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UNITED STATES

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

2215 Sanders Road, Suite 400,

(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 20, 2004 was approximately $15,834,577.

      The number of shares outstanding of the registrant’s common stock as of September 20, 2004 was 15,114,871 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, 2004) are incorporated by reference into Part III of this Report.

GRUBB & ELLIS COMPANY

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GRUBB & ELLIS COMPANY

Item 1. Business

General

      Grubb & Ellis Company, a Delaware corporation organized in 1980, is the successor by merger to a real estate brokerage company first established in California in 1958. Grubb & Ellis Company and its wholly owned subsidiaries (“Grubb & Ellis” or the “Company”) is an integrated real estate services firm with a total of 4,100 employees as of June 30, 2004. The Company employs more than 750 transaction professionals in 41 owned offices, and has access to over 400 additional transaction professionals in 53 affiliate offices. Including its alliance with Knight Frank, one of Europe’s leading real estate consulting firms, it has the collective resources of over 9,000 individuals in more than 200 offices in 30 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 office, industrial and retail buildings, as well as the acquisition and disposition of 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, exit strategies, market forecasts, strategic planning 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 151 million square feet of property under management as of June 30, 2004.

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% and dispositions and acquisitions accounting for the remaining 25% of that revenue. The leasing activity represents a 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 17 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 2004 represented 57% 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 2004, these management services represented the remaining 43% of the Company’s total revenue.

New Credit Facility

      Effective June 11, 2004, the Company entered into a $40 million senior secured credit agreement with Deutsche Bank, which has a three-year term with a one-year extension option and is comprised of a $25 million term loan facility and a $15 million revolving credit facility. Repayment of the credit agreement is collateralized by substantially all of the Company’s assets. The new credit arrangement replaced the Company’s $27.3 million senior credit facility and $4 million subordinated loan held by affiliated entities of the Company’s controlling stockholder and Chairman.

      The Company used proceeds from the $25 million term loan portion of the new credit facility, along with cash reserves of approximately $7.6 million, to pay off all of its outstanding credit obligations and closing costs. The interest rate for revolving or long-term advances under the credit facility will be, at the election of the Company, either (i) Deutsche Bank’s prime lending rate plus 2.50%, or (ii) the London interbank offered rate of major banks for deposits in U.S. dollars (LIBOR), plus 3.50%. The Company will not be subject to principal amortization under the term loan for the first two years. The credit agreement also contains customary covenants related to limitations on indebtedness, acquisition, investments and dividends, and maintenance of certain financial ratios and minimum cash flow levels.

Strategic Initiatives

      Over the past year, the Company has dedicated its resources to those core businesses that offer the highest return potential and value to its clients. This focus has led to increased recruiting and retention of professionals, an increase in the size and volume of transactions and strengthened client relationships.

      As the Company looks to the future, it continues to build on its core strengths. The Company is also focused on building its presence in key markets such as Chicago, San Francisco, New York, Atlanta and Washington, D.C. Management is committed to embracing programs that will lead to increased productivity and retention of its professionals. These programs include continuing education and training for its most successful and tenured professionals and knowledge sharing. The Company recently launched its Specialty Council system, which is designed to encourage professionals in a particular specialty to gain information and share knowledge with their peers on a local, regional and national level. Since the creation of the Specialty Councils in the first quarter of 2004, the Company has witnessed increased collaboration among its professionals and more efficient prospecting of new clients.

      Also in early 2004, the Company created Global Client Services to provide a single point of contact and strategic account management for clients with multi-market and multi-product needs. Global Client Services is comprised of Grubb & Ellis Management Services, Inc., the Institutional Investment Group, the Corporate Services Group, the Grubb & Ellis Affiliate Program and the Company’s strategic alliances, including Knight Frank in Europe, Africa and Asia Pacific and Avison Young in Canada. Shortly after forming Global Client Services, the Company repositioned the Institutional Investment Group and added staff to focus on the needs of a targeted group of strategic investment clients. The initiative is expected to result in more property management and leasing assignments, which ultimately should translate into increased disposition opportunities at the end of the “hold cycle” on these assets.

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.

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      Leasing commissions in most of the markets where the Company competes improved over the past 12 months, fueled by an increase in business capital spending and hiring compared with the prior three years. Investment market conditions remained very strong as low interest rates, improved leasing conditions and the questionable outlook for stocks and bonds attracted buyer interest. These factors contributed to an industry-wide increase in commission revenue. Leasing commission rates have held firm recently, although sales commission rates remain under pressure, especially for larger institutional-grade properties.

      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 national 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, regional or national 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 impact the management, development, use, and/or sale of real estate. The Company’s financial results and competitive position for the fiscal year 2004 have not been materially impacted by its compliance with environmental laws or regulations. Such laws and regulations tend to discourage sales and leasing activities and mortgage lending with respect to some properties, and may therefore adversely affect the Company and the industry in general. Failure of the Company to disclose environmental issues in connection with a real estate transaction may subject the Company to liability to a buyer or lessee of property. Applicable laws and contractual obligations to property owners could also subject the Company to environmental liabilities through the provision of management services. Environmental laws and regulations impose liability on current or previous real property owners or operators for the cost of investigating, cleaning up or removing contamination caused by hazardous or toxic substances at the property. The Company may be held liable as an operator for such costs in its role as an on-site property manager. Liability can be imposed even if the original actions were legal and the Company had no knowledge of, or was not responsible for, the presence of the hazardous or toxic substances. Further, the Company may also be held responsible for the entire payment of the liability if it is subject to joint and several liability and the other responsible parties are unable to pay. The Company may also be liable under common law to third parties for damages and injuries resulting from environmental contamination emanating from the site, including the presence of asbestos containing materials. Insurance for such matters may not always be available. Additionally, new or modified environmental regulations could develop in a manner that could adversely affect the Company’s transaction and management services. See Note 13 of Notes to Consolidated Financial Statements in Item 8 of this Report for additional information.

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, 2004, 2003 and 2002, as a percentage of total annual revenue, ranged from a high of 30.1% to a low of 20.8%.

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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” 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 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.

Item 2. Properties

      The Company leases all of its office space through non-cancelable operating leases. The terms of the leases vary depending on the size and location of the office. As of June 30, 2004, the Company leased approximately 664,000 square feet of office space in 68 locations under leases which expire at various dates through February 28, 2014. 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. See Note 13 of Notes to Consolidated Financial Statements in Item 8 of this Report for additional information, which is incorporated herein by reference.

Item 3. Legal Proceedings

      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.

Item 4. Submission of Matters to a Vote of Security Holders

      No matters were submitted to a vote of security holders during the fourth quarter of fiscal year 2004.

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GRUBB & ELLIS COMPANY

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 each quarter of the fiscal year ended June 30, 2004 and 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.

      As of September 20, 2004, there were 1,132 registered holders of the Company’s common stock and 15,114,871 shares of common stock outstanding, of which 11,252,779 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, 2004 or 2003.

Sales of Unregistered Securities

      The Company did not effect the sale of any unregistered securities during the 2004 fiscal year. Information with respect to the sale of unregistered securities in prior fiscal years can be found in Note 8 of Notes to Consolidated Financial Statements in Item 8 of this Report, and such disclosure is incorporated herein by reference.

Equity Compensation Plan Information

      The following table provides information on equity compensation plans of the Company as of June 30, 2004.

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Equity Compensation Plans Not Approved by Stockholders

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

      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 $3.2 million, $9.5 million, $1.75 million, $6.2 million and $2.65 million for the fiscal years ended June 30, 2004, 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, and 15 of the Notes to Consolidated Financial Statements in Item 8 of this Report.

Note Regarding Forward-Looking Statements

      This Annual Report 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. 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. Such statements can be identified 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,”

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      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 or 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 favorable results and maintain or increase stockholder value include, among other things:

      •     Decline in the Volume of Real Estate Transactions and Prices of Real Estate. Approximately 60% of the Company’s revenue is 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 $25.0 million of outstanding debt in the form of a senior credit facility. Any material downturn in the Company’s revenue or increase in its costs and expenses could impair the Company’s ability to meet its debt obligations.

      •     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, its business and operating results could be materially and adversely affected.

      •     Risks Associated with Strategic Alliances and Acquisitions. As discussed in Part I, Item I of this Annual Report under “Strategic Initiatives,” the Company has established certain strategic alliances. 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 any integration will ultimately be successful, that the Company’s management will be able to effectively manage any acquired business or strategic alliance or that any acquisition or strategic alliance will benefit the Company overall.

      •     The Company Faces Intense Competition. Part I, Item I of this Annual Report under “Industry and 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.

      •     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.

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      •     Control by Existing Stockholders. A single investor has a majority of the voting power of the Company at June 30, 2004. 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 U.S. generally accepted accounting principles, 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.

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, 2004 and 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

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RESULTS OF OPERATIONS

Overview

      The Company reported net income of $14.2 million for the year ended June 30, 2004, reflecting a significant improvement over fiscal 2003 results. Modest improvements in transaction and management services revenue were realized along with substantial reductions in salaries, wages and benefits expense, and selling, general and administrative expense resulting from the Company’s cost control initiatives. Lower severance, office closure and other special charges were also incurred in fiscal 2004 compared to 2003.

Fiscal Year 2004 Compared to Fiscal Year 2003

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 Company’s services revenues, and include fees related to both property and facilities management outsourcing and business services.

      Total services revenue of $440.6 million was recognized for fiscal year 2004 as compared to revenue of $425.9 million for fiscal year 2003. Transaction fees increased by $8.4 million in the current fiscal year over the same period in 2003 due to the improving revenues in certain markets, primarily the investment sales market in Southern California and higher leasing activity in the Northeast United States. This increase was partially offset by the change in ownership structure of the Company’s transaction services operations in Phoenix, Arizona to an affiliated entity. The Company now earns revenue comprised solely of the fees received under the affiliate agreement, as opposed to including the full operations of the office in its financial statements in periods prior to the change in ownership structure in April 2003. The Company also realized a similar decrease in transaction commissions expense due to these factors, and, to a lesser extent, decreases in salaries, wages and benefits expense and selling, general and administrative expense due to the Phoenix ownership change. Management services fees increased by $6.2 million or 3.3% during that same period due to increased fees, as well as reimbursed revenues related to salaries, wages and benefits, as described below.

Costs of Services

      Transaction commissions expense has historically been 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 transaction commissions at rates that increase upon achievement of certain levels of production. As a percentage of gross transaction revenue, related commission expense remained relatively flat at 60.3% for each of fiscal years 2004 and 2003.

      Reimbursable expenses, related to salaries, wages and benefits, increased by $3.5 million, or 2.6%, in the current fiscal year over the same period in 2003, primarily due to the staffing requirements of new facility management assignments.

      Salaries and other direct costs increased by $4.3 million, or 13.4%, in the current fiscal year over the same period in 2003 primarily due to the staffing requirements and other direct costs of increased business services contracts.

Costs and Expenses

      Salaries, wages and benefits decreased by $8.6 million, or 15.6%, during fiscal year 2004 as compared to 2003 primarily from cost savings related to a reduction in workforce in March 2003. The Company also realized decreases related to lower health and workers compensation insurance claims during the fiscal year ended June 30, 2004. These

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      Depreciation and amortization expense for fiscal year 2004 decreased by 13.7% to $6.7 million from $7.8 million in the comparable fiscal year 2003 as the Company continued to monitor its investments in equipment, software and leasehold improvements. In addition 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 $1.3 million was recognized in fiscal year 2004, compared to $1.6 million in the prior year.

      During fiscal year 2004, the Company recorded special charges totaling $3.2 million, consisting primarily of $2.4 million related to the disposition of the Wadley-Donovan Group, and office closure costs of $855,000. The special charges related primarily to the write-off of unamortized goodwill recorded when the Wadley-Donovan Group was acquired in February 2002. See Note 15 of Notes to Condensed Consolidated Financial Statements for additional information.

      Interest income decreased during fiscal year 2004 as compared to fiscal year 2003 as a result of lower investment yield rates.

      Interest expense incurred during fiscal year 2004 and 2003 was due primarily to the Company’s term loan borrowings under the credit facility which was purchased from a bank group in June 2003 by an affiliated entity of the Company’s controlling stockholder and Chairman. The Company refinanced this facility with an unaffiliated financial institution in June 2004. Interest expense was also incurred due to the note payable-affiliate funded in March 2002 and subsequently converted to preferred stock in September 2002, and a second note payable-affiliate funded in May 2003 and subsequently repaid in June 2004. See Note 8 of Notes to Consolidated Statements in Item 8 of this Report for additional information.

Income Taxes

      As of June 30, 2004, the Company had gross deferred tax assets of $15.9 million, with $10.1 million of the deferred tax assets relating to net operating loss carryforwards which will be available to offset future taxable income through 2023. Management believes that the Company will generate sufficient future taxable income to realize a portion of these net deferred tax assets in the foreseeable short term future; therefore, the Company has recorded a valuation allowance for $9.6 million against the deferred tax assets as of June 30, 2004 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 future events, the Company will continue to review its operations periodically to assess whether and when the remaining deferred tax assets may be realized and adjust the valuation allowance accordingly. The net income tax provision recorded in 2004 reflects a benefit for the decrease in the valuation allowance of $7.9 million, compared to a charge of $7.7 million for an increase in the allowance 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 income to common stockholders for fiscal year 2004 was $12.6 million, or $0.83 per common share on a diluted basis, as compared to a net loss of $17.9 million, or $(1.19) per common share for fiscal year 2003. Dividends accrued on the Series A Preferred Stock issued by the Company were $1.6 million in fiscal year 2004 and $1.1 million in fiscal year 2003. See Note 8 of Notes to Consolidated Financial Statements for additional information.

Stockholders’ Equity

      During fiscal year 2004, stockholders’ equity increased by $14.4 million, to $14.6 million from $255,000 at June 30, 2003, as a result of net income generated during the fiscal year. The book value per common share issued and outstanding increased to $0.97 at June 30, 2004 from $0.02 at June 30, 2003.

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Fiscal Year 2003 Compared to Fiscal Year 2002

Revenue

      Total revenue of $425.9 million was recognized for fiscal 2003 as compared to revenue of $431.4 million for fiscal year 2002. Transaction services fees decreased by $21.2 million for the fiscal year 2003 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 $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 increased assignments.

Costs of Services

      As a percentage of gross transaction revenue, related commission expense increased slightly to 60.3% for fiscal year 2003 as compared to 59.9% for fiscal year 2002.

      Reimbursable expenses, related to salaries, wages and benefits, increased by $16.9 million, or 14.4% during fiscal year 2003 as compared to 2002 due to the staffing requirements of new assignments.

      Salaries and other direct costs increased slightly by $557,000, or 1.8% during fiscal year 2003 as compared 2002.

Costs and Expenses

      Salaries, wages and benefits decreased by $16.2 million or 22.3%, 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 $2.6 million, or 4.7%, 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 to $7.8 million from $10.5 million in fiscal year 2002. 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.

      During fiscal year 2002, the Company concluded long standing litigation proceedings on a 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 litigation 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

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      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.

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. The Company recorded a valuation allowance for $17.4 million against the deferred tax assets as of June 30, 2003. 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.

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. The book value per common share issued and outstanding decreased to $0.02 at June 30, 2003 from $0.39 at June 30, 2002.

LIQUIDITY AND CAPITAL RESOURCES

      During fiscal year 2004, cash and cash equivalents increased by $1.0 million. Cash generated by operating activities totaled $14.5 million, and was offset by cash used in investing activities of $1.1 million and financing activities of $12.4 million. Cash used in investing activities related primarily to $1.2 million of purchases of equipment, software and leasehold improvements. Net financing activities related primarily to the repayments of credit facility debt of $32.3 million, $4.0 million loan from an affiliate, and $1.1 million of financing fees. The majority of the funds needed for this refinancing were provided by the funding of a new $25.0 million credit facility debt from an unaffiliated financial institution.

      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 typically peak during the quarter ending December 31. Deferred commissions balances of approximately $10.1 million, related to revenues earned in calendar year 2003, were paid in January 2004, and production and incentive bonuses of approximately $4.8 million were paid in March 2004.

      See Note 17 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, the Company may find it necessary to reduce expenditure levels or undertake other actions as may be appropriate under the circumstances. The

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      Interest on outstanding borrowings under the credit facility is based upon Deutsche Bank 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 all credit facility obligations during fiscal year 2004 was 5.3%.

      Scheduled principal payments on the term loan portion of the Credit Agreement total $2.0 million in the fiscal year ending June 30, 2006 and $23.0 million in the fiscal year ending June 30, 2007 when the term loan is scheduled to mature. The Company also has an option to extend the term loan maturity for an additional year.

      In addition, the Company has contractual obligations under leases related to office space which it occupies throughout the country. In total the Company’s lease and debt obligations which are due over the next five years are as follows (in thousands):

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

Interest Rate Risk— Derivatives

      The Company’s credit facility debt obligations are floating rate obligations whose interest rate and related monthly interest payments vary with the movement in LIBOR. As of June 30, 2004, the outstanding principal balances on these debt obligations totaled $25.0 million. 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 these debt instruments. In order to mitigate this risk, terms of the previous 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. Through March 31, 2004, the expiration date of the agreements, the Company had varying notional amount interest rate swaps outstanding in which the Company paid a fixed rate of 5.18% and received a three-month LIBOR based rate from the counter-parties.

      The terms of the new credit agreement executed by the Company in June 2004 required the Company to enter into interest rate protection agreements to effectively cap the variable interest rate exposure on a portion of the obligations for a period of two years. The Company executed such an interest agreement with Deutsche Bank AG in July 2004, which will provide for quarterly payments to the Company whenever the interest rate on the underlying notional amounts exceeds 3.5%, equal to the interest amount paid in excess of the 3.5% rate.

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

Interest rate risk— Debt

      The Company’s earnings are affected by changes in short term interest rates as a result of the variable interest rates incurred on the Company’s credit facility obligations. However, due to its purchase of the interest rate cap agreement described above, the effects of interest rate changes are limited. If LIBOR borrowing rates increase by

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Item 8. Financial Statements and Supplementary Data

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Stockholders

      We have audited the accompanying consolidated balance sheets of Grubb & Ellis Company as of June 30, 2004 and 2003, and the related consolidated statements of operations, stockholders’ equity, and cash flows for each of the three years in the period ended June 30, 2004. 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 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 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, 2004 and 2003, and the consolidated results of its operations and its cash flows for each of the three years in the period ended June 30, 2004, in conformity with U.S. generally accepted accounting principles.

ERNST & YOUNG LLP

Chicago, Illinois

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GRUBB & ELLIS COMPANY

CONSOLIDATED BALANCE SHEETS

JUNE 30, 2004 AND 2003

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, 2004, 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 STOCKHOLDERS’ EQUITY

FOR THE YEARS ENDED JUNE 30, 2004, 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 CASH FLOWS

FOR THE YEARS ENDED JUNE 30, 2004, 2003 AND 2002