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UNITED STATES

FORM 10-K

OR

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

For the transition period from                      to                     

Commission file number 1-8122

GRUBB & ELLIS COMPANY

(847) 753-7500

Securities registered pursuant to Section 12(b) of the Act:

Securities registered pursuant to Section 12(g) of the Act: None

      Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o

      Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein and will not be contained, to the best of registrant’s knowledge, in its definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o

      Indicate by check mark whether the registrant is an accelerated filer (as defined in rule 12b-2 of the Act). Yes o No x

      The aggregate market value of voting common stock held by non-affiliates of the registrant as of September 22, 2003 was approximately $3,966,625.

      The number of shares outstanding of the registrant’s common stock as of September 22, 2003 was 15,097,371 shares.

DOCUMENTS INCORPORATED BY REFERENCE

     Portions of the Registrant’s definitive proxy statement to be filed pursuant to Regulation 14A no later than 120 days after the end of the fiscal year (June 30, 2003) are incorporated by reference into Part III of this Report.

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GRUBB & ELLIS COMPANY

TABLE OF CONTENTS

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GRUBB & ELLIS COMPANY

General

      Grubb & Ellis Company, a Delaware corporation organized in 1980, is the successor by merger to a real estate brokerage company first established in California in 1958. Grubb & Ellis Company and its wholly owned subsidiaries (“Grubb & Ellis” or the “Company”) is an integrated real estate services firm with 4,750 total employees as of June 30, 2003. The Company employs more than 800 transaction professionals in 49 owned offices, and has access to over 400 additional transactions professionals in 51 affiliate offices. Including its alliance with Knight Frank, one of Europe’s leading real estate consulting firms, it has the collective resources of over 8,000 individuals in 200 offices in 31 countries around the world. The Company is one of the nation’s largest publicly traded commercial real estate firms, based on total revenue.

      The Company, through its offices, affiliates and alliance with Knight Frank provides a full range of real estate services, including transaction, management and consulting services, to users and investors worldwide. Grubb & Ellis strategizes, arranges and advises on the sale, acquisition or lease of such business properties as industrial, retail and office buildings, as well as the acquisition and disposition of multi-family properties and commercial land.

      Major multiple-market clients have a single point of contact through the Company’s global accounts program for coordination of all services. Delivered in a seamless manner across a global platform, the Company’s comprehensive services include feasibility studies, site selection, market forecasts and research.

      Property and facilities management services are provided by Grubb & Ellis Management Services, Inc. (“GEMS”), a wholly owned subsidiary of the Company. Leveraging the management portfolio and the trend for outsourcing, additional revenues are earned by providing business services and construction management. Operating on a national scale, GEMS had approximately 150 million square feet of property under management as of June 30, 2003.

Current Business Platform and Organization

      Historically, Grubb & Ellis’ transaction services operations have generated approximately 60% of the Company’s revenue, with leasing transactions providing approximately 75% of the transaction revenue and dispositions and acquisitions accounting for the remaining 25%. The leasing activity represents a balanced blend of tenant representation, landlord representation and dual-representation. Grubb & Ellis’ transaction professionals are supported by the Company’s in-depth market research, which is regarded by real estate professionals and other industry constituents as one of the leading sources for market data in the real estate industry.

      The management services group has traditionally generated approximately 40% of the Company’s revenue, with reimbursed salaries, wages and benefits generating approximately 75% of the group’s revenue. Management service fees are generated from third-party property management, facilities management, business services, and other related activities and comprise the remaining 25% of revenue from this group. The Grubb & Ellis Management Services business unit provides its customers with client accounting, engineering services, independent property management, and corporate facilities management.

      The Company is currently organized in the following business segments. Additional information on these business segments can be found in Note 19 of Notes to Consolidated Financial Statements in Item 8 of this Report.

Transaction Services

      Historically, transaction services have represented a large portion of the Company’s operations, and in fiscal year 2003 represented 56% of the Company’s total revenue. A significant portion of the transaction services provided by the Company are transaction related services, in which the Company represents the interests of tenants, owners, buyers or sellers in leasing, acquisition and disposition transactions. These transactions involve various types of commercial real estate, including office, industrial, retail, hospitality, multi-family and land.

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      The Company also delivers, to a lesser extent, certain consulting related services primarily to its transaction services clients, including site selection, feasibility studies, exit strategies, market forecasts, appraisals, strategic planning and research services.

Management Services

      GEMS provides comprehensive property management and related services for properties owned primarily by institutional investors, along with facilities management services for corporate users. In regard to certain management and facility service contracts, the owner of a property will also reimburse the Company for certain expenses, primarily employee salaries and related benefit costs, that are incurred on behalf of the owner. Other related services include construction management, business services and engineering services. In fiscal year 2003, these services represented the remaining 44% of the Company’s total revenue.

Ownership and Debt Transactions

      On September 19, 2002, Kojaian Ventures, L.L.C. (“KV”), a related party to C. Michael Kojaian, the Company’s controlling stockholder and Chairman of the Board of Directors of the Company, exercised its right to convert a subordinated promissory note it held into preferred stock of the Company. As a result of this conversion, 11,725 shares of the Company’s Series A Preferred Stock were issued to KV, having a stated value of $1,000 per share. The outstanding related party principal and interest obligations totaling $11,725,000 were reclassified to stockholders’ equity on the date of conversion. The preferred stock contains liquidation preference and voting rights equal to 990 common shares for each share of preferred stock, and votes, along with holders of common stock, on all matters on an as liquidated basis. The Series A Preferred Stock represented an aggregate of 11,607,750 common share equivalents at September 19, 2002, subject to adjustment. As a consequence of the conversion, there was a change in the voting control of the Company, as these equivalents, along with 3,762,884 shares of outstanding common stock owned by KV and its affiliates (approximately 25% of the outstanding common stock of the Company), represent approximately 57% of the total voting power of the Company.

      In May 2003, Kojaian Capital, L.L.C. (the “New Lender”), a related party to the Company’s controlling stockholder and Chairman, agreed to acquire the Company’s credit facility (“Credit Agreement”) from Bank of America, N.A. as agent and lender and certain other lenders (“Banks”), which transaction was effected on June 6, 2003. The Company is not a party to the transaction and the terms of the acquisition have not been disclosed. On June 20, 2003, the Company and the New Lender entered into the sixth amendment to the Credit Agreement (the “Sixth Amendment”), which improved the financial condition of the Company. Among other things, the Sixth Amendment defers further amortization of the principal obligations due under the Credit Agreement until September 30, 2004, and eliminates certain minimum EBITDA and fixed charge ratio covenant requirements through June 30, 2004. As a result of the Sixth Amendment, the Company was no longer in default under the Credit Agreement relating to the achievement of these financial covenants or otherwise.

      In connection with the anticipated acquisition of the credit facility, Kojaian Funding, L.L.C., another affiliated entity of the Company’s controlling stockholder and Chairman, also made a $4 million subordinated loan to the Company on May 9, 2003 (the “Subordinated Loan”) for working capital purposes. The Subordinated Loan requires interest only payments during its term at the rate of 10% per annum, with the entire principal amount of the loan due on July 15, 2004.

Strategic Initiatives

      The Company’s revenues during the first eight months of fiscal 2003 continued to be impacted by the difficult economic climate in the United States and the climate’s direct impact on the real estate services industry. As a result, the Company initiated a number of actions in March 2003 to improve its financial condition, including streamlining the Company’s business organization to better direct investment dollars to its core transaction and management services businesses. Several senior management changes were also made as part of a corporate realignment. The Company is also instituting various cost control initiatives that it believes will serve to strengthen the Company’s financial position, while at the same time permit the Company to continue to provide the same level of services that it has in the past. Specifically, in addition to a work force reduction of approximately 40 individuals, the Company further reduced compensation expense, which is the Company’s single largest expense, through executive officer salary reductions. Also, many contracts the Company held with external professional services firms were eliminated or revised to better support the Company’s new corporate alignment. The Company expects that all of the above

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      Knight Frank is the Company’s strategic partner for the advancement of the Company’s global business strategy. With market presence in Europe, India and the Pacific Rim, the Company believes that Knight Frank is positioned to be an effective alliance partner that complements Grubb & Ellis’ strengths and provides the mechanism to deliver real estate services to global enterprises. As the trend towards globalization among large entities continues to gain momentum, the Company intends to focus on global business development and capabilities.

      The Company continues to develop its national affiliate program, through alliances with 40 real estate services firms, which has enabled it to enter markets where it previously did not have a formal presence and to better meet the multi-market needs of global clients. The Company has also invested in technology systems designed to provide a scalable platform for growth and to efficiently deliver and share data with clients. Among them is what the Company believes to be a state-of-the-art, company-wide information sharing and research network which enables its professional staff across all offices to work more efficiently, access the latest market intelligence, and more fully address clients’ needs.

Industry and Competition

      The commercial real estate industry is large and fragmented. The estimated $4.5 trillion of commercial real estate in the United States produces annual sales transactions valued at $150 billion and annual lease transactions valued at $180 billion. The gross market for annual brokerage commissions is estimated at approximately $13 billion. On a national basis, the commercial brokerage industry is highly fragmented with the half-dozen leading firms generating approximately 10% of the revenue.

      As a result of the current economic downturn, lease rates have declined and stabilized in many markets. Absorption rates have dropped significantly and vacancy rates have increased in many markets. Leasing commission rates have held firm, although sales commission rates have come under pressure, especially for larger institutional-grade properties. These factors have contributed to an industry-wide decline in commission revenue.

      The Company competes in a variety of service disciplines within the commercial real estate industry. Each of these business areas is highly competitive on a national as well as local level. The Company faces competition not only from other real estate service providers, but also from boutique real estate advisory firms, appraisal firms and self-managed real estate investment trusts. Although many of the Company’s competitors are local or regional firms that are substantially smaller than the Company, some of the Company’s competitors are substantially larger than the Company on a local or regional basis. In general, there can be no assurance that the Company will be able to continue to compete effectively, to maintain current fee levels or margins, or maintain or increase its market share. Due to the Company’s relative strength and longevity in the markets in which it presently operates, and its ability to offer clients a range of real estate services on a local, regional, national and international basis, the Company believes that it can operate successfully in the future in this highly competitive industry, although there can be no assurances in this regard.

Environmental Regulation

      Federal, state and local laws and regulations impose environmental controls, disclosure rules and zoning restrictions that have impacted the management, development, use, and/or sale of real estate. The Company’s financial results and competitive position for the fiscal year 2003 have not been materially impacted by its compliance with environmental laws or regulations. Such laws and regulations tend to discourage sales and leasing activities and mortgage lending with respect to some properties, and may therefore adversely affect the Company and the industry in general. Failure of the Company to disclose environmental issues in connection with a real estate transaction may subject the Company to liability to a buyer or lessee of property. Applicable laws and contractual obligations to property owners could also subject the Company to environmental liabilities through the provision of management services. Environmental laws and regulations impose liability on current or previous real property owners or operators for the cost of investigating, cleaning up or removing contamination caused by hazardous or toxic substances at the property. The Company may be held liable as an operator for such costs in its role as an on-site property manager. Liability can be imposed even if the original actions were legal and the Company had no knowledge of, or was not responsible for, the presence of the hazardous or toxic substances. Further, the Company may also be held responsible for the entire payment of the liability if it is subject to joint and several liability and the other responsible parties are

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Seasonality

      Since the majority of the Company’s revenues are derived from transaction services, which are seasonal in nature, the Company’s revenue stream and the related commission expense are also subject to seasonal fluctuations. However, the Company’s non-variable operating expenses, which are treated as expenses when incurred during the year, are relatively constant in total dollars on a quarterly basis. The Company has typically experienced its lowest quarterly revenue in the quarter ending March 31 of each year with higher and more consistent revenue in the quarters ending June 30 and September 30. The quarter ending December 31 has historically provided the highest quarterly level of revenue due to increased activity caused by the desire of clients to complete transactions by calendar year-end. Revenue in any given quarter during the years ended June 30, 2003, 2002 and 2001, as a percentage of total annual revenue, ranged from a high of 32.5% to a low of 20.8%.

Service Marks

      The Company has registered trade names and service marks for the “Grubb & Ellis” name and logo and certain other trade names. The right to use the “Grubb & Ellis” name is considered an important asset of the Company, and the Company actively defends and enforces such trade names and service marks.

Real Estate Markets

      The Company’s business is highly dependent on the commercial real estate markets, which in turn are impacted by numerous factors, including but not limited to the general economy, interest rates and demand for real estate in local markets. Changes in one or more of these factors could either favorably or unfavorably impact the volume of transactions and prices or lease terms for real estate. Consequently, the Company’s revenue from transaction services and property management fees, operating results, cash flow and financial condition are impacted by these factors, among others.

Common Stock De-listed

      On October 17, 2002, the Company’s common stock was de-listed from the New York Stock Exchange (“NYSE”), due to the Company’s book value and market capitalization value being below the minimum levels required by the NYSE’s listing standards. The Company’s common stock commenced trading on the over-the-counter market (“OTC”) effective October 17, 2002, under the symbol GBEL.OB, and ceased trading on the NYSE prior to the opening that day.

      The Company leases all of its office space through non-cancelable operating leases. The terms of the leases vary depending on the size and location of the office. As of June 30, 2003, the Company leased approximately 687,000 square feet of office space in 68 locations under leases, which expire at various dates through October 30, 2012. For those leases that are not renewable, the Company believes there is adequate alternative office space available at acceptable rental rates to meet its needs, although there can be no assurances in this regard. See Note 13 of Notes to Consolidated Financial Statements in Item 8 of this Report for additional information, which is incorporated herein by reference.

      Information with respect to legal proceedings can be found in Note 13 of Notes to Consolidated Financial Statements in Item 8 of this Report and is incorporated herein by reference.

      No matters were submitted to a vote of security holders during the fourth quarter of fiscal year 2003.

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GRUBB & ELLIS COMPANY

PART II

Item 5. Market for the Registrant’s Common Equity and Related Stockholder Matters

Market and Price Information

      As of October 17, 2002, the principal market for the Company’s common stock is the over-the-counter market (“OTC”). Prior to that time, the principal market was the New York Stock Exchange (“NYSE”). The following table sets forth the high and low sales prices of the Company’s common stock on the OTC for the final three quarters of the fiscal year ended June 30, 2003 and on the NYSE for the first quarter of the fiscal year ended June 30, 2003 and each quarter of the fiscal year ended June 30, 2002.

      As of September 22, 2003, there were 1,162 registered holders of the Company’s common stock and 15,097,371 shares of common stock outstanding, of which 11,246,279 were held by persons who may be considered “affiliates” of the Company, as defined in Federal securities regulations. Sales of substantial amounts of common stock, including shares issued upon the exercise of warrants or options, or the perception that such sales might occur, could adversely affect prevailing market prices for the common stock.

      No cash dividends were declared on the Company’s common stock during the fiscal years ended June 30, 2003 or 2002. The Company has agreed, under the terms of its revolving credit facility, not to pay cash dividends on its common stock for the duration of the facility, without obtaining an appropriate waiver from the lender.

Sales of Unregistered Securities

      Effective May 14, 2002, the Company issued to Kojaian Ventures, L.L.C. (“KV”) a promissory note in the face amount of $11,237,500, the outstanding principal, accrued interest and certain costs of which were convertible, generally at the option of the holder, to shares of a new Series A Preferred Stock. On September 19, 2002, KV converted the promissory note to 11,725 shares of Series A Preferred Stock. The sale of the securities was not underwritten and was also exempt from the registration requirements under Section 4(2) of the Securities Act of 1933. The net proceeds of the note were used in part to pay down revolving debt of the Company under its credit agreement and in part for working capital purposes.

      See Note 8 of Notes to Consolidated Financial Statements in Item 8 of this Report, and such disclosure is incorporated herein by reference.

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Equity Compensation Plan Information

      The following table provides information on equity compensation plans of the Company as of June 30, 2003.

Equity Compensation Plans Not Approved by Stockholders

      Grubb & Ellis 1998 Stock Option Plan— this information can be found in Note 11 of Notes to Consolidated Financial Statements in Item 8 of this Report and is incorporated herein by reference.

Item 6. Selected Financial Data

      Five-Year Comparison of Selected Financial and Other Data for the Company:

(1)

Income and per share data reported on the above table reflect special charges in the amount of $9.5 million, $1.75 million, $6.2 million and $2.65 million for the fiscal years ended June 30, 2003, 2002, 2001 and 2000, respectively. Net income for the fiscal year ended June 30, 2001 includes a loss of $676,000 on the extinguishment of debt and a charge of $3.1 million reflecting the cumulative effect of a change in an accounting principle. For information regarding comparability of this data as it may relate to future periods, see discussion in Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations and Notes 5, 6, 16 and 17 of the Notes to Consolidated Financial Statements in Item 8 of this Report.

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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Note Regarding Forward-Looking Statements

      This Annual Report contains statements that are not historical facts and constitute projections, forecasts or forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. The statements are not guarantees of performance. They involve known and unknown risks, uncertainties, assumptions and other factors which may cause the actual results, performance or achievements of the Company to be materially different from any future results, performance or achievements expressed or implied by these statements. You can identify such statements by the fact that they do not relate strictly to historical or current facts. These statements use words such as “believe,” “expect,” “should,” “strive”, “plan,” “intend”, “estimate” and “anticipate” or similar expressions. When we discuss our strategy or plans, we are making projections, forecasts or forward-looking statements. Actual results and stockholders’ value will be affected by a variety of risks and factors, including, without limitation, international, national and local economic conditions and real estate risks and financing risks and acts of terror or war. Many of the risks and factors that will determine these results and values are beyond the Company’s ability to control or predict. These statements are necessarily based upon various assumptions involving judgment with respect to the future.

      All such forward-looking statements speak only as of the date of this Annual Report. The Company expressly disclaims any obligation or undertaking to release publicly any updates of revisions to any forward-looking statements contained herein to reflect any change in the Company’s expectations with regard thereto or any change in events, conditions or circumstances on which any such statement is based.

      Factors that could adversely affect the Company’s ability to obtain these results and value include, among other things:

      •  Decline in the Volume of Real Estate Transactions and Prices of Real Estate. The Company’s revenue is largely based on commissions from real estate transactions. As a result, a decline in the volume of real estate available for lease or sale, or in real estate prices, could have a material adverse effect on the Company’s revenues.

      •  General Economic Slowdown or Recession in the Real Estate Markets. Periods of economic slowdown or recession, rising interest rates or declining demand for real estate, both on a general or regional basis, will adversely affect certain segments of the Company’s business. Such economic conditions could result in a general decline in rents and sales prices, a decline in the level of investment in real estate, a decline in the value of real estate investments and an increase in defaults by tenants under their respective leases, all of which in turn would adversely affect revenues from transaction services fees and brokerage commissions which are derived from property sales and aggregate rental payments, property management fees and consulting and other service fees.

      •  The Company’s Debt Level and Ability to Make Principal and Interest Payments. The Company currently has $27.3 million of outstanding debt incurred in connection with the self-tender offer effected in December 2000 and $5 million of credit revolver debt. The Company also has a $4 million subordinated loan outstanding, which is due to an affiliate. Any material downturn in the Company’s revenue or increase in its costs and expenses could render the Company unable to meet its debt obligations.

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      •  Risks Associated with Acquisitions. As discussed in Part I, Item I of this Annual Report under “Strategic Initiatives,” the Company has established a strategic alliance. Also, in connection with the Company’s strategic initiatives, it may undertake one or more additional strategic acquisitions. There can be no assurance that significant difficulties in integrating operations acquired from other companies and in coordinating and integrating systems in a strategic alliance will not be encountered, including difficulties arising from the diversion of management’s attention from other business concerns, the difficulty associated with assimilating groups of broad and geographically dispersed personnel and operations and the difficulty in maintaining uniform standards and policies. There can be no assurance that the integration will ultimately be successful, that the Company’s management will be able to effectively manage any acquired business or that any acquisition or strategic alliance will benefit the Company overall.

      •  Liabilities Arising from Environmental Laws and Regulations. Part I, Item I of this Annual Report under “Environmental Regulation” discusses potential risks related to environmental laws and regulations.

      •  The Company Faces Intense Competition. Part I, Item I of this Annual Report under “Competition” discusses potential risks related to competition.

      •  The Company’s Revenues are Seasonal. Part I, Item I of this Annual Report under “Seasonality” discusses potential risks related to the seasonal nature of the Company’s business.

      •  The Company’s Ability to Attract and Retain Qualified Personnel. The growth of the Company’s business is largely dependent upon its ability to attract and retain qualified personnel in all areas of its business. If the Company is unable to attract and retain such qualified personnel, it may be forced to limit its growth, and its business and operating results could suffer.

      •  Control by Existing Stockholders. A single investor has a majority of the voting power of the Company, and is affiliated with the sole lenders to the Company at June 30, 2003. As a result, this investor can influence the Company’s affairs and policies and the approval or disapproval of most matters submitted to a vote of the Company’s stockholders, including the election of directors.

      •  Other Factors. Other factors are described elsewhere in this Annual Report.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

      The Company’s consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States, which require the Company to make estimates and judgments that affect the reported amount of assets, liabilities, revenues and expenses, and the related disclosure. The Company believes that the following critical accounting policies, among others, affect its more significant judgments and estimates used in the preparation of its consolidated financial statements.

Revenue Recognition

      Real estate sales commissions are recognized at the earlier of receipt of payment, close of escrow or transfer of title between buyer and seller. Receipt of payment occurs at the point at which all Company services have been performed, and title to real property has passed from seller to buyer, if applicable. Real estate leasing commissions are recognized upon execution of appropriate lease and commission agreements and receipt of full or partial payment, and, when payable upon certain events such as tenant occupancy or rent commencement, upon occurrence of such events. All other commissions and fees are recognized at the time the related services have been performed by the Company, unless future contingencies exist. Consulting revenue is recognized generally upon the delivery of agreed upon services to the client.

      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 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.

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Impairment of Goodwill

      On July 1, 2002, the Company adopted Statements of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets.” The Company completed the transitional impairment test of goodwill as of July 1, 2002 and the annual impairment test as of June 30, 2003 and has determined that no goodwill impairment will impact the earnings and financial position of the Company as of those dates. Future events could occur which would cause the Company to conclude that impairment indicators exist and an impairment loss is warranted. The determination of impairment under FAS 142 requires the Company to estimate the fair value of reporting units. This fair value estimation involves a number of judgmental variables, including market multiples, which may change over time.

Deferred Taxes

      The Company records a valuation allowance to reduce the carrying value of its deferred tax assets to an amount that the Company considers is more likely than not to be realized in future tax filings. In assessing this allowance, the Company considers future taxable earnings along with ongoing and potential tax planning strategies. Additional timing differences, future earnings trends and/or tax strategies may occur which could warrant a corresponding adjustment to the valuation allowance.

Insurance and Claim Reserves

      The Company has maintained partially self-insured and deductible programs for errors and omissions, general liability, workers’ compensation and certain employee health care costs. Reserves are based upon an estimate provided by an independent actuarial firm of the aggregate of the liability for reported claims and an estimate of incurred but not reported claims.

      The Company is also subject to various proceedings, lawsuits and other claims related to environmental, labor and other matters, and is required to assess the likelihood of any adverse judgments or outcomes to these matters. A determination of the amount of reserves, if any, for these contingencies is made after careful analysis of each individual issue. New developments in each matter, or changes in approach such as a change in settlement strategy in dealing with these matters, may warrant an increase or decrease in the amount of these reserves.

RESULTS OF OPERATIONS

Overview

      The Company reported a net loss of $16.8 million for the year ended June 30, 2003, primarily due to a decline in net transaction services revenues and the recognition of $9.5 million of special charges during the year, partially offset by a decrease in operating expenses.

Fiscal Year 2003 Compared to Fiscal Year 2002

Revenue

      The Company’s revenue is derived principally from transaction services fees related to commercial real estate, which include commissions from leasing, acquisition and disposition, and agency leasing assignments as well as fees from appraisal and consulting services. Management services fees, which include reimbursed salaries, wages and benefits, comprise the remainder of the Company’s revenues, and include fees related to both property and facilities management outsourcing and business services. Recent accounting pronouncements and subsequent interpretations have provided further clarification regarding reimbursements of expenses on third party service contracts. As a result, the Company believed that it was no longer appropriate to net the reimbursements received from property owners against the related salary, wages and benefit expense. Accordingly, reimbursements received on third party service contracts are characterized as revenue in the Statement of Operations rather than as a reduction of expenses incurred. In prior reports, the Company had disclosed this reimbursement activity in its accounting policy footnote related to costs and expenses. See Note 1(p) of Notes to Consolidated Financial Statements in Item 8 of this Report for additional information.

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      Total revenue of $425.9 million was recognized for fiscal year 2003 as compared to revenue of $431.4 million for fiscal year 2002. Transaction services fees decreased by $21.2 million in the current fiscal year over the same period in 2002 due to the weak general economy and its impact on the real estate industry, along with an increased turnover in the Company’s transaction professional workforce. Management services fees increased by $15.7 million or 9.2% during that same period due to increased facility management assignments partially offset by decreased property management fees. Reimbursed revenues, as well as reimbursable expenses, related to salaries, wages and benefits increased by $16.9 million, or 14.4%, during the same period primarily due to the staffing requirements of the new assignments.

Costs and Expenses

      Services commissions expense is the Company’s largest expense and is a direct function of gross transaction services revenue levels, which include transaction services commissions and other fees. Professionals receive services commissions at rates that increase upon achievement of certain levels of production. As a percentage of gross transaction revenue, related commission expense increased slightly to 58.7% for fiscal year 2003 as compared to 58.0% for fiscal year 2002.

      Salaries, wages and benefits decreased by $16.5 million, or 16.9%, during fiscal year 2003 as compared to 2002. The decrease resulted primarily from a reduction in workforce in March 2002 and March 2003, along with the reduction of bonus payments and the elimination of the company match to the 401(k) Plan for qualified employees for calendar year 2002. Selling, general and administrative expenses decreased by $2.8 million, or 4.3%, for the same period, as the Company tightened its discretionary spending in the fourth quarter of fiscal year 2003.

      Depreciation and amortization expense for fiscal year 2003 decreased by 25.7% to $8.0 million from $10.7 million in fiscal year 2002, primarily due to the cessation of goodwill amortization described in the following paragraph. The Company holds multi-year service contracts with certain key professionals, the costs of which are amortized over the lives of the respective contracts, which are generally two to three years. Amortization expense relating to these contracts of $1.6 million was recognized in fiscal year 2003, compared to $2.1 million in the prior year due to a reduction in the number of new service contracts executed in the current year.

      In June 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets,” effective for fiscal years beginning after December 15, 2001. Under the new rules, goodwill is no longer amortized but is subject to annual impairment tests in accordance with the Statement. Other intangible assets will continue to be amortized over their useful lives. The Company applied the new rules on accounting for goodwill and other intangible assets beginning in the quarter ended September 30, 2002 and completed the transitional impairment test of goodwill as of July 1, 2002 and the annual impairment test as of June 30, 2003. The Company determined that no goodwill impairment would impact the earnings and financial position of the Company as of those dates. Application of the non-amortization provisions of the Statement resulted in a decrease in depreciation and amortization expense and a corresponding increase in net operating income of approximately $1.6 million for fiscal year 2003 as compared to the same period in 2002, or $0.11 per share.

      During fiscal year 2003, the Company recorded special charges totaling $9.5 million, consisting primarily of severance costs of $6.3 million related to the resignations of the Company’s former Chief Executive Officer, Chief Financial Officer, Chief Operating Officer, the Company’s General Counsel and other salaried personnel, and office closure costs of $3.2 million. See “Fiscal Year 2002 Compared to Fiscal Year 2001” below for a description of special charges incurred during fiscal year 2002.

      Interest income decreased during fiscal year 2003 as compared to fiscal year 2002 as a result of lower available invested cash and declining interest rates.

      Interest expense incurred during fiscal year 2003 and 2002 was due primarily to the Company’s term loan borrowings under the credit facility. Interest expense was also incurred due to the note payable-affiliate that was funded in March 2002 and subsequently converted to preferred stock in September 2002, and a second note payable-affiliate that was funded in May 2003. See Note 8 of Notes to Consolidated Statements in Item 8 of this Report for additional information.

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Income Taxes

      As of June 30, 2003, the Company had gross deferred tax assets of $20.3 million, with $11.8 million of the deferred tax assets relating to net operating loss carry forwards which will be available to offset future taxable income through 2013. Management does not believe that the Company will generate sufficient future taxable income to realize these net deferred tax assets in the foreseeable short term future; therefore, the Company has recorded a valuation allowance for $17.4 million against the deferred tax assets as of June 30, 2003 and will continue to do so until such time as management believes that the Company will realize such tax benefits. Although uncertainties exist as to these events, the Company will continue to review its operations periodically to assess whether and when all deferred tax assets may be realized. The net income tax provision recorded in 2003 reflects a charge for the increase in the valuation allowance of $7.7 million, compared to a similar charge of $5.2 million in 2002. See Note 10 of Notes to Consolidated Financial Statements in Item 8 of this Report for additional information.

Net Income (Loss)

      The net loss to common stockholders for fiscal year 2003 was $17.9 million, or $(1.19) per common share on a diluted basis, as compared to $15.5 million, or $(1.09) per common share for fiscal year 2002.

Stockholders’ Equity

      During fiscal year 2003, stockholders’ equity decreased $5.6 million to $255,000 from $5.9 million at June 30, 2002. The net loss of $16.8 million for fiscal year 2003 was partially offset by the conversion of the note payable-affiliate to preferred stock of $10.9 million, net of issuance costs. See Liquidity and Capital Resources below and Note 8 of Notes to Consolidated Financial Statements in Item 8 of this Report for additional information. The book value per common share issued and outstanding decreased to $0.02 at June 30, 2003 from $0.39 at June 30, 2002.

Fiscal Year 2002 Compared to Fiscal Year 2001

Revenue

      Total revenue for fiscal year 2002 was $431.4 million, a decrease of 16.5% from revenue of $516.6 million for fiscal year 2001. Significantly affecting this decline was a $96.4 million decrease in transaction services fees in fiscal year 2002 from the prior fiscal year. This resulted from decreased activity in the technology markets as well as the current softening in the general economy and its impact on the real estate industry through negative absorption and higher vacancy rates, particularly in the office sector. The terrorist attacks of September 11, 2001 created additional marketplace instability and further deterioration of overall economic conditions across the United States. Management services fees increased $11.2 million, or 7.1%, during the 2002 fiscal year as compared to the prior fiscal year. Decreases in property management fees were offset by increases in facility management revenue resulting primarily from a number of new contracts. Reimbursed revenues, as well as reimbursable expenses, related to salaries, wages and benefits increased $13.3 million, or 12.7%, for the same period due to the new business.

Costs and Expenses

      As a percentage of gross transaction revenue, related commission expense decreased to 58.0% for fiscal year 2002 as compared to 60.4% for fiscal year 2001. This decrease was due to unusually high average commission expense incurred during the prior year in technology markets such as Silicon Valley, San Francisco, Denver, Washington D.C. and New York, resulting from higher production per professional.

      Salaries, wages and benefits were relatively flat, decreasing by $1.4 million or 1.4% during fiscal year 2002 as compared to 2001. Selling, general and administrative expenses decreased by $2.7 million, or 4.0%, for the same period. The decrease in these operating costs of $4.1 million resulted from the Company tightening its discretionary expenditures in response to the slowing general economy.

      Depreciation and amortization expense for fiscal year 2002 decreased to $10.7 million from $11.6 million in fiscal year 2001. The Company holds multi-year service contracts with certain key professionals, the costs of which are amortized over the lives of the respective contracts, which are generally two to three years. Amortization expense

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      During fiscal year 2002, the Company concluded long standing litigation proceedings on the John W. Matthews, et al. v Kidder, Peabody & Co., et al. and HSM Inc., et al. (“Matthews”) case for which it had previously recorded loss reserves. In addition, during this period, loss reserves were recorded as a result of the liquidation proceedings surrounding one of the Company’s insurance carriers (“Reliance” liquidation). The positive outcome of the Matthews case, partially offset by the additional exposure on the Reliance liquidation, resulted in $2.2 million of income from claim related reserves. The Company also incurred other special charges in fiscal year 2002 totaling $3.9 million, consisting of $1.0 million of severance costs related to a reduction of salaried overhead, $2.1 million related to office closure costs, $300,000 related to costs incurred for the retirement of the Warburg Pincus $5,000,000 Subordinated Note and for the evaluation of an unsolicited purchase offer from a third party, and $500,000 related to a write-down of the carrying basis of an investment in a commercial real estate services internet venture. The Company’s decision to write-down its interest in the venture was due to a dilution in the Company’s ownership position, as well as uncertainty in the venture’s ability to achieve its business plan. As a result of these events, the Company recognized net special charges of $1,749,000 for fiscal year 2002.

      During fiscal year 2001, the Company recognized special charges totaling $6.2 million, relating primarily to the impairment of goodwill related to the April 1998 acquisition of White Commercial Real Estate, as well as compensation expense related to stock options exercised in connection with the Company’s self-tender offer, an initial write down in the carrying basis of an investment in an internet venture, and executive severance costs related to prior senior management changes. (See Notes 15 and 16 of Notes to Consolidated Statements in Item 8 of this Report for additional information.)

      Interest income decreased during fiscal year 2002 as compared to fiscal year 2001 as a result of lower available invested cash and lower interest rates.

      Interest expense incurred during fiscal year 2002 was due to the Company’s term loan borrowings under the credit facility related to the Company’s self-tender offer, and the note payable-affiliate funded in March 2002. Interest expense incurred during the first half of fiscal year 2001 was due primarily to seller financing related to business acquisitions made in calendar year 1998. Interest expense incurred in the second half of fiscal year 2001 was due to the term loan borrowings under the credit facility.

      Effective December 31, 2000, the Company restructured its credit agreement with Bank of America, N.A. as agent and lender and certain other lenders (“Credit Agreement”). Unamortized costs related to the prior agreement totaling $676,000 were written off and originally recorded as an extraordinary loss from extinguishment of debt during fiscal year 2001. In accordance with SFAS 145, “Rescission of FASB Statements No. 4, 44 and 64, Amendment to FASB Statement No. 13, and Technical Corrections”, effective for fiscal years beginning after May 15, 2002, any gain or loss on extinguishment of debt that was classified as an extraordinary loss in prior periods shall be reclassified. Accordingly, the $676,000 loss from extinguishment of debt has been reclassified to “interest expense” in the 2001 statement of operations.

      In December 1999, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 101 (“SAB 101”), Revenue Recognition in Financial Statements. SAB 101 summarizes the SEC staff’s views regarding the recognition and reporting of revenues in financial statements for publicly owned companies. The adoption of SAB 101 is reflected as a cumulative effect of a change in accounting principle as of July 1, 2000. Under SAB 101, the Company’s leasing commissions that are payable upon certain events such as tenant occupancy or commencement of rent are now recognized under SAB 101 generally upon the delivery of agreed upon services to the client. Historically, the Company had recognized leasing commissions at the earlier of receipt of full payment or receipt of partial payment when lease and commission agreements had been executed and no significant contingencies existed. The Company had recognized consulting fees as employee time was incurred on a project. While this accounting change affects the timing of recognition of leasing revenues (and corresponding services commissions expense) and consulting revenues, it does not impact the Company’s cash flow from operations.

      The cumulative effect of the accounting change on prior years resulted in a reduction to income for fiscal year 2001 of $3.1 million (net of applicable taxes of $2.1 million), or $0.17 per diluted share. The effect of retroactive application of the accounting change to July 1, 2000 increased transaction services fees by $2.6 million, EBITDA by

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Income Taxes

      As of June 30, 2002, the Company had gross deferred tax assets of $14.6 million, with $5.4 million of the deferred tax assets relating to net operating loss carry forwards. The Company recorded a valuation allowance for $9.7 million against the deferred tax assets as of June 30, 2002.

Net Income (Loss)

      The net loss for fiscal year 2002 was $15.5 million, or $(1.09) per common share on a diluted basis, as compared to net income of $1.4 million, or $0.08 per common share for fiscal year 2001.

Stockholders’ Equity

      During fiscal year 2002, stockholders’ equity decreased $10.4 million to $5.9 million from $16.3 million at June 30, 2001. The net loss of $15.5 million for fiscal year 2002 was partially offset by the receipt of $5.2 million of proceeds from the exercise of warrants along with the sale of common stock under the Company’s stock option plans and employee stock purchase plan. The book value per common share issued and outstanding decreased to $0.39 at June 30, 2002 from $1.22 at June 30, 2001.

LIQUIDITY AND CAPITAL RESOURCES

      During fiscal year 2003, cash and cash equivalents decreased by $147,000 primarily as a result of cash used to fund operating activities of $1.2 million and investing activities of $3.3 million, offset by cash generated by financing activities of $4.4 million. Cash used in operating activities to fund losses from the Company’s operations was partially offset by the receipt of federal tax refunds. Cash used in investing activities related to $2.9 million of purchases of equipment, software and leasehold improvements and $400,000 to a business acquisition. Net financing activities related primarily to the funding of a $4.0 million loan by Kojaian Funding, L.L.C. and additional credit revolver borrowings of $5.0 million, offset by the repayment of the term loan borrowings of $4.5 million.

      The cash flow activities described in the preceding paragraph, along with the classification of $5.0 million of the amounts outstanding under the Company’s credit facility as current debt obligations, have resulted in a negative working capital position of approximately $2.7 million as of June 30, 2003. Strengthening of the Company’s working capital position will require improvement in its cash flow from operations, or additional working capital infusions, as to both of which there can be no assurances.

      The Company has historically experienced the highest use of operating cash in the quarter ending March 31, primarily related to the payment of incentive and deferred commission payable balances, which attain peak levels during the quarter ending December 31. Deferred commissions balances of approximately $7.6 million, related to revenues earned in calendar year 2002, were paid in January 2003, and incentive bonuses of approximately $2.0 million were paid in March 2003.

      See Note 19 of Notes to Consolidated Financial Statements in Item 8 of this Report for information concerning earnings before interest, taxes, depreciation and amortization.

      In the event of adverse economic conditions or other unfavorable events, and to the extent that the Company’s cash requirements are not met by operating cash flow or additional debt or equity proceeds, as to whose availability there can be no assurances, the Company may find it necessary to reduce expenditure levels or undertake other actions as may be appropriate under the circumstances. The Company has long-term principal payment obligations under the term portion of its credit facility of $27.3 million as of June 30, 2003. The Company has also fully utilized its revolving credit facility through borrowings of $5.0 million, and entered into a $4.0 million subordinated loan with a related party in May 2003 as described more fully below.

      The Company was subject to certain financial covenants pursuant to the terms of its amended and restated term loan and credit facility (the “Credit Agreement”) by and among the Company, various financial institutions and Bank of America, N.A. as agent and lender (collectively, the “Banks”), including minimum EBITDA (as defined in the

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      In May 2003, Kojaian Capital, L.L.C. (the “New Lender”), a related party to the Company’s controlling stockholder and Chairman, agreed to acquire the Company’s Credit Facility from the Banks. The Company is not a party to the transaction and the terms of the acquisition have not been disclosed. This transaction was effected on June 6, 2003. The Company also received an extension of the waiver through June 30, 2003 relating to defaults that existed in regards to certain financial covenants required by the Credit Agreement from the New Lender.

      On June 20, 2003, the Company and the New Lender entered into the sixth amendment to the Credit Agreement (the “Sixth Amendment”), which improved the financial condition of the Company. Among other things, the Sixth Amendment defers further amortization of the principal obligations due under the Credit Agreement until September 30, 2004, and eliminates certain minimum EBITDA and fixed charge ratio covenant requirements through June 30, 2004. As a result of the Sixth Amendment, the Company was no longer in default under the Credit Agreement relating to the achievement of these financial covenants or otherwise.

      In connection with the anticipated acquisition of the Credit Facility, Kojaian Funding, L.L.C., another affiliated entity of the Company’s controlling stockholder and Chairman, made a $4 million subordinated loan to the Company on May 9, 2003 (the “Subordinated Loan”) for working capital purposes. The Company is obligated to pay interest only on the Subordinated Loan during its term at the rate of 10% per annum, payable monthly in arrears. The entire principal amount of the Subordinated Loan is due on July 15, 2004, although it may be prepaid in whole or in part at any time by the Company without premium or penalty upon fifteen (15) days’ prior notice. The Subordinated Loan, which was consented to by the Banks, is secured by all the assets of the Company and is guaranteed by all the Company’s subsidiaries, although such security interest is subordinate to the interests of the lender under the Credit Facility. The Company paid a 1% financing fee in connection with the closing of the Subordinated Loan.

      The material terms and conditions of the Subordinated Loan were negotiated by a special committee comprised of the disinterested member of the Company’s board of directors, which committee was established for such purpose. The special committee recommended the entering into of the Subordinated Loan to the full board of directors of the Company, which unanimously approved such terms.

      The Company has fully utilized its revolving credit facility through borrowings of $5.0 million. The borrowings under the revolver are due upon termination or maturity of the credit agreement, December 31, 2005. In addition, the Company must repay all outstanding amounts and not re-borrow such funds for a period of 30 consecutive days each December.

      Interest on outstanding borrowings under the credit facility is based upon Bank of America’s prime rate and/or a LIBOR based rate plus, in either case, an additional margin based upon a particular financial leverage ratio of the Company, and will vary depending upon which interest rate options the Company chooses to be applied to specific borrowings. The average interest rate incurred by the Company on the Credit Agreement obligations during fiscal year 2003 was 5.70%. Beginning in September 2004, the term loan facility amortizes on a quarterly basis through December 31, 2005 when both facilities mature.

      Scheduled principal payments on the term loan portion of the Credit Agreement are as follows (in thousands):

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      The variable interest rate structure of the Credit Agreement exposes the Company to risks associated with changes in the interest rate markets. Consequently, the Company entered interest rate protection agreements in March 2001 with banks that were original parties to the Credit Agreement, fixing the interest rates on 50% of the aggregate principal amount of the term loan scheduled to be outstanding for a three year period ending March 31, 2004. The Company established risk management policies and procedures to manage the cost of borrowing obligations, which include the use of interest rate swap derivatives to fix the interest rate on debt with floating rate indices. Further, the Company prohibits the use of derivative instruments for trading or speculative purposes. As of June 30, 2003, the swap agreements had a total notional amount of $10.5 million, with a fixed annual interest rate to be paid by the Company of 5.18%, and a variable rate to be received by the Company equal to three month LIBOR based borrowing rates. The Company has determined that these agreements are to be characterized as effective under the definitions included within Statement of Financial Accounting Standards No. 133, “Accounting for Derivative Instruments and Hedging Activities”.

      On June 30, 2003, the derivative instruments were reported at their fair value of approximately $174,000, net of applicable taxes, in other liabilities in the condensed Consolidated Balance Sheet. The offsetting amount is reported as a deferred loss in Accumulated Other Comprehensive Loss. The Company’s interest rate swaps are treated as cash flow hedges, which address the risk associated with future variable cash flows of debt transactions. Over time, the unrealized gains and losses held in Accumulated Other Comprehensive Loss will be reclassified into earnings in the same periods in which the hedged interest payments affect earnings.

      On March 17, 2003, the Company disclosed several executive management changes as part of a corporate realignment designed to enable the Company to better serve its clients by focusing on its transaction, management and strategic services business and global client capabilities. Specifically, the Company disclosed that the Company’s Chief Executive Officer and Chief Financial Officer had resigned to pursue other opportunities. In addition, the Company entered into a separation agreement with its General Counsel who resigned effective July 2, 2003.

      In conjunction with its corporate realignment, the Company is also instituting various cost control initiatives that it believes will serve to strengthen the Company’s financial position, while at the same time permit the Company to continue to provide the same level of services that it has in the past. Specifically, in addition to a work force reduction of approximately 40 individuals, the Company is further reducing compensation expenses, which is the Company’s single largest expense, as a result of the agreement of certain of its executive officers to reduce their salaries by as much as fifteen percent. The Company believes the foregoing measures, and others, including, but not limited to the streamlining of its national marketing activities, will result in aggregate savings to the Company of up to $15 million on an annualized basis.

      Effective as of April 1, 2003, the Company entered into a series of agreements which altered the structure of the Company’s transaction services operations in Phoenix, Arizona, effectively transferring its existing Phoenix commercial transaction services business to a newly-formed entity whose majority owners are the real estate salespersons previously employed by the Company in its Phoenix office. As part of the overall transaction, this new entity has signed an agreement pursuant to which it shall participate in the Company’s affiliate program. The revenues earned from the new Phoenix structure will be comprised solely of the fees received by the Company from this affiliate agreement, while the gross revenues of the office will no longer be reflected in the Company’s future financial statements (other than revenue earned from trailing contracts the Company retained). The Company also obtained the right to acquire a minority interest in this entity, which right it exercised in May 2003, and will record its proportionate share of the future operations of the new entity in its financial statements.

      On September 19, 2002, Kojaian Ventures, L.L.C. (“KV”), a related party, exercised its right to convert a subordinated promissory note it held into preferred stock of the Company. As a result of this conversion, 11,725 shares of the Company’s Series A Preferred Stock were issued to KV, having a stated value of $1,000 per share. The outstanding related party principal and interest obligations totaling $11,725,000 were reclassified to stockholders’ equity on the date of conversion. Issuance costs of $783,000, previously offset against the note obligations, were also reclassified as a reduction of additional paid in capital. The preferred stock carries a dividend coupon of 12%, compounded quarterly on a cumulative basis, although no payments of dividends may be made until the credit facility has been terminated. Accrued dividends at June 30, 2003 totaled approximately $1.1 million.

      The preferred stock contains liquidation preference and voting rights equal to 990 common shares for each share of preferred stock and votes, along with holders of common stock, on all matters on an as liquidated basis. The

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      On October 17, 2002, the Company’s common stock was de-listed from the New York Stock Exchange (“NYSE”), due to the Company’s book value and market capitalization value being below the minimum levels required by the NYSE’s listing standards. The Company’s common stock commenced trading on the over-the-counter market (“OTC”) effective October 17, 2002, under the symbol GBEL.OB, and ceased trading on the NYSE prior to the opening that day.

      In August 1999, the Company announced a program through which it may purchase up to $3 million of its common stock on the open market from time to time as market conditions warrant. As of June 30, 2003, the Company had repurchased 359,900 shares at a total cost of approximately $2.0 million. No shares were repurchased under this program during fiscal years 2003 and 2002.

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

      The Company’s bank debt obligations are floating rate obligations whose interest rate and related monthly interest payments vary with the movement in LIBOR. See Note 6 of Notes to the Consolidated Financial Statements in Item 8 of this Report for additional information. As of June 30, 2003, the outstanding principal balances on these long-term debt obligations totaled $27.3 million. Since interest payments on these obligations will increase if interest rate markets rise, or decrease if interest rate markets decline, the Company is subject to cash flow risk related to these debt instruments. In order to mitigate this risk, terms of the credit agreement required the Company to enter into interest rate swap agreements to effectively convert a portion of its floating rate term debt obligations to fixed rate debt obligations through March 2004. Interest rate swaps generally involve the exchange of fixed and floating rate interest payments on an underlying notional amount. As of June 30, 2003, the Company had $10.5 million in notional amount interest rate swaps outstanding in which the Company pays a fixed rate of 5.18% and receives a three-month LIBOR based rate from the counter-parties. The notional amount of the interest rate swap agreements is scheduled to decline as follows:

      When interest rates rise the interest rate swap agreements increase in fair value to the Company and when interest rates fall the interest rate swap agreements decline in value to the Company. As of June 30, 2003, there was a net decline in interest rates since the Company had entered into the agreements, and the interest rate swap agreements were in an unrealized loss position to the Company of approximately $174,000, net of taxes.

      To highlight the sensitivity of the interest rate swap agreements to changes in interest rates, the following summary shows the effects of a hypothetical instantaneous change of 100 basis points (BPS) in interest rates as of June 30, 2003 (in thousands):

      The Company does not utilize financial instruments for trading or other speculative purposes, nor does it utilize leveraged financial instruments.

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Item 8. Financial Statements and Supplementary Data

REPORT OF INDEPENDENT AUDITORS

The Board of Directors and Stockholders

      We have audited the accompanying consolidated balance sheets of Grubb & Ellis Company as of June 30, 2003 and 2002, and the related consolidated statements of operations, stockholders’ equity, and cash flows for each of the three years in the period ended June 30, 2003. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

      We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

      In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Grubb & Ellis Company at June 30, 2003 and 2002, and the consolidated results of its operations and its cash flows for each of the three years in the period ended June 30, 2003, in conformity with accounting principles generally accepted in the United States.

      As discussed in Note 1 to the consolidated financial statements, in fiscal 2003 the Company changed its method of accounting for goodwill.

ERNST & YOUNG LLP

Chicago, Illinois

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GRUBB & ELLIS COMPANY

CONSOLIDATED BALANCE SHEETS

JUNE 30, 2003 AND 2002

The accompanying notes are an integral part of the consolidated financial statements.

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GRUBB & ELLIS COMPANY

CONSOLIDATED STATEMENTS OF OPERATIONS

FOR THE YEARS ENDED JUNE 30, 2003, 2002 AND 2001

The accompanying notes are an integral part of the consolidated financial statements.

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GRUBB & ELLIS COMPANY

FOR THE YEARS ENDED JUNE 30, 2003, 2002 AND 2001

The accompanying notes are an integral part of the consolidated financial statements.

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GRUBB & ELLIS COMPANY

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE YEARS ENDED JUNE 30, 2003, 2002 AND 2001