Grubb & Ellis 10K 2005 Annual report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended June 30, 2005

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

SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission file number 1-8122

GRUBB & ELLIS COMPANY

(Exact name of registrant as specified in its charter)


Delaware (State or other jurisdiction of Incorporation or organization)		94-1424307 (IRS Employer Identification No.)

2215 Sanders Road, Suite 400,

Northbrook IL, 60062

(Address of principal executive offices) (Zip Code)

(847) 753-7500

(Registrant’s telephone number, including area code)

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


Title of each class Common Stock		Name of each exchange on which registered None

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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x

The aggregate market value of voting common stock held by non-affiliates of the registrant as of December 31, 2004 was approximately $17,756,453.

The number of shares outstanding of the registrant’s common stock as of September 22, 2005 was 15,117,604 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, 2005) are incorporated by reference into Part III of this Report.

GRUBB & ELLIS COMPANY

FORM 10-K

TABLE OF CONTENTS


		Page

Cover Page			1
Table of Contents			2
Part I.
Item 1.	Business		3
Item 2.	Properties		7
Item 3.	Legal Proceedings		7
Item 4.	Submission of Matters to a Vote of Security Holders		7
Part II.
Item 5.	Market for Registrant’s Common Equity and Related Stockholder Matters		8
Item 6.	Selected Financial Data		10
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		10
Item 7A.	Quantitative and Qualitative Disclosures About Market Risk		18
Item 8.	Financial Statements and Supplementary Data		20
Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure		47
Item 9A.	Controls and Procedures		47
Part III.
Item 10.	Directors and Executive Officers of the Registrant		48
Item 11.	Executive Compensation		48
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholders Matters		48
Item 13.	Certain Relationships and Related Transactions		48
Item 14	Principal Accountant Fees and Services		48
Part IV.
Item 15.	Exhibits, Financial Statement Schedules, and Reports on Form 8-K		49
Signatures			55
Exhibit Index			56
Amendment to Employment Agreement
Subsidiaries
Consent of Independent Registered Public Accounting Firm
Powers of Attorney
Section 302 Certifications
Sections 906 Certification

GRUBB & ELLIS COMPANY

PART I

Item 1. Business

General

Grubb & Ellis Company, a Delaware corporation organized in 1980, is the successor by merger to a real estate brokerage company first established in California in 1958. Grubb & Ellis Company and its wholly owned subsidiaries (“Grubb & Ellis” or the “Company”) is one of the world’s leading full-service commercial real estate companies. The Company leverages local expertise with its global reach to provide innovative, customized solutions for real estate owners, corporate occupants and investors. As of June 30, 2005, the Company had 4,100 employees and more than 800 transaction professionals in 47 owned offices. In addition, it has access to over 700 additional transaction professionals in 57 affiliate offices. 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 partners, 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, project management 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 153 million square feet of property under management as of June 30, 2005.

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 55% and dispositions and acquisitions accounting for the remaining 45% of that revenue. The leasing activity represents a blend of tenant representation, landlord representation and dual-representation. Grubb & Ellis’ transaction professionals are supported by an extensive platform, including 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. Approximately 75% of the group’s revenue is comprised of reimbursed salaries, wages and benefits related generally to on-site employees at the clients’ facilities. Management service fees generated from third-party property management, facilities management, business services and other related activities 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 16 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 2005 represented 58% 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.

The Company also delivers these services to corporate clients through a coordinated account management process that includes a single point of contact. In addition to traditional transaction services, the Company also provides its corporate clients certain consulting related services, including site selection, feasibility studies, exit strategies, market forecasts, appraisals, project management, 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 on-site 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 2005, these management services represented the remaining 42% of the Company’s total revenue.

Knight Frank

On September 27, 2005, the Company notified Knight Frank in writing that it would not renew its strategic global alliance with Knight Frank, and accordingly, that the parties’ five year relationship would expire on December 31, 2005 in accordance with the terms of the existing alliance agreement. All corporate services contracts currently in existence pursuant to the alliance agreement will be honored and fulfilled in accordance with their terms. The Company is currently considering a number of strategic alternatives, including, among others, other alliances, company-owned and other structures. The aggregate fees earned by the Company from its strategic alliance with Knight Frank were not material to the Company’s consolidated results of operations for the fiscal periods covered by this Annual Report on Form 10-K.

Preferred Stock

In December 2004, the Company entered into an agreement (the “Preferred Stock Exchange Agreement”) with Kojaian Ventures, LLC (“KV”), a related party, in KV’s capacity as the holder of all the Company’s issued and outstanding 11,725 shares of Series A Preferred Stock which carried a preferential cumulative dividend of 12% per annum (the “Series A Preferred Stock”). Pursuant to the Preferred Stock Exchange Agreement, the Company paid to KV all accrued and unpaid dividends with respect to the Series A Preferred Stock for the period September 19, 2002, the date of issuance of the Series A Preferred Stock, up to and through December 31, 2004. In exchange therefore, KV agreed to eliminate in its entirety, as of January 1, 2005, the 12% preferential cumulative dividend payable on the Series A Preferred Stock. Upon the closing of the transaction in January 2005, the Company delivered to KV the one time accrued dividend payment of approximately $3.6 million.

Preferred Stock has a preference over the Company’s Common Stock in the event that the Company undergoes a liquidation, dissolution or certain change in control transactions. In such situations, the holder of the New Preferred Stock would be entitled to payment of the greater of (i) $23.5 million (twice the face value of the New Preferred Stock) or (ii) the equivalent of 40% of the consideration to be paid to all the equity holders of the Company, thereby diluting the return that would otherwise be available to the holders of the Common Stock of the Company had this preference not existed.

The total ownership interest of KV and its affiliates in the Company (the combined total holdings of the New Preferred Stock and Common Stock) remains the same as it was prior to the exchange, which is currently equal to approximately 57% of the Company’s total voting power. The Company’s Board of Directors believes, however, that common stockholders of the Company who are not affiliated with KV benefit favorably from the elimination of the 12% preferential dividend resulting from the exchange of the old Series A Preferred Stock for the New Preferred Stock which carries no preferential dividend.

Like the Series A Preferred Stock, the New Preferred Stock is not convertible into common stock, but nonetheless votes on an “as liquidated basis” along with the holders of common stock on all matters. Consequently, the New Preferred Stock, like the Series A Preferred Stock, currently is entitled to the number of votes equal to 11,173,925 shares of common stock, or approximately 42.5% of all voting securities of the Company. In addition, as noted above, with the elimination of the preferential cumulative dividend, the New Preferred Stock will now only be entitled to receive dividends if and when dividends are declared by the Company on, and paid to holders of, the Company’s common stock. The holders of the New Preferred Stock will receive dividends, if any, based upon the number of voting common stock equivalents represented by the New Preferred Stock.

Credit Facility

On March 31, 2005, the Company amended its secured credit facility that it initially entered into in June 2004 with Deutsche Bank. Under the amended credit facility, the $25 million term loan portion of the credit facility was unchanged. The revolving credit line component of the credit facility, however, was increased from $15 million to $35 million, of which approximately $32 million is currently available. In addition, the term of the credit facility was extended by one year, and it now matures in June 2008, subject to the Company’s right to extend the term for an additional twelve months through June 2009. Other modifications to the credit facility include the elimination of any cap regarding the aggregate consideration that the Company may pay for acquisitions, the ability to repurchase up to $30 million of its Common Stock, and the elimination of all term loan amortization payments due before maturity. Other principal economic terms and conditions of the credit facility remain substantially unchanged. The Company paid closing costs totaling approximately $688,000 in connection with the amendment, of which $550,000 were recorded as deferred financing fees and are being amortized over the amended term of the agreement.

Strategic Initiatives

The Company named Mark E. Rose Chief Executive Officer in March 2005. Since that time, the Company has undergone an extensive strategic planning process, which is expected to be complete within the next several months. Although the plan has not been finalized, the Company expects to adopt a growth strategy based on increasing its offering of client solutions for material and global real estate users and investors. It intends to focus on its key differentiators, including: its extensive market coverage, specialties, innovation, research, the use of technology and teamwork. Priorities will include increased recruiting and retention of professionals, an increase in the size and volume of transactions, capturing more of the growing corporate outsourcing market and strengthened client relationships by providing innovative solutions.

As the Company looks to the future, it continues to build on its core strengths and focus on building its presence in key markets. Management is committed to embracing programs that will lead to increased productivity and retention of its professionals. These programs include continuing education, training, knowledge sharing and increased referrals. The Company instituted its Specialty Council system in fiscal 2004, 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,

the Company has witnessed increased collaboration among its professionals and more efficient prospecting of new clients.

Throughout 2005, the Company has encouraged teamwork as a way to provide better solutions for its clients and garner its share of the growing corporate outsourcing market. Through its local transaction offices and Global Client Services, which includes management services, affiliate network, corporate services and institutional services, the Company is able to provide a single point of contact and strategic account management for clients with multi-market and multi-product needs. The strategy is expected to result in more facilities management and corporate services assignments, which typically generate more consistent, annuity-type revenue.

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.

Leasing commissions in most of the markets where the Company competes have remained stable over the past 12 months, as business capital spending and hiring have remained constant compared to the prior year. 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 2005 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 12 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, 2005, 2004 and 2003, as a percentage of total annual revenue, ranged from a high of 29.2% to a low of 22.4%.

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, 2005, the Company leased approximately 630,000 square feet of office space in 60 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 12 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 12 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 2005.

GRUBB & ELLIS COMPANY

PART II


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

Market and Price Information

The principal market for the Company’s common stock is the over-the-counter market (“OTC”). 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 years ended June 30, 2005 and 2004.


	2005				2004

	High		Low		High		Low

First Quarter	$	4.26	$	1.55	$	1.50	$	1.01
Second Quarter	$	5.20	$	3.60	$	1.20	$	0.80
Third Quarter	$	4.94	$	4.10	$	1.20	$	0.87
Fourth Quarter	$	7.00	$	4.75	$	2.00	$	0.90

As of September 22, 2005, there were 1,088 registered holders of the Company’s common stock and 15,117,604 shares of common stock outstanding, of which 9,686,924 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, 2005 or 2004. Any such dividends declared and paid are restricted in amount by provisions contained in the credit agreement between the Company and various lenders to not more than 100% of Excess Cash Flow generated in the prior fiscal year, as that term is defined in the credit agreement.

Sales of Unregistered Securities

Pursuant to that certain Preferred Stock Exchange Agreement dated December 30, 2004 between the Company and Kojaian Ventures, L.L.C., the Company issued 11,725 shares of Series A-1 Preferred Stock of the Company (“New Preferred Stock”) on January 4, 2005 to Kojaian Ventures, L.L.C. in exchange for 11,725 shares of Series A Preferred Stock of the Company (“Series A Preferred Stock”) held by such entity. The issuance of the New Preferred Stock by the Company was exempt from the registration requirements of Section 5 of the Securities Act of 1933, as amended, as it constituted a transaction by an issuer not involving a public offering. See Note 8 of Notes to Consolidated Financial Statements in Item 8. of this Report for additional information, which is incorporated herein by reference.

On March 8, 2005, the Company granted 159,575 restricted shares of the Company’s common stock, with a fair market value of Seven Hundred and Fifty Thousand Dollars ($750,000) on the immediately preceding trading day, to Mark E. Rose, the Company’s Chief Executive Officer. Such restricted shares, which vest in equal, annual installments of thirty-three and one-third percent (33¹/3%) on each of the first, second and third anniversaries of March 8, 2005 subject to the terms and conditions of that certain Restricted Stock Agreement dated March 8, 2005 by and between the Company and Mr. Rose, were issued in connection with that certain Employment Agreement dated March 8, 2005 by and between the Company and Mr. Rose. The issuance of the restricted shares by the Company to Mr. Rose was exempt from the registration requirements of Section 5 of the Securities Act of 1933, as amended, as it constituted a transaction by an issuer not involving a public offering. Additional information regarding the foregoing issuance can be found in the Company’s Current Report on Form 8-K dated March 8, 2005, and such disclosure is incorporated herein by reference.

On June 6, 2005, the Company granted 84,746 restricted shares of the Company’s common stock, with a fair market value of Five Hundred Thousand Dollars ($500,000) on the immediately preceding trading day, to Maureen A. Ehrenberg, the Company’s Executive Vice President and President of both Grubb & Ellis Management Services, Inc. and Global Client Services. Such restricted shares, which vest on December 30, 2007 subject to the terms and conditions of that certain Restricted Stock Agreement dated June 6, 2005 by and between the Company and Ms. Ehrenberg, were issued in connection with that certain Employment Agreement effective as of January 1, 2005 by and between the Company and Ms. Ehrenberg. The issuance of the restricted shares by the Company to Ms. Ehrenberg was exempt from the registration requirements of Section 5 of the Securities Act of 1933, as amended, as it constituted a transaction by an issuer not involving a public offering. Additional information regarding the foregoing issuance can be found in the Company’s Current Report on Form 8-K dated June 6, 2005, and such disclosure is incorporated herein by reference.

On September 7, 2005, the Company granted 37,314 restricted shares of the Company’s common stock, with a fair market value of Two Hundred and Fifty Thousand Dollars ($250,000) on the immediately preceding trading day, to Robert H. Osbrink, the Company’s Executive Vice President and the President of Transaction Services. Such restricted shares, which vest on December 29, 2007 subject to the terms and conditions of that certain Restricted Share Agreement dated September 7, 2005 by and between the Company and Mr. Osbrink, were issued in connection with that certain First Amendment to Employment Agreement dated as of September 7, 2005 by and between the Company and Mr. Osbrink. The issuance of the restricted shares by the Company to Mr. Osbrink was exempt from the registration requirements of Section 5 of the Securities Act of 1933, as amended, as it constituted a transaction by an issuer not involving a public offering.

Equity Compensation Plan Information

The following table provides information on equity compensation plans of the Company as of June 30, 2005.

Number of securities

remaining available for

future issuance under

Number of securities to be

Weighted average

equity compensation

issued upon exercise of

exercise price of

plans (excluding

outstanding options,

securities reflected in

warrants and rights

column (a))

Plan Category

(a)

(b)

(c)

Equity Compensation plans approved by security holders

853,022

4.60

2,273,952

Equity compensation plans not approved by security holders

592,130

9.18

1,336,983

Total

1,445,152

6.48

3,610,935

Equity Compensation Plans Not Approved by Stockholders

Information regarding the Grubb & Ellis 1998 Stock Option Plan can be found in Note 10 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:


		For the Years Ended June 30,

		2005		2004		2003			2002			2001

		(in thousands, except share data)
Total services revenue		$	463,535	$	440,554	$	425,946		$	431,446		$	516,610
Net income (loss) to common stockholders			12,378		12,576		(17,902	)		(15,477	)		1,369
Benefit (provision) for income taxes			152		2,821		(2,432	)		1,187			(5,102	)
(Increase) decrease in deferred tax asset valuation allowance			5,208		7,853		(7,707	)		(5,214	)		—
Net income (loss)(1)			13,267		14,194		(16,772	)		(15,477	)		4,502
Net income (loss) per common share(1)
	— Basic		0.82		0.83		(1.19	)		(1.09	)		0.26
	— Diluted		0.81		0.83		(1.19	)		(1.09	)		0.25
Weighted average common shares
	— Basic		15,111,898		15,097,371		15,101,625			14,147,618			17,051,546
	— Diluted		15,221,982		15,101,183		15,101,625			14,147,618			17,975,351

(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, and $6.2 million for the fiscal years ended June 30, 2004, 2003, 2002 and 2001, 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 Note 14 of the Notes to Consolidated Financial Statements in Item 8 of this Report.


	As of June 30,

	2005		2004		2003			2002		2001

	(in thousands, except share data)
Consolidated Balance Sheet Data:
Total assets	$	84,620	$	73,715	$	75,102		$	90,377	$	92,426
Working capital		18,094		8,622		(2,723	)		4,251		1,216
Long-term debt		25,000		25,000		—			36,660		29,000
Long-term debt — affiliate		—		—		31,300			—		—
Other long-term liabilities		6,628		7,551		10,323			10,396		9,734
Stockholders’ equity		24,497		14,623		255			5,866		16,316
Book value per common share		1.62		0.97		0.02			0.39		1.22
Common shares outstanding		15,114,871		15,097,371		15,097,371			15,028,839		13,358,615


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 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,” “intend,” “estimate,” “anticipate” or similar expressions. When the Company discusses its strategies or plans, it is 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 stockholder 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 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.

• Control by Existing Stockholders. A single investor has a majority of the voting power of the Company at June 30, 2005. 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, 2005 and 2004, 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

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 net income of $13.3 million for the year ended June 30, 2005, reflecting a slight decrease over fiscal 2004. Modest improvements in transaction and management services revenue were offset by an increase in transaction commissions and salaries, wages and benefits expense.

Fiscal Year 2005 Compared to Fiscal Year 2004

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 $463.5 million was recognized for fiscal year 2005 as compared to revenue of $440.6 million for fiscal year 2004. Transaction fees increased by $18.5 million, or 7.4%, in the current fiscal year over the same period in 2004. The Company continued to realize increased commissions from investment sales in the current fiscal year, as well as growth from its corporate services business. Management services fees increased by $4.5 million, or 2.4%, during that same period due to increased reimbursed revenues related to salaries, wages and benefits, as described below. Increased facility management activity helped mitigate the loss of third party property management assignments due to property sales.

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 increased to 61.8% for fiscal year 2005 as compared to 60.3% for the same period in 2004 due to higher overall transaction revenues as well as increased transaction production levels in certain markets in the country.

Reimbursable expenses, related to salaries, wages and benefits, increased by $4.4 million, or 3.2%, in the current fiscal year over the same period in 2004, primarily due to the staffing requirements of new facility management assignments.

Salaries and other direct costs increased by $291,000, or 0.8%, in the current fiscal year over the same period in 2004.

Costs and Expenses

Salaries, wages and benefits increased by $6.9 million, or 14.8%, during fiscal year 2005 as compared to 2004 primarily due to higher performance based incentive compensation and the hiring of key executives, including the Company’s chief executive officer in the third quarter of fiscal 2005. Also, a significant part of this increase related to historically lower actuarial estimates in fiscal 2004 related to the Company’s health insurance and workers compensation insurance liabilities. Selling, general and administrative expenses decreased by $574,000, or 1.3%, for the same period.

Depreciation and amortization expense for fiscal year 2005 decreased by 14.8% to $5.7 million from $6.7 million in the comparable fiscal year 2004 as the Company continued to closely 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 increased slightly to $1.4 million from $1.3 million in the prior year and slightly offset the decrease.

Interest income increased during fiscal year 2005 as compared to fiscal year 2004 as both average invested funds and interest rates increased.

Interest expense incurred during fiscal years 2005 and 2004 was due primarily to the Company’s term loan borrowings under the respective credit facility in effect during the period. The credit facility in place throughout the first eleven months of fiscal 2004 was provided 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 during fiscal year 2004 due to an outstanding note payable-affiliate that was subsequently repaid in June 2004.

Income Taxes

As of June 30, 2005, the Company had gross deferred tax assets of $11.5 million, with $6.2 million of the deferred tax assets relating to net operating loss carryforwards which will be available to offset future taxable income through 2024. 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 $4.4 million against the deferred tax assets as of June 30, 2005 and will continue to do so until such time as management believes that the Company will realize the tax benefits related to the remaining assets. 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 2005 and 2004 reflects a benefit for the decrease in the valuation allowance of $5.2 million and $7.9 million, respectively. See Note 9 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 2005 was $12.4 million, or $0.81 per common share on a diluted basis, as compared to $12.6 million, or $0.83 per common share for fiscal year 2004. Dividends accrued on the Series A Preferred Stock issued by the Company were $889,000 in fiscal year 2005 and $1.6 million in fiscal year 2004. See Note 8 of Notes to Consolidated Financial Statements for additional information.

Stockholders’ Equity

During fiscal year 2005, stockholders’ equity increased by $9.9 million, to $24.5 million from $14.6 million at June 30, 2004, as a result of net income generated during the fiscal year. The payment of dividends totaling $3.6 million on the Series A Preferred Stock partially offset the increase. The book value per common share issued and outstanding increased to $1.62 at June 30, 2005 from $0.97 at June 30, 2004.

Fiscal Year 2004 Compared to Fiscal Year 2003

Revenue

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 fiscal 2004 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

As a percentage of gross transaction revenue, related commission expense remained 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 decreases were partly offset by slightly higher bonus and incentive salary expense in the fiscal year ended June 30, 2004. Selling, general and administrative expenses decreased by $7.5 million, or 14.2%, for the same period, as the Company decreased its discretionary spending beginning in the fourth quarter of fiscal year 2003. Reduced lease space needs resulting from a number of office closures also contributed to this decrease in expenses.

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 14 of Notes to Condensed Consolidated Financial Statements for additional information.

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.

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 years 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 7 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. The Company recorded a valuation allowance for $9.6 million against the deferred tax assets as of June 30, 2004. 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.

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.

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.

LIQUIDITY AND CAPITAL RESOURCES

During fiscal year 2005, cash and cash equivalents increased by $11.4 million as cash generated by operating activities totaling $17.9 million was partially offset by cash used in investing activities of $2.2 million and financing activities of $4.3 million. Cash used in investing activities related primarily to $2.6 million of purchases of equipment, software and leasehold improvements. Net financing activities related primarily to the payment of dividends on the Series A Preferred Stock as discussed below.

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 $13.5 million, related to revenues earned in calendar year 2004, were paid in January 2005, and production and incentive bonuses of approximately $6.8 million were paid in March 2005.

See Note 16 of Notes to Consolidated Financial Statements in Item 8 of this Report for information concerning earnings before interest, taxes, depreciation and amortization.

September 19, 2002, the date of issuance of the Series A Preferred Stock, up to and through December 31, 2004. In exchange therefore, KV agreed to eliminate in its entirety, as of January 1, 2005, the 12% preferential cumulative dividend payable on the Series A Preferred Stock. Upon the closing of the transaction in January 2005, the Company delivered to KV the one time accrued dividend payment of approximately $3.6 million.

The Company and KV effected the elimination of the 12% cumulative preferred dividend with respect to the Series A Preferred Stock by an exchange of preferred securities. Accordingly, simultaneously upon the consummation of the transaction contemplated by the Preferred Stock Exchange Agreement, on January 4, 2005, KV delivered to the Company its original share certificate representing 11,725 shares of Series A Preferred Stock in exchange for a new share certificate representing 11,725 shares of a newly created Series A-1 Preferred Stock of the Company, or the New Preferred Stock. The New Preferred Stock is identical in all respects to the Series A Preferred Stock except that the New Preferred Stock does not have a cumulative preferred dividend and is now only entitled to receive dividends if and when dividends are declared and paid to holders of the Company’s common stock. As was the case with the Series A Preferred Stock, the New Preferred Stock has a preference over the Company’s Common Stock in the event that the Company undergoes a liquidation, dissolution or certain change in control transactions. In such situations, the holder of the New Preferred Stock would be entitled to payment of the greater of (i) $23.5 million (twice the face value of the New Preferred Stock) or (ii) the equivalent of 40% of the consideration to be paid to all the equity holders of the Company, thereby diluting the return that would otherwise be available to the holders of the Common Stock of the Company had this preference not existed.

The Company entered into an employment agreement with Mark E. Rose as Chief Executive Officer effective March 8, 2005. Terms of the agreement included, among other things, i) a sign-on bonus of approximately $2.1 million, which is subject to repayment by Mr. Rose, in whole or in part, under certain circumstances as set forth in the employment agreement, ii) a guaranteed bonus of $750,000 for calendar year 2005, iii) options to purchase up to 500,000 shares of the Company’s common stock which generally vest over the three year term of the agreement, and iv) annual grants of $750,000 worth of restricted common stock during the term of the agreement, each grant having a three year vesting period from the date of grant.

The Compensation Committee of the Company adopted a Long-Term Executive Cash Plan (the “Plan”) in June 2005. The Plan provides for the payment of bonuses to certain executive employees if specified financial goals for the Company are achieved for the period commencing January 1, 2004 and ending December 31, 2006. As of June 30, 2005, approximately $373,000 has been accrued under this Plan for payment to the executive employees no earlier than the first calendar quarter of 2007.

matures in June 2008, subject to the Company’s right to extend the term for an additional twelve months through June 2009. Other modifications to the credit facility include the elimination of any cap regarding the aggregate consideration that the Company may pay for acquisitions, the ability to repurchase up to $30 million of its Common Stock, and the elimination of all term loan amortization payments due before maturity. Other principal economic terms and conditions of the credit facility remain substantially unchanged. The Company paid closing costs totaling approximately $688,000 in connection with the amendment, of which $550,000 were recorded as deferred financing fees and will be amortized over the amended term of the agreement.

Interest on outstanding borrowings under the credit facility is based upon Deutsche Bank’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 all credit facility obligations during fiscal years 2005 and 2004 was 5.9% and 5.3%, respectively.

The Company has no current principal payments due under the $25.0 million term portion of its Credit Facility with Deutsche Bank as of June 30, 2005. The Company also has a revolving line of credit of $35.0 million, of which approximately $32.5 million is available as of June 30, 2005. During the quarter ended December 31, 2004, the Company issued three letters of credit, totaling approximately $2.5 million, under the revolving line of credit to collateralize certain obligations related to its insurance programs. The Company believes that it can meet its working capital and investing needs with internally generated operating cash flow and, as necessary, borrowings under its revolving line of credit.

The Company leases office space throughout the country through non-cancelable operating leases, which expire at various dates through February 2014.

In total the Company’s lease and debt obligations as of June 30, 2005 which are due over the next five years are as follows (in thousands):


Year Ending
June 30	Amount

2006	$	15,996
2007		12,404
2008		35,278
2009		7,835
2010		4,210
Thereafter		3,072

	$	78,795

The above amounts also include obligations due under a large office lease signed in August 2005.


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, 2005, 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, 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 provide for quarterly payments to the Company equal to the variable interest amount paid by the Company in excess of 3.5% of the underlying notional amounts.

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 50 basis points, over the average levels incurred by the Company during fiscal 2005, the Company’s interest expense would increase, and income before income taxes would decrease, by $125,000 per annum. Comparatively, if LIBOR borrowing rates decrease by 50 basis points below the average levels incurred by the Company during fiscal 2005, the Company’s interest expense would decrease, and income before income taxes would increase, by $125,000 per annum. These amounts are determined by considering the impact of the hypothetical interest rates on the Company’s borrowing cost and interest rate cap agreement. They do not consider the effects that such an environment could have on the level of overall economic activity. These sensitivity analyses also assume no changes in the Company’s future or past years’ financial structure.

Item 8. Financial Statements and Supplementary Data

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Stockholders

Grubb & Ellis Company

We have audited the accompanying consolidated balance sheets of Grubb & Ellis Company as of June 30, 2005 and 2004, and the related consolidated statements of operations, stockholders’ equity, and cash flows for each of the three years in the period ended June 30, 2005. 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. We were not engaged to perform an audit of the Company’s internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and 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, 2005 and 2004, and the consolidated results of its operations and its cash flows for each of the three years in the period ended June 30, 2005, in conformity with U.S. generally accepted accounting principles.

/s/ ERNST & YOUNG LLP

Chicago, Illinois

September 1, 2005

GRUBB & ELLIS COMPANY

CONSOLIDATED BALANCE SHEETS

JUNE 30, 2005 AND 2004

(In thousands, except share data)


			2005			2004

ASSETS
Current assets:
	Cash and cash equivalents, including restricted deposits of $1,105 and $3,340 at June 30, 2005 and 2004, respectively		$	26,415		$	14,971
	Services fees receivable, net			9,339			10,810
	Other receivables			2,509			2,968
	Professional service contracts, net			2,170			1,184
	Prepaid and other current assets			2,656			2,230
	Deferred tax assets, net			3,500			3,000

		Total current assets		46,589			35,163
Noncurrent assets:
	Equipment, software and leasehold improvements, net			8,189			9,865
	Goodwill, net			24,763			24,763
	Other assets			5,079			3,924

		Total assets	$	84,620		$	73,715


LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
	Accounts payable		$	4,218		$	4,756
	Commissions payable			6,282			6,433
	Accrued compensation and employee benefits			11,433			9,072
	Other accrued expenses			6,562			6,280

		Total current liabilities		28,495			26,541
Long-term liabilities:
	Credit facility debt			25,000			25,000
	Accrued claims and settlements			4,972			5,523
	Other liabilities			1,656			2,028

		Total liabilities		60,123			59,092

Stockholders’ equity:
	Preferred stock, $1,000 stated value: 1,000,000 shares authorized; 11,725 shares issued and outstanding at June 30, 2005 and 2004			11,725			11,725
	Common stock, $.01 par value: 50,000,000 shares authorized; 15,114,871 and 15,097,371 shares issued and outstanding at June 30, 2005 and 2004, respectively			153			151
	Additional paid-in capital			67,988			71,410
	Accumulated other comprehensive income			27			—
	Retained deficit			(55,396	)		(68,663	)

		Total stockholders’ equity		24,497			14,623

		Total liabilities and stockholders’ equity	$	84,620		$	73,715

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

GRUBB & ELLIS COMPANY

CONSOLIDATED STATEMENTS OF OPERATIONS

FOR THE YEARS ENDED JUNE 30, 2005, 2004 AND 2003

(In thousands, except share data)


			2005			2004			2003

Services revenue:
	Transaction fees			$267,810			$249,344			$240,916
	Management fees, including reimbursed salaries, wages and benefits			195,725			191,210			185,030

		Total services revenue		463,535			440,554			425,946

Costs of services:
	Transaction commissions			165,615			150,233			145,287
	Reimbursable salaries, wages and benefits			142,771			138,383			134,913
	Salaries, wages, benefits and other direct costs			36,672			36,381			32,073

		Total costs of services		345,058			324,997			312,273
Costs and expenses:
	Salaries, wages and benefits			53,562			46,639			55,288
	Selling, general and administrative			44,806			45,380			52,899
	Depreciation and amortization			5,742			6,736			7,802
	Severance, office closure and other special charges			—			3,224			9,500

		Total costs		449,168			426,976			437,762

		Total operating income (loss)		14,367			13,578			(11,816	)
Other income and expenses:
	Interest income			406			179			245
	Interest expense			(1,658	)		(447	)		(2,271	)
	Interest expense—affiliate			—			(1,937	)		(498	)

		Income (loss) before income taxes		13,115			11,373			(14,340	)
Benefit (provision) for income taxes				152			2,821			(2,432	)

Net income (loss)				13,267			14,194			(16,772	)
Preferred stock dividends accrued				(889	)		(1,618	)		(1,130	)

Net income (loss) to common stockholders				$ 12,378			$ 12,576			$(17,902	)

Net income (loss) per weighted average common share outstanding:
	Basic-			$ 0.82			$ 0.83			$ (1.19	)

	Diluted-			$ 0.81			$ 0.83			$ (1.19	)

Weighted average common shares outstanding:
	Basic-			15,111,898			15,097,371			15,101,625

	Diluted-			15,221,982			15,101,183			15,101,625

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

GRUBB & ELLIS COMPANY

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

FOR THE YEARS ENDED JUNE 30, 2005, 2004 AND 2003

(in thousands, except share data)


			Common Stock									Accumulated
									Additional			Other			Retained			Total			Total
	Preferred		Outstanding						Paid-In-			Comprehensive			Earnings			Comprehensive			Stockholders’
	Stock		Shares			Amount			Capital			Loss			(Deficit)			Income (Loss)			Equity

Balance as of July 1, 2002				15,028,839		$	150		$	72,084		$	(283	)	$	(66,085	)				$	5,866
Issuance of 11,725 Series A shares of preferred stock	$	11,725								(783	)		—			—						10,942
Stock repurchases				(125,000	)		(1	)		(162	)		—			—						(163	)
Employee common stock purchases and net exercise of stock options				193,532			2			271			—			—						273
Net loss		—		—			—			—			—			(16,772	)	$	(16,772	)		(16,772	)
Change in value of cash flow hedge, net of tax				—			—			—			109			—			109			109

Total comprehensive loss																		$	(16,663	)

Balance as of June 30, 2003		11,725		15,097,371			151			71,410			(174	)		(82,857	)					255
Net income		—		—			—			—			—			14,194		$	14,194			14,194
Change in value of cash flow hedge, net of tax				—			—			—			174			—			174			174

Total comprehensive income																		$	14,368

Balance as of June 30, 2004		11,725		15,097,371			151			71,410			—			(68,663	)					14,623
Net exercise of employee stock options				17,500			—			50			—			—						50
Stock-based compensation expense				—			2			165			—			—						167
Payment of dividends on Series A Preferred Stock				—			—			(3,637	)		—			—						(3,637	)
Net income		—		—			—			—			—			13,267		$	13,267			13,267
Change in value of cash flow hedge, net of tax				—			—			—			27			—			27			27

Total comprehensive income																		$	13,294

Balance as of June 30, 2005	$	11,725		15,114,871		$	153		$	67,988		$	27		$	(55,396	)				$	24,497

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

GRUBB & ELLIS COMPANY

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE YEARS ENDED JUNE 30, 2005, 2004 AND 2003

(in thousands, except share data)


			2005			2004			2003

Cash Flows from Operating Activities:
Net income (loss)			$	13,267		$	14,194		$	(16,772	)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
	Deferred tax benefit			4,708			—			(5,197	)
	Increase (decrease) in deferred tax asset valuation allowance			(5,208	)		(3,000	)		7,707
	Depreciation and amortization			5,742			6,736			7,802
	Stock-based compensation expense			167			—			—
	Accrued severance, office closure and other special charges			—			3,224			9,500
	Payment of accrued severance			—			(3,235	)		(3,007	)
	Payment of office closure costs			(1,273	)		(998	)		(1,157	)
	Provision (recovery) for services fees receivable valuation allowances			(148	)		25			84
Net receipt of tax refunds				80			398			6,473
Funding of multi-year service contracts				(3,274	)		(903	)		(2,361	)
Decrease in services fees receivable				1,714			637			1,727
(Increase) decrease in prepaid income taxes				(26	)		21			(252	)
(Increase) decrease in prepaid and other assets				(323	)		(1,830	)		1,061
Increase (decrease) in accounts and commissions payable				(185	)		3,599			(3,370	)
Increase (decrease) in accrued compensation and employee benefits				2,370			(2,585	)		(3,770	)
Decrease in accrued claims and settlements				(550	)		(1,851	)		(449	)
Increase in other liabilities				893			99			736

		Net cash provided by (used in) operating activities		17,954			14,531			(1,245	)

Cash Flows from Investing Activities:
Purchases of equipment, software and leasehold improvements				(2,618	)		(1,222	)		(2,933	)
Other investing activities				380			125			(400	)

		Net cash used in investing activities		(2,238	)		(1,097	)		(3,333	)

Cash Flows from Financing Activities:
Repayment of credit facility debt				—			—			(4,450	)
Borrowings on credit facility debt				—			25,000			5,000
Repayment of borrowings from affiliate				—			(32,300	)		—
Borrowings on note payable—affiliate				—			—			4,000
Repayment on note payable—affiliate				—			(4,000	)		—
Proceeds from issuance of common stock, net				50			—			273
Repurchase of common stock				—			—			(163	)
Payment of dividends on Series A Preferred Stock				(3,637	)		—			—
Issuance costs and deferred financing fees				(685	)		(1,101	)		(229	)

		Net cash provided by (used in) financing activities		(4,272	)		(12,401	)		4,431

Net increase (decrease) in cash and cash equivalents				11,444			1,033			(147	)
Cash and cash equivalents at beginning of the year				14,971			13,938			14,085

Cash and cash equivalents at end of the year, including restricted deposits of $1,105 and $3,340 in June 30, 2005 and 2004			$	26,415		$	14,971		$	13,938

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

GRUBB & ELLIS COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


1.	Summary of Significant Accounting Policies

(a) The Company

Grubb & Ellis Company (the “Company”) is a full service commercial real estate company that provides services to real estate owners/investors and tenants including transaction services involving leasing, acquisitions and dispositions, and property and facilities management services. Additionally, the Company provides consulting and strategic services with respect to commercial real estate.

(b) Principles of Consolidation

The consolidated financial statements include the accounts of Grubb & Ellis Company, and its wholly owned subsidiaries, including Grubb & Ellis Management Services, Inc. (“GEMS”), which provides property and facilities management services. All significant intercompany accounts have been eliminated.

The Company consolidates all entities for which it has a controlling financial interest evidenced by ownership of a majority voting interest. Investments in corporations and partnerships in which the Company does not have a controlling financial interest or majority interest are accounted for on the equity method of accounting.

In January 2003, the Financial Accounting Standards Board issued Interpretation No. 46, “Consolidation of Variable Interest Entities and Interpretation of Accounting Research Bulletin (ARB) No. 51 (“FIN 46”)”. FIN 46 introduces a new consolidation model, the variable interest model, which determines control (and consolidation) based on potential variability in gains and losses of the entity being evaluated for consolidation. The consolidation provisions of FIN 46 apply immediately to variable interests in variable interest entities created after January 31, 2003. It applies in the first fiscal year or interim period beginning after June 15, 2003 to variable interest entities in which an enterprise that is a public company holds a variable interest that it acquired before February 1, 2003. The Company has reviewed the provisions of FIN 46 and has determined that it does not have an impact on the Company’s financial condition and results of operations.

(c) Basis of Presentation

The financial statements have been prepared in conformity with U.S. generally accepted accounting principles, which require management to make estimates and assumptions that affect the reported amounts of assets and liabilities (including disclosure of contingent assets and liabilities) at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

(d) Revenue Recognition

Real estate sales commissions are recognized at the earlier of receipt of payment, close of escrow or transfer of title between buyer and seller. Receipt of payment occurs at the point at which all Company services have been performed, 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, including management 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 on-site employee salaries and related benefit costs. The amounts, which are to be reimbursed per the terms of

GRUBB & ELLIS COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)


1.	Summary of Significant Accounting Policies—(Continued)

the services contract, are recognized as revenue by the Company in the same period as the related expenses are incurred. These fees totaled approximately $142.8 million, $138.4 million and $134.9 million during the fiscal years ended June 30, 2005, 2004 and 2003, respectively.

(e) Costs and Expenses

Costs of services are comprised of expenses incurred in direct relation with executing transactions and delivering services to our clients. Included in these direct costs are real estate transaction services and other commission expenses, which are recorded concurrently in the period in which the related transaction revenue is recognized. All other costs and expenses, including expenses related to delivery of property or facility management services and selling and marketing expenses, are recognized when incurred.

(f) Accounting for Stock-Based Compensation

Statements of Financial Accounting Standards No. 123, “Accounting for Stock-Based Compensation (“Statement 123”)” allows companies to either account for stock-based compensation under the provisions of Statement 123 or under the provisions of Accounting Principles Board Opinion No. 25 (“APB 25”). The Company elected to continue accounting for stock-based compensation to its employees under the provisions of APB 25. Accordingly, because the exercise price of the Company’s employee stock options equals or exceeds the fair market value of the underlying stock on the date of grant, no compensation expense is recognized by the Company. If the exercise price of an award is less than the fair market value of the underlying stock at the date of grant, the Company recognizes the difference as compensation expense evenly over the vesting period of the award. Restricted stock awards are granted at the fair market value of the underlying common stock shares immediately prior to the grant date. The value of the restricted stock awards is recognized as compensation expense evenly over the vesting period of the award.

The Company, however, is required to provide pro forma disclosure as if the fair value measurement provisions of Statement 123 had been adopted. See Note 10 of Notes to Consolidated Financial Statements for additional information.

In December 2004, the Financial Accounting Standards Board issued Statement 123(R) (“FAS 123(R)”) effective for fiscal years beginning after June 15, 2005. The new Statement now requires mandatory reporting of all stock-based compensation awards on a fair value basis of accounting. Generally, companies will be required to calculate the fair value of all stock awards and amortize that fair value as compensation expense over the vesting period of the awards. The Company will apply the new rules on accounting for stock-based compensation awards beginning in the first fiscal quarter of fiscal 2006, which for the Company would be the quarter ending September 30, 2005. The Company has reviewed the provisions of FAS 123(R) and has determined that it will not have a material impact on its financial position or results of operations.

(g) Income Taxes

Deferred income taxes are recorded based on enacted statutory rates to reflect the tax consequences in future years of the differences between the tax bases of assets and liabilities and their financial reporting amounts. Deferred tax assets, such as net operating loss carryforwards, which will generate future tax benefits are recognized to the extent that realization of such benefits through future taxable earnings or alternative tax strategies in the foreseeable short term future is more likely than not.

GRUBB & ELLIS COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)


1.	Summary of Significant Accounting Policies—(Continued)

(h) Cash and Cash Equivalents

Cash and cash equivalents consist of demand deposits and highly liquid short-term debt instruments with maturities of three months or less from the date of purchase and are stated at cost. Cash and cash equivalents whose use are restricted due to various contractual constraints, the majority of which relate to the Company’s insurance policies, totaled approximately $1,105,000 and $3,340,000 as of June 30, 2005 and 2004, respectively.

Cash payments for interest were approximately $1,442,000, $2,435,000 and $2,721,000 for each of the fiscal years ended June 30, 2005, 2004 and 2003, respectively. Cash payments for income taxes for the fiscal years ended June 30, 2005, 2004 and 2003 were approximately $368,000, $164,000 and $180,000, respectively. Cash refunds for income taxes totaling approximately $80,000, $398,000 and $6,473,000 were received in the fiscal years ended June 30, 2005, 2004 and 2003, respectively.

(i) Transaction Service Contracts

The Company holds multi-year service contracts with certain key transaction professionals for which cash payments were made to the professionals upon signing, the costs of which are being amortized over the lives of the respective contracts, which are generally two to three years. Amortization expense relating to these contracts of approximately $1.4 million, $1.3 million and $1.6 million was recognized in fiscal years 2005, 2004 and 2003, respectively.

(j) Equipment, Software and Leasehold Improvements

Equipment, software and leasehold improvements are recorded at cost. Depreciation of equipment is computed using the straight-line method over their estimated useful lives ranging from three to seven years. Software costs consist of costs to purchase and develop software. Costs related to the development of internal use software are capitalized only after a determination has been made as to how the development work will be conducted. Any costs incurred in the preliminary project stage prior to this determination are expensed when incurred. Also, once the software is substantially complete and ready for its intended use, any further costs related to the software such as training or maintenance activities are also expensed as incurred. Amortization of the development costs of internal use software programs begins when the related software is ready for its intended use. All software costs are amortized using a straight-line method over their estimated useful lives, ranging from three to seven years. Leasehold improvements are amortized using the straight-line method over their useful lives not to exceed the terms of the respective leases. Maintenance and repairs are charged to expense as incurred.

(k) Goodwill

Goodwill, representing the excess of the cost over the fair value of the net tangible assets of acquired businesses, is stated at cost and was amortized prior to July 1, 2002 on a straight-line basis over estimated future periods to be benefited, which ranged from 15 to 25 years. Accumulated amortization amounted to approximately $5,815,000 at June 30, 2005 and 2004. The Company wrote-off $2.2 million of unamortized goodwill in 2004 related to the disposition of a consulting services group. See Note 14 of Notes to Consolidated Financial Statements for additional information.

The Financial Accounting Standards Board issued Statements of Financial Accounting Standards No. 141,Business Combinations, and No. 142,Goodwill and Other Intangible Assets, effective for fiscal years beginning after December 15, 2001. Under these rules, goodwill is not 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.

GRUBB & ELLIS COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)


1.	Summary of Significant Accounting Policies—(Continued)

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 of each of the fiscal years thereafter. The Company has determined that no goodwill impairment impacted the earnings and financial position of the Company as of those dates.

(l) Accrued Claims and Settlements

The Company has maintained partially self-insured and deductible programs for errors and omissions, general liability, workers’ compensation and certain employee health care costs. Reserves for such programs are included in accrued claims and settlements and compensation and employee benefits payable, as appropriate. Reserves are based on the aggregate of the liability for reported claims and an actuarially-based estimate of incurred but not reported claims.

(m) Financial Instruments

Statement of Financial Accounting Standards No. 107, “Disclosures about Fair Value of Financial Instruments”, requires disclosure of fair value information about financial instruments, whether or not recognized in the Consolidated Balance Sheets. Considerable judgment is required in interpreting market data to develop estimates of fair value. Accordingly, the estimates presented herein are not necessarily indicative of the amounts that the Company could realize in a current market exchange. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts. The carrying amounts of the Company’s financial instruments, which include cash and cash equivalents, receivables and obligations under accounts payable and debt instruments, approximate their fair values, based on similar instruments with similar risks.

(n) Fair Value of Derivative Instruments and Hedged Items

The Financial Accounting Standards Board issued Statement of Financial Accounting (“SFAS”) No. 138 “Accounting for Derivative Instruments and Hedging Activities” which amends SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities.” SFAS No. 133, as amended, requires companies to record derivatives on the balance sheet as assets or liabilities, measured at fair value. SFAS No. 133 may increase or decrease reported net income and stockholders’ equity prospectively, depending on future levels of interest rates, the computed “effectiveness” of the derivatives, as that term is defined by SFAS No. 133, and other variables affecting the fair values of derivative instruments and hedged items, but will have no effect on cash flows. See Notes 5 and 6 of Notes to Consolidated Financial Statements for additional information regarding derivatives held by the Company.

(o) Costs Associated with Exit or Disposal Activities

The Financial Accounting Standards Board issued Statement 146, “Accounting for Costs Associated with Exit or Disposal Activities” in June 2002. This Statement requires liabilities for costs associated with an exit or disposal activity to be recognized and measured initially at its fair value in the period in which the liability is incurred.

The Company records a liability for one-time termination benefits at the date the plan of termination meets certain criteria including appropriate management approval, specificity as to employee and benefits to be provided and an indication that significant changes to the plan are unlikely. If the employees are required to render service until they are terminated in order to receive the termination benefits beyond the minimum

GRUBB & ELLIS COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)


1.	Summary of Significant Accounting Policies—(Continued)

retention period as defined in the Statement, the Company will recognize the liability ratably over the retention period.

The Company records a liability for certain operating leases based on the fair value of the liability at the cease-use date. The fair value is determined based on the remaining lease rentals and any termination penalties, and is reduced by estimated sublease rentals.

(p) Reclassifications

Certain amounts in prior periods have been reclassified to conform to the current year presentation. Such reclassifications have not changed previously reported results of operations or cash flow.

2. Services Fees Receivable, net

Services fees receivable at June 30, 2005 and 2004 consisted of the following (in thousands):


			2005			2004

Transaction services fees receivable			$	2,587		$	4,205
Management services fees receivable				7,465			7,561
	Allowance for uncollectible accounts			(566	)		(714	)

		Total		9,486			11,052
	Less portion classified as current			9,339			10,810

		Non-current portion (included in other assets)	$	147		$	242

The following is a summary of the changes in the allowance for uncollectible services fees receivable for the fiscal years ended June 30, 2005, 2004 and 2003 (in thousands):


	2005			2004		2003

Balance at beginning of year	$	714		$	689	$	605
Provision for bad debt		—			25		84
Recovery of allowance		(148	)		—		—

Balance at end of year	$	566		$	714	$	689

3. Equipment, Software and Leasehold Improvements, net

Equipment, software and leasehold improvements at June 30, 2005 and 2004 consisted of the following (in thousands):


		2005		2004

Furniture, equipment and software systems		$	44,072	$	42,580
Leasehold improvements			6,286		5,966

	Total		50,358		48,546
Less accumulated depreciation and amortization			42,169		38,681

Equipment, software and leasehold improvements, net		$	8,189	$	9,865

The Company wrote off approximately $805,000 and $2.8 million of furniture and equipment during the fiscal years ended June 30, 2005 and 2004. Approximately $698,000 and $2.6 million of accumulated

GRUBB & ELLIS COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

3. Equipment, Software and Leasehold Improvements, net—(Continued)

depreciation and amortization expense had been recorded on these assets prior to their disposition in the fiscal years ended June 30, 2005 and 2004, respectively.


4.	Earnings (Loss) Per Common Share

Statement of Financial Accounting Standards No. 128, “Earnings per Share” (“Statement 128”) requires disclosure of basic earnings per share that excludes any dilutive effects of options, warrants, and convertible securities and diluted earnings per share.

The following table sets forth the computation of basic and diluted earnings per common share from continuing operations (in thousands, except per share data):


			For the Fiscal Year Ended June 30,

			2005			2004			2003

Basic earnings per common share:
	Net income (loss)		$	13,267		$	14,194		$	(16,772	)
	Preferred stock dividends accrued			(889	)		(1,618	)		(1,130	)

	Net income (loss) to common stockholders		$	12,378		$	12,576		$	(17,902	)

	Weighted average common shares outstanding			15,112			15,097			15,102

	Net income (loss) per common share outstanding — basic		$	0.82		$	0.83		$	(1.19	)

Diluted earnings per common share:
	Net income (loss)		$	13,267		$	14,194		$	(16,772	)
	Preferred stock dividends accrued			(889	)		(1,618	)		(1,130	)

	Net income (loss) to common stockholders		$	12,378		$	12,576		$	(17,902	)

	Weighted average common shares outstanding			15,112			15,097			15,102
	Effect of dilutive securities:
		Stock options and warrants		110			4			—

	Weighted average common shares outstanding			15,222			15,101			15,102

	Net income (loss) per common share outstanding — diluted		$	0.81		$	0.83		$	(1.19	)

Additionally, options outstanding to purchase shares of common stock, the effect of which would be anti-dilutive, were 1,229,652, 1,179,023, and 1,601,091 at June 30, 2005, 2004 and 2003, respectively. These options were not included in the computation of diluted earnings per share because an operating loss was reported or the option exercise price was greater than the average market price of the common shares for the respective periods.


5.	Credit Facility Debt

Effective June 11, 2004, the Company entered into a $40 million senior secured credit agreement with Deutsche Bank, which had a three-year term with a one-year extension option and was 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 Kojaian Capital, LLC and Kojaian Funding, LLC, respectively.

GRUBB & ELLIS COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

5. Credit Facility Debt—(Continued)

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 which totaled $1.1 million. 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 average interest rate incurred by the Company on the credit facility obligation during fiscal year 2005 was 5.9%.

In order to mitigate the risks associated with changes in the interest rate markets, the terms of the new credit facility required the Company to enter into an interest rate protection agreement that effectively caps the variable interest rate exposure on a portion of its existing credit facility debt for a period of two years. The Company executed such an interest agreement with Deutsche Bank in July 2004, which will provide for quarterly payments to the Company equal to the variable interest amount paid by the Company in excess of 3.5% of the underlying notional amounts. The Company determined that this agreement was to be characterized as effective under the definitions included within Statement of Financial Accounting Standards No. 133 “Accounting for Derivative Instruments and Hedging Activities.” The change in value of these instruments during a reporting period is characterized as Other Comprehensive Income or Loss, and totaled approximately $27,000 of unrealized income during fiscal 2005.

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.

On March 31, 2005, the Company amended its secured credit facility. Under the amended credit facility, the $25 million term loan portion of the credit facility was unchanged. The revolving credit line component of the credit facility, however, was increased from $15 million to $35 million, of which approximately $32.5 million is available as of June 30, 2005. During the quarter ended December 31, 2004, the Company issued three letters of credit, totaling approximately $2.5 million, under the revolving credit line to collateralize certain obligations related to its insurance programs. In addition, the term of the credit facility was extended by one year, and it now matures in June 2008, subject to the Company’s right to extend the term for an additional twelve months through June 2009. Other modifications to the credit facility include the elimination of any cap regarding the aggregate consideration that the Company may pay for acquisitions, the ability to repurchase up to $30 million of its Common Stock, and the elimination of all term loan amortization payments due before maturity. Other principal economic terms and conditions of the credit facility remain substantially unchanged. The Company paid closing costs totaling approximately $688,000 in connection with the amendment, of which $550,000 were recorded as deferred financing fees and will be amortized over the amended term of the agreement.

Scheduled principal payments on the term loan, excluding the exercise of the one year extension option, are as follows (in thousands):


Year Ending
June 30	Amount

2006	$	—
2007		—
2008		25,000

	$	25,000

GRUBB & ELLIS COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)


6.	Credit Facility Debt— Affiliate

Kojaian Capital, LLC (the “New Lender”), an affiliated entity of the Company’s controlling stockholder and Chairman, acquired the Company’s then existing credit agreement from the banks on June 6, 2003. Borrowings under the credit revolver portion of the facility, totaling $5.0 million, were repaid on October 31, 2003 from cash generated by the Company’s operations, while the term loan portion of the facility was repaid in conjunction with the refinancing of the Company’s credit arrangements in June 2004. See Note 5 of Notes to Consolidated Financial Statements for additional information.

Interest on outstanding borrowings under this credit facility were 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. The average interest rate incurred by the Company on outstanding borrowings during fiscal years 2004 and 2003, was 5.5% and 5.70% respectively. Direct expenses related to this facility totaled approximately $1,273,000 and were recorded as deferred financing fees and amortized over the term of the agreement. Unamortized fees totaling $317,000 were written off upon repayment of the term loan in June 2004.

The variable interest rate structure of this credit agreement exposed the Company to risks associated with changes in the interest rate markets. Consequently, the Credit Agreement required the Company to enter interest rate protection agreements, within 90 days of the date of the agreement, initially fixing the interest rates on not less than 50% of the aggregate principal amount of the term loan scheduled to be outstanding for a period of not less than three years. In March 2001, the Company entered into two interest rate swap agreements for a three year term, with banks that were original parties to the Credit Agreement. 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.

7. Note Payable— Affiliate

Kojaian Funding, LLC, another affiliated entity of the Company’s controlling stockholder and Chairman, made a $4 million subordinated loan to the Company on May 9, 2003 for working capital purposes. The Company was 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 was due on July 15, 2004, although it was prepaid without penalty in connection with the refinancing of the Company’s credit agreement with Deutsche Bank effective June 11, 2004. See Note 5 of Notes to Consolidated Financial Statements for additional information.

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.


8.	Issuance and Exchange of Preferred Stock

On May 13, 2002, the Company effected a closing of a financing with Kojaian Ventures, LLC (“KV”) which is wholly-owned by the Company’s controlling stockholder and Chairman, who, along with his father, owned, subsequent to the closing of the KV financing, approximately 20% of the Company’s issued and outstanding Common Stock. In addition, certain affiliated real estate entities of KV, in the aggregate, are substantial clients of the Company. The Company accepted the financing offered by KV based, in part, upon the fact that the KV financing, which replaced the financing provided by Warburg Pincus in March 2002 (see Note 5 of Notes to Consolidated Financial Statements for additional information), was on more favorable terms and conditions to the Company than the Warburg Pincus financing.

GRUBB & ELLIS COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

8. Issuance and Exchange of Preferred Stock—(Continued)

Accordingly, on the closing of the KV financing on May 13, 2002, KV paid to the Company an aggregate of $15,386,580 which provided the Company with the necessary funds, which the Company used, to (i) repay a $5,000,000 subordinated note, accrued interest thereon of $137,500 and out-of-pocket expenses of $100,000, (ii) repurchase, at cost, 1,337,358 shares of Common Stock held by Warburg Pincus for a price per share of $3.11, or an aggregate purchase price of $4,158,431, and (iii) pay down $6,000,000 of revolving debt under the Company’s then existing credit agreement. In exchange therefore, KV received (i) a convertible subordinated note in the principal amount of $11,237,500 (the “KV Debt”), and (ii) 1,337,358 shares of Common Stock at a price of $3.11 per share. The form of KV’s financing was substantially identical to the form of the Warburg Pincus financing arrangements, provided, however, that the KV Debt was more favorable to the Company in two (2) material respects.

First, the interest rate on the KV Debt was 12% per annum as opposed to 15% per annum. Similarly, the Series A Preferred Stock into which the KV Debt was converted has a coupon of 12% per annum, compounded quarterly, rather than 15% per annum, compounded quarterly. Second, the preference with respect to the Series A Preferred Stock that KV received was more favorable to the holders of the Company’s Common Stock than the Series A Preferred Stock that was to be issued to Warburg Pincus. Specifically, the holder of the Series A Preferred Stock has a preference over the Company’s Common Stock in the event that the Company undergoes a liquidation, dissolution or certain change in control transactions. That is, the holder of the Series A Preferred Stock is entitled to be paid with respect to its Series A Preferred Stock prior to holders of Common Stock are entitled to be paid with respect to their Common Stock in the event of a liquidation, dissolution or certain change in control transactions involving the Company. The preference on liquidation, dissolution and certain change in control transactions with respect to the Series A Preferred Stock issued to KV is the greater of (i) 2 times the face value of the Series A Preferred Stock, plus the accrued dividend thereon at the rate of 12% per annum, or (ii) the equivalent of 40% percent of the consideration to be paid to all the equity holders of the Company on an “Adjusted Outstanding Basis” (as defined in the underlying documents). Contrastingly, the Senior A Preferred Stock that was to be issued to Warburg Pincus was to have a preference on liquidation, dissolution and certain change in control transactions equal to the greater of (i) 2 times the face value of the Series A Preferred Stock, plus the accrued dividends thereon at the rate of 15% per annum, or (ii) the equivalent of 50% of the consideration to be paid to all equity holders of the Company on a fully diluted basis.

On September 19, 2002, the conversion rights existing under the KV Debt were exercised. 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 Series A Preferred Stock had a preference over the Company’s Common Stock upon liquidation, dissolution and certain change of control transactions. In addition, although the Series A Preferred Stock was not convertible into Common Stock (or any other securities of the Company) it voted along with the Common Stock on all matters that were subject to the vote of common stockholders. The voting power of the Series A Preferred Stock, after final contractual adjustments, was equal to 952 shares of Common Stock for each share of Series A Preferred Stock, or a total of 11,162,200 Common Stock equivalents. As a consequence, upon the issuance of the Series A Preferred Stock to KV on September 19, 2002, there was a change in the voting control of the Company, as the voting power of the Series A Preferred Stock (11,162,200 Common Stock equivalents), along with the 3,762,884 shares of outstanding Common Stock now owned by KV and its affiliates (approximately 25% of the outstanding Common Stock of the Company), represented approximately 57% of the total voting power of the Company.

GRUBB & ELLIS COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

8. Issuance and Exchange of Preferred Stock—(Continued)

In December 2004, the Company entered into an agreement (the “Preferred Stock Exchange Agreement”) with KV in KV’s capacity as the holder of all the Company’s issued and outstanding 11,725 shares of Series A Preferred Stock which carried a preferential cumulative dividend of 12% per annum (the “Series A Preferred Stock”). Pursuant to the Preferred Stock Exchange Agreement, the Company paid to KV all accrued and unpaid dividends with respect to the Series A Preferred Stock for the period September 19, 2002, the date of issuance of the Series A Preferred Stock, up to and through December 31, 2004. In exchange therefore, KV agreed to eliminate in its entirety, as of January 1, 2005, the 12% preferential cumulative dividend payable on the Series A Preferred Stock. Upon the closing of the transaction in January 2005, the Company delivered to KV the one time accrued dividend payment of approximately $3.6 million.

The Company and KV effected the elimination of the 12% cumulative preferred dividend with respect to the Series A Preferred Stock by an exchange of preferred securities. Accordingly, simultaneously upon the consummation of the transaction contemplated by the Preferred Stock Exchange Agreement, on January 4, 2005, KV delivered to the Company its original share certificate representing 11,725 shares of Series A Preferred Stock in exchange for a new share certificate representing 11,725 shares of a newly created Series A-1 Preferred Stock of the Company (the “New Preferred Stock”). The New Preferred Stock is identical in all respects to the Series A Preferred Stock except that the New Preferred Stock does not have a cumulative preferred dividend and is now only entitled to receive dividends if and when dividends are declared and paid to holders of the Company’s common stock. As was the case with the Series A Preferred Stock, the New Preferred Stock has a preference over the Company’s Common Stock in the event that the Company undergoes a liquidation, dissolution or certain change in control transactions. In such situations, the holder of the New Preferred Stock would be entitled to payment of the greater of (i) $23.5 million (twice the face value of the New Preferred Stock) or (ii) the equivalent of 40% of the consideration to be paid to all the equity holders of the Company, thereby diluting the return that would otherwise be available to the holders of the Common Stock of the Company had this preference not existed.

GRUBB & ELLIS COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

9. Income Taxes

The Company maintains a fiscal year ending June 30 for financial reporting purposes and a calendar year for income tax reporting purposes. The provision for income taxes for the fiscal years ended June 30, 2005, 2004 and 2003, consisted of the following (in thousands):


		2005			2004			2003

Current
	Federal	$	4,475		$	1,371		$	(245	)
	State and local		1,076			150			167

			5,551			1,521			(78	)
Deferred			(5,703	)		(4,342	)		2,510

	Net provision (benefit)	$	(152	)	$	(2,821	)	$	2,432

The Company recorded prepaid taxes totaling approximately $197,000 and $251,000 as of June 30, 2005 and 2004, respectively, comprised primarily of tax refund receivables, prepaid tax estimates and tax effected operating loss carrybacks related to state tax filings. The Company also received net tax refunds of approximately $80,000 and $398,000 during fiscal years 2005 and 2004, respectively, primarily related to its state tax carrybacks.

At June 30, 2005, federal income tax operating loss carryforwards (“NOL’s”) were available to the Company in the amount of approximately $10.5 million, which expire from 2008 to 2023. Utilization of certain of these net operating loss carryforwards totaling $2.5 million is limited to approximately $960,000 per year, pursuant to Section 382 of the Internal Revenue Code (“Code”) relating to a prior ownership change.

The Company’s effective tax rate on its income before taxes differs from the statutory federal income tax rate as follows for the fiscal years ended June 30:


		2005			2004			2003

Federal statutory rate			34.0	%		34.0	%		35.0	%
State and local income taxes (net of federal tax benefits)			3.2			5.3			5.2
Meals and entertainment			2.9			2.9			(2.2	)
Change in valuation allowance			(3.8	)		(26.4	)		(53.8	)
Utilization of net operating loss carryforwards			(32.7	)		(11.8	)		—
Insurance claim payment			0.5			(15.6	)		—
Severance and office closure payments			(4.8	)		(8.6	)		—
Goodwill amortization and other			(1.6	)		(4.6	)		2.6
Executive compensation			1.1			—			(3.8	)

	Effective income tax rate		(1.2	)%		(24.8	)%		(17.0	)%

The Company realized approximately $4.7 million of its deferred tax assets during fiscal 2005 due to the generation of significant taxable income during the period. The Company decreased its valuation allowance related to its deferred tax assets by approximately $5.2 million as of June 30, 2005 due to the realization of these assets and the likelihood that the Company would realize a greater portion of its remaining deferred assets in future periods. During fiscal 2004, the Company generated sufficient taxable income to realize a portion of its deferred tax assets and correspondingly reduced the valuation allowance by approximately

GRUBB & ELLIS COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

9. Income Taxes—(Continued)

$7.9 million. The Company had fully reserved its deferred tax assets at June 30, 2003 to reflect uncertainty at that time in regards to the realization of the assets in future periods.

Deferred income tax liabilities or assets are determined based on the differences between the financial statement and tax basis of assets and liabilities. The components of the Company’s deferred tax assets and liabilities are as follows as of June 30, 2005 and 2004 (in thousands):


			2005			2004

Deferred tax assets:
	Federal NOL and credit carryforwards		$	3,586		$	7,872
	State NOL carryforwards			2,575			2,263
	Insurance reserves			2,597			2,376
	Compensation and benefits			561			376
	Commission and fee reserves			510			777
	Office closure reserves			463			1,072
	Claims and settlements			176			331
	Other			1,042			831

		Deferred tax assets		11,510			15,898
Less valuation allowance				(4,391	)		(9,599	)

				7,119			6,299
Deferred tax liabilities				(3,619	)		(3,299	)

	Net deferred tax assets		$	3,500		$	3,000

		Current	$	3,500		$	3,000

		Long Term	$	—		$	—

GRUBB & ELLIS COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

10. Stock Options, Warrants, Stock Purchase and 401(k) Plans

Stock Option Plans

Changes in stock options were as follows for the fiscal years ended June 30, 2005, 2004, and 2003:


	2005					2004					2003

	Shares			Exercise Price		Shares			Exercise Price		Shares			Exercise Price

Stock options outstanding at the beginning of the year		1,329,023			$0.92 to $16.44		1,601,091			$2.00 to $16.44		2,816,861			$1.88 to $16.44
Granted		510,000			$2.99 to $4.70		150,000			$0.92		10,000			$2.00
Lapsed or canceled		(376,371	)		$3.75 to $13.50		(422,068	)		$2.85 to $13.50		(1,225,770	)		$1.88 to $13.50
Exercised		(17,500	)		$2.85		—			—		—			—

Stock options outstanding at the end of the year		1,445,152			$0.92 to $16.44		1,329,023			$0.92 to $16.44		1,601,091			$2.00 to $16.44

Exercisable at end of the year		866,068					1,103,356					1,129,466

Additional information segregated by relative ranges of exercise prices for stock options outstanding as of June 30, 2005 is as follows:

Weighted

Average

Years

Exercise

Remaining

Price-Outstanding

Price-Exercisable

Price

Shares

Life

Shares

$ 0.92 to $ 4.70

715,500

9.20

3.72

1.37

$ 5.44 to $ 8.94

368,552

4.04

6.72

$11.13 to $16.44

361,100

2.40

11.69

1,445,152

Weighted average information per share with respect to stock options for fiscal years ended June 30, 2005 and 2004 is as follows:


		2005			2004

Exercise price:
	Granted	$	4.67		$	0.92
	Lapsed or canceled		8.67			5.30
	Exercised		2.85			—
	Outstanding at June 30		6.48			6.98
Remaining life			6.19	years		5.28	years

The Company’s 1990 Amended and Restated Stock Option Plan, as amended, provides for grants of options to purchase the Company’s common stock for a total of 2,000,000 shares. At June 30, 2005, 2004 and 2003, the number of shares available for the grant of options under the plan was 1,179,952, 1,029,345 and 904,517, respectively. Stock options under this plan may be granted at prices from 50% up to 100% of the

GRUBB & ELLIS COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

10. Stock Options, Warrants, Stock Purchase and 401(k) Plans—(Continued)

market price per share at the dates of grant, their terms and vesting schedules of which are determined by the Board of Directors.

The Company’s 1993 Stock Option Plan for Outside Directors provides for an automatic grant of an option to purchase 10,000 shares of common stock to each newly elected independent member of the Board of Directors and an automatic grant of an option to purchase 8,000 shares at the successive four year service anniversaries of each such director. The exercise prices are set at the market price at the date of grant. The initial options expire five years from the date of grant and vest over three years from such date. The anniversary options vest over four years from the date of grant and expire ten years from such date. The plan was amended in November 1998 to increase the number of issuable shares authorized for the plan from 50,000 to 300,000 and to provide for the anniversary options. The number of shares available for grant was 244,000 at June 30, 2005 and 236,000 at June 30, 2004 and 2003.

The Company’s 1998 Stock Option Plan provides for grants of options to purchase the Company’s common stock. The plan authorizes the issuance of up to 2,000,000 shares, and had 1,336,983, 1,129,219, and 971,979 shares available for grant as of June 30, 2005, 2004 and 2003, respectively. Stock options under this plan may be granted at prices and with such other terms and vesting schedules as determined by the Compensation Committee of the Board of Directors, or, with respect to options granted to corporate officers, the full Board of Directors.

The Company’s 2000 Stock Option Plan provides for grants of options to purchase the Company’s common stock. The plan authorizes the issuance of up to 1,500,000 shares, and had 850,000, 1,350,000 and 1,360,000 shares available for grant as of June 30, 2005, 2004 and 2003, respectively. Stock options under this plan may be granted at prices and with such other terms and vesting schedules as determined by the Compensation Committee of the Board of Directors, or, with respect to options granted to corporate officers who are subject to Section 16 of the Securities Exchange Act of 1934, as amended, the full Board of Directors.

Stock Warrants

In July 1999, the Company issued a warrant to purchase 600,000 shares of the Company’s common stock at $6.25 per share to Aegon USA Realty Advisors, Inc., the parent company of Landauer Associates, Inc. (“LAI”), as part of the consideration granted in the acquisition of LAI. The warrant had a five-year life which expired in July 2004.

Employee Stock Purchase Plan

The Grubb & Ellis Company Employee Stock Purchase Plan provided for the purchase of up to 1,750,000 shares of common stock by employees of the Company at a 15% discount from market price, as defined, through payroll deductions. The numbers of shares purchased under this plan were 193,532 during the fiscal year ended June 30, 2003. This plan was suspended in May 2003.

The Company has a 401(k) Plan covering eligible employees and provides that employer contributions may be made in common stock of the Company or cash. Discretionary contributions by the Company for the plans (net of forfeitures and reimbursements received pursuant to property and corporate facilities management services agreements) amounted to approximately $583,000 and $519,000 for the plan years ended December 31, 2004 and 2003, respectively. The Company did not provide for a company match to the 401(k) Plan for the plan year ended December 31, 2002.

GRUBB & ELLIS COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

10. Stock Options, Warrants, Stock Purchase and 401(k) Plans—(Continued)

Pro Forma Information

Pro forma information regarding net income and earnings per share is required by Statement 123, and has been determined as if the Company had accounted for options granted subsequent to July 1, 1996, and therefore includes grants under the 1990 Amended and Restated Stock Option Plan, 1993 Stock Option Plan for Outside Directors, 1998 Stock Option Plan and 2000 Stock Option Plan and purchases made under the Grubb & Ellis Employee Stock Purchase Plan, under the fair value method of that Statement. The fair value for the options was estimated at the date of grant using a Black-Scholes option pricing model. Weighted-average assumptions for options granted for fiscal years 2005, 2004 and 2003, respectively, are as follows:


	2005			2004			2003

Risk free interest rates		3.99	%		3.40	%		3.83	%
Dividend yields		0	%		0	%		0	%
Volatility factors of the expected market price of the common stock		.834			.795			.393
Weighted-average expected lives		5.00 years			6.00 years			6.00 years

The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options that have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because changes in these assumptions can materially affect the fair value estimate, in management’s opinion, the existing models do not necessarily provide a reliable single measure of the fair value of options granted. The weighted average fair values of options granted by the Company in fiscal years 2005, 2004 and 2003 using this model were $3.21, $0.65 and $0.88, respectively.

The Company currently accounts for its stock-based employee compensation plan under the intrinsic value method in accordance with APB 25. The Company has adopted the disclosure-only provisions of Statement 123, as amended by FASB Statement No. 148, “Accounting for Stock— Based Compensation— Transition and Disclosure (“FAS 148”)”. Compensation expense related to restricted share awards is not presented in the table below because the expense amount is the same under APB 25 and FAS 123 and,

GRUBB & ELLIS COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

10. Stock Options, Warrants, Stock Purchase and 401(k) Plans—(Continued)

therefore, is already reflected in net income. Had the Company elected to adopt the fair value recognition provisions of FAS 123, pro forma net income and net income per share would be as follows (in thousands):


		For the Fiscal Year Ended June 30,

		2005			2004			2003

Net income (loss) to common stockholders, as reported		$	12,378		$	12,576		$	(17,902	)
Add: Total stock-based employee compensation expense determined under the intrinsic value method for all awards, net of related tax effects			—			—			228
Deduct: Total stock-based employee compensation expense determined under the fair value based method for all awards, net of related tax effects			(164	)		(172	)		(340	)

Pro forma net income (loss) to common stockholders		$	12,214		$	12,404		$	(18,014	)

Net earnings per weighted average common share outstanding:
	Basic — as reported	$	0.82		$	0.83		$	(1.19	)

	Basic — pro forma	$	0.81		$	0.82		$	(1.19	)

	Diluted — as reported	$	0.81		$	0.83		$	(1.19	)

	Diluted — pro forma	$	0.80		$	0.82		$	(1.19	)

Stock Repurchase Plan

In August 1999, the Company announced a program through which it may repurchase up to $3.0 million of its common stock on the open market from time to time as market conditions warrant. As of June 30, 2005, the Company had repurchased 359,900 shares of stock at an aggregate price of approximately $2.0 million. No shares were repurchased under this program during fiscal years 2005, 2004 or 2003.


11.	Related Party Transactions

The Company provides both transaction and management services to parties, which are related to principal stockholders and/or directors of the Company, primarily Kojaian affiliated entities (collectively, “Kojaian Companies”) and Archon Group, L.P. (“Archon”). In addition, the Company also paid asset management fees to the Kojaian Companies and Archon related to properties the Company manages on their behalf. Revenue earned by the Company for services rendered to these and other affiliates, including joint

GRUBB & ELLIS COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

11. Related Party Transactions — (Continued)

ventures, officers and directors and their affiliates, was as follows for the fiscal years ended June 30, 2005, 2004 and 2003 (in thousands):


		2005		2004		2003

Transaction fees
	Kojaian Companies	$	485	$	330	$	291
	Archon		2,346		1,819		1,663
	Others		—		—		277

			2,831		2,149		2,231

Management fees
	Kojaian Companies		9,232		10,468		10,274
	Archon		1,842		3,613		5,291

			11,074		14,081		15,565
	Less: asset management fees
	Kojaian Companies		2,957		3,191		3,295
	Archon		87		174		239

			8,030		10,716		12,031

	Total	$	10,861	$	12,865	$	14,262

In August 2002, the Company entered into a lease for 16,800 square feet of office space in Southfield, Michigan within a building owned by an entity related to the Kojaian Companies. The lease provides for an annual average base rent of $365,400 over the ten year life of the lease.

In July 2002, the former Chief Operating Officer’s employment agreement with the Company was terminated, and in March 2003, the Company disclosed that the Company’s former Chief Executive Officer and Chief Financial Officer had resigned. In addition, the Company entered into a separation agreement with its former General Counsel who resigned effective July 2, 2003. Severance charges totaling approximately $3.4 million were recognized during fiscal year 2003 relating to these events. (See Note 14 of Notes to Consolidated Financial Statements for additional information.) None of the options to purchase 850,000 common stock shares were exercised and the option grants were cancelled upon the officers’ employment terminations.

The Compensation Committee of the Company adopted a Long-Term Executive Cash Incentive Plan (the “Plan”) in June 2005. The Plan provides for the payment of bonuses to certain executive employees if specified financial goals for the Company are achieved for the period commencing January 1, 2004 and ending December 31, 2006. As of June 30, 2005, approximately $373,000 has been accrued under this Plan for payment to the executive employees no earlier than the first calendar quarter of 2007.

GRUBB & ELLIS COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

11. Related Party Transactions — (Continued)

In fiscal years 2005 and 2004, the Company incurred $160,000 and $100,000, respectively, in legal fees paid on behalf of C. Michael Kojaian and Kojaian Ventures, LLC (collectively, the “Kojaian Parties”), and $64,000 and $60,000, respectively, in legal fees paid on behalf of Warburg Pincus Investors, L.P. (“Warburg Pincus”), in connection with each of them being named in a lawsuit filed in March 2004. In August 2005, the litigation was settled by the parties and the lawsuit was dismissed with prejudice. Total legal fees through the settlement of the lawsuit, including fees incurred through fiscal 2005, are estimated to be $300,000 on behalf of the Kojaian Parties and $126,000 on behalf of Warburg Pincus. Although the Company was not party to the litigation, the litigation expenses of the Kojaian Parties and Warburg Pincus were being paid by the Company pursuant to contractual indemnification obligations contained in various purchase and sale and credit and security agreements entered by the Company during fiscal 2002. Mr. Kojaian is the Chairman of the Board of the Company, and, along with affiliated persons and entities, has majority-voting control of the Company, and Warburg Pincus owns approximately 39% of the issued and outstanding shares of the common stock of the Company. In addition, of the total legal fees incurred on behalf of the Kojaian Parties, approximately $164,000 was paid to the law firm of Young and Susser. Rodger D. Young, a member of the Company’s Board of Directors since April 2003, is a partner of Young and Susser.


12.	Commitments and Contingencies

Non-cancelable Operating Leases

The Company has non-cancelable operating lease obligations for office space and certain equipment ranging from one to nine years, and sublease agreements under which the Company acts as sublessor.

The office space leases often times provide for annual rent increases, and typically require payment of property taxes, insurance and maintenance costs.

Future minimum payments under non-cancelable operating leases with an initial term of one year or more, excluding any future potential operating or real estate tax expense increases, were as follows at June 30, 2005 (in thousands):


Year Ending June 30,		Lease Obligations

	2006	$	15,996
	2007		12,404
	2008		10,278
	2009		7,835
	2010		4,210
	Thereafter		3,072

		$	53,795

The above amounts also include obligations due under a large office lease signed in August 2005.

Lease and rental expense for the fiscal years ended June 30, 2005, 2004 and 2003 totaled $17,805,000, $20,187,000, and $21,678,000, respectively.

Environmental

As first reported in the Company’s Form 10-Q for the period ended December 31, 2000, a corporate subsidiary of the Company owns a 33% interest in a general partnership, which in turn owns property in the

GRUBB & ELLIS COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

12. Commitments and Contingencies—(Continued)

State of Texas which is the subject of an environmental assessment and remediation effort, due to the discovery of certain chemicals related to a release by a former bankrupted tenant of dry cleaning solvent in the soil and groundwater of the partnership’s property and adjacent properties. The Company has no financial recourse available against the former tenant due to its insolvency. Prior assessments had determined that minimal costs would be incurred to remediate the release. However, subsequent findings at and around the partnership’s property increased the probability that additional remediation costs would be necessary. The partnership is working with the Texas Natural Resource Conservation Commission and the local municipality to implement a multi-faceted plan, which includes both remediation and ongoing monitoring of the affected properties. Although the partnership’s other partners have made all past contributions and are expected to make all future required contributions, there can be no assurances to this effect. As of June 30, 2005, the Company’s share of cumulative costs to remediate and monitor this situation is estimated at approximately $1,157,000, based upon a comprehensive project plan prepared by an independent third party environmental remediation firm, or an increase of $100,000 during fiscal 2005. Approximately $1,074,000 of this amount has been paid as of June 30, 2005 and the remaining $83,000 has been reflected as a loss reserve for such matters in the consolidated balance sheet. The Company’s management believes that the outcome of these events will not have a material adverse effect on the Company’s consolidated financial position or results of operations.

Insolvent Insurance Provider

In the Company’s Form 10-Q for the period ended December 31, 2001, the following situation regarding an insolvent insurance provider was initially disclosed. In fiscal years 1999 and 2000, the Company’s primary errors and omissions insurance carrier was Reliance Insurance Company (of Illinois and California, collectively “Reliance”). The Company had four open claims that were covered by Reliance policies in which defense and/or settlement costs exceeded a self-insured retention.

In October 2001, Reliance was placed in liquidation by order of the Commonwealth of Pennsylvania, which casts doubt on the recovery from Reliance of the Company’s open claims. The Company had established loss reserves for the estimated settlement costs of the claims and all of the claims have now been resolved. The Company is seeking reimbursement for the costs of defense, settlement and/or judgment in excess of the self-insured retention from the liquidator. No new significant information has been obtained for fiscal 2005. The Company is unable to estimate the probability and timing of any potential reimbursement at this time, and therefore, has not assumed any potential recoveries in establishing its reserves.

General

The Company is involved in various claims and lawsuits arising out of the conduct of its business, as well as in connection with its participation in various joint ventures and partnerships, many of which may not be covered by the Company’s insurance policies. In the opinion of management, the eventual outcome of such claims and lawsuits is not expected to have a material adverse effect on the Company’s financial position or results of operations.


13.	Concentration of Credit Risk

Financial instruments that potentially subject the Company to credit risk consist principally of trade receivables and interest-bearing investments. Users of real estate services account for a substantial portion of trade receivables and collateral is generally not required. The risk associated with this concentration is limited due to the large number of users and their geographic dispersion.

The Company places substantially all of its interest-bearing investments with major financial institutions and limits the amount of credit exposure with any one financial institution.

GRUBB & ELLIS COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

13. Concentration of Credit Risk—(Continued)

The Company believes it has limited exposure to the extent of non-performance by the counterparties of its interest rate cap agreement as the counter party is a major financial institution and, accordingly, the Company does not anticipate any non-performance.


14.	Severance, Office Closure and Other Special Charges

During the fiscal year ended June 30, 2004, the Company completed the disposition of the Wadley-Donovan Group, through which the Company provided relocation and economic development consulting services. As a result of the disposition, the Company recorded a loss totaling approximately $2.4 million related primarily to the write-off of unamortized goodwill recorded when the original business was acquired in February 2002. The Company closed certain non-performing offices and recorded additional special charges of $855,000 related to office closure costs which consist primarily of future lease obligations of office space by the Company, net of estimated sublease income, along with related unamortized leasehold improvements. As of June 30, 2005, remaining future net lease obligations, including those which arose in prior years, totaled approximately $824,000. The cumulative amount of special charges incurred by the Company during the fiscal year ended June 30, 2004 totaled $3.2 million.

During the fiscal year ended June 30, 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, and General Counsel, and to a reduction of other salaried personnel, and office closure costs of $3.2 million.


15.	Business Acquisitions and Related Indebtedness

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 signed an agreement pursuant to which it shall participate in the Company’s affiliate program. The fees received by the Company from this affiliate agreement will comprise the revenues earned from the new Phoenix structure, as the gross operations 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 a 20% minority interest in this entity for $400,000.

16. Segment Information

The Company has two reportable segments— Transaction Services and Management Services.

The Transaction Services segment advises buyers, sellers, landlords and tenants on the sale, leasing and valuation of commercial property and includes the Company’s national accounts groups and national affiliate program operations.

The Management Services segment provides property management and related services for owners of investment properties and facilities management services for corporate users.

The fundamental distinction between the Transaction Services and Management Services segments lies in the nature of the revenue streams and related cost structures. Transaction Services generates revenues primarily on a commission or project fee basis. Therefore, the personnel responsible for providing these services are compensated primarily on a commission basis. The Management Services revenues are generated primarily by long term (one year or more) contractual fee arrangements. Therefore, the personnel responsible for delivering these services are compensated primarily on a salaried basis.

GRUBB & ELLIS COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

16. Segment Information—(Continued)

The Company evaluates segment performance and allocates resources based on earnings before interest, taxes, depreciation and amortization (“EBITDA”) that include an allocation (primarily based on segment revenue) of certain corporate level administrative expenses (amounts in thousands). In evaluating segment performance, the Company’s management utilizes EBITDA as a measure of the segment’s ability to generate cash flow from its operations. Other items contained within the measurement of net income, such as interest and taxes, and special charges, are generated and managed at the corporate administration level rather than the segment level. In addition, net income measures also include non-cash amounts such as depreciation and amortization expense.

Management believes that EBITDA as presented with respect to the Company’s reportable segments is an important measure of cash generated by the Company’s operating activities. EBITDA is similar to net cash flow from operations because it excludes certain non-cash items; however, it also excludes interest and income taxes. Management believes that EBITDA is relevant because it assists investors in evaluating the Company’s ability to service its debt by providing a commonly used measure of cash available to pay interest. EBITDA should not be considered as an alternative to net income (loss) or cash flows from operating activities (which are determined in accordance with GAAP), as an indicator of operating performance or a measure of liquidity. EBITDA also facilitates comparison of the Company’s results of operations with those companies having different capital structures. Other companies may define EBITDA differently, and, as a result, such measures may not be comparable to the Company’s EBITDA.


		Transaction		Management			Company
		Services		Services			Totals

		(amounts in thousands)
Fiscal year ended June 30, 2005
	Total Revenues	$	267,810	$	195,725		$	463,535
	EBITDA		19,546		563			20,109
	Total Assets		65,606		15,317			80,923
	Goodwill, net		18,376		6,387			24,763
Fiscal year ended June 30, 2004
	Total Revenues	$	249,344	$	191,210		$	440,554
	EBITDA		22,105		1,433			23,538
	Total Assets		52,672		17,792			70,464
	Goodwill, net		18,376		6,387			24,763
Fiscal year ended June 30, 2003
	Total Revenues	$	240,916	$	185,030		$	425,946
	EBITDA		5,700		(214	)		5,486

Reconciliation of Segment EBITDA to Statements of Operations (in thousands):


		Fiscal Year Ended June 30,

		2005			2004			2003

Total Segment EBITDA		$	20,109		$	23,538		$	5,486
Less:
Depreciation & amortization			(5,742	)		(6,736	)		(7,802	)
Special charges			—			(3,224	)		(9,500	)
Net interest expense			(1,252	)		(2,205	)		(2,524	)

	Income (loss) before income taxes	$	13,115		$	11,373		$	(14,340	)

GRUBB & ELLIS COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

16. Segment Information—(Continued)

Reconciliation of Segment Assets to Balance Sheet (in thousands):


		As of June 30,

		2005		2004

Total segment assets		$	80,923	$	70,464
Current tax assets			197		251
Deferred tax assets			3,500		3,000

	Total Assets	$	84,620	$	73,715


17.	Selected Quarterly Financial Data (unaudited)


		Fiscal Year Ended June 30, 2005
		(in thousands, except per share amounts)

		First Quarter			Second Quarter		Third Quarter		Fourth Quarter

Operating revenue		$	103,679		$	135,580	$	109,439	$	114,837

Operating income (loss)		$	(1,066	)	$	8,686	$	1,393	$	5,354

Net (loss) income to common stockholders		$	(1,818	)	$	7,852	$	1,094	$	5,250

Income (loss) per common share:
Basic—		$	(0.12	)	$	0.52	$	0.07	$	0.35

	Weighted average common shares outstanding		15,103			15,115		15,115		15,115

Diluted—		$	(0.12	)	$	0.52	$	0.07	$	0.34

	Weighted average common shares outstanding		15,103			15,232		15,205		15,282

EBITDA		$	377		$	10,151	$	2,787	$	6,794

Common stock market price range (high : low)		$	4.26 : $1.55		$	5.20 : $3.60	$	4.94 : $4.10	$	7.00 : $4.75

GRUBB & ELLIS COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

17. Selected Quarterly Financial Data (unaudited)—(Continued)


		Fiscal Year Ended June 30, 2004
		(in thousands, except per share amounts)

		First Quarter			Second Quarter		Third Quarter			Fourth Quarter

Operating revenue		$	101,884		$	123,789	$	102,402		$	112,479

Operating income (loss)		$	870		$	8,576	$	(2,748	)	$	6,880

Net (loss) income to common stockholders		$	(150	)	$	7,447	$	(3,690	)	$	8,969

Income (loss) per common share:
Basic—		$	(0.01	)	$	0.49	$	(0.24	)	$	0.59

	Weighted average common shares outstanding		15,097			15,097		15,097			15,097

Diluted—		$	(0.01	)	$	0.49	$	(0.24	)	$	0.59

	Weighted average common shares outstanding		15,097			15,098		15,097			15,105

EBITDA		$	2,599		$	10,210	$	(1,199	)	$	8,704

Common stock market price range (high : low)		$	1.50 : $1.01		$	1.20 : $0.80	$	1.20 : $0.87		$	2.00 : $0.90

During the fiscal year ended June 30, 2004, material adjustments were recorded relating to i) the loss on disposition of the Wadley Donovan Group, totaling $2.4 million in the third fiscal quarter, and ii) a $1.0 million decrease in salaries and benefits expense due to a reduction in the related self-insurance reserves, and a $3.0 million deferred tax benefit due to a reduction in the valuation allowance related to deferred tax assets, both of which occurred in the fourth fiscal quarter.

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

None.

Item 9A. Controls and Procedures

Effective as of June 30, 2005, the Company carried out an evaluation, under the supervision and with the participation of management, including the Chief Executive Officer and the Chief Financial Officer, of the effectiveness of the Company’s disclosure controls and procedures (as defined in Rules 13a—15e under the Exchange Act). Based upon that evaluation, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that the Company’s disclosure controls and procedures are effective to timely alert them to material information relating to the Company (including its consolidated subsidiaries) required to be included in the Company’s Exchange Act filings. There were no significant changes in the Company’s internal controls or in other factors that could significantly affect those controls subsequent to the date of the evaluation.

GRUBB & ELLIS COMPANY

PART III

Item 10. Directors and Executive Officers of the Registrant

The information called for by Item 10 is incorporated by reference from the registrant’s definitive proxy statement to be filed pursuant to Regulation 14A under the Securities Exchange Act of 1934 (the “Exchange Act”) no later than 120 days after the end of the 2005 fiscal year.

Item 11. Executive Compensation

The information called for by Item 11 is incorporated by reference from the registrant’s definitive proxy statement to be filed pursuant to Regulation 14A under the Exchange Act no later than 120 days after the end of the 2005 fiscal year.


Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholders Matters

The information called for by Item 12 is incorporated by reference from the registrant’s definitive proxy statement to be filed pursuant to Regulation 14A under the Exchange Act no later than 120 days after the end of the 2005 fiscal year.

Item 13. Certain Relationships and Related Transactions

The information called for by Item 13 is incorporated by reference from the registrant’s definitive proxy statement to be filed pursuant to Regulation 14A under the Exchange Act no later than 120 days after the end of the 2005 fiscal year.

Item 14. Principal Accountant Fees and Services

The information called for by Item 14 is incorporated by reference from the registrant’s definitive proxy statement to be filed pursuant to Regulation 14A under the Exchange Act no later than 120 days after the end of the 2005 fiscal year.

GRUBB & ELLIS COMPANY

PART IV

Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K

(a) The following documents are filed as part of this report:


1.	The following Report of Independent Registered Public Accounting Firm and Consolidated Financial Statements are submitted herewith:

Report of Independent Registered Public Accounting Firm

Consolidated Balance Sheets at June 30, 2005 and June 30, 2004

Consolidated Statements of Operations for the years ended June 30, 2005, 2004 and 2003

Consolidated Statements of Stockholders’ Equity for the years ended June 30, 2005, 2004 and 2003

Consolidated Statements of Cash Flows for the years ended June 30, 2005, 2004 and 2003

Notes to Consolidated Financial Statements


2.	All schedules for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission are not required under the related instructions, are inapplicable, or the information is contained in the Notes to Consolidated Financial Statements and therefore have been omitted.

3.	Exhibits required to be filed by Item 601 of Regulation S-K:

(3) Articles of Incorporation and Bylaws


3.1		Certificate of Incorporation of the Registrant, as restated November 1, 1994, incorporated herein by reference to Exhibit 3.2 to the Registrant’s Annual Report on Form 10-K filed on March 31, 1995.
3.2		Amendment to the Restated Certificate of Incorporation of the Registrant as filed with the Delaware Secretary of State on December 9, 1997, incorporated herein by reference to Exhibit 4.4 to the Registrant’s Statement on Form S-8 filed on December 19, 1997 (File No. 333-42741).
3.3		Certificate of Retirement with Respect to 130,233 Shares of Junior Convertible Preferred Stock of Grubb & Ellis Company, filed with the Delaware Secretary of State on January 22, 1997, incorporated herein by reference to Exhibit 3.3 to the Registrant’s Quarterly Report on Form 10-Q filed on February 13, 1997.
3.4		Certificate of Retirement with Respect to 8,894 Shares of Series A Senior Convertible Preferred Stock, 128,266 Shares of Series B Senior Convertible Preferred Stock, and 19,767 Shares of Junior Convertible Preferred Stock of Grubb & Ellis Company, filed with the Delaware Secretary State on January 22, 1997, incorporated herein by reference to Exhibit 3.4 to the Registrant’s Quarterly Report on Form 10-Q filed on February 13, 1997.
3.5		Certificate of Designations, Number, Voting Powers, Preferences and Rights of Series A Preferred Stock of the Registrant as filed with the Secretary of State of the State of Delaware on March 8, 2002 incorporated herein by reference to Exhibit 4 to the Registrant’s Current Report on Form 8-K filed on March 12, 2002.
3.6		Certificate of Amendment of Certificate of Designations, Number, Voting Powers, Preferences and Rights of Series A Preferred Stock of Grubb & Ellis Company, incorporated herein by reference to Exhibit 4 to the Registrant’s Current Report on Form 8-K filed on May 14, 2002.
3.7		Bylaws of the Registrant, as amended and restated effective May 31, 2000, incorporated herein by reference to Exhibit 3.5 to the Registrant’s Annual Report on Form 10-K filed on September 28, 2000.


3.8		Amended and Restated Certificate of Designations, Number, Voting Powers, Preferences and Rights of Series A Preferred Stock of Grubb & Ellis Company, as filed with the Secretary of State of Delaware on September 13, 2002 incorporated herein by reference to Exhibit 3.8 to the Registrant’s Annual Report on Form 10-K filed on October 15, 2002.
3.9		Preferred Stock Exchange Agreement dated as of December 30, 2004 by and between the Registrant and Kojaian Ventures, LLC incorporated herein by reference to Exhibit 1 to the Registrant’s Current Report on Form 8-K filed on January 6, 2005.
3.10		Certificate of Designations, Number Voting Posers, Preferences and Rights of Series A-1 Preferred Stock of Grubb & Ellis Company, as filed with the Secretary of State of Delaware on January 4, 2005 incorporated herein by reference to Exhibit 2 to the Registrant’s Current Report on Form 8-K filed on January 6, 2005.

(4) Instruments Defining the Rights of Security Holders, including Indentures.


4.1		Stock Purchase Agreement dated as of December 11, 1996 among the Registrant, Mike Kojaian, Kenneth J. Kojaian and C. Michael Kojaian, incorporated herein by reference to Exhibit 4.3 to the Registrant’s Current Report on Form 8-K filed on December 20, 1996.
4.2		Registration Rights Agreement dated as of December 11, 1996 among the Registrant, Warburg, Pincus Investors, L.P., Joe F. Hanauer, Mike Kojaian, Kenneth J. Kojaian and C. Michael Kojaian, incorporated herein by reference to Exhibit 4.1 to the Registrant’s Current Report on Form 8-K filed on December 20, 1996.
4.3		Purchase Agreement dated as of January 24, 1997 between the Registrant and Warburg, Pincus Investors, L.P., incorporated herein by reference to Exhibit 4.1 to the Registrant’s Current Report on Form 8-K filed on February 4, 1997.
4.4		Stock Purchase Agreement dated as of January 24, 1997 between the Registrant and Archon Group, L.P., incorporated herein by reference to Exhibit 4.2 to the Registrant’s Current Report on Form 8-K filed on February 4, 1997.
4.5		Registration Rights Agreement dated as of January 24, 1997 between the Registrant and Archon Group, L.P., incorporated herein by reference to Exhibit 4.3 to the Registrant’s Current Report on Form 8-K filed on February 4, 1997.
4.6		Securities Purchase Agreement dated May 13, 2002 by and between Grubb & Ellis Company and Kojaian Ventures, LLC, incorporated herein by reference to Exhibit 2 to the Registrant’s Current Report on Form 8-K filed on May 14, 2002.
4.7		Convertible Subordinated Promissory Note and Security Agreement in the principal amount of $11,237,500 dated May 13, 2002 and executed by Grubb & Ellis Company, incorporated herein by reference to Exhibit 3 to the Registrant’s Current Report on Form 8-K filed on May 14, 2002.
4.8		Stock Subscription Warrant No. A-1 dated July 30, 1999 issued to Aegon USA Realty Advisors, Inc., incorporated herein by reference to Exhibit 4.20 to the Registrant’s Annual Report on Form 10-K filed on September 28, 1999.
4.9		Form of Subordination Agreement, executed by Warburg, Pincus Investors, L.P. in favor of Bank of America, N.A., as Agent, and the Lenders, which is an Exhibit to the Option Purchase Agreement incorporated herein by reference to Exhibit 2 to the Registrant’s Current Report on Form 8-K filed on March 12, 2002.
4.10		Option Purchase Agreement dated March 7, 2002 by and among the Registrant, Warburg, Pincus Investors, L.P. and Bank of America, N.A., as Administrative Agent incorporated herein by reference to Exhibit 3 to the Registrant’s Current Report on Form 8-K filed on March 12, 2002.


4.11		Fourth Amendment dated as of May 13, 2002 to the Amended and Restated Credit Agreement among the Registrant, the other financial institutions from time to time parties thereto, Bank of America, N.A., American National Bank and Trust Company of Chicago and LaSalle Bank National Association, dated as of December 31, 2000, incorporated herein by reference to Exhibit 5 to the Registrant’s Current Report on Form 8-K filed on May 14, 2002.
4.12		Form of Waiver executed by Bank of America, N.A., LaSalle Bank National Association and Bank One, N.A., and the Registrant, dated December 20, 2002, incorporated herein by reference to Exhibit 1 to the Registrant’s Current Report on Form 8-K filed on January 10, 2003.
4.13		Form of Waiver executed by Bank of America, N.A., LaSalle Bank National Association and Bank One, N.A., and the Registrant, dated March 26, 2003, incorporated herein by reference to Exhibit 6 to the Registrant’s Current Report on Form 8-K filed on March 27, 2003.
4.14		Form of Waiver executed by Bank of America, N.A., LaSalle Bank National Association and Bank One, N.A., and the Registrant, dated May 1, 2003, incorporated herein by reference to Exhibit 1 to the Registrant’s Current Report on Form 8-K filed on May 2, 2003.
4.15		Form of Waiver executed by Bank of America, N.A., LaSalle Bank National Association and Bank One, N.A., and the Registrant, dated May 30, 2003, incorporated herein by reference to Exhibit 1 to the Registrant’s Current Report on Form 8-K filed on June 13, 2003.
4.16		Form of Waiver executed by Kojaian Capital, LLC and the Registrant, dated June 6, 2003, incorporated herein by reference to Exhibit 2 to the Registrant’s Current Report on Form 8-K filed on June 13, 2003.
4.17		Sixth Amendment dated as of June 20, 2003 to the Amended and Restated Credit Agreement among the Registrant and Kojaian Capital, LLC, dated as of December 31, 2000 incorporated herein by reference to Exhibit 1 to the Registrant’s Current Report on Form 8-K filed on June 23, 2003.
4.18		Copy of $5,000,000 Convertible Promissory Note and Security Agreement dated March 7, 2002 issued by the Registrant to Warburg, Pincus Investors, L.P. incorporated herein by reference to Exhibit 5 to the Registrant’s Current Report on Form 8-K filed on March 12, 2002.
4.19		Form of $6,000,000 Convertible Promissory Note and Security Agreement of the Registrant which is an Exhibit to the Option Purchase Agreement to be payable to the order of Warburg, Pincus Investors, L.P. incorporated herein by reference to Exhibit 6 to the Registrant’s Current Report on Form 8-K filed on March 12, 2002 (Commission File No. 1-8122).
4.20		Securities Purchase Agreement dated May 13, 2002 by and between Grubb & Ellis Company and Kojaian Ventures, LLC, incorporated herein by reference to Exhibit 2 to the Registrant’s Current Report on Form 8-K filed on May 14, 2002.
4.21		Copy of Convertible Subordinated Promissory Note and Security Agreement in the principal amount of $11,237,500 dated May 13, 2002 issued by the Registrant to Kojaian Ventures, LLC, incorporated herein by reference to Exhibit 3 to the Registrant’s Current Report on Form 8-K filed on May 14, 2002.
4.22		Copy of Promissory Note in the principal amount of $4,000,000 dated May 9, 2003 issued by the Registrant to Kojaian Funding, LLC, incorporated herein by reference to Exhibit 4.7 to the Registrant’s Quarterly Report on Form 10-Q filed on May 20, 2003.
4.23		Copy of Guarantee and Collateral Agreement by the Registrant and certain of its Subsidiaries in favor of Kojaian Funding, LLC, as Lender, dated as of May 9, 2003, incorporated herein by reference to Exhibit 4.8 to the Registrant’s Quarterly Report on Form 10-Q filed on May 20, 2003.
4.24		Copy of Security Agreement by the Registrant in favor of Kojaian Funding, LLC, as Lender, dated as of May 9, 2003, incorporated herein by reference to Exhibit 4.9 to the Registrant’s Quarterly Report on Form 10-Q filed on May 20, 2003.


4.25		Copy of Subordination Agreement executed by Kojaian Funding, LLC in favor of Bank of America, as Agent, and the Lenders, dated as of May 9, 2003, incorporated herein by reference to Exhibit 4.10 to the Registrant’s Quarterly Report on Form 10-Q filed on May 20, 2003.
4.26		Copy of Side Letter Agreement executed by the Registrant, dated as of May 9, 2003, incorporated herein by reference to Exhibit 4.11 to the Registrant’s Quarterly Report on Form 10-Q filed on May 20, 2003.
4.27		Copy of Side Letter Agreement executed by the Registrant, dated as of May 9, 2003, incorporated herein by reference to Exhibit 4.12 to the Registrant’s Quarterly Report on Form 10-Q filed on May 20, 2003.
4.28		Copy of Credit Agreement, dated as of June 11, 2004, entered into by and among the Registrant, certain of its subsidiaries, the “Lenders” (as defined in the Credit Agreement), Deutsche Bank Securities, Inc., as sole book-running manager and sole lead arranger, and Deutsche Bank Trust Company Americas, as initial swing line bank, the initial issuer of letters of credit and administrative agent for the lender parties, incorporated herein by reference to Exhibit 1 to the Registrant’s Current Report on Form 8-K filed on June 21, 2004.
4.29		Security Agreement, dated as of June 11, 2004, by and among the Registrant, certain of its subsidiaries and Deutsche Bank Trust Company Americas, as administrative agent, for the “Secured Parties” (as defined in the Security Agreement), incorporated herein by reference to Exhibit 2 to the Registrant’s Current Report on Form 8-K filed on June 21, 2004.
4.30		Amended and Restated Credit Agreement, dated as of March 31, 2005, entered into by and among Grubb& Ellis Company, certain of its subsidiaries, the “Lenders” (as defined therein), Deutsche Bank Securities, Inc., as sole book-running manager and sole arranger, Deutsche Bank Trust Company Americas, as initial swing line bank, the initial issuer of letters of credit and administrative agent for the lender parties incorporated herein by reference to Exhibit 1 to the Registrant’s Current Report on Form 8-K filed on April 5, 2005.
4.31		Amended and Restated Security Agreement, dated as of March 31, 2005, by and among Grubb & Ellis Company, certain of its subsidiaries and Deutsche Bank Trust Company Americas, as administrative agent, for the “Secured Parties” (as defined herein) incorporated herein by reference to Exhibit 2 to the Registrant’s Current Report on Form 8-K filed on April 5, 2005.

On an individual basis, instruments other than Exhibits listed above under Exhibit 4 defining the rights of holders of long-term debt of the Registrant and its consolidated subsidiaries and partnerships do not exceed ten percent of total consolidated assets and are, therefore, omitted; however, the Company will furnish supplementally to the Commission any such omitted instrument upon request.


(10)	Material Contracts


10.1*		Employment Agreement entered into between Brian D. Parker and the Registrant dated March 1, 2003, incorporated herein by reference to Exhibit 5 to the Registrant’s Current Report on Form 8-K filed on March 27, 2003.
10.2*		First Amendment to Employment Agreement entered into between Brian D. Parker and the Registrant dated April 1, 2003, incorporated herein by reference to Exhibit 10.15 to the Registrant’s Annual Report on Form 10-K filed on October 10, 2003.
10.3*		Employment Agreement with First Amendment entered into between Richard L. Fulton and the Registrant dated September 1, 2002 and April 1, 2003, respectively, incorporated herein by reference to Exhibit 10.16 to the Registrant’s Annual Report on Form 10-K filed on October 10, 2003.


10.4*		Employment Agreement with First and Second Amendments entered into between Robert Osbrink and the Registrant dated December 21, 2001, August 16, 2002 and April 1, 2003, respectively, incorporated herein by reference to Exhibit 10.17 to the Registrant’s Annual Report on Form 10-K filed on October 10, 2003.
10.5*		Employment Agreement entered into on November 9, 2004, between Robert H. Osbrink and the Registrant, effective January 1, 2004 incorporated herein by reference to Exhibit 10.1 to the Registrant’s Quarterly Report on Form 10-Q filed on November 15, 2004.
10.6*		Form of First Amendment to Employment Agreement entered into between Robert Osbrink and the Registrant dated as of September 7, 2005.
10.7*		Compensation Arrangement Letter between Maureen A. Ehrenberg and the Registrant dated May 22, 2003, incorporated herein by reference to Exhibit 10.18 to the Registrant’s Annual Report on Form 10-K filed on October 10, 2003.
10.8*		Employment Agreement, dated as of January 1, 2005, by and between Maureen A. Ehrenberg and the Registrant incorporated herein by reference to Exhibit 1 to the Registrant’s Current Report on Form 8-K filed on June 10, 2005.
10.9*		Employment Agreement entered into on March 8, 2005, between Mark E. Rose and the Registrant, effective March 8, 2005 incorporated herein by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed on March 11, 2005.
10.10*		Grubb & Ellis 1990 Amended and Restated Stock Option Plan, as amended effective as of June 20, 1997, incorporated herein by reference to Exhibit 4.6 to the Registrant’s Registration Statement on Form S-8 filed on December 19, 1997 (Registration No. 333-42741).
10.11*		1993 Stock Option Plan for Outside Directors, incorporated herein by reference to Exhibit 4.1 to the Registrant’s registration statement on Form S-8 filed on November 12, 1993 (Registration No. 33-71484).
10.12*		First Amendment to the 1993 Stock Option Plan for Outside Directors, effective November 19, 1998, incorporated herein by reference to Exhibit 10.1 to the Registrant’s Quarterly Report on Form 10-Q filed on February 12, 1999.
10.13*		Grubb & Ellis 1998 Stock Option Plan, effective as of January 13, 1998, incorporated herein by reference to Exhibit 10.6 to the Registrant’s Annual Report on Form 10-K filed on September 28, 1999.
10.14*		First Amendment to the Grubb & Ellis 1998 Stock Option Plan, effective as of February 10, 2000, incorporated herein by reference to Exhibit 10.7 to the Registrant’s Quarterly Report on Form 10-Q filed on May 12, 2000.
10.15*		Grubb & Ellis Company 2000 Stock Option Plan, effective November 16, 2000, incorporated by herein by reference to Exhibit 10.2 to the Registrant’s Quarterly Report on Form 10-Q filed on February 14, 2001.
10.16*		Description of Grubb & Ellis Company Executive Officer Incentive Compensation Plan, incorporated herein by reference to Exhibit 10.4 to the Registrant’s Annual Report on Form 10-K filed on September 28, 1999.
10.17		Letter Amendment dated May 13, 2002 by and between Grubb & Ellis Company and Kojaian Ventures, LLC, incorporated herein by reference to Exhibit 1 to the Registrant’s Current Report on Form 8-K filed May 14, 2002.
10.18		Transition Agreement entered into as of April 1, 2003, portions of which were omitted pursuant to a request for Confidential Treatment under Rule 24(b) of the Securities Act of 1934, as amended, incorporated herein by reference to Exhibit 2 to the Registrant’s Current Report on Form 8-K filed on April 16, 2003.


*	Management contract or compensatory plan or arrangement.

(21) Subsidiaries of the Registrant

(23) Consent of Independent Registered Public Accounting Firm

(24) Powers of Attorney

(31) Section 302 Certifications

(32) Section 906 Certification

(b) Reports filed on Form 8-K


	A Current Report on Form 8-K dated June 6, 2005, was filed with the Securities and Exchange Commission on June 10, 2005, reporting under Items 1.01 and 3.02 that the Company had entered into a three year employment agreement with Maureen A. Ehrenberg, pursuant to which Ms. Ehrenberg will continue to serve as the Company’s Executive Vice President and as the President of both Grubb & Ellis Management Services, Inc. and the Company’s Global Client Services.

	A Current Report on Form 8-K dated June 21, 2005, was filed with the Securities and Exchange Commission on June 27, 2005, reporting under Item 1.01 that the Compensation Committee of the Company had adopted a long-term executive cash incentive plan.

	A Current Report on Form 8-K dated September 12, 2005, was filed with the Securities and Exchange Commission on September 16, 2005, reporting under Item 5.02 that Brian D. Parker had submitted his resignation as the Chief Financial Officer of the Company and that the submission of such resignation was not the result of any dispute or disagreement with the Company.

SIGNATURES

Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

Grubb & Ellis Company

(Registrant)


/s/ Mark E. Rose Mark E. Rose Chief Executive Officer (Principal Executive Officer)		September 28, 2005

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.


/s/ Mark E. Rose Mark E. Rose Chief Executive Officer and Director (Principal Executive Officer)		September 28, 2005
/s/ Brian D. Parker Brian D. Parker Chief Financial Officer (Principal Financial and Accounting Officer)		September 28, 2005
* R. David Anacker, Director		September 28, 2005
* Anthony G. Antone, Director		September 28, 2005
* C. Michael Kojaian, Director		September 28, 2005
* Robert J. McLaughlin, Director		September 28, 2005
* Rodger D. Young, Director		September 28, 2005

/s/ Mark E. Rose

* By: Mark E. Rose, Attorney-in-Fact, pursuant to Powers Of Attorney

GRUBB & ELLIS COMPANY AND SUBSIDIARIES

EXHIBIT INDEX (A)

For the Fiscal Year Ended June 30, 2005


Exhibit

(10)		Material Contracts
10.6		Form of First Amendment to Employment Agreement entered into between Robert Osbrink and the Registrant dated as of September 7, 2005.
(21)		Subsidiaries of the Registrant
(23)		Consent of Independent Registered Public Accounting Firm
(24)		Powers of Attorney
(31)		Section 302 Certifications
(32)		Section 906 Certification

(A) Exhibits incorporated by reference are listed in Item 14 (a) 3 of this Report

Positive
Negative
Uncertain
Constraining
Legalese
Litigious
Readability	H.S. junior Bad

Grubb & Ellis Inactive 10-K2005 FY Annual report

Content analysis