of any
distribution in connection with any voluntary or involuntary liquidation, winding-up or dissolution
of our affairs not less than 30 days and not more than 60 days prior to the distribution payment
date. After payment of the full amount of the liquidating distributions to which they are entitled,
holders of shares of our 12% Preferred Stock will have no right or claim to participate in any
further distribution of our remaining assets.
The following events will not be deemed to be a liquidation, winding-up or dissolution of our
company:
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(1)
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the voluntary sale, lease, transfer, conveyance or other disposition of all or substantially
all of our assets (other than in connection with our liquidation, winding-up or dissolution);
or
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(2)
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our merger or consolidation with or into any other person, corporation, trust or other entity.
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Optional Redemption
On or after November 15, 2014, upon the affirmative vote of the disinterested members of the
Board of Directors, we may redeem the 12% Preferred Stock, out of legally available funds, in whole
or in part, at our option, at a per share redemption price equal to 110% of the sum of the initial
liquidation preference per share
plus
all accrued and unpaid dividends to and including the
redemption date, if the following conditions are satisfied as of the date of the redemption notice
and on the redemption date:
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(i)
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the number of authorized, but unissued and otherwise
unreserved, shares of our common stock are sufficient to
allow for conversion of all of the 12% Preferred Stock
outstanding as of such date;
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(ii)
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the shares of common stock issuable upon conversion of
the 12% Preferred Stock outstanding as of such date are
freely tradable for non-affiliates of our company;
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(iii)
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our common stock is listed on a national stock exchange;
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(iv)
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the issuance of common stock issuable upon conversion of
all of the 12% Preferred Stock outstanding as of such
date would be not be in violation of the rules and
regulations of the NYSE; and
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(v)
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no pending or proposed fundamental change described under
Conversion RightsAdjustment to Conversion Rate upon
a Fundamental Change above has been publicly announced
prior to such date that has not been consummated or
terminated.
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We are required to give notice of redemption not more than 45 and not less than 15 days before
the redemption date. We may only exercise this optional redemption right to the extent we are not
prohibited by law or the terms of any agreement relating to our indebtedness or any future series
of preferred stock from making the cash payment required to redeem such 12% Preferred Stock.
If we redeem less than all of the shares of 12% Preferred Stock, we will select the shares to
be redeemed by lot or pro rata or in some other equitable manner in our sole discretion.
If the redemption date falls after a record date and on or prior to the corresponding dividend
payment date, (a) we will pay 110% of the full amount of accrued and unpaid dividends payable on
such dividend payment date only to the holder of record at the close of business on the
corresponding record date and (b) the redemption price payable on the redemption date will include
only 110% of the initial liquidation preference per share of the 12% Preferred Stock, excluding any
amount in respect of dividends declared and payable on such corresponding dividend payment date.
With respect to any shares of 12% Preferred Stock that are redeemed, on and after the applicable
redemption date, dividends will cease to accumulate on such 12% Preferred Stock, all rights of
holders of such 12% Preferred Stock will terminate (except the right to receive the cash payable
upon such redemption) and such shares will no longer be deemed to be outstanding.
Notice of redemption of the 12% Preferred Stock shall be mailed to each holder of record of
the shares to be redeemed by first class mail, postage prepaid at such holders address as the same
appears on our stock records. Any notice, which was mailed as described above, shall be
conclusively presumed to have been duly given on the date mailed whether or not the holder receives
the notice. In addition to any information required by law, each notice will state: (i) the
redemption date; (ii) the redemption price; (iii) the number of shares of 12% Preferred Stock to be
redeemed; (iv) the place or places where certificates for such shares of 12% Preferred Stock are to
be surrendered for cash; (v) that unpaid dividends accrued to, but excluding, the redemption date
will be paid as specified in the notice; (vi) that on and after such date, dividends thereon will
cease to accrue; and (vii) the then current conversion rate and conversion price and the date on
which the conversion right will expire.
110
Voting Rights
Holders of shares of our 12% Preferred Stock have the voting rights set forth below.
Holders of shares of our 12% Preferred Stock vote on an as if converted basis with the
holders of common stock as a single class on all matters subject to a vote by the holders of common
stock to the extent permitted by law. Certain actions, including amendment of our certificate of
incorporation, require approval by holders of a majority of common stock voting as a separate class
(excluding the 12% Preferred Stock on an as if converted basis).
If dividends on our 12% Preferred Stock are in arrears for six or more quarters, whether or
not consecutive (which we refer to as a preferred dividend default), holders representing a
majority of shares of our 12% Preferred Stock (voting together as a class with the holders of all
other classes or series of preferred stock upon which like voting rights have been conferred and
are exercisable) will be entitled to nominate and vote for the election of two additional directors
to serve on our Board of Directors (which we refer to as 12% Preferred Stock directors), until all
unpaid dividends with respect to our 12% Preferred Stock and any other class or series of preferred
stock upon which like voting rights have been conferred and are exercisable have been paid or
declared and a sum sufficient for payment is set aside for such payment; provided that the election
of any such directors will not cause us to violate the corporate governance requirements of the New
York Stock Exchange (or any other exchange or automated quotation system on which our securities
may be listed or quoted) that requires listed or quoted companies to have a majority of independent
directors; and provided further that our Board of Directors will, at no time, include more than two
12% Preferred Stock directors. In such a case, the number of directors serving on our Board of
Directors will be increased by two. The 12% Preferred Stock directors will be elected by holders
representing a majority of shares of our 12% Preferred Stock for a one-year term and each 12%
Preferred Stock director will serve until his or her successor is duly elected and qualifies or
until the directors right to hold the office terminates, whichever occurs earlier. The election
will take place at:
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a special meeting called by holders of at least 15% of the
outstanding shares of 12% Preferred Stock together with
any other class or series of preferred stock upon which
like voting rights have been conferred and are
exercisable, if this request is received more than 75 days
before the date fixed for our next annual or special
meeting of stockholders or, if we receive the request for
a special meeting within 75 days before the date fixed for
our next annual or special meeting of stockholders, at our
annual or special meeting of stockholders; and
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each subsequent annual meeting (or special meeting held in
its place) until all dividends accumulated on our 12%
Preferred Stock and on any other class or series of
preferred stock upon which like voting rights have been
conferred and are exercisable have been paid in full for
all past dividend periods.
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If and when all accumulated dividends on our 12% Preferred Stock and all other classes or
series of preferred stock upon which like voting rights have been conferred and are exercisable
have been paid in full or a sum sufficient for such payment in full is set aside for payment,
holders of shares of our 12% Preferred Stock will be divested of the voting rights set forth above
(subject to re-vesting in the event of each and every preferred dividend default) and the term and
office of such 12% Preferred Stock directors so elected will immediately terminate and the entire
Board of Directors will be reduced accordingly.
Any 12% Preferred Stock director elected by holders of shares of our 12% Preferred Stock and
other holders of 12% Preferred Stock upon which like voting rights have been conferred and are
exercisable may be removed at any time with or without cause by the vote of, and may not be removed
otherwise than by the vote of, the holders of record of a majority of the outstanding shares of our
12% Preferred Stock and other parity preferred stock entitled to vote thereon when they have the
voting rights described above (voting as a single class). So long as a preferred dividend default
continues, any vacancy in the office of a 12% Preferred Stock director may be filled by written
consent of the 12% Preferred Stock director remaining in office, or if none remains in office, by a
vote of the holders of record of a majority of the outstanding shares of our 12% Preferred Stock
when they have the voting rights described above (voting as a single class with all other classes
or series of preferred stock upon which like voting rights have been conferred and are
exercisable); provided that the filling of each vacancy will not cause us to violate the corporate
governance requirements of the New York Stock Exchange (or any other exchange or automated
quotation system on which our securities may be listed or quoted) that requires listed or quoted
companies to have a majority of independent directors. The 12% Preferred Stock directors will each
be entitled to one vote on any matter.
In addition, so long as any shares of the 12% Preferred Stock issued in the initial offering
thereof remain outstanding, we will not, without the consent or the affirmative vote of holders
representing at least a majority of the outstanding shares of our 12% Preferred Stock voting as a
separate class:
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authorize, create or issue, or increase the number of
authorized or issued shares of, any class or series of
stock ranking senior to such 12% Preferred Stock with
respect to payment of dividends, or the distribution of
assets upon the liquidation, winding-up or dissolution of
our affairs, or reclassify any of our authorized capital
stock into any such shares, or create, authorize or issue
any obligation or security convertible into or evidencing
the right to purchase any such shares; or
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111
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amend, alter or repeal the provisions of our charter,
including the terms of our 12% Preferred Stock, whether by
merger, consolidation, transfer or conveyance of
substantially all of our assets or otherwise, so as to
materially and adversely affect any right, preference,
privilege or voting power of our 12% Preferred Stock,
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except that with respect to the occurrence of any of the events described in the second bullet
point immediately above, so long as our 12% Preferred Stock remains outstanding with the terms of
our 12% Preferred Stock materially unchanged, taking into account that, upon the occurrence of an
event described in the second bullet point above, we may not be the surviving entity, the
occurrence of such event will not be deemed to materially and adversely affect the rights,
preferences, privileges or voting power of our 12% Preferred Stock, and in such case such holders
shall not have any voting rights with respect to the events described in the second bullet point
immediately above. Furthermore, holders of shares of our 12% Preferred Stock will not have any
voting rights with respect to the events described in the second bullet point immediately above if
such holders receive the greater of (i) the full trading price of the 12% Preferred Stock on the
date of an event described in the second bullet point immediately above, or (ii) 110% of the sum of
the initial liquidation preference per share of 12% Preferred Stock plus accrued and unpaid
dividends thereon pursuant to the occurrence of any of the events described in the second bullet
point immediately above. So long as 225,000 of the shares of the 12% Preferred Stock remain
outstanding, we will not, without the consent or the affirmative vote of holders representing at
least a majority of the outstanding shares of our 12% Preferred Stock voting as a separate class,
authorize, create or issue, or increase the number of authorized or issued shares of, any class or
series of stock ranking on a parity with such 12% Preferred Stock with respect to payment of
dividends, or the distribution of assets upon the liquidation, winding-up or dissolution of our
affairs, or reclassify any of our authorized capital stock into any such shares, or create,
authorize or issue any obligation or security convertible into or evidencing the right to purchase
any such shares.
The voting provisions above will not apply if, at or prior to the time when the act with
respect to which the vote would otherwise be required would occur, we have redeemed or called for
redemption upon proper procedures all outstanding shares of our 12% Preferred Stock.
In all cases in which only the holders of 12% Preferred Stock will be entitled to vote, each
share of 12% Preferred Stock will be entitled to one vote. Where the holders of 12% Preferred Stock
are entitled to vote as a class with holders of any other class or series of preferred stock having
similar voting rights that are exercisable, each class or series will have the number of votes
proportionate to the aggregate liquidation preference of its outstanding shares. Where the holders
of 12% Preferred Stock are entitled to vote as a class with the holders of common stock, the
holders of 12% Preferred Stock will have the number of votes proportionate with the number of
common shares into which the 12% Preferred Stock is then convertible.
Without the consent of the holders of 12% Preferred Stock, so long as such action does not
adversely affect the special rights, preferences, privileges and voting powers of the 12% Preferred
Stock, taken as a whole, we may amend, alter, supplement, or repeal any terms of the 12% Preferred
Stock for the following purposes:
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to cure any ambiguity, or to cure, correct, or supplement
any provision contained in the Certificate of Designations
for the 12% Preferred Stock that may be ambiguous,
defective, or inconsistent, so long as such change does
not adversely affect the rights of any holder of 12%
Preferred Stock; or
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to make any provision with respect to matters or questions
relating to the 12% Preferred Stock that is not
inconsistent with the provisions of the Certificate of
Designations for the 12% Preferred Stock, so long as such
change does not adversely affect the rights of any holder
of 12% Preferred Stock.
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Registration Rights
Holders of the 12% Preferred Stock (other than one of the lead investors with whom we entered
into a registration rights agreement as discussed below), will not have any right to require us to
register the resale of the 12% Preferred Stock or the shares of our common stock issuable upon
conversion of the 12% Preferred Stock.
The following summary of the registration rights provided in the registration rights
agreement, as amended, is not complete and is qualified in its entirety by reference to the
registration rights agreement, as amended, filed as an Exhibit to the registration statement of
which this prospectus is a part.
In connection with the purchase of 12% Preferred Stock by certain lead investors, we entered
into a registration rights agreement with respect to 125,000 shares of the 12% Preferred Stock
purchased by such purchasers. Pursuant to that registration rights agreement, we are obligated to
file a shelf registration statement on Form S-1 under the Securities Act not later than 30 days
after the first date of original issuance of the 12% Preferred Stock to register the resale by the
above-referenced purchaser or its affiliates of the maximum number of shares of 12% Preferred Stock
purchased by such purchaser and shares of our common stock issuable upon conversion of those shares
of 12% Preferred Stock purchased as permitted by the SEC. We sometimes refer to the shares 12%
Preferred Stock and the underlying shares of common stock that are to be registered as described in
the immediately preceding sentence as the registrable securities.
112
We are obligated to keep the shelf registration statement of which this prospectus forms a
part effective until the earliest of:
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(1)
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one year from the latest date of original issuance of the 12% Preferred Stock;
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(2)
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the date on which all registrable securities shall have been registered under the Securities Act and disposed of;
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(3)
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the date on which the registrable securities cease to be outstanding;
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(4)
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the date on which all registrable securities shall have been transferred in accordance with Rule 144; or
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(5)
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the date on which the lead investor and its affiliates cease to hold registrable securities.
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A holder of registrable securities that sells registrable securities pursuant to the shelf
registration statement generally will be required to provide information about itself and the
specifics of the sale, be named as a selling securityholder in the related prospectus, deliver a
prospectus to purchasers, be subject to relevant civil liability provisions under the Securities
Act in connection with such sales, and be bound by the provisions of the registration rights
agreement that are applicable to such holder.
If we notify the holders of registrable securities in accordance with the registration rights
agreement to suspend the use of the prospectus upon the occurrence of certain events, then such
holders will be obligated to suspend the use of the prospectus until the requisite changes have
been made.
If, after the shelf registration statement has become effective and while our obligation to
maintain an effective shelf registration statement remains in effect, the aggregate duration of any
periods during which the availability of the shelf registration statement and any related
prospectus is suspended (as described above) exceeds 60 days in any 12-month period, then we are
obligated to pay to holders of shares of 12% Preferred Stock then subject to the registration
rights agreement, liquidated damages in cash in an amount that shall accrue at a rate of 0.50% of
the initial liquidation preference per share of 12% Preferred Stock per month, from and including
the date on which the resale registration default shall occur to but excluding the date on which
all such resale registration defaults have been cured. If a beneficiary of the registration rights
agreement has converted some or all of its shares of 12% Preferred Stock into shares of our common
stock, that holder will not be entitled to receive any liquidated damages with respect to those
shares of converted 12% Preferred Stock or common stock.
We will pay all expenses incident to our performance of and compliance with the registration
rights agreement, provide each holder that is selling registrable securities pursuant to the shelf
registration statement copies of the related prospectus as reasonably requested, and take certain
other actions as are required under the terms of the registration rights agreement to permit,
subject to the foregoing, unrestricted resales of the registrable securities.
Pursuant to the registration rights agreement, we will grant the holders of the registrable
securities certain customary indemnification rights in connection with the shelf registration
statement and each holder of registrable securities will indemnify us for certain losses in
connection with the shelf registration statement.
Our largest stockholder and an affiliate of Kojaian Management Corporation, along with its
other affiliated persons and entities, have agreed not to exercise any registration rights to which
they may be entitled in connection with the registration of their registrable securities under a
registration rights agreement entered into in 2006.
Preemptive Rights
For 180 days following November 6, 2009, if we issue for cash consideration any common stock
or any securities convertible into or exchangeable for, directly or indirectly, our common stock or
any rights, warrants or options to purchase any such common stock or convertible securities (which
we refer to collectively as common equity, and the issuance of any such common equity during such
180 day period, we refer to as the common equity sale), then a lead investor in the offering holder
of our 12% Preferred Stock that was granted registration rights and its affiliates shall also have
the right, subsequent to the consummation of the common equity sale, to purchase up to an amount of
common equity, on the identical terms and conditions as the common equity was issued in the common
equity sale, so as to maintain such holders as converted pro rata ownership of 12% Preferred
Stock prior to the common equity sale. Notwithstanding anything to the contrary set forth above,
such purchase rights shall not apply to any (i) securities issued (other than for cash) in
connection with a strategic merger, alliance, joint venture, acquisition, consolidation, licensing
or partnering agreement; (ii) any common equity issued in connection with any credit facility
obtained by the Company; or (iii) common equity issued pursuant to an employment agreement or
arrangement or an equity compensation plan approved by our Board of Directors.
Reservation of Shares for Issuance
We will at all times reserve and keep available out of our authorized and unissued common
stock, solely for issuance upon the conversion of the 12% Preferred Stock, that number of shares of
common stock as shall from time to time then be issuable upon the conversion of all the shares of
the 12% Preferred Stock then outstanding. The 12% Preferred Stock converted into our common stock
or otherwise reacquired by us will resume the status of authorized and unissued shares of our 12%
Preferred Stock, undesignated as to series, and will be available for subsequent issuance.
113
Global Preferred Stock
The 12% Preferred Stock issued to QIBs is evidenced by a global certificate that has been
deposited with, or on behalf of, DTC and registered in the name of Cede & Co. as DTCs nominee.
Except as set forth below, the global certificate may be transferred, in whole or in part, only to
another nominee of DTC or to a successor of DTC or its nominee.
Purchasers may hold their interests in the global certificate directly through DTC or
indirectly through organizations that are participants in DTC. Transfers between participants will
be effected in the ordinary way in accordance with DTC rules and will be settled in clearing house
funds. The laws of some states require that certain persons take physical delivery of securities in
definitive form. Consequently, the ability to transfer beneficial interests in the global
certificate to such persons may be limited.
Purchasers may beneficially own interests in the global certificate held by DTC only through
participants, or certain banks, brokers, dealers, trust companies and other parties that clear
through or maintain a custodial relationship, with a participant, either directly or indirectly
through indirect participants. So long as Cede & Co., as the nominee of DTC, is the registered
owner of the global certificate, Cede & Co. for all purposes will be considered the sole holder of
the global certificate. Except as provided below, owners of beneficial interests in the global
certificate will not be entitled to have certificates registered in their names, will not receive
or be entitled to receive physical delivery of certificates in definitive form, and will not be
considered the holders.
Payment of dividends on and the redemption price of the global certificate will be made to
Cede & Co. by wire transfer of immediately available funds. Neither we, the trustee nor any paying
agent will have any responsibility or liability for any aspect of the records relating to or
payments made on account of beneficial ownership interests in the global certificate or for
maintaining, supervising or reviewing any records relating to such beneficial ownership interests.
We have been informed by DTC that, with respect to any payment of dividends or of the
redemption price of the global certificate, DTCs practice is to credit participants accounts on
the payment date with payments in amounts proportionate to their respective beneficial interests in
the 12% Preferred Stock represented by the global certificate as shown on the records of DTC,
unless DTC has reason to believe that it will not receive payment on such payment date. Payments by
participants to owners of beneficial interests in 12% Preferred Stock represented by the global
certificate held through such participants will be the responsibility of such participants, as is
the case with securities held for the accounts of customers registered in street name.
Because DTC can only act on behalf of participants, who in turn act on behalf of indirect
participants and certain banks, the ability of a person having a beneficial interest in 12%
Preferred Stock represented by the global certificate to pledge such interest to persons or
entities that do not participate in the DTC system, or otherwise take actions in respect of such
interest, may be affected by the lack of a physical certificate evidencing such interest.
Neither we, the transfer agent, registrar, paying agent nor conversion agent will have any
responsibility for the performance by DTC or its participants or indirect participants under the
rules and procedures governing their operations. DTC has advised us that it will take any action
permitted to be taken by a holder of 12% Preferred Stock only at the direction of one or more
participants to whose account with DTC interests in the global certificate are credited and only in
respect of the amount of shares of the 12% Preferred Stock represented by the global certificate as
to which the participant has given this direction.
DTC is a limited purpose trust company organized under the laws of the State of New York, a
member of the Federal Reserve System, a clearing corporation within the meaning of the Uniform
Commercial Code and a clearing agency registered pursuant to the provisions of Section 17A of the
Exchange Act. DTC was created to hold securities for its participants and to facilitate the
clearance and settlement of securities transactions between participants through electronic
book-entry changes to accounts of its participants, thereby eliminating the need for physical
movement of certificates. Participants include securities brokers and dealers, banks, trust
companies and clearing corporations and may include certain other organizations. Certain
participants, together with other entities, own DTC. Indirect access to the DTC system is available
to others such as banks, brokers, dealers, and trust companies that clear through, or maintain a
custodial relationship with, a participant, either directly or indirectly.
If DTC is at any time unwilling or unable to continue as depository and a successor depository
is not appointed by us within 90 days, we will cause 12% Preferred Stock to be issued in definitive
form in exchange for the global certificate.
Certificated Preferred Stock
The 12% Preferred Stock issued to accredited investors who are not QIBs were issued in
certificated form.
Transfer Agent and Registrar
The transfer agent and registrar for our common stock and the 12% Preferred Stock is
Computershare Investor Services, L.L.C.
114
Liability and Indemnification of Officers and Directors
Our certificate of incorporation contains certain provisions permitted under the Delaware
General Corporation Law relating to the liability of our directors. These provisions eliminate a
directors personal liability for monetary damages resulting from a breach of fiduciary duty,
except that a director will be personally liable:
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for any breach of the directors duty of loyalty to us or our stockholders;
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for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law;
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under Section 174 of the Delaware General Corporation Law relating to unlawful stock repurchases or
dividends; or
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for any transaction from which the director derives an improper personal benefit.
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These provisions do not limit or eliminate our rights or those of any stockholder to seek
non-monetary relief, such as an injunction or rescission, in the event of a breach of a directors
fiduciary duty. These provisions will not alter a directors liability under federal securities
laws.
Our certificate of incorporation and bylaws also provide that we must indemnify our directors
and officers to the fullest extent permitted by Delaware law and advance expenses, as incurred, to
our directors and officers in connection with a legal proceeding to the fullest extent permitted by
Delaware law, subject to very limited exceptions.
We have entered into separate indemnification agreements with our directors and executive
officers that will, in some cases, be broader than the specific indemnification provisions
contained in our certificate of incorporation, bylaws or the Delaware General Corporation Law.
The indemnification agreements require us, among other things, to indemnify executive officers
and directors against certain liabilities, other than liabilities arising from willful misconduct
that may arise by reason of their status or service as directors or officers. We are also be
required to advance amounts to or on behalf of our officers and directors in the event of claims or
actions against them. We believe that these indemnification arrangements are necessary to attract
and retain qualified individuals to serve as our directors and executive officers.
Anti-Takeover Effects of Provisions of Delaware Law, Our Certificate of Incorporation and Bylaws
Our certificate of incorporation, bylaws and the Delaware General Corporation Law contain
certain provisions that could discourage potential takeover attempts and make it more difficult for
our stockholders to change management or receive a premium for their shares.
Delaware Law
We are subject to Section 203 of the Delaware General Corporation Law, an anti-takeover
provision. In general, the provision prohibits a publicly-held Delaware corporation from engaging
in a business combination with an interested stockholder for a period of three years after the
date of the transaction in which the person became an interested stockholder. A business
combination includes a merger, sale of 10.0% or more of our assets and certain other transactions
resulting in a financial benefit to the stockholder. For purposes of Section 203, an interested
stockholder is defined to include any person that is:
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the owner of 15.0% or more of the outstanding voting stock of the corporation;
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an affiliate or associate of the corporation and was the owner of 15.0% or more
of the voting stock outstanding of the corporation, at any time within three
years immediately prior to the relevant date; or
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an affiliate or associate of the persons described in the foregoing bullet points.
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However, the above provisions of Section 203 do not apply if:
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our Board of Directors approves the transaction that made
the stockholder an interested stockholder prior to the
date of that transaction;
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after the completion of the transaction that resulted in
the stockholder becoming an interested stockholder, that
stockholder owned at least 85.0% of our voting stock
outstanding at the time the transaction commenced,
excluding shares owned by our officers and directors; or
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on or subsequent to the date of the transaction, the
business combination is approved by our Board of Directors
and authorized at a meeting of our stockholders by an
affirmative vote of at least two-thirds of the outstanding
voting stock not owned by the interested stockholder.
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115
Our stockholders may, by adopting an amendment to the corporations certificate of
incorporation or bylaws, elect for us not to be governed by Section 203, effective 12 months after
adoption. Currently, neither our certificate of incorporation nor our bylaws exempt us from the
restrictions imposed under Section 203. It is anticipated that the provisions of Section 203 may
encourage companies interested in acquiring us to negotiate in advance with our Board of Directors.
Charter and Bylaw Provisions
Special meetings of our stockholders may be called at any time only (i) by the Board of
Directors, or by a majority of the members of the Board of Directors or by a committee of the Board
which has been duly designated by the Board, whose powers and authority, as provided in a
resolution of the Board of Directors or in the bylaws of the Company, include the power to call
such meetings or (ii) by the affirmative vote of the holders of at least a majority of the
outstanding shares of capital stock of the Company entitled to vote generally in the election of
directors (considered for this purpose as one class).
Members of our Board of Directors may be removed with the approval of the holders of a
majority of the shares then entitled to vote at an election of directors, with or without cause.
Vacancies and newly-created directorships resulting from any increase in the number of directors,
other than an increase in respect of the 12% Preferred Directors, may be filled by a majority of
our directors then in office, though less than a quorum. If there are no directors in office, then
an election of directors may be held in the manner provided by law.
116
SELLING STOCKHOLDERS
We are registering the shares of 12% Preferred Stock and shares of common stock issuable upon
conversion of the 12% Preferred Stock in order to permit the selling stockholders to offer the
shares for resale from time to time. Except for the ownership of the 12% Preferred Stock and shares
of common stock issuable upon conversion of the 12% Preferred Stock, the selling stockholders have
not had any material relationship with us within the past three years.
The table below lists the selling stockholders and other information regarding the beneficial
ownership of the shares of common stock by each of the selling stockholders. The second column
lists the number of shares of 12% Preferred Stock beneficially owned by each selling stockholder as
of December 23, 2009. The third column lists the number of shares of common stock beneficially
owned by each selling stockholder, based on its ownership of the 12% Preferred Stock, as of
December 23, 2009, assuming conversion of all shares of 12% Preferred Stock held by the selling
stockholders on that date, without regard to any limitations on conversions or exercise.
The fourth column lists the shares of 12% Preferred Stock being offered under this prospectus
by each selling stockholder. The fifth column lists the shares of common stock being offered under
this prospectus by each selling stockholder.
Because the conversion price of the 12% Preferred Stock may be adjusted, we may issue a number
of shares of common stock that may be more or less than the number of shares being offered under
this prospectus. The sixth and seventh columns assume the sale of all of the shares offered by the selling
stockholders under this prospectus.
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Maximum
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Maximum
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Number of
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Number of
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Shares of
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Shares of
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Number of
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Number of
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12%
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Common
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Number of
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Number of
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Shares of 12%
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Shares of
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Preferred
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Stock
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Shares of
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Shares
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Preferred
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Common
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Stock to be
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to be Sold
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Preferred
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of Common
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Stock Owned
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Stock
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Sold Pursuant
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Pursuant to
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Stock
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Stock
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Name of Selling
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Prior to
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Owned Prior
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to this
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this
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Owned After
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Owned After
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Stockholder
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Offering
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to Offering
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Prospectus
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Prospectus(1)
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Offering
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Offering
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The SEI U.S.
Small Companies
Fund (Nominee: SEI
U.S. Small
Companies Fund C/O
BBH & Co.)
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3,600
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376,963
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3,600
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218,182
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0
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158,781
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Radian Group
Inc. (Nominee: Ell
& Co.)
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2,700
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293,136
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2,700
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163,636
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0
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129,500
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Wellington
Trust Company,
National
Association
Multiple Common
Trust Funds Trust,
Smaller Companies
Portfolio
(Nominee: Finwell & Co)
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800
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122,345
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800
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48,485
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0
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73,860
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Wellington
Trust Company,
National
Association
Multiple Collective
Investment Funds
Trust, Emerging
Companies Portfolio
(Nominee: Finwell & Co)
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19,200
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2,287,635
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19,200
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1,163,635
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0
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1,124,000
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Dow Employees
Pension Plan
(Nominee: Kane & Co.)
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5,900
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834,975
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5,900
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357,575
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0
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477,400
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Wellington
Trust Company,
National
Association
Multiple Common
Trust Funds Trust,
Emerging Companies
Portfolio
(Nominee: Landwatch
& Co)
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4,300
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746,315
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4,300
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260,606
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0
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485,709
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Oregon Public
Employees
Retirement Fund
(Nominee: Westcoast & Co)
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13,100
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1,481,339
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13,100
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793,939
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0
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687,400
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117
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Maximum
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Maximum
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Number of
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Number of
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Shares of
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Shares of
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Number of
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Number of
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12%
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Common
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Number of
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Number of
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Shares of 12%
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Shares of
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Preferred
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Stock
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Shares of
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Shares
|
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Preferred
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Common
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Stock to be
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to be Sold
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Preferred
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of Common
|
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Stock Owned
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Stock
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Sold Pursuant
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Pursuant to
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Stock
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|
Stock
|
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Name of Selling
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Prior to
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Owned Prior
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to this
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this
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Owned After
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Owned After
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Stockholder
|
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Offering
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to Offering
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Prospectus
|
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Prospectus(1)
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Offering
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Offering
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New York State
Nurses Association
Pension Plan
(Nominee: Ell & Co.)
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3,400
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379,595
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3,400
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206,060
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0
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173,535
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Goldman Sachs
JBWere Small
Companies Pooled
Fund
(Nominee: Hare & Co)
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4,600
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611,436
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4,600
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278,788
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0
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332,648
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Wellington
Management
Portfolios (Dublin)
Global Smaller
Companies Equity
Portfolio
(Nominee: Squidlake
& Co)
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4,300
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332,766
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4,300
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260,606
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0
|
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72,160
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Retirement Plan
for Employees of
Union Carbide
Corporation and its
Participating
Subsidiary
Companies
(Nominee: Kane
& Co.)
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1,000
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290,753
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1,000
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60,606
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0
|
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230,147
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TELUS Foreign
Equity
Active Alpha
Pool
(Nominee: Mac & Co)
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1,600
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155,250
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1,600
|
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96,970
|
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0
|
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58,280
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TELUS Foreign
Equity
Active Beta
Pool
(Nominee: Mac & Co)
|
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800
|
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75,165
|
|
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800
|
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|
48,485
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0
|
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26,680
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Telstra
Superannuation
Scheme
(Nominee: Hare
& Co)
|
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2,600
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|
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|
250,876
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|
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2,600
|
|
|
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157,576
|
|
|
|
0
|
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93,300
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SEI
Institutional
Investments Trust
Small Cap Fund
(Nominee: Hare & Co)
|
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6,600
|
|
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|
1,135,960
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|
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|
6,600
|
|
|
|
400,000
|
|
|
|
0
|
|
|
|
735,960
|
|
Talvest Global
Small Cap Fund
(Nominee: Mac & Co)
|
|
|
400
|
|
|
|
50,122
|
|
|
|
400
|
|
|
|
24,242
|
|
|
|
0
|
|
|
|
25,880
|
|
Seligman Global
Smaller Companies
Fund
(Nominee: Cudd & Co)
|
|
|
2,200
|
|
|
|
285,433
|
|
|
|
2,200
|
|
|
|
133,333
|
|
|
|
0
|
|
|
|
152,100
|
|
SEI
Institutional
Investments Trust
Small/Mid Cap
Fund
(Nominee: Hare & Co)
|
|
|
14,400
|
|
|
|
1,536,286
|
|
|
|
14,400
|
|
|
|
872,726
|
|
|
|
0
|
|
|
|
663,560
|
|
JBWere Global
Small Companies
Pooled Fund
(Nominee: Gerlach & Co)
|
|
|
4,400
|
|
|
|
458,806
|
|
|
|
4,400
|
|
|
|
266,666
|
|
|
|
0
|
|
|
|
192,140
|
|
Fonds voor
Gemene
Rekening
Beroepsvervoer
(Nominee: Ell & Co.)
|
|
|
3,700
|
|
|
|
572,882
|
|
|
|
3,700
|
|
|
|
224,242
|
|
|
|
0
|
|
|
|
348,640
|
|
UBS Multi
Manager Access
Global Smaller
Companies
(Nominee: UBS
Luxembourg SA
C/O BBH & Co.)
|
|
|
1,200
|
|
|
|
138,147
|
|
|
|
1,200
|
|
|
|
72,727
|
|
|
|
0
|
|
|
|
65,420
|
|
Vantagepoint
Discovery Fund
(Nominee: Cudd & Co)
|
|
|
3,500
|
|
|
|
685,821
|
|
|
|
3,500
|
|
|
|
212,121
|
|
|
|
0
|
|
|
|
473,700
|
|
118
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Maximum
|
|
|
Maximum
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
|
|
|
Number of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares of
|
|
|
Shares of
|
|
|
|
|
|
|
|
|
|
Number of
|
|
|
Number of
|
|
|
12%
|
|
|
Common
|
|
|
Number of
|
|
|
Number of
|
|
|
|
Shares of 12%
|
|
|
Shares of
|
|
|
Preferred
|
|
|
Stock
|
|
|
Shares of
|
|
|
Shares
|
|
|
|
Preferred
|
|
|
Common
|
|
|
Stock to be
|
|
|
to be Sold
|
|
|
Preferred
|
|
|
of Common
|
|
|
|
Stock Owned
|
|
|
Stock
|
|
|
Sold Pursuant
|
|
|
Pursuant to
|
|
|
Stock
|
|
|
Stock
|
|
Name of Selling
|
|
Prior to
|
|
|
Owned Prior
|
|
|
to this
|
|
|
this
|
|
|
Owned After
|
|
|
Owned After
|
|
Stockholder
|
|
Offering
|
|
|
to Offering
|
|
|
Prospectus
|
|
|
Prospectus(1)
|
|
|
Offering
|
|
|
Offering
|
|
WMP (Australia)
Global Smaller
Companies Equity
Portfolio
(Nominee: Cudd
& Co)
|
|
|
1,200
|
|
|
|
117,927
|
|
|
|
1,200
|
|
|
|
72,727
|
|
|
|
0
|
|
|
|
45,200
|
|
Lockheed Martin
Corporation Master
Retirement Trust
(Nominee: Ell & Co.)
|
|
|
13,700
|
|
|
|
1,355,953
|
|
|
|
13,700
|
|
|
|
830,302
|
|
|
|
0
|
|
|
|
525,651
|
|
SEI
Institutional
Managed Trust Small
Cap Fund
(Nominee: Hare
& Co)
|
|
|
5,800
|
|
|
|
351,515
|
|
|
|
5,800
|
|
|
|
351,515
|
|
|
|
0
|
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals
|
|
|
125,000
|
|
|
|
14,927,401
|
|
|
|
125,000
|
|
|
|
7,575,750
|
|
|
|
0
|
|
|
|
7,351,651
|
|
|
|
|
(1)
|
|
Estimated based on the total number of shares of common
stock issuable upon conversion of the preferred stock.
Each share of preferred stock is initially convertible
into common stock, at the option of the holder, at a
conversion rate of 60.606 shares of common stock per
share of preferred stock.
|
|
(2)
|
|
Wellington Management Company, LLP (
Wellington
Management
) is an investment adviser registered under
the Investment Advisers Act of 1940, as amended.
Wellington Management, in such capacity, may be deemed
to share beneficial ownership over the shares held by
its client accounts.
|
119
PLAN OF DISTRIBUTION
We are registering shares of 12% Preferred Stock and common stock issuable upon conversion of
the shares of 12% Preferred Stock to permit the resale of such shares of 12% Preferred Stock and
common stock by the selling stockholders, from time to time after the date of this prospectus. We
will not receive any of the proceeds from the sale by the selling stockholders of such shares of
12% Preferred Stock or common stock. We will bear all fees and expenses incident to our obligation
to register such shares of 12% Preferred Stock and common stock.
The selling stockholders may sell all or a portion of the shares of 12% Preferred Stock or
common stock beneficially owned by them and offered hereby from time to time directly or through
one or more underwriters, broker-dealers or agents. If the shares of 12% Preferred Stock or common
stock are sold through underwriters or broker-dealers, the selling stockholders will be responsible
for underwriting discounts or commissions or agents commissions. The shares of 12% Preferred Stock
or common stock may be sold in one or more transactions at fixed prices, at prevailing market
prices at the time of the sale, at varying prices determined at the time of sale or at negotiated
prices. These sales may be effected in transactions, which may involve crosses or block
transactions, in any one or more of the following methods:
|
|
|
on any national securities exchange or quotation service on which the securities may be listed or
quoted at the time of sale;
|
|
|
|
|
in the over-the-counter market;
|
|
|
|
|
in transactions otherwise than on these exchanges or systems or in the over-the-counter market;
|
|
|
|
|
through the writing of options, whether such options are listed on an options exchange or otherwise;
|
|
|
|
|
ordinary brokerage transactions and transactions in which the broker-dealer solicits purchasers;
|
|
|
|
|
block trades in which the broker-dealer will attempt to sell the shares as agent but may position
and resell a portion of the block as principal to facilitate the transaction;
|
|
|
|
|
purchases by a broker-dealer as principal and resale by the broker-dealer for its account;
|
|
|
|
|
an exchange distribution in accordance with the rules of the applicable exchange;
|
|
|
|
|
privately negotiated transactions;
|
|
|
|
|
short sales;
|
|
|
|
|
sales pursuant to Rule 144;
|
|
|
|
|
broker-dealers which have agreed with the selling securityholders to sell a specified number of
such shares at a stipulated price per share;
|
|
|
|
|
a combination of any such methods of sale; and
|
|
|
|
|
any other method permitted pursuant to applicable law.
|
If the selling stockholders effect such transactions by selling shares of 12% Preferred Stock
or common stock to or through underwriters, broker-dealers or agents, such underwriters,
broker-dealers or agents may receive commissions in the form of discounts, concessions or
commissions from the selling stockholders or commissions from purchasers of the shares of 12%
Preferred Stock or common stock for whom they may act as agent or to whom they may sell as
principal (which discounts, concessions or commissions as to particular underwriters,
broker-dealers or agents may be in excess of those customary in the types of transactions
involved). In connection with sales of the shares of 12% Preferred Stock, common stock or
otherwise, the selling stockholders may enter into hedging transactions with broker-dealers, which
may in turn engage in short sales of the shares of 12% Preferred Stock or common stock in the
course of hedging in positions they assume. The selling stockholders may also sell shares of 12%
Preferred Stock or common stock short and deliver shares of 12% Preferred Stock or common stock
covered by this prospectus to close out short positions and to return borrowed shares in connection
with such short sales. The selling stockholders may also loan or pledge shares of 12% Preferred
Stock or common stock to broker-dealers that in turn may sell such shares.
120
The selling stockholders may pledge or grant a security interest in some or all of the shares
of 12% Preferred Stock or common stock owned by them and, if they default in the performance of
their secured obligations, the pledgees or secured parties may offer and sell the shares of 12%
Preferred Stock or common stock from time to time pursuant to this prospectus or any amendment to
this prospectus under Rule 424(b)(3) or other applicable provision of the Securities Act of 1933,
as amended, amending, if necessary, the list of selling stockholders to include the pledgee,
transferee or other successors in interest as selling stockholders under this prospectus. The
selling stockholders also may transfer and donate the shares of 12% Preferred Stock or common stock
in other circumstances in which case the transferees, donees, pledgees or other successors in
interest will be the selling beneficial owners for purposes of this prospectus.
The selling stockholders and any broker-dealer participating in the distribution of the shares
of 12% Preferred Stock or common stock may be deemed to be underwriters within the meaning of the
Securities Act, and any commission paid, or any discounts or concessions allowed to, any such
broker-dealer may be deemed to be underwriting commissions or discounts under the Securities Act.
At the time a particular offering of the shares of 12% Preferred Stock or common stock is made, a
prospectus supplement, if required, will be distributed which will set forth the aggregate amount
of shares of 12% Preferred Stock or common stock being offered and the terms of the offering,
including the name or names of any broker-dealers or agents, any discounts, commissions and other
terms constituting compensation from the selling stockholders and any discounts, commissions or
concessions allowed or reallowed or paid to broker-dealers.
Under the securities laws of some states, the shares of 12% Preferred Stock or common stock
may be sold in such states only through registered or licensed brokers or dealers. In addition, in
some states the shares of 12% Preferred Stock or common stock may not be sold unless such shares
have been registered or qualified for sale in such state or an exemption from registration or
qualification is available and is complied with.
There can be no assurance that any selling stockholder will sell any or all of the shares of
common stock registered pursuant to the registration statement, of which this prospectus forms a
part.
The selling stockholders and any other person participating in such distribution will be
subject to applicable provisions of the Securities Exchange Act of 1934, as amended, and the rules
and regulations thereunder, including, without limitation, Regulation M of the Exchange Act, which
may limit the timing of purchases and sales of any of the shares of 12% Preferred Stock or the
shares of common stock by the selling stockholders and any other participating person. Regulation M
may also restrict the ability of any person engaged in the distribution of the shares of 12%
Preferred Stock or the shares of common stock to engage in market-making activities with respect to
the shares of common stock. All of the foregoing may affect the marketability of the shares of 12%
Preferred Stock or the shares of common stock and the ability of any person or entity to engage in
market-making activities with respect to the shares of 12% Preferred Stock or the shares of common
stock.
We will pay all expenses of the registration of the shares of 12% Preferred Stock or the
shares of common stock pursuant to the registration rights agreement;
provided
,
however
, that a selling stockholder will pay all underwriting discounts and selling
commissions, if any. We will indemnify the selling stockholders against liabilities, including some
liabilities under the Securities Act, in accordance with the registration rights agreements, or the
selling stockholders will be entitled to contribution. We may be indemnified by the selling
stockholders against civil liabilities, including liabilities under the Securities Act, that may
arise from any written information furnished to us by the selling stockholders specifically for use
in this prospectus, in accordance with the related registration rights agreement, or we may be
entitled to contribution.
The selling stockholders have advised us that they have not entered into any agreements,
understandings or arrangements with any underwriters or broker-dealers regarding the sale of the
shares, nor is there an underwriter or coordinating broker acting in connection with the proposed
sale of the shares by the selling stockholders. If we are notified by any one or more selling
stockholders that any material arrangement has been entered into with a broker-dealer for the sale
of shares through a block trade, special offering, exchange distribution or secondary distribution
or a purchase by a broker or dealer, we will file, or cause to be filed, a supplement to this
prospectus, if required, pursuant to Rule 424(b) under the Securities Act, disclosing (i) the name
of each such selling stockholder and of the participating broker-dealer(s), (ii) the number of
shares involved, (iii) the price at which such shares were sold, (iv) the commissions paid or
discounts or concessions allowed to such broker-dealer(s), where applicable, (v) that such
broker-dealer(s) did not conduct any investigation to verify the information set out or
incorporated by reference in this prospectus and (vi) other facts material to the transaction.
Once sold under the registration statement, of which this prospectus forms a part, the shares
of 12% Preferred Stock or the shares of common stock will be freely tradable in the hands of
persons other than our affiliates.
The selling stockholders are not restricted as to the price or prices at which they may sell
their shares. Sales of the shares may have an adverse effect on the market price of the 12%
Preferred Stock or the common stock. Moreover, the selling stockholders are not restricted as to
the number of shares that may be sold at any time, and it is possible that a significant number of
shares could be sold at the same time, which may have an adverse effect on the market price of the
12% Preferred Stock or the common stock.
121
CERTAIN U.S. FEDERAL INCOME TAX CONSIDERATIONS
General
The following is a summary of certain U.S. federal income tax consequences relevant to the
purchase, ownership, and disposition of our 12% Preferred Stock and common stock received upon
conversion of the 12% Preferred Stock. This discussion is based on the Internal Revenue Code of
1986, as amended (the
Code
), Treasury regulations thereunder, published rulings, and court
decisions, all as currently in effect as of the date of this prospectus. These laws are subject to
change, possibly on a retroactive basis. Other U.S. federal tax consequences (such as estate, gift
and alternative minimum tax consequences) and state, local and non-U.S. tax consequences are not
summarized, nor are tax consequences to persons subject to special rules, including, but not
limited to, tax-exempt organizations, insurance companies, banks or other financial institutions,
partnerships or other pass-through entities (and persons holding preferred or common stock through
a partnership or other pass-through entity), dealers in securities, traders in securities that
elect to use a mark-to-market method of accounting for their securities holdings, persons that will
hold the 12% Preferred Stock or common stock as a position in a hedging, integrated, straddle or
conversion or other risk reduction transaction, holders of our convertible notes who convert
their convertible notes into our 12% Preferred Stock, U.S. Holders (as defined below) whose
functional currency for tax purposes is not the U.S. dollar, passive foreign investment companies
and controlled foreign corporations. Tax consequences may vary depending upon the particular
circumstances of an investor. This discussion is limited to taxpayers who will hold the 12%
Preferred Stock and the common stock received in respect thereof as capital assets.
THE DISCUSSIONS OF U.S. FEDERAL INCOME TAX CONSEQUENCES HEREIN ARE NOT INTENDED OR WRITTEN TO
BE USED, AND CANNOT BE USED BY ANY TAXPAYER, FOR THE PURPOSE OF AVOIDING PENALTIES THAT MAY BE
IMPOSED ON A TAXPAYER. ALL TAXPAYERS SHOULD SEEK ADVICE FROM AN INDEPENDENT TAX ADVISOR BASED ON
THEIR OWN PARTICULAR CIRCUMSTANCES.
For purposes of this summary, a
U.S. Holder
is a beneficial owner of the 12% Preferred Stock
and/or common stock received in respect thereof that is for U.S. federal income tax purposes (a) an
individual citizen or resident of the United States, (b) a corporation (or other entity treated as
a corporation for U.S. federal income tax purposes) created or organized in or under the laws of
the United States, any state thereof or the District of Columbia, (c) an estate whose income is
subject to U.S. federal income tax regardless of its source, or (d) a trust if either (i) a U.S.
court can exercise primary supervision over the trusts administration and one or more United
States persons are authorized to control all substantial decisions of the trust or (b) it has a
valid election in effect to be treated as a United States person. A
non-U.S. Holder
is a
beneficial owner of the 12% Preferred Stock and/or common stock received in respect thereof, other
than a partnership (including any entity or arrangement treated as a partnership for U.S. federal
income tax purposes), that is not a U.S. Holder.
If a partnership (including any entity or arrangement treated as a partnership for U.S.
federal income tax purposes) holds the 12% Preferred Stock or common stock, the tax treatment of a
partner will generally depend upon the status of the partner and the activities of the partnership.
If you are a partner of a partnership purchasing the 12% Preferred Stock, we urge you to consult
your own tax advisor.
Prospective purchasers should consult their tax advisors to determine the U.S. federal, state,
local, foreign, and other tax consequences that may be relevant to them in light of their
particular circumstances.
Distributions
U.S. Holders
. If you are a U.S. Holder, distributions with respect to the 12% Preferred Stock
and distributions with respect to our common stock (other than certain stock distributions) will be
taxable as dividend income when actually or constructively received to the extent of our current or
accumulated earnings and profits as determined for U.S. federal income tax purposes. To the extent
that the amount of a distribution with respect to 12% Preferred Stock or common stock exceeds both
our current and accumulated earnings and profits, such distribution will be treated first as a
tax-free return of capital to the extent of your adjusted tax basis in such 12% Preferred Stock or
common stock, as the case may be, and thereafter as capital gain. Distributions constituting
dividends received by certain non-corporate U.S. Holders, including individuals, in respect of the
12% Preferred Stock and common stock in taxable years beginning before January 1, 2011 may be
subject to reduced rates of taxation so long as certain holding period requirements are satisfied.
Dividends received by corporate U.S. Holders may be eligible for a dividends-received deduction,
subject to applicable limitations. You should consult your own tax advisor regarding the
availability of the reduced dividend tax rate or the dividends received deduction in light of your
particular circumstances.
In certain circumstances, investors may receive a dividend with respect to the 12% Preferred
Stock or our common stock that constitutes an extraordinary dividend (as defined in Section 1059
of the Codegenerally a dividend extraordinarily large in relation to the taxpayers adjusted tax
basis in the underlying stock where such stock has not been held for a required period of time).
Corporate U.S. Holders that receive an extraordinary dividend paid in respect of the 12%
Preferred Stock or our common stock are required to (i) reduce their applicable stock basis (but
not below zero) by the portion of such a dividend that is not taxed because of the dividends
received deduction and (ii) to the extent that the non-taxed portion of such dividend exceeds such
corporate U.S. Holders
122
adjusted tax basis in the applicable shares, treat the non-taxed portion of such dividend as
gain from the sale or exchange of the 12% Preferred Stock or our common stock, as the case may be,
for the taxable year in which such dividend is received. Non-corporate U.S. Holders who receive an
extraordinary dividend would be required to treat any losses on the sale of the 12% Preferred
Stock or our common stock, as the case may be, as long-term capital losses to the extent of
dividends received by them that qualify for a reduced rate of taxation as discussed above.
Non-U.S. Holders
. Except as described below with respect to dividends that are effectively
connected with the conduct of a trade or business within the United States, if you are a non-U.S.
Holder, dividends paid to you on the 12% Preferred Stock or common stock, as applicable, will
generally be subject to withholding of U.S. federal income tax at a 30% rate or at a lower (or
zero) rate if you are eligible for the benefits of an income tax treaty that provides for a lower
rate. For purposes of obtaining a reduced rate of withholding under an income tax treaty, you
generally will be required to provide a valid Internal Revenue Service Form W-8BEN or an acceptable
substitute form, claiming the benefits of an applicable treaty.
If dividends paid to you are effectively connected with your conduct of a trade or business
within the United States (and, if an income tax treaty requires, are attributable to a U.S.
permanent establishment or fixed base maintained by you), we generally are not required to withhold
tax from the dividends, provided that you have timely furnished to us a valid Internal Revenue
Service Form W-8ECI. Instead, you will be subject to U.S. federal income taxation on a net income
basis in the same manner as if you were a U.S. Holder.
In addition, if you are a corporate non-U.S. Holder, effectively connected dividends that
you receive may, under certain circumstances, be subject to an additional branch profits tax at a
30% rate or at a lower rate if you are eligible for the benefits of an income tax treaty that
provides for a lower rate. As discussed below, you may be treated as having received a constructive
dividend, which will not give rise to any cash from which any applicable withholding tax could be
satisfied. If we pay withholding taxes on your behalf, at our option, we may set-off any such
payment against payments on our 12% Preferred Stock. You may, however, obtain a refund or credit
against your U.S. federal income tax liability of any excess amounts withheld by timely providing
the required information to the Internal Revenue Service.
Adjustment of conversion rate
The conversion rate of the 12% Preferred Stock is subject to adjustment under certain
circumstances. Treasury regulations promulgated under Section 305 of the Code treat a beneficial
owner of 12% Preferred Stock as having received a constructive distribution includible in such
beneficial owners U.S. income in the manner described under Distributions above, if and to the
extent that certain adjustments (or failures to make adjustments) in the conversion rate increase
the beneficial owners proportionate interest in our earnings and profits. Adjustments to the
conversion rate made pursuant to a bona fide reasonable adjustment formula that has the effect of
preventing dilution in the interests of the beneficial owners of the 12% Preferred Stock will
generally not be considered to result in a constructive dividend distribution. However, certain of
the possible conversion rate adjustments provided in the 12% Preferred Stock (including, without
limitation, an increase in the conversion rate as a result of the failure to pay dividends and an
increase in the conversion rate following a fundamental change) may give rise to a deemed taxable
distribution to the beneficial owners of the 12% Preferred Stock to the extent of our current and
accumulated earnings and profits. Thus, under certain circumstances in the event of a deemed
distribution, you may recognize income even though you may not receive any cash or property.
Non-U.S. beneficial owners of the 12% Preferred Stock may under such circumstances be deemed to
have received a distribution subject to U.S. federal income tax withholding. A constructive
dividend deemed received by a non-U.S. Holder would not result in a payment of any cash from which
any applicable U.S. federal withholding tax could be satisfied. Accordingly, if we pay withholding
taxes on behalf of a non-U.S. holder we may at our option set-off any such payment against
subsequent payments under the 12% Preferred Stock, including cash distributions and common stock
deliverable on conversion.
Sale or other Taxable Dispositions
U.S. Holders
. If you are a U.S. Holder and you sell or otherwise dispose of the 12% Preferred
Stock or common stock in a taxable transaction, you will generally recognize capital gain or loss
equal to the difference between the amount you realize and your adjusted tax basis in the stock.
Such capital gain or loss will be long-term capital gain or loss if your holding period for the
shares is more than one year. Long-term capital gain of a non-corporate U.S. Holder that is
recognized in taxable years beginning before January 1, 2011, is generally taxed at a maximum rate
of 15%. The deductibility of net capital losses is subject to limitations.
Non-U.S. Holders
. Non-U.S. Holders are generally only subject to U.S. federal income tax on
the disposition of capital stock if:
|
|
|
the gain is effectively connected with your conduct of a
trade or business in the United States, and if required by
an applicable income tax treaty as a condition for
subjecting you to U.S. federal income taxation on a net
income basis, the gain is attributable to a permanent
establishment or fixed base that you maintain in the
United States,
|
|
|
|
|
you are an individual, are present in the United States
for 183 or more days in the taxable year of the sale, and
certain other conditions exist, or
|
123
|
|
|
we are or have been a U.S. real property holding
corporation for federal income tax purposes at any time
within the shorter of the five-year period preceding such
disposition or your holding period.
|
If your situation is described in the first bullet point above, you generally will be subject
to tax on the net gain derived from the sale, redemption or other taxable disposition at regular
graduated U.S. federal income tax rates and in the same manner as if you were a U.S. Holder, and,
if you are a corporate non-U.S. Holder, effectively connected gains that you recognize may also,
under certain circumstances, be subject to an additional branch profits tax at a 30% rate or at a
lower rate if you are eligible for the benefits of an income tax treaty that provides for a lower
rate. If you are described in the second bullet point above, you will be subject to a flat 30% tax
on the gain derived from the sale or other taxable disposition, which may be offset by U.S. source
capital losses, even though you are not considered a resident of the United States.
It is unclear whether we are, or will be, a U.S. real property holding corporation during the
relevant period described in the third bullet point above. Under U.S. federal income tax laws, we
will be a United States real property holding corporation if at least 50% of the fair market value
of our assets has consisted of United States real property interests. If we were treated as a
U.S. real property holding corporation during the relevant period described in the third bullet
point above, any gains recognized by a non-U.S. holder on the sale or other taxable disposition of
our 12% Preferred Stock or common stock would be subject to tax as if the gain were effectively
connected with the conduct of the non-U.S. holders trade or business in the United States. In
addition, the transferee of the 12% Preferred Stock or common stock would be required to withhold
tax under U.S. federal income tax laws in an amount equal to 10% of the amount realized by the
non-U.S. holder on the sale or other taxable disposition of the 12% Preferred Stock or common
stock, as applicable.
Conversion into common stockU.S. Holders
U.S. Holders generally will not recognize any gain or loss in respect of the receipt solely of
common stock upon the conversion of the 12% Preferred Stock. The adjusted tax basis of shares of
common stock received on conversion generally will equal the adjusted tax basis of the 12%
Preferred Stock converted, and the holding period of such common stock received on conversion will
generally include your holding period for the converted 12% Preferred Stock.
Cash received in lieu of a fractional share of common stock generally will be treated as a
payment in exchange for the fractional share, and you generally will recognize gain or loss on the
receipt of such cash in an amount equal to the difference between the amount of cash received and
the amount of adjusted tax basis allocable to the fractional shares.
Conversion into common stockNon-U.S. Holders
A non-U.S. Holder who converts 12% Preferred Stock solely for common stock generally will not
recognize any gain or loss in respect of the conversion. To the extent, however, that you receive
cash in lieu of a fractional share upon conversion, you would be subject to the rules described
above regarding the sale or other taxable disposition of the common stock in respect of such
fractional share.
Optional redemption and repurchase of option upon a fundamental change
Subject to certain conditions, on or after November 15, 2014, upon the affirmative vote of the
disinterested members of the Board of Directors, we may redeem the 12% Preferred Stock for cash. In
addition, upon the occurrence of a fundamental change, certain holders of our preferred shares will
have the right, subject to certain exceptions and conditions, to require us to repurchase all, or a
specified whole number, of their 12% Preferred Stock. Treasury regulations promulgated under
Section 305 of the Code treat a beneficial owner of 12% Preferred Stock as having received a
constructive distribution includible in such beneficial owners U.S. income in the manner described
under Distributions above in respect of certain redemption premiums (of more than a de minimis
amount) on 12% Preferred Stock if (a) the issuer has the right to redeem the 12% Preferred Stock,
but only if, based on all the facts and circumstances as of the date of issuance, the redemption is
more likely than not to occur, or (b) the holder has the right to put the 12% Preferred Stock to
the company for repurchase and such right is not subject to remote contingencies. A redemption
premium exists on 12% Preferred Stock to the extent that the redemption price on the 12% Preferred
Stock is in excess of the issue price. We intend to take the position that the optional redemption
is not more likely than not to occur and the likelihood of the occurrence of an event allowing a
holder to exercise a put right is remote, and that therefore the existence of a redemption premium
(if any) would not be treated as a constructive distribution. It is possible that the IRS and a
court would disagree with this position. As mentioned above, a constructive dividend deemed
received by a non-U.S. Holder would not result in a payment of any cash from which any applicable
U.S. federal withholding tax could be satisfied. Accordingly, if we pay withholding taxes on behalf
of a non-U.S. holder we may at our option set-off any such payment against subsequent payments
under the 12% Preferred Stock, including cash distributions and common stock deliverable on
conversion. The remainder of this discussion assumes that any redemption premium would not be
treated as a constructive distribution to beneficial owners of the 12% Preferred Stock.
U.S. Holders who exchange their 12% Preferred Stock for cash in connection with such
redemption will recognize gain or loss on the redemption in the manner described above under
Sale or other Taxable DispositionsU.S. Holders provided that at least one of the following
requirements (as determined under U.S. federal income tax principles) is met: (a) the redemption is
not essentially equivalent to a dividend, (b) the redemption results in a complete termination of
the U.S. Holders interest in the preferred
124
and common stock, or (c) the redemption is substantially disproportionate with respect to the
U.S. Holder. In determining whether any of the above requirements applies, 12% Preferred Stock and
common stock considered to be owned by you by reason of certain attribution rules must be taken
into account. If the redemption does not satisfy any of the above requirements, the entire amount
received (without offset for your tax basis in the 12% Preferred Stock redeemed) will be treated as
a distribution as described under DistributionsU.S. Holders above and your tax basis in the
redeemed 12% Preferred Stock will be allocated to any remaining 12% Preferred Stock and common
stock.
Non-U.S. Holders who exchange their 12% Preferred Stock for cash in connection with the
redemption will generally be treated in the manner described above under Sale or other Taxable
DispositionsNon-U.S. Holders so long as at least one of the requirements described in the
preceding paragraph is met. If the redemption does not satisfy any of the above requirements, the
entire amount received (without offset for your tax basis in the 12% Preferred Stock redeemed) will
be treated as a distribution as described under DistributionsNon-U.S. Holders above and your
tax basis in the redeemed 12% Preferred Stock will be allocated to any remaining 12% Preferred
Stock and common stock.
Information reporting and backup withholding
U.S. Holders
. Information reporting requirements generally will apply to payments qualifying
as dividends on the 12% Preferred Stock or common stock and, unless the U.S. Holder receiving such
amounts is an exempt recipient such as a corporation, to the proceeds of a sale or redemption of
shares. Additionally, backup withholding will apply to such amounts if a U.S. Holder subject to the
backup withholding rules fails to provide an accurate taxpayer identification number, is notified
by the Internal Revenue Service that it has failed to report all dividends required to be shown on
its federal income tax returns, or in certain circumstances, fails to comply with applicable
certification requirements.
Any amounts withheld under the backup withholding rules will be allowed as a refund or a
credit against a U.S. Holders U.S. federal income tax liability provided the required information
is properly furnished to the Internal Revenue Service.
Non-U.S. Holders
. Information reporting will generally apply to dividend payments. Copies of
these information reports may be made available to tax authorities in the country in which the
non-U.S. Holder resides. A non-U.S. Holder will be subject to backup withholding with respect to
dividends paid to such non-U.S. Holder unless such non-U.S. Holder certifies under penalty of
perjury that it is not a U.S. person (and the payor does not have actual knowledge or reason to
know that such non-U.S. Holder is a United States person), or such non-U.S. Holder otherwise
establishes an exemption. Information reporting and, depending on the circumstances, backup
withholding will apply to the proceeds of a sale of 12% Preferred Stock or common stock within the
United States or conducted through certain U.S.-related financial intermediaries, unless the
beneficial owner certifies under penalty of perjury that it is not a U.S. person (and the payor
does not have actual knowledge or reason to know that the beneficial owner is a United States
person) or such owner otherwise establishes an exemption.
Any amounts withheld under the backup withholding rules will be allowed as a refund or a
credit against a non-U.S. Holders U.S. federal income tax liability provided the required
information is properly furnished to the Internal Revenue Service.
125
LEGAL MATTERS
The validity of the 12% Preferred Stock and common stock offered hereby will be passed upon
for us by Zukerman, Gore, Brandeis & Crossman, LLP, New York, New York.
EXPERTS
The consolidated statements of operations, stockholders equity and cash flows of Grubb &
Ellis Company (formerly NNN Realty Advisors, Inc.) and subsidiaries for the year ended December 31,
2006, included in this prospectus and the related financial statement schedule included elsewhere
in the registration statement, have been audited by Deloitte & Touche LLP, an independent
registered public accounting firm, as stated in their report appearing herein (which report
expresses an unqualified opinion and includes an explanatory paragraph relating to the restatement,
discontinued operations and the effects of the retrospective adjustment of the Consolidation Topic:
Noncontrolling Interests in Consolidated Financial Statements). Such financial statements and
financial statement schedule are included in reliance upon the report of such firm given upon their
authority as experts in accounting and auditing.
The consolidated financial statements and schedules of Grubb & Ellis Company at December 31,
2008 and 2007, and for each of the two years in the period ended December 31, 2008, appearing in
this Prospectus and Registration Statement have been audited by Ernst & Young LLP, independent
registered public accounting firm, as set forth in their report thereon appearing herein which, as
to the years 2008 and 2007, are based in part on the reports of PKF, independent registered public
accounting firm. The financial statements and schedules audited by Ernst & Young LLP referred to above are included in reliance upon such
reports given on the authority of such firms as experts in accounting and auditing.
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the Securities and Exchange Commission a registration statement on Form S-1
(including the exhibits, schedules and amendments thereto) under the Securities Act of 1933 with
respect to the shares of 12% Preferred Stock and common stock to be sold pursuant to this
prospectus. This prospectus, which constitutes a part of the registration statement, does not
contain all the information set forth in the registration statement or the exhibits and schedules
filed therewith. For further information regarding us and the shares of 12% Preferred Stock and
common stock to be sold pursuant to this prospectus, please refer to the registration statement.
Statements contained in this prospectus regarding the contents of any contract or any other
document that is filed as an exhibit to the registration statement are not necessarily complete,
and each such statement is qualified in all respects by reference to the full text of such contract
or other document filed as an exhibit to the registration statement.
We are subject to the informational requirements of the Exchange Act and, in accordance with
these requirements, we file reports, proxy statements and other information relating to our
business, financial condition and other matters with the SEC. Reports, proxy statements, and other
information filed by us can be inspected and copied at the public reference facilities maintained
by the SEC at 100 F Street, N.E., Washington, D.C. 20549 and at the SECs regional offices. You may
obtain information on the operation of the public reference rooms by calling 1-800-SEC-0330. The
SEC also maintains a website that contains reports, proxy statements and other information
regarding registrants, like us, that file electronically with the SEC. The address of that website
is: http://www.sec.gov. You can also obtain access to our reports and proxy statements, free of
charge, on our website at http://www.grubb-ellis.com as soon as reasonably practicable after such
filings are electronically filed with the SEC. The information on our website is not part of this
prospectus. Our common stock is listed on the NYSE under the symbol GBE.
126
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
|
Grubb & Ellis Company
|
|
Page
|
Reports of Independent Registered Public Accounting Firms
|
|
F-2
|
|
|
|
Consolidated Balance Sheets as of December 31, 2008 and 2007 (as restated)
|
|
F-5
|
|
|
|
Consolidated Statements of Operations for the years ended December 31, 2008, 2007 (as
restated) and 2006 (as restated)
|
|
F-6
|
|
|
|
Consolidated Statements of Stockholders Equity (Deficit) for the years ended December
31, 2008, 2007 (as restated) and 2006
(as restated)
|
|
F-7
|
|
|
|
Consolidated Statements of Cash Flows for the years ended December 31, 2008, 2007 (as
restated) and 2006 (as restated)
|
|
F-10
|
|
|
|
Notes to Consolidated Financial Statements
|
|
F-12
|
|
|
|
Consolidated Balance Sheets as of September 30, 2009 (unaudited)
|
|
F-62
|
|
|
|
(Unaudited) Consolidated Statements of Operations for the nine months ended September 30, 2009 and
September 30, 2008
|
|
F-63
|
|
|
|
(Unaudited) Consolidated Statements of Cash Flows for the nine months ended September 30, 2009 and
September 30, 2008
|
|
F-64
|
|
|
|
Notes to Consolidated Financial Statements
|
|
F-66
|
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Shareholders of Grubb & Ellis Company
We have audited the consolidated balance sheets of Grubb & Ellis Company and subsidiaries as
of December 31, 2008 and 2007, and the related consolidated statements of operations, stockholders
equity, and cash flows for the years then ended. Our audits also included the financial statement
schedules listed in the index at Item 16. These financial statements and schedules are the
responsibility of the Companys management. Our responsibility is to express an opinion on these
financial statements and schedules based on our audits. We did not audit the financial statements
of Grubb & Ellis Securities, Inc. (f.k.a. NNN Capital Corp.), a wholly-owned subsidiary, which
statements reflect total assets of $6,264,000 and $20,584,000 as of December 31, 2008 and 2007,
respectively, and total revenues of $15,224,000 and $18,315,000 for the years then ended. Those
statements were audited by other auditors whose report has been furnished to us, and our opinion,
insofar as it relates to the amounts included for Grubb & Ellis Securities, Inc. (f.k.a. NNN
Capital Corp.), is based solely on the report of the other auditors.
We conducted our audits in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits and the report of other auditors provide a
reasonable basis for our opinion.
In our opinion, based on our audit and the report of other auditors, the financial statements
referred to above present fairly, in all material respects, the consolidated financial position of
Grubb & Ellis Company and subsidiaries at December 31, 2008 and 2007, and the consolidated results
of their operations and their cash flows for the years then ended, in conformity with U.S.
generally accepted accounting principles. Also, in our opinion, the related financial statement
schedules, when considered in relation to the basic financial statements taken as a whole, present
fairly, in all material respects, the information set forth therein.
As discussed in Note 2 to the consolidated financial statements, on January 1, 2009 the
Company adopted Statement of Financial Accounting Standards Board No. 160, later codified in ASC
810-10, Noncontrolling Interests in Consolidated Financial Statements, an amendment of ARB 51,
and also adopted FASB Staff Position No. EITF 03-6-1, later codified in ASC 260-10, Determining
whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities. All
years and periods presented have been reclassified to conform to the adopted accounting standards.
As discussed in Note 3, the accompanying 2007 consolidated financial statements have been
restated.
|
|
|
/s/ Ernst & Young LLP
|
|
|
|
|
|
Irvine, California
|
|
|
May 27, 2009
|
|
|
except for Notes 2, 3, 10, 13, 15, 16, 19, 20, 22, 25 and 26 as to which
|
|
|
the date is December 2, 2009
|
|
|
F-2
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
|
|
|
Board of Directors
|
|
|
Grubb & Ellis Securities, Inc. (f.k.a. NNN Capital Corp.)
|
|
|
Santa Ana, California
|
|
|
We have audited the accompanying statements of financial condition of Grubb & Ellis
Securities, Inc. (f.k.a. NNN Capital Corp.) (the
Company
) (not separately included herein) as of
December 31, 2008 and 2007, and the related statements of operations, changes in stockholders
equity, and cash flows for the years then ended. These financial statements are the responsibility
of the Companys management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We have conducted our audits in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the financial statements are free of material
misstatement. We were not engaged to perform an audit of the Companys internal controls over
financial reporting. Our audits included consideration of internal controls over financial
reporting as a basis for designing audit procedures that are appropriate in the circumstance, but
not for the purpose of expressing an opinion on the effectiveness of the Companys internal control
over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material
respects, the financial position of Grubb & Ellis Securities, Inc. (f.k.a. NNN Capital Corp.) as of
December 31, 2008 and 2007 and the results of its operations and its cash flows for the years then
ended, in conformity with accounting principles generally accepted in the United States of America.
/s/ PKF
|
|
|
San Diego, California
|
|
|
November 19, 2009
|
|
|
PKF
|
|
|
Certified Public Accountants
|
|
|
A Professional Corporation
|
|
|
F-3
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders Grubb & Ellis Company:
We have audited the accompanying consolidated statements of operations, stockholders equity,
and cash flows of Grubb & Ellis Company (formerly NNN Realty Advisors, Inc.) and subsidiaries (the
Company
) for the year ended December 31, 2006. Our audit also included the financial statement
schedule listed in the Index at Item 16. These financial statements and financial statement
schedule are the responsibility of the Companys management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audit in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of material
misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its
internal control over financial reporting. Our audits included consideration of internal control
over financial reporting as a basis for designing audit procedures that are appropriate in the
circumstances but not for the purpose of expressing an opinion on the effectiveness of the
Companys internal control over financial reporting. Accordingly, we express no such opinion. An
audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement presentation. We believe that
our audit provides a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all material
respects, the results of operations and cash flows of Grubb & Ellis Company and subsidiaries for
the year ended December 31, 2006, in conformity with accounting principles generally accepted in
the United States of America. Also, in our opinion, such consolidated financial statement schedule,
when considered in relation to the basic consolidated financial statements taken as a whole,
presents fairly in all material respects, the information set forth therein.
As discussed in Note 3, the accompanying 2006 consolidated financial statements have been
restated.
/s/ DELOITTE & TOUCHE LLP
Los Angeles, California
May 7, 2007 (May 27, 2009 as to the restatement discussed in Note 3, of discontinued
operations discussed in Note 20, and December 4, 2009 as to the effects of the retrospective
adjustment of the Consolidation Topic: Noncontrolling Interests in Consolidated Financial
Statements discussed in Note 2)
F-4
GRUBB & ELLIS COMPANY
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share amounts)
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
|
2008
|
|
2007
|
|
|
|
|
|
|
|
Restated
|
|
ASSETS
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
32,985
|
|
|
$
|
49,328
|
|
Restricted cash
|
|
|
36,047
|
|
|
|
70,023
|
|
Investment in marketable equity securities
|
|
|
1,510
|
|
|
|
9,052
|
|
Current portion of accounts receivable from related parties net
|
|
|
22,630
|
|
|
|
32,795
|
|
Current portion of advances to related parties net
|
|
|
2,982
|
|
|
|
6,667
|
|
Notes receivable from related party net
|
|
|
9,100
|
|
|
|
7,600
|
|
Service fees receivable net
|
|
|
26,987
|
|
|
|
19,521
|
|
Current portion of professional service contracts net
|
|
|
4,326
|
|
|
|
7,235
|
|
Real estate deposits and pre-acquisition costs
|
|
|
5,961
|
|
|
|
11,818
|
|
Properties held for sale net
|
|
|
78,708
|
|
|
|
201,219
|
|
Identified intangible assets and other assets held for sale net
|
|
|
25,747
|
|
|
|
61,810
|
|
Prepaid expenses and other assets
|
|
|
23,620
|
|
|
|
13,015
|
|
Deferred tax assets
|
|
|
|
|
|
|
7,991
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
270,603
|
|
|
|
498,074
|
|
Accounts receivable from related parties net
|
|
|
11,072
|
|
|
|
10,360
|
|
Advances to related parties net
|
|
|
11,499
|
|
|
|
3,751
|
|
Professional service contracts net
|
|
|
10,320
|
|
|
|
13,088
|
|
Investments in unconsolidated entities
|
|
|
8,733
|
|
|
|
22,191
|
|
Property held for investment net
|
|
|
88,699
|
|
|
|
130,957
|
|
Property, equipment and leasehold improvements net
|
|
|
14,020
|
|
|
|
16,744
|
|
Goodwill
|
|
|
|
|
|
|
169,317
|
|
Identified intangible assets net
|
|
|
100,631
|
|
|
|
118,944
|
|
Other assets net
|
|
|
4,700
|
|
|
|
5,116
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
520,277
|
|
|
$
|
988,542
|
|
|
|
|
|
|
|
|
LIABILITIES, MINORITY INTEREST AND STOCKHOLDERS EQUITY
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable and accrued expenses
|
|
$
|
70,222
|
|
|
$
|
102,004
|
|
Due to related parties
|
|
|
2,447
|
|
|
|
3,329
|
|
Line of credit
|
|
|
63,000
|
|
|
|
|
|
Current portion of notes payable and capital lease obligations
|
|
|
333
|
|
|
|
351
|
|
Notes payable of properties held for sale
|
|
|
108,959
|
|
|
|
242,027
|
|
Liabilities of properties held for sale net
|
|
|
9,257
|
|
|
|
16,036
|
|
Other liabilities
|
|
|
37,550
|
|
|
|
14,017
|
|
Deferred tax liabilities
|
|
|
2,080
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
293,848
|
|
|
|
377,764
|
|
Long-term liabilities:
|
|
|
|
|
|
|
|
|
Line of credit
|
|
|
|
|
|
|
8,000
|
|
Senior notes
|
|
|
16,277
|
|
|
|
16,277
|
|
Notes payable and capital lease obligations
|
|
|
107,203
|
|
|
|
107,343
|
|
Other long-term liabilities
|
|
|
11,875
|
|
|
|
15,291
|
|
Deferred tax liabilities
|
|
|
17,298
|
|
|
|
29,915
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
446,501
|
|
|
|
554,590
|
|
Commitment and contingencies (Note 21)
|
|
|
|
|
|
|
|
|
Stockholders equity:
|
|
|
|
|
|
|
|
|
Preferred stock: $0.01 par value; 10,000,000, shares authorized as of
December 31, 2008 and 2007; no shares issued and outstanding as of
December 31, 2008 and 2007
|
|
|
|
|
|
|
|
|
Common stock: $0.01 par value; 100,000,000 shares authorized; 65,382,601
and 64,824,777 shares issued and outstanding as of December 31, 2008 and
2007, respectively
|
|
|
654
|
|
|
|
648
|
|
Additional paid-in capital
|
|
|
402,780
|
|
|
|
393,665
|
|
(Accumulated deficit) retained earnings
|
|
|
(333,263
|
)
|
|
|
10,792
|
|
Other comprehensive loss
|
|
|
|
|
|
|
(1,049
|
)
|
Total Grubb & Ellis Company stockholders equity
|
|
|
70,171
|
|
|
|
404,056
|
|
Noncontrolling interests
|
|
|
3,605
|
|
|
|
29,896
|
|
|
|
|
|
|
|
|
Total equity
|
|
|
73,776
|
|
|
|
433,952
|
|
|
|
|
|
|
|
|
Total liabilities, minority interest and stockholders equity
|
|
$
|
520,277
|
|
|
$
|
988,542
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
F-5
GRUBB & ELLIS COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
Restated
|
|
|
Restated
|
|
REVENUE
|
|
|
|
|
|
|
|
|
|
|
|
|
Transaction services
|
|
$
|
240,250
|
|
|
$
|
35,522
|
|
|
$
|
|
|
Investment management
|
|
|
101,581
|
|
|
|
149,651
|
|
|
|
99,599
|
|
Management services
|
|
|
253,664
|
|
|
|
16,365
|
|
|
|
|
|
Rental related
|
|
|
33,284
|
|
|
|
28,119
|
|
|
|
8,944
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
|
628,779
|
|
|
|
229,657
|
|
|
|
108,543
|
|
|
|
|
|
|
|
|
|
|
|
OPERATING EXPENSE
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation costs
|
|
|
503,004
|
|
|
|
104,109
|
|
|
|
49,449
|
|
General and administrative
|
|
|
119,660
|
|
|
|
44,251
|
|
|
|
30,188
|
|
Depreciation and amortization
|
|
|
16,028
|
|
|
|
9,321
|
|
|
|
1,808
|
|
Rental related
|
|
|
21,377
|
|
|
|
20,839
|
|
|
|
9,423
|
|
Interest
|
|
|
14,207
|
|
|
|
10,818
|
|
|
|
6,765
|
|
Merger related costs
|
|
|
14,732
|
|
|
|
6,385
|
|
|
|
|
|
Real estate related impairments
|
|
|
59,114
|
|
|
|
|
|
|
|
|
|
Goodwill and intangible asset impairment
|
|
|
181,285
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expense
|
|
|
929,407
|
|
|
|
195,723
|
|
|
|
97,633
|
|
|
|
|
|
|
|
|
|
|
|
OPERATING (LOSS) INCOME
|
|
|
(300,628
|
)
|
|
|
33,934
|
|
|
|
10,910
|
|
|
|
|
|
|
|
|
|
|
|
OTHER (EXPENSE) INCOME
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity in (losses) earnings of unconsolidated entities
|
|
|
(13,311
|
)
|
|
|
2,029
|
|
|
|
1,948
|
|
Interest income
|
|
|
902
|
|
|
|
2,996
|
|
|
|
713
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
(6,458
|
)
|
|
|
(465
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other (expense) income
|
|
|
(18,867
|
)
|
|
|
4,560
|
|
|
|
2,661
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income from continuing operations before income tax provision (benefit)
|
|
|
(319,495
|
)
|
|
|
38,494
|
|
|
|
13,571
|
|
Income tax benefit (provision)
|
|
|
827
|
|
|
|
(14,753
|
)
|
|
|
7,441
|
|
(Loss) income from continuing operations
|
|
|
(318,668
|
)
|
|
|
23,741
|
|
|
|
21,012
|
|
|
|
|
|
|
|
|
|
|
|
DISCONTINUED OPERATIONS
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from discontinued operations net of taxes
|
|
|
(24,278
|
)
|
|
|
(960
|
)
|
|
|
(1,031
|
)
|
Gain on disposal of discontinued operations net of taxes
|
|
|
357
|
|
|
|
252
|
|
|
|
68
|
|
|
|
|
|
|
|
|
|
|
|
Total loss from discontinued operations
|
|
|
(23,921
|
)
|
|
|
(708
|
)
|
|
|
(963
|
)
|
|
|
|
|
|
|
|
|
|
|
NET (LOSS) INCOME
|
|
$
|
(342,589
|
)
|
|
$
|
23,033
|
|
|
$
|
20,049
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income (attributable) available to noncontrolling interests
|
|
|
(11,719
|
)
|
|
|
1,961
|
|
|
|
78
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income (attributable) available to Grubb & Ellis Company
|
|
$
|
(330,870
|
)
|
|
$
|
21,072
|
|
|
$
|
19,971
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic (loss) earnings per share
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income from continuing operations attributable to Grubb & Ellis Company
|
|
$
|
(4.83
|
)
|
|
$
|
0.55
|
|
|
$
|
1.06
|
|
Loss from discontinued operations attributable to Grubb & Ellis Company
|
|
|
(0.38
|
)
|
|
|
(0.02
|
)
|
|
|
(0.05
|
)
|
|
|
|
|
|
|
|
|
|
|
Net (loss) earnings per share attributable to Grubb & Ellis Company
|
|
$
|
(5.21
|
)
|
|
$
|
0.53
|
|
|
$
|
1.01
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted (loss) earnings per share
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income from continuing operations attributable to Grubb & Ellis Company
|
|
$
|
(4.83
|
)
|
|
$
|
0.55
|
|
|
$
|
1.06
|
|
Loss from discontinued operations attributable to Grubb & Ellis Company
|
|
|
(0.38
|
)
|
|
|
(0.02
|
)
|
|
|
(0.05
|
)
|
|
|
|
|
|
|
|
|
|
|
Net (loss) earnings per share attributable to Grubb & Ellis Company
|
|
$
|
(5.21
|
)
|
|
$
|
0.53
|
|
|
$
|
1.01
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic weighted average shares outstanding
|
|
|
63,515
|
|
|
|
38,652
|
|
|
|
19,681
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted weighted average shares outstanding
|
|
|
63,515
|
|
|
|
38,652
|
|
|
|
19,694
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
F-6
GRUBB & ELLIS COMPANY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
Accumulated Other
|
|
|
(Accumulated
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
Common Stock
|
|
|
Paid-In
|
|
|
Comprehensive
|
|
|
Deficit) Retained
|
|
|
Stockholders
|
|
|
Noncontrolling
|
|
|
Total
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Loss
|
|
|
Earnings
|
|
|
Equity
|
|
|
Interest
|
|
|
Equity
|
|
Balance as of
January 1, 2006 (as
previously reported)
|
|
|
17,372
|
|
|
$
|
174
|
|
|
$
|
3,902
|
|
|
$
|
|
|
|
$
|
24,701
|
|
|
$
|
28,777
|
|
|
|
993
|
|
|
|
29,770
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prior year
adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(8,696
|
)
|
|
|
(8,696
|
)
|
|
|
|
|
|
|
(8,696
|
)
|
Balance as of January
1, 2006 (as restated)
|
|
|
17,372
|
|
|
|
174
|
|
|
|
3,902
|
|
|
|
|
|
|
|
16,005
|
|
|
|
20,081
|
|
|
|
993
|
|
|
|
21,074
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends declared
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(31,883
|
)
|
|
|
(31,883
|
)
|
|
|
|
|
|
|
(31,883
|
)
|
Issuance of common
stock to acquire
Realty and NNN
Capital Corp.
|
|
|
5,289
|
|
|
|
53
|
|
|
|
60,361
|
|
|
|
|
|
|
|
|
|
|
|
60,414
|
|
|
|
|
|
|
|
60,414
|
|
Issuance of common
stock
|
|
|
14,080
|
|
|
|
141
|
|
|
|
159,859
|
|
|
|
|
|
|
|
|
|
|
|
160,000
|
|
|
|
|
|
|
|
160,000
|
|
Offering costs
|
|
|
|
|
|
|
|
|
|
|
(13,885
|
)
|
|
|
|
|
|
|
|
|
|
|
(13,885
|
)
|
|
|
|
|
|
|
(13,885
|
)
|
Issuance of
restricted shares to
directors and
officers
|
|
|
541
|
|
|
|
5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5
|
|
|
|
|
|
|
|
5
|
|
Vesting of
share-based
compensation
|
|
|
|
|
|
|
|
|
|
|
2,448
|
|
|
|
|
|
|
|
|
|
|
|
2,448
|
|
|
|
|
|
|
|
2,448
|
|
Contribution from
noncontrolling
interests
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,554
|
|
|
|
7,554
|
|
Distributions to
noncontrolling
interests
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(315
|
)
|
|
|
(315
|
)
|
Deconsolidation of
sponsored programs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(759
|
)
|
|
|
(759
|
)
|
Change in unrealized
(loss) on marketable
securities, net of
taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(26
|
)
|
|
|
|
|
|
|
(26
|
)
|
|
|
|
|
|
|
(26
|
)
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
19,971
|
|
|
|
19,971
|
|
|
|
78
|
|
|
|
20,049
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive
income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
19,945
|
|
|
|
78
|
|
|
|
20,023
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of
December 31, 2006(as
restated)
|
|
|
37,282
|
|
|
|
373
|
|
|
|
212,685
|
|
|
|
(26
|
)
|
|
|
4,093
|
|
|
|
217,125
|
|
|
|
7,551
|
|
|
|
224,676
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends declared
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(14,373
|
)
|
|
|
(14,373
|
)
|
|
|
|
|
|
|
(14,373
|
)
|
Vesting of
share-based
compensation
|
|
|
|
|
|
|
|
|
|
|
9,027
|
|
|
|
|
|
|
|
|
|
|
|
9,027
|
|
|
|
|
|
|
|
9,027
|
|
Common stock for
merger transaction
|
|
|
26,196
|
|
|
|
262
|
|
|
|
171,953
|
|
|
|
|
|
|
|
|
|
|
|
172,215
|
|
|
|
|
|
|
|
172,215
|
|
Issuance of
restricted shares to
directors, officers
and employees
|
|
|
1,450
|
|
|
|
14
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14
|
|
|
|
|
|
|
|
14
|
|
F-7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
Accumulated Other
|
|
|
(Accumulated
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
Common Stock
|
|
|
Paid-In
|
|
|
Comprehensive
|
|
|
Deficit) Retained
|
|
|
Stockholders
|
|
|
Noncontrolling
|
|
|
Total
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Loss
|
|
|
Earnings
|
|
|
Equity
|
|
|
Interest
|
|
|
Equity
|
|
Cancellation of
non-vested restricted
shares
|
|
|
(103
|
)
|
|
|
(1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1
|
)
|
|
|
|
|
|
|
(1
|
)
|
Contribution from
noncontrolling
interests
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
42,061
|
|
|
|
42,061
|
|
Distributions to
noncontrolling
interests
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,866
|
)
|
|
|
(2,866
|
)
|
Deconsolidation of
sponsored programs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(19,419
|
)
|
|
|
(19,419
|
)
|
Compensation expense
on profit sharing
arrangements
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,999
|
|
|
|
1,999
|
|
Distribution to a
noncontrolling
interest in
consolidated entity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,391
|
)
|
|
|
(1,391
|
)
|
Change in unrealized
loss on marketable
securities, net of
taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,023
|
)
|
|
|
|
|
|
|
(1,023
|
)
|
|
|
|
|
|
|
(1,023
|
)
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
21,072
|
|
|
|
21,072
|
|
|
|
1,961
|
|
|
|
23,033
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive
income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
20,049
|
|
|
|
1,961
|
|
|
|
22,010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of
December 31, 2007(as
restated)
|
|
|
64,825
|
|
|
|
648
|
|
|
|
393,665
|
|
|
|
(1,049
|
)
|
|
|
10,792
|
|
|
|
404,056
|
|
|
|
29,896
|
|
|
|
433,952
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends declared
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(13,395
|
)
|
|
|
(13,395
|
)
|
|
|
|
|
|
|
(13,395
|
)
|
Vesting of
share-based
compensation
|
|
|
|
|
|
|
|
|
|
|
11,248
|
|
|
|
|
|
|
|
210
|
|
|
|
11,458
|
|
|
|
|
|
|
|
11,458
|
|
Repurchase of common
stock
|
|
|
(532
|
)
|
|
|
(5
|
)
|
|
|
(1,835
|
)
|
|
|
|
|
|
|
|
|
|
|
(1,840
|
)
|
|
|
|
|
|
|
(1,840
|
)
|
Issuance of
restricted shares to
directors, officers
and employees
|
|
|
1,552
|
|
|
|
15
|
|
|
|
(15
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of stock to
directors, officers
and employees related
to equity
compensation awards
|
|
|
77
|
|
|
|
1
|
|
|
|
378
|
|
|
|
|
|
|
|
|
|
|
|
379
|
|
|
|
|
|
|
|
379
|
|
Cancellation of
non-vested restricted
shares
|
|
|
(539
|
)
|
|
|
(5
|
)
|
|
|
(75
|
)
|
|
|
|
|
|
|
|
|
|
|
(80
|
)
|
|
|
|
|
|
|
(80
|
)
|
Contribution from
noncontrolling
interests
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15,084
|
|
|
|
15,084
|
|
Distributions to
noncontrolling
interests
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4,093
|
)
|
|
|
(4,093
|
)
|
Deconsolidation of
sponsored programs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(27,441
|
)
|
|
|
(27,441
|
)
|
Compensation expense
on profit sharing
arrangements
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,878
|
|
|
|
1,878
|
|
F-8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
Accumulated Other
|
|
|
(Accumulated
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
Common Stock
|
|
|
Paid-In
|
|
|
Comprehensive
|
|
|
Deficit) Retained
|
|
|
Stockholders
|
|
|
Noncontrolling
|
|
|
Total
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Loss
|
|
|
Earnings
|
|
|
Equity
|
|
|
Interest
|
|
|
Equity
|
|
Change in unrealized
loss on marketable
securities, net of
taxes
|
|
|
|
|
|
|
|
|
|
|
(586
|
)
|
|
|
1,049
|
|
|
|
|
|
|
|
463
|
|
|
|
|
|
|
|
463
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(330,870
|
)
|
|
|
(330,870
|
)
|
|
|
(11,719
|
)
|
|
|
(342,589
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(330,407
|
)
|
|
|
(11,719
|
)
|
|
|
(342,126
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of
December 31, 2008
|
|
|
65,383
|
|
|
$
|
654
|
|
|
$
|
402,780
|
|
|
$
|
|
|
|
$
|
(333,263
|
)
|
|
$
|
70,171
|
|
|
$
|
3,605
|
|
|
$
|
73,776
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
F-9
GRUBB & ELLIS COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2008
|
|
2007
|
|
2006
|
|
|
|
|
|
|
Restated
|
|
Restated
|
CASH FLOWS FROM OPERATING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
$
|
(342,589
|
)
|
|
$
|
23,033
|
|
|
$
|
20,049
|
|
Adjustments to reconcile net (loss) income to net cash (used in) provided
by operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity in (earnings) losses of unconsolidated entities
|
|
|
13,311
|
|
|
|
(2,029
|
)
|
|
|
(1,948
|
)
|
Depreciation and amortization (including amortization of signing
bonuses)
|
|
|
28,961
|
|
|
|
8,652
|
|
|
|
2,086
|
|
Loss on disposal of property, equipment and leasehold improvements
|
|
|
494
|
|
|
|
861
|
|
|
|
|
|
Goodwill and intangible asset impairment
|
|
|
181,286
|
|
|
|
|
|
|
|
|
|
Impairment of real estate
|
|
|
90,351
|
|
|
|
|
|
|
|
|
|
Stock-based compensation
|
|
|
11,705
|
|
|
|
9,041
|
|
|
|
3,865
|
|
Compensation expense on profit sharing arrangements
|
|
|
1,878
|
|
|
|
1,999
|
|
|
|
|
|
Amortization/write-off of intangible contractual rights
|
|
|
1,179
|
|
|
|
3,133
|
|
|
|
410
|
|
Amortization of deferred financing costs
|
|
|
1,006
|
|
|
|
1,713
|
|
|
|
31
|
|
Loss (gain) on sale of marketable equity securities
|
|
|
7,215
|
|
|
|
(184
|
)
|
|
|
|
|
Deferred income taxes
|
|
|
(3,784
|
)
|
|
|
(7,109
|
)
|
|
|
(8,147
|
)
|
Allowance for uncollectible accounts
|
|
|
13,319
|
|
|
|
806
|
|
|
|
1,408
|
|
Loss on write-off of real estate deposits and pre-acquisition costs
|
|
|
2,415
|
|
|
|
|
|
|
|
|
|
Other operating noncash gains (losses)
|
|
|
2,267
|
|
|
|
8
|
|
|
|
(105
|
)
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable from related parties
|
|
|
6,480
|
|
|
|
6,018
|
|
|
|
(1,254
|
)
|
Prepaid expenses and other assets
|
|
|
(28,945
|
)
|
|
|
(36,295
|
)
|
|
|
(919
|
)
|
Accounts payable and accrued expenses
|
|
|
(19,915
|
)
|
|
|
15,884
|
|
|
|
2,367
|
|
Other liabilities
|
|
|
(263
|
)
|
|
|
8,012
|
|
|
|
(487
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by operating activities
|
|
|
(33,629
|
)
|
|
|
33,543
|
|
|
|
17,356
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of property and equipment
|
|
|
(4,407
|
)
|
|
|
(3,331
|
)
|
|
|
(2,339
|
)
|
Tenant improvements and capital expenditures Purchases of marketable
equity securities
|
|
|
(997
|
)
|
|
|
(30,732
|
)
|
|
|
(2,360
|
)
|
Proceeds from sale of marketable equity securities
|
|
|
2,653
|
|
|
|
22,870
|
|
|
|
|
|
Advances to related parties
|
|
|
(13,173
|
)
|
|
|
(39,112
|
)
|
|
|
(19,268
|
)
|
Proceeds from repayment of advances to related parties
|
|
|
20,043
|
|
|
|
117,496
|
|
|
|
16,713
|
|
Payments to related parties
|
|
|
(882
|
)
|
|
|
(2,704
|
)
|
|
|
(1,064
|
)
|
Origination of notes receivable from related parties
|
|
|
(15,100
|
)
|
|
|
(39,300
|
)
|
|
|
(10,000
|
)
|
Proceeds from repayment of notes receivable from related parties
|
|
|
13,600
|
|
|
|
41,700
|
|
|
|
777
|
|
Investments in unconsolidated entities
|
|
|
(29,163
|
)
|
|
|
(9,076
|
)
|
|
|
(111,772
|
)
|
Sale of tenant-in-common interests in unconsolidated entities
|
|
|
|
|
|
|
20,466
|
|
|
|
101,128
|
|
Distributions of capital from unconsolidated entities
|
|
|
914
|
|
|
|
1,256
|
|
|
|
20,049
|
|
Acquisition of businesses net of cash acquired
|
|
|
|
|
|
|
339
|
|
|
|
(7,398
|
)
|
Acquisition of properties
|
|
|
(122,163
|
)
|
|
|
(605,126
|
)
|
|
|
(80,905
|
)
|
Proceeds from sale of properties
|
|
|
|
|
|
|
92,945
|
|
|
|
31,684
|
|
Real estate deposits and pre-acquisition costs
|
|
|
(59,780
|
)
|
|
|
(50,202
|
)
|
|
|
(14,106
|
)
|
Proceeds from collection of real estate deposits and pre-acquisition costs
|
|
|
118,835
|
|
|
|
49,427
|
|
|
|
26,722
|
|
Restricted cash
|
|
|
13,290
|
|
|
|
(53,825
|
)
|
|
|
(4,064
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(76,330
|
)
|
|
|
(486,909
|
)
|
|
|
(56,203
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
F-10
GRUBB & ELLIS COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
Restated
|
|
|
Restated
|
|
CASH FLOWS FROM FINANCING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
Advances on line of credit
|
|
|
55,000
|
|
|
|
|
|
|
|
14,000
|
|
Repayment of advances on line of credit
|
|
|
|
|
|
|
(30,000
|
)
|
|
|
(22,500
|
)
|
Borrowings on notes payable and capital lease obligations
|
|
|
103,339
|
|
|
|
547,015
|
|
|
|
120,711
|
|
Repayments of notes payable and capital lease obligations
|
|
|
(56,386
|
)
|
|
|
(143,848
|
)
|
|
|
(95,930
|
)
|
Other financing costs
|
|
|
|
|
|
|
850
|
|
|
|
(1,867
|
)
|
Proceeds from issuance of senior notes
|
|
|
|
|
|
|
6,015
|
|
|
|
10,263
|
|
Repayments of participating notes
|
|
|
|
|
|
|
|
|
|
|
(2,300
|
)
|
Redemption of redeemable preferred membership units
|
|
|
|
|
|
|
|
|
|
|
(5,506
|
)
|
Deferred financing costs
|
|
|
(2,412
|
)
|
|
|
(2,310
|
)
|
|
|
(1,515
|
)
|
Net proceeds from issuance of common stock
|
|
|
52
|
|
|
|
|
|
|
|
146,000
|
|
Repurchase of common stock
|
|
|
(1,840
|
)
|
|
|
|
|
|
|
|
|
Dividends paid to common stockholders
|
|
|
(15,128
|
)
|
|
|
(16,449
|
)
|
|
|
(28,070
|
)
|
Contributions from minority interests
|
|
|
15,084
|
|
|
|
42,061
|
|
|
|
7,554
|
|
Distributions to minority interests
|
|
|
(4,093
|
)
|
|
|
(2,866
|
)
|
|
|
(315
|
)
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities
|
|
|
93,616
|
|
|
|
400,468
|
|
|
|
140,525
|
|
|
|
|
|
|
|
|
|
|
|
NET (DECREASE) INCREASE IN CASH
|
|
|
(16,343
|
)
|
|
|
(52,898
|
)
|
|
|
101,678
|
|
Cash and cash equivalents Beginning of year
|
|
|
49,328
|
|
|
|
102,226
|
|
|
|
548
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents End of year
|
|
$
|
32,985
|
|
|
$
|
49,328
|
|
|
$
|
102,226
|
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid during the period for:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
|
|
$
|
21,089
|
|
|
$
|
10,148
|
|
|
$
|
5,784
|
|
|
|
|
|
|
|
|
|
|
|
Income taxes
|
|
$
|
2,151
|
|
|
$
|
22,622
|
|
|
$
|
179
|
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL DISCLOSURE OF NONCASH ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrual for tenant improvements, lease commissions and capital
expenditures
|
|
$
|
739
|
|
|
$
|
814
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
Equipment acquired with capital lease obligations
|
|
$
|
52
|
|
|
$
|
541
|
|
|
$
|
355
|
|
|
|
|
|
|
|
|
|
|
|
Dividends accrued
|
|
$
|
|
|
|
$
|
1,733
|
|
|
$
|
3,813
|
|
|
|
|
|
|
|
|
|
|
|
Deconsolidation of assets held by variable interest entities
|
|
$
|
301,656
|
|
|
$
|
372,674
|
|
|
$
|
28,016
|
|
|
|
|
|
|
|
|
|
|
|
Deconsolidation of liabilities held by variable interest entities
|
|
$
|
222,448
|
|
|
$
|
269,732
|
|
|
$
|
17,449
|
|
|
|
|
|
|
|
|
|
|
|
Assets acquired in acquisition
|
|
$
|
|
|
|
$
|
462,730
|
|
|
$
|
26,657
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities assumed in acquisition
|
|
$
|
|
|
|
$
|
259,659
|
|
|
$
|
19,342
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
F-11
GRUBB & ELLIS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2008, 2007 AND 2006
1. ORGANIZATION
Grubb & Ellis Company (the
Company
or
Grubb & Ellis
), a Delaware corporation founded
50 years ago in Northern California, is a commercial real estate services and investment management
firms. On December 7, 2007, the Company effected a stock merger (the
Merger
) with NNN Realty
Advisors, Inc. (
NNN
), a real estate asset management company and sponsor of public non-traded
real estate investment trusts (
REITs
), as well as a sponsor of tax deferred tenant-in-common
(
TIC
) 1031 property exchanges and other investment programs. Upon the closing of the Merger, a
change of control occurred. The former stockholders of NNN acquired approximately 60% of the
Companys issued and outstanding common stock.
The Company offers property owners, corporate occupants and program investors comprehensive
integrated real estate solutions, including transactions, management, consulting and investment
advisory services supported by market research and local market expertise.
In certain instances throughout these Financial Statements phrases such as legacy Grubb &
Ellis or similar descriptions are used to reference, when appropriate, Grubb & Ellis prior to the
Merger. Similarly, in certain instances throughout these Financial Statements the term NNN, legacy
NNN or similar phrases are used to reference, when appropriate, NNN Realty Advisors, Inc. prior to
the Merger.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation and Principles of Consolidation
The consolidated financial statements
include the accounts of the Company and its wholly-owned and majority-owned controlled
subsidiaries, variable interest entities (
VIEs
) in which the Company is the primary beneficiary,
and partnerships/limited liability companies (
LLCs
) in which the Company is the managing member
or general partner and the other partners/members lack substantive rights (hereinafter collectively
referred to as the Company). All significant intercompany accounts and transactions have been
eliminated in consolidation. For acquisitions of an interest in an entity or newly formed joint
venture or limited liability company, the Company evaluates the entity to determine if the entity
is deemed a VIE, and if the Company is deemed to be the primary beneficiary, in accordance with the
requirements of the Consolidation Topic.
The Company consolidates entities that are VIEs when the Company is deemed to be the primary
beneficiary of the VIE. For entities in which (i) the Company is not deemed to be the primary
beneficiary, (ii) the Companys ownership is 50.0% or less and (iii) the Company has the ability to
exercise significant influence, the Company uses the equity accounting method (i.e. at cost,
increased or decreased by the Companys share of earnings or losses, plus contributions less
distributions). The Company also uses the equity method of accounting for jointly-controlled
tenant-in-common interests. As reconsideration events occur, the Company will reconsider its
determination of whether an entity is a VIE and who the primary beneficiary is to determine if
there is a change in the original determinations and will report such changes on a quarterly basis.
As more fully discussed in Note 17, the Company has entered into a Third Amendment to its
Credit Facility that requires the Company to comply with the Approved Budget that has been agreed
to by the Company and the lenders, subject to agreed upon variances. The Company is also required
under the Third Amendment to effect the Recapitalization plan on or before September 30, 2009 and
in connection therewith to effect a Partial Prepayment on or before September 30, 2009. Among other
things, in the event the Company does not complete the recapitalization plan and/or make the
Partial Prepayment, the Credit Facility will terminate on January 15, 2010. In light of the current
state of the financial markets and economic environment, there is risk that the Company will be
unable to meet the terms of the Credit Facility which would result in the entire balance of the
debt becoming due and payable. If the Credit Facility were to become due and payable on the
alternative due date of January 15, 2010, there can be no assurances that the Company will have
access to alternative funding sources, or if such sources are available to the Company, that they
will be on favorable terms and conditions to the Company, which at that time could create
substantial doubt about the Companys ability to continue as a going concern after January 15,
2010.
Use of Estimates
The financial statements have been prepared in conformity with accounting
principles generally accepted in the United States (
GAAP
), which requires management to make
estimates and assumptions that affect the reported amounts of assets and liabilities (including
disclosure of contingent assets and liabilities) as of 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.
Credit Facility
Weak economic conditions could impact the Companys ability to remain in
compliance with the debt covenants contained within its Credit Facility described in Note 17 below.
If revenues are less than the Company has projected, the Company will be required to take further
actions within its control to reduce costs so as to allow the Company to remain in
F-12
GRUBB & ELLIS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
compliance with the financial covenants in the Credit Facility. In the event the Company is required to amend the
Credit Facility in order to remain in compliance with the financial covenants set forth therein,
there can be no assurances that it will be able to do so.
Reclassifications
Certain reclassifications have been made to prior year and prior interim
period amounts in order to conform to the current period presentation. These reclassifications have
no effect on reported net income. Adjustments related to the restatement of previously issued
financial statements are detailed in Note 3.
Cash and cash equivalents
Cash and cash equivalents consist of all highly liquid investments
with a maturity of three months or less when purchased. Short-term investments with remaining
maturities of three months or less when acquired are considered cash equivalents.
Restricted Cash
Restricted cash is comprised primarily of cash and loan impound reserve
accounts for property taxes, insurance, capital improvements, and tenant improvements related to
consolidated properties. As of December 31, 2008 and 2007, the restricted cash was $36.0 million
and $70.0 million, respectively.
Accounts Receivable from Related Parties
Accounts receivable from related parties consist of
fees earned from syndicated entities and properties under management, including property and asset
management fees. Property and asset management fees are collected from the operations of the
underlying real estate properties.
Allowance for Uncollectible Receivables
Receivables are carried net of managements estimate
of uncollectible receivables. Managements determination of the adequacy of these allowances is
based upon evaluations of historical loss experience, operating performance of the underlying
properties, current economic conditions, and other relevant factors.
Real Estate Deposits and Pre-acquisition Costs
Real estate deposits and pre-acquisition
costs are incurred when the Company evaluates properties for purchase and syndication.
Pre-acquisition costs are capitalized as incurred. Real estate deposits may become nonrefundable
under certain circumstances. The majority of the real estate deposits outstanding as of
December 31, 2008 and 2007, were either refunded to the Company during the subsequent year or used
to purchase property and subsequently reimbursed from the syndicated equity. Costs of abandoned
projects represent pre-acquisition costs associated with properties no longer sought for
acquisition by the Company and are included in general and administrative expense in the Companys
consolidated statement of operations.
Payments to obtain an option to acquire real property are capitalized as incurred. All other
costs related to a property that are incurred before the property is acquired, or before an option
to acquire it is obtained, are capitalized if all of the following conditions are met and otherwise
are charged to expense as incurred:
|
|
|
the costs are directly identifiable with the specific property;
|
|
|
|
|
the costs would be capitalized if the property were already acquired; and
|
|
|
|
|
acquisition of the property or an option to acquire the property is
probable. This condition requires that the Company is actively seeking
to acquire the property and have the ability to finance or obtain
financing for the acquisition and that there is no indication that the
property is not available for sale.
|
Purchase Price Allocation
In accordance with the requirements of the Business Combinations
Topic, the purchase price of acquired businesses or properties is allocated to tangible and
identified intangible assets and liabilities based on their respective fair values. In the case of
real estate acquisitions, the allocation to tangible assets (building and land) is based upon
determination of the value of the property as if it were vacant using discounted cash flow models
similar to those used by independent appraisers. Factors considered include an estimate of carrying
costs during the expected lease-up periods considering current market conditions and costs to
execute similar leases. Additionally, the purchase price of the applicable property is allocated to
the above or below market value of in-place leases and the value of in-place leases and related
tenant relationships.
The value allocable to the above or below market component of the acquired in-place leases is
determined based upon the present value (using a discount rate which reflects the risks associated
with the acquired leases) of the difference between (i) the contractual amounts to be paid pursuant
to the lease over its remaining term, and (ii) our estimate of the amounts that would be paid using
fair market rates over the remaining term of the lease. The amounts allocated to above market
leases are included in identified intangible assets net and below market lease values are
included in liabilities of real estate properties in the accompanying consolidated financial
statements and are amortized to rental revenue over the weighted-average remaining term of the
acquired leases with each property.
The total amount of identified intangible assets acquired is further allocated to in-place
lease costs and the value of tenant relationships based on managements evaluation of the specific
characteristics of each tenants lease and our overall relationship with that respective tenant.
Characteristics considered in allocating these values include the nature and extent of the credit
quality and
F-13
GRUBB & ELLIS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
expectations of lease renewals, among other factors. These allocations are subject to
change within one year of the date of purchase based on information related to one or more events
identified at the date of purchase that confirm the value of an asset or liability of an acquired
property.
Identified Intangible Assets
The Companys acquisitions require the application of purchase
accounting in accordance with the requirements of the Business Combinations Topic. This results in
tangible and identified intangible assets and liabilities of the acquired entity being recorded at
fair value. Identified intangible assets includes a trade name, which is not being amortized and
has an indefinite estimated useful life. The remaining other intangible assets primarily include
contract rights, affiliate agreements, customer relationships and internally developed software,
which are all being amortized over estimated useful lives ranging up to 20 years.
Properties Held for Investment
Properties held for investment are carried at historical cost
less accumulated depreciation, net of any impairments. The cost of these properties include the
cost of land, completed buildings, and related improvements. Expenditures that increase the service
life of properties are capitalized; the cost of maintenance and repairs is charged to expense as
incurred. The cost of buildings and improvements is depreciated on a straight-line basis over the
estimated useful lives of the buildings and improvements, ranging primarily from 15 to 39 years,
and the shorter of the lease term or useful life, ranging from one to ten years for tenant
improvements.
Properties Held for Sale
In accordance with the requirements of the Property, Plant, and
Equipment Topic, at the time a property is held for sale, such property is carried at the lower of
(i) its carrying amount or (ii) fair value less costs to sell. In addition, no depreciation or
amortization of tenant origination cost is recorded for a property classified as held for sale. The
Company classifies operating properties as properties held for sale in the period in which all of
the required criteria are met.
The Topic requires, in many instances, that the balance sheet and income statements for both
current and prior periods report the assets, liabilities and results of operations of any component
of an entity which has either been disposed of, or is classified as held for sale, as discontinued
operations. In instances when a company expects to have significant continuing involvement in the
component beyond the date of sale, the operations of the component instead continue to be fully
recorded within the continuing operations of the Company through the date of sale. In accordance
with this requirement, the Company records any results of operations related to its real estate
held for sale as discontinued operations only when the Company expects not to have significant
continuing involvement in the real estate after the date of sale.
Property, Equipment and Leasehold Improvements
Property and equipment are stated at cost,
less accumulated depreciation and amortization. Depreciation and amortization expense is recorded
on a straight-line basis over the estimated useful lives of the related assets, which range from
three to seven years. Leasehold improvements are amortized on a straight-line basis over the life
of the related lease or the estimated service life of the improvements, whichever is shorter.
Maintenance and repairs are expensed as incurred, while betterments are capitalized. Upon the sale
or retirement of depreciable assets, the related accounts are relieved, with any resulting gain or
loss included in operations.
Impairment of Long-Lived Assets
In accordance with the Property, Plant, and Equipment Topic,
long-lived assets are periodically evaluated for potential impairment whenever events or changes in
circumstances indicate that their carrying amount may not be recoverable. In the event that
periodic assessments reflect that the carrying amount of the asset exceeds the sum of the
undiscounted cash flows (excluding interest) that are expected to result from the use and eventual
disposition of the asset, the Company would recognize an impairment loss to the extent the carrying
amount exceeded the fair value of the property. The Company estimates the fair value using
available market information or other industry valuation techniques such as present value
calculations. The Company recognized impairment charges of approximately $90.4 million against the
carrying value of the properties and real estate investments for the year ended December 31, 2008,
$18.0 million is recorded separately on the statement of operations and $72.4 million is included
in discontinued operations. No impairment losses were recognized for the years ended December 31,
2007 and 2006.
The Company recognizes goodwill and other non-amortizing intangible assets in accordance with
the requirements of the IntangiblesGoodwill and Other Topic. Under this Topic, goodwill is
recorded at its carrying value and is tested for impairment at least annually or more frequently if
impairment indicators exist, at a level of reporting referred to as a reporting unit. The Company
recognizes goodwill in accordance with the requirements of the IntangiblesGoodwill and Other Topic
and tests the carrying value for impairment during the fourth quarter of each year. The goodwill
impairment analysis is a two-step process. The first step used to identify potential impairment
involves comparing each reporting units estimated fair value to its carrying value, including
goodwill. To estimate the fair value of its reporting units, the Company used a discounted cash
flow model and market comparable data. Significant judgment is required by management in developing
the assumptions for the discounted cash flow model. These assumptions include cash flow projections
utilizing revenue growth rates, profit margin percentages, discount rates, market/economic
conditions, etc. If the estimated fair value of a reporting unit exceeds its carrying value,
goodwill is considered to not be impaired. If the carrying value exceeds estimated fair value,
there is an indication of potential impairment and the second step is performed to measure the
amount of impairment. The second step of the process involves the calculation of an implied fair
value of goodwill for each reporting unit for which step one indicated a potential impairment. The
implied fair value of goodwill is determined by
F-14
GRUBB & ELLIS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
measuring the excess of the estimated fair value of the reporting unit as calculated in step one, over the estimated fair values of the individual
assets, liabilities and identified intangibles. During the fourth quarter of 2008, the Company
identified the uncertainty surrounding the global economy and the volatility of the Companys
market capitalization as goodwill impairment indicators. The Companys goodwill impairment analysis
resulted in the recognition of an impairment charge of approximately $172.7 million during the year
ended December 31, 2008.
The Company also analyzed its trade name for impairment pursuant to the requirements of the
IntangiblesGoodwill and Other Topic and determined that the trade name was not impaired as of
December 31, 2008. Accordingly, no impairment charge was recorded related to the trade name during
the year ended December 31, 2008. In addition to testing goodwill and its trade name for
impairment, the Company tested the intangible contract rights for impairment during the fourth
quarter of 2008. The intangible contract rights represent the legal right to future disposition
fees of a portfolio of real estate properties under contract. As a result of the current economic
environment, a portion of these disposition fees may not be recoverable. Based on the Companys
analysis for the current and projected property values, condition of the properties and status of
mortgage loans payable, the Company determined that there are certain properties for which receipt
of disposition fees was no longer probable. As a result, the Company recorded an impairment charge
of approximately $8.6 million related to the impaired intangible contract rights as of December 31,
2008.
Revenue Recognition
Transaction Services
Real estate commissions are recognized when earned which is typically the close of escrow.
Receipt of payment occurs at the point at which all Company services have been performed, and title
to real property has passed from seller to buyer, if applicable. Real estate leasing commissions
are recognized upon execution of appropriate lease and commission agreements and receipt of full or
partial payment, and, when payable upon certain events such as tenant occupancy or rent
commencement, upon occurrence of such events. All other commissions and fees are recognized at the
time the related services have been performed and delivered by the Company to the client, unless
future contingencies exist.
Investment Management
The Company earns fees associated with its transactions by structuring, negotiating and
closing acquisitions of real estate properties to third-party investors. Such fees include
acquisition fees for locating and acquiring the property and selling it to various TIC investors,
REITs and its various real estate funds. The Company accounts for acquisition and loan fees in
accordance with the amended Fair Value Measurements and Disclosures Topic deferred and the
requirements of the Real EstateRetail Land Topic. In general, the Company records the acquisition
and loan fees upon the close of sale to the buyer if the buyer is independent of the seller,
collection of the sales price, including the acquisition fees and loan fees, is reasonably assured,
and the Company is not responsible for supporting operations of the property. Organizational
marketing expense allowance (
OMEA
), fees are earned and recognized from gross proceeds of equity
raised in connection with offerings and are used to pay formation costs, as well as organizational
and marketing costs. When the Company does not meet the criteria for revenue recognition under the
requirements of the Real EstateRetail Land Topic and the requirements of Real Estate General
Topic, revenue is deferred until revenue can be reasonably estimated or until the Company defers
revenue up to its maximum exposure to loss. Typically, the Companys maximum exposure to loss is
equal to the original amount of the investment. The Company earns disposition fees for disposing of
the property on behalf of the REIT, investment fund or TIC. The Company recognizes the disposition
fee when the sale of the property closes. The Company is entitled to loan advisory fees for
arranging financing related to properties under management.
The Company earns captive asset and property management fees primarily for managing the
operations of real estate properties owned by the real estate programs, REITs and LLCs that invest
in real estate or value funds it sponsors. Such fees are based on pre-established formulas and
contractual arrangements and are earned as such services are performed. The Company is entitled to
receive reimbursement for expenses associated with managing the properties; these expenses include
salaries for property managers and other personnel providing services to the property. Each
property in the Companys TIC Programs is charged an accounting fee for costs associated with
preparing financial reports. The Company is also entitled to leasing commissions when a new tenant
is secured and upon tenant renewals. Leasing commissions are recognized upon execution of leases.
Through its dealer-manager, the Company facilitates capital raising transactions for its
programs its dealer-manager acts as a dealer-manager exclusively for the Companys programs and
does not provide securities services to any third party. The Companys wholesale dealer-manager
services are comprised of raising capital for its programs through its selling broker-dealer
relationships. Most of the commissions, fees and allowances earned for its dealer-manager services
are passed on to the selling broker-dealers as commissions and to cover offering expenses, and the
Company retains the balance. Accordingly, the Company records these fees net of the amounts paid to
its selling broker-dealer relationships.
F-15
GRUBB & ELLIS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Management Services
Management fees are recognized at the time the related services have been performed by the
Company, unless future contingencies exist. In addition, in regard to management and facility
service contracts, the owner of the property will typically reimburse the Company for certain
expenses that are incurred on behalf of the owner, which are comprised primarily of on-site
employee salaries and related benefit costs. The amounts which are to be reimbursed per the terms
of the services contract, are recognized as revenue by the Company in the same period as the
related expenses are incurred. In certain instances, the Company sub contracts its property
management services to independent property managers, in which case the Company passes a portion of
their property management fee on to the sub contractor, and the Company retains the balance.
Accordingly, the Company records these fees net of the amounts paid to its sub contractors.
Professional Service Contracts
The Company holds multi-year service contracts with certain
key transaction professionals for which cash payments were made to the professionals upon signing,
the costs of which are being amortized over the lives of the respective contracts, which are
generally two to five years. Amortization expense relating to these contracts of approximately
$9.2 million and $443,000 was recorded for the years ended December 31, 2008 and 2007,
respectively, and is included in compensation costs in the Companys consolidated statement of
operations.
Fair Value of Financial Instruments
The Financial Instruments Topic, requires disclosure of
fair value of financial instruments, whether or not recognized on the face of the balance sheet,
for which it is practical to estimate that value. The Topic defines fair value as the quoted market
prices for those instruments that are actively traded in financial markets. In cases where quoted
market prices are not available, fair values are estimated using present value or other valuation
techniques. The fair value estimates are made at the end of each year based on available market
information and judgments about the financial instrument, such as estimates of timing and amount of
expected future cash flows. Such estimates do not reflect any premium or discount that could result
from offering for sale at one time the Companys entire holdings of a particular financial
instrument, nor do they consider that tax impact of the realization of unrealized gains or losses.
In many cases, the fair value estimates cannot be substantiated by comparison to independent
markets, nor can the disclosed value be realized in immediate settlement of the instrument.
As of December 31, 2008, the fair values of the Companys notes payable, senior notes and
lines of credit were approximately $195.4 million, $15.5 million and $60.0 million, respectively,
compared to the carrying values of $216.0 million, $16.3 million and $63.0 million, respectively.
The amounts recorded for accounts receivable, notes receivable, advances and accounts payable and
accrued liabilities approximate fair value due to their short-term nature.
Fair Value Measurements
Effective January 1, 2008, the Company adopted the requirements of
the Fair Value Measurements and Disclosures Topic. The Topic defines fair value, establishes a
framework for measuring fair value, and expands disclosures about fair value measurements. The
Topic applies to reported balances that are required or permitted to be measured at fair value
under existing accounting pronouncements; accordingly, the standard does not require any new fair
value measurements of reported balances.
The Topic emphasizes that fair value is a market-based measurement, not an entity-specific
measurement. Therefore, a fair value measurement should be determined based on the assumptions that
market participants would use in pricing the asset or liability. As a basis for considering market
participant assumptions in fair value measurements, the requirements of the Topic establishes a
fair value hierarchy that distinguishes between market participant assumptions based on market data
obtained from sources independent of the reporting entity (observable inputs that are classified
within Levels 1 and 2 of the hierarchy) and the reporting entitys own assumptions about market
participant assumptions (unobservable inputs classified within Level 3 of the hierarchy).
Level 1 inputs utilize quoted prices (unadjusted) in active markets for identical assets or
liabilities that we have the ability to access. Level 2 inputs are inputs other than quoted prices
included in Level 1 that are observable for the asset or liability, either directly or indirectly.
Level 2 inputs may include quoted prices for similar assets and liabilities in active markets, as
well as inputs that are observable for the asset or liability (other than quoted prices), such as
interest rates, foreign exchange rates, and yield curves that are observable at commonly quoted
intervals. Level 3 inputs are unobservable inputs for the asset or liability, which are typically
based on an entitys own assumptions, as there is little, if any, related market activity. In
instances where the determination of the fair value measurement is based on inputs from different
levels of the fair value hierarchy, the level in the fair value hierarchy within which the entire
fair value measurement falls is based on the lowest level input that is significant to the fair
value measurement in its entirety. The Companys assessment of the significance of a particular
input to the fair value measurement in its entirety requires judgment, and considers factors
specific to the asset or liability. In accordance with the provisions of the amended Fair Value
Measurements and Disclosures Topic, the Company has partially applied the provisions of the Fair
Value Measurements and Disclosures Topic only to its financial assets and liabilities recorded at
fair value, which consist of available-for-sale marketable securities and interest rate caps.
Stock-Based Compensation
Effective January 1, 2006, the Company adopted the requirements of
the Equity Topic, under the modified prospective transition method. The Topic requires the
measurement of compensation cost at the grant date, based upon the estimated fair value of the
award, and requires amortization of the related expense over the employees requisite service
period.
F-16
GRUBB & ELLIS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Loss) earnings per share
Basic (loss) earnings per share is computed by dividing net
(loss) income by the weighted average number of common shares outstanding during each period. The
computation of diluted (loss) earnings per share further assumes the dilutive effect of stock
options, stock warrants and contingently issuable shares. Contingently issuable shares represent
non-vested stock awards and unvested stock fund units in the deferred compensation plan. In
accordance with the requirements of the Earnings Per Share Topic, these shares are included in the
dilutive earnings per share calculation under the treasury stock method. Unless otherwise
indicated, all pre-merger NNN share data have been adjusted to reflect the conversion as a result
of the Merger (see Note 11 for additional information).
In June 2008, the FASB issued an amendment to the requirements of the Earnings Per Share
Topic
,
which addresses whether instruments granted in share-based payment transactions are
participating securities prior to vesting and, therefore, need to be included in the computation of
earnings per share under the two-class method. The amendment is effective retrospectively for
financial statements issued for fiscal years and interim periods beginning after December 15, 2008.
As a result of adopting the amendment to the Earnings Per Share Topic on January 1, 2009, the
Company has restated its earnings per share for the year ended December 31, 2007 as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As Previously
|
|
|
|
|
|
|
|
For the Year Ended December 31, 2007
|
|
Reported
(1)
|
|
|
Adjustment
|
|
|
As Adjusted
|
|
Basic earnings per share
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations attributable to
Grubb & Ellis Company
|
|
$
|
0.56
|
|
|
$
|
(0.01
|
)
|
|
$
|
0.55
|
|
Loss from discontinued operations attributable to
Grubb & Ellis Company
|
|
$
|
(0.01
|
)
|
|
$
|
(0.01
|
)
|
|
$
|
(0.02
|
)
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to Grubb & Ellis Company
|
|
$
|
0.55
|
|
|
$
|
(0.02
|
)
|
|
$
|
0.53
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations attributable to
Grubb & Ellis Company
|
|
$
|
0.56
|
|
|
$
|
(0.01
|
)
|
|
$
|
0.55
|
|
Loss from discontinued operations attributable to
Grubb & Ellis Company
|
|
$
|
(0.01
|
)
|
|
$
|
(0.01
|
)
|
|
$
|
(0.02
|
)
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to Grubb & Ellis Company
|
|
$
|
0.55
|
|
|
$
|
(0.02
|
)
|
|
$
|
0.53
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Amounts presented as previously reported have been reclassified to conform to current period presentation, to reflect the adoption of the
Consolidation Topic as discussed in note 2, the restatement discussed in note 3, and the reclassification made to discontinued operations as discussed in Note 20.
|
There was no impact on our earnings per share as a result of adopting this pronouncement for
the years ended December 31, 2008 and 2006.
Concentration of Credit Risk
Financial instruments that potentially subject the Company to
a concentration of credit risk are primarily cash investments and accounts receivable. The Company
currently maintains substantially all of its cash with several major financial institutions. The
Company has cash in financial institutions which is insured by the Federal Deposit Insurance
Corporation, or FDIC, up to $250,000 per depositor per insured bank. As of December 31, 2008, the
Company had cash accounts in excess of FDIC insured limits. The Company believes this risk is not
significant.
Accrued Claims and Settlements
The Company has maintained partially self-insured and
deductible programs for general liability, workers compensation and certain employee health care
costs. In addition, the Company assumed liabilities at the date of the Merger representing reserves
related to self insured errors and omissions program of the acquired company. Reserves for all 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. As of the date of the
Merger, the Company entered into a premium based insurance policy for all error and omission
coverage on claims arising after the date of the Merger. Claims arising prior to the date of the
Merger continue to be applied against the previously mentioned liability reserves assumed relative
to the acquired company.
Income Taxes
Income taxes are accounted for under the asset and liability method in
accordance with the requirements of the Income Taxes Topic. Deferred tax assets and liabilities are
determined based on temporary differences between the financial
F-17
GRUBB & ELLIS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
reporting and the tax basis of assets and liabilities and operating loss and tax credit carry forwards. Deferred tax assets and
liabilities are measured by applying enacted tax rates and laws and are released in the years in
which the temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax
rates is recognized in income in the period that includes the enactment date. Valuation allowances
are provided against deferred tax assets when it is more likely than not that some portion or all
of the deferred tax asset will not be realized. During the year ended December 31, 2008, the
Company recorded a valuation allowance of $48.9 million.
Effective January 1, 2007, the Company adopted an amendment to the requirements of the Income
Taxes Topic. The amended Topic requires prescribes a recognition threshold and measurement
attribute for the financial statement recognition and measurement of a tax position taken or
expected to be taken in a tax return.
As a result of the implementation of the amended Topic, the Company had no additional
liability that was required to be recorded; accordingly, no charge was taken to opening retained
earnings on January 1, 2007 upon adoption of the amended Topic.
Marketable Securities
The Company accounts for investments in marketable debt and equity
securities in accordance with the requirements of the Investments-Debt and Equity Securities Topic.
The Company determines the appropriate classification of debt and equity securities at the time of
purchase and reevaluates such designation as of each balance sheet date. Marketable securities
acquired are classified with the intent to generate a profit from short-term movements in market
prices as trading securities. Debt securities are classified as held to maturity when there is a
positive intent and ability to hold the securities to maturity. Marketable equity and debt
securities not classified as trading or held to maturity are classified as available for sale.
In accordance with the requirements of the Topic, trading securities are carried at their fair
value with realized and unrealized gains and losses included in the statement of operations. The
available for sale securities are carried at their fair market value and any difference between
cost and market value is recorded as unrealized gain or loss, net of income taxes, and is reported
as accumulated other comprehensive income in the consolidated statement of stockholders equity.
Premiums and discounts are recognized in interest income using the effective interest method.
Realized gains and losses and declines in value expected to be other-than-temporary on available
for sale securities are included in other income. The cost of securities sold is based on the
specific identification method. Interest and dividends on securities classified as available for
sale are included in interest income.
Comprehensive Income (Loss)
Pursuant to the requirements of the Comprehensive Income Topic,
the Company has included a calculation of comprehensive (loss) income in its accompanying
consolidated statements of stockholders equity for the years ended December 31, 2008, 2007 and
2006. Comprehensive (loss) income includes net (loss) income adjusted for certain revenues,
expenses, gains and losses that are excluded from net (loss) income.
Guarantees
The Company accounts for its guarantees in accordance with the requirements of
the Guarantees Topic. The Topic elaborates on the disclosures to be made by the guarantor in its
interim and annual financial statements about its obligations under certain guarantees that it has
issued. It also requires that a guarantor recognize, at the inception of a guarantee, a liability
for the fair value of the obligation undertaken in issuing the guarantee. Management evaluates
these guarantees to determine if the guarantee meets the criteria required to record a liability.
Segment Disclosure
As a result of the Merger in December 2007, the newly combined Companys
operating segments were evaluated for reportable segments. As a result, the legacy NNN reportable
segments were realigned into a single operating and reportable segment called Investment
Management. This realignment had no impact on the Companys consolidated balance sheet, results of
operations or cash flows. In accordance with the requirements of the Segment Reporting Topic, the
Company divides its services into three primary business segments, transaction services, investment
management and management services.
Derivative Instruments and Hedging Activities
The Company applies the requirements of the
Derivatives and Hedging Topic. The Topic requires companies to record derivatives on the balance
sheet as assets or liabilities, measured at fair value, while changes in that fair value may
increase or decrease reported net (loss) income or stockholders equity, depending on interest rate
levels and computed effectiveness of the derivatives, as that term is defined by the requirements
of the Topic, but will have no effect on cash flows. The Companys derivatives consist solely of
four interest rate cap agreements with third parties, which were executed in relation to its credit
agreement or notes payable obligations. These cap agreements were not accounted for as effective
cash flow hedges as of December 31, 2008.
Noncontrolling Interests
In December 2007, the FASB issued an amendment to the requirements of the Consolidation Topic.
The Consolidation Topic established new accounting and reporting standards for the non-controlling
interest in a subsidiary and for the deconsolidation of a subsidiary. The Topic requires that
noncontrolling interests be presented as a component of consolidated stockholders equity,
eliminates minority interest accounting such that the amount of net income attributable to the
noncontrolling interests is presented as part of consolidated net income in the accompanying
consolidated statements of operations and not as a separate component of income
F-18
GRUBB & ELLIS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
and expense, and requires that upon any changes in ownership that result in the loss of control of the subsidiary,
the noncontrolling interest be re-measured at fair value with the resultant gain or loss recorded
in net income. The requirements of the Topic became effective for fiscal years beginning on or
after December 15, 2008. The Company adopted the requirements of the Topic on a retrospective basis
on January 1, 2009. The adoption of the requirements of the Topic had an impact on the presentation
and disclosure of noncontrolling (minority) interests in the consolidated financial statements. As
a result of the retrospective presentation and disclosure requirements of the Topic, the Company is
required to reflect the change in presentation and disclosure for all periods
presented. Principal effect on the consolidated balance sheet as of December 31, 2008 related
to the adoption of the requirements of the Topic was the change in presentation of minority
interest from mezzanine to redeemable noncontrolling interest, as reported herein. Additionally,
the adoption of the requirements of the Topic had the effect of reclassifying (income) loss
attributable to noncontrolling interest in the consolidated statements of operations from minority
interest to separate line items. The Topic also requires that net income (loss) be adjusted to
include the net (income) loss attributable to the noncontrolling interest, and a new line item for
net income (loss) attributable to controlling interest be presented in the consolidated statements
of operations.
A noncontrolling interest relates to the interest in the consolidated entities that are not
wholly owned by the Company. As a result of adopting the requirements of the Consolidation Topic on
January 1, 2009, the Company has restated the December 31, 2008, 2007 and 2006 consolidated balance
sheets, as well as the statement of operations for the years ended December 31, 2008, 2007 and 2006
as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As Previously
|
|
|
|
|
|
|
|
As of December 31, 2008
|
|
Reported
|
|
|
Adjustment
|
|
|
As Adjusted
|
|
Minority interests
|
|
$
|
3,605
|
|
|
$
|
(3,605
|
)
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
Noncontrolling interest equity
|
|
$
|
|
|
|
$
|
3,605
|
|
|
$
|
3,605
|
|
|
|
|
|
|
|
|
|
|
|
Total equity
|
|
$
|
70,171
|
|
|
$
|
3,605
|
|
|
$
|
73,776
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As Previously
|
|
|
|
|
|
|
|
As of December 31, 2007
|
|
Reported
|
|
|
Adjustment
|
|
|
As Adjusted
|
|
Minority interests
|
|
$
|
29,896
|
|
|
$
|
(29,896
|
)
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
Noncontrolling interest equity
|
|
$
|
|
|
|
$
|
29,896
|
|
|
$
|
29,896
|
|
|
|
|
|
|
|
|
|
|
|
|
Total equity
|
|
$
|
404,056
|
|
|
$
|
29,896
|
|
|
$
|
433,952
|
|
|
|
|
|
|
|
|
|
|
|
|
F-19
GRUBB & ELLIS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As Previously
|
|
|
|
|
|
|
|
As of December 31, 2006
|
|
Reported
|
|
|
Adjustment
|
|
|
As Adjusted
|
|
Minority interests
|
|
$
|
7,551
|
|
|
$
|
(7,551
|
)
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
Noncontrolling interest equity
|
|
$
|
|
|
|
$
|
7,551
|
|
|
$
|
7,551
|
|
|
|
|
|
|
|
|
|
|
|
Total equity
|
|
$
|
217,125
|
|
|
$
|
7,551
|
|
|
$
|
224,676
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As Previously
|
|
|
|
|
|
|
|
For the Year Ended December 31, 2008
|
|
Reported
|
|
|
Adjustment
|
|
|
As Adjusted
|
|
Minority interest in loss
|
|
$
|
11,719
|
|
|
$
|
(11,719
|
)
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(330,870
|
)
|
|
$
|
(11,719
|
)
|
|
$
|
(342,589
|
)
|
|
|
|
|
|
|
|
|
|
|
Loss attributable to noncontrolling interests
|
|
$
|
|
|
|
$
|
(11,719
|
)
|
|
$
|
(11,719
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As Previously
|
|
|
|
|
|
|
|
For the Year Ended December 31, 2007
|
|
Reported
|
|
|
Adjustment
|
|
|
As Adjusted
|
|
Minority interest in income
|
|
$
|
(1,961
|
)
|
|
$
|
1,961
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
21,072
|
|
|
$
|
1,961
|
|
|
$
|
23,033
|
|
|
|
|
|
|
|
|
|
|
|
Income attributable to noncontrolling interests
|
|
$
|
|
|
|
$
|
1,961
|
|
|
$
|
1,961
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As Previously
|
|
|
|
|
|
|
|
For the Year Ended December 31, 2006
|
|
Reported
|
|
|
Adjustment
|
|
|
As Adjusted
|
|
Minority interest in income
|
|
$
|
(78
|
)
|
|
$
|
78
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
19,971
|
|
|
$
|
78
|
|
|
$
|
20,049
|
|
|
|
|
|
|
|
|
|
|
|
Income attributable to noncontrolling interests
|
|
$
|
|
|
|
$
|
78
|
|
|
$
|
78
|
|
|
|
|
|
|
|
|
|
|
|
Recently Issued Accounting Pronouncements
The Company follows the requirements of the Fair Value Measurements and Disclosures Topic of
the FASB Accounting Standards Codification. The Topic defines fair value, establishes a framework
for measuring fair value in generally accepted accounting principles, and expands disclosures about
fair value instruments. In February 2008, the FASB amended the Topic to delay the effective date of
the Fair Value Measurements and Disclosures for non-financial assets and non-financial liabilities,
except for items that are recognized or disclosed at fair value in the financial statements on a
recurring basis (that is, at least annually). There was no effect on the Companys consolidated
financial statements as a result of the adoption of the Topic as of January 1, 2008 as it relates
to financial assets and financial liabilities. For items within its scope, the effective date of
Fair Value Measurements and Disclosures Topic to fiscal years beginning after November 15, 2008,
and interim periods within those fiscal years. The Company will adopt the requirements of the Topic
as it relates to non-financial assets and non-financial liabilities in the first quarter of 2009
and does not believe adoption will have a material effect on its consolidated financial statements.
In February 2007, the FASB issued the requirements of the Financial Instruments Topic. The
Topic permits entities to choose to measure many financial instruments and certain other items at
fair value. The objective of the guidance is to improve financial reporting by providing entities
with the opportunity to mitigate volatility in reported earnings caused by measuring related assets
and liabilities differently without having to apply complex hedge accounting provisions. The
Company adopted the Topic on a prospective basis on January 1, 2008. The adoption of the Topic did
not have a material impact on the consolidated financial statements since the Company did not elect
to apply the fair value option for any of its eligible financial instruments or other items on the
January 1, 2008 effective date.
In December 2007, the FASB issued an amendment to the requirements of the Business
Combinations Topic. The amended Topic requires will change the accounting for business combinations
and will require an acquiring entity to recognize all the assets acquired and liabilities assumed
in a transaction at the acquisition-date fair value with limited exceptions. The Topic changed the
accounting treatment and disclosure for certain specific items in a business combination. The Topic
applies prospectively to business combinations for which the acquisition date is on or after the
beginning of the first annual reporting period beginning on or after
December 15, 2008. The adoption of the requirements of the Topic will materially affect the
accounting for any future business combinations.
F-20
GRUBB & ELLIS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
In March 2008, the FASB issued the requirements of the Derivatives and Hedging Topic. The
Topic is intended to improve financial reporting of derivative instruments and hedging activities
by requiring enhanced disclosures to enable investors to better understand their effects on an
entitys financial position, financial performance, and cash flows. The Topic achieves these
improvements by requiring disclosure of the fair values of derivative instruments and their gains
and losses in a tabular format. It also provides more information about an entitys liquidity by
requiring disclosure of derivative features that are credit risk-related. Finally, it requires
cross-referencing within footnotes to enable financial statement users to locate important
information about derivative instruments. The Topic is effective for financial statements issued
for fiscal years and interim periods beginning after November 15, 2008, with early application
encouraged. The Company will adopt the requirements of the Derivatives and Hedging Topic in the
first quarter of 2009 and does not believe the adoption will have a material effect on its
consolidated financial statements.
In April 2008, the FASB issued an amendment to the requirements of the Intangibles Goodwill
and Other Topic. The requirements of the amended Topic is intended to improve the consistency
between the useful life of recognized intangible assets and the period of expected cash flows used
to measure the fair value of the assets. The amendment changes the factors an entity should
consider in developing renewal or extension assumptions in determining the useful life of
recognized intangible assets. In addition the amended Topic requires disclosure of the entitys
accounting policy regarding costs incurred to renew or extend the term of recognized intangible
assets, the weighted average period to the next renewal or extension, and the total amount of
capitalized costs incurred to renew or extend the term of recognized intangible assets. The
requirements of the amended Topic is effective for financial statements issued for fiscal years and
interim periods beginning after December 15, 2008. The Company will adopt the requirements of the
amended Topic on January 1, 2009. The adoption of the amended Topic is not expected to have a
material impact on the consolidated financial statements.
In December 2008, FASB issued an amendment to the requirements of the Transfers and Servicing
Topic and an amendment to the requirements of the Consolidation Topic. The purpose of the amendment
is to improve disclosures by public entities and enterprises. The amended Topic requires public
entities to provide additional disclosures about transferors continuing involvements with
transferred financial assets. The amended Topic requires public enterprises to provide additional
disclosures about their involvement with variable interest entities. The requirements of the
amended Topic is effective for financial statements issued for fiscal years and interim periods
ending after December 15, 2008. For periods after the initial adoption date, comparative
disclosures are required. The Company adopted the requirements of the amended Topic on December 31,
2008.
3. RESTATEMENT OF PREVIOUSLY ISSUED FINANCIAL STATEMENTS
On March 16, 2009, management and the Audit Committee of the Board of Directors concluded that
the Companys previously issued audited financial statements should be restated, for the reasons
discussed below.
The restatement of the Companys financial statements was based upon a review of the
accounting treatment of certain transactions entered into by NNN with respect to certain
tenant-in-common investment programs (
TIC Programs
) sponsored by NNN prior to the Merger. The
review of NNNs accounting treatment was prompted by the Company being made aware of the existence
of a letter agreement, wherein NNN agreed to provide certain investors with a right to exchange
their investment in certain TIC Programs for an investment in a different TIC Program (the
Exchange Letter
). In the course of its review, the Company became aware of additional letter
agreements, some providing for a right of exchange similar to that contained in the Exchange
Letter, another that provided the investor with certain repurchase rights under certain
circumstances with respect to their investment and others in which NNN committed to provide certain
investors in certain TIC Programs a specified rate of return. The agreements containing such rights
of exchange and repurchase rights pertain to initial investments in TIC programs totaling $31.6
million.
Upon review of the accounting treatment for these letter agreements as well as other TIC
Programs and master lease arrangements, management concluded that some of the letter agreements had
not been accounted for and that revenue had been incorrectly recognized as it related to these
letter agreements as well as other TIC Programs and master lease arrangements under the
requirements of the Real EstateRetail Land Topic and the requirements of Real EstateGeneral
Topic because the Company had various forms of continuing involvement after the close of the sale
of the investments in the TIC Programs to third-parties. As a result of the recognition by the
Company of the applicable fee revenue in the incorrect accounting periods, the Company reduced
retained earnings as of January 1, 2006 by approximately $8.7 million; increased revenues in 2006
by approximately $518,000; and increased revenues in 2007 by approximately $251,000 to correct
these errors.
Management also concluded that because NNN had various forms of continuing involvement after
the close of the sale of the investments in the TIC Programs to third-parties, certain entities
involved in the TIC Programs were variable interest entities in which the Company was the primary
beneficiary and therefore were required to be consolidated in accordance with the requirements of
the Consolidation Topic. As a result, the Company increased total assets by $12.3 million, total
liabilities by $1.1 million and minority interest by $11.2 million at December 31, 2007 to correct
this error.
Management further concluded the method used for December 31, 2007 to present, in its
statement of cash flows, its deconsolidation of certain entities the Company no longer controlled
was erroneous to the extent certain non cash investing and
F-21
GRUBB & ELLIS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
financing transactions were presented as sources and uses of cash. As a result of this error,
cash flows used in investing activities increased by $251.6 million and cash flows provided by
financing activities increased by $251.9 million.
Restatement adjustments pertaining to income taxes relate to the revenue recognition
restatement adjustments described above.
All applicable notes have been restated to reflect the above described adjustments.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2007
|
|
|
|
As previously
|
|
|
|
|
|
|
|
(In thousands)
|
|
reported(1)
|
|
|
Adjustments
|
|
|
As Restated
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted cash
|
|
$
|
69,098
|
|
|
$
|
925
|
|
|
$
|
70,023
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current portion of accounts receivable from related parties net
|
|
|
32,575
|
|
|
|
220
|
|
|
|
32,795
|
|
Current portion of advances to related parties net
|
|
|
7,010
|
|
|
|
(343
|
)
|
|
|
6,667
|
|
Deferred tax assets
|
|
|
7,854
|
|
|
|
137
|
|
|
|
7,991
|
|
Total current assets
|
|
|
497,135
|
|
|
|
939
|
|
|
|
498,074
|
|
Investments in unconsolidated entities
|
|
|
11,028
|
|
|
|
11,163
|
|
|
|
22,191
|
|
Total assets
|
|
|
976,440
|
|
|
|
12,102
|
|
|
|
988,542
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES, MINORITY INTEREST AND STOCKHOLDERS EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable and accrued expenses
|
|
|
100,867
|
|
|
|
1,137
|
|
|
|
102,004
|
|
Other liabilities
|
|
|
6,712
|
|
|
|
7,305
|
|
|
|
14,017
|
|
Total current liabilities
|
|
|
369,322
|
|
|
|
8,442
|
|
|
|
377,764
|
|
Long-term liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities
|
|
|
32,837
|
|
|
|
(2,922
|
)
|
|
|
29,915
|
|
Total liabilities
|
|
|
549,070
|
|
|
|
5,520
|
|
|
|
554,590
|
|
Stockholders equity:
|
|
|
|
|
|
|
|
|
|
|
|
|
Retained earnings
|
|
|
15,381
|
|
|
|
(4,589
|
)
|
|
|
10,792
|
|
Total Grubb & Ellis Company stockholders equity
|
|
|
408,645
|
|
|
|
(4,589
|
)
|
|
|
404,056
|
|
Noncontrolling interests
|
|
|
18,725
|
|
|
|
11,171
|
|
|
|
29,896
|
|
Total equity
|
|
|
427,370
|
|
|
|
6,582
|
|
|
|
433,952
|
|
Total liabilities and stockholders equity
|
|
|
976,440
|
|
|
|
12,102
|
|
|
|
988,542
|
|
F-22
GRUBB & ELLIS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For The Year Ended December 31, 2007
|
|
For The Year Ended December 31, 2006
|
|
|
As Previously
|
|
|
|
|
|
|
|
|
|
As Previously
|
|
|
|
|
(In thousands)
|
|
Reported(1)
|
|
Adjustments
|
|
As Restated
|
|
Reported(1)
|
|
Adjustments
|
|
As Restated
|
REVENUE
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment management
|
|
$
|
149,400
|
|
|
$
|
251
|
|
|
$
|
149,651
|
|
|
$
|
99,081
|
|
|
$
|
518
|
|
|
$
|
99,599
|
|
Total revenue
|
|
|
229,406
|
|
|
|
251
|
|
|
|
229,657
|
|
|
|
108,025
|
|
|
|
518
|
|
|
|
108,543
|
|
OPERATING EXPENSE
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General and administrative
|
|
|
44,251
|
|
|
|
|
|
|
|
44,251
|
|
|
|
29,845
|
|
|
|
343
|
|
|
|
30,188
|
|
Interest
|
|
|
10,814
|
|
|
|
4
|
|
|
|
10,818
|
|
|
|
5,569
|
|
|
|
1,196
|
|
|
|
6,765
|
|
Total operating expense
|
|
|
195,719
|
|
|
|
4
|
|
|
|
195,723
|
|
|
|
96,094
|
|
|
|
1,539
|
|
|
|
97,633
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OPERATING INCOME (LOSS)
|
|
|
33,687
|
|
|
|
247
|
|
|
|
33,934
|
|
|
|
11,931
|
|
|
|
(1,021
|
)
|
|
|
10,910
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER INCOME (EXPENSE)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity in earnings (losses) of unconsolidated entities
|
|
|
(339
|
)
|
|
|
2,368
|
|
|
|
2,029
|
|
|
|
491
|
|
|
|
1,457
|
|
|
|
1,948
|
|
Interest income
|
|
|
2,994
|
|
|
|
2
|
|
|
|
2,996
|
|
|
|
713
|
|
|
|
|
|
|
|
713
|
|
Other
|
|
|
(650
|
)
|
|
|
185
|
|
|
|
(465
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income
|
|
|
2,005
|
|
|
|
2,555
|
|
|
|
4,560
|
|
|
|
1,204
|
|
|
|
1,457
|
|
|
|
2,661
|
|
Income from continuing operations before income tax (provision)
benefit
|
|
|
35,692
|
|
|
|
2,802
|
|
|
|
38,494
|
|
|
|
13,135
|
|
|
|
436
|
|
|
|
13,571
|
|
Income tax (provision) benefit
|
|
|
(14,601
|
)
|
|
|
(152
|
)
|
|
|
(14,753
|
)
|
|
|
4,230
|
|
|
|
3,211
|
|
|
|
7,441
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
|
21,091
|
|
|
|
2,650
|
|
|
|
23,741
|
|
|
|
17,365
|
|
|
|
3,647
|
|
|
|
21,012
|
|
NET INCOME
|
|
$
|
20,383
|
|
|
$
|
2,650
|
|
|
$
|
23,033
|
|
|
$
|
16,402
|
|
|
$
|
3,647
|
|
|
$
|
20,049
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to noncontrolling interests
|
|
|
(459
|
)
|
|
|
2,420
|
|
|
|
1,961
|
|
|
|
308
|
|
|
|
(230
|
)
|
|
|
78
|
|
Net income attributable to Grubb & Ellis Company
|
|
$
|
20,842
|
|
|
$
|
230
|
|
|
$
|
21,072
|
|
|
$
|
16,094
|
|
|
$
|
3,877
|
|
|
$
|
19,971
|
|
Basic earnings (loss) per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations attributable to Grubb &
Ellis Company
|
|
$
|
0.54
|
|
|
$
|
0.01
|
|
|
$
|
0.55
|
|
|
$
|
0.87
|
|
|
$
|
0.19
|
|
|
$
|
1.06
|
|
Loss from discontinued operations attributable to Grubb &
Ellis Company
|
|
$
|
(0.02
|
)
|
|
$
|
|
|
|
$
|
(0.02
|
)
|
|
$
|
(0.05
|
)
|
|
$
|
|
|
|
$
|
(0.05
|
)
|
Net earnings per share attributable to Grubb & Ellis Company
|
|
$
|
0.52
|
|
|
$
|
0.01
|
|
|
$
|
0.53
|
|
|
$
|
0.82
|
|
|
$
|
0.19
|
|
|
$
|
1.01
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings (loss) per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations attributable to Grubb &
Ellis Company
|
|
$
|
0.54
|
|
|
$
|
0.01
|
|
|
$
|
0.55
|
|
|
$
|
0.87
|
|
|
$
|
0.19
|
|
|
$
|
1.06
|
|
Loss from discontinued operations attributable to Grubb &
Ellis Company
|
|
$
|
(0.02
|
)
|
|
$
|
|
|
|
$
|
(0.02
|
)
|
|
$
|
(0.05
|
)
|
|
$
|
|
|
|
$
|
(0.05
|
)
|
Net earnings per share attributable to Grubb & Ellis Company
|
|
$
|
0.52
|
|
|
$
|
0.01
|
|
|
$
|
0.53
|
|
|
$
|
0.82
|
|
|
$
|
0.19
|
|
|
$
|
1.01
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic weighted average shares outstanding
|
|
|
38,652
|
|
|
|
|
|
|
|
38,652
|
|
|
|
19,681
|
|
|
|
|
|
|
|
19,681
|
|
Diluted weighted average shares outstanding
|
|
|
38,652
|
|
|
|
|
|
|
|
38,652
|
|
|
|
19,694
|
|
|
|
|
|
|
|
19,694
|
|
|
|
|
(1)
|
|
Amounts presented as previously reported have been reclassified
to conform to current year presentation, to reflect the adoption
of the Consolidation Topic and the adoption of the amended
Earnings Per Share Topic. See discussion of reclassifications in
note 2.
|
F-23
GRUBB & ELLIS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For The Year Ended December 31, 2007
|
|
For The Year Ended December 31, 2006
|
|
|
As
|
|
|
|
|
|
|
|
|
|
As
|
|
|
|
|
|
|
|
|
Previously
|
|
|
|
|
|
As
|
|
Previously
|
|
|
|
|
|
As
|
(In thousands)
|
|
Reported
|
|
Adjustments
|
|
Restated
|
|
Reported(1)
|
|
Adjustments
|
|
Restated
|
CASH FLOWS FROM OPERATING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
20,383
|
|
|
$
|
2,650
|
|
|
$
|
23,033
|
|
|
$
|
16,402
|
|
|
$
|
3,647
|
|
|
$
|
20,049
|
|
Adjustments to reconcile net income to net cash provided by
operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity in losses (earnings) of unconsolidated entities
|
|
|
339
|
|
|
|
(2,368
|
)
|
|
|
(2,029
|
)
|
|
|
(491
|
)
|
|
|
(1,457
|
)
|
|
|
(1,948
|
)
|
Depreciation and amortization
|
|
|
9,668
|
|
|
|
(1,016
|
)
|
|
|
8,652
|
|
|
|
2,086
|
|
|
|
|
|
|
|
2,086
|
|
Loss on disposal of property, equipment and leasehold
improvements
|
|
|
|
|
|
|
861
|
|
|
|
861
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation
|
|
|
9,041
|
|
|
|
|
|
|
|
9,041
|
|
|
|
3,865
|
|
|
|
|
|
|
|
3,865
|
|
Compensation expense on profit sharing arrangements
|
|
|
|
|
|
|
1,999
|
|
|
|
1,999
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization/write-off of intangible contract rights
|
|
|
3,249
|
|
|
|
(116
|
)
|
|
|
3,133
|
|
|
|
410
|
|
|
|
|
|
|
|
410
|
|
Amortization of deferred financing costs
|
|
|
1,713
|
|
|
|
|
|
|
|
1,713
|
|
|
|
31
|
|
|
|
|
|
|
|
31
|
|
Gain on sale of marketable equity securities
|
|
|
|
|
|
|
(184
|
)
|
|
|
(184
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred income taxes
|
|
|
(5,918
|
)
|
|
|
(1,191
|
)
|
|
|
(7,109
|
)
|
|
|
(4,936
|
)
|
|
|
(3,211
|
)
|
|
|
(8,147
|
)
|
Allowance for uncollectible accounts
|
|
|
859
|
|
|
|
(53
|
)
|
|
|
806
|
|
|
|
1,408
|
|
|
|
|
|
|
|
1,408
|
|
Other operating non cash (gains) losses
|
|
|
(119
|
)
|
|
|
127
|
|
|
|
8
|
|
|
|
(448
|
)
|
|
|
343
|
|
|
|
(105
|
)
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable from related parties
|
|
|
(8,907
|
)
|
|
|
14,925
|
|
|
|
6,018
|
|
|
|
(2,636
|
)
|
|
|
1,382
|
|
|
|
(1,254
|
)
|
Prepaid expenses and other assets
|
|
|
366
|
|
|
|
(36,661
|
)
|
|
|
(36,295
|
)
|
|
|
(1,062
|
)
|
|
|
143
|
|
|
|
(919
|
)
|
Accounts payable and accrued expenses
|
|
|
1,110
|
|
|
|
14,774
|
|
|
|
15,884
|
|
|
|
51
|
|
|
|
2,316
|
|
|
|
2,367
|
|
Other liabilities
|
|
|
1,857
|
|
|
|
6,155
|
|
|
|
8,012
|
|
|
|
521
|
|
|
|
(1,008
|
)
|
|
|
(487
|
)
|
Net cash provided by (used in) operating activities
|
|
|
33,641
|
|
|
|
(98
|
)
|
|
|
33,543
|
|
|
|
15,201
|
|
|
|
2,155
|
|
|
|
17,356
|
|
CASH FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of property and equipment
|
|
|
(2,693
|
)
|
|
|
(638
|
)
|
|
|
(3,331
|
)
|
|
|
(1,984
|
)
|
|
|
(355
|
)
|
|
|
(2,339
|
)
|
Purchases of marketable equity securities
|
|
|
(2,087
|
)
|
|
|
(28,645
|
)
|
|
|
(30,732
|
)
|
|
|
(2,360
|
)
|
|
|
|
|
|
|
(2,360
|
)
|
Proceeds from sale of marketable equity securities
|
|
|
|
|
|
|
22,870
|
|
|
|
22,870
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Advances to related parties
|
|
|
(5,340
|
)
|
|
|
(33,772
|
)
|
|
|
(39,112
|
)
|
|
|
(19,268
|
)
|
|
|
|
|
|
|
(19,268
|
)
|
Proceeds from repayment of advances to related parties
|
|
|
3,072
|
|
|
|
114,424
|
|
|
|
117,496
|
|
|
|
16,713
|
|
|
|
|
|
|
|
16,713
|
|
Payments to related parties
|
|
|
(3,080
|
)
|
|
|
376
|
|
|
|
(2,704
|
)
|
|
|
|
|
|
|
(1,064
|
)
|
|
|
(1,064
|
)
|
Origination of notes receivable from related parties
|
|
|
(7,600
|
)
|
|
|
(31,700
|
)
|
|
|
(39,300
|
)
|
|
|
(10,000
|
)
|
|
|
|
|
|
|
(10,000
|
)
|
Proceeds from repayment of notes receivable from related
parties
|
|
|
10,000
|
|
|
|
31,700
|
|
|
|
41,700
|
|
|
|
777
|
|
|
|
|
|
|
|
777
|
|
Investments in unconsolidated entities
|
|
|
(2,250
|
)
|
|
|
(6,826
|
)
|
|
|
(9,076
|
)
|
|
|
596
|
|
|
|
(112,368
|
)
|
|
|
(111,772
|
)
|
Sale of tenant-in-common interests in unconsolidated
entities
|
|
|
|
|
|
|
20,466
|
|
|
|
20,466
|
|
|
|
|
|
|
|
101,128
|
|
|
|
101,128
|
|
Distributions of capital received from investments in
unconsolidated entities
|
|
|
|
|
|
|
1,256
|
|
|
|
1,256
|
|
|
|
|
|
|
|
20,049
|
|
|
|
20,049
|
|
Acquisition of properties
|
|
|
(677,392
|
)
|
|
|
72,266
|
|
|
|
(605,126
|
)
|
|
|
(80,905
|
)
|
|
|
|
|
|
|
(80,905
|
)
|
Proceeds from sale of properties
|
|
|
472,553
|
|
|
|
(379,608
|
)
|
|
|
92,945
|
|
|
|
31,684
|
|
|
|
|
|
|
|
31,684
|
|
Real estate deposits and pre-acquisition costs
|
|
|
(11,686
|
)
|
|
|
(38,516
|
)
|
|
|
(50,202
|
)
|
|
|
(15,948
|
)
|
|
|
1,842
|
|
|
|
(14,106
|
)
|
Proceeds from collection of real estate deposits and
pre-acquisition costs
|
|
|
12,749
|
|
|
|
36,678
|
|
|
|
49,427
|
|
|
|
33,768
|
|
|
|
(7,046
|
)
|
|
|
26,722
|
|
Restricted cash
|
|
|
(21,909
|
)
|
|
|
(31,916
|
)
|
|
|
(53,825
|
)
|
|
|
(2,787
|
)
|
|
|
(1,277
|
)
|
|
|
(4,064
|
)
|
Net cash (used in) provided by investing activities
|
|
|
(235,324
|
)
|
|
|
(251,585
|
)
|
|
|
(486,909
|
)
|
|
|
(57,112
|
)
|
|
|
909
|
|
|
|
(56,203
|
)
|
CASH FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-24
GRUBB & ELLIS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For The Year Ended December 31, 2007
|
|
For The Year Ended December 31, 2006
|
|
|
As
|
|
|
|
|
|
|
|
|
|
As
|
|
|
|
|
|
|
|
|
Previously
|
|
|
|
|
|
As
|
|
Previously
|
|
|
|
|
|
As
|
(In thousands)
|
|
Reported
|
|
Adjustments
|
|
Restated
|
|
Reported(1)
|
|
Adjustments
|
|
Restated
|
Advances on line of credit
|
|
|
(30,000
|
)
|
|
|
|
|
|
|
(30,000
|
)
|
|
|
|
|
|
|
14,000
|
|
|
|
14,000
|
|
Repayment of advances on line of credit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(8,500
|
)
|
|
|
(14,000
|
)
|
|
|
(22,500
|
)
|
Borrowings on notes payable and
capital lease obligations
|
|
|
239,888
|
|
|
|
307,127
|
|
|
|
547,015
|
|
|
|
71,106
|
|
|
|
49,605
|
|
|
|
120,711
|
|
Repayments of notes payable and
capital leases obligations
|
|
|
(62,874
|
)
|
|
|
(80,974
|
)
|
|
|
(143,848
|
)
|
|
|
(36,820
|
)
|
|
|
(59,110
|
)
|
|
|
(95,930
|
)
|
Other financing costs
|
|
|
850
|
|
|
|
|
|
|
|
850
|
|
|
|
(1,973
|
)
|
|
|
106
|
|
|
|
(1,867
|
)
|
Contributions from minority interests
|
|
|
13,409
|
|
|
|
28,652
|
|
|
|
42,061
|
|
|
|
904
|
|
|
|
6,650
|
|
|
|
7,554
|
|
Distributions to minority interests
|
|
|
|
|
|
|
(2,866
|
)
|
|
|
(2,866
|
)
|
|
|
|
|
|
|
(315
|
)
|
|
|
(315
|
)
|
Net cash provided by (used in)
financing activities
|
|
|
148,529
|
|
|
|
251,939
|
|
|
|
400,468
|
|
|
|
143,589
|
|
|
|
(3,064
|
)
|
|
|
140,525
|
|
NET
(DECREASE)
INCREASE IN CASH
|
|
|
(53,154
|
)
|
|
|
256
|
|
|
|
(52,898
|
)
|
|
|
101,678
|
|
|
|
|
|
|
|
101,678
|
|
Cash and cash equivalents End of year
|
|
$
|
49,072
|
|
|
$
|
256
|
|
|
$
|
49,328
|
|
|
$
|
102,226
|
|
|
$
|
|
|
|
$
|
102,226
|
|
SUPPLEMENTAL DISCLOSURE OF NONCASH
ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deconsolidation of assets held by variable
interest entities
|
|
$
|
|
|
|
$
|
372,674
|
|
|
$
|
372,674
|
|
|
$
|
|
|
|
$
|
28,016
|
|
|
$
|
28,016
|
|
Deconsolidation of liabilities held by
variable interest entities
|
|
$
|
|
|
|
$
|
269,732
|
|
|
$
|
269,732
|
|
|
$
|
|
|
|
$
|
17,449
|
|
|
$
|
17,449
|
|
|
|
|
(1)
|
|
Amounts presented as previously reported have been reclassified
to conform to current year presentation. See discussion of
reclassifications in note 2.
|
4. MARKETABLE SECURITIES
The Company has partially applied the the requirements of the Fair Value Measurements and
Disclosures Topic to its financial assets recorded at fair value, which consist of
available-for-sale marketable securities. The Topic establishes a three-tiered fair value hierarchy
that prioritizes inputs to valuation techniques used in fair value calculations. Level 1 inputs,
the highest priority, are quoted prices in active markets for identical assets, while other levels
use observable market data or internally-developed valuation models. The valuation of the Companys
available-for-sale marketable securities is based on quoted prices in active markets for identical
securities.
The historical cost and estimated fair value of the available-for-sale marketable securities
held by the Company are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2007
|
|
|
|
|
|
|
|
Gross Unrealized
|
|
|
|
|
(In thousands)
|
|
Historical Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Market Value
|
|
Marketable equity securities
|
|
$
|
4,440
|
|
|
$
|
|
|
|
$
|
(1,355
|
)
|
|
$
|
3,085
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales of marketable equity securities resulted in realized losses of approximately $1.8
million during 2008, of which the Company recognized $1.6 million of these losses during the second
quarter, prior to the sale of all the securities, as the Company believed that the decline in the
value of these securities was other than temporary. Sales of equity securities resulted in realized
gains of $1.2 million and realized losses of $1.0 million for the year ended December 31, 2007.
There were no sales of equity securities for the year ended December 31, 2006.
F-25
GRUBB & ELLIS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Investments in Limited Partnerships
Since the acquisition of its subsidiary, Grubb & Ellis Alesco Global Advisors, LLC (
Alesco
)
in 2007, the Company serves as general partner and investment advisor to six hedge fund limited
partnerships, five of which are required to be consolidated: Grubb & Ellis AGA Realty Income Fund,
LP, AGA Strategic Realty Fund, L.P., AGA Global Realty Fund LP and AGA Realty Income Partners LP
and one mutual fund which is required to be consolidated, Grubb & Ellis Realty Income Fund.
In accordance with the requirements of the Consolidation Topic, Alesco consolidates five hedge
fund limited partnerships as the rights of the limited partners do not overcome the rights of the
general partner.
For the years ended December 31, 2008 and 2007, Alesco had investment losses of approximately
$4.6 million and $680,000, respectively, which are reflected in other expense and offset in
minority interest in loss of consolidated entities on the statements of operations. Alesco earned
approximately $103,000 and $15,000 of management fees based on ownership interest under the
agreements for the years ended December 31, 2008 and 2007, respectively. As of December 31, 2008
and 2007 these limited partnerships had assets of approximately $1.5 million and $6.0 million,
respectively, primarily consisting of exchange traded marketable securities, including equity
securities and foreign currencies.
The following table reflects trading securities. The original cost, estimated market value and
gross unrealized appreciation and depreciation of equity securities are presented in the tables
below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2008
|
|
|
As of December 31, 2007
|
|
|
|
|
|
|
|
Gross
|
|
|
Fair
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair
|
|
|
|
Historical
|
|
|
Unrealized
|
|
|
Market
|
|
|
Historical
|
|
|
Gross Unrealized
|
|
|
Market
|
|
(In thousands)
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Value
|
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Value
|
|
Equity securities
|
|
$
|
1,933
|
|
|
$
|
12
|
|
|
$
|
(435
|
)
|
|
$
|
1,510
|
|
|
$
|
7,250
|
|
|
$
|
134
|
|
|
$
|
(1,417
|
)
|
|
$
|
5,967
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For The Year Ended
|
|
|
For The Year Ended
|
|
|
|
December 31, 2008
|
|
|
December 31, 2007
|
|
|
|
|
|
|
|
Realized
|
|
|
Unrealized
|
|
|
|
|
|
|
|
|
|
|
Realized
|
|
|
Unrealized
|
|
|
|
|
|
|
Investment
|
|
|
Gains
|
|
|
Gains
|
|
|
|
|
|
|
Investment
|
|
|
Gains
|
|
|
Gains
|
|
|
|
|
(In thousands)
|
|
Income
|
|
|
(Losses)
|
|
|
(Losses)
|
|
|
Total
|
|
|
Income
|
|
|
(Losses)
|
|
|
(Losses)
|
|
|
Total
|
|
Equity securities
|
|
$
|
307
|
|
|
$
|
(5,454
|
)
|
|
$
|
841
|
|
|
$
|
(4,306
|
)
|
|
$
|
163
|
|
|
$
|
(185
|
)
|
|
$
|
(618
|
)
|
|
$
|
(640
|
)
|
Less investment
expenses
|
|
|
(283
|
)
|
|
|
|
|
|
|
|
|
|
|
(283
|
)
|
|
|
(40
|
)
|
|
|
|
|
|
|
|
|
|
|
(40
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
24
|
|
|
$
|
(5,454
|
)
|
|
$
|
841
|
|
|
$
|
(4,589
|
)
|
|
$
|
123
|
|
|
$
|
(185
|
)
|
|
$
|
(618
|
)
|
|
$
|
(680
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-26
GRUBB & ELLIS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
5. RELATED PARTIES
Related party transactions as of December 31, 2008 and 2007 are summarized below:
Accounts Receivable
Accounts receivable from related parties consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
(In thousands)
|
|
2008
|
|
|
2007
|
|
Accrued property management fees
|
|
$
|
23,298
|
|
|
$
|
19,574
|
|
Accrued lease commissions
|
|
|
7,720
|
|
|
|
9,945
|
|
Other accrued fees
|
|
|
3,372
|
|
|
|
4,432
|
|
Other receivables
|
|
|
647
|
|
|
|
4,147
|
|
Accrued asset management fees
|
|
|
1,725
|
|
|
|
1,206
|
|
Accounts receivable from sponsored REITs
|
|
|
4,768
|
|
|
|
4,796
|
|
Accrued real estate acquisition fees
|
|
|
1,834
|
|
|
|
87
|
|
|
|
|
|
|
|
|
Total
|
|
|
43,364
|
|
|
|
44,187
|
|
Allowance for uncollectible receivables
|
|
|
(9,662
|
)
|
|
|
(1,032
|
)
|
|
|
|
|
|
|
|
Accounts receivable from related parties net
|
|
|
33,702
|
|
|
|
43,155
|
|
Less portion classified as current
|
|
|
(22,630
|
)
|
|
|
(32,795
|
)
|
|
|
|
|
|
|
|
Non-current portion
|
|
$
|
11,072
|
|
|
$
|
10,360
|
|
Advances to Related Parties
The Company makes advances to affiliated real estate entities under management in the normal
course of business. Such advances are uncollateralized, generally have payment terms of one year or
less and bear interest at 6.0% to 12.0% per annum. The advances consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
(In thousands)
|
|
|
|
|
|
Restated
|
|
Advances to properties of related parties
|
|
$
|
14,714
|
|
|
$
|
9,823
|
|
Advances to related parties
|
|
|
2,937
|
|
|
|
2,434
|
|
|
|
|
|
|
|
|
Total
|
|
|
17,651
|
|
|
|
12,257
|
|
Allowance for uncollectible advances
|
|
|
(3,170
|
)
|
|
|
(1,839
|
)
|
|
|
|
|
|
|
|
Advances to related parties net
|
|
|
14,481
|
|
|
|
10,418
|
|
Less portion classified as current
|
|
|
(2,982
|
)
|
|
|
(6,667
|
)
|
|
|
|
|
|
|
|
Non-current portion
|
|
$
|
11,499
|
|
|
$
|
3,751
|
|
|
|
|
|
|
|
|
As of December 31, 2007, advances to a program that is 30.0% owned and managed by Anthony
W. Thompson, the Companys former Chairman and a significant shareholder, who subsequently resigned
in February 2008 but remains a substantial stockholder of the Company, totaled $1.0 million
including accrued interest. These amounts were repaid in full during the year ended December 31,
2008 and as of December 31, 2008 there were no outstanding advances related to this program.
However, as of December 31, 2008, accounts receivable totaling $310,000 is due from this program.
On November 4, 2008, the Company made a formal written demand to Mr. Thompson for these monies.
As of December 31, 2008, advances to a program that is 40.0% owned and, as of April 1, 2008,
managed by Mr. Thompson totaled $983,000, which includes $61,000 in accrued interest. As of
December 31, 2008, the total outstanding balance of $983,000 was past due. The total past due
amount of $983,000 has been reserved for and is included in the allowance for uncollectible
advances. On November 4, 2008 and April 3, 2009, the Company made a formal written demand to Mr.
Thompson for these monies.
F-27
GRUBB & ELLIS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Notes Receivable From Related Party
In December 2007, the Company advanced $10.0 million to Grubb & Ellis Apartment REIT, Inc.
(
Apartment REIT
) on an unsecured basis. The unsecured note required monthly interest-only
payments which began on January 1, 2008. The balance owed to the Company as of December 31, 2007
which consisted of $7.6 million in principal was repaid in full in the first quarter of 2008.
In June 2008, the Company advanced $6.0 million to Grubb & Ellis Healthcare REIT, Inc.
(
Healthcare REIT
) on an unsecured basis. The unsecured note had a maturity date of December 30,
2008 and bore interest at a fixed rate of 4.96% per annum, however, Healthcare REIT repaid in full
the $6.0 million note in the third quarter of 2008. The note required monthly interest-only
payments beginning on August 1, 2008 and provided for a default interest rate in an event of
default equal to 2.00% per annum in excess of the stated interest rate.
In June 2008, the Company advanced $3.7 million to Apartment REIT on an unsecured basis. The
unsecured note originally had a maturity date of December 27, 2008 and bore interest at a fixed
rate of 4.95% per annum. Effective November 10, 2008, the Company extended the maturity date to May
10, 2009 and adjusted the interest rate to a fixed rate of 5.26% per annum, and effective May 10,
2009, the Company extended the maturity date to November 10, 2009 and adjusted the interest rate to
a fixed rate of 8.43% per annum. The note requires monthly interest-only payments beginning on
August 1, 2008 and provides for a default interest rate in an event of default equal to 2.00% per
annum in excess of the stated interest rate. In September 2008, the Company advanced an additional
$5.4 million to Apartment REIT on an unsecured basis. The unsecured note originally had a maturity
date of March 15, 2009 and bore interest at a fixed rate of 4.99% per annum. Effective March 9,
2009, the Company extended the maturity date to September 15, 2009 and adjusted the interest rate
to a fixed rate of 5.00% per annum. The note requires monthly interest-only payments beginning on
October 1, 2008 and provides for a default interest rate in an event of default equal to 2.00% per
annum in excess of the stated interest rate. As of December 31, 2008, the balance owed by Apartment
REIT to the Company on the two unsecured notes totals $9.1 million in principal with no interest
outstanding.
6. SERVICE FEES RECEIVABLE, NET
Service fees receivable consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
(In thousands)
|
|
2008
|
|
|
2007
|
|
Transaction services fees receivable
|
|
$
|
16,185
|
|
|
$
|
11,289
|
|
Management services fees receivable
|
|
|
11,848
|
|
|
|
8,903
|
|
Allowance for uncollectible accounts
|
|
|
(871
|
)
|
|
|
(343
|
)
|
|
|
|
|
|
|
|
Total
|
|
|
27,162
|
|
|
|
19,849
|
|
Less portion classified as current
|
|
|
(26,987
|
)
|
|
|
(19,521
|
)
|
|
|
|
|
|
|
|
Non-current portion (included in other assets)
|
|
$
|
175
|
|
|
$
|
328
|
|
|
|
|
|
|
|
|
7. VARIABLE INTEREST ENTITIES
The determination of the appropriate accounting method with respect to the Companys variable
interest entities (
VIEs
), including joint ventures, is based on the requirements of the
Consolidation Topic. The Company consolidates any VIE for which it is the primary beneficiary.
The Company determines if an entity is a VIE under the requirements of the Consolidation Topic
based on several factors, including whether the entitys total equity investment at risk upon
inception is sufficient to finance the entitys activities without additional subordinated
financial support. The Company makes judgments regarding the sufficiency of the equity at risk
based first on a qualitative analysis, then a quantitative analysis, if necessary. In a
quantitative analysis, the Company incorporates various estimates, including estimated future cash
flows, asset hold periods and discount rates, as well as estimates of the probabilities of various
scenarios occurring. If the entity is a VIE, the Company then determines whether to consolidate the
entity as the primary beneficiary. The Company is deemed to be the primary beneficiary of the VIE
and consolidates the entity if the Company will absorb a majority of the entitys expected losses,
receive a majority of the entitys expected residual returns or both.
A change in the judgments, assumptions and estimates outlined above could result in
consolidating an entity that is not currently consolidated or accounting for an investment on the
equity method that is currently consolidated, the effects of which could be material to the
Companys consolidated financial statements.
F-28
GRUBB & ELLIS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
As of December 31, 2008 the Company had investments in seven LLCs that are VIEs in which the
Company is the primary beneficiary. These seven LLCs hold interests in the Companys TIC
investments. The carrying value of the assets and liabilities for these consolidated VIEs as of
December 31, 2008 was $3.7 million and $309,000, respectively. As of December 31, 2007, the Company
had investments in 13 LLCs that are VIEs in which the Company is the primary beneficiary. These 13
LLCs hold interests in the Companys TIC investments. The carrying value of the assets and
liabilities for these consolidated VIEs as of December 31, 2007 was $23.9 million and $24.4
million, respectively. The $24.4 million in liabilities includes $18.8 million of full recourse
mezzanine debt. In addition, these consolidated VIEs are joint and severally liable on the
non-recourse mortgage debt related to the interests in the Companys TIC investments totaling
$277.8 million and $392.2 million as of December 31, 2008 and 2007, respectively. This mortgage
debt is not consolidated as the LLCs account for the interests in the Companys TIC investments
under the equity method and the non recourse mortgage debt does not meet the criteria under the
requirements of the Transfers and Servicing Topic for recognizing the share of the debt assumed by
the other TIC interest holders for consolidation. The Company does consider the third party TIC
holders ability and intent to repay their share of the joint and several liability in evaluating
the recovery. Six LLCs deconsolidated during the year ended December 31, 2008 as a result of the
Company selling interests in certain real estate properties that it held through these consolidated
LLCs which resulted in the Company no longer being the primary beneficiary of these LLCs.
If the interest in the entity is determined to not be a VIE under the requirements of the
Consolidation Topic, then the entity is evaluated for consolidation under the requirements of the
InvestmentsEquity Method and Joint Ventures Topic, as amended by the requirements of the
Consolidation Topic.
As of December 31, 2008 and 2007 the Company had a number of entities that were determined to
be VIEs that did not meet the requirements of the Consolidation Topic. The unconsolidated VIEs are
accounted for under the equity method. The aggregate investment carrying value of the
unconsolidated VIEs was $5.0 million and $5.2 million as of December 31, 2008 and 2007,
respectively, and was classified under Investments in Unconsolidated Entities in the consolidated
balance sheet. The Companys maximum exposure to loss as a result of its investments in
unconsolidated VIEs is typically limited to the aggregate of the carrying value of the investment
and future funding commitments. Future funding commitments as of December 31, 2008 for the
unconsolidated VIEs totaled $823,000. In addition, as of December 31, 2008 and 2007, these
unconsolidated VIEs are joint and severally liable on non-recourse mortgage debt totaling $385.3
million and $336.9 million, respectively. This mortgage debt is not consolidated as the LLCs
account for the interests in the Companys TIC investments under the equity method and the non
recourse mortgage debt does not meet the criteria under the requirements of the Transfers and
Servicing Topic for recognizing the share of the debt assumed by the other TIC interest holders for
consolidation. The Company does consider the third party TIC holders ability and intent to repay
their share of the joint and several liability in evaluating the recovery. Although the mortgage
debt is non-recourse to the VIE that holds the TIC interest, the Company has full recourse
guarantees on a portion of such mortgage debt totaling $3.5 million and $0 as of December 31, 2008
and 2007, respectively. In evaluating the recovery of the TIC investment the Company evaluated the
likelihood that the lender would foreclose on the VIEs interest in the TIC to satisfy the
obligation. See Note 8 Investments in Unconsolidated Entities for additional information.
8. INVESTMENTS IN UNCONSOLIDATED ENTITIES
As of December 31, 2008 and 2007, the Company held investments in five joint ventures totaling
$3.8 million and $5.9 million, respectively, which represent a range of 5.0% to 10.0% ownership
interest in each property. In addition, pursuant to the requirements of the Consolidation Topic,
the Company has consolidated seven LLCs with investments in unconsolidated entities totaling $3.7
million as of December 31, 2008 and 13 LLCs with investments in unconsolidated entities totaling
$17.0 million as of December 31, 2007, respectively (of which $5.9 million is included in
properties held for sale including investments in unconsolidated entities on the consolidated
balance sheet as of December 31, 2007). In addition, the Company had an investment in Grubb & Ellis
Realty Advisors, Inc. (
GERA
) of $4.1 million as of December 31, 2007. The remaining amounts
within investments in unconsolidated entities are related to various LLCs, which represent
ownership interests of less than 1.0%.
As of December 31, 2007, the Company owned approximately 5.9 million shares of common stock of
GERA, which was a publicly traded special purpose acquisition company, which represented
approximately 19% of the outstanding common stock. The Company also owned approximately 4.6 million
GERA warrants which were exercisable into additional GERA common stock, subject to certain
conditions. As part of the Merger, the Company recorded each of these investments at fair value on
December 7, 2007, the date they were acquired, at a total investment of approximately $4.5 million.
All of the officers of GERA were also officers or directors of legacy Grubb & Ellis, although
such persons did not receive any compensation from GERA in their capacity as officers of GERA. Due
to the Companys ownership position and influence over the operating and financial decisions of
GERA, the Companys investment in GERA was accounted for within the Companys consolidated
financial statements under the equity method of accounting. The Companys combined carrying value
of these GERA investments as of December 31, 2007, totaled approximately $4.1 million, net of an unrealized
loss, and was included in investments in unconsolidated entities in the Companys consolidated
balance sheet as of that date.
F-29
GRUBB & ELLIS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
On February 28, 2008, a special meeting of the stockholders of GERA was held to vote on, among
other things, a proposed transaction with the Company. GERA failed to obtain the requisite consents
of its stockholders to approve the proposed business transaction and at a subsequent special
meeting of the stockholders of GERA held on April 14, 2008, the stockholders of GERA approved the
dissolution and plan of liquidation of GERA. The Company did not receive any funds or other assets
as a result of GERAs dissolution and liquidation.
As a consequence, the Company wrote off its investment in GERA and other advances to that
entity in the first quarter of 2008 and recognized a loss of approximately $5.8 million which is
recorded in equity in losses on the consolidated statement of operations and is comprised of $4.5
million related to stock and warrant purchases and $1.3 million related to operating advances and
third party costs, which included an unrealized loss previously reflected in accumulated other
comprehensive loss.
As of December 31, 2008 and 2007 the Company had interests in certain variable interest
entities, of which the Company was not considered the primary beneficiary. Accordingly, such VIEs
were not consolidated in the financial statements.
9. PROPERTY, EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Property and equipment consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
(In thousands)
|
|
Useful Life
|
|
|
2008
|
|
|
2007
|
|
Computer equipment
|
|
3-5 years
|
|
$
|
31,115
|
|
|
$
|
32,022
|
|
Automobiles
|
|
5 years
|
|
|
11
|
|
|
|
11
|
|
Capital leases
|
|
1-5 years
|
|
|
1,566
|
|
|
|
1,519
|
|
Furniture and fixtures
|
|
7 years
|
|
|
25,083
|
|
|
|
25,283
|
|
Leasehold improvements
|
|
1-5 years
|
|
|
7,834
|
|
|
|
7,810
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
65,609
|
|
|
|
66,645
|
|
Accumulated depreciation and amortization
|
|
|
|
|
|
|
(51,589
|
)
|
|
|
(49,901
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Property and equipment net
|
|
|
|
|
|
$
|
14,020
|
|
|
$
|
16,744
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company recognized $6.8 million, $1.8 million and $1.8 million of depreciation
expense for the years ended December 31, 2008, 2007 and 2006, respectively.
10. PROPERTY HELD FOR INVESTMENT
Property held for investment consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
(In thousands)
|
|
Useful Life
|
|
|
2008
|
|
|
2007
|
|
Building and capital improvement
|
|
39 years
|
|
$
|
79,315
|
|
|
$
|
113,604
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tenant improvement
|
|
112 years
|
|
|
5,612
|
|
|
|
5,656
|
|
Accumulated depreciation
|
|
|
|
|
|
|
(6,519
|
)
|
|
|
(3,491
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
78,408
|
|
|
|
115,769
|
|
Land
|
|
|
|
|
|
|
10,291
|
|
|
|
15,188
|
|
|
|
|
|
|
|
|
|
|
|
|
Property held for investment net
|
|
|
|
|
|
$
|
88,699
|
|
|
$
|
130,957
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company recognized $3.3 million, $1.4 million and $0 of depreciation expense related
to the properties held for investment for the years ended December 31, 2008, 2007 and 2006,
respectively.
F-30
GRUBB & ELLIS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
11. BUSINESS COMBINATIONS AND GOODWILL
Merger of Grubb & Ellis Company with NNN
On December 7, 2007, the Company effected the Merger with NNN, a real estate asset management
company and sponsor of TIC Programs as well as a sponsor of two non-traded REITs and other
investment programs.
On December 7, 2007, pursuant to the Merger Agreement (i) each issued and outstanding share of
common stock of NNN was automatically converted into 0.88 of a share of common stock of the
Company, and (ii) each issued and outstanding stock options of NNN, exercisable for common stock of
NNN, was automatically converted into the right to receive stock options exercisable for common
stock of the Company based on the same 0.88 share conversion ratio. Therefore, 43,779,740 shares of
common stock of NNN that were issued and outstanding immediately prior to the Merger were
automatically converted into 38,526,171 shares of common stock of the Company, and the 739,850 NNN
stock options that were issued and outstanding immediately prior to the Merger were automatically
converted into 651,068 stock options of the Company. The prior year share and option amounts have
been retroactively adjusted to reflect the 0.88 conversion.
Under the purchase method of accounting, the Merger consideration of $172.2 million was
determined based on the closing price of the Companys common stock of $6.43 per share on the date
the merger closed, applied to the 26,195,655 shares of the Companys common stock outstanding plus
the fair value of vested options outstanding of approximately $3.8 million. The fair value of these
vested options was calculated using the Black-Scholes option-pricing model which incorporated the
following assumptions: weighted average exercise price of $7.02 per option, volatility of 105.11%,
a 5 year expected life of the awards, risk-free interest rate of 3.51% and no expected dividend
yield.
The results of operations of legacy Grubb & Ellis have been included in the consolidated
results of operations since December 8, 2007 and the results of operations of NNN have been
included in the consolidated results of operations for the full year ended December 31, 2007.
The purchase price was allocated to the assets acquired and liabilities assumed based on the
estimated fair value of net assets as of the acquisition date as follows (in thousands):
|
|
|
|
|
Current assets
|
|
$
|
189,214
|
|
Other assets
|
|
|
29,797
|
|
Identified intangible assets acquired
|
|
|
86,600
|
|
Goodwill
|
|
|
107,507
|
|
|
|
|
|
Total assets
|
|
|
413,118
|
|
|
|
|
|
Current liabilities
|
|
|
233,894
|
|
Other liabilities
|
|
|
7,022
|
|
|
|
|
|
Total liabilities
|
|
|
240,916
|
|
|
|
|
|
Total purchase price
|
|
$
|
172,202
|
|
|
|
|
|
As a result of the merger, the Company incurred $14.7 million and $6.4 million in merger
related expenses during 2008 and 2007, respectively, as reflected on the Companys consolidated
statement of operations. Additionally, as a result of the Merger, the Company recorded $1.6 million
and $3.6 million as a purchase accounting liability for severance for certain executives in 2008
and 2007, respectively, as part of a change in control provision in the related employment
agreements.
As part of its Merger transition, the Company recently completed its personnel reorganization
plan, and recorded additional severance liabilities totaling approximately $2.3 million during the
year ended December 31, 2008, which increased the goodwill recorded from the acquisition. These
liabilities relate primarily to severance and other benefits to be paid to involuntarily terminated
employees of the acquired company. Such liabilities, totaling approximately $7.4 million, have been
recorded related to the personnel reorganization plan, of which approximately $6.7 million has been
paid to terminated employees as of December 31, 2008. As a result of the Merger, approximately
$110.9 million has been recorded to goodwill as of December 31, 2008, which was subsequently
written off as an impairment charge during the year ended December 31, 2008.
Acquisition of NNN/ROC Apartment Holdings, LLC
On July 1, 2007, the Company completed the acquisition of the remaining 50.0% membership
interest in NNN/ROC Apartment Holdings, LLC (
ROC
). ROC holds contract rights associated with a
fee sharing agreement between ROC Realty Advisors and NNN with respect to certain fee streams
(including an interest in net cash flows associated with subtenant leases (as Landlord) in excess
of expenses from the Master Lease Agreement (as tenant) and related multi-family property
acquisitions where
F-31
GRUBB & ELLIS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
ROC Realty Advisors, LLC sourced the deals for placement into the TIC investment programs. The
aggregate purchase price for the acquisition of 50.0% membership interest of ROC was approximately
$1.7 million in cash.
Acquisition of Alesco Global Advisors, LLC
On November 16, 2007, the Company completed the acquisition of the 51.0% membership interest
in Alesco. Alesco is a registered investment advisor focused on real estate securities and manages
private investment funds exclusively for qualified investors. Alesco holds several investment
advisory contracts right and it the general partner of several domestic mutual fund investments
limited partnerships. Alesco is also an investment advisor to one offshore hedge fund. The
Companys purpose of acquiring Alesco was to create a global leader in real estate securities
management within open and closed end mutual funds, and hedge funds. The aggregate purchase price
was approximately $3.0 million in cash. Additionally, upon achievement of certain earn-out targets,
the Company is required to purchase up to an additional 27% interest in Alesco for $15.0 million.
Acquisition of Triple Net Properties, Realty, and NNN Capital Corp.
NNN was organized as a corporation in the State of Delaware in September 2006 and was formed
to acquire each of GERI (formerly Triple Net Properties, LLC), Triple Net Properties Realty, Inc.
(
Realty
) and Grubb & Ellis Securities, Inc. (
GBE Securities
formerly NNN Capital Corp.) and its
other subsidiaries (collectively, NNN), to bring the businesses conducted by those companies under
one corporate umbrella and to facilitate an offering pursuant to Rule 144A of the Securities Act
(the
144A offering
), which transactions are collectively referred to as the formation
transactions. On November 16, 2006, NNN closed a $160.0 million private placement of common stock
to institutional investors and certain accredited investors with 14.1 million shares of the
Companys common stock sold in the offering at $11.36 per share. Triple Net Properties was the
accounting acquirer of Realty and NNN Capital Corp.
Concurrently with the close of the 144A offering, the following transactions occurred:
|
|
|
TNP Merger Sub, LLC, a Delaware limited liability company
and wholly-owned subsidiary of NNN, entered into an
agreement and plan of merger with Triple Net Properties, a
Virginia limited liability company owned by Anthony W.
Thompson (former Chairman of the Board), Scott D. Peters
(former executive officer and director), Louis J. Rogers
(former director and former executive officer of Triple
Net Properties) and a number of other employees and
third-party investors. In connection with the merger
agreement, NNN entered into contribution agreements with
the holders of a majority of the common membership
interests of Triple Net Properties. Under the merger
agreement and the contribution agreements, NNN issued
17,372,438 shares of the Companys common stock (to the
accredited investor members) and $986,000 in cash (to the
unaccredited investor members in lieu of 0.5% of the shares of the Companys common stock they would otherwise
be entitled to receive, which was valued at the $11.36
offering price to investors in the 144A offering) in
exchange for all the common member interests. Concurrently
with the closing of the 144A offering on November 16,
2006, Triple Net Properties became a wholly-owned
subsidiary of NNN. For accounting purposes, Triple Net
Properties was considered the acquirer of Realty and NNN
Capital Corp.
|
|
|
|
|
NNN entered into a contribution agreement with Mr.
Thompson and Mr. Rogers pursuant to which they contributed
all of the outstanding shares of Realty, to the Company in
exchange for 4,124,120 shares of the Companys common
stock and, with respect to Mr. Thompson, $9.4 million in
cash in lieu of the shares of NNN he would otherwise be
entitled to receive, which was valued at the $11.36
offering price to investors in the 144A offering.
Concurrently with the closing of the 144A offering on
November 16, 2006, Realty became a wholly-owned subsidiary
of NNN.
|
|
|
|
|
NNN entered into a contribution agreement with Mr.
Thompson, Mr. Rogers and Kevin K. Hull pursuant to which
they contributed all of the outstanding shares of NNN
Capital Corp. to the Company in exchange for 1,164,680
shares of the Companys common stock and, with respect to
Mr. Thompson, $2.7 million in cash in lieu of the shares
of NNN he would otherwise be entitled to receive, which
was valued at the $11.36 offering price to investors in
the 144A offering. NNN Capital Corp. became a wholly-owned
subsidiary of NNN on December 14, 2006.
|
In connection with these transactions, the owners of Realty and Capital Corp have agreed to
indemnify NNN for a breach of any representations and for certain other losses, subject to a
maximum aggregate limit on the amount of their liability of $12.0 million. Mr. Thompson and Mr.
Rogers also agreed to escrow shares of NNNs common stock and indemnify NNN for certain other
matters. Except for these escrow arrangements, NNN has no assurance that any contributing party
providing these limited representations or indemnities will have adequate capital to fulfill its
indemnity obligations.
F-32
GRUBB & ELLIS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The acquisitions were accounted for under the purchase method of accounting, and accordingly
all assets and liabilities were adjusted to and recorded at their estimated fair values as of the
acquisition date. Goodwill and other intangible assets represent the excess of purchase price over
the fair value of net assets acquired. In accordance with the requirements of the Business
Combinations Topic, the Company recorded goodwill for a purchase business combination to the extent
that the purchase price of the acquisition exceeded the net identifiable assets and intangible
assets of the acquired companies.
The purchase accounting adjustments for the acquisition of Realty and NNN Capital Corp. were
recorded in the accompanying consolidated financial statements as of, and for periods subsequent to
the acquisition dates. The excess purchase price over the estimated fair value of net assets
acquired has been recorded to goodwill, which is not deductible for tax purposes. The final
valuation of the net assets acquired is complete.
The aggregate purchase price for the acquisition of Realty and NNN Capital Corp. was
approximately $72.2 million, which included: (1) issuance of 5,288,800 shares of the Companys
common stock, valued at $11.36 per share (the offering price upon the close of the 144A); and (2)
$12.1 million in cash paid to Mr. Thompson in lieu of the shares of the Companys common stock he
would otherwise be entitled to receive, valued at $11.36 per share. As of December 31, 2006, the
total purchase price has been paid.
The following represents the calculation of the purchase price of Realty and the excess
purchase price over the estimated fair value of the net assets acquired:
|
|
|
|
|
|
|
|
|
(In thousands except share and per share data)
|
|
|
|
|
|
|
|
|
Purchase of shares of Realty for cash
|
|
|
|
|
|
$
|
9,435
|
|
Purchase of shares of Realty for stock
|
|
|
|
|
|
|
46,865
|
|
|
|
|
|
|
|
|
|
Total purchase price
|
|
|
|
|
|
|
56,300
|
|
Adjusted beginning equity
|
|
$
|
1,733
|
|
|
|
|
|
Adjustment for fair value of intangible contract rights
|
|
|
(20,538
|
)
|
|
|
|
|
Adjustment to goodwill to reflect deferred tax liability arising from allocation of purchase price to intangible contract rights
|
|
|
8,214
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less: fair value of net assets acquired
|
|
|
|
|
|
|
(10,591
|
)
|
|
|
|
|
|
|
|
|
Goodwill: Excess purchase price over fair value of net assets
|
|
|
|
|
|
$
|
45,709
|
|
|
|
|
|
|
|
|
|
Realty was comprised of the following:
|
|
|
|
|
Assets:
|
|
|
|
|
Current assets
|
|
$
|
5,326
|
|
Intangible contract rights
|
|
|
20,538
|
|
|
|
|
|
Total assets
|
|
|
25,864
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
Current liabilities
|
|
|
7,059
|
|
Long-term deferred tax liability
|
|
|
8,214
|
|
|
|
|
|
Total liabilities
|
|
|
15,273
|
|
|
|
|
|
Fair value of net assets acquired
|
|
$
|
10,591
|
|
|
|
|
|
The issuance of the Companys common stock to the owners of Realty was based upon the
following:
|
|
|
|
|
Realty fair value
|
|
$
|
56,300
|
|
Cash payment toward purchase
|
|
|
(9,435
|
)
|
|
|
|
|
Value of shares issued
|
|
$
|
46,865
|
|
|
|
|
|
Price per share issued
|
|
$
|
10.00
|
|
|
|
|
|
Shares issued to Realty owners
|
|
|
4,686,500
|
|
|
|
|
|
The following represents the calculation of the purchase price of GBE Securities and the
excess purchase price over the estimated fair value of the net assets acquired:
F-33
GRUBB & ELLIS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
|
|
|
|
|
(In thousands, except share and per share data)
|
|
|
|
|
Purchase of shares of GBE Securities for cash
|
|
$
|
2,665
|
|
Purchase of shares of GBE Securities for stock
|
|
|
13,235
|
|
|
|
|
|
Total purchase price
|
|
|
15,900
|
|
Less: fair value of net assets acquired
|
|
|
(1,426
|
)
|
|
|
|
|
Goodwill: Excess purchase price over fair value of net assets
|
|
$
|
14,474
|
|
|
|
|
|
GBE Securities was comprised of the following:
|
|
|
|
|
Assets:
|
|
|
|
|
Current assets
|
|
$
|
5,391
|
|
Property and equipment
|
|
|
104
|
|
|
|
|
|
Total assets
|
|
|
5,495
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
Current liabilities
|
|
|
4,069
|
|
|
|
|
|
Total liabilities
|
|
|
4,069
|
|
|
|
|
|
Fair value of net assets acquired
|
|
$
|
1,426
|
|
The issuance of the Companys common stock to the owners of GBE Securities was based upon the
following:
|
|
|
|
|
GBE Securities fair value
|
|
$
|
15,900
|
|
Cash payment toward purchase
|
|
|
(2,665
|
)
|
|
|
|
|
Value of shares issued
|
|
$
|
13,235
|
|
|
|
|
|
Price per share issued
|
|
$
|
10.00
|
|
|
|
|
|
Shares issued to GBE Securities owners
|
|
|
1,323,500
|
|
|
|
|
|
Supplemental information (unaudited)
Unaudited pro forma results, assuming the above mentioned 2007 acquisitions had occurred as of
January 1, 2007 for purposes of the 2007 pro forma disclosures, are presented below. The unaudited
pro forma results have been prepared for comparative purposes only and do not purport to be
indicative of what operating results would have been had all acquisitions occurred on January 1,
2007, and may not be indicative of future operating results.
|
|
|
|
|
|
|
Unaudited Pro Forma Results
|
|
|
For The Year Ended
|
|
|
December 31, 2007
|
(In thousands, except per share data)
|
|
Restated
|
Revenue
|
|
$
|
733,095
|
|
Loss from continuing operations
|
|
$
|
(790
|
)
|
Net income
|
|
$
|
18,930
|
|
Basic earnings per share
|
|
$
|
0.30
|
|
Weighted average shares outstanding for basic earnings per share
|
|
|
63,393
|
|
Diluted earnings per share
|
|
$
|
0.29
|
|
Weighted average shares outstanding for diluted earnings per share
|
|
|
64,785
|
|
F-34
GRUBB & ELLIS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Goodwill
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transaction
|
|
|
Management
|
|
|
Investment
|
|
|
Goodwill
|
|
|
|
|
(In thousands)
|
|
Services
|
|
|
Services
|
|
|
Management
|
|
|
Unassigned
|
|
|
Total
|
|
Balance as of December 31, 2006
|
|
$
|
|
|
|
$
|
|
|
|
$
|
60,183
|
|
|
$
|
|
|
|
$
|
60,183
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill acquired
|
|
|
|
|
|
|
|
|
|
|
1,627
|
|
|
|
|
|
|
|
1,627
|
|
Goodwill acquired unassigned(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
107,507
|
|
|
|
107,507
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2007
|
|
|
|
|
|
|
|
|
|
|
61,810
|
|
|
|
107,507
|
|
|
|
169,317
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill assigned
|
|
|
41,098
|
|
|
|
6,902
|
|
|
|
59,507
|
|
|
|
(107,507
|
)
|
|
|
|
|
Goodwill acquired
|
|
|
1,533
|
|
|
|
98
|
|
|
|
1,724
|
|
|
|
|
|
|
|
3,355
|
|
Impairment charge off
|
|
|
(42,631
|
)
|
|
|
(7,000
|
)
|
|
|
(123,041
|
)
|
|
|
|
|
|
|
(172,672
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2008
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
The fair values of the assets and liabilities recorded on the
date of acquisition related to the Merger were preliminary and
subject to refinement as additional valuation information was
received. The goodwill recorded in connection with the
acquisition was assigned to the individual reporting units
pursuant to the requirements of the IntangiblesGoodwill and
Other Topic during the year ended December 31, 2008.
Approximately $8.8 million of goodwill is expected to be
deductible for tax purposes.
|
Under the requirements of the IntangiblesGoodwill and Other Topic, goodwill is recorded at
its carrying value and is tested for impairment at least annually or more frequently if impairment
indicators exist at a level of reporting referred to as a reporting unit. The Company recognizes
goodwill in accordance with the requirements of the IntangiblesGoodwill and Other Topic and tests
the carrying value for impairment during the fourth quarter of each year. The goodwill impairment
analysis is a two-step process. The first step is used to identify potential impairment by
comparing each reporting units estimated fair value to its carrying value, including goodwill. To
estimate the fair value of its reporting units, the Company used a discounted cash flow model and
market comparable data. Significant judgment is required by management in developing the
assumptions for the discounted cash flow model. These assumptions include cash flow projections
utilizing revenue growth rates, profit margin percentages, discount rates, market/economic
conditions, etc. If the estimated fair value of a reporting unit exceeds its carrying value,
goodwill is considered to not be impaired. If the carrying value exceeds estimated fair value,
there is an indication of potential impairment and the second step is performed to measure the
amount of impairment. The second step of the process involves the calculation of an implied fair
value of goodwill for each reporting unit for which step one indicated a potential impairment. The
implied fair value of goodwill is determined by measuring the excess of the estimated fair value of
the reporting unit as calculated in step one, over the estimated fair values of the individual
assets, liabilities and identified intangibles. During the fourth quarter of 2008, the Company
identified the uncertainty surrounding the global economy and the volatility of the Companys
market capitalization as goodwill impairment indicators. The Companys goodwill impairment analysis
resulted in the recognition of an impairment charge of approximately $172.7 million during the year
ended December 31, 2008. The Company also analyzed its trade name for impairment pursuant to the
requirements of the Intangibles Goodwill and Other Topic and determined that the trade name was
not impaired as of December 31, 2008. Accordingly, no impairment charge was recorded related to the
trade name during the year ended December 31, 2008.
12. PROPERTY ACQUISITIONS
2008 Acquisitions
Acquisition of Properties for TIC Sponsored Programs
During the year ended December 31, 2008, the Company completed the acquisition of two office
properties and two multifamily residential properties on behalf of TIC sponsored programs, all of
which were sold to the respective programs during the same period. The aggregate purchase price
including the closing costs of these four properties was $111.7 million, of which $69.0 million was
financed with mortgage debt.
F-35
GRUBB & ELLIS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
2007 Acquisitions
Acquisition of Properties for TIC Sponsored Programs
During the year ended December 31, 2007, the Company completed the acquisition of sixteen
office properties and three residential properties. The Company classified these properties as
property held for sale upon acquisition. The aggregate purchase price including the closing costs
of these properties was $294.0 million, of which $254.8 million was financed with mortgage debt.
The Companys discontinued operations include the combined results of these acquisitions. As of
December 31, 2007, twelve of these properties have been sold and four properties remain held for
sale as follows: Park Central, acquired November 29, 2007, Emberwood Apartments, acquired December
4, 2007, Woodside, acquired December 13, 2007 and Exchange South, acquired December 13, 2007.
Acquisition of Properties for Investment
During the year ended December 31, 2007, the Company also completed the acquisition of two
office properties. The aggregate purchase price including closing costs of these properties was
$141.5 million, of which $123.0 million was financed with mortgage debt.
The following table summarizes the estimated fair values of the assets acquired and
liabilities assumed at the date of acquisition for the properties that are included in properties
held for sale as of December 31, 2007:
|
|
|
|
|
(In thousands)
|
|
2007
|
|
Land
|
|
$
|
16,395
|
|
Building and improvements
|
|
|
79,946
|
|
In place leases
|
|
|
5,560
|
|
Above market leases
|
|
|
450
|
|
Tenant relationships
|
|
|
6,931
|
|
|
|
|
|
Net assets acquired
|
|
$
|
109,282
|
|
|
|
|
|
Below market leases
|
|
$
|
(233
|
)
|
|
|
|
|
Net liabilities assumed
|
|
$
|
(233
|
)
|
|
|
|
|
Pro forma statement of operations data is not required as all results of operations for
properties held for sale are included in discontinued operations in the Companys consolidated
statement of operations.
13. IDENTIFIED INTANGIBLE ASSETS
Identified intangible assets consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
(In thousands)
|
|
Useful Life
|
|
|
2008
|
|
|
2007
|
|
Contract rights
|
|
|
|
|
|
|
|
|
|
|
|
|
Contract rights, established for the legal right to future disposition fees of a portfolio of real estate properties under contract
|
|
Amortize per disposition transactions
|
|
$
|
11,924
|
|
|
$
|
20,538
|
|
Accumulated amortization contract rights
|
|
|
|
|
|
|
(4,700
|
)
|
|
|
(3,521
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Contract rights, net
|
|
|
|
|
|
|
7,224
|
|
|
|
17,017
|
|
|
|
|
|
|
|
|
|
|
|
|
Other identified intangible assets
|
|
|
|
|
|
|
|
|
|
|
|
|
Trade name
|
|
Indefinite
|
|
|
64,100
|
|
|
|
64,100
|
|
Affiliate agreement
|
|
20 years
|
|
|
10,600
|
|
|
|
10,600
|
|
Customer relationships
|
|
|
5 to 7 years
|
|
|
|
5,436
|
|
|
|
5,579
|
|
Internally developed software
|
|
4 years
|
|
|
6,200
|
|
|
|
6,200
|
|
Customer backlog
|
|
1 year
|
|
|
300
|
|
|
|
300
|
|
Other contract rights
|
|
|
5 to 7 years
|
|
|
|
1,418
|
|
|
|
1,418
|
|
Non-compete and employment agreements
|
|
|
3 to 4 years
|
|
|
|
97
|
|
|
|
597
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
88,151
|
|
|
|
88,794
|
|
Accumulated amortization
|
|
|
|
|
|
|
(3,848
|
)
|
|
|
(338
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Other identified intangible assets, net
|
|
|
|
|
|
|
84,303
|
|
|
|
88,456
|
|
|
|
|
|
|
|
|
|
|
|
|
F-36
GRUBB & ELLIS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
(In thousands)
|
|
Useful Life
|
|
|
2008
|
|
|
2007
|
|
Identified intangible assets properties
|
|
|
|
|
|
|
|
|
|
In place leases and tenant relationships
|
|
|
35 to 95 months
|
|
|
|
11,807
|
|
|
|
14,132
|
|
Above market leases
|
|
|
1 to 24 months
|
|
|
|
2,364
|
|
|
|
2,364
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14,171
|
|
|
|
16,496
|
|
Accumulated amortization properties
|
|
|
|
|
|
|
(5,067
|
)
|
|
|
(3,025
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Identified intangible assets, net
|
|
|
|
|
|
|
9,104
|
|
|
|
13,471
|
|
|
|
|
|
|
|
|
|
|
|
|
Total identified intangible assets, net
|
|
|
|
|
|
$
|
100,631
|
|
|
$
|
118,944
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization expense recorded for the contract rights was $1.2 million, $3.1 million and
$410,000 for the years ended December 31, 2008, 2007 and 2006, respectively. Amortization expense
was charged as a reduction to investment management revenue in each respective period. The
amortization of the contract rights for intangible assets will be applied based on the net relative
value of disposition fees realized when the properties are sold. The Company tested the intangible
contract rights for impairment during the fourth quarter of 2008. The intangible contract rights
represent the legal right to future disposition fees of a portfolio of real estate properties under
contract. As a result of the current economic environment, a portion of these disposition fees may
not be recoverable. Based on our analysis for the current and projected property values, condition
of the properties and status of mortgage loans payable associated with these contract rights, the
Company determined that there are certain properties for which receipt of disposition fees was
improbable. As a result, the Company recorded an impairment charge of approximately $8.6 million
related to the impaired intangible contract rights as of December 31, 2008.
The Companys trade name was evaluated for potential impairment pursuant to the requirements
of the IntangiblesGoodwill and other Topic. See Note 2 for further discussion.
Amortization expense recorded for the other identified intangible assets was $3.5 million,
$338,000 and $0 for the years ended December 31, 2008, 2007 and 2006, respectively. Amortization
expense was included as part of operating expense in the accompanying consolidated statement of
operations.
Amortization expense recorded for in place leases and tenant relationships was $2.5 million,
$831,000 and $0 for the years ended December 31, 2008, 2007 and 2006, respectively. Amortization
expense was included as part of operating expense in the accompanying consolidated statement of
operations.
Amortization expense recorded for the above market leases was $549,000, $311,000 and $0 for
the years ended December 31, 2008, 2007 and 2006, respectively. Amortization expense was charged as
a reduction to rental related revenue in the accompanying consolidated statements of operations.
Amortization expense for the other identified intangible assets for each of the next five
years ended December 31 is as follows:
|
|
|
|
|
|
|
(In thousands)
|
|
2009
|
|
$
|
3,224
|
|
2010
|
|
|
3,224
|
|
2011
|
|
|
3,122
|
|
2012
|
|
|
1,516
|
|
2013
|
|
|
1,157
|
|
Thereafter
|
|
|
7,960
|
|
|
|
|
|
|
|
$
|
20,203
|
|
|
|
|
|
F-37
GRUBB & ELLIS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
14. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
(In thousands)
|
|
|
|
|
|
Restated
|
|
Accrued liabilities
|
|
$
|
11,502
|
|
|
$
|
14,990
|
|
Salaries and related costs
|
|
|
13,643
|
|
|
|
16,028
|
|
Accounts payable
|
|
|
14,323
|
|
|
|
10,961
|
|
Broker commissions
|
|
|
14,002
|
|
|
|
26,597
|
|
Dividends
|
|
|
|
|
|
|
1,733
|
|
Severance
|
|
|
2,957
|
|
|
|
4,965
|
|
Bonuses
|
|
|
9,741
|
|
|
|
14,934
|
|
Property management fees and commissions due to third parties
|
|
|
2,940
|
|
|
|
4,909
|
|
Interest
|
|
|
651
|
|
|
|
1,431
|
|
Other
|
|
|
463
|
|
|
|
5,456
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
70,222
|
|
|
$
|
102,004
|
|
|
|
|
|
|
|
|
15. NOTES PAYABLE AND CAPITAL LEASE OBLIGATIONS
Notes payable and capital lease obligations consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
(In thousands)
|
|
2008
|
|
|
2007
|
|
Mortgage debt payable to
various financial institutions,
of which 37,000 matures in July
2014 and 70,000 matures in
February 2017. Fixed interest
rates range from 5.95% to 6.32%
per annum. As of December 31,
2008, all notes require monthly
interest-only payments
|
|
$
|
107,000
|
|
|
$
|
107,000
|
|
Capital leases obligations
|
|
|
536
|
|
|
|
790
|
|
|
|
|
|
|
|
|
Total
|
|
|
107,536
|
|
|
|
107,790
|
|
Less portion classified as current
|
|
|
(333
|
)
|
|
|
(447
|
)
|
|
|
|
|
|
|
|
Non-current portion
|
|
$
|
107,203
|
|
|
$
|
107,343
|
|
|
|
|
|
|
|
|
As of December 31, 2008, the future minimum payments due under the capital lease
obligations are as follows for the years ending December 31:
|
|
|
|
|
(In thousands)
|
|
|
|
|
2009
|
|
$
|
371
|
|
2010
|
|
|
189
|
|
2011
|
|
|
23
|
|
|
|
|
|
Less imputed interest
|
|
|
(47
|
)
|
|
|
|
|
|
|
$
|
536
|
|
|
|
|
|
F-38
GRUBB & ELLIS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
16. NOTES PAYABLE OF PROPERTIES HELD FOR SALE INCLUDING INVESTMENTS IN UNCONSOLIDATED ENTITIES
Notes payable of properties held for sale including investments in unconsolidated entities
consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
(In thousands)
|
|
2008
|
|
|
2007
|
|
Mortgage debt payable to various
financial institutions, with variable
interest rates based on London Interbank
Offered Rate (
LIBOR
) and include an
interest rate cap for LIBOR at 6.00%
(interest rates ranging from 2.91% to
6.00% per annum as of December 31, 2008).
The notes require monthly interest-only
payments and mature in July 2009 and have
automatic one-year extension options
|
|
$
|
108,677
|
|
|
$
|
120,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mezzanine debt payable to various
financial institutions, with variable
interest rates based on LIBOR (ranging
from 11.31% to 12.00% per annum as of
December 31, 2007), required monthly
interest-only payments. These debts were
paid in full during the first and second
quarters of 2008
|
|
|
|
|
|
|
30,000
|
|
|
|
|
|
|
|
|
|
|
Mortgage debt payable to various
financial institutions. Fixed interest
rates range from 6.14% to 6.79% per
annum. The notes were scheduled to mature
at various dates through January 2018. As
of December 31, 2007, all notes required
monthly interest-only payments (paid in
full in 2008)
|
|
|
|
|
|
|
72,230
|
|
|
|
|
|
|
|
|
|
|
Mezzanine debt payable to various
financial institutions, fixed and
variable interest rates range from 6.86%
to 10.23% per annum. The notes were
scheduled to mature at various dates
through December 2008. As of December 31,
2007, all notes required monthly
interest-only payments (paid in full in
2008)
|
|
|
|
|
|
|
18,790
|
|
|
|
|
|
|
|
|
|
|
Unsecured notes payable to
third-party investors with fixed interest
at 6.00% per annum and matures in
December 2011. Principal and interest
payments are due quarterly
|
|
|
282
|
|
|
|
507
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
108,959
|
|
|
$
|
242,027
|
|
|
|
|
|
|
|
|
GERI historically had entered into several interest rate lock agreements with commercial
banks. All rate locks were cancelled and all deposits in connection with these agreements were
refunded to the Company in April 2008.
The Company restructured the financing of two properties through amendments to the mortgage
note in July 2008. The amendments allowed the Company to use pre-funded reserves of approximately
$13.0 million to reduce the outstanding balance of the mortgage note payable on the properties. In
connection with the amendments, the LIBOR margin was changed to 3.50% from 2.50%, the cross
collateralization provisions of the mortgages were removed and several minor covenants were
revised.
As of December 31, 2008, the principal payments due on notes payable of properties held for
investments and properties held for sale including investments in unconsolidated entities for each
of the next five years ending December 31 and thereafter are summarized as follows:
|
|
|
|
|
|
|
(In thousands)
|
|
2009
|
|
$
|
108,779
|
|
2010
|
|
|
143
|
|
2011
|
|
|
37
|
|
2012
|
|
|
|
|
2013
|
|
|
|
|
Thereafter
|
|
|
107,000
|
|
|
|
|
|
|
|
$
|
215,959
|
|
|
|
|
|
F-39
GRUBB & ELLIS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
17. LINES OF CREDIT
In February 2007, the Company entered into a $25.0 million revolving line of credit with
LaSalle Bank N.A. to replace the previous revolving line of credit. This line of credit consisted
of $10.0 million for acquisitions and $15.0 million for general corporate purposes and bore
interest at prime rate plus 0.50% or three-month LIBOR plus 1.50%, at the Companys option and
matured February 20, 2010. During 2007, the Company paid $100,000 in loan fees relating to the
revolving line of credit.
On December 7, 2007, the Company terminated the $25.0 million line of credit with LaSalle Bank
N.A. and entered into a $75.0 million Second Amended and Restated Credit Agreement by and among the
Company, the guarantors named therein, the financial institutions defined therein as lender
parties, Deutsche Bank Trust Company Americas, as lender and administrative agent (the Credit
Facility). The Company is restricted to solely use the line of credit for investments,
acquisitions, working capital, equity interest repurchase or exchange, and other general corporate
purposes. The line bore interest at either the prime rate or LIBOR based rates, as the Company may
choose on each of its borrowings, plus an applicable margin based on the Companys Debt/Earnings
Before Interest, Taxes, Depreciation and Amortization (
EBITDA
) ratio as defined in the credit
agreement.
On August 5, 2008, the Company entered into an amendment (the
First Letter Amendment
) to its
Credit Facility. The First Letter Amendment, among other things, provided the Company with an
extension from September 30, 2008 to March 31, 2009 to dispose of the three real estate assets that
the Company had previously acquired on behalf of GERA. Additionally, the First Letter Amendment
also, among other things, modified select debt and financial covenants in order to provide greater
flexibility to facilitate the Companys TIC Programs.
On November 4, 2008, the Company amended (the
Second Letter Amendment
) its Credit Facility
revising certain terms of that certain Second Amended and Restated Credit Agreement dated as of
December 7, 2007, as amended. The effective date of the Second Letter Amendment was September 30,
2008.
The Second Letter Amendment, among other things: (a) modified the amount available under the
Credit Facility from $75.0 million to $50.0 million by providing that no advances or letters of
credit shall be made available to the Company after September 30, 2008 until such time as
borrowings have been reduced to less than $50.0 million; (b) provided that 100% of any net cash
proceeds from the sale of certain real estate assets that have to be sold by the Company shall
permanently reduce the Revolving Credit Commitments, provided that the Revolving Credit Commitments
shall not be reduced to less than $50.0 million by reason of the operation of such asset sales; and
(c) modified the interest rate incurred on borrowings by increasing the applicable margins by 100
basis points and by providing for an interest rate floor for any prime rate related borrowings.
Additionally, the Second Letter Amendment, among other things, modified restrictions on
guarantees of primary obligations from $125.0 million to $50.0 million, modified select financial
covenants to reflect the impact of the current economic environment on the Companys financial
performance, amended certain restrictions on payments by deleting any dividend/share repurchase
limitations and modifies the reporting requirements of the Company with respect to real property
owned or held.
As of September 30, 2008, the Company was not in compliance with certain of its financial
covenants related to EBITDA. As a result, part of the Second Letter Amendment included a provision
which modified selected covenants. The Debt /EBITDA ratio for the quarters ending September 30,
2008 and December 31, 2008 were amended from 3.75:1.00 to 5.50:1.00, while the Debt /EBITDA Ratio
for the quarters ending March 31, 2009 and thereafter remain at 3.50:1.00. The Interest Coverage
Ratio for the quarters ending September 30, 2008, December 31, 2008 and March 31, 2009 were amended
from 3.50:1.00 to 3.25:1.00, while the Interest Coverage Ratio for the quarters ended June 30, 2009
and September 30, 2009 remained unchanged at 3.50:1.00 and for the quarters ended December 31, 2009
and thereafter remained unchanged at 4.00:1.00. The Recourse Debt/Core EBITDA Ratio for the
quarters ending September 30, 2008 and December 31, 2008 were amended from 2.25:1.00 to 4.25:1.00,
while the Recourse Debt/Core EBITDA Ratio for the quarters thereafter remained unchanged at
2.25:1.00. The Core EBITDA to be maintained by the Company at all times was reduced from $60.0
million to $30.0 million and the Minimum Liquidity to be maintained by the Company at all times was
reduced from $25.0 million to $15.0 million. The Company was not in compliance with certain debt
covenants as of December 31, 2008, all of which were effectively cured as of such date by the Third
Amendment to the Credit Facility described below. As a consequence of the foregoing, and certain
provisions of the Third Amendment, the Credit Facility has been classified as a current liability
as of December 31, 2008.
On May 20, 2009, the Company further amended its Credit Facility by entering into the Third
Amendment. The Third Amendment, among other things, bifurcates the existing credit facility into
two revolving credit facilities, (i) a $38,000,000 Revolving Credit A Facility which is deemed
fully funded as of the date of the Third Amendment, and (ii) a $29,289,245 Revolving Credit B
Facility, comprised of revolving credit advances in the aggregate of $25,000,000 which are
deemed fully funded as of the date of the Third Amendment and letters of credit advances in the
aggregate amount of $4,289,245 which are issued and outstanding as of the date of the Third
Amendment. The Third Amendment requires the Company to draw down $4,289,245 under the Revolving
Credit B Facility on the date of the Third Amendment and deposit such funds in a cash collateral
account to cash collateralize outstanding letters of credit under the Credit Facility and
eliminates the swingline features of the Credit Facility and the Companys ability to cause the
lenders to issue any additional letters of credit. In addition, the Third Amendment also changes
the termination date of the
F-40
GRUBB & ELLIS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Credit Facility from December 7, 2010 to March 31, 2010 and modifies the interest rate
incurred on borrowings by initially increasing the applicable margin by 450 basis points (or to
7.00% on prime rate loans and 8.00% on LIBOR based loans).
The Third Amendment also eliminated specific financial covenants, and in its place, the
Company is required to comply with the Approved Budget, that has been agreed to by the Company and
the lenders, subject to agreed upon variances. The Company is also required under the Third
Amendment to effect the Recapitalization Plan, on or before September 30, 2009 and in connection
therewith to effect a prepayment of at least seventy two (72%) of the Revolving Credit A Advances
(the
Partial Prepayment
). In the event the Company fails to effect the Recapitalization Plan and
in connection therewith to effect a Partial Prepayment on or before September 30, 2009, the (i)
lenders will have the right commencing on October 1, 2009, to exercise the Warrants, for nominal
consideration, to purchase common stock of the Company equal to 15% of the common stock of the
Company on a fully diluted basis as of such date, subject to adjustment, (ii) the applicable margin
automatically increases to 11% on prime rate loans and increases to 12% on LIBOR based loans, (iii)
the Company shall be required to amortize an aggregate of $10 million of the Revolving Credit A
Facility in three equal installments on the first business day of each of the last three months of
2009, (iv) the Company is obligated to submit a revised budget by October 1, 2009, (v) the Credit
Facility will terminate on January 15, 2010, and (vi) no further advances may be drawn under the
Credit Facility.
In the event that Company effects the Recapitalization Plan and in connection therewith
effects a partial repayment of the Revolving A Credit Facility on a prior to September 30, 2009,
the Warrants automatically will expire and not become exercisable, the applicable margin will
automatically be reduced to 3% on prime rate loans and 4% on LIBOR based loans and the Company
shall have the right, subject to the requisite approval of the lenders, to seek an extension of the
term of the Credit Facility to January 5, 2011, provided the Company also pays a fee of .25% of the
then outstanding commitments under the Credit Facility.
As a result of the Third Amendment the Company is required to prepay outstanding Revolving
Credit A Advances (and to the extent the Revolving Credit A Facility shall be reduced to zero,
prepay outstanding Revolving Credit B Advances) in an amount equal to 100% (or, after the Revolving
Credit A Advances are reduced by at least the Partial Prepayment amount, in an amount equal to 50%)
of Net Cash Proceeds (as defined in the Credit Agreement) from:
|
|
|
assets sales,
|
|
|
|
|
conversions of Investments (as defined in the Credit Agreement),
|
|
|
|
|
the refund of any taxes or the sale of equity interests by the Company or its subsidiaries,
|
|
|
|
|
the issuance of debt securities, or
|
|
|
|
|
any other transaction or event occurring outside the ordinary course of business of the Company or its subsidiaries;
|
provided, however
, that (a) the Net Cash Proceeds received from the sale of the certain real
property assets shall be used to prepay outstanding Revolving Credit B Advances and to the extent
Revolving Credit B Advances shall be reduced to zero, to prepay outstanding Revolving Credit A
Advances, (b) the Company shall prepay outstanding Revolving Credit B Advances in an amount equal
to 100% of the Net Cash Proceeds from the sale of the Danbury Corporate Center in Danbury
Connecticut (the
Danbury Property
) unless the Company is then not in compliance with the
Recapitalization Plan in which event Revolving Credit A Advances shall be prepaid first and (c) the
Companys 2008 tax refund was used to prepay outstanding Revolving Credit B Advances upon the
closing of the Third Amendment.
The Third Amendment requires the Company to (a) sell the Danbury Property by June 1, 2009,
unless such date is extended with the applicable approval of the lenders and (b) use its
commercially reasonable best efforts to sell four other commercial properties, including the two
other GERA Properties, by September 30, 2009.
The Companys Credit Facility is secured by substantially all of the Companys assets. The
outstanding balance on the Credit Facility was $63.0 million and $8.0 million as of December 31,
2008 and December 31, 2007, respectively, and carried a weighted average interest rate of 5.80% and
7.75%, respectively.
In light of the current state of the financial markets and economic environment, there is risk
that the Company will be unable to meet the terms of the Credit Facility which would result in the
entire balance of the debt becoming due and payable. If the Credit Facility were to become due and
payable immediately or on the alternative due date of January 15, 2010, there can be no assurances
that the Company will have access to alternative funding sources, or if such sources are available
to the Company, that they will be on favorable terms and conditions to the Company. If the Credit
Facility were to become immediately due and payable, the recoverability of the Companys assets may
be further impaired which could affect the ability to repay the debt.
F-41
GRUBB & ELLIS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
18. SENIOR NOTES
On August 1, 2006, NNN Collateralized Senior Notes, LLC (the
Senior Notes Program
), the
Senior Notes Program began offering $50,000,000 in aggregate principal amount which mature in 2011
and bear interest at a rate of 8.75% per annum. Interest on the notes is payable monthly in arrears
on the first day of each month, commencing on the first day of the month occurring after issuance.
The notes will mature five years from the date of first issuance of any of such notes, with two
one-year options to extend the maturity date of the notes at the Senior Notes Programs option. The
interest rate will increase to 9.25% per annum during any extension. The Senior Notes Program has
the right to redeem the notes, in whole or in part, at: (1) 102.0% of their principal amount plus
accrued interest any time after January 1, 2008; (2) 101.0% of their principal amount plus accrued
interest any time after July 1, 2008; and (3) par value after January 1, 2009. The notes are the
Senior Notes Programs senior obligations, ranking
pari passu
in right of payment with all other
senior debt incurred and ranking senior to any subordinated debt it may incur. The notes are
effectively subordinated to all present or future debt secured by real or personal property to the
extent of the value of the collateral securing such debt. The notes will be secured by a pledge of
the Senior Notes Programs membership interest in NNN Series A Holdings, LLC, which is the Senior
Notes Programs wholly-owned subsidiary for the sole purpose of making the investments. Each note
is guaranteed by GERI. The guarantee is secured by a pledge of GERI membership interest in the
Senior Notes Program. The Program was closed in January 2007. The total amount raised from this
program was $16.3 million.
As of December 31, 2008 and 2007, the Senior Notes Programs balance is reflected in the table
below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
|
Ownership
|
|
Subsidiary
|
|
Date Issued
|
|
Maturity Date
|
|
2008
|
|
2007
|
|
Current Rate
|
|
Call Date
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
|
100%
|
|
Senior Notes Program
|
|
08/01/2006
|
|
08/01/2011
|
|
$
|
16,277
|
|
|
$
|
16,277
|
|
|
|
8.75
|
%
|
|
N/A
|
19. SEGMENT DISCLOSURE
In conjunction with the Merger, management re-evaluated its reportable segments and determined
that the Companys reportable segments consist of Transaction Services, Investment Management, and
Management Services. The Companys Investment Management segment includes all of NNNs historical
business units and, therefore, all historical data have been conformed to reflect the reportable
segments as a combined company.
Transaction Services
Transaction services advises buyers, sellers, landlords and tenants on
the sale, leasing and valuation of commercial property and includes the Companys national accounts
group and national affiliate program operations.
Investment Management
Investment Management includes services for acquisition, financing
and disposition with respect to the Companys investment programs, asset management services
related to the Companys programs, and dealer-manager services by its securities broker-dealer,
which facilitates capital raising transactions for its investment programs.
Management Services
Management services provide property management and related services
for owners of investment properties and facilities management services for corporate owners and
occupiers.
The Company also has certain corporate level activities including interest income from notes
and advances, property rental related operations, legal administration, accounting, finance, and
management information systems which are not considered separate operating segments.
The Company evaluates the performance of its segments based upon operating (loss) income.
Operating (loss) income is defined as operating revenue less compensation and general and
administrative costs and excludes other rental related, rental expense, interest expense,
depreciation and amortization and certain other operating and non-operating expenses. The
accounting policies of the reportable segments are the same as those described in the Companys
summary of significant accounting policies (See Note 2). Beginning in 2009, allocations of
corporate compensation and corporate general and administrative costs will be excluded from the
evaluation of segment performance.
F-42
GRUBB & ELLIS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2008
|
|
Transaction
|
|
|
Investment
|
|
|
Management
|
|
|
|
|
(In thousands)
|
|
Services
|
|
|
Management
|
|
|
Services
|
|
|
Total
|
|
Revenue
|
|
$
|
240,250
|
|
|
$
|
101,581
|
|
|
$
|
253,664
|
|
|
$
|
595,495
|
|
Compensation costs
|
|
|
220,648
|
|
|
|
56,591
|
|
|
|
225,765
|
|
|
|
503,004
|
|
General and administrative
|
|
|
45,805
|
|
|
|
64,978
|
|
|
|
8,877
|
|
|
|
119,660
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment operating (loss) income
|
|
$
|
(26,203
|
)
|
|
$
|
(19,988
|
)
|
|
$
|
19,022
|
|
|
$
|
(27,169
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment assets
|
|
$
|
100,606
|
|
|
$
|
90,047
|
|
|
$
|
50,232
|
|
|
$
|
240,885
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transaction
|
|
|
Investment
|
|
|
Management
|
|
|
|
|
Year Ended December 31, 2007
|
|
Services
|
|
|
Management
|
|
|
Services
|
|
|
Total
|
|
(In thousands)
|
|
Restated
|
|
|
Restated
|
|
|
Restated
|
|
|
Restated
|
|
Revenue
|
|
$
|
35,522
|
|
|
$
|
149,651
|
|
|
$
|
16,365
|
|
|
$
|
201,538
|
|
Compensation costs
|
|
|
27,081
|
|
|
|
62,454
|
|
|
|
14,574
|
|
|
|
104,109
|
|
General and administrative
|
|
|
3,894
|
|
|
|
39,535
|
|
|
|
822
|
|
|
|
44,251
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment operating income
|
|
$
|
4,547
|
|
|
$
|
47,662
|
|
|
$
|
969
|
|
|
$
|
53,178
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment assets
|
|
$
|
141,348
|
|
|
$
|
480,155
|
|
|
$
|
14,469
|
|
|
$
|
635,972
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transaction
|
|
|
Investment
|
|
|
Management
|
|
|
|
|
Year Ended December 31, 2006
|
|
Services
|
|
|
Management
|
|
|
Services
|
|
|
Total
|
|
(In thousands)
|
|
Restated
|
|
|
Restated
|
|
|
Restated
|
|
|
Restated
|
|
Revenue
|
|
$
|
|
|
|
$
|
99,599
|
|
|
$
|
|
|
|
$
|
99,599
|
|
Compensation costs
|
|
|
|
|
|
|
49,449
|
|
|
|
|
|
|
|
49,449
|
|
General and administrative
|
|
|
|
|
|
|
30,188
|
|
|
|
|
|
|
|
30,188
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment operating income
|
|
$
|
|
|
|
$
|
19,962
|
|
|
$
|
|
|
|
$
|
19,962
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment assets
|
|
$
|
|
|
|
$
|
273,705
|
|
|
$
|
|
|
|
$
|
273,705
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following is reconciliation between segment operating (loss) income to consolidated
net (loss) income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
(In thousands)
|
|
|
|
|
|
Restated
|
|
|
Restated
|
|
Reconciliation to consolidated net (loss) income:
|
|
|
|
|
|
|
|
|
|
|
|
|
Total segment operating (loss) income
|
|
$
|
(27,169
|
)
|
|
$
|
53,178
|
|
|
$
|
19,962
|
|
Non-segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
Rental related revenue
|
|
|
33,284
|
|
|
|
28,119
|
|
|
|
8,944
|
|
Operating expenses
|
|
|
(306,743
|
)
|
|
|
(47,363
|
)
|
|
|
(17,996
|
)
|
Other (expense) income
|
|
|
(18,867
|
)
|
|
|
4,560
|
|
|
|
2,661
|
|
Income tax (provision) benefit
|
|
|
827
|
|
|
|
(14,753
|
)
|
|
|
7,441
|
|
Loss from discontinued operations
|
|
|
(23,921
|
)
|
|
|
(708
|
)
|
|
|
(963
|
)
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
$
|
(342,589
|
)
|
|
$
|
23,033
|
|
|
$
|
20,049
|
|
|
|
|
|
|
|
|
|
|
|
F-43
GRUBB & ELLIS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Reconciliation of segment assets to consolidated balance sheets:
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
Segment assets
|
|
$
|
240,885
|
|
|
$
|
635,972
|
|
Corporate assets
|
|
|
279,392
|
|
|
|
352,570
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
520,277
|
|
|
$
|
988,542
|
|
|
|
|
|
|
|
|
Corporate expenditures
|
|
$
|
4,407
|
|
|
$
|
3,331
|
|
|
|
|
|
|
|
|
Total capital expenditures
|
|
$
|
4,407
|
|
|
$
|
3,331
|
|
|
|
|
|
|
|
|
20. PROPERTIES HELD FOR SALE INCLUDING INVESTMENTS IN UNCONSOLIDATED ENTITIES AND DISCONTINUED
OPERATIONS
A summary of the properties and related LLCs held for sale balance sheet information is as
follows:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
(In thousands)
|
|
2008
|
|
|
2007
|
|
Cash and cash equivalents
|
|
$
|
14
|
|
|
$
|
17
|
|
Restricted cash
|
|
|
23,459
|
|
|
|
55,253
|
|
Properties held for sale including investments in unconsolidated entities
|
|
|
78,708
|
|
|
|
201,219
|
|
Identified intangible assets and other assets
|
|
|
25,747
|
|
|
|
61,810
|
|
Other assets
|
|
|
|
|
|
|
605
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
127,928
|
|
|
$
|
318,904
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes payable of properties held for sale including investments in
unconsolidated entities
|
|
$
|
108,959
|
|
|
$
|
211,931
|
|
Liabilities of properties held for sale
|
|
|
9,257
|
|
|
|
16,037
|
|
Other liabilities
|
|
|
57
|
|
|
|
7,807
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
$
|
118,273
|
|
|
$
|
235,775
|
|
|
|
|
|
|
|
|
During 2008, the Company initiated a plan to sell the properties it classified as real
estate held for investment in its financial statements. As of December 31, 2008, the Company has a
covenant within its Credit Facility which requires the sale of certain of these assets before March
31, 2009. The downturn in the global capital markets significantly lessened the probability that
the Company would be able to achieve relief from this covenant through amendment or other financial
resolutions. Pursuant to the requirements of the Property, Plant, and Equipment Topic
,
the Company
assessed the value of the assets. In addition, the Company reviewed the valuation of its other
owned properties and real estate investments. This valuation review resulted in the Company
recognizing an impairment charge of approximately $90.4 million against the carrying value of the
properties and real estate investments as of December 31, 2008, $31.2 of which is recorded
separately on the statements of operations and $59.2 million of which is included in discontinued
operations. There were no impairment charges recognized during the years ended December 31, 2007
and 2006.
On October 31, 2008, the Company entered into that certain Agreement for the Purchase and Sale
of Real Property and Escrow Instructions to effect the sale of the Danbury Corporate Center located
at 39 Old Ridgebury Road, Danbury, Connecticut, to an unaffiliated entity for a purchase price of
$76.0 million. This agreement was amended and restated in its entirety by that certain Danbury
Merger Agreement dated as of January 23, 2009, as amended by the First Amendment to Danbury Merger
Agreement dated as of January 23, 2009 (the
First Danbury Amendment
) which reduced the purchase
price to $73.5 million. In accordance with the terms of the Danbury Merger Agreement, as amended by
the First Danbury Amendment, the Company received one half of the buyers deposits in an amount of
$3.125 million from the buyer upon the execution of the Danbury Merger Agreement, which released
escrow deposit remains subject to the terms of the Danbury Merger Agreement, and the remaining
$3.125 million of deposits continued to be held in escrow pending the closing. On May 19, 2009, the
Company and the buyer entered into the Second
Amendment to the Danbury Merger Agreement (the
Second Danbury Amendment
) pursuant to which
the remaining $3.125 million of deposits held in escrow were released to the Company (and remain
subject to the terms of the Danbury Merger Agreement, as amended), and the purchase price was
reduced to $72,400,000. In accordance with the Second Danbury Amendment, the closing of the sale of
the property is expected to occur on or before June 1, 2009.
The investments in unconsolidated entities held for sale represent the Companys interest in
certain real estate properties that it holds through various consolidated LLCs. In accordance with
the requirements of the Real EstateRetail Land Topic, and the requirements of the Property,
Plant, and Equipment Topic, the Company treats the disposition of these interests similar to the
F-44
GRUBB & ELLIS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
disposition of real estate it holds directly. In addition, pursuant to the requirements of the
Consolidation Topic, when the Company is no longer the primary beneficiary of the LLC, the Company
deconsolidates the LLC.
During the year ended December 31, 2008, the Company sold interests in certain real estate
properties that it holds through various consolidated LLCs resulting in the deconsolidation of the
LLCs and a decrease of approximately $198.0 million in properties held for sale including
investments in unconsolidated entities. These non-cash transactions concurrently resulted in a
decrease in restricted cash of approximately $20.7 million, a decrease in other assets, identified
intangible assets and other assets held for sale of approximately $48.4 million, a decrease in
investments in unconsolidated entities of approximately $34.6 million, a decrease in accounts
payable and accrued expenses of approximately $13.5 million, a decrease in notes payable of
properties held for sale including investments in unconsolidated entities of approximately $180.2
million, a decrease in minority interest liability of approximately $27.6 million, a decrease in
other liabilities of approximately $1.3 million and an increase in proceeds from related parties of
approximately $79.1 million.
During the year ended December 31, 2007, the Company sold interests in certain real estate
properties that it holds through various consolidated LLCs resulting in the deconsolidation of the
LLCs and a decrease of approximately $290.3 million in properties held for sale including
investments in unconsolidated entities. These non-cash transactions concurrently resulted in a
decrease in restricted cash of approximately $33.5 million, a decrease in other assets, identified
intangible assets and other assets held for sale of approximately $48.9 million, a decrease in
accounts payable and accrued expenses of approximately $8.6 million, a decrease in notes payable of
properties held for sale including investments in unconsolidated entities of approximately $238.1
million, a decrease in minority interest liability of approximately $19.4 million, a decrease in
other liabilities of approximately $3.7 million and an increase in proceeds from related parties of
approximately $102.9 million.
In instances when the Company expects to have significant ongoing cash flows or significant
continuing involvement in the component beyond the date of sale, the income (loss) from certain
properties held for sale continue to be fully recorded within the continuing operations of the
Company through the date of sale.
The net results of discontinued operations and the net gain on dispositions of properties sold
or classified as held for sale as of December 31, 2008, in which the Company has no significant
ongoing cash flows or significant continuing involvement, are reflected in the consolidated
statements of operations as discontinued operations. The Company will receive certain fee income
from these properties on an ongoing basis that is not considered significant when compared to the
operating results of such properties.
The following table summarizes the income (loss) and expense components- net of taxes that
comprised discontinued operations for the years ended December 31, 2008, 2007 and 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
(In thousands)
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
Rental income
|
|
$
|
23,325
|
|
|
$
|
10,471
|
|
|
$
|
1,541
|
|
Rental expense
|
|
|
(16,182
|
)
|
|
|
(5,210
|
)
|
|
|
(862
|
)
|
Depreciation and amortization
|
|
|
(8,030
|
)
|
|
|
(417
|
)
|
|
|
(199
|
)
|
Interest expense (including amortization of deferred financing costs)
|
|
|
(7,522
|
)
|
|
|
(6,442
|
)
|
|
|
(1,572
|
)
|
Real estate related impairments
|
|
|
(31,237
|
)
|
|
|
|
|
|
|
|
|
Tax benefit
|
|
|
15,368
|
|
|
|
638
|
|
|
|
61
|
|
|
|
|
|
|
|
|
|
|
|
Loss from discontinued operations-net of taxes
|
|
|
(24,278
|
)
|
|
|
(960
|
)
|
|
|
(1,031
|
)
|
Gain on disposal of discontinued operations-net of taxes
|
|
|
357
|
|
|
|
252
|
|
|
|
68
|
|
|
|
|
|
|
|
|
|
|
|
Total loss from discontinued operations
|
|
$
|
(23,921
|
)
|
|
$
|
(708
|
)
|
|
$
|
(963
|
)
|
|
|
|
|
|
|
|
|
|
|
21. COMMITMENTS AND CONTINGENCIES
Operating Leases
The Company has non-cancelable operating lease obligations for office
space and certain equipment ranging from one to ten years, and sublease agreements under which the
Company acts as a sublessor. The office space leases often times provide for annual rent increases,
and typically require payment of property taxes, insurance and maintenance costs.
Rent expense under these operating leases was approximately $23.2 million, $4.3 million and
$2.2 million for the years ended December 31, 2008, 2007 and 2006, respectively. Rent expense is
included in general and administrative expense in the accompanying consolidated statements of
operations.
As of December 31, 2008, future minimum amounts payable under non-cancelable operating leases
are as follows for the years ending December 31:
F-45
GRUBB & ELLIS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
|
|
|
|
|
(In thousands)
|
|
|
|
|
2009
|
|
$
|
22,085
|
|
2010
|
|
|
16,760
|
|
2011
|
|
|
14,069
|
|
2012
|
|
|
12,458
|
|
2013
|
|
|
9,624
|
|
Thereafter
|
|
|
16,903
|
|
|
|
|
|
|
|
$
|
91,899
|
|
|
|
|
|
Operating Leases Other
The Company is a master lessee of seven multi-family
residential properties in various locations under non-cancelable leases. The leases, which
commenced in various months and expire from June 2015 through March 2016, require minimum monthly
payments averaging $795,000 over the 10-year period. Rent expense under these operating leases was
approximately $9.4 million, $8.6 million and $4.6 million, for the years ended December 31, 2008,
2007 and 2006, respectively. As of December 31, 2008, rental related expense, based on contractual
amounts due, are as follows for the years ending December 31:
|
|
|
|
|
|
|
Rental
|
|
|
|
Related
|
|
(In thousands)
|
|
Expense
|
|
2009
|
|
$
|
9,793
|
|
2010
|
|
|
10,812
|
|
2011
|
|
|
10,942
|
|
2012
|
|
|
10,942
|
|
2013
|
|
|
10,942
|
|
Thereafter
|
|
|
19,880
|
|
|
|
|
|
|
|
$
|
73,311
|
|
|
|
|
|
The Company subleases these multifamily spaces to third parties for no more than one
year. Rental income from these subleases was approximately $16.4 million, $16.4 million and $8.9
million for the years ended December 31, 2008, 2007 and 2006, respectively.
The Company is also a 50% joint venture partner of four multi-family residential properties in
various locations under non-cancelable leases. The leases, which commenced in various months and
expire from November 2014 through January 2015, require minimum monthly payments averaging $372,000
over the 10-year period. Rent expense under these operating leases was approximately $4.5 million,
$4.3 million and $3.2 million, for the years ended December 31, 2008, 2007 and 2006, respectively.
As of December 31, 2008, rental related expense, based on contractual amounts due, are as follows
for the years ending December 31:
|
|
|
|
|
(In thousands)
|
|
|
|
|
2009
|
|
$
|
4,474
|
|
2010
|
|
|
4,474
|
|
2011
|
|
|
4,474
|
|
2012
|
|
|
4,474
|
|
2013
|
|
|
4,474
|
|
Thereafter
|
|
|
4,518
|
|
|
|
|
|
|
|
$
|
26,888
|
|
|
|
|
|
The Company subleases these multifamily spaces to third parties for no more than one
year. Rental income from these subleases was approximately $9.0 million, $8.4 million and $8.0
million for the years ended December 31, 2008, 2007 and 2006, respectively.
As of December 31, 2008, the Company had recorded liabilities totaling $7.3 million related to
such master lease arrangements, consisting of $4.6 million of cumulative deferred revenues relating
to acquisition fees and loan fees received from 2004 through 2006 and $2.7 million of additional
loss reserves which were recorded in 2008.
TIC Program Exchange Provision
Prior to the Merger, NNN entered into agreements in which
NNN agreed to provide certain investors with a right to exchange their investment in certain TIC
Programs for an investment in a different TIC program. NNN also entered into an agreement with
another investor that provided the investor with certain repurchase rights under certain
F-46
GRUBB & ELLIS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
circumstances with respect to their investment. The agreements containing such rights of
exchange and repurchase rights pertain to initial investments in TIC programs totaling $31.6
million. The Company deferred revenues relating to these agreements of $986,000, $393,000 and
$584,000 for the years ended December 31, 2008, 2007 and 2006, respectively. Additional losses of
$14.3 million related to these agreements were recorded in 2008 to reflect the impairment in value
of properties underlying the agreements with investors. As of December 31, 2008 the Company had
recorded liabilities totaling $18.6 million related to such agreements, consisting of $4.3 million
of cumulative deferred revenues and $14.3 million of additional losses related to these agreements.
In addition, the Company is joint and severally liable on the non-recourse mortgage debt related to
these TIC Programs totaling $277.8 million and $392.2 million as of December 31, 2008 and 2007,
respectively. This mortgage debt is not consolidated as the LLCs account for the interests in the
Companys TIC investments under the equity method and the non recourse mortgage debt does not meet
the criteria under the requirements of the Transfers and Servicing Topic for recognizing the share
of the debt assumed by the other TIC interest holders for consolidation. The Company does consider
the third party TIC holders ability and intent to repay their share of the joint and several
liability in evaluating the recoverability of the Companys investment in the TIC Program.
Capital Lease Obligations
The Company leases computers, copiers, and postage equipment that
are accounted for as capital leases (See Note 15 of for additional information).
SEC Investigation
On June 2, 2008, the Company announced that the staff of the SEC Los
Angeles Enforcement Division informed the Company that the SEC was closing the previously disclosed
September 16, 2004 investigation referred to as
In the matter of Triple Net Properties, LLC,
without any enforcement action against Triple Net Properties or its subsidiaries.
General
The Company is involved in various claims and lawsuits arising out of the ordinary
conduct of its business, as well as in connection with its participation in various joint ventures
and partnerships, many of which may not be covered by the Companys 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 Companys financial position or results of operations.
Guarantees
From time to time the Company provides guarantees of loans for properties under
management. As of December 31, 2008, there were 151 properties under management with loan
guarantees of approximately $3.5 billion in total principal outstanding with terms ranging from one
to 10 years, secured by properties with a total aggregate purchase price of approximately $4.8
billion. As of December 31, 2007, there were 143 properties under management with loans that were
guaranteed of approximately $3.4 billion in total principal outstanding secured by properties with
a total aggregate purchase price of approximately $4.6 billion. In addition, the consolidated VIEs
and unconsolidated VIEs are jointly and severally liable on the non-recourse mortgage debt related
to the interests in the Companys TIC investments totaling $277.8 million and $385.3 million as of
December 31, 2008, respectively.
The Companys guarantees consisted of the following as of December 31, 2008 and 2007:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
(In thousands)
|
|
2008
|
|
|
2007
|
|
Non-recourse/carve-out guarantees of debt of properties under management(1)
|
|
$
|
3,414,433
|
|
|
$
|
3,167,447
|
|
Non-recourse/carve-out guarantees of the Companys debt(1)
|
|
$
|
107,000
|
|
|
$
|
221,430
|
|
Guarantees of the Companys mezzanine debt
|
|
$
|
|
|
|
$
|
48,790
|
|
Recourse guarantees of debt of properties under management
|
|
$
|
42,426
|
|
|
$
|
47,399
|
|
Recourse guarantees of the Companys debt
|
|
$
|
10,000
|
|
|
$
|
10,000
|
|
|
|
|
(1)
|
|
A non-recourse/carve-out guarantee imposes personal liability
on the guarantor in the event the borrower engages in certain
acts prohibited by the loan documents.
|
Management evaluates these guarantees to determine if the guarantee meets the criteria
required to record a liability in accordance with the requirements of the Comprehensive Income
Topic. As of December 31, 2008, the Company recorded a liability of $9.1 million related to
recourse guarantees of debt of properties under management which matured in January and April 2009.
Any other such liabilities were insignificant as of December 31, 2008 and 2007.
Environmental Obligations
In the Companys role as property manager, it could incur
liabilities for the investigation or remediation of hazardous or toxic substances or wastes at
properties the Company currently or formerly managed or at off-site locations where wastes were
disposed. Similarly, under debt financing arrangements on properties owned by sponsored programs,
the Company has agreed to indemnify the lenders for environmental liabilities and to remediate any
environmental problems that may arise. The Company is not aware of any environmental liability or
unasserted claim or assessment relating to an environmental liability that the Company believes
would require disclosure or the recording of a loss contingency as of December 31, 2008 and 2007.
Real Estate Licensing Issues
Although Realty was required to have real estate licenses in
all of the states in which it acted as a broker for NNNs programs and received real estate
commissions prior to 2007, Realty did not hold a license in certain of those
F-47
GRUBB & ELLIS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
states when it earned
fees for those services. In addition, almost all of GERIs revenue was based on an arrangement with
Realty to share fees from NNNs programs. GERI did not hold a real estate license in any state,
although most states in which properties of the NNNs programs were located may have required GERI
to hold a license. As a result, Realty and the Company may be subject to penalties, such as fines
(which could be a multiple of the amount received), restitution payments and termination of
management agreements, and to the suspension or revocation of certain of Realtys real estate
broker licenses. As of December 31, 2008, there have been no claims, and the Company cannot assess
or estimate whether it will incur any losses as a result of the foregoing.
To the extent that the Company incurs any liability arising from the failure to comply with
real estate broker licensing requirements in certain states, Mr. Thompson, Mr. Rogers and Mr.
Hanson have agreed to forfeit to the Company up to an aggregate of 4,124,120 shares of the
Companys common stock, and each share will be deemed to have a value of $11.36 per share in
satisfying this obligation. Mr. Thompson has agreed to indemnify the Company, to the extent the
liability incurred by the Company for such matters exceeds the deemed $46,865,000 value of these
shares (as of the date of the agreement), up to an additional $9,435,000 in cash. In connection
with this arrangement, NNN has entered into an indemnification and escrow agreement with Mr.
Thompson, Mr. Rogers, Mr. Hanson, an independent escrow agent and NNN, pursuant to which the escrow
agent will hold 4,124,120 shares of the Companys common stock that are otherwise issuable to Mr.
Thompson and Mr. Rogers in connection with the NNNs formation transactions (2,885,520 shares for
Mr. Thompson and 1,238,600 shares for Mr. Rogers) to secure Mr. Thompsons and Mr. Rogers
obligations to the Company with respect to these matters. Mr. Thompsons and Mr. Rogers liability
under this arrangement will not exceed the sum of the value of their shares in the escrow except to
the extent Mr. Thompson may be obligated to indemnify the Company for excess liabilities up to an
additional $9,435,000 in cash. Since Mr. Hanson is entitled over time to receive up to 743,160
shares from Messrs. Thompson and Rogers (557,370 from Mr. Thompson and 185,790 from Mr. Rogers)
from the shares held in the indemnification and escrow agreement, he is a party to it as well and
his liability is limited to those shares. If Mr. Hansons right to receive the shares vests, then
to the extent shares attributable to his ownership are available, and not subject to potential
claims, under the indemnification and escrow agreement, he is permitted to remove 88,000 shares on
each of January 1, 2008 and 2009 to pay taxes. As Mr. Hansons right to receive the shares vests,
then to the extent shares attributable to his ownership are available, and not subject to potential
claims, under the indemnification and escrow agreement, he will be permitted to remove certain
shares to pay taxes. On January 20, 2009, Mr. Hanson was permitted to remove 247,695 shares from
the escrow to pay taxes.
Alesco Seed Capital
- On November 16, 2007, the Company completed the acquisition of a 51%
membership interest in Grubb & Ellis Alesco Global Advisors, LLC (
Alesco
). Pursuant to the
Intercompany Agreement between the Company and Alesco, dated as of November 16, 2007, the Company
committed to invest $20.0 million in seed capital into the open and closed end real estate funds
that Alesco expects to launch. Additionally, upon achievement of certain earn-out targets, the
Company is required to purchase up to an additional 27% interest in Alesco for $15.0 million. The
Company is allowed to use $15.0 million of seed capital to fund the earn-out payments. As of
December 31, 2008, the Company has invested $500,000 in seed capital into the open and closed end
real estate funds that Alesco launched during 2008.
22. EARNINGS (LOSS) PER SHARE
The Company computes earnings per share in accordance with the requirements of the Earnings
Per Share Topic. Under the provisions of the Topic, basic earnings (loss) per share is computed
using the weighted-average number of common shares outstanding during the period. Diluted earnings
(loss) per share is computed using the weighted-average number of common and common equivalent
shares of stock outstanding during the periods utilizing the treasury stock method for stock
options and unvested restricted stock.
On December 7, 2007, pursuant to the Merger Agreement (i) each issued and outstanding share of
common stock of NNN was automatically converted into 0.88 of a share of common stock of the
Company, and (ii) each issued and outstanding stock option of NNN, exercisable for common stock of
NNN, was automatically converted into the right to receive stock option exercisable for common
stock of the Company based on the same 0.88 share conversion ratio.
Unless otherwise indicated, all pre-merger NNN share data have been adjusted to reflect the
0.88 conversion as a result of the Merger.
The following is a reconciliation between weighted-average shares used in the basic and
diluted earnings (loss) per share calculations:
F-48
GRUBB & ELLIS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
(In thousands, except per share amounts)
|
|
|
|
|
|
Restated
|
|
|
Restated
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income from continuing operations attributable to Grubb & Ellis Company, net of tax
|
|
$
|
(306,949
|
)
|
|
$
|
21,780
|
|
|
$
|
20,934
|
|
|
Earnings allocated to participating securities
|
|
|
|
|
|
|
(406
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Numerator for basic and diluted EPS from continuing operations
|
|
$
|
(306,949
|
)
|
|
$
|
21,374
|
|
|
$
|
20,934
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from discontinued operations attributable to Grubb & Ellis Company, net of tax
|
|
$
|
(23,921
|
)
|
|
$
|
(708
|
)
|
|
$
|
(963
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Numerator for basic and diluted EPS from discontinued operations
|
|
$
|
(23,921
|
)
|
|
$
|
(708
|
)
|
|
$
|
(963
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income attributable to Grubb & Ellis Company
|
|
$
|
(330,870
|
)
|
|
$
|
20,666
|
|
|
$
|
19,971
|
|
|
|
|
|
|
|
|
|
|
|
|
Numerator for basic and diluted EPS
|
|
$
|
(330,870
|
)
|
|
$
|
20,666
|
|
|
$
|
19,971
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for basic earnings (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average number of common shares outstanding
|
|
|
63,515
|
|
|
|
38,652
|
|
|
|
19,681
|
(1)
|
Effect of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Unvested restricted stock
|
|
|
|
(2)
|
|
|
|
(2)
|
|
|
13
|
(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for diluted earnings (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average number of common and common equivalent shares outstanding
|
|
|
63,515
|
|
|
|
38,652
|
|
|
|
19,694
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic (loss) earnings per share
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income from continuing operations attributable to Grubb & Ellis Company, net of tax
|
|
$
|
(4.83
|
)
|
|
$
|
0.55
|
|
|
$
|
1.06
|
|
Loss from discontinued operations attributable to Grubb & Ellis Company, net of tax
|
|
|
(0.38
|
)
|
|
|
(0.02
|
)
|
|
|
(0.05
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Basic (loss) earnings per share
|
|
$
|
(5.21
|
)
|
|
$
|
0.53
|
|
|
$
|
1.01
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted (loss) earnings per share
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income from continuing operations attributable to Grubb & Ellis Company, net of tax
|
|
$
|
(4.83
|
)
|
|
$
|
0.55
|
|
|
$
|
1.06
|
|
Loss from discontinued operations attributable to Grubb & Ellis Company, net of tax
|
|
|
(0.38
|
)
|
|
|
(0.02
|
)
|
|
|
(0.05
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Diluted (loss) earnings per share
|
|
$
|
(5.21
|
)
|
|
$
|
0.53
|
|
|
$
|
1.01
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Shares of NNNs common stock as December 31, 2007, were
converted to the Companys common shares outstanding by
applying December 7, 2007 merger exchange ratio for
earnings (loss) per share disclosure purposes.
|
|
(2)
|
|
Excluded from the calculation of diluted
weighted-average common shares were approximately 3.1
million, 2.0 million and 181,000 shares of options and
restricted stock that have an anti-dilutive effect when
applying the treasury stock method as of December 31,
2008, 2007 and 2006, respectively. In addition,
excluded from the calculation of diluted
weighted-average common shares as of December 31, 2008
were approximately 5.2 million shares that may be
awarded to employees related to the deferred
compensation plan. See Note 24 Employee Benefit
Plans for additional information on the deferred
compensation plan.
|
23. OTHER RELATED PARTY TRANSACTIONS
Offering Costs and Other Expenses Related to Public Non-traded REITs
The Company, through
its consolidated subsidiaries Grubb & Ellis Apartment REIT Advisor, LLC, and Grubb & Ellis
Healthcare REIT Advisor, LLC, bears certain general and administrative expenses in its capacity as
advisor of Apartment REIT and Healthcare REIT, respectively, and is reimbursed for these expenses.
However, Apartment REIT and Healthcare REIT will not reimburse the Company for any operating
expenses that, in
F-49
GRUBB & ELLIS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
any four consecutive fiscal quarters, exceed the greater of 2.0% of average
invested assets (as defined in their respective advisory agreements) or 25.0% of the respective
REITs net income for such year, unless the board of directors of the respective REITs approve such
excess as justified based on unusual or nonrecurring factors. All unreimbursable amounts are
expensed by the Company.
The Company also pays for the organizational, offering and related expenses on behalf of
Apartment REIT and Healthcare REIT. These organizational, offering and related expenses include all
expenses (other than selling commissions and the marketing
support fee which generally represent 7.0% and 2.5% of the gross offering proceeds,
respectively) to be paid by Apartment REIT and Healthcare REIT in connection with their offerings.
These expenses only become the liability of Apartment REIT and Healthcare REIT to the extent
selling commissions, the marketing support fee and due diligence expense reimbursements and other
organizational and offering expenses do not exceed 11.5% of the gross proceeds of the offering. As
of December 31, 2008, the Company has incurred expenses of $3.8 million and $0 in excess of 11.5%
of the gross proceeds of the Apartment REIT and Healthcare REIT offerings, respectively. As of
December 31, 2008, the Company has recorded an allowance for bad debt of approximately $3.6 million
related to the Apartment REIT offering costs incurred as the Company believes that such amounts
will not be reimbursed.
Management Fees
The Company provides both transaction and management services to parties,
which are related to a principal stockholder and director of the Company (collectively,
Kojaian
Companies
). In addition, the Company also pays asset management fees to the Kojaian Companies
related to properties the Company manages on their behalf. Revenue, including reimbursable expenses
related to salaries, wages and benefits, earned by the Company for services rendered to these
affiliates, including joint ventures, officers and directors and their affiliates, was $7.3
million, $530,000, and $0, respectively for the years ended December 31, 2008, 2007 and 2006.
Other Related Party
GERI, which is wholly owned by the Company, owns a 50.0% managing
member interest in Grubb & Ellis Apartment REIT Advisor, LLC and, therefore, consolidates Grubb &
Ellis Apartment REIT Advisor, LLC. Each of Grubb & Ellis Apartment Management, LLC and ROC REIT
Advisors, LLC own a 25.0% equity interest in Grubb & Ellis Apartment REIT Advisor, LLC. As of
December 31, 2008, Andrea R. Biller, the Companys General Counsel, Executive Vice President and
Secretary, owned an equity interest of 18.0% of Grubb & Ellis Apartment Management, LLC. As of
December 31, 2007, each of Scott D. Peters, the Companys former Chief Executive Officer and
President, and Andrea R. Biller owned an equity interest of 18.0% of Grubb & Ellis Apartment
Management, LLC. On August 8, 2008, in accordance with the terms of the operating agreement of
Grubb & Ellis Apartment Management, LLC, Grubb & Ellis Apartment Management LLC tendered settlement
for the purchase of the 18.0% equity interest in Grubb & Ellis Apartment Management LLC that was
previously owned by Mr. Peters. As a consequence, through a wholly-owned subsidiary, the Companys
equity interest in Grubb & Ellis Apartment Management, LLC increased from 64.0% to 82.0% after
giving effect to this purchase from Mr. Peters. As of December 31, 2008 and December 31, 2007,
Stanley J. Olander, Jr., the Companys Executive Vice President Multifamily, owned an equity
interest of 33.3% of ROC REIT Advisors, LLC.
GERI owns a 75.0% managing member interest in Grubb & Ellis Healthcare REIT Advisor, LLC and,
therefore, consolidates Grubb & Ellis Healthcare REIT Advisor, LLC. Grubb & Ellis Healthcare
Management, LLC owns a 25.0% equity interest in Grubb & Ellis Healthcare REIT Advisor, LLC. As of
December 31, 2008, each of Ms. Biller and Mr. Hanson, the Companys Chief Investment Officer and
GERIs President, owned an equity interest of 18.0% of Grubb & Ellis Healthcare Management, LLC. As
of December 31, 2007, each of Mr. Peters, Ms. Biller and Mr. Hanson owned an equity interest of
18.0% in Grubb & Ellis Healthcare Management, LLC. On August 8, 2008, in accordance with the terms
of the operating agreement of Grubb & Ellis Healthcare Management, LLC, Grubb & Ellis Healthcare
Management, LLC tendered settlement for the purchase of 18.0% equity interest in Grubb & Ellis
Healthcare Management, LLC that was previously owned by Mr. Peters. As a consequence, through a
wholly-owned subsidiary, the Companys equity interest in Grubb & Ellis Healthcare Management, LLC
increased from 46.0% to 64.0% after giving effect to this purchase from Mr. Peters.
In connection with his resignation on July 10, 2008, Mr. Peters is no longer a member of Grubb
& Ellis Apartment Management, LLC and Grubb & Ellis Healthcare Management, LLC.
Mr. Thompson, as a special member, was entitled to receive up to $175,000 annually in
compensation from each of Grubb & Ellis Apartment Management, LLC and Grubb & Ellis Healthcare
Management, LLC. Effective February 8, 2008, upon his resignation as Chairman, he was no longer a
special member. As part of his resignation, the Company has agreed to continue to pay him up to an
aggregate of $569,000 through the initial offering periods related to Apartment REIT, Inc. and
Healthcare REIT, Inc., of which $263,000 remains outstanding as of December 31, 2008.
The grants of membership interests in Grubb & Ellis Apartment Management, LLC and Grubb &
Ellis Healthcare Management, LLC to certain executives are being accounted for by the Company as a
profit sharing arrangement. Compensation expense is recorded by the Company when the likelihood of
payment is probable and the amount of such payment is estimable, which generally coincides with
Grubb & Ellis Apartment REIT Advisor, LLC and Grubb & Ellis Healthcare REIT Advisor, LLC recording
its revenue. Compensation expense related to this profit sharing arrangement associated with Grubb
& Ellis Apartment Management, LLC includes distributions of $88,000, $175,000 and $22,000
respectively, earned by Mr. Thompson, $85,000, $159,000 and $50,000, respectively, earned by Mr.
Peters and $122,000, $159,000 and $50,000, respectively, earned by Ms. Biller for the years ended
F-50
GRUBB & ELLIS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2008, 2007 and 2006, respectively. Compensation expense related to this profit sharing
arrangement associated with Grubb & Ellis Healthcare Management, LLC includes distributions of
$175,000 and $175,000, respectively, earned by Mr. Thompson, $387,000 and $414,000, respectively,
earned by Mr. Peters and $548,000 and $414,000, respectively, earned by each of Ms. Biller and Mr.
Hanson for the years ended December 31, 2008 and 2007, respectively. No distributions were paid in
2006.
As of December 31, 2008 and December 31, 2007, the remaining 82.0% and 64.0%, respectively,
equity interest in Grubb & Ellis Apartment Management, LLC and the remaining 64.0% and 46.0%,
respectively, equity interest in Grubb & Ellis Healthcare Management, LLC were owned by GERI. Any
allocable earnings attributable to GERIs ownership interests are paid to GERI on a quarterly
basis. Grubb & Ellis Apartment Management, LLC incurred expenses of $338,000, $492,000 and $182,000
for the years
ended December 31, 2008, 2007 and 2006, respectively, and Grubb & Ellis Healthcare Management,
LLC incurred expenses of $1,385,000, $882,000 and $0 for the years ended December 31, 2008, 2007
and 2006, respectively, to Company employees, which was included in compensation expense in the
consolidated statement of operations.
Mr. Thompson and Mr. Rogers have agreed to transfer up to 15.0% of the common stock of Realty
they own to Mr. Hanson, assuming he remains employed by the Company in equal increments on July 29,
2007, 2008 and 2009. The transfers will be settled with 743,160 shares of the Companys common
stock (557,370 from Mr. Thompson and 185,790 from Mr. Rogers). Because Mr. Thompson and Mr. Rogers
were affiliates of NNN at the time of such transfers, NNN and the Company recognized a compensation
charge (See Note 24). Mr. Hanson is not entitled to any reimbursement for his tax liability or any
gross-up payment.
On September 20, 2006, the Company awarded Mr. Peters a bonus of $2.1 million, which was
payable in 178,957 shares of the Companys common stock, representing a value of $1.3 million and a
cash tax gross-up payment of $854,000.
Mr. Peters and Ms. Biller each earned in fiscal 2006 a performance-based bonus of $100,000
from GERI upon the receipt by GERI of net commissions aggregating $5,000,000 or more from the sale
of G REIT properties in 2006. The performance based-bonus was paid in
March 2007.
The Companys directors and officers, as well as officers, managers and employees have
purchased, and may continue to purchase, interests in offerings made by the Companys programs at a
discount. The purchase price for these interests reflects the fact that selling commissions and
marketing allowances will not be paid in connection with these sales. The net proceeds to the
Company from these sales made net of commissions will be substantially the same as the net proceeds
received from other sales.
Mr. Thompson has routinely provided personal guarantees to various lending institutions that
provided financing for the acquisition of many properties by our programs. These guarantees cover
certain covenant payments, environmental and hazardous substance indemnification and any
indemnification for any liability arising from the SEC investigation of Triple Net Properties. In
connection with the formation transactions, the Company indemnified Mr. Thompson for amounts he may
be required to pay under all of these guarantees to which Triple Net Properties, Realty or NNN
Capital Corp. is an obligor to the extent such indemnification would not require the Company to
book additional liabilities on the Companys balance sheet.
In September 2007, NNN acquired Cunningham Lending Group LLC (
Cunningham
), a company that
was wholly-owned by Mr. Thompson, for $255,000 in cash. Prior to the acquisition, Cunningham made
unsecured loans to some of the properties under management by GERI. The loans, which bear interest
at rates ranging from 8.0% to 12.0% per annum are reflected in advances to related parties on the
Companys balance sheet and are serviced by the cash flows from the programs. In accordance with
the requirements of the Consolidation Topic, the Company consolidated Cunningham in its financial
statements beginning in 2005.
24. EMPLOYEE BENEFIT PLANS
Stock Incentive Plans
Unless otherwise indicated, all pre-merger NNN share data have been adjusted to reflect the
conversion as a result of the Merger (see Note 11).
2006 Omnibus Equity Plan
In September 2006, NNNs board of directors and then sole
stockholder approved and adopted the 2006 Long-Term Incentive Plan (the
2006 Plan
). As a result
of the merger of Grubb & Ellis and NNN, all issued and outstanding stock option awards under the
2006 Plan were merged into and are subject to the general provisions of the 2006 Omnibus Equity
Plan (the
Omnibus Plan
). Awards previously issued pursuant to the 2006 Plan maintain all of the
specific rights and characteristics as they held when originally issued, except for the number of
shares represented within each award. The numbers of shares contained in awards issued under the
2006 Plan have been multiplied by a conversion factor of 0.88 to calculate a post-merger equivalent
share amount for each award. In addition, the exercise price of any option award originally granted
under the 2006 Plan has been divided by the same conversion factor of 0.88 to achieve a post-merger
equivalent exercise price. All tables contained within this Note 24 of Notes to Consolidated
Financial Statements have been retroactively restated to reflect the above conversion factors,
effective as if the conversion had been calculated as of January 1, 2006, the earliest date
presented.
F-51
GRUBB & ELLIS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
A total of 2,055,375 shares of common stock (plus restricted shares issuable to outside
directors pursuant to a formula contained in the plan) remained eligible for future grant under the
Omnibus Plan as of December 31, 2008.
Non-Qualified Stock Options.
Non-qualified stock options, or NQSOs, provide for the right to
purchase shares of common stock at a specified price not less than its fair market value on the
date of grant, and usually will become exercisable (in the discretion of the administrator) in one
or more installments after the grant date, subject to the completion of the applicable vesting
service period or the attainment of pre-established performance goals.
In terms of vesting periods, 1,105,219 stock options were granted and vested at the date of
merger. Other stock options granted during the year ended December 31, 2007 vest in equal annual
increments over the three years following the date of grant. Of the stock options granted during
the year ended December 31, 2006, 60,133 options were exercisable on the date of grant. The
remaining options vest in equal annual increments over the two years following the date of grant.
These NQSOs are subject to a maximum term of ten years from the date of grant and are subject
to earlier termination under certain conditions. Because these stock option awards were granted to
the Companys senior executive officers, no forfeiture rate has been assumed.
The following table provides a summary of the Companys stock option activity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-Average
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Remaining
|
|
|
Weighted-Average
|
|
|
|
|
|
|
|
Weighted-Average
|
|
|
Contractual Term
|
|
|
Grant Date
|
|
|
|
Number of Shares
|
|
|
Exercise Price per Share
|
|
|
(In Years)
|
|
|
Fair Value per Share
|
|
Options outstanding as of January 1, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options granted
|
|
|
180,400
|
|
|
$
|
11.36
|
|
|
|
|
|
|
$
|
4.16
|
|
Options exercised
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options forfeited or expired
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options outstanding as of December 31, 2006
|
|
|
180,400
|
|
|
$
|
11.36
|
|
|
|
9.87
|
|
|
$
|
4.16
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options granted
|
|
|
610,940
|
|
|
$
|
11.36
|
|
|
|
|
|
|
$
|
3.61
|
|
Options exercised
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options forfeited or expired
|
|
|
(140,800
|
)
|
|
$
|
11.36
|
|
|
|
|
|
|
$
|
3.78
|
|
Options converted and vested related to acquired company
|
|
|
1,105,219
|
|
|
$
|
7.06
|
|
|
|
|
|
|
$
|
3.60
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options outstanding as of December 31, 2007
|
|
|
1,755,759
|
|
|
$
|
8.65
|
|
|
|
6.14
|
|
|
$
|
3.65
|
|
Options granted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options exercised
|
|
|
(76,666
|
)
|
|
$
|
6.53
|
|
|
|
|
|
|
$
|
4.23
|
|
Options forfeited or expired
|
|
|
(601,918
|
)
|
|
$
|
10.74
|
|
|
|
|
|
|
$
|
2.12
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options outstanding as of December 31, 2008
|
|
|
1,077,175
|
|
|
$
|
7.76
|
|
|
|
6.79
|
|
|
$
|
4.51
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options vested and exercisable as of December 31, 2008
|
|
|
820,797
|
|
|
$
|
6.63
|
|
|
|
6.39
|
|
|
$
|
4.79
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options expected to vest as of December 31, 2008
|
|
|
256,378
|
|
|
$
|
11.36
|
|
|
|
8.06
|
|
|
$
|
3.61
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options vested and expected to vest as of December 31, 2008
|
|
|
1,077,175
|
|
|
$
|
7.76
|
|
|
|
6.79
|
|
|
$
|
4.51
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Equity Topic requires companies to estimate the fair value of its stock option equity
awards on the date of grant using an option-pricing model. The Company uses the Black-Scholes
option-pricing model. The determination of the fair value of option-based awards using the
Black-Scholes model incorporates various assumptions including exercise price, fair value at date
of grant, volatility, and expected life of awards, risk-free interest rates and expected dividend
yield. The expected volatility is based on the historical volatility of comparable publicly traded
companies in the real estate sector over the most recent period commensurate with the estimated
expected life of the Companys stock options. The expected life of the Companys stock options
represents the average between the vesting and contractual term, pursuant to the requirements of
the Compensation-Stock Compensation Topic. The fair value of each option grant is estimated on the
date of grant using the Black-Scholes option-pricing model with the following weighted-average
assumptions used for grants during the years ended December 31, 2007 and 2006. (The Company did not
grant any options during the year ended December 31, 2008):
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2007
|
|
2006
|
Exercise price
|
|
$
|
8.59
|
|
|
$
|
11.36
|
|
Expected term (in years)
|
|
|
5.0
|
|
|
|
6.0
|
|
Risk-free interest rate
|
|
|
3.97
|
%
|
|
|
4.67
|
%
|
Expected volatility
|
|
|
81.79
|
%
|
|
|
43.94
|
%
|
Expected dividend yield
|
|
|
4.1
|
%
|
|
|
4.1
|
%
|
Fair value at date of grant
|
|
$
|
3.45
|
|
|
$
|
3.66
|
|
F-52
GRUBB & ELLIS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Option valuation models require the input of subjective assumptions including the expected
stock price volatility and expected life. For the years ended December 31, 2008, 2007 and 2006, the
Company recognized stock-based compensation related to stock option awards of $554,000, $619,000
and $281,000, respectively. The related income tax benefit for the years ended December 31, 2008,
2007 and 2006 was $209,000, $248,000 and $110,000, respectively. The total fair value of stock
options that vested for the years ended December 31, 2008, 2007 and 2006 was $774,000, $189,000 and
$250,000, respectively. As of December 31, 2008, there was $491,000 in unrecognized compensation
expense related to stock option awards that the Company expects to recognize over a weighted
average period of 13 months.
Restricted Stock.
Restricted stock may be issued at such price, if any, and may be made
subject to such restrictions (including time vesting or satisfaction of performance goals), as may
be determined by the administrator. Restricted stock typically may be repurchased by the Company at
the original purchase price, if any, or forfeited, if the vesting conditions and other restrictions
are not met.
For the years ended December 31, 2008 and 2007, the Company granted restricted stock awards of
1,552,227 shares and 1,449,372 shares, respectively. Total compensation expense recognized for
restricted stock awards was $7.8 million, $5.5 million, and $1.7 million for the years ended
December 31, 2008, 2007 and 2006, respectively. The related income tax benefit for the years ended
December 31, 2008, 2007 and 2006 was $2.9 million, $2.2 million, and $681,000, respectively. As of
December 31, 2008, there was $6.9 million of unrecognized compensation expense related to unvested
restricted stock awards that the Company expects to recognize over a weighted average period of 18
months.
F-53
GRUBB & ELLIS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The following table provides a summary of the Companys restricted stock activity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-Average
|
|
|
|
|
|
|
|
Grant Date
|
|
|
|
Number of Shares
|
|
|
Fair Value per Share
|
|
Non vested shares outstanding as of January 1, 2006
|
|
|
|
|
|
|
|
|
Shares issued
|
|
|
541,200
|
|
|
$
|
10.83
|
|
Shares vested
|
|
|
|
|
|
|
|
|
Shares forfeited
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non vested shares outstanding as of December 31, 2006
|
|
|
541,200
|
|
|
$
|
10.83
|
|
Shares issued upon merger
|
|
|
40,000
|
|
|
$
|
12.49
|
|
Shares issued
|
|
|
1,409,372
|
|
|
$
|
10.31
|
|
Shares vested
|
|
|
(456,133
|
)
|
|
$
|
10.78
|
|
Shares forfeited
|
|
|
(102,667
|
)
|
|
$
|
10.89
|
|
|
|
|
|
|
|
|
|
Non vested shares outstanding as of December 31, 2007
|
|
|
1,431,772
|
|
|
$
|
10.37
|
|
Shares issued
|
|
|
1,552,227
|
|
|
$
|
3.06
|
|
Shares vested
|
|
|
(455,195
|
)
|
|
$
|
10.65
|
|
Shares forfeited
|
|
|
(514,792
|
)
|
|
$
|
9.79
|
|
|
|
|
|
|
|
|
|
Non vested shares outstanding as of December 31, 2008
|
|
|
2,014,012
|
|
|
$
|
4.95
|
|
|
|
|
|
|
|
|
|
Employment Agreements.
In October 2006, the Company entered into employment agreements
with each of Mr. Peters, Mr. Rogers, Ms. Biller, Francene LaPoint, the Companys Former Executive
Vice President, Accounting and Finance, Mr. Hanson and Mr. Hull. These agreements provide that each
of these executives agree to devote substantially all of his or her full working time to NNNs
business. The agreements have a term of three years, and provide for an annual base salary and
bonus targets under the performance bonus program. Additional benefits include health benefits and
other fringe benefits as the board or compensation committee determines. Mr. Hansons employment
agreement further provides for a special bonus based on his ability to procure new sources of
equity, and Mr. Peters new employment arrangement with the combined company provides for a $1.0
million payment for a second residence in California following the close of the Merger and the
purchase of a second residence. In January, 2008, Mr. Peters irrevocably waived his right to
receive the $1.0 million payment for a second residence in California. Effective July 10, 2008, Mr.
Peters resigned as Chief Executive Officer and President of the Company. Effective October 3, 2008,
Ms. LaPoint resigned as Executive Vice President, Accounting and Finance of the Company.
Other stock award.
On September 20, 2006, the Company awarded Mr. Peters a bonus of $2.1
million, which was payable in 178,083 shares of the Companys common stock for a value of $1.3
million, and cash of $854,000.
Other Equity Awards
In accordance with the requirements of the Equity Topic, share-based
payments awarded to an employee of the reporting entity by a related party, or other holder of an
economic interest in the entity, as compensation for services provided to the entity are
share-based payment transactions to be accounted for under this Statement unless the transfer is
clearly for a purpose other than compensation for services to the reporting entity. The economic
interest holder is one who either owns 10.0% or more of an entitys common stock or has the
ability, directly or indirectly, to control or significantly influence the entity. The substance of
such a transaction is that the economic interest holder makes a capital contribution to the
reporting entity, and that entity makes a share-based payment to its employee in exchange for
services rendered. The Equity Topic also requires that the fair value of unvested stock options or
awards granted by an acquirer in exchange for stock options or awards held by employees of the
acquiree shall be determined at the consummation date of the acquisition. The incremental
compensation cost shall be (1) the portion of the grant-date fair value of the original award for
which the requisite service is expected to be rendered (or has already been rendered) at that date
plus (2) the incremental cost resulting from the acquisition (the fair market value at the
consummation date of the acquisition over the fair value of the original grant).
On July 29, 2006, Mr. Thompson and Mr. Rogers agreed to transfer up to 15.0% of the
outstanding common stock of Realty to Mr. Hanson, assuming he remained employed by the Company, in
equal increments on July 29, 2007, 2008 and 2009. Due to the acquisition of Realty, the transfers
were settled with 743,160 shares of the Companys common stock (557,370 shares from Mr. Thompson
and 185,790 shares from Mr. Rogers). Since Mr. Thompson and Mr. Rogers were affiliates who owned
more than 10.0% of Realtys common stock and had the ability, directly or indirectly, to control or
significantly influence the entity, and the award was granted to Mr. Hanson in exchange for
services provided to Realty which are vested upon completion of the respective service period, the
fair value of the award was accounted for as stock-based compensation in accordance with the
requirements of the Equity Topic. These shares included rights to dividends or other distributions
declared on or prior to July 29, 2009. As a result, the Company recognized $2.8 million, $2.7
million, and $333,000 in stock-based compensation and a related income tax benefit (deferred
F-54
GRUBB & ELLIS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
tax asset) of $1.1 million, $1.1 million and $130,000 for the years ended December 31, 2008, 2007 and
2006, respectively. As of December 31,
2008, there was $1.6 million of unrecognized stock-based compensation related to the unvested
portion of the award that the Company expects to recognize in 2009.
On December 7, 2007, Mr. Thompson transferred 528,000 shares of his own Company common stock
to Mr. Peters, which were to vest in equal annual increments over the five years following the date
of grant. Since Mr. Thompson was an affiliate who owned more than 10.0% of the Companys common
stock and had the ability, directly or indirectly, to control or significantly influence the
entity, and the award was granted to Mr. Peters in exchange for services provided to the Company
which are vested upon completion of the respective service period, the fair value of the award was
accounted for as stock-based compensation in accordance with the requirements of the Equity Topic.
These shares included rights to dividends or other distributions declared. As a result, the Company
recognized $48,000 in stock-based compensation and a related income tax benefit (deferred tax
asset) of $19,000 for the year ended December 31, 2007.
On July 10, 2008, Scott D. Peters resigned as the Companys Chief Executive Officer and
President, and as a consequence, the employment agreement between the Company and Mr. Peters was
terminated in accordance with its terms. As such, previously recognized stock-based compensation
expense related to the transfer of shares, including accrued dividends or distributions declared,
were reversed, along with forfeiture of all rights and interests. Additionally, there will be no
further recognition of stock-based compensation related to the unvested portion of the award.
401k Plan
The Company adopted a 401(k) plan (the
Plan
) for the benefit of its employees.
The Plan covers employees of the Company and eligibility begins the first of the month following
the hire date. For the years ended December 31, 2008, 2007 and 2006, the Company contributed $3.3
million, $817,000, and $525,000 to the Plan, respectively.
Deferred Compensation Plan
During 2008, the Company implemented a deferred compensation plan that permits employees and
independent contractors to defer portions of their compensation, subject to annual deferral limits,
and have it credited to one or more investment options in the plan. Deferrals made by employees and
independent contractors and earnings thereon are fully accrued and held in a rabbi trust. In
addition, the Company may make discretionary contributions to the plan which vest over one to five
years. Contributions made by the Company and earnings thereon are accrued over the vesting period
and have not been funded to date. Benefits are paid according to elections made by the
participants. Included in Other Long Term Liabilities as of December 31, 2008 is $1.7 million
reflecting the non-stock liability under this plan. The Company has purchased whole-life insurance
contracts on certain employee participants to recover distributions made or to be made under this
plan and have recorded the cash surrender value of the policies of $1.1 million in Other Noncurrent
Assets.
In addition, the Company may award phantom shares of Company stock to participants under the
deferred compensation plan. These awards vest over three to five years. Vested phantom stock awards
are also unfunded and paid according to distribution elections made by the participants at the time
of vesting and will be settled by the Company purchasing shares of Company common stock in the open
market from time to time and delivering such shares to the participant. During 2008, the Company
granted an aggregate of 5.4 million phantom shares to various employees under this plan, of which
5.2 million phantom shares were outstanding as of December 31, 2008. The Company recorded stock
compensation expense of $3.1 million for the year ended December 31, 2008 related to certain of
these grants which provided for a minimum guaranteed value upon vesting.
25. INCOME TAXES
The components of income tax (benefit) provision from continuing operations for the years
ended December 31, 2008, 2007 and 2006 consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
(In thousands)
|
|
|
|
|
|
Restated
|
|
|
Restated
|
|
Current:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
(10,981
|
)
|
|
$
|
16,991
|
|
|
$
|
375
|
|
State
|
|
|
(1,891
|
)
|
|
|
3,195
|
|
|
|
331
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(12,872
|
)
|
|
|
20,186
|
|
|
|
706
|
|
|
|
|
|
|
|
|
|
|
|
Deferred:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
17,367
|
|
|
|
(4,886
|
)
|
|
|
(6,766
|
)
|
State
|
|
|
(5,322
|
)
|
|
|
(547
|
)
|
|
|
(1,381
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12,045
|
|
|
|
(5,433
|
)
|
|
|
(8,147
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(827
|
)
|
|
$
|
14,753
|
|
|
$
|
(7,441
|
)
|
|
|
|
|
|
|
|
|
|
|
F-55
GRUBB & ELLIS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The Company recorded prepaid taxes totaling approximately of $1.2 million and $2.4
million as of December 31, 2008 and 2007, respectively, comprised primarily of state tax refund
receivables and state prepaid tax estimates. The Company also received net federal and state tax
refunds of approximately $6.2 million and $300,000 during 2008 and 2007, respectively, comprised
primarily of refunds of estimated overpayments and net operating loss carryback claims resulting in
refunds of taxes paid in previous years.
The Company generated a federal net operating loss (
NOL
) of approximately $9.5 million for
the taxable period of the acquired entity ending on the Merger date December 7, 2007. The Company
carried back $6.6 million of this NOL to 2006 and claimed a refund of taxes paid of $1.7 million.
As of December 31, 2008, federal net operating loss carryforwards were available to the Company in
the amount of approximately $2.2 million, translating to a deferred tax asset before valuation
allowance of $800,000, which will begin to expire in 2027. The remaining NOL carryforward is
subject to an annual limitation under IRC section 382 because the Merger caused a change of
ownership of the Company of greater than 50.0%. The annual limitation is approximately $7.3
million. Prior to the issuance of the Companys December 31, 2008 financial statements, the Company
filed its 2008 federal income tax return claiming an ordinary loss of $29.2 million. The Company
carried back this NOL to 2006 and 2007 and claimed and received a refund of taxes paid of $10.3
million.
The Company also had state net operating loss carryforwards from previous periods totaling
$74.5 million, translating to a deferred tax asset of $6.1 million before valuation allowances,
which will begin to expire in 2017. The current increase in deferred assets related to state net
operating losses has been offset by an increase in the valuation allowances of $2.4 million as the
future utilization of these state NOLs is uncertain. The additional increase in deferred tax assets
of $2.2 million related to current year estimated state net operating losses has been offset by the
same increase in the valuation allowance.
The Company regularly reviews its deferred tax assets for recoverability and establishes a
valuation allowance based upon historical taxable income, projected future taxable income and the
expected timing of the reversals of existing temporary differences to reduce its deferred assets to
the amount that it believes is more likely than not to be realized. Due to the cumulative pre-tax
book loss in the past three years and the inherent volatility of the business in recent years, the
Company believes that this negative evidence supports the position that a valuation allowance is
required pursuant to the requirements of the Income Taxes Topic. As of December 31, 2008, there is
approximately $6.2 million of taxable income available in carryback years that could be used to
offset deductible temporary differences. Management determined that as of December 31, 2008, $55.2
million of deferred tax assets do not satisfy the recognition criteria set forth in the
requirements of the Topic. Accordingly, a valuation allowance has been recorded for this amount. If
released, the entire amount would result in a benefit to continuing operations. During the year
ended December 31, 2008, our valuation allowances increased by approximately $52.1 million. Of the
$52.1 million increase, $2.4 million was charged against Goodwill due to state return to provision
true-ups of the pre-merger returns.
The differences between the total income tax (benefit) provision of the Company for financial
statement purposes and the income taxes computed using the applicable federal income tax rate of
35.0% for 2008 and 2007, and 34% for 2006 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
(In thousands)
|
|
|
|
|
|
Restated
|
|
|
Restated
|
|
Federal income taxes at the statutory rate
|
|
$
|
(107,721
|
)
|
|
$
|
12,792
|
|
|
$
|
3,769
|
|
Income of properties not subject to corporate income tax(1)
|
|
|
|
|
|
|
|
|
|
|
(4,905
|
)
|
Tax benefit of change in tax status
|
|
|
|
|
|
|
|
|
|
|
(6,086
|
)
|
State income taxes, net of federal benefit
|
|
|
(5,433
|
)
|
|
|
1,923
|
|
|
|
(51
|
)
|
Credits
|
|
|
(236
|
)
|
|
|
(250
|
)
|
|
|
|
|
Other
|
|
|
(235
|
)
|
|
|
(251
|
)
|
|
|
|
|
Non-taxable income
|
|
|
|
|
|
|
|
|
|
|
(238
|
)
|
Non-deductible expenses
|
|
|
63,121
|
|
|
|
460
|
|
|
|
70
|
|
Change in valuation allowance
|
|
|
49,677
|
|
|
|
79
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision (benefit) for income taxes
|
|
$
|
(827
|
)
|
|
$
|
14,753
|
|
|
$
|
(7,441
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Represents Grubb & Ellis Realty Investors, LLC income for the period January 1, 2006 through November 15, 2006.
|
F-56
GRUBB & ELLIS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Deferred income taxes reflect the net tax effects of temporary differences between the
carrying amounts of assets and liabilities for financial reporting and income tax purposes. The
significant components of deferred tax assets and liabilities as of December 31, 2008 and 2007 from
continuing and discontinued operations consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
December 31, 2008
|
|
|
December 31, 2007
|
|
(In thousands)
|
|
|
|
|
|
Restated
|
|
Stock compensation
|
|
$
|
953
|
|
|
$
|
968
|
|
Accrued expenses
|
|
|
3,446
|
|
|
|
3,096
|
|
Severance accrual
|
|
|
1,160
|
|
|
|
1,986
|
|
Allowance for bad debts
|
|
|
3,764
|
|
|
|
1,745
|
|
Deferred revenue
|
|
|
122
|
|
|
|
1,750
|
|
Workers compensation reserves
|
|
|
689
|
|
|
|
703
|
|
Net operating losses
|
|
|
|
|
|
|
2,559
|
|
Other
|
|
|
870
|
|
|
|
535
|
|
Less valuation allowance
|
|
|
(8,363
|
)
|
|
|
(1,561
|
)
|
|
|
|
|
|
|
|
Current deferred tax assets:
|
|
|
2,641
|
|
|
|
11,781
|
|
|
|
|
|
|
|
|
Intangible assets
|
|
|
(2,569
|
)
|
|
|
(2,532
|
)
|
Prepaid service contracts
|
|
|
(1,055
|
)
|
|
|
(1,076
|
)
|
Other
|
|
|
(1,097
|
)
|
|
|
(182
|
)
|
|
|
|
|
|
|
|
Current deferred tax liabilities:
|
|
|
(4,721
|
)
|
|
|
(3,790
|
)
|
|
|
|
|
|
|
|
Net current deferred tax assets (liabilities)
|
|
$
|
(2,080
|
)
|
|
$
|
7,991
|
|
|
|
|
|
|
|
|
Stock compensation
|
|
$
|
4,720
|
|
|
$
|
2,616
|
|
Capitalized cost of member redemption
|
|
|
461
|
|
|
|
935
|
|
Property and equipment
|
|
|
3,523
|
|
|
|
2,568
|
|
Legal reserve
|
|
|
1,449
|
|
|
|
2,067
|
|
Real estate impairments
|
|
|
40,139
|
|
|
|
|
|
Other
|
|
|
5,099
|
|
|
|
3,653
|
|
Capital losses
|
|
|
2,528
|
|
|
|
|
|
Net operating losses
|
|
|
9,200
|
|
|
|
4,125
|
|
Less valuation allowance
|
|
|
(46,841
|
)
|
|
|
(1,542
|
)
|
|
|
|
|
|
|
|
Noncurrent deferred tax assets
|
|
|
20,278
|
|
|
|
14,422
|
|
|
|
|
|
|
|
|
Intangible assets
|
|
|
(38,470
|
)
|
|
|
(43,693
|
)
|
Other
|
|
|
894
|
|
|
|
(644
|
)
|
|
|
|
|
|
|
|
Noncurrent deferred tax liabilities
|
|
|
(37,576
|
)
|
|
|
(44,337
|
)
|
|
|
|
|
|
|
|
Net noncurrent deferred tax liabilities
|
|
$
|
(17,298
|
)
|
|
$
|
(29,915
|
)
|
|
|
|
|
|
|
|
Net deferred tax liabilities:
|
|
$
|
(19,378
|
)
|
|
$
|
(21,924
|
)
|
|
|
|
|
|
|
|
The Company classified estimated interest and penalties related to unrecognized tax
benefits in our provision for income taxes. As of December 31, 2008, the Company remains subject to
examination by certain tax jurisdictions for the tax years ended December 31, 2004 through 2008.
There were no significant changes in the accrued liability related to uncertain tax positions
during the year ended December 31, 2008, nor does the Company anticipate significant changes during
the next 12-month period.
F-57
GRUBB & ELLIS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
26. SELECTED QUARTERLY FINANCIAL DATA (unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year 2008
|
|
|
|
Quarter Ended
|
|
(In thousands, except per share amounts)
|
|
March 31, 2008
|
|
|
June 30, 2008
|
|
|
September 30, 2008
|
|
|
December 31, 2008
|
|
Total revenue
|
|
$
|
154,427
|
|
|
$
|
161,183
|
|
|
$
|
153,191
|
|
|
$
|
159,978
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating loss
|
|
$
|
(5,014
|
)
|
|
$
|
(2,622
|
)
|
|
$
|
(57,410
|
)
|
|
$
|
(235,582
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to Grubb & Ellis Company
|
|
$
|
(6,298
|
)
|
|
$
|
(5,380
|
)
|
|
$
|
(56,282
|
)
|
|
$
|
(262,910
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(0.10
|
)
|
|
$
|
(0.08
|
)
|
|
$
|
(0.88
|
)
|
|
$
|
(4.15
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding
|
|
|
63,521
|
|
|
|
63,600
|
|
|
|
63,601
|
|
|
|
63,388
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
(0.10
|
)
|
|
$
|
(0.08
|
)
|
|
$
|
(0.88
|
)
|
|
$
|
(4.15
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding
|
|
|
63,521
|
|
|
|
63,600
|
|
|
|
63,601
|
|
|
|
63,388
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year 2007
|
|
|
|
Quarter Ended
|
|
(In thousands, except per share amounts)
|
|
March 31, 2007
|
|
|
June 30, 2007
|
|
|
September 30, 2007
|
|
|
December 31, 2007
|
|
Total revenue
|
|
$
|
32,982
|
|
|
$
|
44,271
|
|
|
$
|
50,272
|
|
|
$
|
102,132
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
$
|
5,554
|
|
|
$
|
16,830
|
|
|
$
|
5,755
|
|
|
$
|
5,795
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to Grubb & Ellis Company
|
|
$
|
4,252
|
|
|
$
|
9,597
|
|
|
$
|
4,416
|
|
|
$
|
2,807
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.11
|
|
|
$
|
0.23
|
|
|
$
|
0.10
|
|
|
$
|
0.06
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding
|
|
|
36,910
|
|
|
|
41,943
|
|
|
|
41,943
|
|
|
|
43,917
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
0.11
|
|
|
$
|
0.23
|
|
|
$
|
0.10
|
|
|
$
|
0.06
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding
|
|
|
36,910
|
|
|
|
41,943
|
|
|
|
41,943
|
|
|
|
43,917
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-58
GRUBB & ELLIS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
27. SUBSEQUENT EVENTS (unaudited)
Hiring of New Chief Executive Officer
On November 9, 2009, the Company announced that Thomas P. DArcy will join the Company as
president, chief executive officer and a member of the board of directors, effective November 16,
2009 (the Effective Date).
Sale of Unregistered Securities
On September 30, 2009, the Company further amended its Credit Facility by entering into the
First Credit Facility Letter Amendment. The First Credit Facility Letter Amendment, among other
things, modified and provided the Company an extension from September 30, 2009 to November 30, 2009
(the Extension) to (i) effect its Recapitalization Plan and in connection therewith to effect a
prepayment of at least seventy two (72%) percent of the Revolving Credit A Advances (as defined in
the Credit Facility), and (ii) sell four commercial properties, including the two real estate
assets the Company had previously acquired on behalf of Grubb & Ellis Realty Advisors, Inc.
The First Credit Facility Letter Amendment also granted the Company a one-time right,
exercisable by November 30, 2009, to prepay the Credit Facility in full for a reduced principal
amount equal to approximately 65% of the aggregate principal amount of the Credit Facility then
outstanding (the Discount Prepayment Option).
In connection with the Extension, the warrant agreement was also amended to extend from
October 1, 2009 to December 1, 2009, the time when the Warrants are first exercisable by its
holders.
The First Credit Facility Letter Amendment also granted a one-time waiver from the covenant
requiring all proceeds of sales of equity or debt securities to be applied to pay down the Credit
Facility to facilitate the sale by the Company to an affiliate of the Companys largest stockholder
and Chairman of the Board of Directors of the Company, $5.0 million of subordinated debt or equity
securities of the Company (the Permitted Placement) so long as (i) the Permitted Placement is
junior, subject and subordinate to the Credit Facility, (ii) the net proceeds of the Permitted
Placement are placed into an account with the lender, (iii) the disbursement of the funds in such
account is in accordance with the approved budget that has been agreed to by the Company and the
lenders, (iv) that the lenders be granted a security interest in the net proceeds of the Permitted
Placement, and (v) the Permitted Placement is otherwise satisfactory to the Lenders. In addition,
if the Permitted Placement is in the form of subordinated debt, the Company and the entity making
the $5.0 million loan are required to enter into a subordination agreement with the lenders.
Finally, the First Credit Facility Letter Amendment also provided that $4.3 million that was
deposited in a cash collateral account to cash collateralize outstanding letters of credit under
the Credit Facility would instead be used to pay down the Credit Facility.
The Companys Credit Facility is secured by substantially all of the Companys assets. The
outstanding balance on the Credit Facility was $63.0 million as of September 30, 2009 and December
31, 2008 and carried a weighted average interest rate of 8.37% and 4.51%, respectively.
On November 6, 2009, a portion of proceeds from the offering of preferred stock were used to
pay in full borrowings under the Credit Facility then outstanding of $66.8 million for a reduced
amount equal to $43.4 million and the Credit Facility was terminated.
On October 2, 2009, the Company issued a $5.0 million senior subordinated convertible note
(the
Note
) to Kojaian Management Corporation. The Note (i) bears interest at twelve percent (12%)
per annum, (ii) is co-terminus with the term of the Credit Facility (including if the Credit
Facility is terminated pursuant to the Discount Prepayment Option), (iii) is unsecured and fully
subordinate to the Credit Facility, and (iv) in the event the Company issues or sells equity
securities in connection with or pursuant to a transaction with a non-affiliate of the Company
while the Note is outstanding, at the option of the holder of the Note, the principal amount of the
Note then outstanding is convertible into those equity securities of the Company issued or sold in
such non-affiliate transaction. In connection with the issuance of the Note, Kojaian Management
Corporation, the lenders to the Credit Facility and the Company entered into a subordination
agreement (the
Subordination Agreement
). The Permitted Placement was a transaction by the Company
not involving a public offering in accordance with Section 4(2) of the Securities Act of 1933, as
amended (the
Securities Act
).
On November 6, 2009, the Company completed the private placement of 900,000 shares of 12%
cumulative participating perpetual convertible preferred stock, par value $0.01 per share
(
Preferred Stock
), to qualified institutional buyers and other accredited investors. In
conjunction with the offering, the entire $5.0 million principal balance of the Note was converted
into the Preferred Stock at the offering price and the holder of the Note received accrued interest
of approximately $57,000. In addition, the holder of the Note also purchased an additional $5.0
million of preferred stock at the offering price. The Company also granted the initial purchaser a
45-day option to purchase up to an additional 100,000 shares of Preferred Stock.
F-59
GRUBB & ELLIS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The Preferred Stock was offered in reliance on exemptions from the registration requirements
of the Securities Act that apply to offers and sales of securities that do not involve a public
offering. As such, the Preferred Stock was offered and will be sold only to (i) the initial
purchaser for resale to qualified institutional buyers (as defined in Rule 144A under the
Securities Act), (ii) to a limited number of institutional accredited investors (as defined in
Rule 501(a)(1), (2), (3) or (7) of the Securities Act), and (iii) to a limited number of individual
accredited investors (as defined in Rule 501(a)(4), (5) or (6) of the Securities Act).
Upon the closing of the sale of the $90 million of Preferred Stock, the Company received cash
proceeds of approximately $85.0 million after giving effect to the conversion of the Note and after
deducting the initial purchasers discounts and certain offering expenses and giving effect to the
conversion of the subordinated note. A portion of proceeds were used to pay in full borrowings
under the Credit Facility then outstanding of $66.8 million for a reduced amount equal to $43.4
million, with the balance of the proceeds to be used for working capital purposes.
The Certificate of Designations with respect to the Preferred Stock provides, among other
things, that upon the closing of the Offering, each share of Preferred Stock is convertible, at the
holders option, into the Companys common stock, par value $.01 per share at a conversion rate of
60.606 shares of common stock for each share of Preferred Stock, which represents a conversion
price of approximately $1.65 per share of common stock, and a 10.0% premium to the closing price of
the common stock on October 22, 2009.
The terms of the Preferred Stock provide for cumulative dividends from and including the date
of original issuance in the amount of $12.00 per share each year. Dividends on the Preferred Stock
will be payable when, as and if declared, quarterly in arrears, on March 31, June 30, September 30
and December 31, beginning on December 31, 2009. In addition, in the event of any cash distribution
to holders of the Common Stock, holders of Preferred Stock will be entitled to participate in such
distribution as if such holders had converted their shares of Preferred Stock into Common Stock.
If the Company fails to pay the quarterly Preferred Stock dividend in full for two consecutive
quarters, the dividend rate will automatically be increased by .50% of the initial liquidation
preference per share per quarter (up to a maximum amount of increase of 2% of the initial
liquidation preference per share) until cumulative dividends have been paid in full. In addition,
subject to certain limitations, in the event the dividends on the Preferred Stock are in arrears
for six or more quarters, whether or not consecutive, subject to the passage of the amendment to
the Companys Certificate of Incorporation discussed above, holders representing a majority of the
shares of Preferred Stock voting together as a class with holders of any other class or series of
preferred stock upon which like voting rights have been conferred and are exercisable will be
entitled to nominate and vote for the election of two additional directors to serve on the board of
directors until all unpaid dividends with respect to the Preferred Stock and any other class or
series of preferred stock upon which like voting rights have been conferred or are exercisable have
been paid or declared and a sum sufficient for payment has been set aside therefore.
During the six-month period following November 6, 2009, if the Company issues any securities,
other than certain permitted issuances, and the price per share of the Common Stock (or the
equivalent for securities convertible into or exchangeable for Common Stock) is less than the then
current conversion price of the Preferred Stock, the conversion price will be reduced pursuant to a
weighted average anti-dilution formula.
Holders of Preferred Stock may require the Company to repurchase all, or a specified whole
number, of their Preferred Stock upon the occurrence of a Fundamental Change (as defined in the
Certificate of Designations) with respect to any Fundamental Change that occurs (i) prior to
November 15, 2014, at a repurchase price equal to 110% of the sum of the initial liquidation
preference plus accumulated but unpaid dividends, and (ii) from November 15, 2014 until prior to
November 15, 2019, at a repurchase price equal to 100% of the sum of the initial liquidation
preference plus accumulated but unpaid dividends. On or after November 15, 2014, the Company may,
at its option, redeem the Preferred Stock, in whole or in part, by paying an amount equal to 110%
of the sum of the initial liquidation preference per share plus any accrued and unpaid dividends to
and including the date of redemption.
In the event of certain events that constitute a Change in Control (as defined in the
Certificate of Designations) prior to November 15, 2014, the conversion rate of the Preferred Stock
will be subject to increase. The amount of the increase in the applicable conversion rate, if any,
will be based on the date in which the Change in Control becomes effective, the price to be paid
per share with respect to the Common Stock and the transaction constituting the Change in Control.
The Company has entered into a registration rights agreement (the
Registration Rights
Agreement
) with one of the lead investors (and its affiliates) with respect to the shares of
Preferred Stock, and the Common Stock issuable upon the conversion of such Preferred Stock, that
was acquired by such lead investor (and affiliates) in the Offering. No other purchasers of the
Preferred Stock in the Offering will have the right to have their shares of Preferred Stock, or
shares of Common Stock issuable upon conversion of such Preferred Stock, registered. In addition,
subject to certain limitations, the lead investor who acquired the registration rights also has
certain preemptive rights in the event the Company issues for cash consideration any Common Stock
or any securities convertible into or exchangeable for Common Stock (or any rights, warrants or
options to purchase any such Common Stock) during the six-month period subsequent to the closing of
the Offering. Such preemptive right is intended to permit such lead investor to maintain its pro
rata ownership of the Preferred Stock acquired in the Offering.
F-60
GRUBB & ELLIS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Except as otherwise provided by law, the holders of the Preferred Stock vote together with the
holders of common stock as one class on all matters on which holders of common stock vote. Holders
of the Preferred Stock when voting as a single class with holders of common stock are entitled to
voting rights equal to the number of shares of Common Stock into which the Preferred Stock is
convertible, on an as if converted basis. Holders of Preferred Stock vote as a separate class
with respect to certain matters.
Upon any liquidation, dissolution or winding up of the Company, holders of the Preferred Stock
will be entitled, prior to any distribution to holders of any securities ranking junior to the
Preferred Stock, including but not limited to the Common Stock, and on a pro rata basis with other
preferred stock of equal ranking, a cash liquidation preference equal to the greater of (i) 110% of
the sum of the initial liquidation preference per share plus accrued and unpaid dividends thereon,
if any, from November 6, 2009, the date of the closing of the Offering, and (ii) an amount equal to
the distribution amount each holder of Preferred Stock would have received had all shares of
Preferred Stock been converted to Common Stock.
Pursuant to the overallotment option of up to 100,000 shares of Preferred Stock granted to the
initial purchaser in connection with the offering the Company effected the sale of an aggregate of
aggregate of 65,700 shares of Preferred Stock for gross proceeds of approximately $6.6 million.
.
F-61
GRUBB & ELLIS COMPANY
CONSOLIDATED BALANCE SHEET
AS OF SEPTEMBER 30, 2009
(In thousands, except share and per share amounts)
(Unaudited)
|
|
|
|
|
ASSETS
|
|
|
|
|
Current assets:
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
9,444
|
|
Restricted cash
|
|
|
12,476
|
|
Investment in marketable securities
|
|
|
631
|
|
Current portion of accounts receivable from related parties net
|
|
|
7,756
|
|
Current portion of advances to related parties net
|
|
|
26
|
|
Notes receivable from related party net
|
|
|
9,100
|
|
Service fees receivable net
|
|
|
22,208
|
|
Current portion of professional service contracts net
|
|
|
3,372
|
|
Real estate deposits and pre-acquisition costs
|
|
|
4,127
|
|
Properties held for sale net
|
|
|
22,468
|
|
Identified intangible assets and other assets held for sale net
|
|
|
4,823
|
|
Prepaid expenses and other assets
|
|
|
14,115
|
|
|
|
|
|
Total current assets
|
|
|
110,546
|
|
Accounts receivable from related parties net
|
|
|
13,819
|
|
Advances to related parties net
|
|
|
6,897
|
|
Professional service contracts net
|
|
|
8,613
|
|
Investments in unconsolidated entities
|
|
|
3,341
|
|
Property held for investment net
|
|
|
82,808
|
|
Property, equipment and leasehold improvements net
|
|
|
14,078
|
|
Identified intangible assets net
|
|
|
96,455
|
|
Other assets net
|
|
|
5,621
|
|
|
|
|
|
Total assets
|
|
$
|
342,178
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS (DEFICIT) EQUITY
|
|
|
|
|
Current liabilities:
|
|
|
|
|
Accounts payable and accrued expenses
|
|
$
|
61,179
|
|
Due to related parties
|
|
|
1,992
|
|
Current portion of line of credit
|
|
|
62,709
|
|
Current portion of capital lease obligations
|
|
|
984
|
|
Notes payable of properties held for sale
|
|
|
31,613
|
|
Liabilities of properties held for sale net
|
|
|
2,376
|
|
Other liabilities
|
|
|
41,117
|
|
Deferred tax liability
|
|
|
4,822
|
|
|
|
|
|
Total current liabilities
|
|
|
206,792
|
|
Long-term liabilities:
|
|
|
|
|
Senior notes
|
|
|
16,277
|
|
Notes payable and capital lease obligations
|
|
|
107,953
|
|
Other long-term liabilities
|
|
|
11,262
|
|
Deferred tax liabilities
|
|
|
15,664
|
|
|
|
|
|
Total liabilities
|
|
|
357,948
|
|
Commitments and contingencies (See Note 14)
|
|
|
|
|
Stockholders (deficit) equity:
|
|
|
|
|
Preferred stock: $0.01 par value; 10,000,000 shares authorized as
of September 30, 2009 and December 31, 2008; no shares issued and
outstanding as of September 30, 2009 and December 31, 2008
|
|
|
|
|
Common stock: $0.01 par value; 100,000,000 shares authorized;
65,180,830 and 65,382,601 shares issued and outstanding as of
September 30, 2009 and December 31, 2008, respectively
|
|
|
651
|
|
Additional paid-in capital
|
|
|
411,913
|
|
Accumulated deficit
|
|
|
(428,931
|
)
|
Other comprehensive loss
|
|
|
(43
|
)
|
|
|
|
|
Total Grubb & Ellis Company stockholders (deficit) equity
|
|
|
(16,410
|
)
|
Noncontrolling interests
|
|
|
640
|
|
|
|
|
|
Total (deficit) equity
|
|
|
(15,770
|
)
|
Total liabilities and stockholders (deficit) equity
|
|
$
|
342,178
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
F-62
GRUBB & ELLIS COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
For the Nine Months
|
|
|
|
Ended September 30,
|
|
|
|
2009
|
|
|
2008
|
|
REVENUE
|
|
|
|
|
|
|
|
|
Management services
|
|
$
|
199,636
|
|
|
$
|
185,855
|
|
Transaction services
|
|
|
118,793
|
|
|
|
173,191
|
|
Investment management
|
|
|
43,912
|
|
|
|
84,480
|
|
Rental related
|
|
|
22,754
|
|
|
|
25,302
|
|
|
|
|
|
|
|
|
Total revenue
|
|
|
385,095
|
|
|
|
468,828
|
|
|
|
|
|
|
|
|
OPERATING EXPENSE
|
|
|
|
|
|
|
|
|
Compensation costs
|
|
|
342,072
|
|
|
|
365,488
|
|
General and administrative
|
|
|
83,801
|
|
|
|
84,387
|
|
Depreciation and amortization
|
|
|
8,368
|
|
|
|
13,692
|
|
Rental related
|
|
|
16,159
|
|
|
|
15,384
|
|
Interest
|
|
|
12,490
|
|
|
|
9,928
|
|
Merger related costs
|
|
|
|
|
|
|
10,217
|
|
Real estate related impairments
|
|
|
16,615
|
|
|
|
34,778
|
|
Goodwill and intangible assets impairment
|
|
|
583
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expense
|
|
|
480,088
|
|
|
|
533,874
|
|
|
|
|
|
|
|
|
OPERATING LOSS
|
|
|
(94,993
|
)
|
|
|
(65,046
|
)
|
|
|
|
|
|
|
|
OTHER INCOME (EXPENSE)
|
|
|
|
|
|
|
|
|
Equity in losses of unconsolidated entities
|
|
|
(1,635
|
)
|
|
|
(10,602
|
)
|
Interest income
|
|
|
472
|
|
|
|
757
|
|
Other income (loss)
|
|
|
394
|
|
|
|
(3,801
|
)
|
|
|
|
|
|
|
|
Total other income (expense)
|
|
|
(769
|
)
|
|
|
(13,646
|
)
|
|
|
|
|
|
|
|
Loss from continuing operations before income tax (provision) benefit
|
|
|
(95,762
|
)
|
|
|
(78,692
|
)
|
Income tax (provision) benefit
|
|
|
(587
|
)
|
|
|
23,124
|
|
|
|
|
|
|
|
|
Loss from continuing operations
|
|
|
(96,349
|
)
|
|
|
(55,568
|
)
|
|
|
|
|
|
|
|
Discontinued operations
|
|
|
|
|
|
|
|
|
Loss from discontinued operations net of taxes
|
|
|
(379
|
)
|
|
|
(18,871
|
)
|
Gain (loss) on disposal of discontinued operations net of taxes
|
|
|
(626
|
)
|
|
|
181
|
|
|
|
|
|
|
|
|
Total loss from discontinued operations
|
|
|
(1,005
|
)
|
|
|
(18,690
|
)
|
|
|
|
|
|
|
|
Net loss
|
|
|
(97,354
|
)
|
|
|
(74,258
|
)
|
Net loss attributable to noncontrolling interests
|
|
|
(1,686
|
)
|
|
|
(6,298
|
)
|
|
|
|
|
|
|
|
Net loss attributable to Grubb & Ellis Company
|
|
$
|
(95,668
|
)
|
|
$
|
(67,960
|
)
|
|
|
|
|
|
|
|
Basic loss per share:
|
|
|
|
|
|
|
|
|
Loss from continuing operations attributable to Grubb & Ellis Company
|
|
$
|
(1.49
|
)
|
|
$
|
(0.79
|
)
|
Loss from discontinued operations attributable to Grubb & Ellis Company
|
|
|
(0.02
|
)
|
|
|
(0.28
|
)
|
|
|
|
|
|
|
|
Net loss per share
|
|
$
|
(1.51
|
)
|
|
$
|
(1.07
|
)
|
Diluted loss per share:
|
|
|
|
|
|
|
|
|
Loss from continuing operations attributable to Grubb & Ellis Company
|
|
$
|
(1.49
|
)
|
|
$
|
(0.79
|
)
|
Loss from discontinued operations attributable to Grubb & Ellis Company
|
|
|
(0.02
|
)
|
|
|
(0.28
|
)
|
|
|
|
|
|
|
|
Net loss per share
|
|
$
|
(1.51
|
)
|
|
$
|
(1.07
|
)
|
|
|
|
|
|
|
|
Basic weighted average shares outstanding
|
|
|
63,618
|
|
|
|
63,574
|
|
|
|
|
|
|
|
|
Diluted weighted average shares outstanding
|
|
|
63,618
|
|
|
|
63,574
|
|
|
|
|
|
|
|
|
Dividends declared per share
|
|
$
|
|
|
|
$
|
0.2050
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
F-63
GRUBB & ELLIS COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
For the Nine Months
|
|
|
|
Ended September 30,
|
|
|
|
2009
|
|
|
2008
|
|
CASH FLOWS FROM OPERATING ACTIVITIES
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(97,354
|
)
|
|
$
|
(74,258
|
)
|
Adjustments to reconcile net loss to net cash used in operating activities:
|
|
|
|
|
|
|
|
|
Loss on sale of real estate
|
|
|
1,031
|
|
|
|
|
|
Equity in losses of unconsolidated entities
|
|
|
1,635
|
|
|
|
10,602
|
|
Depreciation and amortization (including amortization of signing bonuses)
|
|
|
12,770
|
|
|
|
28,017
|
|
Loss on disposal of property, equipment and leasehold improvements
|
|
|
449
|
|
|
|
312
|
|
Impairment of real estate
|
|
|
16,365
|
|
|
|
45,767
|
|
Impairment of goodwill and intangibles
|
|
|
583
|
|
|
|
|
|
Stock-based compensation
|
|
|
8,734
|
|
|
|
8,484
|
|
Compensation expense on profit sharing arrangements
|
|
|
102
|
|
|
|
1,716
|
|
Amortization/write-off of intangible contractual rights
|
|
|
776
|
|
|
|
1,179
|
|
Amortization of deferred financing costs
|
|
|
1,501
|
|
|
|
342
|
|
(Gain) loss on marketable equity securities
|
|
|
(449
|
)
|
|
|
3,344
|
|
Deferred income taxes
|
|
|
1,108
|
|
|
|
(28,849
|
)
|
Allowance for uncollectible accounts
|
|
|
12,824
|
|
|
|
10,861
|
|
Loss on write-off of real estate deposit and pre-acquisition costs
|
|
|
122
|
|
|
|
|
|
Other operating noncash gains
|
|
|
|
|
|
|
612
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts receivable from related parties
|
|
|
9,750
|
|
|
|
4,635
|
|
Prepaid expenses and other assets
|
|
|
7,463
|
|
|
|
(24,395
|
)
|
Accounts payable and accrued expenses
|
|
|
(7,167
|
)
|
|
|
(31,103
|
)
|
Other liabilities
|
|
|
704
|
|
|
|
8,614
|
|
|
|
|
|
|
|
|
Net cash used in operating activities
|
|
|
(29,053
|
)
|
|
|
(34,120
|
)
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES
|
|
|
|
|
|
|
|
|
Purchases of property and equipment
|
|
|
(2,332
|
)
|
|
|
(3,359
|
)
|
Tenant improvements and capital expenditures
|
|
|
(2,571
|
)
|
|
|
(2,958
|
)
|
Purchases of marketable equity securities
|
|
|
(4,231
|
)
|
|
|
(505
|
)
|
Proceeds from sale of marketable equity securities
|
|
|
|
|
|
|
2,653
|
|
Advances to related parties
|
|
|
(3,808
|
)
|
|
|
(10,169
|
)
|
Proceeds from repayment of advances to related parties
|
|
|
1,934
|
|
|
|
22,543
|
|
Payments to related parties
|
|
|
(455
|
)
|
|
|
(2,217
|
)
|
Origination of notes receivable to related parties
|
|
|
|
|
|
|
(15,100
|
)
|
Repayment of notes receivable from related parties
|
|
|
|
|
|
|
13,600
|
|
Investments in unconsolidated entities
|
|
|
(3,963
|
)
|
|
|
(673
|
)
|
Distributions of capital from unconsolidated entities
|
|
|
91
|
|
|
|
603
|
|
Acquisition of properties
|
|
|
|
|
|
|
(111,690
|
)
|
Proceeds from sale of properties
|
|
|
93,471
|
|
|
|
|
|
Real estate deposits and pre-acquisition costs
|
|
|
(2,565
|
)
|
|
|
(56,568
|
)
|
Proceeds from collection of real estate deposits and pre-acquisition costs
|
|
|
4,277
|
|
|
|
81,851
|
|
Restricted cash
|
|
|
1,337
|
|
|
|
15,270
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) investing activities
|
|
|
81,185
|
|
|
|
(66,719
|
)
|
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES
|
|
|
|
|
|
|
|
|
Advances on line of credit
|
|
|
11,389
|
|
|
|
55,000
|
|
Repayments on line of credit
|
|
|
(11,389
|
)
|
|
|
|
|
Borrowings on notes payable
|
|
|
936
|
|
|
|
94,149
|
|
F-64
|
|
|
|
|
|
|
|
|
|
|
For the Nine Months
|
|
|
|
Ended September 30,
|
|
|
|
2009
|
|
|
2008
|
|
Repayments of notes payable and capital lease obligations
|
|
|
(79,154
|
)
|
|
|
(56,219
|
)
|
Other financing costs
|
|
|
(137
|
)
|
|
|
52
|
|
Deferred financing costs
|
|
|
(1,456
|
)
|
|
|
(2,693
|
)
|
Net proceeds from the issuance of common stock
|
|
|
|
|
|
|
314
|
|
Repurchase of common stock
|
|
|
|
|
|
|
(1,840
|
)
|
Dividends paid to common stockholders
|
|
|
|
|
|
|
(15,129
|
)
|
Contributions from noncontrolling interests
|
|
|
5,827
|
|
|
|
15,323
|
|
Distributions to noncontrolling interests
|
|
|
(1,689
|
)
|
|
|
(3,020
|
)
|
|
|
|
|
|
|
|
Net cash (used in) provided by financing activities
|
|
|
(75,673
|
)
|
|
|
85,937
|
|
|
|
|
|
|
|
|
NET DECREASE IN CASH AND CASH EQUIVALENTS
|
|
|
(23,541
|
)
|
|
|
(14,902
|
)
|
Cash and cash equivalents Beginning of period
|
|
|
32,985
|
|
|
|
49,328
|
|
|
|
|
|
|
|
|
Cash and cash equivalents End of period
|
|
$
|
9,444
|
|
|
$
|
34,426
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL DISCLOSURE OF NONCASH ACTIVITIES
|
|
|
|
|
|
|
|
|
Issuance of warrants
|
|
$
|
534
|
|
|
$
|
|
|
|
|
|
|
|
|
|
Capital lease obligations
|
|
$
|
2,274
|
|
|
$
|
|
|
|
|
|
|
|
|
|
Deconsolidation of assets held by variable interest entities
|
|
$
|
|
|
|
$
|
243,398
|
|
|
|
|
|
|
|
|
Deconsolidation of liabilities held by variable interest entities
|
|
$
|
|
|
|
$
|
198,409
|
|
|
|
|
|
|
|
|
Deconsolidation of sponsored mutual fund
|
|
$
|
5,517
|
|
|
$
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
F-65
GRUBB & ELLIS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Overview
Grubb & Ellis Company (the
Company
or
Grubb & Ellis
), a Delaware corporation founded over
50 years ago in Northern California, is a commercial real estate services and investment management
firm. On December 7, 2007, the Company effected a stock merger (the
Merger
) with NNN Realty
Advisors, Inc. (
NNN
), a real estate asset management company and sponsor of public non-traded
real estate investment trusts (
REITs
), as well as a sponsor of tax deferred tenant-in-common
(
TIC
) 1031 property exchanges and other investment programs. Upon the closing of the Merger, a
change of control occurred. The former stockholders of NNN acquired approximately 60% of the
Companys issued and outstanding common stock.
The Company offers property owners, corporate occupants and program investors comprehensive
integrated real estate solutions, including transactions, management, consulting and investment
advisory services supported by market research and local market expertise.
In certain instances throughout these Financial Statements phrases such as legacy Grubb &
Ellis or similar descriptions are used to reference, when appropriate, Grubb & Ellis prior to the
Merger. Similarly, in certain instances throughout these Financial Statements the term NNN, legacy
NNN, or similar phrases are used to reference, when appropriate, NNN Realty Advisors, Inc. prior
to the Merger.
Basis of Presentation
The consolidated financial statements include the accounts of the Company and its wholly owned
and majority-owned controlled subsidiaries, variable interest entities (
VIEs
) in which the
Company is the primary beneficiary, and partnerships/limited liability companies (
LLCs
) in which
the Company is the managing member or general partner and the other partners/members lack
substantive rights (hereinafter collectively referred to as the Company), and are prepared in
accordance with generally accepted accounting principles (
GAAP
) for interim financial
information, the instructions to Article 10 of Regulation S-X. Accordingly, they do not include all
of the information and footnotes required by GAAP for complete financial statements. These
consolidated financial statements should be read in conjunction with the Companys Consolidated
Financial Statements for the year ended December 31, 2008 included elsewhere in this registration
statement. In the opinion of management, all adjustments necessary for a fair presentation of the
financial position and results of operations for the interim periods presented have been included
in these financial statements and are of a normal and recurring nature.
The Company consolidates entities that are VIEs when the Company is deemed to be the primary
beneficiary of the VIE. For entities in which (i) the Company is not deemed to be the primary
beneficiary, (ii) the Companys ownership is 50.0% or less and (iii) the Company has the ability to
exercise significant influence, the Company uses the equity accounting method (i.e. at cost,
increased or decreased by the Companys share of earnings or losses, plus contributions less
distributions). The Company also uses the equity method of accounting for jointly-controlled
tenant-in-common interests. As reconsideration events occur, the Company will reconsider its
determination of whether an entity is a VIE and who the primary beneficiary is to determine if
there is a change in the original determinations and will report such changes on a quarterly basis.
As of September 30, 2009, the Company has classified two of its remaining four properties as
properties held for sale in its consolidated balance sheets and has included the operations of such
properties in discontinued operations in the consolidated statements of operations for all periods
presented as required by the Property, Plant and Equipment Topic of the Financial Accounting
Standards Board (
FASB
) Accounting Standards Codification (
Codification
). All four remaining
properties had been previously classified as held for sale for the year ended December 31, 2008.
However, as of June 30, 2009, one of these properties, and as of September 30, 2009 a second of
these properties, no longer met the held for sale criteria under the requirements of the Property,
Plant and Equipment Topic of the FASB Codification and, accordingly, each was reclassified to
properties held for investment in the consolidated balance sheets with the operations of such
property included in continuing operations in the consolidated statements of operations for all
periods presented.
Use of Estimates
The financial statements have been prepared in conformity with GAAP, which require management
to make estimates and assumptions that affect the reported amounts of assets and liabilities
(including disclosure of contingent assets and liabilities) as of 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.
F-66
GRUBB & ELLIS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (continued)
Reclassifications
Certain reclassifications have been made to prior year and prior period amounts in order to
conform to the current period presentation. These reclassifications have no effect on reported net
loss and are of a normal recurring nature.
Restricted Cash
Restricted cash is comprised primarily of cash and loan impound reserve accounts for property
taxes, insurance, capital improvements, and tenant improvements related to consolidated properties.
Fair Value Measurements
In September 2006, the FASB issued the requirements of the Fair Value Measurements and
Disclosures Topic of the FASB Codification. The Topic defines fair value, establishes a framework
for measuring fair value in generally accepted accounting principles, and expands disclosures about
fair value instruments. In February 2008, the FASB amended the Topic to delay the effective date of
the Fair Value Measurements and Disclosures for non-financial assets and non-financial liabilities,
except for items that are recognized or disclosed at fair value in the financial statements on a
recurring basis (that is, at least annually). There was no effect on the Companys consolidated
financial statements as a result of the adoption of the Topic as of January 1, 2008 as it relates
to financial assets and financial liabilities. For items within its scope, the amended Fair Value
Measurements and Disclosures Topic deferred the effective date of Fair Value Measurements and
Disclosures to fiscal years beginning after November 15, 2008, and interim periods within those
fiscal years. The Company adopted the requirements of the Topic as it relates to non-financial
assets and non-financial liabilities in the first quarter of 2009, which did not have a material
impact on the consolidated financial statements.
The Fair Value Measurements and Disclosures Topic establishes a three-tiered fair value
hierarchy that prioritizes inputs to valuation techniques used in fair value calculations. Level 1
inputs are the highest priority and are quoted prices in active markets for identical assets or
liabilities. Level 2 inputs reflect other than quoted prices included in Level 1 that are either
observable directly or through corroboration with observable market data. Level 3 inputs are
unobservable inputs, due to little or no market activity for the asset or liability, such as
internally-developed valuation models.
The following table presents changes in financial and nonfinancial assets measured at fair
value on either a recurring or nonrecurring basis for the nine months ended September 30, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quoted Prices in
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Active Markets
|
|
|
Significant Other
|
|
|
Significant
|
|
|
|
|
|
|
|
|
|
|
for Identical
|
|
|
Observable
|
|
|
Unobservable
|
|
|
Total
|
|
|
|
September 30,
|
|
|
Assets
|
|
|
Inputs
|
|
|
Inputs
|
|
|
Impairment
|
|
Assets (in thousands)
|
|
2009
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Losses
|
|
Investments in
marketable equity
securities
|
|
$
|
631
|
|
|
$
|
631
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
Properties held for sale
|
|
$
|
22,468
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
22,468
|
|
|
$
|
250
|
|
Property held for investment
|
|
$
|
82,808
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
82,808
|
|
|
$
|
(7,050
|
)
|
Investments in
unconsolidated entities
|
|
$
|
3,341
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
3,341
|
|
|
$
|
(9,565
|
)
|
Fair Value of Financial Instruments
The Financial Instruments Topic, requires disclosure of fair value of financial instruments,
whether or not recognized on the face of the balance sheet, for which it is practical to estimate
that value. The Topic defines fair value as the quoted market prices for those instruments that are
actively traded in financial markets. In cases where quoted market prices are not available, fair
values are estimated using present value or other valuation techniques. The fair value estimates
are made at the end of each quarter based on available market information and judgments about the
financial instrument, such as estimates of timing and amount of expected future cash flows. Such
estimates do not reflect any premium or discount that could result from offering for sale at one
time the Companys entire holdings of a particular financial instrument, nor do they consider that
tax impact of the realization of unrealized gains or losses. In many cases, the fair value
estimates cannot be substantiated by comparison to independent markets, nor can the disclosed value
be realized in immediate settlement of the instrument.
As of September 30, 2009, the fair values of the Companys notes payable, senior notes and
line of credit were calculated to be approximately $120.3 million, $15.8 million and $42.6 million,
respectively, compared to the carrying values of $138.6 million, $16.3 million and $63.0 million,
respectively. The calculation was based on assumed discount rates ranging from 8.25% to 10.25%. In
F-67
GRUBB & ELLIS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (continued)
addition, the First Credit Facility Letter Amendment (as defined and discussed in Note 11)
granted the Company a one-time right, exercisable by November 30, 2009, to prepay the Credit
Facility (as defined in Note 11) in full for a reduced principal amount equal to 65% of the
aggregate principal amount of the Credit Facility then outstanding. Calculation of the fair value
of the line of credit assumed a high probability the Credit Facility would be prepaid at the
reduced principal amount.
As of December 31, 2008, the fair values of the Companys notes payable, senior notes and
lines of credit, which were calculated based on assumed discount rates ranging from 8.4% to 10.4%,
were approximately $195.4 million, $15.5 million and $60.0 million, respectively, compared to the
carrying values of $216.0 million, $16.3 million and $63.0 million, respectively. The amounts
recorded for accounts receivable, notes receivable, advances and accounts payable and accrued
liabilities approximate fair value due to their short-term nature.
Noncontrolling Interests
In December 2007, the FASB issued an amendment to the requirements of the Consolidation Topic.
The Consolidation Topic established new accounting and reporting standards for the non-controlling
interest in a subsidiary and for the deconsolidation of a subsidiary. The Topic requires that
noncontrolling interests be presented as a component of consolidated stockholders equity,
eliminates minority interest accounting such that the amount of net income attributable to the
noncontrolling interests is presented as part of consolidated net income in the accompanying
consolidated statements of operations and not as a separate component of income and expense, and
requires that upon any changes in ownership that result in the loss of control of the subsidiary,
the noncontrolling interest be re-measured at fair value with the resultant gain or loss recorded
in net income. The requirements of the Topic became effective for fiscal years beginning on or
after December 15, 2008. The Company adopted the requirements of the Topic on a retrospective basis
on January 1, 2009. The adoption of the requirements of the Topic had an impact on the presentation
and disclosure of noncontrolling (minority) interests in the consolidated financial statements. As
a result of the retrospective presentation and disclosure requirements of the Topic, the Company is
required to reflect the change in presentation and disclosure for all periods presented. Principal
effect on the consolidated balance sheet as of December 31, 2008 related to the adoption of the
requirements of the Topic was the change in presentation of minority interest from mezzanine to
redeemable noncontrolling interest, as reported herein. Additionally, the adoption of the
requirements of the Topic had the effect of reclassifying (income) loss attributable to
noncontrolling interest in the consolidated statements of operations from minority interest to
separate line items. The Topic also requires that net income (loss) be adjusted to include the net
(income) loss attributable to the noncontrolling interest, and a new line item for net income
(loss) attributable to controlling interest be presented in the consolidated statements of
operations.
A noncontrolling interest relates to the interest in the consolidated entities that are not
wholly owned by the Company. As a result of adopting the requirements of the Consolidation Topic on
January 1, 2009, the Company has restated the December 31, 2008 consolidated balance sheet, as well
as the statement of operations for the nine months ended September 30, 2008 as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As Previously
|
|
|
|
|
|
|
|
Nine Months Ended September 30, 2008
|
|
Reported
|
|
|
Adjustment
|
|
|
As Adjusted
|
|
Minority interest in income
|
|
$
|
6,298
|
|
|
$
|
(6,298
|
)
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(67,960
|
)
|
|
$
|
(6,298
|
)
|
|
$
|
(74,258
|
)
|
|
|
|
|
|
|
|
|
|
|
Income attributable to noncontrolling interests
|
|
$
|
|
|
|
$
|
(6,298
|
)
|
|
$
|
(6,298
|
)
|
|
|
|
|
|
|
|
|
|
|
Recently Issued Accounting Pronouncements
The Company follows the requirements of the Fair Value Measurements and Disclosures Topic of
the FASB Accounting Standards Codification. The Topic defines fair value, establishes a framework
for measuring fair value in generally accepted accounting principles, and expands disclosures about
fair value instruments. In February 2008, the FASB amended the Topic to delay the effective date of
the Fair Value Measurements and Disclosures for non-financial assets and non-financial liabilities,
except for items that are recognized or disclosed at fair value in the financial statements on a
recurring basis (that is, at least annually). There was no effect on the Companys consolidated
financial statements as a result of the adoption of the Topic as of January 1, 2008 as it relates
to financial assets and financial liabilities. For items within its scope, the amended Fair Value
Measurements and Disclosures Topic deferred the effective date of Fair Value Measurements and
Disclosures to fiscal years beginning after November 15, 2008, and interim periods within those
fiscal years. The Company adopted the requirements of the Topic as it relates to non-financial
assets and non-financial liabilities in the first quarter of 2009, which did not have a material
impact on the consolidated financial statements.
In December 2007, the FASB issued an amendment to the requirements of the Business
Combinations Topic. The amended Topic requires an acquiring entity to recognize all the assets
acquired and liabilities assumed in a transaction at the acquisition-date fair value with limited
exceptions. The Topic changed the accounting treatment and disclosure for certain specific items in
a business
F-68
GRUBB & ELLIS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (continued)
combination. The Topic applies prospectively to business combinations for which the
acquisition date is on or after the beginning of the first annual reporting period beginning on or
after December 15, 2008. The Company adopted the requirements of the Topic on a prospective basis
on January 1, 2009. The adoption of the requirements of the Topic will materially affect the
accounting for any future business combinations.
In March 2008, the FASB issued an amendment to the requirements of the Derivatives and Hedging
Topic. The requirements of the amended Topic are intended to improve financial reporting of
derivative instruments and hedging activities by requiring enhanced disclosures to enable investors
to better understand their effects on an entitys financial position, financial performance, and
cash flows. The requirements of the amended Topic achieve these improvements by requiring
disclosure of the fair values of derivative instruments and their gains and losses in a tabular
format. It also provides more information about an entitys liquidity by requiring disclosure of
derivative features that are credit risk-related. Finally, it requires cross-referencing within
footnotes to enable financial statement users to locate important information about derivative
instruments. The requirements of the amended Topic became effective for financial statements issued
for fiscal years and interim periods beginning after November 15, 2008, with early application
encouraged. The Company adopted the requirements of the amended Topic in the first quarter of 2009.
The adoption of the requirements of the amended Topic did not have a material impact on the
consolidated financial statements.
In April 2008, the FASB issued an amendment to the requirements of Intangibles-Goodwill and
Other Topic. The requirements of the amended Topic are intended to improve the consistency between
the useful life of recognized intangible assets and the period of expected cash flows used to
measure the fair value of the assets. The amendment changes the factors an entity should consider
in developing renewal or extension assumptions in determining the useful life of recognized
intangible assets. In addition the amended Topic requires disclosure of the entitys accounting
policy regarding costs incurred to renew or extend the term of recognized intangible assets, the
weighted average period to the next renewal or extension, and the total amount of capitalized costs
incurred to renew or extend the term of recognized intangible assets. The requirements of the
amended Topic are effective for financial statements issued for fiscal years and interim periods
beginning after December 15, 2008. The Company adopted the requirements of the amended Topic on
January 1, 2009. The adoption of the requirements of the amended Topic did not have a material
impact on the consolidated financial statements.
In June 2008, the FASB issued an amendment to the requirements of the Earnings Per Share
Topic
,
which addresses whether instruments granted in share-based payment transactions are
participating securities prior to vesting and, therefore, need to be included in the computation of
earnings per share under the two-class method which apply to the Company because it grants
instruments to employees in share-based payment transactions that meet the definition of
participating securities, is effective retrospectively for financial statements issued for fiscal
years and interim periods beginning after December 15, 2008. The Company adopted the requirements
of the amended Topic in the first quarter of 2009. The adoption of the requirements of the amended
Topic did not have a material impact on the consolidated financial statements.
In April 2009, the FASB issued an amendment to the requirements of the Financial Instruments
Topic. The amended Topic relates to fair value disclosures for any financial instruments that are
not currently reflected on the balance sheet at fair value. Prior to issuing the requirements of
the amended Topic, fair values for these assets and liabilities were only disclosed once a year.
The amended Topic now requires these disclosures on a quarterly basis, providing qualitative and
quantitative information about fair value estimates for all those financial instruments not
measured on the balance sheet at fair value. The adoption of the requirements of the amended Topic
did not have a material impact on the consolidated financial statements.
The requirements of the Investments-Debt and Equity Securities Topic, is intended to bring
greater consistency to the timing of impairment recognition, and provide greater clarity to
investors about the credit and noncredit components of impaired debt securities that are not
expected to be sold. The Topic also requires increased and more timely disclosures regarding
expected cash flows, credit losses, and an aging of securities with unrealized losses. The adoption
of the requirements of the Topic did not have a material impact on the consolidated financial
statements.
In April 2009, the FASB issued an amendment to the requirements of the Fair Value Measurements
and Disclosures Topic. The Topic relates to determining fair values when there is no active market
or where the price inputs being used represent distressed sales. It states that the objective of
fair value measurement is to reflect how much an asset would be sold for in an orderly transaction
(as opposed to a distressed or forced transaction) at the date of the financial statements under
current market conditions. Specifically, the requirements of the Topic reaffirms the need to use
judgment to ascertain if a formerly active market has become inactive and in determining fair
values when markets have become inactive. The adoption of the amended Topic did not have a material
impact on the consolidated financial statements.
In April 2009, the FASB issued an amendment to the requirements of the Business Combinations
Topic. The requirements of the Business Topic clarifies to address application issues on the
accounting for contingencies in a business combination. The requirements of the amended Topic is
effective for assets or liabilities arising from contingencies in business combinations acquired
F-69
GRUBB & ELLIS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (continued)
on or after January 1, 2009. The adoption of the requirements of the amended Topic did not
have a material impact on the consolidated financial statements.
In June 2009, the FASB issued an amendment to the requirements of the Transfers and Servicing
Topic, which addresses the effects of eliminating the qualifying SPE concept and redefines who the
primary beneficiary is for purposes of determining which variable interest holder should
consolidated the variable interest entity. The requirements of the amended Topic become effective
for annual periods beginning after November 15, 2009. The Company is reviewing any impact this may
have on the consolidated financial statements.
In June 2009, the FASB issued SFAS No. 168,
The FASB Accounting Standards Codification and the
Hierarchy of Generally Accepted Accounting Principles a Replacement of FASB Statement No. 162
(
SFAS No. 168
). SFAS No. 168 established that the
FASB Accounting Standards Codification
(the
Codification
) became the single official source of authoritative U.S. GAAP, other than guidance
issued by the SEC. Following this statement, the FASB will not issue new standards in the form of
Statements, Staff Positions or Emerging Issues Task Force Abstracts. Instead, the FASB will issue
Accounting Standards Updates. All guidance contained in the Codification carries an equal level of
authority. The GAAP hierarchy was modified to include only two levels of GAAP: authoritative and
non-authoritative. All non-grandfathered, non-SEC accounting literature not included in the
Codification became non-authoritative. The Codification, which changes the referencing of financial
standards, became effective for interim and annual periods ending on or after September 15, 2009.
The adoption of SFAS No. 168 did have a material impact on the consolidated financial statements.
The Company has adopted the requirements of the Subsequent Events Topic effective beginning
with the quarter ended September 30, 2009 and has evaluated for disclosure subsequent events that
have occurred up through November 13, 2009, the date of issuance of these financial statements.
2. MARKETABLE SECURITIES
The historical cost and estimated fair value of the available-for-sale marketable securities
held by the Company are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of September 30, 2009
|
|
|
As of December 31, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair
|
|
|
|
Historical
|
|
|
Gross Unrealized
|
|
|
Market
|
|
|
Historical
|
|
|
Gross Unrealized
|
|
|
Market
|
|
(In thousands)
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Value
|
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Value
|
|
|
|
|
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity securities
|
|
$
|
532
|
|
|
$
|
|
|
|
$
|
(43
|
)
|
|
$
|
489
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
There were no sales of marketable equity securities during the nine month period ended
September 30, 2009. Sales of marketable equity securities resulted in realized losses of
approximately $1.8 million during the nine months ended September 30, 2008.
Investments in Limited Partnerships
The Company acquired Grubb & Ellis Alesco Global Advisors, LLC (
Alesco
) in 2007 and through
this subsidiary the Company serves as general partner and investment advisor to one hedge fund
limited partnership and as investment advisor to three mutual funds as of September 30, 2009. The
limited partnership is required to be consolidated in accordance with the requirements of the
Consolidation Topic. As of December 31, 2008, Alesco served as general partner and investment
advisor to five hedge fund limited partnerships and as investment advisor to one mutual fund.
During the nine months ended September 30, 2009, four of the hedge fund limited partnerships were
liquidated.
For the nine months ended September 30, 2009, Alesco had investment income of approximately
$629,000, which is reflected in other income (expense) and offset in noncontrolling interest in
loss of consolidated entities on the statements of operations. For the nine months ended September
30, 2008, Alesco had investment losses of approximately $1.6 million, which are reflected in other
expense and offset in noncontrolling interest in loss of consolidated entities on the statements of
operations. Alesco earned approximately $25,000 and $99,000 of management fees based on ownership
interest under the agreements for the nine months ended September 30, 2009 and 2008, respectively.
As of September 30, 2009, these limited partnerships had assets of approximately $142,000,
primarily consisting of exchange traded marketable securities, including equity securities and
foreign currencies.
The following table reflects trading securities and their original cost, gross unrealized
appreciation and depreciation, and estimated market value:
F-70
GRUBB & ELLIS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of September 30, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair
|
|
|
|
Historical
|
|
|
Gross Unrealized
|
|
|
Market
|
|
(In thousands)
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Value
|
|
|
|
|
|
|
|
(Unaudited)
|
|
|
|
|
|
Equity securities
|
|
$
|
170
|
|
|
$
|
|
|
|
$
|
(28
|
)
|
|
$
|
142
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Nine Months Ended September 30, 2009
|
|
|
For the Nine Months Ended September 30, 2008
|
|
|
|
Investment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
Income
|
|
|
Realized
|
|
|
Unrealized
|
|
|
Total
|
|
|
Income
|
|
|
Realized
|
|
|
Unrealized
|
|
|
Total
|
|
|
|
|
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
|
|
|
|
Equity
securities
|
|
$
|
206
|
|
|
$
|
(191
|
)
|
|
$
|
640
|
|
|
$
|
655
|
|
|
$
|
237
|
|
|
$
|
(2,172
|
)
|
|
$
|
622
|
|
|
$
|
(1,313
|
)
|
Less investment
expenses
|
|
|
(26
|
)
|
|
|
|
|
|
|
|
|
|
|
(26
|
)
|
|
|
(244
|
)
|
|
|
|
|
|
|
|
|
|
|
(244
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
180
|
|
|
$
|
(191
|
)
|
|
$
|
640
|
|
|
$
|
629
|
|
|
$
|
(7
|
)
|
|
$
|
(2,172
|
)
|
|
$
|
622
|
|
|
$
|
(1,557
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3. RELATED PARTIES
Related party balances are summarized below:
Accounts Receivable
Accounts receivable from related parties consisted of the following:
|
|
|
|
|
|
|
September 30,
|
|
(In thousands)
|
|
2009
|
|
Accrued property management fees
|
|
$
|
16,492
|
|
Accrued lease commissions
|
|
|
8,755
|
|
Accounts receivable from sponsored REITs
|
|
|
4,545
|
|
Accrued asset management fees
|
|
|
2,048
|
|
Other accrued fees
|
|
|
1,997
|
|
Accrued real estate acquisition fees
|
|
|
698
|
|
Other receivables
|
|
|
178
|
|
|
|
|
|
Total
|
|
|
34,713
|
|
Allowance for uncollectible receivables
|
|
|
(13,138
|
)
|
|
|
|
|
Accounts receivable from related parties net
|
|
|
21,575
|
|
Less portion classified as current
|
|
|
(7,756
|
)
|
|
|
|
|
Non-current portion
|
|
$
|
13,819
|
|
|
|
|
|
F-71
GRUBB & ELLIS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (continued)
Advances to Related Parties
The Company makes advances to affiliated real estate entities under management in the normal
course of business. Such advances are uncollateralized, have payment terms of one year or less
unless extended by the Company, and generally bear interest at a range of 6.0% to 12.0% per annum.
The advances consisted of the following:
|
|
|
|
|
|
|
September 30,
|
|
(In thousands)
|
|
2009
|
|
Advances to properties of related parties
|
|
$
|
15,663
|
|
Advances to related parties
|
|
|
3,281
|
|
|
|
|
|
Total
|
|
|
18,944
|
|
Allowance for uncollectible advances
|
|
|
(12,021
|
)
|
|
|
|
|
Advances to related parties net
|
|
|
6,923
|
|
Less portion classified as current
|
|
|
(26
|
)
|
|
|
|
|
Non-current portion
|
|
$
|
6,897
|
|
|
|
|
|
As of September 30, 2009, accounts receivable totaling $310,000 is due from a program
30.0% owned and managed by Anthony W. Thompson, the Companys former Chairman who subsequently
resigned in February 2008. The receivable of $310,000 has been fully reserved for and is included
in the allowance for uncollectible advances. On November 4, 2008, the Company made a formal written
demand to Mr. Thompson for these monies.
As of December 31, 2008, advances to a program 40.0% owned and, as of April 1, 2008, managed
by Mr. Thompson, totaled $983,000, which includes $61,000 in accrued interest. As of September 30,
2009, the total outstanding balance of $983,000, inclusive of $61,000 in accrued interest, was past
due. The total amount of $983,000 million has been reserved for and is included in the allowance
for uncollectible advances. On November 4, 2008 and April 3, 2009, the Company made formal written
demands to Mr. Thompson for these monies.
Notes Receivable From Related Party
In December 2007, the Company advanced funds to Grubb & Ellis Apartment REIT, Inc. (
Apartment
REIT
) on an unsecured basis. The unsecured note required monthly interest-only payments which
began on January 1, 2008. The balance owed to the Company as of December 31, 2007 which consisted
of $7.6 million in principal was repaid in full in the first quarter of 2008.
In June 2008, the Company advanced $3.7 million to Apartment REIT on an unsecured basis. The
unsecured note originally had a maturity date of December 27, 2008 and bore interest at a fixed
rate of 4.95% per annum. On November 10, 2008, the Company extended the maturity date to May 10,
2009 and adjusted the interest rate to a fixed rate of 5.26% per annum. The note required monthly
interest-only payments beginning on August 1, 2008 and provided for a default interest rate in an
event of default equal to 2.00% per annum in excess of the stated interest rate. Effective May 10,
2009 the Company entered into a second extension agreement with Apartment REIT, extending the
maturity date to November 10, 2009. The new terms of the extension continue to require monthly
interest-only payments beginning May 1, 2009 and bears interest at a fixed rate of 8.43% with the
original default rate.
In September 2008, the Company advanced an additional $5.4 million to Apartment REIT on an
unsecured basis. The unsecured note originally had a maturity date of March 15, 2009 and bore
interest at a fixed rate of 4.99% per annum. Effective March 9, 2009, the Company extended the
maturity date to September 15, 2009 and adjusted the interest rate to a fixed rate of 5.00% per
annum. The note requires monthly interest-only payments beginning on October 1, 2008 and provides
for a default interest rate in an event of default equal to 2.00% per annum in excess of the stated
interest rate.
There were no advances to or repayments made by Apartment REIT during the nine months ending
September 30, 2009. As of September 30, 2009, the balance owed by Apartment REIT to the Company on
the two unsecured notes totaled $9.1 million in principal with no interest outstanding.
On November 10, 2009, the Company consolidated the aforementioned $3.7 million and 5.4 million
unsecured notes into the Consolidated Promissory Note with Apartment REIT whereby the two unsecured
promissory notes receivable were cancelled and consolidated the outstanding principal amounts of
the promissory notes into the Consolidated Promissory Note. The Consolidated Promissory Note has an outstanding principal amount of $9,100,000, an interest rate of 4.5%
per annum, a default interest rate of 2.0% in excess of the interest rate then in effect, and a
maturity date of January 1, 2011. The interest rate payable under the Consolidated
F-72
GRUBB & ELLIS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (continued)
Promissory Note is subject to a one-time adjustment to a maximum rate of 6.0% per annum, which will be evaluated
and may be adjusted by the Company, in its sole discretion, on July 1, 2010.
4. VARIABLE INTEREST ENTITIES
The determination of the appropriate accounting method with respect to the Companys variable
interest entities (
VIEs
), including joint ventures, is based on the requirements of the
Consolidation Topic. The Company consolidates any VIE for which it is the primary beneficiary.
The Company determines if an entity is a VIE under the requirements of the Consolidation Topic
based on several factors, including whether the entitys total equity investment at risk upon
inception is sufficient to finance the entitys activities without additional subordinated
financial support. The Company makes judgments regarding the sufficiency of the equity at risk
based first on a qualitative analysis, then a quantitative analysis, if necessary. In a
quantitative analysis, the Company incorporates various estimates, including estimated future cash
flows, asset hold periods and discount rates, as well as estimates of the probabilities of various
scenarios occurring. If the entity is a VIE, the Company then determines whether to consolidate the
entity as the primary beneficiary. The Company is deemed to be the primary beneficiary of the VIE
and consolidates the entity if the Company will absorb a majority of the entitys expected losses,
receive a majority of the entitys expected residual returns or both. As reconsideration events
occur, the Company will reconsider its determination of whether an entity is a VIE and who the
primary beneficiary is to determine if there is a change in the original determinations and will
report such changes on a quarterly basis.
The Companys Investment Management segment is a sponsor of TIC Programs and related formation
LLCs. As of September 30, 2009, the Company had investments in seven LLCs that are VIEs in which
the Company is the primary beneficiary. These seven LLCs hold interests in the Companys TIC
investments. The carrying value of the assets and liabilities for these consolidated VIEs as of
September 30, 2009 was $2.3 million and $17,000, respectively. In addition, each consolidated VIE
is joint and severally liable, along with the other investors in each respective TIC, on the
non-recourse mortgage debt related to the VIEs interests in the respective TIC investment. This
non-recourse mortgage debt totaled $277.2 million as of September 30, 2009. This non-recourse
mortgage debt is not consolidated as the LLCs account for the interests in the Companys TIC
investments under the equity method and the non recourse mortgage debt does not meet the criteria
under the requirements of the Transfers and Servicing Topic for recognizing the share of the debt
assumed by the other TIC interest holders for consolidation. The Company does consider the third
party TIC holders ability and intent to repay their share of the joint and several liability in
evaluating the recovery.
If the interest in the entity is determined to not be a VIE under the requirements of the
Consolidation Topic, then the entity is evaluated for consolidation under the requirements of the
Investments-Equity Method and Joint Ventures Topic, as amended by the requirements of the
Consolidation Topic.
As of September 30, 2009, the Company had certain entities that were determined to be VIEs
that did not meet the consolidation requirements of the Consolidation Topic. The unconsolidated
VIEs are accounted for under the equity method. The aggregate investment carrying value of the
unconsolidated VIEs was $1.0 million as of September 30, 2009, and was classified under Investments
in Unconsolidated Entities in the consolidated balance sheet. The Companys maximum exposure to
loss as a result of its investments in unconsolidated VIEs is typically limited to the aggregate of
the carrying value of the investment and future funding commitments. During the nine months ended
September 30, 2009, the Company funded a total of $2.6 million related to TIC Program reserves.
Future funding commitments as of September 30, 2009 for the unconsolidated VIEs totaled $1.5
million to fund TIC Program reserves. In addition, as of September 30, 2009, these unconsolidated
VIEs are joint and severally liable on non-recourse mortgage debt totaling $395.1 million. Although
the mortgage debt is non-recourse to the VIE that holds the TIC interest, the Company has full
recourse guarantees on a portion of such mortgage debt totaling $3.5 million as of September 30,
2009, for which the Company has recorded no liability as of September 30, 2009. This mortgage debt
is not consolidated as the LLCs account for the interests in the Companys TIC investments under
the equity method and the non recourse mortgage debt does not meet the requirements of Transfers
and Servicing Topic for recognizing the share of the debt assumed by the other TIC interest holders
for consolidation. The Company considers the third party TIC holders ability and intent to repay
their share of the joint and several liability in evaluating the recovery. In evaluating the
recovery of the TIC investment, the Company evaluated the likelihood that the lender would
foreclose on the VIEs interest in the TIC to satisfy the obligation. See Note 5 Investments in
Unconsolidated Entities for additional information.
F-73
GRUBB & ELLIS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (continued)
5. INVESTMENTS IN UNCONSOLIDATED ENTITIES
As of September 30, 2009, the Company held investments in five joint ventures totaling $0.5
million, which represents a range of 5.0% to 10.0% ownership interest in each property. In
addition, pursuant to the requirements of the Consolidation Topic, the Company has consolidated
seven LLCs which have investments in unconsolidated entities totaling $2.3 million as of September
30, 2009. The remaining amounts within investments in unconsolidated entities are related to
various LLCs, which represent ownership interests of less than 1.0%.
At December 31, 2007, Legacy Grubb & Ellis owned approximately 5.9 million shares of common
stock of Grubb & Ellis Realty Advisors, Inc. (
GERA
), which was a publicly traded special purpose
acquisition company, which represented approximately 19% of the outstanding common stock. Legacy
Grubb & Ellis also owned approximately 4.6 million GERA warrants which were exercisable into
additional GERA common stock, subject to certain conditions. As part of the Merger, the Company
recorded each of these investments at fair value on December 7, 2007, the date they were acquired,
at a total investment of approximately $4.5 million.
All of the officers of GERA were also officers or directors of Legacy Grubb & Ellis, although
such persons did not receive any compensation from GERA in their capacity as officers of GERA. Due
to the Companys ownership position and influence over the operating and financial decisions of
GERA, the Companys investment in GERA was accounted for within the Companys consolidated
financial statements under the equity method of accounting.
On February 28, 2008, a special meeting of the stockholders of GERA was held to vote on, among
other things, a proposed transaction with the Company. GERA failed to obtain the requisite consents
of its stockholders to approve the proposed business transaction and at a subsequent special
meeting of the stockholders of GERA held on April 14, 2008, the stockholders of GERA approved the
dissolution and plan of liquidation of GERA. The Company did not receive any funds or other assets
as a result of GERAs dissolution and liquidation.
As a consequence, the Company wrote off its investment in GERA and other advances to that
entity in the first quarter of 2008 and recognized a loss of approximately $5.8 million which is
recorded in equity in losses on the consolidated statement of operations and is comprised of $4.5
million related to stock and warrant purchases and $1.3 million related to operating advances and
third party costs, which included an unrealized loss previously reflected in accumulated other
comprehensive loss.
6. PROPERTY HELD FOR INVESTMENT
Property held for investment consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
(In thousands)
|
|
Useful Life
|
|
|
2009
|
|
Building and capital improvement
|
|
39 years
|
|
$
|
73,712
|
|
Tenant improvement
|
|
1 12 years
|
|
|
6,653
|
|
Accumulated depreciation
|
|
|
|
|
|
|
(7,037
|
)
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
73,328
|
|
Land
|
|
|
|
|
|
|
9,480
|
|
|
|
|
|
|
|
|
|
Property held for investment net
|
|
|
|
|
|
$
|
82,808
|
|
|
|
|
|
|
|
|
|
The Company recognized $576,000 of depreciation expense related to the properties held
for investment for the three and nine months ended September 30, 2009. The Company holds two
properties for investment. Both of these properties were previously held for sale and one was
reclassified as held for investment as of June 30, 2009 and the other was reclassified as held for
investment as of September 30, 2009. During the periods each property was held for sale, the
Company did not record any depreciation expense related to the property. In accordance with the
provisions of the Property, Plant, and Equipment Topic, management determined that, for properties
held for investment, the carrying value of each property before the property was classified as held
for sale adjusted for any depreciation and amortization expense and impairment losses that would
have been recognized had the asset been continuously classified as held for investment was greater
than the carrying value of the property at the date of the subsequent decision not to sell. As
such, the Company made no additional adjustments to the carrying value of either asset as of
September 30, 2009.
F-74
GRUBB & ELLIS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (continued)
7. IDENTIFIED INTANGIBLE ASSETS
Identified intangible assets consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
(In thousands)
|
|
Useful Life
|
|
|
2009
|
|
Contract rights
|
|
|
|
|
|
|
|
|
Contract rights, established for the
legal right to future disposition fees of a portfolio of real estate properties under contract
|
|
Amortize per disposition transactions
|
|
$
|
11,342
|
|
Accumulated amortization
|
|
|
|
|
|
|
(4,700
|
)
|
|
|
|
|
|
|
|
|
Contract rights, net
|
|
|
|
|
|
|
6,642
|
|
|
|
|
|
|
|
|
|
Other identified intangible assets
|
|
|
|
|
|
|
|
|
Trade name
|
|
Indefinite
|
|
|
64,100
|
|
Affiliate agreement
|
|
20 years
|
|
|
10,600
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
(In thousands)
|
|
Useful Life
|
|
|
2009
|
|
Customer relationships
|
|
|
5 to 7 years
|
|
|
|
5,400
|
|
Internally developed software
|
|
4 years
|
|
|
6,200
|
|
Other contract rights
|
|
|
5 to 7 years
|
|
|
|
1,163
|
|
Non-compete and employment agreements
|
|
|
3 to 4 years
|
|
|
|
97
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
87,560
|
|
Accumulated amortization
|
|
|
|
|
|
|
(5,890
|
)
|
|
|
|
|
|
|
|
|
Other identified intangible assets, net
|
|
|
|
|
|
|
81,670
|
|
|
|
|
|
|
|
|
|
Identified intangible assets property
|
|
|
|
|
|
|
|
|
In place leases and tenant relationships
|
|
|
1 to 104 months
|
|
|
|
11,510
|
|
Above market leases
|
|
|
1 to 92 months
|
|
|
|
2,364
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13,874
|
|
|
|
|
|
|
|
|
|
Accumulated amortization
|
|
|
|
|
|
|
(5,731
|
)
|
|
|
|
|
|
|
|
|
|
Identified intangible assets, net property
|
|
|
|
|
|
|
8,143
|
|
|
|
|
|
|
|
|
|
Total identified intangible assets, net
|
|
|
|
|
|
$
|
96,455
|
|
|
|
|
|
|
|
|
|
Amortization expense recorded for contract rights was approximately $1.2 million for the
nine months ended September 30, 2008. No amortization expense was recognized during the nine months
ended September 30, 2009 related to the contract rights. Amortization expense is charged as a
reduction to investment management revenue in the applicable period. During the period of future
real property sales, the amortization of the contract rights for intangible assets will be applied
based on the net relative value of disposition fees realized. The intangible contract rights
represent the legal right to future disposition fees of a portfolio of real estate properties under
contract. As a result of the current economic environment, a portion of these disposition fees may
not be recoverable. Based on our analysis for the current and projected property values, condition
of the properties and status of mortgage loans payable associated with these contract rights, the
Company determined that there are certain properties for which receipt of disposition fees was
improbable. As a result, the Company recorded an impairment charge of approximately $583,000
related to the impaired intangible contract rights as of September 30, 2009.
Amortization expense recorded for the other identified intangible assets was approximately
$2.4 million and $2.6 million for the nine months ended September 30, 2009 and 2008, respectively.
Amortization expense is included as part of operating expense in the accompanying consolidated
statement of operations.
Amortization expense recorded for the in place leases and tenant relationships was
approximately $1.1 million for the nine months ended September 30, 2008. The Company recorded
approximately $280,000 of amortization expense for the nine months ended September 30, 2009 related to in place leases and tenant relationships. Amortization
expense is included as part of operating expense in the accompanying consolidated statement of
operations.
F-75
GRUBB & ELLIS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (continued)
Amortization expense recorded for the above market leases was approximately $384,000 and
$416,000 for the nine months ended September 30, 2009 and 2008, respectively. Amortization expense
is charged as a reduction to rental related revenue in the accompanying consolidated statement of
operations.
8. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses consisted of the following:
|
|
|
|
|
|
|
September 30,
|
|
(In thousands)
|
|
2009
|
|
Accounts payable
|
|
$
|
15,256
|
|
Salaries and related costs
|
|
|
13,977
|
|
Accrued liabilities
|
|
|
11,922
|
|
Bonuses
|
|
|
9,131
|
|
Broker commissions
|
|
|
7,489
|
|
Property management fees and commissions due to third parties
|
|
|
2,699
|
|
Severance
|
|
|
207
|
|
Interest
|
|
|
468
|
|
Other
|
|
|
30
|
|
|
|
|
|
Total
|
|
$
|
61,179
|
|
|
|
|
|
9. NOTES PAYABLE AND CAPITAL LEASE OBLIGATIONS
Notes payable and capital lease obligations consisted of the following:
|
|
|
|
|
|
|
September 30,
|
|
(In thousands)
|
|
2009
|
|
Mortgage debt payable to a financial
institution collateralized by real estate held for
investment. Fixed interest rate of 6.29% per annum
as of September 30, 2009. The note is non-recourse
up to $60 million with a $10 million recourse
guarantee and matures in February 2017. As of
September 30, 2009, note requires monthly
interest-only payments
|
|
$
|
70,000
|
|
Mortgage debt payable to financial institution
collateralized by real estate held for investment.
Fixed interest rate of 6.32% per annum as of
September 30, 2009. The non-recourse note matures
in July 2014. As of September 30, 2009, note
requires monthly interest-only payments
|
|
|
37,000
|
|
Capital lease obligations
|
|
|
1,937
|
|
|
|
|
|
Total
|
|
|
108,937
|
|
Less portion classified as current
|
|
|
(984
|
)
|
|
|
|
|
Non-current portion
|
|
$
|
107,953
|
|
|
|
|
|
10. NOTES PAYABLE OF PROPERTIES HELD FOR SALE
Notes payable of properties held for sale consisted of the following:
|
|
|
|
|
|
|
September 30,
|
|
(In thousands)
|
|
2009
|
|
Mortgage debt payable to a financial institution
collateralized by real estate held for sale. The
non-recourse mortgage note charges variable interest rate
based on the higher of LIBOR plus 3.00% or 6.00%. The
applicable interest rate was 6.00% per annum as of September
30, 2009. The notes require monthly interest-only payments
and matured on July 9, 2009
|
|
$
|
31,613
|
|
|
|
|
|
The mortgage note payable of $31.6 million related to properties held for sale at
September 30, 2009 million matured on July 9, 2009. There is no assurance that the loan will be
extended. However, the Company does not expect any significant impact to the financial condition or
cash flows of the Company should the loan not be renewed due to the non-recourse nature of the
loan.
F-76
GRUBB & ELLIS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (continued)
11. LINE OF CREDIT
On December 7, 2007, the Company entered into a $75.0 million credit agreement by and among
the Company, the guarantors named therein, and the financial institutions defined therein as lender
parties, with Deutsche Bank Trust Company Americas, as lender and administrative agent (the
Credit
Facility
). The Company was restricted to solely use the line of credit for investments,
acquisitions, working capital, equity interest repurchase or exchange, and other general corporate
purposes. The line bore interest at either the prime rate or LIBOR based rates, as the Company may
choose on each of its borrowings, plus an applicable margin ranging from 1.50% to 2.50% based on
the Companys Debt/Earnings Before Interest, Taxes, Depreciation and Amortization (
EBITDA
) ratio
as defined in the credit agreement.
On August 5, 2008, the Company entered into the First Letter Amendment to its Credit Facility.
The First Letter Amendment, among other things, provided the Company with an extension from
September 30, 2008 to March 31, 2009 to dispose of the three real estate assets that the Company
had previously acquired on behalf of GERA. Additionally, the First Letter Amendment also, among
other things, modified select debt and financial covenants in order to provide greater flexibility
to facilitate the Companys TIC Programs.
On November 4, 2008, the Company amended its Credit Agreement (the
Second Letter Amendment
).
The effective date of the Second Letter Amendment is September 30, 2008. (Certain capitalized terms
set forth below that are not otherwise defined herein have the meaning ascribed to them in the
Credit Facility, as amended.
The Second Letter Amendment, among other things, a) reduced the amount available under the
Credit Facility from $75.0 million to $50.0 million by providing that no advances or letters of
credit shall be made available to the Company after September 30, 2008 until such time as
borrowings have been reduced to less than $50.0 million; b) provided that 100% of any net cash
proceeds from the sale of certain real estate assets required to be sold by the Company shall
permanently reduce the Revolving Credit Commitments, provided that the Revolving Credit Commitments
shall not be reduced to less than $50.0 million by reason of the operation of such asset sales; and
c) modified the interest rate incurred on borrowings by increasing the applicable margins by 100
basis points and by providing for an interest rate floor for any prime rate related borrowings.
Additionally, the Second Letter Amendment, among other things, modified restrictions on
guarantees of primary obligations from $125.0 million to $50.0 million, modified select financial
covenants to reflect the impact of the current economic environment on the Companys financial
performance, amended certain restrictions on payments by deleting any dividend/share repurchase
limitations and modified the reporting requirements of the Company with respect to real property
owned or held.
As of September 30, 2008, the Company was not in compliance with certain of its financial
covenants related to EBITDA. As a result, part of the Second Letter Amendment included a provision
to modify selected covenants. The Company was not in compliance with certain debt covenants as of
March 31, 2009, all of which were effectively cured as of such date by the Third Amendment to the
Credit Facility described below. As a consequence of the foregoing, and certain provisions of the
Third Amendment, the $63.0 million outstanding under the Credit Facility has been classified as a
current liability as of September 30, 2009.
On May 20, 2009, the Company further amended its Credit Facility by entering into the Third
Amendment. The Third Amendment, among other things, bifurcated the existing credit facility into
two revolving credit facilities, (i) a $38,000,000 Revolving Credit A Facility which was deemed
fully funded as of the date of the Third Amendment, and (ii) a $29,289,245 Revolving Credit B
Facility, comprised of revolving credit advances in the aggregate of $25,000,000 which were deemed
fully funded as of the date of the Third Amendment and letters of credit advances in the aggregate
amount of $4,289,245 which are issued and outstanding as of the date of the Third Amendment. The
Third Amendment required the Company to draw down $4,289,245 under the Revolving Credit B Facility
on the date of the Third Amendment and deposit such funds in a cash collateral account to cash
collateralize outstanding letters of credit under the Credit Facility and eliminated the swingline
features of the Credit Facility and the Companys ability to cause the lenders to issue any
additional letters of credit. In addition, the Third Amendment also changes the termination date of
the Credit Facility from December 7, 2010 to March 31, 2010 and modified the interest rate incurred
on borrowings by initially increasing the applicable margin by 450 basis points (or to 7.00% on
prime rate loans and 8.00% on LIBOR based loans).
The Third Amendment also eliminated specific financial covenants, and in its place, the
Company was required to comply with the approved budget, that has been agreed to by the Company and
the lenders, subject to agreed upon variances. The approved budget related solely to the 2009
fiscal year (the
Budget
). The Budget was the Companys operating cash flow budget, and
encompassed all aspects of typical operating cash flows including revenues, fees and expenses, and
such working capital components as receivables and accounts payables, taxes, debt service and any
other identifiable cash flow items. Pursuant to the Budget, the Company was required to stay within
certain variance parameters with respect to cumulative cash flow for the remainder of the 2009 year
to remain in compliance with the Credit Facility. The Company was also required under the Third
Amendment to effect the Recapitalization Plan, on or before September 30, 2009 and in connection
therewith to effect the Partial Prepayment of the Revolving A Credit Facility. In the event the
Company failed to effect the Recapitalization Plan and in connection therewith to reduce the
F-77
GRUBB & ELLIS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (continued)
Revolving Credit A Credit Facility by the Partial Prepayment amount, the (i) lenders would
have had the right commencing on October 1, 2009, to exercise the Warrants, for nominal
consideration, to purchase common stock of the Company equal to 15% of the common stock of the
Company on a fully diluted basis as of such date, subject to adjustment, (ii) the applicable margin
automatically increased to 11% on prime rate loans and increased to 12% on LIBOR based loans, (iii)
the Company was required to amortize an aggregate of $10 million of the Revolving Credit A Facility
in three (3) equal installments on the first business day of each of the last three (3) months of
2009, (iv) the Company was obligated to submit a revised budget by October 1, 2009, (v) the Credit
Facility would have terminated on January 15, 2010, and (vi) no further advances were available to
be drawn under the Credit Facility.
In the event the Company effected the Recapitalization Plan and the Partial Prepayment amount
on or prior to September 30, 2009, the Warrants would have automatically expired and not become
exercisable, the applicable margin would have automatically been reduced to 3% on prime rate loans
and 4% on LIBOR based loans and the Company had the right, subject to the requisite approval of the
lenders, to seek an extension to extend the term of the Credit Facility to January 5, 2011,
provided the Company also paid a fee of .25% of the then outstanding commitments under the Credit
Facility. The Company calculated the initial fair value of the Warrants to be $534,000 and has
recorded such amount in stockholders equity with a corresponding debt discount to the line of
credit balance. Such debt discount amount will be amortized into interest expense over the
remaining term of the Credit Facility. As of September 30, 2009, the net debt discount balance was
$291,000 and is included in the current portion of line of credit in the accompanying consolidated
balance sheet.
As a result of the Third Amendment the Company was required to prepay Revolving Credit A
Advances (and to the extent the Revolving Credit A Facility shall be reduced to zero, prepay
outstanding Revolving Credit B Advances) in an amount equal to 100% (or, after the Revolving Credit
A Advances are reduced by at least the Partial Prepayment amount, in an amount equal to 50%) of Net
Cash Proceeds (as defined in the Credit Agreement) from:
|
|
|
assets sales,
|
|
|
|
|
conversions of Investments (as defined in the Credit Agreement),
|
|
|
|
|
the refund of any taxes or the sale of equity interests by the Company or its subsidiaries,
|
|
|
|
|
the issuance of debt securities, or
|
|
|
|
|
any other transaction or event occurring outside the ordinary course of business of the
Company or its subsidiaries;
|
provided, however, that (a) the Net Cash Proceeds received from the sale of the certain real
property assets shall be used to prepay outstanding Revolving Credit B Advances and to the extent
Revolving Credit B Advances shall be reduced to zero, to prepay outstanding Revolving Credit A
Advances, (b) the Company shall prepay outstanding Revolving Credit B Advances in an amount equal
to 100% of the Net Cash Proceeds from the sale of the Danbury Property unless the Company is then
not in compliance with the Recapitalization Plan in which event Revolving Credit A Advances shall
be prepaid first and (c) the Companys 2008 tax refund was used to prepay outstanding Revolving
Credit B Advances upon the closing of the Third Amendment.
The Third Amendment required the Company to use its commercially reasonable best efforts to
sell four other commercial properties, including the two remaining GERA Properties, by September
30, 2009. The Companys Line of Credit is secured by substantially all of the assets of the
Company.
On September 30, 2009, the Company further amended its Credit Facility by entering into the
First Credit Facility Letter Amendment. The First Credit Facility Letter Amendment, among other
things, modified and provided the Company an extension from September 30, 2009 to November 30, 2009
(the
Extension
) to (i) effect its Recapitalization Plan and in connection therewith to effect a
prepayment of at least seventy two (72%) percent of the Revolving Credit A Advances (as defined in
the Credit Facility), and (ii) sell four commercial properties, including the two real estate
assets the Company had previously acquired on behalf of Grubb & Ellis Realty Advisors, Inc.
The First Credit Facility Letter Amendment also granted the Company a one-time right,
exercisable by November 30, 2009, to prepay the Credit Facility in full for a reduced principal
amount equal to approximately 65% of the aggregate principal amount of the Credit Facility then
outstanding (the Discount Prepayment Option).
In connection with the Extension, the warrant agreement was also amended to extend from
October 1, 2009 to December 1, 2009, the time when the Warrants are first exercisable by its
holders.
F-78
GRUBB & ELLIS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (continued)
The First Credit Facility Letter Amendment also granted a one-time waiver from the covenant
requiring all proceeds of sales of equity or debt securities to be applied to pay down the Credit
Facility to facilitate the sale by the Company to an affiliate of the Companys largest stockholder
and Chairman of the Board of Directors of the Company, $5.0 million of subordinated debt or equity
securities of the Company (the
Permitted Placement
) so long as (i) the Permitted Placement is
junior, subject and subordinate to the Credit Facility, (ii) the net proceeds of the Permitted
Placement are placed into an account with the lender, (iii) the disbursement of the funds in such
account is in accordance with the approved budget that has been agreed to by the Company and the
lenders, (iv) that the lenders be granted a security interest in the net proceeds of the Permitted
Placement, and (v) the Permitted Placement is otherwise satisfactory to the Lenders. In addition,
if the Permitted Placement is in the form of subordinated debt, the Company and the entity making
the $5.0 million loan are required to enter into a subordination agreement with the lenders.
Finally, the First Credit Facility Letter Amendment also provided that $4.3 million that was
deposited in a cash collateral account to cash collateralize outstanding letters of credit under
the Credit Facility would instead be used to pay down the Credit Facility.
The Companys Credit Facility is secured by substantially all of the Companys assets. The
outstanding balance on the Credit Facility was $63.0 million as of September 30, 2009 and carried a
weighted average interest rate of 8.37%.
On November 6, 2009, a portion of proceeds from the offering of preferred stock (see Note 20)
were used to pay in full borrowings under the Credit Facility then outstanding of $66.8 million for
a reduced amount equal to $43.4 million and the Credit Facility was terminated.
12. SEGMENT DISCLOSURE
Management has determined the reportable segments identified below according to the types of
services offered and the manner in which operations and decisions are made. The Company operates in
the following reportable segments:
Management Services
Management Services provides property management and related services
for owners of investment properties and facilities management services for corporate owners and
occupiers.
Transaction Services
Transaction Services advises buyers, sellers, landlords and tenants on
the sale, leasing and valuation of commercial property and includes the Companys national accounts
group and national affiliate program operations.
Investment Management
Investment Management includes services for acquisition, financing
and disposition with respect to the Companys investment programs, asset management services
related to the Companys programs, and dealer-manager services by its securities broker-dealer,
which facilitates capital raising transactions for its investment programs.
The Company also has certain corporate level activities including interest income from notes
and advances, property rental related operations, legal administration, accounting, finance and
management information systems which are not considered separate operating segments.
The Company evaluates the performance of its segments based upon operating income (loss).
Operating income (loss) is defined as operating revenue less compensation and general and
administrative costs and excludes other rental related, rental expense, interest expense,
depreciation and amortization, allocation of overhead and other operating and non-operating
expenses.
F-79
GRUBB & ELLIS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (continued)
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
(In thousands)
|
|
2009
|
|
|
2008
|
|
Management Services
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
199,636
|
|
|
$
|
185,855
|
|
Compensation costs
|
|
|
27,702
|
|
|
|
28,550
|
|
Transaction commissions and related costs
|
|
|
7,346
|
|
|
|
6,625
|
|
Reimbursable salaries, wages, and benefits
|
|
|
142,601
|
|
|
|
131,084
|
|
General and administrative
|
|
|
8,043
|
|
|
|
6,356
|
|
|
|
|
|
|
|
|
Segment operating income (loss)
|
|
|
13,944
|
|
|
|
13,240
|
|
|
|
|
|
|
|
|
|
|
Transaction Services
|
|
|
|
|
|
|
|
|
Revenue
|
|
|
118,793
|
|
|
|
173,191
|
|
Compensation costs
|
|
|
32,986
|
|
|
|
36,423
|
|
Transaction commissions and related costs
|
|
|
77,981
|
|
|
|
111,337
|
|
Reimbursable salaries, wages, and benefits
|
|
|
1
|
|
|
|
|
|
General and administrative
|
|
|
25,459
|
|
|
|
26,975
|
|
|
|
|
|
|
|
|
Segment operating income (loss)
|
|
|
(17,634
|
)
|
|
|
(1,544
|
)
|
|
|
|
|
|
|
|
|
|
Investment Management
|
|
|
|
|
|
|
|
|
Revenue
|
|
|
43,912
|
|
|
|
84,480
|
|
Compensation costs
|
|
|
20,888
|
|
|
|
22,944
|
|
Transaction commissions and related costs
|
|
|
31
|
|
|
|
18
|
|
Reimbursable salaries, wages, and benefits
|
|
|
7,077
|
|
|
|
4,372
|
|
General and administrative
|
|
|
32,593
|
|
|
|
31,524
|
|
|
|
|
|
|
|
|
Segment operating income (loss)
|
|
|
(16,677
|
)
|
|
|
25,622
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reconciliation to net loss attributable to Grubb & Ellis Company:
|
|
|
|
|
|
|
|
|
Total segment operating (loss) income
|
|
|
(20,367
|
)
|
|
|
37,318
|
|
Non-segment:
|
|
|
|
|
|
|
|
|
Rental operations, net of rental related expenses
|
|
|
6,595
|
|
|
|
9,918
|
|
Corporate overhead (compensation, general and administrative costs)
|
|
|
(43,165
|
)
|
|
|
(43,667
|
)
|
Other operating expenses
|
|
|
(38,056
|
)
|
|
|
(68,615
|
)
|
Other income (expense)
|
|
|
(769
|
)
|
|
|
(13,646
|
)
|
|
|
|
|
|
|
|
Loss from continuing operations before income tax (provision) benefit
|
|
|
(95,762
|
)
|
|
|
(78,692
|
)
|
Income tax (provision) benefit
|
|
|
(587
|
)
|
|
|
23,124
|
|
|
|
|
|
|
|
|
Loss from continuing operations
|
|
|
(96,349
|
)
|
|
|
(55,568
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
(In thousands)
|
|
2009
|
|
|
2008
|
|
Loss from discontinued operations, net of taxes
|
|
|
(1,005
|
)
|
|
|
(18,690
|
)
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(97,354
|
)
|
|
$
|
(74,258
|
)
|
Less: Net (loss) income from noncontrolling interests
|
|
|
(1,686
|
)
|
|
|
(6,298
|
)
|
|
|
|
|
|
|
|
Net loss attributable to Grubb & Ellis Company
|
|
$
|
(95,668
|
)
|
|
$
|
(67,960
|
)
|
|
|
|
|
|
|
|
F-80
GRUBB & ELLIS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (continued)
13. PROPERTIES HELD FOR SALE
A summary of the properties and related LLCs held for sale balance sheet information is as
follows:
|
|
|
|
|
|
|
September 30,
|
|
(In thousands)
|
|
2009
|
|
Restricted cash
|
|
|
828
|
|
Properties held for sale net
|
|
|
22,468
|
|
Identified intangible assets and other assets held for sale net
|
|
|
4,823
|
|
|
|
|
|
Total assets
|
|
$
|
28,119
|
|
|
|
|
|
Notes payable of properties held for sale
|
|
$
|
31,613
|
|
Liabilities of properties held for sale net
|
|
|
2,376
|
|
|
|
|
|
Total liabilities
|
|
$
|
33,989
|
|
|
|
|
|
During 2008, the Company initiated a plan to sell the properties it classified as real
estate held for investment in its financial statements. As of September 30, 2009, the Company has a
covenant within its Credit Facility which requires the Company to use its commercially reasonable
best efforts to sell four commercial properties. The recent downturn in the global capital markets
significantly lessened the probability that the Company would be able to achieve relief from this
covenant through amendment or other financial resolutions. Pursuant to the requirements of the
Property, Plant, and Equipment Topic
,
the Company assessed the value of the assets. In addition,
the Company reviewed the valuation of its other owned properties and real estate investments. The
Company generally uses a discounted cash flow model to estimate the fair value of its properties
held for sale unless better market comparable data is available. Management uses its best estimate
in determining the key assumptions, including the expected holding period (between 5 and 7 years),
capitalization rates (between 9.0% and 9.2%), discount rates (between 10.1% and 10.5%), rental
rates, future occupancy levels, lease-up periods and capital expenditure requirements. The
estimated fair value is further adjusted for anticipated selling expenses. Generally, if a property
is under contract, the contract price adjusted for selling expenses is used to estimate the fair
value of the property. This valuation review resulted in the Company recognizing no impairment
charges against the carrying value of the properties and real estate investments held for sale for
the nine months ending September 30, 2009. Although the Company is using its commercially
reasonable best efforts to sell the four remaining commercial properties, at the current time it
appears that it is unlikely that two of the remaining properties will be sold. Accordingly, and in
light of the foregoing, these properties no longer meet the held for sale criteria under the
requirements of the Topic as of September 30, 2009 and the properties were reclassified to
properties held for investment in the consolidated balance sheet with the operations of these
properties included in continuing operations in the consolidated statements of operations for all
periods presented.
On October 31, 2008, the Company entered into that certain Agreement for the Purchase and Sale
of Real Property and Escrow Instructions to effect the sale of the Corporate Center located at 39
Old Ridgebury Road, Danbury, Connecticut, to an unaffiliated entity for a purchase price of $76.0
million. This agreement was amended and restated in its entirety by that certain Danbury Merger
Agreement dated as of January 23, 2009, as amended by the First Amendment to Danbury Merger
Agreement dated as of January 23, 2009 which reduced the purchase price to $73.5 million. On June
3, 2009, the Company completed the sale of the Danbury Property for $72.4 million.
The investments in unconsolidated entities held for sale represent the Companys interest in
certain real estate properties that it holds through various limited liability companies. In
accordance with the requirements of the Real Estate-Retail Land Topic, and the requirements of the
Property, Plant, and Equipment Topic, the Company treats the disposition of these interests similar
to the disposition of real estate it holds directly. In addition, pursuant to the requirements of
the Consolidation Topic, when the Company is no longer the primary beneficiary of the LLC, the
Company deconsolidates the LLC.
In instances when the Company expects to have significant ongoing cash flows or significant
continuing involvement in the component beyond the date of sale, the income (loss) from certain
properties held for sale continue to be fully recorded within the continuing operations of the
Company through the date of sale.
The net results of discontinued operations and the net gain on dispositions of properties sold
or classified as held for sale as of September 30, 2009, in which the Company has no significant
ongoing cash flows or significant continuing involvement, are reflected in the consolidated
statements of operations as discontinued operations. The Company will receive certain fee income
from these properties on an ongoing basis that is not considered significant when compared to the
operating results of such properties.
The following table summarizes the income and expense components that comprised discontinued
operations, net of taxes, for the nine months ended September 30, 2009 and 2008:
F-81
GRUBB & ELLIS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (continued)
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
(In thousands)
|
|
2009
|
|
|
2008
|
|
Rental income
|
|
$
|
8,983
|
|
|
$
|
15,844
|
|
Rental expense
|
|
|
(7,469
|
)
|
|
|
(11,489
|
)
|
Interest expense (including amortization of deferred financing costs)
|
|
|
(2,387
|
)
|
|
|
(4,606
|
)
|
Real estate related impairments
|
|
|
250
|
|
|
|
(22,703
|
)
|
Depreciation and amortization
|
|
|
|
|
|
|
(8,057
|
)
|
Tax (provision) benefit
|
|
|
244
|
|
|
|
12,140
|
|
|
|
|
|
|
|
|
(Loss) from discontinued operations-net of taxes
|
|
|
(379
|
)
|
|
|
(18,871
|
)
|
|
|
|
|
|
|
|
Gain (loss) on disposal of discontinued operations net of taxes
|
|
|
(626
|
)
|
|
|
181
|
|
|
|
|
|
|
|
|
Total income (loss) from discontinued operations
|
|
$
|
(1,005
|
)
|
|
$
|
(18,690
|
)
|
|
|
|
|
|
|
|
14. COMMITMENTS AND CONTINGENCIES
Operating Leases
The Company has non-cancelable operating lease obligations for office space
and certain equipment ranging from one to ten years, and sublease agreements under which the
Company acts as a sublessor. The office space leases often times provide for annual rent increases,
and typically require payment of property taxes, insurance and maintenance costs.
Rent expense under these operating leases was approximately $18.5 million and $17.4 million
for the nine months ended September 30, 2009 and 2008, respectively. Rent expense is included in
general and administrative expense in the accompanying consolidated statements of operations.
Operating Leases Other
The Company is a master lessee of seven multifamily properties in
various locations under non-cancelable leases. The leases, which commenced in various months and
expire from June 2015 through March 2016, require minimum monthly payments averaging $795,000 over
the 10-year period. Rent expense under these operating leases was approximately $6.9 million and
$7.0 million for nine months ended September 30, 2009 and 2008, respectively.
The Company subleases these multifamily spaces to third parties. Rental income from these
subleases was approximately $11.3 million and $12.4 million for the nine months ended September 30,
2009 and 2008, respectively. As multifamily leases are executed for no more than one year, the
Company is unable to project the future minimum rental receipts related to these leases.
As of September 30, 2009, the Company had recorded liabilities totaling $8.4 million related
to such master lease arrangements, consisting of $4.6 million of cumulative deferred revenues
relating to acquisition fees and loan fees received from 2004 through 2006 and $3.8 million of
additional loss reserves which were recorded in 2008.
The Company is also a 50% joint venture partner of four multifamily residential properties in
various locations under non-cancelable leases. The leases, which commenced in various months and
expire from November 2014 through January 2015, require minimum monthly payments averaging $372,000
over the 10-year period. Rent expense under these operating leases was approximately $3.4 million,
for both the nine months ended September 30, 2009 and 2008.
The Company subleases these multifamily spaces to third parties. Rental income from these
subleases was approximately $6.7 million and $6.8 million for the nine months ended September 30,
2009 and 2008, respectively. As multifamily leases are executed for no more than one year, the
Company is unable to project the future minimum rental receipts related to these leases.
TIC Program Exchange Provision
Prior to the Merger, NNN entered into agreements in which NNN
agreed to provide certain investors with a right to exchange their investment in certain TIC
Programs for an investment in a different TIC program. NNN also entered into an agreement with
another investor that provided the investor with certain repurchase rights under certain
circumstances with respect to their investment. The agreements containing such rights of exchange
and repurchase rights pertain to initial investments in TIC programs totaling $31.6 million. In
July 2009 the Company received notice from an investor of their intent to exercise such rights of
exchange and repurchase with respect to an initial investment totaling $4.5 million. The Company is
currently evaluating such notice to determine the nature and extent of the right of such exchange
and repurchase, if any.
The Company deferred revenues relating to these agreements of $281,000 and $492,000 for the
nine months ended September 30, 2009 and 2008, respectively. Additional losses of $14.3 million and
$4.5 million related to these agreements were recorded during the quarter ended December 31, 2008
and during the nine months ended September 30, 2009, respectively, to reflect the decline in value
of properties underlying the agreements with investors. As of September 30, 2009, the Company had
recorded
F-82
GRUBB & ELLIS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (continued)
liabilities totaling $22.6 million related to such agreements, consisting of $3.8 million
of cumulative deferred revenues and $18.8 million of additional losses related to these agreements.
Capital Lease Obligations
The Company leases computers, copiers and postage equipment that
are accounted for as capital leases (see Note 9 of the Notes to Consolidated Financial Statements
for additional information).
General
The Company is involved in various claims and lawsuits arising out of the ordinary
conduct of its business, as well as in connection with its participation in various joint ventures
and partnerships, many of which may not be covered by the Companys 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 Companys financial position or results of operations.
Guarantees
From time to time the Company provides guarantees of loans for properties under
management. As of September 30, 2009, there were 147 properties under management with loan
guarantees of approximately $3.5 billion in total principal outstanding with terms ranging from one
to 10 years, secured by properties with a total aggregate purchase price of approximately $4.8
billion. In addition, each consolidated VIE is joint and severally liable, along with the other
investors in each relative TIC, on the non-recourse mortgage debt related to the VIEs interests in
the relative TIC investment. This non-recourse mortgage debt totaled $277.2 million as of September
30, 2009.
The Companys guarantees consisted of the following as of September 30, 2009:
|
|
|
|
|
|
|
September 30,
|
(In thousands)
|
|
2009
|
Non-recourse/carve-out guarantees of debt of properties under management(1)
|
|
$
|
3,438,375
|
|
Non-recourse/carve-out guarantees of the Companys debt(1)
|
|
$
|
107,000
|
|
Recourse guarantees of debt of properties under management
|
|
$
|
39,717
|
|
Recourse guarantees of the Companys debt
|
|
$
|
10,000
|
|
|
|
|
(1)
|
|
A non-recourse/carve-out guarantee imposes liability on the
guarantor in the event the borrower engages in certain acts
prohibited by the loan documents. Each non-recourse carve-out
guarantee is an individual document entered into with the
mortgage lender in connection with the purchase or refinance of
an individual property. While there is not a standard document
evidencing these guarantees, liability under the non-recourse
carve-out guarantees generally may be triggered by, among other
things, any or all of the following:
|
|
|
|
a voluntary bankruptcy or similar insolvency proceeding of any borrower;
|
|
|
|
|
a transfer of the property or any interest therein in violation of the loan documents;
|
|
|
|
|
a violation by any borrower of the special purpose entity requirements set forth in the loan documents;
|
|
|
|
|
any fraud or material misrepresentation by any borrower or any guarantor in connection with the loan;
|
|
|
|
|
the gross negligence or willful misconduct by any borrower in connection with the property, the loan
or any obligation under the loan documents;
|
|
|
|
|
the misapplication, misappropriation or conversion of (i) any rents, security deposits, proceeds or
other funds, (ii) any insurance proceeds paid by reason of any loss, damage or destruction to the
property, and (iii) any awards or other amounts received in connection with the condemnation of all or
a portion of the property;
|
|
|
|
|
any waste of the property caused by acts or omissions of borrower of the removal or disposal of any
portion of the property after an event of default under the loan documents; and
|
|
|
|
|
the breach of any obligations set forth in an environmental or hazardous substances indemnification
agreement from borrower.
|
Certain violations (typically the first three listed above) render the entire debt balance recourse
to the guarantor regardless of the actual damage incurred by lender, while the liability for other
violations is limited to the damages incurred by the lender. Notice and cure provisions vary
between guarantees. Generally the guarantor irrevocably and unconditionally guarantees to the
lender the payment and
F-83
GRUBB & ELLIS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (continued)
performance of the guaranteed obligations as and when the same shall be due
and payable, whether by lapse of time, by acceleration or maturity or otherwise, and the guarantor
covenants and agrees that it is liable for the guaranteed obligations as a primary obligor. As of
September 30, 2009, to the best of the Companys knowledge, there is no amount of debt owed by the
Company as a result of the borrowers engaging in prohibited acts.
Management initially evaluates these guarantees to determine if the guarantee meets the
criteria required to record a liability in accordance with the requirements of the Guarantees
Topic. Any such liabilities were insignificant as of September 30, 2009. In addition, on an ongoing
basis, the Company evaluates the need to record additional liability in accordance with the
requirements of the Contingencies Topic. As of September 30, 2009, the Company had recourse
guarantees of $39.7 million, relating to debt of properties under management. As of September 30,
2009, approximately $21.3 million of these recourse guarantees relate to debt that has matured or
is not currently in compliance with certain loan covenants. In evaluating the potential liability
relating to such guarantees, the Company considers factors such as the value of the properties
secured by the debt, the likelihood that the lender will call the guarantee in light of the current
debt service and other factors. As of September 30, 2009, the Company recorded a liability of $5.2
million, related to its estimate of probable loss related to recourse guarantees of debt of
properties under management which matured in January and April 2009.
Investment Program Commitments
During June and July 2009, the Company revised the offering
terms related to certain investment programs which it sponsors, including the commitment to fund
additional property reserves and the waiver or reduction of future management fees and disposition
fees. The company recorded a liability for future funding commitments as of September 30, 2009 for
these unconsolidated VIEs totaling $1.5 million to fund TIC Program reserves.
Environmental Obligations
In the Companys role as property manager, it could incur
liabilities for the investigation or remediation of hazardous or toxic substances or wastes at
properties the Company currently or formerly managed or at off-site locations where wastes were
disposed of. Similarly, under debt financing arrangements on properties owned by sponsored
programs, the Company has agreed to indemnify the lenders for environmental liabilities and to
remediate any environmental problems that may arise. The Company is not aware of any environmental
liability or unasserted claim or assessment relating to an environmental liability that the Company
believes would require disclosure or the recording of a loss contingency.
Real Estate Licensing Issues
Although Triple Net Properties Realty, Inc. (
Realty
), which
became a subsidiary of the Company as part of the merger with NNN, was required to have real estate
licenses in all of the states in which it acted as a broker for NNNs programs and received real
estate commissions prior to 2007, Realty did not hold a license in certain of those states when it
earned fees for those services. In addition, almost all of GERIs revenue was based on an
arrangement with Realty to share fees from NNNs programs. GERI did not hold a real estate license
in any state, although most states in which properties of the NNNs programs were located may have
required GERI to hold a license. As a result, Realty and the Company may be subject to penalties,
such as fines (which could be a multiple of the amount received), restitution payments and
termination of management agreements, and to the suspension or revocation of certain of Realtys
real estate broker licenses. To date there have been no claims, and the Company cannot assess or
estimate whether it will incur any losses as a result of the foregoing.
To the extent that the Company incurs any liability arising from the failure to comply with
real estate broker licensing requirements in certain states, Mr. Thompson, Louis J. Rogers, former
President of GERI, and Jeffrey T. Hanson, the Companys Chief Investment Officer, have agreed to
forfeit to the Company up to an aggregate of 4,124,120 shares of the Companys common stock, and
each share will be deemed to have a value of $11.36 per share in satisfying this obligation. Mr.
Thompson has agreed to indemnify the Company, to the extent the liability incurred by the Company
for such matters exceeds the deemed $46,865,000 value of these shares, up to an additional
$9,435,000 in cash. These obligations terminate on November 16, 2009.
Alesco Seed Capital
On November 16, 2007, the Company completed the acquisition of a 51%
membership interest in Grubb & Ellis Alesco Global Advisors, LLC (
Alesco
). Pursuant to the
Intercompany Agreement between the Company and Alesco, dated as of November 16, 2007, the Company
committed to invest $20.0 million in seed capital into the open and closed end real estate funds
that Alesco expects to launch. Additionally, upon achievement of certain earn-out targets, the
Company is required to purchase up to an additional 27% interest in Alesco for $15.0 million. The
Company is allowed to use $15.0 million of seed capital to fund the earn-out payments. As of
September 30, 2009, the Company has invested $500,000 in seed capital into the open and closed end
real estate funds that Alesco launched during 2008.
Deferred Compensation Plan
During 2008, the Company implemented a deferred compensation plan
that permits employees and independent contractors to defer portions of their compensation, subject
to annual deferral limits, and have it credited to one or more investment options in the plan. As
of September 30, 2009, $2.6 million, reflecting the non-stock liability under this plan were
included in Accounts payable and accrued expenses. The Company has purchased whole-life insurance
contracts on certain employee participants to recover distributions made or to be made under this
plan and as of September 30, 2009 have recorded the cash surrender value of the policies of $1.0
million, in Prepaid expenses and other assets.
F-84
GRUBB & ELLIS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (continued)
Grants of phantom shares are accounted for as equity awards in accordance with the
requirements of the Equity Topic, with the award value of the shares on the grant date being
amortized on a straight-line basis over the requisite service period. In addition, the Company
awards phantom shares of Company stock to participants under the deferred compensation plan. As
of September 30, 2009, the Company awarded an aggregate of 6.0 million phantom share, to certain
employees with an aggregate value on the various grant dates of $23.3 million. As of September 30,
2009, an aggregate of 5.7 million phantom share grants were outstanding. Generally, upon vesting,
recipients of the grants are entitled to receive the number of phantom shares granted, regardless
of the value of the shares upon the date of vesting; provided, however, grants with respect to
900,000 phantom shares had a guaranteed minimum share price ($3.1 million in the aggregate) that
will result in the Company paying additional compensation to the participants should the value of
the shares upon vesting be less than the grant date value of the shares. The Company accounts for
additional compensation relating to the guarantee portion of the awards by measuring at each
reporting date the additional payment that would be due to the participant based on the difference
between the then current value of the shares awarded and the guaranteed value. This award is then
amortized on a straight-line basis as compensation expense over the requisite service (vesting)
period, with an offset to deferred compensation liability.
15. EARNINGS (LOSS) PER SHARE
The Company computes earnings (loss) per share in accordance with the requirements of the
Earnings Per Share Topic. Under the provisions of the Topic, basic earnings (loss) per share is
computed using the weighted-average number of common shares outstanding during the period less
unvested restricted shares. Diluted earnings (loss) per share is computed using the
weighted-average number of common and common equivalent shares of stock outstanding during the
periods utilizing the treasury stock method for stock options and unvested restricted stock.
Basic earnings per share is computed using the weighted-average number of common shares
outstanding. The dilutive effect of potential common shares outstanding is included in diluted
earnings per share. The computations of basic and diluted earnings per share from continuing
operations are as follows:
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
(In thousands, except per share amounts)
|
|
2009
|
|
|
2008
|
|
Numerator:
|
|
|
|
|
|
|
|
|
Loss from continuing operations attributable to Grubb & Ellis Company, net of tax
|
|
$
|
(94,663
|
)
|
|
$
|
(49,270
|
)
|
Loss from discontinued operations attributable to Grubb & Ellis Company, net of tax
|
|
|
(1,005
|
)
|
|
|
(18,690
|
)
|
|
|
|
|
|
|
|
Net loss attributable to Grubb & Ellis Company
|
|
$
|
(95,668
|
)
|
|
$
|
(67,960
|
)
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
Denominator for basic loss per share:
|
|
|
|
|
|
|
|
|
Weighted-average number of common shares outstanding
|
|
|
63,618
|
(1)
|
|
|
63,574
|
(1)
|
Effect of dilutive securities:
|
|
|
|
|
|
|
|
|
Non-vested restricted stock and stock options
|
|
|
|
(1)
|
|
|
|
(1)
|
|
|
|
|
|
|
|
Denominator for diluted loss per share:
|
|
|
|
|
|
|
|
|
Weighted-average number of common and common equivalent shares outstanding
|
|
|
63,618
|
|
|
|
63,574
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic loss per share
|
|
|
|
|
|
|
|
|
Loss from continuing operations attributable to Grubb & Ellis Company, net of tax
|
|
$
|
(1.49
|
)
|
|
$
|
(0.79
|
)
|
Loss from discontinued operations attributable to Grubb & Ellis Company, net of tax
|
|
|
(0.02
|
)
|
|
|
(0.28
|
)
|
|
|
|
|
|
|
|
Basic loss per share
|
|
$
|
(1.51
|
)
|
|
$
|
(1.07
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted loss per share
|
|
|
|
|
|
|
|
|
Loss from continuing operations attributable to Grubb & Ellis Company, net of tax
|
|
$
|
(1.49
|
)
|
|
$
|
(0.79
|
)
|
Loss from discontinued operations attributable to Grubb & Ellis Company, net of tax
|
|
|
(0.02
|
)
|
|
|
(0.28
|
)
|
|
|
|
|
|
|
|
Diluted loss per share
|
|
$
|
(1.51
|
)
|
|
$
|
(1.07
|
)
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Outstanding non-vested restricted stock and options to purchase
shares of common stock and restricted stock, the effect of which
would be anti-dilutive, were approximately 2.6 million and 2.5
million shares as of September 30, 2009 and 2008, respectively.
These shares were not included in the computation of diluted
earnings per share because an operating loss was reported or the
option exercise price was greater than the average market price
of the common shares for the respective periods. In addition,
excluded from the calculation of diluted weighted-average common
shares as of September 30, 2009 and 2008 were approximately 6.0
million and 4.8 million phantom shares, respectively, that may be
awarded to employees related to the deferred compensation plan.
As of September 30, 2009, 12.7 million shares that may be awarded
to the lenders related to the potential exercise of the Warrants
were also excluded from the calculation of diluted
weighted-average common shares.
|
F-85
GRUBB & ELLIS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (continued)
16. COMPREHENSIVE LOSS
The components of comprehensive loss, net of tax, are as follows:
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
(In thousands)
|
|
2009
|
|
|
2008
|
|
Net loss
|
|
$
|
(97,354
|
)
|
|
$
|
(74,258
|
)
|
Other comprehensive (loss):
|
|
|
|
|
|
|
|
|
Net unrealized (loss) gain on investments, net of taxes
|
|
|
(43
|
)
|
|
|
706
|
|
Elimination of net unrealized loss on investments, net of taxes
|
|
|
|
|
|
|
120
|
|
Elimination of net unrealized loss on investment in GERA warrants
|
|
|
|
|
|
|
223
|
|
|
|
|
|
|
|
|
Total comprehensive loss
|
|
|
(97,397
|
)
|
|
|
(73,209
|
)
|
|
|
|
|
|
|
|
Comprehensive income (loss) attributable to noncontrolling interests
|
|
|
(1,686
|
)
|
|
|
(6,298
|
)
|
|
|
|
|
|
|
|
Comprehensive loss attributable to Grubb & Ellis Company
|
|
$
|
(95,711
|
)
|
|
$
|
(66,911
|
)
|
|
|
|
|
|
|
|
17. CHANGES IN EQUITY
The following is a reconciliation of total equity, equity attributable to Grubb & Ellis
Company and equity attributable to noncontrolling interests from December 31, 2008 to September 30,
2009.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
(Accumulated
|
|
|
Grubb & Ellis
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
Other
|
|
|
Deficit)
|
|
|
Company
|
|
|
|
|
|
|
|
|
|
Common Stock
|
|
|
Paid-In
|
|
|
Comprehensive
|
|
|
Retained
|
|
|
Stockholders
|
|
|
Noncontrolling
|
|
|
Total
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Loss
|
|
|
Earnings
|
|
|
Equity
|
|
|
Interests
|
|
|
Equity
|
|
Balance as of
December 31, 2008
|
|
|
65,383
|
|
|
$
|
654
|
|
|
$
|
402,780
|
|
|
$
|
|
|
|
$
|
(333,263
|
)
|
|
$
|
70,171
|
|
|
$
|
3,605
|
|
|
$
|
73,776
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vesting of
share-based
compensation
|
|
|
|
|
|
|
|
|
|
|
8,736
|
|
|
|
|
|
|
|
|
|
|
|
8,736
|
|
|
|
|
|
|
|
8,736
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of warrants
|
|
|
|
|
|
|
|
|
|
|
534
|
|
|
|
|
|
|
|
|
|
|
|
534
|
|
|
|
|
|
|
|
534
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of
restricted shares
to directors,
officers and
employees
|
|
|
486
|
|
|
|
4
|
|
|
|
(4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeiture of
non-vested
restricted shares
|
|
|
(686
|
)
|
|
|
(7
|
)
|
|
|
(133
|
)
|
|
|
|
|
|
|
|
|
|
|
(140
|
)
|
|
|
|
|
|
|
(140
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contributions from
noncontrolling
interests
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,827
|
|
|
|
5,827
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Distributions to
noncontrolling
interests
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,689
|
)
|
|
|
(1,689
|
)
|
F-86
GRUBB & ELLIS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
(Accumulated
|
|
|
Grubb & Ellis
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
Other
|
|
|
Deficit)
|
|
|
Company
|
|
|
|
|
|
|
|
|
|
Common Stock
|
|
|
Paid-In
|
|
|
Comprehensive
|
|
|
Retained
|
|
|
Stockholders
|
|
|
Noncontrolling
|
|
|
Total
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Loss
|
|
|
Earnings
|
|
|
Equity
|
|
|
Interests
|
|
|
Equity
|
|
Deconsolidation of
sponsored mutual fund
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5,519
|
)
|
|
|
(5,519
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation expense
on profit sharing
arrangements
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
102
|
|
|
|
102
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in unrealized
loss on marketable
securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(43
|
)
|
|
|
|
|
|
|
(43
|
)
|
|
|
|
|
|
|
(43
|
)
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(95,668
|
)
|
|
|
(95,668
|
)
|
|
|
(1,686
|
)
|
|
|
(97,354
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(95,711
|
)
|
|
|
(1,686
|
)
|
|
|
(97,397
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of
September 30, 2009
|
|
|
65,183
|
|
|
$
|
651
|
|
|
$
|
411,913
|
|
|
$
|
(43
|
)
|
|
$
|
(428,931
|
)
|
|
$
|
(16,410
|
)
|
|
$
|
640
|
|
|
$
|
(15,770
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During the nine months ended September 30, 2009, the Company granted 486,000 restricted
shares of common stock. During the year ended December 31, 2008, the Company granted 1.6 million
restricted shares of common stock and 77,000 shares of common stock were issued as a result of the
exercise of stock options.
18. OTHER RELATED PARTY TRANSACTIONS
Offering Costs and Other Expenses Related to Public Non-Traded REITs
The Company, through
its consolidated subsidiaries Grubb & Ellis Apartment REIT Advisor, LLC, Grubb & Ellis Healthcare
REIT Advisor, LLC, and Grubb & Ellis Healthcare REIT II Advisor, LLC, bears certain general and
administrative expenses in its capacity as advisor of Apartment REIT, Healthcare REIT and
Healthcare REIT II, respectively, and is reimbursed for these expenses. However, Apartment REIT,
Healthcare REIT and Healthcare REIT II will not reimburse the Company for any operating expenses
that, in any four consecutive fiscal quarters, exceed the greater of 2.0% of average invested
assets (as defined in their respective advisory agreements) or 25.0% of the respective REITs net
income for such year, unless the board of directors of the respective REITs approve such excess as
justified based on unusual or nonrecurring factors. All unreimbursable amounts are expensed by the
Company.
The Company also paid for the organizational, offering and related expenses on behalf of
Apartment REIT for its initial offering that ended July 17, 2009 and Healthcare REIT for its
initial offering through August 28, 2009. These organizational, offering
and related expenses include all expenses (other than selling commissions and the marketing
support fee which generally represent 7.0% and 2.5% of the gross offering proceeds, respectively)
to be paid by Apartment REIT and Healthcare REIT in connection with their initial offerings. These
expenses only become the liability of Apartment REIT and Healthcare REIT to the extent other
organizational and offering expenses do not exceed 1.5% of the gross proceeds of the initial
offerings. As of September 30, 2009, the Company has incurred expenses of $4.3 million, in excess
of 1.5% of the gross proceeds of the Apartment REIT offering. As of September 30, 2009, the Company
has recorded an allowance for bad debt of approximately $4.3 million, related to the Apartment REIT
offering costs incurred as the Company believes that such amounts will not be reimbursed.
The Company also pays for the organizational, offering and related expenses on behalf of
Apartment REITs follow-on offering and Healthcare REIT IIs initial offering. These organizational
and offering expenses include all expenses (other than selling commissions and a dealer manager fee
which represent 7.0% and 3.0% of the gross offering proceeds, respectively) to be paid by Apartment
REIT and Healthcare REIT II in connection with these offerings. These expenses only become a
liability of Apartment REIT and Healthcare REIT II to the extent other organizational and offering
expenses do not exceed 1.0% of the gross proceeds of the offerings. As of September 30, 2009, the
Company has incurred expenses of $1.3 million, in excess of 1.0% of the gross proceeds of the
Apartment REIT follow-on offering. As of September 30, 2009, the Company has incurred expenses of
$1.8 million, in excess of 1.0% of the gross proceeds of the Healthcare REIT II initial offering.
The Company anticipates that such amount will be reimbursed in the future from the offering
proceeds of Apartment REIT and Healthcare REIT II.
Management Fees
The Company provides both transaction and management services to parties
which are related to an affiliate of a principal stockholder and director of the Company
(collectively, Kojaian Companies). In addition, the Company also
F-87
GRUBB & ELLIS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (continued)
pays asset management fees to
the Kojaian Companies related to properties the Company manages on their behalf. Revenue, including
reimbursable expenses related to salaries, wages and benefits, earned by the Company for services
rendered to Kojaian Companies, including joint ventures, officers and directors and their
affiliates, was $5.4 million and $5.6 million for the nine months ended September 30, 2009 and
2008, respectively. In August 2009, the Kojaian Management Corporation prepaid $600,000 of property
management fees to the company which was repaid in September 2009 upon collection of management
fees from parties related to the Kojaian Companies to which the company provides management
services.
Other Related Party
GERI, which is wholly owned by the Company, owns a 50.0% managing
member interest in Grubb & Ellis Apartment REIT Advisor, LLC and each of Grubb & Ellis Apartment
Management, LLC and ROC REIT Advisors, LLC own a 25.0% equity interest in Grubb & Ellis Apartment
REIT Advisor, LLC. As of September 30, 2009, Andrea R. Biller, the Companys General Counsel,
Executive Vice President and Secretary, owned an equity interest of 18.0% of Grubb & Ellis
Apartment Management, LLC. On August 8, 2008, in accordance with the terms of the operating
agreement of Grubb & Ellis Apartment Management, LLC, Grubb & Ellis Apartment Management LLC
tendered settlement for the purchase of the 18.0% equity interest in Grubb & Ellis Apartment
Management LLC that was previously owned by Mr. Scott D. Peters, former chief executive officer of
the Company. As a consequence, through a wholly owned subsidiary, the Companys equity interest in
Grubb & Ellis Apartment Management, LLC increased from 64.0% to 82.0% after giving effect to this
purchase from Mr. Peters. As of September 30, 2009, Stanley J. Olander, the Companys Executive
Vice President Multifamily, owned an equity interest of 33.3% of ROC REIT Advisors, LLC.
GERI owns a 75.0% managing member interest in Grubb & Ellis Healthcare REIT Advisor, LLC and,
therefore, consolidates Grubb & Ellis Healthcare REIT Advisor, LLC. Grubb & Ellis Healthcare
Management, LLC owns a 25.0% equity interest in Grubb & Ellis Healthcare REIT Advisor, LLC. As of
September 30, 2009, each of Ms. Biller and Mr. Hanson, the Companys Chief Investment Officer and
GERIs President, owned an equity interest of 18.0% of Grubb & Ellis Healthcare Management, LLC. On
August 8, 2008, in accordance with the terms of the operating agreement of Grubb & Ellis Healthcare
Management, LLC, Grubb & Ellis Healthcare Management, LLC tendered settlement for the purchase of
18.0% equity interest in Grubb & Ellis Healthcare Management, LLC that was previously owned by Mr.
Peters. As a consequence, through a wholly owned subsidiary, the Companys equity interest in Grubb
& Ellis Healthcare Management, LLC increased from 46.0% to 64.0% after giving effect to this
purchase from Mr. Peters.
The grants of membership interests in Grubb & Ellis Apartment Management, LLC and Grubb &
Ellis Healthcare Management, LLC to certain executives are being accounted for by the Company as a
profit sharing arrangement. Compensation expense is recorded by the Company when the likelihood of
payment is probable and the amount of such payment is estimable, which generally coincides with
Grubb & Ellis Apartment REIT Advisor, LLC and Grubb & Ellis Healthcare REIT Advisor, LLC recording
its revenue. Compensation expense related to this profit sharing arrangement associated with Grubb
& Ellis Apartment Management, LLC includes distributions of $131,000, $85,000 and $122,000, to Mr.
Thompson, Mr. Peters and Ms. Biller for the nine months ended September 30, 2008, respectively.
There was no compensation expense related to the profit sharing arrangement with Grubb & Ellis
Apartment Management, LLC, and therefore no distributions to any members, for the nine months ended
September 30, 2009. Compensation expense related to this profit sharing arrangement associated with
Grubb & Ellis Healthcare Management, LLC includes distributions of $44,000 and $131,000,
respectively, to Mr. Thompson, $0 and $387,000, respectively, to Mr. Peters, $203,000 and $491,000,
respectively, to Ms. Biller, and $203,000 and $491,000, respectively, to Mr. Hanson for the nine
months ended September 30, 2009 and 2008, respectively.
As of September 30, 2009, the remaining 82.0% equity interest in Grubb & Ellis Apartment
Management, LLC and the remaining 64.0% equity interest in Grubb & Ellis Healthcare Management, LLC
were owned by GERI. Any allocable earnings attributable to GERIs ownership interests are paid to
GERI on a quarterly basis.
The Companys directors and officers, as well as officers, managers and employees have
purchased, and may continue to purchase, interests in offerings made by the Companys programs at a
discount. The purchase price for these interests reflects the fact that selling commissions and
marketing allowances will not be paid in connection with these sales. The net proceeds to the
Company from these sales made net of commissions will be substantially the same as the net proceeds
received from other sales.
Mr. Thompson has routinely provided personal guarantees to various lending institutions that
provided financing for the acquisition of many properties by our programs. These guarantees cover
certain covenant payments, environmental and hazardous substance indemnification and any
indemnification for any liability arising from the SEC investigation of Triple Net Properties. In
connection with the formation transactions, the Company indemnified Mr. Thompson for amounts he may
be required to pay under all of these guarantees to which Triple Net Properties, Realty or NNN
Capital Corp. is an obligor to the extent such indemnification would not require the Company to
book additional liabilities on the Companys balance sheet. On June 2, 2008, the Company was
notified by the SEC staff that the SEC closed the investigation without any enforcement action
against the Company or its subsidiaries.
F-88
GRUBB & ELLIS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (continued)
See issuance of a 5.0 million senior secured convertible note to, and purchase of 5.0 million
of preferred stock by a related party in Subsequent Events (Note 20) below.
19. INCOME TAXES
The components of income tax (benefit) provision from continuing operations for the nine
months ended September 30, 2009 and 2008 consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
(In thousands)
|
|
2009
|
|
|
2008
|
|
Current:
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
(69
|
)
|
|
$
|
(4,224
|
)
|
State
|
|
|
7
|
|
|
|
(958
|
)
|
|
|
|
|
|
|
|
|
|
|
(62
|
)
|
|
|
(5,182
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred:
|
|
|
|
|
|
|
|
|
Federal
|
|
|
549
|
|
|
|
(13,628
|
)
|
State
|
|
|
100
|
|
|
|
(4,314
|
)
|
|
|
|
|
|
|
|
|
|
|
649
|
|
|
|
(17,942
|
)
|
|
|
|
|
|
|
|
|
|
$
|
587
|
|
|
$
|
(23,124
|
)
|
|
|
|
|
|
|
|
The Company recorded net prepaid taxes totaling approximately $529,000 as of September
30, 2009, comprised primarily of state tax refund receivables and state prepaid tax estimates.
As of December 31, 2008, federal net operating loss carryforwards were available to the
Company in the amount of approximately $2.2 million, translating to a deferred tax asset before
valuation allowance of $797,000 which will begin to expire in 2027. The Company also had state net
operating loss carryforwards from previous periods totaling $74.5 million, translating to a
deferred tax asset of $6.1 million before valuation allowances.
In evaluating the need for a valuation allowance as of September 30, 2009, the Company
evaluated both positive and negative evidence in accordance with the requirements of the Income
Taxes Topic. Management determined that $36.4 million of deferred tax assets recorded during the
nine months ended September 30, 2009 do not satisfy the recognition criteria set forth in the
Topic. Accordingly, a valuation allowance has been recorded for this amount. If released, the
entire amount would result in a benefit to continuing operations.
The differences between the total income tax (benefit) provision of the Company for financial
statement purposes and the income taxes computed using the applicable federal income tax rate of
35% for the nine months ended September 30, 2009 and 2008 were as follows:
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
(In thousands)
|
|
2009
|
|
|
2008
|
|
Federal income taxes at the statutory rate
|
|
$
|
(32,862
|
)
|
|
$
|
(21,236
|
)
|
State income taxes net of federal benefit
|
|
|
(3,852
|
)
|
|
|
(2,989
|
)
|
Credits
|
|
|
(143
|
)
|
|
|
(177
|
)
|
Non-deductible expenses
|
|
|
1,029
|
|
|
|
1,346
|
|
Change in valuation allowance
|
|
|
36,477
|
|
|
|
|
|
Other
|
|
|
(62
|
)
|
|
|
(68
|
)
|
|
|
|
|
|
|
|
(Benefit) provision for income taxes
|
|
$
|
587
|
|
|
$
|
(23,124
|
)
|
|
|
|
|
|
|
|
F-89
GRUBB & ELLIS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (continued)
20. SUBSEQUENT EVENTS
Departure of Directors or Certain Officers; Election of Directors; Appointment of Certain Officers
On November 9, 2009, the Company announced that Thomas P. DArcy will join the Company as
president, chief executive officer and a member of the board of directors, effective November 16,
2009.
Sale of Unregistered Securities
On October 2, 2009, the Company effected the Permitted Placement (see Note 11) and issued a
$5.0 million senior subordinated convertible note (the
Note
) to Kojaian Management Corporation.
The Note (i) bears interest at twelve percent (12%) per annum, (ii) is co-terminus with the term of
the Credit Facility (including if the Credit Facility is terminated pursuant to the Discount
Prepayment Option), (iii) is unsecured and fully subordinate to the Credit Facility, and (iv) in
the event the Company issues or sells equity securities in connection with or pursuant to a
transaction with a non-affiliate of the Company while the Note is outstanding, at the option of the
holder of the Note, the principal amount of the Note then outstanding is convertible into those
equity securities of the Company issued or sold in such non-affiliate transaction. In connection
with the issuance of the Note, Kojaian Management Corporation, the lenders to the Credit Facility
and the Company entered into a subordination agreement (the Subordination Agreement). The
Permitted Placement was a transaction by the Company not involving a public offering in accordance
with Section 4(2) of the Securities Act of 1933, as amended (the
Securities Act
).
On November 6, 2009, the Company completed the private placement of 900,000 shares of 12%
cumulative participating perpetual convertible preferred stock, par value $0.01 per share
(
Preferred Stock
), to qualified institutional buyers and other accredited investors. In
conjunction with the offering, the entire $5.0 million principal balance of the Note was converted
into the Preferred Stock at the offering price and the holder of the Note received accrued interest
of approximately $57,000. In addition, the holder of the Note also purchased an additional $5.0
million of preferred stock at the offering price. The Company also granted the initial purchaser a
45-day option to purchase up to an additional 100,000 shares of Preferred Stock.
The Preferred Stock was offered in reliance on exemptions from the registration requirements
of the Securities Act that apply to offers and sales of securities that do not involve a public
offering. As such, the Preferred Stock was offered and will be sold only to (i) the initial
purchaser for resale to qualified institutional buyers (as defined in Rule 144A under the
Securities Act), (ii) to a limited number of institutional accredited investors (as defined in
Rule 501(a)(1), (2), (3) or (7) of the Securities Act), and (iii) to a limited number of individual
accredited investors (as defined in Rule 501(a)(4), (5) or (6) of the Securities Act).
Upon the closing of the sale of the $90 million of Preferred Stock, the Company received cash
proceeds of approximately $85.0 million after giving effect to the conversion of the Note and after
deducting the initial purchasers discounts and certain offering expenses and giving effect to the
conversion of the subordinated note. A portion of proceeds were used to pay in full borrowings
under the Credit Facility then outstanding of $66.8 million for a reduced amount equal to $43.4
million, with the balance of the proceeds to be used for working capital purposes.
The Certificate of Designations with respect to the Preferred Stock provides, among other
things, that upon the closing of the Offering, each share of Preferred Stock is convertible, at the
holders option, into the Companys common stock, par value $.01 per share at a conversion rate of
60.606 shares of common stock for each share of Preferred Stock, which represents a conversion
price of approximately $1.65 per share of common stock, and a 10.0% premium to the closing price of
the common stock on October 22, 2009.
The terms of the Preferred Stock provide for cumulative dividends from and including the date
of original issuance in the amount of $12.00 per share each year. Dividends on the Preferred Stock
will be payable when, as and if declared, quarterly in arrears, on March 31, June 30, September 30
and December 31, beginning on December 31, 2009. In addition, in the event of any cash distribution
to holders of the Common Stock, holders of Preferred Stock will be entitled to participate in such
distribution as if such holders had converted their shares of Preferred Stock into Common Stock.
If the Company fails to pay the quarterly Preferred Stock dividend in full for two consecutive
quarters, the dividend rate will automatically be increased by .50% of the initial liquidation
preference per share per quarter (up to a maximum amount of increase of 2% of the initial
liquidation preference per share) until cumulative dividends have been paid in full. In addition,
subject to certain limitations, in the event the dividends on the Preferred Stock are in arrears
for six or more quarters, whether or not consecutive, subject to the passage of the amendment to
the Companys Certificate of Incorporation discussed above, holders representing a majority of the
shares of Preferred Stock voting together as a class with holders of any other class or series of
preferred stock upon which like voting rights have been conferred and are exercisable will be
entitled to nominate and vote for the election of two additional directors to serve on the board of
directors until all unpaid dividends with respect to the Preferred Stock and any other class or
series of preferred stock upon which like voting rights have been conferred or are exercisable have
been paid or declared and a sum sufficient for payment has been set aside therefore.
F-90
GRUBB & ELLIS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (continued)
During the six-month period following November 6, 2009, if the Company issues any securities,
other than certain permitted issuances, and the price per share of the Common Stock (or the
equivalent for securities convertible into or exchangeable for Common Stock) is less than the then
current conversion price of the Preferred Stock, the conversion price will be reduced pursuant to a
weighted average anti-dilution formula.
Holders of Preferred Stock may require the Company to repurchase all, or a specified whole
number, of their Preferred Stock upon the occurrence of a Fundamental Change (as defined in the
Certificate of Designations) with respect to any Fundamental Change that occurs (i) prior to
November 15, 2014, at a repurchase price equal to 110% of the sum of the initial liquidation
preference plus accumulated but unpaid dividends, and (ii) from November 15, 2014 until prior to
November 15, 2019, at a repurchase price equal to 100% of the sum of the initial liquidation
preference plus accumulated but unpaid dividends. On or after November 15, 2014, the Company may,
at its option, redeem the Preferred Stock, in whole or in part, by paying an amount equal to 110%
of the sum of the initial liquidation preference per share plus any accrued and unpaid dividends to
and including the date of redemption.
In the event of certain events that constitute a Change in Control (as defined in the
Certificate of Designations) prior to November 15, 2014, the conversion rate of the Preferred Stock
will be subject to increase. The amount of the increase in the applicable conversion rate, if any,
will be based on the date in which the Change in Control becomes effective, the price to be paid
per share with respect to the Common Stock and the transaction constituting the Change in Control.
The Company has entered into a registration rights agreement (the
Registration Rights
Agreement
) with one of the lead investors (and its affiliates) with respect to the shares of
Preferred Stock, and the Common Stock issuable upon the conversion of such Preferred Stock, that
was acquired by such lead investor (and affiliates) in the Offering. No other purchasers of the
Preferred Stock in the Offering will have the right to have their shares of Preferred Stock, or
shares of Common Stock issuable upon conversion of such Preferred Stock, registered. In addition,
subject to certain limitations, the lead investor who acquired the registration rights also has
certain preemptive rights in the event the Company issues for cash consideration any Common Stock
or any securities convertible into or exchangeable for Common Stock (or any rights, warrants or
options to purchase any such Common Stock) during the six-month period subsequent to the closing of
the Offering. Such preemptive right is intended to permit such lead investor to maintain its pro
rata ownership of the Preferred Stock acquired in the Offering.
Except as otherwise provided by law, the holders of the Preferred Stock vote together with the
holders of common stock as one class on all matters on which holders of common stock vote. Holders
of the Preferred Stock when voting as a single class with holders of common stock are entitled to
voting rights equal to the number of shares of Common Stock into which the Preferred Stock is
convertible, on an as if converted basis. Holders of Preferred Stock vote as a separate class
with respect to certain matters.
Upon any liquidation, dissolution or winding up of the Company, holders of the Preferred Stock
will be entitled, prior to any distribution to holders of any securities ranking junior to the
Preferred Stock, including but not limited to the Common Stock, and on a pro rata basis with other
preferred stock of equal ranking, a cash liquidation preference equal to the greater of (i) 110% of
the sum of the initial liquidation preference per share plus accrued and unpaid dividends thereon,
if any, from November 6, 2009, the date of the closing of the Offering, and (ii) an amount equal to
the distribution amount each holder of Preferred Stock would have received had all shares of
Preferred Stock been converted to Common Stock.
Pursuant to the overallotment option of up to 100,000 shares of Preferred Stock granted to the
initial purchaser in connection with the offering, the Company effected the sale of an aggregate of
65,700 shares of Preferred Stock for gross proceeds of approximately $6.6 million.
F-91
|
You
should rely only on the information contained in this prospectus and any
prospectus supplement that may be provided to you in connection with this
offering. We have not authorized anyone to provide you with information that is
different. Neither we nor the selling stockholders are making an offer to sell
these securities in any jurisdiction where the offer or sale is not permitted.
You should assume that the information appearing in this prospectus is accurate
only as of the date on the front cover of this prospectus.
|
_____________________________
TABLE OF CONTENTS
|
|
|
|
|
|
|
Page
|
|
Summary
|
|
|
1
|
|
Risk Factors
|
|
|
5
|
|
Cautionary Statement Concerning
Forward-Looking Statements
|
|
|
22
|
|
The Company
|
|
|
23
|
|
Ratio of Earnings to Fixed
Charges
|
|
|
31
|
|
Use of Proceeds
|
|
|
32
|
|
Price and Related Information Concerning
Registered Shares
|
|
|
33
|
|
Dividend Policy
|
|
|
34
|
|
Selected Consolidated Financial
Data
|
|
|
35
|
|
Managements Discussion and Analysis of Financial Condition and
Results of Operations
|
|
|
37
|
|
Management
|
|
|
62
|
|
Corporate Governance
|
|
|
64
|
|
Executive Compensation
|
|
|
67
|
|
Certain Relationships and Related Transactions
|
|
|
85
|
|
Principal Stockholders
|
|
|
93
|
|
Description of Capital Stock
|
|
|
96
|
|
Description of 12% Preferred Stock
|
|
|
98
|
|
Selling Stockholders
|
|
|
117
|
|
Plan of
Distribution
|
|
|
120
|
|
Certain U.S. Federal Income Tax Considerations
|
|
|
122
|
|
Legal Matters
|
|
|
126
|
|
Experts
|
|
|
126
|
|
Where You Can Find More Information
|
|
|
126
|
|
Index to Consolidated Financial Statements
|
|
|
F-1
|
|
Grubb & Ellis Company
7,575,750 Shares of Common Stock
125,000 Shares of 12% Cumulative Participating Perpetual
Convertible Preferred Stock
The date of this prospectus is
December , 2009
PART II: INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13.
OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the costs and expenses, other than underwriting discounts and
commissions, payable in connection with the sale and distribution of the securities being
registered. All amounts are estimated except the SEC registration fee. All of the expenses below
will be paid by us.
|
|
|
|
|
Item
|
|
|
|
|
SEC registration fee
|
|
$
|
695.50
|
|
Blue sky fees and expenses
|
|
|
0
|
|
Printing and engraving expenses
|
|
|
15,000
|
|
Legal fees and expenses
|
|
|
75,000
|
|
Accounting fees and expenses
|
|
|
50,000
|
|
Transfer Agent and Registrar fees
|
|
|
5,000
|
|
Miscellaneous
|
|
|
5,004.50
|
*
|
|
|
|
|
Total
|
|
$
|
150,700
|
|
ITEM 14.
INDEMNIFICATION OF DIRECTORS AND OFFICERS
Under Section 145 of the Delaware General Corporation Law, we can indemnify our directors and
officers against liabilities they may incur in such capacities, including liabilities under the
Securities Act of 1933, as amended (the
Securities Act
). Our bylaws, as amended (Exhibits
3.123.17 to this registration statement), provide that we shall indemnify our directors and
officers to the fullest extent permitted by law and allow us to advance litigation expenses upon
our receipt of an undertaking by the director or officer to repay such advances if it is ultimately
determined that the director or officer is not entitled to indemnification. Our bylaws further
provide that rights conferred under such bylaws do not exclude any other right such persons may
have or acquire under any bylaw, agreement, vote of stockholders or disinterested directors or
otherwise.
Our certificate of incorporation, as amended (Exhibits 3.13.11 to this registration
statement), provides that, pursuant to Delaware law, our directors shall not be liable for monetary
damages for breach of the directors fiduciary duty of care to us and our stockholders. This
provision in the certificate of incorporation does not eliminate the duty of care, and in
appropriate circumstances equitable remedies such as injunctive or other forms of non-monetary
relief will remain available under Delaware law. In addition, each director will continue to be
subject to liability for breach of the directors duty of loyalty to us or our stockholders, for
acts or omissions not in good faith or involving intentional misconduct or knowing violations of
law, for actions leading to improper personal benefit to the director, and for payment of dividends
or approval of stock repurchases or redemptions that are unlawful under Delaware law. The provision
also does not affect a directors responsibilities under any other law, such as the federal
securities laws or state or federal environmental laws.
Our certificate of incorporation further provides that we are authorized to indemnify our
directors and officers to the fullest extent permitted by law through the bylaws, agreement, vote
of stockholders or disinterested directors, or otherwise. We have obtained directors and officers
liability prior to this offering.
We have entered into agreements to indemnify our directors and certain of our officers in
addition to the indemnification provided for in the certificate of incorporation and bylaws. These
agreements will, among other things, indemnify our directors and some of our officers for certain
expenses (including attorneys fees), judgments, fines and settlement amounts incurred by such
person in any action or proceeding, including any action by or in our right, on account of services
by that person as a director or officer of Grubb & Ellis or as a director or officer of any of our
subsidiaries, or as a director or officer of any other company or enterprise that the person
provides services to at our request.
II-1
ITEM 15.
RECENT SALES OF UNREGISTERED SECURITIES
The following is a summary of transactions which occurred within the last three years,
involving sales of our securities that were not registered under the Securities Act:
(1)
|
|
November 2006, we issued 16 million shares of
common stock to various investors in our 144A
private equity offering at an offering price
of $10 per share. Friedman, Billings, Ramsey
& Co., Inc. acted as initial purchaser
placement agent in connection with respect to
such offering.
|
|
(2)
|
|
From November 2006 to January 2006, we
granted options to purchase an aggregate of
903,000 shares of common stock to our
employees (including our executive officers)
under our 2006 Long-Term Incentive Plan at an
exercise price of $10 per share. In November
2006, we also granted 615,000 shares of
restricted stock to our executive officers
and non-employee directors.
|
|
(3)
|
|
In November 2006 we acquired Triple Net
Properties, LLC and Triple Net Properties
Realty, Inc. and in December 2006 we acquired
NNN Capital Corp., each through contribution
agreements that we entered into with the
holders of outstanding stock or membership
units of each of these entities. Pursuant to
the contribution agreements, we issued shares
of our common stock in exchange for shares of
common stock or membership units held by the
existing holders, except that, with respect
to Triple Net Properties, LLC, we cashed out
the unaccredited investor members in lieu of
issuing shares of our common stock and with
respect to one executive officer, we issued
cash in lieu of shares for a portion of his
ownership. In connection with these
transactions, we issued an aggregate of
25,751,407 shares of our common stock. The
issuances by the Company and NNN of
restricted shares in the transactions
described above were exempt from the
registration requirements of Section 5 of the
Securities Act, as such transactions did not
involve a public offering by the Company.
|
|
(4)
|
|
On November 15, 2006, as an inducement for an
employee to extend his employment with the
Company and pursuant to a Second Amendment to
an Employment Agreement dated November 15,
2006 and a related Second Restricted Share
Agreement dated November 15, 2006, the
Company granted to an employee 31,964
restricted shares of the Companys common
stock which vest on December 29, 2009 and had
a fair value of $350,000 on the trading day
immediately preceding the date of grant. On
February 15, 2007, as an inducement for an
employee to accept employment with the
Company and pursuant to an Employment
Agreement dated February 9, 2007 and a
related Restricted Share Agreement dated
February 15, 2007, the Company granted to an
employee restricted shares of the Companys
common stock which vest on February 14, 2011
and had a fair market value of $227,500 on
the trading day immediately preceding the
date of grant. On March 8, 2007, pursuant to
an Employment Agreement dated March 8, 2005
and a Restricted Share Agreement dated March
8, 2005, the Company granted to its CEO
71,158 restricted shares of the Companys
common stock which vest in equal, annual
installments of thirty-three and one-third
percent (331/3%) on each of the first, second
and third anniversaries of March 8, 2007 and
had a fair market value of $750,000 on the
trading day immediately preceding the date of
grant. The issuances by the Company of
restricted shares in the transactions
described in this paragraph were exempt from
the registration requirements of Section 5 of
the Securities Act of 1933, as amended, as
such transactions did not involve a public
offering by the Company.
|
|
(5)
|
|
On March 8, 2007, pursuant to an Employment
Agreement dated March 8, 2005 and a
Restricted Share Agreement dated March 8,
2005, the Company granted to its former Chief
Executive Officer, Mark E. Rose, 71,158
restricted shares of the Companys common
stock which vest in equal, annual
installments of thirty-three and one-third
percent (331/3%) on each of the first, second
and third anniversaries of March 8, 2007 and
had a fair market value of $750,000 on the
trading day immediately preceding the date of
grant. On September 20, 2007, pursuant to the
Companys 2006 Omnibus Equity Plan, the
Company granted to its then outside directors
an aggregate of 21,164 restricted shares of
the Companys common stock which were
scheduled to vest one-third on each of the
first, second and third anniversaries of the
date of grant and had an aggregate fair
market value of $200,000 on the trading day
immediately preceding the date of grant.
These shares, as well as any unvested
restricted shares held by Mr. Rose, fully
vested on December 7, 2007, as a result of a
change in control provisions contained in the
awards. Additionally after consummation of
the Merger, on December 10, 2007, pursuant to
the Companys 2006 Omnibus Equity Plan, the
Company granted to its outside directors an
aggregate of 62,972 restricted shares of the
Companys common stock which vest one-third
on each of the first, second and third
anniversaries of the date of grant and had an
aggregate fair market value of $420,000 on
the date of grant. The issuances by the
Company and NNN of restricted shares in the
transactions described above were exempt from
the registration requirements of Section 5 of
the Securities Act, as such transactions did
not involve a public offering by the Company.
|
|
(6)
|
|
On June 27, 2007, pursuant to its 2006
Long-Term Incentive Plan, NNN granted an
aggregate of 576,400 restricted shares of its
common stock to NNNs independent directors
and executive officers which are scheduled to
vest one-third on each of the first, second
and third anniversaries of the date of grant
and had an aggregate fair market value of
$6,547,904 on the date of grant.
|
II-2
(7)
|
|
During 2008, the Company
implemented a deferred
compensation plan that
permits employees and
independent contractors to
defer portions of their
compensation, subject to
annual deferral limits, and
have it credited to one or
more investment options in
the plan. As of March 31,
2009 and December 31, 2008,
$2.1 million and $1.7
million, respectively,
reflecting the non-stock
liability under this plan
were included in Other Long
Term Liabilities. The Company
has purchased whole-life
insurance contracts on
certain employee participants
to recover distributions made
or to be made under this plan
and as of March 31, 2009 and
December 31, 2008 have
recorded the cash surrender
value of the policies of $1.2
million and $1.1 million,
respectively, in Other
Noncurrent Assets.
|
|
(8)
|
|
During 2008, we implemented a
deferred compensation plan
that allows for the granting
of phantom shares of
company stock to participants
under a deferred compensation
plan arrangement. These
awards vest over three to
five years. Vested phantom
stock awards are paid
according to distribution
elections made by the
participants at the time of
vesting and are expected to
be settled by the Company
purchasing shares of our
common stock in the open
market from time to time and
delivering such shares to the
participant. As of September
30, 2009, $2.6 million
reflecting the non-stock
liability under this plan
were included in Accounts
payable and accrued expenses.
The Company has purchased
whole-life insurance
contracts on certain employee
participants to recover
distributions made or to be
made under this plan and as
of September 30, 2009 have
recorded the cash surrender
value of the policies of $1.0
million in Prepaid expenses
and other assets.
|
|
(9)
|
|
The Company awards phantom
shares of Company stock to
participants under the
deferred compensation plan.
As of September 30, 2009, the
Company awarded an aggregate
of 6.0 million phantom shares
to certain employees with an
aggregate value on the
various grant dates of $23.3
million and $22.5 million,
respectively. On September
30, 2009, an aggregate of 5.7
million phantom share grants
were outstanding. Generally,
upon vesting, recipients of
the grants are entitled to
receive the number of phantom
shares granted, regardless of
the value of the shares upon
the date of vesting;
provided, however, grants
with respect to 900,000
phantom shares had a
guaranteed minimum share
price ($3.1 million in the
aggregate) that will result
in the Company paying
additional compensation to
the participants should the
value of the shares upon
vesting be less than the
grant date value of the
shares.
|
|
(10)
|
|
On June 3, 2009, pursuant to
the our 2006 Omnibus Equity
Plan, we granted to certain
of its executive officers an
aggregate of 150,000
restricted shares of our
common stock which vest in
equal one-third installments
on each of the next three
anniversaries of the date of
grant and had an aggregate
fair market value of $104,000
on the date of grant
|
|
(11)
|
|
On November 6, 2009, we
completed a $90 million
offering of 900,000 shares of
our 12% Preferred Stock to
various qualified
institutional buyers and
accredited investors. In
connection with the initial
12% Preferred Stock offering,
we also granted to JMP
Securities, Inc., the initial
purchaser and placement
agent, a 45-day option to
purchase up to an additional
100,000 shares of 12%
Preferred Stock. The 12%
Preferred Stock was offered
in reliance on exemptions
from the registration
requirements of the
Securities Act that apply to
offers and sales of
securities that do not
involve a public offering.
Pursuant to the overallotment
option, the Company effected
(i) the sale on November 13,
2009 of an aggregate of
14,350 shares of 12%
Preferred Stock for gross
proceeds of approximately
$1.4 million, (ii) the sale
on November 25, 2009 of an
aggregate of 40,800 shares of
12% Preferred Stock for gross
proceeds of approximately
$4.1 million, and (iii) the
sale on December 9, 2009 of
an aggregate of 10,550 shares
of 12% Preferred Stock for
gross proceeds of
approximately $1.1 million.
|
|
(12)
|
|
On November 16, 2009, Mr.
DArcy received a restricted
stock award of 2,000,000
restricted shares of Common
Stock, of which 1,000,000 of
such restricted shares are
subject to vesting over three
years in equal annual
increments of one-third each,
commencing on the day
immediately preceding the
one-year anniversary of
November 16, 2009. The
remaining 1,000,000 such
restricted shares are subject
to the vesting based upon the
market price of the Companys
Common Stock during the
initial three-year term of
the employment agreement.
Specifically, (i) in the
event that for any 30
consecutive trading days the
volume weighted average
closing price per share of
the Companys Common Stock on
the exchange or market on
which the Companys shares
are publically listed or
quoted for trading is at
least $3.50, then 50% of such
restricted shares shall vest,
and (ii) in the event that
for any thirty (30)
consecutive trading days the
volume weighted average
closing price per share of
the Companys Common Stock on
the exchange or market on
which the Companys shares of
Common Stock are publically
listed or quoted for trading
is at least $6.00, then the
remaining 50% percent of such
restricted shares shall vest.
Vesting with respect to all
Mr. DArcys restricted
shares is subject to Mr.
DArcys continued employment
by the Company, subject to
the terms of a Restricted
Share Agreement to be entered
into by Mr. DArcy and the
Company on November 16, 2009,
and other terms and
conditions set forth in the
employment agreement.
|
|
(13)
|
|
On December 17, 2009, each of
the C. Michael Kojaian,
Robert J. McLaughlin, Devin
I. Murphy, D. Fleet Wallace
and Rodger D. Young were
granted 45,113 restricted
shares of the Companys
common stock pursuant to the
Companys Omnibus Equity Plan
and which vest in equal 33
1/3 portions on each of the
first, second and third
anniversaries of the grant
date.
|
II-3
The issuances of securities in the transactions described in paragraph 1 above were effected
without registration under the Securities Act in reliance on Section 4(2) thereof or Rule 506 of
Regulation D thereunder based on the status of each investor as an accredited investor as defined
under the Securities Act. The issuances of securities in the transactions described in paragraph 2
above were effected without registration under the Securities Act in reliance on Section 4(2)
thereof or Rule 701 thereunder as transactions pursuant to compensatory benefit plans and contracts
relating to compensation. The issuances of securities in the transactions described in paragraph 3
above were effected without registration under the Securities Act in reliance on Section 3(a)(9) or
Section 4(2) thereof as transactions based on the status of each investor as an accredited investor
as defined under the Securities Act and the fact that the shares were issued in exchange for
existing equity. None of the foregoing transactions was effected using any form of general
advertising or general solicitation as such terms are used in Regulation D under the Securities
Act. The recipients of securities in each such transaction either received adequate information
about us or had access, through their relationships with us, to such information. The issuances by
the Company of the phantom share awards in the transactions described above were exempt from the
registration requirements of Section 5 of the Securities Act pursuant to Section 4(2) of the
Securities Act, as amended, as such transactions did not involve a public offering by the Company.
ITEM 16.
EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
The following documents are filed as part of this report:
(a) Exhibits
The following exhibits are filed herewith pursuant to the requirements of Item 601 of
Regulation S-K:
See exhibit index.
(b) Financial Statements Schedules
The following schedules are filed herewith pursuant to the requirements of Regulation S-X:
II-4
SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS
GRUBB & ELLIS COMPANY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at
|
|
|
Charged to
|
|
|
|
|
|
|
|
|
|
|
Beginning of
|
|
|
Costs and
|
|
|
|
|
|
|
Balance at End of
|
|
(In thousands)
|
|
Period
|
|
|
Expenses
|
|
|
Deductions (1)
|
|
|
Period
|
|
Allowance for accounts receivable
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2008
|
|
|
1,376
|
|
|
|
12,446
|
|
|
|
(3,289
|
)
|
|
|
10,533
|
|
Year Ended December 31, 2007
|
|
|
723
|
|
|
|
709
|
|
|
|
(56
|
)
|
|
|
1,376
|
|
Year Ended December 31, 2006
|
|
|
153
|
|
|
|
886
|
|
|
|
(316
|
)
|
|
|
723
|
|
Year Ended December 31, 2005
|
|
|
992
|
|
|
|
153
|
|
|
|
(992
|
)
|
|
|
153
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for advances and notes receivable
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2008
|
|
|
1,839
|
|
|
|
1,331
|
|
|
|
0
|
|
|
|
3,170
|
|
Year Ended December 31, 2007
|
|
|
1,400
|
|
|
|
451
|
|
|
|
(12
|
)
|
|
|
1,839
|
|
Year Ended December 31, 2006
|
|
|
562
|
|
|
|
811
|
|
|
|
27
|
|
|
|
1,400
|
|
Year Ended December 31, 2005
|
|
|
1,186
|
|
|
|
3,957
|
|
|
|
(4,581
|
)
|
|
|
562
|
|
|
|
|
(1)
|
|
Uncollectible accounts written off, net of recoveries
|
II-5
SCHEDULE III REAL ESTATE AND ACCUMULATED DEPRECIATION
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs
|
|
|
|
|
|
|
|
|
|
|
Maximum Life on
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capitalized
|
|
|
|
|
|
|
|
|
|
|
Which Depreciation in
|
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|
|
|
|
|
Initial Costs to Company
|
|
|
Subsequent
|
|
|
|
|
|
|
|
|
|
|
Latest Income
|
|
|
Gross Amount at Which Carried at December 31, 2008
|
|
|
|
|
|
|
|
|
|
|
|
Buildings and
|
|
|
to
|
|
|
Date
|
|
|
Date
|
|
|
Statement is
|
|
|
|
|
|
|
Buildings and
|
|
|
|
|
|
|
Accumulated
|
|
(In thousands)
|
|
Encumbrance
|
|
|
Land
|
|
|
Improvements
|
|
|
Acquisition
|
|
|
Constructed
|
|
|
Acquired
|
|
|
Computed
|
|
|
Land
|
|
|
Improvements
|
|
|
Total
|
|
|
Depreciation
|
|
Properties Held for Sale
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rocky Mountain Exchange (Office)
|
|
$
|
411
|
|
|
$
|
1,202
|
|
|
$
|
2,559
|
|
|
$
|
505
|
|
|
|
1984
|
|
|
|
6/8/2005
|
|
|
|
N/A
|
|
|
$
|
396
|
|
|
$
|
1,089
|
|
|
$
|
1,485
|
|
|
$
|
366
|
|
Denver, CO
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Danbury Corporate Center
|
|
|
78,000
|
|
|
|
3,689
|
|
|
|
58,666
|
|
|
|
9,427
|
|
|
|
1981
|
|
|
|
12/7/2007
|
|
|
|
N/A
|
|
|
|
1,008
|
|
|
|
57,370
|
|
|
|
58,378
|
|
|
|
2,634
|
|
Danbury, CT
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
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|
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|
|
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|
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|
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|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Abrams Centre
|
|
|
20,540
|
|
|
|
3,012
|
|
|
|
14,650
|
|
|
|
1,268
|
|
|
|
1983
|
|
|
|
12/7/2007
|
|
|
|
N/A
|
|
|
|
2,025
|
|
|
|
11,968
|
|
|
|
13,993
|
|
|
|
1,234
|
|
Dallas, TX
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6400 Shafer
|
|
|
21,961
|
|
|
|
3,222
|
|
|
|
16,313
|
|
|
|
777
|
|
|
|
1979
|
|
|
|
12/7/2007
|
|
|
|
N/A
|
|
|
|
1,105
|
|
|
|
8,621
|
|
|
|
9,726
|
|
|
|
640
|
|
Rosemont, IL
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Properties Held for Investment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
200 Galleria
|
|
|
84,000
|
|
|
|
7,440
|
|
|
|
64,591
|
|
|
|
571
|
|
|
|
1984
|
|
|
|
1/31/2007
|
|
|
|
N/A
|
|
|
|
5,527
|
|
|
|
50,276
|
|
|
|
55,803
|
|
|
|
4,550
|
|
Atlanta, GA
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Avallon Complex
|
|
|
53,000
|
|
|
|
7,748
|
|
|
|
54,771
|
|
|
|
|
|
|
|
1986-2001
|
|
|
|
7/10/2007
|
|
|
|
N/A
|
|
|
|
4,765
|
|
|
|
34,650
|
|
|
|
39,415
|
|
|
|
1,968
|
|
Austin, TX
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
257,912
|
|
|
$
|
26,313
|
|
|
$
|
211,550
|
|
|
$
|
12,548
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
14,826
|
|
|
$
|
163,974
|
|
|
$
|
178,800
|
|
|
$
|
11,392
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
II-6
Schedule III REAL ESTATE AND ACCUMULATED DEPRECIATION (continued)
(a) The Changes in real estate held for investment and held for sale for the year ended December
31, 2008 are as follows:
|
|
|
|
|
(In thousands)
|
|
|
|
|
Balance at December 31, 2007
|
|
$
|
335,957
|
|
Additions
|
|
|
12,813
|
|
Acquisitions
|
|
|
144,162
|
|
Impairments
|
|
|
(71,488
|
)
|
Disposals
|
|
|
(105
|
)
|
Deconsolidations
|
|
|
(242,539
|
)
|
|
|
|
|
Balance at December 31, 2008
|
|
$
|
178,800
|
|
|
|
|
|
(b) The changes in accumulated depreciation for the year ended December 31, 2008 are as
follows:
|
|
|
|
|
(In thousands)
|
|
|
|
|
Balance at December 31, 2007
|
|
$
|
3,781
|
|
Additions
|
|
|
7,760
|
|
Disposal
|
|
|
|
|
Deconsolidations
|
|
|
(149
|
)
|
|
|
|
|
Balance at December 31, 2008
|
|
$
|
11,392
|
|
|
|
|
|
(a) The Changes in real estate held for investment and held for sale for the year ended
December 31, 2007 are as follows:
|
|
|
|
|
(In thousands)
|
|
|
|
|
Balance at December 31, 2006
|
|
$
|
44,326
|
|
Additions
|
|
|
265
|
|
Acquisitions
|
|
|
671,985
|
|
Disposals
|
|
|
(89,650
|
)
|
Deconsolidations
|
|
|
(290,969
|
)
|
|
|
|
|
Balance at December 31, 2007
|
|
$
|
335,957
|
|
|
|
|
|
(b) The changes in accumulated depreciation for the year ended December 31, 2007 are as
follows:
|
|
|
|
|
(In thousands)
|
|
|
|
|
Balance at December 31, 2006
|
|
$
|
230
|
|
Additions
|
|
|
175
|
|
Acquisitions
|
|
|
3,670
|
|
Disposal
|
|
|
(3
|
)
|
Deconsolidations
|
|
|
(291
|
)
|
|
|
|
|
Balance at December 31, 2007
|
|
$
|
3,781
|
|
|
|
|
|
II-7
ITEM 17.
UNDERTAKINGS
Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be
permitted to directors, officers and controlling persons of the registrant pursuant to the
foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public policy as expressed in
the Act, and is, therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the registrant of expenses incurred or paid by a
director, officer or controlling person of the registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling person in connection with
the securities being registered, the registrant will, unless in the opinion of counsel the matter
has been settled by controlling precedent, submit to a court of appropriate jurisdiction the
question whether such indemnification by it is against public policy as expressed in the Act and
will be governed by the final adjudication of such issue.
The undersigned registrant hereby undertakes that:
(1) To file, during any period in which offers or sales are being made, a post-effective
amendment to this registration statement:
(i) To include any prospectus required by Section 10(a)(3) of the Securities Act;
(ii) To reflect in the prospectus any facts or events arising after the effective date
of this registration statement (or the most recent post-effective amendment thereof) which,
individually or in the aggregate, represent a fundamental change in the information set forth
in the registration statement. Notwithstanding the foregoing, any increase or decrease in
volume of securities offered (if the total dollar value of securities offered would not
exceed that which was registered) and any deviation from the low or high end of the estimated
maximum offering range may be reflected in the form of prospectus filed with the Commission
pursuant to Rule 424(b) if, in the aggregate, the changes in volume and price represent no
more than a 20% change in the maximum aggregate offering price set forth in the calculation
of Registration Fee table in the effective registration statement; and
(iii) To include any material information with respect to the plan of distribution not
previously disclosed in the registration statement or any material change to such information
in the registration statement.
(2) That, for the purpose of determining any liability under the Securities Act of 1933, each
such post-effective amendment shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of the securities at that time shall be deemed to be
the initial
bona fide
offering thereof.
(3) To remove from registration by means of a post-effective amendment any of the securities
being registered which remain unsold at the termination of the offering.
(4) For the purpose of determining liability under the Securities Act of 1933 to any
purchaser:
(i) If the registrant is relying on Rule 430B:
A. Each prospectus filed by the registrant pursuant to Rule 424(b)(3)shall be
deemed to be part of the registration statement as of the date the filed prospectus
was deemed part of and included in the registration statement; and
B. Each prospectus required to be filed pursuant to Rule 424(b)(2), (b)(5), or
(b)(7) as part of a registration statement in reliance on Rule 430B relating to an
offering made pursuant to Rule 415(a)(1)(i), (vii), or (x) for the purpose of
providing the information required by section 10(a) of the Securities Act of 1933
shall be deemed to be part of and included in the registration statement as of the
earlier of the date such form of prospectus is first used after effectiveness or the
date of the first contract of sale of securities in the offering described in the
prospectus. As provided in Rule 430B, for liability purposes of the issuer and any
person that is at that date an underwriter, such date shall be deemed to be a new
effective date of the registration statement relating to the securities in the
registration statement to which that prospectus relates, and the offering of such
securities at that time shall be deemed to be the initial bona fide offering thereof.
Provided, however, that no statement made in a registration statement or prospectus
that is part of the registration statement or made in a document incorporated or
deemed incorporated by reference into the registration statement or prospectus that is
part of the registration statement will, as to a purchaser with a time of contract of
sale prior to such effective date, supersede or modify any statement that was made in
the registration statement or prospectus that was part of the registration statement
or made in any such document immediately prior to such effective date; or
(ii) If the registrant is subject to Rule 430C, each prospectus filed pursuant to Rule
424(b) as part of a registration statement relating to an offering, other than registration
statements relying on Rule 430B or other than
II-8
prospectuses filed in reliance on Rule 430A,
shall be deemed to be part of and included in the registration statement as of the
date it is first used after effectiveness. Provided, however, that no statement made in
a registration statement or prospectus that is part of the registration statement or made in
a document incorporated or deemed incorporated by reference into the registration statement
or prospectus that is part of the registration statement will, as to a purchaser with a time
of contract of sale prior to such first use, supersede or modify any statement that was made
in the registration statement or prospectus that was part of the registration statement or
made in any such document immediately prior to such date of first use.
(5) That, for the purpose of determining liability of the registrant under the Securities Act
of 1933 to any purchaser to the initial distribution of the securities, the undersigned registrant
undertakes that in a primary offering of securities of the undersigned registrant pursuant to this
registration statement, regardless of the underwriting method used to sell the securities to the
purchaser, if the securities are offered or sold to such purchaser by means of any of the following
communications, the undersigned registrant will be a seller to the purchasers and will be
considered to offer or sell such securities to such purchaser:
(i) Any preliminary prospectus or prospectus of the undersigned registrant relating to
the offering required to be filed pursuant to Rule 424;
(ii) Any free writing prospectus relating to the offering prepared by or on behalf of
the undersigned registrant or used or referred to by the undersigned registrant;
(iii) The portion of any other free writing prospectus relating to the offering
containing material information about the undersigned registrant or its securities provided
by or on behalf of the undersigned registrant; and
(iv) Any other communication that is an offer in the offering made by the
undersigned registrant to the purchaser.
(6) For purposes of determining any liability under the Securities Act of 1933, the information
omitted from the form of prospectus filed as part of this registration statement in reliance upon
Rule 430A and contained in a form of prospectus filed by the registrant pursuant to Rule 424 (b)(1)
or (4) or 497(h) under the Securities Act of 1933, shall be deemed to be part of this registration
statement as of the time it was declared effective.
II-9
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the registrant has
duly caused this registration statement to be signed on its behalf by the undersigned, thereunto
duly authorized in the City of Santa Ana, State of California, on
this 28th day of December, 2009.
|
|
|
|
|
|
GRUBB & ELLIS COMPANY
|
|
|
By:
|
/s/ Thomas DArcy
|
|
|
|
Name:
|
Thomas DArcy
|
|
|
|
Title:
|
Chief Executive Officer, President and Director
|
|
|
Pursuant to the requirements of the Securities Act of 1933, as amended, this registration statement
has been signed by the following persons in the capacities indicated:
|
|
|
|
|
Signature
|
|
Title
|
|
Date
|
/s/ Thomas DArcy
|
|
Chief Executive Officer,
|
|
December 28, 2009
|
Thomas DArcy
|
|
President and Director
(Principal Executive Officer)
|
|
|
|
|
|
|
|
/s/ Richard W. Pehlke
|
|
Chief Financial Officer and Executive
|
|
December 28, 2009
|
Richard W. Pehlke
|
|
Vice President
(Principal Financial and Accounting Officer)
|
|
|
|
|
|
|
|
/s/ C. Michael Kojaian
|
|
Director
|
|
December 28, 2009
|
C. Michael Kojaian
|
|
|
|
|
|
|
|
|
|
/s/ Robert J. McLaughlin
|
|
Director
|
|
December 28, 2009
|
Robert J. McLaughlin
|
|
|
|
|
|
|
|
|
|
/s/ Devin I. Murphy
|
|
Director
|
|
December 28, 2009
|
Devin I. Murphy
|
|
|
|
|
|
|
|
|
|
/s/ D. Fleet Wallace
|
|
Director
|
|
December 28, 2009
|
D. Fleet Wallace
|
|
|
|
|
|
|
|
|
|
/s/ Rodger D. Young
|
|
Director
|
|
December 28, 2009
|
Rodger D. Young
|
|
|
|
|
EXHIBIT INDEX
|
|
|
Exhibit
|
|
|
No.
|
|
Description
|
(2) Plan of Acquisition, Reorganization, Arrangement, Liquidation or Succession
|
|
|
|
2.1
|
|
Agreement and Plan of Merger, dated as of May 22, 2007,
among NNN Realty Advisors, Inc., B/C Corporate Holdings,
Inc. and the Registrant, incorporated herein by reference
to Exhibit 2.1 to the Registrants Current Report on Form
8-K filed on May 23, 2007.
|
|
|
|
2.2
|
|
Merger Agreement, dated as of January 22, 2009, by and
among the Registrant, GERA Danbury LLC, GERA Property
Acquisition, LLC, Matrix Connecticut, LLC and Matrix
Danbury, LLC, incorporated herein by reference to Exhibit
2.1 to the Registrants Current Report on Form 8-K filed
on January 29, 2009.
|
|
|
|
2.3
|
|
First Amendment to Merger Agreement, dated as of January
22, 2009, by and among the Registrant, GERA Danbury LLC,
GERA Property Acquisition, LLC, Matrix Connecticut, LLC
and Matrix Danbury, LLC, incorporated herein by reference
to Exhibit 2.2 to the Registrants Current Report on Form
8-K filed on January 29, 2009.
|
|
|
|
2.4
|
|
Second Amendment to Merger Agreement, dated as of May 19,
2009, by and among the Registrant, GERA Danbury LLC, GERA
Property Acquisition, LLC, Matrix Connecticut, LLC and
Matrix Danbury, LLC, incorporated herein by reference to
Exhibit 2.1 to the Registrants Current Report on Form 8-K
filed on May 26, 2009.
|
|
|
|
(3) Articles of Incorporation and Bylaws
|
|
|
|
3.1
|
|
Restated Certificate of Incorporation of the
Registrant, incorporated herein by reference
to Exhibit 3.2 to the Registrants Annual
Report on Form 10-K filed on March 31, 1995.
|
|
|
|
3.2
|
|
Certificate of Retirement with
Respect to 130,233 Shares of
Junior Convertible Preferred
Stock of Grubb & Ellis
Company, filed with the
Delaware Secretary of State on
January 22, 1997, incorporated
herein by reference to Exhibit
3.3 to the Registrants
Quarterly Report on Form 10-Q
filed on February 13, 1997.
|
|
|
|
3.3
|
|
Certificate of Retirement with
Respect to 8,894 Shares of
Series A Senior Convertible
Preferred Stock, 128,266
Shares of Series B Senior
Convertible Preferred Stock,
and 19,767 Shares of Junior
Convertible Preferred Stock of
Grubb & Ellis Company, filed
with the Delaware Secretary
State on January 22, 1997,
incorporated herein by
reference to Exhibit 3.4 to
the Registrants Quarterly
Report on Form 10-Q filed on
February 13, 1997.
|
|
|
|
3.4
|
|
Amendment to the Restated
Certificate of Incorporation
of the Registrant as filed
with the Delaware Secretary of
State on December 9, 1997,
incorporated herein by
reference to Exhibit 4.4 to
the Registrants Statement on
Form S-8 filed on December 19,
1997 (File No. 333-42741).
|
|
|
|
3.5
|
|
Amended and Restated
Certificate of Designations,
Number, Voting Powers,
Preferences and Rights of
Series A Preferred Stock of
Grubb & Ellis Company, as
filed with the Secretary of
State of Delaware on September
13, 2002, incorporated herein
by reference to Exhibit 3.8 to
the Registrants Annual Report
on Form 10-K filed on October
15, 2002.
|
|
|
|
3.6
|
|
Certificate of Designations,
Number, Voting Powers,
Preferences and Rights of
Series A-1 Preferred Stock of
Grubb & Ellis Company, as
filed with the Secretary of
State of Delaware on January
4, 2005, incorporated herein
by reference to Exhibit 2 to
the Registrants Current
Report on Form 8-K filed on
January 6, 2005.
|
|
|
|
3.7
|
|
Preferred Stock Exchange
Agreement, dated as of
December 30, 2004, between the
Registrant and Kojaian
Ventures, LLC, incorporated
herein by reference to Exhibit
1 to the Registrants Current
Report on Form 8-K filed on
January 6, 2005.
|
|
|
|
3.8
|
|
Certificate of Designations,
Number, Voting Powers,
Preferences and Rights of
Series A-1 Preferred Stock of
Grubb & Ellis Company, as
filed with the Secretary of
State of Delaware on January
4, 2005, incorporated herein
by reference to Exhibit 2 to
the Registrants Current
Report on Form 8-K filed on
January 6, 2005.
|
|
|
|
3.9
|
|
Certificate of Amendment to
the Amended and Restated
Certificate of Incorporation
of Grubb & Ellis Company as
filed with the Delaware
Secretary of State on December
7, 2007, incorporated herein
by reference to Exhibit 3.1 to
the Registrants Current
Report on Form 8-K filed on
December 13, 2007.
|
|
|
|
Exhibit
|
|
|
No.
|
|
Description
|
3.10
|
|
Certificate of the Powers,
Designations, Preferences and
Rights of the 12% Cumulative
Participating Perpetual
Convertible Preferred Stock,
as filed with the Secretary of
State of Delaware on November
4, 2009, incorporated herein
by reference to Annex B to the
Registrants Schedule 14A
filed on November 11, 2009.
|
|
|
|
3.11
|
|
Amendment to the Restated
Certificate of Incorporation
of the Registrant as filed
with the Delaware Secretary of
State on December 17, 2009,
incorporated herein by
reference to Exhibit 3.1 to
the Registrants Current
Report on Form 8-K filed on
December 23, 2009.
|
|
|
|
3.12
|
|
Bylaws of the Registrant, as
amended and restated effective
May 31, 2000, incorporated
herein by reference to Exhibit
3.5 to the Registrants Annual
Report on Form 10-K filed on
September 28, 2000.
|
|
|
|
3.13
|
|
Amendment to the Amended and
Restated By-laws of the
Registrant, effective as of
December 7, 2007, incorporated
herein by reference to Exhibit
3.2 to Registrants Current
Report on Form 8-K filed on
December 13, 2007.
|
|
|
|
3.14
|
|
Amendment to the Amended and
Restated By-laws of the
Registrant, effective as of
January 25, 2008, incorporated
herein by reference to Exhibit
3.1 to Registrants Current
Report on Form 8-K filed on
January 31, 2008.
|
|
|
|
3.15
|
|
Amendment to the Amended and
Restated By-laws of the
Registrant, effective as of
October 26, 2008, incorporated
herein by reference to Exhibit
3.1 to Registrants Current
Report on Form 8-K filed on
October 29, 2008.
|
|
|
|
3.16
|
|
Amendment to the Amended and
Restated By-laws of the
Registrant, effective as of
February 5, 2009, incorporated
herein by reference to Exhibit
3.1 to Registrants Current
Report on Form 8-K filed on
February 9, 2009.
|
|
|
|
3.17
|
|
Amendment to the Amended and
Restated Bylaws of the
Registrant, effective December
17, 2009, incorporated herein
by reference to Exhibit 3.2 to
the Registrants Current
Report on Form 8-K filed on
December 23, 2009.
|
|
|
|
(4) Instruments Defining the Rights of Security Holders, including Indentures.
|
|
|
|
4.1
|
|
Registration Rights Agreement, dated as of April 28, 2006, between
the Registrant, Kojaian Ventures, LLC and Kojaian Holdings, LLC,
incorporated herein by reference to Exhibit 99.2 to the Registrants
Current Report on Form 8-K filed on April 28, 2006.
|
|
|
|
4.2
|
|
Warrant Agreement, dated as of May 18, 2009, by and between the
Registrant, Deutsche Bank Trust Company Americas, Fifth Third Bank,
JPMorgan Chase, N.A. and KeyBank, National Association, incorporated
herein by reference to Exhibit 4.2 to the Registrants Annual Report
on Form 10-K filed on May 27, 2009.
|
|
|
|
4.3
|
|
Registration Rights Agreement, dated as of October 27, 2009, by and
among the Registrant and each of the persons listed on the Schedule
of Initial Holders attached thereto as
Schedule A
.
|
|
|
|
4.4
|
|
Amendment No. 1 to Registration Rights Agreement, dated as of
December 4, 2009, by and among the Registrant and each of the persons
listed on the Schedule of Initial Holders attached thereto as
Schedule A
.
|
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.
|
|
|
(5) Opinion regarding legality
|
|
|
|
5.1
|
|
Opinion of Zukerman Gore Brandeis & Crossman LLP
|
|
|
|
(10) Material Contracts
|
|
|
|
10.1*
|
|
Employment Agreement entered into on November 9,
2004, between Robert H. Osbrink and the Registrant,
effective January 1, 2004, incorporated herein by
reference to Exhibit 10.1 to the Registrants
Quarterly Report on Form 10-Q filed on November 15,
2004.
|
|
|
|
10.2*
|
|
Employment Agreement entered into on March 8, 2005,
between Mark E. Rose and the Registrant,
incorporated herein by reference to Exhibit 10.1 to
the Registrants Current Report on Form 8-K filed on
March 11, 2005.
|
|
|
|
10.3*
|
|
Employment Agreement, dated as of January 1, 2005,
between Maureen A. Ehrenberg and the Registrant,
incorporated herein by reference to Exhibit 1 to the
Registrants Current Report on Form 8-K filed on
June 10, 2005.
|
|
|
|
Exhibit
|
|
|
No.
|
|
Description
|
10.4*
|
|
First Amendment to Employment Agreement entered into
between Robert Osbrink and the Registrant, dated as
of September 7, 2005, incorporated herein by
reference to Exhibit 10.6 to the Registrants Report
on Form 10-K filed on September 28, 2005.
|
|
|
|
10.5*
|
|
Form of Restricted Stock Agreement between the
Registrant and each of the Registrants Outside
Directors, dated as of September 22, 2005,
incorporated herein by reference to Exhibit 10.15 to
Amendment No. 1 to the Registrants Registration
Statement on Form S-1 filed on June 19, 2006 (File
No. 333-133659).
|
|
|
|
10.6*
|
|
Employment Agreement entered into on April 1, 2006,
between Frances P. Lewis and the Registrant,
incorporated herein by reference to Exhibit 10.17 to
the Registrants Current Report on Form 10-K filed
on September 28, 2006.
|
|
|
|
10.7*
|
|
Grubb & Ellis Company 2006 Omnibus Equity Plan
effective as of November 9, 2006, incorporated
herein by reference to Appendix A to the
Registrants Proxy Statement for the 2006 Annual
Meeting of Stockholders filed on October 10, 2006.
|
|
|
|
10.8
|
|
Purchase and Sale Agreement between Abrams Office
Center Ltd and GERA Property Acquisition LLC, a
wholly-owned subsidiary of the Registrant, dated as
of October 24, 2006, incorporated herein by
reference to Exhibit 99.1 to the Registrants
Current Report on Form 8-K filed on October 30,
2006.
|
|
|
|
10.9*
|
|
Second Amendment to Employment Agreement entered
into between Robert H. Osbrink and the Registrant,
dated as of November 15, 2006, incorporated herein
by reference to Exhibit 1 to the Registrants
Current Report on Form 8-K filed on November 21,
2006.
|
|
|
|
10.10
|
|
Letter Agreement between Abrams Office Centre and
GERA Property Acquisition LLC, a wholly owned
subsidiary of the Registrant, dated December 8,
2006, incorporated herein by reference to Exhibit
99.1 to the Registrants Current Report on Form 8-K
filed on December 14, 2006.
|
|
|
|
10.11
|
|
Second Amendment to the Purchase and Sale Agreement
between Abrams Office Centre, Ltd. and GERA Property
Acquisition LLC, a wholly owned subsidiary of the
Registrant, dated December 15, 2006, incorporated
herein by reference to Exhibit 99.1 to the
Registrants Current Report on Form 8-K filed on
December 21, 2006.
|
|
|
|
10.12
|
|
Letter Agreement between Abrams Office Centre, Ltd.
and GERA Property Acquisition LLC, a wholly owned
subsidiary of the Registrant, dated December 29,
2006, incorporated herein by reference to Exhibit
99.1 to the Registrants Current Report on Form 8-K
filed on January 5, 2007.
|
|
|
|
10.13
|
|
Letter Agreement between Abrams Office Centre, Ltd.
and GERA Property Acquisition LLC, a wholly owned
subsidiary of the Registrant, dated December 29,
2006, incorporated herein by reference to Exhibit
99.2 to the Registrants Current Report on Form 8-K
filed on January 5, 2007.
|
|
|
|
10.14
|
|
Letter Agreement between Abrams Office Centre, Ltd.
and GERA Property Acquisition LLC, a wholly owned
subsidiary of the Registrant, dated January 4, 2007,
incorporated herein by reference to Exhibit 99.3 to
the Registrants Current Report on Form 8-K filed on
January 5, 2007.
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|
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10.15
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|
Letter Agreement between Abrams Office Centre, Ltd.
and GERA Property Acquisition LLC, a wholly owned
subsidiary of the Registrant, dated January 19,
2007, incorporated herein by reference to Exhibit
99.1 to the Registrants Current Report on Form 8-K
filed on January 25, 2007.
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|
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|
10.16
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|
Purchase and Sale Agreement between F/B 6400 Shafer
Ct. (Rosemont), LLC and GERA Property Acquisition
LLC, a wholly owned subsidiary of the Registrant,
dated as of February 9, 2007, incorporated herein by
reference to Exhibit 99.1 to the Registrants
Current Report on Form 8-K filed on February 9,
2007.
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|
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|
10.17*
|
|
Employment Agreement between Richard W. Pehlke and
the Registrant, dated as of February 9, 2007,
incorporated herein by reference to Exhibit 99.1 to
the Registrants Current Report on Form 8-K filed on
February 15, 2007.
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|
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10.18*
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|
Amendment No. 1 Employment Agreement between Richard
W. Pehlke and the Registrant, dated as of December
23, 2008, incorporated herein by reference to
Exhibit 10.1 to the Registrants Current Report on
Form 8-K filed on December 23, 2008.
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|
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10.19
|
|
Purchase and Sale Agreement between Danbury
Buildings Co., L.P., Danbury Buildings, Inc. and
GERA Property Acquisition LLC, a wholly owned
subsidiary of the Registrant, dated February 20,
2007, incorporated herein by reference to Exhibit
99.2 to the Registrants Current Report on Form 8-K
filed on February 22, 2007.
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|
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Exhibit
|
|
|
No.
|
|
Description
|
10.20
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|
Letter Agreement between Danbury Buildings Co.,
L.P., Danbury Buildings, Inc. and GERA Property
Acquisition LLC, a wholly owned subsidiary of the
Registrant, dated March 16, 2007, incorporated
herein by reference to Exhibit 99.1 to the
Registrants Current Report on Form 8-K filed on
March 21, 2007.
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|
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10.21
|
|
Amendment to Purchase and Sale Agreement between
Danbury Buildings, Inc. and Danbury Buildings Co.,
L.P. and GERA Property Acquisition LLC, a wholly
owned subsidiary of the Registrant, dated February
20, 2007, incorporated herein by reference to
Exhibit 99.1 to the Registrants Current Report on
Form 8-K filed on May 3, 2007.
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|
10.22
|
|
Letter Amendment to Purchase and Sale Agreement
between Danbury Buildings, Inc. and Danbury
Buildings Co., L.P. and GERA Property Acquisition
LLC, a wholly owned subsidiary of the Registrant,
dated as of April 30, 2007, incorporated herein by
reference to Exhibit 99.2 to the Registrants
Current Report on Form 8-K filed on May 3, 2007.
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10.23
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|
Form of Voting Agreement between Registrant and
certain stockholders or NNN Realty Advisors, Inc.,
incorporated herein by reference to Exhibit 10.1 to
the Registrants Current Report on Form 8-K filed on
May 23, 2007.
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10.24
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|
Form of Voting Agreement between NNN Realty
Advisors, Inc. and certain stockholders of the
Registrant, incorporated herein by reference to
Exhibit 10.2 to the Registrants Current Report on
Form 8-K filed on May 23, 2007.
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|
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10.25
|
|
Form of Escrow Agreement between NNN Realty
Advisors, Inc., Wilmington Trust Company and the
Registrant, incorporated herein by reference to
Exhibit 10.3 to the Registrants Current Report on
Form 8-K filed on May 23, 2007.
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|
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10.26
|
|
Deed of Trust, Security Agreement, Assignment of
Rents and Fixture Filing by and among GERA Abrams
Centre LLC, Rebecca S. Conrad, as Trustee for the
benefit of Wachovia Bank, National Association,
dated as of June 15, 2007 incorporated herein by
reference to Exhibit 10.1 to the Registrants
Current Report on Form 8-K filed on June 19, 2007.
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|
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|
10.27
|
|
Commercial Offer to purchase by and between Aurora
Health Care, Inc. and Triple Net Properties, LLC,
dated November 21, 2007, incorporated herein by
reference to Exhibit 10.1 to the Registrants
Current Report on Form 8-K filed on December 28,
2007.
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10.28
|
|
First Amendment to Offer to Purchase by and between
Aurora Medical Group, Inc. and Triple Net
Properties, LLC, dated November 29, 2007,
incorporated herein by reference to Exhibit 10.2 to
the Registrants Current Report on Form 8-K filed on
December 28, 2007.
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10.29
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|
Form of Lease among NNN Eastern Wisconsin Medical
Portfolio, LLC and Aurora Medical Group, Inc., dated
as of December 21, 2007, incorporated herein by
reference to Exhibit 10.3 to the Registrants
Current Report on Form 8-K filed on December 28,
2007.
|
|
|
|
10.30
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|
Form of Subordination, Non-Disturbance and
Attornment Agreement, between Aurora Medical Group,
Inc. and PNC Bank, National Association dated as of
December 21, 2007, incorporated herein by reference
to Exhibit 10.4 to the Registrants Current Report
on Form 8-K filed on December 28, 2007.
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|
10.31
|
|
Form of Estoppel Certificate from Aurora Medical
Group, Inc. to PNC Bank, National Association, dated
as of December 21, 2007 incorporated herein by
reference to Exhibit 10.5 to the Registrants
Current Report on Form 8-K filed on December 28,
2007.
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10.32
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|
Form of Guaranty executed by Aurora Health Care,
Inc. in favor of NNN Eastern Wisconsin Medical
Portfolio, LLC dated December 21, 2007, incorporated
herein by reference to Exhibit 10.6 to the
Registrants Current Report on Form 8-K filed on
December 28, 2007.
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|
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10.33
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|
Promissory Note for $32,300,000 senior loan of NNN
Eastern Wisconsin Medical Portfolio, LLC to the
order of PNC Bank, National Association, dated
December 21, 2007, incorporated herein by reference
to Exhibit 10.7 to the Registrants Current Report
on Form 8-K filed on December 28, 2007.
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|
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10.34
|
|
Promissory Note for $3,400,000 mezzanine loan by NNN
Eastern Wisconsin Medical Portfolio, LLC to the
order of PNC Bank, National Association, dated
December 21, 2007, incorporated herein by reference
to Exhibit 10.8 to the Registrants Current Report
on Form 8-K filed on December 28, 2007.
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|
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10.35
|
|
Mortgage, Security Agreement, Assignment of Leases
and Rents and Fixture Filing by NNN Eastern
Wisconsin Medical Portfolio, LLC in favor of PNC
Bank, National Association, dated December 21, 2007,
incorporated herein by reference to Exhibit 10.9 to
the Registrants Current Report on Form 8-K filed on
December 28, 2007.
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Exhibit
|
|
|
No.
|
|
Description
|
10.36
|
|
Agreement for Purchase and Sale of Real Property and
Escrow Instructions, dated as of October 31, 2008,
by and between GERA Danbury LLC and Matrix
Connecticut, LLC, incorporated herein by reference
to Exhibit 99.1 to the Registrants Current Report
on Form 8-K filed on November 5, 2008.
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|
|
|
10.37*
|
|
Employment Agreement between NNN Realty Advisors,
Inc. and Scott D. Peters incorporated herein by
reference to Exhibit 10.26 to the Registrants
Annual Report on Form 10-K filed on March 17, 2008.
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|
10.38*
|
|
Employment Agreement between NNN Realty Advisors,
Inc. and Andrea R. Biller incorporated herein by
reference to Exhibit 10.27 to the Registrants
Annual Report on Form 10-K filed on March 17, 2008.
|
|
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|
10.39*
|
|
Employment Agreement between NNN Realty Advisors,
Inc. and Francene LaPoint incorporated herein by
reference to Exhibit 10.28 to the Registrants
Annual Report on Form 10-K filed on March 17, 2008.
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|
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|
10.40
|
|
Employment Agreement between NNN Realty Advisors,
Inc. and Jeffrey T. Hanson incorporated herein by
reference to Exhibit 10.29 to the Registrants
Annual Report on Form 10-K filed on March 17, 2008.
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|
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|
10.41
|
|
Indemnification Agreement dated as of October 23,
2006 between Anthony W. Thompson and NNN Realty
Advisors, Inc., incorporated herein by reference to
Exhibit 10.30 to the Registrants Annual Report on
Form 10-K filed on March 17, 2008.
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10.42
|
|
Indemnification and Escrow Agreement by and among
Escrow Agent, NNN Realty Advisors, Inc., Anthony W.
Thompson, Louis J. Rogers and Jeffrey T. Hanson,
together with Certificate as to Authorized
Signatures incorporated herein by reference to
Exhibit 10.31 to the Registrants Annual Report on
Form 10-K filed on March 17, 2008.
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10.43*
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|
Form of Indemnification Agreement executed by Andrea
R. Biller, Glenn C. Carpenter, Howard H. Greene,
Jeffrey T. Hanson, Gary H. Hunt, C. Michael Kojaian,
Francene LaPoint, Robert J. McLaughlin, Devin I.
Murphy, Robert H. Osbrink, Richard W. Pehlke, Scott
D. Peters, Dylan Taylor, Jacob Van Berkel, D. Fleet
Wallace and Rodger D. Young. incorporated herein by
reference to Exhibit 10.41 to the Registrants
Annual Report on Form 10-K filed on March 17, 2008.
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10.44*
|
|
Change of Control Agreement dated December 23, 2008
by and between Dylan Taylor and the Registrant,
incorporated herein by reference to Exhibit 10.2 to
the Registrants Current Report on Form 8-K filed on
December 24, 2008.
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10.45*
|
|
Change of Control Agreement dated December 23, 2008
by and between Jacob Van Berkel and the Company,
incorporated herein by reference to Exhibit 10.3 to
the Registrants Current Report on Form 8-K filed on
December 24, 2008.
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|
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10.46
|
|
First Amendment to Agreement for Purchase and Sale
of Real Property and Escrow Instructions, dated as
of January 8, 2009, by and between GERA Danbury LLC
and Matrix Connecticut, LLC, incorporated herein by
reference to Exhibit 99.1 to the Registrants
Current Report on Form 8-K filed on January 14,
2009.
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|
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|
10.47
|
|
Second Amendment to Agreement for Purchase and Sale
of Real Property and Escrow Instructions, dated as
of January 12, 2009, by and between GERA Danbury LLC
and Matrix Connecticut, LLC, incorporated herein by
reference to Exhibit 99.2 to the Registrants
Current Report on Form 8-K filed on January 14,
2009.
|
|
|
|
10.48
|
|
Third Amendment to Agreement for Purchase and Sale
of Real Property and Escrow Instructions, dated as
of January 14, 2009, by and between GERA Danbury LLC
and Matrix Connecticut, LLC, incorporated herein by
reference to Exhibit 99.1 to the Registrants
Current Report on Form 8-K filed on January 21,
2009.
|
|
|
|
10.49
|
|
Fourth Amendment to Agreement for Purchase and Sale
of Real Property and Escrow Instructions, dated as
of January 16, 2009, by and between GERA Danbury LLC
and Matrix Connecticut, LLC, incorporated herein by
reference to Exhibit 99.2 to the Registrants
Current Report on Form 8-K filed on January 21,
2009.
|
|
|
|
10.50
|
|
Fifth Amendment to Agreement for Purchase and Sale
of Real Property and Escrow Instructions, dated as
of January 20, 2009, by and between GERA Danbury LLC
and Matrix Connecticut, LLC, incorporated herein by
reference to Exhibit 99.3 to the Registrants
Current Report on Form 8-K filed on January 21,
2009.
|
|
|
|
10.51
|
|
Sixth Amendment to Agreement for Purchase and Sale
of Real Property and Escrow Instructions, dated as
of January 21, 2009, by and between GERA Danbury LLC
and Matrix Connecticut, LLC, incorporated herein by
reference to Exhibit 99.2 to the Registrants
Current Report on Form 8-K filed on January 27,
2009.
|
|
|
|
Exhibit
|
|
|
No.
|
|
Description
|
10.52
|
|
Escrow Agreement, dated as of January 22, 2009, by
and among Grubb & Ellis Company, Matrix Connecticut,
LLC and First American Title Insurance Company,
incorporated herein by reference to Exhibit 99.1 to
the Registrants Current Report on Form 8-K/A filed
on January 29, 2009.
|
|
|
|
10.53
|
|
Mortgage, Security Agreement, Assignment of Rents
and Fixture Filing between GERA 6400 Shafer LLC to
Wachovia Bank, National Association dated as of June
15, 2007, incorporated herein by reference to
Exhibit 10.2 to the Registrants Current Report on
Form 8-K filed on June 19, 2007.
|
|
|
|
10.54
|
|
Open-end Mortgage, Security Agreement, Assignment of
Rents and Fixture Filing between GERA Danbury LLC to
Wachovia Bank, National Association dated as of June
15, 2007, incorporated herein by reference to
Exhibit 10.3 to the Registrants Current Report on
Form 8-K filed on June 19, 2007.
|
|
|
|
10.55
|
|
Letter Agreement by and among Wachovia Bank,
National Association, GERA Abrams Centre LLC and
GERA 6400 Shafer LLC, dated September 28, 2007,
incorporated herein by reference to Exhibit 10.1 to
the Registrants Current Report on Form 8-K filed on
October 4, 2007.
|
|
|
|
10.56
|
|
Letter Agreement by and between Wachovia Bank,
National Association and GERA Danbury, LLC, dated
September 28, 2007, incorporated herein by reference
to Exhibit 10.2 to the Registrants Current Report
on Form 8-K filed on October 4, 2007.
|
|
|
|
10.57
|
|
Second Amended and Restated Credit Agreement, dated
as of December 7, 2007, among the Registrant,
certain of its subsidiaries (the Guarantors), the
Lender (as defined therein), Deutsche Bank
Securities, Inc., as syndication agent, sole
book-running manager and sole lead arranger, and
Deutsche Bank Trust Company Americas, as initial
issuing bank, swing line bank and administrative
agent, incorporated herein by reference to Exhibit
10.1 to Registrants Current Report on Form 8-K
filed on December 13, 2007.
|
|
|
|
10.58
|
|
Second Amended and Restated Security Agreement,
dated as of December 7, 2007, among the Registrant,
certain of its subsidiaries and Deutsche Bank Trust
Company Americas, as administrative agent, for the
Secured Parties (as defined therein), incorporated
herein by reference to Exhibit 10.2 to Registrants
Current Report on Form 8-K filed on December 13,
2007.
|
|
|
|
10.59
|
|
First Letter Amendment, dated as of August 4, 2008,
by and among the Registrant, the guarantors named
therein, Deutsche Bank Trust Company Americas, as
administrative agent, the financial institutions
identified therein as lender parties, Deutsche Bank
Trust Company Americas, as syndication agent, and
Deutsche Bank Securities Inc., as sole book running
manager and sole lead arranger, incorporated herein
by reference to Exhibit 99.1 to Registrants Current
Report on Form 8-K filed on August 6, 2008.
|
|
|
|
10.60
|
|
Second Letter Amendment to the Registrants senior
secured revolving credit facility executed on
November 4, 2008, and dated as of September 30,
2008, incorporated herein by reference to Exhibit
10.2 to the Registrants Quarterly Report on Form
10-Q filed on November 10, 2008.
|
|
|
|
10.61
|
|
Third Amended and Restated Credit Agreement, dated
as of May 18, 2009, among the Registrant, certain of
its subsidiaries (the Guarantors), the Lender
(as defined therein), Deutsche Bank Securities,
Inc., as syndication agent, sole book-running
manager and sole lead arranger, and Deutsche Bank
Trust Company Americas, as initial issuing bank,
swing line bank and administrative agent,
incorporated herein by reference to Exhibit 10.61 to
the Registrants Annual Report on Form 10-K filed on
May 27, 2009.
|
|
|
|
10.62
|
|
Third Amended and Restated Security Agreement, dated
as of May 18, 2009, among the Registrant, certain of
its subsidiaries and Deutsche Bank Trust Company
Americas, as administrative agent, for the Secured
Parties (as defined therein), incorporated herein
by reference to Exhibit 10.62 to the Registrants
Annual Report on Form 10-K filed on May 27, 2009.
|
|
|
|
10.63*
|
|
Employment Agreement between Thomas DArcy and the
Registrant, dated as of November 16, 2009,
incorporated herein by reference to Exhibit 10.1 to
the Registrants Quarterly Report on Form 10-Q/A
filed on November 19, 2009.
|
|
|
|
10.64
|
|
First Letter Amendment to Third Amended and Restated
Credit Agreement, dated as of September 30, 2009, by
and among Grubb & Ellis Company, the guarantors
named therein, Deutsche Bank Trust Company Americas,
as administrative agent, the financial institutions
identified therein as lender parties, Deutsche Bank
Trust Company Americas, as syndication agent, and
Deutsche Bank Securities Inc., as sole book running
manager and sole lead arranger, incorporated herein
by reference to Exhibit 99.1 to the Registrants
Current Report on Form 8-K filed on October 2, 2009.
|
|
|
|
Exhibit
|
|
|
No.
|
|
Description
|
10.65
|
|
First Letter Amendment to Warrant Agreement, dated
as of September 30, 2009, by and between Grubb &
Ellis Company and the holders identified in Exhibit
B thereto, incorporated herein by reference to
Exhibit 99.2 to the Registrants Current Report on
Form 8-K filed on October 2, 2009.
|
|
|
|
10.66
|
|
First Letter Amendment to the Third Amended and
Restated Security Agreement, dated as of September
30, 2009, made by the grantors referred to therein
in favor of Deutsche Bank Trust Company Americas, as
administrative agent for the secured parties
referred to therein, incorporated herein by
reference to Exhibit 99.3 to the Registrants
Current Report on Form 8-K filed on October 2, 2009.
|
|
|
|
10.67
|
|
Senior Subordinated Convertible Note dated October
2, 2009 issued by Grubb & Ellis Company to Kojaian
Management Corporation, incorporated herein by
reference to Exhibit 99.4 to the Registrants
Current Report on Form 8-K filed on October 2, 2009.
|
|
|
|
10.68
|
|
Subordination Agreement dated October 2, 2009 by and
among Kojaian Management Corporation, Grubb & Ellis
Company and Deutsche Bank Trust Company Americas,
incorporated herein by reference to Exhibit 99.5 to
the Registrants Current Report on Form 8-K filed on
October 2, 2009.
|
|
|
|
10.69
|
|
Form of Purchase Agreement by and between Grubb &
Ellis Company and the accredited investors set forth
on Schedule A attached thereto, incorporated herein
by reference to Exhibit 99.1 to the Registrants
Current Report on Form 8-K filed on October 26,
2009.
|
|
|
|
(16) Change in Certifying Accountants
|
|
|
|
16.1
|
|
Letter from Deloitte & Touche LLP to the Securities and Exchange
Commission, dated December 14, 2007, incorporated herein by reference
to Exhibit 16.1 to the Registrants Current Report on Form 8-K filed
on December 14, 2007.
|
|
|
|
(21) Subsidiaries of the Registrant
, incorporated herein by reference to Exhibit 21 to the
Registrants Annual Report on Form 10-K/A filed on November 20, 2009.
|
|
|
|
(23) Consent of Independent Registered Public Accounting Firm
|
|
23.1
|
|
Consent of Ernst & Young LLP
|
|
|
|
23.2
|
|
Consent of Deloitte & Touche LLP
|
|
|
|
23.3
|
|
Consent of PKF
|
|
|
|
(99) Additional Exhibits
|
|
99.1
|
|
Letter of termination from Grubb & Ellis Realty Advisors, Inc. to the
Registrant dated as of February 28, 2008, incorporated herein by
reference to Exhibit 99.1 to the Registrants Current Report on Form
8-K filed on February 29, 2008.
|
|
|
|
|
|
Filed herewith.
|
|
*
|
|
Management contract or compensatory plan arrangement.
|
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